Full text of Diaries of Henry Morgenthau, Jr. : Volume 437 : Part 2

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Draft of Secretary Morgenthau's Speech

to the Advertising Club of Boston
September 9, 1941.

that188
Draft
left 3. 1941
9.00 A.M.

Twenty miles from here, at the wooden bridge at Lexington,
the men of New England first proved that Americans could defend

what they held dear. Today the people of these States are
proving that they are still the same New Englanders. Whatever
their origin - and they have come from many lands - they are

true descendants of the Minute Men. In hundreds of factories
and shipyards from Connecticut to Maine, the people of New

England are responding magnificently to their country's needs.

I am glad to be here tonight to pay my tribute, on behalf of
the entire administration in Washington, to the great work
that New England is doing to make America strong.

I am glad also that my host tonight is the Advertising
Club of Boston, for the advertising profession is a mighty
force in creating public understanding. We cannot make
ourselves the arsenal of democracy and the defender of

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EX

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freedom unless we understand the tremendous issues involved

in this Battle for the World. In the same way we at the
Treasury cannot accomplish the financing of the defense

program unless the public sees clearly the need for greater

sacrifice and for greater effort.

In particular, I think it is high time for the American
people to become aware of the economic and social danger that

must not be allowed to cripple our defense program, the problem
that occupies more and more of my time and thought as Secretary

of the Treasury, the problem of inflation.

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confront a Secretary of the Treasury now a days are not
cold and impersonal problems of high finance, they are

problems that cannot be solved without a clear, public
understanding of the issues involved, and of these there is
no problem that occupies more of my time and thought in the
Treasury than the danger of inflation which hangs over us
tonight.

We have been talking about inflation for a long time

as if it were a threat remote from our daily lives. It is
a distant threat no longer. We are facing it now and we
must deal with it at once.

If we are timed or selfish or shortsighted in facing
this issue, the consequences may haunt us and our children

for years, But if we are courageous we can beat this thing.
If we keep always in mind the interests of our country as
a whole, if we provide promptly the appropriate means and

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use them vigorously whenever necessary, we can prevent

inflation from fastening its grip upon us.
That task calls for alertness and mental toughness
on the part of everyone in the executive departments of the
Government, everyone in the halls of Congress and every one

of us here tonight.

The word "inflation" is cold and lifeless, so cold
that even an advertising man might have difficulty in making

it real, but the thing it describes is treacherous and cruel.
Memories are so short that I suppose many of us have forgotten

what happened the last time inflation struck us 25 years ago,

but the effects of that inflation lasted for many years and
brought untold heartbreak and misery in their train. We are
now just where we were in 1916 - on the very edge of inflation.

I can think of no subject more worthy of hard thinking on the
part of this great audience and of the American people as a
whole.

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192

Let us look at the record to see what happened a genera-

tion ago. In 1916 the cost of living began to rise sharply
but there were few who saw its significance. It was only
when prices had risen by 70 percent that President Wilson

recommended any steps to prevent inflation. In fact, the
country was so blind to its dangery that as late as June,
1917, Congress actually hastened inflation by reducing the
reserve requirements for member banks of the Federal Reserve

System. By 1920 a ten pound bag of sugar cost $2.67, a dozen

eggs cost 92 cents, a ten pound bag of flour cost 88 cents,
a pound of butter cost 76 cents and a pound of pork chops

cost 50 cents. By that year prices had skyrocketed to twice

the level of five years earlier. The money the housewife
paid for one loaf of bread in 1914 bought only half a loaf
in 1920. The money she paid for a pound of bacon in 1914
bought only half a pound in 1920. The money she paid for a

yard of cotton cloth was only enough to buy only 1/3 of a yard

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in 1920. The family with no increase in income found its
that

purchasing power cut in half. It found food, fuel, shelter
and clothing that cost a dollar in April, 1916, had risen
to almost two dollars by 1920.
We have now,as we had then, a moderate rise in the cost

of living, a great rise in wholesale prices, and a still
greater rise in the prices of basic commodities like wheat,
the

hogs, cotton and lumber. It is & rise in the prices of basic
commodities that constitutes our danger signal today, for

they are always the advance guards of a rise in the cost of
living.

If prices continue to rise as they did from 1916 to
1920, we shall find that food, fuel, shelter and clothing
that now cost a dollar will once more cost almost twice as
much before the process has ended.

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194

The rise in prices is by no means confined to food-

stuffs and clothing. I have before me, for instance, the
actual figures on the cost of constructing a standard six- room frame house in one of our typical cities. This home
that could have been built a year ago for $6,000 now costs

$7,140 to build. Here we have an increase in prices of
nearly 20 percent and if it goes along the 1916 pattern, we

are only at the beginning of the story.
Not only is the cost of building homes rising but even
for the millions who do not own their homes higher rentals
are on the way. We find already in scores of areas where

industrial expansion has first taken hold, rents rising 10,
20, 30 percent and even higher.

There is, however, one great difference between conditions
today and 1916. We now know what is going on. This time our

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eyes are open to the dangers that lie ahead of us. We now

know that the time to do something about inflation is before
it occurs, not after it has gathered momentum. We should
profit by our greater knowledge and take prompt and effective
action now.

There is no need for me to remind this audience in detail
of the reasons why prices have already risen. The reasons are
plain for everyone to see. Our economy today resembles an

overloaded steam boiler. The fire under the boiler is being
fed by billions of additional purchasing power in the hands of

the public. The fire is growing hotter and is generating more
steam than the boiler can safely hold. If we are to prevent
the boiler from bursting, we must damp down the fires by withdrawing purchasing power, and we must also enlarge the boiler

by increasing the supplies of goods available to the consumer.

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-8-

In speaking of these things I am not being an alarmist

or defeatist. We can, as I have said before, defeat this
threat, just as we can lick the forces of evil that have been
let loose upon this earth. But we need to understand the
issues and we need to see clearly the consequences of inaction

or delay. I should like, therefore, to look at the problem

first
quite coollyfor a few minutes, to see what we have done and
and then what we need to do
what

we need to do in order to stop prices from rising further.
In the first place, Congress is on the point of passing

a huge tax bill designed to raise almost four billion dollars
in additional revenue, thus withdrawing a great amount of
purchasing power that competes with the defense effort.

Secondly, the Treasury in its borrowing program is trying

to obtain as large a portion of its funds as possible from
current consumers' income. Through a new form of note -

the tax anticipation note - it is seeking to increase the

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effectiveness of the income tax as a check on current purchasing

power, and I am happy to report to you that more than a billion
dollars' worth of these notes were sold in the month of August.
The Treasury has also begun a program of selling Defense
Savings Bonds and Stamps to people of moderate and low incomes.

The people have responded to a tune of a billion and a quarter

dollars in four months, without coercion of any kind;and in
that response the people of Massachusetts and of New England

generally have stood in the forefront.
The President has recently issued an order authorizing
the Board of Governors of the Federal Reserve System to

control consumers installment credit. The Congress is considering,

and I hope will pass, a bill to limit price rises and to
supplement the efforts of the Office of Price Administration,

to limit price rises by voluntary cooperation.

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198

All these are useful steps to a necessary end, but they
are not enough. We may have to extend general controls over

bank credit and create controls over selected capital expenditures. I hope that we may extend the social security program so as
to increase the flow of funds to the Treasury from current
income during the emergency and increase the outflow of funds

when needed in the post defense period. We shall have to
reduce the Federal lending and underwriting program such as
non-emergency housing expenditures and mortgage guarantees.

We must, as I have said many times, reduce nonessential Federal
expenditures. We must also appeal for economy in state and

local government expenditure and a curtailment of their borrowing
for nondefense purposes.

All of these measures would attack the problem by attempting
to reduce the demand for goods now and by helping to build up

a backlog for the post war world. But we should also attack the

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199

problem from the opposite direction by making every effort to
increase the supply of goods available to the consumer wherever
this can be done without encroaching upon the defense program.

Above all, we must make full use of those supplies that are

available not only in defense production but in the civilian
goods which do not compete with defense output.

I wonder if the housewife knows when she pays 20 percent

more than she did a year ago for a bag of flour that our

supply of wheat is the largest on record, and that 498 million
bushels of two years' crops are stored in Canada. I wonder
if she knows when she pays 15 percent more for a pound of

sugar than a year ago that there are unusually large sugar
stocks in this country and in Cuba. I wonder if she knows
when she pays 25 percent more for butter, that we have great

stocks of butter in storage, and large reserve stocks of

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200

farm products of many kinds which should be released for
consumption as fast as necessary to prevent unreasonable price
rises.

The Government now owns 7 million bales of cotton in

reserve, and cotton prices have risen from 91 cents a pound
on August 1, 1939 to over 16 cents a pound at the present
time. We ought not to withhold surpluses from the market
in this manner. The housewife ought not to be made, in times

like these, to pay a tribute to profiteers and speculators
when she buys a cotton sheet for her home or a shirt for her

husband or a suit for her child.

Millions of people still go without the milk, butter and
eggs which nutrition experts have found necessary to good

health and good morale; yet we are withholding the largest

reserve of milk, butter, eggs and cheese in our history.
I know from experience on my own farm that within two months

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201

we could increase our supply of milk by feeding some of our
huge surplus of corn to the COWS. I know that we could use
some of our surplus grains as feed for chickens and get more

eggs, yet the price of a standard poultry ration has increased
60 percent since the war began. This has been historically

a land of milk andhoney. There is still plenty of milk and
honey but too much of it is in the warehouse. Let's make it

flow. If we were to let it flow to the public we would not
only help in keeping prices stable but we would be doing some-

thing even more important; we would be helping to make our
people healthier and happier.

It is sheer folly from the farmer's point of view to be
pushing prices up by creating scarcities in times like these.
The farmers suffered oruelly for twelve long years after the

collapse of the inflation of 1920 and 1921. It is sheer folly
in the same way for labor leaders to seek continual increases

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202

in wages which in turn produce higher manufacturing costs,

higher prices, and a higher cost of living. It is shortsighted for landlords to charge all that the traffic will
bear in cities where housing space is at a premium because
of defense needs.

There are always selfish groups in any country which

think they can profit from inflation. They are dead wrong.
Inflation does more than merely to rob the wage-earner

of a portion of his earnings. It does more than saddle the
farmer with a load of debt which he cannot repay. It is
more destructive of morale than any other single force.

Inflation divides the country. It sets up producers against
consumers, workers against employers, the people who owe
to

money against the people/whom the money is owed. No group

in a community profits from inflation in the long run except
THE THREE HORSEMEN - THE SPECULATOR, THE PROFITEER AND THE

HOARDER.

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203

These are truths that should be self-evident. They

should be especially 80 now, in view of the fact that rising
prices will only add to the cost of our defense program and

make the arming of our country steadily more difficult. They
should be self-evident now in the light of the experience
that we suffered only 25 years ago.
You in New England have 300 years of experience behind

you. The American people as a whole have 150 years of selfgovernment behind them. We are not children any longer. We
are a mature nation, and we should be able to face up to our
responsibilities as mature men and women. My plea to you

tonight is that we should learn from bitter experience. My
hope and my belief is that no group among us - whether farmers,
working men or business men - shall be tempted by the illusion

of selfish gain into allowing prices to rise unchecked. The
cost of inflation is too ruinous to producer and consumer alike

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204

for anyone in authority to tolerate it now. I can give you
only this pledge - that we at the Treasury will do everything
humanely possible to check the rise in prices before it will
do any lasting damage to our economy. But we at the Treasury
must have the firm support and the clear understanding of

130 million Americans behind us. If we have that support

and that understanding, I know that we shall not fail.

205

September 3, 1941
10:15 a.m.
RE EXCESS RESERVES

Present:

Mr. Bell

Mr. Stewart
Mr. Bernstein
Mr. Haas
Mr. Murphy
Mr. White

H.M.Jr:

Well, now, Dan, how will we run this thing?

Bell:

Well, I hardly know. Have you read George's
memorandum?

H.M.Jr:

Very hastily.

Bell:

It is a good memorandum, and personally I
agree with him.

H.M.Jr:

Everybody come closer. Come within my ten-foot
vision.
Does somebody want to take the argument, why
we should do what the Federal Reserve wants

us to do? Will somebody take that side?

Stewart:

Well, I will make an observation. I think the
memorandum is a good memorandum. I think it

is very persuasive, and I think it is par-

ticularly persuasive because it really comes
to a conclusion quite convenient to the Treasury.

I don't mean that to be funny. I mean, it is

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-2 one of those cases where it is awfully difficult to come to any other kind of decision. I
think it depends on how seriously you take

H.M.Jr:

Stewart:

the threat of inflation, and I take it seriously. I think it depends-I take it terrifically seriously.
I think the next step is to say where you
think the inflation is serious. I think,
among other places, it shows itself in the

bond market now. Now, if you look back on

these periods of incipient inflation, the
action is always too late. This has a reminiscent quality. There are two experiences

we went through.
H.M.Jr:

Just one minute, for my speech. You are quoting

Lloyd George.
Stewart:

That is right.

H.M.Jr:

"Too late moving here, too late in arriving
there, too late in coming to this decision,

too late in starting enterprises, too late in
preparing for this war, the footsteps of the
Allied forces have been dogged by the mocking
specter of 'too late. , " That is the quotation.

Stewart:

It certainly applies to all these problems
of monetary control.

H.M.Jr:

The way you put it, "too little and too late."

Stewart:

That is right.

H.M.Jr:

Well, they have been using it, but that is the
quotation.

Stewart:

I was thinking of two earlier periods in our

experience. There is the 1919 post-war period

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-3 with the Treasury on one side and the Reserve
System on the other, chiefly.
H.M.Jr:

Is that a public document?

Stewart:

That is in the files. There was a long correspondence. At the time it was rate control,

the question of rates and when rates ought to

be brought up.
Bell:

Just before the Victory Liberty Loan.

Stewart:

By 1920, yes, a collapse.

H.M.Jr:

Now, what is the position that Treasury took?

Stewart:

Treasury at that time was arguing that the
Federal position was not unsound, that it had

this financing to do, that it would be at

unnecessarily higher rates. They could carry

through on the war basis and Strong was argu-

ing for the immediate correction of the discount rate in New York. I don't pretend that

that is the only factor in that position, but
the correspondence is long and well written.

Bell:

Yes, it is good.

Stewart:

It is good correspondence.

H.M.Jr:

I thought at that time that David Houston
was blamed by the farmers for the collapse
of the twenties.

Stewart:

Well, Harding did as much of it as anybody
did during those days.

H.M.Jr:

What were the steps taken?

Stewart:

The real incipient period, or at least the

climax on top of the war period is the period

that comes in the Victory Loan in 1919.

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-4H.M.Jr:

Well, you see I am not - I have never studied

Bell:

It began in January, I think, 1919.

Stewart:

Right after the Armistice and the demobilization
you
have got this period of cleaning up the
accumulated indebtedness.

H.M.Jr:

Is that a very long correspondence?

Bell:

Yes, quite a bit.

H.M.Jr:

How much?

Bell:

Oh, it is a file about an inch or so think.

H.M.Jr:

that. It was when, in--

Couldn't somebody digest that for me? I wish

you would have it done promptly and then have
references in case I want to do it some more.
That was in connection with the Victory Loan.
How big a loan was that?
Bell:

That was a four and a half billion dollar loan.

H.M.Jr:

What rate?

Bell:

There are two issues of Victory Notes, one of
three and three-quarters and the other of four
and three-quarters.

H.M.Jr:

Did my interrupting spoil your thought?

Stewart:

Not a bit.

H.M.Jr:

Go ahead.

Stewart:

Well, the other period, and it is not unlikely,

is the 1928 period, controversy between the
Reserve Board and the New York bank at that time.
The Reserve Board was arguing for direct antion
as against rate action. The New York bank

209

5argued for rate action. Again it was a sort
of division in monetary authorities. Now

looking back on both those periods, the time is

lost when you say it is too late. It is the

time consumed in discussing which method ought

to be used. They really should have done both
things.

H.M.Jr:

Done what?

Stewart:

Both the direct control and the rate.

H.M.Jr:

What is the direct control?

Stewart:

The direct control is the thing George argues

for here, a selective process. In 1928 it was
the security loan. Now it is giving way for
the defense industry and shutting off the non-

defense industry. It is perfectly rational.
But it isn't to my mind entirely persuasive

that at this stage one ought to choose between
methods before one closes the book. One ought
to see whether or not both methods may not be
necessary and desirable.

H.M.Jr:

And therefore you lean--

Stewart:

I am not yet ready to say in view of all the

implications and using the Reserve restrictions
that that is what I want to do at this moment.

I do say just at the first reading of this I haven't read the Federal Reserve memo or

talked with George - I do say I would not shut

off the possibility of doing both things if
I took inflation seriously.
H.M.Jr:

I haven't read the Federal Reserve memorandum.
What was it?

Haas:

I just got it.

H.M.Jr:

I asked them for one, didn't I? I asked Gaston

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-6to ask them for one.
Haas:

I wasn't here and Henry did it and--

H.M.Jr:

You see, when I heard this last week - I sense

these things. I heard about it, and I said,
"Well, get the Federal Reserve to give us a

memo and get Haas' shop to give us a memo and

we will sit down and thrash this thing out,
because I take it very seriously.

Stewart:

I thought you did.

H.M.Jr:

This is the way I feel without having gone
into the ground work too thoroughly. I would
be willing to increase their reserves by the
maximum, irrespective of what it costs us in
our borrowing, if I was convinced that by doing

that I was really foresighted, you see. The
thing that - and then the other thing, on the
small end of it, the personal end of it - there

is always the human element that enters into it.
We are all small. Having them in on that is
the next move that they want, legislation to
have much further control, you see.

(Secretary held an unrecorded telephone conversation with Miss Grace Tully.)
Stewart:

You know, we humans that you refer to were

equally present in these other episodes to
the point where friendships were broken. Men

who had had long associations with each other
H.M.Jr:

felt quite bitter, and for long years-You see, all of this is a closed book. If I

Stewart:

Well, I think that this is the time where

can draw on you for the experience--

prospective is entirely unimportant. These
personalities disappear. But you do find them

in the action that is taken. I think any

211

-7correspondence or action that is taken has to
put the Treasury's position in such a fashion
that it has the farsighted concern. You can

put it and say, "I don't believe that such a
policy, viewed in the long run, is a wise thing
to do because of its implications." You can't
ever afford to say that you wouldn't do it
because you would pay a low rate. You can't
afford to do that.

H.M.Jr:

But you see, I am going to let you read this
draft of my talk which covers the whole field

of inflation and it is finished. If you care
to listen to it, I will give you a chance to

hear it tomorrow morning, but I want to let you
know how serious I am about it.

Stewart:

How seriously do you regard inflation in the
bond market? Prices are higher and yields are

lower than it will be possible to sustain them
in the light of the present prospective develop-

ments. That is a definition of inflation, to
me.

H.M.Jr:

Well, let me put it this way. The price of the

Stewart:

Yes.

H.M.Jr:

So we can't compare the - I mean--

Stewart:

But you introduce a new element of national

bond market has been high and interest rates
have been low long before we had national
defense. Right?

defense. That is one of the factors in affecting one's judgment, as to the capacity to

sustain that level of rates.

H.M.Jr:

Well, let me give you - make a statement which
is not an answer to your question but bears on
the point.

212
-8What I was trying to answer you was this: If
we are going to do something like this three
months from now or six months from now - in
other words, you get the bond market to give

it a shock and see just what will happen to

it, there will never be a better time than
right this week. I mean, if we are going to

do this thing, I will say I doubt if we will
ever have a better time for the rest of my
term than right now. Now, it is like the

President - he cancels the cotton bill freez-

ing and cotton goes up, so we might - if we
are going to do something about reserves, I
say for God's sake let's do it now and see

what happens and see whether the bond market

is or isn't inflated. That isn't reasoning,

but it is the old elbow, and I won't have a
better chance, because I have got a working

balance of just under two billion, and I can
take it in my stride, and I can go on either
with bills or notes and see what happens. So,

as I say, that isn't--

Stewart:

The time is appropriate.

H.M.Jr:

Nothing scientific, but what I am trying to
answer you is, I am not afraid to do this
thing. Now, let's say we do this thing, and
let's say that the bond market takes it in its

stride. Well then, it isn't inflated. If it

goes down four or five points, then it is in-

flated. I don't know. Of course, the last

time they did it, it took them eighteen months
to get over it. They went - it was about
eighteen months that we had a bad bond market,

wasn't it? Life insurance bought what the
banks sold and saved the day. They did it

practically dollar for dollar. I realize
perfectly what I am saying, but I feel this way,
that if the Fed feels that this thing is an
inflated market and enough people around here

feel it is deflated, and they want to squeeze

213
9-

the water out, now is the time to do it. I

don't want - I have got too many things, and I

don't want this thing hanging over my head.
There has been enough talk. It has all been
written up in the press. I mean, somebody
in the Federal Reserve System has been talking.
The other day I heard this woman, Sylvia Porter,

in New York with a whole story on it. Goldsmith in the bond letter had the thing, so it

is all out.

Bell:

Everybody is talking about it.

Stewart:

It is hanging over everybody's head.

H.M.Jr:

And as I say, I realize I am not being very

Stewart:

That is the only science I know is to test the

scientific.

market and what you would do, you would say

this is the most convenient time to make a
test. There isn't any other wisdom possible.

Everyso often you have to test it to find out
whether or not it behaves right.
H.M.Jr:
Haas:

They can raise it about another billion

dollars?

A little over a billion, reducing from five to

four the excess reserves. But the market
would want to know if that ends it, whether you
would want to join with the Federal Reserve is
to ask for legislation to give them more power,

you see, and If they think this is just the
beginning of it, that is one thing, or if you
are going to give assurance that ends it and
from there on you are going to use selective

controls, that is another problem. And if you
give it a drastic crack, the Federal's staff

and the Board feels that the way to handle the

214
- 10 -

bond market is to control it through

tap security and they handle the whole market by buying back and forth.
H.M.Jr:

What kind of security?

Haas:

Tap securities.

H.M.Jr:

What are they?

Haas:

In other words, continue a sale. You continue as tap or continue as a sale. They
control the market. It seems to me that

if this is artificial, what we have got
now, that sort of thing is just making
trouble and putting a distinctly artificial
situation in where it is not required at
all.
Bell:

It seems to me if we are going through with
it then we ought to let the market alone

and let it settle to itslevel and not have
the Federal Reserve try to peg the rate
at two and a half percent.
H.M.Jr:

Did you say that in the memorandum?

Haas:

Oh, yes.

Murphy:

They suggested a memorandum that they wrote

215
- 11 -

this thing, that it would be well to get it

marked down in one piece so the climb wouldn't
hang over, and it simultaneously would increase
reserve requirements. We should put out a tap

issue of three to four percent, offer an unlimited amount of it, and thereby cause the

market to drop off like a precipice, after
which it could be stabilized for good.
H.M.Jr:

At three or four per cent?

Murphy:

They say three dash four.

Haas:

And I question whether it will be an important

factor in it - in controlling inflation. In

other words, if you are going to do this, the

memos from the staff - Goldenweiser mentioned

it in his, but the other - you have got to

have these specific controls on top of this
other one to really control inflation, because

all the commercial ones they will go ahead and

the Board will continue on. An increase in
rate won't defer them any. People will pay it.
So if this solves the problem you could say,

H.M.Jr:

"Well, now, inflation is under control. We
have it in the bag. We made this sacrfice."
That is one thing. But if you go ahead and
run the rates up to three or four per cent
and then you still have your inflation problem on your hands, you will find out, and I
think you have got to weigh it very carefully.
The reason I say what I did is, I am willing
to remove all personal feelings out of this
thing and just set them aside. I have never
permitted myself to let personal feelings
interfere with our welfare. If I am convinced

this is the right thing to do, hell, let's do
it. You have never heard my--

216
- 12 Bell:

No, that is right.

H.M.Jr:

If a fellow has got some deep feeling that this
is the way to do the thing and this is going

to end it, and it is right, then do it.

Stewart:

I am in the same mood. This doesn't answer
the problem. The only question is whether or

not there aren't a multitude of things you will

have to do.
Haas:

We might compromise and go the limit if they

Stewart:

Do you want that sort of thing?

Haas:

That is it. That practically ties the Federal

H.M.Jr:

could give assurances that from then on it will
be used for specific controls.

Reserve and says, "From then on you mean nothing."

Again, to get on the personal basis, you
don't know who is doing the thing over there?

Is it one man or is it a group? Is it the Board
together?
Bell:

I think it is the Board.

Haas:

Draper, I think, dissents, isn't that right?

Murphy:

I gathered that impression when I was over
there. He didn't say so in so many words.

H.M.Jr:

Were you over there?

Murphy:

Yes, sir. I met with Draper and Szymczak and

and Thurston and Thomas and Piser and
I had

at Mr. Gaston's me

to get in touch with them. up Thomas

Longstreet. Clayton people intended suggestion. I to called meet He those asked

and when I came over he had that group assembled.

217
- 13 H.M.Jr:

Here is the thing that isn't clear in my mind.

1 know there are a great many forces which are

working for higher prices and locking up this
money, I just don't see how that stops people

from wanting to spend the money on non-defense

articles.
it to me. Now, I wish somebody would explain

Stewart:

It doesn't. It deals with one area of

inflation, to my mind, which is the bond market.

The Government bond market is a base line for

every other article in the bond market. The

result is that if it is inflated it tends to

create the same position all the way through,
so that either during or after the war you have
a problem of the readjustment of your base
line, whether your base line is near enough in
line with what you expect to be able to carry
through - let's put it the other way around.

Suppose we say, "Well, this rate is all right.
Not merely - don't mean to test it, but we
have a capacity and it is good. Take two or
three per cent rate, carry the financing through
on it, and hold that position post-war, so that
you say, "This is a pegged thing." Now, my

own belief is that it is an extremely difficult
art in the long term money market. I think

one of the weaknesses in currency is the
management of this long term rate over a long

and Indefinite period. Therefore, I believe
the present market to be inflated, but I
wouldn't go beyond saying that this is a correction of one of the places where I think it
is inflated and therefore do it for readjustment
at some time, and I would rather have the readjustment at some convenient stage than I

would after I had had another thirty billion
of debt accumulated and in the hands of the

public. I don't think a war of this magnitude
can be conducted on a two per cent basis

or a two and a half per cent basis.

218
- 14 H.M.Jr:

Well, let's say that instead of two and a half
we
go to three. How does that stop inflation?

Stewart:

One half per cent better. One half per cent
less readjustment, which is ten points.

H.M.Jr:

But how does --

Stewart:

It doesn't. That puts you into a whole area

of what we all mean when we talk about inflation,
which is so wrapped in mystery and logic and
subterfuge.

H.M.Jr:

But let me get this thing straight. If what
these people are worrying about is the readjustment after the war, that is one thing. Or If
it is that they feel that the present price of
bonds is too high and the price should be
driven down, that is something else.

Stewart:

Are some of them saying that?

H.M.Jr:

I don't know. Here is the thing. Supposing

Stewart:

Yes.

H.M.Jr:

Make the banks hold it. And then we go and
get out what, a long term issue on the new
basis? That would be one way. A three per

we say, "We will do this. All right, we
increase the reserves and lock up another billion
dollars. That is what we do, isn't it?

cent issue. Or I say I am not convinced that
the price of bonds is too high and I don't want
to sell any more long term issues because I am

not sure. Therefore, I get out a five

year note. That increases reserves because

it will go solely to the banks, won't it?

Stewart:

Increase the deposits, yes. There is no question
about it. You have got a much more difficult
t ask here than existed in either of the other
two episodes.

219
- 15 H.M.Jr:

Couldn't you have an in-between thing and say,

"All right, instead of giving the bond market
a terrific shock, let's have a creeping interest

rate. Let it go up gradually.

Murphy:

No one likes to buy bonds on a creeping interest

H.M.Jr:

Of course the answer is that they will if they
can't get anything else. That is the trouble.
You have got to be terribly frank with each
other. The trouble is, there are no new

rate.

money bond issues.

Stewart:

Anybody in the banking business that shows a

loss on a book value of an earlier issue, that
slows down a new issue --

H.M.Jr:

But the trouble is, I think if you go through
the last - back to the first of January --

just do it for fun, I mean not now. See how
many new issues were brought out as bond issues.
I doubt if there have been a hundred million
dollars.

Stewart:
H.M.Jr$

Of new money?

Of new money, Henry. Now, the fellow is faced

with this. He says, "I have got to earn my
salary and my payroll and I may take a loss

but I am going to buy these Government bonds

anyway, although everything tells me I shouldn't."

So he goes against his better judgment and
we force his hand.
Stewart:

He goes a little longer than he meant to go

H.M.Jr:

If this is all right, it is too high. We had

in order to get the yield.

that fellow from Baltimore, remember? He was
a smart old fellow. What was his name? That
bank?

220
- 16 Bell:

McAdams of the Baltimore Trust?

H.M.Jr:

Well, he just - they tell me he is one of the
smartest trading fellows. He spends a lot of
time on his three farms, but he sat here and
told us - called a spade a spade, didn't he?

Bell:

Yes, he was very frank.

Murphy:

There is quite a time factor, though, Mr. Secretary, while the acquisition of income may
be ultimately necessary, you can always
temporize with cold cash, and it seems to me
that bond buyers generally are much more ready
to buy on a low market or high market than on

a falling market, and that a falling market,
gradually falling, creates a very bad environ-

ment for selling bond issues.
H.M.Jr:

Here is the way I feel. This thing isn't -

Haas:

This is very short. He didn't want to put it

H.M.Jr:

Is it short?

Haas:

Two and a half pages.

H.M.Jr:

Where is it? It only came this morning?

Haas:

Last night.

Murphy:

About six o'clock.

Haas:

I will give you the whole batch.

Bell:

Whose memorandum is this?

Murphy:

I don't know. It was given to me by Thomas
as an academic discussion, a rather thorough

the trouble with the damn Federal Reserve
memos is that they are so long.

on that level, he said, so he addressed it
to me, but I think he hoped you would read it.

discussion of the matter. It was written by

221

- 17 -

them in the spring. I found it quite interesting. It is in that memorandum that they say,
"If you are going to raise the rates, you ought
to raise them fast.

Haas:

I think it comes down to this, Mr. Secretary,
what Walter Stewart mentioned. Is this rate
too low? Do you want a higher rate?

Doing it isn't going to be an important factor
in inflation. In fact, these memos that you
have there, they indicate that to do this with

gold inflation you have got to increase your
taxes much more. You have got to put in forced
loans. So what you wind up with, you do this
as a method of raising the general interest rate
and then do all the other things that are nece ssary to control infla tion, including these

selective controls. Isn't that right, Walter,
doesn't it come down to that?

Stewart:

That is the only thing you can argue, it is

to diminish the magnitude of your task. You

somewhat make your total task easier, though
you see by the same methods it won't be easier

in the long run.

H.M.Jr:

A lot of these arguments in the memorandum are

out of date. There is no criticism today of

the banks extending credit. They are doing
a beautiful job. You would think he was writing
this two years ago. How much have the banks
increased the loans?

Haas:

About two billion eight hundred million, but

that is inflation, too. That has to be
improved.

H.M.Jr:
Haas:

Another thing, I don't like, "The decision must

be made to support the rates selected."

That is the tap.

222
- 18 H.M.Jr:

That is just as artificial as anything else.

Haas:

I think it is more artificial.
It is a rate peg in the market. They look at
it and the Government's credit is standing on
its own feet.

H.M.Jrs

I don't mind saying I think that is a very,

very weak memorandum. I mean, I would state

his case much better than that. He stated
it very badly, don't you think so?
Stewart:

Yes, I think the mood to approach this in is
that --

H.M.Jr:

I think it is terrible.
(Mr. White entered the conference).

I am terribly disappointed. I would state it
better than that.

Stewart:

It is rather different from the others.
While there were differentials of monetary

H.M.Jr:
Stewart:

authority, the real control is here.
It should be, shouldn't it?

Yes, it is all right. And the real borrower
is here. So you have got a peculiar two-fold
responsibility. Entirely apart from the motives

with which this sort of recommendation is
made and what else they have in their mind,
personalities, whether the arguments are good
arguments, all I say is that this is a good
time to be aware of this responsibility and
appraise it in the light of prospective problems
instead of the immediate situation.

Haas:

Mr. Secretary, did you notice the British press

comments on the January statement of the Board?

223
- 19 H.M.Jr:

No.

Haas:

I have forgotten whether I sent those in.

H.M.Jr:

I will tell you what I would like to do, Dan.

They came over in a pouch from the British
Embassy. That is the type of headline they
had. There were several papers of the same
tenor all the way through.
Could you get this group together maybe this
afternoon?

Bell:

This group?

H.M.Jr:

Yes. and do a little more threshing around.
I don't think we have done enough of that in our
own place and --

Bell:

We haven't read any of this stuff from the Federal Reserve. We just got that. Unless
George read it.

H.M.Jr:

I won't have a chance, unfortunately, to touch
it again until eleven tomorrow, but if anybody
gets any ideas --

Bell:

You have got a conference at eleven.

H.M.Jrs

With these two men, tomorrow.

I don't mind talking perfectly frankly before
them. I think, Walter, - and Viner is here.

You might send him - he will be here tomorrow.
You might send him a wire to be here at nine
fifteen tomorrow.

Bell:

Isn't he coming?

H.M.Jr:

He is coming. He will be here.

Bell:

I thought he would be here.

H.M.Jr:

That is right, he will be here.

224
- 20 Bell:

Who notified him, Mrs. Klotz?

H.M.Jrs

I notified him to be here tomorrow. He will
be here.

Well, I just think if you could get this group

together this afternoon - Harry will have to be

excused because he is working with Kuhn on

this other thing. O.K.? I mean, don't you
think - and just remember this. If we are
going to do it, now is the time to do it.
Stewart:

Yes.

225
(COPY)

September 2, 1941

Secretary Morgenthan
Mr. Haas

subject: Excess Reserves, Credit Centrols, and Treasury
Financing

SUMMARY

This memorandum is prepared at the request of Mr.
Gaston made following a telephone call which he
received from Chairman Eecles while you were away.
A copy of Mr. Gaston's nemorandum to you summaris-

ing his conversation with Chairman Ecoles is attached herete.

Chairman Eeeles asks that the Treasury consur with
the Reserve Board in raising reserve requirements

to the present statutory limite and in requesting
from Congress a further increase in such limits.
He recognises that such action will depress the
market for Government securities, but believes it
necessary is order to combat inflation. He urges,
therefore, that long-term financing be deferred
until after the announcement of such a program in
order that both the Treasury and the Reserve Board
may be spared any accusation of bad faith.
Excess reserves now amount to about $5.0 billions,

a decrease of $1.9 billions since the all-time high
reached on October 23, 1940. Barring changes is
official policy or the import of substantial amounts
of gold fres Russia, total reserves appear likely to
fluctuate within a narrow range for the next year or

so. Any further decrease in excess reserves, thererequired reserves due to continued deposit expansion.

fore, is likely to come only from an increase is

226
Secretary Morgenthan - 2

such transfermation of excess reserves into deposite

-- at a ratio of about #5 of Reposite to $1 of oz.... reserves -- would be inflationary, rather than
deflationary, in its implications.

While the immediate effect of raising reserve require-

ments is to increase interest rates, its stated objective is to combat inflation. This objective would
be achieved in SORO degree by the more psychological
effect of the increase. In order to be of permanent

value as an anti-inflationary measure, however, an
increase in reserve requirements must result in squeesing some borrowers out of the market. This would be

done by making borrowing more expensive and so causing
the Government and the defense industries to compete

with other borrowers on a price basis. This naturally
leads to the question of whether an increase in intorest rates is the best method of squeezing non-essential borrowers out of the market.
A consideration of this question leads to the oenelusion that the direct exclusion of non-essential bor-

rowers from the market would be preferable to exclusion

by rate competition. Selective credit controls -- such
as control of consumer credit, of housing credit, of

new capital issues, of stock exchange loans, and of
bank loans for non-defense purposes -- appear, therefore
to be superior to the general eredit control proposed
by Chairman Eecles.

It 10 consequently suggested that you should not concur
in Chairman Eecles' request that you join with the
Reserve Board in recommending an increase in reserve

requirements. In such a case there seems to be no
reason to defer long-term Treasury financing beyond
the time when 11 would otherwise be advisable.
I. Chairman Eeeles' Proposal

On August 22, Chairman Eeeles called Mr. Gaston to express

his hope that the Treasury would offer no long-term securities

in September or at any time up to December, but that such new
money as might be required in the meantime should be procured
by means of Treasury bills. A copy of Mr. Gasten's memorandum

227
secretary Morgenthes - 3

to you summarising his telephone conversation is attached
hereto. Mr. Gaston requested us to consult with members of
the staff of the Board of Governors concerning Chairman

Eecles' proposal and to prepare a to you.
Chairman Eeeles' reasoning is as follows:

The present level of Government Bond prices is justified
only by the existence of a large volume of excess reserves.
It is desirable in the interest of the centrol of inflation
that this volume of excess reserves be reduced sharply. No
would like to have the Treasury conour with the Reserve Board

in increasing reserve requirements up to the present statu.
tory limits and is asking Congress to increase these limits,
thereby giving the Reserve System authority to increase reserve
requirements yet further. These actions would probably cause
a substantial decline in the bond market. He is particularly
concerned about this deeline in the case of the two new longterm taxable issues, as he believes that the tax-exempt issues
and all short-term issues can take care of themselves. He is
very anxious, therefore, that no new long-term taxable issues
be put out at the present level of the market. To do se at
this time. and shortly thereafter to take the action which he
considers necessary with respect to reserve requirements, would,
he believes, subject both the Treasury and the Reserve Board to

justifiable accusations of bad faith.

Chairman Eacles' views appear to present the following
questions:

(1) Is it desirable to increase reserve requirements
at this time?

(2) If this is not desirable, should any alternative
measures be taken?

(3) If reserve requirements are to be raised, should

long-term financing be postponed until such action

has been taken or at least recommended to Congress
by the Reserve Board and the Treasury?

(4) Could the Treasury finance itself for some months
entirely by short-term borrowing, as suggested by
Chairman Eecles?

The last two questions present much the easier problems and
may be considered first.

Secretary Morgenthan - 4

Action of the character proposed would be likely to cause
a substantial deeline in the market. The Treasury would,
therefore, be open to a justifiable accusation of bad faith
if it should undertake long-term financing while contemplating
joining in such a recommendation.
Financing Treasury needs for the next few months exels-

sively by short-term issues would appear to present no special

difficulties, except that most of the securities so sold would

go into commercial banks and se would result in increasing bank
deposits. Such an increase could be easily justified, however,

if it were merely the first step in a program which would result in the long run in the sale of fewer, rather than more,
securities to commercial banks.

It would seem, on the other hand, if you do not propose

to conour with the Reserve Board in recommending an increase

in reserve requirements, that there is no need for postponing
long-term financing longer than might be indicated by the other
factors in the situation.
The advisability of adopting Chairman Ecoles' specific
suggestions with respect to current financing operations, therefore, turns upon the broader question of the advisability or
inadvisability of consurring with the Reserve Board in their

proposal to increase reserve requirements.

II. The Present Situation with Respect
to Excess Reserves

Excess reserves amounted, on August 27, to $5.0 billions.

This is a decrease of $1.9 billions since the all-time high

reached on October 23, 1940. The factors accounting for this
decrease are shown in the following tablet

Secretary Morgenthau - 5

Factors Accounting for Decrease in Excess
Reserves, October 23, 1940, to August 27, 1941

(In billions of dollars)
Factors absorbing excess reservest

Increase in money in circulation

Increase in Treasury eash and deposits
in the Federal Reserve Banks
Increase in required reserves

All other

1.7
.5
.8

.4

3.4

Factors creating excess reservest

Increase in monetary gold stock

All other

1.3
.2

Decrease in excess reserves

1.5
1.9

It will be observed from the above table that total reserves declined during this period by only 31.1 billions -the remaining $0.8 billions of the decline in excess reserves

being caused by an increase in required reserves resulting
from deposit expansion during the period.

About $0.7 billions of the decrease in total reserves was

caused by an increase in Treasury deposits and other more or
less non-recurring factors. The remaining $0.4 billions of
the decrease was caused by the excess of the increase in money

circulation over the increase in monetary gold stock. The
movements of these two factors are likely to dominate future
in

movements in total reserves for some time to some.

As nearly as can be estimated - barring changes in official policy, or the import of substantial amounts of gold from
Russia -- total reserves appear likely to fluotuate within a
relatively narrow range for the next year or so. This means

secretary Morgenthan - 6

that any further substantial decrease in excess reserves is
likely to come only from aa increase in required reserves due
to continued deposit expansion. Such a decrease in excess
reserves would, of course, be inflationary, rather than defistionary, in its implications, as it would nean that some
of the previously existing excess reserves had been trans-

formed into deposits -- at a ratio of about 85 of deposits

to $1 of excess reserves - and had se moved one step further
toward the spending

III. Probable Consequences of an Increase
is Reserve Requirements

The objective of raising reserve requirements is to asst at

in preventing inflation. The insediate effect of such an in-

crease would be to reduce the available supply of bank credit
and so to make banks less ready to lend and to purchase securi-

ties. It night also incline many of them to sell securities

already held. This would be especially true as an increase in
reserve requirements would hit the New York City banks the
hardest and other banks are inclined to follow the lead of the
New York City banks in handling their security portfolios. V

1/ The following table indicates the distribution by classes of
cities of excess reserves on June 25, 1941, and the amounts
to which they would be reduced if reserve requirements were

increased to the present statutory limits:

Excess Reserves if
Actual Excess: Requirements
Increased
1 Reserves
to Statutory Limits
:

(In millions of dollars)

:

Central reserve cities 2,612
Reserve cities
Country banks
Total

1,750

1,976
1,398

869

684

5,231

4,058

The above table makes no allowance for withdrawals of

inter-bank balances incident to increasing reserve requirements. The staff of the Board of Governors estimates
that such withdrawals would not exceed $75 millions.
(This footnote continued on next page)

231
Secretary Morgenthau - 7

An increase in reserve requirements would consequently
increase interest rates and put down bond prices. This was
agreed to by all members of the staff of the Reserve Board

with whom the matter was discussed.

The extent of the increase in interest rates - and de-

crease in bond prices -- would depend upon the character of

the action taken and is difficult to predict. An increase in

requirements to the present statutory limits, coupled with a
definite assurance that no further increase was contemplated,
might have very little market effect. A contemplated increase
in requirements above the present statutory limit, however,
would be bearish to an indeterminate degree depending upon its
impact upon banker psychology. An increase in reserve requirements sufficient to reduce excess reserves below $1 billion
could very easily put new long-term borrowing on a 3 percent
basis and put down the price of the new taxable 2-1/2's of
1956-58 by as much as 10 points. (This is about the same as
the average decline in the prices of long-term Treasury bonds
between the high reached in June 1939 and the low after the
outbreak of the war.)
An increase in reserve requirements would also put down

sharply the prices of all outstanding partially tax-exempt

securities. It is true, of course, that such securities, be-

cause of their growing scarcity, would have a better chance
of staging a recovery than would taxable securities, the supply
of which is being constantly increased, but such a recovery
might be a matter of years.

If reserve requirements were raised substantially, it
would also probably be necessary to start new series of savings
bonds at substantially higher rates than those now being of-

ferred and to refund into such new series many of the outstanding
bonds which whould be presented for cash redemption in order to

take advantage of the higher rate. It might even be necessary
(for reasons of public morale) to make the higher rates retro-

active on savings bonds already sold.

(Footnote 1/ continued from preceding page)
If reserve requirements were increased to 25 percent above
the present statutory maximum, the excess reserves of central
reserve city banks w uld have been reduced as of June 25 to about

$712 millions and the aggregate reserve deficiency of all banks
having reserve deficiencies would have been about $600 millions.
Since June 25, the date to which the above figures apply,
aggregate excess reserves of all member banks have decreased
about $241 millions.

232
Secretary Morgenthan - 8

Increasing the cost of borrowing to the Government would

not in itself help solve the problem of inflation. It should

be considered rather as a disadvantage of the proposed method
of attack and should be weighed against its supposed advantages.

The first benefit in the fight against inflation likely

to be derived from increasing reserve requirements is paycho-

logical. Increasing reserve requirements is a traditional

method of combating the inflation incident to business booms
and its use at the present Juneture would probably be interpreted as a token of sincerity. The announcement of such a
policy might tend, therefore, to dampen speculation in the
commodity markets.

Such a psychological advantage would be short-lived, how.
ever,unless the increase in requirements had more fundamental
consequences also. The primary consequence of the increase

would be, as we have seen, a stiffening in interest rates.
This stiffening would apply to all borrowers - governmental
and non-governmental, essential and non-essential alike. It
would be effective in controlling prices, however, only as it
actually reduced borrowing and hence spending. In order for
the action to be effective, some borrowers would have to be
squeezed out of the market. The Government and the defense
industries would not be among the borrowers so squeezed out.
They would have to pay whatever rate was necessary in order

to obtain the requisite credit. This leads naturally to the

question of whether an increase in rates is the best method
of squeesing non-essential borrowers out of the market. This

is the fundamental problem of the relative desirability of
general vs. selective credit controls and will be considered
in the next section.

IV. Relative Merit of General and Selective
Credit Controls in the Present Situation

It is the purpose of all credit controls to reduce borrow-

ing and hence spending, and so to restrain price increases
judged to be undesirable. Credit controls may be classified
as general and selective.
General credit controls operate by causing an all-around
scarcity of lendable funds, thereby putting a general pressure
on all borrowers to reduce their borrowings and hence their

spendings. General credit controls to be effective must bring

233
Secretary Morgenthau - 9

about an increase in the rate of interest, since it is through

such an increase that general pressure is brought to bear upon
borrowers. An increase in member bank reserve requirements is

a general credit control. Open market operations (selling

Government securities) by the Federal Reserve Banks constitute
another.

Selective credit controls operate by wholly or partially
shutting out a given class of borrowers from access to the
existing supply of lendable funds. In this way, total borrow-

ing - and hence total spending -- is out down without any
controls already in operation consist of some limitation of
stock market borrowing (by means of margin requirements) and
some limitation of consumer credit. Other selective controls
which might be availed of at the present time would be limits-

necessity for a rise in the rate of interest. Selective credit
tion of housing credit, restriction of new capital issues, and
restriction of bank loans for other than national defense pur-

poses.

The relative appropriateness of the application of general
or selective credit controls to any situation showing evidences
of incipient inflation, depends upon the character of the situation. If a more or less uniform contraction of borrowing all
along the line is desired, general credit controls are more

appropriate. If, on the other hand, it is desired to contact
borrowing only in certain fields, selective controls are in-

dicated. It is, of course, by no means barred that the appropriate remedy for some situations might be the application of
both general and selective controls of verying degrees of intensity.

The present situation appears to call for the application
of special and not general controls. The reasons for this conclusion are simple. The application of general controls would
place a pressure (reflected by higher interest rates) upon box
rowers all along the line. There are two very important classes
of borrowers, however, who will not contract their borrowings a
cent under this pressure, nor is it socially desirable that they
should. These borrowers are the Federal Government and the
national defense industries. Between them they will probably
account during the current fiscal year for at least three-quarters
of total borrowing, and they will have to pay whatever rate is

necessary to secure the needed funds.

The pressure engendered by general credit controls, there-

fore, can be effective only with respect to the remaining

234
secretary Morgenthau - 10

borrowers who together will probably account for not over
one-quarter
of total incipient
borrowing.
Even
these borrowers
furtherunder present
boom
conditions,
will be very
by means of

more, hard to stringent
discourage rate
increases.
controls at The the net present effect
general
credit

would be to increase

the
Federal
Government
of rowing time,
applying
therefore,
to and to greatly the national the cost defense of bor-

in order to effect a
for other
purposes.
industries, borrowing
relatively
Mild general small credit contraction controls
a less drastic effect
on

be even
less
would in samewould
token, have
effective
interest in combating rates, but inflation by the

since it is only through the medium of an increase in interest
rates that general credit controls are able to effect reductions
in borrowing and spending.

Selective eredit controls, on the other hand, may be con-

centrated solely on those areas of the economy where contraction

is desired. Borrowing may be wholly or partially blooked out
in these areas, thereby increasing the proportion of the total
supply of funds available to the Government and the national
defense industries. This seems more desirable than tightening
credit conditions generally and forcing the Government and other
defense borrowers to compete on a price basis for an expanding

proportion of a limited supply of credit. The use of selective
credit controls might be compared in this respect to the present

policy of prohibiting the use of aluminum for pots and pans and
60 permitting its purchase for national defense purposes at a
moderate price. The use of general eredit controls could, by
the same tokan, be compared with a policy of out-bidding the pot
and pan industry for the available supply of aluminum. Either
policy might be made to result in a diversion to defense needs

of any given proportion of the total supply of aluminum - but
at very different costs.
V. Conclusions

It appears that selective, rather than general, credit
controls should be relied upon for use in the present situation. and
Such controls will be more effective in checking inflation
may be applied without increasing the cost of borrowing to the
Government and the defense industries.

Selective controls are already being applied to stock
market loans and to consumer credit. Stock market loans at the
present time constitute no problem. If at some time in the

secretary Morgenthau - 11

235

future they should give signs of doing so, the existing con-

trole should be tightened as much as necessary. The Reserve
Board has just commenced the regulation of consumer credit.

The initial regulations are very mild and will have to be

tightened very considerably 1f the volume of such credit is
to be substantially reduced.

other fields in which selective credit controls may be

necessary are housing, new capital issues, and bank loans for
other than national defense purposes.

Housing credit could be reduced very substantially by the

application of selective controls. At the present time the

expansion of such credit is being actually promoted by advertising campaigns by the FHA and other agencies.

New capital issues do not present an important problem at
the present time, but should be regulated by selective controls

when and if they do.

(

Perhaps the most fruitful and immediate -- as well as the
most complex - field for the operation of selective credit controle is that of on-defense loans by banks. Member bank loans
expanded by $2.8 billions during the fiscal year 1941 -- a great
deal of which must have been for non-defense purposes. If this
expansion is in whole or part undesirable -- a necessary premise
for the adoption of general credit controls - some attempt should
be made to get at it directly. The British have attempted to do
this and their success in this regard has been an important factor
in accounting for the low rate at which they have been able to
finance the var. British banks have been instructed to relax
their standards for defense borrowers, but to exereise rigid sontrol over all credit for non-defense purposes. AS a result,
despite the increase in loans for defense purposes, total "Advances"
of the London Clearing Banks have declined by about 1126 millions
since the beginning of the war, and an equal sum has consequently
been placed at the disposal of the Government without an
increase in bank deposits.

If, as suggested above, you should decide not to coneur with
Reserve Board in a recommendation to raise reserve requirements, there would appear to be no necessity to defer long-term
the

financing longer than might be indicated by factors in the situation other than the proposed increase in reserve requirements.

236

COPY
August 22, 1941.
MEMORANDUM

Secretary Morgenthau
Mr. Gaston

TO:
FROM:

Marriner Ecoles called me today to say that he
was leaving tonight to be gone for three or four weeks
and he would like to give us his thoughts on September

financing, if there should be any, a subject on which
he had not had an opportunity to talk to the Secretary
although he had mentioned it briefly to Mr. Bell.
Mr. Eeeles hopes there will be no long term securities offered in September or at any time up to December,
but that such new money as we may require may be procured by means of bills. His reason was that the
market today is based on a large volume of excess reserves.
There are few long term taxable bonds outstanding. The
two issues out are both selling on a two per cent yield
basis. If there should be any new long term financing in
September it would naturally be priced at near today's
market. This would mean in effect freezing of the present
situation. By that he meant that our hands would be
tied as to any action to change reserve requirements. We
have not yet used the present power to increase reserves,
which amounts to about a billion and a quarter. He thinks
Federal Reserve should consider with the Treasury an increase in the reserve requirements up to the limit of
existing power. Not only should this be done before any
new long term securities are issued, but he thinks that
the Treasury and the Federal Reserve should join in saying that it seems advisable to get further powers for
increasing reserve requirements and that both these things
should be done so that the market can absorb their effect
before any new long term securities are put out. Otherwise he thinks the Administration, including the Federal
Reserve as well as the Treasury, would be open to charges
of bad faith.

Copy to:

Mr. D. W. Bell

237

BOARD OF GOVERNORS
OF THE

FEDERAL RESERVE SYSTEM

Date September 2. 1941

Office Correspondence
Mr. George Hasa

Subject:

o

from

Mr. E. A. Goldenweiser

This memorandum is for the purpose of raising the question of

the

advisability of deferring long-term Treasury financing until after

a decision has been reached in the matter of raising member bank reserve
requirements.

In the light of developments in the last few months, it is
clear that, from the monetary point of view, it would be in the public

interest at this time to raise reserve requirements of member banks to
the extent authorized by law. This would fix the requirements at double
the ratios stated in the law and would reduce excess reserves by about

1.25 billion to about $3.8 billion. Consideration should also be given
to the advisability of seeking additional authority over reserves to bc

available for use when the occasion arises.

An increase in reserve requirements would be in line with

other measures undertaken by the Government to prevent inflation, such

as, for example, the request for authority to control prices and the
adoption of restraints on instalment purchases. An increase in bank
reserve requirements would reinforce the public's confidence that the
Government is determined to control inflation. Such an assurance to the
public would in itself reduce the danger of inflation which is accentuated by a widespread tendency to buy goods in excess of needs "before
prices go up".

An increase in reserve requirements would also diminish the
pressure on banks to find outlets for their funds and would strongly
reinforce the policy pursued by the Treasury to place its issues with
purchasers other than banks in order to tap existing funds rather than
to create new ones. So long as the banks have unlimited reserves it

will be difficult to limit their purchases of United States Government

obligations. During the fiscal year 1941 banks absorbed an amount equal

to nearly all the open-market securities offered by the Treasury. If
securities issued are not available to banks, they will be in a position
to buy outstanding securities from other investors who will, in turn,
buy the new issues. The banks will also be under pressure to extend

credit in other directions.

-2-

238

Selective credit controls, such as regulation of instalment
credit, have a place in the program. They cannot, however, take the
place of general controls, for several reasons. So long as banks have
unlimited funds and there is active demand for credit, the banks will

find outlets for their funds. If one field is restricted, they will

move into another field. No matter what kinds of loans or investments
banks make, there is an expansion of deposits available for spending by
the public. Also the problems of selective controls are new, complex,
and there has been little experience in handling them. They also raise
problems of discrimination. Selective controls are useful in directing
the flow of credit out of undesirable into desirable channels, but they
are not an adequate means of restricting the total growth of bank credit
and deposits.

In connection with the problem of reserve requirements, it
is recognized that in present circumstances coordination of all financial
policies is essential to the public interest and that nothing should be

done that would conflict with the Government's defense effort. Agreement
on a policy with regard to reserves is, therefore, necessary before action is taken.

In this connection the question arises whether it would be
feasible for the Treasury to defer announcement of any contemplated longterm new financing until, say, October 15, when the question of increasing reserve requirements will have been explored. It would not seem
desirable to issue a long-term security in September, and immediately

after that to raise reserve requirements. In view of the volume of
available funds in the hands of banks and other investors, raising requirements to the limit authorised by law should not result in any

material change in money rates, though there may be some temporary re-

action in the market. In that case, the purchasers of the new issue may
feel that it was not fair of the Treasury to sell the bonds under now
prevailing market conditions without letting the public know that action
on reserves was under consideration. It would seem to be far better to
have the question of the course of action to be pursued with respect to
reserve requirements decided before the Treasury makes another long-time

offering to the public.

The Treasury and the Federal Reserve System are in a position
to establish and maintain any rate on Treasury borrowing that they may
determine as the most desirable, and it would be the System's duty, when

the decision has been made, to support the rate selected. But it is a
legitimate question whether a slightly higher cost for borrowed money
would not, in the long run, be cheaper for the Government, which is the
largest purchaser, as well as more consistent with the public interest

than a slightly lower cost achieved at the risk of a general rise in

-3-

239

prices of defense and other commodities. Besides, an interest rate declining constantly to lower and lower levels, which is the tendency
under present conditions, raises many far-reaching problems for the
economy as a whole,

Sales of savings bonds and tax-anticipation certificates have
exceeded expectations, and it is believed that the Treasury has ample
funds with which to meet its current requirements for some time to come,
so that it would be entirely practicable to defer new financing to the
middle of October.

E.G.

COPY

is 240 AM
3/26/41
The Role of the Banks is Treasury Financing,

in Relation to Problems of Credit Control
In assisting the Treasury to raise whatever funds are required, supplementary to tax revenues, to place purchasing power in
the hands of the Government during the next few years of economic var-

fare, the banks have two functions to perform. One of those functions

is that of dealers in outstanding issues. The other is absorption of
part of the increasing Government debt in their investment portfolios.

Little discussion of the dealer function is required. No
matter what credit policies are adopted, the Government can arrange

to have this function adequately performed. A brief analysis of this
question is given in an appendix.

The basic issue at the present time, both for Treasury

financing and for credit control, is this: how seriously should the
Government take the conventionally respectable idea that participation
of the banks in Government financing should be held down to a minimum
in time of var OF economic vari

The issue may be expressed in three more or less equivalent
forms. Should the growth of bank assets and deposits be held down?
Should interest rates be increased? Should some attempt be made to

reduce the idle funds of investors? (It will be shown below that

actually it will be impossible to reduce idle funds - apart from
their activation by an inflationary development - except by a complete

immediate surtailment of bank credit. Such drastic action is not proposed or considered in this memorandus.)

-2

241

Arguments on the negative side are very powerful. Strong
action to hold down the growth of bank assets night mean a breakdown

of the defense effort through "manecessary" interference from the

side of finance. It would involve a collapse in market values of
the present assets of banks and other institutions. These and other
arguments are outlined in the first main section of this memorandum.

On the other side there are arguments for early and force-

ful action to hold the participation of the banks in Government f1nancing to an absolute minimum. These arguments are logically echerent,

but it is not likely that they will find general acceptance. They are
presented in the second section of this nemorandus.

Some sort of a compromise solution is possible. Essential

elements of this program would include: (1) stability of interest

rates; (2) utilization of all possible devices short of restriction
of excess banking reserves to test out and stimulate the absorptive
powers of the non-bank investment market; (3) full exploitation of
taxation and selective credit centrels to moderate the force of consumer demands. The idea of decisive action to prevent inflation through
credit controls would be abandened, the banks would be allowed to con-

tribute as fully as necessary to the easy success of Treasury financing
in doing its part in "winning the economic war". and the Government
would hope to avoid the choice between inflation and rigerous regula-

tion of consumption by carrying out a broad program of fiscal and
other controls.

-3-

242

The present economic situation is in many ways very different from that to which we have become habituated in the past several
years. There is new only a small and gradually disappearing margin

of overcapacity in basic manufacturing, transportation and electric
power industries. We are assured of a poverful stream of effective
purchasing demand for some time to come. So long as the Government's
expenditures under the defense program continue to increase, and pee-

sibly for a while thereafter, the Federal Reserve System need not have

the slightest fears that any action of credit control will be followed
by a serious recession in business activity. Although the conditions
which limit Federal Reserve policy have been tightened by the necessity

of "Winning the war", they have been relaxed in another direction as a

result of this certainty of prosperity.
Acceptance of Government centrols of economic life during a
period of economic varfare is such more general now than twenty-five
years ago. In the first World Var our Government imposed no centrole

until 1917: under the stimulus of a booming export trade with the Allies
and as a result of other events in the world at var, the wholesale
price index had already risen by 75 per cont and the cost of living

by 25 per cent. Earlier recognition of the problem of preventing
inflation raises the hope that we say avoid inflation this time.
(A doubling-and-a-half of the price level. such as occurred between

1915 and 1920, west be regarded as true inflation.) However, there
is no more intention new than there was in 1915, 1916. or even 1917

and the first half of 1918. of imposing rigerous centrole upon consumer

243

buying. V Beyond this, there is one faster now present, not present
twenty-five years age, which seriously threatens the success of price-

level stabilization. This is upprecedented each liquidity in the
basiding system and - savers and investors.
Major moortalatics in the present situation, which make

decisions on credit policy difficult. are (1) the eventual sise and
timing of defense expenditures and (2) the amount and distribution of

slack still remaining in the country's productive capacity. These
two uncortainties are related since capacity is not absolute but 10

capable of growth as a limited rate. It is only natural that those
uncertainties will continue to be received in favor of decisions to
avoid far-reaching centrols - steep consumption taxes and price-fixing
and rationing of commure' goods - at least until some measure of

true inflation of the cost of living has already taken place. Such
forms of control are in themselves still abherrent to a democracy.
Once imposed, their reneval after the was would have serious ecenomic
repercussions unless performed with care.

1/ "Price fixing" on - goods was limited to the regulation of

processors' and distributors' margine on food and coal. This was
of limited effectiveness because 11 was not possible to centrol
the farm prices of foodstuffs. Sugar was the only consemers'

commodity subjected to compaleory rationing. Only w the of 1918 were plans being made to fix the prices to consumers of
some other articles each as shoes.

244
Aggaments smines preventias banks from greatly increasing their
holding of Government penalties
(1) The meet povernal argument is the fear that 11 would prove

quite impossible to dispose of the Treasury's output of new securities
without calling upon the banks to abserb a considerable part. This
argument is somewhat weakened If is is proposed only to reduce excess

reserves, say to $2,000,000,000 is that case this problem would not be

pressing at first. within & fairly limited time, however, 11 would
assert itself, and any plane made now must look ahead for several years.

(2) The next most poverful argument is that a rise in longterm interest rates would result in a tremendous drop of market values
of bonds now held by the booking system and other institutions. Insidentally. while the question at issue is whether or not a growth in bank
holdings ought to be substantially prevented, this could not be assom-

plished without an alimination or substantial reduction of - TOserves. (For even if banks were flatly prohibited from subscribing to
new issues they could buy up outstanding securities.) There is differonce of opinion about the immediate effect on long-term interest rates

of the imposition of a "selling" plan outting - reserves may to
one-third their present values. IS eeens evident, however, that longterm interest rates would seek a higher level as the remaining excess
reserves were absorbed and some 141. deposite of investors were dream

into the Treasury either by tanation or berrowing, even though as not
decline in 1010 funds would occur. Such an eventual rise of long-term
rates night OF might not be discounted by the market from the outset.

...

245

However, a therenghgoing program for the provention of 1
further growth is bank investments would include action by the Treasury

to insure that this inevitable rise in interest rates took place ismodistely and ease for all. This could be accomplished very effectively by
the Treasury offering long-term and intermediate securities on tap in

unlimited quantities at par with a 4-3 per cent range of rates. (This
is approximately 1 per can't above the presently anticipated yields on

fully taxable bonies) Such action, in conjunction with a out is reserves, would lead to - immediate and fairly precise readjustment of
bond prices. The forced rise in yields on the new tap issues, and therefore on all issues competing with them, would be greater than any foresse-

able future rise flowing only from the out is - reserves. IS is likely that the tap issues would be unacceptable to investors, that those

issues would 8 to a discount, or that the general love of yields would
rise beyond the rate structure envisaged w the coupons on those issues.
Subsequent finstrations of bend prices would be wash smaller than those
we have become accustoned to.

Such action to force - immediate readjustment of bond prices
and yields has mach to commond 11 as part of a realistic progres of

restricting bank investments. Net the prospect of a 15-point desires
in market values of partfolio bonds would be alamying both to bankers
and the Government.

(3) The rise in interest issues accompanying each a shift in
yields would be of no great advantage to the basire if they were to be

orbetantially deprived of the opportunity to by the not high-rate beads.

-7-

246

However, loan rates would rise, and as leans turned over the banks
gross earnings would increase.

From the Treasury's point of view. however, the higher rates

would appear very costly. On thirty or forty billion dollars of new
debt, a difference of 1 per cans in rate would enlarge the animal

interest charges by three or four hundred million dollars. Added to
this there would be the extra changes on issues to refund maturities
during the years the high rates remained in effect.
(4) Finally. arguments may be advenced on economic grounds:

the rise in rates would accentuate the unequal distribution of nation-

a incoues is would be injurious to - and industry and perhaps
even to the defense effort since 11 would inhibe expension of industrial and housing espacity: higher rates would be "uneconomic" is
these modern days when industrial productivity has relused the demond

for capital far below the supply.
These arguments, unlike the others, may be wiefly dismissed.
They indicate too mach habituction to the economic climate of recent

years, or they assume. fallasiously. that the higher level case isposed would be permane. liverales of income from consumers to

investors, undesirable in normal times, will be destroite in "ver-time"
(provided that the extra indone paid to investors can be receptured,
by taxation preferently, or at least by borrowing) because a temporary
Production in consumption will be necessary. A reduction in new housing

construction will be particularly desirable as a time when durable

materials and labor will be access Industrial expansion. unlike

---

247

housing construction. 10 almost totally inconsitive to interest rate
changest and profite (even after high corporation tames), supplemented

by mederate use of the - markets and of bank leans 80 long
as they remain available, and further supplemented by direct Govern-

sent finessing, will provide sufficient funds for all expension penditures which prove accessary for defense OF otherwise permissible.

Finally, the opportunity of sase again levering interest rates and
of making lean funds freely available would be of positive value in
combatting post-var recession.

In summary, three poverful obstacies oppose any thorough

going effort at present to restrict the expension of bank assets and
deposites fear of a breakdown of Treasury finance, fear of a great

drop in institutional asset values, and dislike of an increase in the
Treasury's costs of financing. Noreover. these obstacles will persist.
The second and third may come to seen less important if inflation of
the cost of living gets under way, but the fear of a breakdown is

Treasury finance will be greater. not less, if restriction of the
credit base is proposed later. at a time when the Treasury will have
become thoroughly habituated to relying on the banks for a substantial
part of its new money.

-9-

248

Arguments in fever of preventing banks from greatly increasing
their holding of Development
To make a case against the poverful arguments which have just

been considered, 11 is necessary first to establish a reasonable presumption that the economic war sea be financed without the assistance

of the banks, second to bring forward positive arguments for the a
sity of limiting bank expension, and third to show that other objections
are immaterial.

The conclusions which can be reached are by no means irresis-

tible. They come out something like this.
(1) Treasury financing ean get along without much assistance

from the banks, If taxes are raised sufficiently and are supplemented by
forced loans in the event that the defense program is materially iscreased beyond present expectations, M the outleck for future interest
rates is clarified and the Government's determination to prevent inflation

is made obvious, M a rise in interest rates is not only permitted but
authorised by the Treasury, and M a "seiling" plan of bank reserved is
adopted compled with a plan for the Federal Reserve Basks to abouts tea-

porary or persistent Treasury shortages without at the same time supplying
the member banks with an additional base for multiple deposit expension.

For a number of reasons, If Treasury financing is ever to get along without
a great deal of assistance from the beaks during this period of economic
var, the measures which would make this possible meet be undertaken very

soon. The outlook for future interest rates will remain hasy and there

will be recurring expectations of inflation so long as credit restriction
remains a future possibility and not a present fast. This means that

- 10 -

249

investors will continue to sky away from the bend market. On the other

hand, the Treasury's plans for future interest Fates will not be easily
altered once they are made, and they would underbtedly have to be altered

at a time of abstaining from bank finance. The total amounts to be Faised
by taxation as over against berryving can be adjusted only animally, and

for a period lying several months in the future. No solden increase in
taxation will be possible at the moment that credit restriction becomes
desirable.

(2) If 11 is assumed that inflation of the cost of living and
of real estate values comparable with that which occurred in the last

var must be prevental this time, and if 18 is believed that this can
be done with the aid of monetary centrols, preparation must be made

now to utilise monetary controls at the appropriate moment. Fiscal
arrangements must help to keep consumer desand in line with available
supplies of basic commodities and Government policy must continue to

be directed at increasing supplies and seeing that they are fairly distributed among the defense and non-defense industries at reasonable

prices. But rigorous regulation of the consumer himself as in Germany

(or of the purchaser of real estate) is neither desirable nor likely
to be adopted in time. Therefore, almost assuredly, assures will evertually have to be taken, and perhaps within a year, that will sharply
reduce the availability of money to consumers and speculators and to

business firms and corporations trading in inventories. at the moment
when as a result of pressure from effective consumer demand the visions

cycle of price-cost-price inflation begins. Unfortunately, because of
the unprecedented cash liquidity of individuals (as well as banks).

- 11 -

250

this action is far from certain to accomplish its purpose. Merely to
close the private loan market at that future moment will not necessarily

suffice, for 1d1e funds will pour into the real estate market, the stock
market, and - no far as possible - into purchases of consumption goods.

The most that eath be said is that the chances of will be greater
the more nearly idle funds have been held to their present level instead

of being allowed to increase at a rapid rate. With the help of stock
market regulation, perhaps the psychological sheek of a complete electic of

the loan market will be enough to precipitate a temporary reversal of the
boom psychology. despite the trensadous pressure of consumer demands. But

If idle funds are allowed to continue to pile up before this time comes,
and it is hard to see how this can be avoided, the chances of success will
be negligible.
Estimates are given below which suggest that demand deposits

and currency now held for investment purposes by individuals or hearded
amount to something like 17 billion dellars, as compared with perhaps

7 or g billions in 1929. It is further suggested that if stability of
the price level can be maintained during the next two years without re-

stricting bank expansion, and If in fast the Treasury borrows $15 billions
from the Banks out of a potential two-year total financing of close to
$30 billions, 1 the growth of deposite in excess of the requirements of
governments, corporations and consumers might amount to another #17 billion,

bringing the total of individuals' 1d1e funds to well over $30 billions!
This is on an assumption that something harmone to sten - defense

outlays free a now probable $30 billions to she billions during the
calendar years 1941 and 1942.

1

251
- 12 -

A very early restriction of bank expansion - as for by the use of the setling reserve plan with excess reserves out to

a

third - is therefore necessary If any reliance at all is to be placed
on the power of closing the private loan market completely. But the

virtue of this action new would not be solely in its aspect of preparation for other action later. In a wash more cenerate and certain
way it would help to saintain the conditions that would make the later
action never necessary. The Treasury in agreeing to this program would

consit itself to an extremely heavy schefule of taxes and forced lease,
for only in this way could 18 get along without much help from the

banks. Returning to the figures sited in the proceding paragraph, If
the Treasury were to expect only $5 instead of $15 billions from the
banks out of prospective two-year berreving requirements of say $29 bil-

liens, while other institutional sources might he counted on for 85 billions at the most, 10 would have to manage to get $19 billions instead
of $9 from individuals. In no conceivable way could 11 gat such a was
within a two-year period without resorting to steep income and payrell
taxes and foreed leans. And nothing could more antisfastorily perform
the task of transferring purchasing power from consumors to the Govern-

ment is a way that would avoid price inflation.
The central argument for restricting bank expansion therefore
has two facets. On the one hand this policy would diminish the notes-

tial further growth of 1410 funds (but not stop it): on the other hand
it would accorditate stiff taxation and forced lease which offer the

252
- 13 only sure safeguard against inflation - short of completely effective
price-fixing and rationing - If the Refense program is to be enlarged
bayond present expectations.

If the defence program does net exceed the proportions

that can now be envisaged - If defense outlays in the calendar years
1941 and 1942 are not to exceed any $30 billions, and financing entrements in the SAME period are not to exceed any 121 billions cording to tax plans now expected - a more rigorous tamiton scheme

may not be required. But in this case the higher interest rates, and
above all the fixed interest rates, which the plan outlined OR pages
5 and 6 would bring, would certainly be of assistance in disposing of
caviage bonds and long-term issues.

(3) If inflation is almost inevitable in the absence of either
ricorous control of the consumer OF foresighted monetary controls, and
If immediate monetary controls GSR remove the necessity for future controle by persuading consumers to part with their money or by causing the

Treasury to force them to part with 11, then 11 is easily worth the cost
to the Treasury of am extra interest Marden of a few hundred million

dollars a year to take its share of lendership is planning such monetary
controls.

The temporary check to the bookkeepers of bead values, in

plieft in any plan which Paises interest rates, is of no real causequence. There 10 no need for any beak to sell boards before maturity,

much less for any bank to fail as a result of doing so. New high-rate
bonds will be made more not less attractive since there will be as

253

- 14.
excellent chance of their appreciating in the years immediately felloving the MAP when interest rates are lowered.

It will be observed that these have born based
on a series of three assumptions: first, that the infastrial and fiscal
controls likely to be undertakes is the absence of imediate credit
control are not likely to prevent the emergence of the visions sycle
of inflations account, that the inflationary sycle when 10 energes may

possibly be killed by elesine the private loan market, but certainly
not If investors' 1410 funds have continued to increase at a rapid rates

third, that 11 10 politically and administratively feasible to undertake
the preliminary erolis controls and the additional fiscal planning which
will be necessitated (and which, in fact, will be the most valuable produet of the credit estrole). Without signing these assumptions, the
reasoning underlying the conclusions on be developed with the help of
some figures.

The two charte attached show the estimate ownership of posite and currency over the past decade. There estimates are fairly
accurate for the years 1934-1938, somewhet less se for earlier and later

years. In the second chart the each of *individuals" (intended to or
elude is AB approximate way the cash of unincorporated businesses) is

broken dona into (1) savings deposits, (2) *ensorreption each arbitrarily
teken equal to half a month's "national income payments", and (3) other
cash. Changes in the last category roughly represent changes is reserve

cash of investors and heards. As an infex of heards or "tale money" is

254
. 15 .
the sense of senaturally large investment reserves, 100 variations

from average probably understate the real situation w $2 or #3 billion
in 1931 and 1932 and may overstate 19 by 01 OF $2 billion is recent

years. As of the and of 1935 18 is indicated that investment-and-idle
money was about $1 billion greater than is 1989: by the and of 1940
the excess was $9-1/2 billions.

The table bringe together a member of significant fasts lating to the distribution of Government debt and of each holdings
since the and of 1935, along with four soto of hypothetical statements
for the years 1941-42. The first two of these represent developments
with the defense program and tax structure approximately as assumed is
Mr. Metston's semorandos of March 24, 1941, the first column assumes

adoption of the program on pages 5 and 6 of this and no rise
in the price level, while the second assume a 20 per cent rise in

prices over the two years. Similarly, the second of the last pair of
columns assuses a 40 per sent price rise under a considerably enlarged

defense program, As will be above later, the construction of a table

like this for future periods involves the hidden assumption that the
amount of current saving (or increases is individual assets) implied w
the figures is consistent with the assumptions made about national incone
and the price level, and measures taken to enforce saving.

One more column might have been added to illustrate the ample that vas eited on page 11 above. This example combined the as

sumption as to price level of column A-2 with the assumption as to

255
- 16 distribution of Government debt of column B-2. The appropriate figures
may be derived by adding $10 billion to lines 2. 3, 5. and 13 of column

A-?, and defecting $10 billion from line 14, the other figures in that
column remaining unchanged.

A brief comment may be made upon each of the main items. In

10th and 1942, Government financing with the banks and public will be

at a rate from 10 to 15 times the average rate of the last five years.
Connercial bank holdings will increase at least twice as fact, perhaps
5 OF 6 times as fast, The growth of desceits and currency outstanding
will exceed the growth of commercial bank investments as in past years,

though this will now be the more to expansion of loans than to gold
inflows. Holdings of "nonindividuals" may either increase OF decrease,
depending most importantly upon the effect of price changes upon non-

financial business holdings. The figures for the letter understate the
changes in total business each and equivalent (from an estimated level
of about $13 billion at the and of last year) because 11 has been assumed

that 12 billion of a special offering of Government securities will be
purchased by corporations.

Under any circuestances short of an actual deeline is bank

assets, 11 someans certain that individuals" cash holdings will in-

crease. Horeover, the rath of increase will be greater than even in
1939 and 1940. The case will be true of the growth of individuals'
investment-and-id1e each, despite the probably more Papid increase in
savings demosite and in cash needed for current
turnover.

256
17 -

The amounts of Government securities to be absorbed by

individuals in 1941 and 1942 under the various accupations, as shows in

the last line of the table. are derived by deducting the assumed increases

is bank and other institution holdings from the figures is line 1. Is
every case these amounts are well-nigh astronomical as compared with

individuals' net absorption of Government securities is recent years.
Individuals have been buying several hundred millions a year of savings
bonds, and disposing of other issues on balance. What is required,

then, is an increase is the absorption of savings bonds and a reversal
of the aggregate position of individuals toward the marketable issues.
The Treasury hopes that the new savings bonds will bring in free $2-1/2

to $4 billions a year. If other issues can be sold to the noninstitutional
public is annual volume of say $2 or #3 billions a year, is would be

possible to fulfil the conditions of three of the hypothetical colume.
That is, with a defense program not exceeding $21 billions is 1941-

1942 (or $15 billions in findal 1942) 11 should be possible to get along
without selling more than $5 billions to the commercial banks (selum

4-1), and if there was no restriction of bank credit the financing
problem would be still easier (column B-1). Likewise if there is a
substantial expansion in the defense program as assumed is column B-2

the financing problem will not be too difficult, If $15 out of 829 billions to be borrowed are obtained from the banks. In each of these
cases forced leans would presumably not be accessary during the period

considered, but 11 would be a great help is obtaining the marginal $1

or $2 billions to be able to offer higher interest rates than new

257
18 prevail and to be able to assure investors that the rates offered would
be the maximum ever to be available. This will be particularly impor-

tant if a positive effort to limit bank expension is undertaken through
an immediate out is excess reserves.

If the defense effort is yet to be enlarged again is the near

future, to an expenditure total of say $20 billions is fiscal 1942, a
thoroughgoing and successful program to prevent inflation by reducing
excess recerves and restricting bank expension would require the sale

of perhaps $19 billion of securities to individuals 1/. or else equivaleat measures of extra taxation and forced leading. This is the example
shown in column A-2, and already mentioned on page 12 above. To repeat

what was said there, nothing could accomplish the purpose of preventing

inflation sere satisfactorily than this kind of a fiscal program to
keep Government debt out of the banks.

Are the hypethetical figures for "individuals' heldings is
this table, especially is column A-1 (presently estimated defense program

with control of bank expansion). consistent with other applicable date
such as the estimated average national income of about $90 billion over
the two-year period ahead? And can figures arrived at as these are

by a calculation of residuals be taken to represent a probable or

possible situation? The estimation of change is total holdings of
cash offers no difficulty, once accumptions have been made as to the
amount of change in bank assets. The figures for other holdings
The taxes assumed in deriving this figure already include some
additional levies to become effective innodiately during the
fiscal year 1943.

1

258
- 19 say be sonehvat in error, but they reflect se far as can be estimated
the probable desires of the various groups to hold cash; considere-

tion is also gives to such factors as volune of capital expenditures
or investments and availability of funds from earnings or borrowings.
There is nothing inherent is a great increase in bank deposite which
automatically forces anyone or any group to hold its proportionate
share of the increase. But can similar reasons be offered to explain

why individuals are likely to hold just the amount of cash that the
residual calculation has allotted to theat Is there not something
paradoxical in the expectation that individual cash holdings will
increase se sharply while at the same time the assumption is being

made that individuals will aboorb a very large voluse of new security
offerings?

This question is posed in a most violent way by the figures
in column A-2, where individuals are expected to absorb a total of
#30 billion of cash and Government securities (or perhaps submit to
heavy taxation), and is column B-2, where they are expected to aboorb

124.5 billion (the total of figures in fifth and bottom lines). Celmm A-2 offers the lesser difficulty, because 11 was assumed in this
case that price stabilisation succeeds. It succeeds only through
very drastic taxation, as a substitute for part of the assumed borrowing. OF through forced loans. The very same thing that maintains

price stability -- and thereby justifies the estimates made for non-

individuals and the whole residual calculation - will force individuals

- 20 -

259

to absorb Government debt (or be further taxed) on top of a rather
large increase is their aggregate each holdings, especially in those
held idle by investors OF as heards.
The case of column B-2 is somewhat different. The assumptions

here are: no restriction of bank expansion, and a 40 percent price
rise by the end of 19421 national income will therefore average about

$110 billion. The greater rise is national money income calls for a
considerable increase is cash turning over from week to veek, and this

increase is individuals' average holdings will no doubt be is the
nature of as addition to whatever other increases in individuals'
assets might occur as the result of what 10 ordinarily called saving.
There will also be a somewhat greater that ordinary increase is savings
deposits, and a very considerable increase in business cash holdings,

permitted by larger profite and required by the higher price level of
commodities and labor. Thus the final residual of "individuals"
investment and idle each" (8.5) when added to the assumed absorption

of Government securities by individuals (9.0) adds to a total no

larger than that assumed is column A-1 (6.9 . 11.0). This in itself
does not necessarily validate the B-2 estimates, even if the A-1

estimates are acceptable. Despite the probably higher level of isdividual savings in case B-2, 11 is probable that under been conditions
a part of these savings would be placed is real estate and stocks

rather then in cash and bonds. If, in the final analysis, 11 should
be decided that the residual estimate is column B-2 does not correspond

to the probable faste of the situation as defined, then the whole

260
21situation must be redefined. IS sight be that with Government expendstures as large as here assumed, and with no restriction ea bank expen-

sion, that the price increase would be even greater, that business

cash would be built up still more, and that a revised residual sales-

lation of individuals' holdings would finally check with a direct
and independent estimate.

Finally, we return to the case presented in column A-1
(presently estimated defense program with control of bank expension).

The residual calculation of increase is total individual holdings
(including savings deposite and turnover each) 10 $11 billion, and
the assumption of individuals' absorption of Government securities

is another $11 billion for the two-year period. Can we conclude,
on independent grounds, that these are reasonable figures and that

the basic accumption of avoidance of price inflation is therefore
validated?

Let us first compare the yearly average total increase of
cash and Government debt heldings of individuals, $11 billion,
with the corresponding average for 1936-1940, 63 billion a year.

This is not encouraging at first eight. On the other hand, the rate
of individuals' saving (abstention from consumption OF increase is

not worth), will average considerably higher in 1941-1942 than is
1935-1940, some estimates would seen to place the probable differ-

ence as high as #4 or 85 billions. New savings placed is life insurance
will apparently continue at much the same rate as is the earlier period.

In the earlier period the not aggregate change is individuals' assets

- 22 -

261

other than each, Government securities, and insurance appears to have

been rather small and perhaps negative, according to the rough esti-

sates that are available, Is the earlier part of the period some
not saving vas probably applied to repayment of debts: in the latter
part some may have gone into home equities; individuals appear to

have been not sellers of private securities on balance. If ve cas
assume that the part of new saving going into these and other mis-

collaneous forms will continue to be small or even negative on bal-

ance is the coming period -- and the restriction of credit will help

by reducing residential construction activity - we still seen to
be about $3 OF $4 billions a year short of the necessary $11 billions.

The following alternative conclusions are indicated: either the
additional necessary new saving by individuals can be induced by

stabilising and increasing interest rates, with the help also of
an intensive promotion campaign for savings bonds, or the original

conclusion that the price level could be stabilised without more
drastic increases in taxation appears to be invalidated.
One other angle of the problem deserves attention. New

are the changes is cash holdings and in bond holdings likely to be

distributed as between the rich and the less well-te-do? It is
probable that the major part of presently existing "investment and
idle funds", perhaps two-thirds of it or more at a guess, belongs
to the group who reported taxable incomes over $5,000 is 1936 and

1937 and who had an aggregate taxable income of about #9 billion a

year out of national income payments to individuals of about

262
- 23 -

670 billion is these years. Much of the aggregate not saving of
recent years that went into each and savings bonds vas probably
performed by these people, but 11 does not seem likely that even

with their total incense after taxes reaching say $12 billion a
year they are likely to save more than a half, let us say, of the
required $11 billions a year. Thus, not only must total new
saving of individuals be increased, but new saving of the large
lover-income group must especially be stimulated. The lever group

can be expected to "save" - 1.0., add to its holdings - most of
the $1/2 billion a year increase in active consumption each. IS
will also acquire a simer part of the added savings deposits and
idle cash. Beyond this, 11 must be stimulated OF if necessary

forced to lead to the Government, or be taxed, if we are to pass
through 1942 without the beginnings of price inflation.
In conclusion, the one point which deserves meet emphasis

is a discussion of general credit restriction is that the chief
virtue of such a policy lies is the Treasurys adherence to 19,
implying a determination to out down, by taxation, voluntary saving
OF forced saving, the effective consumer denands which compete is
time of economic war with the Government's own demands for relatively
scaree supplies of labor and goods.

263

ABN

3/27/43

Appealls

The Banks as Dealers is Government Securities

The attractiveness of Government securities as investments

depends not only on the perfect certainty of receiving interest and

principal payments when due, but also on their liquidity - the

possibility of disposing of them at any time at a fair price.
Government securities may be either negotiable OF sea-

negotiable. Liquidity is given non-negetiable securities -- such
as the outstanding savings bonds and the proposed new issues of
savings bonds - by the Government's promise to redeem on donand

OF after a specified notice period. The Treasury would find 18
undesirable to have a very large part of its debt redeemable upon

notice OF domand. It will therefore continue to issue marketable
securities, even if 11 adopts the tap method of sale for some of
then.

Marketable securities must have a market. The beaks are

now an indispensable part of this market. Individual transactions
is Government securities frequently reach a such larger sise than

is ever reached by individual transactions in stocks ea the exchanges,
or even by 'secondary distributions" of stock heldings through syndicates of underwriters and dealers. The half-dosen non-bank dealers
in Government securities would provide, by themselves, as utterly
inadequate market. of course, many of the large sales come from
banks. But even if we imagine the banks somehow forced to hold

2

264

their Government securities to maturity, never selling any part of
their holdings, the non-bank dealers would provide an incloquate

market for other offerings.
There are three waye is which this inadequate market eas
be supplemented. One is the present may, whereby banks is general

buy and sell and some banks is particular operate special trading
departments. So long as other arrangements are not made to provide
as adequate market, 18 would be entirely inadvisable to prevent
banks fres buying and selling any Government securities that are to

be otherwise negotiable. Erea If excess reserves were greatly reduced OF eliminated the banks could be freely allowed to carry out

this function of asting as dealers. The Federal Reserve System

might provide special discount facilities, at a low rate, to finance
dealer transactions on a surnover basis.
A second way of providing as adequate market 10 to lot
both the member banks and the Federal Receive Banks deal is securi-

ties. The Federal Reserve Banks sight enter the market parely as

breker-dealers, accepting the bids and offere of others, OF they

night operate as traders initiating transactions. The more they
operated as traders the more nearly the market could be pagged.

It may be desirable to pag the market during a period is which a

vast quantity of securities are to be sold. One usual objection
to the Federal Reserve Beaks' operating is this way is that their
operations would affect the reserve position of the member beaks.

265

-3This objection may less its force in the present situation. On the
one hand, if a program of credit restriction is adopted 10 might
include the "eeiling" reserve plan, under which multiple expension
on newly acquired reserves is not possible. Net only could the
Reserve System safely peg the market; 11 could safely stand

ready to abserb any persistent shortage of funds. This would set

at rest fears that credit restriction sight cause a real breakdova
in Treasury finance. On the other hand, if a program of credit
restriction is not adopted, changes in excess reserves due to
Federal Reserve trading operations would be of little consequence.

The third way of providing an adequate market is for the
Federal Reserve Banks to supplant the member banks entirely. In
this case 11 would be possible to prehibit banks from purchasing
any Government securities during the emergency and to prohibit them

from ever selling Government securities before saturity. But no
purpose would be served by this drastic innovation that could not
be well served in some other way.

+5.0
+29.0

+15.0

-0.5

-0.4

+0.2

+1.2

*4.5

+4.0

+3.0

+9.0

+6.5

+15.5

+20.5

exp. = 40

A-2 : 3-2

-0.5

+5.0
+10.5

+29.0

:

+0.8

-0.3

+0.1

-0.4

-0.7

+3.1

+6.9

+1.0

+11.0

+19.0

:

2 years

B-1
+6.0

+1.0

-0.4

-0.4

+0.2

+1.0

+0.6

+3.5

+2.0

+7.0

+3.1

+1.0

+6.9

+8.0

+12.5

+13.5

+21.0

:

exp. = 30

A-1

-0.5

+5.0
+10.5

+21.0

-0.3

+0.1

+0.8

-0.4

-0.7

+11.0

+11.0

:

Hypethetical, End 1940-End 1942

:

+4.2

+2.7

+2.8

-0.2

+7.9

+0.4

+0.5

+0.7

+0.4

+1.9

+1.4

+5.6

+0.7

+2.8

+1.1

+10.7

2 years

years

Estimated Changes

End 1938 : End 1940 :

+5.9

+1.4

+7.3

+2.2

+0.4

+5.1

+0.5

+0.2

+0.2

+2.1

+1.1

3

and 1935- Sand 1938- : Nat'l defense : Nat'l defense

(in billions of dollars)

Estimated and Hypothetical Changes in Cash Moldings, 1936-1942

(excluding deposits at Federal Reserve Banks and interbank deposits)

investment or hearded 6/

consumption 5/

viduals" if additional taxaties

were not imposed I/

And Hypothetical Amount and Distribution of Increase in Government Debt

percent.
Under A-1 and A-2 18 is ascessed there is me price rise. unier 3-1 20 percent. water 3-2 40

Demand deposits and currency held for
Currency and demand deposits held for

Savings deposits
Nonfinancial business, corp. and other

Other public bodies
U. S. Government

Foreigners

Financial corps. and bank trust depts. 3/

Note: It is assumed that national income at present prices, reaches $100 Million by the and of 194e.

Gov's securities to be absorbed by "indi-

Holdings of "individuals":

Holdings of
Gov's securities of commercial banks

Gov't public securities. incl. savings bonds 1/

Total heldings of deposite and currency 2/

Holdings of "unindividuals"

Heldings of "individuals"

1/ Includes guaranteed debt. Excludes adjusted service bonds and securities held by trust funds
and agencies. Under columns A-1 and B-1 the amount in fiscal 1942 would be 11.5. under column
A-2 and B-2, 16 billions. Tax revenues are assumed as is Mr. Edmiston's menorandum of March 24,
1941, except that under A-2 and B-2 still other additional taxes are assumed in fiscal 1943. to
yield #4 billions immediately.

2/ Holdings are the Board's figures for "Total deposits and currency in the United States", with as
additional deduction of float to allow for checks in transit between payers and receivers. (The
usual adjustment for float is for items in transit between banks.) The hypothetical figures is
the last four columns assume, in addition to the increase in commercial banks holdings of Generament securities shown is the line above, an increase is other loans and investments of 40 at
commercial and savings banks and an increase in currency and/or bank reserves of 3.1; also as
increase is float between depositors of 1.6.

3/ The hypothetical decreases are mainly for life insurance companies.
by The hypothetical changes assume in all cases that 2.0 of Government securities are purchased.
Cash and marketable securities is assumed to increase 10 percent under A-1 and A-2, 20 percent
under B-1 and 40 percent under B-2.

5/ It is assumed that money held for consumption purposes is equal to one-half month's "national
income payments". See Note below table.

6/ This is a residual item.
The 1936-1938 figure excludes 0.7 of adjusted service bonds. The hypothetical figures for
securities to be absorbed by individuals are computed by subtracting line 2 from line 1 and further
subtracting $5 billion for securities sold to life insurance companies (2), autual savings banks
and other financial institutions:(1), and nonfinancial corporations (2). The amount absorbed by
individuals in the fiscal year 1942 would be about half the figure in each of the last four column.
See footnote 1 for the taxes that have been assumed.

268
B-1259

August 11, 1941
(Revised)
ANALYSIS OF RESERVE POSITION OF MEMBER BANKS,
VEEK ENDEC FEDNESDAY, JUNE 25, 1941

by

John E. Horbett,

Assistant Chief, Division of Bank Operations
Member bank excess reserves during the week ended June 25, 1941

amounted to approximately 5.2 billions. If reserve requirements were increased
to twice basic statutory requirements (the maximum allowable under present law)
excess reservcs would be reducbd by approximately 1.2 billions. If the law

were amended and requirements were increased to two and ono-half times the

present basic statutory requirements, excess reservos would be reduced by 3.4
billions And would thon amount to 1.8 billions. The summary figures by classos
of banks are shown in tho following table
EXCUSE

Class of banks

reserves
on present
basis

Reduction which would result if
requirements were increased to-2-1/2 times basic
Twice basic
requirements

requirements

(Millions of dollars)
all minter banks--total
Control reserve city banks
No York
Chiesgo

Russer city banks

Country banks in places with a
population of-100,000 or moro
15,000-100,000
Under 15,000

5,231

1,172

3,423

2,202

531

1,588

410

105

311

1,750

352

1,031

230

47

326

72

313

65

127
193
173

An analysis has been made of the reserve position of individual member
tente turing the rock ended Junc 25, 1941, and the results are shown in the
tying st tements. The analysis is based on information supplied by the
: Reserve Banks in response to the Board's telegram of July 11. One part
cheme THE effect of an increase in reserve requirements to twice basic statutory

Ford

Guir

nts: th. other shows the effect of an increase to two and one-half times

statutory requirements.

269
-21. If reserve requirements were increased to twice basic statutory

requirements 26% 20%, and 14 on demand deposits and 6% on time deposits-All but 43 member banks could meet such an increase in requirements

either out of their present excess reserves or by converting up to
one-half of their balances with other banks into reserve balances.
The 43 banks would have an aggregate deficiency of

$782,000 after converting one-half of their bank
balances into reserve balances; 23 of them would
each have a deficiency of $5,000 or loss.

The largest of those 43 banks had total assets of
27 millions, the second largost 14 millions, and

the third largest 6 millions.

35 of the 43 banks work country banks located in
places with E. population of less than 15,000. The
average ratio of loans and investments to total
cssets of those 35 banks was 845. compared with
64% for all country banks and 62% for all member
banks. Over ono-half of these 35 banks were in
the three eastorn Federal Reserve districts.

A statement listing these 43 banks and showing their
loans, investments, deposits, etc., on June 30 is

attached. It will he observed that in nearly all

cases the ratio of bank balances to deposits of these
banks wes considerably below that of the average bank.

1,441 banks with resorvo balances less than twice basic statutory
requirements could meet such an increase by converting up to cnohalf of their balances with other banks into reserve balances;
their aggregato doficiencios before such conversion would be 67
millions.
About throo-fourths of the banks whose reserve balances were not
sufficiont to moot an increase to twice basic requirements would
have sufficient reserves after convorting not more than 10 por
cont of thoir bank balances into reserve balances. Thore wore a
few banks, however, that would not have enough reserves even after

converting all of their bank balances into reserve balances. The
accompanying table distritutes the member banks according to the
percentage of bank balances that would have to be converted into
reserve balances.

B-1259

(Revised)

-3-

270

DISTRIBUTION OF YEP BER RAPKS ACCOPDING TO THE PERCEPTAGE
OF BANK BALANCES THAT VOUID HAVE TO BE CONVERTED INTO
RESERVE BALANCES TO MEET AN INCPEASE IN RESERVE
REQUIREMENTS TO THICE BASIC REQUIREMENTS

Number of banks that would have to convert
the following percentages of bank balances
into reserve balances--

Number

Total
number

Class of banks

of

banks

with

sufficient

10%

reserves

or

216

61

31-

51-

71-

Over

50%

70%

100

100%

59

1 is

8

J --

40

60

2

--

--

--

265

199

138

6. 45

1,001
4,956

733

219

32

3,895

779

156

4

1

Country banks in places

--

-3

3

9
2

2
1

with C population of--

1

--

--

14

345

Reserve city banks

-3

1

3

1

12

Chicago

10 2

26

1

36

New York

1

Contr 1 reservo
city banks:

100,000 or more
15,000-100,000
Under 15,000

19

17

7

1

.11 norber br.nks

1, 105

5,065

30%

20%

loss
6,549

21-

11-

5

47

7

44

6

14

15

1,061

B-1259

(Rovised)

-4-

271

2. If resorvo requirements woro increased to two and ono-half
tinos basic strutory requirements -- 32-1/2%, 25% and 17-1/2% on
donand deposits and 7-1/2% on tino doposits-261 member banks would have to provido additional reserves after

converting one-half of their balances with other banks into

reserve balances. These-banks would have an aggregate deficiency

of 180 millions after converting one-half of their bank balances
into recerve balances.

2,977 banks with reserve balances less than two and one-half
tincs basic statutory requirements could meet such an increase
by converting up to one-half of their balances with other banks
into resorvo balances.
3,311 banks--about half the total number of member banks--had
reserve balances sufficient to meet an increase to two and one-

half times the basic statutory requirements.

B-1259

(Revised)

CHART 1

DISTRIBUTION J HOLDINGS
UFI DEPOSITS AND CURRENCY
1929-1940

Hypothetical

clusing present
befendo

the rost ridtion
of bank expuncion

80
80

70

TOTAL HOLDINGS
OF CASH
60
60

Tot+1 deposits sad
currency In U. SIN

CO

Gov

50

individual
20

1329 1930 1931 1932 1933 1934 1335 1936 1937 1938 1939 1340 1341

134:

273

CHART 2

Hypothetic I
(see chart 1)

CASH HOLDINGS or "INCIVIDUALS"
1929-1940

Savings deposits
20

"revertment photos deposits

10

currency and depisits for consumption purposes"

davings Deposit4

Computation
cash

Investors and dde cash
1320

1371 137 1333 1384 1375 1336 1337 1338 1389 1340 1341 134

6
35

14

-458
-224

3,895

1,026

4,956
-9,416
90,291

15,000

257,959

313,281
Centrel Reserve

Country benice

248,085

Less than

and over

5
733

263

-56

6

-135

14
1,001

B-1259
266,422

-12,432

151,272
326,163
253,855

15,000-

(Revised)
100,000

1
60

6

14

138

199

-18

14

-6,566

80,692

189,143

100,000

182,559

229,634

ll
6
14

-611

4,766

-294

1,349

6,156

Total

-28,414

713,524

322,255

869,078

684,499

1
79
-52

-25

265

345

6
20

-34,695

city

213,423

banks

1,432,567

1,749,663

Reservetwice basic statutory requirements:In places with a population of--

1,397,820

4

8

12

6

--

--

26

-2,893

-2,325

410,160

307,908

305,583

Chicago

1

9

36
26

6

-567

26

-463

2,402
-1,974

city banks

New York

1,670,760
2,201,546

1,673,301

43

-782

6,549

1,441

5,065

-1,230

-67,408

540,973

All

banks

4,058,662

5,230,447
4,127,300

On time deposits

Reserve percentagos, if increased toin reserve requirements:On domand deposits

twice basic statutory requirements

balances into reserves

balances into reserves

Number of banks

Excess reserves if requirements were increased

Number of banks

Excess reserves if requirements were increased to

Deficiency in reserves before convorting bank balances

Excess reserves on present basis

Number of banks

Excoss reserves after converting half of tank

Deficiency in reserves before convorting bank balances

Number of benks

Deficiency in reserves after convorting half of bank

convorting half of bank balances into reserve balances:

than half of their back balances into reservo balances:

ANALYSIS OF RESERVE POSITION OF HEMPLE BANKS, BEEK ENDED WEDNESDAY, JUNE 25. 1941

CONFIDENTIAL

1. Banks with reserve balances sufficient to meet the inercaso

4. All member banks:

Note: Due to the fact that balances due from banks are deductible from domend deposits subject to reserve, a withdrawal of such balances results

in some increase in required reserves. If allowance is made for this, two banks would move from group 2 to group 3 and would have small

3. Banks that would have to provide additional reserves after

2. Banks that could noot the increase by convorting not more

deficioneiss in reserves after converting one-half of bank balances into reserve balances.

Table 1--Assumine an increase in recerve requirements to twice basic statutory reserve requirements

(Based on averages of daily Cigures: amounts in thousands of dollars)

member

74
9

7
30

4

5

23

40

15

25

74
197

--

--

--

--

--

--

--

100

176

276
San

123

Francisco

5

7
36

155

410

1

2

1

5

29

34

46

12

-

570

135

346

486

B-1299

(Revised)
Dallas

6

2
36

50

--

--

--

737

3

3

2

14

51

27

24

--

214

521

630

455

377

288

173

City

Kansas

4

9

3

6

6

9

3

1

16

--

--

--

452

50

19

31

86

-

114

334

apolis
Minne-

5

7
24

88

17

17

12

34

44

66

10

St.

-

-

-

--

--

337

Les

340

274

Louis

4

8

1

5

9
45

65

12

1

14

20

735

76

39

--

144
880

151

638

112

20

561

Chicago

9

-

--

--

--

245

11

10

54

72

44

18

--

317

1

12

21

-

72

213

169

327

261

495

413

522

396

Atlenta

34

1

2

1

65

23

50

73

31

--

-

--

344

--

437

3

1

2

2
91

mond
Rich-

3

3

6

30

33

26

79

18

95

20
113

-

--

--

--

106

558

667

-

3
land

Cleve-

3

9
-

-

9

1

7

2

2
19

19

22
145

501

655

69

92

17

21
119

Phila-

delphia

14

36

8

3

3
40

11

26

655

10

62

30

14

26

163
787

130

537

465

194

144

118

York

New

3

9

36

--

--

48

34

--

249

34

72

12

24

47

106

-

346

3

1

10

94

Boston

1

1

1
43

345

5

35

60

79

13

199

265

733

138

263

4.956

1,001
5,065

6,549

1,026

3,895

1,441

Total

number

not

could

that

number

assuming an increase in reserve requirements to

the number that could have have not such on increase by converting helf of their bank balances into reserve balances.

(a) (b) the number of banks that not such an increase by convorting half of their bank balances into reserve balances, and

O. Reservo balances plus 1/2 bank balances insufficient

b. Reservo balances plus 1/2 bank balances sufficient

b. Reserve balances plus 1/2 bank balances sufficient

a. Reserve balances sufficient

0. Resorve balances plus 1/2 bank balances insufficient

a. Reserve balances sufficient

O. Reserve balances plus 1/2 bank balances insufficient

be Reserve balances plus 1/2 bank balances sufficiont

b. Reserve balances plus 1/2 bank balances sufficient

a. Reserve balances sufficient

be Reserve balances plus 1/2 bank balances sufficiont

a. Reserve balancos sufficiont

C. Reserve balances plus 1/2 bank balances insufficient

a. Reserve balances sufficient

0. Reserve balances plus 1/2 bank balances insufficient

C. Reserve balances plus 1/2 bank balances insufficient

a. Reserve balances sufficient

D. Reserve balances plus 1/2 bank balances sufficient

ANALYSIS OF RESERVE POSITION OF PEPEE

CONFIDENTIAL

*The groupings a, b, and O, undor had each reserve main classification, balances sufficiont show-- to moot an incronso to twice basic statutory requirements,

1. All member banks--total

6. Country banks, population loss than 15,000--total

5. Country banks, population 15,000-100,000--total

4. Country banks, population 100,000 and over--total

3. Reserve city banks--total

2. Central reserve city banks--total

Table la--Assuming an increase in reserve requirements to twice basic statutory reserve requirements

Number of banks, by Federal Peserve districts-

twice basic statutory requirements*

the

(c)

7

St

186

2,562

7-1/2

2,208

17-1/2

4.956
-6,362
193,582

-2,363

-46,736

15,000
163,372

313,281

Less than

140.18h

31

469

481

1,001

7-1/2
-4.457

-2,016

199,217
-61,200

17-1/2

227.406
(Revisod)
133.560

326,103
15,000

100,000

90

99

10

199
-615
7-1/2
17-1/2

100,000

-1,998
142,896

-38,289
124.372

and over

103.009

229,634

227

3,141
2,788

7-1/2

6,156
17-1/2

Total

-5,516
535.695
515,152

-12,417

869,078

377,053

-146,225

18
147

180

7-1/2

345

25

city
398,075

banks
Reserve

-61,224

In places with 4 population of--one-half times basic statutory requirements

718.715

-179,867

-104.386

1,002,968

1,749,663

7

3

2
12

7-1/2
32-1/2
-9,463

16,150

-6,181

-3,767
96,894

114,538
Chicago

410,160

6
16

14

36

city banks

Control Reserve

Country banks

7-1/2
32-1/2
-5,437
New York

1/551

738,454
613,216

-119,601

-109,695

2,201,546

261

3,311

6,549

2,977

All

928,826

banks

22,785

-340,992

-180,202

5,230,447

1,807,878

2,391,655

On demand deposits

member

On time deposits

Reserve percentages, if increased to two and

balances into reserves

balances into reserves

two and one-half times basic statutory requirements

banks.
Excess reserves if requirements wore increased

Number of banks

Excess reserves after converting half of bank

Deficiency in reserves before converting bank balances

Number of banks

Deficiency in reserves before convorting bank balances

Deficiency in reserves after converting half of bank

Excess reserves on present basis

Number of banks

Excess reserves if requirements wore increased to

in reserve requirements:

than half of their bank balances into reserve balances:

ANALYSIS OF RESERVE POSITION OF MEMBER BANKS, WEEK ENDED WEDNESDAY, JUNE 25, 1941

CONFIDENTIAL

3. Banks that would have to provide additional reserves aftercomo incrunse in reserve requirements. If allowance is made for this, a number of the banks in group 2 would movo into group 3 and would

4. All member banks
have same deficiencies in reserves after converting one-half of bank balances into reserve balances.

Note: Due to the fact that balances due from banks are deductible from domand deposits subject to reserves a withdrawal of such balances results in

1. Banks with reserve balances sufficiont to meet the increase

Number of banks

2. Banks that could meet the increase by convorting not more

converting half of bank balances into reserve balances:

1 This aggrogate not deficiency is due to the increase in reserve requirements which results from . withdrawal balances due from B-1299

.
3
30

13

9

7

2

9

1

15

12

13

40

-

--

-

--

179

26

57
197

--

84
276

131

San

Francisco

2
36

22

1

1

1

19

17

19

40

21

20
486

268

570

243

222

267

34

280

6

1
50

15

4

2

B-1259

34

15

51

14

31

20

630

-

304

--

418

(Revised)

737

City

Kansaspallas

9

4

7

2

1
50

31

18

240

13
170

377

--

194

452

4

8

16

18

194

apolis

Minne-

3

5

6
24

3

8

9

44

17

16

23

21

340
--

--

208

211

161

415

216

--

425

176

Louis

St.

3

7

3

2
65

12

12

5

34

28

7

9
76

75

14

638

151

2

338

530

880

Chicago

5

3

7

1
15

21

2

4

43

29

72

11

--

-

173

--

141

317

111

100

213
--

Atlanta

34

4

2

1

2

40

31

73

14

19

140

183

327

-

195

235

437

Rich-

3

1

7

mond

17
495

113

--

265

278

200

--

381

667

44

66

16

26

12

21

3

1

9
33

21

land
Clove-

Number of banks, by Federal Reserve districts-

and one-half times basic statutory requirements*

8

19

48

39

48

92

10

522

255

219

--

325

655

5

9

2

12

22

55
275

dolphia

Phila-

468

787

Now

14

16

1

3

5

3

6
36

63

18

40

11

163

103

106

46

32

13

47

21

537

328

177

256

York

5

4

1

1

8

14

36

10

18

55

90

--

-

162

-

158

--

346

16

88

194

26

Boston

9
48

90

18

16

23

99

31

10

186

481

489
199

180

147

345
261

4,956

2,562

2,208

1,001

Total

3,311

6,549

2,977

number

could

that

number

the

assuming an increase in reserve requi ements to two

a. Reserve balances sufficient

b. Reserve balances plus 1/2 bank balances sufficient

0. Reserve balances plus 1/2 bank balances insufficient

C. Reserve balances plus 1/2 bank balances insufficient

be Reserve balances plus 1/2 bank balances sufficient

a. Roservo balances sufficient

C. Reserve balances plus 1/2 bank balances insufficient

(b) the number that could have not have not not such an increase by converting half of their bank balances into reserve balances.

be Reserve balances plus 1/2 bank balances sufficient

(a) the number of banks that had reserve such an inercase by converting half of thoir bank balances into reserve balancos, and

a. Reserve balances sufficient

c. Reserve balances plus 1/2 bank balances insufficient

b. Reserve balances plue 1/2 bank balances sufficient

a. Reservo balances sufficiont

G. Resorvc balances plus 1/2 bank balances insufficient

Distribution of number of banks, by classes,

b. Reserve balances plus 1/2 bank balances sufficient

a. Reserve balances sufficiont

b. Reservo balances plus 1/2 bank balances sufficient

C. Reserve balances plus 1/2 bank balances insufficient

a. Reservo balances sufficiont

The groupings a, b, and c, under each main classification, balances sufficiont show-- to meet an increase to two and one-half times basic statutory requirements,

6. Country banks, population less than 15,000--total
5. Country banks, population 15,000-100,000--total

4. Country banks, population 100,000 and over-total

ANALYSIS OF RESERVE POSITION OF MEMBER BATES. TEEK ENDED 1 ZDN..SDAY, JUNE 25. 194

CONFIDENTIAL

Table 2a--Assuming an increase in reserve requirements to two and one-half timos basic statutory reserve requirements

3. Reserve city banks--total

1. All member banks--total

2. Control reserve city banks--total

(e)

.4

.5

1.2

1.2

1.1

1.7

2.7

4.0

1.3

1.9

20.2

14.3

3.5

.7

.6
4.1

1.2

2.5

2.7

to

Bank

deposits
balances

4+9

1.1

7.4

13.6

13.3

20.0

44.6

27.6

37.E

10.2

16.6

4.6

7.9

5.6

B-1259

(Revisod)

11.4

16.7

21.5

Other

tios to

securi-

assets

35.7

15.8

41.8

20.4

41

3.5

1.8

7.8

12.2

21.4

21.5

14.9

12.9

20.6

Ratios (per cont)

ties to

securi-

assets

U.S.Govt

36.1 29.1

19.6

15.3

70.9

45.3

42.5

82.0

81.7

32.3

25.4

29.1

le.8

74.5

67.2

63.3

56.7

66.3

48.1

69.0

to
Lorns

assets

88.5

67.1

73.2

81.2

79.5

73.9

79.2

71.6

85.7

854

369

82.9

89.9

82.6

79.7

81.1

605

L81

84.5

invest-

assets
Loans and
ants to

2
649

511

De-

292

1,650
4,468

posits

1,389

4.034

3,095

3,864
16,850

6
9 2,467

55

35

77

3

9

2

25

16

10

30

Le
326

110
148 12,630
270 23,375

banks

Balances

due from

35

69

35

76

80

53

50

78

26

54

106

628

470

667

259

975

2,793
2,776

3,619
ities

secur

Other

8
74

27

92
388

231
723

205

263

5,693

1,038

1,927

1,742
3,836

12,093

ities

secur-

U.S.Govt

452

402

573

305

462

174

435

423

1,067

1,563

1,3Le

1,504
1,870

4,143

7,044

2,212

2,723

In thousands of dollars
Loans

454

362

630

714

606

769

1,883
1,080

3,541

4,886

2,636

4,607

4,838

1,659

19,531

13,908

27,128

Total

assets

25

15

4

17

11

10

56

17

5

5

5

5

6
13

14

463

Addi-

tional

needed

Name of bank

First National Bank

First National Bank
Dolaware National Bank

First National Bank
National Bank of

National Bank of Florida

Poultnoy National Bank

National-Dimo Bank

National Bank of
First National Bank

Fest End National Bank

Calvert Bank

Schrodor Trust Companyreserves

OF TESS THAN 15,000

OF 15,000-100,000
OF 100,000 OR VORE

Falls,vt Enosburg Falls National Bank

COUNTRY BANKS IN PLACES TITH is POPULATION

COUNTRY BANKS IN PLACES 1.ITF A POPULATION

COUNTRY BANK IN A PLACE ITH A POPULATION

RESERVE CITY BANK

CENTRAL RESERVE CITY BANK

population of 15,000-100,000

Total, 5 country banks in placos with a

PROVIDE

of daily figures for the work endod Juno 25, 1941)

Lebanon, N. H.

Poultney, Vt.

Cato, N. Y.

Dolhi, N. Y.

Florida, N. Y.

Headd II. Y.

Harrisvillo, N.Y.

Enosburg

TO

Shamokin, Pa.
Shanokin, Pa.

Groomich, Conn.
Baltimoro, Md.

City and State

Middletown, N.Y.

Kinne-polis Fidelity State Bank
Now York, N.Y.

ASSETS AND LIABILITIES OF BANES HICH, AFTER CONVENTING HALF 07 THEIR BANK BALANCES INTO RESERVS BALANCES, 1.CULD

HAVE

2

(The figures of assets and liabilities are as of June 30. 1941, but the reserve analysis was based on avorages

ADDITIONAL RESLEVES IN ORDLP TC FEET AN INCREASE IN RESERVE REQUIREMENTS TO TV ICE BASIC STATUTORY REQUIREMENTS

CONFIDENTIAL

No.

F. R.

Dist.

5

9

2

2 Hackonsack, N.J. Bergon County National Bank

2

3

3

1

1

1

2

2

2

2

2

8

.9

.6
to

1.5

2.7

.3

1.8

1.2

.9

3.0

1.8

1.8

3.6

4.4

3.5

2.1

3.0

8.6

2.8

1.5

6.0

9.7

4.2

6.6

2.1

5.0

2.1

*9.5

Bank

balances

deposits

Page 2

.5

.6
3.7

4.9

13.9

21.9

10.5

29.0

15.9

10.3

19.8

43.3

E-1259

5.3

6.7

12.9

17.5

30.6

2.8

19.1

2.8

15.1

64.9

29.7

(Revised)

ties to
assets

Other

socuri-

.3
5.5
17.9

12.0

tios to

socuri-

3.1
12.0

41.7

9.3

9.5

7.7

5.7

9.1

7.1

41.2

11.5

34+7

15.0

62.7

70.0

46.8

52.5

63.7

82.8

82.1

84.3

82.5

88.1

14.8

23.2

25.9

39.7

26.8

69.5

83.3

15.1

17.9

14.8

13.0

assets

U.S.Govt.

Ratios (por cont)

9.9
52.4

to

19.2

47.7

79.2

56.0

65.4

29.1

78.4

49.2

62.2

33.4

46.6

58.2

63.0

70.8

77.1

48.8

assets

Loans

87.5

83.1

78.3

87.4

85.5

81.4

86.4

83.2

84.4

74.6

81.9

75.5

82.9

85.1

85.5

84.3

89.9

79.8

20

investassets

Loans and

70
319

436

620

690

419

225

223

545

583

913

498

327

723

607

291

218

120

237

Dc-

1,151

posits

1,197

2,495

4.537

37

5

2

13

53

11

11

4

4

2

2
31

5.787

1,702

15

32

52

12

75

18

25

5

30

20

6

6
121

banks

Balances

due from

53

45

68
631

144

203

43

Le

28

984

19

57

140

219

36

105

317

1

3

2
59

84

25

122

3,914

itics
Other

4
51

39

64

55

40

17
149

218

672

292

25

25

28

75
516

293

268

236

121

319

424

25

20
-0-

107

908

govt.

ities
socur-

scour-

In thousands of dollars

84
154

893

118

222

169

130

168

715

329

174

277

255

243

237

377

138

598

283

136

598

1,240
Lonna

1,143

3,136

1,372

124

529

701

506

264

270

912

643

706

347

299

681

372

808

192

109

assets

Total

1,444

3

8

2

1,366

2,878

4

8

1

1

4

2

2

4

1

2

3

8

6

2

1

3

1

1
30

14

13

21

6,030

1,978

1,035

5,604

tional
Addi-

ments to

needed

reserves

of daily figures for the work ended June 25, 1941)

(The figures of assots and liabilities are as of June 30, 1941, but the reserve analysis was based on averages

Name of bank

State Savings Bank

Second National Benk

First National Bank

St. Marys Stato Bank

First National Bank

First National Bank

First State Bank

Citisons National Bank

First National Bank
First National Bank

First National Bank

Dauphin National Bank

First National Bank
First National Bank

Battle Ground State Bank

Rockbridge National Bank

Catawissa National Bank

First National Bank

First National Bank

Long Island National Bank

National Bank of

First National Bank

First National Bank

Dodson, Tex
St. Marys, Kans.

Lomon, 8. D.
Stoystown, Pa.
City and State
Hermon, N. Y.

Hicksvillo,N.Y

Bakorton, Pa.

Liberty, N. Y.
Remson, N. Y.

Catawissa, Pa.

Ulstor, Pa.

Dauphin, Pa.

Loxington, Va.

Stophon, Minn.

Battlo Ground, Ind.

Granito,Okla.

Annona, Tox.

Cemoron, Tax.

Manistique, Michi

Goorgotown, Ky.
Weatherly, Pa.

Tons Rivor, N. J. First National Bank

Masontown, Pa.

Martinsburg, Pa.
Warronsburg, N.Y. Emorson National Bank

(Continued)

No.
ASSETS AND LIABILITIES OF PERPER RAYS HICH AFTER CONVERTING HALF OF THLIR BANK BALANCES INTC RESERVE BALANCES, 1 OULD TC PROVIDE

CONFIDENTIAL

ADDITIONAL RSSRRVES IN ORDER TO YEST AN INCREASE IN RESERVE REQUIREMENTS TO THICE BASIC STATUTORY REQUIREMENTS

2

2

2

2

2

3

3

3

3

3

3

3

4

4

4

5

7

9

9

9
10

F. R.

Dist.

10

11

11

11

to

2.5

1.6

2.2

11.5
19.5

Bank

22.2

B-1299

balances

deposits

(Revised)

Page 3

49

4.6

21.9

13.0

11.0

17.4

Other

socurities to
ancets

us

7.0

4.9

14.4

19.0
20.0

ties to

securi-

27.2

assets

U.S.Covt.

Ratios (per cent)

67.0

to

48.0

60.8

45.1

31.3

33.4

Loans
assets

78.6

assets

70.6

8463

82.9

64.3

76.0

investments to

Loans and

489

106

Do-

posits

56

24
773 30,941

1,108 50,258

1,526 86,263

banks

Balances
due from

7
26

7,906

itios

secur-

Other

17,353

10,958

7
38

5,193

ities

27,020

11,091

secur=

U. S.Govt

87

In thousands of dollars

364

17,372
Loans

33,152

26,286

143

543

assets

Total

36,163

58,330

99,366

2
13
224

294

782

Addi-

tional

needed1

of daily figures for the week ended June 25, 1941)

banks, as reported for the work ended Juno 25, 1941, word considerably bolow the amount shown in the June 30 call report.

Name of bank

reserves

from

First Stato Bank

First National Bank

due

DAVIDL

ASSETS AND LIABILITIES OF VENDER BAITS HICH, AFTER CONVERTING PALF OF THEIR BANK BALANCES INTO RESERVS BALANCES, WOULD AVE

(The figuros of assets and liabilities are as of June 30, 1941, but the reserve analysis was based on every

16

ADDITIONAL RESERVES I' ORDER TO VELT AN INCREASE IN RESERVE REQUIREMENTS TO TWICE BASIC STATUTORY

balances

populati n of loss than 15,000

Average ratios for all country banks,Apr.4.1941

Total, 35 country banks in pluces with a

Grand Total, 43 banks

Total, 41 country banks

Dumns, Tax.
City and State

Oglosby, Tox.
Average
After converting one-half of bank balancos into reserve balances.

.
(Continuod)

1,
11

No.

CONFIDENTIAL

F. R.

Dist.

11

281
September 3, 1941
2:30 p.m.
HMJr:

Hello.

Operator:

Mrs. Klotz is back now.

HMJr:

Where's Mr. Henderson?

Operator:

I have him right here. Go ahead.

HMJr:

Hello.

Leon

Henderson:

Hello. Did you have a good rest?

HMJr:

Yes, I did. Is this Leon?

H:

Yes.

HMJr:

How are you?

H:

I'm in pretty good shape.

HMJr:

Say, Leon, this is something that normally

I'd rather talk to you about across the
table, but I'm sure it was an oversight

on your part. Remember you and I had sort
of a gentlemen's agreement as to that
business of Ways and Means, that if you
were going to do anything on taxes, you'd

talk to me first?

H:

HMJr:

H:

Yeah.

Well, Senator George has sent me down this
correspondence from you on joint returns
Yeah.

and calling a spade a spade - I mean,

HMJr:

I just think it - that wasn't the understanding

you and I had.
H:

HMJr:

Oh, why then - then that's my fault, Henry.
I meant about testifying.
Oh.

282
-2All we did was this. We did some work on

H:

joint returns

HMJr:
H:

Yeah.

and I had spoken about it and the
fellows worked it up and came in here one
morning

HMJr:
H:

HMJr:
H:

Yeah.

and asked me whether it wouldn't be a
good thing to send it on down to him
Yeah.

and I didn't think - I was busy, and
didn't think anything more about it.

HMJr:

Yeah.

H:

That's the only thing we've sent down. I
thought - I meant about

HMJr:

Well

H:

I had in mind testifying. It never occurred
to me on this thing.

HMJr:

Well, frankly George didn't seem to sort of

H:

What?

HMJr:

like it and

he didn't kind of like it, see? And
I thought I'd - normally I'd sit down, but
I didn't want to take up your time.

H:

Well, you can rest assured on that. That's
the only thing we've done

HMJr:
H:

Yeah.

and I won't do any more of them - even
what seems as harmless as that. It looked

to me as just a little technical work.

283

-3- HMJr:

Well,
you know how hard it is keeping your
own stable.

H:

Sure. It was

HMJr:

I'm not making a

HMJr:

It was absolutely an oversight on my part.
I'm sure it was.

H:

And

H:

HMJr:

Now, in return, Leon, that price statement
which they wouldn't let me give before the
Committee

H:

HMJr:
H:

Yeah.

I'm going to give it Tuesday night in Boston.
You're going to be called as a witness one
of these days.

HMJr:

I know. But I'm going to say all the things

up there that they wouldn't let me say. And
sometime - hello.

H:

They didn't get to you.

HMJr:

I know, but

H:

They haven't finished with me yet, you know.

HMJr:

No. But sometime I'11 tell you why I think they

H:

called me off.

Well, I don't think there - there wasn't any there wasn't anything back of that. It was
just they had not - they wouldn't let go of
me.

HMJr:
H:

They wouldn't?

No. There was - there's no hidden reason
that I can see.

284
4

HMJr:

Well, I personally - I don't know. Maybe
it's just suspicion, but I think - I showed
the thing to three fellows from the Department of Agriculture
Uh huh.

H:

and within the same day Ed O'Neal got

HMJr:

very interested in what I was doing.
H:

Uh huh.

HMJr:

Hello.

H:

Yeah. Well, I don't - this had nothing - it
may have.

HMJr:

Then the next thing I knew was they didn't

want me.

H:

Well

HMJr:

But anyway, I'm going to give this; and I'd

H:

All right

HMJr:
H:

like very much if Ferdie Kuhn could come
over and show it to you tomorrow
and get

Well, it better be in the morning, because
in the afternoon I'll be before the Maloney
Committee on this oil business.

HMJr:

Well, then he - it won't be ready, 80 maybe -

H:

Well, when - I'll tell you. When Ferdie

would you want to take it home or would you
want it Friday morning?

gets it done - when you get it done, why
don't he call me and we '11 decide then.

HMJr:

H:

All right. I'11 send one copy to you and
one to Miss Elliott.

All right.

285
-5HMJr:

Because
was very helpful when you were
up on theshe
Hill.

All right.

H:

HMJr:

But I'm sure there's nothing in there but
what you'd like, but there might be, and
you might have some good suggestions.

H:

All right. Well, then, consider that I've
apologized for violating

HMJr:
H:

HMJr:
H:

Well

.....88
it..... I say, the boys had been working on
Yeah.

and I didn't - they brought it in one
morning and said, "How about sending this
to George?" I sat thinking about it and I
signed a note and out it went and out of

mind even.
HMJr:

I - well, 80 much for that. I mean, there's

80 much to do you and I can't afford to have

any squabbles.
H:

That's right. That's right.

HMJr:

Let me ask you this. Are you happy over the
new setup?

H:

I'm happy in that it's - we - you've got a
spirit of working

HMJr:

Yeah.

H:

..... and Don has taken hold, and I'm happy
about that

HMJr:

Yeah.

H:

I'm not - I would rather have had a full-time
working Board

286

-6HMJr:

Yeah.

.....
see itthat is, it's a full-time job, as I

H:

HMJr:

Yeah.

not something for busy people to do.

H:

HMJr:

No.

I'm not 80 happy with the prospect of three
jobs that I've got when price is about enough

H:

HMJr:

Yeah.

but we were short on material, Henry, for

H:

these civilian supply jobs

HMJr:
H:

I see.

And it's going to mean an extra load for me,

but it's got more promise in it than anything
we've ever seen.

HMJr:
H:

HMJr:
H:

HMJr:

Good. Good.

Say, if you've got your pencil there - if
your girl's on I've got a new number.

No, the girl's not on.
Well, that's all right. Republic 0154.
Wait a minute. Republic...

H:

0154.

HMJr:

Say it again.

H:

Republic

HMJr:

Yeah.

H:

01

HMJr:

01.

287
-7H:

54.

HMJr:

0154 - Republic.

H:

Yeah. That's my desk's private number.

HMJr:

0154 - I'll give it to her.

H:

All right, Henry.

HMJr:

Take oare of yourself.

H:

All right, fella.

HMJr:

Good-bye.

H:

Good-bye.

288

MEMORANDUM

September 3, 1941.

TO:

Secretary Morgenthau

FROM:

Mr. Sullivan

JhS

At noon today the Senate Finance Committee took up the

tax bill and before recessing at three o'clock this afternoon they
had tentatively agreed on everything in the bill except the following items, which were passed over because they were controversial
and will be taken up when the Senate meets tomorrow forenoon at
eleven o'clock:
Lowered personal exemptions,

Repeal of the special 10% excess profits tax,
Community property,

Estate and gift taxes,

Admissions tax,
Coin operated devices,
Social Security tax amendments.

There is a possibility that the wine tax may be reopened,
although it was tentatively agreed to this afternoon.
I talked with Senator Barkley about wiring absent senators
to return and he said everyone had been wired last night. He agreed,
however, to wire them again this afternoon.

289
September 3, 1941
3:30 p.m.

RE DEFENSE SAVINGS STAFF

Present:

Mr. Sloan
Mr. Buckley
Mr. Kuhn

Mr. Callahan
Mr. McCarty

Mr. Pulte
Mr. Olney

Mr. Duffus

Mr. Mahan
Mr. Edward

Mr. Sparks
Mr. Graves

Graves:

Have you anything particular you would like
to ask me about?

Graves:

Oh, as we go along I have got a little - I
have got no list.
To start off with?

H.M.Jr:

No list of complaints.

Graves:

I think we might begin, then --

H.M.Jr:

I have got one little one. I never heard

Kuhn:

After you left, Mr. Secretary, Jerome Kern
wrote saying that he was doing a song and
he was going to get together with Gershwin,
but I never saw a letter from Porter.

H.M.Jr:

from Cole Porter. Did you write him a
letter?

-2-

Callahan:

290

I think we asked Mr. Gershwin first and he
said that he could work much better with
Jerome Kern and we couldn't very well tell

him that we insisted on Cole Porter. I

don't know whether there is anything between
them or not.
H.M.Jr:

Who is going to do the song now?

Callahan:

Gershwin and Kern.

H.M.Jr:

That is all right.

Kuhn:

Couldn't get anyone better.

H.M.Jr:

How about a follow up on it?

Callahan:

What do you mean?

H.M.Jr:

Write Gershwin how he is coming.

Callahan:

Both of them wrote in the other day and said
they were getting together on it and they
hoped to give us a report in a week or ten
days.

H.M.Jr:

Wonderful. That is all I have got. I will

Graves:

Yes, sir. Then Mr. Mahan might tell us

think of some things as we go along.

about postage. You asked me the other day

about the status of that and I told you
and I will let Mr. Mahan confirm that.

Mahan:

Mr. Secretary, we have been concentrating

H.M.Jr:

Where is Sloan?

Graves:

Sloan stayed outside for a minute to take

H.M.Jr:

All right.

on the distribution --

care of some other business.

291
3

Mahan:

We have been concentrating on the retail

posters. It has been probably the greatest

distribution of display material that has
ever been made. There have been around

three million pieces distributed and

arrangements made for those pieces to be

picked up and actually delivered to retailers,

as Mr. Pulte will tell you later. Now, as
you know, there were a million and a half
of the Minute Man posters distributed.

There have been ten thousand of the "Buy a

Share in America" posters and there is
another hundred thousand on order that will
be distributed in about ten days, approximately.

H.M.Jr:

Do they like that poster?

Mahan:

Like it very much.

H.M.Jr:

I mean the "Buy a Share in America".

Mahan:

We have had very good comments on it and it

shows up very well. I saw one in Mr. Sparks'

bank. He stole one of the first that was
issued and it looked very well in the frame.
It looked better than the other poster, I
think.

We have ordered a hundred thousand more of

those in the large size and a hundred thousand

in the small size. Both of those are due

in ten days. We have ordered ten thousand

of the prize winning poster as a pilot
quantity for distribution to the states and
to get the comment on that poster, and then

we are going to order a quantity of those

for payroll allotment posting. That is a

particularly good one with the two hands and
so forth.

H.M.Jr:

That is all right. It is very good.

292
4-

Graves:

You mean, Mr. Mahan, to be put out in the
factories and plants?

Mahan:

Yes, in connection - ask about our payroll

allotment plan. That is a particularly good
poster for that. I think the important
thing is the three million pieces that have
been distributed ready for this September
fifteenth show. Now, we might cover albums
too.

H.M.Jr:

We don't begin to have anything like the
coverage they do in Canada, for instance.

I mean, you can't go anywhere in Canada but

what you are conscious all the time of their

savings posters. It is the only poster they

have but you bump into it every where you
go, which you don't with ours.
Mahan:

That is the best distribution we will have,

is this three million. That will mean
practically every retail store of any size
is covered, not with one but with several.

On the ten cent album which we wanted to

have ready at the opening of school, ten
million of those are now on their way to

post offices and fifteen million additional

have been ordered so that as that supply is
used up we will have a new one coming and

and we think that is very important as a

part of this retail activity, to have it as many children as possible with albums.

Graves:

I might say this. I don't know whether you

knew, but when we ordered stamp albums to

begin with we did not order anything for
the ten cent stamp.

H.M.Jr:

You did not?

Graves:

We did not, and we have had great demand

for the same kind of album in the ten cent
stamp that we have had all the time for

293

-5-

the other denominations and this represents

the initial supply of ten cent albums.

Mahan:

That is right, first album. There was
one other activity this morning on - the
Cunningham Drug Stores want to print two
hundred thousand copies of the song
themselves at their own expense and

offer it both through full page newspaper
ads and also over the radio.

H.M.Jr:

Where are those stores?

Mahan:

In Detroit and Michigan. They have stores
throughout Michigan. They were very very
helpful.

H.M.Jr:

Got any more whiskey ads?

Mahan:

I don't know about the whiskey situation.

H.M.Jr:

Who put that field over?

Graves:

Do you know about it, Sid, the Seagram ad?

Mahan:

No, I don't know about it. I have simply
seen it. I don't know what the circumstances
are. As a matter of fact, the representative
is going to be down tomorrow.

Graves:

They aid that on their own, I assume, without
any --

Mahan:

Sparks:

I think so. We will know tomorrow. But

I think --

They phoned for a meeting for tomorrow to

talk over a plan that they had but at that

time they said nothing about publishing an

advertisement.
H.M.Jr:

It is not too good.

294
-6--

Mahan:

Ithough.
think we are perfectly agreeable to this,

H.M.Jr:

That is all right.

Mahan:

Fine. I think that is everything, Mr. Graves.
Is there anything further about the distrib-

Graves:

ution of the song that you know about, Sid?
Mahan:

No.

Buckley:

I have a record on the total number

distributed, if that is what you mean.
Graves:

Yes, that is right.

H.M.Jr:

The last I heard it was a hundred and seventyeight thousand. That is the memo you (Sloan)

sent me, is that right?

Buckley:

We have sent out so far about a hundred and

eighty-five thousand but there are forty-five
thousand cards that haven't been counted

yet. They sort of pile up on us. That

gives us a total of about one hundred and
seventy-five thousand cards received and a
hundred and eighty-five sent out, not

including the forty-five thousand that
haven't been counted. If there was just one
apiece it would bring it up to something
around about two hundred thirty thousand.

H.M.Jr:

There is something wrong with our mailing

list. He tells me that twenty thousand

postal cards have been returned on account
of the wrong address.
Buckley:
Graves:

Eighteen thousand five hundred ninety-five,

up to this point.

Is that disproportionate?

295

-7 Buckley:

It is out of two million. One percent of
two million would be twenty thousand,

wouldn't it?
Graves:

Yes.

Buckley:

I don't think that is out of line.

H.M.Jr:

One percent of --

Buckley:

It is out of line of a customers' list.
It wouldn't be out of line of a prospects'
list. This isn't quite one percent. But
it isn't - ordinarily that wouldn't be
considered out of line.

H.M.Jr:
Graves:

But that list is supposed to be kept up to

date.

But no closer than that. I doubt if it
ever would be any more nearly correct than

that one percent that this is developing.

H.M.Jr:

All right.

Buckley:

This of course gives us a chance to check

Graves:

our list, too, which is a good thing, and
bring it up to date automatically.
I think Mr. Pulte should tell you some
details about this Retailers for Defense

Week.

H.M.Jr:

Go ahead.

Pulte:

Well, the Retailers for Defense Week, Mr.
Secretary, is opening on September fifteenth,
continuing until the twentieth. We expect
by that time to have five hundred thousand

retail stores cooperating in the selling

of Defense Savings Stamps. Every one of the

296
-8forty-eight states now has material that
is being distributed through various sources
to the retail merchants. In connection
with that, President Roosevelt has issued

H.M.Jr:

a proclamation for the week reading,
"Retailers for Defense Week, to aid in
the sale of Defense Savings Stamps.
Did he issue that?

Pulte:

He issued that proclamation. It appeared

in the Sunday morning Times, the New York

Times, it appeared in papers all over the
country. Where we have Defense Savings

committees, that is, local committees,
they have handled the contact with the

merchants through the merchants associations,
various trade associations, Chambers of
Commerce, and other groups. They have

made arrangements for the distribution of
material and arrangements for the retailers
to obtain Defense Savings Stamps from

their post offices or having wholesalers
buy the stamps and re-sell them to the
retailer for sale to the consumer.
Where we are not organized, Chambers of

Commerce and merchants groups have worked

hand in hand with the retailers and with
the newspapers in arranging for the

distribution of material and also working with
the postmasters very closely in the towns
for distribution of the Defense Savings
Stamps and we are - there is an indication of
how close their cooperation is being
extended. Chambers of Commerce are

contacting the post offices to find out

how many stamps they have got on hand before

the drives open so the post offices can
order sufficient stamps. As an example
of distribution, also, large companies -

for instance, the Standard Brands Corporation

297

-9 of New York - have you heard about that?
H.M.Jr:

Mr. Sloan wrote me a very excellent
memorandum and brought me up to date on

all this stuff.

Pulte:

Then I am just reiterating.

H.M.Jr:

I read it and I guess I remember it.

Pulte:

Well, then, I will sum it up by saying
that --

H.M.Jr:

You have really got to give me something
that is pretty new because Sloan did a
good job.

Pulte:

Then I will give you something that is new,

I hope. In Michigan the retail stores
from a period of July tenth to July thirtyfirst averaged about a dollar per day in
sales of stamps. That is, the chain stores,
the records we have.

H.M.Jr:

A dollar a day?

Graves:

Per store?

H.M.Jr:

Do you think that is good?

Pulte:

We think it is because it has a cumulative

H.M.Jr:

What period?

Pulte:

July tenth to July thirty-first, a twenty

H.M.Jr:

It sounds terrible to me.

Pulte:

Well --

effect. It starts people off buying stamps.

day period.

298
- 10 -

Graves:

I don't think it is. The sales of
stamps - we have of course no report

yet for August, but sales of stamps in

May, June and July ran roughly three

million dollars per month. Is that
right?

Pulte:

That is right.

Graves:

Now, suppose you have five hundred
thousand outlets and suppose that average

should be maintained. I doubt if it
will, but suppose it should be. That is

a half illion dollars a day or twelve or

fifteen million dollars a month as against
three million, which has been the rate of
sale, or was the rate of sale for the
first three months.

H.M.Jr:

Say that again.

Graves:

Assume that this dollar a day that Mr.

Pulte says was the average in Michigan -

assume that dollar a day is attained by
the five hundred thousand outlets that
we will have selling stamps from the
fifteenth of September. That would give
us a half million dollars a day, or from
twelve to fifteen million dollars a month
for stamps, compared with three million
dollars a month which was the rate of sale
of stamps during May, June and July.
H.M.Jr:

Now let me give you a few figures, see.
Here is my problem. You might as well get
my problem. The Bureau of the Budget says

we are going to spend twenty-two hillion

dollars. The tax bill may raise twelve

billion dollars. It leaves ten billion

dollars I have got to raise and the thing
that I have got to figure is how much I am
going to raise through this organization

299
- 11 -

plus Tax Anticipation certificates and

how much I have got to go out and borrow

from
the banks, so that is the thing that
I have.

Graves:

Well, on the stamp thing, I view it this
way, that --

H.M.Jr:

We can't do it all by stamps.

Graves:

No, no, it is cumulative. That lays a

foundation for the purchase of bonds which

will become increasingly effective as

time goes on. I think people will get in
the habit of buying their stamps at the

stores. You are going to find that dollar

a day -H.M.Jr:

Oh, I am for this. You and I hoped we
would have fifty thousand stores by the first
of September.

Graves:

I guess we had them.

Kahan:

I am sure we have them.

Pulte:

Oh, we have more than that.

H.M.Jr:

But when you say a dollar a day per store,

H.M.Jr:

it seems awfully little, that is all.
That is right. It does.
It seems awfully little.

Mahan:

I think that is partly accounted for, Mr.

Graves:

Secretary, by the fact that a great many of
them were not selling right from the outset.
They probably - there was probably a lag

in there of several days in the case of many
stores.

H.M.Jr:

I wouldn't have raised the point except it

300
- 12 -

was said as though it was to impress me
and the only way it impressed me was as to

how little.

Graves:

I don't think he intended to impress you,
just inform you.

Pulte:

That was all, inform you.

H.M.Jr:

O.K. I was impressed if you have fifty

thousand stores and I will be overcome if
you have five hundred thousand stores by

the first of October.

Graves:

Merely putting stamps on sale in retail

Pulte:

Yes, I think it does, Mr. Graves.

Graves:

Supposing Mr. Buckley tells us about the

H.M.Jr:

stores doesn't by any means insure the sale
of stamps. We have got to get going with
these local community committees everywhere before we can expect to have the
maximum possible result. Does that finish
you up, Mr. Pulte?

mail order thing.

Don't misunderstand me. I wouldn't have

said anything about the dollar. If you have
got your fifty thousand by the first of
September, I am delighted. If you have

two hundred fifty thousand by the first of

October, I will be very much pleased, and
if you get your five hundred thousand by
the first of January, I would be very much
pleased.
Pulte:

Well, the cooperation has been so splendid
that - and the pledges of cooperation from

organizations of retailers all over the

United States indicate that five hundred

thousand or more merchants by September fifteenth

301

- 13 -

will be selling stamps.
H.M.Jr:

Well,
if it is, it is amazing, an amazing
achievement.

Graves:

By the way, Mr. Sloan or Mr. Mahan, what

is this invitation to the Secretary to

appear at the - at a meeting of these
retail people again?
Yahan:

That is September fifteenth, a clinic to
be held at the Mayflower Hotel from two

until five o'clock and we will have on
exhibit there everything pertaining to
stamps and there will be speeches made

by several of the prominent retailers,
in which I hope they will indicate_jve
are going to have our five hundred

thousand and quite a program has been
arranged preceding the Don Nelson dinner
and the committee would very much like

to have you open that shindig if you

would, Mr. Secretary, and say a few
words of welcome to them.

H.M.Jr:

What is the Don Nelson dinner?

Mahan:

That I do not know much of in detail.

It is a dinner, I believe, given by the

National Retail Dry Goods Association

to their honorary president. It is
entirely a merchants --

H.M.Jr:

If I am here on the fifteenth I will do it.

Mahan:

That would be fine.

Kuhn:

Isn't that the day you testify on the Hill?

H.M.Jr:

Supposedly. I won't be here on the sixteenth.

This would be in the afternoon?

302
-

14

-

Mahan:

Yes.

H.M.Jrs

They will still be sober at two, won't they?

Mahan:

We would like to, of course, have you open it,
if you will. That would please the boys very

(Laughter)

much.

H.M.Jr:

Well, if I am here, Harold, I will do it.

Graves:

Fine.

Mahan:

Fine.

Graves:

Now, Mr. Buckley.

Buckley:

This report, Mr. Secretary, is based on a complete
picture of what has been accomplished in the
Mail Order Division of the Defense Savings Staff

since its inception last spring. The chart of
activities includes:
*(1) Regular Purchasers - those who, as the

result of previous solicitation, are buying at
regular intervals. To this list (approximately

100,000 at the present time), we are S tarting
this month to send a special le tter and three
order forms, asking their cooperation in bring-

ing the bonds to the attention of others.

"(2) Customers - all those who have bought but
who haven't agreed to buy regularly. To this
list (approximately 2,000,000 as of July 31st),
we are sending a letter urging adoption of
the Regular Purchase Plan, a colorful folder and
a Regular Purchase order form. These start
going out this Friday, September 5th.

"(3) Prospects - large investors - taken from

the Customer and I. R. files. TO this list

303
- 16 (375,000 corporations, partnerships, associa-

tions, etc.), we have just sent a special mailing consisting of a letter, order form and folder
featuring F and G bonds.

"(4) Prospects - smaller investors. These

are the I. R. names (approximately 4,874,000

as of July 31st) that we are testing - in a
variety of different ways - in order to find

the formula that will produce maximum results.

"Before we discuss the results of our testing
to date, let me raise one point that seems to

me to be vitally important. In one

sense, this mail order campaign - including all

of our mail selling efforts - is different

from practically all others. In any commercial
mail order business, the product is available
only by mail and results are measured in but
two ways - the mail orders that come back and

the repeat business that follows.

"In this mail order campaign of ours, results

should be determined by :

"(1) The number of people who are induced

to send their orders direct.

"(2) The amount of money received in

relation to the cost of getting it.

"(3) The amount of potential repeat

business that becomes available at

a very low selling cost.

"(4) Equally important - the educational
work done on the entire list.
"Thus, from Test Series No. 1 for instance,
which went out June 21st, it should be remembered

that in addition to getting 300 people to buy

over $140,000 worth of bonds at a cost of
85/100th of 1 percent, the mailing called on
94,256 other people - told them the entire

304
- 16 Savings Bond story, and provided one more link

in the chain of publicity and advertising being

used to raise money for national defense.

"From Series One, relative returns mean more than

total orders or dollars received. We put these
ten tests in the mail, with existing material,
to find out things and from that standpoint,
they accomplished their purpose.

"We learned, for instance, that it was safe for

us to circularize on Defense Savings Staff
stationery; that a mailing on E bonds was as

good, if not slightly better, than a mailing

on all three bonds; that there was an extremely small demand for F bonds. We also learned

that if our best test had been sent to the
entire list, the selling cost would have been

down to 73 cents for each $100 worth of bonds
sold.

"That should represent a maximum selling cost

for future mailings, since none of the assemblies
in Series No. 1 contained specifically prepared mail order material, and had the further
disadvantage of being sent out during one of
the poorest mail selling seasons of the entire
year.

"From Series Two, which went into the mails
July 19th, we are likewise getting some useful

information. While returns are incomplete, it

seems safe to conclude that the best test, both
from the standpoint of orders and dollars

received, will be an E mailing - thus confirming what we discovered in Series No. 1. We

have also learned that with all other factors

being equal, our new folder "How to Buy a Share

in America" is outpulling the blue and white

Defense folder used in the first tests; that

the State of Massachusetts produces twice as

305
- 17 -

many orders as the State of Michigan; that a
combination of letter, folder and order
form.

"From Series No. Three, which went into the

mail last Saturday, August 30th, we will get a
comparison between the pulling power of I.R.

names with incomes over $5,000, incomes under

$5,000 and a mixture of the two. This list check-

up is being made in California, Georgia and
Maryland. Also being tested are several new
letters; an advertising message on the envelope
versus a plain window envelope; and as another

confirmation, the pulling power of E bonds versus

all three.

"This third series is going out at a very favorable time. In a comparatively short while it
should give us an indication of the returns

that can be expected from the approximately
2,000,000 new over $5,000 names that have just
been put on plates, as compared with the greater
number of under $5,000 names that are available
11

if it is found desirable to circularize them.

H.M.Jr:

I have no comment.

Graves:

Mr. Duffus?

H.M.Jr:

Only where the hell is the movie on "Any Bonds
Today?" for the newsreels?

Duffus:

Well, it was my understanding, sir, that that
was discontinued. I will contact Mr. Dietz

tomorrow morning and find out about that, but
I thought that was dropped because of that one

of Barry Wood. I thought they were letting

that go. I will follow through on that
tomorrow.

H.M.Jr:

He said he was going to do us a good one.

306
- 18 Duffus:
H.M.Jr:

I will find out about that right away.
He said that song track was all right and for-

get about the photographer.

Duffus:

I will check on that in the morning and give you

H.M.Jr:

That was what I heard.

Duffus:

That was my understanding from Mr. Dietz, that

H.M.Jr:

Maybe that - he said, now, was the sound track

Duffus:

I will find out about that. We opened Treasury

an answer on that tomorrow.

it was discontinued after his talk.

all right? It was fine. He said, "Forget
the photography and let me take care of that."
That is the last I heard.
House in New York this noon at Rockefeller Plaza

with Colonel Patterson introducing. First they

had a band and then Colonel Patterson introduced

Mr. Willkie, who introduced Mrs. Hull, who cut

the ribbon. I talked with them two hours after

it was opened. They have had a continual sale
of stamps, the crowd was so big. We open a
similar House tomorrow in Boston.
H.M.Jr:

Who is responsible for putting it in Rockefeller
Plaza?

Duffus:

The Esso people.

H.M.Jr:

Wouldn't they go to Fourteenth Street or
Twenty-third?

Duffus:

We told them it was our wish that it be at
either Fourteenth Street or Twenty-third,
but in a meeting in Colonel Patterson's office
they said they wanted it there at Rockefeller
Plaza, where of course the Rockefellers are
interested and where they have been having
these shows like the penguins and the seals

307
- 19 all year, and they have been building up the

publicity and attractiveness of it. They

have guide tours through it and it was close
to the N.B.C. radio broadcasting studios, from
which we will draw a lot of talent.
H.M.Jr:

Well, can they get an airplane in there?

Duffus:

Yes. They don't have it in. It goes in

on the fifteenth, the same type of plane
that we had over here, right in the center of the

Plaza where they had all the Mexican cactus

and all. It is spotted in there and goes in
the fifteenth of September. They have now

one of the biggest searchlight anti-aircraft
units with twelve men on it, so that any time

a plane flies over New York City the crowd
can gather around and they can detect a plane

that is out of sight and see it when it flies

over. They can pull in something, I have for-

gotten, it is thirty or fifty miles away, they

can hear a plane from that base. It is a very,
very fine show. Then I thought you might be
interested on the sixteen millimeter film of

"America Preferred". We had two hundred prints

made of that. We talked with Chief Wilson of
the Secret Service and figured out the best
way to handle that, which was to turn over ten
prints to him, which he in turn fastened to

the end of "Know your Money", so that every time
"Know your Money" is shown any place in the
country, they also see "America Preferred".

Now, we are along with the retail store plan
having additional copy written saying that stamps
are on sale at the stores, which will be tacked
on to the end of the film because right now we
are starting to show it in schools and colle ges
and mass meetings, and the unions are starting

to use it in their union meetings all over the
country.

308
- 20 H.M.Jr:

How is the sales picture of me telling the

Duffus:

We will have that in tomorrow afternoon, so

retail fellows?

that we can look at it Friday. Have you
seen the new room downstairs?

H.M.Jr:

No. Is it finished?

Duffus:

The seats will be in the first of the week,

and then it will be - it is all ready to use

now, but the new chairs aren't in.
H.M.Jr:

I will go down there.

Duffus:
H.M.Jr:

It is very fine.
Is it?

Duffus:

We will have the other one over here, and if

H.M.Jr:

That all sounds good.

Graves:

Is that all you had?

Duffus:

That is all I had.

H.M.Jr:

Mr. Callahan can review the radio situation.

Callahan:

We have "America Preferred" resuming on the

you are free we will see the retail film.

air Saturday night. The following Saturday
night we have Suzanne Stem and under
your name and in your absence last week we

wired some eighteen outstanding artists. We
have received sixteen replies, all favorable,

all very enthusiastic.

H.M.Jr:

The seventeen who have the income tax examinations?

Callahan:

We have one from Rio de Janeiro. Melchoir,
Josef Hoffman, out in Hollywood and says his

309
- 21 -

knee is bad and he is awfully sorry, but he will
do anything in the world. He wished he could

play, but he can't. A flock of them. They

are very favorable. I mean, not only accepting
the invitation, but expressing thankfulness
that you invited them.

H.M.Jr:

What program do they go on?

Callahan:

On the "America Preferred".

H.M.Jr:

That Saturday?

Callahan:

An artist each Saturday night.

Kuhn:

That is the Deems Taylor one.

H.M.Jr:

Did Deems Taylor pick these?

Callahan:

He and Alfred Wallenstein, who got together and
picked all these people. Then Deems Taylor
and Wallenstein medievery week and discuss
the music.

H.M.Jr:
Callahan:

Who meets with them?

Rainey. He acts in the same capacity as Mr.

Monroe in the Treasury Hour. We have a new
program going on Saturday, September 16, called

the "Brush Creek Follies".

H.M.Jr:

Brush?

Callahan:

Brush Creek Follies. (Laughter)

H.M.Jr:

What is this? You know, I am going to have

to travel with a radio to listen to all the

programs.

Callahan:

That is a sort of a hill billy program which

has been on the air for the past several years
from Kansas City. It has been over the Columbia
network. We had a man out there last week,

310
- 22 and they said beginning that Saturday, that
they wanted to devote the program to bonds

and S tamps. It is a program that appeals to
farmers.

H.M.Jr:

Is it coast-to-coast?

Callahan:

Coast-to-coast. Twelve o'clock on Saturdays
and I think eleven o'clock our time.

H.M.Jr:

Wonderful.

Callahan:

Of course you know we first had the Treasury
Hour.

H.M.Jr:

I congratulate you on that. I showed that to

Callahan:

I think that is about all. Bendix is all set.

the President Saturday. He was very much pleased.

They have signed a contract with the National

Broadcasting Company.
H.M.Jr:

Who is going to run that show?

Callahan:

Mr. Monroe will be in the picture. I don't

H.M.Jr:

Could you come tonight and be fifteen minutes

Callahan:

Yes, sir.

H.M.Jr:

I would like to talk a little bit about that

Callahan:

That is all I have.

Graves:

Mr. McCarty is Mr. Callahan's man who handles
the press and magazines and publications and

know. Now, I have talked with Mr. Dietz -earlier, get there about a quarter past seven?

before Mr. Dietz comes.

so on. Suppose you tell the Secretary something
about what you are doing, Mr. McCarty.

McCarty:

All right, sir, Mr. Graves.

311

- 23 We have a few late results, Mr. Secretary, on

Baseball Defense Bond Day, which originated
in the Press Section, and you have already,
through Mr. Sloan's report, heard about how we

set that up nationally and I think there were
some of the results in there from the leading
cities of the country, but since then we have
gotten in more results to give us an idea of
the way it went all over, and now there was

scheduled that day a hundred and forty-two
games over the country, professional baseball
games, both the major and the minor leagues.
The results show that a few of those were rained
out. There were one or two - a few others we
haven't heard from yet, but we have had definite
word that a hundred and twenty-one of those
games did see a celebration of the defense
program, of Defense Bond Day, that there were
bands marching, that local celebrities appeared
and sat in boxes behind the home plate, and
the players pledged themselves to buy bonds,

all of which resulted in a good bit of

attendant publicity in the newspapers and on
the radio.

In New York, for instance, there were pictures
in the New York Sun and the Brooklyn Eagle.

here were whole columns given over to it.

I just had a late report this morning that a

hundred and ten stations reported that there
were over five hundred announcements over
Baseball Defense Bond Day on radio stations.
These were good results and pleased us a

good bit. Now we are hearing from the

teams who were away from home that day that

they would like to have a Baseball Defense

Bond Day in their own home town when they go

back, so we want to help them with that
enthusiasm and are sending out additional
transcriptions of your speech and of the introduction by High Commissioner Landis, as well

312
- 24 -

as the literature which will be handed out by
the Boy Scouts to these teams, additional

ones who are coming back home and want to have

their own day, and among those of course is
included Washington, which unfortunately was

away from home when we had the big Baseball
Defense Bond Day, and the Washington club is

very anxious to have their day here on September 13, which is a week from Saturday. So

that will take care of our local team.

Callahan:

The Secretary might come to the game if he is
in town.

McCarty:

We would like very much to have you at the game,

Mr. Secretary, if you are going to be in town
on that day.

H.M.Jr:

What day?

McCarty:

A week from Saturday, the thirteenth.

H.M.Jr:

I won't be here.

McCarty:

We will miss you.

H.M.Jr:

All right?

McCarty:

Just one other thing I might mention, which is

the addition of several new lists of publication

media, including labor publications and the

shipping newspapers. We have just made out a
rather comprehensive list of almost a hundred
labor publications which are now going to
receive material regularly as well as shopping

newspapers. I don't believe there is a shopping
newspaper in Washington. I know there are
none in New York. But over the country there
are about a hundred and eighty shopping
newspapers. They are give-aways, but they are
very important in some cases.

H.M.Jr:

We get one in Washington. They throw one at
my front door.

313
- 25 McCarty:

Oh, they do have one here?

H.M.Jr:

I am familiar with it.

McCarty:

In Los Angeles, for instance, the Downtown
Shopping News, has a million circulation.
We are also going to cover the Negro press,

the trade publications, the dailies, the week-

lies and the foreign language groups.
H.M.Jr:

I thought you might like to know, Harold,

that coming down on the train Harry Hopkins

said that in the eight years he has been in

the Government, he thought the best public
relations job that has been done by any Department is the one that you people are doing, and

he said it in front of - what is the fellow from
Time Magazine?

Kuhn:

Belair?

H.M.Jr:

He said it in front of Felix Belair, so it

wasn't just something for me, and strictly in
the family, the President said the worst job
has been done by Harold Ickes on gasoline
(Laughter).

McCarty:

And Mr. Secretary, just a couple of magazines
I picked up on the way over because they have
just come off the press and both carry a
very nice Defense Bond Message. One is
Liberty, which of course has a very wide
circulation, and then a woman's magazine,
Harpers Bazaar, which gives us four pages,

tying it up with fashions. And then there
are two more pages on the other side.

H.M.Jr:

This is interesting. National City Bank

McCarty:

Yes, several banks.

has something in here.

314
- 26 H.M.Jr:

It is just where they are turned down?

McCarty:

There
are four pages in all, sir. They have
a series.

H.M.Jr:

Banking people, is that the ones who take care

McCarty:

of the girls?
Well, that is to sell clothes and also bonds.

H.M.Jr:

Does he pick the girls?

McCarty:

Harpers Bazaar picks the girls.

H.M.Jr:

I thought South Carolina there picked the girls.

McCarty:

You have probably been seeing some of the

H.M.Jr:

Do you want this back?

McCarty:

No, you may keep that. I brought it to you.

H.M.Jr:

I got that comic stuff from Sloan. In that

McCarty:

Those were initial results. Just this morning

I thought he was doing a good job.

comic results that have been appearing over
the country, those that have been mentioned
over the reports.

flier did you call it --

in the Post there were two additional ones, and
I believe we can be assured that they will keep

up like this for an almost indefinite time, be-

cause we have the support of practically all the
syndicates in the country who have gone to their
artists and given them the material we prepared

for them.
H.M.Jr:

That helps.

McCarty:

I think we can keep that up.

H.M.Jr:
Graves:

Good. That is good work.
Does that finish you, Mr. McCarty?

- 27 McCarty:
Graves:

315

Yes, sir.
I think you might want to hear from Mr. Edward.

H.M.Jr:

I don't think you know what I mean. Come
here, Edward, and look at these pictures.

Edward:

I know what you are talking about, but that
is twenty years ago. (Laughter)

H.M.Jr:

All right.

Edward:

Mr. Secretary, during the month of August
we have had the wholehearted cooperation of
my friends down at the Federal and the state
superintendents of banks throughout the

country, and with the state secretaries, and
the result is that there are quite a number of
other banks who are not qualified to sell
bonds, but have lately qualified. The reports
are not available as yet except from three of
the Reserve Districts. Atlanta, Kansas City,
and Dallas have sent in their reports. The
others will probably be in within the next three

of four days. In these three districts during

the month of August forty-one additional
national banks and a hundred and fifty-nine

additional state banks qualified. This percentage holds good with the other nine districts.
It is reasonable to predict that some seven
hundred or eight hundred additional banks will
qualify during August. Including these two

hundred above mentioned, we now have approximately ten thousand two hundred banks quali-

fied, and these figures do not include approxi-

mately a thousand branch banks. The head

office is the only one counted in the calculation. Therefore in the banking fraternity

we have about eleven thousand two hundred

agents of issue for Series E Bonds.
H.M.Jr:
Edward:

How are we coming along with fixing up these
banks to carry the E Bond without collateral?

Mr. Bell has that on his desk now. I worked on

316
- 28 -

it last week with Mr. Batchelder and some
of the fellows and we have made some sug-

gestions for you, and I think you will
probably see it in the next three or four
days. I talked to Danny about it today, and
he is about ready to bring it to you. We are
not having a great deal of complaint from
banks about putting up collateral, although

the trouble is, I think, as Harold said

several times, we are afraid that a good many
banks are not stocking the bonds as they

would if they didn't have to put up collateral,
and therefore run out of bonds. For instance,

out of this eleven thousand two hundred banks
that have qualified, only about twenty-two
hundred of them have actually pledged collateral.

The other ones are just getting the sixty-

five hundred dollar maximum amount of bonds

and the result is that they have been running
out of bonds. It probably would help some if

they were allowed to have more bonds, and
while we are on the subject, my recommendation, my suggestion to Mr. Batchelder was
that banks might have these bonds up to the

extent of - that is, insured banks, up to fifty

percent of their capital in surplus with a

maximum of five hundred thousand dollars to
any bank, subject to some provision by the

Federal. Mr. Batchelder sent out a questionnaire
to the Federal Reserve Banks in all the

districts asking their experience and their

recommendations about this collateral. Ten

out of the twelve Federal Reserve Banks recom-

mend that we withdraw it, that we furnish
the bonds without collateral.
Graves:

Does that apply to all agencies or exclude
building and loan, for instance?

Edward:

Well, the banks, of course - the Federal

Reserve didn't make any reference to the banks,
but my suggestion or recommendation was that -

317
- 29 -

Mr. Sparks was in on this conference with the
building and loan people. Our recommendation
was to furnish the bonds to insured banks
and also to insured building and loan associations on the same basis. In other words,
if they have insurance, let them all come
under the blanket. Let the insurance feature
be the determining factor as to whether or not
they could have bonds without collateral.
Now, about the sale of E Bonds, I was talking
to Mr. Sloan today and the statistics seem to
indicate that August was not as good as July
throughout the country, but I am very happy
to tell you that I think we sold more bonds in
South Carolina in August than we did in July.
H.M.Jr:

Is that right?

Edward:

I know my bank did, and I believe that we are
actually going to sell more bonds in the state
in August than in July, although the Nation
shows a decrease, I think, of around twenty

percent, isn't it?

Graves:

Eighteen, I think, of the E Bond.
Tell the Secretary where South Carolina stands

in the roll of states on this thing.

Edward:

Right square on top. (Laughter).

H.M.Jr:

I congratulate you.

Graves:

On the basis of its proportionate share of

national income.

H.M.Jr:

That is wonderful.

Edward:

We sold in South Carolina in July twice as
many bonds as were sold in North Carolina,

318
- 30 -

and North Carolina is twice as big a state
with three or four times the wealth.
H.M.Jr:

It is amazing. It shows what can be done.

Graves:

That is right.

Edward:

Another thing, throughout the Nation the banks
have sold approximately twice as many E Bonds

as the post offices have sold. South Carolina

banks in July sold six times as many bonds as

the post offices sold. You don't mind my

bragging a little bit, do you?
H.M.Jr:

I would be disappointed if you didn't.
(Laughter) While we are on that, Harold, I
wish you would take up with Danny Bell - I
wish we could get a little more publicity on

the twelve hundred dollar tax certificate. I

don't think we are getting enough publicity on

that. If you could pour on a little bit more

Graves:

publicity on the twelve hundred dollar one.
Yes, sir.

Edward:

My bank is a taxpayer. I bought two hundred
twelve thousand two hundred dollars worth of
those things last week.

H.M.Jr:

All right?

Graves:

Mr. Sparks has the report of the Field Division.
I think you mi ght begin, Bob, if you don't mind,
by showing the Secretary that map.

Sparks:

I brought this down with the idea of leaving it
with the Secretary if he would like to keep

it. We hope it will be a little bit neater

next week. It is the first experiment at
presenting pictorially the picture of the
H.M.Jr:

present status.
Pennsylvania looks awfully big to me.

Graves:

Kentucky and Nebraska and Iowa and Utah and

319
- 31 Wyoming have people in contact with the folks
in those states and we hope within the next week
or so to have the beginning of an organization.

there are only about, I think, six or seven

states where we absolutely have done nothing.

Sparks:

That is right.

Graves:

And maybe in another month--

H.M.Jr:

Oh, we have got to clean those up, Harold, in
September. By the first of October there can't

be any white states. No whites by the first of
October. We have just got to. I don't want

to see any white spaces by the first of October.

We have just got to fix that, that is all.
:

320
- 32 Graves:

We have had some killing luck in some of
these cases. You remember I told you General
Westervelt had accepted the chairmanship in

Illinois. I just talked with him on the

phone before I camein here and the Vice President has asked him to come to Washington to

take part in all this new organization, and

he wants to be excused.
H.M.Jr:

Well, no whites in October.

Graves:

I think that is reasonable.

H.M.Jr:

By the first of October.

Graves:

And we will make every effort--

H.M.Jr:

Here is New Hampshire. What is the matter
with John Sullivan?

Graves:

John and I have talked about that a good many
times. He has a man in mind.

H.M.Jr:

And Mrs. Ed Foley from Montgomery, Alabama.

I bet you she could find somebody for you.
Alben Barkley certainly could recommend somebody.
Graves:

That is the trouble, Senator Barkley has

recommended a man in Kentucky that won't do,

and we have got to struggle with that situation.

H.M.Jr:

And you ask the head of the Civil Aeronautics,

Hinckley. He is an awfully good man. I bet

you he could find somebody. He won't recommend
anybody who won't do.
Graves:

We have a man in Utah today.

H.M.Jr:

Bob Hinckley is an awfully good man.

321

- 33 Graves:

I think we will have Utah and Wyoming. I

talked to Senator O'Mahoney today about
Wyoming. He has recommended a man to us for

administrator there. I think we will clean

up those western states.
H.M.Jr:

Did you ask Senator Norris about anybody in

Nebraska?

Graves:

No. We have a chairman for Nebraska, a man
named McDermott, who I think is--

Sloan:

Vice president of the First National in Omaha.

Graves:

I was going to say he hasn't accepted but is
expected to accept.

H.M.Jr:

Gentlemen, by September 30 you have got to

clean up the United States. That is May,

June, July, August, September, five months.

I don't say they have all got to be red.

Oh yes, that is the first color.

Sparks:

There should be some color in them.

Graves:

Well, I think we can very nearly guarantee

Sparks:

I think so. We will do everything under the

H.M.Jr:

I have been patient. Five months. All

Graves:

Of course I would like to say on that point
that I am the fellow, myself, that has held

that.
sun.

right now, what else?

back on this state organization. It isn't

Mr. Sparks that is in any way in default on
that.

H.M.Jr:

I know. You shouldn't give me a map though,

with white states on it.

322
- 34 Sparks:

We wanted to let you set the goal for us,
Mr. Secretary. We will do everything we can
to make that the zero hour for you.

H.M.Jr:

September 30 is the zero hour.

Sparks:

We have sent out for more detailed information

on this entire picture. We have received the
information from twenty-eight states so far
that report that they plan a total number of
five thousand and twenty-seven state and

local committees in those twenty-eight states.

That is the number planned. The number

organized in those twenty-eight states so far
is three thousand four hundred and ninety,
which represents about seventy percent of the

goal in those twenty-eight states. Of that

three thousand four hundred ninety, seventeen
hundred and sixty-seven are city committees
already organized and seventeen hundred and
twenty-three are county committees already

organized. The total membership actually at
work on these state, county, and city committees in the twenty-eight states that have
reported amounts to forty-three thousand
eight hundred and fifty persons on these committees in twenty-eight reporting states.
We have been trying to gather factual information on the salary allotment plans as per your
instructions, and we have on actual record,
having reported to us so far, the names of
four thousand three hundred and sixty-seven
companies that have actually reported a salary
allotment plan and most of them have sent

copies of their plans. The total personnel

in these four thousand three hundred sixty-

seven companies amounts to one million four
hundred nine thousand eight hundred fifty-

six employees. The percentage of participation is our main headache. We are still worrying with it and doing everything possible--

323
- 35 H.M.Jr:

It is very few people.

Sparks:

Well--

H.M.Jr:

If you have got thirty-six million people

at work - it is somewhere between thirtysix and forty million people that work.
Graves:

If you will permit me, Bob, on that point

we don't feel that we should attempt to cover

any except the large and responsible employers

with a payroll allotment plan sponsored by
the Treasury.

H.M.Jr:

Harold, as many people as we have got, God

Graves:

I know, but it is a beginning. What I am
trying to say is that we have got to leave

that is nothing.

out side this plan the persons who work in

beauty parlors and stores and so on where

there are only two or three or four. We can't
encourage the establishment of payroll allot-

ment plans in institutions of that kind.
H.M.Jr:

I am not sure that you are right.

Graves:

Well, there is the risk of default, the risk
that employers will not turn in the money

just as we have a certain fringe of defaulters in Social Security taxing where
people don't pay it over to the Internal
Revenue.

H.M.Jr:

Have we got a group that is doing nothing but
payrolls?

Graves:

Right.

H.M.Jr:

How many people are there in that group here
in Washington?

324
- 36 Sparks:

Two.

H.M.Jr:

It is not enough. You see, what you fellows
forget, I am standing off a forced - a plan
for forced payroll deductions by telling them
they can do it this way. Here you have got
two people.

Sparks:

In addition to that, Mr. Secretary, we have
eight field representatives, all of whom are
well trained in salary allotment, but they
are not concentrating their entire time on
that.

H.M.Jr:

Well, if you don't mind my saying it, you
should have a thousand people in the field.

Sparks:

Well, all of these volunteer workers are be-

H.M.Jr:

It isn't enough. I am terribly - you ought to

ing trained in that also.

have a thousand people going after the factories.
My God! a thousand people can't cover this
country. I mean, your publicity is way ahead

and you follow up on a thing - it is very

disappointing. How can two people look after
the business of the United States? I mean,

here you have a - I don't know, the last I

heard, Opacs had a thousand people here in

Washington with all the business in the
United States, and we have got two.

Graves:

Well, Mr. Morgenthau, I don't think that is

H.M.Jr:

Well,Harold, I don't know whether it isfair
or not, but the statement is fair that you

a fair analysis. Our--

can't look after the business of the United
States with two people in Washington.

Graves:

I am not so sure. That is the point that I

had in mind when I said what I did. Our

325
- 37 -

reliance in this whole thing is on these

state and local committees and the two people

that we have specializing on this are largely
and local committees to do this work. Mr.
Sparks just told you that we have got--

people who go around and instruct our state

Sparks:

Eight field representatives.

Graves:

Twenty-five thousand members of state and

Sparks:

Forty-three thousand eight hundred and

Graves:

There is the agency we have got to count on

local--

fifty.

in the long run to do this job. The two

people are merely going about from territory

to territory advising with these state and

local committees.
H.M.Jr:

Now, look, I make this flat statement. Now,
I have been around long enough. Whether it

is fair or not, I will make it. That you

haven't got one one-hundredth enough people

on this payroll thing, and you will never get

it done with these three thousand committees
or not. Here we have been going four months
and the people we have got to count on to do
the saving are the factory workers, and you

can't do it with eight field people paying
part of their attention to this thing and two

people in Washington looking after eight.
We can get all the money we want, and I haven't
put the pressure on you in this thing, but
from now on I am going to. The people we
have got to reach are in the big factories.

Take a corporation like Chrysler. It would
be worth while to have a half dozen people

just working with Chrysler to put the thing

across.

326
- 38 Graves:

Well, our principle has been to induce the
union people to do that work for us.

H.M.Jr:

But supposing you had - I don't know how
many branches Chrysler has got. Certainly

they have got a lot, all over the United

States, and if there was one Treasury man with
every branch and with every factory who could
go to every union meeting and everything else

to follow the thing up until the thing was
going - you can't do it with the organization
you have got and it isn't lack of money.
Edward:

Mr. Secretary, the bankers are sponsoring this

payroll plan also. They are working on it.

H.M.Jr:

It isn't enough, Harold.

Graves:

Well, it isn't that we haven't had the money

as you say. We have done it the way we are
doing it because we have supposed that in the
end that was the most effective way to work
through these state and local committees instead of through salesmen that we would send
around to contact the management directly, and
we have avoided that.
H.M.Jr:

After four months the net result is that we

have a little over a million people, I take

it, with each one setting aside their savings.

Graves:

No, it isn't even that good. As I understand

what Mr. Sparks has said-Sparks:

No, that is right, it is not that good. A

million four hundred is the total personnel

in those companies. We don't know what the

percentage of participation is.
H.M.Jr:

Then I say it is even worse than I thought it

was. It has got to be better, Harold.

327
- 39 Graves:

Well, I still feel that our proper approach
is through these state and local committees.

H.M.Jr:

I agree with you.

Graves:

And not through paid people out of Washington.

H.M.Jr:

I don't care how you do it, but I am S aying

to you that if there is only a million four

hundred that are signed up and of those we
don't know what the percentage is, who are
saving systematically each month, I am saying

that after four months it isn't enough.

Graves:

That is right, I agree with you.

H.M.Jr:

And last month the national defense ran over
a billion dollars and we are not keeping up

with it. We have got to find some way of

doing it and getting more people because if

we don't I can't stand off this pressure for
forced savings.

Graves:

Let me just sum up the way I feel about it.
It all goes back to the slow progress that

we have been making in setting up our state
and county and city organizations, and once

we are able to bridge that gap, I think we
will make much more rapid progress.

Sparks:

I think the progress is going to be very
rapid as we fill in those white spaces and as
the yellows turn to blue. You will find
most of these in the red states.

H.M.Jr:

Now Michigan is really organized.

Graves:

That is right.

H.M.Jr:

Can't you put in there some kind of a plan
of payrolls the way you have on retail and let's

328
- 40 -

work it out in Michigan and let's find a

proper way to get Michigan, an industrial

state - I suppose it is one of the most
two or three highly industrial states in the
country - to get it so that we can do as well

on the payroll in Michigan as we have on the

retail.
Sparks:

H.M.Jr:

I think we can.
I mean, let's concentrate on Michigan and
find out. You concentrated on Michigan and

you worked out a beautiful plan on retail
stores. Let's take Michigan and say, we have
got to get way, that if there are so many
million employees working in the factories,
that we will work a way out to get those
people so that a high percentage of them are

setting aside their savings. The thing will

just be taken out of my hands. I don't want
to do it the forced way, the Fascist way.
I want to do it the democratic way, but if

I am going to do it the democratic way, we have

got to do it.

Sparks:

I think we can make a demonstration in Michigan.

H.M.Jr:

Let's make a demonstration in Michigan and we

will get these people in factories. I have
said again and again - I have asked that the
list of factories in Michigan under Social

Security, do we have a copy of it in Washing-

ton? I will make a bet we haven't got it.

Sparks:

H.M.Jr:

We haven't got the list, no.
I have asked for it for over a month, that

that list, a copy of it, be here in Washington, that we get a copy of the list of the
employees in Michigan, so that we can watch
it and check it off.

329
41 Sparks:

Social Security lists show that there are
fourteen million four hundred sixty-five
thousand employees employed in companies

employing eight or more employees.

H.M.Jr:

Where?

Sparks:

In the United States.

H.M.Jr:

Get the Michigan list and get it here and let's
check it off. Let's put on a compaign in
Michigan on the payroll thing. What I am say-

ing here is in the room. It mustn't get out.
I must be able to talk to you people frankly.

When somebody does a good job, I am delighted.

If you are not doing something, we have just

got to do better. Just get me a Social

Security list of employees in Michigan and

let's have it here and watch it and work out
some way for the State of Michigan that we
will get these men to saving money. Then

after we solve it in Michigan, we can use it

in other places. If you don't do it, take

my word, they will pass some legislation
whereby they will do this thing through a

forced method. I don't want to do it that
way. That is why I am so insistent that we
do it some other way. Now, forty-three

thousand people on the committee sounds lovely,

but we have got to do this payroll thing, and
the way to do it is to send enough people into
the field to work with the unions. When I

first talked about it, they were trying to

settle the Ford question. They settled the

Ford question. And then something else. They

will have plenty to do. But they always have
plenty to do. How about it, Harold?
Graves:

I think your last comment is absolutely right,
that our proper approach to this thing has

been through the unions and that--

330
- 42 H.M.Jr:

Where is what's-his-name? I haven't seen
him for five weeks?

Graves:

He has gone back to Chicago. He has Mr.

Hyatt who is working on this particular job
in collaboration with Mr. Sparks' people.
H.M.Jr:

I want a section set up under somebody here

that I can talk to, myself, who is going to
plan. I want a Mr. Smith or Mr. Brown. I

be r esponsible for the payroll deduction
want somebody.
Graves:

You have that.

H.M.Jr:

Well, who is it?

Graves:

Mr. Touchstone.

H.M.Jr:

Where is he.

Graves:

He is in the field.

Sparks:

In the field right now working on salary

H.M.Jr:

Dammit, let's have somebody so every time

Graves:

That is a job that has pretty nearly got to

allotments.

I ask for him he isn't out of Washington.
be done out of Washington, this job of
Touchstone's.

H.M.Jr:

Well, I would like to talk to some fellow who
is going to do the State of Michigan for me.
I would like to talk to him myself.

Graves:

All right.

H.M.Jr:

Then let's say that whoever the man is, that is
his responsibility. Who is the man--

331
- 43 Graves:

Hyatt, I believe.

H.M.Jr:

No, Houghteling. Either this is Houghteling's
job or it isn't, but I haven't seen Houghteling
in six weeks. He hasn't been here for six

Graves:

H.M.Jr:
Graves:

weeks. I don't know what he was doing.
He works. He was here last week.

He is not here when I am here. All right,

Harold?

All right.
We will restudy that whole thing.

H.M.Jr:

Give me something next week and have some-

body here in the middle of the week to say,
"Now this is what we are going to do in
Michigan."

Graves:

Fine. Does that cover your statement, Mr.
Sparks?

Sparks:

Yes, that does.

Graves:

I think that is all, Mr. Morgenthau, unless
you have something.

H.M.Jr:

Now, we have got the retail thing. That is
going beautifully. Now let's get the payroll
thing, and get our state organizations by the

first of October; and, as I say, our publicity

thing is running way ahead of the rest of the

stuff. Let's build that up now. We have got

the eighty thousand employees in the Treasury.

You can have all of them if you want to work
on this thing.
Sparks:

That does not include the governmental employees?

H.M.Jr:

Just the Treasury alone, there are eighty

332
- 44 thousand employees.
Graves:

Well, if you mean that in relation to this

payroll allotment plan, I think that something like eighty-five percent of the Treasury
employees are--

H.M.Jr:

No, I meant to put a program across. I don't

know how many employees we have got in Michigan,

but I mean I am willing to throw the whole

Treasury back of this thing to get this thing
going.

Sparks:

I think we can put on a very effective demon-

stration, one that will spread very rapidly
through all the red states, and we will

keep changing the colors as rapidly as pos-

sible on that so that they will all be red.

I think the Secretary appreciates that, even
though it is a small percentage of the total
number, that the volunteer workers in the
red states are responsible for most of that
production.
H.M.Jr:

I am an old hand at this business, and I know

when a thing is going well and when it isn't,

and this particular part of the thing isn't

going well enough, and I think it has got to
go better, that is all there is to it. I am
sure it can.

Graves:

Well, as I said, I think there is a worse

aspect which has been developed here. Mr.

Sparks gave you a figure of a million four

hundred thousand people.
Sparks:

That is right.

Graves:

Employed by the concerns which have the plan

in operation, but the number actually participating is some small percentage of that
total.

333
- 45 H.M.Jr:

You can't move a step in any office or
business or street or town anywhere in
Canada that you don't trip over one of
their posters. I mean, you can't move anywhere
and here in our own post office, when I go
into the Hyde Park post office, they haven't
even got a poster. Right in Hyde Park there

isn't even a poster. So we just haven't

scratched the surface. The President's own

post office, there isn't a single poster.
There was one in the back room. If you
screw your neck up you can see it.

Graves:

Maybe they need a new postmaster up there.

H.M.Jr:

Harold, if I had the time to go around and

It certainly is not our fault that they
haven't got a poster in that post office.

travel - and maybe I am going to have to make

the time - to go around and - I would just
like every place I move to see one of our
posters. We have got to raise a hell of a

lot of money, and we have got to mop up this

extra payroll. What is the objective? They
are spending all of this money, a billion
dollars for defense, and it is up to the

Treasury Department to mop this money up and

save it so that it doesn't all go into non-

defense and just make these prices go up and

up and up through the scarcity if there isn't
enough stuff being manufactured for the

people to buy it. Our job is to mop up these
savings and to keep inflation from going
through the ceiling and that is what I am

excited about. Now, don't let's lose sight of
the fact that each person has a little job,
and we have got this ten or twelve billion

dollars one way or the other to raise. If

we don't, we have just got to go to the banks
and we just aggravate the whole situation,

and it is this whole question of inflation.

Now, the people have got the money, they are

334
- 46 -

getting it, and the roll is beginning to

go in their pockets. We have got to go and
get a goodly share of their earnings either
first through taxes and second through their
savings, and this thing, and we have been at
this thing five months. We have just gotto

do a better job. I know this organization

can do it under Harold Graves. He has never

failed me yet, and he isn't going to fail me

now. All right.

335

Report From Mail Order Division
September 3, 1941

This report is based on a complete picture of what has
been accomplished in the Mail Order Division of the Defense

Savings Staff since its inception last spring.

The ohart of activities includes:
(1) Regular Purchasers - those who, as the result of pre-

vious solicitation, are buying at regular intervals. To

this list (approximately 100,000 at the present time), we
are starting this month to send a special letter and three
order forms, asking their cooperation in bringing the bonds

to the attention of others.

(2) Customers - all those who have bought but who haven't

agreed to buy regularly. To this list (approximately 2,000,000
as of July 31st), we are sending a letter urging adoption of
the Regular Purchase Plan, a colorful folder and a Regular
Purchase order form. These start going out this Friday,
September 5th.

(3) Prospects - large investors - taken from the Customer

and I. R. files. To this list (375,000 corporations, partner-

ships, associations, etc.), we have just sent a special mailing
consisting of a letter, order form and folder featuring F and

G bonds.

(4) Prospects - smaller investors. These are the I. R.
names (approximately 4,874,000 as of July 31st) that we are

testing - in a variety of different ways - in order to find
the formula that will produce maximum results.

Before we discuss the results of our testing to date, let me
raise one point that seems to me to be vitally important. In
one sense, this mail order campaign - including all of our mail

selling efforts - is different from practically all others. In

any commercial mail order business, the product is available
only by mail and results are measured in but two ways - the
mail orders that come back and the repeat business that follows.

In this mail order campaign of ours, results should be determined
by:

-2-

336

(1) The number of people who are induced to
send their orders direct.

(2) The amount of money received in relation

to the cost of getting it.

(3) The amount of potential repeat business
that becomes available at a very low
selling cost.
(4) Equally important - the educational work
done on the entire list.
Thus, from Test Series No. 1 for instance, which went out
June 21st, it should be remembered that in addition to
getting 300 people to buy over $140,000 worth of bonds at

a cost of 85/100th of 1 percent, the mailing called on

94,256 other people - told them the entire Savings Bond

story, and provided one more link in the chain of publicity

and advertising being used to raise money for national defense.
From Series One, relative returns mean more than total orders

or dollars received. We put these ten tests in the mail, with
existing material, to find out things and from that standpoint,
they accomplished their purpose.

We learned, for instance, that it WE.S safe for us to circularize
on Defense Savings Staff stationery; that a mailing on E bonds

was as good, if not slightly better, than a mailing on all three

bonds; that there was an extremely small demand for F bonds. We

also learned that if our best test had been sent to the entire
list, the selling cost would have been down to 73 cents for each
$100 worth of bonds sold.

That should represent a maximum selling cost for future mailings,
since none of the assemblies in Series No. 1 contained specifically
prepared mail order material, and had the further disadvantage of
being sent out during one of the poorest mail selling seasons of
the entire year.

From Series Two, which went into the mails July 19th, we are likewise getting some useful information. While returns are incomplete,
it seems safe to conclude that the best test, both from the stand-

-3-

337

point of orders and dollars received, will be an E mailing -

thus confirming what we discovered in Series No. 1. We have

also learned that with all other factors being equal, our

new folder "How To Buy A Share In America" is outpulling the

blue and white Defense folder used in the first tests; that

the State of Massachusetts produces twice as many orders as

the State of Michigan; that a combination of letter, folder
and order form is more productive than a card, folder and

order form.

From Series No. Three, which went into the mail last Saturday,
August 30th, we will get a comparison between the pulling
power of I. R. names with incomes over $5,000, incomes under

$5,000 and a mixture of the two. This list check-up is being

made in California, Georgia and Maryland. Also being tested
are several new letters; an advertising message on the envelope
versus a plain window envelope; and, as another confirmation,
the pulling power of E bonds versus all three.

This third series is going out at a very favorable time. In
a comparatively short while it should give us an indication

of the returns that can be expected from the approximately
2,000,000 new over $5,000 names that have just been put on
plates, as compared with the greater number of under $5,000

names that are available if it is found desirable to circularize
them.

Eventually

State and LoanI CommIttees OpgunIsed

Stat Coint Items Organized
ristrators and/or Chairsen appoInted
Not started

CLEARTYPE
UNITED STATES

.

339
September 3, 1941
4:50 p.m.
HMJr:

Breckenbridge
Long:

I'm all right, Breck.
Well, Henry, I thought maybe you could take

an interest in this over in your department and see if you couldn't - let me present
the thing to you briefly.
We're troubled in this country by a lot of
German propaganda films.

HMJr:

Yeah.

They're some of the very bad things floating

L:

around here.

HMJr:

Yeah.

L:

There's one, "The War On The Western Front"

HMJr:
L:

HMJr:

Yeah, I know about it.
And there are three or four more. The tendancy
was just to scare our people
Yeah.

and subdue them

L:

HMJr:
L:

Yeah.

and we've been trying every way to

get some action to either take these films

or to intercept, and
HMJr:

Well, let me interrupt you, Breck, because
I know all about this.

L:

Well

HMJr:

Any that come in - have been coming in now

for some time - we don't let them get out

any more.
L:

Yeah.

340
2

HMJr:

But those which are out, we can't do a
thing about it.
Well, I wondered if you couldn't by a
stretch of interpretation - you do, now,
hold those from coming in by taking their

L:

bills of lading.

HMJr:
L:

HMJr:

Yeah. Well, we

You freeze the bills of lading, in other

words.

Well, I don't know how we do it; but those
that come in now, they just never get on the
market.

L:

HMJr:

That's right.
But those which are out - I've been all
through that, and there isn't a thing that
we can do unless the Attorney General can
think up something.

L:

Uh huh. It just occurred to me - we had a
meeting here about it this afternoon

HMJr:

Yeah.

L:

that this UFA thing, they come to UFA U-F - A - and UFA is simply a wholly-owned
subsidiary of this German parent company

HMJr:

Uh huh.

L:

Which, in itself, is fostered and subsidized
by the German government.

HMJr:

I'm a hundred percent with you, and if anybody if the Attorney General can tell me how to do

it - I'd love to do it.

L:

Uh huh.

HMJr:

I can promise you that for over a month now
there have been no more coming in.

341

-3L:

Yes.

HMJr:

The last time we showed one we had the

Attorney General here. It was a picture
called, "Bismarck".

Uh huh.

L:

HMJr:

And we all voted on it and the amusing thing,

Mrs. Biddle said, "Don't let it come in,"
and Biddle said, "Let it come in," to be
different.

L:

(Laughs)

HMJr:

We out-voted him.

L:

Yeah.

HMJr:

But we haven't let any come in. It's a month

L:

Yes, I knew that. But these other old things
are still marching around.

HMJr:

We can't do a damn thing about it.

L:

Uh huh. Well, I just thought that maybe you it hadn't come to your personal attention.

HMJr:
L:

or six weeks, now.

No, I happen to know all about it, but
Well, then I won't bother you with it or take

HMJr:

any more of your time.
but I can promise you that no more will

L:

Yeah. Yeah. Well, we're - have been very

come in.

much interested and have been wrestling with

it for a month or six weeks here, and I just
thought that it hadn't come to your personal
attention; but you've had it, why that's all
I got to say.

HMJr:

Thank you, but call me any time.

L:

All right, Henry, thank you.

342
THE WHITE HOUSE
WASHINGTON

September 3, 1941

My dear Mr. Secretary:
My friend Mr. Guthrie was not among those
mentioned in the newspaper clipping that you sent me yesterday.

I have made inquiry as to the basis of the news-

paper report, and I find that it is in reference to an attempt

to get some order out of the chaos that has prevailed in the

Army trading posts. It appears that there is no uniformity of
prices even for standard products. I have been told that in
some instances the prices charged for nationally-advertised
products at Army posts are higher than those charged in private
downtown shops. Mr. Guthrie has been seeking to get some
system of centralized buying so that variations in prices from
post to post may be eliminated. Even cigarette prices vary
from post to post.

The new setup, as I understand it, will make it
possible for each trading post to buy any place it wishes on
condition that the wholesale prices it must pay to local jobbers
are no higher than the prices quoted to the central buying
office in New York. At the same time, a definite mark-up is

to be provided. In this way, there will be a top limit to

the prices that can be charged to soldiers at the Army posts.
Moveover, in the case of some nationally-advertised brands,
the proposed procedure will make it possible to sell certain
commodities at prices below those which prevail in private
stores.

Cordially,

Irada Lubin
Isador Lubin
The Honorable

The Secretary of the Treasury
Washington, D. C.

343
September 2, 1941

Dear Mr. Lubin:

What about this story? Is it
a reflection on your friend about whom
you spoke to me?

Sincerely yours,

H.m.g.
Honorable Isador Lubin,
The White House,

Washington, D.C.

By

Messenger 4:05pm

Saught

344
ARMY EXCHANGES

NTRALIZE
BUYING
War Dept. to Set U Off
Here After Report Arbitrary
Objections Hit Program
PLAN PRICE AGREEMENTS
Each Post Unit Will Titen

Over

From Manufacture's on B
of These Quotations
The War Departist
central purchasing genat
Monday for Army print

at 111 Eighth
learned yesterday

This action followerd

published in Till
TIMES last Summix

that "arbitrary object

part of high-ranking
cials were threaten
the centralized

administrator.,2.

at exchanges

The purchasing

which will be under

Manet
onel Frank
price agreeme
with manufacturer.

sands of articles

NON-1

arhanges Index
anges then
basis of and

the

Accounting.

consistrative

Army's post exchance
Human in Washing
ted that the 1weet

annual business

0.000.000 Seat
Colonel Mansfield

ed by Captain

Jenjito

ermerly connected
Kresge Company
Cobert E. Cooper
Montgomery Ward

Grocery interests
esterday by the

and men had been
what they described

sary delay in getting THAN
change program operation

The

had complained that Arta

officials had oversed

MILDER.

tions advanced by International

who had gone to Washingt
specifically to help in getting
post exchange program
and operating

345

September 3. 1941

Dear Mr. Mackensie:

In the last few crowded years I have set many,
and become quite intimate with some, splendid personalities
representing your government. There were few, however,

whom I came to like more, whose talents and services in

the cause of Britain I estimated higher, and whose loss

I could feel more deeply. than that of Arthur Purvis.
Though you and I have never not, we have in
common the bond of the loss of one whom both of us called

our friend. I wish you to know how profoundly I appreciated

your thoughtfulness in writing to no.
Yours sincerely,

(Signed) 4. Morgenthan, Joe

Mr. Moir Mackensie

21 Tothill Street
London, S.W.1

20th

Via Clipper
cc min channery

346
FEDERATION OF BRITISH INDUSTRIES
TELEGRAMS

FOBUSTRY. PARL LONDON
TELEPHONES

WHITEHALL 6711
(10 LINES)
DIRECTOR.

GUY LOCOCK C.M.G.
GENERAL

21. TOTHILL STREET.

FBI

LONDON. S.W.1.

SECRETARY

WALKER.

18th August, 1941.

YOUR REF.

OUR REF.

Henry Morgenthau, Esq.,

Secretary of the Treasury.

Tashington. D.C.,
U.S.A.

Dear lus. luorgenthan
We have never met, but I feel compelled to write to
you to express my deep and real sympathy with you at the
well believe

passing of your friend Arthur Purvis. 1 can

that his death, and in such tragic circumstances, must have
1 think you will be glad
been a terrible blow to you.
to know that when he lunched with me just a couple of days

after his arrival here he spoke of you in glowing and
grateful terms for your consistently wise council and help.
From a National point of view his many friendships
in both countries. and his immense understanding of our
mutual problems. would seem to render him irreplacable.
As one who held him in deep regard may 1 venture to say

that I share with you your sorrow at the death of our friend.

fours faithfully

luoir luackenyie

34?

Willard Hotel,

Washington, D.C.,
3rd September, 1941.

Dear Mr. Secretary,

I have your letter of September 2nd
stating that you have designated Dr. H.D. White

to be the Treasury's liaison officer for all
matters of lend-lease arrangements and of the

British dollar position.
I shall be glad to arrange for all
communications and enquiries on these subjects

intended for Treasury consideration to be
channeled through him in the future.
Believe me,

Dear Mr. Secretary,
Yours sincerely,

Helleyes

The Honourable
Henry

Morgenthau, Jr.,

Secretary of the Treasury,
Washington, D. C.

348

SEP 2 1941

n dow air
I have designated Dr. E. D. White to be the

treasury's Mistoon officer for all matters of Lead-Lease

- of the Britten dollar position. In

future, therefore, I would - is if all and Suggision - those subjects intended for
Treasury consideration were channeled through him.
Sincerely years,
(Signed) E. Morgenthan, IN

Secretary of the Treasury.

Mr Products Millings,
Union Secretary of the British Treasury,
British Supply Countil is North
willard motol,
Weekington, D. C.

File to Mr. Thompson

VW/A
gav Siey's office

349
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE

TO

FROM

September 3, 1941

Secretary Morgenthau
H. D. White

Subject: American airplanes in the United Kingdom
1. Colonel Roy A. Dunn, one of General Arnold's men, has just

returned to the U.S., after making an intensive inquiry as to the

number of unused American airplanes in Britain. He told Coe that:
a. He had himself counted 1,200 unused American planes,

a large number of which were still in crates.

b. He knows the places where they are.
C. Various explanations were given him as to why they

were not in use --lack of personnel, lack of proper
equipment, absence of spare parts, and the desire to
re-test on the spot the planes received.
Two additional reasons may be (1) the influence of vested airplane contractors' interests in England, and (2) the suspicion of
high British air officials of certain kinds of American equipment.
2. Stacy May, of O.P.M., also made some inquiries. The British
gave him the following figures:
Tomahawks in R.A.F

456

Tomahawks "arrived" but "not been delivered" to
R. A. F
Other American planes "arrived" but "not been

283

delivered" to R. A. F

About 500

There are other American planes in "storage reserve" and these
may make up the 1,200 Dunn spoke about. Mr. May 18 "satisfied he has

the full story and that, considering the value of P-40, the British
are using it as well as they can".

3. Coe stated that because you omitted reference to the question
of American airplanes in your recent cabled instructions to him, he is
not following up that subject. You may want to contact the two men

for the full story. (May is due back in the U.S. if he is not al-

ready here).

(Coe to Secretary, August 18)

350
TREASURY DEPARTMENT

wit

INTER OFFICE COMMUNICATION

DATE September 3, 1941

Secretary Morgenthau

TO

Mr. Kamarok

FROM

Subject: British Article on the Flying Fortress
The following are excerpts from an article in the London

Times' "Trade and Engineering" periodical, August 1941 issue.
The Fortress 1

"The official British name for the B 17 C, known in the
United States as the Flying Fortress, is to be the Fortress 1.
The original order of 20 machines has now been completed and
delivered, and as these giant bombers have proved to be every

bit as good as their American manufacturers claimed, it is
hoped that many more will be flown over soon. Further
deliveries have been promised under the Lease and Lend Act,

and it is expected that these will be a later and improved
If there is any criticism which could
version, the B 17 E.
made of the Fortresses which have so far been sent over for
the use of the R.A.F. it is that, like almost every other

be

American machine, they are under-armed.

"The writer recently had the opportunity of inspecting

the last of the original deliveries at a Ministry of Aircraft

Production depot, where they were being overhauled before
being sent on to an operational squadron of the R.A.F. Bomber
Command.

The Fortress's ceiling is put at 41,000 ft. when

carrying 39,000 1b., but even though it 18 known to be an

excellent performer at high altitude, this may be rather an

over-statement.

"Major Carl Brandt, senior test pilot of Boeings, came
over in one of the first machines delivered across the Atlantic
to give the British authorities the benefit of his advice and
to instruct test pilots in flying them. The Fortress 18
already extremely popular with the R.A.F. crews, for, having
been constructed originally for civil purposes, it is roomy
and extremely comfortable. The test pilot at this M.A.P.
depot -- an R.A.F. officer with a long experience of bomber
aircraft -- told the writer that the Fortress was the best
aeroplane that he had ever flown. It was completely free from
vices and, when once one had got accustomed to the instrument

panels, it was quite easy to fly, in spite of its great size.

351

-2-

Division of Monetary
Research

"An interesting development at this depot is the establish-

ment of special engine shops for handling the three main types
of American motors -- the Allison, Pratt and Whitney, and
Wright Cyclone. One shop has been set aside exclusively for
the assembly, overhaul, and reassembly of Allison engines, which
are now being used by the R.A.F. in great numbers in the
Tomahawk fighters which have given such a fine account of themselves in the Middle East and elsewhere. This move should
greatly simplify the problem of the maintenance of American

aircraft and engines in this country, which, in the past, has

given no small amount of trouble."

352
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION

DATE September 3, 1941
TO

FROM

Secretary Morgenthau

H. D. White

Subject: Post-War Policy of Free Trade

Many British officials are uncertain whether the United
States realizes the implications of its request that Britain
go along with a post-war policy of free trade. They question

whether the U.S. Government is going to be willing to lower
its tariffs, make the necessary internal economic adjustments,
and grant the large credits necessary to enable the rest of
the world to abandon exchange and trade controls.

Some British Treasury officials have said to Coe "that
they would be all for free trade if after the war England, and
other countries, have sufficient foreign exchange income to pay
for the goods they will need". Many fear, however, that England will not be able to abandon exchange controls after the
war and that a return to "free trade" 8.9 it used to be conceived is not going to take place.
Mr. Baxter's section of the Ministry of Post-War Planning
is tackling as their first job the problem of freer trade, because of the President's request for a statement of policy.
They are in a quandary; they do not wish to displease the United States, and yet they do not know that they will be able to
abandon foreign exchange control.

The Times editorial of August 18 on the Roosevelt-Churchill

conversation (which Coe enclosed) manifests a real doubt 8.8 to
whether what the United States seems to be asking can really be
achieved. Coe suggests that the U.S. Treasury should earmark
some men for full time study of these problems.
(Coe to Secretary, August 18)

353
MURRAY HILL 2-1160

Emergency Committee for Zionist Affairs
41 EAST 42nd STREET
ROOM 1121

NEW y o R K CITY

September 3, 1941

Hon. Henry Morgenthau

Secretary of the Treasury
U.S. Treasury Department
Washington, D.C.
My dear Mr. Morgenthaus

I am writing you following the conversation I had with
your secretary Mrs. Klotz. Since it is uncertain whether you will
be able to see me tomorrow, Thursday, I am taking the liberty of
enclosing copy of a memorandum which we have submitted to Under

Secretary Welles, following several conversations which we had with

him. In the last interview he assured me of his readiness to approach the British Government through Mr. Winant, in order to receive the desired assurance that nothing is being done or will be
done at this time to affect the status of Palestine.

We have had no word on the subject from Mr. Welles since
then. In the meantime, however, we have received from Dr. Weizmann

certain documents which confirm our supposition that negotiations are
being carried on with the Arabs which directly and indirectly affect
Palestine. There are matters in this connection which I would prefer
to discuss with you orally, and will be glad to have the opportunity
of doing so the latter part of next week.

With deep appreciation of your helpful interest, I am
Very sincerely yours,

Enamethermann
Emanuel Neumann

Enc.

Im human
paw the sein

9-11-41 at 3:30pm

0

354

0

P

Y

August 7, 1941

Mon. Summer Welles

Under Secretary of State
Washington, D. C.

Dear Mr. Secretary:
Supplementing the recent meeting which
Mr. Emanuel Neumann on behalf of the Emergency Committee

for Zionist Affairs had with you, I have the pleasure of
submitting herewith the memorandum which he undertook to

submit on our behalf. We hold ourselves in readiness for
a conference with you touching this problem, should you

find it necessary further to discuss the matter with us.

I am dear, dear Mr. Secretary, with most
hearty greetings

Faithfully yours,

Stephen S. Wise

MEMORANDUM SUBMITTED TO UNDER SECRETARY OF STATE
THE HONORARIA SUMMER WELLS

354.A

BY THE EMERGENCY COMMITTEE FOR ZIONIST AFFAIRS
L.

It has been generally assumed that British policy with regard to Palestine would

ndergo no important modification during the progress of the war. In Zionist circles it
as

hoped that no further steps would be taken toward implementing the White Paper of 1939

and it was beliefed that there would certainly be no basic change in the status of Palestine
r of the Palestine Mandate.

2. A recent address delivered by the Secretary of State for Foreign Affairs, Mr.
Anthony Eden, made specific reference to a coming change in the status of Syria and Lebanon

nd promised support by the British Government for a scheme of federation in the Middle
East as yet undefined.

Dr. Stephen S. Wise and Dr. Nahum Goldmann conferred with you shortly thereafter, and

fou were kind enough to state that in your view it was extremely improbably that the
British Government would take any steps involving the status of Palestine ei ther by the

clusion of Palestine in a federation or otherwise, without prior consultation with the
Government of the United Statestand furthermore, that if proposals affecting the status of
alestine or of the Jewish National Home were forthcoming, the American Government would

accord the representatives of American Zionism adequate opportunity to present their views
efore taking any position on such questions.
We take this accasion to express our profound appreciation of these statements made
by you at the time to our representatives.

3. Since the interview referred to took place, signs have been multiplying that the
question of new political dispositions in the Middle East have been occupying the attention

important British circles following the termination of the Syrian campaign. There is in
considered judgment reason to believe that the possibility of effecting a political
reorganization in the Middle East is being considered in British official quarters. This
has given rise to a certain apprehension leat under the pressure of war and of military
developments in that region, steps may be taken or commitments made which involve the

status of Palestine and of the Jewish National Home, in a manner and direction we can not

foresee or judge at this distance. Such steps or commitments, if made either publicly or

-2 -

355

privately, may conceivable lead to the result that the Mandate for Palestine would be
asterially affected at a time when neither the League of Nations nor its permanent
landates Commission are in a position to function. A further consequence would be that
such international settlement as may be expected to take place at the end of the war may
be prejudged by such commitments or by the creation of accomplished facts.

4. We would therefore respectfully suggest that it would be most helpful if the
American Government would elécit from the British Government authentic information OF solor

this subject as well as an assurance that it does not intend to carry on negotiations or make
commitments involving a change in the legal and political status of Palestine or a deroration of the position of the Jewish National Home, whether by promoting a union between

alestine and other territories, or otherwise; and that no steps will be taken without
previous consultation with the government of the United States.

We wish to record our gratitude to you for so kindly offering to act promptly in
this matter, and to express the hope that we may be informed of the result in due course.

356

TREASURY DEPARTMENT
INTER-OFFICE COMMUNICATION

DATE September 3. 1941

TO Secretary Morgenthan
FROM Mr. Cochran

The following table presents a breakdown of our silver purchases by sources:
Sources of Silver Purchased Under

the Silver Purchase Act -- 1941
Country of Origin

Jan.-June

July
(In

New Production Silver
Argentina

$ 201

August

Jan.-August

thousands

of dollars)

$ --

$ 80

$ 281

1,263

420

420

2,103

659

79

147

180

-

885

59

307

280

Not Designated*

2,014
3,428

333

538

2,601
4,299

Total New Prod.

$7,624

$1,319

$1,465

$10,408

Canada

Honduras
Java
Peru

239

Other Silver
China
Japan

$ 282
918

----

--

$

282

--

918

--

175

Mexico

175

Not Designated*

280

$ 210

$ 201

691

Total Other

$1,655

$ 210

$ 201

$ 2,066

Grand Total

$9,279

$1,529

$1,666

$12,474

*A large part of the "Not Designated" silver is believed to represent imports
from Mexico. For comparison purposes, total silver immorts into the U.S.
from Mexico are given below, according to type of silver:
Jan.-June

July

(In thousands
New Production

Other (refined)
Total

August

Jan.-August

of dollars)

$2,798
9,875

$ 577

$ 198

$ 3,573

2,148

2,005

14,028

$12,673

$2,725

$2,203

$17,601

357

September 3, 1941.

Dear Mr. Director:

This will acknowledge receipt of your letter
of August 27, on the subject of measures for the
protection of places and facilities essential to the

National defense and asking that I name a responsible
person in the Treasury Department who may confer with
Brigadier General Gasser, of your office, on the matter.
I designate Herbert E. Gaston, Assistant Secretary of the Treasury, as my representative with respect

to the matters of which you write. Mr. Gaston will
shortly write you with respect to the questions raised

in your letter.

Sincerely yours,
(Signed) H. Morgenthau, Jr.

Secretary of the Treasury.

Honorable F. H. LaGuardia,

U. S. Director Civilian Defense,
Washington, D.C.

File to

Mr. Gaston
Charmacy

358

MINUTES OF THE ECONOMIC DEFENSE BOARD SEPTEMBER 3, 1941

Present at the meeting weres

Assistant Secretary of State Dean Acheson,
Assistant Secretary of State Breekinridge
Long, Under Secretary of War Robert P.

Patterson, Assistant Secretary of the Navy
Adlai Stevenson, Mr. Harry White represented
the Secretary of the Treasury, Mr. L. A.
Wheeler represented the Secretary of Agriculture,
and Mr. will Clayton represented the Secretary
of Commerce.

Mr. L. P. Nickell, Maritine Commission also
attended.

Assistant Secretary of State Long reported that the State
Department and the inter-Departmental committee, had been studying

coffee. South American countries using coffee have progressively
raised coffee prices. It was reported by the Assistant Secretary
of State that Columbia has set fifteen different prices on coffee
recently, each now price being higher than the last. He stated that
Mr. Henderson, of office of Production Management, has filed reconmendations regarding coffee prices. Assistant Secretary of State
Acheson said that Mr. Paul Daniels has given much study to coffee.
The Vice President asked Mr. Laurence Duggan, of the State Department, and Mr. L. A. Sheeler, of the Department of Agriculture, to
consult with Mr. Harm, of the office of Production Management, and
Mr. Paul Daniels, and report back to the Defense Board.
The Vice President stated that hereafter many problems will
be handled in their preliminary stages outside of formal Board meetings, recommendations of the staff being presented to the Economic
Defense Board. He said that the Economic Defense Board now has an
office at Kew Apartments, telephone Republic 5050, Extension 1000.

Mr. Will Clayton stated that an exporter is compelled to go
through six different agencies before be known whether he GHD export

materials at this time. It was his opinion that in view of the
President's policy that after the Supply Priorities and Allocations

Board has made a ruling, there should be no need for specific export
licenses. The Vice President said that he is informed by Mr.
Donald Nelson, Executive Director of the Supply Priorities and

359
Allocations Board, that 10,000 export licenses have been granted,
that there are 20,000 export licenses pending, and several thousand
have been denied. There is a bottleneck because of slowness in
deciding upon export licenses, in Mr. Nelson's opinion. Mr. Nelson

says that he will clear the whole situation up in one week's time. Mr.
Will Clayton said that many exports to South America are not subject
to priority and that it should not be necessary for South American
countries to procure export licenses for such commodities. The Vice
President asked that Mr. Clayton discuss this matter with Mr. Donald
Nelson.

Under Secretary of War Patterson stated that Russia has made

such large demands upon the United States for materials, that we will
not be able to help South American countries substantially. Mr.
Clayton stated that one-third of our copper comes from South America
and that we must return some copper and other materials to South
America. The Vice President asked Mr. Clayton and Mr. Acheson to
discuss this situation with Mr. Donald Nelson.
The Vice President asked Assistant Secretary of State Long

for a report on the final destination of oil which is being shipped

from Port Arthur, Texas to Spain. Assistant Secretary of State Long
stated that the report that much of this oil is going to Germany and
Italy is probably incorrect, but that the State Department is not
yet ready to file its report and recommendation.

The Vice President stated that his information is that little,
any, goods are now being shipped to Japan. Assistant Secretary
of if State Acheson stated that some goods are going from the Philippines

to Japan. Mr. Harry White said that it may be advisable to adopt

preclusive selling as well as preclusive buying. It was his sold recom- by
mendation that we should learn exactly what goods are being
Japan to the Philippines and South America and that we should under

sell Japan on such materials. Mr. will Clayton stated that Japan is

such less from South America now and is not selling any United goods
buying in South America due to the freesing of Japanese funds in the

States and the failure of Japen to get raw materials. Mr. Clayton

stated that Federal Loan Agency has a $8,000,000 fund for the purpose

of de-Germanising South American air lines. He said are that being quarts shipped
crystals, from South platinum, America to and Italy industrial by airplane diamonds and and that mica this air service

should be stopped.

NATIONAL DEFENSE PIPE LINE - SOUTHEASTERN PIPE LINE SYSTEM

360

BY THE PRESIDENT OF THE UNITED STATES OF AMERICA

A PROCLAMATION

WHEREAS the act of Congress entitled "An act to facilitate
the construction, extension, or completion of interstate petroleum
pipe lines related to national defense, and to promote interstate
commerce", approved July 30, 1941 (Public Law 197 - 77th Congress),

vests in the President certain powers relating to the construction,
extension, completion, operation, and maintenance of interstate
pipe lines related to national defense.

NOW, THEREFORE, I, FRANKLIN D. ROOSEVELT, President of the

United States of America, under and by virtue of the authority vested
in me by sections 2 and 3 of said act of July 30, 1941, do hereby
find and proclaim (1) that it is necessary for national defense purposes that there be constructed and completed a pipe line system for
the transportation and distribution of petroleum and petroleum products
moving in interstate commerce, the route for which is generally indicated
on a map which is on file in the Office of the Petroleum Coordinator
for National Defense, detailed survey mape of which shall be of record
in the said office, commencing at Port St. Joe, Florida, and extending
in a northerly direction through the States of Florida and Georgia,
and into Tonnessee to a point on the Tonnossee Rivor at or in the
vicinity of Chattanooga, Tennessce, (2) that Southeastern Pipo Line
Company, a private corporation organizod under the lawe of the State
of Delaware, has commenced the work necessary for the construction of
such a pipe line system, and has partially constructed the same and
represents that it 18 prepared to complete said pipe line system,
and (3) that it 18 nocessary for the purposos of construction, complotion, operation, and maintonance of said pipe line system that
the Southeastern Pipo Line Company have the right to acquire, by the
exorciso of the right of eminent domain as provided in the aforesaid
act, along the route and between the points hereinbefore identified,
(a) such parcels of land or any interests therein, not in excess of
100 acres in each separate parcel, for the location of its storage

tanks, pumping stations, delivery facilities, and other facilities

in connection therewith, and (b) easements and rights of way, not in
excess of 100 feet in width, for the construction, completion, operation, maintenance and removal of the pipe lines, including right of
access thereto over adjoining lands: Provided, That such right of
eminent domain be exercised by the Southeastern Pipe Line Company for

the aforesaid purposes prior to June 30, 1943.

The pipe line hereinbefore identified shall be constructed,
completed, operated, and maintained subject to such terms and conditions as the President may hereafter from time to timo prescribe as
necessary for rational defense purposes.
IN WITNESS WHEREOF, I have horounto set my hand and caused

the seal of the United Statos to be affixed.
DONE at the City of Washington this third day of September
in the year of our Lord ninetoen
hundred and forty-one, and of the
Independence of the United States
(SEAL)
of America the use hundred and
sixty-sixth.

FRANKLIN D. ROOSEVELT

By the President:
CORDELL HULL,

Secretary of State.

361

FOR THE PRESS

IMMEDIATE RELEASE

FOR THE PRESS

SEPTEMBER 3, 1941

Announcement was made today of appointment by the

President of the membership of the Mission to Russia as follows:

Chairman, W. AVERELL HARRIMAN, now serving as the President's

Special Representative in London on Material Aid to the
British Empire.

MAJOR GENERAL JAMES H. BURNS, Executive Officer, Division of

Defense Aid Reports associated with Harry L. Hopkins.
General Burns has served with distinction in the Ordnance
Department of the Army.
MAJOR GENERAL GEORGE H. BRETT, Chief of Air Corps, at present

on a special Mission to Great Britain and the Middle East
in connection with deliveries of American aircraft.
ADMIRAL WILLIAM HARRISON STANDLEY, U. S. NAVY, former Chief

of Naval Operations, 1933-37. Admiral Standley was a
member of the Delegation of the United States to the
Cencral Disarmanent Conference held in London, 1934,

also a delegate on the part of the United States to the

London Naval Conference of 1935.

WILLIAM L. BATT, Deputy Director, Production Division, Office
of Production Management. Chairman, Business Advisory
Council for the Department of Commerce. Lr. Batt is
President of S.K.F. Industries, Inc., and Chairman of
the Board, American Management Association.

The Mission will join with a similarly constituted

British Mission under the Chairmanship of Lord Beaverbrook
for a conference in Moscow with the Russian Government regarding the supplying to Russia by the United States and Great
Britain of munitions, raw materials, and other supplies needed
by Russin for her defense against German aggression.
The holding of this conference was agreed to between
the President and the Prime Minister at their recent meeting
at soa.
-

TREASURY DEPARTMENT

362

INTER-OFFICE COMMUNICATION

DATE September 3. 1941
TO

FROM

Secretary Morgenthau
Mr. Cochran
STABILIZATION AGREEMENTS

China:

On July 14, 1937 the Treasury entered into an agreement with the
Central Bank of China to purchase yuan up to a total of $50,000,000 U.S. currency.
The agreement has been renewed each six months and now expires December 31, 1941.

At present we hold 65,000,000 yuan, whose book dollar value is $19,112,500, and
against which $19,379,015.65 in gold is held at the Federal Reserve Bank of New York

as collateral. The rate of interest is 1/2% above the current rediscount rate of
the Federal Reserve Bank of New York.

Brazil:

On July 15. 1937. the Treasury entered into an agreement with the
United States of Brazil, which expires on July 15. 1942. We agreed to purchase

milreis up to a total value of $60,000,000, with Brazil leaving on deposit in New
York gold collateral to guarantee the repurchase of the milreis by Brazil. The rate
of interest is 1/2 of 1% above the current rediscount rate of the Federal Reserve

Bank of New York, There have been transactions under this arrangement, but at pres-

ent we are holding no milreis. This agreement also provides for the sale of up to

a maximum amount of $60,000,000 in gold by the United States to be held under earmark

in our vaults for the account of Brazil. This agreement was modified on September 2,
1938. to permit Brazil to ship gold from abroad to be held in this earmarked account.
Up to August 30. 1941, $29,465,770.90 in gold had been sold by us to Brazil and
$11,532,765.19 had been shipped by Brazil to New York to be held under earmark.

On January 1, 1941, the Treasury entered into an agreement with the
Banco Central de la Republica Argentina and the Government of Argentina. Under this
agreement we undertake to purchase Argentine pesos up to the equivalent of $50,000,000

Argentina:

U.S. currency. No collateral is required. The interest rate is fixed at 1-1/2%.
The
into and effect upon ratification and confirmation by

itsauthority
constitution
and laws to enter into this agreeArgentina agreement of theunder
comes
operation
ment. Up to the present time the foregoing conditions have not been met and the
agreement is inoperative. The agreement was drafted to expire on June 30. 1941. An
extension of the agreement has also been drefted, but cannot be made effective until
the agreement itself becomes operative.

China:

On April 1. 1941, the Treasury entered into an agreement with the
National Government of the Republic of China and the Central Bank of China. This calls
for the purchase by the Treasury of Chinese yuan up to the equivalent of $50,000,000 1942.

U.S. currency. No collateral is required. The agreement expires June 30.

Interest at the rate of 1-1/2x. China has not yet called for the $50,000,000. Manuel Fox The

is

Chinese-American-British Stabilization Board in China. on which Mr. A. of August.
the American representative, did, however, begin to operate in the middle New York

The Chinese Government banks have deposited with the Federal Reserve Bank of

their contribution of $20,000,000 to the joint Stabilization Fund.

363

-2Mexico:

An agreement with the Government of the Republic of Mexico and

the Banco de Mexico is practically ready for signature. This involves purchases
of Mexican pesos by the United States up to the equivalent of $40,000,000 U.S.

currency. There is no collateral. The rate of interest is at 1-1/2%. The

repurchase clause with Mexico gives that country 180 days' notice and then ar
additional 180 days within which to repurchase. This is a generous departure
from our usual 30 days' notice. The Department of State expects its related
negotiations with Mexico to be consummated in time for the signing of the
Stabilization agreement before September 16. The Treasury is also to agree to
purchase up to 6,000,000 ounces of silver monthly from Mexico, under an arrangement similar to that which we have with Canada.
Colombia:

The Ambassador of Colombia has recently returned from his country

to which he went a few weeks ago with a draft Stabilization agreement with the
Stabilization Fund of the Government of Colombia, the Banco de la Republica,
Bogota, Colombia, and the Government of the Republic of Colombia. under which
the United States would buy Colombian pesos up to the equivalent of $3,000,000

U.S. currency. No collateral is involved. The interest rate would be 1-1/2%.

We should have further discussions with the Colombian Ambassador shortly.
Ecuador:

When the Ecuadorian Minister of Finance visited Washington in
August he discussed with the Secretary, and subsequently with the Secretary's
assistants, the question of a Stabilization agreement which might provide as
much as $5,000,000 U.S. currency. It is not believed that more than perhaps

half of such a sum could at all be justified. The Department of State has requested that we continue negotiations with the Ecuadorian Ambassador.
Bolivia:

We have promised the State Department that we would consider a
Bolivian request for monetary assistance.

KM

364

0

0

P

Y

BRITISH EMBASSY,

WASHINGTON, D. C.,

September 3rd, 1941.

With the Compliments of Mr. W.
Ritchie

Copy of letter dated September
3rd to Mr. Dean Acheson

Mr. Merle Cochran,

U. S. Treasury Department,
Washington, D.C.

Copy:new 9/4/41

365

C

0

P

Y

BRITISH EMBASSY,
SAFE HAND

WASHINGTON, D.C.,

September 3rd, 1941.

Dear Mr. Acheson,

The following is the text of a statement made by Mr.

Eden in the House of Commons on August 6th:-

"The Honorable members will remember that about a week ago

I announced certain freezing measures, which had been

instituted by the United States, the Netherlands and the
British Empire against Japan as a result of the Japanese
seizure of bases in French Indo-China. Those freezing

measures are not, as seemed to be thought by some
Honourable members in the debate, framed so as to permit

transactions which are not expressly forbidden. On the
contrary the operation is the reverse. They automatically
forbid all transactions except those which are expressly
permitted. As the House will understand, I cannot now
disclose the details of the manner in which this policy
is to be applied but there has been throughout closest
collaboration and frankest discussion between His Majesty's

Government at home, in the Dominions, in India, Burma and
in the Colonies, and the Governments of the United States
and the Netherlands; and the two latter Governments have

furnished us with full particulars and with comprehensive
information of their actions. The same collaboration is continuing regarding the operation of these measures as was in
evidence in former days. The House will understand that it
is bound to take a little time to exchange the views and
information which are necessary for common understanding of

such a far-reaching experiment as freezing orders will
present. But that work is now practically completed.
There is one assurance I would like to give the House; these
steps were not lightly taken. The Freezing order was
seriously intended and it will be seriously executed."
Mr. Dean Acheson,

Assistant Secretary of State,
State Department,
Washington, D. C.
NFH:WR:TMI

cc to Mr. Cochran

366

-2I am sorry you have not had this before, but I have
only just received
it myself.
I am sending a copy of this letter to Mr. Cochran
for his information.
Yours sincerely,

(Sgd) Noel F. Hall

Copy:new 9/4/41

0

367

0

P

DEPARTMENT OF STATE

Y

WASHINGTON

September 3. 1941

In reply refer to
EA 840.51 Frozen Credits/3254

The Secretary of State presents his compliments
to the Honorable the Secretary of the Treasury and
transmits a copy of despatch mailed August 13, 1941
from the American Consulate General in Hong Kong con-

cerning the reaction in Hong Kong to recent freezing
orders and the placing of the Colony of Hong Kong in

the sterling bloc.

Enclosure:
Mentioned above.

C

368

P

VOLUNTARY

(Supplementing radio message No. 293 of August 6. 4 p.m.)

CONFIDENTIAL

HONG KONG REACTION TO RECENT FREEZING ORDERS
AND THE PLACING OF THE COLONY IN THE
STERLING BLOC

From:

John H. Bruins
American Consul

Hong Kong

Date of Completion:

August 11, 1941

Date of Mailing:

August 13, 1941

Approved:

Addison E. Southard
American Consul General

369

1. Bank "Runs" of Short Duration:
On the two business days following the announcement

of the freezing of Chinese assets, local Chinese withdrew considerable sums in local currency from their local
bank accounts. This small "run" soon stopped, and there
was nothing approaching a panic. Hong Kong banks were

not embarrassed by this withdrawal, as nearly all of them

are overburdened with deposits which are difficult to
loan out advantageously.

2. British Control Orders Slow in Arriving:
The principal complaint of most bankers is the

slowness in arrival of the official British orders regulating both the "freezing" and the entry of Hong Kong

into the sterling bloc. It is pointed out that such
regulations have been in force in Singapore for many

months, and that all the details should have been immediately available here. American banks in Hong Kong

have also received conflicting telegrams from their
New York headquarters, and the atmosphere of uncertainty

prevails. This is regarded as an annoyance and as an
added business risk, which will probably be removed in
the course of a week or two.

370
-23. Uncertain Status of Bills Payable:

The principal difficulty is the status of bills
payable. Most of these are in Chinese names. The pur-

chase of such bills is an important part of banking
business here. Telegraphic inquiries to New York by
the local banks have brought equivocal replies. The
National City Bank continues to buy them. The Chase
Bank continues to handle them in small amounts. The
American Express Company has declined to handle them

until the situation is clarified. The Chase Bank reports
that some such bills sent to New York early in July,
long before the present orders were issued, have been
refused payment. It has been requested by its New York

headquarters to supply a full report on the number and

amounts of such bills now in transit.

4. Difficulties of Shanghai Arbitrage:
Local banks used to sell Shanghai dollars to importers, and covered by sending foreign currency equivalent to Shanghai. Under the new "sterling bloc"

regulations, it is apparently impossible to send out
such foreign currency remittances. Such transactions
occur

371

-3 occur mainly in connection with textile imports from
Shanghai (at least such part of the business as has not

fallen into Japanese hands), local importers thus requiring Shanghai dollars in payment. Before negotiating
business of this type, banks have satisfied themselves
that the business is being carried on by a bona fide
Chungking-sponsored firm. Some bankers are inclined to
attribute the weakness in Shanghai currency in recent

days to the aforementioned lack of demand for it, at-

tributable in turn to the inability of supplying cover.
The manager of the American Express Company stated con-

fidentially to-day that he had just been authorized to
supply the sterling cover from their London office to
Shanghai. He explains this by the fact that every such

transaction requires exhibition of bills of lading and
thus represents goods coming into the Colony and also
by the fact that reimbursement comes to him in the form
of Hong Kong dollars which are a controlled currency.
The above is another example of non-uniformity in prac-

tice due to conflicting orders under which the banks
are at present operating.
Uneven

Copy:wec:9-3-41

-4372
5. Uneven Spots in Administration:
There are numerous instances of inconvenience and
annoyance. The manager of the Chase Bank mentioned two

instances. Last April his New York headquarters recon-

mended the transfer of all U. S. dollar accounts in
Hong Kong to New York, in view of the uncertain situe-

tion in the Far East. This was carried out. Many of
these accounts were in the names of Chinese persons.

Some difficulty has been experienced in obtaining re-

lease of money for their children's education in the
United States, although it is understood provision has
been made under a general license for such living expenses. The second is an instance of a Chinese person
having a loan of about US$1,000,000 against about two

million dollars worth of securities. The market having
been favorable, securities to the value of about
$1,000,000 were sold in New York to liquidate the loan,

but cannot now be transferred, and interest must still

be paid on the loan. It is also understood that quasiChinese Government institutions such as the Postal Bank
and the Central Trust of China have not been granted
general licenses.

373
-5-

6.

Americans Obligated to Report All Holdings:

British subjects were formerly compelled to register their holdings abroad. Recent Hong Kong regu-

lations have extended this obligation to all nationalities. Thus, American citizens now in Hong Kong are

obligated to report to the British authorities all of
their holdings, even in the United States, and to offer
them to the British authorities at the convenience of
the latter against payment in sterling or local currency.
Thus far, there has been no compulsion exercised in re-

gard to holdings of local Americans in the United States.
However, this matter has already caused one American

millionaire to leave the Colony suddenly. and has also
made impossible the operation of American brokerage

offices here, dealing in American securities. There
are two such vis: Levy Bros. and Swan, Culbertson &

Frits.
7. Colony Reconciled to Trade Curtailment:
Special permits from the local currency control
authorities are required before any personal remittances
abroad may be made. For example, nearly all men make

constant remittances to their wives who have been evacuated,
and

374

- 6- -

and each such transaction now calls for a permit.
Thus far they have been freely issued. On the other
hand, business remittances are closely scrutinized, and

it appears inevitable that the inclusion of the Colony in

the "sterling bloc" will result in a serious curtailment
of trade.

800

-7-

800

JHB:bp

Distribution:

In cuintuplicate to the

Department (by air mail);
Hectograph copy to the
Department;

Copy to Embassy, Chungking;
Copy to Embassy, London;
Copy to Consulate General,
Shanghai.

375

376
Sources of Information:
Interviews with Hong Kong
bankers as noted in the
text;
Recent Hong Kong Government

Financial Regulations;
United States Executive
Order 8389 as amended by
Executive Orders No. 8785

and No. 8832. Also general licenses 54 to 69 issued

under these Executive Orders.

377
C

0

P

Y

Department of State
Washington

September 3. 1941.

In reply refer to
EA

The Secretary of State presents his compliments to
the Honorable the Secretary of the Treasury and encloses
five copies of a paraphrase of telegram No. 444, dated
September 1, 1941, 5 p.m., from the American Consulate

at Manila, Philippine Islands, transmitting a message
for the Secretary of the Treasury from Mr. A. Manuel Fox.

Enclosure:

From Consulate, Manila,
No. 444, September 1,
1941.

Copy:new 9/3/41

COPY

378

PARAPHRASE OF TELEGRAM RECEIVED

FROM: American Consulate, Manila, Philippine Islands
DATE: September 1, 1941, 5 P.m.

NO.: 444

STRICTLY CONFIDENTIAL
THE FOLLOWING IS FOR THE SECRETARY OF THE TREASURY
FROM FOX.

"Business as usual" continues to be the attitude in
Shanghai, Every effort is being made by both the Board
and myself to impress upon licensed banks that an emergency

exists. The only bank that is cooperating is the Hong Kong
& Shanghai Bank. A few others, such as American banks,

give lip service cooperating only for a day or two.
Drastic action with respect to license No. 59 may be

necessary if the losses of the Board are to be kept within
reasonable limits. As immediate action, it is suggested
that licensed banks be threatened and warned of the with-

drawal of its privileges under this license.
As an alternative, I could recommend to the Board the

lowering of an official rate. However, from our many
discussions of the subject, I am confident that this would
have a bad psychological effect in China where, in view

of rumors of peace, they are especially sensitive at the
present time,
With respect

379
-2-

With respect to license No. 59. threat and warning

would have an effect, especially if it were done publicly,
in Chungking. The suggested warning and possibly even more

drastic action would be an essential step before the lower-

ing of the official rate by the Board should it prove to
be necessary to make such a reduction.

With regard to telegram No. 206: The subject of
imports into China is covered in some detail in my memorandum,

United States trade with China urgently needs to be closer
controlled. I decidedly recommend either the revoking of
general licenses Nos. 58 and 64, except for trade via Rangoon,

or the adopting of the system of export licenses lines of
the order of August 25 of the British Board of Trade. The
Department is in the best position to make the final choice

in this matter.
1

I have just learned from Noble of the Export Control of
the Philippines that there has been a loosening of control
of United States exports to Shanghai instead of a tightening

as it appears that it is comparatively easy to get licenses
approved in Shanghai. Taylor had already been instructed to
prepare the material on the questions which were raised in
telegram No. 206. This information will be forwarded at
the earliest opportunity to the Department.
It is most desirable to have family remittances reach

the Board automatically. It is necessary that each important
area

380
- -3 -

area have a point of centralization. In the United States
the authorized channel could be the efficient Bank of China.

After local consulations, I am suggesting that the Central

Bank of China be the point of centralisation in the Philippines.
(It was recommended previously that the Philippine Bank of
Communications have this position.)
Should the Central Bank of China, which already has
a deposit account with the Philippine Bank of Communications,
open a deposit account with the China Banking Corporation

in Manila, all remittances could funnel through the Central
Bank of China there. I am urging the Government of China
to approve this procedure rather than that which was previously
recommended. I am also making arrangement through the office
of the High Commissioner along these lines.

Would it be possible for action to be taken when the

remittances are centralized in the U.S. to provide that
these be made at the official rate of the Board? Should

this be so, parallel action in the Philippines could easily
be taken.

There is great opportunity at the present time for
economic survey and recommendations provided the Government

of China is made aware of the definite interest and the
support of Washington. There are many urgent questions on
which there is a good chance of some remedial actions.

It is proposed that native talent be used; however,
direction and supervision is needed in such matters.

381
It would be appreciated if Adler could be made available
to me for work in Hong Kong and China. At the present time

Adler is in Manila. Since Adler has previously worked with
Far Eastern problems and freezing, he would be of great help.
The relation of the Board to the Agency is important.

A Frankenstein is created by the letters of April 25 in
providing for the agency to which all foreign exchange
from remittances and exports may accrue, with parallel

powers to the Board. There is convincing proof that an
attempt is being made to take full advantage of the latitude

of the provisions of April 25.
At the present time, the Agency is being set up as a

highly political coplection. All members of the Board
are greatly worried by the highly political complection
of the Agency as it is now being set up. A clash between
the Agency and the Board will inevitably develop - leading

to an ugly situation for the Department - if nothing is done.
It is therefore recommended strongly that the Depart-

ment consider this--preferably in collaboration with the

British. Hall-Patch is quite disturbed. I know that he
would welcome such action which would advise the Board and

the Government of China that:

(a) It is the opinion of the Treasury General Counsel
that the Board should be set up by Executive Yuan decree,
dated August 12, especially as the Agency has been so set

up and as no difficulty is experienced in China in predating
decrees.

382
-5-

(b) It is the considered opinion of the Department
that the Agency should concentrate on policy matters and
that the exchange operations should be reserved to the

Board particularly because of its technical competency and
compactness. To save face for the Agency it could be sug-

gested that it pass a resolution that the Board handle all
of the exchange transactions.

Please stress the urgent need for action since the
Chinese members have already been requested to return to

Chungking to attend the initial meeting of the Agency but
were advised by me to await my return there.
This is the end of the message.
HICKOK
SAYRE

EA:PAX

Copy:

1:9-3-41

383

PARAPHRASE OF TELEGRAM RECEIVED

FROM: American Consulate, Saigon, French Indochina

DATE: September 3, 1941, 5 p.m.

NO.: 88
A complaint has been made to this Consulate by the

Inspector General of the Bank of Indochina in regard to
the proceeds of a shipment of volfram which Amounts to
$15,289.13. This was credited to the blocked account
of the French-American Banking Corporation on May 28,

1941. The Inspector General also complained that the

Treasury had refused to allow the transfer of the credit
under reference to "special account A°. This action, the

Inspector General claims, is in violation of the licensed
which was issued in accordance with Executive Order No.
8389 on the seventh of March.

This Consulate would be glad to learn if and (1 when)

disposition (1 is) (8 made) of the proceeds in question
in order that this Consulate may use this information for
its own guidance in future dealings with the Bank of
Indochina.

This message was sent to Cavite in order that it
might be repeated to the Department for its information.
BROWNE

(NOTE: A repetition of the garbled groupe has been
requested. Should the correction be other
than that interpreted, the proper persons

will be notified.)

EASPAK

840.51 Frozen Credits/3341

TREASURY DEPARTMENT

384

INTER-OFFICE COMMUNICATION
For Miss Chauncry

DATE September 3. 1941

TO Secretary Morgenthau
FROM Mr. Cochran

CONFIDENTIAL

Registered sterling transactions of the reporting banks were as follows:
Sold to commercial concerns
L 79,000
Purchased from commercial concerns L122,000

Open market sterling held steady at 4.03-1/2, and there were no reported
transactions.
In New York, closing quotations for the foreign currencies listed below were

as follows:

Canadian dollar

Argentine peso (free)

10-9/16% discount

Uruguayan peso (free)

.2374
.0505
.5800
.2070
.2750
.4425

Cuban peso

1/2% discount

Brazilian milreis (free)
Colombian peso
Mexican peso

Venezuelan bolivar

In the unofficial exchange market in Shanghai, the yuan advanced 1/16 to

4-13/16 The sterling-dollar cross rate worked out to 4.04, off 1-3/8
There were no gold transactions consummated by us today.

The Federal Reserve Bank of New York reported that the Bank of Canada
shipped $2,759,000 in gold from Canada to the Federal for account of the
Government of Canada, for sale to the New York Assay Office.
We were informed that the Bombay gold price on August 30 was equivalent

to $34.14, or 12 higher than the quotation for August 23. Silver was priced

at the equivalent of 44.70 up 1/8

The prices fixed in London for spot and forward silver remained unchanged
at 23-1/2d and 23-7/16d respectively. The U.S. equivalents were 42.67 and
42.55g.

The Treasury's purchase price for foreign silver was unchanged at 35

Handy and Harman's settlement price for foreign silver was also unchanged at
34-3/44.

385

CONFIDENTIAL
-2-

We made two purchases of new production silver amounting to 100,000 ounces

under the Silver Purchase Act. This silver, which was bought for forward
delivery, came from various foreign countries.

The report of August 27, 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 $4,898,000,
an increase of $127,000 in the short position since August 20. Net changes were as
follows:

Short Position
Country
England**
Europe
Canada

Latin America
Japan

Other Asia

All others
Total

August 20

$ 38,000 (Long)
2,769,000
154,000 (Long)
112,000
71,000

2,019,000

8,000 (Long)
$4,771,000

Short Position
August 27

$ 166,000
2,700,000
100,000 (Long)
36,000 (Long)
116,000
2,091,000
39,000 (Long)

$4,898,000

Change in

Short Position*
+ $204,000

- 69,000

+ 54,000

- 148,000

+ 45,000
+ 72,000

- 31,000

+ $127,000

*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.

IMP.

386
BRITISH EMBASSY,
WASHINGTON.

September 3rd, 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 we,

Dear Mr. Secretary,

Very sincerely yours,

R.J. Captrell
The Honourable

Henry Morgenthau, Jr.,

United States Treasury,
Washington, D.C.

387

FROM LONDON DATED SEPTEMBER lat. 1941.

30th/Slat.
tons of high explosives and nearly
1,000 incendiaries dropped Cherbourg. Many burate
seen in docks area.
8.

31 Blenheims bombed industrial buildings
Lille, aerodréme in Britanny, and shipyards near Reuen.
Fortress from 85,000 ft. dropped bombs in the centre

of Bremen. Fighters escorting Blenheims destroyed 1

enemy fighter. No lost 2 fighters.
3.

Might of 3let/September 1st.
Nearly 200 aircraft despatched; targets
included Cologne and issen; 7 missing.
4.

Highs of August 80th/Slat.

Wellingtons attacked Tripolit.
One ship hit and set on fire.
5.
Malta. August 30th/Slat.
Five torpedo bombers attacked 1800 ton enemy

merchant vessel near Lampedusa. One hit scored left

ship listing heavily.
German Air Force. Ang. Slat/Sept. 1st.
93 aircraft operating of which 38 crossed
coast. One destroyed by night fighters. Main concentra6.

tion on Hall and neighbouring district. Some damage to
house property and some casualties.

388
NO OBJECTION TO PUBLICATION IN SERVICE JOURNALS

MILITARY INTELLIGENCE DIVISION

TENTATIVE LESSONS BULLETIN

WAR DEPARTMENT

No. 153
G-2/2657-235

Washington, September 3, 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 mature 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) M-B-M.

THROUGH SUN AND SANDSTORM TO SOLLUM

SOURCE

This bulletin is based on a translation of an article which was
written by a German war correspondent. The article was published in
April in the Voelkischer Beobachter, a Berlin daily newspaper.
Intended propagandistic effects should not be overlooked.

NO OBJECTION TO PUBLICATION IN SERVICE JOURNALS

-1-

NO OBJECTION TO PUBLICATION IN SERVICE JOURNALS

389

THROUGH SUN AND SANDSTORM TO SOLLUM

The men of a reconnaissance detachment were the first German

soldiers to reach the Libyan-Egyptian frontier and to occupy the

Egyptian frontier station of Sollum. They first set foot on African

territory in the middle of February, and scarcely eight weeks later
they were a full 1700 kilometers - reckoning only the distance on the
coast road - away from their starting point, Tripoli. And in those

hundreds of kilometers were embraced the most difficult marches under

the greatest privation; days and nights of wakefulness and fighting,

of defense, of attack and reconnaissance; sandstorms and the scorching
heat of the sun - an accomplishment of men and materiel so incredible

that it is almost indescribable.

When they reached Africa, the men knew nothing of the desert;

they knew the land only from books and stories. But they saw it with
their own eyes, and they lived it on a march which took them from
Tripoli to Sirte in less than two days. That trek alone was an achieve-

ment for men and machines, and it showed what could be accomplished,
even under completely unfamiliar circumstances, by will power and

intelligent leadership; for even the command of the German African
Corps had not expected that the detachment could travel to Sirte in
such an amazingly short time.

Just behind Sirte lay the main battle line of the Italians,

The detachment took but one day's rest and then pushed forward again,

across the Italians' main battle line and on to Nofilia, 130 kilometers
from Sirte.

At Nofilia the detachment was detailed to hold the enemy, to
reconnoitre in his direction, and to throw him back if he should
make an attempt to attack the German position. Many were the tasks
that had to be performed, tasks which were fitting for a reconnaissance detachment. All branches of service represented in the detachment were well supplied with work. The armored reconnaissance cars;
the infantrymen; the crews of accompanying guns; the pioneers; the
antitank guns: the intelligence personnel; the motorcycle riflemen
companies; the transport crew; the red cross personnel; all felt the
load. Day and night everyone was prepared and on guard.
Three weeks went by. Slowly the front was pushed farther
forward into the region of Arco dei Fileni. Again and again
reconnaissance troops approached the enemy in an effort to ascertain
the strength of opposing forces. Twice these reconnaissance troops
came in contact with the enemy. The first clash between German and
English troops in Africa took place on the morning of February 24, 1941,
southeast of Agedabia. The skirmish was costly for the English, who
NO OBJECTION TO PUBLICATION IN SERVICE JOURNALS

-2-

390
NO OBJECTION TO PUBLICATION IN SERVICE JOURNALS

lost both men and materiel, While German troops thus faced the enemy,

they familiarized themselves with the desert, in which, as they well
knew,
soon would have to fight a battle unlike any they had ever
fought they
before.
In the gray of dawn on March 24, exactly a month to the day

after the first meeting of German and English strength, the attack
rolled on E1 Agheila, which a wenk British force had occupied by
surprise. Frontally, and with a flanking movement, the Germans adYanced on E1 Agheila and took it. The well-mined terrain in front of
the position delayed, but did not stop the attack; and once again the

reconnaissance detachment could rest, only to advance 1,000 kilometers
less than two weeks afterwards.

E1 Brega was the next goal. After a stubborn resistance, it

was taken on the dawn of March 31, by sections of the reconnaissance
detachment in conjunction with tanks, Stukas, and machine gun units.
From then on the advance against the enemy continued at a pace that had

hitherto been thought impossible in desert country. After securing
the right flank of the German troops at E1 Brega, and then capturing
Agedabia on April 2 and securing the left flank, the reconnaissance
detachment began its really great period with the advance on Bengasi.

Would Bengasi be defended? Was it the strong position that
the English said it was? Would not the enemy do its utmost to hold
this port? Over the road to Bengasi the convoy rolled, and above it,
like great invisible question marks, hovered those thoughts. As always, the scout troops were in the van to guard against surprise.
To the side of the road, deserted refueling camps and ruined vehicles

gave their little pictures of the great war. Kilometer after kilometer
ground away under wheel. Ever searching, the men's eyes looked out
across the countryside and ahead and down the road, Over there-isn't

that an English tank behind that truck that's shot to pieces?
Cautiously the vanguard stalked closer. There was no movement; it
looked suspicious. The young lieutenant colonel, automatic pistol in
hand, walked up to the scene; his eyes widened. In a tent, sleeping
quietly and peacefully as if there were no Germans, were three Tommies.
"Morning boys," the voice of the lieutenant colonel started the three

up out of their sleep. One reached quickly for his pistol, but let it
fall when he saw the threatening barrel of the automatic pistol in
front of him.

The flanking guard stretched far out into the desert on both
sides of the road; Bengasi was approached on a broad front. Night
turned to morning - Bengasi was in German hands. It could hardly be
believed. The city, the possession of which meant so much, had fallen

into German hands without a struggle. And just as the Germans could
scarcely believe it, the Italians were beside themselves with happiness
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and joy: they prepared a tremendous reception for their allies. All
the cares and anxieties, the privations and sacrifices that had been
stored up, were changed in a flash to one great transport of joy.
The march continued, and the position was made secure beyond

Bengasi. After that 170 kilometer jump from Agedabia to Bengasi,
there was a two-hour rest. The soldiers stretched out under palm
trees, ate and refreshed themselves, showed each other the first bits
of booty, and scrubbed some of the dirt out of their sweat-covered
faces. And from there, too, the radio message went out that Bengasi
had fallen. Suddenly, out of a clear sky, came a good luck omen.
General Rommel, who "is always everywhere, and always in the front,
as one of the men once said, stood in the midst of the officers and
men of the reconnaissance detachment.

A burning heat covered the land as the detachment turned toward the east, away from the coast road and into the desert. March,
march, march, came the order: do not lose sight of the enemy again;
stay right on his heels. The commander of the reconnaissance detach-

ment knew the deep significance of his mission, and he fulfilled that
mission so well, that, at the victorious conclusion of this great
advance all the way to the Egyptian border, the Fuhrer and Commander

in Chief bestowed upon him the Knight's Cross of the Order of the Iron

Cross for his brilliant leadership and personal bravery. Included in

this reward to Lieutenant Colonel Baron von Wechmar, of course, was
recognition of the splendid achievement and the exemplary fighting

spirit of his detachment.

No longer was the road smooth under the vehicles' wheels;
sand and stones alone paved their way. Above, was only the sun and

thick dust. Mouths grew dry and tongues too lazy to speak - even if
they could speak in that furnace of hell. But onward, ever onward,
pushed the detachment. Benina was reached and passed. Suddenly word

came from the van - machine gun nests and strong fortifications are
on the heights, and tanks are in the hollow. Already the enemy

artillery was flashing; everything halted. In a trice the detachment
was broken up, the artillery was brought into position, and everything

humanly possible was done to meet the sudden fire. The decision was

reached immediately - attack; tanks forward! A dense, raging curtain
fire confronted the attacking tanks, but they paid no attention to it,
nor to the mine fields that had to be crossed and the toll those mines
demanded. The tanks rolled toward the hill fortification and fought
their way through it, out a broad antitank trench brought them to a
halt, and they had to turn back. The enemy immediately began an infantry counterattack, but German motorcycle riflemen were ready, and
they threw themselves against the counterattackers. Pioneers were

already breaking paths through the thick mine fields. Artillery on

both sides thundered unceasingly. Step by step the men worked their
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way toward the enemy position; the machine gun neste which had not already been disposed of by the tanks, were mopped up by the infantrymen.
Under cover of darkness, the men reached the antitank trench; there

they held their position all night. Forgotten were dust and weariness;
only
fight.the law of war applied, and that permits but one thought - to
While the battle was raging, pioneers were working feverishly

to repair explosion craters in the winding road that lead to Fort

Regima; the vehicles had to have a clear road during the planned attack.
Slowly the din of fighting died down; alert and watchful, the Germans

waited. Only the cries of the wounded interrupted the still of the
night. At dawn Nazi troops came out of their cover and stalked closer
to the fort. A terrific tension hung over the men. No shots fired?
Confound it, why don't they fire? Cautiously the men felt their way
forward; the top seemed an eternity away to them, but they finally
reached it. The fort had been evacuated in the night, and only a part
of the garrison was still there. That part surrendered, and numerous

prisoners were taken.

Once again the desert swallowed up the long column, now march-

ing in convoy. Through the send it moved, across E1 Abiar and then
straight toward E1 Mechili. No longer were there roads; the compass
was the only road sign, and the vehicle tachometers the only kilometer
stones.

Suddenly one evening the vanguard reported that some 40 enemy

tanks were approaching in a frontel attack and that approximately the
same number were coming from the north. It looked bad, very bad.
Eighty tanks were not going to prove an easy foe. The only redeeming

feature was that they apparently had little heart for attack. At any
rate they hesitated. Swiftly the column turned and made for a
commanding height to the rear; then it formed a defense front against
the superior tank forces of the English. The detachment took up a
hedgehog formation, so that it could instantly meet attacks from any
side; but nothing happened.

In the early afternoon a reconnaissance patrol surprised and
captured a British gasoline convoy on its way to the tanks with

necessary fuel. As it took little thought to realize that if the

English tanks had no more gasoline, they could not stay in battle very
much longer, it was decided to break through the line of tanks. The
mission had to be accomplished; no more time could be lost. At twilight the detachment started on its mad night march through the
desolate wasteland of gorges, wadies, and sand. It could only travel
at en average of ten, or at most fifteen, kilometers per hour; the
vehicles had almost to feel their way forward, as they bounced from
side to side on the rocky ground. In the morning the riddle was solved.
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Many of the tanks were standing in the desert; some were still with
crews, some deserted. Their gasoline supply had run out, and they
lay helpless at the mercy of the Germans, Without much delay the
journey was continued, until a mine field just in front of Mechili
barred the advance and made a rather long stop necessary.

But the desert had not shown all of her obstacles yet. A
heavy sandstorm started up and the march became a torture. Despite
everything, however, the detachment reached Mechili at the very
moment that other German units were taking the village. The catch
made there was wonderful. Not only were six generals and 2000 men
taken prisoner and 14 German prisoners set free, but immeasurable

material booty was also captured. From tanks to golf clubs, from
serious weapons to the tools of the Englishman's sports, from whiskey
to fruit preserves - everything was there. Think what that meant to
troops which had not had anything hot to eat for five days: for men
who had had to exist on a half liter of water per day and who had
perhaps even poured that in the radiator of their conveyance simply
because the motor needed it even more than did the thirsty men!

In syite of the tremendous exertions of the days gone by, no
rest could be given the troops. The advance on Tobruk by the coast
road had begun. The attempt to veer around the enemy far to the south

had failed because of the insurmountable difficulties of the terrain.
In the meantime, units of the machine gun battalion had gained
possession of a route over which Tobruk could be passed to the south.
To be sure, that meant marching more than 70 kilometers in the worst

part of the desert, but that made no difference - the main thing was
that it could be done at all. The second great desert trek began.
The way lead across Acroma, and soon English reconnaissance tanks

bobbed up. But the antitank defense was alert, and two of them were
put out of commission. The others retreated; but from a distance they
could still direct the fire of a battery on the marching detachment.
A bigger loop had to be made to the southwest to avoid that battery.
Everything comes to an end sooner or later. At noonday the
detachment marched on past E1 Adem and then once more through the

worst kind of sandy desert. A sigh of relief went up in the ranks

when the wheels once more struck the coast road. The detachment was
now behind Tobruk's own defenses and could take up the task of advancing

past Berdia to the Libyan-Egyptian frontier. Very cautiously, on the
night of April 11, it set out along the coast road toward Bardia. To
the right and left of the road British reconnaissance cars and tanks
were still wandering about in the countryside. Just as the first

German vehicles approached the city, the harbor road was blown up and

fire poured out of the magazines, signs that the English had just withdrawn. Considerable booty in materiel and supplies fell into the hands
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of the Germans, who quickly occupied Bardia and extended their defenses

to the heights in back of the city. Then the giant hedgehog, with

weapons bristling, stood watch, while reconnaissance troops scouted

in the direction of Sollum. Unceasingly, British low flying planes

and bombers raked the advancing detachment, but with little success.
What German soldiers have once attained they do not give up, no matter
how hard the enemy may resist. On the evening of April 12, the message
came from the advance units: "6:40; Libyan-Egyptian border crossed
and Sollum occupied," - there was great joy.
For eight weeks this reconnaissance detachment had been on

African soil. Always facing the enemy, never at rest: waking and
fighting, attacking and defending itself; the desert had become its

home.

He alone who has felt the hot breath of the desert, who has
endured to the end the torture of thirst without water, who has, in
near desperation, reached for the iron ration, can know what it means

to fight in the desert. Only he who for hours and days in the Ghibli

has sat in a conveyance or stretched out in a tent with a handkerchief
over mouth and nose, who, with a few comrades, has pushed in sheer

desperation, and to exhaustion, a vehicle stuck fast in the sand, who
has looked in vain on the smooth flat surface of the desert for cover
from a low flying plane, knows what African fighting is.

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G-2/2657-220;

No.

483 M.I.D., W.D. 11:00 A.M., September 3, 1941
SITUATION REPORT

I. Eastern Theater.
Ground: The German drive from Gomel southeastward made

slight progress on August 31st. Another German Armored Division suc-

ceeded in reaching the Briansk-Kiev railroad to the northeast of
Voromezh. To the south of Berezna, progress was also made. In this
sector German infantry units are approaching the Desna River. The
six German bridgeheads east of the Dnepr River were not enlarged on

August 31st.

No definite information has been received with regard to operations on the Yartsevo-Roslavl-Bryansk front, although
Russian counterattacks appear to be continuing at various points along

this line.
on

German advances continued in the Leningrad sector
the 31st. A German column advancing northeastward from Tosno reach-

ed the Neva River at Ivanoyskoye, a town to the northeast of Kolpino.

Farther east a German combat group, advancing northeastward from Chudowa down the Volchov, has reached the railroad station of Myslowe on

the Leningrad-Jaroslavl railroad.

To the southwest of Leningrad, German forces advan-

cing from Kingisepp have captured the village of Bieguinzy. Unofficial reports from Berlin state that the German advance has actually
reached the area just south of Krasnoyeselo.
Air: The Italian communiques reported German bombings of

large forces of Russian aircraft concentrated on the Kiev-Gomel-Smolensk line.

II. Western Theater.
Air: British planes made night raids on Berlin, starting
a large number of fires, and also operated over northern central and
southwestern Germany. German activity was reported over airports in
the Midlands and ports on the British east coast.

III.

Middle Eastern Theater.

Ground: Little of importance.

Air: British air activity has been strong recently against
Tripoli, Bengazi, Bardia and Gambut. Fleet Air Arm claims bombed air-

craft at the Italian bases of Gherbini and Comiso, Sicily. Malta was
raided by Italian planes and British ground forces are reported by the
Italians to have been machine-gunned in the Jarabub oasis.
RESTRICTED

Paraphrase of Code Cablegram
Received as the War Department

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396

at 11:32 a.m., September 3, 1941
London, fileds 4:37 Demo, September 3, 1941.

1. British Air Activity over the Continued.
a. Right of September 12. 43 tens of m, including one 4000
pound beeb, and 5800 incondisiries were dropped in Cologne. 10 tens
of HB were also dropped on secondary targets.

b. Day of September 2. A total of 401 fighters were employed

as follows 116 in the protection of shipping, 55 on interception
patrols, 196 - offensive missions and 34 on special operations. off
Stavanger, 3 Beauforte attacked 3 motor vessels, claiming hite by

terpedes - - meter vessel of 7000 tens and an escort vessel. Both
vessels were believed smak. These aircraft were engaged by 3 Common

Me-109's. , direct hite on a 4000 ten motor vessel off the Belgian
conet were claimed in an attack by 3 Menhaine with fighter count.
2 B-27's, which had been dispatched to Dutaberg and Hanburg, abam-

dened their missions because of bad weather. A third B-17 attached
Brease free 30000 feet. No German aircraft opposed this attack.
One of the basis dropped was observed to burst in the center of the

city.
6. Right of September 23. A total of 199 bembers were dispatched as follows: 125 to Freakfort, 32 Rempdone, 7 Halifax, 6
Starlings and 4 Manchesters to Berlin, 10 to Ostend, and 15 on sea

mining off the Frisian Islands. Although stanspherie conditions
over the targets were good, there was widespread fog over the

British Islee and most aircraft were compelled to land any from
their have bases.

2. German Mr Activity over Britain.

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a. Day of September 15 Bember-ecennaissance aircraft, 15

long range and , fighters were used.
b. Name of September 12. 5 mine layers, 5 recommissions
aircraft and 25 long range bombers were employed.

c. Day of September 2. Defensive fighter patrols were maintained in the area of Calais.

d. Night of September 23. Defensive night fighters patrolled
in the area of Charbourg. Offensive night fighters operated over
East Anglis and Lineolashire. Long range bembers were active over
St. Abb's Head and Whitby.

9. Aircraft Losses Reported.
a. British lesses. During the day of September 2, no fighters

were lost. 1 terpedo carrying Beaufighter failed to return. 1
Blenhein was lost by anti-aircraft fire off the Belgian coast. Boab
or lesses during the night of September 2-3 were as follows. Frenkfart raid, 4 last, 5 crashed in England, the crew of one of which
was killed; Berlin raid, 2 Hampdens, 2 Halifax and 1 Manchester lost,
and sea mining mission, 2 lost.

b. Asia losses. On September 2, British fighters shot down 2
Me-109's. Another Me-109 was destroyed in the engagement with Beau-

fighters.

4. British Air Activity, Other Theaters.
a. North African Theater. 16 tens of HE were dropped on the
harber of Tripoli by 9 Wellingtons during the night of August 32September 1. 2 meter vessels were reported sunk. Benghasi harber

was also attacked this night. 3 Blenhaine began this attack by
banking a tanker and gasoline storage barge from aa altitude of

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20 feet (8). At the same time the town was bombed by 2 Maryland

bombers. 6 Wellingtons renowed the attack 2 hours later, drop-

ping 5 tons of bombs. During the day of September 1, direct hite

- the power station at Tripoli were claimed in an attack by 7
Wellingtone. Axis shipping and the munitions factory at Cretens
(8) were attacked on this day with good results by 7 Elenhains.

5. Axis Air Activity, Other Theaters.
a. Middle Eastern Theater. The Germane have based a squadFOR equipped with 6 Fecke Wulfs at the Kleusis airdrens in Crete,

apparently intended for operations against shipping in the Red Sea,

according to a statement by the British Air Ministry.
LEE

I. B.18 , 3.00P, 9/3/41
Distribution:
Chief of the Army Air Forces
State Department (2)

Assistant Chief of Staff, 0-2

War Plans Division

Office of Naval Intelligence (2)
O. L Q.
Record Section

Intelligence Branch
Secretary of Treasury
A.S.W.A.

Section File
Collection Section
B.N.
G-3

A.C.

CE,B &

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