Full text of Diaries of Henry Morgenthau, Jr. : Volume 450 : Part 2

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188
October 13, 1941
11:35 a.m.
HMJr:

Fiorello

Hello.

LaGuardia:

Hello, Henry.

HMJr:

How are you?

L:

Pretty good.

HMJr:

Fiorello

L:

Yes.

HMJr:

L:

HMJr:

thank you for bringing to my attention

about those Internal Revenue fellows.

Oh, yes. That'11 happen in the best of
families.

Well, they're out; and they're not going
back.

L:

Good. Say, Henry

HMJr:

Yeah.

I've put my police on the alert for

L:

bootlegging.
HMJr:
L:

Yeah.

And I think we ought to resume - you ought
to get more men here, because you know it's
very tempting now with the taxes.

HMJr:

I see.

L:

And we caught a couple, but very small stuff,
you know.

HMJr:

Why don't you drop the taxes on liquor between
now and November first?

L:

We are dropping it two per cent.

189

-2HMJr:
L:

(Laughs)

But listen, after all, Henry, I've got a
government to run here. We re going to drop
the sales tax on it.

HMJr:

I see.

L:

Two per cent.

HMJr:

Well, I'11 pass the word along to the Internal

L:

Yes, because

HMJr:

Now, we'll make a couple of spot checks.

L:

Yes, we.

HMJr:

Any particular district, Fiorello, you're

L:

What's that?

HMJr:
L:

Revenue fellows.

interested in?

Any particular district?
No, it'11 be general. We've got to watch
it and also the stamps in the cabarets.

HMJr:
L:

HMJr:
L:

I see.

That's it - you see if they can save fifty
cents on a bottle, they'11 do it.
Right.

Because they're after it. And thank you very

much for cleaning that up, Henry.
HMJr:

And we'll do the other thing this week.

L:

Thank you.

HMJr:

Thank you.

190
OFFICE OF THE COMMISSIONER OF CUSTOMS

October 13, 1941.
TO:

Secretary Morgenthau

FROM:

W. R. Johnson.

RE: X-ray detection of concealed
jewels - Your memorandum of
October 7, 1941.

Extensive tests conducted in 1937 with a KellyKoett X-ray fluoroscopic machine, supplemented by
tests suggested by your inquiry, show that the X-ray
machine cannot definitely establish the presence of
concealed jewels in packages.

Under certain favorable conditions, the X-ray
will indicate the presence of jewels in a package
by shadows, but it cannot be known whether the
shadows are of pearls, rubies, emeralds, or of
articles other than precious stones. Diamonds are
practically transparent to X-rays and their
presence is rarely indicated. A string of pearls
under most favorable conditions might possibly be
identified by the shape of its shadow.
The tests were conducted with containers made

of various materials, including wood, leather,
cloth, fiber, and bakelite.
Metal containers, such as the cases in which
jewels are ordinarily carried in baggage, make the
X-ray disclosure of the contained jewels extremely
difficult and usually impossible. Metal locks,
chains, hinges, etc., on leather or cloth bags also
seriously interfere with X-ray examination of the
contents. The presence of any articles other than
jewels in the same container with jewels results in
X-ray shadows which may obscure or confuse the shadows
of the jewels.

191

-2-

The X-ray machine should be used, as here-

tofore, by customs in a few special cases, but
I believe that its general use in the examination,
for example, of leather containers which we do not
want to open, would not produce satisfactory

results.

W. R.Johnson

192
October 13, 1941
3:00 p.m.
HMJr:

Hello.

General
Watson:

E. M. W.

HMJr:

H. M. Jr., broadcasting.

W:

How are you? Well say, are you all right?

HMJr:
W:

I'm all right.
Frances and I worried about you the other
day in that damn airplane business.

HMJr:

Yeah.

W:

But you came out all right?

HMJr:

I still come out.

W:

Well

HMJr:

W:

I'm the only man that ever flew into a tree

and flew out.

Well, that's what I understand. (Laughs)

Well, that's all right as long as you re all
right.

HMJr:

Yeah.

W:

Now look here, this fellow Saul Haas

HMJr:

Yes.

Bone - his secretary is always phoning

W:

HMJr:
W:

HMJr:

Yeah.

and the President said that Jimmie Rowe
is holding the thing up because he heard the
fellow had been doing a lot of talking against
the President out there.

Well, now, I'll tell you what's happened. The

193

-2man
who's back of this - who's stirring this
up - is Harold Ickes.
W:

HMJr:

W:

HMJr:

Yes.

Now Herbert Gaston is out - was out in Seattle

to talk before the A. F. of L.

Yeah.

I told him to make a particular investigation
as to his loyalty, to talk to this John and

Anna Boettiger about it, and he said he would.
And Herbert will be back in a day or two.
W:

Yeah.

HMJr:

And as soon as I get a report from him, I'11

send it over. But all of the criticism about

Saul Haas comes from Harold Ickes.
W:

Well, now, look here, H. M. Jr., this fellow secretary to Bone - Bone's sick over there at
the hospital

HMJr:
W:

I know.

saye he wants an answer yes or no from us

and if he got yes, he's going to assume that
the recommendation is distasteful. What the

hell of that? Well, what - I haven't even told
the President.

HMJr:

Yeah. Well

W:

What would you tell him?

HMJr:

Who, the President?

W:

No, tell Bone's secretary.

HMJr:

Well, why not tell him the truth, that there's
been certain criticisms and we've had these
criticisms investigated and we expect before
the end of the week to have an answer.

194

-3W:

HMJr:
W:

HMJr:

W:

HMJr:
W:

Shall I tell him that the Treasury Department
is
going to report to us before the end of
the week?

If you want to, yes.

Shall I tell him that?
You can, and then I'll have a report for you
before the end of the week.

All
I think
tell right.
him the
truth.that's the best thing, just
I think so.
He said that you said he was okay. He had
been here a month.

HMJr:

That is correct.

W:

Yes.

HMJr:

And I don't believe that Harold Ickes knows
what he's talking about.

W:

Yeah.

HMJr:

But you know, "Pa", sometimes the truth pays;

you never know.
W:

That's right. That's right.

HMJr:

Yeah.

W:

Well, all right. Well, I'll just tell him that
an honest-to-God investigation is being made

and that we'll hear within a week.

HMJr:

That's right.

W:

All right, thank you, sir.

HMJr:
W:

HMJr:

Thank you.

All right. Good-bye.
Good-bye.

195
October 13, 1941
3:18 p.m.
HMJr:

Operator:

Hello.

She said Colonel Donovan is not there, that
have him call you.

he's gone, but she'd try to locate him and

HMJr:

No. Is his secretary on the wire?

Operator:

Just a moment. I have his secretary.

HMJr:

Hello.

Col. Donovan's

Secretary: Yes, sir.

HMJr:

This is Mr. Morgenthau speaking.

S:

Yes, sir.

HMJr:

Is Colonel Donovan in town?

S:

Yes, he is. He just left the office,

Mr. Secretary, about five minutes ago.

I thought he was still in there.

HMJr:

Well, now, I'd like him to see Count Coudenhove-

Kalergi. Got that?

S:

How do you spell that?

HMJr:

(Laughs) You sound southern.

S:

(Laughs) I am.

HMJr:

How far south?

S:

Oh, just Virginia.

HMJr:

I see. Well, I'll - C-o-u-d-e-n-

S:

Yes, sir.

HMJr:
S:

h-o-v-e.
H-o-v-e.

196

-2HMJr:

Hyphen.

S:

Yes, sir.

HMJr:

Capital K-a-1

S:

Yes, sir.
e-r-g-1.

HMJr:
S:

HMJr:

Yes, sir.

Now, if you will leave word with my office

when Colonel Donovan can see Count Couden-

hove-Kalergi, I'll get word to him. He'll
be here today and tomorrow.

S:

Yes. The Count will be in town today and
tomorrow?

HMJr:

Yes.

S:

Uh huh.

HMJr:

Well, wait a minute, I'll ask him. (Talks

aside) Will you be here today and tomorrow?

Yes, he'11 stay if he can see him today or
tomorrow.

S:

Yes, sir.
(Talks aside) Where can you be reached?
He can be reached at the Carnegie Endowment.

(Talks aside) with the Carnegie Endowment
Fund?

The Carnegie Endowment at Jackson Place,
here in Washington.
S:

HMJr:

Yes, sir.
The Carnegie Endowment Fund for Peace, you

know.

197

-3S:

Yes, sir. And you want me to call the Count

HMJr:

Yes.

S:

HMJr:

direct?

All
right. So I'll make those arrangements
and let him know

You'd better - I tell you. You better do it
through Mrs. Klotz. K-1-o-t-z. Let Mrs. Klotz
know.

S:

HMJr:

Yes, sir. That is your secretary?
That's right.

S:

All right, sir. I'll do that.

HMJr:

And she'll get in touch with him.

S:

Yes, I certainly will.

HMJr:

Thank you.

S:

You're welcome.

198
October 13, 1941
3:23 p.m.
HMJr:

Hello.

Francis
Biddle:

Hello, Henry. This is Francis.

HMJr:

No.

B:

Yes.

HMJr:

Francis, the Biddle, huh?

B:

That's right. Attorney General.

HMJr:

Yeah.

B:

Henry, there are two small matters. In the
first place, I think you already know, LaGuardia
called me last week to say he wanted to know
why a lot of Revenue Agents were in New York

HMJr:
B:

checking over petitions for his nomination.
They've all been taken out.
And would I put a squad on them. I said,

"Certainly not. You take it up with the
Secretary. I don't want to interfere with
him in any way.

HMJr:

A squad on my men, huh?

B:

A squad of your men.

HMJr:

Yes.

B:

All right. You know about that.

HMJr:

Yeah, they've been withdrawn; but what I'm

B:

HMJr:
B:

trying to find out is who gave the order.
Well, I'd be very much interested, and let's

raise a hell of a stink over it.
I'm trying to

Especially if it comes from the man we think
it comes from.

199

-2HMJr:

Well, I don't know who you mean.

B:

Well, I mean somebody at New York.

HMJr:

Yes.

B:

(Laughs)

HMJr:

Yes. That's where I think it did.

B:

Good boy.

HMJr:

But we're on it, and we're following - we're
on it and we're running it down, but the men
were taken off Saturday.

B:

Uh huh. The other thing is this.

HMJr:

Yeah.

B:

I talked to the President about it last week.
A very amusing thing happened. Last spring,
under the President's Directive Order - I think
now they call them Directives - but under the
President's Directive, the FBI was supposed to
do all the investigation of subversive clerks
in the various departments. It so happened
that just before that statute was passed - it
was part of an appropriation bill setting aside
a hundred thousand dollars and directing the
FBI to make the investigation and to report
to Congress.

HMJr:

Yes.

B:

Just before that, we discovered that the FBI

had been investigating Mrs. Helm
HMJr:
B:

HMJr:
B:

Yes.

and they called us up in great consternation.
That's right.
She'd gotten on the - on one of the other payrolls, you know.

HMJr:

Yes.

200

-3And Bob was so annoyed about the whole thing,

B:

that he took the FBI off all investigations

except our own.
HMJr:

Yes.

Then Congress passed this order, and since

B:

then, we've been doing - in a rather unsatisfactory way - the investigations. Now, when
I talked to the President about it, he asked

me to do two things.
HMJr:

Yes.

B:

In the first place, hereafter instead of writing

HMJr:

Yeah.

B:

to the departments - "Do you want so and so investigated? We think he's subversive"
we're going to go ahead and make the in-

vestigation and then send over the results to
the department 80 that they won't be out in
the position of trying to determine something
they really haven't got the information about -

try to do it a little more objectively.

And secondly, he wanted to have us do all the

investigations hereafter so that it be centered
in one organization. What actually happens is,
I understand, the Civil Service are doing a
little investigation and you re doing a certain
amount for some of the war defense industries.

HMJr:

Well, we're doing it for the OEM.

B:

Only the OEM?

HMJr:

Only

B:

Only OEM.

HMJr:

.....88 far as I know.

B:

Well, the President said he'd like us to do
it for everybody.

201

-4HMJr:

Well, now, you'd better get a letter; because

after this happened, the White House asked me
to do OEM and OPM.

B:

Oh, yes.

HMJr:

And I said I wouldn't. I refused to do it.

B:

Yes.

HMJr:

Then the President wrote me a formal request.

B:

Oh, yes. Who would have that?

HMJr:

Who would have what?

B:

Your - his request to you. Have we a copy of
it?

HMJr:

Well, I - no, I don't see why you should.

B:

No, but I mean I thought you wanted me to

HMJr:

Well, I'll

B:

HMJr:

B:

Will you take a look at it?
No, I'11 do better than that. I'll send you
a copy of it.
Good. The reason is this. Our reason, Henry,
is we're very much afraid of what's going on
in Congress. Apparently those boys - the Dies
crowd - are just waiting for a chance to crack
down hard, and some of the organizations - well,
the Library and Labor and some of the others,

are very nervous about it and haven't been making
very many investigations.

HMJr:

Look, Francis

B:

And we'd rather like to take the responsibility
of the whole thing.

HMJr:

Now let me just - it's all right with me.....

B:

Fine.

-5HMJr:

202

just as long as the President will write
me a formal letter relieving me of that
responsibility.

B:

HMJr:

All right. Well, will you send me a copy?
You'll have a copy by hand within the hour.
Now, one other thing. This thing, you see,
what's happened is this; and you d better make

up your mind if you're going to take full
responsibility. A lot of these people - these
dollar-a-year-men - you won't find they're subversive in the sense that it's usually used

B:

HMJr:

Yes.

but you'll find that cuite a few of them

have income tax troubles, and your men never
made the investigation on that.
B:

Well, do you think that should be made in addition

HMJr:

Oh, well I think it's - personally, I think

to the other?

it's more important, because the dollar-a-year-

men that come down are not subversive, but they
may have some very bad income tax records.

B:

HMJr:

Yes, that's quite right.
And not what we've been doing. We haven't done
the subversive thing.

B:

Oh, you haven't done the subversive thing?

HMJr:

Oh, no.

B:

Well, I understood that you had been doing it.

HMJr:

Oh, no.

B:

You're sure of that?

HMJr:

Positive.

B:

You are?

-6HMJr:
B:

Yes.

I don't think we care a thing about the

income
tax. I think that's for you to
continue.

HMJr:

Look, Francis.

B:

Yes.

HMJr:

203

Let me take - look - because you and I will
never have any trouble. Now, let me send the

letter over that the President wrote you.

B:

Yes.

HMJr:

And - it's not very complimentary to your
department

B:

HMJr:

B:

HMJr:

Sure.

but I'll send it over anyway; and I think
for his sake you'd better not circulate it.
All right.
You'll see why when you read it. I didn't
write it.

B:

No. I understand.

HMJr:

But I think for the President's sake, you'd

better not show it to anybody.

B:

Right.

HMJr:

See?

B:

Yeah. I don't think - I didn't understand
that, Henry. I understood you were doing

some of the subversive examination.
HMJr:

B:

I tell you what I'11 do. I'll send my
over with the letter
Oh, well.....

Administrative Assistant, Norman Thompson,

204

-7which you can read - Norman Thompson.

HMJr:
B:

HMJr:

Oh, certainly, yes.

And for the sake of the President, I think
we'd better not leave the letter over there.

B:

Fine. I'11 just glance at it, and then

HMJr:

And then Norman knows all about this.

B:

Yeah.

HMJr:

B:

We're not doing the subversive, but we are
doing the income tax.

Well, I think you ought to go on with that,
by all means.

HMJr:

And if you will tell Norman, and he can tell

B:

Fine.

HMJr:

Because a lot of these fellows shouldn't be

you, because he's handled the whole set-up.

working for the Government.

B:

That's right.

HMJr:

Because they've got lousy income tax records.

B:

Fine.

HMJr:

But I am ninety-nine per cent sure we've
never done any work on the subversive.

B:

Very good. I

HMJr:

We

B:

rather think you have, but I'm not - of

course, you know more than I do - but I rather
think you have.

HMJr:

No. No.

B:

Well, that's first rate then.

.

205

-8HMJr:

No, we have not.

B:

Well, then there's no problem at all.

HMJr:

I know we haven't.

B:

Fine.

HMJr:

I mean, when I say I know we certainly haven't
the last year or two.

B:

Fine. Oh, well that's all right.

HMJr:

Now, let me ask you this. When do you
want to see Norman Thompson?

B:

Why, I can see him this afternoon if he

HMJr:

Name the time.

B:

Within the next half hour I could see him.

HMJr:

Do you want him there at four o'clock?

B:

HMJr:
B:

May I just check - let's see a minute. Oh,
I could see him at four-fifteen.
He'll be there.
Fine.

B:

Is that all, because I've got one.
That's all.

HMJr:

I was surprised that during your absence they

HMJr:

appointed somebody out in Cleveland instead
of Grossman. Remember I called you?

B:

HMJr:

B:

Oh, I know you did, yes.

And then they - you said that you wanted to
make that investigation.

Well, I looked into it, but Freed had a very,

very strong record. I think it had practically

206

-9been decided.
HMJr:
B:

Yeah.

I mean, I think the thing had - Bob had
sent through the thing, though I didn't
know it at the time.

HMJr:

He had sent it through?

B:

He'd sent it through already, yes.

HMJr:

Oh.

B:

Yes. Well, I ought to have called you.

HMJr:
B:

I'm sorry, Henry. I didn't think about it.
Well, I was a little surprised.
I'm sorry. I should have called you about
it. But Bob had sent Freed's recommendation
in before I came in to act.

HMJr:

I see.

B:

I'm sorry.

HMJr:

All right.

B:

Righto.

HMJr:

Thank you.

207
October 13, 1941
3:31 p.m.
HMJr:
Norman

Thompson:
HMJr:

Norman

Yes, sir.
I just made a statement to the Attorney
General that on this investigation of OPM and
OEM that we're doing, we don't do any sub-

versive
investigation. Am I right or wrong?
Hello.

T:

HMJr:

T:

Well

I mean as to whether the man is subversive just to income tax.

That's right. That's as I understand it.

Mr. Gaston, the last time I was with him,
we discussed it with Elmer Irey, and that
was my recollection, that he confined it to
that.

HMJr:
T:

HMJr:

T:

HMJr:
T:

HMJr:

But we never go in for the subversive stuff.
No, sir.
Well, I swore up and down that we didn't.
Now who's - are you familiar with that?
You'd better let me check with Irey or

Well, I tell you what you do
with Gaston.

I tell you what you do. You know the letter
the President wrote us about asking us to

do it?
T:

HMJr:

Yes, sir.

You get hold of that letter, and you and
Elmer be in Francis Biddle's office at fourfifteen this afternoon.

208
-2
T:

HMJr:

Yes, sir.
And tell Elmer that I said that we don't do
any subversive. If I'm wrong, I want him

T:

to tell me about it.
That's right.

HMJr:

But he had some conversation with the President.

I told him he could read the letter of the

President to me.
T:

HMJr:

T:

HMJr:

T:

HMJr:

T:

Yes.

But in view of what the President said about
the department, I didn't want to leave that
letter lying around.
That's right.

But if the President wants to call us off,
then I want a formal letter, see?
That's right.
But Biddle said the only thing he's interested
in is that he wants to have entire responsibility for the subversive end.
That's right.

HMJr:

And he'11 be glad to have us do the income

T:

I see.

HMJr:

Well

T:

HMJr:

tax end.

I'm pretty sure that's what we're doing, but
I'11 check it.
Well, you and Elmer be at his office at fourfifteen.

T:

Yes, sir.

HMJr:

And give me a written report on what happens.

T:

Yes, sir.

HMJr:

Thank you.

209

TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION

DATE October 13, 1941.
TO

Secretary Morgenthau

FROM

Mr. Thompson

In accordance with your instructions Mr. Irey and I went to
the office of the Attorney General this afternoon. I showed the
Attorney General the President's letter of February 28, 1941, in
which he directed that investigations in all cases of persons
proposed for employment in the several defense organizations

requiring investigation be undertaken by the Treasury Department.

In this letter the President stated that he wished "you would have
your investigative service arrange to handle them very promptly and
thoroughly."

In accordance with the President's direction these investigations have had a thorough check, which included a complete

character investigation. In the case of dollar-a-year men, the
check has been only of income tax returns.

The Attorney General pointed out that in an Act of Congress
approved June 28, 1941, it became the duty of the Federal Bureau

of Investigation to:
"investigate the employees of every department,
agency, and independent establishment of the

Federal Government who are members of subversive

organizations or advocate the overthrow of the
Federal Government, and report its findings to
Congress."

210
-2-

I told the Attorney General that we had understood that law

to mean, as it so states, that the Federal Bureau of Investigation
was charged with the responsibility for investigating cases where
persons are members of subversive organizations or advocate the
overthrow of the Federal Government. The Attorney General expressed

some doubt as to that limitation and I gathered that he had in mind
that the Federal Bureau of Investigation should investigate all

cases to develop the facts as to possible subversive activity. of
course, in our investigations when we run into evidence of definite
subversive activity or questionable loyalty, we should and do report
that to the Federal Bureau of Investigation as required by the
statute referred to.
The Attorney General indicated that the whole matter needed

study to see that there is no duplication of investigations in
these matters, and indicated that he is going to talk to the
President about it.
The Attorney General also raised a question as to whether the
Treasury or the Federal Bureau of Investigation should make pre-

liminary investigations in cases of alleged subversive activity on
the part of Treasury employees. It has been the practice for the
Department of Justice to refer such cases to us for advice as to
whether the matter warrants investigation by the Federal Bureau of

Investigation. Whether or not this practice is to be continued
he seemed to be in doubt.

for

211
THE WHITE HOUSE
WASHINGTON

February 28, 1941

MEMORANDUM FOR THE SECRETARY OF THE TREASURY:

I have just received a memorandum from Mr. McReynolds to

the effect that investigations of persons proposed for employ-

ment in the several defense organizations which he has requested
of the Federal Bureau of Investigation have been unsatisfactory
because of the slowness with which the Bureau was able to handle

them. I have, therefore, instructed him to turn over to you
all cases requiring investigation and I wish you would have your
investigative service arrange to handle them very promptly and
thoroughly. McReynolds will make the usual form of request for
this work to be performed by the Treasury under authority of the

provisions of the Economy Act.

212
October 13, 1941
3:38 p.m.
HMJr:

Milo

Hello.

Perkins:

Yes, Mr. Secretary.

HMJr:

Henry Morgenthau.

P:

How are you, sir?

HMJr:

Fine. How are you?

P:

Just grand, Mr. Secretary.

HMJr:

P:

I just wanted to thank you for talking to
the Vice-President about that Bankhead matter.
It was very nice of you to do it.
Well, I had the greatest admiration for your
broad shoulders. (Leughs)

HMJr:

And

P:

These are wonderful days. The reward of trying

HMJr:

to help your fellow men is to get kicked in the
pants, I guess, and just all keep going. (Laughs)
But it's borne fruit, and I just wanted to say
"thank you".

P:

Well, it's damn thoughtful of you to call, and

HMJr:

Well, those are the little things which show

not at all necessary.

you whether you have a few friende in town or
not.

P:

You've got them.

HMJr:

Well, I'd like to think of you as one of them.

P:

Well, you know I am.

HMJr:

I know.

P:

Well, it's just swell of you to call, and I

213

-2deeply appreciate it.
HMJr:

Thank you.

P:

Good-bye.

HMJr:

Good-bye.

214
October 13, 1941
3:41 p.m.
HMJr:

Hello. Hello. Hello.

Operator:

She'll put him on in just a second.

Vice-Pres.
Wallace:

Hello.

HMJr:

Hello, Henry.

W:

Yes.

HMJr:

How are you?

W:

Oh, fine.

HMJr:

I just wanted to say to you that Bankhead
called me up and was terribly nice about that

whole business of what he was supposed to have
said about Henderson and me.

W:

HMJr:

W:

Yes.

And he said that he did it through a mutual
friend and I have good reason to believe that
you were that mutual friend.

Well, you're - I'll say this: you're awfully
smart to deduce it, but

HMJr:

It was terribly nice of you, and I really

appreciate it; because one doesn't have many
friends in this town, and Bankhead claimed he

never said it - that he'd been misquoted - and
gave a statement out to the press.

W:

HMJr:

W:

HMJr:
W:

Did it get printed?
It did not. Those things never catch up. But
he showed a nice spirit about it.
Yeah. Yes, I know he feels
He really seemed to be quite upset.
Yeah.

215
2HMJr:

W:

HMJr:
W:

HMJr:
W:

But I did appreciate your talking to him, and
it's
nice to know that one has a few friends
in town.
By the way, Henry, I sent over to Harry White
a proposition to check in his personal capacity
Yes.

that you might possibly be interested in
checking into.
What's that?

Oh, it's an idea I had - sort of a pipe dream that I thought might help prevent inflation and
also give savings to draw on in the future.

HMJr:

I see. Well, I'll speak to Harry about it.

W:

I thought - he was kind enough concerning it,

80 I thought it might be worthwhile calling to

your attention.
HMJr:
W:

Good.

If he hadn't spoken kindly about it, I wouldn't

have bothered you with it.
HMJr:
W:

HMJr:
W:

All right.
But he spoke sufficiently kindly in a personal
capacity, 80 I'm inclined to think it might be

worthwhile looking into.
I'11 take it home with me tonight and read it.

All right.

HMJr:

Thank you.

W:

Good-bye, Henry.

HMJr:

Good-bye.

TREASURY DEPARTMENT

216

INTER OFFICE COMMUNICATION

DATE Oct. 13, 1941
TO

FROM

Subject:

Secretary Morgenthau

Mr. Haae A
Effect on Total Amount of Debt if Outstanding Guaranteed Obligations are Replaced by Direct

In accordance with your request, I have had
prepared and am attaching hereto a table showing
the amount by which the direct debt of the United
States would be increased if all outstanding
guaranteed obligations were retired and refunded

by the issuance of direct obligations. The table
shows this under two assumptions: (1) that all
callable guaranteed issues will be retired at the
first call date, and (2) that all such issues will
run to final maturity.

Attachment

217

Amount by Which the Direct Debt Would Be Increased

If All Guaranteed Obligations Outstanding October 1. 1941,
Should Be Retired and Refunded by Direct Obligations *

Date

If Retired at

First Call Date

If Retired at

Final Maturity

(In millions of dollars)
December 31 1941
June 30, 1942
December 31 1942
June 30, 1943
December 31 1943
June 30, 1944
December 31. 1944
June 30, 1945

1,265
2,736
3,025
3,349
5,743
5,743
6,910

December 31, 1946
June 30, 1947

6,910
6,910

4,107

May 15, 1949

6,910

6,036

May 1, 1952

6,910

6,815

March 15, 1964

6,910

6,910

Treasury Department,

616

Division of Research and Statistics.

616
926

1,522
1,811
2,135
2,820
3,695
4,107
5,201

October 9, 1941.

Excludes FHA debentures. The whole amount of these
debentures outstanding on August 31, 1941, was $17

millions. Additional debentures will be issued under
existing law from time to time in unpredictable amounts.

218
MEMORANDUM

October 13, 1941.

TO:

The Secretary

FROM:

Mr. Sullivan

In response to your inquiry over the telephone about
the difficulties the examiners of the Vinson Investigating Committee have been having, I called Mr. Toland, Counsel for the

Committee. He advised me it was the Bethlehem Shipbuilding
Company which refused to permit the examiners to continue their
investigation of the company's books. This examination had been

in progress for about three weeks, after a lengthy delay in getting

under way, which Toland attributed to the company's desire to weed
out the records before permitting the examiners to see them. The
examination was going forward under a Congressional subpoena, when

a Navy admiral wrote to the Commandants of all shipbuilding yards
instructing them not to permit the companies to answer questions

in regard to classified contracts. (Toland advises me that
practically all contracts are classified.)

When the Committee's examiners were ordered to stop
work on the books of the Pethlehem Shipbuilding Company, Mr. Toland
arranged a conference with Secretary Knox, which was held on Friday,

October 10th. As a result of this conference the instructions from
the admiral to the commandants of the shipbuilding companies were

withdrawn.

Toland advised me that in one contract the Bethlehem
Shipbuilding Company made a profit of 72 percent and has already

redrafted this particular contract to reduce the cost to the Govern-

ment by $750,000.

Toland stated that the 247 percent profit referred to in

the news release had been earned by an instrument company. I asked

him if I could get a list of the firms that had made unconscionable
profits but he said he could not give it to me without authority
from the Committee. However, he said he would be glad to discuss
it with me at length at luncheon on Monday, October 13th.

Ths

219

TREASURY DEPARTMENT
INTER-OFFICE COMMUNICATION

CONFIDENTIAL

DATE October 13, 1941
TO

Secretary Morgenthau

FROM

Mr. Haas

Subject: The Business Situation,

Week ending October 11, 1941
Summary

(1) The seasonally-adjusted index of industrial producBoard at 161, a gain of 1 point over the revised index for the
previous month. In September of last year the index stood at
127, and in August 1939, just before the outbreak of the war,
tion for September is now estimated by the Federal Reserve

it was only 105.

(2) The BLS all-commodity index in the week ended

October 4 rose 0.4 point to 91.6, thus equalling the previous
high reached in the second week in September. The BLS cost
of living index for September, according to confidential preliminary figures, will show the striking increase of 2.0 percent, the highest since the war began.
(3) The seasonal peak in freight carloadings normally
occurring during the current month appears almost certain to
fall below earlier trade and ICC expectations, apparently
because of revised freight handling policies and increased

railroad efficiency. As a result, a freight car shortage

this season 18 likely to be averted, although the car surplus
will be uncomfortably small at the best.
(4) Steel tonnage scheduled for production last week
rose slightly above the previous record high. However, labor
troubles and scrap shortages may have cut actual production
below scheduled output. The OPM has placed iron and steel

scrap under full priorities control.

(5) The scope of the potential curtailment in non-defense
activity has been broadened by the limitation on new building
construction imposed by SPAB. Total building in 1941, exclusive of repairs and remodeling, is estimated by SPAB at

$11,000,000,000, of which $6,100,000,000 is non-defense construction. An indefinite part of the non-defense work will be
eliminatedby the new order.

-2-

220

Industrial production slightly higher
On the basis of preliminary data, the Federal Reserve
Board now estimates the seasonally-adjusted index of indus-

trial production for September at 161. This is 1 point

higher than the downward-revised figure for the previous
month, and contrasts sharply with year-earlier levels when
the index stood at 127. In August 1939, just before the
outbreak of the war, the index was only 105. Despite the
further slight rise last month, the index has shown a

distinct tendency to level off since last June, the rise
in actual production since that time being only a little

greater than the usual seasonal proportions. (See Chart 1.
The steadiness of the adjusted index of industrial pro)

duction last month was not matched by the New York Times

weekly index of business activity which showed a slightly
declining tendency. Moreover, in the week ended October 4,
the Times index extended its decline by dropping 0.5 point
to 127.7. However, during the same period Barron's index

of business activity rose 0.6 point to 139.0.

Some indication of reduced employment in non-defense
industries is seen in the September employment report of
the New York State Department of Labor. Factory employment
and payrolls in New York State during September, for the
first time this year, showed less than a normal seasonal
gain over the previous month. Employment rose 2.5 percent,
as compared with a usual increase of about 2.9 percent, and

payrolls rose 3.8 percent against a usual gain of 3.9. Several non-defense plants were reported to have laid off workers
due to lack of materials.
BLS all-commodity index higher
The BLS all-commodity index in the week ended October 4

rose O. 4 point to 91.6, carrying it back to the high point
reached in the second week in September. In the intervening
period, the price index of farm products declined 1 percent,
but all other major commodity groups advanced or remained
unchanged. The largest advance was a 3 percent gain in the
chemicals and allied products group, featured by an advance

of 17 percent in prices of drugs and pharmaceuticals. This
sharp rise was ascribed partly to the higher excise taxes
effective October 1.

221

-3Basic commodities lower

The BLS wholesale price index of 28 basic commodities
declined 1 percent in the week ended October 10, largely because

of reduced prices for domestic agricultural products. Although
the index of 11 import commodities declined moderately, the
greater part of the decline in the combined index was due to a
decrease of 1.2 percent in the domestic commodities group. (See
Chart 2.) The drop in this group would have been more marked

if a rise of 13 percent in zinc prices, due to the lifting of

the price ceiling by OPA in order to stimulate production, had
not partially offset declines in other commodities.
Cotton prices declined last week as the Government crop
report issued on Wednesday indicated a larger yield than the
trade had expected. The October crop estimate of 11,061,000
bales was 351,000 bales higher than the September estimate.
The domestic wheat crop as of October 1 was estimated
by the Crop Reporting Board during the week at 961,000,000
bushels, an increase of 3,500,000 bushels over the September 1
estimate. Wheat futures moved lower during the week and now
show a rather substantial decline from the recent high reached
around the beginning of the month.
New "parity" basis under consideration

A further move toward "inflation by legislation" is seen
in the Thomas Bill (S. 1955) to provide a new formula for
computing parity prices of farm products, introduced in the

Senate on October 6 and referred to the Committee on Agriculture

and Forestry. This bill would re-define "parity" by (1) shift-

ing the base period to 1919-1929 from 1910-1914, and (2) using
the BLS all-commodity index (1926 = 100) as a measure of changes

in the cost of goods bought by farmers. It would also base
parity prices on central market price averages, rather than
on farm price averages as at present.

From an inflation viewpoint, the bill would have two
important influences. It would increase by about 5 percent

the current parity prices for agricultural products as a

group, although parity prices for some products (notably
wheat) would be reduced. This would be significant in view
of the "110 percent of parity" limitation on farm product

price ceilings in the pending price control bill. Secondly,

-4-

222

and of much greater importance, it would provide a more rapid
rise in parity prices, since the BLS all-commodity index
(itself heavily weighted with farm products) may be expected
to rise more steeply than the present index of costs of goods
bought by farmers, which by legislation includes also interest
and taxes. The combined effect would be largely to nullify

the effectiveness of the price control bill, SO far as farm
products are concerned.

The extent to which prices of important farm products
have advanced above parity, as currently defined, 18 shown

in Table 1. It will be noted that the farm products which

were above parity on September 15 included a considerable proportion of the important sources of farm income.
Living costs advance in the United States and Canada

The BLS cost of living index for September, according

to confidential preliminary figures, will show the striking

increase of 2.0 percent, the highest since the war began.
(See Chart 3, upper section.) The cost of living index has
increased 6.8 percent since March.

it

Some indication of the effect of a war economy on living
costs may be gained from a review of recent Canadian experience. Figures released last week by the Dominion Bureau of
Statistics show that living costs in Canada rose 0.9 percent
during August, and have advanced 13.8 percent since the be-

ginning of the war. (Refer to Chart 3.) In comparison, the

cost of living index for the United States in September showed
a gain of 9.3 percent since the war began.

The rapidity of the advance in food costs during recent
months, both in Canada and the United States, is particularly
outstanding. (See lower section of Chart 3.) The August index of retail food costs for Canada shows a rise of more than

one-fifth (22.2 percent) since the beginning of the war, while

food costs in the United States in September had risen approxi-

mately 18.5 percent.

Peak freight carloadings below expectations
The sagging tendency in the New York Times index recently

has been largely due to the failure of freight carloadings to
show the usual seasonal expansion. As a result, earlier trade
and ICC expectations of maximum weekly loadings of around

1,000,000 cars this fall are almost certain to be too high,
and earlier concern over the ability of the railroads to
handle this year's peak traffic will be allayed.

-5-

223

As will be seen by referring to Chart 4, top section,
the sharp rise in freight traffic which occurred in the

spring subsequently has flattened out. The rise in loadings
to only about 1 percent, in contrast with a normal rise of
around 11 percent. This has been due partly to increased
railroad efficiency and to changes in freight loading and

from the end of June to the beginning of October has amounted
unloading policies.

The failure of freight carloadings to show the normal
seasonal expansion has helped to alleviate the pressure on
equipment facilities. Nevertheless, by the week ended
October 4, the average daily surplus of freight cars was
down to 39,000 cars, as compared with 72,000 a year earlier.

Nevertheless, it now appears likely that the fall traffic

peak will be passed without any serious car shortage, although
the surplus at best will be uncomfortably small.
Railroad equipment orders decline

New orders for freight cars in the past 2 months have

fallen considerably below year-earlier levels. (Refer to
Chart 4, lower section.) Despite this recent decline, new

freight cars ordered for domestic service from the beginning
of 1941 until the end of September totalled 109,000 as compared with only 39,000 in the corresponding period of 1940.
Due largely to a lack of steel, railway equipment builders have fallen behind original production expectations and
now have huge order backlogs on hand. This lag in production
has been viewed with concern, since it is believed that sustained heavy output of new equipment will be needed to meet
1942 peak traffic requirements.
Railroad earnings improve

The heavier volume of traffic in 1941 has been accompanied by a substantial improvement in railroad earnings.
Net operating income of Class I railroads in August rose
67 percent above year-earlier levels to a new high since

1929. (Refer to Chart 4, middle section.) Railroad net
operating income for the first 8 months of 1941 reached the
highest levels since 1930, and the rate of return on property

investment rose to 4.12 percent from 2.36 percent in the
corresponding period of 1940. Despite the improved showing,
however, 29 roads still failed to earn interest and rentals
in the period mentioned.

-6-

224

Steel production rises to a new high
Despite the shortage of steel scrap and sporadic labor
troubles, steel tonnage scheduled for production last week
reached a record high. The operating rate rose 1.2 points
to 98.1 percent of capacity. While steel operating rates
have reached an even higher percentage of capacity in the
past, the actual tonnage slated for production last week exceeded the previous peak by a slight margin, owing to increased
capacity.
Trade sources continue to express considerable concern
over the shortage of steel scrap, and at the end of the week
the OPM issued an order placing iron and steel scrap under
full priorities control. Under the provisions of the order,
producers, dealers, brokers and consumers are required to
make monthly reports to the OPM showing their inventories,
sales, etc. On the basis of the information thus obtained,
the OPM is expected to work out a general policy for the distribution of scrap under mandatory orders.

Sporadic labor troubles of short duration continue to
harass the steel industry. At the beginning of last week,
a 2 day strike of CIO cranemen at the Gary, Indiana plant
forced the Carnegie-Illinois Steel Corporation to halt operations at 12 blast furnaces and 53 open hearths. At the same
time operations at the Wickwire Brothers Steel mill at
Cortland, New York were curtailed by the first strike in the
company's history. A short-lived tie-up in operations also
occurred at the Fairfield steel mills of the Tennessee Coal
and
Iron Company as a result of a strike of machinists and
electricians.
Curtailment of non-defense activities broadens

The basis for curtailment of non-defense business activities was widened last week by the action of the Supply
Priorities and Allocations Board in placing a ban on all new
construction using appreciable quantities of critical materials, if not needed for defense or essential to the health and
safety of the people. While much will depend on how the order is enforced, its potential effect may be gathered from

the fact that estimated total building in 1941, exclusive of

maintenance repairs and remodeling, is expected by SPAB to
reach $11,000,000,000 of which $6,100,000,000 is non-defense
work,

:

- -7 -

225

About 1,500,000 workers are estimated to be employed

at present in non-defense construction, in addition to

400,000 employed in remodeling, maintenance and repairs.
SPAB estimates that the 1941 building program is consuming

13,800,000 tons of steel ingots, of which 6,300,000 tons 18

going into non-defense work. It 18 further estimated that
this last figure could be cut to less than 3,000,000 tons
under the new program.

Earlier last week it was reported that the OPM was expected to order a substantial cut in washing machine production, to be followed by limitations on the output of vacuum
cleaners, metal office equipment and air conditioning
equipment.

Automobile production and sales below 1940

In line with the curtailment program imposed by OPM, automobile production has been running under year-earlier levels
since the beginning of September. Production last week rose

2,000 units to 79,000 -- the highest weekly figure attained
thus far in the production of 1942 model cars. Nevertheless,
output was still 27 percent under the corresponding week of
last year.

Following the very heavy sales of last spring and early

summer, retail sales of General Motors cars dropped sharply
in August, and in September reached a new low since September

1938. (See Chart 5.) The low sales figure no doubt was
partly due to lack of adequate new car stocks, since stocks
at the end of August had been cut to the lowest point since

September 1938 and were 41 percent under year-earlier levels.
Some preliminary trade reports, however, have indicated that
sales of new model cars have not been good, perhaps because
of heavy advance buying and because of adverse consumer reaction to sharp price advances. An accurate appraisal of the
retail demand for 1942 model cars probably will not be pos-

sible until sales results for the current month are available.
New orders index rises as textile buying gains

Due entirely to a substantial rise in textile orders,

new orders index rose 8 percent in the first week in (See

October our to the highest levels since the end of August.

Chart 6.) New orders for steel declined moderately to
114 percent of capacity from 117 percent in the previous
week. In addition, orders for all other products than steel
and textiles declined 5 percent below the previous week.

FEDERAL RESERVE BOARD INDEX OF INDUSTRIAL PRODUCTION
1935-39=100

AM

J

M

1939
J

F

J

PERCENT

1940

1942

1941

JASONDJFMAN J JASONDJF MAMJ

PERCENT

Seasonally Adjusted

165

165
dec

160

160
155
155

150
150
145
145

140
140
135
135

130
130
125
125
120
120
115
115

110
110
105
105

100

100

95

F s o N D J F M A M J J A SOND J F M A M J

J

1939

1940

1941

95

1942

office of the Sandary of the Treasury

C 349-2

MOVEMENT OF BASIC COMMODITY PRICES

Domestic and Imported
AUGUST 1939-100

PER

Weekly Average

CENT

PER

PER

PER

CENT

CENT

CENT

Daily

165

165
150
150

// Imported

160

Commodities

160

140
140

// Imported

155

155

Commodities
130

17 Domestic
Commodities

150

150

120

17 Domestic
Commodities

145

135

135

M

o
A

J

A

J

F

J

N

o

M

S

S

A

J

M

D

JULY

1941

J

1940

2

26

100

9

100

140

140

16

23

30

AUG.

13

20

27

6

110
110

145

4

120

"

130

10

25

OCT

SEPT

1941

Percentage Change for Individual Commodities, August PER
1940 Low to October 3. and to October 10. 1941
PER

Tallow 164.3%

17 Domestic Commodities

CENT

"Cottonseed Oil 152.0%

CENT

II Imported Commodities

+150

+150

+125
+125

Shellac 110.3%
alard 102.8%
Cotton 75.4%
Hogs 71.6%

+100

Cocoa 95.0%

+100

Coffee 94.5%

Print Cloth 693X
Wheat 63.7%
Rosin 63.6%

+75

Burlap 72.9%

+75

Hides 59.0%

Barley 52.9%

Butter 302X
Zinc 301%

.50

Lead 232X
Steers 15.0%
Copper 11.8%

+25

Wool 52.5%
+50

Sugar 341%

Flaxseed 292%
"Silk 210%
+25

Rubber 208%

Steel Scrap.dom 8.72

Tin 3.0%

*Corn 8.2%
"Steel Scrap exp 2.7%
o

0

Aug 1940
Low

Oct. 3

Oct.10

Aud 1940

Oct 3

Oct.

Low

P.199 37

A

228
Table 1

Prices received by farmers, as percentage of parity,
September 15, 1941 1

Commodity

Maryland tobacco
Cottonseed
Wool

Beef cattle
Lambs

Veal calves
Hogs

Flue-cured tobacco

Butterfat 2

Milk 3,

Chickens
Cotton
Hogs

Eggs 2
Turkeys

Percent
168
161
145
131
122
122
112
108
107
106
104
103
101

Commodity
Corn

Percent
so

Flaxseed

80

Rice

80

Wheat

79

Sweet potatoes

77

Oats

73

Sugar beets

69

Peanuts

68

Potatoes

68

Buckwheat

66

Apples

64

Barley

61

Rye

58

91

Sugarcane

55

89

Hay

49

1 Prices received are exclusive of Government payments.
2 / Adjusted for seasonal variation.
/ Based on weighted average wholesale price of milk, and milk
3

equivalent of butter and butterfat.

Source: U. S. Department of Agriculture.

Chart 3
CONFIDENTIAL

229
COST OF LIVING, U.S. AND CANADA
AUGUST 1939 100

PER
PER

CENT
CENT

Cost of Living
120
120

115
115

Canada

(Does. Bus. or STAT.)
110
110

105
105

U.S.

(B.L.S.)
100
100

95

95

1939

1940

1941

1942

PER
PER

DENT

DENT

Foods, Retail
130
130

125
125

120
120

115
115

Canada

(Bus. or STAT.
110
110

105

105

U.S.
(B.L.S.)
100
100

95

95

1939
Mad the Secretary -

1940

1941

1942

C - 412

-

-

RAILROAD SITUATION
JAN.

MAK.

FCB.

APR.

MAY

JULY

JUNE

AUG.

SCPT.

OCT.

NOV.

DCC.

CARS

CARS

THOUSANDS

THOULANDS

Freight Carloadings
WEEKLY AVERAGES

500

900

800

800

'40

'41
700

700

600

600

'30
500

500

400

400
MAR.

FEB.

JAN.

APR.

MAY

JULY

JUNE

AUG.

SEPT.

OCT.

NOV.

DEC.

DOLLARS

DOLLARS

WILLIONS

MILLIONS

Net Railway Operating Income
CLASS RAILROADS

100

100

80

80

'41

'40

60

60

40

40

39
20

20

0

0

JAN.

MAR.

FEB.

JUNE

MAY

APR.

JULY

AUG.

SEPT.

OCT.

NOV.

DEC.

CARS

CARS

THOUSANDS

THOUSANDS

New Freight Car Orders
25

25

'40

'30

'41

20

20

15

15

10

10

5

5

m

NY

N

0

0

0

JAN.

FEB.

MAR.

APR.

MAY

JUNE

JULY

AUG.

SEPT.

OCT.

NOV.

DEC.

Office of the Secretary of the Treasury

Director - and Statistics

c - 375

GENERAL MOTORS
Retail Sales of New Care during Model Years 1936 - '42
OCT.

SEPT.

NOV.

DEC.

JAN.

FEB.

MAR.

APR.

MAY

JUNE

JULY

AUG.
CARS

CARS

THOUSANDS

THOUSANDS

275

275

250

250

225

225

200

200

1941 MODEL YEAR

175

175

1940 MODEL YEAR
150

150

125

125

1939 MODEL YEAR
100

100

75
75

1938 MODEL YEAR
50
50

1942 MODEL YEAR
25
25

0

0

SEPT.

OCT.

Office of the Secretary of the Treasury
Division of Research and Stateship

NOV.

DEC.

JAN.

FEB.

MAR.

APR.

MAY

JUNE

JULY

AUG.

I 121

-

1

INDEXES OF NEW ORDERS
Combined Index of New Orders and Selected Components
PERCENTAGE
POINTS
290

290

280

280

270

270

260

260

250

250

240

240

230

230

N
220

220

210

210

Total

foodbined Index)

1936 100

M

200

190

190

180

100

170

170

160

160

150

150

W
140

140

130

130

120
120

110

110

W

100

100

90
90

Total excluding Steel and Textiles

80

so

70
70

V

60

50

50

40

Steel Ordere
30

20

Textile Ordere

10

III
0
A

1939

1940

232
-

1.5.0
Chart 6
CONFIDENTIAL

233

CONFIDENTIAL

UNITED STATES SAVINGS BONDS

Comparative Statement of Sales During
First Ten Business Days of August, September, and October, 1941
(August 1-12, September 1-12, October 1-11)
On Basis of Issue Price

(Amounts in thousands of dollars)

August

:

:

:
:

September

: September

: September
over

: August

:

:

:

:

: October

October
over

Percentage of Increase
or Decrease (-)
October : September
over

over

:

:
:

:

:

Item

:

:

or Decrease (-)

:

Amount of Increase

:

Sales

: September : August

- 8.9%

$ 17,197

$ 16,673

$ 18,311

$ 524

Series E - Banks

32,198

28,279

33,425

3,919

- 5,146

13.9

- 15.4

Series E - Total

49,395
9,191
54,152

44,952
7,225
47,064

51,735
10,148
64,181

4,443
1,966
7,088

- 6,783
- 2,923

9.9
27.2
15.1

- 13.1
- 28.8
- 26.7

$112,737

$ 99,242

$126,064

$13,495

-$26,822

13.6%

- 21.3%

Series E - Post Offices

Series F - Banks
Series G - Banks
Total

-$ 1,638

- 17,117

Office of the Secretary of the Treasury, Division of Research and Statistics.

3.1%

October 13, 1941.

Source: All figures are deposits with the Treasurer of the United States on account of proceeds of
sales of United States Savings Bonds.
Note: Figures have been rounded to nearest thousand and will not necessarily add to totals.

234

CONFIDE

UNITED STATES SAVINGS BONDS

Daily Sales - October 1941
On Basis of Issue Price

(In thousands of dollars)
Post Office

All Bond Sales

Bank Bond Sales

Bond Sales
Date

Series E

Series E

Series F

Series G

Total

Series E

Series F

Series G

Total

$ 1,450

$ 3,029

$ 1,286

$ 8,271

$ 12,587

$ 4,479

$ 1,286

$ 8,271

$ 14,036

1,870
2,150
1,270

2,786
3.299
1,696

867

4,324
6,323
6,400

7,977
10,687
8,707

4,656
5,449
2,966

867

4,324
6,323
6,400

9,847
12,837
9,978

3,449
1,207
1,363
1,652
1,495
1,291

4.778
2,595
3,674
4,270
3.672
2,400

1,444

15,508
6,080
8,106
8,827
9,933
7,129

8,226
3,802
5,037
5,923
5,167
3,690

1,444

632

9,286
2,913
3,611
3,654
5,272
4,098

632

9,286
2,913
3,611
3,654
5,272
4,098

18,956
7,287
9,469
10,479
11,428
8,420

$ 17,197

$ 32,198

$ 9,191

$ 54,152

$ 95,540

$ 49,395

$ 9,191

$ 54,152

$112,737

October 1941
1

2

3

4

6

7

8

9

10
11

Total

1,065
612

572
821
903
989

1,065
612

572
821

903
989

Office of the Secretary of the Treasury, Division of Research and Statistics.

October 13. 1941.

Source: All figures are deposits with the Treasurer of the United States on account of proceeds of sales of
United States Savings Bonds.

Note: Figures have been rounded to nearest thousand and will not necessarily add to totals.

235

OCT 13 1941

My dear Mr. President:

I think you will be interested in the
"program", prepared jointly by the Post
Office and Treasury Departments, for the
guidance of postmasters and employees of

the Postal Service in promoting the sale
of Defense Savings Bonds and Stamps.

Faithfully yours,
(Signed) E. Morgenthau, Is.

The President,
The White House.

HNG/mff

By missenger Simmons 5.15 pm

n.m c

INTERNATIONAL

*

PROGRAM

STATES OF

for Guidance of

POSTMASTERS
for DEFENSE SAVINGS BONDS and DEFENSE SAVINGS STAMPS

AGAIN

the Post Office
Department furthers its service to
the Nation
through the sale of
Defense Savings Bonds & Stamps

A SHARE OF AMERICA
FOR EVERY AMERICAN
Today, America is on guard. A united Nation is engaged in an all-out

program of national defense.

These are days in which we are calling on every resource at our command, for the
national defense
program can be carried through only in terms of men, machines, weapons,
materials,
and money.

Billions of dollars are needed by the Government for the purchase of airplanes, tanks,
guns, ships, munitions of all types, and all the other weapons of modern warfare.

America today faces a more pointed challenge to its freedom and security than has
confronted this Nation during any previous period in our national history. The United
States Government's answer to this threat from abroad has been the great national defense

program on which we are now engaged. This is a program in which each of us and every
member of our families have a vital stake.
Our front line of defense in the present emergency may well be termed the post offices
of the country. For the Government has called upon the Post Office Department and entrusted to its personnel one of the most important single tasks of the entire defense effort.

This is the sale of the National Defense Bonds and Stamps through our post offices. How

generously and how nobly the men, women, and even the little children of the country
respond to the call of their Nation in its hour of need depends in a large degree upon you

postmasters and those under your supervision.

It is the duty of every postmaster and postal worker handling Defense Bonds and Stamps

to see that complete and comprehensive information relative to the Bonds and Stamps and
what they mean to the Government in terms of national defense is placed before every patron
served by your respective post offices.

This is not to be a high-pressure campaign in any sense of the word. This is an appeal

to the patriotism, to the thrift and to the future security of the people of this country. It is
an appeal to them to Buy a Share in America and at the same time to increase their own
savings and protect the future security of themselves and their families.
The Post Office Department in cooperation with the Treasury Department has formulated

a program for the dissemination of information and the educating of the American public
with respect to the Bond and Stamp Program. This program and the manner in which it
is to be carried out by the Postal Service is contained in the following pages. It is the duty
of every postmaster to insure the success of this program by adhering to these instructions.

With this in mind, I feel certain that there will be no doubt as to the Post Office
Department and the American public generally responding in a most generous and wholehearted manner to the Bond and Stamp Program.
I have every confidence in the postmasters and the postal personnel to do a splendid
job during the critical months that lie ahead.

Contained in these pages is a definite and comprehensive program for you to follow
together with the supporting material and instructions as to what will be expected of you from

time to time during the various stages of this program.

OFFICEADE SAMPLE

ADD
STATES

grown Cweeken
POSTMASTER GENERAL

He stands for
Safety and Freedom,
and sales of Defense

Savings Bonds and

Stamps

The Minute Man is the emblem of America arming for
Defense. Shown on the Stamps themselves, on the Bonds, on
the Stamp Albums, on posters, in newspapers and magazineseverywhere, the Minute Man is the symbol of "America on
Guard"-on guard against attack-on guard against inflationon guard against public indifference to the imminent need for
wholehearted financial and moral support of the country's Defense

Savings Program. More than two and one-half million Minute
Man posters in various sizes have been distributed to post offices,
banks, retail establishments, industrial plants, etc. Wherever you
go you will see the Minute Man, serving as constant reminder to
buy Defense Savings Bonds and Stamps.

By sheer repetition of his direct command, "Buy United States
Defense Savings Bonds and Stamps" the Minute Man keeps the
public overlastingly conscious of the part they can play in providing the money needed so urgently for national defense.

Most important for us to remember is

the fact that practically every Minute
Man display, no matter where it stands, is

directing the public to our offices as the
place to go for Defense Savings Bonds
and Stamps. Every person that is halted

by the Minute Man has this impressed
upon him-

"ON SALE
AT YOUR POST OFFICE"

our FIRST job

FOR

ALL OF US
*

Be Patriotic

Be Thrifty
Buy a Share in America
In all our country's history Postmaster General Benjamin Franklin,
Father of the Postal Service, has typified thrift and belief in America. A

voluntary, wholehearted participation in a regular savings program by
all postal employees might well find its inspiration in his example and
teachings.

Leading business firms in the country have adopted plans for systematic

savings by employees. The labor unions are urging their members to buy
Defense Bonds and Stamps regularly. The employees of the Postal Service
who are going to carry forward this program in the interest of national defense

should themselves be provided with the opportunity to participate in this
program. By the example we set, others may be inspired to increase their
efforts to save and to invest their savings in America.
The United States Treasury Department has devised and put in opera-

tion throughout the Treasury Service a plan for the voluntary, periodic
purchase of Defense Savings Bonds and Postal Savings Stamps by its em-

ployees. The Treasury Department recommended that the plan be used
generally throughout the Government Service. The Post Office Department

examined the plan and presented it to the official representatives of each
of the Postal Service organizations for consideration. These representatives
unanimously recommended that the Treasury Department plan, modified
only to conform to conditions peculiar to our Service, be adopted and placed
in operation throughout the Postal Service as soon as practicable.

Accordingly, a Post Office Department Employees' Voluntary Purchase

Plan was formulated jointly by the Department and the official
tives of the Service organizations. The desire of the organizations representa- expressed

through their representatives, to have this program of systematic
placed in operation, is gratifying and it undoubtedly will receive the savings

patriotic support of everyone in our great service.
an opportunity of aiding the Government in
emergency, does hearted the and plan but afford Not this whole. only real
habits of thrift.

it provides a splendid means of investment and of developing

Once this plan is available throughout the Service and the proper facil.
ities are provided for the participation of each employee in each unit of the

Service,for
postal
employees will respond patriotically and set a stimulating
example
others.
Detailed instructions relative to the Post Office Department Employees'
Voluntary Purchase Plan will be sent to you at an early date and

in operationbeimmediately
thereafter.
of published should instructions
placed Copies
the the plan
of all should be posted on bulletin boards for the information
employees. A requisition form will accompany this
after
postmasters
indicate
thereon
of soon copies
asreceipt,
possible
of the should
pamphlet
the
number and as
tion printed instructions needed for posting, and send the
Postal by ordinary mail to the Third Assistant Postmaster General, Division requisi- of

Savings, Washington, D.C.

our SECOND job
DISPLAY
DEFENSE

WINDOW
DEFENSE WINDOW
BUY

BUY

DEFENSE

DEFENSE

BONDS

STAMPS

HERE

HERE

BUY DEFENSE SAVINGS BONDS AND STAMPS

Defense window
Postmasters at offices authorized to sell Defense Savings Bonds and
Postal Savings Stamps will be furnished with one or more sets of window
display pieces for use in the main office and in stations and branches where

these securities are sold. Three types of displays will be provided-for
windows at which only Bonds are sold-for windows at which only Stamps
are sold-and for windows at which both Bonds and Stamps are sold.

Window displays will be prepared in such forms that they can be
adapted to the type of windows with which the office is equipped, so that
window signs, such as "Postal Savings," "Money Orders," and "Stamps"
will not be concealed.

A requisition form will accompany this pamphlet and as soon as
possible after receipt, postmasters should indicate thereon the number of
window displays of each type needed, and send the requisition by ordinary mail to the Third Assistant Postmaster General, Division of Postal
Savings, Washington, D.C.

in our Lobbies

BUY BONDS
AND STAMPS
INIT

WINDOW

*

AT YOUR
POST OFFICE

DEFENSE WINDOW

You will be furnished with one or more sets of display pieces consisting of placards and direc-

tional arrows for your public lobbies. There will be two types of directional arrows-one directing
patrons to windows where bonds are sold, and one to windows where stamps are sold.
You should indicate on the accompanying requisition form the number of placards and directional form arrows of each type needed at your office, including stations and branches, and send the

promptly
by ordinary
Savings,
Washington,
D.C. mail to the Third Assistant Postmaster General, Division of Postal

and STAMPS
SERENCE WINDOW

AT YOUR

POST OFFICE

DEFENSE WINDOW

U.B.MAIL

on our Trucks
During the coming year, five or six different posters will be furnished to
be mounted on trucks at offices where Motor Vehicle Service is established.
The posters will be 22 by 28 inches and will be specially treated to prevent
damage from the weather.

The first series of these posters is now available for distribution and
postmasters at offices where Motor Vehicle Service is established should
indicate on the accompanying requisition form the number of truck posters

needed. The requisition should be sent by ordinary mail to the Third
Assistant Postmaster General, Division of Postal Savings, Washington, D.C.
Postmasters will be informed when other posters of this series are ready

for distribution and advised as to the manner in which requisition should
be made.

on our Letter Boxes
PULL DOWN
G

DEFENSE SAVINGS

Buy

BONDS and STAMPS
9

G

G

LETTERS
1

9

You will be furnished with placards to be used in the advertising card
frames on No. 1 and No. 2 street letter boxes. The placards should be used
on all boxes equipped with the advertising frames.

You should indicate on the accompanying requisition form the number

of street letter box advertising cards needed at your office and send the
form promptly by ordinary mail to the Third Assistant Postmaster General,
Division of Postal Savings, Washington, D.C.

our THIRD job
Educate YOUR STAFF so THEY MAY

Inform PATRONS ACCURATELY
AND COURTEOUSLY

DEFENSE

*

WINDOW
BUY

DEFENSE WINDOW

BONDS

BUY

BONDS

and

and

STAMPS

STAMPS

HERE

HERE

GSBONDSANDSTAMPS

the man at the window
must know the answers!
It is the duty of the postmaster to see that clerks assigned to Defense Savings Bond and Postal

Savings Stamp Windows are thoroughly familiar with all matters pertaining to these securities
and with all literature relating thereto. It is essential that patrons be served rapidly, intelligently,
accurately, and courteously.

*
*

*

Questions and
Answers about
DEFENSE SAVINGS
BONDS and STAMPS

for use by
POSTAL EMPLOYEES

You

con-

taining

Bonds
concerning
questions will be furnished and answers
for use by Defense
your WindowSavings
Clerks, a Manual

Postal Savings
Stamps, designed
to all of the
questions with which

to

and

provide them with authoritative
for

this should
A purpose. see to it that there are sufficient they will copies be confronted of the Manual in their available work. answers You

requisition form will

after
and

receipt,

you

accompany this pamphlet and
should indicate thereon

as

soon

as

possible

send

General, Division the requisition of Postal by Savings, ordinary Washington, mail to the the number Third D.C. Assistant of Manuals Postmaster needed,

AND

UESTIONS

ANSWERS
about

DEFENSE SAVINGS
BONDS and STAMPS
TURNER

usual
is a six-page folder containing and answers Stamps. to This the folder

Illustrated above about Defense Savings Bonds people who inquire about
Itquestions

that people as ask a handout piece not only to at your post office windows.

has been furnished but also to patrons who call folders were handed out at
Bonds and Stamps, helpful if a small supply of these folders can also be distributed

each window where means which may suggest this manual

would be very business other is transacted. These themselves to you. the num-

mail
in
lock Indicate boxes and on the by requisition form which and accompanies send the requisition by ordinary Wash-

ington, D.C.
of
ber of to these the Third folders Assistant which you Postmaster will require General,
Postal Savings, literaseries Division
informative

Postmasters will be to advised distribute very by shortly letter carriers, about States. a village carriers, and rural

ture carriers which to twenty we plan million homes in the United

The greatest volunteer program
ever launched
by Ear
In May, June, and July, 845 individual radio
stations broadcast 234,182 radio announcements
for Defense Bonds and Stamps. On commercial
NBC

MM

CBS

MBS

programs such as Kraft Music Hall, Quiz Kids,
Fred Waring, Bob Hope Show, and Fibber McGee
and Molly, 326 special announcements have been

broadcast. All this in addition to three network
radio roundtables, the Treasury Department's own
three programs, "The Treasury Hour," "For America We Sing," and "America Preferred" on three
major networks, addresses on stamps and bonds
by Secretary Morgenthau, Under Secretary Bell,
Assistant Secretary Graves and many others.

with Pictures
Since April 18, 19 separate motion picture films
have been produced and released to over 12,000

theaters who are showing them to more than

PREFERRED

70,000,000 people per week. These films consist
of eight newsreel shots, seven trailers on feature
pictures, one eight-minute short subject and three
skits in feature pictures. A16-millimeter 10-minute,
sound film has been produced for use by schools,
clubs, and organizations.

in Type
The Banks of the country have run more than a
half-million dollars' worth of advertising on Defense

Savings Stamps and Bonds in three months and
are continuing a similar program. Leading Shop-

ping Newspapers have run more than 125,000
lines in May, June, and July. Many magazines
have printed feature articles and cover messages
on Defense Bonds and Stamps. All this is in ad-

dition to thousands upon thousands of lines of
publicity for the Defense Savings Program in
every printed medium.

THE POSTMASTER'S JOB
Postmasters will be responsible for carrying out the
program of the Post Office Department as it is outlined in
this manual.

The Treasury Department is setting up State and Local
organizations and the postmaster may serve as a member (but

not as chairman) of any committee on which he is invited to
serve. He is to cooperate with the work of that committee and
with the work of the Treasury Department's organization representative of the United States Defense Savings Staff, but not to

an extent which will interfere with his duties as postmaster.
In other words, the postmaster's participation should take the

form of cooperation with, rather than initiation of, activities
in his local community. Individuals and firms should be requested

to submit requisitions direct to the local Defense Savings Staff
Committee for any display material, etc., which they may desire,
or, if such a committee does not exist, to the State Administrator.

If neither a local nor a State organization is available, requisi-

tions by the public should be submitted direct to the Defense
Savings Staff, U.S. Treasury Department, Washington, D.C.

237

n
THE WHITE

HOUSE Oct- 13-1901

WASHINGTON

NOEL COWARD

SAVOY (to TEL
LONDON

(ENGLAND)
HAVE JUST HEARD YOUR
RECORDS OF "LONDON PRIDE
AND

"CAN ANYONE OBLIGA

us WITH A CREN GUN" AT
HOUSE

WHITE/A WHICH WERE GIVEN

To THE PRESIDENT BY LORD
Louis MOUNTBATTEN WOULD

LIKE YOU TO BROADCAST
- THESE SONGS OVER NATIONIWIDE

237

THE WHITE HOUSE
WASHINGTON

Hook_ue UNDER AUSPICES

OF THE TREASURY ON
OCTOBER 21ST BETWEEN

NINE AND TEN PM NEW =
YORK TIME DETAILS COULD
BE ARRANGED BY REPRESENTATIVE

OF NBC BE WOULD
APPRECIATE A REPLY CARE
OF TREASURY WASHINGTON

Henry
(Chare to

238
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION

DATE October 13, 1941

Secretary Morgenthau

TO

FROM

Mr. Haas

Employment under the Work Projects Administration showed

a

slight decline of 1,000 persons, to 1,032,000 for the week

ended October 1, 1941.

Attachments

239
WORKS PROJECTS ADMINISTRATION

Number of Workers Employed - Weekly
United States
Week ending
1941

Number of Workers

(In thousands)

February 5
February 12
February 19
February 26

1,892
1,893
1,885
1,867

March 5
March 12
March 19
March 26

1,806
1,764
1,736
1,708

April 2
April 9
April 16
April 23
April 30

1,662
1,634
1,607
1,586
1,560

May 7
May 14
May 21
May 28

1,519
1,497
1,474
1,464

June 4
June 11
June 18
June 25

1,442
1,423
1,410
1,368

July 2
July 9
July 16
July 23
July 30

1,172
1,030
1,016
1,025
1,036

August 6
August 13
August 20
August 27
September 3
September 10
September 17
September 24

October 1

Source: Work Projects Administration

1,041
1,042
1,043
1,045
1,043
1,037
1,035
1,033
1,032

240
WORK PROJECTS ADMINISTRATION

Number of Workers Employed - Monthly
United States
Number of Workers

(In thousands)

1939

January
February

March

April
May

June

July
August
September

October

November
December
1940

January
February

March

April
May

June

July
August
September

October

November
December
1941

January
February
March

April
May

June

July
August
September

Source: Work Projects Administration

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

They include certified and noncertified workers.

2,986
3,043
2,980
2,751
2,600
2,551
2,200
1,842
1,790
1,902
2,024
2,152
2,266
2,324
2,288
2,092
1,926
1,665
1,701
1,691
1,704
1,779
1,821
1,878
1,895
1,867
1,708
1,560
1,464
1,368
1,036
1,045
1,033

241
WORK PROJECTS ADMINISTRATION
Number of Workers Employed

United States
Weekly W.P.A. Employment

Monthly W.P.A. Employment

1939

1942

1941

1940

42

MAR. MAY ON SEPT. nov. JAN. MAR, MAY - - -

WILLIONS WILLIONS

or

MORRIS

BILLIONS
of

11

WORKERS WORKERS

2.7

2.7

2.6

2.6
3.2

3.2

2.5

2.5

2.4

2.4
2.8
2.8
2.3

2.3

2.2

2.2

2.4

2.1

2.4
2.1

2.0

2.0

2.0 1.9

2.0

1.5

1.8

1.8

1.7

1.7
1.6
1.6

1.4

1.6

1.5

1.5
1.2
1.2
1.4

1.4

1.3

1.3

.8

1.2
.8

1.2

.4

1.0

.9

....

1937

0

IN

0

1935 1936

MM

1938

1939

1940

1941

.8

-

JAN.

42

MARK

MAY

JULY

1940

SEPT.

NOV.

JAN.

MAC

MATERIAL

1941

SEP.

NOV.

-

1.1

1.0

JM.

1942

SOURCE: MORE PROJECTS ADMINISTRATION

Z 221 c
Office of the Secretary of the Treasury

- - - Service

.9

1.1

.0

TREASURY DEPARTMENT

242

INTER OFFICE COMMUNICATION

DATE October 13, 1941
TO

Secretary Morgenthau

FROM

Messrs. Foley and Pehle

As of the opening of business October 13, 1941, there
were 4365 pending applications in the Foreign Funds Control.

EXPORTS OF PETROLEUN PRODUCTS, SCRAP IRON AND SCRAP STEEL

FROM THE UNITED STATES TO JAPAN, RUSSIA, SPAIN, AND GREAT BRITAIN

243

AS SHOWN BY DEPARTURE PERMITS GRANTED

Week ended October 11, 1941

HUSSIA

SPAIN

:

JAPAN

GREAT BRITAIN

:
OTROLEUM PRODUCTS

Fuel and Gas Oil (including
Diesel 011)

--

--

--

--

--

--

--

--

493,500 Bbls.

Crude -

Blended or California
High Octane Crude*

-

All Other Crude
Gasoline -

199,481 Bble.

Gasoline A**
Gasoline B*

--

All Other Gasoline

----

514,000 Bble.
922,780 Bbls.
32,000 Bbls.

--

58,700 Bble.
84,275 Bbls.

oricating 011 -

Aviation Lubricating 011
All Other Lubricating 011
Tetraethyl Lead ***

--

17,367 Bbls.

--

--

--

--

--

"Boosters", such as IsoOctane, Iso-Hexane, or

--

Iso-Pentane

--

CRAP IRON AND SCRAP STEEL

Number 1 Heavy Melting Scrap

--

--

2,568 Tone

All Other Scrap

--

--

3,800 Tons

fice of the Secretary of the Treasury, Division of Research and Statistics.
October 13, 1941.
ource: Office of Merchant Ship Control, Treasury Department.

Any material from which by commercial dietillation there can be separated
more than 3 percent of aviation motor fuel, hydrocarbon or hydrocarbon
mixture - President's regulations of July 26, 1940.
Aviation Gasoline.

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

244
Hotel Richemond,
Geneva.

13 October 1941.

Personal

My dear Mr. Secretary,
Some information has come my way showing that the

Nazi party in Germany itself is to some extent honeycombed with Communism.

I have it from a University source that the German

students here, of whom a number have remained, are Communists

almost to a man. The other day, some Nazi party members,
come from Germany to visit a Trade Fair in Switzerland,
were in Geneva. They delivered messages to the German

students here from Communist headquarters in Germany, to the

effect that the students were to carry on as at present for
the time being, and that they would get fresh instructions
some time in November.

little story from Rome: A Fascist in uniform was
struck by a civilian, in a bus, and then by another civilian. After arrest, Civilian A said the Fascist had trod
on his corns. Civilian B said that when he saw the other
A

fellow hit the Fascist, he thought the hour had come.
with kind greetings,
Yours sincerely,

small Tyln
Royall Tyler

The Honorable

Henry Morgenthau, Jr.,

Secretary of the Treasury,
Washington, D.C.

245

BRITISH AIR COMMISSION
1785 MASSACHUSETTS AVENUE
WASHINGTON. D.C.
TELEPHONE HOBART 9000
PLEASE QUOTE
REFERENCE NO

With the compliments of Sir Henry Self,
who encloses weekly Statement No. 21, with

reference to aircraft flight delivery as
at October 13, 1941

The Honorable Henry Morgenthau, Jr.

Secretary of the Treasury
Washington, D. C.

October 13, 1941

13th October 1941

ENTIAL REPORT

LOCATIONS OF OCEANIC FLIGHT DELIVERY AIRCRAFT -- WEEKLY REPORT NO. 21

246

1. B-170

20 in U.K.
2. B-24'a and LIBERATORS

(a) Six diverted B-24's off Contract A-5068
6 in Service

(b) Liberator I off Contract F-677
19 in U.K.
1 at Kansas City
20

(c) Liberator II off Contract F-677
4 in U.K.
12 at Montreal

7 at Detroit
1 en route Detroit
1 at Wright Field

2 at Albuquerque, N. M.
8 at Akron
4 en route Long Beach from Akron
13 at Long Beach
52

3. HUDSON V LONG RANGE

166 in U.K.
2 at Gander

36 at Debert (training)
1 at Montreal en route Debert
1 at Detroit en route Debert
7 at Montreal
3 at Kansas City
6 for U.S.A.A.C. Familiarization Program
222*

4. HUDSON III LONG RANGE

208 in U.K.
8 at Montreal

20 for U.S.A.A.C. Familiarization Program
1 en route March Field
1 at Long Beach
238 **
5. CATALINAS

Excluding three which crashed

78 in U.K.
9 in Singapore

after leaving United States.
Excluding nine which crashed

16 in Australia

two in the United States, three

9 at Dartmouth
1 in Bermuda

in Canada. and four en route U.K.

113

B-17

0 KINGDOM

B-24

20

Lib.I

Lib.II Hudson V Hudson III Catalina Total
501

78

208

166

19

6

ons

4

2

2

16

16

lia

9

9

pore
9

9

1

1

Debert

36

36

1

Montreal en route Debert
Detroit en route Debert

1
1

1

27

12

Detroit

8

7

Nontreal

7
7

En route Detroit

1
1

18

Akron

18

Wright Field
Albuquerque, N.M.
as City

1
1
2

4

2

4

3
1

A.A.C. Familiarization

6

1

route March Field
in route Long Beach from Akron

En

1
4

Long Beach

13

6

20

52

14

1

20

26

20

222

238

113

671

For Miss Chauncey

TREASURY DEPARTMENT

247

INTER-OFFICE COMMUNICATION
DATE October 13, 1941

Secretary Morgenthau

TO

FROM Mr. Bell

DISTRICTLY CONFIDENT

Official sales of British-owned dollar securities under the vesting order

effective February 19. 1940:

No. of Shares $ Proceeds of
Sold
Oct.

Shares Sold

Nominal Value
of Bonds Sold

$ Proceeds of
Bonde Sold

10

359

11

Nil

26,026
27,845
10,926
11,633
12,882
Nil

1,703

89,312

87.500

64.500

9,814,938-1/2

280,620,686

45.193.216

37,118,673

9,816,641-1/2

280,709,998

45,280,716

37,183,173

220

6

440
7
8
9

325
359

18,500
16,000
23,000
9.000
21,000
Nil

16.396
12,705
16,993
5,177
13,229

Nil

Sales from

Feb.22,1940 to
Oct.4,1941
Total

Feb.22,1940 to
Oct.11,1941

For Miss Chauncey

248

TREASURY DEPARTMENT
INTER-OFFICE COMMUNICATION
DATE

October 13. 1941

Secretary Morgenthau

TO

FROM Mr. Bell

DWB

STRICTLY CONFIDENTIAL

Official sales of British-owned dollar securities under the vesting order

effective February 19. 1940:

$ Proceeds of
Shares Sold
Oct.

6

7
8
9

10
11

$ Proceeds of
Bonds Sold

Total

26,026
27,845
10,926
11,633
12,882
Nil

16,396
12,705
16,993
5,177
13,229
Nil

42,422
40,550
27,919
16,810
26,111
Nil

89,312

64,500

153,812

280,620,686

37,118,673

317,739,359

280,709,998

37,183,173

317,893,171

Sales from

Feb.22,1940 to
Oct.4,1941
Total

Feb.22,1940 to
Oct.11,1941

$ proceeds of non-vested securities sold
Sept.29,1941 to Oct.4,1941
$ proceeds of non-vested securities sold
Sept.1,1939 to Sept.27,1941
$ proceeds of non-vested securities sold
Sept.1,1939 to Oct.4,1941

700,000

234,000,000
234,700,000
GRAND TOTAL

9 Units sold from Aug.18,1941 to Oct.11,1941 for
11 Shares Stock Dividend sold from Aug.18,1941 to Oct.11,1941 for
55,572 Rights sold from July 24,1941 to Oct.11,1941 for

317,893,171

234,700,000
552,593,171
$42

$123

$102,590

249
DEPARTMENT OF STATE
WASHINGTON

In reply refer to

October 13, 1941.

EA 841.24/886

My dear Mr. Secretary:
There is enclosed herewith a message for you from

the American Ambassador in London. The records of this

office show that copies of the despatch in question were
sent to you immediately upon receipt, but as of possible
convenience a further copy is enclosed.
Sincerely yours,

/s/ Herbert Feis
Herbert Feis

Adviser on International
Economic Affairs

Enclosures:

1. No 4857 of October 11
from London.

2. No. 4782 of October 8
from London.
The Honorable

Henry Morgenthau, Jr.,

Secretary of the Treasury.
Copy:hr:10-13-41.

250
0

0

P

Y

PD

GRAY

London

Dated October 11, 1941

Rec'd. 1:24 p.m.

Secretary of State,
Washington.

4857. October 11, 5 p.m.
FROM THE AMBASSADOR FOR THE SECRETARY OF THE
TREASURY,

Your 4324, October 9. 3 p.m. received. Since
my 4348, September 17, I have forwarded to the
State Department a message number 4782, October 8,

11 a.m. Please ask that a copy be sent to you

for your information.
WINANT.

HPD

Copy:hr: 10-13-41.

251
GRAY

KD

London

Dated October 8, 1941

Rec'd. 6:35 a. m.

Secretary of State,
Washington.

4782, October 8, 11 a. m.

Your 4262, October 6, 9 D. m. as it relates
to my 4348 to Secretary Morgenthau.

I am glad to hear that the inter-departmental
advisory committee to handle problems growing out
of the Eden memorandum has been established. I

am also glad to know that the State Department
and the Division of DEfEnSE Aid Reports with the
Treasury Department are represented on this committee.

I feel sure that the procedure developed will meet
the needs of the situation. I doubt the wisdom of
sending an officer to London to SERVE in a liaison
capacity with the British Board of Trade and agree
that the problem of short supply alone would be a
serious obstacle to any such plan.
There are other reasons that also prompt ME to

write on this matter. There was certainly an inclination after the signing of memorandum on LendLEASE Exports to encourage Exporters to get guidance
from

252
-2- #4782, October 8, 11 a.m., from London.
from this Embassy. There were also proposals that a
special committee with Embassy representation be

set up with the idea of ironing out on short notice
interpretations of the agreement (or alternatively
that the London branch of the United States Chamber

of Commerce be designated to function in this

capacity). If this work were thrown on the Embassy
WE would have no time for anything Else. It would
mean that the Embassy at a difficult time would find

itself in constant friction with Export merchants in
this country and at the same time making decisions
affecting United States Exporters three thousand miles
away from our base. The Board of Trade would be con-

stantly tempted to USE us here as a buffer in making
decisions for which they are responsible and in the

End WE would find that the practical policing of the
agreement would fall upon the Embassy staff.

I have insisted that the administration of this
Export arrangement is being handled in the United

States and I hope very much that you will continue to

support ME in maintaining this position.
WINANT.
EF

C

253

0

P

Y

DEPARTMENT OF STATE
WASHINGTON

October 13, 1941

In reply refer to

EA 840.51 Frozen Credits/3831

The Secretary of State presents his compliments

to the Honorable the Secretary of the Treasury and
transmits herewith copy of despatch 998, dated August
23, 1941, from the American Consulate General at Hong

Kong concerning the effect of Hong Kong's entry into

the sterling bloc and of the recent American and British
orders freezing Chinese assets.

Enclosure:

Despatch no. 998 from Hong Kong,
August 23, 1941.

254

No. 998

AMERICAN CONSULATE GENERAL

Hong Kong, August 23, 1941.

Confidential

Subject: Effect of Hong Kong's entry into
the Sterling bloc and of the recent
American and British orders "freezing" Chinese assets.

The Honorable

The Secretary of State,
Washington, D.C.
Sir:

I have the honor to report on the subject of the

recent "freezing" orders and the action of the British
authorities in placing Hong Kong in the Sterling bloc.
Now that nearly one month has elapsed, it is pertinent

to report the initial effect of the new policy, together
with local comment thereon from informed sources. The
following comment has accordingly been prepared by

Consul John H. Bruins of this office.
United States Executive Order no. 8389 as amended by

E. O. 8785 of April 10, 1940 and by E. O. 8832 of July 26,
1941, froze Chinese and Japanese assets as from June 14,

1941. Hong Kong Order no. 895 of July 30, 1941, froze

Chinese assets. Hong Kong's entry into the "Sterling
bloc" became effective August 2, 1941. Both the American
and British orders freezing Japanese assets and the

Japanese retaliatory action are not discussed in the

2present despatch in view of their negligible effect on
trade between Hong Kong and the United States.

As already reported, the initial effect of the foregoing was to cause a standstill in any new foreign trade
commitments in Hong Kong until the pertinent administrative measures became known. There were also mild runs on
local banks by Chinese who withdrew considerable sums.

The run lasted less than two days and did not embarrass
any of the banks.

There has been very little criticism or adverse effect from the American freezing order because of the
exemption therefrom of transactions with the Chinese Government and because of General Licenses nos. 58 and 59 under

which bona fide foreign trade between the United States
and China may continue to be financed. Some inconvenience
has been caused by the fact that some Hong Kong banks

transferred their U.S. dollar accounts to their United
States branches or correspondents several months ago be-

cause of the uncertain situation in the Far East. Most
of these accounts were in Chinese names, and such owners

now find their funds blocked in the United States. This
action was taken by local banks in the supposed best in-

terests of their clients, who are now inclined to criticise
the action since most of such funds were for personal uses.
The Chase Bank and the Kincheng Banking Corporation are

among those who took this action.

255

-3-

Some criticism of the British orders has appeared,

first because of the confusion caused by the initiation
of "freezing" and entry into the Sterling bloc at almost
the same time, and second, over the policy involved in

the inclusion of Hong Kong in the Sterling bloc. Mr.
D. Kelvin-Stark, Hong Kong Controller of Exchange ad-

mitted to the writer in a recent conversation, that the
new regulations are so complicated that he has practi-

cally ignored the British "freezing" order and confined

his action to the new sterling policy in view of his
opinion that it transcends the former.
There is no doubt but that trade between Hong Kong

and China has been adversely affected by the entry of

Hong Kong into the Sterling bloc. Because of the effective Japanese blockade of the South China coast, this
trade is now mainly between Hong Kong and Shanghai. Hong

Kong buys much more from Shanghai than is sold to that

port. This adverse trade balance would normally be
equalized by remittances which are now impossible. Local
coverages of payments are -possible under the new regula-

tions in so far as they balance, but at present no excess
of purchases by Hong Kong appears to be possible. The
American Express Company made an arrangement whereby

Sterling was transferred from its London office to Shanghai account for debit to the Hong Kong office which in
turn is repaid for the import of goods in Hong Kong dol-

256

257
lars. The latter is now a British controlled currency.
The National City Bank and the Chase Bank also attempted
this arrangement but were denied by the Hong Kong autho-

rities. This is doubtless one of the details of the now
regulations which needs standardization.

From such information as is available, it appears

that the British banks are thus far getting most of the
business which represents trade up to the point where it
balances. None of the banks can make payments for goods

imported without a special permit. For the present, the
policy is to allow payments for foodstuffs and other
"essential" requirements, but to refuse them for most
other imports including all luxuries. The Chinese banks
in Hong Kong consist of four Government banks (only two
of which engage in exchange business with the public)

and a large number of commercial banks. The latter ap-

pear to be hard hit by the new British regulations. The
Hong Kong Controller of Exchange stated confidentially
to the writer that many of the Chinese banks are carrying

on for the present by smuggling large quantities of notes
back and forth between Hong Kong and Macao. He added

that the Hong Kong Government staff available here is

utterly inadequate to cope with this matter, and that no
attempt has been made thus far to search travellers going
to and from Macao.

The "Sterling bloc" order gazetted July 31st effective August 2nd also extended the obligation to offer

-5-

foreign holdings to the local Government in exchange for

sterling. Previously this applied only to British subjects. The amendment made it applicable to all persons.
Thus all Americans in the Colony are supposed to report
their holdings wherever situated after which the Hong Kong
Government may, at its convenience, require such assets

to be surrendered against payment in Sterling at the official rate. The local Government has not gotten around

to the enforcement of this provision, although it is stopping telegraphic orders for trading in securities abroad.
Some doubt has been expressed in informed quarters

whether the local Government can legally compel local

Americans to surrender their holdings which are now in
the United States which in most cases would cause

material deterioration in value.
Some criticism has arisen from the withholding of
remittances from abroad. Many Chinese both in Hong Kong

Colony and in adjacent South China receive regular remittances from the United States, Canada and the West Indies.
Normally such remittances were cashed in Hong Kong into

local currency which passed along into the surrounding

territory. Under the new British regulations, such money
cannot be sent out of Hong Kong. This also tended to
remove support from the Chinese National dollar. However,
this matter has now been arranged by permitting Hong Kong

banks to remit to the interior amounts up to 75% of their
normal previous transactions of this character.

258

259
The Stabilization Board of China offered sterling
and American dollars in Shanghai on August 18th at rates

below the open market, for certain legitimate trade purposes. This had no direct effect in Hong Kong where payments normally occur in Hong Kong dollars. The American
banks in Hong Kong state that their Shanghai branches did

not have room enough in their vaults for the large quantity of Chinese currency obtained from the sale of American dollars at the advantageous rate.

Local criticism centers mainly around the policy of

placing Hong Kong in the Sterling bloc. It is argued
that Hong Kong is almost totally dependent for its income

on transit trade to and from China, and that inclusion in

the Sterling bloc cuts off an important part of this
trade. The Colony is not a producing center, but it is

primarily a trading point. In so far as trade is cut
off, the Colony does not prosper. This point of view
was repeated privately to the writer by Mr. W. H. Evans
Thomas, Manager of the Chartered Bank of India Austra-

lia and China. He added that in his opinion the order
emanated from the belief in London that the Colony would
otherwise become a leakage point for Empire Sterling

resources. He gave it as his opinion that such is not
the case and that exactly the opposite may occur, namely

that the curtailment of business here may result in the

Colony becoming a financial liability instead of an asset.

-7-

A similar statement was made privately by Mr. Kan Tong Po,

Chief Manager of the Bank of East Asia, probably the
largest non-Government Chinese bank in Hong Kong.

Summary: From the foregoing, the following conclusions may be drawn:

(1) The multiplicity of new financial regulations
within a few days caused great confusion in Hong Kong, and
a temporary stoppage of new trade commitments;

(2) No ill effects have been observed in the Colony
attributable to the American order freezing Chinese as-

sets, other than the unfortunate but well-intentioned action on the part of some banks which transferred considerable sums to the United States in recent months:

(3) Considerable reduction in the trade of the Colony

is expected as a result of its inclusion in the Sterling
bloc;

(4) Not only British subjects but all persons must
now report their foreign holdings for possible later
surrender in exchange for sterling at the official rate;
(5) Remittances from abroad are accepted for dis-

tribution into adjacent territory up to 75% of normal
requirements;

(6) Many competent observers believe that the inclusion of Hong Kong in the Sterling bloc was a mistaken

policy, and that the action, because of its adverse effect on trade, may even result in the Colony becoming

260

261
a financial liability to the Empire instead of anaset.

Respectfully yours,

Addison E. Southard
American Consul General

Distribution:
In quintuplicate to Department;
Copy to Embassy, Chungking:
Copy to Embassy, Peiping:

Copy to Consulate General, Shanghai.

800

JHB/g

Copy : bj: 10-17-41

COPY OF A COPY

(COPY:FE:LBW)

262

EMBASSY OF THE
UNITED STATES CF AMERICA

No. 173

Chungking, October 13, 1941

Subject: Transmitting Memorandum Regarding the Price Problem and

Financial Policy in Unoccupied China.

AIR MAIL.

Strictly Confidential.
The Honorable

The Secretary of State,
Washington, D.C.
Sir:

I have the honor to transmit herewith a copy of a strictly confidential
emorandum that was prepared at the request of General Chiang Kai-shek by
Dr. Arthur N. Young, financial advisor to the Government of China, regarding
the price situation in unoccupied China and containing suggestions for

improving the nation's financial position. At the time Dr. Young furnished

the Embassy with a copy of his memorandum he specifically requested that it be

treated as strictly confidential with regard both to contents and source.

In discussing the memorandum with Dr. Young a few days ago he told an
officer of this Embassy that he was informed that the Generalissizo had
found the memorandum very interesting and was taking measures to have the

suggestions studied. Dr. Young was encouraged by this report and therefore
intends to follow up the matter and endeavor to have his recommendations

adopted.

Summary of Memorandum.

Prices have increased twelve-fold since 1937. This increase
is attributed to scarcity of commodities and a poor crop in 1940

but inflation is the fundamental cause. Strict control of further

increase in note issue is therefore the chief remedy. The
recommendations suggested in order to check inflation are increased
taxation, abandonment of the proposal for Government monopolies,
increased borrowing from the public, borrowing from the commercial

and provincial banks and control of their credit, economy in Central
Government expenditures, economy in military budget, reorganization
of Government offices, control of provincial development schemes and

special efforts to control inflation in Yunnan.

Recommendations similar to those in Dr. Young's memorandum have been dig-

cussed at considerable length recently by individuals interested in the

263

-2-

inflationary tendency in China and the nation's deteriorating financial

position but there have been no indications that the Government is pre-

pared to follow a policy along such general lines. Following the

recommendations adopted at the Third Financial Conference held at Chungking

in June of this year (as reported in my despatch no. 54 dated July 2, 1941)
there has been an attempt to improve the tax structure with a view to
increasing the country's revenue. The collection of the land tax in kind and
the issuance of food treasury certificates are two measures that have been
introduced already (see my despatch no. 168 dated October 8, 1941). Recently
provisions have been made as well for increasing the salt revenue (as reported
in my despatch no. 145 dated September 18, 1941). These efforts during the
past few months are highly commendable but there still exists possibilities
for increasing the national revenue which are not utilized, The proposed
salt monopoly plan has been abandoned and there is no evidence of progress

in instituting other monopolies.

Borrowing from the banks and public affords only a limited field for
government financing in as much as the capital assets in this area have been
tapped now for over a period of four years. Even in the matter of food treasury
certificates (a type of borrowing from the public) the authorities admit that
they are faced with difficulties which may cause them to abandon any measures
to enforce this scheme (see my despatch no. 168 dated October 8, 1941).

Economy in Government administration has not received serious official
consideration. Deficit financing provides an easy means of obtaining funds
and there has been little attempt to cut down requests for additional
appropriations. Considerable sums of money are spent on development projects,

both national and provincial, that do not contribute in any way to the war
effort.

Although China's financial condition has reached a critical state there

is no immediate danger of collapse but remedial measures are imperative in as
much as the present state of affairs cannot be allowed to continue indefinitely.

Consequently effective reforms along the lines of those recommended by
Dr. Young deserve the serious consideration of the Ministry of Finance.
Respectfully yours,
C. E. GAUSS

C. E. Gauss

Enclosure: 1/ Copy of memorandum, as stated.

Original and one copy to the Department by air mail.
Three copies to the Department by pouch.
One copy for the Division of Commercial Affairs by pouch.
One copy for the Consulate General at Shanghai.
One copy for the Embassy at Peiping.
851

JJM/CWC

Copy:hmd:11/27/41

264
Enclosure No. 1 to Despatch No.
173 dated October 13, 1941 from
the Embassy, Chungking.

Strictly Confidential

Chungking, September 23. 1941
THE PRICE SITUATION AND FINANCIAL POLICY

By Arthur N. Young, Financial Adviser
The present situation

Average prices in eight leading cities of China roughly doubled
in the first two years of war. But now they are roughly six times as
high as two years ago, that is, a twelve-fold increase since 1937.

Added to the ravages of war, this increase has caused enormous
hardship to the people and confronts the Government with the necessity
of doing everything possible to ameliorate conditions and check the
deterioration.

What has the future in store? Some indication of possible

developments is had by comparing prices in China and in some of the

European countries during the war of 1914-18. The following is a
summary taken from a more detailed table annexed hereto:
Europe, 1914-20*
France

Italy

July, 1914

100

100

June, 1915

142

16

186

17

Austria**

Average

8 cities

Chung-

king

100

100

141

100 July, 1937
179 June, 1938

122

135

210

382

39

191

220

268

331

616

If

40

504

560

18

329

452

1,560

If

41

19

329

390

21

326

647

3,009
5.552
8,918
84,000

22

362

630

1,553,000

#

"
If
#
#

20

493

687

20

435

712

.

If

Dec.

China, 1937-41

1,100

1,658

If

In China, price movements in the first two years of war were much

like those in France and Italy. These countries, though suffering
severe financial difficulties, got through their crises without collapse,
The extreme and unprecedented inflation in Germany is not cited
here because of its special causes and unusual development. See table amexed
**Retail food prices in Vienna through 1920: thereafter another series of
Austrian retail prices is continued, based upon the former index. See table
annexed
Estimated,

265
2-

and prices there at no time went higher than the level obtaining in
China about a year ago, say a 7-fold increase. But China's price
history in the second two years follows more nearly the pattern of
Austria, which later had a serious collapse and got through only
after prolonged suffering and having to call for an international
salvage operation. No one can safely predict, on the basis of what

happened elsewhere, what may come in China or what future price
movements may be. But if China goes the way of Austria, in four years

it will take $1,000 to buy what $1 buys today. Every possible effort

must be made to avoid such a development.

In another month China's war will have lasted as long as the war

of 1914-18; but the end is not yet in sight. China therefore must

still sustain itself to reap the rewards of its valiant fight, -

especially now that China has access to far-reaching foreign aid, and
may have allies against Japan.

The diagnosis of China's price problem is not difficult. At

times scarcity of goods, notably the short crop of 1940, and breaks in
the exchange market have greatly stimulated the price rise. Throughout,
war dislocations and especially difficulties of transport have played
a large part. But the fundamental cause is the constantly growing
increase of currency. Probably China now has nearly ten times as much

currency in circulation as in 1937. It is not only the increase of
fapi. There is also the circulation of provincial and commercial banks,

of the Red army, et cetera; and of puppet notes, the Federal and now the
Central Reserve Bank, military yen and the like. The price increase has
somewhat outrun the increase in circulation; but this is explained by
the scarcity of goods, difficulty of transport, reduced demand for money
because of impaired trade, and diminished confidence in money which leads
people to spend it more rapidly and thus has the same effect as actual
increase in the quantity issued.

Thus by far the greatest cause of the price difficulty is the heavy
issue of fapi as the result of financing the war mainly by borrowing

from the four Government banks. The remedies therefore have to be sought

chiefly in the strictest possible measures to control the further growth
of fapi issues. Other measures such as price control, rationing,
encouragement of production et cetera are only palliatives. They can be
applied only to a limited extent under actual conditions, and cannot

much influence the main trend in China as a whole.

Roughly there are two main sorts of remedial measures:- first, to
get back from the public as many as possible of the fapi already issued,
and spend them again instead of issuing more; and, second, to refrain
religiously from issuing more fapi than absolutely necessary. Although
the broad lines of the problem are so simple, practical measures are not

easy. And the problem is complicated because many persons and organizations

266
-3asking for funds do not see that, while deficit financing in the
present manner is not difficult for a time, it will eventually break
down if unmodified. Private trade will go largely to a barter basis.

A Government relying mainly on bank borrowing will not be able
indefinitely to obtain the goods and services it needs.

The better crops this fall should help to check the recent

rapid rise in prices. This, it is hoped, may give a brief breathing

spell which the Government can use for reform. But unless drastic
action is promptly taken, runaway inflation cannot be avoided,
Recommendations

1. Increased taxation. This is a two-edged sword in checking
inflation. By getting back fapi, the Government can expend them again

instead of issuing more. Also the public's ability to bid up prices

is lessened, because their purchasing power is reduced by the amount
they pay to the Government. Success of the program of the Ministry of
Finance to increase revenue is of vital importance. The Government

has been receiving from taxation only about 5-10% of its total
expenditure. The salt tax has been increased as from September 1,
and the yield is expected to increase from $100 million to $930 million
yearly. The land tax should be even more productive, and prompt
progress with this reform is properly a major objective of the
Government. But results will be disappointing unless an efficient
organization is built up. The staff should work according to a
carefully prepared plan, be properly trained and supervised, and in
particular be adequately paid in order to attract good men and keep
them contented and loyal. Personnel could be drawn partly from other
branches of the Government whose work is less essential. Further
proposals re taxation are made in the following section.
2. Government monopolies. The scheme to put into effect
monopolies of salt, sugar, tea, wine, tobacco and matches calls

for a large expenditure. A capital expenditure of over $1,500 million in the first year for salt alone has been estimated. For all
these products, the capital expenditure would run into billions, and
for a long time is likely to exceed greatly the possible revenues.
From the financial viewpoint, therefore, it is very important at this

time not to proceed with any of these schemes in order to save expense.

It will be far better to concentrate on collecting substantial tax

revenue from all of these goods, rather than to take steps towards
monopoly. Moreover, from the economic standpoint, the carrying out of
the scheme will result in dislocating the established trade and causing
loss to many, aggravating the economic hardships of the war and causing
criticism of the Government. Besides, the ordinary Chinese trader

working for profit is most resourceful and hard-working, and will carry

on these trades much more efficiently than any Government bureau.

267
Detailed knowledge of these trades is very specialized, and (except
as to salt) is not possessed by any existing Government organization.
Either the Government monopolies would have to use inexperienced men

who would take long to learn the job; or bring in men of the trade who
would tend to work more for themselves than for the Government. The
available good administrators are needed for land tax and other impor-

tant activities. Especially in time of war, it is wise to concentrate

on
solution of existing problems rather than needlessly to create new
ones to be solved.

3. Increased borrowing from the public. Direct borrowing is
difficult because, with the currency depreciating, people hesitate to

buy bonds payable in fapi. Yet means for direct borrowing should be
sought. Schemes for savings bonds and the like are good, as far as
they go. The scheme of rice certificates is based on a sound idea
because holders are partly safeguarded against receiving at maturity
money with smaller buying power, but may prove difficult to apply in
practice. Other possible means to safeguard lenders should be explored,
but taking care to avoid action that would hurt confidence in the
currency.

4. Borrowing from commercial and provincial banks, and control

of their credit. An important indirect means to tap the savings and

income of the public is to borrow from banks other than the four Govern-

ment banks. Even though it involves difficult political problems,
efforts should be made to induce provincial and private banks to invest
deposits in loans to the Government, or at least to control their credit so that they employ these funds for really essential purposes.

Otherwise such funds may be used largely for unessential ends, or
even for speculation and hoarding, thus bidding up prices and competing
with the Government for essential labor and materials.

5. Economy in Central Government civil expenditures. The forthcoming budget gives a new opportunity for reform. War expenditure must
of course be given priority, but postponable expenditure should be
strictly curtained. The guiding principle of the forthcoming budget,
and for all requests for extraordinary outlays, should be the paramount
need for strict economy in order to check the price rise by diminishing
the increase of fapi issues. Lately Government offices have been invited
to prepare their estimates of funds desired for a Three Year Plan.
Most offices have an understandable desire for expansion, in view of
China's vital urge for economic, social and cultural development and
the great needs that indisputably exist. Moreover, the amounts asked
will be exaggerated because of the belief that budgets will be cut
down before finally approved. Therefore we may expect a program to be
presented calling for huge expenditures, which the country cannot now
afford. Furthermore, there is a shortage not only of many materials
but of skilled and even common labor, directing and technical skill,
and of means of transportation. To provide fapi to be spent for purposes

268
-5-

that are not necessary creates competition with essential activities
of the Government. Not only does it reduce the supply of goods and

labor available for these activities, but it bids up the prices.

The real issue is a choice between, on the one hand, giving
priority to war needs and measures of reform that are needed to prevent the war economy from going to pieces, and, on the other hand,
diverting China's resources to a variety of lesser purposes at the

risk of probably economic and financial disintegration. It is therefore of vital importance to establish firmly the principle that there
is to be no expansion of activities of any Governmental organization,
or addition to staff, unless clearly proven necessary for the war
effort. In particular, the Central Government's capital outlay of
all kinds should be closely scrutinized, so that projects not closely
related to the war effort, involving any considerable expenditure of
fapi, will be postponed.

6. Military expenditures. While of course there can be no reduction in really important war expenditure, the question arises
whether there is room in the huge military budget for economy that
would not impair defence. For example, could a program be adopted of having
a smaller but better trained and equipped personnel? Could physically
unfit men be eliminated? Could provincial forces that serve no real
need be reduced? If so, not only would total payments be reduced,
but also labor would be set free for increased production of food and

other essential work, thus indirectly checking the rise of prices.

7. Reorganization of Government offices. Many officials are
devoting their attention to schemes for expansion and to get and spend
more public funds, but few are studying the organization of the Government, as to how it may be improved and consolidated, and how the
different offices can perform their work more efficiently, and what unnecessary offices might be eliminated. Nor what personnel of existing
offices are on the job and doing useful work, and what are merely
"supernumeraries", who either draw pay for no work or for only nominal

work. Sooner or later the multiplication of useless offices and the

padding of payrolls with useless or worse than useless men will have

to be studied and drastic action taken. It would better to tackle

this problem now, not only to benefit from the economy but also to inprove the Government's organization when there is so much vital work to
be done, rather than later when the wartime organization will have to be
cut down. Creation of a small but impartial commission of very able and
public-spirited men to analyse the functions and work of the different
offices and recommend reorganization is recommended. As an immediate

measure, now that the cost of living is rising and officials are mostly
underpaid so that the work is suffering, the several departments could

well be told to reduce numbers and curtail unessential work so as to save
funds that could be used to give a proper living salary to those engaged in

the really important activities and whose work is good. It is poor
economy to have responsible work done by persons not paid a living wage.

-6-

269

8. Control of provincial development schemes. Most provinces
have schemes of economic development and expansion of activities that
call for large use of funds, much of which must come from subsidies from
the Central Government or from loans. Recently two large-scale schemes
of development have been announced, the Szechuan-Sikong Development Co.

and the Yunnan three-year economic program. There are similar schemes

in Kiangsi and Kansu. Such schemes might be useful if strictly limited
to undertakings of immediate importance to the war effort. But they do
China more harm than good if the projects either are unnecessary or, if
useful, they cannot be finished in time to be of value in the war. Not
only do they add needlessly to the circulation of fapi and aggravate the
price rise, but them compete with the Central Government for the limited
supply of labor, material and transport. Any increase in provincial
expenditure, therefore, whether through the budgets or through development companies or bank credit should be most closely scrutinized in the

light of the principles herein outlined.

9. Special effort to control inflation in Yunnan. The unavoidable

need for heavy expenditures in Yunnan for the Burma Road, the new rail-

way, purchase of tin, and military purposes creates a special danger of
serious inflation. In the past, Yunnan has been a danger spot in which
price rises first showed themselves before extending to the rest of China.
The Central Government is now spending there over $40 millions monthly.

As railwey building is pressed after the wet season, and as the road is
paved and other improvements made and traffic increased, this figure soon
may grow to well over $100 millions, even on the basis of the present
price level. Central Government revenue in Yunnan, however, is not more
than say $5 million monthly.
In these circumstances, special effort is Warranted to try to
prevent the situation in Yunnan from getting out of hand. There is first

the obvious need for all possible economy in expenditure of both the
National and Provincial Governments, and postponement of all but essential
development schemes. Also there should be every possible economy in

private capital outlay, and strong control of the credit of all banks,
otherwise the limited supply of materials and labor will be diverted to

less essential purposes and prices needlessly bid up. The revenue system
in Yunnan should be overhauled to raise more revenue and since the land
tax in Yunnan is to remain a provincial revenue for the present, the
province might assume a larger share of the costs of pending projects.

Requisitioning of labor, while ordinarily a doubtful expedient, is

apparently advisable in Yunnan. Furthermore, payments in foreign currency
might be substituted to some extent for fapi - not in the actual circu- for
lation, but for some transport costs et cetera and perhaps partly

payment for tin for export if found practicable. A deal with the proauthorities covering these various matters seems wise. They

would vincial naturally want a quid pro quo. One thing that could be offered

them is financial aid, including foreign currency, for reconstruction
after the war. A detailed scheme could be worked out as a basis for
negotiations with the provincial authorities, if these suggestions are
agreeable in principle to the Government.

270
-7--

Chungking, September 23, 1941

Comparison of indices of wholesale prices in China, 1937-41, and in
certain European countries, 1914-18,
Note. All European data are from European Currency and Finance, by
John Parke Young, except that the figures for Austria, 1914-20, are
from Die Preisentwicklung wichtiger Lebensmittel and Bedarfsartikel
in Wien, 1914-20, by Klezl.
France

Italy

Germany

Austria

China

8 cities
1914

1937

July

101

100

Dec.

124

June
Dec.

July

100

100

114#

125

131

Dec.

107

103

142

141#

179

200#

139
148

179 June
247 Dec.

186

210#

152

382

215

249#

151

562 Dec.

331#
395#

172

616

203

1938
122

135

152

173

191

220

317

348

June

504

560

828 Dec.

764

1,187

Junexx1,100

1,658

1939

1917
268

Dec.

313

1918

1941

June

329

452

209

Dec.

353

403

245

1919
June

329

390

308

Dec.

423

497

803

3,009
4,587

June

493

687

Dec.

435

712

1,380
1,440

5,552
8,918

June

325

553

Dec.

326

647

1,370
3,490

13,400
84,000

1922
June

325

584

306,000

Dec.

362

630

7,030
147,480

1,560
2,854

1920

1921

1,553,000

1923
Dec.

June

1940

June

June

king

100

1916
Dec.

Chung-

99

1915

June

average

618 1,938,500
126,160,000,000,000

409

1,827,000
1,948,000

271
8

X There are available no series of price data for Austria except,
(1) cost of food necessities in Vienna, 1914-20, and (2) retail

prices of 52 commodities from 1921, based on January 1921 as 100.

In the absence of other data, the first series has been extended
after 1920 by taking the December 1920 figure, 8,918, as equal to
100 in the second series. Figures for 1914-20, except the first
and last, relate to the month after that specified above.
# Figures relate to the month following that specified above.

XX Estimated from incomplete data.

Copythnd:11/27/41

272
PARAPHRASE OF TELEGRAM RECEIVED

FROM: American Embassy, (Paris) Vichy
DATE:

October 13, 1941, noon

NO.1

1299

The following telegram is from Matthews for the
Treasury Department:

I saw Couve de Murville yesterday, when he came to

Vichy on one of his periodic visits to this capital. Couve
is one of several officials in the Ministry of Finance here
who are still completely sympathetic to the cause of the
Allies.
I asked him why the French governmental authorities now

are trying to get the United States to unfreeze enough funds

from their accounts in New York for the servicing of their
foreign loans during the whole of the next calendar year.
His reply was that they had two motives:
(1) A possible future rupture in the relations between
Vichy and the US is feared.

(2) The probable entry of the United States into the
present war - to use his own words - may cause Germany to

stop them from paying service on these debts.

In view of the foregoing, he told me that he and his
colleagues are anxious to complete all the required details

right now 80 that full service for 1942 will be assured I understand that their plan includes some $4,000,000 in
amortization

273
2

amortization payments. Then if the French Government must

later on send out instructions - at the instance of Germany that payment of service on debts is to end, the instructions
need not be heeded and the fiscal agents can continue payments
without hindrance; in this case the agents would be Morgan
and Company,
LEAHY.

OCL

EA:LWW

274
RESTRIC CTED

0-2/2657-220; No. 517

M.I.D., W.D. 11:00 A.M., October 13, 1941.
SITUATION REPORT

I.

Eastern Theater.

Ground: The situation on the entire front is extremely obscure.
The sieges of Leningrad and Odessa continue.

Heavy fighting is still taking place around the pockets

of Vyazma and Bryansk. German High Command claims that their advance con-

tinues and that the above pockets lie well to the rear of the front line.

The Russians claim the German advance is being slowed down and have checked
the German advance 18 miles north of Orel.

There is no information available from the Kharkov area.
Along the Sea of Azov, the Germans claim to be continuing their advance.

II. Western Theater.
Air: British reports claim 300 bombers in action last night

from the Baltic to the Southern Alpine border. Bremen and Nuernberg
were two of the many targets. Germany admitted heavily increased

activities.

German effort.

Manchester and Hull were reported as the main targets of

III. Middle Eastern Theater.
Ground: There are indications of increased Axis activity at
Tobruk which may presage a general attack.

Air: Italian sources report another attack on Tobruk while
the R.A.F. in this theater claims to be concentrating against Italian
shipping.
RESTRICTED

275

October 14, 1941
9:30 a.m.

GROUP MEETING

Present:

Mr. Buffington
Mr. Bell
Mr. Barnard
Mr. Thompson

Mr. Morris
Mr. Haas
Admiral Waesche
Mr. Kuhn.
Mr. Graves
Mr. Johnson

Mr. Sullivan
Mr. Viner

Mr. Schwarz

Mr. Foley
Mr. White

Mrs. Klotz

H.M.Jr:

Jake, have you anything?

Viner:

No.

H.M.Jr:

Edward?

Foley:

Forty-three hundred and sixty-five applications at the end of this week.

H.M.Jr:

Oh, you are going down?

Foley:

Yes, from eighty-five hundred. Stonier is
bringing in the editor of "Banker" this morn-

ing. I think if Ferdie could be available,

he might meet him. Mr. Buffington might meet

276

-2him also.

Buffington:

When is that?

Foley:

This morning some time. I will let you know.

H.M.Jr:

Well, I want Mr. Graves and Mr. Kuhn to be
downstairs at twenty minutes of eleven.

While I am talking about that, here is a
letter from Lowell Mellett. He wants Mrs.
Morgenthau - they first tried to get Mrs.
Roosevelt but they couldn't The Hecht

Company is having a dinner for several hundred
people at the Mayflower with a day-long

celebration on opening their large store.
They wanted Mrs. Morgenthau to accept the

ten thousand dollar Defense Bond. I think
it is crazy. Why should she go to the Hecht
Company? It is from Lowell Mellett. You

(Kuhn) tell him I think it is crazy. Would

Kuhn:

you mind telling Lowell Mellett?
That she can't do it?

H.M.Jr:

I hate to use the word "undignified," but to
go to a celebration of the Hecht Company - it

would be different if they offered her a

complimentary account there or something or

let her buy her dresses wholesale.
Sullivan:

How about this price control thing?

H.M.Jr:

Anything.

But just one ten thousand dollar bond doesn't

amount to much.

Anything else, Ed?
Foley:

No.

H.M.Jr:

John?

277
-3Sullivan:

No, sir.

Morris:

Nothing, sir.

H.M.Jr:

Wonderful.

Johnson:

I have nothing of interest.

H.M.Jr:

Admiral, have you got my little picture?

Waesche:

Yes, I just got your note before I came in,

and it is being reproduced. I will have it

over here by eleven o'clock.
H.M.Jr:

Would it be embarrassing to Coast Guard if
we sent an independent report to the President or should we just send the picture?

Waesche:

I don't think it would be embarrassing. I

haven't any report that is really worth much.
It would just be a picture of the ship, to gether with a description of the vessel.
H.M.Jr:

Well, let me have that. He was very much

interested in it. Then he said to me, "What

are we going to do with the Germans after

we get them here?" So I said, "Well, Coast
Guard could ferry them between Miami and
Puerto Rico the way we did those escaped

prisoners from Devil's Island." He thought
that was a swell idea.

Waesche:

We would like to get that little ship, Mr.
Secretary. That is a nice ice ship. It will
help us in our studies of the types of vessels
best suitable for ice work.

H.M.Jr:

Why can't you get it?

Waesche:

I have already taken it up with Admiral
Ingersol, and I am writing him a letter today

278

-4asking him for it before it gets down here.
H.M.Jr:
Waesche:

Are you going to get me my new wings?

Yes,
sir. We may want some help from you
on that.

H.M.Jr:

Well, I am ready.

Waesche:

When we need the priorities. We wired the
factory day-before-yesterday and that wire
should be in now, and as soon as I get the

dope - and if they don't give us the priority

without your help, we will come to you.
H.M.Jr:

Find out who is the man who has the say,

whether I get the wings or not. They are
getting me an entirely new pair of wings,

Mrs. Klotz. Mine melted. I flew too close
to the sun.

Waesche:

I would like to have about two minutes with
you after this conference.

H.M.Jr:

Sure.
George?

(Mr. Haas handed daily reports to the Secretary.)
H.M.Jr:

Dan, have you ever considered increasing the
amount of the G Bonds that a fellow can buy?

Bell:

Yes, I have done that on one or two occasions.
It is always a question of how far you can go,

whether you don't force them to sell securities

out of the portfolios to buy this kind of a
bond because of the rate. We have left fifty
as the limit.

279

-5H.M.Jr:

Well, the it?
time to do it would be December,
wouldn't

Bell:

Yes, beginning January 1.

H.M.Jr:

To
getit.it still in this year, if they wanted
to do

Bell:

You mean so that they could have the limit

this year and the limit next year?

H.M.Jr:

Yes.

Bell:

You can do it any time. It is just a matter
of regulation.

Barnard:

Nothing.

H.M.Jr:

Harold?

Graves:

Nothing.

H.M.Jr:

Have you decided about your trip?

Graves:

No, I was going to go down and see the

Congressman whose name I mentioned to you

last night. I was going today if possible.

H.M.Jr:

Chick?

Schwarz:

Senator Bankhead's idea seems to be to repeat with some kind words the Associated

Press heading in the story. Here is the
picture made yesterday. It is a good picture.
H.M.Jr:

Oh, yes.

Now, when I get that, for instance, could I

have a little story about who the girl is,
the story behind it so it could go into my
record?

280

-6-

Schwarz:

Surely.

H.M.Jr:

It is nice.

Schwarz:

I will fix it up and send it down to

you.

H.M.Jr:

Will you?

Schwarz:

Yes. That is all.

H.M.Jr:

Harry?

White:

Nothing, sir.

Buffington:

Nothing.

Bell:

On your memo to me this morning on new financing for non-defense, do you mean do we get a
report on those companies every time they
want to have any new financing?

H.M.Jr:

What I mean is, for instance, when SEC gets

an application for a company, let's say

that they wanted to expand cosmetics, want

to build a new million dollar plant, want

to borrow some new money, do we know about

it?
Bell:

I don't think we get any reports from SEC,
do you, George?

Haas:

Not in detail.

-

281

-7-

Bell:

We get a report every week from Allan
Sproul as to the applications pending and

when it is likely to hit the market.
H.M.Jr:

What I want is when it first goes to
SEC.

Bell:

When the application is filed?

H.M.Jr:

Yes, and to have somebody offer there that
would be responsible to somebody over
here.

Bell:

All right.

H.M.Jr:

We don't do that now.

Bell:

I don't think so, unless George's shop

does.

Haas:

We did it for a period there.

H.M.Jr:

Let's have it, and I would like to have it -

Bell:

use Dave Morris on this.
O.K.

282

-8H.M.Jr:

The idea is that if we could sort of
informally know just when the application

is filed and then also, I would like to

have some kind of contacts somewhere if

thestates.
cities are going to do any financing,
or

If any state or city is going to do any
financing, the character of the financing
- now, if it is going to go near something
that could be postponed, I would like to

get some kind of arrangement that we could

kill it, you see.
Bell:

Yes.

Foley:

Well, SEC wouldn't know about the states and
municipals.

H.M.Jr:

Then you have got to do it through the

Feds.

Bell:

I doubt if they would know about it until
it had gone so far they couldn't stop it.

Viner:

Or half a dozen investment banking houses

would have all the information in the country
on that.

Foley:

That is right, the big ones.

H.M.Jr:

You (Buffington) would know how to get that,

wouldn't you?
Buffington:
Viner:

Yes, sir.
They would know it much sooner than SEC

would.

Morris:

SEC never knows it.

Foley:

No, not on public offerings.

283

-9 H.M.Jr:

Well, Bell, between you and Dave Morris

and Buffington, lets line it up that

any financing, other than Federal,

that I would be able to get it here in
time that if we thought It was a nonessential, it could be postponed, you

see.

Bell:

You want the same information that might
come to a capital control committee, for
instance.

H.M.Jr:

That is it.

Viner:

The British operated like that for years
with an unofficial capital issues control

committee with no statutory rights to say
"No", but just expressing their wish to the

market.
H.M.Jr:

That is what I had in mind.

Viner:

If you do that, you will have to set it
up rather carefully, because it will get
lots of publicity.
What I want to do first, is to explore
it, and that is the purpose of that lun-

H.M.Jrs

cheon tomorrow.

Foley:

I might go a step farther and consider
sending letters to the governors and
mayors of the principal cities, and ask them
to check with you.

H.M.Jr:

What I want, Ed, is a carefully worked out
program so that I can say if I want to do

It this is the way to do it, but I don't

want anybody to know about outside of the

Treasury. Simply a carefully worke a out

program, Dan. If I want to do it, this is

the way that we can get all the things, you
see, Jake.

2

284

- 10 Viner:

You ought to get Harry White to get somebody

in his shop to write up a little history

of the English committee.
White:

It is already prepared and has been circulated
some time.

Viner:

That is efficiency.

White:

We read your every wish, Jake.

Buffington:

Mr. Secretary, you have no reason not to
want to get ahead of the SEC? There are ways
that you might get any important financing
before it becomes public from SEC records.

H.M.Jr:

Well, if Bell would get you, Buffington,
and you, Morris, together and work up a

little plan for me, the three of you.
Bell:

I think it is important to get it before

Buffington:

the plans are formulated.
That is what I meant.

H.M.Jr:

Using what anybody in this room has. If

anybody has any ideas, if they would give

them to Bell. I don't want any leaks on it

outside the Treasury, no leaks, please, but

I would like to have it fairly soon. Have
you got any suggestions, Jake?
Viner:

I will think about it.

H.M.Jr:

Dr. Viner is here all week. He could work
it into shape.

Viner:

I am leaving this afternoon.

H.M.Jr:

Really?

Viner:

My students are just waiting there with
their tongues hanging out.

285
- 11 -

H.M.Jr:

That is what you say.

Foley:

They have probably got their tongues out
(laughter).

Viner:

They are all ganging up on me.

H.M.Jr:

Poor Jake. Well, anyway, make the best

use of Dr. Viner today that you can, will

you?

Bell:

Yes.

Viner:

They told me I have got to vacate my room at

Foley:

Bell:

the hotel by four o'clock this afternoon.
Haven't you got a priority?

If you stay over two days, you are not
a transient. Joe Cotton, who used to be
with us, and is now in OPM, said some ques-

tion had been raised over there, and I take

it it is a matter of difference of opinion

between OPM and RFC as to whether the new

plant construction for defense purposes
should be built by the Government, by
Government money direct, or through the
loan process, and whether or not Jesse
should loan money to the companies to build
the plants or whether or not he should build
them outright, and the Government own them.

They have got some indication that the
Treasury is opposed to the loan process,
and we ought to build them. I don't know

that we are interested in it at all.

H.M.Jr:

We used to be very much interested in it.

I don't know why we should now. Have
any of you boys been in this?
Sullivan:

That isn't quite what Joe told me. He
said he hadn't heard that we were interested

- 12 -

286

in it, but because the deals were being held
up, he was just trying to find out who was
holding it up, and he wondered if there was
any interest here.
Bell:

Well, he said he got some indication that
the Treasury preferred one way, and he

thought that was -H.M.Jr:

Who in the Treasury? We are eighty thousand
strong.

Bell:

I don't know. That may be being used as an

excuse, you see, for not going ahead. I
want to tell him that we are not interested

in it.

Foley:

We are not now, but a year ago or a year
and a half ago we were very much interested.

Bell:

That is what I told them.

Foley:

That they build them and own them.

H.M.Jr:

That was when we were doing the Curtiss

Wright and Pratt and Whitney. He is only
a year and a half behind the times.
Bell:

I told him I knew we were interested sometime ago, but thatI hadn't heard anything
about It recently, and I thought we were

entirely out of it, and I would like to tell

him that.
H.M.Jr:

That is right.

Bell:

O.K. That is all.
May I have five minutes after the Social
Security conference?

H.M.Jr:

Sure. If you are ready at five minutes of
ten, I will be ready five minutes ahead,

or aren't you ready?

287
- 13 Bell:

Yes, I am ready. I just thought I was going
to stay at ten o'clock anyhow.

H.M.Jr:

Well, it is only twelve minutes of, and I
will see the Admiral and then I will ring
you in your office when he leaves.

Bell:

All right.

H.M.Jr:

There is a Horace Alexander, you (Thompson)
make a note, who works in the Treasury, and

who came here at the age of eight, and he is

the first cousin or something, of Mr. Alexander, First Lord of the Admiralty, and
last night Lord Mountbatten went out
somewhere to call on him. I don't know

whether he is a messenger or what, but I
would be curious to know. Horace Alexander.
Thompson:

I will check on it.

Bell:

He didn't come in to the Treasury at eight,
did he?^

H.M.Jr:

No, he went out last night to call on him.

Klotz:

He means at the age of eight.

H.M.Jr:

No, those people work for other agencies

(laughter). But I was just curious to

know who he is, and what he does. We

insist of a mentality of twelve.

Klotz:

You have got it (laughter).

H.M.Jr:

Harry, I will have to put up a loudspeaker
down at your end of the room. I can't hear
those witticisims.

White:

Chick hears them. He is my audience (laughter).

H.M.Jr:

All right.

s 288
October 14, 1941

My dear Mr. President:
I am sending you herewith a copy

of the picture of the Norwegian steamer
BUSKOE, which was seised in northeast
Greenland waters.

Yours sincerely,

(Signed) B. Morgenthau, Jul

The President,
The White House.

By Messenger

Dixon 4:45

n. me.

289
THE COMMANDANT OF THE UNITED STATES COAST GUARD

WASHINGTON

14 October, 1941

CONFIDENTIAL

MEMORANDUM FOR THE SECRETARY OF THE TREASURY:

Attached hereto are several copies of a picture of the Norwegian steamer BUSKOE which was seized in northeast Greenland waters.
The BUSKOE is a typical Norwegian sealing steamer, especially strength-

ened against ice, length 105 feet, beam 22 feet, draft 13 feet.

In our studies as to the best type of vessel for use in
navigating in ice in Greenland waters, one school of thought (minority
opinion) believed that a small vessel of this general type would be

more serviceable than a larger vessel.

Provided arrangements can be made with the Navy Department,
the State Department, and other interested agencies of the Government,

it is my intention to request the Navy Department to permit the Coast
Guard to man and operate this vessel for the dual purpose of using
her in Greenland waters, along with other vessels of the Coast Guard
now operating with the Navy, and for experimental use in determining
the best type of vessel for use in working through ice in Greenland

waters.

annualche
R. R. WAESCHE

Rear Admiral, U. S. Coast Guard
Commandant

M-IZ-VD

NORGE

M-17-VD

ORGE

.

292

CG-OP-073

OCT 14 1941

Rear Admiral R. R. Waesche,
Commandant, U. 3. Coast Guard,
Washington, D. C.
Sir:

I recommend that Radioman, first class, S. J. Brodnan, U. S.
Coast Guard, be awarded the Distinguished Flying Cross for an extra-

ordinary achievement while participating in an aerial flight.

On the late afternoon of October 3, 1941, Radioman, first

class, S. J. Brodnan was radioman of the Coast Guard airplane V-188
with the Secretary of the Treasury on board, and while executing an
instrument let-down procedure to break through the overcast preparatory
to landing at New Hackensack, New York, the airplane crashed through
tree tops and was severely damaged. An inminent crash landing seemed

certain, but the pilot and crew kept the damaged airplane in the air
and after a flight of almost two hours in low visibility and darkness
arrived over Philadelphia where clear weather prevailed. Because of

the condition of the airplane a dangerous landing at high speed was
necessary and it was successfully accomplished without injury to the
persons on board or further damage to the airplane.

The courage, quick thinking, skill, resourcefulness and
efficient teamwork of the pilot and crow transformed almost certain
disaster into safety which seems incredible now in the light of the

known damage to the airplane.

I make this recomendation as an eyewitness of Radioman,

first class, Brodnan's contribution to this extraordinary achievement

and his outstanding performance of duty on this occasion.
Sincerely yours,

(signed) 5. Morgenthau, Jr.

Secretary of the Treasury.

Typed 13 Oct., 1941.

EGR:RWH

293
OCT 14 1941 650

Rear Admiral R. R. Kaesche,
Consandant, U. S. Coast Guard,
Washington, D. C.
Sir:

I recommend that Aviation Chief Machinist's Mate Lonnie
Bridges, U. S. Coast Guard, be awarded the Distinguished Flying
Cross for an extraordinary achievement while participating in an

aerial flight.

On the late afternoon of October 3, 1941, Aviation Chief

Machinist's Mate Lonnie Bridges was plane captain of the Coast Guard
airplane V-188 with the Secretary of the Treasury on board, and while
executing an instrument let-down procedure to break through the overcast preparatory to landing at New Hackensack, New York, the airplane
crashed through tree tops and was severely damaged. An imminent crash
landing seemed certain, but the pilot and crow kept the damaged air-

plane in the air and after a flight of almost two hours in low visi-

bility and darkness arrived over Philadelphia where clear weather
prévailed. Because of the condition of the airplane a dangerous
landing at high speed was necessary and it was successfully accom-

plished without injury to the persons on board or further damage to

the airplane.

The courage, quick thinking, skill, resourcefulness and
efficient teamwork of the pilot and crew transformed almost certain
disaster into safety which seems incredible now in the light of the

known damage to the airplane.

I make this recommendation as an eyewitness of Aviation

Chief Machinist's Mate Lonnie Bridges' contribution to this extraordinary achievement and his outstanding performance of duty on
this occasion.
Sincerely yours,
(Signed) 5. Morgenthau, Jr.

Secretary of the Treasury.

o
650

00-0P-073

OCT 14 1941

Rear Admiral R. R. Waesche,
Commandant, U. S. Coast Guard,

Washington, D. C.

Sir:

I recommend that Aviation Chief Machinist's Mate (AP) E. T.
Preston, U. S. Coast Guard, be awarded the Distinguished Flying Cross

for an extraordinary achievement while participating in an aerial
flight.

On the late afternoon of October 3, 1941, Aviation Chief
Machinist's Mate (AP) K. T. Preston was co-pilot of the Coast Guard
airplane V-188 with the Secretary of the Treasury on board, and while
executing an instrument let-down procedure to break through the overcast preparatory to landing at New Hackensack, New York, the airplane
crashed through tree tops and was severely damaged. An imminent cresh
landing seemed certain, but the pilot and crow kept the damaged air-

plane in the air and after a flight of almost two hours in low visi-

bility and darkness arrived over Philadelphia where clear weather
prevailed. Because of the condition of the airplane a dangerous

landing at high speed was necessary and it was successfully accom-

plished without injury to the persons on board or further damage to
the airplane.

The courage, quick thinking, skill, resourcefulness and
efficient teamwork of the pilot and crew transformed almost certain
disaster into safety which seems incredible now in the light of the

known damage to the airplane.

I make this recommendation as an eyewitness of Aviation

Chief Machinist's Mate (AP) E. T. Preston's contribution to this

extraordinary achievement and his outstanding performance of duty
on this occasion.
Sincerely yours,
(signed) S. Morgenthau, Jr.

Secretary of the Treasury.

Typed 13 Oct., 1941.
EGR:RWH

294

CO-OP-073

OCT 14 1941

Rear Admiral R. R. Wassche,
Commandant, U. S. Coast Guard,

Washington, D. C.
Sir:

I recommend that Lioutenant ii. E. Sinton, U. S. Coast Guard,
be awarded the Distinguished Flying Cross for an extraordinary achieve-

ment while participating in an aerial flight.

On the late afternoon of October 3, 1941, Lieutenant Sinton
was pilot of the Coast Guard airplane V-188 with the Secretary of the
Treasury on board, and while executing an instrument let-down procedure
to break through the overeast preparatory to landing at New Hackensack,
New York, the airplane crashed through tree tops and was severely
damaged. An inminent arash landing seemed certain, but the pilot and
crew kept the damaged airplane in the air and after a flight of almost
two hours in low visibility and darkness arrived over Philadelphia
where clear weather prevailed. Because of the condition of the airplane
a dangerous landing at high speed was necessary and it was successfully
acooplished without injury to the persons on board or further damage
to the airplane.

The courage, quick thinking, skill, resourcefulness and
efficient teamork of the pilot and crew transformed almost certain
disaster into safety which seems incredible now in the light of the
known damage to the airplane.

I make this recommendation as an eyewitness of Lieutenant
Sinton's extraordinary achievement and outstanding performance of
duty on this occasion.
Sincerely yours,
(signed) B. Morgenthau, JT.

Secretary of the Treasury.

Typed 13 Oct., 1941.

EGR:RNH

295

296
October 14, 1941
10 a.m.

RE SOCIAL SECURITY

Present:

Mr. Barnard

H.V.Jr:

Gentlemen, this is the way I feel. By
my speaking first, don't let that keep you
from speaking last. I read this thing very
carefully, and I don't see how I can object,
as laying down the principles to the President. I don't see how I can object. As
a matter of fact, I don't see why I shouldn't
be for it. I would like to know if anybody
thinks there is anything bad in there. The
only thing I would like to say to Altmeyer
is that before the President sends it, I

Mr. Bell
Mr. Viner
Mr. Sullivan

think he ought to send for the chairmen
of the two committees and talk it over, and
when he does, I would like to be there.
Bell:

Hasn't that been promised?

H.M.Jr:

But the President might be reminded. Do
you think it shouldn't come from me?

Bell:

Not at all. I just thought the President

had had that definitely in mind.

H.M.Jr:

What do you think, Barnard?

Barnard:

I can't see going along with this taking
over general relief at this time.

297

-2H.M.Jr:

You don't see it?

Barnard:

I don't see it, no. I agree with Currie's
position on I don't see I don't
see you can at the

any that. As particular
far as Ithing,
seeitit,

you how can't, shorter but than that. that present it. time stop

seems to me, you can stop short of now, and

from the Treasury point of view, it should

be done.

Bell:

Should not be done?

Barnard:

Yes, you should stop short of that.

H.M.Jr:

How would you change that?

Barnard:

I would eliminate taking over general relief
from states and the price that goes with it.
I think the increase in taxes here is too

much for this purpose at this time. It

adds tremendously to the confusion all through

the country to do it. The old age pension

thing I think is all right. I am for the

program in general, and I don't see how
you could stop it now, and I don't see any
disadvantages to the Treasury particularly

in it. It is somewhat anti-inflationary

for the present, but the other I don't see.

H.M.Jr:

Bell:

What does Currie say on that?
Currie says that he has some doubts about

it.

"I am somewhat concerned over the proposal

to initiate Federal grants for general

relief. If this is not at the expense of

WPA, we are in the position of increasing

non-defense expenditures when the financial

condition of states is improving and the
need diminishing. If compensated by a cut

298
-3-

in WPA, you will be criticized for giving
up the long fight for work relief, rather
than the dole. A possible way out is to
confine Federal grants to the permanently
disabled in addition to the blind. There

would be some logic in this, as the

program contemplates giving old age insurance
to the future covered permanently disabled,

and the grant would look after a good portion
of the current unemployables."

Well, I feel somewhat the same way about it,

only for a little different reason. If I

thought that we were going to get a cut in
WPA rolls by this general relief program,

I wouldn't object to it, but I think we are

going to get both. I mean, we are going to
get this general relief and WPA, and there
isn't anything we can do about it. I think
the additional burden on the Treasury is
really something to think about in these
times.

Barnard:

Well, you probably won't get the cut in

WPA, because you haven't got all the employables
on WPA, anyway. They are on state relief.

At least, that has been true in New Jersey
right along. We never have been able to

get enough work in WPA, so I wouldn't

anticipate much cut in that.

H.M.Jr:

Well, you had it for a very short time
for that short term.

when we had that four million people on WPA

Bell:

'38?

H.M.Jr:

No, back in '34 or '35. What did they call
it? CWA. Then they came along and at a
stroke of the pen they took nine hundred

thousand people who were unemployed and threw

them back on the state.

299

-4Barnard:

But CWA was being operated by the states
with Federal money when we switched. In

my state there were about forty per cent
of the people on state relief who were
employable who could not be taken into

WPA. That is the reason why I don't think
you can anticipate much cut in that.
H.M.Jr:

The tax wouldn't go into effect until the
calendar year '43?

Bell:

Well, it was hoped originally when this
thing was started that you could get a

bill through this fall and it would go into
effect January 1st. Now, if they don't start
considering this tax until the next session - I mean this program until the next

session of Congress, I don't see how they

can put the tax into effect until probably
the following year, or several months later
to give them a chance to set up their

programs.
Viner:

When would they increase the benefits, and
so on, immediately?

Bell:

No, I should think that they ought to go
along together.

H.M.Jr:

Jake, on the over-all, what would you advise
me?

Viner:

Why, I would advise against any transfer to

the Federal Government of any obligations
which are now with the state and local Govern-

ments at this time. The fiscal position of
the Federal Treasury is all-important. The
state and local governments are going

to find their financial positions eased.
They are already finding their positions
temporarily eased. They are not in trouble.

300

-5-

But the Treasury may be in
trouble.

So I would say this is the wrong
time to shift burdens from them,
obligations from them to you, so

that on this general relief I would
oppose that on that ground.

Also, in the copy you sent me,

there was attached to it a little

note by Blough in which he said
that certain passages marked had

been put in at the request of the
Treasury. Well, I am very unhappy
about those passages. I have given
Dan a note suggesting a redrafting,
because if that goes into the record
as - in response to the Treasury's
suggestion, they are very, very
weak passages at both places.

I think I would recommend that you
ask Altmeyer if he wouldn't change
the wordings, somewhat.
Bell:

You see, Mr. Secretary, we have made

no attempt to redraft this message.
Blough admitted that some of the
language was --

301

-6H.M.Jr:

Well, I was disappointed.

Bell:

The only thing he has attempted to do is
to fit in a passage here and there on the

fiscal situation. I think Jake is right,
that that can be turned around and made

stronger from our point of view than it is.
I think he is right about that.
Viner:

Well, I have suggested rough drafts of alternate sentences that don't lengthen it at

all, but change the emphasis in a way which
I should say ought to be more satisfactory
from the Treasury point of view and yet I
don't see don't see why Altmeyer would have
any ground for objecting.

Bell:

I don't think he will. He has accepted our
suggestions.

Sullivan:

I am in accord with these gentlemen, Mr.
Secretary, and for one additional reason.
You will recall the surtax schedule we

introduced. We finally got one that started

at six percent. I anticipate that we will

have a big fight to increase those surtax
rates early in the next session.

Now, if an additional five percent has been
taken out, or four percent has been taken out
of the workers' pay envelopes in these kind of
taxes, they are going to say, "Well, you have

already got that. We can't raise these increases. Now, to be sure, this will have

the anti-inflationary effect of taking that
money out of circulation. The worker will
not have it to spend, but it is money we
will have to pay back, and I think to that
extent it is going to hamper us in our efforts
to pay as large a part as we reasonably can
of our current expenditures.

302
-7H.M.Jr:

Well, of course the thing that you say is you will find that in these meetings I am as critical of myself as I am of anybody else, or more
so - is, we go on the assumption we get the

money now - let's be very frank in the room -

and we spend it on - it goes out. But there
is an obligation there for these people
against old age or retirement. The obligation is on our books, but the money, the
cash that we take in, we spend.

Now, when this thing is over and these people

are laid off and begin to draw on us for this

money, we have got to go out and raise it
five years from now from some other source,
which would be taxes.

Sullivan:

At a time when it is going to be more difficult to raise money in taxes.

H.M.Jr:

We like to think now that we are going to be
able to reduce taxes. Is that too harsh?

Viner:

Well, I would say we will have to get used to
a higher level of revenues, tax revenues.

H.M.Jr:

True, but you can't - in times, say, when

business falls off half, you can't get the
taxes.

Sullivan:

H.M.Jr:

And you may run into a situation, Jake,

where in order to encourage business, you
might presumably be obliged to reduce taxes
to build up re-employment.

I mean if the national income goes back to

fifty billion dollars, which it could very

quickly if this armament thing was over,
then you come along with this high payroll

tax or want to raise it because a lot of
people are laid off. How the hell are you
going to do it?

303

-8Bell:

But aren't you going--

Viner:

No, if the national income falls to fifty
billion, you are going to borrow. You will
not face increased taxes then.

Bell:

But aren't you going to spend a lot of money--

H.M.Jr:

Could you hold your thought a minute?

Bell:

Yes.

H.M.Jr:

Let's say by that time - I mean if this thing
lasts two or three years more, that will be

a hundred billion dollars. On top of a hundred

billion dollar debt, we are going to have
to borrow some more?

Viner:

I don't contemplate that with joy, but we

have been moving into that now steadily for
ten years. I don't see why you should suddenly

get scared about it. That is the pattern

that has been laid out.
H.M.Jr:

Well, there are degrees of being scared.

Viner:

I think the concern about the future - there
will be problems, but--

H.M.Jr:

What I am leading up to is this: There is
another way of doing this thing, and that is
through the tax route. Then you get it and
you don't have to pay it back.

Viner:

Well, Mr. Secretary, that raises a very
fundamental issue. Do you or don't you
believe in the extension of the Social Security
program?

Now, I would say for various reasons, some of
them not economic, I believe in the extension

of the program, although I think this is too

304
9-

sentimental and romantic an extension in

certain phases. It isn't hard-boiled enough

but a good deal of it, I say, is - it is in

our national interest that we move on and if

we are going to move on, there never has been

a better time than just this moment and there
never will be.

H.M.Jr:

I go back to my original position. My

original position was that I was ready wholeheartedly to go along on the old age and the

unemployment insurance, but no more at this

time. That was my original position, wasn't

it, Dan?
Bell:

Yes.

H.M.Jr:

Wasn't it?

Barnard:

Yes, that is what I understood.

H.M.Jr:

And I go back to that.
Now, both of those things would be helpful
to the Treasury and it would be a step

forward, you see, but this other thing,
raising this thing so we are collecting

ten percent, five from the employer and
five from the employee, we will never be

able to go back on it, and I just think
that instead of going wholeheartedly on

that - then there is another thing that

Mr. Barnard said which I haven't forgotten.
That is, these taxes on the employer fall
equally on the business that makes money

and on the business that loses and it is
particularly hard on the losing fellow.
It makes it that much harder for him to
come back.

Viner:

You are only raising his taxes from four
percent to five percent.

305
- 10 -

H.M.Jr:

He isn't paying four now?

Bell:

Yes, he is paying four now.

H.M.Jr:

No, not now.

Bell:

The employer is paying four now.

Sullivan:

One on old age and three on unemployment.

H.M.Jr:

It hasn't got there yet.

Viner:

But it is about to get there.

H.M.Jr:

It doesn't start until January 1,either.

Bell:

No, it is there now. The employer pays

three percent for unemployment taxes
now and one percent on old age.

That is right, isn't it, John?
Sullivan:

Yes.

H.M.Jr:

I don't think so.

306
- 11 -

Barnard:

I think that is correct.

H.M.Jr:

Three now?

Barnard:

Yes and the old age will go up another one

percent in '43.

H.M.Jr:

Well, you are going to jump him to five.

Bell:

No, it is four now, three unemployment and one
old age. The employee only pays one old age.

Viner:

As far as tax burdens are concerned now, of
course it is going to be hard on them but
wait until you see what we have to do next

year. You are going to do lots of other hard
things.

H.M.Jr:

But Jake, I will give you another question.

In the next six months we are going through a

terrifically difficult business adjustment

period. I mean, I have heard statements made

that - let's say that they are exaggerated,

but anyway, in order to do what England and
Russia and our own Army want, ninety percent

of this business has to be armaments. Let's

say that that is high. Let's say seventy-five
percent, what? That is high enough, isn't

it?

Now, the period of readjustment -Viner:

I think seventy-five percent is a gross

exaggeration, because if we had all the
shipping in the world we could probably not
carry even to England seventy-five percent

of our national output.

H.M.Jr:

Well, anyway, Jake, let's say a very large
percentage, and I will say this, that the
readjustment certainly will take place during
the next six months.

- 12 -

307

Viner:

That is all the more reason for this measure

H.M.Jr:

Why?

Viner:

Because that readjustment is not going to stop
the powering out of income from the Federal

if you think --

Treasury, but it is going to cut down the

amount of goods available to them for spending.

Therefore, you will have a real fierce

inflation unless you draw away some of that
by one way or another, because I don't think
anybody is saying that the national income is

going to fall because of this problem of
adjustment.

What you are saying is that the Government,
instead of spending for defense purposes at

the rate of a billion and a half a month, will
boost that to three billion or three and a
half a month, but that is all going to create
purchasing power and dollars but at the same
time the Government will be withdrawing the
goods that these people can send that purchasing

power against. Therefore, I say it is all

the more urgent to tap that purchasing power
one way or another.

H.M.Jr:

Would you do it the way the Altmeyer memorandum gives it?

Viner:

Well, with the qualifications I have made, I
say yes, I would do it that way as well as do
a taxation too. I TO uld move on. I probably
wouldn't qualify anything that some of them
would have in mind here even if this goes in.
I would say do them both.

Sullivan:

If you had your choice, which way would you do
it?

Viner:

I think I would do it largely this way because,

- 13 -

308

as I say, this has got to get into our system
and I don't know any better time to get it

in and this has merits also. It is an

execution of the President's policy since
he came in, and a desirable one. I would
like to see that job polished up and finished.
H.M.Jr:

Well, now, I will tell you what I would like

you to do.
Viner:

I don't like to be caught in the act of --

H.M.Jr:

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

I don't know what the rest of you people
have got to do for the rest of the morning;
I don't know how busy you are.

Bell:

I have got a conference on this other thing

right after this meeting.
H.M.Jr:

What is that?

Bell:

This private financing thing.

H.M.Jr:

Well, you people aren't tied up, are you?

Viner:

I was asked to go to that, and I have got
something else.

Bell:

Then he has got the British meeting at eleven.
This afternoon would probably be better.

H.M.Jr:

I am free at 3:45. Would you get together right
after lunch and discuss this for an hour or
two?

Barnard:

I can do that.

H.M.Jr:

And possibly draft a Treasury statement, not

trying to follow this. Draft one looking

forward to what we might have to do in taxes.
Sullivan:

Sure.

309
- 14 -

H.M.Jr:
Viner:

See?

But of course, I was struck by the vagueness

and the generality of that but Dan tells me
that is the way they ought to do it for a

message by the President.

Sullivan:

That is an agreement.

H.M.Jr:

But why don't you do this? I don't care if
Altmeyer gets angry. I would much rather

drag my feet. I don't see daylight yet on
this thing. You (Sullivan) come in with the

taxes. Your point is that you can't get it both
through taxes and payroll taxes.

Sullivan:

That is right.

Bell:

Aren't you going to hit people with this tax
that you can't hit with any general tax
scheme unless we have a miscellaneous sales

tax?

Sullivan:

No.

Viner:

Do you have some thought in mind of withholding

taxes to get really down to the low income

levels?

Sullivan:

We are working on that now. We are down to the
low income levels, Jake. We are down to

seven hundred and fifty dollars a year.

Viner:

But you take nothing from them.

Sullivan:

That is right but we were fighting for twice

Viner:

as much. The surtaxes we proposed in the
lowest bracket were eleven percent against
the six that was adopted.

Well, I think that our imagination tends to

- 15 -

310

lag behind the needs of the situation, and
even Congress. I think one tends to be unfair
to them. They will move on. They will be
resisting and lagging but as the pressures
and needs come they will move on with you,

three months too late always, but don't

assume now that next spring they won't be

willing to put on another load.
H.M.Jr:

If you people are free, we will talk it over.
Now, here is Sullivan. He is on the tax
end. I would put down 3:45. Let's have
another whirl at it, if you fellows could get
together after lunch. What?

Bell:

Two-thirty in my office?

Sullivan:

Right.

H.M.Jr:

Maybe you can put something on a piece of

paper. Maybe that is asking too much. If
not, we will do it again tomorrow.

Barnard:

It is very important.

H.M.Jr:

You haven't seen me work. I drag my feet

Bell:

It certainly is.
All right, I will see you all again at 3:45.

H.M.Jr:

until I am satisfied that two-thirds of the
people in the Treasury are satisfied. Well,
I am not satisfied yet. It is a big problem.

311
October 14, 1941
2:12 p.m.
HMJr:

Hello.

Operator:

Go ahead.

HMJr:

Hello.

Fiorello
LeGuardia: Hello.
HMJr:

Hello, Fiorello.

L:

Henry

HMJr:

Yeah.

L:

I'm awful sorry I made a nuisance of
myself, but that crew has been up there ever
since and they're right now at the Concord
Plaza working them.

HMJr:

At the Concord Plaza?

L:

Yeah.

HMJr:

Are you sure that that's our people, and

L:

Internal Revenue.

not Department of Justice?

HMJr:
L:

No. I wish they were Department of Justice.
That's what they need. (Laughs)

HMJr:

What?

L:

That's what they ought to have up there -

Department of Justice, you're right. No,
they're Internal Revenue. McNamara is up
there with them.

HMJr:

Mc

L:

McNamara.

HMJr:

McNamara's up there with them?

312

-2L:

Yeah.

HMJr:

And our people are there at the Concord Plaza
now?

L:

Found them at the Concord Plaza, and they've
all been there ever since; up at Fitzpatrick's
Club, too.

HMJr:

What club?

L:

Fitzpatrick's Club.

HMJr:

But I mean, where are they actually working at

L:

In one of the rooms there.

Concord Plaza?

L:

What is that, a hotel?
Yes, it's a hotel, and they're going through
these petitions and tabulating and comparing
and doing all sorts of accountant's work.

HMJr:

Well

L:

McGoughran and McNamara.

HMJr:

McGoughran.

HMJr:

L:

(Talke aside) What's this 529 Courtland Street?
Oh, they're at 529 Courtland Street, and at the
Concord Plaza Hotel.

HMJr:

Five what?

L:

Twenty-nine Courtland Street.

HMJr:

Five twenty-nine Courtland.

L:

Yeah.

HMJr:

Well, isn't that downtown?

L:

That's downtown, and there are two crews.

313

-3McNamara's at the Concord Plaza. That's
HMJr:

L:

What is it? Five twenty-nine Courtland, and
the other is at Concord Plaza?
Right.

HMJr:

Well, if it wasn't you, I wouldn't believe
it possible.

L:

And McNamara and McGoughran are the two markers

HMJr:

in charge.
I see.

L:

Yeah.

HMJr:

Well

L:

Give it a look, will you, Henry?

HMJr:

Within a second.

L:

Thank you.

HMJr:

Where are you?

L:

I'm in New York.

HMJr:

All right.

L:

Thank you.

314
October 14, 1941
2:17 p.m.
Preston
Delano:

Thank you.

HMJr:

I read in the papers about your speech up in
New Hampshire.

D:

Oh, did you?

HMJr:

And I was delighted.

D:

Well, that's very thoughtful and nice of you

HMJr:

And

D:

HMJr:
D:

HMJr:

to say it.

We had a very nice reception for it up there.
Everybody seemed to like it.

Good. Well, it read fine.
Well, that's very nice of you.
More power to you.

D:

Thank you so much.

HMJr:

Hit them again!

D:

HMJr:
D:

I'll do it.
All right.
Good-bye.

315

October 14, 1941
2:30 p.m.

RE VIOLATION OF THE HATCH ACT

Present:

Mr. Cann

Mr. Sullivan
Mr. Thompson

Mr. Bell

Mrs. Klotz

H.M.Jr:

Mr. Cann, there is something wrong in your
department.

Cann:

I am sorry to hear that, sir.

H.M.Jr:

Mr. LaGuardia calls me up and says there
are Internal Revenue men right now in New

York under Mr. McGovern and some under Mr.

McNamara.
Cann:

Both those men are in the same office.

H.M.Jr:

In the Concourse Plaza and 529 Corcoran Street,

and Mr. Sullivan and Mr. Bell both told me
yesterday they were all pulled off Saturday.

Cann:

That was my understanding.

Bell:

Those were your instructions, weren't they?

Cann:

Yes, sir, not only my instructions, Mr.

Secretary, but I was called back Saturday

316
-2-

afternoon at five-thirty to the effect that
they were off the job, and I talked to
Mr. McNamara yesterday morning again. Of

course, that was a holiday up there yesterday, and I talked to him regarding the matter,
and he said this morning that of course

when the employees would report back in to
work, he would take it up with each man who
had been on that particular work and advise

them as to - that he had ruled that that was
a violation of the Hatch Act.

Now, I haven't talked to him today, but that
was my orders and that was my understanding.

Now, if this is the situation, of course,
it is utterly unbeknown to me.

Sullivan:

I reported to the Secretary, Norman, what
you told me, that they were called of Saturday
afternoon.

Cann:

That is correct.

Sullivan:

And they were not to be allowed to go back

Cann:

We advised them at the time that we would
consider the matter formally Monday, which
we did with Mr. Foley, you and I and Mr.
Thompson, and it was agreed that it was, in

unless the order was countermanded.

our opinion, a violation of the Hatch Act.

H.M.Jr:

When did you get word to these men?

Cann:

Well, I worked through Mr. McNamara Saturday.

H.M.Jr:

Who is McNamara?

Cann:

He is the Assistant Collector in Charge.

H.M.Jr:

Well, would the men go back to these places

317
-3this morning?
Cann:

No, sir, they weren't told to go back to this
office at all. Of course, these men were
working on their own time. That is, they

were not on government time. I assumed

from all that I could gather that the head

of the Bronx Department or whatever you call

it, the Democratic organization, had called
on these men to do this work. They hadn't
called upon the Collector's Office to furnish
these men, but they had called upon the men
individually and the men had gone to work

individually wi thout taking it up with Mr.
McNamara. Then at a later date, after they
had worked two evenings, they came down and

they asked Mr. McNamara if, in his judgment,

this was a violation of the Hatch Act. He
told them that he didn't think that was a
violation of the Hatch Act. And then when
I talked to him, he said, "I will have to
get in touch with the head men in this
particular area, which I will do immediately."
Then I said, "After you have done that, I
want you to call me back and advise me that
these men have been taken off the job." So

that is what he did. He called me back and
said he had talked to--

H.M.Jr:

What day?

Cann:

Saturday at five-thirty. He called me back
and said, "I have talked to this man, and he

advises me that he will immediately have these
men taken off the jobs."
Bell:

That was reported to me at six-thirty at my

home Saturday night.
Cann:

That is right.

H.M.Jr:

According to Mayor LaGuardia, they are there

--

318

now.
Cann:

H.M.Jr:

Then I would like, of course, to take further
steps immediately about it. We will send a
man down. The only other think I can see
to
do is to
send a man up there particularly
to these
places.
Who is this man McNamara? Why doesn't he

carry out orders?

Sullivan:
Cann:

It
is a question
it seens
to me. of his carrying out orders,
Well, Mr. Secretary, of course his position

was that these men were working on their

own time, but I pointed out to him, I said,
"Regardless of that fact, you are their
superior, and it is up to you to see that
they are advised to quit that job.'

Now, I am satisfied that he thought himself
that that was done because when I talked to
him yesterday to follow this thing up and
advise him about final determination-H.M.Jr:

Will you go into Mr. Sullivan's office. Where
can you find McNamara?

Cann:

I will call him at the Collector's office.

H.M.Jr:

Call him up and find out what he has done, and
then come back.

(The conference adjourned for a few minutes.)

319

-5(Mr. Cann, Mr. Sullivan, Mr. Thompson,

and Mrs. Klotz returned to the conference).
H.M.Jr:

What happened, Cann?

Cann:

We contacted Mr. McNamara and he stated speci-

fically that he had talked to those men

this morning and advised them that his

prior ruling that the Hatch Act had not been

violated - it was, in his opinion, being
violated, and it is his statement that there
are none of their men on that job, but as
I told Mr. Sullivan here, it is possible
that there might be some men out of the
agency, of the Bureau there, maybe out of

the other Collector's office, and I would
like to check on that.
H.M.Jr:

Have you got somebody you can send on that?

Cann:

Yes, and I would like to have that done.
It may be that there are some employees of
the U.S. District Attorney's office engaged
in this work, and they might be confused

with our men.
H.M.Jr:

I wish in the next hour you would let somebody from your office go to both of these
places, will you please?

Cann:

Yes, sir.

Sullivan:

You put in the call from my office. Don't
wait until you go back.

H.M.Jr:

Well, he can go back.

Sullivan:

Yes, but put it in and that will save him

H.M.Jr:

O.K.

fifteen minutes.

320
October 14, 1941
3:40 p.m.
HMJr:

Hello.

Operator:

Senator Hughes.

HMJr:

Hello.

Senator
Hughes:

Hello, Mr. Secretary.

HMJr:

How are you? Morgenthau talking.

H:

What?

HMJr:

This is Morgenthau.

H:

Oh, yes. Well, this is Hughes. This is
Senator Hughes.

HMJr:
H:

HMJr:
H:

I know. How are you?

Oh, I'm not any too well.
I'm sorry.

Why, I want to - we're rather interested
from Delaware

HMJr:
H:

Yeah.

in the selection of a man to sell - to
have charge of the Defense Bonds. I understood Mr. Johnson is director of that, isn't
he?

HMJr:

Who?

H:

Mr. Johnson?

HMJr:

No, Mr. Graves is in charge.

H:

What?

HMJr:

Harold Graves is in charge.

321

-2H:

Who?

HMJr:

Harold Graves. G-r-a-v-e-s.

H:

HMJr:

Yeah. Anyhow, whoever it is, has gone into
Delaware and selected Ex-Governor Buck,
a Republican and who is to be the candidate
against me next year, to have charge of that;
and, of course, that gives him a certain amount
of prestige and we don't think so much of it.
Uh huh. Well, of course, what we've been

trying to do all over the country is get good
patriotic
fellows that are willing to give
us
their time

H:

HMJr:

H:

Yeah.

.....

and we haven't asked them about their

politics.
Well, we'd better ask them about politics if

we expect to stay in office any length of time.

HMJr:
H:

Yeah.

How can I run for office over there and support
the Administration and have you fellows going
down in Delaware appointing some - picking up
some fellow who's a candidate for Senator against
me to get some publicity on the Administration
and so on and so on?

HMJr:

Well, I'll be glad to look into it, Senator.
I've - 80 far, we've gotten along pretty well

all over the country. We haven't had any
complaints, and the main thing is that we're

trying to get the people to buy Defense Bonds.

H:

Well, of course, we want to do that, too.

HMJr:

Yeah.

H:

But I think we're at fault in rather over-

looking the fact that there's something else

322

-3besides that always.
HMJr:
H:

HMJr:

Yeah.

That is to say that the Administration puts
us in rather a bad position with our people
at home when you go into our state, and without consulting a soul, without consulting any
of us who are supposed to be responsible and
who are expected to do things in the state,
we Senators, for instance, both of us - Delaware
has two Senators here - pick up a man like
Buck, who is a very active Republican politician and who is an active candidate against
me next year, without consulting us at all, I
think it's rather too much.

Well, give me a chance to look into it, will
you?

H:

Yes. Yes, I'11 be glad to.

HMJr:

Yes.

H:

But I think that Mr. Johnson has gone quite a
good ways, and I wish you'd stop it there if
you possibly can so

HMJr:

H:

Well, I'll tell him that - give me a chance
to take a look at it.
He's not definitely on it, but he's contacted
him.

HMJr:

Yeah. Well, I'll tell him to hold it up until
I can take a look at it.

H:

Very good. Thank you.

HMJr:

Thank you for calling.

H:

Thank you, sir. Good-bye.

323

October 14, 1941
3:45 p.m.
RE SOCIAL SECURITY

Present:

Mr. Barnard

Mr. Sullivan

Mr. Viner

Mr. Bell

H.M.Jr:

All right, Professor.Bell.

Bell:

Well, we have talked about this matter a
little and we think maybe you might consider
the subject from that angle (handing Secretary

a paper). The first one, direct relief,

being the least important of the whole report
and probably one which you should say to the

President shouldn't be included at this time.

No additional burden should be added to the
Treasury program.

I think we all agree that, at least we would
recommend, that that go out.

The second one is disability and hospitaliza-

tion. 'hat is the next least important.

Well, sometime you may want it. Certainly

this isn't the time to start it. If you

want to start it at all at this time, you
might confine it just to the wage earner and
leave out the family unit, as a unit. That
isn't important from a fiscal standpoint,

because the outgo about equals the income.

I think there is a little excess income for
the first year, but it just about evens out
as far as the rest is concerned.

324

-2The next two sort of go together, the unemploy-

ment compensation and the old age coverage.

There is additional coverage and additional

benefits. Unemployment is somewhat

less important than the old age, but nevertheless you ought to consider them together
and I think we would agree that we might recom-

mend those.

Now, in recommending them, the last two things
mentioned there you ought to give considera-

tion to. One is that you certainly want to
make it very clear that you don't want the
benefits without the taxes, and that has to
be understood before any bill is passed.

The third is as to how it is going to interfere
with any Treasury tax program that you want

next year, whether or not this is going to
dip into the - the Social Security program
is going to dip into the field that you may

want to cover with the Treasury tax program
in the next Congress.
That can probably be gotten up and the argu-

ments on all sides for a memorandum from you

to the President, or we might draft a message

along the lines that we think it ought to
take on three or four or two, three, and
four.

If I haven't covered it, you fellows speak
up.

H.M.Jr:

Jake?

Viner:
Barnard:

No, that is -That is all right.

Viner:

That covers our discussions.

325

-3Bell:

Now, John has got a memorandum on the tax

Sullivan:

This is in the form of a memo from me to you.
I assume if you want a memo from yourself
to the President it would incorporate what
Dan says, and I don't know whether you would

policy.

want to use any of this or not. This gives
you the background of our experience last

year.
H.M.Jr:

Have you gentlemen seen this?

Sullivan:

They have.

H.M.Jr:

Well, I think what we ought to do is this:
I think this viewpoint from the Treasury

certainly should be presented to the President,

and I think that - well, this is very much
along the lines I talked originally, three
and four, the unemployment trust fund and

the old age retirement, and I think what we
ought to do is to draw up - evidently there
is no pressure from the White House - a very
careful memorandum and let Douglas Brown

try to shoot hole s into it and see what fault
he will find. We will let Altmeyer shoot holes

into it before it leaves the office. We
will see if he says it is unfair. Then
we will simply lay it on the line and if the
President wants to do something this year,
we will go along on unemployment and old

age and we will tell him why we don't like

direct relief and disability and hospitalization at this time. There is only so much
blood you can get out of a turnip, and the
question will be which way would do the

most good to the country. I think I would

say something about losing businesses,
businesses losing money, and the small busi-

ness man, and under which method he would

326

-4prosper most. In all of our taxes,

after all, we make special allowances for

the fellow if his income is twenty-

five thousand or less, so we take
care of him that way, and there

is no allowance made under Social
Security, none whatsoever.

I am sorry Jake can't be here, but

if the three of you will take it on and

if I could have something Thursday
morning, does that rush you too much?
Bell:

Pretty much.

H.M.Jr:

Does it?

Bell:

I think if we could wait until boy

got back, who would be in on all of this,

it would help us a lot.
H.M.Jr:

You can't wait, Bell.

-5-

327

Bell:

Do you think we need this before next week?

H.M.Jr:

Well, I don't like to be caught.

Barnard:

Give it to me, and I will try a crack at
it while you are waiting. I am free tomorrow.

Sullivan:

What I thought, Dan, was that Mr. Barnard and
I could have our fling tomorrow, and then
maybe show it to you late tomorrow afternoon
or else Thursday morning.

Bell:

That will be fine to do that.

H.M.Jr:

I really think I ought to have it, because

I am afraid the President may say, "Well,
Henry, I have been sitting around here waiting for you for weeks now." He might.

Viner:

Why not plan to have it as best you can by,
say, Thursday morning, but if you have more

time-H.M.Jr:

Oh, yes.

Viner:

Give them a chance to rephrase it.

H.M.Jr:

I want something in my pocket in case he
jumps on me, but I won't use it, and they

will send it out to you, Jake, if you don't
mind. I won't use it, but I will look for
something at eleven o' clock Thursday.

Sullivan:

Yes. I think we can have something, Dan,
don't you?

Bell:

Oh, yes, we can have something. I don't
know what kind of a product it will be.

H.M.Jr:

Well, give me something, Dan.

Bell:

O.K.

328

-6Viner:

My own opinion, Dan, is that that is the

right way to go at it. It is the job of

the Social Security to do it, but they ought

to do it in the light of your reactions.

H.M.Jr:

That is the honorable way to do it, isn't it?

Let Douglas Brown and Arthur Altmeyer have a

look at it. And I would let Lauchlin Currie
have a look at it.
Sullivan:

Well, not until after you have seen it.

H.M.Jr:

Why
not? If he isn't busy tomorrow, let him
see it.

Viner:

Sullivan:

If you haven't seen it, then it is just not

final. It is at the staff level here.

I don't know what Dan's program is tomorrow,

but I think we ought to all be in accord

before we let anything go out.
Bell:

I think so. I can see you tomorrow afternoon.

H.M.Jr:

I would let Lauchlin Currie and Altmeyer and

Doug Brown see it.
Bell:

I don't think I agree with Lauch Currie on
his budgetary reductions, charging direct

relief to trust funds.

Barnard:

That is beginning to whittle away that insurance fund.

Bell:

Sure. That is the first step.

H.M.Jr:

But strangely enough, there have been no

leaks on the fact that the Treasury is holding
back on this thing. There has been nothing
in the newspapers.

Sullivan:

Well, as I said to you last Friday, we are

329

-7not holding back because the President told
Senator George--

H.M.Jr:

I know. Since when do you expect to always
read the truth in the newspapers?

Well, I think I will let it go like that.

If I could have your technical advice on a
telephone set-up, Barnard, we will take a
look at it. They have got one in the other
room carrying out your suggestion.

330
October 14, 1941
MEMORANDUM FOR THE SECRETARY

From: Mr. Sullivan

JLS

When the Treasury appeared before the Congressional

committees on the 1941 Bill, it recommended an 11 percent surtax rate on the first dollar of income above
substantially higher exemptions than in the 1941 Act.
This, together with the normal tax and the defense tax,
amounted to approximately 16 percent. The Congressional
committees opposed these rates on the grounds that they
were too high on the low income classes and as the bill
was finally passed, the surtax rate was reduced to 6 percent which, together with a 4 percent normal rate, amounts
to approximately 10 percent on the dollars of income
immediately above exemptions.

The payroll taxes under the present social security
program amount to 5 percent. Of the 5 percent, 4 percent
is now payable by the employer and 1 percent by the
employee. These rates are scheduled to increase, effec-

tive January 1943, from 5 percent to 7 percent. If the
program proposed by the Social Security Board is enacted,
the payroll taxes will increase from 5 percent to 10 percent, effective January 1942. Of this 10 percent, 5 percent will be payable by the employer and 5 percent is to

be payable by the employee.
Under the Revenue Act of 1941, taxpayers are required
to pay in normal and surtax approximately 10 percent on

the first dollars of income above exemptions. Thus, on

the dollars of income above these exemptions the low
income classes would be required to pay at least 15 percent under the Social Security Board's program, even if

no increases were scheduled for 1942 income taxes.

It seems clear that the Treasury will be obliged to

recommend a substantial increase in the income taxes on
the low income classes, and probably a substantial

collection at the source tax. In view of our experience
with the Revenue Act of 1941, I believe that either of
these steps to raise substantial amounts of additional
revenue from the individual income tax will encounter

strong resistance if imultaneously the payroll taxes

331

-2are increased. The Congress will certainly take
the payroll taxes into account in determining the
amount of increase possible in the income tax burden
on the small wage earner. Every increase in the
payroll taxes diminishes the amount available for
general revenue purposes.

332

/ Direct relief
2. Disability and hospitalization
3. Unemployment Trust Fund

Old. age retirement
/) enger of grtting benefits and not takes.
Treasury tapes

TREASURY DEPARTMENT

333

INTER OFFICE COMMUNICATION

DATE October 14, 1941

TO Secretary Morgenthau
FROM Mr. Thompson

Mr. Ugo Carusi, Executive Assistant to the Attorney General,
called me on the phone today and stated that the Attorney General
wished him to discuss with me a plan which the Attorney General feels

should be adopted in connection with character investigations, the
suggestion being that in each case on which Mr. Irey undertakes the

character investigation he confine the investigation to all matters
except those of loyalty and subversive activities, the F.B.I. to check
immediately on the latter subjects. For this purpose, Mr. Carusi
suggested that when a name goes to Mr. Irey for investigation it be

submitted at the same time to the F.B.I. for their check.
As a result of our telephone discussion, it was arranged that
on Mr. Gaston's return tomorrow I would take the matter up with him

for discussion with Elmer Irey, following which Mr. Irey would work
out the details of what might be agreed upon with Mr. Hoover of
F.B.I. Any plan agreed upon would be subject to approval by the
Secretary of the Treasury and the Attorney General before being put

into effect.

The

334

TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE
TO

FROM

Secretary Morgenthau

October 14, 1941

Messrs. Foley and Pehle

Attached for your information is a copy of
a report of the conversation had by J. Homer Butler,*

of the Foreign Funds Investigative Unit, with
Georges Wildenstein, Paris and New York art dealer.

Jose
inth
* Since discharged

Attachment

335

COPY

FOREIGN FUNDS CONTROL

70 Pine Street, New York
John W. Pehle, Esquire,

October 9, 1941

Assistant to the Secretary,
Treasury Department,
Washington, D. C.
Sir:

Re: Conversation with Mr. Georges Wildenstein,
Paris and New York art dealer.
The writer called on Mr. Wildenstein on September 23rd

in connection with a general inquiry. The following conversation,
which Mr. Wildenstein repeated to me, seems to be of sufficient

interest to report it.

Prior to the arrival of the German army, Mr. Wildenstein
left Paris and went to Aix-en-Provence. One day Mr. Aberstock,

a Berlin art dealer, arrived at the hotel accompanied by a high
ranking German officer, looking for Mr. Wildenstein.

Aberstock showed Mr. Wildenstein a letter signed by
Hitler commissioning him to buy certain art works for Germany.
He also had a letter of recommendation signed by Laval. He asked

Mr. Wildenstein to purchase for him certain art works, and told
him to offer payment in French francs, marks or lire. Mr.

Wildenstein protested on the grounds that owners would not wish
to part with their valuable possessions in exchange for these
currencies. Mr. Aberstock asked what currency Mr. Wildenstein
would suggest, and when he replied "dollars" Mr. Aberstock declared

that "dollars would not be a desirable currency after they (the

Germans) had finished with America". Mr. Wildenstein asked, "Do
you think the United States is going to be such an easy job?"

Aberstock replied, "It will be an easier inside job than France

was.'

Respectfully,
J. HOMER BUTLER,

Treasury Representative.

Respectfully forwarded,
Approved:

S. J. KENNEDY,

Treasury Representative,
Acting in Charge.

336

TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION

DATE October 14,1941
TO

Secretary Morgenthau

FROM Messrs. Foley and Pehle

You may be interested in the following example of the

work done by the Foreign Funds Control. The Foreign Funds

Control is not in a position to prevent shipments of goods
from the United States to Indo-China which are paid for out
of two special accounts established prior to the Japanese
control of Indo-China and consisting of the proceeds of
imports of strategic materials into the United States. This
Government committed itself to allow the proceeds of such

imports of strategic materials to be used for exports to

Indo-China insofar as the Foreign Funds Control was concerned.

However, through the information we get of materials
leaving the United States for Axis-controlled areas such as
Indo-China, we have been able, through Export Control, to
prevent certain shipments from being exported to Indo-China.
Recently we noted that a shipment of steel bars was moving
under an Export Control license to a firm in Haiphong, IndoChina. We immediately got in touch with Export Control and
pointed out to them that since the license was granted on
May 1, 1941, there has been a considerable change in the
situation in Indo-China and they might wish to consider re-

voking such license. Export Control indicated that they
appreciated the matter being called to their attention and

the license was canceled and Customs notified accordingly.

Serial
in7L

337
OCT 14 1941

Mr. Flayd B. Odlum,

Director, Division of Contract
Distribution,
Office of Production Management,

Social Security Building,

Washington, D. C.

Sir:
Receipt is acknowledged of your letter of
October 6, 1941, with enclosures, in connection
with the policy of spreading orders under the
Executive Order of September 4, 1941.

Mr. Barnard, Assistant to the Secretary,
has advised no that Mr. Harrison Smith of
your office conferred today with Mr. Mack,
Director of Procurement, in connection with

the questions involved. I understand that

the conference was a very satisfactory one,
and that the plane are being worked out to
fit the Procurement Division purchasing pro-

gran into the policies outlined by your office.
Sincerely,
(Signed) 3. Morgenthan, 32,

TAM:CB

Secretary of the Treasury.

By Messenger 9:25am

n.m.c
cc-Shampson

338
TREASURY DEPARTMENT
PROCUREMENT DIVISION
OFFICE OF THE DIRECTOR

WASHINGTON

October 9, 1941.
MEMORAN DUM TO THE SECRETARY:

Pursuant to arrangements made by Mr. Barnard with

Mr. Odlum, I conferred with Mr. Harrison Smith of Mr.
Odlum's office today and discussed with him the outline of proposed action contained in Mr. Odlum's letter
to you of October 6, 1941, and the general problems in
connection with the spreading of orders of our purchasing program.

I explained to Mr. Smith the extent and the nature

of purchases made by the Procurement Division and in a
general way, we considered means whereby such purchases

might be worked into the general plan of Mr. Odlum.

It was agreed that I would furnish Mr. Smith a
breakdown of the various items which we contemplate

purchasing, as detailed as possible in the light of

information on hand as to the needs of the various
parties under each of our purchasing programs. This
data is now in the process of preparation.

It was further understood that after this data had
been studied by Mr. Odlum's office and that office had

become more familiar with our purchasing programs, Mr.

Smith and I would confer again as to the adoption of a

definitive plan. When such plan is evolved I will
submit the same to you for your approval.

In order to avoid introducing any new element into
our procedure which might delay the processing of pur-

chase requisitions, the principle was agreed upon that
the determination as to whether a question of spreading
of a particular order was involved would be made by Mr.
Odlum's office in connection with the clearance of such
order by OPM so that when we receive such clearance from

OPM it will contain definite suggestions or requests of
Mr. Odlum's office.

339

-2-

with.A proposed reply to Mr. Odlum is enclosed here-

Director Cht of

that

Procurement.

340

TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION

DATE October 14, 1941

Secretary Morgenthau

TO

FROM

H. D. White

If the Axis' superiority in plane production is as

large as is indicated in the appended memorandum, it is
dangerous to delay much longer in revamping our own program. This memorandum, prepared by Mr. Kamarck, is preliminary and necessarily based on incomplete data. It
is to be hoped that somewhere in the Government there
exists information to disprove some of Kamarck's figures.

The following are the significant conclusions of the
memorandum:

1. England cannot increase her production significantly;

Russia's production can only decrease, hence any large
increase in output must come from the United States.

2. If the Allies are to achieve effective equality

with Germany and if Russia continues to hold her present
area and continues to fight, then the United States must
increase its combat plane production from its present level
of something less than 1,000 per month to over 5,000 per

month. Incidentally, it would seem that our goal should
be superiority rather than equality.

3. If, further, Germany conquers some of the important will

Western industrial areas of Russia, the amount that we
have to produce to permit the Allies to maintain effective
equality would raise the 5,000 figure to 6,000 or 7,000.

4. If Russia ceases to fight, we will have to produce

even more than that.

These conclusions indicate the magnitude of the job

before us, but if we start to think about the time factor,
the job is even bigger.

TREASURY DEPARTMENT

341

INTER OFFICE COMMUNICATION
DATE October 9, 1941
TO

Mr. White

FROM

Mr. Kamarck

Subject:

Preliminary Memorandum: Axis and Allied Production of Airplanes

Summary

1. To secure an air force as effective as the Axis possesses, it is
probably necessary that the total Allied production of planes should be twice
as great as Axis production. This is because the Axis has the favorable cen-

tral position, Allied strategical needs are greater, Allied planes have to

be more specialized, and the Allied lag in the past has to be made up.

2. The present Axis production of planes is from 3,500 to 5,500 a month,
or, say, 4,500 a month. English production, Russian, and the Allied share of
American production totals about 4,000 a month.

I. Axis and Allied Needs
To achieve equality with the Axis in effective air power, more than
equality in planes produced is needed.

(a) The fighting efficiency of a plane in the air forces of the Axis

is much greater than that of a plane in the air forces of the
Allies. The Axis occupies the central position, while the Allies
are along the periphery. The Axis can concentrate its planes

more quickly at the decisive spot. Planes that bomb London today
may bomb Moscow tomorrow. A large proportion of the air force of

each of the Allies is, moreover, strategically immobile. The
British, no matter how great the need of Russia, are not likely
to send their Metropolitan Fighter Squadrons to Russia, just as
they refused to send them to France. The same is true of Russia.
None of the South African air squadrons are permitted to leave

Africa. On this count alone, to be as effective as the German
air force, it would be necessary for the Allies to have perhaps
a 50 percent numerical superiority.

(b) All of the Axis planes are available for use against the Allies.
This is not true of the Allied air forces. Both the Russians

and the British are forced to maintain air squadrons in Asia as
a protection against possible Japanese aggression. Also, some
of the Allied production has to be diverted to Free China. Thus,

a numerically equal total Allied air force would be inferior visa-vis the Axis.

-2-

342
Division of Monetary
Research

(c) It may well be that, since the Allies are attempting to overtake
the German Air Force, a larger proportion of Allied production

consists of trainers than is true of the Axis production. An
equality
total planes produced may well hide an inferiority
in combatin
planes.
(d) In order to secure the same size air force, current Allied production has to be greater than current Axis production, since
the lag of the past has to be made up.

(e) Because of the dependency of England upon sea transport for
supplies, a large number of planes have to be used for convoy
patrol and shipping protection. These planes and the large
number of specialized naval cooperation planes that England
needs are not available for use in land campaigns. The Axis,
on the other hand, uses only a few dozen planes at most to attack

shipping. These are, moreover, not so rigidly specialized that

they cannot be used in land warfare.

(f) Only a part of the American production can be counted in with
the Allied production since the American Air Force is not

fighting in the war.

II. Axis Production
(a) Estimates of monthly airplane production in Germany vary widely,
from 1,700 to 4,500. The sources which should be in the best
position to know the true situation, incline towards the upper
figure. Informed Swedish sources told our military attache in
Stockholm in January, 1941, that the German maximum capacity

at that time, nine months ago, was 3,000 planes a month. The
Soviet Military Attache in Budapest informed our military attache
in April 1941, that German airplane production was 4,500 a month.

Most of the lower estimates are either from British sources or
are, apparently, largely based on British sources. On the record,
the British seem to have under-estimated German airplane produc-

tion in the past. On March 7, 1940 (two months before the Battle

of France which was lost, among other reasons, due to marked

Allied inferiority in the air), Sir Kingsley Wood, Secretary of
State for Air, stated, "Even on a numerical basis, the output of

aircraft in Britain and France is now greater than that of Germany".

We do know that the Germans have been straining every nerve since

the war began to increase their production of aircraft.

343

-3-

Division of Monetary
Research

The various estimates of the monthly production of airplanes
by Germany are listed below with their sources:
1. 1700, April 1941 (U.K. military magazine, The Fighting
Forces, April 1941)
2. 1750, April 1941 (American observer in France, Report
to M.I.D.)
3. 1800, September 1940 (U.K. source, Report to M.I.D.)
4. 2000, January 1940 (estimate of Colonel Maguire, head
of German section, M.I.D.)
5. 2200, September 1941 (T.P. Wright, Vice-President,
Curtiss-Wright Corp., in Aviation, January, 1941)
6. 3000, January 1941 (Swedish sources, Report of U.S.
Military Attache, Stockholm)
7. 4200, September 1940 (Paul H. Wilkinson, Diesel Aviation
Consultant, visitor to German factories in summer
of 1939, in Aviation, September, 1940)

8. 4500, April 1941 (Russian Military Attache, Budapest,
Report to M.I.D.)
(b) Italy is probably producing not more than 500 planes a month.
According to the June 1940 issue of The Aeroplane, British air
magazine, the Italians were producing 250 planes a month on her
entrance into the war. This figure they hoped to double. Hanson
Baldwin believed that in June 1940, the Italians were already producing 500 planes a month. T.P. Wright, Vice-President of CurtissWright, estimated that in September, 1941, the Italians would be
producing 600 planes a month. (Aviation, January, 1941). This
figure may not have been reached. Our Rome military attache

reported in April, 1941, that the Italian industry was in bad

shape. Some factories were doing repair work. Others were assembling German planes or making units or instruments for German

planes.

344

-4-

Division of Monetary
Research

(c) In addition to German and Italian production, the Axis now
controls the airplane industry of most of the rest of
Continental Europe. Aside from France and the Netherlands,
the other countries did not produce any sizeable number of

planes. Nearly all, however, had a few airplane factories.

France probably did not produce more than 100 planes a month

before she capitulated. According to Werner, (Battle for the

World, p. 23), France produced 71 planes in February, 1939,
and never went much higher. T.P. Wright, on the other hand,
estimated that in June, 1940, the French were producing 400
planes a month (Aviation, January, 1941). Dutch production
probably was not as high as 50 a month. Of the other occupied countries, Belgium had 6 plants; Denmark, 2; Poland, 4;
Sweden, 5; Czechoslovakia, 7; Hungary, 2; Bulgaria, 1;

Norway, 2; etc. There is very little information on what has
happened to these factories. Some of them have been comman-

deered to build planes for Germany. This is true of Czechoslovakia and Poland. New factories have been built in Czechoslovakia according to Jane's All the World's Aircraft. Many
of the plants in the occupied countries are used to repair
German warplanes damaged on active service.

On the whole, the Germans are probably not getting more than
500 planes a month from the occupied areas.

(d) Total Axis production, then, (adopting 3,000 as the minimum
and 4,500 as the maximum German production, and 500-1,000 as

the contribution of Italy and the occupied areas) is from

3,500 to 5,500 airplanes a month. 4,500 may be a good average
figure.

III. Allied Production
(a) There is surprising unanimity in the estimates of English plane
production as being around 1,800 a month. The estimates of
monthly production follow:
(1) 1,800, September 1940 (U.S. Military Attache Report,
September 15, 1940)

(2) 1,850, September 1941 (T.P. Wright, Vice-President,
Curtiss-Wright Corp., in Aviation, January, 1941)
(3) Around 1,800, August 1940 (Winston Churchill stated on
August 21, 1940 that U.K. production was already
greater than the German. Official statements in

-5-

Division of Monetary

345

Research

November, 1940 said that British aircraft output was
ahead of Germany, according to Jane's All the World's
Aircraft. The British estimate of German plane pro-

duction, as shown in an article in the British military
magazine, Fighting Forces, April, 1941, was 1,700 planes
a month. We may assume, perhaps, that 1,800 is the

figure the British produce which is "greater" than the
German production. It is not likely to be much higher
than 1,800 since the statement would probably say "considerably greater.")

(b) There are very few estimates of Russian plane production. The
available data indicate that at about the outbreak of war, the
Russians were producing around 2,000 planes a month.

In 1935, the Russians were producing 333 planes a month, (Jane's

All the World's Aircraft, 1940). In 1936, the Russians produced

666 planes a month (according to Colonel von Buelow in Militaerwissenschaftliche Rundschau quoted in Werner, The Military Strength
of the Powers, p. 77). In 1939, the Soviet Union produced 1,666
planes a month (Colonel von Buelow and Breguet, quoted in Werner,
p.77). These figures indicate an absolute increase of 333 planes
a month per year. Assuming the same absolute increase, in 1941 the
Russians would be producing about 2,300 planes a month. While up
to now, no major airplane producing centers have been lost by the
Russians, the loss of some of the Ukrainian basic industries must
have some impact on airplane production. The other war dislocations, also, should lead to some decrease in production. It may
be safe, then, to estimate Russian plane production at 2,000 a

month.

(c) The United States is shipping currently 250 planes a month to the
Allies.
(d) The total number of planes a month being added to the Allied Air
forces, therefore, comes to 4,050 planes a month. (English contribution, 1,800 a month; Soviet, 2000; and American, 250).

346
OCT 14 1941

My dear Mr. Secretary:

There are outstanding contracts totaling
$114 million for which the British have obligated
themselves to pay dollars, and which we have been

discussing with Mr. MeCley. The 8114 million is
made up of the following:
(1) Tanks and tank enginee

contracted for prior to

March 11

$44,000,000

(2) Airplane enginee contracted
for prior to March 11

40,000,000

(3) Ordnance contracted for
since March 11

30,000,000
$114,000,000

It would be very helpful to the English in
strengthening their dollar position if you could
see your way clear to take these contracts off their

hands.

I would appreciate it if you could let me have

en answer on this matter.

Sincerely yours,
(Signed) R. Morgenthau. Jr.

Secretary of the Treasury.

The Honorable,

The Secretary of War.
By Messenger 3:50 p.m

n. m C.
MDWsien

10/14/41

347

TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION

DATE October 14, 1941.
TO

FROM

The Secretary

Mr. Barnard

The first letter attached from Mr. Mack seems to me to
represent sufficiently substantial progress to warrant a moment
of your attention.

AND

348
TREASURY DEPARTMENT
PROCUREMENT DIVISION
OFFICE OF THE DIRECTOR

WASHINGTON

October 14, 1941
Memorandum to Mr. Barnard:

The attached copy of a letter from Mr. Elliot of

the British Purchasing Commission refers to the discussion

had at this office relative to the proposed plan to simplify
the procedure having to do with steel purchases.

Our thought is that submission by the British of
steel requirements for three months will permit a single
determination by Mr. Hopkins' organization as to whether
the quarterly needs are within the scope of the Lend-Lease
Act, OPM will then be in a position to allocate for the
three-month's period and we will be in a position to make
purchases accordingly.
Representatives of the Lend-Lease organization and

OPM are in agreement as to the practicability of the plan
and agree further that it will eliminate many requisitions
caused by submitting individual requisitions, which has been
the procedure heretofore, resulting in hundreds of requisi-

tions being received which under the scheduled program could

be consolidated to a very large extent.

It is expected that the new plan will be put into
effect as soon as Mr. Elliot is ready to submit a schedule
of requirements.
Clifton E. Mack,
Director of Procurement
Attachment - 1

349
C

0

BRITISH PURCHASING COMMISSION

P

Y

10th October, 1941
Dear Mr. Mack:

The discussion, which we had yesterday afternoon in
your office with representatives of the OPM and of the Lease-Lend

Administration, was, I feel very helpful.

While I think the representatives of the OPM had in mind

the whole picture and not steel alone, the points they raised are well
taken. They were perhaps not aware of the extent to which our joint
procedure has already evolved along the very lines they indicated.

As regards the conclusions which were reached, I shall be

grateful if you will confirm or correct my understanding of them, which is
as follows:-

(1) That the Liaison Committee will finally pass, or if
necessary reject, steel requisitions as soon as they are received.
(2) That requisitions for direct shipment to the U.K.
under the programme approved from time to time by the Lease-Lend Administration and OPM can be regarded as acceptable under Lease-Lend.

(3) That we shall, in future, submit blanket requisitions
under this programme covering requirements for not less than three months

ahead, and, if possible, longer.

This will enable us to deal with actual specifications
as sub-requisitions, which the Liaison Committee will not require to pass

again, and which will, therefore, come direct to Treasury Procurement and OPM.

(4) The Liaison Committee will consider granting the right
of diversion to theatres of War, in respect of such requisitions.
(5) In the case of requirements for the British Empire a
similar procedure will be considered for the products which can be presented
in the form of a programme, such as, for example, tinplate.
(6) Otherwise, however, requirements for the British Empire
will be submitted as they arise.
We are undertaking to do everything possible to obtain and
furnish adequate explanations regarding use and to submit only requisitions
for uses, acceptance of which can reasonably be expected.

-2 -

350

(7) That it would be unwise to attempt at this stage to
categorise acceptable uses, since the situation is not sufficiently crystalized
to justify this, and since changing strategic considerations must tend to
govern the Liaison Committee's decisions.

The agreement recently reached, which will enable us
to eliminate large numbers of requisitions for miscellaneous requirements
for the British Empire in order that they may again be su pplied from the
U.K., and to continue such arrangements as long as practicable, will, in

our opinion, greatly facilitate the above simplification of procedure.
Yours sincerely,

/s/ I.F.L. Elliot
Mr. Clifton E. Mack,

Director
Procurement Division
U. S. Treasury Department

WASHINGTON, D.C.

Cc Mr. A. D. Whiteside,

" Robert J. Lynch
Sir Clive Baillieu

351

UNDARD FORM No. 14 A
APPROVED BY THE PRESIDENT
MARCH 10. 1926

TREASURY DEPARTMENT

BY RADIO

WASHINGTON

TELEGRAM

CHARGE TREASURY DEPARTMENT APPROPRIATION FOR

OFFICIAL BUSINESS--GOVERNMENT RATES

--

Defense
Savings - Expenses of Loans
(The appropriation from which payable must be stated on above line)
October 14, 1941

Mr. Noel Coward
Savoy Hotel

Lonion, England

THANKS DELIGHTED YOU CAN : ROADCAST FOR US
LOOKING FORWARD TO HEARING YOU NEXT TUESDAY

Henry Morgenthau, Jr.

2-14117

352
October 14. 1941.

Dear Julge Gampbell:

I such appreciated your letter of October
10th, with its compente on Rr. Duffington, and
the enclosed recent for my reading.
You will be interested to know, I as sure,
that Mr. Duffington is nov is the Treasury and
we feel sure that the connection will work out
is a satisfactory very.

with thanks again for your letter, and
certial personal regards,
Sincerely,

(Signed) E. Morgenthau, Jr.

Judge William J. Campbell,

United States District Court,
Chicago, Illinois.

GEF/dbs

UNITED STATES DISTRICT COURT
CHAMBERS OF

CHICAGO

JUDGE WILLIAM J. CAMPBELL

October 10, 1941

Hon. Henry Morgenthau, Jr., Secretary,
Department of the Treasury,

Washington, D. C.

Dear Mr. Morgenthau:

Since your telephone call the other day while
you were in Chicago I have made careful inquiry
relative to Mr. George Buffington and I can
assure you that all the information which I
have received has been of the highest tribute

to Mr. Buffington. The particular factors

in which you were interested have no objection
whatsoever to the gentleman's appointment.
The enclosed gives a brief summary of the
information I was able to get about Mr. Buffington

personally. I suppose you already have this in
much greater detail but I thought you might be
interested in scanning over this in addition.
I certainly enjoyed hearing from you.

With kindest personal regards, I am
Sincerely

353

354
PREFATORY

George Buffington is 43 years of age, married, has three children,
and resides in his own home located on Sutton Road, Barrington,

Illinois. Title held in his wife's name, Sarah Louise Buffington.

Mr. Buffington was born in Buffington, Kentucky, March 9, 1898. He did
not attend college.
BUSINESS

Since Aug. 1, 1938 he has maintained an office in suite 880, 231 S. LaSalle
Stree, and is engaged in business under his individual name as a financial
consultant, making arrangements for the purchase of controlling stock in
concerns, working with the investor and the concern itself.
He is Vice President & Director of Campbell, Wyant & Cannon Foundry Co.,

Muskegan, Michigan, and is a director of the Sullivan Machinery Co.,
Michigan City, Ind.
ANTECEDENTS

Prior to Aug., 1938 he was for five years a partner in the stock broker-

age firm of Winthrop Mitchell & Co., members of the New York Stock
Exchange. He was formerly from 1926 to 1933 a partner in the Stock
Exchange firm of Eastman Dillon & Co.
PROPERTY

He represents a worth in excess of $50,000 in security holdings not
including his Barrington home, which cost $50,000, and title held by his
wife.

He enjoys a good income.
BANKING

He has since 1928 carried a non-borrowing account with one loop bank,

involving daily substantial proportions.
INSURANCE

He carries in excess of $75,000 life insurance.
REFERENCE

He has retail credit established in the local trade.
COURT ACTION

Our records show one suit filed against him on 5-10-35, Cir. Ct. for
$735.00 by Lloyd L. Burrows, and item reported adjusted.
SOCIAL

He is a member of the Union League Club, and the Barrington Hills
Country Club.

355
-2-

CONCLUSION

Mr. Buffington is well regarded at sources consulted, and is deemed
worthy of confidence.

356

MEMORANDUM
October 8, 1941.

The records of the War Department show the following

with respect to George N. Buffington:

Enlisted at Chicago on May 31, 1917, giving as

residence Evanston, Illinois, and stating that he was
born in Erlanger, Kentucky, March 9, 1898. He was as-

signed to the Base Hospital at Chicago on enlistment
and was transferred to Headquarters Company, 326 Battalion
Tank Corps, on July 14, 1918; transferred to "." Company,
Provisional Lotor Transport Company, December 16, 1918,
and was given his discharge on August 15, 1919, with
character "Excellent." He was overseas from September 25,
1918, to August 9, 1919, when he returned as a Sergeant
in a Motor Transport Company. He was with the Army of
Occupation in Germany from January 8, 1919, to July 22,
1919; was gassed in Longres, France, in November, 1918;
and was given a Victory Medal with French clasp.

The
gen

full HWW

ful

region

357

October 14. 194

Mr. D. W. Bell

Mr. District

STRICTLY CONFIDENTIAL

AS 10143
a.m. I received from Mr. Groupice. the Russian Charge l'Affaires. the
following
letter:
"Ny dear Mr. Secretary:
On OF about October 16. 1941 there will be deposited at the United
States Nint, San Francisco, gold valued at approximately $5,000,000 for
account of the Secretary of the Treasury of the United States by order

of the Government of the Union of Seviet Socialist Republics. This gold
will arrive on the s. 8. Dateprestroy and 11 is to be applied against
the amount of gold sold under the agreement of August 15. 1941.

Very truly yours,
A. Groughter

Charge d'Affaires."

The letter was addressed to Secretary Mergesthan and dated October 14, 1941.

AS 10:50 a.s. I spoke to Mr. Gameres at the Federal and informed his that I
had received the above letter. Mr. Cameres stated that he had heard from the Chase
Bank and that both the Chase and the Amtorg Trading Corporation felt that the Chase
should receive instructions from the State Dank of the U.S.S.R. to deposit the shipment for account of the Secretary of the Treasury rather than that bank accepting

instructions from the Asterg.

AS 10:55 a.s. I called Mr. the Russian Charge d'Affaires, and informed

his that I had received his letter but that I noticed that the steamship was the
DHIEPROSTROY, not the MICHURIAN. as I had been previously advised. I asked

Mr. Gradgie if there were two ships easing and he replied that there was only one,
the SHIPPROSTROT. I them mentioned to his the position which the Chase and the

Astorg had takes regarding instructions for the depositing of this gold and

Mr. Groupino conferred with Mr. Lakasher, President of the interg Trading Corporation,

who was with his at the time. Mr. then told me that Mr. Lakashev had given
instructions to the Asterg yesterday to deposit the gold is San Transises is the to
same Basser as the previous shipment, that 11 was not necessary for the Chase
receive instructions from the State Bask and that the instructions of the Amtorg
regarding the depositing of the gold were valid.
48 11:05 a.s. I called Mr. Canares and informed his of the reply received Bank. free
Mr. Groughter and he said that he would pass this information on to the Chase

.1.

358

AS 11:45 Mr. called bask and said that the Chase Beak had new told

his that 18 was receiving a letter from the intore trading Corporation regarding
the depositing of this gold and that the letter was satisfactory to the Chase Seak.

&

hilep-10/14/41

.

359
Exchange Stabilisation Fund

Superintendent,
United States Nine,

San Francisco, California.
0a or about October 16, 1941 you will receive gold valued at approximately
$5,000,000 for the account of the Secretary of the Treasury by order of the
Government of the Union of Seviet Socialist Republies. Upen receipt of this gold
you are hereby authorised and instructed to welt and determine the value. After
determination of the value you are further authorised and instructed to purchase

the gold at the flat price of $35 per fine trey eases without subtracting the
1/4 of 1 percent handling charge. to draw the deposit certificate accordingly and
to draw your check for the not value of the gold (less the usual sist charges)

to the order of the Federal Reserve Bank of San Francisco for account of the
Federal Reserve Bank of New York for credit to the "Secretary of the Treasury.
Special Account." Please instruct the Federal Reserve Beak of San Francisco to
transfer this amount by telegraph to the Federal Reserve Bank of New York for
credit to the "Secretary of the Treasury, Special Account." Please have the
Federal Reserve Bank of Sea Francisco include in its telegram to the Federal
Receive Beak of New York the custura of the number of fine cusess. the total dollar
value, the mount of the regular 1/4 of 1 percent handling charge. and the sist
charges which have been deducted, as well as the same of the ship en which of the Hist gold

the date of ite arrival. Please prepare six copies

manner inserting is the prepared spaces
was Form transported, 48-R is the usual and the handling at the charge. feet of the the

the total value of the gold, the melting charge.

report total charges, and the set value of the gold, with the hamdling and other do not charges nea-

deducted, but without other extreneous notations on the form. Please that

tion the report, as was done is the case of the September transaction. forward these

the 1/46 on handling charge has been computed but not charged. Districh, Please Pressury

forms to the Secretary of the Treasury. Attention: Freak that you

Department, Washington, D. C. You will observe from the instructions are

not to deduct the 1/4 of 18 handling charge.

Secretary of the Treasury.

nitialed: FD SEF OD BB
FD:1ap-10/14/41

360
Exchange Stabilianties
Fund

OCT 14 1941

Superintendent,

United States Nint,
San Francisco, California.
Beforring to telegram today regarding deposit
$5,000,000 gold for account Secretary of the Treasury
please advise w telegraph when gold is received by

you

(Signed) D. W. BELL

Acting Secretary of the Treasury

PBtenk-10/14/41

361
Chase National Bank
October 14, 1941.
(Reference 2-45-ECF)

Mr. L. W. Knoke,
Vice President,
Federal Reserve Bank of New York,
New York.

Dear Mr. Knoke:

We are in receipt of instructions from Amtorg Trading Corporation,

requesting us to notify you, as Fiscal Agents of the United States,
that, at the instance of the State Bank of the U. S. S. R., we are

authorized to deposit forthwith all of the gold that arrived on the
"S. S. Dneprostroy," in the San Francisco mint, for account of the
Secretary of the Treasury.
We are telegraphing our San Francisco representative accordingly.

Kindly forward copy of this letter to the Treasury Department
in Washington.

Very truly yours,
(signed)

E. C. Funck,
Second Vice President.

(Rec 'd. from Mr. Knoke's office, F.R.B.,N.Y.,12:10 p.m., 10-14-41, hr)

362
October 24, 194

Filee

m. Motrich
Mr. Sang of the Februal Reserve - of New Took informed - today that -

Federal received - from the Beak of Chima. New Took. for wells of the
Bank of England w order of the Gentral Beak of Mine. amping.
Mr. Sayment of the Bank of Chim, New Test, 9024 m that instructions to

make this payment were received from the Beak of - I Song.

&

EDilap-10/15/41

363
CONFIDENTIAL

No. 176

Chungking, October 14, 1941

Subject: Reported criticism of Dr. T. V. Soong in connection with the American-Chinese Stabilization
Agreement.

Airmail
CONFIDENTIAL

The Honorable

The Secretary of State,
Washington, D. C.
Sir:

I have the honor to enclose as of possible interest
to the Department copy of a memorandum submitted to me by

Second Secretary Drumright relating to information obtained
by him and Third Secretary Service from Mr. Maurice Votew

during the latter's recent week-end visit to the officers
named.

Mr. Votaw is an American citizen, a teacher at St. John's
University at Shanghai for some years, who is now connected
with the publicity department of the National Government at
Chungking. Mr. Votaw has been living during the summer with
the family of Dr. H. H. Kung, the Minister of Finance, and
I

1/

-2 -

364

take it that his remarks are based upon information he acquired in his official and personal associations.
I need not dwell on the known antipathy between
Dr. H. H. Kung and his brother-in-law, Dr. T. V. Soong, or

on the latter's attitude toward the Generalissimo.

I attach no particular importance to the information
regarding the Sino-American stabilization agreement and its

non-ratification. I assume that if the document is of a
character requiring ratification, such ratification would

have been sought from the Chinese Government before

Dr. A. Manuel Fox came out to take his place on the Stabilization Board. The dissatisfaction with the terms of the agreement, if any, may have its source in the rivalry between
Drs. Kung and Soong and some disposition on the part of the

former to disparage the ability of the latter.

The remarks regarding Dr. Soong's relations with offi-

cials of the American Government conform to rumors which

have been circulating in Chungking for some time. They,
also, may have had source in the known feud between the
brothers-in-law.
I submit the enclosed memorandum merely on the off-chance

that it carries information which may be of interest or value
to the Department in reference to the stabilisation agreement
and the full acceptance of its responsibilities thereunder
by the Chinese national government.

Respectfully yours,

C. E. Gause

Enclosure:
1/ Memorandum as above

Original and two copies by air to the Department
Two copies to the Department by pouch
CEO/ws
851

True copy

of signed original

October 6, 1941.
MEMORANDUM TO THE AMBASSADOR

Subject: Reported Reluctance of General Chiang
Kai-shek and Dr. H. H. Kung to seek
Ratification of American-Chinese
Stabilization Agreement; Alleged Unpopularity of T.V. Soong in Washington.

Mr. Maurice Votaw, an American citizen who has been

teaching at St. John's University at Shanghai since 1922
and who has been on leave of absence for the past two years
80 that he could give his services to the Chinese Government,
spent the week-end with Mr. Service and me; and in the
course of some rather extended conversations he made some

assertions that are believed to be worthy of record. It may
be mentioned that Mr. Votaw is widely known in Chinese offi-

cial and educational circles, that he is the right-hand
assistant of Mr. Hollington K. Tong, Vice Minister of Pub-

licity and confident of General Chiang Kai-shek, and that
he is well known and often gives his services to Madame
Chiang Kai-shek and Dr. and Mrs. H. H. Kung, having lived
with the latter family throughout the summer of 1941. It
is believed that Mr. Votaw is a reliable source of information.

Mr. Votaw said that General Chiang Kai-shek and
Dr. H. H. Kung are on the horns of a delemma with regard to

ratification of the American-Chinese stabilization loan agree-

ment. He said that according to law the agreement must be

ratified by the Legislative Yuan to give it legal validity,

but that both General Chiang and Dr. Kung are hesitant to
take this action because of the alleged rigorous terms and
language of the agreement; they fear that the Legislative
Yuan may refuse to ratify the agreement. Mr. Votew went on
to say that Mr. T. V. Soong had not referred the agreement

to the authorities in Chungking for their approval before
he signed it and that moreover he had signed as a "plenipotentiary" official of the Chinese Government when in fact

he had no such powers. Mr. Votaw added that a copy of the
agreement was not received in Chungking for more than a
month after it had been signed. He asserted that the Chinese
authorities (inferentially General Chiang and Dr. H. H. Kung)
resented the severity of the language employed in the agree-

ment as well as its restrictive and binding terms. In this

relation he explained that information had been received to
the effect that the draft agreement had been drawn up by some
expert mortgage attorney in Washington: and he said that the

observation had been made (by whom he did not say) that the
stabilization agreement smacked of a contract such as a

money-lender might draw up. The British-Chinese stabilization

365

2-

366

agreement was by comparison much more liberal in its terms
and conditions and in the mildness of its language, Mr. Votaw
added. He went on to say that General Chiang and Dr. Kung
were astounded to learn that Mr. T. V. Soong would sign such
an agreement and that they were very much displeased with his

action in so doing. Mr. Votaw stated that he did not know
what action would be taken by the Chinese authorities in
respect
of the ratification of the American-Chinese stabilization
agreement.

Discussion of the foregoing subject led to talk on the
status of Mr. T. V. Soong. In this connection, Mr. Votaw
said that Generalissino Chiang and Mr. Kung would like to
recall Mr. Soong from Washington but do not know just how

to go about effecting this action. He said that Mr. Soong's
actions in the United States are not looked on with favor
by Chinese in Chungking or in the United States. Mr. Votaw
continued that Mr. Soong in his dealings with American officials has acted with utter disregard of the Chinese Ambassador in Washington; that his actions have been calculated to
undermine the position of other important Chinese in the

United States and notably Mr. K. C. Li of the Wah Chang
Trading Company (who has just arrived in Chungking on a
flying trip from New York). Mr. Votew asserted that General

Chiang and other Chinese officials are irritated at Mr. Soong's
endeavors to gather to himself credit for the recent negotiations with the American Government.

Mr. Votaw said also that word has come from Washington

that Mr. Soong has by his lack of tact and arrogance alienated
the friendship and kindly feelings of a number of high Ameri-

can officials. For example, it is said that Secretary

Morgenthau will not receive Mr. Soong. Another report current
in Chungking is that Mr. Soong recently offended Mr. Hull
by walking out of a dinner party because he was not satisfied with the seating arrangement and that later when he
came to call on Mr. Hull he was not received.
(Sgd) EFD

EFD/Wr

True copy

of signed original

Copy:ec:11-27-41

PARAPHRASE OF TELEGRAM RECEIVED

367

FROM: AMERICAN CONSUL, SHANGHAI
TO:

Secretary of State, Washington

DATED: October 14, noon.

NO.: 1464
My October 11, no. 1454. Genuine alarm is expressed by
Chinese bankers here at runaway commodity price situation and

adverse psychological reaction to slumping in market exchange

rates for Chinese currency in Shanghai, despite the fact that

the volume of such transactions is limited. There is a severe
test here of local confidence in Chinese currency. It is maintained by these bankers that the avowed aims of Stabilization

Board in granting exchange allotments at high official rates
and of the American Treasury authorities in freezing Chinese
credits are defeated through the existence of too many loopholes

and inadequate control mechanism. It is anticipated that there
will be serious aggravation of living conditions in Shanghai,
particularly among the wage earning class. American banknotes
are reported having been bought up by Japanese interests locally

for hoarding and for needed purchases of materials out of local
stocks, especially metals, as payment is demanded in American

currency by the sellers.
The general situation has been further aggravated by
additional control measures imposed by Japanese and Nanking

authorities probably designed to offset policy of the Stabilization
Board toward Shanghai and expectation is rapidly gaining in the
exchange that the Japanese will attempt, if present developments

are not checked, to assume additional economic control in this
area,

Copythr:10-20-41.

LOCKHART

368

TREASURY DEPARTMENT
INTER-OFFICE COMMUNICATION

DATE October 14, 1941.

Chauncey

Morgenthan

TO

FROM Mr. Dietrich

CONFIDENTIAL

Registered sterling transactions of the reporting banks were as follows:
Sold to commercial concerns
Purchased from commercial concerns

£103,000
& 35,000

Open market sterling held steady at 4.03-1/2, and there were no reported
transactions.
The Argentine free peso, which closed at .2350 on Saturday, improved to .2365
by the close today in a thin market. It is believed that the upward movement may
have resulted from the announcement that a trade agreement had been concluded
between this country and Argentina.

In New York, closing quotations for the foreign currencies listed below were
as follows:
Canadian dollar

11-3/8% discount

Colombian peso
Mexican peso

Uruguayan peso (free)
Venezuelan bolivar

.0505
.5775
.2070
.4600
.2670

Cuban peso

1/8% discount

Brazilian milreis (free)

We purchased $2,500,000 in gold from the earmarked account of the Central Bank
of the Uruguayan Republic.
No new gold engagements were reported.

We were informed that the Bombay gold price on October 11 was equivalent to

$34.16, or 2$ higher than the quotation of October 4. Silver was again priced at
the equivalent of 44.20
Both yesterday and today, the prices fixed in London for spot and forward silver
remained at 23-1/2d and 23-7/16d respectively. The U.S. equivalents were 42.67
and 42.55*

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.
We made no purchases of silver today.

369
-2The Federal Reserve Bank's report of October 8, listing deposits of banks in
Asia with the New York agencies of Japanese banks, showed that such deposits totaled
$57,586,000, an increase of $133,000 since October 1. Also reported were selected

items from the statement of the Yokohama Specie Bank's New York Agency, which revealed
no appreciable changes.

CONFIDENTIAL

370
RESTRICTED

G-2/2657-220; No. 518 M.I.D., W.D. 11:00 A.M., October 14, 1941

SITUATION REPORT

I.

Eastern Theater.

Ground: There is no change in the situation at Leningrad
and Odessa.

On the central front, the Germans are pressing

their attacks vigorously. The front now extends along the line:
Rzhev-Gzhatsk-Medyn-Kaluga-thence south.

Kursk has been captured by the Germans.
The Germans' advance north and south of Kharkov

continues slowly.

No further information covering the German advance

north of the Sea of Azov is available.
Unconfirmed information indicates that the Germans

have reached Borodino and that their advance guards are in the vicinity of Taganrog.
Air: A Russian source admitted that it appeared a few days
ago that Germany had attained absolute superiority in the air. The
Government newspaper "Izvestia" says that this condition has changed
in the past few days and that Red fighters now patrol all the major
sectors.

II.

Western Theater.

Air: R.A.F. objectives were scattered last night with
Dusseldorf and Cologne as principal ones, while Bologne and shipping
off the French coast were among the others. Daylight raids took
place on German air bases in northern France, with heavy activity
resulting between the attackers and the forces based there.
Germany claims to have raided numerous airfields in
eastern England last night.

III.

Middle Eastern Theater.

Air: An engagement between Italian air units and a British
has taken place in the Eastern Mediterranean. Italian battle- torwere said to have scored hits on a

cruiser
10,000
tons.said
The
cruiser
was
naval pedo-carrying
shipof
and
unit a planes
bombers
British
to have attacked been
observed listing badly. Sunday night heavy British
Bengazi, Tripoli, Bardia and the airdrome at Gazala.
RESTRICTED