The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
DIARY
Book 453
October 21 - 23, 1941
-
-ABOOK
Page
453
123-A
Agriculture
Speculators (Cotton, wheat. etc.): HMJr asks for
list of - 10/21/41
Parity Prices for Farm Products: Wickard's
testimony in connection with price control bill
before House Banking and Currency Committee -
239
10/22/41
merican Bankers' Association
HMJr thanked for attending annual convention 10/23/41
296
-Barth, Alan
Cox (Oscar) thanks HMJr for consideration snown 10/22/41
kacLeish-HMJr conversation - 10/22/41
-Canada
See Revenue Revision
Commodities
Speculators in cotton, wheat, etc. : See Agriculture
DDaker
See WAT Conditions: Gold
Defense Savings sonds
See Financing, Government
-FFinancing, Government
Defense Savings Bands: FATE on THE
eneczed with of
10/21/41
Susgulation
=
187
188
-I-
Book Page
Inflation
See War Conditions
-M-
Mint, Bureau of
Metal, by tons, used in coinage - 1940, 1941,
and estimated for 1943 - 10/21/41
a) HMJr's letter to Nelson - 10/21/41
(Nelson's letter - 10/17/41: page 110)
453
108
109
PPortugal
See War Conditions: Gold
Price Control
See War Conditions: Inflation
Public Reletions, Treasury
See Treasury Efficiency
-R-
Research and Statistics, Division of
Report on projects during August 1941
323
Revenue Revision
Shoup (Carl) study: "Amount of Taxes Needed in
June 1942 to Avert Inflation" - 10/21/41
Canada-United States avoidance of double
taxation: Conferences to be resumed in
Washington October 27
Canada-Great Britain-United States: Comparative
data on income and profits taxes - 10/21/41.
a) Cable to American Embassy, London,
correcting Chamber of Commerce
statement - 10/23/41
Rose, Frank
See Treasury Efficiency
Senwars, Charles
Treasury efficiency
Security
Depositories
free
Virginia
22
115
119
301
Texation
See Revenue Revision
Treasury Efficiency
For mail discussion, see Book 452, page 17;
Book 456, page 299
Conference: present: HMJr, sell, and Thompson -
453
10/22/41.
173
185
a) Rose (Frank) discussed
b) Additional personnel report - Thompson
314
memorandum - 10/23/41
1) Public Relations reorganized
a) See Thompson selections 10/27/41: Book 454, page 202
-U.S.S.R.
See War Conditions
United Kingdom
See Revenue Revision
War Conditions: United Kingdom
-W-
War Conditions
Exchange market resume' - 10/21/41 etc
Foreign Funds Control:
Food Speculation: General license permits this;
HMJr discusses with White and Foley 10/23/41
137,269,368
290
a) Conference - 10/24/41: Book 454, page 1
1) Amendment to General License No. 9
Book 454, page 26
b) Resume' of steps taken to date - Foley
memorandum - 10/29/41: Book 455, page 248
General License No. 32 amended to eliminate
possibility of free dollars being made
294
available to Axis powers - 10/23/41
Gold:
Dakar and Portugal: Memorandum from American
Embass% Buenor Atres, on stocks at Dakar and
purchases by Portugal - 10/22/41
Needed
in
255
- W - (Continued)
War Conditions (Continued)
Purchasing Mission:
Federal Reserve Bank of New York statement
showing dollar disbursements, week ending
October 15, 1941
Book
Page
453
319
U.S.S.R.:
Anglo-Russian Inter-Bank Agreement of
September 4, 1941, implementing AngloRussian Inter-Governmental Agreement of
August 16, 1941
362
United Kingdom:
Anglo-Russian Inter-Bank Agreement of
September 4, 1941, implementing AngloRussian Inter-Governmental Agreement of
August 16, 1941
West Virginia
See Social Security
Wickard, Claude R. (Secretary of Agriculture)
See Agriculture
362
1
TREASURY DEPARTMENT
Washington
Press Service
FOR RELEASE, MORNING NEWSPAPERS,
No. 28-12
Tuesday, October 21, 1941
10/20/41
The Secretary of the Treasury announced last evening that the
tenders for $150,000,000, or thereabouts, of 91-day Treasury bills,
to be dated October 22, 1941, and to mature January 21, 1942,
which were offered on October 17, were opened at the Federal
Reserve Banks on October 20.
The details of this issue are as follows:
Total applied for - $303,852,000
- 150,185,000
Total accepted
Range of accepted bids:
High - 100.
Low - 99.989 Equivalent rate approximately 0.044 percent
"
11
"
Average price 99.994
0.024
(71 percent of the amount bid for at the low price was accepted
October 21, 1941
9:30 a.m.
GROUP MEETING
Present:
Mr. Haas
Mr. Thompson
Mr. Blough
Mr. Foley
Mr. Morris
Mr. Bell
Mr. Kuhn
Mr. Schwarz
Mr. Gaston
Mr. Barnard
Mrs. Klotz
Mr. White
H.M.Jr:
I am going to rush you people a little bit
this morning. Eccles is coming in at
ten because I have just got to get on this
financing.
(The Secretary held a telephone conversation with Mr. Sproul and Mr. Rouse.)
H.M.Jr:
Kuhn:
Whose job would it be to find out whether
the Navy have notified their various people
that Mr. Knox is going on the air tonight?
I can do that. You mean the people at sea
and so on?
H.M.Jr:
Well, particularly in the schools. They
think they should be notified.
Kuhn:
Oh! All right.
3
-2H.M.Jr:
There are forty thousand boys in schools,
and they think they should be excused
tonight to listen to Mr. Knox. At sea
and at school.
Kuhn:
I will do it right after this meeting.
Gaston:
We are in the Navy now. (Laughter)
Kuhn:
Roy just asked if the Navy had taken over
the Treasury Hour, and I said, "I wished
they had." " (Laughter)
Klotz:
It would make life simpler for you.
H.M.Jr:
Incidentally, you might tell Vincent Callahan to tell Mr. and Mrs. - whatever their
names are.
Kuhn:
Hummert?
H.M.Jr:
Yes. That when they go to the trouble to
put on a song by an American composer, they
might mention his name. They didn't mention
his name last night. Would you pass that on?
Did you listen?
Kuhn:
No.
H.M.Jr:
Well, I did. They didn't mention his name.
"We will now hear a song by a young American
composer in the Army," and then they play it
and don't say what he is doing in the Army
or his name.
Bell:
It is probably against the rules of the
Intelli ence Service. They "O by numbers.
H.M.Jr:
Anything of importance.
Thompson:
I have mothin
-3H.M.Jr:
Den?
Bell:
You sent me this cable of October 16 from
Fox and asked for a reply today. That
cable came in last Thursday when we were
preparing a cable to Fox, and we read it
over and it said in that cable: "We have
just received your 4-20. We are nevertheless sending you this cable to clarify the
situation. 11
Now there are more cables in last night from
Fox which we haven't gotten yet, and this
doesn't really need answering at this point.
We have set it out in the cable that went
out last Thursday.
H.M.Jr:
Bell:
Well, can I forget about it?
Yes, sir.
H.M.Jr:
Are you and White in agreement?
Bell:
I think we are. I think all of us are in
agreement. Probably tomorrow or Thursday
we will have another conference on China
when the new cables come in.
H.M.Jr:
O.K.?
Bell:
Yes, sir.
H.M.Jr:
Got anything else?
Bell:
I have an amendment to the Treasury regula-
tions on tax notes which will enable parent
companies to subscribe for subsidiaries. Our
balance Saturday got down to a low of five
hundred million.
H.M.Jr:
Oh, really?
5
(Mr. Bell handed tax anticipation note
pamphlet to the Secretary.)
H.M.Jr:
When it is printed, it won't come through
Bell:
Yes, sir, that is the printed document.
H.M.Jr:
Gaston:
like that, will it?
Will it show through? What do you call that,
offset?
That is offset on the press. That is not
offset printing. It is an offset on the
press.
H.M.Jr:
On the press?
Gaston:
Yes.
H.M.Jr:
That is what I meant.
Bell:
I take it it was the grade of paper they had
to use.
Gaston:
It doesn't come through, but it is from the
draw sheet - it picks up the previous impression.
H.M.Jr:
I wish you would tell the Government Print-
ing Office it is very unsatisfactory. Just
hold that in your hand.
Who contacts them?
Bell:
I don't know who did it, but we will find out.
H.M.Jr:
Well, would somebody pass the word before they
print them all? You can't read that.
Gaston:
Of course, that is a thing they will only run
for one or two impressions. That is something that picks un - where the type is run
6
-5-
through without the sheet, and then they
try to scrub it off, and it picks up for
two or three sheets after that.
H.M.Jr:
Get me another copy, will you.
Bell:
Yes.
H.M.Jr:
This is terrible. Get me another copy.
Bell:
Yes.
That is all I have.
H.M.Jr:
Harry?
White:
I have nothing.
H.M.Jr:
Wonderful.
Schwarz:
I have nothing.
H.M.Jr:
Have you got any follow-ups?
Klotz:
I am looking for them.
H.M.Jr:
George, at ten o'clock, Eccles and you and
Henry Murphy, please.
Haas:
All right.
H.M.Jr:
How about that cost of living stuff for Mrs.
Roosevelt?
7
-6Haas:
Here it is. Last night I had this run off
(handing report to Secretary), which gives
the September thirtieth. The latest we had
was August. It didn't change it much.
H.M.Jr:
All right?
Haas:
Yes.
Kuhn:
Major Namm and his Retailers' Group will be
meeting here in the Treasury on Thursday.
Harold Graves is very anxious to have you just
say "Hello" to them downstairs sometime Thursday.
Could you manage it?
H.M.Jr:
Sure. Remind me Thursday.
Kuhn:
Thursday morning?
H.M.Jr:
Yes.
What is the name of the fellow that used to
be comptroller of Macy's?
Barnard:
Beardsley Ruml.
H.M.Jr:
Is he still there?
Barnard:
Yes, still treasurer.
I have the time of the various items tonight.
I will send it in to you in the form of a
Kuhn:
memo.
H.M.Jr:
What time? Will you get it in to Mrs. Klotz's
hands, actually get it in to her hands?
Then I will get it. Please. What time does
Noel Coward come on?
Eight twenty-three and a half.
Kuhn:
H.M.Jr:
I
have
of the
got
8
-7Kuhn:
I have all the information about that man.
I didn't know what you wanted it for.
H.M.Jr:
Well, the other man, this fellow Streit is --
Kuhn:
Oh, yes, Etheridge is a different kind of fellow.
He is a political writer.
Well, Streit?
H.M.Jr:
Kuhn:
Streit will be down in Washington tomorrow if
we want him.
H.M.Jr:
Last week on October 25 or thereabouts we got
a letter from the Pittsburgh United Electric
and Machine Workers, and I wanted to send
a letter.
Kuhn:
I believe it was answered on Saturday.
H.M.Jr:
Would you tell Mrs. Klotz about it sometime?
Kuhn:
Yes.
H.M.Jr:
All right, Ferdie?
Kuhn:
Yes.
H.M.Jr:
Roy?
Blough:
The British-Canadian income tax comparisons
you asked for will be ready before lunch today.
H.M.Jr:
Wonderful. With an explanation so I can
Blough:
With some explanation which we will be glad to
understand it?
elaborate as much as you wish.
H.M.Jr:
You see what I want with this Canadian thing,
I would like to say the various things that
happen to a man there, the withholding tax,
9
-8and this tax and that tax, and they have to
make -- I know they have to make a tax for
the war -- I mean, I think it is a hospital
tax. They have got all kinds of taxes.
Blough:
You want a description of these taxes plus
the effect of the whole business as a burden?
H.M.Jr:
Yes. And then how it affects the fellow I would give it in various jumps, you see, from
one thousand to two thousand, twenty-five hundred and up, you see.
Blough:
The tables are already ready.
H.M.Jr:
You take the workman in Canada has to pay
Blough:
four or five different taxes.
That is correct.
H.M.Jr:
And you have them all?
Blough:
We have them all, but it may take a little
bit longer to write, SO it may be the middle
of the afternoon before it is ready.
H.M.Jr:
That is all right.
Morris:
I have a letter from Allan Sproul. I am not
quite sure whether you saw it or what I am
supposed to do with it. It says he is working
on trying to get some data on capital issues.
H.M.Jr:
That is just for your information, that is all.
Morris:
And has Sullivan seen you about a report on
yesterday afternoon or do you want one?
H.M.Jr:
No. Last night he went home with me, and I
talked with him at eight this morning, so I
am up on that. You might acknowledge that
letter from Sproul.
10
-9Morris:
All right.
H.M.Jr:
will you be here at ten?
Morris:
Yes.
H.M.Jr:
Ed?
Foley:
We got a telegram from Irving Wright, the
chief examiner on the West Coast, to the
effect that the Yokohama Specie branch in
San Francisco, there were very large withdrawals yesterday, and it may be necessary
to close that branch, and I have contacted
Dean Acheson. He has got his people over
here this morning, and they are phoning the
facts to us at twelve o'clock, our time.
H.M.Jr:
Yokohama Specie where?
Foley:
In San Francisco. They don't know whether these
licensed Japanese nationals are taking it
out and putting it under the mattress or
putting it in another bank. They are getting
those facts for us, too. Insofar as liquidity
is concerned, the bank is under water. It
may be necessary to revoke the license.
H.M.Jr:
Let me know.
Foley:
Insofar as retaliation is concerned, only the
National City has one branch. The other two
branches are closed in Japan.
I talked to Francis Biddle yesterday and he
doesn't want to give us those names. He says
he is going to make an investigation himself
because he was given 8 hundred thousand by
Congress to make the investigations. After
the people have been investigated he will turn
the reports no recommendation.
the manner
11
- 10 -
Hoover. I will talk to Hoover again,
however, but he thinks that that
is --
H.M.Jr:
Well now, Gaston is taking up their
whole thing. This is these fiftysix so-called communists in the
Treasury. Why am I not entitled to
know? If he won't give them, Mr.
Dies will give them to me.
Foley:
I said that he said he thought that would
be better. He didn't think it would
look right for him to give them to
us.
H.M.Jr:
Oh, nuts. I am just sick and tired
of the way Francis Biddle is behaving.
My God, he is the worst yet.
White:
Absolutely.
Gaston:
Yes.
H.M.Jr:
This is in the room.
White:
He is worse than that.
H.M.Jr:
He is the worst one yet (laughter). I
thought, gee whiz --
Bell:
Popular isn't he?
12
- 11 -
Gaston:
Did you read the New Yorker's story on Bridges
having fun with the FBI? It may soothe you a
little bit if you read that.
H.M.Jr:
Send it in to me.
Well, Herbert and this man (Thompson) know about
my contact on this, investigating under orders
from the President on OPM. Have you (Gaston) got
it up now?
Gaston:
Yes, I have.
H.M.Jr:
Talk about it and if Francis Biddle won't give
it to me, see --
Foley:
He doesn't want to.
H.M.Jr:
Well, if he doesn't give it to me -I told him I would mention it to you.
Foley:
H.M.Jr:
All right, we will ask Mr. Dies for it because
I am not going to sit here for months while
J. Edgar Hoover investigates the Treasury.
Foley:
Well, we can pick it up from Mr. Dies. I don't
think we will have any trouble getting it from
him at all, but I think Francis is right. I
think it would be better for us to get it from
that source rather than for him to give it to
us because it would look like a whitewash if
he turned around and gave it to us, particularly
when he has been given a hundred thousand dollars
by Congress to make this investigation.
White:
Now look, Ed, if there are any Communists in
groups, it seems to me the quicker we know it
and the quicker we get them out, the better.
There is some awfully confidential material
floating around here.
- 12 -
Foley:
That is perfectly true, Harry, and he says
that the people that he and I know on the list
are people that obviously Dies has taken from
some mailing list somewhere and they are no
more Communists than we are.
Thompson:
I suspect we have already investigated them.
H.M.Jr:
You missed it. I got off a good one. Ed
Foley says they are no more Communists, Harry,
than you and I are, and I said, "How much is
that worth?"
Foley:
That is what Biddle says to me, "than we are."
H.M.Jr:
Well, I still say, ever since Ed has seen there
is a ten thousand dollar fellow on that, he
has been a little worried. Well, anyway, if
this fellow --
Foley:
Do you want me to ask Larry to pick it up from
H.M.Jr:
Yes.
Foley:
Well, that will be all right with Francis.
Thompson:
Then we ought to check that list with the invest-
Foley:
I think that is right. There is one fellow on
the Dies Committee?
igations we have made. We have probably covered
them all.
there I am sure of too, Dan.
H.M.Jr:
All right. Now what else?
Foley:
Congressman Luther Johnson, who is on the
H.M.Jr:
Foreign Affairs Committee --
I had better call up Elmer Irey first and see if
it is all right with him because I don't want to
14
- 13 -
Klotz:
get Elmer Irey angry at me. (Facetiously)
You couldn't.
H.M.Jr:
But that is what happened over there when they
went over to see them. Francis Biddle says,
"I don't know whether I can do this. This
may make Mr. Hoover very angry." Isn't that
what he said?
Thompson:
He didn't mention Hoover's name, but that is
what he said.
Gaston:
He is too big to mention him by name. He
just says, "he, and "him."
White:
Capital "he"? (Laughter)
Gaston:
He didn't mention Hoover by name. That would
H.M.Jr:
Are you all through, Ed?
Foley:
Yes. (Laughter) I am discouraged.
Gaston:
In view of the turn that this Honolulu thing
be sacriligious.
is taking, we are sending Fred Gaertner, the
Supervising Customs Agent on the Pacific
Coast and one of his brightest men out by
Clipper from Honolulu Thursday. They are
going to get there Saturday--
H.M.Jr:
Well, I think on that--
Gaston:
to see if they can give any help, because
it has turned into a proposition where the
Army isn't taking the stand of wanting to see
that justice is done. It is a straight out
battle against the Customs. They want to
destroy this man.
- 14 -
H.M.Jr:
Well, I want Ed Foley, then, to send one of his
Gaston:
Well, you see, he can't act as a lawyer out
H.M.Jr:
He can tell me, though, what is going on.
Gaston:
This man Fisher, one of the two Customs men who
15
men too.
there.
is going out, is a lawyer.
H.M.Jr:.
Gaston:
H.M.Jr:
I still say, if it is this kind - I would like
Ed to send a man out.
All right.
It is a straight legal matter and it is now
between Stimson and myself and I want to be
advised on the law on that.
Gaston:
I don't think, just privately, that Stimson is
strong enough to buck that Army machine.
H.M.Jr:
No, I think Stimson is a great fellow. Don't
forget what he did on the Spanish thing, and so
forth. I think you underestimate him. On a
moral issue, there isn't a finer man in this
country than Henry Stimson. He is strong enough
to buck anybody on a moral issue. I have got
Gaston:
great respect for him. But I think if we are
sending people out - talk it over.
I will do that.
Foley:
I think we ought to have somebody there who can
make an investigation of the facts and let us
know.
H.M.Jr:
Well, you talk it over. My inclination is, I
think it ought to be a lawyer.
- 15 -
Foley:
All right.
H.M.Jr:
And a trained one.
16
Anything else? All right?
Gaston:
All right. Oh, I wanted to tell you, I don't
know whether Carl Shoup sent to others in the
Treasury a copy of his study on the necessary
H.M.Jr:
taxation to stop inflation. If he didn't, I have
a copy of it. It is quite interesting.
Well, I got a letter about it and he is to be
here Thursday morning, but if you have it, if
you would give it to -Haas:
He sent several around.
White:
He sent several around. It is worth reading,
particularly the first few pages.
I would like to have one.
H.M.Jr:
Gaston:
Seventeen percent supplementary additional
taxation on net income.
H.M.Jr:
I would like to have one.
17
October 21, 1941
9:30 a.m.
HMJr:
Hello.
Allan
Sproul:
Good morning, Mr. Secretary.
Robert
Rouse:
Good morning, sir.
HMJr:
Good morning, gentlemen. Look, if you don't
S:
know now, could I call you back a little later?
I'd like to have you tell me what you think we
ought to do on this refunding.
Well, I can tell you what I think right now.
HMJr:
Go ahead.
S:
I think we ought to - that you ought to open
up the bunch of 43's, and give a fifty per
cent exchange to the maturing RFC's and CCC's
and do the rest for cash in the same issue.
HMJr:
S:
Uh huh.
I think that fits in best to the general program
of financing we've been talking about, that 18,
long term obligations for the permanent investors
and as short as possible including bills for the
banks.
HMJr:
Uh huh.
S:
And it's impossible to do this all with bills
and to retain any rights values, which I think
is desirable temporarily, and therefore the
next best thing, it seems to me, is that short
note in which only a small amount is outstanding
and in which price - pricing it at par to exchange
holders gives about the right premium on a 50%
exchange.
HMJr:
Yeah. That's the way you feel.
S:
Yeah.
HMJr:
Well, we're pretty far apart.
-2S:
What?
HMJr:
We're pretty far apart.
S:
We are? (Laughs)
HMJr:
Yeah. But I'11 call you back a little later.
Mr. Eccles is coming in at ten.
S:
I see.
HMJr:
And I'11 call you back after he leaves.
S:
All right, fine.
HMJr:
Thank you.
18
-
19
Treasury Department
Division of Monetary Research
Date
To:
10/21/41
19
Miss Chauncey
The Secretary might well read
the first Chapter (which is a summary).
However, if he doesn't have
time, , I am having a one page summary
made of the memorandum which will be
done in ample time for him to read
before the three o'clock meeting.
H.D.W.
MR. WHITE
Branch 2058 - Room 214
20
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE October 21, 194
TO
Mr. White
FROM
Mr. Shapiro
object: Summary of Report "Amount of Texes Needed in June 1942 to
Avert Inflation"
It is estimated that in June 1942, defense stending will be at an annual
rate of 14 billion higher than in June 1941. As production in June 1942 will
probably be at 3 rate of 012 billion higher than in June 19/2, the output of
civilian goods (probably for private investment) will be restricted by 2
billion.
This program of increased defense spending cannot be achieved without =
rise in crices unless purchasing power at the annual rate of 12 billion --
the increase in defense spending minus voluntary reduction in private canital
ionnation - is withdrawn from the public. Increased Federal revenues will
absorb $6 billion of this sum. Of the remaining $6 billions, 3 billion will
be absorbed by the increased sale of defense bondo.
That leaves 85 billion still to be mopped up.
If inflation is to be averted, further withdrawals at the annual rate
of at least 05 billion must be taken from consumer incomes by June 1942. It
is even possible that the withdrewal of as much AF $9 billion may be necessary.
This can be achieved by conculsory saving or increased taxation. It is probably
easier to collect higher taxes now than in the post-war period.
The best form of taxation (according to the report) is a supplementary
tax on incomes, collected currently at the sources to avoid the lag, to facilitate the texation of low incomes, and to make rate changes easier. A supplementary income tax, to ake effect in January 1942, at the rate of 13 percent
rising to 2 maximum of 17 percent in later months on income in excess of
exerctions (1,000 married, $500 single, 300 per dependent) would raise
revenue at the rate of 05 billion annually; a 24 percent rate would raise S7
billion; and a 31 percent rate would raise 09 billion.
The report points that even such a program has the following limitations:
8. Cannot stop certain types of price rises.
b. Texation may not prevent a rise in the cost of living in view of
the large stock of acney.
C. No consideration is iven to special taxes on business income.
d. The relevant data require constant rechecking
21
Columbia University
in the City of New Pork
SCHOOL OF BUSINESS
October 17, 1941
Mr. Henry Morgenthau, Jr.
Secretary of the Treasury
Washington, D. C.
Dear Mr. Secretary:
I am enclosing a copy of a research report
that analyzes the need for taxation to prevent infla-
tion. I trust that this study may be of some value
to the Treasury in the light of the current pressing
problems of finance.
Sincerely yours,
Carthory
Carl Shoup
CS:RH
enclosure
Copy No.
A
22
AMOUNT OF TAXES NEEDED IN JUNE 1942 TO AVERT INFLATION
A Preliminary Report Submitted to a Joint Committee
of the Carnegie Corporation and the
Institute of Public Administration
CARL SHOUP
RUTH P. MACK
MILTON FRIEDMAN
October 15, 1941
Copy No.
fidential)
AMOUNT OF TAXES NEEDED IN JUNE 1942 TO AVERT INFLATION
A Preliminary Report Submitted to a Joint Committee
of the Carnegie Corporation and the
Institute of Public Administration
.
CARL SHOUP
RUTH P. MACK
MILTON FRIEDMAN
October 15, 1941
Table of Contents
Summary of Preliminary Report
1
Preliminary Report
The Growing Divergence of Money Income and Real Income
8
9
Defense Requirements and Output Limitations
10
Relation of Public Finance Policy to Rising Prices
11
Method of Estimating the Amount of Taxes Required
15
The Approach
17
General Description
19
Step by Step Analysis
23
Selection of Appropriate Tax Measures
33
The Supplementary Personal Income Tax
35
Sales Taxes
40
Rates Needed for the Supplementary Income Tax
44
Appendix A
48
Appendix B
51
SUMMARY OF PRELIMINARY REPORT ON AMOUNT OF TAXATION NEEDED
IN JUNE, 1942, TO AVERT INFLATION
The cost of living in the United States has been rising during the past
few months almost as fast ae it did during the first world war. In no year in
the period 1915-1920 did the index rise at an average monthly rate for the year
greater than 1.7 per cent. The rise from March to April, 1941, was 1.0 per cont;
from April to May, 0.7 per cent; from May to June, 1.7 per cent; from June to
July, 0.6 per cent; from July to August, 0.8 per cent. Moreover, the Federal
Government is planning to increase greatly its defense spending. Is there,
then, a real danger of substantial inflation (that is, a substantial rise in the
cost of living) over the next year or two? If the danger exists, can it be
largely eliminated by increased taxation? How much taxation is needed for that
purpose, and when?
Let us compare the situation as it stood during last June with the prospects for June, 1942, under a favorable set of assumptions. In June, 1941, defense expenditures were more than $800 million, or at a rate of about $10 billion a year. In June, 1942, they are expected to reach an annual rate of $24
billion, or about $14 billion more than in June, 1941. Production for the country as a whole can probably increase at most by about $12 billion in the same
period. Hence civilian output must decline by $2 billion at June, 1941, prices.
If consumer spending did not rise above the June, 1941, level, it seems likely
that private capital formation would decline by between $1 billion and $2 bil-
lion. If the larger of these declines occurs, the increase in expenditures by
government minus the decrease in the spending by producers of private capital
goods can be matched by an increase in physical output. But the fact that $12
billion more is being spent means that consumers will be getting about $12
2
billion more income (actually nearer $11 billion because of retention of prof-
its by corporations; but to avoid dealing in fractions of billions in the computations that follow in this summary, the $12 billion figure is used). Federal
tax revenue will be at an annual rate about $6 billion higher next June than
last, as a result of both the larger flow of income and the higher rates enacted
in the Revenue Act of 1941. The $12 billion increase in consumers' income will
therefore mean only a $6 billion increase in purchasing power. But the consumere will have no greater physical amount of consumer goods and services on which
to spend this added $6 billion, for they will have received this extra income by
producing, not consumer goods, but armaments, which they cannot buy. Last June,
consumers were buying at an annual rate of about $70 billion. Next June, government and producers of private capital goods will together, net, be adding to
consumer purchasing power some $6 billion a year more than last June. The recip-
ients of this added purchasing power will be spending part of it on consumption -- probably some $4 billion a year more than last June, the remainder being
absorbed by personal or corporate saving. Those who benefit by the increase of
$4 billion a year in consumption expenditures will in turn be spending more than
in the previous year. Just what the total increase in consumers' spending will
be is difficult to estimate, but it would probably be at least $8 billion a year.
By next June, then, consumers would be spending at an annual rate of at
least $78 billion, with only $70 billion of goods and services to spend it on,
at last June's prices. The extra $8 billion of consumers' outlay would be almost entirely reflected in a price rise, of about 10 per cent. With 80 sharp a
rise in consumer spending and consequently in prices, the expenditures on private capital goods would probably not decline by $2 billion (assumed above) but
might instead actually rise. More than that, the government's own spending
would presumably increase, since it would have to pay higher prices for the
3
goods it purchased (its tax revenue would increase too, but probably not so
much). The rise in the coet of living would strengthen existing tendencies
toward wage increases, thus raising costs, and therefore prices, still higher.
Hence the cost of living would probably have risen by much more than 10 per
cent next June. To prevent this widespread rise in prices by direct price o on-
trol would require universal rationing and merciless policing.
Such price rises, based on an excess of consumer purchasing power, can be
stopped by preventing consumers from getting the $6 billion excess purchasing
power, or by inducing them to spend less of it than they normally would. The
Defonee Savings Bond campaign will help acomewhat here. Suppose that consumers
are buying Defense Bonds, next June, at an annual rate about $4 billion greater
than last June. Part of this will reflect merely a shifting of assets -- a
drawing down of savings deposits, return of hoarded currency, and 80 on. Part
of the rest will come from normal savings, the kind of savings that are already
allowed for in the calculations above. Only the remainder -- probably not more
than $500 million a year -- will come out of money that would otherwise have
been spent on consumption. This reduction in consumer outlay because of De-
fense Bond purchases will offeet an equivalent amount of spending by the recip-
ients of the excess purchasing power that the government is distributing
through its defense program. Taking into account indirect effects on the incomee and spending of others, total spending by all consumers would be about
$7 billion a year above June, 1941, instead of $8 billion, thanks to the Defense
Savings Bonds campaign. This decline of $1 billion in extra spending would
help, but obviously it would not be enough to stop the upward spiral of prices
outlined above.
To stop the price rise, consumers must be prevented from getting the excess
purchasing power not offset by the Defense Bonds that are bought by cutting
4
consumption. The aurest way, and in fact the only practicable way, to prevent
them from getting it is to extract an additional $5 billion or 80 from their
incomes, either by additional taxes or by compulsory savings. That is, by June,
1942, the government must be collecting, currently, $5 billion more out of cansumer incomes than will be coming in under the present revenue system, if it
wants to prevent a substantial rise in prices by then and forestall an even more
serious one in the latter part of calendar 1942.
The extra receipts needed by June, 1942, to prevent a price rise may prove
to be much higher than $5 billion, possibly as high 88 $9 billion (annual rate).
The $5 billion estimate is based on a combination of optimistic assumptions
about possible increase in output, and decline in expenditures by producers of
private capital goods.
One way to increase government receipts out of consumer income is through
forced savings brought about by compulsory payments to the government in return
for securities not redeemable until after the emergency. But while this method
has the advantage that it promises a future payment for present sacrifice, it
would mean as great a sacrifice in terms of the individual's present consumption, and would further intonsify the poet-war problem posed by a large pub-
lic debt. There is little reason to believe that the taxes which would repay
the debt -- or even pay the interest on it -- would be any more progressive than
those which can be levied now. The time to collect the tax is now, when the
government is adding large sums to the income stream through the defense program.
A tax on income is the most direct method of absorbing the excess purchas-
ing power. But an increase in the ordinary income tax will not do. A Revenue
Act of 1942, even if passed early in the year, would not drain purchasing power
until 1943. The added tax must be collected currently from 1942 incomes. The
best way to do this is to utilize collection at the source so far as possible --
5
to have the payor deduct the tax from the wage, salary, interest, or dividend
payment before it reaches the worker or investor. Collection at the source is
necessary anyway, for two other reasons. First, even the most careful forecast
of the amount of taxes needed to prevent a price rise will prove somewhat in
error. The amounts involved are 80 large that an error could have serious consequences unless it were subject to prompt correction by changes in the rate of
the new tax as often as every three months or so. Second, the amount of new
taxes needed is 80 large that it will almost surely force a lowering of the personal exemptions still further (say, to $1,000 for a married couple and $500 for
a single taxpayer). Taxpayers near these levels can be reached satisfactorily
only by collection at source. Moreover, since they spend about 88 quickly as
they receive, they might not have the cash on hand to pay the tax unless they
were asked to pay at least once a month; and they could scarcely be expected to
file twelve returns a year. But they could file one return a year, which would
allow them to claim refunds, if personal exemptions, etc., had not been correct-
ly taken into account in deducting at source. Similarly, it will be difficult
to collect increased taxes from taxpayers a cmewhat higher on the income tax
scale unless a convenient method of installment payment is provided for the ad-
ditional tax burden. Partners and proprietors (including farmers), and landlords
could be required to submit quarterly returns, paying on their estimated current
incomes, subject to an annual correction.
To raise the $5 billion, this supplementary Bource-collected income tax
would have to be imposed at a rate of about 17 per cent on that part of the income in excess of exemptions of $1,000 (married) and $500 (single) and a $300
credit for each dependent.
If $9 billion had to be raised, a 31 per cent rate for the supplementary
income tax would be needed. It would be better, then, to put the exemptions
6
substantially below $1,000, $500, and $300, and possibly modify the revenue re-
guirements to allow a price rise of, say, 5 per cent a year, thus permitting the
use of a much lower tax rate.
If $7 billion had to be raised, a 24 per cent tax rate would be needed,
under the $1,000, $500, and $300 exemptions.
If we had to. make a decision at this moment, we should recommend a tax on
the lowest basis, that is, at 17 per cent, subject to upward change if a further
check of our technique and data indicated still a range of $5 billion to $9
billion. If it did, we should then recommend lowering the exemptions to about
$900, $450, and $250, and also allowing the cost of living to rise very moderate-
ly, thus permitting the tax rate to be set at perhaps 20 per cent.
To avoid more than 100 per cent taxation in combination with the 1941 Revenue Act, the 17 per cent tax could be levied on the income minus the regular
income tax on 1942 incomes paid under the 1941 Revenue Act. This adjustment
would be carried through in the annual return, filed in 1943, not in the withholding.
To avoid a steady upward rise in prices before next June, the supplementary
income tax needs to be in operation, at a e cmewhat lower rate, as early as Janu-
ary, 1942. The rate should, for this purpose, be at least 13 per cent for the
first quarter of 1942, and 17 per cent for the second quarter (April-June) Even then, a price rise from the June, 1941, level would not have been entirely
avoided; some has already occurred, and more may occur by January, 1942. To
this extent our computations in this preliminary report do not take full account
of the actual situation.
If the supplementary tax were thought to be somewhat too light on the wellto-do, the rate schedule of the regular income tax could be adjusted accordingly.
7
A supplementary income tax of 17 per cent on that part of an individual's
net income above $1,000 ($500 single) is a severe burden, but not so severe as
the evidently inevitable rise in the cost of living that will result unless some
tax measure of this magnitude starts draining purchasing power by January and is
in full operation by next June.
Some limitations to the scope of the present report must be emphasized. In
the first placo, some kinds of price rise cannot be stopped by taxation -- for
example, the recent increases in the prices of cotton and wheat so far as they
have been caused by the government's loan program. The present report offers no
suggestions on direct prevention of such price increases. In the second place,
the amount of money that should be raised by taxation may be greater than the
amount needed merely to prevent a rise in the cost of living. The long term
possibilities of an unduly heavy interest charge on the budget and a dangerously
large stock of money are relevant here; but limitations of time and resources
have made it impossible for the present report to analyze these mattere. The
amounts of taxation that we now recommend are therefore minimum quantities.
They would by no means balance the budget; in fact, they imply the continuance
of a large annual deficit.
In the third place, our analysis of anti-inflationary taxation has not
given full consideration to the problem of special taxes on business income.
A
simple rise in the corporate income tax rate does not seem very suitable; the
answer may lie in some form of taxing undistributed corporate profits -- a c omplex matter than cannot be adequately treated in this report.
In the fourth place, the figures that we have used in our computations can
surely be refined by further research and will surely have to be changed as new
conditions develop. At the least, a monthly recomputation is called for, even
though it would be better not to shift the tax rate, in practice, until the recomputations showed the need for a substantial change.
8
AMOUNT OF TAXES NEEDED IN JUNE 1942
TO AVERT INFLATION1
How much taxation is needed 1f a substantial rise in the retail price level
("inflation") is to be averted? To this question the present report addresses
itself, and to collateral questions also: How soon are the tax measures needed?
What kinds of taxes will be suitable for this purpose?
The present report ie preliminary; it will be followed, within a month or
two, by a final report that will include, among other items, statements of
sources utilized in deriving the data that, for brevity, are presented here
without much explanation.
This preliminary report first discusses, in the light of recent changes
and the general prospect for the next year or so, the advisability and pos-
sibility of keeping the cost of living from rising sharply. Then follows
a description of what has proved to be the major task of the present study,
that is, the computation of the approximate amount of added tax revenue
that will be needed if a substantial rise in the cost of living is to be
avoided. The technique used in this computation is described first in general terms and then step by step. The added revenue needed is given as of
June, 1942. Computations for a number of earlier months -- oven for months
before January, 1942, if there is any real prospect of enacting new tax
1. The present study was made possible through a grant of funds to the Institute of Public Administration by the Carnegie Corporation, and has been
carried on under the auspices of a joint committee representing the Corporation and the Institute. The members of the committee and the two in-
stitutions bear no responsibility for the contents of this preliminary
report. The work was started in June, 1941; it is expected that a final
report will be submitted toward the close of the year. The authors
acknowledge the valuable assistance of Harlan Bramble and George Lent in
research, and Dorothy Harmon, secretarial assistant. We cannot express
adequately here our indebtedness to the many individuals who have assisted
us 30 generously.
9
measures before then -- can be made by the same technique. Lack of time and re-
sources is the only reason they have not been given here. The final section discusses the kinds of tax that would be suitable to raise the revenue needed to
avert inflation, and offers some recommendations on this soore. An appendix
describes briefly the work done by others in the field covered by this report;
another appendix presents an algebraic formulation of our technique.
The Growing Divergence of Money Income and Real Income
Three major aspects of the events of the past year need to be kept in
mind in formulating a fiscal policy for the coming year.
In the first place, during June, 1940, real national income was being
generated at the rate of $74 billion a year. One year later the flow had increased to $86 billion in June, 1940, prices.
In the second place, this increase of $12 billion was spread throughout
the economy. Although the largest part, perhaps over one-half, had taken the
form of increased defense, there had also been a marked increase in both the
flow of consumer goods and services and additions to privately owned business
plants not included in the defense expenditures.
In the third place, the increased physical output was accompanied by
a
price increase of over 4 per cent as recorded by the a comewhat lethargic Bureau
of Labor Statistics cost of living index, which tends to understate the actual
rise. But this increase for the year as a whole was by no means evenly distributed throughout the year. The accompanying chart showe for each quarter what
part of the increase in money incomes went into a price rise rather than into a
rise in real output. From the third to the fourth quarter of 1940, none of the
increase in income was absorbed by the increase in prices -- physical output
rose as rapidly as money income. From the fourth quarter of 1940 to the first
quarter of 1941, only 10 per cent of the increase in money income was absorbed
THE GROWING DIVERGENCE
BETWEEN REAL AND MONEY INCOME
NATIONAL INCOME
CURRENT PRICES
NATIONAL INCOME
ANNUAL RATE
00
-95
NATIONAL INCOME
JUNE, 1940 PRICES
-80
75
-70
.
June July Aug.
Sept. Oct. Nov. Dec.
1940
Jan.
Feb. Mar. Apr. May June July
1941
10
by price rises. But from the first to the second quarter of 1941, about half
(51 per cent) of the rise in income went into increased prices rather than an
augmented flow of goods. This tendency for rising prices to absorb a growing
proportion of the increases in money income is apparently continuing -- from
June to July, about 55 per cent of the increased income was 80 absorbed.
Defense Requirements and Output Limitations
If we look now towards the future rather than the past, the dominating
fact is the magnitude of the defense program. We have estimated that it will in-
crease from an annual rate of $10 billion in June, 1941, to $24 billion in June,
1942. These figures are based primarily on the October 5, 1941, estimate of the
Director of the Bureau of the Budget.
In the past it has been possible to increase both output for defense and
for civilian consumption. Can this continue?
The $12 billion increase in the annual rate of output at constant prices
from June, 1940, to June, 1941, is one of the largest, if not the largest, ever
attained in this country during any twelve-month period. It was accomplished by
increasing civil non-agricultural employment by some 3 million and average
hours per week in manufacturing industries by about 10 per cent. The labor re-
serve is apparently sufficient to permit a further increase in employment and
hours of about the same magnitude by June, 1942, though such an increase would
come close to absorbing all but an irreducible minimum of the unemployed, unless
it drew heavily on that part of the reserve that is not counted as unemployed.
The smaller number of unemployed and the very much higher rate at which the
economy is now operating makes the problem of absorbing such an increase far
more difficult than it was a year ago. Moreover, the same increase in man-hours
would probably yield a smaller increase in output. The additional man-hours
would be worked primarily by the less skilled, since they are the ones who are
11
now unemployed or are working short hours: scarcity of materials and plant limitations are appearing at an increasing number of points; Liminishing returns
are setting in with increasing intensity; the need to use substitutes will increase the real cost of output, etc. These considerations suggest that we shall
probably not exceed during the next year the record set during the 12 months
prior to June, 1941, and may even fail to equal it. This view is supported by
the slackening rate at which the Federal Reserve Board index of production has
changed in June, July, and August.
If this conclusion is valid an extremely important inference follows: The
real flow of goods to the private sectors of the economy cannot increase, during
fiscal 1942, over the annual rate prevailing in June, 1941. In fact, it will
have to decrease by at least $2 billion (at June, 1941, prices). This fact,
rooted in physical problems of production, is independent of fiscal policy at
the same time that it sets the problem which fiscal policy must solve: How to
maximize the real flow of goods for defense first and for consumption second, at
the same time that the cost of defense is equitably distributed?
Relation of Public Finance Policy to Rising Prices
It is generally conceded that a rapid rise in the price level is one of the
least equitable methods of distributing the cost of a war. It increases the
cost of defense, it laye a burden of maladjustment on the future, it taxes the
poor more heavily than the rich and wage earners more heavily than recipients of
profit, and recipients of fixed incomes most heavily of all. To be sure, the
recipients of fixed incomes muet in any case sacrifice something, after the maximum aggregate of civilian consumption has been reached; an increasing part of
the aggregate must be offered to defense workers thereafter drawn from other
trades and from the unemployed. But the amount and distribution of the sacrifice of the fixed income groups can be determined to scme extent by a carefully
12
constructed fiscal policy, giving results preferable to those arising under the
confusion of inflation. The prevention of a substantial increase in the cost of
living is, therefore, a prerequisite to any equitable distribution of the defense
burden; it is the major objective of fiscal policy today, although it is important to remember that it is by no means the only objective. This report does not
deal with these other objectives but addresses itself exclusively to the problem
of the prevention of price rises that serve no productive purpose and hence af-
fect merely the distribution of the cost of defense.
In part, price change lies outside the juriediction of fiscal policy. Some
part, for example, of the price increases during the past year were related to
increases in the price of imported goods. Some part also resulted from rises in
the price of agricultural products induced by guaranteed minimums deemed neces-
sary to protect the farmer and encourage crop expansion. Although it would be
possible for fiscal policy to counteract price increases of these sorte by inducing offsetting price decreases in other sectors of the economy, the resulting
discouragement to production and hardships for various groups would make such a
forced maintenance of a stable average level of prices soarcely worth while.
Fiscal control of prices is called for when, because of a general superfluity of money in the hands of would-be buyers relative to goods on the shelves of
would-be sellers -- a situation well described by the term a "seller's market"
there is a tendency for most prices to rise. The problem of preventing such a
rise, should it be desirable to do so, is in large measure a Treasury problem.
Such a situation exists today and is responsible for a very considerable part of
the increase in prices over the past few months.
The question whether the moment has come to put a stop to it depends upon
an analysis of the functions served by the price rise. It might make possible,
by enlisting the efforts of marginal producers, an otherwise unattainable
13
increase in total national output. It might also facilitate the transfer of resources from private to public sectors of the economy and from one corner of the
private sector to another.
The fact that total output of consumer's goods has in the past increased
contemporaneously with prices suggests though it by no means proves that the
price rises may have been responsible for part of the increase in physical output; the fact that increases in output are growing meagre compared with the
price rise associated with them raisee questions concerning the desirability of
permitting price rises to continue. We are about at the point when the social
cost of increases in output purchased by drastic price rise starts to exceed the
social gain derived from the increased output. This is at best a very general
judgment based on necessarily hazy evaluation of such factors as the extent to
which the price rise is actually responsible for the increased output; the disorganization related to changes in price relationships; the extent to which the
cost of defense will be increased; the tendency for price changes to spiral on
the basis of labor demands and consumer reactions.
Price changes related to the second type of function -- facilitating trans-
fere -- may well have a function to perform that is as yet unfulfilled. For
this reason it may be well to set as the objectives of fiscal policy the prevention of significant price changes -- say a rise of 5 per cent or more a year
rather than the maintenance of a stationary price level. As a first approximation, however, we have used an unchanging price level as our objective -- un-
changed at least from January, 1942, if not from June, 1941, in view of the in-
crease that will already be a fact by the earliest practicable time action can
be taken on a new tax bill.
The Treasury can attack the problem of controlling price change by controlling redundant money incomes, computed net after taxes, when redundancy is
14
defined in terms of the relation between the dollar demand for goods of various
sorts and the dollar equivalent of available goods at a stable or nearly stable
price level. It could also conceivably attack the same problem by attempting to
influence, by appropriate tax or other measures, not 80 much the amount of income after taxes as the proportion of the income that consumers and producers
would be willing to spend. Although the latter approach might be very important when the pressing problem is how to increase spending, it is perhaps less
well suited to the present problem, the restriction of spending. The former
method of achieving a constant price level -- the draining off of redundant purchasing power -- is an efficient control device which is in part alternative and
in part supplementary to direct techniques for price and production control.
Its efficiency lies in the very significant fact that it operates within
the framework of accepted government function and form. It therefore does not
have to overcome the inertia and resistance inevitably associated with new meas-
ures. It also does not endanger in ways difficult to anticipate the operation
of an important economic equilibrating mechanism such as the price system. In
the second place, it achieves its purpose through a minimum of restriction and
policing -- certainly there is less onerous restriction of individual freedom
involved in the payment of a higher tax than there is in the prescription and
enforcement of the price which millions of sellers may ask and millions of buyers
offer at thousands of individual transactions. The importance today of this
sort of efficiency in government technique is hard to overstress. We are engaged in an undeclared war against autocracy. It would be as tragically foolish
to emerge from that war with the weight of compulsion fogging American faces as
it would to find there the fear of impotent dollars. Mechanically efficient
techniques of control are the only assurance that we shall see neither.
15
However, draining off purchasing power seems a more efficient method of con-
trolling prices of consumer goods than prices of producer goods. Its power lies
in the extent to which income is the major determinant of spending over relative-
ly short periods of time. This relation is fairly stable for consumers. But
there are many factors other than current income that determine the willingness
of producers to purchase plant and equipment -- prospective income, prospective
and current rate of operation, technological change, the ability to borrow the
necessary funds rather than finance capital purchases out of income. These fac-
tors cause the relation of spending to income to be highly variable over short
periods of time. This means that the relationship that exists between the amount
of producer current income and current additions to durable goods is both un-
clear and unpredictable in quantitative terms. If it were considered desirable
to reduce the purchase of plant and equipment by private industry, the appropriate technique is not a general income or excess profits tax but a specific penal-
ty tax on equipment purchases, priorities, licensing provisions and other instruments more accurately sharpened for their task of selective amputation.
The problem that we set ourselves, then, is the maintenance of an approximately constant price level through removing redundant consumer purchasing power,
either by taxation or compulsory saving.
Method of Estimating the Amount of Taxes Required
Consumers receive income primarily in return for their contributions (or
the contribution of their property) to the production of goods and services.
These goods and services are of three major types: (1) those purchased by the
Federal Government, including armaments; (2) consumer goods and services, includ-
ing those secured through State and local governments; (3) additions to the na-
tion's stock of capital not included in (1). While consumers receive income for
the production of all three types of goods and services, they can spend this
16
income only on (2), consumer goods and services. The rest of their income is
either drained off by taxes, or absorbed by personal saving. If the amount consumers want to spend on consumption exceeds the aggregate value of consumer
goods and services at the prices for which they were made to sell, a change in
one or both of these aggregates must occur to bring them to equality in the completed sale. Consumers may decide to save more than they had previously planned,
or they may be forced to save more by their inability to induce producers to
sell to them; producers may sell more by drawing down inventories, or they may
sell the same amount of goods at a higher price, or they may sell the same
amount of goods at the same price and turn away the customers whose wants they
cannot satisfy. Ordinarily the way in which producers select between these al-
ternatives, the effect of the nature of that selection on their future production plans, the effect of changes in production on consumer income, and, to
close the circle, the effect of changed consumer income on effective consumer
demand presents a very complicated chain of cause and effect which must be ana-
lyzed if the dynamics of changing national income is to be understood. We have
developed a technique for an analysis of this sort on a monthly basis which will
be presented in the final report.
But today, because consumer demand is not the dominant limiting factor in
production, the current problem presents a special case which is for two reasons
more readily analyzed than the usual situation: In the first place, the fact
that the economic machine is straining at its job of turning out butter and
bombs means that the wages, salaries, dividends, etc., distributed to consumers
in the course of making the butter and bombe are far greater than the cost of
the butter alone, even after consumers put aside some portion of their income
for a rainy day. Moreover, because of the ceiling placed on the increase in
that output by limitations of physical production and because of the urgency of
17
the demande for bombs, there is no chance for butter production to catch up with
the amount that consumers would want to opend if they were permitted to keep all
of their increased income. In the second place, the options that producers can
exercise in the face of redundant purchasing power are materially limited by
their inability to increase the physical quantity of goods offered for sale
(temporarily by decreasing inventories and eventually by increasing production)
This means that a rise in price is virtually the only way aggregate dollar demand can be absorbed; the chief practicable alternative is refusal to sell to
some of their actual or potential customers.
The Approach
To estimate the volume of taxes or compulsory saving needed by any spe-
cified date to prevent rising prices three questions must be answered: What
total amount of civilian production will our productive facilities and armament
needs permit by that date? How will this total be distributed between groups
(2) and (3), 1.0. between consumer goods and services and private capital formation? What income after taxes in the hands of consumers will make them want to
spend on consumer goods and services an amount equal to the value at present
prices of the attainable output of such goods and services? The difference between the answer to this last question and the total income paid out by business
and government in the course of producing armaments, consumer goods, and capital
items is the total amount of taxes or compulsory saving that must be imposed if
rising prices are to be avoided.
This statement of the problem purposely oversimplifies. The three basic
questions are closely related to one another; in addition, the answers to them
depend on the very result they are designed to yield, namely, the amount and kind
of taxes needed. For example, what amount of consumption expenditures will be
associated with any particular amount of income after taxes depends on the kinds
18
of taxes levied; consumption expenditures will be less if the taxes are paid primarily by very low income groupe than if they are paid by high income groups,
and 80 on. The interrelation of the three questions is exemplified by the dependence of the amount producers will want to add to their capital equipment on
the way the increased armament output 18 obtained. This is discussed in more
detail below, where the problem of diversion is considered, The manner in which
these interrelations are taken into account is indicated in the following sections, which describe how we give quantitative answers to the questions posed.
This description is in two parts -- first, in summary form, and then step by
step.
19
General Description
As was noted above, the Federal Government will by next June be spending $14
billion per year more on armaments than in June 1941. About $6 billion of this
$14 billion increase will be drained off by the anticipated increase in tax
receipts as a result both of the higher rates levied in the Revenue Act of 1941
and the higher level of business activity. There remains a flow of $8 billion of
purchasing power that will be exercising pressure on the price system. As we
have seen, none of this can be matched by an increased flow of goods for civilian
use. Indeed, even if the total flow of goods increases by as much as seems at
all possible, namely, $12 billion at June, 1941,prices (annual rate), the flow
of goods for civilian use will have to decrease by $2 billion if armament needs
are to be satisfied. And if we can increase output by only $9 billion, a not
unlikely possibility, the flow of goods for civilian use will have to decrease
by $5 billion. If prices are not to rise, the streams of purchasing power which
are now buying these quantities of goods must be sterilized.
To some extent the upward pressure on prices will be counteracted by forced
reductions in consumption and private capital formation through the imposition
of priorities; increased saving both by individuals, induced by the Treasury's
savings bond campaign, and by corporations, out of the income received from
government business; a somewhat lower level of capital formation because con-
sumption will cease to rise; and a number of other less important factors. On
the other hand, pressure in the opposite direction will be exerted by factors
such as the need for new housing because of changes in the location of the popu-
lation and for new types of capital because of changes in the composition of
consumption, and the increased proportion of total income flowing to wage earners
and other recipients of small incomes who ordinarily spend a large part of their
income on consumption.
20
The net effect of these factors depends in considerable measure on the extent to which the armement needs can be satisfied by employing currently idle
resources rather than diverting resources that are already being used for other
purposes. If a relatively large amount of diversion is needed, the restrictive
effect of priorities and unavailability of goods will be correspondingly severe,
less capital formation will be required in view of the smaller change in the
location of the population, but more because of changes in the composition of
consumption. In this case, if there were no change in prices and consumer disposable income (i.e., income after taxes or compulsory saving achieved by ob-
ligatory purchase of government securities not redeemable until after the
crisis), private capital formation would, by June, 1942, probably be running at
an annual rate about $1.8 billion below that of this June and consumption at an
annual rate about $400 million below this June. If diversion is relatively
small, on the other hand, capital formation would probably decline by less then
a billion dollars and consumption would rise by almost a billion. In both cases,
something like a billion dollars of the increased government expenditures might
be retained by corporations in the form of cash or investments and never paid
to consumers.
The total upward pressure on prices will be least if there is relatively
large diversion and, at the same time, the total flow of goods can be increased
by $12 billion, at June, 1941, prices. In this case, the $2 billion necessary
reduction in civilian output would come about automatically if prices and consumer disposable income were kept unchanged from the June, 1941, level. The $8
billion excess purchasing power being distributed by the government would be
offset by the reduction of something over $2 billion in purchasing power distributed by others and by the $1 billion increase in corporate retained income,
leaving some $5 billion as the net excess purchasing power. This is the annual
21
rate at which, by June, 1942, the government would have to be absorbing excess
purchasing power through additional taxes or compulsory saving to keep prices
from rising.
The greatest upward pressure will be exerted on prices if there 10 relative
ly little diversion and the total flow of goods can be increased by only $9
billion at June, 1941, prices. In this case, if prices and consumer disposable
income were kept constant, the decline in capital formation would about offset
the rise in consumption. Consequently, no part of the $5 billion reduction in
civilian output will occur automatically and there will be no offset to the $8
billion excess purchasing power being distributed to consumers other than the
increased corporate retained income. In order to keep prices constant, the gov-
ernment will have to drain off not only the remaining $7 billion excess purchasing power but also enough additional purchasing power to reduce expenditures by
consumers and the producers of private capital goods by $5 billion. In order to
accomplish this end, about $2 billion additional purchasing power would have
to be drained off. No more than this would be necessary because, if the individuals from whom this money were withdrawn spent less, others would have smaller
incomes and would in turn spend less, and with the decline in consumption,
producers of private capital goods would add their mite by reducing their expenditures by more than has already been allowed for. In all, then, under the
less favorable circumstances postulated, government receipts by June, 1942, will
have to be at an annual rate $9 billion higher than will be attained without
additional measures, if the price rise is to be averted.
If no measures are taken to increase government receipts by the suggested
amounts, a very substantial price rise is in prospect by June, 1942. Under the
most favorable circumstances, the Federal Government and producers of private
capital goods will be distributing some $6 billion more in purchasing power
22
than they were this June. About $2 billion of this $6 billion might be absorbed
by personal and corporate saving. The rest would be spent on consumer goods and
services, thereby increasing the incomes of others who would in turn spend more
than previously. Just what the total increase in consumers' spending would be
it is difficult to specify, but it would almost surely be at least $8 billion a
year.
Last June, consumers were spending at an annual rate of about $70 billion;
next June, with no greater physical amount of goods and services available for
purchase, they would be spending at an annual rate of at least $78 billion. The
result is that prices would be driven up about 10 per cent. In the face of 80
sharp a rise in consumer spending and hence in prices, expenditures on private
capital goods would probably not decline by $2 billion, but might instead actually rise. More than that, the government's own spending would prosumably in
crease, since it would have to pay higher prices for the goods it purchased
(its tax revenue would increase too, but probably not 80 much). The rise in the
cost of living would strengthen existing tendencies toward wage increases, thus
raising costs, and therefore prices, still higher. Hence, the cost of living
would, in fact, have risen by much more than 10 per cent next June. To prevent
this widespread rise in prices by direct price control alone would require a
degree of rationing and price fixing that could be enforced only by policing
on a totalitarian scale.
Our estimates of the amounts that the government must withdraw from con-
sumer income to prevent such a price rise by fiscal measures are necessarily
rough and rest heavily on personal judgment and none too well informed guesses.
We have tried to keep these to a minimum and to express them in the form of a
range rather than a single figure; but there is no escaping the intermixture of
fact and judgment in any estimate for the future. Additional date that were
23
either not available to us, or that time-limitations made it impossible for us
fully to exploit would enable the margin of error in our estimates to be somewhat reduced. Of even more importance, the estimates should be continually re-
vised in the light of changing events so as to provide an up-to-date basis for
policy decisions. Any forecast is bound to be in error, and the amounts involved
are 80 large that errors could have serious consequences unless subject to
fairly prompt correction.
Step by Step Analysis
The role that personal judgment plays in our estimates, and their susceptibility to periodic revision can perhaps best be indicated by supplementing the
summary statement given above by a brief step by step description of our method.
All money figures given in the course of this description are expressed as
annual rates in billions of dollars. "Private capital formation" includes
throughout state and local construction and capital goods ultimately destined
for defense use but privately financed (that is, their cost does not appear d1-
rectly, as such, in the official estimates of defense expenditures) as well as
plant and equipment for private business use, inventory change, residential construction, and the net export balance.
1. Dates were selected as the beginning and terminal points for which estimatee are to be obtained. We have used June, 1941, and June, 1942, in our de-
tailed analysis. As soon as possible, similar estimates should be made for
other intermediate dates.
2. Certain basic assumptions were made:
a. The progress of the war and America's relation to it will not have
changed sufficiently by June, 1942, to alter fundamentally the size of the defense program, the state of public morale and the general international setting
for domestic probleme.
24
b. General price increases in consumer goods should be prevented, al-
though adjustment in the price of specific commodities to facilitate transfer
of resources may occur to some extent.
3. Probable increase in the physical output of the economy was estimated
in accordance with the reasoning described on page 10. A range of 9 to 12
billion dollars in June, 1941, prices was selected as a reasonable one.
4. The probable increase in defense spending was set at $14 billion on the
basis of the October 5 Bureau of the Budget estimate that defense spending would
be at an annual rate of $24 billion in June, 1942, and Treasury figures indicating that defense spending in June, 1941, was at an annual rate of $10 billion.
Non-defense spending by the Federal Government was assumed to be the same in
June, 1942, as in June, 1941. On these assumptions, the Federal Government will
be adding $14 billion more to the income stream in June, 1942, than it was in
June, 1941. (In principle, some allowance should be made for expenditures on
existing assets, since at least some part of these do not add to the income
stream. However, this allowance is of no quantitative importance and can be
neglected.)
5. An increase in defense expenditures of $14 billion can only be achieved
if both new and already employed resources are utilized in the defense program.
The estimate of the extent to which resources currently employed elsewhere will
be diverted to defense work must be based on very crude judgments involving
criteria such as achievements during the past year, Bureau of Labor Statistics'
estimates of the extent to which increased labor needed in defense industries
will come from unemployed or new rather than now employed workers, the expensi-
bility of the supply of certain crucial raw materials such as steel and eluminum
and other non-ferrous metals, the plant bottlenecks in the machine tool and
other machinery industries, the amount of priorities unemployment and the extent
25
to which the administration is willing to force the utilization of plants affected by it. Obviously, these judgments ought to be refined on the basis of an
industry by industry analysis.
In view of the importance of the estimate of diversion and the crudeness
of the information on which it must be based, we have expressed our estimate in
the form of a range. This range, like all others that we use, is not made 80
wide as to include all possible values; rather, it is intended to be wide enough
to include all the likely cases (something like the range between the first and
third quartiles of a frequency distribution). AB a minimum, we assume that di-
version will amount to $5.5 billion. This implies that there are $8.5 billion
of resources now idle but available and suitable for defense work. As a maximum,
we assume that diversion will amount to $9 billion, implying that the use of re-
sources now idle will account for $5 billion of the $14 billion increase in defense output. On the basis of even elighter evidence than that on which this
range is based, we have assumed that two-thirds of the diversion will come from
the consumer goods industries and one-third from producer goods industries.
6. The diversion of resources to government use and the other changes in
the economic picture that are clearly foreshadowed would lead to changes by
June, 1942, in the expenditure patterns of both consumers and producers of
private capital goods. These changes might either counteract or intensify the
upward pressure on prices exerted by the increased government spending. In order
to isolate these changes in expenditure patterns from the effect of increased
government spending, we assume that consumer outlay is the same in June, 1942,
as in June, 1941, in estimating the probable change in expenditures by the producers of private capital goods; and that consumer disposable income (income
after taxes or forced saving) is the same, in estimating changes in consumer
outlay. To the extent that these assumptions turn out to be incorrect, the estinates must be modified at a later stage.
26
7. Starting, then, with our preliminary assumption that consumer purchases
at a steady price level will remain constant, we need to determine the probable
change in private capital formation. The major variables taken into account are
the disappearance of the increase in consumer outlay; changes in the relative
importance of the production of different aorte of consumer goods; changes in
the geographic location of industry and consumers; changes in the amount of
privately financed plant expansion for defense (more precisely, whatever defense
plant expansion is not included in the estimate in step 4 above); changes in the
export balance; the incidence of diversion through priorities, allocation, or
the bidding away of resources. Estimates were made of the impact of each of
these variables on residential construction, inventory change, plant and equipment purchases, construction by state and local governments, and export balance.
These estimates were sometimes in the form of a single figure, at other times,
of a range. In all cases, separate estimates were made for the minimum and maximum diversion assumptions (step 5). For example, the estimates of the change
in inventories that would be caused by shifts in the composition of consumption
were made somewhat 88 follows: Inventories were increasing at a rate of about
3.0 billion dollars per year in June, 1941. Of this total perhaps a half, or
$1.5 billion, was in the consumer goods industries (a somewhat smaller propor-
tion of inventories than of production, since government expenditures and capital formation increased faster and required, on the average, heavier inventories
than the consumer goods fields). A change in the composition of consumption will
imply a shift to fields in which inventories are relatively small -- services,
perishable and semi-durable goods. The shift will be smaller under the minimum
transfer assumption than under the maximum. In the light of our estimates of
the amount of diversion, we evaluated the probable change in inventories of conmer's goods that would be caused by shifts in the composition of consumption
a
27
as .4 billion dollars under the minimum and -.7 billion dollars under the
maximum diversion assumption; i.e., the annual rate of increase would be smaller
by these amounts in June, 1942, than in June, 1941.
Since many of the individual estimates are in the form of ranges, the
aggregate of the estimates for all component items yields one range for the
minimum diversion assumption and another range for the maximum diversion assump-
tion. We have used the central pointe of these ranges as our final estimates.
(Computing the final range by combining the minimum under one diversion assump-
tion with the maximum under the other would clearly yield too wide a range since
it would require the coincidence of extreme figures for all component items.)
These estimates are that under the minimum diversion assumption, private capital
formation would be $.8 billion less in June, 1942, than in June, 1941, and
under the maximum diversion assumption, $1.8 billion less.
8. The estimates of probable change in consumer outlay if prices and consumer disposable income remain the same, like the estimates of probable change
in capital formation, were made by evaluating the separate influence of the
major factore affecting consumer spending. The factors taken into account are:
change in cash anticipatory buying; change in installment purchases; increasing
unavailability of goods because of diversion; the defense savings bond campaign
and similar patriotic appeals to reduce consumption; a lead or lag in the adjustment of cash spending to changing incomes; changed distribution of consumer
disposable income.
The effect of the last factor listed -- changed distribution of income depends greatly on the means taken to keep consumer disposable income constant
in the face of expanded government spending. We have assumed that this will be
done by means of taxes that will fall more heavily on the higher income groupe
(viz. , those with incomes of more than $1,500) than on the lower. Since a large
28
part of government expenditures takes the form of wages and salaries, this means
that we anticipate substantially greater equality of consumer income after taxes
in June, 1942, than in June, 1941. Further, it means that many individuals
in the higher income groups will have smaller incomes after taxes next year
then this. There may well be a tendency for some of these individuals to adjust
their spending and saving pattern, in part at least, to their income before
rather than after taxes. We have tried to take account of this tendency in our
estimates.
In estimating the influence of unavailability of goods because of diversion
of resources to the defense program, we have differentiated between installment
and cash purchases, since it 80 happens that the kinds of goods that will be
made unavailable are very largely purchased on installment. We assume that a
reduction in installment purchases will involve little additional spending on
other goods, but that, on the other hand, the bulk of the reduction in cash purchases will be reflected in increased spending on other goods.
According to our estimates, minimum diversion of resources to defense would
mean an increase of $0.8 billion in consumer outlay by June, 1942, if prices
and consumer income after taxes or forced saving remain constant. Maximum di-
version would mean a decline of $0.4 billion.
9. The combined effect of the changes in capital formation and consumption
estimated in the two preceding steps would be to leave total private spending
unchanged under the minimum diversion assumption, since the decrease in capital
formation ($0.8 billion) would be matched by the increase in consumer outlay
($0.8 billion), and to reduce total private spending by $2.2 billion under the
maximum diversion assumption ($1.8 billion decrease in capital formation plus
$0.4 billion decrease in consumer outlay). In view of the small changes in can-
super outlay we have not tried to take account of their repercussions on capital
formation (see step 6).
29
10. Comparison of the maximum probable increase in physical output of $12
billion (step 3) with estimated expansion in defense spending of $14 billion
(step 4) indicates that civilian output must be reduced by $2 billion. With maximum diversion, slightly more than this decrease -- $2.2 billion -- would
be
forthcoming without a reduction in consumer disposable income. In this case, a
price rise would be forestalled if the amount of additional taxes (or forced
saving) were sufficient to keep consumer disposable income constant. The amount
of taxes needed for this purpose is estimated in step 11. With minimum diversion,
none of the needed decrease in civilian output would be forthooming without reducing consumer income after taxes. In this case, prevention of a price rise
requires a reduction of consumer income after taxes by an amount sufficient to
reduce private spending by $2 billion. The amount of taxes needed for this purpose is estimated in step 12. Step 13 gives corresponding estimates for the
smaller increase in total output of $9 billion (step 3).
11. To keep consumer income after taxes constant, the whole $14 billion
increase in government spending must be offset by reduction in private spending,
increased retention of profits by corporations, or increased taxes and com-
pulsory saving. We saw in step 9 that $2.2 billion would be offset by the reduction in private spending. Some part also would probably be offset by increased retention of profits by corporations. Although the heavy taxes in the
Revenue Act of 1941 might tend to decrease business retained income, the ac-
celerated tempo of business activity, in conjunction with the lag in dividend
distributions and the tendency to set up high tax and other reserves, ought to
increase it. Accordingly, we may, more for purposes of illustration than because
we have any great confidence in the guess, assume that it remains the same on
old business and is about 10% on new business, thus increasing by 10% of $12
billion or, roughly, about $1 billion. (The same estimate is used in the steps
30
that follow.) There remains about $10.8 billion [14 - (2.2 + 1)] to be offeet
by increased taxes or forced saving. About $6 billion of this will be forthcoming from existing taxes - this increase in the annual rate of tax receipts
between June, 1941, and June, 1942, reflects both the higher level of business
activity and the higher tax rates enacted in the Revenue Act of 1941. The rest -
$4.8 billion - is the amount of additional taxes or forced saving needed by
June, 1942, to avert inflation if total output increases by $12 billion and
diversion of resources currently employed accounts for $9 billion of the $14
billion increase in defense spending.
12. If output increases by $12 billion but there is only $5.5 billion of
diversion, private spending would remain the same if consumer disposable income
remained the same. To keep consumer income the same would call for $13 billion
additional taxes or compulsory saving, since the only offeet to the $14 billion
increase in government spending would be the increase in retained corporate
profits. But this would not be enough to keep prices from rising. Enough additional taxes are needed to reduce private spending by $2 billion.
To estimate how much more taxes would accomplish this end is a difficult
problem. Increased taxes will reduce the spending of those who pay the tax;
this will reduce the incomes of others who in turn will reduce their spending,
and 80 on. Moreover, these reductions in consumer spending may lead producers
of private capital goods to reduce their spending more than we have already
allowed for. We have here the familiar multiplier process at work whereby succeseive withdrawals of income generate a larger total reduction of income than
the initial reduction or successive respendings of income generate a larger
total addition to income than the initial addition. This process is, of course,
at work at all times and with respect to all parte of the income stream. But we
have heretofore been able to ignore it because we have been concerned with
31
keeping total income constant. As a very rough approximation of the multiplier
relation we can assume that the government must withdraw from (or add to) the
income stream about 1/2 or 1/3 of the desired decrease (or increase) in spending
The figure of 1/2 would be precise if consumers reduced consumption by 2/3 of
any reduction in income (this is the proportion for 1941 levels of income suggested by Appendix c, Consumer Expenditures in the United States, National Re-
sources Committee, 1939), if all indirect effects were encompassed, and if producers of capital goods did not change their spending in response to the reduction in consumer spending. Of course, not all indirect effects are encompassed
since additional taxes would have been in effect only a fairly short time by
June, 1942. However, this would probably be more than counterbalanced by the
reduction in private capital formation. The figure of 1/3 implies a sharper
reaction on the part of the producers of private capital goods. If a sizable
reduction in private spending were called for, the use of such a mechanical
figure would be too crude to be acceptable. It would be preferable to try to
estimate the reflex influence of the decline in consumption on capital forma-
tion directly -- somewhat along the lines of our analysis in step 7. Similarly,
a more detailed analysis of consumer reaction would be needed. However, our
problem is to reduce private spending by only $2 billion; the possible error
made by using the crude multiplier relation is too small to justify much addi-
tional effort. Applying the 1/2 to 1/3 range gives $2/3 to $1 billion as the
additional taxes or compulsory saving needed to reduce private spending by $2
billion. Total additional taxes or compulsory saving needed are therefore about
$14 billion, and taxes over and above the 1941 Revenue Act, $8 billion.
13. If total output increases by only $9 billion (instead of $12 billion)
by June, 1942, civilian output must decline by $5 billion (instead of $2 billion).
The estimates of tax requirements in steps 11 and 12 must accordingly be
32
increased by enough to bring about an additional decline of $3 billion in private spending. We may make the adjustment by the method used in the preceding
paragraph -- namely, by using the crude multiplier relation -- though if the desired decrease in private spending were any larger, the related change in capi-
tal formation ought certainly to be estimated. Applying the 1/3 to 1/2 range
used here gives 1 to 18 billion dollars as the additional taxes or compulsory
saving needed to reduce private spending by an additional $3 billion. The total
amount needed over and above the Revenue Act of 1941 is about $6 billion under
the maximum diversion assumption and about $9 billion under the minimum diversion assumption.
The accompanying table summarizes our estimates of the amount of taxes or
compulsory saving over and above the Revenue Act of 1941 needed under alterna.
tive combinations of assumptions. The estimates in the tables are given to the
nearest tenth of a billion, though in the text we have rounded them to billions.
Increase in Total Output
at June, 1941, Prices
Amount of additional revenue
needed with Diversion of
$5.5 billion
$9.0 billion
$12 billion
4.8
8.0
9 billion
6.0
9.2
33
Selection of Appropriate Tax Measures
What measures of taxation or compulsory saving are available to take money
from consumers in a quantity sufficient to avert inflation? How much choice is
there in fact between taxation and compulsory saving or among various kinds of
taxes?
Compulsory saving -- the obligatory purchase of government securities not
redeemable until after the emergency -- has two advantages over taxation:
first, it promises a future payment for present sacrifice and thereby enables
8 greater indusement to be offered to attract individuals to defense work;
second, it can provide an automatic mechanism for distributing purchasing power
when the driving force of the armament program ceases. Neither advantage seems
sufficient to justify at this time the imposition of compulsory saving rather
than taxation. Compulsory saving would mean as great present sacrifice of goods
and services, and would further intensify the post-war problem of a large public
debt. There is little reason to believe that the taxes which would repay the
debt -- or even pay the interest on it -- would be any more progressive than
those which can be levied now. Moreover, we are far from the point when a future reward will be the only inducement we can offer to secure greater exertion.
As our previous analysis has shown, the defenso program does not require a dras-
tic restriction of consumption for the time being; it merely requires that
consumption be kept slightly below the level of June, 1941 -- a level somewhat
higher than any achieved during the preceding decade. At BO high a level of
consumption there is considerable room for offering greater inducements to some
at the expense of the consumption of others. The second advantage of compulsory
saving -- the automatic distribution of purchasing power after the crisis -- can
be attained equally well by remitting certain types of taxes at that time. And
both methods are probably inferior to others that could be adopted, since neither
discriminates among individuals on the basis of need.
34
The time to collect the tax is now, when the government is adding large
sums to the income stream through the defense program. The choice among various
taxes probably narrows to three: some form of individual income taxation, a
retail sales tax, and a sales tax on manufacturers of finished goods, 1.e.,
goods ready for consumption.
A tax on "value added" by manufacturers, and possibly also wholesalers and
retailers, is perhaps a fourth possibility, but the exemption of particular
commodities like food would be impracticable under such a tax. An exemption of
food would be necessary if it were desired to avoid a severe burden on those
with very low incomes -- say, less than $500 a year.
A tax on the sales of all products, including semi-finished and raw products, would favor the vertically integrated firm where the product passes from
raw to finished state with no sales, and it would also favor some kinds of
finished products, commonly produced with less processing and less marketing,
over the rest.
A series of heavy excises -- production taxes or sales taxes on specific
products -- could raise the necessary money only if (1) 80 many products were
covered that the result was more nearly a general sales tax with exemptions, or
(2) the rates on a few products were very high, resulting in widespread distress
among the employees and investors of those few industries.
Direct property taxation is for all practical purposes forbidden the Federal Government under the constitutional clause that requires apportionment of
such taxes among the states on the basis of population.
The taxation of corporate profits has some tendency to check inflation by
removing one source of demands for increases in wages, although it also tends to
lessen the employer's resistance to whatever demands are made. It does not
check consumer spending enough to be of major significance for present purposes
35
since its only direct action is in decreasing the amount of dividends (but pre-
sumably not of interest) paid out. Also, a mere flat-rate addition to the corporate income tax is sure to weigh heavily on many small-income stockholders who
are probably overburdened even by the current rate; hence the advantage from the
viewpoint of equity would be at least doubtful. The undistributed profits of
corporations present a pressing problem, but one too complex to be explored in
this report. Taxation of the purchase of capital goods by business firms might
be useful in lessening excess civilian drain on scarce materials, etc., that had
slipped through S.P.A.B.'s allocation net, but the quantitative aspects of this
problem seem unpredictable, at least in the present study. Hence, although we
have by no means entirely ignored the possibility of utilizing further business
taxation in an anti-inflation program, a variety of considerations has induced
us to concentrate on the taxation of consumers as the overwhelming, if not the
sole, element in such a program.
The Supplementary Personal Income Tax
Even individual income taxation would not be reasonably effective in check-
ing the threatened inflation if it took the form simply of an addition to the
rates of the existing individual income tax. This tax is collected only after a
lag of about a year; income received in January-December, 1942 would result in
tax payments only in March, June, September, and December, 1943 (with some ex-
ceptions). Unless a very heavy tax on 1941 incomes, additional to that imposed
by the Revenue Act of 1941, were enacted, the $5 billion to $9 billion extra
revenue that will be required by next June (annual rate) could not be obtained
under traditional income tax methods. Two devices suggest themselves: quarterly
prepayment on the estimated income of the current year; and collection at
source. These techniques would not need to apply to the income tax as it stands
in the Revenue Act of 1941 (hereafter called the "regular" income tax); they
36
would be necessary only for the supplementary tax designed to raise (as of June,
1942) $5 billion to $9 billion a year.
The quarterly prepayment method is the only one applicable to partnership
and proprietorship income, including farm profits, and to rents and probably also
royalties (80 much rent is paid by a large number of small tenants). The Treasury would send each of these taxpayers a tax bill based on one-quarter of his
preceding year's net income, and the taxpayer could, if he desired, pay instead
on a return based on his actual income for the quarter. The regular annual return after the close of the year would allow adjustment for overpayments
(refunds) or underpayments.
Perhaps neither this method nor collection at source would be successful in
the case of domestic servants.
The choice between the two methods remains available, however, with respect
to much the largest segment of the income stream -- wages and salaries in general,
and interest and dividends.
Two considerations weight the balance heavily in favor of collection at the
source: the probable necessity of changing the rate of the supplementary income
tax before the calendar year 1942 is out, and the difficulty of inducing millions of small taxpayers to file quarterly returns on estimated quarterly 1942
income.
The rate would probably have to be changed because of the difficulty of
forecasting the amount of taxation needed to check inflation. For example, it
might be seen by September, 1942, that retail prices had risen by, say, 2 per
cent or more a month in June, July, and August, despite the supplementary tax of
17 per cent suggested below; hence Congress might deem it imperative to step up
the rate to 20 per cent or 80 for the October-December quarter. While such a
changing of rates is no insuperable obstacle to the filing of quarterly returns
37
and quarterly prepayments on estimated 1942 income, it might result in considerable confusion and many errors in payment.
The task of inducing millions of small taxpayers to make quarterly prepay-
mente is, however, self-evident and decisive. Even if they understood the requirements and were eager to fulfill them, they would in many cases find themselves without enough money to pay. Monthly prepayments or even weekly prepay-
ments would be necessary, to get the money while the taxpayer still had it.
If personal exemptions and credit for dependents were to be granted under
this supplementary tax, each taxpayer would have to file a return once a year,
perhaps as part of his regular income tax return (in March, 1943, for example),
to ascertain whether he was entitled to some refund because too much had been
collected at source (during 1942). In some cases, too little might have been
collected; the system can be set up, of course, either to result almost entirely
in refunds, or almost entirely in supplementary payments, or in a mixture of
both.
Those who had prepaid in 1942 on an estimated 1942 income would in any
case have to file a correcting return in 1943. Moreover, if the quarterly rates
had been changed during the year, the annual return could be made the occasion
for applying to the whole year's income an average rate, granting refunds (or
credite) against the regular tax for over-payments, with an additional tax for
underpayments. This would avoid inequities due to taxing at different rates
incomes arising in different parts of the year.
Some simplicity in administration and in compliance could be gained by eliminating deductions, personal exemptions and the credit for dependents. To
raise the necessary $5 billion or $9 billion would require a rate of from 5 per
cent to 10 per cent if no exemptions, credits and deductions whatsoever were allowed; and experience might soon show the need for a rate still higher. The
38
burden on those with very low incomes -- families with less than, say, $800 or
$1,000 a year -- would be severe; and, for the purpose of checking inflation, not
essential. The result would in our opinion be decidedly unfair, because the
added tax burden would be BO regressive. Moreover, entirely aside from the
issue of unfairness, there is the productive power of the economy as a whole to
consider. The restriction that would be forced in the consumption of the barest
necessities would impair the productive powers of the working members of these
lowest-income families and also increase demands on government and private
sources for cash relief, free food, free medical service, and SO on. Finally,
it is not clear that there would be a net administrative advantage. The task of
covering the millions of income recipients of less than $500 a year would be
huge. For these reasons, the present discussion assumes that personal exemptione and a credit for dependents would be allowed under the supplementary income tax.
How large might they be? Without committing ourselves finally on this
point, we mave made estimates of revenue on the basis of $1,000 for married
couples, $500 for single persons, and $300 for each dependent, chiefly because
we happen to have available some data on tax base and number of taxpayers under
these hypothetical provisions. These are the exemptions that will be assumed in
the present discussion. If, however, much more than $5 billions has to be
raised by a supplementary income tax, exemptions of $800 and $400 (or thereaboute) and a credit of $200 for each dependent might be considered.
The exemptions of the regular income tax, given the rate schedule of that
tax under the Revenue Act of 1941, might or might not be reduced to the level of
the supplementary tax. If they were, there would presumably be less need for
actual refunds on the supplementary at-source and prepayment tax, since there
would be a greater opportunity for subtracting from the regular income tax
39
otherwise due at the time of filing the annual return in March, 1943, inadvertant
overpayments in 1942 on account of the supplementary tax. This device could in
any case, of course, be used by those taxpayers who would pay something on the
regular tax even if the exemptions and credit (for the regular tax) were left as
high as they are in the Revenue Act of 1941. If the exemptions and oredit were
lowered for the regular tax, the revenue needed from the new tax would be some-
what less, but probably not enough to affect estimates to the nearest billion
dollars. On the other hand, such a decrease in exemptions and credit would
probably result in a somewhat less progressive rate structure for the income tax
as a whole.
The allowance of deductions like interest paid, state and local taxes paid,
professional or occupational expenses, and 80 on, to arrive at net income, under
the source-collected and prepayment tax, would presumably be seriously needed
for many types of taxpayer. Since it could not readily be taken into account in
setting the amount to be deducted at the source, it would enhance the need for
refunds, but only in those cases where the regular tax otherwise due was not
large enough to absorb the overpayments that had been made on this account (plus
the overpayments connected with the exemptions and credit). In the present discussion it is assumed that under the supplementary tax the same deductions are
allowed as under the regular tax.
Could the rate of the supplementary tax be graduated? While it would not
be impossible to do so, in view of the opportunity for correction in the annual
return filed after the income year had ended, it would complicate matters somewhat. It would probably make advisable the deduction at source at varying rates.
Not every employee, of course, would need to be accounted for at a different
rate; indeed, if the rate-graduation brackets of income were fairly wide, most
of an employer's deductions from payroll would be made at only two or three tax
40
rates. But the personal exemption minimum of $500 itself introduces a factor
of graduation.
In general, there is no urgent need for graduation in this supplementary
part of the income tax. Indeed, in view of the high rate needed for this supplementary tax on the average -- say between 15 and 20 per cent -- its rate will
have to become regressive at the high level of income if it, in combination with
the regular income tax, is not to take more than 100 per cent of the taxpayer's
income. Tentatively, we suggest introducing this feature by levying the supplementary rate, not on the net income (after exemptions and credits), but on that
net income minus the regular tax payable on it. The withholding would be done
at a flat uniform rate on income less pro-rated exemptions and dependent credit;
the adjustment to place the tax on income less regular tax would be made in the
annual return. If the result were deemed to be too regressive an addition to
the tax structure, the rates of the regular income tax could be adjusted to
counterbalance this regressivity.
Sales Taxes
How does a supplementary source-collected (and prepaid) income tax of this
kind compare with a tax on the sale of finished manufactured goods, and a tax
on retail sales? There are a considerable number of significant points on which
these taxes are either bound to differ or might differ, but the points of chief
importance are probably as follows:
1. The supplementary income tax would keep the retail price level lower
than would the manufacturers sales tax. The income tax would keep a large part
of the consumer's income from appearing on the retail market at all. The sales
tax would not prevent it from appearing on the market (and hence pushing prices
up higher than they would be under the supplementary income tax), but would ab-
sorb it after it had reached the manufacturer. The manufacturers sales tax
41
would, therefore, make the amount of income that the manufacturing firms will
be able to pay out to stockholders, partners, and proprietors less than it
would have been 1f no additional tax at all had been levied. Perhaps, indeed,
some of these profits that would be present under a no-tax policy would cause
increases in wages. In these respects the sales tax would keep the price level
lower than it would be if no additional taxation of any Bort were imposed. But
the price level would still be higher than under a supplementary income tax. A
more detailed analysis, to be submitted in the final report of the present
study, will show further modifications to be made in this broad generalization,
but the prospect as stated here 18 near enough to accuracy for the present pur-
pose, i.e., for choosing among the major revenue possibilities.
2. The exemptions under the supplementary income tax make no allowance for
differences in cost of living in various localities. A $1,000 income means much
less in a large metropolitan area than it does in a country town; generally, it
means less in the northern United States, where fuel and clothing bills exceed
those of the South. Some day it may be possible to vary the personal exemption
and credit for dependents to allow for such differences; at the present, it is
impracticable to do BO. A manufacturers sales tax that exempts dwelling rental
thereby automatically makes some allowance for regional differences in cost of
living, for it is in dwelling rental that much of the difference is found. Over
a period of decades the sales tax would raise the cost of dwelling accommodation
unless building materials were exempted, but over the shorter period it would be
virtually without direct effect.
3. Complete exemption of families and single persons with extremely low incomes is practicable under the supplementary income tax; but not under a manufacturers sales tax.
42
4. Millions of individuals would come into direct contact with the Federal
Treasury through filing returns and claiming refunds or making additional
payments under the supplementary income tax. This would create a mixture of
civic consciousness and irritation. We estimate that under exemptions of $1,000
and $500, and with a $300 credit for dependents (and with no earned income
credit), the supplementary income tax would make at least 19,700,000 families
and single individuals taxable; the total might well prove to be 10 per cent to
20 per cent higher. The sales tax would in general be paid by persons (business
firms) who were already familiar with Federal taxation.
5. Many farmers escape the income tax because the cash personal exemption
is set against an income that is in large part non-cash, and hence readily wipes
out the remaining cash segment of the income. The sales tax, to be sure, fails
to reach farm-produced, farm-consumed income, but its application to clothing
and household supplies makes it at least somewhat effectual in places where the
income tax is not.
S. To check consumption without allowing a rise in price, somewhat more tax
revenue might be required under the supplementary income tax than under a salee
tax if, as is commonly assumed, a larger proportion of the former would be paid
out of savings than the latter. But both taxes, as here set up, are paid so
largely by those with low incomes that it may be doubted that this difference
is quantitatively important.
7. Administratively, there is probably not enough to choose between the two
measures to influence the decision appreciably, inview of the far weightier issuee involved. Both measures are practicable. It would probably be desimable to
exempt manufacturers with less than, say, $5,000 sales a year, in view of their
large numbers and small total sales. Both measures would require new branches
in the Internal Revenue Bureau. The income tax could not function well for low
43
incomes without a large number of local offices throughout the country where the
puzzled taxpayer filling out his annual return could go for brief advice. The
sales tax would necessitate a licensing system to prevent double taxation of
a finished article sold to a wholesaler and resold to a manufacturer for sale
by him, and, in general, would require either a great expansion of the division
now handling manufacturers' excises, or a whole new division. An important point
of definition, which influences the administrative task considerably, arises
in the sales tax; are "finished goods" to include producers' goods, like
machine toole? It is inconsistent to include them while excluding raw materials
that enter into the finished product, but the inconsistency 18 found in virtually all tax laws here and abroad.
On most of these seven pointe a retail sales tax makes a considerably
better showing than the manufacturers' sales tax, except that there would be
more taxpayers to cover; exemption, either in law or in fact, would probably
have to be granted to thousands of small retailers. The retail tax would be decidedly better if some plan could be devised for allowing complete exemption
to all persons with incomes under, say, $500, to all married couples with incomes under $1,000, and to all dependents to the extent of $300. 1 Such a plan
has never been tried; but it might be workable if the taxpayer were given a
book of coupons, up to the limit of his (or his family's) exemption, the
coupons to be valid in payment of the tax by the retailer. We could not advocate such a device without far more study than we have been able to give to it,
but it obviously deserves some consideration. If the retail tax were stated
separately from the price, the price level as the consumer would view it might
not furnish quite 80 much fuel for wage-increase demande as would a rise in
prices under no tax or a manufacturers' sales tax (the comparison with the
1. We are indebted to Dr. Lagzlo Eckor-Racz for this suggestion.
44
supplementary income tax raises some complex questions). If rent were not taxed,
the regional variations in cost of living would be taken somewhat into account.
Farmers might be taxed somewhat more than under the income tax. On the other
hand, use of retail salee tax by the Federal Government might meet with strong
opposition from those states already using it for their own purposes. None of
the state rates exceed 3 per cent. At least until the practicability of allowing
personal exemptions and credits is thoroughly explored, and perhaps even then,
our choice remains the supplementary income tax.
Rates Needed for the Supplementary Income Tax
How large a tax rate would be needed if the supplementary income tax alone
were to be yielding, in June, 1942, from $420 million to $750 million, 1.6., an
annual rate of $5 billion to $9 billion? On the basis of a considerable amount
of research that we were able to carry through in this field during the past two
months, and which will be set forth in detail in our final report, we estimate
that the taxable net income, after deductions and after personal exemptions and
credit for dependents (but without any earned income credit) would amount to at
least $26.4 billion on calendar 1941 incomes. For 1942 incomes this figure could
presumably be raised to about $29 billion. No deduction needs to be made for
evasion, unless the tax is administered less efficiently than the regular income
tax has been, for the method of deriving the estimate allows, roughly, for whatever degree of underreporting (and non-reporting) has characterized the regular
tax. Within the rough estimates used here, no allowance needs to be made for
added cost of administration (the added cost, to set up local offices for advice
to taxpayers, to handle refunds, and 80 on, would perhaps not exceed $100 mil-
lions, or from about 1 per cent to 2 per cent of the added revenue).
Consequently, if new revenue at the rate of $5 billion a year was needed,
tax rate would have to be No or 17 per cent (only applicable, it will be
45
recalled, to the taxable income, that is, the part of the net income that is left
after deductions and after the personal exemption and the credit for dependents)
9
If $9 billion were needed, the rate would have to29'
be or 31 per cent of
the taxable income. For general purposes we may use a central figure, $7 billion,
with the corresponding tax rate, on taxable income, of 24 per cent. Thus a married couple with no dependents and a net income (before exemptions and credit)
of $1,200 would pay (at the 24 per cent rate) $48 in supplementary income tax.
The husband, we may suppose for illustration, is receiving a monthly salary of
$110 and is paying out $120 a year in interest and state and local taxes, and
2
has no other deductions. He files with his employer a statement of family status,
claiming $1,000 a year exemption. This, divided by 12 months, gives $83.33 a
month to be applied as exemption against the $110 salary, leaving $26.67 to
which the employer applies the 24 per cent rate in ascertaining how much to
withhold and turn over to the government each month -- viz., $6.40, or $76.80
over the year. The following March, the couple file a return, showing $1,320 income, less $120 deductions, or $1,200, minus a $1,000 exemption, leaving $200
taxable at 24 per cent, giving a tax of $48. Against this is applied the $76.80,
showing an overpayment of $28.80, which the government refunds (perhaps in de-
fense stamps and savings bonds). If the exemption of the regular income tax has
also been reduced to $1,000 on 1942 incomes, while the rates have remained as in
the Revenue Act of 1941, this married couple would deduct the $28.80 overpayment
from the regular tax otherwise due. This would be $15.20, leaving a refund due
of $13.60. Under the device suggested above to avoid more than 100 per cent taxa-
tion in the higher ranges, the 24 per cent rate would, in the annual return
submitted in March, 1943, be applied only to $200 minus $15.20 (regular tax),
or $184.80.
46
Not all the added $5 billion to $9 billion would have to come from the supplementary income tax. Some could be quite easily obtained by closing some of
the existing loopholes in the income tax and the estate tax. Increases could be
scattered around among the corporation taxes and customary excise taxes, though
we doubt the wisdom of either of these. Special excises to help check consump-
tion of materials and labor needed for defense may prove useful if priorities
and allocation cannot for some reason or other do a comprehensive job on these
points. Special taxes to recoup windfall profits of dealers in and producers of
articles made scarce by priorities and allocation may prove advisable. But we
are sure that all of them together would not eliminate the need for a new
general tax like the supplementary individual income tax or a general sales tax,
both because (1) the revenue requirements to prevent inflation, as we foresee
them now, are 80 large and because (11) the situation may change so rapidly,
the errors of forecast may prove 80 considerable, and the necessity for oorrecting them promptly may be 80 great that there must be in operation by June,
1942, at the latest, (and preferably by January, 1942, as noted below) a power-
ful tax-raising instrument of a kind that will be capable of raising still more
hundreds of millions a month by the quick action that a simple change in tax
rate allows. Incidentally, it must be recalled that most of these other taxes
would probably be less effective, per dollar of tax revenue, in checking consumption than would the supplementary income tax.
If $5 billion to $9 billion a year is needed by next June, something will
surely be needed before then. Lack of time has prevented us from computing, for
this preliminary report, data for a month earlier than June. We intend to submit a figure for January, and possibly other months, within a week or two.
Meanwhile, we propose -- until something more precise is computed -- that the
supplementary tax be imposed beginning with incomes of January, 1942; and that
47
the withholding rate for the first quarter be 13 per cent, and for the second
quarter, 17 per cent.
In any case, the rates would be subject to change, not oftener than once a
quarter, 1f either (a) continued research modified the forecast, (b) the rate
was found in practice to be inadequate or too severe (as judged by the retail
price index and other data).
Finally, it must be emphasized that the amounts of added tax revenue reoommended in this report are minima, since considerations other than the checking
of a substantial rise in the cost of living may suggest still more revenue,
while it seems unlikely that there will be any other considerations that will
suggest cutting down the revenue. An example of the former consideration is the
danger that the country may find itself loaded with an unduly heavy interest
charge for public debt after the emergency, or that the stock of money in the
economy will be unduly large. The tax measures proposed in this report would
not balance the budget: far from it. In June, 1942, the deficit would be running
at least as high as in June, 1941, and probably higher.
48
APPENDIX A
RECENT RESEARCH BY OTHERS IN THE FIELD OF INFLATION AND FISCAL POLICY
The technique used in this report was developed only after a study of the
work already done by others in the same field. It is to a considerable extent
based on that work, since it must utilize much the same data and analysis. It
differs, however, in that it pushes forward to a definite conclusion of "how
much" and "when" and, in doing so, breaks the general problem down into a
larger number of sub-problems that are analyzed separately.
With respect to the American scene, most of the work has gone on within
various departments of the Federal Government and the results have not been pub-
lished. Most of the products of this work have, however, been made available
to the writers of the present report, on a confidential or semi-confidential
basis. In a few instances the material was too confidential even for such a
limited release; the chief instance is a "defense primer" composed by the Defense Economics Unit of the Office of Price Administration several months ago,
containing, we understand, fairly specific suggestions on the amount of taxa-
tion that would be needed to avert inflation. But even if this report were to be
made available now, it would probably not add much to the information we have
gathered from other sources, and in any case the computations would need extensive revision.
The Finance Economics Unit of the Office of Price Administration developed,
at about the same time, a suggestive technique for determining the amount of
taxation needed, utilizing the device of successive approximations based on
certain observed relations over the past few years between gross national product
and "offeets to savings" (government deficit, private capital formation, and so
on). It also utilizes certain other historical relations.
49
The Bureau of the Budget has developed recently a division of fiscal research which has been attacking the problem of refining and modifying the "in
flationary gap" analysis utilized in the recent British White Paper Cmd. 6263 on
sources of war finance. This analysis depends primarily on certain observed relations in recent years between increases in government deficit plus increases
in new private investment, and increases in national income ("multiplier" analy-
sis); but is so constructed as to permit account to be taken of modifications
in these relations.
The "gap" and "multiplier" techniques have been analyzed carefully in two
memoranda submitted a few weeks ago to the Defense Economics Unit of the Office
of Price Administration by one of its consulting experts.
The Federal Reserve Board and the Treasury have, of course, been studying
the general fiscal problem, but have not, so far as we are aware, produced memo-
randa along the particular lines described above.
Outside the Government, four studies have been made: the volume by Hart,
Allen and others (Financing Defense), the article by Angell ("Taxation, Inflation, and the Defense Program," Review of Economic Statistics, Vol. XXIII, May,
1941, pp. 78-82), the volume by Seymour Harris (The Economics of American De-
fense) and the study by the National Bureau of Economic Research on the financ-
ing of defense. This last study will not be completed until some time in 1942,
but mimeographed copies of the preliminary drafts of some of the chapters have
been made available to the present writers. The Hart-Allen study develope a tax
program in some detail, but the key point they make is that prediction on even
the roughest basis should be eachewed, owing to its uncertainty, and the tax
structure should be varied from time to time in accordance with what has hap-
pened to the cost-of-living index. Angell's analysis is limited to ascertaining
the time by which a substantial rise in prices is likely to be under way, and .
50
does not offer a quantitatively specific taxing program. Harris' study covers
the economics of defense in a comprehensive mannery the remarks on taxation,
however, are not designed to formulate a particular program with specific timing. The National Bureau study has not yet progressed far enough to produce a
particular technique of analysis for determining how much taxation is needed.
Abroad, the British White Paper referred to above, and comments on it by
the London Economist, by Paish and by Kaldor are the chief examples known to the
present writers of attempts to weigh the inflation problem in quantitative
terms. Time and resources have not permitted an examination of the German and
Italian literature. There seems to have been nothing significant in French.
Without exception, none of these studies (except possibly the "Defense
Primer") has pushed its analysis far enough to give results definite enough for
use by policy makers (legislators and top administrative officials). This reluctance or inability to carry through to a conclusion has existed partly because there has been no constant, inescapable pressure on any of these research
groups to do 80. In part, too, it reflects an uneasiness on the part of the research workers over the heavy dependence on historical relations between def-
icits and income, and 80 on, that their techniques necessitate. The times are
80 different now from 1935-39 that relations existing then may not exist at all
today. The present project, while it has used these relations for purposes of
checking its findings, has reached its conclusions chiefly by broaking the prob10m down into more manageable parts and studying each part in the light of
current and prospective conditions.
51
APPENDIX B
ALGEBRAIC STATEMENT OF METHOD USED TO ESTIMATE TAXES NEEDED
Let A = expected change in government spending between initial and terminal
dates
I . expected change in total output, at prices of the initial date
D = I - A = desired change in civilian output, i.e., in consumption plus
private capital formation
C = expected change in consumer outlay if prices and consumer disposable
income (1.e., income after taxes and compulsory saving) remain the
same
F = expected change in private capital formation if prices remain the same
and consumer outlay changes by C
R = expected change in business retained profits and certain reserve accruals
M = change in spending on consumption and private capital formation at
terminal date associated with a change of $1 in government deficit
spending from the amount needed to keep consumer income the same
T = change in receipts from taxes and forced savings needed to avert inflation
t = expected change in receipts from taxes and forced savings under existing legislation
E=T - t = taxes needed in addition to those levied under existing legislation
Then (C + F) = change in government deficit spending that will keep consumer
income the same (1.e., will be consistent with a change of
C + F in consumer outlay + private capital formation)
D (C+F) = change in consumer outlay and private capital formation
that must be brought about by changing consumer disposable
income
E=T-t-A-R+(C+F) - 11 [D - (C+F)]- t
23
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE October 21, 1941
TO
Secretary Morgenthau
FROM
Messrs. Sullivan and Morris
Subject: Calls "on the Hill" re "guaranteed issues", Monday afternoon, October 20.
Our first call was on Senator Barkley who was just a
little concerned about the public's psychological reaction to the
increase in the debt limit. He recognized the advantages of the
saving in interest and a unified financing program but wished to
think the matter over. He further said he would like to discuss
this matter personally with Senators George (who he thought would
be back by Wednesday, or Thursday, at the latest) Connally, and
La Follette, and possibly one or two others.
At this point Senator McNary joined our discussion
group. Senator McNary was entirely favorably disposed to the
whole situation and said he would talk to Senator Taft.
Senator Barkley asked for a list of the outstanding
obligations involved, and when they matured. It seemed to make
considerable difference to him from a psychological point of view
that the maturities were spread over a period of years and, there-
fore, that it was not a question of taking them all over in a
lump sum right away. This list has been sent to Senator Barkley,
.
as per Exhibit A, attached hereto.
--
24
The next call was on House Speaker Rayburn. Represen-
tative McCormack was also present. Both of them seemed to think
the proposal to take over the guaranteed issues was entirely
logical and proper and that there would be no difficulty in justifying such action.
Speaker Rayburn and Representative McCormack then asked
if there was any legislation so important that the Treasury felt
the House should not recess between Thanksgiving and January 3rd.
Mr. Sullivan said that in accordance with instructions from the
Conference Committee, the Treasury was working on a bill covering
the so-called administrative adjustments, most of which were
purely of a technical and non-controversial matter, but that
(also) in accordance with the Conference Committee's instructions,
the bill would include such matters as the compulsory joint return of husband and wife. Speaker Rayburn said that it would
take from three years to eternity (this last by implication) to
pass any bill containing such a provision.
However, if these controversial features were left out
and a bill containing only administrative adjustments were presented, it was then suggested that a sub-committee could probably
be appointed to go over the matter and have a report ready by the
beginning of 1942, and Mr. Sullivan was asked if he thought this
would be satisfactory to the Treasury. In reply, Mr. Sullivan
25
-said he thought this would be quite a disappointment, even on
the administrative matters, as the Treasury hoped to have all
of these completely out of the way before the close of this
year. He indicated that he would, of course, pass on to
Secretary Morgenthau the opinions expressed on these matters
by Messrs. Rayburn and McCormack.
Drong
This
26
EXHIBIT A
My dear Senator Barkley:
The schedule you requested, covering the
Governmental issues which Mr. Morris and I discussed with you yesterday afternoon, is enclosed
herewith. You will note that the securities are
listed chronologically, according to maturity or
earliest call date, where one exists.
If there are any further data we can give
you, please call on either of us, and we will be
glad to supply it.
With many thanks for your help in this matter,
I am
Sincerely yours,
/s/ John L. Sullivan
John L. Sullivan,
Assistant Secretary.
Mr. Alben W. Barkley,
United States Senate.
27
Approximate Amounts Outstanding
as of October 20, 1941
(In millions of dollars)
11/1/41 )
1
7/8
3
2-3/4
11/15/41)
1/15/42
1/15/42-47
3/1/42-47
:
1/4
:
11/1/41 )*
HOLC
FFMC
:
7/8
RFC
CCC
:
(%)
:Dates to Call:
(if any) and :
Maturity
: Totals by
:
Rate
USHA
: Periods
300
112
204
310
236
103
Current fiscal period
1,265
ending June 30, 1942
1
2-1/4
7/8
3/4
7/1/42
7/1/42-44
10/15/42
5/1/43
276
875
320
289
Fiscal period July 1,
1,760
1942-June 30, 1943
1-1/8
1-3/8
3-1/4
1
3
3
7/15/43
2/1/44
3/15/44-64
4/15/44
5/1/44-52
5/15/44-49
324
114
95
571
779
835
Fiscal period July 1,
2,718
1943-June 30, 1944
1-1/8
1-1/2
412
2/15/45
6/1/45-47
755
Fiscal period July 1,
1,167
1944-June 30, 1945
Totals
: Fiscal
2,101
2,409
1,269
905
226
6,910
. To follow normal procedure, refinancing plan should be announced not
later than Thursday, October 23rd.
28
MEMORANDUM
October 21, 1941.
TO:
The Secretary
FROM:
Mr. Sullivan
Upon receipt of your telephone call this morning, I phoned
Mr. Doughton to inquire if I could drive him to the Capitol, thinking
this would be a good opportunity for us to discuss the problem of
covering the indirectly guaranteed Federal agency obligations into the
National Debt. Mr. Doughton had left for the Hill so I immediately
drove there. Enroute I saw Congressman William Boehne, and transferred
to his car. Driving to the Capitol we discussed the problem and he was
very much in favor of what you hope to do. Arriving on the Hill I interviewed Congressman Doughton who seemed to have some misgivings that the
Republican Party would use this increase in the National Debt for political
purposes in the coming campaign. I explained to him that by election time
we would have taken over about a billion and a half of this amount.
Eventually he concluded that he would be willing to "play along".
I then interviewed Congressman Treadway who said that he felt
that on a matter of this kind he would have to be bound entirely by your
recommendation. He said, "I can't agree that I will support any increase
in the National Debt which may be proposed, but I can say to you that you
will not be prejudiced in securing my vote for such an increase because
of having covered these obligations over into the National Debt".
I then saw Congressman Jere Cooper who was very much in favor
of your plan. My next visit was to Senator LaFollette who heartily
endorsed your proposal. Senator Glass was not in and is not expected
in today.
During my interview with Congressman Treadway, he stated that
he thought Congressman Dan Reed would be opposed to covering these in-
directly guaranteed Federal agency obligations into the National Debt.
I decided not to see Mr. Reed because if I did there were many others
on the Committee I would have to see.
JLS
29
October 21, 1941
10 a.m.
RF FINANCING
Present:
Mr. Hadley
Mr. Sullivan
Mr. Piser
Mr. Morris
Mr. Haas
Mr. Murphy
Mr. Eccles
Mr. Bell
H.M.Jr:
I have just talked with Sullivan, and he has
been unable to reach the President. If I
had a week it would be all right, but Bell
says I have got to do it Thursday. Couldn't
I wait until next Monday, Dan?
Bell:
I just don't see how we have got time to
print these things and get them out to the
banks.
Eccles:
Monday to Saturday. Saturday is the first,
the due date, isn't it?
Bell:
Yes, Saturday is the first. We would have
to do all that work in a week. You see,
you wouldn't get - you couldn't get it out
before Tuesday. Monday afternoon you would
send out word, and Tuesday you would open
it.
Eccles:
Send out word Saturday, and have them open
Monday. You may have to.
30
-2H.M.Jr:
Yes, if we can't get it cleared. I am
going to talk to Sullivan and I told John
if he couldn't cover the Senate and the House
today to let you (Bell) know and you would
take care of the Senate side.
Pell:
Has he made progress?
H.M.Jr:
I don't know. He just called me up and asked
me if I would call Barkley over at the White
House and I said no, I wouldn't do that.
Well, let's go on the assumption that I get
the green light from the Hill. That is the
purpose of the meeting this morning, you
see, and that the President approves, you
see. Then the question is, what are we going
to do. Have you had time to consider it?
Eccles:
Well, the only time I had WAS that Piser has
been following this and he has written a
memorandum on the thing which I had seen,
but we have had no opportunity for any dis-
cussion of the thing at all, so that I can
indicate here or he can indicate just what we
have been thinking about, which is no doubt
somewhat along the same lines you have been
thinking about.
H.M.Jr:
I wish you would.
Eccles:
Do you want to do that, Piser? Go ahead.
Piser:
Well, in regard to the type of issue, it
seems to me that a long bond is out of the
question, in view of the secondary distribution going on in the recent issue of two
and a halves, and my own personal preference
would be not to issue a short note, in view
of the large maturities and the absence of
open dates that you have up to about five
years, so I should think it would be either
a five year note or a intermediate bond, and
-3-
31
my personal preference would be for an intermediate bond, because I think even that type
of issue would go about half to the banks,
or say five hundred million to the banks.
(Mr. Hadley entered the conference).
If that five hundred million went to the banks
it would leave them with approximately the same
amount of issues as they have now, whereas I
think --
H.M.Jr:
Say that again, will you?
Piser:
I figure that on an intermediate bond, say
a '49 - '51, approximately five hundred million
would go to commercial banks, which is about
the amount that they hold in the three maturing
guarantees. If it were a shorter issue,
say a five year note, it seems to me that more
would go to the banks, so it would be adding
to the Government security holdings of banks.
H.M.Jr:
We only figure a five hundred million dollar
Piser:
I thought you were going to raise cash in
H.M.Jr:
No.
Bell:
Only in case we paid off part of the issue.
Piser:
Oh, I didn't understand that.
H.M.Jr:
It would be five hundred million the way it
issue, total.
addition.
is now.
Bell:
H.M.Jr:
If you just refund, yes, five hundred million.
That is all I want to do now.
32
-4Piser:
I didn't understand it that way.
H.M.Jr:
Well,
that is the purpose of these meetings.
Five hundred.
Bell:
Well, what I told you was that what we would
try to do, if we paid off half of it in cash,
would be raise four hundred million dollars
in cash. There is about three hundred sixtyseven million dollars to pay off in cash, which
includes the hundred and twelve million of
United States Housing Authority, and that
is what I was trying to get the cash back for
and reimburse us for that outgo.
H.M.Jr:
Well, I think I would keep it just as small
Eccles:
Are you thinking of giving rights? To what
extent do you figure it? Is that what you
as we can.
want to discuss?
H.M.Jr:
Well, the way I feel is this: We checked
up and we found that with the exception
- that the only concern who is a large holder
of those which have been sold is J.P.M.
That was the only one.
Eccles:
Some of those fellows in Chicago - I happened
to be over there on Wednesday, and I was
over to the Fed and of course they knew I
was - it was Thursday morning. I had been
there Wednesday night, and had seen some of
these bankers and they had tried to get me
and I wouldn't talk to them. They were
all up in the air about taking away rights.
Sol Smith - you know Sol, Dan - what-is-his-
name of the Harris Trust Company, and there
was some other bank there had a lot of these
and they were just about ready to have a
fit, because they had understood - this
33
-5feeler came out in the press that they were
going to be paid off in cash.
H.M.Jr:
Well, my own feeling is, I haven't talked
about it, that I don't see any particular
reason to give these fellows a kick in the
pants at this time. My inclination is to
give them the right to convert. That is,
the CCC and the RFC holders. The other fellows
were on notice originally that there would
be no rights.
Eccles:
Which is that?
H.M.Jr:
United States Housing.
Eccles:
H.M.Jr:
Yes, you can't give them rights on that stuff.
It is so terribly short.
But on the CCC and the RFC - I mean, I have
got to live with these fellows and I don't
want to get them unnecessarily -Eccles:
I think you have paved the way though, now,
H.M.Jr:
except for part of this.
Well, as I say --
Eccles:
If you want to reduce the rights, I think
because I don't think they expect rights
you have got an excellent opportunity now.
H.M.Jr:
Well, they are down.
Eccles:
Clear down because --
H.M.Jr:
Well, they are down.
Eccles:
Nobody expects the full rights at this time.
H.M.Jr:
We can price the thing much closer, and that is
34
-6why I want to keep it smaller and make it a
small issue.
Eccles:
There is this thought here. The RFC is going
to need considerable cash between now and the
end of the year, aren't they? About four hun-
dred million, Dan.
Bell:
Something like that, yes.
Eccles:
Why not get that cash now for them? Here you
have only got two months. I mean, November
first, and they need it within sixty days.
Why couldn't you at this time make this a billion issue, six hundred of it refunding and
four hundred million cash? You wouldn't have
a particle of trouble, if you want to put
out a five year note or a short bond. I mean,
it would be just as easy, I think, to put
out your billion dollar -H.M.Jr:
Eccles:
It is awfully close.
Yes, but it isn't close in that it is such
an entirely different market.
H.M.Jr:
But Marriner, for whatever it is worth,
if I go out and raise nine hundred million
dollars now, let's say for five years or
ten years, I will get an awful panning.
Eccles:
Why?
H.M.Jr:
Oh, they will say we are going right back
to the banks and the other thing is a failure.
Eccles:
Well, six hundred million of it is refunding.
I think if you said the six hundred is
refunding and you are getting the four
hundred million in anticipation of the
RFC's requirements at the end of the year.
-7-
35
H.M.Jr:
Well, we had hoped to pick up some of that
RFC money through bills.
Bell:
You see, we had in our original cash position
six hundred fifty million dollars of short
cash, five hundred for the RFC and a hundred
and fifty million for United States Housing.
Everybody expected that to go to the banks.
That is one reason they argued against any
short issue in your October financing because
they said the banks will get all they want
on the agency financing. You are taking over
the agency financing and just have a refunding.
When you do that, we are losing some money
on our cash position. I think we will get
by.
Eccles:
Well, I was thinking that your outlay is going
to be so great that at any time in making
a new issue you could get five hundred million,
it tends to reduce the number of issues, and
you certainly can use the cash. It did seem
to me that a billion dollars would be just as
easy here as six hundred million, and you have
got a good reason for saying that you are getting the extra four now to take care of what
will be the RFC requi rements between now and
the end of the year. Certainly either in
a different year issue or in a short bond, the
market is - would be very favorable, I think,
in either one of those, and I don't believe
you would find your banks taking - holding
any more than they now hold when you got
through with the thing.
You see, your banks hold practically all your
six hundred million anyway, so you - when you
finally got through with it, I would doubt if
your banks would end up with any more than they
have now got. If they did - this is what
the banks may do. I know a lot of the banks
36
-8are still holding some of these long issues.
I mean, there is just no place to go, and they
have got some of those issues that they
subscribe for. I think they would be more they would be ready to shift from some of
those into these if these were available.
H.M.Jr:
Could I just ask a question? How would you
gentlemen price a March 15, '46, now how would
you price that?
Hadley:
I would price it at one per cent.
H.M.Jr:
One?
Hadley:
A little over a half point premium. But I
Eccles:
might be higher than the others.
Well, we had here - you had a September, '46.
That is five years. It would make that October.
One and a quarter coupon.
H.M.Jr:
I was thinking of March 15.
Eccles:
Oh. What have you got there, Piser? He
has got it priced here for September.
H.M.Jr:
Well, our boys say one per cent.
Eccles:
Pretty thin, is it?
Piser:
I would say it ought to be one and an eighth.
My yields are higher than the Treasury yields
are on this.
H.M.Jr:
Our boys give it from eighteen to twenty-three
thirty-seconds.
Eccles:
Maybe you fellows are figuring wrong, either
one or the other of you.
H.M.Jr:
Go outside, Hadley, and call up Rouse and ask
37
9-
him how he would figure, will you, a March
15? Ask him how he would figure a March 15,
please.
(Mr. Hadley left the conference).
Eccles:
He is on his vacation.
H.M.Jr:
No, he is there.
Eccles:
Did he get back?
:H.M:Jr:
Yes.
Bell:
He got back Monday.
Eccles:
He was away last week, and I didn't know
whether he got back or not.
H.M.Jr:
Well, I will tell you. That is one of the
reasons I want to get these darn RFC's and
other things out of the way. I haven't
caught my breath yet, and here I have got
another issue.
Eccles:
Well, it is going to be that way from here
on.
H.M.Jr:
Well, not if we can get this stuff out of the
way. Then we oughtn' t to have to do it more
than six times a year. That is one of the
things, to get this thing out of the way.
Eccles:
You have RFC stuff next year, of course,
coming in again.
H.M.Jr:
Yes.
Eccles:
Your HOLC and --
Bell:
Well, HOLC is not until July, but you have
got
Federal Farm Mortgage of about forty
million.
- 10 -
38
Eccles:
Is it your idea, Henry, to cover HOLC as well
H.M.Jr:
Well now, there is a legal question. Are
Bell:
Yes, sir. No legal question about it.
H.M.Jr:
Oh, I was thinking of the Land Banks.
Bell:
Federal Land Banks.
H.M.Jr:
The answer to your question is "Yes".
Eccles:
All of them, in other words?
H.M.Jr:
The whole works.
Bell:
Nothing in the market but Treasuries.
Eccles:
Well, I think that certainly simplifies
your problem. It ought to simplify the
as the Mortgage?
they guaranteed?
market problem tremendously.
H.M.Jr:
Oh, sure.
Eccles:
Tell, if you just put out the six hundred --
H.M.Jr:
It is only going to be five hundred.
Eccles:
Yes. I see. You would pay in cash the
United States Housing and give the rights
for the RFC and the other. That would
be a pleasant surprise to the market.
Bell:
If you give them the rights?
Eccles:
Yes.
Bell:
It would now.
Eccles:
They have --
39
- 11 H.M.Jr:
Nobody knows how I have thought. I have
kept it very quiet because I didn't want
to get it out and have them run the rights
up on me, and then have them say - I would
be right back where I was.
Eccles:
Well, of course you will be if you give them
the rights.
H.M.Jr:
Well, not if we price this thing fairly close.
They have had no warning. I can give them
some warning next time. And New York says
only give them the right to convert half.
I think if you are going to do it, do it all
or nothing. That is the way I feel. Half
won't satisfy them.
Morris:
Well, if you give it all you can price it very
H.M.Jr:
That is right.
Eccles:
Well, you could give it all and price it closely
or give half and not price it so closely.
Haas:
I am afraid pricing close will give you a
close, and it comes out not too badly.
thrill. It would give me one, pricing it
close (laughter).
Eccles:
Well, a five year issue wouldn't. I wouldn't
worry on a five year.
Haas:
Well, Marriner, take a look at what we are
basing the price on.
Bell:
Did you see Murphy and George squirm in their
seats?
H.M.Jr:
You squirm on one per cent, four and a half
years?
Murphy:
It is apt to be close. I wouldn't have any
- 12 -
40
doubt about it going over but the top of
our range of premium is twenty-three, and
you couldn't go above that, and you have the
result of it finally coming out better than
their fondest expectations were a week ago.
Bell:
Yes, originally.
H.M.Jr:
How do you mean?
Murphy:
Well, one, due in March 15, '46, we figure
will sell at a range of eighteen to twenty-
three. I think there is two thirds - all the
chances are it will fall within that range.
It might go up to twenty-six or seven. Now,
the premium is only ei ghteen at the peak,
when they expect a guarantee, so the result
is that your rights crash to nothing, they
come up part way, they dribble off, then they
go way up, yet you shave that coupon to seven
eighths and none of us would sleep.
H.M.Jr:
Who is suggesting seven eighths?
Murphy:
Well, no one, except that the one, you see -
H.M.Jr:
You mean you will have a restless night at
one? And at seven eighths you won't sleep
there is no --
at all?
Murphy:
That is right.
Eccles:
Well, no, as I get his point, it is that
seven eighths is too close and one is too
much of a premium.
Murphy:
That is right.
H.M.Jr:
Oh, one is too much?
41
- 13 -
Murphy:
Yes, the chances are it will be too much.
I wouldn't have any doubt about it going.
Eccles:
It would give you twenty-five thirty-seconds,
he says, which is higher than they have
ever been.
Murphy:
That is, it could be.
H.M.Jr:
Oh. How about June?
Bell:
Well, it wouldn't make a lot of difference, Mr. Secretary.
H.M.Jr:
How about June?
Murphy:
Well, I am a little disturbed on account of
my friend Piser down here saying that we
need a one and an eighth for March. Now,
we go out to June with a one and I think
it will go, that is what I think.
H.M.Jr:
It is a matter of mathematics.
Haas:
Well, it is judgment, Mr. Secretary.
Bell:
It is judgment and --
- 14 -
42
Eccles:
You can't get it--
Bell:
There is a hole in the market in that area.
Haas:
H.M.Jr:
You see, we haven't got taxable notes out.
We have only got these couple of issues out,
and they are not very popular at that.
We are just guessing.
Piser thinks - how much leeway would there
be on a March 15?
Piser:
On a one percent?
H.M.Jr:
Yes.
Piser:
Well, I would price it about par.
H.M.Jr:
Gee whiz!
Piser:
I am out on a limb. Nobody agrees with me.
H.M.Jr:
If you are right and I did it, we both would
Piser:
They agree more with Henry Murphy.
Bell:
Mr. Secretary, I want to tell you that in
be. How about New York?
March '46 there are four hundred eighty-nine
million dollars of bonds, high coupon bonds,
that are callable, and in June there are two
issues, aggregating one billion eight hundred
H.M.Jr:
fifty million.
Well, but you didn't say that three - it is
only four hundred eighty-nine million?
Bell:
I said four eighty-nine, yes.
H.M.Jr:
Oh, did he?
Bell:
Yes.
- 15 -
43
Now, maybe-H.M.Jr:
That is another reason--
Bell:
Another five hundred million on that would
H.M.Jr:
That is another reason for not making it any
bigger. That wouldn't bother me, would it
be nine hundred.
you?
Eccles:
What is that?
H.M.Jr:
That four hundred eighty-nine million could
be called - there is a '46 - '56, three and
three quarters, four hundred eighty-nine
million, to be called on March 15.
Eccles:
March 15, when?
Bell:
'46.
Eccles:
Oh, I wouldn't worry about that.
Bell:
But you have got to assume that they will be
called and therefore that is a maturity date.
Eccles:
Yes, but I mean it is an option. You are
not compelled to-Bell:
It is a high coupon.
H.M.Jr:
Well, I wouldn't worry. You have drawn it to
my attention. I won't be here.
Bell:
You won't be here, I suppose that is the
answer. (Laughter)
Eccles:
You have got so many other problems in the
meantime-H.M.Jr:
Let me just switch the conversation for one
- 16 -
44
minute, if I may. Supposing - this is what
I want. Supposing Congress says to me,
"Well, we don't want you to do it"?
Eccles:
Well, gosh, I am--
H.M.Jr:
Am I going to fly in the face of Congress?
Bell:
Not as long as you have taken it up with
them.
Eccles:
What it would be, it would be Barkley and--
H.M.Jr:
I think George will be all right.
Eccles:
It would be those fellows that don't know
anything about the problem, that is the
trouble.
H.M.Jr:
Well, Walter George is the chairman. He
isn't here, that is another thing. They
are trying to get him on the phone.
Eccles:
Where is he?
H.M.Jr:
They are trying to call him on the phone.
Eccles:
You shouldn't have a bit of trouble with
George, I wouldn't think.
Listen, how does Jesse feel about this?
H.M.Jr:
Jesse is all right, because I told Jesse
that I would charge him one percent for money
that he gets as long as our rate stays at
around two and a half, but as the public
debt goes up, his rate will go up accordingly. You see?
Eccles:
That is one percent for five years. I mean,
that is about the--
- 17 H.M.Jr:
45
He first said, "Well, you can charge me
whatever the five-year rate is," so I said,
"No, I think what would be fair is if we
charge you one percent and then have it.
key to the general public debt - if .that
goes up, we will up you a little bit."
So he said, "That is entirely fair, and I
will go along with you." See?
H.M.Jr:
Well, I was thinking if Jesse feels all
right about it-Isn't that what he said?
Bell:
Yes, that is what he said.
H.M.Jr:
Oh, yes, I called him first.
Eccles:
That you wouldn't have any trouble on the
Eccles:
Hill. He could maybe help you on that. If,
on the other hand, he didn't-H.M.Jr:
Oh, no. Before I made my announcement, I
talked to him, and the way he put it, he
was in a very Jesse Jones-like manner. He
said, "I will recommend to my boys that they
accept it." (Laughter)
(Mr. Hadley entered the conference.)
Eccles:
Did you laugh?
H.M.Jr:
Yes.
Bell:
What Jesse wants is the one percent. He
doesn't care how he gets it.
H.M.Jr:
So I announced in my press conference that
Mr. Jones was sympathetic to this, and he
has been perfectly happy about it.
Hadley:
Mr. Rouse said that the yield on a March 15,
'46, might run all the way from eighty up to
- 18 -
46
one hundred, and he would split the
difference at ninety just as a rough guess,
which would mean one percent at about par
14 or one and an eighth percent at 101.
H.M.Jr:
Don't give me one and an eighth. What would
be--
Hadley:
About par 14. It might run higher.
H.M.Jr:
But he puts it at a low of 14 and our boys
put it at a low of 18.
Hadley:
I have a low of 18.
H.M.Jr:
Well--
Piser:
You have a high, Murphy of--
Murphy:
Twenty-three.
Eccles:
And a low of what?
Murphy:
Eighteen.
H.M.Jr:
And Rouse is as low as forty?
Hadley:
Yes. He says it might go much - the yield
might go lower and the price might run up
quite a bit, but that is a good guess right
at the moment.
Murphy:
Well, the top of his range, you say, is one
percent, which is only par?
Hadley:
Yes. Well, he says that is the two outside
Murphy:
Way outside.
H.M.Jr:
Well, I think that when we get through here,
these fellows ought to get together and get
Rouse on the wire, don't you think so?
possibilities.
- 19 Eccles:
47
And kind of see where the difference is. It
is judgment, I suppose. They have nothing
to measure it with. Of course, they are
trying to judge the market, aren't they,
Piser?
Haas:
That is what makes it difficult to price it
close and be sure after you have done it.
H.M.Jr:
Would you think a one percent, one and a
Haas:
Well, sometimes, Mr. Secretary, we have
half years is close?
points right on each side, and you have a
great deal of confidence. You can say it
will be within a few thirty-seconds. This
one, there is too much judgment in it. Our
bench marks are not certain.
H.M.Jr:
Well, how much off could I be as a low?
Haas:
Rouse says it might even go at par, but I
don't think they will be that much off.
Hadley:
He says that is the statistical outside,
Eccles:
I wouldn't personally worry at a one percent four and a half year issue.
H.M.Jr:
I wouldn't either.
Haas:
I wouldn't worry about it.
H.M.Jr:
Especially when it is all conversion.
Haas:
I wouldn't worry, but what if it turns out
but he says par fourteen would be a good
figure.
and they have quite a large premium? That
is the worst that can happen.
Eccles:
Yes, but I mean that is giving them, of course,
- 20 -
48
more than they expect.
Haas:
That is right, that is the worst they can have
on that thing.
Eccles:
But I think you have got to take that chance.
I don't think you have got a possibility of
dealing any more accurately - say par to
eighteen-thirty seconds. How can you get
any closer than that?
H.M.Jr:
It is like the other day. We were talking,
and I didn't have time to explain it to the
President, and I just sent the thing over
cold to him. We went out fifteen years
beyond the last issue and the thing sold at
a hundred and three. Well, it might just
as well have sold at par. He said, "Well,
how did it go to a hundred?" I said, "Well,
Mr. President, I would a damn sight rather
sit here and have it at a hundred and three
than ninety-seven. We went out fifteen
years. I mean, how can you guess it? You
don't know. They sit here and tell you
they are going to buy it and so forth and
so on. If you had told me a year ago that
these fellows would buy a thirty-one year
two and a half percent bond, I wouldn't
have believed it. They wouldn't have a year
ago, either.
Eccles:
No, they wouldn't have a year ago. But of
course their accumulation of funds is such
now that there is no other place to put them.
H.M.Jr:
Say, this is a nice thing for bankers, four
and a half year, one percent.
Eccles:
Oh, the banks would be perfectly satisfied
with it, because--
H.M.Jr:
With no cash offer.
- 21 Morris:
Would
it be stressing it too much to put it
September 26?
H.M.Jr:
The way these fellows talk, yes, sir. I
49
would keep it right at March.
Bell:
Mr. Secretary, if you announced today that
you are going to allow exchange privileges
and allow Bob Rouse to talk to the market on
the basis of three to five years, tomorrow
morning you can say what you ought to price
it at.
H.M.Jr:
I can't do that, Dan. I can't say a word
until I get word from the Hill. They will
read it and they will say, "What is Morgenthau asking our advice for?"
Bell:
No, I mean you don't have to announce
whether it will be a Treasury or a guaranteed
issue.
H.M.Jr:
Oh!
(The Secretary held an unrecorded telephone
conversation with Mr. Sullivan.)
Bell:
So Doughton is playing along. What does
that mean?
Eccles:
Making a concession. (Laughter)
Bell:
That sounds pretty good. You have got the
House clear, and certainly there are a lot
of people in the Senate that would like to
see this. Byrd and-H.M.Jr:
Dan, supposing I announce there are going to
be rights. That doesn't help us any, does
it?
Haas:
They would go up right away.
- 22 -
50
H.M.Jr:
Well, you would want that.
Haas:
Sure, that is all right.
Eccles:
That would give you an indication of how to
price this, how it would go.
H.M.Jr:
But it wouldn't if they don't know whether
they are going to convert into a Treasury
issue or into a guaranteed issue.
Eccles:
Well, there is very little difference in a
Treasury and a guaranteed.
Hadley:
There is quite a bit in that area. It would
be quite a bit on the basis of rates.
Eccles:
How much?
Hadley:
Well, if they were going to get a five-year
Treasury note or a five-year guaranteed issue,
it would be more attractive on the basis of
a Treasury note to some than it would be if
it was a guaranteed issue. I think it would
be better to get some indication of what
rates they would put on an issue without
giving them a leak on what you are going to
do.
Bell:
The first question, of course, they are going to ask, Bob Rouse will say, "Well, are
we going to get rights?"
H.M.Jr:
Well, I have kept my mouth shut. I think it
is much better to be able to say, "Now,
gentlemen, on Thursday we are going to give
you the right to convert into a Treasury
issue or into another guaranteed," give them
a clean-cut statement. The market will
adjust itself quickly.
Eccles:
You ought to get this thing cleared. If you
- 23 -
51
can get hold of George, then you will be
able to get Barkley later.
H.M.Jr:
I will call Barkley myself.
Eccles:
If you get George and Barkley, I wouldn't
care whether I got anybody else or not.
Bell:
Well, Vandenberg is already--
H.M.Jr:
Oh, Vandenberg is--
Bell:
He is enthusiastic about it.
Eccles:
He won't count so much.
H.M.Jr:
Well, he will when I come up to get the debt
Bell:
He is on the Finance Committee.
H.M.Jr:
But he is for it.
Eccles:
But if you get Barkley - I wouldn't worry
increased.
about going up before the Finance Committee
to get the debt increased. There is nothing
they can do. There is going to be no problem
on that score. The main thing is, it would
seem to me, to get leaders like Barkley and
George so that they can't say that you did
this without talking to the leaders, but if
you can talk to Barkley and George, I would
go ahead and announce it. I wouldn't wait
to get anybody else unless you could get
them with comparative ease. If you got
those two, then why wait about seeing anybody else? You have got the chairman of the
committee, and you have got the leader.
H.M.Jr:
Oh, if I have Barkley and George, I am not
waiting for anybody else.
- 24 Eccles:
You wouldn't get anybody else at all?
H.M.Jr:
No, because I have got the Speaker and I
52
have got McCormack and I have got Doughton.
Eccles:
Well, don't you think you are going to be
able to get those fellows before this after-
noon?
H.M.Jr:
Oh, yes.
Eccles:
Well, then, you can announce it.
Bell:
Then you could announce it. It would be
a straight Treasury issue, and they would get
rights, you could announce that.
H.M.Jr:
And they would get rights, and it is going
Bell:
Then your problem is simplified, I think.
Eccles:
Sure. Then tomorrow you can price it.
H.M.Jr:
And you are all right about the four and a
Eccles:
to be a note.
half or in that territory?
I think a four-and-a-half year is all right.
I wouldn't be afraid of the short bond, but
if you were going to get more than the six
hundred - for instance, if you were going
to get four hundred million new money to
finance the RFC to the end of the year, I
would think that short bond would be a good
thing to put out.
Bell:
It may be tomorrow when we get this settled
down in the markets, you can put out your
one percent September.
Eccles:
That is right.
- 25 Bell:
You will get ten or twelve thirty-seconds
and it will be just right. It sells at par,
doesn't it?
Piser:
Practically.
Bell:
It has been a little unpopular.
Eccles:
Keep the bills off the rest of the year,
more or less indefinitely, another fifty
million.
Bell:
The Secretary hasn't announced any policy
53
on the bills, but assumed in our cash estimate that they will go right through the
cycle of thirteen weeks.
H.M.Jr:
At least a hundred and fifty a week.
Bell:
To the end of the thirteen weeks. We will
have to go there in order to get us our
money back that we lose.
Eccles:
What I was asking was, that the fifty million bills, you would continue to put them
out for how long, the thirteen-week period?
H.M.Jr:
Oh, yes, but I might increase them. I might
go to two hundred.
Bell:
When we get to the end of November we may
be short of cash and may have to increase it to
two hundred.
Eccles:
You could do that very easily because you
have got all the flexibility in the world in
that bill market. You can pay them off if
you find that you are financing into a long
term field, depending upon what future
developed in that field.
H.M.Jr:
That is the beauty of the thing. Unless you
- 26 -
54
fellows have some strong feeling, I would
Eccles:
like to keep this to a straight refunding.
I don't have any at all.
H.M.Jr:
Piser?
Piser:
No.
H.M.Jr:
It makes it much simpler. For instance,
supposing you added two hundred fifty
million or two hundred million in cash.
You would get the whole thing--
Eccles:
I wouldn't do that. If I was going to get
a billion dollar issue.
any cash on the thing, I would make this
H.M.Jr:
That I don't want.
Eccles:
Six hundred million of it would - five
hundred would be refunded, a hundred would
be paid off and you would have four hundred
cash which would finance your RFC to the
end of the year. The only thought of the
four hundred million cash plus the hundred
million cash for refunding was to finance
the RFC to the end of the year. I don't
think there would be any question about
being able to sell the issue, but I don't
think it is important at all.
Piser:
Mr. Secretary, what would you think of putting out an additional issue with the March
1943 notes?
H.M.Jr:
That is what'Sproul said in New York.
I can tell you the reason I don't do it.
I would be glad to have you people know
it. I think I have said it before, but I
- 27 -
55
am not sure. I would like very much
not to sell any more issues under four
or five years, and I will tell you why.
Just as sure as I am sitting here, there
will come a period in the next two or three
years where we will be sitting and saying,
Do you think we can go as long as eighteen
months?"
Now, therefore, I would like to get my
issues out to four or five years and keep
pushing them out so the inshore stuff will
be free for the day when we get some bad
news, which we will get, you see.
Eccles:
Of course, you have got your bill market
you would have-H.M.Jr:
See? We have had it before. We have
talked, "Do you think we can go as long as
eighteen months or two years?" That is why.
Eccles:
Well, I don't believe you are right, but I
think that under a war economy, if that is
possible, then I think we have failed to
completely control the money market to the
extent that we can and should, to the extent
that every other country is doing it. I mean,
that is the way I feel.
H.M.Jr:
Well, Marriner, I hope and pray I am wrong,
but no one can criticize me for not selling
any more issues that fall due in the next
three or four years and keep that open
against the day where we will have to use
it. After all, you and I have been here
going on our ninth years, and I think it
has happened three or four times that we
couldn't sell anything longer than a couple
of years.
- 28 -
56
Eccles:
Well,
you have got a different situation.
Now--
H.M.Jr:
But it did happen, Marriner.
Eccles:
It happened twice. It was in '34 when I was
in Treasury here, September '34--
H.M.Jr:
Well, you weren't here with me in November '33--
Eccles:
No, that is right.
H.M.Jr:
... when I sold eleven months issues and that
was as long as I could go. Wasn't it eleven
months?
Bell:
Yes. Eleven and thirteen months.
Eccles:
The Federal was being pretty well handled by I mean New York was handling the open market
committee pretty largely. Now, you have got
a very different situation.
H.M.Jr:
True, but,Marriner the worst that you or
Piser can say is, "My God, Morgenthau is
seeing things under the bed." Well, all
right.
Bell:
We may come to another scheme.
H.M.Jr:
I wanted to explain to Piser exactly how I
felt. I am not advertising it, that Morgen-
thau sees gloom ahead, but I just would like
to keep - not place more than a three-or four-
year period.
Eccles:
I think we have got to think about this, too,
in the planning of future financing, and that
is that the Federal and the Treasury have got
powers to control the situation, and if they
haven't got them they had better get them.
In the situation that you are going into you
- 29 -
57
just cannot leave yourself in the money thing
any more than you can in your defense effort
subject entirely to a private market interest.
That is the way I look at it, and in studying what has happened everywhere else, the
market is pretty well controlled.
H.M.Jr:
George is in Vienna, Georgia.
Eccles:
I thought he was from Atlanta. I never heard
of Vienna. It must be a suburb out of
Atlanta. Didn't he practice law - didn't he
have a law office in Atlanta?
Bell:
I don't know.
Eccles:
I think so.
H.M.Jr:
Well, I feel this way. I will work on this
all day, but I wish you people would think
about it, see. Could I get you today?
Eccles:
Yes, I will be over there.
H.M.Jr:
Supposing I call up Sproul and Rouse now and
Eccles:
Have you talked to Sproul or Rouse at all,
talk to them.
Piser?
Piser:
No, I haven't.
H.M.Jr:
Let me talk to them while you are here.
Piser:
Rouse wasn't in.
Eccles:
In a market that is declining due to some
adjustment you may favor, of course you
can't sell and don't want to sell a long
issue or even an intermediate issue. You
want to use - if you have financing to do,
- 30 -
58
you want to do short financing and it is
proper, of course, that you should during
any period of adjustment, even though it
may be an adjustment that you favor. People
will not buy long issues or even intermedi-
ate issues in a market that is making some
adjustment, even though it may be a pretty
small adjustment. The long issues sell
always, of course, and the intermediate issues,
when a market is rising and is showing great
strength, and we have been in that zone now
for a long period.
H.M.Jr:
That argument points up where?
Eccles:
Well, it points up to the point that you
made, that it is a good thing to have an
opening for a short financing. I didn't
want you to get - you might have gotten the
impression from what I said here that we
are going to have no period in which the
bond market would do other than stay where
it is or go up.
(Telephone conversation with Mr. Sproul and
Mr. Rouse follows:)
(Telephone conversation with Senator George
follows:
59
October 21, 1941
10:47 a.m.
HMJr:
Robert
Rouse:
HMJr:
You're on my loudspeaker, and besides my own
people, Mr. Eocles and Mr. Piser are here.
Yeah.
This is - we still haven't got the clearance
from Congress to go ahead with this, you see,
but I'm trying desperately to get it today.
R:
That 18 to
HMJr:
To sell Treasury issues.
R:
HMJr:
To take the place of all guaranteed issues.
That's right. But we have - we've cleared
it with the House, but we've - Senator George
is out of town and I'm trying to get him.
R:
HMJr:
Yeah.
This is the way I look at it, and I think -
if Mr. Eccles could nod his head or not - I
think he's perfectly happy about what I'm
going to say. If not, he can get on the wire
and talk to you himself.
We're thinking of a five hundred million Treasury
four and a half year note - one per cent - and giving
them, the present holders of RFC and Commodity
Credit, full rights.
R:
Yeah.
HMJr:
That's the way I stand right now, and Mr. Eccles
has a poker face, I don't know how he feels.
R:
Any cash?
HMJr:
No cash.
R:
No cash at all.
HMJr:
No.
-2R:
60
Well, there's no question about your ability
to do that. It would be a cinch. It will
leave the market uncertain as to what is going
to be the final policy on rights, of course,
and I think it's desirable that that uncertainty
be cleared up as soon as possible.
HMJr:
R:
HMJr:
R:
Well, I don't know whether I can satisfy them
right away.
No.
But I certainly would within the next week or
so when I really had time to - well, to go into
it more fully.
Well, I'm - I was really talking in terms of
the next week or 80 rather than today, if you
were going to do this today.
HMJr:
Well, we wouldn't do this now until Thursday
morning.
R:
No.
HMJr:
You see? We'd announce this refunding Thursday
morning.
R:
HMJr:
Yeah.
But as to the future policy - well, I want to
talk to you people, I want to talk to the
Board, I want to talk to my own people.
R:
Yeah.
HMJr:
And I just don't know.
Well, in the absence of any decision on rights,
this issue looks good to me.
R:
HMJr:
It looks all right?
R:
Yes.
HMJr:
And I don't want - I've been very frank here.
-3 -
61
I don't want to have these fellows say that "Oh, why does Morgenthau have to do this to
us? He could have given us a little notice,"
and 80 forth. And as far as money is concerned,
out of pocket, the Treasury - I don't think the
Treasury will be out of pocket a nickel; but I
do think
might
leave
and
I justwedon't
want
to adocouple
that. of sore spots,
R:
Well, in my discussions here, I got the impression
that if you out them off now, sharply, it certainly
would leave some sore spots. If you gave them
partial exchange privileges now and indication
that they were going to be out off in the future,
they still wouldn't cheer about it, but they'd
understand it and it would be a workable plan.
HMJr:
Well, we think this over, if you give them half
R:
Well, it's a form of notice which has some
the rights, it's neither fish nor fowl.
teeth in it, and allows them to readjust their
position if that's necessary on the immediately
maturing issues.
HMJr:
Well, I could do that within a week or ten days.
R:
Yes, you could.
HMJr:
Now, I'm not - they can't say I'm wobbling,
because I haven't said anything about rights.
R:
No, you said you were studying the problem.
Operator:
Hello.
HMJr:
Yes.
Operator:
I have a long-distance call.
HMJr:
Tell them to wait. All right, go ahead.
Hello.
You'll have - I've got Walter George. Would
you mind my talking to him a moment?
S:
Not a bit.
October 21, 1941
10:53 a.m.
Operator:
62
Go ahead.
HMJr:
Hello. Hello.
Operator:
Hello, Senator George. Hello, Senator George.
Operator #2:
Operator, put me
Disconnection.
Operator:
Oh, I'm sorry. She says we were cut off.
HMJr:
Oh.
Operator:
Do you want to finish with the other con-
HMJr:
Well no. I'11 keep this open for Walter
versation?
George.
Operator:
All right.
HMJr:
You'd better keep this open.
Operator:
Right.
HMJr:
I think I've finished on the other anyway.
Operator:
Tell them I'11 call them back a little later.
All right.
HMJr:
Have you got Walter George?
Operator:
I'11 try again. I had him on there. We were
cut off right away.
Walter
George:
Yes.
HMJr:
Walter George?
G:
Yes.
HMJr:
I hope I didn't disturb you.
Not at all, Henry. How are you?
G:
-2-
63
HMJr:
I'm fine. How are things down in that nice
G:
Well, it's rather quiet.
HMJr:
G:
HMJr:
state of yours?
Good.
Getting along very nicely.
Walter, the reason for my calling you 18 this.
Last week I sent up a sort of a trial balloon
to see how the people would feel if from now
on we only borrowed in the name of the Treasury
and didn't borrow any more in the name of some
of these other agencies like the RFC and Commodity
Crédit and Home Owner's Loan.
G:
Yes.
HMJr:
My
G:
Yes.
HMJr:
trouble is this. The way it is now, for
instance, I've got to borrow - do something
seriously. I've got two issues coming due,
and they keep coming due all the time; and with
this tremendous financing I've got to do, I'd
like to be in a position where I only borrow
for the Treasury.
Now, if I only borrow for the Treasury, I can
do it cheaper, and I'd only have to go to the
market about every other month. Now, the disadvantage I want to point out to you is, that
over a period of four or five years, I would
increase the debt by about seven billion dollars
of the Treasury.
G:
Yes.
HMJr:
And that would mean that I'd have to come up
G:
Yes.
HMJr:
But with this war coming on, I'm trying to finance
a little bit sooner to get the debt increased.
as well and as cheaply as I can; and everybody
-3-
64
in the Treasury and in the Federal Reserve,
feels that we could do it better if we only
were borrowing for the Treasury and for nobody
else. Now, Jesse Jones is entirely satisfied
to have me do his borrowing and lend it to him
in time, you see.
G:
HMJr:
G:
Yes.
Now, I've cleared it with the people in the
House - everybody's - the Speaker and McCormack
and Doughton - they're all satisfied to have me
do this. But I didn't want to move without
talking to you.
Well, Henry, it looks to me like it's a wise
plan.
HMJr:
G:
HMJr:
G:
HMJr:
Yes.
I saw your statement last week - I understood
something about it.
Yes.
And 80 far as I can see, it 18 a wise plan, and
I'd be very glad to support you in it.
Well, that would be very kind. Now, could I
quote you to that extent to Senator Barkley?
G:
Yes, you may.
HMJr:
Well, thank you 80 much.
G:
I'm coming on back tomorrow, anyway. I've got
to get back up there because some of these things
are coming up and I want to be there when they
happen.
HMJr:
Well, I was trying to get
G:
How's that?
HMJr:
I was trying to get a sort of a blessing today
from you and Senator Barkley if I could, you
see.
-4-
65
G:
You can quote me to - just as I stated. It
HMJr:
Well, thank you ever 80 much.
G:
All right, Henry.
HMJr:
Thank you.
G:
All right, sir.
HMJr:
Good-bye.
G:
Good-bye.
seems to me it's wise, and I'11 be very happy
to support you in that program.
66
- 31 Eccles:
There was no trouble there. He apparently
had read about it.
was advised. He was familiar with it. He
Bell:
He had read the statement.
H.M.Jr:
I don't know whether I was smart or dumb. I
said it first in the paper, and then went to
him, but I had a reason for doing it. I
wanted to crack down on those damn rights when
I did it.
Eccles:
Well, there is this thing. By going in the
paper you found out what the market reaction
was, and it seemed to me it is so favorable
it made it easier for the Senators to approve.
H.M.Jr:
Morris, step outside and tell Dick Patterson
I am going into another meeting at eleven,
and I will step out and shake hands with him
if he will be a little patient. He is chair-
man from New York of the Defense Savings Staff.
Eccles:
He
used to be Assistant Secretary of Com-
merce.
H.M.Jr:
Excuse me.
Eccles:
You said you didn't know whether you were
smart or dumb in announcing the thing first.
I think it was the smart thing to do because
it made it easier to get the approval of
these people on the Hill when they found
out that the market acted favorably than
would have been the case if they hadn't
know how the market would react.
H.M.Jr:
I did it a little differently. Usually I
ask them first and then go to the press
afterward.
(Mr. Sullivan entered the conference.)
- 32 H.M.Jr:
67
Come in. We are all waiting with our
tongues hanging out. Are you all right
with Doughton?
Sullivan:
Yes. He had some reservations entirely
political. He was afraid the other fellows
would use that in the coming compaign as
indicating the extent to which the national
debt-H.M.Jr:
Who?
Sullivan:
The Republicans would use it.
H.M.Jr:
Who said this?
Sullivan:
This is Doughton. I explained that we were
taking them over as they matured and it
would take five years for the full amount
to mature, and that probably we would not
have taken them much over a billion and a
half by the time the next campaign rolled
around, and he agreed to play along.
Treadway said that he felt that in a matter
of this kind, in an emergency such as this,
he would have to be bound entirely by your
recommendation. He said, "I don't want you
to interpret this as my agreeing to support
any kind of an increase in the debt limit
that may be proposed, but I can promise you
that your proposal will not be prejudiced
because of having done this."
I then saw Jere Cooper, who was very much
in favor of it. On the way up to see Mr.
Doughton I saw Congressman Boehne, also of
House Ways and Means, driving by. I stopped
him and got into his car and rode up with
him, and he was in favor. Bob LaFollette
didn't take a minute to make up his mind.
He thought it was obviously the thing to do.
- 33 -
68
Senator Glass was not in and they called
his home and he is not coming in today.
H.M.Jr:
Well, I would forget about him.
Sullivan:
Now, you recall that Speaker Rayburn and
John McCormack were entirely in favor of it;
so, too, was Senator McNary. Senator McNary
was to talk with some of his men and report
to Senator Barkley today. I was to hear
from Senator Barkley after he had seen
Senator George. Senator Barkley appeared
to be in favor of it, but wanted time to
talk it over with the others.
H.M.Jr:
Well, why don't I leave a call for Barkley
myself as long as I spoke to George?
Sullivan:
I think that would be well, because I told
him we had until Thursday, you see. I
didn't know about this meeting today. For
the record, Senator Vandenberg had already
whole-heartedly indorsed this.
H.M.Jr:
Well, Marriner, as soon as I get to Barkley,
then I will get to the President.
Dan, give me a little memo along these lines
for the President in case he questions me,
how long it will take before this thing-Bell:
Sure.
H.M.Jr:
Supposing he asks me the question, "Well,
would
Henry, at this rate, how much sooner
you have to get the debt increased? Would
you do it right away?"
Bell:
Yes.
H.M.Jr:
I think we are all right for the moment.
69
October 21, 1941
11:05 a.m.
Roswell
Magill:
Henry?
HMJr:
Yes.
M:
How are you? This is Roswell Magill.
HMJr:
I'm all right. How are you?
M:
Oh, much the same. Did you get my letter?
HMJr:
No.
M:
Well, I talked to John Sullivan yesterday.
He asked me to come down, as I take it you
know, and I merely was calling on your behalf.
HMJr:
M:
HMJr:
M:
Yes.
And I wrote you last night along these lines,
that I can't very well come tomorrow because
I've got classes here.
Yes.
This eye business of mine is still persisting,
80 that I'm really greatly handicapped in my
work.
HMJr:
Oh.
M:
I can't read during the day to amount to anything.
HMJr:
M:
Oh, I'm sorry.
Now, so that if it's - I wouldn't want to
undertake to come down there and stay any
length of time simply because it's - I'm
having too much difficulty in carrying my
ordinary work, if you follow me.
HMJr:
Well, then, why not let it go over until next next week. Would next week be any better?
70
-2M:
The - well, my class is here regularly
Monday, Tuesday, and Wednesday. Now, what
I would say is this. If I could come down
and give you any help on a day or two, why
I would be very glad to do it.
HMJr:
No.
M:
You know that. I'm anxious to do what I can.
HMJr:
M:
Well, a day or two right now wouldn't help
much. It might a little later.
Yeah. Well, I don't think I ought to undertake much more than that, Henry.
HMJr:
Well, why not give us a day or two?
M:
That I'd be glad to do.
HMJr:
What day could you come?
M:
Well, most - whatever you say.
HMJr:
Thursday?
M:
I can come Thursday, if you'd like.
HMJr:
Good.
M:
of this week.
HMJr:
That'11 be fine.
M:
All right. Well, I'11 be down there Thursday.
HMJr:
Thank you.
M:
I wish you'd make what use of me you can.
HMJr:
I'm sorry I'm not available for a longer time,
but you see how it is.
All right.
M:
Thanks very much.
HMJr:
Thank you.
M:
Good-bye.
71
October 21, 1941
1:18 p.m.
Grace
Tully:
Hello.
HMJr:
Yes.
T:
Mr. Secretary?
HMJr:
Yes.
T:
Okay on your proposal.
HMJr:
Listen, I still say that you're wasted over
there.
T:
(Laughs)
HMJr:
All right.
T:
All right, sir.
HMJr:
Ever so much obliged.
T:
You're welcome.
HMJr:
Good-bye.
T:
Good-bye.
72
October 21, 1941
2:45 p.m.
HMJr:
Jesse
Hello. Jesse?
Jones:
Yeah.
HMJr:
We're all set to go on this financing. I
sounded out the leaders in the Senate and
the House as to issuing Treasury obligations
and gradually pulling your stuff in and
the other boys, and I've cleared it with the
President. Hello.
J:
HMJr:
Yeah.
So I think what we'll do Thursday is, we'll
offer five hundred million of Treasury notes
and give the RFC and the Commodity Credit
fellows a chance to convert into this, you see?
J:
Yeah.
HMJr:
We're going to give them the rights.
J:
Yeah.
HMJr:
And I'11 sell something between a four and
five year Treasury note.
J:
HMJr:
J:
HMJr:
J:
I see.
Now, is that all right?
Perfectly fine. I talked to our boys about
it, and they all are agreeable.
They're all agreeable.
After our talk the other day I discussed it
with them, and they're perfectly happy about
it.
HMJr:
Did you have any trouble convincing them?
J:
Not the slightest.
HMJr:
Wonderful.
73
-2J:
Not the slightest. I told them I had assured
HMJr:
That's right.
J:
So that's all right.
HMJr:
Thank you, Jesse.
J:
Thank you.
you we were willing to cooperate and 80 forth
and 80 on, and that you had agreed to - had
stated what you would do on certain lines.
74
October 21, 1941
2:45 p.m.
RE FINANCING
Present:
Mr. Bell
Mr. Morris
Mr. Murphy
Mr. Haas
Mr. Hadley
Mr. Schwarz
Mrs. Klotz
H.M.Jr:
I talked to the President and Barkley and
Jesse Jones. I haven't said anything to
Commodity Credit. Have you said anything
to them?
Bell:
Yes, they are all right. So is Federal Housing.
H.M.Jr:
You (Schwarz) tell the boys that Thursday
morning we will offer - is it five hundred
million?
Bell:
Thereabouts. You can say five hundred million
or thereabouts.
H.M.Jr:
Five hundred million or thereabouts of a long
term note for conversion from the RFC note
and the Commodity Credit.
Schwarz:
The RFC seven eighths and Commodity Credit
one?
H.M.Jr:
RFC is seven eighths, three hundred million,
and the CCC is one per cent, two hundred and
four.
Schwarz:
All right.
75
-2H.M.Jr:
Now, wait a second. Now, paragraph.
At some time during the next week or two I
will clear up the question as to the future
status of rights.
Schwarz:
O.K.
Bell:
All rights? Rights on directs as well as --
H.M.Jr:
Yes.
Haas:
Do you have to commit yourself on that?
H.M.Jr:
No.
Haas:
Not seeing --
H.M.Jr:
I don't want them to think that this thing,
you see -Schwarz:
This is pressing.
H.M.Jr:
Why not simply say during the next week or
two I will go into this whole question of
rights?
Bell:
If you want to say that, that is all right,
but I am wondering if you need to say it.
H.M.Jr:
Well, if I don't say it, that makes them think
that they are always going to have the rights.
This is the time to say something.
Haas:
I guess sc.
Morris:
Would you want to say rights on guaranteed
issues?
H.M.Jr:
Well, that is worse.
Schwarz:
Then you leave open the question of directs.
-3Bell:
H.M.Jr:
76
It keeps the market a little disturbed during
the time you are having to finance.
Supposing I say the rights on guaranteed
issues?
Bell:
That would narrow it.
Murphy:
It seems to me instead of keeping open the
question of rights, I would tend to close
the question on the directs. The market
would tend to infer that the rights on directs
would continue as heretofore.
H.M.Jr:
Murhpy:
But not if I say this.
Not if you say on rights in general, but if
you said rights on guaranteed issues, it
would seem to me that the market would suppose
that the rights on directs would continue as
heretofore.
Bell:
That is what Dan was trying to convey.
H.M.Jr:
Supposing I just say this, that at an early
date I will dispose of the question of rights
as they affect - as they pertain to guaranteed
issues. Then I don't commit myself on Treasuries.
That leaves it open for me to say from now on
there won't be any rights or there will be,
or there will be partial rights.
Murphy:
I wouldn't take it that way. This is a matter
of interpretation. If you say now that you
expect in several weeks to clear up the matter
of rights on guaranteed issues and then if
say ten days from now you made an announcement
that applied both to guaranteeds and Treasuries,
it seems to me that a person who had bought
Treasuries during the meantime might have
some ground for complaint because the fact
that you confined your statement to guaranteeds
-4 -
77
would create some presumption that Treasuries
would continue as they have always been.
Bell:
I thought you told Sproul the other day of
your announcement that you had reference only
to guaranteed issues and not to the direct,
that he let that seep around.
H.M.Jr:
Well, of course, I have never said anything
about rights.
Haas:
No.
Hadley:
Why couldn't you just say you are going to
make a statement about rights?
H.M.Jr:
No, say nothing.
Bell:
That would suit me a lot better.
Haas:
I would be inclined to say nothing.
Schwarz:
If there is doubt, leave it open.
Haas:
What you might do, Mr. Secretary - you don't
have many alternatives, and after seeing
the alternatives you might decide you don't
want to do anything.
(The Secretary held a telephone conversation
with Mr. Sproul as follows:)
October 21, 1941
2:50 p.m.
HMJr:
Robert
78
Are you gents there?
Rouse:
We I 're both here.
Allan
Sproul:
Yes, sir.
HMJr:
Well, I've finally cleared everything on
the Hill with all Democratic and Republican
leaders and with the President of the United
States, 80 I'm ready to go.
S:
HMJr:
Well, that's fine.
Now, what I thought I would do is this, that
I would tell my press man to tell the newspaper
boys for immediate release, that Thursday
morning we were going to offer five hundred
million dollars of a long Treasury note
S:
Yeah.
and that the RFC and Commodity Credit
HMJr:
would have a right to convert
S:
HMJr:
Yeah.
and that at a later date I would discuss
the question of future rights.
S:
I think that takes care of it.
HMJr:
See?
S:
Yeah.
HMJr:
See, at a later date. Sometime within the
next week or two I would try to clear up this
whole question about rights.
S:
I think that takes care of it, and I think
that note issue - if you're still thinking of
doing the four and a half year one that you
mentioned this morning - is all right in that
-2-
79
setting as an issue which preserves the
status quo while you are determining what
you're going to do in the future on guaranteeds
and rights.
HMJr:
Now what do you mean by that?
I mean by that it gives them the - give the
S:
market something of the kind of an obligation
it wants with full right privilege, and leaves
them, I think, very well satisfied until there
HMJr:
has been a determination of the final question
of rights and guarantees.
Yes. Well, now what the people think here is
that if I announce this, that that will kind
of let us estimate the thing better tomorrow.
Is that right?
S:
You mean the term and the.
HMJr:
Yes. I mean it - just that note in that section.
S:
Do you want us to have any talks with anyone
about that, either this afternoon or tomorrow preferably after you've made that announcement?
HMJr:
Preferably this afternoon.
S:
All right. We could see two or three of the
HMJr:
Now are you perfectly happy about a note in
S:
banks which are large holders of the maturing
notes and some of the dealers.
that area?
Yes, I am, and - that is - agreeing or taking
the situation as it is, if we're not ready to
decide these more difficult questions, I think
it's a good note and will go well.
HMJr:
Oh. All right. Well, I'll have it out on the
S:
All right; and we'll go right ahead and talk
wire in a few minutes.
to some people here in the market about what
80
-3kind of an issue might
HMJr:
S:
HMJr:
S:
Now, a long note - I don't have to say between
four
can't and
I? five. I could just say a long note,
Yes, I think 80.
Right. I mean, a long note can't be longer
then five years.
No, they'11 consider that four or five years
80 it will blanket the kind of an issue you
have in mind very nicely.
HMJr:
S:
HMJr:
Righto.
All right. We'll go right to work.
Thank you.
81
-5Schwarz:
H.V.Jr:
O.K. then, we will just limit it to -Now, sending this fellow to see Senator
Hughes, he found I told the truth. You
see, Barkley had seen Hughes and Hughes
had told him that I said it was no Senator's
business whom I appointed in the State of
Delaware, that I would appoint anybody I
wanted, and I wasn't going to let politics enter
into this. Barkley says, "Here is this
fellow that is the head of this thing that
is going to run against this man a year from
now. You have no right to appoint him."
I said, "Did he tell you I said that? It
just isn't true. I called him up and told
him that as long as that is what he wanted,
the fellow fortunately had heart trouble and
he couldn't take the thing anyway. But
you see, this thing - I am holding you on
purpose. I don't want you to get out of
here until three o'clock. I know just what
I am doing, Chick (laughter). In a minute
you can go. The thing hadn't caught. He
had heard the first story, but he hadn't heard
I had taken care of it. He went back, talked
to him, saw that I had told the truth, and
the thing went through.
Klotz:
H.M.Jr:
It is marvelous that you always tell the
truth.
I never get caught not telling it. It works
both ways.
Bell:
I thought he was very happy at the conversation
you had with him the other day.
H.M.Jr:
Who?
Bell:
Hughes.
H.M.Jr:
Yes, but Barkley hadn't otten the second
story. He had gotten the first one before I
had taken care of the thing. All right, gents.
82
October 21, 1941
2:58 p.m.
HMJr:
Allan
Sproul:
Hello.
Hello.
HMJr:
Allan
S:
Yes.
HMJr:
S:
my boys here think that I oughtn't to
say anything about rights at this time. I
haven't
said anything. Just say nothing.
Just have this announcement.
Well, you have said that you were studying
the question of converting all guaranteeds
into directs, and that has raised in the
market the question of what was going to be
done about rights.
HMJr:
Yeah, but I haven't said anything publicly.
S:
No.
HMJr:
Now, supposing we give out this announcement
and I say nothing. Now, I have a press conference Thursday and they can ask me. The
boys are a little bit afraid that I tie my
hands. You see, it's the newspapers that are
carrying on this discussion. I haven't said
anything.
S:
No. I think that would be a better procedure
in this official announcement of the - this
offering - to say nothing about it, but to
answer questions if they re asked at your
conference Thursday. I think that would be
better.
HMJr:
S:
Well, that's what they think around here.
I think that that would be a better procedure.
Otherwise, you'd be dragging it in for the
first time yourself in an official statement.
-HMJr:
S:
HMJr:
It's just because - you see, the trouble is,
you and I should never read a newspaper.
That's right. (Laughs)
It gets us all muddled.
Sure.
S:
HMJr:
Okay?
I think that's right. I think that's a
S:
better procedure.
S:
All right. Everybody's satisfied.
All right.
HMJr:
Hello.
S:
Yes.
HMJr:
HMJr:
S:
HMJr:
S:
You'll never know how far out on the end of
the limb I was on this.
(Laughs) Well, I sort of gathered that you
felt you were out there.
Well, I had to settle a couple of patronage
questions before these fellows would say yes.
(Laughs) Well, I'm glad that I don't have to
do that.
HMJr:
Well, you'd be surprised.
S:
How far down it goes.
HMJr:
Oh, yes. An eighteen hundred dollar clerk
S:
often settles the future of the nation.
(Laughs)
HMJr:
And I'm not joking, either.
S:
No, I know you're not.
83
84
- 3- HMJr:
S:
HMJr:
S:
HMJr:
S:
Yeah.
Well, it's
Anyway
it's the way things are done, and you
have to conform.
shirt.
I got my way and I didn't give up my
Well, that's all you can ask for. I think
that's an accomplishment.
3
HMJr:
S:
All right. Good-bye.
All right. Good-bye.
85
THE SECRETARY OF THE TREASURY
WASHINGTON
10-21-41
TO THE PRESIDENT:
The present method of financing governmental corporations and
credit agencies of the Government by issuing guaranteed obligations of
the United States, is making our financing more complicated as time
goes on, especially in view of the large Treasury financing require-
ments made necessary by the defense program. The maturities of these
guaranteed obligations now usually fall between the Treasury's quarterly
financing dates, but the Treasury's own financing program is now getting
SO heavy that we will hereafter be in the market more often than on
the quarterly dates. From a practical standpoint, it means, therefore,
that the Government will be under the present system in the market
almost every month unless the two programs can be coordinated and
simplified. I believe that the present methods can be changed so that
the Treasury will not be in the market more of ten than once every other
month, for its own account and that of the agencies.
With this in mind, I hope to be able eventually to eliminate entirely
from the market all guaranteed issues by taking them up with direct
Treasury issues. The guaranteed issues are now selling on the market
to yield 1/8% to 1/4% more than the Treasury issues of comparable
maturities. Because of this I believe that the Treasury, if it does
all of the financing through the sale of direct Treasury obligations,
would save money in total interest charges.
We have talked to the leaders of both parties in both Houses of
Congress and have found that there is universal approval of this proposal.
There is set out below a table of the outstanding guaranteed issues
maturing in the next four fiscal years:
Fiscal Year
(Maturity or
earliest call
R.F.C.
C.C.C.
U.S.E.A.
F.F.M.C.
HOLC
Total
date)
610
1943
596
1944
895
204
112
339*
-
-
1945
-
239
-
114
930*
-
412
-
-
1942
875*
779*
755*
1,265
1,760
2,718
1,167
Total for period
ending June 30.
1945
2,101
905
226
Callable
1,269
2,409 6,910
-2-
86
It will be noted from the above table that the method, which I
propose be followed, will increase the public debt in the fiscal year
1942 by $1,265,000,000 in order to refinance the maturing or callable
guaranteed obligations. It will probably be necessary to add from one
billion to one and a half billion dollars for current cash requirements,
or a total increase in the public debt for the fiscal year 1942 of
possibly $2,265,000,000 to $2,765,000,000. The fiscal year 1943 would
require a further increase in the public debt of $1,760,000,000 to
meet maturing or callable guaranteed issues. What the cash requirements
will be for these agencies during the fiscal year 1943 is rather difficult to estimate at this time. Of the total increase in the public
debt amounting to $6,910,000,000 to meet the maturing or callable
guaranteed issues set out above, approximately $4,000,000,000 falls in
the fiscal years 1944 and 1945. It may be possible to reduce some of
these figures by the application of receipts brought in through the
liquidation of assets of these corporations and credit agencies.
According to the latest Budget estimates, the gross public debt
of the United States on June 30, 1942, will be more than $61,000,000,000
without providing for the future accruals on United States Savings
Bonds and for $2,200,000,000 to replace the minimum guaranteed issues
that would otherwise be put out in the fiscal year 1942. In any case,
it will be necessary for the Treasury to ask Congress during the early
spring of 1942 for an increase of several billions of dollars in the
present debt limitation in order to meet the deficit for the fiscal
year 1943. It seems to me that it would not be difficult to get an
increase in the present debt limitation of $65,000,000,000 of an amount
sufficient to enable the Treasury not only to finance the deficit in
regular receipts, but also to take care of the financial requirements
of the governmental corporations and credit agencies.
On November 1, 1941, the RFC has a maturity of $300,000,000 and
the USHA has one of $112,000,000, and on November 15, the CCC has a
maturity of $204,000,000. In carrying out the suggestions made above,
I propose on Thursday of this week, subject of course to your approval
in the regular manner, to offer a Treasury note for about $500,000,000,
to be issued only in exchange for the RFC and CCC maturities aggregating
about that amount, and I propose to pay off in cash the USHA maturity
of $112,000,000. I hope that the method here suggested for financing
future guaranteed issues and the proposal for financing the immediate
maturities will have your approval. If so, I should be pleased if you
would so indicate at the bottom of this memorandum.
the
87
Calendar of Direct and Guaranteed Bonds and Notes 1
October 1, 1941
(In millions of dollars)
Fixed maturities
Description
Date
Direct
Guaranteed
Callable issues
Final maturities
First callable
Direct
Guaranteed
Direct
Guaranteed
1941-Jan.
Feb.
Mar.
Apr.
May
June
July
Aug.
Sept.
Oct.
Nov. 1
Nov. 1
Nov.15
Dec.15
300
112
RFC 7/8%
USHA 1/4%
204
000 14
204
Note 1-1/4%
1942-Jan.15
Jan.15
Feb.
Mar. 1
Mar.15
616
204
Total
-310
RFC 7/8%
236
FFMC 3% (1942-47)
FFMC 2-3/4% (1942-47)
Note 1-3/4%
103
426
Apr.
May
June
July 1
July 1
276
RFC 1%
875
HOLO 2-1/4% (1942-44)
Aug.
Sept.15
Oct.15
Nov.
Dec.15
342
Note 2%
RFC 7/8%
320( T
232
Note 1-3/4%
1,000
Total
1,214
906
1943-Jan.
Feb.
Mar.15
Apr.
May 1
June15
June15
July15
Aug.
Sept.15
Oct.15
Nov.
Dec.15
66(T)
Note 3/4%
289
000 3/4%
Note 1-1/8%
Bond 3-3/8% (1943-47)
Feb. 1
Mar.15
Mar.15
Apr.15
Apr.15
May 1
May 15
June15
July i
Aug.
Sept.15
Sept.15
454
324(T)
RFC 1-1/8%
279
Note 1%
1,401
Bond 3-1/4% (1943-45)
421
Note 1-1/8%
.
1,395
Total
1944-Jan.
629
USHA 1-3/8%
Note 1%
FFMC
Bond
3-1/4%
3-1/4%
613
1,855
114
515
(1944-64)
(1944-46)
1,519
571(T)
RFC 1%
(1944-52)
FFMC 3% (1944-49)
Note 3/4%
95
779
HOLO 3%
835
416
875
HOLO 2-1/4% (1942-44)
Note 14
Note 3/4%
283
635(T)
Oct.
Nov.
Dec.15
Total
1
1,037
Bond 4% (1944-54)
1,849
685
2,556
1,709
875
Excludes special issues, issues redeemable at option of holder, postal savings
bonds, FHA debentures, and depositary bonds.
88
Calendar of Direct and Guaranteed Bonds and Notes 1/
October 1, 1941
(In millions of dollars)
Fixed maturities
Description
Date
1945-Jan.
Feb.15
Mar.15
CCC 1-1/8%
Note 3/4%
Direct
Guaranteed
Callable issues
First callable
Final maturities
Direct
Guaranteed
Direct
Guaranteed
412(T)
718
Apr.
May
June 1
July
Aug.
Sept.15
Oct.15
755
HOLC 1-1/2% (1945-47)
1,214
Bond 2-3/4% (1945-47)
Bond 3-1/4% (1943-45)
Nov.
Dec.15
Dec.15
Bond 2-1/2%
Note 3/4%
Total
1946-Jan. 1
Feb.
Mar.15
Apr.15
May
June15
June15
Conversion 3%
1,401
541
531 (T)
412
,790
1,214
755
1,401
16
489
Bond 3-3/4% (1946-56)
Bond 3-1/4% (1944-46)
1,519
1,036
Bond 3% (1946-48)
Bond 3-1/8% (1946-49)
819
July
Aug.
Sept.
Oct.
Nov.
Dec.
Total
1947-Jan. 1
Jan.15
Conversion 3%
FFMC 3% (1942-47)
16
2,344
1, ,519
13
236
103
Feb.
Mar. 1
FFMC 2-3/4% (1942-47)
Apr.
May
June 1
June15
755
HOLO 1-1/2% (1945-47)
Bond 3-3/8% (1943-47)
454
July
Aug.
Sept.15
Oct.15
Nov.
Dec.15
1,214
Bond 2-3/4% (1945-47)
Bond 4-1/4% (1947-52)
Bond 2%
Total
759
701
714
759
1,668
1,094
1948-Jan.
Feb.
Mar.15
Mar.15
1,115(T)
Bond 2% (1948-50)
Bond 2-3/4% (1948-51)
1,223
Apr.
May
June15
1,036
Bond 3% (1946-48)
July
Aug.
Sept.15
Bond 2-1/2%
451
Oct.
Nov.
Dec.15
571
Bond 2% (1948-50)
Total
451
2,909
1,036
Excludes special issues, issues redeemable at option of holder, postal savings
bonds, FHA debentures, and depositary bonds.
1
89
Calendar of Direct and Guaranteed Bonds and Notes 1/
October 1, 1941
(In millions of dollars)
Fixed maturities
Description
Date
Direct
Guaranteed
Callable issues
First callable
Final maturities
Direct
Guarantood
Direct
Guaranteed
1949-Jan.
Feb.
Mar.
Apr.
May 15
June15
835
FFMC 3% (1944-49)
819
Bond 3-1/8% (1946-49)
July
Aug.
Sept.
Oct.
Nov.
Dec.15
Dec.15
Bond 3-1/88 (1949-52)
Bond 2-1/2% (1949-53)
Total
491
1,786
2,277
1950-Jan.
Feb.
Mar.15
819
835
1,115(T)
Bond 2% (1948-50)
Apr.
May
June
July
Aug.
Sept.15
Bond 2-1/2% (1950-52)
1,186
Oct.
Nov.
Dec.15
-571
Bond 2% (1948-50)
Total
1,186
1,686
1951-Jan.
Feb.
Mar.15
1,223
Bond 2-3/4% (1948-51)
Apr.
May
June15
Bond 2-3/46 (1951-54)
1,627
July
Aug.
Sept.15
Bond 3% (1951-55)
755
Oct.
Nov.
Dec.15
Bond 2-1/46 (1951-53)
Total
1,118
3,500
1,223
1952-Jan.
Feb.
Mar.15
Apr.
May 1
Bond 2-1/25 (1952-54)
,024(T)
779
HOLO 3% (1944-52)
June
July
Aug.
Sept.15
Oct.15
Nov.
Dec.15
1,186
Bond 2-1/24 (1950-52)
Bond 4-1/45 (1947-52)
491
Bond 3-1/8% (1949-52)
Total
1/
-759
1,024
2,436
779
Excludes special issues, issues redeemable at option of holder, postal savings
bonis, PHA debentures, and depositary bonds.
-
90
Calendar of Direct and Guaranteed Bonds and Notes 1
October 1, 1941
(In millions of dollars)
Fixed maturities
Description
Date
Direct
Guaranteed
Callable issues
Final maturities
First callable
Direct
Guaranteed
Direct
Guaranteed
1953-Jan.
Feb.
Mar.
Apr.
May
June15
Bond 2% (1953-55)
725
July
Aug.
Sept.
Oct.
Nov.
Dec.15
Dec.15
1,786
1,118
Bond 2-1/2% (1949-53)
Bond 2-1/4% (1951-53).
Total
725
2,904
1954-Jan.
Feb.
Mar.15
1,024(T)
Bond 2-1/2% (1952-54)
Apr.
May
June15
June15
Bond 2-3/4% (1951-54)
Bond 2-1/4% (1954-56)
1,627
681
July
Aug.
Sept.
Oct.
Nov.
Dec.15
1,037
Bond 4% (1944-54)
Total
681
3,688
1955-Jan.
Feb.
Mar.15
Bond 2-7/8% (1955-60)
2,611
Apr.
725
May
June15
Bond 2% (1953-55)
July
Aug.
Sept.15
755
Bond 3% (1951-55)
Oct.
Nov.
Dec.
Total
2,611
1,480
1956-Jan.
Feb.
Mar.15
Mar.15
Bond 3-3/4% (1946-56)
Bond 2-1/2% (1956-58).
489
1,449(T)
Apr.
May
June15
681
Bond 2-1/4% (1954-56)
July
Aug.
Sept.15
Bond 2-3/4% (1956-59)
982
Oct.
Nov.
Dec.
Total
1
2,431
1,170
Excludes special issues, issues redeemable at option of holder, postal savings
bonds, FHA debentures, and depositary bonds.
91
Calendar of Direct and Guaranteed Bonds and Notes 1,
October 1, 1941
(In millions of dollars)
Fixed maturities
Description
Date
Direct
Guaranteed
Callable issues
Final maturities
First callable
Direct
Guaranteed
Direct
Guaranteed
1957-Jan.
Feb.
Mar.
Apr.
May
June
July
Aug.
Sept.
Oct.
Nov.
Dec.
Total
1958-Jan.
Feb.
Mar.15
1,449(T)
Bond 2-1/2% (1956-58)
Apr.
May
June15
Bond 2-3/4% (1958-63)
919
July
Aug.
Sept.
Oct.
Nov.
Dec.
Total
919
1,449
1959-Jan.
Feb.
Mar.
Apr.
May
June
July
Aug.
Sept.15
982
Bond 2-3/4% (1956-59)
Oct.
Nov.
Dec.
982
Total
1960-Jan.
2,611
Feb.
Mar.15
Bond 2-7/8% (1955-60)
Apr.
May
June
July
Aug.
Sept.
Oct.
Nov.
Dec.15
Bond 2-3/4% (1960-65)
Total
1,485
1,485
2, ,611
1/ Excludes special issues, issues redeemable at option of holder, postal savings
bonds, FHA debentures, and depositary bonds.
92
Calendar of Direct and Guaranteed Bonds and Notes 1
October 1, 1941
(In millions of dollars)
Fixed maturities
Date
Description
Direct
Guaranteed
Callable issues
First callable
Final maturities
Direct
Guaranteed
Direct
Guaranteed
1961-Jan.
Feb.
Mar.
Apr.
May
June 1
July
Panama 3%
50
Total
50
Aug.
Sept.
Oct.
Nov.
Dec.
1962-Jan.
Feb.
Mar.
Apr.
May
June
July
Aug.
Sept.
Oct.
Nov.
Dec.
Total
1963-Jan.
Feb.
Mar.
Apr.
May
June15
Bond 2-3/4% (1958-63)
-919
July
Aug.
Sept.
Oct.
Nov.
Dec.
Total
919
1964-Jan.
Feb.
Mar.15
FFMC 3-1/4% (1944-64)
95
Apr.
May
June
July
Aug.
Sept.
Oct.
Nov.
Dec.
Total
95
1965-Jan.
Feb.
Mar.
Apr.
May
June
July
Aug.
Sept.
Oct.
Nov.
Dec.15
Bond 2-3/4% (1960-65)
Total
1/
1,485
1,485
Excludes special issues, issues redeemable at option of holder, postal savings
bonds, FHA debentures, and depositary bonds.
STRICTLY CONFIDENTIAL
93
RFC 7/8 Percent Notes Maturing on November 1, 1941
Amount Owned by the Largest Holders Reporting
to the Treasury as of August 31, and September 30, 1941
(In millions of dollars)
Investor
Aug. Sept. : Net
The Northern Trust Co., Chicago, I11
31 : 30 :change
86.9 86.9
21.0 21.0
16.0 16.0
15.0 15.0
11.0 11.0
Irving Trust Co. New York, N.Y
10.0
10.0
10.0
10.0
9.0
9.0
-
National Bank of Detroit, Detroit, Mich
6.7
6.7
-
French American Banking Corp., New York, N.Y
5.4
5.0
3.0
3.0
2.5
5.4
5.0
3.0
3.0
2.5
-
2.3
2.2
2.0
1.2
1.2
2.3
2.2
2.0
1.2
1.2
-
1.2
1.2
1.2
-
1.1
1.0
+.1
Guaranty Trust Co., New York, N.Y.
Metropolitan Life Insurance Co., New York, N.Y
J. P. Morgan & Co., Inc. New York, N.Y
First National Bank of Chicago, Chicago, Ill
Bank of the Manhattan Co., New York, N.Y
National City Bank, New York, N.Y
Bankers Trust Co., New York, N.Y
Penn Mutual Life Insurance Co. Philadelphia, Pa
State Bank of Albany, Albany, N.Y.
Maryland Casualty Co., Baltimore, Md
The New York Trust Co., New York, N.Y
The Cleveland Trust Co., Cleveland, Ohio
City National Bank & Trust Co. Chicago, Ill
Bayonne Trust Co., Bayonne, N.J
Union Planters National Bank, Memphis, Tenn
Union National Bank, Houston, Texas
Brown Bros. Harriman & Co., New York, N.Y
Emigrant Industrial Savings Bank, New York, N.Y.
Bank of New York, New York, N.Y.
Marine Midland Trust Company, New York, N.Y
American Motorists Insurance Co., Chicago, I11
Total amount owned by largest holders
Total amount outstanding
Percent of total owned by largest holders
Office of the Secretary of the Treasury,
Division of Research and Statistics.
-
-
-
-
-
-
-
1.3 6.9 +5.6
1.2
1.0
1.0
9.3
228.
-
-
-
-
-
-
.5
-8.8
225.3
-3.1
299.6 299.6
-
76.2% 75.2% -1.0%
October 21, 1941
STRICTLY CONFIDENTIAL
94
CCC 1 Percent Notes Maturing on November 15, 1941
Amount Owned by the Largest Holders Reporting
to the Treasury as of August 31, and September 30, 1941
(In millions of dollars)
Investor
National City Bank, New York, N. Y
Irving Trust Co., New York, N. Y
First National Bank, New York, N. Y
P. Morgan & Co., Inc., New York, N. Y
J.
National Bank of Detroit, Detroit, Mich
The Cleveland Trust Co., Cleveland, Ohio
Net
Aug. 31
23.3
12.0
8.3
6.9
6.2
5.6
5.0
4.9
4.7
Yanufacturers Natl. Bank, Detroit, Mich
First National Bank of Chicago, Chicago, Ill
First National Bank of Boston, Boston, Mass
First National Bank, Shreveport, La
4.2
The Northern Trust Co., Chicago, Ill
4.0
Sept. 30
23.3
12.0
8.3
6.9
6.2
5.6
5.0
4.9
4.7
4.2
3.8
3.0
3.5
3.0
4.0
3.8
3.6
3.5
3.0
Toledo Trust Co., Toledo, Ohio
Bank of North Dakota, Bismarck, N. D
2.5
2.2
2.0
2.0
2.0
2.5
2.2
2.0
2.0
2.0
Marine Midland Tr. Co. of N.Y., New York, N.
N. Y. Life Insurance Co., New York, N. Y
1.8
1.6
1.6
1.5
2.0
1.8
117.6
116.2
204.2
204.2
City Natl. Bk. & Tr. Co. Chicago, Ill
Bankers Trust Co., New York, N. Y
Fidelity Union Trust Co., Newark, N. J
mden Trust Co., Camden, N. J
Northwestern Natl. Bk. & Tr. Co. Minneapolis
Public Natl. Bk. & Tr. Co. of N.Y., New York, N.Y.
The Detroit Bank, Detroit, Mich
Commerce Trust Co., Kansas City, Mo
The New York Trust Co., New York, N. Y
American Motorists Insurance Co., Chicago, Ill
Total amount owned by largest holders
Total amount outstanding
Percent of total owned by largest holders
Office of the Secretary of the Treasury,
Division of Research and Statistics.
57.6%
Change
1.6
1.6
1.5
-
56.9%
+.6
-2.0
-1.4
-.7%
October 21, 1941.
95
CONFIDENTIAL
UNITED STATES SAVINGS BONDS
Comparative Statement of Sales During
First Seventeen Business Days of August, September, and October, 1941
(August 1-20, September 1-20, October 1-20)
On Basis of Issue Price
(Amounts in thousands of dollars)
over
:
:
:
:
: September
: over
: August
:
:
:
:
:
:
:
:
Series I - Post Offices
August
: September
:
:
October : September
: October
Percentage of Increase
or Decrease (-)
:
Item
Amount of Increase
or Decrease (-)
:
Sales
October
over
: September
: over
: September : August
$ 27,987
$ 1,696
53,118
6,239
- 7,854
13.8
- 6.6%
- 14.8
-$ 1,850
6.5%
Series E - Banks
51,503
$ 26,137
45,264
Series 3 - Total
79,335
14,700
78,824
71,402
11,353
71,518
81,105
14,534
88,919
7,933
3,347
7,306
- 9,703
- 3,181
- 17,401
11.1
29.5
10.2
- 12.0
- 21.9
- 19.6
$172,859
$154,273
$184,558
$18,586
-$30,285
12.0%
- 16.4%
Series F - Banks
Series G - Banks
Total
$ 27,833
Office of the Secretary of the Treasury, Division of Research and Statistics.
October 21, 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.
9,847
7,287
9.978
8,420
9,469
18,956
12,837
Total
10,479
7,296
2,231
7,463
9,060
12,293
11,428
10,918
10,861
$ 14,036
$172,859
511
CONFIDENTIAL
6,323
4,324
6,400
3,654
3,611
2,913
9,286
4,098
5,272
4,989
3,908
3,482
4,969
3,800
3,013
October 21, 1941.
$ 78,824
$ 8,271
Series G
867
572
612
632
989
903
821
1,444
1,065
759
261
724
895
846
860
1,164
All Bond Sales
$ 14,700
$ 1,286
Series F
2,966
5,449
4,656
8,226
3,802
3,690
5,167
5,923
5,037
3,055
1,459
6,139
4,429
6,222
3,604
5,031
$ 79,335
$ 4,479
Series E
6,080
8,707
7,977
8,106
8,827
9,933
7,129
9.778
8,091
6,283
9,438
7,685
6,417
1,794
15,508
10,687
Total
96
$145,026
$ 12,587
511
4,324
6,323
6,400
9,286
2,913
3,611
3,654
5,272
4,098
3,482
4,989
3,908
4,969
3,013
3,800
$ 78,824
$ 8,271
Series G
867
(In thousands of dollars)
572
612
821
903
989
632
261
759
724
895
846
860
On Basis of Issue Price
Daily Sales - October 1941
1,164
1,444
1,065
UNITED STATES SAVINGS BONDS
Bank Bond Sales
$ 14,700
$ 1,286
Series F
2,786
3,299
1,696
4,778
2,595
3,674
4,270
3,672
2,400
3,624
1,022
2,175
3,054
3,609
2,424
3,395
$ 51,503
$ 3,029
Series E
437
1,870
2,150
1,270
3,449
1,207
1,363
1,652
1,495
1,291
879
1,376
2,515
1,422
1,180
2,827
$ 27,833
$ 1,450
Series E
Post Office
Bond Sales
Figures have been rounded to nearest thousand and will not necessarily add to totals.
United States Savings Bonds.
1
2
3 4
6 7
8
9
10
11
13
14
15
16
17
18
20
Total
Date
Note:
Source: All figures are deposits with the Treasurer of the United States on account of proceeds of sales of
Office of the Secretary of the Treasury, Division of Research and Statistics.
October 1941
UNITED STATES SAVINGS BONDS
CONFIDENTIAL
Defense Series F and G
97
Number of Units, by Denomination, Sold Each
Month from May through August, 1941
$5,000
$1,000
$10,000
:
Total
(in thousands)
:
:
$500
$100
Issue Price
:
:
:
Month
:
Units by Denomination
:
Series y
6,063
3,318
11,851
2,507
4,458
28,197
$ 52,711
June
5,500
2,410
7,191
1,184
1,541
17,826
22,404
July
8,233
3.536
9,904
1,541
1,633
24,847
27,032
August
7,027
2,862
6,774
1,107
999
18,769
18,080
26,823
12,126
35,720
6,339
8,631
89,639
$1,985
$4,487
$26,433
$23,454
$63,869
May
Total
Issue Price
(in thousands)
$120,228
Series G
32,207
15,000
57,414
10,815
18,916
134,352
$311,370
May
June
20,331
9,423
33,435
5,400
7,389
75,978
141,070
July
25,186
13,474
43,891
6,841
7,544
96,936
162,792
20,077
9,674
31,137
4,970
5,485
71,343
117,682
August
Total
97,801
47,571
165,877
28,026
39,334
378,609
$9,780
$23,786
$165,877
$140,130
$393,340
Issue Price
(in thousands)
fice of the Secretary of the Treasury,
Division of Research and Statistics.
$732,913
October 21, 1941.
uroe: Tabulations by the Division of Loans and Currency from an andit of original
stube.
Note: Issue price figures have been rounded to nearest thousand and will not
necessarily add to totals. Amounts do not agree with released sales
figures which were on the basis of deposits with the Treasurer of the
United States.
98
My dear Mr. Attorney General:
I am enclosing copy of a selfexplanatory letter which I sent to
Secretary Stimson yesterday.
I am personally interested in
this case, and am asking one of our
lawyers to fly to Honolulu tonight to
make an investigation of the fasts on
the ground. As soon as I have received
a report I should like to have an
opportunity to take the matter up with
you again.
In the meantime, I hope it will
be possible to secure a continuance of
the case, which has been set for trial
on October 27, 1941.
Sincerely yours,
(Signed) 2. Morgenthan. Jr.
The Honorable
The Attorney General of the United States.
Inclosure
EHFJr/HC/mp
Typed 10/21'41
Sent by message
1:30- Strugis
99
C
0
P
Y
October 20, 1941.
My dear Mr. Secretary:
On September 22, 1941, Lieutenant Markin R. Connelly of the
United States Army was fatally shot by Customer Guard John K. Yeung
at Honolulu, T. H., as the former was leaving the United States Army
Transport PRESIDENT CLEVELAND.
I an informed by the acting collector of customs at Honolulu
that the shooting occurred while the guard was on official duty, in
connection with an attempt of Lieutenant Connelly to pass through
the customs lines with a package without submitting it to inspection
upon the guard's request. Criminal prosecution of Mr. Young on a
charge of second degree murder has been instituted in the territorial
court, and I - informed by the Department of Justice that the case
has been removed to the federal court. The case has been set for
trial on October 27, 1941, and efforts of the counsel for the defendant to obtain a delay have been unsuccessful.
The Customs Agency Service of this Department is conducting an
investigation to ascertain the facts and evidence in the case. In-
formation has been received indicating that Meutenant Connelly and
an army nurse and two naval officers, who were with him, were all
under the influence of liquor at the time of the shooting. A man
and woman, who apparently were writing for Lieutenant Connelly outside
the customs barrier, allegedly witnessed the scane and then fled.
The customs agent conducting the investigation has consulted Lt.
Colonel Thomas H. Green of the Judge Advecate's office, Honolula.
Colonel Green indicated that he would insist upon a speedy trial; that
he would prevent the agent from interviewing the navy witnesses; and
that the army bitterly resented statements (which Colonel Green in-
correctly attributed to the acting collector of customs) appearing
in the press regarding Lieutenant Connelly's mental condition. Colonel
Green at first refused permission for the agent to interview the army
nurse. On October 15, 1941, however, he stated that the agent would
be permitted on October 20, but not sooner, to ask the nurse if she
oared to make a statement. The impression gained by the agent from
the manner in which this permission was granted was that the nurse
would probably refuse to furnish information.
The information available to - indicates that an employee of
the Bureau of Customs of this Department is awaiting trial on a charge
100
-2of murder for a shooting which apparently occurred in the course of
performing his official duties; that the case is being rushed to
trial before the Treasury Department has an opportunity to make the
necessary investigation; and that the Treasury Department has been
prevented from completing such investigation by the attitude of army
officials in Honolulu. I am, therefore, constrained to urge upon
you that you immediately instruct the appropriate army officials in
Honolulu, by telegraph, to cooperate not only in making all witnesses
available for interview by the customs agent, but also in encouraging
such witnesses to disclose fully and freely the information in their
possession. It is also requested that the local army officials be
instructed to cooperate in further efforts of counsel for the defendant
to delay the trial until the investigation can be completed.
Very truly yours,
(Signed) H. Morgenthau, Jr.
Secretary of the Treasury.
The Honorable
The Secretary of War.
RC:bl 10-20-41
(Note: This letter delivered by Secret Service agent to Secretary
Stimson personally at his home after office hours, October 20,
1941.)
101
October 21, 1941
3:41 p.m.
HMJr:
Secretary
Hello.
Stimson:
Henry, I've looked into your case in
HMJr:
Yes.
Hawaii.
S:
I find that the matter is in the hands of
HMJr:
Yes.
the Federal Court there
and that the Judge Advocate there has
S:
no - nothing - no official function to perform
at all.
HMJr:
S:
I see.
I have telegraphed that - quoting the protest
that you made to me about it, and say that it's
my desire - that it's my instructions that they
do not interfere in any way in the fair trial
of that case. That I want justice done.
HMJr:
S:
HMJr:
S:
Well, thank you 80 much. We've - we put
I know what the situation there can be where
the racial question comes in.
That's right.
And I talked pretty Dutch to the Judge Advocate
here about it.
HMJr:
Good.
S:
I don't know how it may be done, but I hope
HMJr:
Well, if I hear any more, I may take the
S:
HMJr:
liberty of calling you.
All right.
Thank you, Harry.
102
VISION
Collecting the Revenue
from Customs, 1941
Washington, D. C.
October 21, 1941
Joseph B. Poindexter
Governor of Hawaii
Honolulu, Hawaii
ROBERT CHAMBERS CHI.F COUN EL CUSTOMS AND FRED GARDNER
CUSTOMS AGENCY SERVICE ARRIVING HONOLULU ON FRIDAY
CLIPPER TO ASCERTAIN FULL FACTS FOR ME REGARDING FATAL
SHOOTING OF LIEUTENANT MARTIN R. CONNELLY, U.S. ARMY,
BY CUSTOMS GUARD JOHN K. YEUNG AT HONOLULU SEPTEMBER
22, 1941. I SHALL APPRECIATE ANY ASSISTANCE YOU MAY
BE ABLE TO EXTEND TO THEM.
(Initialed) H. No, Jr.
Henry Morgenthau, Jr.
Secretary of the Treasury.
Sent to telegraph office al 5:30 pm -10-21-41
ZHFJr/RC/fa
103
October 21, 1941.
MEMORANDUM
TO: Secretary Morgenthau
FROM: Mr. Gaston
Elmer Irey went over to see McReynolds today by
appointment, and by my direction, in order to clear up
the situation with respect to character investigations
of Defense candidates. He was surprised to find present
Ugo Carusi, Assistant to the Attorney General; Arthur
Flemming, Civil Service Commissioner; and Lawson A. Moyer
and Mrs. McMillin of the Civil Service Commission staff.
Carusi stated flatly that Hoover desired to take
over the investigations, leaving to us only the income
tax check-ups and that this had the Attorney General's
approval. He said the F.B.I. was unwilling to disclose
its records to other agencies and that the F.B.I. had
sole responsibility for investigating loyalty of candidates. Irey responded that it was plainly impracticable
to have two different field investigations by two different agencies; that we did not ask for the responsibility
of making these investigations and that we were willing
to surrender it at any time when properly directed to do
so. He mentioned some of the difficulties of getting
adequate cooperation from the F.B.I.
McReynolds said that he would write a memorandum
to the President recommending that the responsibility
for the investigations be transferred to the F.B.I. and
that a duplicate list be supplied to us solely for the
purpose of checking the income tax records.
104
October 21, 1941
4:35 p.m.
HMJr:
William
McReynolds:
Hello.
How do you do, sir?
HMJr:
Hello, Mac.
Mc:
How are you feeling?
HMJr:
Oh, a little cranky just at the moment. How
Mc:
Oh, a little cranky, too. You haven't fallen
HMJr:
Not for the moment.
Mc:
are you?
down in any more airplanes, have you?
Not for the moment? (Laughs) You scared me
to death. Has Mrs. Morgenthau permitted you
to go in the air again?
HMJr:
Yeah - under much stricter regulations.
Mc:
(Laughs) I talked to - Rus Waesche told me
about that, and I got scared all over again.
HMJr:
Yeah.
Mc:
Listen. I've been talking to Justice and
Elmer about this - the investigation of personnel.
HMJr:
Yes.
Mc:
And we've come to an arrangement by which they
take the stuff back and assume full responsi-
bility for it. That is the OEM group.
HMJr:
Mc:
HMJr:
Mc:
Yeah.
But I'm writing a letter - or memorandum - to
you for the President's signature
Yeah.
releasing you from the responsibility of
doing that in accordance with his memorandum
105
-2of February 28.
HMJr:
Mc:
Yeah.
I didn't think it was fair to you to make an
informal arrangement that this thing would be
taken away.
HMJr:
Mc:
I've got to have it in writing.
You've got to have it in writing, and you've
got to have it from the same source that
started it.
HMJr:
That's right.
Mc:
And I told the boys they couldn't budge an
inch or make any other arrangement until that
was done.
HMJr:
Mc:
That's right.
Yes, we're on the way to do that. The only
thing I've got is what Francis Biddle told me
that the President said. He didn't say anything
to me.
HMJr:
Well, I send them over there; and what Biddle
tells me the President said, is no good with
me.
Mc:
Yeah. Well, for that matter, neither is it
with-me.
HMJr:
What?
Mo:
Neither is it to me.
HMJr:
Yeah.
Mc:
And BO I'm putting it up, and if - I was sure
you wouldn't object as long as the President
authorizes the thing to be done, and
HMJr:
What makes you think the President's going to
sign it?
-3 Mc:
Iit.haven't the least idea whether he'11 sign
HMJr:
Well, if he wants to sign it, it's just one
Mc:
106
less worry.
Yeah, I should say so. And if he doesn't want
to sign it, why I'm perfectly happy about it.
But they come to me with instructions that we
should do 80 and so because the President said
so. Now I'm going to find out whether the
President said so.
Mc:
Who brought it to you?
Biddle called me himself.
HMJr:
I see. If the President wants to sign it, it's
HMJr:
Jake with me, Mac.
Mc:
Yeah. Well, I was sure. I just wanted you to
HMJr:
Well, I appreciate very much your calling.
Mc:
Thank you, sir.
HMJr:
It was very gentlemanly of you.
Mo:
Thank you.
HMJr:
Thank you.
Mc:
Good-bye.
know what I was doing on it.
107
ASSISTANT SECRETARY OF THE TREASURY
October 21, 1941.
MEMORANDUM
TO:
Secretary Morgenthau
FROM: Mr. Gaston
Admiral Waesche is sending me
over a copy of the Navy broadcast of
last Friday to ships in the Pacific,
but he remembers distinctly that it
provided that all ships bound for
Vladivostok should continue their
voyages.
ms.
the confidential material
brondemt was ret's
to on adm w aerche personally
per instructions of being
TREASURY DEPARTMENT
108
INTER OFFICE COMMUNICATION
DATE October 21, 1941
TO
FROM
Secretary Morgenthau
Mr. Thompson
Replying to your memorandum of today, I have obtained from
the Bureau of the Mint the following figures showing the number
of tons of metals used in our coinage. The figures shown are for
the fiscal years 1940, 1941, and estimated for 1942.
TONS OF METALS USED IN UNITED STATES COINAGE
Fiscal
Zinc
Tin
242
60
15
4,700
434
137
34
5,875
542
171
43
Year
Silver
Copper
1940
665
2,235
1941
1,220
1942,
1,525
estimated
at 25%
increase
over 1941
Nickel
109
OCT 21 1941
Mr. Donald M. Nelson,
Executive Director,
Supply Priorities and Allocations Board,
Social Security Building,
Kashington, D. C.
Dear Mr. Nelsons
I have your letter of October 17, 1941, suggesting that
the Mint consider the substitution of other materials for copper
and nickel in the manufacture of the one and five cent pieces.
I have instructed the Director of the Nint to proceed
at once with study and experimentation to determine what can be
done toward conserving these metals. Obviously, any substitutes
would have to be aduptable to the Rechanical processes of the Mint.
The Kint will be working under pressure between now and Christans to
meet the heavy coinage orders. Only limited progress, therefore,
toward conservation of niskel and copper our be expected during that
period. Already, however, the Mint has made some experimentation and
finda that Monel metal can be substituted for electrolytic refined
nidsel, of which I understand there 1a a serious abortage.
However, any change in the content of these coins will re
quire legislation. AS soon as our experiments have been completed
I shall request such change in the present laws as is deamed desireble
in view of the experiments.
Sincerely,
(Signed) H. Morgenthau, J20
Secretary of the Treasury.
By Messenger Browne
4:25pm
October 30, 1941.
champeon
SUPPLY PRIORITIES AND ALLOCATION BOARD
SOCIAL SECURITY BUILDING
WASHINGTON, D.C.
October 17, 1941
Mr. Secretary:
On behalf of the Supply Priorities and Allocations Board, I wish
strully to direct your attention to a rather serious problem, in
solution of which your Department can render an important contribuHon to the success of the effort in which our nation is now engaged.
As you know, we are expecting the phenomenon of priority unemplayment to have severe repercussions upon civilian morale. In the
idustries using non-ferrous metals the shortage of materials will be
extremely troublesome. Although we all realize that the consumption
copper and nickel in coinage is not normally a significant amount,
seems to me that the enclosed charts clearly indicate that consumption
these metals by the mint is today a matter regarding which the
Priorities and Allocations Board may properly concern itself.
ordingly, I wish to outline to you the situation with regard to the
ferrous metals used in coinage.
The situation in copper is as follows. Defense and essential
drillan requirements exceed available supply by approximately 230,000
year. As a result of our efforts to stimulate domestic pro-
and to increase imports of this metal, we expect an additional
000 tons to become available in 1942, but we do not expect this to
page with the increase in military needs. We must also remember
the. substitution possibilities are drastically limited because of
electrical uses of copper. You can readily understand, therefore,
are concerned regarding supplies of this metal.
Niokel has been under allocation since March of this year.
15,500,000 pounds is available each month against a demand of
,000 pounds. Of this amount we are allocating 1,000,000 pounds
th to oivilian uses which has enabled us to meet requests bearing
erence rating of B-2 or higher, i.e., "Materials for the manufacf parts for the repair or replacement of existing apparatus,
nt, and devices which must continue to operate in order to pre- for
essential production and services." It has been impossible
st eight months to meet requests for niokel bearing a preference
of B-3 or lower, i. e., "Materials for new apparatus, equipment,
vices used directly in operations which must continue in order
serve essential production and services.
-
Our forecasts of the supply available for 1942 indicate that we
peot the production rate to fall by approximately 500,000 pounds
th
or 3.2 per cent. Our Iron and Steel Branch estimates that
per
military nickel requirements in 1942 will show an increase of 70
per cent over 1941. In view of the fact that an increase of only 6.5
per dent will destroy the marrin on which the Civilian Supply Division
is now making allocations, an extremely severe shortage of nickel
must be expected for 1942. The situation is rendered even more acute
by the extremely small stock of nickel now on hand. Our military
reserve amounts at the present time to only ten days' supply.
Considerable impairment to essential civilian industries has
resulted from the nickel shortage, and we cannot be certain that some
of this damage has not been the result of our efforts to fill the mint
demands. It was recently the unpleasant duty of our Board to deny to
the Tennessee Eastman Corporation the stainless steel they required for
the construction of a plant for the manufacture of plastics. That
corporation offered evidence that their proposed plant would have
provided materials capable of replacing 8,000,000 pounds of aluminum,
18,000,000 pounds of chrome nickel plated steel, 6,000,000 pounds of
stainless steel, and 34,000,000 pounds of zinc. This request was
denied because 01' the nickel shortage, and the amount of nickel contained
in the stainless steel requested by that corporation was approximately
the same amount as is consumed by the mint in an average month.
Widespread unemployment has resulted from the copper and nickel
shortages and many, small business men, to whom a supply of metal means
economic life or death, have suffered as a result of the demands of
the mint. In the case of nickel, our Labor Division estimates that the
metal allocated to the mint, if made available to the electrical produots industry, would permit the employment of 55,000 persons.
I am sure it is not your wish to see this continue into 1942,
ticularly since we can state with assurance that no improvement in
the metal shortage is in sight. I know you will be very deeply oonraed by this situation, and A believe you will agree with mo that
sive and prompt action must be taken. I am confident that you will
ist that the Treasury Department assume its full share of this
len. It is our desire to extend all possible aid to your Department
to task of accommodating its policies to the changed conditions,
It is hoped that the Treasury will be able to come forward with its
solution.
Since legislation will probably be necessary, we believe it should
laked for by the Treasury with the purpose, given as that of making
(lable to the Armed Forces certain strategic metals. In the choice
substitute materials we certainly feel that the Treasury Department
Id make the decision in the light of its knowledge of the suitity of such materials for use in coinage.
-
this connection, I want to pass on to you our thoughts on
materials with the hope that they may be of some value to
y Department. First I wish to mention that my staff in-
that a lignin base plastic made from farm waste might prove
ood substitute for the existing one-cent coins. These plastics
and there is no shortage of any of the materials needed in
facture.
the case of five-cent coins it will apparently be necessary
tal if we are to avoid causing trouble in the coin-operated
how in use. The Division of Civilian Supply has circularised
raturers of "slug-rejecting" devices who state that a substiin should have a density above 8.2 grams per cubic centimeter
Minimum conductivity of 30 microhms per cubio centimeter. My
olls me that an alloy of zino and silver with small amounts of
d
electrolytic manganese would have approximately these pro-
Since a relative surplus of these metals exists, we would
the testing of such an alloy in your coining presses.
I might also say that it has been suggested that the resulting
in appearance of the coins might be turned to good account by
ting these coins 8.8 "Defense" or "Victory" coins. This would
ly increase the awareness of the man in the street to our
with a resultant stimulating of desire to follow the lead of
easury in the conservation of all strategic materials. Such acold have an excellent effect on the morale of the business
ty.
By making available to civilian industry the non-ferrous metals
in coinage we will obtain an increase of approximately 3 per
in the amount of copper available for civilian use, and 14 per cent
amount of nickel; at the expense of a reduction in the supply
no available for civilian use of only 0.35 per cent. This supply
pper and nickel should enable us to increase production of useful
and services to an extent which may contribute materially to the
11 of inflation. The virtues of this method of inflation control
obvious for comment.
I will greatly appreciate any recommendations for an equitable
did solution of this problem.
With best wishes.
Very truly yours,
Whileen
Donald M. Nelson
Executive Director
Supply Priorities and Allocations Board
able Henry Morgenthau, Jr.
of the Treasury
COMPARISON OF O.P.M. INDUSTRY ALLOCATIONS OF NICKEL
WITH DELIVERIES TO U.S. MINT
AVERAGE DELIVERIES - 1st 8 MONTHS OF 1941
THOUSAND POUNDS
60
40
20
80
100
120
140
O
Spark Plugs
Incondescent Lamp
Bulbs (proposed)
Electrical Appliances
(Stoves, Toosters etc)
Thermostats
Radio Tubes
(proposed)
Optical Goods
Redio Speakers
(Afnico Magnets)
Stainless Steel
Pins
Mint
20
40
60
80
100
120
140
THOUSAND POUNDS
O
ON OF O.P.M. INDUSTRY ALLOCATIONS OF COPPER
WITH ALLOCATIONS TO U.S. MINT
SEPTEMBER AND OCTOBER, 1941
2
3
6
7
I
I
idential)
THOUSAND SHORT TONS
5
8
O
(Passenger)
Sets
-
III
!!!!!
a
Conditioning
1940 Monthly Average
September 1941 (Estimate)
October 1941 (Estimate)
11.
R
III
Lomps
:
Goods
Div. Allocation
Supply Din Allocation)
IIIIII
8
7
6
5
4
3
2
I
O
THOUSAND SHORT TONS
EXPRESSED IN PERCENTAGE OF 1940 CONSUMPTION
100
200
PER CENT
300
O
200
300
PER CENT
115
1941
My dear Mr. Secretary:
Reference is made to a letter from Mr. Berle, dated
October 18, 1941, (Nu 311.512342 Double/158), forwarding
a note from the Canadian Minister and inquiring as to the
date for the resumption of discussions relative to a convention between Ganada and the United States for the
avoidance of double taxation.
It is noted that the Deputy Minister of Finance and
the Commissioner of Income Tax will be able to proceed
to Washington in the latter part of October to continue
the discussions which were held in Ottava on October 6.
7. and 8. Accordingly, if convenient to the represents-
tives to the discussions, we should desire to commence
further consideration of the proposed convention on
October 27. 1941, is the Board of Tax Appeals room,
Bureau of Internal Revenue, Washington. D. C.
Sincerely yours,
(Signed) a. Morgenthan, Js.
Secretary of the Treasury
The Honorable
The Secretary of State
Washington, D. C.
By Messenger
Haifd
10/21/41
File to Mr. Inompo
DEPARTMENT OF STATE
WASHINGTON
October 18. 1941
In reply refer to
A 811.512342 Double/158
My dear Mr. Secretary:
Reference 18 made to Mr. Smith's letter of September 26, 1941, and to previous correspondence concerning
the resumption of exploratory discussions with the
Canadian authorities looking toward the conclusion of
a Convention between Canada and the United States for
the avoidance of double income tax.
There is enclosed a copy of note no. 630 dated
October 13, 1941, from the Canadian Minister at Washing-
ton indicating that the Deputy Minister of Finance and
the Commissioner of Income Tax will be able to proceed
to Washington in the latter part of October to continue
the discussions which were held in Ottawa on October
6, 7 and 8.
In
Honorable
Henry Morgenthau, Jr.,
Secretary of the Treasury.
T
-2-
In order that I may be in a position to reply to
the enclosed note, I should appreciate your informing
no as BOON 8.8 conveniently possible of the date on which
officers of your Department desire to commence these
further discussions.
Sincerely yours,
For the Secretary of State:
Assistant
Secretary
Adolf
and
A. Berle, Jr.
losure:
From Canadian Legation,
October 13, 1941.
October 13, 1041
No. 630
Sir,
I have the honour to refor to discussions
which took place in Ottawa on October C, 7 and 0,
botwoon representatives of Canada and the Unitod
States, looking to the conclusion of a convention
for the avoidance of couble taxation, at which time
a provisional draft convention was prepared to sorvo
as a basis for further consideration. The represen-
tatives of the nited States bolioved that another
meeting should be :eld at all oarly Late for the
purpose of putting t. .o provisional draft into final
form for signature.
I are instructed by IV Covernment to
inform you tlint t.o oputy Ministor of Finance and
the 5. Incano Tax will Do ablo to procood
to notify ton C.O lattor part of october. I 821 to
add that Jarlia ant note carly in November and that
it 1207 provo For those officials to be
absout from Ottawa aftor Parliament convenes. In view
of Choco conal..orall ND, : a. Do crateful to loarn
want Cate www. mont t. c conventonce of the United
Statos or C. o proposed mooting.
The Sort
Cordell mull,
barry of Stato of the
I have the honour to be,
wit.. the Highost consideration,
Sir,
Your nost obedient,
humblo servant,
United States,
Washington, D. C.
Leighton McCarthy
Farm
119
October 21, 1941
MEMORANDUM FOR THE SECRETARY
In accordance with your request of October 20, 1941,
there are submitted for your information data on income and
profits taxes paid by individuals and corporations in the
United States, Great Britain, and Canada.
1. Income taxes on individuals
In the United States individuals are subject to one
Federal income tax which includes the normal tax and surtax.
Income taxes are also imposed by 31 States, the District of
Columbia, and the city of Philadelphia.
In Great Britain as in the United States individuals
pay one income tax which includes the income tax and surtax.
In Canada individuals pay two national income taxes,
the income tax proper which includes the income tax and the
surtax on investment income and the National Defence Tax
which is collected at source. Income taxes are also imposed
by 6 provinces.
in
As shown in Table 1, the individual income tax 1e lower
the United States than it is in Great Britain or Canada.
For exemple, for a married man with no dependents and a net
income of $5,000, the income tax (including the New York State
tax) is $406 in the United States, $1,855 (before post-war
credit) in Great Britain and $1,000 in Canada; that is, the
American income tax at this level of income is approximately
one-fifth of the British tax and two-fifths of the Canadian.
2. Income taxes on corporations
In the United States corporations pay an income tax, a
surtax, and an excess profits tax. Corporation income taxes
are also imposed in 32 States and the District of Columbia.
In Great Britain corporations pay an income tax and
either the National Defence Contribution or the excess profits
tax, whichever is greater.
120
2-
In Canada corporations pay an income tax and an excess
profits tax. In addition taxes are imposed by 5 provinces.
As shown in Table 2, the income tax rate in the United
States (combining the Federal and New York State rates) 18
35 percent. The minimum British tax is 55 percent (50 percent income tax and 5 percent National Defence Contribution)
British corporations may reimburse themselves with respect
to the income tax when distributing earnings to shareholders
and are, therefore, merely the withholding agente with respect
to the standard rate of 50 percent on dividends. The minimum
rate of income tax in Canada is 40 percent (18 percent income
tax and 22 percent minimum excess profits tax).
The United States excess profits tax rates range from
35 percent to 60 percent on excess profits in excess of (a)
a credit of 95 percent of average earnings for 1936-1939, or
8 percent on the first $5,000,000 of invested capital and
7 percent on the balance, whichever is greater, and (b) a
specific exemption of $5,000. The British excess profits tax
is imposed at the rate of 100 percent on profits in excess of
average profits with a minimum tax equal to 5 percent of net
income. Under the Finance Act of 1941, provision is made to
credit 20 percent of the net amount of excess profits tax
paid by every concern and to refund such amount after the war.
The Canadian excess profits tax is 75 percent of profits in
excess of average profits, with a minimum tax equal to 22
percent of net income.
3. Social security taxes
In addition to income taxes social security taxes are
collected from employees and employers in the United States
and Great Britain. In the United Kingdom the amount of tax
payable depends upon employees' age and sex and not upon the
amount of earnings. The Dominion of Canada imposes no social
security taxes but does maintain a voluntary annuity system.
Provincial taxes for social work purposes such as, for example,
the hospital tax in Quebec are also imposed. This tax is 5
percent of the sale price of meals if such price is 35 cents
or more. The procedes of this tax are devoted to the maintenance
of charitable hospital facilities.
RoyBlough
121
Table 1
Comparison of present individual income taxes in United States
(including New York State), Great Britain and Canada 1
Married person - no dependents
(including
New York State)
640
credit) 4/
A. Amounts of tax
Post-war
Canada 5
credit 4/
5
-
800
-
-
-
6
42
8
52
52
111
61
235
76
325
112
505
127
-
5
$
1,000
1,400
1,600
2,000
2,500
Great Eritain 37
Tax (before post-war
-
2/
-
Income
:
United States
&
95
175
90
730
147
275
3,000
5,000
147
955
160
400
406
10,000
50,000
100,000
1,524
21,700
54,808
747,861
1,855
4,505
36,455
84,080
961,850
227
260
260
260
1,000
3,080
26,965
61,875
871,045
1,000,000
260
B. Effective rates of tax
-
-
-
96.2
-
84.1
-
45.1
72.9
-
Treasury Department, Division of Tax Research
31.8
37.1
-
1,000,000
15.2
43.4
54.8
74.8
25.3
29.2
-
100,000
-
50,000
-
10,000
3.6
4.9
8.1
20.3
-
-
3,000
5,000
0.4%
2.1
11.1
16.8
-
-
2,000
2,500
-
1,600
6.5
-
1,000
1,400
-
-
800
0.8%
-
640
5.9%
8.8
11.0
13.3
20.0
30.8
53.9
61.9
87.1
October 21, 1941.
Keximum earned income assumed. Basis of computation: For United States (Revenue Act of
1941) earned income credit 10% (maximum $1,400) and personal exemption $1,500; for
New York (Consolidated Laws, Chap. 60, Art. 16) no earned income credit, personal exemption 32,500; for Great Britain, (Finance Act, 1941) earned income credit 10% (maxium $600) and personal exemption $560. For Canada (Income War Tax Act of 1941) incomes
up to 30,000 assumed to be earned and incomes of more than $30,000 assumed to include
earned income of that amount and additional investment income to make up the total, exemption or $1,500 for purpose of surtax on investment income and personal exemption
$1,500. The British surtax rates are applicable to total income before personal exemotion and credit for dependents and "earned income" credit, the United Statesbefore
surtex
rates apply after deduction of personal exemption and credit for dependents, but
"earned income* credit; the Canadian surtax applies only to investment income.
Net income before deductions for State income tax and personal exemption. Under the
New York law, the Federal income tax is not allowed as 0 deduction in computing net income, whereas under the Federal law, State income taxes are allowed as deductions in
arriving at net income.
Pound converted at $4.00.
Under the Finance Act of 1941 the personal allowance of married persons WAS reduced from
170 to 1140, and for single persons from 1100 to LSO. The exemption limit was decreased
from 6120 to L110 and "earned income" credit was reduced from 16-2/38 with a meximum
credit of £250 to 10% with a maximum credit of 6150. A system of forced saving was introduced, The saving 18 the difference between the tax computed on the basis of (a) the
old personal exemptions and credits and (b) the new exemptions and credits and is to be
repaid to the taxpayer after the war. This post-war credit is limited as follows: (a) all All
earned income 660 ($240) for a single person and 165 (8260) for a married person; (b)
investment income 610 ($40) for 8 single person and 615 (860) for B married person.
Dominion taxes only. Includes defense tax.
122
Table 2
Comparison of present corporation income and excess
profits taxes
in theGreat
United
States
(including
State),
Britain,
and
Canada.New York
Income tax
Canada
:
: New York State)
Great Britain
:
:
: (including
:
: United States
50% 2
35% 1
18% (20% for
(for corporations
corporations
net incomes of more
than $25,000)
solidated
returns)
filing con-
with normal tax
Minimum under
excess profits
tax
Total income tax
Excess profits tax
-
5
55% 2
35%
35%-60% 3
100% of excess
22
40%
75% of excess
profits 4 or 5%
profits 5/ or
whichever 18
greater
come whichever
of net income
Treasury Department, Division of Tax Research
22% of net in-
is greater
October 21, 1941
1 Includes Federal normal tax of 24%, surtax of 7% and New York State
tax of 6%. The New York tax is allowed as a deduction in determining
net income subject to Federal normal and surtax. The total rate,
when this deduction 18 considered, can not exceed 35%.
2
3
The corporation may reimburse itself for the tax when distributing
earnings to shareholders. The corporation therefore is merely the
withholding agent with respect to the standard rate of 50% on
dividends
The excess profits tax is imposed at graduated rates on excess profits
net income in excess of (a) a credit of 95% of the average earnings
for 1936-1939 or 8% on the first $5,000,000 of invested capital and
7% on the balance, whichever is greater and (b) a specific exemption
of $5,000. New York State imposes no excess profits tax.
The excess profits tax is imposed on the excess of profits of the
taxable year over profits for 1935, 1936, the average of 1935 of and
1937 or the average of 1936 and 1937. Under the Finance Act
1941, 20% of the net amount of excess profits tax paid by every
concern (after deducting any repayment on account of deficiencies)
is treated as a credit to be refunded to the taxpayer after the
war at such date as Parliament may determine.
The excess profits tax is imposed on excess profits net income in
excess of the average profits for 1936-39.
123
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE October 21, 1941
TO
Secretary Morgenthau
FROM Vincent F. Callahan
With regard to your memorandum of October 21st asking
if the farm announcements of the Treasury Department were cleared
with the Department of Agriculture, I wish to advise that we have
not checked the farm announcements with the Department of Agriculture.
However, arrangements are being made to check all future announcements
with them.
For your information the farm announcements were written
by several experienced farm directors of radio stations in the
Middle West. These men are actively engaged in broadcasting to
farmers every day.
Vincent -). Collahs
123-A
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATEOctober 21, 1941
TO
George Haas
FROM Secretary Morgenthau
I wish you would find out whether there is any way
of our learning whom the real speculators have been
recently in cotton, wheat, lard and some of the other
commodities. I am really interested.
I wish you would talk to somebody in Secretary
Wickard's office. I think it would be very interesting
if we could find out whom these people are because I
feel that the speculation has had a lot to do with the
price rise. Let me know about it as soon as possible.
Druiting arranged at 3:30 Today
get minutes De but tists meeting
(muting not recorded
of speculators were shown
to Hago by d. Dept.-
123-B
Every trader in the futures markets for the following
commodities, having a position in any one future in any one
market equal to or greater than the limit mentioned, must
report to the Commodity Exchange Administration daily (or
whenever any change in his position is made).
.
If
Barley
If
Oats
200,000 bushels
If
Wheat
Corn
Limit
If
Commodity
If
Rye
Flaxseed
Potatoes
Lard
Cottonseed oil
Soybean oil
.
Eggs
25 carlots
#
Soybeans
Butter
250,000 pounds
300,000
Cotton
5,000 bales
1,000 tons
Soybean meal
1,000
Cottonseed meal
Mill feeds
Wool tops
1,000 .
125,000 pounds
In addition to the above commodities, the Commodity
Exchange Administration has similar authority over certain
other commodities in which there is at present no futures
trading, namely, rice, grain sorghums, tallow, cottonseed,
peanuts, and peanut oil.
THE BRITISH SUPPLY COUNCIL IN NORTH AMERICA
Box 680
BENJAMIN FRANKLIN STATION
TELEPHONE REPUBLIC 7860
WASHINGTON D. c.
October 21, 1941
Dear Mr. Morgenthau:-
My colleagues, who have just returned from
an interesting and delightful interlude in your little
theatre, wish to join their hearty thanks and appreciation
with mine for your kindness in giving them this opportunity
of seeing two fascinating films, "The Bomber" and "Revolt
in Norway".
Yours sincerely
Morris W. Wilson
Chairman
The Hon. Henry Morgenthau, Jr. ,
Secretary of the Treasury of the U.S.
Washington, D.C.
124
125
Free Synagogue
Synagague house
NEW YORK
40 WEST 68 STREET
NEAR CENTRAL PARK
October 21,1941.
Hon. Henry Morgenthau, Jr.
Treasury Department
Washington, D.C.
Dear Henry:
My heartfelt thanks for your fine word about Justice
Brandeis, which we shall be glad to publish. I have not seen
you since the day that Brandeis spoke of you to me in terms
of high appreciation. It rejoiced my heart to hear him speak
of you as he did. I am grateful to you for having said and
done things which brought comfort to his great heart
for
other
Faithfully yours,
SSW:W
POST OFFICE Box 6677
126
1601 y STREET N. W.
WASHINGTON. D.C.
October 21, 1941
The Honorable
The Secretary of the Treasury
Washington, D. C.
My dear Mr. Secretary:
The changes which have been taking place in the past
few weeks in the Far Eastern front and the enormous importance
of preventing Japan from stabbing Russia in the back while she
faces Germany in Europe have raised new problems in the opera-
tions of "China Defense Supplies", about which I would like to
have the guidance of the President.
Just as appointments for diplomatic representatives
are arranged on the advice of the Secretary of State, I understand it will be proper for a technical representative such as
myself to be introduced for a personal interview of this importance through the Secretary of the Treasury. I have had indications that the President would be willing to see me at this
time. But because I wish to make sure that I act in accordance
with the procedure indicated, I am applying to you for the
courtesy of arranging an appointment as early this week as possible.
Respectfully yours,
as
j
P.M.
Ac. 10-22-41
T. V. Soong
127
October n. 1941
Dr. Fets
D. W. Bell
Please send the following cable to the American Babasay, Changing
For Fex from Union Secretary Bell.
As you remember Press was to assist is establishing the accounting
precedure is connection with the operations of the Stabilization Fund.
As the Fund is - actively operating I accure that his assignment is
completed. As Frese is new nooded here is the Treasury I suggest that
arrangements be sade se that he - return to this country with Bechras
or seener. Best regards.
TD:da-lap-10/21/41-2
128
TELEGRAM SENT
GRAY
PM
October 21, 1941
10 p.m.
AMEMBASSY,
CHUNGKING VIA N.R.
246.
FOR FOX FROM UNDER SECRETARY BELL.
"As you remember Frese was to assist in
establishing the accounting procedure in connec-
tion with the operations of the Stabilization
Fund. As the Fund is now actively operating I
assume that his assignment is completed. As
Frese is now needed here in the Treasury I suggest that arrangements bE made so that he can
return to this country with Cochran or sooner.
Best regards . If
FF:VCL
HULL.
(FL).
129
DEPARTMENT OF STATE
WASHINGTON
In reply refer to
October 21, 1941
FF FW 893.51/7323
The Secretary of State presents his compliments to the
Honorable the Secretary of the Treasury and transmits here-
with five copies of the paraphrase of telegram no. 404, dated
October 9, 1941, from the American Consulate General at Hong
Kong concerning the report by the Stabilization Board of its
statement of operations for the period, August 18 to September
30.
Enclosure:
No. 404, October 9. 1941,
from Hong Kong.
Copy: VW: 10-21-41
130
Corrected Copy
PARAPHRASE OF TELEGRAM RECEIVED
FROM: American Consulate General, Hong Kong.
DATE: October 9. 1941, 5 p.m.
NO. : 404.
THE FOLLOWING IS IN STRICT CONFIDENCE TO THE SECRETARY OF
THE TREASURY FROM FOX.
It is desired by the Stabilization Board of the assembly
that I report that its statement of operations, covering the
period from the 18th of August to the 30th of September, has
been drafted and that the Board is now reviewing it. This
statement will be sent on the next Clipper. In the meantime,
the Board wishes to make the following report for your
confidential information:
APPLICATIONS
Rejected: $ 3,755,881
Approved:
6,894,108
Rejected: pounds sterling - 224,291
Approved: pounds sterling - 913,665
The above message is a paraphrase of the original one.
SOUTHARD
NPL
FF:VCL
Copy: VW: 10-21-41
C
131
P
Y
DEPARTMENT OF STATE
Washington
In reply refer to
FF 840.51 Frozen Credits/3952
October 21, 1941.
The Secretary of State presents his compliments to
the Honorable the Secretary of the Treasury and transmits
herewith copies of telegram no. 413, dated October 17. 1941,
from the American Embassy at Chungking concerning the
freezing of Chinese capital in the United States.
Enclosures:
No. 413 from Chungking,
October 17. 1941.
GRAY
TEM
132
Chungicing via N.R.
Dated October 17, 1941
Rec'd 11 p.m.
Secretary of State,
Washington.
413, October 17. 2 p.m.
The Embassy has received a third person note from the
Minister for Foreign Affairs which reads substantially as follows:
"At the request of the Chinese Government the American Govern-
ment has frozen the capital of the Government and people of China
in the United States. For future remittances of the Chinese Overseas, the Chinese Government has now fixed four principles as follows:
(One) The remittances of Chinese residents at various localities
abroad shall be concentrated in and handled by the Central Bank of
China;
(Two) The Central Bank of China may at places abroad commission
the Bank of China, Bank of Communications, or Farmer's Bank of China
as its agent banks, but it shall commission only one agent bank each
locality;
(Three) Having obtained the permission of the Central Bank of
China and the concurrence of the aforementioned agent banks, the banks
originally handling remittances of Chinese Overseas, make application
* This telegram is a correction of Message No. 414 from Chungking,
dated October 7. 1941.
133
-2-
to do so but shall pay the local currencies received to the
agent banks commissioned by the Central Bank of China and
the agent banks shall credit the amounts (?) Central Bank's
account; and,
(Four) The equivalent in legal tender notes shall be
reimbursed by the Central Bank of China to the remitting
banks through the commissioned agent banks.
The Bank of China at New York and the Bank of Communi-
cations at Manila have been commissioned agent banks for
the American continent and the Philippine Islands respectively."
The Ministry requests that the appropriate American
authorities be informed of the foregoing in order that they
may be able to assist in the matter.
GAUSS
NPL
Copy:bj:10-21-41:eh
134
PARAPHRASE OF TELEGRAM RECEIVED
FROM:
AMERICAN CONSUL, SHANGHAI
TO:
Secretary of State, Washington
DATED:
October 21, 1941, 5 p.m.
NO.:
1523
A United Press despatch from Washington indicating that
as a result of recent conference between Chinese and American
and British financial representatives Chinese currency at
Shanghai may no longer be supported by Stabilization Board
disturbed Shanghai yesterday. While discrediting the report
with its implied imminent application, Chinese bankers expressed
belief that abandonment of official exchange would not be
advisable under present Far East circumstances. Such action
they believe would promptly result in Japanese or Manking
authorities placing Shanghai foreign trade under complete control
perhaps instituting for foreign trade something akin to barter
system. If such action were not taken with regard to import
trade control, however, black market exchange operations would
increase greatly although substantial limitations would be provided by effective export controls in foreign countries,
It would obviously be very difficult for Manking or Japanese
regime to effect any immediate displacement with their own fiat
currencies owing to the enormous volume of Chinese national
currency in circulation in Shanghai foreign controlled areas and
east (?) region. The Hanking regime would probably announce
severance of parity between the Chinese national currency and
the
135
-2-
the "Central Reserve Bank currency and would then establish
an arbitrary ratio between these two currencies. There would
also doubtless be an announcement for retirement of the Chinese
national currency in progressive stages over a considerable
period as time would be required for either the Nanking or
Japanese regime to print enough of their own notes to make the
replacement owing to acute shortages in Japan and here of paper
and printing facilities. There would be acceleration of advance
in commodity prices in Shanghai in terms of Chinese national
currency beyond the present upward pace despite official exchange
for imports being available. Public consumption goods shortage
might thus become acute and it could be anticipated that there
would be serious privation as in Japan, Manchuria and other
warring countries. If equitably distributed locally without
diversion for outside purposes, present abnormal stocks of
most staple commodities in Shanghai are probably adequate for
six months requirements or more.
Although perhaps with more restricted allotments it is the
belief according to indications that local Chinese bankers expect
Stabilization Board policy will be to continue exchange support
of Shanghai. This belief appears to be confirmed by official
denial today of press reports issued yesterday
in Chungking,
LHE
OF
but it is anticipated that further measures to eradicate local
black exchange market will be taken. bit is
AMERICA DELVERVER
RECEIVED
Copyshr:10-27-41.
LOCKHART
136
PARAPHRASE OF TELEGRAN RECEIVED
DATE: FROM: American Subassy, Rio de Jameire, Brasil.
October 21, 1941, 9 D.E.
NO.: 1553.
banks The Bank of Brasil has been informed by the Govern-
two ment of Switzerland and Portugal that the
Government banks may ship gold to Brasil for latter safe-
keeping and the Bank of Brasil replied that 11
CAFFERY
disposed to cooperate in the batter under
reference. is
BB
EAIGLINE
TREASURY DEPARTMENT
137
INTER-OFFICE COMMUNICATION
DATE October 21, 1941
Chaunony,
TO
Secretary Morgenthau
CONFIDENTIAL
FROM Mr. Dietrich
Registered sterling transactions of the reporting banks were as follows:
$51,000
Sold to commercial concerns
Purchased from commercial concerns 11,000
Open market sterling was again quoted at 4.03-1/2, and there were no reported transactions.
In New York, closing quotations for the foreign currencies listed below
were as follows:
Canadian dollar
Argentine peso (free)
11-1/8% discount
Uruguayan peso (free)
Venezuelan bolivar
.2370
.0505
.5775
.2070
.4650
.2650
Cuban peso
1/8% discount
Brazilian milreis (free)
Colombian peso
Mexican peso
We sold $20,000,000 in gold to the Swiss National Bank, which was added to
its earmarked account.
No new gold engagements were reported.
In London, both spot and forward silver were again priced at 23-1/2d,
equivalent to 42.67
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 silver purchases today.
The Federal Reserve Bank's report of October 15. listing deposits of banks
in Asia with the New York agencies of Japanese banks, showed that such deposits
totaled $57,741,000, an increase of $155,000 since October 8. Also reported were
selected items from the statement of the Yokohama Specie Bank's New York Agency,
which revealed no appreciable changes.
138
-The report of October 15, received from the Federal Reserve Bank of New
York, giving foreign exchange positions of banks and bankers in its district,
revealed that the total position of all countries was short the equivalent of
$3,591,000, a decrease of $295,000 in the short position since October 8. Net
changes were as follows:
Country
England**
Europe
Canada
Latin America
Japan
Other Asia
All others
Total
Short Position
October 8
$ 831,000 (Long)
2,570,000
191,000 (Long)
11,000 (Long)
314,000
2,115,000
80,000 (Long)
$3,886,000
Short Position
October 15
$1,167,000 (Long)
2,465,000
32,000 (Long)
51,000
351,000
1,979,000
56,000 (Long)
$3,591,000
Change in
Short Position*
- $336,000
- 105,000
+ 159,000
+ 62,000
+
-
136,000 37,000
+ 24,000
- $295,000
*Plus sign (+) indicates increase in short position, or decrease in long position.
Minus sign(-) indicates decrease in short position, or increase in long position.
**Combined position in registered and open market sterling.
A
CONFIDENTIAL
139
RESTRICTED
G-2/2657-220; No. 524 M.I.D., W.D. 11:00 A.M., October 21, 1941
SITUATION REPORT
I. Eastern Theater.
Ground: Information is lacking on the progress of military
operations on the Central Front. German armored units appear to be
pushing against strong Russian fortifications north, west and south
of Moscow. The mass of the German infantry has not yet closed up
on their armored divisions.
South of Kharkov, the German High Command claims
the capture of Stalino, 100 miles northwest of Rostov.
German troops have gained a footing on the island
of Dagoe.
II.
Western Theater.
Air: The British Air Ministry communique claimed heavy
action against Bremen, %ilhelmshaven and Emden, and other parts of
northwest Germany during last night. There was daylight action
over France but weather conditions limited the action.
No German activity has been reported for this thea-
ter last night.
III.
Middle Eastern Theater.
Air: British sources admit another bombing of Tobruk,
but claim effective action against Axis shipping in the Mediterranean and the bombing of Comiso and Licata, in Sicily, and Benghazi,
in Libya.
RESTRICTED
140
October 22, 1941
9:30 a.m.
GROUP MEETING
Present:
Mr. White
Mr. Gaston
Mr. Bell
Mr. Blough
Mr. Thompson
Mr. Schwarz
Mr. Sullivan
Mr. Foley
Mr. Kuhn
Mr. Haas
Mr. Morris
Mrs. Klotz
H.M.Jr:
After the meeting I would like Mr. Bell and
Thompson and Mrs. Klotz to stay.
Herbert?
Gaston:
I have a memorandum here about a visit of
Elmer Irey to McReynolds yesterday. We
decided that that matter of investigations
was really a matter that was up to the
White House to decide, and I asked him to go
over and see McReynolds. When he went over
there he found that McReynolds had with him
Carusi and a delegation from the Civil Ser-
vice Commission. Carusi said flatly that
Hoover wanted to take over those defense
personnel investigations because he did not
want to reveal his records to any other agency,
and he thought there ought not to be two different
field investigations. Elmer Irey agreed
that there ought not to be two
141
-different field investigations, and we were
quite willing, if the White House wished
to take it back from us - that it wasn't
at our request that we took it, and we were
perfectly agreeable to whatever the White
House decided.
The upshot of the meeting was that Mc Reynolds
said he would write a memorandum to the
President recommending that the investigations
be turned back to the FRI and that we
would have duplicate lists for checking
income taxes only. That is the way the
thing stands.
H.M.Jr:
Thompson:
That isn't what Mr. - the Attorney General
told me.
No. His proposal was that Almer Irey investigate everything but loyalty and subversive
activity, but I think that would have been
impossible to do.
H.M.Jr:
That isn't what he told me.
Thompson:
No.
Gaston:
They had changed positions and - well, in
H.M.Jr:
If you were me, Ed, would you call up
Francis Biddle and just let him know that he
the first place we were surprised to find
they were there. In the second place,
they had changed positions. They wanted
to take the whole thing back again. I
think Elmer was right. I think our only
position could be that we didn't ask for the
stuff, and if the White House wants to take
it back, let them take it back.
wasn't being straightforward on this with
me, or would you let it go?
142
-Foley:
I would let it ride.
H.M.Jr:
McReynolds called me up himself to tell me
what he was doing. He didn't want to do it
unless it was agreeable to me.
Gaston:
Did he? I am glad of that.
H.M.Jr:
So I know all about it. I told McReynolds
last night as far as I was concerned,
whatever the President wanted was agreeable
to me, and the less outside things I have to
fool with, the better.
Gaston:
That is exactly the position Elmer took.
H.M.Jr:
He called me up last night.
Thompson:
The Attorney General has also written
you that he is going to undertake the
investigations of employees of all branches of
the Government who are members of subversive
organizations and the investigations will be
undertaken without notice to the heads of the agencies
or the departments concerned. After the invest-
igations are completed, a factual report will
be sent to the head of each agency or department
without recommendation, and he would like to
know what action is taken. He stated the
President approved the plan, and State. I think
you will go along with that.
H.M.Jr:
No, I am not going to sign this. You write
it back. I want documentary evidence that
the President approved it. Iwon't sign it.
I want word from the President of the United
States that he wants a Federal OGPU going
into every Treasury employee. I want a good
stiff letter. You had better let Foley see it.
143
-4Thompson:
This is based on the law which gave FBI
the direction to make such investigations.
H.M.Jr:
That is all right. I want to know from the
President of the United States that he wants
them to investigate, because I know what
will happen. I me an, they are not going
to stop at subversive. They are going
into everything. I want it limited to
President said it. In view of the
position, I want to take a stiff position
subversive, and I want to know that the
and I want Foley in on it. I want to know
from the President of the United States that
he wants it, and I may bring it up in
Cabinet, that he wants the FBI going
in and investigating all Government employees.
Thompson:
I should think they would give us the names.
H.M.Jr:
After all the contacts I have had with the
FBI there is no reason for it. I won't
sign it.
Gaston:
I have nothing else.
Foley:
Following that situation out on the West
H.M.Jr:
Are you doing that through the Comptroller's
Foley:
Yes.
H.M.Jr:
Does Bell know about it?
Bell:
Nothing more than what I heard yesterday.
foley:
Everything that we are doing is being done
Coast of the Yokohama Specie Bank, it wasn't
necessary to do anything yesterday.
office?
through Preston Delano. I have a memorandum
here from him.
144
-5H.M.Jr:
Foley:
H.M.Jr:
Sullivan:
Anything else?
That is all.
John?
Arthur Anderson and Mr. Evans will be here
Monday morning. They couldn't come before.
they are both coming. Randolph Paul is expected
in today. Shoup and Magill will be here to-
morrow morning.
H.M.Jr:
Randolph Paul will be here today?
Sullivan:
That is right.
Klotz:
Magill said he could come Thursday.
H.M.Jr:
I spoke to him last night, and he said he
Sullivan:
was coming. Well now, who is going to
receive these people?
I am going to talk with Randolph and turn
him over to Mr. Blough and have him get
the general plan.
H.M.Jr:
Well, supposing Randolph Paul comes in to
see me at eleven. Will you have him?
Sullivan:
Yes, sir.
H.M.Jr:
I want to talk to him myself, and I think,
Mrs. Klotz, if you will - well, I will see
these people - tell Chester Barnard we will
have a meeting in my office at 11:00 tomorrow on
his proposal. And then Mr. Barnard ought
to receive these other people the first thing
tomorrow morning, these other people who are
coming in, you see, and get them going,
Magill and Shoup.
Klotz:
will they contact you (Sullivan)?
145
-6Sullivan:
I told them I wouldn't be here, and to get in
touch with Mr. Tarleau, and he would refer them
to Blough.
H.M.Jr:
Anyway, they should get in touch with Barnard
just as soon as they get here.
Sullivan:
Shoup will get in touch with Roy, of course.
H.M.Jr:
Anyway, between the lot of you, will you please?
Sullivan:
Yes, we will see that they get to Barnard in
a split second.
H.M.Jr:
You are not going to be here?
Sullivan:
Not tomorrow. I would like to have you look
over that talk I am going to give out there.
H.M.Jr:
Will you show it to Kuhn first?
Sullivan:
Yes, indeed.
H.M.Jr:
Then Kuhn can bring it to me.
Sullivan:
Right.
H.M.Jr:
Now, we are all cleared up. I mean, I cleared
Sullivan:
They are going to do it?
H.M.Jr:
Yes, we announced it at three o'clock yester-
with Barkley, so everything is all right.
day.
Morris:
We have the first report from the New York
Federal on the capital issues proposition.
I was wondering who you wanted me to work with
on that. George Haas and Bell?
H.M.Jr:
Yes. And when you have got something that is
significant, bring it to me.
146
-7 Morris:
Well, this first report needs a little study
to find out - it doesn't prove anything.
We don't know what the amounts are for, and
I think we can find out in some cases.
H.M.Jr:
Did you get anything out of your trip to New
Morris:
Yes, I did, a good deal.
H.M.Jr:
I think you might go up again tonight and
York last time?
spend Thursday and Friday at the Fed
and then be back here Monday morning. I
want you to get as much as you can on
this financing, because I will use you more
and more in the financing.
Morris:
All right.
H.M.Jr:
If you spend a couple of days in the Fed
with them, I think it would be good.
Morris:
All right.
Bell:
Mr. Secretary, was there a luncheon today?
H.M.Jr:
No, I have Harriman today.
Pell:
Some of the people at that luncheon last
Wednesday had an idea there was going to
be another luncheon this week. I didn't
get that, but they did.
H.M.Jr:
No, we only discuss it when we are not financing. Not today. If you want one next week,
we will.
Bell:
No, I didn't particularly want one. They got
H.M.Jr:
I think they are right. I think you (Morris)
the impression there would be another luncheon
this week.
might go up and spend another two days.
147
-8 I want you really to get proficient and
efficient in this. I think two days up
there would be helpful with the Fed.
Morris:
All right.
H.M.Jr:
I will tell them you are coming.
Kuhn:
I have nothing.
Blough:
Nothing.
H.M.Jr:
A little later on I want to go over
Blough:
I am sorry that it is --
H.M.Jr:
No, no, it is a good job. I am complimenting
Blough:
It is supposed to be so easily understood
H.M.Jr:
Well, you escort me through it the first
Blough:
All right.
H.M.Jr:
that tax thing with you (Blough),
because I need a little help.
you, but I want a little --
that you can go right through it.
time.
What Blough has done, if anybody is interested,
he has given me a report on the comparisons
of the various incomes in the United States
Sullivan:
with Canada and England. It is a swell job,
if anybody wants it.
I would like a copy of that.
Gaston:
Taxes?
H.M.Jr:
Yes.
Foley:
I would like a copy.
148
-9Gaston:
I would like to see it.
H.M.Jr:
It is a swell job.
Blough:
Just income taxes. All you wanted was
H.M.Jr:
That is right.
income taxes on that, wasn't it?
Well, you might do inheritance and estate
too.
Blough:
We would be glad to expand that.
H.M.Jr:
I would go right on with excises and everything else.
White:
It is highly desirable to do a complete
job on them.
H.M.Jr:
I would do the whole works.
Gaston:
That is what the Brooklyn report was supposed to be on.
H.M.Jr:
I want to read Shoup's report. Who has
White:
You have on your desk a report, and you have
that for me?
a summary too.
Gaston:
I just handed a copy to Dave Morris.
White:
There is one addressed to you which Miss
Chauncey has.
Bell:
H.M.Jr:
It is quite long.
George? Did you get my thing on that food
business?
149
- 10 -
That is in there. (Handing reports to
Secretary.) I talked to Carl Hamilton.
Haas:
I
think you told him what you wanted.
I would like to see the names. Should I
write a letter to Wickard and say I want
H.M.Jr:
it?
It may help.
Haas:
H.M.Jr:
Haas:
H.M.Jr:
=
I wish you would try it today.
There are about twenty commodities. Do you
want to start with one, say wheat and lard?
Start with wheat and cotton, whichever the
big ones are. Ask him which ones he is
suspicious of. Who is in charge of that?
Haas:
It is a man by the name of Mehl, I think.
H.M.Jr:
That isn't the man we used to work with,
Haas:
is it?
No, he is still over there, but he is not
in charge of it.
H.M.Jr:
I am terribly interested in this.
Haas:
They have the names. They may not give them
to me, but they may send them direct to you.
You see, it is very important information if
it got out in the market.
H.M.Jr:
Well, you tell them I would like to have it,
and I would be very glad if the man would
bring them to me himself, but I want Mr.
Wickard to know beforehand that I am getting
them.
Haas:
I see.
- 11 -
H.M.Jr:
150
And if the man can do it, I am available at
three-thirty today. I will put you down.
But if the man would come over and explain
it to me, but he should tell Mr. Wickard
that I am doing it, that I want it, you
see.
Haas:
All right. I think that--
H.M.Jr:
Why not have him come over at three-thirty?
Haas:
All right.
H.M.Jr:
I want you here, Ferdie.
Kuhn:
Three-thirty?
Haas:
Do you want me?
H.M.Jr:
Oh, definitely.
Haas:
Here is the report by denominations. The
report shows that the ten thousand denomi-
nation accounts for over half of the sales.
H.M.Jr:
I see. Let's try and bring him over here at
three-thirty today, but tell him to tell Mr.
Wickard that I am doing this, you see.
Haas:
H.M.Jr:
Schwarz:
Yes, sir, I will.
I mean, I want the Secretary's office to
know it.
For our information, I understand the Federal
is seriously considering an extensive educational compaign on Consumer Credit.
H.M.Jr:
Well, do you want to get a free ride in connection with Foreign Funds, Ed? Do you
know about it?
- 12 -
151
Foley:
No.
H.M.Jr:
Supposing you (Schwarz) talk with Ed.
Schwarz:
I will tell him.
H.M.Jr:
Anything else?
Schwarz:
That is all.
H.M.Jr:
Harry?
White:
You asked about the industrial consumption
of silver. This year there will be seven
million ounces more used than last year.
There is fifty-one million ounces as against
forty-four, instead of the doubling which
somebody gave you the figure of.
H.M.Jr:
Now Bell or somebody came in and told me on this future business, when we wanted to
give up this future contract, you said it
was going to be seventy million.
Bell:
Somebody told us the industrial would require
between seventy and eighty million ounces.
White:
I guess that is also right, but twenty-five
million ounces of that, approximately, is
re-used old silver. The Industrial use of
silver this year totals seventy-nine million
ounces as against sixty-seven million ounces
the previous year, but of that, from twentyfive to thirty million ounces is reworked
old silver.
H.M.Jr:
The figure that was given me, the arts use
eighty million.
White:
Well, that is true.
H.M.Jr:
No statement was made as to whether it was
- 13 -
152
new silver or old silver.
No, but I thought the statement was made
White:
that there was a terrific increase in the
use of silver.
H.M.Jr:
That was my interpretation.
White:
Oh, I see. Well, there is some increase,
but it is about seven or eight million ounces.
H.M.Jr:
Then this thing was brought to my attention
to release this future contract because there
is a shortage of new silver.
Bell:
It was indicated that there would be a shortage in the next few months of industrial
silver in the market.
White:
Well, I don't know. We called up OPM, Bureau
of Mines and OPA and all the organizations
who would know about it and to their knowledge
there are no new uses of silver that are
significant beyond what we have. There is
some increased use for soldering and so forth,
but it is all rather small.
H.M.Jr:
Who asked us to release this?
Bell:
I don't know. I haven't my memorandum now,
but somebody in New York who couldn't buy it.
Is there any silver coming in from abroad?
White:
Some from Canada and some from Mexico. There
is very little to my knowledge coming in
from anywhere else. I will check up on
that. Peru, we get some.
Bell:
We get Canada's production.
White:
We get Canada's production. We get Peru.
153
- 14 Bell:
They can't buydomestic production because
White:
No, they can't buy silver that is mined in
the United States. That sells for seventy-
it is too high.
nine cents an ounce - seventy-one cents an
ounce.
H.M.Jr:
I told Bell to ask you (Foley) to prepare
Foley:
All right, he hasn't spoken about it.
Bell:
No, I have not. I have got it on my desk.
H.M.Jr:
I see.
White:
You asked about exports to the Philippine
some legislation on that.
Islands. It took us a long time to get that.
We had to send them about three cables. They
had to build up an organization, but we have
been getting it. Three days ago we got the
first batch coming in in three weeks. I
have the report here on one page. I can
H.M.Jr:
give you the report briefly orally, or I can
leave it with you.
I would like you to talk to me about it.
Are you familiar - because Mr. Wallace told
me there has been - after it was decided at
Cabinet that Jesse Jones should buy up all
the output of the Philippine iron ore mines--
White:
Yes, I am familiar with that story.
H.M.Jr:
I never got it from you. There was a vote,
and they voted seven to one to go ahead.
White:
Well, they did that at the last defense
meeting and there was a report of the meet-
ing and at this meeting, which I didn't
attend but just got the notice of, they
- 15 -
154
brought that one notch forward. I can give
you the whole story whenever you want it.
H.M.Jr:
Tell Fitz I want to see you, and I want to
know the whole Philippine situation.
White:
Yes. This letter from Soong - I think the
appropriate thing is merely to telephone to
ask him to come in to see you and tell you
what he has got on his mind before you make
H.M.Jr:
an appointment. Is. that all right?
Tell Fitz.
White:
And have Fitz get in touch with him?
H.M.Jr:
Yes.
White:
That is all.
H.M.Jr:
Dan?
Bell:
You have been interested in these dismissed
employees, people we had to dismiss because
of consolidating offices throughout the
country. This is just to let you know that
the New York office where they consolidated
Albany they had to let fifty-eight employees
go, and they were all replaced and forty-
seven of them were placed at higher salaries,
which averaged about forty-thre percent more
than they were getting with the Treasury.
It shows that the Treasury is paying too
little or the others are paying too much, I
don't know which.
Did Governor Neely call you or McNutt?
H.M.Jr:
He called me and said he had talked to Paul
Mc Nutt. McNutt said he had nothing to do
with that.
- 16 Bell:
155
That isn't true. A fellow by the name of
Powell is the Executive Director to the
Board and Mr. Powell wrote to the Director
of the Unemployment Compensation Commission
in West Virginia on September 22 and told
them that if they didn't straighten out
their matter of collecting and depositing
the unemployment taxes that they would not
give them any further administrative funds.
That is what he is faced with now. They
won't give him a further allotment for
administrative funds.
H.M.Jr:
Will you take it off my shoulders and see
it through?
Bell:
It isn't on your shoulders.
H.M.Jr:
Then will you prepare a letter for me today?
Bell:
On that subject, we got a very nice letter
from Altmeyer on the cooperation of the
Treasury and the money we have saved them
through these depositaries.
H.M.Jr:
Could you prepare a letter this afternoon
for me to sign?
Bell:
To whom, Neely?
H.M.Jr:
Yes. And I will send a copy to McNutt.
What?
Bell:
Yes.
H.M.Jr:
Could I have that this afternoon?
Bell:
Yes. Do you want to cover the depositary
situation too?
H.M.Jr:
Whatever it is.
- 17 -
Bell:
156
I covered that very fully in a letter to
Congressman Edmiston who was also interested
in the letter. I will enclose a copy of
this letter if you want to.
H.M.Jr:
Do that. If it is to McNutt, let's send
him a copy of the whole business.
Bell:
If you are interested for just a minute,
what they do is bring all of the collections
of checks on these taxes into Charleston.
Then they divide them seventeen ways and
send them to seventeen banks for collection.
Those banks collect them and hold that money
for a period of anywhere from ten to fifteen
days, and then the central office draws
checks on those seventeen banks and deposits
those checks in a Charleston bank, and the
Charleston bank holds them for ten or fifteen
days, and then they draw a check and send
it in to the Treasury.
Now, those banks have anywhere from eight
hundred fifty to a million dollars on deposit
for anywhere from two to three weeks all
the time of collected funds.
H.M.Jr:
Bell:
Well, if you will fix me up a letter, I will
sign it this afternoon.
It is the only state in the Union that hasn't
come around to our system. We have been
out there and talked to them, and they just
won't budge.
H.M.Jr:
Anything else.
Bell:
That is all.
Thompson:
Here is that letter on Mr. Barth.
H.M.Jr:
How did you fix it?
- 18 -
Thompson:
157
Well, fortunately he is on the Foreign
Funds roll which is now subject to classi-
fication. It will have to go through the
Civil Service Commission.
H.M.Jr:
Ferdie,
hang on to this until this afternoon
for me.
Thompson:
The next grade would be fifty-six.
H.M.Jr:
Is that all?
Thompson:
That is all.
H.M.Jr:
Thank you all.
158
Original to Mr. Thompson to investigate.
159
List of Treasury employees submitted to
the Attorney General by the House Committee
on Un-American activities.
Alcorn, Marion
Stenographer
1819 K St., NW
Washington, D.C.
General Counsel's Office
Member Fashington Book Shop
Allen, Murray B.
1418 21st St. NW
Kashington, D.C.
Cherk $1620
Internal Revenue
Member Washington Cormittee for Democratic Action
Member Washington Book Shop
Arkin, Mae
17 6th St. N.W.
Clerk-Steno $1740
Comptroller of the Currency
Washington, D.C.
Member American League for Peace and Democracy
Arnold, Francis E.
1132 Girard St. N.W.
Skilled helper $.70 per hr.
Washington, D.C.
Member Washington Committee for Democratti Action
Barron, Rita
Procurement Div.
Bell, James H.
Skilled Helper 8.84 per hr.
Jr. Clk. $1440
236 Mass. Ave. NE
Washington, D.C.
Member Washington Committee for Democratic Action
Bureau of Eng. & Prtg.
1002 Columbia Rd. NW
Washington, D.C.
Member Washington Book Shop
Berg, Yetta
812 Randolph St.
Washington, D.C.
Sr. Typist $1500
Loans & Currency
Member Kashington Cosmittee for Desocratic Action
Member American League for Peace and Democracy
Blankin, Sylvia
3406 Warder St. NW
Stenographer $1440
Acets & Deposits
ashington, D.C.
Member American League for Peace and Democracy
Bloom, David
4141 Henderson R.
Arlington, Va.
Structural engineer $3200
PuMic Buildings
Member American League for Peace and Democracy
160
-
Brunswick, George
Agent $2000
Carter, Kenneth H.
Messenger
Internal Revenue
423 Mellon St. SE
Washington, D.C.
Member Washington Committee for Democratic Acti n
Member American League for Peace and Democracy
733 13th HE
Internal Revenue
Washington, D.C.
Member Washington Consittee for Democratic Action
Casady, Lauren W.
6702 5th NW
Sr. Economist $4600
Monetary Research
Fashington, D. C.
Member Washington Cous ttee for Democratic Action
Member Washington Book Shop
Cler $1620
Chaiken, A1
Accts & Deposits
1346 Quincy St. NW
1027 Quebeck St NW
Washington, D.C.
Member American League for Peace and Democracy
Chambers, Robert
Sr. Attorney $4600
Customs
Gaithersburg, Md.
Member Washington Committee for Democratic Action
Member New York Committee, American Committee for
Democracy and Intellectual Freedom
Signer, Open letter for Closer Cooperation with
the Soviet Union
Stenographer $1800
Cohen, Ethel
303 Roosevelt St.
Bethesda, Md.
Member Washington Consittee to Aid China
Duffield, Mr. Eugene
Asst. to Secretary $7000
Great Falls St.
East Falls Church, Va.
Member Washington Committee for Democratic Action
Feker-Racs, L. Lassle
2333 S. Nash St.
Sr. Economist-Analyst $5200
Bureau of Internal Revenue
Arlington, Va.
Member Washington Committee for Democratic Action
Eichhols, Robert B.
Sr. Atty. 44000
Office of Secretary
1423 34th St. NW
Internal Revenue
Washington, D.C.
Member Washington Committee for Democratic Action
161
-3Feinberg, Benj.
Clerk $1620
2115 Eye St. NW
Washington, D.C.
Member American League for Peace and Democracy
Clerk
Fox, Melvin
3002 P St. NW
Washington, D.C.
Member Washington Committee to Aid China
Glasser, Eather G.
Clerk $1620
3616 Conn. Ave. Nw
Washington, D.C.
Member Washington Committee for Democratic Action
Glasser, Harold
339 Willard Avenue
Director, $6500
Monetary Research
Friendship Heights, Md.
Member Washington Committee for Democ atic Action
Gottlieb, Lillian
Clifton Terrace East
14th & Clifton St. NW
Printers Asst. $.72 per hr.
Engraving and Printing
Washington, D.C.
Member Washington Book Shop
Johnston, J. Richard
Attorney
4135 N. Benderson Rd.
Arlington, Va.
Member Washington Book Shop
Kaplan, Herbert
Architect $3300
4141 N. Henderson Rd.
Arlington, Va.
Member American League for Peace and Democracy
Kaplan, Morris
4119 Davis P1. NW
Washington, D.C.
Associate Chemist $3200
Customs - Baltimore, Md.
Member Washington Committee for Democratic Action
Member American League for Peace and Democracy
Kats, Sol
2106 N St.NW
Agent $2000
Internal Revenue
Washington, D.C.
Member Washington Book Shop
Member Washington Committee for Democratic Action
Kaufman, Harry
Agent $2000
Internal Revenue
1801 Wyoming Ave. NW
Baltimore, Mc.
Washington, D.C.
Member of Washington Book Shop
162
-4Kensler, Gertrude
1139 Conn. Ave. NW
200 11th St. * SW
Operator $1370
Engraving and Printing
Washington, D.C.
Member American League for Peace and Democracy
Klein, Bertha
Typist $1440
3616 Neward St. NW.
Washington, D.C.
Member Washington Book Shop
Letcher, Isadora A.
Operator 8.96 per hr.
Engraving and Printing
Levenstein, Myrtla
Stenographer $1620
Internal Revenue
Lloyd, Mary M.
Asst. Printer $7304.89
1835 5th St. NW
Washington, D.C.
Member Washington Committee for Democratic Action
1430 Belmont St. NW
Washington, D.C.
Member of Washington Book Shop
1747 K St. NW
Washington, D.C.
Member Washington Committee for Democratic Action
Legue, Francis S.
1322 I St., NW
Engineer and Draftsman $3200
Procurement
Washington, D.C.
Member American League for Peace and Democracy
Member Washington Committee for Democractic Action
Lyman, Henry L.
145 Carroll St. SE
suches-Struet
Engineer
Kashington, D.C.
Member of Washington Book Shop
McDonald, W.O.
Electrician $10.50 p.d.
Engraving and Printing
3016 11th St. NW
Washington, D.C.
Member Washington Committee for Democratic Action
Printers Asst. $.60 per hr.
McKensie, Mrs. Golden V.
Engraving and Printing
40 N. St., NW
Washington, D.C.
Member Washington Committee for Democratic Action
163
-5Morse, Andrew S.
Messenger $1260
410 11th St. SE
Washington, D.C.
Member Washington Book Shop
Pollock, Tillie W.
219 N. Glebe Rd.
Asst. Clerk-Stenographer $1620
Coast Guard
Arlington, Va.
Member Washington Committee for Democratic Action
Robertson, John R.
Sr. Accountant and Auditor $3500
1835 K St. NW
Washington, D.C.
Internal Revenue
Rollins, Milton
Sr. Clerk $2000
Internal Revenue
Smith, Daisy C.
Operator $.84 per hr.
Member Washington Committee for Democratic Action
5809 14th St. NW
Washington, D.C.
Member Washington Committee for Democratic Action
1028 Lamont St. NW
Washington, D.C.
Member Washington Committee for Democratic Action
Spiegel, Ann B.
1929 16th St. Nw
Washington, D.C.
Clerk-Stenographer $1800
Research and Statistics
Member Washington Book Shop
Member Washington Committee for Democratic Action
Member American League for Peace and Democracy
Stanton, E.C.
4815 Battery Lane
Sr. Meah. Engr. 14800
Procurement Division
Bethesda, Md.
Member Washington Committee for Democratic Action
Stein, Pearl B.
1228 Eye St. NW
Washington, D.C.
Typist 81440
Internal Revenue - New York, NY
Member Washington Committee for Democratic Action
Sturner, William A.
Principal Clerk$2300
Internal Revenue
4910 3rd St. NW
Washington, D.C.
Member Washington Committee for Democratic Action
Member American League for Peace and Democracy
164
-6Sutton, James
1020 - 19th St. NW
Attorney
General Counsi's Office
Washington, D.C.
Member Washington Book Shop
Topley, Cleveland L.
Foreman $3250
1527 N. Randolph St.
Arlington, Va.
Member Washington Committee for Democratic Action
Walton, Dorothy (Mrs. Stanley Surrey)
2715 Cortland P1., NW
Apt. 1
east. Legislative Counsel $6500
Washington, D.C.
Member American League for Peace and Democracy
Pard, Anna
1223 Vermont Ave.
Dr. Clerk $2300
Internal Revenue
Washington, D.C.
Member American League for Peace and Democracy
Wechsler, Sanford L.
Clerk $1620
1733 R St., NW
Washington, D. C.
Member Washington Book Shop
Testfall, Benton B.
Chemist $3200
104 Allegheny Ave.
Takona Park, Md.
Member Washington Book Shop
White, Harry Dexter
8610 Fairfax Rd.
Under Clerk $1380
Betheada, Md.
Member Washington Committee for Democratic Action
Wilmerding, Lucius
Tech. Asst. $5000
Accts and Deposits
Wollner, Mrs. Herbert J.
Chemist
Wood, Herbert 8.
2909 Brandywine St. NW
Washington, D.C.
Sr. Technical Advisor $6500
2823 N St. NW
Washington, D.C.
Mem/Washington Committee for Democratic Action
1341 30th St. NW
Washington,D.C.
Member Washington Committee for Democratic Action
Internal Revenue
Member Washington Book Shop
Mx Sponsor, Washington Committee to Aid China
165
October 22, 1941
TO:
THE SECRETARY
FROM:
MR. GASTON
I have asked Elmer Irey to get everything they
have on Roswell Russell and Roy V. Fox.
The substance of the matter is that with respect
to the man Russell, Henry J. Paynter, formerly of the AP
in New York and formerly of PM, was added to Bob horton's
public relations staff and he was interviewed by Russell.
lie wrote you saying that man was employing a line of conversation very much like that of Wheeler and Nye. He did
not mention the man. We readily found out who it was.
We interviewed Russell and found he had entertained those
views. He admitted he had said something along that line
to Paynter in conversation with him. Russell is a young
fellow, an Altochol Tax man. He is the Middle Western
type of apparently Isolationist who has been influened
by the Wheeler-Nye propaganda. We did not think there
was any basis on which we could prefer charges against
Russell. We simply sent him back to his Alcohol Tax post.
The second case was that of Fox. He is a Customs
Agent, formerly attached to Erwin May's force in Berlin.
The complaint on him came to me from David Cushman Coyle
who relayed it from Barrow Lyons, newspaper man, formerly
financial writer, also employed by Bob Horton. The story
was much the same. We looked into the records and found
Fox was the man who interviewed Lyons. Fox was confronted
with the story and said it was not true, but we found by
talking to his associates upon the Interview Staff that he
had expressed the views in talking to them that it was a
concerted drive by certain elements to get us into this war
and it was none of our business -- in effect, the Isolationist point of view. We acted in the case of Fox the same
as we did in the case of Russell. We turned him right Fox back
to Customs and I have talked to John about the case.
166
-2-
is on his previous assignment of Customs Agent at Norfolk.
Viopond, Assistant Collector down there, does not think
highly of him on the ground that he talks too much and
does not accomplish much, but we are planning in the case
of both of these men to keep them under observation and
in the case of ox I hope to learn something more about
him through Erwin May.
I don' 't think that in either case we have any more than
evidence of views and argumentative disposition that unfits
them for the work of interviewing candidates for defense
-
jobs.
167
OCT
22
1941
My dear Governor
Reference is made to your telephone call yesterday concerning
certain proposed banking arrangements in connection with the Unemploy-
sent Insurance funds in the State of Vest Virginia. In the conversation
you referred to a communication which had been received from a Mr. Powell
and apparently assumed that he was connected with the Treasury Department.
Upon looking into the matter, I find that you probably were referring to Mr. Oscar X. Powell, Executive Director of the Social Security
Board. Mr. Powell, it appears, addressed a letter under date of September 22, 1941. to Kr. Honer Y. Hanna, Director, Department of Unemploysent Compensation, Charleston, West Virginia, on the subject of the
procedure and practices of the West Virginia Department of Unemployment
Compensation, with respect to the handling of contributions collected
from the time of receipt until their subsecuent deposit to the State's
credit in the Unemployment Trust Fred in the United States Treasury.
This letter, I am informed, stated that the Social Security Board had
taken the position that the procedure now in use in West Virginia did
not conform with the provisions of existing law requiring the immediate
deposit of contributions into the Unemployment Trust Fund in the Treasury
and suggested corrective action in order that there may be no delay in
the consideration of grants for administrative expenditures.
For your information as to the part which the Treasury has taken
in this matter, I enclose a copy of a letter addressed to Honorable
Andrew Edition, House of Representatives, by Under Secretary Bell under
date of July 17, 1941. As you will note from this letter, the Treasury
has no direct jurisdiction, but is cooperating with the Social Security
Board to the extent of making available certain essential depositary
facilities which, I am informed, have already been accepted by all States
with the exception of West Virginia. The use of the facilities afforded
by the Treasury's depositary system has been advantageous not only to the
Social Security Board in reducing grants for administrative costs, but
has been of substantial benefit to the individual State Unemployment
Trust Funds inassuch as the arrangement for immediate clearance of the
contributions into the Unemployment Trust Fund of the Treasury permits
the retention of the funds upon an interest-bearing basis to the fullest
extent.
It is regretted that the Treasury could not entertain a proposal
to maintain balances of Treasury funds in more than one bank in West
168
-2-
Virginia as a basis for servicing the State Unemployment Insurance Funds
as experience has demonstrated that consolidation of the accounts in
one bank is such more economical from as administrative standpoint, and
miminises the balances which it is necessary for the Treasury to tie up
in the form of fixed deposits with banks for this purpose.
As previously indicated, this arrangement has been perfected in
all States except West Virginia to the autual advantage of such States
and the Social Security Board. There is no direct benefit to the
Treasury under this arrangement, but on the contrary. the Department
has incurred some expense in supervising the depositary set-up and in
maintaining balances of Government funds as offsets to the costs insured
by the banks in servicing the State accounts. The Treasury has been
glad to cooperate with the Social Security Board in the matter, in view
of the broad interest of the Federal Government in premoting and
sponsoring the Social Security program.
Very truly yours,
(Signed) a. Morgenthan. 30.
Secretary of the Treasury.
Honorable Matthew N. Neely,
Governor,
State of West Virginia,
Charleston, West Virginia.
Enclosure.
EDBIEW 10-22-41
n.m.c.
File Sent to Mr. Bell
169
October 22, 1941
Dear Mr. McNutts
For your information, I - enclosing herewith
a copy of a letter which the Secretary is today
sending to Governor Neely of West Virginia, together
with a copy of my letter to Congressman Edmiston
dated July 17. 1941.
Very truly yours,
Under Secretary of the Treasury
Honorable Paul V. MaNutt,
Administrator,
Federal Security Agency,
Washington, D. 0.
Mailed 10-22-41
DWB:ce
1.
941
My dear Mr.
I have your letter of July e, 1941, in which protest is made
against a proposed plan to place the Unemployment Insurance funds
in the State of Test Virginia in one bank instead of twenty-one.
In view of your interest in this proposed change, this Department
has reviewed the matter and the following is submitted for your information.
As you are aware, while the Social Security Act, as amended,
places certain duties upon the Secretary of the Treasury, the adminis-
tration of that act generally is vested in the Social Security Board.
Early in the development of the program the Social Security Board
called the attention of the Treasury to an administrative problem
which had arisen involving banking facilities in the various States.
The Social Security Board pointed out that certain sections of
the Social Security Act provide, in effect, that the Board shall make
no certification for payment to any State, from funds appropriated by
the Congress for the purpose of assisting in the administration of
State unemployment compensation laws, unless the Board finds that the
law of the particular State includes, among other things, provision
for "the payment of all money received in the unemployment fund of such
state, immediately upon such receipt to the Secretary of the Treasury
to the credit of the Unemployment Trust Fund established by section 904;"
and expenditure of all money requisitioned by the State agency from the
Unemployment Trust Fund, in the payment of unemployment compensation,
"(underscoring supplied).
exclusive of expenses of administration;
It was brought to the attention of the Treasury also, that the
General Counsel of the Social Security Board had raised the question
of the legality of permitting the retention of balances in clearing
accounts and benefit payment accounts in banks as a basis for the
servicing of such accounts. The Board requested, in view of the broad
interest of the Federal Government in promoting and sponsoring the
social security program, which, in effect, is a cooperative arrange-
meat between the States and Federal Government, that the Treasury
authorize the use of it s established depositary system in connection
with the clearing accounts and the benefit payment accounts in the
several States. The Treasury agreed to provide the necessary depositary State
facilities under certain conditions, one of which was that the
agencies would cooperate to the extent of consolidating both their
clearing accounts and benefit payment accounts in order that the most
economical and expeditious arrangements might be perfected. There
is no direct benefit to the Treasury under this arrangement, but, on
the contrary, the Department has incurred some expense in supervising
the depositary set-up and in maintaining balances of Government funds
in banks as an offset to the cost incurred by the banks in servicing
the State accounts. The Department has been advised by the Social
Security Board that the use of the Treasury's depositary facilities
has saved an approximation of $1,000,000 per year, which it otherwise
would have been necessary for the Board to grant to the States as costs
of providing the necessary banking service. Furthermore, this arrange
ment is of substantial benefit to the individual State unemployment
trust funds inasmuch as it permits retention of the funds in the unemployment trust fund in the Treasury upon an interest-bearing basis to
the fullest extent.
with respect to the situation in West Virginia, it is noted from
the records of the Treasury that the benefit payment account is divided
among four banks and the clearing account among sixteen banks. So far
as the Treasury is aware, Best Virginia is now the only State in which
these accounts are so divided. It appears, upon the basis of the best
information available in the Treasury, that the Unemployment Trust Fund
of the State of Hest Virginia, due to its present system of dividing
accounts and failing to take advantage of the banking facilities which
the Treasury stands ready to make available, is losing a substantial
amount in interest, inasmuch as there are, at times, balances in banks
aggregating about $1,000,000, which, if deposited in the Treasury, would
be earning interest at A rate averaging approximately 23% per annum.
Whether the Unemployment compensation Commission of the State of Kest
Virginia is complying with the terms of the Social Security Act is, of
course, a question for determination by the Social Security Board.
Mr. H. .. Rabon, a representative of this Department, conferred
with Dr. G. C. Robertson, Director of the Rest Virginia Unemployment
'I
Compensation Commission, on May 28, 1941, regarding a proposed modifi-
cation of the procedure now being followed in handling the benefit
payment account and the clearing account. Dr. Robertson was advised
that the Treasury could not consider placing balances of its funds with
the various banks handling the accounts as a basis for services rendered.
In accordance with arrangements which have been set up in other States,
it was suggested that the entire benefit payment account and clearing
account be placed with one bank. The Charleston Nat tional Bank, Charleston, had
West Virginia, was mentioned as the depositary bank since this bank
been previously contacted by the Mest Virginia agency and the Treasury
concerning the matter. ith the knowledge and consent of Dr. Robertson,
Mr. Rabon called at The Charleston National Bank and discussed the matter
with Mr. Mason Crickard, Vice President. The bank agreed to handle the
entire benefit payment account and clearing account. Mr. Rabon returned had
to Dr. Robertson's office and advised him that tentative arrangements
been made with the bank.
-3The Treasury has been informed by the Social Security Board
that the consolidation of the State accounts has been of great bene-
ftt, not only to the State Commissions, but in the administrative
functions of the Board. This procedure is now in operation in all
States, with one or two exceptions. As previously indicated, the
matter is not, of course, under the direct supervision of the Treasury,
but in view of your interest in this question, I have taken the liberty
be
of explaining the Treasury's position at some length. Should there
any further information which you might desire, please do not hesitate
to call upon this office.
Very truly yours,
Bell
Under Secretary of the Treasury
Honorable Andrew Edmiston
House of Representatives
Washington, D. C.
:mlp
7/12/41