Full text of Diaries of Henry Morgenthau, Jr. : Volume 345 : Part 2

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84
January 6, 1941
10:41 a.m.

HM Jr:

Hello.

Secy.
Knox:

Hello, Henry.

HM Jr:

Good morning.

Knox:

How are you?

HM Jr:

I'm all right. This is in answer to your call

Knox:

Yes. Well, I wanted to talk to you, Henry, because
I had a talk with Admiral Evans of the British

of Saturday.

Fleet, who has some rather urgent needs which I

have been trying to supply for certain items which
he was very much interested in. I took the meat
axe on my ordnance department and got most of them
for him.

HM Jr:

Wonderful!

Knox:

And I took them to the President and got his okay,
and I thought you would like to know about them

before I told Evans. At least, I thought you would
be interested.

HM Jr:

Yes, I am.

Knox:

There is nothing that you need to do, but I just
wanted you to have it for your information.

HM Jr:

Well, that's very courteous of you. Could you
give me a list of the things?

Knox:

Yes. I'll give them to you right now. I have them
right here in the basket somewhere. Just a minute.
(Pause) Just a second, Henry.

HM Jr:

All right.

Knox:

I guess we're all looking in the wrong place for
them. Oh, yes, here they are. I was looking in
the wrong place for them. He wanted some five-

85

-2inch, 38 calibre guns with the fire control. We
haven't any of those, and I've got to say no to
that because we haven't enough to take care of
our own ships that are in commission. But he
also wanted some binoculars. Hello?

HM Jr:

Hello.

Knox:

And I went to Bausch and Lomb, and put it up to
them good and stiff.

HD Jr:

Yes.

Knox:

And I found they are only working two shifts, so

I got them. to agree to work three shifts if I

could get some additional aluminum for them.

Well, I went to Stettinius and got Stettinius
to talk to those people, and they're going to
get the extra aluminum. The minute they get

that, they are going to work three shifts,

and then I am going to suggest to the President

that we divide them fifty-fifty, so that they

will get as many as we do hereafter.
HM Jr:

Wonderful!

Knox:

And then they want some four-inch guns of a type
we have on hand. They asked for 150 of them,
and I find that we have 640 that we were saving
to arm merchantmen with them, and I have fulfilled

their full request of 150.

HM Jr:

Grand!

Knox:

And then they wanted some forgings for the flasks

of torpedo boats - 21-inch and 18-inch - and I

wormed out of our ordnance department the
promise to give them 40 from January to May,
and 365 from June to November, and 640 from

December to May of next year, which I think

probably will take care of part of their needs
any way.

HM Jr:

Yes.

86

-3Knox:

Now those are the items and I haven't had a chance

to see you since I worked this out, and I haven't
talked to Evans yet, but I am going to send for

him when he comes back and tell him that they can
have these things.
HM Jr:

Well, I appreciate the courtesy. It makes it easier

Knox:

All right, Henry.

for me.

Now, when are you going up to the Capitol?
HM Jr:

Oh, about 1:15 or 1:30.

Knox:

Are you going alone, are you taking your wife with

you, or what?
HM Jr:

Well, I have Bell and someother people from the
Treasury.

Knox:

I see. Well, I'll see you up there then.

HM Jr:

And, Frank -

Knox:

Yes.

HM Jr:

I told Foley to show you that legislation.

Knox:

Yes, and I think it is a damned well drafted piece
of work. Simple, straight-forward, anybody could
understand it. It does the things we want done,
and if we can get it through in the form in which

it is drafted, it will be just wonderful.

HM Jr:

Right. Well, thank you so much. This works both
ways, you know. If we keep each other posted, it
helps a lot.

87

-4-

Knox:

Yeah?

HM Jr:

I say keeping each other posted helps a lot.

Knox:

You bet. All right, Henry.

HM Jr:

Thank you.

Knox:

Goodbye.

88

Copy to Foley 1/6/41

89

January 6, 1941
10:47

H.M.Jr:

Hello.

Henry L.
Stimson:

Hello, Henry.

H.M.Jr:

Good morning.

S:

I'm sorry I haven't been able to be very
effective at these discussions about this
bill, but I have been laid up for a couple
of days.

H.M.Jr:

Well, your people

S:

They've been helpful.

H.M.Jr:

They were here all Sunday afternoon.

S:

Yes, and they've just been speaking to me

about it. The one thing that worries me a
little was the report that Rayburn was
proposing to put it in so that it would go
to the Foreign Affairs and Foreign Relations
Committee on the ground that it would have
easier going in those committees.

90

-2S:

Well, I'm amazed at that because - of course,
certainly the Foreign Relations Committee
is backed against anything except Isolationists
and the Foreign Affairs Committee, while I'm
not very familiar with many of the men on the
Democratic side, on the Republican side it
has got Hamilton Fish, Tinkham and apparently

is a pretty Isolationist bunch.

H.M.Jr:

Un-huh.

S:

Now, if it went in as an individual bill

H.M.Jr:

traveling, I should think.
Well, it hasn't been jelled yet but my boys

S:

and went to the Appropriations Committee of
the Senate, it would have considerably better

here seem to think that it would have pretty
good sledding in Foreign Affairs.
Well, how about Foreign Relations? It has
got to go to both. Foreign Relations would

debate it all winter. The Appropriations
would be pretty good. of course, this is a

matter that you know a great deal more about
than I do
H.M.Jr:

No, I don't

S:

I'm rather amazed.

H.M.Jr:

Well, let me give you the background on it.

S:

Yes.

H.M.Jr:

As I gather - this is a confidential conversation
I understood that took place between the
President and Sam Rayburn - that he said to
the President at this time as Speaker he
wanted at least to give the impression that

these things originated on the Hill, and
the President said fine. And at Cabinet
when I gave him this thing he said, now, get
this thing to Eaton, Rayburn or McCor mack
and let them draft it and let them feel that
they're going to do it.

S:

Yes.

H.M.Jr:

And we made no suggestions as far as I know

as to where it should go, and I'm under

91

-3the impression, and I may be wrong, that
this was Rayburn's idea.
S:

Well, I heard that too, but I wondered.

It seemed as though - it seemed to me as

if you were running it right into the lion's

den.

H.M.Jr:

Well, why don't you, if you get a chance,

S:

Well

H.M.Jr:

We'll be - we meet in Rayburn's room, don't

raise it with the President?

we, today.

S:

I supposed we met in the President's room.

H.M.Jr:

Well, I think the President's room - that's

S:

If I can get him on the telephone now I'll

right. It is the President's room. Well,
I'll talk to my boys. I, frankly

speak to him, but I supposed he was very busy.

H.M.Jr:

S:

H.M.Jr:

Well, I don't know, but as far as I'm concerned
my mind is open, I mean, I have no opinion on
it which

Well, I have no reason except the observation
of an outsider. I know the two Committees.
I've been before both Committees - Foreign
Relations recently and Foreign Affairs constantly when I was here before, but of course
it has changed somewhat since then, but they've
got their old war horses in. Both of those
Committees, Foreign Relations particularly,
have been packed by the Isolationists for the

last twenty years. That's why I was surprised.
Well, I'll talk to my boys and tell them what
you said.

S:

It's merely - mind you, I'm not trying to
intervene or interrupt at all. That's just

my best judgment.
H.M.Jr:

Oh, Harry. Let's - I sent it over to you to
get the benefit of your experience and your

92

-4advice because I'd just as soon have it as

anybody's in town - a little more so. And
that's why I sent it over there and I will

tell Ed Foley, who has been handling this for
me, just what you've said.
S:

H.M.Jr:
S:

I think your boys did a very good job on it

and I had practically no suggestions to make.
They worked over it afterwards with McCloy
and someone else in this office
Greenbaum.

and they all tell me it is a very good
job, but what I'm thinking is I don't want
to see the President's plan turned into a

Roman holiday to be discussed all winter by
the Committee.

H.M.Jr:

Well, it can't be; we haven't got time for

S:

I know, but those damn fools don't know

that. The situation is too critical.

whether it's critical or not, they'11 go
ahead as they have before. All right, that's
just what I imagine.

H.M.Jr:

Well, thank you. Thank you for calling.

92-A
January 6, 1941
MEMORANDUM
TO:

The Secretary

FROM: Mr. Young

Re: Meeting of Colonel Maxwell's Advisory Committee
Colonel Maxwell had a meeting of his Advisory Committee

this morning, at which I was represented by Mr. Buckley.
Several points came up in which I think you will be interested.
These are:

1.

A proposed proclamation was presented to the group, the
effect of which would be to eliminate the need for export
licenses on all exports to Canada except arms, ammunition,
and materiel of war. There was no sub-committee report on
this proclamation, and it appeared to have been worked out
by Colonel Maxwell and the State Department. The reasons

advanced for wanting it put into effect were (1) that it

would expedite shipment of goods to Canada, and (2) that it
would lessen the detail work in the State Department of
passing on these applications. It reserved to Colonel
Maxwell the right to put any particular items back under
the export license procedure if he so desired.
Neither Mr. Buckley nor I had been apprised of the content
of this proclamation prior to the meeting, and he suggested
in the meeting that there was serious danger at this time

with rapid changes in the situation with respect to critical

and strategic materials in having our large exports of these
items to Canada not require an application. With so much of

Canada's buying in the United States not rooming through the
British Purchasing Commission, there would be a rather serious
danger that substantial shipments of items sorely needed in
our defense program could be made before they would come to
our attention through the customs figures. And even though
some of these would be caught through the committees working
with the Defense Commission, there are undoubtedly many materials which they are not following closely and many items even
within categories they do follow closely which would not come
to their immediate attention because so many Canadian orders
come through American branches of Canadian firms and Canadian
branches of American firms.

-2-

92-8

In the course of the discussions on this point, Mr. Alex-

ander Henderson, Assistant on Export Licensing in the Defense
Commission, supported the view taken by Mr. Buckley, saying
that he had been informed of the meeting only a few minutes
before it began and had never had an opportunity to examine
or study the proposed proclamation. He stated that he was
not in a position to say whether the proclamation was wise

or not but certainly felt that from the standpoint of his
section of the Defense Commission an opportunity ought to
be given for careful consideration before any action was
taken.

After additional discussion in which one or two others
expressed the view that there were some aspects of this
proclamation which might benefit from further study, Colonel
Maxwell agreed to hold up any action on the proclamation
until Friday, January 10, at 3:00 P.M., at which time
another meeting will be held. In the meanwhile, I propose
to discuss it with Mr. Henderson, of the Defense Commission,
and should appreciate your views as to our attitude.
2.

Another proposed proclamation was presented to the group

bringing copper, brass, bronze, zinc, nickel, and potash
under export control. A sub-committee report was presented
indicating that either there was a shortage or danger of
shortage in each of these materials. Since this proposal
coincides in most cases with ideas which we have been
a

advancing for some time, Mr. Buckley made no comment, and

it was agreed that the proclamation would be considered
approved by the Committee. Colonel Maxwell will seek to

have the President issue it as promptly as possible. The
effective date on this proclamation 18 February 3, 1941.
3.

Colonel Maxwell then presented to the group General Miles,

Chief of Army Intelligence, who had been invited to talk to
them briefly about the war situation in various parts of the
world. His talk was brief and more or less a recapitulation
of information which is generally available on the situation

in the various countries. Of interest, however, is the fact
that he prefaced his remarks with a reference to economic
warfare as a function of export control, stating at the same
time his view that economic warfare "must run parallel with
military warfare".

92-C

-3-

Of interest also at this time is a statement made by
Colonel Maxwell at the opening of the meeting that this
was the "first meeting of the new year and the first
meeting of this committee as a 'policy' committee".
have no explanation of this statement, nor am I aware
that the function of the committee has changed from
"advisory" to "policy making" This may have been a
leading statement intended to tie in with General Miles'
I

4.

reference to economic warfare.

for
1'

1

Copy to Gaston 1/6/41

93

94

January 6, 1941
10:55 a.m.
H.M.Jr:

Hello.

Operator:

Congressman McCormack calling.

John W.
McCormack:

Hello, Mr. Secretary.

H.M.Jr:

Hello, Mac.

McC:

How are you today?

H.M.Jr:

Fine.

McC:

Happy New Year.

H.M.Jr:

Plenty of them to you.

McC:

I've a matter I'm very much concerned about

and I want to get to the source.
H.M.Jr:
McC:

Right.

Do you know of any proposal to change Joe

McGrath in Boston?

H.M.Jr:

News to me.

McC:

Well, I'm glad to hear that because I'm -

that pleases me very much because I'd feel
very disappointed because he's been a great
Democrat, his breakdown was due to the work

he did for the Party, and he's coming back.
H.M.Jr:

News to me.

McC:

Well, I'm glad to hear it because Bill Burke

the chairman of the Democratic State Committee

just called me up and told me that some
fellow by the name of Matthews had called him

up at the request of Ed Flynn to find out
if he'd O. K. the appointment of a fellow

by the name of Brennan to succeed Joe McGrath.

Well, of course I couldn't believe it because
somewhere along the line I think I'd hear of

it.

95
-2
H.M.Jr:
McC:

Sure. You know I'd call you.
Sure, but this fellow Brennan, to give you an
example - Brennan, while I like him personally,
my God, he was a delegate to the Convention
at Chicago and he wasn't for Farley - he voted
for Farley - he was against the President.
That's worse than being for somebody. You and
I could be for somebody without being against

the other fellow. Unfortunately, we might like
but this fellow was against the President.
to be for both, but we have to make a choice,

H.M.Jr:
McC:

Well, I'll be damned.
And he was out talking to the Press, he was
making statements, he was damning everybody
who was with the President and of course you

know the situation out there. I was the one

H.M.Jr:
McC:

that had to fight Walsh and the whole gang.
I know. You did a wonderful job.

Well, thanks, Mr. Secretary, but I mean the
boys looked to me and I was the one that
wouldn't be afraid of him, you know, from a

political angle. I knew that they wouldn't
dare undertake to go into my District to
punish me because they'd only hurt themselves.
And they know that I wouldn't let them do it
without fighting, but this fellow was vociferous.
Well, I'm glad to hear that because you'd know.

H.M.Jr:

Well, I still think I'm Secretary of the
Treasury and I haven't heard anything about
it.

McC:

Well, all right. Now, we can forget this
talk because apparently - because we want to
nip it in the bud - that's enough for me, but

I was very much concerned because if it was,
why I think it would be wrong to change
McGrath, but certainly if there was, it would
be absolutely unwise and wrong to appoint

this other fellow - not that I've got anything
against
I have. him personally, but politically, why

H.M.Jr:

Right. Well, thanks 80 much. I hope to see
you soon.

96

-3-

McC:

Well, thank you, Mr. Secretary and anytime
you have anything up here, while I'm not
on
and Means, I still have my love for
thatWays
Committee.

H.M.Jr:

Well, I'll be needing your help.

McC:

Well, you can always count on that - I say
that because of the respect.

H.M.Jr:

Thank you 80 much.

McC:

Good-bye, Mr. Secretary.

97

January 6, 1941
12:06 p.m.

H.M.Jr:

Hello.

Operator:

Director Smith.

H.M.Jr:

Hello. Henry Morgenthau.

Harold
Smith:

Yes.

H.M.Jr:

Harold, I see on the ticker that you're

S:

Well, I talked to him about that, I think it

H.M.Jr:
S:

seeing the President at 3:15. Do you think
you could put on his desk that Executive
Order that I'm 80 much interested in?

was Friday or Saturday, in relation to this
other defense order which he is trying to
untangle and he said he didn't want to do
anything about it until he got the other

thing set up.
Well, couldn't he do the two together?
Well, I don't know whether he could or not.
I think they've both got to be studied and we
don't know how the other thing is going to
come out. He's talked to Hillman and Knudsen
today and he has referred some things to the
Secretaries of War and Navy, and that has got

to be untangled, I'm very sure of that, or the
whole thing is likely to be in a mess. Now, he

H.M.Jr:

said he'd like to put it off for about a week.
Well, I want to tell you what I'm going to
tell him - I think I'm seeing him tomorrow 80 I want to lay my cards

S:

Yeah.

H.M.Jr:

Now Martin Dies has got onto this transfer
of this Russian money. I don't know how
he has done it and I don't know when he's
going to get onto this whole thing and blow
it, that we re not controlling this business,
you see. Hello?

S:

Yeah.

98
-2
H.M.Jr:

And I'd hate like hell to have Martin Dies

S:

Yeah.

H.M.Jr:

force our hands and then have the President
freeze the thing because Dies made him do it.

Now it's all there. As far as I know Mr. Hull
is satisfied and Sumner Welles is satisfied
and I just don't want the President to be in
a position - I don't think he's very crazy
about Martin Dies - to have him criticize
the Administration for not controlling these
foreign funds and their use. Now he's on it,
he's out, he's gotten hold of the Russian
thing, and I'm going to tell him that. I
think I'm seeing him tomorrow. Now as far as
I know - I got the impression from him that
he liked the set-up.

S:

Yeah. Well, now, I can tell you that normally
you see when a thing like that would come in
Bailey would send it around to the interested
departments for their reaction.

H.M.Jr:

Yeah.

S:

We have thought that that other thing 18 80
hot

H.M.Jr:

Which one?

S:

The defense order - in perhaps relation to

this that I told Bailey to hold up sending
it out because I think eventually we'll
have to send it out perhaps. But at any rate
before we do, I think we ought to clear it

fairly carefully with the President or - I

don't know, they've got this whole Defense
thing 80 completely stirred up that I don't
know what else might be brought into the
picture, and I'm just playing a cautious game
with your order so far as any formal clearance
is concerned.

H.M.Jr:

Well, I just - I mean, I didn't want you to
feel I was going - but I am seeing him tomorrow
and I'm going to bring this thing of Martin
Dies' to his attention.

99

-3S:

H.M.Jr:

All right.
And I do feel

S:

And all I can tell you is that I've already
brought it to his attention.

H.M.Jr:

Fair enough.

S:

Yeah.

H.M.Jr:

Thank you.

S:

All right.

100
January 6, 1941
12:16 p.m.
E.M.Jr:
Arthur

Hello,

Purvis:

Hello. Good morning, Henry.

H.M.Jr:

Hello, Arthur. On our usual man-to-man

basis, I see in the morning Post that

General Dowding
P:

Oh, yes. I was going to ring you about it
this morning. I hesitated to worry you about
it. He's coming here and is very anxious to
meet you.

H.M.Jr:

P:

Yeah, but I mean it's all in the papers,
but nobody asked me, said she.

(Laughs). No. Well, I'm the one to blame
on that. I was going to ask you whether you
could receive him. I just felt diffident
about asking you while this other bigger
thing was on the scene. That's all.
He'e coming here - he's here available at
any hour of this afternoon or tomorrow,
whenever you like.

H.M.Jr:
P:

Is he in Washington?

He will be here. He was to be here about arrive about this time. They warned me last
night that he will be arriving about this
time and I said I would get in touch with

you today, but that I did feel that with this
legislation in the offing it might be difficult
for you.

H.M.Jr:

Well,
let's make it tentative for 11:00
tomorrow.
11:00 tomorrow.

H.M.Jr:

Tentative.

P:

That will be simply grand.

H.M.Jr:

If you could call tomorrow - have someone call

McKay and just check, you see.

101

-2P:

Yes, I will.

P:

Have somebody call around 10:00 o'clock.
Excellent.

H.M.Jr:

will you bring him?

H.M.Jr:

P:

Yes, yes. Thank you very much. May I
bring him in and then may I do something
else? Would it be possible a little later
today - we've been talking over certain
things that are worrying us about this
legislation - would it be possible for me
to bring over a little memorandum this afternoon some time of points that are sort of
worrying us?

H.M.Jr:
P:

Well,

Or I could even send it over, but I thought
there were one or two that might he worth a
word with you. I would be a relatively short
memo, but

H.M.Jr:

Supposing you come at 4:30 and go to Mrs.

Klotz's office.

P:

Yes.

H.M.Jr:

And I'll be ready

P:

Thank you so much,

H.M.Jr:

4:30.

P:

Splendid. Thank you very much, Henry.

H.M.Jr:

Right.

103
TREASURY DEPARTMENT
INTER-OFFICE COMMUNICATION

CONFIDENTIAL

DATE January 6, 1941
TO

FROM

Secretary Morgenthau
Mr. Haas

BOA

Subject: The Business Situation,

Week ending January 4, 1941.
Summary

(1) Preliminary data of the Federal Reserve Board indi-

cate an FRB index of 136 in December, an increase of 3 points
over the November figure, and 10 points over December 1939.

This will make the average for the year 122, against 108 in

1939 and the previous record of 113 in 1937.
(2) Basic commodity prices rose somewhat further last

week, particularly in the foodstuffs group. Substantial advances occurred in lard, cottonseed oil and tallow, attributed
in trade reports largely to heavy buying of fats by Russia and
Japan. On the other hand, prices of butter, cocoa, and wool
showed noticeable declines.

(3) The recent sharp rise in building costs has increased
the cost of building a standard 6-room house by 13 per cent,
according to compilations for the St. Louis area by the Real
Estate Analyst. While lumber costs levelled out in December,
labor costs continued to advance.

(4) Export freight is again accumulating at New York,
due to increased receipts without a corresponding rise in exports. Our total exports of domestic merchandise, now domi-

noted by war materials, showed about a normal seasonal decline
in November.

(5) New orders for steel have held up unusually well during the holiday season. U. S. Steel orders in the Christmas
week remained above capacity, though declining to 110 per cent
from 148 in the previous week. Steel companies have already
found it necessary to allocate some types of steel, giving
priority to defense uses.

103

-2FRB index reaches new high in December

Preliminary data of the Federal Reseave Board indicate
further rise in the FRB index to 136 in December, a figure
higher than most expectations. This represents a 3-point
gain over November and is 10 points above December 1939. The
sharp gains of the past several months have brought the average FRB index in 1940 to 122, which compares with 108 in 1939
and with the previous record figure of 113 in 1937.

8

The rise in business activity is bringing noteworthy

gains in employment. Total non-agricultural employment in
November increased by nearly 40,000 workers, a strong contrast
to the normal decline of about 400,000 in that month. The
gain over the low of the year reached in February amounts to
nearly 1,900,000 workers, the major portion of the increased
employment being in manufacturing industries.

The potential expansion in consumer demand resulting from
the increased employment and payrolls must be an important con-

sideration in plans for capacity expansion of various industries,
if a bidding up of consumer-goods prices is to be avoided. The

scope of the increase in buying which has already occurred is
indicated by date on retail sales, in dollar values, for the
first 11 months of 1940. While non-agricultural employment in
that period increased 3.1 per cent over the previous year, sales
by department stores increased 5 per cent and sales of semi-luxury
goods showed an even greater rise. Motor vehicle dealers, for
example, report a gain of 22 per cent. household appliance
dealers, 13 per cent, and jewelry stores, 13 per cent.

Basic commodity prices rise further
Indications of a renewed rise in basic commodity prices,
particularly foodstuffs, became somewhat more noticeable last
week. (See Chart 1.) The price index of 12 foodstuffs again
reached a new high since last May, while among the 16 industrial materials only one (wool) declined. In the futures merkete at the close of the week, hides, wheat, lard, cottonseed
oil and coffee showed outstanding strength.

The decline in wool prices reflects in part an increasing

volume of imports of South African wools, which are meeting a
good demand. The fact that defense needs for the present
fiscal year have already been largely covered has tended to
discourage further speculative buying.

104

-3Steel scrap continues to advance. The rise in flaxseed
prices reflects both an increased demand for paint materials
and unfavorable crop reports from Argentina, with the scarcity
of shipping space from that country a continuing bullish
influence.

Among the foodstuffs, notable advances were recorded for

tallow, lard, and cottonseed oil. Tallow prices have been
strengthened by reduced supplies and high prices of imported
fats and oils used in making soap. Trade reports attribute
the recent strong market for various fats and oils in large
part to heavy buying of coconut oil and lard by Russia and
Japan, impliedly for trans-shipment to Germany. Russia is
reported to have acquired large quantities of lard recently,
presunably by taking delivery of January futures at Chicago,
while Japan is reported to have taken about 500 tons of lard
contracted for in December In addition, trade reports indicate that Russia has bought coconut oil heavily on the Pacific
Coast.

Butter prices again dropped sharply under heavy receipts.
Cocoa prices continued the decline of the previous week on in-

creased speculative liquidation, reflecting in part a feeling
that some arrangement may be made by this country to relieve

shipping shortages by taking over British trade routes.

A rise in cooper prices is expected shortly in trade

circles, owing to increasing tightness in domestic copper
supplies. Only one producer is reported to have any copper

available for prompt shipment.

Residential construction costs 13 per cent above July
Estimated costs of construction for a standard 6-room
frame house in the St. Louis district, compiled each month
by the Real Estate Analyst, show an increase of 13 per cent
since July. The itemized increases for materials, labor,

and general costs are shown in Chart 2.

It will be noted that the largest percentage increase

has been in the cost of finished and unfinished lumber. Lumber costs, however, levelled out between November and December.

(It may be mentioned that the BLS figures on lumber prices
showed a levelling out during the three weeks ended December 14,

but in the last two weeks of December a further rise has carried
them again to new highs.) The cost of heating and plumbing materials in December shows a decline to below the cost in July,
for which the Real Estate Analyst gives no explanation.

- 4. -

The greatest advances during the past month were in labor
costs, and general costs have shown a further rise. (Lower

sections of chart.)

Ordinarily, an increase of 13 per cent in residential
building costs within such a short period might seriously re-

duce the volume of new home construction. The construction of

new housing for workers on defense projects, however, seems

likely to offset any drop in private residential building during 1941. The daily average F. W Dodge residential awards
and defense construction) were 51 per cent higher than in the
same period 8 year earlier, as compared with a gain of 31 per
cent in November and 21 per cent in October.
Steel companies allocating orders

for the first half of December (which include some military

Steel mekers have already found it necessary to allocate
some types of steel, according to trade reports, giving priority to orders for defense purposes. The delivery situation for
some steel products is becoming unusually tight, particularly
for the heavier plates. In consequence, some consumers of
plates have found themselves unable to secure delivery within
88 much as 20 weeks, unless the material is needed for defense

uses.

New orders for steel have held up unusually well during
the holiday season. U. S. Steel orders in the Christmas week
continued above capacity, the reported tonnage equalling
110 per cent of capacity, as compared with a high figure of
145 per cent in the previous week. Operations of the steel
industry will reach a new high at 97.2 per cent of capacity
for the current week, which compares with last week's rate of
95.9 per cent.

To assure a large supply of iron ore next spring, the
mining of iron ore will be continued during the winter in
larger volume than usual. Ore vessels are being put into
condition during the winter months, and there is a possibility that some additional boats may be put in service.
Export freight accumulating at New York

The volume of lighterage freight in storage and on hand
for unloading in New York harbor at the end of December
reached a new high for the period covered by our reports.
(See Chart 3.) There is no shortage of storage space, however, since the reported figures for December 31 show only

6,143 carloed units in use out of a total of 20,025 units,
including covered piers, open piers, and ground storage.

105

106

-5The accumulation at New York results from a recent increase

in receipts of freight for export (see Chart 41, while the vol-

use actually exported has remained at a somewhat lower level.
(See Chart 5.)

War materials dominate November export trade

War material industries continued to receive strong stimulus from export business during November, while agricultural
exports lagged far below year-earlier levels. Total exports of

United States merchandise in November declined 4 per cent from
the previous month, or about the usual seasonal amount, reducing
the monthly total to $321,000,000 as compared with $336,000,000
in October.

Reference to Chart 6 will disclose that the principal declines occurred in shipments of aircraft, iron and steel, copper,

iron and steel scrap, cotton and corn, while automobiles and machinery showed the most conspicuous gains. Despite the declines
in aircraft and metal shipments, a group of 6 war material items

consisting of machine tools, aircraft, heavy iron and steel,
non-ferrous metals, firearms, and motor trucks accounted for
no less than 40 per cent of total exports during the month.
The gain in automobile exports was due principally to increased shipments of motor trucks, while a moderate increase in
exports of metal-working and other types of industrial machinery carried aggregate machinery exports to the previous peak
figure reached last April. The decline in exports of iron and
steel scrap to the lowest levels since January 1937 reflected
the embargo measures put into effect in mid-October, while the
51 per cent drop in copper exports was due to a sharp decline in
shipments to Japan. The value of aircraft exports in November
was 15 per cent below the previous month and 29 per cent below

the record high of last August.
Since the seasonal peak in agricultural exports is normally
reached in October, a decline in this group was to be expected.
However, in contrast to the decline of 20 per cent from the previous month, the reduction from November 1939 levels was no less

than 58 per cent. The severe drop in agricultural exports re-

duced these items to only 8 per cent of the total, as compared
with 22 per cent in the corresponding month in 1939. Cotton
exports amounted to less than $8,000,000 a figure $23,000,000
below that of November 1939. Although exports of cotton to
the Soviet Union declined somewhat from the previous month,

this country took about one-third of the total.

107

-6New orders show holiday downturn

Our index of new orders for the last week of December
showed a sharp decline due to the Christmas holiday. (See
Chart 7.) Previous experience suggests that this or the
following week should mark the seasonal low in the new orders index. In the New York wholesale markets, according
to press reports, retailers are arriving in record numbers
to begin active purchasing of spring merchandise, with initial buying budgets stepped up 7 per cent or more over a
year ago.

Weekly business indexes

Due to the usual difficulty of making accurate allowances

for holiday influences, the components of the New York Times
index of business activity during the week ended December 28
showed wide fluctuations. However, declines more than offset
gains, and as a result the combined index dropped to 114.2
from 115.6 (revised) in the previous week.

The principal factors in the decline were substantially
greater than seasonal decreases in electric power production
and cotton mill activity. However, it should be noted that
in both cases the adjusted indexes had reached very high
levels, and some reaction in the index of cotton mill activity
W8B particularly likely in view of the sharp rise that had OCcurred in the previous week. The adjusted index of automobile
production also declined sharply, while a smaller drop occurred
in the index of steel ingot production. On the other hand, a

sharp rise occurred in the index of lumber production and more
moderate gains were made by the freight carloadings indexes.

Barron's index of business activity during the week ended

December 28 confirmed the trend of the Times index and dropped
to 125.4 from 126.4 in the previous week.

Preliminary data for the week ended January 4 reveal a
recovery in steel operations which brought the operating
rate nearly to pre-holiday levels. However, automobile production showed a further decline, which carried output 5,000
units below the previous week and 11,000 units below the corresponding week of the previous year.

MOVEMENT OF BASIC COMMODITY PRICES
AUGUST 1939=100

9
M

5

PLK

PER

CLNT

CENT

9

o
PLA

16

30

23

14

21

28

PER
CENT

Weekly Average

CLNT

JANUARY

DECEMBER

NOVEMBER

12 19 26 2

4

OCTOBER

11

940

Daily
130

128

126
130

16 RAN INDUSTRIAL

125

MATERIALS

125

124

124

1G Raid INDUSTRIAL
120

MATERIALS
120

120

120

115
115

110

116
110
110

112

112
105

12 FOODSTUFFS

105

12 FOODSTUFFS

108

108
100
100

5

.

-

.

A

1940

12

19

26

16
2

-

A

-

,

J

0

.

939

LIIIII

mill

104

23

104
14

21

26

11

9

JANUARY

DECEMBER

NOVEMBER

OCTOBER

30

7

95

95
o

4

...

11111

LLL

940

STALLOW

.

.

Percentage Change for Individual Commodities, August Low to December 27, 1940, and to January 3, 1941
PCR

CENT

PER

CENT

16 RAW INDUSTRIAL MATERIALS

WOOL

12 FOODSTUFFS

40

SHIPES

40

35

WHEAT
35

30

30

STEERS

COCOA

25

BARLEY

BURLAP

25

STEEL SCRAP, DOM.

COTTONSEED OIL
20

FLAXSEED

20

BUTTER
HOGS
SUGAR

LEAD

ZINC

15

STEEL SCRAP, EXP.
PRINT CLOTH

15

ROSIN
COPPER
10

-COFFEE
10

THURRER

LARD
5

SHELLAC
COTTON
5

CORN
"SILK
0

TIM

0

-5
5

-10
10

Aus. Low

Dcc.27 JAN.3

Aug. Low

Dcc.27

JAM.3

P 187 P
Mark the Secretary of the Treasury

- - - Statesting

CHANGES

IN COST OF CONSTRUCTION OF STANDARD
6-ROOM FRAME HOUSE, ST. LOUIS

Percentage Change, November and December over July 1940

ITEM AND PERCENT CHANGE

PERCENT

JULY TO Dcc. 1940

Materials

COST
DEC.

1940

30

UNFINISHED LUMBER 32.9%

$493

25

FINISHED LUMBER 23.7%

805

WINDOWS, DOORS, ETC. 14.0%

645

20

15

MASONRY AND TILE

MATERIALS 6.9%

655

10

PAINT. HARDWARE AND

ELECTRIC MATERIALS 1.0%

390

HEATING AND PLUMBING -2.5%

508

5

MATERIALS

0

NOV.

-5

$3,496

DEC.

JULY

MASONRY AND TILE

20

MATERIALS 18.2%

Labor

UNFINISHED LUMBER 15.2%

$726
182

15

PAINT, HARDWARE AND

ELECTRIC MATERIALS 13.1%

259

FINISHED LUMBER 13.0%

243

WINDOWS, DOORS, CTC. 12.3%

219

10

HEATING AND PLUMBING 10.3%

5

LABOR

321

$1,950

0

NOV.

-5

DEC.

JULY

20

INSURANCE.

General

SALES TAX, ETC. 14.7%

$375

15

GENERAL CONTRACTORS

PROFIT 13.4%

585

10

SUBCONTRACTORS OVERHEAD

5

NOV.

DEC.

0

JULY

. MISSOURI SALES TAX (NOW 2 PER CENT ON MATERIALS), 1 OLD AGE AND UNEMPLOYMENT
TAX (FEDERAL AND STATE) LIABILITY AND EMPLOYEES COMPENSATION INSURANCE,

AND PROF IT 8.0%

380

GENERAL

$1,340

TOTAL COST. DEC.

$6,786

TOTAL COST. JULY.

$6,004

INCREASE

$782

PERCENT

13.0

FIRE AND TORNADO INSURANCE, COMPLETION BOND.
SOURCE: REAL ESTATE ANALYST.

-/-

Office of the Secretary of the Transity

C-368
no

LIGHTERAGE FREIGHT IN STORAGE
AND ON HAND FOR UNLOADING IN NEW YORK HARBOR
940

1939

JAN.

DEC.

NOV.

FCB.

MAY

JULY

JUNE

AUG.

SEPT

1941

III

NOV.

OCT.

DEC

CARLOADS

JAN.

APR.

MAR.

FCB.

EFFETT

CARLOADS

THOUSANDS

12

12

11

11

10

10

9

9
8

8

7

7
6
6

5
5
4
4

3

3

13

APR.

27

25

11

MAY

22

8

MAR.

30

JUNE

6

2

FEB.

16

1940

20

JULY

3

3

JAN.

17

17

31

AUG.

14

SEPT.

28

12

26

OCT.

23

9

6

9

1939

DEC.

20

NOV.

7

NOV.

23

21

DEC.

4

25

18

JAN.

1

11

15

FCB.

I

28

15

MAR.

29

12

26

APR.

1941

*LARGELY EXPORT FREIGHT, BUT ABOUT 10% REPRESENTS FREIGHT FOR LOCAL

AND COASTAL SHIPMENT. FIGURES EXCLUDE GRAIN.

Office Secretary the Treasury
Dream - and Statistics

c 303 A

RECEIPTS OF FREIGHT FOR EXPORT AT NEW YORK
AND
AT 9 OTHER NORTH ATLANTIC PORTS
1940
MAY

JULY

DEC.

NOV.

I

1939

AUG.

SEPT.

TTT

FEB.

JAN.

DEC.

NOV.

OCT.

TTT

MAR.

CARLOADS
THOUSANDS

APRI

CARLOADS
THOUSANDS

6.5
6.5

6.0
6.0

5.5
5.5

NEW YORK

5.0

5.0

4.5
4.5

4.0
4.0

3.5
3.5

9 OTHER PORTS

3.0

3.0

2.5
2.5

2.0
2.0

1.5
1.5

1.0
1.0

.5

.5

0

0

1939

Office of the Secretary of the Treasury
- . Research and Statistics

JAN.

FEB.

MAR.

APR.

MAY

JULY

JUNE

1940

AUG.

SEPT.

OCT.

NOV.

7

DEC.

21

DEC.

4

27u125
9 23 6 20 3 17 2 16 30 13 27
11 2588 22 6 20 3 17 31 14 28

NOV.

23

9

18

JAN.

1

25

11

26

15

1

28

12

FEB.

15

MAR.

29

26

12

APR.

1941

c 304 A

CARLOADS OF FREIGHT EXPORTED FROM NEW YORK
1941

1 940

1939

MAR.

FEB.

JAN.

DEC.

APR.

JUNE

MAY

JULY

TT

AUG.

TT

THE

APR.

MAR.

FEB.

JAN.

DEC.

NOV.

OCT.

SEPT.

CARLOADS
THOUSANDS

CARLOADS
THOUSANDS

6.0
6.0

5.5
5.5

5.0
5.0

4.5
4.5

4.0
4.0

3.5
3.5

3.0
3.0

2.5
2.5

2.0

FEB.

2

3

JAN.

MAR.

13

APR.

27

25

11

MAY

22

8

JUNE

6

6

9

DEC.

1939

30

20

JULY

3

NOV.

20

16

17

AUG.

31

14

SEPT.

28

12

26

OCT.

1940

23

9

23

17

NOV.

21

7

25

11

DEC.

4

28

18

JAN.

I

the

15

FEB.

I

2.0

94

15

MAR.

29

26

12

APR.

AS ESTIMATED FROM DATA OF GENERAL MANAGERS' ASSOCIATION OF NEW YORK.

c 306 A
Office of the Secretary of the Treasury

Dream - IN Matistica

U.S. TOTAL TRADE AND EXPORTS- BY COMMODITIES
....

1938

1937

....

DOLLARS

TOTAL TRADE

M

Imports

(nper)
Exports

350

100

100

250

200

150

130

100

MM

Trade Balance

180

100

so

.

-so

-100

1000

1924

1934

1933

1933

1934

1934

1938

-100
1934

1940

1934

EXPORTS OF U.S MERCHANDISE
Selected Nonagricultural Commodities
DOLLARS

Total Nonagricultural

DOLLARS

DOLLARS

325

300

275

250

225

200

175

28

Aircraft

150

125

mm

100

75

Chemisale

50

25

o
JAN

MAR MAY JULY MET NOV

Total Agricultural

Selected Agricultural Commodities
DOLLARS

Millions

DOLLARS

Cotton

DOLLARS

Millions
150

125

100

40

75

so

25

MAR MAY JULY NOV

Tobacco

DOLLARS

INDICES OF NEW ORDERS
Combined Index of New Orders and Selected Components

PLACENTAGE
POINTS

PERCENTAGE
POINTS

210
210

200
200

190
190

NL

180

180

170
170

160
160

150
150

140
140

130
130

Total

(combined Index)

1000 100

120
120

110
110

100
100

5

90

90

80

80

70

70

60

60

Total excluding Steel and Textiles
50

50

40

40

Steel Orders

30

30

20

20

10

10

Textile Orders
0

1938

Treasury

1939

1940

1-85-C

STRICTLY CONFIDENTIAL

PARAPHRASE

CONFIDE IAL
115

A telegram (no. 14) of January 6, 1941, from the
American Consul General at Shanghai reads substantially
as follows:
Foreign banks in Shanghai, including American, and

vested interests in general, are reiterating strongly
the ominion that it would be a grave mistake for the
authorities at Chungking to give in to the school of
colitical thought which is in fevor of scuttling Shanghei
as being DC longer valuable to Chinese financial strategy,

P.S would be the case if the national yuen in the foreign
exchange market of Shanghai were no longer to receive

support. It is claimed that much of the advantage of
past endeevors would be nullified by such action after so
such effort has thus far been spent in keeping up the
Chinese currency's prestige at Shanghai. Furthermore,

such action would have the effect of forcing practically
all interests in Shanghei to lose face in connection with
resistance to the encroschments of the Wang Ching-wei

regime. It is not likely, in the opinion of an American
banker, that the stabilization funds will be drawn upon
soon except for the purpose of supporting an excess of

imports. In the opinion of this banker a fund of $50,000,000
(U.S. currency) should be sufficient for that purpose for
= year and F half at least under present conditions and

it is

STRICTLY CON IDE

-2-

CONFIDE

116

it is not likely that speculators will attempt raids
once they realize there is a powerful control. This
American banker is of the opinion also that the reason
for the heavy drains in the past on exchange reserves was

that support was being maintained at too high a rate,
which at one time may have been done on purpose to allow

certain persons to get their money out, but that there is
no need for repeating errors made in the past. Fapi
enjoys still a very great prestige, according to an
emphatic statement made by this banker. Besides, it is
said again and again, that in spite of the beleaguered
position in which Shenghai is in some respects, that

city continues to be the financial center of China. It
is prophesied that there will be a sharp reflection in
the areas controlled by the Chinese of any disaster to
the Chinese national currency in Shanghai. For this
reason no consideration should be given, except as a last
resort, to any abandonment of the position in Shanghai,

especially as after the hostilities the concentration at
Shanghai of capital investment in industrial plants and
otherwise must be used as a source for rehabilitation.
Abandonment of the position in Shenghai could serve no

useful purpose either to the American position or to
Chinese aime and it would assist Japanese aims to destroy
loyal

STRICTLY CONFIDEN

AI

CONFIDENTIAL
-3-

117

loyal Chinese position and American interests in Shanghai.
The view was expressed by another American banker that

the American fund (?) for stabilization should be used
to keep trade open and on a working basis and later on,
if necessary, to set up an allotment or licensing system

at a pegged or official rate for specific necessary imports
and to permit the existence at levels under those rates of
a black market.

118
TREASURY DEPARTMENT
INTER-OFFICE COMMUNICATION

DATE January 6, 1940

Secretary Morgenthau

TO

FROM

Mr. Haas CA
For the week ended December 25, 1940, Work Projects Adminis-

tration employment increased 6,000 to 1,878,000 persons. While
this figure is 58, 000 above employment during the final week of
November, it is 274,000 below the figure for the comparable week
of 1939.

Attachments

119
WORK PROJECTS ADMINISTRATION

Number of Workers
Employed - Monthly
United States
Number of Workers

(In thousands)

1938

July
August
September

October
November
December
1939

January
February
March

April
May

June

July
August
September

October

November
December
1940

3,053

3,171
3,228
3,346
3,287

3,094
2,986
3,043
2,980
2,751
2,600
2,551
2,200

1,842
1,790

1,902
2,024
2,152

July

2,266
2,324
2,288
2,092
1,926
1,665
1,701
1,691

August

1,704

January
February
March

April
May

June

September
October
November
December

Source: Work Projects Administration

Monthly figures are weekly figures for the latest
week of the month.

They include certified and noncertified workers.

1,779

1,820
1,878

120
WORK PROJECTS ADMINISTRATION

Number of Workers
Employed - Weekly
United States
Yeek ending
1940

May 1
May 8
May 15
May 22
May 29

June 5
June 12
June 19
June 26

July 3
July 10
July 17
July 24

July 31
August 7
August 14
August 21
August 28
September 4
September 11
September 18
September 25

October 2
October 9
October 16
October 23
October 30
November 6
November 13
November 20
November 27
December 4
December
11
December
December 18
December 25

Source: Work Projects Administration

Number of Workers

(In thousands)
2,059
2,009

1,970
1,945
1,926
1,858
1,785
1,714
1,665
1,608
1,620
1,659

1,690
1,701
1,709
1,708
1,698
1,691

1,690
1,687
1,689
1,704
1,747
1,762
1,768
1,776
1,779
1,783
1,785
1,806
1,820

1,832
1,855
1,872
1,878

121

WORK PROJECTS ADMINISTRATION
Number of Workers Employed

United States
Weekly V.P.A. Deployment

Monthly V.P.A. Employment

1941

1940

1939

- ILLIONS
or

MEA

as

MAR.

MRL

MAY

WORLD

OF

3.4

NORKERS
3.4

3.3

3.3
3.2
3.2
3.2

3.2

3.1

3.1

2.8

3.0
3.0

2.8

2.9

2.9
2.8

2.4
2.8
2.4

2.7
2.7
2.6

2.0

2.4

2.0

2.5

2.5
2.4

2.4
1.6
2.3
1.4

2.3
2.2

2.2
1.2

2.1

12

2.1
2.0

2.0
1.9

.
1.9
1.8

1.8
1.7

A

1.7
1.6

1.6

.

41

1.5

-

MAR.

MAY

JULY

1939

SEPT.

NOV.

-

1.5

MAR.

MAY

JULY

1940

SEPT.

NOV.

JAN.

MAR.

1941

SOURCE PROJECTS

Z- 221 a
Office the Secretary of the Treasury

I

122
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE January 6, 1941.

TO Secretary Morgenthau

CONFIDENT IAL

FROM Mr. Cochran

Registered sterling transactions of the reporting banks were as follows:
1109,000
Sold to commercial concerns
Purchased from commercial concerns L 85,000

The Federal Reserve Bank of New York sold L776 in registered sterling to a
son-reporting bank.

In the open market, sterling remained at 4.03-3/4 until late in the day. It

closed at 4.03-1/2. Transactions of the reporting banks were as follows:
L 6,000
Sold to commercial concerns
Purchased from commercial concerns L14,000

As for the other currencies, there was a slight weakening of the Canadian
llar quotation, while the Cuban peso continued to improve. Closing quotations
Vere:

Canadian dollar
Swiss franc
Swedish krona
Reichsmark

Lira

Argentine peso (free)

Brazilian milreis (free)

Mexican peso
Cuban peso

Chinese yuan

14-1/8% discount
.2321
.2385
.4005
.0505
.2360
.0505
.2066

8-1/16% discount
.05-5/8

We sold $997,000 in gold to the Central Bank of the Uruguayan Republic, to be

added to its earmarked account.

We purchased $13,836,000 in gold from the earmarked account of the National

Bank of Rounania.

The Federal Reserve Bank of New York reported that the Bank of Canada shipped
$5,297,000 in gold from Canada to the Federal for account of the Government of
Canada, for sale to the New York Assay Office.

123
-2No gold or silver prices were received from Bombay today.

at

In London, the prices fixed for spot and for ward silver were both unchanged,
23-3/8d and 23-5/16d respectively. The dollar equivalents were 42.444 and 42.33

Handy and Harman's settlement price for foreign silver was unchanged at 34-3/44.
the Treasury's purchase price for foreign silver was also unchanged at 35
Ye made five purchases of silver totaling 775,000 ounces under the Silver Purchase
Act. Of this amount, 300,000 ounces represented a sale from inventory. and the remaining 475,000 ounces consisted of new production from foreign countries, for forward
delivery.

IM

124
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION

DATE January 6, 1941.
with

Secretary Morgenthau
FROM

Mr. Cochran

The Federal Reserve Bank of New York reported to us the transactions on the
attached statement in Hungarian accounts maintained with the National City Bank
12 See York and the Guaranty Trust Company of New York,

KMP

125
.
Paid To

Paid To
of Banking Companies,
N.Y., in favor of

Budapest

Central Corporation

Guaranty Trust Co.,

Account Debited

Hungary, Budapest
National Bank of
Account Debited

$118,400

Amount Debited
Amount Debited

of Hungary,
National City

Guaranty Trust Company

National City Bank

Bank of N.Y.,

by order of

Received From

Received From

ies, Budapest
Account Credited

of Banking CompanAccount Credited

Central Corporation

$118,400

Amount Credited

Amount Credited

Date
Date

Jan. 6

Jan. 6

National Bank

Budapest

126
COUNCIL OF NATIONAL DEFENSE
COORDINATOR OF COMMERCIAL AND CULTURAL RELATIONS
BETWEEN THE AMERICAN REPUBLICS

STATE DEPARTMENT BUILDING
WASHINGTON D.C

Janu ry 6, 1941

MEMORANDUM FOR: The Honorable Henry Morgenthau, Jr.

FROM: Nelson A. Rockefeller

You will find, herewith, for your
confidential information a copy of our

weekly digest of the current activities
of the verious departments and agencies
handling matters on inter-American concern.

Attachment

127

2411

COUNCIL OF NATIONAL DEFENSE
COORDINATOR OF COMMERCIAL AND CULTURAL RELATIONS
BETWEEN THE AMERICAN REPUBLICS

CONFIDENTIAL

January 6, 1941
WEEKLY PROGRESS REPORT

ON ACTIVITIES IN RELATION TO THE OTHER AMERICAN REPUBLICS
COMMERCIAL

$125,000,000 Loaned for Exchange Crises

The Export-Import Bank has loaned a total of $125,000,000 to meet the
exchange crises in the other American Republics, which is expected to
carry every Latin American country except Cuba through until next fall.
The Cuban negotiations which constitute the final application for an
emergency loan to be acted upon are still in process.
Cuba Faces Sugar Problem

The problem of the Cuban sugar crop is receiving increasing attention
in Cuban negotiations. The view has been expressed that unless Cuba

can market 2,500,000 tons of sugar this year, it will face a serious

labor situation. Cuban production has averaged around 2,900,000 tons,
and there may be need for financial assistance to carry the additional
surplus.

Developments in Materials

Zinc: The President of Mexico is taking steps to solve the labor dispute at the Rosita smelter according to latest reports received
from State. The Coordinator's office has had prepared a preliminary
survey of sources of zinc elsewhere than Mexico which indicates the
possibility of obtaining 35,000 tons of concentrates per year from
Peru, 60,000 tons from Argentina, and 20,000 tons from Bolivia, if
the U.S. were to take their entire production.
Long-staple Cotton: Discussions concerning the possibility of increasing our quota on imports of Peruvian long-staple cotton are continuing among Agriculture, State, Tariff, and Coordinator's office.
Rubber: Preliminary reports from the four rubber survey parties now
in Latin America indicate suitable areas for rubber production in
Latin America. The survey parties, numbering twenty-five people in
all, were sent by Agriculture last August. They have been in every
rubber-producing country from northern Bolivia to Nicaragua and will
finish up in southern Mexico by the first of February.
Wool: Although the Argentino and Uruguayan wool markets remain firm,
there is a lack of shipping space for northbound movement of this
wool.

128

3411

Page 2

January 6, 1941

Colombian Debt Settlement

On December thirtieth the Colombian Government offered to the holders

of its national dollar bonds a permanent settlement involving the is- of new three per cent bonds in the amount of the present principal outstanding, plus one-half of the outstanding coupons in arrears,
& total of about $50,000,000. State, on behalf of itself, the Treasury,
and the Federal Loan Administrator, issued a statement indicating it was

their opinion that the offer constitutes a fair effort on the part of

Colombia to adjust its obligations, although decisions to accept or rejoot the offer must obviously lie with the individual bondholder. On
the following day the Foreign Bondholders' Protective Council, Inc. issued a statement criticizing the offer as less than the Colombian could
pay.

Stacy May and Tariff Reports Near Completion

Coordinator's office has been distributing a sories of twenty-six commodity studios prepared at its suggestion by the Bureau of Research and
Statistics of the Advisory Commission (National Defense) under the genoral supervision of Stacy Key. These reports illustrate complementary
relations of the Latin American and U.S. defense economies.
Progress on reports of the Tariff Commission is as follows:
1. The Foreign Trade of Latin America: The Commission will release
shortly the section dealing with the commercial policies and trade

relations with Mexico. Preliminary drafts of the sections treat-

ing Panana and Costa Rica have been completed. When they are nimeo-

graphed, these confidential sections will be available to departments and agencies especially interested in the subject. It is 0Xpected that the translation of parts two and throc of this report
will commence shortly.

2. Latin America As a Source of Strategic and Critical Materials: Fourteen of the thirty-five commodity stories have been completed in

preliminary form. They have been mimoographed and confidentially
distributed.
3. A Reference Manual of Latin American Commercial Treaties: The trans-

Intion of this report is in process.

First Development Group Appointed
Then George W. Magalhaes and J. Refacl Oreamuno, member and vice chairman

of the Inter-American Development Commission, left Rio do Janciro last
week to continue their tour of South American capitals, they announced

the establishment of the first national council of the Commission in
Brazil. The members of the council who discussed their duties with the

representatives are Leonardo Truda, chairman, former president, Bank of

Brazil, and chief, Brazilian Economic Mission to the U.S. last fall; Valentim F. Boucas, vice-chairman; Alvaro Catao; Heitor Freire de Carvalho;
and Jose Nabuco.

129

2411

WESKLY PROGRESS REPORT, Part II
Page 3

January 6, 1941
COMMUNICATIONS

Motion Picture Program Takes Shape

The motion picture program, its organization, its aims, and its developments, was extensively discussed at the Policy meeting (Coordinator)
last Monday.

An executive committee, formed in Hollywood to help Whitney (Coordina-

tor) carry out his program, has been divided into six sub-committees:
1. The committee on ways and means of finding storios, headed by Shoridan
Gibney, head of the Soreon Writers' Guild, numbers among its purposes
the aim to have each studio produce one or two South American feature

films a year, making a total of fourtoon or fifteen films. Last

year very few films having Latin American themes were produced.
2. The committee on stars to visit South America plans to have one star
tour Latin America every month. Twentieth Century Fox is planning
trips for Alice Faye and Carmen Miranda, and Paramount is planning
one for Dorothy Lamour. Enthusiasm for Hollywood actors and actresses
is evidenced by the frequent requests to Paloy (Columbia Broadcasting System) on his recent trip that they appear on radio programs
whether or not they speak Spanish.
3. The committee on South American film facilities will send several
technicians to South America to make a survey of facilities, such
as sound equipment, English-speaking extras, etc. It has boon difficult to have films taken in South America because motion picture
companies have had no knowledge of what facilities are available.
4. The committee on shorts is (a) examining existing material, and, (b)
considering possible now shorts for sound tracking in Spanish and

Portuguese. At present the possibilities of releasing "Fantasin"

and making "March of Time" shorts for South American distribution
are under discussion, but it has not yet boen determined whether
these projects will be undertaken.
5. The committee on art and design will encourage art directors to put
Latin American motifs into costumos, etc.
6. The committee of the Academy of Motion Picture Arts and Sciences

will direct educational functions; for instance, they are considering the establishment of a Berlitz School at the studios for instruction in Spanish and Portuguese.

The film producers have agrood that the Coordinator's office should advise them on the selection of an individual to read every script denling
with Latin America for the Producers' Association which has authority to
disapprove any script deemed objectionable.

The cooperation of the movie industry is domonstrated by two recont changos
made in pictures:

1. "Down Argentine Way" has boon submitted to the Argentine Embassy for

criticisms, and a numbor of scenes are being rc-shot at n cost of
$40,000 to $50,000.

2. Because of South American objections to Clark Gable in the role of

130

2411

Page 4

January 6, 1941

Simon Bolivar, Louis B. Mayer has placed Robort Taylor in the part
instead, although the domostic box office loss by this change is oxpocted to far exceed any small gain in South American receipts.
Although the Mexican inaugural was covered more fully than any similar
Latin American event before, continuing problems in adequate nows cover-

age are resulting in constant attention to the question.
Although the large number of films shown on both coasts of South America
appear to be American, there has been some difficulty in showing certain

U.S. films in Latin America. "The Groat Dictator" with Charlie Chaplin

has been almost universally bannod due to protost from the Gurman Embas-

sies, and it is felt that & picture, "Eyes on Brazil," just completed by
Pathe, may not be approved for showing in Brazil because of its anti-Nazi
content.
CULTURAL

The following cultural projects received favorable consideration last
Friday at the Executive meeting of the Coordinator's office.
Loan of Public Administrators: Under this plan which will be carried
out by the Moe committee (Coordinator), this office will pay the
travelling expenses and per diem of public administrators who may
be exchanged between the other American Republics and the U.S. or
vico versa.

Art Exhibits: The art committee has unanimously recommonded that three
exhibitions of American paintings and water colors with accompanying
catalogs, North Amorican art publications, and color reproductions

be sent to South America. The first will go to the principal citics

of northern South America; the second to the principal citics on the
west coast; and the third to the principal cities on the cost coast.
The books and catalogs accompanying the exhibit will remain in South
America as permanent records.

Ten Archaoological Expeditions: The art committee has recommended ten

archaeological expeditions to Latin America: (1) northern Kexico,

(2) Costa Rica and Salvador, (3) Cuba, The Antillos, and Venezuola,
(4) Colombia, (5) Ecuador, (6) Bolivia, The South Peruvian Highland,
and Lake Titicacn Basin, (7) North Peruvian Highland, (8) Costal
Poru and Chile, (9) Shollheaps of Poru and northern Chile, and, (10)
Brazil. Those expeditions seem ospecially valuable since archaeology
is porhaps the most common link in the history of North and South

America, and is probably the greatest cultural pursuit of Latin American intellectual leaders.
University of Chicago's Summer Session: Undor this project the Coordinator's office will assist the University of Chicago in bringing
eminent scholars from Brazil, Cuba, Mexico, the Argentino Rupublic,
and Poru to the regular summor session of the Harris Institute next
summer.

Aid to Students: A proposal that the Coordinator's office should assist
in the entertainment of a group of Chilonn students coming for a
special course at Columbia University this winter was favorably
acted upon. Owing to the additional Latin American students coming

131
Page 5

January 6, 1941

to the University of North Carolina this winter, an increase in
funds for their trips in U.S. has been authorized.
Inter-American Literary Magazine: The mooting felt assistance for the
initial studies in connection with the proposed inter-American literary magazine, which will probably bo called "The Homisphere,"

was advisable.

Speakers' Bureau

After discussion with Coordinator's office, Time, Inc. is planning to

announce shortly a non-profit speakers' bureau so that U.S. orgenizations
and groups may more easily obtain sponkers on Latin America.

Weekly Progress Report No. . 15

132
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
STRICTLY CONFIDENTIAL

TO

Secretary Morgenthau

FROM

Mr. Klaus

DATE January 6, 1941

FBI reports:

December 31. Frau von Lewinski, wife of the former German Counselor,
has told Thomsen that she is working with Mrs. Wheeler, wife of the Senator, 14 the America First organization and is preparing at the request
of Senators Tydings and Wheeler an outline of Hitler's peace objectives.
Frau von Lewinski approached Thomsen for information and assistance.

h!

133
Department of State
Washington

realy refer to

871.75 International Telephone

January 6. 1941.

and Telegraph Corp./121

The Secretary of State presents his compliments to the Honorable
the Secretary of the Treasury, and encloses 8 copies of paraphrase of
telegram No. 6 of January 3 from the American Vegation, Bucharest,

with regard to the sale of the controlling interest of the International
Telephone and Telegraph Corporation in the Rumanian Telephone Company

to the Rumanian National Bank.

Enclosure:

Paraphrase, No. 6.
January 3 from Bucharest.

Copyalm

134
PARAPHRASE OF TELEGRAM RECEIVED

FROM: American Legation, Bucharest, Rumania

DATE: January 3. 1941, 11 a.m.

NO.: 6
The Legation has just been informed by Mr. Quinn of the International Telephone and Telegraph Corporation that last night the final

contracts were signed for the sale of the controlling interest of his
Company in the Sar de Telefone to the National Bank of Rumania. The
National Bank is to pay approximately $13,700,000 from its funds blocked
in the United States to the International Telephone and Telegraph Corporation.
It is Mr. Quinn's understanding that the Federal Reserve Bank of New York has
received a request from the Humanian National Bank to issue the necessary

license. He further understands that instructions have been given to the
Rumanian Charge d'Affaires in Washington to turn this sum over to Colonel

Behn when it is unblocked, and the shares in turn are to be given to the

Charge d'Affaires. It is provided under the terms of the agreement that the
exchange must take place by the tenth of January, and that as soon as the

transfer of stock is accomplished, complete operation and control of the Sar
de Telefoane is assumed by the National Bank,

Until decision has been made by the Treasury Department on the

question of unblocking the funds, Quinn requests that the sale be given no

publicity. He said that when he has full texts of the several documents
making up the agreement he will furnish copies to the Legation. I will
forward them to the Department as soon as possible by pouch.
GUNTHER.

011 M e in 27
EA:LTT
RECEIVED

COPY

135

COPY

TREASURY

GRAY

BERLIN

Dated January 6, 1941

Rec'd. 6. p.m.
Secretary of State,
Washington.

27, January 6. 6 p.m.

In an article in the last issue of the NEUTSCHE (i) ER ZEITUNG, Fritz

Beinhardt, assistant Minister of Finance, gives data on the Reich's tax

revenues for the first eight months of the current fiscal year April to Novemper 1940. During this period taxes yielded 17,096 million marks as against
14,914 million marks during the corresponding period of the 1939-1940 fiscal

year. The comparative figures for the three principle taxes were as follows:
wage tax 1,900 million marks as against 1,750 million marks assessed income

tax 3,158 million marks as against 2,780 million marks and turn over tax 2,619
million as against 2,572 million marks.

According to Reinhardt's estimate the Reich's tax revenues for the fiscal
year ending March 31, 1941 will total 26 to 27 billion marks compared with 23.6
(marks?)

billion million in the preceding fiscal year. Including the wartime contribution
of German communes and other miscellaneous items the Reich's revenues from all

sources except loans are expected to aggregate 30 billion marks according to

Beinhardt. He also stated that no net tax increases were contemplated for the
year 1941.

In his article Reinhardt also referred to the favorable conditions in the

(within?)
money and capital markets which have enabled the Reich to reduce without a

136
-2-27, January 6, 6 p.m., from Berlin.

year the interest rate on Treasury notes from 4 1/2 to 3 1/2 percent.
However, his further statement that "the part of the Reich's expenditure
which is met out of tax revenues is constantly increasing" does not

check with statistics relative to the movement of the Reich's debt up
until the end of September 1940. These data indicate that during the
last six months the monthly borrowings of the Reich have increased faster
than tax revenues. Please inform Commerce and Treasury.
MORRIS

WWC

137

PLAIN

RDS

NANKING VIA N.R.

Dated January 6, 1941

Rec'd 11:30 p.m., 5th

Secretary of State,
Washington.

One, January 6, 10 a.m.

The "Central Reserve Bank" opened at nine o'clock
this morning in accordance with announced plans.
Sent to the Department, Repeated to Chungicing,

Peiping and Shanghai; by mail to Tokyo.

PAXTON

KLP

eh:copy

N

S

21

138

January 6, 1941.

R

ELORANDUM

TO:

Secretary Morgenthau

FROM: Mr. Gaston

des Timpo)
With reference to the attached of your

telephone conversation with Congressman John McCormack on

January 6, regarding the possibility of replacing Joe McGrath

as Collector of Customs at Boston, I find nothing in the De-

partment of an official nature regarding the matter. Apparently
no official recommendation has been received.
Mr. Johnson, the Commissioner of Customs, advises me that
Congressman McCormack called him up today and was very much per-

turbed because he said that a Committeeman had advised him that

it was the intention to replace McGrath and that it would come

through Ed Flynn's office. I feel that it would not be advisable
to agitate the question with Ed Flynn, but see what develops.

139

TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION

DATE January 6, 1941

DIFICITIAL

Secretary Morgenthan
TO

FROM

Mr. Filey

The Dies Committee statement alleging the transfer of $15,000,000 from the
Soviets to the Reichsbank in New York in the "last two months" is not supported
It our records. According to our records, payments and receipts in the Chase to
of from Germany and its controlled governments during October, November, and
December were as follows:

Soviet Receipts from

Soviet Payments to
$2,350,000
Elovakia

$ 550,000

$

$

14,625

53,000

1,000,000

Bredez

October

December

November

October

witzerland

November

December

$1,050,000

$ 110,000

590,980

----

74,549

551,485

1,705,523

616,893

529,160

414,656

2,532,300

280,000

sigeria

880,000

70,410
Totals

$2,403,000 $1,620,410 $14,625

$1,671,625

$3,450,179

$4,213,742

Totals for Three Months' Period
Germany

Slovakia
Sweden

Soviet Payments

Soviet Receipts

$2,900,000

$1,160,000

67,625

1,000,000

Switzerland
Bulgaria

665,529

2,873,901
3,476,116
280,000
880,000

Sungary

70,410

Japan

Totals

$4,038,035

$9,335,546

The

140

PLAIN
JT

LONDON

Dated January 6, 1941
Recid 4:48 p.m.

Secretary of State,
Washington.

41, sixth.
FOR TREASURY:

With reference to the last paragraph of my No. 11 of
January 2 in spite of preoccupation with the more fundamental problems of production and manpower there is

apparent growing anxiety regarding the internal financial
position. Total Government Expenditure is certain to
EXCEED the Estimates of the July supplementary budget by

around sterling 300 million while revenue though given
SOME buoyancy by the degree of inflation already evident
may also EXCEED Estimates by something like sterling 100

million but it will not be sufficient to prevent a
deficit well above that of the Estimates. Furthermore as
pointed out in an outspoken article in the ECONOMIST of
January 4 the annual rate of Expenditure in November and
DECEMBER was above sterling 4,000 million and in the first
three WEEKS of December at the rate of sterling 4410

million which indicates the magnitude of next year's

budget. Loans of all types ran at the annual rate of

sterling

141

-2- 41, January 6 from London

sterling 1232 million in December and though this was a
substantial advance on the rates in Earlier months the
level is manifestly inadequate to meet the growing
deficit. The amounts contributed by the USE of gold

resources is, as the statist puts it, "singularly diffioult to estimate". Furthermore perhaps they do not
wish to count their chickens before they are hatched
none of the writers commenting on the budget position

mention the relief implied in the President's loan of
armaments plan. But anxiety regarding the financial front
is in fact based as much on the wage price situation as on
a study of the EXCHEQUEI returns. For Example the TIMES

of January 4 printed a lucid article by Seebohn Rown tree
urging a Government wage policy coupled with family
allowances to prevent widespread undernourishment while

an Editorial on the same day urged a "national" rather
than a "government" wage policy, that is a policy agreed
to rather than imposed but initiated by the Government
for wages generally. Indeed the British EXPERIENCE in the

field of wages is important. It is repeatedly urged that
delay in facing this problem is the most patent of the
present Government's failures and the nature of the problem
is well summed up by Rowntree as follows: "The trade

unions press for the highest terms they can get from the
employers

142

-3- 41, January 6 from London

employers and when the latter argue that in fixing wages
the danger of inflation must be bores in mind the workers
38k not unnaturally "Do you really believe that the
granting or withholding of our demand which only applies
to a VERY small proportion of all the workers in the

country would affect the question of inflation one way
or another? When employers reply that in the case under
consideration the effect on inflation would be negligible
but that the cumulative effect of a number of such wage
settlements would be very great then the workers reply,
Well, that's a matter for the Government to settle,
they should lay down principles to guide negotiators on
both sides". It is important that the Government should
do this with the least possible delay for the absence of
any unifying principles is leading to much confusion and

the adoption of entirely different wage policies by different industries gives rise to much dissatisfaction
HE urges family allowances to assure adrquate nourishment

for children because to achieve this by flat wage
increases would be very costly and would foster inflation
because from a study made in 1936 in York it appears that
about 58 percent of adult male workers have no children
while 9 percent have 42 percent of the dependent children.
It is possible that statements in today's DAILY TELEGRAPH
and

143

-4 41, January 6, from London
and FINANCIAL TIMES regarding impending changes in the

Government system of committees coordinating production

and Economic problems may indicate that at long last the
Government is grasping the nettle which has been nourished

by its neglect. The political correspondents of these
two newspapers state that a new production council to
bring about 100 percent mobilization of manpower is contemplated to replace Greenwood's Committee referred to in
the Embassy's telegram No. 1517, June 5 while the DAILY
TELEGRAPH forecasts a "defence trade and export committee"

to frame Economic policy and deal with price control and
import and export questions. The announcement that the
Government would USE its compulsory powers made by the

Minister of HOME Security in a broadcast on schemes for

fire watching may also indicate that compulsion may be
used in a wide enough field to have SOME bearing on
wage problems.
JOHNSON

CSB

144

PLAIN

EH

London

Dated January 7, 1941
Rec'd 6:35 p.m.

Secretary of State,
Washington.

58, Seventh.
FOR TREASURY.

There is considerable disappointment with last
night's official announcement, forecast in the Embassy's
No. 41 of January 6, outlining the Prime Minister's replacement of Greenwood's Economic Policy Committee by a
new import EXECUtiVE and a production EXECUtiVE, with

the directing committee presided OVER by the Lord Presi-

dent of the Council, Sir John Anderson (formerly by
Chamberlain) continuing the coordination of the new bodies
and the committees on civil defense, home policy and food
policy, and the Prime Minister assuming responsibility
for harmony with the War Cabinet's general policy. Those
who have recently been urging the importance of a wage

policy and steps to check inflation find that these two
problems are not mentioned in the scheme. For Example,
the FINANCIAL TIMES' Editorial states: "The present pro-

posals relate to the supply of goods and man-power. They
do

145

EH -2- 58, January 7 from London.

do not touch such important associated questions as prices
and wages, without the dovetailing of which into a broad

scheme the government will find the financial situation
becoming increasingly difficult. These are thorny
problems but they threaten to become the harder to handle
as the delay in dealing with them becomes more protracted.

In short, the government still SEEMS not to have realized
the need for the formulation of a comprehensive Economic

policy which is of far more immediate importance than
any statement of PEACE aims." The TIMES' Editorial also
stresses the same point and deplores the government's
apparent hesitancy to USE the compulsory powers so

willingly granted last May. "Worst of all the impression
has been created that on the whole Economic side of the

war the government are still fumbling without any compre-

hensive policy." It is significant also that Kindersley
in a broadcast last night launching the NEW Year's savings
campaign asking for double the results of last year used

the phrase, "It would be a disaster if the increased inCOMES were to be spent in competing for the greatly re-

duced quantity of goods available for personal use--for
the certain result of such competition must be a disastrous
rise in prices". As the TIMES asserts, "The absence of
any

146

EE -3- 58, January 7, from London.

any wEll-considered policy to maintain the real value of
the currency is plain enough", and if a disastrous rise

in prices is allowed to occur, it will be disastrous
particularly to those who respond to Kindersley's appeal

"to save and land to the limit of their capacity". The
MANCHESTER GUARDIAN which is critical of the scheme on

the grounds that it still lacks a responsible minister
and staff devoted to dealing with the Economic problem

as a whole, also stresses in its city column today the
urgent need for NEW ways "to Ensure and perhaps to enforce

a further Expansion of savings voluntary, involuntary and
if need be compulsory". Indeed the present situation
SEEMS to underline the advisability of a planned and con-

sidered wage policy from the first if inflationary trends
are to be avoided no matter what the powers, defined or

undefined, of the authorities controlling credit and

monetary matters. Incidentially, it is significant that
the Federal RESERVE Board's request for more EXTENSIVE

powers to control inflation have been criticized here
as an Economic anachronism by the very writers who re-

peatedly criticized their our government for neglecting
to prevent inflation. This is obviously because the
British EXPERIENCE is proving that control of inflation
lies not in money market control along but involves also
a realistic grasp of wage, savings and price problems.
NPL

JOHNSON

Treasury Department

Division of Monetary Research
Date

147

Jan. 7, 19 41

To:

Secretary Morgenthau

From:

H. D. White

You may be interested in this British
device for stimulating economical
production and keeping prices and profits
of Government armament contractors from

rising unreasonably. It is called the
"target price" mechanism and has been

used widely by the British for some
years, particularly in connection with
their procurement of aircraft.

148
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION

DATE January 6, 1941

Mr. White

TO

FROM

Mr. Gass

Subject: The Report of the Price Stabilization Division on
"Bonus" Schemes and "Target Price" Mechanisms
Employed In British Armament Procurement Contracts

This is a very good piece of work--informative, admirably condensed, lucidly written and well reasoned.
It describes "bonus" and "target price" schemes used generally

in British aircraft contracts and occasionally in contracts for

other armaments. The essense of the "target price" idea is a price
set by the Aircraft Ministry on the basis of its own observations of
actual cost and its own control over the efficiency of operations,
supported by constant inspection of both accounting and operations.
The essence of the "bonus" idea is the sharing of cost reductions
below target price (and of increased costs above target price) between the private manufacturer and the Aircraft Ministry.
Target price is determined from actual cost of production by
tests, under government oversight, after "straight-line" production
has been attained. Bonuses are paid as a percentage of cost reductions achieved after target price has been set. Costs during the
period in which a bonus was earned are used to set a new target
price, and so on. The principle of a moving target to keep both
profits. and prices in line is thereby made the essential feature of
British aircraft procurement contracts.
Up to 1938, target price and bonus provisions were so adjusted

that efficient contractors earned about 10 percent profit on their

turnover. From then until the spring of 1939 prices and bonuses of were

adjusted to yield a profit of about 6 percent. "By the spring
1939 the efforts of the Air Ministry resulted in a system fixing
'target costs', 'target prices' and bonus schedules so as to yield
a maximum of 5% on turnover in excess of normal yearly earnings, and

but this only resulted where exceptional efficiency operated element
the contractor owned the capital assets. The fixed profit August

of the 'target price' was scaled down to 3%". (Aviation, as

1940, P. 59, shows the profits of leading American companies,

149

-2-

Division of Monetary
Research

a percentage of sales, during 1939, to have been 7.6 percent
for Douglas, 8.9 percent for Lockheed, 10.7 percent for CurtissWright, 17.0 percent for Martin, 18.0 percent for United, 25.7
for North American and 30.6 percent for Consolidated.)

Perhaps the most important of the lessons of the British
experience are:

1. To reap full benefit from a bonus or target price
system, there must be adequate provision for

frequent revision of target prices.

2. The success of any bonus or target price system is
dependent on a sound system of accounting prescribed
by the Government.

3. To make a bonus or target price system work, Government
must maintain systematic inspection of both production
methods and accounting practices.

150
CONFIDENTIAL

Price Stabilization Division
Leon Henderson, Commissioner

BONUS" SCHEMES AND "TARGET PRICE' MECHANISMS EMPLOYED
IN BRITISH ARVAMENT PROCUREMENT CONTRACTS

Page

I. "Target Price* and "Bonus Schemes in British
Aircraft Procurement Contracts
1. Basic Principles and Procedure
2. "Target" Price Setting and Bonus Provisions in Ordinary Commercial Contracts

1

1

3

3. Target Price Setting and Bonus Schemes

in Aircraft Shadow Factories'

4. Outstanding Lessons of British Experience
II. Contract Procedures Employed in Procurement of
Armaments Other than Aircraft

1. Contract Procedures Used in the Procurement of Ordnance

2. Contract Procedures in Construction of
Cantonments

3. Contract Procedures in Ship Construction
and Repair by the Admiralty

6

8

11

11

12

13

151
December 4, 1940

"BONUS" SCHEMES AND "TARGET PRICE" MECHANISMS EMPLOYED IN BRITISH
ARMANENT PROCUREMENT CONTRACTS

This memorandum has been prepared almost entirely on the basis

(of conversations with British Air Ministry officials and British Ordnance officials now in the United States; in less important partioulars it is based on the Reports of the Select Committee on National
Expenditure, which are identified below.
The memorandum surveys the use of "target price" mechanisms

and "bonus" schemes in British contracts for the production and procurement of armanent. Because these devices are used almost exclu-

sively in contract procedures for the production of aircraft, the

procedures in that industry have been treated at considerable length
in Section I. The lesser extent to which "target price" and "bonus"
schemes have been used in the procurement of armaments other than

aircraft has been discussed briefly in Section II.
SECTION I

"Target Price" and "Bonus" Schemes

in British Aircraft Procurement Contracts
1. Basic Principles and Procedure
"Bonus" schemes to encourage economical production of the air-

(craft requirements of the British Air Ministry have been used in almost all Air Ministry contracts since the rearmament program was

initiated. Their use has been necessitated by the peculiar conditions
of the aircraft industry and the peculiar nature of Air Force needs.
The certainent British aircraft industry consists of a small number of

firms, each producing special types of planes and engines and each
controlling most of its own patents and designs. Hence reasonable

prices and efficient production could not be sought by the use of
competitive tender. Nor could they be secured by direct negotiation
at the time contracts were let. Pressure of time was always acute,
and the specifications for aircraft requirements were almost always
subject to change during the duration of a contract.

-2-

152

For these reasons it has been necessary to determine prices by
actual experience with each contract, and to make special provision
to insure that contractors' costs be kept as low as possible. These
objectives have been sought by the use of several forms of combined
"target" price setting and bonus schemes. The basic principles underlying the methods of price setting used by the Air Ministry in recent
years, and the bonus schemes which supplemented them, will be enumer-

ated below. The evolution of the plans, and the variants employed to
meet special circumstances, will be described later.

(a), The actual cost of production of the article is determined

by tests after "straight-line" production is attained. These

tests are conducted under government oversight (but without

detriment to the contractors' responsibility) and the cost
accounting methods employed require governmental approval,

and all accounts are subjected to governmental audit. Certain elements are mutually agreed upon as constituting cost
for the purpose of the test and all subsequent cost computations. Fixed cost items are included only when the contractor owns capital equipment.

(b) On the basis of this actual test a so-called "target cost"

is agreed upon between the Air Ministry and the contractor.

This "target cost adjusts the actual cost of producing the

test batch for increases and decreases which may be expected to accompany the production of the remaining output under the contract with reasonably efficient management by

the contractor. It provides the point of reference for

both the basic price to be paid the contractor for subsequent production and for the determination of his "bonus",

as described below.

(c) The "target price", which is the base price promised the
contractor for his output under the contract, is determined by adding to the "target cost a fixed sum per unit
for profit determined as an agreed percentage on the esti-

mated 'target cost per unit; it is designed to insure that
total profits do not exceed what is considered an adecuate

and equitable profit on turnover. In practice, the Air
Ministry usually takes into consideration, when fixing this
price, the remuneration which the reasonably efficient contractor is likely to receive on account of the bonus described below, so that the total remuneration including the
bonus should represent a fair return. This rate of return
on turnover is calculated to yield a fair and adequate return on the capital investment of the contractor, or to represent a reasonable reward for economical management, where
the assets are government-owned.

(d) The "savings bonus" is a percentage of any reduction below
"target cost" which the contractor achieves on subsequent
output. Actual cost is computed in the same manner as the

cost of the test "batch." The contractor receives percentages of any reduction of actual costs below "target costs"

according to a prearranged schedule of progressively increasing bonuses. Complementing the bonus schedule is another,
used in commercial contracts, by which the Air Ministry and

-3-

153

the contractor share any amounts by which actual costs exceed "target costs."

(e) Virtually all Air Ministry contracts provide for revision
of the target costs and of target prices should changed

conditions make such revision appropriate. In fact, revisions based upon subsequent tests or straight-line production costs are almost universal in large contracts. In
certain cases revision is made at stated intervals of time
but a more typical practice is to revise the "target price"
at appropriate "batch" stages corresponding to production
schedules. The principle of a "moving target" to keep both
prices and profits in line and to make bonus payments depend on efficiency alone is thus an essential feature of
British aircraft "bonus" contracts.

A hypothetical illustration of the operation of a typical bunus
scheme follows: If the actual unit cost of the test "batch" were b100,

and straight-line production indicated reasonable prospects of cost
reductions, the "target cost* for the next batch might be left at 6100,
in order to make it possible for the contractor to effect some savings

without great difficulty. But the contractor's share of savings in

this "easy" region would be limited to 10% As savings become more
difficult, the sharing would be stepped up to 20% and ultimately to

SO The "target price* might then be set at L106 which would yield

66 for fixed profit. If the contractor's actual cost for a subse-

quent "batch" were 190, and the bonus schedule provided for his re-

ceiving 10. of the first 5% savings, 20 of the next 5% and 30% of
all further savings, below "target cost", his share of savings would
amount to bly. (The actual price he receives would be 697 the "target price" of 6106 minus be which is the Government's share of the
savings.) On an actual cost of 190, therefore, the contractor receives e profit of 67 which equals 7.7% on his turnover. Had his
actual cost equalled the "target cost" at 1100, he would have received the "target price" of 6106, but his profit would have been
only 66, or about 5.66% on turnover. Had his actual cost been b105,
he would have received nevertheless only the "target price" of 6106

plus two-thirds of the excess cost of 15 i.e. 13-1/3. His total receipts would thus be b109-1/3 and he would reap a profit of only

64-1/3, roughly 4% of his turnover. (In this case, as typically,
the contractor bears one-third of the first 5% excess, two-thirds
of the next 5% and the whole of any excess beyond 10% of the "target cost.")

2. "Target" Price Setting and Bonus Provisions in Ordinary Commercial Contracts

The first tentative step towards the adoption of bonus schemes

-4-

154

in aircraft contracts with private firms was taken about 1927, for
the purpose of securing for the Air Ministry any savings made in
production, and to insure that the contractor would not reap exorbitant profits. Although the simple arrangement adopted at that
time did not in itself constitute a bonus scheme, it is described
in this memorandum because it provided the Air Ministry with the
basic procedures upon which bonus schemes were subsequently developed.

This scheme simply prescribed a maximum price to be paid to

the contractor set so as to yield, according to Air Ministry estimates,
about 10% on turnover. The contractor was required to refund to
the Air Ministry in their entirety all savings achieved below this

maximum price as compared to actual costs plus 10% The contractor,
however, bore all risks of exceeding the estimated cost and received
nothing in excess of the maximum price. Since the soheme provided
the contractor no incentive to minimize cost, the objectives of
securing efficiency and minimizing air procurement cost were not
fully assured.

The first true "bonus scheme" was adopted in 1935. That
scheme provided that savings, determined in the manner described
above, should not be returned entirely to the Air Ministry, but be
shared with the contractor according to a formula related to the

facts of the particular case. A typical instance would be: of the
first 5% reduction below "target cost", the contractor would receive

10% of the next 5% reduction, 20%: whilst of savings in excess of
10% below "target cost" the contractor would receive 30%. If the
contractor's cost exceeded the "target cost" he suffered the entire
loss beyond an excess of 10% with a scaled sharing of excesses up to
that limit as indicated above. In this as in later bonus schemes
"target costs" were fixed to permit some savings at the 10% sharing
level, but in order to earn bonuses at the higher rates a contractor
had to be exceptionally efficient.
The foregoing represents the developed practice as it emerged

in 1938 but since, as in the earlier period, 1935-1937, the primary

concern of the Air Ministry was to insure profitability of aircraft
production despite small turnover, the maximum price was so fixed 10%

that when the bonus was added the contractor would earn about on

turnover. But at that time the contractor carried all excesses of

cost beyond the maximum target price.

About 1938 the greatly increased turnover of the contracting

155

-5aircraft firms made it possible and desirable to reduce basic rates
of profit on aircraft contracts. Prices and bonuses though determined
on the same principles as earlier, were not fixed so as to yield,
with reasonably efficient management, about 6% on turnover. The "tar-

get price" was set at about 45 above "target cost." The latter was
so tixed as to make it fairly easy for the contractor to realize
savings sufficient to yieldhim an additional 3% Only by exceptionally
efficient operation could he make savings sufficient to bring his
profit much above 6%.

By the time the war began the turnover of aircraft firms
was so large as to make even a 6,4 profit on turnover unnecessarily

high. By the spring of 1939 the efforts of the Air Ministry resulted in a system fixing "target oosts", "target prices" and
bonus schedules so as to yield a maximum of 5% on turnover in

excess of normal yearly earnings, but this only resulted where exceptional efficiency operated and the contractor owned the capital
(assets. The fixed profit element of the "target price" was scaled
down to 3%

As explained above, "target costs" were adjustable by agreement should changed cost conditions make them obsolete. Furthermore, except on small contracts, the Air Ministry early adopted

the policy of adjusting "target costs" rather frequently to insure
that prices, bonuses, and the total profits of contractors remain

reasonable. In large contracts revisions were often made about
\every 300 units of output; in some cases the revision was almost
6 continuous process due to frequent changes in specifications.
No formal arrangement for periodic revision was, however, incor-

porated in contracts with British firms. The Air Ministry and the
aircraft firms had sufficient experience with, and confidence in,
each other so that informal procedures were considered sufficient.
In a very recent contract between the British Air Ministry

and an American firm, the Houdaille Company, for the procurement of

Aircraft guns, a formal arrangement for adjustable target price
tetting and bonus determination on a somewhat different principle, is
employed. This arrangement is considered especially appropriate to
cases in which the procurement agency and the contractor have had
limited experience with each other's methods.

The Houdaille contract provides that the actual price paid
the Company be set for each quarter-year as follows, subject to the
proviso that in no circumstances will a price of more than $350
ber gun be paid: The maximum price which will be paid the company during

each quarterly period is equal to the actual cost of theprevious quarter
year, plus a fixed manufacturing fee of $34 per gun, plus a fixed royalty
payable to the Colt Company for the use of design. Should the company's

156

-6cost plus the fixed fee plus the royalty in any current period be below
this maximum price, it receives its actual cost plus fee plus royaltyexcept for any adjustment on account of the bonus described below.

Should, however, its cost plus fixed fee plus royalty rise above its
maximum price for the current quarterly period, it receives, nevertheless, only the maximum price-plus bonus, if any. Its actual cost plus

fee plus royalty for the current period thereupon becomes the saximum
price for the ensuing period, and the same procedures obtain for determination of the price paid the company during that period.
The above procedure by which basic prices are determined is supplemented in the Houdaille contract by the following bonus scheme: The
base for the bonus is the fixed maximum price of $350, regardless of
subsequent costs of production. The contractor receives one-quarter of
any amount by which his actual cost of production plus fee plus royalty
in any quarter falls below this $350 maximum price; the remaining threequarters of these savings are retained by the British Government.
The company, therefore, has two continuing incentives towards
economy: First, its 25% share of any savings made by producing a gun
at a cost below $350, and second, the fact that should its costs during

any period rise above those for the previous period, its base profit
during that quarter will be correspondingly reduced.

3. Target Price Setting and Bonus Schemes in
"Aircraft Shadow Factories 1

The typical system described in the previous section was applied
without fundamental alteration to production in the so-called "shadow
factories", government plants constructed and operated by contractors
as government agents.

The original shadow factory agreements called for construction of
the plants and a stipulated output of engine components, engines, or airframes. Later contracts covered further production by these factories.
No bonus features were included in the construction contracts, which simply
provided for payment of fixed construction fees, roughly proportioned to
the size of the plant. With respect to production, however, a basic fixed
fee, proportioned roughly to the expected cost of output-originally to the
costs of private firms which produced identical aircraft products, but
later to costs as revealed by shadow factor experience-was supplemented
in 11 shadow factory contracts by bonus schemes.
As in the schemes used in commercial contracts, the bonus for
efficient management was based on the relation between a "terget cost*
1,

For a fuller description of the British "Shadow Factory" scheme, see
"The British Shadow Factory Plan", Lincoln Gordon, September 4, 1940;
also "The British Program for Armament Plant Expansion, 1935-1939",
J.S. Earley and W. S. B. Lacy, October 21, 1940.

157

-7-

(called in those contracts a "basic price") and actual cost of
production. This "target cost" did not include, as did "target
price" in commercial contracts, a profit item, since the overnment owned all capital and the contractor received his basic
reminoration in the fixed fee mentioned above. For the same reason
"target" and actual costs did not include fixed cost elements;
they did, however, include costs of labor, materials, insurance,

maintenance and other operating expenses.

Procedure for the determination of the "target cost" was

set forth recisely in the contract. If there was no difficulty

in obtaining agreement, "target cost" was to be based on the actual
cost of the first "batch" of twenty-five planes or engines produced
as soon as straight-line production was reached. Should the Air
Ministry and the contractor be unable to agree, successive "batches"

of twenty-five units, up to five, were to be run off, the fifth

"batch" to be adopted for target cost setting if prior agreement

had not been obtained. Should no agreement be reached on the basis

of the fifth "batch", there was resort to arbitration. The arbi-

trator was one person agreed upon between the Air Ministry and the
company, or, in default of agreement, a person to be appointed by
the Lord Chief Justicc of England.

The actual cost of production was thereafter obtained for
the output of each four-week period. The contractor was riven
(credit in & special "bonus account" for agreed percentages of any
amounts by which his actual cost durin that period fell below
"tar-et cost" for the units produced. Conversely, the contractor
WELS debited the same ercentages of any excess of actual cost over

"target cost." At the end of the contract any net amount standing
to the credit of the contractor in the bonus account was paid to
him as E reward for efficient and economical operation. The contractor suffered no loss of revenue should his actual costs over the
life of the contract exceed "target cost". The fixed fee was thus
a

minimum guarantee to the contractor.

Th: contractor was paid increasing percentages of "savings"

as his savings relative to "target cost" increased. In the original

shadow factory agreements the contractor received 12g/ of the savings
up to an amount which, in the case of airframes, represented about
5

or 6. of their originally estimated actual cost, and 17 of all

further savings. These percentages, as well as the basic operation
fees, were readjusted downward in later shadow factory contracts,
but the principle of progression remained the same. Although the
original shadow agreements contained no arrangement for periodic

-8-

158

revision of the "target cost", it was agreed that if changes in the
cost of materials or wages, or other factors not related to the oontractor's efficiency of operation, should make the "target cost" appear
unfair to either party, it should be varied by agreement to give effect
to such changes. If agreement upon such readjustment proved impossible,

resort to arbitration was provided. In later shadow contracts the
"target cost" was re-set from time to time, often after each 300 units
of production, by new tests of the cost of producing additional "batches."
The only essential differences, then, between the bonus schemes
used in commercial contracts and those used in shadow factory agreement were: (1) In the shadow factory schemes the basis remuneration

of the contractors was not fixed by determining a "target price" as
in commercial contracts, but was a negotiated fee proportioned to
estimated cost of production--originally to the costs of similar
products produced by private firms, but later to the costs as rerealed by shadow factory experience. The sole use of the "target

cost" device was to help determine the amount of bonus which would

supplement the fixed fee; (2) The determination of cost was simplified by the exclusion of overhead cost items; (3) The amounts by which
actual costs exceeded "target cost" was debited against earned bonus,

but the contractor suffered no loss of income if, over the life of
the contract, actual costs were higher than "target cost", (4) Provision for arbitration was formally agreed upon; (5) The schedule
for the sharing of savings was less elaborate.

The importance of the bonus provision to the net income of the

contractor is indicated by the fact that, in the original contract for

the production of Bristol Blenheim bombers, a reduction in actual cost
of even 5% below "target cost" raised the contractor's profit on turnover from about 3.7% to 4.6% Should costs be cut by 10% the profit
on turnover would be 5.8%

The above method of "target" cost setting and bonus payments has

continued in operation in shadow factory contracts since the original

agreements, although the fixed fees have been greatly reduced and the
"target costs" have been successively readjusted downward. The total
remuneration of the contractor, which in the original agreement amounted
to about 5 to 7%, has been reduced to about 2% on turnover.

4. Outstanding Lessons of British Experience

In the opinion of British Air Ministry officials the following

-9- -

important lessons have been learned from their experience with "tar-

get price" and "bonus" schemes:

(a) Bonus schemes applied to the production of air force requirements are highly useful in encouraging economy and reducing

Air Ministry costs. They have not been found useful in connection with the construction of aircraft plants on government account because of the impossibility of using actual
experience as a test to determine costs of construction
under normally efficient management;

(b) Negotiation of contracts and the commencement of actual production are accelerated by the knowledge that prices will
later be determined at a reasonable level by the target system. The addition of bonus schemes further facilitate nego-

tistion by assuring the contractor that he will benefit from

all increases in efficiency which he may subsequently develop;

(c) The British Air Ministry considers the use of bonus schemes
to encourage speed inadvisable. They feel that contractors
can be relied upon to speed production under the stimulus
of sharing of savings and that to pay pure bonuses for early
deliveries to profit-making corporations would lead to labor
unrest;

(d) Bonuses for reducing costs need not be complemented by pen-

alties for failure to attain economy, other than liability

for sharing of excess costs beyond the "target cost", if
prices are determined, as in the target system, in such a
way that contractors' profits decline as their costs rise;
(e)

No bonus scheme designed to encourage economy is an adequate

substitute for a sound method of fixing basic prices on government procurement contracts. In fact, British Air Ministry
experience indicates that the efficacy of bonus schemes designed to promote economy and to prevent unjustified profits
or undeserved losses to contractors requires a method of fixing base prices which accurately predicts the actual cost
of straight-line production under reasonably efficient conditions.

(f) In the absence of adequate cost precedents, the "target
cost" and "target price" system, under which actual cost
experienced in producing the contracted article is obtained, is the best method by which prices and bonuses on aircraft procurement can be determined. The advantages of
its use may be summarized as follows:-

159

-10-

(1) By basing prices upon actual costs of production and

by providing for their periodic or continuous revision, it insures that the basic profit paid the contractor is closely related to his actual cost of production;

(2) When combined with a bonus scheme, it insures that

this cost of production will be as low as diligent

management can make it;

(3) Because the bonus, which is an integral part of the
total remuneration, is based upon an accurate test of
his cost conditions, the contractor's total remunerstion will depend upon his efficiency and not upon fortuitous circumstances beyond his control;
(g)

To reap full benefit from a bonus or "target price" system,
the government must include in its contract practical pro-

visions for revision of "target prices" at frequent intervals of time or production. Definite revision provisions

are particularly advisable when the government procurement
agency has limited experience with such systems or with the
firm under contract;
(h)

The success of any bonus scheme, as well as of the "target
\price" system, requires an adequate system of accounting
prescribed by the Government;

(i) Governmental oversight (but without detriment to the con-

tractor's responsibility) of the production of the test

batches, upon which target cost is based, and adequate

auditing of contractors' accounts, are essential to the
success of any bonus or "target price" system;

(1) The British Air Ministry has found it advisable to set
"target cost" sufficiently high to permit the normally
efficient contractor to realize some savings bonus,
but to consider such anticipated bonus is calculating

the "target price."
(k) If an elaborate sub-contracting system is developed, the
same "bonus" and "target price" systems employed by pa-

rent firms can be incorporated in agreements with sub-

contractors.

(1) The Excess Profits Tax applies a chargeable rate of 100%
to all "excess" business profits earned since April 1,

1939. The incidence of this tax has virtually nullified
the incentives to economy provided by "bonus" schemes.
However, both "target prices" and "benus" systems have

been retained as the best available means of directly

controlling costs, prices and profits.

160

- 11 -

161

SECTION II

Contract Procedures Employed in Procurement of Armaments other than Aircraft.

1. Contract Procedures Used in
the Procurement of Ordnance.

Bonus schemes have not been used in the procurement of the

ordnance requirements of the British War Office or the British Admiralty. Their use has been considered unnecessary for the following reasons:

(a) The immense experience with the production of all types

of ordnance, amassed in the several Government ordnance
factories, provided the procurement agency with adequate
data concerning the cost of producing these armaments;

(b) The whole production system was based upon elaborate production "layouts" (charts, photographs, drawings, blue-

prints, specifications, and instructions) whi ch closely

estimated the amount of material and the number of nan
and machine hours required in the production of each component part, and the probable cost thereof; a check of
methods, output and costs was made at frequent intervals.

(c) A large number of experienced firms capable of making
ordnance, according to the above methods, were usually
available. Such firms, acting as parent firms, formed
the nuclei of a large subcontracting system, each unit
of which was capable of satisfactory production under
the system mentioned above.

Accordingly, the competitive tender system was practical in
most cases and has continued in general use up to the present time
in both War Office and Admiralty ordnance procurement contracts.

Although such contracts stipulated a fixed price, they almost invariably included an escalator clause which provided for revisions
of that price should those costs beyond the control of the contractor
change. The basic profit included in this fixed price was formerly

- 12 about 10% in both Army and Navy contracts; this profit item has,
however, been reduced since early 1939 to lower levels.
Where straight competitive bidding was impracticable, where
the experience of government arsenals was not convincing, or where
a firm was asked to make a product in the production of which it

had little or no experience, the following system of "target price"
setting (not, however, complemented by "bonus" schemes) was employed:

The cost of a "test batch" was determined by a time and cost study

of its production. The test was run in accordance with the "layout"
provided by the government arsenals and under the close inspection

of arsenal officials. The cost of this batch having been ascertained, it was compared wherever possible with a "bogey" cost based on

the experience of the government arsenals. If the contractor's cost
was, in the opinion of the procurement officials, reasonably in line
with the "bogey" and reasonably indicative of subsequent cost of production, a fixed price, based on results of the test, was adopted

for subsequent output for the entire life of the contract. As in
the contracts let by tender, the price was fixed so as to yield a
fixed percentage, originally about 10% on turnover, Escalator
clauses were likewise included.

Should the contractor cut his cost below that upon which the
price was set, he reaped the entire benefit; conversely, should his
costs be above those anticipated, he suffered the entire loss.
2. Contract Procedures in Construction of Cantonments.

In constructing some of the cantonments for the British Army,
an attempt was made to apply the target price and bonus system. The
following paragraphs from the Third Report of the Select Committee
on National Expenditure, printed May 7, 1940 (pp. 7-9) outline the
scheme and the reasons for its apparent failure
"The contracts for these camps, known as 'target price
contracts, provided that the contractors should be paid
(a) actual and necessary prime costs, (b) a fixed fee calculated as a percentage of an estimated cost and covering
overheads, profits and the use of certain tools, and (c) a
bonus on any saving they succeeded in making on the target
price. The target price may perhaps be best described as
'an adjusted price of a previous estimate having regard to
local conditions and the cost of labour.' Its purpose was
to encourage economy in building, by fixing a reasonable
basic estimated cost, such as would enable a contractor by

162

163
- 13 the exercise of care, energy, and ability, to reduce this
basic or target cost and thus to earn a bonus.
"This theory has proved entirely unworkable in practice. As the cost of labour and mater ial varied so extensively, the actual target price could not always be ascer-

tained until the work was approaching completion. The SubCommittee were informed that the system was adopted in order

to find out the theoretical cost of a camp under certain
specified conditions, but, as these conditions rarely pre-

vail, the target price becomes of little practical utility.

In effect, the incentive to economy only exists as long as
the contractor has a prospect of earning a bonus. Although
the divergencies between the original estimates and the final costs are at present unknown, the general indication is
that the latter will be greatly in excess of the estimates.
"The Sub-Committee consider that the failure of the
target price system and the resulting inadequate returns
to contractors have led firms to accept more work (involving few extra overhead charges) than they could effectively deal with, and that this has led to much inconvenience
and delay. They do not think that the supervision of work
has been effective or satisfactory
"Since speed is no longer the dominating factor, a
stronger incentive to economy may now be provided by ob-

taining fixed price tenders by competition, subject to subsequent measurement. In order to induce firms to tender
at reasonable prices under existing conditions, "variation
clauses" are included in these contracts by which the fixed
contract price may be varied up and down after the date of
acceptance, in accordance with clearly defined alterations
in the rate of wages and the market prices of materials.

3. Contract Procedures in Ship Construction and Repair by the Admiralty.
So far as we have been able to ascertain, no bonus schemes
or "target price" mechanisms have been employed by the Admiralty

in contracting for the construction of ships or their repair. Contracts for ship construction have traditionally been let on a competitive tender basis and this system generally obtains at the preent time. During the first year of World War II, because of shortage of time and facilities, the Admiralty has used various types of
"cost-plus" contracts, but the Select Committee on National Expen-

164
- 14 -

diture has recently recommended that the Admiralty revert to its
traditional fixed price contract system. A more complete discussion of contract procedures traditionally and recently employed
by the Admiralty in the construction and repair of ships is contained on pages 3-5 of the Seventh Report of the Select Committee

on National Expenditure, printed June 25, 1940,

407640

ALLISON ENGINEERING COMPANY

165

Deliveries of Airplane Engines
CONFIDENTIAL
ActualSTRICTLY
Estimated
deliveries
:

deliveries

on existing orders

:
040

January

10

May 1 June 1
June 2 29
June 30 - July 27

15

July 28 - August 31

91

September 1 - 28

31

50

221

September 29 - October 5

49

October 13 - 19
October 20 - 26

61

October 6 12

October 27 - November 2
November 3 - 9.
November 10 - 16
November 17 - 23

November 24 - 30
December 1 - 7
December 8 - 14
December 15 - 21
December 22 - 28

December 29 - January 4

73

48
80

44
49

19
56
30
86

78
52
2

441

Earch

303
416
549

April

592

January 5 - 31
February

Kay

June

July

August

September
October
November
December

603
612
645
710
790
897
633
504

942

January

February

320
142

March

90

April

71

May

June

fice of the Secretary of the Treasury
Division of Research and Statistics.

40
4

January 6, 1941.

166
EXPORTS OF PETROLEUM PRODUCTS, SCRAP IRON AND SCRAP STEEL

FROM THE UNITED STATES TO JAPAN, RUSSIA, SPAIN, AND GREAT BRITAIN
AS SHOWN BY DEPARTURE PERMITS GRANTED

Week ended January 4, 1941
JAPAN

RUSSIA

SPAIN

GREAT BRITAIN

PRODUCTS

? and Get Oil (including
Health (ii)

Elemited : California
as Octabe Cruie*
411 Other Crude

204,387 Bbls.

-

-

379,953 Bble.
83,400 Bbls.

---

---

--

-

95,936 Bbls.

---

--

1,981 Bbls.
8,378 Bbls.

--

-

57.156 Bb1s.

9.000 3bls.

-

inscline

Gescline ⑈
Geocline A,

ALL Other Gasoline

---

-

Cabricating Oil -

triation Imbricating 011***
All Other Imbricating Oil
!straethy! Lead

-

--

14,006 Fbls.
34,002 Bbls.
--

--

--

--

--

-

-

86,000 Bbls.

--

--

-

2,680 Tons

--

-

--

4,565 Tons

such as IsoOctabe, Iso-Fexame, or
Inc-Frature
de IRCE AT SCRAP STEEL

Jumber 1 Servy Melting Scrap
All Other Scrap

Mice of the Secretary of the Treasury, Division of Research and Statistics.
January 6. 1941.
Office of Merchant Ship Control, Treasury Department.
Any material from which by commercial distillation there can be separated
tore them 3 percent of aviation motor fuel, hydrocarbon or hydrocarbon
sixture - President's regulations of July 26, 1940.
Aviation Gesoline.

is defined in the President's regulations of July 26. 1940.

167
January 6, 1941

Military Supplies for Greece

Planes

Since our memorandum of December 14th, there have been the

following developments in this situation:
On the 16th of December the British Charge d'affaires told the
Under Secretary of State, Mr. Welles, that the Greek Government had
informed the British Government that they would accept 30 planes from

the British aviation forces in Egypt in substitution for 30 P-40s
offered by this Government. Apparently shortly after this the Greeks

reversed their stand, since on December 20th Mr. DePasta came in from
the Greek Legation with a memorandum rejecting the offer of Defiant
planes and discussing the reasons why the Greek Government "insists on
securing P-40 airplanes". However, three days later, December 23rd,
the State Department. as a result of an exchange of cables with the

American Minister in Athens, apparently still felt that the matter
would eventually be cleared up by the British turning over to the
Greeks certain planes which they had in Egypt.

On December 30th the Greek Minister came in to see Mr. Young of
the President's Liaison Committee and explained, in connection with the
30 pursuit planes, that he had been instructed by his government to
accept delivery of any modern American pursuit plane, not necessarily

the Curties P-40. In response to a suggestion, he said he had no instructions from his government in regard to accepting any British
planes.
even though they might be of a type superior to those heretofore offered the Greeks.

On December 31st Mr. Murray of the Near Eastern Division of the
State Department showed to Mr. Young copies of a letter from Mr. Butler

of the British Embassy, stating that the British were willing to turn

over to the Greeks 30 Curtiss P-36a (Mohawks) immediately, if the
United States Government would undertake to deliver 30 P-40s (Tomahawks)
to Basra by an American steamer at an early date. At this point,
Mr. Murray produced a copy of a cable from the American Minister in
Athens. as well as a report of a conversation on December 28th Greek between

the Greek Minister and Mr. Murray. both to the effect that the
Government will accept in lieu of P-40s any modern United States
pursuit plane. if it is of A type now on order by the United States
Aray. (This restriction had not been mentioned by the Greek Minister
in his conversation of the 30th with Mr. Young.) Accordingly, there

-2-

163

was also discussed at this time the possibility of obtaining a

release of the Republic P-43s now being produced for the Army. While
these planes are not armored, they might prove suitable for us by the

Greeks and would certainly fulfill the conditions set forth by that
Government. In the course of this conversation with Mr. Murray, it
also developed that the Greeke, as a result of their conversations

with the Under Secretary of State on November 20th. had come to expect

eventual delivery of 60 planes by the United States, 30 more or less
immediately and 30 over a period.

Ammunition:

A long list of Greek ammunition requests was brought in by the
Minister on November 13, 1940. At that time it was suggested that the
Greek Government confer with the British Government to see what part

of this list could be supplied direct by the latter, then with the

British Purchasing Commission to ascertain what part of the remainder
could be supplied by that organization and that we would then be glad
to consider with them whatever requirements remained.
The next development of any importance in this matter was a short

list of 6 items left by the Greek Minister with Mr. Allen in the Near

Eastern Division of the State Department. This list was checked with
the War Department and on December 28th Mr. Joe Green reported that

while certain of the items were apparently somewhat similar to United
States Army items, there was definitely no surplus of any of this
materiel. This statement was subsequently confirmed directly with
Colonel MacMorland.

In the meantime, a specific request had been made for a small
amount of 57 mm. ammunition to be released from Navy surplus stocks.
This ammunition had not been part of that mentioned on either of the
two lists.
On December 30th the Greek Minister came in to see Mr. Young and

was told that there was apparently some question as to the availability
of the items which he required, at least out of Army stocks, in view
of the shortness of our own supplies. The Minister said he appreciated
this point and was accordingly writing Mr. Hull a letter, asking for
special consideration in this connection.
On January 3rd, 1941 a group consisting of the commercial counsellor
of the Greek Legation, a Greek army ordnance expert. and a representative of the British Purchasing Commission, Captain Leigh, came in and

spoke to Mr. Williams of Mr. Young's staff. They submitted a list of

ordnance requirements which they said rendered obsolete any previous

list in this connection. They had apparently checked this list with
the War Department and found that it would be possible to use a number

163

-3- -

of items that we have on hand, with only slight modifications: in this
connection. they said that they had received a friendly and sympathetic
reception in the War Department. These gentlemen were advised. in

accordance with the procedure originally outlined to the Minister. to
check this new list with the British Purchasing Commission technical
experts and then send in. through the British Purchasing Commission.
2 specific request as soon as possible.
In a conversation on January 6th, with Mr. Koundouriotis. Greek
Chancellor. it was apparent that he had no knowledge of the information
which had been presented to us on Friday, January 3rd.
Miscellaneous:

Other requests for assistance by the Greeks have been received as

follows:

On November 11th negotiations were reported under way with Continental

Motors in connection with 35 220 h.p. airplane engines for training

purposes. No specific action was taken by the Greek Government on these
negotiations at that time. When the matter was brought up by Mr.
Koundouriotis or December 30th, he was again advised that filing of
specific request by the Greek Government in this connection would be
a

the next step.

On December 21st, a request for allocation to the Greek Government
of 300,000 pounds of magnesium out of the Dow Chemical Company production

schedule was asked for by the Greek Minister. This request is still

under consideration by the Army. Navy and Defense Commission.

On January 4th a request was received from the Minister for priority
on certain orders for fire trucks of a total value of $570.000.

P.4.

170

TELEGRAM SENT
JR

GRAY

January 6, 1941
10 p.m.

AMLEGATION

BELGRADE ( )UGOSLAVIA)

2.

FROM TREASURY.

An application is pending before the Treasury
Department for a transaction involving the sale of
gold by Danmarks National Bank, the purchase of such

gold by the B.I.S. and the sale of an equivalent amount
of gold by the B.I.S. to Banque Nationale du Royaume

de Yeugoslavie, payment to be effected by latter bank
against dollar sight account maintained by such bank
with B.I.
Treasury would appreciate it if you will
S

.

investigate and promptly cable your comments on
Yougoslavian end of transaction.
HULL

(FL)

462.00 R 296 B.I.S. /903
EA:GL:LWW

TO:

171
Nell

1/6/41

4.15pm
This is a copy of the memo

and statute that was taken to the
White House at 4:15 p.m. today for

discussion with the President.
I dated the memo. The Secty

had not seen it so I will not know
how it was signed until Mr. Foley
returns from the White House.

Name

MR. FOLEY

Since

172

x

STRICTLY CONFIDENTIAL
JAN 6 1941

REMORANDOR FOR THE PRESIDENT:

attached is a proposed joint resolution to enable
this country to furnish war materials of every character to
other countries whose defense you consider to be vital to the
defense of the United States.
The attached draft amends the Joint Resolution which

you signed last June authorising the United States to manufacture,
purchase and repair our materials for the South American republics.
Since the original resolution was referred is both Houses so the
Committees - Foreign Affairs, the proposed amendment will go back
to the same Committees. Otherwise, a controversy might arise
among several Committees for jurisdiction over the measure.

The proposed legislation provides is the broadest terms
for material aid to the non-eggreesor countries upon such conditions

as you my prossribe. Certain belligereate, such as England,
Canoda and Greese, are expressly mentioned, se as to repeal, without

doing se by specific reference, certain restrictive legislation such

asi the credit provisions of the Neutrality set, the provisions of
the Espionage hat of 1917, which may conceivably prohibit the

173

-2-

sending out of motor torpedo boats and other vessels of war; the

provisions of the Enburgo Act of July 2, 1940, insofar as it sight
require the Secretaries of Bar and Havy to get a license for the
exporting of MBF materials, and other provisions of donestic law

which limit aid to belligerents.
The proposed legislation gives the United States the
following powers in supplying material aid to those countries
whose defense is vital to the defense of the United States:

(1) To manufacture war defense materials in its
arsenals, factories, and shipperds.
This power to manfacture does not carry

with is a waiver of any of the donestic
love, such as the Right-Boar Act, the
Talsh-Healey Act, the Bagner Act, and other

similar legislation.
(2) To presure or purchase any war anterials from our

airplane factories, private shipyards, or our other
manufacturers.

This purchasing CAD be done on the conditions

and is the - which you does to be satisfactory.

(3) To sell, lesse, lead or otherwise dispose of any war
materials to any country whose defense is vital to the
defense of the United States.

174

-3Such a disposition is to be made upon
such conditions and in any signer which you

deem to be satisfactory. . sale or lesse
of the articles can, if you wish, provide
for payment is kind, or for any direct or
indirect benefit to the United States. Such
& disposition to a foreign country would not

require the certifiests of the Chief of Staff
of the Aray or the Chief of Reval Operations,
and could be made, is your discretion, with-

out the formality of public advertisement, or
without the other restrictions which would
otherwise apply to the disposition of Governsent property.

(4) To test, repair, outfit, or otherwise to place in
good working order any defense article.
These powers can also be exercised upon

such conditions and in the namer which you

deem satisfactory. This provision is broad
enough to permit the use of our bases, yards,

and other naval facilities to outfis and to
repair non-of-ear of Great Iritals and other
non-aggressive countries.

(5) To comminities any defense information.

175

-4This section gives you the widest discretion
to make available designs, blue-wrints, and

other information for use either in comsection with particular equipment, which is

emplied, or for manufacturing defense sate-

rials is the foreign countries.
(6) To export any defense article.
This section is intended to eliminate restrictions
is the Espionage Act of 1917 and in the Enbergo

Act of July 2, 1940, against the exportation of
certain war materials.

It is not bread enough is itself to authorise
the physical delivery is American vessels of
was materials to combat areas.

(7) To furnish any other aid of a supply or material
character.

This section is a general great of power
intented to cover unforesous situations not

specifically - and to supply a carsaia degree of flexibility in mosting situations
which my arise in the fast-changing world sit-

Provision is made is the proposed Act for the purchase is
South America, Canada or the other countries whose defease is vital to

176

-5the United States, of arms, Minition, and implements of war shop is
is deemed necessary is the interests of the United States to do so.
Bar material purchased in Canada by the United States, for example,

could then be transferred to Canada by sale or lease under the pro-

visions of this joint resolution.
The proposed Let limits any foreign country which obtains
defense articles from the United States from transferring them to any

other foreign country without the consent of the President.
The rights of American manfacturers are safeguarded under

the proposed Act by providing for payment for the patent and other
rights of such manufacturers to any defense article disposed of to a
foreign country.

The proposed resolution cestains an authorisation for appropriation, and provides that the sonays collected from the disposi-

tion of war materials will, if the Director of the Budget approves, be

placed in the same appropriation out of which alas the acneys to a
the articles.
The joint resolution contains & provision authorising you to
issue rules and regulations to carry out its purposes and to delegate
to any Department, Agency, or officer any of the powers granted to you
under the resolution.

SCraja
1/6/41

177
JOINT RESOLUTION

To furnish material support to nations
whose defense is vital to the defense
of the United States.
Resolved by the Senate and House of Representatives of the United
States of America in Congress assembled, That Public Resolution Numbered

63 approved June 15. 1940, entitled "Joint resolution to authorize the
Secretaries of War and of the Navy to assist the governments of American

republics to increase their military and naval establishments, and for
I

other purposes," is amended to read as follows:

Section 1. This Act may be cited as 'An Act to promote the
Defense of the United States.'

*Sec. 2. As used in this Act -"(a) The term 'defense article' means:

"(1) Any weapon. munition. aircraft, vessel, or boat;

"(2) Any machinery, facility, tool. material, or
supply necessary for the manufacture, production,

processing, repair, servicing, or operation of
any article described in this subsection;
"(3) Any component material or part of or equipment

for any article described in this subsection;
*(4) Any other commodity or article for defense.
Such term 'defense article' includes any article described in this subsection: Manufactured or procured pursuant to section 3: to which the

United States has or hereafter acquires title, possession. or control;
or owned, leased, or otherwise held by any foreign government.

178
-

"(b) The term 'defense information means any plan, specification, design, prototype, or information pertaining to
any defense article or to defense.
"Sec. 3(a). Notwithstanding the provisions of any other law, the
President may. from time to time, when he deems it in the interest of
national defense. authorize the Secretary of War, the Secretary of the
Navy, or the head of any other department or agency of the Government:

"(1) To manufacture in arsenals, factories, and
shipyards under their jurisdiction, or otherwise
procure, any defense article for the government of
any American republic, England, Canada, Ireland,
any other government of the British Commonwealth of
Nations, Greece, or any other country whose defense

the President deems vital to the defense of the
United States.

"(2) To sell, transfer, exchange, lease, lend, or otherwise dispose of, to any such government any defense

article, including, but not limited to, a sale,
transfer, exchange, lease, or loan, providing for
payment or repayment in kind or property, or for

any other direct or indirect benefit to the United
States which the President deems satisfactory.

179
-3-

"(3) To test, inspect, prove, repair, outfit,
recondition, or otherwise to place in good
working order any defense article for any
such government.

*(4) To communicate any defense information to
any such government.

"(5) To export any defense article to any such
government.

"(6) To furnish to any such government any other
aid of a supply or material character which
the President considers necessary or proper

in the interests of the national defense
and to effectuate the purposes of this Act.
"(b) The powers conferred by and the actions authorised under

paragraphs (2) to (6), inclusive, of this section shall be exercised and
carried out upon such conditions and in such manner as the President
deems satisfactory.

"Sec. 4. All contracts or agreements made for the disposition of
any defense article or defense information pursuant to section 3 shall
contain a clause by which the foreign government undertakes that it

will not, without the consent of the President, transfer title or
possession of such defense article or defense information by gift.

sale, or otherwise, or authorize the use of such defense article or
defense information by or under the direction of any other foreign
government.

180

-4*Sec. 5. The Secretary of War. the Secretary of the Navy, or the
head of any other department or agency of the Government involved shall,

vhen any such defense article or defense information is exported,
immediately inform the department or agency designated by the President

to administer section 6 of the Act of July 2. 1940 (54 Stat. 1090). of
the quantities, character. value, terms of disposition. and destination
of the article and information so exported.
*Sec. 5(a). There is hereby authorized to be appropriated from
time to time. out of any money in the Treasury not otherwise appropriated. such amounts as may be necessary to carry out the provisions
and accomplish the purposes of this Act.

*(b) All money and all property which is converted into money
received under section 3 from any government shall, with the approval

of the Director of the Budget, revert to the respective appropriation
or appropriations out of which funds were expended in acquiring the
defense article or defense information for which such consideration is

received. and shall be available for expenditure for the purpose for
which such expended funds were appropriated by law. during the fiscal

year in which such funds are received and the ensuing fiscal year.

"Sec. 7. The Secretary of Mar, the Secretary of the Savy, and
the head of the department or agency shall in all contracts or agreesents for the disposition of any such defense article or defense in-

formation fully protect the rights of all citizens of the United States
who have patent rights in and to any such article or information which

181
-5is hereby authorised to be disposed of and the payments collect. ..
royalties on such patents shall be paid to the owners and holders of
such patents.

"Sec. 8. The Secretaries of Mar and of the Havy are hereby authorised to purchase or otherwise acquire arms, ammunition. and in-

plements of war produced within the jurisdiction of any country to
which section 3 is applicable, whenever the President deems such

purchase or acquisition to be necessary in the interests of the
defense of the United States.
"Sec. 9. The President may. from time to time, promulgate such
rules and regulations as may be necessary and proper to carry out any

of the provisions of this Act; and he may exercise any power or authority conferred on him by this Act through such department, agency,

or officer as he shall direct."

182
THE SECRETARY OF THE TREASURY
WASHINGTON

January 6, 1941

Dear Eleanor:

I am sending you, in strict confidence, for your guidance a copy of
the inclosed telegram from Mr. Matthews,
who has been in charge of our Embassy
at Vichy.

Sincerely yours,

Hany
Mrs. Franklin D. Roosevelt,
The White House.

STRICTLY CONFIDENTIAL

183

PARTIAL PARAPHRASE OF TELEGRAM RECEIVED

FROM: American Embassy, (Paris) Vichy

DATE: January 2, 1941, 5 p.m.
NO.:

4

FOR THE TREASURY FROM MATTHEWS.

Reference is made to telegram of December 18, 8 p.m., No. 856 from
the Department.

There is no representative of the American Friends Service Committee

stationed at Vichy. Therefore I asked our Consul General at Marseille
to keep a close eye on milk distribution to French children; the headquarters of the Committee is at Marseille,

In a letter from the Consul General at Marseille he reports that a
"great difficulty" confronts Mr. Kershner, the head of the Quakers

organization in France, in view of the fact that milk exports from
Switzerland are not permitted by the Swiss Government. Seventy tons of
milk were purchased in Switzerland by the Committee, and this purchase

has been paid for in full, but delivery has not been made. The letter
from the Consul General continues that with past supplies "substantial
stocks of which are apparently still on hand Mr. Kerahner and his
associates have been making distribution through the Secours National in
a large number of centers in unoccupied France and a considerable ship-

ment of milk was sent recently to Paris where its distribution will be
supervised by two members of Mr. Kershner's organisation, The Quakers

are not only distributing milk but clothing and such medicines as are
available to them.
END SECTION ONE.

SEDEN

EA:LWW
imc

COPY

MATTHEWS.

STRICTLY CONFIDENTIAL

184

PARTIAL PARAPHRASE, SECTION TWO, No. 4.
January 2, 1941. from the American Saturay, Tichy
"Mr. Kerschner said that althouch the Secours National was

in active charge of the distribution of supplies in unoccupied France,
his own people kept a close personal check on this distribution also
and that no case had arisen as yet where be had any reason to believe

that the relief went elsewhere than to the French children for whom it
was intended. He also expressed his conviction that whatever was

being sent to Paris would be given only to French children there. Up
to this time his organization has had no difficulty whatever with the
German authorities and has. apparently, been impressed with the correctness

of the latter with respect to this distribution".
Kershmer himself, says his executive secretary, personally oversees

a "great variety of projects such as delivery of food to 140 school
canteens in Marseille where 10,000 children receive a soon day meal;

delivering milk to 90 nurseries and clinics in Marseille where 4,000

children receive half a liter of milk a day".
I am making attempts to check milk distribution through other

sources, and shall try to keep as careful a watch as possible on this
matter.
END OF MESSAGE,
MATTHEWS.

EA:LNW

if

COPY

185

January 6, 1941

Dear Eleanor:

I am sending you, in strict confidence, for your guidance a copy of
the inclosed telegram from Mr. Matthews,
who has been in charge of our Embassy
at Vichy.

Sincerely yours,

Mrs. Franklin D. Reosevelt,
The White House.

186

January 6, 1941

Dear Eleanor:

I am sending you, in striet confidence, for your guidance a copy of
the inclosed telegram from Mr. Matthews,
who has been in charge of our Embassy
at Vichy.

Sincerely yours,

Mrs. Franklin D. Reosevelt,
The White House.

187
PARTIAL PARAPERASE OF TELEGRAM RECEIVED

FROM: American Rebasey, (Paris) Tichy
DATE: January 2, 1941. 5 D.S.

NO.: 4
FOR THE TREASURY FROM MATTHEWS.

Reference is made to telegram of December 18, $ p.s. No. 856 from
the Department.

There is no representative of the American Friends Service Committee

stationed at Vichy. Therefore I asked our Consul General at Kareeille
to keep a close eye on milk distribution to Freach children; the headquarters of the Committee is at Marseille,

In a letter from the Centul General at Mareeille he reports that a
'great difficulty confreate Mr. Kerebaer, the head of the Quakers
organisation in France, is view of the fast that silk exports from
Shiteerland are not permitted by the Swiss Government. Seventy teas of
silk were purchased in Switserland by the Committee, and this purchase

has been paid for in fall. but delivery has not been made, The letter
free the Censul General continuos that with past supplies 'substantial
steels of which are apparently still on hand Mr. Kerehaer and his
associates have been making distribution through the Secure National is
a large number of centers in uncompled Frence and a considerable ship
10 THE

mat of silk was seat recently to Parts above its distribution will be
spervised by the members of Mr. Kerchaer's organization. The Quakers

are not only distributing silk but - 1 as andicines 31 as are
available to them.
END SEOTION ONE.

DESTRIMENT

BECEMER

EA:LNV

is

COPY

183
PARTIAL PARAPHRASE, SECTION TWO. TELEGRAM No. 4.

January 2, 1941, from the American Babascy, Vichy

Mr. Kerschner said that although the Secours National was

is active charge of the distribution of supplies in unoccupied France,
his own people kept a close personal check on this distribution also
and that no case had arises as yet where he had any reason to believe

that the relief went elsewhere than to the French children for whom 11
was intended. He also expressed his conviction that whatever was

being sent to Paris would be given only to French children there. Up
to this time his organisation has had no difficulty whatever with the
German authorities and has, apparently, been impressed with the correctness

of the latter with respect to this distribution".
Ker shaor himself, says his executive secretary, personally overeees

a "great variety of projects such as delivery of food to 140 school
cantoons in Marseille where 10,000 children receive a nece day meal;

delivering milk to 90 marseries and clinics in Marseille shere 4,000

children receive half a liter of milk a day".
I as making attempts to check silk distribution through other
suarces, and shall try to keep as careful a watch as possible on this
antter.
END OF MESSAGE.

MATTERS.

M:LN

COPY

189

Treasury Department
TELEGRAPH OFFICE

PO 15 SER

PSCW NEWYORK NY JAN 6 1139A
*ONORABLE HENRY MORGENTHAU JR

6 PM 12 20

SECRETARY OF THE TREASURY

VERY IMPORTANT I SEE YOU TUESDAY YOUR CONVENIENCE. WIRE IF AT ALL
POSSIBLE

G W VAUGHAN

1218p

4:00 pm Julo pam

190

OFFICIAL

JANUARY 6, 1941
MR. GUAY W. VAUGHAN
PRESIDENT CURTISS WRIGHT CORPORATION
30 ROCKEFELLER PLAZA
NEW YORK NY

SECRETARY MORGENTHAU GLAD TO SEE YOU TUESDAY JANUARY SEVENTH
AT FOUR PM

H S KLOTZ
PRIVATE SECRETARY

191

OFFICIAL

JANUARY 6, 1941
MR. QUAY W. VAUGHAN
PRESIDENT CURTISS WRIGHT CORPORATION
so ROCKEVELLER PLAZA
NEW YORK NY

SECRETARY MORGENTHAU GLAD TO SEE YOU TUESDAY JANUARY SEVENTH
AT FOUR PM

H s KLOTZ
PRIVATE SECRETARY

192

OFFICIAL

JANUARY 6, 1942
MR. GUAX W. VAUGHAN
PRESIDENT CURTISS WRITER CORPORATION
so ROCKEFELLER PLAZA

NEW YORK =

SECRETARY MORGENTHAU GLAD TO SEE YOU TUESDAY JANUARY SEVENTH
AT FOUR PM

N S KLOTE
PRIVATE SECRETARY

193
January 6, 1941

Dan Bell said tonight that Mr. Aldrich made a
speech - I think he said in Boston on November 8th -

which is practically the so-called Eccles plan. I

wish that Harry White would get hold of Aldrich's

speech, break it down for me, and see where the
Aldrich speech and the Eccles plan are the same, and

where they are different. I would like to have this

not later than Wednesday morning.

Copy to Mr. White

at 9:00 January 7, 1941.

194

TREASURY DEPARTMENT
INTER-OFFICE COMMUNICATION

DATE Jan. 6, 194
TO

FROM

Secretary Morgenthau
Mr. Hass

subject: Transferring Checking Accounts of Banks to the
Post Office -- The 100 Percent Reserve Plan.

The following is in reference to your request for e memoshould be transferred to the Post Office, etc. Such a transfer
would be one means of applying in practice the so-called 100
percent reserve plan. This plan -- however its details are
randum developing your idea that checking accounts of banks

worked out -- proposes in effect to restore the state of affairs

which existed before banks, first by issuing notes in excess of
their reserves of specie, and later by the acceptance of deposits
subject to check, created E medium of exchange backed oy only
a fractional reserve. Before that time the only money was specie
or notes secured 100 percent by specie.

The most obvious advantage of this simple state of affairs
is that it is perfectly safe. The whole medium of exchange is
of one piece and there can be no question of the ability of the

issuers of some kinds of money -- as e.g., bank notes or bank
deposits -- to exchange them on demand for other kinds of money
-- 88 e.g., specie or Government paper money -- which kinds are
alone deemed to be "fundamental" or good-in-themselves. Under
the 100 percent reserve system there can be no problem of bank
failures affecting the money supply.
less obvious adventage of the 100 percent reserve system
-- but a more important one under present circumstances -- is
that the total amount of the medium of exchange is not subject
to exaggerated or "leveraged" fluctuations dependent upon how
far banks choose to expand their loans and investments (and
Mence deposits) based upon relatively small changes in the supply
of the fundamental money which constitutes their "reserves"
There would be only a one-for-one expansion (or contraction)

ratio between changes in the fundamental money supply and changes

in the total medium of exchange. Under the 100 percent reserve
system there can be no problem of excess reserves.

The 100 percent reserve plan, while old in its fundamental

idea, has received widespread attention among students of

economica as a partial solution of today's problems only since

195
Secretary Morgenthau - 2

1933. For a hundred and fifty years before that time economic
thought on this matter was largely dominated by the idea that
the use of fractional reserves economized the use of the precious
metals and so was a good thing on balance despite its incidental
disadvantages. Since 1933 the idea that "economizing" the use of
the precious metals is such a good thing has been swept away by
the force of circumstances -- although it by no means follows

that those who have abandoned the idea of economizing the
precious metals have thereby become converts of the 100 percent

reserve plan.

The 100 percent reserve system was first seriously proposed
to the American public in a pamphlet circulated in November 1933
by a number of economists at the University of Chicago including
Henry Simons, Frank Knight, Henry Schulz and Paul Douglas. It
has since been advocated by Professors Irving Fisher of Yale
University, James W. Angell of Columbia University, Frank Graham
of Princeton University and by Lauchlin Currie then of Harvard

University. It enjoys at the present time the support of a

large number, but probably not the majority, of professional
economists interested in the subject.

It is the essential element of the 100 percent reserve plan
that all banks maintain a reserve of 100 percent against their
demand deposits. This reserve could be maintained either in the
form of a credit directly on the books of the Treasury or on the
books of a central bank or some other instrumentality of the
Government designated for the purpose. As the entire amount of
their demand deposits would be required for the reserve, there
would be no surplus to lend. Bank loans and investments could
be made only from time deposits and "commercial" banking as now
conducted would disappear. It would be necessary to draw a very

sharp line between demand and time deposits. Only the former
would be designed for use as money while the latter would become

interest-bearing investment certificates designed to attract
real savings which the banks could re-invest in loans and investments. The savings function would still require banking judgment
and would best be left in the hands of the privately-owned banks.
The demand deposit function would be entirely mechanical, and it
would be merely a question of convenience whether it continued to
be carried on by the privately-owned banks or whether it was
transferred to the Post Office or some other Government agency.

In order to effect a transition to the 100 percent reserve

system it would be necessary for the banks to turn over to the

Government assets equal in value to the whole of their demand

196
Secretary Morgenthau - 3

deposits - the Government in turn to assume the liability for

such deposits. Total demand deposits (excluding interbank
deposits) amounted to about $34.5 billions as of June 30, 1940.
Total reserves held with the Federal Reserve Banks as of the
same date amounted to about $13.8 billions. These would all
have to be turned over to the Government and the problem of excess

reserves would thus disappear. In addition, practically all of

the $16.6 billions of Government securities (including guaranteed
securities) held by banks other than mutual savings banks would
have to be turned over to the Government and would disappear as
interest-bearing debt. These two items would account for about
$30.4 billions of the total liability assumed by the Government.
Another $137 millions would be accounted for by member banks
turning over to the Government their stock in the Federal Reserve
Banks -- as the necessity for and function of these banks would
disappear with the adoption of the 100 percent reserve system.
Payment for the remaining $4 billions could be made in other
assets which the Government could either hold or liquidate at its
convenience -- applying the proceeds to a reduction in the public
debt. If the Government were to take over the actual servicing
of the demand deposits through the Post Office or otherwise, it

sight well take over nearly $1 billion of the total of $1-1/4

billions of banking house, furniture and fixtures now held by all

banks since most of this is now used in servicing demand deposits.
The remaining assets would remain for the benefit of the time
deposits (which the Government might then guarantee in order to
avoid any accusation that it had "skimmed off the cream" of the

assets and left the blue milk for the time depositors.)

Several alternative plans have been proposed for transition
to the 100 percent reserve system and the details could be worked

out relatively easily if the principle itself were agreed on.

The transitional process could be made either inflationary,
deflationary or neutral, as desired, in its effect on the economy.
The system itself is neither inherently inflationary nor deflationary. Its great advantage is merely that it would permit of
E more delicate operation of the controls in any direction desired.
The 100 percent reserve plan is not inherently a "radical"
proposal. In the long run the balance of advantage appears
strongly in its favor and it is completely compatible with a

continued functioning of the competitive capitalistic order. Its
great disadvantage is that it would upset a powerful vested
interest. It certainly could not be adopted except after a bitter
fight and should not be proposed unless such opposition is
expected and prepared for.

197
COFFID ENTIAL

TENTATIVE LESSONS BULLETIN

MILITARY INTELLIGENCE DIVISION

No. 81
G-2/2557-235

TAR DEPARTMENT

Washington, January 6, 1941.

NOTICE

The information contained in this series of bulletins
will be restricted to items from official sources which are
reasonably confirmed. The lessons necessarily are tentative and in no sense nature studies.
This document is being given an approved distribution,

and no additional copies are available in the Military Intelligence Division. For provisions governing its reproduction see Letter TAG 350.05 (9-19-40) 1--B-M.

NOTES ON GERMAN AND ITALIAN BOMBS
SOURCE

The notes presented herowith, dated October 10, 1940,

are from & British official source, which makes the following
comment:

are intended to give only
intelligence of general interest on the subject of foreign boubs.
Technical details are not given, nor are the items in any way intended to provide instruction on the disposal of delayed action
"These

items

and other boubs."

Attention is invited to a discussion of German incendiary
boubs in TELTATIVE LESSON'S BULLETIN No. 67, Section 2, and to a

discussion of British methods of dealing with German bombs in
TENTATIVE LESSONS BULLETIN No. 63, Sections 1-3.
CONTENTS

1. GERMAN BONES

2. ITALIAN BOMBS

CONTIDENTIAL

-1-

198
CONFIDITIAL

1. GERMAN BOMBS

a. 750-Kilogram Bomb
There is a new type of German boub which has E thin

case and weighs approximately 750 kilograms. It is not known
exactly what form the tail takes, as no bomb has yet been recovered with this intact. No markings have been noted. The bomb
is sky blue.
b. Concrete Bomb
The German concrete boab weighs from 30 to 35 kilo-

grans, is two feet three inches in length of body, and seven
inches in diameter. The color is light green.
The bomb consists of an outer casing of concrete

1/ inches thick, with miscellaneous steel reinforcement. It CCDtains a T.N.T. charge in a steel cylinder, as well as a high explesive charge in a similar cylinder in the nose.
It is possible that the boub was designed for practice
purposes but is being used as on enti-personnel bonb.
C. Dropping of Twin Boubs

It is reported that the Germans are dropping tain
boubs, one of which detorates on inpact. The other, fitted with

a delay fuze, buries itself in the ground. The presence of the

delayed action bomb is concealed by the crater formed by the first
bomb.

2. ITALIAN BOLIPS

a. The Thermos Bonb

Reports indicate that the Italians are using a new
type of bomb which becomes live on inpact and may be detonated

thereafter by vibration or disturbance, such as that caused by
moving vehicles or aircreft engines running up. Lethods presently
being used for clearing the boubs are as follows:
(1) Small ares fire from a minimum range of 50 yards;
(2) Fire from an arnored Pren gun carrier;
(3) A heavy metal rope or chain, as long as practicable,
dragged over the ground betreen two suitably protected vehicles.
(This method is used in large open spaces such as aerodromes.)
CONFIDENTIAL

-3-

193

In appropriate the bomb is shaped like a thermos flask,

132 inches long by inches = diemeter. It has two bress rings

around the 2038. The Sonia are painted either black and kind OF
green. Those painted green are reported to be the more sensitive
and should be treated with additional caution.
sizes.

It is possible tart these books my be used in larger
b. The 250-Send Send-inmor-Piercinz Bomb

The - Italia peni-ermor-piercing type bomb weighs
250 pounts, has a total overall length of four feet and is ten
inches in diameter. the length of the boob without tail and fuse

is two feet siz income The tell is painted stay, while the main
casing is a natural steel-gray color with slight traces of gray and
red paint and is probably filled with austol.
The becomes trues by the withdrawl of the
arming vine during right Since the fuse has an inherent delay
action o." a fraction = . second, the bocb will always burst after
the nose has perstituted : dayst verying from two to five feet,
according to what the ground is hard or soft. 1 case has been
reported in thick a been profested the substantial stone roof of
a house in Valta = last between this roo? and the next floor.
- ======== boni may penetrate soft ground to a
depth of ten fect, are subsequently, like other delayed action

and *dud" bombs, it =7 - hurisontally in any Direction or even

turn # In the case of most houses, the bomb will

penetrate three - four (Lours and come to rest in the basement.
c. The 330-Ford Eith Explosive Bomb

This best is similar in action to the 250-pound bomb,
but weighs only 130 pounds. It has an overall length, complete

with tail, of three Sect. The bomb itself is one foot eleven

inches long. The dismeter is the same as that of the 250-pound
boub - ten inches.

Since the salls of this type of beab are thinner than
those of the 250-gener bomb, particularly at the nose, it lacks
the armor-giercing effect of the heavier bomb and is not expected
to penetrate a strong stone floor.
d. 13-2000 Ireanitary Bomb
The 43-gound incendiary bonb has an overall length,

-3-

200
CONFICITIAL

complete with tail, of tue feet nine and one-half inches. The
beab itself is one foot ten inches long. The diameter is six

and one-balf inches.

The bomb, which is similar to the German one-kilogram

incendiary, consists of a body of nagnesium filled with igniting

medium - in this case, pressed aluninium powder and oxide of iron.
Around the easing of the bond are five holes, closed by cork

plugs, to assist in the combustion of the contents.

Armed by the withdrawal of the arning vane during

flight, the bomb ignites impediately upon striking the ground.
The main filling burns with violent splattering for a period of
from tro to three minutes. During this time, showers of sparks
are shot out to a radius of ten yards, and it is not possible
to spercach nearer than this to the bomb. At the end of this
period the spluttering has ceased and the casing of the bomb itsell is burning, as with the German one-lilogram incendiary. The
phase in which the magnesium itself burns lasts about ten minutes.
Since, generally speaking, incendiary bombs weigh

about half as much as hi h explosive bonis of similar size, it is
possible that the 43-pound incardiary may be mistaken for the 50-

kilogram Italia torped'o type bomb. Accordingly, it is not

reconsended that unekilled personnel endeavor to disurn "dud"

incendiaries of this size.

CONFILENTIAL

201
G-2/2657-220

RESTRICTED

No. 285

SITUATION REPORT

M.I.D., W.D.
January 6, 1940.
12:00 M.

This military situation report is issued by the Military
Intelligence Division, General Staff. In view of the occasional
inclusion of political information and of opinion it is classified

as Restricted.

I. Western Theater of War.

1. Air Force Operations.
There was minor German offensive activity over Great

Britain during daylight of the 4th and 5th. On the night of the

4th-5th the German Air Force operated normally, focusing principally
on the Bristol area. Last night the scale of attacks was again
normal with the main effort directed against London.
Information on R.A.F. operations is incomplete. How-

ever, it is known that Brest was attacked on the nights of the 4th5th and 5th-6th. In addition there were raids elsewhere over the
occupied territory and over western Germany.

II. Greek Theater of War.

Actions of a local character are reported in Albania, in-

cident to Greek infiltration in the north and east. Air activity
apparently was minor.

III. Mediterranean and African Theaters of Var.

Bardia, the first big Italian stronghold in Libya, was

captured by the British at 1:30 p.m. January 5, 1940. Advanced
British mechanized units are reported some fifty miles to the west
of Bardia,

The R.A.F. cooperated closely in the assault on Bardia.

RESTRICTED

CONFIDENTIAL
Paraphrase of Code Radiogram
Received at the War Department

302

at 1:30 Pell., January 6, 1941

London, filed 16:45, January 6, 1941.
1. On Sunday, January 5, planes of the Coastal Command at
tasked German barges, marchant ships and destroyers and make direct

hits on a eruiser. On the same day German oil installations were
attached. During the night before one large fire was started when
British medium bembers bonbed oil installations in Balland and

Germany. The city of Breat was the principal target of the attack
that night and several fires were observed in the water-front area
in spite of limited observation due to unfavorable weather conditions.
2. During daylight hours of January 5, 45 German planes were

pletted ever Britain, principally engaged in seattered raids and in
recommissance. A small member of please were over Lenion, and
Haidenhead. Pangbourne and Burfard were attached. Later information

now indicates that 220 German planos were over Britain - the sight
of January 4-5 and that 55 were pletted during daylight hours of
January 4. During the night of January s-s, the Germans used many

incendiary bumbe in a fairly severe attack - Lession, but - large
fires resulted because of the efforts of the andy-established fire

waterers organisation. High explesive bombe - - - On
the same night miner German attacks were directed at Linealaskire and
Yorkshire.

3. During the period January 3 to 5, the British last three
become and destroyed - Serves bember and two German fighter please.

4. The Royal Air Force is active in the made East, both in
Albania and between Tobrak and Bardia in Likya. da January s, five

CONFIDENTIAL

CONFIDENTIAL

203

Delivery airplanes ware destroyed - large fires - started in

I where five teas of be - - by the British a - a five Italian airplanes - / is their attack
- - 1,200-bee British - Terror, off the coast of Libera.
- of - attacking please was - and three others destroyed

by - Initial fighter plane.

4 a January 4, a German - 380 miles off the Days
There Balanda terpedoed and set fire to a British missing I
four markhant vessels in a come have arrived is England. & -

- 4. a 1,800-ter British vessel street a sine is the The

- and sank.

a. The - inflicted - by the 18-hear German
- dering the might of December 22-33 - the - sight attack
- I 25-34 has been reported by the U.S. Camel is the reports,

- - 27 - December 30. A total of 1227 - / Injured, - were seriously injured - SES - Milled.
- - distributing system - the water works - weeked Private,

Milita - industrial properties suffered - - The most
- - to inhestrial properties were inflicted - the See 011

- addition, Lisotype and Makino Co., factory,
a - plant, Superheader Co., - other plants. or the city's

- milrant stations, three were - the Classical less is

1 by beakers to be at loast - - is - - high - 680,000,000. Civilian marals is at a very high point.

s. as I - fires have out in the "atty" as a
- of - raine left by the Service abtook of December 29-30.

CONFIDENTIAL

204

CONFIDENTIAL
Dangereus weekage must be demalished before the fires can be -

pletely put out.
8. Marchance, stores of food, and a railread station were
hardest hit by the German attack - Bristel during the night of Jam-

mary 3-4. In the raid - Cardiff during the night of January 2-3,
the important intestrial plants were affected only by the disreptice

of public utility services. Seventy-four persons were killed and
160 were seriously injured during this raid.
9. A total of 27,570 persons have been injured and 19,545 have
been killed by German air activity in the estire United Kingdom during
the three-month period beginning in September 1940.

LES

Distribution:
Secretary of War
State Department

Secretary of Treasury

last. Secretary of Mar

Chief of Staff - 2

War Plans Division

Office of Erral Intelligence

M-2
G.S, 1

CONFIDENTIAL

205
STATEMENT BY THE MEMBERS OF THE OFFICE OF PRODUCTION MANAGEMENT.

The task which confronts the office of Production Manage-

rent is one, not only 01 critical importance, but also one of surpassing urgency.

1711

The President has said that the United States must become

the arsenal of democracy. To create such an arsenal and to estab-

lish and maintain production that will insure its efficiency and

adequacy require for more than we, who are charged with its manage-

ment, can provide. ite promise all that we have to the fulfillment
of this order from our Commander-in-Chief, but all that we have
:dill be far from sufficient.

Te shall have need of the active, aggressive and enthusiastic cooperation of every nan, woman and child in the United States
if WL are to make this arsenal in America adequate to the successful
defense of democracy and freedom. This can only mean that in the
immediate future everything in our national life must be subordinated
to the necessity for defence.
Industry must subordinate its concern over the possible fu-

ture effects of tremendous impliste expansion. It must be satisfied with a normal return for new expitel required. If there is in
industry and menaperient anywhere E subconscious, unexpressed hope for

war-time profits, that tust be stemly repressed. If there are

those who think the can employ this emergency for any selfish sdventages, they must simmiss such thoughts. Democracy is fighting for

its very life in its struggle to retain the principles of a free
economic system.

In any successful defense program the active, intelligent
and patriotic cooperation of the pen who man the machines is vital.
Lows now in effect make secure the principle of collective bargaining
and throw about the interests of the workingman adequate protection
Labor must know that under the administration of the Office of Pro-

duction Management no secrifices will be asked of it that will not to
cotched by & corresponding sacrifice on the part of capital, but just
as it is intolerable for capital to seek a solfich adventage by resson of the present emergency, EC must labor avoid any attembt to make

improper use of its positio in the present world-side emergency. The

whole principle of collective bargaining and the rights of labor under
our system of Government and economy is being challenged.

If the totalitarism forces of the world are victorious, :11

the hard-won rights of labor will be dustroyed and both capital and
labor will bacons the involuntary vessals of an sell-powerful State.

Labor be &S great a stake in this crisis & capital, and both must
work torether harmoniously if the United States is to make its con-

tribution to 5 democratic victory in the world.

To achieve the results which the country expects from the
Office of Production Management, the expect and must have the kind of

cooperation from everyday that counts no sacrifice too great to make

if it will contribute to a more successful and a more efficient defense. It is this spirit which VS stock to invoke, and it is in a
similar spirit that to undertake this great task which the Commanderin-Chief has committed to our hands.
HENRY L. STIMSON

Secretary of HER

FRANK KNOX

Secretary of the Nevy

January 7, 1341

WILLIAM S. KNUDSEN

Director General

SIDNEY HILLMAN

Associate Director General

206

IMMEDIATE RELEASE

FO THE PRESS

JANUARY 7, 1941

The President today simed and issued the following
Executive Order, Administrative Order and the additional papers

attached:

EXECUTIVE ORDER

1711

ESTARLISHING THE OFFICE OF PRODUCTION MANAGEMENT IN THE
EXECUTIVE OFFICE OF THE PRESIDENT

AND DEPINING ITS FUNCTIONS AND DUTIES

By virtue of the authority vested in me by the Constitu-

tion end the statutes, and in order to define further the

functions and duties of the Office for Emergency Management
with respect to the national emergency as declared by the
President to exist on September 3, 1933, and to increase pro-

duction for the national defence through mobilisation of

material resources and the industrial facilities of the Nation,
it is hereby ordered:
1. There shall be in the Office for Energency Manage-

ment of the Executive Office of the President, ar Office of
Production Management which shall consist of (1) 5 Director
General, and (2) an Associate Director General, each to be
appointed by the President, (3) the Secretary of Tar, and (4)
the Secretary of the Navy. The members shell serve as such
without compensation but shall be entitled to actual and
necessary transportation, subsistence, and other expenses

incidental to the performance of their duties.

2. with such advice and assistance as it may require
from other departments and agencies of the Federal Government,

and subject to such regulations or directions as the President
may from time to time prescribe, and subject further to the
general policy that the Departments of ar and Navy and other
departments and agencies of the Government will be utilized to
the maximum extent competible with efficiency, the Office of
Projuction Management shall:

a. Formulate and execute in the public interest
all measures needful and appropriate in order
(1) to increase, accolerate, and regulate the
production and supply of materials, articles
and equipment and the provision of emergency

plant facilitios and services required for
the national defense, and (2) to insure effective coordination of those activities of the
several departments, corporations, and other
agencies of the Government which are directly
concerned therewith.

b. Survey, analyze, and summarize for purposes

of coordination th stated requirements of
the Yar and Newy and other departments and

agencies of the Government, and of foreign
governments for materials, articles, and
equipment needed for defense.

C. Advise with respect to the plans and schedules
of the various departments and agencies for
the purchase of materials, articles, and equipment required for defense, to coordinate the
placement of major defense orders and contracts

and to koop informed of the procress of the
various programs of production and supply.

207

d. Flan and take all lawful steps necessary
to assure the provision of an adequate
supply of FOR materials essential to the
production of finished products needed
for defense.

e. Formulate place for the mobilization for
defense of the procestion facilities of
too Nation, and to take all lawful action
necessary to carry out such plans.
I. Determine the adequancy of existing produc-

tion facilities and to assure their sart-

- use; and, when necessary, to stimulate
and plan the creation of such additional
facilities and sources of production and
supply as may be essential to increase and
expedite defense production.

E- Determine when, to stat extent, and in what
samper priorities shall be accorded to CE-

liveries of material as provided in Section
2(a) of the Act entitled % Act to Expedite
National Defense and for other Purposes",

approved June 28, 1940. Deliveries of IS-

terial shall take priority, as provided in

said Act, in accordance with such determinations and the orders issued in pursuance
thereof by the Office of Production Management.

h. Perform the functions and exercise the authorities TESTEC in the President by Section
9 of the selective Araining and Service Act
of 1940.

1. Serve as the lisison and channel of communi-

cation between the Advisory Commission to
the Council of National Defense and the Departments of Year and Navy fith respect to
the duties incosed upon the Commission by the
following named acts, and with respect to all
other matters pertaining to defense purchasing
and production: Public Nos. 567, 791, 800 and
801 and Public Resolution No. 95, 76th Congress.

j. Perform such other functions as the President
may from time to time assign or delegate to it.

The Director General, in association with the
Associate Director General, and serving under the direction and
supervision of the President, shall discharge and perform the
3.

administrative responsibilities and duties required to carry out
the functions specified in paragraph 2, subject to and in conformity with the policies and regulations (not inconsistent with

such regulations as may be issued by the President) prescribed
by the Office of Production Management.
4.

There shall be within the Office of Production

the following and such other operating divisions as
the President may from time to time determine:

5. A Division of Production

b. A Division of Purchases

C. A Division of Fricrities

Each division of the Office of Production Management

shall be in charge of a director appointed by the Office of Prodoction Management with the approval of the President.

208

-35. There shall be within the Office of Production
Management a Priorities Board composed of six members. A chairman and three other members shall be appointed or designated by
the President; the Director General and Associate Director General

shall be members, ex officio. The Priorities Board shall serve as

an advisory body and, from time to time as may be required by the
Office of Production Management, shall make findings and submit
recommendations with respect to the establishment of priorities,
the placing of randatory orders, the assignment of preference

ratings, the allocation of deliveries, and other related matters.
In saking its findings and recommendations, the Priorities Board
shall take into account general social and economic considerations and the effect the proposed actions would have upon the

civilian population.

6. Ethin the limits of such funds as may be allocated to
it by the President on the recommendation of the Bureau of the
Budget, the Office of Production Management may employ necessary

personnel and take provision for the necessary supplies, facilities, and services. However, the Office of Production Manage-

ment shall use insofar as practicable such statistical, informational, fiscal, personnel, and other general business services and

facilities as may be made available through the Office for
Emergency Management or other agencies of the Government.

7. Executive Order No. 8572 of October 21, 1940, as
amended by Executive Order No. 8612 of December 15, 1940, is
revoked.
FRANKLIN D. ROCSEVELT
THE WHITE HOUSE,

January 7, 1941.
ADMINISTRATIVE ORDER

FURTHER DEFINING THE STATUS AND FUNCTIONS OF THE OFFICE FOR
EMERGENCY MANAGEMENT

WHOREAS Executive Order No. 8248, dated Sep-

tember E, 1930, provides, in part, as follows:
"There shall be within the Executive Office

of the President the following principal divisions,
namely: (1) The White House Office, (2) the Bureau
of the Budget, (3) the National Resources Planning
Board, (4) the Liaison Office for Personnel Management, (5) the Office of Government Reports, and (6)

in the event of a national emergency, or threat of

a national emergency, such office for emergency managenent as the President shall determine;"
AND THOUGAS the office for Energency Manage-

ment was formally established by Administrative Order

of and it is deemed advisable to modify
theMay
ordersaid
and further
define duties
the
25, 1940,
functions of the said office;

and

NOV, THEREFORE, by virtue of the authority

vested in = by the Constitution and the Statutes,
and in pursuance of Part I of the aforesaid Executive
Order of September 8, 1959, it is hereby ordered as
follows:

209
1. The Office for Emergency Management shall

have the following duties and functions:

(a) To advise and assist the President in the
discharge of extraordinary responsibilities imposed

upon him by any esergency arising our of war, the threat
of war, imminence of war, flood, drought, or other con-

dition threatening the public peace or safety.

(b) To serve as a division of the Executive Office of the President, with such subdivisions as may be
required, through which the President, during any aftergeney, pay coordinate and supervise and, in appropriate

cases, direct the activities of agencies, public or private, in relation thereto.
(c) To serve as a channel of communication between such agencies and the President concerning ezer-

geney activities, to keep the President currently

advised of their progress, to assemble and analyze
information concerning additional measures that should

be taken, and to assist in the preparation of reconsendations for any necessary legislation.

(d) To provide and maintain liaison during any such
emergency with other divisions of the Executive Office
of the President and with other agencies, public or
private, for the purpose of bringing about maximum

utilization and coordination of their services and fa-

cilities.

(e) To advise and assist the President upon or
before termination of any such emergency with respect
to any measures that may be needful to facilitate a

restoration of normal administrative relations and to
ameliorate the consequences of the energency.

(f) To perform such other duties and functions
with respect to any such emergency as the President

may from time to tino direct.

2. The work and activities of the followingnamed agencies, and such other agencies as the Presi-

dent may from time to time designate, shall be coordinated in and through the office for Emergency
Management under the direction and supervision of
the President:

(a) The Council of National Defense,

the Advisory Commission to the
Council of National Defense and
all subordinate bodies and agents
of the Council and Commission.

(b) Defense Communications Board.

(c) office of Production Management
(to be created immediately here-

after).

210

-53. Provision may be made in the Office for
Emergency Lanagement for liaison facilities and for the

maintenance routine office services required in the
of

conduct of the work and activities of the spencies coordinated through or established in the Office for Energeney Consignent.

4. Any provisions of the Administrative Order
of May 25, 1940 establishing the office for emergency
Management inconsistent with this order are hereby
superseded by this order.

FRANKLIN D. RCOSEVELT

THE WHITE HOUSE

January 7, 1941.

ORDER OF INS COUNCIL OF NATIONAL DEFENSE
RETORING AN ORDER CREATING THE OFFICE FOR THE
COORDINATION CF NATIONAL EXPRESE PURCHASES

The Order of the Council of National Refense here tofore spiroved on June 27, 1940, establishing the Office for

the wooddination of National Defense Purchases and Appointing
a Coordinator of National Defense Purchases is hereby revoked.

All records of the said Board shall be made available to the
Executive Office of the President, to the and that any unfinished business may be tsken over and carried on in that

Office. This Order shall take effect when approved by the
President.
Henry L. Stimson,
Sceretary 01 Jar
Frank Knox,

Secretary of the Newy

Herold L. Ickes,

Secretary of the Interior

Claude R. wickerd,

Secretary of Agriculture
Jesse H. Jones,
Secretary of Commerce
Frances Parkins,

Secretary of Labor
Approved:
FRANKLIN D. ROOSEVELT

THE HOUSE
January 7, 1941

-6ORDER OF THE COUNCIL OF NATIONAL DEFENSE
REVOKING AN ORDER ESTA-LISHING
h PILIORITIES BOARD

The Order of the Council of National Defense heretofore approved on October 18, 1940, establishing a Priorities
Board is hereby revolved. All records of the said Board
shall be made available to the Executive Office of the
President, to the end that any unfinished business may be

taken over and carried on in that Office. This Order shall

take effect when approved by the President.

Henry L. Stinson,
Secretary of War.
Frank Knox,

Secretary of the Navy.

Harold L. Ickes,

Secretary of the Interior.

Claude R. Michard,

Secretary of Agriculture.
Jesse H. Jones,
Secretary of Commerce.

Frances Perkins,

Secretary of Labor.
Approved:
FRANKLIN D. ROOSEVELT

THE THIS HOUSE

January 7, 1041

212

January 7. 1941
9:06 a.m.
E.M.Jr:

Hello,

Jerome

Frank:

H.M.Jr:
F:

Hello. Jerome talking.
Hello, Jerry.
I want to tell you what happened up in
respect to a meeting to be held this noon.

New York yesterday and get your advice with
Right.

Apparently Quinn has got along very well
with everybody but three groups, three houses.
He'e got enough money without them. They are:
Bunker of Lehman Brothers, Tracy of the
Dillon Read Investment Trust and McGrath of
Lazard Freres Investment Trust.
H.M.Jr:

Yeah.

Those three fellows ostensibly take the

position that the British oughtn't to be
required to sell this, that they didn't
want to sell in the last War and they oughtn't
to have to. Now, that's what Dave reported
to me yesterday afternoon late. Last night I
got word - I got it very confidentially that in the Lehman camp they are saying that
the way it was put up to them, which I don't

believe, was that this was an effort to force
the British to sell at ar. unconscionably low price,
which of course isn't so.
H.M.Jr:

Right.

Now what the motivation is I don't know.

It may be one of several. It may be that
these fellows are close to the corner and
that the corner sent out that word. It may
be that they want to have this business done,
they want to grab it and make public distribution of it and are against the idea of the
investment trust buying it and holding some

of it and not selling it.

213

-2H.M.Jr:
F:

I get you.

That's a fight between - you see, they're
fearful I think, some of these investment

trusts, these three I named are dominated by

investment bankers
H.M.Jr:

That's Lehmans

F:

Lehman, Dillon and Lazard.

H.M.Jr:

Well, Dillon

F:

H.M.Jr:
F:

Dillon has got an investment trust that they
manage, Lehman has got one that they manage,
and Lazard have. Now they've got a conflict
of interest there.
Yeah.

There is a likelihood that the investment
trusts will, as in this case, become real
underwriters; that is, buy securities and
dispose of them when they get ready. The
investment bankers don't like that and this
may be a symptom of that fight.

H.M.Jr:

I see.

F:

Now, Dave wants to know what he can say today

H.M.Jr:

Please.

F:

H.M.Jr:
F:

and I wondered if this would be all right

for him to say that the United States
Government is not requiring the British to
sell.

That's right.
But it 18 trying to work out something 80
that should they decide to sell they can sell
on the best terms, and with the least disturbance to our markets.

H.M.Jr:

Exactly. of course.

214

-3F:

And that we have been asked merely to see

that the group get together so that they
can first, get into reasonable negotiations
for a decent price and second, so that
nobody in the group will get an unfair

advantage.
H.M.Jr:
F:

H.M.Jr:
F:

H.M.Jr:

F:

H.M.Jr:

100%.

All right, I'11 tell him that, and he can
certainly say that the Government isn't trying
to have the British sell at an unfair price.
Well, it's ridiculous.
That's just propaganda, you see.

Now, one thing if you have the time that I'd
like to suggest: that you call up Forrestal,
see, and tell him
About Dillon.

to call up Dillon and tell him to get

on the bandwagon.
F:

H.M.Jr:
F:

Yes. That's what I had planned. I'11
certainly do it now that you've suggested it.
Call up Forrestal and then 1f Lehman and

Lazard want to hold out, to hell with them.
Well, that's what Quinn says. He can get
along with them and he thinks that if the
deal progresses they '11 either come in at

the last minute or that they'l try to horn

in and get it for themselves.
H.M.Jr:

Well, I can take care of them later. I'll
talk to you about it, but I'd like Forrestal,
who sat in with us, I'd like him at least to
have a chance to talk to Clarence Dillon and
tell him to get on the bandwagon.

F:

H.M.Jr:

O. K. I'll do it right away.
And then, as I say, just leave those other
two houses. If we want to take care of them,
I know how to do it.

215
-

F:

4

-

All right, I'll let you know. Dave is going

to meet them about noon and I'11 let you know

what happens.
E.M.Jr:

Swell.

F:

Fine.

216

January 7, 1941
9:20 a.m.
RE BRITISH PURCHASING PROGRAM

Present:

Mr. Young

Mr. Purvis
Sir Hugh Dowding

Mrs. Klotz
Purvis:

Well, Sir Hugh has just arrived via Canada.
We really haven't had a chance of talking
with him yet as to how we can get real value

out of his visit; but from my very short

acquaintance in London, I am quite sure that
we are going to get very great value out of
his visit here. He was Fighter Commander,
as you know.

H.M.Jr:

Do you want to talk first or should I talk?

Dowding:

Well, may I talk just for a minute?

H.M.Jr:

Please.

Dowding:

I want to say that I exercised considerable
ingenuity at home so as not to get cut and
dried instructions over here, you see, and
I have got a perfectly free hand to exercise

myself in whatever way seems to be best for
the common objective, you see, and I should
very much appreciate your advice how I can best

spend my time out here. That is all I want

to say.
H.M.Jr:

Well, I think I am partly responsible for your
coming. I asked for somebody who had the

217

-2experience that you have gone through. Both
for your own fight and for our own defense, I

think there is a distinct contribution that
you can make along these lines. You take
it, for instance, these Curtiss P-40's that

you are getting. They run along until some time
in June or July. Now, so far as I know, the
Curtiss have not a proven plane which will
follow along after the Curtiss P-40. The next
fighting plane that we have, which comes into
production, is the Bell. Everybody seems to

think it is pretty good, but I don't think

anybody is sure; and I don't suppose they will

be sure until you have actually fought it.

I can't find out - it may exist - of anything

that we have which is going to follow after the
Bell, and as I understand it, you have found
it necessary to constantly increase gun fire
and whether even the Bell is uo to what you
already have, I don't know; but you would know.

I don't know what plane, for instance, they are
going to put the Rolls Royce engine in, which
is being made by Packard. I don't know whether
there is one. In other words, it seems to me
that we have gotten along to a certain point
here and you, knowing what is necessary to

win in the air, my suggestion is that the

sooner that you can get the Army people to let
you see what they have on their drawing board,

the better; and then give them the benefit of

your experience.

Now, that was what I had in mind when I
originally asked for somebody from the Fighter
Command to come, and I am sure that the Army

will make that possible. If they don't, I will
be glad to help; an-Superscript(2) I think with that in mind,

the sooner that you call on the Secretary of
"ar the better, and then General Marshall and
then I suppose he will turn you over to the head

218

-3of our Air Corps, but I am very much worried
about what plane we are going to have to fight

with
in '42, and I don't see anything that we
have.

Now, there undoubtedly are things on the drawing
board, and I suppose the place where you could

find out the quickest is by going to Dayton

where the Army has all of the ir experimental
planes and drawings, and everything else; but
does that sound fairly reasonable?
Dowding:

Certainly, yes.

H.M.Jr:

Wouldn't that be putting your talents to the

Dowding:

I won't use the word "talents", but it is a

best use?

thing that I am absolutely up to date on, what
I may call the theory and practice of our
fighting, and that experience is absolutely
at the disposal of your companies.

Purvis:

We have a vital interest in this country being
at work on a fighter which - more than ever
we have that vital interest now with the line
that the President has decided to take.

H.M.Jr:

Well, what I envisage and what I hope, once we

get this legislation through, is that we will
be ordering so many thousands of fighters

which the President will be able to say,

"Well, so much for the United States Army,
so much for the Navy, and so much for the English,
so much for the Greeks, and so much for the

Chinese," but it will be one fighter. Therefore,
I think it is terribly important that we are
not the way we are - we have got 20 Boeings
somewhere, and they have got to rip out the
Norden bombsight and put in the other bomb sight

and all that time is lost. If you can get
in on the drawing board stage before the
thing gets into production, that is the time
to co it; and frenkly, I really - while it
is not my responsibility, I have made it
such. I am very mich worried what we are

going to have in '42.

Now, I would be very much surnrised if there
is a plane already designed and ready for
these Packarc Rolls Royce enjines. I would
be very much survrised. And only a week or
two ago I asked Guy Tearhn of Curtiss-Wright

what he had. ell, it is still very much

in the experimental stage, what is going to
follow, and I think that the sooner you could

get into that situation the better. What do
you think
s:

Oh, I think it sounds like straight common
sense to me. Of course, it is what you said
originally when the question of a visit was

in question. Also it should apply to the

bomber situation, too, and you have a lot of
information on that even though your special
experience has been in the fighting class.

inc:

Yes.

Jr:

Well, I certainly would extend it to the bomber,
but as I say, my OTD feeling is, I think that
the quicker you can get to Dayton with per-

mission to stay there lone enough and to see

everything, the better, and the more use it
will be both to your country and to ours. Dayton
is the nerve center.

is:

I should take Sir Hugh to see Secretary Stimson
and also Secretary Knox.

220

-5H.M.Jr:

Right.

Purvis:

Because there is a Navy side to this, though
that is secondary to the Dayton.

H.M.Jr:

Yes, but then as soon as you can get Mr. Stimson
to General Marshall and General Marshall will

turn him over to the Air Corps, I think the
better. I take it what you are more interested
in is to get the correct type rather than the
actual purchasing, isn't that right?

Dowding:

Yes. In other words, the financial purchasing
side I am glad to say has nothing to do with
me.

H.M.Jr:

But as to the types?

Dowding:

Yes.

H.M.Jr:

You see we still have a bomber, and I think I
am right, Phil, that we are making - we have
three different types of power drives for the
gun in the same bomber, which seems to me

rather silly. I mean we ought to make up our

mind how we are going to drive the gun, what

the force is, but here is three different

kinds of motive power -Purvis:

Such as electric, hydraulic, and so on.

H.M.Jr:

Yes, isn't that right?

Young:

Yes, on the turret.

H.M.Jr:

Instead of saying, Well, this is the best under
battle conditions. We ought to take that."

Dowding:

We have had practical experience, because we

have tried the other. We have been through a

221

-6-

period of trial and error for several years
over this turret power business, and I don't

say that we have got the best possible thing

now, but we have got a very good one which

works. I mean, the best is always the enemy
of the good, and we have got a very effective
power turret now and - I mean, I have noticed
in recommending to you the Bolton Paul, which

is a proved and tried turret.

H.M.Jr:
Dowding:

Is that the Nash?

The Nash is the hydraulic turret and the Bolton
Paul is an electric, and one or the other suits
different types of machines, of course. They
are both very good types.

H.M.Jr:

Well, what I would appreciate is for my own
education that after you have been out to Dayton
and after you have seen what you have, if you
would come back and give me the benefit of what
you have seen.

Dowding:

Yes.

H.M.Jr:

Plus your criticism.

Dowding:

Yes.

Purvis:

There is a point which arises in connection with
that from both sides of the water, which I
learned from Commander Boone a commander of

yours in the aeronautical end, that I can't

be too emphatic about. He pointed out that
there is equipment going from this side, and
he thinks the idea works equally the other way,
which has no appropriate technical talent from
here to teach its proper use and application

on the other side, and that as a result very
naturally things are discarded. He thinks that

222

7

the trouble - this is from his own observations
which he has apparently made in England - the

trouble with the 50 calibre gun that we have

been hearing about that have been coming from

here, that that is literally due to certain

lack of knowledge about the handling of that
particular gun which should come straight out
of the supplier over here and that every contract
should carry through with the necessity of an

actual instruction unit on its peculiarities

and so on. He said the same thing here, taking

the turret that you were just mentioning. I

understand that our turret has certain defects
from the point of view of the people on this
side which Booneis quite sure now from his
observations on the other side is due to a lack
of appropriate teaching at this end as to how
that thing has to be handled, and he received
reports, apparently from the United States end,
that our turret was not good; but he was able
to see on the other side the fact that it was
and also to get a pretty good idea as to why
they were probably discarding it as being poor
here.

But I think this exchange of technical talent

both ways to make our special apparatus work

is a matter of first class importance, and I

promised, by the way I would mention it to you,
and I thought some time if you wouldn't mind
letting Boone have a chance of talking his own
experience in England on this thing with you.

I think he is very valuable.

H.M.Jr:

One little thing, Phil, which I have been
meaning to say to you. If we are going to
get the last of those 9 Consolidated bombers
for the English - I don't know how far along
they are, but if you could find out - we shouldn't
begin to put the Norden bomb sight in and then

223

8

-

have to rip the damn thing out again, so if
the English are going to get those nine - I
think there is now a 66-2/3 chance that you

are - for heaven's sake, even though the deel
hasn't been made, why don't they issue orders

to begin to put the Sperry bomb sight in. You

would save a counle of months on that.
Purvis:

Yes, it would be just terrible if we had to

E.M.Jr:

It seems perfectly asinine to put the thing
in and have to rip it out. I don't see why

reverse on that.

they can't stop the thing now and begin to
put the Sperry bomb sight in.
Deading:

There is a very good instance of that going on
now at present. You have sent a number of
fighters over to England, and they all came

off French contracts. The result is the first
two or three months over there they can't be
used if they are to be pulled to pieces and
have our equipment put in.

Purvis:

You mean radio equipment?

Cowding:

Not only that, but everything is non-standard.
The French, if they want to open up the throttle,

they vull it back. If we want to oven up the
throttle, we push it forward.

Purvis:

Rather unfortunate to do it wrong then in the

Coming:

Yes. Then there is the radio and the oxygen
apparatus, the blind flying instruments, everything has got to be altered to our standards
over on the other side.

middle of a battle.

Well, I agree this is an extreme case, of course,

224

because the French have entirely different
equipment, entirely different ideas from ours,

but it is a case in point about the value

which could be obtained from a proper - from
the greatest possible degree of standardization
over on this side. I daresay complete standardization is not possible, but one should go as

far along that road as it is possible to get.

H.M.Jr:

You see, I have been asking about once a week

why they don't fight those Curtiss P-40's and
I always get some other answer, but this is the
best answer I have had yet.

Purvis:

Sounds much more convincing than any we have
had yet.

H.V.Jr:

But don't the English government have inspectors

Purvis:

The French debacle was June 17. These things

at the Curtiss factory to make sure --

were probably so far advanced at that time that
the contractor wouldn't change all his specifications. He had no doubt ordered all these
instruments to French specifications and there

we were. I imagine that is what it is, because
I think changes were introduced later.

H.M.Jr:

Young:

Purvis:

How is it now, Phil, do you know? You have been
up to Curtiss.
Oh, they have been putting out the English type
for some time now. They have changed over.
I wonder whether you could give the Secretary
just a very thumbnail sketch of where the
various types of American machines are being
used. I know you (Secretary) are interested

in it.

Dowding:

Yes. One gets out of date in a fortnight about

225

- 10 the very latest developments, you see, but

this is the general situation.

The Hudsons, of course, have been in use for

a long time. They are, I think, probably the

best type of aircraft which the Coastal Command

have for that particular kind of work. It is

used for observation over the sea and attack
of submarines and so on and so forth. That is
a proved and tried type which has been invaluable
to us.
Then we have got the Glenn Martin, which is

just going into service now, and I think

there are only a few of them that have been
delivered now; but they are actually in use
now in the Mediterranean, and I don't know if
you saw some very interesting pictures after

the attack in Taranto on the Italian fleet.

Those photographs were taken by Glenn Martin
reconnaissance machines.
H.M.Jr:

I got last night the Illustrated Weekly from

Purvis:

Yes, that just arrived.

H.V.Jr:

It had all of those Teranto pictures.

Dowding:

Yes. Then we have got the Douglas bomber --

H.V.Jr:

Excuse me. That is the magazine that has those

Dowding:

London, and that is where I saw those photographs.

pictures. (Handing to Purvis)
The Douglas DB-7, and so far as the fighter
plane is concerned, we thought that it would
make probably a very good night fighter, particularly with the more powerful engines with
which it is going to be equipped; and when I
came away, there was one squadron being equipped

with these DE-7's for use as a night fighter.

- 11.

You understand there are certain special
radio equipment and so on that have to be

out in. But I expect we shall get good
results from them as a night fighter. I am
a little bit coubtful about the hitting power

because at the present moment it has got four
different calibre machine guns, and then you
understand that when you do make an intercertion

at night, the opportunity lasts only a very

few seconds and you have got to deliver a very
hard fire and get the bomber down in a few
seconds or you lose your opportunity, but

that would be my only criticism of that as
a type for the night fighter when it has got
& little bit more performance.

The other unaltered type is, I believe, going
into service as & light bomber. I don't know
in what form the procesed deal is, I haven't
heard the proposals for that. But there are
two uses for the DB-7, and substantially there

is one squadron operating with them now as night

fighters. I can't give you the exact situation,
machines for familiarizing all the rilots with

but this squadron had already got several

them, doing night flying, night landings on
them, preparatory to fuller equipment. Everybody is very enthusiastic about the tricycle

undercarriage. They think that it is a very
excellent innovation and particularly for night
landings.

Jr:

Does the Douglas have that

ding:

Yes, the DB-7.

.Jr:

I see you have got 2 ner trainer with a tricycle

ding:

Yes. Naturally we choose training types which

landing now too.

will give the requisite flying experience for

227

- 12 the service types that we are going to use,

but as a matter of fact, I should think there
was very little need to do special training
on the tricycle type, because it is so very
easy to land on.

Now, the point is, if it hasn't occurred to you,
that an ordinary bad landing is caused by the
vilot allowing the wheels to touch - to drop
the machine down while it has still got some

flying speed. The result of that is that the

tail drops, the angle of incidence increases,

and he goes ballooning off the ground again,
and then drops heavily onto the ground again.
With the tricycle undercarriage, the main
wheels are so far back that if he makes a bad

landing of that sort, all that happens is that

the nose slams down onto the ground instead of

the tail coming down, and he sticks to the ground
like glue and doesn't do this ballooning at all.

H.M.Jr:

will it spoil a pilot if he gets used to a

Dowding:

Yes.

Purvis:

It is like all luxuries.

Dowding:

Yes, and so the - any special training would
be required for people who have to fly ordinary

tricycle landing gear and has to go back to
the other type?

undercarriages after learning to fly the tricycle.

Well then, the fighter types - I will explain

about these Curtiss machines. It seems that
the amount of reconstruction is very serious,
because I made some special inquiries about that

and I was told that the first two will not be

completely altered to our requirements until
February.

228
- 13 Purvis:

Is that so?

Dowding:

The first two. I believe they didn't have

Purvis:

Were those the P-40's or P-36's?

Dowding:

P-40's.

E.M.Jr:

They won't be ready until February?

Dowding:

Those two.

Purvis:

These must have been French types.

Dowding:

Yes, certainly, they were French types.

Purvis:

Then there will be a point at which the British

armor and bullet proof glass in, did they?

type came in, the exact date of which we could

find out from Self, and those types - there
won't be a corresponding lag, I take it, on the
British type?
E.M.Jr:

Shouldn't be any lag.

Dowding:

There will be no lag at all.

H.M.Jr:

I would like to ask, how many of the French
type of the P-40's were there?

Purvis:

I will find that out.

H.M.Jr:

How many did you get?

Purvis:

I know there was a French contract for P-40's,
and the question will be at what point we were
able to get the manufacturer switched. What

we want to know is how many French P-40's we
had.

H.M.Jr:

Too bad we didn't put some of Mr. DeGaulle's

229
- 14 men in them and let them fly them.
Dowding:

Well, there aren't an awful lot of Mr. DeGaulle's

Purvis:

There might have been two.

Dowding:

Oh yes, more than that.

H.M.Jr:

But they don't get around until February.

Dowding:

men there.

I made some special inquiries about that, and
I was astonished to hear that that was the
answer, that the modifications were so extensive
as that.

Purvis:

I will try to get a little memorandum for you

Dowding:

I am not authorized by the Air Staff to speak

on the thing from Self, from the supply end.

about this, but I think it is possible that

the main use for these P-40's will be in the
Middle East and in Egypt and that, I think I mean, if that were the decision, I think

it would be a very reasonable one. You see,
we are all organized in our home defense unit
for using the Hurricanes and the Spitfires, and
we have got our spares and our stores there

and our pilots all trained for them, and while

we have got to create new organizations on
some, it is reasonable to out the new types

there. In the spring the Middle East will

probably be the main theater of war, of course.
It seems incredible that the Germans shall hold

aloof indefinitely from that theater. And for
a time, probably, the most important fighting

will be taking place in the Middle East. That
is only a personal guess, really.
Then we have got the Grummans, which the fleet

air arm is using. I have very little direct

230
- 15 information about that, but I know they have

been in use for at least three months. I

believe they have encountered some technical

trouble in using them owing to a redistribution
of the weight laterally. They have found the
undercarriage a little bit narrow and inclined

to tip over to one side. But I don't think
that that was anything very serious. They are
now in use in the fleet air arm.

Purvis:

I think a method was found of overcoming a

defect, but it was a defect in the design of
the plane.

Dowding:

Yes. I wouldn't say it was a defect in the
design. I rather gathered it was some re-

distribution of weight which had been carried
out at our instance, but I don't know the
details.

Purvis:
Dowding:

Oh, I see. That may be it.
After all, the United States Navy have been using
the Grumman for a long time. There can't be
anything fundamentally wrong with them at all.
Would you like me to say a word on the question
of fighter armament and the reason for - this

is a very big change in principle that is going
on now.

H.M.Jr:

Please.

Dowding:

Up to the present the .303 weapon has been a

perfectly adequate weapon for the fighter. We
started in the last war with a single gun and
then at the end of the war we were using twin
guns and then, thinking on general principles,
I have always been of the opinion that fire
power is one of the decisive factors in war,
whether it is on land or sea or air, and why
stop at two guns? Why not get the maximum

231

- 16 -

possible volume of fire during the short period
that you can keep your sights on the enemy in
air battle. I don't want to make too much of
a personal thing about that. It happened to
be a fad of my own. Anyway, the Air Ministry
as such accepted this principle and adopted
the eight gun fighter, which was the maximum
fire power.

H.Y.Jr:
Dowding:

That is a real contribution.
And at the beginning of the war, the eight gun
fighter was really decisive. There was nothing
that could stand up against it for more than a
few seconds. It is true that the Germans had
rendered their petrol tanks immune to small
arms fire, which would otherwise have been their
most vulnerable part, but the crew was vulnerable
and the engines were vulnerable, and it was not
a very difficult task to shoot down a German
bomber, whereas the small fighters were almost
contemptible adversaries because they were so

easily shot down once this great blast of fire

was delivered even for a second or so.

Well now, one had always foreseen that this state

of affairs would not persist indefinitely. I
think if I were to - if I were let loose in the
Air Ministry archives, I could produce a

memorandum which I wrote about in 1932, pointing

out that sooner or later the defense against
this eight gun fighter would be an intelligent

armoring of all types of aircraft, fighters and

bombers, against fire delivered from directly

or nearly directly astern. It at present appears

to be an insolvable problem to armor a machine

against fire from every direction, you see, and I
don't think that it is a contingency that we have
to consider at the moment. But, however, it
also seemed to me obvious that the time would

232

- 17 come when enemy aircraft would be armored

against attack from directly astern and the

rifle calibre machine gun would then become

practically useless from that particular
aspect.

There remains the possibility of a flank attack
with heavy deflection, which is, of course,
extremely difficult to carry out very accurately
because the amount of allowance you have to
make ahead of a machine flying at 300 miles

an hour is fantastic. I mean, it amounts to,

in certain cases, more than two complete
lengths ahead of a big bomber, in those
ranges. So, although one could get a certain

amount of effect from that, I didn't think you

could get a decisive effect from heavy de-

flection shooting. Actually, I have been

surprised at the success which has attended
deflection shooting, especially against bombers

in formation, because perhaps if we don't hit
the one we aim at, we are apt to hit the next
one behind, and as there is no armor protection

from the flank, a single bullet which hits the

vilot may bring the machine down, whereas if

you have got to bring it down by fire from
astern, it may take - I worked out very roughly
that it took 500 hits with machine gun bullets
to bring down a heavy bomber, even if it wasn't
armed.

H.M.Jr:

As against one on the side.

Purvis:

If you are very lucky.

Dowding:

I don't say that one bullet hitting the machine

on the side will bring it down, but if the one

bullet hits the pilot, it will bring it down;

whereas the pilot in the big bomber was substantially immune even without any armor because

of the length of the fuselage behind and all the --

233

- 18 Purvis:

All
thetostuff
that had to be penetrated before
it got
him.

Dowding:

All the impediments in the way of the bullet.
And then there is, of course, the third possibility which again has been surprisingly
successful, and that is the attack from head
on, which has proved very deadly when it has

been possible to bring it about against the

bombers. In fact, very often a single fighter

has broken up a whole formation, attacking from
the front and shooting down the leader.

Well, I must get - I mustn't start a lecture
on this, but the point is that the time has
come when we have got to go to a piercing weanon

instead of a - I mean a weapon which is capable

of piercing the armor, and I am afraid that
even the .5 gun is not such a weapon.

H.M.Jr:

But how about our 37?

Dowding:

The 37 is unnecessarily big. The 20 millimeter

is unnecessarily big, as a matter of fact, but
there is nothing in existence between the 20

millimeter, which is .8 of an inch, and the .5
gun. The theoretical ideal is probably a .65
or a .7 gun, but we are really compelled to
use the 20 millimeter and that is amply big
enough and it is not necessary to have a
piercing gun bigger than the 20 millimeter.

H.M.Jr:

Of course, the Bell is equipped with the 37
millimeter cannon that goes through the propeller.

Dowding:

Yes, I know.

H.M.Jr:

That will go through anything, then

234
- 19 Bowding:

Yes, but it is uneconomical.

Purvis:

You are taking up more than you need to do
the job.

Towding:

You are getting into the question of destroying
airplanes by exclosive shells, which is an
uneconomical procedure.

E.V.Jr:

Well, at least we are ahead, anyway.

Purvis:

But this outs a premium on getting the 20
millimeter guns going pretty promptly.

E.M.Jr:

Tell, I an glad to have had this, and I want

to hear more. I want to hear more and I do
want to make sure that everything gets in the
Army; and if, for any reason, it doesn't, and
Sir Hugh isn't given prompt access, let me
know.

Purvis:

I will. Thank you very much.

Dowding:

I am quite sure that I shall be given every

facility, and I will go off right away and
take advantage of it; and if I may, I will come
back and talk to you again later. But the point
I want to out over is that this - the necessity
for going to the big piercing gun has blown up
the whole size of the fighter, you see.

Purvis:

Because of the weight, you mean?

Donding:

Because of the weight you have got to carry
and it means that you have got to have a 2,000
horsepower engine instead of a 1,000. I am
talking two years ahead, you see.

H.M.Jr:

That is what I was talking, you see. We are all
set for this year, but what is going to come in
the calendar year of 42, I think - I am very

235

- 20 much worried about it.
Dowding:

Every fighter in two years' time will have to
have a 2,000 horsepower engine. A little
fighter with the Merlin type --

H.M.Jr:

You see then, if that is true, these engines

Dowding:

No, but --

H.M.Jr:

We have no 2,000 horse, liquid. We have them

Purvis:

Is the Sabre 2,000 horsepower?

Dowding:

The Sabre is the answer at present, yes.

H.M.Jr:

Well, you see, I have been saying again and

which are going in with the Rolls Royce, which
is going into Packard now, and we have no 2,000
horse liquid cooled engine even in the beginning
of production.

in the air cooled, but not in the liquid cooled.

again that they ought to bring this Sabre engine
over.

Purvis:

I think we have got one coming.

H.M.Jr:

Plus the plane.

Purvis:

The only way we can do it at the moment because

of the lack of planes, I understand, is to

demonstrate to people over on the other side,
but very quickly that will be able to be changed,
but at the moment they have shipped the engine
anyway, I understand.

H.M.Jr:

Well, they ought to.

Dowding:

And they ought to send a Typhoon over here at
the earliest possible moment. There are two

errors they could make. One is to send it over

236
- 21 when the whole assembly might have some

fundamental fault that prevented it flying
and simply give it a bad name over here,
although it was easily curable. The other
thing is to keep it there until they have
cleared every blessed trouble, all the little
things that don't matter, you see. They
ought to get the thing right, get any big
bugs eliminated and then send it over here.

H.M.Jr:

You see, if the Typhoon and the Sabre are the
answers, I have been hearing about them -

that is a Napier engine, isn't it? Anyway,

before you get too far along with these 9,000
Rolls Royce engines the question is whether
you will want those or whether you will want -Dowding:

Oh yes. The 1,000 horsepower engine was still

H.M.Jr:

Of course we are not using them except in the

Purvis:

That is all bound up --

H.M.Jr:

That is all the thing that has been going on

Dowding:

Well, I am giving you my personal opinion, which

coming for the twins and that sort of thing.

single engine fighters, but that is all the
thing --

for months and that is where you can render
your country and mine a great service.

is based on experience, you see, and if I start
talking to people things that I think they

would like to hear or somebody else would wish
me to say, then my personal value will have
disappeared.
H.M.Jr:

No, if you get to know me better, I am not what I want is the bare facts, no matter if
they hurt.

237

- 22 Purvis:

Yes, that is right, that is very true.

Dowding:

I will still say them.

Purvis:

May I have that talk with you on that other
subject fairly soon?

H.M.Jr:

Yes, but you will have to do Philip Young;
and the press knows that you are here, so

And what is more, if they hurt the other end,

that you may meet then when you go out.

Dowding:

Yes, I am going to talk to them at 3:30 this

F.V.Jr:

You can talk to them, but I just want to tell
you I can't keep it a secret.

Dowding:

That is all right.

afternoon.

238
January 7, 1941
10:32 a.m.
H.M.Jr:
James

Jin?

Forrestal:

Henry?

E.M.Jr:

My apologies.

I just wanted to say to you that I now know
that the Treasury gets everything you have

F:

H.M.Jr:

including your shirt.
(Laughs). Well, I apologize, but I don't

F:

You don't, eh?

E.M.Jr:

I thought I was the last person off that car.

F:

(Laughs).

E.M.Jr:

But I never saw you on the train.

F:

feel terribly guilty.

I don't know where you were, whether you were
asleep or what.

(Laughs). Well, I never knew you were on
until I heard you had my beg.

H.M.Jr:

And then this porter picks up everything

F:

When I leave the Government, I'11 just be
able to confirm every impression about the

loose and put it in the car and I didn't getting in terribly late that night.
Treasury.

H.M.Jr:

I ah

F:

O. K., Henry. I want to see you soon.

H.M.Jr:

F:

Listen, while I've got you on the wire - (laughs) I won't ask you whose shirt you slept in that night,
but seriously, I told Jerome Frank to call
you up. Has he done it?
Yes, he called me and I called Dillon this
morning to see if - and he hadn't heard of

the thing at all.

239

-2H.M.Jr:

Well, what do you know about that?

So I told him to get busy on it and take a
look. I think that what you're running
against probably is the usual thing in

F:

business
of who is going to run the party.
That's my hunch.

H.M.Jr:

Oh, that's it, huh? Well, I thought the
S.E.C. was going to run it.

Well, no. Jerry told me that what's his
name
- the fellow at Seligman's 18 running
it.

F:

H.M.Jr:

Quinn.

F:

Yeah, and I think you'll run into difficulty

H.M.Jr:

Oh.

F:

H.M.Jr:

on that.

But that's the usual thing. I've come up
against that in business right along.
Okey doke. Next time I go up I suggest you
have a steel chain around your bag, see,

tied to your wrist. Hello?

F:

Yeah.

H.M.Jr:

So that I can't steal it from you.

F:

Let me drop over sometime during the day,
Henry.

F:

All right.
I'll check with your office.

H.M.Jr:

Do that.

F:

Good-bye.

H.M.Jr:

O. K.

H.M.Jr:

240

January 7, 1941
10:41 a.m.

H.M.Jr:
Summer

Hello.

Welles:

Good morning, Henry.

H.M.Jr:

Hello, Summer.

H.M.Jr:

me have about fifteen minutes with you
sometime within the next two or three days.
Sure. What subject?

I was wondering if you would be able to let

In order to take up with you and Philip Young
the question of five particular machine tools

that the Soviet are interested in. It's a
question of replacement and priorities. It's

one of those cases that it'11 have to be done
under your own decision and the question of

policy is directly involved.

H.M.Jr:

I see. How's 3:00 o'clock Wednesday?

X:

3:00 'clock Wednesday will be fine. That's tomorrow.

H.M.Jr:

That's tomorrow.

X:

H.M.Jr:
W:

All right. Will you have someone in your
office notify Philip Young?

It will be done in one second. I'll do it
immediately. Sure I'll take care of that.
All right, Henry. I'11 be there at 3:00
tomorrow.

H.M.Jr:

Right.

Y:

Good-bye.

H.M.Jr:

Good-bye.

241
January 7. 1941
2:32 p.m.
E.M.Jr:

Hello.

Operator:

Senator Wagner.

Sen. Robert
Wagner:

Hello.

E.M.Jr:

Henry talking.

W:

Yes, Henry. This is Bob Wagner.

E.M.Jr:

Good afternoon.

Good afternoon. Say, I wanted to ask you

this question: if we open that matter of the
British credits here, I take it that we ought
to ask you. We can't ask anybody inferior

in a banking committee hearing, so you'd have
to come.

E.V.Jr:

Yeah.

W:

Would it be convenient for you - what do you

H.M.Jr:

Well, now, here's the thing: the President

W:

Yeah.

H.M.Jr:

think of the advisability of it first, Henry?
told me about his conversation with you
yesterday. See?

And this is - since I've talked with you
and since he's talked - I've had a long talk
with Cordell Hull, not on this thing but on

this question of this bill, aid for Britain.

See? Hello?
Yes.

H.M.Jr:

And I think I know how it's going to shape
up but I'm not sure and I just wonder if we
can't - in a day or two now we'll know. But
starting this thing with you might be given

the wrong kind of significance. I's nervous
as hell about it.

W:

What is that?

242

-23.1.Jr:

I as nervous as hell about it because I
think we all agree the thing to do is to get
this bill through to help England.
Yeah.

Y:

E.N.Jr:

Now, if I come up there and say the wrong
thing and hurt getting this bill through,
I never would forgive myself.
Yeah.

V:

E.M.Jr:

So I wonder if you couldn't give me a day or
two because I think by tomorrow night I'll
know more which way this bill is going to
shape itself.

Yeah. Of course in any event I did tell Lister
I don't think you can avoid, if any legislation comes up, the committee insisting upon whatever committee it is - some evidence as

to what their financial situation here is.

E.M.Jr:

I know, but I don't know which way

V:

That's all right, Henry.

E.M.Jr:

V:

H.M.Jr:

and the President said that he wasn't

sure and, as I say, I never would forgive
myself if I pulled a boner.
Yeah, I understand.

And if you'd be a little patient - when I
say a little patient I'm asking for a day
or two.

W:

Well, that's all right. I'm not impatient
at all. I thought originally you had the
idea that it would be a wise thing to do.

H.M.Jr:
V:

I still think so.
Yeah. Eventually it will have to be done,
Henry. You can't get away - I told that to
the President. I said, you'll never pass
legislation without some - in my opinion.
Now, I'm only giving an opinion - without

243
-3some information on' that. Well, anyway, I've
talked to nobody about it. I've kept it
down. I happened to talk to Jimmy Byrnes
about it. In a way I was sorry because,
while Jim is a wonderful fellow, he begins
to confer and all that sort of thing. I
haven't talked to anybody else about it, and
so I'm going to keep it quiet, and I won't
hold - I was going to hold a meeting of the
committee tomorrow or Thursday

E.M.Jr:

No. I'm not ready.

..... and I'll just
H.N.Jr:

And then another thing, let's be frank.
Jesus, if I come up there before you they're
going to cross-examine me on this Eccles
thing.

Well, of course we can keep that - that's
another question that's coming up later on,
because there's already legislation introduced on that. I must have a talk with you

about that - I mean, a lot of things are

going to loom up, but we'd be able to control

that pretty well.

H.M.Jr:
W:

Well, you wouldn't control it if somebody
asked me what I thought about it.
Yeah. Well, of course you're always able
to answer those things.

H.V.Jr:

Well

N:

But I tell you what I'll do. I'll let it

H.M.Jr:

rest now.

I'll positively get in touch with you in a

day or two, just as soon as I know which

way this other thing is going to go.
Now, on the other thing, I talked to Carter

yesterday and whenever you're ready now you'r overwhelmed on this - and whenever
you're ready why we can meet easy enough and

I'll bring A1 Barkley into it too.

244

-4S.M.Jr:
Y:

Well, how about Friday morning?

I'11 find out if Carter is going to be here

and I'11 let you know.

H.M.Jr:

Friday morning is O.K.

W:

Yeah. All right.

H.M.Jr:
W:

Thank you.

All right, Henry.

245

January 7, 1941
3:20 p.m.

H.M.Jr:

Hello.

Frank
Knox:

Hello, Henry.

H.M.Jr:

How are you, Frank?

K:

Fine.

H.M.Jr:

Frank, I hope in the next couple of hours
to have the final draft of this legislation
of aid to England.
Yeah.

K:

H.M.Jr:

I saw the President yesterday and he asked

me to get Cordell first to initial it, then
me, then Stimson and you.

K:

Get what?

H.M.Jr:

Get all four of us to initial it.

K:

I see.

H.M.Jr:

Now, it's over there now and it's

K:

Over with Cordell?

H.M.Jr:

Yeah. I had an hour and a half with him

K:

Yeah.

this morning and he made a couple of changes not important.

H.M.Jr:

And the principal one is it's not an
amendment to another bill, it's an original
bill 80 therefore it can go to any committee
that the leaders want to send it too, you see.

K:

Yeah.

H.M.Jr:

It doesn't have to go to Foreign Affairs.

K:

Yeah.

246

-2H.M.Jr:

And the other thing he suggested which I
thought was good, instead of naming the
countries - not to name any countries.

Well, I don't know. I thought there was

K:

H.M.Jr:

rather a good reason for naming the countries.
Well, he doesn't want to name them and then

K:

Well, you'll lose some following.

H.M.Jr:

True, but

K:

H.M.Jr:

he thinks that it's a little bit safer.

Naming Ireland in there was a stroke of
business I thought.
I know, but the President also was weak on
that whole thing - much to my amazement. He
was worried about it that fellows like Wheeler

might say, well, this is really a declaration
of war, you see, and as long as the President
felt a little worried about the whole thing
taking this form and Hull was a little
worried, I don't think it's important enough

K:

to fight about.
That's right.

H.M.Jr:

What?

K:

H.M.Jr:

That's right.
Particularly now as Cordell is willing to

work with me and take the brunt of it on the

Hill. See?
K:

That's good.

H.M.Jr:

Sometime - we'll phone you to find out - but

K:

hope, I'll call up to find out if we can send
it over. Take your time and read it and if
you could initial it why it would help.
All right, fine, Henry.

sometime between now and 6:00 or earlier, I

247
-3H.M.Jr.

But when it comes to you it'11 already have
Hull's and mine on it and I hope to get it in
the hands of the President tonight.

K:

All
right, Henry. I'll do it as soon as it
comes.

H.M.Jr:

Thank you so much.

K:

All right. Good-bye.

H.M.Jr:

Good-bye.

248

January 7, 1941
3:22 p.m.
H.M.Jr:

Hello.

Operator:

Secretary Stimson.

H.M.Jr:

Hello.

Henry L.
Stimson:

Yes, Henry.

H.M.Jr:

How are you?

S:

Fine.

H.M.Jr:

Harry, I had an hour and a half with Hull
today, after having an hour with the President

yesterday on this bill.

S:

You're speaking now of the

H.M.Jr:

Aid to England, or aid Ireland or aid to

S:

H.M.Jr:

S:

H.M.Jr:
S:

China.

You mean, now, the bill that I've been talking
of with Foley.

That's right. Now the objection that you raised
was the way it was written as an amendment it
had to go to Foreign Affairs.
Yes.

That's been crossed off so it's an original
bill now.

Yes, well that's the only point I had objection
to. I only objected to that in case the people
who knew more about it than I did agreed with
me that Foreign Affairs was not the best com-

H.M.Jr:

mittee for it to go to.
Well, Cordell thinks that Foreign Affairs in

the Senate is very bad; he thinks in the House

it's all right.
S:

Yes.

249

-2H.M.Jr:

But he is joining with me tomorrow in seeing
the leaders in the Senate and the House to

try to direct it to the best committee, but

it is crossed off so it's an original bill
so it can go to any committee.
So it can go to any.

S:

H.M.Jr:
S:

The chances are it will not go to Foreign
Affairs
in the Senate.
I want you to understand, Henry, my attitude
wholly about it. I approved of its being
an amendment to that Act except for this
question.

H.M.Jr:

I think your judgment was good.

S:

And that question occurred to me when, I
think it was Foley or someone else told me

that they were thinking it would go to the

Foreign Affairs Committee.
H.M.Jr:

Now they made one other change at Cardell's

suggestion. We're not naming any countries;
we re leaving the names out. He didn't want
any names.

S:

E.M.Jr:

Yes, all right.
And the President was a little worried about
that aspect - not that, but the whole question.
Somebody had been to him on making

S:

Let me see. I forget now the - it named the
oppressed countries, didn't it?

H.M.Jr:

Yes, but it left out China.

S:

Left out China.

H.M.Jr:

But when it came to that Cordell thought it
was better not to name any countries. See?

S:

Yes. I don't remember - I haven't the bill

H.M.Jr:

I don't think it makes enough difference. Hello?

before me now and I shouldn't

250

-3-

Yes. Well, I'm perfectly agreeable on it.

S:

H.M.Jr:

Now what's happening is the President said he

wanted
allinitial
of ourit.initials on it first and then
he would
Yes.

S:

H.M.Jr:

It is over in Mr. Cordell Hull's office now
and as soon as he has initialed it, I'd like
to send it over to you and then I'm sending
it to Frank Knox and I hope to get it to the
President yet before supper.

All
right. It won't take any length of time
here.

S:

H.M.Jr:

And then Cordell and I are seeing that
will you send it by a messenger who'11 carry
it along to Knox?

S:

H.M.Jr:

Well, Foley will come himself.

S:

Oh, yes. All right.

H.M.Jr:

I'd come, but I'm sending Foley.

S:

Oh,

no,

no, no. Well, I think it is a wise

precaution to leave it so that it doesn't
necessarily go to that committee.

H.M.Jr:

Well, it leaves it so it can go to any committee it can go to different committees in the Senate

and the House.
S:

H.M.Jr:

Yes, I see.
I was worried because somebody had practically

sold the President on making it a corporation.

I don't know who.
S:

Someone had told the President what?

H.M.Jr:

That it should be done through a corporation.

S:

I hadn't heard of that.

251
4H.N.Jr:

Well, he was practically sold on it, but then
we pointed out that 1f it was a corporation

it would mean an amendment to the Johnson Act

and then he dropped it.
S:

An amendment to the

H.M.Jr:

Johnson Act.

S:

You mean as to lending

S:

Well, private lending.
Private lending, yes.

H.M.Jr:

But somebody did a job on him; I don't know who.

S:

By jinks - (laughs) - that would have been a

H.M.Jr:

H.M.Jr:

bad fix, wouldn't it?

I think it would have been terrible because
you know how much trouble it is: you get it
all fixed up, then you've got to go through
Jones all over again and we haven't got that
much time to waste.

S:

No, we have not. Well, I think you've done a

H.M.Jr:

Thank you.

S:

Good-bye.

good job, Henry. I'm very glad you did it.

252

COMPIDENTIAL

NOT TO BE RELEASED UNTIL

10:00 P.M., JANUARY 7. 1941.
ADDRESS BY THE HONORABLE WILLIAM C. BULLITT
BEFORE THE INTERNATIONAL RELATIONS CLUB
OF THE UNIVERSITY OF NORTH CAROLINA,

CHAPEL HILL, N. C.,
AT 10:00 o'clock TUESDAY EVENING, JANUARY 7. 1941.

To be carried over nation-wide Blue Network of
NATIONAL BROADCASTING SYSTEM 10:00 to 10:30 P. M.

The fifth of December, 1938, it was my privilege to accompany President

Boosevelt on his visit to Chapel Hill. The President began his address that
day by quoting the words: "We live in a world of change."
The speed of change has been so accelerated since the President spoke

those words that it has become enormously difficult to "see life steadily
and see it whole." Nations have lost their independence in a few hours.
Shrines and landmarks of centuries have been blown to dust in a night. The

world of yesterday does not exist today. The world of today will not exist
tomorrow.

We are trying to live our lives in peace, in freedom and in Christian
decency on an earth where there is little peace, less freedom and a constantly diminishing area of Christian decency.

Moreover, we are obliged to think of our relations with other nations

in terms of a shrunken geography. For the first time in our history the var
machines of Europe can reach the Western Hemisphere in a few hours. The

physical isolation in which we have lived and developed our own way of life

-2-

253

is at an end. Whether we like it or not - and most of us don't like it
because ve were happy in our isolation - the earth has been so contracted

by the airplane that in a very real sense all the nations of the world have
become our neighbors.

Another invention has abolished distance completely for the ear. The
radio enables us to hear instantly a voice speaking in any spot on earth.

We can no longer ignore ideas on other continents. They are in the air in
our homes, our offices, and our automobiles. There is an old and noble saying: "Nothing human is alien to me and my brother's sorrows are my own."
So also today is his propaganda.
The moral change which this shrunken world has suffered is even more

bewildering than the geographical change produced by the radio and the air-

plane. Before 1914 all the nations of the earth accepted in one form or
another the ethical principle of Christian life - the great Commandment:
"Do unto others as you would they should do unto you.' The Chinese phrased

it passively in the words of Confucius saying: "Do not do unto another what
you would not wish him to do unto you.' The Mohammedans and the Buddhists

had their phraseologies. But all men, except A few tribes of savages, bowed

to a moral doctrine that was either that of Christ or close to that of Christ.
The Emperor of Japan, the Cyar of Russia, the Emperor of Germany, the

Emperor of Austria-Sungary: like the King of England, the King of Italy, the
President of France, the President of the United States, and the heads of

all smaller nations, were linked by A community of moral doctrine. All were

ashamed to kill without due process of law, to be cruel, to lie, to break
their pledged word. A unity of moral outlook had replaced to some degree

the old unity of Christendom. If men did not live up to their principles,
they at least felt a sense of guilt when they did not: and, if their

254

3-

principles did not guide their actions, at least they restrained their actions.
The rulers of all nations spoke the same moral language.
The community of moral outlook which existed before 1914 exists no longer.

The Bolsheviks in Russia were the first rulers to deny the validity of Christian
ethics when they declared: "Religion is the opium of the people.", and instituted a government of the people, by the dictator, for the bureaucrats:

a

government based on secret police and firing squads under which only an obedi-

eat slave can enjoy relative security.

The Fascists in Italy followed, but discreetly, since they knew that the
Catholic Church was Italy's greatest asset and feared to lose that asset. But

they installed the lie, the pledged word given and broken, as their chief
vespon in international politics.
The Nagis under the leadership of a genius of evil then turned their
backs on all the moral terchings of Christ, Mohammed, Confucius, and Buddha,

and announced that the highest virtue was to be hard, and that there was one

master race - the German - which was superior to all other races, that this
race had the right to conquer Europe and then the whole earth and rule triumphant over a world of slaves.

The Japanese, meanwhile, rediscovered a divine mission for themselves,
and to prove their moral superiority began to disembowel the Chinese with
their bayonets.

In the course of a few brief years Russia, Italy, Germany and Japan
turned away from even lip-service to the moral principles which had been ac-

cepted generally throughout the world before the war of 1914. The speed of
this transformation seems extraordinary until one considers that the moment

a dictator seizes power he establishes immediate and absolute control over all
Avenues by which thought can reach the human brain. He controls the press,

the radio, the motion picture and all speech. He shields his people with the

-255
utmost care from the intrusion of truth. And into them he pours propaganda.
No DAD in any totalitarian country, in these days of dictaphones, can express

an opinion at variance with the dictator - even privately to his most intimate

friends or his family - without risking a firing squad.
Moreover, there are in the human animal powerful and imperfectly repressed

instincts that respond to the dictators' creed of barbarism. Evolution is a
long and slow process, and in spite of twenty centuries of Christian civilization a savage hides beneath the surfact of each civilized san's nature.
Hitler was able to force the people of Germany, - who had given the world
Goethe and Beethoven, and had given the United States so many splendid citi-

zens, - to adopt a creed of cruelty, because he offered an enjoyable outlet to
the primitive anthropoid who lurks in man and delights in cruelty and slaughter.

In our country, we still are free men - the heirs of twenty centuries of
Christian civilization. Our homes, our communities, and our nation are founded

on our belief in the eternal verity of the teachings of Christ. Our lives are
SO permeated by this belief that we almost forget it exists. It is as present
and impalpable as the air we breathe. We are so accustomed to living in
liberty and Christian decency with free churches, free speech, a free press,
and free discussion that we forget that these are luxuries which now can be

enjoyed in only a very few countries. And we are apt to forget that when
freedom leaves, fear enters.
Unless one has lived in countries where a man does not know whether the

workman on the bench next to him, or his closest associate or friend, is, or
is not, a secret agent of the all-powerful dictator - where every nan and
woman fears to hear in the night at the door the knock of the secret police it is difficult to comprehend the degree to which fear dominates human life
when freedom is destroyed, or the horror that life becomes when lived in
total fear.

-5- -

256

Existence in the totalitarian states is not life as we Americans under-

stand life, but is living terror.
No bridge of understanding can be built between our nation and the
totalitarian states, because a minimum of good faith is as necessary for
friendly understanding between nations as between individuals. The dictators
have proved to us that we cannot believe a word they say or trust a pledge they
make. They have discarded for themselves and for their peoples the whole code

of international morality. Force unrestrained by morality is their creed.
Their threat to us is a threat not only to our independence but also to all
that we care about on earth. Our country. is in danger. Our way of life is
in danger. Our Christian civilization is in danger. We can expect no mercy

or honor in their dealings with us. And we face the threat of this new
barbarism on a shrunken earth.

To carry out their plans of conquest, Germany, Italy and Japan leagued
themselves together by an agreement signed in Berlin on September 27, 1940.

The threat of ultimate var against us contained in that agreement has since
been underlined in red by the Chancellor of Germany, by the Foreign Minister
of Japan, and by spokesmen of the Italian Government.
How are we going to meet that threat?

At no time in our history has there been greater need for clear thinking
by all Americans. We cannot solve this problem by emotional reactions or

epithets, or good intentions or high sounding words, We have to think hard
in the old American way - with cracker-barrel common sense.

Let us begin by remembering that the Atlantic and Pacific Oceans, even

in these days of airplanes, are formidable obstacles to invasion of the
Americas. So long as the British Navy continues to hold the Germans and

Italians on the other side of the Atlantic, while our Fleet watches in the

-6-

257

Pacific, we have the practical equivalent of a two-ocean navy. This is the
situation today. But if the British Eary were eliminated, we should have a
one-ocean BAVY - and we would still have two oceans to defend. And a one-ocean

DAVY can cover two oceans just about as well as one pair of pants can cover two
pairs of legs.

We are building ships of war as fast as we can, but we shall not have a

two-ocean navy until 1945. If, before that time, the British Navy should cease
to defend the Western Hemisphere on the Atlantic side, we should be able to

protect either the Pacific Coast or the Atlantic Coast: but we could not pro-

tect both. Without the British Fleet, we could not bolt both the front door
and the back door of our national home.

Some people faced by this fact comfort themselves with the belief that
even though Great Britain should collapse, the British Navy would continue to

fight and hold the Atlantic for us. Unfortunately, we cannot shape our
national policy on pure optimism alone. The present government of Great

Britain would no doubt desire the fleet to continue to fight even though the
British Isles should have been occupied by the Nazis. But when disaster overwhelms a country, its government falls. The French Government of Reynaud desired the French Navy and Army to base themselves on North Africa and continue
to fight against Germany. That government fell, and the French Army and Navy

were withdrawn from the struggle. In the face of this recent example, it is
not wise to be too optimistic about a continuance of var by the British Navy if we should be so blind as to permit by default the conquest of Great Britain.
We know that Latin America is vital to our national defense. But if we
are thinking honestly we have to admit that in many states of Latin America

there are strong totalitarian elements. If Great Britain's resistance to
Germany and Italy should collapse, the way would be wide open for the installa-

tion of totalitarian government in one or more states of South America. Re-

258
-7cently a distinguished opponent of President Roosevelt's policies argued that

even if the dictators should control all South America as far north as the
Equator, we could still be safe. The experience of cities in Englard has
shown that the Panama Canal cannot be made secure at this moment against bomb-

ing planes based on South America, If the Canal should be put out of commission, our one-ocean navy would be fixed in one ocean, and the other ocean
would become a broad highway - open for invasion.

More than ninety percent of the human race would be controlled by the
dictators and be organized against us. A Japanese iron ring around Asia and
Australasia and a German iron ring around Africa and Europe, including Great

Britain and Ireland, would cut us off from trade with so great a portion of
the earth that we - in a mutilated stump of the Western Hemisphere - would be

thrown into economic disorder. The standard of living of even the poorest
American would be gravely reduced. And we should have to try to support with
our crippled economic system armaments collosal enough to resist the whole

world. How long under those conditions could we keep alight the flame that
was kindled on the Fourth of July, 1776 - the flame of freedom for all men?

Because it is disagreeable to look at these facts, there are still a few
Americans who close their eyes and mumble that we ought to try to come to some

reasonable understanding with the dictators. Austria, Czechoslovakia, Belgium,
the Netherlands, Norway and Denmark did everything they could to avoid dis-

pleasing the Nazis: but they were attacked as ruthlessly as if they had acted
with outright hostility to Germany. Their fate has shown what happens to

nations that try to appease the Nazis. Yet those who cannot bear to look at
the harsh reality still comfort themselves by dreaming that we can get close

to the dictators and establish happy cooperation with them. That kind of

259
wishful thinking reminds me always of the old limerick:
"There was a young lady of Niger,

Who went for a ride on a tiger,

They came back from the ride,

With the lady inside
And the smile on the face of the tiger."

If we cannot appease the dictators, and if the victory of the dictators
would have such tragic consequences for ourselves, what should we do?

Help the British! Help the Greeks! Help the Chinese!
That answer is obvious.
Help how?

We hate war and because of that hatred the question of entering this war
as a national policy does not even arise. We know that the surest way to de-

feat the axis powers is for us to go to war in support of Great Britain,
Greece and China, but we hate war 80 much that we prefer to take a chance on

the ability of the British, the Greeks and the Chinese to defeat the dictator
powers without direct military assistance from us. We know what the conse-

quences of totalitarian victory would be for us, and we are taking this risk
with our eyes open. Unquestionably the people of the United States at this

moment prefer to take this risk rather than go to war.
How can we diminish the risk?

Only by giving to those who are fighting the axis powers every possible
supply, material, munition, and arm that can be of use to them. We must give
what they need, not what we think we can comfortably spare. We can not, in

our own self-interest, give less than what they need, If we have not got what
they need, we must produce it and produce it fast. Merchant ships, war vessels

airplanes, guns, munitions, steel, wheat - all that we give will be used in defense of our own security.

If we should stack the cards against the British by withholding what they
need and we have, we would condemn ourselves to war at A day not distant,
alone, without allies, and unprepared.

-9-

260

It is so greatly to the advantage of the totalitarian states to have us
stay out of war while they are attempting to conquer Great Britain, Greece and
China that they will almostcertainly not make war on us so long as Great
Britain stands - no matter how much material aid we furnish and no matter what

form that aid may take. The dictators will fune and fulminate but they will
not risk declaring war on us unless they first have conquered Great Britain.
Each day that the British, the Greeks and the Chinese hold out increases

our own readiness to parry attack. But it is no secret that today ve are far
from prepared. We must buy time in which to prepare, We can buy that time

only by helping the nations that are now holding the totalitarians away from
our shores.

The totalitarian governments have expressed the opinion that we are already too late - that nothing our "clumsy democracy" can now do to accelerate
production will produce enough weapons in time, and that they will conquer
Great Britain before we vake up.

Our method of production during the past six months has been the confortable and lazy one of superimposing production for defense on the normal
business of the country. That was the method employed by France and Great

Britain before they were drawn into war. It led to the defeat of France and

to the deadly peril in which Great Britain now finds herself. It has failed
us, as it failed them. And the President has now declared that production for
defense must take precedence over other production. The Nation, from East to

West, from North to South, - every man, small or great, - must respond to the

President's leadership. This response will constitute the acid test of our
democracy, of our ability as free men, acting of our free will, to banish
every thought of self and selfish gain.
The problem of increased production can not be solved by any administrative

organization or any small group of men, however able they may be. It can be

261
- 10 solved only by the whole American people working together as a unit. Without
being in war, and in order to keep war away from our shores, we must now produce instruments of defense as fast as though we were in var.

To find within themselves the will to work as if they were in war is hard
for men who live in peace. But the instinct of self-preservation should tell
each individual American that the very existence of all that he holds dear depends now on his own efficiency and his own readiness to work and to sacrifice
for his country.
We read each day in our newspapers and we hear each day on our radios the
news from London, and we should all know now just what Churchill meant when he

promised his countrymen nothing but "blood, toil, tears and sweat". If we toil
and sweat now - but only if we do - we may be able to escape the blood and tears.
At this time of danger each American must ask himself each day not what

he can get from his country but what he can give to his country, and must ask
himself each night: "Earn I given enough?"

We are told by propagandists for the dictators that our democracy is out-

worn, inefficient, a thing of the past, that our government of the people, by
the people, and for the people is sure to perish from the earch. We are asked
to fall on our knees before a system in which one man decides for all other men

what they shall think, eat, drink, wear, and do: - a system the essence of
which is fear, the secret police, the firing squad, the concentration camp and

torture. We are told that this is "the wave of the future".
But we know that through all changes on this earth, there is that which
does not change: the Eternal Nature of the Commandment: "Do unto others as

you would they should do unto you." We know that no "wave of the future", no

firing squad, no torture, can change that Truth. It has already hung on the
Cross.

262
- 11 -

The totalitarian dictatorships have turned their peoples away from that
Truth and are trying to impose on Europe and the world what they call a "new

order". By their works we know them, and we know that their "new order' is

a

very old order indeed; the foul, old order of slavery.
Our forefathers died for the right of a man to bow to no master but God.
They started the wave of the future: a wave which has not yet even begun to
reach its crest. The wave of the future is freedom, democracy, peace. The
,

wave of the past is slavery, dictatorship, war.

Our forefathers took this continent and made it a good land for men of

every race to live in. We, too, can turn our faces into flint. We have in our
American loins the strength of every people. We are, in living truth, a
brotherhood of man. And we can take the future as our forefathers took the
past. The inventions that have shrunk the world are now being used for
slaughter and propaganda. We can use them to establish pence and spread truth.

In this past year, men of good will throughout the earth have felt more
deeply than for centuries the need for a unity of Christendom. Each one of us,
each individual American, has his place today in the construction camp of
Christendom.

We know how to work: and we know how to fight: and we know what it is to

be free. The slaves of the dictators are not the future. We are the future.
And the future is ours!

263

Hryto
gave
original
Sovett
gase slt,

CONFIDENTIAL

January 7. 1941

To:

The Secretary

From:

Mr. Young

Re: Meeting with Mesers. Burdette Wright and
Guy Vaughan concerning P-40 planes.

At the present time the British have been negotiating with
Curties Wright for a total of 2086 P-40D airplanes in three
lots - 420, 600, and 1066. with respect to the negotiations

for the 420, the British are ready to sign the contract but

have advised Curtiso Wright that they are barred from so doing
by instructions from Washington. Negotiations for the 600 have

progressed satisfactorily, but the British have stated that
they are not yet quite rendy to sign. Concerning the 1066, the

British are still in the talking stage.

The deliveries on these three groups are as follows:
420

55
65
60

November, 1941
December, 1941

April, 1942
May, 1942
June, 1942

July, 1942
August, 1942
September, 1942
October, 1943
November, 1942

1066

65

August, 1941
September, 1941
October, 1941

January, 1942
February, 1942
March, 1942

600

55
85

68

85

100

130

100
100
52

100
95

100
90

115
168
280
113

264

In affition to the potential British orders outlined above,
Cartino Wright ema also produce 843 P-400 please with delivery

as follows

April, 1941
May, 1942
June, 1941

July, 1941
August, 1941
September, 1942
October, 1941
November, 1941
December, 1941
January, 1942
February, 1943

2

6

8

20
37

66
90

130
170
214

101

These 843 additional planes would have to be released by the

Air Corps if they were to be sold to a foreign purchaser. Further
some arrangement would have to be made for the supply of engines.

(Signed) Philip Young

PY:bj

265

January 7, 1941

x
MEMORANDUM FOR:

Secretary Stimeon
Secretary Know
Secretary Jense

M Kandoon
Mr. Hillman

The President is going to see us at eleven
o'clock Thursday surning. The reason that I asked

for this appointment is to afford - opportunity
for all of - to discuss with the President what
we can de w assist the British during the interis

period pasting the passage of legislation by Congress.

I - incleaing herevith (1) a suggestion for
an interis program and, (2) a very confidential -

orandes given se by Mr. Arthur Pervis as to the latest
estimate by the British Government of their military
needs.

266

MEMORANDUM FOR THE SECRETARY

Interis Plan
Pending the enactment of the proposed joint resolution
authorising the lacement by the United States of orders on behalf
of foreign governments and leasing to foreign governments the
articles so ordered, the following interim plan can be used for

(1) The expansion of roductive facilities for defense materiel;

and (2) The procurement of such material.
(1)

Excension of Production Facilities
The R.F.C. and the Far and Navy Departments presently

have funds available for the excension of defense roduction. The
R.F.C. has a revolving fund of $1,500,000,000 for such purposes.

of this amount approximately $400,000,000 is probably still available.

By a recent decision of the R.F.C. to reduce the take
out obligations of the Mar and Navy Departments about $40,000,000

more has been sade available to these departments for defense lant
expansion. In addition to other lant expansion funds which these
departments still have available, further funds for this purpose
could be sade available by releasing all R.F.C. take out funds which
have been set aside by Army and Navy.

There would appear to be ample funds for the additional
plant expension program. If any more funds become necessary, the
note issuing power of the R.F.C. could be increased by the amount
necessary to accomplish this objective.

267

-2(2)

Procurement

For the actual placement of additional orders the
War Department has availables (a) $60,000,000 for the procurement

of aircraft, aircraft engines and aircraft parts; and (b)

$430,000,000 for the procurement of ordnance items. The Bar
Department is prepared to make these funds available for the
foregoing purposes, instead of using them, for example, for April June 1941 maintenance of aircraft, with the idea in mind that the
War Department can get further appropriations later for such
maintenance and similar purposes.

In all probability, the Navy Department can make similar
funds available.
By spreading the procurement orders with these funds
and dovetailing them with plant expansion, the program can be carried forward so that the necessary deliveries can be made as soon

as the proposed joint resolution is enacted.

1/3/41

200

268

SECRET
BRITISH SUPPLY COUNCIL IN NORTH AMERICA

Fillard Hotel
Washington DC

January 5, 1941

Dear Mr. Secretary:

I inclose for transmission to the
President the new statement of Fritish Requirements during 1941 and 1942 of Merchant Ships

Aircraft

Ordnance

Steel
Machine Tools

- which statement was promised in the Prime

Minister's letter to the President of December
8th, 1940, paragraph 16, and again in his cable
of January 2, 1941.

Very truly yours,

Arthur Bhin's
Chairman

The Secretary of the Treasury,
Washington,
D. C.

269

STATEMENT OF BUTTER REQUIREMENTS

of Bardenet Ships, Aircraft, Ordered Steel and Machine Teals
for delivery free the United States
during 1941 1942

Estimated deliveries

1941

Small leter Craft
Varias enginee

leabers . General I

units
teal.

Purmuit

50,000

Total Operational
Trainers

Great Total
THE TAXI EQUIPMENT

700

1,000

5,600

22,900

14,300

25,700

2,500

5,950

3,700

6,300

3,150

8,200

28,950

18,000

32,000

9,900

1,350

3.400

5,700

1,350

2,300

3,200

1,000

2,400

2,800
1,200
400

1,200

-

90

400

-

-

3,700

5,100

5,000

3,200

550

5,900

800

11,150

2,700

4,200

1,000
23,000

350

80

5,900

800

16,250
4,200

6,400
600

2,000

4,500

6,000

2,300

31,000

42,000

23,500
168,000
27,000

7,000
46,500

4,500

68,000

49,000

48,000
92,000

550

4,100

4,020

16,000
1,000

items

Rifies

300

1,000

350

4,500

.30 Machine Dana
Sub-aschine June

600

1,000

2,900

600

.303 Machine Dama

100

1,000

1,100

80

single

16,300
8,000

5,500

8,700

Items

.50 Machine June.

7,500

100

single

20 - Oarliken Gums

14,000
7,300

200

Bedium Date

20 - Aircraft Campee

1,900

1,500

400

Never June (16 tach 2 1

1,200

3,000

Hold Dans

Tank Anti-Tank Jane..
Anti-Aircraft Beary June
Anti-Aircraft Light Guns

1,900

700

SOUNCE

Heavy Canada

200

200

2,000

items

Universal Carriers

300

4,000

single

infentry and Order

2,900,000

3,250,000

200

4,500

-

1942

2,650,000

1,000

spares

Fiying Boats

-

from Datted States

150

3,200,000

250,000

150

80,000

42,000
4,500
450

2,200

so

1,950

400

18,000
3,000

168,000
75,000
160,000

-

single
write

Total Deliveries Required

1941

1942

1941

1942

-

gross tess

Marchast shipe sarge limers, - -

free Patted States

-

250 (other than Marahipe)

Deficiencies to be provided for

under mentiation is United States

-

Insurance

free orders already placed

-

Unit of

50
210

25

45

thousands

Revolvers

25

165

10

50

10
50

Medium Dum

7,600
1,600

9,200
1,950

Beavy Dan.

thousands

Heavy Anti-Aircraft

Tank Anti-Teak

1,950

1,500
6,800

Light Anti-Aircraft

3,950

300

400

1,200

3,400

6,100

Aerial Bombe
200
15

10

20 - Atreraft

115

.30

12

thousand

Alley Special Purpese 1

tens

Drop Forgiage

110

1,500

1,500

6,900

150

200

3,000

2,950

725
222
18

192
600

18

900
100

-

-

$ million

Machine Teals

ISAN . a Burdent Ships.

.I

R. strength

ca -F. -

a. Backlagies

240

3,000
1,460

25

6,600

6,500

700

725

240

210

900

1,500

900

1,000

-

900

100

100

760

165

20

6,600

900

220

75
360

7,600

not yet defined

12

900

Mg Irea....
Steel Iron Sarap.

4,900

20

6,600
700

650

400

25

-

DO STREL
Ordinary Type Stam

1,100

-

.55 Aast-Tank Rife

2,120

730
650

Platal Californi (emilating ab-eaching -

165

-

millions

.303

3,950

5,950

-

.50

700

650

-

85

29,000
4,950

not yes defined

10

550

1,500

7,500

19,800
3,000

-

Field Own.

-

LIMINITION

-

Anti-Teak Rifield

Based - mistenance of United Kingdom a fleet at existing level.

1.0., after allowance for present rate of lessee.

Based - present British Air Staff estimate of equatres requirements to
give preparderence over essay.

Based - British Bar Office strategic calculations.

I - United Kingdom deficiency as a result of less of Continental

- of supply.

All of the above activates - the mistesance of British output.

100

100

270
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION

DATE January 7. 1941
Secretary Morgenthau
FROM Mr. Cochran

CONFIDENTIAL

Registered sterling transactions of the reporting banks were as follows:
180,000
Sold to commercial concerns
Purchased from commercial concerns 136,000

The Federal Reserve Bank of New York sold 116,000 in registered sterling to

non-reporting bank.

Open market sterling remained at 4.03-1/2. Transactions of the reporting

banks were as follows:

15,000
Sold to commercial concerns
Purchased from commercial concerns 13,000

The Canadian dollar, which has had an easy tendency of late, recovered today.
t closed at 13-7/8% discount, as against 14-1/8% yesterday.
A further improvement took place in the Cuban peso rate, which moved from
8-1/16% discount yesterday to 7-11/16% at the close today.

Closing quotations for the other currencies were:
Swiss franc
Swedish krona
Reichsmark

Lira
Argentine peso (free)

Brasilian milreis (free)
Mexican peso
Cuban peso
Chinese yuan

.2321
.2385
.4005
.0505
.2360
.0505
.2066

7-11/16% discount
.05-5/8

There were no gold transactions consummated by us today.

Under licenses previously issued, the Federal Reserve Bank of New York treasferred from the account of the Central Bank of E1 Salvador gold valued at approximately

to transfer raises the amount of in

in thisNo.account
ownedofby
B.I.S. account
$300,800 account
6 No. to 6is
$450,800;
the the
B.I.S.Central
gold This Bank
gold

of E1 Salvador and is pledged to secure repayment of credits granted that Bank by the

B.I.S.

-2-

271

There were no new gold engagements reported to us today.

A gold price equivalent to $33.99 was received from Bombay today, 3#
higher than last Saturday's quotation. Silver was priced at the equivalent of
43.974. a gain of 1/16
The prices fixed in London for spot and forward silver were both unchanged,
at 23-3/88 and 23-5/16d respectively. The deller equivalents were 42.444 and
42.334.

Handy and Harman's settlement price for foreign silver was unchanged at 34-3/44.
The Treasury's purchase price for foreign silver was also unchanged at 35#.
We made Of four purchases of silver totaling 525,000 ounces under the Silver

Purchase Act. this amount, 300,000 ounces represented a sale from inventory, and
the remaining 225,000 ounces consisted of new production from foreign countries, for

forward delivery.

The report of December 31 received from the Federal Reserve Bank of New York,

giving foreign exchange positions of banks and bankers in its district, revealed that
the total position of all countries was short the equivalent of $9,958,000, an increase
of $318,000 in the short position. Net changes were as follows:
Change in Short
Short Position
Short Position
Position
Country

December 24

December 31

Singland**

$ 883,000

$1,100,000
3,754,000
410,000 (Long)
230,000
4,164,000
1,205,000
55,000 (Long)

Europe
Canada

Latin America
Japan

Other Asia

All others
Total

3,533,000
297,000 (Long)
137,000
4,126,000
1,237,000
21,000

$9,640,000

$9,958,000

+ $217,000

+ 221,000

- 113,000

+ 93,000
+ 38,000

- 29,000

- 109,000
. $318,000

*Plus sign (+) indicates increase in short position, or decrease in long position.
Minus sign (-) indicates decrease in short position, or increase in long position.
*Combined position in registered and open market sterling.
The Federal Reserve Bank's report of December 31, listing deposits of banks
in Asia with the New York agencies of Japanese banks, showed that such deposits
totaled $99,479,000, a decrease of $3,520,000 since December 24. Most of the change
in deposits took place on the books of the Tokehama Specie Bank's New York agency.

The latter's principal dollar liabilities to and dollar claims on Japanese banks in

Asia stood as follows on December 31:

MMP
CONFIDENTIAL

272

3

December 31

liabilities: Deposits for Japan & Manchuria
Deposits for China
: U.S. Treas. bills, comm. paper, etc.
: Loans

Claims

: Other - mainly Jap. import bills

$50,550,000
36,637,000
31,049,000
36,454,000
12,349,000

Change from Dec. 24
- $4,420,000

+ 994,000

- 1,134,000

- $ 81,000
+ 468,000

.

the last three categories refer mainly to Japanese banks in Japan and Asia. It will
be observed that deposits and bills held for account of such banks together declined
about $5,500,000. Since more than $3,000,000 worth of gold arrived from Japan on
December 27 and was sold to the San Francisco Mint, it appears that as much as
$8,500,000 may have been withdrawn from Japanese deposits with Yokohama's New York
agency during the week under review.

CONFIDENTIAL

273
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
STRICTLY CONFIDENTIAL
TO

FROM

DATE January 7, 1941

Secretary Morgenthau
Mr. Klaus

FBI reports:

January 3. An investigation has been conducted of the activities of one
Leopold Hugo Paul Klotz and his wife, generally known as "Baroness" Vera Mont-

gomery, and their relation to the Luscombe Airplane Corporation. Klotz is a

German alien and his wife was a customers' woman for Beverley Bogert and Company, stockbrokers in New York. They have bought into the Luscombe Airplane

Cor oration and now have control. The Corporation is suspected of violation
of Export Control regulations regarding airplanes and airplane parts, and the
Herald-Tribune is about to publish a story that Vera Montgomery has carried,
and is proposing to continue to carry, large amounts of money (ellegedly a
billion dollars in currency) into Mexico, obtained by liquidating German accounts in the United States through the brokerage firm of Winslow, Douglas
and MeEvoy. On April 6, 1940, Klotz flew to Mexico with persons said to be
connected with William Rhodes Davis (former New York State Senator John A.
Hastings and others) to see President Cardenas.

January 3. It is reported that Germany has 22,000 former Ukrainian army
officers concentrated in Poland for the purpose of acting as officers in a
Ukrainian army of 500,000 to fight Russia in an invesion of the Ukraine; the
informant states that these officers have secret intentions of fighting both
Russia and Germany when the army is organized and supplied in order to free
the Ukraine.

January 4. The Japanese press is showing more and more hostility to
the United States; Russians have become popular in Tokyo in consequence of

Japan's idea that Hitler should whet Stalin's appetite in the direction of
Iran and Afghanistan in order to eliminate Japan's anxiety regarding Siberia
and Mongolia.

Sir

274
January 7, 1941

Memorandum Dictated by Mrs. Klotz
Tom Smith came in to see me and asked me to

help his boy get into Ordnance, and I said no, that I

could not. Then he asked me whether I considered it an
exemption to get into Ordnance, and I said that I did.

He then asked me, "Do you think he should take his chances

in the draft?" I told him that I thought he should.

I was very frank in letting Tom Smith know, and

I looked him straight in the eye, that I thought it was

wrong and that I could not help him.

275
RESPECTED BAYK

of NEY YORK

January 7. 1941.

Mr. H. Merle Cochran,
Treasury Department,

Washington, D.C.
Dear Mr. Cochrans

At Mr. Incire's suggestion I - enclosing a
memorandum which was prompted by the recent publicity

concerning transfers of dollars from Emesian to German
account.

Very truly yours,

/s/ Walter E. Resell, Jr.
Walter E. Berell, Jr.

Enclosure

Copyrals

276

Federal Reserve Bank
of New York
CORRESPONDENCE

Mr. Inake

-

Y. E. Resell

CONFIDENTIAL

Date January 4, 1941.

Subject Transfers of Dollar Funds
between Russia and Germany

(Copies to Nessrs. Sproul, Williams, McKeon (Cameron), Reelse, and Sanford)

Much publicity vas given in today's press to large transfers of funds from
the Russian State Bank to the Beichsbank account at Chase and a "mysterious finan-

cial process" by which Germany is able to acquire dollars despite the British
Mockade. THE NEY YORK TIMES dispatch goes so far as to state that the Dies

Committee has preliminary evidence to show that "at least $15,000,000* was trans-

ferred in this manner during the past two months. Specifically, three individual
transfers were mentioned; $700,000 OF October 2, $500,000 on October 14, and
$250,000 on October 25.

On the basis of the information which Chase currently makes available to us,
three such transfers were actually made on Chase's books at approximately the

dates indicated. Actually, the $700,000 transfer on October 3 was the first of
a series of seven Russian dollar payments to Germany. The total, however, amounted

to only $2,900,000. In addition, a small transfer of $200,000 Was made by the
Bussian State Bark to the Deutsche Golddiskontbank last August. Aside from being
considerably below the $15,000,000 mentioned in the news dispatches, these trans-

fers are only one half the picture. During the same period, $525,000 was transferred from the Reichabank account to the Russian State Bank. Furthermore, when

transfers of $1,075,000 made between the early part of June and the end of last
September are taken into account, the total movement of funds from the Reichsbank

to Jussian account amounted to about $1,600,000. In addition, $2,000,000 was
transferred from the Golddiskontbank account to the Russian account at Chase.

277
-2The total movement of dollar balances to German from Russian account from early

June, therefore, amounts to about $3,600,000 or more than the total amount of

transfers in the opposite direction.
While, as Chase intimated in its statement to the press, transfers between
Russian and German accounts probably reflect to a large extent commercial transactions, it is possible that some of the payments made to Germany by Russia may
represent reimbursement for German gold which was exported to the United States
by Russia. During September and October Russia exported and sold about $25,200,000

of gold to this country. However, judging from the size of the Russian dollar
transfers to Germany, it would appear that if any of this gold belonged to Germany
it must have been relatively small.
The relative importance of the transfer of funds between Russia and Germany
may be seen from the size of the recent transfers between Russia and other European countries. In the early part of September we know that Greece paid $5,900,000

to Russia, primarily in payment for the purchase of Russian wheat. In addition,
Chase's reports to us indicate that Russia has received a net amount of at least
$5,000,000 from Sweden since the first of last June and at least $4,000,000 net
from Switzerland. Here again it probably can be assumed that these net payments

to Russia are largely of a commercial nature and, no doubt, represent the settlezent of adverse balances accumulated in connection with these countries trade
agreements with Russia. Under a new arrangement between Switzerland and Russia,

Switzerland reportedly has agreed to pay for Russian wheat and cotton in free
exchange. Some part of the recent Swiss payments to Russia, however, may be

associated with Swiss purchases of gold from the Soviet Government.
WHR:EC

Copy:ala

278
EH

GRAY

Berlin
Dated January 7, 1941
Rec'd 8:16 p.m.

Secretary of State,
Washington.

45, January 7, 3 p.m.
My 4941 of December 7, 10 a.m.
FOR TREASURY FROM HEATH.

Investments of the Reichsbank normally show the

greatest increase during the last WEEK of the year but
the increase shown in the Reichsbank's statement for
the 31st of DECEMBER far EXCEEDS previous year End

records. This development had been forecast by the
press.

The investment portfolio of the Reichsbank (Treasury

and commercial bills, collaterals and security holdings)
stood at 15,846,000,000 marks on DECEMBER 31 as compared

with 14,065,000,000 marks a WEEK earlier, 14,036,000,000
marks on November 30 and 12,619,000,000 marks on DECEMBER

31, 1939. The increase was almost Exclusively due to

rediscounts, commercial and treasury bill holdings of
the Reichsbank having increased to the record figure of
15,419,000,000 marks on DECEMBER 31 as compared with

13,554,000,000 marks a WEEK Earlier, 13,532,000,000 marks
on

279

EH -2- 45, January 7, 3 P.M. from Berlin.
on November 30 and 11,392,000,000 marics on December

31, 1939. The Reichsbank's holdings of eligible SEcurities stood at 32,000,000 merics on December 31, 1940
as compared with 51,000,000 marics the End of November

and 804,000,000 marks on December 31, 1959. Collateral
loans on December 31, 1940 WETE 36,000,000 marks as compared with 26,000,000 marita OCT November 30 and 30,000,000

marks on December 31, 1939. Holdings of miscellaneous
securities stood at 357,000,000 merics on December 31,
1939 and compared with 427,000,000 marks a month earlier

and 393,000,000 marks a year earlier. In contrast to
the sharp increase in investment holdings the Reichsbank's
miscellaneous assets (which include the Reichabank's

operating credit to the Government) decreased to
1,726,000,000 marks on December 31 from 2,044,000,000
marks on December 21, 1,870,000,000 maris on November
30 and 20,033,000,000 marks on December 21, 1939.

Reichsbank note circulation stood at 14,055,000,000
marks on December 31 as compared with 15,286,000,000 marks

a WEEK Earlier 13198 a month earlier and 11,798,000,00

marks on December 31, 1939. The unusual increase in

investment holdings was compensated for on the liabilities
side by the increase in note circulation above shown and
an

280

EE -3- 45, January 7, 3 p.m. from Berlin.
an unusual increase in the volume of sight deposits
which reached a NEW record of 2,561,000,000 marks a

figure far in EXCESS of the previous high of 2,018,000,000
marks on December 31, 1939. Sight deposits had stood at
on November 30.

1,782,000,000 marks on December 21 and 1,706,000,000 marks/
The commentary in the BOERSEN ZEITUNG ascribes the

unusually large increase in investments on the one hand
and note circulation and sight deposits on the other--in
increase in sight deposits

particular the unusually large / due to the fact of the
DEW 37% Government bonds on January 2 following a period
of about two WEEKS in which no Government bonds had been

issued for the purchase of which funds WERE being gotten

ready. It has been admitted in the press, however, that
the Expansion was EVEN larger than anticipated.
MORRIS

EX3

PLAIN

JR

281

Nanking via N.R.
Dated January 7. 1941

Rec'd 7:23 a.m., 8th.
Secretary of State,
Washington.

5. January 7. 5 p.m.
Nanking's 1, January 6, 10 a.m.
"Central Reserve Bank".

The local Chinese press this morning reports that, after the opening
ceremony on the 6th, Chow Fu-Hai, Governor of the new institution, made a

statement the gist of which follows:

BEGIN STATEMENT (1) Although the "Government" upon its establishment

strove to reserve the value of the old fapi for the people's interest Chungking, disregarding that consideration, has flooded the market with unlimited quantities of notes which resulted in depreciation of currency
values and increase in commodity prices. Chungking claim last June that
only four billion dollars were in circulation was ridiculed by an expert who

declared that at that time the actual circulation was six billion six
hundred million dollars. The new bank is being established to avoid inflation and will issue its notes against ample cash reserve. The new notes

are to circulate at par with the old at first but if the value of the

latter drops too far the new notes will be stabilized to prevent distrubance
to finance and the people's livelihood.
(2) Cash reserves for the new notes not only exceed the forty per cent
provided for by the bank's regulations but have reached nearly one hundred
per cent. Therefore the new notes may be freely used to purchase foreign
exchange or changed for fapi at par without restriction for the time being

in order to help circulation.

(3) With a view to maintaining the value of the currency, efforts
will be made to increase exports so as to balance foreign trade. Control
measures on foreign trade will be adopted when necessary in accordance with
article four of the agreed terms of the Sino-Japanese agreement. Restrictions
will be exercised on the importation of old fapi notes from Hong Kong to
prevent depreciation in the value of the currency. END STATEMENT.
The "Central Reserve Benk" authorizes claim to have received deposits

of twenty million dollars on the first day of business and to have issued
notes to the value of seven million dollars.
Sent to the Department. Repeated to Chungking and Shanghai. By mail
to Tokyo.

PAXTON

TFV

eh:copy
BECEASE

282
GRAY

JR

Shanghai via N. R.
Dated January 7. 1941

Rec'd 7:13 a.m., 8th.
Secretary of State,
Washington.

January 7. 3 p.m.
Shanghai's December 23. 3 P.E.

Japanese consular officer states after further investigation that
neither Shanghai nor Manking Japanese authorities officially informed of
regulations in question: that regulations nevertheless understood to have
been issued at Hankow with the aim of preventing transportation of funds
for profit due to difference in Shanghai and Hankow exchange values: that

regulations are understood to be applicable to transportation of funds
both up and down river; that transportation of actual currency not in
excess of $300 Chinese is prohibited but that transportation of letters

of credit or drafts or transmission of funds through the mail is not
(repeat not) prohibited; and that, although the matter was of some
importance earlier, when the regulations were announced, because of the

then existing difference in exchange rates at the one point, at the present
time the matter is of less significance because the exchange rates at
Hankow and Shanghai are at nearly the same level. The official in question

indicated that he had not (repeat not) had access to the actual regulations.
Sent to Hankow: repeated to Department: Peiping, Chungking.
LOCKHART

IFV

mg

COPY

283

January 7. 1941

MEMORANDOM FOR HERBERT GASTON

FROM: SECRETARY MORGENTHAU

Please see that this is taken care of by noon
tomorrow and let me know so that I can call up Jere
Cooper myself.
Thank you.

284
January 7, 1941
4:07 p.m.
H.M.Jr:

Hello.

Operator:

Congressman Cooper.

Jere
Cooper:

Henry?

H.M.Jr:

Jere, you're quite a traveler.

C:

Ub-huh.

E.M.Jr:

Where in the hell have you been all day?

C:

H.M.Jr:
C:

H.M.Jr:
C:

Well, you've been traveling some yourself.
Yeah, sitting right here at my desk with
my coat off sweating.
Oh, yeah. I called down there and they
said you were fixing to leave the country.
Yeah.

Yeah. Well, I wanted to see if I could sleep
an hour later in the morning - didn't know
whether you wanted to call me or not and
thought I had better check up and find out

before I tried it.

H.M.Jr:

(Laughs). God, what a reputation I've got.

C:

(Laughs).

E.M.Jr:

What's on your mind?

D:

Sorry to bother you but you know this is a
reciprocal game and I don't want you to ever
hesitate calling on me when I can help you
so it sometimes happens that I have to have
a little help too you know.

E.M.Jr:

It's granted. What is it?

C:

Well, you may recall that in October, 1939

I took it up with you and you very kindly
took care of it for me, and I'm calling you

285

-2about my good friend Rice A. Ingras - I-n-g-r-e-e.
You had him appointed on October 25, 1939 in
your Special Agents Division there under
Chief Wilson, you know.

H.M.Jr:

Oh, yeah.

C:

You remember taking care of that for me.

H.M.Jr:

Yeah.

C:

And he was first assigned to duty here in

Washington in a field office, then later

assigned to Birmingham on January 15, 1940,

and he has a splendid record and I understand
he got notice a few days ago that it's going
to be terminated at the end of December - I
mean the end of January.

H.M.Jr:

Oh, for heaven sake.

C:

So I can't have that now.

H.M.Jr:
C:

We can't have that happen until we get the
tax bill through anyway.
of course, now, if you want me to do the
job for you why I can't do it with a 200-pound
man around my neck.

H.M.Jr:

(Laughs). If it was a woman it would be

C:

That would be different, yes, but I can't

something different.

carry the load you boys want ae to carry

now with a 200-pound man around my neck 80

I've got to have some relief.

H.M.Jr:
C:

Jere, I will take it off your neck.
Fine. All right.

H.M.Jr:

Consider it done.

C:

All right, and listen, Henry.

H.M.Jr:

Yeah.

286
-3C:

H.M.Jr:

Have them tend to it right away because he's
here for a few days leave and he'll be due
to go back Friday of next week, I think.

If it's done before noon tomorrow, is that
quick enough?

C:

That'11 be fine.

H.M.Jr:

All right.

C:

Let me hear from you, old fellow.

H.M.Jr:

I will.

C:

All right, Henry. Thank you 80 much.

H.M.Jr:

You're welcome.

C:

I appreciate your kindness.

H.M.Jr:

Good-bye.

C:

Good-bye.

TO:

Cum In Kay 287

I am returning
this for you ftes.
Cooper was in Committee

waiting but of informat

his Secretary (who

knew about - The matte)

that Ingram would
be relained

in

From: MR. GASTON

TO:

283

The Socratory

Chief Wilson has revoked the

instructions drop Rice A.
to

Ingres from the emergency roll
and will continue his appointment
to June 30. (Exerciency Appointments

are limited to the fiscal year.)
Wilson rates him as *just fair

but says we can continue to get
useful service out of him and
perhaps his dismissal may is a
tonic. It was not for cause but
one of ten made because of lack

of funds to carry them all.

From:

MR. GASTON

289

January 7, 1941

MEMORANDUM FOR HERBERT GASTON
FROM:

SECRETARY MORGENTHAU

Please see that this is taken care of by noon
tomorrow and let me know so that I can call up Jere
Cooper myself.
Thank you.

290

January 7, 1941

Nessrs. Stimson and Know,
Washington, D. C.
Centlement

On December 31, the President of the United

States received the Greek Minister.

The President has informed - that at this
interview be promised the Greek Minister the oppor-

tunity to purchase in the United States 60 fighting
planes.

I would greatly appreciate your cooperation

is assisting me to earry out the President's promise.
This matter is urgent.
Youre sincerely,
(Signed) H. MORGENTHAU, JR.

(Copy to Honorable Cardell Hall)

(Note: A of this
letter was
of the two gentlemen
sent ribbon to each copy

to whom it is addressed.)
Copy also given to Mr. Young.

291

January 7, 1942

Messre. Stinson and Knox,
Washington, D. C.
Gentlement

On December 31, the President of the United
States received the Greek Minister.

The President has informed - that at this
interview he promised the Greek Minister the opper-

tunity to purchase in the United States 60 fighting
planes.

I would greatly appreciate your cooperation

is assisting me to carry out the President's promise.
This matter is urgent.
Yours sincerely,

(Copy to Honorable Cardell Hull)

292
January 7, 1940

My dear Cordell:

For your information, I am
inclosing copy of a letter to Mesers.
Stimson and Knox.

Yours sincerely,

Honorable Cordell Hull,

Secretary of State.

293
January 7. 1940

My dear Gordell:

For your information, I inclosing copy of a letter to
Stimson and Knox.

Yours sincerely,

Honorable Cortell Hall,
Secretary of State.

This appointed
Kandsen

Helman

294

293

FOR THE PRESS

IMPRIATE RELEASE

JANUARY 7, 1941

The President today sizes and issued the following
Executive
Order,
Administrative Order end the additional papers
attached:
ECONOMINE

ESTABLISHING THE OFFICE OF PRODUCTION MANAGELENT IN THE
EXECUTIVE OFFICE CE THE F RESIDENT

AND DEPINING ITS FINSTIOUS AND DUTIES

By virtue of the authority Tested in the by the Constitution and the statutos, and in order to define further the
functions and duties of the Office for Emproyment Management

with respect to the national as declared by the

President to exist on September 3, 1353, and to increase pro-

duction for the national def'tuse three mobilization of
material resources and the insurance Abilities of the Nation,
it is hereby ordered:
1. There shall be in the Office for Emergency Manage-

ment of the Executive Office of the Prosident, an office of

Production Lanagement - forsist of (1) s Director
General, and (2) an Associate Director General, each to be

appointed by the eximent, (a) the Secretary of ar, and (4)
the Secretary of the Mary. the there shell serve as such
without compensation but stall :- edited to actual and
necessary transportation, subsister.com : other expenses

incidental to the performance of their duties.

2. With such advice and 55 it may require

from other departments II or the Federal Government,

and subject to such repulations or directions 5.5 the President

may from time to time preseribe, and subject further to the
general policy that the Departments of 12 and Davy and other

departments and agencies of the will be utilized to
the seximum extent sempetible 16th -he Office of

Projuction Management shill:

a. Formulete and : in the public interest

all mecsures made and appropriate in order

(1) to increase, and posulate the
production MM sopyly 15 materials, articles

and equipment and the provision of emorgency

plant ?callition the surfices required for
the national defeats, 125 (1) to insure offec-

tive coordination = thes activities of the
several departments, corporations, ser other

activities of : dift are directly
concerned it with

b. Survey, analytic and summit for purposes
of ^cordination th STATIC quirtments of
the 32 and Sev. sa other departments and

armine of the for remont, and of foreign
poweran =*$ 102 = right, articles, and

equipment : d.finst.

C. Adviso with = to the plans and schedules
of th vulta partness and scencies for

of materialf, articles, and equip-

2 for differ to
mont the purchas require acordinate and th

placemont of major of 250 orders contracts

and to - the procries of the
various process of production supply.

-2d. Plan and take all lawful steps necessary
to assure the provision of an adequate
supply of raw materials essential to the
production of finished products needed

for defense.

e. Formulate plans for the mobilization for
defense of the production facilities of
the Nation, and to take all lawful action
necessary to carry out such plans.
f. Determine the adequacy of existing produc-

tion facilities and to assure their maxi-

mum use; and, when necessary, to stimulate

and plan the creation of such additional
facilities and sources of production and
supply as may be essential to increase and
expedite defense production.

C. Determine when, to what extent, and in what
manner priorities shall be accorded to de-

liveries of material as provided in Section
2(a) of the Act entitled "An Act to Expedite
National Defense and for other Purposes",
approved June 28, 1940. Deliveries of ma-

terial shall take priority, as provided in

said Act, in accordance with such determinations and the orders issued in pursuance
thereof by the Office of Production Management.

h. Perform the functions and exercise the au-

thorities vested in the President by Section

9 of the Selective Training and Service Act
of 1940.

i. Serve as the liaison and channel of communication between the Advisory Commission to
the Council of National Defense and the Departnents of Var and Navy with respect to
the duties imposed upon the Commission by the

following named acts, and with respect to all
other matters pertaining to defense purchasing
and production: Public Nos. 667, 781, 800 and
801 and Public Resolution No. 95, 76th Congress.

j. Perform such other functions as the President
may from time to time assign or delegate to it.

The Director General, in association with the
3.
Associate Director General, and serving under the direction and
supervision of the President, shall discharge and perform the

administrative responsibilities and duties required to carry out
the functions speci fied in paragraph 2, subject to and in conformity with the policies and regulations (not inconsistent with
such regulations as may be issued by the President) prescribed
by the Office of Production Management.

There shall be within the office of Production
Lanagement 4. the following and such other operating divisions as
the President may from time to time determine:

A Division of Production

b. a. A DivisionofPurchases

C. A Division of Priorities

Each division of the Office of Production Management Pro-

shall be in charge of a director appointed by the Office of
duction Management with the approval of the President.

296

297

-35. There shall be within the Office of Production
Management a Priorities Board composed of six members. A chairman and three other members shall be appointed or designated by
the President; the Director General and Associate Director General

shall be members, ex officio. The Priorities Board shall serve as

an advisory body and, from time to time as may be required by the
Office of Production Management, shall make findings and submit
recommendations with respect to the establishment of priorities,
the placing of mandatory orders, the assignment of preference

ratings, the allocation of deliveries, and other related matters.

In making its findings and recommendations, the Priorities Board
shall take into account general social and econo.ric considerations and the effect the proposed actions would have upon the

civilian population.

6. Within the limits of such funds as may be allocated to

it by the President on the recommendation of the Bureau of the

Budget, the Office of Production Management may employ necessary

personnel and make provision for the necessary supplies, faci-

lities, and services. However, the Office of Production Management shall use insofar as practicable such statistical, informational, fiscal, personnel, and other general business services and
facilities as may be made available through the Office for
Emergency Management or other agencies of the Government.

7. Executive Order No. 8572 of October 21, 1940, as
amended by Executive Order No. 8612 of December 15, 1940, is
revoked.
FRANKLIN D. ROOSEVELT
THE WHITE HOUSE,

January 7, 1941.
ADMINISTRATIVE ORDER

FURTHER DEFINING THE STATUS AND FUNCTIONS OF THE OFFICE FOR
EMERGENCY MANAGEMENT

WHEREAS Executive Order No. 8248, dated Sep-

tenber 8, 1939, provides, in part, as follows:
"There shall be within the Executive Office
of the President the following principal divisions,
namely: (1) The White House Office, (2) the Bureau
of the Budget, (3) the National Resources Planning
Board, (4) the Liaison Office for Personnel Management, (5) the Office of Government Reports, and (6)

in the event of a national emergency, or threat of

a national energency, such office for emergency management as the President shall determine;"
AND WHEREAS the Office for Emergency Manage-

ment was formally established by Administrativo Order

of and it is deemed advisable to modify
theMay
ordersaid
and further
define duties
the
25, 1940,

functions of the said office;

and

NOW, THEREFORE, by virtue of the authority

vested in no by the Constitution and the Statutes,
and in pursuance of Part I of the aforesaid Executive

Order of September 8, 1939, it is hereby ordered as
follows:

293

41. The Office for Energency Management shall

have the following duties and functions:

(a) To advise and assist the President in the
discharge of extraordinary responsibilities imposed
upon him by any emergency arising our of - the threat
of war, imminence of mar, flood, drought, = other condition threatening the public peace or safety.

(b) To serve as a division of the Executive office of the President, with such subdivisions as my be

required, through which the President, during any emergency, may coordinate and supervise ani, in appropriate

cases, direct the activities of agencies, public or private, in relation thereto.
(c) To serve as a channel of communication between such agencies and the President concerning ear-

gency activities, to keep the President currently

advised of their progress, to assemble and analyze
information concerning additional sensures that should

be taken, and to assist in the preparation of recon-

mendations for any necessary legislation.

(d) To provide and maintain liaism during any such

energency with other divisions of the Executive Office
of the President and with other agencies, public or
private, for the purpose of bringing about maximum

utilization and coordination of their services and fo-

cilities.

(e) To adviso and assist the President upon or

before termination of any such emergency with respect

to any measures that may be needful to facilitate a
restoration of normal administrativo relations and to
ancliorate the consequencis of the company.
(f) To perform such other duties and functions
with respect to any such expressy as the President
may from time to tim direct.

2. The work and activities of the followingnamed agencies, and such other agencies 3.3 the Presi-

dent may from time to time designate, shall be coardinated in and through the office for Emergency
Management under the direction and supervision of
the President:
(a) The Council of National Defense,
Council the Advisory of National Commission Defense to the and

all subordinate bodies and agents
of the Council and Commission.
(b) Defense Communications Board.

(c) office of Production Management

(to be created immdistaly betafter).

299

-53. Provision may be made in the Office for

Emergency Management for liaison facilities and for the

maintenance of routine office services required in the
conduct of the work and activities of the agencies coordinated through or established in the Office for Emergeney langement.

4. Any provisions of the Administrative Order

of May 25, 1960 establishing the office for error

imagement inconsistent with this order are hereby
superseded by this order.

FRANKLIN D. ROOSEVELT

WHITE HOUSE

January 7, 1941.

ORDER OF 35 COUNCIL OF NATIONAL DECENSE
REVOKING All ORDER GREATING THE OFFICE FOR THE
COORDINATION OF NATIONAL DEPOSIT PURCHASES

The Order of the Covneil of National Defense heretofore approved on June 27, 1940, establishing the Office for
the -condination of National refense Purchases and Appointing
= Coordinator of National Defense Purchases is hereby revoked.

All records of the said Board shall be made available to the
Executive office of the President, to the and that any un(Smither business my be taken OTHER and carried on in that

Office. This Order shall take effect then approved by the
President.
Henry L. Stimson,

Secretary of ar

Frank Emox,

Secretary of the Nevy

Strold L. Ickes,

Secretary of the Interior

Clarade in Lickard,

Sceretary of Agriculture
Jussi If Jones,
Secretary of Commerce

Francus Parkins,
Secretary of Labor
Approved:
FRANELIN D. ROOSEVELT

THE NHT HOUSE

January 7, 1941

300

-6ORDER OF THE COUNCIL OF NATIONAL DEFENSE
REVOKING AN ORDER ESTABLISHING

A PRIORITIES BOARD

The Order of the Council of National Defense heretofore approved on October 18, 1940, establishing a Priorities
Board is hereby revolved. All records of the said Board

shall be made available to the Executive Office of the

President, to the end that any unfinished business may be

taken over and carried on in that Office. This Order shall

take effect when approved by the President.

Henry L. Stimson,
Secretary of War.
Frank Knox,

Secretary of the Navy.

Harold L. Ickes,

Secretary of the Interior.

Claude R. Wickard,

Secretary of Agriculture.
Jesse H. Jones,
Secretary of Commerce.

Frances Perkins,
Secretary of Labor.
Approved:
FRANKLIN D. ROOSEVELT
THE WHITE HOUSE

January 7, 1941

301

office of Production
Management Story
January 7, 1941

20 Herbert Gaston
from Secretary Morgenthau

I spoke to Eugene Duffield and apologized to

him. He didn't seem to know what I was talking about.
He said he had not heard from you. I suggest that
Duffield come over to see you this morning.
I also want to know whether you have or have

not been in touch with Steve Early. If you haven't,
I think you should get in touch with him this morning.

1-7-41
FROM: MR. GASTON'S OFFICE

TO:

302

The Secretary

I talked to Steve Early and let know
that in iv opinion it is had business to
put detectives on to trying to find out

where D newsmeter story care from. He

said he had no idea of having Duffield
or the Tell Street Journal questioned,

but that societbady and gone up to "ew York

and lef a secret draft of no order

a WES determined to find out who the

traitor FRS. I fact is, htfield tells

me (I saw him at 12:30) he picked up the
story from a for casual words heard here,

including world no en at a cocktail party,
and he never IST - draft. Forrestal
called - Equate :- very emotion 1 mood
and told in in effect that they were serving
Woscow' by printi such . story. Here
asked 12 thought to shoul tel: to Steve.
him be woul be Spice Steve a favor

and prevent suspicion of immocent

neople; but feel he oblination to tel: anybody anything. He said

he would tall to Steve. : old the Chief

his men vere not to ask etions of

Duffield or is : rest of their
work, / ich YES : :terviewi eople in the

Studiet are Delense Dona $510" and picki up

copies of the 1001 entirI draits. has been
completed.

MRS.

WALL STREET JOURNAL

Knudsen
Receives Broad Powers

In Tentative Executive
Order in Defense Set-Up
A Current Draft Makes Him
"Director General" Over
Hillman, Stimson and Knox
Batt. Biggers May Be Elevated
From THE WALL STREET Jocasal Washington Burees

WASHINGTON-William S. Knudsen will
become "director general" of the defense program under a current-but tentative draft of
the executive order creating the new office of
production management for defense.

Although President Recervelt in announcing
the new office insisted that no one man would
be given command of the defense program one
draft of the order actually establishing the office
makes Mr. Knodern
Sidney Hillman labor representative who is
to be "associate director general is relegated
to a position of "adviser" to Mr. Kandera with
no administrative authority. Mr. Roosevelt in
announcing the new office had put Mr. Hillsan
on a par with Mr. Kaudera.
Secretaries Stimson and Know the other
two members of the four-mas office of production management, retain their administrative
functions as heads of the War and Navy Departments, exercising these functions under the
"director generalship" of Mr. Kandaca
Defense Personnel Problems

Presidential approval of the executive order
in this form would indicate a basic change is
Mr. Roosevelt's feeling about the desirability
of one-man supervision of the arms program
Two other important defense personnel matters
are also facing the President They are:
1. Appointment of as administrator of
priorities Donald M. Neison administrator
for the existing priorities board is to be
elevated to membership - the new priorities board leaving the important position
of administrator vacant. William L Batt,
deputy to defense commissioner Edward R.

Stettinius Jr. has been mentioned for the
post. The administrator will have the real

day-to-day control of the priorities -

DEC. 31, 1940
2 Selection of a chief for the production subdivision" of the new office of prodoction management for defense. The beed

of this subdivision will be next to Mr.

Knudsen himself. the most important as
cial in industrial mobilization Friends of
John D. Biggers Mr. Kaudem's deputy. are
urging his appointment to this position.

Question of Deplases Connections

One suggestion which may affect the staff.
ing of these and other positions is that the executive order creating the new defense office
should require members of the organization to
divorce themselves from any business commections Many business men, serving the defense
commission on a dollar-a-year basis, retain
their business positions
Some officials suggest that since the members of the new office will have executive duties
as distinguished from the advisory duties of the
commission appointees to the new office should
follow the example of Commissioners Knudsen
and Stettinius in relinquishing all business con-

a This suggestion however. is not in

the current version of the executive order.
Because a draft of the executive order areating the defense office apparently modifies the
President's original ideas about the co-equal
character of Messrs Koudera Hillman Stim.
see and Knox there is seene doubt whether it
will be approved in its existing form
Order Net Yet Submitted
Thus far the order has not been submitted
to the White House for approval or eves cleared
by the trie responsible for it: Budget Director
Harold Smith White House administrative assistant William McReynolds and Louis Brown.
low. co-author of the President's governmental
reorganization plan However representatives
of the budget bureau the Justice Department
the War Department and Mr. Knudsen's diviPlease turn to page s. colous $

New Defense Set-Up
(Continued from First Page)
sice of the defense commission have been work.

ing on drafts of the order.
The executive order. in at least one present
draft reserables the Army-Nary proposal for
a defense high-command rather than the plan
described by President Roosevelt on December
20. The Army and Navy originally suggested
a three-man defense board consisting of Mr.
Knodeen and Secretaries Stressee and Knox

303

304

January 7, 1941
20 :

Mr. Kuhn

Secretary Morgenthau

Please get in touch with Edgar Mowrer of the
Chicago Daily News, and tell him that I am very sorry
to inform him that he must not write a story that we

are thinking of freesing all foreign funds. I cannot
be put in the position of trying to force the
President's hand. Please tell him that if he writes

such a story, not only will I be very much displeased,

but he will be taking the responsibility of most likely

being instrumental in postponing any action along these
lines.

305

January 7, 1941

2

George Haas

Secretary Morgenthau

I wish you would take a look at a half dozen

of the leading bank stocks during December, and then see

what happens to their prices after Eccles' statement.
Please run a chart on the prices of these bank stocks, and
as soon as you have it ready bring it to my attention.

306

MEMORANDUM

January 7, 1941.
TO:

Secretary Morgenthau

FROM:

Mr. Sullivan

Immediately after you advised me to consult with others
in regard to the advisability of the Carnegie Corporation or any

other outside foundation contributing through the Institute of

Public Administration to supplement Treasury salaries on the work
Dr. Gulick was to perform for us, I canvassed Messrs. Bell, Gaston,
and Foley. We were unanimous that it was unwise for the Treasury
Department to permit any second foundation to contribute to the

salaries we will be paying the staff selected by the Institute of

Public Administration.

Accordingly I called Dr. Gulick and so advised him. He
suggested that it might be possible for his own Institute to make
up whatever differences existed between Treasury salaries and the
amount the Institute was required to pay these men. I then told
him that that would be agreeable. He then suggested that the Carnegie
Corporation might be willing to make a contribution to the Institute
of Public Administration to put them in a more solvent position. I
advised him that we had no interest in any loans or contributions the
Carnegie Corporation might make to the Institute of Public Administration but that we had not been willing to undertake this venture knowing that by some indirect means the Carnegie Corporation had made a

contribution to the Institute of Public Administration for this

particular purpose. When our conversation concluded be felt that
although this might cause him more difficulty in working the proposals out it was better to encounter this difficulty now than to
run into any embarrassments and disturbances that might result on
the Hill when it became known that another fouriation was helping
to sponsor this work.

Dr. Gulick is to work out the difficulties and write to
me at once.

I then called Mr. Fred Osborne representing the Carnegie
Corporation and advised him that we were reluctent to have another
foundation contribute to the expense of this project and he agreed
that it might prove most unwise.

JLS

307

Dowding
AIR MARSHAL SIR HUGH DOWDING, CHIEF OF BRITAIN'S HOME DEFENSE AIR
CORPS, SAID TODAY THAT THE ROYAL AIR FORCE IS USING FOUR TYPES OF
AMERICAN PLANES--THE LOCKHEED HUDSON MEDIUM BONBER, GLENN MARTIN

BOMBER, CURTISS PURSUIT AND DOUCLAS DV-7 BOMBERS--WITH "MOST VALUABLE
RESULTS.

1/7--W0440P
ADD DOWDING.

SIR HUGH SAID THAT THE COASTAL COMMAND HAD FOUND THE LOCKHEED MUDSON

BOMBERS "OUTSTANDING." THESE PLANES, HE SAID, ARE BEING FLOWN TO
ENGLAND, WHERE THEY HAVE ADDITIONAL GUN TURRETS INSTALLED.

THE GLENN MARTIN BOMBERS, HE SAID, ARE "JUST COMING INTO REAL

SERVICE." PHOTOGRAPHS OF THE BRITISH RAID ON THE ITALIAN SEA BASE OF
TARANTO WERE TAKEN FROM THESE PLANES, HE SAID, ALTHOUGH THEY DID NOT

TAKE PART IN THE ACTUAL ATTACK.
WITH STANDARDIZATION IN SUCH MATTERS AS RADIOS, THROTTLES AND OTHER

DETAILS, THE CURTISS FIGHTERS ARE BEING *SUCCESSFULLY USED" WHILE THE
DOUGLAS DV-7 BOMBERS ARE "VERY USEFUL AND HAVE TAUGHT THE BRITISH THE
ADVANTAGES OF TRICYCLE UNDERCARRIAGES.

SIR HUGH REVEALED THAT THE EAGLE SQUADRON, MADE UP OF AMERICAN

VOLUNTEERS, HAS COMPLETED ITS INITIAL TRAINING WITH HURRICANE PLANES,
AND "MAY NOW BE IN ACTION" IN THE EAST PART OF ENGLAND.
*WE WELCOME THE AMERICAN PILOTS," SIR HUGH SAID, *NOT BECAUSE OF
ANY ACTUAL NEED FOR THEM, BUT BECAUSE THEY ARE VOLUNTEERS WHO WISHED

TO SHARE WITH THE BRITISM EMPIRE THE PERIOLS AND THE GLORY OF THIS WAR.

AN INVASION OF ENGLAND, SIR HUGH SAID, IS AN IMPOSSIBILITY* AS
LONG AS BRITAIN RETAINS CONTROL OF THE AIR OVER ENGLAND, AND LIMITS
GERMAN AVIATION OPERATIONS TO *HAPHAZARD NIGHT BOMBING.
1/7--W0506P
C45TER19.

308
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION

1-16

see Haw discussed
DATE January 7. 19th

Secretary Morgenthau
FROM

Mr. Cochran

By appointment I received Mr. Alphand, Financial Counselor of the French Enbasay,

at

4:50 this afternoon. He told me that he had mentioned to Mr. Pehle that his

Ambassador had discussed with Under Secretary of State Welles the question of disposing of certain amounts of gold from the French stock at Martinique for the purpose
of obtaining funds to pay for goods to be shipped from this hemisphere to Northern

Africa. Pehle had let him know, in turn, that Ray Atherton had telephoned from the
State Department seeking an indication as to the Treasury's position on the subject.
Alphand had come to me since he felt that there was a gold question involved. as well
as a Control question.

Alphand explained his ideas in some detail. He hoped it would be possible to
ship from the Martinique gold stock certain small amounts, the first quantity to be
$10,000,000. to some port in the United States, or preferably to Puerto Rico. Against

this gold he hoped that the Treasury would make available to the French Government

free dollars which could be used to finance exports to Martinique or via Martinique
Northern Africa. I told Alphand that the Treasury would not accept gold for earmark or for purchase delivered in Puerto Rico or in any American port other than
New York or San Francisco. He argued that it should be possible for us to let the
gold be deposited in Puerto Rico, then send someone there to verify the quantity,
and extend a credit to France against this gold. I told him definitely that we had
no facilities in Puerto Rico for assaying and taking care of such gold and that it
would be necessary in any circumstances to have such gold delivered to our Assay Office
in New York before it could either be sold to the Treasury or added to the earmarked
gold account of the French Government or Bank of France with the Federal Reserve Bank
of New York. Alphand indicated no preference as to selling the gold and then having
the proceeds placed in a free account, or in adding the gold to the earmarked stock
of the Bank of France in New York and obtaining from us a liberation of a corresponding amount of dollars from the blocked account of France.

Alphand stressed the need for petroleum products in Northern Africa. He said
it was particularly important that these be available for the harvesting and threshing of the grain crops of that area, since he said this was all done mechanically
and fuel is lacking. He pictured the distress and starvation that night result from
inability to harvest the vitally important cereal crops of French Northern Africa.
In our conversation Alphand reiterated his desire that we correct the December

allotment of funds for French Yest Indies, it being very important that the full
allotment be given during this busy sugar season. He regretted the decision which
he said Foreign Funds Control had taken with respect to an application for the transfer of certain private French blocked dollar accounts on this market to the Federal
eserve Bank against the payment of francs to the French concerns involved.

309
2

Alphand told me that he was seeing Atherton tomorrow at 12:00 and asked if

I would not speak with Atherton before that time. I called Etherton while Alphant
was here. but was not able to reach him until after Almitant's departure. Atherton
briefly summarized the State Department's position. E said there was the question
as to whether we should facilitate the utilization of Martinique as an entrepot for
shipments of merchandise from the Western Hemisphere to Furthern Africa. The sufgestion had been made that gold be taken from the Martinique stock and be disposed

of for this purpose. I told Atherton of I technical talk with Alphand, and Atherton

assured me that his Department had emphasized to the French that the gold in question
would have to be delivered at New York, rather than in Pursto Rico. if a plan night
be consummted. It was the understanding of both Alphant and &therton that it would
not be a question of moving the whole French gold stock from Eartinique at one time.
but merely the utilization of such amounts as could The utilized for making exports.

with British approved navicerts therefor, from this benimbere to Northern Africa.

Alphand had added that the question might later be raised of shipping wheat and corn

directly to continental France, but he realised that the question of obtaining havicerts for this purpose might be difficult.

Atherton told me that he was to receive Alphand at 12:00 tomorrow. but would
like very much to have an expression of Treasury opinion before that hour. and if
possible, in time for him to discuss the question again with Rr. Welles before
receiving Alphand. When I asked Atherton if the State Department favored our taking
care of the gold problem along the lines set forth by Alminand, be replied that the
State Department would view favorably a very much controlled trade between Martinique
Africa. He stated furthermore that the State Department does not object to the
use of gold from the Martinique stock for this purpose. rather than see France move

toward the exhaustion of her other credits on this market. Be thought it was in our

interest to see the gold expended in the United States and the purchases made there-

from rather than the trade diverted to Latin America. E feels that if some arrangement is not made to permit the French to utilize their guld through operations on
this market. it will eventually send it to some other merbet and we will lose the
trade which it might finance. I told Atherton that I would have to take this matter

= with the Secretary. but that I would try to do so morning and let Atherton

hear from me before BOOK. After this conversation. I telephoned Alphand at the French
Tabasay. I simply let him know that I had spoken with Etherton who had posed the
problem much as Alphand had done, and that I had promised to see if I could submit
the technical question to Secretary Morgenthau tomorrow marning.

KMR

310
BRITISH EMBASSY,
WASHINGTON, D.C.

January 7th 1941.

Personal and Secret.

Dear Mr. Secretary,

I enclose herein for your
personal and secret information a copy

of the latest report received from
London on the military situation.
Believe me,

Dear Mr. Secretary,

Very sincerely yours,
IF

Wank Beth

The Honourable

Henry Morgenthau, Jr.,
United States Treasury,
Washington, D. C.

311

Telegram from London dated January 6th 1941.

1. Nevel.
Moditerrenean

with the fleat which bombarded Bardia on 3rd has

arrived at lexondric. During those perations
enemy sireraft attacked on several opcisions but
no damage or cisualties were sustained spert from a
few c aunities in one gunboat due to e DOOT miss.

2. 'ttroke on shipping.
One British vessel (5000 tons) was sunk

b. a submerine on January 5th 250 ailes north-east of
Cape Verde islands,

3. Two east-const convoys and a channel
convey mere attacked by enemy sircraft yesterday.
No damage has been reported.

4. Royal Ar Force. M.
On January 4th Mianhoine damaged at le at 5

dispersed aircraft at Derna and other landing grounds
where direct hits were also registered on stor 0 and

tents. other successful mide were carried out signing
Bardin and Tobruk which was bombed again on the anne

night.

5. Gernea ir Force. Night of sth/8th. about
80 enemy sircroft were engaged ohiofly in the London erea

6. Aircraft casualties in o critions over and
from the British Isles:
Enery: 1 fighter destroyed by our bombers.

British: 1 sirereft missing.
7. Home Security. Bristol.
Night of 3rd/4th. Casualties are not given
of

312

a

.

as 91 killed and 135 seriously injured. Gas supply
is still bodly affected and also the water supply

at high levels. Electricity is normal.
8.

Night of 4th/5th. No key points
were seriously affected.

9. London area. Night of 5th/8th. Minor
deseage to some auburban Twilway services. Extensive

danage to buildings in two districts from personute
sines.

313
BRITISH EMBASSY.
WASHINGTON, D.C.

7th January, 1941

Personal and Secret

Dear Mr. Secretary,
I emclose herein for your personal

and secret information copies of the latest
reports receUven from London on the military

situation.
Believe me,

Dear Mr. Secretary,

Very sincerely yours,

Have Beth
The Honourable

Henry Morgenthau, Jr.,
United States Treasury

Washington, D. T-

314

Telegrau received from London
dated January 3rd, 1941
Saval

a ships lost by enemy up to December
29th, 1940:
German

250, representing 1,257,000 gross tons
approximately.

Italian
89, representing 453,000 gross tons approximately.

In addition 27 ships of 44,000 gross tons
(approximately under enemy control or useful to the
enemy have been sank.
8.

Mediterrenean In bac weather during the night

of January 1st/Tad the destroyers escorting Vichy French

convey to Gibraltar lost touch with 3 of them. Additional
destroyers have been sent to search.
3.

Attacks on shipping. A British ship (6500 tons

not in ecavey was torpedoed on the night of January End/Srd
350 miles North East of Cape Verde Island.
Convers. Two convoys totalling 36 ships have
4.
arrived from Canada. One British (6400 tons, is feared

sunk. Cargoes included 10 of steel an metals, 9 of
grain, and $ tankers.
Italy. A photographic reconnaissance on January
5.

lst a three 6-inch cruisers, 4 destroyers, and 20
large merchant vessels at Tripoli; and an air reconnaissance
on December 31st reported a large convoy approaching
Valona.
6.

Reyal Air Force. Night of January 2nd/3rd.

Forty-seven heavy bombers were sent out; 39 to Bremen, 7

to a shipyard at Raden and 1 to an oil target at Ansterdam.
One/

315

-2-

One aircraft missing.
7.
on the night of January 1st/2nd ten Wellingtons
dropped 18 tons of bombs on the port and shipping at

Tripoli. Two or three merchant shipe received direct hits.
All our aircraft returned undamaged.
German Air Force. Night of January End/3rd
8.
about 170 enemy aircraft were operating main concentration

being directed against the Cardiff area. Our night
fighters damaged one enemy bomber over South coast and

probably destroyed another over France.
9.

Aircraft casualties in operations over and

from British Iales:
Enemy: by our fighters

Destroyed

Damaged
1

By day

Probable by night
Total the

1

1

1

2
2

Britishi One bomber missing.
Home Security. Night of January 2nd/3rd.
10.

Cardiff. One ship in docks was hit. Three gasometers
were hit and gas supplies have temporarily failed.
Extensive damage was done to private and commercial

property principally in the centre of the city.

316

TELEGRAM RECEIVED FROM LONDON

DATED JANUARY 4th 1941

1.

Naval

On January 3rd 8,000 ton tanker mined

180 miles west of Gironde. Aircraft sent to
attack, 1 located tanker and near missed her.
Reconnaissance January 3rd showed 1 Hipper class

cruiser in dock at Breat and 16 U-boats at
Bordeaux. During the night of January 3rd and
4th aircraft attacked these U-boats, reports

not yet available.
Two ships of French convoy intercepted

off Moroccan coast have arrived at Gibraltar and
other two were expected to arrive yesterday after-

noon. Attacks on shipping, British ship (2,500
tons) sunk by mine in Thames Estuary yesterday.
Convoy of ships has arrived in home
waters from Sierra Leone.
2.

Military.
Albania,

In the central sector 4 Italian counterattacks on Mt. Tomor repulsed. Elsewhere nothing

to report.
3.

Royal Air Force.
Night of January 2nd and 3rd.
Shipyards and railways at Bremen attacked

by 20 heavy bombers with good results. Five more
heavy bombers attacked miscellaneous targets. During the same night 3 Blenheims from Fighter Command

carried out offensive patrols against enemy aerodromes/

317

seredremes in Northern France and at the same
time made bomb attacks.

Night of January 3rd and 4th.
Seventy one aircraft sent to Bremon.

Early reports indicate this attack very success.

ful. One aircraft missing.
Libya.

On nights of January 1st/2nd and 2nd/3rd
both heavy and medium bombers attached military

targets at Bardia and during daylight on January
2nd 44 Blenheims carried out similar operations.
Albania.
January 2nd 8 medium bembers attacked

E1 Basan and started large fires in the centre of
the town.
4.

German Air Force.

January 3rd. Enemy activity chiefly
over Channel and North Sea. Decommsissancs by

single aircraft made over Glangow and Cardiff.
Weather was bad and our fighters made no interceptions

Night of January 3rd/4th. About 200
enemy aircraft operated, nais attack was made upon

Bristol area.
5.
Aircraft casualties over and from
British Ieles.

6.

Enemy

511

British

1 bember missing.

Home Security.

Lenden. 4 fires still showing in the
City on the night of January 2nd/Brd. Glare was
caused by smouldering debris which cannot be ex-

tinguished until dangerous buildings in the vicinity
are/

318

are demolished. January 3rd delayed action
beath exploded while be ing "deniti with, 4 man
killed and one wounded.

Cardiff.
Night of January 2nd/3rd. Latest

castalties 48 killed and 160 seriously injured.
Many fires but only about 10 buildings actually
getted. All fires extinguished by 2.a.m. Same
might. Roof and windows of Llandaff Cathedral
extensively damaged. No key point factory

affected except indirectly through interruption

of public utility services.
Bristol.
Night of January 3rd/4th. Attack
started at 6:30 p.m. and continued throughout

the night. Several serious fires but all under
centrol by 6 a.m., although not before considerable
damage done to private property and to some food

stares and warehouses. Main damage is to principal

railway station.
Number of fires caused at Bath by incentiary bomb and high explosive bombs but quickly
brought under control.
Scattered bombing occurred in Newcastle
Test and in Lancashire.

319

Telegram from London dated

January 5th, 1941
Naval

Air reconnaissance on January 3rd showed one

Hipper class cruiser in dry dock at Breat and 16 U-boats
at Bordeaux.
2.

H.M.S. "Terror" was unsuccessfully attacked

by 5 enemy aircraft off Libyan coast.
S.

The other 2 French merchant vessels referred

I

to in yesterday's operational telegram have arrived at
Gibraltar.
4.

A British contraband control vessel bombarded

Bulhar in British Somaliland yesterday morning and
demolished the Residency. She was unsuccessfully attacked

by enemy aircraft.
British ship "Nalkora" was shelled by 2 U-boats
about 350 miles N.N.E. of Cape Verde Islands at 2100/2
5.

and was last seen burning; some survivors have been picked
up.
6.

Military
Libya. By the evening of January 4th, 8,000

prisoners had been captured and operations were proceeding

satisfactorily.
7.

The garrison of Bardia was estimated on December

31st to be 20,000 with 80 field and medium guns.
8.
Royal Air Force.
January 4th. During the late afternoon Blenheimg
from the coastal command attacked the Hipper class cruiser

at Breat. It is believed that direct hite were obtained.
In addition a Mass class destroyer was hit and also
another vessel thought to be a destroyer. One German

fighter was destroyed and one of our aircraft is missing.
One/

320

-8-

One Hudson obtained six direct hits on a three thousand
ton merchant vessel and another aircraft seored three
direct hits on an 800 ton vessel both off South Heat
Norwegian coast.

Night of the 4th/5th January. A total of 108
aircraft sent outs

9.

Locality

Target

Brest

Enemy cruiser

54 heavy bombers

011

28 medium bombers.

Hamburg and

Rotterdam

DuisbergRuhrort

Inland port

Mine-laying

Lille and

-

Propaganda

leaflets

Paris

Number of Aircraft

9 heavy bombers

10 aircraft
8 heavy bombers.

All our aircraft returned safely.
10.

Libya.
On January 3rd Blenheims bombarded Bardia,

Tobruk and enemy landing grounds. Three enemy aircraft

on the ground were hit and one Blenheim is missing. Our
fighters maintained offensive patrols and one Hurricane
intercepted five Italian bombers which were attacking
H.M.S. "Terror"; the Hurricane destroyed three of them
and damaged a fourth.
11.

Photographs show that a 10,000 ton merchant

vessel was sunk during attack by our heavy bombers on

Tripoli harbour on January 1st.
18.

Italian East Africa
on January 3rd a Blenheim dropped boube on the

main quaya at Massawa and probably hit a destroyer. Three
other medium bombore severely damaged buildings at two

Italian bases in Ethiepa.
18.

german Air Force.

January 4th. Enemy activity was chiefly

confined/

321

-3-

confined to shipping reconnaissances off our coasts.
Only 10 aircraft came inland two of which reconnoitred
Liverpool and Glasgow areas respectively. One enemy
fighter and one bomber were destroyed.
14.

Night of 4th/5th. About two hundred and forty
aircraft were operating, main attack being directed
against Avonmouth area. Mining is suspected off various
East coast ports.

Aircraft casualties in operations over and

15.

from British Isles.
Fighters

Enemy

Bombers

Total

1

8

Destroyed by our

fighters
British

8

2 bombers missing.
16.

Home Security

Cardiff. Night of 2nd/3rd January. Casualties
now reported 74 killed and 156 seriously injured.
17.

Bristol. During air raid on Bristol night of

Srd/4th Corvette Orck Rose and one boom vessel slightly
damaged. Considerable damage done to commercial sheds and

timber yards.
18.

Night of 4th/5th. Although a few bombs fell

in Bristol and South Wales area, the main attack was on
Avonmouth where a number of fires were started but all
were extinguished by 10 p.m. Damage cannot yet be
assessed. At Weston Super Mare, damage was caused to

houses and railway property but public utility services
were generally undamaged.

CONFIDENTIAL

322

Paraphrase of Code Radiogram

Received at the Var Department

at 2:12 P.R. January 7. 1941.

Leades, filed January 7. 1941.
1. On Monday, January 6. Lockhood-Hadson
bembers attached to the Coastal Command caused some damage to a

German convey off the coast of Nervey by several near misses. The
same day a German tanker was hit directly by one of two British
bembers that were assigned the mission of bombing tankers. Usfavorable weather daring the night of January 5-6 caused the

cancellation of all activity of the Coastal and the Dember Consends except the sining of French parts.
2. During daylight hours of January 6. German please
attached Lenton without causing damage to industrial properties.
Some shope and private residences were damaged. There was good

weather is Britain, and several German raids were made is the
southeasters and easters sections. The Creydon, Northelt and
Herneburah airfields were bombed but the extent of the damage

is not Icense. Later reports now estimate that on January 5. 45
German please were ever Regised and that during the following

sight 80 were active.

3. On January 5 and during the following sight, the
Italian Air Force was wach more active than usual. During this

same period saves teas of bombs were dropped with great -

TIAL

323

CONFIDENTIAL

by the British on the Tobrak defenses. On January 3 a near miss

caused minor injuries on a small British gmain taking part in
the boubardment of Bardia. This was the only essulity to shipe

or personnel suffered by the British floot in this bonhardment.
4. The elestric power system in Bristol, which was
damaged by the German attack during the night of January 3-4 is

now operating normally but the water and gas services are still

out of order. Ninety-one individuals were killed and 35 seriously

injured in this raid.
5. On January 5. German airplanes unsuccessfully
attacked three British merchant vessal conveys. On the same day

a 5,000-tea British vessel, 280 siles northeast of the Gape Verde
Islands was terpedood by a U-beat and east.

LEE

Retributions
Secretary of Var
State Department

Secretary of Treasury
Aest. Secretary of Var

Ohief of Staff

War Please Division
O.N.I.
AG

as

CONFIDENTIAL

324

0-2/2657-220
No. 286

RESTRICTED

SITUATION REPORT

M.I.D., W.D.
January 7, 1941.
12:00 M.

This military situation report is issued by the Military
Intelligence Division, General Staff. In view of the occasional
inclusion of political information and of opinion it is classified

as Restricted.

I. Western Theater of far.
1. Air Force Operations.
Air activity during daylight yesterday was unimportant
over and around the British Isles. Last night both British and
German bombers were grounded by a snow storm and generally bad

weather.

II. Greek Theatre of Var.
Local actions reported. The R.A.F. again bombed Valona.

III. African and Mediterranean Theatre of War.
British advance elements are reported approaching the

Tobruk area. Clearance of the battlefield at Bardia is progressing.
Patrol activity is reported on the Anglo-Egyptian Sudan, and Kenya

frontiers.

The R.A.F. is nov attacking Tobruk.

RESTRICTED