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4th November 4, 1939 To: The Secretary From: Mr. Hanes Bob Doughton and Jere Cooper asked me to meet them this morning at 8:30 in Bob Doughton's office. We had a long conversation about the program for continuing the studies on the tax structure. I outlined my position to them as follows: 1. The House of Representatives passed a resolution last summer authorizing the Ways and Means Committee to make a thorough study of the administrative and legislative features of the Revenue Law. 2. The Ways and Means Committee directed its subcommittee to comply with that resolution. 3. As a result, Chairman Jere Cooper in the last two weeks of the last Congress conducted a series of meetings with the staff of the Treasury and the staff of the Joint Committee of the Ways and Means and of the Senate Finance. 4. As a result of those meetings the subcommittee instructed the Joint Committee staff to work with the staff of the Treasury in the study and preparation of data upon some 75 specific items of the Revenue Law. 5. The Under Secretary of the Treasury was authorized to conduct on behalf of the subcommittee of the Ways and Means Committee informal hearings here in Washington or elsewhere with taxpayers and the public generally, with a view of getting from all groups interested as much information as possible on the practical approach of the tax law and its effect upon the economy in general. 6. Following these instructions the Under Secretary of the Treasury sent the attached letter to approximately 1500 people, representing labor, agriculture, industry, the professions, and as well, the general public. 7. The response to this appeal for assistance was instantaneous and the good will developed thereby has become increasingly apparent. More than 283 individuals have appeared in person at a series of informal hearings conducted here in the Treasury and we have collected a mass of very valuable data which I hope will form the nucleus for a permanent a record for the future. I might add that the Treasury staff has done 205 206 -2- - magnificent job in their sympathetic approach to the individuals that have visited the Treasury during the past 60 days. It has been a tedious task and I believe has definitely created the impression throughout the entire country that the Treasury is trying to do a sincere and earnest job. 8. I told Messrs. Doughton and Cooper that in my opinion the worse thing that could possibly happen from our viewpoint was for the subcommittee to pass over this cooperative effort lightly as it would mean that the Treasury would never be taken seriously again by those who have given so willingly of their time. 9. This brings me to a concrete recommendation that the subcommittee meet next week in accordance with their schedule and that the Joint Committee staff and the Treasury staff submit to them such data as has been compiled. The Treasury is not in a position nor is it our desire at this time to make specific recommendations for change in the tax structure. We are, however, prepared to lay before the Joint Committee a completely impartial study of all the items assigned to us by them. 10. I told Messrs. Doughton and Cooper, when asked for my personal opinion, I was not at all sure that it would be desirable to open up the tax question at this time, that I felt definitely this was a question to be weighed very carefully between the leaders in both Houses, together with the Secretary of the Treasury and the President of the United States. However, at this time it is not necessary to cross that bridge, since the study which they have been authorized to make may continue for an indefinite period. 11. At no time during this conference nor during any other conference has the Treasury ever made reference to specific recommendations for changes of any kind. We have not been authorized to do so and shall not do so until we have been authorized or instructed by the Secretary of the Treasury on each and every step. J.W H. 207 COPY The Subcommittee of the Ways and Means Committee of the House of Representatives has been instructed (H. Res. 277) to make a thorough study of internal revenue taxation during the recess of the Seventy-sixth Congress. The Chairman of this Subcommittee, Mr. Jere Cooper, is desirous of having all pertinent material ready for presentation early in the next session of the Congress. With the approval of his Committee, I am writing to ask your cooperation in this effort to work out a tax revision program which will further improve the laws relating to individual and corporation taxes, the regulations derived therefrom and the administrative procedure in their collection. If you - or any organization with which you are connected - should be interested in having your views placed before the Committee in full, I shall be glad to arrange, at a time convenient to you before November 1st, a private hearing before the Treasury staff assigned to compile a record of present public tax opinion. Your views will receive every consideration and I shall appreciate your help. This is our common problem and a successful effort toward its solution will depend largely on our mutual and sympathetic understanding of the questions that confront both the Government and the taxpayer. I shall await your answer with interest. Sincerely yours, GENERAL COUNSEL TREASURY DEPARTMENT WASHINGTON 208 Villa November 4, 1939. My dear Mr. Secretary: Eddie Greenbaum telephoned changes in his memorandum which you took with you last night, and I am enclosing a redraft incorporating these changes. I thought you might like to have this before you in case you should be talking with Eddie before your return. I understand that Eddie does not desire to sign his memorandum until after Mr. Knollenberg has had a chance to see it. Eddie had not heard from Mr. Knollenberg when he made the changes incorporated in the enclosed redraft. If you want me over the week-end, I can be reached through your operator. Sincerely yours, N. Toley I. Hon. Henry Morgenthau, Jr. c/o Mr. Robert Guex Box 164 Fishkill, New York. Enclosure (1) 209 November 4, 1939 RE: JOSEPH M. SCHENCK, DARRYL F. ZANUCK, WILLIAM GOETZ, WILLIAM B. DOVER AND HARRY KADIS. I concur in Mr. Knollenberg's memorandum dated November 2, 1939 but think it may be helpful to submit the following comments in amplification: 1. The bribery of Revenue Agent Kadis in November, 1936. As stated by Mr. Knollenberg, the Department has not sufficient evidence at the present time to warrant an indictment for the act of bribery alleged to have occurred in November, 1936. However, this does not mean that no criminal action should be taken in connection with the bribery charge, including this specific act. The facts indicate clearly that Agent Kadis was bribed and warrants presentation to a Grand Jury. Such presentation should be as part of an investigation into other related matters, as hereafter indicated, and not as an isolated fact. The following are some of the known facts presently susceptible of proof: Special Agent Kadis accepted substantial favors and gratuities from the taxpayers, including the use of a limousine automobile at a cost to Twentieth Century-Fox Film Corporation of almost $3,500; he secured the employment by this company of a young lady of his acquaintance at a compensation of $100 a week, which employment lasted for several years up to and including February, 1939; he was assigned to a further field investigation in 1938 and promptly notified Dover of this assignment, 210 -2whereupon, Dover cabled Zanuck, who was then in Paris, that he had received a telephone call from Kadis, "our tax man New York", who explained that he had been assigned to the case and felt that this was an "unusually good break falling into his hands instead of others"; Dover, who was neither an attorney or tax expert secured a power of attorney from Mr. and Mrs. Goetz, who had their own counsel, and proceeded to New York for the preparation of affidavits; and Kadis actively participated in the preparation of these affidavits. With these and other facts, it is believed that bribery can be established, not only as against Kadis but those who gave the bribe. Consideration should also be given to the advisability of proceeding under I. R. C. Section 4047(e), R.S. 3152, so far as Kadis is concerned, and with a conspiracy charge so far as others are concerned, As stated in a memorandum of Elmer Irey dated October 30, 1939, the persons responsible for the bribery and the conspiracy should not escape punishment. The original recommendation of the Bureau in this respect is fully warranted by the known facts. Although this task will be made more difficult by reason of the rather perfunctory Grand Jury investigation already made, the situation is sufficiently serious to warrant further action. The Grand Jury investigation only took one hour and twenty minutes, and consisted of calling two hostile witnesses 211 -3- whose testimony might have been helpful, but who were given the opportunity to see the Government's hand and to put white-washing denials in the record. In spite of this it is recommended that further action be taken, and it is believed that this can be done in connection with the prosecutions hereafter recommended. 2. Failure to report taxable profit on exchange of Century stock for Fox stock in 1935. I agree with Mr. Knollenberg that the reorganization did not result in taxable profit to Mesers. Schenck and Goetz. The criminal liability of Messrs. Schenck, Goetz and Zanuck will be discussed in item 4. The tax liability of Zanuck will be discussed in point 3. 3. Failure of Zanuck to report as taxable income the value of certain of the Fox stock received by him in 1935. As pointed out by Mr. Knollenberg, Zanuck would have no taxable gain if the stock he received in the new company was in pursuance of the plan of reorganization "solely for" his Century stock. (Section 112(b)(3)). The documentary evidence as to whether part of this stock was actually received in return for other benefits, such as a more favorable employment contract, is not yet available for our examination. Disparity in the proportion of stock received is indicative that this may be the fact and, if established, would warrant the Bureau in making an assessment for deficiency against Zanuch for 1935. Even in the absence of positive proof at the present time, I feel that under the peculiar and unusual circumstances in this case the Bureau is justified in making and should now make an assessment. 212 -4 If this cannot be ultimately sustained, nevertheless, affidavits furnished by Messrs. Zanuck, Schenck and Goetz furnish basis for assessment in 1934. In these affidavits dated December 23, 1938, they state, under oath, that Zanuck owned 30 per cent of the old Century stock (I have not seen these affidavits, but assume that the excerpts furnished are correctly quoted). If it be a fact that Zanuck did own 30 per cent of the stock prior to the reorganization, there must have been a taxable gain to him at the time when his interest was increased from 20 per cent to 30 per cent. No such gain has been reported by him and his tax liability for the gain is clear. 4. Making a false statement in affidavits filed in 1938. I agree that Section 35 of the Criminal Code is applicable but doubt whether conviction could be obtained if there was no original tax liability. For the reason stated above, however, I feel that such liability on Zanuck's part exists and if that be a fact then I recommend presentation to a Grand Jury of the evidence concerning the acts of Messrs. Schenck, Goetz and Zanuck and other persons whose acts may have violated the provisions of Section 35. Many of these acts occurred in New York, the place where Schenck and the Corporation filed their returns. It is recommended that criminal prosecution be initiated in the Southern District of New York, and it is in connection with such a Grand Jury presentation under Section 35 that I feel that further evidence can be developed on the bribery charges against Kadis -and others referred to above. 5. Schenck's liability on his 1935, 1936 and 1937 returns. As pointed out by Mr. Knollenberg, there is strong evidence, wholly apart from the reorganization question, that Schenck filed fraudulent income tax returns for 1935, 1936 and 1937. This is the subject matter of a letter from the Bureau to the Department of Justice dated July 14, 1939. Although we have had no opportunity to go into this matter fully, my examination of the available papers indicates that in 1935 Schenck took a false deduction of $173,228.33 on an alleged loss resulting from the sale of stock in a Mexican corporation. This stock was alleged to have been sold by him in December, 1935 for $50,000, although in that year he received dividends of $33,853 on that stock, The alleged purchaser of the stock apparently was without funds and Schenck provided him with funds to make the so-called payment of $50,000. In this 1935 return, Schenck took deductions for expenses of which over $28,000 seemed to be clearly false. Although his contract with the corporation entitled him to reimbursement for "reasonable traveling and living expenses while away from home" he made deductions in his personal return, for what he called business expenses and for such items as an automobile purchased for a lady friend, flowers, salary of his valet, personal barber, etc. In his returns for 1936 and 1937 similar deductions appear. In my opinion, there seems ample justification for an additional assessment against him by reason of the alleged loss of stock in 1935 and false deductions for 1935, 1936 and 1937. I like- 213 214 -6wise feel that the facts warrant's fraud penalty and criminal prosecution. General Comments Although I do not agree that the known facts bear out the Bureau as to its contention that tax liability resulted to Messrs. Schenck and Goetz by reason of the reorganization, I do agree fully with the recommendations of the Bureau heretofore made that the facts called for criminal prosecution. Indeed, it seems to me that on the basis of the Bureau's investigation, it would have been derelict in its duty if it had not made a recommendation for action by the Department of Justice. Although it may be beyond the scope of this memorandum, nevertheless, I am taking the liberty of making a further suggestion. It is my feeling that where the Bureau makes a recommendation for criminal action arising out of a tax situation, an assessment should be made against the taxpayer prior to the institution of criminal proceedings. Such assessment should, of course, not be made without con- sultation with those officials in the Department of Justice who will be charged with the responsibility of conducting the criminal proceedings. I am cognizant of the difficulties in connection with the adoption of such a new procedure and understand the reasons why it has been long established policy to postpone making the assessment 215 -until after the criminal proceeding. However, I feel that the Supreme Court's decision in the Mitchell Case overruling the Coffey Case eliminates many of the objections that heretofore existed. Prosecution without a prior assessment furnishes the taxpayer with an opportunity to cry "persecution" by alleging that he is being criminally prosecuted without establishment of tax liability and opportunity to pay his tax. Such an argument might prove a weighty one before a jury in a prosecution under Section 35. It is believed that if the facts warrant an assessment, such an assessment should be made not only to remove the inference referred to above but also to make available the implications which would strengthen a prosecution under Section 35, and, indeed, any prosecution arising out of a tax fraud. Respectfully submitted, 216 November 4, 1939 RE: JOSEPH N. SCHENCE, DARRYL F. ZANUCK. WILLIAM GOETZ, WILLIAM B. DOVER AND HARRY KADIS. I concur in Mr. Knollenberg's memorandus dated November 2, 1939 but think it may be helpful to submit the following comments in amplification 1. The bribary of Revenue Agent Kadia in November, 1936. As stated by Mr. Knollenberg, the Department has not sufficient evidence at the present time to warrant an indictment for the act of bribery alleged to have occurred in November, 1936. However, this dees not mean that no criminal action should be taken in connection with the brikery charge, including this specific act. The facts indicate clearly that Agent Kadis was bribed and warrants presentation to & Grand Jury, Such presentation should be as part of an investigation into other re- lated setters, as hereafter indicated, and not as en isolated fact. The following are some of the known facts presently susceptible of proof: Special Agent Kadia accepted substantial favors and gratuities from the taxpayers, including the use of a limousine automobile at a cost to Twentieth Century-Fox Film Corporation of almost 83,500; he secured the employment by this company of a young lady of his acquaintance at . compensation of $100 a week, which employment lasted for several years up to and including February, 1939, he was assigned to a further field investigation in 1938 and promptly notified Dover of this assignment, Gumbaumi 3rd draft 217 whereupon, Dover eabled Zenuck, who was then in Paris, that he had received a telephone call from Kadie, "our tax men New York", who explained that he had been assigned to the case and falt that this was an "unusually good break falling into his hands instead of others"; Dover, who was neither an attorney or tax expert secured a power of attorney from Mr. and Mrs. Goots, who had their own counsel, and proceeded to New York for the preparation of affidavits; and Kadie actively participated in the preparation of these affidavits. With these and other fasts, it is believed that bribery can be established, not only as against Kadia but those who gave the bribe. Consideration should also be given to the advisability of proceeding under I. R. C. Section 4047(e), R.S. 3152, so far as Kedia is concerned, and with a conspiracy charge so far as others are concerned, As stated in a amorandum of Elmer Irey dated October so, 1939, the persons responsible for the bribery and the conspiracy should not escape punishment. The original recommendation of the Bareau in this respect is fully warranted by the known facts. Although this task will be made more difficult by reason of the rather perfunctory Grand Jury investigation already made, the situation is sufficiently serious to warrant further action. The Grand Jury investigation only took one hour and twenty minutes, and consisted of calling two hostile witnesses 218 whose testimony might have been helpful, but who were given the eyportunity to see the Government's hand and to put white-washing denials in the record. In spite of this 18 is recommended that further action be taken, and 11 is believed that this can be done in connection with the prosecutions hereafter recommended. 2. Failure to report taxable profit on exchange of Century stock for Fox stock in 1935. I agree with Mr. Knollenberg that the reorganization did not result in taxable profit to Means. Schenck and Goots. The oriminal liability of Mesers. Schenek, Goets and Zanuek will be discussed in item 4. The tax liability of Zanuck will be discussed in point 3. 3. Failure of Zanuak to report as taxable income the value of certain of the Fox stock received by him in 1935. As pointed out by Mr. Knollenberg, Zanuck would have no taxable gain if the stock he received in the now company was in pursuance of the plan of reorganization "solely for" his Century stock. (Section 112(b)(3)). The documentary evidence as to whether part of this stock was actually received in return for other benefits, such as a more favorable employment contract, is not yet available for our examination. Disperity in the proportion of stock received is indicative that this say be the fast and, 1f established, would warrant the Bureau in making an assessment for deficiency against Zanuah for 1935. Even is the absence of positive proof as the present time, I febl that under the peouliar and unusual circumstances in this case the Bureau is justified in making and should now make an assessment. 219 If this cannot be ultimately sustained, novertheless, affidavits furnished by Messre. Zanuek, Schenck and Goots furnish basis for assessment in 1934. In these affidavits dated December 23, 1936, they state, under oath, that Zanuek owned 80 per cent of the old Century stock (I have not seen these affidavits, but assume that the excerpts furnished are correctly quoted). If 18 be a fast that Zanuek did own 30 per cent of the stock prior to the reorganization, there must have been a taxable gain to him at the time when his interest was increased from 80 per cont to 30 per cent. No such goin has been reported by him and his tax liability for the gain is clear. 4. Making a folse statement in offidavits filed in 1958. I agree that Section 35 of the Criminal Code is applicable but doubt whether conviction could be obtained if there was no original tax liability. For the reason stated above, however, I feel that such liability on Zanuck's part exists and if that be a fact then I recommend presentation to a Grand Jury of the evidence concerning the asts of Messre. Schenek, Goots and Zanuck and other persons whose asts may have violated the provisions of Section 30. Many of these asts occurred in New York, the phase where Schenek and the Corporation filed their returns. It is recommended that oriminal prosecution be initiated is the Southern District of New York, and is is in connection with such a Grand Jury presentation under Section 35 that I feel that further evidence can be developed on the bribery charges against Kadie 220 B and others referred to above. 5. Schoock's liability on his 1935. 1936 and 1937 returns. As pointed out by Mr. Knollenberg, there is strong evidence, wholly apart from the reorganization question, that Schenek filed fraudu- lent income tax returns for 1935, 1936 and 1937. This is the subject matter of a letter from the Bureau to the Department of Justice dated July 14, 1930. Although we have had no opportunity to go into this matter fully, my examination of the available papers indicates that in 1936 Schenek took a false deduction of $173,228.33 on 1 alleged less resulting from the sale of stock in a Mexican corporation. This stock was alleged to have been seld by his in December, 1935 for $50,000, although in that year he received dividends of $33,853 on that stock. The alleged purchaser of the stock apparently was without funds and Schenek provided him with funds to make the so-called payment of $50,000. In this 1935 return, Schemek took deductions for expenses of which over $20,000 seemed to be clearly false. Although his contract with the corporation entitled him to reimbursement for "reasonable traveling and living expenses while away from home" he made deductions in his personal return, for what he called business expenses and for such items as an automobile purchased for a lady friend, flowers, salary of his valet, personal barber, etc. In his returns for 1936 and 1937 similar deductions appear. In my opinion, there seens ample justification for an additional assessment against his by reason of the alleged loss of stock in 1935 and false deductions for 1935, 1936 and 1937. I like- 221 wise feel that the fasts warrest a fraud penalty and oriminal preseaution. General Comments Although I do not agree that the known facts bear out the Bureau as to its contention that tax liability resulted to Messre. Schenck and Goots by reason of the reorganization, I do agree fully with the recommendations of the Bureau heretofore made that the facts called for oriminal prosecution. Indeed, it seems to me that on the basis of the Bureau's investigation, it would have been derelies in its duty if 11 had not made a recommendation for action by the Department of Justice. Although is may be beyond the seeps of this memorandum, novertheless, I em taking the liberty of making a further suggestion. It is my feeling that where the Bureau makes a recommendation for criminal action arising out of a tax situation, an assessment should be made against the taxpayer prior to the institution of ariminal precoodings. Such assessment should, of course, not be made without con- sultation with those officials in the Department of Justice who will be charged with the responsibility of conducting the oriminal proceed ings. I am cognisant of the difficulties in connection with the adoption of such a new procedure and Understand the reasons why 18 has been long established policy to postpone making the assessment 222 7 until after the criminal proceeding. However, I feel that the Supreme Court's desision in the Mitchell Case overruling the Coffey Case eliminates maby of the objections that heretefore existed. Prosecution without a prior assessment furnishes the taxpayer with an opportunity to ony "persecution" byralleging that he is being oriminally prosecuted without establishment of tax liability and opportunity to pay his tax. Such on argument might prove a weighty one before a jury in a prosecution under Section 35. It is believed that if the fasts warrant an assessment, such an assessment should be made not only to remove the inference referred to above but also to make available the implications which would strengthen a prosecution under Section 35, and, indeed, any prosecution arising out of a tax fraud. Respectfully submitted, STRICTLY CONFIDENTIAL TREASURY DEPARTMENT 223 INTER OFFICE COMMUNICATION DATE November 4. 1939. Secretary Morgenthau TO FROM Mr. Cochran Confirming our conversation of 12:30 today, I give you herewith a few notes: Monet was knighted after the last war by Great Britain. During the war he had occupied an unimportant position in the French Ministry of Commerce. Someone conceived the bright idea of the Hudson Bay Company chartering its fleet, than inactive, to France for the duration of the war. Monet is credited with having put this deal across with the French Government. The charter was profitable to the British concern of which Sir Robert Kindersley, British partner in Lazard Freres of London, is one of the principal shareholders. As a consequence, Sir Robert was influential in getting the knighthood for Sir John Monet. Bloch Laine, who arrived from France two days ago by clipper to head the French Purchasing Missions in the United States, has been a partner in Lazard Freres, Paris, for several years. According to the press, he was met on his arrival by a Morgan representative. A friend in whom I have absolute confidence and who is well acquainted with Morgans told me recently that Morgans in New York had put up to Morgans in Paris the proposition of Monet entering the Paris firm as a partner. The Paris partners had objected to Monet entering their firm, they being more familiar with his record than are the New York partners. My personal opinion is, frankly, that, considering the above factors, plus some already known to us, the Treasury would do well to be left out of arrangements to be consummated by the Foreign Purchasing Commissions. BMK STRICTLY CONFIDENTIAL TREASURY DEPARTMENT INTER OFFICE COMMUNICATION 224 1172 DATE November 4, 1939. TO Secretary Morgenthau FROM Mr. Cochran When the Secretary spoke to me at 9:30 this morning by telephone from Fishkill, I informed him that I had received last night from Mr. Pinsent, Financial Counselor of the British Embassy, a personal note, together with enclosure, in regard to a contemplated order by the British Purchasing Commission. The note and enclosure are attached hereto. In accordance with the Secretary's instructions, I have now telephoned Mr. Pinsent. I informed him that since the matter of liaison with foreign purchasing commissions has not yet been clarified, and may not be thoroughly worked out until next week, the British Embassy should make direct contact with the Far Department in regard to the specific order under reference, especially since the matter appears urgent. When Mr. Pinsent asked me if I was telephoning the War Department, I replied in the negative, but let Pinsent know that he should call me back if his representative had any difficulty at the War Department. I read to the Secretary an item which appeared upon the broad ticker at 9:12 this morning, a copy of which is attached. I told the Secretary that Mr. Leroy-Beaulieu, Financial Counselor of the French Embassy, had telephoned me from New York yesterday evening request- ing an appointment for Wednesday, on or after 11:00 o'clock, to present Mr. Bloch Laine, the partner in Lazard Freres of Paris who has just arrived in this country to be the chief of the French Purchasing Commissions. I explained to the Secretary that Bloch Laine, whom I have known for several years in Paris, was on certain financial missions to this country during the last war. The Secretary desired to have no further contact with representatives of foreign purchasing commissions until the President's instructions in the premises are received. Consequently, I have telephoned Leroy-Beauliento let him know that we shall get in touch with him next week about an appointment. I told the Secretary that an Associated Press report from Paris this morning stated that Great Britain and France are conferring there today on a joint plan for purchases of war materials overseas. The Secretary mentioned confidential information which he had received upon this subject. M.M.R. V BRITISH EMBASSY, WASHINGTON, D.C. November 3rd, 1939 Dear Cochran, Enclosed is a note of a purchase which we wish to make as soon as the Act is signed, with a question whether the Administration can give us certain assistance. Perhaps you will let me know what is the answer, by 'phone - or if necessary, I will come down to see you about it. Yours sincerely, Jempineers Mr. H. Merle Cochran, United States Treasury, Washington, D. C. 225 3 26 As soon as the legislative situation permits, the British Purchasing Commission wishes to place an order for:both 600 G. R. 2600/A5D military } 600 G. R. 205B/587B) rating Wright aeronautical engines. Does Mr. Cochran feel that this morning's conversation justifies our hoping that the U. S. Government would be willing to indicate to us the price at which they are buying these types of engines? If the answer is in the affirmative would Mr. Cochran desire to arrange to obtain the information for us or should we tell Group Captain Pirie, the British Embassy Air Attache, to apply for such particulars through the usual channels at the U. S. War Department? If possible we would like to secure the information by Monday, November 6th, 1939. 227 Set up of a Government priority committee was revealed today to prevent a flood of British and French war orders - $500,000,000 right away - from wrecking national defense plans. It was created last summer as an inter-departmental group known as the clearance committee of the joint Army-Navy Munitions Board. Civilian veterans who kept supplies moving and factories properly occupied in 1917-18 have been aiding the streamlined 1939 model priority group. Among those who have conferred here was Walter S. Gifford, President of the American Telephone and Telegraph Company. The committee has been in touch with foreign Governments to suggest how orders should be distributed here to insure minimum conflict between Anglo-French production and that which is essential for our own armed forces. Col. Charles Hines is executive officer of the committee which includes, War, Navy,Treasury, Justice and State Department representatives. notread TREASURY DEPARTMENT INTER OFFICE COMMUNICATION 14 228 DATE November 4. 1939 Secretary Morgenthan TO Mr. Cochran FROM The main feature of the foreign exchange market was the drop in the rate for sterling. In Amsterdam, sterling was quoted at 3.99 and in New York it opened at 3.98-5/8. Shortly after the opening here, miscellaneous selling orders for small amounts of sterling, including Japanese, came on the market and the rate declined. About mid-morning it was quoted at 3.97-1/2. At that time it was reported that the Japanese were the only sellers of sterling and that the Chase Bank had received an order from Rumania to sell 1200,000. The Chase Bank withheld its order from the market temporarily, pending disposal of the sterling offered by the Japanese. The rate eventually reached a low of 3.96-1/8 and closed at 3.96-1/4. Sales of sterling by reporting banks in New York totaled 375,000, from the following sources: Commercial concerns L 38,000 4337,000 Foreign banks (Europe, Far East and South America)Total 4375,000 Purchases of sterling amounted to 1279,000, as indicated below: By commercial concerns L 96,000 1133.000 By foreign banks (Europe, Far East and South America) Total 1279,000 The banks also reported that the British Control purchased sterling amounting to 69,000 at the official rate of 4.02. All of this sterling represented cotton bills. The Federal Reserve Bank purchased for the Central Bank of Uruguay 500,000 French francs, 120,000 Guilders and 50,000 Swedish kronor. The Chinese yuan was quoted at .09-1/4, the high for the current upward movement. It was reported that the Chinese Control was purchasing sterling in Shanghai. We purchased from the Netherlands Bank $650,000 in gold from its earmarked account. CONFIDENTIAL $ -2 - - 229 The Federal Reserve Bank reported to us the following shipments of gold con- signed to it: $2,974,000 from England, for the account of the Netherlands Bank. 2,075,000 from England, for the account of the Bank of Portugal. 1,560,000 from Italy, to be held at the disposal of the Swiss National Bank. 530,000 from Italy, for the account of the Bank of Italy. $7,139,000 Total The disposition of these shipments is unknown at the present time. In yesterday's report mention was made of a gold shipment of approximately $2,000,000 from the Bank of England and the possibility that the shipment may be the beginning of resumption of gold shipments to the U. S. for official account. We have now been advised that this shipment is being made by order of the Bank of Portugal, and it is one of the shipments of gold listed above. CONFIDENTIAL 230 PARAPHRASE OF TELEGRAM RECEIVED FROM: American Embassy, Paris NO.: 2660 HA DATE: November 5, 1939. SECTIONS ONE TO FIVE Yesterday morning we took Butterworth to call on our Bank of France friend. Couve de Murville lunched with us, and neither he nor our friend at the Bank of France nor Rueff could furnish any estimate, even in round figures, of probable war purchases in the United States by the French during the first six months or year of the war. Neither were they able to estimate to what extent these purchases would be offset by nonpurchases of a number of peacetime imports normally made by France which she would probably be forced to do without because of the urgent need of conserving her resources. (Examples would be the normally sizeable imports of apples and pears from the United States.) Other pertinent aspects of the problem regarding which the authorities in France do not as yet have clearly evolved ideas are the volume of French imports in the future and the extent to which trade will be diverted for political or military reasons. Reference 231 (Reference is made to our telegrams no. 2587 of October 26, 7 pm., no. 2632 definite of November 1, and no. 2635 The/impression was gained by of November 2, 3 p.m.) us, as well as by Butterworth, however, that no sudden or immediate wave of war payments coming due in the United States is anticipated by the French but it is anticipated rather that there will be a steady but rather gradual upward curve in such payments. The cost and physical difficulties of shipping gold to the United States when it shall become advisable to make such shipments is causing our friend about at the Bank of France some worry. The conclusion has/been reached that sending it by Warship to Canada and from Canada to New York by train is the only practical method. He stated that incidentally, in anticipation of approaching war, he personally had for a long time been in favor of keeping large amounts of French gold in the United States. (He said he had urged the British to take similar steps also but without result.) Our friend at the Bank of France asked a number of questions with reference to exchange control policy in Great Britain. He then stated that although in many ways the British have a more complicated problem than that faced by France because of the part played by London as a 232 a world financial center and because of the part which sterling plays in trade between third countries, Britain for these very reasons has a supply of trained and exchange-minded personnel, and he lamented the fact that such a personnel is almost non-existent in commercial and banking circles in France. In addition, the Bank of France had been about decimated by the general mobiliza- tion; he said that actually the army had taken 90 percent of the personnel in important sections of the bank's activities. At first this personnel had been replaced by old retired employees who had long ago lost both the habit of work and the capacity for it, and by partly trained women who were not able to stand the strain of the work in question. He said that almost insurmountable difficulties had been presented to France (and to him!) by being faced with a situation like this at the very moment when such a new and complicated system as was involved in exchange control (a system which was 80 distasteful to French instincts) was being established. He stated that the situation is improving slowly now, and Governor Fournier last week was able to secure the release by the military authorities of 150 keymen of the bank who were stationed, it 80 happened, in the interior districts. (There will be no release of those stationed 233 stationed at the front with the army no matter how much the country may need them in its economic life.) The importance of the problem and which general mobilization presents to France and the paralyzing effects produced by it, cannot be over-emphasized. Happily for them, this factor scarcely appears as yet in the British picture. This has been called to your attention before (our telegrame no. 2445 of October 12, 8 pm., no. 2499 of October 17, 6 p.m., and no. 2632 of November 1, 7 p.m.) but we take the liberty of repeating it since we feel that in any attempt to judge the future trend of finance and war economy in France, this factor should be kept oonstantly in mind. The prospect of the unofficial franc exchange quotations in New York and elsewhere seemed to cause our friend concern. With some amusement he remarked that through the sizeable quantities of france which had been furnished to French Embassies and Consulates in foreign countries and through the developments of the Mendelssohn loan, the French Treasury had been the chief seller on the Black Bourse. (He added that he had always been opposed to the Mendelssohn loan because 90 percent of the final purchasers were French anyway.) As is everyone else in France, our friend was delighted 234 has been lifted delighted that the arms embargo. He said somewhat sharply, however, that he wished such detailed and accurate accounts of prospective French war purchases in the United States would not be published in the press in the United States. He felt that the German submarine high command must find such accounts of real value. EA:EB END SECTION FIVE 235 GRAY HR Paris Dated November 5, 1939 Rec'd 12:50 p.m. Secretary of State Washington 2660, November 5, 1 p.m. (SECTION SIX) Butterworth left last night by train for Lisbon. Under a decree published in the Journal Official of yesterday supplementary credits totaling 810 million francs are authorized under the war budget for 1939 to provide for increased pay and allowances for soldiers and their families and a "combat indemnity" of ten francs daily to all ranks directly Engaged in the front lines or fighting. Another decree provides for adjustment of the production tax as envisaged under Article Four of the deCREE of November 12, 1938 (SEE the Embassy's despatch No. 3272 of November 15, 1938). The object of this measure is to clarify the stipulations of the production tax law and to adjust it with a view to increasing its yield. (END MESSAGE.) BULLITT WWC T FEDERAL RESERVE BANK OF NEW YORK 236 DATE November 6, 1939. FICE CORRESPONDENCE CONFIDENTIAL FILES F/C 71(e) SUBJECT TELEPHONE CONVERSATION WITH L. W. Knoke BANK OF ENGLAND. Mr. Bolton called at 10:08 a.m. He expected to get a great many inquiries in connection with the Neutrality Act, he said, and particularly in connection with the question of financing exports from the United States to the United Kingdom. Could a private buyer arrange bank credit, or just what was the situation? I replied that I had not actually seen the bill in its final form but would look into the matter and let him know. His next question dealt with gold: one of the commercial banks in London had been asked by the Central Bank of Uruguay whether they would make advances against gold as collateral held on deposit in the United States. I replied that not only was the earmarking of gold in the United States subject to license but also the acquisition of a benefial interest; that only one such license had been issued to a commercial bank here in the last five years and that that had not been availed of. I asked Bolton the following question put up to us by the Federal Reserve Bank of Chicagos "May a British subject residing in Chicago who has American securities registered under the British Defence Act sell these securities provided the proceeds of sale are deposited with Federal Reserve Bank of New York for account of the Bank of England; the securities are physically located in Chicago." 237 FEDERAL RESERVE BANK OF NEW YORK DATE November 6, 1939. FFICE CORRESPONDENCE CONFIDENTIAL FILES SUBJECT TELEPHONE CONVERSATION WITH BANK OF ENGLAND. L. W. Knoke 2 The answer was simple, Bolton replied; a license was necessary and application should be made through the English bank in con- nection of the owner of the securities. If the inquiry came from the Federal Reserve Bank of Chicago we could pass it along to him, if we wanted to, and they would try to arrange for the license. (It appears that the transaction has become subject to a license although the owner of the securities is a resident in Chicago and the securities themselves are located in Chicago because the owner registered the papers under the British Defence Act.) Was there anything new in the Osborne matter, I asked, and Bolton replied that he was sending us a cable today asking us to put our plan into effect and place $1,000,000 at Osborne's dis- posal. If I wanted to, I could pass this information on to Osborne. I called Mr. Bolton at 12:35 and referred to his earlier question as to the financing of exports from here to the United Kingdom. I told him I had had a chance to look into the matter a little and according to my very informal and personal opinion, there was nothing in the new statute which prohibited credit by private persons here to private persons abroad as long as the latter did etc. belligerent not act on behalf of the governments/and provided that no sale of arms, munitions or war implements was concerned, and also provided 238 FEDERAL RESERVE BANK OF NEW YORK DATE November 6, 1939. FICE CORRESPONDENCE SUBJECT TELEPHONE CONVERSATION WITH CONFIDENTIAL FILES BANK OF L. W. Knoke 8 ENGLAND. form Mr from that full title to the merchandise had passed to the buyer. In other words such credits would be unsecured credits with the seller assuming the full credit risk. That being so, Bolton thought that this requirement seemed to stop one sort of business, namely, the shipment on consignment of goods (agricultural instruments, lorries, etc.) to agents in the country of sale. I replied that my first reaction would be to agree with him although, as I had mentioned before, I was as yet very little familiar with the whole problem. I referred to our exchange market and to the fact that sterling was under some pressure, having sold down to 3.93 3/4 this morning. As mentioned in our recent cables the selling had been in part due to offerings by the Japanese. Bolton replied that they understood that the latter had £1,000,000 to sell; nobody knew where they got it from and what made the transaction more mysterious was that the Japanese quota under the Australian wool export was between £5,000,000 and £6,000,000, which the Japanese would have to cover sooner or later. The continental selling to which our recent cables had made reference, I continued, was for account of Rumania and here again we were wondering where the Japanese were getting the sterling balances. I explained that we had reason to believe that the total amount of dollars which the Rumanians were trying to accumulate would be in the neighborhood of $10,000,000, that about 1/8 of that had been accomplished by means of Swiss franc and sterling sales and we 239 FEDERAL RESERVE BANK OF NEW YORK DATE FICE CORRESPONDENCE CONFIDENTIAL FILES November 6, 1939. SUBJECT: TELEPHONE CONVERSATION WITH L. W. Knoke BANK OF ENGLAND. 4 were wondering now how much more sterling would be offered by them in addition to the £750,000 done in the last few days. Bolton replied that he had no idea where the sterling was coming from, either in the case of the Japanese or in that of the Rumanians. One must remember, however, that all foreign balances were free in London. As far as the Rumanians were concerned, the starling might be the proceeds of some orders which had been given to them for the purchase of grain and petroleum. He continued that what I had told him was of particular timely interest because they were at the moment negotiating an agreement in London with Rumania. Bolton then referred to the possible purchase ofabout £1,000,000 by a company of the International Tel. & Tel. group, which might fall due in a week or so and would have to be covered at the official rate. If that transaction were to be closed in New York, would it be possible for us to act for account of the Bank of England? (It appears that the business has to be done at the official and not at the current lower rate for sterling because the company which owes the amount is a British company and, as such, not allowed to operate in the outside market.) I replied that I could see no reason why we should not be ready to execute the Bank of England's order. DIVISION LEK:KW PER SUNV 229 A No. V. November 6, 1939. French purchases in the United States. Since October 30, the French Missions have placed to date the following orders: 1.- BURGESS CO. INC., Beaver Falls, Pa. Contract of October 31,1939. 1.500.000 projec- tiles at $ 5128,& 1.500.000 projectiles at $3087 $1,232,250.00 2.- BALDWIN LOCOMOTIVE WORKS, Eddystone, Pa. Contract of October 31,1939. 6 machine tools (presses) 94,180.00 3. THE R.K. LE BLOND MACHINE TOOL CO., Cincinnati, Ohio. Contract of November 1,1939. 718 machine tools 1,700,657.00 4.- REED PRENTICE CORPORATION, Worcester, Mass. Contract of November 1,1939. 48 machine tools 194,036.21 5.- SPRINGFIELD MACHINE TOOL CO., Springfield, Ohio. Contract of November 2, 1939. 56 machine tools 212,088.00 6.- THE PRODUCTO MACHINE COMPANY, Bridgeport, Conn. Contract of November 3,1939. 3 machine tools 37,950.00 7.- TAFT PEIRCE MANUFACTURING CO., Woonsocket, R.I. Contract of November 2,1939. Divers calibers 32,185.14 8 AUTO ORDNANCE CORPORATION, 270 Broadway, N.Y. Contract of November 1,1939. Loaders and equipment 9 AUTO ORDNANCE CORPORATION, 270 Broadway, N.Y. Contract of November 1,1939. Thompson machine guns to 259,200.00 525,000.00 GENERAL MOTOR CORPORATION, New York. Contract of October 14, 1939. 2000 trucks at $1588 each and $ 75.000 spare parts $3,251,000.00 240 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE November 6, 1939. TO Secretary Morgenthau FROM Mr. Cochran Sterling opened this morning at 3.96-3/8. The rate deteriorated shortly to 3.95. due principally to sales by the Japanese. We received word from New York that the Chase Bank had an order to sell 6250,000 for the Bank of Rumania. At the end of last week the Bank of Rumania sold 550,000. It is our belief that these sales are being made to acquire dollars for the purchase of some $11,000,000 worth of gold which the Bank of Rumania last week notified the Federal they desire to purchase. As the rate continued to decline, and we had received no comment from Mr. Knoke thereon, I telephoned him at 10:50. I referred to the weakness in sterling and asked if he had been in touch with the Bank of England in regard thereto. He replied that the Japanese were selling and that such markets were inevitable. I told him that I could understand how sales by one or two big sellers on a comparatively thin market would have a depressing effect. My only point was that the drop this morning had been so sharp, and considering that the Bank of Rumania might still be offering some 62,000,000 to complete their gold purchase, I thought the Bank of England ought to be informed as to the situation on our market. Knoke then volunteered that he had received a call from Bolton early this morning, but that the rate of exchange had not been discussed, the conversation being limited to a question by Bolton upon our neutrality legislation. I told Knoke that I would be much happier if he would call Bolton back and volunteer information as to the sterling market here, without raising any question or suggesting any action on the part of the British. Knoke telephoned me at 12:47 that he had talked with Bolton. The latter had known about the Japanese selling and understood that they had about 11,000,000 to dispose of. He did not know how the Japanese happened to have so much to sell, especially since they must pay 4 or 5 million pounds in the near future for Australian wool. Bolton was keenly interested in the news of Rumania selling their sterling, and evidently appreciated Knoke's initiative in calling him. Bolton did not know where the Rumanians got their sterling, but found particular interest in the sale thereof, since the British are now talking of a new trade agreement with Rumania. Knoke will send me a transcript of his conversation with Bolton, as well as the notes of a talk which he had with Cariguel, also this morning. Cariguel had talked to his principally in regard to the proposed arrangement for an official with of the French Ministry of Finance to draw checks on the Bank of France account the Federal Reserve Bank of New York, I transferred Mr. Knoke to Mr. Bernstein for an answer which Mr. Knoke required with respect to the credit phases of our neutrality act. KMR 241 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION CONFIDENTIAL DATENOVEMBER 6, 1939 Secretary Morgenthau TO FROM Mr. Haas HBA Subject: The Business Situation, Week ending November 4, 1939. Summary (1) The prospect of a business setback in the first half which have operated to restrain overproduction this fall and others to strengthen the outlook for next year. The prospective slackening in early 1940 may therefore take the form merely of a levelling out of the business trend, assuming that the war of 1940 has been diminished by a number of influences, some of continues. (2) Industrial production in October, in terms of the FRB index, reached within approximately 1 point of the 1936-37 peak of 121, and may reach or exceed the 1929 peak of 125 before the end of the year. This marked increase in business activity, while due in part to present and prospective war orders, 16 based fundamentally on the general improvement in the underlying domestic situation which began in 1938. (3) The possibility of near-term overproduction is minimized by the relatively greater increase in durable goods output, part of which 18 going directly into increased capital equipment in various industries. Since these goods are taken off the market, the effect on the business outlook 18 more favorable than if a considerable part of the production represented nondurable goods going into inventories. The present situation Looking at the current business recovery in broad perspect- ive, it should not be considered more than a normal development if the volume of business activity should soon surpass the 1929 high, various observers. Recovery from the other countries depression as expected in most by leading has high already levels, carried though their industrial production indices to new this has been accomplished partly through armament activity. An 8 per cent increase in the population of the United States since 1929, and new inventions in various industrial fields, 242 Secretary Morgenthau - 2 have expanded the potential volume of consumer demand and industrial production. These may have been offset, on the other hand, by certain unfavorable factors, notably the curtailment of export outlets since 1929, and the widespread individual losses in the banking crisis of 1933 (not generally suffered by other countries) from which this country has been slow to recover. Evidence that the unfavorable factors are being overcome, however, is shown by the fact that the present business upturn clearly represents an extension of the recovery which began in 1938, and would have occurred regardless of the outbreak of war, though at a less rapid rate. At no time during the 1938 recovery did industrial production get really out of balance with con- sumption or demand, according to our basic business indices. The temporary downturn in early 1939, which was exaggerated by the coal strike and the European crisis, represented merely a consolidation of previous gains, which put the national economy on a more solid footing to resume its general improvement. The renewed recovery this fall carried industrial production in October to approximately its 1936-37 peak, and within a few points of its all-time high reached in 1929, according to a preliminary estimate of the FRB index. (See Chart 1) The estimated October figure of 120 compares with the high of 121 reached in December 1936 and with the June 1929 peak of 125. Further gains during the rest of the year are widely expected. Effect of capital goods expansion The business outlook is strengthened by the near approach to capacity operations in various industries, which will necessitate increased capital expenditures for enlargement of capacity, thus providing an additional source of demand for industrial materials. The railroads this fall were first to need increased capacity, and their orders for freight cars, locomotives, and track materials, have been an important factor in raising steel activity to its present rate. Reflecting increased operations in the capital goods industries, the FRB index of durable goods production (see lower section of Chart 1) has risen from a low of 71 in May to 103 in September, or 45 per cent, while the rise in production of nondurable goods has been only 10 per cent. This has sharply increased the ratio of durable to nondurable production, but not to a level where it may be considered excessive. 243 Secretary Morgenthau - 4 commentators continued bullish, and inventory accumulation was overlooked. (c) Active policies adopted by industrial leaders to discourage speculative buying, through allocation of orders according to previous volume and through other methods, has been a further constructive influence. (d) The near approach to capacity operations in certain industries, notably in steel, and the hampering of automobile production by strikes, has operated to restrain output this fall and throw it partly into 1940. (2) Prospective support for business next year, which will tend to prevent a setback at that time, is provided by a number of factors: (a) Export orders will doubtless be a more important business factor in early 1940 than they are now, owing to repeal of the arms embargo, the placing of foreign orders that had previously been turned down because of the pressure of domestic business, and the development of increased trade between this country and South America. (b) Further capital goods expansion on a considerable scale may be seen next spring, due to a prospective enlarge- ment of capacity in various industries to relieve threatened plant shortages. Recent orders placed by the railroads, which were first to initiate a large-scale expansion program, will help to sustain steel operations in the early part of next year. The utilities have recently announced plans for substantial increases in capacity in 1940, following successive new peaks in power output. Current estimates of expendi- tures by this industry in 1940 of between $600,000,000 and $650,000,000 are about one-third more than this year. (c) Our basic indices and other data show a definitely stronger business foundation than during the 1936-37 rise, justifying our belief that the general recovery now under way is not likely to receive an important setback in the near future. New orders index continues decline The more conservative trend of buying in recent weeks is reflected in the fifth successive decline in our weekly index of new orders during the fourth week of October. (See Chart down 2) All to three groups were lower for the week, with textile orders well their pre-war volume. The total index, however, remains above any other week this year previous to September, and justi- fies expectations of a further rise in industrial production. 244 Secretary Morgenthau - 3 A favorable aspect of the increased production going into capital equipment is that these goods are largely taken off the market and do not provide a burden of inventories to be liquidated, as would an overproduction of consumers' goods. It is important to keep in mind, however, that capital expansion is extremely sensitive to changes in the business or financial outlook. This accounts for the traditional belief that a business recovery sustained largely by the production of capital goods is unusually vulnerable to adverse developments. So long as the volume of consumers' goods moving into con- sumption bears a reasonable relationship to the volume of capital goods purchased, the situation will remain favorable. This relationship got seriously out of line in 1937, when the production of durable goods became excessive in relation to nondurable (as shown in Chart 1) at a time when the nondurable goods themselves were not moving into consumption as rapidly as they were being produced. The present business outlook Probabilities appear to be increasing that no material setback in business will occur in the first half of 1940, assuming that the war continues, and the expected slackening in business activity at that time may take the form merely of a flattening out of the business trend. This improvement in the outlook arises from a number of influences that have recently become more apparent: (1) Certain factors have been operating to minimize the danger of an excessive business expansion this fall: (a) The speculative attitude toward the price outlook Fear of wartime price inflation has largely been dissipated by the recent uninspiring trends of the commodity and stock markets, and by the continued inaction of the belligerent armies. has changed markedly since the buying boom of early September. (b) The almost unanimous opinion among business ob- servers that a setback will occur in early 1940, which has been thoroughly publicized, and the reiterated fears of excessive inventory accumulation expressed in most trade busi- and financial reviews, have had a restraining influence on the ness expansion this fall and are tending to prevent anticipated early-1940 setback. The situation thus differs widely from that in the early part of 1937, when business 245 Secretary Morgenthau - 5 Among the individual companies, it is worthy of note that sales of commercial gases by Air Reduction have risen sharply, apparently reflecting increased construction activity and increased use in the steel industry for such operations as welding and brazing. A greater than usual fall increase in sales by Johns-Manville and Sherwin-Williams apparently also reflects increased construction activity, probably for industrial expansion. This is confirmed by a 71 per cent increase in private heavy construction awards during the four weeks in October, as reported by the Engineering News Record, over the corresponding weeks in September, while public awards showed a 6 per cent decline. Important news in the steel orders situation was the booking of orders last week by several makers of steel plates at unchanged prices for first quarter delivery. This does not necessarily indicate that other steel prices may not be raised, but is nevertheless encouraging to steel buyers. Exporters of steel report a steady increase in export inquiries and sales, and say that they could dispose of at least twice the amount they are selling if the steel were available. Principal export orders are coming from South America, South Africa and the Far East. An acute steel shortage among companies making automobile parts is preventing full acceptance of foreign orders for trucks, according to Ward's Reports, since the truck companies cannot make firm commitments for the necessary parts. The price situation Speculative interest in the commodity markets continues to be dampened by the lack of activity on the war fronts, and by the resulting uncertainty over the trend of demand for commodities. The BLS all-commodities index has accordingly level- led out and shows a downward tendency. (See Chart 3) During the week ended October 28, the price index of semi-manufactured goods showed noticeable weakness, declining nearly 1 per cent, while the price averages for raw materials and finished goods were slightly lower. Among the basic commodities, sugar futures last week declined to a 5-year low, reflecting the pressure of supplies released by abandonment of the quota plan. Tin prices turned downward on an increase in export quotas from 70 per cent to 100 per cent of standard. Cottonseed oil and lard were relatively weak, reflecting a continued heavy movement of hogs 246 Secretary Morgenthau - 6 Recent weather to market. Wheat and cotton strengthened on adverse reports. rainfall in the Mississippi and Ohio valleys, while improving the crop outlook in some sections, has missed the important wheat area in western Kansas and Nebraska. Advising against further commitments in most commodities for the time being, the November report of the National Association of Purchasing Agents mentions that "inventories are being increased across the country, and this procedure is apt to continue through the remaining weeks of the year," The increase, however, is said not to have been carried to the point of overstocking, since manufacturers are fully aware of the danger in excessive inventories, but merely to protect manufacturing operations through the early months of next year. Stock market inactive The repeal of the arms embargo last week had little effect on stock prices, and the Dow-Jones average of 30 industrials continues within the limited range established early in September slightly under the high reached in the fall of 1938. (See Chart 4) The total volume of transactions on the New York Stock Exchange during October declined to the smallest volume recorded for that month, with one exception, since 1924. This contrasts markedly with the speculative activity in September, when total transactions were the largest for that month in seven years. The dampening of speculative interest in recent weeks may be traced to several factors. The failure of war activity to increase, as had earlier been expected, and the many confusing cross currents in recent European developments, have led to uncertainty among traders as to the duration of the war and the effect of the war on American industry. Judging from the stock market action, there is no real conviction that the war will be long continued. The steady selling of American securities by Great Britain, and the prospect that the volume would be increased on any strong market upturn, have tended to dampen speculative enthusiasm. Fear of taxes on war profits of industrial corporations has probably, as in 1916 and 1917, also tended to restrain speculative buying. Nevertheless, a strong underlying situation in the stock market is indicated by the relatively low level of stock prices in comparison with current corporation earnings, by the failure of active selling to develop on unfavorable news, and by the very low level of brokers' loans, which reflect the smallness of speculative stock holdings. 247 Secretary Morgenthau - 7 Brokers' loans have declined steadily through most of the year, reaching a few weeks ago the lowest level since early 1933. (See lower line on Chart 4) In past years, as indicated by the monthly data at the left of the chart, very low levels of brokers' loans have been reached just before substantial upturns in stock prices. Current business activity The New York Times index for the week ended October 28 rose 1.2 points to 104.7, a new high since mid-September 1937. (See Chart 5) All components were higher except the index of miscellaneous carloadings, which declined 2.6 points. Total carloadings declined to 834,016 from 861, 198 the previous week, apparently indicating that the fall peak has been passed. The adjusted index of steel ingot production (lower section of chart) has risen steeply in recent weeks to a new high since 1929. The adjusted index of cotton mill activity, on the other hand, has made no further gains during the past month, but has flattened out at approximately the early 1937 level. The rate of steel output is scheduled for the current week at 92.5 per cent of capacity, up 1.5 points, exceeding for the first time the 1937 high of 92.3 per cent. The rate of output reached 100 per cent of capacity during June 1929. Chart 1 248 INDUSTRIAL PRODUCTION. AND DURABLE AND NON-DURABLE GOODS PRODUCTION 1919 1921 PER CENT 120 110 100 90 1923 1925 Seasonally Adjusted 1927 w 1929 1931 1933 1935 1937 1939 PER CENT (Ratio) 140 Industrial Production 100) 120 100 Ratio of Durable to 80 Non-Durable Good's 80 60 70 40 60 20 50 1921 1923 1925 1927 1929 1931 1933 1935 0 1919 PER CENT 1937 1939 PER CENT 130 130 120 120 Non-Durable Goods 110 100) 110 100 100 90 90 80 80 70 70 60 60 Durable Goods 50 50 40 40 30 30 20 1919 1921 - 1923 1925 1927 1929 20 1931 1933 1935 1937 1939 Office Secretary Treasury C-227 INDICES OF NEW ORDERS Combined Index of New Orders and Selected Components 1939 1940 PERCENTAGE POINTS PERCENTAGE POINTS 160 160 150 150 140 140 130 130 120 120 TOTAL (COMBINED INDEX) 1936 100 110 110 100 100 90 90 80 80 70 70 60 60 TOTAL EXCLUDING STEEL AND TEXTILES 50 50 40 40 STEEL ORDERS 30 M 30 20 20 10 10 TEXTILE ORDERS 0 0 N D o $ A J J -.--- Office at the Secretary of the Treasury 1939 J 1938 M M 1940 I 85 B B.L.S. ALL COMMODITY PRICE INDEX AND COMPONENT GROUPS 1926 100 PER PER CENT CENT All Commodity Prices 82 82 80 80 78 78 76 76 74 74 72 III ... +11 JAN. MAR. MAY +++ JULY 1938 SEPT. + NOV. +++ JAN. MAR. ......... +++ MAY JULY 1939 SEPT. 72 NOV. PER PER CENT CENT Component Groups 84 84 82 82 FINISHED PRODUCTS 80 80 78 78 SEWI-MANUFACTURES 76 76 74 74 M 72 72 70 70 RAW MATERIALS 68 68 66 - JAN. ... MAR. - of - - I Office of the Secretary of the Treasury JULY MAY 1938 SEPT. 111 111 ... +++ NOV. JAN. MAR. MAY 66 JULY SEPT. NOV. 1939 250 P. 173-A Chart 3 STOCK PRICES AND BROKERS LOANS 1932 1934 1936 DOLLARS 1938 1940 DOLLARS MILLIONS Monthly DOLLARS DOLLARS WILLIONS Weekly 190 1580 190 1580 100 1500 180 1500 170 1420 170 1420 160 1340 160 1340 DOB-JONES 30 INDUSTRIA DOW JONES 30 INDUSTRIALS 150 1260 150 1260 II 140 I'l 1180 140 1100 130 1100 1020 120 1020 940 110 860 100 1180 130 120 110 940 100 860 90 780 90 700 80 780 BROKERS LOANS 80 700 SBOKERS LOANS 70 620 50 380 300 1934 1936 1938 1940 40 30 460 . 460 540 380 ill . 60 300 BUSH . . 540 19 39 . before 620 70 LOANS TO BROKERS AND DEALERS IN SECURITIES BY WEEKLY REPORTING MEMBER BANKS IN NEW YORK CITY. P 186 BUSINESS ACTIVITY PER Seasonally Adjusted Est Normal 100 CENT 110 100 37 36 90 38 39 80 70 N.Y Times UNITED 60 JAN. MAR. CENT JULY NOV SEPT. COTTON MILL ACTIVITY STEEL INGOT PRODUCTION PER MAY PER Est Normal - 100. Adjusted CENT 1921-31-100 Adjusted 140 120 39 100 120 36 37 36 80 100 38 39 60 80 30 40 60 N x Times NY Times 20 JAN MAR MAY tice of the Secretary of the Treasury Orrigion Research and Statistics JULY 40 SEPT NOV JAN MAR MAY JULY SEPT. NOV. -235- 26(f) FEDERAL RESERVE BANK OF NEW YORK OFFICE CORRESPONDENCE CONFIDENTIAL FILES L. W. Knoke SUBJECT time DATE November 6, 1939. 253 TELEPHONE CONVERSATION WITH BANK OF FRANCE. Mr. Cariguel called at 9:45 this morning. He understood, he said, that there had been some trouble in connection with the opening of an account on our books in the name of the French Treasury and that Mr. Morgenthau did not approve of that; they were anxious to know just exactly what the position was. I explained that as far as I knew, the Treasury Department, for technical reasons, was now favoring the opening of an account on our books in the name of the foreign central bank rather than of a foreign government, that the same suggestion had, of course, been made to the British and that I thought that the British were all set to go ahead. The latter statement seemed to surprise Cariguel. What seems to cause the French most difficulties is the thought that a third party should open an account on our books in the name of the Bank of France. I replied that all this, of course, was their problem but as I saw the picture from here it was a case where the money put into that account belonged to this third party and was subject to this same third party's instructions. Cariguel replied that they were going into the question and considering the matter now to see what could be done. It had occurred to them that one way out would be to open a credit in favor of the French Attache in Washington to take care of payments which the latter might have to effect. I replied that of course I could not express an opinion one way or the other but I rather thought that Washington would not 1.1 60M 5-99 FEDERAL RESERVE BANK 254 OF NEW YORK 254 DATE November 6, 1939. FFICE CORRESPONDENCE CONFIDENTIAL FILES SUBJECT TELEPHONE CONVERSATION WITH L. W. Knoke BANK OF FRANCE. 2 be very keen about that plan and that my first thought was that the Treasury might be disappointed in that kind of a suggestion. He must, however, realize that that was my personal opinion. LWK:KW 03V13038 BEET VAV 255 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE November 6, 1939. TO Secretary Morgenthau FROM Mr. Cochran The Secretary telephoned me at 9:30 and again at 12:30 on Saturday morning. Thereafter, I forwarded to him at Fishkill memoranda covering the subjects which we had discussed, namely, the letter from Germany, the meeting which the Secretary had had on November 3 with the members of the British Purchasing Commission and Embassy officers, and my gossip concerning the connections of French financial officials. Shortly after I spoke with the Secretary last on Saturday, Mr. Pinsent, Financial Counselor of the British Embassy, telephoned me. This morning at 9:15, when the Secretary telephoned me from the farm, I relayed to him Mr. Pinsent's message. That is, the British Ambassador is giving a dinner on Wednesday evening to which he will invite the Service Attaches of his own Embassy and their opposite numbers in the War and Mavy Departments. The Ambassador would be delighted if the Secretary him- self could come. If this is not possible, the Ambassador would appreciate the Secretary suggesting some one from the Treasury Department. Mr. Pinsent said that they were counting on me also. The Secretary told me that it would be impossible for him to attend since he was leaving Washington that evening. He said that it would be quite alright for me to go. I questioned this, stating that since I am identified with the Stabilization Fund there might be some embarrassment to the Secretary if it became known that I was the Treasury representative at a dinner given for the British Purchasing Commission. The Secretary agreed that my position was now different from that which I formerly occupied under the State Department, and that he thought my decision was correct. He said he would telephone Mr. Hanes in regard to the invitation. The Secretary stated that he had received the material which I had forcarded him on Saturday. He said he was becoming more and more convinced 111 that he should not function as advisor to these visiting foreign groups. I told him that while I did not want to be too pessimistic about the troubles we might get into, I concurred entirely in this sentiment. He said that with the present arrangement with Lazard Freres and Morgans the situation is worse from our viewpoint than if the French had worked through Morgans alone. I heartily agreed. I mentioned that Leroy-Beaulieu had told me by telephone Saturday that he had spoken with his people by telephone that morning and had learned that only the details remained to be arranged in regard to setting up the French account with the Federal Reserve Bank of New York, and sending out a member of the staff of the Ministry of Finance from Paris to be the signing officer in this country. -2- 256 I read to the Secretary an item from the Washington Star of Saturday in which Alsop and Kintner credited Mr. Eccles with the plan for the British to carry their war purchase account with the Federal Reserve Bank of New York, At the Secretary's request, I am mailing the clipping to him this morning. After talking with the Secretary I telephoned Pinsent the Secretary's regrets. I added that the Secretary would speak with Mr. Hanes about the invitation and that Mr. Pinsent would hear from the latter directly, or should phone him if he has no word by noon. It was understood that if anyone goes from the Treasury it should not be myself. Pinsent thought that the representative from the War Department would be Mr. Louis Johnson or his Chief Executive. I told Mr. Pinsent that the Secretary had not yet seen the President with respect to the matter which we have been discussing the past few days. 257 November 6. 1939 To: The Files From: Mr. Hones The Secretary instructed me over the telephone this morning to have a thorough investigation made as to how Internal Revenue Agent Kadis succeeded in having assigned to himself the investigation of the tax returns of Goetz and Zanuck. who paid their taxes from California residences, along with his examination of Schenck's return which vas made in New York. I have asked Elmer Irey to talk to me about this, and to begin investigation immediately. J.W.H. .58 PARAPHRASE OF TELEGRAM RECEIVED FROM: American Embassy, Berlin, Germany DATE: November 6, 1939, 5 p.m. NO.: 1964 The following is confidential from Heath for the Treasury: Reference is made to the letter of October 4, 1939, from the Secretary. While Taylor was in Rumania, he said, he was told that about one-half of the gold reserve of the Polish Government had been kept in Rumania for use in the upkeep of the large number of military, official and other refugees of Poland who are now in Rumania. It was Taylor's understanding that the remainder of the gold reserve was shipped to Alexandria, Egypt. KIRK. EA:LWW 259 GRAY LMS Paris Dated November 6, 1939 Rec'd 6:50 p. m. Secretary of State, Washington. 2670, November 6, 7 p. m. FOR THE TREASURY. 01/8 Schrob Philip . Pssohwn writing in the annual LA FRANCE ECONOMIQUE for 1938 which has just appeared gives SOME interesting figures on France's balance of payments in 1938. HE places the deficit on current account at the relatively insignificant figures of 300,000,000 francs of 1939 value ( or 120,000,000 francs of 1928). HE arrives at this total as follows: on the "credit" side, freight 2,500,000,000, insurance 200,000,000, transit 250,000,000, tourist expenditures in France 4,375,000,000, interest received 2,500,000,000, total 17,825,000,000. (END SECTION ONE) BULLITT ROW:EMB 260 REB GRAY Paris Dated November 6, 1939 Rec'd 8:02 p. m. Secretary of State, Washington. 2670, November 6, 7 p. m. (SECTION TWO) On the "debit" side, unfavorable trade balance (including trade with the colonies) 15,250,000,000, remittances abroad of foreign workmen in France, 625,000,000, Expenditures of French tourists abroad 5,000,000, interest due 1,750,000,000, total 18,125,000,000. On this 300,000,000 deficit Schwob estimates a total capital inflow for 1938 (in which he includes gold imports) of 7,740,000,000,000 francs of 1928). francs ( or 3,095,000,000,000 (END SECTION TWO) BULLITT NPL 261 JI GRAY Paris Dated November 6, 1939 Rec'd 7:05 p.m. Secretary of State Washington 2670, November 6, 7 p.m. (SECTION THREE) Of that gold imports totaled 7,500,000,000 supplemented by a visible capital inflow of 1,190,000,000 on an offsetting visible capital outflow of 1,250,000,000. The same publication Estimates French national income for 1938 at 267,000,000,000 francs compared to 242,000,000,000 in 1937, 201,000,000,000 in 1936, 175,000,000,000 in 1935, and an average for the years 1929-1930 of 245,000,000,000. BULLITT ROW:EMB 262 GRAY JI Paris Dated November 6, 1939 Rec'd 6:57 p.m. Secretary of State Washington 2670, November 6, 7 p.m. (SECTION FOUR) The Journal Official which appeared carries the announcement of Monsieur Eugene Auguste Marquaiz as general disbursing officer for EXPENSES of the French Government in the United States under the provisions of the decree reported in our telegram No. 2499, October 17, 6 p.m. COUVE de Murville tells me that the appointment is of a somewhat "routine" nature and that M. Marquais who is still in France will not necessarily be the official designated to draw on the account or accounts referred to in your strictly confidential telegram No. 1289, October 23, 1 p.m. and our telegram 2634, November 2, 1 p.m. A decree published in today's Journal Official extends until November 30 next the authorization given Treasury paying offices under the Earlier decree reported in our telegram No. 1742 of September 2, to pay certain specified military expenditures EVEN it. the absence of authorized credits. (END SECTION FOUR) BULLITT NPL:EMB 263 GRAY PAP PARIS Dated November 6, 1939 Rec'd 8:40 p.m. Secretary of State Washington 2670, November 6, 7 p.m. (SECTION FIVE). The JOURNAL OFFICIEL likewise contains an arrete setting up a plan of rationing among manufacturers and consumers of certain minerals. The plan covers iron ore, lead, zinc, antimony, manganese, tungsten, cobalt, molybdenum vanadium, bauxite, graphite, et cetera. It sets forth conditions under which sales will be made to French factories, to Belgium, to Great Britain and to other countries as well as the method of supervision. The national committee set up to push the sale of the new armament bonds ((our telegram No. 2625, October 31, 7 p.m.) today issued its first brief patriotic appeal for subscriptions which was widely published in the press. BULLITT EMB:NPL 264 GRAY PAP PARIS Dated November 6, 1939 Rec'd 8:49 p.m. Secretary of State Washington 2670, November 6, 7 p.m. (SECTION SIX). Continuing last week's upward march the securities market opened buoyant today. It was later subject to some profit taking. Its optimism derives from the lifting of our arms embargo, Norway's release of the CITY OF FLINT, a better feeling about the Russo-Finnish negotiations and a general, if unfounded, feeling of growing Nazi discomfiture and (?). Rente issues improved fractionally on their recent strong advance. The AGENCE ECONOMIQUE'S stock exchange indices now show ordinary rente issues at 81.9 as against 79.7 on September 4. The exchange guaranty issues are now 105.2 as against 114.2 on September 4. BULLITT EMB:NPL 265 GRAY PAP PARIS Dated November 6, 1939 Rec'd 8:44 p.m. Secretary of State Washington 2670, November 6, 7 p.m. (SECTION SEVEN). Its general bourse index is at 100.5 compared to 89.7 on September 4 (the base period of 100 is December, 1930). The B.I.S. statement for October shows a further re- duction in its balance sheet of 41.2 millions to a total of 452,000,000. Funds for the October 15 coupon of the Polish stabilization loan of 1927 were deposited prior to September 1, and will be paid in French francs at the rate of 5.598 per annum coupon less French income payment of 32.40% which the Polish Government had not paid. (END OF MESSAGE). BULLITT EMB 03V13038 ofer you 266 REB GRAY Berlin Dated November 6, 1939 Rec'd 8:06 p. m. Secretary of State, Washington. 1965, November 6, 6 p. m. PLEASE RETEAT TO TREASURY. My 1951, November 4, 5 p. M., with the supplementary statement that payments in free foreign Exchange are likewise prohibited if it is believed that the recipients are intermediariEs for persons or firms domiciled in Great Britain, France, and the other countries named in the order of November 2. It is to be noted that this order is the first published action of the Reich forbidding payments with Enemy countries. At the Foreign Office it was stated that it was not the intention of the German Government to issue a general decree or law prohibiting trading with the Enemy since power to control and prohibit such transactions was contained in existing foreign Exchange legislation. KIRK NPL 267 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE November 6, 1939 TO Secretary Morgenthau FROM Mr. Cochran The sterling rate was again under pressure with increased volume in transactions in that currency. In Amsterdam, the rate was quoted from 3.97-1/16 to 3.97-1/4 as compared to 3.96-1/4, which was the closing quotation in New York on Saturday. In view of the fact that the rate advanced in Amsterdam, and of the subsequent orders received for execution in New York, it appears that foreign sellers of sterling signify their preference for dollars rather than for other currencies. At the opening in New York, sterling was quoted at 3.96-3/8. Shortly after, the Japanese banks were reported as sellers, and at about the same time the Chase Bank received an order from Rumania to sell 1250,000. The Chase Bank withheld its order from the market temporarily, pending disposal of the sterling offered by the Japanese. However, during the interim, there was some miscellaneous selling of sterling by various banks. Shortly before noon the rate had declined to the low of 3.93-3/4. At that time the Chase had executed about half of the Rumanian order, and subsequently disposed of the balance. During the afternoon, there was some commercial demand for sterling and the rate recovered to 3.94-5/8. It closed at 3.94. Sales of sterling by reporting banks in New York totaled 1763,000, from the following sources: 4346,000 4477,000 Commercial concerns Foreign banks (Europe and Far East) Total 4763,000 Purchases of sterling amounted to 4737,000, as indicated below: By commercial concerns By foreign banks (Far East, Europe and South America) Total 501,000 236,000 4737,000 The banks also reported that the British Control purchased sterling amount- ing to 158,000 at the official rate of 4.02. All of this sterling represented cotton bills. The belga was in demand in Amsterdam today and at the close of that market some purchase orders were dispatched to New York for execution. The belga closed at .1670 up 6 points from Saturday's closing quotation in New York. CONFIDENTIAL 268 -2The other important currencies closed as follows: French france Guilders Swiss france .0223-1/2 Canada 10-1/2% discount .5308 .2243 The Chinese yuan was quoted at .09 off 1/4 from Saturday. We received, through the Federal Reserve Bank of New York, a request from the National Bank of Rumania to purchase $2,500,000 in gold to be added to their earmarked account, which request was approved. We purchased from the Bank of France $10,000,000 in gold from their earmarked account. This makes a total of $45,000,000 in gold purchased from the Bank of Frence since September 3rd, the date of the declaration of war. The Federal Reserve Bank reported to us the following shipments of gold: 3,160,000 from the Netherlands consigned to Federal Reserve Bank of New York to be earmarked for account of the Netherlands Bank at the Federal Reserve Bank of New York. 1,390,000 from South Africa consigned to Federal Reserve Bank of New York for account of the Netherlands Bank, the disposition of which is unknown at the present time. 563,000 from the Netherlands consigned to the National City Bank of New York for sale to the United States Assay Office at New York. 60,000 from Sweden consigned to National City Bank of New York for sale to United States Assay Office at New York, 5,173,000 Total The equivalent of today's London silver price was 41.10. The price fixed Handy and Herman for foreign silver remained unchanged at 34-3/4*. The Treasury's price was also unchanged at 35. In New York, we made three purchases of silver, totaling 175,000 ounces, under the Silver Purchase Act. by B.M.R. CONFIDENTIAL 269 PARTIAL PARAPHRASE OF TELEGRAM RECEIVED FROM: American Embassy, Rio de Janeiro NO.: 387 DATE: November 7, 1939, 2 p.m. The Director of Exchange informs me that in order to provide equitable treatment in the allocation of exchange for remittance of earnings, dividends, royalties, and other items apart from import bills, the Bank of Brazil has established classifications and fixed percentages for monthly exchange quotas for these items. Companies whose records have been approved by the Bank will receive monthly quotas within the exchange possibilities of the Bank. American companies that have not applied for this exchange should do so at once. CONFIDENTIAL. For November the total allotment is around $800,000. In the future the total monthly quota will be fixed by the Bank at the first of the month. We will send detailed information by air mail. CAFFERY 07913038 EA:EB BEER 270 November 7, , 1939 HM,Jr showed the original of this to the President at Hyde Park today. comment. The President read it and made no deuds of qu to show this To higher that please is elew Nex I am not / , nov do with to NON be Mr. , a Swamen Chris I needler and I de no? tothe the electile . ,NOV / request, Too don't Arious >) 2 Wall Street New York November 2, 1939 Personal and Confidential Dear Cochran: Here is the letter. It came in via the S.S. STATENDAM, but the envelone was marked for airmail, the sender apparently assuming that it would be sent to Great Britain or elsewhere to catch the Clipper. The first sentence refers to the telegram which I sent some weeks ago when you first telephoned. Reading this letter in the light of the oral message which I received, I take the sentences on page 2 about changing "certain conditions" to mean the elimination of Hitler. The invitation to speak to which he refers was extended way back in March by Randolnh Burgess, T. W. Lamont and myself when we were working un the spring meeting of the just announced that he was about to start on A trip around the world. There is a real question whether the Academy would Academy. We thought of Schacht because the newspapers had be willing to give him A platform under current conditions, but on balance I rather think they should because, after all, if we gladly give platforms to Lord Lothian (I attended the very successful dinner to him the other night) and to other representatives of belligerents, I suppose the democratic principle means that a German is entitled to at least a hearing, particularly one whose views are supposed to be those of Schacht. The procedure which he has been pleased to de- scribe as attendant unon any invitation that might be extended 1s, of course, pretty far fetched. Probably nothing could be said at all and probably it 16 wiser to discourage any visit. My own personal view happens to be that Schacht wants to get out of the country and, once out, would spend all of his time trying to undermine the existing regime and to qualify himself as an international savior. My own guess 18 that he fears that he would not be able to get out on a simple invitation to make A speech, but that it would be impossible not to let him out if it became known that his visit mirht be looked upon without disfavor by our authorities. The principal question that comes to one's mind is 2 Letter of Nov. 2/39 H. Merle Cochran, Esq. Treasury Department Washington, D. C. whether this letter was written with the knowledge of the quick judgment. After careful thought, knowing Schacht as we both do and with the circumstantial evidence that I have, I incline strongly to the view that this letter is off his own bat without the knowledge of the authorities. The authorities. It is a natural suspicion and is the natural sending of the communication from Holland supports this view, although it is equally subject to the suspicion that this was an effort to throw us off the scent. I do feel that the sentences about conditions, referring as they do to Hitler, can hardly be thought to have official blessing; and, above all, if the Government simply wants him to come over here and do some propaganda work for peace, which naturally every German desires at this point in the developments, then there would not be the slightest reason for interjecting all the business about trying to get something in the nature of official recognition in advance. He would simply say that he was now ready to make a speech and hoped that I could arrange for it; and then, after he got here, do what he could to get in touch with the authorities. As stated, I really think the third from the last paragraph means in part that he needs help to get out of the country, and also means, of course, that he wants to have his visit, both before his own people and before the public generally, made as important as possible. This plays right into his well known ambition for being called by his own people to be the next leader, and would give him the onnortunity he desires to demonstrate to the other belligerents and to neutrals his international approach to the problems and his non-Nazi and more civilized intentions. You will note that the letter is strictly conif its contents got out. Indeed, if it was written without fidential and naturally it would cause a perfect furore his Government's knowledge, it nicht provide an early job for an undertaker. So I must ask you to treat this with your accustomed care. I send you the original, but have kept a copy. I have shown the letter to Lamont, because he is indirectly referred to in connection with the first invitation. I have not shown it to Burgess, so that you and Lamont share the secret. When he refers to the need for acting before events make it more difficult, I assume he means military events which would render any peace talk harder. He will be naturally disappointed by having missed the air service, and upon receipt of the letter I cabled to Hechler as follows: "Letter received today. Will communicate later". Faithfully yours, Enclosure H. Merle Cochran, Esq. Washington C. seac been Det. 16 Dear Mr. Fraser, last week I heard from Hechler that you had cabled to the BIS about my present activities. I have asked Hechler to tell you that I was still formally a Reicisminister but that I had no activities and that I hoped to be useful at a given time. Ever since I have thought a great deal whether I could help to prevent the disaster which is threatening civilization from the present conflict. when suggesting something by this letter to you I would like to emphasize that I have not talked about the following to anyone and that 1 am writing entirely on my personal responsibility Whatever I am going to say is therefor the personal idea of an individual and can and must not compromize anyone else. The underlying feeling which I have is, that more than anyone else the resident of the United States could and should do something. It is very difficult to expect an initiative for negociations to come from one of the belligerants. on the other hand it is certainly true that the War of 1914-1918 had been won by the Americans, that the armistice was based on the 14 points of President Wilson, a "democratic" President, and that America was not able to impose a Peace Treaty on the lines of those 14 points. The only conclusion which she drew therefrom was that she rejected the proposed treaty and left Europe alone. Person- ally I believe therefor that America should try to achieve what she failed to achieve in 1919, because it is perfectly clear thatwhatever has happened since, has its roots in the unfortunate Versailles Treaty. A 1 resident, who will bring about a just and lasting peace will become the savior of the world. Now I know very well that 1 resident Roosevelt that he may feel rather disappointed about the answers or non-answers which he got from this side. But all this should not prevent a responsable and most leading statesman from has endeavoured very much to prevent a new war and I admit looking out for any possibility of help. May be that an official initiative from the 1 resident's side may not be feasable and certainly nothing should be done which would hurt the prestige of the resident but what I have in mind is some private ini tiative backed in a certain way by the President, in order to gain time and to find an approach 40 more official talks. My feeling is that gaining time (11 help a great deal at the present moment. There -2- There are people who think it might be too early to discuss definite plans before certain conditions have taken place. I am starting from another point. My feeling is that the earlier discussions would be opened the easier it will be to influence the development of certain existing conditions. I feel certain that the time is not too far off when it will be most useful to have definite ideas about the future solution. None of the belligerants, whatever events may arrive, will disarm before knowing that the present conflict is to be followed by a just and noble peace instead of a dictate. Such certainty cannot be obtained by public speeches of the belligerants, because we have seen too many broken promises during these last two decades. To overcome the existing state of distrust a neutral plan must be elaborated beforehand, which will certainly impose sacrifices to both parties but also offer very clear advantages and which will give to the whole world the conviction of a peace tolerable by everybody and lasting for more than one gene- ration. I feel to be able to contribute to such a plan about which I have thought a great deal and which has kept me busy for years. From all these feelings, thoughts and deliberations the following suggestion has sprung up: You invited me very kindly early this year to come over to America and lecture somewhere. At that time it was impossible for me to accept, but I accepted in principle. I wonder whether it would be possible now to bring me over for the same purpose in order to lecture about say "World economy in war and peace times". If it would become known that I was going over, the mere fact might raise a lot of combinations, rumours and hopes which all might contribute to defer fateful happenings. Once being over personal conversations may help to find a way out and prevent greater disaster. of course you could not invite me without the agreement of your Government and I could not go without the agreement of my Government. But it is just this fact which would underline the importance of the visit. Now I do not know how your resident would react and I must leave this to you, I neither know how my Government would react. My personal position is that I am a formal member of the Cabinet, that I have been removed from official influence but that I have certainly not lost their respect. Therefor it might be difficult for them to reject any suggestion of the above kind. As to the procedure to be followed, my thoughts are these: You should send me a cable signed by you and conveniently -3- conveniently by others, inviting me on behalf of some important non-political Institute to come over and lecture about "world economy in war and peace times", as I had in principle promised to you early this year. The invitation should be added by a statement that the U.S.A.: resident had been informed about and agreed to such invitation and that the resident expects me to pay him my res. ects when being over because he had known me so wall. It night fur- ther be useful if the invitation and the accompanying cirHouse or the Secretary of State to our Chargé d'Affaires cumstances as above would be communicated by the White in order that he might inform our Government. After having received the invitation I would then ask my Government to agree. You might further think it useful to privately inform some of our mutual friends. On the other hand everything has to be avoided what could prejudice the free decision of my Government, because it must be avoided to embarrass anyone. It must therefor be understood, that the contents of this letter must remain strictly confidential. If you agree to my suggestion it would of course be of the highest importance to act as quickly as possible, before anything irrevocable might ha If your answer would be to the positive then no infor ation to me besides the invitation is necessary. If however your answer is negative or if you want some further i formation please cable to Hechler Basle with whom 1 sha_1 arrange to pass on any message from you. Please give my kingest regaras to 11 my friends over there and believe me, dear ..r. Fra er, to ce with all good wishes and kindest regards very sincerely "ours 277 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE November 7. 1939 Secretary Morgenthau TO FROM Mr. Cochran Mr. Pinsent, Financial Counselor of the British Embassy, telephoned me yesterday afternoon to the effect that since Mr. Louis Johnson of the War Department was not being invited to the Embassy dinner on Wednesday night but only officers of rank corresponding to that of Captain Collins, they plan to send an invitation to him. I asked Pinsent if he had been in touch with Mr. Hanes during the day. He said that he had not, but was sure that Mr. Hanes would have nothing to say about the propriety of the invitation to Captain Collins. I told Mr. Pinsent that, nevertheless, I should like to speak with Mr. Hanes on this point. I immediately saw Mr. Hanes, who said that Secretary Morgenthau had told him in the forenoon that the Secretary was not going to the dinner and that neither was I. Mr. Hanes agreed with me that Captain Collins should not go. As I was leaving Mr. Hanes' office, he got Secretary Morgenthau on the telephone on a call which had been placed before I was in his office. A few minutes later, the Secretary told me by telephone that he approved the decision that Captain Collins should not be invited, and he told me to have Pinsent leave the Treasury out until after the question of liaison is decided. Accordingly, I telephoned Mr. Pinsent to this effect at 5:20 p.m. At 5:30 yesterday afternoon, I went to the State Department, upon the request of Dr. Feis, to see a cablegram there which he did not desire to send to the Treasury, but upon which he desired to have our reaction. After reading the cablegram in question, No. 2655 of November 3, from the Embassy at Paris, I told Dr. Feis that the Treasury desired to make no comment thereon for transmission to Ambassador Bullitt. When Dr. Feis said that he was disposed to file it, I requested and received a copy for Secretary Morgenthau. Thinking the matter over further, Feis asked me if there might not be some merit in the Treasury giving a message which might discourage both Bullitt and Reynaud from the idea of possible French borrowing from us. When the Secretary called me at 9:00 o'clock this morning I briefly summarized the foregoing message. When the Secretary called back at 9:30 I gave more details. This message, as well as some that we have received from London recently, tends to confirm my belief that the Treasury is going to have a full program in dealing with purely financial and monetary matters during the war,& should endeavor to refrain from undertaking duties outside of purely Treasury functions. When talking with the Secretary this morning I mentioned that Mr. Pinsent desires to call on Wednesday with Mr. Purvis, and that Mr. Leroy Beaulieu wishes to come at 11 o'clock or later on Wednesday to present Bloch Laine, the new officer to head the French Purchasing Mission in the United States. 278 2The Secretary told me that these people would have to wait until Wednesday morning for answers. The Secretary was to lunch with the President today. The Secretary asked me to find out from Pan American Airways the hour, as near as possible, when Butterworth's plane is due from Lisbon. When a telephone call was made to Pan American Airways, it was confirmed that the plane leaves Lisbon on November 8 and is expected at Port Washington on Thursday November 9. The office could not confirm that the plane should reach New York at noon time, as anticipated in Cable No. 2255 of November 2 from London. The Pan American Airways promised to call us if there are any changes in the schedule. # Prepared by: Mr. Murphy Mr. Mr. Lindow Mr. Tickton Mr. Haas 279 TREASURY DEPARTMENT CONFIDENTIAL INTER OFFICE COMMUNICATION DATE November 7, 1939 TO FROM Secretary Mergenthau Mr. Haas Subject: Current Developments in the High-Grade Securities Markets SUMMARY (1) Long-term Government bonds gained slightly, on net balance, over the past eight days (Chart I). The new RFC note is in line with comparable se- curities (Chart II). The new Treasury note of March 1944 remains out of line (Chart III). (2) Both high-grade corporate and municipal bonds (Chart V) advanced last week, in contrast with the movement of long-term Treasury bonds. The spread between the average yields on long-term Treasury and high-grade corporate bonds reached a record low level (Charts I and IV). Thus, high-grade corporate bonds were at a record high in relation to long-term Treasury bonds. The volume of new corporate issues continued small at $8 millions while new municipal obligations totaled about $143 millions, of which all but $10 millions had maturities of less than one year. (3) California's credit has been weakened considerably as various radical plans have been considered. The spread between the yield of bonds of the State of California and the State of New York widened sharply at the time of the EPIC campaign in 1934 and the "Ham and Eggs" pension plan cam- paigns in the last two years (Chart VI). The interest rate on short-term State warrants issued in October was 4 percent, as compared with a low of .48 percent early last year, and 1.04 percent in the spring of this year (Chart VII). (4) British consols closed Monday at 68-3/8, up slightly from a week previously. French 3 percent rentes advanced sharply during the last eight days, closing Monday at 72.30, the highest price since the outbreak of war. A German State railway loan of 500 million marks (nominally $200 millions) -- the first German Government loan since the outbreak of war -- was sold last week. 280 Secretary Morgenthau - 2 I. United States Securities Long-term Government bonds advanced slightly on net bal- ance during the past eight days, while short-term issues showed small losses. Both long- and short-term securities gained in the early part of the week, and lost the latter part of the week. Price increases on Monday, November 6, were sufficient to produce net gains for long-term securities for the eight-day period, but were not large enough to produce net gains for the shorter issues. The average yield of all long-term Treasury bonds increased .01 percent last week, but decreased .02 percent on Monday, November 6, closing at 2.52 percent (Chart I). The relative movement of different maturities of Treasury securities during the past eight days is shown in the following table: Average price change Week ended Nov. 4 : Monday, Nov. 6 Total (In thirty-seconds) Notes 1 to 3 years 3 to 5 years Bonds Under 5 years to call 5 to 15 years to call 15 years and over to call -1 -3 +2 +1 -10 0 +2 +2 +7 +11 -1 -1 +4 +8 +1 The new RFC note (offered last Tuesday) was well received by the market, and, unlike the new CCC note of three weeks ago and the new Treasury note of two weeks ago, has been approximately in line with other securities of comparable maturities since issuance. Chart II shows the yields 8.8 of the close on Monday, November 6, of all guaranteed is- sues having fixed maturities, and indicates clearly that the new RFC issue was well in line. The new Treasury note of March 1944 has remained weak in relation to notes of similar maturities (Chart III). On all but four days since it was issued, the new note has had a higher yield than the note of June 1944. Thus, the new 281 Secretary Morgenthau - 3 note may be said to be out of line by about three months. It is possible, of course, that the June note is selling on relatively better basis than it would otherwise, because of the fact that it is a discount issue. Even ignoring the a June note, however, the new note would appear to be some- what out of line. Evidence of the weakness of the new note is shown by the fact that the Federal Reserve System found it desirable to purchase $7,750,000 of the new notes, while selling notes maturing between June 15, 1940 and December 15, 1942, and 2-1/4 percent HOLC bonds of 1942-44. According to the Federal Reserve Bank of New York, demand was evidenced for the issues sold, while the new notes were in supply in the market. During the week ended last Wednesday, the Federal Reserve banks permitted another $15 millions of Treasury bills to run off. This amount, together with the increase of $50 millions in the amount of bills outstanding during the week, provided a total increase of $65 millions in the privately held marketable supply of bills. Of this amount, weekly reporting member banks in 101 cities absorbed $38 millions. Banks in New York City acquired $51 millions, but weekly reporting banks outside of New York City reduced their holdings by $13 millions. Last week's offering of $100 millions of Treasury bills was sold at a rate of .017 percent, the lowest since July 19. This compares with a rate of .028 percent on $150 millions of bills offered a week previously. It was announced over the week-end that the first offering of 6-month notes by local housing authorities under the new United States Housing Authority plan would be inaugurated on Wednesday with a $50 millions offering of eleven local authorities. Of the total amount, $1-1/2 millions is scheduled for the Alley Dwelling Authority of the District of Columbia. The notes will, in effect, be guaranteed by the United States Housing Authority and will be fully exempt from Fed- eral income taxes, and in most cases from State income taxes. The proceeds will be used to refund cash already advanced to local authorities by the United States Housing Authority under loan contracts and to pay accrued interest thereon, and for meeting future costs of construction. It is expected that similar short-term notes in amounts of $50 millions will be offered by various local housing authorities every four to six weeks. 282 Secretary Morgenthau - 4 II. Other Domestic Securities Markets In contrast with the movement of long-term Treasury bonds last week, both high-grade corporate and municipal bonds advanced considerably. The Treasury average of yields on high-grade corporate bonds decreased .07 percent during the week and .02 percent on Monday, to close at 2.95 percent. The spread between the average yields on long-term Treasury bonds and high-grade corporate bonds reached a record low of 42 percent last week, and stood at .43 percent on Monday (Charts I and IV). The Dow-Jones average of yields on twenty 20-year muni- cipal bonds also declined .07 percent last week, to close at 2.86 percent on Saturday. The spread between the yields on long-term Treasury and municipal bonds declined from .40 per- cent to .32 percent, but 18 still higher than it was early this year (Chart V). New corporate issues aggregated about $8 millions last week. The largest issue consisted of $5 millions of National Gypsum Company 3-7/8 percent debentures of 1954, sold to a group of insurance companies and educational institutions. New municipal issues consisted of about $143 millions, of which all but $10 millions had maturities of less than one year. Two issues made up almost all of the short-term amount -- $100 millions of New York State .20 percent notes maturing June 17, 1940 (7-1/2 months), and $30 millions of Commonweal th of Pennsylvania 1-1/2 percent 7-month notes sold at a price to yield .44 percent. The New York State notes were reoffered in some instances at .15 percent, and in others at .125 percent. The Pennsylvania notes were bought by a group of banks and one insurance company, and were not reoffered. III. "Ham and Eggs" Holders of California bonds are awaiting with interest the results of the election being held today to determine whether the so-called "Ham and Eggs" pension plan will be adopted. California's credit used to be considered among the best, but it has weakened considerably as various radical plans have been under consideration. Chart VI compares the yields, quarterly from 1930 to date, of a bond of the State of New York and a bond of the State of California. It will be noted that in 1930 there was very little difference between the yields of the two 283 Secretary Morgenthau - 5 bonds. The differential increased in 1932 and 1933, a period when the municipal bond market was completely disor- ganized. In 1934, it rose sharply as Upton Sinclair campaigned for the governorship on his "End Poverty In California" platform. Upon the defeat of Mr. Sinclair, the differential began to decline until the middle of 1938, by which time it was back to the approximate level of 1930 and 1931. The differential increased sharply, however, in the sum- mer of 1938, when the "Ham and Eggs" (Thirty Dollars Every Thursday) proposal, which was to be voted on in November, began to be taken seriously. The differential continued to rise, moreover, even after the defeat of the plan in November. The closeness of the vote* indicated that the plan was by no means finally disposed of, and, in fact, its supporters began a new campaign almost at once to bring it before the voters again. Petitions calling for a vote were filed early in 1939 and on May 18 Governor Olson announced his intention to call a special election this November. Under these conditions, it is not surprising that the differential did not decline. The differential remained close to its peak through September of this year, the market awaiting the result of the second election on the "Ham and Eggs" proposal. In October, the differential increased sharply again, to a new high of .90 percent. On Monday, November 6, it amounted to .80 percent. The effect of the "Ham and Eggs" campaigns on California short-term credit is even more striking. Chart VII shows the interest cost on representative new issues of California State short-term warrants (maturing in less than one year), monthly beginning with January 1938. It will be noted that the rate doubled between August and September 1938, and increased by about as much again in October. The defeat in the November election brought a reduction to approximately half the record October level, but the rate did not decline to the levels of early 1938. In the spring of 1939, the interest cost again began to increase as the second campaign for "Ham and Eggs" gained momentum. Very sharp increases occurred in July and August, the rate more than doubling over June. In September, demand completely disappeared, and no private bids were received. This may have been partly due to the demoralization of the markets due to the outbreak of war, but the imminence of the election was undoubtedly an important factor. In any event, three issues were subsequently taken up by State agencies. In October, bids reappeared, and several issues were sold at a rate of 4 percent. *1,143,670 for, to 1,398,999 against. Secretary Morgenthau - 6 284 IV. Foreign Markets British Government securities changed little in price last week, the 2-1/2 percent consols closing at 68 on Friday, November 3, against 68-1/8 a week previously. On Monday, November 6, they closed at 68-3/8 to yield 3.68 percent. The press reported last week that a national loan bill The first war loan is expected to be announced shortly after the new bill is passed, and, according to most estimates, will amount to about L250 millions (about $1 billion at current rates of exchange). On a per capita basis, this would be equivalent to about $3 billions in the United States. The British war budget for this fiscal year is 62,000 millions (about $8 billions) with revenue from taxation estimated at roughly half. Thus, about 11,000 millions (about $4 billions) is to be raised by borrowing. This would be equivalent on a per capita basis to about $12 billions in the United States. will be presented to Parliament on Wednesday, November 7. French Government securities were extremely strong last week, and reached new high levels for the period since the outbreak of war. Perpetual 3 percent rentes, which stood at 68.50 on Friday, October 27, advanced to 72.10 by Friday, November 3. They increased further on Monday, November 6, to 72.30, to yield 4.15 percent. Press dispatches indicated that demand was apparently stimulated by repatriated capital seeking investment and by the market's favorable reaction to Finance Minister Reynaud's discussion of the budget. According to reports from Amsterdam, Holland is apparently preparing the way for an early issue of a defense loan. On November 3, the Government asked authorization of an in- crease of 200 million guilders ($106 millions) in its permissible limit for emergency defense loans. On a per capita basis, the increase in authorization would be equivalent to about $1.6 billions in the United States. The first German Government loan since the outbreak of the war, a State railway loan of 500 million marks (nominally $200 millions), was sold last week. Unfortunately, press dis- patches have provided only fragmentary data about the loan. It appears that the proceeds may be largely diverted to Gov- ernment use despite the fact that technically the loan is supposed to be for the benefit of the railroads. Apparently, little new money will be realized, however, in view of the maturity at the end of October of the last "Treasury delivery bills". In any event, the loan is, of course, of negligible proportions in terms of Germany's war budget. 28 Chart I COMPARATIVE YIELDS OF AVERAGE OF ALL LONG TERM U.S. TREASURY AND AVERAGE OF HIGH GRADE CORPORATE BONDS FEB MAR APR MAY JUNE 1938 :, JAN JULY AUG. SEPT OCT 1939 1939 NOV DEC MAR FEB APR MAY JUNE JULY AUG. SEPT OCT NOV DEC DEC NOV. OCT. Inverted Scele PER CENT Inverted,Scale PER CENT PER CENT WEEKLY. Saturday Quotations DAILY 2.2 2.2 2.4 2.4 2.6 2.6 2.6 20 2.8 22 Long Term Treasury" (12 years or more earliest can date) 24 3.0 3.0 32 3.2 Long Term 2.8 Treasury 3.0 3.2 Corporates Corporate 3.4 3.4 3.4 3.6 3.6 3.6 3.8 3.8 3.8 4.0 4.0 40 PER PER PER CENT CENT CENT 1.00 1.00 80 .80 100 80 Spread Between Long Term Treasury and Corporate Spread 60 40 60 60 40 .40 .20 20 . 0 . . - JULY AUG SEPT JAN FEB MAR APR MAY 1938 JUNE JULY 1939 - AUG SEPT OCT NOV DEC o JUNE DEC . MAY NOV OCT 20 . APR OCT - NOT NOV . MAR is , FEE . . - 1 AN o 20 DEC 1939 "Break - line indicates change - composition of Long Farm Treasury average Office / Treasury F-SO-E-2 YIELDS OF GUARANTEED ISSUES WITH FIXED MATURITIES November 6. 1939 1940 1939 1941 1942 1943 1944 PER GENT PER DENT 1.10 1.10 R.F.C. ISSUES O 1.00 OTHER ISSUES 1.00 .90 .90 .80 .80 NEW R.F.C. ISSUE .70 .70 .60 .60 .50 .50 .40 .40 .30 .30 .20 .20 .10 .10 0 1939 1940 1941 1942 1943 1944 0 a GD First Office of the Secretary of the Treasury Divides of Research and - F - 136 6 OF November 6, 1939 1939 1940 1944 1943 1942 1941 PER CENT PER CENT 1.10 1.10 1.00 1.00 .90 .90 NEW NOTE x x .80 .80 .70 .70 x .60 .60 .50 .50 .40 x .40 x .30 .30 x .20 .20 x .10 .10 0 1939 - of - - I Office of the Secretary of the Treasury 1940 1941 1942 1943 1944 0 F 135 287 Chart IV COMPARATIVE YIELDS OF AVERAGE OF ALL LONG TERM U.S. TREASURY AND AVERAGE OF HIGH GRADE CORPORATE BONDS 1927 1928 1929 1930 1932 1931 1933 1934 1935 1936 1937 1938 1939 PER CENT Inverted Scale PER CENT Inverted Scale Monthly Ave age of Daily Fig res 20 2.0 2.5 2.5 Long Term Treasury 3.0 3.0 3.5 3.5 Lotest figures or of Now 6 4.0 4.0 High Grade Corporate 4.5 4.5 5.0 5.0 Moody's Aao 5.5 5.5 PER CENT PER CENT 2.5 2.5 2.0 2.0 1.5 1.5 1.0 1.0 Spread 5 5 o 1927 0 - . - Security . 1928 1929 1930 1931 1932 1933 1934 1936 1936 1937 1938 1939 F-78-B-1 COMPARATIVE YIELDS OF AVERAGE OF ALL LONG TERM U.S. TREASURY AND Dow-JONES AVERAGE OF MUNICIPAL BONDS Yields Based on Saturday Quotations 1938 JAN FEB. MAR APR MAY JUNE Inverted Scale PER CENT 1939 JULY AUG SEPT OCT NOV. DEC JAN PEB MAR APR MAY and JULY AUG SEPT OCT NOV DEC Inverted Scele PER CENT 2.2 Long Term Treasury" (he years - more . contrast cell date) 2.2 2.4 2.4 2.6 2.6 2.8 2.8 Twenty 20-Year Municipal Bonds 3.0 3.0 3.2 3.2 3.4 3.0 PER PER CENT CENT 80 80 60 60 Differential 40 40 20 20 - OCT NOV - . SEPT + a AUS " DEC JAN FEB MAR APR 1938 MAY - and JUNE JULY - L AUG SEPT OCT NOV DEC M ANY 14 . - JUNE o JAN FEB MAR APR MAY 1939 "Break - None indester change - composition of Long Term Treasury average 0 Office of the Treatment F-144 2 COMPARATIVE YIELDS OF A CALIFORNIA STATE AND A NEW YORK STATE BOND Quarterly, 1930 to Date 1930 1931 1932 1934 1933 1935 1936 1937 1939 1938 1940 PERCENT PERCENT (INVERTED) (INVERTED) EPIC ELECTION 2.0 2.0 N. Y. STATE 4's, 1961 2.5 2.5 3.0 3.0 FIRST HAM AND Eggs ELECTION 3.5 3.5 4.0 4.0 CALIFORNIA 4's, 1985 SECOND HAM AND (CALLABLE 1950) 4.5 4.5 Eees ELECTION 5.0 5.0 PERCENT PERCENT 1.0 1.0 DIFFERENTIAL .5 .5 0 0 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 NOTE: LATEST FIGURES ARE FOR OCT. 1939 - of - - - Office of the Secretary of the Treasury F-139 1938 A $ o N D J F M A J J 1939 J 1940 . INTEREST COST OF ONE REPRESENTATIVE ISSUE PLOTTED FOR EACH MONTH: MATURITIES ARE LESS THAN I YEAR J A $ o N D J M 0 0 .5 .5 SECOND HAM AND Eass ELECTION 1.0 1.0 1.5 1.5 2.0 2.0 2.5 2.5 FIRST HAM AND Eees ELECTION 3.0 3.0 3.5 3.5 4.0 4.0 NO BIDS RECEIVED GENT CENT PER PER 1940 1938 1939 INTEREST COST ON CALIFORNIA STATE SHORT - TERM WARRANTS Chart VII -r The Secretary 0 Here is the memo on than Financing for The period april 1,1917 to June 30, , 1919 DWB 11-7-39 MR. BELL Assistant to the Secretary the 292 TREASURY DEPARTMENT WASHINGTON November 7. 1939. TO THE SECRETARY: I. TREASURY WAR FINANCING April 1, 1917 to June 30, 1919 The Problem At the time of our entry into the World War (April 6, 1917). the Treasury was faced with fiscal problems complex in their nature, and of a magnitude never before presented. Then (March 31, 1917) we had a gross public debt of $1,282,000,000 and a net cash balance in the general fund of the Treasury of less than $100,000,000. The Federal Reserve Banks were only three years old and inexperienced in handling large fiscal agency transactions, and the old sub-Treasury system. then in existence, was never quite suited to large Treasury operations. The excess reserves of member banks of the Federal Reserve System were of an insignificant amount, so that there was no broad base for the credit expansion necessary to finance in the United States the enormous needs of this country and the nations associated with it in the prosecution of the World War. The American public generally was not at all familiar with Government bonds, or, as a matter of fact, with any other kind of bonds. A large part of the Government securities then outstanding bore the so- called circulation privilege, and sixty-five per cent of these securities were on deposit with the Treasurer of the United States to secure the circulation of national banks and therefore not in the hands of the investing public. 293 -2- At the outset it was quite clear that it would be necessary to levy additional taxes and that it would also be necessary to borrow substantial amounts. It was decided that we would endeavor to tax the American people to finance approximately thirty per cent of the war expenditures and that we would borrow the balance. This policy was carried out rather effectively. To borrow the huge sums required it was obvious, in view of the fact that the American public was unfamiliar with Government securities, that the Treasury would have to conduct intensive campaigns for the sale of these securities to the investing public. The Treasury realised that it would be necessary to call upon the American people to invest their accumulated savings in Government securities. It even went further and asked them to invest anticipated savings by borrowing from banks to buy Liberty Bonds, the amount so borrowed to be repaid over a subsequent period. In view of the fact that the banks did not possess large excess reserves during this period, it was imperative that the Treasury financial transactions be conducted with a great deal of care so as not to tighten the money market unduly. In order to meet this situation it made provision for accepting maturing loan certificates/in payment of subscriptions to Liberty Bonds, and for accepting maturing tax certificates/in payment of income taxes. In handling the matter in this fashion and with the help of the Federal Reserve System, there was very little effect on the money market. 1 Explained on page 8. 294 -It was during this period that the Treasury also adopted the scheme of permitting banks to pay for subscriptions to Government securi- ties allotted to them and for any subscriptions allotted to them for account of their customers, by crediting the account of the Government with the subscribing bank for the total amount of subscriptions so allotted. The amount of these credits was then called from time to time as needed to meet the Treasury expenditure obligations. In this manner the cash flowing into the Treasury from the money market was just about offset by the cash outflow to the market through Government expenditures. The foregoing comments are not intended to imply that the Treasury had no fiscal problems or took no action on the financial and economic front prior to our entry into the War in April, 1917. The outbreak of the European Var in July, 1914, presented many grave problems. International credits and exchanges were completely disorganized, ocean transportation was for a time partially paralyzed, and the entire business and economic structure of the country was shaken to its foundations. The Secretary of the Treasury stated in his annual report covering the fiscal year 1914 that through the prompt and effective action of the Treasury Department, together with the cordial and intelligent cooperation of the banking and business interests of the country, the danger of a panic was averted. Some of the actions which the Treasury took between July, 1914 and April, 1917. were as follows: The Treasury advised the banks of the country that it was keeping in close touch with the situation and was prepared to give all legitimate help where it became apparent that assistance was needed; that the Aldridge- 295 -4Vreeland Act was still in force: and that the Treasury was holding $500,000,000 of emergency currency which the banks could get upon application. The Treasury called conferences of the bankers and others interested, which resulted in the establishment of a $150,000,000 cotton loan fund to take care of the exportation of cotton, and a $100,000,000 gold fund which was used to stabilize foreign exchanges. Both of these funds were subscribed to by the banks of the country. During this period there was established a War Risk Insurance Bureau through which the Government wrote war risk insurance on our shipping. The Pan-American Financial Conference was held during this period, which, according to the Secretary of the Treasury, had results of a farreaching and beneficial character. Receipts and Expenditures The following comment on receipts and expenditures of the Govern- ment before and after we entered the war will give some idea of the fiscal problems confronting the Treasury in shifting the fiscal machinery of Government from a peace to a war-time basis. Prior to our entry into the war the expenditures of the Government had been running at the rate of about sixty to eighty million dollars a month, and the receipts had been running, on the average, at about the same level. The fiscal year ended June 30, 1917. during the last three months of which we were in the war, showed total ordinary expenditures, excluding loans to foreign governments, of $1,095,000,000 against total ordinary receipts of $1,128,000,000, or a surplus of about $33,000,000. However, loans to foreign governments aggregated $885,000,000, 296 -5which, when added to other expenditures, produced a deficit for that year of $852,000,000. Considering the last three months of this fiscal year alone, during which we were involved in the war, total ordinary receipts aggregated $582,000,000, and ordinary expenditures, exclusive of loans to foreign governments, aggregated only $344,000,000. The amount of loans to foreign governments increased expenditures for this period to $1,229,000,000, which left a deficit of $647,000,000. For the following fiscal year, beginning July 1, 1917, our expenditures began to expand rapidly because of military activities, ranging from $210,000,000 in July to $1,273,000,000 in the following June, one year later, or total ordinary expenditures for this year, exclusive of loans to foreign governments, of $7,959,000,000. If we add loans to foreign governments, which aggregated $4,738,000,000 during this period, our total expenditures were $12,697,000,000 against receipts of $3,665,000,000, or a deficit of $9,032,000,000. During this period our revenue receipts increased slowly until in April, 1918, they had only reached $209,000,000; in May, $595,000,000; but in June, when the large income tax payments were received, they increased to $1,932,000,000 for that month alone. Unfortunately, the quarterly income tax payments were not adopted until some time later. In the following fiscal year (1919) our ordinary expenditures continued to increase until December, 1918, and January, 1919. when they reached their peak of $1,672,000,000 for each of those months. 297 - 6- - In February, 1919, they had decreased to $1,045,000,000, and for June of that year they had gotten down to $755,000,000. During this period we expended on ordinary account the insense sum of $15,036,000,000, exclusive of loans to foreign governments, which aggregated $3,479,000,000. Adding this latter amount to total ordinary expenditures, the Treasury outgo during this fiscal year is increased to $18,515,000,000. Our receipts during this period were $5,152,000,000, leaving a deficit of $13,363,000,000. Tax receipts ranged from $150,000,000 to $400,000,000 a month except in July, 1918, when they amounted to $642,000,000, in March, 1919. to $1,298,000,000, and in June, 1919. to $1,181,000,000. The fiscal year 1920 should probably be considered one of liquidation of war obligations, during which our tax structure produced its largest returns. The ordinary expenditures for this period amounted to $5,982,000,000, and after adding loans to foreign governments, to $6,403,000,000. The ordinary receipts collected for this year amounted to $6,695,000,000, leaving a surplus of $291,000,000, which was promptly applied to the reduction of the public debt. Reviewing the period April 6, 1917 to June 30, 1919. which may be considered as the war period from the fiscal point of view, we find that the United States Treasury expended during these twenty-seven months, including loans to foreign governments, the vast sum of $32,441,000,000. To finance this huge outlay, it collected from the American people the sum of $9,399,000,000 in taxes and borrowed from them the balance. At 298 -7the end of this period we had a gross public debt of $25,482,000,000 compared with $1,282,000,000 when we entered the var. The general fund balance stood on June 30, 1919. at $1,252,000,000 as compared to about $100,000,000 in April, 1917. The following table shows the character of the public debt on June 30, 1919: (In millions of dollars) $ 883 Pre-war debt Liberty Bonds $ 16,304 Victory Notes 3,468 Certificates of Indebtedness .. 3,625 War Savings Certificates Other debt 954 24,351 248 Total gross debt $ 25,482 The following table shows the total receipts and expenditures for each month of the period April 1, 1917 to June 30. 1919 (twentyseven months). and the excess of expenditures over receipts (deficit) which the Treasury was required to finance through the sale of public debt obligations: - 299 Receipts and Expenditures (In millions of dollars) Budget Operations Period Receipts Ordinary 1917 March 31 April May June Total Ordinary - Expenditures Foreign Loans - Monthly Deficit Total 94 90 200 290 198 119 407 526 328 290 135 278 413 123 582 344 885 1,229 647 196 July 84 210 452 662 578 August 75 280 478 758 683 76 351 396 747 671 91 464 481 945 854 November 139 514 472 986 847 December 105 614 492 1,106 1,001 January February 103 722 370 99 678 325 arch 157 838 pril 318 209 928 287 ay 595 424 1,932 1,087 1,273 243 1,092 1,003 1,156 1,215 1,511 1,516 3,665 7,959 4,738 12,697 9,032 July 642 September 152 1,609 1,805 1,557 1,665 1,935 2,061 967 152 1,265 1,526 1,275 1,176 1,656 1,672 344 august September October 1918 June Total ctober 152 ovember 311 December 204 279 282 489 279 389 989 904 999 1,006 916 a 416 1,653 1,405 1,513 1,624 1,857 1919 anuary february arch pril 196 163 1,298 422 279 by Total 1,672 1,045 1,058 1,019 917 195 1,962 1,190 1,380 1,429 1,112 290 145 322 410 1,766 1,027 82 1,007 833 371 1,181 755 55 810 5,152 15,036 3,479 18,515 13,363 9,399 23,339 9,102 32,441 23,042 a rand Total a Surplus -- 300 Public Debt Operations In financing this huge outlay the Department decided to issue in the first place short-term certificates. One type of certificates was designated "tax certificates" which were issued in anticipation of tax receipts. Another type was designated "loan certificates," and were issued in anticipation of Liberty Loan receipts. These two types of certificates constituted the bulk of the short-term financing. There were, however, a third and fourth type of certificate which should be mentioned at this point. The third type was designated "Var Savings Certificates," which were issued to encourage thrift and economy among the people of the country, and so that every man, woman, and child, however small their means, could be given an opportunity to assist the Government in the financing of the war. The fourth type was designated "Special Certificates," which were issued usually to cover overdrafts in the Treasurer's accounts with the Federal Reserve Banks. These certificates only ran for a few days at the most and were issued for the purpose of leveling out a money market situation. As they represented for the most part transactions which had no net effect on financing operations, no further comment concerning them is deemed necessary. During the last three months of the fiscal year 1917 loan certificates were issued in the amount of $868,000,000 in anticipation of receipts from the First Liberty Loan. In the fiscal year 1918 $6,068,000,000 in loan certificates were issued in anticipation of the Second and Third Liberty Loans, and $1,625,000,000 in tax certificates in anticipation of 301 - 10 - tax receipts. In addition $353,000,000 of Var Savings certificates were sold. For the fiscal year 1919. when we had a deficit of over thirteen billions of dollars, it was necessary to issue loan certificates in the aggregete of $10,082,000,000 in anticipation of receipts from the Fourth and Fifth Loans, and $2,510,000,000 in tax certificates. War Savings securities also helped to finance the expenditures during this year to the extent of $738,000,000. For the twenty-seven month period the Treasury issued $3,135,000,000 in tax certificates, $17,018,000,000 in loan certificates, and $1,091,000,000 in Treasury savings certificates. The loan certificates were usually issued weekly and would run from thirty to one hundred and twenty days, their maturities arranged to fall within the period of the installment payments on the subsequent Liberty Loan, and their redemptions made from the proceeds of that loan. The tax certificates were issued periodically and would run from three to seven months. their maturity arranged so as to fall on installment tax payment dates. The following table shows for each month from March 31. 1917 to June 30, 1919. the volume of public debt operations by character of obligations, the gross public debt, and the general fund balance. In order that the size of the financing problem can be more clearly vis- ualized, the monthly deficit is repeated in this statement. 302 - 11 Public Debt Operations (In millions of dollars) Public Debt Operations Monthly Deficit Period Tax Loan Ctfs Ctfs Liberty War Loans Savings Ctfs Gross Public Debt General Fund Balance 1917 rch 31 ril 196 265 328 403 ne 123 Total 647 - 578 By gust ptember 200 1,466 868 1,466 - 62 683 550 394 671 525 53 tober 854 vember 847 cember 1,001 1918 - - 1,239 1 2,546 647 14 - 42 692 268 6 nuary 989 492 200 ruary 904 74 1,010 rch 999 111 671 ril 1,006 72 1,101 246 60 916 124 10 2,813 57 416 60 756 187 90 9,032 1,625 6,068 7,574 353 the a Total 967 la gust 1,653 1,405 1,513 1,624 1,857 tember ober rember ember - 357 1 32 58 1,409 551 210 66 610 375 113 92 1,198 22 92 707 3,504 1,904 64 744 2 89 50 1,183 650 76 1,766 1,027 392 1,805 1,279 706 52 178 12 ch 82 11 1,007 - 1,282 1,544 1,944 2,976 2,768 3,694 4,270 5,775 7,898 7,357 8,436 9,563 10,402 11,350 12,876 12,244 93 159 231 1,064 491 505 471 1,031 1,837 823 892 1,074 1,012 930 1,484 1,585 1,507 1,083 13,421 14,612 15,885 18,777 19,438 21,076 1,846 1,415 1,080 23,239 24,467 24,208 24,821 25,917 25,482 1,325 1,692 1,549 1,053 1,316 1,252 950 1919 uary pruary 10 348 659 60 594 123 600 =5 1 9 371 758 83 2,156 1,189 Total 13,363 2,510 10,082 11,359 738 nd Total 23,042 3,135 17,018 20,399 1,091 833 a a Surplus 6 303 - 12 Loan Campaigns In preparing the country for the huge financial task of providing funds with which to meet the costs of the war, the Secretary of the Treasury was among the first to impress upon the people the importance and necessity of economizing in the consumption of articles of clothing, food and fuel, and every other item which would constitute a drain upon the available supplies of materials and resources of the country. He stated at the outset that the American people had not been sufficiently aroused to the necessity of economy and of saving in that really serious time. After we had been in the war for a period of six months, he again emphasized the importance of saving and said that he could observe relatively small denials of pleasures, comforts and conveniences on the part of the average citizen, that we were drawing upon our general store of supplies in the country with almost the same freedom as before we entered the war, and that the great financial operations of the Government could not be carried forward successfully unless the people economised in every possible way to save their money and lend it to the Government. If, by saving money. they gave up some of their needless pleasures, they reduced the demand on the general supply of food, clothing and other materials of the country and thereby released that much more for the use of our armies. The Secretary addressed general circular letters to bankers, 304 - 13 - keeping them fully informed at all times of the Treasury requirements, of what could be expected in Treasury certificate issues, and when they could look for a popular loan. He also wrote circular letters to the taxpayers of the country, thanking them for contributing to the support of the Government in such perilous times and telling them of their rights to purchase tax certificates and turn them in to the Treasury in payment of income taxes. He also kept the Ways and Means Committee of the House of Representatives fully informed as to what the Treasury needed in the way of new taxes or new borrowing legislation. War Savings Certificates The Secretary realised that to impress upon the American people the lesson in economy and saving, it would require widespread publicity and constant effort. With this in view, when the Second War Loan Act was under consideration in the summer of 1917 he recommended to Congress that the Treasury be authorised to raise $2,000,000,000 by the sale of war savings securities, with stamps to evidence initial payments, so that the American people would have the opportunity, as well as the direct encouragement, to economize, to lend their savings, in such small amounts even as twenty-five cents. to their own Government. The Second Liberty Bond Act authorised the Secretary to sell these certificates in an aggregate amount of $2,000,000,000 outstanding at any one time. Later by the Act of September 24, 1918 this aggregate amount was increased to $4,000,000,000. - 14 - 305 The Secretary emphasized that this investment was not created for the rich as they could buy Liberty Bonds, but was intended primarily for people of small means. The smallest unit of value under this plan was the thrift stamp, which cost twenty-five cents. These stamps were affixed to thrift cards which, when filled with sixteen stamps, could be exchanged for an interest-bearing war savings stamp upon payment of the few cents difference in value. War savings stamps could also be purchased outright. Beginning in January, 1918 (with advance sales permitted in December, 1917) when the plan started, the cost was $4.12. Thereafter the price increased one cent each month through the year. This first series covered the calendar year 1918 and all stamps sold during the year matured on January 1, 1923, at which time their value was $5. With the first war savings stamp bought, the purchaser obtained a war savings certificate card containing spaces for twenty stamps. These stamps could be redeemed before maturity with a return of about 3% on the investment, as compared with a yield of 4% compounded quarterly if held to maturity. The amount of any one series which could be held by any one person was limited to an aggregate of not to exceed $1,000 maturity value. Notwithstanding this limitation, the monthly sales increased from $14,000,000 in December, 1917, to $90,000,000 in June, 1918, and suddenly jumped to $210,000,000 in July of that year. From that point on they gradually declined until they reached $52,000,000 in January, 1919. after the war. During the period from December, 1917 to June 30. 1919. the Treasury re- 306 - 15 - ceived from the sale of war savings certificates a total sum of $1,091,000,000. It is interesting to note that during this period only $140,000,000 of these certificates were redeemed, $123,000,000 of which were redeemed after the signing of the Armistice. The following table shows by months, from December, 1917 to June 30, 1919. cash receipts from the sale of war savings certificates and cash redemptions of such certificates: Treasury War Savings Certificates Receipts and Redemptions December, 1917 to June, 1919 (In millions of dollars) Fiscal year 1918 Cash Receipts Redemptions Receipts Redemptions 210 2 113 92 3 - 89 3 - - - - - 64 - - 76 - 3 March 58 April 60 52 12 20 10 22 21 9 1 42 1 32 6 Total for year: 353 Total for period December, 1917, to June, 1919: 17 1 90 4 5 57 June 21 1 May 8 14 - 14 - January February Cash - November December Cash 2 July August September October Cash - Month Fiscal year 1919 738 136 1,091 140 307 - 16 Liberty Loan Campaigns In launching the campaign for the sale of the first Liberty bonds, it was decided to make the appeal directly to the people, and every effort was made to give each man, woman, and child an equal opportunity to subscribe. The Treasury used each Federal Reserve Bank, as fiscal agent of the Government, as the central agency in each of the twelve Federal Reserve districts for receiving subscriptions, for taking care of the details of the allotment of subscriptions, the handling of payments after allotment, and the delivery of the bonds. Liberty Loan committees were organized in every city, town or other com- munity in each Federal Reserve district under the general direction of the Treasury, and in this manner twelve great organizations were created for furthering the sale of Liberty Bonds in unprecedented amounts. Bankers, business men, bond houses, newspapers and periodicals, press associations, various patriotic organizations, cooperative and fraternal societies, and other organizations throughout the length and breadth of the land gave generously of their services to the great cause. Even soldiers and sailors came forward with their subscriptions, amounting to more per capita than those from civilians. In an effort to arouse as such interest as possible and to leave no stone unturned to place the matter fully before the people, the Secretary of the Treasury, during each campaign, made numerous speeches throughout the country. 308 - 17 First Liberty Loan By the Act approved April 24, 1917 (just eighteen days after we declared war on the German Government) the Secretary of the Treasury was authorised, with the approval of the President, to issue bonds of the United States to the extent of about $5,500,000,000 at a rate of interest not to exceed 3-1/2%. The Secretary of the Treasury announced on May 14, 1917 the first issue of bonds for popular subscription in the sum of $2,000,000,000. The bonds were dated June 15, 1917. bore interest at the rate of 3-1/2% per annum, and were exempt both as to principal and interest from all taxation, except estate or inheritance taxes. Under the terms of the issue and in accordance with the provisions of the First Liberty Bond Act, the holders of these bonds were given the recurring right of conversion into any subsequent series of bonds issued at a higher rate of interest before the termination of the war. In determining the amount of this issue, it is of interest to note from the Annual Report of the Secretary of the Treasury covering the fiscal year 1917 the following comment on this point: "Because of the sise of this financial undertaking there was no precedent to guide the Government as to the amount of bonds which the country would readily absorb at one time and there was such confusion of counsel as to the amount of the initial offering. Many students of finance and men experienced in large bond operations be- lieved that the first issue should not exceed $1, 000, 000, 000, and some thought that the amount of the first loan should not exceed $500,000,000. After receiving views and suggestions from bankers, investment houses, business mon, and investors in all parts of the country, I finally determined 309 - 18 to make the amount of the loan $2,000,000,000. This decision was controlled by the essential requirements of our own part in the war and the necessities of the foreign Governments to which the Congress had author- ized the extension of credits." The total subscriptions to the First Liberty Loan amounted to more than $3,000,000,000, a fifty per cent over-subscription. The Secretary allotted approximately $2,000,000,000 of these subscriptions as he had made no provision in the announcing circular that he would take any part of the over-subscription. It was estimated that more than four million subscriptions were entered for these bonds. Second Liberty Loan Under date of September 24, 1917. the Second Liberty Bond Act was approved, which authorised the Secretary of the Treasury to issue, in addition to the $2,000,000,000 sold under the Act of April 24, 1917, bonds in the total sum of about $7,539,000,000, which would bear interest at a rate not to exceed 4% per annum. Again a provision was inserted in the Act which gave the holders of any of these securities the privilege of converting them into bonds bearing interest at a rate higher than 4% if any subsequent series of bonds bearing a higher rate should be issued by the United States before the termination of the war, but this was a non-recurring privilege. The bonds issued under the First Liberty Bond Act were fully tax-exempt, except for estate or inheritance taxes, whereas interest on the bonds issued under the Second Liberty Bond Act, except for interest on limited amounts, was subject to graduated additional 310 - 19 income taxes, commonly known as surtaxes and excess profits and war profits taxes. Only about one-quarter of the first Liberty Bonds were converted into subsequent issues because of the value attached to them as a result of the tax-exempt features. The Second Liberty Loan was formally offered to the public on October 1, 1917 in the amount of $3,000,000,000, but here the Secretary reserved the right to allot additional bonds up to one-half of the amount of any over-subscription. The bonds were dated November 15. 1917. bore interest at the rate of 4%, and were to nature November 15, 1942 but could be redeemed in whole or in part on any interest payment date on or after November 15. 1927. The amount of subscriptions received for this offering was $4,617,532,300, an over-subscription of about 54% of the amount offered. The Secretary took advantage of the reservation in his offering circular to accept 50 per cent of the over-subscription, and therefore allotted $3,808,000,000. It was estimated that approximately 9,400,000 subscrip- tions were entered for this loan. Third Liberty Loan Congress, by the Act of April 4, 1918, known as the Third Liberty Bond Act, amended the Second Liberty Bond Act and raised the amount of bonds authorised to be issued from about $9,500,000,000 to $12,000,000,000 and increased the rate of interest from 4% to 4-1/4% Upon the recommen- 311 - 20 - dation of the Treasury the conversion privilege for subsequent issues bearing rates of interest above 4% was eliminated. In the spring of 1918, when the Treasury had under consideration the matter of offering another popular loan, the question of the rate of interest on the new bonds became quite acute. With the bonds of previous loans selling below par and industrial and other securities yielding a rate much in excess of the interest rate on Government bonds, it was the general banking opinion that the rate on the Third Liberty Loan should be 4-1/2%, and few believed that it would be possible to sell a large amount of bonds at a lower rate. The Treasury stood firm in its belief that the rate of interest itself would not maintain Liberty Bonds at par in the financial markets; that the price of Liberty Bonds even though quoted at less than par on the exchanges, would not deter the American people from buying at par the same bonds when offered by their Government to secure the necessary funds to carry on the war; and that the patriotism of the American people was not measured by interest rates nor determined by fluctuations in the market price of Government securities on the exchanges. It was decided, therefore, that the rate of interest which the new bond should bear should be 4-1/4% and not 4-1/2% The amount of the offering was $3,000,000,000 and it was announced to the public on April 6, 1918, the first anniversary of America's declaration of var. The bonds were dated May 9. 1918, bore interest at the rate 312 - 21 as of 4-1/4% per annum, and matured September 15. 1928. They were also tax-exempt to the same extent as the bonds issued under the Second Liberty Bond Act. The right was reserved to allot additional bonds up to the full amount of any over-subscription. The amount of subscriptions received was $4,176,516,850. approxi- mately 39% over-subscription. All subscriptions were allotted in full. It was estimated that there were 18,308,325 subscriptions to this loan. Fourth Liberty Loan Again the Congress was asked for additional authority, so on July 9. 1918, the Fourth Liberty Bond Act became a law which amended and supplemented the Second Liberty Bond Act. It increased the authorization to issue bonds from $12,000,000,000 to $20,000,000,000 without any change in the rate of interest or other bond-issuing provisions. The Fourth Liberty Loan, in the amount of $6,000,000,000, was offered to the public on September 28, 1918, with the right reserved to allot additional bonds up to the full amount of any over-subscription. The bonds were dated October 24, 1918, matured October 15. 1938, with the right to call such bonds for redemption on and after October 15. 1933. They bore interest at the rate of 4-1/4% per annum and contained substantially the same tax-exemption provisions as the bonds of the Second and Third Loans. The amount of subscriptions received was $6,993,000,000, all of which were allotted in full. It was estimated that 22,777,680 subscriptions were tendered for this loan. 313 - 22 - Fifth or Victory Liberty Loan Early in the calendar year of 1919 it became clear that another loan to fund the floating debt, which had rapidly accurulated as a result of mounting expenditures in the months immediately following the signing of the Armistice, would be necessary. The matter was again submitted to the Congress and on March 3. 1919, the Victory Liberty Loan Act was enacted, which amended the Second Liberty Bond Act. This new Act authorised the issuance of notes of the United States in an aggregate amount of not over $7,000,000,000, on such terms and conditions and at such rates of interest as the Secretary might prescribe, with broad, flexible authority concerning exemptions from taxation. Formal offering of the issue was made under date of April 21, 1919. in the form of two series of 3-4 year convertible gold notes, the 4-3/4% series being exempt from taxes except surtaxes and estate and inheritance taxes, and the 3-3/4% series being exempt from all taxes except estate and in- heritance taxes. The notes of the two series were inter-convertible at the option of the holders. The notes were dated May 20, 1919. matured on May 20, 1923, with the option of the United States to redeem them on June 15 or December 15. 1922, in whole or in part. The amount of the loan was $4,500,000,000, for which subscriptions amounted to $5,250,000,000, an over-subscription of about 17% The amount of allotments was confined to the original offering of approximately $4,500,000,000. 314 - 23 There is set out below a table showing the estimated number of sub- scriptions to each of the five Liberty Loans, the amount of the offering in each case, the amount of subscripti one, and the amount allotted. In the footnote at the bottom of this table information is shown as to the terms of payment accorded the subscribers to each loan. Information Concerning the Five Liberty Loans Estimated number of Subscriptions Amount Amount of of Offering Subscriptions : First Amount Allotted : of Bonds : Loan Date : Liberty (In millions of dollars) 6-15-17 4,000,000 2,000 11-15-17 9,000,000 3,000 4,618 3,808 Third 5-9-18 18,308,325 3,000 4,176 4,176 Fourth 11-15-18 22,777,680 6,000 6,993 6,965 Fifth* 5-20-19 11,803,895 4,500 5,250 4,495 18,500 24,072 21,433 Second Victory Notes 3,035 1,989 Note: Terms of payment for Liberty Bond issues: First Liberty Loan 2% with Subscription 18% on June 28, 1917 20% on July 30. 1917 30% on Aug. 15. 1917 30% on Aug. 30, 1917 Second Liberty Loan 2% with Subscription 18% on Nov. 15. 1917 40% on Dec. 15. 1917 40% on Jan. 15. 1918 Third Liberty Loan 5% with Subscription 20% on May 28, 1918 35% on July 18, 1918 40% on Aug. 15. 1918 Fourth Liberty Loan 10% with Subscription 20% on Nov. 21, 1918 20% on Dec. 19, 1918 20% on Jan. 16, 1919 30% on Jan. 30. 1919 Fifth Liberty Loan 10% with Subscription 10% on July 15. 1919 20% on Aug. 12, 1919 20% on Sept. 9. 1919 20% on Oct. 7. 1919 20% on Nov. 11, 1919 315 - 24 - Other Related Activities During the period of the war there were a number of activities which had to be coordinated with the Treasury's task of providing funds to support our armies in the field. These activities will be discussed below. Army Payments in Europe The fact that we had transported a large army to Europe made it necessary to provide the machinery with which to make large payments abroad. At first the disbursing officers of the army drew their dollar checks against credits established for them with the Treasurer of the United States and sold such checks to acquire foreign currencies for payments abroad. As the number and amount of payments increased in Europe it became obvious that it would be unsatisfactory for army dis- bursing officers to cintinue to draw their checks in dollars because of the effect on exchange rates and because of the danger that such checks would be lost in transmission to the United States. Then, too, with many officers carrying balances with foreign depositaries, it required us to keep larger cash balances than would be necessary under a more centralized system. After a lengthy consideration of the problem, a plan was put into effect whereby the Treasurer of the United States would carry balances in france and sterling with the French Treasury and the Bank 316 - 25 - of England, respectively. As the United States needed france or sterling it would purchase these currencies under an arrangement made with the respective Governments at agreed rates, and the dollars in payment of these purchases would be placed to the credit of those Governments in New York, to be used by them to meet their commitments in the United States. By thus making dollars available to these countries in the United States, it reduced their cash requirements on the United States Treasury. In other words, it reduced the amount of money that the Treasury would otherwise have had to loan to these Governments to meet their war commitments in the United States. The currencies so acquired were carried in the account of the Treasurer of the United States at the rates at which they were purchased and were transferred to and accounted for by the Financial Requisition Officer at these same rates. Under this plan a Financial Requisition Officer was appointed in both Paris and London. These officers received credits in their accounts with the Treasurer in Washington upon the approval of dollar requisitions by the War Department in Washington. The Financial Requisition Officer would draw dollar checks on his account and would receive from the French Treasury or the Bank of England in payment for such dollar checks an amount of france or sterling at the established rate which he would then place to his credit in local depositaries (usually branches of American banks which had been designated by the Treasury to act as Government depositaries) through which the day-to-day expenditures were handled. 317 - 26 - The various disbursing officers of the Army, under this plan, did not maintain individual credit balances in designated depositaries in France and Great Britain as they had prior to the adoption of the plan, but they drew their checks against the balances maintained to the credit of the Financial Requisition Officer in each case and up to the limits of the authorisations previously given each disbursing officer by the Financial Requisition Officer. A similar arrangement was made with the Government of Switzerland whereby the Treasurer acquired Swiss france in exchange for the transfer of dollars to that Government in the United States. The Swiss france were then made available to disbursing officers to cover payments for supplies, etc., acquired in Switzerland. An arrangement was also made with a group of American banks whereby pesetas were acquired by the Treasurer of the United States and made available to disbursing officers to meet payments in Spain. Swedish kronen and Dutch guilders were acquired by disbursing officers for use in Sweden and Holland, respectively, under arrangements worked out between the Treasury and the Federal Reserve Bank of New York. Depositaries were also designated in Belgium, Italy, Canada, and the Argentine for use of disbursing officers. War Finance Corporation During this period there was some fear that the Government's borrowings might absorb so large a proportion of the available funds of 318 - 27 - the country as to leave the nation's essential industries without the necessary financial resources to adjust their production to the increased demands of the war. In order that there might be an organization to supply these essential credit resources to war industries of the country, the Congress authorised the creation of the War Finance Corporation. This Corporation was created to extend financial assistance to the war industries indirectly through banks of the country and in exceptional cases directly to the war industries themselves. It appears that the banks did not avail themselves to any great extent of the resources of this Corporation, but its very existence no doubt provided a steadying and beneficial effect upon the financial condition of the country. It was there if they needed it. In cases where the war industries were unable to obtain the necessary funds through ordinary banking channels, the Corporation afforded the necessary relief directly to such industries. Capital Issues Committee It was highly important that every effort be made to conserve the capital of the country as well as the material and labor supply. It was essential that some organisation be created which would review every proposal requiring the use of capital so that it would not interfere with the requirements of the Government. Upon recommendation of the Secretary of the Treasury, Congress authorised the creation of the Capital Issues Committee with ample powers of investigation as to proposed new security issues and with power to 319 - 28 - prohibit the sale of such securities as might be determined to be incompatible with the public interests. This Committee, during the period of its existence, passed upon applications covering proposed security issues aggregating about $2,350,000,000. About twenty per cent of the amounts involved, or $460,000,000, was disapproved. These involved for the most part new extensions which would not have contributed to the winning of the war. Foreign Exchange In September and October, 1917 and January, 1918, the President issued Executive Orders which set forth rules and regulations governing the exportation of coin, bullion and currency and transactions in foreign exchange generally, and designated the Federal Reserve Board to act as the agency of the Secretary of the Treasury in performance of the duties imposed upon it by such orders. Pursuant to this authority the Federal Reserve Board established a Division of Foreign Exchange with headquarters in the Federal Reserve Bank in New York to obtain complete reports concerning operations in foreign exchange and to advise in the transmission of funds to foreign countries. 320 - 29 II. CURRENT WAR PROBLEMS If the United States should become involved in the present con- flict in Europe, the organization of the Treasury is now much better equipped to handle large financial operations than it was in 1917. It has demonstrated this during the past several years. If we should become involved in another war. it could rely upon the last war's experience for guidance in many problems that would confront us. The Federal Reserve System has also had twenty-five years' experience behind it and it now has excess reserves of more than $5,500,000,000, whereas in 1917 it had neither the experience nor the reserves. The American people have certainly become thoroughly familiar with Government securities and while the Treasury would no doubt have to appeal to their patriotism, I do not believe there is any question but what they would readily buy Government securities. Unquestionably there would have to be a sales campaign of some kind, but our war experience in Liberty Loan Campaigns and our more recent experience in selling United States Savings bonds would help materially in this respect. We could expect our military expenditures to increase rapidly and at first, because the war stimulus should materially increase employment, it would seem that there should be a substantial offset to these increased expenditures by reductions in those made for the Work Projects Administration, the Civilian Conservation Corps, and the Agricultural Adjustment program, and after this current year due to the fast liquidation of existing contracts. a substantial reduction in Public Works Administration expenditures. 321 - 30 If we should be so unfortunate as to get into this war, the President should probably make an immediate appeal to the people to economise in every way possible and to save their money to lend to the Government to carry on the fight. The importance of economising should be emphasised upon every occasion. The Government should like- wise economise in every branch and save every possible dollar for military activities. I have attempted below to show in a general way what economies might be effected over a two-year period in those branches of Government not directly connected with the prosecution of the war, and also to show what we might expect by way of increases in expenditures for national defense. It will take some time after war is declared to effect these reductions in expenditures because of the lag between the time the obligations are incurred and the time such obligations are presented to the Treasury for payment. For the purpose of this memorandum I have taken the estimates of expenditures for the fiscal year 1940 as contained in the last budget and revised them to include the largest increases made by the last Congress, and have given estimated revisions of such expenditures, still using 1940 as a base, at the end of each of four six-months periods after our entrance into a war. The figures, of course, can be nothing more than rough estimates. 322 - 31 - (In millions of dollars) Estimated expenditures on an annual basis 1 Estimates : at the end of six-months periods after for declaration of war Second Third First :- Fourth 1940 : six months: six months: six months: six months : : : $ 865 850 800 750 750 National Defense 1,450 3,000 6,000 8,000 10,000 Interest 1,050 1,100 1,200 1,300 1,400 Social Security. etc. 1,100 1,100 1,200 1,300 1,400 General public works 600 500 300 200 200 Public Works(10ans,etc.) 500 100 Agricultural Adj.Program 800 500 100 2,019 1,500 500 Veterans benefits 539 539 539 Loans,subscriptions, etc. 300 100 All other 155 - - - Departmental 100 100 - Unemployment Relief 539 539 - 9,378 - - 100 50 50 50 9,389 10,689 12,239 14,439 - 32 - 323 I understand that a study is being made as to what revision should be made in our tax structure in case of war. The present tax structure would probably yield large returns under war conditions. It will be recalled that we collected in 1938. with practically our present tax law in effect, approximately $6,300,000,000 from all sources, which is not far from the amount we collected in 1920, the year of peak receipts under the war-time tax structure. It seems to me that we might expect under war-time conditions a great deal more revenue than we have ever before collected, including social security and state unemployment taxes. Mr. Haas is making a study to ascertain whether the present tax system, under conditions similar to the last war, would produce as much or more revenue than was produced at that time. During a war every able-bodied man should either be employed in industry or enlisted in the Army. With industry on a war-time basis the unemployment and the old-age taxes would naturally increase materially and the payments going out on account of unemployment benefits would practically disappear and on account of old-age retirements would not materialize to any great extent because of the continued employment during the war of those eligible for retirement. These taxes should be a large source of revenue to the Treasury which it could use in financing a war. One big disadvantage resulting from this situation would be that after the war unemployment would no doubt increase rapidly and the payments from these funds for unemployment and retirement benefits would be substantial. It would be necessary. therefore, for the Treasury in the 324 - 33 immediate post-war period, which is usually a period of uncertainties in the money market, to refinance a large part of any special Government obligations held in these Trust Accounts to make funds available for the purpose of meeting such payments. This is a problem requiring careful study. While all of the Treasury short-term financing during the last war was conducted through the sale of Treasury certificates of indebtedness which carried a coupon rate fixed by the Treasury before issuance, it now has the further flexibility of selling Treasury bills at a discount on a bid basis. If another emergency should arise, the Treasury could sell a large volume of Treasury bills to meet immediate cash requirements,and then could refund those bills at a later date into bonds or other securities through popular loans, payment for which could be made in bills. Treasury bills could also be issued in anticipation of income tax receipts, and we could make it possible for the taxpayer to use these bills in payment of such taxes. At the present time the Secretary of the Treasury has authority to sell Treasury bills and Treasury certificates of indebtedness with a maturity of not more than one year, Treasury notes with maturities from one to five years, and Treasury bonds without limitation as to maturity. Of course the limitation of $45,000,000,000 on the amount of securities authorised to be issued and outstanding at any one time under the Second Liberty Bond Act, as amended, would have to be raised to meet the new conditions. 325 - 34- - In addition to the problem of financing huge expenditures for war purposes, the Treasury will have the task of refunding its maturing obligations as well as the maturing obligations of Government corporations and credit agencies. The following statement shows the amount of these obligations (exclusive of Treasury bills and callable securities) in millions of dollars for each quarter during the next three calendar years: 154 677 892 504 192 677 696 426 - 84 84 834 414 1,248 342 737 25 762 204 501 705 232 2,853 335 3,188 2,219 1,107 3,326 1,000 Third quarter - Fourth quarter 310 736 - 738 Second quarter 1,450 - 72 Direct Other Total - 1,378 - First quarter 1942 1941 Direct Other Total - 1940 Direct Other Total 342 232 310 1,310 Disbursing: This would be a relatively simple matter as we could with slight modification follow the procedure adopted during the last war with respect to Army payments made in France and Great Britain. Financing Industry: The Reconstruction Finance Corporation is already in existence and has had sufficient experience to permit it to perform all of the functions performed by the War Finance Corporation during the last war. It probably would be of even greater help as its authority is much broader than the War Finance Corporation possessed, and its experience during the past seven years has carried it into greater fields of activity 326 - 35 Capital Issues: The question of controlling the capital issues market could very well be placed under the supervision of the Securities and Exchange Commission so that it would not be necessary to create a new organization for this purpose. Foreign Exchange: The Treasury has already given considerable study to this matter and is, I understand, prepared to take immediate action whenever the situation requires it. DWB 327 Nov. 7,1939 Purchase of War Materials by foreign governments; HM,Jr discussed with FDR setting up of committee with representatives from Army, Navy and Treas to report to FRD throu McReynolds 328 PLAIN HSM London Dated November 7, 1939 Rec'd 12:25 2. m. Secretary of State, Washington. 2295, November 7. FOR TREASURY. 1. Apart from the addition of the Netherlands East Indies' guilder to the list of officially fixed exchange rates reported in my 2253 of November 2, 6 D. M., there have been no changes since October 30 (SEE my No. 2212 of October 30) in the officially fixed rates until today when the belga appreciated slightly to 23.90-24.10. The changes in other rates have been a slight appreciation of the Danish krone to 21 (in the middle) today and of the Italian lira to 77-78, while the Shanghai Exchange now stands at 5 - 5-3/4. The Japanese yen following the dollar is quoted today 1s.2-1/4d. - 1s.2-9/32d. 2. There is little comment on the weakening of sterling in NEW York following the passage of the Neutrality Act and where mentioned today's press comments note that the view in London is that the British Government will provide all necessary dollar Exchange at the officially fixed rate, that it would be unwise to change the 329 hsm -2- No.2295, November 7, from London the rate when heavy purchases are about to be made and that the British Treasury has doubtless provided itself with ample dollar balances by means of (a) the purchase of dollars from British nationals, (b) gold resources in the United States, and (c) American securities which are being steadily sold by British nationals, the dollar proCEEds of which are surrendered to the British Treasury. The slump in sterling in NEW York is therefore regarded as "a passing phase which does not affect the long-term view of the pound abroad". (DAILY TELEGRAPH). The TIMES today does not mention the matter. 3. The Chancellor of the Exchequer announced in the House of Commons today that he had COME to the con- clusion that it would not be in the public interest to issue the two half yearly statements of the position of the Exchange Equalization fund in war-time. KENNEDY CSB 03113038 eeer material sway 330 PARAPHRASE OF TELEGRAM RECEIVED FROM: American Embassy, Berlin DATE: November 7, 1939, 4 p.m. NO.: 1973 SECTION ONE FOR TREASURY The oversubscription on the first day of the state railways loan of 500,000,000 marks illustrates the continuing liquidity of the money market which has made it possible for the Reich Treasury to borrow without diffi- culty at short-term. This continuing liquidity is also shown in the month-end statements of the Reichabank and the Gold Discount Bank (a subsidiary of the Reichabank). In these statements it was shown that there had been a decline from the high levels recorded at the end of August and September both in the volume of bills discounted and in the Reichabank note circulation. On the other hand, the introduction of substitute currencies, that is renten bank notes, the mark notes issued by the Reichs Credit Kasse in occupied Poland, and army certificates of indebtedness have considerably lessened the strain on the Reichabank. (END OF SECTION ONE) EA:EB 10 331 PLAIN JI Berlin Dated November 7, 1939 Rec'd 3:46 p.m. Secretary of State Washington 1973, November 7 (SECTION TWO) The Reichsbank's bill and check portfolio stood at 9358 million marks on October 31, a decrease of 746 million marks from holdings of such paper on September 30, of 914 million marks from the August 31 figure of 10272 million, and of 1234 million from the record figure reached on September 7. In contrast with the Reichsbank the Gold Discount Bank however showed an increase in its bill portfolio during October, its bill holdings at the month End being 2104 million marks (including 48 million marks of regular treasury bills) as compared with 1743 million marks on September 30. The October - End figure is however still slight below that of August 31 when the Gold Discount Bank held 2131 million marks of bills including 99 million marks of regular treasury bills. Adding together the portfolios of the two institutions 332 -2-1973, November 7, (SECTION TWO) from Berlin institutions their joint position as regards bill holdings on October 31 was 11462 million marks as compared with 11848 million marks on September 30 and 12403 million on August 31. KIRK CSB 1/ 333 (PARTIAL) PARAPHRASE OF SECTION THREE OF TELEGRAM NO. 1973 OF NOVEMBER 7, 1939, 4 P.M., FROM AMERICAN EMBASSY, BERLIN. However, the sole explanation of decline in the bill portfolio of the Reichabank does not lie in the liquidity of the money market. The Government's action in more and more often resorting to borrowing directly through its operating credit with the Reichabank instead of bor- rowing indirectly, as they formerly did, by discounting Treasury bills and notes with the institution is another cause. The Government's operating credit's limit was one hundred million marks until the reorganization of the Reichabank in June. There isn't any limitation on this kind of borrowing under the new charter of the Reichsbank; it is not known how much was taken --omission-- by the Reich and operating credit during the month of October. It is noteworthy, however, that the item "miscellaneous assets" which includes the "operating credits" increased from 1,604 million marks on September 30 to 1,874,000,000 marks on October 31, indeed during the last week of the month "miscellaneous assets" which had declined during the preceding three weeks registered an increase of 616,000,000 marks. In addition to borrowing from the main central bank the Government borrows directly from the second subsidiary of the Reichsbank, the Rentenbank. In September the Reich borrowed 400 million marks from that institution (which compares with the September issuance 334 -2- issuance of 408 million marks of Rentenbank notes) . Reichbank note circulation declined from 10,995 million marks on September 30 to 10,819 million marks on October 31. It can only be speculated as to how much the note issue of the Central Bank would have risen if it hadn't been for the circulation of substitute currency. 408,000,000 marks in small notes of the Rentenbank were issued during the month of September; the October issuance of this Rentenbank currency has been evaluated at between 200,000,000 and 300,000,000 marks by a private estimate. It is estimated by the German financial press that the army issued 500,000,000 marks of notes during October; this may have lessened to a certain extent the demand for Reichabank notes of large denomination. Expenditures of the army are paid in Poland with mark notes of the Reichskreditkasse; this Reichskreditkasse has replaced the former Central Bank of Poland. The Government's intention to hoard silver for pay- ments abroad in the future is indicated possibly by the rise in the holdings of coin by the Reichsbank of from 66,000,000 marks on the thirty-first of August to 200,000,000 marks on September 30th, and tolatter 333,000,000 marks on the thirty-first of October, which/is a record figure. EA:MSG 335 PLAIN HSM Berlin Dated November 7, 1939 REC'd 3:26 p. m. prot Secretary of State, Washington. 1973, November 7. (SECTION FOUR). Another item of interest in the statement is the continued increase in the Reichsbank's portfolio of "Eligible securities" which rose from 1013 million marks on August 31 to 1324 million marks on September 30 and to 1440 million marks on October 31, presunably as a result of open market operations. Reichsbank sight deposits at 1520 million marks declined somewhat from the September 30 figure of 1602 million marks. The Reichabank holdings of Rentenbank notes increased slightly from 158 million marks to 168 million marks. The Reichsbank clearings, the principal clearing system of Germany, declined from a total of 118 billion marks in September to 115 point 7 billion in October. The Reichsbank's gold reserve on October 31 remained unchanged at 77 million marks. The gold discount banks gold stock, however, has fallen from 40 point 6 million marks on July 31 to 29 point million marks on October 31. (END MESSAGE). KIRK KLP 11 336 GRAY PAP PARIS Dated November 7, 1939 Rec'd 10:50 p.m. Secretary of State Washington 2680, November 7, 7 p.m. FOR THE TREASURY. The securities market was again fairly active but was subject to considerable profit-taking. Most French industrial issues closed down slightly and rente issues were off fractionally. An exception to the rule were the 1937 41s with dollar exchange guaranty which were up 3 points, presumably in sympathy with stronger dollar quotations in New York and a feeling that lifting of the arms embargo means eventually greater strain on the franc. The market was favorably impressed with the "progress" of Russian-Finnish negotiations and the possible implications of the visit of the King of Belgium to Holland. Official foreign exchange quotations in Paris underwent the first change in almost a fortnight when the belga weakened one point; it is now quoted at 728 - 734 as against 729 - 735. Some anxiety is developing here as to the effect on Belgian economy (even if the country is not invaded) of the costs of her continued mobilization 337 PAP -2- 2680, November 7, 7 p.m. from Paris mobilization and the dislocating effects thereof on Belgian industry. The weekly statement for November 2 of the Belgian National Bank shows an increase in gold holdings of 4,538,000 francs to 18,020,000,000 francs. Foreign exchange holdings are down 114,000,000 to 4,093,000,000. Belgian commercial advances are up 16,500,000 to 2,776,500,000 and commercial advances abroad are up 500,000 to 18,500,000,00 Note circulation shows an increase of 294,000,000 to 27,144,000,000. (END SECTION ONE). BULLITT CFW:JRI 338 GRAY PAP PARIS Dated November 7, 1939 Rec'd 10:40 p.m. Secretary of State Washington 2680, November 7, 7 p.m. (SECTION TWO). The Treasury account is up 53 millions to 8.8 millions. Gold coverage is 64.34% as against 64.90 the previous week. This morning's JOURNAL OFFICIEL carries a decree author- izing payment of special deficiency credits amounting to about 400,000,000 francs covering expenditures chargeable to the budgetary years 1936, 1937 and 1938, During the period October 1 - 15 deposits in ordinary savings banks totalled 57 millions and withdrawals 99 millions (this compares with deposits of 92 millions and withdrawals of 735 millions during the last half of September - our telegram No. 2550, October 23, 5 p.m.). In a brief political speech in the Sarthe yesterday Caillaux made an appeal for carrying on the war on a pay as you go basis. He contrasted the greater burden of this war with the last one and said: "We repeat and should continue to repeat that no comparison is possible between former wars, almost placid, which in any event did not profoundly 339 PAP -2- 2680, November 7, 7 p.m. (SECTION TWO) from Paris profoundly trouble the current life of the country and that which has been imposed upon us today; nor can there be any worth while comparison from the financial point of view between the World War of 1914 and that of 1939. BULLITT JRL:CFV 340 GRAY PAP PARIS Dated November 7, 1939 Rec'd 9:14 p.m. Secretary of State Washington 2680, November 7, 7 p.m. (SECTION THREE). Formerly it was a question of making the war popular and agreeable by not raising taxes; we cannot do the same today without a collapse of our finances. The reserves accumulated by a century of exchange prosperity which one only appreciates when it is gone, have in effect been thrown to the winds." (END OF MESSAGE). BULLITT NPL:EMB eeer 8.00 341 GROUP MEETING Present: Mr. Hanes November 8, 1939. 9:30 a.m. Mr. Smith Mr. Duffield Mr. Viner Mr. Thompson Mr. Stewart Mr. Bell Mr. Haas Mr. Graves Mr. Gaston Mr. Cotton Mr. Cochran Mr. Harris Mr. Foley Mr. White Mrs Klotz H.M.Jr: How about you? Hanes: What do you mean? H.M.Jr: We meet at 10:00 o'clock with this committee, don we, Delano and the rest of them? Hanes: Yes. H.M.Jr: That is the first meeting. Hanes: That meeting with Johnson at 11:00 o'clock is on the old question we were interested in of the depreciation and obsolescence. It is just the Internal Revenue Bureau. Edison and Johnson and Green, of the State Department, apparently. I don't know how he got into it. Apparently the President told Johnson and Edison to get Green and some others from the Bureau to help them about this depreciation and obsolescence, so that is the meeting at 11:00 o'clock. I don't see any reason why we shouldn't at least find out what it is all about. H.M.Jr: No, I don't either. That is all right, sure. Are you going to take Guy with you or not? Hanes: No, I don't think so. H.M.Jr: Well, that is all right. 342 -2Hanes: Now, Ed Foley and Bernstein seem to think that we ought to write a note - we ought not to ask for a return of the administration of the Credit Section, which you will remember the President assigned to us in the last Neutrality Act under Section 3. Well, Section 7 has no proviso and their feeling is that it becomes a policing job or a legal job, and one which the Treasury shouldn't be interested in. I brought that up yesterday at a meeting with the State Department which we had in Herbert Gaston's office and Berle was strongly of the opinion that he wanted the Treasury to stay in; he didn't want us to get out. I just bring it up here to let Ed Foley know that the State Department - I agree with Ed and Bernstein that it is a policing job, but the State Department seems to want us to stay in because of the fact that they are having so many questions come up every day in regard to this H.M.Jr: Foley: Neutrality Act which are purely financial, and for that reason they wanted us to stay along and help them, not change the situation. I don't know Well, I am cold on it, so I don't know. Well, before there were several questions that had to be determined, what was the short-time credit, what was the normal credit. Here there are no ques- tions of that character at all. We had something ience in the other situation, but here it is simply a question of the interpretation of the law and it is a job of law enforcement for the Department of Justice through the United States Attorneys. I don't think we have any part in it at all.. The State Department takes this attitude, that whereas it is a law enforcement job and will fall we could contribute because of our financial exper- Hanes: to the Department of Justice, nevertheless the man who wants information is not going to the Department of Justice for it, so somebody has got to receive those requests. Gaston: I think that is right. H.M.Jr: Before I leave town, suppose we thrash it out. Hanes: Fine. I have no feeling about it one way or the other. It wouldn't be difficult to take and if 343 -3the State Department would be happy to have us say we would help them, I would be willing to let it go on the way it is. H.M.Jr: Let's let things stay as they are. Foley: It will be a headache. H.M.Jr: What is this job, anyway? Foley: Another one. Gaston: We have got one. Hanes: You could set down a few minutes to talk with Elmer Irey sometime during the day about a few of the things you asked me to follow up and also we have got another case I think you ought to know about, so - it will take about five minutes. It could wait until you come back. H.M.Jr: No. If it is unpleasant, I would rather get it Hanes: I don't think it is terribly unpleasant, but it behind me. might cause us a little trouble. H.M.Jr: Why don't we say this, you are having lunch with me today. O. K.? Hanes: O. K. H.M.Jr: Supposing we see Irey right after lunch. Hanes: All right. Say 2:15? We will call him when we come up. H.M.Jr: (To Mrs. Klotz) Tell Irey to be on tap for 2:00 o'clock. How is that? Hanes: Fine. One other thing, Huntington Cairns has appointed a Tax Commissioner over in Maryland that requires an Executive Order, and it is a non-paying job. 344 -4H.M.Jr: Ed, I thought I would have you and Hanes and these three advisory bankers for lunch today. They are all here, aren't they? Hanes: They were yesterday and I think they are today. H.M.Jr: And Preston Delano. I guess you had a busy day yesterday. Hanes: We had a right busy day yesterday. H.M.Jr: Good morning, Ambassador. Gaston: Good morning. H.M.Jr: Where is your frock coat? Gaston: Still looking for it. H.M.Jr: What will the newspaper men call you now? Gaston: I hope to keep it away from the newspaper men. Duffield: The State Department is collaborating with him, H.M.Jr: You will be amused at what the President said to me at luncheon yesterday. He said, "You know," " looking at me, "I am sending Gaston down to Guate- too, I will say that. mala." That was quite interesting. So you are his personal representative and that is the way he considers you. I am serious now. He considers that you are representing him and he takes it very seriously. Gaston: He does? H.M.Jr: Yes. Gaston: Would you like to talk to me sometime? H.M.Jr: What I am trying to do is this, I stayed over to- morrow just for one reason - and you (Mrs. Klotz) might check with the White House - to talk to the President over there. Mr. Hanes and I are going over at 11:00 o'clock tomorrow. That was worth staying here for and I knew that you (Mr. Hanes) Bruere? ? 345 -5would be lots more mind-easy. How about tonight, Herbert? Gaston: That will be all right. H.M.Jr: At a quarter of 9:00? Gaston: That will be all right. H.M.Jr: Who do you want to bring with you? Gaston: Harry, I think. H.M.Jr: You think it over and I am available at a quarter of 9:00. Gaston: Yes. I am principally concerned about what we put out and what we suggest there. H.M.Jr: Better say a quarter of 9:00. You come and bring whoever you want. Gaston: All right. You spoke to me about this letter from Gardner Jackson. That subject of taking care of the seamen who were thrown out of employment was originally taken up with the President by Robert Guerre and he assigned the matter to McReynolds. McReynolds has had some conferences on the thing. Of course, they are very anxious to get to see the President, but H.M.Jr: May I interrupt you? Gaston: The short of it is, I think I can just turn Gardner Jackson over to McReynolds. H.M.Jr: If you do that, tell Mac to tell him that if he sees him - that Mac's seeing him is an answer to Gardner Jackson's letter to me. And Mac will see him? Gaston: I haven't been able to get Mac, but I will take care of it and see that he gets in touch with Mac. H.M.Jr: Have you tried the golf course? You say you haven't reached Mac? 346 6Gaston: I wasn't able to reach him because he was on the golf course. I was invited to go, but wasn't able to. H.M.Jr: All right. What else? Gaston: I have nothing else. Foley: Jim Landis says that he will be available all day H.M.Jr: Is he here? Foley: No, he is back in Cambridge. He will be available all day except at 4:00 o'clock and at your conven- ience, if you would like to call him, he will be in his office. He thought it would be better that H.M.Jr: Foley: way than for him to call you. Let's have this meeting at 10:00 and then we will have the luncheon and I will see Elmer Irey and then maybe I will call him later. I have this morning revised copies of Knollenberg's and Greenbaum's memos, which I am having typed. Eddie says I may tell you that he will sign his as soon as it is back in his possession. I have a memorandum that I would like to submit based on those two comments. H.M.Jr: All right, see Mrs. Klotz. will you send Special Assistant U. S. Attorney General Sammy Kraus the following telegram and sign my name to it, based on this publicity, if you can get it by Mrs. Klotz: "Atta boy, Sarmy." He got in the New York Evening Sun as Special Assistant United States Attorney General and proposes granting an extension to all the telephone companies, et cetera, et cetera. It is O. K. Foley: H.M.Jr: Better not say Special Assistant to the General Counsel of the Treasury Department. Just tell him, "Atta boy, keep up the good work." You (Mrs. Klotz) can send it. Mrs. Klotz will send it. I will leave it in her hands. 347 7 Klots: It is done. H.M.Jr: And find out for me when I come back whether I can use Sammy in another spot. Foley: You have to get him away from Bill Campbell first. H.M.Jr: Incidentally, it is interesting to know that about two years ago Mr. Oliphant wrote me a memorandum asking whether I wouldn't please send the American Telephone and Telegraph president a note to come up here and ask him whether he wouldn't voluntarily stop the use of his wires for the dis- Foley: semination of racing tips. Well, Sam called up the night before and said the public prosecutor for Cook County - they held their press conference and announced they were making demand that they cease giving this service and he pointed out quite jubilantly that this was one of the things you were very interested in. He told that to me on the telephone when he told me in advance what they were doing. He was very happy. H.M.Jr: Foley: H.M.Jr: I thought it was at that time taking in a little too much territory for me. That is right, and it has worked out very nicely this way because they got the local prosecutor and the U. S. Attorney to do it. That is the proper way. You will have a chance before I go sometime. Duffield: Senator Mead has introduced a new bill for credit to small business and the Banking Committee of the Senate has asked us for a report. The new bill is exactly the plan which Governor Eccles outlined to you here in your office last spring. Last spring we made no report on either bill and I suppose we should do the same on this one. H.M.Jr: Oh, that would come under - after Arizona. I think that would come in after I come back. Duffield: The only other thing I have is that that (handing card to Secretary) is the script about which I spoke to you on the telephone for this counterfeit * 348 -8movie. They are reproducing currency in the thing and the idea is to have a card like that (indicating) that you would be willing to sign. That is not the way it would be written finally, Mr. Secretary, but some such thing. H.M.Jr: Duffield: I can't pass on these things on a jump like that. You fellows have got to use your horse sense. I think all of us agree that if we could work out acceptable phraseology, we see no reason why your name shouldn't be at the bottom of it. H.M.Jr: I think it is a silly thing that a fellow sees this thing with a sign right at the beginning of this picture and signed by Henry Morgenthau and all the way through he thinks, "What a so-and-so he is.' Let Chief Wilson sign it or the General Counsel. At the end I can say I hope the audience have enjoyed Caston: it as much as I have, or something like that. That isn't quite it. You have to give permission for this reproduction and in this warning notice you do give permission, so you are the person who H.M.Jr: permits them to see this picture. No, the way that reads Gaston: If that is the draft they prepared, that wouldn't H.M.Jr: do, because that makes you responsible for ballyhoo. The way that reads is, "You can come on the grass but don't mind if I arrest you." " White: Is the picture a good one? Duffield: H.M.Jr: It may not even exist. Metro-Goldwyn-Mayer, isn't it? White: If it is anything like the Coast Goard, you better not have it in it. H.M.Jr: Let the General Counsel sign it, unless Johnny wants Duffield: You would rather have the Chief sign it? to. 349 -9H.M.Jr: I don't want to sign it, no. Duffield: That is all. H.M.Jr: I might as well say this to you all, I had a chance to talk with the President about those Alsop and Kintner articles and how worried I was about them and so forth and so on, and the very difficult questions like the Bremen, et cetera, that they wanted to know that we couldn't and wouldn't answer, no matter what they thought about it. They asked also about the exchange of letters on French planes, et cetera. Anything they want to know that you don't feel you can answer, just refer them to me. Would that make life easier for you? Duffield: Yes. H.M.Jr: All right? Duffield: Yes. Cochran: The belga and the Dutch florin are weaker this morning under pressure. H.M.Jr: Should I worry? Cochran: I don't think so. There is a concentration of troops on the border. European stock markets are all pretty nervous. H.M.Jr: All right? Cochran: I have one or two things later in the day. H.M.Jr: Well, I am seeing you, and I want McReynolds and Stewart: Graves and Collins in at 3:30. McReynolds, Collins, Graves and you, 3:30. If you (Stewart) care to see me, and Mr. Viner, at 4:00 o'clock, I would be delighted. I would like very much to. H.M.Jr: Have you got anything, Cotton? Cotton: No. H.M.Jr: Jake? 350 - 10 Viner: Haas: Harris: No. (Handing report to Secretary) That is all I have, Mr. Secretary. We spent the last two days, Mr. Secretary, on the provisions that relate to Customs under this new bill and the thing is in an awful mess and up to an early point this morning, why, I don't think there is any solution to be found. At the present moment, we have got somewhere between 35 and 40 ships held up. There doesn't seem any way that we can clear them unless possibly they take their entire cargo out and start all over again. Whose responsibility is that? Harris: It is the loose way in which it was drawn up. H.M.Jr: I mean, shouldn't the Maritime Commission, in the , H.M.Jr: interests of shipping, have been sitting there every minute? Harris: I don't know. Nobody asked any opinion on a lot of these things and there was no way of getting them in. They were drawn up by people who knew nothing about shipping. I don't think the Maritime Commission WAS consulted. It couldn't have been, on some of these phrases, they are so bad. H.M.Jr: The first responsibility, of course, is the State Department's. Everything we do cleared through them and we only got in by accident on this ninety- days clause and I think that part is all right, isn't it? Harris: Well, it is the question of transfer of ownership. We have got cargo in ships or loaded before the proclamation was signed and cargoes down in the bottom of the holds, got 10,000 tons of cargo on it, and it doesn't conform to the new law. H.M.Jr: Can the Treasury help? Hanes: I think we could help by letting them forget some of those things. 351 - 11 Harris: I don't think you can, John. Hanes: Let them make a mistake and go on out. I think it is an outrage to unload those things. You can do it, there is no doubt about it, but Harris: if you do it it looks like it is in direct and absolute violation of the statute. H.M.Jr: Harris: Anything I could do? I don't know. We are going to have another huddle on it this morning. H.M.Jr: Did I get a memorandum from you on what you did Harris: No, I can't get this fellow on the telephone. Yes- for the Swiss Minister? terday was a holiday in New York and I couldn't reach him and I haven't been able to reach him in here. It is in the mill and I think it will be done this morning, because I gave instructions five minutes after you told me the other day. I will give you a report later in the morning. H.M.Jr: Right. Harry? White: The Exchange has dropped again, as you know. We have a memorandum that will be ready tomorrow morning on the significance of it and whether anything should be done about it. H.M.Jr: All right. White: The last report was an outflow of capital of five million dollars. The reports that you asked for several weeks ago with respect to details of holdings of central banks, et cetera, have finally been cleared through all the appropriate agencies and the forms are being remade and we hope to get even this week, or in next week's report, the first of the series containing the breakdown. There is a proposal that has come before a special sub- committee of the Committee on Commercial Policy that involves a very important change in policy 352 - 12 - with respect to the powers of controlling exports and imports of merchandise. It has not yet come to the Committee on Commercial Policy, but will very soon. The very H.M.Jr: I will be back from Arizona by the time they clear White: Yes. H.M.Jr: Unless it is rush stuff, I don't want to take any- it, won't I? thing today. Unless it is stuff that definitely needs a yes or no from me, that is all I am going to do today. White: It definitely won't pass before you get back. H.M.Jr: They have never yet worked that fast. White: And anyway, it will require no legislation, so you can have a chance at it later. H.M.Jr: Just the yes or no stuff today. I am a little bit dubious about sending that letter out. I will talk to you now or sometime later. White: H.M.Jr: If you are dubious, don't send it, that is easy enough. White: H.M.Jr: It isn't quite as appropriate as the other. Then forget it. Incidentally, I understand the National Resources Board is taking up the question of what preparation should be made in case there White: is peace in the world. I don't know about it. H.M.Jr: Inquire, will you? White: Yes, I will. One other thing, we have prepared one of these little of the 22 Latin American countries. Collado, of the State Department, has asked whether they couldn't books of anywhere from 30 to 60 pages on each one 353 - 13 get a copy of each one for background material. He says they haven't got enough men to prepare material on Latin America like that. They have about 18 and we have got 2. H.M.Jr: White: H.M.Jr: If it is here so that Mr. Hull knows about it and I am not here, I would forward it to Mr. Hull either over my signature or Mr. Hanes' signature and let Mr. Hull know about it. Write a nice letter that we are glad to cooperate. Otherwise, Mr. Hull will never know that this was prepared by Harry White and his division. Tell him we are glad to cooperate and furnish them with this information or anything else. Otherwise, they will never hear about it. Let him know that Harry White's division did it, so he won't just hear one side of the story. I wasn't thinking of that so much as that there is so much involved in there and it is done rather in a brief time. It really isn't our business, anyway. I have definite reasons for wanting to build up a favorable feeling on the part of Mr. Hull and Mr. Welles toward your division. I would rather have it only 80 or 90 percent right than to have Collado say, "I asked White's division for something and they wouldn't give it to me." All right? White: Right. H.M.Jr: Dan, I would like you and Foley here tomorrow at 10:00 o'clock on a matter which I am interested in. The Comptroller General turned down a request for an appropriation for the Self-Help. We took it up yesterday with the President and Mrs. Roosevelt and the President instructed Mrs. Roosevelt to call up Harold Smith, Director of the Budget, and tell him that he wants this, and then he went into a long dissertation on getting the right kind of a lawyer. Bell: They have one down in the Comptroller's office. H.M.Jr: Well, I thought if you could be studying this in advance - I know we are getting into the difficult part. I am going to give this to you (handing paper to Mr. Bell). Is there a chance of both the President and Mrs. Roosevelt and my wife and myself are all interested in this thing. 354 - 14 - Mrs. Roosevelt is interested in this Self-Help Cooperative down at - somewhere near that famous abandoned mine. Bell: H.M.Jr: Down in West Virginia. There is a whole town that a fellow auctioned Bell: off the waterworks of the town. They took all the pipe away and here this town is left and they haven't even got a water supply. That is this little Self-Help Cooperative Exchange work that is the only thing that keeps them going. I thought we would have a little meeting tomorrow. Would you invite Harold Smith here, do you think, or had we better get to the legal work first? Is it a question of allocating WPA funds? H.M.Jr: Yes. Bell: There is a provision in the Act, isn't there? H.M.Jr: That is the point, somebody in the Treasury had that provision put in and now the Comptroller General says it is illegal and I am not awfully sure, but I thought that between you (Foley and Bell) you had that thing put in there. Now he has turned you down. I am not turned down. Foley: Sounds bad, Dan. H.M.Jr: Didn't you fellows do that work? Bell: Yes. Foley: We were watching it to see that there was language in there which we thought would be adequate to provide for a transfer of funds to Self-Help. I I heard about it. haven't seen this ruling, and I was surprised when H.M.Jr: Foley: Bell: I thought it was a direct slap at you and Bell. I wouldn't be surprised. New York vaults have about $6,300,000,000 of gold, The which is within about $2,000,000,000 of its 355 - 15 - capacity and there is a billion dollars of ear- marked gold in New York which, if released, will take up one-half of this remaining capacity. Mrs. Ross has recommended an appropriation to move $3,000,000,000 of gold from New York to Fort Knox. I think Mr. Graves and I agree with that recommendation. You won't get the money available anyhow until July 1 and at that time you can determine H.M.Jr: How much is there there? Bell: Six billion three in New York. H.M.Jr: I would take at least four of it. Bell: Well, there was some policy determined about three years ago that we keep approximately $3,000,000,000. H.M.Jr: Too much. Bell: Then we will put in an appropriation to move $4,000,000,000. H.M.Jr: Check, Harry? White: The less publicity that can be arranged about that, the better. H.M.Jr: Mrs. Ross will ride on the first truck with a spotlight, and so forth, and Harold will be on the tailboard. Bell: We thought by putting this estimate in the budget rather than sending it up as a supplemental or deficiency, it would receive less publicity. H.M.Jr: You talk to Harold and explain how Mrs. Ross should Thompson: I have here appointment letters for Mr. Knollenberg and Mr. Greenbaum. They don't care for any salary, but we had to give them a dollar a year to make it legal for them to work on income tax reports. H.M.Jr: How about Dean Landis? not get the publicity. I would make it four. 356 - 16 Foley: I told him to have his secretary send down his expenses. He wouldn't take per diem. His expenses he will send to me tomorrow. H.M.Jr: All right. TREASURY DEPARTMENT Washington 357 December 8, 1939 FOR THE SECRETARY: May Mrs. Klotz return to me the documents used in the Kintner-Alsop stories 80 that I can have them for my guidance only when I talk to the other newspapermen today. ESD OR 6k221 memot Pres 9-39 358 November 8, 1939 3:30 pm Present: Mr. McReynolds Capt. Collins Mr. Graves Mr. Cochran HM,Jr: Let me explain what I have been doing, during the last month or two, without anybody knowing it and keeping it as secret as possible. I will now tell you my little story. In addition to your (Collins' getting information, The French and English have been giving it to me directly. I don't know whether you knew it or not. Did you? Capt. Collins: Not all of it. Some. dent. HM,Jr: I get this and walk it over to the Presi- Did you know what I did on the searchlights for The French could not get any. That's searchlights from General Electric. them? Captain Collins: And Westinghouse. HM,Jr: No, not Westinghouse. Sperry. And I got them every other one. It was that kind of thing was able to do, with the President's backing. I have carried this thing up to now. It's getting to be too big. I can't do it any more. So I recommended to the I President, yesterday, that he set up an informal Board composed of the Admiral in charge of Supplies -- whatever you call him. Capt. Collins: Paymaster General of the Navy. HM,Jr: Paymaster General of the Navy. And the Chief Quartermater of the Army? Quartermaster General of the Capt. Collins: Army. 359 -2- HM,Jr: And what's your title? Capt. Collins: Director of Procurement, Sir. HM,Jr: And the Director of Procurement. And have you three meet, informally, meet with one representative of the French Embassy and one representative of the British Embassy, the President feeling it should be an accredited representative of the Embassy, at least once a week or oftener, but an accredited representative of the Govern- ment. He said somebody on their regular staff. And the reason is that this last fellow that they sent over, the French, -- talking here in the room -- neither the President nor I like on account of his connections. That's Bloch Laine. It's too much "all one firm". That's the firm of Lazaard Freres. And he is personally going to see the British and the French Ambassadors, and the purpose of seeing you gentlemen is I am to give him this memorandum tomorrow at 11 o'clock outlining what we are to do. You three people are to communicate with the President through McReynolds. You are to give this stuff to McReynolds and Mac will get it to the President. I wanted Mac to act as Secretary, but under the rules and regulations that's an executive position and Mac can't do that, but he can be an avenue of communication. I understand they have more damn red tape in the White House than we have in the Treasury, which is going some! The President said, he divided this thing into two things. It falls into three categories. I want this all a piece of paper. We have arranged that the English and the French shall deposit all the money that they are going to use to do their purchasing in an account in the Federal Reserve of New York. The British and French Governments have agreed that the Treasury will have access to those acon counts at all times. Is that right? Mr. Cochran: It is. HM,Jr: You (Cochran) have all of this. So that's Number 1. Number 2 in the set-up the British have agreed and have sent Mr. -- what's his name? Mr. Cochran: Walter Whigham. HM,Jr: Well, whatever is the fellow's name. That 360 -3- as toofthe sale Bank Canada. of securities they are going to use the Mr. Cochran: Branch banks of Canada in New York. HM,Jr: Branch banks of Canada in New York as depositories. Mr. Cochran: They will be the agents through which the sales take place. HM,Jr: You (Cochran) get that fixed up. And Mr. as to the disposition of American securities. Whigham will be here to consult with the Treasury and S.E.C. Mr. Cochran: American dollar securities owned by the British. HM,Jr: That's right. I have informally made the securities but are not ready yet. I have also made the same suggestion to the French who have not yet taken over the securities. But that is the formula for the sale of same suggestion to the Canadians, who have taken over the securities. Number 1: method of depositing the money, and Number 2: sale of securities, and Number 3 is this thing which I am talking about now. And contact is between the President and representatives of the buying machines of England and France, and the suggestion which I made and which the President liked is that he would, sa I say, set up -- we won't call it a Board, which will meet. It would have no Secretaries or Assistant Secretaries. There will be just you three and the general purpose would be you meet and listen to their needs. For example, the English have given me a memorandum. They want 1,000 motors and they want to know how much. And the Army has turned them down. Wouldn't do it. "will let you know." Then the question comes up here of priority and this whole question of priority, prices, availability, you three men would sit -- prices, priority and availability, the whole question. And you would keep this thing fed to the President via McReynolds and we can do this informally and if the President 18 willing, I would like to have a copy. You can just ask the President whether I can have a copy. Now, I want to give that to the President at eleven tomorrow. At that time Hanes is fixing up a memorandum 361 -4- that he wants the President to write to me, which he is going to have War and Navy O. K., as the result of a meeting today in Johnson's office where they say we need 18,000 motors a year and we can only manufacture 12,000 and the proposal is that Pratt-Whitney and Wright Motors spend $5,000,000 between them and we will let them write that off in the life of the contract. At the end of the time the plant will belong to the United States Government. That's the proposal and that would give them a production of another 6,000 motors. Now, what Hanes wants the Presi- dent to do is write a letter to me, with the approval of the Army and Navy, that we, the Treasury, should work that out through the Vinson-Trammel Act, but we would not go ahead unless the Committee that set up -- the Vinson-Trammel Committee would formally approve what the Treasury is going to do before the Treasury does it. Does that sound all right? Capt. Collins: Yes. Mr. Cochran: That's not part HM,Jr: That's not part of this. But most of it falls in these three categories: deposit of money; sale of securities, and buying. Mr. Cochran: The first two were taken care of through the Treasury proper. ,Jr: You see, the President is sending for the his desk. Two are done, and the third, the purchasing French and British Ambassadors. He wants a memorandum on thing, 18 not done. He wants this memorandum on his desk "Now, gentlemen,we have done this. We have done this. We want to do this" -- the third thing. And on account of the Laz,rd-Freres thing, I think the President is going to in- sist he see somebody connected with the Embassy rather than Mr. Bloch Laine. Mr. Cochran: So this is a memorandum from you to the President. HM,Jr: A memorandum from me to the President that he can have on his desk 80 when he sees these two gentlemen he will have this thing, because he can't carry all this thing in his mind, and he asked me to set it up for him and I told 362 -5- the President I want to personally drop out of this thing. I refused to see Mr. Laine today and I don't want any more to do with it. You three would act as one. You divide it up so that you (Collins) see them on cotton and woolens and they see them on plane engines. You divide up between the three of you. Captain Collins: I think there will have to be some meetings of all, because there is overlapping there. HM,Jr: Well, the idea of the President is you would see these gentlemen once a week. I made this recommendation to the President partly to get out of it myself and artly to make it workable for him. How does it sound, Collins? Captain Collins: I think it is all right. We may have to go a little farther than the Quartermaster General because there will be many things of a purely military type over which the Quartermaster General will not have control. HM,Jr: Such as Captain Collins: motors; guns. HM,Jr: Doesn't he have control over that? Captain Collins: No, Sir. HM,Jr: Who does? Captain Collins: General Arnold as everything of an aerunautical nature, which all heads back to General Johnson, as I understand it. HM,Jr: Let's make it the Quartermaster General on my recommendation. The President does not want to get in the Woodring-Johnson fight at this time and I thought the Quartermaster General would answer it. What do you think, Mac? do. Mr. McReynolds: I think that's the best thing to It may be that will work out a solutation of that, 1f you can get it done. HM,Jr: Well, to give you an example: Louis Johnson called up Hanes: "I just talked to the President. I want you to come right over. We are going to talk about priority 363 -6- on airplane engines." Johnnie said, "I am not going to go without the President or Mr. Morgenthau directing me. "Well, the President is going to talk to Mr. Mor- genthau. . ident. But I think this will make it easier for the PresMr. McReynolds: Louis Johnson can'tebe depended on. What he says is what he would like to see facts, without any regard to facts. HM,Jr: But, Mac, representing the President, isn't this all right? Mr. McReynolds: I think so. Sounds O. K. to me. Harry is going to have a difficult problem on his hands getting these people together, that is, getting in agreement. Of course he won't have any trouble with the Navy on priorities. The only way you can get anything out of these fellows would be -- in the military line -- will be for two members of the Committee to outvote the Army because, God! they won't agree to anything! HM,Jr: We will give him this set-up to start with and isn't this a good place to start with, from his stand- point? Mr. McR: I think so. Mr. Graves: I was wondering if it would not be an advantage to name the Director of Procurement as Chairman. HM,Jr: No, I don't want it. Excuse me, I don't want it. Mr. Graves: What I had in mind, the thing might be rather ineffectual because somebody might hold it back. HM,Jr: I don't want to have that responsibility. the Mr. Graves: Then you ought to name x Navy man. HM,Jr: No. Each fellow has an office. One week they meet here; next week, in the next fellow's office; 364 -7- alternate, and when they meet in that office that fellow will be Chairman. Mr. Cochran: Mac would not be present. Mr. McReynolds: No, I don't want it. HM,Jr: No chairman; I don't want it. Mr. McReynolds: You will get plenty of grief if of course you will get more action if you did and it may settle down to that, but let the President do that. you did. HM,Jr: Let the President do that and he's got to crack the Woodring-Johnson nut and this may be a start with him. He's very much pleased with what we have done so far -- last month -- and he's delighted with the search- light, antiaircraft, business. Got a kick out of that. And I think that this is all right. Don't you, Mac? Mr. McReynolds: I think it is all right. HM,Jr: The four of you go somewhere and give me a finished piece of paper for tomorrow morning, will you? I want a finished document I can lay on his desk. Mr. McReynolds: Merele knows the first two points. And that's just a record of accomplishment. HM,Jr: That's right. want. Mr. McReynolds: And the other is what you said you Mr. Cochran: And we can get together and write up the third now and I will write up the first part. ument. HM,Jr: But tomorrow morning I want a finished doc000-000 BK221 365 November 8, 1939 3:00 pm Present: Mr. Pinsent Mr. Leroy-Beaulieu Mr. Cochran Mrs. Klotz HM,Jr: Gentlemen, the reason I asked you to come together was that I had a message that I wanted to get over to both of you and your Ambassadors, but I think if you could keep it on this side of the water and I will explain why I think it would be good -- you see it complicates things sometimes. As you know, without my ever having said 80 formally, I have been seeing both of you in regard to the purchasing of materials here at the request also said that I was doing it on a temporary basis. I have now asked the President to relieve me of this of the President. I made that quite clear, but I responsibility because it is getting to be too big and it's too much. I just can't do it all. That does not mean our vis-a-vis work as far as finances, etc., but as to purchasing supplies by your respective Governments I have asked to be relieved of that. In the discussion with the President, yesterday, he did me the honor of asking me to draw up a memorandum of recommendation as to how this should be done, which I expect to present to him at 11 o'clock tomorrow morning. It will be something in the nature of a, informally, a representative of the Army and the Navy and the Procurement, meeting on an informal basis, the three men, and seeing one accredited representative of your respective Embassies once a week, or more often if necessary, at which time such things as priority, prices, will be discussed or anything that you feel has to do with the buying of materials in this country for your Governments. That is just the question of military. You see what I mean? 366 -2- Mr. Leroy-Beaulieu: Uhm. HM,Jr: These gentlemen will have a way of getting this quickly to the President, direct. Mr. Leroy-Beaulieu: Uhm. HM,Jr: There is every desire that a coopera- tive means be found so that you people can buy reason- ably and buy what you need without interfering with our own needs. You see? But I want to again repeat I am recommending that it be an accredited representative or, put it another way, some member of the Embassy staff. Mr. Pinsent: Do you mean Embassy staff especi- ally, Mr. Secretary? Our first thought would be, of course, the head of our special purchasing organization in the United States. HM,Jr: It may not be. Mr. Pinsent: Generally speaking, while of course I don't know that we have worked our ideas 80 far in detail do is HM,Jr: What the President is going to/ask your two Ambassadors to come in and see them himself. Mr. Pinsent: I see. I see. HM,Jr: But the President is going to see the French Ambassador personally and the Ambassador of Great Britain personally and, therefore, while I am giving you quite a lot I don't want this to go back to the other side until the President has had a chance to see them. In other words, this is between the President, your Ambassadors and myself. Mr. Leroy-Beaulieu: Yes; I see. Mr. Pinsent: Yes. Yes. HM,Jr: But he is personally going to do this and I am giving you quite a compliment, because I don't 367 -3- want these cables coming back, because there are things happening on the other side which the President does not understand and Indon't understand. Mr. Pinsent: Which we don't. Mr. Leroy-Beaulieu: Which we don't. Mr. Pinsent: We are only told further consultation is going on on the other side. HM,Jr: And we get cables on this side which don't seem to check with what we get from over there, but the President will see your two Ambassadors and pending his talking to your respective Ambassadors I am asking you and your Ambassadors to "hold everyting as we say, but I will deliver this memorandum to him tomorrow morning. Mr. Leroy-Beaulieu: Tomorrow morning? Mr.Pinsent: And what you are telling us is so our Ambassador may know what the President wishes to discuss. HM,Jr: Yes, and also explain that until he does see them I am dropping out of the picture because I don't want to see anybody else on this subject. Mr. Pinsent: Yes. do it. HM,Jr: It has just got to be too much. I can't Mr. Pinsent: Yes. You told us all along HM,Jr: and I have asked the President to re- lease me. Mr. Coohran: That was why on the phone when I made the appointment I could not tell him. Mr.Pinsent: I had half expected that because you had told us all along you did not expect to be concerned with that. 368 -4- HM,Jr: You did expect it? Mr. Pinsent: I did expect it. HM,Jr: I am setting up machinery which I think will be acceptable to the President. Mr. Leroy-Beaulieu: And you said you did not see how it could be worked out if you were sick or anything interfered with your presence here and so on. HM,Jr: And this is too important. There are so many things coming up and I am leaving tomorrow night for ten days and the show must go on. Mr. Leroy-Beaulieu: But do you know, Mr. Secretary, if the President has something special in mind that he would prefer that it be a member of the Embassy or, in other words, he would prefer that it would not be a member of the purchasing commission. You don't know about that? HM,Jr: I think he will talk quite frankly with the Ambassadors. He and I both have something very definite in mind and I think that we will have to wait until he talks to them. Mr. Leroy-Beaulieu: I see. them. HM,Jr: And I think he will talk it over with You see, these people are coming over and we don't know all about it and I think he would like to satisfy himself a little more. Mr. Leroy-Beaulieu: Yes. I see. HM,Jr: But he can talk to your respective Am- bassadors and ask them questions that he has in mind, but it 1s to be one person, one Englishman, one Frenchman, to meet at least once a week with, mostlikely, the Quartermaster General and the head of Supplies of the Navy and the Director of Procurement, you see. Those three which are the people that have the authority. You see? Mr. Leroy-Beaulieu: Yes. 369 -5- HM,Jr: And then that can flow directly to him. It will be something like that. Nothing formal, ex- cept meeting with your people once a week or oftener if necessary, but the question you have in mind (Pinsent) that sort of thing really gets down to pretty much some- thing the President will have to say yes or no himself. Mr. Pinsent: I did not know whether Cochran had told you. HM,Jr: Oh, yes. He bursts through the door until I give him a yes or no. Mr. Pinsent: I did not want to take you by surprise. HM,Jr: He gets in one way or the other. Mr. Pinsent: Is that question one which would be submitted to the President? HM,Jr: I take it that would be the sort of thing that would be submitted to the three gentlemen whom the President will designate, but pending his seeing your Ambassadors and setting up this informal committee, I think it will have to wait, unless you can get it through the Army. Mr. Pinsent: They said no. HM,Jr: It's the kind of thing that someone will- ing to take a chance and has interest at heart will have to do. Mr. Pinsent: There is a certain risk in that par- ticular case of our paying a higher price than the price wish us to do that any more than he would wish to do it which has been paid and I don't know whether he would himself. HM,Jr: No, ne won't. But you are going to have trouble getting engines, but what with our demands and the French they have things pretty well cleared up. You see, they took a chance. They took a chance and I am afraid you are out in the cold. I would be surprised if you could get an engine in six months. 370 -6- Mr. Pinsent: I don't know whether there is any surplus capacity on this side. HM,Jr: Unless you people are willing to pay for additions to the plant, the way the French here Mr. Leroy-Beaulieu; The way we bought. You know about that? Mr. Pinsent: Yes. HM,Jr: The French have been very foresighted and now they are profiting by it. That's my story, gentlemen. retary. Mr. Pinsent: Well, thank you very much, Mr. Sec- HM,Jr: And don't feel there is not any disposition on the part of the President and myself to continue to give you every possible cooperation that you are en- titled to, but I just physically can't do it. It's 1m- possible. Mr. Pinsent: Yes. Mr. Leroy-Beaulieu: Well, we are sorry that we will not be seeing you as much. that we will not have those opMr. Pinsent: portunities and pretexts. HM,Jr: Well, we can talk about other things. There are plenty of other things to talk about. Mr. Pinsent: I think all we shall have to do is thank the Secretary and report to our Ambassadors. HM,Jr: Right! And, as I say, I am giving this to the President. Will you (Leroy-Beaulieu) stay, please? Mr. Leroy-Beaulieu: Yes, I will. (Mr. Pinsent and Mr. Cochran left and no record was made of HM,Jr's conversation with Mr. Leroy-Beaulieu.) 000-000 72(e) FEDERAL RESERVE BANK OF NEW YORK 371 DATE November 8, 1939. FFICE CORRESPONDENCE CONFIDENTIAL FILES L. W. Knoke SUBJECT TELEPHONE CONVERSATION WITH BANK OF ENGLAND. I called Mr. Bolton at 12:15 today. I referred to their cable No. 1063/29 and requested correction of two points of a technical nature, which he promised. with reference to our telephone conversation of Monday regarding the maturing debt of a British subsidiary of the International Tel. & Tel., I mentioned that one of the banks had called up today and inquired whether we would sell them exchange at the official price. "I told them," I said, "that we had informed you on the telephone that we were ready to act on your instructions if and when received." This inquiry seemed to indicate, Bolton thought, that the transaction would be closed in New York, which was immaterial as far as they were concerned. " I discussed our exchange market and repeated that sterling continued under pressure with the rate now below 3.92. Japanese banks were reported to be offering for forward delivery (first for three months delivery and when they could not do anything in that, for one month delivery at discounts of 8 1/4% per annum and 2 7/8% per annum, respectively). The Rumanians were still selling, one of our banks having received a further order for 500,000, most of which I understood had been done. That brought Rumanism sales up to £1,250,000, in addition to which we ourselves had just received a best order to sell $612,000. We were naturally operating very carefully realising full well that if we jumped into the market we would be likely to put the rate down quite a little. FEDERAL RESERVE BANK 372 OF NEW YORK FFICE CORRESPONDENCE DATE November 8, 1939. CONFIDENTIAL FILES SUBJECT TELEPHONE CONVERSATION WITH L. W. Knoke OM BANK OF ENGLAND. 8 We were supporting the guilder rate for account of the Dutch, continued. Belgas were weak, down to 1656 on the offered side. I The Belgians, Bolton thought, were in a very bad mess with runs on one or two of the smaller banks having taken place. Both Holland and Belgium were in a state of continued anxiety and every message which he received from them pointed to increasing uneasiness and increasing deterioration in both countries. LWK:KW lest 373 November 8, 1939 Mr. Chen called on the Secretary today and asked whether Mr. Sheahan could stay in China another 3 to 6 months. The Secretary asked Mr. Chen to check this d1- rectly with Mr. Keeshin. Mr. Chen said that he was worried about the Russian help to his Government. HM,Jr told him that he was ad- vised that sometime in September Litvinoff came to Chung- king. Mr. Chen said that he did not know, but that he would find out. The Secretary then said, "When you cable, say that Litvinoff came there recently. Don't say anything about September. HM,Jr also said to Mr. Chen, "I was also told that his mission was not successful." Chen said he would cable and get this information for the Secretary. Chen said that they had gotten three loans from Russia. The first was $50,000,000, the second $50,000,000 and the third $150,000,000; that the first two had been exhausted. Chen added that they had specially agreed to buy airplanes and ammunition with this money, and that this money had to be spent in Russia in payment for wood oil, tea and tungsten. 374 November 8. 1939. Dear Jerome: On my return to the office I find your letter of November 3rd awaiting me, and I want to acknowledge its receipt. I shall be glad to talk over the matter which we have already discussed, at any time that you may care to do so. with all good wishes, Sincerely, (Signed) a a Honorable Jerone N. Frank, Chairman, Securities and Exchange Commission, Washington, D. C. GXF/dbs SECURITIES AND EXCHANGE COMMISSION WASHINGTON ICE OF THE CHAIRMAN November 3, 1939 The Honorable Henry Morgenthau, Jr. Secretary of the Treasury Dear Henry: Subsequent to our recent discussion, I learned that the National Resources Planning Board and several others in the government are undertaking a study of the problems that may arise "when peace breaks out" together with ways and means of meeting such problems. I shall keep in touch with them and, at some future date, I shall suggest a renewed discussion with you of those problems. Sincerely yours, erome N. Frank Jane Chairman 1832 375 STATE 376 DEPARTMENT OF STATE WASHINGTON November 8. 1939 My dear Mr. Secretary: I transmit herewith, for your information, a map prepared by the Geographical Section of the State Depart- ment, which indicates the belligerent ports to which American ships may not carry goods and passengers and to which citizens may not proceed; likewise, the combat area of waters within which American ships may not proceed and American citizens may not travel. In view of the questions raised in the Mediterranean area you will note that Syria, Palestine and Egypt are not included as belligerents; nor is Tangier. Morocco and Algiers, however, are regarded as belligerents. Sincerely yours, Assistant Secretary Enclosure: Map The Honorable Henry Morgenthau, Jr., Secretary of the Treasury. Tentative subject NEUTRALITY ADT OF 1959 and PROCLAMATIONS ISSUED NOVEMBER 4, 1939 ports to which American citisens MAY NOT 2(a)]. citisens to part of e(r)) and November 1939 - lakes, aircraft transport rivers over any 378 11/8/39 Neutrality Acts Foley and Bernstein more and more convinced Treas should not ask for return of the adm of credit section assigned to Treas in former Neutrality Act under Section III 379 JR GRAY Paris Dated November 8, 1939 Rec'd 8:20 a.m. Secretary of State, Washington. 2682, November 8, noon. FOR THE TREASURY. Paul Reynaud will address the American Club at 1:45 tomorrow afternoon on the French financial situation. Mr The address will be broadcast by Paris Mondiago on short WAVE lengths 19.68 metres and 25.60 metres. BULLITT :WWC DEVIDOON PROT 380 PLAIN HSM London Dated November 8, 1939 Rec'd 1 p. m. Secretary of State, Washington. 2305, November 8. FOR TREASURY. 1. In introducing the national loans resolution reported in my 2267 of November 3, the Chancellor of the Exchequer last night revealed no facts regarding the date, amount or nature of any forthcoming war loan. He emphasized that the bill to be introduced is "to confer powers not to EXERCISE them" and that he could not anticipate any action that might bE taken under the powers to be given. The present bill is to take the place of the war loans acts passed annually from 1914-1919 and is also to merge in the Treasury's general borrowing powers the unused balance of 6105 million under the defence loans acts. As during the last war the authority to borrow will be limited in time to a single year; the limitation in amount is the total requirements for the "supply services" (including Army, Navy, Air Force and civil services); and a further 6250 million is provided to COVER the period between the End hsm -2- No. 2305, November 8, from London End of the current fiscal year and the passing of the subsequent year's national loans bill. Simon stated however that "It is quite impossible to suppose that WE would SEEK to borrow the whole of this year's supply" but he gave no indication of the proportion which might be borrowed and hence no indication of the amount of any forthcoming loan. The powers contained in clause 3 of the resolution enabling money raised from national savings certificates to be applied for any purpose (at present such money must be used for redemption of debt) was devised so that the small investor should feel that his contribution however small goes directly to the purpose of winning the war. War savings certificates WERE introduced during the last war in November 1915 to tap small savings. There WERE 6137.7 million outstanding on March 31, 1918 and L227 million on March 31, 1919. Since then with the name changed to national savings certificates, this form of saving has become increasingly popular, the total outstanding on the 31st March 1939 being L381 million. Each certificate costs 16s. the purchaser being entitled to L1 at the End of five years or 61.6s.Od. at the End of ten years from the date of purchase. During the last war EXTENSIVE publicity cam- paigns were carried out for the sale of war savings certificates. No such campaign has however been launched so far 381 382 hsm -3- No. 2305, November 8, from London far during the present war, the Chancellor's statement mentioned above being the first indication that this form of saving is to be used as the small man's channel for lending his savings to help win the war. With reference to my 2068, October 17, 6 p. m., the floating debt had increased by November 4 to 11,345.6 million of which 6580 million represented Treasury bills issued by tender and 6706.6 million through the tap. If this WEEK'S offer of L55 million of Treasury bills is allotted in full the tender issue will increase to 665 million, the highest point since January 1938. The Government's ordinary revenue for the first ten WEEKS of the war has totalled 6148.7 million averaging L14.9 million a WEEK while Expenditure has totalled L344.2 million averaging 634.4 million a WEEK giving an average weekly deficit of L19.5 million. 2. The Chancellor of the Exchequer also announced in Parliament last night the Government's intention to appoint a select parliamentary committee on war Expenditure with terms of reference broadly following those of the select committee set up in 1917. 3. In a written answer in Parliament yesterday the Financial Secretary of the Treasury gave the names of the members of the capital issues committee which succeeded the foreign transactions advisory committee appointed in April 383 hsm -4- No. 2305, November 8, from London April 1936, the present committee being charged with the administration of the restrictions on capital issues which form regulation No. 6 of the defence (finance) regulations. The members are Lord Kennet, Chairman, B. G. Catteras (Vice-Chairman), Thomas Frazer, Sir Austin Harris, A. G. A. Jamieson, Lt. Col. J. B. Neilson and R. P. Wilkinson, Deputy-Chairman of the Stock Exchange. KENNEDY HPD 384 JI GRAY Paris Dated November 8, 1039 Rec'd 5:21 p.m. Secretary of State Washington 2696, November 8, 7 p.m. FOR THE TREASURY. The securities market WCS somewhat henvy today partly due to Expectation of an early Nazi invasion of Holland and possibly Belgium and to the flooding of additional areas in the former country. (The joint PEACE appeal of Wilhelmina and Leopold are dismissed here as purely "for the record"). REntES WERE down fractionally with the EXCEPTION of the dollar Exchange issue of 1937 which was off two francs fifty on profit taking. Official Exchange rates WERE unchanged. (END OF SECTION ONE) BULLITT EMB 385 JI GRAY Paris Dated November 8, 1939 REC'D 6 p.m. Secretary of State Washington 2696, November 8, 7 p.m. (SECTION TVO) Today's JOURNAL OFFICIEL published arretes covering the forms of declaration of holdings abroad to be made by French physical and French and forsign moral persons in Algeria and the colonies. Mutatis mutandis they are similar to the form of declaration established for the metropolitan area (our telegram 2625, October 31, 7 p.m.) The Netherlands bank statement for the WEEK Ending November 6 shows gold reserves at 1,104,000,000 florins as against 1,108,000,000 the previous WEEK. Total liabilities WETE 1,387,000,000 against 1,142,000,000. Gold coverage stood at 79.50% as against 76.83%. PER (END OF MESSACE) BULLITT EMB 386 NOV 8 1939 My dear Mr. Secretary: This is to acknowledge receipt of your letter of November 2, 1939, requesting the designation of a Treasury representative to serve on the subcommittee set up by the Executive Committee on Commercial Policy to consider problems arising in connection with this Government's participation in the work of the InterAmerican Financial and Economic Advisory Committee. Mr. Harry D. White has been designated as the Treasury's representative on the subconsittes. Sincerely, Jr. The Honorable The Secretary of State By hand 387 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE November 8, 1939 TO Secretary Morgenthan FROM Mr. Cochran Sterling was again under heavy pressure with the largest turnover in transactions in that currency since the institution of these reports on September 19. The rate was quoted at 3.95-1/2 in Amsterdam and it opened in New York at 3.95. There were some small selling orders reported in the market, and at about 10:30 a. m. the rate was quoted at 3.94. The Chase National Bank reported that they had received from Rumania instructions to sell $500,000. At that time the Chase had orders to buy 1300,000 which they utilized against the Rumanian order. The balance of 1200,000 was eventually disposed of. At noon sterling was quoted at 3.92-3/4, at which time the Federal Reserve Bank of New York informed us that it had received an order from the National Bank of Rumania to sell about 600,000 at the best price. Of this amount, it sold 1245,000. The Federal advised the Pumanian Bank by cable that it would retain the unsold portion of the order and attempt to execute it tomorrow unless otherwise instructed by it. The sterling rate was at the low for the day of 3.91 at the close. Since November 3. Rumania has placed orders in this market to sell approximately 11,900,000. Of this amount 11,545,000 were sold and the balance, 335,000, represents the unexecuted portion of the Federal Reserve Bank's order of today. The Rumanian Bank advised the Federal that it intends to purchase approximately $11,000,000 gold. Of this amount. $3,500,000 in gold has already been sold to it, and we assume that the proceeds from the sterling sales will be used to purchase the balance of the gold. Sales of sterling by the reporting banks in New York and the Federal Reserve Bank of New York totaled 11,187,000 from the following sources: Commercial concerns Foreign banks (Europe, Far East and South America) Federal Reserve Bank of New York Total L 254,000 L 688,000 & 245,000 11,187,000 Purchases of sterling amounted to 11,065,000, as indicated below: By commercial concerns By foreign banks (Europe, Far East and South America) Total & 397,000 L 668,000 11,065,000 The banks also reported that the British Control purchased sterling amount- ing to 161,000 at the official rate of 4.02. All of this sterling represented cotton bills. CONFIDENTIAL -2- 388 The French franc closed at .0222, as compared with Monday's quotation of ,0223-1/2 in New York. The reason for the decline is due to the fact that the franc is pegged to sterling and moves in sympathy with that currency. The belga was considerably lower at .1652. On Monday it closed at .1670. The pressure on the belga was caused by the feeling that the peace proposals instituted by Belgium and the Netherlands would not be accepted and the recurrent fear of invasion. Another reason is the possibility that continued mobilisation of the Belgian army may have an adverse effect on the internal economy. The guilder and Swiss franc were steady at .5308-1/2 and .2242, respectively. Canada closed at 10-3/4% discount. The German reichsmark was quoted in the New York market today at 4015 which is the first quotation for that currency since shortly after the outbreak of the war. We understand that when a New York bank sells reichsmarks, the reichamarks are provided by its German correspondent bank, and the dollars are credited to the German bank on the books of the New York bank. By handling the transaction in this manner, Germany is in a position to acquire dollar exchange. The Cuban peso was under pressure and the discount widened to 13-3/8%, due to the unfavorable sugar situation in that country. The Banco do Brazil paid $3,000,000 to the Federal Reserve Bank of New York for conversion into gold under the agreement of July 15, 1937. We have now sold to Brazil a total of $6,000,000 in gold under this agreement. Ye purchased the following amounts of gold from the earmarked accounts of the banks indicated: $1,835,000 from the National Bank of Belgium. 315,000 from the Bank for International Settlements. $2,150,000 Total The Bank for International Settlements cabled to the Federal Reserve Bank to apply for a license to transfer approximately $560,000 in gold from its Account Account No. 3 to its Account No. 2. Permission to make the transfer was granted. is No. 3 represents gold owned by the National Bank of Hungary and Account No. 2 the the BIS's own account. This transaction may be a sale of gold by Hungary to BIS, or it could represent payment in liquidation of obligations owed by the Hungarian Bank to the BIS. The Federal Reserve Bank of New York reported to us the following shipments of gold for sale to the U. S. Assay Office at New York: $3,528,000 from Canada consigned to the Federal Reserve Bank of New York. York. 29,000 from England consigned to Johnson Matthey & Co., New $3,557,000 Total CONFIDENTIAL 3- 389 On the report of November 1 received from the Federal Reserve Bank of New York, giving the foreign exchange position of banks and bankers in its district, the total position of all currencies was short the valent of 18,714,000, a decrease of $1,415,000 in the short position for the week. The net changes in position are as follows: SHORT POSITION SHORT POSITION DECREASE IN COUNTRY OCTOBER 25 NOVEMBER 1 SHORT POSITION England Europe $ 6,874,000 $ 5,049,000 8,424,000 8,345,000 932,000 291,000 4,056,000 41,000 $18,714,000 Canada Latin America Far East All Other Total 628,000 286,000 3,851,000 66,000 $20,129,000 $ 1,825,000 79,000 304,000 (Increase) 5,000 (Increase) 205,000 (Increase) 25,000 $ 1,415,000 The equivalent of today's London spot silver price was 41.77 and the forward price 41.78 The price fixed by Handy and Harman for foreign silver remained unchanged at 34-3/4* The Treasury's price was also unchanged at 35$. In New York we made one purchase of silver, amounting to 100,000 ounces under the Silver Purchase Act. Mr. Knoke told me at 5 p.m. on November 6th, that, as of that date, the State Bank of Russia had a balance of $7,300,000 with the Chase Bank, as compared with $4,900,000 on November 1. This gain had come from a transfer of $1,300,000 from Sweden and a gold shipment of $2,000,000. The balance of the Amtorg with the Chase on November 6. was $1. 100,000, as compared with $700,000 on November 1. Mr. Maxwell Hamilton, Chief of the Far Eastern Division of the State Department, telephoned me that the State Department preferred that the replies to our inquiries made of the Consul at Hanoi in regard to shipments through that port to China, be made by airmail rather than telegraph, because of the danger of interception of telegraphic messages by certain foreign countries. I agreed to leave the decision to the judgment of the State Department. Km.R. CONFIDENTIAL 390 November 8, 1939 FOR THE SECRETARY: Alsop and Kintner have asked to see you before you leave town if that is possible. I informed them that matters like the Bremen and the French airplane deal were to be handled through the White House, but I did not know how far to go beyond that. There are, in addition, some strictly Treasury matters such as the selection of advisers and a description of the situation here in days immediately before the outbreak of the war which can not properly be referred to the White House and which, in my opinion, could be given to them in a properly edited fashion. ESD 391 November 8, 1939 10:56 a.m. HMJr: Hello. HMJr: Mr. Crowley. Hello. 0: Go ahead. HMJr: Hello. Operator: Leo Crowley: Hello, Mr. Secretary. HMJr: How are you, Leo? C: Fine, how are you? HMJr: Pretty well 0: That's good. HMJr: ......for an old man. C: That's good. HMJr: Leo, I just read this memorandum on the meeting yesterday which you attended and I just want to tell you again I appreciate your attitude and your support in this matter about the Bank of America. 0: Thank you, Mr. Secretary. We haven't changed our position on that thing and we aren't going to. HMJr: Well C: You know -- you know where we are on that thing. HMJr: Well, I like to know where you are, and as you see we're going at it very carefully and being -- trying to be as judicious as possible. 0: I think so and I think that they're handling it very well. HMJr: All right. Thank you, Leo. C: Thank you. HMJr: Goodbye. November 8, 1939 11:07 a.m. HMJr: Hello. Operator: Dean Landis. HMJr: Hello. James Landis: Hello. HMJr: Hello, Jim. Henry Morgen L: How are you? HMJr: I'm 0. K. L: I'm sorry I couldn't stay but I just had to get back 392 today. HMJr: Well that was my understanding that you L: Yeah. HMJr: couldn't stay. Ed is here in the room with me, nobody else. L: Yeah. HMJr: And I understand that you think this thing is as serious as I do. L: I think it's very serious. HMJr: What? L: I think it's very serious. HMJr: Uh-huh. Now, what's the -- what's the first -- or L: the next move we should make? Well, I think -- you see, you have to consider two things: one is curing the situation in the bank itself, and the other is considering the removal of the management of the bank. HMJr: Yeah. -2- 393 And I think that's a very -- a thing that should be given very weighty consideration because my own doubt 18 that the situation in the bank will never be cured with that management in control. HMJr: I see. They' ve demonstrated their unwillingness to work with the Comptroller's office. HMJr: Yeah. And have done things which are -- are 80 significant -such significant violations of law that it's -- that you can't toy with them any longer. I see. And it seems to me very important that you should, right away, get somebody to work on that case from the standpoint of considering whether or not the evidence in the case 18 sufficient to bring Section 30 proceeding. HMJr: Well that's, of course, what I asked you when I called you. L: Yeah. Now, it seems to me -- I -- you see, I -- you can't make a judgment of that nature in just a -- a short time. HMJr: I appreciate that. L: Upon the basis of what the bank examiner says in -- certainly in the last two reports, there doesn't seem to be any doubt but that there are sufficient violations of law both to justify the Comptroller in proceeding before the Federal Reserve Board, and in getting a judgment from the Federal Reserve Board of removal. HMJr: L: HMJr: I see. But much more work should be done on that than has been done at the present time or can be done Right. -3L: 394 at the present time. And I -- I think you want to get somebody to handle it. Ed Foley - I talked to him about it. H1s -- I mean, I think he recognizes this case. that he has to get somebody who will try HMJr: L: Right. And that that man should be called in as quickly as possible. HMJr: He agrees on that. L: Yeah. HMJr: Now, from Ed that you were going to think Iitunderstood over L: Yeah. HMJr: ......&S to who you could recommend. L: Yeah. Now, I -- my -- I have several recommendations but my first choice, I think, would be a man I talked to Ed about last night - that's Robert Proote r of Boston. He is a man of about my age; the outstanding man in his generation at the Boston bar. HMJr: L: Yes. And he went through the banking crisis of 1933 as counsel for the Boston Clearing House. HMJr: I see. L: He is now actively counsel for the Second National Bank up here. HMJr: Yeah. L: And he knows banking and he's a -- he's a very good lawyer. HMJr: Right. L: Now, I -- I have other suggestions too. HMJr: Yes. 395 -4L: HMJr: L: L: But he would be my first choice on that. I see. Well, I -- I don't know who he is or what he is. Is he -- would you call him -- his -- what is his attitude towards government? Is it fairly liberal? Yes, it's pretty liberal. I -- I know his politics. His politics are Republican. HMJr: Yes. L: They were Democratic. HMJr: Yes. L: But he is Republican. HMJr: Yes. L: But I wouldn't worry about that in this connection. HMJr: No. L: Because you're dealing here with violations of law. HMJr: Yes. L: It isn't a question of -- of liberal or conservative on this kind of thing. I think that was exhibited quite well at the conference yesterday when -- well, I wouldn't think of Spencer or O tely as particularly "New Dealers" and yet they were shocked at the situation. HMJr: I appreciate that. They -- I think they've been L: Yeah. awfully good too HMJr: ......in their attitude. L: Yeah. I -- I mean, I wouldn't hesitate in taking HMJr: Now L: A conservative. someone from the banking side. 396 -5HMJr: HMJr: Has Procter had any experience as a trial lawyer? Yes, a great deal of experience. A great deal? L: Yeah. L: HMJr: Well, supposing I turn this fellow over in my mind? L: Yeah. HMJr: And I'll ask Ed to do the same. L: Now, would you like some other names? HMJr: Definitely, yes. L: Grendel Clark of New York. HMJr: Grendel L: I am not sure whether he would agree to do it. He's -he's an outstanding lawyer in New York. He's a member of the Corporation of Harvard University. HMJr: Yes. L: I -- extraordinarily fine person. HMJr: Yeah. L: And if he could be gotten, he would be excellent. HMJr: I see. I know the name - I don't know why, it just L: Yeah. A man of great experience - about, I should sounds familiar. say, 55. Ah -- Harry Drinker of Philadelphia. HMJr: I don't know him. Harry...... L: Drinker, of Philadelphia. HMJr: D-r-1-n-R L: HMJr: e-r. ......e-r. 397 -6Another outstanding man of that Bar, and that's L: a pretty good Bar. HMJr: I see. L: And familiar in the -- great familiarity in the field of finance. HMJr: Right. L: John Lincoln O'Brien - Ed can tell you all about him. He represented the government in the Tennessee Valley Litigation. L: Oh. Where does he hang out? He I 8 in New York too. HMJr: I see. L: I -- well, wait -- wait a minute, he has a -- offices, HMJr: I see. L: But he also has offices in New York. HMJr: Uh-huh. L: Ah -- Walter Fischer of Chicago. HMJr: Oh, I have heard of him I think. L: Yeah. HMJr: He' HMJr: L: I think, in Rochester too, or Buffalo. A fairly elderly person. I would be a little worried about him - he's a little too old. HMJr: I think he's a friend of Harold Ickes. L: Yeah. Yeah. HMJr: Yeah. L: Then Malcolm Monroe of Lou-- of New Orleans. Ed can tell you all about him. -7HMJr: L: 398 Malcolm Monroe of New Orleans. Yeah. Bethwell and Webster of New York -- he was formerly general counsel for the Federal Communications Commission. HMJr: L: HMJr: Oh. He's -- he's a Republican. I see. L: He was there before '33. HMJr: Uh-huh. L: An excellent lawyer though, and I think liberal in temper. HMJr: I see. L: Ed may know him. HMJr: Right. Well that gives us a list to work on, but as I take it you -- your number one choice is Procter? L: Yes, I -- I would take him. I mean, I -- I have -I'd have complete confidence in him and in his ability to handle a -- a job of this nature. HMJr: Would Felix know him? L: Oh yes, Felix knows him very well. HMJr: I see. I see. L: Yeah. HMJr: Well, now you're -- you're going into this thing L: Well now that is -- that I -- I don't know what you further though yourself, aren't you? want me to do there. HMJr: Well supposing -- I don't know whether you were able to BOAK it all up yesterday or not. -8L: HMJr: 399 Yeah. But if you want, what I'd like to do is to have you -- to have them give you all the facts and then when I come back I'd like to take a half a day and sit down and discuss it w1 th you myself. L: Yeah. HMJr: You see? L: Yeah. HMJr: That's what I'd like to do. L: Yeah. HMJr: I'll be back in ten days. Would that be agreeable? L: That -- that's all right. I'11 be glad to do that. I -- I think it would be wise to try and get a man in right away HMJr: Oh, I'm going who can perhaps guide Delano in his conferences L: that he's going to have with A. P. Giannini next Monday. HMJr: I'll do that at once. L: Uh-huh. HMJr: I'll do that at once. L: Yeah. HMJr: I'11 do that at once. Well thanks for all the time and thought, and this 18 serious, and I'd like, if I could, to feel that you advised me as to my actions L: Yeah. HMJr: until we get to the point where we make up our mind what we're going to do. L: Yeah. 400 -9HMJr: I'd appreciate your advice, because it's terribly difficult and there are 80 many irone in the fire that people have other than the Treasury. Yeah. L: HMJr: So L: One further thing HMJr: Please. L: If you decide to contact Procter on this thing. HMJr: Yes. L: He can get in touch with me and I can -- I can have HMJr: Good. L: You can check him through Felix very easily. HMJr: Good. L: And if you -- it would be easy for him to come out and talk to me about the situation HMJr: Yeah. a talk with him right here. L: preparatory to any question as to whether he'd want to get into it or not. K. That's a good idea. HMJr: O. L: Yeah. HMJr: L: I'll do that. Well, thanks. All right. HMJr: And you'll be hearing from me when I get back. L: Fine. HMJr: Ever so much obliged. L: You're welcome. HMJr: Goodbye. 401 November 8, 1939 11:26 a.m. HMJr: Jerome Hello. Frank: Hello. HMJr: Hello, Jerry? Yes, sir. F: HMJr: Well, how -- how's everything? F: All right. (Laughingly) Did you have a good time? Oh, pretty good. I hope to -- I'm going away tomorrow HMJr: for a week or ten days. F: I see. HMJr: I had a message you called me. F: Oh, well I sent over to you last night a confidential letter on that Committee meeting and perhaps you haven't had a -- come to your attention yet. HMJr: I -- I got it but I -- I didn't know whether that was it or not. Yes, I put -- I enclosed a letter that I drafted to -- in answer of the questions and I wanted to know if it was satisfactory to you. HMJr: Well, I -- I haven't -- I got it, but frankly I F: Very good. Well, if you -- I'll wait until I hear haven't read it yet. from you. HMJr: And -- that's that and we're going along nicely and working very hard on Bank of America. F: Fine. HMJr: And F: The late -- have you heard the latest rumor? HMJr: No. -2F: 402 I got yesterday that Jimmy wants -- 18 proposing to go into the motion picture business on his own. HMJr: Yeah. F: And that he's -- Giannini is willing to finance him provided things are fixed up for him here. HMJr: Well, the one I heard is Jimmy was going in and I think -- well, I think -- I don't know where I got that -- that Green of this "Esquire" was to back him. F: Oh. HMJr: Is that the man's name? Green? F: HMJr: Yes, that's right. Green. But as long as I'm here it ain't going to be fixed up. F: Well, same here. HMJr: O. K. F: (Laughs) All right. HMJr: Goodbye. 403 November 8, 1939 11:53 a.m. HMJr: Vanderbilt Webb? Webb: Good morning, sir. HMJr: This is Henry. How are you? I'm fine. I did not get an opportunity to talk with W: Mr Orr about this. HMJr: Yes. W: But -- but I'm thinking it over -- I thought it over a lot yesterday. HMJr: W: HMJr: Right. And then I took the liberty, because I knew you wouldn't mind, of talking instead with Mr. Debevoise (? ) who is his immediate personal adviser on legal matters and it's really under whom I'm working. Right. And we talked about it at some length this morning. HMJr: Right. And the thing that occured to me yesterday after -I was stupid not to have it occur to me at the time and it immediately occured to him, and that makes me feel I should not do it HMJr: Yes. no matter - no matter how interesting it might W: be HMJr: W: HMJr: W: Yes. 18 the close connection here with a certain large bank, with which you are familiar. I understand. And particularly the fact that, as you know, there's another certain large bank that's involved on the other side. -2HMJr: 404 I see. And it seems to me that it might be prejudical to everybody to have it -- if this proposed action were recommended to have it come out that I had been mixed up in it and that charges might be made that HMJr: Of competition. W: There's -- yeah, there was an effort on the part of the bank to do something to the other bank. HMJr: It never occured to me. I say, it never occured to me. It didn't occur to me until after I left you yester- W: day. Then I began to think about it and it occured at once to Debevoise. HMJr: W: Well And I think that's probably a reason why, from both your standpoint as well as ours, it would be inadvisable to do it. HMJr: Well, unfortunately there are so many nasty-minded W: And -- and one very specific one, in this situation. HMJr: That's right. Well, I -- I can't -- I have no people around I can see that they would think that. answer. W: Yeah. HMJr: I W: Well, I'm awfully sorry, and I appreciate your thinking about me and I don't feel as sorry from your standpoint as I otherwise would, because as I told you yesterday, I'm not sure that I'd be awfully well qualified anyway. HMJr: Well, I was -- I was satisfied you would have been. W: Yes. HMJr: And maybe some other time I may ask you to help out on some other matter. -3Well, was fine to see you and I hope you have a granditflight west. HMJr: Thank you so much. Goodbye. HMJr: Goodbye. 405 406 November 8, 1939 12:04 p.m. HMJr: Jerome Hello. Frank: Yes, sir. HMJr: Jerome F: Yes, sir. ......I HMJr: have in my hand two copies of a list of British securities. F: Yes. HMJr: I want to send over one to you. F: Yes. HMJr: They sizzle in my hand. F: I beg pardon. HMJr: They sizzle in my hand. F: (Chuckles) Yes. HMJr: What time could you receive these? F: Oh, anytime you say. HMJr: Well F: HMJr: I'll be here for -- until one o'clock certainly. Well, I want to write a letter. Supposing I get -right after lunch. F: Very good. HMJr: And I'll just write a letter. I'm going to ask you F: to sign for it. And then you'11 let me know about that letter to your committee. HMJr: That's right. F: O. K. 407 November 8, 1939 2:35 p.m. Present: Mr. Hanes Mr. Gaston Mr. Irey Mr. Cairns Mrs. Klotz HM,Jr: (To Mr. Cairns) All of your associates are out somewhere so will you pinch hit for them? Mr. Cairns: I will do my best. HM,Jr: Mr. Greenbaum called me up today to say this memorandum on the so-called Twentieth Century- Schenck case, etc., et al, is in. See? Was in the process of coming in, signed by Knollenberg and himself. The thing that I am thinking is the next move would be the preparation of a letter to the Attorney General, to be signed by me, restating the case and asking him -- this is the way I feel, all subject to conference -- that the case be tried in New York. If there is unanimous agreement, or 75% agreement, in the Treasury that this is the procedure, I would like the letter to go up to Greenbaum and Knollenberg to have them pass on it and if time is the essence it would be one of the few letters to be sent out to me to be signed. But I am willing to sign this myself, because I talked to Greenbaum and asked him 1f that is the next move and he said yes. Mr. Hanes: That letter to be based on the memorandum from Greenbaum and Knollenberg. HM,Jr: Based on that and incorporating that in the letter to the Attorney General, but asking that this be tried in New York by the United States District Attorney. At first blush how does that sound? 408 -2- Mr. Hanes: All right, taking Schenck on the 1935 return and not going back to the reorganization, but going back to the false returns in 1935 and 1936 and the bribery? HM,Jr: As I understand it, there is the bribery case; the bribery of Byoff, I suppose Mr. Irey: Byoff has not been mixed up in this case. to Mr. Hanes: Schenck's income tax subsequent/the reorganization. Mr. Irey: That's right. HM,Jr: I thought it was 1934. Mr. Irey: 1935. HM,Jr: And the 10% that Zanuck got from the 30-40, whenever he got it. Mr. Hanes: From 20-30, that's right. HM,Jr: Whenever he got it. Zanuck's extra 10%; Schenck's Mr. Gaston: later returns. HM,Jr: later returns and the bribery case. Mr. Irey: The Zanuck case, they are going to have difficulty getting that into New York because he filed in California, and whether we can get jurisdiction HM,Jr: My feeling would be, as a non-lawyer, try what you can in New York and try and win there and after you have won there then go the other place. Mr. Hanes: And your letter wants to follow specifically their memorandum just as it is? HM,Jr: That's right. And I think in this case it is something I ought to sign myself, but it would be 409 -3- following Knollenberg's and Greenbaum's memorandum. And then in this case, which is most likely clear to you people, Greenbaum raises a point. He felt that we would have public opinion with us more in the future if when we have these cases, like this, that when we start -- I think I am right in quoting him, but you fellows can correct me -- a Grand Jury procedure we immediately get out a 90-day letter slapping the tax on them. Is that right? Mr. Irey: That's correct. HM,Jr: In other words, not to wait until we win or lose a criminal case, but I take it when we decide to go ahead, immediately get out a 90-day letter claiming the tax on 1935. Is that the way they said it? Mr. Hanes: Yes. HM,Jr: And not wait like we do now. We try a case, -- if we want a criminal suit--then subsequently we get out a 90-day letter. Mr. Irey: That's the way we have always done it. HM,Jr: And Greenbaum is suggesting we do the two things simultaneously. Mr. Irey: I don't agree with him on it. I would like a chance to discuss it sometime, but that's his sug- gestion. HM,Jr: But, Johnnie, are you willing to take this and carry the ball when I go? Mr. Hanes: Yes. And we send the letter Mr. Gaston: to Greenbaum. HM,Jr: (to Cairns) Is this too much Greek for you? Mr. Cairns: No. I have a general idea of the background. HM,Jr: But I would not let too much time pass. I would keep this thing pushing. It's all Treasury. 410 Mr. Hanes: That letter will have to be drawn by the Legal Department. Mr. Cairns: We will do it immediately. HM,Jr: I want Mr. Helvering to initial it and Wenchel to initial it and Mr. Irey and Mr. Foley and I would like it sent to me by Mr. Hanes when he feels it's ready, and passed on by both Knollenberg and Green- baum. Mr. Cairns: Before you get it? HM,Jr: Before I get it. And then we can have Cahill come in and have a good heart to heart talk with him and give him all the help he wants. Will you (Cairns) report that then? Mr. Cairns: Yes, indeed. 00o-o0o TREASURY DEPARTMENT 411 INTER OFFICE COMMUNICATION DATE November 8, 1939. TO Secretary Morgenthau FROM Mr. Cochran At 5:15 November 6, Mr. Erikson, Commercial Counselor of the Swedish Legation, telephoned me to the effect that his office had received the following cablegram from the Governor of the Bank of Sweden: "Bramanaes has asked us to sell part of the gold earmarked for his account at Stockholm to New York for earmarking there. We have asked Knoke arrange ear- marking for Bramanaes as we are reluctant to have foreign gold earmarked in our name. We hope Washington has no objection. Rooth." We had no word from the Federal Reserve Bank on the evening of Novem- ber 6 in regard to this transaction, and none came November 7. since this was a holiday in New York. This forenoon I telephoned Mr. Knoke that the Swedish Legation in this city had asked me whether a transaction had been consummated which in- volved the transfer of certain gold earmarked for the Bank of Sweden at the Federal Reserve Bank at New York to the Bank of Denmark. Knoke told me that a certain arrangement had been consummated, but that of somewhat a different type from that described. In accordance with my request, he telephoned to us the text of the attached cables which actually describe the transaction. Since this was not a case of transfer of gold from one earmarked account to another, but of changing the disposition of gold in transit, the Federal Reserve Bank had been able to carry out the instructions without any reference to the Treasury, and the matter was settled. Consequently, I telephoned the Swedish Legation to this effect. BunR. 412 CABLE From: Stockholm To: Federal Reserve Bank, New York, N. Y. Date: November 4, 1939. #179. Referring our cable and letter November 1 please note follow- ing altered instructions. Please do not sell gold shipped per SS SCANYORK but earmark this gold for account Danmarks Nationalbank, Copenhagen on same conditions as our own gold deposited with you. Particulars by letter. Please cable receipt of these instructions. (Signed) Sverigesriksbank Read. by telephoned from Mr. Inoke's Secretary 11/8/39. 413 CABLE From: Copenhagen To: President Harrison Federal Reserve Bank, New York, N.Y. Dated: November 4, 1939. Concerning gold shipped from Sweden for account of Danmarks Nationalbank, I beg you to take into friendly consideration the new wishes set forth by Sverigeariksbank on our behalf. Letter follows. (Signed) Brananaes Danmarks Nationalbank Read. by telephoned from Mr. Knoke's Secretary, November 8, 1939. 414 November 8, 1939 4:45 p.m. HMJr: Hello. Operator: Go ahead. HMJr: Hello. Marriner Eccles: Henry HMJr: I thought you were going away. E: I'm going in about 30 minutes. HMJr: 'Attaboy, you're just 24 hours ahead of me. Oh, 18 that right? E: HMJr: Yeah. E: Well, I understood you were going to get away. HMJr: Yeah, I'm going away tomorrow night. E: And -- well, I told you last week, I think it was, that I was planning to go away and asked you if you saw any -- any reason at that time and told you I'd check with you before I left. HMJr: That's right. E: So you said you saw no reason then and so I'm check- ing now. I've got to go to St. Louis in any case but I planned on continuing west from there unless there was some reason tha t I didn't see for being here. HMJr: E: No, I expect to go tomorrow night and I hope to be back here a week from Sunday. Uh-huh. Well, I'm going to stay away longer than that because I have to -- I have to go further, you see? HMJr: E: I see. That's too damn far to go out there except once a year - 2500 miles - and so when I go I like to stay a little while. -2HMJr: Well, I hope you get some rest and some fun. E: Well, thank you. The same to you. Thanks for calling. HMJr: E: See you when I get back. HMJr: That's right. E: Goodbye. HMJr: If anything happens that I think you ought to know, E: 415 I'll give you a ring. Well now, I'll tell you, I'm -- my office here will know where I am and I've said, of course, that I don't want to come back but -- but I can do just like I did before - I can always catch a night plane and in 12 hours E: Yeah. Well, if something breaks that I think that you personally ought to know I'11 give you a ring or -- or -- either I or Johnny will give you a ring. Yeah. 0. K. then. Thank you. HMJr: Goodbye. E: Goodbye. HMJr: November 8, 1939 4:55 p.m. HMJr: Hello. Operator: Secretary is there. Hull has gone for the day. Mr. Renchard HMJr: Renchard? 0: Yes. HMJr: Of his office? 0: Yes. HMJr: All right, let me talk to him. 0: Go ahead. HMJr: Hello. George W. Renchard: Hello. HMJr: Henry Morgenthau, Jr. R: Yes, sir, Mr. Secretary. HMJr: Mr. Hull R: 416 He left a -- a few moments ago, Mr. Secretary, and I don't expect him back. He had an appointment outside the department. HMJr: R: HMJr: R: HMJr: Well now, you give me some advice. I don't know whether you're familiar with this situation but both American Flagships and foreign flagships are tied up in various ports Yes. lacking clearance certificates which the Treasury has to have through Customs. Yes, sir. Now, State, Commerce and Treasury are all in this thing and we've reached an impass e because the lawyers won't agree. -2R: HMJr: 417 I see. Let me give you -- now, what I'm trying to get is a meeting tonight yet called by the Secretary of State of the people involved 80 that we could -- if we can't agree we could have two memorandums to lay on the President's desk tomorrow morning. Is Mr. -- now what would -- how can I get that done? R: Well now, our man over here who is in charge of shipping is Saugstad. HMJr: R: I think Welles. you've got to go either - Mr. Hull or Mr. I see. HMJr: R: Well now just -- may I see whether Mr. Welles is here, Mr. Secretary? HMJr: Yeah. R: All right, sir. Just a moment please. (Brief pause.) R: Mr. Secretary, Mr. Welles is in his office and I'll put you right through to him. HMJr: Thank you. (Brief pause.) HMJr: R: HMJr: Hello. Just one moment, please, Mr. Secretary. Hello. R: Operator. Operator: Yes. R: Would you please put this call through to Mr. Welles? O: All right, sir. R: Thank you. -3Welles' Secretary: Hello. HMJr: Hello. W's Sec: Mr. Welles. HMJr: This 18 Mr. Morgenthau. Hello. Hello. Hello. Summer Welles: Hello. HMJr: Summer V: Henry, how are you? HMJr: I'm all right. W: HMJr: W: HMJr: W: HMJr: W: HMJr: W: HMJr: I didn't think you were coming back until tomorrow. Well, I did to clean up some things. Let me express to you personally my very deep gratitude at what you did on Saturday. Well It was a great help. We' ve got to stick together. Well, you bet, and thanks a lot. Well, glad to have done it. The President seemed pleased - I had lunch with him yesterday. Fine. Summer, I have in the office here Hanes and Basil about American Flagships and foreign flagships. Two ships, for example, had sailed from Seattle before the Act passed were put in to San Francisco Harris and Huntington Cairns. It's this question to take on additional cargo. We, in the Treasury, have to get certificates for them to sail. W: Yes. 418 -4- HMJr: W: HMJr: 419 There is lawyers. disagreement between State Department lawyers and our Um-hm. These ships are loading -- they're all over -- there are about 20 ships involved. HMJr: What is the ultimate port of destination? Just a minute let me ask -- wait a minute -- what -(brief pause) they say Liverpool or Marseillaise ports. W: HMJr: I see. And Berle is taking one position and Huntington Cairns is taking another. W: Yeah. HMJr: And -- of course, in the Act the authority -- Congress gave you people the authority. Yes. HMJr: W: It's causing a great financial loss to a number of people and -- and the knot has to be cut. Yeah. And what I was calling -- I first called Mr. Hull and he has left and I'm calling you is that I think that these men ought to get together tonight and either agree or disagree so that both briefs could be laid before the President tomorrow morning. W: HMJr: I agree with you fully and I'll take steps to see that that's done at once. Now could -- could I (chuckles) -- Now -- I sort of hesitate about this, but in addition to Berle couldn't someone like Hackworth get in on this? W: Yes, indeed. HMJr: What? Yes, indeed. -5HMJr: 420 who And I don't know/sits from Commerce but let me ask -- (talks aside) well, Huntington Cairns said if he knows -- if he's notified that the meeting is going to take place, he'll get ahold of the Commerce people. W: All right. I'll ask them to get in touch with him immediately. HMJr: W: HMJr: Yes. But the point is, if they can't agree then there should be two briefs and those two briefs should be forwarded by State to the President and let him decide. I'll be glad to do that. But it's -- it's great financial hardship. W: I'11 be glad to do that. HMJr: So if you will have someone get in touch with Cairns? W: I'll ask that they get in touch with him at once. HMJr: Righto. See you soon. W: All right, Henry. HMJr: Thank you. W: I'll look forward to seeing you. Thanks. HMJr: Goodbye. W: Goodbye. 421 November 8, 1939 5:10 p.m. HMJr: Hello. Operator: Mayor LaGuardia. HMJr: Hello. Fiorello LaGuardia: Hello. HMJr: How are you? L: Mr. Secretary, how are you? HMJr: I'm all right. How's the Mayor? L: Fine. Look, Mr. Secretary, the -- your Department has been purchasing the supplies for W.P.A HMJr: L: Yes. which we pay for. HMJr: (Laughs) L: And now we -- I contribute 9 million dollars cash HMJr: I'd say about 14 million more. What's the matter, did we L: About 23 million in cash. HMJr: What's the matter, did we keep all the commission? L: No, that part of it is all right, but your man and -- oh, more - 9 million dollars in outright appropriations and then on each project where the capital outlay or assessment -- oh, it's about -- was crying the other day. He says he wants us to contribute more to the cost of purchasing to finish the year and I haven't got it. HMJr: Well, why would my man say that? L: That's fine. HMJr: I say, why should my man say that? -2 L: HMJr: L: HMJr: L: 22 His appropriations are running short. Well, what the hell, he's just a buying agent. That's it. I mean -- I don't see that it's any of his business. Well, I just wanted to tell you the facts. It isn't that we're ducking anything. The contribution that we're making has just got me right up to the very tip of my hair. I -- I can't -- you know, I'm not -- I'm not the Secretary of the Treasury, I'm just a poor of a Mayor HMJr: L: (Hearty laughter.) with limited power. HMJr: What fellow got after you for more money? L: Forbes. HMJr: Who? L: Forbes. HMJr: Forbes? L: Ford - Ford - Ford. HMJr: How do you -- Ford? L: Yes. HMJr: Oh yes, he's the director for New York. L: L: That's right. Well, I don't see that it's any of his damn business. That's what I think. HMJr: What? L: That's what I think. HMJr: Well, I mean, he's like any other purchasing agent. HMJr: He's given so much money and he's supposed to go ahead and do the buying. -3L: HMJr: 423 Yes. But how the allocation of where the money comes from as long he gets the money that's -- in the bank, that's hisasbusiness. L: HMJr: Yeah. All right. I just wanted to tell you that I can't give any more than I'm giving. Well, that isn't my job. That's up to Harrington and Carmody. L: Yes. HMJr: And a fellow by the name of Roosevelt. L: Well, he's all right. Of the three he's all right. HMJr: What's the matter with me? L: Oh, of course you're all right, but you didn't put yourself in. HMJr: (Laughs) No, I'll tell Ford that he should keep his nose out - that's none of his business. L: Fine. Thank you very much. HMJr: Righto. L: All right, thank you.