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DIARY Book 227 December 6 - December 9, 1939 A- Agriculture, Department of Wallace told by HMJr "at the suggestion of FDR, he (HMJr) will be pleased to hear about Wallace's tax program whenever it's convenient" - 12/7/39 a) Wallace's telephone conversation Book Page 227 222 213 Appointments and Resignations Willingham, Harris E. Resume of service with Federal Alcohol Administration and Central Treasury Accounts Office - 12/6/39 128 -BBudget Message, 1940 See Financing, Government C- Coast Guard-Lighthouse Consolidation "No instructions from the President as to savings' 12/8/39 446 Cuba Sugar: See Customs, Bureau of Customs, Bureau of Cuban Sugar: Johnson memorandum on delay in increase in duty on - 12/6/39 25 a) Discussed at 9:30 meeting - 12/7/39 203 -F. Financing, Government March Notes, Refunding of: Setting for - (Haas memorandum) 54,75 a) Selection and pricing of issues for refunding the March notes - 12/7/39 b) Haas reports on conference held at Federal Reserve Bank of New York with representatives of Salomon Brothers and Hutzler, Discount Corporation, et cetera - 12/8/39 Budget Message, 1940: 145 440,448 $500 million additional revenue: Blough memorandum on possible method of raising a) Given to FDR 12/6/39 32 -GGreat Britain HMJr reports to State Department relative to reciprocal exemption from income tax of profits arising from operation of aircraft - 12/7/39 136 -I- Book Page Ireland: HMJr reports to State Department relative to reciprocal exemption from income tax of profits arising from operation of aircraft - 12/7/39 227 134 -LLighthouse-Coast Guard Consolidation "No instructions from the President as to savings" 446 12/8/39 -NMexico See also War Conditions: Germany HMJr regretfully informs Suarez (Secretary of Finance and Public Credit) he sees no opportunity for Mexican visit within immediate future - 12/8/39 424 0- Ottley, John K., Sr. Opening of account discussed with HMJr - 12/6/39 23 -PProcurement Division Appropriation, fiscal year 1941: Graves memorandum 12/7/39 142 -RRevenue Revision See Financing, Government: Budget Message, 1940 -WWallace, Henry A. See Agriculture, Department of War Conditions China: Tin shipments discussed by HMJr, Cochran, Chen, and Lochhead - 12/8/39 432 - W - (Continued) Book Page War Conditions (Continued) Closing Agreements: Electric Boat Company: conference between Treasury and Navy - also present: Mr. Sutphen (Electric Boat Company) - 12/6/39 227 87 a) Memorandum to FDR stating Treasury position 12/6/39 114 Consolidated Aircraft Corporation: Conference in Internal Revenue Building; present: representatives of Internal Revenue, Treasury, and Navy; and contractor's representative 12/6/39 182 Conference; present: HMJr, Currie, Sullivan, Foley, and Kades; Sullivan reviews conference with Navy representatives and present status of negotiations 12/7/39 Woodring acknowledges HMJr's letter (12/4/39 154 ELL will consult with HMJr again "if necessary" - BK226 p.lia-A, 158,259) 12/9/39 Exchange market resume - 12/6/39, et cetera Finland: 475 3,217, 434,478 War Debt: Hollandale, Mississippi, Rotary Club transmits $26 to apply on retirement of debt to United States; HMJr suggests that he be authorized to turn this over to Finnish Minister - 12/7/39 133 Germany: Coast Guard message picked up from Mexico City to German firm: Gaston's pencilled note, "This indicates efforts of Germany to deliver goods to Mexico through 'neutral' shipment from Italy" - 12/7/39 Treasury Office: HMJr reports to State Department on closing of, and transfer to Stockholm - 12/7/39 Petroleum Situation: memorandum on - 12/8/39 Reich debt at end of August-September 1939: American Embassy, Berlin, report - 12/8/39 Great Britain: Exchange control by Dominion Governments reported on in House of Commons by Financial Secretary of Treasury 12/6/39 166-A, 167 131 228 460 125 Neutrality Act of 1939: Gaston memorandum explaining Berle's disagreement with conclusions voiced by Senator Pittman and his intention to discuss with FDR - 12/7/39 Purchasing Mission (British-French): France: Leroy-Beaulieu to acquaint HMJr (formally) with Bank of France's decision to open special account with Federal Reserve Bank of New York - 12/6/39 Great Britain: Bank of England Account A set up: checks to be signed by any two of the following: Purvis, Greenley, Rae, and Osborne - 12/6/39 Motor Situation for 1940: Collins' resume - 12/7/39 United States Committee set up by FDR consisting of Director of Procurement, Treasury; Quartermaster General, Army; Paymaster General, Navy - 12/6/39 191 2 43 169 44 - W - (Continued) Book Page War Conditions (Continued) Strategic War Materials: Molybdenum: Discussion between HMJr and Hochschild: Hochschild shows HMJr telegram from a Climax stockholder in England suggesting they stop selling to Russia; HMJr says he will take up matter with France and England to see if they can increase their purchases227 12/6/39 78 a) Hochschild's letter enclosing memorandum on Russian imports of lead and copper 12/7/39 151 b) Hochschild 'phones he is worried about their laborers being laid off; HMJr says he will use every effort to get new business from England, France, and United States, and FDR wants to include Japan in moral embargo - 12/7/39 c) U.S.S.R. and Japan not to be sold molybdenum 153 in future - Hochschild reports to HMJr - 12/8/39 407 1) HMJr so informs Purvis a) Cochran memorandum 415,469 428 Riefler-Stewart-Viner memorandum giving certain relevant information - 12/8/39 Butterworth memorandum after conference with Purvis who has now seen representatives of International Nickel Company - 12/9/39 Purchases: HMJr's letter to Collins quoting memorandum of December 6th from FDR and asking Collins to carry out its instructions - 12/7/39 451 477 172 Taxation: Obsolescence to armament manufacturers discussed by Currie and HMJr - 12/6/39 a) HMJr reports to 9:30 group on conference with Currie at his home - 12/7/39 See also Financing, Government: Budget Message, 1940 United States Committee to work with Purchasing Mission (British-French): See War Conditions - Purchasing Mission (British-French) Willingham, Harris E. See Appointments and Resignations 19 201 1 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE December 6, 1939. TO Secretary Morgenthau FROM Mr. Cochran On the Secretary's instructions, I telephoned Dr. Feis at 3:40 p.m. today and asked him kindly to send a cablegram immediately for Ambassador Bullitt's confidential attention, letting the Ambassador know that Secretary Morgenthau plans to call him by telephone on Thursday, and suggesting that he have before him his cablegram #2742. Km 2 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE December 6, 1939. TO AM Secretary Morgenthau FROM Mr. Cochran Mr. Leroy-Beaulieu telephoned me from New York at 10:50 this forenoon, and again this afternoon at 3:00 o'clock. He desires an appointment with the Secretary on Thursday, or preferably Friday, to acquaint the Secretary formally with the decision of the Bank of France to open its special account with the Federal Reserve Bank of New York. Mr. Leroy-Beaulieu stated that one Bank of France official had arrived in New York this morning from Halifax, and that another Bank of France official, the one who is to be in charge of the special account in this country, should reach New York Monday on the Rex. Leroy-Beaulieu told me that he had let Pinsent know of these developments, and he thought this information would be helpful, since he was under the impression that there was some "hitch" in British arrangements. Mr. Knoke telephoned me at 2:45 p.m. He stated that Mr. Osborne had told him today by telephone that Under Governor Catterns of the Bank of England had telephoned Osborne that he was going to cable the Federal Reserve Bank of New York to open the British account as planned. Incidently, Mr. Knoke mentioned that the Chase Bank in New York had today received a market inquiry from Amsterdam as to whether there is any possibility of this Government putting an embargo on gold of Russian origin. I telephoned Mr. Leroy-Beaulieu's office at 4:00 o'clock and told his secretary, in his absence, that Secretary Morgenthau would receive him at 10:45 a.m. on Friday. At 4:00 o'clock I talked with the office of Mr. Purvis in New York, upon confirming that Mr. Pinsent is at present in that city. With Mr. Purvis secretary, I fixed an appointment for Secretary Morgenthau to receive Mr. Purvis at 11:00 a.m. Friday. KMR 3 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION my CONFIDENTIAL DATE TO FROM Secretary Morgenthan Mr. Cochran December 6, 1939 The rate for sterling in the foreign exchange market today showed considerable strength. The opening quotation was 3.90 and it was reported there was some commercial demand in the market. During the day, the rate improved steadily to 3.92. and closed there. From the turnover figures given below, it is evident that the banks took a considerable amount of the sterling offered into their own account, which had the effect of making a higher rate for sterling. Sales of spot sterling by the four reporting banks totaled 1632,000, from the following sources: By commercial concerns By foreign banks (Europe, Far East and South America) Total L 185,000 L 447,000 I 632,000 Purchases of spot sterling amounted to 441100, as indicated below: By commercial concerns I 375,000 I 116,000 By foreign banks (Europe and Far East) Total L 491,000 Cotton bills totaling 1362,000 were sold to the British Control at the official rate of 4.02 by the following reporting banks: L 185,000 by the Guaranty Trust Company L 154,000 by the Bank of the Manhattan L 23,000 by the National City Bank L 362,000 Total The other important currencies closed as follows: French francs Guilders Swiss francs Belgas Canadian dollars .0222 .5309 .2242-1/2 .1651 12-3/4% discount The rate for the Cuban peso continued to improve to 10-3/4% discount. -2- 4 The Federal Reserve Bank of New York purchased 100,000 belgas and 30,000 guilders for the Bank of Latvia, We purchased the following amounts of gold from the earmarked accounts of the banks indicated: 4,980,000 from the Bank of Norway 1,250,000 from the Netherlands Bank 585,000 from the National Bank of Belgium $ 6,815,000 Total The Federal Reserve Bank of New York reported to us the following shipments of gold: $ 4,008,000 from Norway, shipped by the Bank of Norway to the Federal Reserve Bank of New York, to be earmarked for account of the Bank of Norway. 1,099,000 representing two shipments from India, shipped by the National Bank of India to the Guaranty Trust Company, San Francisco. 425,000 from India, shipped by the National City Bank, Bombay, to the American Trust Company, San Francisco. 301,000 from India, shipped by the National Bank of India to Australian Bank, San Francisco. 245,000 from India, shipped by the National Bank of India to the Swiss Banking Corporation, San Francisco. 6,078,000 Total All of the above shipments, with the exception of the first one listed, will be sold to the U. S. Mint in San Francisco. We received from the State Department cables from the American Consuls at Calcutta and Hong Kong, stating that invoices were certified for the following gold shipments: $ 266,000 from India, shipped by the National City Bank of New York, Calcutta, to the National City Bank of New York, New York. 294,000 from India, shipped by the National City Bank, Bombay, to the American Trust Company, San Francisco. 1,235,000 from Hong Kong, shipped by the Chase Bank, Hong Kong, to the Chase National Bank, San Francisco. 352,000 from Hong Kong, shipped by the Banque Belge pour l'Etranger, Hong Kong, to the Bank of America N.T.&S.A., San Francisco. 336,000 from Hong Kong, shipped by the Chartered Bank of India, Australia and China, Hong Kong, to the Bank of California N.A., San Francisco. 163,000 from Hong Aong, shipped by the National City Bank of New York, Hong Kong, to the American Trust Company, San Francisco. $2,646,000 Total Those shipments consigned to San Francisco will be sold to the U. S. Mint in that city and those sent to New York will be sold to the U. S. Assay Office there. CONFIDENTIAL -3- 5 The U. S. equivalents of the London spot and forward silver prices were 41.13# and 40. 984, respectively. Handy and Harman's price for foreign silver was unchanged at 34-3/44. The Treasury's price was also unchanged at 35 We purchased a total of 460,000 ounces of silver, under the Silver Purchase Act, of which six purchases amounting to 300,000 ounces were purchased in New York. The remaining 160,000 ounces were purchased through the Crocker First National Bank in San Francisco. We also purchased 60,000 ounces of silver from the Bank of Canada, under our regular monthly agreement. The Bombay silver price figured cut to an equivalent of 43.40 as compared to 43.55$ yesterday. The steadiness of the price would indicate that the Bombay silver market is returning to more normal conditions. CONFIDENTIAL 6 December 6, 1939. 10:40 a.m. H.M.Jr: How are you? Admiral Land: H.M.Jr: I just got back from the White House this minute. L: Yes. H.M.Jr: And Mrs. Klotz tells me that you want to have a word with me on the phone if nothing else. L: Well I've got, if it's convenient to you I'd come over H.M.Jr: No. L: Would that be all right? at eleven o'clock and maybe we could - H.M.Jr: No, I've got the whole Navy Department coming here at eleven - Edison's coming over on a contract. L: Huhhuh. H.M.Jr: Edison's coming at eleven. I see. L: L: That's why I couldn't shift, you see? Huhhuh. Well I - H.M.Jr: You're going to New York, aren't you? H.M.Jr: L: I've got to go, but - I've got this economic club thing that I've had on - I wish I didn't have but I've got it. H.M.Jr: Are you speaking there? L: Yes, sir. H.M.Jr: Tonight. Won't you be back tomorrow morning? L: I'll be back tomorrow morning. H.M.Jr: Well is there something on your mind that won't wait. L: Well yes, there's two or three things that - on this whole shipping situation that I'd like very much to go 7 -2over with you and ultimately I think we may have to get - mix some other people in it and we'll take it H.M.Jr: up with the Big White Father. Well, how about three o'clock Thursday. L: Yes, that's all right. I was just looking it up to Hello. see H.M.Jr: L: How are you fixed? I've got a Congressman coming in at two-thirty but I'll get rid of him. I can do it at three o'clock, and what - how long is it going to take you with Edison, do you know? H.M.Jr: Oh, God, he's coming over with a big gang. L: Well I guess I'd better not try it today then. H.M.Jr: L: H.M.Jr: It's one of these closing agreements on the shipping it's been going on for five months. Well then we'll say tomorrow afternoon at three o'clock. Yes, because Edison saye this an argument that's been going on for five months. L: I see. Well three o'clock tomorrow then Mr. Secretary. H.M.Jr: Thank you. L: O.K. H.M.Jr: Goodbye. 8 December 6, 1939. 2:27 p.m. Hello. H.M.Jr: George Harrison: Hello. H.M.Jr: Hello George. H: Yes, Henry, I'm not meaning to bother you except that I told you I would. H.M.Jr: Good. H: About a thing like this. Another large payment that's been made by the Reich bank to the German Consular General. H.M.Jr: Yes. H: But in view of the recent arrangement that we have with the Chase National. H.M.Jr: Yes. H: Who gets all this information now and is collecting it. H.M.Jr: Yes. H: H.M.Jr: H: H.M.Jr: H: I didn't know whether you wanted me to give it to you direct or not. Well if you didn't give it to me who would you give it to. Well I think the person himself gets it here you see. Well as long as you've got me on the phone, do you want to tell me what it is. Yes. Well it is a payment of seven hundred thousand that was made last week. H.M.Jr: H: I see. of Which two hundred thousand was withdrawn from the Chase, in large bills. H.M.Jr: I knew about that. H: What? H.M.Jr: I knew about that. 9 -2H: H.M.Jr: H: Yes, 80 I think you - I think I'm getting it. I think you're getting it and I called you up - first I wanted to be sure and second to suggest that perhaps the best way to do it was go through on the regular routine way now through the Chief. H.M.Jr: It's coming along nicely. Yes, thanks to your initiative. Well George, H: Yes. H.M.Jr: Everything is quiet I want to do some financing Tuesday, I want to refund that March issue. H: Yes. H.M.Jr: Bo you might be thinking about it. H.M.Jr: First rate. I think that last issue settled down all right hasn't it? Well I think it has, the market's been a little upset but it's not, it's very - very quiet and very relatively steady. Will you do this for me? H: Yes. H.M.Jr: Between now and ten o'clock tomorrow morning, do you know of any good reason why I shouldn't announce at H: H.M.Jr: H: my ten-thirty press conference that I'm calling - asking the open market committee to meet with me, see? H: Yes. H.M.Jr: I'd like to know that before ten-thirty tomorrow. H: Yes. When you have the committee meet with you? H.M.Jr: H: Monday. I see. 10 -3H.M.Jr: But tell him that. Making that public would be notice of a thing you're financing. H: Yes. H.M.Jr: So - H: H.M.Jr: H: H.M.Jr: All right, sir, well I'll talk it over with the fellows here and call you back if there's any change. If you'd do it - let me know between ten and ten-thirty tomorrow. Yes. If you don't hear anything If I don't hear anything I'll announce at ten-thirty that I'm going to invite the open market committee to meet. H: All right. H.M.Jr: Notice to the world that we're going ahead, you see. H: Surely. H.M.Jr: O.K. H: Yes, all right. H.M.Jr: Thank you. 11 December 6, 1939. 3:10 p.m. Operator: Mr. Parker. H.M. Jr: Right. O: Go ahead. Geo. B. Parkers Hello, Mr. Secretary. H.M.Jr: Hello Mr. Parker. P: Hulloha to you. Right back at you. H.M.Jr: Yes. P: I read that thing that you sent out to me, and I think what it's all about is very significant and has been How are you today? Hulloha to you. explained adequately. H.M.Jr: P: Yes. I mean not only as it relates to the matter of profit on war contracts but it relates to the operation of that whole thing called the closing agreement. H.M.Jr: Yes. P: And I'm no expert on tax matters, it's pretty much of an Einstein proposition to me. I think I understand the principle involved and that is the allowance for operation instead of capital investment. That's the headline on it. H.M.Jr: Just a second. Can I call you, the President is calling me. P: Yes. I wish you would because I want - I don't want to head you off but I'll be here for an hour Decatur 3084. 12 December 6, 1939. 3:16 p.m. H.M.Jr: Geo. B. Parker: Hello H.M.Jr: Yes. P: Now what I thought I'd like to do would be either Yes, what I started to say was this that to spell out and have it accurate. The thing involving the intricacies of allowances for depreciation capital investment and all the tax angles is like - kind of like explaining to the average person the Einstein theory which you don't understand so well yourself. to attempt - I think I get the point involved in this closing agreement thing. From my slight knowledge of the business operations of newspapers, if we buy a line-e-type that's a capital investment. H.M.Jr: P: H.M.Jr: P: H.M.Jr: Yes. Under certain circumstances a line-a-type might be allowed as an operating expense. The difference would show up in the taxation column. That's right. That's the guts of this thing. Well let's put it this way. Your line-a-type machine might be used up in two or three years. P: Yes. H.M.Jr: P: A building might take twenty or twenty-five years. That's right. H.M.Jr: See? P: Yes. H.M.Jr: Now, in this particular case they have to put in jigs and dyes. P: Yes. H.M.Jr: Which they say will - only manufacture of this particular gun. That's right. P: 13 2H.M.Jr: Can't be used for anything else. P: Yes. H.M.Jr: We'r allowing them the life of the contract which is P: H.M.Jr: P: H.M.Jr: P: H.M.Jr: P: H.M.Jr: P: H.M.Jr: In other words, as an operating charge instead of a capital investment that hangs on. That's right. Well I thought I got the point all right, but I'm no expert in taxation matters. Neither am I. I'm going to try myself to write an editorialexpository in its nature. Yes. From the material that you sent out. Yes. And I would like to check with you, Johnny Hanes or somebody else, before it goes, because as I say, I don't know the taxation intricacies or the Einstein theory and one's about as hard as the other. Well, Hanes is away. I mean when it comes to explaining. P: H.M.Jr: P: H.M.Jr: P: either one or two years. Yes. To the average reader what it's all about. The average reader doesn't have those things because he isn't conducting a business, and yet I think in this expression of policy that then what you sent out to me is probably one of the most hopeful things to the industry and business of the country that I've seen. Really. It isn't anything new I guess, I mean it's merely an expression of policy as it relates to war materials but applied to industry generally it might be a very hopeful stimulating thing but I wouldn't want to get - -3 - 14 off on the wrong foot and be inaccurate in the exposition of it. H.M.Jr: P: Well I tell you, we have got a man who worked on this, his name is Sullivan, whose assistant Yes, he's - he was in the conference. H.M.Jr: Yes. P: And he'd be available to you to come to see you at any time or any place. Well I'd be very glad to drop in and see him or if I could get a man like Raymond Clapper or Tom Stokes or somebody to spell this out in the news way first. H.M.Jr: Well now - P: Then editorialize on it, that might be a better plan. H.M.Jr: I'll tell you what we'll do. P: How's that? H.M.Jr: I will tell Eugene Duffield who's in my office here, who handles public relations. P: H.M.Jr: P: H.M.Jr: Yes. About my conversation with you. All right. And that if he gets a call from you or your office together with Sullivan. That's fine. That's the way to handle it. he should arrange whoever you designate should get P: H.M.Jr: P: H.M.Jr: P: H.M.Jr: P: How's that? That's fine and I appreciate it. The young man's name is Duffield. Duffield. Yes. And Mr. Sullivan is the other man. 15 4H.M.Jr: Yes, but I mean Duffield will arrange whoever you designate. P: I thank you very much and I hope to see you soon. H.M.Jr: Well it's terribly nice of you to bother to call me up. Well I was very much interested in it but as I say P: H.M.Jr: I'm no tax expert. It's very important because I spent one hour this morning,confidentially, on the same thing for the Navy. P: Yes. H.M.Jr: Trying to drive this thing into the head of the Navy what we can and cannot do, and I just couldn't get it into their heads. P: Yes, which indicates that it's kind of a tough one for even experts to understand. H.M.Jr: Well I tried my best for one hour, this is off the record, I shouldn't say it, to explain it to none less than Edison. P: Yes. H.M.Jr: And I said to Edison. I put it this way, "Now look Mr. Edison, you got out a new ediphone and you had an order for a hundred thousand ediphones and you wanted to build a plant, I couldn't do anything for you on the plant but I could on the machinery. P: Huhhuh. H.M.Jr: See? P: I see. H.M.Jr: And I went over and over and over and when he got through P: he still didn't understand it. May I ask you this one question, if I'm not taking too much of your time. H.M.Jr: P: No. Suppose I'm in the business of manufacturing a certain type of armament and you have a sudden peak load of -5- 16 war orders. H.M.Jr: Yes. P: And in order to do that I've not only got to create dyes that operate and yet are useless. H.M.Jr: P: H.M.Jr: P: H.M.Jr: Yes. Which I can understand under this program but I've also got to expand my plant, and that plant when the war 18 over is no good, and that's exactly what happened in the last war. Right. Now what do I do about that? Do I get any allowance on that? We can't do it in advance, but we'd handle that just the way we did with some breweries when prohibition came along. P: Oh, I see. H.M.Jr: And they became obsolete, we let the fellows write it P: I get you. H.M.Jr: P: H.M.Jr: P: off. But the fellow's got to wait until the war is over or his orders are over and then come and say, "Now look I've got this plant on my hands, what are you going to do about it? Yes I see. But we can't do it in advance. But by that process he could advertise his plant by reason of the volume of business he would get during the so-called peak load. H.M.Jr: Well, he'd have to wait until the end. P: I understand that. H.M.Jr: And we have precedent on that, as I say the best cases is a brewery. P: Yes. 17 -6H.M.Jr: P: H.M.Jr: And we did let those fellows, when they were through, the plants became obsolete, we let them write it off. Don't you have the same principles in relation to the development of an oil well? I mean, an oil well is a thing that doesn't last forever. Well now that's another thing and that's something where we've got a hundred million dollar loop hole on this depletion thing. P: H.M.Jr: I see. We could collect a hundred million dollars a week and correct this depletion thing, but what - the Texas California delegation are too big for us. P: H.M.Jr: P: H.M.Jr: Is that so? There's a hundred million dollar loophole there. Is that a fact? Yes, and we just haven't got enough influence to get beyond the Texas and the California delegates. H.M.Jr: Yes, well they're pretty close. But isn't - P: That's another thing again but isn't the principle P: H.M.Jr: P: somewhat the same? Yes, but in that case, as I understand, they write it off over and over again. Yes I see. Sometime I'd like to have that spelled out to me. H.M.Jr: P: H.M.Jr: Well, the boys could do that any time, but we're getting away - we figure we lose a hundred million dollars a year on depletion of oil wells. I see. Well I can understand how there would be a loophole and still the principle is that if you find an oil well Oh yes. -7- 18 And that depletion felt in say a year. H.M.Jr: P: Oh yes. It's a different thing in establishing a newspaper which proceeds and publishes indefinitely. H.M.Jr: That's right. It's the difference between a permanent P: That's right. H.M.Jr: See? P: All right, I appreciate that very much and I'll have H.M.Jr: Right. P: I think it's damned important, but nothing is important H.M.Jr: Well you're right and that's why I appeal to you because P: Well thank you very much sir, and I hope to see you structure and something which you wear out. somebody check in or check in myself with Mr. Sullivan. 1f you print it and it isn't understood. I know you know how to use words. soon. H.M.Jr: P: Righto. Goodbye. December 6, 1939. 3:29 p.m. H.M.Jr: Lauchlin 19 Tax? Curry: No. I'm not a great tax expert. H.M.Jr: Yes, English taxes. C: English taxes? H.M.Jr: Yes. C: Oh, oh that thing I had prepared for me. Yes - H.M.Jr: Who did them for you? C: Combe H.M.Jr: Who? C: Combe H.M.Jr: Who's that? C: He's down on leave of absence from the new school. He's at Commerce now. H.M.Jr: Oh, I sec. C: He's quite a good man I think. H.M.Jr: I see. C: And I called him in a rush the other day when I got a request for some information what the British are doing on taxes and he prepared that for me. I have if you're interested I have subsequent, an estimate he put in on the eel of the National Defense Contribution. Showed last fiscal year it was twenty million pounds. H.M.Jr: I used to have something to do with taxes. C: (laughs) I have very little Mr. Secretary. H.M.Jr: All right. C: What I called you for was another matter of some mutual interest and that's this obsolesence thing, you know. 20 -2H.M.Jr: Yes. C: To armament people. H.M.Jr: Yes. C: H.M.Jr: C: The President, some time back as you know asked me to acquaint myself with it and follow it and so I've been keeping in touch with you indirectly. Yes. And heartily approved of you - I heartily agreed with your reaction to the whole thing. H.M.Jr: Yes. C: And sent a note the other day, to the President. H.M.Jr: Yes. C: Summarizing the result of my investigations outlining about five different course of procedures. H.M.Jr: Yes. C: And coming to the conclusion that adequate remedies existed under existing laws and practices, and advising to make any special arrangements or even asking for special congressional action. But did suggest that I thought that in order to be in the clear that the Procurement people and Army and Navy should be thoroughly acquainted with what is possible under the present laws, because I was cuite impressed when I got into it to find what is possible. H.M.Jr: C: Huhhuh. And so I just got this note back from the President I'll read it to you, he says, "I like your ideas in this and wish you would take it up with the Secretary of the Treasury in person and also after talking with him lay down as definite rules and procedures as possible and have these sent to Army and Navy, etc. F.D.R." H.M.Jr: C: That's all, uh? That's all, yes. Now, I had an opportunity to see 21 -3a memorandum written by Mr. Kades over in your place. H.M.Jr: Yes. C: On what 18 possible on existing law which forms a very good basis I think for this. of course I don't know H.M.Jr: C: whether these people over there really do know what is possible. Well we had Edison over here for an hour and the answer is they don't know nothing. That doesn't surprise me. (laughs) I had a talk with Admiral Furlong, I don't think he understood much. H.M.Jr: Well, - C: Possible though. H.M.Jr: Let me - let me just see how this thing is running. I'll known within an hour. I've got two tentative appointments out for tomorrow. C: Uhhuh. H.M.Jr: And I'll get word to you see? C: Fine. H.M.Jr: Just as soon as I hear. C: Fine. H.M.Jr: C: H.M.Jr: C: And you say you've got five suggestions. Well some of them were not - I mean I objected to most of them. Some Are they Kades' or part Kades - No things that developed as in discussion with your people over there, the things that could be done. For instance drawing up a new regulation, permitting a more rapid rate of obsolesence of armament making equipment, and I advise against that. H.M.Jr: Yes. C: Free outright Government purchase and Diesel equipment to private concerns, and I felt there were lots of 22 4- disadvantage in that. That companies claim any obsolesence they wish and have final determination made by the Board of Tax Appeals. That's kind of messy and expensive to companies, and the - what I finally came out with was No. 5 as under present procedures the companies had the privilege of submitting amended returns for a period of three years. This can be extended by mutual consent of the companies and the Commissioner. This means that while companies would only claim normal obsolesence now they have the opportunity of securing what would be in effect retroactive readjustment of obsolesence allowances and should they later appear justified H.M.Jr: this closely resembles current British practice. Well Sullivan suggested that this morning and I have another suggestion which I am making to the President in writing today on this thing. C: Uhhuh. H.M.Jr: Which I'll send you a copy of. C: Fine. H.M.Jr: But I'll see you anyway Thursday or Friday and would C: Fine. H.M.Jr: Don't take my kidding on taxes too seriously. like to see you. C: No I'm not. H.M.Jr: And I'll talk to you about that too. C: Fine. H.M.Jr: C: I'd like to. All right. H.M.Jr: Glad you called me Lauch. C: Not at all. H.M.Jr: Fine. C: Bye. Bye. original to Mr. Bell 12/6/39 - as per Secy's instructions. mes -above orig. returned & destroyed. HMJr: December 6, 1939 4:44 p.m. Hello. Operator: Go ahead. Hello. HMJr: John K. Otley,Sr: Mr. Secretary. HMJr: Talking. O: This is John Otley. O: Hello, Otley. Ah - fine. I was going - knowing how busy you HMJr: Yeah. O: ... and I've got everything on my desk cleaned up HMJr: were - ah - and I was going off for a two or three days in the country shooting birds except the one little thing that you were kind enough to say to me last Saturday that you were going to do Monday. HMJr: Yeah. Well, they - I told Bell to do it. I gave the orders on Monday. 0: HMJr: Ah - well, ah - I haven't heard anything from it. Well, it may take a day or two to get it through but you're going to get it. - well, that - that's all right. I was just O: I HMJr: No, I gave the order 0: HMJr: ... little thing like that might have gotten by. No. You know that we've got to do it a little O: Yeah. afraid you'd - ah - extra because we're not supposed to make deposits in a town where there's a Federal Reserve Bank. 23 -2HMJr: 24 So we've got to get you something a little special. O: HMJr: Fine. All right. But the orders were given and you go get yourself some birds and when you come back you'll find that an account has been opened. O: Well, fine. Thank you a thousand times. HMJr: No, but the orders were definitely g1 ven. O: Yeah. All right. Well, thank you so much. I like sticktoitiveness. HMJr: C: What? HMUr: I like the way you stick to getting business. (Laughs) Well, thank you. I don't turn 'em loose. O: HMJr: Well, you go out and get some birds. O: Yes. All right, I'll get some. But I hope - ah - if it's during the season I have to c ome back up there I'11 try and bring you some. HMJr: All right. Thank you. 0: Yeah. HMJr: Thank you. 0: Goodbye. MEMORANDUM FOR THE SECRETARY: Re: Delay in Increase on Cuban Sugar date OFFICE OF THE COMMISSIONER OF CUSTOMS December 6, 1939. TO MR. HARRIS: FROM W. R. JOHNSON. About five o'clock on the afternoon of September 11, 1939, a representative of the State Department advised me by telephone that action to increase the rate of duty on Cuban sugar was contemplated. He stated that the date of action had not been decided, but that it would probably be very soon. I said that the principal interest of the Customs Service would be to have the duty increase become ef- fective at a time when all customs offices were closed so that there would be no confusion as to whether entries and withdrawals were effected before or after an increase occurring during office hours. About six o'clock on the same day, we had received in the Bu- reau a tentative draft of a notice to be issued by the Secretary of Agriculture to make the duty increase effective. Under the law, the increase became effective when the notice of the Secretary of Agriculture was made public. At that time (about six p. m.) I talked by telephone with a representative of the Department of Agriculture, was advised that it desired to make the increase effective immediate- ly, stated that our administration would be facilitated if the increase became effective after ten p. m., and before eight a. m., and received advice that the Department of Agriculture would make the change effective at 11 p. m., that night. A final copy of the notice of the Department of Agriculture signed by Secretary Wallace was received shortly after this telephone conversation. "Effective 11:00 p. m., September 11, 1939" was typewritten at the end of the notice. (See T. D. 49962, attached.) A circular telegram to all collectors of customs was prepared and signed by me, advising them of the increase in duty and that it would be effective at 11 p. m., September 11, 1939. This telegram was filed at the Treasury telegraph office at 6:52 p. m., September 11, indorsed for transmittal "Via Government Facilities" in accordance with the instructions contained in Bureau Office Memorandum No. 147, dated July 25, 1932 (copy attached). Shortly after nine o'clock the following morning (September 12), the Assistant Collector of Customs at New York called me on the telephone to verify rumors that there would be a duty increase affecting Cuban sugar. He had not received the Bureau's telegram, the terms of which were then dictated to him over the telephone. I learned later that our telegram was received at New York, Baltimore, and Philadelphia 25 26 -2- at various times on the morning of the 12th between ten and twelve o'clock, eastern standard time (eleven and one, daylight saving time). Presumably there were like delays in receipt at the other ports. The White House had announced during the afternoon of September 11 that the AAA quota limitations on importations of sugar were abandoned, and it was generally understood in the sugar trade that this would be followed promptly by an increase in the duty on Cuban sugar. Importers owning sugar in customs bonded warehouses and on ships in port attempted to clear as much of their sugars as possible on the morning of the 12th to avoid the expected increase in duty. In several cases entries or withdrawals were filed with deposits of duty at the lower rate of 0.9 cent per pound, but the collectors refused delivery except on increase of the deposit to 1.5 cents per pound when they received advice of the duty increase before actual release of the sugar. The importers protested to the Bureau and to the Department of Agriculture, claiming that no public notice had been given by the Department of Agriculture until the notice was actually filed with the Federal Register at 12:54 p. m., September 12, 1939. The Depart- ment of Agriculture finally decided that this claim was valid. (See T. D. 49977, attached) It seems clear that the Department of Agriculture overlooked the requirement of publication to make its notice effective when it advised us of the effective time. It is an established rule in customs law that when an importer does all he can to enter or withdraw merchandise and is wrongly prevented from so doing, the entry or withdrawal will be treated as though it were effected at the time of the attempt. Applying this principle in the instant case, we have held that several large lots of sugar were entitled to entry or withdrawal at the lower rate of duty on the basis of the importers' attempt to enter or withdraw before 12:54 p. m., on September 12, notwithstanding that the lots were actually released after the effective time of the duty increase. The Department of Agriculture was informally advised, before it decided upon the 12:54 p. m., ruling, that this result would follow. W. Johnson to be are theBalkan BenThe Mellett To to would Lowell across Deal digging the Hollywood All to meetinghad Feud this for with Milofinu circle cording ury surprised if the longneighborly distress something invited that be is doing & loner of acceptedare desperatelythe Henry Wallace acting Santa Claus Cotton around plan tensibly there is little Secretly Romania And they dumped soBest diplomatic information at exactly 12:54 that the tariff If you don't see much ofmotivated primarily by the than Finland And while lost before 12:54 noon thatseemed Russian labor peace Bothimportant (Trade Mark Registered)SUERE dealers Government Murphy these days thely Romania the old tariff rate ofmeant loss unition in the Balkan SUGAR in NewBy DREW PEARSON and ROBERT S. ALLEN Jand long way off Chaffsudden attack on Finland was $1.50 $2,000,000from Moscow indicates that the was increased from 90 cents to tion between them to to help Washington Daily cents the Pinland that to Merry-Go-Round Ranes By Coast from other Reason the Swedes One in the Soviet alegrams radio Finnish Notes would country like Finland ly. be figured that it was partment Henry gram fear of Germany ES-HERALD-Around the Clock- WEDNESDAY. DECEMBER 6 1939 Robert tariff. 28 e (T.D. 49962) Cuban sugar-Change in rates of duty Rates of duty increased on sugar and other products covered by item 501; schedule II of the Cuban Trade Agreement-TD 47232 TREASURY DEPARTMENT, OFFICE OF THE COMMISSIONER OF CUSTOMS, Washington, D. C., September 12, 1939. To Collectors of Customs and Others Concerned: There are published below for your information a Public Notice of the Secretary of Agriculture, issued on September 11, 1939, and a telegram pursuant thereto issued on the same date and addressed to collectors of customs, regarding a change in the rates of duty on sugar nd other products covered by item 501, schedule II of the Trade Agreement with Cuba. BASIL HARRIS, Commissioner of Customs. OTICE OF SECRETARY OF AGRICULTURE PURSUANT TO THE TRADE AGREEMENT WITH CUBA WHEREAS the note to paragraph 501 of schedule II of the trade agreement beween the United States of America and Cuba, signed August 24, 1934, provides as allows: and when the quota provisions of the Act "to include sugar beets and sugarthe as basic agricultural commodities under the Agricultural Adjustment Act, nd for other purposes," approved May 9. 1934, become inoperative, and the ecretary of Agriculture gives public notice that no equivalent limitation on the aportation of any article subject to that Act has been imposed, the duty on any uch article imported into the United States of America from the Republic of luba shall be determined as though such article were not enumerated and detribed in this schedule; provided, however, that such rate of duty shall not reced that imposed on the day of the signature of this Agreement. d WHEREAS the President of the United States of America, acting pursuant to ection 509 of the Sugar Act of 1937 (which continued, in substance, the quota rovisions of the act "to include sugar beets and sugarcane as basic agricultural commodities under the Agricultural Adjustment Act, and for other purposes," pproved May 9, 1934), has suspended the operation of the quota provisions of that et: Now, THEREFORE, I, H. A. WALLACE, Secretary of Agriculture, do hereby give ublie notice that no equivalent limitation on the importation of any article subject the Sugar Act of 1937 has been imposed for the period of suspension of the quota rovisions of that act. DONE at Washington D. C., this 11th day of September, 1939. Witness_my and and the seal of the Department of Agriculture. [SEAL] H. A. WALLACE, Secretary of Agriculture. Effective 11:00 p. m., September 11, 1939. 29 CUSTOMS CUSTOMS 5 4 TELEGRAM (T.D.49976) VIA GOVERNMENT FACILITIES Travel September 11, 1939 Collectors of Customs: (See attached list.) Delegation onautbority to direct travel by use of extra-fare trains. C.T.D. 49885 amended) Due to Public Notice by Secretary Agriculture accordance item 501, schedule II, Cuban Trade Agreement, T. D. 47232, sugars and other products COVE TREASURY DEPARTMENT. thereby and entered for consumption or withdrawn from warehouse for sumption on or after 11 P M Eastern Standard Time, September 11, less subject to duty at twenty per centum less than rates promulgated in T. D. 4704 Stop. No change in import compensating tax. JOHNSON OFFICE OF THE COMMISSIONER of CUSTOMS, Washington, D. C. To Collectors of Customs nd Others Concerned Reference is made to arreamendment of section 15 of the Govern- ment Travel Regulations authorizing the use of extra-fare trains under certain conditions. (T. D. 49963) T. D. 49885 is hereby amende adding at the end of paragraph 2 (a) thereof: Port of entry Extension Nimits of the customs port of entry of Baltimore, Md., in custom collection district 13 (Md.), to include Sparrows Point, Md. TREASURY DEPARTMENT, (III) Specific written travel orders for travel on extra-fare trains, or approval of such travel, where the cost thereof, taking in consideration salary and subsistence savings, is not in xcess of travel by regular fare trains, or in emergencies where necessary for saving life or property. BASIL HARRIS, Commissioner of Customs. OFFICE OF THE COMMISSIONER OF CUSTOMS, Washington, D C., September 15, 1939 To Collectors of Customs nd Others Concerned: There is published below for the information of customs offic. Approved September 30, 1939: HERBERT E. GASTON, Acting Secretary of the Treasury. and others concerned the follow ting Executive Order, dated September 6, 1939, extending the limits of the customs port of entry of Baltim Md., in customs collection district 18 (Md.) to include Sparrows Pou Md., effective thirty days from the date of the order. (T. D. 49977) Cuban sugar-Application of duty rates BASIL HARRIS, Commissioner of Customs (192-13.1) Dutiable status of Cuban sugar entered or withdrawn for consumption before 12:54 p. m., Eastern Standard Time, September 12, 1939 TREASURY DEPARTMENT, EXECUTIVE ORDER OFFICE OF THE COMMISSIONER OF CUSTOMS, Washington, D. C., October 5, 1939. By virtue of and pursuant to the authority vested in me by section 1 of Act of August 1, 1914, 38 Stat. 609, 623 (U. 8. C., title 19, sec. e). it is order that limits of the customs port of entry of Baltimore, Maryland in Custa To Collectors of Customs and Others Concerned: Collection District No. 13 (Maryland), be, and they are hereby, extended There is published below for your information a telegram addressed to collectors of customs regarding the rates of duty applying to Cuban sugars and other products covered by item 501, schedule 2, of the Trade Agreement with Cuba, entered or withdrawn for consumption before 12:54 P. M., Eastern Standard Time, September 12, 1939. Note in this connection T. D. 49962. include Sparrows Point, Maryland This order shall become effective thirty days from the date hereof. THE WHITE HOUSE, September 6, 1939. FRANKLIN D. ROOSEVELT (343.1) BASIL HARRIS, Commissioner of Customs. CUSTOMS 6 TELEGRAM OCTOBER 5, 1939 VIA GOVERNMENT FACILITIES Collectors of Customs: (See attached list) to recent advice Secretary Agriculture concerning time of issuance publi notice Due under note to item 501, schedule II. Cuban Trade Agreement T. D. 47232 and other products covered thereby for which a warehouse withdrawal ha been sugars filed and a permit of delivery issued before 12:54 P. M. Eastern Standard Time September 12. 1939. or for which a consumption entry has been accepted prior that time are subject duty at rates listed opposite item 501, Cuban Trade Agreement Bureau telegram September 11 modified accordingly. BASIL HARRIS (T. D. 49978) Trade agreement notice Public notice of intention to negotiate a trade agreement with the Government of Chile TREASURY DEPARTMENT, OFFICE OF THE COMMISSIONER OF CUSTOMS, Washington, D. C., October 7, 1939. To Whom It May Concern: Pursuant to section of an act of Congress approved June 12, 1934, entitled "An Act to Amend the Tariff Act of 1930," as extended by Public Resolution 10, approved March 1, 1937, and to Executive Order 6750, of June 27, 193A the Secretary of State has issued the notice published below of an intention to negotiate a foreign-trade agreement with the Government of Chile. Also published below is a relevant letter of the Committee for Reciprocity Information (012.) FRANK Dow, Acting Commissioner of Customs. PUBLIC NOTICE Trade/agreement negotiations with Chile Pursuant to section of an act of Congress approved June 12, 1934, entitled "An Act to Amend the Tariff Act of 1930, as extended by Public Resolution No 10. approved Maron 1. 1937, and to Executive Order No. 6750, of June 27, 1934 Thereby give notice of intention to negotiate a trade agreement with the Government of Chile All presentations of information and views in writing and applications for supment plementatural presentation of views with respect to the negotiation of such agree- enter should be submitted to the Committee for Reciprocity Information in acingthe with the announcement of this date issued by that Committee concernpublic hearings set for manner and dates for the submission of briefs and applications, and the time CORDELL HULL, Secretary of State. 30 OFFICE OF THE COMMISSIONER OF CUSTOMS OFFICE MEMORANDUM NO. 147 July 25, 1932. Office Memorandum No. 121, dated October 24, 1931, respecting the preparation and transmission of telegraphic and cable messages is hereby amended as follows: All telegraphic messages and radiograms sent to Customs officers and others on official business and primarily in the interest of the service, the cost of which is to be borne by the Government, will hereafter be sent to the Treasury Telegraph Office, main Treasury Building, for transmission via Government communication lines. The words "VIA GOVERNMENT FACILITIES" shall appear at the top of all such messages. The practice of preparing an extra carbon copy of a telegraphic message for signature by the Assistant Secretary, the Under Secretary or the Secretary, is extended to include all messages transmitted via Government facil- ities. (The extra copy in each case is for the Treasury Telegraph Office.) All messages sent collect and in the interest of private individuals should be transmitted over the regular commercial lines as heretofore. The Government maintains facilities for the transmission of such telegraphic and cable messages, without cost to the Bureau, to the following-named points: Anniston California All points Montgomery Birmingham Colorado Alabama Denver Alaska All points Arizona Douglas Nogales Tucson Yuma Connecticut New London Florida Key West Pensacola Georgia Atlanta Columbus Savannah Illinois Chicago Great Lakes Indiana Indianapolis Iowa Des Moines 31 -2- Kansas Fort Leavenworth Junction City Kentucky Louisville Newport Louisiana Missouri Kansas City St. Louis Nebraska Omaha New Hampshire Portsmouth Portland Maryland Aberdeen Annapolis Baltimore Cumberland Massachusetts Boston New Jersey Lakehurst Oceanport New York Governors Island New York City West Point Wrightstown North Carolina Fayetteville Fort Bragg Michigan Detroit Sault Ste. Marie Minnesota St. Paul Philadelphia Rhode Island Newport South Carolina Charleston Tennessee New Orleans Maine Pennsylvania Ohio Columbus Dayton Oklahoma Muskogee Chattanooga Texas Brownsville Dallas E1 Paso Galveston San Antonio Utah Salt Lake City Vermont Burlington Virginia Norfolk Washington Puget Sound Seattle ALL POINTS IN - China, Japan, Panama Canal Zone, Puerto Rico, Cuba, Guam, Philippine Islands, Virgin Islands, Territory of Hawaii. A telegraphic message routed "VIA GOVERNMENT FACILITIES", ad- dressed to a place not enumerated in the foregoing list, is sent over the Government wire to the nearest point and there turned over to a commercial company. This results in a saving of fifty per cent or more on the price of each message. All messages shall be delivered to the Chief, Division of Mails and Files, for dispatch. F X A EBLE Commi ssioner. File 12/6/39. These were given to the President today. 32 Extra Copa P Y Y December 4. 1939. Mr. Hanee Mr. Blough Subject: Possible method of raising $500,000,000 additional revenue. In this optional method it is proposed to raise approximately $300,000,000 additional revenue from increases in the personal income surtaxes, and $200,000,000 from increases in the estate and gift taxes. The suggested rate schedules are attached. Formal estimates have not yet been made but a comparison with other rate schedules indicates that those schedules would raise approximately the indicated amounts. I. Personal Income Surtaxes The surtaxes at selected levels of income after deduction of exemption are shown in the following tablet Total surtax Surtax not income (In thousands of dollars) Present rates - 2 Increase Suggested rates $ $ 20 $ 20 40 100 60 10 300 480 180 20 1,260 7.700 30,000 286,000 641,000 2,500 16,120 43,420 299,420 654,420 1,240 8,420 13,420 13,420 13,420 5 50 100 500 1,000 It will be noticed that this Fate schedule does not provide for any decreases in the higher surtax brackets. It does not increase rates on brackets of income above $100,000. 33 II. State and an Taxes The estate taxes under the present rates and under the suggested rate schedule are shown in the following tables specific exemption Total estate tax $ Net estate after : (In thousands of dollars) Present rates Suggested rates Increase 20 40 100 200 500 1,000 10,000 $ 600 2,000 9.600 26.600 89.600 222.600 4,962,600 $ 1,800 5,400 21,000 54.500 162.000 417,000 5,547,000 $ 1,200 3,400 11,400 27,900 92,400 194,400 584,400 There have been no increases of the present scale in the estate bradate above $6,000,000. It is assused that the gift tax rates will be increased to three fourth the proposed estate tax rates. III. Note Regarding Other Incoue and Ratate Tax Observa For the sake of simplicity, the optional plan is limited to rate increases. The bulk of the additional revenue would probably have to come from such increases under any plan. Certain changes in exemptions, deductions, etc. which would increase the tax base. would no doubt be considered and to the extent adopted. would make possible smaller rate increases than those shown. IV. Note Regarding Expose-Profits Tax IS as is desired to impose an excess-profite tax as part of the revenue plan. the increases in surtax rates and estate and gift tax rates could be kept smaller than those shown in the suggested schedules. A considerable amount of additional work would be necessary to develop a formula for an extens-prefits tax sufficiently complete to make practicable as estimate of revenue yield. 231fub 12-4-39 34 Retate and gift Sex rate exhodule designed to value approximately $200 million additional revenue V . 5 10 - 20 30 40 60 - Fate percent # Total tax 8 5 a 0- # Bradbet 8 . (in thousands of dollars) B $ # fax bases Net estate after specific essention 4 10 8 200 s 600 20 12 30 40 16 1,800 3,400 5.400 10,000 15.200 21.000 37.000 54.500 73.900 94,000 182.000 417.000 20 60 23 so 26 so - 100 100 - 150 150 - 200 200 - 250 250 - 300 300 - 500 500 - 1,000 1,000 - 2,000 2,000 - 3.000 3.000 - 4.000 4,000 - 5,000 5,000 - 6,000 6,000 - 7.000 7.000 - 8,000 8,000 - 9.000 9.000 . 10,000 10.000 - 20,000 20,000 - 50.000 50.000. - 29 32 35 38 Mi * 47 69 907,000 1,417,000 1,947,000 2,497,000 3,067,000 3,657,000 4,267.000 4,097,000 5,547,000 12.247.000 32,947,000 70 - by 51 53 55 57 2 61 63 5 67 1 Treasury Department. Divicion of Tax Research December 4. 1939 V It is assumed that present an tax rates will be increased to three fourth the proposed estate tax rates. (This schedule to accompany - of December 4. 1939.) ISeab 12/4/39 35 Surtax schedule for intividual income tax designed to raise approximately $300 million additional income 8 6 percent Total surtax 8 8 to 8 2- 8 of dollars) Rate 8 not income (in thousands a I Partes 20 2 1 is 2 60 4 140 6 $ 8 7 10 10 260 480 12 13 T40 14 16 16 20 18 24 18m 20 26 20. 22 32 23- 24 36 26 40 1,060 1,460 1,940 2.500 3,140 3.860 4,660 6,420 11,120 16,120 21,320 29,420 43,420 72,420 102,420 133,420 165,420 231,420 299,420 474,420 654,420 & 10. 12- 14 16 24 26 44 30m R$ 47 40m 50 50 50m 60 52 75 54 60m 75- 100 56 100m 150 58 150 200 200m 250 250m 300 300m 400 400- 500 500- 750 60 62 64 66 68 to 750-1,000 1,000-2,000 2,000-5,000 73 5,000, up 75 72 74 Treasury Department, Division of Tax Research 1,384,420 3,604,420 December 4. 1939 (This schedule to accompany monorantus of December 4. 1939.) LStab 12/4/39 36 Comparison of present and suggested rates of individual income tax SINGLE PERSON NO DEPENDENTS : 1/ Present Suggested Effective rates 8 exemption : Net income Maximum bracket rates Before personals (normal and surtax) Present Suggested 1.66 2.1% s 3.6 4.6 10 14 5.6 7.0 20,000 17 32 9.2 14.6 30,000 23 48 13.0 23.6 50,000 31 54 18.7 35.0 100,000 59 60 33.4 46.5 250,000 66 66 51.7 57.1 500,000 72 72 61.0 63.7 1,000,000 76 76 68.0 69.4 2,000 4% 5% 6,000 s 10,000 Treasury Department, Division of Tax Research December 4. 1939. Masters earned income assumed. LSIIF 12-4-39 37 Comparison of present and suggested rates of individual income tax MARRIED PERSON TWO DEPENDENTS Box income before bradbet ratees personal exemption a(normal and surtex) 8 Effective rates and credit for # depondants V $ Present Suggested 2,000 - - 6,000 4% 68 Present - Suggested - 1.4% 2.0% 11 3.4 4.2 10,000 9 20,000 15 28 7.3 11.2 30,000 23 4g 11.3 19.9 50,000 32 * 17.2 32.6 100,000 59 60 32.0 45.4 250,000 66 66 51.1 56.5 500,000 72 72 60.7 63.4 1,000,000 76 T6 67.8 69.2 Department, Division of Tax Receares 4. 1939. Maximum earned income assued. LStar 12/4/39 38 Comparison of present and suggested rates of estate tax Maximum bracket rates 100,000 200,000 300,000 500,000 1,000,000 3,000,000 5,000,000 10,000,000 50,000,000 # $ 50,000 Effective rates Present I Suggested Present : before exemption : 1 Net estate 2% 8% 12 23 17 35 20 41 23 4th 29 47 41 51 As SEAS 69 4% 4.2 9.9 12.9 16.1 21.1 31.2 38.0 49.4 64.7 Suggested 1.2% 10.0 20.3 25.9 32.9 39.8 46.6 49.5 55.2 65.8 Treasury Department, Division of Tax Research December 4. 1939. THIS 39 Present individual surtax rate schedule under the Revenue Ast of 1938 Amount of eartax not income (Thousands of dollars) 0- h6- 4 - 6 4 s - 10 8 10 - 12 12 - 14 14 - 16 16 18 20 22 26 - Rate percent 7 8 780 9 18 11 20 13 15 17 19 32 - # 38 38 - 44 24 50 27 1,000 1,260 1,560 2,240 3.380 4,640 6,080 7.700 9.560 11.660 14,000 16.580 19,400 24,500 30,000 59,000 89,000 120,000 152,000 218,000 286,000 461,000 21 32 Rx36: 68 35 29 74 MS38 to - so so - 90 90 - 100 100 - 150 190 - 200 200 - 250 230 - 300 300 - 400 400 - 500 500 - 750 51 55 62 64 66 68 70 750 - 1,000 1,000 - 2,000 2,000 - 5,000 73 5.000 up 75 80 180 300 440 600 5 22 68 - $ no 26 44 50 56 62 - Total series comistive 60.000 72 1,372,000 3,591,000 74 Treasury Department, Division of Tax Research. December 4. 1939. LSTand 12/4/39 40 Retate Tax Rate Schedule (Revenue Act of 1932 as emended in 1935) (Dollars in thousands) : : Bracket rate : Net estate Cumulative tax on higher amount 1 $ 0 10 10 20 4 20 30 6 30 40 8 40 50 10 50 TO 12 TO 100 14 2% 100 - 200 17 400 20 600 - 800 26 400 600 800 - 1,000 1,000 - 1.500 1,500 - 2,000 2,000 - 2,500 2,500 - 3,000 3,000 - 3.500 3.500 - 4,000 4,000 - 4.500 4,500 - 5.000 5,000 - 6.000 6,000 - 7.000 7.000 - 8,000 8,000 - 9.000 9.000 - 10,000 10,000 - 20.000 20,000 - 50,000 50,000 - 23 29 32 35 38 $ .2 .6 1.2 2.0 3.0 5.4 9.6 26.6 66.6 112.6 164.6 222.6 382.6 557.6 747.6 41 952.6 44 1,172.6 1,407.6 1,657.6 1,922.6 2,482.6 3,072.6 3,682.6 4,312.6 4,962.6 11,662.6 32,362.6 47 50 53 56 59 61 63 65 67 69 TO Treasury Department. Division of Tax Research. December 4. 1939. LS:bh Estra C 41 December 1, 1939. COPY Mr. Names Mr. Blough The memoranda of Mr. Randolph Paul which were submitted to the Treasury Department contain 31 points involving possible tax changes whichwould increase revenues, 15 points involving changes which would document revenue, and a plan for an excess profits tax. The following suggestions appearing in the memoranda have not been under active consideration by the Treasury Department during the last eighteen months: I. The problems involved in the following recommendations appear not to have been considered at least in recent years: 1. Clarify the law to make taxable any excess of the principal sum of insurance installments above the principal sun of the life insurance policy at the time of the insured's death. 2. Authorise the courts and the Board of Tax Appeals to relax the rule of rea indicata in meritorious tax cases. II. With respect to each of the following items. the problem has been actively considered in recent months but the solution proposed by Mr. Paul has not been considered: 1. Impose income taxes on stock dividends heretofore considered to be nontaxable. 2. Establish a conclusive presumption that gifts made after the decedent reaches sixty years of age are made in contemplation of death. 3. (a) Eliminate the tax on intercorporate dividends where stock ownership gives no control. (b) Stiffen the tax on intercorporate dividends in cases of inexcusably complicated corporate structures. 4. No plan for an excess profits tax has been prepared in such detail as that presented by Mr. Paul, although the general problem has been considered. 42 -2III. The following problems have not been actively considered during the last sichteen months but were actively considered in 1937. 1938. or both years. 1. Eliminate the deduction for nonbusiness casualty losses or restrict them to a fixed percentage of the taxpayer's net income, or treat them as capital losses. 2. Limit the allowance for the deduction of interest on noninterest borrowings to $500. 3. Limit the allowance for the deduction of nonbusiness bad debts to $1,000 in the case of each debtor. 4. Limit the allowance for the deduction of taxes on nonbusiness property to taxes on small homes. 5. Allow a deduction of perhaps $100 a year for medical or dental expenses. 6. Limit the deduction for payments by the employees to pension trusts to perhaps $5,000 for any one employee. 7. Limit exempt building and loan associations to those of a genuine cooperative character primarily related to financing home ownership. 8. Tax nonresident aliens and foreign corporations upon income from sources within the United States in such a way that there is no discrimination in their favor. 9. Provide that all tax suits and proceedings shall be brought against the United States, eliminating the highly artificial distinction between suits involving the United States, the Commissioner and the Collector. Bifus 12-1-39 COPY Cachey INCOMING CABLEGRAM London, Dec. 6, 1939. 43 M Federal Reserve Bank of New York New York No. 1180/39 FOR KNOKE ONE Your No. 904/39 Please open another Special Account for us on your books designated Bank of England Account A and transfer $5,000,000 to this account by the debit of G Account We have authorized the following to sign cheques on our TWO behalf drawn on such Special Account A: Arthur B Purvis Colonel JHN Greenly Sir James Rae J.A.C. Osborne any two to sign. Such cheques should be signed "Bank of England ". . Account A by . Please have cheques in this form imprinted and delivered to J.A.C. Osborne THREE You already. have specimen signature of J.A.C. Osborne and he will furnish to you specimen signatures of the other persons listed in paragraph two. FOUR FIVE We authorize you to pay and charge to such Account A any cheques drawn on you signed as described in paragraph two. May we take it you will complete outstanding instructions or ao you prefer all future payments should be made through new account. Unice or and Technical Assistant to to - eeer 8.030 THENTHANTO YAUGA3HT Bolton Bank of England. THE WHITE HOUSE 44 WASHINGTON December 6, 1939. My dear Mr. Secretary: I have created an informal committee to represent the American Government in its contacts with the interested foreign governments in all matters relating to the purchase of war materials in the United States, consisting of the following: (a) The Director of Procurement, Treasury Department; (b) The Quartermaster General of the Army; (c) The Paymaster General of the Navy. This committee will serve as the exclusive liaison with reference to procurement matters between this Government and the interested foreign governments. It will hold sessions at least once weekly, and at such more frequent intervals as may be necessary. At these sessions. it will receive an accredited representative of the embassy of any interested foreign government for the purpose of giving consideration to the requirements of such government for supplies, equipment, and materials, in relation to: (a) availability of the desired articles, (b) priorities, and (c) prices. The committee will submit a complete report of its proceedings, acts and reconmendations, at least weakly. to the President through Mr. McReynolds. The Secretary of State has informed the British and French Ambassadors of this arrangement. Will you please inform the Director of Procurement of his designation as a member of this committee and ask him to serve as its chairman. Sincerely, The Honorable, timel Monsmet The Secretary of Treasury. THE WHITE HOUSE WASHINGTON 45 December 6, 1939. My dear Mr. Secretary: I have created an informal committee to represent the American Government in its contacts with the interested foreign governments in all matters relating to the purchase of war materials in the United States, consisting of the following: (a) The Director of Procurement, Treasury Department; (b) The Quartermaster General of the Army; (c) The Paymaster General of the Havy. This committee will serve as the exclusive liaison with reference to procurement matters between this Government and the interested foreign governments. It will hold sessions at least once weekly, and at such more frequent intervals as may be necessary. At these sessions, it will receive an accredited representative of the embassy of any interested foreign government for the purpose of giving consideration to the requirements of such government for supplies, equipment, and materials, in relation to: (a) availability of the desired articles, (b) priorities, and (c) prices. The committee will submit a complete report of its proceedings, acts and recommendations, at least weekly. to the President through Mr. McReynolds. The Secretary of State has informed the British and French Ambassadors of this arrangement. Will you please inform the Director of Procurement of his designation as a member of this committee and ask him to serve as its chairman. Sincerely, The Honorable, timeline Monseen The Secretary of Treasury. STRICTLY CONFIDENTIAL 46 June 4. 1940 Customs Dereme (station W.S.C.) a. Morle Cochren. Technical Assistant to the Secretary m The attached draft of a letter to the Secretary of State reached me yesterlay. Since I have constant contact with the Department of State, and was formerly Assistant Chief of the division is that Department which distributes censular reports, I took the liberty of telephoning the State Department and obtained the leas of the report in question, which is attached herete. This original com should be returned to me for further transmission back to the Department of State. Incidentally, a copy of this report to also on file is Dr. Harry White's office in the Treasury Department. If the Suress of Customer may desire, I shall be very gial to be of any possible assistance is the future is obtaining reports informally for them from the Department of State. pm.p. No:da:6.4.40 see auto K227 THE WHITE HOUSE WASHINGTON December 6, 1939. My dear Mr. Secretary: I have created an informal committee to represent the American Government in its contacts with the interested foreign governments in all matters relating to the purchase of war materials in the United States, consisting of the following: (a) The Director of Procurement, Treasury Department; (b) The Quartermaster General of the Army; (c) The Paymaster General of the Navy. This committee will serve as the exclusive liaison with reference to procurement matters between this Government and the interested foreign governments. It will hold sessions at least once weekly, and at such more frequent intervals as may be necessary. At these sessions, it will receive an accredited representative of the embassy of any interested foreign government for the purpose of giving consideration to the requirements of such government for supplies, equipment, and materials, in relation to: (a) availability of the desired articles, (b) priorities, and (c) prices. The committee will submit a complete report of its proceedings, acts and recommendations, at least weekly, to the President through Mr. McReynolds. The Secretary of State has informed the British and French Ambassadors of this arrangement. will you please inform the Director of Procurement of his designation as a member of this committee and ask him to serve as its chairman. Sincerely, The Honorable, timell The Secretary of Treasury. 47 THE WHITE HOUSE WASHINGTON December 6, 1939. My dear Mr. Secretary: I have created an informal committee to represent the American Government in its contacts with the interested foreign governments in all matters relating to the purchase of war materials in the United States, consisting of the following: (a) The Director of Procurement. Treasury Department; (b) The Quartermaster General of the Army; (c) The Paymaster General of the Navy. This committee will serve as the exclusive liaison with reference to procurement matters between this Government and the interested foreign governments. It will hold sessions at least once weekly, and at such more frequent intervals as may be necessary. At these sessions, it will receive an accredited representative of the embassy of any interested foreign government for the purpose of giving consideration to the requirements of such government for supplies. equipment, and materials, in relation to: (a) availability of the desired articles, (b) priorities, and (c) prices. The committee will submit a complete report of its proceedings, acts and recommendations, at least weekly. to the President through Mr. McReynolds. The Secretary of State has informed the British and French Ambassadors of this arrangement. will you please inform the Director of Procurement of his designation as a member of this committee and ask him to serve as its chairman. Sincerely, The Honorable, The Secretary of Treasury. December 6. 1930. Dear Mr. Tyler: I appreciated very such having your telegram of December 3rd, and have noted the contents with interest. Thank you for this dispatch. I shall look forward to hearing from you after you make the trip you are planning. Sincerely, (Signed) H. Morementhan, Jr. Mr. Royal tyler, c/o League of Nations, Geneva, Switzerland. GEF/dbs 49 50 PARAPHRASE OF TELEGRAM RECEIVED FROM: American Consulate General, Geneva NO.: 300 DATE: December 3, 1939 FOR MORGENTHAU FROM ROYAL TYLER. "I have returned to Geneva. I met the Director General of the National Bank of Hungary while I was in London. He stated that whatever may happen Hungary will go on transferring service of League loan in accordance with the agreement of 1937 and it will also continue to make payments on corporate relief credits as offered by that country. The foreign exchange losses of the National Bank during 1939 amount to approximately $18,000,000, leaving about $35,000,000 of gold and utilizable exchange. Barring accidents, it is Hungary's intention to keep on making payments to foreign creditors with the exception of the League loan and corporate relief credits as offered for a period of three years beginning in the summer of 1937. However, Hungary is afraid that if the war continues, she may not be able, after the summer of 1940, to renew on the same scale. At the present time Hungary's difficulties are securing access to markets for her exports 80 that she can obtain foreign exchange which she can use to purchase raw materials and importing the raw materials through the blockade 51 -2ade block established by the British. It is Germany's desire to reduce Hungary to the status ofHungary an agrarian colony. from For that reason, in exchange for food, Germany is trading no raw materials except coal. Therefore Hungary is assert- ing that her industry is important to her national independence and she is appealing to Great Britain to permit imports into Hungary to go through the blockade on the strength of certificates stating that they are for Hungarian consumption. However, it is said by the British that they have proof that imports which Hungarian firms have certified as being for Hungarian consumption are being slipped to Germany by those firms. Some of these shipments have been blocked by the British. It seems possible that a deal may be arranged whereby an annual amount of each key commodity will be agreed upon, with the British permitting imports up to the amounts agreed upon and no further questions asked. But the British are refusing to accept certificates even though they contain official endorsements to the effect that a check cannot be made by officials. I am planning to be in Budapest from December 8 to December 14. From there I will go to Italy. I shall report to you upon my return." TITTMANN EA:EB BILL21 52 NAVY DEPARTMENT OFFICE OF THE CHIEF OF NAVAL OPERATIONS WASHINGTON Op-38-3-10 6 December 1939 Memorandum relative to assignment of PBY airplanes to Coast Guard: Reference: (a) Secy of Treasury Memo. of 30 November 1939, with President's endorsement. As reference (a) was not quite understood by the Navy Department, clarification was requested by telephone from Admiral Waesche, as a result of which it 1 appears that Mr. Morgenthau is under some misapprehension as to the nature of the operations undertaken by the Coast Guard in the North Atlantic in connection with the neutrality patrol. By agreement between Admiral Stark and Admiral Waesche, the Coast Guard took over the Grand Banks patrol, a rectangular area defined by the following points: Lat. 43-15 N - Long. 64-30 W; Lat. 43-15 N Long. 55-00 W; Lat. 40-50 N - Long. 64-30 W; Lat. 40-50 N Long. 55-00 W, which area was to be covered by surface craft only. In addition, the Coast Guard agreed to cover by both surface and aircraft, as necessary, a small inshore area along the coast of Maine and a somewhat larger area included between the shore line and lines joining the following points: Block Island, Lat. 38-10 N - Long. 71-15 W, and Cape May, N. J. The Navy is re-assuming the task of patrolling this last area, to seaward of the 25-fathom surve. 2. The off-shore aerial patrol is being carried on with all the patrol aircraft which can be made available without weakening below a certain point the patrol-plane squadrons on the West Coast and at Panama, although some aircraft have had to be taken from both these locations to augment our Atlantic squadrons for this purpose. 53 Op-38-3-10 It should be noted that of the type of plane requested (PBY-4's) there are but three in continental U. S., one squadron being in the Philippines and another in Hawaii. of these three planes, one is 3. at the Consolidated Company as the "Dog Ship" for new production which it is hoped will soon be under way, another is assigned a special and important project, and the third is being operated in a West Coast squadron as a replacement. Other planes of the PBY type could be furnished the Coast Guard, but only by either reducing West Coast squadrons below what is considered the safety point under present conditions, or diluting the present aerial patrol to a point where it would be generally ineffective. Several weeks ago Admiral Waesche contacted the Chief of Bureau of Aeronautics with regard to the possibility of obtaining some planes from the PBY-5 production when it eventuates and was assured that this was possible. One such plane, for which the Coast Guard has funds, has been so earmarked with the possibility of seventeen additional planes of this contract, dependent upon Coast Guard funds being available therefor. Production, however, is not expected prior to May 1940. Copy to: Admiral Waesche 0-0-P-Y TREASURY DEPARTMENT 54 CONFIDENTIAL INTER OFFICE COMMUNICATION DATE December 6, 1939 TO Secretary Morgenthau FROM Mr. Haas ABA Subject: Setting for the Refunding of the March Notes SUMMARY (1) Treasury obligations were strong last month (Chart I). A reaction started last week, however, as the Finnish crisis developed. Long-term Treasurys are far above their crisis lows but in the upswing have done less well than have other high-grade bonds (Chart II). (2) A large proportion of the March notes are probably held by commercial banks. The Federal Reserve banks hold $162 millions of these notes in their Open Market Account. A larger than usual proportion of the maturing notes may be held by weal thy individuals who obtained them in the first instance for First Liberty 3-1/2's and want only fully tax-exempt securities. Neither the banks nor these individuals are likely to desire a long bond in exchange. (3) Data on the maturity distribution of the Government portfolio of the major classes of holders indicate that banks tend to concentrate their holdings in the shorter maturities. Insurance companies, on the other hand, invest a large proportion of their portfolio in longer bonds (Chart III). (4) Bids for the rights on the March notes are at a high level when compared with bids for the rights on previous note maturities (Chart IV). These high bids would seem to indicate that the market anticipates a liberal pricing on the new issue and, accordingly, the inclusion in the offering of a long or medium-long bond, which would be likely to carry a higher premium than a note. (5) The size of the March note issue focuses attention on the desirability of issues having optional call periods. There are already appreciable amounts of fixed maturity obligations coming due in every year through 1948, except 1946 (Chart V). (6) British and French Government securities remained practically unchanged last week. Finnish bonds dropped very sharply and other Scandinavian issues somewhat less sharply. 55 Secretary Morgenthau - 2 I. Condition of the Market The refunding of the March 1940 notes -- the largest refunding operation to face the Treasury since the Liberty bond refinancings -- will come, if carried out in the next week or so, at a time when the market for new capital issues has been thoroughly awakened from the state of virtual inactivity that existed during the outbreak-of-war crisis. This awakening has not been limited to offerings of Government securities alone, but has extended itself successfully to the field of municipal and corporate obligations. During the past few weeks, for example, relatively large amounts of long-term bonds have been floated by the City of New York and the Public Service Company of Colorado. During the past seven weeks, the Federal Government and its agencies have floated $1.5 billions of notes and bonds in the market. Each new offering has gone well in the market, and, with the exception of the March 1944 note, each new issue is selling in line with other securities of comparable term and character. The March 1944 note, as has been pointed out previously, is still somewhat out of line, selling at the close on Tuesday, December 5, to yield one basis point more than the note maturing three months later, instead of a number of basis points less, as might ordinarily have been expected. Treasury obligations, as a class, have shown considerable strength in the market during the past month. and, at the close on Tuesday, December 5, long-term bonds were about two points above the prices obtaining a month earlier (Chart I). The reaction which started during the middle of last week at the time of the development of the Finnish crisis, however, caused long bonds to lose about a point. It is important to note that long-term Treasurys have done less well in the upswing from the September lows than have either high-grade municipal or corporate issues. This relatively poor performance is brought out in Chart II, which shows the downward price swing (upward yield movement) experienced by each type of issue between its summer high and its September low, and the upward price swing from that low to yesterday's close (December 5). Treasury bonds, it is noted from the chart, started to decline earlier than either municipal or corporate issues. Their decline covered a somewhat longer period, and amounted to a little less than the decline of the other issues. This was probably due to the support given the Government bond market early in September by the Federal Reserve banks and the Treasury. On the upswing, Treasurys started later, and, when 56 Secretary Morgenthau - 3 compared wi th the other issues, have recovered a smaller pro- portion of the ground lost. Municipal bond prices, for ex- ample, are not far from their summer highs (reached June 24), and corporate bonds have recovered about three-quarters of their decline. Long-term Treasurys, on the other hand, have recovered only a little more than half of the decline experienced between June 5, the summer high, and September 25, the crisis low. II. Who Holds the March Notes? In view of the large amount of the March note maturity, it would be particularly desirable to know at this time who holds the March notes. There is a very limited amount of information with respect to the actual amounts held by the various classes of security holders, however. The available statistical data do not break down holdings by issues, and no system of direct inquiry to obtain this information 18 available at the present time. The figures that we have been able to obtain from various sources and for various dates are shown in the following table: Federal Reserve Open Market Account 3 national banks in New York City 10 national banks outside of New York City First National of Baltimore. Total, 14 large national Date 11/29/39 Total accounted for Not accounted for Total outstanding of total 162 11.8 70 5.1 48 3.5 53 3.8 171 12.4 Various dates in 1939 Various dates in 1939 10/28/39 banks 800 insurance companies 200 savings banks : (millions of dollars) : Holder :Percent : Amount 12/31/38 12/31/38 59 12 4.3 .8 974 29.3 70.7 1,378 100.0 404 Note: National bank figures from Comptroller of the Currency. Insurance company and savings bank figures from Poor's Manual. Secretary Morgenthau - 4 57 In addition to the above figures, we have some informa- tion provided by Mr. Rouse of the Federal Reserve Bank of New York. He estimates that from $450 millions to $750 millions of the maturing notes are held in his Federal Reserve district with his "best guess" at $650 millions. This amount includes the $162 millions held by the Federal Reserve Open Market Account and probably about $100 millions held by other holders included in the above table. Inadequate as they are, the foregoing figures indicate that commercial banks as a class are probably the most important holders of maturing notes. They indicate also that New York City banks probably hold a significant proportion of the total holdings of all banks. There is another factor besides bank holdings, however, which may be quite important at this financing. About 55 percent of the March notes was issued in 1935 to refund the 3-1/2 percent First Liberty bonds. The income from these bonds was exempt from Federal surtaxes, and, accordingly, many of these bonds were held by wealthy individuals, who wanted to take advantage of their fully tax-exempt status. It is quite possible, therefore, that on the occasion of the coming refunding, a much larger than usual proportion of the maturing notes will be in the hands of individuals who do not want, and will not permanently hold in their investment portfolios a Treasury bond which is not exempt from surtaxes. If the Treasury offers these holders a choice between a new bond and a new note in exchange for their holdings, they are likely to prefer the note, unless it is priced too unattractively as compared with the new bond. If the Treasury should not offer a note option, or if such option should be merely nominal because of the relative pricing of the issues, these individuals might be inclined to sell the rights to the new issue, or to sell the bond acquired in exchange. Heavy selling 80 engendered might place the market in a rather weak technical position, particularly if it happened to coincide with unfavorable foreign developments. The fact that commercial banks, especially those in New York City, hold a considerable proportion of the maturing notes also contributes to the possibility that the exchange offering, if it includes an attractively priced long bond, might place the entire Government securities market in a weak technical position. These banks are quite likely to undertake an important secondary distribution operation if they obtain long bonds in exchange, and this operation might be disturbing to the market. 0 Secretary Morgenthau - 5 58 III. Maturity Preferences of Holders of the Public Debt Although our information on the holdings of the March notes is quite limited, we do have information the the maturity distribution of the holdings of all direct Government securities by the principal classes of holders. These data are presented in Chart III. They are in terms of the "privately held marketable supply" of the direct public debt, a definition which excludes United States Savings and Adjusted Service bonds, and securities held by the Federal Reserve banks andfunds. Federal governmental corporations, credit agencies, and trust The chart emphasizes the fact that banks tend to concen- trate their holdings in the shorter maturities. About 46 per- cent of the direct public debt has a maturity of more than ten years, for example. Banks in New York and Chicago, however, hold only 36 percent of their Government portfolio in such maturities, and all other insured commercial banks outside of these cities, only 41 percent. Insurance companies, on the other bonds. hand, have 56 percent of their portfolios in the longer IV. Rights Values of Maturing Notes At the close on Tuesday, December 5, the bid price for the rights on the March notes stood at the high level of 1-10/32 points. Rights have been moving upward for about three weeks, the gain having amounted to 6/32 of a point. The high level of bids made for the March rights would seem to indicate that the market anticipates a long or mediumlong bond will be included as one of the vehicles for the approaching refunding. In past refundings of Treasury notes, it is observed, the market has assumed that the Treasury would be likely to price its issues so that a larger premium would be carried by a long than by a short issue offered in exchange. Accordingly, the market has allowed its antici- pation of the length of the exchange issues to control, to a considerable extent, the level of the bids made for the rights. Bids as high as those obtaining at present have, accordingly, been made only when the market has been anticipating a rela- tively long issue. This was the case during the fifteen months preceding the war crisis, when the market generally expected long bonds and was usually correct in its expectation. 59 Secretary Morgenthau - 6 Chart IV compares the value of the rights on the maturing issue with the premium carried by the issues offered in exchange in each of the Treasury note refunding operations engaged in since the beginning of 1934. The rights values have been taken on a date about fifteen days preceding the day of issuance of the new securities, 80 as to eliminate, as far as possible, the influence of official intimations as to the characteristics of the new offerings. For simplicity, the highest right value bid has been taken when two notes were refunded at the same time, and the highest premium available at the close of the first day of trading on any security offered in exchange has been taken when alternative exchange securities were offered. It appears, as shown in the bottom grid of the chart, that the premiums carried by the new issue (or by one of the new issues, if two or more were offered) were in excess of the market's bid for the rights in eight of the nineteen refundings. In each of these cases, the Treasury offered new bonds in exchange for the maturing issue. On the other eleven occasions, the premiums carried by the new issue were less than the market's bid for rights. In five of these cases, the Treasury issued new notes in exchange without the option of a bond, and in three other cases, added to issues of securities already outstanding. Premiums carried by such offerings have ordinarily been lower than those carried by new issues of bonds. It is interesting to note in connection with these nineteen refundings that, in the aggregate, the excess of premiums over rights values just about balances the excess of rights values over premiums. In other words, a speculator who purchased an identical amount of each of the maturing notes at the prices shown would have come out just about even 1f, on each occasion, he had availed himself of the exchange offer- ing, and then had sold the new issue at the close of the first day of trading. V. Composition of the Public Debt The large amount of the March notes -- the largest amount of Treasury debt with the exception of the Third Liberty Loan ever placed in a single issue of fixed maturity obligations -focuses attention again on the intrinsic superiority from the point of view of the Treasury of issues having optional call periods. Large fixed maturities such as the one to be refunded might be quite embarrassing to the Treasury should they come due at an inopportune time. C 60 Secretary Morgenthau - 7 The present composition of the public debt classified with respect to the amount of debt callable and maturing in each calendar year is presented in Chart V. This chart differs from somewhat similar charts which we have submitted previously, partly in that it includes guaranteed as well as direct debt, but more importantly in that it is primarily classified on the basis of whether the securities have fixed maturities or optional call provisions. The chart shows that there are now fixed maturities of appreciable amount in every year through 1948, except 1946. Beyond 1944, however, these fixed maturities are never greater than three-quarters of a billion dollars in any one year. VI. Foreign Government Securities British and French Government securities underwent little change this week. British 2-1/2 percent consols closed on Tuesday, December 5, at 67-7/8, to yield 3.68 percent, as compared with a yield of 3.70 percent last Tuesday. French 3 percent perpetual rentes closed at 71.95. The Russian invasian of Finland has been followed by a severe decline of Finnish bonds on the New York Stock Exchange and some weakening of most of the loans of other Scandinavian countries. The present levels of representative Scandinavian issues, as compared with their levels just before the crisis and their highs for the year, are shown in the following table: : Net Tues. :decline, High for: Tues. : : Nov. 28 Dec. 5 : Nov. 28: 1939 Dec. 5 : (closing prices) Finland, 6's of 1945 107 88 36-7/8 51-1/8 Norway, 4-1/4's of 1965 103-7/8 83-1/4 69-1/4 14 Denmark, 4-1/2's of 1962 97-1/2 59-1/4 50-1/2 Attachments 8-3/4 CHANGES IN THE PRICES OF U.S. SECURITIES AFTER AUG. 19. 1939 Points Plotted Represent the Difference from Aug. 19 Price of Rach Maturity Class 1939 1940 OCTOBER SEPTEMBER 23 NOVEMBER DECEMBER 14 POINTS POINTS CHANGE) (NET CHANGE) Daily 11 NOTES. 1-3 YEARS NOTES. 3-5 YEARS - BONDS, UNDER YEARS TO CALL -2 -26 -24 -24 24 -21 24 34 " BONDS. 5-15 YEARS 10 CALL H 4 4 41 -51 BONDS, OVER is YEARS TO CALL se -6 -6) " -76 -7 -74 -7 71 -71 11111 30 6 16 9 2 AUGUST -- Office of the Secretary of the Treasury 23 9 26 19 SEPTEMBER 28 30 " 18 25 21 14 OCTOBER INVOICE 1939 NOTE: BREAK IN LINE HEDECATES CHANGE 14 COMPOSITION or . MATURITY CLASS accounts 1940 13 MAJOR MOVEMENTS OF THE YIELDS TREASURY, HIGH GRADE CORPORATE AND MUNICIPAL BONDS F Points Plotted Represent Changes from the Lowest Yield Reached by Each Class of Security in 1930 1939 DECEMBER NOVEMBER OCTOBER AUGUST SEPTEMBER 9 16 23 16 23 30 10 17 24 JULY 14 9 7 21 2 1 T T 26 28 T 19 11 4 T 12 18 T 5 T T 29 25 T 22 15 2 T T I T IT 3 BASIS POINTS 8 T JUNE BASIS POINTS T 10 10 DOW-JONES MUNICIPAL 0 0 10 10 HIGH GRADE CORPORATE 20 20 30 . 30 40 40 LONG TERM TREASURY 50 50 60 60 70 70 . 80 . 24 3 JUNE I 17 8 15 JULY 22 29 5 12 19 AUGUST 26 2 9 16 SEPTEMBER 1939 23 30 7 10 14 21 28 4 OCTOBER II 18 NOVEMBER 25 2 9 16 80 23 DECEMBER ADJUSTED TO ALLOW FOR CHANGES IN COMPOSITION OF TREASURY AVERAGE. Office of the Secretary of the Treasury Division of Research - - F-144 Chart III PRIVATELY HELD MARKETABLE SUPPLY OF DIRECT U.S. OBLIGATIONS By Classes of Holders June 30, 1939 DOLLARS DOLLARS BILLIONS BILLIONS Amount Held 26 28 24 24 20 20 16 16 12 12 8 8 4 4 0 0 TOTAL N.Y. AND OUTSTANDING CHICAGO MEMBER BANKS ALL OTHER INS. COMM'L. BANKS 37 LIFE ALL OTHER INSURANCE COMPANIES HOLDERS Composition of Holdings by Maturity Classes, In Percent of Total Held PERCENT PERCENT UNDER UNDER 5 YEARS 5 YEARS 80 80 5 - 10 YEARS 60 5 10 60 YEARS 40 40 10-20 10-20 #YEARS YEARS 20 20 OVER OVER 20 YEARS 20 YEARS 0 0 TOTAL N.Y. AND OUTSTANDING CHICAGO ALL OTHER INS. COMM'L MEMBER BANKS BANKS 37 LIFE ALL OTHER INSURANCE COMPANIES HOLDERS EXCLUDES U.S. SAVINGS AND ADJUSTED SERVICE BONDS AND SECURITIES HELD BY THE FEDERAL RESERVE BANKS AND FEDERAL GOVERNMENT CORPORATIONS, CREDIT AGENCIES AND TRUST FUNDS. Office of the Secretary of the Treasury Division of - - I F 145 Chart V INTEREST BEARING PUBLIC DEBT - NOV. 30,1939 Including Guaranteed Adjusted to give effect to the new issue to be dated Dec a 1939 DOLLARS DOLLARS Billions Billions Amount Due or First Becoming Callable By Calendar Years 5 5 Guarenteed Caliable Issues 4 4 Direct Guaranteed Fixed Issues Direct 3 3 2 2 0 0 5 5 Amount Maturing By Calendar Years 4 4 3 3 2 2 F 0 0 40 44 42 46 48 50 52 54 56 58 60 62 64 66 68 70 Excluding (1) Postel Savings Bonds (2) US Savings Bonds (3) Adjusted Service Bonds (4) Special issues to Government Agencies and Trust Funds Office al the Secretary of the Treasury Dreams - - - B-176-A 05 Chart IV RIGHTS VALUES" COMPARED WITH PREMIUMS ON NEW ISSUES Exchange Offerings on Treasury Note Refundings, 1934 to Date PRICE ABOVE PAR PRICE IN 32NDS. ABOVE PAR IN 32NDS. 70 70 "RIGHTS VALUE" PREMIUM ON NEW ISSUE 60 60 50 50 40 40 30 30 20 20 10 10 0 0 APR. JUNE MAR. JUNE 1934 DEC. MAR. SEPT. JUNE 1935 DEC. MAR. SEPT. DEC. MAR. SEPT. JUNE DEC. MAR. 1938 1937 1936 NOV. JUNE 1939 DEC. 1940 40 40 Excess of Premium Over "Rights Value" 30 SECURITY OFFERED IN EXCHANGE 30 NEW NEW NOTE BOND 20 ADDITION TO OUTSTANDING ISSUE 20 10 10 MAR. JUNE 0 M DEC. DEC. & MAR. JUNE SEPT. MAR. SEPT. I MAR. JUNE NOV. SEPT. DEC. MAR. JUNE 0 JUNE APR. DEC. -10 -10 -20 -20 -- Office of the Secretary of the Treasury 1935 1936 . 1934 1937 1938 1939 1940 WHEN MORE THAN ONE NEW ISSUE WAS OFFERED THE HIGHEST PREMIUM IS SHOWN F 143 1940 1942 PER CENT YIELDS OF TREASURY BONDS Based on ClosingAND PricesNOTES DEC. 9. 1939 1944 1946 66 1948 1950 1952 1954 1956 1958 1960 1962 1964 2.75 1966 1048 1970 PER CENT 250 2.75 225 250 200 2.25 Note: 1.75 2.00 1.50 1.75 125 1.50 1.00 1.25 Notes es 1.00 75 Bangle with no cell period O Bonds WITH cell period 50 .75 Arrows to zero line indicate 25 negative yield Bonds 50 or 2 25 0 DOLLARS Millions o 3500 DOLLARS Amount Outstanding Millions 3000 3500 Note: Bonds 2500 3,000 2000 2500 500 2,000 1.000 1,500 500 1,000 500 0 1942 1944 1946 1948 1950 1952 1954 1956 1958 1960 1962 1964 Note For callable arematurity computed to and issues plotted or below of. the earliest date if curves the fittedare band . by selling eye above per and or of bonds theshown final date ifofthe bond selling por Thecoll smooth Dollar amounts in descriptions issues are in millions Issues for which on exchange offer hot been made and hot expired are excluded 1966 1968 0 1940 1970 30 COMPARATIVE YIELDS OF AVERAGE OF ALL LONG TERM U.S TREASURY AND AVERAGE OF HIGH GRADE CORPORATE BONDS JAN FEB MAR APR MAY JUNE were 1938 1939 .. ... JULY AUG SEPT. OCT NOV DEC JAN FEB. MAR APR MAY JUNE 1939 JULY AUG. SEPT OCT NOV DEC 1.4 17 THE - 1.7 PER CENT DEC. NOV OCT Inverted Scale PER CENT Inversed.Scale PER CENT WEEKLY, Saturday Quotations DAILY 2.2 2.2 2.2 . Long Term Treasury" (12 years or more date) 24 2.4 2.4 2.6 2.6 2.6 Long Term Treasury 2.8 2.8 2.8 30 3.0 3.0 3.2 3.2 3.2 Corporates Corporate 3.4 3.4 3.4 3.6 3.6 3.8 3.8 4.0 40 DED PER CENT CENT PER CENT 1.00 1.00 1.00 80 80 3.6 3.8 40 80 Spread Between Long Term Treasury and Corporate Spread 60 APR MAY JUNE JULY AUG SEPT OCT NOV DEC JAN FEB MAR APR MAY JUNE JULY 1939 0 193A "Break - line indicates change in composition of Long Term Treasury average Office the Secretary the Treasury - lua 0 MAR AUG. SEPT OCT NOV DEC E is 1 - - - - - 20 OCT. 10 . FEB 20 . is JAN 40 NOV 1939 25 . 20 40 as 40 60 o 60 DEC INTEREST BEARING PUBLIC DEBT - NOV. 30. 1939 Daily Treasury Statement Basis Adjusted to give effect to the new issue to be dated Dec a 1939 DOLLARS Billions DOLLARS Billions Amount Due or First Becoming Callable By Calendar Years 4 4 Bonds Notes Bills 3 3 2 2 I I 0 0 44 42 40 48 46 54 52 50 62 '60 58 56 64 66 68 70 DOLLARS Billions DOLLARS Billions Amount Maturing By Calendar Years 4 4 3 3 2 2 I 0 0 '40 42 44 46 48 50 52 54 56 58 60 '62 64 66 68 70 Excluding (1) Postal Savings Bonds (2) US Savings Bonds (3) Adjusted Service Bonds (4) Special issues to Government Agencies and Trust Funds - Office of the Secretary of the Treasury B-43-C-1 YIELDS OF TREASURY BONDS AND NOTES DEC. 9. 1939 1942 1940 1944 GS Based on Closing Prices 1944 1948 1950 1954 1982 1986 1962 1960 1988 1966 1964 1968 1970 PER PER CENT CENT 2.75 2.75 250 250 * 2.25 225 2.00 2.00 Notes 48, 1.75 1.75 2 8 1.50 1.50 1.25 1.25 Notes 1.00 1.00 Bongle with no cell period .75 o Bonds with cell period 75 Arrows to zero line indicate 28 .50 negative yield 50 Bonds 25 25 24 2 o 0 DOLLARS & Millions DOLLARS Millions Amount Outstanding 3500 Notes 3000 3,500 3,000 Bonds 2,500 2500 2,000 2000 1,500 1,500 1,000 1.000 500 500 o 1942 1944 1946 1948 1950 1954 1954 1962 1960 1958 coll date if the bond Note For callable bonds vields are computed date if to. the and bond issues is selling plotted below or of. par the The earliest smooth surves are fitted by eye and os of the final maturity descriptions of issues are in millions Dollar Issues for amounts which shown on exchange in offer has been made and hot expired are excluded . 0 1940 1952 selling 1966 1964 above per 1968 1970 70 COMPARATIVE YIELDS OF AVERAGE OF ALL LONG TERM US TREASURY AND AVERAGE OF HIGH GRADE CORPORATE BONDS 1938 1939 1939 JAN FEB. MAR APR MAY L JUNE JULY AUG. SEPT. OCT. NOV DEC JAN FEB MAR APR MAY JUNE JULY AUG SEPT OCT NOV DEC 1.1 DEC NOV OCT Inverted Scele Inverted Scale PLICENT PER CENT PER CENT WEEKLY. Saturday Quotations DAILY 2.2 2.2 2.2 . Long Term Treasury (ia years or more date) 2.4 2.4 24 2.6 2.6 2.6 Long Term 2.8 2.8 Treasury 2.8 3.0 3.0 3.0 3.2 3.2 32 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 CENT CENT PER CENT 1.00 1.00 1.00 80 80 80 Spread Between Long Term Spread Treasury and Corporate* 60 60 60 40 40 40 20 T 0 AUG SEPT OCT NOV DEC IT JUNE 0 JAN FER MAR APR MAY JUNE 11 - III JULY OCT 20 . = = N - JULY AUG SEPT OCT NOV DEC JAN FEB MAR APR MAY 1939 - NOV 20 25 - o 20 13 DEC 1939 1938 "Break - And indicates change - compention of Long Term Treasury average More the Secretary the Treatment F-SO-E-2 INTEREST BEARING PUBLIC DEBT - NOV. 30.1939 Daily Treasury Statement Basis Adjusted to give effect to the new issue to be dated Dec 8 1939 DOLLARS Billions DOLLARS Billions Amount Due or First Becoming Callable By Calendar Years 4 4 Bills Notes Bonds 3 3 2 2 I 0 '40 42 DOLLARS 44 464850 52 54 `56 `58 60 6264 0 66 68 70 Billions DOLLARS Billions Amount Maturing By Calendar Years 4 4 3 2 3 2 I 0 '40 42 44 0 '46 48 50 52 '54 56 58 60 '62 '64 66 68 70 Excluding (1) Postal Savings Bonds (2) U.S Savings Bonds (3) Adjusted Service Bonds (4) Special issues to Government Agencies and Trust Funds Office of the Secretary of the Treasury - Research - Reference B-43-C-1 YIELDS OF TREASURY BONDS AND NOTES DEC. 9. 1939 1940 1942 1944 1946 1948 1950 PER 72 Based on Closing Prices 1954 1982 1956 1958 1960 1962 1964 1964 1968 1970 CENT PER CENT 2.75 2.75 250 # 250 # N o 225 2.25 2.00 2.00 Notes 48, 1.75 1.75 2 $ # 1.50 1.50 ME 1.25 1.25 1.00 Notes 1.00 * Bonds with no cell period 75 .75 o Bonds with call period Arrows to zero line indicate 50 50 negative yreld Bonds 25 25 of = o 0 3 DOLLARS DOLLARS Millions Millions Amount Outstanding 3,500 Notes 3.000 3,500 3,000 Bonds 2500 2500 2000 2000 1,500 1.500 1,000 1.000 500 500 o 0 1940 1942 1944 1946 1948 1950 1952 1954 1956 1958 1960 1962 1964 Note For and callable OR of bonds the final yrelde maturity are computed date if to. the and bond issues plotted below or of par the The earliest smooth call surves date if are the fitted bond " by selling eye above port Wene in are is selling issues Dollar Issues for amounts which shown on exchange in descriptions offer has of been made and hot expired are excluded 1966 1968 1970 73 COMPARATIVE YIELDS OF AVERAGE OF ALL LONG TERM U.S. TREASURY AND AVERAGE OF HIGH GRADE CORPORATE BONDS - 1938 JAN PER MAR APR MAY JUNE JULY 1939 AUG SEPT OCT NOV DEC JAN FEB MAR APR MAY JUNE JULY AUG 1939 SEPT OCT. NOV DEC inverted PER CENT Segle NOV OCT DEC Inverted Scale Inverted Segie PER CENT WEEKLY. Saturday Quotations PER CENT DAILY 2.2 2.2 2.2 2.4 Long Term Treasury (12 years or more to data) 2.4 2.4 2.6 2.6 2.6 2.8 2.8 Long Term Treasury 2.8 30 3.0 3.0 3.2 3.2 3.2 Corporates Corporate 3.4 3.6 3.8 4.0 3.4 3.4 3.6 3.6 3.8 3.8 4.0 4.0 PER PER PER CENT CENT 1.00 1.00 1.00 80 80 80 288 CENT Spread Between Long Term Treasury and Corporate Spread 60 60 60 e 40 40 40 20 - - MAR - FEB - APR MAY JUNE JULY AUG SEPT OCT NOV DEC JAN FEB MAR APR 1938 "Break in line indicates change - compension of Long Term Treasury average MAY JUNE JULY 1939 .. AUG ... OF SEPT OCT NOV - ... DEC 0 JAN - . E - 20 24 . . 20 OCT 28 DEC 1939 0 INTEREST BEARING PUBLIC DEBT - NOV. 30.1939 Daily Treasury Statement Basis Adjusted to give effect to the new issue to be dated Dec 8 1939 DOLLARS DOLLARS Billions Billions Amount Due or First Becoming Callable By Calendar Years 4 4 Bonds Notes Bills 3 3 2 2 I I 0 0 40 44 42 46 50 48 54 52 64 62 60 '58 56 70 '68 66 DOLLARS Billions DOLLARS Billions Amount Maturing By Calendar Years 4 4 3 3 2 2 I 0 0 '40 42 44 46 48 '50 52 '54 '56 58 60 62 64 66 68 70 Excluding (1) Postal Savings Bonds (2) U.S Savings Bonds (3) Adjusted Service Bonds (4) Special issues to Government Agencies and Trust Funds B-43-C-1 Office of the Secretary of the Treasury - - - Baration 75 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE TO FROM Dec. 6, 1939. Secretary Morgenthau Mr. Haas Subject: An Important Technical Consideration in Connection with the Refunding of the March Notes It is emphasized in the accompanying "setting" memorandum that the most important holders of the March notes are commercial banks, and that many of these banks do not desire longterm bonds at the present time as a permanent addition to their portfolios. It is also pointed out that 55 percent of these notes were originally issued in exchange for First Liberty 3-1/2's -- an issue which, at the time of its call, was largely held by wealthy individuals because of its complete tax-exemption feature. A much larger than usual portion of the "rights" may, therefore, be held on the present occasion by wealthy individuals who originally acquired them in this manner. Such individuals are not likely to be interested in acquiring a partially tax-exempt security such as a Treasury bond for permanent holding, irrespective of maturity. These considerations suggest that, if a predominant proportion of the original exchanges should go into a long-term bond, a great deal of secondary distribution might be required; and that even a medium-term bond might require in this instance a more than usual amount of such distribution. A two- or three-way exchange offering of the ordinary sort is very apt to result in just such a lopsided distribution, even if a conscious effort is made to avoid it. This is because the premium on a note can be cut shorter than that on a medium-term bond, and that on a medium-term bond shorter than that on a long- term bond, with an equal degree of safety. If this 18 done -- and it is difficult to avoid it -- the banks, and, to a lesser extent, the wealthy individual holders, will "go" for the big premium, irrespective of their intentions with respect to permanent holding. In this way the market might be placed in a very vulnerable position technically. The Treasury, in brief, is in the anomalous position that the holders of rights -- who, for the most part, have no interest in acquiring long-term bonde for permanent holding -- stand between it and the real long-term bond market. 76 Secretary Morgenthau - 2 It is suggested as a means of avoiding this difficulty, at least in large part, that we might explore the possibility of making the exchange offering in fixed proportions, say, one- third notes, one-third medium-term bonds, and one-third longterm bonds -- or, one-third notes and two-thirds medium-long bonds. If this were done, commercial banks as a class would tend to retain permanently their allotments of notes and mediumterm bonds, while wealthy individuals would tend to retain per- manently their allotments of (fully tax-exempt) notes. The required amount of secondary distribution might be substantially reduced in this manner, and the market so placed in a stronger technical position. It is true, of course, that in certain cases some secondary distribution would be required under this plan which would not otherwise have been necessary, because some individuals would be "forced" by the arbitrary allotment to accept securities which they did not desire. It is not likely, however, that the secondary distribution 80 made necessary would be an important offeet to that avoided. This is because the classes of investors who would be most likely to offer their shorter-term securities for secondary distribution -- insurance companies, for example -hold relatively few rights. The factor of safety on a "fixed package" offering of the type suggested would, of course, be determined by the composite premium on the combination of securities offered, and could be adjusted somewhat more easily than that on an offering of the usual sort. The larger the proportion of this "composite" prewould be the factor of safety for the entire offering on original issuance -- but the greater also would be the possibility of the mium which was apportioned to the shorter securities, the greater long-term bond going below par in the event of a subsequent general market decline. The suggested procedure appears to have sufficient a priori merit to warrant an inquiry into the likely market reaction which it would arouse. While it is without precedent (at least since the World War) for an exchange offering in the case of a direct security, it has a recent precedent in that of a guaranteed security. This precedent is in connection with the HOLC 1-1/2 percent bonds which matured on June 1 of this year. The holders of these bonds were given the privilege of exchanging them in the fixed ratio of 40 percent in new 1-year 3/8 percent bonds and 60 percent in new 2-year 5/8 percent bonds. This division which met the requirements of the HOLC much better than they could have been met by a haphazard exchange determined by the relative 77 Secretary Morgenthau - 3 prioing of the two maturities - seems to have been well received by the market. It should be pointed out, however, that the present proposal -- involving as it does a much wider spread of maturities - might meet with some adverse oriticism not foreshadowed by this relatively slender precedent. BK227 78 December 6, 1939 Lunch with Harold Hochschild. Told him what I had in mind about molybdenum. He showed me a telegram from Mr. Beattie, in England, one of his principal stockholders in Climax Molybde- num, suggesting they stop selling Russia any more molybdenum. Their contract with Amtorg expires the end of this year and on Friday he plans to take it up with his Board of Directors and suggest that they do not enter into another contract with Russia for the sale of any molybdenum. He says he will be very glad to do this, simply as a result of my conversation. He 18 also going to talk with the President of Kennecott, who produces about 4,000,000 pounds a year, and ask them if they will do the same. He pointed out to me that they make considerable sales to Japan and if we make a similar request on Japan they will be glad to take it up with the Board. I then told him that I would take it up with the English and the French and ask them whether they could not increase their purchases of molybdenum, based on the telegram that I got from Bullitt about the 16th from Bullitt, where Professor Rist said molybdenum was the one thing that Germany needed more than anything else that we could stop her from getting. I also told him that we would see whether we could buy any molybdenum as a war stock for our own Government. My understanding with Hochschild was that this was not to be quid pro quo and that he would go ahead independently, and he agreed to that. 79 PARAPHRASE OF TELEGRAM RECEIVED FROMS American Embassy, Paris DATE: November 13, 1939, 7 p.m. NO.: 2742. PERSONAL AND STRICTLY CONFIDENTIAL FOR THE SEGRETARY AND THE SECRETARY OF THE TREASURY. Our no. 2736, November 13, 3 p.m. Matthews was informed last evening by Rist that there was one vulnerable spot in the German armor-molybdanum. Rist said be understood solybdenua to be essential to the manufacture of armanents and shells. He also understood that although 11 is to be presumed that Germany has sufficient stock to meet present needs it cannot last forever. He said that the United States produces far more than any other country in the world (approximately 92.5 percent of world production for 1938, 85 percent of this was produced by (7) molybdenun company - Minerals Year Book, 1939). The French blookade authorities have had recent information that Russia is making preparations for near-future purchases from us of substantial amounts for transshipment to Germany (according to the Year Seek we export from 50 to 76 percent of production annually, although there is no separate classification for this in our trade statistics). He wondered )whether the United States needs of solybdemum for national 80 national defense passports were great enough to vegatro entergring exports of this notal) of be greatly hoped that this would be the case. Rist added that France might also be in need of supplies of which night possibly be purchased from us. (The other major producers are Nexton, Newseee and Wesway in the enter of their appearance.) No stated that in any event 10 would be impossible for his to overestimate the importance from the standpoint of the allies of preventing arrival of molybtenes in Germany. He further stated (as in sologram eav., October 24, 6 p.m.) that fate, oils and sorage likewise are recognised weaknesses in the were economy of Germany and he hoped only small I of these materials would reach Germany. EID MESSAGE BULLITY 03/13/33 eeer M you jasm31equ0 e A I von to golalvic donances TH3MTRA930 YAU8A3AT soltio ENTER at Indiana EASH m BK227 81 December 6, 1939. My dear Mr. Secretary: I have created an informal committee to represent the American Government in its contacts with the interested foreign governments in all matters relating to the purchase of war materials in the United States, consisting of the following: (a) The Director of Procurement, Treasury Department: (b) The Quartermaster General of the Army; (c) The Payanster General of the Navy. This committee will serve as the exclusive liaison with reference to procurement matters between this Government and the interested foreign governments. It will hold sessions at least once weekly, and at such more frequent intervals as may be necessary. At these sessions, it will receive an accredited representative of the embassy of any interested foreign government for the purpose of giving consideration to the requirements of such government for supplies, equipment, and materials, in relation to: (a) availability of the desired articles, (b) priorities. and (e) prices. The committee will submit a complete report of its proceedings acts and recommendations, at least weekly. to the President through Mr. McReynolds. The Secretary of State has informed the British and Brench Ambassadore of this arrangement. will you please inform the Quartermaster General of his designation as a member of this committee. Sincerely, The Honorable, The Secretary of War. Digned by President 82 December 6, 1939. My dear Mr. Secretary: I have created an informal committee to represent the American Government in its contacts with the interested foreign governments in all matters relating to the purchase of war materials in the United States, consisting of the following: (a) The Director of Procurement, Treasury Department; (b) The Quartermaster General of the Army; (e) The Paymaster General of the Navy. This committee will serve as the exclusive liaison with reference to procurement matters between this Government and the interested foreign governments. It will hold sessions at least once weekly, and at such more frequent intervals as may be necessary. At these sessions. it will receive an accredited representative of the embassy of any interested foreign government for the purpose of giving consideration to the requirements of such government for supplies, equipment, and materials. in relation to: (a) availability of the desired articles, (b) priorities, and (a) prices. The committee will submit a complete report of its proceedings, acts and reconmendations. at least weekly, to the President through Mr. McReynolds. The Secretary of State has informed the British and French Ambassadors of this arrangement. will you please inform the Paymenter General of his designation as a member of this committee. Sincerely, Hon. Charles Edison, Acting Secretary of Navy. Bigned by President 83 December 6, 1939. My dear Mr. Secretary: I have created an informal committee to represent the American Government in its contacts with the interested foreign governments in all matters relating to the purchase of war materials in the United States, consisting of the following: (a) The Director of Procurement. Treasury Department; (b) The Quartermaster General of the Army: (a) The Paymester General of the Navy. This committee will serve as the exclusive liaison with reference to procurement matters between this Government and the interested foreign governments. It will hold sessions at least once weekly, and at such more frequent intervals as may be necessary. At these sessions. it will receive an accredited representative of the embassy of any interested foreign government for the purpose of giving consideration to the requirements of such government for supplies. equipment, and materials, in relation to: (a) availability of the desired articles, (b) priorities, and (e) prices. The committee will submit a complete report of its proceedings, acts and recommendations. at least weekly, to the President through Mr. McReynolds. The Secretary of State has informed the British and French Ambassadore of this arrangement. will you please inform the Director of Procurement of his designation as a member of this committee and ask him to serve as its chairman. Sincerely, 2 he Honorable, Digital by Present The Secretary of Treasury. ADDRESS OFFICIAL COMMUNICATION TO THE SECRETARY OF STATE WASHINGTON a.c. 84 DEPARTMENT OF STATE WASHINGTON December 5, 1939. My dear Mr. Secretary: I submitted to the President today the question of the most satisfactory means and methods of contact between the purchasing missions which are being created in this country by foreign governments, and the American Government. In doing 80 I called to his attention the suggestion put forward by you in your memorandum of November 10. He has approved the creation of the committee therein suggested, to report to him through Mr. McReynolds. The French and British Embassies have been accordingly informed today, and I am attaching copies of the memoranda given to them. The matter of the selection of the chairmanship of the committee and the despatch of the necessary letters asking these officers to assume these duties requires attention and I shall consult you about it today. Sincerely yours, Enclosures: Memoranda. The Honorable Henry Morgenthau, Jr., Secretary of the Treasury. Kills 85 December 4, 1939. MEMORANDUM TO THE BRITISH ANBASSADOR In discussion with the Under Secretary on November 30, the British Ambassador inquired as to the manner in which contact should be established between the AngleFrench Purchasing Board in the United States and the authorities of the United States Government to avoid any unnecessary disturbance to the American economy. This Government plans to set up in the very near future an informal committee made up of representatives of the Treasury, War and Navy Departments, which committee will report directly to the President through his Administrative Assistant, Mr. MoReynolds. When established, this committee will be glad to discuss with the Anglo-French Purchasing Mission any questions which involve interference with the purchases to be made by the Government of the United States in connection with its preparedness program, any questions which involve priorities, and any questions cognate to the question of fair prices and which thus affect the internal economy of the United States. EA:HF:EB MEMORANDUM Responsive to the inquiry contained in the French Enbancy's memorandum of December 2, 1939 as to the method by which the American Government wishes to establish con- fact between itself and the Angio-French Purchasing Mission, the Enbassy is informed that this Government proposes to establish in the very near future an informal committee made up of representatives of the Treasury, the War Department and the Navy Department, which committee will report directly to the President through his Administrative Assistant, Mr. NoReynolds. When established, this com- mittee will be gind to discuss with the Anglo-French Purchasing Mission any questions which involve interference with the purchases to be made by the Government of the United States in connection with its preparedness program, any questions which involve pelorities, and any questions cognate to the question of fair prices and which thus affect the internal economy of the United States. Department of State, Washington, U:SW:IJ 12/4 December 5, 1939. Bizz7 87 RE CLOSING AGREEMENTS Present: Mr. Irey December 6, 1939. 11:00 a.m. Mr. Foley Mr. Helvering Mr. Sullivan Mr. Kades Mr. Edison Mr. McLaine Admiral Furlong Captain Kraus Mr. Speer Edison: I think the quickest way to crystallize this thing is to mention one problem and then see where we stand on that. Perhaps that will bring out the points on the others. Now, here is what the problem is that we have had. We are very anxious to quickly build up some small boats for harbor and coastal defense, because in the last war we had to make very quick use of a lot of yachts and pleasure boats and one thing or another, so we have been experimenting both with American design and with an English design of boat. The English design is all finished, the boat is ready. The American designs are still in the process of building and are purely experimental. We don't know yet what they will do. We hope they will beat the English design, but still we can get that and we have been turning on all the heat to get it quickly. We made a deal with the Electric Boat Company which Mr. Sutphen represents here today to fabricate some of these boats. H.M.Jr: Sutphen: Sutphen: He is an old pal of my father's, is that right? That is right. H.M.Jr: He is so handsome I didn't recognize him. H.M.Jr: 6 He has gotten so handsome as he gets older that I didn't recognize him. We used to talk boats. 88 -2Edison: Well, incidentally, he is one firm - the Electric Boat Company - that has been actually sending checks back on the Vinson-Trammell Act and he did it without waiting for the order - without its being pulled away from him, so the reluctance against paying anything back on the Vinson-Trammell Act has not existed in the case of the Electric Boat Company. Sutphen: Thank you. Edison: But we made this arrangement. We have these boats over here and we have been trying to get them tested and we tried to obtain 23 or 24 boats as rapidly as possible, because we want to get a group of them to try out practically, for one thing as a group, then we also wanted to develop a method of building them in quantity production, wanted to develop a factory unit that can turn them out, not only those boats but other boats too. So, as I say, we have been turning the heat on in every direction to get this thing closed up fast. In order to make these boats cheap and fast and to develop this technique of quantity production, they have to build an addition to the plant at Bayonne at a cost of some $600,000, which is going to be built solely for this purpose and is not needed by the Electric Boat Company for any business they may get in Bayonne and it is really a unit solely for this purpose, to give us the kind of unit we want and to build these boats. The only thing left now, in the negotiations, except actually signing the contract, is the question of whether all or any part of this $600,000 will be granted to them as a part of the cost in a closing agreement such as we discussed previously. Now, that is the problem and the answer to that, I think, will bring out the points that we want to discuss. H.M.Jr: Well now, Guy, who do you want to talk - Mr. Edison suggested we use this as a formula and explain to them what the President's provision is on depreciation. Do you want to do it or do you want somebody 89 -3Helvering: You mean relative to this contract? H.M.Jr: Let's use this as an example. Mr. Edison wants to use this one. Edison: In other words, we have a different case in Aeronautics, but we have an exactly similar case in ordinance. Helvering: Well, on this particular case, we have no informa- H.M.Jr: Well, as you fellows can think fast, ask Mr. Sutphen any questions. Let's just develop for Mr. Edison what we would do. Let's find out what he wants and just go through the motions and use this as an example. Ask him what he is going to do, and so forth, and give him an approximate ruling on how we would handle it, that is what Mr. Edison wants and that is what I would like. Edison: I was under the impression H.M.Jr: tion at all on the Bureau except what was handed us this morning. I think you said that you had been at this, hadn't you - wasn't this the one you said you had been waiting for weeks or months on? Sutphen: H.M.Jr: It has been a year, I think. Mr. Helvering says he got the first thing on it this morning. Let's call a spade a spade, see, so we find out where we are wrong and if, by any chance, the Navy is wrong. Helvering: I will correct that to this effect, that the H.M.Jr: Did you get that, Charlie? Helvering: I haven't even read that. It was given to me H.M.Jr: gentleman called yesterday but the only written statement is what we received this morning. since I came here. It is a compliment to us. They think that we can look in the stars and get the answer, but anyway. 90 -4Edison: I understood from the talk we had the other day and from this letter, that all closing agreements were out. H.M.Jr: No. Edison: Then I have got the wrong impression. Foley: Mr. Secretary, I was handed this as I came in the door, too. From just glancing at it, this is the same si tuation as the Consolidated. There is a conditional bid submitted to the Navy based upon a closing agreement being entered into with the taxpayer by the Treasury. H.M.Jr: Sit up next to Mr. Edison, will you, Ed? Foley: This was just handed to ne as I came in the door same as the Consolidated case upon which the letter was written the other day that you have reference and as I read it this situation is practically the Foley: to now. In other words, there is a bid conditioned is the cost of the plant? That is right. H.M.Jr: Do you want to write off the whole business? Sutphen: What we asked for was whether we would have the H.M.Jr: Do you mind my interrupting you a minute? Nobody here in the Treasury has had a chance to read this thing. Could Mr. Sutphen state what the proposal is and then one of my people will tell you what we can or cannot do. How would that be? It gives us a chance to do our homework in the open. What is the proposal, Mr. Sutphen? Well now, Mr. Secretary, I appreciate the fact that your department hasn't seen this, but during the period of negotiating the matters with the Navy, it has been discussed time and again how we would prepare to build these units. upon $600,000 being written off. That $600,000 Sutphen: privilege of writing off one half of it. In other words, it is not an ordinary boat building job, it is half airplane and half boat. 91 -5 They are equipped with over 3,000 horsepower and I went to England at the request of the Secretary and acquired this boat over there for the Navy's account and offered my services gratis for all of them. When we decided on the proposal of the type of boat they would want - they want to duplicate the British boat completely and the President has also had conferences with us. I met the President over this with the Secretary within the last six weeks. The President's remarks to me - he said, "How are we going to take care of an emergency of the boat builders, small firms all over the country?" He had gone through in the last war the building of 110-footers and I had preceded him by building for England and France some 580 to 600-foot boats before we entered the war, so the President and I understand this small boat problem of production and quantity. I said, "Mr. President, if the Department sees its way clear, we have in mind building a separate unit." We have at Bayonne now a plant where we build cruisers, and the Secretary knows it. We have been there for forty years. But this is secret job in a way. The Department wants to a keep all this job more or less a secret and I strongly urge that. To mix it up in our own plan, take part of one building and part of another, it wasn't practical. There has never been, I don't believe, in the history of the United States, a really planned boat building plant ahead of production and this is what we are trying to do here, plan it in advance and make it economical as a building unit and to build expeditiously. The President said, "How am I going to take care of these other builders in case of emergency?" I said, "We have thought that out. We can sublicense them under our agreement with this English firm and we can fabricate in this building probably faster than they can assemble in these smaller yards." He said, "I am perfectly satisfied, but I just wanted you to bear in mind I want the facilities, if we go into this thing, so we can reproduce fast." 92 -6Well, I think we have got kind of a reputation in the last war of reproducing things when we built 150 ships at Newark, a complete ship every three days. H.M.Jr: May I interrupt you? Sutphen: Yes. H.M.Jr: Do you mind - get right down - let's get down to this thing. Sutphen: The point is this, Mr. Secretary, that I figure and I made my bid conditional, that this plant unit would cost $600,000. We asked that we be permitted to charge off at least one-half of that amount on account of building these boats under this contract. We don't know what the boats will cost, no one knows. We hope, though, that we can clear ourselves and write that off so that in the future we can make better prices to the Navy or to the Coast Guard, whoever wants to use the facilities. H.M.Jr: You want to build a building to cost $600,000 and Sutphen: you want to write off half of it - how quickly? Within the next two years, during the life of H.M.Jr: That is the proposal? Sutphen: Yes, sir. H.M.Jr: Now, can you (Foley) or the Commissioner - we can answer very easily what we can or cannot do. Now, these two contracts. Mr. Helvering or Mr. Foley, who will answer that? Helvering: Well, our depreciation rates on buildings, of course, are very well established. Upon the proper certification of the Navy that this building will be used for this purpose only, and that the use - at the end of the useful period it will either become the property of the United States or will be continued in other contracts - we only allow one hundred percent depreciation. 93 -7It doesn't matter so much to us whether it is written off in two years or four years. H.M.Jr: One hundred percent depreciation? Helvering: That is all we can take on this building. As far as we are concerned, it doesn't matter so much how much of that goes in, but it is inconceivable that 50 percent of it will depre- H.M.Jr: ciate in one year, that the use of it would an idea this is a firm, substantial building. oh yes, the Austin people would construct it. It is very similar to an airplane plant in the details of construction. This isn't any different than the Consolidated? Foley: No, this is the same as the Consolidated, Mr. Edison: Yes, but in the case of the Consolidated, they wanted us to advance the money to build the plant. In this case, he is going to build the plant and all that but he merely says, "Please let me, in figuring the profit on this thing for ason-Tramell business, I would like to know now that I can put half of that in the cost before you make me turn be 50 percent gone in one year, because I have Sutphen: 9 Secretary. some money back." This isn't a question of financing in advance like it is in the Consolidated. Foley: No, but in so far as our problem is concerned, the use of the closing agreement to determine in advance the rate of depreciation of this plant construction, it is the same problem as we had in Consolidated and from our point of view it doesn't represent any different kind of a tax problem than Consolidated did. Where we are talking about jigs and dies and tools, and equipment of that character that is acquired especially for the contract and won't be used except on that contract and it is reasonable to assume when the contract is completed that it won't be usable again, we can agree now as to what he would be entitled to at the completion of the 94 -8- contract in so far as the write-off of the cost of that kind of equipment, but where we are talking about writing off the cost of a building, and what that building can be used for and what its value is at the end of this contract, we are in the realm of conjecture and we are just guessing and I don't think we can safely use the closing agreement to tell now what the value of this building is going to be, either in two years or three years or four years. We will be perfectly willing to sit down with Mr. Sutphen at that time and determine what depreciation he can take in so far as profit under the Vinson-Trammell Act is concerned and in so far as his tax problem is concerned, but how we can do that now, when we have no facts upon which to go, is something that I think is unreasonable for them Foley: Is it a matter of law or a matter of policy? I think it is a mixed matter of law and policy. Sullivan: We are bound by reasonableness anyway. H.M.Jr: May I just try to be helpful? The President was in complete sympathy on our turning down the Consolidated boat thing because it hinged on a writeoff on the building, you see, irrespective of where the money came from. If this thing is on a building, we can't do anything, but now let me make a suggestion. In contemplating the construction of these boats, are you going to put in Edison: any special machinery? Sutphen: No, just ordinary woodworking machinery. H.M.Jr: You see, in the case of the Colt Arms, there they had to put in a lot of special jigs and dies which would only be used for the production of this particular gun, couldn't be used for anything else but that one gun and the Army certified that those jigs and dies would be completely used up and would be useless at the end of the life of the contract. Now, in that case we could go along and I am right in saying that we permitted one hundred percent depreciation, I believe. Is that right? 95 -9Foley: H.M.Jr: That is right. On the jigs and dies, and the production of this gun, which could only be used - I mean this machinery they put in could only produce that and nothing else. Foley: And then there was a condition there that if that those same tools and machines were used on additional contracts, the cost of that wouldn't be included in the bid. H.M.Jr: They wouldn't include the cost of the dies and jigs twice. I am giving you this example to try to be helpful. Mr. Edison wanted to know where the Navy stood. Now, we can do something with you on special machinery but on buildings, no. Edison: H.M.Jr: What I am trying to get in my head is, what stymies you on building? I mean, if you have a building and it costs so much and you charge it all off in ten minutes, I mean right on the first boat or right you make no profit but you make twice as much the next year. I don't see why The point is this: The purpose of this meeting was to try to explain our attitude. We don't consider that we should give any special treatment to a manufacturer who is manufacturing something for armament purposes than we should to a manufacturer who is manufacturing a dictaphone and the practice of write-offs on buildings is something which goes through the whole history of Internal Revenue and our own factory - I don't know what the write-off is, but if you were going to build a new factory to manufacture the new Ediphone and came in here and said, "We have got a brand new Ediphone and we have got a wonderful market; we have got 100,000 sold, but we have got to build a new building, but before we do it we want to know whether you will let us write this thing off on this one order which we have for 100,000 Ediphones. Will you - it will take us three years to produce it, will you let us write it off in three years? We have this order, a firm order." Well, the answer would be no. Mr. Edison, you go ahead and build your building, and your building will be treated, depending upon 96 - 10 - whether it is steel or whether it is concrete or whether it is brick or whether it is wood, depending upon the material. We will base our write-off on what we think is the life of the building. But you say, "Well, I don't want to start on this thing, because here I have got this wonderful order and I can complete it in two years and I don't know whether I will get another order, somebody will maybe get a better machine than I." I would say, "I am very sorry, Mr. Edison, all I can do is depending upon the materials that go into this building; we will tell you what the write-off will be and we will give this to you in writing, but you have got to go ahead." Now, whether the man who gives you the order gives you the money or whether it is out of your own treasury or whether you go to the public has no bearing on the facts. Whether the financing comes from any one place for that building and whether you are manufacturing an Ediphone or whether you are manufacturing some electric device for a shell or a mine or some- thing, or a boat, it wouldn't make a bit of difference. I want to explain our attitude. We would treat you - we might even give you a little bit more of a break, because we think that you are manufacturing something for peacetime. We might even give you a little bit of a break over this fellow who is going to manufacture something for war. You might get the edge on him. Foley: That is especially true, Mr. Secretary, when Congress says that you can't make H.M.Jr: Does that explain it? Edison: It does, except that it isn't the case, I don't H.M.Jr: Just a minute. Have I missed Sullivan: That is right. Is that right? H.M.Jr: think. Sullivan: Fine. 97 - 11 H.M.Jr: Would I treat him that way if he was going to put up a new plant for this new Ediphone which looks so pretty? Sullivan: H.M.Jr: Sullivan: Edison: I think you would have to. And I would give him the same treatment, depending on the material that goes in the building? That is right. Let me ask you this: Suppose you were going to build Boulder Dam and the contractor put in a price and said, "I am going to take ten years to build this thing, and the Government said, "No, you build that in two years." Well, "In that case, I will have to build a town and as soon as the Dam is over, that town is just a desert waste, it is no good.' The Government says, "All right, I want your people properly housed on this Dam and I want you to build it in two years." He says, "Well, this town is going to cost me 10 million dollars. I don't want the town. It is no good to me. After it is built it is worthless. Can I charge that into the cost?" "No, those are buildings, you can't put that into your cost." Helvering: Sutphen: "Well then, I don't want the contract." That very thing is already - that very thing you mentioned, Boulder Dam, has been handled in the Bureau, but it wasn't handled when they made the contract. It was handled when they became obsolete, just as we would do with Mr. Sutphen here if at the end of two years this boat didn't prove to be what you thought it would and there was no more manufacturing on it, then this plant would become obsolete and it would be charged off. Mr. Secretary, can I just bring up one point here? I appreciate the difficulty and the die and tool expense of a manufacturing plant where they have to make something especially for the Army and the Navy and where those tools wouldn't be used in ordinary commercial work. In this plant unit, we are trying not only to build the boats in a S8 - 12 - rapid time - one a week - but we have to lay twelve boats down. The machinery is very simple machinery, woodworking machinery, but the plant is the tool that we want. In other words, to have space to lay twelve of these boats down at one time takes an enormous space, 420 feet long, 240 feet wide, headroom of 26 feet, and that is the tool that we have to have for this special work. It is a building tool, it is a plant tool. It is not just a small tool but it is a special tool. Well, I am just trying to show you, Mr. Secretary, that here is the program. We don't know whether the Navy will want many of these boats or only a few. We couldn't afford to go in and build ourselves a plant of $600,000 for 23 boats. It would just be improper. The Department wanted to have me study that end just as the President did. How can we insure ourselves that in case of emer- gency - I said this is the first thing to do, to build a plant and the plant is a tool. Imagine the space H.M.Jr: Just a second - it is impossible. You can't sell me the idea. You can't sell me a factory building as a tool, matter left.not as long as I have got any gray Sutphen: I am trying to illustrate No, it is a very pretty thought but I have got to H.M.Jr: Sutphen: defend what I do here in the Treasury on the Hill and for me to go up and explain that a factory was a tool - I don't want to be laughed at. I wouldn't want to have you H.M.Jr: I just Sutphen: H.M.Jr: But you see my point, that we are trying to accomplish here a rapidity of production. All right, but you can't use the Treasury as a device to do something which we feel, and which the President is in complete sympathy with, that a 99 - 13 Foley: H.M.Jr: That we can't do for anybody else. That we can't do for Mr. Edison or Mr. Smith or Mr. Jones. Sutphen: That is right. H.M.Jr: And the policy is that anything we are going to do we are going to make public, and I, personally, have got to defend this - Mr. Edison does, as Secretary of the Navy, and I have got to defend it and I can't defend that. Now, again trying to make a suggestion which is no good or maybe of use, what it gets down to, it seems to me, is that you have got to do this, you have got to do what we did in England and that is build these shadow factories and the Government will have to go and build a $600,000 plant and lease it to Mr. Sutphen. Edison: What good is it? Why have the Government pay a lot of extra money? H.M.Jr: You are paying it anyway in your depreciation. Foley: You are going to do it this way, by indirection, what you would do by direction, because the Treasury wouldn't be getting this income that it would normally be getting. I would have to raise $600,000 in taxes out of your Income and mine in order to pay for this plant or I lose $600,000 worth of income. It is the same thing. It all comes out of the Treasury in the H.M.Jr: long run. Edison: You might not pay a cent this way. H.M.Jr: Well, look, we have had this thing now for five months. We have been over it very, very carefully and the question of permitting the depreciation of a factory in excess of normal depreciation for any manufacturer - we just can't do it. You wanted to know where we stand. This is important for you and it is important for the country and I think the sooner the Navy knows where we stand, the better. 100 - 14 - We just can't do it. I think if you want these boats and you can't make a dicker, you will find that you will have to build this plant for Mr. Sutphen just the way Edison: Then the Government has got a plant it doesn't want, that won't be any good to it. You will have a lot of tunnels and pipes and walls and things, and what good is it, and it has paid the whole works. H.M.Jr: Edison: But we pay it the other way. If you do it under this closing agreement, there is a chance you might not pay anything. H.M.Jr: You wanted to know this morning where we stood. Edison: Yes. H.M.Jr: Well, now you know. Edison: What you are saying is this: You are saying we will have to delay our battleships two years; you are saying that we don't get airplanes. H.M.Jr: Oh, no. Edison: You are saying that we won't get these boats. H.M.Jr: If you don't mind, may I be frank in front of these gentlemen? Edison: Sure. H.M.Jr: You are being very unfair and unjust, because it isn't my fault that there is a Vinson-Trammell Act and it isn't my fault that Senator Nye has expressed himself as - in his Committee, how he feels about this and Senator Couzens investigated this very thing at the end of the World War. It is all on the records of Congress. Just because you can't use a device - if you don't mind saying to circumvent Congress doesn't mean we are to blame if you can't build your battleships. You have still got your six million dollars, or 99 percent of it. - 15 Edison: That was only for armor plate. Furlong: Where I used it was on good Government ground where I could recover it and use it. We would have to build here for about five million dollars for these other companies. H.M.Jr: What was on that ground? Furlong: Other parts of the plant. H.M.Jr: Owned by whom? Furlong: The United States Navy. H.M.Jr: And who was Assistant Secretary of the Navy when it was built? Furlong: Mr. Edison. H.M.Jr: And he built a Government plant which he was very, very proud of at Charleston, and by spending $750,000 you again put it in order. Furlong: Yes, and that is where I like to put it. Foley: Then you leased it, didn't you? Furlong: H.M.Jr: No, I just leased the furnishings in it. He is very, very proud of it. If it was good then, why Furlong: That is fine. H.M.Jr: Why isn't it all right to build a plant for Mr. Sutphen? Furlong: But this other thing that we have in the Army we have about two million dollars that Bethlehem wants and a couple of million that Midvale wants. If we put that stuff up for them, we can never use it. We can use it at Charleston. H.M.Jr: Right on that, I want you to say before Mr. Edison that there is nothing before the Treasury now on 101 102 - 16 the armor plate situation, we have no proposal from you. Furlong: Yes, we wrote a letter to you on November 22, asking for a closing agreement with the Midvale people. H.M.Jr: On November 22? Furlong: The appointments here, over that subject, previous H.M.Jr: Then it is November 22, but that was quite recently. Furlong: That is right. It hasn't got to me yet, but that goes back to last H.M.Jr: to that - and it has been put off from time to time. July, from July to November. Edison: We have got to find out first what is needed. They have to get estimates and bids and drawings and then we had a careful check to make sure we wouldn't be rooked and then we had to certify to you that these things were so and it all took a little time, but we did have this all in process. Also we had the money being worked out with the Midvale Company in South Charleston. But I said at the Treasury H.M.Jr: other day, I thought I had been misinformed, itthewas all in the mill. All I am trying to say is this, there are two dif- ferent things we are talking about. One is, let's call it the Electric Boat type of thing which you brought over here and which we "no can do." The other thing, the Midvale, hasn't been brought to me yet. Now, I would be delighted to ask for a joint appointment for you and me to see the President and bring it to his attention, just where you are at with the Treasury, where you are at with Mr. Sutphen, and then - because I am not going to let you even think that we are holding back your proposal because - it is a device that you can't use, it is just - you will have to get some other device than the Treasury. 103 - 17 Edison: What isn't clear in my mind is, you can use it on that desk but you can't use it on the waste basket. H.M.Jr: Oh, no. Edison: That is what I can't see. H.M.Jr: You can use it on the desk, you can use it on the waste basket, but you can't use it on the four walls, because the four walls have been here for 100 years and this waste basket may last six months. That is the difference. That may be good for six months, but these four walls I guess they have been here for 100 years and that is the difference. Furlong: Say, Mr. Secretary, you know there is a funny thing came up about this. After we got this authority from you to ask for a closing agreement, I then, of course, told these steel companies that we wanted them to ask for these agreements, but the Bethlehem Company, those fellows, they don't want to do it and they won't do it because they want all the money right away, they want us to hand it out to them. They know there will be some chance when the Treasury goes around to tell them that, "Here, some of this you can use in the next ten or fifteen or twenty years," and they won't write this off for them and they know that, so they want me to give them the whole thing. That is the reason I was holding back on this six million, I didn't want to give it to that crowd. Sullivan: I think, Mr. Secretary, I should tell you that the Midvale people yesterday were in about this tained serious doubts as to the propriety of our executing a closing agreement relating to a subject upon which Congress had expressly authorized the Navy to spend six million dollars, and the reason we wrote them to that effect was because we did not care to have anybody think that we were engaging in anything that might be interpreted as an effort to evade the Congressional desire and same thing and we wrote them that we had enter- intent. That is the situation on Midvale today. 104 - 18 Furlong: I carefully explained to the Committee of Congress when I got the six million that we were trying to arrange it with the Treasury to get this but that I wasn't sure that the negotiations between the Navy and the Treasury would come out all right, because I wasn't quite sure how the Treasury would stand on it. We have had a lot of talk on it with the Treasury. So I asked them, so this program wouldn't fall down entirely, to give me the six million and the six million has been taking out of the shipbuilding, which is authorized for 1940 and we have to go up and ask for a deficiency because it has taken away from the shipbuilding, so that was the reason it came up, because the negotiation hadn't been absolutely settled with Mr. Morgenthau and he Sullivan: was negotiating with this Secretary at the time. But that is now earmarked to eight private in- Furlong: Right. Sullivan: And what each one of those three plants are asking for is about $600,000. Furlong: Sullivan: No, Bethlehem has in for $1,806,000 Their request Furlong: Navy has spent over a million and Midvale is asking dus tries to manufacture armor plate. for six hundred fifty-three. They are asking for $653,000. They had spent a million - over a million' on battleships, 57 to 60 and there, on that, they are going to take their chances with the Treasury on the general run of the mine business as you usually make the arrangements, as you say, with anybody. They will have to do that. But that is how the six million came in, is because I wasn't sure; we were at the same time negotiating with the Treasury. So I got it for armor, only, but the rest of these fellows that make everything else - I am the only fellow that got it because - well, I have been working on this for two years. But the rest of the industry, there are lots of other things besides armor. 105 - 19 Edison: There is one point I want to make and if I am wrong on it - I would like to speak direct, but if we spend this six million dollars, we will have spent six million dollars that you had to raise by getting taxes. If we make a closing agreement, there is a chance we won't have to spend a nickel. H.M.Jr: Answer that. Sullivan: No Edison: Now wait. Suppose the company made a profit of five percent. If you don't let them write this off, if you don't make a closing agreement, you just throw that out. Suppose, on the other hand, that you do make a closing agreement, they make a profit of seven percent. Now, how much does it cost the Government? Sullivan: I am afraid I don't understand the case. We are allowing them to take out of their gross profits, under your suggestion, six hundred thousand dollars. That comes off the top. Edison: Yes. Suppose their profit was seven percent. They have made seven percent on this thing and they are allowed ten. Sullivan: That is right. Edison: They make seven percent. Now then, the question comes up whether you should allow this to be written off or not. If you don't allow it, they make more profit, or they make either more or less profit, but it is within the ten percent, that is what I am trying to say. In either case, it doesn't turn any money back to the Government. Therefore, in that case the Government - it hasn't cost the Government anything. Whether you allow it or not is purely academic. Sullivan: Edison: If they establish a loss they can carry that over against their return the next year. If they establish a loss. - 20 - 106 There is a case where it won't cost the Govern- ment anything. Sullivan: But if the deficiency in profit technique is changed in the Walsh bill to apply to naval craft, then your case would fail because then in the succeeding contracts they would be able to make up the difference between the ten percent and the seven percent and in that way Edison: Sullivan: Edison: But that isn't the law. No, not yet, sir. I am saying, what we are working with now, there is a chance of its not costing the Government a cent. In the case of spending the six million, it is going to cost definitely six million. H.M.Jr: Well, to get back to Mr. Sutphen, I am willing to go across the street with you and recommend that in cases like Mr. Sutphen's and cases like the Consolidated and cases like some of the airplane engines where we need the production, that the President include in his "B" budget sufficient money for the Government to build these factories and lease them to the manufacturer. Now, I am willing to recommend that and I am willing to go with you and recommend it. Edison: I think, Henry, that is going to cost the Governstuff they don't want. The President and I are together on this thing, see, and I am sure that we are together with the Congress and the public on this, see, so if you don't mind my saying it, there is no use ment an unnecessary sum of money for a lot of H.M.Jr: pleading on this question of excessive depreciation on buildings for a munitions maker, because as long as I sit here I don't O. K. it. In order not to be the kind of fellow that says no and not be helpful, I am willing to go across the street and recommend "X" millions of dollars for the Government to put in the plant where you need certain things and the Army needs certain things to prepare them. Now, I am willing to recommend it 107 - 21 - and I am willing to put the influence of the Treasury behind it. Not to be an obstructionist, but in order to get this thing done and get it done rapidly, I will do that. Edison: That is what we did the last time, you remember. H.M.Jr: I know what the engine situation is. We said, of the worst of the two bargains that we would spend the taxpayers' money by getting the appropriation and we got six million, but it is going to cost the Government a lot of Edison: Foley: money which I was trying to save. The alternative is to repeal the Vinson-Trammell Act. H.M.Jr: Well, that is ridiculous. Foley: Surely. H.M.Jr: I will go across with you and let you fellows I will make that bargain with you if you will Edison: Edison: also let me come back after we get the deal and say, "Well now, I have got a way - I recommend a way of saving all this money. But not through the depreciation route. Well, I would like to recommend that. H.M.Jr: What Edison: I would like to recommend that. H.M.Jr: You heard what he said at Cabinet. I don't want to repeat what he said. I don't think he understands the problem. Yes he does. I don't think you do. The President H.M.Jr: Edison: H.M.Jr: has got it all right. I sent him a copy of the letter I wrote you. I wasn't jumping off the 108 - 22 - Furlong: deep end. He understands perfectly and is in complete sympathy with what we are doing here and I think that the quicker the Navy appreciates that they can't use the Treasury route, the quicker they will get their armor plate, the quicker they will get the boats from Mr. Sutphen, the quicker we will get the airplane engines. It is an eternal headache, Mr. Secretary, for us to have those plants up there at the end of the contract. H.M.Jr: It is no headache Furlong: They are no good to us. H.M.Jr: We just disposed of the buildings - residences that were built to house people during the war in connection with a shipbuilding corporation. We just finally sold those the other day. War is a headache anyway. If you want this stuff and you want it fast, I am convinced the way to do it is for the Government to build these things and lease them at a nominal rate to the manufacturer alongside Edison: And that will hold everything up until we get legislation out of Congress next May or June, won't it? H.M.Jr: Edison: Furlong: Sullivan: Well, you haven't made very fast progress with six million dollars in your pocket on armor plate. This is a different problem. The reason we didn't is because they were trying to get this closing agreement. They have gone ahead with the plants and hope to get them. Couldn't these trial boats be made in the present yards? Edison: No. Sullivan: They had quite a lot of room there. Edison: I suppose you could. 109 - 23 Sutphen: Yes, you could, of course, but the point was that we couldn't accept it as a secret and keep it as secret as we want to keep it and when we want to demonstrate Foley: That point was made at the hearings and I think Admiral Land's reply to Senator Vandenberg's question was that all your stuff was known all over the world and there were no secrets. Isn't that correct? Sutphen: I don't remember. Foley: Sutphen: I can show it to you in the hearings. Not in reference to this. Foley: In reference to your company. Sutphen: I don't agree with Admiral Land today. I think H.M.Jr: we are keeping things pretty secret. Don't you think we have gone as far as we can today? Edison: I guess so, yes. I guess we aren't very clear about our problem because I think if you understood some of the figures of it, you would see what we are trying to do, driving at, and that one point about its costing the Government to use the six million, I still maintain it is just a waste of Government funds. H.M.Jr: Captain Kraus would like to say something. Kraus: I would just like to say this, Mr. Secretary. In order to separate my pet project, consolidate it, from this general situation, a good many things have transpired at high speed in the last few days and we have in hand a modification of the consolidated proposal which eliminates all the inside financing and in which the bidder, although he still makes a conditional bid, a bid conditioned on a closing agreement, has put his request for a closing agreement in a form that I believe is right down to the Treasury's groove. Now, whether he will agree to such - 24 - 110 closing agreement as the Treasury may offer remains to be seen, but I am just telling you this at the moment to indicate that there has been a change in that situation and that the Treasury Department may be confronted with that question again, but it is in quite a dif- H.M.Jr: ferent form, with no inside finance, and a straightforward request for a closing agreement defining in the Treasury's language what treatment will be accorded to the variety of items; in other words, it is wide open now and it is wide open now and it is not tied up with the write-offs specifically on buildings. In other words, we made an effort to regularize this from the point of view of existing law. Well now, Captain Kraus, in order to save time, instead of the manufacturers seeing you alone and then seeing our Treasury people alone and not always telling them the same story, if you have got the Consolidated in town Kraus: They are. H.M.Jr: And Mr.this. Helvering, I understand you let Mr. Sullivan handle Helvering: Yes. H.M.Jr: With Mr. Helvering's permission, I will tell him to drop everything else he is doing and go to work on this one, but let him see them together so that they don't play one of us off against the other. Kraus: Yes. Sullivan: I think we should stress at this meeting, sir, the fact that we can make progress using this technique of a conditional bid. The original idea was that the closing agreement, if any, was to be executed before the bid was made and we afforded that facility to the contractor so that at the time he made his bid he would know as well as anyone can know what his tax situation is to be and hence would be able to bid in an enlightened manner. A bid that is conditioned upon our execu- ting this, that or the other kind of a closing 111 - 25 agreement, as the Electric Boat has done, as Consolidated has now done for the second time, is just wasting time for the Navy and for us and for the bidder. H.M.Jr: Now look, as Mr. Edison - I don't know just the Navy set-up. I don't know whether Captain Kraus has this exclusively or not, but whoever has, if he will instruct whoever has authority to talk to you and let us give Consolidated a straight from the shoulder talk on what we will do and what we can do, it will save time. Let's use this as a model and try to get a model contract out of this so that you can multiply it as many times as you want. We will take all the time that is necessary if somebody representing you will bring him in so Sullivan and - they may change it more, but let's try to make a model contract out of this so then you can multiply it by a hundred times, but if you designate whoever handled Con- solidated to go to Mr. Sullivan's office, he will sit there and lock the door and we either get a contract or not. Edison: There is a peculiar arrangement in the Navy. We have different bureaus handling different matters. Admiral Furlong handles Ordinance. Kraus is handling Consolidated and other bureaus handle H.M.Jr: other things. It might have to be two or three. That is all right. All they have got to do is call up Mr. Sullivan and he will sit down with them and he will lock the door and he will work day and night. But let us explain once and for all what the Treasury's position is, and we take this just as seriously as you do, because we have got to collect six million dollars from 130 million people. We can do something for Kraus. If you can't get somewhere, bring them in here and I would like to talk to these babies, Consolidated. 112 December 6, 1939 Commissioner of Internal Revenue Internal Revenue Building Washington, D. C. Attention of I.T.P.: CA-CAA SIR: We hereby make application for a closing agreement in pursuance of Section 606 of the Revenue Act of 1928 as amended by Sections 801, 802 of the Revenue Act of 1938, covering the construction and equipment of a new boat-building plant to be located on our property, Bayonne, N. J. On December 4, 1939 we submitted to the Chief of the Bureau of Supplies and Accounts, Navy Department, Bids for constructing twelve (12) Submerine Chasers - Schedule No. 900-2930 and eleven (11) Motor Torpedo Boats - Schedule No. 900-2939 at a total cost of $4,999,963.00. Our bid being conditioned on the following: a. A satisfactory closing agreement with respect to the special plant unit which we propose to install for the construction of these boats. The estimated cost of this plant unit is $600,000. It is our understanding that the closing agreement will provide an allowance as a part of the cost of the work under these contracts of at least one-half the cost of the plant unit. b. An allowance as a part of the cost of the work under the contract of the amount paid by us to others for engineering the contract fees, price.not however to exceed five percent (8%) of No give herewith a description of the special plant unit and equipment thereof, which we propose to build if we are awarded thedescribed contract above. for the construction of twenty-three (23) motor boats as Main building: 240 by 420 feet. Office building adjacent: Approximately 50 by 150 feet. $425,000 Maia building with office adjoining Launch ways, dooks and basia 76,000 December 6, 1939 Headway Blowing system and steam boxes Machinery: Joiner use Boat Building use Machine shop Coppersmith Engine shop Hand tools Installation Office furnishings Store room fixtures Allowance Total estimated cost $5,500 18,600 12,000 15,000 21,000 1,000 1,500 5,000 2,600 5,000 5,000 20,000 $605,200 Respectfully submitted, ELECTRIC BOAT COMPANY Numy R Enigheen Vice-President 113 BIC 227 114 DEC 6 1939 MEMORANDUS FOR THE PRESIDENT: A conference was held in my office this morning in which Acting Secretary of the Ravy Edison, Admiral Furlong, Capt. Kraus and Warren Melaine represented the Havy, and Mr. H. R. Subphan and Mr. Spear represented the Electric Boat Company of New York. Commissioner Guy T. Helvering, John L. Bullivan, nd Felay and Charles Kades also par- ticipated. The general position of the Treasury Department in relation to the closing agreement technique as applied to contracts under the Vinson-Transell Act was discussed. The primary question was whether or not the Internal Revenue Bureau would execute a closing agreement parmitting the Electric Best Company to charge off as obselescence one half of a construction cost of a new building and new plant facil. ities estimated to cost slightly over $600,000. Mr. Sutphen stated that all a and equipment to be installed in the new building was standard and that no special tools or equipment were required for this contract. After stating what we would be willing to do in regard to obsolescense of special tools and equipment acquired for the particular contract, I then explained to than that under the law we could not allow any other rate of charge-off for depreciation and obselescence than the standard rates in force in the Bureau and now applied to factory construction of all types. The Acting Secretary of the Havy stated that our refunal to enter into such a closing agreement would postpone for a long while the construction of these boats, although subsequently Mr. Susphen acknowledged that the 23 bests provided for in this contract could be manufactured in the existing plant but without the secrecy that would be assured by the construction of the addition to the plant. When I suggested to the Acting Secretary of the Havy that the proper solution was for the government to build these plants and then lease them to private industry, the Asking Secretary of the Navy renonstrated that this would be far more expensive for the government because under the closing agreement the government would not be obliged to pay any part of the construction costs. Repeatedly is was explained to the Acting Secretary of the Havy that any deduction for unreasorable depresiation or obselescence would result in the government paying for such construction because a proportionately larger amount of actual excess profit would be retained by the contructor. I constantly reiterated that - could not treat one taxpayer differently than we treated all 115 At this point the representatives of the Navy Department reverted to the case of the Consolidated Aircraft Corporation and stated that they had just received new proposals contemplating an entirely different type of closing agreement. I explained to the Acting Secretary of the Mavy that the appropriate officials at the Internal Revenue Bareau would suspend any other work they are now engaged in and hold themselves in readiness to consult with the representatives of the Navy Department and representatives of the Consolidated Aircraft Corporation on any new proposals the contractor wished to make. And I further stated to Mr. Edison that at the conclusion of these negotiations I would be glad to meet with the representatives of the Havy and the Consolidated Aircraft Corporation if that was deemed desirable. At the close of the meeting I again emphasised the fact that the closing agreement technique could not in any way be used to circumment the clear intent of the Vinson-Transell Act and afford to any taxpayer more than he was legally entitled to, and offered to Mr. Edison the support and influence of this Department in any legislation he might see fit to propose to Congress to provide funds for the erection of needed additional facilities to expedite the national defense program. Although this matter was not discussed in the meeting, it is sub- mitted that the problem which faces the War and Navy Departments can be solved in either of two ways (1) By eresting plants similar to the "shadow factories" in Great Britain and leasing such plants to private industry and by expanding existing navy yard and arsenal facilities; or (2) by constructing or financing the construction of such plants as part of a federal public works program under the Federal Works Agency. IS is my considered opinion that it would be far better to spend millions for defense than to use the tax laws to subsidise private monitions makers. (Signed) H Morgenthau, Jr. 12-6-39 116 REB GRAY Paris Dated DECEMBER 6, 1939 Rec'd 7:40 p. m. Secretary of State, Washington. 2912, DECEMBER 6, 7 p. m. FOR THE TREASURY. The entire French press carries prominently this morning the proposal of the President and the Secretary to carry for the time being in a separate suspended treasury account Finn's war debt payment due DECEMBER 15 and the suggestion that Congress may subsequently make it available in SOME form to Finland. There has been as yet no Editorial comment but the move has of course met with popular approval here. This morning's JOURNAL OFFICIEL carries a decree and arrete concerning the required declarations of holdings abroad. You will recall from our telegram No. 2765, November 15, 7 p. m. that the time-limit for filing such declarations was postponed from DECEMBER 1 to January 15, 1940. The present decree brings into line the Extension of time for filing of provisional declarations by those serving with the colors from February 1 to April 1 (our telegram REB -2-#2912, From Paris, DEC. 6, 7 p. m. 117 telegram No. 2028, September 18, 1 p. m., paragraph two) and those subject to force majeure are given until March 15. Today's JOURNAL OFFICIEL likewise contains the delayed monthly report of Treasury operations during August 1939. It reveals that the Treasury had a balance of 8,807,000,000 francs on hand at August 31 compared with 10,976,000,000 at July 31. This included the Treasury deposit of Missindise 1,492,000,000 at the Bank of France (compared with 3.647.000.000 at July 31) and funds available at its various paying agencies, in colonial banks, and abroad. Expenditures of the Treasury during August totalled 56,940,000,000 francs and receipts 54,772,000,000. (END SECTION ONE) BULLITT Repetition requested on underscored figures. NPL 118 GRAY EDA PARIS Dated DECEMBER 6, 1939 RECEIVED 7:55 p.m. Secretary of State Washington 2912, December 6, 7 p. m. (SECTION TWO) The monthly statement of the situation of the public debt at August 31 is also published in the Journal Official of today. It reveals a net increase during the month of August of 1100 million francs to a total of 445,742 million chiefly as concerns the 42% 1937 loan with Exchange guarantee (935 millions) and the three year armament bonds (1733 millions). The Netherlands National Bank statement for the WEEK Ended December 4 reveals gold holdings of 1,024,000,000 florins as against 1,029,000,000 the previous WEEK. DE- mand liabilities totalled 1,353 as against 1,394, millions. Note circulation rose materially from 1,143,000,000 to 1,158,000,000. Gold coverage rose from 73.81% to 75.68% BULLITT RR 119 GRAY JT PARIS Dated DECEMBER 6, 1939 Rec'd 8:15 p.m. Secretary of State, Washington. 2912, December 6, 7 p.m. (SECTION THREE). The AGENCE ECONOHIQUE ET FINANCIERE carries a report that "the Financial Counselor of the British Embassy at Washington has denied rumors that the British Government intends to create a holding company designed to obtain advances against American securities held by the English". (Please SEE my telegram No. 2896, DECEMBER 4, 7 p.m.). "ThESE securities, he said, are at present sold for the account of individual holders". The article adds that the rumors were occasioned "by the arrival at Washington of two high British officials to confer with the Federal RESERVE Board and the Securities and Exchange Commission concerning the problem of liquidation of American SECURITIES in British hands". BULLITT EMB 120 REB GRAY Paris Dated DECEMBER 6, 1939 Rec'd 7:25 p. m. Secretary of State, Washington. 2912, DECEMBER 6, 7 p. m. (SECTION FOUR) The article continues that "large NEW York banks feel that Washington will send up SOME trial balloons to ascertain the popular reaction on the Johnson Law and the Neutrality act. Public opinion is certainly very favorable to the Allies and Washington will do all that is possible to facilitate their transactions in the United States. But in Congress any attack on the Johnson Law or the Neutrality Act would COME up against opposition". Meanwhile it concludes "banks and certain private groups are buying portfolios of American securities from foreign holders at prices below Wall Street. The opinion prevails at NEW York that if any plan is adopted for the liquidation of securities it is the Government of the United States in accord with that of London that will take the initiative." BULLITT NPL EMB 121 GRAY CK Paris Dated DECEMBER 6, 1939 Rec'd 8:50 p.m. Secretary of State Washington 2912, DECEMBER 6, 7 p.m. (SECTION FIVE) The press gives an Estimate of the total losses in the Credit Anverois failure at 200,000,000 of which 60,000,000 must be borne by shareholders. Funds set up in the months of June, July, and August it is announced today, will permit payment to French holders of Young loan obligations of the semi-annual coupon due December 1 on the basis of twelve francs 50 net per 25 franc coupon. The coupon is to be paid today. The French financial press reports that the Official Gazetta in Italy has published new rules concerning the import and Export of Italian bank notes and tourist checks. These rules people provide that banknotes of 50 and 100 lira which are now abroad will not be permitted to be brought into Italy unless their holders within a period of 20 days for those in Europe and 40 days for others, present them to the Italian Foreign Exchange Office which will set up in the name of each owner a non-interest bearing account to the value thereof. Any provisions with respect to the owners' 122 CK 2-No. 2912, DECEMBER 6, 7 p.m (section five) Paris. owners' utilization of such "account" are not mentioned in the press. The securities market was strong and active today and most French industrial and bank shares registered sub- stantial gains. Rentes, however, were almost stationery. Suez shares WERE up 480 and Royal Dutch 145 francs. Scandinavian securities WERE steady. (END OF MESSAGE) BULLITT EMB BEEN 1 330 123 PARAPHRASE OF TELEGRAM SENT TO: American Embassy, Paris, France DATE: December 6, 1939, 5 p.m. NO.: 1490 m CONFIDENTIAL FOR THE AMBASSADOR. On Thursday Secretary Morgenthau plans to telephone to the Ambassador, and suggests that the Ambassador have telegram No1 2742 of November 13 from the Embassy at hand. WELLES Acting (HF) EA:LWW (COPY:FE:EJE) Air Mail *COPY AMERICAN CONSULATE 124 Hanoi, Indochina, December 6, 1939 No. 24 SUBJECT: Transit of Commodities to China during November 1939. The Honorable The Secretary of State, Washington. Sir: I have the honor to refer to my despatch no. 13 of November 10, 1939. in regard to the quantity of freight transitted to China via Indochina during the month of October, 1939, and to submit the following information concerning the month of November, 1939. It is reliably reported that approximately 32 thousand tons of freight were transitted to China via Indochina during November. Of this amount, 18.5 thousand tons were transported over the Dong Dang-Nanning road and 13.5 thousand tons were transported by the Indochina-Yunnan Railway. During the latter part of the month under review the road was not usable because of the Japanese activities in Kwangsi and during the early part of the month the railway did not operate at full capacity. A part of the 18.5 thousand tons transitted by road was returned to Indochina, following the closing of that road and to prevent this cargo being captured or destroyed by the Japanese. It is estimated that about 5 thousand tons were or are being returned to Indochina. This gives a net transit to China of about 27 thousand tons, or 13 thousand more than in the month of October. As in the preceding month, at least from 80 to 85 per cent of this tonnage was destined directly or ultimately for the Chinese National Government or for semi-governmental organizations. Petroleum products amounted to slightly over 7 thousand tons. As a result of this increased traffic, B tocks at Haiphong were reduced by from 8 to 10 thousand tons, even including the cargo returned to Indochina in the latter part of the month. This is the first month in which any appreciable inroads have been made in the a ccumulation at Haiphong. Accordingly, it may be estimated that at the end of November there were 190 thousand tons of cargo at Haiphong, including some 3000 motor vehicles, and perhaps 7 thousand tons in other parts of Tonkin, chiefly at Dong Dang. It is to be regretted that, just as positive results were being obtained in solving the transportation problem, the Japanese advance rendered useless the main route of transportation to China. Respectfully yours, CHARLES S. REED II American Consul Original and 2 copies to the Department Copies to Embassy, Chungking and Peiping Copy to Consulate General, Hong Kong Copy to Consulate, Saigon 815.4 CSR:car 125 PLAIN HSM London Undated Rec'd December 6, 1939 12:55 p. m. Secretary of State, Washington. 2551. FOR TREASURY. 1. In reply to a question in the House of Commons last night as to whether the Dominion Governments had been approached with a view to forming a joint Empire Exchange control the Financial Secretary of the Treasury stated that "Each of the Dorrinion Governments has imposed Exchange control under its own legislation and EVERY Effort is made to Ensure coordination and cooperation bEtwEEN the authorities concerned both as regards the Governments and the central banks". In reply to a further question as to the completeness of the control be said: "I think everything is quite satisfactory in this field at the noment." 2. With regard to Simon's Paris statement on monetary cooperation between Great Britain and France, Einzig raises 126 hsn -2- No. 2551, December 6, from London raises the question as to whether the stabilization of the sterling-franc rate means a continuance of the officially fixed rate in London and Paris or includes also the intention to take steps for maintaining the official rate in unofficial markets. 3. With reference to No. 2485 of November 29, 1 p. M., the Government revenue and Expenditure accounts for the WEEK ending December 2, published today show total revenue at 112.3 million and Expenditure at 676.3 million, giving a deficit on the WEEK of 664 million. Though the Expenditure figure was swollen by the 133 million payment of war loan interest, it also represents the highest weekly total since the outbreak of war on supply SERVICES and a big jump on the past three WEEKS. This figure at 653.5 million represents a daily Expenditure rate of 67.5 million. The returns showed an increase in total tap Treasury bills outstanding of 617.8 million to 6697.7 million, the highest figure since the peak of £706.6 on November 4. Though the deficit was 664 million the total floating debt increased by only 656 million, receipts from national savings certificates having brought a net 13.8 million and receipts from: the new national defense bonds a total of L4 1/4 million. (The sale of savings certificates in a normal WEEK yielded $500,000. ) 4. 127 ham -3- No. 2551, December 6, from London 4. The silver price was up 1/16 to 23 7/16 for spot and 23 5/8 for forward with the Bombay mint delivery demand continuing heavy. 5. The Argentine peso rate was moved today from 17.00-50 to 17.15-65. Other officially fixed rates WERE unchanged. The Finn mark was slightly firmer at 220 bid. JOHNSON MCL TREASURY DEPARTMENT WASHINGTON OFFICE OF THE ADMINISTRATIVE ASSISTANT TO THE SECRETARY December 6, 1939. MEMORANDUM FOR THE SECRETARY: Harris E. Willingham resigned from the Federal Alcohol Administration on November 30, 1937. While with that agency he received salaries ranging from $8,000 to $10,000. On March 17, 1938, Mr. Willingham was appointed as an Ad- ministrative Officer in the Central Treasury Accounts Office under Mr. Bartelt at $6,000 per annum for a period not to extend beyond June 30, 1938 This appointment was renewed not to extend beyond June 30. 1939 and again renewed not to extend be- yond June 30, 1940, There is nothing in the file to indicate that at the time of his original appointment there would be any objection to the continuance of Mr. Willingham's services so long as there was a need for them and emergency funds were avail- able. Mr. Bartelt tells me that he recommended the renewal of Mr. Willingham's employment at the close of each fiscal year because of the efficient and essential service he was rendering both as an accountant and administrative officer. for 128 COPY PARAPHRASE notreal A telegram (no. 436) of December 6, 1939, from the American Consul General at Hong Kong transmits a message of December 3 from Consul Reed at Hanoi which reads sub- stantially as follows: The capture of Nanning and the fact that the Japanese troops have advanced to the north and northeast is admitted by the Chinese at Hanoi who state that unless they can regain possession of Nanning they expect extensive bombing operations in Yunnan and Kweichow will be carried on by the Japanese using the air field at Nanning as a base. Some of the cargo stored at Lungchow is being returned to Indochina as the road to Nanning is unusable. It will be some months before another road farther to the west which is being built will be ready for use and even after that road is ready it can take care of only 3000 tons of traffic a month at the most, according to estimates. The railway hopes to transport approximately 15,000 tons during December, according to information received by Consul Reed. It is Mr. Reed's understanding that for the time being certain lots of goods are being stored which were expected to arrive in Haiphong destined for China. 129 130 COPY n OPMAV December 6, 1939 Ree'd 9:28 a.m. ACTION, STATE CONFIDENTIAL. the following was received free the Assistant Naval Attache at Changing on December 5. A shiplead of Baseian munitions arrived at Rangoon from 0dessa latter part of October in a ship of 9000 tons displasment. The ship's - was for transit across China and received local Government's full cooperation. traffic is expected to triple over Dayne reate as soon as improvements are completed, the everage monthly traffic for the last 3 months having been 2000 tens mostly Seviet and German essential was materials. British heads day that there is - pressure from the Japanese to close the read and also state they have as fear that there will be as attack through Sisa because Hipponese political activity has been ineffective. 0 R 95 (reference member). CAVIBOES yourself ELP 8891 8 030 to motalvi(I) 131 DEC 7" 1939 The Honorable, The Secretary of State. Sir: Due to the present war situation in Europe, which has made it practically impossible for the staff of Treasury representatives stationed in Berlin to conduct routine customs investiga- tions in Central Europe, the conclusion has been reached by this Department to close the office of the Treasury Attache at Berlin on December 31, 1939, and to establish an office at Stookholm, Sweden as of January 1, 1940, with a skeleton staff, for the purpose of conducting valuation investigations in the Soandinavian countries that may be requested by customs appraising officers in this country in connection with importations from that area. At the present time the Treasury Attache, Mr. Erwin G. May, together with Treasury Representatives Walter M. Welff and Rey V. Fox, and a staff of alien interpreter-translators (Margarete Brandt, Frances Bielschowsky, and Erich P. Schuok- ert), are rendering assistance to the Embassy at Berlin. However, in a letter received from the Treasury Attache at Berlin under date of October so, 1939, he expressed the belief that "after November 30 and certainly after December 31, the Babasay will be able to take over the unit completely with its own officers. Upon the establishment of an office in Stookholm, as above referred to, it is the intention of this Department to place Mr. Erwin G. May in charge thereof, with one assistant, Treasury Representative Walter M. Welff, and a clerk, to be selected later. It is, further, the intention of this Depart= ment to discontinue the services of the three alien interpretertranslators now attached to the Berlin office, as of December 31, 1939. 132 It is requested that the matter of the cabablishment of sa office for representatives of this Department in be take up by your Department with appropriate officials of the Smedish Government, in order that this Department my be informed whether such action would most with the approval of the Swedish authorities. Very truly yours, (Signed) H. Morgenthau, Jr. Secretary of the Treasury. ORIGINAL FORWARDED TO ADDRESSEE FROM OFFICE OF THE SECRETARY ⑉ 11-18-20 by hand at 9:15am 12/8/39 File to Mr. Thompson 4 133 December 7. 1939. My dear Mr. Galeerans 1 acknowledge receipt of your telegram of today's date, and the accompanying Western Union Money Order in the amount of $26.00, payable to my order, which you and your fellowmembers in the Hollandale Retary Club desire me to apply to the retirement of Finland's debt to the United States. I am sorry to have to advise you that no provision is made under the laws of the United States for the acceptance and direct application of such contributions by the Treasury Department. However, in order that your laudable gift may not fail, I suggest that you authorize me to indorse and deliver your money order to Hjalmar J. Procope, the Finnish Minister, together with a copy of your telegram. Otherwise, I shall be compelled to return the contribution. I shall hold the money order, pending receipt of advice as to its disposition. Very truly yours, (Signed) H Morgenthau, Jr. Secretary of the Treasury. Mr. W. C. Galceran, Jr., President, Hellandale Rotary Club, Hollandale, Mississippi. sent Airmail main PC O. DTEabe 12-5-39 KHFsaka 12-7-39 File to Mr. Thompson 134 DEC go 1939 My dear Mr. Secretary: Reference is made to letter from this Department dated March 21, 1939 in reply to your letter of February 11, 1939 (symbols TD 811.5123410 Shipping/17) relating to a note from the Irish Legation concerning reciprocal exemption from income tax of profits arising from the operation of aircraft, and asking whether a statutory provision providing for such exemption was likely to be enacted into law before the end of March 1939. While the principle of such provision has been adopted in the tax convention with Sweden and in the proposed tax convention with France, the existence of more pressing matters incident to the enactment of the Revenue Act of 1939 prevented consideration of the statutory proposal during the first session of the 76th Congress. In view of this fact and of the pending negotiations with Great Britain upon the same subject matter, this Department considers it timely to advise that it is now prepared to enter into negotiations at Washington looking to adoption of a tax convention between the United States and Ireland. While the note from the Irish Legation forming the basis of your letter has reference only to the question of the reciprocal exemption of aircraft profits, it has been noted that in reply to inquiry emanating from the Fiscal Committee of the League of Nations in February 1937 addressed to various countries relating to the attitude of the respective countries toward the subject of prevention of tax evasion, the Permanent Delegate of Ireland at Geneva in letter dated June 9, 1937 stated that Ireland was favorably disposed toward the proposal for conventions having for their object the prevention of tax evasion. The interest of that country in tax conventions is also indicated by its conventions of 1926 and 1928 with Great Britain which are directed toward the avoidance of double taxation as between the two countries and to related administrative cooperation designed to prevent tax evasion. In view of the position thus indicated, it is suggested that, if you perceive no objection to such course, you convey to the Irish Government that this Government, in keeping with its existing tax convention policy, is interested in exploring the possibilities of a convention between the two countries. The prospects of including within the scope of such convention avoidance of double taxation and of administrative cooperation incident thereto may, it is presumed, be developed in the course of the discussions which take place with respect to the problem of aircraft earnings. 135 -2- In the event that further correspondence relative to this matter is necessary, please refer to IR:OC:A-289343-23. Very truly yours, (Signed) E. Secretary of the Treasury. The Honorable, The Secretary of State, Washington, D.C. - FORMANDED TO ADDRESSES FROM OFFICE OF THE SECRETARY by messenger 12/9/39 File to Mr. Thompson 136 in 37 DEC 7 1939 My dear Mr. Secretary: Further reference is made to your letter dated October 25, 1939, (symbols TD 579.6AE1/96) transmitting draft of proposed convention between the United States and Great Britain relating to reciprocal exemption from income taxation of profits derived from the operation of aircraft and requesting the comments of this Department on such draft. The draft referred to has been made the subject of careful study and from the standpoint of this Department constitutes a suitable instrument for the accomplishment of the desired objectives. Should the British authorities propose changes in the draft or seek discussions with respect thereto, this Department is prepared to further collaborate with your Department in the matter. The draft transmitted with your letter is returned herewith. In the event that further correspondence relative to this matter is necessary, please refer to IR:GC:A-289342-4. Very truly yours, (Signed) H Morgenthau, Jr. Secretary of the Treasury. The Honorable, The Secretary of State, Washington, D. 0. Enclosure. ORIGINAL FORWARDED TO ADDRESSEE FROM OFFICE OF THE SECRETARY by hand File to Mr. Thompeon Convention between the United States of America and Great Britain for the Avoidance of Double Income Taxation on Profite Derived from the Operation of Aircraft The President of the United States of America and His Majesty the King of Great Britain, Ireland and the British Dominions Beyond the Sens, Emperor of India, in respect of Great Britain and Northern Ireland, being de sirous of avoiding double income taxation on profits derived from the operation of aircraft, have decided to conclude a convention for that purpose and have appointed as their respective Plenipetentiaries The President of the United States of America: : His Majesty the King of Great Britain, Ireland and the British Dominions Beyond the Seas, Emperor of India: : for Great Britain and Northern Ireland: who, having communicated to each other their full powers, found in good and tue form, have agreed AB folloves ?- ARTICLE s (a) The Government of the United Kin 10m of Great Britain and Northern Ireland unfertake that any profits or gains derived from the operation of aircraft registered in the United States of America by a citizen of the United States of America, resident outside the United Kingdom, or by a corporation organized in the United States of America shall be exempt from income tax, including eurtax, national defense contributions tax and excess profits tax, chargeable in the United Kingdom. (b) The Government of the United States of America undertakes that any profits or gains derived from the operation of aircraft registered in the United Kingdom by AR individual, other than a citizen of the United States of America, resident in the United Kingdom, or by a cor oration organized in the United Kingdom shall be exampt from income tax, including surtax and excess profits tax, imposed by the revenue laws of the United States of America. ARTICLE II The exemptions provided for in Article I of the present convention shall be greated in respect of taxes imposed by the United Kingdom for the year of assessment commencing - the sixth day of April, 1940g and for n sequent years, and in respect of taxes Sapposed hay the United States of America for years beginning - ⑉ after January 1, 1940. ANTICLE III The Saym United States of America', where used in shis convention, includee only the States, the Terrie Sories of Alaska and Hawnii, and the District of ColumMa. The toms "United Kingdom of Great Britain and Barthern Irolant® and *United Kingdom", where used in this convention, include only Great Britain and North ⑉ Iroland, -5ARTICLE IV The present convention shall be ratified, in the CASS of the United States of America, by the President, by and with the advice and consent of the Senate, and in the GABE of Great Britain and Northern Ireland, by His Majesty the Kink, with the consent of the Parliament. The ratifications shall be exchanged at Tashington. This convention shall come into force on the first day of January following the exchange of the instruments of ratification. The convention shall continue in force for a period of five years and indefinitely thereafter but may be terminated by either contracting State at the end of the five-year period or at any time thereafter, provided a notice of termination has been Fiven at least six months in advance, the termination to take effect on the first day of January following the expiration of the six-month period. IN ITNESS WHEREOF the respective Plenipotentiaries have signed this convention and have affixed their seals hereto. DONE in duplicate at Washington this P 1939. day of 142 TREASURY DEPARTMENT WASHINGTON December 7, 1939. III MEMORANDUM FOR THE SECRETARY: Re: Procurement Division Appropriation, Fiscal Year 1941. Our hearings before the Budget Bureau on the Procurement Division estimates occurred on Wednesday. The estimates included approximately $2,000,000 additional to permit the expansion of purchase activities in accordance with your instructions. The Budget Bureau people expressed the opinion that if this additional amount is to be made available to the Procurement Division, corresponding reductions should be made in the appropriations of the several departments, bureaus, and establishments for which the Procure- ment Division is to do the purchasing. The opinion was expressed also that it would be better to defer the assumption of further purchase functions by the Procurement Division until negotiations can be had between the Procurement Division and the several departments, bureaus, and establishments, to determine (a) the extent to which the Procurement Division should function, and (b) the amount of funds which each department, bureau, and establishment should contribute to the Procurement Division to permit the Divi- sion to function with respect to its particular requirements. We were advised that, in accordance with these opinions, the following alternative propositions would be submitted to the Director of the Budget, and, presumably, by him to the President: (1) The Procurement Division will, for the present, be limited to making purchases in the District of Columbia. No additional funds will be provided for the fiscal year 1941 for the purpose of enlarging its present functions. The Division will be expected to operate during the fiscal year 1941 within the funds now available, and any additional functions will be financed by means of surcharges billed against the requisitioning agencies. (2) The Procurement Division will be allowed to extend its functions to field purchases, as well as to those in the Memo. for the Secretary-2. District of Columbia. It will, however, be provided no additional direct appropriation for increasing its activities. Any additional funds necessary will have to be se- cured by transfer from the several departments, bureaus, and establishments, after negotiation by the Procurement Division with each agency concerned. (3) The necessary additional appropriation will be recommended for the Procurement Division. This must be accompanied, however, by corresponding reductions against the 1941 estimates of the several departments, bureaus, and establishments, the amount of the reduction to be determined in each case by the Bureau of the Budget after negotiation between the Procurement Division and the agency concerned. (It was admitted that since the Budget is practically completed, time will not permit this course to be followed.) None of the foregoing propositions would be satisfactory to this Department. None would leave us in a position to carry out your in- structions. I submitted the following alternative propositions for consideration, with the request that in fairness to the Treasury De- partment, these also should be laid before the Director of the Budget: (4) The necessary additional appropriation will be recommended for the Procurement Division. Deductions will be made (if insisted upon by the Bureau of the Budget) pro rata against the 1941 estimates of the several departments, bureaus, and establishments, in proportion to the relative work load to be assumed by the Procurement Division for the benefit of each, in accordance with estimates furnished the Budget Bureau by the Treasury Department. (5) The necessary additional appropriation will be recommended for the Procurement Division, without any deductions from the 1941 estimates of other agencies. The Bureau of the Budget may, however, subsequently require the impoundment of funds by the several departments, bureaus, and establishments to the extent that expenditures by these agencies are rendered unnecessary by reason of the assumption of the purchasing function by the Procure- ment Division. The question is one of policy: Is it desired that the Procurement Division shall make the major purchases for all nonmilitary branches? If so, this policy can not, in my judgment, be carried into effect 143 144 Memo. for the Secretary-3. under any of the propositions (1), (2), and (3) above, except after months, possibly years, of wrangling with the several departments, bureaus, and establishments, respecting (a) the extent of functions to be taken over, and (b) the amount of funds to be transferred to the Procurement Division to pay the costs of administration. Inasmuch as you discussed this subject earlier with Mr. Smith, the Director of the Budget, I think it not unlikely that he will confer with you before a decision is reached regarding the Procurement Division estimates. If so, I strongly recommend that the effort be made to secure the approval either of proposition (4) or proposi- tion (5) above. Should this effort fail, there will be no practical basis upon which to carry out the program which you have outlined. GRAVES. Propared by: Mr. Murphy Mr. Mr. Tickton Lindow Mr. Haas 145 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE December 7, 1939 Secretary Morgenthau TO 904 Subject: Selection and Pricing of Issues for Refunding the FROM Mr. Haas March Notes I. Premium on March Notes Irrespective of Exchange Offering About 12/32 of a point in interest would accrue between December 20, 1939 and March 15, 1940 on any March note not sur- rendered for exchange in connection with the proposed refunding offer. Any note not exchanged would become "3-months' money" upon which the current rate of interest 1s practically nil. The March notes, therefore, are worth a premium of at least 11/32, irrespective of any exchange offer which may be made for them. As a consequence of this, 11/32 of the premium on the "best" of the new securities offered in exchange must be excluded from the "real margin of safety" of the exchange offering. This is beuntil maturity if the best premium available on any of the new issues should fall below 11/32 before the expiration of the exchange offer. If the notes were maturing immediately, on the cause the holders of the March notes would prefer to hold them other hand, or if they were immediately callable, the new issue would be taken up as long as it was worth more than par. II. Pros and Cons on the Selection of Issues The selection of securities for the refunding may be considered under four heads according 8.8 the securities are offered in proportions to be determined at the option of the holders of the maturing notes, or in fixed proportions, and according as it 18 a two-way or three-way offer. The remainder of this memorandum 18 devoted to a discussion of these alternatives in turn, with a proposed selection of issues. The selections considered appropriate for each of the four alternatives are also presented together in the attached table for purposes of ready comparison. All issues are priced on the basis of closing bids, December 6. 146 Secretary Morgenthau - 2 It is concluded that, if the offering is to be made in propor- tions to be determined at the option of the holders of the maturing notes, the balance of advantage appears to lie in the direction of a two-way exchange. If it is to be made in fixed proportions, however, a three-way exchange seems to have the edge. A. Proportions at Noteholders' Option -- Two-Way Offer : Suggested issues Probable net premium (Decimals are thirty-seconds) Note: Reopen 1's due March 15, 1944, at 1/2 point pre- mium (now selling at 101.01) .17 Medium-long bond: 13-17 year (1952-56) 2-3/818 1.06 The note offering is merely nominal in this alternative. It is not considered advisable, therefore, to start a new issue because it would be very small and could not be added to later if interest rates advanced even very slightly. If more than such a nominal exchange offer were to be made, it would not be advisable to reopen the March 15, 1944 notes, because this would result in too large a total issue. It would probably be inadvisable, however, to make more than a nominal offer of notes in exchange, because, if such an offer were made and secured a large number of takers, the market would be likely to give it a bearish interpretation. A disadvantage of the medium-long bond employed in this alternative is that it is not very economical fiscally. This is because an increase of 3/8's in the coupon rate from 2 percent to 2-3/8 percent permits an increase of only six years in the final maturity of the bond, whereas an increase of an additional 1/8 would permit a further increase in final maturity of five years. This disadvantage of a medium-long bond applies, of course, irrespective of whether the offering is made in optional or in fixed proportions. 147 Secretary Morgenthau - 3 This alternative would result in the great bulk of all exchanges going into the bond. Its principal disadvantage, aside from the lack of fiscal economy just discussed, is that it would present the problem of secondary distribution discussed in our memorandum of December 6. B. Proportions at Noteholders' Option -- Three-Way Offer Suggested issues Probable net premium (Decimals are thirty-seconds) Note: Reopen 1's due March 15, 1944 at 1/2 point pre- mium (now selling at 101.01) .17 Medium bond: Reopen 2's due 1948-50 at 3/4 point premium (now selling at 101.22) .30 Long bond: 17-22 year (1956-61) 2-1/2's 1.07 This alternative has an advantage over the corresponding two-way offer in that the use of two bonds permits of greater fiscal economy -- 1.e., it permits a greater extension of maturity to be purchased for a given amount of coupon. The inclusion of a medium-term bond would probably also result in cutting down the necessary amount of secondary distribution. The main disadvantage of this alternative is that it is difficult or impossible to predetermine the amount of exchanges between the medium and long bond, unless one of the exchange of- ferings is merely nominal. In the suggested set-up the long-term bond has been deliberately preferred, but the majority of exchanges might, nevertheless, go into the medium-term bond. This might be very bearishly interpreted by the market. For this reason, it is recommended that a two-way offering be employed if the proportion of exchanges is to be left to the option of the holders of the maturing notes. Secretary Morgenthau - 4 148 C. Fixed Proportions -- Two-Way Offer Suggested issues Probable premium (Decimals are thirty-seconds) (1/3) Note: 5-year 1 percent (2/3) Medium-long bond: 13-16 year (1952-55) 2-3/8's "Composite" premium .25 1.09 1.04 The technical advantage of an offering in fixed proportions on the present occasion as a means of reducing secondary distribution was discussed in a memorandum submitted December 6. This type of offering also has the advantage on all occasions that the approximate amount of each of the new issues can be known in advance. In this case, if offered in the proportions proposed, the new note issue would be for about $450 millions and the new bond issue for about $900 millions, both convenient amounts. The estimated premiums on the two new issues would be equiva- lent to a "composite" premium on the maturing notes of 1-4/32, or to a "real margin of safety" (subtracting 11/32) of about 25/32. This would appear ample. The principal disadvantage of an offering in fixed proportions is its unfamiliarity. It "coerces" the holders of the maturing notes to exchange them for securities fitting in with the require- ments of the Treasury. Of course, they would be equally "coerced" if a single security were offered, and are "coerced" in any event by the relative pricing of the issues even if the options are left to the noteholders, but the appearance here may be as important as the reality and might result in unfavorable press comment. A careful check of the market should be made before making an exchange offering in fixed proportions. Aside from the relative merits of exchange offerings in optional and fixed proportions, the major disadvantage of this al- ternative is the lack of fiscal economy of the medium-long bond. This has already been discussed in connection with the suggestion for the employment of such a bond in a two-way offer with optional proportions. 149 Secretary Morgenthau - 5 D. Fixed Proportions -- Three-Way Offer Probable net premium Suggested issues (Decimals are (1/3) Note: 5-year 1 percent thirty-seconds) .25 (1/3) Medium bond: Reopen 2's due 1948-50 at par (now selling at 101.22) (1/3) Long bond: 17-22 year (1956-61) 2-1/2's "Composite" premium 1.22 1.07 1.07 The advantages and disadvantages applying generally to offerings in fixed proportions apply here also in the same manner as in the corresponding two-way offer. It also has the minor additional disadvantage of being somewhat more complex. The special disadvantages attaching to a three-way offer with optional proportions do not apply, however, if fixed proportions are used. A three-way offer, on the other hand, is more economical fiscally and would reduce secondary distribution as compared with a two-way offer. It, therefore, appears to have the edge if fixed proportions are employed. Attachment. 150 Estimated Premiums on Proposed New Issues in Two-way and Three-way combinations (Basis of closing bids, December 6) Three-way Two-way Yield :Probable Yield :Probable: basis) net : premium basispremium net (Decimals are 32nds) (%) (%) (Decimals: are 32nda) Optional Proportions Note: te: Reopen 1's due 3/15/44 open 1's due 3/15/44 @ 1/2 premium (now 1/2 premium (now .17 elling at 101-1/32) dium-long bond: B-17 year (1952-56) 2-3/818 selling at 101-1/32) .17 Medium bond: 2.27 1.06 Reopen 2's due 194850 @ 3/4 premium (now selling at 101-22/32) .30 Long bond: 17-22 year (1956-61) 2-1/2's Fixed Proportions (1/3) Note: 5-year (12/15/44) /3) Note: -year (12/15/44) 1's /3) Medium-long bond: 3-16 year (1952-55) 2-3/8's .84 .25 1's 1.07 .84 .25 (1/3) Medium bond: Reopen 2's due 19482.26 1.09 50 @ par (now selling at 101-22/32) (1/3) Long bond: 17-22 year (1956-61) 2-1/2's imposite premium 2.41 1.04 Composite premium 1.22 2.41 1.07 1.07 (asury Department, Division of Research and Statistics. December 7, 1939 BK229 1519 THE AMERICAN METAL COMPANY. LIMITED 01 BROADWAY NEW YORK HKH:AA December 7,1939. TELEPHONE BOWLING GREEN 9-1800 CABLE ADDRESS: EFFLUX. NEW YORK Honorable Henry Morgenthau, Secretary of the Treasury, Washington, D. C. Dear Henry: By mistake I took with me yesterday the rather hastily written memorandum on Russia's imports of lead and copper that I had intended leaving with you. I am enclosing it slightly revised. I had lunch today with K. P. Chen. As he can explain when he sees you tomorrow, we have brought the proposed zinc business to a point where we are hopeful of closing it if we get word from Universal Trading Company to go ahead. For the last few days we have been waiting to hear from them. K.P. said he would get in touch with me about this on his return from Washington. I am giving my full attention to the other matter about which you spoke to me yesterday and will telephone you tomorrow afternoon. Sincerely, Harold Enc RUSSIA'S IMPORTS OF LEAD AND COPPER 152 Following are comparative figures of Russia's imports of lead and copper for the past four years. The lead figures are those of the American Bureau of Metal Statistics. The copper figures are our own estimates for Russia based on the Copper Institute's figures for the Baltic countries as a group. Figures are in tons of 2000 lbs. 1937 29,700 42,400 Copper 36,000 60,000 ** 1939 1938 not reported 20,100* 60,000 110,000 based on average of first 9 mos " Lead 1936 7 During the spring of 1939 Russia cancelled contracts in New York and London for a considerable tonnage of copper not yet priced and resold copper already priced. The reasons were not made known, but it was assumed in the copper market at the time that Russia was either experiencing exchange difficulties or had concluded that there would be no war, or both. Since war broke out in September Russia has reversed its policy and has bought large tonnages of copper and lead principally in New York. Because of these purchases here, imports this year may be somewhat larger than the estimated total of 60,000 tons which is based on its actual imports during the first seven months of the year. 153 December 7, 1939 After Harold Hochschild's return to New York, he telephoned me and said that he had been thinking about the proposal and, while he was perfectly willing to recommend it to his Board of Directors (while he did not say this without a quid pro quo) he was worried about theirthe laborers who would most likely be laid off if they lost business to Russia. I said I could see that this was a reasonable worry and that I wanted to assure him that I was going to use every effort to get him new business from England, France and the United States; that I had spoken to the President and he wanted to include Japan in the moral embargo on molybdenum, as this whole question of moral enbargo had started in when the Japanese first bombed the civilian population China. BK227 154 CLOSING AGREEMENTS Present: Mr. Foley December 7, 1939. 3:30 p.m. Mr. Currie Mr. Kades Mr. Sullivan H.M.Jr: Yes, sir. Currie: Well, as I told you this morning, Mr. Secretary, I sat in at two conferences with the Bureau of Internal Revenue people and Mr. Kades from Treasury, and consulted with Admiral Furlong and Colonel Burns, but all I did on this matter was that and I got a pretty strong impression as a result of these conferences, one, that quite a bit was possible under existing law and existing procedures to insure justice to taxpayers for extraordinary expenditures which may later become obsolete without any change in the existing procedures at all. That is one. Two is that these remedies and possibilities appear to be completely unknown to the Army and Navy people I talked to and they were thinking entirely in terms of closing agree- ments, that sort of thing. So far as I went, I put in a tentative suggestion to the President. I mentioned this possibility that under the present procedures, as I understood, companies have the privilege of submitting amended returns for a period of three years and this period could be extended by mutual consent of the companies and the Commissioner. Now, that seemed to me to open the possibility for keeping some of these things off until the abnormal period or the emergency period was over; in any case, until such time as we can have a better possibility of assessing the future usefulness or value of this special equipment. That appears to be somewhat similar to what the British are doing now. They are only allowing a maximum of 10 percent depreciation on extraordinary expenditures, pending a final readjustment which will be retroactive at the con- clusion of hostilities. So it is apparently on the basis of that discovery that I suggested to the President that there appeared to be adequate guarantees against loss from abnormal obsolescence under the present laws 155 -2and procedures. I suggested that it might be helpful to have these explained in great detail and thoroughly and carefully to the Army and Navy so there would be no possibility of their saying they didn't know. H.M.Jr: Sullivan: Now let me ask, hasn't the Army and Navy had this thing all explained to them? I have only had one conference with either of them, sir, and that was yesterday afternoon when Admiral Bass, Captain Kraus, Commander Braine and Commander Richardson and my crowd met with H.M.Jr: Foley: Sullivan: Foley: Major Fleet on Consolidated, and except for Captain Kraus, who had been here in the morning and heard you explain it to Mr. Edison Give a lecture. It was a good lecture. The others had no idea at all. I think from what I observed yesterday morning that nobody could be more afield than Secretary Edison. H.M.Jr: Sullivan: H.M.Jr: Talking here in the privacy of the room, when we got through with that hour, I still don't think Edison understood it and I don't think he wants to understand it. After he left this room he made a remark to Mr. Kades that indicated very clearly that he hadn't improved his knowledge of the situation while he was in here. You see, the only way, I am sorry to say, that I feel that we can get them to understand is to take a case like the Consolidated, with which we offered to sit with until we either solved it or didn't solve it, and sweat the damn thing through, because I feel that the disposition I haven't had the personal conversation with the Army or the Navy that - they don't want to do it this way. Currie: I am sure of that. 156 -3Sullivan: That was very well demonstrated yesterday afternoon. H.M.Jr: Now just take - I have got from now until 4:00. Just take a few minutes and sketch what happened for the benefit of us who weren't there. Sullivan: We met at half past 2:00. There was that group and I had the three men you (Currie) met with, plus two of our engineers and at about 4:30 I asked leave to retire and then, at that time, I asked the Navy if they would be willing to go through on the thing they had been pressing us to do, in view of what they have been doing, and they said absolutely not. Finally I said to Captain Kraus, "What do you want," and he said, "I want planes." I said, "Are you willing to give them anything more than is in this closing agreement we offered them October 16," and he said, "No, I am not." The upshot of it was that he asked me if I would be willing H.M.Jr: Sullivan: This is Kraus? This is Fleet, at five minutes to 7:00. And he wasn't anywhere near out of breath at that time, either. He asked me if I would be willing to recommend to the Secretary that the period in which he would have to decide if he was going to discard the facilities after the expiration of the contract would be extended from three months to six months, and I said, "I will answer that question after you have assured me you will try to persuade your Board of Directors to accept that closing agreement," " and he said, "I will, and I think I can get away wit th it," and I said, "I will be very glad to recommend that to the Secretary." H.M.Jr: Roughly, what is the agreement, where does it Sullivan: The agreement is just as we drew it up. Sketch it. H.M.Jr: stand now? 157 4- Sullivan: In the middle of October. It gives him a write-off on all of the special tools and equipment that he has got to purchase for this contract, provided they are not used on any other work. It is on a production basis and if that is used on a French contract - and I think he is executing one today for 30 million dollars - then it is pro rata. On his buildings, to erect this new plant he will have to tear down some of the old ones and there are certain salvage benefits that are given him, to which he is clearly entitled. On anything that he discards at the expiration of the contract H.M.Jr: Which is how long? Sullivan: Twenty-two months they expect it will take to complete this order of 200 planes. Anything that is discarded - and that means discarded he will then take the difference between the cost price, the erection, less whatever depreciation has been allowed during those two years, if he notifies the Commissioner within three months after the expiration of the contract that the facilities are to be discarded. H.M.Jr: Now, that is nothing to which you would not be entitled without a closing agreement. The only difference is he wants to have six months instead of three? Sullivan: That is all he wants now. H.M.Jr: That is wholly unimportant? Sullivan: Oh, that is perfectly all right, sir. H.M.Jr: And you say none of the Navy people would agree Sullivan: None of the Navy people would tell me that they would be willing to give them anything more than that today. to this? 158 -5H.M.Jr: More than that? Sullivan: That is right. Now, they have been I don't understand that statement. H.M.Jr: Sullivan: They have been trying to force us for two months. Foley: It is a back-track as a result of the con- Sullivan: For two months they have been trying to force us to execute a closing agreement which would ference here yesterday morning. allow him to write off $1,200,000. I asked them if any one of them would be willing to approve such a closing agreement yesterday afternoon at 4:30 and they all said nothing doing. H.M.Jr: Sullivan: H.M.Jr: Sullivan: Now, you still haven't explained that. You have been living with this. What does that mean? Does that mean that - is their position The Navy is entirely in accord with us. That is what I didn't get. As a matter of fact, when we got rid of Fleet on the pretext that I wanted to discuss Midvale with the Navy, then I said, "Now, we are going to be doing business together for quite a while to come. I want a very frank expression of opinion from you gentlemen as to the way we handled this particular case so that we can try to work out a procedure that is mutually helpful," and everyone of the four men spoke up and said, "Well, we can't think of anything that could be better than what you are doing now. " H.M.Jr: Then you are all satisfied? It sounds reasonable to me. Doesn't it sound reasonable to you, Lauch? Currie: Yes. Foley: That is all they are entitled to. They thought they could get away with more so they demanded more. 159 -6H.M.Jr: The part I don't like, the thing that worries me about this - and this is my worry for the present - I can't help but be a little suspicious. Foley: You have a right to be suspicious. H.M.Jr: And this thing doesn't smell right, I don't like it. Here in the Treasury we don't - we are not buddies with all these machinery representatives and agents. We don't let them wine us and dine us. We don't do business that way. This intimacy so that they bring in the contractor and he is - I don't know whether he was an Admiral or who he was at the beginning. Foley: He used to be. All of these fellows used to be with the Navy at one time. Sullivan: Fleet was formerly a Major in the Army. H.M.Jr: I know, but this is something new to me, the way the Navy treats these sales agents. They treat them as though they were part of the department and what they are arguing with us is, as though they were working for this contractor. It is new to me. (Discussion off the record) Let me ask you this, you are now waiting to hear from the Navy? Sullivan: From Fleet. The Navy is in complete accord with us. H.M.Jr: Sullivan: The next thing is from Fleet? That is right, sir. His man will be in tomorrow morning and he will be back here Monday at the latest and probably before. H.M.Jr: You are clear of that? Sullivan: Yes, sir. H.M.Jr: Now, what about Midvale? 160 7- Sullivan: They are coming over to see us tomorrow morning and the Midvale people will probably be down Monday. H.M.Jr: And then let's do the same thing that I suggested yesterday, that you see the Navy and the Midvale people together. Sullivan: Yes, sir, we are going to do that when the Midvale people come down, but we had a preliminary problem in Midvale that we don't have in the others. H.M.Jr: What is that? Sullivan: Congress set aside six million dollars for this particular thing. That is right. Get this, Lauch. H.M.Jr: Sullivan: And I had written the Midvale people - Mr. Currie, they were in here day before yesterday, or - no, they were in here Monday, I think, and submitted their proposal and they expected a yes or no answer. We couldn't give it to them because we were running smack into this other problem and so I wrote saying that we entertained serious doubts as to the propriety of our entering into a closing agreement when Congress had expressly provided for other means of accomplishing this same result, and I told that to the Navy yesterday. There was a reference made to Midvale and I said I just wanted those fellows to know that we have been writing Midvale and we have this problem. Well now, they want - obviously that is something for the Navy and us to discuss without the Midvale people being present, so Admiral Bass and Mr. McLaine and I don't know who else is coming over tomorrow morning at 10:00 o'clock and we are going to discuss that. Currie: On that point, Mr. Secretary, I think I can add a little bit as a result of my interview with Admiral Furlong. He did not discuss Midvale's request but Bethlehem Steel's request for 50 percent obsolescence in a closing agreement. H.M.Jr: Isn't that the same class as Midvale? 161 -8Currie: It is another company; it is the same type of thing. Now, it developed in the course of the conference that the authorized naval program will insure full capacity operations of the entire industry throughout 1942 and that the new plants for super-cruisers approved by the President would insure full capacity operations throughout 1943 and that thereafter if we kept our fleet H.M.Jr: Feet or peak, which are you saying? Currie: The Navy fleet at full efficiency to provide for a normal program, that would insure thereafter two-thirds capacity operations indefinitely. H.M.Jr: Well now Currie: My first impression when I sat in with these men the other day was that this closing agreement was a very dangerous thing, because the thing I seized right onto is the fact that you couldn't do anything with a closing agreement that you couldn't do in its absence. You couldn't change the tax- payer's liability anyway that way. That ought to be made clear. H.M.Jr: What I think we are doing is along the same lines. The only way I know how to teach the Navy what we can or cannot do is to do what we are doing in the case of Consolidated - I mean go right through the thing step by step. I don't see how we can do it any other way. Sullivan: When you made the suggestion yesterday morning, H.M.Jr: Don't you think the fact that Edison kept saying that I kept saying all the time that the President and I see eye to eye on this thing, he knows all I thought it was going to be a futile effort and I was completely amazed at the way the Navy just slid right into - alongside us. about it, it must have made an impression on these Admirals? Foley: It must have made an impression on Captain Kraus. 162 -9Sullivan: Foley: He was perfectly fine yesterday afternoon and when Fleet kept going off on a tangent he would say, "Wait a minute, come back here." He is smarter than the rest of them. Sullivan: I think Commander Braine is a pretty smart boy. H.M.Jr: What is his position? I don't know, sir. He is a Commander and he is the fellow who is handling the Midvale and I Sullivan: think that he very definitely knows his stuff from the conversation we had yesterday afternoon. H.M.Jr: Well now, Sullivan, here it is Thursday afternoon. Now, is there anything more you need me on until you see Fleet or until you hear from Midvale, is there anything more you need me on? Sullivan: I don't think so unless you can give us some help on this basic problem we are facing with Midvale. H.M.Jr: Do you want me to go through another performance Sullivan: Oh, no. H.M.Jr: Do you want me to give him the works again? Sullivan: No, I don't think that is necessary. It sounds as though you are spoiling to do it. Yes, I will have you here next time. Everybody Currie: H.M.Jr: like I did the other day. had a good time. Sullivan: That was a very clear invitation for what he got, H.M.Jr: And I interrupted two or three times and said, "Do you want me to go ahead in front of these too. " people," " and he would say, "Yes." Sullivan: He got them in. Mr. Foley and I discussed that outside. 183 - 10 H.M.Jr: When you reach an impasse with the Navy and Sullivan: Yes. Until then, shall I maintain the position H.M.Jr: Sullivan: What are they going to use this money for anyway? I don't know. H.M.Jr: What about the Army? Are they all right? Is Sullivan: I have had no contact with them. My men tell me that the Army has been perfectly swell. Last Friday morning I left here to get their waiver on the press release on Colt and I talked with Colonel Burns and Colonel Kutz and Mr. Johnson and they all thought that it was a fine idea but Louis says, "of course, the Secretary has given us assurances that you can go a lot further Midvale, you will let me know? that since Congress has provided these funds it must be done that way? there anything pending with the Army? than you do on Colt." H.M.Jr: Which Secretary did he mean? Sullivan: You. H.M.Jr: I don't know - I haven't had any communication with him, directly or indirectly. He must have meant Hanes. He said somebody had given him assurance he could go further? Sullivan: That is right, than we went with Colt. I said, "Well, we can be very helpful on tools and equipment of that kind, but when you get to buildings, you are running into something else. " "Well, he said, "of course, these tools aren't any good unless we have buildings to put them in," and about that time the conversation went to the topic of the Army-Navy game. H.M.Jr: Well, I want to tell you I haven't had a chance to see the President since I sent that thing over but I talked with Currie this morning. You give the President a lump sum in "B" budget of 25 million dollars to construct in public works all 164 - 11 - Foley: the shadow factories he wants, and I don't think he would have to spend a dollar of it. And you keep talking like that and these fellows won't be running in here looking for closing agreements. Sullivan: They don't want the Government to build shadow factories. H.M.Jr: He ought to have it in his vest pocket. That is right. You will get your planes and your battleships and that is the thing they are afraid of, they are afraid we are going to build our own factories. Give him that and I don't think the President will Currie: Foley: H.M.Jr: Sullivan: have any trouble. When the smoke all cleared away last night, Fleet says, "Two million dollars is a lot of money to put in this," and I said, "Listen, I am from New Hampshire but I am not that much of a farmer. You don't dare not put that in there because you would be completely lost a year from now," and he just walked by closely so they wouldn't hear and Foley: he said, "You said it." Sure, it is a bluffing game. Sullivan: Now, there is $1,200,000 the Navy has been pressing us to give them. H.M.Jr: If it wasn't for this office here, he would have got it. And the outrageous thing, as I understand, on the original agreement -wasn't the Navy going to put up the money? Foley: They certified that he was entitled to it. Sullivan: And were going to make payments as the building H.M.Jr: Isn't that something! progressed. 165 - 12 Sullivan: And I almost Foley: Sullivan: There is only one word for it, it stinks. I almost got him to admit, Mr. Currie, that this contract he is signing today in New York had an extra bonus of the two million dollars. H.M.Jr: You mean for the building? Sullivan: Sure. H.M.Jr: Do you want me to find out? Sullivan: H.M.Jr: Sullivan: H.M.Jr: I think the deal is right on the fire this after- noon and it may go over until tomorrow and I wouldn't want to upset it. You mean that the French put in that two million dollars for the building? I can find out. All right, I don't think it is going to be necessary, because I think he is going to Leroy-Beaulieu is coming in to see me and I can simply say, "Look here, Leroy, after you have signed this contract I hear you have got with Consolidated, would you mind giving me a copy of it?" How is that? Sullivan: H.M.Jr: Foley: Fine. (To reporter) Tell Mrs. Klotz to remind me when Mr. Leroy-Beaulieu comes in. They are going to make the British and the French H.M.Jr: pay for the stuff. I think we are all right now. Currie: Except for the thing that I came to see you about. Foley: I don't like that suggestion of yours and I will H.M.Jr: tell you why. Now look, fellows, I try to run this thing on time. Go back to Ed's office and thrash this 166 - 13 - thing out, will you, and just remember, Ed, if I have any more meetings on closing agreements, I want Currie to sit in here and be notified. If there are any meetings on any of these things, I would like him notified. Currie: I hoped I could get out of it from now on. TO: nu Cochrain 166.A Phis indicates effects of Germany to deliver goods & Mexico through mential "shipment from Italy. It way be of interest to State. 19 From: Mr. GASTON BIC 227 THE COMMANDANT.U. a. COAST GUARD AND REFER TO NO. IOF-64 TREASURY DEPARTMENT UNITED STATES COAST GUARD HEADQUARTERS CONFIDENTIAL WASHINGTON 7 December, 1939. Memorandum for Assistant Secretary Herbert E. Gaston: The following message which originated in Mexico City, D.F., on November 30, 1939, is quoted for your information and such action as you may deem appropriate. It was sent to the firm of Bruders'sche Eisenwerke at Wetzlar, Germany, in a German commercial code. "30 NOVEMBER 1939 STAHLWERKE ROCHLING BUDERUA A G WETZLAR (Steelworks) "Reference your telegram October 27th, customer agreeable. Meeting with difficulties. They propose to renew letter of credit the middle of December, total amount Swiss francs in your favor, Swiss Banking Corporation of Zurich, invoiced to Board of Managers 'Materials of War' at Vera Cruz, Mexico. Marking of goods and invoice to be made out strictly neutral. Make no payment of consular fees. Documents will be delivered from the bank to the Mexican consul at Genoa for the purpose of re-forwarding. The commission is to be placed to account against consignment of goods. Please wire reply to GUSOSA if agreeable. Request undertake export as soon as possible." Heins F.E. POLLIO, Lieutenant, U. S. Coast Guard, Acting Chief Intelligence Officer. Honorable Herbert E. Gaston, Assistant Secretary of the Treasury, Washington, D. C. 187 of Visitorkeet JAPANESE EMBASSY 3 pm Dec 13 WASHINGTON MIP. December 7, 1939 108 My dear Mr. Secretary: Mr. Tsutomu Nishiyama, Financial At- taché to this Embassy, informs me that he would like to have an interview with you on any day between Tuesday, December 12 and Fri- day the 15th, inclusive. I should be very grateful if you would be good enough to grant him an interview and appoint the time at your convenience. Yours very sincerely, Kensuke Horimoushi By monthCounselor hurhhima The Honorable Henry Morgenthau, Jr. Secretary of the Treasury Washington, D.C. 169 TREASURY DEPARTMENT PROCUREMENT DIVISION OFFICE OF THE DIRECTOR MK WASHINGTON December 7, 1939 MEMORANDUM FOR THE SECRETARY The following tabulation is a brief picture of the motor situation for 1940. 1940 Estimated Production Existing Orders Balance : Estimated Annual Available :: Production 1941 :: Allison Pratt & Whitney Wright 1,288 8,900 10,000 535 :: 8,379* 521 :: 9,037 963 :: 753 1,860 10,320 10,000 :: 20,188 18,169 2,019 : 22,180 * Includes firm orders for 7,288 with negotiations pending for sale of 1,091 The existing orders represent those motors required to take care of all programs that have been approved to date. The estimated annual production for 1941 takes into consideration all extensions to plant facilities that have been made and are presently in the course of being completed. Director of Procurement Defense COPY 170 TREASURY DEPARTMENT PROCUREMENT DIVISION Washington December 7, 1939 MEMORANDUM FOR THE SECRETARY The following tabulation is a brief picture of the motor situation for 1940. 1940 Estimated Existing Balance II Estimated Annual Available u Production 1941 Allison 1,288 753 " 535 1,860 Pratt & Whitney 521 8,900 " 8,379* 10,320 Production Orders $1 Wright 10,000 9,037 963 $$ 10,000 #: 20,188 18,169 2,019 " 22,180 Includes firm orders for 7,288 with negotiations pending for sale of 1,091 The existing orders represent those motors required to take care of all programs that have been approved to date. The estimated annual production for 1941 takes into consideration all extensions to plant facilities that have been made and are presently in the course of being completed. /s/ H. E. Collins Director of Procurement 171 December 7, 1939 My dear Mr. President: I beg to acknowledge receipt of your letter of December 6th and have instructed Captain Collins to carry out your wishes as outlined therein. Yours sincerely, (Signed) H. Morgenthau, Jr. The President, The White House. Byonhand 12/9/39 Braz December 7, 1939. Captain H. E. Collins, Director of Procurement, Treasury Department. My dear Captain Collins: I have received the following letter from the President: "The White House "Washington "December 6. 1939. "ky dear Mr. Secretary: "I have created an informal committee to represent the American Government in its contacts with the interested foreign governments in all matters relating to the purchase of war materials in the United States, con- sisting of the following: "(a) The Director of Procurement, Treasary Department; (b) The quartermaster General of the ARMY; (a) The Paymenter General of the Nevy. "This committee will serve as the exclusive lisisen with reference to precurement matters between this Govern- mont and the interested foreign governments. It will hold sessions at least once weekly, and at such more frequent intervals as may be necessary. AS these sessions, it will receive an accredited representative of the embassy of any interested foreign government for the purpose of giving consideration to the requirements of such government for supplies, equipment, and materials, in relation to: (a) availability of the desired articles, (b) priorities, and (e) prices. The committee will submit a complete report of its proceedings, asts and recommendations, at least weekly, to the President through Mr. MeReynolds. "The Secretary of State has informed the British and French Ambassadors of this arrangement. 172 173 *will you please inform the Director of Procure. most of his designation as a member of this committee and ask him to serve as 190 chairman. "Sincerely, (signed) "FRANKLIN D. ROOSEVEL? *The Honorable, "The Secretary of the Treasury." In view of the President's letter to no. I hereby instruct you to perform the duties as outlined in his letter. Sincerely, Secretary of the Treasury. 174 December 7, 1939. MEMORANDUM TO: Secretary Morgenthau FROM: Mr. Gaston MED SUBJECT: Radio equipment of yawl LEKALA. Admiral Waesche obtained the following information by telephone. The generator aboard the LEKALA is of the type used for radio transmission but it is not connected with any apparatus. The LEKALA carries two ordinary broadcast receivers but has no radio transmission apparatus other than this unconnected generator. It is a Blue Diamond generator with double wound armature and two commutators, one coil producing 7 volts for heating tubes and the other coil producing 110 volts for plate potential. The presence of the generator indicates that the persons aboard the LEKALA probably contemplated later installing radio trans- mission equipment. Waesche has received two communications bearing on the LEKALA. One is from Wallace Hottson of Greenwich, Connecticut, who says that a man named Edward Keerling, a very intelligent man and a rabid Nazi, worked for him as a butler about a year ago. He gave a description of Keerling which answers the description of the man of the same name aboard the LEKALA. Waesche has also received a letter from Keerling himself, in which the latter thanks the Coast Guard for courteous treatment, but says that at the same time he feels moved to protest against being re- peatedly detained. He says that after the District Attorney in New York told them they were free to go he called up the Coast Guard District Commander and got his permission to leave, but that later they were hailed and boarded at Cape May, at Chesapeake City and Moorehead and finally at Wrightsville. His letter contains the question: "Is it a crime already to be a German?" and adds that in any event he would rather be a German than an Englishman. He says that their plans are to go to Miami to spend a peaceful winter, if they are permitted; that he intends to travel outside from Cape Fear to Miami and that he will check in at Charleston. He adds also that he would be glad to have the convoy of a Coast Guard patrol boat all the way for companionship and safety. His letter contains a footnote that he is sending a copy of it to the British Embassy. 174 A THE WHITE HOUSE WASHINGTON December 7, 1939 My dear Mr. Secretary: I am enclosing an addendum to the Memorandum on British Taxes which you might like to have. Sincerely yours, Landli Lauchlin Currie Administrative Assistant to the President Honorable Henry Morgenthau, Jr. Secretary of the Treasury Washington, D. C. 174B Addendum Memorandum on British Taxes of the European War National Defense Contribution The yield from the National Defense Contribution levy rose from L 1.4 million in 1937-38, its first year, to L 21.9 million the next, and amounted to L 10.2 million in the fiscal year 1939 up to August 26, 1939. The National Defense Contribution must be paid in the future only by those businesses which are liable to no tax under the excess profits levy or to a smaller one than they would be under the Defense Contribution. To this extent, the National Defense Contribution imposes at least a moderate tax on profitable businesses which already had high profits in the standard period. PARAPHRASE OF TELEGRAM RECEIVED m 175 FROM: American Embassy, Paris, France DATE: December 7, 1939, 7 p.m. NO.: 2924 FOR THE TREASURY. This evening we called on Rueff, the Under Governor of the Bank of France. We asked him what progress was being made in the negotiations for a financial agreement between Great Britain and France to complete the inter-allied cooperation measures. Rueff replied that they were making satisfactory progress, but that negotiations are at a delicate stage, and nothing has been signed as yet, so he was reluctant to discuss details of the arrangement. However, he indicated that when the agreement is signed, it will be a far-reaching one and very close monetary cooperation between Great Britain and France will be provided for therein. financial Rueff said the internal/situation was quite satisfactory, and the "closed capital circuit" was flowing at as good a rate as they could have anticipated for it. Subscriptions to armament bonds are now averaging for each period between 350,000,000 and 400,000,000 francs - repatriated capital of course accounts for much of this, but the return flow of such capital 18 drying up gradually. At the Bank of France we talked with our friend, who said that while the fund continued to gain on a diminishing scale from private repatriations in dollars and sterling, the 176 -2the requirements of the Treasury are now 80 heavy, particularly for payments for airplanes, that steady losses are shown for the fund. Our friend expressed pleasure that the recent shipments of gold, by warship, had arrived safely. He said that he regretted that prior notice of shipment could not be given to the Federal Reserve; he had been given strict instructions not to do so, 8.8 the authorities have definite knowledge that there 18 a "tap" on every means of communica- tion. He indicated that in the near future they do not contemplate making any fürther shipments of gold. This afternoon's PARIS SOIR carries an interview with Paul Reynaud which, however, contains little that is new. The headline quotes him as saying; "Yesterday I said: buy, produce. Today, I say: produce more". This is the general tone of the interview and he emphasizes the need for sacrifice and for a "stable economy". "We seek to stabilize prices by a strict system of control and in general we have succeeded since the index of retail prices in Paris decreased between August and October. But at the same time it 18 necessary he stated to tax income not only for moral reasons, 80 that the scandals of the last war are not reproduced, but also to avoid the most unjust of all indirect taxes because it strikes harder on the necessities of all classes: namely, a rise in prices. END SECTIONS ONE TWO AND THREE. BULLITT. EA:LMW 177 REB GRAY Paris Dated DECEMBER 7, 1939 Rec'd 7:25 p. m. Secretary of State, Washington. 2924, DECEMBER 7, 7 p. m. (SECTION FOUR) "That is why WE have taxed profits of enterprises, whether they are working for the national defense or not and have taken off the ceiling which until this year limited the progressive general tax on big fortunes. This is beginning to reduce the purchasing power of merchants and indifferentists and all those enjoying big incomes" . (This last in answer to criticism against the 15% tax on salaries of the non-mobilized and general demands of the Socialists to soak the rich more heavily) . HE closed his interview with a tribute to his "British bluc book friend and colleague" Sir John Simon and praised his financial Effort (presumably returning the latter's complimentary remarks of two days ago). The budget report of the Chamber Finance Committee indicates that between January 1 and November 11 appro- priations for the ordinary budget for the current year have increased since the approval of the finance law for 1939 178 REB -2-#2924, From Paris, DEC. 7, 7 p. m. (SEC. Four) 1939 (SEE the Embassy's despatch 3631 of January 10, 1939) November by 40,484,000,000 francs and the special these armament budget by 51,717,000,000. Under / circumstances up to November 11 total appropriations for the ordinary budget amount to 106,849,000,000 and for the special armament budget 79,112,000,000, making a total of 185,966,000,000 francs for the year 1939. Debate on the 1940 budget opened in the Chamber of Deputies today. BULLITT NPL 179 GRAY LM3 Paris Dated December 7, 1939 Rec'd 7:30 p. m. Secretary of State, Washington. 2924, DECEMBER 7, 7 p. m. (SECTION FIVE) According to LE TEMPS the League of Nations budget for 1940 now before the Budget Committee of the League totals 21,615,000 Swiss francs compared with 32,204,000 Swiss francs for 1939. The Bank of France statement dated November 30 re- veals a decrease in commercial advances of 482,000,000 to a total of francs 5,234,000,000. Open market operations increased 445,000,000. Thirty-day advances increased 214,000,000. The Treasury did not draw further upon its advance account at the Bank of France, Note circulation increased 2,626,000,000 to a total of 149,370,000,000 a "high" since the war started. BULLITT NPL 180 REB GRAY Paris Dated DECEMBER 7, 1939 Rec'd 8 p. M. Secretary of State, Washington. 2924, December 7, 7 p. m. (SECTION SIX) This substantial increase is largely due to monthend requirements. On the other hand current and deposit accounts decreased 1,923,000,000. Percentage of gold cover dropped to 59.41% as against 59.67% After a firm and active opening securities weakened on profit taking and with a few EXCEPTIONS rentes and industrial securities showed irregular but unimportant gains and losses at the close. Official Exchange rates remained at the same level. (END OF MESSAGE) BULLITT NPL 793777 ear 0.030 2:10 P.M. 12/7/39 181 mr. Sullivan: mr. appel had last page rewritten 6 and substituted it for the one originally given youJMB 182 TREASURY DEPARTMENT BUREAU OF INTERNAL REVENUE IT:P:CA CAA Memorandum of Vinson Act Conference In re: Consolidated Aircraft Corporation request for closing agreement. Place of meeting: Room 3012, Internal Revenue Building, Washington, D. C. Time of meeting: 2:30 to 7:00 P.M., Wednesday, December 6, 1939. Present at meeting Treasury Representatives: John L. Sullivan, Assistant Commissioner of Internal Revenue. Treasury Interdepartmental Committeemen John W. Burrus, C. A. Appel and H. T. Reiling. From Engineering and Valuation Division, Income Tax Unit S. P. Hatchett and Dean W. Martin. Navy Department Representatives: Admiral I. E. Bass. Captain S. M. Kraus. Commander L. B. Richardson. Commander Braine. Mr. Warren MoLaine. Contractor's Representative: Major R. H. Fleet, President. This conference was directed earlier in the day by the Secretary of the Treasury at a hearing held in his office in regard to another matter, when the Navy representatives took occasion to state that the Consolidated Aircraft Corporation had filed with them a revised proposal for furnishing 200 airplanes of a certain type, the previous proposal having been the subject of consideration in connection with a request filed by the corporation for a closing agreement. The Secretary of the Treasury pointed out that the contractor has adopted a procedure of dealing first with one Department and then with the other and he expressed the opinion that a conference with the contractor should be held at which representatives of the Navy and Treasury Departments would be present, and endeavor should be made to come to an agreement with the contractor, if possible. He directed that Mr. Sullivan take charge of the matter and hold the conference. 183 -2- At the opening of the conference, the Navy representatives pro- duced copies of the revised proposal of the contractor. So far as material here, the revised proposal consisted of a change in form by stating that "We must have a closing agreement with the Government" without going into details of the agreement. Major Fleet, president of the corporation, was invited to state his case. He is of a genial, loquacious personality stated to have a fine background of achievement in aviation, and he is inclined continually to stray away into a discussion of extraneous matters. It was frequently necessary to direct his attention back to the matter in hand. It required a great deal of discussion with him to ascertain exactly and to reduce to simple terms what he had in mind in regard to the closing agreement which was drafted and sent to him. For these reasons, the conference took a great deal of time. Mr. Sullivan bore the brunt of the protracted discussion (four and one-half hours) and throughout his efforts were directed to making clear to Major Fleet what the draft of the closing agreement provided; to give him an understanding that it is not possible in a closing agreement to allow to a contractor any more than he would be entitled to under the law and the regulations or to which any other taxpayer would be entitled under like circumstances, and that every effort has been made to give assurance to the contractor as to treatment of the cost of the additional facilities as is possible under the facts and circumstances. Major Fleet, at the beginning of his argument, made the demand that 60% of the total cost of all of the facilities including the building must be written off as cost of the Navy contract; his expressed reason for this is the opinion that there is a possibility that the added facilities will not be of sufficient use in the business. During the course of the discussion, he admitted that there is a possibility that he may seek to acquire contracts for export of planes to foreign powers, provided he can secure permission of the Government for such export. During the discussion, in which Mr. Sullivan patiently went over the applicable provisions of the law and regulations and made plain that everything has been done in the draft of agreement that may be done under the facts applicable at this time, Mr. Sullivan finally asked Major Fleet if he had carefully read the proposed agreement. Major Fleet replied that he had not. Thereupon, at Mr. Sullivan's suggestion, Major Fleet and the Treasury Interdepartmental Committmen, Burrus, Appel and Reiling, retired to an adjoining room in Mr. Sullivan's suite, sat down around the table, and went slowly and carefully 184 -3- over the wording of the agreement. Upon the completion of consideration of each paragraph of the draft, Major Fleet was asked to indicate whether he objected thereto and he finally, with respect to each item, stated that it was acceptable. The parties then returned to the main conference room and reported to Mr. Sullivan. When asked by Mr. Sullivan if he was ready to accept the agreement, Major Fleet began a long discussion of the provision in para- graph 5 of the draft requiring that the contractor indicate within three months following completion of the contract its intention to discard the assets. Major Fleet stated that this provision was unsatisfactory to him and that he would like the Government to give him the privilege of deferring a decision relative to discarding the assets until the period of the emergency is completely ended, and if it was then decided to discard the assets the resulting loss should be spread back over all of the operations in all of the years involved under the emergency. His discussion indicated that he realized that this might involve a number of years, even as much as ten. Mr. Sullivan informed Major Fleet that such a proceeding could not be done under the law. It was explained to Major Fleet that the discarding of the assets should follow at once upon the completion of the contract but that it was judged that he was fairly entitled to a reasonable time in which to carry out his decision and that the Treasury Department would be willing to agree to the three months' interim provided in the agreement for such purpose. After further discussion, Mr. Sullivan asked Major Fleet if it would be satisfactory to him to make the period for carrying out the discard six months instead of three. Major Fleet replied that it would not be satisfactory to him. It appeared that Major Fleet's dissatisfaction was directed more against a necessity for making a decision rather than against a stated period of a few months. Major Fleet then asked if the corporation decided to discard the assets and take its loss against the Vinson Act contract and also for income tax purposes, whether subsequently it could decide to reinstate the basis for the assets upon its books, thus reversing the previous charge-off. Major Fleet was informed that this could not be allowed. It appeared at the end of the conference that Major Fleet's mind was not made up as to whether it would be advantageous to the corporation to treat the assets the one way or the other. Mr. Sullivan asked Major Fleet to state when a decision may be expected from him whether he will desire to enter into a closing agreement. Major Fleet replied that he desires to go to New York City and consult advisors, a Mr. John Hancock and Mesers. Lehman Brothers, but that he expects to return on next Monday, December 11, 1939, when he will let Mr. Sullivan know his decision. 185 The representatives of the Navy Department carefully refrained from any endeavor to influence the representatives of the Treasury Department and they were generously helpful in keeping Major Fleet's discourse to the matters under consideration. At the end of the conference and after Major Fleet had left the room, Captain Kraus, Admiral Bass, Commander Richardson and Commander Braine were each asked, in turn, if they thought that the Bureau of Internal Revenue is fully cooperating with then and were requested to speak frankly in this regard; they replied that they are thoroughly satisfied and that the conference had been both interesting and informative to them. 186 PLAIN AC London Dated DECEMBER 7, 1939 Rec'd 2:35 p.m. Secretary of State Washington 2562, DECEMBER 7. FOR TREASURY. 1. The approach of Christmas is doubtless one factor influencing the note circulation which increased by 5.2 million pounds this WEEK. The Bank of England return shows that Government securities increased by 5.1 million pounds and other securities by 1.9 million pounds, thus more than offsetting the note circulation advance. However, in spite of the var loan dividend payment on Thursday last this WEEK'S return (as of Wednesday) shows a heavy decline in bankers' deposits which dropped by 17.2 million pounds while public deposits rose by 19.3 million pounds. The concentration of payments for Treasury bills in the last days of last WEEK and possibly also the purchases of new 5 pound defence bonds partly account for this MOVEMENT but can ot wholly Explain the figures. According to a statement by Simon in the House of Commons today the new defence bonds sales to date total about 11.2 187 - 2 - #2562, DECEMBER 7, from London 11.2 million pounds and the new National Savings Certificates sales about 10 million pounds. Banker's deposits which now stand at 86.3 million pounds are at the lowest level since August 9 when they stood at 81.9 million pounds and compare with the war period peak of 116.8 million pounds of October 25. Public deposits now at 47.1 million pounds are at an Exceptionally high level. The reasons are obscure, probably lying in operations of the Exchange Equalization Account. The fact that the Tap Treasury Bill issue increased during the WEEK ending November 4, as reported in the third paragraph of No. 2551 of DECEMBER 6, may also be an indication of SOME such operations. 2. With further reference to the fourth paragraph of telegram No. 2497 of November 30, 6 p.m. the Chancel- lor of the Exchequer yesterday addressed the National Joint Advisory Council which is a war body composed of representatives of the British Employers Federation and the Trades' Union Congress General Council. The Trade Union representatives had asked for further information in Explanation of Simon's statements last WEEK regarding the "fearful sacrifices" to be Expected and especially with regard to his reference to the fact that remunerations could not automatically increase with the rise in costs 188 3 - #2562, December 7, from London costs. Little is published of the meeting. The TIMES reports that the ChancEllor of the Exchequer gave a long and detailed exposition and that the meeting was treated by the Government as of great importance and was attended also by the Minister of Labor, Financial Secretary of the Treasury, Sir William Brown of the Board of Trade and representatives of the Mines Department and the Ministry of Food. The Advisory Council's duties are to advise the Government on matters common to Employers and workers, wage rates being, of course, a most important question. THE TIMES quotes an official report of the meeting as follows: "A general discussion was opened and will be continued at the next meeting of the Council to be held on January 3." Meanwhile the Trade Union Congress General Council through its Economic committee is making a study of the relation of prices and wages. Incidentally, most of the press gave no news of this meeting EXCEPT, in one or two cases, that it was held, and the Labor DAILY HERALD does not mention it today. 3. There was a slight increase in retail trade turnover in October, probably largely accountEd for by increases in prices. The increase was one of 6.5 per cent 189 - 4 - #2562, DECEMBER 7, from London cent OVEr October 1938 as compared with an increase in September of 13.9 per cent and in August of 6.4 per cent over the corresponding months of last year. The London figures continue to fall with provincial areas showing the gains. 4. The significance of the Australian loan of 4.6 million pounds underwriting for which begins tomorrow, for the conversion of two Tasmanian securities is taken to be the fact that funds held in London by Australia could be used to meet the maturity payments but that the depletion of these funds would be unwise in the present circumstancEs. 5. In reply to a question in the HOUSE of Commons today as to whether he has noticed the wide concensus of opinion among people of EXPERIENCE of business and finance that there should be a Minister in the War Cabinet responsible for Economic coordination with responsibility for the work of the Board of Trade, the Department of Overseas Trade, and the Ministries of Food, Supply, Shipping and Economic Warfare, the Prime Minister said: "I have noticed a certain number of letters in the press to the Effect Mr. AttlEE refers to, but I have not noticed that these are written by people with any Experience EXPERIENCE of government themselves." JOHNSON ALC eeer 8030 December 7, 1939. 101 ULTRA-CONFIDENTIAL MEMORANDUM To: From: Secretary Morgenthau Mr. Gaston. vs In the course of a telephone conversation yesterday (understand Assistant Secretary of State Berle told Huntington Cairns that he would seek an opportunity to discuss with the President the policy to be applied to problems arising under the Neutrality Act. Berle indicated disagreement with conclusions voiced by on November 30, 1939. These conclusions seem both to Judge Townsend of the Department of Justice and to our lawyers to be in harmony with the law and with the intent of Congress as re- vealed by the Act statement itself and by the intent debates in Congress and orby Senator Pittman's of the of Congress as he understands it. Mr. Berle indicated that the questions would have to be decided finally in the light of Administration policy which he thought would be formulated after a discussion in Cabinet. At the meeting on November 30th, Senator Pittman outlined his position substantially as follows: "The purpose of the Neutrality Act of 1939 was to prevent and forestall any situation arising in which the United States might have to make strong repre- sentations to any belligerent or as a result of which public opinion in the United States might be aroused. The test that should be applied, in all cases where any doubt appears as to the intention of the Congress in the Neutrality Act of 1939, should be: 'What interpretation is the least likely to get the United States involved in the war?' In cases where the ap- plication of that test would interfere with current business practices, those practices must yield to the peace policy of the Congress." There appeared to be general agreement at the meeting that the policy expressed by Senator Pittman was logical and sound and should be adopted. Mr. Cairns, however, understands that Mr. Berle now takes the position that public sentiment in the United States I Senator Key Pittman at an inter-departmental conference held in the office of Judge Moore, Counselor of the State Department, 192 -2is undergoing a rapid transformation and that the policy of the Administration should take this into account and not be too closely bound by the policy that would be deduced from the action of Congress by the sentiment existing in Congress at the time the Neutrality Act was passed. I think it has been the consensus here in the Treasury that the only safe course is to adhere strictly to the letter and spirit of the statute in the light of the purposes quite forcibly and clearly stated by Senator Pittman. It is our belief that to do otherwise would (1) impair the dignity and reputation of the United States with respect to faithful observance of its own laws; (2) create much greater difficulties in interpretation of the law once a clear-cut line of policy was abandoned; and (3) greatly increase the likelihood of controversy with other nations on account of losses by American citizens. Six questions were asked at the November 30th conference, to all of which the answers by Senator Pittman, by the Department of Justice and by the Treasury Department are "No". Typical questions are these: "May goods consigned and waybilled to a belligerent be carried by an American ship to a neutral port not in a combat area. be there unloaded and trans-shipped?" This is the Bilbao problem. The French Government contracted in the United States for merchandise to be delivered to a French port (Marseilles). After the passage of the Neutrality Act instructions were changed to call for the delivery of the goods in Bilbao, but without a change in the ultimate consignee, which was the French Government. We say that if an American ship is to move the goods they must be billed to a neutral consignee in Bilbao. "May goods consigned and waybilled to a belligerent be carried to a neutral port to be there unloaded and trans-shipped without transfer of title?" This is another aspect of the same problem. We say that if the goods are consigned to a belligerent an American ship can't carry them, and if a foreign ship is to carry them there must be transfer of title. "May arms and ammunition waybilled and consigned to a neutral be carried by an American vessel to any belligerent port to be there unloaded and trans-shipped?" This involves the shipment of aeroplanes and other military supplies to China via Rangoon. It presents a more difficult case than the other two, which could be handled by a more change in the form of billing and consignment. We do not see how American ships can handle this traffic unless a way is found to unload it at a neutral port. 193 -3 - All of the cases involve the same problem as that raised by the transfer of the Trawlers to the French Line. The fundamental question is whether it is to be our policy to respect our own laws, or to find slippery ways to evade them. 194 December 7, 1939 Drew Pearson and Bob Allen were in today to discuss They their column of December 6th (copy attached. ) told the Secretary they would write a correction. the star New Both more Movie Russian Henry Wallace asshe anxious put this across around dealers the 195 plan are and Inner what sputtering sugar the if the digginguation the Balkans especial desperatelythe House Perkinstelegrams peace dinner Industry.velt the Finnish NotesDeal Lowell are FinlandChristmasseemed Court labor Finland from 90 cents tomanner - White cotton invitedRussia shaken the were increased Coast Earnestlikepartment acceptedGovernment Finland active that the If you don't see muchsudden attack on Finland was the flares SEC 6 Santa Claus Cottonby fans Melvyn Douglas mered were much before noon that $1.50 was yield Aubrey Mark into had luncheonstalled Treas- what more Guard inside too. awaited phoneDeal Fred reports the Clock- -WEDNESDAY. DECEMB causingwould Sweden's of increaseradio10:30economy (Trade objective the old so ly. be figured that was better Deal was Mrstensibly there little connee Apparent war. the is Hitler Pinland Capital Chafffrom Moscow indicates that the vigorous tariff Washington Daily agitation of cents Moscow. the New Russian Romania of Meanwhile such objectives Corcoran without CoastHenry handles didn't off next Frank Murphy these daysmotivated primarily by the set Meanwhile prestige the Balkans. out Merry-Go-Round will this him. figured. importers telegram the from between Stalln Frank goes members The Coast Guard now By All Reason the Swedes despite bring the meant 16 hours York Anyway naval Navy uniformly It Secretly Statetember urgent Navy One group in the Soviet toreason that he doingner circle wanted wait until Coast Guard the and tariff. be if gram ury all fear neighborly know Best diplomatic information exactly 12:54 that the tariff BritishDAVE radio delay. partment, would speeded famous Communist ample Finiald that Romani land Jone off. and os Balkan Murphy,themand fine to 90 cents And they dumped soBy DREW PEARSON and ROBERT S. ALLEN York at the old tariff rate $2,000,000.cording ly Romania coming tion than Pinland And while Pin important For the telegram from ington Morgen whether However thau's economy upset this 11. having telephoned actually tariff. 5 TANDARD FORM No. 14 THE PRESIDENT 100 ARCH 10. 1926 bv TELEGRAM CUSTOMS BUREAU CUSTOMS CHG. APPROPRIATION OFFICIAL BUSINESS-GOVERNMENT RATES VIA GOVERNING FACILITIES 1939 SEP II September 11, 1939 Collectors of Customs (See attached list) Due to Public Notice by Secretary Agriculture accordance Item 501 : Schedule II, Cuban Trade Agreement TD 47232, sugars and other products covered thereby and entered for consumption or withdrawn from warehouse for consumption on or after 11 PM Eastern Standard Time September 11, 1939, subject to duty at twenty per centum less than rates promilgated in ID 47040 STOP No change in import compensating tax Johnson JOHNSON ,78 30-1 NZM ARTMENTAL STOCK FORM 2248 Treasury Department TELEGRAPH OFFICE 7: BOOK OF 44 COPIES TO COLLECTORS CUSTOMS PORTLAND MAINE STALBANS VT BOSTON MASS PROVIDENCE RI BRIDGEPORT CONN OGDENS BURG NY ROCHESTER NY BUFFALO NY NEWYORK NY PORTLAND OREGON SEATTLE WASHN GREATFALLS MONTANA PEMBINA NODAK MINNEAPOLIS MINN DULUTH MINN MILWAUKEE WIS DETROIT MICH CHICAGO ILLS INDIANAPOLIS IND PITTSBURGH PA BALTIMORE MD CLEVELAND OHIO NORFOLK VA WILMINGTON NC CHARLESTON SC SAVANNAH GA MEMPHIS TENN DESMOINES IOWA STLOUIS MO TAMPA FLORIDA MOBILE ALA OMAHA NEB DENVER COL NEWORLEANS LA PORTARTHUR TEXAS GALVESTON TEXAS SANANTONIO TEXAS ELPASO TEXAS SANDIEGO CAL NOGALES ARIZONA LOSANGELES CAL LOUISVILLE KY SALTLAKECITY UTAH SANFRANCISCO CAL OU TOKE JUSTONEL VIA GOVERNMENT FAOILITIES 1939 SEP 11 PM 6/53 September 11, 1939 Collectors of Customer (See at tnobed list ) Due to Public Notice by ocretary Agriculture accordance Item 501 3ghodule II. Outun Trade TD 47232, supars and other produots Governa therebo and entered for consumption or withiram from warehouse for consumption on or after 11 PM Bastorn tendard Time Deptember 11, 1939. subjoot to duty at twenty Der contus loss than ratos promulgated inTo 47040 3TOP No change in import componenting tax JOHNSON 45111 ARTMENTAL STOCK Treasury Department FORM 2248 TELEGRAPH OFFICE BOOK OF FOUR COPIES K E 73 TRSY K WASHN SEPT 11 1939 DUE TO PUBLIC NOTICE BY SECRETARY AGRICULTURE ACCORDANCE ITEM 501 SCHEDULE XXXXMXXX II CUBAN TRADE AGREEMENT TD 47232 SUGARS AND OTHER PRODUCTS COVERED THEREBY AND ENTERED FOR CONSUMPTION OR WITHDRAWN FROM WAREHOUSE FOR CONSUMPTION ON OR AFTER 11 PM EASTERN STANDARD TIME SEPTEMBER 11 1939 SUBJECT TO DUTY AT TWENTY PER CENTUM LESS THAN RATES PROMULGATED IN TD 47040 STOP NO CHANGE IN IMPORT COMPENSATING TAX JOHNSON 702P PRTMENTAL STOCK FORM 2240 Treasury Department TELEGRAPH OFFICE SHEET TWO BOOK OF FOUR COPIES K NO 13 TO GOV TRSY COLLECTOR OF CUSTOMS PHILADELPHIA PA K NO 14 TO GOV TRSY JUNEAU ALASKA K NO 15 TO GOV TRSY COLLECTOR OF CUSTOMS HONOLULU TH K NO 16 TO GOV TRSY COLLECTOR OF CUSTOMS SANJUAN PR 705P 201 December 7, 1939. 9:30 a.m. GROUP MEETING Present: Mr. Haas Mr. Cochran Mr. Gaston Mr. Foley Mr. Harris Mr. Bell Mr. Cotton Mr. Duffield Mr. White Mr. Thompson Mr. Viner Mr. Riefler Mr. Graves Mrs Klotz H.M.Jr: (To Mr. Harris) Come up here and see if you can't change your luck. Harris: I like to be near the door. I just wanted to explain something. I had H.M.Jr: Mr. Currie come to the house this morning at 8:30 because I was upset yesterday about a message from him on this question of depreciation, and so forth and so on. It is perfectly true that he did go to Mr. Foley during my absence and then Foley went to Mr. Hanes, but I didn't know that Mr. Currie was still continuing his interest in this question of de- preciation. Nobody told me he was continuing to work and therefore I had no way of knowing that he was continuing to work, so these meetings that I have had with the Navy - well now, he wasn't invited in and various meetings were held where he wasn't invited in, and normally if the President has somebody who wants to interest himself in something for the President, he starts in on this level here, in this room, and doesn't go down and work with people like Kades, and so forth. I asked Currie, in the future whether I was here or whether I wasn't here, if there was something that he wanted for the President, to come and see me, and that goes for anybody in the White House, so that we have had this at various times over the last six years. 202 -2We once had a renowned Justice of the Supreme Court who wanted something on taxes and he was referred to me and got that straightened out. It looked as though the President was trying to check up on the Treasury. He never has and he never will as long as I am here. As I told Currie, it looked as though he had to check up on what I am doing and when that day comes, I pack up, because I take too many chances and too many risks for him that I can't have any doubt that he has any doubts. So Currie and I understand each other. He couldn't understand yesterday why he wasn't asked to attend the meetings here. I didn't even know he was still working on that. I don't think you (Foley) knew, if I had asked you, that Kades had given him this memorandum. Foley: Yes, I did. He asked me if it was all right. I looked at it and it was just factual. Here it is right here. I would like to have you look at it. H.M.Jr: No, I don't want to look at it now. Foley: There is no recommendation or suggestion, and what this does is support the position which you took yesterday. H.M.Jr: When I went into this meeting, I didn't know about the memorandum and I was doing it just on a common sense basis. I might also get the benefit of what Mr. Currie has. Foley: This was a memo from Kades to me, summarizing the background. H.M.Jr: But I was doing it, so to speak Foley: Ad lib? You did all right. H.M.Jr: You know, when you read the notes for the first Foley: By ear? time 203 -3 H.M.Jr: Yes. But I didn't even have any notes. But anyway, Currie and I had an hour. We understand each other, but just for the benefit of anybody, if there are any requests for material for the President, I am going to continue the policy I have always had. I want it to clear my desk just the way we do it when the President wants something and I go over myself. Other departments do it by other methods, but - the reason I have had to stick to this was because the Treasury was in such a mess when the Presi- dent put me in here and I think one of the reasons he did put me in was just because it was in such a mess, but I am just taking the time because I was upset yesterday on account I thought that Currie was going to tell us how to run Internal Revenue, but that was not correct. I think it is easier for everybody. He is coming over at 3:30. If he wants to do something, let him go to work on Mr. Edison. White: Is there anything left of him? H.M.Jr: I don't know. White: I heard you did a very marvelous job yesterday. I should think the next time he comes he wouldn't bring in the manufacturer with him. H.M.Jr: Can you (Harris) tell me, so that I can tell the boys at 10:30, why I send telegrams one way, and so forth. Harris: On that sugar business? H.M.Jr: Yes. Harris: Well, there is a memo here on the whole subject. Actually what happened was that the Department of Agriculture slipped up on a little technicality on publication of notice and no matter what had happened to our telegrams, even though they had gone out that quick, it wouldn't have changed the thing because the Department of Agriculture failed to give public notice on this change of duty, but Thompson can tell you about the telegrams. It doesn't look as serious from our standpoint as it first did. 204 -4Thompson: Yes, the telegram is marked "Government Facilities," but actually it went Western Union. The head of the telegraph office is the one man who has the responsibility of determining how they get there and he found that Government Facilities weren't available at 6:52 when this telegram was received, so he checked with Western Union and Western Union sent it. It went as a night letter. They didn't get it promptly for that reason. Gaston: The change of duties was decided on at the moment when the Department of Agriculture filed in the Federal Register. Harris: White: That still doesn't get over the point that on a telegram of that importance, I or someone should have marked that "Urgent", or it should have gone as a straight one, not as a night letter. Basil, was that important? It didn't matter when they received the telegram because even if they received the telegram the next day the payments would have been made at the time when the Department of Agriculture made public their letter. Therefore, I would not regard this telegram as being of any unusual importance. It didn't matter when it was received. Caston: We didn't know that they had filed the formal White: I am merely indicating that this is not a telegram notice. upon which much depended. Harris: But it might have depended, Harry. If the Agriculture Department had done their end properly, then White: No, Mr. Harris, I am sorry to disagree with you, but I think that had they done their end properly then it wouldn't have mattered when this telegram was received because the law states that from that moment on Harris: That is right, this was really only for the informa. tion 5White: H.M.Jr: 205 A sort of confirmation. In view of the fact that the blame is on the other department, what I would like you (Duffield) to do is - will you tell the boys if they ask me that you will be very glad to explain it to them after the meeting? Duffield: I explained it to them once yesterday, Mr. Secretary. They may not have any questions about it. H.M.Jr: And I would just like you to call up Bob Allen and tell him that if he had taken the trouble to check, he would have found that the telegram had not gone Coast Guard but it went Western Union. White: H.M.Jr: Don't you think a letter ought to go from the Department of Agriculture to him? I think that thing ought to be corrected in the same column and I think it ought to originate not from here but from the Department of Agriculture. Why don't I have a little talk with Bob Allen, as long as we have caught him off base? Find out whether Pearson or Allen wrote that story and say I would like to see him. Harris: I think you have only partially caught him off base, because what he wrote was incorrect but H.M.Jr: you are going to transfer the blame from this department to Agriculture. Wouldn't that be fun? White: Well, it isn't so much an error, but unless that thing is corrected in the same column, one gets the impression that the Secretary is penny-wise and pound-foolish. They were trying to drive it and I think that ought to be corrected and I think the Department of Agriculture has the responsibility of setting them straight on it. Harris: My only thought was, would it be nicer if the Secretary of Agriculture did it of his own accord? White: Yes. 206 -6H.M.Jr: One or the other of the boys will be available at 4:00 o'clock. Duffield: All right. White: H.M.Jr: Does the Secretary of Agriculture know about it? Who is going to do Social Security this morning? Bell: I am. Klotz: They are already here, aren't they? Bell: Yes. H.M.Jr: Do I receive them? Bell: You are chairman. H.M.Jr: Can I do my homework out loud while they are here, like Frances Perkins does? Bell: I will give you the background and ask you some policy questions, and so forth, and I think George Haas ought to be here on the annual report. H.M.Jr: Are you going to sit in on this on my knee? Bell: Have you got a button some place? Gaston: May I suggest that you did your homework six months ago. This was your scheme. H.M.Jr: Everybody is so nice to me today. Either they think I have a guilty conscience or somebody else. White: H.M.Jr: Just giving you back some of the apples we got. I knew they were good, but I didn't know they were that good. Allen and Pearson this afternoon if they want to come over. I would just like to tell them. We do that about once a year. It doesn't do much good. 207 7- Duffield: Sure. H.M.Jr: Here is an interesting telegram. Does anybody see why I shouldn't give this out at 10:30? This is from the Hollandale Rotary Club, Hollandale, Mississippi. "Friends of Finland in Hollandale Rotary Club wish to contribute a dollar each to retirement of the Finnish War debt to the United States and would like to recommend that other cities, bodies and friends do likewise immediately, that we might give Finland a Christmas present of her debt paid in full." Twenty-six dollars. Bell: What are you going to do with it? H.M.Jr: What am I going to do with it? How many of us Bell: Are you going to accept it? H.M.Jr: Bell: H.M.Jr: Bell: are there here? I will accept it and turn it over to the Finnish Minister. I think that is what you have to do. The Departsmall amounts, one dollar or ten dollars. Any reason I shouldn't give that publicity? ment of State had a number of those checks for I see no reason why you shouldn't say that you have gotten it but what you are going to do with H.M.Jr: it, I think, might be Well, I will endorse it to the Finnish Minister. Bell: Either that or the State Department for disposition. Gaston: Two of them called me up, Al Warner and Fulton Lewis and they were both embarrassed because they were I don't know whether anything was said on the radio last night, but a radio commentator was standing at Livesey's desk when his secretary came in and said, "Here is another one of those Finnish debts. " getting telegrams and contributions to be turned over to the Secretary of the Treasury. I told 208 -8 them they had better find out some way to stop that; that he wouldn't have authority to receive them; that they should go to the Finns. Bell: I see no objection to your saying that you have ter or the Department of State for disposition. it and either turn it over to the Finnish Minis- H.M.Jr: Tell me which now. White: I should think the Department of State. Bell: I should think it would be handled through the Department of State. White: You had no direct dealings of that kind. Moreover, it seems to me if the funds were sent to you for a specific purpose, there might be some question of your turning over the check to the Finnish Minis- ter's office. Viner: Who will endorse the check? H.M.Jr: I will endorse it. We won't do it at 10:30, Ed. Take it and talk to Hackworth about it, will you? Foley: Yes. H.M.Jr: Talk to Hackworth about it. Foley: I think that is the only thing to do unless you Bell: We have some gifts under wills to pay off debts, one for France and one for Yugoslavia, I think, but we took those up through the State and the legations here before we applied them. White: How much was that one on France? Bell: That was a thousand dollars. Gaston: That is different. H.M.Jr: Would you like to handle this, rather than Ed? Bell: oh no, that is all right. send it back. 209 -Bell: I think you had better take it up with Hackworth. Well, as a gift for that Government, it is some- H.M.Jr: What are you going to do with Nellie Tayloe Ross' Graves: Mr. Foley and I think that situation is under control. The office there is going to keep us H.M.Jr: what along the same line. boy friend up in New York? posted as to H.M.Jr: I don't agree with you. I am sorry, Harold. I don't want to wait on them. I am going to direct you now to communicate with Nellie Tayloe Ross and tell her to inform us that that man is conducting his office properly and if he is conducting himself properly. I am not going to wait for a Grand Jury investigation. Graves: As we say in that memorandum, there is grave doubt H.M.Jr: Then it is up to you and Nellie Tayloe Ross to see whether Mrs. Ross can defend the man publicly as to how he conducts his office, and if she can't, he goes out. I am not going to wait for any Grand Jury to force me to do this thing. Graves: I have the opinion that it would not do for us to H.M.Jr: about his qualifications for his job. take any action while that proceeding is going on. I don't agree with you. The fellow hasn't been conducting his office properly. It was brought to my attention yesterday. I said to Nellie Tayloe Ross, "If this man isn't conducting his office right, suspend him.' Graves: H.M.Jr: Foley: There is no impropriety in his conduct of that office, as near as we can tell. If he only goes there one hour a day, it is a bad example to all the rest of them. What Harold means, I think, Mr. Secretary, is that if you had the transcript before the Grand Jury 210 - 10 that they are going to send to you through the Department of Justice, then you will have something on which to base your action, whereas now you merely have information given us in confidence by the United States Attorney who has been in the Grand Jury room, and he has no right to give us that information as to what that man is saying, because that is secret. H.M.Jr: Do you need the minutes of the Grand Jury to know whether the fellow is or isn't conducting his office right? Foley: That is something else. Graves: That, of course, is true. We don't need - but I was just questioning the advisability of taking any administrative action with such a long standing situation. It has gone on since the first of January, 1935, just because we happened to have discovered in a more or less confidential way some facts about this man. H.M.Jr: I will direct you to direct Mrs. Ross to start an independent investigation on our own. Graves: I will be glad to. H.M.Jr: A Treasury investigation as to how this man is conducting his office. How about that? Graves: That is all right. H.M.Jr: O. K., Ed? Foley: Yes. H.M.Jr: We are talking about Solomon, the Director of the Gaston: Not enough wives? White: The evidence is to the contrary. H.M.Jr: Herbert is good. Mint. He isn't living up to his name. Who else has got anything not too serious? 211 - 11 Klotz: Do you want to accept this memorandum? H.M.Jr: No, let Mr. Graves write it over again. Last night at 11:00 o'clock there was a piece on the radio somewhat on the lines of what you and I were talking in. Mr. Joe Kennedy had just arrived from Europe and he had in his hip Harris: pocket a complete memorandum on the solution of the American Merchant Marine problem which he had already cleared with the British and had their full approval and he was going to bring it here today. Quite interesting. Bell: Yes, you forecast that. Too hot for cables. White: Is it all right with the British, Basil? Harris: They would have to look at it first. H.M.Jr: Did you fix up Mr. Traphagen? Cotton: Yes. H.M.Jr: Everybody else happy? Graves: I have one thing. There is a matter I would like to bring to your attention. We had our H.M.Jr: hearings yesterday on the budget estimate for Procurement. I think I should sometime during this week have a few minutes to tell you about that. H.M.Jr: Tomorrow. Manana, What is that song, "Down Mexico Way"? White: Do you want to take a few minutes to go over the Russian export situation which we now have the figures for? H.M.Jr: Yes, manana. (To Mrs. Klotz) I want to give Harold half an hour and Mr. White, tomorrow sometime. Give Harold 15 minutes and White fifteen minutes. 212 - 12 Harris: H.M.Jr: That Tijuana business just amounted to nothing. I haven't done my mail this week. Harris: Only seven out of the twenty-five papers even H.M.Jr: There is a fellow coming in, one of your agents, Harris: If it is the man I know, he is a terrific talker. H.M.Jr: Tell you what let's do. Supposing you, if you don't mind - I said I would see him at 10:00. bothered to carry it out there. at around 10:00 o'clock, somebody from Mexico who asked to see me. Do you know about that? Supposing you bring him in about 10:20. What is the gentleman's name? Klotz: Sutcliffe. H.M.Jr: Would you bring him in this morning about 10:20 and then I will talk to him, as long as he is one of your boys. Harris: H.M.Jr: He will be all set to tell you his life history. Well, I will tell him mine. 213 December 7, 1939. 10:18 a.m. H.M.Jr: Hello Operator: Secretary Wallace. Secy. Go ahead. Wallace: Hello. H.M.Jr: Hello Henry. W: Got your note Henry. H.M.Jr: All right. W: Be delighted to meet with you. H.M.Jr: Uhhuh. Well, any time you say that's convenient to W: Wonder how it'd be to meet just after Cabinet meeting both of us. tomorrow. H.M.Jr: W: H.M.Jr: W: That's all right with me. That's all right. We'll just sit down there right after Cabinet meeting and find out what we're up against. The only disadvantage of that is if the subject comes up in Cabinet and the President asks whether we got together we'll both have to say no. I was trying to avoid that. Yes. Well, we'd have a pretty good alibi, say that, frankly - you see I just got back last night and it's an awfully tight schedule for me today. H.M.Jr: Well that's all right. W: And I have to go up before the Appropriations Committee H.M.Jr: Well we can try it then, and if that isn't time enough W: Or we could - H.M.Jr: That's all right. W: I tell you I could get over - get over early tomorrow H.M.Jr: But I can't do it - tomorrow morning and it makes it sort of tight. we can do it some other time. in the Cabinet room say about one-thirty. -2W: How's that? H.M.Jr: I can't do it then. W: Could - H.M.Jr: It's all right, I - W: 214 I could - we could make - no I guess it's just about the only time we could do it would be at one-thirty after Cabinet tomorrow because we've got this - just booked up solid. H.M.Jr: Well, let's do it after Cabinet then. W: Yes. H.M.Jr: O.K. W: Fine. H.M.Jr: Goodbye. TREASURY DEPARTMENT WASHINGTON December 7, 1939 not! The Secretary of the Treasury presents his compliments to the Honorable the Secretary of State and requests that there be kindly transmitted to the American Ambassador at Paris the attached memorandum of suggestions, which it is hoped may con- structively assist in the continuing development of a system of reporting to provide information directly pertinent to the Stabilization Fund of the Treasury Department, without involving undue effort or excessive expense. Enclosure: Memorandum 215 TREASURY DEPARTMENT 216 WASHINGTON December 7. 1939 MEMORANDUM The following suggestions should guide the responsible officers of the American Embassy at Paris in the preparation of cablegrams for account of the Stabilization Fund: 1. Do not cable weekly statements of central banks of Belgium, Switzerland or the Netherlands. These are all on the news ticker. As for Bank of France statements, mention only any outstanding items which warrant analysis and would not be clear without your explanation. 2. Do not report on national finances, banking, taxes and trade of any country other than France unless these subjects have some direct bearing on France. 3. Exchange rates and trends of security markets are received here by commercial news service earlier than your cablegrams. Submit only observations upon or interpretation of significant movements. 4. With exchange control in force, day to day information on rates and operations becomes less important. Follow all developments carefully and report fully by mail decrees, regulations, et cetera, on foreign exchange, but cable only important facts immediately of interest as policy matters or affecting American interests directly. 5. Do not cable decrees or regulations of only local importance. 6. Editorials and public speeches on financial subjects could be more helpfully dealt with in occasional comprehensive written reports. 7. In non-confidential cablegrams endeavor to omit reference to confidential cablegrams. Make only such reference to earlier messages as may be absolutely necessary to a clear understanding. 8. The American Consul General at Basel is covering the B.I.S. TREASURY DEPARTMENT 217 INTER OFFICE COMMUNICATION DATE TO December 7. 1939 CONFIDENTIAL Secretary Morgenthan FROM Mr. Cochran The foreign exchange market was dull today with the sterling turnover slightly smaller than that of yesterday. Sterling opened at 3.91-3/8 and on some commercial demand, including rubber concerns, it advanced to 3.92. Around noon, the Chase Bank reported that it had received instructions from abroad to sell 1200,000. At that time, one of the Japanese banks was also a seller and the rate declined to 3.91-1/2. During the afternoon the rate improved in a quiet market to 3.92. Toward the close some selling reappeared and the final quotation was 3.91-1/2. Sales of spot sterling by the four reporting banks totaled $710,000, from the following sources: By commercial concerns. L 135,000 L 575,000 By foreign banks (Europe, South America and Far East) Total... L 710,000 Purchases of spot sterling amounted to 1341,000, as indicated below: By commercial concerns By foreign banks (Europe and South America) L 249,000 & 92,000 Total.. & 341,000 As shown by the turnover figures, sales of sterling exceeded purchases by 1369,000. All of this amount may have been taken into the positions of the reporting banks, or part could have been retained by them for their own positions and the balance sold to non-reporting banks. It is also possible that the full amount was sold to non-reporting banks. Cotton bills totaling 1144,000 were sold to the British Control at the official rate of 4.02 by the following reporting banks: & 128,000 by the Guaranty Trust Company 6,000 by the National City Bank L 134,000 Total -2218 The other important currencies closed as follows: French france Guilders Swiss france Belgas Canadian dollars .0221-7/8 .5309 .2243 .1651 12-7/8% discount The Federal Reserve Bank received a cable from the B.I.S. requesting it to obtain a license to transfer approximately $130,000 in gold from its Account No. 1 to its Account No. 2. Account No. 1 is gold owned by the Lithuanian Bank and Account No. 2 is the B.I.S.'s own gold. Permission to make this transfer was granted to the Federal Reserve Bank of New York. This transaction is probably a sale of gold by the Central Bank of Lithuania to the B.I.S. We purchased the following amounts of gold from the earmarked accounts of the banks indicated: $1,500,000 from the Netherlands Bank 1,125,000 from the Bank of Mexico 700,000 from the Bank of the Republic, Colombia 300,000 from the National Bank of Belgium $3,625,000 Total The Federal Reserve Bank of New York informed us of a shipment of gold valued at $1,925,000, by the Netherlands Bank, Amsterdam, consigned to the Federal Reserve Bank of New York, to be placed under earmark for account of the Netherlands Bank. The State Department forwarded to us a cable sent by the American Legation at Ottava stating that the Royal Bank of Canada shipped approximately $77,000 in gold to the Royal Bank of Canada, New York. This shipment will be sold to the U. S. Assay Office at New York. The spot and forward prices for silver in London were fixed at 23-5/16d and 23-1/2d, respectively, a decline of 1/8d for each delivery. The U. S. equivalent of the spot price was 41.02 and the forward price 40.87 Both Handy and Harman's and the Treasury's prices for foreign silver were unchanged at 34-3/44 and 35 respectively. We made five purchases of silver totaling 275,000 ounces in New York. All of this silver was new production for forward delivery. find. CONFIDENTIAL TREASURY DEPARTMENT 219 INTER OFFICE COMMUNICATION DATE December 7. 1939. TO Secretary Morgenthau FROM Mr. Cochran Mr. Butterworth telephoned me from New York at 12:20 noon today. He was in the Federal Reserve Bank and was going to lunch there. Butterworth spent most of yesterday meeting Ambassador Kennedy arriv- ing on the Pan American Clipper. After consultation with the Ambassador, who preferred that Butterworth remain in New York until Sunday, Butterworth had decided to take the plane leaving that day rather than tomorrow, Friday. Mr. Kennedy is seeing Mr. Whigham this afternoon. Butterworth has had no word that he is to be present. I told him that if he did attend the meeting we would like to have his confidential report thereon. Today Butterworth talked with Messrs. Whigham and Gifford, who showed him some of their cablegrams exchanged with London. Butterworth gained the impression that these two men are getting "fed up" with the delay and with the difficulty in getting London to make up its mind in regard to the security proposition. Butterworth recalled that before Whigham and Gifford left London several possibilities for handling the securities had been discussed. On shipboard these two men had eliminated all possibilities except that of vesting. The messages shown Butterworth would indicate that the London officials have themselves not yet discarded the other alternatives, such as that of optional vesting. Butterworth said that Messrs. Whigham and Gifford were entirely pleased with the reception they have received on the American side, but are disappointed with their lack of instructions from London, and are perhaps a little annoyed that the matter is still unsettled when Ambassador Kennedy is arriving. I told Butterworth that Knoke could bring him to date on the Bank of England account situation, which I briefly summarized. Butterworth wanted to know when he should speak with the Secretary, since the latter had asked that Butterworth communicate with him before leaving New York. I am passing this word on to the Secretary, who could reach him at the Federal Bank during the lunch hour, or at the Waldorf Astoria later. If Butterworth does not hear from the Secretary today, he will call back before leaving New York, I let Butterworth know that we would approve his trip to northern England to be made at a convenient time. year. TREASURY DEPARTMENT 20 INTER OFFICE COMMUNICATION DATE December 7. 1939. TO Secretary Morgenthau FROM Mr. Cochran I talked by telephone with Mr. Knoke at 10:15 this forenoon. He stated that a cablegram had now been received from the Bank of England asking the Federal Reserve Bank of New York to open the special account which has been under discussion, and designating four individuals who can sign against this account. These gentlemen are Messrs. Purvis, Greenley, Rae, and Osborne. Any two must sign. The check forms are being printed, and the account is being opened as of today. The Bank of England has authorised the initial deposit, by instructing a transfer of $5,000,000 from its "G" Account with the Federal. Mr. Knoke promised to send me a copy of the telegraphic instruction under reference. I asked Mr. Knoke if there was any authorization therein to make the details of the account available confidentially to the Secretary. He replied negatively, and recalled that in the meeting held in the Secretary's office on October 19. which was attended by Messrs. Harrison and Knoke among others, it had been agreed that the Secretary would take care of the nego- tiating for this privilege. I told Knoke that this proviso had been included in the general plan which we had submitted to Pinsent and had also cabled to our Ambassador in London. Furthermore, on October 30 Pinsent had delivered to us a message from the Chancellor of the Exchequer, the opening paragraph whereof reads: "The Chancellor of the Exchequer wishes to convey to Mr. Morgenthau his personal thanks for his advice and assistance, and to say that he readily accepts the proposal to open a special account with the Federal Reserve Bank of New York, and agrees that Mr. Morgenthau should personally and confidentially have access to it." When Governor Harrison was in the Treasury last Saturday and I endeavored to impress upon him the urgency of getting the account matter settled, the question of access to the account by the Secretary arose. I read the above quoted note from the British to Governor Harrison. I told him to go ahead with his bank to bank arrangements and that if the set-up as received by him from the Bank of England did not contain the special proviso, the Treasury would take the matter up either through Mr. Pinsent or through our Embassy in London. I suggest, therefore, that when Pinsent comes back to Washington from New York he be shown a copy of the instruction from the Bank of England to the Federal Reserve Bank, and be asked to see that the necessary instruction is sent from London to complete the arrangement. In answer to an inquiry made by the British as to how payments on outstanding contracts should be handled, Knoke told me that he planned to reply that these items should now be transferred to the new account. I agreed. 2 - 221 Knoke also told me that the Bank of France man, Rousseau, who had accompanied the French gold via Canada, called at the Federa? Reserve Bank and reported that he was instructed by telephone yesterday by the Bank of France to remain in this country to sign the account of the Bank of France to be opened with the Federal Reserve Bank of New York. It appears, therefore, that the French arrangement should shortly be consummated, although the Federal has not yet received any definite instructions from the Bank of France. This may be cleared up further when Leroy-Beaulieu visits us Friday morning. 222 December 7. 1939 Dear Bearys I am writing you at the suggestion of the President. Whon you have a few since to spare, I would to pleased to hear from you about your tax program. Yours sincerely, Honorable Beary A.Vallaon, Secretary of Agriculture. 223 - 9. 1000 - Houses 1 - westes you as - supportion of the President. - m - . for signine to spare, N would to pleased w hear from you about your - program. Yours sincerely. Recorable Housy Secretary of Agriculture. B December 9. 1999 Dear Bearyn I as written you as the suggestion of the President. Mas you have a for since w spare, 1 would to pleased to hear from you about your tax program. Yours sincerely, Reservable Beasy A.Vallass, Secretary of Agriculture. 224 2211 THIRTIETH STREET 225 WASHINGTON. D.C. Dear Heing I am writing you, at the suggestion the Pres $ When y on are a few minute to stare I would hear pleased to 1 barn Sum y on about your tax propram Bx227 226 December 8, 1939. 9:40 a.m. H.M.Jr: Hello Collins: Good morning Mr. Secretary. H.M.Jr: Hello Captain. C: Just two minutes ago, sir, I had a phone from Captain Colonel Hynes in the War Department concerning the letter. H.M.Jr: C: Yes. And he said that Mr. Johnson and Mr. Edison, I believe, were going to see the President about it, because Mr. Johnson had a Board set up which has been functioning perfectly for about three months. H.M.Jr: Yes. C: And he said presumably the President didn't know about that or he wouldn't have ordered the Board that we had last night. So they're going to have H.M.Jr: a talk with him today. Well, the - Johnson and Edison saw me last night at the C: Yes, sir. H.M.Jr: C: H.M.Jr: C: H.M.Jr: meeting. And they went right after me and they said they thought that this letter was most likely one of these half-baked crazy ideas of McReynolds and Lauchlin Currie. Hello - Yes, sir, listening. So I said, "Well if you don't like it why don't you tell the White House". So he said, "Well do you know that we have a Board, so forth and 80 on". So I said, "Look, gentlemen, if you don't like this thing, see just go to the White House, don't bother me with it". Yes, sir. Well, Johnson said, "We've got to come over and see you". "Well", I said, "You can see me any time you want to, I still say if you don't like it, the place to go to is the White House". Operator: Operator. H.M.Jr: Yes. Hello. O: He hung up, or else he was cut off. -2H.M.Jr: O: 227 Make up your mind. Well I don't know, he's notGo there. I'll get him back ahead. for you. Just a minute. C: Hello. H.M.Jr: Hello. C: We were cut off Mr. Secretary. H.M.Jr: Yes. What I'm just saying is, just keep calm, the President had a month to think this thing over, he did it and so forth and 80 on, and we know that besides wanting to see the French Mission there's another thing in it. There's something the matter with your wire Collins. C: H.M.Jr: Yes, sir, I'll have to have that checked. Yes. Well anyway the fact that the information is all very amusing and - H.M.Jr: Well that's just my attitude. entirely. It's most amusing. I told you last night Johnson is fit to be tied. C: Yes. H.M.Jr: Oh he's just fit to be tied. So - C: C: I hope his blood pressure goes to two hundred and sixty. H.M.Jr: Is that enough? C: Well that'll stop him anyhow. H.M.Jr: O.K. All right. C: All right, sir. Thank you very much sir. H.M.Jr: All right. C: Goodbye. 228 THE GERMAN PETROLEUM SITUATION 12/8/39 12-8-39 229 CONCLUSION 230 Can Germany Obtain Enough 011 to Carry on the War?1/ Conclusions In the preparation of this report, we have utilized surveys prepared by Army and Navy Departments, as well as material obtained from interviews with several leading oil men. Data in many pertinent publications has also been examined. Nevertheless, the absence of definite factual material on many points has made it necessary to essay evaluations concerning several of the most important factors. Such information as we have -- which we believe to be at least as comprehensive as is available to any Department of the Government, or any private corporation -warrants the following tentative conclusions: 1. Germany has not achieved self-sufficiency in oil. Her domestic production provided about one-third of her recent peace-time consumption, and the highest increased domestic production during the first 2 years of war will not provide more than half of her minimum estimated wartime requirements. 2. Germany will have enough oil within her own borders -from stocks already on hand and from her current production -- to meet her requirements for from 9 to 15 months of real warfare with the present belligerents, excluding oil which she will be able to import. 3. During the second year of real warfare, Germany will be dependent upon the importation of large quantities of oil; she will have to obtain from 20 to 50 million barrels during the next 24 months to be able to continue effective warfare during the second year. These figures are based on an estimated war-time consumption of not more than 80 million barrels, which is 20 million barrels greater than the lowest estimate by reputable authorities and 250 million barrels smaller than the highest estimate which is quoted by reputable authorities. 4. The only sources from which Germany can obtain imports of that magnitude during this war are Rumania and Russia. In the years immediately prior to the war, Rumania has furnished only about 10 percent of Germany's imports, and Russia less than 1 percent. This report was prepared chiefly by F. Taylor Ostrander, Jr., Division of Monetary Research, Treasury Department. 1 2- 231 5. Can Rumania and Russia supply Germany with the oil she needs? Rumania will have a large enough surplus of oil production over consumption during the next 2 years to supply Germany's war needs for the second year of war, if most of that surplus goes to Germany. (Rumania's export surplus is now between 30 and 35 million barrels, and after a year or so, it might be increased to as high as 45 million barrels.) Russia exported only about 7 million barrels in 1938, went to Germany, it would not be of great assistance. Russia's oil production is about 5 times greater than Rumenia's, however. If consumption is held in check, the elimination of her tremendous oil wastage or an increase in her production might result in an increase of Russian exports to at least 40 million barrels, the total of her exports in 1932. and is shipping less this year; if this entire amount 6. will Germany be able to obtain the Rumanian and Russian export surpluses? Not more than one quarter of Rumania's exports have been going to Germany. Because of Allied ownership and control of a large part of the Rumanian oil fields, and because of the profitable opportunities for alternative sale of her oil for free exchange, Germany can obtain the entire Rumanian export surplus only if the Rumanian Government, either through fear or inclination, actively cooperates on the German side. Even with Rumania's active cooperation, Germany cannot obtain Rumanian oil unless Russia continues at least her present degree of passive cooperation. Because of geographic and military strategic factors, Russia can, if she wishes, prevent Germany from obtaining Rumanian oil. After the first year of warfare, Germany's war machine will be absolutely dependent, for its oil supplies, upon Russia's foreign policy. Germany's foreign policy and plan of campaign, even during the first year, must take cognizance of that somber fact. Even if she obtains the political cooperation of these two countries, tremendous obstacles of payment and transportation must be overcome before Germany can obtain the required amounts of oil from them. Yet these obstacles are not insurmountable. 7. Time is in Germany's favor -- so long as Russian cooperation continues. The longer war continues, the more likely it will be that Germany can increase her own domestic production significantly, develop adequate means of transportation to the East, bring about an increase in Rumanian and Russian oil export surpluses, and, if Rumania is 232 3 recalcitrant, complete a successful invasion of that country -- of course, providing Russia permits it, which 18 unlikely. 8. These conclusions will have to be modified if Germany's war-time requirements for oil are considerably higher than 80 million barrels a year, if her stocks are significantly less than 30 million barrels, or if her refineries are destroyed by aerial bombardment; in these cases, her dependence upon imports would arrive earlier and be correspondingly greater. If Germany's stocks are significantly larger than 60 million barrels, her dependence upon imports will be correspondingly delayed. 9. The effort to prevent her war-time oil consumption from rising will considerably handicap Germany's full and free use of her highly-mechanized war machine; she will have to make constant adaptation of her military strategy to her available oil supplies. 10. Germany should have sufficient aviation gasoline for intensive aerial warfare, but the performance of her planes will not be up to the standard set by the Allied planes. The new 100-octane aviation gasoline, which improves airplane performance so markedly, will not be as freely available for use by Germany's air force as it will be for use by the Allied air forces.