Full text of Diaries of Henry Morgenthau, Jr. : Volume 248 : Part 2

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216
RE INDIANA INVESTIGATION

Present:

Mr. Foley

March 20, 1940
10:15 a.m.

Mr. Sullivan

Mr. Landis

Mr. Magill

Mr. Graves

Mr. Helvering
Mrs Klotz
Mr. Mooney

H.M.Jr:

Well, Mr. Helvering, what I would like you and
Mr. Graves to do this morning is review what I
call the Indiana cases, just where we are and
the decision that Treasury has to make in regard
to whether we do or don't get a court order.

Now, whatever way you want to proceed, and these

Landis:

two gentlemen that I have invited down, will you
please feel free to interrupt at any stages.
That is always easy.

Helvering:

Mr. Secretary, Mr. Graves has been in touch with
the writing of this recommendation, and so forth,
and I would like to have him make a statement
about it.

Graves:

The matter that is before the Department for
decision is the question of whether a petition

will be filed with the District Court at Indiana-

polis to compel testimony from the Treasurer of
the Hoosier Democratic Club, which is in the newspapers referred to as the Two Percent Club. I
think, Mr. Morgenthau, that I might read this
memorandum which I gave you last night, which
sums up the background of that petition.
"On November 7, 1938, Honorable James W. Morris,

Assistant Attorney General for the Attorney
General, addressed a letter to the Commissioner
of Internal Revenue referring to him for appropriate action a communication which the Department of Justice had received from one George R.
Jeffrey, relative to charges of possible tax
evasion by the Hoosier Democratic Club. The
Commissioner had himself received a similar
letter direct from Jeffrey and on October 20,
1938, had, through the Chief of the Intelligence

Unit, referred this matter for investigation

217

-2to Mr. A. P. Madden, Special Agent in Charge of
the Chicago Division. Madden assigned the case
for investigation to Special Agent Vaughn.
"During November, 1938, Special Agent Vaughn interviewed Bowman Elder, Treasurer of the Hoosier

Democratic Club, with a view to eliciting infor-

mation necessary to determine the taxable status
of the Club.
"On November 30, 1938, Elder addressed a communica-

tion to Special Agent Vaughn, giving certain
information asked for by Vaughn and stating grounds
upon which the Club claimed exemption from taxation.
"On December 2, 1938, Special Agent Vaughn trans-

mitted Elder's communication to the Bureau of
Internal Revenue at Washington with a request that
on the basis of the facts submitted the Bureau
make a rule as to the taxable status of the Club.
"On January 13, 1939, the Bureau addressed a

letter to the Hoosier Democratic Club, calling
upon it for certain supplemental information
concerning the Club's activities and its finances.
"On February 6, 1939, Elder, in response to this
request from the Bureau, transmitted to the Bureau
a sworn statement concerning the scope of the
Club's activities, incorporating tabular statements of receipts and expenditures."
Since that time, that is, since February 1, 1939 "Since that time, an investigation by officers
of the Bureau of Internal Revenue has been proceeding to secure accurate information regarding
the Club's receipts and expenditures and to
verify the statements made by Elder with a view
to securing a tax-exempt status for the Club."
Now, this investigation has been proceeding

since February and has developed beyond a doubt

that the statements filed by Elder with the

Bureau, under oath, were false and misleading.

218

-3Elder has consistently refused to disclose the
information which is essential to a determination
of the question raised by Jeffrey, who originally
presented the matter to this Department and to
the Department of Justice, and the petition that
is now under consideration has as its purpose
compelling Elder to appear either before the
court or before revenue officers in the court's
discretion to furnish true and complete information with respect to the receipts and expenditures
of the Club.
Now, that is where we are. I perhaps might say
that that investigation, begun in November, 1938,
was undertaken as a routine investigation by the
officers of the Bureau of Internal Revenue and

it proceeded as a routine investigation, I think,
probably without your (Secretary's) knowledge
and I might go so far as to say probably without
the knowledge of the Commissioner --

H.M.Jr:

Which one?

Graves:

This routine investigation into the taxable status

H.M.Jr:

Well, I am just trying to make a record. I mean,
I didn't know anything about this until I read
the investigation on Mr. Greenlee.
That is right. That is what I was going to ex-

Graves:

H.M.Jr:
Graves:

H.M.Jr:
Graves:

of the Two Percent Club.

plain.
I don't know when that was.

I was going to come to that phase of the thing.
This thing that you told me, the first I knew
about it was yesterday.
That is right. In May, 1939, a recommendation
was made to the President by Senators Van Nuys
and Minton that one Greenlee be appointed

Collector of Internal Revenue at Indianapolis.
I think that was probably your first knowledge

of this situation. At that time, according

219

-4to the record, conferences were held between
yourself and Commissioner Helvering and the
decision was reached that the President would
be advised that there was no vacancy in the

office of the Collector of Internal Revenue at
Indianapolis. That was for the reason that
the incumbent of that position, and he still
is the incumbent, a man named Smith, has been
a very competent Collector. I think Mr. Helvering would tell you he is probably one of his
half dozen most capable Collectors and the view
was taken - the position was taken by you with
the President that you were unwilling to see
this man Smith removed, since his record as
Collector had been excellent. The matter was
dropped for a time, but in June, 1939, the
President again, through General Watson, requested you to proceed with this Greenlee
appointment.

At that time you directed the usual investigation into the qualifications of this candidate,
Greenlee. That investigation proceeded until
late July, at which time you transmitted to the
President the results of the investigation which

showed that this man, Greenlee, had been patronage
secretary to McNutt during the time when McNutt

was Governor of Indiana in 1933 to 1937; that
prior to 1933, this man had had no income of
any proportions and no substantial property;

that in the course of this investigation he was
called upon, as usual, to furnish a net worth
statement, that is, a statement of his assets
and liabilities. He furnished such a statement
which showed his net worth to be in excess of

$100,000. When questioned as to the sources of
his income, and mind you this was a personnel

investigation and not an income tax investigation,
merely to determine this man's qualifications
to be appointed Collector of Internal Revenue,
there was some failure to return income of
these proportions in his income tax returns,
but when questioned as to the sources of his
income, he gave evasive answers, contradictory
answers. He, for instance, said that he won
substantial sums of this money playing poker.
Ultimately, his statement was that he had been
a candidate for the Democratic nomination for

220

-5Governor in 1937 - 1938, and that many people
in Indiana had made contributions to him to
be used in his campaign, that he had expended

a certain fraction of the collections that he

had received for campaign purposes, but after
the campaign was over there was a residue,

which, as I recall, was said by him to be
$60,000.

H.M.Jr:

Sixty?

Graves:

Sixty. He put this in a safety deposit box
and from time to time had used that for his
expenses and had used that for investments.
I say that was his ultimate statement.
Investigation by our offices disclosed that he,
while patronage secretary for Governor McNutt,
had been in the position to control or to
participate in the control of granting of permits
to liquor dealers. Indiana operates under a
license system. Its licenses are exceedingly
lucrative for the reason that they are monopolistic in character. Each region, according to
population, may have only one, or a certain
limited number of beer dealers. All of the
beer coming into the State of Indiana must pass
into their system through, as I recall it,
14 importers, which have particular sections of
the State and their connection, the connection
of these importers with beer imports, is purely
nominal. They don't receive the physical product.
They merely get a cut on the transaction as between the wholesaler who furnishes the product
and the retailer who buys it. In any case,
these licenses, being monopolistic, are very
lucrative and they were, according to our investigation, divided up among political figures
in Indiana and Mr. Greenlee saw to it that,
according to our investigation, he himself received one of these importer's permits.
Now, he didn't take it in his own name. He
took it according to our investigation, in the

name of a dummy, but with an agreement on the

part of this dummy that when he, Greenlee,

221

-6should leave the service of the State, the

stock that
would
be --was in the name of the dummy
H.M.Jr:

It was his son, wasn't it?

Graves:

No, it was a man named Handy.

Helvering:

It was his son.

Graves:

Yes. It is the Handy Beverage Company of

Shelbyville, Indiana. Handy, the father, had
a certain part of the stock and the son, the
dummy, had 51 percent of the stock and the
agreement was that this son would transfer

the stock when Greenlee left his state office
and there is that evidence; while it perhaps
lacks full corroboration, it is certainly
substantiated by the fact that that transfer
actually was consummated when Greenlee left
the service of the state in 1937.
That much we know and of course Greenlee's

revenue, income, from that source was a very
substantial income. There is also evidence which cannot be substantiated at this moment

by certain proof - that Greenlee participated
in other ways in graft payments from contractors and others in Indiana.

Now, you sent this record to the President in
late July and following that you gave instructions as it happens, I was Acting Commissioner of Internal Revenue at the time and your instructions
were given to me - that you wanted, in view of
the evidence that had been developed in this
case of Greenlee, that you wanted a thoroughgoing investigation to be made by the Income by the Bureau of Internal Revenue into all of
these liquor licensees, there being evidence
of irregularities in this one case, it seemed
probable that a further investigation would

disclose similar irregularities in other cases.
So at that time a substantial force of investigators were assigned to that project. As I

222

7said a moment ago -H.M.Jr:

Just a second. There is a thought that comes

to me as you go along. It would be interesting just for another reason, but all relative I wonder what was the date that McNutt was put
into his present position. Does anybody know?
Foley:

It was around May or June, about eight months

ago.

H.M.Jr:

Go ahead.

Graves:

As I said a moment ago, up to that time the
investigation of the taxable status of the

Hoosier Democratic Club had been conducted as

a routine matter and as, I think you just said,
it was not brought especially to your attention.
In the process of this intensive investigation
which began last August, it quickly developed
that the key to this whole corrupt situation,
if such it was, in Indiana, was this Two Percent Club and an approach was made again - I

should amplify that by saying that evidence
was quickly developed that payments by liquor
dealers had been made in substantial sums, on
the testimony of the dealers themselves, to
this Club and it seemed to our investigators
that an investigation of the Club would be pro-

ductive more quickly of the results - of a result than to pursue 50 or 100 possible different
companies or concerns who may have made payments

to the Club, so an approach was again made to
this Hoosier Democratic Club after August, and

at that time a complete examination of the books
was made by our officers and certain facts were
developed in that way, which I think are important enough for me to state now.

It was found in the first place that the charter

or by-laws of the Club contemplated that its
receipts mainly would be paid over to the State
Democratic Committee and to the National Democratic Committee, but in examining the payments
recorded on the books of the Club as having been

made to the State Democratic Committee, it was

found that the officers of the Club - I will

say found that Bowman Elder, the Treasurer of

23

-8the Club, had falsely recorded substantial

payments as having been made to the State
Democratic Committee, which in fact had not
been made to the State Democratic Committee.

The falsification was in this: Checks would
be drawn by Elder, charged against the bank
account in which the Club's funds were deposited, drawn to the order of the Treasurer
of the State Democratic Committee, taken by
Elder to the Treasurer of the State Democratic
Committee. The Committee's endorsement would
be procured on the check and the check would

then be retained by Elder and cashed by him
and the funds deposited by him in a safety
deposit box or in a special bank account.

Now, the examination that I referred to disclosed amounts aggregating $117,500, whereby
by the collusion of the officers of the State

Democratic Committee, the record shows payment
to the Committee, when in fact the money was

never paid out of Elder's hands. It was retained by him, and as he testifies, disbursed
for general purposes.

Now, we can get no testimony from Mr. Elder as
to what became of that $117,500. He won't say.

He won't say who got it. He won't say what
purposes the money was expended for.

Foley:
Graves:

Well, they were general political purposes.
I am coming to that.

Magill:

May I ask there, Harold, to what years does

Graves:

The whole period, Mr. Magill.

Magill:

Is some of it directly traceable to later years?
Well, this went to all these years.
What I am getting at is this, a person might

Graves:

Magill:

this $117,00 apply?

reasonably say he doesn't remember very well

224

-9what happened to the money he had in 1933.
Graves:

on yes, some of it was as late as 1938. '38,
in fact, was a big year.
Now, as Mr. Foley just suggested, the statement
made by Bowman Elder was not - was not, "I won't

tell you." His statement was, "I can't remember
in detail what became of that money. It was
expended for the general purposes of the Demo-

cratic Party." That is it, isn't it, Ed?

Foley:

That is right.

Graves:

Now, so much for that. Evidence was obtained,

H.M.Jr:

or information was secured, we will say it that
way, by our investigators that in addition -May I interrupt you there? The point that - we
don't know that he expended it for the Democratic
Party or that he might put it in his own pocket.
We don't know, that is correct.

H.M.Jr:

We don't know whether it became personal income

Graves:

Foley:

or whether he spent it.
That is correct, we don't know.

That is what I wanted to bring out. His statement is that it was for general political purposes.

H.M.Jr:

He
perfectly well have put it all - spent
it onmight
himself.

Foley:

He might have.

H.M.Jr:

Yes, it is perfectly possible.
There isn't any evidence that that is so.
But there is no evidence that he spent it for

Foley:
H.M.Jr:
Foley:

H.M.Jr:

the Democratic Party, either.
Well, he said so.
Well, that is no evidence.

225

- 10 Foley:

Well, it is some evidence.

H.M.Jr:

But not substantiated. There is nothing to
prove his statement. He might have said he
spent it on exploration.

Foley:

You would have to disprove it, Mr. Secretary.

H.M.Jr:

No, I think the burden of proof is on him.
He establishes that when he testifies.

Sullivan:
Foley:

He said he spent it for general political purposes. Then you have to show he didn't, that
he spent it for himself.

Graves:

Evidence reached our people or information

reached our investigators to the effect that
substantial sums of money had been paid in
to Elder by liquor people, beer importers,

and beer wholesalers, and testimony was taken
from the people who had actually made such

contributions, copies of checks - or checks

were obtained of which we have copies, showing

that such transactions had occurred, and Elder,
when questioned on that point, admitted that

the Club had, in the period that we are talking
about, from '33 to '38, received from one hundred
to $125,000 in that way. We have documentary
proof of such payments up to, I think, $87,000,
Mr. Helvering. We have information that those

amounts might reach as high a figure as $500,000.
Now, again, we questioned as to the receipt

of this money. Mr. Elder admits that he re-

ceived such funds up to one hundred or $125,000.
When questioned as to the disbursement of these
funds, he makes the same general statement as
the one he made with reference to the money
he secured by these spurious endorsements, expended for the general purposes of the Democratic

Party, and he will not go beyond that statement
in explaining the disposition of this fund. Now,
there is where we stand. As long ago as December,

H.M.Jr:

as I understand it, the question was raised -Before you go on that, I don't want to over-

simplify this thing, but let me see if - I am

226

- 11 looking now at my two special advisers, whether

this is - as I understand, the thing that happened,

people in the State of Indiana made contributions,
political contributions, to Mr. Bowman Elder, who

Craves:

H.M.Jr:

deposited them, I take it, in the bank.
That is right.

Foley:

He then drew a check on that bank and walked
over or walked around his own office and gave
these checks to - what do you call them?
Hoosier Democratic Club.

H.M.Jr:

Is that right?

Graves:

No,
as I understand, I don't think that is exactly
what happened.

H.M.Jr:

I thought Bowman Elder gave these checks to the
Hoosier Democratic Club and they endorsed them
and gave them back to him.

Foley:

No, he received them as Treasurer of the Hoosier
Democratic Club. He was the agent of the Club
when he received the money. They traced about
$750,000 into the Two Percent Club over a period

of from 133 to '38, approximately 125 or 130
thousand dollars a year. Those are straight
receipts from office holders in the State of
Indiana. Then, accounting for the disbursements,
he fails to show what he did with approximately
$120,000. He claimed when he was first interrogated that he had drawn a check payable to
the Central Democratic Committee of Indiana, but
the records of the Club of the Central Democratic
Committee do not show that that payment was ever
received and when he was --

H.M.Jr:

Wait a minute. The records of the Club were
the records of the Central Democratic --

Foley:

The Central Democratic Committee. The records

of the Club show that he received this $750,000
and he can account for all the disbursements
except about $120,000 that he claims he paid

227

- 12 over to the Democratic Central Committee. The
Democratic Central Committee, as I understand

it, doesn't show on its books that the money
was ever received and as to that, he says that
he spent it for the general good of the Democratic Party. When they asked him more questions, he said, "oh, it was for traveling expenses." "Well, how much?" Well, he didn't
know, "And to what people?" and he names only
a few people and, "What else was it spent for?"
"Well, it was spent for hall hire and printing
and different expenses in connection with campaigns around the state. "Well, name some
of those expenses." "Well, I'm not able to
name them very definitely, but he has attempted
to give an explanation of what he did with the
money. He hasn't said, "I won't tell you. I
am not going to answer that question." He
hasn't said that. But he has attempted to tell
what he did with the money and that is rather
important, because that has some bearing on

the petition and the granting of the order,

because in order to get such an order you have
to show contumacy. You have to show that the
witness wasn't cooperative, that he obstructed

Foley:

the investigation, that he refused to divulge
information. Then this undisclosed fund -Now, the so-called slush fund.
As I understand it, there is about $125,000
there. He is very indefinite about where that
money came from and he is very indefinite about
what he did with that money. I mean, that might
be, as I understand it, $120,000 that he didn't
account for out of the 750.

Graves:

No, no, no, no possibility of that. That is

H.M.Jr:

Foley:

entirely separate and distinct.
Why couldn't it be?

Graves:

Because --

Foley:

I know he doesn't claim it, but why couldn't
it be?

228

- 13 Magill:

The aggregate amount of the undivided funds

for the period 1933 to 138 ran between
$100,000 and $125,000. It was kept partly
in cash and partly in a bank account. The
funds in the unidentified group were received principally from individuals who had
been granted permits to sell malt and alco-

holic beverages and also from people who

were friendly with the Club and the Democratic

Party. That is his statement.

Graves:

They are two separate and distinct things.

Foley:

Then the $120,000 and the $125,000 making a
a total of 245 or 50 thousand dollars are not
accounted for.

Magill:

I think you may have a point on your contumacy,
or however you pronounce that word, but I don't -

just in glancing through this - I don't see

that he identified at all what happened to these
funds which, according to the checks, were payable
to
the Democratic Committee, but actually were
cashed.
Graves:

Foley:

I think that is my impression, too.
I think that is true, Ross. My point there is
that he wasn't properly questioned about it.

They asked him what the amount was. They didn't
ask him the approximate amount and they didn't
ask him how much, as an estimate, he received

at any one time, and they didn't pursue it as
they did the first time he was interrogated in

January.

Magill:

I haven't seen that. Now, this is what I see
here. I don't know whether this is all there
is in here, because as I say, I haven't checked
this with any care. I just saw it for about
five minutes. The agents say, "Now, referring
to the 35 checks you have just identified and
the total is $93,100, and as I get the situation,

you are unable to explain how this $93,100

was disbursed. If
H.M.Jr:

Doesn't Mr. Landis have a copy?

229

- 14 Graves:

What page are you on, Mr. Magill?

Magill:

I am on page 6.

H.M.Jr:

Ros, could you just - I want to get one thing
in my mind before you go in on this testimony.

I have now the picture of Mr. Bowman Elder,
Treasurer of the Hoosier Democratic Club, who

is supposed to turn this money over to the

Democratic State Central Committee and the
Democratic State Central Committee's records
don't show approximately receiving $120,000

which he said he turned over to them. I have

that picture. If I could get it as simply

as that before we get into this testimony,
if you don't mind, the picture on the so-called
slush fund. I mean, what was the process of
that? I just want to get how these two things
flow. May I have just a minute? How does that
flow?

Graves:

Collectors were sent out to various areas
in the State to take up contributions from
the various liquor dealers and beverage dealers,
and so on. They would get the money either in
cash or in checks drawn to their personal
order and they would bring the cash to Bowman
Elder.

H.M.Jr:

What would he do with it?

Graves:

H.M.Jr:

He would put that either in a bank account or
in a safety deposit box.
Have they been identified?

Graves:

Yes.

H.M.Jr:

What does he say?

Graves:

Payments have been identified to the extent of
$87,000 and he admits that the amount -What does he claim or think he did with the

H.M.Jr:

$87,000?

230

- 15 Graves:

H.M.Jr:
Graves:

H.M.Jr:

He claims he expended it for the general
purposes of the Democratic Party.
What do you think he did with it?
I don't know.
But the money was collected from liquor
which went into the safety deposit box and
when he is asked what he did with that, he

dealers and brewers and we know of $87,000

doesn't - he says, "For the good of the
Democratic Party"?

Graves:

Yes.

H.M.Jr:

But the Democratic Central Committee or anybody else doesn't come into that picture.

Graves:

No, not at all.

H.M.Jr:

Two separate funds, one he gets from liquor
dealers and one he gets largely from office

holders.
Graves:

That is right.

H.M.Jr:

The office holders' money went into the Hoosier

Democratic Club and the so-called slush money

went directly to Bowman Elder, is that right?
Graves:

You have it.

H.M.Jr:

Is there any evidence --

Sullivan:

Wait a minute, didn't it go to him --

H.M.Jr:

May I finish, please?

Sullivan:

I beg your pardon.

H.M.Jr:

Just a minute, please. I don't want my thought
interrupted. Is there any evidence that the
money from the slush fund went into the Hoosier
Democratic Club, is there any confusion of those,

mixing up of those?

231

- 16 Graves:

It isbehalf
supposed
Elder collected this money
on
of thethat
Club.

H.M.Jr:

But I mean, there is no evidence. Do we have
the Club's records?

Graves:

on
yes,ofwe
have
examined them and we have photostats
their
books.

H.M.Jr:

But is there any possibility of them mixing?
No possibility of those two things being dupli-

Graves:

cated in any respect.

H.M.Jr:

Now, John.

Landis:

May I just interrupt here - but in both instances,
to follow out the Secretary's thought, Elder
was acting purportedly in behalf of the Hoosier
Democratic Club.

Sullivan:

That was what I wanted to interrupt for. You
said in the first instance it went to him as

Treasurer of the Hoosier Democratic Club and the

next time he got it himself. In both cases, he
was acting as Treasurer of the Club, both in
respect to the slush fund and in respect to the
contributions of the employees.

H.M.Jr:

I see. O. K.

Magill:

The only point I was going to make is a comparatively
minor one in connection with what you are getting

out. I don't see, on glancing through this, that
he ever gave any specific destinations of these
funds. The story seems to be, as I get it out
of here, that the agents had him identify check
after check after check which were made payable
to the State Committee, or rather the Chairman
of the State Committee, and he said each time
that these were endorsed by the Chairman of the
State Committee and that he, Elder, or the Chair-

man of the State Committee, cashed them. Then,
when he is asked what happened to the money, his

answers are - here is one of them and I think

they are all like this.
"It was spent for political purposes. I cannot

232

- 17 -

give you the details, general political pur-

poses." Now, he repeats that explanation time
and time again. There is a point in here where
he says something about traveling expenses, but
I don't think he ever becomes more concrete than
that.
Foley:

Not in that examination, but there is an examination
that -- of him conducted on the 2nd of January

Graves:

Do you have that, Ed?

Foley:

Yes, I do.

Graves:

Could you identify the questions and answers

that are more specific than that?

Foley:

oh, sure.

Graves:

Suppose you do.

Magill:

On the slush fund, what he says is this: It

comes down to that on page 17 in here. He says,
"The reason for that was, this was money spent
for political purposes for the benefit of the
Democratic Party and I was advised that no
accounting was necessary." Now, as far as this

examination is concerned, I think that is as
specific as he gets, as far as I can see from
a casual examination. But he does say that it
was used for general political purposes.
You might be interested in this, Mr. Secretary.
He says, "You might put this in the record. By
my direction on the books of the Hoosier Democratic Club, all checks drawn to Jackson, Storen

and Gramelspacher were charged to the Democratic
State Committee as a matter of convenience.
These said checks could have been charged to any

account. The above funds were used for general
political purposes and the purpose for which the
Hoosier Democratic Club was organized under its
by-laws and the money was in no way funds of the
State Committee and never was intended to become
part of the State Committee.

233

- 18 -

That
was the general story, as I get it, from
casual reading.
Helvering:

And those are the same amounts which, on the
record of the Hoosier Democratic Club, were

credited as paid to the State Central Committee.

Magill:

That is right, yes, sir.

Graves:

While Mr. Foley is getting that paper, I would
like to make this suggestion, that there may
be some defects in the interrogatory. There
may be need to a better foundation for this
petition. If so, they can be easily corrected.
It is a matter of reexamining Bowman Elder and
asking him the particular questions which should
be asked him in order to lay the necessary foundation, but I think the more important question is
the question whether, in any case, we are to
proceed with this.
That is the question.
With this petition.

H.M.Jr:
Graves:

H.M.Jr:

And I want the advice of these two gentlemen,
where we go from here. Have you people seen

the letter from Mr. Clark?

Magill:

Yes.

H.M.Jr:

Have you seen it?

Viner:

Graves:

I have seen a draft of the petition.
No, the letter from Mr. Clark. That is the
question. I mean, how should we answer this
letter from Mr. Clark? That is what all the
fussing is about.
I have that. I will show it to Dean Landis.

H.M.Jr:

That is the jumping off point, is where do we

H.M.Jr:

go from here.

Magill:

As it looks to me, you have got two questions,
just from what - I have gone over this thing

234

- 19 with Harold orally and have spent perhaps
an hour before I came in here looking over

this thing. I think you first have got to

decide what your general policy is going to
be, do you want to press this thing or don't
you. Do you think that prima facie, you
have got enough here so that it is worth
while to press the thing to a conclusion?
That, it seems to me, is the major issue.
Then, as a secondary issue, there is the
question, among other things, as to what
reply you should make to Mr. Clark. There
is the question of whether or not a further
oral examination before you go to the court
should be had of Mr. Elder, and so on. There
are a series of questions of detailed procedure
there that I think are very important.

Speaking to those for a minute, I said to
Mr. Graves this morning that in my own judgment I would be inclined to think it would
be certainly worth while considering whether
or not you shouldn't ask Clark to give you
the benefit of the Department of Justice's
suggestions as to how this thing should be
conducted. The only objection I see to that
is it means a further delay, and that is a
serious objection.
H.M.Jr:

Well, as to that, I would like - my own feeling is, I think we have got to make up our
own minds.

Magill:

I think that is true. I think your major

question is whether you want to push this
or whether you don't.
H.M.Jr:

I don't think we can throw it back on the
Department of Justice. I think we have got

to make up our own minds and I would like to
make up my own mind with the help of people
in the room here.
Sullivan:

Apropos of Ros' remark, Mr. Foley and I had
lunch yesterday with Mr. Clark and Mr. Tweedy,

235

- 20 and Mr. Clark said that if we were to go ahead,
there certainly should be a new examination
because there wasn't the proper basis for the

petition and if there were the proper basis,
if the proper line of questioning was asked
so that we had a basis for the petition, he
then thought you could toss a coin as to whether
or not the petition would be granted.
H.M.Jr:

Well, who is Tweedy?

Sullivan:

He is in Justice and has been working on this

H.M.Jr:

Well, I think the thing for Landis and Magill
to do is to satisfy themselves of, have we or

case with Clark.

haven't we got a case here.
Foley:

That is the thing, Mr. Secretary. This isn't

a question of the sufficiency of examination.
It isn't a question of the sufficiency of
the petition. This has a much larger question
that deals in questions of policy and that is,
what has to be decided here and that we can't
ask the Department of Justice to decide. They

will
not do it. It is not their job, it is our
job.
H.M.Jr:

Foley:

If you don't mind, I differ with you a little bit.

Possibly the word "policy". The policy, as far
as the Treasury is concerned, was established
the first day I came in here and that is simply
if we feel that a man has not paid the taxes on
income received, that we take steps to collect it
and that is the whole thing. That is the policy,
no matter who he is or what his connections are.
Now, that is the policy, so there is no question
of establishing a policy.
The reason I bring up the policy question, Mr.
Secretary, is this isn't just an ordinary question of income tax evasion. This is a question
as to whether or not political contributions
are taxable and it is a question that goes back
over the whole history of the Bureau.

H.M.Jr:

No, I don't agree with you on that. You haven't
convinced me, because I don't - no, I can answer

236

- 21 -

you on that and I will be glad to be interrupted. We are not - I am glad you raised
that point, because in my own mind I think
I see clearly and I wish - let me state how

I - the question of the $700,000 that was
contributed to the Hoosier Democratic Club
in good faith by the people that made the
contributions, we are not questioning whether
that is or isn't taxable. The thing that we
are questioning is that there is a gap of
$117,000 as to what became of that money.
Now, I am not questioning the thousands of
people, whether the money they contributed
to that organization is taxable, but I am
questioning what happened to the $117,00
that this fellow took out and claimed that

he gave to the Democratic Central Committee

and they never got it. Now, that is the
point, as I see it. We are not arguing about
whether a contribution to a Democratic or a
Republican party is taxable. As far as I see

it, that isn't the question at all, but the

Landis:

question is, what happened to that $117,000.
You raise a very fundamental question, Mr.
Secretary. Assume that that $117,000 was or not only the $117,000 but the slush fund
as well, the $125,000, was taken by Elder and
these other gentlemen and put into their own

pockets. Let's assume that to be true. The
thing that I would like to question upon

that assumption is whether, those facts being
established, that would change the problem of
the taxability of the Hoosier Democratic Club,
of the contributions made to the Hoosier Democratic Club. Assume it is embezzlement on

Foley:

H.M.Jr:

the part of Elder -It doesn't make any difference in so far as
the taxable status of that club is concerned.
Wait a minute. I don't see that the Hoosier
Democratic Club are, so to speak, on the grill.
I am not questioning this Hoosier Democratic

Club.

Foley:

Then I think Jim's point and my point, Mr.
Secretary, is that we ought not to file the

237

- 22 petition which says that the purposes of the
petition are to determine the taxable status
of the Hoosier Democratic Club. If we think
there is $117,000 that Mr. Bowman Elder
pocketed, and that he used for his own purposes, then I think we ought to send out a
letter and we ought to assess a tax against
Mr. Bowman Elder for that income and that will
put Mr. Bowman Elder on his proof and he will
have to come in and show that he didn't use it
for his own personal use but that he used it

for the political use of the party, and if he
isn't
a
tax.able to show that, he will have to pay

H.M.Jr:

Would you just let me go back a minute? Would
you (Landis) say what you said and only make

it a little bit - expand on it. Let's just go

back to that point.
Landis:

I would like to ask this question. I don't

know the answer to it, but let's assume that I
go out and collect money in behalf of the
Democratic Party under the name of some club
or other and I collect $100,000 worth of tax.
I spend $50,000 of that for the purposes of the
Democratic Party, accounting for it minutely,
and then I make up my mind after I have collected
those contributions that I am going to steal
$50,000. I would like to know whether, if that
action on my part makes the original contribution,
which was not income and not subject to taxation,
makes it taxable income. And until that question
is answered to me, I don't know anything about
this.

H.M.Jr:

Let
try to answer that. Let's just keep
it onMagill
that basis.

Magill:

May I step back one step, because I think - in
connection with your own question, I think one
analysis you have got to make is the one that
Mr. Landis is entering into.

H.M.Jr:

I don't quite understand that, I don't get it

yet.

238

- 23 Magill:
H.M.Jr:

The question as it has been - that is why I am
going back. I wasn't sure -I don't understand his point.

Landis:

The question was initially presented, as I gather,
whether the Hoosier Democratic Club was an exempt
organization from income tax or not.
Let's assume that it isn't.

Magill:

There is a long list in the statute, in Section 101

Magill:

of the statute, of organizations which are exempt
from income taxation and it is my understanding
that this club contends that it is exempt under one
of those provisions which has to do with what are
called civic leagues. Now, it is essential to E
good many of those exemptions, at least, and I
should think to that particular one, that the money
shall not have been spent for the benefit of particular members of the organization but shall
have been spent to advance the purposes of the
organization, whatever those may be. Hence, in
answering Mr. Landis' question, if it should
prove to be true that the funds of the club
were largely expended for the benefit of particular officers or for what you will, that would,
I believe, have an important bearing on the exemption
of the club itself from income taxation purposes.
Now, Mr. Landis whittles that down to a still

finer point, that is --

Foley:

They are not exempt.

Magill:

Suppose the club, on the face of it, is a perfectly proper organization and suppose the bylaws and constitution and so forth provide that
its funds are to be expended solely for the
advancement of Jeffersonian democracy and the

promotion of social intercourse among its members.

That is the record. But the fact is - take his
point - that after the funds are collected,
Mr. Elder pockets some of them or he gives some
of them to district leaders, or he does this or
that or the other thing with them that are not
within the stated purposes of the club. In

239

- 24 -

other words, the club is in fact used for an
individual's own personal gain, but that isn't
stated in the intentions of the organization.
Well, I think, to answer his point, my own
guess would be this, just a guess, if the organization itself could show that it was or-

ganized for the purposes of promoting the
Democratic Party, et cetera, and this business
by Elder constituted in effect a theft, as you
have described it, or an embezzlement or some-

thing of that kind, I shouldn't suppose the
fact that the Treasurer is a crook ought to
affect the question of whether or not the
organization itself is exempt.
Now, let me say there to tie in with one of
your thoughts, I think the Bureau of Internal
Revenue would still have a lot of interest in
whether or not Mr. Bowman Elder should report
the $100,000 or whatever it is that he has
taken.

Foley:

I think that is the issue.

H.M.Jr:

Just one second. I am trying - what I am trying
to do is the way we always do. I have got to
have each thing as we go along, I have got to
thoroughly understand it. Let me go back a

minute and everybody can have a chance.

As I get the point here, we are talking about
two propositions. Number one is, is the Hoosier
Democratic Club entitled to tax exemption. That
is number one. Is that right?
Landis:

I would pass that for a moment and assume that

it is subject to tax exemption. I mean, I would
assume it is not subject to tax exemption.
Assume it is not within that category of associations who are exempt.

H.M.Jr:

Assume it is not, and that thing has been pending
before the Bureau since '38.

Landis:

Let's assume it isn't.

240

- 25 H.M.Jr:

Then what?

Landis:

Then what this evidence discloses is that you
have had a number of contributions to the club.
The
contributions, as such, as I understand it,
are not taxable.

Helvering: There
is where you are jumping over a big
hurdle.
Magill:
Landis:

Yes, that would still be a question, I take it.
Well, it is a very doubtful question then, as
to whether contributions that are made to a
non-exempt organization are taxable income to
the non-exempt organization.

Magill:

Well, Jim, you get into another proposition
there, I take it, which is another fence you
jump, but I think you jumped it too quick.
If this organization could be shown to be set
up really for the purpose of enriching Bowman
Elder, or whoever it may be, in Indiana, then
I take it not only is the organization not
exempt but it might very well realize income
to the extent that it compelled people to pay
in funds to it which were to be used for the
private profit of the fellows that organized

it.

Landis:

Let me clear myself on a point of law here that
I think is very important. Supposing I go
around and solicit my friends for contributions
to a fund which I am going to give to an individual, "X", who is in financial difficulties. I
assume that that thing that I have created, that
fund, whatever it is, is not exempt under the
income tax laws as an association. Are those
contributions subject to be regarded as income
either to the association or to myself or to
"X"?

Magill:

I would think so, at least to the extent that
you didn't spend them for "X". In other words,
your case is this --

Landis:

No, you are jumping --

241

- 26 Magill:

But you go around and collect $10,000 from

your colleagues at Harvard. You say, "I am
going
to use this money to support refugee
German Professor "X".

Landis:

An individual.

Magill:

An individual. Having got the $10,000, you
give maybe $3,000 to refugee individual "X"
and $7,000 to support the Landis family.
Supposing the thing is all right to start with.
Is that taxable income? I take it and give it
to "X". It is taxable income to me?

Landis:

Magill:

Landis:

Magill:

Well, I don't think you can answer your question. If it is not taxable income, it is not
because you are an agent for a designated purpose. You are collecting this for a particular
purpose and hence it should not be treated as
money which is - that you may use to buy groceries with. Now, suppose you don't - you don't
use it for the designated purpose.
Then will you say it isn't taxable income to
me or to "X"?

I think it is not taxable income only so long
as it can be shown that you received it for
the particular purpose and used it for that

purpose.
Landis:

Magill:
Landis:

All right.
Let me illustrate it -Let me go one step further. Suppose after I
get that money, I steal $5,000 of it. Does that

make $5,000 of that $10,000 income?
Landis:

I would be inclined to think so.
Well, that is important.

H.M.Jr:

Let's ask Mooney how he would rule on a thing

Magill:

like that. Take this case, Mr. Mooney, that

242

- 27 -

Mooney:

Mr. Landis has set up. You just go through
the motions. How would you handle it?
I would say that when I received that, I

H.M.Jr:

When who received it?

Mooney:

solicits.

H.M.Jr:

You are going to collect $10,000 for a fund

Mooney:

That is right. Now, I would say that when
I received that money it was given to me for
the purpose of turning it over to the refugees.
When I received it, it didn't constitute taxable
income to me because I was receiving it as a
gift for a specific purpose. I would say that
if we stop at that point the Bureau of Internal
Revenue would never say that that amount constituted income to me but if I misappropriated
that fund, if I used it to my own benefit, made
investments with that money, I would say the
minute I had that I have appropriated that money

received it as a gift.

I am an agent now that goes around and
to give some refugees.

to my own use and we would say that constitutes
taxable income.

Foley:

But you wouldn't tax the refugee.

Landis:

For the fund?

Mooney:

No.

H.M.Jr:

Wait a minute, three men pointing fingers at
him. Give the fellow a chance.

Mooney:

You are asking another question. I answered
the question within the limits which were submitted.

Landis:

That is right.

H.M.Jr:

Do you want to restate it?

Sullivan:

I would like to ask one that I think will clarify
it quite a bit.

243

- 28 Mooney:

Well, yes, that is another question, whether

it will be, say - whether I would be liable
for a tax return or not. I am an individual.
The minute I get that money you might say that
I am a trustee. Therefore, I should be required
to file a trust return. I am an individual,
showing the distribution of that money to the
beneficiaries. It wouldn't constitute taxable
income to the beneficiaries, because after all
it is a gift to the refugees. I am acting merely
as a medium through which the money passes.

H.M.Jr:

I am a trustee with one other person for some
money that my mother-in-law left my three

children. Don't we file a return on that?

Klotz:

Sure.

Magill:
Foley:

You better had, if you haven't.
You are getting income out of that trust fund.
You are a fiduciary, though.

H.M.Jr:

Don't I file a return?

Foley:

of course you do, because that money is earning
money and you account for it.
I would answer the question, I would say that
you would be supposed to file a return.

Landis:

Mooney:

Sullivan:
H.M.Jr:

Magill:

Well, I want to ask one -I will answer you -I think you can get this - you can consider
another thing, Mr. Secretary. There is another
proposition that comes in, of common experience
here. You may be paid money for traveling expenses or whatever. If the money was really
expense for that purpose, I take it you realize
the taxable income. On the other hand, if
your firm said, "Well, we don't want to monkey
with expense accounts and here is $100 for
that trip to Washington," and actually it
only cost you $50.00, at least theoretically
you would be supposed to report the other

244

- 29 $50.00 as income for the particular year.
Now, when you apply that to the Two Percent
Club, I think whether or not the intention
was that certain organizations were to be
enriched by it, if the facts were that they
were enriched, that it does have an important
bearing on the exemption of the club itself.
And I think it certainly is arguable that
unlike the refugee case, the individuals who

have received the money have received taxable
income.

Landis:

I would like to interrupt there and just point
out in what Mr. Magill is saying, which I think
is very important in any inquiry in the direction
of this case, it seems to me that the question
of the taxable status of the Two Percent Club
is an immaterial question to the issues that
are raised by this program. Such investigations

of the tax laws as may have occurred in connection
seem to me not to have been incurred by the Two
Percent Club. They seem to me to have been incurred by the fellow who took the money. If he
took the money, he stole it from the Two Percent
Club.

H.M.Jr:

That is what I told Harold Graves night before

Graves:

Yes.

H.M.Jr:

That is the position I took night before last.

Landis:

last, didn't I?

Are you through?

I would say, therefore, that the justification
for examining into these expenditures does not
flow from the fact that the Treasury is particularly interested in the examination of the
Hoosier Democratic Club. Rather, it is interested
in the question as to whether Mr. Elder or
Mr. Greenlee, or whoever they are, reported
a true income.

Magill:

I don't think that is wholly true.

H.M.Jr:

This is marvelous.

245

- 30 -

H.M.Jr:

For this reason.
This is wonderful.

Magill:

Look at this thing for a moment in its darkest

Landis:

darkest picture. Suppose that the Hoosier
Democratic Club was set up as the organization
which was to dispense patronage to see that the
boys got and held their jobs, to dispense liquor
contracts and dispense public contracts, et cetera,
et cetera. Let's assume that the fact is that
we have only discovered a part of the picture
and that the fact is that hundreds of thousands
of dollars went to the Hoosier Democratic Club
through these years, that it was the recognized
receiving and disbursing agency for slush funds
in Indiana. Well now, if some one organization
or association for that purpose -I quite agree.

Magill:

And these payments are made with these things

Magill:

light, that is, let's - I am not assuming that
these are the facts, but just look at it as the

in view and then payments go out of the club

for this or that or the other thing, but not

solely for the interests of the Democratic
Party, et cetera, I would be disposed to think
then that the Hoosier Democratic Club itself
is a profit-making organization which is subject
to the income tax and that it ought to be taxed
and that it doesn't really make any difference
exactly who got the money.

Now, you are also concerned, obviously, with
whether Mr. Elder was making a good thing out
of this and whether X, Y & Z were making a good
thing out of it, because you want to tax them
personally, too, but I don't think you can
assume in advance that the question of the
exemption of the Hoosier Democratic Club is
a wholly immaterial thing.
Landis:

I agree on that. In other words, if you want
to paint this picture which will show that
the so-called contributions coming in from
your liquor dealers, et cetera, are not contributions but are payments by way of a

246

- 31 consideration flowing out from the Hoover
Democratic Club, whatever that consideration
may be, then you have something that you can
crawl into.
H.M.Jr:

I am glad you called it the Hoover Democratic

Club. May I just interrupt the thing here
just a second, right on this particular point?
Since November, 1938, the question has been
pending before this Bureau, is or isn't the
Hoosier Democratic Club taxable. Now, is it
fair for me, as Secretary of the Treasury,

to ask you people if you have time enough to
make up your mind, and if you haven't, why
haven't you? Why haven't you made up your
mind, Mr. Helvering, since November, '38, is
the Hoover - now I am doing it - the Hoosier
Democratic Club is or isn't taxable?

Helvering: Well, from the information we have, I have
long held that they were, so far as I am
concerned, because first Mr. Magill and Mr.
Landis both touched upon it. To be exempt
they must show contributions to be voluntary.
There is no question of that in my mind, that
many of these were given for a consideration.
Therefore, the Democratic Hoosier Club, the
Hoosier Democratic Club should file a return
and by the very nature of their filing a return
we would find out what the expenditures were
and where they went to, for what purposes.
H.M.Jr:

Let's just stick on this one thing. Is that

Magill:

Certainly.

H.M.Jr:

Supposing I simply say - now look, I am sick
and tired. I have waited since November, 138,

agreeable to you?

and you people have had ample time to make up

your mind, is or isn't it. Then, what is your

answer, what additional information do you need
to make a recommendation that this Club is or

isn't taxable?

Landis:

Could I interrupt there? I don't think you are
asking the right question.

247

- 32 H.M.Jr:

All right.

Landis:

Because it has - that question has a double
answer. A Club like the Hoosier Democratic
Club may or may not be tax exempt from this
standpoint. It may be tax exempt so that
whatever income it acquired is exempt under
the laws of the Federal Government. Now, that
is one category in which the eleemosynary institution fits. I don't think that is the
question in this case.

H.M.Jr:

How would you put it?

Landis:

I think the question Mr. Helvering raised a
moment ago is that you are inquiring as to
whether or not this was assumed to be not
tax exempt, is receiving any income and therefore ought to make a return to the U. S.

H.M.Jr:

Is receiving any income?

Landis:

Yes. Contributions are not income.

Foley:

They are gifts and not within the definition
of income.

Helvering: If the gifts were contributions, there is some
consideration.

Foley:

If you could say they are securities for jobs --

Magill:

I think --

Foley:

....and considerations for the gift and it is
no longer a gift.
Which he didn't state. Mr. Helvering said, I
think, two things, really, first that the payments to the Hoosier Democratic Club were in
large part not contributions at all but were
required payments of one sort or another,
secondly, I think it is implicit in what
Mr. Graves, in particular, said with respect
to this program, that it is the assumption that

Magill:

large amounts have been received by the Hoosier

248

- 33 Democratic Club which so far had not been
disposed for purposes which, if known, would
Helvering:

Mooney:

indicate that the Hoosier Democratic Club
is not an exempt organization.
And if they are not exempt they should file
a return with expenditures and receipts fully
set out.

Could I elaborate a little on that? First of

all, we would have to determine whether or not
this Hoosier Democratic Club is exempt or not
from taxation. That is the first problem. Now,
if we were to rule on this case in a manner similar to cases of a similar nature, we would hold
that it is not entitled to exemption because to
qualify as an exempt corporation, it has to come
within the provisions of Section 101. We would

say that it is not a civic league because it is
partisan in nature and its activities are devoted
to a certain particular interest which is not
for the purpose of the general welfare of the
community as a whole.

Now, we have ruled in any number of other cases

that such political organizations as this are
not exempt from taxation. That is one step.
After we rule that they are not exempt, then
they are required just the same as any other
corporation to file a return.
Then in connection with the filing of that return,
we have to ascertain whether or not they have
any taxable income. Now, if the receipts of the
club or the political organization are contributions and gifts, they do not constitute taxable
income. That is a conclusion to be reached from
the nature of the receipts of the income. We
would have to analyze the receipts to determine
whether they were in truth and in fact contributions, therefore not includable in gross
income. So in many instances, and I would say
in practically all instances, Mr. Secretary,
where we have held that a political organization
is not exempt from filing a tax return, nevertheless that organization is not subject to

249

- 34 the payment of any taxes, because it has no
taxable net income.

Now, in this case, if we proceed under the
premise that it is not entitled to exemption,
it may or may not cwe any tax, depending upon
whether or not what it receives does or does
not constitute taxable income. I would say

a true political contribution to that organization in the sense that it is a voluntary
gift to the organization to be dispensed for

political purposes, does not constitute taxable
income, it would be excluded under provisions
of it being a gift. We have so ruled. But
in determining that question, then we would
have to take into consideration whether or
not these amounts in the total - we would have
to analyze also the receipts of the company.
As I understand it, the so-called slush fund
receipts are not recorded on the books and
records of the Hoosier Democratic Club.

Graves:
Mooney:

That is right.
Now, it is true, I believe, and it has been
stated that Elder acts as agent for the Hoosier
Democratic Club, that he was receiving the slush
funds for the benefit of the Club, but the Club
records do not reflect the receipt of such payments. Now, is it possible that there are also
other items that have been received ostensibly
for the Club that are not reflected on the Club's
records? We have to make inquiry of Bowman Elder
and ask if that is so. In other words, our investigation has developed the fact that the Club
has received money. Then it is our problem, after
we have held that they are not exempt, to determine whether or not the receipt of that money
constitutes income.
Now, it may not constitute income to the Club
but we then inquire into how it was spent and

if it was appropriated to any of the officers
for the special benefit of any of the officers
or employees of the Club and they have benefitted
by the distribution of that money, I say that
then that would constitute income to them.

H.M.Jr:

Well now, in this study that you have made,
and you have given a very clear statement that

250

- 35 -

I can follow, and this was your sole responsibility, where would you go from here if you

had to make up your mind.
Mooney:

H.M.Jr:

Mooney:

I would say this.
If you have made up your mind. I can skip it,
but if you have made up your mind, how would
you proceed on this matter?

I haven't made up my mind, but I would like to
make this statement. To me this is an ordinary
case. Here is a case of a corporation that we
know has received money. It may be exempt or

it - it is not exempt. I would say this. I

have made up my mind, Mr. Secretary, that it is
not exempt under the statute. There would be
one possibility that it might qualify under
Section 101-9, which is a social club, but it

has no social aspects at all, so therefore it
couldn't, in my opinion, qualify under 9. It
must, if it qualifies at all, qualify as an
exempt corporation under 101-8. I think it is
understood that it comes without that provision.
So therefore, it is not exempt from taxation.
Therefore, it is in the same position as any
other corporation.

All right. We require every other corporation
to file a return, whether it is taxable, whether
it has taxable income or not, it has to file a
return which permits us to make the necessary
investigation to determine whether it has to
be taxable income or not. Then, in connection
with the investigation of any taxpayer who is
liable for the filing of a return, we do not
get the cooperation that we are entitled to
and it is necessary for us to go into court and
get a court order compelling the production
of records and testimony - we do that, if it
is necessary. So, looking at it from the
viewpoint of an ordinary case, I see no reason
why we shouldn't do it.
The question as to the time or the appropriate-

ness of the time, I think that is another matter.

H.M.Jr:

This procedure which you are talking about now,

about going into - getting a court order to

251

- 36 -

Mooney:

make the club produce its records, is that
the procedure, let's say, the one that we
sent over to the Department of Justice and
that they requested or is this the one -I really don't know.

Graves:

He has examined the petition which we have

H.M.Jr:

Would his man be - fit into the petition

Graves:

Well, either way, but I think --

Foley:

We have got the books of the Club, Mr. Secretary.

H.M.Jr:

I think this would be it, Mr. Secretary, as I
get Mr. Mooney's procedure. Mr. Mooney would
first send the Club a ruling to the effect

before us now.

as it was a week ago or as the way it is now?

that the Treasury determined it was not an
exempt organization, wouldn't you, and that
returns should be filed for the years 1933 to
1939, inclusive. Having received the returns,
you would examine them, if you did receive them.
If you concluded that certain expenditures here
listed were not adequately detailed, you would
send an agent out to examine the records of the
Club. Maybe you can short circuit that, because
maybe you have already looked at them. If you
didn't get adequate information, then it would

be up to the point of this petition for a court
proceeding. Is that it?

Mooney:

That is the usual procedure. In other words,
where in the course of our investigation the
taxpayer refuses to disclose his records, it
is necessary for us to go in and get a court
order for him to produce, and if he does
produce, but we are satisfied as a result of
our investigation that there are items that are
not reported on the books, that he has knowledge
of other items of income that he refuses to
divulge or items of expenditures that he
refuses to divulge, we could go to court and
get an order compelling him to testify. As
I understand it, although I am not familiar

252

- 37 -

H.M.Jr:
Mooney:

at all with what has gone on before -Then
you are in the same status as Mr. Magill
and Mr. Landis.

As far as this petition is concerned, I consider that it is necessary because of the
failure on the part of the officer of the

corporation to divulge the necessary information from which we can determine whether or

not the organization itself is taxable and

also whether or not individuals who may have
appropriated some of that money to their

own benefit are taxable. It has a twofold
purpose.

H.M.Jr:

Well, whoever wants to take the witness on
hand. I would like to ask a few questions
on this business of exemption from the neces-

sity of filing a return. That is, 1108, as

far as - I don't know the numbers at all, but
I am just taking your number there. As I
understand the general purport of that section,
certain associations, corporations, clubs, et
cetera, may or may not be required to file a
return.

Landis:

If they are given an exempt status.
Now, does the ordinary political association,
such as, we will say, the National Republican
Party, file a return under that?
Not if they are given an exempt status.
Are they given an exempt status?

Mooney:

It is a matter of right. They can't declare

Mooney:

Landis:

Mooney:

themselves exempt. I believe they have to
write in and ask the Commissioner of Internal
Revenue.

Mooney:

Have they ever done that, Tim?
I don't know.

Foley:

They have never filed a return and the same

Foley:

thing is true for the Democratic National

253

- 38 Committee and the State committees and right

straight down the line, and they haven't asked
for exemption.

Mo oney:

Well, let's look at that from a practical angle.
I think the answer there is that they probably

Foley:

have assumed that if they did make application,
it would have been granted.
And the Bureau went along with that assumption.

Mooney:

That is right. Now, this is true, also. Various
subsidiary political organizations from the
various states have written in and asked as to
whether or not they are entitled to exemption.

We have written them and told them no, they are
not exempt.

Foley:
Mooney:

In some instances, and in some instances we have.

I don't think our record is awfully good on that.
It isn't. Well, it may appear to be confused,
but when you analyze this, I don't believe it is,
as to why we have in some instances said yes

and sometimes no. It in turn depends upon the
kind of construction that you are going to place
upon 101-9. As a rule, they all come in and
ask for exemption under 101-8, which is a civic
league, organized for social welfare and we say
that in such instances we construe a civic league
like, say, the Columbia Heights Citizens Association, or some organization of that type, which
is non-partisan and has regular meetings and is
devoted to the welfare of a particular community.
There is no question about institutions of that
sort who ask for an exempt status, but in every
instance to my knowledge, where you have had a
state political organization with no social
features attached to it at all, so that it has
to qualify as an exempt corporation under 101-8,
invariably we have denied them exemption.

Now, that doesn't mean that we ever get a dime
of tax by denying them the exemption, but that

does make it mandatory that they file returns
and then, if they have any income; in other
words, it is possible that they may invest

254

- 39 some of the contributions, particularly if some
wealthy individual may give them a large contribution of $5,000 and they may decide to invest that. If they have any of that investment
income, that would be subject to taxation. Now,
those cases invariably have been denied exemption
and they have been required to file returns.
In other instances where there are social features
attached to the club, such as your New York
Democratic State Committee - that may not be the

exact name, I don't know, but it is the Democratic
organization in New York City, anyway - which has

a lot of social features attached to it.
Foley:

That is the Young Democratic Club and I am

Mooney:

H.M.Jr:

Maybe that is it, Ed.
You are a Director of it, aren't you?

Foley:

I was.

Mooney:

The Union League, say, of Philadelphia or Chicago --

Foley:

They have got exemption.

Mooney:

Foley:

Right; so did this National Democratic Club in
New York, on this basis.
It is not the National Democratic Club.

H.M.Jr:

It might be the National Democratic Club, because

Foley:
H.M.Jr:
Foley:

familiar with it.

the Club has that building at 37th Street.
That is right.
And it is really a lunch club.
That is right, but I am trying to distinguish
it from the National Democratic or the State
Democratic Committee.

H.M.Jr:

But there is a club in New York which is more or
less of a luncheon club. I am a member.

255

- 40 Foley:

Sure.

Mooney:

They have written in and asked for exemption
under 101-9, because 101-9 is worded this
way. "Any club organized and operated for

pleasure and recreation and other non-profit
activities is entitled to an exempt status
if the earnings or income do not inure to the
benefit of any one particular shareholder.
All right, now first of all to qualify under
that section a club has to have social acti-

vities to be a club. If it is social, it is

subject to the dues tax, too, and whether or
not it is subject to the dues tax, determines
whether it has any social aspects or not.
Now, under an interpretation of that section,
as it has been interpreted in the past, if
it qualifies as a social club, because that
section says, "And other non-profit activities,"
it is entitled to an exemption. In other words,
under a broad interpretation of other non-profit

activities, which would include political activities, obtaining contributions for political
purposes and so forth, they would be given

exemption and wouldn't be required to file a
return and I think when you analyze it that way,
why, our rulings are really not in such a state

of confusion, I think, as at first glance they

would appear to be.
H.M.Jr:

Let me just put it this way. Knowing how these
things are ruled on, how these things are done,
it seems to me that there is plenty of smoke
here for us to be suspicious of the fact that
this club may be a cloak to collect money from
office holders and from holders of liquor licenses,
and so forth, to collect money, knowing that you
can do it under the cloak of this kind of a club
and then this man may use it for any purposes
in the world, including the lining of his own
pockets, and there is enough here, and enough
doubt, that I don't see why we haven't got the
right to run this thing down, to find out what
disposition was made of this money by this
individual. Now, the fact that he is using
the cloak of a Democratic club may prove to

256

- 41 -

Foley:

have been very smart, but the fact remains that
this individual from two sources, one from office
holders and one from holders of liquor licenses,
et cetera, has collected a lot of money and there
is some $200,000 which he just says, "Well, I
can't give you the details."
Why not assess him for that, Mr. Secretary? Let's
assume he got it. Let's assume it was income
to him.

H.M.Jr:

That is the purpose of this thing. As I say, I
am trying to see this thing clearly and the fact

that there are so many people who can have so
many differences of opinion - I don't ask these
men down to hold a class here instead of Columbia

and Harvard unless it is interesting. Otherwise,
they wouldn't come next time. I would hate to

disappoint you and give you something that you

just - well, that is easy, it is just like that.

Why do they bother to bring me down here by plane?
H.M.Jr:

My gosh, did Landis get a plane?
Not - American Airlines, not Henry Morgenthau, Jr.

Magill:

Oh, that is all right.

Landis:

I would like to interject an idea, because my
earlier questioning leads up to this kind of
consideration. I do it in due humility, because
I am not too familiar with this procedure of
compelling testimony in connection with the income tax cases. I am somewhat familiar with
the procedure of getting recalcitrant witnesses
to talk in other cases. One fine thesis that
I think ought to underlie, certainly in the cases
with which I am familiar, the use of the compulsory
process to get testimony from the witness, and
that is the definition of what the objective of
the proceeding is, that is, the objective hasn't got
to be simply one of very nice curiosity or anything
of that nature. It should tie itself up with
the conception of what the violation of the law
is that is being charged in this instance.
Now, as I see it, there are three possible violations that may have occurred. One is the

Magill:

257

- 42 -

violation of law by Elder in not reporting
sums that he may have received from the

117 thousand plus the rest, as taxable income.
A secondary violation of the law that may have
occurred is that the club, as such, should
have filed a statement with the Internal Revenue
Bureau, because it was not entitled to an exempt

status under 1108, or whatever it is. A third,
and perhaps the most difficult of all to prove,
is that the club has gotten taxable income,
that the contributions are not contributions
but that they are paid for consideration coming
out from the club.

H.M.Jr:

Landis:

I am going to ask you to start over again. They
just gave me a slip saying that the committee
voted 14 to 4 to do away with foreign silver
purchases. Let's start over again.
Well, I think it is very important when one
thinks of the initiation of a proceeding to
compel a contunacious witness to testify to
have that proceeding related to a definite
object of being concerned with the discovery
of a violation of law, not simply, as I say,
curiosity, and I would base that upon the
general judicial attitude toward that, probably,
as well as the general public reaction that will
attend any such use of judicial process. I think
the public reaction in such a thing is justified
if there is a charge of violation of law, but
if there is no clear charge of violation of law,
that kind of thing becomes, as Holmes expressed

it, "A fishing expedition.
H.M.Jr:

Who expressed it?

Landis:

Holmes.

H.M.Jr:

Did they have them in those days?

Landis:

Yes, they had them in those days. Therefore, I
think that a cause like this has to be analyzed
with reference to what alleged or supposed
violations of law are involved and, as I see it,
there seems to be three. One is the violation
of law on the part of these individuals, Elder,

258

- 43 in not reporting the sums he may have received from the Hoosier Democratic Club as
taxable income. The second is that the
Club itself may not have filed the required
statement on the ground that it wasn't exempt,
which is EL touchy question. The first question is not a touchy question. The first
question seems to me to be one of those questions of plain honesty, that the Bureau ought
to be keen on considering. The third question,
which would be immensely difficult to prove,

is the contention that the Club itself has received taxable income on the ground that the
contributions are not contributions but are

H.M.Jr:
Landis:

payments for favors coming from the Club.
Right. Granted.

And if this thing is to proceed, and I don't
want to express any judgment on that at the
present time, it seems to me at the start

one ought to take the easiest method of proceeding, the less contentious method of proceeding, and proceed in connection with the
alleged violations on the part of the officials.
Having established those alleged violations,
the very proof that will establish that will
give you the basis for ruling that the Club
is not a tax-exempt club. Perhaps it may also
give you the basis, or further inquiry may be
needed, inquiry of the type I doubt has been
carried out, to show that the contributions
are not contributions, that they are earned
income to the Club. I say earned not in a
technical sense but in a popular sense. That
seems to me the stage of procedure about which
one could work up a situation of this kind.

H.M.Jr:

Well, Jim, following what you are saying, take
the easiest of the three routes.

Landis:

Yes.

H.M.Jr:

The individual ones. How would we proceed on

that individual one?

259

- 44 Landis:

I don't know. I am not too familiar with this
field, Mr. Secretary. I wonder if there has
been an effort to examine this man Elder with
reference to his income; the direction of the
effort has been toward the Hoosier Democratic
Club, not toward the individuals, as I understand, in this case.

Graves:

I might make some observation about that. The

Landis:
Graves:

Landis:

fact is that the man could not be compelled to
testify with reference to his own income.
On the ground that it would incriminate him.
Exactly. No court in the world would give you
an order to get that testimony.
After all, you could ask him, as the Bureau constantly does, to produce his records. See what
you get from those personal records, and then
the Club, as Treasurer for the Club, he has not
that defense, so that the examination of the
problem of the expenditures, the $117,000 expenditures, would tie itself up with the question of whether or not Elder got that money.

Graves:

That again is a question of laying a better
foundation for this particular proceeding.

H.M.Jr:

May I get in on it? This is where Graves stopped
me night before last. I was at exactly the same
point that you are now, and then I was told that
if we proceeded, Mr. Elder couldn't be made to
testify against himself. Now, let's just take
this a minute. Let me take Mooney, if you don't
mind, or I don't care, anybody. Supposing the
decision is made that we will proceed and we
want to find out from Mr. Elder what he did
with this money or any other money. We know of
200 and some-odd thousand dollars which he has
received. We know that by his own admission.
How can we legally and properly get him to
explain that $200,000?

Mooney:

If we proceed against him individually?

H.M.Jr:

Yes.

260

- 45 Mooney:

I would say there is no way in which you
could compel him to testify against himself,
because he would say that - he would refuse
to answer on the grounds that it might tend
to incriminate him.

Magill:

Mooney, this occurs to me. I have been thinking about that point. Mr. Graves, am I right
that this testimony seems to indicate that
the so-called slush fund, the payments from
the liquor dealers, went to Bowman Elder personally and not to the Hoosier Democratic Club,
as such?

Graves:

Magill:

I think the most we can say is that it went to

him as Treasurer of the Hoosier Democratic Club.
There is some question about the intent of those
who contributed. For instance, we find among
the checks --

Well, without going into that too much, at any
rate, it does appear, doesn't it, that he got
the money, that he kept it in a little tin box
at the Indiana Athletic Club and some of it in
a bank account, and that he himself disbursed
it?

Magill:

That is right.
That it didn't go through any other --

Graves:

And was never recorded on the books of the Club.

Magill:

Then back to Mr. Mooney. Would it be feasible
on the basis of this evidence or similar evidence which you might obtain in a further
examination of Mr. Elder, simply to make an
assessment against Elder or send him out a

Graves:

deficiency letter with respect to - this amount
of money, whatever it is, $125,000, and just
charge him with the personal income tax on
that amount, after which he would have the
burden of showing what happened to it.

Graves:

I think if you did that, he would pay it.

Foley:

Isn't that what you want?

261

- 46 Graves:

Not as I understand it.

H.M.Jr:

Well, just a minute.

Magill:

You might charge him with making false and
fraudulent returns, too, and crack him with
another 50 percent.

Graves:

I think you could put all the penalty you want
in there and he would pay it.

Landis:

That would be a very serious admission of the

Graves:

Their reaction would be, "We are willing to

H.M.Jr:

Club.

pay this to get rid of the inquiry."

I am going to come back to you in a minute, because you are shocking Foley and I don't want
Foley to be shocked, so we will come back to

that in a minute. Ed is delicate.

You raised your hand.

Sullivan:

I was wondering if this discussion about forcing
Elder to testify wasn't rather academic. Over
three weeks ago he asked if he couldn't come
down and tell the story.

H.M.Jr:

oh, that is quite different. He wanted to come
into my office privately, through the back door
and talk to me.

Sullivan:

No, that isn't my understanding.

H.M.Jr:

Well, it is mine.

Sullivan:

Then you have had some conversations that I
don't know about.

H.M.Jr:

He didn't want to see anybody but me.

Sullivan:

Who?

H.M.Jr:

Elder.

Sullivan:

Well, that is news to me.

262

- 47 H.M.Jr:

Well, when he talked to the agent, when he

talked to Agent Sullivan in Indianapolis,
he refused to talk to him, but he is willing
to come down here and see me.

Sullivan:

Well, I don't know about that.

Klotz:

That is the impression we got.
When did he refuse to talk to Sullivan?

Sullivan:
H.M.Jr:

Sullivan:

In his testimony. His testimony was taken
down. John, if you are right, then it is all
the easier, see, because he not only tried
through his attorney to reach you, but he
tried to do it through two other attorneys,
to reach me, see, but the impression I got is
that he would come in here, up this elevator,
up to me, but he wouldn't talk to the accredited
representative of the Treasury.
That is not the impression given to me.

H.M.Jr:

If I am wrong, there is nothing that has been
lost.

Sullivan:

That is right.
If I am wrong. Is that right?
That is right.
May I ask another question? Mr. Mooney, if this

H.M.Jr:

Sullivan:
Magill:

was just an ordinary case of John Doe in Oregon
and nobody is running for President from Oregon,
and other facts being the same, what would you

do in the usual course of events with respect
to Mr. John Doe, who is Treasurer of the Oregon
Democratic Club, et cetera?

Mooney:

Why, I would approach the problem with two ob-

Helvering:

You mean on the basis they had asked for exemp-

Magill:

That isn't the question I want him to answer.
What I am - well, we will take that up next.

jectives in view.
tion?

263

- 48 I don't know why I need to put it in Oregon,
but all I want to do is ask you what you would
do in the ordinary case, on the ordinary facts,
the other facts being the same, and the particular question I have in mind, these facts
we are just speaking of, suppose it appears
that the liquor slush fund was kept by this
Treasurer in a little tin box, and so forth,
and he disbursed it and he says, "I disbursed
it for the general purposes of the Democratic
Party," but you haven't yet discovered what
the dickens he really did with the money.
What
would you do so far as he personally is
concerned?
Mooney:

First
of all,
involved
-- if you only had an individual

Magill:

I am assuming you have got the whole picture.

Mooney:

You would proceed directly against the individual. Suppose you had a corporation and it
so happens --

Magill:

Wait a minute, if you don't mind. May I pin

you on the individual? Would you do anything
as to Bowman Elder in this case?

Mooney:

Well now, I am not sure that I have your question properly in mind. You said, assume now
that you have got another case out in Oregon,
that involves --

Magill:

I think maybe I had better erase that. What
I want to do is - and I may as well make it
explicit - I want to take the McNutt element
out of the situation. Let's assume that is
not a question of any public interest whatever.
It is a question of the ordinary administration
of the Bureau. But aside from that fact, the
other facts are identical with what they are
here. What would you do as to the individual?
With respect to the individual, I would say
this: We are concerned primarily with the
Government collecting any taxes that are
properly due upon the net income realized.

Mooney:

264

- 49 If we found that here was an individual who
had utilized a corporation for the purpose
of collecting and covering up the collection
of income which constituted income when it
was realized, and then the diversion of that
income from the corporation to him, we would
proceed against both the corporation and the

individual for the purpose of collecting the
corporate tax liability, if any, and the individual tax liability, under the theory that
what he received was from the corporation taxable
to him as a dividend. There is your ordinary
case which we have every day.

Magill:

Mooney:

Take this little variation out of it, if you

will. Let's assume that so far as this slush
fund is concerned, it appears that it didn't
really go to the corporation, that it went
into the Treasurer of the corporation's own
books, if you like.
Well, there you have to assume a lot of things.
In other words, it would be based upon your
assumption or your determination of your ultimate facts, what course you would follow. I
mean by that, this: If the slush fund is a
fund and if he is custodian of the fund in his
own individual capacity or acting as trustee
for someone else other than the Hoosier Democratic Club, and it has no connection with
the Hoosier Democratic Club, the Hoosier Democratic Club would not be a party to any inquiry
on our part as to the receipt of that money and
the disbursement of the money.

On the other hand, if he is custodian of that
fund as the Treasurer of the Hoosier Democratic
Club and he is acting for the Club in his
capacity as custodian of that fund, why then
it belongs to the Hoosier Democratic Club. It
is part of the receipts of the Hoosier Democratic Club, he being the agent for the Hoosier

Democratic Club and the Hoosier Democratic Club

is still in the picture and if that constituted

a taxable income, regardless of whether an

individual operates as an individual or whether
he operates as trustee or whether he operates
as an agent for a corporation or an officer

265

- 50 -

Magill:

of a corporation, the ultimate question there
as to who receives that money is, is the recipient of that money taxable under the theory
that it is taxable income. First of all, you
have got to determine -Would you proceed against the bulk, in other
words, would you determine some kind of a is this a case where you put in a jeopardy
assessment? I don't know.

Helvering: Not unless they were giving away the fund.
Mooney:
A jeopardy assessment there only arises for
precautionary measures to protect the interests of the Government, so far as collections
are concerned.

Magill:

Mooney:

What I am getting at, I should think at the
very least this slush fund is a slippery item,
that it is going to be very hard to find out
who did get it and who was beneficially interested in it. Well then, would you proceed
against both the club and Elder?
(Nodding head affirmatively) In other words,
here is a man acting as an officer of a corporation. We are interested in knowing what
was received by the corporation and how it
was expended. Now, he is an officer of the
corporation and can be called upon, I believe,
to testify as to the nature of the receipt
of this money and how it was expended, because
he is then testifying in his capacity as an
officer of the company as to how that fund
was received by the corporation and other
parties separate and apart from themselves,

another identity, whereas you couldn't call

Magill:

upon him in his individual capacity to testify -I don't know that you need to get him to testify.
If you - in the ordinary tax proceeding, put
the shoe on the other foot. If you think that
I received $10,000 income last year that I
didn't report, you don't waste any time getting
me to testify about it. You simply slap a
deficiency on me for that amount of money and

266

- 51 -

if I want to explain that, actually I got it

but I paid it over to Guy Helvering, or something or other like that. I have to make that
explanation if I am going to get out of a tax
on myself, but the Club you use is an assess-

ment against me.
Mooney:

Well, in the ordinary case now - for instance,
a good example would be rebates that were not
reflected on the books of the corporation and
the President of the corporation appropriated
them to his own use. We proceed there against
the individual. We also proceed against the
corporation under the theory that it was received by the corporation and then passed on
to the individual and we tax both of them.

Magill:

You determine what, a deficiency against both,
is that what you do?

Mooney:

Right. We would determine a deficiency against

both.

Magill:

Have you gone over this testimony here?

Mooney:

No, I haven't. There, of course, Doctor, you
have one element in those cases that is not
present in this case, which is the one factor

which Dean Landis has indicated will probably
be our most troublesome problem. In the case
that we imagined, say, of the rebates, there
is no question in anyone's mind but what the
receipt of those rebates constitutes income

to the corporation. There is no question there
as to the nature of the income. Here in this
case it is a very difficult problem as to
whether or not the receipts, all the receipts
constitute taxable income or not, depending
upon whether or not they are in fact contributions in a true sense of the word, or whether
they are not contributions but in fact something other than contributions. In other words,

that in itself is not --

Magill:

Let me ask you two or three things here now.
First, when those various cases came out of
New York a while ago, in which this miraculous

tin box came into being, I don't know whether

267

- 52 you know about that group of cases -Mooney:

Magill:

Tin Box Town?

I think there was a Sullivan that had the

miraculous box.

Mooney:

It might have been O'Hara.

Magill:

Did you 80 after Sullivan?

Mooney:

Yes.

Magill:

Now, suppose the Tonawanda Democratic Club,

which was simply Sullivan in another name, and
he collected these funds and he used some of
them for the Democratic Party and he used a lot

of them for Sullivan. Well, you would still go

Mooney:

Magill:

after Sullivan, wouldn't you?
We would go after both of them. If we were

satisfied, if we felt that they were not in
fact true contributions - in other words, the

mere fact that he utilizes the corporation,
wants to get the advantage of a corporation,
that in turn subjects the corporation to a
possible liability as well as himself.
I don't like your word "contribution", in a.
sense. They are contributions in a sense by
somebody who wants to get value for his money.
He isn't interested in the Democratic Party
a darned bit, but he is interested in getting
favors from Sullivan or whoever it may be.
Or another case I think of, that is the thing
again without the club where the real estate
experts in Big Bill Thompson's machine - there
were four or five of those fellows who got
about $500,000 a year for appraising real
property the city was going to take over. I
don't think anybody supposed for a moment that
those particular fellows kept the $500,000
they got, but the actual procedure was to
collect a tax from them on the $500,000, which
I believe you ultimately succeeded in doing.
You won the cases. I don't know whether you
got the money. So it seems to me that in

268

- 53 answer to Mr. Landis' question half an hour

ago that - isn't it really indicated here that
you proceed against both on the basis of your

normal procedure?
Mooney:

I think I have answered that before, that that
is so.

H.M.Jr:

What does that mean, proceeding against both?
Again, if you don't mind, how would you proceed
against both.

Mooney:

We would proceed against both for the purpose
of making a - first, our necessary investigation,
as a result of which we would conclude whether

or not either one or both derived taxable income, subject to taxation.
Now, in our normal case, we ascertain our facts.
It isn't necessary for us to go into court and
get - to get the production of records and testimony. If it is necessary, though, to do it, I
believe we have instituted a petition in court
compelling the production of records and testimony of all the parties for the purpose of ascertaining what the true facts are and then
ascertaining the liability if we find that there
is a liability due. In other words, the mechanics
of the proceeding are probably different, depending upon the nature of the case.

Foley:

Well, Tim, suppose you make an assessment against

the Hoosier Democratic Committee for income it

had never received and make an assessment against

Bo Elder at the same time for income he had received on behalf of the Hoosier Democratic Club,

Mooney:

but which isn't reflected on the books of the
Club. He comes in and pays a tax on that. He
says, "Sure, I got it. I will pay a tax." What
have you got against the Club
Well, there again --

Foley:

You can't tax the same income twice.

Mooney:

Wait a minute, maybe you can. There again you
have jumped a lot of hurdles. Assuming now that

269

- 54 that does represent income to the Club and if
it was stolen from the Club, the Club might be
entitled to an exemption representing the money
embezzled from the Club.

Foley:
Mooney:

Suppose it doesn't claim a deduction.

Well, if it doesn't claim a deduction - I can't
conceive of it not claiming a deduction, but if
there was an embezzlement, if they didn't claim
it, I would say that it is impossible to reach
a conclusion that the failure to claim it is an
admission on their part that it does constitute
income and that it was a disbursement to the

Foley:

individual as a dividend. In other words, wherever
you have a corporate set-up -I don't think it makes any difference, Tim, but
we haven't got a corporation here. This is an
unincorporated association.

Mooney:

Foley:

H.M.Jr:

You have got an unincorporated association which,

if taxable, would be taxed under corporate rates.
But we haven't got a corporation here.
May I just interject a minute? Following on the
idea of doing the normal thing, which I always
like to do; I always think I am on safer ground
if I do the thing that we would do if there
weren't any national prominent people involved,
am I correct in this that - let's say we only
proceeded against Elder and not against the
Club simultaneously. Elder might say, "Well,

that is the Club." Aren't there certain dis-

advantages of only proceeding against one only?

Elder might say, "Well, as Treasurer of the
Club, you have to start all over again." You
have lost that time, but if you go against both
simultaneously there is 200 some odd thousand
dollars that was either income or receipt to one or

the other. Is that right or wrong?

Mooney:

I think that's right.

H.M.Jr:

You go along simultaneously with both. I appreciate this, which I think is what possibly
Mr. Landis might have had in mind, from the

270

- 55 -

standpoint of publicity or public reaction
I think we will get a better break if we
just proceeded against Mr. Elder, but I don't
know how important that is. Is that what
you had in mind?

Landis:

I am not sure I had that in mind. I was just
doing some thinking along that line. Going on
the basis of what I know at the present time,

I could not make up a judgment on the various
different methods of procedure. How necessary

is it to resort to this device at the present
time in the light of whatever evidence is available, I don't know. I can't reach a judgment

on that wi thout having some knowledge of what
the evidence is.
Sullivan:

May I ask one question?

H.M.Jr:

Surely.

Sullivan:

Is there any suspicion on the part of the Bureau
that Bo Elder took this money himself?
Well, I think maybe he did.
The question is - how did you answer it? The
question is whether you thought Elder might
have taken it.

Helvering:
H.M.Jr:

Helvering:

I say there is no question in my mind but what

he has disbursed this money in various ways, but
whether it was to pay campaign expenses or to

Magill:

individuals, I don't know.
You don't think he used it for his own personal

Helvering:

I would not think so.

Magill:

Is he a person of means?

Sullivan:

Substantially.

benefit.

Helvering: I think so.
Graves:

Lately!

271

- 56 Sullivan:

His family have always had a great deal of

Graves:

I did not know that. It may be true.

Sullivan:

I thought so. I may be wrong.
(At this point, the Secretary suggested a recess
while he discussed some matters with Mrs. Klotz.)

Magill:

What bothers me and what bothered you (Landis)

money, haven't they?

as a lawyer - it's the point I think Foley made
right at the beginning - and that is that on
the face of this explanation here, this testimony, if you take it for what Elder said and
assume he was telling the truth under oath,
the only evidence that you have at all with
respect to the destination of these funds which
he collected were that they were used for party
purposes. That's all you have got. Now, I
don't think that's so, and you (Landis) probably
don't think it's so and I don't suppose Ed thinks
that's so; that probably there is more to it than
meets the eye here. On the other hand, I am
afraid on the basis of what you have here, as
I have glanced at it casually, that you do not

yet have a basis to go before the Court and say,
"This fellow has refused to answer our questions
as to what happened to this money and we want you
to compel him," and I don't think you can convince the Court on what you said here that it
appears that there was misappropriation of these
funds or they were used for bribes or some other
thing if he says they were used for party purposes.

Now, it seems to me perfectly clear, Mr. Secretary, if I may state my conclusion on that, that
before you go to the Court it would be essential
that somebody of the order of Foley, of a high
order of intelligence, should frame a series of
pretty searching questions to ask Elder, using
what you have here as a basis, and before you go
to the Court you should first put Elder over the
hurdles in a very severe way, having in mind the
objective - what Mr. Landis has stated - what
violation of the law are you trying to find.
What violations of the law do you think exist?

272

- 57 Your question to be directed to bringing out
facts on that question, and secondarily, bringing out a square statement by Elder that, "I
am not going to tell you.' I don't think you
have that here.
H.M.Jr:

What I would like you to do is this: I would
like to S tap at this point. I would like to
resume right after lunch. If Mr. Magill and
Mr. Landis have no date, I would like to eat

with them at one o'clock and then these gentlemen are at your disposal, unless you want to
have fresh air. Have lunch with me at one

o'clock and resume this at 2. Is that all
right?

Magill:

Sure.

Landis:

Sure.

(Whereupon, at 12:50 p.m. the conference was

recessed until 2:00 p.m.)

273

- 58 AFTERNOON SESSION

(The conference was reconvened at 2:00 p.m.)
H.M.Jr:

I want to ask the Commissioner something. Have
you
gone ahead with the 90-day letter to Greenlee?

Helvering: No.
H.M.Jr:

Helvering:

I thought you were going to. Greenlee and Keeler.
Keeler, we did.

H.M.Jr:

Why not Greenlee?

Helvering:

We don't have the information which we hope to

H.M.Jr:

get as the result of further investigation.
Well, let me just pursue this thought a minute.

Supposing we decide that we don't go in with
a petition to examine the Hoosier Democratic
Club. Haven't you got enough to go ahead with
a 90-day letter to Greenlee?

Helvering:

H.M.Jr:

Yes - well, I would have to check the record
to see just what we have got on that. We have
got some $60,000 which we think is unexplained
income. of course, we would have to give him
a 90-day letter in which he would have an
opportunity to explain what it was.
Well, let me put this up to be knocked down
by these people here. I have been listening

to this thing and I can't see - the way I
feel at 2:16 is that I would like to send

Mr. Greenlee a 90-day letter and I would like
to send Mr. Bowman Elder a 90-day letter on
the 200 and some odd thousand dollars. Now,
am I correct that if these go out your people
would then - either Mr. Elder says, "I don't,"

or, "I do." If he owes it, he pays it. If

he doesn't, who does he appear before?

Helvering: He probably would ask for a conference with

the agent in charge of his district. If he
accepted the assessment, of course he would
go to the Collector's office and pay it.

274

- 59 -

But if he doesn't, the agent in charge?
Helvering: He would ask for a hearing, undoubtedly, and
at the end of 90 days, if he hadn't asked
about that, he would have to file a petition
H.M.Jr:

with the Board of Tax Appeals.

In these conferences, let's say with the agent,
the agent in charge can ask him any question
he wants to and if the answer is, "I spent it
for political purposes," with no documentary
evidence to prove it, that wouldn't be accepted
by your agent, is that right?
Helvering: Yes.
H.M.Jr:
And then this question of his testifying against
himself, all of that is out, is it? He has got
to explain this slush fund of $80,000 and the
120, which he admits he has pocketed, he has got
to give documentary proof what he did with it
or we would just take it for granted the money
went into his own pocket. We have that right,
H.M.Jr:

haven't we?

Helvering:
H.M.Jr:

Any unexplained items we won't allow as a deduction.

But he has got to have documentary proof, hasn't

he?

Helvering: Well, it wouldn't have to be written, if that is
what you mean.

Foley:

H.M.Jr:

Foley:

Well, the burden of proof would be on him to
show he didn't keep the money but he used it

for political purposes.
Yes, but just one second. But Ed, I just want
to get this thing straight. Not to insult you.
I am Bowman Elder. I say, "Mr. Foley, I spent
$10,000 in the State of Michigan --"
This isn't my money. You can't tax this against

me.

H.M.Jr:

I just say, "Mr. Foley, I spent $10,000 out of
the 200 that I sent over to Michigan. I gave

275

- 60 it to John Smith." Do you accept that?
Foley:

On that statement?

H.M.Jr:

Yes.

Foley:

No.

H.M.Jr:

Don't I have to prove it, don't I have to show

Foley:

That is right.
I have got to give a satisfactory explanation

H.M.Jr:

to whom the money went and everything else?

H.M.Jr:

to you of what I did with that $200,000.
Otherwise, I will make you pay the tax on it.
What is the matter with that, as a method to

Foley:

Nothing.

H.M.Jr:
Foley:

What is the matter with that?
That is what I suggested.

H.M.Jr:

Did you?

Foley:

This morning, yes.

H.M.Jr:

But not prior to today?

Foley:

Well, yes, in your (Sullivan's) office, that we

Sullivan:
Foley:

That is right.
In writing.

H.M.Jr:

To me, in writing?

Foley:

Yes, sir.

H.M.Jr:

Do you mind, to refresh my memory?

Sullivan:

You asked me to find out how Mr. Irey and Mr.

Foley:

proceed?

send out a letter against Bowman Elder. We gave
you a recommendation to that effect.

Helvering and Mr. Foley and I felt about doing

276

- 61 exactly that and I wrote you that on the Keeler
case the 90-day letter would go out at once.
On the Greenlee case, Mr. Foley and I felt that
it should be done that way and Mr. Irey felt
that he would have to wait to get a report back
and wait until the petition was filed before he
could determine whether or not there should be
a criminal prosecution agreement.
H.M.Jr:

Are there two separate memoranda?

Sullivan:

No, sir, both of those things are on my memorandum

Foley:

I haven't given you a memorandum on it.

Sullivan:

to you.

I have given you two memoranda on that matter.

That was on the first one. Do you want me to
send for it?

H.M.Jr:

I have sent for it. Ros, do you want to pick
this to pieces, this present angle?

Magill:

Well, that seems to me to be, what you are suggesting, a thoroughly sound method of procedure.
Now, there are two threads left, it seems to me,
that you might want to tie up. There is still
the question about the Club, as to what you want
to do about that.

H.M.Jr:

What do you think we ought to do about it?

Magill:

Well, that is a very knotty question.
Look at all the lecture material you are getting

H.M.Jr:

Magill:

here.

May I think out loud? I think you feel to start
with that the thing to do, probably, at this
moment, the thing that I would kind of itch to
do if I were a lawyer, would be to put this

fellow Elder on the spot again by a more thorough
cross-examination than what he got at Mr. Sullivan's hands and on this previous occasion.

H.M.Jr:

You are speaking of Agent Sullivan?

Magill:

Agent Sullivan, yes.

277

- 62 H.M.Jr:

This is New Hampshire Sullivan.

Magill:

I see. And see whether you could get out of
him anything more which would enable you either,
A, to have a basis for a petition to the Court,

or, B, to proceed against the Club. The difficulty that I think you would foresee in that is
that if Elder is at all wise or well advised in
further examination by Sullivan, he will account
for that money in a way which, on the face of it,
would be a satisfactory explanation, although it

wouldn't be detailed.
H.M.Jr:

Can I interrupt you?

Magill:

Yes.

H.M.Jr:

We talked about that at lunch and going through
that all again and you told me and I wanted
Mooney to listen to this, no matter how well
these questions are phrased, this Elder, being
smart at this stage, he can give as good an
answer as he did before, in e vading it.
Give as good or better.

Mooney:

Magill:

If he is smart, I don't think he would say in
the further examination that he wouldn't answer,
he is not going to tell you. He will say, "Well
now, this is 1933 you are asking me about and

in that year I handled about $50,000 for the Club.
Now, all I can tell you is that that year we had

such and such campaigns around the State of Indiana
and I campaigned in 25 counties and we hired halls

and bands and so forth. I don't know how much
each of those cost, because I didn't keep a record

of it and I don't have to."

H.M.Jr:

May I interrupt again?

Magill:

Yes.

H.M.Jr:

But on the 90-day letter before our man, he can't

Sullivan:

answer that way, can he?

No, the burden of proof is on him. He either
talks satisfactorily or pays.

278

- 63 H.M.Jr:

That is the point. I am sorry, Ros.

Magill:

No, that is all right. Now, that is one thing,

H.M.Jr:

this Club item, whether you really want to do
something about the Club, and I would agree with
Mr. Landis, as an effective proposition you can
be a lot more effective publicly and every other
way in dealing with these individuals than you
can dealing with this Club. Well, then the other
thread that I have in mind is whether or not
there are not a good many other fish in the sea
besides Elder and Greenlee and whatever this
other fellow's name is, Keeler, whether you
want to proceed in such a way that you are
apt to catch some more of them or what proceedings could be taken which would be apt to result
in catching some more of them. That is a question for Irey, but I suppose that we - one thing
that is impressive here is that if this Elder
is a big fellow in Indiana and if you can take
some proceeding against Elder which will lead
people in Indiana to feel that he isn't above
the law, the chances are that you will catch
some more and that is about as important as
getting some taxes out of Elder himself.
There is nothing in here about sending Bowman

Sullivan:

Elder a 90-day letter.
No, sir, you said Greenlee.

H.M.Jr:

But I said Bowman Elder.

Sullivan:

You mean this afternoon?

H.M.Jr:

Yes, I said Bowman Elder.

Sullivan:
H.M.Jr:

Oh, I beg your pardon, sir. I understood you
to ask Mr. Helvering -two questions about him, and then I said

Sullivan:

We never referred to Bowman Elder in that memo-

Feley:

I was under the impression that that was in
this memorandum. I remember where it was. It

Bowman Elder.
randum.

279

- 64 was at lunch down stairs the day John and I
had lunch down stairs with you, that I made
the suggestion.

H.M.Jr:

Well, I don't remember it, but I will take
your word. But it isn't in this memorandum.

Sullivan:

No, sir.

H.M.Jr:

The reason I was surprised was, I was so

Foley:

pleased with myself night before last when I
made the suggestion to Harold, "You proceed
against Bowman Elder, not on the 90-day letter,
but to proceed.
Well, Guy, when I talked with you - when was
it, last Thursday, before I went up to New
York - that was the recommendation I made to
you.

H.M.Jr:

A 90-day letter for Bowman Elder?

Foley:

Yes.

H.M.Jr:

But this isn't it.

Sullivan:

No.

H.M.Jr:

This is Keeler and Greenlee. We agreed on that.

Sullivan:

You called me and asked me to sound them out.

H.M.Jr:

But they haven't gone ahead with Greenlee. I
said okay. They haven't proceeded.
Elmer wanted to wait on that until he got the
report and decided on the criminal prosecution.

Sullivan:
H.M.Jr:

Well, I would have sworn he had gone ahead with

it, because I gave you a green light on Greenlee.

Sullivan:

I beg your pardon. I asked you if you had seen
the memorandum.

H.M.Jr:

And I said yes, go ahead.

Sullivan:

You said it was all right. But what the memorandum sets forth is that Irey wants to wait
on Greenlee.

280

- 65 H.M.Jr:

Helvering:

Well, I was under the impression that you
had gone ahead. What do you think, Guy,
about proceeding now with a 90-day letter
against Bowman Elder and a 90-day letter
against Greenlee? I take it the Keeler
letter has gone.
Yes. Well, in discussion with Mr. Foley,

I said to Mr. Foley, and it is the same
thing I expect to say here, that we decided
that there weren't sufficient grounds to

ask for a petition on what we have now, that
Mr. Bowman Elder be interviewed again. If
the result of that was that we were still
in as much dark by his answers by continually
saying he didn't remember, it was just for the
general good of the party, or whatever his
answers were, then we ought to make up, in

that case, if we didn't have sufficient

grounds after this examination, ask for an
order to make up the notice to the Club that
they were not exempt and would have to file
a return and also assess the tax against
Bowman Elder.

H.M.Jr:

Guy, there isn't one chance in a hundred that
he is going to give you any more information
on another interview.

Helvering:

I think that is true.

Foley:

You won't get any more if you get an order

H.M.Jr:

out of him, I think.
I haven't crossed that bridge, but I am satisfied if you go and interview this fellow again

on the same basis, that you are not going to
get any more information, because all he is
going to do is call in the newspaper fellows
and tell them again some more of this persecution
stuff. Let me put it to you a little different.
Let me shoot at it from another angle. Supposing
we go ahead. Isn't Mooney - aren't you finally

Mooney:

responsible for collecting this tax?
For the determination of the liability.

281

- 66 H.M.Jr:

Mooney:

Let me address my question to you. In proceeding with a 90-day letter tomorrow against
Mr. Keeler, Greenlee and Bowman Elder, do you
feel that you would be giving up anything by
taking that route as your chances of collecting
it if he pocketed it, rather than going around
through the Court and the petition? That is a
fair question.
I couldn't answer that for the reason that we
don't know what we might run into, based upon
cross-exemination of Bowman Elder or what
answers he might give to certain questions
asked of him.

H.M.Jr:

Let me put it another way. On a 90-day letter
basis, you have the right to ask the questions you have got the precedent and procedure and
everything else and the burden of proof is on
him and he goes into Court and refuses to testify
because it would incriminate himself, is that
right, which isn't true on the deficiency letter,

is it?

Mooney:

No, the deficiency letter - of course, you would
have a civil suit there. He could say that he
spent the money for political purposes. I don't
believe we would accept that statement without
substantiating evidence.

H.M.Jr:

Don't say you don't think. Supposing I asked
you personally to handle this Bowman Elder case
for me. I don't think I would, but supposing
I did. How would you go ahead on the 90-day
basis?

Mooney:

I would say that unless I had proof of the actual
disbursement of these funds to third parties, I
would say that that income constituted taxable
income to him, because I was not satisfied that
the amount had actually been expended. In other
words, I don't believe the mere statements that
he has made already have furnished the burden
which is necessarily imposed upon him to prove

that that doesn't constitute income to him.

H.M.Jr:

Let me ask you another question. Supposing we

find that out of this $200,000 he pocketed

282

- 67 $25,000 or $50,000. Is that embezzlement, and

if so, what? Is that a Federal or State statute?

Graves:

State.

Sullivan:

State.

H.M.Jr:

Well, under the precedent of the Bureau, do we
turn over our evidence to the State of Indiana?
I don't believe we do.

Mooney:

H.M.Jr:

We don't. Well, if we find he pocketed it, then
that brings in the Club at that time, doesn't it?

Foley:

You mean the Club could take action against him

H.M.Jr:

if it wanted to in Indiana?
If it wanted to.

Foley:

Sure. They could present that to the Grand Jury
and have him indicted under the laws of Indiana.

Magill:

If you are going to send out a 90-day letter
to Bowman Elder at this time, shouldn't you
also send a letter to the Club, advising that
it doesn't have any exemption and we want a

return?
H.M.Jr:

Yes.

Landis:

I disagree with that.
I don't go along with that. I think we ought
to answer this request that we have from them
as to whether or not they are entitled to

Foley:

exemption from taxation.

H.M.Jr:

How would you answer?

Mooney:

I think that is what Dr. Magill meant.
I didn't understand it that way.

Foley:

Helvering: You meant we should notify them?
Magill:

That ties in with what I have in mind. If you

have a request from them, why in the dickens

- 68 -

don't you give them a ruling? If your ruling
is that they are not exempt, which I should
think it would be, tell them they are under
obligation to file a return for these years.
H.M.Jr:

They are under obligation.

Magill:

Yes.

Foley:

It follows from that if you tell them they are
subject to tax, not entitled to an exemption.
Then I suppose in order to claim exemption for
all their political contributions, they would
have to list them and then they would have to
take their deductions as gifts and not as income and then it would be up to the Bureau to
say that they had to pay a tax or they didn't
have to pay a tax.
What is the matter with that? I mean, as Ros
Magill said, it is up to us to fish or cut
bait. They either a civic organization or
they aren't. I guess there is nobody in this

H.M.Jr:

room who doubts but what they are not a civic
organization.

Helvering: There is no way they could qualify for exemption.
H.M.Jr:
Is there any reason why in a day or two you
couldn't write them and say it is up to them,
that they are not qualified, and it is up to
them to file a return for the years involved?
Foley:

Well now, I think there are two problems there.
First, you can answer the inquiry that you have
from them as to whether or not they are entitled
to exemption from tax, but the next step, it
seems to me, is up to them and it isn't necessarily up to us to say, "Now go ahead and file
your returns."

Magill:

Why do you draw that line, Ed? If they are not
exempt from tax, then they are supposed to file
returns. Why don't you tell them so?
I think I can cut this very short. There must
be letters going out every day or every week
notifying organizations that they are not tax

H.M.Jr:

283

284

- 69 -

exempt. What kind of a letter is this?
Mooney:

H.M.Jr:

Denied exemption, directly to the company.

We also notify the Collector of Internal
Revenue and we tell the organization they
must file income tax returns.

Why not handle it the way you handle it
every day? Whatever the way it is done
in every other case, do it the same in this
case. Nobody can argue about that. If
Mr. Helvering has decided that they are not
entitled to tax exemption, handle it the way
you handle every other notice that goes out.
What, Guy?

Helvering: Yes, sir.
H.M.Jr:

There can't be any argument about that.

Sullivan:

Are any political organizations exempt without
a social aspect?

Mooney:

I would say no. To my knowledge, every one that
has been granted exemption has qualified under
nine as a social club. That is in the case of
these few that I mentioned this morning, the
New York Democratic Club, the Union League of

Philadelphia, and similar organizations.

Helvering: You must recognize the fact that State Committees,
National Committees, can never ask for any
exemption.

Foley:

That is right, and what you are doing, Guy, here,
it seems to me, is penalizing the follow that
asks you. He must do the right thing, so he
says, "Am I subject to tax or am I not subject
to tax?" so you say, "You are subject to tax,
therefore you have got to file returns." Now,
if the Hoosier Democratic Club on this theory
is not entitled to an exemption, then I don't

think that any of the other political clubs

on the same theory are entitled to exemptions.
Magill:

I think you are wrong on this for this reason,
which it seems to me makes all the difference,
and I suppose is why we are sitting here. As

285

- 70 -

Foley:

I gather, there is a strong belief among those
was a racket, that it was a collecting agency
for the State of Indiana, that it is a political
organization, but that is only half the story.
The rest of the story is that it was collecting
large funds which were disbursed in various
probably illegitimate ways. Now -What is the matter --

Magill:

Wait until I finish. If this thing was simply

present here that this Hoosier Democratic Club

the Republican National Committee or the Demo-

cratic National Committee, or the Indiana State
Committee, I presume all of us would agree that
there would be no difficulty on any one of two
or three ways in establishing that it is not
liable to any income tax. On the other hand,

this particular organization, we think, is a
kind of wolf in sheep's clothing, if you like.
It has established a form and a pretense of
political activity which is a cloak for the
collection of bribes and graft and disbursements of those among various people and it is
on that basis that I, at least, would move that
this thing is not a social club; it is not a
civic club; indeed, it is very contrary of all
those things; that what is done is to debauch
the State of Indiana and it is for that reason
that we say we don't - far from giving an exemption, we think it is just the kind of a thing
that should be kicked in the pants.

Now, I don't see that you concern yourselves
for a moment with the status of the Young Democrats in New York or anybody else. In the
first place, we take these cases as they come.
The one we have in front of us is this particular
one and they have asked for a ruling; all right,
let's give it to them. I don't know why it
shouldn't have been given to them before, but
at any rate let's give it to them now and when
the Young Democrats ask for exemption, we will
take them as they come and rule on them and
for all I know, you may want to go up to Congress next year and get a more specific exemption of the whole kit and boodle of them.

286

- 71 Foley:

I would do it the other way, Ros. I would

go up to Congress and recommend that none

of them are exempt, they all have to keep
books and file returns.
Magill:

If somebody in New York called Bowman Elder
or Tim Sullivan, or whoever runs the Tonawanda

Club, which is really an agency to collect graft
and only incidentally to support the Democratic
Party, I would go after them with a big club
and I don't know why you shouldn't on the basis
that something called the Young Democrats may
well be exempt. It may very well be. I would
say exactly the same thing I said to Harold
Graves this morning, if this was a Ladies Aid
Society of the First Methodist Church of Evanston, Illinois, it was something with a very
nice name like that and it was established that
what it really was existing for was to collect
graft from the red light district and dispense
it to political leaders, the fact that part of
their money went to support a foreign missionary in China wouldn't preclude me from going
after them with a gun and saying, "Boys, you
are not exempt because you are not spending
your money in the way you are supposed to.

Sullivan: Ros, you are going just half way and if the
thing -Magill:

I thought I was going 125 percent of the way.

Sullivan: I don't think so. I think if the things you

cite in support of your taking the position
that they are not exempt are true, then their
entire income is taxable.

Magill:

Well, I don't think so, but that is another
reason.

Helvering: Well, their entire income wouldn't be taxable.
They had expenditures.

Sullivan:
Magill:

If they expended it illegally, it wouldn't be

a deduction, would it?
No, but here --

287

- 72 Foley:

The expenditures wouldn't make any difference,

Magill:

If you and I want to give - to spend a thousand
dollars trying to get McNutt elected President
and make speeches all over the country or do
whatever else we can do, we can do it and it
hasn't any effect on our tax returns one way or
the other. Now, suppose that all of us in this
room would like to see McNutt elected President,
so we form an organization and put some money
in the kitty for that purpose and not all of us

it would be receipts.

travel, but some of us do. I am still inclined
to think there is no income tax liability involved, not in this organization status, but the
fact that we have simply banded together for a

common purpose and there is no organization

which has any income at all. But that is a fine
spun
into. theory that I don't think we need to go
H.M.Jr:

I can't - somebody back in November raised the
question whether this Club was tax exempt or not,
didn't they? Somebody raised it, and for a year
and a half we have sat here and haven't answered

that question. I think it is up to the Commissioner to answer yes or no.

Helvering: Well, they are sending a statement of facts. They
sent in a statement of facts. We asked them to
verify that statement and couldn't get it verified,
so we asked Mr. Irey to make an investigation as
to whether those facts are true or not and if this
was - we have in the file their application and
what they set out. Up to the present time we
haven't got - haven't received sufficient answers
to answer that question. Technically, on the
ground on which they made the application -Foley:
Then it follows from that if you don't give them
a gruelling, that until they prove otherwise
they are subject to tax, isn't that right, John?
Magill:
Ed, I don't get you. Why should you be so doggone hesitant about giving these people a ruling
that they are subject to tax and by golly they
have
to file a return? I don't see the
basis got
for that.

288

- 73 Foley:

I will tell you, Ros, because the thing - you
are putting the Bureau in the field where the
differences between these Clubs are so nebulous
and so unsusceptible of determination that
you are injecting the Bureau into the political
field.

H.M.Jr:

Well, if you don't mind, Mooney gave me an explanation on the difference this morning and he

convinced me that there is a difference.

Foley:

Magill:
Foley:

H.M.Jr:

Well, I understand that difference, but that
isn't the difference that Ros is referring to
now. Ros says this is a racket and this agency
is merely a collection agency to corrupt all
of the - not corrupt, but I mean it is a collection agency in Indiana.
Part of its purpose was to corrupt, too, as
far as that is concerned.

To corrupt public officials and other people
that were recipients of money from the Club.
Now, that isn't the distinction that Tim Mooney
gave us this morning. He says -Now, wait a minute, Ed. I don't want to get
too legalistic. Let's forget for a minute
this burning desire for reform which burns
in Magill's breast, see. I wish you wouldn't
keep bringing in my friend Kitty's name on
this. Let's just forget for a moment, see.
We go back to Mr. Mooney and his description
this morning. You are so worried about the
good reputation of the Bureau, see, that they
can't say one day they will rule this Club as
exempt and the other day it isn't. I say what
this fellow said this morning, I am willing to
have him say it or to put it in my mouth to
say it if I have got to go before the Joint
Committee on Taxation and explain how we rule
on political clubs, because I will make him
write it out and then I will say it. Wouldn't
you be willing to take what he said this
morning?

Foley:

Sure, I would take that. You mean the National
Democratic Club in New York. It has club

facilities --

289

- 74 H.M.Jr:

And the Young Mens Democratic Club of New York,

Foley:

Well, I don't think he put the Young Democratic
Club in that status.

H.M.Jr:

The ones he described this morning.

Foley:

You take the Union League Club in Philadelphia
and put it in the same status and the Union
League Club in New York and put it in the same
status and he would give all of them exemption,
because there are some social aspects in con-

the young fellows. I mean, the ones he described.

nection with their political activities. I

agree with that, but I understand that Ros is

injecting a different --

H.M.Jr:

Never mind about Ros.

Foley:

He says they are bad boys and they smell a little
bit, then we ought to go after them and if they
are not so bad and if they don't smell so much,
then we ought to leave them alone, and I say that
is an impossible administrative situation.
Well, what you are saying is that we can't do
this thing by sense of smell and I agree with
you, but I also agree with Ros that it stinks

H.M.Jr:

to high heaven.

Magill:
Foley:
H.M.Jr:

Sullivan:

I still say that at least a Scotchman can distinguish a crook from an honest man and that
is all I am asking you to do.
You mean that does not apply to the Irish?
The President S ettled the religious issue last
night. Wait a minute - all right, how many
fingers? (Mr. Sullivan raising hand)
I very carefully held my hand not in profile
so that question wouldn't be asked. What is
our answer to the question about the various
State and National committees? I mean, I
don't think we can take the position of playing
ostrich and saying that --

290

- 75 H.M.Jr:

Worry about that when you leave the room and

go in and talk with the State boss at Kansas
about that, will you.

Helvering: I could tell you very quickly what we did to
them in Kansas. We held them taxable, the
Jackson Club, and it is exactly the same Club
as this one.

Sullivan: Here is the question I am raising, when anybody
makes an application to us for exemption, we
rule that they are not exempt, a political organization, without social aspects. Now, are
we justified in not demanding returns from the
important ones that do not ask for exemption?
Listen, you haven't got enough to do, see, waiting
H.M.Jr:

for a tax bill. Now, this is something for you
to study.

H.M.Jr:

That is what I was trying to do right now.
But do it somewhere else, will you?

Sullivan:

I think that that is --

H.M.Jr:

Now, look --

Sullivan:

Sullivan:
H.M.Jr:

Sullivan:
H.M.Jr:

very important.

Now, look, while you are waiting for a tax bill,
you study that, see, and -But if this ruling of a denial of exemption goes
out, the horse is gone.
Well - no.

Helvering: Do you think they are exempt?
Foley:

I am perfectly willing --

H.M.Jr:

Wait, give the Commissioner a chance.

Sullivan:

I think they are in exactly the same position as

the Democratic and Republican National Committees
and State Committees.

291

- 76 Helvering: Well, they have asked us for an exemption.
Now, what I want to know, do you think they
are exempt?

Sullivan:

If the others are, yes.

H.M.Jr:

Is who exempt?

Helvering:

The Hoosier Democratic Club.

H.M.Jr:

You don't think - do you think this Hoosier

Sullivan:

I think they are in exactly the same situation

Democratic Club is exempt?

as the Republican and Democratic National Committees.

H.M.Jr:

They are not before us.

Foley:

Well, no, but John is saying, Mr. Secretary, that
you can't go in without knowing where you are
coming out.

H.M.Jr:

Oh, now look, I have been trying to be honest
and - I am not afraid if I take this step, where
the next one is going to lead me, see. I also
want to take this step, one, because it is
pending before us, and two, because I think it
will be useful, but it doesn't give Mr. Bowman
Elder an avenue of escape. Now, if I am wrong
on that, please tell me, because that is what
I have got in my mind, that if we don't proceed
at this time and tell this Club that they are
not tax exempt, it gives Mr. Elder an avenue of
escape.

Sullivan:

No, that doesn't follow, sir.

Helvering: No.
Sullivan:
They are not related, those two questions.
H.M.Jr:

They are not related?

Sullivan:

No.

Foley: No.

292

- 77 H.M.Jr:

Magill:
H.M.Jr:

Do you agree that they are not related?

I don't. I think they are very much related.

You don't charge the Club --

If I am wrong, then I don't have to take this
step at this time, but I think that they are would you tell me in legal language which will
hold these fellows, at least they can answer
you, I mean - I do this thing by ear. Now, you
give them some book, will you, why these two
things are related?

Magill:

One very likely thing Elder can say is, "This
was no money of mine. I got this simply in
behalf of the Club and the Club isn't up in

any proceedings. Go ahead, talk to them.'
Now, you discover that a year from now, maybe,

after you have gone after Elder for a while
and then finally he seeks to use this out.
"All these funds you are charging me with, I
got as Treasurer for the Club and they were
disbursed on behalf of the Club and it is the
Club's money and it isn't mine." Now, he has
got a perfectly good out there, so far as I
can see.

Foley:

What is the tax exemption of the Club got to
do with it, Ros?

Landis:

Nothing.

Foley:

Either they were political contributions or

Magill:

No, no. Take the next step. If you rule that
the Club is not exempt, which seems to me clear
as a bell, as far as that is concerned -Well, I don't agree on that but I will go along.
I just don't see where it has a thing in the

Foley:

Magill:

they weren't.

world to do with the Republican Committee or

the State Committee of Indiana. You are ruling
on this thing - you really can rule on it on an

Foley:

entirely different basis.
Maybe you can distinguish it, but I don't think
I can, Ros.

293

- 78 Mooney:

May I say something?

H.M.Jr:

Please. If I am going to be noble, I want to

Magill:

You
had better be noble on a good granite foundation.

H.M.Jr:

Indiana limestone.

Mooney:

I think the Bureau would take the position that
in this particular case these contributions that
have been made to the Club were not taxable income to the Club, that they constituted two
donations or contributions, but still the Club
would not be entitled to an exempt status, similar
to the rulings which we have issued on other
Clubs, the Club would not be entitled to the
exempt status and therefore would have to file
a return. Then in connection with the filing
of the return, the question would arise as to
whether or not these contributions constitute
a taxable income or not, which is entirely

be noble for some good reason.

separate and distinct as an issue, separate and
apart from determining whether or not the Company
or the Club is entitled to an exempt status.
That is what Dr. Magill said about the purpose
for which this money was used for the nature of
the receipt of the money is something that is
separate and apart from determining whether or

H.M.Jr:
Landis:

not they are entitled to an exempt status.
Now, I would say that to look at this Club,
Hoosier Democratic Club, as a strictly political
club, with none of this background at all before
us, we would make a ruling if it is entitled to
an exempt status or not in line with what we
had ruled with respect to other clubs of the
same character, two political organizations
carrying on an activity, and we would say,
"You are not entitled to an exempt status.
You would have to file a return." "
I don't think there is any argument.
I think Mr. Mooney is making the point very
clearly that the proposition as to Elder's
liability has no thing to do with the tax

294

- 79 -

exempt status of the Club. I think you are
making that point very clearly, because you

would say -Magill:

No --

Landis:

Wait a minute, let me just finish this, because

what Mr. Mooney would say would be irrespective

of the legality or the illegality of those ex-

penditures, irrespective of whether or not
Mr. Elder can account for them to the last dime
or whether he can't account for them. The Club

Mooney:

is still not tax exempt.
That is true.

Landis:

And therefore, we say those things, those two
cases, have no relationship to each other.

Magill:

Well, but you have got this further string in
your bow and Mooney may not want to take it,
but Mooney has it in mind and all I am objecting
to is, one attribute of an exempt organization
under Section 101 is the use that it makes of

attorneys. That is one way you determine whether
an organization is exempt or not and that applies
to the particular paragraph which you have in
mind here, so that if this Club was being used
for the purpose of feathering Mr. Elder's nest,
or somebody else's nest, I don't mean the Democratic Party being used for somebody's individual

profit, that would go to the question of whether
or not the organization is exempt. Now, isn't
that correct, Mooney?

Mooney:

That would be another factor, too.

Landis:

That is another factor. But the Jackson Club
of St. Louis, or whatever it was that was men-

tioned here a moment ago, has been ruled to be
non-tax exempt for the same reason this Club

can be ruled not to be tax exempt, so that the
racketeering angle has no necessary relationship
to the question as to whether the Club is tax
exempt. It does have a relationship to the very
much more difficult question which you can't
approach at this time, namely, whether or not
the Club has taxable income. It does have
relationship to that.

295

- 80 H.M.Jr:

May I get in on this and say why I think
they are related? You send word to this
Club that nobody here, on the merits of
the Club alone, is going to say they are
entitled to exemption. Therefore, we send
out the usual papers notifying them that
they are not and it is up to them to file
an income tax blank during these years, and
I take it when they file an income tax, they
have got to show receipts and expenditures.
Is that right?
Helvering: Yes.
H.M.Jr:

When they show receipts and expenditures and
we have that on one hand and showing receipts

and expenditures on the other, and on this
the $200,000 - or the $120,000 that the Club
didn't get, we can put the two side by side
and they may make a picture. Therefore, I say

hand we have what Mr. Mooney said he did with

that the two things are related and they will
be useful in this trying to establish whether
there is a tax or not, because the Club has

to show receipts and expenditures on the one
hand over these years and Mr. Elder has to

say - here the Club says, "We didn't get
$117,000," and Mr. Elder .says, "I gave it to

the Club," or, "I didn't give it to the Club,'
or, "I did this with it, and the two things

Mooney:

go down a parallel course and it can't help
vestigation of Mr. Elder. I am not interested
in investigating the Club at this stage, but I
am interested in what did Mr. Elder do, and if
we have receipts and expenditures for that Club,
they ought to be very useful to you (Mooney).
Am I right or wrong?
You are right.

H.M.Jr:

Therefore, I say the two things to dovetail

Landis:

I would like to ask a question, though, and that
is, how are you going to get those receipts and

but be useful to anybody who is making an in-

into each other.

expenditures?

296

- 81 H.M.Jr:

Well, that is something else again.

Landis:

I think that is the question.

H.M.Jr:

They say they have the books.

Helvering:

Here is the receipts.
Yes, but you don't need those.
The burden of proof will be on them.
I didn't propose procedure with reference to
their not having filed income statements.
In their return, they would have to show what
they did with the money.
That is, you would send them a 90-day letter?
Mooney says they are not exempt, send us a return
for these years. The next thing is, if they send
returns or not. If not, I suppose you make up
a deficiency letter as best you can on the basis
of what you have got.

Landis:

Magill:
Landis:

Magill:
Landis:

Magill:

Mooney:

We would normally make an investigation, which

Helvering:

Mr. Secretary.

H.M.Jr:

Mr. Commissioner.

Helvering:

I would just like to make a statement right in
the room here, now. There are two objections
that are being followed in this. If the objective is to tax the people who ultimately
received the income, we don't need to worry
about that. If the objective is to proceed

investigation is under way at the present time
for determining just what the nature of the
receipts are, what the disbursements are, and
who, if anybody, is subject to taxation.

against these fellows who have received money

and failed to report it or falsified their

returns, of course we won't get very far with
that proceeding because they will pay this
tax.

297

- 82 -

Now, I am perfectly willing, if we say that
this exposition here of this investigation
doesn't give a ground for filing the petition

and you say, and I am inclined to agree with
you, that you don't think we would get any more
out of Bowman after examining him for a dozen
times more, then we are in the same position after
examining him again that we are now. We won't

have the ground for filing a petition.
H.M.Jr:
That is right.
Helvering: Therefore, we haven't got enough to file a
petition and we won't have after subsequent
examinations. Then the thing to do is to
make up these various tax amounts and assess
them. We can collect the tax, but to cover
up, then, there is hope to be developed as to
where this money went, and so forth, but it
will not be developed. May I just give you an

illustration? It isn't a political club, but

Mr. Street, of Chicago, an attorney who represents an insurance company in the State of
Missouri, filed a return for $500,000, or whatever the amount was, in which he was willing
to pay the tax and did pay the tax. Now, if
it hadn't been for a mistake he made in that
return, that would have closed the whole thing
on the Missouri insurance case.

Now, if you file these taxes against Mr. Elder,
he would pay them and unless we found out dif-

ferent, it would close all these cases. If that
is what wants to be done, collect the cash.

H.M.Jr:

Are you ready to make a recommendation?

Helvering:

What is that?

H.M.Jr:

Are you ready to make a recommendation?

Helvering:

Yes. My recommendation was that we question

Bowman Elder once more in detail and if the

sufficient evidence isn't then available on
which to base a petition for the advice of
the Attorney General, that we proceed to go
ahead and collect these taxes and close this
case.

298

- 83 H.M.Jr:

Would you feel very badly if I told you to
forego with one more examination and proceed
with a 90-day letter?

Helvering: No, if that is what you think is good policy
to do, but if that is the procedure, we don't
need any advice on that. We can handle that.
It is regular procedure.
H.M.Jr:

Helvering:

Well, what would you say as a betting man that
the chances are on another examination you will
get any additional information?
Well, I think Bo Elder is smart enough to say
that he can't remember, he spent it for general
purposes.

H.M.Jr:

Helvering:
H.M.Jr:

Then, Guy, I don't consider that I am overruling
you. I am not.
No, I only made that suggestion because they
intimated they wanted to talk further.
Do you consider I would be overruling you if I
said to proceed with a 90-day letter?

Helvering:

Not at all.

H.M.Jr:

And to notify the Club their request for exemption
has been refused and they will get the usual
treatment as in such cases?

Helvering:

I will certainly agree with that. Of course,

really they are not exempt, Mr. Secretary, but
that doesn't say they owe us any tax.

H.M.Jr:

The material goes out and then we sit and wait
a reasonable time to see whether they file a
return or not, is that right, or do you begin
to make an investigation?

Mooney:

We give them - set a limit to file returns.

H.M.Jr:

How much time?

Mooney:

Well, I think that is usually - I couldn't say
offhand, but that is taken up with the Collector.

299

- 84 The Collector contacts them.
H.M.Jr:

Whatever the usual thing is. You would give

Mooney:

Yes.

them the same as anybody else?

Helvering: The procedure, Mr. Secretary, is, we notify
the Collector of the ruling that they are
not tax exempt and they notify them and they
may ask for 30 to 60 days to prepare the returns and he will grant it.
H.M.Jr:

Ed?

Foley:

All right.

H.M.Jr:

John?

Sullivan:
H.M.Jr:

Yes, I think it is a good solution, except I
am still worried about that thing you told me
to worry about in the future.
Well, you have pending a tax bill. Don't let's

Sullivan:

No, I understand.

go over it again.

Helvering: Well, John, we have been having these rulings
now to my certain knowledge for seven years and
no conflagration has started from it. May I
just take this - every State or National Club
is established on a well-defined legal law.
They say that in the State - to the State Committee, both Republican and Democratic or any
other Committee, must have a meeting of county
of state members in which they form a committee

and set up in the statute just how that will
be done. They are statutory committees. All
these voluntary committees are on an entirely
different basis.

H.M.Jr:

Harold, you have been on this thing. What do

Graves:

Well, my belief is if you go this way this ends
our investigation. You see, if you issue a

you think?

300

- 85 90-day letter to Mr. Bowman Elder and follow
the usual procedure, which I understand you
would want to have followed -H.M.Jr:
Graves:

Absolutely, the usual way.
the procedure would be this: You would

give him what is called a 30-day letter, which
gives him a chance in the informal proceeding
to protest the preliminary determination represented by that 30-day letter. That is 30 days.
Then file a protest, under oath, which starts
conference proceedings in the office of the
Internal Revenue Agent in Charge and that may
go on indefinitely in the ordinary case but it
could be cut off preemptorily by the Internal

Revenue Agent in Charge, if that was desired,
but in any case you would have a month and a
half go by before, under the ordinary procedure,

you could issue the 90-day letter. The 90-day
letter gives the taxpayer an additional 90
days before he has to move a finger. Any time
during that 90-day period he may appear again
before the Bureau of Internal Revenue or he may
not. He may wait until the last day of the
90-day period and file a petition to the Board
of Tax Appeals. That starts proceedings which
may be protracted over many, many months, so
that the 90-day letter gives no promise of a
settlement of this thing by eliciting information from Bo Elder. He can let this go easily
for eight or nine months to a year before you
get this thing to an issue.
Now, under those circumstances, I say that if
you follow that procedure, it really puts an
end to the Indiana investigation, because we
would never get anything out of Bo Elder in
the expiration of that 90 days' period that
would give us further information on which to
proceed.

H.M.Jr:

Graves:

I don't think we could get anything the way
we are going now. I think we have got everything we are going to get.
I think it should be clearly understood if
this is done that we should withdraw our

301

- 86 investigators and quit annoying people, either in other words, you go forward with all of the
weapons that we can command or we should stop,
and if this procedure should be decided upon,

my judgment is we should stop.
H.M.Jr:

As far as McNutt is concerned, we would stop.

Foley:

That is right.

Graves:

I would say stop as to all the remaining people

against whom we have no specific evidence.
H.M.Jr:

I agree with that.

Graves:

That leads me to mention Greenlee. I understood
you to say you wished a 90-day letter issued

against Greenlee. I think that - at least I am

told by these men with whom I have been advising
that we have a probable criminal case against

Greenlee. If a 90-day letter is issued in his

H.M.Jr:

case, that defeats any criminal proceedings.
And how long will it take you to make up your
mind whether you have or haven't got a criminal
case in this?

Graves:

I don't know. I imagine the boys will take it might be two weeks or two months.

Foley:

Well, that isn't necessarily so, is it, Harold,

Graves:

Practically, because if you send out the letter
and he pays the tax, you can't prosecute him.
Well, on the Schenck case we put it up to the
Department of Justice and the Department of
Justice said, "We will take it up with the
U. S. Attorney in New York," and the U. S.

Foley:

that you defeat your criminal case if you send
out the 90-day letter?

Attorney advised us to send out the 90-day
letter, gave us a recommendation, so we sent

it out.

Graves:

That doesn't mean that you haven't, by doing
that, defeated your criminal prosecution.

302

- 87 Foley:

No, but that is the thing, you see, Mr. Secretary, that Eddie Greenbaum ran up against in
the Mitchell case. He says it is very hard
to go up against a jury when the jury wonders
why you have never told the defendant how much

he owes. The defendant keeps saying, "I have

asked these people to tell me. I am willing
to pay the amount of the tax. They are hounding
me and they aren't interested in the amount of
the tax. They won't tell me."

Graves:

That came up in the Annenberg case.

Foley:

And I don't think it is necessarily so that you

H.M.Jr:

Let me get a law on this thing. I will get

destroy the criminal case by a 90-day letter.

you out of here, Ros. Supposing we go ahead
with a 90-day letter on Mr. Greenlee and we
find that the $60,000 was deliberately hidden,

and so forth and so on, that makes it a criminal
case, doesn't it? The fact that he admits it

and pays it - after we collect it, is it too
late --

Graves:

Not legally, no, but you take this man before a
jury and he gives testimony that he has paid

this tax liability, satisfied it in full, the

Government has got every dime that is coming

to it, that constitutes a big defense for this
fellow.

H.M.Jr:

But I have always thought - I never could understand when I went through the Mellon case, it
seems to me that a civil suit and a criminal
action - it always seemed cockeyed to me that
we proceed on a criminal basis and then a civil
suit afterwards. First we establish the fact
that a fellow owes so much and then if he does,
what he did was criminal, then he should pay
the criminal fine, but we always do it the
other way around.

Foley:

We put it up to the Department of Justice, Mr.
Secretary, because they handle the criminal
side and we handle the civil side. If they
tell us to go ahead with the civil side and
not wait until the criminal case has been tried,

303

- 88 -

H.M.Jr:
Foley:
Graves:

we go ahead with the civil side every time and
it doesn't necessarily mean that you can't go
ahead with your criminal case.
How about letting the Department of Justice
decide on Greenlee?

Sure, absolutely, that is the fair thing to

do.

That is all right, because that would be the
normal course of action in the Greenlee case,
is to complete our investigation and send it
to the Department of Justice and let them
decide and ordinarily we do not issue the 90day letter in such a case until after it has
gone to the Department of Justice and they

have decided.
H.M.Jr:

And how long will it take you to clean up the

Graves:

I don't think our investigators can say, because it depends on their getting certain
additional evidence which they have been
trying to get and so far haven't succeeded
in getting and of course we shouldn't go on
forever with that. If we can come to that

Greenlee case?

evidence pretty quickly, perhaps we should

do something else.
H.M.Jr:

Then let's try to clean up the Greenlee investigation, turn it over to the Department of Justice
and ask them, is this a criminal or civil suit.
O. K.?

Helvering: Yes.
Has Elmer left town?
Sullivan:
H.M.Jr:

Yes.

Sullivan:

Because in that memorandum I think you will

see a note that he felt that without such a
petition the criminal action against Greenlee
might fall.

304

- 89 H.M.Jr:

Sullivan:
H.M.Jr:

Well, Harold and the Commissioner are acting

together on this.
I was just thinking, Harold might be able to
check with Elmer.

I never discussed the question of a petition
with regard to Greenlee. I am not familiar

with the Greenlee case, except very roughly.
I am only familiar with the Bowman Elder case
and I am satisfied that we don't want to ask
for a petition, but I don't know enough about
the Greenlee case and I should think having
established a precedent in regard to Bowman
Elder, you fellows could go ahead and decide
Greenlee on your own. I mean, without calling
in a - me, or these other gentlemen.
Graves:

H.M.Jri

That is true. I understood you to say that
you wanted us to discontinue any further investi-

gations or proceedings except as to persons
against whom we have definite, specific evidence.
And in the room here, we have certain facts now
about Mr. McNutt and we either have them or

haven't and I said the other day, now let's
clean up what we have got.

Graves:

Well, as to that, I would suppose, Mr. Secretary,
that if we turn up a few thousand dollars against
McNutt and have no intention of furthering our
investigation to develop something more substantial,
we ought to quit in respect to Mr. McNutt and

not come in to trivialities in this case.

H.M.Jr:

Helvering:

Magill:

I agree with you on that.
In other words, if he hasn't returned his income,
he ought to return it and pay a tax on it.
If he owes us a thousand dollars, make him pay
it, doggone it.

H.M.Jr:

We have enough now on McNutt to show that he

Helvering:

We have got certain items and if he can explain
those, there is no income tax and he ought to

should have filed a return.
be exonerated.

305

- 90 Foley:

It is your idea that somebody ought to interview him?

Helvering: Yes.
And ask him what he has to say about these
Foley:
items.

H.M.Jr:

He has never been interviewed?

Foley:

No.

H.M.Jr:

Well, he should be. I don't want to go too fast.

Let's just go back a minute on this Bowman Elder
business. Let's forget about Greenlee and McNutt.
Jim, are you satisfied on the decisions on Bowman
Elder, on the Hoosier Democratic Club?

Landis:

No, I am not. I would like to express just why
I am not. And I think what has been said recently
has considerable relevance to it. I am quite
satisfied with the idea of going after Bowman
Elder by the 90-day letter. He may or may not
pay under those circumstances. If he pays, that
tells us something. If he doesn't pay and fights
us, that will tell us something. If at the same
time you investigate Mr. McNutt on these matters,
you will learn something more that has some relevance to the entire picture of the Hoosier Demo-

cratic Club. The Greenlee investigation will
tell you something more that has some relevance
to the picture of the Hoosier Democratic Club,
and I would hold off on my - with reference to
the Hoosier Democratic Club until I got that
material. I have no question at the present time
that that Club is not tax exempt in the same way
that State Democratic Committees are not tax
exempt. It would seem to me in taking that
position with the Hoosier Democratic Club, we
cannot act in an ostrich-like fashion and say
we will neglect to treat other outfits that we
know are on a parity, we will neglect to put
the same burden on them that we are going to
put upon the Hoosier Democratic Club. The

only justification for that, for a differentiation

306

- 91 along that line, seems to be not upon the basis
of casual inquiry coming in from the Jackson
Club and the Hoosier Democratic Club and none
coming in from the State Democratic Committees,

but a justification for treatment might lie
along the lines of the bad as distinguished
from the good. At the present time, you haven't you have suspicions, but you haven't got enough
evidence to really tell the world the Hoosier

H.M.Jr:
Landis:

Democratic Club falls in the bad class. You
may have that as a result of these various
things. It may be necessary that you will
eventually be forced to come forward with some
kind of a petition of the nature you have now
to compel testimony from certain people. As
you consider just exactly what you are going
to do with the Hoosier Democratic Club and just
exactly what the general line of policy is that
the Treasury should have with reference to
political institutions that are not at the same
time social clubs, there I would delay.
On that. But you would not delay in sending
Mr. Bowman Elder a 90-day letter?

No, I don't see the excuse for delaying it and
I think I would disagree with Mr. Graves in
saying that that would foreclose the whole
issue, because you have, even if Elder pays
up, you still have the Hoosier Democratic Club
to play with. I mean by that, seriously, either
to say this thing is worth going into or not
worth going into, depending upon how these
others go.

Graves:

Landis:

What I was trying to say was, the mere postponing of the say when you can come to a determination of these matters for a matter of 90
days or nine months under ordinary procedure -True, it does, and my own judgment would be
that I would postpone it and I would think
justifiably postpone it in the way to accumulating more evidence on the thing, because
that is certainly the most touchy angle of

this whole proposition. Elder is not the
touchy angle. No individual who doesn't pay
his tax is a touchy angle. The United States

307

- 92 Government oughtn't to be affected in any way

by that. But this issue of whether or not
you are going to rule that statewide political
organizations are not tax exempt and therefore
are under an obligation to file these statements, is an issue which the Treasury has
never really faced. It has faced it in small,
negligible instances. Nobody knows about the
Jackson Club in New York and the Republican
Club, but everybody knows about the Two Per

Cent Club. I think that is a rubicon for the
Treasury. Either you cross it or you don't
cross it, but I think the Treasury ought to
think very carefully. I am all for crossing
it, but I think it ought to think very carefully how it is going to cross it.

H.M.Jr:

Graves:

H.M.Jr:

How would it be if we decide tonight that we

go ahead with the Bowman Elder angle now, give
him a 90-day letter?
Under the regular procedure?
Under the regular procedure. I will be back

here on the 8th of April. We will put this

question to the Hoosier Democratic Club, and
put it in Mr. New Hampshire Sullivan's icebox where he can take it out and look at it
every day. Between now and the 8th of April,
your people, Helvering, will try to clean up
this McNutt thing, what we have now on hand,
the bank account in New York. Have we heard
from that?

Graves:

No.

H.M.Jr:

Different things that you already know about
or leads, I mean I wouldn't go out indiscrim-

inately and - get all of this thing together.

Now, if between now and April 8, you think
you have got sufficient evidence that you
want to interview him, I have a private telephone wire there and you can call me up on
the phone and you can say, "Well, Mr. Morgen-

thau, I don't want to wait until the 8th of
April. We have got enough now to interview
Mr. McNutt." I don't want you to wait on me,
see.

308

- 93 -

Helvering: I would like to have that decided today, because just practically we have these items
and I think if Mr. McNutt can explain them
we ought to give him that opportunity at the
earliest possible date.
I can't hear you.
H.M.Jr:
Helvering: We have these certain items and if he can
explain those --

H.M.Jr:

How long can you stay?

Magill:

I can stay until 5:00.
You don't want to fly, do you?
Not particularly.

H.M.Jr:

Magill:

Nagill:

You have got another ten minutes, haven't you?
Don't stop on my account.

H.M.Jr:

Who can tick the things off, the questionable

Helvering:

I can only do it from information that has been

H.M.Jr:

Graves:

items?

handed me.

I can get a memo on that if you like, in just 's

minute.

H.M.Jr:

You go get it. Have you got a memorandum?

Graves:

The boys have got it out here.

H.M.Jr:

Let's see what Guy knows.

Helvering:

I know of two items. One item - or two or three
items relative to bank deposits in cash and
insurance.

H.M.Jr:

He has got two items of $5,000 each, hasn't he,
that he deposited in the bank in cash?

Helvering:

Five thousand.

H.M.Jr:

You told me ten. Is that right? He has got an

309

- 94 insurance policy running to around $120,000

made out to his wife, which is paid for by
either Elder or - by Elder, running to around
$4900. Then he has got a stock brokerage
account in Chicago which we have a copy of,
and one year he made $2,000 and the other

year he made $3,000. Is that right?
Helvering: That is right, yes.
H.M.Jr:

And we have run into another account in New
York which we have got a subpoena on. But

those are the things we know about, right?
And from '32 to '37 he did not file any returns.
All of these would be taxable.
Foley:

What Guy wants you to say is - just as soon as
I have got all I need, then I would like to be
authorized by you to contact Mr.McNutt and interview him, the sooner the better, isn't that
right, Guy, and not wait until you come back?

H.M.Jr:

Do you recommend that?

Foley:

Yes, I recommend it.

H.M.Jr:

Do you recommend it?

Sullivan:

Yes, sir.

H.M.Jr:

Let's say just as soon as you've got the things
together on these items, I would interview him.
I will have to get further information about these
two or three items.

Helvering:
H.M.Jr:

I think you have got everything, unless there is
something they have got in the Bank of New York.
They have got $10,000 of cash deposits, his life
insurance policy, his stock exchange account in
Chicago. Those are all documentary evidences;
a thousand dollars on speeches. That doesn't
amount to anything. But those are the things and the fact he did not make any return in
132 or 137.

Landis:

I report my speeches.

310

- 95 H.M.Jr:

Anybody advises me he is a tax-exempt institution.

I will tell you what I ticked off. Two items

at five thousand each. His life insurance policy
made out to the estate or his wife, premium,
$4900; a stock exchange account in Chicago, one
year, $2,000 profit and one year, $3,000 profit.
Graves:

Roughly.

H.M.Jr:

And an undisclosed, yet, account in New York which
we don't know about.

Graves:

That is right.

H.M.Jr:

Anything else? And a thousand dollars on speeches.
And then invested $3500 in a newspaper at Fort
Wayne, Indiana, and he brought back with him
from the Philippines $25,000 as an opening account,

Graves:

as I understand it, of the "NcNutt for President
Club" in Indiana and the condition was that that
was received by him in consideration of his tending
to further legislation in this country favorable
to people in the Philippines.

H.M.Jr:

That, plus the New York thing and we have no
other leads, have we?

Foley:

This is the first time we have heard anything
of this.

H.M.Jr:
Foley:

It is?
Sure it is.

H.M.Jr:

Wonderful.

Helvering:

I haven't heard anything of that last one.

Graves:

That --

Sullivan:

That clicks with you, that last one.

Helvering: Which?
Sullivan:
That last item clicks with you.

311

- 96 Helvering: $25,000?
Sullivan:
Yes. I don't mean the amount, but wasn't he
here. on some legislative business?
Graves:

Yes, he was.

Helvering:

He was here. I didn't know he got any money
for it. I thought he was doing that as a
Philippine representative.

H.M.Jr:

I will decide here now unless somebody shouts,

that just as soon as you can tie these things
together, he is to be interviewed.

Helvering:

I think that is only fair to him.

H.M.Jr:

But then we stop everything else. We pull all

these threads together and interview him.
Mr. Bowman Elder gets the 90-day letter and

Mr. Greenlee - when you get that stuff together
you send it over to the Department of Justice
for a ruling if it is criminal or civil and
on the advice of Chief Landis, we take another
look at the Democratic Club.
Helvering: Now, that is - I asked Dean Landis a question -H.M.Jr:
Excuse me. I want you to know that the only
man I know of that addresses Tammany Hall Clubs
in New York is Counselor Magill. You didn't
know that, did you?
Foley:
I never heard it.
Magill:

Whose club was it?

H.M.Jr:

You know darn well. How much did you get for
the speech?

Magill:

I didn't get a dime for the speech.

H.M.Jr:

All right.

Magill:

What was that? He was an insurgent, that fellow.
But that is - never mind.

312

- 97 H.M.Jr:

All right.

Helvering: Might I clear just one more point, Mr. Secretary?

H.M.Jr:

You have got 31 minutes to let this fellow go.

Helvering: I would just like - Dean, if you were in my
place and this request had been made of you
for a ruling, did I understand you to say you
wouldn't make the ruling or you would make the
ruling and take time to investigate -Landis:

H.M.Jr:

No, I would hesitate to make the ruling even

at the present time. I don't see that there
is pressing need for that ruling. I think
that is a very curious ruling which you are
called upon to make, and although I think it
is a clear one. I don't think there can be

a question about the clearness of it.
of course, these other Clubs - I don't know I only know of one or two to my own personal
knowledge. They didn't assume any evidence
like this does, but there wasn't any question
about it when it came down to making a ruling
that they weren't exempt and required to file
returns. In many of those cases, and this
one particularly I know all about, I think
when they got their evidence all in and they

were taxable, yet they made a statement showing
they had gotten so much money and they had spent
so much for these purposes and the help they

had to hire in the office ate it all up and

therefore there was no tax. Now, in this
club, if these items show that all but $117,000
can be shown as expenses, and I understand it
can --

Graves:

That is right.

Helvering:

And they say that $117,000 went to Mr. Elder.
They have accounted for their money.

H.M.Jr:

Guy, as long as Jim Landis asks to wait, what
I would like to do is make an appointment now

313

- 98 -

Magill:
Landis:
H.M.Jr:

with these people for the first Wednesday or
Thursday when I am back. Is it Wednesday or
Thursday that is best?
Friday is better than either one.
Friday is practically the only day for me.
Then let's say that on Friday, April 12, we
will meet again at 1:00 o'clock.

Landis:

That is all right.

H.M.Jr:

And we will report to you gentlemen at that time
what we have done, where we are, and New Hampshire
Sullivan will have made a complete study, et cetera
and so forth, and in the meantime, we have got are you perfectly happy?

Graves:

Yes.

H.M.Jr:

Satisfied?

Graves:

Yes.

H.M.Jr:

Mooney, 0. K.?

Mooney:

H.M.Jr:

Certainly.
Satisfied?

Mooney:

Yes, sir.

H.M.Jr:

Think this is all right?

Mooney:

Yes.

H.M.Jr:

I am satisfied.
Definitely.
I think it is a good day's work.

Klotz:
H.M.Jr:

Helvering:

Then we proceed with the 90-day letter to Bowman
Elder, we either recommend a prosecution or assess

a tax, we delay the advice of the Club as to

314

- 99 whether they are taxable or not, draw these
things together and have some man whom Mr. Graves
and I designate -H.M.Jr:

That is right.

Helvering:

interview Mr. McNutt as soon as possible.
Does that cover it?

H.M.Jr:

Entirely. O. K., that is a good day's work.
Thank you all.

315
C

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P

March 19, 1940
MEMORAMDUN FOR THE SECRETARY:

Following is a summary of the record relative to the
inquiry into the taxable status of the Hoosier Democratic
Club:

(1) On November 7, 1938, Hon. James W.

Morris, Assistant Attorney General, for the
Attorney General, addressed a letter to the
Commissioner of Internal Revenue, referring
to him for appropriate action a communication
which the Department of Justice had received
from one George R. Jeffrey, relative to
charges of possible tax evasion by the Hoosier
Democratic Club.

(2) The Commissioner had himself received

a similar letter direct from Jeffrey, and, on
October 20, 1938, had, through the Chief of the
Intelligence Unit, referred this matter for investigation to Mr. A. P. Madden, Special Agent
in Charge, Chicago Division. Madden assigned

the case for investigation to Special Agent E.

H. Vaughn.

(3) During November, 1938, Special Agent
Vaughn interviewed Bowman Elder, Treasurer of

the Club, with a view to eliciting information
necessary to a determination of the taxable
status of the organization.
(4) On November 30, 1938, Elder addressed a
communication to Special Agent Vaughn, giving
certain Information asked by Vaugh, and stating
grounds upon which the Club claimed exemption
from taxation.
(5) On December 2, 1938, Special Agent Vaughn

transmitted Elder's communication to the Bureau of
Internal Revenue at Washington with the request

that on the basis of the facts submitted the Bureau
make a ruling as to the taxable status of the Club.
(6) On January 13, 1939, the Bureau addressed

a letter to the Club, calling upon it for certain

316

orandum for the Secretary- 2.

supplemental information concerning the Club's

activities and finances.

(7) On February 6, 1939, Elder, in response
to this request, transmitted to the Bureau a sworn
statement concerning the scope of the Club's activities, incorporating tabular statements of receipts
and expenditures.

(8) Since that time, an investigation by offi-

cers of the Bureau of Internal Revenue has been proceeding, to secure accurate information regarding
the Club's receipts and expenditures and to verify
the statements made by Elder with a view to secur-

ing a tax-exempt status for the Club.

The pending investigation has developed, beyond a doubt,

that the statements filed by Elder with the Bureau, under
oath, were false and misleading. Moreover, Elder has consistently refused to disclose the information which is
essential to a determination of the question raised by
Jeffrey and subsequently referred to the Bureau by the De-

partment of Justice, as above stated. The petition for a
court order now under consideration is for the purpose of
compelling Elder to supply this information.

GRAVES.

HNG/mff

317
KEESHIN FREIGHT Lines, INC.

J.L.KEESHIN

221 WEST ROOSEVELT ROAD

PRESIDENT

CHICAGO

March 21, 1940

The Honorable Henry J. Morgenthau, Jr.,
Secretary of the Treasury,
Treasury Building,
Washington, D.C.

My dear Mr. Secretary,
Enclose herewith copies
of memoranda which I received from Mr. A. B. Bassi,
from Hongkong, China, addressed to H. E. Minister
Chang Kia-Ngau, dated January 10, February 6, 9,
and 12, respectively.

Very truly yours,

S. L. Keeshin

Johnson
JLK:LR

Encs. (9)

1010

C

0

P

Y

318

To

H.E. Minister Chang Kia-Ngau

With reference to the contemplated purchase of forty pick up

units; so classified, and twenty wreckers, listed under tabulation of
bid, Specification UB1-T8 and T9 Bids 875 and 876 respectively, of
Universal Trading Corporation, there seems to be considerable confusion.

For the pick up units listed, the Ford specification; which, in
this case is assumed to be the approved unit, list the 1-ton Pick up,
with express type body, 96 x 54 x 19.17 on 122" wheel base chassis
powered with the 85 H.P. engine.

The twenty wreckers listed are specified with the express type
pick up bodies within which is to be mounted a orane. Body special
service type, mounted on 18 ton chassis of 134" wheel base, also
powered with the 85 H.P. engine.

Mr. T. K. Chao's letter of transmittal of Jan. 4th, 1940 with
attachments, asking for comment on the subject, includes a copy of his

letter to S. D. Ron approving the selection of sixty, Ford Panel Bodied
134" wheel base units powered with the 90 H.P. motor; which we assume

he refers to be the "95" engine and, in which he asks that they be
purchased at $1,000 gold complete.

It is our understanding that the original intention to secure
these pick up units equipt with express bodies was for the use of the
Highway Bureau's engineers for use in carrying tools equipment and men

on the several sectional divisions.
Work of this type requires very little accumulated milenge as it
represents many short runs and long standing periods.

It has been previously suggested that for this work that the
Chevrolets owned by the Szechwan Kwengsi administration, which were

not adequate for the purpose they were purchased, be rebuilt and
furnished with available bodies and turned over to the Highway Bureau
where they would adequately handle the requirements imposed upon them,

with practically no other investment than the repairs required.

319

2

If it is found that an insufficient number of these Chevrolets
are available to complete the forty necessary pick up units, then the
one ton Ford Chassis with express body, which we feel is quite
acceptable for this work, could be purchased to make up the deficiency.

If this should be the case; which we consider unlikely, due to
the fact that Szechwen Kwangsi lists over 300 of these units, we also
suggest that under this circumstance, these pick up units be purchased
from the stocks at Hong Kong where they could be secured at a price

below that for any new purchases from America. These specific units
are New Late Model 1939 - "85" H.P. Fords and available for immediate
delivery.

As to the twenty wreckers contemplated, it would in the case of
the Panel bodies be impossible to mount thereon a wrecking orane of

any type. In addition we cannot reconcile the purpose for which
wreckers would be purchased by the Bureau of Highways or the Bureau

of Highway Transportation except to furnish transportation agencies

with facilities for servicing disabled equipment. However on this
score we cannot help but feel that all transportation agencies are
responsible for maintaining; among their service and maintenance

equipment, facilities for salvaging their own disabled units.
With further reference to the foregoing, your letter of December

12th with attached list of Highway Bureau supplies for distribution,
expressly inferred: that these 60 units were in Heiphong and not on the
proposed purchase list of U.T.C. and subject to your approval.

We call your attention to these discrepancies in the interest of

more definite and reliable information in the future so that neither of
us may be misled into a recommendation for purchases that are considered
superfluous.
Chungking

Jan. 10th, 1940

M. E. Sheahan

per A.B. Bassi

320

C

0

P

Ref: 1/2/40

Y

To

H.E. Minister Chang Kia-Ngau

Adjustment of Road Building Machinery Requirement

Subsequent to the receipt of the attached communication from

Universal Trading Corporation with reference to the subject matter,
a discussion was held with Mr. C. L. Lee, Supervising Engineer,
Bureau of Highways, and later, with both Mr. Lee and Mr. T. K. Chao,

Director-General of Bureau of Highways. A confirmation of the
consensus of opinion and decisions reached is as follows:
The original estimated requirements, consider the machinery
alone and the appopriation for the total amount was predicated

thereon, ignoring both cost items of transportation and spare parts.

In addition thereto, the substitution of a more suitable device
under Item No. 3 also contributed towards a substantial increase.

However it is felt that the additional utility value of this unit
would justify the additional cost.
In preference to greatly reducing the number or eliminating
anyone type of equipment and or utilizing as suggested in the
Universal cable, the unused portion of the automobile spare parts

appropriation, it was felt that a reduction in each class of equipment
within a logical balance was advisable under the circumstance to

eliminate the possibility of protracted delays.
The following tabulation sets forth our understanding in

finalizing this subject matter:

2

321
Actually Bid

Equipt Required

Original Estimate

Each Total

Total Each
No. 1-10 Adams Tractor or Equivalent

25,000 - 2,500

International 64 H.P. Crawler --- 2,795 27,950
No. 2-10 Adams Road Maintainer or Equiv.

15,000 - 1,500

787 7,870

Same No. 62

No. 3-10 Motor Graders Adams or Equiv.

20,000 2,000

4,136 41,360

Caterpillar Tandem

40,000 - 2,000

No. 4-20 Stone Granulators

Iowa Portable (Caterpillar Powered)
60,000 - 3,000

2,315 46,300

No. 5-20 Diesel Rollers
2,968 59,360

Gelieon Disel 5 to 8 ton

182,840

160,000

Spare Parts

21,540

Freight

31,009
235,389

Adjustments to the foregoing were made as follows:
2,795 25,155

No. 1-9 International Tractors

787 7,083

No. 2-9 Adams No. 62 Maintainers

No. 3-1 Caterpillar Motor Grader

4,136 16,544

No.4-12 Iowa Stone Crushers

2,315 27,780

No.5-13 Galieon Rollers 5 to 8 ton

2,968 38,584
115,146

Reduced - Spare Parts appx.

- Freight appr.

14,500
21,500

"

151,146

The total while approximate, permits of R fluctuation within the
amount of $8,854 which should guarantee the actual total, remaining within
the appropriation.
Chungking

Feb. 9, 1940

(Signed)

M. E. S.

A. B. Bassi

322

COPY

DLT MINISTRY OF COMMUNICATIONS CHUNGKING
REFERRING PURCHASE ROAD MACHINERY DECISION MADE ON FOLLOWING

MAKES AND TYPES CRAWLER TRACTOR INTERNATIONAL 64HP DIESEL

56 INCH GAUGE DOLLARS 2,795. WHEEL TRACTOR INTERNATIONAL
58 HP DIESEL DOLLARS 2.125 ADVISE WHICH TYPE PREFERABLE MAINTAINER
ADAMS NUMBER 62 DOLLARS 787 DIESEL MOTOR GRADER CATERPILLAR
46 HP TANDEM DRIVE LEADING FRONT WHEEL DOLLARS 4.136 PORTABLE
STONE CRUSHER IOWA MANUFACTURING CO 9 BY 16 INCHES 9 CUBIC
METER PER HOUR THREE QUARTER INCH CRUSHED STONE WITH CATERPILLAR

DIESEL DOLLARS 2.315 ROLLER GALLON DIESEL 5 TO 8 TONS TANDEM
STANDARD ELECTRIC STARTER DOLLARS 2.958 ALL DELIVERIES NOT
MORE THAN FIVE WEEKS ALL STANDARD UNITS COMPLETE WITH REGULAR
EQUIPMENT ACCESSORIES AND SPAREPARTS APPROXIMATEL DOLLARS

21.540 FREIGHT DOLLARS 31.009 TOTAL DOLLARS 235.380 EXCEEDING
APPROPRIATION BY DOLLARS 85.380 SHALL WE REDUCE NUMBER OF UNITS
OR USE DOLLARS 88.000 THE UNUSED PORTION OF AUTOMOBILE SPARE
PARTS APPROPRIATION CABLE INSTRUCTIONS UNIVERSAL

Chungking

Feb. 6th, 1940

Ref: 2/2/40

323

C

0

P
Y

To

H.E. Minister Chang Kin-Ngau

With particular alarm we view the present situation with
reference to the shortage of Motor Fuel and Lubricant stocks in

Free China, and feel that an answer to this situation is one of
immediate concern. The regulations surrounding the procurement of
petroleum products has in no way aleviated the scarcity and the
restrictions imposed upon those, who are most competent to handle

the situation, has added to the aggrevation.
Organizations; whom for years, have established ways and means

of procurement and distribution of these products, have been restricted
and in some cases completely disorganized by the red tape, with which,

free movement of this essential commodity is wrapped. Especially with
reference to embargoes placed on Motor Gasoline in the past.

Quotas that have been established; for the Rail facilities
available, have seldom been reached and the restricted use of the
Highways has added to the confusion and scarcity.

The so called "black market" prices have no doubt found their

inception in this resultant scarcity.
Each change in the established routes of communications have

resulted in long delays to reorganize personnel and methods for
procurement of supplies via new channels.

Private enterprise and initiative if stiffled thru the restraint
placed upon its ability to quickly function in matters of vital concern
to its particular specialization, is inexcusable. The thousands of
Motor Vehicles now standing idle is mute testimony to the possibility

of such e situation existing.
The example of waiting for U.T.C. gasoline to be transhipped to

Burna, rather than seizing the opportunity to obtain any and all
additional fuel stocks available; thru any source whatsoever, is
deplored and toleration of its continuance should be discouraged
immediately.

324

2

In order to assure a greater volume and a more reliable service
of supply, it is suggested that the established petroleum marketers

in China, be permitted to exercise their initiative and utilize their
experienced staffs and economical system of distribution, to lay down

stocks of Fuel and Lubricants, throughout their marketing territories
in quantities, based on a plan which they consider will best satisfy
a uniformity of distribution and anticipated demand.
Transportation should be made available to them either thru

C.T.C. or their choice of private contractor at regular rates or
they should be permitted and/or encouraged to establish their own

system of Transportation, be it land, water or air, as may be required
to accomplish their objectives.
The stocks thus laid down would still remain the property of
the marketer with no expense or investment to the National Government

involved therein. Supplies could be requisitioned by the National
Government as and when required and obtained immediately either

thru the Fuel Control Commission or in any other expedient manner
from stocks on hand.

This foregoing is with particular reference to so called free
stocks and does not in any way refer to purchases for Civil or Military
bodies against foreign loans such as U.T.C.etc.
Regulations by the Fuel Control Commission should be within
the scope of providing for a minimum volume that must be imported

thru any facility available and also provide, that all Petroleum
products are subject to diversion to Government use, whenever or

wherever held by supplier and that an inventory of stocks shall at
all times be made to the Commission to include receipts and disbursements and to whom the disbursements are made. Permits; preferential
as to their issuance, based on normal requirements of purchaser
should be obtained from the commission for the issuance of Fuel,

325
3

this should not affect the supplier, on goods in transit to
destinations or areas not in receipt of, minimum requirements,
allocations or quotes.
The foregoing suggestions do not in any way suggest restricting
the functions of the Fuel Control Commission, but removes a burden

of responsibility from that body, in that it assures; within reason,

that free stocks of motor fuel will be available at interior points,
when, as and if arrangements for purchases are completed.

The Marketer on the other hand, is relieved of Peak and Valley
demands and can prepare for anticipated requirements, in a stendy
and uniform manner.

It is anticipated that if the foregoing suggestions were
effective at this time, stocks would be either at hand or en increase
in volume thru any port of entry could more quickly be accomplished,

by on organization already functioning, than establishing a new
service of supply, however efficient the plans or personnel.
With particular reference to the Rangoon Gateway, it is logical
to assume that somewhere within China's border on the Burme highway,

a cost differential censes to exist on freight from Rangoon to
Kunning vorsus freight from Heiphong to Lashio. This point would
vary in either direction, dependant upon methods of transportation
used. Based on the advantage of laid down cost, the volume thru

either port of entry would be regulsted naturally. Thus an organized
regular movement, regardless of volume, would be in effect and any
sudden advantage or change in conditions preveiling, would require

only an orderly increase in activity of an existing service of supply,
thru regular channels, thereby avoiding confusion end interruption
of operations.
The first assault by the enery, upon the Indochine Yunnan

Railway indicated the necessity for immediately establishing a service

326

4

of supply via Burmer as the most reliable means of obtaining
uninterrupted movement of Fuel and Materials for the conduct of

hostilities. Any dependence upon the further use of the railway
above Laokai for the despatch of materials considered contraband;

for the present at least, seems futile. Continued interruptions thru
further assaults against this facility appear imminent.

It would seem logical at this time to suggest that a joint
survey be prepared by the authorized representatives of the Petroleum
marketers now serving the Central Government and a representative of

this Ministry, to determine ways and means of obtaining "free stocks"
of Petroleum products for distribution in China: thru the Rangoon

gatewey, utilizing both the personnel and facilities for distribution
of the supplier and the aid of this Ministry in the matter of the
transportetion problems involved, for . mitual solution of an
aggravating and serious problem.
(Signed)

M. E. S.

A. B. Bassi

Chungking

Feb. 12th, 1940

327

GROUP MEETING

Present:

Mr. Haas
Mr. Thompson
Mr. Graves

March 21, 1940
9:30 a.m.

Mr. Harris
Mr. Cotton
Mr. Viner

Mr. Cochran

Mr. Foley

Mr. Sullivan

Mr. White
Mr. Schwarz

Mrs Klotz

Foley:

Here is a matter the President sent over for
recommendation in connection with the restoration

of civil rights. The man plead guilty to tax

evasion in 1930. He didn't serve any sentence

and it will restore his civil rights. It has

been recommended by the Department of Justice.

We won yesterday in the Board of Tax Appeals,
the Chicago Stockyards case, where there is an

unreasonable accumilation of surplus and this
means that approximately five or six million
dollars will be distributed and it is a fact
that the Supreme Court has held that on questions of fact on such matters the finding of
the Board of Tax Appeals is conclusive.

White:

Is that the first substantial case?

Foley:

Yes.

White:

I think that ought to get a little publicity,

H.M.Jr:

in view of the controversy which was raised
last year and in view of your statement to the
effect that you were going to proceed along
these lines to accomplish the objective which
the previous law was set up to do.
Talk it over with Chick.

Sullivan:

Did you read the memorandum on the new attitude
of the Navy on Winson-Trammell contracts?

H.M.Jr:

No, I did not.

328

-2Sullivan:

Well, they have come in and now they don't
care to certify, which is quite a change in
their attitude from the proposed amendment

that they wanted to have conclusive certifying privileges and we would not have any
discretion and now they are very reluctant
and say that the terms in the September press
release were a mistake. I assume that we

shall insist upon their certification, shall

we not?
H.M.Jr:

Oh, definitely.

Sullivan:

The attorneys for Glenn Martin are coming over

this morning. I don't know what they have in

mind.
Co chran:

The ticker just now said the Queen Mary sailed
at 8:20 this morning, they didn't know where.
Reynaud was to have the members of the pros-

H.M.Jr:

pective Cabinet meet at 8:45 our time this
morning. The names haven't been indicated,
but he was trying to get a national Government from one side and it went quite over to
the right.
Silver in London is a little down this morning.
It was 35.30 yesterday, 34.54 this morning.
There was just that one matter of Leroy-Beaulieu -I have this matter about Leroy-Beaulieu and two
Assistant Treasury Attaches and he asks how

close is this to my heart. Well, it is not it isn't a matter of life and death with me.
Is it with you?

Harris:

No, but it is something that we sometime ago

thought might be desirable to do. At that
time I think the State Department didn't want
to do it. Now, the State Department seems

to be fairly agreeable to it. I think it

would be a good thing.
H.M.Jr:

Well, if the French don't want to do it on
their own, I am certainly not going to have

them check this up as a major concession to

me.

329

-3Harris:
H.M.Jr:

All right.
I am not going to - it isn't that important.
If they don't want to do it, okay. I mean,
they are making such a mountain out of this

thing.
Cochran:

Yes, I agree there.

H.M.Jr:

Tell them I - that I originally asked for it

and I haven't changed my mind but if they are
going to make this thing as though they are
doing me a great big favor, as far as I am
concerned, they can jump in the Seine River.

Harris:
H.M.Jr:

That would be "insane", all right.
Is that all?

Cochran:

Yes.

H.M.Jr:

Joe?

Cotton:

I have nothing.

H.M.Jr:

Chick?

Schwarz:

I have canvassed, unofficially, the Military

Affairs Committee of the House and just in the
event you have read the story in the Washington
Post this morning and the opinion of the Com-

mittee is that there is no basis for that story.
It is rather obvious as a result, then, that it

was planted with that rider which covers the
War Department as the suggestion to the Committee. The Committee has no such feeling. As

a matter of fact, it is thinking of dropping
the whole thing.

H.M.Jr:

You mean of having me come up?

Schwarz:

Well, dropping the whole inquiry, if you call

it that. The story says there were some Committee men asked, but nobody has asked the
Chairman of either the Committee or the Subcommittee to invite you.
John Mitchell was in yesterday afternoon, after
listening some time to Mr. Clapper's poison, and

330

-4-

I talked to him a little bit and defensively,
just background, he had so many allegations
that I felt impelled to give him some of the
picture.

H.M.Jr:

O. K. Anything else? Will you be here for a
day?

Viner:

Part of a day.

H.M.Jr:

Which part?

Viner:

The greater part.

H.M.Jr:

You might read my testimony before the Committee

Viner:

I will. I was just told that --

H.M.Jr:

The statistics are very interesting. It shows
how much influence I have on the Hill. I will

on silver.

be seeing you during the day sometime.
George, can you stay behind a minute?

Haas:

All right.

H.M.Jr:

Basil?

Harris:

There was a piece in the London paper this morn-

ing, an extract, saying that the British were
very interested in the amount of copper that
was moving from New York to Vladivostock. So
apparently they are at last getting aware of
that.

H.M.Jr:

There is a boat loading for Vladivostock, I
take it, in New York, wasn't it?

Harris:

Yes.

H.M.Jr:

And it was loaded with copper and they unloaded

Harris:

and I don't get the significance of it.
I don't either. The instructions came through
the Russian official agency, Amtorg.

331

-5H.M.Jr:

Harris:

It would be interesting if they stopped shipping
copper entirely.
Yes, wouldn't it?

H.M.Jr:

Someone thought it might have something to do

with the fact that they were afraid the British
were going to stop their vessels and if there
was not copper on board they would have less

excuse to seize the vessel.

Harris:

Yes.

White:

There is a ship being loaded with several million
dollars worth of material, much of which could
easily be regarded as raw material, so that if
the British were looking --

H.M.Jr:

Do you know the name of the boat?

White:

White:

No, I don't. The report is just on my desk.
Well, it is the one that they are loading now
that they took the copper off.
But this has a lot of things besides copper.

H.M.Jr:

Yes, a lot of machinery.

Harris:

They put other stuff on in its place.

H.M.Jr:

The Queen Mary, they said they were going to
clear for the Canal Zone. Then when they came

in they cleared for Trinidad. They cleared
the Mauretania for Bermuda.

H.M.Jr:

If anything more comes in while I am gone and -

Harris:

Just like yesterday, you mean.

H.M.Jr:

Yes.

Harris:

Yes.

H.M.Jr:

Anything else?

Bell is here - in regard to this copper and
shipments to Russia, would you give it to him
so he can forward it to the President, please?

332

-6Harris:
H.M.Jr:

Well, could I have two minutes sometime this
morning? I have just got two small matters

I would like to talk to you about.
Do it right after this meeting.
Harry?

White:

Nothing.

H.M.Jr:

Harold?

Graves:

Nothing.

H.M.Jr:

You are all set now?

Graves:

Yes, we are proceeding. Sullivan went to
Indianapolis last night to disband this force
we have.

H.M.Jr:

O. K.

Graves:

We are proceeding here today with this 90-day

letter procedure, which I think we can finish
this week. Next week we will take up the
third man.

H.M.Jr:
Thompson:

O. K.

In the reduction of the force in the Procurement
Division, we made no exception, as you know, to
the formula list. Mr. Graves and I feel, however,
that an exception should be made for the White
House cripple.

H.M.Jr:
Thompson:

Definitely.
We will have vacancies from time to time in our
other divisions and offices in the Department
and I thought we would fill them with some of
these people.

H.M.Jr:

Definitely, and there is one person there that

Thompson:

Yes, I have a special list, which includes

Congressman Doughton is interested in.

Miss McKinney, Mr. Doughton's protege.

333

-7H.M.Jr:
Thompson:

McKinney, that is the name, isn't it?
I will watch the vacancies. We have three
emergency vacancies in the Secret Service

now to be
filled
machine
work.

by men only on duplicating

H.M.Jr:

Are they over there?

Thompson:

Yes. I can fill all of these vacancies by
Procurement people.

Did you want me to tell you about this purse
snatcher?

H.M.Jr:

Would you (Mrs. Klotz) mind calling up Mrs.
Morgenthau and asking her about a man in
Procurement who has helped out in Self-Help,
and if you can get his name, if there is a
vacancy, even if it is a - a mimeograph man,
is it? He succeeded in getting them 6,000

pairs of shoes for the Self-Help cause. If

we get his name and there is a vacancy -Thompson:

This man is one of the emergency employees

under Mr. Wilson, I think. He was appointed
about 15 months ago on recommendation of
Admiral Peoples. He seems to have fallen by
the wayside.

H.M.Jr:

May I see his picture? Is that the one?

Thompson:

This is the second chance, because nearly a
year ago -One of those he held up was Houghteling, you
know. He got his watches.
Well, one of the girls whose pocketbook he
tried to snatch works down in the Appointment
Division.

Harris:
Thompson:

H.M.Jr:

He held up Mr. Houghteling?

Thompson:

This is the second time. About six or eight
months ago he did the same thing.

334

-SH.M.Jr:

Well, I have no thing to do with it. It is
the District police.

Thompson:

Oh, yes.

H.M.Jr:

What is the matter with him, anyway?

Thompson:

Well, I imagine - a Minister came in to plead
for him last time.

Harris:

I think he has been playing the ponies, as I
hear. He is backing the wrong horses, I guess.
This is his second offense and he is definitely

Thompson:

going to jail.

H.M.Jr:

Do you know how we send down mail while I am
at Sea Island?

Thompson:

Yes, I suggest we send it down by the Dining
Car Steward and send you a telegram to have

the train met to get the pouch from the

Steward.

H.M.Jr:

Don't bother sending me a telegram. Send it
to the man who is going to meet the train.
This saves me one more telephone call. If
there is any important mail to reach me, you
can get it to Mr. Thompson by when?

Thompson:

I think by 4:00 o'clock.
By 4:00 o'clock. He can send it down and I
will get it the next morning, if there is
something really important. I expect to get
away tonight. I have a telephone down there,
if it is really important. Anybody expecting
a child or something like that, to call me
up? I am expecting you all at lunch at 1:00

H.M.Jr:

o' clock unless you have other engagements.

Klotz:

Were they invited?

H.M.Jr:

Were you all invited once?

Klotz:

They don't look it.

Foley:

Never heard it.

335

-9Harris:

Never heard it.

Klotz:

I am sorry. The lunch is prepared but you

H.M.Jr:

didn't give invitations.

I will see you now, Basil, and you with him,
George.

336

March 21, 1940.
3:45 p.m.
H.M.Jr:

Hello.

Operator:

Captain Collins. Go ahead.

H.M.Jr:
Captain

Hello.

Collins:

Mr. Secretary?

H.M.Jr:

Yes.

C:

H.M.Jr:
C:

H.M.Jr:
C:

I thought you ought to know this before you left,
I had a reaction to the meeting.
Yes.

Wilbur called, he said that those people that were
there this morning were more than overjoyed at it.
I see.

They had never met you, and that their only
regret was that they couldn't have had a meeting
with you five years ago.

H.M.Jr:

Why is that?

C:

Uh?

H.M.Jr:

Why is that?

C:

Just on general principles.

H.M.Jr:

I see.

C:

They were just highly elated over it and Wilbur
told me to tell you that Mr. Hunt said that any
time you wanted him or any of the organization

to come to Washington they were yours to command.

H.M.Jr:
C:

Well that's They thought that you had done a perfectly
marvellous job there this morning and it was
going to clear the atmosphere at least in so far
as they were concerned with our friend.

H.M.Jr:

Good.

C:

And so I thought you'd like to know it.

337

-2-

H.M.Jr:

Which was the man that sat at my left and did most
of the talking at the beginning?
That was hunt, the President.
Oh he's the President.

C:

He's the President of American Aluminum.

H.M.Jr:
C:

HTM.Jr:
C:

I didn't know that.
And the big fellow, the grey haired fellow is the
vice-president in charge of sales and the boy

H.M.Jr:

that mixed it up with Purvis is the New York man.
But for Hunt who started off, he's president.

C:

He's the president of the company, he's the big

H.M.Jr:

shot.

Well that's the man who invited me to come down
to Alco.

C:

That's right. That's the one.

H.M.Jr:

Yes, yes.

H.M.Jr:

He's a son-in-law, I believe, of Davis, Chairman
of the Board.
Well I don't think that Purvis made a very good

C:

I don't either. I think it was lousy.

H.M.Jr:

Yes. I don't think it because it made him out

C:

presentation.

pretty small potatoes.

C:

I think so.

H.M.Jr:

What?

C:

H.M.Jr:
C:

I think so too. They were very much impressed
over that statement that he came forth with
toward the last when you smoked it out of him.
Well -

The horse trading phase of it they didn't, they
said they had suspected that right along and that

-3-

338

sort of confirmed some of their suspicions about
some of the other tactics that those people have
used.
H.M.Jr:
C:

H.M.Jr:

Well it seems to me that he tried to mix the two
things up, and I wouldn't let him.
That's right. No, that's the trouble there. When
you kept them from jumping the hurdle there why
that ruined his play.
Yes. And it may be twenty thousand tons of ingot
that have nothing to do with our domestic
situation.

C:

Not a bit. Not a bit.

H.M.Jr:

And incidentally you know, he told us yesterday
comes from British Guiana.
that bauxite
It comes out they get very little from British
Guiana.

C:

Yes. None at all.

H.M.Jr:

Yes.

H.M.Jr:

As far as they're concerned they got none. You
remember their figure was seventy-five out of
Dutch and twenty-five cent domestic.
Well 1f and when the Army releases any stuff send

C:

Yes sir.

H.M.Jr:

See?

C:

You wouldn't want me to give you a ring?

H.M.Jr:

Not on that.

C:

All right sir.

H.M.Jr:

Don't - call me when it's something I've got to

C:

I won't bother you.

C:

a note over to Norman Thompson and he has the
meil bag that comes down to me.

decide.

339
4

C:

But 1f it's just on a release of planes or engines
- a letter is plenty good.
All right, fine. Well I'll keep the memoranda

H.M.Jr:

That's right. But the letter business - I mean

C:

I see.

H.M.Jr:

See?

C:

Yes sir.

H.M.Jr:

O.K.

H.M.Jr:

C:

H.M.Jr:

going to Norman and he can out them in the pouch
for you.

the telephone is something that you've got to
need my help and I'm more than willing to give it.

All right sir, and I hope you have a very pleasant
trip.
I'liked the meeting and I thought it was a good
meeting.

C:

oh it was gorgeous.

H.M.Jr:

Right.

C:

Gorgeous.

H.M.Jr:

Because - well I just didn't like the way Purvis

C:

Well it may be a forerunner of 8 lot of other deals.

H.M.Jr:

That's right. That's right.

C:

Though it's a good indicator.

H.M.Jr:

O.K.

C:

All right sir.

H.M.Jr:

Thank you.

C:

Thank you sir. Goodbye.

handled himself.

340
March 21, 1940.
5:00 p.m.
Operator:

Go ahead.

H.M.Jr:

Hello.

Senator
King:

Sorry to bother you my dear friend, this is

H.M.Jr:

You never can bother me.

K:

H.M.Jr:

Senator King.

I've had a cold for four or five days and the doctor
made me stay in, in my bedroom, I'm going to get out
tomorrow. I'm a little bit disturbed, pardon
me for troubling you, about the action of the
committee on the repeal or modification of the
Silver Act. It seems to me that in view of the
fact that we're getting so - our exports are being
paid for largely in silver and in view of the
uncertain condition and so on, it might be wise
to defer action upon either the gold, putting
the gold into circulation and withdrewing silver

for a little while.
Well, what I testified was this that I felt that

this was not an appropriate time to cut off the
purchase of foreign silver but there wasn't
a single senator from the Rocky Mountain states they had to back me or who would testify.

K:

H.M.Jr:
K:

Is that so.
I never was so lonesome in my life.
Well if I hedn't been sick I would have been
there.

K:

Well there wasn't single person there, a so-called
friend of silver, not one.
Well I'm so sorry.

H.M.Jr:

And the State Department wouldn't come up, they

H.M.Jr:

wouldn't say anything and they left this whole

thing to me. I simply said, which I believe, that
this is an inappropriate time to do it.

K:

Well I think that you took the wise course.

341

-2H.M.Jr:

K:

H.M.
K:

H.M.Jr:

And I said if they're moing - they voted twentyfive thousand dollars to study the monetary and
fiscal
affairs of the country and why take a move
on
silver.
Sure.

An
isolated
move when they're going to study the
whole
business.

Well
seems
oughtI -toit wait
untilto- me it's very stupid. They
But Senator King there wasn't a single person Well I'm amazed.

H.M.Jr:

K:

H.M.Jr:
K:

H.M.Jr:

- that would appear. Key Pittman was so busy that
day that he sent A man over there with a written
memorandum.
Yes.

He wes too busy to come.

Well that's too bed.
And
here I was, all by myself, a farm boy from
Dutchess County (laughs)

H.M.Jr:
K:

H.M.Jr:
K:

An
apple grower and supposed to be an expert on
silver.

Well I wish there were more men in public life
that had the sense that you've got my dear friend.
Well it's very kind of you to say so, but Because I've esteemed you so highly and I've had

much
ability.confidence in your integrity and in your
H.M.Jr:

That's very kind of you but there's certainly I never was so lonesome in my life as I was on
that day.

K:

Well I may drop around in a day or two and talk

a little further with you.

342

-3H.M.Jr:

Well
I'm leaving in a half an hour for Georgia,
with my family.

K:

Well you'll be back when?

H.M.Jr:

I'll be back -

K:

Next week?

H.M.Jr:

No, about ten days.

K:

Oh yes.

H.M.Jr:

This is the childrens' school vacation.

K:

Oh I see.

H.M.Jr:

And I'm going away with them.

K:

Well, God be with you.

H.M.Jr:

Thank you, goodbye.

343
March 21, 1940.
4:53 p.m.
H.M.Jr:

Hello.

Operator:

Delano. Go ahead.

H.M.Jr:
Preston

Hello.

Delano:

Hello sir.

H.M.Jr:

Preston?

D:

Yes sir.

H.M.Jr:
D:

H.M.Jr:

First, unofficial business, we enjoyed our
evening very much with you the other night.
So nice of you to say so.
Official business, I'm leaving and I wondered 1f
you had anything recently on the new capital for
Bank of America.

D:

It's getting pretty close.

H.M.Jr:

It is.

D:

I think that the immediate point is that Mr. Jones
is in discussion with them concerning their price
for conversion. He disagrees with them on that
and has told them that they have to revamp it
some.

H.M.Jr:
D:

H.M.Jr:
D:

Yes.

We have raised two points, one is the question of
the amount of retirement that we will permit them
to make each year on the preferred stock.
I see.
And on that I think we're getting very close to
an agreement. They're willing to come to about

a million dollars a year.

H.M.Jr:

I see.

D:

The other is that we would like to have them.

H.M.Jr:

I don't hear very well.

D:

Hello.

-2E.N.Jr:

344

I hear better now.

I:

The other is that we would like to have them put
at least twelve million dollars of this into
immediate capital rather than the cut back to
seven and a half which they had in mind, and on
that point we're supported by Mr. Jones of the RFC
and I think they'11 meet US on that. So I think
we're coming close -

H.M.Jr:

How do you mean they'11 beat you?

They'll meet us.

):

They'll meet you.

Yes, meet us on that. So I think we're coming
close Mr. Secretary, on all these things and I
think by the time you come back we'll have the
whole thing settled.

D:

H.M.Jr:

All right.

D:

I'll be - when the thing gets down to the point
of where there is agreement all around I'll of

course give it to Danny so that you can have
a report from him on it where you are, you see?

H.M.Jr:
D:

H.M.Jr:
D:

Well after it's all over, when I come back, we'll
all have to have a party.
(laughs) I think we've got one coming.
I think so. We'll charge it up to the Bank of
America.

Well I - (laughs) - there may be some way of doing
that.

D:

They might even give it.
I would think they ought to don't you?

H.M.Jr:

They ought to give something.

D:

I think so (laughs) How long are you going to be

H.M.Jr:

away Mr. Secretary.

H.M.Jr:

I hope to be away for at least two weeks.

345

-3D:

H.M.Jr:

Hope you get a good rest sir.
Thank you.

D:

Goodbye.

H.M.Jr:

Goodbye.

STRICTLY CONFIDENTIAL
TREASURY DEPARTMENT
INTER-OFFICE COMMUNICATION
DATE March 21, 1940

TO Secretary Morgenthau
FROM Mr. Cochran

In accordance with the instructions given by the Secretary in the 9:30
meeting this morning, I telephoned Mr. Leroy-Beaulieu, Financial Counselor
of the French Embassy, at 10:30. I told Leroy-Beaulieu that the Treasury
Department had for some time sought diplomatic status for two members of its

staff in Paris, in addition to Treasury Attache Waite. I added that the

Treasury Department had renewed this request to the State Department some

weeks ago, and that the State Department had seen fit to transmit the request
to our Embassy in Paris for appropriate representation to the French Government. Leroy-Beaulieu said that he understood this much from his own people,
but wanted to know how much importance the Secretary really attached to the
matter. I told Leroy-Beaulieu that we had made the request through the appropriate channels and desired that it be given appropriate consideration.
We were not making a special issue of the request and were not appealing for
his intervention.

346

STRICTLY CONFIDENTIAL

347

TREASURY DEPARTMENT
INTER-OFFICE COMMUNICATION

DATE March 21, 1940
TO

Secretary Morgenthau

FROM Mr. Cochran

In talking with Leroy-Beaulieu this forenoon in regard to the French
Government shift, he felt that the new Cabinet could not be called one of
National Union. I remarked upon the number of Socialists who had been added
on the Left. Leroy-Beaulieu countered by pointing out that Reynaud himself

was to the Right and that other Right leaders, such as Rollin, Minister of

Commerce, had been added. He did not think that the complexion of the Cabinet had been much changed, however, and insisted that the principal result

was more to correct a state of mind than to take a definite course of action
on specific issues. Leroy-Beaulieu said that when he saw Reynaud recently,
the latter was complaining that the Allies were letting the opponents take

the initiative in the war. He favored reversing this. Reynaud would like to

make orderly plans, emphasizing the danger of letting things drift and
"muddling through". He will bring home to the people the sacrifices that
must be borne, and will probably insist upon stricter internal regulations
with the view to an effective carrying out of the war. Leroy-Beaulieu doubts
that any immediate change in actual plans for a military campaign will be
made. Leroy-Beaulieu reminded me that Daladier is not out, that he continues
in the Cabinet as Minister of War, and that he represents French thought even
better than Reynaud, the former being well known throughout the country while

the latter is primarily a Parisian.

Leroy-Beaulieu thinks Reynaud has a good chance of forming a Cabinet
which may last for some time.

B

&.

348
(Confidential)

PARAPHRASE

A telegram (no. 141) of March 21, 1940, from the American Ambassador at Chung-

king reads substantially as follows:
It can well be seen that what action to take in regard to Japanese military
notes must be a serious matter to thosefaced with the necessity of taking some steps
looking toward the reopening of trade on the Yangtze River. If the Japanese are conof

cerned with the existence of the military notes in connection with the reopening

the river to general trade the reason must be that they want to avoid a repetition
in the Yangtze area of the somewhat unfortunate experience in the Tientsin area of
the Federal Reserve currency notes. The regime sponsored by the Japanese in the
Yangtze valley is dependent for its success upon both economic and military support

which has been coming altogether from Japan in the past. In discussing the development of export trade from Japan to China, Japanese economists have not seen fit to

recall to their own attention or to the attention of the world the fact that a very
large part of Japan's exports to China has been necessary to redeem Japanese military
notes and Japanese yen currency, thereby causing loss to Japan and benefit to Chinese

currency. How to transfer to Chinese and foreign trade responsibility for supplying
economic aid without without assisting Chinese national currency and causing Japan

to lose hoped-for benefits is Japan's present problem. Inflation has been brought
about and trade has been strangled by the link system which was made necessary by

attempts to hold up currency of the Federal Reserve Board in North China. It is

natural to expect that a like situation will develop in the Yangtze area if an altogether new currency similar to the notes of the Federal Reserve Board and protected

by the link system is introduced. In the event of such action Chinese goods will only
be driven through smugglers' routes benefiting French Indochina, Hong Kong and the
Chinese national currency.

(See also paraphrases of telegrams no. 221 of March 17 and no. 87 of March 19, from
Shanghai and Peiping, respectively.)

343

RE ALUMINUM COMPANY OF AMERICA

Present:

March 21, 1940
11:15 a.m.

Captain Kraus

Captain Collins
Major Lyons
General Brett.
Mr. Hunt

Mr. Wilbur
Mr. Stanley
Mr. Davies

Mr. Foley
Mr. Purvis

Colonel Cave

Hunt:

I might explain, Mr. Secretary, that Mr. Stanley
is our Sales Manager and Mr. Davies is the Manager
of our New York office, who has been in direct
touch with the British and the French mission,
and Mr. Wilbur is the Manager of our Washington
office, who has been in touch with your people
here in Washington.

H.M.Jr:

Thank you. The reason I asked you gentlemen to
come down was this: As you know, the President

has asked me to do sort of a coordinating job
for him and in doing this, and in talks with
Mr. Purvis, he is very much worried that his
serious bottlenecks will develop in aluminum and
the various shapes and forgings and so on that
I can't discuss technically as we begin to get
into this program. As he described it to me,
he told me it figures roughly this: The figures
which I am carrying in my mind are that the
production of ingots of the aluminum company in
the United States is around 150,000 tons and is
expected to go to 180,000 tons when you open
up your West Coast plant.

Hunt:

H.M.Jr:

That is a little low.
And that there are some 200,000 tons of ingots
produced in Canada. He tells me that by rule
of thumb if we go to a thousand planes a month
in this country, it will consume some 60,000

tons of aluminum. He also tells me that they
ran into this thing in '37 in England and that
was one of their great troubles. I just have

a smattering of this, but for the first talk
with you and the reason I wanted the Army and
Navy represented is because, after all, if it

350

-2is as serious as he paints the picture, our
own national defense comes very much to the
front. He tells me that a thing like a tube,
for instance, that it takes six months before
it is ready for use. It goes through certain
finishing processes and he is very much - anyway, I am just repeating and he tells me that
on castings - forgings, that you fellows are
going to be right up against it and won't
admit it. Furthermore, he thinks that you are

holding a pistol to his head on some 20,000
tons of ingots that you want to get from Canada.
There is the story and I wondered if you people
would care to say, looking forward to the production that we now have for our Army and Navy
and civil production and what we have on hand
for foreigners plus what we are going to get,
do you people feel that you can take care of
it during the next two years?

Hunt:

Yes, sir, we feel that we can. We are prac-

tically sure of it. If it is handled in a

reasonable way and we get the orders promptly.

One great trouble is that we hear a lot of
talk about what requirements are going to be
made, but they are very slow in placing the
orders. There are always changes in specifications. But we have no fear but what we can
take care of all of this business if the orders

are placed and we understand what they are, what

they want. In the first place, about the ingot,
we usually talk in millions of pounds. The
foreigners very often - or usually talk in tons.

H.M.Jr:

Hunt:

H.M.Jr:

Could you talk in tons, because I have learned
my lesson on that. Just switch from pounds to

tons. When it gets to pounds the figure will
be so high. If you don't mind.
That is all right, sir. About a year ago we

had around 160,000 tons in stock. We are
making at the present time 170,000 tons, roughly,
a year. We shipped the British, last year,
something over 30,000 tons on the orders. We
knew that the --

May I interrupt you? Was this in the form of
ingot or --

351

-3 Hunt:

H.M.Jr:
Hunt:

Mostly ingots, some fabricated. We knew that
they were increasing their capacity very greatly,
both in England as well as in Canada, so when
they approached us in regard to their requirements this year, we asked them to furnish us the
ingot, not that we haven't got it, but we were
preparing against increased needs in this country,
both from our own military authorities as well as
domestic consumption, and against the time when
we will bring in larger production on the West
Coast. We said, "Here, we can give you the fabricating capacity, but we would like to have you
furnish us the ingots, especially inasmuch as
we have supplied you with all this metal last
year." They didn't seem to make any particular
bones about it and said, "All right, sure. You
put it up to us and - that you want the ingot

and we will supply it.'
As far as that has been, we think it is wiser
for the - this country to have plenty of ingot
in the country at all times against any needs
that may arise from our own military authorities
or our own domestic business. It is on that
basis that we figure that in 1941 or 142 there
will be plenty of production of ingot. of
course, it takes a long time to increase your
ingot production. You have got to go back to
your water power and all the facilities along
the line. They have the metal and we asked
them to supply it. We didn't hold any pistol
to their heads -That is my definition, not his. He is a very
polite gentleman.

I see. But we thought it was good business.
of course, from our own company's standpoint,

we would make more money if we supplied the

ingot and we have it and we could supply it.
tons of stock. Our production is coming right
along, but we thought it was wise business in
the long run to get the ingot from them.
Now, as far as the fabricated parts -Excuse me. Was he correct that your production
was going to go to 180,000 tons shortly?

We have got at the present time some 100,000

H.M.Jr:

352

-4Hunt:

H.M.Jr:

Hunt:

H.M.Jr:

Our production is going to be in 1941 - will be
200,000 tons or over, two hundred and - two hundred
and ten, maybe more. It depends a great deal on
the water, and take in the South this year we
have got a very low water - a dry season and
next season in all probability we ought to have
a very good water. It usually runs that way, so
that in 1941 I think we will be 210, maybe 220,000
tons and that ought to take care of all the needs
of anything that is in sight at the present time.
In fact, we are looking for orders.
Well, I don't mind, just talking here in confidence, both Mr. Purvis and Sir Henry Self don't
agree with you. Neither of them agree with you
and Sir Henry Self says they were right up
against the same thing as that in 1937 and that
it took them all this time to get straightened
out. He says it is a very slow process.
That, in confidence too, I think there may be
some reasons why Mr. Purvis is trying to -I thought maybe you would tell me before we had

them in. We are all citizens of the United States
and I take it we have all got one interest and

that is our national defense interest first. I

wondered 1f he had some selfish interests of which

I wasn't aware and that is why I want to get it

first.

Hunt:

H.M.Jr:
Hunt:

H.M.Jr:

I don't say that this is in his mind, but it is
possible that - at least, if he can control the

entire production of an industry, such as aluminum and have it sewed up so that it can't go to
any one else, he at least prevents it going any
place where he doesn't want it to go and he
sits in a rather nice position as far as American
industry, as well as American military affairs.
How could he possibly control it?
If he - he would like very much, that is one
thing we have noticed, that -Excuse me.

353

5Hunt:

Well, while I don't want to make any accu-

H.M.Jr:

If that machine bothers you, there is just
one copy which goes into my safe. There is
just one. But I have got so much I can't
remember it and there is only one copy and
the only person I report to on this thing is
the President of the United States and there
have never been any leaks out of this office,
but I do have one copy and his notes are
burned, but the one copy does go in the safe

sations, still --

for my grandchildren.

Hunt:

I see.

H.M.Jr:

I can't remember these things, but with the
exception of the President, he is the only
person I report to.
We thought that there was a feeling that on
the part of the mission that they were very
much interested in our capacity for various
products, total and all along the line. We
have been conservative in giving them the

Hunt:

capacity. In the first place, we didn't think

it was any of their business and we didn't
want to tell them it was "X" amount and then
find that they wanted it all and that we had
nothing left, and we wanted to keep a little
cushion. That very likely is the reason that
he has had those figures and given them to
you, which no doubt he has gotten from our
people. Maybe Mr. Davies has given them to
him. We felt that they were more interested
in the capacity than they were in placing
orders. They have placed very few orders.
The orders that they have placed, they have
been changing the specifications on. We can't
get shipping instructions and we can't get this
and that and as far as their people down the
line, why, they are entirely satisfied with
what - with our service. We have broken our
necks to rearrange our schedules at times to
suit them and various things. It is possible

that they would like to control all of the
industry so as to prevent any possibility of
any leaks and - into Germany. It is also

354

6-

H.M.Jr:

possible that some of the metal that they are
getting is not being used for military purposes. We have sort of felt that there might
some of it creep down into South America and
they are going after some of those markets,
but I am not making any accusations about it.
In other words, I have felt that our company
policy has been that while we wanted to give
them all that they wanted and needed for
military purposes, that after all, our first
duty was to the United States military purposes and American industry and that we didn't
want them to have a mortgage on our entire
capacity or our entire industry. They have
shown indications they would like to have it.
Of course, we can't let them have that.

Hunt:

No, sir, I realize that.

H.M.Jr:

I am not familiar with - I understand a con-

siderable amount of bauxite comes from British

Guiana.
Hunt:

Yes, sir.

H.M.Jr:

You say --

Hunt:

Dutch Guiana, I beg your pardon.

H.M.Jr:
Hunt:

Is that controlled by the British?
No, sir, that is Holland.

H.M.Jr:

Are you having any trouble getting the bauxite

Hunt:

No, sir. We are having a little trouble getting

H.M.Jr:

Does it all come from Eritish Guiana and --

Hunt:

Dutch Guiana.

H.M.Jr:

Dutch Guiana.

you need?

the bauxite, but the Dutch Government is causing
no trouble.

355

-7Hunt:

Oh, no, bauxite is very widely distributed
over the earth's surface. There is lots of
it in the East Indies and in Africa. There
is lots of it in the southern part of France.
That is where it was first discovered.

H.M.Jr:

But as to consumption in the United States,
what proportion comes from British Guiana and

what proportion from Dutch Guiana?
Hunt:

The consumption in the United States, about
two-thirds comes from Dutch Guiana, that is,

Holland, Dutch, in the northern part of South

America, and about one-third from Arkansas,
the State of Arkansas.
H.M.Jr:

And what proportion from British Guiana?

Hunt:

Practically none. British Guiana supplies

H.M.Jr:

Then they couldn't hold you up?

Hunt:

No, sir, they can't.

H.M.Jr:

There is no way of their putting a leverage on
you by saying you can't get the bauxite?
Not unless they would declare war on the United
States or Holland or interfere with our ship-

Hunt:

Canada and some European countries.

ments, and then we have fairly good-sized mines
in Arkansas which we have conserved purposely
to - against war needs.

H.M.Jr:

Well, on the present basis of your ingot production, what proportion of the bauxite is
produced within the United States?

Hunt:

On the present proportion, around a third,
a quarter to a third, but we could push that
up, if we had a war and our shipping was shut
off, we have enough American production of
bauxite in Arkansas and Georgia blocked out
that we could last for three or four years
without any more than we have discovered and

as we get deeper, it is like anything else,

you find more. We have done that purposely

and at considerable expense.

356

8

H.M.Jr:

How long does it take to get a mine like that

Hunt:

H.M.Jr:

We could put it right into production within
30 or 60 days. It is working now.
Is it surface mining?

Hunt:

Surface mining, mostly. There is some under-

in production?

ground.

H.M.Jr:

But you could, in 30 days.
Yes, sir. You need have no fear that we would
be shut off from bauxite under any conditions.
We could take care of the situation very well.
General Brett, would you like to ask some ques-

Brett:

No, sir, he is giving a very clear indication.

H.M.Jr:
Hunt:

tions?

We have checked on our things, Mr. Secretary.

H.M.Jr:

Nothing new?

Brett:

We were not worried from our standpoint, after

H.M.Jr:

You are not worried?

Brett:

That is, including the aviation industry of the

H.M.Jr:

Even if we get in this foreign order?
Even to taking care of the foreign order. We

Brett:

having laid their production figures on the
table for us.

United States as well as our own requirements.

felt that the aluminum company can meet all
the requirements of American industry under
any circumstances and to the extent that they
can expand within a reasonable time. On the

item of forgings, with the exception of forgings,
and that is purely a question of placing of orders,
anyway, so that the company has an opportunity
to meet the demand. Now, the forgings have been

held up due to the failure of the industry to
place their orders and give them time. That is

357

-9-

H.M.Jr:
Kraus:

H.M.Jr:

usually the last item they ask for.
Well, I can't remember all these things. Did
somebody mention forgings to me?

Extrusions, possibly.
What the hell is an extrusion?

Kraus:

It is a piece that is manufactured by squirting
it out of a die, rather than a closed die, and
it is literally extruded through a gate.

Brett:

Those things are something that can be taken

care of by increased facilities as business

warrants.
H.M.Jr:

But he made a firm statement that it takes
six months for a tube to cure, or something

like that.

Davies:

That is not a case.

Hunt:

That is not the case, no, sir. He is mistaken

H.M.Jr:

Well, he is coming in. How about you, Captain

Kraus:

We have had no distress, Mr. Secretary, over
the ability of the aluminum company to meet
our needs and the general domestic needs. The
only question under which we had some - not
real distress, but at least an acute interest,
was when some of the inquiries for - foreign
inquiries appeared to us to exceed by a considerable amount what their fabricating industry
could consume, and it looked as if there might
be a doubling up, an effort to accumulate stock

there.

Kraus?

against the possibility of interruption of
shipment, which might make a temporarily serious
condition in this country. If this stuff were
all dumped abroad, maybe as much finished

aluminum as we will say the French airplane
industry could consume in several years, we
might be pretty hungry for aluminum during that

period, but I don't think that many of those

358

- 10 -

inquiries have eventuated into orders. but I
am quite sure that some of those inquiries that
are morely heard about as rumors far exceeded
the capacity of the fabricating plants in
western Europe to utilize within a reasonable
time, and that was the only worry we had, that
if those orders - if those inquiries eventuated,

we might have a temporary scarcity of aluminum
here, because it would all have been, maybe
two or three years supply would have gone abroad.

Brett:
Kraus:

May I ask a question, sir? Is that recently?
I haven't heard any more about it in recent

weeks.

Brett:

That was some time ago?

Kraus:

Yes, and as I say, very few of those inquiries
have eventuated into orders and that was the
only thing that disturbed us.
of course, there must be an orderly procedure
on this, Mr. Secretary, from the standpoint of
the fact that no one member of the industry,

Brett:

of the aircraft industry, must lay in a tre-

mendous stock. There must be an allocation
and a movement of the supplies as they show
their demand and they must get their orders in
promptly for what they need, but we have had

no anticipation of any difficulty at all as

H.M.Jr:

Brett:

far as the United States is concerned.
I didn't know whether this was like the engine
situation.

Well, we have checked this on several occasions,

sir, against way last fall, the early part of

last fall, and under - each time we have had
perfect confidence in the fact that we could
meet the program as we had laid it down and
then when the question of the 8,000 plane program came up, we immediately made another check
and we felt confident that the aluminum company
could meet all the demands within the United
States. of course, it might have to be controlled and allocated and checked on.

359

- 11 H.M.Jr:

Well, you see, if asking Sir Henry, who, I
gather, has had charge of their production
for three years, what was one of their troubles,
one of their things he said, "I think I called
it a major trouble in '37, was getting aluminum."
He said that that was their major trouble.

Hunt:

That may have been from their own - trouble
from their own production over there, because
they had no trouble over here.

H.M.Jr:

I am just - he didn't say here, but he said
in England, their principal trouble was -Very likely that was true in the foreign situa-

Hunt:

tion, because they have made very large commitments in Canada since 137. We have understood

that the British Government have loaned the
producer there in Canada quite a large sum of
money at a very low rate of interest and taken
some kind of obligation on their production
over a period of time and they have gone into

it very heavily in the last year or two.

H.M.Jr:

Where does the French aluminum company get its

Hunt:

You mean its ore?

H.M.Jr:

Yes.

Hunt:

It gets it from the southern part of France.

H.M.Jr:

Are they self-contained?

Hunt:

Yes, sir. The Good Lord gave the French a
great blessing there because they not only
have the water power and the bauxite, but
they have other ingredients that are very
convenient and very little shipping and very

ingots?

little delay.

H.M.Jr:

And they can produce enough to take care of

Hunt:

They always have. They have a very high duty

their own needs?

into France and up until the war, there was

360

- 12 figuratively speaking not a pound of aluminum
shipped into France, up until September.
H.M.Jr:

This isn't entirely within my jurisdiction,
but if at any time you people felt that in
this thing that we are trying to do here,
that the English were trying to take trade
advantage of us in South American, I would
be interested in hearing about that.

Hunt:

H.M.Jr:

Brett:
Stanley:

H.M.Jr:

Stanley:

We don't want to make any accusations, but
the way the thing has been handled, while we

thought we were giving them all the results
that they wanted and needed and could use,
we have been a little - wondering what all
the shooting was about, to be frank with you.
Well, unless somebody has some idea, I will
have Mr. Purvis in now.
Now, General Brett, I want you to stay, please.
Are you getting ready to get up?
No, sir.
May I say a word, Mr. Secretary? I think one
of the salient points was raised by Captain
Krause here. Now, I assume that our intelligence in this country must know fairly well
what the production of aircraft in France is
and what the production in England is and it
is my personal opinion that what has been
shipped over there from this country, plus
what they produce in their own country, is
way beyond any production or anything that it
is possible to use in that program. Now, in
the early stages -You are talking about airplanes or aluminum?
I am talking about aluminum in airplanes.

H.M.Jr:

You mean they are taking in more aluminum than
they can possibly use?

Stanley:

Use in airplanes, as we understand the program.

361

- 13 -

For instance, here, I think Captain Collins
in the early stages - we said find out what
they want. 2,000 tons of sheet a month. The
whole aircraft industry of the United States
doesn't use 2,000 tons of sheet a month.
Another time they said, "Well, what do you
want?" "2,000 tons of rod a month." It is
perfectly absurd. The quantities that they
have mentioned, they are absurd, so that I
think that we must - I went to see the Commissioner in New York in November. I said,
"Gentlemen, we want to do everything we can
to help you, but we must have a program.
Tell us what your program is, what you want,

and when you want it, and we will try and

give it to you." To this date, we haven't
a comprehensive program.

H.M.Jr:

What you say doesn't surprise me, because
it was sometime this December or January
that that mysterious Frenchman was here.

We called up the Embassy to try to find out
who he was, to get him accredited before he
came down here. We never were able to locate
him. You have heard that story?

Stanley:
H.M.Jr:

Yes, sir.
I won't see anybody unless he is accredited by
the Embassy and the State Department. I couldn't
locate him.

Stanley:

If the British Mission will say what their program is, what their production is, and what
excess they want to take care of it, and if
the French Mission will do the same and we
get the same information from our own Army and
Navy, then we have got something to work on

and we can do something constructively. All
this general talk that the Commissions are
handing us is useless in planning.

Stanley:

Well, I would tell them that.
Oh, we tell it to them.

H.M.Jr:

Tell them in here.

H.M.Jr:

362

- 14 Kraus:

Your related subject, Mr. Secretary, might
give you some of the background. Both the
War and Navy Department are making every
effort to make the production of finished
aluminum as it relates to aircraft manufacture
a production business. We are wholesalely
inspecting their product and whenever they
have any in stock, it is available for us
here as an inspected product and it permits
the production operation of the industry.
Now, the Navy Department - I imagine the War
Department has done the same thing - the Navy

Department has urged its airplane contractors
to release quantities so that the aluminum
company can process those individual items
in a production manner, and I am quite sure
the War Department has done the same thing,

and that applies with very great gravity and
seriousness to the foreign program, too. If
they are going to dribble out releases for
particular airplanes, the industry - I doubt
very much if the industry can attain these
very satisfactory figures of output except
in ingot, as Mr. Hunt has mentioned. It
could produce ingot until it was blue in the
face, but we can't run this industry as a
production rolling mill running 24 hours a
day without a run of the same thicknesses
and the same kind of material or these
capacities just evaporate and aren't obtainable so it is important that they conduct
their business in a manner off mass production.
H.M.Jr:

Fortunately, I am of a suspicious nature and
this thing didn't make two and two and that
is why I asked you to come down and let Mr.
Purvis come in and tell his story. It may
be something important and it may not, but

I feel it was worth my time. If it is all

Hunt:

right, shall we have him in now?
Just a second, now, Mr. Secretary. One possi-

bility about that six months on that tubing
business, it is possible that this is the
answer to that. We do know that their technique
in Europe is entirely different from our technique.

363

- 15 -

Stanley:

H.M.Jr:

They have in this process of hardening, they
use what we call, "age hardening," that is,
taking time to do it. We have a process of
artificially hardening and accelerating it
and it doesn't take nearly as long. That may
be the answer to the six months proposition.
Or it may be alloys. They want special alloys.
They are pefectly willing to buy our American
built planes from the standard alloys of the
War Department, but when they want something
they want something different. You can realize
what that does to production.

I think a little plain talk is always helpful.
(Mr. Purvis and Captain Cave enter the conference)

Mr. Purvis, I have been going to school for the
last half hour and I think we have had, from my
standpoint, a very satisfactory talk, a very
frank talk, and to sum up, I think what these
gentlemen feel is that they don't know what the
Allies want. If they knew what the Allies really
wanted, then they would be in a position to say
whether they could or could not produce it for
them, first taking care of our own domestic
needs. They find themselves in the position
that they don't know. They have assured me, and
representatives of the Army and Navy have assured
me, on the present basis, as far as the domestic
needs and national defense are concerned, we are
all right, but until they know what the Allies
want, they can't tell whether there is or is
not a bottleneck.
Purvis:
H.M.Jr:

Yes, right.
And they say quite frankly they are waiting and
that the specifications - everything is shifting
and they don't know as of today what you really
want.

Purvis:

May I present it from a slightly different

angle? I think there was a stage when that
would have been a very legitimate position to
take. That was at the stage where, having

364

- 16 certain capacities available on the other side,
growing, it was obvious that a surplus had to
be obtained elsewhere and this was the only
place, of course, to get it. Naturally, therefore, the question became, what could we get
from here. I do suggest that the difficulty
in getting exact specifications at that time
was the usual difficulty that you get. You
come into a market. You want to find out roughly
what tonnages are available and what kind of sheet
or bar, or whatever it may be, because you can't
give specifications and tie them in with an
existing program which is drawing supplies from
a great many other factories until you know
what is available in the market, roughly speaking,
in tonnages and during that stage when we were
ascertaining what the productive possibilities
here were in tubes, bars, sheets, and so on,
forgings and so on, there was a lack of detailed
specification.
However, I would be very surprised if in the
last few weeks there has been such a lack. For
instance, I would say that on the British end
today there are two divisions, if I remember
rightly, though I haven't been in the strict
detail, but the orders which are being discussed,
partly placed, for British account, are of about
10,000 tons in all, I think, and I would say

both in France and in England, requirements

that there is a detailed specification of all

that.

The second thing, of course, is such orders as

may come out of the new aviation contemplated

program. There we are in the formative stage
of the exact numbers. I don't know to what
extent details have been placed, but that won't
be so difficult anyway, I would imagine, from
the aluminum corporation's standpoint, because
it will be for American specifications, U. S.
Army standard, both by U. S. concerns - and
that would seem to me to simplify the whole
thing so that from the strictly British angle,
as far as I know, there is an exact specification of every quantity that we wanted in the
hands of the aluminum corporation and has been

part of the negotiations which have been going
on.

365

- 17 -

In the case of the French, I believe that it
is perhaps of the order that specifications
are there for 70 percent of the amount. I
would rather feel that at this stage the difficulty that we are up against is that there is
no supply, apparently. Otherwise, we may give
specifications of the kind of sheet or tube
or whatever it will be, but we are met with
the reaction, "Well now, you all have to supply
this material from which it is made." Well,
that is, of course, driving us back on our
own markets. There is very much a question
whether there is any point in coming away
from our own market if we are simply driven

back in it, except in some particular stages.
Now, that is one phase of our difficulty and
the other phase is merely that the deliveries
are naturally, in certain cases, very far
ahead. We have been unable to get anything
that would fit in with the requirements that
we want, particularly in regard to the three
bottlenecks that I mentioned to you yesterday,
Mr. Secretary, the forgings, the tubes, and
so on. Now, there is our picture and I think

it is a fair statement.

Stanley:

How late is your information?

Purvis:

You mean in days or hours?

Stanley:

I just thought possibly you veren't up to date,

Purvis:

It depends on what you mean by up to date. If
you are talking about hours, I have been away
for 18 hours.

Stanley:

Well, a week, say.

Hunt:

Go ahead, Mr. Davies. You have been in touch
with the situation in New York.
I will take those three commodities, tubing,
rods and --

Davies:
Hunt:

that is all.

He said die castings.

366

- 18 -

Davies:

Forgings, tubes and die castings.
You don't mean die castings. Do you mean

Purvis:

That is an indirect bottleneck.

Davies:

That has never been mentioned.

Purvis:

It is simply a bottleneck that exists.

Davies:

We have been told by the engine people --

Hunt:

Mr. Purvis, if you will give us an order
for a million pounds of die castings today,

Purvis:

Purvis:

forgings?

we will ship them to you.
Then I must evidently modify my statement to
this point, that I was talking about what I
believed to be the three bottlenecks in the
thing as it comes to us.
In the case of the forgings and in the case

of the tubes, it is based on direct inquiries
or orders placed. In the case of the die
castings we are up against - it is merely
what the engine makers tell us in connection
with the new program we will probably run

into. Is that right?

Davies:

As I understand it, yes, that is correct.

Hunt:

Go ahead on the other things.

Davies:

We have never had an inquiry from you for

forgings. You mentioned rod. In the first

place, you mentioned your total requirements
for 1940 would be 1102 tons. Inside of two
weeks or three weeks, that changed to 10,000

Purvis:

tons. It is a little hard when something
multiplies by ten on you while you are planning on the first unit.
War is like that.

Davies:

We have orders for ten percent of what you

want. Those orders were received, the first

367

- 19 -

one, the sixth of March. Before the end of
March, we promised to have a carload of
tubing ready for you. You said you were
in desperate need. So in less than three
weeks we were going to ship a carload of
tubing to you. You gave us an order for

800-odd tons of rod on March 6. On March 13,
I called up Mr. Robbins and said, "We have
a carload. Where is your inspector?" The
balance of the 9,000 tons we received the

Purvis:

Davies:

Purvis:

details the day before yesterday.
What - I still couldn't see, however, what
you want me to - what you are trying to prove
there. Am I right in thinking - I am not
trying to prove that you are not trying to
do what we want to the extent of your capacity,
because my information has been that everything
that you could do in that regard in working
out the details of the situation has been
done in the most satisfactory way. I am
talking about the facts that - affecting future
orders, the 1102 tons we know is placed. The
deliveries are not quite as good as we would
have liked or hoped, particularly on tubes,
as you know, because that has been the subject,
I have no doubt, of considerable discussions.
You are giving us some delivery, I admit.
We started delivery in three weeks. I think
that is pretty good.

It is not the start of the delivery, it is the

quantities. It is a question of your capacity.
the condition. But the fact is that if we

We are not complaining about that. That is

Davies:

could get three times as many tubes from you
today, you would get the orders, as you know,
tomorrow, provided you have the material.
As of two weeks ago, I was told that you wanted

Purvis:

We do.

Davies:

Two days ago I was told that it was 1,000.

2,000 tons of tubing.

368

- 20 Purvis:

Was any suggestion made on your part that

Davies:

tion of supplies being -Could I finish? I would like to finish on
this tubing. The 2,000 became 1,000 and
the sizes became entirely different, so I
am just saying that we haven't the order yet

the 2,000 would be tied up with the ques-

and we just heard that it was changed two days
ago and we are prepared to take that and run

it. I don't know where the difficulty is.
The point is on the time, sir.

Purvis:

Davies:

Purvis:

I understood that those - any tube orders that
were placed - as I say again, I am not in the
detail of these orders, but my understanding
was that any further tube orders placed with
you would start delivery about August.
Defer the tube orders. As the position was
given to me -So there was no hurry to place the - and would
be conditioned on getting ingot from the other

side, so that I don't think there is any - is

Davies:

Purvis:

that about right?
You are right about additional shipments; new
orders would begin in July or August, but we
must know before July or August what we are
going to plan for.
Oh, very much. You will know, absolutely.
That is why we have been discussing it. But

we are faced, I think, with the fact that you

Davies:

say first we have got to have ingot and secondly,
we can't do anything for you. Now, what we are
naturally - the reason - when we go back to the
other side and say that the deliveries are impossible until such and such a date, what always
happens between buyer and seller? Quantities
are liable to change, even specifications, because it may not come in time to be of any
good. But we are not complaining about that.
That is tied up into your capacity.
All I was attempting was to explain to you
that as fast as these orders are coming in

369

- 21 -

you are getting action on them. As fast as

we have had any details, you have had action,
very promptly.

Purvis:

Perhaps we are talking about two slightly different things. As I understand it, you would
like to give us action but haven't the capacity.

Davies:

We have given you action.

Purvis:

You have given us a small start. We could have
taken the whole quantity in one month. We have
cut the quantities, because the times at which
we could get them in England and in France have

caused a variation in quantities.

Davies:

Purvis:
Davies:

Purvis:

Isn't it a fact that if you were to obtain - you

said you could have taken all that tubing at one
time. Isn't it a fact that if you took all that
tubing at one time, you would have enough tubing
to build all the airplanes the Eritish could
build in the next two or three years?
I wish it were.

Is it so?
I am afraid that our specifications in the use
of our tubing in airplanes are so utterly different from yours here that that is just not so.

We wouldn't be, I assure you, just now requesting
tubes if we didn't want them very badly.

H.M.Jr:

Could I just shift this discussion for a minute?

Let's forget about the immediate needs of the
English and French as to what they have. I mean,

personally if I had to umpire this thing, I would
say sit by and we would watch you go a couple

more rounds.
Purvis:

I think it is round 50 for me.

H.M.Jr:

I wouldn't want to make a decision right now.
You would have to go at least five more rounds
for me to decide. It would be a highly technical

decision at that. But there certainly are
grounds for you gentlemen to get together,

370

- 22 because there seems to be a definite mis-

understanding as to what you want and what
the aluminum company can do as to your im-

mediate needs, but I should think that would
be accomplished - that doesn't bother me so
much, because I think you both can take
pretty good care of yourselves. That is the
thing which I would like you to talk about,
Mr. Purvis. Is that this order which is in
contemplation for 8,000 planes - 11 or 12,000
engines, whatever it is, and what worries,
if any, would you have if you placed those
orders in the market as to the availability
of aluminum and its various forms, shapes and
extrusions.
Purvis:

I think chiefly, as I understand it, though
Colonel Cave perhaps can give - the actual

forgings as distinguished from the stock from
which the forgings are made, and this thing
that we are warned by the engine makers of
die castings. I think those are the most
important. Tube would probably be difficult,
but not impossible. Is that a fair statement
on the basis of the information we have?
Cave:

I think so, sir. I should like to consider

that, that I think you gentlemen must have
somewhere a better idea of this problem than
I have, because I have only been able to take
two American factories which happened to be

supplied - and get the details. I have had
to apply that information to this program and
say that one will be in proportion to the other,
which may not be, and it is only in that way

that I can get out figures at all. I think

you have had a copy of the figures, have you
not?

Davies:
Cave:

No, sir, I am not survey that I know the figures
that you have in mind.
It amounts to a total of over a - from, say,
now until next April, '41, of something like
15,000 tons. I don't know whether that figure
has been mentioned to you.

Davies:

I have never heard the date of April. I have

371

- 23 heard no date beyond the end of this year.
Purvis:

That would have to be - of course, you have
your order in ahead of time.

Purvis:

That is my estimation, which I don't think
you will find is very far out by proportions.
It may be wrong in tons.
You have had to work from rough calculations.

Cave:

Yes.

Stanley:
Purvis:

Are we talking for domestic manufacture?
Manufacture of this new order.

Davies:

I haven't seen the figure, but I would agree

Cave:

with it. It sounds right.

Stanley:

You are talking now, not the stuff to ship

Purvis:

Two problems, as I tried to bring out. One
is what would be shipped from this country
of the extrusion sort, the other is what would
go into the program of further orders as

abroad --

placed.

Stanley:

I would like to suggest to Mr. Purvis that
this problem of capacity, you appreciate, depends
upon the business that you are going to put in
your mills. Now, we have been threatened with
a lot of airplane business in this country for
a long time. When you ask us to tell you what
our capacity is, what do you expect to tell us
when we don't know what we are going to get in
this country? You are just asking an impossible
question.

Purvis:

Are you quite sure that you haven't had the - in
the first place, as I said, we have given you
not only the figures, but the details in regard
to the orders as such from this country, a hundred percent British and seventy percent French.
Now, so far as the other program is concerned,
it is in the stage where the planes are being
chosen as to types, and obviously final figures

372

- 24 on that program can only be expressed in

broad tonnages.
Stanley:

If we don't know anything about the tonnage
on the various products we have to produce

for planes to be shipped to the Allies, we
don't know that yet. Now, that is an unknown. How are we going to say what our
capacity is to produce products, unfabricated
products, I mean, so far as the plane products to ship to the Allies? You have got
to know something.

H.M.Jr:

I gather here - you see, this plane order
is rapidly coming to a head. It looks that
way. Now, what I am interested in on this
thing is that if this order does materialize
and therefore 8,000 or 9,000 or 12 or 13,000
engines, I take it that you people have made
a rough estimate how much aluminum it is.
And you say it is 15, 000 tons?

Cave:

Roughly 15,000 tons.

H.M.Jr:

And you people who are in this business know
what that means, a breakdown, how much is

tubing, how much is this, that and the other.
Now, the point I am interested in is this:
Let's say that this order materializes within
a couple of weeks.

Purvis:

Maybe, yes.

H.M.Jr:

Within a couple of weeks. And that is placed
in the United States for engines and planes
on top of what our Army wants and our civil
needs and our normal exports. What do you
gentlemen think, would the aluminum company be

prepared to handle that without the distortion,
and so forth and so on?

Stanley:

Of course, the time element, Mr. Secretary,

you realize - over what period of time are
these planes to be delivered? When does delivery
start and over what period of time are they to
be completed?

Purvis:

Roughly speaking, you have got the 15,000 tons
by March of next year to be completed.

373

- 25 Stanley:

When is it to begin? Approximately when will
the manufacture of these planes in this country
begin?

H.M.Jr:

Brett:
H.M.Jr:

Brett:

Well, I want to help him on that. He has got
to get his releases, and so forth and so on,
from the Joint Board. Let's say if he is
lucky, a couple of weeks. I mean, if he -You are talking about the release of aircraft?
I am not in any position to say.

Well, I will say if he is lucky. That is a

perfectly safe statement. He may get the release for export within, say, a couple of weeks.
He may get it sooner or he may get it within
a week or three weeks. But sometime certainly
between now and the 15th of April, they ought
to know what they can or cannot get. It certainly won't take the Army and Navy longer
than between now and the 15th of April to know
what they are willing to do.
of course, we have an actual estimate of all of
the aluminum which is required in sheet forgings,
castings, wire, bars, rods, tubing. The 2800

P-40's and 3,000 Martins and 3500 Allison engines
and so many Wright engines and so many Pratt
Whitney engines. This thing has been coordinated
throughout with the aluminum company and the

total is this 66 million, which is approximately
your 150,000 tons, which you speak of - 15,000,
or whatever it is. This is in tons, but I mean -H.M.Jr:

Then the aluminum company does know.

Stanley:

Oh, we know what the proposed 8,000 program is,

H.M.Jr:

Then you do know --

Stanley:

Oh, we knew the original 8,000. We have broken

but now I just talked with Martin yesterday.

that all down with the people here, but that

has all changed now. That has never come through.
H.M.Jr:

All right. Now, they are talking about 5,000

planes and - let's put it on this basis. This

374

- 26 -

is simple. If you broke that down and that
order is bigger than what they are talking
about now, could you take care of that?
Stanley:

We figured when we went over those figures
that that was for 18 months, beginning
August or September - the original idea on

this program was that it was to start March
1, and complete it September 1, 1941.

Purvis:

That is the last delivery of the last plane.
It is six months ahead to the Allies, gentlemen, isn't it?

Stanley:

That has never been questioned.

H.M.Jr:

Supposing that order was 20 or 25 percent
bigger than what you are talking about now,

isn't it? If that order was placed instead

of March 1, supposing it was placed May 1,
and the whole thing was shoved along two
months, I mean, the whole thing was advanced
two months to American industry. I am not
talking about exports, but aluminum to be
supplied to American manufacturers, that is
my principle.

The answer to that is unqualifiedly yes, we

Hunt:

will take care of it.

Purvis:

You will? And you will be able to take care

Hunt:

Yes, we are taking care of the virgin aluminum.

Davies:

Yes.

Purvis:

For any of the outstanding orders for these

Hunt:

For the planes. Now, the metal that is being
shipped direct from us to you, we are asking
the British to supply us that metal this year.

of --

Isn't that a fact?

things for France and England?

375

- 27 H.M.Jr:

Now, may I interrupt just a second? Before
we come back to that I just want to ask, if
you don't mind my checking, I want to ask
General Brett if he will answer this. Take
the order as it was originally planned, the
8,000 planes, the one that was supposed to
go through on March 1 and all the rest, and

after all, place the order two months later
and the delivery dates are all the same. Are
you satisfied from the standpoint of the
Army that if that order is placed in this
country without any - that the aluminum company would be prepared to continue your program and the Navy's program and take care of
our domestic needs without any distortion,
take care of you on time and then take care

Brett:

of the Allies besides?
That is the result of checks over the period
since, well, starting way last year in the

spring, checking wi th the aluminum company
throughout and then with the expansion program,
and of course we have conducted checks not only
on the Army business but on the Navy business
and also commercial business and keeping in

touch as far as possible with foreign business, and during these periods of checks that

we have automatically kept up with the aluminum
company, I can say that every - there may be

intangibles that may develop that I can't put
my finger on, but today I believe that the
aluminum company can take care of our program
as it is now laid out, can handle the Navy,
not only from the air standpoint, but also
their normal orders for surface craft, and
that as a result of these estimates which
were made on the original statement of the
8,000 program, that in the logical course of
production that the aluminum company can
handle it, provided the contractors under
just a certain amount of pushing and enget their orders in so that they

and things

their specifications - pieces,

couraging, such can get as the forgings extrusions special reaction and we

of that sort. Now, that is the

have had from the aluminum company over a

period of the last three or four months, that

376

- 28 every time an additional business was in the
offing, they have come to us and we have sat
down and they have shown their production
capacity and we believe - I say this because
this estimate right here is based on 2800

P-40's, 30,000 Martin bombers, 3,000 Douglas,
3500 Allisons, 4364 Wrights and 3851 Pratt &
Whitney engines.

Now, this is the program that includes sheet
forgings, extrusions, castings, and so forth.
H.M.Jr:

That is bigger than what you contemplated.

Purvis:

There is just one little point that perhaps
might usefully be made and that is this, that
of course what we are trying to do is to obtain

those planes in addition to the planes we can
build in England and France, not afterward, and
I am not sure whether General Brett has taken

H.M.Jr:

Purvis:
H.M.Jr:

Brett:

into account the inquiries that are in the
market for direct shipment.
I am coming to that in a minute. I am trying
to divide this thing. My first interest is
the use internally, and I want to entirely
satisfy myself that the internal situation is
all right. That is my principle charge from
the President, that we should look after the
United States first.
That is legitimate and proper.
I see what you have in your mind, but I will
come to that in a minute.
I would like to make one suggestion and that
is when I say commercial, I am speaking of
commercial aircraft only.

H.M.Jr:

You mean the airlines?

Brett:

Commercial aircraft. It doesn't include such
demands as might be made for such as special
trains and the like.
I wouldn't expect that.

H.M.Jr:

377

- 29 Brett:
H.M.Jr:

Speaking purely of the aircraft.
I am talking about American airlines or
that 25 million dollar program for Civil
Aeronautics.

Brett:
H.M.Jr:
Kraus:

I am including that.
Now, Captain Kraus, do you differ at all?
No, I am in entire agreement with it. In
fact, the data was collected in the War and
Navy common pool.

H.M.Jr:

You are satisfied?

Kraus:

We are satisfied with it and I agree with

H.M.Jr:

May I ask the aluminum company or whoever wants

General Brett.

Hunt:

to answer this question, in connection with
received from the Allies for the planes to
be manufactured in the United States, is there
any question about getting any ingot from anywhere, I mean, is there anything - any deal
that is pending in connection with this?
Not as far as I know. Do you know of anything,

Davies:

No, sir.

Stanley:

I would like to qualify that just a little

this order we are talking about, if it is

Mr. Davies?

bit by saying that we want to protect our
present inventory and keep it about where it
is and up until the time when our increases
are coming in, which are in the fall out in
Vancouver, September or October, so we think
in the interest of national defense and the

interest of the United States that it is our
responsibility to carry sufficient inventory we
of raw aluminum to meet any emergency and
have aluminum and we are making it every

day, but we think when it comes to all this
extra program that as much as we shipped
30,000 tons last year to France and England,
that it is pretty nearly up to them to help

378

- 30 out and give us the ingot back here so as to
protect our position.
H.M.Jr:

Excuse me. I want to stick to this, if you
don't mind. I want to have the aluminum

company answer the question. The program of

manufacturing planes as it is now, plus the
proposed order in the United States, is your

ingot situation all right?

Stanley:

Yes.

H.M.Jr:

And you are not asking for any release of
ingots in connection with this order?

Stanley:

No, this order hasn't been placed.

Hunt:

We won't ask for any ingot from Canada.

H.M.Jr:

H.M.Jr:

In connection with this order?
In connection with the order for airplanes
which General Brett is talking about.
That is what I wanted to know. Now, you don't

Purvis:

I like that way.

H.M.Jr:

Now, as I get it, what you are talking a bout
is production and manufactures of ingots and
sheets and tubes for export in that form to

Hunt:

mind my doing it in my own way?

England.

Purvis:

Correct.

H.M.Jr:

Which, I gather, is another deal.

Purvis:

Yes, and which antedated this one.

H.M.Jr:

Well now, you can go to it on that and I will
listen, but what I wanted to make plan is the
domestic situation.

Hunt:

Very good.

H.M.Jr:

Is that all right?

379

- 31 Hunt:

Quite satisfactory and it clarifies the

H.M.Jr:

Now, you people want something exported in
the form of aluminum products, which is some-

situation.

thing else again.

Purvis:

Well now, on the - our difficulty is this,

that before the clearance to place the plane
order will come from the other side, the
rather natural question will be asked, will
this interfere with the output of planes already - for which factories are already in
position to produce in England and France.
That is something which obviously will be a
determining factor on whether any export
order for planes themselves are placed here
or not.

Stanley:

What do you want and when do you want it?

Purvis:

It is all in your hands, sir, in detail, but

I would be very happy to go over it again.
The 10,000 tons for which specifications have
been given to the eighth inch of every bar
and tube and I understand the French have

given specifications for 70 percent of theirs.

After all, you had all the British -Davies:

Day before yesterday.

Purvis:

But you have it, that is all. And as a matter
of fact, the only reason that you didn't have
it - you had a tenative one before that. You
didn't like the look of that one. You sug-

gested certain changes should be made in it,
so we went back and made some changes in it,
which I understand - but I mean you have had I know specifically that you have had, Mr.

Davies, a statement of the exact sizes. Ad-

mittedly we have changed. That often happens
Davies:

during a negotiation.
Mr. Purvis, you and I could settle this better
without whirling around.

380

- 32 Purvis:
Davies:

I think we need a ring.
I would like to point out one thing which

would make this clearer to everyone. You

say you changed around to accommodate us.

Purvis:

oh no, no, no, no.

Davies:

Well, never mind. Let me give you an example

of the difficulty we are up against when you
talk about capacities. Mr. Secretary, I would
like you to listen to this because I think
everyone wonders what it is all about. You
told us you wanted 2,000 tons of tubing of
certain sizes. I told them, "What are you
going to do with it?" Do you build your
planes entirely out of tubing," because we
know how much tubing it takes in this country and they are so far above there is nothing
to it. I asked if they would mind checking to
see if it was right. They were worried about
a bottleneck. It came back and instead of
2,000 tons, it was 1,000 tons, and instead of

being a little tube ingot, now it is big tube
ingot.

Purvis:

That must be a big help.

Davies:

So right away you increased the capacity four
times by that change.

Purvis:

Mr. Davies, I think if I may suggest to you,
you underrate the intelligence of the people
on the other side. We begin to cable and say,
"Look here, tubes are going to be very, very
difficult and you have got to check, and
probably what they do is to turn over their
capacity to the things that are more difficult
to make and give the capacity here to the
things that are easier to make in order to
increase the capacity here. I think you must
assume that the change was in order to ease
the situation. You still think, however,
that the point you asked me was whether or
not the - you have had specifications. I
say to the British - you have had the British
specifications on everything to the last eighth
of an inch.

381

- 33 Davies:

Two days ago.

Purvis:

You asked whether you had it. You had it

in an earlier form. It has changed and, as
you say, it helps the situation from your
view. I still think, however, that the situation as we have understood it, one of the
reasons why all this hasn't moved faster, and
this, I can say very positively, because we
have had two or three rather fierce Anglo-French
meetings in which the difference between the
two nationalities came out and everybody wanted

to speak at once and fortunately in this meet-

ing they don't, but actually --

H.M.Jr:

You have excluded the French today.

Purvis:

Actually what we are - you would have all this
specifically and definitely for - in the last
five weeks if we hadn't been coming up against
this fact that we shall ask you to supply the
materials, which again comes back to the question of cabling back to England. You may have

to tell us you can't do it.

Devies:
,

Purvis:
Davies:

I have been begging you to give us the orders

so we can tell the mill and start working.

Mr. Davies, if we give you tomorrow 2,000 tons

of tube orders, could you start delivery of
any of it before July or August?
It would help the mill a great deal in planning,
if they knew what was an order and not just
something I had been talking about for a couple
of months.

Purvis:

We had definitely understood that there were

no deliveries until July or August from you
on that material. If that is changed, you
can have the order today.

Davies:

I might say the same thing I quoted you ten
days ago on a thousand tons of forgings stock
and told you we are going to have a lot of
capacity and we have got to know what kind of

ingot to make it out of. We would like to

382

- 34 -

have the order and I think they are cabling
London about that to make sure they haven't
changed the size or specifications.
Purvis:

I suggestion that this is merely a question,
Mr. Secretary, of meeting the - there are
two points. One is, what can they give us

and the other is, when we know roughly
whether they can take on so much forging
or so much tube, what size do we want. There
is always a movement between the two parties

of that kind. That is the nature of over --

Davies:

H.M.Jr:

Mr. Purvis, I am not arguing with you. I am

just trying to indicate willingness. That is
all I am trying to do.
I feel this way. I have satisfied myself as
to my chief responsibility that if the Allies
place this order, can the aluminum company

take care of our own needs satisfactorily and

still handle this additional order without
going out of the country for additional ingot
production, and you answered yes. Now, when

you get down to the question of shipping
aluminum ingots or manufacturing it, there
seems to be a little difference and there
seems to be a little horse trading going on

which I don't particularly care to get in on.

Hunt:

We can take care of that.

H.M.Jr:

I think you can and I think Mr. Purvis can take
care of himself, but it has gotten down to a
horse trading thing, which doesn't particularly
concern me, but I really don't think it comes
within my province, but I am satisfied that
the chief thing - that they can handle this
thing and - this additional order and the
aluminum company can take it. They say they
can, General Brett says they can, Captain Kraus

says they can, so all we are waiting for is
the order and all you are waiting for is the
releases.

Purvis:

Yes. That is the fact that we can assure - our

other little difficulty, in order to make that

383

- 35 -

clear, is that before our order can materialize
from England is that we shall be asked on this
side of the water to give a clearance that it
will not interfere with the production of planes
over there by limiting shipment of the aluminum
company.

H.M.Jr:

Purvis:
Stanley:
H.M.Jr:

Purvis:

I don't want to get in on that. I am not going
to get in on that. Now, I don't want to get
in on that. That is some more horse trading.
I think that is the problem.
It is a problem.
Well, I appreciate very much your coming. I
am satisfied and I hope you are satisfied as
to the industry being able to take care of the
aluminum product as it affects the airplane and
engine orders, if placed, and when placed in
this country.

Yes, subject, of course, to their being able
to handle this other thing which is, of course,
somewhat questionable.

H.M.Jr:

Purvis:

Well, that is up to you folks.
We will try and get together.

these were returned 384

to miss
pery to gene 3 alsow
3/21/40.

TREASURY DEPARTMENT
WASHINGTON

MEMORANDUM FOR THE PRESIDENT

The correspondence transmitted with your memorandum

of February 12th is returned herewith.
The statements contained in the memorandum from the

Chief of the Bureau of Aeronautics, Navy Department, confirm
studies that have been made by the Treasury.

In connection with the matter of engines, it appears
from investigations that I have personally made of the Pratt
and Whitney and Wright plants that their production for the

year of 1940 is fully obligated. If any engines are to be

had for any program such as that being presently studied for
Norway they will have to be taken from some of the orders at
present on the books of these companies.

Secretary of the Treasury.

THE WHITE HOUSE
WASHINGTON

February 12, 1940

MEMORANDUM FOR

H. M. Jr.

The enclosed relates to Navy

airplane engines. Please read and return
with any suggestions you may care to make.

F. D. R.
Enclosures

THE WHITE HOUSE
WASHINGTON

February 10, 1940.
BANDUM FOR

THE PRESIDENT

I talked with Admiral Towers concerning the procurement of aircraft engines from the smaller companies.
The attached memo from Admiral Towers gives the gist
his comments.

As I see it, the smaller companies are not in a
position, basically, to turn out engines of powers
suitable for our combat planes. They have neither the

experience nor the equipment to go into production of
the larger powers required. Even if the larger companies
could be induced to turn over their engines for counterpart manufacture by the smaller companies, these latter
have not the essential equipment to handle.
Respectfully,

D

J. CALLAGHAN.

388
D.C.

NAVY DEPARTMENT

BUREAU OF AERONAUTICS

JHT-GB

WASHINGTON

9 February 1940
MEMORANDUM FOR CAPTAIN CALLAGHAN
SUBJECT:

Procurement of Aircraft Engines from the Smaller
Companies.

The smaller companies, with one exception, manufac-

ture nothing but small engines which have a military application
only in training planes. As we are required by law to manufacture 10% of our planes and engines at the Naval Aircraft Factory
and this percentage represents approximately the total training
plane requirements, there is little likelihood of our being in
the market in the near future for any of the small engines.
2.

The one exception mentioned above is the Ranger En-

ginnering Division of the Fairchild Engine and Airplane Corporation, Farmingdale, L.I., which manufactures an intermediate size
engine. This bureau has given a great deal of encouragement to
that company and now has under test two different models of obto
servation planes equipped with the Ranger engine. We expect
place an order within the next few weeks for approximately 140
observation planes equipped with Ranger engines. Our remaining
procurement for the current fiscal year, amounting to some 75
planes, will be of types which require large engines not obtainable
from any of the small companies. We are scheduled to procure an
additional 100-150 observation planes during the fiscal year 1941
and it appears that these also will be of a type equipped with

Ranger engines.

Summarizing, of our next 500 planes at least 140
will be equipped with engines from one of the smaller companies,
3.

and it is quite probable that more of this type will be ordered
early in the fiscal year 1941.
I would like to point out that the big companies are
4.
big because they have developed and produced satisfactory engines
of the large horsepowers required for most of the current military
I

types, and the small companies are small because they have not.
feel that we have done everything within reason to encourage the
various reputable small companies to develop large types. For example, we have contracts for experimental engines of large types

with five different small companies, but this experimental development takes a long time and I see little prospect of pulling the
small companies into big business on big engines for at least two

Memo. for Captain Callaghan
-2-

SUBJECT:

Procurement of Aircraft Engines from the Smaller
Companies.

years. Wefor
have
done
to encourage
of
parts
by all
thewe
bigcan
companies
withthe
theplacing
little com-

and I feel that this is the manner
contracts
panies,
themost
in which
future. the little
companies
canservice
be ofinthe
near

J. H. Towers

THE PRESIDENT,

The correspondence transmitted with your memorandum

of February 12th is returned herewith.
The statements contained in the memorandum from the

Chief of the Bureau of Aeronautics, Hevy Department, confirm
studies that have been made by the Treasury.

In connection with the matter of engines, it appears
from investigations that I have personally made of the Pratt
and Whitney and Wright plants that their production for the

year of 1940 is fully obligated. If any enginee are to be

had for any program such as that being presently studied for
Forway they will have to be taken from some of the orders at
present on the books of these companies.

HEC:GE

Secretary of the Treasury

THE WHITE HOUSE

Washington

February 12, 1940.

MEMORANDUM FOR

H. Me Jr.

The enclosed relates to Navy airplane engines.
Please read and return with any suggestions you may care
to make.

F. D. R.

Enclosures

FC

O

P

Y"

THE WHITE HOUSE

Washington

February 10, 1940.

MORANDUM FOR

THE PRESIDENT

I talked with Admiral Towers concerning the procurement of aircraft engines from the smaller companies.
The attached memo from Admiral Towers gives the gist of

his comments.

As I see it, the smaller companies arq not in a
position, basically, to turn out engines of powers suit-

able for our combat planes. They have neither the excperience nor the equipment to go into production of the
larger powers required. Even if the larger companies could
be induced to turn over their engines for counterpart manufacture by the smaller companies, these latter have not
the essential equipment to handle.
Respectfully,

(Signed) D. J. Callaghan.

"C
O

P

NAVY DEPARTMENT

Bureau of Aeronautics
Washington

JHT-GB

9 February 1940

MEMORANDUM FOR CAPTAIN CALLAGHAN

SUBJECT: Procurement of Aircraft Engines from the Smaller Companies.
1.

The smaller companies, with one exception, manufacture nothing

but small engines which have a military application only in training planes.
As we are required by law to manufacture 10% of our planes and engines at
the Naval Aircraft Factory and this percentage represents ap roximately

the total training plane requirements, there is little likelihood of our

being in the market in the near future for any of the small engines.
2.

The one exception mentioned above is the Ranger Engineering

Division of the Fairchild Engine and Airplane Corporation, Farmingdale,
Le I., which manufactures an intermediate size engine. This bureau has

given a great deal of encouragement to that company and now has under test
two different models of observation planes equipped with the Ranger engine.
We expect to place an order within the next few weeks for approodmately 140
observation planes equipped with Ranger engines. Our remaining procurement

for the current fiscal year, amounting to some 75 planes, will be of types

which require large engines not obtainable from any of the small companies.
We are scheduled to procure an additional 100-150 observation planes during

the fiscal year 1941 and it appears that these also will be of a type

equipped with Ranger engines.

Summarizing, of our next 500 planes at least 140 will be equipped
with engines from one of the smaller companies, and it is quite probable that
3.

more of this type will be ordered early in the fiscal year 1941.
4.

I would like to point out that the big companies are big because

they have developed and produced satisfactory engines of the large horsepowers
required for most of the current military types, and the small companies are
small because they have not. I feel that we have done everything within
reason to encourage the various reputable small companies to develop large
types. For example, we have contracts for experimental engines of large
types with five different small companies, but this experimental development
takes a long time and I see little prospect of pulling the small companies
into big business on big engines for at least two years. Tie have done all we
can to encourage the placing of contracts for parts by the big companies with

the little companies, and I feel that this is the manner in which the little

companies can be of the most service in the near future.
(Signed) J. H. Towers.

"COPY"

MERODANDUR FOR THE PRESIDENT

The correspondence transmitted with your nenorandum of February 12th

is returned horewith.

The statuseries contained in the memorandum from the Chief of the Bureau
of Aeronautics, Havy Department, confirm studies that have been made by
the Treasury.

In connection with the matter of engines, it appears from investigations
that I have personally made of the Pratt & lihitney and Wright planta

that their production for the year of 1940 is fully obligated. If any

engines are to be had for any program such as that being presently
studied for Korway they will have to be taken from 8008 of the orders
at present on the books of both of these

Efforte are being made at the to arrange for & diversion of
nomo of the engines under order by the French to Norway and Sweden.

Secretary of the Trussury

CONFIDENTIAL
WAR DEPARTMENT
OFFICE OF THE CHIEF OF THE AIR CORPS
WASHINGTON

January 19, 1940

MEMORANDUM FOR General Watson.

In compliance with telephone request there is attached a
letter to the Honorable Henry Morgenthau, Jr., containing the information requested.

For and in the absence of

The Chief of the Air Corps,

Bolbohu
Ira C. Eaker,

Lieut. Colonel, Air Corps,
Executive.

CONFIDENTIAL

January 19g 1940
RANDUM

FOR General Watson.

to the In Honorable compliance with telephone request there

on tter requested. Henry Morgenthau, Jrop containing is attached the informa a
For and in the absence of
The Chief of the Air Corps,

Ira C. Eaker,
1.

Lieut. Colonel, Air Gorps,
Executive.

CONFIDENTIAL
WAR DEPARTMENT
OFFICE OF THE CHIEF OF THE AIR CORPS
WASHINGTON

January 19, 1940

Honorable Henry Morgenthau, Jr.,
Secretary of the Treasury,
Washington, D. C.
Dear Mr. Morgenthaus

In compliance with your recent request for information as to
the possibility of having the 450 h.p. class engine manufactured by
other than the three large engine industries, such as Allison, Wright,
and Pratt & Whitney, there is furnished herewith a table which indicates
the additional engine companies, the type of equipment they are manu-

facturing, and what their production would be if converted into a 450
h.p. class engine. Of course in certain primary training planes, the
lower type engine is used, that is the 220 and even the 180 h.p. engine.
Therefore all of this production would not have to be changed over to
the 450 h.p. class.

ENGINES MANUFACTURED

(Under 500 HP)
(Per Month

(Per Month)
:Maximum Production, Present Maximum Production
:

:Facilities & present types: 450 HP Type

Jacobs Aircraft Engine Co.
:

379 (7)

508 (3)

:
:

40 (4)

9 (7)

:

:

Monasco Manufacturing Co.

51 (7)

100 (2)

Bangor Engineering Corp.

Continental Motors Corp.

35 (7)

55 (1)

:

Manufacturer

:

150 (5)

:

Aviation Mfg. Corp.)

52 (7)

:

100 (6)

:

8

rner Aircraft Corp.

69 (7)

B

Lycoming Division

:

595

:

:

:

TOTAL PER MONTH

953

:

: 11,436

CONFIDENTIAL

I

TOTAL PER YEAR

7,140

CONFIDENTIAL
898
(1) R-775, 255 HP.
(2)
(37

Inverted air-cooled 6-440, 180 HP.
R-670, 220 HP (this motor also used by Ordnance
Department for tanks).

125 HP motor (Ryan Trainer).
(5) R-680, 220 HP.
(6) Warner Super Scarab, 165 HP.

(4)

(7) Figured on the basis of 1000 man-hours
(P & W require 849).

Source: Production Data Estimates.

The above is purely a rough estimate. A detailed study is
being made to determine accurate information. This study will take some

little time, and will be furnished to you as soon as completed.
Very truly yours,
For and in the absence of

The Chief of the Air Corps,

Ira C. Eaker,

Lieut. Colonel, Air Corps,
Executive.

CONFIDENTIAL

January 19, 1940

Honorable Henry Morgenthau, Jro,

Secretary of the Treasury,
Washington, D. C.

Dear Mr.

Morgenthaus

In compliance with your recent request for information as to
the possibility of having the 450 h.P. class engine manufactured by
other than the three large engine industries, such as Allison, Wright,
and Pratt & Whitney, there is furnished herewith a table which indicates
additional engine companies, the type of equipment they are manu
the facturing, and what their production would be if converted into a 450
hope class engine. of course in certain primary training planes, the
type engine is used, that is the 220 and even the 180 h.P. engine. to
Lover Therefore all of this production would not have to be changed over
the 450 hope class.
MANUFACTURED

(Under 500 HP)
(Per Month

(Per Month)

Production

I

Maximum

450

35 (7)

I

Janobs Aircrift Engine Co.

55 (1)

I

51 (7)

8
B

Engineering Corp.

100 (2)

.

a

379 (7)

8

I

1

finental Motors Corp.

508 (3)

I

9 (7)

8

1

s

Manufacturing Go.

40 (4)

8

#
$

Migg Corp.)

69 (7)

8

Division

150 (5)

8

$
a

52 (7)

s

$

Aircraft Corp.

100 (6)

8

I

0

:

595

8

$
I

TOTAL PER MONTH

953
a

I

Frattifies

8

TOTAL PER YEAR

8 11,436

CONFIDENTIAL

I 140

CONFIDENTIAL

(1) R=775, 255 HP.

Inverted air-cooled 6-440, 180 HP.
(3)
R-670, 220 HP (this motor also used by Ordnance
Department for tanks).
(4) 125 HP motor (Ryan Trainer).
(2)

(5) R=680, 220 HP.
Tarner Super Scarab, 165 HP.
(6)
(7)

Figured on the basis of 1000 man-hours
(P & W require 849).

Source: Production Data Estimates.

The above is purely a rough estimate. A detailed study is
being made to determine accurate information. This study will take some
little time, and will be furnished to you as soon as completed.
Very truly yours,
For and in the absence of
The Chief of the Air Corps,

Ira C. Eaker,

Lieut. Colonel, Air Corps
Executive.

CONFIDENTIAL

letter

signer

address not
of
but Bureau

of

consuties
D.C.

NAVY DEPARTMENT
Haler to No. Aer-PL-EMN

BUREAU OF AERONAUTICS

L1-1(40)
W

WASHINGTON

RESTRICTED

January 16, 1940.
MEMORANDU

SUBJECT:

Number and Types of Navy Airplanes scheduled to be

delivered during calendar year 1940.
Month

Type

Number

Fighter - F2A

16

"

16

"

11

May

June

If

July

11

Fighter - F4F

2

10
10

July

W

FY

18

PT

19

11

November

JRF-1

If

3

R3D

1

"
2

FT

If

4

Utility - J2F-4

4

"

W

5

If

W

4

Training - N3N
"

4

10

If

20

20
20
20
20

10

Adv.Training - SNJ
"

"

"

11

TT
11

If

TT

3

12
13

July

January
February

April

February

March

August
September

FT

11

10

"

If

Beechcraft
Grumman

Douglas
If

"

Grumman
W

"

Naval Aircraft Factory
11

TT
TT

11
TT

If
W

If

If
H
ff

TT

If

11

10

Grumman

July

W

TT

3

April

June

IT

11

16

March

May

TT
W

If

February
January

April

FT

20

"

March

11

5

W

If

October

Transport - GB-1

3

Brewster

August
September

11

11

12

June

ff

If

10

February

IT

11

Manufacturer

TT
TV

October
March

April

May

June

July
August
September

If

North American
W
11

11

11

If
If

"

If

11
W

11

Aer-PL-EMN

L1-1(40)

RESTRICTED

MEMORANDUM

Number and Types of Navy Airplanes scheduled to be

SUBJECT:

delivered during calendar year 1940.

Number

Month

Type

Manufacturer

ObservationScout

-OS2U

February

March
22

April

27

May
"

24

"

24

Vought
If

1

June

If

July

If

August

22

Septemb er

20

October

"

10

Scout-Bomb-

2

ing - SBC-4

12

February

April
May

12
H

9

1

SBD-1

June
March

April

6

Curtiss
11

If

w

Douglas
"

May

"

16

June

"

14

July

"

14

18
17

18

August
September

"

11

18

SB2U-3

November
December
March

12

April

18

May

W

Vought

June

16

July

10

10

If

October

"

17

1

W

IT

18

"

18

"

18
"

SBN
IT

"
"

August
September

If

If

October

November
December
May

August
September

October

November
December

-2-

11

Naval Airc. Factory
#

w

W

"

#
#

W

EMN

Aer

L1-1(40)

RESTRICTED! MEMOR A INDUM
SUBJECT:

Number and Types of Navy Airplanes scheduled to be

delivered during calendar year 1940.
Month

Type

Number

Manufacturer

Patrol-Bomb-

3

ing - PBM
11

W

3

"
W

5m

3

"

1

PB2Y

W

If

11

1

"

"
1

If
W

1

1

11

"

1

11

1

W

PBY-5
11

2

If

"

4

11
TT

7

"

12

12

W

FT

August
May

July

Consolidated

August
September

11

October

W

W

If

July

TT

1

Martin

June

N

W

April

May

11

5

11

March

PT

If

If

November

If

July

"

August
September

"

If

October

11

November
December

"

If

Experimental Planes
Fighter XF5F

1

XFL
XFLU

FY

1
W

1

1

1

Training XN5N

Patrol-

Bombing XPBM-1
PT

1

1

XPBM-2

ScoutBombing XSB2A

1

1 Scout-Obs.
1

XSB2C
XSQ 2U-1

XS03C-1

March

Grumman

May

September

Naval Airc. Factory

March
June

Martin

August
June

Curtiss

February
January

Vought

Curtiss

April

-3-

Bell

Vought

FY

Brewster

10c
Aer-PL-EMN

RESTRICTED

L1-1(40)

MEMORANDUM

W
SUBJECT:

Number and Types of Navy Airplanes scheduled to be

delivered during calendar year 1940.
Recapitulation
Totals by Types

Fighters

127
335
154

Scout-Bombing

Observation-Scouting
Scout-Observation
Patrol-Bombing
Training
Advanced Training

2

66

151
61

Utility

18

Transport

10

Utility-Transport

3

Total

927

Estimates are predicated on ordering following planes with
supplemental 1940 funds not later than 15 February, 1940:
81 SB2U-3
27 F4F
25 SNJ

authous
S. M. Kraus
Captain, U.S.N.,

By direction Chief of the Bureau of Aeronautics.

-4-

CONFIDENTIAL

ARMY

4

AIRPLANES 1940

CONTRACT

Dec. Jan. Feb. Mar. Apr. May June JOY Aug. Sept Oct. Nov. Dec.
B-17B

Boeing

B-17C

Boeing

XB-24

Consolidated

B-24

Consolidated

B-24A

Consolidated

B-23

Douglas

B-25

North American

B-26

Martin

A-20, A-20A

Douglas

YFM-1, YFM-1A

Bell

YP-38

Lockheed

P-38

Lockheed

YP-39, YP-39A

Bell

P-39C

Bell

P-40

Curtiss

YP-43

Republic

6

1I2223

4

1

3

3

1

6 12 14
11

6

2

20

1

10

7

2

1

5

3

9

8

7
6

t

2

1

2

1

1

3

2

6

2

3

3

2

1

3

11

14

14

10

9

4

6 .6
3

15

20.

40

30

45

45

45

-

0-47B

3

2

2

1

1

3

North American

CONSIDENTIAL

4

4

45

45

CONFIDENTIAL

Army

AIRPLANES 1940

CONTRACT

Dec. Jan. Feb. Mar. Apr. May June July Aug. Sept Oct. Nov. Dec.
0-49

Stinson

YO-50

Bellanca

Y0-51

Ryan

C-45

Beech

F-2

Beech

PT-13B

Stearman

PT-17

Stearman

PT-18

Stearman

PT-19

Fairchild

PT-20

Ryan

BT-13

Vultee

BT-14

North American

BC-1A

North American

AT-1

North American

10

2

10

5
4

1

1
1

1

Curtiss

1

0-52

2
1

2

2

2

1

2

2

2

1

10

10

4

3

2

1

10

15

20

25

20

20

10

10

10

10

15

18

10

10

10

10

15

17

43

43

43

43

9

4

1

1

40

30

10

8

5

5

1

5

5

5

1

1

15

10

8

4

1

1

2

2

1

1

8

5

2

CONFIDENTIAL

14

9

4

10

17

26

32

40

40

40

40

21

29

29

29

29

29

29

29

14

16

16

16

14

14

14

8

2

23

14

d

CONFIDENTIAL

Army

ENGINES 1940

R-1820-65

Wright Aero. Corp.

R-1830-33

Pratt & Whitney

R-1830-33

Pratt & Whitney

R-2600-9

Wright Aero. Corp.

R-8800-5

Pratt & Whitney

R-2600-7

Wright Aero. Corp.

R-2600-3

Wright Aero. Corp.

V-1710-41

Allison Eng. Co.

2

V-1710-27 RH

Allison Eng. Co.

1

V-1710-29 LH

Allison Eng. Co.

V-1710-27 RH

Allison Eng. Co.

V-1710-29 LH

Allison Eng. Co.

V-1710-37

Allison Eng. Co.

V-1710-35

Allison Eng. Co.

V-1710-33

Allison Eng. Co.
Prest & Whitney

16

11

12

16

16

18

20

24

32

42

42

42

8

8

4

4

12

4

16

12

12

8

8
4

2

4
1

1

14 22 44 54

58

20

30

20

10

2

1

1

1

35

25

25

20

15

8

40

40

40

40

2

1

1

2

3

2

3

1

3

3

3

1

3

3

10

15

15

14

11

1

1

10

15

15

14

11

6

1

5

2

3

3

3

3

3

1

6

6

8

8

10

75

75

75

1

2

15

30

15

15

5

15

Pratt & Whitney

CONTRACT

Dec. Jan. Feb. Mar. Apr. May June July Aug. Sept Oct. Nov. Dec.

4

is

15

5

35

5

75

50

2

75

CONFIDENTIAL

Army
R- 985-23

Pratt & Whitney

R- 985-19

Pratt & Whitney

United Aircraft Div.

R- 680-11

Lycoming

R- 670-5

Continental Motor

R- 755-7

Jacobs Aircraft Eng. Co.

R- 985-25,-27

Pratt & Whitney

R- 985-25,-27

Pratt & Whitney

R-1340-49

Pratt & Whitney

R-1340-49

Pratt & Whitney

ENGINES 1940

CONTRACT

Dec. Jan. Feb. Mar. Apr. May June July Aug. Sept Oct. Nov. Dec.
2
4

4

4

4

12
6

6

5

15

15

13

4

8

5

1

5

5

20

20

20

20

20

18

15

15

15

15

15

15

15

15

15

15

20

20

10

20

10

40

10

19

1

26

32

40

40

40

17

40

10

29

29

29

29

29

21

29

29

14

18

37

36

36

4

11

6

2

5 9 14 14 14 14 12

CONFIDENTIAL

1

12

14

THE WHITE HOUSE
WASHINGTON

January 19, 1940.

CONFIDENTIAL

MEMORANDUM FOR SECRETARY MORGENTHAU:

The President says you can have

this, but you are held responsible that you

get it back for his confidential files, as
these are the only copies made and he wants

to retain them.
Sincerely,

EDWIN M. WATSON

Secretary to the President.

Enclosures.

I.

What are the needs of our Army and Navy

in the field of aviation for 1940 and 19417

II. How many airplanes and engines, if any,
could
be
diverted to the French and English for immediate delivery?
III. Ask for an explanation of the French and

English proposed buying program.

IV. Would it be possible to have Pratt-Whitney

or Curtiss-Wright license an experienced Company to
manufacture their engines, the company to be located
somewhere in the Mississippi Valley, as both PrattWhitney and Wright are on the Atlantic Coast?

Mary

January 16, 1940.

Deliveries by Months - Calendar Year 1940.
January

3 Transport

Grumman

4 Utility

W

1 Scout-Observation

Curtiss Total 8

February

2 Fighter
3 Transport
4 Training

Grumman

Beechcraft

1 Observation-Scout
2 Scout-Bombing

1 Scout-Observation

5 Utility

March

1 Transport

Naval Aircraft Factory

Vought

Curtiss
Vought

Total 18

Grumman

Douglas

5 Utility

Grumman

10 Training

3 Advanced Training
4 Observation-Scout

1 Scout-Bombing
1 Scout-Bombing

4 Patrol-Bombing

1 Fighter

Naval Aircraft Factory

North American
Vought
Douglas
Vought

Martin

Grumman

Total 30

April
2 Transport

Douglas

4 Utility

Grumman

20 Training

10 Advanced Training
22 Observation-Scout
12 Scout-Bombing
6

12

"

"

"

3 Patrol-Bombing

1 Fighter

Naval Aircraft Factory
North American
Vought

Curtiss

Douglas
Vought

Martin
Bell

Total 92

May

Brewster

16 Fighter
20 Training

Naval Aircraft Factory
North American

10 Advanced Training
27 Observation-Scout

Vought

14
18

Douglas
Vought

12 Scout-Bombing
"
"

If

If

1

W

#

Curtiss

Naval Aircraft Factory

Aavy

May(cont'd)

5 Patrol Bombing

1 11
1 Fighter

Martin
Consolidated
Vought
Total 125

11

June

16 Fighter

Brewster

10 IT

20 Training
10 Advanced Training
24 Observation-Scout
9 Scout-Bombing

16 FT
16

PT

Grumman

Naval Aircraft Factory
North American
Vought

Curtiss

Douglas
Vought

W

IT

Martin

6 Patrol-Bombing

Curtiss Total 128

1 Scout-Bombing

July
Brewster

11 Fighter

10 M

Grumman

4 Transport
20 Training
3 Advanced Training
24 Observation-Scout

14 Scout-Bombing

10 If

Douglas

Naval Aircraft Factory

North American
Vought
Douglas
Vought

Martin

3 Patrol-Bombing

Consolidated Total 101

2 TT

August

10 Fighter
20 Training

Naval Aircraft Factory

18 Scout-Bombing

Cought
Douglas
Vought

Grumman

12 Advanced Training
22 Observation-Scout

10 R

3
R
OF
1 Patrol-Bombing
FS

North American

Naval Aircraft Factory

Martin
Consolidated

3"

Brewster Total 100

1 Scout-Bombing
September

12 Fighter
20 Training
13 Advanced Training
20 Observation-Scout

17 Scout-Bombing

18 11 TT

4
TO
"
5 Patrol-Bombing

Grumman

Naval Aircraft Factory
North American

Vought
Douglas
Vought

Naval Aircraft Factory
Naval Aircraft Factory
Consolidated

1 Trainer

-2-

Total 110

413

Many
October
18 Fighters
16 Trainers
10 Observation-Scout
18 Scout-Bombing

18 W

If

5
.
8 Patrol-Bombing

Grumman

Naval Aircraft Factory
Vought
Douglas
Vought

Naval Aircraft Factory
Consolidated Total 93

#

November

19 Fighters

Grumman

Douglas
Vought

17 Scout-Bombing
18

"

Naval Aircraft Factory
Consolidated Total 71

"
4

13 Patrol-Bombing
December

18 Scout-Bombing
17 or
W

4#

11

12 Patrol-Bombing

Douglas
Vought

Naval Aircraft Factory
Consolidated Total 51

CONFIDENTIAL

Materiel Plan. Sec.
1/16/40

414
UNDELIVERED AIRPLANES, ENGINES, PROPELLERS AS OF DECEMBER 81, 1939
(ARMY, NAVY, COMMERCIAL AND FOREIGN)

Airplanes

Engines

Propellers

United States

Air Corps
Combat

Training
Miscellaneous

Total Military

1865
1500
24
3389

Navys
Combat

Training
Total Navy
Commercial

Total U. S.

958.4
55.0

1667

861.5

4504

1084

5263.9

11,157

7034

282

Training
Total

734

Combat

Training
Total

All other Foreign:

--1431

Combat

France:

4283

1013.4

Foreign

British Empire

5222

1016

1231.5
243.0
1474.5

Combat

364

Training

128

Total

492

-

---

2305

865

--6275

7583

823

508

Total Foreign

2982.5

9403

8956

Grand Total

8246.4

20,560

15,990

Source: Materiel Division Statistical Report
12/31/39

THE WHITE HOUSE
WASHINGTON

February 1, 1940.
MEMORANDUM FOR

H.M. Jr.
To read and speak to me about.
F.D.R.

January 29, 1940

My dear Mr. President,

Attached is the draft of the
study I promised you at Bolling Field on

the subject of "Aircraft Engine Production."
Happy Birthday!

Sincerely yours,

The President
The White House

Enclosure

Watson

M. to the President
House

White

The

TO

AIR CORPS

CONFIDENTIAL

D.C.

WAR DEPARTMENT
OFFICE OF THE CHIEF OF THE AIR CORPS
WASHINGTON

January 23, 1940.
MEMORANDUM TO:

The Assistant Secretary of War.

SUBJECT:

Aircraft Engine Production.

1.

Pursuant to the request contained in your memorandum

of January 18, 1940, same subject, a review of statistical data shows that
there is a requirement both definite and under discussion for delivery of

approximately 32,000 engines by October, 1941.

2. Considerations that are pertinent to the execution
of an engine production program of this magnitude from the point of view
of long range national defense are as follows:
a.

Farming out of parts.
The extent and nature of subcontracting should

be very carefully controlled in a manner that would avoid delays in
the continued development of several liquid cooled engines of 1,000

horsepower or more now under development by the smaller manufacturers,

and their normal production of training engines.

It is to the advantage of the Government to place
these development types of engines in production at the earliest

possible moment. It appears that the possibility of the production
of the high powered engines which are in the process of development

by the smaller concerns would be retarded if the total capacity of
these smaller aircraft manufacturers were utilized for building parts
only.

The farming out of complete engines through
licensing or through other agreements.

The licensing of engines of the 500 horsepower
class now produced by the larger manufacturers is a logical procedure
and advantageous to the Government, however, it would place the smaller the

engine manufacturers in a position to compete with the owner of in
designs when the present program is completed, and would result
possible curtailment of commercial sales by the parent companies
of the types of engines that are responsible for an appreciable portion
a

CONFIDENTIAL

CONFIDENTIAL
Memo to Assistent Secretary of War, January 23, 1940 (Cont'd).

of their normal income. This in turn would reflect to the disadvantage
of the Government since a portion of the earnings derived from the sale
of the smaller types of engines are utilized in the deveopment of
military engines of the higher powered classes.
C.

The logical expansion of existing facilities.
The expansion of the existing facilities of the

Iarger en ine manufacturers with a maximum utilization of subcontracting
is hundoubtedly a lo ie 1 means of accomplishing the program under

discussion. However, the bottleneck in new facilities is not construction
but machine tools and experienced labor. The necessary construction can.
be accomplished in 120 days.
d.

The proper reographical distribution of new plants.
The utilization of the smaller engine manufacturers

for either the licensing of smaller engines or financial assistance

that would permit them to go into production on their own engines would
be to the advantare of the Government with regard to the strategical

location of engine factories. The construction of new facilities for
the expansion of the larger engine manufacturers in further inland
areas would be desirable from the point of view of national defense.

On the other hand, problems of management, technical supervision, labor
and subcontracting of minor parts would be introduced that would effect
a considerable hardship on the larger manufacturers.
The extent of the expansion required to execute a
program of the magnitude under discussion will require from 25% to 35%

of the. total amount of the contracts being utilized for new construction,
tooling and equipment. This compared to the aircraft manufacturers, is
large. Two percent of their cross sales have been estimated as the cost

of new facilities. This is the result of the added tooling required for
the engine
e.

The time factor.
In the execution of an engine program such as is

under discussion, the time factor is the governing consideration. If

the maximum production in the shortest possible time is required, moderate there

is an oninion that the objectives can best be accomplished by a as
expansion of existing facilities of the larger manufacturers. This,

pointed out above, must be accompanied by utilizing the smaller manu-

facturers as subcontractors for parts both of higher powered military
and for the lower powered training engines. Such a procedure

would enrines not conform to a lo icol plan or provide for meeting the require

ments of' a Lon ran e national defense policy.
-2-

CONFIDENTIAL

CONFIDENTIAL

20

Memo to The Assistant Secretary of War, January 23, 1940 (Cont'd).

f.

Licensing foreign engines.
The question of producing foreign proven types

of engines by the idle plants is a means of meeting export requirements for engines that should be considered.

There are at least two facilities suitably located
geographically which could be utilized for the production of foreign
type engines. The bottlenecks are primarily tools, jigs, and fixtures,
and in view of the present status of the machine tool industry, indicates
that feasible utilization of idle factories for the production of foreign
engines is problematic.

The utilization of the existing aircraft industry
for the production of foreign types of engines would be of a greater
advantage to the Government than the utilization of the automotive

industry for this purpose. Therefore, if it is desirable for any

reason to license foreign engines for manufacture in the United States,
the licenses should be placed with the aircraft engine concerns that
could be depended upon to continue the development of their own engines

to a point that would warrant their future production. Additional

sources of engines have a definite advantage in the point of view of
the Government since it fosters competition with regard to both merit
and price. On the other hand, there is a limit to the number of
manufacturers that can be supported during peace time by Government
orders and commercial demands.

g. Supporting data.
Detailed substantiation of the forepoing comments
can only be rade by specific studies repared in line close O 1130
action cooneration enumerated. with

the manufacturers

3. A summary of benefits flowing to the Government from the
discussed export program is as follows:

Additional manufecturing facilities for military
engines of large a. horsepower by placing in production engines that are
now under development by the smaller companies.
Additional manufacturing aircraft engine facilities horse-

for the production b. of standardized training engines of the 500
power class.
The creation of technical staffs and managements of air

and the training C. of skilled labor necessary for the production
craft engines on a large scale.

-3-

CONFIDENTIAL

421

Memo to The Assistant Secretary of War, January 23, 1940 (Cont'd).

₫. A strategic location of additions to present

engine
engines. production facilities of the manufacturers of larger type
The time factor governs the realisation of the
advantages cited above. In the execution of the proposed export program,
requirements for deliveries largely eliminate the production of standard
training engines, under license agreement, by the smaller engine manufacturers.
Likewise, the required delivery schedules for the large engines precludes

strategically locating additions to the existing production facilities.
4.

the point of view of long range planning and
national defense, it From
is concluded:
2.

That substantial benefits can be realized from

the maximum utilization of existing facilities. Also that the

experience gained by both management and labor will facilitate the

production of aircraft engines in the event of war.

That licensing domestic and foreign engines to
smaller aircraft engine manufacturers, with adequate trained personnel,
b.

will foster the desired competition in the development of new type

liquid cooled wines.

c. That the maintenance over a long period of time,
of the benefits acquired, will require substantial future subsidies

in the form of research and development funds and means of providing

educational orders for the subcontractors that would be utilized in
the event of war.

Maured
BY

H.

Arnold,

Major General, Air Corps
Ohief of the Air Corps.

422

TREASURY DEPARTMENT
PROCUREMENT DIVISION
OFFICE OF THE DIRECTOR

WASHINGTON

March 21, 1940

MEMORANDUM FOR THE SECRETARY

The new so-called "Interceptor" built by the Curtiss-Wright Corporation
at the St. Louis plant was designed originally as a trainer for export
powered with a Whirlwind motor. China evidenced an interest in it but
wanted more power. Therefore, the Cyclone 1820, developing approximately
1150 HP, was substituted for the 450 HP Whirlwind for which the plane

was originally designed. The substitution of this motor increased the

maneuverability of the plane and developed a climbing speed of 5300 feet
per minute which, it is claimed, outclasses the climbing speed attained

by any other plane so far as is known at this time.

The above information was obtained from Mr. Guy Vaughn, President of the

Curtiss-Wright Corporation, who promised to give me full details on this
new model as soon as he could get the information together.

Chairman, President's Liaison Committee

3-24-40

TO:

The Secretary

Rep. Harter's aviation

423

subcommittee of the House

military affairs committee
today visited the Pratt and
Whitney plant at East Hartford
in a body.

of

From: MR. SCHWARZ

424

MAR 21 1940
PERSONAL

My dear Mr. Ambassador:

Please accept my most appreciative thanks for your personal
note of March 19. informing me that your Government has been good
enough to accept the suggestion. made at my instance, that an

officer of the American Air Force be permitted to visit regularly
the French Front.

It is my understanding that you are communicating this informe-

tion directly to the Department of State in order that appropriate

arrangements may be made through diplomatic channels to take

advantage of this offer.

With kindest personal regards, I remain, my dear Mr. Ambassador,
Very sincerely yours,
(Signed) H. Morgenthau, Jr.

MMP

ORIGINAL FORWARDED TO ADDRESSEE

FROM OFFICE OF THE SECRETARY

His Excellency
Count de Saint Quentin,
Ambassador of the French Republic,
Washington, D. 0.

HMO/YMm 3/21/40

By Messenger MAR 21 1940 1:20 P.m.

425

AMBASSADE
DELA RÉPUBLIQUE FRANÇAISE

Washington. le March 19, 1940.

AUX ETATS-UNIS a

PERSONAL

My dear Mr. Secretary:
Following our talk at the Embassy some time in
January, I asked my Government if it would allow an

officer of the American A ir Force to visit regularly
the French front.
I have the pleasure to let you know that I have
just had an answer from my Government, according to

which the Air Minister willingly accepts this suggestion.
The designated officer will be able, under the direction
of the High Command, to collect all useful information.
He would be accompanied during his visits to the front
by a French officer and would be expected to keep in
close touch with the general staff of our Air Forces./.
I remain, my dear Mr. Secretary, with best personal
regards,

Yours very sincerely,
The Honorable

Henry Morgenthau,

Secretary of the Treasury,
The Treasury,
Washington, D.C.

hdelainsanentis

AMBASSADE
426

DE LA REPUBLIQUE FRANÇAISE
AUX ÉTATS-UNIS

Personal

The Honorable
Henry Morgenthau,

Secretary of the Treasury,
The Treasury,

Coelran,
please before

Washington, D.C.

answer 11mg

STRICTLY
CONFIDENTIAL
TREASURY DEPARTMENT

427

INTER-OFFICE COMMUNICATION

DATE March 20, 1940
TO

Secretary Morgenthau

FROM Mr. Cochran

At 4:30 this afternoon, I succeeded in reaching the French Ambassador by
telephone. I told him that the Secretary was most appreciative of the Ambassador's personal note of March 19 and would personally acknowledge this
communication.

In answer to my question, the Ambassador stated that he had not informed
the State Department of the willingness of his Government to make the arrangement which had been suggested to him privately by the Secretary of the Treasury
at an Embassy dinner. After my observations in the premises, the Ambassador
stated that he would inform the State Department that he had become aware of

the interest in American air official circles of obtaining the privilege under

reference, and that he had accordingly communicated with his Government and had

now obtained this privilege. He stated that he would attend to this comunication, without indicating the real source of the request.

TREASURY DEPARTMENT

428

INTER-OFFICE COMMUNICATION

DATE March 21, 1940
TO

Secretary Morgenthau

FROM

Mr. Cochran

The reported volume of sterling transactions was greatly reduced today, and
the rate for that currency experienced a moderate improvement. After opening at
3.71, sterling advanced steadily to 3.72-5/8 by noontime. Business during the

afternoon was fairly light, and the rate remained at 3.72-3/8 until late in the
day. The final quotation was 3.72-1/4.

Sales of spot sterling by the six reporting banks totaled 4488,000, from the
following sources:
L 214,000

By commercial concerns

By foreign banks (Europe, South America and Far East) L 254,000
Total L 468,000
Purchases of spot sterling amounted to 1217.000, as indicated below:
L 157,000

By commercial concerns

By foreign banks (Far East, Near East and South America)I 60,000

Total L 217,000

The following reporting banks sold cotton bills totaling 18,000 to the

British Control on the basis of the official rate of 4.02-1/2:
L 7,000 by the Guaranty Trust Co.
1,000 by the National City Bank
8,000 Total

The other important currencies closed as follows:
French francs

.0211-1/8

Guilders
Swiss francs

.5310

Belgas

.1703

Canadian dollars

.2242-1/2

18-5/8% discount

We sold $80,000 in gold to the National Bank of Belgium, to be added to its

earmarked account.

CONFIDENTIAL

-2-

gold:

429

The Federal Reserve Bank of New York reported the following shipments of

$ 5,902,000 from England, representing three shipments by Samuel Montagu & Co.,
to the Bankers Trust Co., New York, for account of the Amsterdam Bank,
Amsterdam.

1,852,000 from Italy, shipped by the Bank of Italy for its own account to the
Federal Reserve Bank of New York.

1,692,000 from Italy, shipped by the Bank of Italy to the Federal Reserve Bank
of New York, to be earmarked for account of the B.I.S.
560,000 from Switzerland, shipped by the Credit Suisse, Zurich, to the Guaranty
Trust Co., New York, for account of the Credit Suisse, London.
127,000 from England, shipped by Samuel Montagu and Co., to the Guaranty Trust

Co., New York.
$10,133,000 Total

All of the above shipments, with the exception of the one from the Bank of Italy to
the Federal for account of the B.I.S., will be sold to the U. S. Assay Office at
New York.

The Federal Reserve Bank of New York informed us that yesterday they credited
$6,000,000 to the Bank of England's account and $1,456,000 to the account of the
Commonwealth Bank of Australia, the sum of these credits representing an advance
payment for gold shipped by the Commonwealth Bank of Australia, which was sold to
the U. S. Mint in San Francisco. The partial payment to the Commonwealth Bank of

Australia is of interest, since payments for similar shipments in the past have
been credited entirely to the account of the Bank of England at the Federal.

There was a holiday in India today, and the Bombay silver market was closed.

In London, the prices for spot and forward silver were both quoted at 20-11/16d,
off 5/16d. The U. S. equivalents were 34.54$ and 34.37$ respectively. The decline
in the London prices was attributed to the announcement that the Senate Banking and
Currency Committee had reported favorably on the Townsend Bill, which prohibits the
purchase of foreign silver under the Silver Purchase Act.
Handy and Harman's and the Treasury's prices for foreign silver were unchanged

at 34-3/44 and 35 respectively.

We made ten purchases of silver totaling 1,052,000 ounces under the Silver
Purchase Act. Of this amount, 300,000 ounces represented a sale from inventory
and the remaining 752,000 ounces consisted of new production from foreign countries,

for forward delivery.

We al so purchased 50,000 ounces from the Bank of Canada under our regular
monthly agreement.

pum.?.

CONFIDENTIAL

TREASURY DEPARTMENT

430

INTER OFFICE COMMUNICATION
DATE March 21, 1940

Secretary Morgenthau

TO

FROM

Mr. Cochran

STRICTLY CONFIDENTIAL

At 10 o'clock this morning Mr. Ballantyne, Secretary-General of the
Anglo-French Purchasing Board in Washington, telephoned me, requesting

assistance in facilitating the sailing from New York at 11 o'clock this
forenoon on the S.S. Samaria of Colonel R. I. P. Earle. It appeared that

Colonel Earle had failed to obtain an income tax clearance, concerning
which he had been in touch with Mr. Perouzi at the Customs House in New
York. Mr. Ballantyne informed me that Colonel Earle received no remuneration
from the Board, other than a subsistence allowance, and that he had been
over here only about one month. In answer to my question, Ballantyne stated
that Colonel Earle had been brought over as a technical adviser on tanks.
He did not know whether Earle would be returning to the United States.

After obtaining the advice of Mr. Basil Harris and of Mrs. Shipley,
Chief of the Passport Division of the Department of State, I told Assistant
Secretary Sullivan of the situation, and the latter straightened the difficulty with New York, so that Colonel Earle was able to sail.
Mr. Sullivan suggested that I obtain a list of the members of the
Anglo-French Purchasing Board, which should be submitted through diplomatic
channels to the State Department, indicating salaries and allowances,

whether paid in this country or in Europe, in order that prompt clearances
may in the future be given members of the Commission, without necessity for
a hurried consideration of a case such as arose this morning. Mr. Purvis
and Mr. Pinsent, with both of whom I was talking on different subjects this
morning, were of the opinion that the State Department already had a list
of members of the Commission. Mr. Purvis offered to send me directly, or
through the Embassy and Department of State, a list of his assistants, together with salary figures. He remarked that several of the men, including
himself, received absolutely no compensation, either in the way of salary
or subsistence allowance. I told Mr. Purvis, as well as Mr. Pinsent, that
I would let them know definitely what we desired after talking the matter
over again with Mr. Sullivan, and finding out what the State Department

actually has on file.

BMS

an

When Mr. Ballantyne visited me on March 23, he agreed to send me at in
early date a list of the members of the Anglo-French Purchasing all Board

this country, indicating compensation. This list will not be inclusive, between
but will provide the names of those members likely to be travelling

the United States and Europe. There are now several hundred employees, some

of them American, and many of them not likely to be travelling.
ON

431
PARAPHRASE OF TELEGRAM RECEIVED

FROM: American Embassy, Paris, France

DATE: March 21, 1940, 6 p.m.
NO.:

375

FOR THE TREASURY DEPARTMENT FROM MATTHEWS.

This afternoon I called on Couve de Murville and

talked with him about the existing French practice of
requiring franc invoices for a portion of exports from
the United States. Couve read to me the pertinent

parts of a confidential circular which the Ministry of
Finance is sending today to all departments and bureaus
of the French Government in which they are expressly

instructed not to request that payment be accepted in
francs for exports from "free commercial settlement

countries", including the United States to France. The
circular states that on the contrary, such payment should
be made in the exporting country's currency - reference,
telegram of March 7, No. 301 from the Embassy, and

despatch of March 12, No. 6207, from the Embassy; this

instruction setting forth this policy was published in
the March 7 issue of Journal Officiel.
Couve said that the Ministry of Finance and the
Bank of France had always followed the policy (reference,
telegram of March 20, No. 366 from the Embassy) that

exports from the United States should be paid in dollars.
However,

432

-2However, sometimes it is difficult to get other departments
of the Government to comply with this policy, especially
since many of them were under the erroneous impression that

if invoiced in francs import authorizations would more
easily be approved. Incidentally, he suggested that
American exporters be counseled to insist that dollar payments be made. Couve also told me categorically that
they are not considering any new regulations for restricting the utilization of transferable francs.
The French authorities, he admitted, have not been
too pleased by the franc drop on the free market. He
was somewhat critical of the British measures bringing it

about, saying that the British had acted "too brusquely"
and their exchange control administration had been "rigid",
but he readily admitted that the French problem is quite

different from that of the British.
END SECTIONS ONE, TWO AND THREE.
SECTION FOUR.

If it were only a question of protecting the franc,
he added, that could be done without difficulty.
Couve confirmed that in the Reynaud Cabinet the

Finance Minister will be Deputy Lucien Lamoureux, the

Foreign Affairs post being taken by Reynaud himself.
At

433

-3At
1926 he has served in
Committee, one time and Lamoureux since was a reporter of the Chamber Finance

in

posts, the 1933 including a period of nine months as various Budget Cabinet

expects Daladier
Cabinet.
I amposition.
glad to say that Minister Couve
to hold his
present
over.

The securities market was firm todayThe
on Bank
a light
of turn
Rentes advanced fractionally.

France statement published today shows no increase
686,000,000. advances to the state. Currency circulation decreased in
END OF MESSAGE.
MURPHY.

EA:LMW

434
GRAY

AC

Bucharest

Dated March 21, 1940

Rec'd 7:30 p.m.

Secretary of State
Washington

89. March 21, 8 p.m. (SECTION ONE).

Your 65, March 12, 5 p.m.
For Treasury and for your information.
In statistics quoted below obtained fr m Rumanian
cust ms, Germany including Austria and Czschoslovakia
and the two months' period DECEMBER 1939 and January 1940

is comcared t. correstonding m nths of previous year.
SECTION ONE. Imports from Germany totalled

68,000 metric t ns, a 28% increase over corresponding

period. Their leivalue was 2,500,000,000 a 79% increase.

The ;rincipal increases occurred in iron, manufactures,
machinery and VEhicles which accounted for 75% of total
value and in which arms imports are included without

distinction; the significant increase in value -Er weight
unit is understood to be due both to an increased preportion
of armament and to higher armament prices. I am reliably

informed that deliveries to EVEN the ratid anti-aircraft
deficiencies, anti-tank guns have been resumed. Imports
of

435

- 2 - #89, March 21, 5 p.m. from Bucharest
of explosives were quadrupled; decreases occurred in
imports of both VEgEtablE and wool textiles.
SECTION TWO. Exports to Germany totalled 283,000

tons, a 45% increase. Their value was 2,352,000,000 lei
an increase of 108% due principally to tripling of
cereal Exports and to doubling of value of petroleum
although petrcleum tonnage declined 10%. Lumber Exports
decreased to 1/7th; livestock and animal products WERE

approximately the same; fruits and vegetables more than

tripled.
SECTION THREE. Petr leum Exports to Germany in metric
system tons according t the MONITEUR DU PETROLE ROUMAIN,

December, by Danube 53,825, by rail 21,004, total 74,829,

January 30,161 byrail only.
During January no shipments to Germany were made by
allied owned com anies leaving Romano-Americane as

largest shipper. No rail shipments via the Cernauti
Lemberg Line WERE recorded.

No Russian deliveries of oil have been made at

Corfuza since the 8,000 tens of lubricating oil unloaded
February 22. It is however revorted that SOME 13,000

tons of Russian oil in small Italian tankers is now lying
at Varna, Bulgaria, awaiting rail transport.

SECTION

436

- 3 - #89, March 21, 5 D.m. from Bucharest
SECTION FOUR. Payment and transport situation.

Little change has occurred in the transport situation outlined

in previous telegram. The increase in oil rail shipments
to 33,000 tons in January indicates that Germany is having
SOME SUCCESS in supplying additional locomotives and

rolling mill stock and is believed to be now using more
than 3,200 tank cars here. The Danube is EXPECTED to

reopen next WEEK but there is no reliable information con-

cerning increased tanker capacity. British interests are
underst rd to have lent SAME neutral tonnage, amount unknr wn.

Germany's favorable merchandise balance of 148,000,000

lei for the period indicates that no payment difficulties
will arise in the immediate future and local banks at
present are quite willing to finance cil shipments to
Germany in Expectation of from t reimbursement through

clearing. Ability to balance clearing in more distant
future continues doubtful and may depend partly on German

ability to demand higher armament prices in compensation

for increased oil prices.
SECTION FIVE. Present petr leum regulations and
price situation. (END SECTION ONE).
GUNTHER

CK:RP:RR

437
PARTIAL PARAPHRASE, SECTIONS TWO AND THREE, NO. 89
OF MARCH 21, 1940, FROM BUCHAREST.

Activities of Petroleum Commissioner. Since his
appointment in January the Petroleum Commissioner has

supervised the establishment of domestic sales quotas

proportionate to the companies total production and fixed
domestic prices at the August level; has prohibited the
sale of storage tanks without his prior approval; and is
now understood to be engaged in making sufficient modification in the mining law to induce the companies to increase
production and undertake new exploration, though no definite
changes have yet been announced.

Petroleum export regulations. Export of refined
gasoline of over 68 octane rating has since September

been administratively prohibited by export permit authorities. This prohibition was extended on March 11th by formal
order of the Petroleum Commissioner to all crudes or
mixtures containing 68 octane gasoline. All production
of high octane gasoline is being bought by Rumanian army

for storage.
A decree law of March 18th establishes for the first

time a fixed export and import price list in lei for
all petroleum products, which the companies understand
will be enforced as minimum prices on which the 25% export

tax is levied; and a tax of 80% on the excess of any export

price over this list. Although possibly intended as a
revenue measure only, informants in the industry state

that

438

-2that the effect of the law will be to set maximum as well

as minimum prices at this official level since practically
all Rumanian producers export to distributing subsidiaries
and have little incentive to enforce price increases on
such subsidiaries if 80% of the increase is taken by the
Rumanian Government. Most of the official prices are more
than 60% above August prices and 75% above current Gulf

prices; they are however some 25% below the export prices
prevailing during the previous week and companies are

complaining bitterly. For example 60 octane gasoline is

7670 lei per ton on the official list, equivalent to
$36.24 at the present buying rate of 211.65 lei per dollar;
whereas the price on March 7th was $48.34 and the corres-

ponding Gulf price $20.02. This wide discrepancy between
Gulf and Constanza prices is of course due to the Allied
buying campaign and explains the almost complete cessation

of sales to competitive free exchange markets such as
Egypt and Palestine which can now import more cheaply from
the Gulf.

This almost compulsory lowering of the price level is

attributed in official statements to the desire of the
Government to resume sales to markets having free exchange,

so they will not be wholly dependent on sales to Great

Britain and the clearing countries. However, the point is
made

439

-3made by the companies that the official prices are still
too high to compete with those in the countries having
free exchange which are accessible to ocean transport.
They give two other explanations for the Government action i.e., it is the wish of the Government to show some degree
of yielding to complaints of Germany and Italy that the
export prices are too high, and in this way head off
demands for upward valuations of the mark and lira to
compensate for the unacknowledged devaluation of the lei

on the tenth of March - reference, telegram of March 4,
No. 63, from the Legation. A second explanation is that
the British may have decided to abandon support of the

inflated price level, being convinced that their campaign
of oil buying would be rendered ineffective soon by
the tax of 80 percent on surplus prices, which may make
over-bidding so expensive that it would be prohibitive,
and by the possible institution in the near future of
export sales quotas for Germany. There is support for
the last-mentioned explanation in the rumors that the
prices which the Government adopted in its official list
were suggested by Astra Romana, which is owned by the British

and which has been doing most of the buying for the Allies.
The Government has not 8.8 yet taken any official steps
toward imposing quotas for Germany; however, for April

delivery it is rumored that only 60,000 tone could be
secured

440

-4by buyers in Germany, as compared with the alleged guarantee
that they would have 130,000 made available each month.

It is the belief of the industry that when Clodius comes
to Bucharest the next time he will insist that the guarantee
be effectively implemented. It is currently rumored that
the Rumanian Government may do the local buying on a company

quota basis and resell the product to Germany, as a facesaving device for the companies owned by the Allies.
There was definite indication some weeks ago of an
embargo by Great Britain on shipments to Rumania of badly
needed raw materials; orders placed in England were not

dissenting, and sellers either pleaded lack of shipping

space or offered no explanation at all. Unofficially, British
officials in Bucharest admitted that it was by government
order that this unacknowledged embargo was carried out,

in order to strengthen the bargaining power of the British

in the struggle for oil. However, one British official
pointed out to me that it would have been better if they
had permitted the goods to go to Egypt, anyway. There
has apparently been resumption of shipments, at least in
part, There is still no indication whether the embargo
was intended merely as a sample demonstration that may

be employed more forcefully at a later date or whether
decision was reached by the British that they cannot stop
oil

441

-5011 shipments to the Germans without involving Rumania

in the war, with the ultimate risk that Rumania would
be forced into Germany's arms. Another point may be that

under present transport conditions the amount of oil that
could be shipped to Germany is not of sufficient strategic

importance to warrant the risk involved in trying to stop it.
END OF MESSAGE.
GUNTHER.

EA:LWW

442
BUREAU OF FOREIGN AND DOMESTIC COMMERCE

OFFICE OF THE DIRECTOR
J

March 22, 1940
From

To

DIRECTOR

Hon. Henry Morgenthau, Jr.,
Secretary of the Treasury

For

Sent at the request of Mr.
Noble, Under Secretary of
Commerce.

Damn m young
James W. Young

March 21, 1940
ECONOMIC DEVELOPMENTS

THE TREND OF INDUSTRIAL ACTIVITY during the first half of March con-

tinued downward. The pace of the decline was not so rapid as in
February; limited data now available indicate a contraction in

March about half 65 large as in the previous month.

EXAMPLES: Our index of industrial production which has been
running about 10 points higher than the Federal Reserve index
has moved as follows in recent weeks.
January 27
February 3
February 10
February 17
February 24

128

March 2
March 9
March 16

115

123
119

116
117
114
113

SIGNIFICANCE: It is of little importance that the rate of decline has recently been alower then during February-in that

month there was a very large drop of 10 points in the Reserve

Board's index. The significant thing is that the decline is

continuing and that the March drop will be of substantial magnitude. The best guess one could make at this time would be 103
on the Board's index for March as against 109 for February. By
the end of the month the rate of industrial activity probably

will be below the level of last August.

MOST COMMENTATORS in the public press have interpreted this slowing

in the rate of decline 68 pressging on upturn in the curve of
business. But no signs of the bottom of the recession are as
yet in evidence-let alone a recovery move. Consideration of

the position of a few major industries will give an indication
of the general situation.
EXAMPLES:

STEEL - The ingot rate for the current week was announced

at 62.4 percent of capacity, a decline of 2.3 points from
the previous week. New orders are reported by the trade

journals to be running at about two-thirds of production,
the low level at which they have been for the past six weeks.

News from the trade is that ingote and some standardised finish-

ed steel products are beginning to pile up in the hands of producers. From these indications it appears that a further contraction in activity can hardly be avoided during the weeks
ahead.

443

444

-2AUTOMOBILES - The automobile industry has been looked to

by many to turn the tide of the business recession. To date
production has held at a very high rate with assemblies everaging better than 100,000 per week since the first of the year.
(Thousand Units)
January average
February

103

.

99

March 2

100
104

9

16

106

This production schedule was evidently based on anticipated

sales greater than has been realised, with the result that
stocks in the hands of dealers have been accumulating at a

faster pace than usual. By the end of March they will approximate one-half million units. This is an excessive level of new
car inventories and will require a greatly expended sales volume
as we move into the heavy spring buying period both to maintain
output and to gradually reduce stocks of 1940 model cars. In
January and February new car sales were about 35 percent over a

year ago. For the first 10 days of March sales were only 12

percent above last year but this unfavorable showing has been
attributed to inclement weather.

At this time it is difficult to see how the industry could have

its usual seasonal expension in production this spring-in fact,
if there is not a considerable increase in consumer takings in
the near future, larger than now appears likely, a contraseasonal
decline in the rate of production is in prospect.
PAPER - This commodity is of major interest because of its wide
use, and its significance as a major nondurable good. New orders
have been below production all of this year with the consequence
that backlogs have been continuously reduced. In recent weeks
there has been a slight pick-up in new business.
New Orders for Fine, Printing & Wrapping Paper
(Thousands of tons weekly)
August

September

February 3
.

10
12
24

March 2

72.4
92.3
71.8
68.8
63.8
66.6
73.5

445

-3 Despite to this minor rise in orders, production has continued

decline; the contraction in the latest week was the largest since the beginning of the recession.
Total Paper Production
(Percent of capacity)
August
November

82.9
97.2
90.6
86.5

January
February
March 2

84.0
79.9

9

This decline in production seems to us more indicative of the
industry's view of the outlook then the optimistic statements
appearing in the press about a prospective gain in output.
While producers' stocks are below those of last August, dealers'

and industrial users' inventories must be very high in the light

of the expanded production schedule maintained in the September
1939-January 1940 period.
COTTON TEXTILES - Cotton mills were unusually active during

the six months starting August 1939. Measured by the FAR cotton consumed by mills, the volume of production was as follows:
Cotton Consumption

(Thousands of bales)
August
September

625

628

October

687

November
December

719
653

January

730

Total

4,042

February

663

This is at an annual rate of over 8 million bales, more than a
half million above the all-time record established in 1937.
This rate is too high to be maintained over the next six months.
In fact, February showed a sharp decline contrary to the usual
seasonal-although mill consumption of 663 thousand bales is

still a high figure. Current reports from the trade indicate

that activity is being further reduced this month. New orders

have been very low, probably less than 50 percent of production,

and mill stocks have started to rise. There can be no doubt

that the statistical position of this important industry is un-

favorable.

-4SIGNIFICANCE: Thus, the evidence from these four key areas

is all on the bearish side. The end of the business decline
is definitely not yet in sight and all talk of a near-term
reversal is idle speculation. It rests upon assumptions of

improvement in basic demand factors not now apparent, or upon
developments associated with the war which simply can not be
appraised.
Basic commodity prices continue to weaken and the stock mar-

ket lacks consistent firmess. Both of these facts suggest
that business is not confident of early improvement in the
economic situation.

446

447
FOREIGN TRADE NOTES

Germany: In the absence of direct reports bearing on the economic condition of Germany, some of the reports from neutral countries throw
some light on Germany's export capacity.
A report from Turkey indicates that German trade with that country has
declined considerably since the outbreak of the war. Turkish imports
from Germany during the months of September, October, and November,

1939, amounted only to about 7 million Turkish pounds ($5,383,000), as
compared with 21 million Turkish pounds ($16,800,000) in the corresponding months in 1938. Turkish exports to Germany in the same three
months of 1939 amounted to 9 million Turkish pounds ($6,921,000), as
compared with more than 30 million ($24,000,000) in the corresponding
months in 1938.

Germany is alleged to have objected to the reservation of the entire
Turkish chrome production for the Allies as an unneutral act, but
the Turkish Government has taken the position that it is purely a
commercial transaction.

Germany is making a great effort to maintain its exports to Sweden,
but has had to discontinue its exports of textiles and shoes, and

it is alleged that Sweden is compelled to import a lot of poor stuff
in order to maintain the clearing agreement. It is also stated that
electrical and other machinery can no longer be obtained from Germany

and that there is, therefore, a considerable opportunity for American
exporters.

Soviet Union: A report dealing with the economic situation in that
country toward the end of 1939 enumerates the principal difficulties
as follows: a shortage of skilled labor, combined with low labor
productivity; en inadequate production of essential raw materials,
such as coking coal, petroleum, and iron ore; a growing scarcity of
foodstuffs to meet the domestic demand; and e rise in the volume of

currency circulation which is reflected in increased prices on a
number of essential consumption goods.

Argentina: There is reported to be a growing resentment among Argentine
business men against some of the British business practices under

the present abnormal conditions. In addition to the discatisfaction

with the high prices of British textiles, referred to in last week's

Notes, there has also developed some friction in connection with the
British purchases of Argentine meat. It appears that Great Britain
has refused to furnish oargo space on British vessels for 8 part of
the shipment of 200,000 tons of meat on the ground that Argentine
authorities have not allocated shares to the foreign, including the
British, meat producers in Argentina.

448

Sweden: The country is experiencing great difficulty in obtaining certain

commodities which could be furnished by American producers. Those
cover copper, phosphates, shoes, machine tools, and various iron and

steel products such as barbed wire and stainless steel. It is rather
interesting to note that Sweden is receiving orders for certain iron
and steel products from some of the Southeastern European countries
which normally import such products from Germany.

Bureau of Foreign and Domestic Commerce,
March 21, 1940.

1

449

WEEKLY WHOLESALE PRICE INDEXES

(1926 = 100)

80.4
92.6
67.4
73.2
93.5
89.7
74.2
87.0
73.1

82.4
98.3
71.4
74.1
94.9
90.7
77.1
87.1
76.1

83.1
102.4
73.3
72.8
95.5
93.3
77.5
89.6
76.8

83.0
102.5
73.0
72.6
95.5
93.2
77.4
89.6
76.9

,
:
I
:

70.6
74.5
80.3

66.2
74.4
79.3

73.0
82.0
82.3

,

Semimanufactured articles
Finished products

80.7
92.6
66.1
73.7
94.4
90.2
76.2
86.6
73.9

,

Raw materials

78.2
68.0
70.4

'Percent increase,
Mar.16,1940 from
Mar.18, Aug.26,

16

,

Chemicals and drugs
House-furnishing goods
Miscellaneous

78.3
68.5
69.9

I

Building materials.

79.3
69.7
75.5

,

Metals and metal products

74.8
61.1
66.7

Mar.

9

,

Fuel and lighting materials'

76.7
67.1
70.7

Mar.

,

All commodities other than.
farm products and foods
Hides and leather products.
Textile products.

16

I

Foods

Sept.

26

,

Farm products

Aug.

18

,

111 commodities

Mar.

I

Group

1940

72.2
79.7
81.4

ource: U. S. Department of Labor, Bureau of Labor Statistics.

71.9
79.6
81.4

1939

1939

2.0
1.3

4.5
11.3
5.5

0.4

,

1939

2.9
10.7
10.4
1.5
1.7
3.3
1.6

3.2

10.7
8.3

0.8

3.5
4.1

2.1
3.9
4.3
3.0
5.2

1.8
6.8
1.4

8.6
7.0
2.6

450
SELECTED COMMODITY PRICE SERIES

Commodity

opper, electrolytic,
New York

1939

Unit

March 22

per 1b.

August 30

11 1/4

10 1/2

4.85
4.84

5.05
5.14

ad, prompt shipment,
New York

do

Inc, Now York

do

In, straits, New York'
abber, plantation,N.

Sept. 13

12

5.50
6.64

do

45 19/20

49 3/4

75

do

15 7/8

16 13/16

do

10 1/2

11

des, light native
cons, Chicago.
11k, 13-15 denier,

1940

March 13

Mar. 20

11 1/2

11 1/4

5.25
6.14

5.15
6.14

22 1/2

48 1/8
18 3/4

46 5/8
18 9/16

15

13 1/4

12 1/2

78% seriplane, N.Y. $ per

1b.

2.29

2.72

3.21

2.98

2.92

age, 10 markets.

per

1b.

8.56

8.53

9.01

10.36

10.40

38 1/2 inches, N.Y.

per

yd.

4 3/8

4 5/8

5 3/8

tton, middling, averPint cloth, 60x64,

tops, May 1940

utures, N. Y.

gar, raw, 96°, duty

per 1b.'2/79.5

3/81.5

4 7/8

5

96.7

98.2

3/111.9

2.83
5.50

2.81
5.53

free, New York
con, Accra, New York

do
do

2.87
4.75

New York

do

7 3/8

do

6.40

5.65

7.75

5.95

5.75

6.87

5.61

7.30

6.87

6.75

ffee, Santos, No. 4,
rd, cash, Chicago.

tonseed oil, May
1940 futures, N. Y.
at, May 1940 fu-

do

2

IS per bu. '2
tures, Chicago
gs, good and choice,

.67 3/4'3

20-240 lbs. Chicago per cwt. 7.58

ers, beef, medium,

50-1,100 lbs., Chi.

do

9.38

3.70
6.45

2.92
4.38

5/8

.67

1/2

7 3/4

1/4'3

.85

3/8

1.01

1/4

5/8'

1.05 3/4

6.88

8.13

5.40

5.33

8.38

8.88

8.63

8.63

Nominal. 2 May 1939 futures. 3/ December 1939 futures. 4 Hogs weighing 220-250 lbs.

tress All commodities, with the exception of wool tops, cottonseed oil, hogs, and

ers, are taken from the Journal of Commerce; wool tops and cottonseed oil are taken
the Wall Street Journal; and Hoga and steers are from the U. S. Department of Agvulture, Bureau of Agricultural Economics.

451

COMPOSITE PRICES OF PIG IRON, STEEL SCRAP, AND FINISHED STEEL

Pig Iron

1

Steel Scrap 2,

Finished Steel 3

Date

(Dollars per gross ton)

(Cents per pound)

1939:

March 21
August 29
September 19

October 3

20.61
20.61
22.61
22.61

15.17
15.62
19.25
22.50

2.286
2.236
2.236
2.236

22.61
22.61

16.71
16.54

2.261
2.261

1940:

March 12
March 19

Based on average for basic iron at Valley furnace and foundry iron
at Chicago, Philadelphia, Buffalo, Valley and Southern iron at
Cincinnati.

1

2 Based on No. 1 heavy melting steel quotations at Pittsburgh, Philadelphia, and Chicago.
3

Based on steel bars, beans, tank plates, ire, rails, black pipe,

sheets and hot-rolled strip. These products represent 85 percent
of the United States output.

Source: The Iron Age.

452

PRICES OF PETROLEUM PRODUCTS - IN BULK AT GULF COAST PORTS

ships' bunkers,

-

65 octane

Date

number 2

March 13
March 20

Source:

3.125 - 3.375
3.375 - 3.75
3.875 - 4.00

1.45
1.45
1.45

0.70 - 0.72
0.78 - 0.80

5.25 - 6.00
5.25 - 6.00

4.125 - 4.25
4.125 - 4.25

1.70
1.70

0.90 - 1.05
0.90 - 1.05

,

1940:

"C", cargoes

4.50 - 4.75
4.75 - 5.00
6.25 - 6.875

Platt's Oilgram.

S

10

1

March 22
August 30
September 13

Bunker oil, grade

(Dollars per barrel)

(Cents per gallon)
1939:

1

Motor gasoline, Light fuel oil, Diesel oil,

0.825 - 1.00