Full text of Diaries of Henry Morgenthau, Jr. : Volume 2 : Part 1

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BOOK #2

PRESIDENT ROOSEVELT

August 1, 1939
thru

May 15, 1940

0269
August 29. 1939

After Cabinet, there were four or five of us standing

around and they brought in and handed the President Chamberlain's

speech. The President said, "That is fine - that is fine - things

are happening. I like it when something is happening every
minute".

Sumner Welles told H. M. Jr. that if anybody wants to get
anything in SEC they go to see J. S. Rosenbaum. H. M. Jr., called
Earle Bailie and asked him to find out about it

0270
August 31, 1939

To:

The Files

From: Mr. Hanes

Luncheon at 1 o'clock today with the President. He seemed very
much concerned about conditions in Europe which was quite natural

in view of the fact that Germany at this minute was already preparing
to attack Poland. I had never seen the President in such a grim
mood.
Having directed all of his instructions in reference to the BREMEN
being held in New York harbor through me it was quite natural that he
should begin our conversation by talking about this ship. He asked me

to find out for him how much oil the BREMEN had taken aboard in New York,
and whether or not this amount was unusual, as he seemed to be afraid that
this ship was preparing to be converted into a sea raider to prey upon

commerce in the event of war. I got this information together and sent

him the following memorandum:

"The BREMEN took aboard in New York 5,531 tons, or 35,953 barrels

of fuel oil. She had asked and had been granted permission to take
50,000 barrels. I am informed that the amount she took is a comfortably
adequate supply for a high speed run to Bremerhaven. On her former trip
to Hamburg she used 880 tons per day to develop 28.5 knots. A normal
fuel supply for an eastward crossing is 4,700 to 4,900 tons. She has
bunker capacity for 6,616 tons or between 42,000 and 43,000 barrels.
So far as can be judged from the bunker data, therefore, the Master of
the Bremen planned merely a high speed run to a home port."

When the President had finished talking about the BREMEN he said

he wanted to discuss the financial outlook in general, and then specifically the September financing in which we had planned to issue $500 million
new cash long term bonds, and the refunding of the 1 3/8 percent notes
maturing December 15th in the amount of $526 million.

He then told me that he wanted me to go to work on reframing and
restating the Budget making the balance sheet of the Nation a business
man's balance sheet in contrast to the present method of charging all
Government construction as current outgo. The President said that he
did not want to have to ask Congress at the next session to increase

the debt limit beyond the present 45 billion. He said he wanted to
finance everything possible outside of the debt in guaranteed obligations
issued against the independent agencies wherever possible.

-2-

0271

The President seemed to be very worried about going over the

debt limit, and said he believed it possible to finance the Government
to the end of 1940 within the present debt limit of $45 billion. He

suggested that we take out of the Budget all assets such as Boulder Dam,

etc., that could be financed, and set up a plan to do so in order that
the Treasury might be reimbursed, and the necessity for raising further
cash thus averted.

Specifically, he made the following suggestions which would relieve
us of the necessity of issuing more Government bonds before the end of
1940:

(1) Income from trust funds and Social Security would give us a
surplus over and above benefit payments.

(2) RFC, U. S. Housing, and other agencies now borrowing from the
Treasury approximately $350 million should finance themselves through
sale of their own obligations and the money be returned to the Treasury.

(3) We should issue silver certificates against seigniorage profit,
plus all other silver in the Treasury, which would give us the right
to issue approximately $1,300 million in silver certificates.
(4) We could use all the free gold now in the Treasury which would
amount to $154 million.

(5) Use the present Treasury cash balance, which he thought more
than adequate, down to about $1 billion. thus releasing approximately
$650 million more.

Marriner Eccles had spent 45 minutes with the President the day
preceding my luncheon with him and the only one of Marriner's pet theories
that the President failed to mention to me was that we should use $1,800
million of the gold now in the Stabilization Fund, which he claims to be
excessive.

It is going to be difficult, in my opinion, to convince the

President that these steps are in large part unsafe and unsound from the
standpoint of good fiscal policy.

0272
September 1. 1939

To:

The Files

From:

Mr. Hanes

Present at the Cabinet meeting were Messre. Hull, Woodring, Murphy,
Edison, Howes, Wallace, Ickes, Noble, Hanes and Madame Perkins.
The President was in a very serious mood. When he came into the

room he did not speak to anyone but started out by saying, "there is no
use in talking facts with you because you are as familiar with them
as I am." He said that we have no definite information concerning the
attitude of the British and the French, and that there was nothing to
be done except to watch the situation very carefully, and stand by for
a Cabinet meeting some time over the week-end. If there was sufficient
news of importance the meeting might be held on Sunday. In any event,
he would call one for Monday morning.

The President said that he had been over the papers in State,
Treasury, War and Navy Departments and he felt confident that as nearly
as could be everything was in readiness. He discussed with each department
head purely routine matters, none of which had any particular significance
in connection with the war crisis. He talked at some length about the

price structure and its regulation in the event of war. He asked the
Secretary of Agriculture to contact the Assistant Secretaries of War and

Navy, who are in constant communication with the War Resources Board,

with the idea of working out some formula for the control of commodity

prices along with industrial price control. In this connection he spoke
at length about his idea of coordinating the work, in the event of our
going to war, through a body which he anticipates setting up under an
old statute, which has never been repealed, called the "Council of
National Defense". A description of the act under which this "Council
of National Defense" was set up follows:

TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE

TO

Mr. Hanes

FROM Mr. Foley

The Council of National Defense, created by the Act
of August 29, 1916 (Ch. 418, sec. 2, 39 Stat. 649), was created

"for the coordination of industries and resources for the
national security and welfare" and consists of the Secretaries
of War,. Navy, Interior, Agriculture, Commerce and Labor.

It is the function of the Council to supervise and
direct investigations and make recommendations to the President

and the heads of executive departments relative to a great

variety of problems, including -

#* * *the location of railroads with
reference to the frontier of the United States
so as to render possible expeditious concentration of troops and supplies to points of defense;

the coordination of military, industrial, and

commercial purposes in the location of extensive

highways and branch lines of railroad; the utilization of waterways; the mobilization of military

and naval resources for defense: the increase of
domestic production of articles and materials
essential to the support of armies and of the
people during the interruption of foreign commerce;
the development of seagoing transportation; data
as to amounts, location, method and means of pro-

duction, and availability of military supplies;

0273

0274

the giving of information to producers and
manufacturers as to the class of supplies
needed by the military and other services of
the Government, the requirements relating
thereto, and the creation of relations which
will render possible in time of need the immediate concentration and utilization of the
resources of the Nation."
The legislation requires the Council to nominate to
the President, and the President to appoint, an advisory commission, consisting of not more than seven persons, each with

some special knowledge of some industry, public utility or the
development of some natural resource, or "be otherwise specially
*

*

*

qualified

for the performance of the duties . * *".

The

Council is authorized to adopt rules and regulations for the
conduct of its work, subject to the approval of the President,
and is directed to provide work for the advisory commission to
the end that the special knowledge of the commission may be

developed by suitable investigation, of research and inquiry,
and made available in conference and report for the use of the
Council. The Council is also authorized to organize subordinate

bodies for its assistance in special investigations.
All subordinate bodies and the advisory commission are

required to submit reports to the Council, and the Council is
required to report to the President or to the heads of executive
departments upon inquiries or subjects undertaken by it, and an

0275

-3annual report is required to be submitted to the Congress through
the President.

Pursuant to the authority contained in the aforementioned
legislation, an advisory body, the Committee on Public Information,
and the War Industry Board were organized to assist in the work of
the Council. No meetings of the Council have been held since the

fiscal year 1921. During the period of its active life appropriations were made in varying amounts to finance the operations both
of the Council and of the Committee on Public Information and the

War Industry Board. A survey of the various appropriation acts
from 1916 to 1921 indicates that the Council expended approximately
$1,470,000, the Committee on Public Information expended approximately $250,000, and the War Industry Board expended approximately

$1,225,000. In addition to these amounts $375,000 was appropriated

to the Bureau of Standards to do certain research work for the Council.
Although it may appear to over-simplify the problems that
are bound to arise during a period of war abroad, it would seem

reasonable to stress as fundamental the mobilization (at least on
paper) of the productive resources of the country against the time
when it may become necessary to operate on a war time basis, and,

more immediately, the desirability of setting up controls that will
insure against run-away price policies in our economic structure

0276

-4which might have the effect of greatly increased price levels without
corresponding increases in consumers income. You may recall that most

of the tremendous increase in the price level during the 1914-1918 war

period took place before this country entered the war, and it might be
advisable to consider setting up immediately machinery comparable to
that deemed necessary during the World War but which was not then set up

until this country was actually embroiled and the price changes an
accomplished fact.
The War Resources Committee recently announced, headed by

Mr. Stettinius, may deem one of its functions to be a consideration of
the problem here posed. Indeed, consideration might be given to the
designation of the Stettinius committee as the advisory commission to
the Council. This would have the advantage of centralizing and coordinating
defense planning.

A further thought would be the utilization of the Temporary
National Economic (Monopoly) Committee for purposes of national defense.
This Committee is organized and functioning, and probably possesses more

current information relative to the patterns and price policies of industry
than any other Government agency. You might want to consider suggesting

the use of this Committee, in connection with the work of the Council
of National Defense and other groups, to assist in meeting this problem

(or in preparing to meet it should the need arise).

E.W.Foley

General Counsel

-2-

0277

In addition to the 6 Cabinet members who are mentioned above, the
President anticipated augmenting the Council of National Defense by

outside representatives: (1) a representative of industry, (2) a food
administrator, (3) a price fixer, (4) a representative from labor, (5)
a statistical coordinator - here the President mentioned the name of
Lubin, and (6) 4 Administrative Assistants to the President. These
last named four would be: (a) a coordinator, (b) a public relations or
publicity man, (c) a man like Lauchlin Currie, (d) a general factotum, or
leg-man to act as liaison between all the members of this council and the
President. It is the President's idea that this Council of National
Defense would be the top structure of the machinery for prosecuting a war.
The War Resources Board would report directly to this council. and the
War Resources Board would confine its attention largely to industrial
production. Madame Perkins had suggested to the President that a
representative from labor be put on the War Resources Board, but he
declined to do this.
The President then asked me to report to the Cabinet on the subject
of markets in government bonds, stock exchange securities, commodity
markets, foreign exchanges, which I did. He then asked me what the
recommendation of the Open Market Committee had been at the meeting

held in the office of the Secretary of the Treasury regarding September
financing. I told the President that it was the unanimous opinion of

the Open Market Committee, in which the Treasury concurred, that we
undertake no new financing at this time, and that we delay any decision
concerning refunding of the 1 3/8 percent notes, maturing December 15th,
until next Tuesday or Wednesday at which time the Secretary of the
Treasury will be back and it would leave his hands untied to go ahead
with the refunding issue if conditions should warrant and he should so
decide. I reported that I had communicated this recommendation to
the Secretary on board the Coast Guard Cutter "Campbell", and that I would
not make public announcement of this decision until I could get answer
from the Secretary. The President thought it proper to handle the matter

in this way. I further told the President that when I had received the
Secretary's answer that I would pass it on to him.

0278

September 6, 1939

The President told me it was all right to
go ahead and ask for Moyle's resignation. I told
him I had another place for him. Told me to tell
Moyle in these times a man 81 years old is too old
for the job.
Told the President that Jerry Frank had been
here and cleaned that up.
Asked the President whether I could see the
French and British Ambassadors and ask them what they

are doing about purchasing and he said yes. He told
me he had suggested to the English that they form a
corporation like Amtorg rather than use Morgans or
Chase Bank.

Asked the President's Naval Aide whether I
could have Puleston to evaluate Navy or War news. He
said he would let me know.
He told me that the English and French were
hurt at our offer on the Normandie and Queen Mary
and they thought in these times we were pushing them

a little hard and told me to call it off. Said I
would.

0279
September 11, 1939

Lunch with the President.
I spoke to the President about George

Harrison and Jerome Frank and his memorandum

to me of September 7th. He still seemed to
have it on his mind and he' had it on his desk

before him another memorandum from Jerome Frank

about it. I told him I was going to try and

have Harrison and Frank for lunch tomorrow.
Evidently Jerome Frank keeps needling the Pres-

ident on this thing.
I told the President that I was going,

every Wednesday, to have Frank and Eccles and

Jesse Jones for lunch and the President sat up
straight and said, "Why Jesse Jones?" I said,
"Why not?" He said, "Don't you know Jesse
Jones is in the dog house, very much in the

dog house?" I said, "No." He said, "He's
responsible for killing the Lending Bill."
said, "His leaving, his testimony, all went to
killing the Bill and," he said, "I would not
talk to him while he was away; would not talk
to him for ten days after he came back. FinalHe

ly he asked Pa Watson 'Am I in the dog house?

and Watson told him 'You are half in and half

out'. So I looked at the President and said,
"Well, in the first place, Jessie is the head

of a very important Department and, in the
second place, he will wheedle himself back into
your
good graces and third, I think it's up to
me to hold his hand.
I then gave the President a copy of
Collins' memorandum of the 6th and 8th in re-

gard to strategic materials. He read the thing

very, very carefully, was tremendously interested
and evidently it was all quite new to him. The
President said, "I thought that you could get

quinine in Peru. Find out.

I said, "Now what I want is another
$100,000,000 for this work." So he said, "Ask
Harold Smith if the President through a proclam-

0280
-2-

ation can anticipate the buying and create a deficiency of an additional $10,000,000.
I told the President that we had "missed

the boat" on these things because the Army and

Navy had not gotten their requirements into us
early enough.

I again told the President what we had
done to help out the Navy on the armor plant and
that we were now working with the Army on the

Allison Motors. He said he thought that was
all done. I said, "Yes, the Army reported it
was all done at Cabinet before `I left, but I
found on my return it had not been done and I am
now going to try to hurry it up and that I expected
to announce publicly what we have done for the Navy
80 that will let all manufacturers know that they
can get similar treatment."
Last night on the train I spoke to the

President about getting Nelson Rockefeller as
Assistant Secretary in charge of Procurement.
He did not like the idea. He said, "You don't
want to get too many of these kind of people in.
If you could get him and some Liberal to offset
it, possibly it would be all right.' He said,
"You know, there has even been some criticism of
the people you have brought in.
He brought up the subject again at lunch
and he said, "About that suggestion you made last

night." He said, "If you bring in any more new
publicly and said 'I am for this Administration.

people I want you to get somebody who has come out

I said, "Well, that's all right." And again he
gently criticized the people I brought in. He said,
It's all right. I reminded him I showed him the

list last spring and I reminded him I showed it to
know,
him again last Monday. He said, "I know.
but we have to be careful that J. P. Morgan does
not get control, not that I have anything against
J. P. Morgan because I am talking to him all the
time myself." He said, "I have spoken to Leffingwell on the telephone, and I understood him to
I

say "Tommire Lamont was in Washington, so I am in

0281
-3-

touch with Morgan, but the public need not know

that. He said, Did you do anything about
Forestal?" I said, "Yes, I had him next day
for lunch, but he said he would not come unless
there was war. "Oh," he said, "Well, all right.
He can get Clarence Dillon, who is an old friend
of mine, to come back and take his job again and
he could come down here, but, # he said, "then
there might be come criticism of Clarence Dillon
because his name is Dillonbinisky. (I was glad
I had seen Forestal.)

So he said, "What about Biggers?" I said,
"Well, that's funny. I had Dan Bell ask him and
he thought about it and said his Board would not
let him come." I said, "I would love to have
Biggers. Nobody I would rather have." So he
said, "Couldn't you have him on part time providied eventually he would come on full time?".
He said, "Well, let me take care of that." So
I said, "Well, nobody can get him but you, but I
would love to have him.'

The President told me that the policy of

the HOLC from now on is to make the borrowers pay

back a little extra, if possible, in order to accumulate money. So I said, "Have you told that
to Jones?" He said no. He said as far as

R.F.C. is concerned, they are on a 24-hour basis;
they should only make absolutely necessary loans.
He said, "We should conserve all of our money for

more important things if the occasion arises."

I said, "I agree with that."

000-000

0282

September 12, 1939

The President called me at 3:30. He said,
"Did I talk to you last Friday about doing something

for South America at this Panama conference?"
did not give me a chance to answer and he went on
and he said, "You know, Welles is leaving," # and
enumerated a number of things. Among other things
he said, "I want to do something on stabilization. If
Then he got more and more positive in his statements.
He

He said, "I want to go the whole hog and no quibbling
and I want to do it by noon tomorrow.' If So I said,
"Fine!" But he was more positive than I have heard
him on anything in a long time.

I then called up Welles' office to speak to

him and they said he was at the White House and I
knew from the President's tone that he had an audience.

0283
September 14, 1939

I spoke to Welles at 5:05 to-day and he told me that
he has talked to the President about a loan to Finland. The
President does not want to raise the question of getting
Congressional approval at a Special Session. He suggests
that I advise the Finnish Minister how ho can get it in
New York; that he should stay away from J. P. Morgan
and
that the

suggests that he try Dillon Reed. Welles said
remember; that if the interest rates which they ask in

President suggested some other house which he could not

New York were too high we might make a proposal in their
behalf to Congress after January 1st.

0284
THE SECRETARY OF THE TREASURY
WASHINGTON

September 18, 1939

MEMORANDUM FOR THE PRESIDENT

Continuing my policy of keeping you informed as

to developments in connection with our investigation of
Bank of America National Trust and Savings Association, I

am attaching a copy of a letter together with enclosures
which the Comptroller of the Currency has delivered today
to the Attorney General.

Enclosures

COPY

TREASURY DEPARTMENT

0285

COMPTROLLER OF THE CURRENCY
WASHINGTON
ADDRESS REPLY TO

"COMPTROLLER OF THE CURRENCY"

Sep 15 1939

Sir:

There is enclosed herewith a copy of a letter received by
this office from National Bank Examiner L. H. Sedlacek, set-

ting forth very briefly the facts concerning three transactions
whereby funds or credits of the Bank of America National Trust &
Savings Association, San Francisco, California, were used in an

attempt to eliminate obligations owing to the Bank by its parent
corporation, Transamerica Corporation, or subsidiaries of Transamerica Corporation. Some time ago a copy of this letter was
transmitted personally by representatives of the Treasury Department to Mr. Thurman Arnold, as Acting Attorney General in your
absence from Washington, and a copy with photostatic copies of

pages from reports of examination of the Bank relative to these
transactions was more recently transmitted personally by repre-

sentatives of the Treasury Department to officials of the Criminal
Division of the Department of Justice.
The report of examination of the Bank, commenced on March

31, 1939 and closed on July 21, 1939, (subsequent to the receipt of
the above-mentioned letter from National Bank Examiner Sedlacek),

contains the following statement with reference to an additional

transaction or practice which this office feels it should bring

A

0286
-

to the attention of the Department of Justice:
"Bank carries its own Fidelity Insurance for the

first $100,000.00 and premiums which would otherwise

be paid out to an Insurance Company are deposited with
Transamerica General Corporation. Amounts deposited

prior to 1934 were consolidated at that time in one account under the heading 'Fidelity Bond Losses' and the

balance of $402,336.19 has remained unchanged. Interest
was paid on this account until 1934 when the regulation
prohibiting payment of interest on bank deposits became
effective. Premiums paid since the early part of 1934
have been deposited in another account under the heading of Insurance Reserve' and balance as of March 31,
1939 was $1,870,323.36 making the combined total of the
two accounts $2,272,659.55. Claims for all Fidelity
losses are presented to Transamerica General Corpora-

tion and when paid are charged against this latter ac-

count.

"The above deposit is not shown in the assets of

the bank, nor is it shown in the liabilities under 'Reserves'.

"Circumstances surrounding the transaction indicate quite clearly that the funds belong to the bank
and should be properly shown in its Capital structure
and that the deposit maintained with Transamerica
General Corporation is nothing more than an unsecured
borrowing on which no interest is paid. Predicated upon
these conclusions the deposit is shown as a direct liability
of Transamerica General Corporation and is included with
the other borrowings of Transamerica Corporation and its
Subsidiaries under Excess Loans, exceeding the limits prescribed under Section 5200 U.S.R.S.

"This method of handling self-insurance funds constitutes an unsafe and unsound practice and the question

arises as to the correctness of the published reports of
condition. It is requested that these funds be returned
immediately to the bank in cash and that proper accounts
be set up on the books."

Since receipt by this office of the report of examination containing the above excerpt, efforts have been made to obtain additional

J287

-3information concerning the nature of the so-called self-insurance

plan of the Bank. Accordingly, there are transmitted herewith
copies of a letter, dated August 7, 1939, from Mr. John W. Grant,
President of Transamerica Corporation to Mr. Russell G. Smith,

Executive Vice President of the Bank of America N. T. & S. A.

(which was transmitted to this office with a letter, dated August
8, 1939, from the Secretary of the Board of Directors of the Bank),
and a letter, dated August 30, 1939, from National Bank Examiner
C. H. McLean to Chief National Bank Examiner, Mr. Irwin D. Wright

(which letter was transmitted to this office by letter, dated
August 31, 1939, from Chief National Bank Examiner Wright). In so
far as they may be ascertained from these documents, the facts

relative to the Bank's so-called self-insurance plan appear to be
as follows:

1. At least until a recent date, Transamerica Corporation had
a plan whereby all subsidiaries of Transamerica Corporation obtained
fidelity insurance for the first $100,000 by making payments, analoguus
to premiums, into a common pool. Under that plan the Bank paid 80called premiums to Transamerica General Corporation, a wholly owned

subsidiary of Transamerica Corporation which, prior to July 1937,
owned more than 99 per cent of the stock of the Bank.
2. There was no written agreement between the Bank and Trans-

America General Corporation with reference to the so-called selfinsurance plan.

0288

-43. Transamerica General Corporation is not authorized by its

charter to do a surety or fidelity business.
4. Payments by the Bank to Transamerica General Corporation

are not shown on the books of the Bank either as an asset due from
the Corporation or as reserve funds of the Bank, but were charged
to expenses as paid.

5. Transamerica General Corporation does not handle the funds
&

received from the Bank as trust funds, but carries them on its
ledger as "Deposit of Self Insurance Funds of the Bank of America
N.T. & S.A.". President Grant of Transamerica General Corporation

claims that the funds are considered as actual reserves and this
contention is supported by the consolidated statement of Transamerica
Corporation (which owns all the stock of Transamerica General Corporation) which shows these funds as Reserves for Taxes and Contingencies.

6. Transamerica General Corporation added interest to the balance of the payments from the Bank on its books for each year until
1934.

7. Until the termination of the plan Transamerica General Corporation pays all approved loss claims up to $100,000 to the Bank. From

July 1, 1938 to June 30, 1939 it paid the following:
Holdups
Shortages

Forgery losses

$18,195.73
85,875.86
22,985.10
$127,056.69

0289

-5-

8. At least in so far as the Bank is concerned, the plan of making
payments for self-insurance to Transamerica General Corporation appears

to have been discontinued. The last payment, in the amount of $327,812.89,
was made on July 20, 1938 and covered the premium due to June 30, 1939.

The current premium on the $100,000 self-insurance, in the amount of
$324,725.31, has been set up on the Bank's books, as of August 8, 1939,

under the heading "Reserve for Contingencies Self Insurance".

9. Transamerica General Corporation considers itself liable for all
losses for one year from the date of cancellation of the arrangement, or
until June 30, 1940. It is not contemplated that Transamerica General
Corporation will pay to the Bank the balance remaining in the so-called
reserve fund after that date. From the above quoted excerpt from the report of examination, it appears that the balance, as of March 31, 1939,
was $2,272,659.55.

The information contained in this letter is being submitted to the
Department of Justice for such attention and action as may be deemed ap-

propriate. Should the Department of Justice desire any additional information, it will be furnished upon request.
Very truly yours,

Preston Delano

Comptroller of the Currency.
The Honorable

The Attorney General of the United States.
Enclosure.

0290
TREASURY DEPARTMENT

C

0

COMPTROLLER OF THE CURRENCY
P

Y

ADDRESS REPLY TO

"COMPTROLLER OF THE CURRENCY"

WASHINGTON

January 10, 1939

Comptroller of the Currency
Washington, D.C.

Dear Sir:

I have been requested by the General Counsel for the

Bureau of the Comptroller of the Currency to set forth in a condensed form the more pertinent facts contained in the last reports
of examination covering the Bank of America National Trust and
Savings Association, San Francisco, California, concerning the
following three transactions which have been the subject of
controversy.

In 1931 and 1932 assets of the aforementioned bank totaling
almost $50,000,000 were classified as "non-bankable and loss" in reports of examination. These assets to the extent of more than
$35,000,000 were made the subject of three contracts of sale (referred to hereafter as Inter-America Corporation contracts) entered
into between the bank and the Corporation of America, which was a
wholly-owned subsidiary of Transamerica Corporation. Each contract
provided for payment of the purchase price by the Corporation of

America at the end of one year from date of execution. Maturity
dates of the original contracts were extended from time to time. At
that time Transamerica Corporation owned 99.65% of the stock of the

bank and was, therefore, responsible directly or indirectly for the
threatened impairment of the bank's capital structure. Subsequently,

Transamerica Corporation took over the assets of Inter-America Corporation (successor to the Corporation of America) and assumed its

liabilities, one of which was the balance remaining due on the

$35,000,000 obligation represented by the aforementioned three con-

tracts. The following two transactions relate to the means used in
attempting to eliminate obligations of Transamerica Corporation or
its subsidiaries under the aforementioned contracts:
(1) In 1935 and 1936 the appreciation in value of certain

unrelated government and municipal bonds owned by the bank was written

up to the extent of more than $14,000,000 on the bank's books. Simultaneously, the bank repurchased like amounts of the "non-bankable and
loss" assets previously sold under the inter-America Corporation contracts, applying the proceeds of these repurchases toward the reduction
the

of the liability to the bank under the said contracts. On or about

dates the "non-bankable and loss" assets were repurchased they were

charged off as losses on the books of the bank. In justification for
these transactions it is stated by officers of the bank that if the

-2-

0291

unrealized profits on securities which were written up had been
utilized in the payment of a dividend, more than 99% of that dividend would have inured to the benefit of Transamerica Corporation
or its subsidiaries and the return of that dividend by Transamerica

Corporation or its subsidiaries to the bank for application on the

Inter-America Corporation contracts would have brought about substantially the same result as was accomplished in the manner indicated above, except that by the means adopted the payment of
taxes in an approximate amount of $3,000,000 was avoided. It should
be noted that the obligations under the Inter-America Corporation
contracts were collateralized and that the Transamerica Corporation

and its subsidiaries were solvent corporations and, therefore,
financially able to pay their obligations.

(2) On February 1, 1933, and January 2, 1934, the bank
entered into contracts with wholly-owned subsidiaries of Transamerica
Corporation whereby the bank sold all of its charged-off assets,

including those to be charged off up to July 1, 1937, for a total

consideration of $300,000. Subsequent to these sales some of the
charged-off assets were liquidated and the proceeds thereof, in the
amount of $1,486,185, were credited upon the unrelated Inter-America
Corporation contrancts. On July 14, 1937, a transaction was entered
into whereby the remaining portion of the charged-off assets was resold to the bank by subsidiaries of Transamerica Corporation for a
price of $6,500,000 under a so-called guaranty by Transamerica Corporation that the bank would obtain through liquidation of these
assets the amount of the purhcase price. of the aforementioned
$6,500,000, paid by the bank in repurchasing its formerly chargedoff assets which had been previously sold for only $300,000, a major
portion thereof in the amount of $5,844,386 was made available to
Transamerica Corporation by its subsidiaries through inter-company
book entries, and that amount was eventually credited upon the obligations of Transamerica Corporation to the bank. The remaining
portion of the purchase price was used by a whooly-owned subsidiary
of Transamerica Corporation to eliminate a portion of its indebtedness to the bank on certain real estate contract obligations.
The following transaction relates to a means used by Transamerica Corporation and the Bank of America National Trust and
Savings Association in an attempt to eliminate a separate obligation
of Transamerica Corporation which arose out of a purchase by the

corporation from the bank on October 1, 1931, of certain real estate
carried on the books of the bank as "banking premises," but which
were not being used for banking purposes , for a consideration of
$9,155,786, which obligation had been reduced to less than $6,000,000

at the time of the transaction here referred to. After Transamerica

0292

-3Corporation had purchased the aforementioned real estate, it sold
same to one of its wholly-owned subsidiaries, the Capital Company.
On July 14, 1937, (note that this date is the same as that referred
to in connection with the transaction immediately hereinbefore discussed), more than nine months after the debt due to the bank was to
have been paid to it, an arrangement was entered into whereby the
bank contributed $5,875,000 to the surplus of Merchants National
Realty Corporation (all of the stock of which was owned by the bank
and carried in its bond account), thus increasing the book value of
its investment in the stock of that corporation by the same amount;

on the same date the Merchants National Realty Corporation purchased
from Capital Company aforementioned, for the sum of $5,874,457, the
aforementioned unused banking premises. That purchase price represented the balance remaining due the bank from Transamerica Corpora-

tion on the contract of October 1, 1931. That sum was immediately
paid by Capital Company to Transamerica Corporation to eliminate
Capital Company's liability on its contracts with Transamerica Cor-

poration in connection with its purchase of the properties, and

Transamerica Corporation in turn used the same funds to eliminate

its liability to the bank under the October 1, 1931, contract. In
connection with this transaction it should be noted that in effect

the bank used its funds to the extent of $5,875,000 to purchase real
estate (through the medium of a wholly-owned affiliate), but in its
reports of condition and other public statements the assets so obtained were carried as "other stocks, bonds and securities," rather
than "other real estate owned."

It should be noted that in each of the aforementioned transaction funds or credits of the bank were allegedly used to eliminate
secured obligations of Transamerica Corporation or its subsidiaries
by methods which some persons might deem deceptive, and that none of

the transactions in question were formally approved by the Board of
Directors of the Bank.
Very truly yours,
S. L. H. Sedlacek,
National Bank Examiner.

0293
EXHIBIT C

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TRANSAMERICA CORPORATION

Y

San Francisco, California,
August 7, 1939.

Mr. Russell G. Smith,
Executive Vice President,
Bank of America N.T. & S.A.,
San Francisco, California.
Dear Mr. Smith:

Mr. Andrews has referred to me your letter of August 2,
quoting excerpts from the report of the National Bank Examiner's
examination of the bank commencing under date of March 31, 1939.

Page 2 - Insert 7.
"Self-Insurance Funds.

"The bank carries its own fidelity insurance
for the first $100,000, and premiums which would ordinarily be paid to an insurance company are deposited with
Transamerica General Corporation."
Answer.

These are not the facts. It is true that the bank now
carries its own fidelity insurance for the first $100,000, but the

bank does not deposit the premium with Transamerica General Corporation.

The Examiner doubtless has reference to the plan formerly
in operation under which Transamerica Corporation carried its own

fidelity insurance for the first $100,000 on employees of its subsidiaries, including Bank of America N.T. & S.A. This plan was
and still is in operation in respect to all subsidiaries of Trans-

america Corporation under the plan and each such subsidiary was required to pay and still pays the regular annual insurance premium
to Transamerica General Corporation, a wholly-owned subsidiary of
Transamerica Corporation, just as it would have been required to pay
the premium to an outside insurance company. Thus Transamerica Corporation became and still is the "insurance company" for its own sub-

A.M

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0294

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Mr. Russell G. Smith.

-2-

August 7. 1939.

sidiaries, on fidelity risks up to the first $100,000. Those premiums
did not constitute and were not in any respect a "deposit." They were
an actual operating expense of the subsidiary, and in consideration of
the premiums Transamerica Corporation assumed the risk that ordinarily

would have been assumed by an outside insurance company. Premiums on

all fidelity risks in excess of the first $100,000 were paid by Transamerica's subsidiaries, including Bank of America N. T. & S. A., into

the Fidelity & Deposit Company of Maryland and were treated on the books of
the subsidiary as an operating expense, just as the premiums paid to
Transamerica Corporation by the subsidiaries were treated on the books
of the subsidiary as an operating expense.

"This deposit amounts to $2,272,659.55 and

actually represents reserve funds of the bank that are
not shown on the books either as capital funds or as

assets."

That is not true. Does the National Bank Examiner maintain
that had the premiums on the first $100,000 risk been deposited with
the Fidelity & Deposit Company of Maryland that such deposits would
actually represent reserve funds of the bank! Vis-a-vis Bank of America
N. T. & S. A. or any other Transamerica subsidiary, Transamerica Corporation is in exactly the same position as any insurance company. The
premiums were paid to Transamerica Corporation in good faith in the ordinary course of business and Transamerica Corporation assumed exactly the

same and all the risks that any other fidelity insurance company would

have assumed in consideration of the premiums paid.

Furthermore, it should be remembered that just as in the case
of any insurance company, Transamerica Corporation was liable to each
subsidiary for each and every loss, even if they amounted in the aggregate to many times the aggregate of the premiums paid by the subsidiary.

Although it may not have any bearing on the request of the
National Bank Examiner that the excess of premiums paid by the Bank of
America to Transamerica Corporation, over and above losses so far determined, should-be refunded to the bank, it should be pointed out that the
self-insurance plan adopted by Transamerica Corporation in 1932 covering

itself and its subsidiaries was dictated entirely by a desire to take advantage of the preferential rates on group insurance and to retain for

ourselves whatever profit there might accrue from the excess of reserves
over and above losses. The plan which was in operation for the bank and

0295

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P

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Mr. Russell G. Smith.

-3-

August 7, 1939.

which is still in operation with substantially all of Transamerica Corporation's subsidiaries, has saved those subsidiaries many thousands
of dollars in premiums during the years since 1932; this by reason of
the fact that group insurance premiums are much less than the premiums
charged on unit policies.

Page 8 - Insert 16
"Transamerica General Corporation - Deposit of self-insurance
funds - $2,272,689.55

"Bank carries its own fidelity insurance for the

first $100,000 and premiums which would otherwise be paid
out to an insurance company are deposited with Transamerica
General Corporation."
Answer.

The answer to this statement of the National Bank Examiner is
fully covered under the heading "Page 2 - Insert 7" above.

"Amounts deposited prior to 1934 (should be 1932)
were consolidated at that time in one account under the heading 'Fidelity Bond Losses,' and the balance of $402,336.19
has remained unchanged. Interest was paid on this account
until 1934 when the regulation prohibiting payment of interest
on bank deposits became effective."
Answer.

Interest was not paid on this account. Interest was never
paid on this account. The balance of $402,336.19 reserve on our books
was in effect invested, and interest was debited to "Expense" and
added to the reserve for each year until 1934. It was simply a coincidence if we ceased crediting interest to the reserve when the regulation prohibiting payment of interest on bank deposits became effective.
The regulation referred to did not apply to us. We ceased crediting the

0296

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P

Y

Mr. Russell G. Smith.

August 7. 1939.

reserve with interest when it became self-evident (based on favorable
loss experience) that the entire reserve on our books was more than

sufficient to pay probable losses. The fact that there is carried on

our books a separate account for the 402,339.16 balance referred to
by the National Bank Examiner has no significance. As a matter of
fact, we carry four separate accounts on our books covering the fidelity insurance reserves, primarily as a matter of convenience in pre-

paring statistical data on the operation and results of the selfinsurance plan.

"Circumstances surrounding the transaction in-

dicate quite clearly that the funds belong to the bank
and should be properly shown in its capital structure, and

that the deposit maintained with Transamerica General Corporation is nothing more than an unsecured borrowing on

which no interest is paid."

Answer.

As is clearly indicated in the answers under captions "Page 2 Insert 7" and "Page 8 - Insert 16," the reserves do not. by any stretch
of the imagination, belong to the bank, any more than the reserves,
which are carried on Transamerica's books for depreciation of assets of
its subsidiaries, belong to those subsidiaries. Transamerica Corporation
assumed the risk in good faith and the annual premiums at manual rates
were paid to Transamerica Corporation also in good faith, the subsidiaries meanwhile relying upon Transamerica Corporation to pay all losses,
even if in the aggregate they greatly exceeded the amount of fidelity reserves carried on the books of Transamerica Corporation for each subsidiary involved.
While we are not aware of "the circumstances surrounding the
transaction" to which the Examiner refers, the circumstances disclosed by
our records and files prove conclusively that the reserves do not belong
to the bank and are in no sense of the word a "deposit" by the bank.
The circumstances to which we refer are as follows:
1. The management of Transamerica Corporation never regarded and never
treated the payment by the bank of insurance premiums as "deposits"
by the bank.

0297
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Mr. Russell G. Smith.

-5-

August 7. 1939.

2. The management was aware of the prohibition in the Certificate
of Incorporation of Transamerica General Corporation to the effect

that "Nothing in this Certificate of Incorporation contained

should be construed as authorising the corporation to
on the business of receiving deposits of money."

carry

3. Bank of America N.T. & S.A. could not have regarded the payment
of premiums as a deposit because it must have been aware of the

prohibition against national banks depositing funds with a nonbanking corporation.

4. That the bank did not regard the funds as a deposit is borne out
by the fact that at no time was Transamerica General Corporation

requested by Bank of America or by any National Bank Examiner to
confirm the amount of money that was on deposit with it in respect

of insurance premiums.

5. The premiums charged to Bank of America N. T. & S. A. by Transamerica Corporation, in consideration of Transamerica Corporation's
assuming the risks attaching to such insurance, were calculated on
an actuarial basis, and were in amount exactly the same as would
have been charged by any insurance company.

6. In its annual letter to Bank of America N. T. & S. A., Coast Service
Company (the insurance counselor for Transamerica Corporation)

advised the bank that the premiums were carried in "a reserve on the
books of Transamerica General Corporation. At no time did the bank
deny that the amount 80 invoiced was for "premiums": neither did it
advise Transamerica General Corporation that the amount was to be
carried on deposit in the name of the bank.

7. All losses arising through hold-up, defalcation, forgery, etc. were

paid by Transamerica General Corporation to the Bank of America N. T.
& S. A. without question and in exactly the same manner as any insurance
company would honor claims for losses.

8. Regardless of the amount of losses paid, Transamerica Corporation
charged Bank of America N. T. & S. A. with a restoration premium

to reinstate the self-insurance fidelity bond to its full amount.

9. When members of the self-insurance group ceased to be subsidiaries
they were excluded from the benefits of the plan but were not entitled
to nor did they receive the excess of premiums paid in over losses
paid.

0298

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Mr. Russell G. Smith

August 7. 1939.

10. Since the self-insurance plan was inaugurated in 1932, it is
surprising to say the least that the allegation that the re-

serves belonged to the bank was not made long before now. If
the reserve is to be regarded as a deposit of Bank of America

N.T. & S.A. at this date, it must, ipso facto, have been a deposit of the bank in 1933 and 1934 or any other year. And yet

at no time during the examination of Bank of America N.T. & S.A.
was that reserve regarded, assumed, alleged, or stated to be a

deposit or as part of the net sound capital structure of Bank
of America N.T. & S.A.

Although we have fortunately not had the opportunity of
proving the fact conclusively, it should nevertheless be accepted

as a fact that Transamerica Corporation will pay, until such time
as its obligations under the plan expire by time limit, any and
all losses occurring in the bank even though the aggregate of such

losses exceeds the amount carried by Transamerica Corporation in

its reserve. This conclusion is borne out by the fact that in the

case of self-insurance reserves carried for two other banking subsidiaries, the aggregate of losses paid did exceed the amount of

premiums paid by such banks.

"Predicated upon these conclusions, the deposit is
shown as a direct liability of Transamerica General Corporation
and is included with the other borrowings of Transamerica Corporation and its subsidiaries under 'Excess Loans,' exceeding
the limits prescribed under Section 5200 U.S.R.S."
Answer.

The Examiner is apparently not very sure of his ground. In
one breath he says the premiums were "deposits" and in the next "an unsecured borrowing." Since the premises are wrong in both cases, the
conclusions of the Examiner are necessarily also wrong. The balance
of the reserves still carried on the books of Transamerica Corporation

in respect of Bank of America N.T. & S.A.' risks for fidelity insurance
covering the first $100,000, as well as the balance of the reserves

carried on its books in respect of its controlled subsidiaries, is a
reserve liability of Transamerica Corporation, and is included in its

annual report under the caption "Reserve for Taxes and Contingencies.
Yours very truly,
(Signed) John M. Grant
John M. Grant,
President.

299
TREASURY

DEPARTMENT

OFFICE OF
COMPTROLLER OF THE CURRENCY

August 31st, 1939

Mr. C. B. Upham,

Deputy Comptroller of the Currency,
Treasury Department,
Washington, D. C.
Dear Cy:

In compliance with your letter of August 24th, in which
you request certain information about the so-called "self-insur-

ance" of Bank of America National Trust and Savings Association,
Examiner McLean has endeavored to supply answers to the seven
statements set out in the memorandum of August 12th, copy of
which was enclosed with your letter.

Mr. McLean's letter is enclosed herewith and if the information contained therein is not adequate, please advise me at once,
and I will endeavor to have the reply prepared in accordance with
your desires.
Sincerely,

(Signed) Irwin D. Wright
IRWIN D. WRIGHT

Chief National Bank Examiner

Twelfth Federal Reserve District

IDW:A

300
TREASURY DEPARTMENT
OFFICE OF
0

COMPTROLLER OF THE CURRENCY

P

Y

August 30th, 1939

Mr. Irwin D. Wright,

Chief National Bank Examiner,

1 Montgomery Street, Room 921,

San Francisco, California.

Dear Mr. Wright:

I am enumerating below additional information developed in connection with the self-insurance
fund of the Bank of America National Trust and
Savings Association, which is carried on the books
of Transamerica General Corporation and was criti-

cised in my last report of examination.

This information was requested in Mr.
Tietjen's memorandum to Mr. Upham dated August 12th,
1939.

1. I was unable to obtain a copy of the

charter of Transamerica General Corporation, but
was advised that it contained general corporate
powers and did not authorize the transacting of a

surety or fidelity business.

2. The funds deposited with Transamerica
General Corporation by the Bank are claimed by the
Corporation as general funds and are said to be
shown as earnings in income tax returns. The funds
are not handled as trust deposits but I was unable

to verify the statement that the funds were considered as earnings on which income tax is paid.
3. Transamerica General Corporation pays

all approved loss claims to the bank. In the period
July 1, 1938 to June 30, 1939 it paid the following:
Holdups
Shortages

Forgery losses

$18,195.73
85,875.86
22,985.10
$127,056.69

0301

-24. The amount on deposit with Transamerica
General Corporation is not shown on the books of the
bank in any manner, either as an asset due from the

corporation or as reserve funds of the bank. The

funds when paid over to Transamerica General Corporation are charged to expense and claimed as a deduction in income tax returns.
Transamerica General Corporation carries

the funds on its ledger as "Deposit of Self Insur-

ance Funds of the Bank of America N.T. & S. A.
However, President Grant claims the funds are considered as actual reserves and the heading on the

ledger is incorrect. The contention is supported

by the consolidated statement of Transamerica
Corporation which shows these funds as Reserve
for Taxes and Contingencies.

5. The only authority by which the bank
entered into the arrangement, and it is not believed to cover recent transactions, is as follows:
Jan. 20, 1923. Resolution of the
Executive Committee of the Bank of Italy, State
Bank, to deposit with the Stockholders Auxiliary

Corporation premiums covering forged securities.

Dec. 1, 1927. Paid $50,000.00 to
National Bankitaly Company, Reserve for Fidelity
Bond. To open account.
Sept. '8, 1928. Letter shows National
Bankitaly Company carried in self-insurance account

for the bank the following:

Forgery Reserve

Fidelity Reserve

$154,031.18
51,497.67

Sept. 11, 1928. Resolution of the

Executive Committee to pay $50,000.00 forgery reserve and $31,000.00 fidelity reserve to National
Bankitaly Company.

V

0302

-3June 23, 1931. Resolution of Executive
Committee covering establishment of self-insurance
in the bank.

Dec. 13, 1932. Authorization to trans-

for account from National Bankitaly Company to Transamerica General Holding Company, which would indicate

that the bank considered the funds as part of its

reserves.

6. There is no agreement in existence.

It is stated by officials that it was a mutual agree-

ment whereby all subsidiaries of Transamerica Corporation paid self-insurance funds into a common pool,
instead of paying them out to authorized insurance
companies, so that any savings would revert to the

parent company. It is further stated that Transamerica
General Corporation would have considered itself liable

for all losses, even if in excess of the premiums

paid in by other subsidiaries of Transamerica Corporation. This would appear to be a deliberate underwriting of insurance and not authorized in the charter.
7. Payments to Transamerica General Corporation were made by the Administration Office under
instructions from the Cashier.
The last payment was made July 20, 1938 covering the premium due to June 30, 1939 and was remitted
to Transamerica General Corporation by entry letter
through the Clay and Montgomery Branch of the bank
in the amount of $327,812.89.
The arrangement apparently has been discon-

tinued and current premium on the $100,000.00 selfinsurance in the amount of $324,725.31 was set up
on the bank's books August 8, 1939 under the heading
"Reserve for Contingencies Self Insurance."

I am advised that Transamerica General Corpo-

ration considers itself liable for all losses occurring
under the fidelity bond for one year from the date
of cancellation of the arrangement, or until June 30,
1940, the same as any other insurance concern and

for the period July 1, 1939 to August 28, 1939 it has
paid claims or has claims pending totalling $31,048.29.

0303
4

Mr. Grant's letter in which he refutes the
statement in my report that interest was paid on
this account is in error. A re-check of the account
shows that interest was paid on the balance until
the end of 1934.

I believe the above information to be correct
in all respects, even though a considerable portion
of it was obtained verbally from President Grant of

Transamerica General Corporation and from Vice President Russell G. Smith of the Bank of America National
Trust and Savings Association.

Yours very truly,
(Signed) C.H.McLean
C. H. McLean

National Bank Examiner

0304
September 18, 1939

Lunch with the President.
Spoke to him about the Islands of San Pierre
and Miquelon. He was very much interested and said

he would look into the matter. He told me, in strict-

est confidence, that he 18 leasing hangars and bases
for sea planes in Bermuda and two other places in the
West Indies; that nobody knew this.

I told him that I was thinking of refunding
just as soon as possible. He said, "Well, can't you
get along without increasing the total outstanding
debt now?" I said, "No, that's impossible. I
said, "I know what you told Eccles and Eccles told
Hanes and Hanes told me." I said, "I don't want to
use up things like silver certificates, et cetera, except as a last resort. I want to go ahead and sell
5-year notes or 8-year bonds, whatever the market will
take now. Then, if things get worse we have some
our $500,000,000 worth of notes coming due in December

of these emergency powers in reserve.

He argued some with me, but I was very insistent.
I said, "You have been kind enough to say that you don't
worry about the Treasury and I don't want you to worry
about it and I want to keep our finances in such shape
that we always can see ahead for three months without

financing.

He said, "Well, can't you sell certain securities
for Jones and HOLC?" I said, "Yes, I intend to."
"And," he said, "1f you keep your balances to 1 billion
or 1 billion, won't that be enough?" I said, "That's
what I have in my mind, but I don't want to have anybody
hold a pistol at my head." He argued a little bit
more, but I was very, very insistent and I had my way
entirely.
This is a very important victory for the Treasury because Eccles had him sold on doing something
quite different. I said, "I consider my number one
job is to finance the Government and I want to be able
to continue to do so and not find ourselves in the same
shape that you were in the Fall of 1933."

0305

-2-

I told him that I had been misinformed by
Edison and, therefore, had misinformed the President, namely: that the Navy had come to an understanding with the armament people. I said, "Why
don't you take Admiral Peoples and have him check
up on the Navy and see if they are up to date"Ifonthe
their various contracts. "And," I said,
Army is in no better shape than when I contacted

them some time ago, I think you will find that they
are not up to date.' I said, "You remember, last

year, when we suggested we bring all the Army and
Navy planes here and what a shocking exposition it
was. He said, "Yes." I said, 'Why don't you
"In other words,"
let Peoples check up for you?"
he said, 'you would rather have Peoples drunk on the

White House staff than the Treasury." I said, "Yes,
He
and that's not 80 funny because it's true."
laughed. He said, "Well, I am just teasing
you."
(This refers

I said, "I know, but it's a fact.'

to his suggesting my using Peoples at the last meeting I had with him. Evidently I made an impression
on him why I did not want Peoples.)
He said, "How are you getting along with

Harrison and that investigation?" So I said, "Well,
I am seeing him this afternoon." He said, "Why
haven't I read anything about it in the paper?
Well, I skipped that one and I told him I was going
to tell Harrison and Ransom this afternoon it was up
to them to get these banks to volunteer what they did
during that particular hour. He said, "If they won't
give it to you voluntarily we can make them do it.
said, "How?" He said, "Through SEC. He said,
"After all, the price of Sterling influences the price
of stocks and, therefore, SEC has the right to go in.
Well, I think the President had his tongue in his cheek,
that his suggestion will not hold water.
The President said ne may go up Friday night

to Poughkeepsie. "Would I like to go with him?
said, Yes. He said, "You can stay home on the Day
of Atonement." He said, "I have nothing to atone
for.

I

In talking about the Islands he said that we

0306

might want to lease them because, being one-third
Scotch, one-third Dutch and one-third Jewish, with
that combination "I don't want to have to give a
nickle more than I have to. #
00o-00o

0307
September 22, 1939

Present:

H.M.Jr:

Mrs. Klotz

Tom K. Smith

I've got an idea and it is strictly confidential

and I want you to think about it because you are

the one fellow that can help me. If we should
then, as I understand it, we have to appoint a

decide to move through FDIC on the Bank of America
Conservator for the Bank of America.

You are going out to the West Coast to attend the
Bankers Convention. Knowing the Californians, I
believe the Conservator has to be a Californian.
Now there must be in California a man of Italian
extraction who is on the level and in whom the
people have confidence.

Smith:

H.M.Jr:

You are talking about Rosetti. Rosetti operates
a very conservative bank and is just the opposite

of Giannini. I can find out all about Rosetti.
You get hold of Rosetti and, in strictest confidence,
sound him out without letting him know why. If he
is not at the convention, go to Los Angeles and
see him.

Smith:

I think you have a wonderful idea.

H.M.Jr:

I want someone as a Conservator in whom the worker,

who has his few hundred dollars deposited in the
Bank of America, has confidence so that this propaganda that the Jews are persecuting the Italians
will go out the window.

V. H. Rosetti is head of the Farmers and Merchants
National Bank of Los Angeles.

H. M. Jr. asked me to have Irey investigate Rosetti
and also to send Sam Klaus out to California to see
what he can find out about him.

0308

September 25, 1939

Lunch with the President.

I said, "Mr. President, I don't know why Hanes

is 80 much interested in this question of short term
credits to foreigners. Possibly you can enlighten
me." I said, "After Cabinet, when you told me that
you did not want anything done, I came back and told
this to Hanes and Foley and Duffield. And then to-

day, on my return, I get the inclosed proposed press
release from Hanes." The President read it and shook

his head two or three times going through it. He said,
"I thought I made this thing very clear to Hanes at
Cabinet, but evidently he does not understand it.
I said, "Well, Mr. President, and I don't understand
it, but maybe you will be able to tell me how two and
two make four.' And I said, "Winthrop Aldrich seems
to be awfully close to Mr. Hull and calls him up all
the time." Then the President went on and told me
how he had laid out Winthrop Aldrich when he suggested

that he should do the buying for the English and the
President again repeated his formula that he wanted
something like the English to do their own buying and
the French to do their own buying through some corporation like the Amtorg. I said, Mr. President, it's
lucky that you put someone in the Treasury who isn't
of Wall Street, by Wall Street, or expects to go back

to Wall Street and, I said, "I lie awake nights trying to forestall some of these things.
I said, "I wrote you last week that I am having
my troubles with Eccles. I said, "The time hasn't
come yet to ask for help, but I don't want to lose the
"

advantageous position that I am in now, namely: that
I can choose the time to finance and refund and if
I wait until December then the New York crowd can dic-

tate to me." I said, "Eccles' crowd say that they

want to keep money rates low and we say we want to

clear the track to finance, because if you keep buying
bonds, the normal investor will stay out of the market.
not
The President said, "That's right. He said, "I
going to get interested or worried in the bond market
until the interest rate for ten-year money goes above
3%."
So I said, "Well, that's a long way off.
think you can borrow ten-year money now for 2%; fiveam

I

0309
-2-

year money for 11% I said, "with these huge ex-

cess reserves, there isn't a chance that money will
go to 3% for sometime to come." He said, "Well,
that's my only worry." He said, "You know, I do
these things by rule of thumb. I said, "Well, if
by the first of October the Fed does not get out of
the market, I may ask your help.

He said, "Have you talked to Eccles?' I said,

"Personally not since Wednesday when I had him for
lunch, but I sent two of my men over to see him and
his whole Board and they had a pretty good meeting
and told them that they must let us know when they go

in and out of the market." He said, "Are they doing
that now?' and I said, "Yes." He said, "What about
seeing him yourself?' I said, "I will if necessary,
but I don't want to have any rows with him." I said,
"The less rows between Departments now, the better."

He said, "I agree."

Then I showed him and let him read the memorandum from Hanes in regard to Hanes' conversation

with Doughton and Cooper. The President said, "He's
quite right. We don't want anything until November 1.'
But he said, "He is like a woman who puts the most 1mportant thing last. "I make this recommendation for
the further reason that our business and economic con-

ditions are changing so rapidly for the better that we
should judge all of these matters in the light of the
then existing conditions rather than this far in advance.' He said, "Doesn't Hanes mean that if business
gets better, our income will be so much greater we won't
have to increase taxes?" I said, "Absolutely.
said, "Well, I am very fond of Johnnie Hanes, but Johnnie just does not understand. He said, "If you take
He

a plebescite today as to whether the people would rather

have price fixing by fiat or excess profits tax, he
said, "it would be an overwhelming vote for excess
profits taxes. The people don't want to see individuals and groups profiteer.

I said, "Well, strictly between us, Mr. Presi-

dent, I have not told this to John Hanes, I have asked

Magill and Shoup to prepare a memorandum for me on ex-

cess profits tax, to be ready on the first of October.
I said, "The way I see it, we need excess profits tax,

0310
-3-

taxes on the middle group increased and lower the

exemptions in the lower brackets. He said, "Absolutely! Simple program. Suits me perfectly. But,"
he said, "not until after the first of November."
I said, "You will be pleased to know that

Jerome Frank told me that he was delighted with
Ross Magill's report on the New York Stock Exchange
and that 1f the New York Stock Exchange would carry
out Magill's recommendation he, Jerome Frank, would
be willing to lay off on the New York Stock Exchange."

The President said, "That's very interesting and I
did not know it."
I then told the President that we were going
ahead in extending our purchases for the civil departments outside of Washington, and that Harold Smith
was very much pleased. When I mentioned Harold Smith

he seemed surprised. And I said, "One of the first
things we were going to do was to see whether the
various departments in a particular city were buying
be-

electricity at the same price. I told him this
cause I knew it would tickle him and it did. I said,
"You remember what we did in New York City," and he

said, "I remember very well."
I again took pains to tell him that when I came
back to the Treasury I found the Treasury in a subordinate position and that I had to stay awake nights to
fight these very insidious attacks on the Treasury.
He said, "I outlined to you what my War Indus-

tries Board is going to be." I said, "Yes." He

said, "You know, there are going to be seven positions;
one on prices, another on labor," and he listed them.
"But," he said, "the seventh one I am having the great-

est difficulty in filling and that is to be Fiscal Ad-

visor." He said, "Not but what you and I would continue to run things the way we are now, but I have to
have a leg man." So he said, "Now don't get excited,
but I think I am going to take another one of your men
away from you." I said, "Mr. President, who is it?"

"Merle Cochran. When he gets those things straightened

0311
-4-

out, what would you think of Merle Cochran?"

So

I said, "Well, Merle Cochran is excellent where he

is but I don't think he is suited for you at all.

He 8 too much of a central banker." I said, "Through
the BIS he got too close and friendly with people like

Montague Norman and Dr. Schacht and last week, when
I wrapped these New York foreign exchange dealers over

the knuckles, he was quite shocked. I said, "I don't
think he's the man for you. He said, "Won't he
be

good between the State Department and the rest of them
and
think still
80. stak on your payroll?" I said, "I don't

He said, "Well, Frankfurter's hot dogs are sug-

gesting someone. they want me to take. What would you

think of Dean Acheson?" I said, "Not at all." I

said, "He got out that statement which was unfriendly

to you and, "I said, "you just can't change him."
said, "He goes with this social crowd in Washington,
Arthur Krock and the rest of them, and I just would
not think of him. But give me a little time 80 that
I can find somebody, because, after all, that would be
the key position."
I

a0o-00o

0312

September 28, 1939

Saw the President this morning.

Ag I came in, Basil O'Connor walked out.
said, "This seems like old times having you drive me
out of the President's room.'
He

The President said, "Basil O'Connor has just
made a very interesting suggestion." He said, "In

the first place, O' Connor's office is filled with

sleek, well dressed people who want O' Connor to help
them make contacts with the French and English pur-

chasing agencies. O'Connor said a couple of bankers
have suggested to him why not appoint four or five
dollar-a-year men to help Procurement do the buying
for the French and the English and that all the commissions involved be turned over to the Red Cross.
So the President said, "This is a pretty good idea,
but I don't see why there should be any commissions.

So I said, "Well, that's one of the things I
came over to talk to you about. I can offer to the

French or the English and any other Government the
right to open an account with the Federal Reserve as

our fiscal agent provided that you approve.

The

President said, "Fine! Go right ahead with it."
The President then said, "You know, I had in
six members of the Cabinet the other day to sit around
the table and give me sort of a pep talk," and as he
went along I gathered what he was doing was explaining
to Wallace why on this new board of seven he had to

have an agricultural supply man. He said, "I told

them how during the war the Secretary of the Interior's
time was taken up by sitting on various boards when he
should have been Secretary of the Interior." The Pres-

ident said, "I satisfied them all that they had nothing
to worry about on this new War Industries Board.

So I said, "Well, that leads me to the next

question. You suggested to me that you wanted either
Merele Cochran or Dean Atcheson to be on this Board to
look after fiscal matters and we both agreed that neither

0313
-2-

of these two gentlemen would do and before suggesting

somebody to you, I really will have to find out more
what his duties are going to be." The President
thought a minute and he said, "Well, what's the matter
with Lauchlin Currie?" I said, "That's what I want
to know. Why do you need two of them?" He said,

"I don' t." He said, "What I had in mind is this.

He said, "For example, I am bringing Admiral Leahy
back as my senior Naval Aide." I said, "I know. You
told me that.
"But he does not know anything about supplies,

and therefore," he said, "he will need somebody like

Peoples. He said, "Not necessarily the Peoples, but

a Peoples, and the same way some of these other people

don't know anything about finance.
So I said, "But you have got Lauch Currie." He

said, "You are right. I don't need anybody else." And
then he said, "I don't want to fill up those three vacancies on my Administrative Staff, but" he said, "I can
get rid of Rowe any time because, he said, "McReynolds
is doing such a fine job with personnel I don't need
Rowe. I can get rid of him."
So I said, "If you are bringing up Leahy, why not
make Peoples an assistant to Leahy and hold Leahy responsible for keeping Peoples sober. # He said, "That's
a

good idea. If

Whatever the President had in mind, and he evidently had in mind that one of the seven must be a fiscal
man, I now feel that the fact that he did not have me
present on Tuesday when he was trying to sell a bill of
goods to six Cabinet members, he felt that there was
nothing to explain to me because he wasn't going to interfere with the Treasury and that since Monday he has
decided he does not need a fiscal man and, therefore, he

will use Lauch Currie. So I would say that that idea

has been permanently set aside, at least I hope 80.
He said, "How is the bond market coming along?"

I said, "Fine! I said, "I called up Eccles yesterday,

after that nasty article appeared, to talk to him and I

0314
-3-

got a beautiful letter from him today.' If And I said,
"I don't think we are going to have any troubles.
000-000

0315
October 1, 1939
7:10 p.m.

The President called me awhile ago, and I told him that
we had been asked by the State Department to prepare something for

Key Pittman on the Neutrality Bill.

We felt that the consideration fell into two matters:
One, whether the credit clause in the cash-and-carry plan
now under consideration was contrary with the Johnson Act, and that

we in the Treasury felt that, and were of the view that, the
opposite was the fact. Particularly in view of a memorandum in

the Treasury's files of a conference in my office in 1934 at which
Senator Johnson was present. When we had asked the Senator the

specific question relative to short-term credits, the Senator had
answered that the elimination of short-term credits had not been

considered part of the purpose of his Bill.
The President said, "That's wonderful! That's fine!"
And the second part, with reference to the question of the

extension of 90-day credits, I felt that the President shouldn't do
anything to urge it. That the whole history was that it had been
introduced in the House for the direct purpose to restrict the
powers of the President as to the extension of any such credits, and

that we in the Treasury felt that the President should let the
pressure come from the outside on this.
The President said, "I am in complete agreement with you, and

0316
-2

that is exactly the way I feel, and Cordell agrees absolutely."

I told him that Cordell didn't talk that way to me this
morning. He gave me the impression that he would like to see
this included.

"So would I", said the President, "but I am not going to do
anything about it. The pressure will have to come from elsewhere."
He asked me to send over to him the memorandum, and the

memorandum on the conference in my office, and while he didn't tell
me so in 80 many words, I got the impression that he will see that

it is sent and gets to Key Pittman.

0317
October 3, 1939

Lunch with the President.
The President said, "Some of these people give
me an awful pain in the neck. For example, Joe Kennedy."
He said, "Joe always has been an appeaser and always will

be an appeaser. He said, "If Germany or Italy made a
good peace offer tomorrow, he said, "Joe would start working on the King and his friend, the Queen and from there
on down, to get everybody to accept it and," he said, "he's
just a pain in the neck to me."

And he said, "The trouble with Bullitt is in the

morning he will send me a telegram 'Everything is lovely
and then he will go out to have lunch with some French
official and I get a telegram that everything is going to
hell.'
He said, "The only thing that saves the information
is I know my men."

I gave the President the reasons for my postponing
the financing and told him that one of the reasons was

that I felt that the peace or war question would most likely
be settled this week. He said, "The trouble nowadays is
that the thing you expect to happen does not happen and it
does not follow necessarily that it will this week.' I
told him they had run the interest rates up on me and I did
not want to pay the price.
I told him what I had done in regard to the proposed
silver embargo into India and he thought I had handled it

just right. He said, "If you tell the British today that

they can't put an embargo on the importation of silver into
India they would say 'For Heaven's sake! Run along! And

don't bother me at this time with trivial matters. We are
trying to fight a war.
He signed the memorandum authorizing Public Health

to spend $20,000 for malaria. He read it very hastily
and said "Is this legal?" and I said yes and he signed it.
I told him the reason I brought it over was because I had

initiated it.

He handed me back the memorandum from Captain Puleston

0318
-2-

on his conversation with Mr. Wachtler, of General Motors.

The President said, "That's an excellent memorandum and

I hope to receive more like it."

He showed me a letter from Cyrus Eaton, who was

complaining about the advisory board set up in the Treasury composed of Burgess and Bailie, "two J. P. Morgan men.
"What right did they have being in the Treasury?"

So I said, "Well, Cryus Eaton is getting religion

pretty late in life. And I said, "I wish you would read

this memorandum of Coohran's conversation with Leroy-Beaulieu
in which Beaulieu says that they would have opened an account

with Morgan long ago if it had not been for me." I said,
"After all, Mr. President, unless I confine myself to college professors, if I want to get people who have had training in finance to assist me, I have got to get people of the
type of Burgess and Bailie and Hanes." And I said, "I watch
myself very closely to see that I do the right thing."
The President then asked me how George Harrison was

behaving and I told him about my conversation with Harrison
this morning.

The President said how could I find out what the

English and French are buying in this country. I said,
"If you want all of their accounts to be open, you can
introduce some legislation into the Neutrality Bill which

would make it mandatory for them to have their account with
the Federal Reserve, and he thought a minute and he said,
"No. If I want them to So
do that's
it, I will
just tell them to.
out.
I don't need any law.
He said, "I had these six Congressmen, led by Voorhis
in today, who wanted to put on taxes on munitions and he

said, "I was good. And I persuaded them for the time being to do nothing." He said, "Why just take munitions?
Why not tax the brass fellow or the brass pipe fellow who
makes the shell in its early stages? Why not put a tax
on the copper fellow?" He said, "The best tax is the ex-

cess profits tax and," he said, I told them that if they

want to talk to anybody they should talk to Thurman Arnold
in Justice who has an idea to handle it after the German

anti-trust pattern which," the President said, "is crazy

and won't work. Talk to Jerome Frank and Leon Henderson

0319
-3-

or to the Treasury. The President said that he thought

the best system was excess profits.

I told him Magill's memorandum had come in.

I then let him read Hanes' letter to me which, when
he was through reading, he said, "All that Hanea says is
don't let' put on any extra taxes until we have a war.
He said, "I agree with Hanes. I don't want any war, but
I do want to tax the people who are making excess profits"
for the various reasons which I have said in my letter.
He read my letter and he liked it enormously. He said,

"That's fine! That's grand.' Before reading it I told

him that I was fearful that if I gave it to Hanes that
some of his conservative friends would learn about it and
we had better hold our fire. He said, "How is Hanes getting along?" I said, "Fine." I said, "He was the only

one of the whole group who advisedme not to get out a bond
issue this week."

Hanes.

He said, "There is one thing that worries me about
When he comes to Cabinet I see that he takes

copious notes and," he said, "I don't like it. He says
"How do I know how they will look like 20 years from now?

said, "That's partly my fault, because I asked Hanes to
write a report for me on what took place at Cabinet 80 that
I could read it when I returned, just the way Magill did
but Magill having been editor of a paper was able to do it
"Well," he said, "Gideon Wells,
without making notes.
former editor of the Harvard paper, kept notes on Lincoln's
Cabinet and being one of the few friends that Lincoln had
I

in the Cabinet they are very valuable, but" he said, "if
some other member of Lincoln's cabinet who was not friendly
had kept it, just see what a distorted viewpoint you would
get.

So I said, "While you are talking on that, there is
Cabinet meetings. That's Frank Murphy. I said, "He
keeps pages. He said, "I noticed he did and I am going
to talk to him about it.
a member of your Cabinet who keeps a very full account of

I then showed him my letter of September 26th on
the Chinese tin proposition and he said, "Do everything

0320
-4-

you can to help the Chinese." I said, "I will."
I was mighty glad I had my tax letter because it
was an offset to the Cyrus Eaton letter and when I got
through the President said, "Well, those men don't decide
policy. They just advise you," and I said, "That's right.
And then I said, "Any gains that George Harrison or his
group made in usurping the Treasury's power while I was
gone, the Treasury has completely regained its position."
He said, "Illustrating that the English having an
account with the Federal Reserve and I wouldn't know how
much they would buy -- here's the Electric Boat Company
has an order for 80 of these hush-hush subchasers, only

25 of which are being built in this country; some are
being built in France; some in England and some" I think
he said, "in Holland.
The President said, "On Sunday I went all through
the New York Times to see what stocks I could buy which
in some way did not come in conflict with the Government

and after reading the whole list I only decided there were
two." And he was serious. "One was a perfume stock and
the other was stock in watch companies." He said, "As
the salaries of the girls increase, they will buy more
perfume and lip stick and the also by wrist watches for
Christmas. . So I said, "What about silk stockings?" He
said, "Well the Japanese silk might do that. If So I said,
"What's the matter with mail order stock? He said, "No.

Mail order stock, that might come in conflict. He said,
"There are only two, perfumes and watches.
000-000

M ORR A IDUN

0321

September 29, 1939.

Mr. Pinsent, Financial Counselor of the British Embassy, called
at 3 p.m. today. He stated that he had received a message from his
Government in regard to Indian silver policy. Since the Government
of India desires in present circumstances to conserve its foreign exchange holdings, it has been releasing Government silver to the Indian

market. To make this policy more effective, it is proposed that the
Government of India impose at an early date an absolute embergo on

silver imports. The British prefer that no action be taken without

acquainting Secretary Morgenthau with the plan and seeking his reaction. Furthermore, they would appreciate any personal advice the
Secretary might care to give as to whether such move at this time
might influence the Silver Block to take an adverse attitude on the

Neutrality Bill. Mr. Pinsent desires to hear from us yet today.

I submitted the foregoing information to Secretary Morgenthau
at 3:45 p.m. He asked me to put it in memorandum form for the
Three Economists and Mr. White to start studying this afternoon.
He asked me to tell Mr. Pinsent by telephone that no immediate
reply could be given and that the matter would be taken up on
Monday. I have done this.

With respect to the subject of silver, Mr. Knoke told me by
telephone at 2:35 this afternoon, and in strict confidence, that

the Chase Bank had just given him the following information. The
representative in Mexico of the Chase Bank had telephoned today.
presumably from the Bank of Mexico, stating that the Mexicans believed the drop in silver was due to manipulations by the United
States Treasury, following the Canadian silver purchase which the
United States felt obliged to make. The New York office gave its
representative the information to disabuse the Mexicans of this
silly reasoning. emphasising that the recent rise in silvering had
been due to short-covering; that the subsequent decline had come
when positions were covered; and that Mexican sales of silver had
contributed to this drop.

H. Merle Cochran

Frankli

D.

Receevers Mebrary

160
per T.D.

RHP 9-29-39

FILE
H.

COPY

H.

Cochree

0322

October 3. 1939

MEMORANDUM
To:

Mr. Livesey

From:

Mr. Cochran

Will you kindly forward the following eablegram:
"American Embassy, London.

for Butterworth from the Secretary of the Treasury.
Financial Counseler Pinsent of the British Embassy
has informed me that the Government of India,

desiring in present circumstances to conserve its
foreign exchange heldings, has been releasing
Government silver to the Indian market. To make

this policy more effective, is was proposed
that the Government of India impose at an early
date an absolute enbargo on silver imports.
Pinsent said his Government had instructed

him to ascertain my reaction to this contemplated
measure.

I replied that I appreciated the action of
his Government in consulting no: that I did not

desire to express any opinion as to this policy;

but that I did not raise any objection thereto."

16th

Franklin B. Roosevelt Mbrary
DEGI

ASSIFIED per T.O. 160

RHP 7-29-71

0323
THE WHITE HOUSE
WASHINGTON

September 28, 1939.
MEMORANDUM FOR

THE SECRETARY OF THE TREASURY

will you speak to me
about this?
F. D. R.

N

0324

monder
THE SECRETARY OF THE TREASURY
WASHINGTON

September 26, 1939

My dear Mr. President:
The Chinese Ambassador called on me today

and informed me that he had just learned, this

morning, that the Government of French Indo-China
had announced that from now on no munitions, motor

cars or gasoline Govern-

I
have
and
given him this to try

ment could

to

get an explanation the French government.

The approached

me on an additional Export-Import

Bank against country. I
would appreciate your advising me how far you wish
pass Chinese the called information through belonging sale Ambassador loan up from of Ambassador their from tin to and in the has territory. the asked this Chinese also Bullitt him

me to go with this negotiation.

Yours sincerely,

The President,
The White House.
Franklin D. Roosevelt Library

DECLASSIFIED per T.O. 160

RHP 7-29-71

Confirtantial

0325
THE SECRETARY OF THE TREASURY
WASHINGTON

Dear Johnnie:

I was much interested in your letter of September 20th
and think your schedule of preparatory taxation studies a
good idea. I have discussed taxation with the President,
and we agreed that the time is inopportune for deliberations which involve conferences outside the Treasury. I believe there is general agreement at both ends of Pennsylvania

Avenue that no tax legislation will be offered at this Special Session of Congress.
The President and I are in complete accord with regard

to the central problems of tax legislation. We both feel
that in this period of world conflict when free enterprise
and the profit motive are being attacked on both flanksit-from Fascism on one side and Communism on the other -is particularly important that our tax policy should serve

to strengthen and not weaken our basic institutions.
As I see it the forces threatening our democratic struc-

ture will find support in this country if the government
overlooks the interests of the under-privileged groups while
at the same time permitting over-privileged groups to attain
special gains. In the months to come the discontent of the
groups which have been injured by the war situation will be
aggravated if they feel that favored persons are permitted to
make and keep the extraordinary profits that arise as a consequence of the war. From my own personal experience in the

agricultural crisis of 1933 I know how people react to situations in which they justly feel themselves to be the victims
of social forces, even in the absence of the contrast of
spectacular gains by others.
You yourself told me of the tobacco growers of North
Carolina who have just lost their market and you indicated

that they look to the government to help them. I agree with
you that they, like others who are hard hit by the war, have
a right under such circumstances to look to their government
for assistance. But I consider it wise social policy as well
as wise fiscal policy to obtain funds to help these groups by
tapping the special gains that flow from the war situation.
The President and I are agreed that during the coming

period of increasing industrial activity it would also be

feasible to increase taxes on the middle income groupe and

0326

lower exemptions in the lower income groups. Such action
18 not only warranted by the increased ability to bear

higher taxes but it is also wise as a step in the direction
of putting our fiscal house in order and attaining a more
equitable distribution of our tax burden.
This is not a war tax program. To my mind it is an

appropriate tax program for a neutral country in a world at
war. I feel that through such an enlightened policy we can

check that impetus towards war which springs from excessive
war gains on the one hand and excessive misery on the other.

Such a fiscal program would not only strengthen our neutrality
but
would
help balance the budget in the face of growing defense
needs.

It is impossible to prophesy the nature or duration of
the war abroad. But one line of economic policy is clearly
desirable. We must avoid, as far as we can, distortions of

our economic system which would have disastrous consequences

when the period of expansion slackens. We should not permit
the mirage of a temporary boom and exhorbitant profits to

lead us into situations which inevitably result in severe
contractions later. We should, of course, do everything
possible to promote healthy and balanced recovery, yet we
must be constantly alert to avoid the development of that
type of boom which is largely a war phenomenon and which
of necessity is followed by deep depression and social in-

stability. Taxation intelligently applied is one of the

instruments which can effectively reduce such distortions
while keeping our democratic institutions intact.
I am glad you gave me this opportunity to state my

position to you in writing, although I confess I should not
have done BO had you not taken the initiative in writing to
me. We shall, of course, have ample opportunity to discuss
our tax program at length during the coming months.
Sincerely,

Mr. John W. Hanes,
Under Secretary

of the Treasury,

Washington, D. C.

THE UNDER SECRETARY OF THE TREASURY
WASHINGTON

September 20, 1939

Dear Henry:

Ever so often I am struck with the inclination to set down on
paper, for whatever they may be worth to you, certain views in regard
to the national situation which, unfortunately, due to the pressure of
the problems now upon us I do not have the opportunity to discuss with
you at length. Such views may not be in accord with your own, and in
that case "to the wastebasket" without hurt feelings on my part.
You will remember that on December 13, 1938, prior to the convening
of the last Congress, I took occasion to place before you certain views

in regard to Administration policy to be pursued during that session of
Congress. I respectfully refer you to that communication.
Here goes for another one:

(1) I am sure it is not necessary for me to tell you of my hearty
approval of the purpose prompting the President to call the special

session of Congress, and I am in complete agreement with what I understand will be the limited scope of the recommendations of the President
to the Congress.

(2) Feeling that an attempt will be made at this extra session to
bring up the question of var taxes, I have endeavored to prepare myself
for this emergency by making the following moves: - (a) I am asking
Roy Blough to make a complete survey of all war tax legislation introduced during the World War, (b) I have asked Commissioner Helvering to
make a complete survey of the administrative side of the picture resulting
from those taxes enacted during the World War, (c) I have called a meeting
between the Treasury staff, and the staff of the Joint Committee on
Internal Revenue Taxation, for next Monday afternoon at 3 o'clock to
discuss these questions in detail.
My apprehensions are that there will develop in the Congress a
movement to enact revenue legislation in anticipation of our entering
the war. To my mind this would be a grave mistake, and it is my sincere
conviction that the full power of the Administration should be mobilized
to prevent passage of such legislation if it should be proposed.

I make this statement for the following reasons:

(1) If this country should finally enter the war, it will require a

declaration by Congress, and our entire fiscal policy will be immediately
revised in the light of the then existing conditions. I assume that the

Treasury will have prepared & tax bill to submit to Congress upon the
declaration of war. The Treasury bill will of course be based upon
experience and information relevant to our economic and social condition
at the time its enactment becomes mandatory.

(2) In my opinion, the country expects the special session, under
the leadership of the Administration, to strengthen our national defense,
and make provision for the protection of our people against aggressions
from without and against aggressions from within. This can and should be
done without arousing our people into a frenzy of fear that we are moving

faster than is justified by public opinion. The rank and file of the

American people are favorable to the removal of the present embargo, but
recent events in Russia within the last twenty-four hours, in my judgment,
have reenforced the determination of our people to keep American soldiers

out of Europe. To be frank with you, I am satisfied that the kaleidoscopic
movement in Europe will serve to strengthen the opposition to the proposal

of the President. Our people were tremendously impressed by the speech
of Lindbergh, and I hear them taking that in the past hundred years, Poland
has been partitioned four times by war, and you hear plain men say,
"Why in the hell is it necessary for America to shed blood over a boundary

dispute in Europe?". I did not mean to lapse into this phase of the
situation, but it is important to consider national psychology and its
bearing on the immediate action of the Congress.

(3) The above point is pertinent to the immediate issue I am making

for the reason that the enactment of a war tax bill with its necessarily
drastic provisions will tend to create the impression that the Administration
regards war as inevitable. The very proposal of such a measure as was

circulated among the Senators last spring, and signed by fifty-four of them,
providing for a confiscatory tax bill would have the effect of immediately
retarding the forces of recovery on every front, and result in a sudden
application of fear that would stifle the present dominant spirit of
economic recovery for which you and I have so patiently and persistently
striven to accomplish.

(4) You will also find that the opponents of the President will drag

out again the old skeleton of war mongers and war profits, and undertake
to relight the political antagonisms against munitions makers from the
DuPonts down. In spite of the fact that the opponents of the President

know that a war tax bill will eliminate profits, they will contend that

we are driven into war by the hidden forces and powers of those who seek

to fatten upon the miseries of the world. I do not see how they can get
by with this plan, but it affords such a masterful theme for demagogues,
combined with the confusion of the public mind that it will not be
neglected or postponed in this session of Congress. It is from this
group that you may expect to originate the movement for the immediate

passage of a war-time tax bill. but it will hardly be proposed until after

- -3-

the passage of the President's neutrality measure, and will be offered
then as an embarrassment to the Administration under the guise of contributing enormously to the movement to keep us out of war.

(5) Just one other point. and this is most important. I am convinced
that if this Congress passes the President's proposal, and keepe its hands

off war-time taxes, that the revival of private enterprise in all its
implications, which I shall not here detail, will multiply Federal revenue,
increase the national incone to over eighty billion dollars, and thereby
contribute to the solution of our great problem - the balancing of our
Federal budget.
Sincerely,

Johnnie HavesThe Honorable Henry Morgenthau, Jr.
Secretary of the Treasury
Washington, D. C.

0330
October 5, 1939

At Cabinet, Frank Murphy sent me a note which said,

"For the first time in my life, at my age, I am hating.

And
heinsaid,
"I hate the Nazis. I never hated anybody
before
my life."
I gave the attached memorandum to the President

and said. "I would like to talk with you and Hull after

Cabinet,
whereupon
loud to the
Cabinet. the President proceeded to read it out
Hull gave an example of someone who came in today

and wanted us to bring over works of art from Europe to
this country for safekeeping and he said he thought the
initiative should come from those countries who own the
works
of art. He felt that the same thing applied in
this case.

I pointed out that 1f the French wanted to take

the initiative, they could sell part of their gold to us

earmarked in this country and use those dollars to acquire
gold from any neutral country and ship it over here and we
would
it on
arrival,
it has been my policy only to
pay
forbuy
gold
after
it had8.8
arrived.
The President then said, "But you did use warships

last year," and I said yes. f said, "Do you want to use
them again to bring over gold?" and he shrugged his shoulders
and left me with the impression that the initiative should
come from either Switzerland, Belgium or Sweden. "After
all,' he said, "it would not be difficult to come into the
Tripartite 1f they wished to," . and I said no.

I asked Hull what he wanted me to do and he said

please
a
cable.prepare a memorandum for him on which he could base

The President asked the Cabinet what wolfram was

and nobody knew. The President said, facetiously, "Can't
'Before we do that, I would rather issue apple certificates
because I own plenty of them." And I got a good laugh.

you issue some currency backed by diamonda?" and I said,

0331

October 9, 1939

(dictated October 10th)
Lunch with the President.

Told the President that there was a man in America

who had five letters to five different individuals from

Germany, and that he was here representing Dr. Schacht,
who tried to work up sympathy to back Sohaoht to overthrow

Hitler. I heard of this through Merle Cochran, who learned
of it from Leon Fraser, who was one of the five. Another
one of the five was Felix Frankfurter. The President was

very much interested and said he would like to see Frankfurter and me at 9:30 Tuesday morning.
The man in question is Adam von Trott. Frankfurter
knew him two and one half years ago. He' a Rhodes scholar;
handsome, tall German, with an Oxford accent. He has asso-

ciated himself with Mr. Carter who 18 the head of Institute
of Pacific Relations, which 18 financed by the Rockefellers.
Mr. Carter called up Frankfurter for an appointment and
brought von Trott down. Von Trott talked about everything,
the gist of which was were we going to back the English in
a policy to exterminate the Germans, because if we did it
would only force Germans like themselves to back Hitler,
but that if the English would be reasonable, there would
be a chance for peace.

Frankfurter said he was never 80 surprised in his
life to know that Iknew that this man had seen him and until I told him he had no indication that he had come from
Schacht.

The President told me to get hold of J. Edgar Hoover,
which I am trying to do through Frank Murphy, and have him
investigate him, his room gone through, etc. etc. The
President feels quite sure that he must be out of the Foreign
Office to do underoover work here and that after we have the
report he expects to turn it all over to Ambassador Lothianhe
to turn over to their Scotland Yard. The President said
does not want to know who the head of Scotland Yard is in

the United States. It seems, back in 1914, that ron Ribbentrop did just this sort of thing in Canada.

At lunch I talked to the President about my financing
and told him that with Daladier and Chamberlain talking
Tuesday and Wednesday, respectively, I questioned the ad-

0332
-2-

visability of doing the financing and that, 11 it was

war, whatever we sold this week would sell off and, if
it was peace, why they might go up. The President
surprised me by saying, "Well, I don't agree with you on
what may happen if there is war or peace becase, he said,
"with commodities selling off in this country, the English
using all their supplies that they have on hand," he said,
"how can anybody tell what will happen domestically, in
the world, or in the Government bond market. Therefore

I think it's advisable to postpone it."

I told him we wanted to increase our bills by

- $50,000,000 next week. He said, "All right but how
about issuing some more silver certificates? (He certainly sticks to his ideas.) I said, "Well, let's keep
that for a rainy day.
I told him that we could sell another $250,000,000
worth of notes of RFC, but I was sure Jones would kick

when he learned he would have to pay above one percent
interest for a three-year note when he was now borrowing

from the Treasury at one percent. The President seemed
to be amused to think that Jones would have to pay more

than he is paying the Treasury. I said we could also

borrow $100,000,000 for United States Housing, but if I
did not increase my bills my cash balance would go down
to $650,000,000 by December 15.

I then told him about the lunch which Cochran and

Cohen had arranged for Bishop Shiel of Chicago last

summer with Henry Ittelson, A1 Lasker, Louis Strass and
others; that it had been Corcoran and Cohen's idea that
the Jews in America should show their appreciation to the
memory of Pope Pius XI for the liberal attitude which he

had taken towards minority races; that at this luncheon
the group left the impression with the Bishop that they
were favorably impressed with the idea. While Corooran

and Cohen had $1,000,000 in mind, no sum was mentioned at

the luncheon. Subsequently, the Bishop sailed for Rome;
saw the Pope, who approved of the idea, and the Bishop re-

turned and let it be known as to how the present Pope felt.
That Ben Cohen had asked me to assist him to get the Jews

to come through with some kind of a gift. The story seemed
to be entirely new to the President.
I told the President that Harold Ickes had called

0333
-3-

me in the morning to try to get me to intercede in

getting passports for the 400 Jewish medical students
studying in Scotland and the President said he was opposed to giving any vias to Americans, whether they
wanted to go to Germany or France or Sootland. The
President felt he could not make an exception for the
students wishing to go to Scotland.
The President said that in a roundabout way he
had heard that counterfeit money either was or will
come in from both Germany and Russia and to inform Chief

Wilson. I told this to Herbert Gaston last night, to
follow it up.
I told the President that I had a nifty for him

(based on the attached memorandum). I said, "There will

be somewhere between 10,000 and 20,000 able-bodied seamen

let off if and when your embargo is lifted." The President said, "Well, I question that, because after all," he
said, "I am hopeful that Congress will liberate that part

of the bill which permits American passengers to go on
cruises to the West Indies, South America and the Pacific

Coast.' I said, "Well, suppose it 18 only 5,000.
I
"At Cabinet

still say I have a nifty for you. I said,

you remarked that John Lewis was not coming through in

backing you on your fight to lift the embargo. I know

Gardner Jackson very well and he helped me with the C.I.O.

unions in the Maritime Commission.' The President said,
"Well, C.I.O. is only on the West Coast. The Maritime

union is different; it's A. F. of L. on the Atlantic.
I said, "I still have a nifty for you."

I told him something about Gardner Jackson. He

said, "I would like to meet him sometime. He said, See
if you can find out from him, without letting him know that
the President wants to know, is Lee Pressman a Communist.
If

I told the President that we had been making a preliminary study on the German oil situation and had come to
a conclusion, based on the Standard 011 of New Jersey's

information, that Germany was self-sufficient as far as

gasoline and lubriating products were concerned for her
army. I said, "We are not satisfied with this and I am
rather shocked to find how little the Army and the Navy

know and how little there is in Washington. I think it
is very important. It's a delicate thing for the Treasury

0334

to go into some of these places to ask and I would like
to have Lauchlin Currie to help us. As your assistant
(Told White to do it last
he can go places we can't."
night and White told me that Lauchlin Currie was tickled
to death.)

The President said, "I saw in the papers that the
short of oil." He said, "Everybody makes the mistake in
estimating the consumption of oil in Germany in war time
because, he said, "I suppose it's safe to say in peace
times 75% of the consumption is by private cars and they
have stopped that entirely. Furthermore," he said, "fuel
oil is practically never used in Germany for heating purposes." He said, "I suppose most of the heating in private
homes in Germany, for their little stoves, they use cheap

Department of Commerce said that the Germans would be

ground ooal."

I said I agreed with him completely and I said that

Germany had perfected proceeses in getting gasoline out of
coal to such an extent that, as far as we have gone, we be-

lieve that they were self-sufficient. He agreed with me.
I

asked him whether he had instructed the Navy to

put out an air control over the route that the IRIQUOIS
was going to take. He said they would do it today.

I then showed him for the first time a list of the
purchases that the French were going to make, supplied to
me by Leroy-Beaulieu. I drew the President's special at-

tention to the fact that the French desperately need searchlights which they have on order from the General Electric
and the Sperry Company and that, through the Army orders,
the French would not get deliveries until some time in
June. When I talked to Leroy-Beaulieu I said, "I will try
to get you every other one," and I was delighted that the
President said that he would have them given every alternate
one.

Much to my surprise, the President said, "How will

we get this over to the Army" and I smiled. And
he said,
"Shall we ask Woodring or Johnson?' I again smiled.
said, "Well, in view of the trouble that I had on the French
planes with Woodring, I suggest that you tell both of them,
but for Heaven's sake don't let on that I am feeding this

stuff to you. He said, "I will tell General Watson.'

Well, unfortunately, Watson was out to lunch, 80 I went

0335
-5-

in to see Miss Le Hand; told her about this; asked

her to follow through for me, which she said she would.
Then when I learned that she was 80 terrifically upset
about their being submarines on the Atlantic Coast, I
said, well, I had every good reason to believe that
there is no systematic air reconnaissance being made
by the Navy and it seems to me that the Atlantic Coast
should be divided up into zones and the Navy can do one

of two things: they can say wewill take it all, or the

practical thing would be to say we will give Coast Guard,

let's say, from New York to Cape May, and give the Army
another zone and the Marine Corps another zone, and I

think it's most important. She agreed. She promised
she would talk to the President that afternoon and let

me know.

I let the President read the memorandum which had
been furnished to me by Bailie and Greenbaum on Bailie's

troubles with Robert Allen and Justice Douglas. The
President read the thing very carefully and said, "Well,
there certainly is nothing to this." He said, If you
and I, Henry, started to sue a columnist every time he

said something that wasn't so, we would be suing them once

a week.'

I asked the President if he had any feeling about
Bailie and Burgess being here. He said none, other than

that several congressmen and senators had talked to him
that I had too many people coming from New York, but other-

wise he had nothing. So I said, "Well, I have been having
a little trouble with him and what about letting them go

home?" He thought a minute and said, "Why don't you handle
in

it the way I handled the Stettinius Board? I announced
view of the fact the United States was not going to get into
the war, they had been down here to make a study and report
and go home. And he said, "You could say that Bailie and
Burgess had made their report. They were going home. And
come back." (This 18 the best I can remember. How ac-

when you needed them you could call for them and have them

curate this is, I don't know :- this part of my conversation.)

I subsequently saw Bailie for about an hour and when
he asked me what the President said, I told him that the
President was entirely satisfied with his story on the
Bailie-Bob Allen-Douglas business and that the President

0336
-6-

had indicated that he would leave it to Bailie and me

to decide what our relations should be. But I didn't
want to say what the President said, that Bailie should
go. After long conversation Bailie said that he and
Burgess had been talking about this for three weeks and
had felt that in view of their respective businesses
that they might have to devote less and less time to

the Treasury and more and more time to their businesses.
For example, how did I feel about Burgess attending a
Directors' meeting of the National City Bank this week?

I said it was out of the question, just the way I felt
it was out of the question for Bailie to attend the

C & O meeting. He said, "Well, he was just going to
be in the same hotel and would only have breakfast with

the people but not attend the meeting. Well, after
long talk, Bailie said that he did not want to seem, to
a

the public, that he was driven out of the Treasury twice.
I said, "Well, that is of course ridiculous." And that,
therefore, he and Burgess felt that the thing to do was
to come here less and less and then not come at all.
He said that after a couple of weeks we could plant the
story that they were not coming here regularly any more.
I said, well he had been thinking this over for three
weeks and it was a new idea to me and I wanted to sleep
on it. Bailie reminded me that Jim Perkins, Chairman
of the National City, was sick and that Mr. Burgess
would have to go back. He said, "For example, I was
riding up town the other day and Tim Fox said to me,
I hope you are not going to stay in Washington too
long because there are so many things we need you for
here in New York'.'
000-000

TREASURY DEPARTMENT

0337

INTER OFFICE COMMUNICATION

DATE October 6, 1939

TO

FROM

Secretary Morgenthau
Mr. White

Subject: A Possible Needy Case

1. If the present neutrality law 18 enacted with the

"cash and carry" provision one of the effects, as you know,
will be the disemployment of a large number of ships, those
now going to Western and Northern Europe. It has been estimated that more than one-half million gross tons of shipping
will be rendered inactive. Although a part of the shipping
in the North Atlantic can be diverted to other routes there
will remain a large volume of idle ships.

As a consequence, there will result a large increase in

the number of unemployed seamen; how many I do not know; it
may be as much as 10,000. There are several cogent reasons
why seamen should receive special treatment:

(a) Seamen are not eligible for the usual forms

of unemployment compensation.

(b) The skilled seamen represent an indispensable
asset to every merchant marine and the dissipation of
this asset should not be permitted.
(c) Seamen as a group represent one of the most
volatile groups among the workers and are strongly
organized. Consequently their disemployment might have

undesirable political effects.
(d) It is a clear case where one group suffers
seriously in order that the interests of the whole com-

munity may be protected.

2. It seems to me here is an excellent opportunity to
bring home the point you recently raised with respect to taking care of certain groups that are bound to be especially
hurt as a direct consequence of national policy. I am wondering whether you might not be interested in getting a detailed
report on this from Mr. Harris or the Maritime Commission and
canvass the situation to see what plans can be devised to pre-

pare for the situation.

0338
The German 011 Situation

Can Germany obtain under present conditions enough oil

to effectively prosecute the war?

An examination of confidential reports submitted by
Intelligence Department and of published articles and data
on various aspects of the German oil situation reveals no
adequate basis for a definite answer to the above question.
The evidence does, however, seem to point to the likelihood that Germany within the first twelve months of war
will have available - (a) from her accumulated stocks, (b)
from her current production of natural and synthetic oils
and gasoline, and (c) from imports from only Balkan production, enough oil and gasoline for that period - provided
Germany uses no more during the next twelve months of war
than she has during the last months of "peace".
the Standard 011 Company of New Jersey, and the Army

Captain Puleston expressed the opinion that the war
needs of Germany would not exceed her peace time consumption.
This opinion is based on two assumptions, Germany's ability

to curtail non-vital uses of oil and our Army's opinion that
Germany's war time military needs will not be as great as
generally supposed. In the report of the Army Intelligence
Department available to us there are no data that can be
offered in substantiation of the validity or the invalidity
of this view.

Mr. Sadler, Vice-President of the Standard 011 Company,
Germany can obtain and produce enough oil and gasoline to

in charge of the European field, was of the opinion that

meet her war time needs.

Both these views are contrary to the opinions which we
German military publications by German authorities.
To obtain additional data and information which would
help to answer the above question with some degree of
assurance, the following is suggested:

have found in several other sources, including articles in

1. A detailed and careful study by military and
naval experts of Germany's war time needs.

2. A check with oil experts familiar with the

German situation of the data we now have on Germany's

0339
-2-

productive capacity of synthetic oils and her stocks.
3. Collection of information with respect to the
present condition of the Polish oil fields.
4. Collection of further information with respect
to Russia's possible export surplus and her capacity
to transport oil to Germany.
5. Collection of further information with respect
to the potential increase in Rumanian and Hungarian
production of oil within the next twelve months.
I. How much oil has Germany been using in peace time?
Estimates of Germany's domestic oil consumption during

the past twelve months are in the neighborhood of 60 million
barrels. The estimates on this item do not vary greatly
and the figure can be accepted as approximately correct.
II. How much oil does Germany have on hand in stock?

Altogether the information available on this matter is
too inadequate to justify any estimate. Estimates from

numerous sources vary from one month's to one year's supply.
the Army Intelligence Department calculates that Germany has
at least 17 million barrels on hand. On the other hand,
Standard Oil's estimate based on analyses of Germany's pro-

duction, imports, consumption, etc., results in a much lower
figure than that.
III. How much oil can Germany import under present conditions?
If it can be assumed that the naval blockade will prevent Germany from obtaining any oil by sea transportation
and if it be further assumed that Russia will not supply any
substantial quantities of oil to Germany, then German imports
must come from Rumania, Hungary together with the production
of the Polish fields just acquired. Rumania alone produces
over 30 million barrels in excess of her own consumption
needs. That alone is half Germany's consumption during the
past twelve months.
IV. How much oil does Germany produce?

Germany produced about 5 million barrels of natural
oil in 1938, which was probably enough to produce all the

0340
3-

lubricating oil she needs. In 1939 the output of natural
crude oil will be increased to well over 6 million barrels.
Other forms of oil and gasoline can be made from
brown coal, lignite and coke. Germany has supplies of
these materials adequate to produce all the gasoline she
needs, but she does not at the present time have plant
capacity sufficient to produce even one-half her peace time
needs. In 1938 Germany is reported to have produced about

13 million barrels of synthetic oil and gasoline. By the
end of 1939 she will have stepped it up to possibly 18 million barrels. By the end of 1940, (baring destruction of
plants by the enemy) she can probably increase her capacity
another 25 percent or so. Altogether by the end of 1940

Germany may be able to produce 30 million barrels of oil
and gasoline.

V. What will be Germany's war time needs for oil?
Estimates vary greatly as to Germany's war time needs

for oil and gasoline. Captain Puleston believes that her
war time needs will not exceed her peace time consumption
for last year. Mr. Sadler expressed the view that her war
time needs would not exceed her expanding productive
capacity plus present stocks and available imports. In
other words he believes that Germany will not lack oil and

gasoline necessary to prosecute a long war.

Other writers feel that the war time needs will be in
excess of her peace time needs; these estimates range from
75 million to 200 million barrels a year. We have no data

at our disposal which would help us to know which views
are more dependable.

If this government is keenly interested in the oil
situation in Germany, the reports and information now available in Washington will have to be extended and improved
in
order to supply satisfactory answers to the significant
questions.

THE WHITE HOUSE
WASHINGTON

HIGHLY CONFIDENTIAL

October 5, 1939.
MEMORANDUM FOR

H. M., JR.

Is it true that Earle
Bailie is suing Mr. Justice
William Douglas for slander

or libel?
F. D. R.

0341

9-39
0342
On March 26, 1939, there appeared in the "Washington Merry-

Go-Round" an article describing a conspiracy by "Old Guard elements"
to unseat William McC. Martin, President of the New York Stock Ex-

change, and to put in his place "a tough guy" to confront Chairman
Douglas and his successor. The article named Earle Bailie as one
of three leaders of the conspiracy.
The conspirators were charged with specific acts, including
the calling of a "secret meeting" at which strategy was decided
upon. The impression given was that there was dirty work afoot.
To those who knew of Bailie's efforts to cooperate with theTreasury
and with the SEC it was susceptible only of the construction that
he was a double crosser.

Upon Bailie's return to New York after a six weeks' absence
he was shown this article. Through his counsel, Mr. Bruce Bromley,
he complained to George Carlin, General Manager of the United
Feature Syndicate, which controls the "Washington Merry-Go-Round"

and requested a withdrawal of the charges. Bromley gave Carlin

a detailed statement in which Bailie categorically denied that he
had any connection with any such conspiracy, if one existed, was

not in sympathy with it, was in no way a participant in any of the
acts charged, and had never met one of the three named conspirators

and had not seen the other for months. Subsequently Carlin re-

ported that Robert S. Allen, the author of the article, did not
think he should make any retraction because his story had been

AM

0343
-2-

verified by "an entirely reliable source," which he named as the
new Supreme Court Justice, William 0. Douglas, and indicated that

Bailie, who assumed that Justice Douglas had been misquoted,

tried for several days to reach him on the telephone. Failing in
this, he wrote Justice Douglas on April 27 inquiring whether Allen
was correctly quoting Justice Douglas. No answer was received up
to May 23 and on that date Mr. Bromley wrote to Mr. Carlin asking
for an apology.

In the meantime, Bailie had called upon Mr. Jerome Frank,
new Chairman of the SEC, whom he knew to be Justice Douglas' friend,
to

discuss the situation with him. Frank saw Douglas several times.

Bromley also called on Justice Douglas at the indirect invitation

of the latter. Douglas said he had talked to Allen, and had "indicated to Allen that he had heard "rumors" and reports to the effect that Bailie was connected with an effort to unseat Martin as
President of the Exchange. He declined to give the name of any
informant. On June 7 Justice Douglas had Mr. Frank write Mr.

Bromley a letter justifying his action on the ground that he was
only repeating what he had heard.

Bailie never threatened to sue Justice Douglas or intended
to do so. He wrote him on June 22 expressing his disappointment
that Justice Douglas was unwilling to give the name of the person
who had made the false charges and concluded with the statement

that "if this situation now stands as you wish it, it is terminated
as far as I am concerned."

.

Justice Douglas would 80 state if requested.

0344

THE

THE SECRETARY OF THE INTERIOR
WASHINGTON

OCT 9 1939
Hon. Henry Morgenthau, Jr.,

Secretary of the Treasury,
Washington, D. C.

Dear Henry:

Following my conversation with you over the phone this morning I
am outlining the situation with reference to the more than 350 American
medical students who have been studying in Scotland and are prevented
from returning because of new passport regulations in the State Depart-

ment.

The American Medical Association has been appealed to, as well as

the Association of American Medical Colleges. It seems that for more
than ten years the number of applicants for admission to medical schools
in the United States has been in excess of the number which the schools
were able to accept, in recent years the number of applicants being

twice the number of students actually admitted to the first year class
in medicine. I am advised that the medical schools cannot gear their
facilities to meet the demands of qualified applicants because of the
necessity for closely supervised laboratory work in the first two years
and for intimate personal contact with patients in the last two years.
It was this situation which resulted in many American students attending certain Scottish medical schools.
The students involved are matriculated in three Scottish medical
schools, viz., The School of Medicine of the Royal Colleges, Edinburgh,
Anderson College of Medicine, Glasgow, and St. Mungo's College of Medi-

cine, Glasgow. The distribution of students according to classes is as
follows:

Approximately

70 entering the Second Year
100 entering the Third Year
110 entering the Fourth Year

60 entering the Final Year

As I have stated, the American Medical Association and the Association of American Medical Colleges have been appealed to, and both asso-

ciations will discuss the question at meetings to be held this month.
A solution of the problem is difficult for several reasons. The universities in the United States are completely filled, although I understand
that five schools, including Stanford University, have signified their

0345

willingness to aid in the solution, provided that other schools in the
United States and Canada will agree to cooperate. Another difficulty
is on the question of credits. The universities which these students
have been attending are so-called extramural schools of medicine which

do not provide a degree or qualification registrable in the British

Medical Register but admits the student to the examinations of one of
the licensing corporations, as, for instance, the Scottish Conjoint
Board. If the student passes these examinations he obtains from the

corporation a qualification which is registrable. Admission require-

ments of these extramural schools are below the standards for regular
university admission. Therefore, some adjustment would have to be made
with regard to credits if these students were to be intergraded into
the American medical schools.

It seems to me, however, that the quickest and most satisfactory
solution would be to grant passports to these students so that they may
return to Scotland and complete their medical work. I understand that

they are quite willing to return to Scotland if the passport difficulties can be cleared up.

Mr. Charles R. Roberts is Chairman of the Joint Committee of
American Clubs of Scotland. His address is 545 Fifth Avenue, New York.
Sincerely yours,

Secretary of the Interior.

-2-

0346

FEDERAL SECURITY AGENCY

OFFICE OF THE ADMINISTRATOR
INTEROFFICE COMMUNICATION

October 9, 1939
TO:

Mrs. Klotz

FROM:

Mary E. Switzer

The Public Health Service has had a number of letters similar
to the attached from Mr. Michael J. Quill and has had a number of

personal conferences and interviews with representatives of the

foreign medical students. A sample of the kind of written reply is
attached.

You will see that the Public Health Service has already discussed the matter with the State Department and been advised that there

is nothing further to be done there. The Service does not feel that
it can take any action whatever in connection with the admission of
students into American medical schools.

Enclosures.

24

0347

September 18, 1939

Mr. Michael J. Quill,
2150 Crescent Avenue,
Bronx, New York.

My dear Mr. Quill:
The problem of the 400 medical students to which you
refer in your letter of September 13 has been discussed
with the State Department a number of times and there is

nothing that can be done to relieve the situation as far
as passports are concerned.

For a number of years applications for admission to
American medical colleges have far exceeded the teaching

facilities that are available and I assume that this is

one, if not the only reason that these students undertook
their studies abroad. The Dean of one of our medical
schools told me that he had received about 1,000 applications for an entering class which had to be limited to 70.
If more were accepted the standard of teaching would have
been reduced to a level which would not have enabled the
graduates to be licensed to practice medicine.

Under such circumstances, you will see the difficulty
in gaining admissions to schools which are already filled
to capacity. The matter has received our sympathetic consideration and I am sorry that I have no satisfactory solution
to offer.
Very sincerely yours,

Acting Surgeon General.

0348
2150 Crescent Avenue

Bronx, New York
September 13, 1939

Dr. Thomas Parran

Surgeon General of the United States
Washington, D. C.

Dear Dr. Parran:

It has come to my attention that 400 American students
who have been studying medicine in Scotland are being denied
the rights to continue their studies. The State Department
has refused to issue passports and the American Medical schools
have refused to accommodate them.

These students are American citizens, graduates of American

colleges and universities. They have spent the major part of
their lives in preparing for a profession which now, through
no fault of their own, they cannot attain. Many of them have
but a year or two to complete their training and some just
their final exams. It is unthinkable that these American
boys should be deprived the right to continue and complete
what they have struggled to make their life work.

I feel that these American students deserve the assistance

of all who are in a position to help them. If you could aid

them in securing passports or if that is not possible help them

to gain admission to our American medical schools, you would be
doing them a great service.
Very sincerely yours,

(Signed) Michael J. Quill
U. O. P. W. A.
Local 16

N

0349
October 9, 1939

The President, at lunch today, said to do just
what we are doing and forget about it.

All

TREASURY DEPARTMENT

0350

INTER OFFICE COMMUNICATION
DATE

October 9, 1939
TO

FROM

Secretary Morgenthau

Edward H. Foley, Jr.

For your Information and Confidential
A few days prior to September 28, 1939, State Department

advised us that before the outbreak of hostilities British authorities
had arranged to send a war plane to the United States to be imported
temporarily for experimental purposes. The consignee was Group Captain

G. C. Pirie, Air Attache of the British Embassy. The plane was to be

tested by the Army, which had made a similar arrangement with the British

to test the Bell Fighter, our fastest war plane.

Upon the outbreak of hostilities the Army cancelled its arrangements with the British authorities. Through inadvertence the
British shipment was not cancelled and the plane was laden on the
SS AMERICAN IMPORTER which left Liverpool September 20, 1939, bound

for the United States. The AMERICAN IMPORTER touched at Belfast
September 25, 1939, but was unable to land the plane. The AMERICAN
IMPORTER reached New York on October 4, and the plane which was in two

crates was unladened. The crate containing the engine is now in the
Appraiser's Stores on general order. The crate containing the rest of
the plane is now on the dock of the United States Lines. It is planned
to place it this afternoon in a Government bonded warehouse or in the
Appraiser's Stores, preferably the former. It will be entered in
Durning's name and will be on general order. The plane cannot be transferred to another vessel for direct or indirect forwarding to England
because of the export embargo. It could not be left on the AMERICAN
IMPORTER for return to England since the carriage of the plane is forbidden by Section 6 of the present Neutrality Act.

We were advised on October 6 by General Yount that the plan
of placing the plane in bonded warehouse had "very high" approval. He

returned this morning to state that, after a conversation with the Chief
of Staff, it was felt the Treasury should be informed that the approval

Game directly from the President, who regards the importation as extremely

dangerous.

The Army is particularly desirous that Captain Pirie be put to

no expense in the matter, since the whole arrangement was made for the

benefit of the Army. I believe that we shall be able to handle the

matter without charge.

Durning's original plan was to store the plane at the Army
base in Brooklyn, but the Army would not accept delivery because of the
dangers involved.

ENTh.

0351
October 14, 1939 - 10 a.m.
After I showed the President that England had spent

a hundred and twenty million dollars in four days, half of
it yesterday, to maintain the pound he seemed quite shocked
and this information started him off on a long conversation
as follows:

(Statement attached)

Bullitt told him last night that the English and French

air forces were even worse than the people admitted; that
Germany is producing 40 planes a day or 1200 a month; that the
very best that England and France could look forward to would

be to have England produce 400 a month and France 200 a month

or a total of 600 or just half of the production of Germany.

Therefore, England and France were going to establish three
points in Canada. They are going to manufacture airplanes in
mass production in Montreal across the border from Niagara Falls
and opposite Detroit; that we, the Treasury, would have to study
some way of helping them finance it.
The President said"as to our policy the way things are
going we do not know when the United States will be challenged,
and our air force is not in any better shape than England and
France. Therefore, we must look forward to doing something

about it. He said"next year's budget will be out of balance
about three and one half billion. Let's say that we will give
no more money for Public Works in the form of subsidizing states
and municipalities; that we will take practically all of the
money away from Hopkins, this leaves perhaps 500 million to take
care of the needy in the south and in the big cities; that we
will take half of the money from CCC. All of these funds should
total about three billion dollars. We will transfer some of the
money from the regular appropriations to the Army and Navy so
that when we are finished we will have a picture that the regular
appropriations for the regular departments, including Army and
will
Navy, will be approximately on a normal basis. The budget
be out of balance three and one half billion - 500 million for
Relief and three billion dollars for one item - aircraft. With
that figure we will break the rest of the World if they try to
keep up with us."

The President said, "I have not told this to another

living soul. I have not even mentioned it to Bill Bullitt.

Now, how to finance it. I cannot remember whether that first
2% tax on income for relief purposes in New York State was
under me or Lehman." I said, "It was under you". The President
said, "We will have a tax to be known as a National Defense Tax

to raise two billion dollars and nobody can kick." He said, "I
want you to think about what kind of a tax it should be." I think

the President has a magnificient idea and I am most enthusiastic.

--

0352

I said, "Mr. President, I have a companionate piece for
this. Since the Munich Conference, I have worked out a financial
Monroe Doctrine which I hope will be called the Roosevelt
Doctrine, and is planned to make your "Good Neighbor Policy"

work. I would like plenty of time to discuss it with you on

Tuesday." He said he would be glad to see me, unless the appointment with Herbert Lehman should interfere.

What the President did yesterday in telling Aubrey Williams
that he had to live within the present appropriation until the
first of March, plus what he told me to do has done more to
reassure me,as to the President's constructive thinking power,
than anything that has happened since I went thru the battle with

him last March on his so-called Recovery Legislation.

The President said, "I will give you a tax program that
will take care of your government bonds." He said this to me
after I said to him, "You know, Mr. President, you keep telling
me that government bonds are too high. You ought to be very much
pleased that they are as high as they are - and just because the
money has been raised so easily people do not appreciate what I
have gone thru".

0353

TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE:
To

Secretary Morgenthau

FROM

A. Lochhead

October 13, 1938

SALES OF DOLLARS IN SUPPORT OF POUND STERLING

October 10, 1938 to October 13. 1938 inclusive
British Fund
October 10, 1938

$ 20,500,000

October 11, 1938

15,000,000

October 12, 1938
October 13, 1938

American Fund

$3,100,000

Pound Sterling Range

$ 4.75-3/4 - $ 4.78-3/8

-On

4.75-1/4 - 4.76-1/4

21,500,000

-0-

4.74-5/8

60,000,000

3,200,000

$117,000,000

$6,300,000

-

4.73-1/4 -

4.74-3/4
4.74-1/4

-

and
39

THE WHITE HOUSE
WASHINGTON

my dear Mr. President.

Jain really very
new

much your excited idea national about to

together

defense, 11 the budget defenge and

a with a new 1 tax.

Iam sure we can
put it across to

the any
Herry

0355

I handed coty this of of

to the 1 Pies.
He seemed very

much pleased said 0354
he thought HOME of

it only day

(Do not know exact date)

0356

H. M. Jr. called Grace Tully and said, "Triple, triple

confidential. We have very good reasons to believe that
Senator Smathers took a fee of $5,000. illegally. We know that

he took it and did not report it in his income tax. There is
talk about town that he is going to be appointed a Judge. We
turned it over to the Department of Justice."

0357
October 28, 1939

The President told HM,Jr today that he did not
feel as well about conditions this week as he did last
week.

m

0358
November 21, 1939

Lunch with the President.

During my discussion with the President at
lunch, the question came up about Giannini and the
President asked me where the matter stood and I told
him that we had been going into the whole matter;
that we had Jim Landis going over it and I wanted to

bring in two other people and what did he think of
Dean Lloyd Garrison of Wisconsin. He said "Excellent."
I said I was also going to bring in Eddie Greenbaum.
He said, well, when would I make up my mind on

the thing. I said I had not yet made up my mind, but
hoped to have a brief for him on his return and I

thought it was sufficiently important for him to look

at the brief and see the people who were advising me

and he said he would.

And then he said, in a rather forceful way,

"You know the circumstances in connection with the
opening of the Bank of America." He said, "That
crooked Crocker crowd tried to keep the Bank from
opening through crooked means." And I said nothing.
And I said, "Well, in 1934, they appointed a fellow
as President of the Federal Reserve who owed Giannini
$12,000,000 and we had to get rid of him."

I had quite a difficult time with the President

over getting him to agree to my doing some $500,000,000
new money financing next week. He knew that our balances were $1,400,000,000. He said that Johnnie Hanes

told him that it was not necessary to do any financing
at this time.
I said, "Well, Mr. President, in 1936 I built up
our balances for you so that in July on through election
we did not have to do any financing." I said, "Without
trying to be immodest, I have had considerable success.
I recommend this: leave my balances up where they are

and then maybe let's let the thing run off gradually

next summer." "Well, why couldn't I do all bills?"

-2-

0359

I said, "Because I want to keep them for a rainy day."

He then told me that one stock exchange house in New
York said that beginning in January business was going
to be bad and that Mr. Percy Johnson, former head of
The Chemicals, was in and told him the next two years
would be wonderful, and if I did some new money finan-

cing now would it hurt business? (How it could hurt
business I don't know, but I assured him it would not.)
I was prepared for this, because White gave me

some talk last night about their using silver certifi-

cates and that the President wanted to try to use every
device to avoid having to go to Congress to increase the

national debt limit and I told Harry White, last night,
that I was sick and tired of all of this monkey business.
He said, "Well, if you call it monkey business, that damns
it." So I said, "Why doesn't your friend Currie think
of how permanently to solve unemployment and things of
that kind rather than trying to tinker with the currency."
And I said, "I am certainly not going to be part or parcel
of it for the last year I am in the Treasury." I said,
"If I had followed Currie's advice on the railroad car
situation," I said, "I would be in a pretty kettle of
fish because the railroads have had as big an increase
in freight as anybody forecast and they have been entirely able to take care of themselves 'without any
bottlenecks blocking them' and have repaired their old

cars and built sufficient new cars without any help from

the Government, which is just 100% opposite from what

Lauch Currie prophesied" plus White!
The President then started to jump on Johnnie
Hanes again over his statement about Eccles. So I got
over to the President -- he said Hanes should never have

criticized Eccles -- so I got over to the President my
conversation with Eccles just before I left. I asked
Eccles if he had anything and he did not tell me and I

said "Eccles has no business to be talking about taxes
any more than I have to be talking about excess reserves."
And I said, "Furthermore, you told Hanes and me not to

talk about taxes, but it's all right for Eccles to go
ahead." So the President said, "Well, those rules just
apply to you and me." I said, "I know. That's the
trouble. And, furthermore, I will live up to those

rules as long as I am with you." And that pleased him
very much. But he said, "That still does not answer my

0360
-3- -

criticism of Johnnie Hanes." I said, "Well, you know
the story about little Audrey, that two Wongs don't

make a Wite", and he said "O.K."

I don't want to give the impression that our
lunch was not friendly. It was very friendly and he
was in very good humor and asked me particularly how
Henry was getting along out West and I told him, but
we did cover quite a little ground.
He then gave me this document by Randolph Paul,

who evidently was asked by the President to prepare a
study on taxation and, to my amazement, the Presid ent
knows that he is Johnnie Hanes' personal tax lawyer.
And he then said, "You know Bob Hinckley of Civil Aeuro-

nautics." I said, "I know who he is." He said, "Well,
his brother is Collector of Internal Revenue at Salt Lake
and someone has summoned him to Washington because he
solicited contributions." He said, "I don't mind if
you fire him if he is guilty, but don't let it all get
out in the papers beforehand. And he said, "Look into
it," which I will do.

0361
November 30, 1939

Lunch with the President.
The President asked me how my bond issue went

and I told him very well and he seemed satisfied. I
said, "Fortunately for me, the Russian-Finnish situation did not break on Tuesday".

I spoke to him about the troubles we were having

with the Self-Help Co-ops and gave him the memorandum,
prepared by Foley, and asked the President whether he

wouldn't transmit it to Brown. I said the man who is
giving us all the trouble is Corrington Gill. So the
President said he could take care of it.
He said, "I understand that your costs are high."
said, "True, but we don't believe in laying off the
I

people because they happen to be unskilled or all thumbs,
because we feel that is the sort of people we should

reach." He said, "I agree.

I told him that Bell had been following the course
very carefully. He said, "Give me the figures on what
it costs to take care of a white person under the SelfHelp Co-op for a year compared with what the District of
Columbia costs are for a white person who is on WPA for

a year. He said, "When I have those figures, I will
take the matter up with Gill.

He said, "Henry Wallace never misses a chance to

knock the Self-Helps, but I know why." I said, "I know
that way down deep, Wallace was opposed to all cooperative
movements. The President said, "I know. One of Wallace's real fears is against corporation farming and collective farming."
Then told him the story about Purvis and Bullitt

and he told me that he had written Bullitt a letter a
week ago, which more or less must have paraphrased my

memorandum to him on the subject of joint purchases. I
told him how Purvis and Greenley were in here yesterday;
that I told them I could not do anything to help them
and that they would have to go to the State Department

and tell their troubles there and ask the State Department to pass it on to the President. The President said,

"That's right." I told him that Capt. Collins told me

0362
-2-

only yesterday that they had been ready to do some-

thing in regard to aluminum, but they could not find
the Frenchman with whom they were supposed to work.

I then told him why I wanted Dean Acheson.

The President said, unhesitatingly, that he would be
fine. He read my memorandum very carefully in regard to what we proposed to do. I said, "If we agree
on Saturday and Sunday that this is the plan, do you

want me to consult with you again?" He said no, but,
he said, just tell these people to bear in mind that
the Crockers originally tried to steal the Bank of Italy
and it was will Woodin who kept them from doing it and
or
they should bear that in mind. (He said this two
three times and, of course, what he has in mind is he,
personally, does not want to be dragged into the thing
for having opened it.)

So he said, "Have you informed the Attorney Gen-

eral about this?" and I said, "No, because it is no
concern of his." The President said, "I don't know,
is there any criminal angle to this?" and I said, "No,
there is not." He said, "What about SEC?" I said,

"I haven't kept them posted as to the most recent movement, but we are in constant communication with them.

He said, "Fine! He said, "Don't you think you ought
to tell the Attorney General about it?" and I said, "No.
It's not necessary. It's none of his business. The
President said, "O. K." He said, "But be careful that
if you do get rid of the Gianninis that they don' put
somebody in who wants to get control and who represents
the old Crocker crowd." (Now, what he means by that,
I don't know."

I said, "Well, we have a new wrinkle in mind.
Heretofore any contract made with a bank under reorganization, it has always been stipulated that the RFC
through Jesse Jones should pick the Directors. We pro-

pose this time to state that the Comptroller of the Currency should pick the Directors, which means that I can
come to you and ask you who you would like to serve as

Directors and whether any people we have in mind are
acceptable to you. So," I said, "you need not have any
fear about who the ultimate control of this bank will go to,

in case we have to make a change. He said, "That's O.K."

0363
-3-

I then told him what we had done about turning
down the Navy on their 60% rate on Consolidated flying
boats and that I proposed, from now on, to make was
all of

our closing agreements public. He thought that
fine. I said, "That will keep the Republicans, like
the Senator from New Hampshire, from criticizing us.
I asked if he agreed with Alsop and Kinter to
let them have the stuff through September and he said
he did not know; that I should ask Steve Early.
I said, "Mr. President, you most likely know that
poor little Coast Guard has had to take over the entire
patrol of the North Atlantic during the cold, cold winter

months while your Navy goes down to Cuba and plays around

in the balmy sunshine. He said, "No. When did that
happen?" I said, "About a month ago." He said, "I
thought the Coast Guard liked the cold. They always
go up to Alaska in the summertime." I said, "Well, the
least that you could do for us is to give us four long
distance flying boats to help out.' He said, "Well,
send me over a memorandum on what kind you want. I
said, "The Navy is opposed to this." He said, "Well,
you send me over the memorandum.

The President said, "You saw in the press what I

said about additional taxes." And he said, "I am having a lot of fun seeing them yap on both sides."
I told him Paul was over here working and we

hoped to get for the President, shortly, what Paul's
various suggestions would cost or what we would gain
by them. He said, "Fine!"

I found the President a little bit on edge, al-

though he was very nice with me.
000-000

President
1. clean whoson

2, self Help-co.op

(costof
per compared
indistrict
white) to cost of w.P.H

3. , Purvis - Bullit

4. form flying boats.
5- absof+Katmen

3 ships modal

-

1

0365

November 30th, 1939

(Afterthought, dictated December 4. )

In my Thursday lunch with the President, he wanted

us to collect every dollar plus the 50% fine and then
put Moe Annenberg in jail. Frank Murphy leaned over

to me and said to me, during Cabinet, that he was going
to send Moe Annenberg to jail.

In

0366

Cabinet, December 1, 1939

(Dictated Dec. 4, 1939)

The President told me at Cabinet to try to find

out whether Russia or Germany was buying up principal
sources of supplies needed by France or England and,

if they are, to see what we can do to stop it.

A

0367
December 4, 1939
2:45 pm

(After return from White House lunch)
Present:

Mr. Foley

Mr. Cochran

Mr. Duffield
Mr. Bell

Mrs. Klotz

Dr. White, for latter part of meeting
after the above had left the Secretary's office.

HM,Jr: The President of the United States says
he wants, tomorrow, at his press conference to announce
that in view of the honorable gentlemen, the Finns, and
the Honorable this and the Honorable that, when he accepts the check of the Finns, which he understands that

Ihave to do, he, the President of the United States, is
going to direct little me to direct little you (Bell)
to put this thing down in a special thing, earmarked,

so it just stands out on a line all by itself, 80 that

he can say, when Congress meets, he 18 going to ask

Congress to take this little line which says -- how
much money? Quarterly payment?

Mr. Bell: $180,000 or something like that.
HM,Jr: And he's going to ask Congress to donate it
to the Finnish Red Cross or something like that. Now,
he said, Tell me how to do it. I said I would have something over in his hands tonight. Good-bye! Good-bye!
(Waving good-bye to the group.)

Mr. Duffield: I thought you looked awfully pleased

walking back from the White House!

Mr. Bell: Wait a minute!

0368
-2-

Mr. Cochran: He has a question.

Mr. Bell: Well, as long as he's going to recommend it to Congress, why not go at it in a straight
fashion; ask for an appropriation of an equivalent
amount. It goes into the Treasury. He has no authority to set it aside. Only thing we could do would be
to hold it in suspense for a period until such time
HM,Jr: Can you do that?

Mr. Bell: Yes. Suppose we can. Supposed to

cover
money forthwith into the Treasury. Suppose
60
daysthe
might
HM,Jr: And what would happen if you held it in

suspense for 60 days legally?

Mr. Bell: Oh, nothing. The Comptroller General

mightholding
call upout
and
"Where is this receipt you have
been
onsay
me?"
HM,Jr: What would you tell him?
pense.

Mr. Bell: Just tell him we are holding it in susHM,Jr: What he wants is some kind of a statement

he can give to the press which will be in the form of
instructions to me. I said I would get something over

tonight. I am telling you (Cochran) so you can tell
Mr.
Hull's office what we are doing. It's foreign
affairs.

Mr. sign
Bell:toYou
ident can
you.want a draft letter that the PresHM,Jr: No, I don't think it necessarily has to
be formal. Just a press release that he will ask the

Secretary of the Treasury to hold this in suspense.
Mr. Foley: Until he can make appropriate recommendations.

HM,Jr: Inasmuch as he will recommend to Congress,
in his annual message, that this amount be donated to
the Finnish Red Cross.

0369
-3-

Mr. statement?
Bell: Finnish Red Cross is what you want to
put in the

HM,Jr: I hope that. I don't know what else the
country donates it to. Certainly not munitions.
Mrs.
Klotz:
express of the four of you is
just too
funy.
AllThe
different.
Mr. Bell:
submarines.

I would like to give them a couple of

HM,Jr: Isn't there a Finnish Red Cross?

Mr. Cochran: They are soliciting funds.
would
say Finnish
up andHM,Jr:
let meI see
it about
4:15. Red Cross. Fix that

Mr. Bell: Want to say "relief" or more broader

subject than Finnish Red Cross?

Mr.Cochran: "Rehabilitation of Finland".
HM,Jr: I think Finnish Red Cross would be the

best thing. Did Ritter ask for funds in his appeal?
Mr. Cochran: Yes, in his appeal for Red Cross he
asked for medical supplies and things of that sort.
HM,Jr: Do you need a lawyer on that?

Mr. Foley: Certainly not! Certainly not!
Mr. Bell: If you want it done you had better leave

him out! I am sure it's illegal, but O.K.

Mr.
to give
it.Foley: If he wants some help we will be glad

HM,Jr: While you are out there, dictate a letter
of transmittal for me to give to the President because
I want to leave here at 4:30. I have a sick boy at home.
Mr. Bell: You don't care whether that money is

paid in Washington or New York? Have an idea the Finna

0370
-4-

have made arrangements for the National City to pay it
over to Federal in the usual manner.
HM,Jr: Maybe we will want a caremony. Maybe
the President wants to receive it and make a gesture.
What do they pay it on?

Mr. Bell: The 15th. I think the thing to do on

this thing 18, Gene, when he has fixed it up, I think
you ought to walk it over to Steve Early; explain what
the President has in mind; give it to Steve to give to
the President as long as he's the press man, and say in
view of this would the President want to receive the check
and make a little speech or does he want me to receive it.

I think 1f Dan has it right after press conference, I will
look at it, give it to Gene and Gene will walk it over to

Steve.

in. )

The group left the office and then Dr. White came
Present:

Dr. White:
Mrs. Klotz

HM,Jr: When I got through with the President -- this
is going to be awfully hard to explain because I don't understand it myself; all I k how is that Sumner Welles preceded me just before I had lunch with the President, and
it was a quarter of two and they announce that Mr. A. A.
Berle was on the outside. Berle came in and we had about

45 minutes and the President cross-examined him on this
whole business, this whole conference thing, and about the

agenda and sort of establishing the fact that everything

they had done up to now was kosher, and 80 he sort of started
and went through the whole rigamarole and I made him say we

were on schedule.

When Berle walked in, I asked the President if it was

nice to high-pressure me after lunch. All they tried to

0371
-5-

get at was whether they should do it on a unilateral
basis, country to country, or all the countries together.

You could see the President wanted something done. Berle

did not tell him what they were going to do. I said,

"Mr. President, do you want a super-super Federal Reserve?"
"No."

I got this out of the conference, they don't -- whatever they do in the future, out of this Welles-Berle thing
they don't want it in any way tied up with the old debts.
That he said. He says, It is perfectly agreeable if there
is to be some new unit of exchange; that they should be made
up of Treasury representatives in each country. The President said "Give them a nice uniform 80 they will think it's
important. I said, "Make me a member if it's going to
be a nice uniform. He said, "Maybe we will tie it up with
the Fisher Index and have that kind of a dollar." The President said that. Berle admitted that they did not have anything yet, but that this was terribly important and we had
to have something -- I am vague because they were vague.

When I got outside I said to Berle, "Let's understand
each other. Did the President agree to anything in there.
"No.

"Did you make any recommendation to him?"
"No."

"Now, Berle, you know that I have been working on South

America for three or four years. Up to now, any time I
wanted to do something I got tripped up. I said, "For
seven years we have given them lip service. I want to do
something, but this is Welles' and your show and just in
order to do something after seven years you wantto do something which is economically unsound." He said, "I certainly
don't." I said, "I don't know whether it is or not, because
have not seen the questions. But it looks like, after
I

seven years, we are going to give something that will not

hold water. I said, "It would be just plain silly." He

said, "I don't want anything that's uneconomic. He said,
"If we find it will not hold water, then we can kind of

soften the whole thing down to make it seem very unimportant."

0372
-6-

"It seems to me," I said, "very unfortunate that

after all this time that it has to take a financial
route and then fall flat." Well, of course, he said,
he had to keep his Committee going.

He said he did not know that he was going to be

called. He was out at lunch and he was sent for and
he was just as much surprised as I was. Which may or
may not be true. But that's roughly what happened.
It may or may not make sense to you, but certainly Welles
18 getting worried.

Dr. White: I gather the situation is this: that

Berle 18 troubled because he does not think that there
18 a great deal in that channel, but he feels that something must be done and he feels that Welles is very
strongly -- they have got to come out with something

and if they don't come out with this, there 18 very little
else that they can come out for that will be important.
We met this morning. I said we would have a series

of questions for him. My suggestion. He did not ask us
to do it. I told him I was tied up and could do it all
right by this afternoon. I said would four o' clock be
all right and he said yes.
HM,Jr: He tried to sort of make it look like he was
waiting on us, which was ridiculous. Then he tried to go
through the motions of resigning; I should put somebody
at the head of the Committee. I said, "No, Mr. President,
Mr. Welles feels this thing 80 deeply and his responsibility
as your representative 80 greatly that I feel that he should
have his man representing him on that Committee and Mr. Berle
is perfectly adequate and all right and we will give him all
the support

Dr. White: Yes, we can work all right on the outside.
HM,Jr: I just wanted to let you know the kind of a

dizzy meeting

Dr. White: The reason why it's dizzy, they haven't
got any definite plan and they are getting franctic and Welles'

whole Latin-American program may be jeopardized by what they

come out with, but 1f they can come out with a Bank it sounds

like a lot to a layman.

0373
-7-

HM,Jr: It wasn't very nice, but that's the way

Welles works.

Dr. White: Well, we are giving him some very excellent questions and suggestions which will give him

an opportunity to stall.
(Dr. White left)

000-000

I had a chance to explain to the President that
I worked all day Saturday on the Bank of America thing

and just what happened and I again got a clearance from
him.

The President read Bell's memorandum on the Budget

and he said, "Why is Bell 80 pessimistic?" I said, "He
isn't any more pessimistic than anybody connected with
the Government.

I gave him an outline of Irey's memorandum on McNutt
and he was very much interested.

0374
December 6, 1939

The President gave me an O. K. to go ahead on the
financing.
I gave the President Blough's analysis on how to
raise $500,000,000 and also gave him Blough's analysis
of Randolph Paul's report.

AM

0375

Extra Copy

December 1, 1939.
COPY

Mr. Hanes

Mr. Blough

The memoranda of Mr. Randolph Paul which were submitted to the Treasury

Department contain 31 points involving possible tax changes which would
increase revenues, 15 points involving changes which would decrease revenue,
and a plan for an excess profits tax. The following suggestions appearing
in the memoranda have not been under active consideration by the Treasury
Department during the last eighteen months:
I. The problems involved in the following recommendations appear
not to have been considered at least in recent years:

1. Clarify the law to make taxable any excess of the
principal sum of insurance installments above the
principal sum of the life insurance policy at the
time of the insured's death.
2. Authorise the courts and the Board of Tax Appeals to

relax the rule of res judicate in meritorious tax
cases.

II. With respect to each of the following items. the problem has
been actively considered in recent months but the solution
proposed by Mr. Paul has not been considered:

1. Impose income taxes on stock dividends heretofore
considered to be nontaxable.

2. Establish a conclusive presumption that gifts made
after the decedent reaches sixty years of age are
made in contemplation of death.

3. (a) Eliminate the tax on intercorporate dividends
where stock ownership gives no control.

(b) Stiffen the tax on intercorporate dividends in
cases of inexcusably complicated corporate
structures.

4. No plan for an excess profits tax has been prepared
in such detail as that presented by Mr. Paul, although
the general problem has been considered.

0376

-2III.

The following problems have not been actively considered
during the last eighteen months but were actively considered
in 1937. 1938. or both years.

1. Eliminate the deduction for nonbusiness casualty
losses or restrict them to a fixed percentage of
the taxpayer's net income, or treat them as capital
losses.

2. Limit the allowance for the deduction of interest
on noninterest borrowings to $500.

3. Limit the allowance for the deduction of nonbusiness
bad debts to $1,000 in the case of each debtor.

4. Limit the allowance for the deduction of taxes on
nonbusiness property to taxes on small homes.

5. Allow a deduction of perhaps $100 a year for medical
or dental expenses.

6. Limit the deduction for payments by the employees to
pension trusts to perhaps $5,000 for any one employee.

7. Limit exempt building and loan associations to those
of a genuine cooperative character primarily related
to financing home ownership.

8. Tax nonresident aliens and foreign corporations upon
income from sources within the United States in such
a way that there is no discrimination in their favor.

9. Provide that all tax suits and proceedings shall be
brought against the United States, eliminating the
highly artificial distinction between suits involving

the United States, the Commissioner and the Collector.

RB:fab
12-1-39

Extra Copy

0377
December 4. 1939.
Mr. Hames

Mr. Blough
Subject:

Possible method of raising $500,000,000 additional revenue.

In this optional method it is proposed to raise approximately $300,000,000
additional revenue from increases in the personal income surtaxes, and
$200,000,000 from increases in the estate and gift taxes.
The suggested rate schedules are attached. Formal estimates have not yet
been made but a comparison with other rate schedules indicates that these
schedules would raise approximately the indicated amounts.
I. Personal Income Surtaxes

The surtaxes at selected levels of income after deduction of exemption
are shown in the following table:

(In thousands of dollars)

Total surtax

:

Surtax net income

Present rates

Increase

Suggested rates

2

$

20

$

20

40

100

60

10

300

480

180

20

1,260
7.700
30,000
286,000
641,000

2,500
16,120
43,420
299,400
654,420

1,240
8,420
13,420
13,400
13,420

5

50

100

500

1,000

It will be noticed that this rate schedule does not provide for any
decreases in the higher surbax brackets. It does not increase rates on

brackets of income above $100,000.

0378

-II. Estate and 01ft Taxes

The estate taxes under the present rates and under the suggested rate
schedule are shown in the following table:

Total estate tax

Net estate after
:

Suggested rates

Increase

:

:

specific exemption

(In thousands of dollars) Present rates
:
20
40

100
200
500

1,000
10,000

2,000
9,600
26,600
89,600
222,600

1,800
5,400
21,000
54.500
182,000
417,000

4,962,600

5,547,000

$

600

$

$

1,200
3.400
11,400
27.900
92.400
194,400
584,400

There have been no increases of the present scale in the estate brackets

above $6,000,000.

It is assumed that the gift tax rates will be increased to three-fourth

the proposed estate tax rates.

III. Note Regarding Other Income and Estate
Tax Changes

For the sake of simplicity, the optional plan is limited to rate increases.

The bulk of the additional revenue would probably have to come from such
increases under any plan. Certain changes in exemptions, deductions. etc.
which would increase the tax base, would no doubt be considered and to the
extent adopted. would noice possible smaller rate increases than those shown.
IV. Note Regarding Excess-Profits Tax

If it is desired to impose an excess-profits tax as part of the revenue
plan, the increases in surtax rates and estate and gift tax rates could be

kept smaller than those shown in the suggested schedules. A considerable
amount of additional work would be necessary to develop a formula for an

excess-profits tax sufficiently complete to make practicable an estimate of

revenue yield.

RS:fab

13-4-39

0379
Surtax schedule for individual income tax designed to
Faise approximately $300 million additional income

:

a

1

of dollars)

Rate

percent

1

2

Total sartax
:

(in thousands

-

Surtax
not income

$

2

F

6

6

140

4

7

280

8

so

10

10

480

1012-

12

13

740

14

16

14.

16

20

18

24

20

28

2.060
1,460
1,940
2,500
3.140
3,860
4.660
6,420
11,120
16,120
21.320
29,420
43,420
72,420
102,420
133.420
165,420
231,420
299.420
474,420
654,420

16
18
2022-

24
263040506075100150-

22
24

SM
36

26

40

30

2#

40

47

50

50

60

52

75

54

100

55

150

58

200

60

200- 250

62

250- 300
300- 400
400- 500

68

500-> 750
750-1,000

72

1,000-2,000
2,000-5,000
5,000, up

64

66
33561

70

1,384,420
3,604,420

73
74
75

Treasury Department, Division of Tax Research.

December 4. 1939.

(This schedule to accompany memorandum of December 4. 1939.)

LStemp

12/4/39

20
60

4

0380

Estate and gift tax rate schedule designed
to raise approximately $200 million
additional revenue 1/

:
:

:
1

200

$

4
0

Total tax

1

Bracket
rate
percent

$

:

of dollars)

:

specific exemption
(in thousands

1

estate after

:

Tax bases Net

5

10

10

20

12

20

30

16

30

40

20

40

60

23

60

80

26

80

100

29

100

150

32

150

200

35

200 250 -

250

38

300

500

300

500 - 1,000
1,000 - 2,000
2,000 - 3,000
3.000 - 4,000
4,000 - 5,000
5,000 - 6,000
6,000 - 7,000
7.000 - 8,000
8.000 - 9.000

600

s

5

1,800
3,400
5.400
10,000
15,200
21,000
37,000
54,500
73.500
94,000
182,000
427,000
907,000

41

44
47
49
52

53

55
57
59
61

63

9.000 - 10,000
10,000 - 20,000
20,000 - 50.000

65

50,000, up

70

67
69

1,417,000
1,947,000
2,497,000
3,067,000
3,657,000
4,267,000
4,897,000
5,547,000
12,247,000
32,947,000

Treasury Department, Division of Tax Research

December 4, 1939

1/ It is assumed that present gift tax rates will be increased to three
fourths the proposed estate tax rates.

(This schedule to accompany memorandus of December 4. 1939.)
LSieb

12/4/39

0381

Present individual surtax rate schedule under
the Revenue Act of 1938

0

Rate percent

Total surtax
cumulative

1

(Thousands of dollars)

:

not income

:

Amount of surtax

4

-

4-

6

4

6

8

5

8

10

6

12

7

300
440

14

8

600

10

12 14 -

16

9

16

18

11

18

20

13

22

15

26

17

32

19

20 22 26 32 38 44 50 56 -

38

21

44

24

50

27

31

62 - 68
1893

35

68 -

74

PM

74

so

80 90

47

90 100

51

100 150
150 200
200 250
250 300
300 400
400 500

55

500 - 750

750 - 1,000

1,000 - 2,000
2,000 - 5,000
5,000 up

M.B.

62

a
66

84
68
TO

72
73

74

$

so

180

780

1,000
1,260
1,560
2,240
3.380
4,640
6,080
7.700
9.560
11,660
14,000
16,580
19,400
24,500
30,000
59.000
89,000
120,000
152,000
218,000
286,000
461,000
641,000

1,371,000
3,591,000

75

Treasury Department, Division of Tax Research. December 4. 1939.

LS/am
12/4/39

0382

Setate fax Bate Schedule
(Revenue Act of 1932 as amended in 1935)

(Dollars in thousands)

1

$

Bracket rate

10

2%

10

20

4

20

30

6

30

40

6

40 -

50

10

50

70

12

70

100
200
400

14

0

100

200 400 -

600

600 800

800 - 1,000
1,000 - 1,500
1,500 - 2,000
2,000 - 2.500
2,500 - 3.000
3,000 - 3.500
3.500 - 4,000
4,000 - 4,500
4.500 - 5,000
5,000 - 6,000
6,000 - 7.000
7,000 - 8,000
8,000 - 9,000

9,000 - 10,000
10,000 - 20,000
20,000 - 50,000
50,000 -

17

20
23

26
29
32
35
38

41

44
47
50

56
KENS

R
61

63
65
67

69

Camulative tax
:

:

Net estate

on higher amount

$

.2
.6

1.2
2.0
3.0
5.4

9.6
26.6
66.6
112.6
164.6
222.6
382.6
55766

747.6
952.6
1,172.6

1,507.6
1,657.6
1,922.6
2,482.6
3,072.6
3,682.6
4,312.6
4,962.6
11,662.6
32,362.6

TO

Treasury Department, Division of Tax Research. December 4. 1939.

0383

Comparison of present and suggested rates of
individual income tax
MARRIED PERSON TWO DEPENDENTS

Net income before IMaximum bracket rates:
Effective rates
personal exemption ((normal and surtax)
:

$

2,000

-

-

6,000

4%

61

Present

I

Suggested

:

:

Present

december 1/

-

1

and credit for

suggested
-

1.4%

2.0%

11

3.4

4.2

10,000

9

20,000

15

28

7.3

11.2

30,000

23

48

11.3

19.9

50,000

31

54

17.2

32.6

100,000

59

60

32.0

45.4

250,000

66

66

51.1

56.5

500,000

72

72

60.7

63.4

1,000,000

76

76

67.8

69.2

Treasury Department, Division of Tax Research December 4. 1939.

1/ Maximum earned income assumed.

13-4-39

0384

0385

Comparison of present and suggested rates of
individual income tax
SINGLE PERSON NO DEPANDENTS

:

Present

Suggested

1

:

1

Effective rates

:

exemption

:

Net incone INaximum bracket rates
before personali (normal and surtex)

Present

Suggested

:

1.6%

2.1%

8

3.6

4.6

10

14

5.6

7.0

20,000

17

32

9.2

14.6

30,000

23

48

13.0

23.6

50,000

31

54

18.7

35.0

100,000

59

60

33.4

46.8

250,000

66

66

51.7

57.1

500,000

72

72

61.0

63.7

1,000,000

76

76

68.0

69.4

2,000

4%

5%

6,000

8

10,000

$

Treasury Department, Division of Tax Research December 4. 1939.

y

Maximum earned income assumed.

33-4-39

0386
December 6, 1939

HM,Jr spoke to the President on the phone at three

o'clock and the following is a record of their conversation:

HM,Jr: I had a very successful lunch with my
friend on molybdenum. It so happens that their contract
expires this year with the Amtorg and they are having
their Board of Directors meeting on Friday and he is going
to take it up and recommend that they do not sell any more.

My friend thinks that if he does it for Russia that they
ought to do it for Japan as well. But I did not want to
recommend that they go ahead without talking to you.

President: Oh, yes! This falls in line with Hull's

proclamation to sell no bombers to Japan.

HM,Jr: My friend showed me a telegram from one of

his big English stockholders which said carrying out the
President' appeal of a moral embargo on Russia that he,
as a stockholder, would be willing to forego his dividends
if his company would stop selling molybdenum to Russia.

President: That is very interesting. That is grand!
HM,Jr: I told him that we would do everything poshe said that he would do it, irrespective.
President: You are going to take it up with Purvie?
sible to get England and France and ourselves to buy and

HM,Jr: I will.
(Harold Hochschild was the gentlemen whom the Secretary

had for luncheon today.)

December 9, 1939.

0387

At Cabinet I brought up the question of the Treasury's
responsibility in enforcing the Neutrality Act and said that
wherever the decision was a close one, and might get us into a
war, we were deciding against doing any particular thing which
might get us into war. (The President was in a very kidding
mood and started to kid me about this) and said, "If you have
to decide along the lines that will not get us into war YOU
decide, but if there is any decision which you think might
get us into war, come and see me about it". He left me with
the distinct feeling that he might want to make decisions which
might get us into war. I was terribly disappointed and evidently
showed it, because Farley was the only one who came to my rescue
and said, "You know, Mr. President, Henry is being serious about

this" and I replied, "Yes, I know the President is kidding, but

I am in dead earnest".

The thing that frightens me so is that evidently Berle,
in his remarks to Cairns, reflects the President. I said,
"In every step that we are taking, Murphy and Hull have backed
me up". The President said, "Is Frank Murphy doing it in
writing" and I said, "Yes", and his reply was, "Frank, that is
terrible".

0388

December 12, 1939

The President today O. K'd John L. Sullivan,
now Assistant to the Commissioner of Internal Revenue,
for Assistant Secretary.

The President told HM,Jr to get two good men
to go in the Navy under Edison to watch the Navy contracts.

0890

This is what Bell was to be permitted to read in your office.

free nmc has sounthe

0390

December 12, 1939
2:35 pm

Present:
Mr. Gaston

Mr. Foley

Dr. Haas

Dr. White

Mrs. Klotz

Mr. Dan Bell (for latter part of the meeting)

HM,Jr: Gentlemen, if you will sit down. I am
going to do something a little differently than I have
ever done it before, and this is extra confidential.

And the burden falls on me, but I want you to think
about it and all of you keep your mouth shut and don't
talk to anybody except as you talk to each other.

This is at lunch with the President. I am sorry
Dan isn't here, but you can let him read the transcript
of this.

I will give the easy thing first, but not the

thing I am excited about. The President got on gold
Barney Baruch, Baruch taking the attitude "take all the
gold you want and don't worry about it and there will
always be a demand for gold" and Kennedy saying that
the English are not going to give up anything from the
Empire if they can help it and go through the war and
keep everything. Therefore, they are not going to sell
their securities and let us have the gold. He also said
that Kennedy thought that dumping a lot of securities on
the market would be harmful, while Baruch takes the position that our market can absorb them. (And also,
and he said he wanted me to talk with Joe Kennedy and

make a note that Baruch was there Sunday and he wants
me to see Kennedy and Baruch, but he will have to come

to see me and ask for the appointment.)

I told him what had happened on this matter and

I said I was going to tell Pinsent that I was very much

0391
-2-

disturbed, about our having to take all the gold
instead of securities. The President said he agreed
with me only he went a step further. He made the
suggestion to Kennedy that they call privately on
somebody like Gerard Swope and have a Pan American

Corporation that would buy $1,000,000 worth of securities and sell them to North and South America, saying

that these securities were bought from the British to
help them win the war. Say 80 openly. And the people
interested in helping Democracy should buy shares in
this investment trust, he said, which would be much
better than most investment trusts, and run very economically, and 80 forth and so on.

That gives you how he is thinking and I told

him we were preparing in the Treasury a series of

articles in answer to this gold business, but I felt
that it was one thing to take gold from a country that
had nothing else to sell us. We could do that, but
it would look very silly if we continued to take gold
from England who had something else to sell us and we
just could not sit here and take it, and the President
agreed with us. He agreed with us in thinking, but
he's thinking not in terms of R. F. C.. He does not
want to go against the Johnson Act. But some private
corporation. I am not arguing about that and it's not
for the moment as important.

Now, this is the part. I am going to try, for
once in my life, to handle this thing in as -- how shall
I say it -- detached manner as I can. I can't be very

detached about it. I want to make a documentary story -most of this will fall on Haas and Bell.

In the first place, the President said, "I have
not got my figures on the Budget." That's number one.
He said, "I am thinking," I think he said, "on a
$2,600,000,00 deficit.' In other words, that's what
he wants it to be. So he said, "Now, Henry, just be-

cause the National debt blocks are set this way (gestur-

ing) is no reason why we should not rearrange them and
what I want to say in my message to Congress is that on

July 1, 1941, the National debt will be less than it is
on January 1, 1940.

So I said, "And that means that you have got to

0392
-3-

find $4,600,000,000.* If you ladies don't mind my

using the exact language of the President, he says,
"When the last Administration moved out, those bastards
only left us $125,000,000 in the Treasury and," he said,

"if they are going to be the same kind of fellows that

succeed us there is no reason why we should leave any

more. If it is our kind of fellows, we will leave
them a little more."

What? Another $100,000,000?

He said, "Now, that gives us about $1,000,000,000.

Then he said, "You get about another $1,500,000,000 on

your silver certificates. That's $2,500,000,000, and
$1,000,000,000 out of your Stabilization Fund is
$3,500,000,000.00 Somehow or other he got it up to

4 billions. Must have had 1à billions out of General
Fund; 1à billions, silver certificates, that's three
billions, and 1 billion out of Stabilization is 4 billions.
So I said, "What are you figuring on the revenue?"

"6 billion 6 00 million."
So I did not tell him that that is a billion
higher than your figure, isn't it George? So I said,
"I don't think it's going to be anything like that.
"Well," he said, "not only do not any two departments agree, but no two people in the same Department
agree and,' he said, "Barney Baruch says that he can hire
all these experts from $5,000 to $12,000 and if they were
8.8 smart as he was they would be as rich as he. He listens
to them all and then goes into a huddle with B. M. and
takes B. M's advise and he tells the President he should
do the same thing. You have told me six different times
(this 1s where I think he is 100% wrong) if you had a
$70. billion income you would get a 7 billion return;
$80 billions, you would get $8 billions on the present
income tax bill, and $90 billions, over $10 billions.
I am correct, we have never figured it on national income?

Dr. Haas; He asked in the last Budget message

for a figure something like that. We calculated and

gave him a figure with footnotes and of course the

0393
-4-

Budget Bureau took off the footnotes, but in the
last Budget message there is a table something like

that. I know it's in the message.
HM.Jr: I said, "Well, Mr. President, I don't
know what it will show, but I will give you my estimates for the last five or six years, whatever they

were in December, and show you, plus or minus, how near

we were to being right and I will send you over the best

figure that we have got. Of course," I said, "you do
it this way and you still are going to have your deficit.
Your National debt may not be as great by using these
devices" -- because I personally feel (just got this
an hour ago) that this is the worst thing he can do for
himself. He has not done this thing during the time

he was in and it would give the Republicans the ideal
campaign issue as between financial sanity and financial
something else, which they haven't got and all that Mr.

Dewey has to do 18 go out and campaign on honest book-

keeping. And it doesn't accomplish anything! The deficit isn't any smaller! He's got in mind -- he' used
the 2 billion 8 figure for over a month and he's trying
to make a 40 inch waist go into a 28 inch corset, but
when he got through there is still the 40 inch waist.
It may be distributed differently.
I don' know who he has been talking to and the
Bell and I feel that Harold Smith just won't stand up
to him. I can't argue with him because he does not want
to argue. We will have to prepare the documents along
the way I think and of course he can do anything he wants
afterward, but it is funny, I had the same talk with
Wallace this morning and in discussing the fact that
his Certificate Plan came outside the Budget he said, "I
know that's dishonest, but it accomplishes what I want."
I said "Not only that, but you also circumvent the Courts
on the processing tax."

unfortunate thing -- again all of this is confidential --

So I don't know where the President gets it, but
I think if he goes through with it he may be just trying
it out on me, but I think the first thing, George, we
have to get over the estimates and go back on the history
and you ought to get these people and let them look at it
and do it very, very carefully, as carefully as you have
ever been before. Because if the President had this in

0394
-5-

mind, the way I would advise him to do it I would set
it up legally. He has to, when he sends in his deficit,
he has to show legally where he is going to raise the
money.

Dr. White: How can he spend out of the Stabiliza-

tion Fund?

HM,Jr: I said, "You know, Mr. President, you and
I are both on record publicly that wewould only use the
Stabilization Fund to retire the Debt.
Dr. White: Under the law, no matter how we use it,
you can buy bonds with it, but if you buy bonds with it
then you have got bonds and it's part of your Debt. If
you retire the debt you must have the cash.
HM,Jr: Dan and I sat down and made an estimate as

to what the deficit was going to be and I will take Dan's

figures over anybody else's because with five years' experience in the Budget and everything else, he knows. And
taking into account the deficit and taking into account
the 2 billion budget for munitions, we come to about a
$10 billion expenditure.
I don't want anybody to breathe this to anybody
because a lot of people inside the Government would give

their hat to get this and we must not let it out.
with a $10 billion expenditure and a 5 billion 8
revenue

Mr. Haas: Nearly 6 billion.
HM,Jr:
6 billion, you get a $4 billion
deficit. You can dress it up any way. You can call
it a-b-o-d elephant and you will see the elephant if you
have one. And I just don't think you are going to fool
anybody. Why shouldn't the President, if he wants to
set them up, say "If Congress does not give me this authorization to increase the debt limit, O. K. gentlemen,
this is the way I will have to do it. I will use my
silver certificates, use my Thomas currency, so forth
and so on, increase the value, revalue silver, up to
100% and so forth and so on. If this 18 what you want,

0395
-6-

all right. I can do it that way or I can do it the

way I have the last seven years. But somebody has
scared him into thinking the debt limit 18 the major

political issue and I don't think it is, unless he
it by some phony bookkeeping. Then he makes it the major issue. I have said three times to the press -- I
have it 80 it is in the lap of Congress. And I can
read the papers and the columns. Right now there isn't
anything on the financial front that the Republican columnists can take and attack me and, through me, the President. There is nothing in particular, but give them
this and, my God!, the trade treaty thing sinks into insignificance!

I am going to try to be philosophical, but we have
to do it in a documentary way. I can't argue because he
won't listen.

Dr. Haas: I am afraid, Mr. Secretary, if he does
this thing that the Executive Departments will lose the
Budget. Came in in 1921. Use it this way, Congress
will take it away.
HM,Jr: This estimating originates with you, doesn't
it?
Dr. Haas: Yes, sir.
HM,Jr: You have to get up the documents and let

us all take a look.

Dr. Haas: These documents showing your past
history?

HM,Jr: That's part of it. This is our revenue.
This 18 our past history. Whatever you gave him last
year. If you told him if you have a 70 billion national

income you will have $ 7 billions taxes
Dr. Haas: Under certain estimates that we sent

over. And that is still true.

HM,Jr: I don't know what else you are doing, but

you had better drop everything.

Dr. Haas: I have dropped everything.

0396
-7-

HM,Jr: The President is going away Thursday

night, so it will be kind of quiet for a few days.
Dr. Haas: Do you want it for Thursday?

HM,Jr: Friday might be a nice day to take it.
He said, "I have a sop for the businessmen. Anybody who starts a new business not connected with any
other business -- 100% new business -- for three or four
years he can fall in the 12% tax bracket.
Dr. Haas: When 1s the business "new" is going to
be the question.

HM,Jr: Do you (Foley) -- as a bookkeeper, what

do you think of this thing? We are among friends here.
That the President should say in his Budget message as
of January 1, 1940, that in July 1941 the debt will be
less than it is in 1940 and explaining how. He has to
under the law. Look that up, Ed. Dan says under the
law in the Budget message the President has to explain

legally how to raise the money. I told him that the
other day and he checked it and that's worrying him. How
do you like it, Ed?

Mr. Foley: I don't like it at all.
HM,Jr: Am I over-excited in my "detached" manner?

Mr. Foley: I think you are all right. I don't
think he will ever do this. I think you have to in-

crease the debt limit this winter and I think the way
to do it, as you point out, unless they do increase the
debt limit he will have to use these other measures to
get by until 1941.
HM,Jr: (To Dr. White) I told you to tell that to
Lauch Currie; that he should lay off me in feeding this
silver certificate stuff to the President. The President
could do as he did on the right to devalue -- say to
Congress "You gave it to me. He has silver certificates
here; he has something else; he has got those things if
Congress forces him into using them.

Mr. Foley: But they won't. They will all vote

0397
-8-

to to defend the limit, but they will go ahead and vote
because they will be up against a dun. They will increase the debt limit this year.
HM,Jr: Do you want to see the President do this,
Harry?

Dr. White: Not that way. He can't with the

Stabilization Fund, although I would like to see the
Stabilization Fund buy bonds and I do think heshould

buy silver certificates, but I think it is not good to
have a political budget. I do think more silver cer-

tificates should be bought and the Stabilization Fund
should be permitted to buy bonds. He does not have to
talk two words about the debt limit. If he hasn't the
debt limit he will use other cash resources.
(Mr. Bell came in at this point.)

HM,Jr: (To Mr. Bell) To boil this thing down,

the President says in his Budget message he wants to
show that on July 1, 1941 the public debt 18 going to be
less than it is on January 1, 1940. On the assumption

that the debt limit is going to be 2 billion 6 or 2 billion
8, we have to find 4 billions for him that he can spent
out of silver certificates, stabilization fund and balances on hand. I have been talking to them for 20 to
25 minutes and you can read this thing in Mrs. Klotz
room.

I told George the first gun we have to fire is

on the basis of estimates which George is going to send
over and the President says has to be 6 billion 6.
Let me ask you a question, Dan. This 18 all
old for you. Supposing I send an estimate over to the
President,-- for argument's sake -- that the revenue
will be 6 billion, for a round figure. Can he change
that any way he wants to? Can he make it 6 billion 6
if he wants to.

Mr. Bell: I think he can.
HM,Jr: Well, that's his business.
Mr. Foley: It's the Executive budget. Sure,

that's his power!

0398
-9-

Mr. Bell: I think he can. I think he can

change any estimate he wants in the Budget. It's B

his Budget.

HM,Jr: See, what has happened is this. As
I told them, I would try to be as detached as I could.
I told him recently that he had to put in the Budget
how he was going to raise the money, and this is his

answer.

Mr. Bell: Not a very good answer from the
country standpoint, but he has to put in the Budget
the method of financing the Budget.
Dr. White: He certainly must be dissuaded from

making a point of it in his Budget. One thing to do
it. That will have to stand on its own merits. But
it' 8 a different thing to attempt to acquire credit.
HM,Jr: He's proud of it.
Dr. White: To say he is going to have a debt

less because he has these assets. Danny, can he use
the Stabilization Fund? Wouldn't bonds acquired by

the Stabilization Fund still be part of the outstanding

debt?

Mr. Bell: Oh, yes! He can spend $1 billion
from the gold in the Stabilization Fund. You don't

8

have to issue anything from the Stabilization Fund.
Mr. Gaston: You would have to have authority
to transfer that to the General Fund.

Mr. Bell: My salary appropriation, consisting
of $200,000, is not actual dollars; just on the books.

Dr. White: Well, we will settle that.
Mr. Bell: I think the lawyers might find a distinction there, but I think the Stabilization Fund appropriation 18 just like any other appropriation that

Congress appropriates.

Dr. White: You could spend that money and still

have a billion 8 in the Stabilization?

0399
-10-

Mr. Bell: Have a credit which the Stabilization could draw on. As a matter of fact, you sold
$200,000,000 to the Treasury and took a credit in New
York for it. That's the capital you are operating
on and every day you sell gold for the Treasury and

take credit for it.
HM,Jr: I have given you all. There are cer-

tain legal factors, certain commonsense and practical
factors.

ture.

Mr. Bell: Commonsense has to come in the picNo argument if he wants it.

HM,Jr: I told these people to talk among themselves and nobody outside -- extra confidential -- but
I want a memorandum to start with. He would not listen

to me today. Just wouldn't listen. So the first thing
that goes over is the revenue. That will be the first

shot. I have to answer him why I consider that this is
an unwise thing to do, but the first shot is the revenue
figures.

Mr. Gaston: If he raises the revenue figures,

we had better not have a tax bill because then we would
have to go up and justify our tax estimates before the

Ways and Means Committee.

Dr. White: You will have to do something about
excess reserves, because the Federal Reserve's excess
reserves will be close to $10,000,000,000 1f you utilize
those sources for reducing the debt. Would you consider

increasing the issue of silver certificates?

HM,Jr: Not above the cost. I have difficulty

doing that.

Mr. Bell: Well, thank the Lord we don't have any

refunding until June.

000-000

0400
December 15, 1939

When I saw the Chinese Ambassador at the

reception last night he said that when he went
down the line the President stopped him and said,
"Mr. Ambassador, Secretary Morgenthau has given
me your memorandum on your financial needs."

Isn't it amazing that he should remember

to tell him that!

I said to the Chinese Ambassador, "Did you

get my message that you are as handsome as Mr.

Procope?" The Ambassador pushed his cheet out

and said, "Yes, I did."

0401
December 18, 1939

I sent the President the attached telegram on
Sunday and last night Mr. Hassett, Assistant to Steve
Early, called me and said that the President wanted
Gaston and me to see Wallace. I demurred and he said

no, that is what the President wanted. I told him

that Wallace was coming to my office at ten this morning and Hassett said that he would telephone Wallace
and tell him that the President wanted me to discuss

Farm Credit with him, and I told Hassett that that
would be helpful.

Part of the thing that stimulated me to do this
was that on Saturday I received from Frank Gannett a
copy of the telegram that he sent to the President,

which was released in Monday morning's papers, copy
attached.

AX

-

Dec18.1939
2211 THIRTIETH STREET
WASHINGTON D. c.

12.P.M.

0402

The President.

If Farm Credit is still

in the Barn intact

I believe Wallace is
making a major icmonic

and political blunder

by
urging
you
take
to
hernit him to over

Farm codit in toto

F The majority of form

organizations are risty to

make this a urgan
fight
and
you
the
willy
have to take

brunt fit. alth augh it

will be Wallace
the

fault. and Why a other give perfect fections
the farm rete

with There
is
a
issue
1

way way to compromise
with out throuning any nine
additional burden an
If you are
w.

gaster
and I would
at be
glad extrain
your conveinance

Dec18.1939
2211 THIRTIETH STREET

12.P.M.

WASHINGTON D.C.

The President.

If
Farm
Crodit
is
will
tit the Barn intact
I believe Wallece is
making a major esmenic

and political blender

by
urging
you
to
hernit him to take one a
farm codit in toto
F The majority of form
ageniations are rolly to

0403

make this a usjer
fight
and
you
the
will
have to take

brunt
fit
although
it
will be Wallece
fault. and Why other give fections the

Rehublicans arting a perfect
farm vite

issue with
There a
1"
way way to comprimise

without throwing any more
a additional burden an you

If you are interested

extrain
your at
converning
gastin and
I would
be

STANDARD FORM No. 14A
APPROVED BY THE PRESIDENT

The White House

FROM

MARCH 10. 1926

Washington

TELEGRAM

Dec. 17, 1939.

OFFICIAL BUSINESS-GOVERNMENT RATES

The President,
Hyde Park, N.Y.

I believe Wallace is making a major economic and political blunder
by urging you to permit him to take over Farm Credit in toto.
The majority of farm organizations are ready to make this a major
fight and you will have to take the brunt of it, although it will
be Wallace's fault.
Why give the Republicans and certain other factions a perfect issue
with which to grab the farm vote. There is a way to compromise
without throwing any more additional burden on you.
If you are interested Herbert Gaston and I would be glad to explain
at your convenience.

HENRY MORGENTHAU, JR.

COPY OF TELEGRAM SENT BY FRANK GANNETT

0405

FROM ROCHESTER, N. Y.

RELEASED to the Press from Washington, D.C.

for Monday morning papers, and thereafter:

HONORABLE FRANKLIN D. ROOSEVELT,
THE WHITE HOUSE, AND

HYDE PARK, N. Y.

DEAR MR. PRESIDENT:

DECEMBER 16, 1939.

sent in duplicate)

CAN YOU BE AWARE OF THE SHOCKING IMMORALITY AND INJUSTICE OF THE
PURPOSE OF THE SECRETARY OF AGRICULTURE TO DESTROY THE INDEPENDENCE

AND TO IMPAIR THE FINANCIAL INTEGRITY OF THE FARM CREDIT ADMINISTRATION
AS ANNOUNCED BY YOUR SECRETARY, MR. EARLY, AT HIS PRESS CONFERENCE ON
THURSDAY?

BY MISUSE OF THE POWERS VESTED IN YOU BY THE EXECUTIVE REORGANI-

ZATION BILL, THE FARM CREDIT SYSTEM CREATED 20 YEARS AGO, LARGELY
FINANCED AND DIRECTED BY FARMERS THEMSELVES, BY DEMOCRATIC PROCESSES
WILL BECOME A POLITICAL FOOTBALL.

ABOUT A MILLION FARMERS AND 1200 COOPERATIVES WITH 1,160,000 MEMBERS, MR. PRESIDENT, HAVE A VITAL STAKE IN THE INTEGRITY OF THEIR
CREDIT SYSTEM. THEY HAVE INVESTED MORE THAN $130,000,000 IN THE VOTING
CAPITAL STOCK OF THE VARIOUS BANKS IN THE SYSTEM. BEFORE THE DEPRESSION, THE CAPITAL STOCK OF THE FEDERAL LAND BANKS WAS 99 PER CENT
FARMER-OWNED AND TODAY IS STILL 47 PERCENT, AND THE ANNOUNCED INTENTION
OF CONGRESS WAS TO PERMIT FARMERS TO REGAIN THEIR PRIVATE CONTROL.
NOW, NOTWITHSTANDING SECRETARY WALLACE'S PLEDGE TO RESPECT THE
AUTONOMY OF THE FARM CREDIT ADMINISTRATION, THE FARM OWNERS ARE TO BE
DISPOSSESSED OF THEIR RIGHTS WITHOUT DUE PROCESS OF LAW.

THIS MISUSE OF YOUR POWER BY APPOINTED BUREAUCRATS IS JUST WHAT
SOME OF US FEARED WHEN WE OPPOSED YOUR ORIGINAL EXECUTIVE REORGANIZA-

TION BILL. UNDER THE MODIFIED LAW AS FINALLY PASSED, YOU WERE GIVEN
THE POWER TO MAKE SUCH CHANGES IN DEPARTMENTS, SUBJECT, HOWEVER, TO
CONGRESSIONAL DISAPPROVAL WITHIN 60 DAYS.

LAST APRIL YOU TRANSFERRED THE FARM CREDIT ADMINISTRATION, WHICH
WAS AN INDEPENDENT AGENCY, TO THE JURISDICTION OF THE DEPARTMENT OF
AGRICULTURE. THERE WAS IMMEDIATE PROTEST FROM FARMERS AND FARM ORGAN-

IZATIONS. THEIR SUSPICIONS WERE ALLAYED, AND ADVERSE ACTION BY

CONGRESS WAS AVERTED BY A PUBLIC STATEMENT BY SECRETARY WALLACE, ON

MAY 22, WHICH SAID THAT IT WAS ISSUED "WITH THE CONCURRENCE OF THE

0406
-

PRESIDENT". IN THAT STATEMENT MR. WALLACE SAID: "THE FARM CREDIT
ADMINISTRATION DOES NOT SEEM TO BE ADAPTED TO COMPLETE IDENTIFICATION
WITH THE DEPARTMENT ( OF AGRICULTURE). THE RELATIONSHIP INVOLVED CAN
BE HANDLED BEST BY A CONTINUATION OF ITS PRESENT METHOD OF OPERATION,
WITH THE SECRETARY OF AGRICULTURE EXERCISING A COORDINATING SUPERVISION IN ONLY THE BROADEST AND MOST GENERAL WAY".
FURTHERMORE, MR. WALLACE SAID THAT RESPONSIBILITY FOR CARRYING
OUT THE FUNCTIONS OF THE FARM CREDIT ADMINISTRATION WOULD REMAIN WITH

THE GOVERNOR. HE CONTINUED: "IT IS TRUE SUCH CONTROLS AND PROCEDURES THAT THE HEAD OF THE AGENCY DISCHARGES IS PUBLIC RESPONSIBILITY.
THEREFORE, TO. THIS EXTENT THE FARM CREDIT ADMINISTRATION WILL BE AN
AUTONOMOUS FEDERAL AGENCY AS HERETOFORE".

CONGRESS, TRUSTING THE PLEDGED WORD OF A MEMBER OF YOUR CABINET,
DID NOT DISAPPROVE YOUR TRANSFER OF THE FARM CREDIT ADMINISTRATION TO
THE DEPARTMENT OF AGRICULTURE. THE TIME FOR EFFECTIVE CONGRESSIONAL

ACTION HAVING PASSED, MR. WALLACE, SPEAKING THRU THE LIPS OF YOUR
SECRETARY, MR. EARLY, WHO DECLARED THAT THE SECRETARY OF AGRICULTURE

"VERY NATURALLY TAKES THE POSITION THAT IF HE IS GOING TO BE RESPONSIBLE FOR IT (THE FARM CREDIT ADMINISTRATION) HE OUGHT TO HAVE CONTROL

OF IT".

THE FARM CREDIT ADMINISTRATION HAS BEEN FREE FROM PARTISAN AND

DEPARTMENTAL POLITICS. YOU DESERVE CREDIT FOR THE HIGH QUALITIES OF
THE MEN APPOINTED TO IT. WITH THREE BILLION DOLLARS OF LOANS OUTSTANDING WITHOUT FEDERAL GUARANTEES, THESE FARM CREDIT BONDS HAVE SOLD

AROUND 105. A TOTAL OF THREE BILLIONS OF LONG-TIME CREDIT REPRESENTS
40 PER CENT OF LOANS TO AMERICAN AGRICULTURE. THIS RECORD IS LARGELY
DUE TO THE FACT THAT IT WAS AN INDEPENDENT AGENCY RESPONSIBLE ONLY TO
CONGRESS AND THE PRESIDENT AND THEREFORE ABLE TO ADHERE STEADFASTLY
TO SOUND BUSINESS PRINCIPLES.

YOU ALONE, MR. PRESIDENT, CAN INTERVENE. YOU CAN STOP THIS MISUSE OF THE BLANK CHECK POWERS WHICH YOU DEMANDED OF CONGRESS. YOU CAN
STOP THIS UNWARRANTED ENCROACHMENT UPON FARMERS' RIGHTS AND THIS
TERRIFYING DESTRUCTION OF PRIVATE ENTERPRISE AND CENTRALIZATION OF
ECONOMIC POWER. THE NATION LOOKS TO YOU TO REQUIRE YOUR SECRETARY OF
AGRICULTURE TO KEEP HIS PLEDGE OF LAST MAY TO RESPECT THE AUTONOMY OF
THE FARM CREDIT SYSTEM AND TO WITHDRAW HIS REQUEST FOR THE RESIGNATION
OF THE PRESENT EFFICIENT GOVERNOR OF THE FARM CREDIT ADMINISTRATION.

(SIGNED) FRANK GANNETT

0407
December 20, 1939

HM,Jr spoke to the President at 11 o'clock.

HM,Jr: I am a little bit confused. There

are three ways on the figures. The 1938 parity

payment was $212,000,000. 1939 parity payment was
$225,000,000, which makes $437, ,000,000. Have you

in mind that you want to bring it to Congress attention that they owe you $437,000,000? Do you want to
bring Congress' attention that if they should pass

another parity payment that they will owe you the additional money and do you also want to bring to the
attention of Congress that you want them to raise
$500,000,000 for the B Budget? Whatever the amount
is for the B Budget do you want to do all three of
these.

President: Do you think so?

HM,Jr: Yes. What we will be able to do is

send you a rough draft this afternoon and could you
let me know whether or not it suits you.

m

0408
December 21, 1939

HM,Jr called the President at 12 o'clock and

said, On the United Press ticker there was a story
about Hanes resigning. I asked him about it and he
said that he was going to resign. I did not have
time to talk to him because this happened just before
my press conference, but before I talk to him further
I wanted to discuss it with you first. He was very
determined. I thought that if he was determined to
resign, it would be much better to do it before your
Budget message -- at least announce it. If you agree
with me, I will bring it up when I come over at three
o'clock. Now there is nothing at issue. He says
that he has got to get back into business. It was
80 important I did not want to talk to him without

first getting your guidance. If you did have a few
minutes I would like to stay behind. will you give
me some signal?"
The President said that he would be glad to
have him stay behind. The substance of the President's part of the conversation with HM,Jr was that
if Hanes was going to resign, it was much better to
have him resign right off because there 18 no new
policy pending, and that Hanes ought to say 80.

My

0409
January 8, 1939

I told the President about Dean Bates, of Michigan,
to be examiner of the Bank of America, also about Whitney
Seymour and he said Fine! on both.
The President also said, "For Heaven's sake, don't
let anybody know how much gold we have. We must keep that

a secret," the point being that if he wanted to spend it
that was O.K., , but he does not want anyone else to know.

m

0410
January 8, 1940

Lunch with the President.

(President dictated this part while Bell was present.)
The President of the United States said we could take
a big load off his shoulders if you and Harold Smith and
Lauch Currie would make a study for him on the 1939-19401941 crop program. The President wants this whole question
of parity payments -- how much does each farmer get, depending upon the crop, for 1939; what are we committed for, for
1940 and 1941 -- this whole question came up at Cabinet on
Friday and the President did not know that Wallace had agreed
to pay parity payments to the farmers who would harvest their
crops in 1940. Now the importance of that is that the President had a conference with Bankhead and they agreed that if
the prices went above 75% of parity, there would be no parity
payment program. And the President said, "Let me understand

this, Henry. If I plant my 40 acres of cotton in 1940 and

cotton goes to 17 cents, I get my conservation of 1 cents and
then I get the additional parity payment even though it goes
to 17 cents although I am not entitled unless parity was 12

or 12 cents?" Wallace said, "Yes," and the President said,
"Henry, that's just criminal.

But you see, the President is in a very embarrassing
position with Bankhead, 80 he said he was going to write out
a memorandum and sign it and Henry Wallace said, "Can I be
there," and the President said, "No."
Then I said, "Well, Mr. President, what about this
$170,000,000 which is still available for parity payment?"
and Wallace either did not know or would not tell the President what the $170,000,000 was for. Therefore, what the
President is asking you and Currie and Smith is to give him
the whole breakdown on what this thing is, in very simple
language, and he ended up by saying "I want to know particularly what promises have been made to the farmers of America."
The President, Vice President Garner and the Secre-

tary of the Treasury did not understand.

Mr. Hull called the President just before, I had lunch

and does not want the President of the United States to take

0411
-2-

the initiative on writing a letter to Congress about

the Finnish matter and he thought that we ought to take
it up, he said, with Bob Doughton and Congressman Taylor
and see that somebody introduces a bill which will be ac-

ceptable whatever it is. And then the President said
if they should ask, either he or I, by direction of the

President, could write and tell them what I had done on
the last payment, but he is to see Doughton and Taylor

and get them to initiate a bill which the President can
say 18 O. K.

I told the President about this meeting here this
worst I would have to come to him for help. He said,
"If Eccles won't agree, why not suggest that each of the
four agencies appoint one outside banker to read the Comptroller's report and let the four decide whether the report

afternoon on Bank of America and that if worst came to

is fair or not.

(Just Mrs. Klotz present when HM,Jr dictated the

balance of his meeting, Mr. Bell having left.)

The President was very much pleased on the reception
he got on the Budget message. He said, "We sure have them
fooled!

I spoke to the President about bringing Professor
Rist and Mr. Gwatken over here and I said there had been

entirely too much publicity and I felt that we had better
stall on it and that both Hull and Sumner Welles felt excited about it and that I did not see what we could do
about oil and copper. He said, "That's agreeable. Let's
continue to stall.
(HM,Jr called General Watson in the afternoon after
he had lunched with the President and told him, in substance,
the following:

0412
-3-

The Army has a contract for 524 Curtiss Wright P-40' 8

with first delivery in March and the French contract is for
100 of the same planes with no delivery until July. The

President wants the French to have 25 of the Army's planes
during April, May and June, and then the French army can
return them to the U. S. Army when their deliveries start
in July. HM,Jr reminded General Watson that he had handled
a similar instruction from the President with Colonel Burns,
rather than through Woodring or Johnson.

****
The President read Harry White's memo of January 8th

to the effect that there were no exports from the United

States to the U.S.S.R. from Dec. 19, 1939 to December 3, 1940,

and the President was amazed.

0413
January 12, 1940.

I gave this memorandum to the President and at
the same time said, "What about this story of the 10%

increase that I read in all the papers?" He said,
did not give out that story." Says the President.

"I

He said, "I simply explained to Bob Doughton that whatever the net amount was over that in New York State, we
added a flat percentage, either 5% or 10% to whatever the
net amount was you had to pay, and Bob Doughton gave it

out." He said, "I never said anything."

He read this memorandum and said, "No! No! That's

not what
I have in mind. If I did not do it, Herbert
Lehman
did."

I think he's wrong and what he had in mind is that

described in Ed Foley's memorandum and the thing he has

in
mind
into
it. does not exist and I have asked Ed Foley to look

0414

TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE

TO

Secretary Morgenthau

January 9, 1940.

FROM E. H. Foley, Jr.

Increase in New York State Personal Income Tax in 1931

Personal income tax rates on returns for the calendar year 1931 (or
for the fiscal year returns due during the calendar year 1932) were in-

creased 100% over the existing personal income tax rates by an amendment

to the tax law enacted at the Extraordinary Session of the New York State
Legislature in 1931, and approved by the Governor on September 23, 1931.
[L. 1931, Chap. 795 (Tax Law, $351-b)]

Until this increase, the tax rates had been 1% of the amount of net
income not exceeding $10,000, 2% of the amount of net income in excess of
$10,000 but not in excess of $50,000, and 3% of the amount of net income
in excess of $50,000. The new rates for the three brackets were increased
to 2, 4 and 6% respectively.
The law stated that its objective was "to provide moneys to pay appropriations for the relief of unemployed persons and the alleviation of
distress occasioned by the present economic depression." This conformed

to the recommendation made by Governor Roosevelt in a message to the Leg-

islature on August 28, 1931 that a tax be laid on personal incomes to
provide the necessary moneys to meet an appropriation "for the relief of
distress and the amelioration of unemployment." [I Public Papers and
Addresses of Franklin D. Roosevelt (1938) 457, 467-8]
This message recommended the creation of the "Temporary Emergency

Relief Administration" and the appropriation to the TERA of $20,000,000 of
which $1,000,000 would be retained for expenditure by the State, leaving
$19,000,000 for apportionment among the counties and cities of the State.
The message stated:

"The necessary money for this unemployment and distress

relief should be raised by a tax on personal incomes. It seems
logical that those of our residents who are fortunate enough to

have taxable incomes should bear the burden of supplementing

the local governmental and private philanthropic work of assist-

ance. I believe that this tax should fall proportionately on

all incomes, over and above existing exemptions. If each person
paying an income tax were required to pay merely half again as

much, I am informed by the State Tax Commission, the necessary

twenty million dollars will be raised." [ibid, p. 465]

0415

One third of the revenues derived from the personal income tax inposed by the 1931 law was paid into the State Treasury to the credit of
the General Fund. The remaining two thirds was allocated between the
state and local governmental units in accordance with the usual formila
for distribution of the income tax. [Tax Law, $382, as amended by L.

1931, Chap. 512]

The State's share of the personal income taxes collected under the
new rates prescribed by the 1931 law was about $19,500,000. [Ann.Rep.
State Tax Commission, 1932 (Leg. Doc., 1933, No. 11), p. 81]

inth

0416
January 15, 1940.

Saturday night at my house I said to the President,
"Bob Doughton called me to-day to say that he had no
success when he talked with the Speaker and Sam Rayburn

about the loan to Finland". Steve Early talked up and
said, "Yes, I understand that they are opposed to it".

If my memory serves me right, I got the impression
from the President that he would take it up with the

leaders when he saw them on Monday.

0417
January 16, 1940

At lunch with the President today, gave him memorandum
about White, State Superintendent of Banks, to take Leo

Crowley's place. Told the President I thought he ought to

do something promptly before the question came up definitely
as to whether or not the Bank of America would withdraw from
the National system and become a State bank.

I let him read the latest A. P. Giannini telegram
(dated January 15th). The President asked if I had received many like that and I said I thought three or four.
He said, "Well, Giannini is only putting his head into a

noose
be cause some day we will want to release all of these
telegrams.
I told him I was having a statement prepared against
the day that Giannini might withdraw from the National banking system abd claim that I had driven him out.

Toldthe President that I thought he ought to see the 80called "Collins Board" and the head of Army and Navy aviation
and discuss with them three things: (1) what are our needs
for 1940 and 1941 for the Army and Navy; (2) what, if anything, could we spare. from the Army and Navy orders now to the
French and English, and (3) he personally should take a look
at the plan of Procurement for the Allies as to engines and

planes. I personally felt that we ought to try and build

up a new airplane engine company somewhere in the Middle West

as both of our airplane engine companies were located close

to the Atlantic seaboard. He agreed. I said that this

was such a big thing that he ought to pass on it himself.

He told me to arrange the meeting for tomorrow morning.
I asked him whether he wanted to see Pleven before he
returned to France on Thursday and he thought he had better
not.

As I went in to see the President, General Watson handed
me a statement from the Army and Navy showing what their deliveries
would be for each month of 1940. I turned it over
to the President and kept no copy.

Theabout
President
said several
times that he is very much
worried
the European
situation.

In discussing the airplane thing he said that he would

0418
-2-

like to see our industry on such a basis that on short
notice we could produce 30,000 planes a year. I said if
he had that in mind, we certainly ought to avail ourselves
of the opportunity of building up our industry through the
purchases of the Allies. He agreed it was most important.
000-000

After dictating the above, the Secretary phoned General
Watson and the following is the Secretary's side of the conversation:

The President asked me to ask you to arrange a meeting

for him at his office tomorrow morning. He would like to
have what I call, for want of a better name, the "Collins

Board" and the fellow from the Arny and the one from the
Navy plus the head of Aviation for Army and Navy, and myself.
He did not say anything about the Secretary of War or
Navy
and I leave that to you possibly to bring that to his
attention.

Give us the first appointment, Pa.

Well, listen, I don't know what else he's got, but this
$1,200,000,000, and listen, fella, this is Allied money that
is going to build up our airplane industry so that the Army
and Navy will be on its biggest feet. I don't know of any
is damn important. Do you know what this program involves?

cheaper way of doing it.

Well, my hunch is I would invite the Secretary of War
and the Secretary of Navy. That's my hunch. You are a
diplomat. The President did not suggest the Secretary of
War or Navy and if it would make them any happier, don't
put me on the list. See what I mean?
000-000

0419
January 24, 1940

At lunch with the President we got on this business

of running for a third term. The President said, "I

definitely know what I want to do," but then he veered off.
He said, You know I have told Farley that we ought to
have a convention Labor Day week-end, but I cannot sell
him on the idea." He said, "This whole question of

headquarters is very unimportant, and the Democrats know
how to set up headquarters much better than the Repub-

licans.' He added, "Of course, I cannot tell Farley
that headquarters is not really important. Farley wanted
the convention on the New York State Fairgrounds, but I
said no, that I still remembered the convention of 1924.

Farley suggested Philadelphia, and I said no because the

last time we had it there we had a friendly Republican
Mayor and this time we have not." The President said,
"I want it in Chicago." He asked me what I thought of

it, and I said, "Geographically, I think it is excellent,
but I do not know enough about the political situation
to comment. So the President said, "Well, I will tell

you something which I have not told Farley. Mayor Kelly

of Chicago is for whomever I want, so it is perfectly
safe to have the convention in Chicago."

I asked the President, "Just what did you mean
when you said that you definitely knew what you wanted

to do?" He then proceeded to tell me the following story.

He said Louis Brownlow was in and said, "My wife sent you
a message which is pretty fresh, and I do not know whether

I can tell it to the President of the United States."

The President said, "Go right ahead," so Brownlow said,
"My wife wants me to tell you to keep on just as you are

but keep your mouth shut." The inference I got from this

was that
Roosevelt is anxious to keep on and keep his
mouth
shut.

I said to him "You know, Mr. President, you can
count on me always. Then he said, "I know that."
said, "When I have lunch with you I want you to be comfortable and, therefore, I do not keep bringing up the third
term issue." The President said, "Well, Henry, it has gotten
so far that it is a game with me. They ask me a lot of
I

0420
-2-

questions, and I really enjoy trying to avoid them." He
added, "I do not want to run unless between now and the
convention things get very, very much worse in Europe,

and I believe that this pretty well sums up his state

of mind today.

The President said, 'When George Norris was down

he was saying that if I did not run what would all the

Liberals do; where would they go?" The President said,

"I told George, 'Did you ever stop to think that if I

should run and be elected I would have much more trouble
with Congress in my third term and much more bitterness

to contend with as a result of my running for a third
term than I have ever had before?'

"

This is a new angle which I had not thought of,

and it is perfectly true. I said, "After all, Mr.

President, you can make up your mind at the last moment,
and make up your mind in a split second," 11 and he said,
"Absolutely.
"