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DIARY Book 506 March 9 and 10, 1942 -AAbbott (Bud) and Costello (Lou) Purchase of bomber by earmarking salaries earned on tour of Nation's theatres discussed in White House-Treasury correspondence - 3/10/42 Alien Property Custodian Executive Order setting up office discussed by Smith Book Page 506 264 221 and Bill; Crowley to be head - 3/10/42 (See also Book 507, page 51) a) Conversation with FDR discussed by Treasury 224 group b) Amendment to Executive Order covering Frozen Funds - HMJr memorandum to Foley - 3/12/42: Book 507, page 170 c) Press release: Book 507, page 171 -BBritish Empire See Lend-Lease British Purchasing Mission Vesting order sales - 3/9-10/42 134-137, 309,310 Federal Reserve Bank of New York statement showing dollar disbursements, week ending February 25, 1942 - 311 . 3/10/42 Business Conditions Haas memorandum on situation, week ending March 7. 1942. 113 - Congress of Industrial Organizations See Financing, Government: Defense Savings Bonds -DDefense Savings Bonds See Financing, Government -EExchange Market 147,348 Resume's - 3/9-10/42 FFederal Reserve System See Financing, Government - F - (Continued) Book Page Financing, Government Excess earning power discussed by Treasury group; present: HMJr, Stewart, Viner, Buffington, Sullivan, Bell, Haas, Murphy, and Lindow - 3/9/42 506 a) Charts b) Eccles-Bell conversation reported c) Eccles-HMJr conversation d) Excess reserves - alternative bases for agreement 49,179 77 179 200 210 Federal Reserve Bank presidents endorse Board of Governors plans for financing war effort through special types of securities, etc. - 3/10/42. 260 a) Burgess-HMJr conversation - 3/12/42: See Book 507, page 124 Federal Reserve--Treasury conference on "proposed basis of agreement on financing policy" - 3/12/42: Book 507, page 146 a) Memorandum: Book 507, page 166 Purchasers of Tax Certificates - classification by type - 3/10/42 298 Defense Savings Bonde: Congress of Industrial Organizations participation HMJr-Murray correspondence - 3/9/42 Jolson, Al: Duffus asked as to ability as song leader 3/10/42 Forand, Aime J. (Congressman, Rhode Island): Defense Savings Stamp - purchase and cancellation: Suggestion covered in Treasury--White House correspondence 3/10/42 Federal Reserve Bank representatives to discuss mechanics of campaign with Treasury representatives 3/10/42 College presidents informed of Treasury plan - 3/10/42. Outstanding volunteer workers: Presentation of certificate discussed - 3/10/42. Daily changes in stock of Series E Bonde - 3/10/42 99 160 270 276 279 288 295 Forand, Aime J. (Congressman, Rhode Island) See Financing, Government: Defense Savings Bonds Foreign Funds Control Matthiessen and Hegeler Zinc Company - LaSalle, Illinois: Secretary of War given information on possible pro-Nazi tendencies - 3/10/42 252 -JJolson, Al See Financing, Government: Defense Savings Bonds -KKrock, Arthur Vichy connections discussed in PM - 3/9/42 91 -L- Book Page 506 300 Lend-Lease U.S.S.R.: Ships loading at Philadelphia - Gaston report - 3/10/42 (See also Book 507, pages 21 and 325) Vessels in American ports loading materials for United Kingdom and British Empire excluding United Kingdom - 3/10/42 Payment in cash or in kind for materials diverted from British dollar contracts discussed in Lend-Lease-Treasury correspondence - 3/10/42 301,303 305 Liberia Currency discussed in State-Treasury correspondence 3/10/42 326 (See also Book 507, page 385 - 3/14/42) -M- Matthiessen and Hegeler Zinc Company - LaSalle, Illinois See Foreign Funds Control Military Reports British operations reports - 3/9-10/42 Coordinator of Information reports: 148,349 France - 3/9/42 150 British Home Intelligence report - 3/10/42 350 German Home Propaganda - 3/9/42 Kamarck summary - 3/9/42 Morgenthau, Henry, III HMJr discusses enlistment with Patterson (Under Secretary of War) - 3/9/42 (See also Book 507, page 1) a) Patterson memorandum 152 155 36 41 b) Additional information: Book 507, page 185 -R- Revenue Revision See Financing, Government Federal, State, and local tax burden (estimated average) on single person with $750 income and married couple with $1500 income - 3/9/42 a) Discussion with Henderson Vandenberg, Arthur H. (Senator, Michigan): To be provided with sales tax information - 3/10/42 85 89 257 -Shipping See Lend-Lease Silver Legislation authorizing cessation of purchases and permitting Treasury to sell at not less than 35t an ounce - White memorandum - 3/9/42 a) Copy of bill 27 31 - TBook Page Taylor, Wayne Chatfield Present with Krock (Arthur) at Vichy dinner PM article - 3/9/42 -U- U.S.S.R. See Lend-Lease United Kingdom See Lend-Lease -Vandenberg, Arthur H. (Senator, Michigan) See Revenue Revision 506 91 1 March 9, 1942 9:30 a.m. GROUP MEETING Present: Mr. Gaston Mr. Paul Mr. Buffington Mr. Graves Mr. Bell Mr. Charles Bell Mr. Kuhn Mr. Viner Mr. Blough Mr. Kuhn Mr. Foley Mr. White Mr. Stewart Mr. Haas Mrs. Klotz H.M.JR: I thought we might have a class reunion. MRS. KLOTZ: Where is everybody? MR. BELL: It has been a long time. H.M.JR: Yes. I guess they didn't expect one. Mr. Gaston? MR. GASTON: The matter George spoke to me about on Saturday, we are getting out some instructions to Collectors on those statistics. It is mainly a matter of Philadelphia the Philadelphia man was down here during the week on that very topic. The matter is a delay on Lend-Lease cargos, and we are going to have somebody from New York and probably 2 -2from Boston come in also to get-- (Mr. Sullivan entered the conference.) H.M.JR: When can I begin to get those? MR. GASTON: You will begin to get those within the next day or two. The order is going out today. H.M.JR: I would like very much to have them - could I have something tomorrow from Philadelphia? MR. GASTON: I think so. Tickton is going to Philadelphia today. The man was down from Philadelphia last week reporting. The Army had made a complaint and, according to his report, the main difficulty in Phila- delphia-- (Mr. Haas entered the conference.) H.M.JR: Tell them what it is. MR. GASTON: Well, it is a question in the delay in loading the - dispatching the Lend-Lease cargos, and our Assistant Collector in Philadelphia reported last week after the Army had complained to us - he came down here and reported that the main difficulty in Philadelphia has been a row between McCormack and the Pennsylvania Railroad. (Mr. Foley entered the conference.) H.M. JR: Would you make a note and tell Philadelphia I want my first report tomorrow morning. MR. GASTON: Yes, I will get a report tomorrow morning. H.M.JR: Now, what I want is, I want the percentage of how much is loaded, and when the ships first arrive. MR. GASTON: That is all in the memorandum that I gave you. 3 -3But the first thing tomorrow morning, I want H.M.JR: it. (Mr. White entered the conference.) MR. GASTON: That will be very easy because he has already been down here talking about that situation. H.M.JR: What are the ones? MR. GASTON: A petroleum car is going out of Port Arthur. There is some occasional stuff from New York, and there may be some from Boston. There is a little going from the West Coast, too. There is stuff going from Seattle and some oil cargos going from Southern California. H.M.JR: But in Philadelphia, there were supposed to be seven vessels. MR. GASTON: The bulk of the miscellaneous cargo, machinery and all that stuff, is going from Philadelphia. H.M.JR: And I will have that, and George, you will whip that into shape so I can have something by noon tomorrow? MR. HAAS: Yes, sir. MR. GASTON: We will get your report from Philadelphia today. We are going to handle this thing over the ticker. I think that is reasonably safe. Of course this data is all dynamite as far as open telegraph is concerned. H.M.JR: You can't break teletype. MR. GASTON: No. We have got a machine right across from my office there. Harney is 271. H.M.JR: Who is Harney? MR. GASTON: He is assistant to Elmer on coordination. 4 -4H.M.JR: You have your own man? MR. GASTON: Right across the hall from me. H.M.JR: Do you have your own number? MR. GASTON: Yes. H.M.JR: What is your number? MR. GASTON: I don't know the number of that machine. He and Peabody are in that office. Peabody is an Intelligence man, and they handle that machine. H.M.JR: Is that separate from ours? MR. CHARLES BELL: Yes, sir. H.M.JR: I think ours upstairs is 288, isn't it Charles? MR. CHARLES BELL: Yes, sir. MR. GASTON: This machine was put in particularly for the Coordinator on this guard business. H.M.JR: Mine is 288, I think. That is all right to have it on the teletype? MR. GASTON: Yes. There is a new Executive Order on harbor security placing it exclusively - giving the Secretary of the Navy new authority, and he has turned that all over to Coast Guard. H.M.JR: Herbert, who delegated the fifteen or twenty men that were assigned to be investigators in Aniline and Dye? Who assigned those men? Who says which men should do what? I mean, they have got, I don't know, fifteen or twenty men up there. MR. FOLEY: About twenty. MR. GASTON: The men that are doing the investigation? 5 -5Well, those men were originally in the group - nearly all of them were originally in the group assigned for guarding by Maloney who is the Coordinator in New York and different ones that they considered good investigators. It is an arrangement between-H.M.JR: But I mean, who-MR. GASTON: Between Federal Reserve Bank and Maloney. H.M.JR: But there must be somebody in my staff who is responsible for the fact that there are fifteen or twenty men there in Aniline and Dye. MR. GASTON: For the fact there are that many men? H.M.JR: Yes. MR. GASTON: Well, because the Foreign Funds asked for them and Maloney, the Coordinator in New York who is the Secret Service Agent in charge, is the man who has assigned the men to that work. H.M.JR: Is it Maloney? MR. GASTON: Yes. H.M.JR: Have you seen the report on it? MR. GASTON: I have not seen the report. H.M.JR: Well, Maloney comes under Wilson and then under you, doesn't he? MR. GASTON: Maloney, on this work, comes under Irey, and then under me. H.M.JR: Well, Herbert, it eventually comes up to you, doesn't it? MR. GASTON: That is right. H.M.JR: Take a look at the report that Foley made 6 6- to me on these men and the quality of them. I mean, the fact that they suddenly became investigators on one of the most difficult jobs we have, I think the whole thing is a reflection on our own organization. MRS. KLOTZ: I understood they were assigned as guards, and then were just taken on as investagors without Mr. Irey knowing anything about it. H.M.JR: Well, I don't see how Irey can escape that, I mean, the fact that they stay there. Somebody, some- where along the line, is responsible. The fact that we had men who are qualified as guards doing the most intricate investigation, I think it is - I mean, start- ing with you and Foley, I think the whole thing is - that a thing like that can happen in the Treasury is terrible. MR. GASTON: Well, I just haven't seen that report. I haven't been able to keep - I haven't had reports on what those men are doing. They have been working very closely under Ed's men up there in New York, and I am quite ignorant of what the men have been doing. H.M.JR: Well-MR. GASTON: We have tried to set up an arrangement under which the coordinators would furnish the men, but it hasn't always worked out. H.M.JR: Well, supposing Norman Thompson takes a look into that whole thing for me with Gaston. Is that what you wanted to talk to me about? MR. GASTON: No. H.M.JR: Well, supposing he does that. I mean, the fact that a thing like that can happen. Each person says that it is somebody else's fault, but you have got a lot of guards doing the most intricate investigating and they stick there. It is a reflection on the Treasury. I don't want it to happen again, that is the whole point of the investigation. If it could happen once, it is bad enough, but nobody will take the responsibility that 7 -7 they are there, and that we have a lot of men of guard mentality supposed to - up against some of the cleverest people in the world. I think - I say it could happen once, but it can't happen twice. MR. GASTON: Well, these men are not - these men that they have held are investigators. They have also got guards who have been independently hired. H.M.JR: Well, Herbert, take a look at the report. Everybody says it is somebody else's responsibility. I am not saying it is yours, but I want to know whose responsibility it is. I don't know whether Foley claims it is his responsibility or not. MR. FOLEY: No, Mr. Secretary, I think I made my position perfectly clear. These men are investigators, and they are doing investigating work, and we asked the Treasury Investigating Service to provide us with men. Now, the caliber of the men that they provide us with is not our responsibility and, as I understand it, that is the thing that you are questioning. H.M.JR: Now, wait a minute. Who did you ask? MR. FOLEY: We asked Maloney up in New York. MRS. KLOTZ: Mr. Irey says they are not investigators. He says they were assigned as guards. MR. FOLEY: No, not these men. MR. CHARLES BELL: I think that question goes right to Mr. Irey. Maloney only-- H.M.JR: Well, It is Irey's responsibility, and the fact remains, you have got a lot of men who haven't even a mediocre education doing this intricate work, and the fact that Irey - I don't know what it is, but I would like to run it down so it can't happen again. Now, if Irey sent them in as guards, as Mrs. Klotz said, and then they became investigators, he should have pulled them out. The fact that Joe O'Connell will work with 8 -8 people like that is a reflection on him, the fact that he didn't kick them out or register a complaint. The whole thing - look here, Ed-MR. FOLEY: Beggars can't be choosers, Mr. Secretary. H.M.JR: Now wait a minute. If I send you ten lawyers and all of them are in the bottom of their class, are you just going to take them? MR. FOLEY: No, certainly not. H.M.JR: Then why should O'Connell take the responsi- bility for these investigators? MR. GASTON: We would like to take the responsibility on this thing if we can get some figures. I have never heard any complaint on this or had any requests for men. Men who were put on guarding - we were endeavoring to relieve all the Treasury men on guarding in this Foreign Funds and replace them with hired men so long as they were doing guarding, and then I found in New York and other places they didn't want to let them go because they were using them on investigating work. If we get the requests here for the kind of men they want, we try to get them good men and take full responsibility on it. I have had no report on what these men were doing. H.M.JR: Elmer is under a cloud, as far as I am concerned, on this thing until he can prove otherwise, so I am asking Norman to do this thing. I mean, you send me - if you send Mrs. Klotz down some stenographer from the Pool to help here, and Mrs. Klotz sends in some letters which are badly written, I would say, "Why do you do this?" Well, she would send the person back until she got a good person. She wouldn't accept a person who was a poor typist and so forth. She would send it back. Then the attitude, "Well, that is what they sent me, so I can't do anything." Now, to get that attitude in the Treasury in these times, I think it is terrible, and I want to dynamite it. MR. CHARLES BELL: We recruited about two hundred 9 -9college graduates as investigators since last June. They are high-class men who have had some training in foreign exchange and who would understand this situation perfectly. Those men are under me primarily on Foreign Funds. MR. FOLEY: These aren't Foreign Funds men he is talking about. MR. GASTON: I don't think Irey has had any complaint about this. I haven't heard anything about this at all. H.M.JR: I am the man who is complaining. MR. GASTON: Well, if there is something wrong, I would likethis. to know about it myself. I haven't had any report on MR. FOLEY: A copy of Bernard's report has been given to Irey, and Irey is taking steps now to replace the people that we found were not up to standard with good people. H.M.JR: Well, I still say that if I send Harry White back three or four economists and they are no good, and they do a lot of bad work, and he comes in and says, "Well, I am sorry, Mr. Morgenthau, the men you sent me were no good" - that wouldn't happen in this shop. There is something where it is. wrong, Ed, somewhere, and I want to find out MR. GASTON: I would like to have a chance to look into this myself. H.M.JR: O.K. MR. GASTON: Because I have heard nothing about this. It doesn't come to me. H.M.JR: I don't know how many other places we have got policemen doing investigating work. I have prided myself on our investigators, but I can't at this moment. 10 - 10 MRS. KLOTZ: There are a lot of the best men that have been taken away, and there is going to be a shortage of investigators. H.M.JR: Well, did you see a copy of this report on these men? Let Mr. Gaston have a copy of it. You will look into it also? MR. GASTON: Yes. If we are going to be responsibile for furnishing these men, I would like to know something about what they want. I am trying my best to get this thing centralized so we can be responsible instead of having the men simply grabbed without consultation. The thing was done in a great hurry at the start, and on the night of December 7 - and orders were sent out whereby the Federal Reserve banks just went out and got inen without even consulting the Coordinators. I got Ed and Bernie and so on together to try to get this thing regularized so that the requests would be made through the Coordinators, and so that we could handle it in some sort of way. H.M.JR: Well, it is evident, Herbert, that we have to have some kind of a change. I mean, somebody, somewhere, has to be responsible, so if I say, "Well, these men are no good," somebody can say, "Well, that is my fault." MR. GASTON: Well, I am perfectly willing to take the responsibility if I can get some information, but it is an illustration of how this thing comes up. I learned nothing about it. about it. I don't know when Irey heard anything H.M.JR: Well, he must have had - how long has Irey had it? MR. FOLEY: Well, Irey knew about it when you asked me to have somebody check them. H.M.JR: That is ten days ago. MR. FOLEY: That was ten days or two weeks ago, and then Irey was furnished with a copy of the report after Larry Bernard checked them. 11 - 11 H.M.JR: Well, Irey should have told you (Gaston) at once. He is your subordinate, isn't he? MR. GASTON: That is right, on this sort of work. once. H.M.JR: Well, he should have reported to you at MRS. KLOTZ: The men were taken from Alcohol Tax. MR. GASTON: There were a great many men taken directly without consultation with us at all. Men who were on-- MR. FOLEY: These fellows were never guards, Herbert. They were taken as investigators. We asked for a certain number of investigators in New York, and these were the fellows that were assigned to us. The Secretary asked me to check them and see whether or not from a standpoint of competence they were up to par, and Larry Bernard checked them and talked to each one of them and said that they were all loyal, and he had no question as to their honesty or their integrity. He did have some question as to the competency of about ten or eleven of them. (Mr. Stewart enters the conference.) MR. GASTON: I knew nothing about this. No request was ever made to me for these people or hasn't been yet. MR. FOLEY: That information was given to Elmer before the check was made, and the report after the check was given to Elmer, and Elmer told Larry Bernard that he was taking steps to see that they were replaced and competent people were put there. H.M.JR: I would send for Elmer and ask him why he doesn't let you know what is going on. MR. GASTON: Well, I think that Mr. Foley's office should let me know a little bit about what is going on. 12 - 12 MR. PAUL: May I interrupt you just a moment, Mr. Morgenthau? I think Mr. Blough and I had better get up on the Hill. This is the first day, and we have to be up there at ten o'clock. H.M.JR: All right. Good luck. (Mr. Paul and Mr. Blough leave the conference.) H.M.JR: John? MR. SULLIVAN: You sent me a memo about the discus- sion in Cabinet on mash, industrial alcohol. H.M.JR: Yes. MR. SULLIVAN: I will have a complete memo on that for you by noon. H.M.JR: Good. MR. SULLIVAN: I think they are wrong. I think this was picked up in small quantities through the hills. H.M.JR: Well, the Attorney General was very positive about it. MR. SULLIVAN: Well, you would have to have a tank car of mash to get a few gallons of alcohol. H.M.JR: Is it in his custody? MR. SULLIVAN: After it is seasoned? Yes. But I will have a complete memo on that. I saw the Commissioner Thursday afternoon, and you wanted me to get in touch with you afterward. H.M.JR: Yes. MR. SULLIVAN: Doughton sent for me yesterday morning. There was something else he wanted me to tell you, so whenever you are free today, I will be glad to see you. That is all I have. 13 - 13 MR. BUFFINGTON: I have nothing. H.M.JR: Ferdie? MR. KUHN: I have only some background on the Disney matter. I mentioned it to you. H.M.JR: I will read it. Then you let me know. But I am not going to try to sell Disney. MR. KUHN: You want to see him, though? H.M.JR: Only after he is ready to do the picture. When he has made up his mind to do the picture. MR. KUHN: I have nothing else. H.M.JR: George? MR. HAAS: Here is the Nelson report. That explains why the situation is as it is. We are moving right along on that. The main thing there is that he said the Russians were slow in specifying what they wanted. Then, when the specifications did come in, they were non-standard, so it required practically a custom job for each item. We are moving along. The position of the goods at shipside from there on is very vague. I hope to get some information from Philadelphia today on that. H.M.JR: All right. Anything else? MR. HAAS: That is all. H.M.JR: Walter? You get in a conference with Bell, will you? MR. STEWART: I will. H.M.JR: They seem to think they have to have a dress rehear sel before they see me at three. Harry? MR. WHITE: Will you want to set aside some time this week to meet the same group that you had here twice 14 - 14 in considering what items you expect the British to let you have, what payments you wish to make for British expenditures? H.M.JR: Yes. MR. WHITE: Dean Acheson sent you his suggestion, how to handle the situation. You remember that you were going to wait until he had let you know. Well, he has let you know in this memorandum which-- H.M.JR: You had better send that in and let me read it. MR. WHITE: Well, there is an answer going through to him which merely-- H.M.JR: When will I get-says that you will be ready today, that you expect soon to call a meeting. H.M.JR: Oh. Could we have it while Stewart is MR. WHITE: here? MR. WHITE: You wanted him in on that, yes. I should think so. You (Stewart) are here for two days? MR. STEWART: Today and tomorrow. H.M.JR: I could do it at three tomorrow. MR. WHITE: You will have the large group in tomorrow, the State Department and Army and Navy? If so, you had better have a prior time. H.M.JR: Well, I can do ours in the morning and these others in the afternoon. MR. WHITE: It is quite all right. H.M.JR: Supposing I put you down for eleven o'clock tomorrow morning and then the big group at three? 15 - 15 - MR. WHITE: Then you had better notify the large group this morning. H.M.JR: Well, will you tell Stephens? MR. WHITE: Yes. Do you want the same people here who were here last time? There was a large representation, Agriculture, Army, Navy, Lend-Lease. H.M.JR: I think so. MR. WHITE: And Economic Warfare? H.M.JR: I think so. Anybody who is interested in the Treasury can meet here at eleven tomorrow. We will take full advantage of Stewart being here. We will work him. You had better let me take that letter home to read it tonight, the letter, Harry, that Acheson wrote me and then circulate it amongst our own group. MR. WHITE: It already has been. H.M.JR: Has Stewart seen it? MR. WHITE: He hasn't seen it, sir. H.M.JR: No. Harry, what about this price of silver in Bombay? MR. WHITE: Well, you have got the answer before you. The answer is very simple. H.M.JR: No, I have just got the question. MR. WHITE: Well, the answer was very simple. I can give it to you orally. The answer was routed to you. The reason there is an increase in demand for silver is rather the simple one that owing to the increasingly grave political and military situation, many Indians seem to prefer silver to rupee currency, paper currency, which is a natural outgrowth of the victories the Japanese are 16 - 16 having. Then, there has always been a big spread between their price and the New York price, which has been increased by virtue of the cessation of the granting of permits for the importation of silver. In other words, there is still less silver coming on the market now. The spread between the future and the present prices is also a reflection of the fact that they are so disturbed about the future prospects of Indian independence that a lot of them don't want to enter any future commitments for the sale of silver. There is nothing unusual about the situation beyond that. H.M.JR: Ed? MR. FOLEY: Here is this letter about Larry Bernard. If you could give us a few minutes this morning around eleven thirty. H.M.JR: Yes. What else? MR. FOLEY: Nothing. H.M.JR: I sent you a suggestion. I don't know whether you have got it yet. MR. FOLEY: Not yet. H.M.JR: Should we let the Tolan Committee on the West Coast know what we are doing? What? MR. FOLEY: By all means. H.M.JR: I sent you a memo on it. MR. FOLEY: By all means. I talked with John Pehle - yes, that is a good idea. H.M.JR: Don't you think that is a good idea? They are still there, you see. now. MR. FOLEY: That is right. They are in San Francisco 2 17 - 17 H.M.JR: You might be drafting a telegram to them. Ed, don't you think that is a good idea. MR. FOLEY: Yes, it is. We could either do it by sending them a copy of the instructions that we have given to the - I mean the program we worked out, and the instructions that have been given to the Federal Reserve in San Francisco, or we could have John Pehle go around and see them, and tell them orally what we have done. H.M.JR: I think you ought to have a written record. MR. FOLEY: All right. They - the boys didn't get to Los Angeles until about eleven o'clock Pacific Time Saturday night. They had a head-wind all the way out and had pretty hard sledding, and Pehle called me yesterday about three o'clock. It was around twelve out there, eleven or twelve. They had spent the night in Los Angeles, and they were going on up to San Francisco in the afternoon, yesterday afternoon. They expected to spend a couple of days there, and McCloy was going on up to Portland and Seattle and wanted Pehle to go along with him, and Mr. Eisenhauer was on the plane along with Szymczak, so they are all together. H.M.JR: That is grand. Anything else? MR. FOLEY: Nothing else. H.M.JR: Harold? MR. GRAVES: Nothing. H.M.JR: Just as a reminder, I spoke yesterday on the phone to the man that handles that. What's his name? MR. GRAVES: Duffus. H.M.JR: He hadn't got anywhere on it yet. You might give him a little push. He is sick, though. MR. GRAVES: He will, he is on the job this morning. 18 - 18 - H.M.JR: All right. MR. GRAVES: He had been away ever since the last meeting. He is back this morning. H.M.JR: Dan? MR. BELL: Did somebody prepare an answer to Henderson's letter? H.M.JR: No. MR. BELL: Should it be answered? H.M.JR: Yes. MR. BELL: I think it should. H.M.JR: Anything else? MR. BELL: Would you want to sign the China agreement tomorrow if we are able to get everything ready? H.M.JR: Oh, I called up Mr. Wells around one o'clock Saturday, and he said he would clear it the same day. MR. BELL: I didn't hear. H.M.JR: He said he would. MR. BELL: I will give him a ring this morning, then. H.M.JR: He said he would clear it. MR. BELL: Well, if they clear it and if you can get Soong to clear it, we might be able to do it this evening. H.M.JR: What is that? MR. BELL: I say if they clear it in the State Department and we can get Soong to clear it without further cables to China, we might be able to sign it this evening. - 19 - 19 H.M.JR: Well, the only time I can do it would be at two forty-five. MR. BELL: Otherwise it will have to be tomorrow? H.M.JR: Yes, but I would like to do it today if possible. MR. BELL: I will see what can be done? H.M.JR: All right? MR. BELL: Yes. H.M.JR: Anything else? MR. BELL: That is all. MR. WHITE: Henderson, at the meeting of the Price Committee, spoke very highly of the cooperation which the Treasury is giving him, and the opportunities that the Treasury is providing his organization to comment on the tax program. H.M.JR: Ferdie, before my press conference this afternoon - somebody in Chick's family was sick. He called me up. I have not seen in the press, and I would like to know. There are two things I would like to get for this afternoon. One is the table on the indirect taxes that the man - married man and single man pay, and then that tax - the other table which shows how much they save up to fifteen hundred dollars. MR. KUHN: Would you like to give that to them this afternoon? H.M.JR: Yes. MR. SULLIVAN: It is in the hearings, Ferdie. H.M.JR: But it is not in the press. MR. KUHN: It is very interesting that the press editorially has been swell about the tax program, I think, 20 - 20 - on the whole, but today for the first time, the financial editorsgot to work and that is just what you might of expected. H.M.JR: Have you seen it in the press, this table? MR. SULLIVAN: No, I have not, sir. H.M.JR: I don't think they ran it. MR. WHITE: There was an article in the TimesHerald, in the gossip column, about you and Frankfurter. Was it called to your attention? H.M.JR: No. MR. WHITE: Well, I think you would want to read it. I got it second-hand. H.M.JR: Give it to me third-hand. MR. WHITE: Well, you will be able to see it in the article. I can tell you what was reported to me, as being that Frankfurter and yourself were very much disturbed about the possibility of Cripps supplanting Churchill, and rushed to the President to urge him to prevent it, if possible. (Laughter) H.M.JR: Cissie knows more about it than I do. It is news to me. I would like to see it. MR. WHITE: I was hoping it would be news to you. H.M.JR: It is news to me. John, you might stay a minute. MR. SULLIVAN: Yes, sir. 21 March 9, 1942 Ed. Foley Secretary Morgenthau Please talk over with me this morning the advisability of letting the Tolan Committee on the West Coast know just what steps we have taken during the last few days. Taben up at 9'30 meeting 3/9/42. 22 Salaries & Expenses Foreign Exchange Control-1942 MAR 9- 1942 RONORABLE JOHN N. TOLAS, CHAIRMAN HOUSE COMMITTEE INVESTIGATING NATIONAL DEFENSE NIGRATION SAN FRANCISCO, CALIFORNIA THE FEDERAL RESERVE BARK OF SAN FRANCISCO IS WORKING OUT A PROGRAM TO DEAL WITH THE PROPERTY OF EVACUEES FROM THE PACIFIC COAST MILITARY AREAS SUBSTANTIALLY AS OUTLINED BELOW: [HERE TAKE IN ATTACHED THIS PROGRAM IS BEING PUT INTO EFFECT AT THE REQUEST OF THE SECURITARY OF WAR AND WILL BE CARRIED OUT UNDER THE GENERAL DIRECTION OF THE LOCAL MILITARY AUTHORITIES. FULL AUTHORITY HAS BEEE DELEGATED TO THE FEDERAL RESERVE BANK OF SAN FRANCISCO TO CARRY OUT SUCH A PROGRAM. I AM ASKING JOHN W. PSHLE, ASSISTANT TO THE SECRETARY, WHO IS IN SAN FRANCISCO FOR THE PURPOSE OF HELPING THE FEDERAL RESERVE BANK TO PUT THIS PROGRAM INTO EFFECT, TO COMMUNICATE WITH YOU AND KEEP YOU ADVISED AS TO THE PROGRESS OF THE PROGRAM. (signed) H. Morgenthau, Jc. SECRETARY OF THE TREASURY. BBinrd - 3/9/42. 3/9/42 23 Miss Chauncey: is is the attachment referred to in the Tolan wire of today. Sent teletype - to be delivered to Tolan at 1749 Pleasant Valley Avenue, Oakland, Calif. Copy to be sent to Pehle at Federal Reserve Bank, San Francisco, by teletype. 12:50 p.m., March 9, 1942. SUGGESTED PROGRAM FOR THE FEDERAL RESERVE / RANK 24 OF SAN FRANCISCO AND OTHER PUBLIC AGENCIES TO DEAL WITH PROPERTY OF EVACUEES FROM PACIFIC COAST ILITARY AREAS. The success of the proposed program will depend upon placing complete responsibility for its execution in a responsible West Coast agency acting under the general direction of the local military authorities. I Scope of Problem: The evacuation on short notice of tens of thousands of persons from Military Areas on the Pacific Coast raises serious problems in connection with the liquidation of their property holdings and the protection of the property of such persons against fraud, forced sales, and unscrupulous creditors. Obviously the emergency will cause financial loss to the ;roup involved. However, the following program is intended to accord to this group reasonable protection of their property interests consistent with the war effort. II - Legal Authority: Since the program is one basically to assist the evacuee in the liquidation of his property, it is expected that in most instances the evacuee will voluntarily avail himself of the facilities afforded by this program. Governmental sanctions will be necessary to deal with creditors and others who seek unfair advantage of the evacuees. There is ample legal authority now vested in the military authorities and in the Treasury Department which can be delegated to such West Coast agency to deal with this problem without necessity of obtaining further legislation or new executive orders. III - Administration of Program: The nature and urgency of the situation, coupled with the large volume of transactions that will require prompt handling, necessitates the program's being administered by an agency on the West Coast cloaked with full authority to act without reference to Washington. The over-all control of all aspects of the evacuation must obviously rest in the military authorities. Subject to this over-all control by the Army, the direct responsibility for the execution of the property aspects of the program should be placed in the Federal Reserve Bank of San Francisco, which has branch offices in Los Angeles, Seattle, and Portland. The Federal Reserve -2- 25 ank will be in a position to obtain the cooperation of other Government gencies, and of well-known and experienced Individuals and institutions in the various communities throughout the West Coast area. This coopera- tion, together with the established integrity and ability of the Federal Reserve Bank, will enlist the confidence of all of the affected groups and discourage gouging by creditors or other self-seeking interests. The Federal Reserve Bank will also work in close liaison with the Federal Security Agency, the United States Department of Agriculture, and other Federal, State, and local public agencies that can be of assistance in dealing with the property during the course of its liquidation. These agencies will undoubtedly be called upon by the military authorities to handle other aspects of the evacuation problem, such as the transportation and resettlement of the evacuees, and their reemploy- ment in new areas. The Federal Reserve Bank of San Francisco, which is the fiscal agent of the Treasury Department, will be clothed with ample authority to execute the program. The Treasury Department will lay down the broad principles and objectives of such program as well as the general procedure to be followed. The Department will also furnish the San Francisco Bank by airplane with the requisite number of trained experts to assist in working out the details of the program in the field and to participate its execution. If need be the Department is in a position to provide the San Francisco Federal at once with 100 or more men for this purpose. The keynote of this program is\speed. It is believed that it can be put in operation by Monday, March d, 1942. IV - Outline of Program. A. Properly staffed offices under the direction of the San Francisco Federal Reserve Bank will be opened at once in the local communities from which evacuees will be moved. B. Announcement will be made throughout the area by the Federal Reserve Bank of San Francisco that its representatives in these offices are prepared to assist evacuees with the problem of liquidating their property and protecting them against those seeking to take unfair advan- tage of their plight. a C. These representatives will assist in putting the evacuees in position to obtain buyers, lessees, and other users of their property on fair terms. In cases where the evacuee is unable to select his own agent to dispose of his property, the Federal will be prepared to act as agent for the evacuee under a power of attorney or similar arrangement and ke steps to liquidate the property on fair terms. 26 -3D. Evacuees threatened by creditors will be encouraged to come to the representatives of the Federal for advice and guidance. The Federal representative will also discuss the matter with the creditor with the view to working out a fair settlement and limiting the remedies that may be pursued by the creditor who threatens un- fair action. By and large the mere existence of this program of helping evacuees will eliminate or forestall most of the sharp practices that are now feared. E. In some cases the property of the evacuee may be such that its real value can only be realized at a future time, e.g., Japanese novelties. In such cases the Bank's representative will assist the evacuee in arranging for the storage of such property if that is the wish of the evacuee. F. On agricultural properties the Bank's representative, with the assistance of representatives of the U. S. Department of Agriculture, will attempt to arrange for the leasing or sale of such property or if need be for the growing of the crops, with a view to preventing their loss through Inattention. G. The Federal Reserve Bank of San Francisco and its representatives will be cloaked with adequate authority to cope with problems arising on the basis of existing circumstances. The program will be flexible and at all times the Bank will attempt to keep matters on a voluntary basis, satisfactory to the evacuee. Where these offorts fail it may be necessary for the Bunk's representative to step in and take the property over for the purpose of obtaining a fair and reasonable liquidation. It is expected that the setting up of this program and the accordance to the evacuees of facilities for the liquidation of their property should greatly expedite the departure on a voluntary basis of the avacuees from the military area. 3/4/42 27 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE March 9, 1942 TO Secretary Morgenthau FROM Mr. White HOW Subject: Silver Legislation gr We are submitting a draft of the silver bill which, during the period of emergency, directs the cessation of silver purchases and authorizes the sale of Treasury silver at not less than thirty-five cents an ounce. We believe that it would be preferable to suspend silver purchases during the emergency rather than to seek permanent elimination of such purchases because: 1. It will call forth less opposition on the part of silver interests. It will justify your raising the problem at this time 2. purely as a measure for diverting labor and equipment to war uses. 3. It will not directly raise the question of the desirability of our silver policy in the past. 4. It will not prevent Congress from going farther and eliminating entirely all silver purchases, but the responsibility will be theirs and not yours. If you agree with the foregoing, the following steps are suggested: 1. Have the President indicate whether he wants the silver question raised at this time. He may prefer not to stir up opposition in Congress on a matter of relatively small importance. 2. Get a statement from the War Production Board that (a) more silver on the market at current prices would help the war effort and (b) that silver mining is absorbing labor and equipment which could be more profitably used in the war effort. 3. Secure the support and acquiescence of Jesse Jones to the purchase by the Metals Reserve Corporation of high-cost copper, lead, and zinc from mines thatdepend on high silver prices to maintain production of these essential materials. When these three steps are satisfactorily completed, you will probably want to discuss the problem with leaders in the Senate nd the House before having the bill presented. You may wish to read the appended memorandum setting forth in more detail the emergency silver program. 28 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE March 9, 1942 Secretary Morgenthau TO Mr. White FROM Subject: Silver Legislation We are ready to submit for your approval a draft of a bill providing for suspension of silver purchases and authorizing the Treasury to sell silver at not less than 35 cents an ounce during the period of emergency. The bill does not affect the Treasury's power to purchase silver for coinage or to issue silver certificates. We feel it would be a mistake to include in the bill authority to sell Treasury silver except with a stipulated minimum price. The threat of the enormous Treasury supply of silver hanging over the market without a minimum price at which it could be sold would arouse much greater opposition to the bill by the silver interests, and might make passage of the bill uncertain. Moreover, we do not believe that the authority to sell silver is of immediate im- portance because with the entire domestic output offered in the market it is very doubtful whether there would be any substantial demand for Treasury silver at anything like current prices. The addition to the market of domestic output of possibly 50 to 60 million ounces (output for 1942 at 71 cents will be about 70 million ounces) should prevent the price of silver from rising above 35 cents for some time, and might well drive the price down to 30 cents. If, in addition, an attempt were made to sell substantial quantities of Treasury silver in competition with domestic and imported silver, the price would be still further depressed-how much, of course, would depend on the quantity of silver the Treasury tried to sell. Furthermore, the amount of silver offered on the market would very likely be further increased by the fact that such legislation would encourage countries to sell some of the silver they now hold BE monetary reserves. Should the expension in the industrial uses of silver prove to be so great that a shortage appears notwithstanding the added supply from domestic output, the Treasury could, under the terms of the bill drafted, sell some of its silver. The drafted bill also contains a provision for the continued purchase of domestic silver at the 71-cent price for P. period of three months after the enactment of the bill. -- 29 As the hearings and discussions on the bill will certainly last many weeks, the silver producers will have a period of at least four to five months in which to make whatever adjustments may be necessary. Silver mined during the period of suspension would not be eligible for purchase by the Treasury as newly-mined domestic silver when the emergency is terminated. As the supply of silver available for industry will be increased 00 able to sell silver at 35 cents an ounce or more, it is not re- by the full amount of the domestic output, and 8.8 the Treasury will garded 98 necessary to provide for lending Treasury silver for re- coverable industrial uses. The adventages of "suspending silver purchases at this time are clear. They are as follows: 1. The labor, equipment, and materials released from mines which produce predominantly silver can be utilized in the war effort. The increased supply of silver in the domestic market will probably drive down somewhat the price of silver but with a lower rice of silver more will be used in industry and more of the competing metals will be free for defense use. 2. The South American countries producing silver are accumuasting gold and dollar balances now. Therefore, a slightly reduced rice of silver will not significantly impair their exchange osition particularly as the principal effect of the lower price ill be to reduce profits withdrawn in dollar exchange by American nine owners. Though it is true that our silver purchases are inflationary and though much can be made of that in public discussion, actually the extent to which the coinage of silver adds to the money supply of a country is so negligible as to warrant little emphasis on this aspect of the problem. The chief objection to suspending the purchase of silver is that it will reduce the receipts and hence the output of mines producing copper, lead, and zinc along with silver. This is a serious objection in view of the need for these materials for defense, but it can be met very simply by the Metals Reserve Corporation which already has the authority and pursues the colicy of paying higher prices for higher-cost output. The application of this policy to the silver problem needs no new legislation but merely requires & prior understanding with Secretary Jones that he will take care of such contingencies, SO that when appearing before the Congressional Committees you 111 be able successfully to meet any objection that cessation f domestic silver purchased by the Treasury will reduce the 30 -3supply of domestically-mined copper, lead, and zinc. With regard to foreign copper, lead, and zinc, produced along with silver, the etals Reserve Corporation can, in exceptional cases, also pay slightly more for such metals. In any case, the decrease in price to foreign silver producers will probably not be large enough to seriously curtail production abroad during war time. are: Two disadvantages in suspending the silver purchase program 1. It will be interpreted 8.9 8 confession by the Administration that its silver purchase program was a mistake. I think it might be justly said, however, that the silver purchase program while not suited to a country at war was well suited to a country in depression. Nonetheless, the step will be heralded by the press and commentators as the "deserved end of a ridiculous policy instituted by the present administration." 2. If the suspension of silver purchases were to reduce the market price of silver below 35 cents an ounce, it would show an even greater disparity between the market price of silver and the value of silver bullion on the books of the Treasury. However, nless very considerable quantities of silver are sold at 35 cents Cn ounce, there will be no bookkeeping loss. 31 A BILL To suspend certain provisions of the Silver Purchase Act of 1934 and of the Act of July 6, 1939, to provide for the sale of silver, and for other purposes. Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That Section 3 of the Silver Purchase Act of 1934, 48 Stat. 1178 (U.S.C., title 31, sec. 734a), is hereby suspended: Provided, That nothing in this Act shall be construed to limit the authority of the Secretary of the Treasury to carry out the provisions of any contract or agreement made pursuant to said section prior to the enactment of this Act, or to acquire and make payment for silver pursuant to any such contract or agreement. Sec. 2. Section 4 of the Act of July 6, 1939, 53 Stat. 998 (U.S.C., title 31, sec. 316c), is hereby suspended, such suspension to become effective on the ninetieth day following the date of enactment of this Act, and no silver mined during the period of suspension shall be eligible for deposit pursuant to the provisions of said section 4: Provided. That within such reasonable time after the effective date of such suspension as the Secretary of the Treasury shall determine, the coinage mints shall, in accordance with the pro- visions of said section 4 of the Act of July 6, 1939, and the Regulations of the Secretary of the Treasury issued thereunder, receive and settle for deposits of silver mined prior to the effective date of such suspension. 32 -Sec. 3. The Secretary of the Treasury, without regard to any other provision of law, is hereby authorized to sell at home or abroad, in such amounts, at such rates in excess of thiry-five cents per troy ounce .999 fine, at such times, and upon such terms and conditions as he may deem reasonable and most advantageous to the public interest, any silver bullion in the monetary stocks of the United States not then held for redemption of any outstanding silver certificates. Sec. 4. Sections 1 to 3, inclusive, shall remain in force only until December 31, 1944, and after such sections cease to be in force, any provisions of law amended or suspended thereby shall be in full force and effect as though this Act had not been enacted. 33 A BILL To suspend certain provisions of the Silver Purchase Act of 1934 and of the Act of July 6, 1939, to provide for the sale of silver, and for other purposes. Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That Section 3 of the Silver Purchase Act of 1934, 48 Stat. 1178 (U.S.C., title 31, sec. 734a), is hereby suspended: Provided, That nothing in this Act shall be construed to limit the authority of the Secretary of the Treasury to carry out the provisions of any contract or agreement made pursuant to said section prior to the enactment of this Act, or to acquire and make payment for silver pursuant to any such contract or agreement. Sec. 2. Section 4 of the Act of July 6, 1939, 53 Stat. 998 (U.S.C., title 31, sec, 316e), is hereby suspended, such suspension to become effective on the ninetieth day following the date of enactment of this Act, and no silver mined during the period of suspension shall be eligible for deposit pursuant to the provisions of said section 41 Provided That within such reasonable time after the effective date of such suspension as the Secretary of the Treasury shall determine, the coinage mints shall, in accordance with the pro- visions of said section 4 of the Act of July 6, 1939, and the Regulations of the Secretary of the Treasury issued thereunder, receive and settle for deposits of silver mined prior to the effective date of such suspension. 34 -2Sec. 3. The Secretary of the Treasury, without regard to any other provision of law, is hereby authorized to sell at home or abroad, in such amounts, at such rates in excess of thiry-five cents per troy ounce .999 fine, at such times, and upon such terms and conditions as he may deem reasonable and most advantageous to the public interest, any silver bullion in the monetary stocks of the United States not then held for redemption of any outstanding silver certificates. Sec. 4. Sections 1 to 3, inclusive, shall remain in force only until December 31, 1944, and after such sections cease to be in force, any provisions of law amended or suspended thereby shall be in full force and effect as though this Act had not been enacted. Zgt xRB3 S.J.S.footh 8v us 35 MEMORANDUM March 9, 1942. TO: The Secretary FROM: Mr. Sullivan TLS I understand that the Attorney General has stated that there will be destroyed 567,000,000 gallons of bootleg mash and that he has inquired why this could not be converted into distilled alcohol. During the fiscal year 1941, the following quantities of alcohol, distilled spirits and mash were seized: 6,868,078 " Low-proof moonshine spirits Mash 40,449 gallons 234,947 " Alcohol It is the policy of the Alcohol Tax Unit to remove all distilling equipment and materials having a tangible value to a place of storage whenever the cost of removal is not out of proportion to the value of the property. All alcohol seized at illicit distilleries is removed, forfeited and cleared for disposition through the Procurement Division except in those instances where the distillery is in such an inaccessible place that the cost of removal exceeds the value of the alcohol. The cost of removal and re-distillation of low-proof moonshine spirits exceeds its value at the time of seizure and hence is destroyed on the premises. The same procedure is followed with the mash. The 6,868,078 gallons of mash seized in 1941 was taken from 11,000 different illicit distilleries, almost all of which were in inaccessible locations. Mr. Berkshire reports to me that he knows of no alcohol, low-proof moonshine spirits or rash in the custody of the Department of Justice and that the Treasury Department not only has no quantity of low-proof moonshine spirits or mash but does not contemplate any change in its policy to retain rather than to destroy either of these two commodities. 36 March 9, 1942 10:31 a.m. HMJr: Hello. Operator: Mr. Patterson. HMJr: Hello. Hello, Bob. Robert Patterson: Hello, Henry. HMJr: How are you? P: Fine. HMJr: Bob, I'd like if you could clear up something P: Yes. HMJr: for me. Is it correct or incorrect that the Army no longer accepts volunteers except for the Air Corps. P: No, it accepts them for all. HMJr: It does. P: Yes. In two ways. HMJr: Yes. P: HMJr: P: HMJr: A man can go to a regular recruiting station, or he can go to his local draft board and stand forth as a volunteer and be sent in by them. Is that - that still is true? That still is true. Because I was told yesterday by a General, who shall be nameless, that they no longer took them other than for the Air Corps. P: Well - no, they' '11 take any recruits. They no longer can specify their branch of service, like infantry or cavalry or field artillery or something. They just are taken into the Army at the -2- 37 recruiting station, sent to a reception center, and are there assigned to a branch, and they have no right to take their own. HMJr: P: HMJr: P: Yes. But they'11 take recruits. But during that I made inquiry on it within the last week. HMJr: You did. P: Yes. HMJr: But once they get in there, if this man wants to be a candidate for the officers' training school once he gets in after his three months, he can become a candidate, can't he? P: Yes. HMJr: What? P: Yes. HMJr: Is that correct? P: HMJr: Yes. That is right. But let me just go through - if a man wants to volunteer, he goes to his - he goes where? P: He can either go to an Army recruiting station HMJr: Yes. P: HMJr: P: as in Boston or New York; or he can go to his local draft board. I see. And say he wants to volunteer. Would it be an awful lot of bother to have one of your people just give me the thing in Army language? I'11 send a little memo over to you. 38 -3HMJr: P: HMJr: Just have somebody write it out. I'11 send a little memo over to you. Just if a person wanted to - a boy wanted to volunteer, how would he do it. P: Yeah. HMJr: And then P: I've got the thing up because it affects - my own boy is going to do it. HMJr: Well P: And he - I told him to go to the Army recruiting HMJr: Your own boy's going to do it. P: Yeah. HMJr: And then - did you work it out from them - I station in Boston. mean, how he can become a candidate for officers' training? P: He - yes, he can - he'll be taken in and sent to one of what they call the replacement training centers. HMJr: P: Yes. Infantry or artillery or cavalry or anything else, and he makes application to go to an officers' candidate school and is eligible to go after four months. HMJr: P: HMJr: I see. Well, does it He will have to serve in the ranks four months. Does it make a difference what reception center he goes to as to what branch of the service he wants to go to? P: Yes. The reception - oh, no, not reception center. 39 -4HMJr: P: HMJr: P: HMJr: Well, what's the next thing where he Replacement training center. Does it make a difference? Well, he - the replacement training center will, when he gets into one of those - that's for infantry, say, that pretty much sets what branch of the service he's going to be assigned to. So if he wants to go into infantry or cavalry, he's got to make up his mind at the time he goes in. P: Well, yes, and he could only state his preference and he may not get sent to it. HMJr: I see. P: In the old days, a year ago, a man who volunteered for the regular Army could say, "I want to serve in the infantry." HMJr: Yeah. P: And that would be the term of his enlistment. HMJr: Yeah. P: He can't do that any more. HMJr: Yeah. P: All he can say is, "I would prefer to serve in the infantry. # Maybe he gets it, and maybe he's sent to the Quartermaster Corps. HMJr: I see. P: But I'11 send you a little memo over. HMJr: Would you? P: You bet. HMJr: I mean, just the way you'd do it for your boy; because I have my boy in mind also. -5P: Yeah. HMJr: You see? P: Yeah. HMJr: And he's interested. P: 40 Yeah. The Air Corps, of course, 18 a separate thing. You can volunteer direct for the Air Corps. HMJr: No, he isn't thinking of the Air Corps. P: That's that Flying Cadet Course, and 80 on. HMJr: Yes. P: That's a different thing. HMJr: And is there anything over there that you've got which describes each of the services? P: Yes. HMJr: There is. P: Yes. HMJr: Could that be sent over, too? P: Yes. I can do it. HMJr: Thank you 80 much. P: Right. Good-bye. 41 WAR DEPARTMENT OFFICE OF THE UNDER SECRETARY WASHINGTON, D.C. March 9, 1942 The Honorable Henry Morgenthau, Jr. Secretary of the Treasury Washington, D. C. Dear Mr. Secretary: The following is the information which you requested with respect to enlistment in the Army: Men aged 18 to 36 may enlist at any U.S. Army Recruiting Station and men aged 18 to 45 may volunteer for in- duction at their Selective Service local board. At both the recruiting station and the local boards men aged 18 to 27 may enlist in the Army Air Force. There are only two choices available, the Army Air Force and the Army of the United States. At the reception centers where the men are sent after induction they are classified and assigned to the various branches of the service. In their classification they may state a preference for a branch of the service, such as the Field Artillery, and if there are vacancies in such branch and they possess the requisite qualifications, they are assigned to the branch of their preference. All men in the ranks have an opportunity to qualify for an Officers Candidate School after three months service as an enlisted man. It is expected that in this calendar year there will be approximately 75,000 commissions given to graduates of the Officers Candidate Schools in the Ground Forces alone. Men who enlist in the Air Force and pass the necessary test for a flying cadet at completion of their training period are commissioned in the Air Force. Most of the flying personnel in the Air Force, such as pilots, navigators and bombardiers are commissioned personnel. The Air Force offers one of the broadest opportunities for a young man to become a commissioned officer. I trust the foregoing information is sufficient for your purposes. If not, I will be glad to furnish you further details. Best wishes. Sincerely yours, Robert P. Patterson, Under Secretary of War. 42 March 9, 1942 2:38 p.m. HMJr: Hello. Operator: Miss Tully. HMJr: Hello. Grace HMJr: Yes, Mr. Secretary. How are you, sir? I'm very fine. T: That's good. HMJr: Physically. T: Good. Tully: HMJr: T: Mentally, I'11 let you say. (Laughs) You sound all right to me; I think I'11 pass you. HMJr: Thank you. If the Presidente is free and kindly, I'd like to have a little chin Wednesday morning. T: I see. All right, sir. HMJr: You don't sound very enthusiastic. T: I don't know what's happening Wednesday morning, but I can let you know. I heard a story about you. HMJr: What was that? T: Got a minute? HMJr: T: I've got ten minutes. Well, the President's supposed to be driving around - up around Hyde Park HMJr: T: Yes. .....and got into the adjacent county. 43 -2HMJr: Yes. T: And ran out of gas. HMJr: Yes. T: Have you heard it? HMJr: No, no. T: And 80 he - they wanted to get some gas and they asked him for the money, and he didn't have any money with him. HMJr: T: Yeah. So he decided he'd have to get a check cashed and he went to the bank in this little place and presented the check. HMJr: Uh huh. T: Well, they looked at it, and it was a pretty big check to buy gasoline with. HMJr: Yeah. T: So they decided they'd have to call Secretary Morgenthau and ask him about this check, 80 they called you. HMJr: T: Yeah. And you said, well, yes. He told you all about his running out of gas, you see, and didn't have any money, and 80 forth and HMJr: Wait a minute. The President called me or T: No, no, the vice president of the bank called the bank called me? you. HMJr: T: Oh, the vice president of the bank. Yes. Because it was 80 big a check he wanted your say-80 on it, whether it was all right to cash it. fl 44 -3HMJr: T: Yeah. And 80 you said, "Well, now, you've told me all the circumstances and you told me it's a big check. How big is it?" HMJr: Yeah. T: The vice president saye, "It's for a million dollars. HMJr: Yeah. T: And you said, "Oh, give him a hundred. He won't know the difference." HMJr: (Laughs) T: I haven't told that to him yet, but I will. (Laughs) HMJr: T: HMJr: T: (Laughs) I haven't heard a real good joke in a long time, and I like that one. (Laughs) Oh, that's wonderful. That's pretty fresh on your part, but still (Laughs) HMJr: Pretty fresh on my part? (Laughs) Oh, that's the first good belly laugh I've had in I don't know when. T: Good. HMJr: Come up and see me sometime. T: All right, fine, I will. (Laughs) HMJr: T: HMJr: T: (Laughs) Oh, good. I'11 call you later on the other. All right. Good-bye. (Laughs) 45 March 9, 1942 MEMORANDUM FOR THE SECRETARY'S FILES Meeting in the Secretary's Office March 9, 1942 2:30 p.m. Present: Mr. A. Law Mr. W. Morris Mr. T. Helgeson Mr. C. Bland Mrs. Klotz Treasury ) Mr. White Three of these men were from the Pontiac plant in Flint, Michigan. (The fourth was from the C.I.O organization in Washington.) They had telegraphed last week to Secretary Morgenthau asking for an appointment. This conference was in answer to that telegram. Their spokesman stated that the plant normally employed 5,200 persons, but that since January 28 only 500 had been employed (they also had a three-week lay-off during the Christmas season). Of the 500 now in the plant, 250 were tool and dye workers who were doing virtually nothing. These tool and dye workers, though on the pay roll, had requested to be permitted to go to some other plant where they could be helping to produce, but were told they would have to resign to do so. Inasmuch as that meant loss of seniority, they preferred to stay though they were not engaged in production. The representatives of the men had requested a-plant manager to give them some indication of when work might be resumed, but were un- able to get any satisfactory explanation from the plant manager. They hoped that the Secretary would be able to suggest how they might proceed to get some information or assurance that there would be work. They stated that unless the men were promised work soon, some of the men would have to move and try to get work in other parts of the country. They also said that the morale of the men would be seriously effected. The Secretary asked what they thought their plant could produce. They said they thought it could produce ambulances or fire trucks. The Secretary asked whether they thought they could produce "invasion landing" boats, They replied that they had a modern plant with large presses, welders, and other skilled workers and they felt the plant could be adapted to such work. -- 46 The Secretary telephoned Assistant Secretary of the Navy Patterson, and told Patterson that he had this delegation of workers from the Pontiac plant in his office who wanted to obtain some work for their plant. He asked Patterson whether he could give them any time to listen to their story to see whether he (Mr. Patterson) could be of any assistance in getting that idle plant working on some defense needs. Patterson replied that if they would come over at once he would talk with them. They left at once for Mr. Patterson's office. The Secretary asked the men to let him know of the results they obtained. Hon 47 March 9, 1942 2:56 p.m. HMJr: Hello. Operator: Mr. Patterson. HMJr: Hello. Bob. Robert Patterson: Yes, Henry. HMJr: Henry. I'm back at you again today. P: Yeah. HMJr: Bob, I've got a very fine delegation here of automobile workers from Pontiac. Remember you and I went into that once before? P: HMJr: Yeah. And with your help we were successful. They represent five thousand workers from Pontiac with no work and nothing in sight. Hello. P: Yeah. HMJr: And they want to go to work. P: Yeah. HMJr: I wondered if you could give them enough time to hear their story, because P: HMJr: P: I'd be glad to see them. I can see them right now if they can come over. That's wonderful. I'm in the new War Department building at Twenty-first Street and Virginia Avenue. HMJr: Well, how can I get them into your building? P: Oh, they'11 pass them. HMJr: They will be? 48 -2P: Yes. I'11 send down word. HMJr: Well P: How many? HMJr: There are four of them. P: Yes. HMJr: Mr. Bland - hello. P: Yes. HMJr: Mr. Law. P: Right. HMJr: And Mr. Morris. P: Mr. Bland and party. HMJr: Mr. C. Bland and party. P: Right. HMJr: I'll send - they'11 be there in ten minutes. P: Right. HMJr: And, as I say, they want to go to work. P: HMJr: Yeah, Yeah. I'11 be glad to see them. It's a General Motors plant. P: Yeah. HMJr: Let me know if there's anything you can do. P: I will, Henry. Send them over. HMJr: Thank you. P: You bet. 49 March 9, 1942 3:00 p.m. FINANCING 2 Present: Mr. Haas Mr. Buffington Mr. Murphy Mr. Lindow Mr. Bell Mr. Stewart Mr. Viner+ Mr. Sullivan H.M.JR: Say, listen, Dan, if you are going to go to War Bonds instead of Defense Bonds, why don't you stop the buying? MR. BELL: We have. H.M.JR: As of when? (Mr. Stewart and Mr. Viner entered the conference.) MR. BELL: Oh, last Friday. H.M.JR: Did you? MR. BELL: Yes. We have got in the mill eighteen million bonds. H.M.JR: Well, you have got twenty-five million on hand. MR. BELL: Yes, and we have got eighteen million more in the mill. That is over forty million bonds we have got on hand that we can't possibly use before July 1. 50 -2- H.M.JR: I don't agree with you. I believe you can nobody will know the difference. Walter Stewart wouldn't sell War Bonds and have them stamped Defense Bonds and know the difference. He never looks at a bond. MR. STEWART: I certainly wouldn't know the dif- ference. H.M.JR: Would you look at a bond to see whether it is a War Bond or a Defense Bond? MR. STEWART: No. H.M.JR: There you are. He is just the people. MR. BELL: Well, I am not a promotion man. I would like to do that. You will have to talk to Harold Graves' section. H.M.JR: Well, I don't care, Dan, I am not going to wait after the first of July for anybody. MR. BELL: Well, we are planning to go July 1 to War Bonds and dispose of as many of what we have got in the mill as possible. H.M.JR: Mr. Stacy May - have you got a pencil? MR. BELL: Yes. H.M.JR: says that January - his figures show that there were two and a half billion dollars spent, he figures, on the war. MR. BELL: January? H.M.JR: January. February, his tentative figure is two billion six. We spent four billion in June and five and a half in December. That was as of March 7. I am planning to see him every two weeks now. MR. BELL: That includes all expenditures? 51 -3H.M.JR: Everything. He says it includes factories which are being started and Lend-Lease and everything for war. MR. BELL: Well, ours includes Lend-Lease, but they don't include RFC. war. H.M.JR: Well, he said everything that is for the MR. BELL: Does that include private? H.M.JR: No, I don't think so. MR. BELL: Just governmental expenditures? H.M.JR: Yes. Call him up, Haas, and ask Stacy May on that question, will you? Ask him, George, whether that is private or governmental. MR. BELL: I think he includes all the Defense Plant and the RFC and those subsidiaries plus the Treasury, and he may put his on his checks-issued basis. H.M.JR: Can I pass along the compliments you gave the boys at lunch? MR. STEWART: Yes, indeed. H.M.JR: Mr. Stewart said that George and you men were doing a better job in this war than was done in the last war in preparing the technical material for financ- ing, which I thought was quite a compliment, coming from Mr. Stewart. MR. HAAS: Thank you. We appreciate it greatly. H.M.JR: He said you didn't look quite as much like cranks as some of the other fellows. All right, Dan, you are licked before you start. (Laughter) 52 -4- - MR. BELL: I suppose so. What is the use of starting then, if we are already licked? H.M.JR: Well, go on, let's have the program. MR. BELL: Well, it is quite large, and I suppose the best way to do is just about what we did this morning. Viner and Stewart will take these tables and eliminate some of the detail and let each one of these boys explain what the table means, and we will get at the final problem that way. Lindow, would you give the Secretary that Table 1 and 2 and just hit the high spots? MR. LINDOW: I think you have seen these tables in an earlier draft. The first table shows the flow of goods and services to Government and to private sectors of the economy and compares the application of incomes made available as between these two sectors, putting the savings and taxes against the Government sectors, since we can borrow the savings either directly or indirectly, and it shows that Government will have available through taxes and savings eleven billion dollars less than it will spend for goods and services. Similarly, private persons will have available for spending after their savings eleven billion dollars more for goods and services than there are goods and services available. H.M.JR: It sounds like a phoney to me. (Laughter) I mean, the fact they come out the same isn't an accident? MR. LINDOW: No, that is the mirror of it. The fact that Government doesn't take away that extra eleven billion from individuals leaves it with them and leaves us short. H.M.JR: I see. MR. LINDOW: That is the so-called gap. Now, from this table we have picked up the savings 53 -5- figures which add to twenty-six point five billions, and we usually apply them-- (Discussion off the record.) MR. LINDOW: So in the second table we take the amount that we have to finance, which is thirty-nine point eight billions, and we say that there are two sources of funds, two broad sources. The first is the savings and accumulations from current income during the year, which we get from the first table. So much for personal savings, so much for business savings, so much for depreciation funds that aren't spent by corporations, those items. We distribute them over the various types of Government securities which we would sell. We would do that by applying some of the savings as direct investments, individuals buying baby bonds, for example, and also the indirect items where they might repay a bank loan or they pay money to insurance companies, and they have a net increase in their assets, and then they can buy ordinary marketable issues, so we do that for each type of Government security, make the best estimates we can. Then we have a residual amount which has to be borrowed as well, but we can't get it from savings because there aren't any left. We have broken the residual amount down into the funds we can get from idle balances. H.M.JR: How much can you get from savings? MR. LINDOW: Twenty-six and a half billions. H.M.JR: And that is what we should get from savings? MR. LINDOW: Yes, sir. No, that wouldn't be in savings bonds, Mr. Secretary, because some of it we would get through banks. If an individual pays off a bank loan, then we could borrow the same amount from the bank. H.M.JR: How much are you sure we could get through War Savings Bonds? MR. LINDOW: Seven billion two. -6- 54 MR. BELL: That is from a non-inflationary source. MR. LINDOW: That is right, that is from current incomes. We show some others that would come from idle balances. We have a billion and a half in that, giving us eight points seven altogether, but you see the amounts individuals would pay to banks - a fellow pays on a housing mortgage, for example. If he pays off that loan, then we can borrow from the bank the same.amount, and it is just as good as though we got it directly from the individual, because the bank deposits went down when the fellow paid off his loan, and then the bank can buy a bond from us and the deposits will go back to just where they were before, and there has been no inflationary effect, so out of the twenty-six and a half billions total savings, we figure we can only get in savings bonds a little over seven billion, but we would get from banks eight billion. (Mr. Sullivan entered the conference.) (The Secretary held a telephone conversation with Alex Budge of Honolulu.) MR. SULLIVAN: I turned this over to Randolph Thursday. There was a telegram. H.M.JR: I know. Tell Randolph, and yourself, put a little heart in this. The main thing I am worried about is the interest. MR. SULLIVAN: There is quite a lot to it. H.M.JR: All right, but sometime tomorrow. They are worried over there, and they don't know when they are going to be attacked again. You know. Haven't we got the right to waive interest? MR. SULLIVAN: No. H.M.JR: Have you got to charge six? MR. SULLIVAN: Sure. H.M.JR: Under the law? 55 -7MR. SULLIVAN: If they are financially unable to pay it, you can compromise the principal as well as the interest, but that isn't the situation. There is a great deal more in this thing. H.M.JR: Is there? MR. SULLIVAN: Yes, sir. H.M.JR: He says it is the little fellows. Couldn't the fellow that has to pay five thousand dollars or less get the right to waive interest? MR. SULLIVAN: You can always compromise for inability to pay, sir. H.M.JR: I know, but that keeps them on the-MR. SULLIVAN: I think it would be very bad to give them a blanket waiver, because there are a great many of those people who can afford to pay better than most people in this country. H.M.JR: Well, I haven't been in on it, but let's have a little heart over reason. MR. SULLIVAN: All right. H.M.JR: I mean, I would approach it from that angle, John. MR. SULLIVAN: Well, it is very difficult not to go overboard. I mean, you get enough hard cases to-- H.M.JR: No, h-e-a-r-t. MR. SULLIVAN: I know, but I say it is difficult not to go overboard in the direction in which you are pointing. H.M.JR: Well, I wouldn't mind going overboard on interest. If it was a question of waiving interest, I wouldn't worry about that, even though we favor a couple -8- 56 of big fellows. MR. SULLIVAN: Well, we will talk with you about it. H.M.JR: I mean, that wouldn't worry me. MR. SULLIVAN: We will talk with you about it. H.M.JR: O.K. MR. LINDOW: I wanted to explain that the twenty- six point five billion that we estimated for savings, as well as all the other estimates, which make all these parts into a logical whole, is based on existing habit patterns and pressures as we can see them at the time. Now, if you had a lot of rationing and that resulted in sterilizing some of the excess funds, it would result in greater savings. If you stepped up the baby bond program a great deal, that might result in greater savings and further increases, you see. So that the twenty-six five is based on what we could see at the time, rather than allowing for the future steps which were not already in the cards as we could see them. MR. BELL: Even advance of the taxes from last year to this year might have some effect. MR. LINDOW: That is right. Although we did take into account the effect of the new tax bill which had been stated in the President's budget. MR. BELL: But not the withholding end of it? MR. LINDOW: That is right. So adding together, then, the twenty-six five from current savings and thirteen three from what we might call inflationary sources, you get the thirty-nine eight that you have to get, and that includes borrowing from banks of eight point eight that doesn't come from current savings. That is, it isn't offset by reductions in loans or the mere accumulation of bank balances. 57 -9MR. BELL: You will notice, Mr. Secretary, that this provides for seventeen billion dollars borrowing from the banks, in the next to the last column. MR. LINDOW: This figure over here. MR. BELL: Eight two comes from non-inflationary sources, and eight eight comes from inflationary sources. MR. LINDOW: We have the two new proposed securities in here too. The new short-term one which we figure will yield about three point eight billions and the new longterm one which would give about two point six billions. Also tax notes which we figure at a billion two. H.M.JR: Well, I will say this, George, this is what I asked for anyway. MR. HAAS: That is right. That is what you have been asking for. from. H.M.JR: You remember, I said where can we get it MR. HAAS: That is right. MR. LINDOW: I might say a word about the estimates. We talked to each of the members of the group that you asked to have a representative appointed from each agency. We went over the general approach and the figures in this table and although there are differences about individual figures here and there, nobody felt that the conclusions you would draw from the table were misleading. H.M.JR: Would you publish this, Walter? MR. STEWART: Well, if I published anything it would be this first Table 1. Then it seems to me I would do it at a time when I was making a drive for some particular way of meeting the gap, some combination of-H.M.JR: You wouldn't publish Table 2? 58 - 10 MR. STEWART: Those seem to me more - having a larger margin of error because Table 2 carries out the assumption that you are going to have the gap of eleven, that you have got to meet it by some method. If one said there is a gap of eleven, it has got to be met by some method, such as withholding taxes or more rationing or something else, what combination would meet it? This poses the question and this undertakes to answer it. H.M.JR: How about you, Jake? MR. VINER: Why, I think it would be helpful to publish one. It just possibly might result in suggestions which would either improve the estimating or - it would also be educational in terms of explaining to the public that there is a gap that has not yet been solved. I would agree with Stewart that I wouldn't publish two quite in its present form. I would like to see two published, too, but just reword it a little so it is more like one, as a problem chart. This is still in preliminary stage, because two really states - two is one carried into application and broken down, but it is two has not yet been reworded as much as one has been reworded so as to indicate that it is a problem chart. Don't you agree that if two were to be published, it a would be more of these-MR. LINDOW: Yes. MR. VINER: warning labels. I think I would be inclined to have two published too, because if outside people were going to get to work on that, two would give them a good deal of help in testing one. MR. LINDOW: The only difficulty I see in publish- ing either table is that it might be misinterpreted. Eleven billions - the eleven billion problem has to either be solved, Mr. Secretary, in order to retain the price assumptions we have made here, or the price rises will be a lot larger than we have allowed for, in which case the gap will be bigger than eleven billions. H.M.JR: But Congress hasn't yet got very excited - 59 - 11 - about this price question. It isn't - isn't one of the ways to get them excited to show them something like this? MR. BELL: I think if you were making a drive for additional taxes or something like that, it might be a good time to bring it forward. MR. VINER: I think that Stewart's point that one and two oughtn't to be published unless there was to be some suggestion to the public as to ways in which this problem could be met - in other words, the Treasury oughtn't to throw a fiscal problem to the public. The Treasury has got to present programs to the public. It presents a problem and it also has to present at least a choice of solutions so that you would have to have in mind either an intensification of the tax program or withholding or forced saving or an intensified Defense Savings Bond campaign or say, "This is going to be Henderson's part.' MR. HAAS: Henderson has already put out the con- clusion of the table. H.M.JR: Yes, but nothing like this. MR. HAAS: But not the detail of it, and he - that is all I had. H.M.JR: What do you think, George? MR. BUFFINGTON: I think it is very enlightening to feel as Mr. Viner does, until you have got some suggested solutions, it might be a dangerous or unwise thing to put it out. H.M.JR: I think I will sort of try it out. Now, where do we go on from here? Let me get the whole story first. What is the next thing? MR. BELL: The next step is the table that Mr. Murphy will explain on the monthly financing. I don't think he needs to go into detail. He can point out the main figure there, the amount that will come from the member 60 - 12 banks of the Federal Reserve System. These two tables don't jibe as to figures, because this covers fifteen months - sixteen months, rather. H.M.JR: Go ahead, Professor. MR. BELL: Yes, sixteen months, whereas the other one covers the fiscal year. 7 MR. MURPHY: This table is to show by months how we might finance a program set out by the fiscal year 1943. We set out by estimating that during this time we will get twenty-nine point nine of revenues, and I think it would be apropos to mention in this connection that in distributing these revenues between months in accordance with the proposal of Mr. Paul and yourself before the House Ways and Means Committee, you don't get the seven billion dollars that the budget provides for during the fiscal year. You get seven billion dollars and more on an ultimate annual basis, but you don't get it as provided in the budget during the fiscal year. So we have assumed in this table, putting it on a budget basis, that you will get seven billion dollars in the fiscal year and have distributed on that basis, but in order to realize the whole twenty-nine point nine, it would require to that extent a tightening up in the tax proposals to advance collections so that you would get seven billion dollars during the fiscal year. That gives us our first figure of twenty-nine point nine of revenues to be received during the sixteen-month period. During that period, defense expenditures will be sixty-four point three, distributing the amount on a constantly rising scale. Non-defense expenditure is eight point five, giving us seventy-two point eight of expenditures. You will have a budget deficit of fortytwo point nine, and you will need four point three in addition for the corporations, giving the total amount to be financed, forty-seven point two. Now, we have estimated that you will be able to realize a total of five point five from trust funds. That includes the two billion dollars addition to the 61 - 13 Social Security program. And nineteen point one from non-marketable securities, which include the two tap securities. That will leave twenty-two point six to be rasied in the market during this period, of which we estimate that you can get three point two from purchasers other than banks. You see, the initiation of taps will in itself take out most of the purchasers other than banks for your market securities. That will leave nineteen point four to be purchased by banks, of which we estimated that perhaps one point three could be sold to non-member banks. That is assuming that they take the same share of the increase that they have of the present holdings of securities, and an additional four point three could be sold to the banks merely replacing an equivalent amount of loans which will be decreased as a result of restrictions on consumer credit, priorities, allocations, et cetera. That will leave thirteen point eight to be taken by the Federal Reserve System and by the Federal Reserve System I mean the System and its members combined. If excess reserves will be maintained at their present level, ignoring all factors other than the increased reserve - amount of required reserves which will occur merely from the member banks buying bonds and thereby increasing their deposits, the Federal Reserve Banks will have to purchase fifteen dollars and twenty- four cents worth of securities for every dollar's worth that is taken by the Federal and members together. If they did that, the purchases by Federal would exactly offset the increased required reserves that would occur from the member banks purchasing the others. If that were done, then during this sixteen months' period, the member banks would purchase eleven point seven billion and Federal would purchase two point one billion of Governments. MR. HAAS: That would increase reserves- MR. BELL: In other words, existing reserves of three billion plus and to sell to the member banks eleven billion seven hundred million dollars to maintain those - 14 - 62 reserves, the Federal Reserve banks would have to buy two billion one hundred million dollars worth of securities in the next fifteen months in the market in order to supply those reserves. H.M.JR: How about if they change those reserves? MR. BELL: Well, that is the same effect. MR. MURPHY: Another way of doing it. H.M.JR: Is that an easier way? Doesn't that make it mentally easier for the banks? MR. MURPHY: You mean the requirements? H.M.JR: I mean why can't they lower it. MR. MURPHY: We have argued, and it would be better to purchase securities in the market rather than lower reserve requirements for these reasons. In the first place, it permits a much finer, nicer adjustment than you can get by changes in reserve requirements. You can only change those very occasionally; and, in the second place, when reserve requirements are reduced from the point of view of an individual bank, it merely means this. It has the same amount of money that it had before, but a law has been changed. Less of it is required. On the other hand, when the Federal Reserve System purchases securities in the market, from the standpoint of any individual bank, the only thing - impact on that bank is that it is getting additional money. The clearings are in its favor. Its money is piling up and it seems to us that it is a far more effective psychological stimulus to a banker to find money coming in through clearings with his old requirements the same than to merely say, "You have got the same money as before, but we will merely cut down your requirements." It seems to have a much more effective lever. H.M.JR: Theoretically. MR. MURPHY: I would say practically. 63 - 15 - H.M.JR: Theoretically I think it is lovely. How are you going to do this? On February 13 Guaranty Trust in New York had one-third - one-quarter of all the excess funds in New York, and they wouldn't buy any of our bonds except fifteen million. Now, how are you going to have that flow in there? MR. MURPHY: Well, I would say two things. H.M.JR: How are you going to control that? it. MR. HAAS: Explain the bills, Henry. That will do H.M.JR: I mean, how are you going to do it? Here is one bank that has one-quarter of all the excess reserves. MR. MURPHY: Could I make two points there, Mr. Secretary. In the first place, contrasting open market operations with reduction in reserve requirements, which do you think would have the most influence on your Guaranty people? If that three hundred million became four hundred million, as far as they could see, merely because they had gotten new money on one end, or if they simply received a notice from the Federal Reserve bank, a balance sheet stating exactly the same as it is, saying, "You know - your requirements are less. Now the excess is five hundred instead of three hundred." If And the second point, if we put out these tap securities and out our long long market and our nonbanking market on a tap basis, then having segregated the bank market, we will be able to meet the Guaranty Trust Company half way. What Guaranty wants is short securities. 64 - 16 H.M.JR: That has got nothing to do with excess reserves. The way you are going to do it, the Guaranty their excess cash will just increase by that much. MR. BELL: Not necessarily, because the Federal wouldn't necessarily have to buy it from them. It could buy it from some other bank. The excess of the Guaranty could remain the same. They could remain the same so far as the Guaranty is concerned. H.M.JR: Are they going to buy from banks? They are going to buy from Government dealers. MR. BELL: No, but if the Federal is buying in the Government market and increasing the holdings of the banks in general, the Guaranty isn't going to want to increase its reserves. It has got plenty. The bank that wants excess reserves will sell securities. H.M.JR: They can do that now. MR. BELL: That is right. MR. MURPHY: Even the banks that sell no securities will have their excess reserves increased. H.M.JR: Henry, your plan is beautiful, but you rely - I have got to sit back here and rely on the Federal Reserve Board from day to day. On the other hand, if they change their requirements, then it is done. Otherwise, I have got to be after them every single day to do something. If Mr. Eccles doesn't like it one day, he doesn't do anything. I mean, I have got to rely on them from day to day. On the other hand, they do this thing in a lump sum and then - I mean, they just change the reserves over night, and it is done. MR. BELL: Well, we were hoping that if we could carry through this whole program-- H.M.JR: I mean, I have got to sit here and at the pleasure of Mr. Eccles, how much he is going to buy each day. Then they get in an argument, and for one week - 17 - 65 they may not do anything. I mean, if you had a thing which was mechanical, like making the odds on a racing board, how much money you put in, the odds automatically went up and down, so that the thing disappeared auto- matically through machinery, I would be for you. I mean, if there was so much dropped in here and then you had to multiply - a machine worked electrically and did the multiplying on the thing, I would be for you, but that happens to be Mr. Eccles, and -r. Eccle hasn't always been for two and a half percent money. MR. MURPHY: Well, could you secure a commitment with Mr. Eccles, Mr. Secretary, by which until the commitment was dissolved by mutual consent, and of course, it would have to be endorsed by the multiplicity of authorities they have over there, agree to keep excess reserves at a stipulated level by open market operations? MR. BELL: At a minimum. MR. MURPHY: At a minimum figure. MR. BELL: That was our hope. H.M.JR: We have had agreements with them on buying bonds and after he goes three days, he gets cold feet. If you were dealing with - what do they call this, pari- mutuel? If you were dealing with a pari-mutuel that you stick to much money in, and up comes SO many figures-to MR. HAAS: That is what you need. We were trying work out some. We recognized the need for something like that. H.M.JR: I don't know how it works. I know you bet SO much - I have seen it once in my life - and then the thing changes. Well, if you had a formula that you borrowed so much and automatically it went that much, it would be fine, but you are up against this human element. MR. HAAS: That is right. H.M.JR: Let Viner and Stewart - they always are friendly with the Federal Reserve. I don't mean to be 66 - 18 - sarcastic. I mean that seriously. I mean, they are always for using them. Would you be willing, if you were Secretary of the Treasury, to have to rely on a day to day - either of you - a day to day operation? MR. VINER: At the present time you have no alter- native. The question is, which form shall the reliance take? If you can get an agreement from them to maintain a minimum of excess reserves, I think you have gotten a great deal. Now, I know from past experience that if it were open market operations they might work so slowly and so grudgingly that it wouldn't do the job. H.M.JR: That is what I mean. MR. VINER: But I don't see why you oughtn't to get a firm agreement from them that they will maintain it they will not let excess reserves fall below a particular minimum, and then I would say it is not a matter of very great consequence to you which of their two methods they use. H.M.JR: Can you write a formula, what the minimum should be? MR. VINER: I would ask Dan Bell, and then I would write it for you. MR. BELL: We think the existing level is all right. H.M.JR: Well, it is too tight. MR. BELL: Well, it is all right if they are spread properly. H.M.JR: Yes, but you can't spread them, Dan. We went right up against this thing last time. MR. VINER: Well, I would say two things. H.M.JR: It was too damn tough. MR. VINER: I would have a minimum level and also a minimum level for New York. 67 - 19 H.M.JR: What is the sense of having the thing so tight that you are operating around with a billion eleven twelve hundred million and with one bank holding three hundred million. MR. VINER: New York is in a special position. H.M.JR: I don't see what is to be gained by keeping it so tight. It keeps interest rates hard, keeps short money hard. I don't get it. They have got me in a vise. What were you going to say, Jack? MR. VINER: I would say that I would like to see you get a pledge both as to the minimum over-all excess reserves and also as to the minimum excess reserves in the New York money market, because there is a special situation in New York. H.M.JR: Right. MR. VINER: And I think that New York situation is relatively going to get worse rather than better. H.M.JR: I agree with you there. MR. VINER: You have fundamental forces working to-- H.M.JR: Can they do that? Can they have "X" for the country and "Y" for the area? MR. VINER: They can do that by changing-MR. HAAS: Changing designations. MR. VINER: They can do it partly that way. I think they might also conceivably do it by doing their open market buying in that form which New York buys heavily rather than in which the country buys. MR. BELL: In other words, they can sell short-term securities, or buy short-term securities. You see, if they buy short terms, that tends to build up the New York excess reserves MR. VINER: rather than the country's. If they buy long terms, that 68 - 20 tends more to build up the country's excess reserves. But, you can also reclassify New York. Is that the correct term? MR. HAAS: Reclassify, yes. MR. BELL: I don't know that it is quite clear that they can do it, but there is one view over there that they can reclassify New York and Chicago, doing away with central reserve cities which have a twenty-six percent reserve, and lower that to - making it twenty percent. MR. MURPHY: Yes. It might not be legal, but there is no one that could bring suit against them. MR. HAAS: I think it looks a little funny. MR. MURPHY: It looks funny. It doesn't seem to be what the law contemplates. H.M.JR: I don't want to go through the same situa- tion I did on the last financing. There is no excuse for having the thing as tight as it was in New York, absolutely no excuse. What do you think, Walter Stewart? MR. STEWART: Well, there seem to be two human elements there. One is Eccles and the other is the Guaranty Trust Company. Under either method, whether you have changed excess reserves by changing classification or changing the minimum or buying in the open market, any single bank can, if it wants to, run a corner. If neither one guarantees against it, I should have thought that what you wanted was a combination of the two in some form which did deal with the New York situation and with the Board both, but how you could get more than the understanding, agreement, I don't know. It is all you have got. There is no other way that I know of, except for administering the funds of a reserve system without agreement with the Federal Reserve Board on open market operations or somebody, so, I don't see how you escape it. 69 - 21 - H.M.JR: Well, I am willing to modify my position this much. If you people could work out a formula of minimum excess reserves for the country, which is no lower than the present one, and one for New York, which is a more liberal one, because it is too tight, see. The last one was too tight, Dan. I would want it at least twenty-five percent more than it was in the last financing. In other words, I want around - oh, I might guess a billion and a half. MR. BELL: How much did they lose the last time in reserve requirements? MR. MURPHY: I have got it here. MR. BELL: A billion dollars, wasn't it? No, about six hundred million. MR. MURPHY: The last week before the increase, excess in New York was one three forty-five, and the week after the increase it was seven seventy-five, so it went down about six hundred million. MR. HAAS: And now it is up nearly a billion. MR. MURPHY: Nine forty four the last week. H.M.JR: Well, when the financing was a billion one and there was three hundred million in one bank which was frozen, it brought it down to eight hundred million, you see. So, there was only eight hundred million affected reserves-- MR. HAAS: A billion and a half is a good round figure. H.M.JR: . which was too little. They had me by the throat. I would like - I think you ought to have a billion and a half in New York. Now, I don't - it is really no concern of mine, if they would guarantee to maintain a billion and a half in New York, and how much for the country? MR. BELL: A billion three. 70 - 22 MR. MURPHY: There is three point two there now. The last week in which you had a bigger one in New York was October twenty-second. Things looked pretty well back there. I say the last week at which they had a billion and a half in New York Was October twenty-seven. I would rather like to be back there. H.M.JR: Yes. And how much for the country then? MR. MURPHY: Four six. H.M.JR: How much is it now? MR. MURPHY: For the country it is three two, and New York-- H.M.JR: We had four billion for the country? MR. MURPHY: Four, six fifty-five for the country on October second. H.M.JR: I wouldn't want to guess for the country. But a liberal amount for the country and a billion and a half minimum in New York, and they would maintain it there. MR. VINER: You say four for the country and one point five for New York would mean an easy money market? MR. STEWART: If you deal with New York-MR. BELL: New York has had something under a third of the reserves. MR. HAAS: A little over three outside New York would be all right, I think. H.M.JR: Well, around four, a minimum of four or four and a half for the country and a billion and a half for New York, and they agree to maintain it there. MR. HAAS: I should think outside of New York, four would be plenty, and then a billion and a half in New York and you would have five five. 71 - 23 - MR. VINER: No, four is over-all. MR. HAAS: Over-all? Oh, that is too tight. MR. VINER: Do you think it is too tight? MR. HAAS: Yes. H.M.JR: Well, you would want to think about it. MR. HAAS: Yes. MR. BELL: They will argue that it isn't tight now with three to three and a half. H.M.JR: Well, it is. MR. HAAS: That is over-all. H.M.JR: And they have no reason not to do it. MR. MURPHY: Of course, it is the rise in short money rates which permits a bank like Guaranty to hoard three hundred million. If pickings were thinner, they would have to invest their three hundred million in order to make their dividend. That is the truth. It is interesting to note that Devine, in his annual review of the bond market, gives as factors that he thinks will keep the bond market strong the fact that increased taxes and low money rates will force the banks to increase their portfolios in order to maintain earnings. MR. BELL: Well, that is true. H.M.JR: Well, let me put it this way-MR. BELL: It was demonstrated last week. this and taxes are the most important things I have got. Why don't we continue this tomorrow and let this other thing go, this Dean Acheson thing? H.M.JR: We will let that go tomorrow and let's continue this discussion. 72 - 24 MR. BELL: You mean you won't have the big confer- ence on Lend-Lease? H.M.JR: No, I won't have it at all. I want to keep on this subject. Now, could you, Dan - it is ten minutes of four - could you sound out the Fed on this, or do you want to first make up your mind what you want before you see me again? MR. BELL: Well, I would like for you to get the complete picture first, because we have spent hours with the Federal, and had a conference with them, you remember, a week ago Friday, all day. H.M.JR: But, supposing you just called up Eccles and said, "Look, we have been talking with Mr. Morgenthau and we have got to this point. How would you feel about guaranteeing a minimum of excess reserves for the country and for New York"? MR. BELL: All right, I can do that. H.M.JR: I mean, without naming any figures. MR. STEWART. You can guess his answer, can't you? MR. BELL: Oh, yes. MR. STEWART: He would say, "I will keep the long- term rate at two and a half percent if the Secretary will say that is what he is for. If That is the answer. MR. BELL: Well, he would say that, I am sure, but to show you how they are thinking on this reserve situation they had the Advisory Council meeting last week, and they passed two resolutions. One was that it said the Federal Advisory Council believes that in principle, at least, reserve requirements should remain as stable as possible, and that changes in such requirements should not be made unless clearly required by the credit situation. The Council is of the opinion that there is no present need for a change in the reserve requirements. 73 - 25 H.M.JR: Well, to which I answer, nuts. H.M.JR: I think they have anticipated some of our requests, and gotten resolutions on the record. MR. VINER: Well, we don't care whether they do it by reserve requirements. Then, if the Counsil won't do it, we will say, "It is up to you to do it by open mar- ket operations. H.M.JR: The Council has no authority. They are purely advisory. MR. BELL: That is all. H.M.JR: They are purely advisory. They meet four times a year, don't they? MR. BELL: At least four. H.M.JR: Well, Dan, what harm is there in calling up Eccles? MR. BELL: None. H.M.JR: I mean, you haven't got much to do the rest of the afternoon. MR. BELL: That is right. (Laughter.) I will be free after six. H.M.JR: And simply say, "We have been talking of going part way, and Mr. Morgenthau would like to know the way he is leaning is, he would like a guarantee from the Open Market Committee that you people will keep the excess reserves of the country at a definite minimum, and the excess reserves for the City of New York at a definite minimum." MR. BELL: You don't want to say those minimums yet? H.M.JR: No, I think that these boys ought to work a little bit more. It is too important. - 26 - 74 MR. BELL: The first question he is going to ask me is, "Are you willing to announce a program, agree upon a program of financing?" H.M.JR: Well, we are working on it. MR. BELL: And state the pattern of rates? H.M.JR: You tell him I can't make up my mind. To me the excess reserve thing comes first. MR. BELL: I will talk to him. H.M.JR: Then, why don't we say we will meet again at ten thirty tomorrow morning? MR. BELL: All right. H.M.JR: We will keep at this tomorrow, because I haven't soaked this up yet. MR. BELL: Well, this is a big problem. I think this is just as important as your financing, which you spent two or three days on. H.M.JR: We will meet at ten thirty tomorrow, and we will just keep at this, but I can't go any further until I know that - will they do it. Don't you think, gentlemen, that is a good way, I mean to get them to guarantee that they will keep it at a minimum? And then if they want to go the way Murphy says, O.K., and if they want to do it some other way, O.K., as long as they give me a memorandum. MR. BELL: We don't care how they do it. H.M.JR: As long as they keep it at a minimum. MR. BELL: That is right. If we get some agreement out on some minimum, that is what we would like to have. MR. STEWART: Well, it makes a difference of two bil- lion dollars in your securities. It is two billion dollars - 27 - 75 that they wouldn't otherwise have if it is built up in reserve requirements, because they will be carrying two billion more under your calculations here. MR. BELL: Well, we would prefer that they would do it in open market operations, but if they prefer the other, I don't think we would fuss with them a lot. MR. STEWART: That is a large figure. less. H.M.JR: You mean they would have to buy that much MR. STEWART: They would buy that much more under an open market operation than they would under a change in the reserve requirements. H.M.JR: And they wouldn't have to do it under the change in reserve? MR. HAAS: No. H.M.JR: So that would be an argument for my orig- inal case. MR. STEWART: An argument for open market as against just changing reserve requirements. H.M.JR: Why should they want more securities? MR. STEWART: Well, I don't know whether they want more or not. There are some earnings in them, but from the standpoint of the Treasury, if it is an equal choice, I should have thought you might rather have them buy the securities than change the reserve requirements. It places two billion dollars in securities. MR. VINER: Of course, there is this point. On the open market operations they can do them - they can dribble them on the market day after day. If they used the reserve requirement thing, they have to do some forecasting, and they may overdo it, and they may underdo it. 76 - 28 - H.M.JR: I agree. MR. VINER: ... so that if you get a guarantee and it is an absolute guarantee that on no day are excess reserves to be permitted to fall below four billion, that means they will have to use open market operations to a substantial extent because they can't - the other way is always a guess, always uncertain. MR. MURPHY: It wouldn't look good to lower reserve requirements twice. H.M.JR: But, also you agree with me that before I do anything about any rates or anything else I ought to have such an agreement? MR. VINER: Yes, except I think it would be legitimate on their part to say, "No, we can't undertake to maintain these as minimum reserves without knowing what you are going to do. " MR. BELL: That is what they will say, but it is part-- MR. VINER: That is part of a program which would be jointly worked out that - would they be willing to make that one item in the program. I think that is the way to put it, not, are they willing now. agreeMR. to it.BELL: That is the way they will want it if they MR. V INER: And I think they are right, don't you? MR. BELL: Yes, I do. H.M.JR: All right, we will do some more tomorrow. James explained by Mr. Murphy in 4th 10 77 INITIAL PRELIMINANT ESTIMATES STRICTLY CONFIDENTIAL Table I Analysis of the Diseguilibrium Implicit in the Estimated Flow of Goods and Services and the Estimated Application of Incomes to Various Uses Fiscal Year 1943 (Based on A national income of $115 billions and a rise in the cost of living of about 10% from December 1941) (In billions of dollars) Flow of Goods and Services A. To be purchased by Government 1. Defense expenditure a. Total b. Less: Prepayments, land and offshore, etc C. Net defense expenditure Application of Incomes made available (Under existing habit patterns and pressures) A. Available for Government use: 1. Assured Taxes: 56.6 a. Existing business taxes 1 b. Existing personal taxes C. New business and personal taxes 2/ d. Total taxes 2.5 54.1 2. Other public expenditures: A. Federal b. State and local C. Total other public expenditure 16.7 6.8 7.0 30.5 2. Potential - For buying Government 6.1 securities, directly or indirectly 7.8 (Unabsorbed saving, depreciation and other allowances): a. Unabsorbed personal saving 3/ 13.9 3. Total Government 68.0 b. Social security net accumulation C. Unabsorbed business saving 4, d. Reserves for existing taxes e. Reserves for new taxes f. Unabsorbed depreciation and other allowances 5A 6. Total 15.5 4.0 .3 1.7 0.5 4.5 26.5 3. Total income available for Government use B. To be purchased by private persons: B. Available for private use: 1. Income absorbed by private capital 1. Private capital expenditures: a. Plant and equipment b. Inventories: (1) Increase in volume -.5 5.5 expenditures a. Absorbed depreciation and other allowances 1/ 5/ b. Absorbed business saving 4 C. Absorbed personal saving d. Total (2) Increase in value. 1.5 (3) Total C. Foreign balance d. Residential housing construction. c. Total 2. Consumption goods and services: a. Durables. b. Non-durables and services c. Total 57.0 1.0 WV -.5 4.5 1.5 .5 6.5 .5 6.5 2. Income available for consumer spending 68.0 3. Total income available for private use 79.0 3.5 64.5 3. Total private C. National Gross product plus inventory revaluations 85.5 74.5 142.5 C. National gross product plus inventory revaluations 142.5 February 4. 1942 Not included in national income concept used by Department of Commerce. In estimating personal and business saving, the revenue to be obtained from new taxes is arbitrarily divided 1/3 each from (1) corporation income and excess profits taxes, (2) excise taxes, and (3) individual income, estate and gift taxes. Total personal saving, exclusive of social security net accumulation, is estimated at $16.0 billions. Total business saving is estimated at $1.8 billions. Total depreciation and other allowances is estimated at $9.0 billions. Note: There is a disequilibrium implicit in the above figures, amounting to $11.0 billions. resulting from the discrepancy between the goods and services the Government requires and the income available for Government use. This disequilibrium may be solved by transferring income now estimated to be available for private use so that it becomes available for Government use. This may be accomplished by increasing taxes, or by increasing saving, either by voluntary or forced means, or by the use of direct price and rationing controls. Unless the disequilibrium is solved by changing the application of incomes, however, 11 will solve itself by changing the flow of goods and services as a result of price rises which will occur in addition to the 10 percent rise in the cost of living allowed for. This will in turn cause Government expenditures to increase in order to purchase the same volume of goods and services and so further complicate the problem of raising funds to pay for the expenditures. 78 Table II Estimated Sources of Funds to Finance Budgetary Deficit and Federal Agencies Financed with Treasury Funds Fiscal year 1943 (In billions of dollars) Distribution between types of Government securities New bonds to Series : Total amount absorb E. F. deferred business and expen- 0 ditures Marketable securities New security to absorb long-term non- Special Tax notes market funds issues : Sources of funds Savings security Sold to :individ- banks and :insurance funds : insurance companies: uals Subtotal Sold other than : to to trust Sold to corporations Sold companies for marketable to banks securities 1/ 1. Current savings and accumulations estimated on the basis of existing habit patterns and pressures (based on a national income of $115 billions and a rise in the cost of living of about 10% from December 1941) - - - - - - - - .2 .1 4.0 1.9 .2 .2 4.0 - .1 .3 .2 .9 - 1.1 - 3. Business saving 7.0 4.0 6.3 - 2. Social security trust funds 15.5 - 1. Personal saving .1 .1 4. Corporate tax accruals in excess of tax payments: - - - - - - .2 - - - .2 - .5 .4 1.1 1.1 - - - (b) New taxes 1.7 - (a) Existing taxes .3 .3 5. Excess of bookkeeping charges for depreciation and similar items over actual outlays 1.2 .2 - 4.5 .2 2.9 2.7 - therefor 6. Net surplus of State and local - - - - 1.5 1.2 .2 1.2 - 3.0 2.6 4.0 .8 - 7.2 - 26.5 - accumulations 10.7 8.2 1.9 .4 .2 - 7. Total from current savings and - revenues over expenditures 11. Funds available only at the cost of an additional price rise: 1. Funds derived by converting old idle balances into active balances through purchase of Government securities: - - - - 1.2 1.4 .4 - - 39.8 8.7 3.8 2.6 1.2 4.0 .2 - - 1, Includes securities sold to Federal Reserve Banks. - - 1.5 8.8 - - 13.3 8.8 8.8 8.8 .4 1.9 17.0 19.5 - 8.5 III. Total borrowing according to the budget (but this will have to be increased as a result of prices rising even higher than allowed for If borrowing listed under Group II is used) 4 - 3. Total under Group II 1.5 - 2. Residual balance which will have to be borrowed from banks. 4.5 - ances - - (c) Total from old idle bal- - - 1.4 .3 - 1.2 .1 - .2 - 1.5 1.0 - (a) By individuals (b) By corporations March 5. 1942 79 STRICTLY CONFIDENTIAL Estimated Means of Financing the Deficit Monthly, March 1942 through June 1943 (In billions of dollars) 1943 1942 March A Net budget receipts , Budget expenditures 1. Defense 2. Non-defense 3.0 2.5 c Net budget deficit -5 .5 2.8 3.0 July 2.4 August .8 .7 3.2 3.5 3.4 1.0 1.0 2.8 2.9 3.7 3.9 4.1 4.3 .9 4.5 May 1.0 1.0 4.9 29.9 4.9 5.1 5.3 5.4 64.3 4.7 .6 4 4.2 4.5 5.1 5.5 4-4 5.0 3.9 5.0 3.9 -3 2.9 3.5 3.8 2.9 3.1 3.4 4.1 3.2 1.3 2.2 1.5 .3 -3 .3 .4 3.2 .5 .2 -4 5.6 5.7 4.6 4-7 .2 .2 .2 .2 .2 -3 4.0 4.3 2.4 3.8 3.7 1.6 3.4 3.5 1.9 3.3 .3 .3 4.9 4.8 .5 1.0 .2 .6 47.2 5.5 -5 7 .4 -5 1.2 -3 .8 .6 .6 .6 .6 .8 -4 .3 .7 -4 -3 - - 1.0 2.4 2.2 -4 .2 .2 .8 .8 .7 .2 .2 2.0 .5 1.4 1.7 1.5 .2 .2 .6 1.5 .3 -3 .6 .3 .3 4.4 -3 .3 .3 3.0 .1 -4 1.4 1.5 2.2 1.7 .8 1.2 .1 .1 .1 .2 .2 .2 .2 1.6 11.0 .7 .7 .2 .2 .2 .2 .2 ..1 .8 .8 .5 .5 .7 1 2.1 1.6 2.1 1.8 .4 .2 1.6 1.6 3.0 2.3 19.1 .6 22.6 -3 .9 .2 .2 .2 .2 1.5 2.0 1.3 .2 .2 1.0 1.9 1.6 .1 19.4 .1 1.3 - .2 .2 3.2 .2 2.1 2.8 4 .7 .1 .2 .2 .2 .2 - -3 4 .4 -5 -5 .1 .6 .5 .1 .1 .2 - .1 .1 - - .1 Sold to names banks offsetting an equal reduction in bank loans. 4. 4.3 1.4 -4 .4 Sold to non-member banks o -4 42.9 .2 .6 3. Marketable securities sold to COMMETcial banks and Federal Reserve Banks a Total -4 1.2 .3 .5 other than commercial banks and Federal Reserve Banks .5 .5 c. Marketable securities: 1. Total marketable securities 2. Marketable securities sold to investore .2 72.8 .1 5. Total non-marketable securities .3 .4 1. Tax notes 2 Savings bonds 3 Proposed new short-term security 4. Proposed new long-term security .2 - 4. Securities sold to Government trust funds B. Non-marketable securities b .6 .1 .2 8.5 6.1 .3 .1 II. Meets of financings .7 .5 3.9 -5 Total 5.2 3.4 3.4 .2 .7 .4 June 1.3 .4 .5 .7 April March .4 -5 .4 .6 -3 D Net outlays of Government corporations 1. Total to be financed May .7 3.2 3 Total April November October September February January 5 1. Amount to be financed June December .3 .4 4.3 -3 .3 .3 .3 .3 -3 .3 .4 -4 .4 .2 .1 Sold to Federal Reserve Banks and member banks thereby increas. ing their net loans and investments (1) Monthly (2) Cumulative .2 1.9 .2 2.1 .4 1.5 1.1 5.3 4-9 6.8 7.9 10.2 11.0 9.9 8.5 .8 1.1 1.4 .6 .9 4.0 2.9 2.5 .4 1.1 .4 2.2 1.6 -2 13.8 12.4 14.0 13.8 13.8 III Purchases of Government securities by the Federal Reserve Banks required if excess reserves are to be held unchanged (except for changes caused by factors other than member bank purchases of Government securities and decreases in loans outstanding): 1. Monthly. 2. Comulative 1.6 .2 1.8 -4 .3 1.3 2.1 .5 2.5 4.2 3.4 4.5 7.2 6.7 5.8 1.2 8.4 .2 .2 .2 9.3 .2 .3 .8 .6 .3 .4 1.0 1.2 8.6 1.4 -.2 11.7 11.9 11.7 11.7 .1 2.1 .2 .1 .1 .1 .2 .1 1.9 10.5 .9 .9 -3 , 2. Cumulative B. Purchases by Federal Reserve Banks: .8 .2 .9 increasing their net loans and investments 1. Monthly 7 A. Purchases by member banks thereby 1.3 1.5 1.7 1.6 1.9 2.1 2.1 2.1 -7 .4 March 7. 1942 Treasury Department, Division of Research and Statistics. cc - Mr. Sullivan 80 March 9, 1942 3:13 p.m. HMJr: Hello. Operator: Hello, Mr. Budge. HMJr: Hello. Operator: Go ahead, please. Alexander Budge: Hello. HMJr: Hello, B: Good morning, sir. HMJr: Hello, Mr. Budge. B: Good morn - good afternoon, rather. HMJr: It's all right. B: HMJr: B: We've been hoping that it would be possible to have some action on the income tax relief for certain cases that will come up during the course of the next few months. Yes. This with particular reference to the rate of interest which has a very definite effect in an area such as ours from the standpoint of morale. HMJr: B: Yes. Now, I'm not talking about it from the corporate angle or my own situation at all. HMJr: I understand. B: We have, for instance, in this company, we have about three million and a half due, which is all reserved for. HMJr: Yeah. 81 -2B: HMJr: B: But sometime ago Mr. Burlew of Interior and Mr. John Sullivan of Treasury had some discussions on this subject. Yeah. The thought was to put the Internal Revenue Department in a position where they could review each case HMJr: B: Yes. and might have some discretionary power to postpone the payment and also either waive the interest or if interest was to be charged it would be at a nominal rate HMJr: B: Yeah. the thought being to avoid discouragement, which we have a little of around here now, as you might imagine. HMJr: B: Yes. No blanket action would be necessary. Now, in this connection, I thought there ought to be a source of - possibly a loaning agency. HMJr: Yes. B: It seems to me that they are not in a position to make loans for the payment of taxes except under rather restricted conditions until after further legislation. HMJr: B: Yeah. It is deemed that you'll appreciate that their low collateral is abnormally depressed on the stock market. HMJr: B: Yes. It would seem that if a corporation could be run by Treasury that could loan at a nominal 82 -3rate of interest on a collateral of Hawaiian securities, based let's say on eighty per cent of the average market for two or three years, with some respect for low evaluation will - such a corporation if loaning only payment of taxes, would be a definite relief and would straighten out the tax situation in many cases. In other words, now the collateral is 80 depressed that the normal business will be unable to make plane that will be satisfactory. HMJr: Well, now, Mr. Budge - hello. B: Yes. HMJr: Can you wait just one second. I just sent for Mr. Sullivan. Let me just ask him a question, will you? B: What did you say? HMJr: Hello. B: Yes. HMJr: Just wait one minute. Can you hold on one minute? B: Yes. HMJr: Just wait one minute. B: Yes. HMJr: Hello. B: Yes. HMJr: B: Mr. Budge, I'll talk this thing over with Mr. Sullivan - hello - and I'11 get you off a cable the first thing in the morning. Yes. I don't think, Mr. Morgenthau, it isn't a matter of rush as much as it is to have someone think of it definitely in point not of the dollars to be waived - lost in any way, but -4 - 83 towards the number of people that will be affected in the smaller brackets; and it seems to me an orderly review of the whole question would probably enable some legislation that would not in any way be costly to the Government but would be of very definite help to a big section of our people. HMJr: B: Well, naturally, we're all here interested, and I haven't got into it myself Yes. but I will talk with Mr. Sullivan HMJr: B: HMJr: Thank you very much. and some time tomorrow we'll get you off a cable and tell you what we can or cannot do. B: Fine. HMJr: Now, Mr. Budge, what's your address in Honolulu? B: Just Alexander Budge, Honolulu, will get me all right. HMJr: What will? B: Alex Budge. HMJr: I don't hear you. B: Alex. A-1-e-x. HMJr: B: Oh, Alex Budge. Yes. You might say Merchant Street. I guess they have to have an address on it. HMJr: What street? B: Merchant. HMJr: I don't get that. B: Merchand. M-e- 84 -HMJr: B: Merchant. Yeah, Merchant Street. Yeah. HMJr: Well, we'll get it off to you sometime tomorrow. B: Thank you very much. HMJr: I don't know what we can do, but Mr. Sullivan says that the delegate King has been in touch with him. B: Yes, I know that he had been. HMJr: Yeah. B: I thought it had been more or less - they were HMJr: losing interest in it and it seemed No, no, we're not losing interest. B: Fine. Well, thank you very much. HMJr: All right. We'11 see what we can do. B: Earl wanted to be remembered to you. HMJr: Thank you. Remember me to the General. B: All right. HMJr: Good-bye. B: Good-bye. 3/9/42 85 mis material was used by HM, Jr at his press conference today together with material on average family which is attached to read- ing copy of Tax Statement of 3/3. It was HM, Jr's an swer to New York Board of Trade. 86 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE March 9, 1942 TO FROM Secretary Morgenthau Mr. Kuhn A single person earning $750 a year pays a total of $130 in Federal, state and local taxes of all kinds. That amounts to 17.3% of his income. It means that he would have to work more than eight weeks just to pay his taxes. A married person with no dependents, earning $1500 a year, pays an estimated total of $250 a year in Federal, state and local taxes of all kinds. This is 16.7% of his income. Here again he must work more than eight weeks in order to pay his annual tax bill. These estimates are based on Federal taxes for the fiscal year 1942, and state and local taxes for the year 1941. 87 ESTIMATED AVERAGE FEDERAL, STATE AND LOCAL TAX BURDEN ON A SINGLE PERSON WITH A $750 INCOME AND ON A MARRIED COUPLE WITH A $1500 INCOME 1 TOTAL TAX BURDEN : : : AMOUNT PERCENT OF INCOME : : Single : Married: Single : Married person : couple : person : couple : : $750 : $1,500 : $750 : $1,500 income : income : income : income : Federal 52 97 6.9% 6.5% State 31 61 4.1 4.1 Local 47 92 6.3 6.1 Total 130 250 17.3 16.7 Treasury Department, Division of Tax Research On the basis of estimated fiscal year 1942 Federal and estimated fiscal year 1941 State and local tax collections. 1 88 The New York Times. MAR 10 1942 so wide has become thereicavage SAYS TAX EXEMPTS between the Treasury and the 'CAN'T STAND MORE' that Mr. Morgenthau contemplates Ways and Means Committee over the tax question that it was said another appearance before the committee to make an even strong- MorgenthauOpposes Lowering of Limits, Asserts Poor Pay Heavily in Hidden Levies AGAINST A SALES IMPOST er plea that the group now exempt be left free from direct taxes. To explain his attitude Mr. Mor- genthau read today from the Treasury study, a study which he said indicated that a single person earning $750 a year (the present lower limit on taxable salaries) paid $130 in Federal, State and local taxes of all kinds. This was But Ways and Means Majority Favors One-New York Trade 17 3-10 per cent of his income and required eight weeks' work to earn. A married man with no dependents Board Assails Exemptions and earning $1,500 paid $250. which was 16 7-10 per cent, or the equiva- tent of eight weeks' labor. By HENRY N. DORRIS Special to THE NEW YORK TIMES. WASHINGTON, March 9-The probability of a fight to the finish between the Administration and Congress over the question of subjeeting persons now exempt under the income tax laws to direct levies or a general sales tax was heightened by two developments today. The first was a statement by Secretary Morgenthau, at his press conference, reiterating the Administration's stand against either removing exemptions on income taxes or imposing a general sales tax. Mr. Morgenthau read from an analysis completed recently by Treasury Department experts showing that persons who did not earn enough to be subject to the income tax were already paying heavily in "hidden" levies, and "After seeing these figures," said Mr. Morgenthau, "I came to the conclusion that we would not be justified in lowering exemptions or imposing a general sales tax. Families and individuals below the exemption level are making a fair enough contribution at this time to the government. "Until we have exhausted all other sources of revenue and closed all loopholes we should not add any burdens to this group." The Secretary said this group did not have enough purchasing power to cause inflation. The Ways and Means Committee continuing its hearing on the proposal to raise $7,610,000,000 in new revenue, heard M. L. Seldman, chairman of the taxation commit- tee of the New York Board of Trade, urge that income tax exemp- tions be removed. Because of these exemptions, Mr. Seidman said, three-quarters of American families, about half the commented that "this group can't number of wage-earners. and more stand more taxes." not subject to direct taxes. He The second development was the revelation. through an unofficial poll of the House Ways and Means Committee, that a majority now favored a sales tax in some form- either at the manufacturing or the retail level-and that this group than half the national income are would not lift exemptions for surtax purposes, but would substitute a flat 10 per cent normal tax for the 4 per cent now levied. A general sales tax was opposed by Mr. Seidman, as was the Treas- ury's proposal to require joint in- reached this conclusion through a belief that all wage-earners should come tax returns for married cou- penses. for corporations were too high. contribute toward the war ex- ples. Mr. Seidman also held that the proposed excess-profite_tates 89 March 9, 1942 4:38 p.m. Leon Henderson: Hello, Henry. HMJr: Leon. H: Yeah. HMJr: How are you? H: HMJr: Pretty good. Leon, I just had a press conference, and they went after me on this question of lowering the exemptions of $1500 and $750. H: HMJr: Uh huh. Well, we have our own figures on the amount of taxes which this group use which we gave them. Then it came on to these tables which we got from your Hildegarde Kneelan H: HMJr: H: HMJr: Yeah. which shows that until you get above twelve hundred and fifty dollars, an American family doesn't save anything. Uh huh. And - oh, before I went on the Hill, Roy Blough got from somebody in their office permission to use those figures. Hello. H: Yes. HMJr: And I just wanted to tell you I told them where I got them from. H: HMJr: H: Uh huh. And if they come over there and 80 forth and 80 on, I hope that you'll hold up my hand. All right. Have you got a - when you get your 90 -2transcript, this part, will you send it over, 80 that '11 just hit it right on the nose right away. HMJr: I'11 have that done right away - it ought to maybe take about an hour does it take to do it? H: HMJr: All right. We won't say anything tonight. Well, I'll get it over there, and - but, of course, from our standpoint, it's very important and your people have been very helpful but I wanted to let you know that I went to town - I did the same thing once before, and there wasn't a single paper carried it when I testified. I gave them the same figures when I went up Tuesday, and Paul is sitting here, and he says he gave the same figures, and no newspaper carried it H: HMJr: H: HMJr: in the United States, so I've tried it once more, and it's pretty, I think, sinister the fact that there isn't a newspaper that carried those. (Laughs) They' '11 probably carry it this time. And you'll see that I told them that the people that wanted to lower them are the people that don't want to pay the taxes themselves. Uh huh. But I'11 get you a transcript and get it over; and if there's anything in there that you can't put your name to, before you throw me down, give me a call. H: Yeah. I will. HMJr: Thank you. H: All right, Henry. HMJr: Thank you. TREASURY DEPARTMENT finished 91 INTER OFFICE COMMUNICATION DATE March 9, 1942 TO FROM Mrs. Klotz Mr. Morgenthau Please be sure to get the clipping from Sunday's PM on Arthur Krock and Wayne Chatfield Taylor. attached Please look up Wayne Chatfield Taylor's letter of resignation from the Treasury. I would like to see it. (See diary book to which this memo is attached) 92 France Has had "immobilizing effects on French assistance to Germany. Vichy Finds Pal in Krock One is James Clement Dunn, political adviser on European affairs, who was leader of the pro-Franco bloc in the Department during the Spanish Civil War. The other is a minor bureaucrat, Samuel Reber, in charge of Times' Bureau Chief Only Correspondent to Detect 'Doubt' Over RAF's Paris Raid mous ment stateon mas St. faEuropean authorship "the French affairs. of the desk" original To Reber in draft the is division of attributed the of Day issued "so-called in by protest the Free Department against French seizure Navy" Christ- of Pierre and Miquelon by the Free French. By I. F. STONE PM's Fureau The other Department official present was Wallace Murray, in charge of the Division newspaperman to discover that RAF bomb of Near Eastern Affairs. Only other American officials present at ings of Paris had created "doubt and dis WASHINGTON, Mar. 7.-The only in the U. S. A. was Arthur Krock the dinner were Jesse Jones's righthand sent" head of the New York Times bureau in man, Under Secretary of Commerce Wayne Washington. Chatfield-Taylor, and Colonel Bentley Mott. The only newspaperman among the guests former U. S. military attaché at Vichy. the first formal dinner given here by the Krock, with isolationist Boake Carter, and Vichy French Embassy Feb. 27 was Arthur the New York Enquirer (whose publisher. Krock. Hearst-pal William Griffin, is under subLess interventionist than his paper, per pena by the Federal Grand Jury investigatsistently anti-New Deal, Krock frequently ing Nazi propaganda), is reported in this sees Vichy's ambassador, Gaston Henry week's issue of the Nation as carrying on a Haye. minor campaign to create a wartime job "Doubt and dissent," Krock discovered for Joseph P. Kennedy. Great Britain Times editorial-page column of Mar. 6. Kennedy, as ambassador 'seem to have been invoked by the RAF was among the Munich-minded men at his to bombings of the industrial environs of Paris." Krock himself concluded by saying that "total war calls for total war and declaring "if the United Nations spare any war industrial area, the enemy, as he has proved, will not." But on his way to those conclusions, the hief correspondent of the Times made some "exclusive" discoveries: 1 The degree of American disapproval worth noting. I"In the United States signs were to be discerned among strong supporters of the off Axis war of regret mingled with dis- if approval. . Suggestions that the bombing might lestroy the immobilizing effects on French assistance to Germany of this government's policy toward Vichy. A Job for Kennedy Source of these scoops may be indicated the list of other guests at the sociallyVichy Embassy. Of the three guests from the State Dept. are prominently identified with the be- if that American economic aid to Vichy Arthur Krock of the New York Times who discovered that the bombing Paris had created "doubt and dissent in the U. S. A.' Photo by Wide World 93 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE March 9, 1942 TO FROM Mrs. Klotz Mr. Morgenthau Will you invite General Marshall to have lunch with me on Thursday, please. Marshall ancepted 94 March 9, 1942 Harold Graves Secretary Morgenthau The meeting which we had scheduled for Wednesday for your staff, I would like to have at 9:15 on Thursday. O.K. - 95 March 9, 1942 Dear Randolph: Many thanks for sending me that quotation from the President's recent radio talk. I agree with you that it is a fine statement and that it should be used more widely. It expresses the present situation exactly. Sincerely, (Signed) Henry Mr. W. Randolph Burgess, 55 Wall Street, New York, N. Y. file n.m.c. FK/egk Copies a thoupan 96 "NEVER BEFORE HAVE WE HAD SO LITTLE TIME IN WHICH TO DO SO MUCH". President Roosevelt. ( 97 W. RANDOLPH BURGESS 55 WALL STREET NEW YORK March 7, 1942 Dear Henry: There was one line in the President's recent address which deserves wider use than it has received. A nephew of mine, working for International Business Machines, picked it up and has circulated it in the form of the attached card. I quoted it the other day in a speech and have been surprised that more people have not picked it up. Sincerely yours, Randager Hon. Henry Morgenthau, Jr. Secretary of the Treasury Washington, D.C. 98 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE March 9, 1942 TO FROM Mrs. Klotz Mr. Morgenthau Please have somebody go through my files. Sometime during the last two years we had a meeting in my office at which Mr. Batt was present. I have a vague recollection that he was arguing we had enough steel production. I know that he and I got into quite an argument. I would like to see what it was about. Thank you. (this is being Lone) ach white 7/3/40 Frished - 99 CIC CONGRESS OF INDUSTRIAL ORGANIZATIONS 1106 CONNECTICUT AVENUE, NORTHWEST WASHINGTON, D. C. TELEPHONE DISTRICT 3582 Office of March 9, 1942 THE PRESIDENT The Secretary of the Treasury Washington, D. C. Dear Mr. Secretary: I refer to your letter of January 28, with regard to your visit to the Detroit area. I have held your letter so that I might send you the enclosed copy of our paper, "Steel Labor". You will note the picture on Page 8. I am pleased to note the reaction to the work you are doing in promoting the sale of stamps and bonds. You may be assured that anything we can do to assist in this great work will be done. With every good wish, I am Sincerely yours, President, Congress of Industrial Organizations " 100 SWOC MEMBERS DONATE DAY'S PAY TO U.S. See Page 3 "STEEL ABOR THE VOICE OF THE STEEL WORKERS ORGANIZING COMMITTEE-C.I.O. Indianapolis, Ind., February 27, 1942 Val. VH No. SWOC ASKS VOTE AT U.S. STEEL PLANTS; UNION SECURITY, $1 RAISE DEMANDS IN 'LITTLE STEEL' GO TO WAR LABOR BOARD SWOC REVEALS PLAN TO BOOST 15 Largest Steel Firms Report $28,497,000 Profit Increase 'BIG STEEL' PACT In 1941 An Average Gain of 11.4 Per Cent Despite 10 BE REOPENED Wage Raise Forced by SWOC Last April $300,000,000 STEEL OUTPUT present the the figure will United figure in Nation Losing 2,000,000 Tons Yearly by Alleged Government Board Enters *Little Steel' Picture to Break Deadlock profits Scrap Shortage FOR PAY RAISES 11.4 1941 for the SWOC Gives $14,000 to FDR Birthday Fund David J. McDonald SWOC Paralysis this for the drive is cele- Roose. SWOC Awarded Raise At American Can Co. STEEL INDUSTRY PROFITS Financial Statements of Fifteen Leading Steel Firms Show How Profits Climb 13 principal in the United States of the nation, follow for the Year Year $116,019,000 Steel Corporation Tube Company 16,124,000 14,824,000 Company 8,506,000 5,685,000 America 7,439,000 6,230,000 Corporation 5,062,000 3,722,000 2,193,000 709,000 of Corporation Wire Corporation Steel 7,642,000 11,000,000 Corporation 1,223,000 1,815,000 1,295,000 2,332,000 Other making of country capacity STEEL Page Two Page Three $500,000 WON IN AMERICAN CAN PACT Reading, Pa., Locals Donate One Day's Pay to U.S. EMPLOYES GET 10-CENT RAISE IN CINCINNATI MEMBERS SHOW INDIANAPOLIS LOCAL INVESTS $2,700 IN BONDS MOLTRUP STEEL CO. PAYS $11,238 DESIRE TO AID, MEDRICK SAYS Half Rates BACK PAY TO SWOC MEMBERS Syracuse Locals Offer Solid Aid To Crush Hitler Are Gift Table Solid Vote Given SWOC in Memphis MEMBERS GET AID COMPENSATION Indiana Plants Sign New Pacts Won TUBE CITY LOCAL BUYS NATIONAL DEFENSE BONDS Won't Shave Until Bethlehem Signs J. L. Agrees to Bond Check-off 81,675 BONDS SOLD UNDER CHECK-OF PAY STEEL LABOR STEEL LABOR Page STEEL LABOR 'LITTLE STEEL VOTED 'YES'-SO WILL BIG CIO URGES UNEMPLOYMENT RELIEF TO BOLSTER MORALE OF DISPLACED WORKERS UNFAIR RENT RAISES CONDEMNED BY CIO Canadian Steel Workers Tour U.S.Mills Canadian SWOC Members Tour U.S. Mills WORKERS SEEK Joseph Good Honored SWOC MEN SING TO AID WAR PROGRAMS IDEAS TO HELP LETTERS FROM READERS TO THE EDITOR Policy WAR CAPACITY Republic Miner Gets Back Wages Pioneer Local Buys $1,600 Defense Bonds LAKE ERIE UNION VOTES FOR SWOC STEEL LABOR Page Eight February 27. 1912 California Locals Endorse SWOC Demands ACTION TAKEN AT STATE-WIDE UNION PARLEY 'BIG STEEL PACT SWOC INVESTS $50,000 IN BONDS TO BE REOPENED (Continued from Page 1 clause has always the Oakland Conference Also Sets Goal of $750,000 Defense Bonds Oakland, Cal. Feb. delegates 20 local unions the SWOC California, membership close to 20,000. unani- mounly pledged their support of the present policy of the union to secure of not less Board bargaining rights for 263,000 dollar workers This PAY YOUR DUES fifth action Plan Will Boost SWOC Steel Output (Continued from Page 000 light tanks. 10 battleships and Buy Defense is The frequently shown County Defense with Defense when Office the April Clark the of members the SWOC WINS VOTE AT SWOC Men Awarded Navy 'E' Medals INTERLAKE IRON CO. 8 Chicago, III. Feb. 27 By Ambridge. Pa. Feb 27 Km Drawn Steel Co recently Excel by symbolic Local of in defense Office Union the vote of 429 to 263. the SWOC bargaining rights for employes two plants of the Interlake Iron through an election conducted the National Labor Relations Board. The election was held determine employee the the in Maywood July. whether SWOC Local or the Employes Association Interlake members of the SWOC said Manuel Wood, SWOC representative in the Iron should act as bargaining agent district, for the employee U.S. HONORS WORKERS AT GREAT LAKES STEEL keep eent ation lack than Mr the the plant. le Heart of Stanley presi effectu of to Arsenal keep Democracy the at total capacity 101 January 28, 1942 Dear Mr. Murray: I think you may be interested in seeing the enclosed picture taken during my visit to the Detroit area on Sunday. The gentleman on my right is Stanley Cook, President of Local #1299 of your own Steel Workers Organizing Committee. This flag was awarded at the Great Lakes Steel plant, where more than 90% of your union members are saving regularly out of their pay for the purchase of Defense Bonds. They have been making a perfectly wonderful response to the Defense Savings campaign. It gave me a real lift to go to the Detroit area and see the extent of C.I.O. participation in our payroll savings plans. My wife went for me to the Chrysler Tank Arsenal and said that the enthusiasm among the C.I.O. workers there was thrilling. Later I had the privilege of speaking to a great and friendly audience of U.A.W.-C.I.O. workers at the Coliseum, and again found a spirit of which you may well be proud. Sincerely, (Signed) B. Morgenthan. Jr. Mr. Philip Murray, President, Congress of Industrial Organizations, 1106 Connecticut Avenue, Washington, D. C. CC - to Mr. Thomason FK/hkb 102 THE SECRETARY OF THE TREASURY WASHINGTON January 28, 1942 Dear Phil: I think you may be interested in seeing the enclosed picture taken during my visit to the Detroit area on Sunday. The gentleman on my right is Stanley Cook, President of Local #1299 of your own Steel Workers Organizing Committee. This flag was awarded at the Great Lakes Steel plant, where more than 90% of your union members are saving regularly out of their pay for the purchase of Defense Bonds. They have been making a perfectly wonderful response to the Defense Savings campaign. It gave me a real lift to go to the Detroit area and see the extent of C.I.O. participation in our payroll savings plans. My wife went for me to the Chrysler Tank Arsenal and said that the enthusiasm among the C.I.O. workers there was thrilling. Later I had the privilege of speaking to a great and friendly audience of U.A.W.C.I.O. workers at the Coliseum, and again found a spirit of which you may well be proud. Sincerely, Mr. Philip Murray, President, Congress of Industrial Organizations, 1106 Connecticut Avenue, Washington, D. C. 103 March 9, 1942 Dear Mr. Murray : Thank you very much for sending me a copy of your broadcast on war production. It was an excellent talk and I should like to send you my congratulations. I appreciate your courtesy in enabling me to have the full text. Sincerely, (Signed) E. Jr. Secretary of the Treasury Mr. Philip Murray President Congress of Industrial Organizations 1106 Connecticut Avenue, Northwest Washington, D. C. file n.m.c. FK:blb (3/9/42) copies to thompson 104 CONGRESS OF INDUSTRIAL ORGANIZATIONS 1106 CONNECTICUT AVENUE, NORTHWEST WASHINGTON, D.C. TELEPHONE DISTRICT 3582 Office of a PASSED " : March 6, 1942 The Honorable Secretary of the Treasury Washington, D. C. Dear Mr. Secretary: I am sending you herewith a copy of the nation-wide broadcast which I shall deliver tonight over the Blue Network, to express the response of the Congress of Industrial Organizations to the call of President Roosevelt for the immediate stepping up of war production. Sincerely, Philip Murray President uopwa 27 105 WE'LL WORK TO WIN By Philip Murray, President Congress of Industrial Organizations (A nationwide broadcast delivered over the Blue Network on Friday, March 6, from 10:15 to 10:30 P.M., EWT) The President of the United States and Donald Nelson, Chairman of the War Production Board, have challenged labor and industry to speed up war production inmediately, on a greater scale than has ever been attempted in any country in the history of mankind. I am going to accept this challenge tonight on behalf of the five million working men and women who make up the Congress of Industrial Organiations. Our President is now our Commander-in-Chief in a world war which threatens not only our nation's security and our very lives, but all our freedoms, our way of life, and our living standards, as no previous war has ever done. There can be no question of the response of true American working men and women to the de- mands of our Commander-in-Chief in such a war. It is the wholehearted and enthusiastic response of good soldiers of democracy, who know that everything depends upon united and disciplined support of our great leader. But I can go much further than this. For I speak for the working people, who have more at stake in this war than perhaps any other section of our population. We are fighting nations whose economy is based on slave labor. In Gormany, Italy and Japan there are no labor unions, as we know them. On the contrary, the first aim of any Nazi or Fascist movement is to destroy the labor unions. Labor leaders are stood up against the wall and shot. Workers who seek botter conditions in the shop are hounded, beaten, placed in concentration camps or murdered. Without union protection and without democracy, the workers are ground down to coolie wage levels and intolerable working conditions. They are treated as voiceless instruments of their dictators, their war lords and their industrialists. In every country conquered by Hitler and his gang, like conditions, or even worse, have been imposed on the working population. A similar fate will cer- tainly be in store for the working people of America, if our fighting strength is not sufficient to crush the military might of the Axis. We know that this is labor's war. We of labor must be more than loyal followers and patriotic citizens. We are and must continue to be leaders in the demand for moro production and for every step that is necessary to win the war. 106 -2- Certainly the history of the war to date leaves no room for complacency. Hitler has counted on the softness and the complacency of every country he has conquered. The Japanese have taken full advantage of our unproparedness. Furthermore, the months which lie immediately ahead will be of crucial importance, par- ticularly in the field of industrial production. Our whole country, and every man and woman in it, must be aroused and mobilized for total war, for a tremendous transformation from a peaceful people to a nation of warriors, if we are to turn the tide of battle from defense and retroat to offense and victory. When I speak of a nation of warriors, I am thinking too of our industrial workers. Modern mechanized warfare calls for some 18 workers in industry for every man at the front. Each fighting man depends for his very life on the workers who produce his munitions, his arms and his supplies. They too must think as soldiers, bending their every effort for more and more production, for one purpose above all others -- victory for our armed forces. We pledge our complete and wholehearted support to our Commander-in-Chief, President Roosevelt, for the achievement of the production goals which he has set. In doing so, we are mindful that upon the shoulders of labor rests the primary responsibility for achieving these goals. We are also mindful that the experience of other countries has taught us other lessons besides the fate which lios in store for labor if Hitler wins. It has taught us that national unity can be undermined by appeasers and Quislings, whose subtle propaganda can be as dangerous as actual plant sabotage. We are determined that our country shall not suffer the fato of France or Norway, through the disruptivo efforts of fifth columnists or selfproclaimed patriots who preach disunity. At the present time, in particular, we must guard against carping critics of our President and of the program which he has initiated for winning the war. Constructive criticism we must have, to mobilize our full democratic effort, But let the appeasers and the men of faint heart beware of the wrath of America's workers, if their constant carping cloaks a purpose to dis-unite, to confuse, and to sabotage our war effort. Mr. Donald Nelson, our Production Chief, has just announced a concrete program for increasing and speeding up war production. We welcome this program most heartily and pledge our enthusiastic cooperation for placing it into execu- 107 tion. In fact, we of the CIO take pride in the knowledge that we have been pioneers and leaders in the demand for just such a program for mobilizing American industry for all-out war production. The Industry Council Plan which the CIO advanced more than a year ago was designed for just this purpose. So too were the proposals advanced by our unions in all the major industries for early conversion to war production and industrywide planning. We were the first to put forward conorete proposals for producing more steel, more aluminum, more copper, more airplanes and more of all the other goods and services that are needed for victory. We take courage and ronewed inspiration from the fact that our Production chief is now urging steps which wo have long advocated. The joint labor-management plant committees which he proposes are directly in line with our Industry Council proposals, as is the whole spirit of the program which he advances. Speaking now to the officers and members of our affiliated unions and councils, I call upon you to act without delay in the spirit of the call issued by our President and our War Production Chief. Many of you, I know, have already approached the managements in your respective plants with concrete proposals for joint effort to increase production. In many cases, where such committoes have been set up, production has increased from 10 to 50 per cent. In somo casos, it is true, we have encountered reluctance on the part of management. But now that such committee planning for increased production has bocome the national policy of our government, I am suro that WO can count on patriotic employers to join with labor in sotting up functioning committees for the promotion of every constructive step to produce more and more. The goals cannot be set too high. Production Chief Nelson has also advanced proposals for appropriate awards for the soldiers of industry as well as for our soldiers in uniform. This is a splendid idea. So too is his proposal for enlisting the spirit of American competition in achieving over higher production quotas. I know that our CIO members will enter wholehoartedly into this spirit of patriotic competition. Perhaps somo of my non-labor listeners may be saying to thomsolves at this point: "All you have said is fine and dandy, but what is all this wo road about strikes and about labor trying to take a solfish advantage?" 108 -4- Lot us moot this question squarely and frankly. Let us clear from our minds the fog of propaganda deliberately spread by profiteers, reactionaries and appeasers who are trying to take a selfish advantage over labor in this emergency. If we so examino the facts, wo will find labor's position is firm and consistent, that winning the war must be our first consideration, and that nothing must be allowed to interrupt war production. Labor itself WOLS the first, of its own free will, to advance an effective program for the ending of strikes. No sooner was war declared than both the Congross of Industrial Organizations and the American Federation of Labor, assembled in conference with representativos of industry and government, solennly pledged themsolves to set aside the strike woapon for the duration of the war. Wo also advanced proposals, accepted by the President, for the peaceful solution of all labor disputes, through mediation, conciliation and arbitration. There has not been a single authorized strike in a war industry since that tino, and all the efforts of the CIO and its unions have been directed to ending at once such minor incidents as have occurred. These incidents have been fow and of the briefost duration, but they have been grossly inflated and misrepresented by solfish propagandists for the purpose of promoting anti-labor legislation. There is no force, not even that of a complete dictator, which can furnish any absolute guarantee that a man will not cease working under conditions which he finds intolerable. The best guarantee that can be givon under a free system is the pledge of the workers' own democratically elected representatives and the assurance that collective bargaining will remedy grievances without the need to strike. The CIO can point to a record of uninterrupted production by millions upon millions of industrial workers; and to the ;oneeful solution of thousands of grievances and disputes which might otherwise have led to stoppagos, had there been nc union on the job to prevent them. We are dotormined to maintain this record. I am again calling the attention of our unions and our membership to the colorn agreement, to which we have voluntarily subscribed, that "there shall be no strikes or lookouts", and "all disputes shall be settled by peaceful moans". This is our commitment to our President and to our country. I call upon all our unions, their officers and their members, to exercise the utmost patience and tol- erance in adjusting all disputes. Proper channels are now provided for their 109 -5- poaceful adjustment. Support your country and your unions by seeing that not an hour of production-time is lost from any cause, until we win the war. Production Chief Nelson has called for a 168-hour working week for the machinery of industry. We are wholeheartedly in favor of working our plant and equipment every hour of the week that it can be utilized, Our unions, in many alsos, have been the first to call for 24-hour and seven-day week production. But human beings are not machines. Their efficiency depends upon reason- able working hours and adequate rest periods. Practical experience in Great Britain and other countries, under war conditions, has shown a sharp decrease in actual production when excessivo hours were worked, and working hours have had bc reduced for the very purpose of increasing production, In conclusion, I want to stress again and again to labor and to the pub- lic that America is today at the parting of the ways. If we lie down on the job, if we shirk, if we listen to the sly preachers of disunity and complacency, if we fail to back up our armed forces with all that is in us, we can go down to defoat, dishonor and the loss of all our liberties -- to the complete blackout of civiliza. tion which Hitler and the Axis are fighting to bring about. But if, on the other hand, the American people, and the working people in particular, are true to ourselves and to our country, if we stand loyally behind our President, if we devote our every thought and effort to more and more production, more effective civilian defenso, and more and more support to our armod forces, wo shall turn the tide of battle in these very days and weeks that lie ahoad of us, to final and complete victory. Our destiny is in hour hands -- the hands of every one of us. To labor, and particularly to the members of the Congress of Industrial Organizations, whom I have the honor to represent, I say: Get on the job at once Heed the call of our Commander-in-Chief and our country! Let our slogan be: WORK, WORK, WORKI PRODUCE, PRODUCE, PRODUCE: 110 CONFIDE NTIAL Daily changes in the stock of Series E savings bonds on hand 1 (In thousands of pieces) : : this day : : this day Feb. 23 214 24 manufactured Stock on hand at close of day IBM deliveries this day 800 21,905 55 800 22,650 1,600 25 104 800 23,346 700 26 158 800 23,988 875 27 240 800 24,548 660 28 162 24,386 none-closed none-closed none-closed 24,386 304 500 24,582 160 500 24,922 171 500 25,251 200 500 25,551 210 500 25,841 none-closed 25,630 Mar. 1 2 3 4 5 6 7 211 Office of the Secretary of the Treasury, Division of Research and Statistics. 1 : Number of pieces :pieces sold : : Number of - - - - 625 - 625 - 625 March 9, 1942 Includes stock in hands of (1) Federal Reserve Banks and branches, (2) Post offices, (3) Federal Reserve Bank issuing agents, and (4) Treasury vaults in Washington. CONFIDENTIAL UNITED STATES SAVINGS BONDS Comparative Statement of Sales During First Six Business Days of March, February and January 1942 (March 1-7. February 1-7, January 1-7) On Basis of Issue Price (Amounts in thousands of dollars) : January : February -$ 4,782 - 42,384 -$ 7,895 - 16.8% 22,102 - 39.1 - 47,166 - 34.5 - 46.3 - 39.3 11.6 55.7 61.7 - 37.3% 30.0% : $ 23,708 $ 28,490 $ 36,385 65,889 108,273 86,171 89,597 11,354 59.086 136,763 21,136 97,261 122,555 13,573 60,150 - 38,175 14,208 7,563 37,111 $160,037 $255,160 $196,279 -$95,123 $58,881 - 9.782 Office of the Secretary of the Treasury, Division of Research and Statistics. over : Total : Series G - Banks : February over : : Series F - Banks March over : : Series E - Total : February : : Series E - Banks February : January Percentage of Increase or Decrease (-) : : Series E - Post Offices March over : : : February or Decrease (-) : : : March Amount of Increase : Item Sales January - 21.7% 25.6 March 9. 1942. 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. 112 CONFIDENTI UNITED STATES SAVINGS BONDS Daily Sales - March, 1942 On Basis of Issue Price (In thousands of dollars) Post Office Date All Bond Sales Bank Bond Sales Bond Sales Series E Series E Series F Series G Total Series E Series F Series G Total $ 5,811 $ 15,868 $ 2,043 $ 8,726 $ 26,636 $ 21,678 $ 2,043 $ 8,726 $ 32,447 2,975 3,395 3,869 4,179 3,480 8,459 8,833 10,448 10,696 11,586 1,629 2,658 1,680 1,759 1,586 8,780 12,558 11,870 10,825 6,328 18,868 24,048 23,998 23,279 19,499 11,434 12,228 14,317 14,875 15,066 1,629 2,658 1,680 1,759 1,586 8,780 12,558 11,870 10,825 6,328 21,843 27,443 27,867 27,458 22,979 $ 23,708 $ 65,889 $ 11,354 $ 59,086 $136,329 $ 89,597 $ 11,354 $ 59,086 $160,037 March 1942 2 3 4 6 7 Total Office of the Secretary of the Treasury, Division of Research and Statistics. 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. March 9. 1942. 113 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION CONFIDENTIAL DATE March 9, 1942 Secretary Morgenthau TO FROM Mr. Haas Subject: The Business Situation, Week ending March 7, 1942. Summary (1) The Federal Reserve Board's preliminary and confidential estimate of the seasonally-adjusted index of industrial production for February is 173, as compared with 171 (revised) for January. Aggregate industrial output rose more than seasonally, largely as a result of increased acti- vity in the manufacture of armament. (2) Stock prices moved lower last week, with selling attributed to prospects of heavier taxation and adverse war news. The Dow-Jones average of industrial stocks declined to the lowest level since 1938, while the average of utility stocks reached the lowest point since its compilation was begun in 1929. (3) Despite relative stability in basic commodity prices, the general price level continues to rise. With a further advance of 0.3 percent to 96.8 in the last week in February, the BLS all-commodity index has reached the highest level since September 1928. The index now stands 29.1 percent above the level of August 1939 and 5.0 percent above that of the week before the attack on Pearl Harbor. (4) National income payments moved up to a new record annual rate of $101.2 billions in January. However, the purchasing power of national income fell slightly below that of December, due to the relatively sharp rise in living costs during the month. (5) The tonnage of steel ingots scheduled for production last week slightly exceeded the previous record set last fall. However, the operating rate of 97.2 percent of capacity has been bettered on numerous occasions. Operations during the current week are scheduled at 97.4 percent of capacity. -2- 114 Industrial production at new high Aggregate industrial output last month showed further gains. The Federal Reserve Board's preliminary and confidential estimate for February indicates that the seasonallyadjusted index of industrial production during the month rose 2 points to a new high of 173. (See Chart 1.) The gain was due to the fact that actual output rose more than seasonally, and on the whole slightly exceeded the previous peak levels attained last fall. Activity was sharply re- duced in the automobile industry, and was also out somewhat in the woolen textile, and paper industries. However, these declines were more than offset by increases in other industries, principally those engaged in armanent manufactur- ing. Despite the recent gain in industrial output, the Production Director of the WPB last week stated that shortages of materials threatened to prevent attainment of some of the production goals set by the President. The rise in the industrial production index last month contrasts with the declines shown during most of the period by the New York Times' and Barron's weekly indexes of business activity. However, as man-hours expended on war materials output assume increasing importance as a gauge of production, weekly indexes of business activity are likely to show greater divergences from the monthly FRB index than in the past. Moreover, the coverage of weekly indexes has been reduced in recent periods due to discontinuation of weekly production data for the automobile and cotton textile industries. Stock market declines to new low In the face of mounting industrial activity, the stock market continues to move lower. Under the impact of additional adverse war news and the outlook for further tax increases, the Dow-Jones industrial stook averages last week declined over 4 percent to a new low since 1938. (See Chart 2.) On a relative basis, utility stocks made an even poorer showing and declined to the lowest level since compilation of the average was begun in 1929. Friday's closing utility average of 12.20 contrasts strikingly with the record high of 144.61 reached on September 21, 1929. The volume of trading was relatively light until near the end of the week, when activity increased moderately as the market weakened. Even railroad stocks, which have recently been resisting the declining trend of the market, sagged moderately in the latter part of the week. Excellent traffic prospects, 3( 115 improved earnings and finances, as well as relatively lighter tax burdens, have contributed to the stronger market performance of these stocks. (Refer to Chart 2.) Early last week the Interstate Commerce Commission authorized freight rate increases equivalent to about two-thirds of the amount sought by the railroads, in order to offset increases in wage rates and other costs. Judging from subsequent action of railroad stocks, the ICC decision was about in line with market expectations. While the rise in freight rates will enable the rail- roads largely to offset recent wage increases, they will also add to industrial costs, which will have to be absorbed into the general price structure. At last year's traffic level, the increased rates would raise the national freight bill by about 203 million dollars annually. Wholesale prices continue to rise Extensive control of basic commodity prices has not kept the BLS all-commodity price index of nearly 900 commodities from continuing its upward climb. In the week ended February 28 the all-commodity index rose 0.3 percent to 96.8, the highest above the August 1939 pre-war level. (See Chart 3, red line.) After levelling out from mid-September through the week point since September 1928. The index now stands 29.1 percent ended December 6, wholesale prices rose sharply in the week following the Pearl Harbor attack, and resumed their general upward trend. From December 6 to the end of February the index advanced 5.0 percent. As is shown in Chart 4, four component indexes accounted for most of the advance: farm product prices increased 12.3 percent; chemicals and allied products, 8.2 percent; foods, 7.7 percent; and textile products, 4.6 percent. That chemical prices have not risen higher is doubtless due to broad action taken by the OPA and the Board of Economic Warfare. Textile prices in the week ended February 28, it will be noted, advanced more than prices for any other group, reflecting sharply increased prices for woolen and worsted materials, and moderate increases in clothing prices. Basic commodity prices higher The BLS price index of basic commodities moved upward last week, departing from its previous stable trend. (See Chart 5.) The indexes for foodstuffs and raw industrial materials both advanced. The rise in foodstuff prices was due principally to higher prices for livestock and livestock products. Hog prices have now advanced 32.1 116 percent since December 6 and 107.3 percent since August 1939; prices for steers have advanced 8.2 percent since December 6; and lard prices have increased 17.7 percent since December 6 to ceiling levels. Price changes among industrial raw materials last week were limited to three commodities. Flaxseed prices continued their broad rise, and wool prices advanced, while cotton prices declined slightly. The strength in flaxseed and linseed oil prices was intensified by further stringency in shipping space from Argentina and an announcement that the Canadian Government had "frozen" all flaxseed stocks in elevators and mills because of the international situation restricting supplies of vegetable oils. Cotton textile situation tightening Sales of cotton goods, especially of unfinished goods, are currently exceeding their very high production volumes, and it 18 believed in the trade that shortages will develop by next summer on many classes of finished goods. Manufacturers of finished goods are finding it difficult to obtain continuous and unvarying supplies of oloth, and manu- facturers of cotton goods are finding it increasingly difficult to obtain adequate supplies of yarn. In January, cotton mills consumed raw cotton at a record daily level, although this was only two percent over the rate in effect ten months ago. Only a very small percentage of spindles were idle, and those in operation averaged close to 19 hours of active work a day. The chief limit to some further activity is reported to be a shortage of satisfactory labor. The Department of Agriculture forecasts an even greater rate of mill consumption of cotton in the months immediately ahead, at a level which will materially reduce the carryover of raw cotton as of August 1, 1942. Factors contributing to greater cotton consumption are reduced imports of and increased war requirements for jute, hard fibers (principally sisal, henequen and abaca), and wool. Moreover, imports of raw and manufactured cotton, silk, flax, and hemp, now reduced or eliminated, have hitherto aggregated a considerable quantity. In 1935-39, these imports averaged 31 percent of the fibers available for consumers in the United States. Cotton will also have to be used in much larger quantity in place of burlap for the greater requirements in the production, harvesting, and marketing of farm products, and for sandbags. -5- 117 Some comment 18 noted of a possible cotton shortage in 1943. In this connection it is significant that Secretary Wickard has called on cotton farmers to plant their full acreage allotment of 27,400,000 acres of cotton in 1942. The 1941 crop of 10,976,000 bales was produced from a planted acreage of 23,250,000. National income payments still rising National income payments continued to rise in January and attained an annual rate of $101.2 billions. (See Chart 6.) This compares with an annual rate of $100.2 billions in the previous month and $81.7 billions in January 1941. However, due to a relatively sharp rise in living costs during January, the purchasing power of national income payments actually showed a elight decline from the peak levels reached in December. (Refer to Chart 6.) The total national income produced in 1941 18 estimated by the Department of Commerce at $94.5 billions, or 22 per- cent above that in 1940. A part of the increase, however, was due to the higher price level, real income showing an estimated increase of 15 percent. Wages and salaries paid in 1941 totalled $61.2 billions, about 25 percent greater than in the previous year. The Department of Commerce notes that at the end of 1941, national income produced was running at an annual rate of about $104 billions, of which about 20 percent represented war production. Seasonal decline in non-agricultural employment Largely as a result of seasonal factors, civil non- agricultural employment in mid-January was 1,235,000 lower than a month earlier. However, 62 percent of the decrease was due to the usual reduction in temporary personnel in wholesale and retail trade following the Christmas holiday sales rush. Total civil non-agricultural employment in January was approximately 39,850,000 -- a gain of 2,700,000 over the year-earlier level. Factory employment rose 1,500,000 during the year, thus accounting for well over half of the total increase. Analysis of the January non-agricultural employment on a regional basis reveals that the widest gain over yearearlier levels was shown in the Pacific coast States, with an increase of over 17 percent. Nevertheless, the largest gain for any State was shown by Alabama, followed by Oregon, the District of Columbia, and Arkansas, in the order named. Only Florida and Louisiana showed employment decreases from year-earlier levels, although the gain in Michigan was limited to less than 2 percent, due, no doubt, to the cur- tailment in automobile production. The percentage increase -6- 118 decrease in non-agricultural employment by States from January 1941 to January 1942 is shown in the attached Table 1. Steel operations at new high or Although last week's steel operating rate of 97.2 per- cent of capacity has been exceeded on numerous occasions, the tonnage of steel ingots scheduled for production last week (in view of the industry's expanded capacity) was slightly above the previous record set at the end of last October. During the current week, operations are scheduled at 97.4 percent of capacity. In connection with its efforts to break the bottleneck in steel plate production, the WPB announced last week that new specifications had been worked out with the Maritime Commission for plates for the "ugly duckling* cargo ships. As a result, it was stated that 80 to 90 percent of the plates needed for these ships would come from converted strip mills, as compared with only about 10 percent hereto- fore. This will serve to relieve the heavy pressure on the normal plate-making facilities of the industry. 119 Table 1 Percentage increase in non-agricultural employment January 1941 to January 1942, by States State Alabama Oregon District of Columbia Arkansas Washington California Maine Nevada Virginia Missouri Nebraska New Hampshire New Jersey Connecticut Colorado Vermont Georgia Ohio Misconsin Massachusetts Pennsylvania Arizona Maryland Indiana Minnesota Percent State increase 22.9 21.4 21.2 17.9 17.6 16.4 15.5 14.8 12.9 12.3 12.0 11.8 11.8 11.5 11.1 11.0 10.7 10.3 9.6 9.3 9.3 9.3 9.2 8.9 8.9 Source: Bureau of Labor Statistics Illinois Utah Iowa West Virginia Tennessee New Mexico New York Kansas Oklahoma Idaho South Carolina Rhode Island South Dakota Kentucky Mississippi Texas North Carolina Delaware North Dakota Montana Wyoming Michigan Louisiana Florida Percent increase 8.8 8.8 8.6 7.8 7.8 7.5 7.5 7.5 7.0 6.5 6.1 6.1 5.5 5.4 4.9 4.4 4.3 4.2 3.9 3.6 2.5 1.9 -0.9 -1.5 1 DERAL RESERVE BOARD INDEX OF INDUSTRIAL PRODUCTION 1935-39-100 1939 1940 1941 1942 PERCENT J MAM J N D AJJASONDJFMAMJJASONDJFMAM PERCENT Seasonally Adjusted 170 170 165 165 160 160 155 155 150 150 145 145 140 140 135 135 130 130 125 125 120 120 115 115 110 110 105 105 100 100 95 J FMAMJJASOND 1939 J F M1940 A M J J O N D JFMAMJJASONDJFMAMJ 1941 1942 95 Office of the Security of the Treasury C-349-2 Range MAY any MM 30 Industrial Stocks 180 180 170 170 160 160 150 150 140 140 130 130 120 120 110 110 100 100 90 90 55 55 50 50 20 Railroads 45 45 40 40 35 35 30 30 25 25 20 20 15 15 10 10 35 35 15 Utilities 30 30 25 25 20 20 15 15 10 10 SMARES Volume of Trading SHARES WILLIONS (AVERAGE OF DAILY) 3 0 MAR. JULY 1942 0 Chart 3 122 B.L.S. INDEXES OF WHOLESALE COMMODITY PRICES 1926 = 100 Weekly Daily 1942 on PER PER GENT CENT PER GENT 106 104 104 106 103 103 104 102 102 102 101 101 100 100 100 98 ALL COMMODITIES (NEEKLY) 97 ALL COMMODITIES 93 28 age COMMODITIES 92 28 BASIC COMMODITIES 76 76 74 72 as DCC. FEB. APR. 17 OCT. DEC. FEB. in so to 60 JUN. , 940 17 24 11 10 25 APRIL P.29.2 Chart 4 123 WHOLESALE COMMODITY PRICES Percentage Changes in Major Groups of B.L.S. All Commodity Index Week Ended Dec. 6. 1941 to Week Ended Feb. 21 and Feb. 28, 1942 PCR CENT FARM PRODUCTS 12 10 CHEMICALS, ETC. 8 FOODS 6 ALL COMMODITIES TEXTILE PRODUCTS 4 BUILDING MATERIALS MISC. COMMODITIES HOUSEFURNISHINGS 2 HIDES AND LEATHER PRODUCTS METALS AND METAL PRODUCTS 0 FUEL AND LIGHTING -2 DEC.6 Fca.21 Fca.28 1941 1942 1942 Office of the Secretary of the Treasury Division of Research and Statistics P 235 MOVEMENT OF BASIC COMMODITY PRICES AUGUST 1939-100 PERCENT PERCENT PERCENT PERCENT Weekly Average Daily 220 220 200 200 200 200 190 190 12 Foodstuffs 12 Foodstuffs 180 160 170 170 140 160 120 150 100 140 16 Row Industrial Materials 16 Row Industrial Materials 20 - JAN. . DEC. 1942 1941 27 3 JUNE AUG. OCT. DEC FEB APR JUNE AUG. OCT DEC. - 100 150 a 120 160 . 140 180 , 160 180 140 . a 180 . MAR FEB. 1942 1941 PERCENTAGE CHANGE FOR INDIVIDUAL COMMODITIES Dec. 6. 1941 to Feb.27and Mar. 1942 Aug. 1939 to Mar. 6. 1942 PERCENT PERCENT Hage M/X 12 Foodstuffs 12 Foodstuffs +25 200 +20 Cottonesed Oil IQUX 160 Tallow MATX Lord +15 Lard Borkey as SHoge 107.3X Cocoa 106.7X 120 Corn aix +10 Barley 86.2X Corn 82.00 Steere azx Tollow 79X Wheat 722X 80 Coffee nzx Sugar 4.9% +5 Wheat LA Steare anx Cottonesed Oil SEX Butter 44AX 40 Coffee ox 0 Sugar JOSE Cocoa -asx Butter -LSX -5 0 AuA 1939 Mar. 6. Dec.6. 1942 1941 Mar 6. 1942 1942 PERCENT Shelloc 231.3x PERCENT Feb.27, Flanseed J2.5% 16 Raw Industrial Materials 16 Raw Industrial Materials +25 200 Cotton 10942 Load NJX +20 Cotton our Burlap I004X 160 Roan OR (Print Cloth 04/X Zinc 49/X Pleased 420X 120 (Print Cloth 44X +15 Wool 2X Shelloe OX Whol 50.33 Roain ALIX Zine ox +10 SM ox (Hides Rubber ox St.Songa.dom 80 Rubber MAX glood 290X Copper ox +5 St.Screendom ox Tin ox need 40 Copper NOX St Screp up ox 0 - ICEX Hides ox Tin 4.4X Burlap -4.2X -5 1939 Mar. 6. Dec.6. 1942 1941 Feb.27 1942 Mar 6. 1942 P-234-3 . 0 Aud NATIONAL INCOME AND ITS LQUIVALENT PURCHASING POWER 1939 DOLLARS 94 1940 1942 DOLLARS BILLIONS BILLIONS Monthly 100 100 96 96 92 92 NATIONAL INCOME 88 88 84 84 80 80 PURCHASING POWER OF NATIONAL INCOME . 76 76 72 72 1939 1940 1941 1942 J Based ON COST OF LIVING INDEX OF B.L.S. Aug. 1939 = 100 Office of the Secretary of the Treasury - . - - Media C - 415 126 March 9, 1942 MONTHLY REPORT OF NATIONAL DEFENSE CASES FEBRUARY 1942 9190 Applications received as of January 31, 1942 Applications received during February Previously reported cases reopened 6 9196 Total received as of February 28, 1942 * * * * 5647 Completed investigations as of January 31 Completed investigations during February Total completed investigations as of February 28 177 5824 486 Applications withdrawn as of January 31 Applications withdrawn during February Applications delivered to Department of Justice Total applications withdrawn as of February 28 - 2852 3338 9162 Total cases closed as of February 28, 1942 Applications pending in office as of February 28 Applications pending in field as of February 28 5 29 34 Total applications pending as of February 28,1942 9196 Total cases disposed of and pending as of February 28 * * * * Agents engaged on this work under direction of this office close of February 1942. Secret Service Customs Service Narcotics Service Intelligence Unit 54 - - Alcohol Tax Unit - - 2 - 6 - 38 127 Sent to McConnell in New York c/o J. J. O'Connell, Jr. AIR MAIL 128 MAR 9- 1942 Dear Mr. McConnell: Now that we have reached an understanding that you are to take on the job of running, as its President, the affairs of General Aniline and Film Corporation, aided by a small group of not more than three men to serve with you as a Board of Directors, I think it desirable to state again the general policy which the Government proposes to pursue in handling the affairs of the Company. Our program envisages the elimination of all things in General Aniline and Film Corporation representing control by German interests. These controls stemmed in the first instance from ownership of the corporation by I. G. Farbenindustrie which, in azi Germany, has been its staunchest bulwark and full partner. In dealing with its satellites outside of Germany, I. G. Farben developed an extensive and well- organized system of controls. Men were trained in I. G. Farben methods and techniques in the home office and plants. Some of these men were able technical men, others were younger sons of the dominant families within the organization, but all of them were men whose loyalty to I. G. Farben was unquestioned and none of them would have been appointed to such im- portant industrial posts outside of Germany if such had not been the case. As soon as they were trained they were sent to various countries where they were placed in key technical or administrative positions in companies within the I. G. Farben sphere of influence. They were encouraged to marry within the new country and acquire its citizenship, but they remained "I. G. Farben Men". Even after filling the key positions in this way other control techniques were employed. As recently as late in 1941 managerial policy was being dictated from Germany by transatlantic telephone, and until that year periodical official visits were 129 the settled rule. Option agreements of bewildering complexity reinforced or replaced control by share ownership. Cross-licensing agreements, control agree- ments and agreements for the exchange of patents and "know-how", implemented by frequent exchange of in- formation cemented enduring ties. All of these methods were found to be present in General Aniline and Film Corporation. The German-owned stock has already been vested in the Secretary of the Treasury. Furthermore, WC have broken the lines of communication between the two companies in so far as they relate to the open exchange of information and "know-how", and we are and shall be dealing with the more obvious ways in which the operations of General Aniline have been con- trolled from Cermany in the past. More difficult is the problem of Company personnel, and that is a matter which requires development somewhat in detail. An effective job of freeing the organization from German domination and control requires the elimination of the I. C. Farben men. In practice, all persons of executive or man- agerial status who have been connected with I. G. Farben will have to be replaced as soon as possible by men unquestionably devoted to American ideals. With regard to technical personnel of similar background, our objective may take longer to attain. Assuming that these men, or some of them, have such technical qualifications as would make their immediate dismissal impracticable from an operating standpoint, they will be retained under surveillance for so long as is required to obtain and train suitable substitutes for them. In determining the rate of effecting these changes I expect to rely heavily on the judgment of the management. Persons of doubtful allegiance may also be found who do not have I. G. Farben backgrounds. These, too, will be eliminated. However, our program does not 130 -3involve the dismissal of employees simply because they are of German birth or extraction. Of course, the whole program must be carried out wi th a view to maintaining, and wherever possible expanding, the operations of the Company whose products are so necessary in the war effort. will you please confirm to me your willing- ness to operate the affairs of the Company in a manner calculated to achieve the results hereinbefore outlined. Sincerely yours, (Signed) H. Morgenthau, Jr. Secretary of the Treasury. Mr. Robert E. McConnell, Middleburg, Virginia. JJO'C:mdm 3/7/42 Faley carried seey. 131 2020120 SALARIES to EXPENSES FOREIGN EXCHANGE CONTROL 1942 Allot. 1-b Washington, Dec. March 9, 1942 E. 0. SEUBERT, PRESIDENT STANDARD OIL COMPANY (INDIANA), 910 SOUTH VICHIGAN AVENUE, CHICAGO, ILLINOIS. WE HAVE TAKEN OVER OWNERSHIP OF GENERAL ANILINE & FILM CORPORATION, IMPORTANT CHEMICAL MANUFACTURING COMPANY FORMERLY CONTROLLED BY GERMA Y AN BALLY NEEDED IN OUR MAR EFFORT. ROUL LIKE TO ELECT A BOARD OF TECHNICALLY TRAINED MEN WITH BUSINESS EXPERIENCE AND PARTICULARLY KANT YOUR DR. ROBERT E. WILSON. IT WILL REQUIRE HALF TO TRO-THIRDS OF HIS TIME FOR FIRST MONTH BUT NOT MUCH THER AFTER. HE BILL PHONE YOU LATE TODAY on TOMORROW MORNING REGARDING ACCEPTANCE BRICK I HOPE YOU WILL APPROVE. (Signed) H. Morgenthau, Jr. SECRETARY OF THE TREASURY EHF:vls - 3/9/42 132 TREASURY DEPARTMENT PROCUREMENT DIVISION OFFICE OF THE DIRECTOR WASHINGTON March 9, 1942 MEMORANDUM TO THE SECRETARY: The following are a few observations made as a result of a preliminary study of the W. P. B. report of Russian Lend-Lease steel requirements received today. 1. The narrative report by commodities has been prepared to show an overall picture. The immediate concern is to make up existing deficiencies by April 1st as directed by the President, and our reports to you have been prepared on that basis. It is realized that the time is short, due for the most part to delays by the Russians in submitting requisitions. However, the President's request, likewise the purpose of Mr. Stettinius' visit to you, and your in- structions emphasize exerting every effort to overcome ex- isting deficiencies prior to April 1st on Protocol items, which is the objective. 2. The schedule which follows page ten in the report shows the Protocol commitment for the six months prior to Ap- ril 1st as 294,120 tons. I have not checked that figure, but the next column shows the deficiency as of April 1st as 106,516 tons which takes credit for items other than those contained in the Protocol, and the actual deficiency is 175,693 tons, the total of items 25 to 41, crediting the excesses. 3. Evidently the W. P. B. Steel Group has used dif- ferent classification for their report. For example, Steel Wire for which they show 26,713 tons allocated, of which 7500 tons are allocated for delivery by April 1st, whereas our records show receipt of allocation orders for 4202 tons. POPDEFENSE BUY There may also be allocations which they have made which have not yet cleared through to us because the figures which they report do not reconcile with our record of actual allocations -- 133 received in many instances, which will be checked further. On page nine of the report it is stated that the deficit as of April 1st will be made up by April 30th. While the report goes into considerable detail, my reaction to it was that it was not responsive to the immediate problem of overcoming to the extent possible existing deficiencies of specific items by April 1st. Clifton E. Mack Director of Procurement 134 Chauncey TREASURY DEPARTMENT INTER-OFFICE COMMUNICATION DATE March 9. 1942 TO Secretary Morgenthau FROM Mr. Dietrich STRICTLY CONFIDENTIAL Official sales of British-owned dollar securities under the various vesting orders since February 19, 1940: No. of Shares $Proceeds of Sold $ Proceeds of Bonds Sold Holiday - - - 24 Nominal Value of Bonds Sold - Feb. 23 Shares Sold - - - - - - - - - - 27 28 - - - 26 - 25 - Sales from Feb.22,1940 to Feb. 21,1942 9,847,610-1/6 281,858,763 45,647,516 37,473,716 45,647,516 37,473,716 Sales from Feb.22,1940 to Feb.28,1942 9.847.610-1/6 281,858,763 X For Miss Chauncey 135 TREASURY DEPARTMENT INTER-OFFICE COMMUNICATION DATE March 9. 1942 Secretary Morgenthau TO FROM Mr. Dietrich STRICTLY CONFIDENTIAL Official sales of British-owned dollar securities under the various vest- ing orders since February 19, 1940: - Total - - - 24 Bonds Sold - Feb. 23 $ Proceeds of - Shares Sold - $ Proceeds of - 25 - - - 26 - - - 27 - - - 28 - - - Sales from Feb.22,1940 to Feb.21,1942 281,858,763 37,473,716 319,332,479 281,858,763 37,473,716 319,332,479 Sales from Feb.22,1940 to Feb.28,1942 $ proceeds of non-vested securities sold Feb. 16, 1942 - Feb. 21, 1942 $ proceeds of non-vested securities sold Sept. 1, 1939 - Feb. 14. 1942 $ proceeds of non-vested securities sold Sept. 1, 1939 - Feb. 21, 1942 319,332,479 500,000 243,100,000 243,600,000 GRAND TOTAL Jan. 7. 1942 - Cash Dividend on 156 Shares Jan. 9. 1942 - Partial Liquidating Dividend 9 Units sold from Aug. 18, 1941 - Feb. 14. 1942 11 Shares Stock Dividend sold Aug. 18, 1941 - Feb. 14, 1942 for 56,007 Rights sold from July 24, 1941 - Feb. 14, 1942 for 243,600,000 562,932,479 61 $ 125 42 123 102,938 Miss Chauncer 136 TREASURY DEPARTMENT INTER-OFFICE COMMUNICATION DATE March 9. 1942 Secretary Morgenthau TO FROM Mr. Dietrich STRICTLY CONFIDENTIAL Official sales of British-owned dollar securities under the various vesting orders since February 19. 1940: No. of Shares $ Proceeds of Nominal Value $ Proceeds of - Bonds Sold - - - - - - of Bonds Sold - Feb. 16 Shares Sold - Sold - - - 17 18 - - - - 19 - - - - - - - 21 - - - 20 - - Sales from Feb.22,1940 to Feb.14,1942 9,847,610-1/6 281,858,763 Sales from Feb.22,1940 to Feb.21,1942 9.847.610-1/6 281,858,763 45,647,516 37,473,716 45,647,516 37,473,716 A 137 TREASURY DEPARTMENT For Miss Chauncey INTER-OFFICE COMMUNICATION DATE March 9. 1942 TO Secretary Morgenthau FROM Mr. Dietrich STRICTLY CONFIDENTIAL official sales of British-owned dollar securities under the various vesting orders since February 19, 1940: $ Proceeds of Shares Sold Bonds Sold Total - - - - - - Feb. 16 $ Proceeds of 17 - - - - - - - 18 - 19 - - 21 - - - 20 - - Sales from Feb.22,1940 to Feb.14,1942 281,858,763 37,473,716 319,332,479 281,858,763 37,473,716 319,332,479 Sales from Feb.22,1940 to Feb.21,1942 $ proceeds of non-vested securities sold Feb. 9. 1942 - Feb. 14, 1942 $ proceeds of non-vested securities sold Sept. 1, 1939 - Feb. 9. 1942 $ proceeds of non-vested securities sold Sept. 1, 1939 - Feb. 14, 1942 319,332,479 200,000 242,900,000 243,100,000 243,100,000 562,432,479 GRAND TOTAL 61 Jan. 7. 1942 - Cash Dividend on 156 Shares $ Jan. 9, 1942 - Partial Liquidating Dividend 9 Units sold from Aug. 18, 1941 - Feb. 14, 1942 11 Shares Stock Dividend sold Aug. 18, 1941 - Feb. 14, 1942 for 56,007 Rights sold from July 24, 1941 - Feb. 14, 1942 for A 125 42 123 102,938 138 Bill OF White received Undostate 3/9/12. DEPARTMENT OF STATE WASHINGTON STRICTLY CONFIDENTIAL March 9. 1942 My dear Mr. Secretary I refer to your request for my comment in regard to the proposed agreement to extend financial aid to China pursuant to Public Law 442, approved February 7, 1942, and Public Law 452, approved February 12, 1942. The matter is, of course, one with regard to which responsibility lies primarily with you and the Presi- dent. In my opinion, retention of Article II of the draft originally presented to Dr. Soong or an exchange of letters along the lines thereof would serve useful purposes both for the Chinese Government and for this Government. I believe that such a provision would be reflective of the cooperative spirit which underlies the common war effort of the two countries and might be of some assistance to the Chinese Government in resisting pressure from any group in China which might advocate an unwise use of any part of the funds made available. Realizing FORDEFENSE BUY UNITED STATES SAVINGS BONDS The Honorable Henry Morgenthau, Jr. Secretary of the Treasury. 139 -2- Realizing that you have considered both the economic and the political angles of the problem, I am prepared, in view of the opinion which you have expressed orally that the adoption of the Chinese Government's sugges- tions would be satisfactory, to concur in the conclusions at which you arrive and the course which you propose. Sincerely yours, Dyll. Acting Secretary 140 THE UNDER SECRETARY OF THE TREASURY WASHINGTON March 9, 1942 LEVORANDUL FOR THE SECRETARY: Attached is a photostat copy of a letter we received today from Under Secretary Welles on the question of eliminating Article II from the draft of agreement we originally presented to Dr. Soong. In Dr. Soong's letter of March 3. 1942, he stated that the Generalissimo hed raised the following point with respect to Article II: "Reactions in Chungking as to Article II appear to be that the U. S. Government will in some way pass judgment on the uses to which the Loan may be put, and thereby limits in some degree the freedom of making disbursement. "As China in any case would like to keep the Secretary informed, and as the Secretary has in the past without any agreement always exerted himself on every occasion to help China, he suggests that Article II is unnecessary, since it makes of such voluntary acts mendatory. He therefore hopes that Article II may be dropped. " In line with our conversation a few days ago we agreed among our- selves to drop out Article II. Representatives of the State Department were present and while they thought that Article II WAS desirable, they indicated their general approval or at least we thought they did. We do not feel that we can let the letter of Under Secretary Welles' stand on the record so we have drafted a reply which is also attached. In view of the urgency of this matter, I am sending this to your house. DWB OPDEFENSE BUY BONDS JOSSUMPS 141 THE SECRETARY OF THE TREASURY WASHINGTON STRICTLY CONFIDENTIAL My dear Mr. Welles: I have your letter of March 9, 1942, expressing your opinion that it would be desirable to retain in the Agreement Article II of the draft first presented to Dr. T. V. Soong. It is my view that the decisive considerations governing the $500 million financial aid to China, as well as the desirability of retaining provision for consultation and exchange of information, are political in character. From the point of view of protecting the financial interests of the United States and of safeguarding the most effective economic use of the financial aid, the retention of Article II would be desirable. However, the Treasury was unwilling to take the responsibility of seriously affecting the great political and psychological value of this financial aid by insisting upon the inclusion of this provision in view of the reactions of Generalissimo Chiang Kai-shek, as indicated in the letter from Dr. T. V. Soong to this Department. I construe your letter to mean that you believe that from a political point of view the retention of Article II is desirable. Accordingly, unless you advise me to the contrary, I propose to reply to Dr. Soong that, after having taken the matter up with the State Department, POPDEFENSE BUY UNITED STATES SEVINGS FOONDS 142 -2it is the view of this Government that Article II should be retained in the Agreement since it is "reflective of the cooperative spirit which under- lies the common war effort of the two countries and might be of some assistance to the Chinese Government in resisting pressure from any group in China which might advocate an unwise use of any part of the funds made available". Since I feel that the time is of essence and that we should consummate this agreement without delay, I would appreciate an answer from you on this matter as soon as possible. Sincerely yours, Secretary of the Treasury. The Honorable Summer Welles, Under Secretary of State. DEPARTMENT OF STATE WASHINGTON CTLY CONFIDENTIAL March 9. 1942 dear Mr. Secretary: I refer to your request for my comment in regard to the proposed agreement to extend financial aid to China pursuant to Public Law 442, approved February 7, 1942, and Public Law 452, approved February 12, 1942. The matter 18, of course, one with regard to which responsibility lies primarily with you and the Presi- dent. In my opinion, retention of Article II of the draft originally presented to Dr. Soong or an exchange of letters along the lines thereof would serve useful purposes both for the Chinese Government and for this Government. I believe that such a provision would be Elective of the cooperative spirit which underlies the common war effort of the two countries and might be or some assistance to the Chinese Government in resisting pressure from any group in China which might advoto an unwise use of any part of the funds made lable. Realizing the Honorable Henry Morgenthau, Jr. Secretary of the Treasury. -2- Realizing that you have considered both the economic and the political angles of the problem, I am prepared, in view of the opinion which you have expressed orally that the adoption of the Chinese Government's sugges- tions would be satisfactory, to concur in the conclusions at which you arrive and the course which you propose. Sincerely yours, Acting Secretary Dights 145 DEPARTMENT OF STATE Washington In reply refer to March 9. 1942 FD The Secretary of State presents his compliments to the Honorable the Secretary of the Treasury and encloses copies of an excerpt from a telegram dated March 6, 1942, from the American Ambassador at Chungking, China. Enclosure: From Embassy, Chunging an excerpt, March 6, 1942. eh:copy 3-9-12 C 146 0 P Y EXCERPT FROM TELEGRAM FROM CHUNGKING, DATED MARCH 6, 1942 "In the economic finance field, interest has centered around the large American and British credits, granted to China in February and the manner in which they will be employed. Currency inflation, with resultant price rises, hoarding, and speculation continue to be a major concern. A 'commodities administration has been established with a view to stabilizing prices and attacking the hoarding situation. A new land administration has been set up ostensibly as a preparation for dealing with land problems. Past experience does not make for optimism with regard to the success of these organizations, but there is some reason for hope that in present circumstances they may attack the problems more resolutely. There are indications that the American credit might be effectively employed as an aid toward solving these problems and to stimulating production of consumption goods as well as to attack the currency inflation situation.* eh:copy 3-9-42 147 TREASURY DEPARTMENT INTER-OFFICE COMMUNICATION DATE March 9. 1942 TO Secretary Morgenthau CONFIDENTIAL FROM Mr. Dietrich Registered sterling transactions of the reporting banks were as follows: Sold to commercial concerns Purchased from commercial concerns 2 29,000 £115,000 Of the sterling purchased, £100,000 was reported to have represented the proceeds of the export of burlap from this country to Canada. Open market sterling remained at 4.03-3/4, with no reported transactions. The Canadian dollar discount widened to 11-11/16%, as compared with 11-1/2% on Saturday and 11-3/4% a week ago. Reflecting a slight change in the rates received from Mexico City, the New York bid and offered quotations for the Mexican peso were .2060 and .2064, respectively, as compared with the quotations of .2055 and .2065 which have prevailed since last December 9. In New York, closing quotations for the foreign currencies listed below were 38 follows: Argentine peso (free) Brazilian milreis (free) .2370 Venezuelan bolivar Uruguayan peeo (free) .0516 .5775 .2800 5295 Cuban peso 7/32% premium Colombian peso We sold $3,988,000 in gold to the Central Bank of the Argentine Republic, which was earmarked for its account. No new gold engagements were reported. In London, spot and forward silver remained at 23-1/2d, equivalent to 42.67 The Treasury's purchase price for foreign silver was unchanged at 35t. Handy and Harman's settlement price for foreign silver was also unchanged at 35-1/8. We made no purchases of silver today. 148 41c anit Copy No. 13 BRITISH MOST SECRET (U.S. SECRET) OPTEL No. 80 Information received up to 7 A.M., 9th March, 1942. 1. NAVAL FAR EAST. No news has been received from the following ships and it is prosumed that they are lost: 2 H.M. Cruisers, 2 destroyers, 2 sloops and a base ship. One of H.M. Cruisers has arrived safely in port. One of H.M. trawlers was sunk by mine or torpedo south of ICELAND (c) on the 8th. It is now known that a British tanker of medium tonnage, a 9000 ton British merchant vessel and a small 'orvegian ship were lost in the Jave area. A 7000 ton British Merchant ship was torpedoed on the 23rd February in outward CONVOT far out off Newfoundland, 2. MILITARY. Libya. 7th. Some increased enemy activity in Tmimi area. Enemy armoured cars withdrew after being engaged by one of our infantry columns in the area ten miles southwest of Tmimi. Burna. No military report received. New Guinea. Mo news of a Japanese landing at Salanaya beyond the published report. Air reconnaissance on 5th showed 20 merchant ships at anchor at Rabaul (New Britain). 3. AIR_OPERATIONS. Western Front. 8th. A total of 24 Bostons were sent to attack a power station at Comines. The railway centre, Abbeville and the Fatford factory near Paris, Hits were seen on the two latter targets. About 480 fighters carried out offensive operations or escorted the bombers. Enomy defensive pa trols involv about 150 aircraft. 2 enemy fighters vero destroyed and 6 damaged. We lost 3 Spitfires and one Boston. 8th/9th. 265 aircraft, including 62 heavy bombers, were sent out. Essen 210. Havre 12. Ostend 6. Aerodromes 21. Sea-mining 15. Preliminary reports indicate that the attack on Essen was successful. 8 aircraft are missing About 50 enemy aircraft operated against this country mainly off the oast coast. Night fighters destroyed 1 and damaged another. Libya. 6th/7th. Wellingtons bombed Benghasi and laid nines in the harbour. One small vessel was destroyed. Malta, 7th, 7th/8th and 8th. A total of about 150 aircraft attack with Luga as main objective. 4 Wellingtons and one Beaufighter were damaged. 149 -Burma. 6th. Our Divisional Headquarters, 20 miles N.E. of Rangoon vas heavily bombed and machine-gunned. 7th. Our fighters gave continuous protection to our troops during their withdrawal from Rangoon and to shipping evacuating demolition parties and civilians. Java. 5th. an attack north of Bandung. The last Allied fighters were destroyed in repulsing 150 UNITED STATES GOVERNMENT COORDINATOR OF INFORMATION WASHINGTON, D.C. 100% IG March 9, 1942 The Honorable The Secretary of the Treasury Washington, D. C. Dear Henry: The attached is a summary of opinion trends in occupied France and is based upon reliable and secret information which has come to us. Sincerely, Bill William J. Donovan Enclosure 151 The French were tremendously depressed over the SECURITY fall of Singapore and the escape of the German battle- ships, but the parachute raid on the French coast by the British had a heartening effect out of all proportion from military significance. A flood. of rumors of imminent Anglo-American invasion of the Continent were unloosed. The already pro-British feeling was stimulated by the Billancourt raid. However, it gave German propaganda an occasion to exploit the accusation of indiscriminate action against civilians by the RAF. This caused widespread ill feeling, especially in such coastal areas as Bordeaux and Le Havre. Because of increasingly successful radio jamming few people in Paris are aware of Japanese shipping losses. The listeners want only news and are averse to talks. A great deal of latent feeling over France's future was brought out at the Riom trials. This brought to light intense and widespread attachment to the idea of a Republic which conceived however as different from Third Republic. A strong emotional hold is had on large sections of people with such words as "liberate". Because of fear and the effect of French opinion of a break between Vichy and Washington and because of American pressure, it is generally felt that Vichy is trying to avoid sending supplies to Rommel. 152 UNITED STATES GOVERNMENT COORDINATOR OF INFORMATION WASHINGTON, D.C. OF March 9, 1942 The Honorable Henry A. Morgenthau Secretary of the Treasury Washington, D. C. Dear Henry: The attached is a report on German home propaganda. Sincerely, Bill William J. Donovan Attachment The Far East is still subordinated to Russia 153 in German Home Propaganda which takes the line "England can no longer do anything to us. The British Empire is being taken care of by Japan. Germany's only serious enemy is Russia and when she is beaten the rest will be easy though not of necessity short." There is no longer a ban on stating that in certain parts of the Eastern Front the German position has been "dangerous." The impression is given that the German troops have almost entirely been on the defensive, but in spite of incredibly bad weather conditions they have repelled all "tough and vigorous Soviet Attacks, all tasks mastered", Russians claim advances "absurd". In prophesy- - ing the results of the coming spring offensive, great caution is being displayed. Churchill is personally and consistently blamed for the "irretrievable loss" of the British Far Eastern possessions and the "grim hopelessness" of the allied position. The role of America is minimized as "too weak to help". Much less talks are devoted to Japan, but 1/5 is all news. Much greater prominence is given to the Japanese and German sinkings of allied shipping in the Atlantic and Pacific. Production in America is belittled, inadequate to replace the huge losses and "propaganda bluff". 154 -2- ECRET INFORMATION The report of Petain's Comment on Billan- court raid was given in such a way as to make it appear that he was accusing the British openly of a cowardly attack worse than Mers-el-Kebir. Norwegian news was wholly suppressed includ- ing the resignation of the Norwegian bishops. There is no increase in general home morale in spite of the successes of the Japanese. There is a strong suggestion of a drop in morale among the officers--supplying upper middle classes of East and North Germany. As the majority of the people are so strained, they haven't the power to concentrate and absorb exacting programs, Goebbels advised the film industry to concentrate on producing relating entertainment. 8 155 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE March 10,1942 Secretary Morgenthau TO Mr. Kamarck FROM Summary of Intelligence Reports Subject: Japanese Attack on Russia According to the French Ambassador at Tokyo, the Japanese High Command is planning an attack on Siberia in April to synchronize with the anticipated Nazi drive against Russia. (C.O.I., "The War This Week," February 26-March 5, 1942) Distribution of Japanese Army Divisions Opposite Siberia 25 South Seas: Java 8 Rest of Indies and Malaya Philippines Thailand and Burme New Britain 3 E 5 2 2 (threat to Australia) Total South Seas 22 16 China (plus independent brigades) Japan 9 Grand Total 72 (2-1/4 million men, 2,800 tanks) (C.O.I., "The War This Week, " February 26-March 5, 1942; M.I.D. Situation Map, March 9,1942) -. 2 - 156 Reasons for Japanese Victory in Malaya General Wevell summarized the following factors as being responsible for the Japanese victory in Malaya: 1. Previous war experience of the Japanese troops. 2. Good discipline and high morale of the Japanese soldiers. 3. A high standard of Japanese training for the campaign. 4. The possession of tanks by the Japanese. 5. Japanese superiority in the air. There is a strong probability that the divisions used in the Malayan expedition were the crack divisions of the Japanese army. (This list 18 revealing in giving A picture of what actually happened. The British troops were not primarily defeated because they had no tanks and few planes, although lack of these did contribute to the defeat. They were beaten because the Japanese did a better job. Tanks and airplanes are not AS important in jungle fighting as in ordinary warfare.) (M.I.D., Information Bulletin Number 9) Finland Tanner, Finnish Minister of Commerce, recently made a speech in which he stated that since there had been no military activity for three months, none need be anticipated. The Censor suppressed the address, but not before the release of it by one paper had caused wild rejoicing among the Finnish troops. Desertion is becoming common. Finnish troops are reported to be disappointed at finding that the inhabitants in the areas conquered by Finland are not Finna yearning to be free, but rather tough enemies. (C.O.I., "The War This Week," February 26-March 5,1942) 157 -3German Navy (There have been a large number of alarmist rumors about the size of the German Navy. The following is the list of German warships, according to the British. This is accurate, I believe. In the last war, without the highly developed aerial reconnaissance of the present day, the British always had An accurate picture of German naval strength. In this war, concealment of a major naval unit on the part of the Germans is well-nigh impossible.) Battleships Tirpitz, (35,000 tons. ) No sister ships are under construction. (Evidently, construction of ships "H" and "I", originally planned to form with the Bismarck and Tirpitz battle-line of four ships, has been Abandoned.) a Battle Cruisers Gneisenau, (26,000 tons) Scharnhorst (26,000 tons) Pocket Battleships Luetzow, (10,000 tons) Admiral Scheer, (10,000 tons) Heavy Cruisers Hipper, (10,000 tons) Prinz Eugen, (10,000 tone) One under construction Light Cruisers Four light cruisers (8,000 tons and under) Aircraft Carrier Graf Zepplin (British Ministry of Information, March 6, 1942) -- 158 VOICE OF THE CHIEF BROADCASTS Rommel (General Erwin Rommel is described as A man whose vanity and ambition know no bounds.) "What sent the S.S. strategist to Rome, is not the welfare of his troops. It is the welfare and career of Herr Erwin Rommel. He wants to get the supreme command over the Mediterranean region, with all German and Italian land and sea forces and the air force under Field Marshal General von Kesselring under his brilliant leadership. "It is that same pernicious illusion of grandeur which led Rommel to leave two valuable divisions with all equipment in Bardia and Halfya to their fate. Rommel imagined he could always get them out again. "Rommel, with his excellent connections to Himmler the Almighty, promised the Italians German tanks, planes, U-boats. Those promises are akin to the lies he has told his own troops. To instill them with the wrong kind of courage, he pretended that Moscow hed fallen, that the Russian campaign was as good AS finished. These are the methods employed by a man who was not even sent to a war academy before an army WAS entrusted to him. "Rommel was able to redeem himself in Libya only by the fact that reinforcements of tanks and planes were sent to him after being taken away from the Eastern front, thereby upsetting the immeasurably more important offensive against the Russians. The S.S. in Russia (The Chief devotes an entire broadcast to the refusal of Gestago Chief Himmler and his) "shyster group leaders to gamble any more of his costly S.S. formations in the dangerous enterprises at the front. The fighting and dying 18 left exclusively to the Wehrmacht while the S.S. get their special training by the perpetration of cruelties against prisoners, civilians and disarmed masses. If "A unit of Field Marshal von Bock's army, holding a sector Lodowaya, had lost 135 officers and 2,700 men. There near was danger of the enemy breaking through in that sector. It Field Marshal von Bock was unable to move up his reserves. looked dangerous and only a swift and unusual decision could have saved the situation. -5- 159 "The only non-combatant formation in the immediate vicinity was the 131st S.S. police regiment. The Field Marshal personally got in touch immediately with the commander, Von Bach-Stalewski, at Moghilev, and requested the services of that regiment: Von Bach-Stalewski was merely to pinch-hit until von Bock's own reserves could arrive. Suddenly, von Bach-Stalewski became hard of hearing and made evasions: he said his regiment had neither artillery nor tanks and therefore could not fight. In conclusion, he promised to come to headquarters and talk matters over. But Field Marshal von Bock needed no BachStalewski at his headquarters. What he needed was a regiment at the front. And at once. After a short decision, the Field Marshal got in touch with General Deluege (Commander in Chief of the S.S. police troops) and two hours later, the police regiment received the order to move up. "Unfortunately, this occurred too late. The enemy had already broken through and was advancing in the direction of Pavlograd. The S.S. regiment got a thorough thrashing. Here, they had to shoot at Russians -- who were neither disarmed nor prisoners of war. There were a couple of old sergeants. Those fought bravely. But the rest of the S.S. leadership balks description. In the heat of the battle, the S.S. regimental commander and his A.D.C. vanished, presumably to report in person to their General on the situation. These should have been shot outright If it only were possible to get S.S. men of such caliber before a court martial! "Lodowaya was lost, and Pavlovach, too, went to the dickens. The whole damned thing had to be retaken later. This, to be sure, WAS quite immaterial to Von Bach-Stalewski. But that his proud 131st regiment had been battered into smithereens, he could not get over. He made quite a stink over it. Now he calmly takes the cure for his gallstones. As for the Fatherland, here we have one more proof of the willingness of the S.S. Bolshevike to do their part at the front.' (Foreign Broadcast Monitoring Service, Federal Communications Commission, March 9, 1942.) 160 March 10, 1942 Mr. Duffue The Secretary What would you think of A1 Jolson as a community song leader? Let me know by memo, and send the memo direct to Mrs. Klotz, please. well c pr, time serv 2/13 I sturs 3/13- Mr. Puffus chased with Mrs. Kletz on the phone- 161 March 10, 1942 Lieutenant Stephens The Secretary Please call up Senator Harry Byrd's secretary and ask him when he's going to have the next meeting of his Economy Committee, of which I'm a member. phone at 10 meeting shows 162 March 10, 1942 10:25 a.m. HMJr: Summer Hello. Welles: Good morning, Henry. HMJr: How are you? Fine, thanks. W: HMJr: Look, Summer, I have your letter before me in regard to the Chinese. Yeah. W: HMJr: Now, in the sentence, taken by itself, that says, "In my opinion, the retention of Article two of the Draft originally presented to Dr. Soong are along the lines which serve useful purposes. # See? Yeah. W: HMJr: Well, I don't know whether you intentionally or not, but that puts the State Department on record that they think that that should be in. Do you know what Article two is? W: HMJr: I wouldn't have written the letter unless I'd known what was in it. Well W: Certainly I feel that way. HMJr: You feel that way. W: Why, surely. I think it would have been a much sounder document, but since the HMJr: All right. Well, then, you - as long as you feel that way, you take full responsibility then for throwing down what Chiang Kai-shek wants. W: No, I don't take any responsibility for throwing anything down. As I said in my letter, I think 163 -2- the responsibility in this financial trans- action clearly is the President's and particularly yours as Secretary of the Treasury. HMJr: W: HMJr: Yeah, but you're making a record for yourself. I'm not in the habit of doing that. Well, I was trying to approach it in a friendly fashion, otherwise - I've got a letter written that I can throw back - it's just as smart as the letter that you've written, almost as smart. W: Well, Henry, I'm not in the habit of trying to write smart letters. After all, in nine years' experience with me, I don t think you have any reason to say that. HMJr: W: Well, I distinctly feel - I mean - to that what this letter 18, and if. you want to leave it that way, that's all right, and I think it would in the long run - I think the arrangement probably would have worked out better if we'd suggested to Chiang Kai-shek that some arrangement for consultation with you would have been wise. HMJr: You know, I called you up on the phone and put you on notice how your own people felt; and then I said that I thought it would be much better to take it the way the Chinese wanted it, and you said, "Yes, I think - I agree with you." W: HMJr: W: HMJr: Well, I thought, of course, when you were speaking on the telephone, Henry, that you were referring to the general draft of the agreement that had been sent in. Oh. You see, I didn't get your letter when you promised it at two o'clock, and I didn't have a chance to see it until early Sunday morning. Well, Bell said he'd have it over there at two. I don't know when it got over there. -W: HMJr: W: HMJr: W: 164 I think it came over about - they told me about seven o'clock, 80 I didn't have a chance to see the Well, all I know is that Bell said he'd have it there at two. Yeah. Well, it wasn't here, 80 I didn't have an opportunity of considering it until Sunday; and in going over it Well, that has nothing - that wouldn't make any difference if it got there at two or at seven, I mean, as far as this letter 18 concerned. Well, if I'd had the opportunity of studying it on Saturday afternoon, I could have probably have had an opportunity of talking with you personally about it; but since you wanted the reply early yesterday morning, Monday, with the other things that I have on my hands it's not possible to give as much time as I should like to. HMJr: W: Yeah But I think the general arrangement contained in Article two to which you refer, was a much easier way for us to work it out with a view to the future. After all, neither you nor I know whether Chiang Kai-shek 18 going to be murdered tomorrow and whether somebody else 18 going to step into his place. If that happens, we have absolutely no assurance whatever as to the disposition of those funds. HMJr: Oh, as Secretary of the Treasury, I'd like to have all kinds of safeguards; but the spirit under which the thing was undertaken, I thought we were going to try to please them as much as possible. Well, I thought, Henry, that if you had sent back a message to Chiang Kai-shek, possibly rephrasing Article two 80 that there would be some provision for consultation with you in the future, that probably it would have been a better and a wiser procedure; and that is the reason that I suggested that. 165 HMJr: Do you want After all, 80 far as I can understand, the only reason for this tremendous urgency 18 the anniversary on Thursday; and that doesn't seem to me a BUF- ficiently important reason to jam it through quickly without at least making the effort to give you some opportunity for wise advice as to the disposal of those funds. HMJr: W: But you want your letter to stand. What I'm anxious to do is to try, 1f possible, and get that provision amended 80 that there 18 some opportunity for cooperation with you in the future on the part of the Chinese Government. HMJr: I say you want your letter to stand. W: I don't want it to stand at all 80 long as the arrangement can be worked out. HMJr: Well, of course - I mean, with your letter, it leaves me nothing else to do but to follow what you've said, and that's what I'm going to do. W: Well, don't you think it's wise to try and get them to agree to some provision for cooperation and consultation? HMJr: W: Well Every other arrangement that we've made with every other government has had something of that kind in it. HMJr: Well, but this loan is unique. W: Certainly it's unique. I quite agree with you. HMJr: And in testifying before the Senate, I told them in the House they said, "How much could we get back?" I said, "You start with zero, and anything above that would be your own guess. " W: Well, I think that's a perfectly fair statement. 166 -5- I think it's a political loan, naturally. HMJr: W: Yeah. I quite agree with you, and I certainly would rather go ahead with it on the basis you now have it than not go ahead at all; but if sending back a friendly message saying that you feel that it would be helpful to have some cooperative arrangement inserted there if you can get it, I think it would be a better document than it now 18. HMJr: W: HMJr: W: Oh, no question about it; but on the other hand, if it irritates Chiang Kai-shek and - seriously then the whole loan might not as well be made. Well, we haven't even tried, have we? Oh, yes. The original we gave - we gave an original set of copies of the papers to Soong. Then Soong wrote back saying that Chiang Kai-shek would prefer to have that omitted. HMJr: W: That's right. But I don't think that you sent any personal message to Chiang Kai-shek from this Government, saying why you thought it would be desirable to retain something of that kind in it. HMJr: No. W: That was what I wanted to suggest. HMJr: No. Well, I'll answer your letter and then you people can give us a suggestion what the next step should be. W: Well, I've already just told you what I think the wise thing to do would be, and that is to either do it through Soong or direct to Chiang Kai-shek, suggesting that there be some rephrasing of that 80 as to provide for some measure of cooperation on your part. HMJr: Well, will you have something drafted for me? 167 -6W: I'd be delighted to, Henry. HMJr: All right. W: Now, do you want me to wait for your letter, or send it over without waiting? HMJr: You'd better wait for my letter. W: All right. HMJr: W: Thanks. All right, Henry, thanks. 168 March 10, 1942 11:00 am AID TO CHINA Present: Mr. Bell Mr. White Mr. Viner Mr. Bernstein Mr. Southard H.M.JR: I read this correspondence here with Welles, and then I called him up on the phone and had quite an acrimonious discussion with him. I asked him if he knew what Article Two was. He said, "I supposed I had put it in." I said, "Well, of course, you have written me a smart letter, and I don't know that we can write you a smarter one, but do you really want this to stand on the record?" So he said, "Yes, yes, I think it is important," so I said, "Well, I called you Saturday, and you agreed to leave it out." He said, "Well, you said you would have a letter over too, and it never got here until seven." I said, "Well, Bell told me he would have it there at two. I didn't have a chance to study it." MR. BELL: It wasn't seven, but it was three thirty. MR. BERNSTEIN: In the middle of the afternoon. Three thirty. MR. BELL: At three thirty Bernie was in my office and said that the letter had just gone over. H.M.JR: "Well, anyway," said, "what difference does that make?' "Well," he said, "what makes you think that you can't get them to agree?" I said, "Well, I thought the whole idea - you know they don't want to, and why take a risk at this time?" So he said, "Well, we can send back a message suggesting a few changes 169 -2- and so on." I said, "Well, fix it up." He said, "Well, do you want me to fix it up now, or wait until I get your letter?" I said, "You had better wait until you get my letter." I said, "If you want to make a record--" He says, "We are not trying to make a record," and I said, "Well, I think you are; and if you are trying to make a record, as Secretary of the Treasury naturally I want all the safeguards, but I thought we were trying to please General Chiang Kai-shek." I said, "I thought that was the whole purpose," So I suppose there isn't much left for me to do but to send this letter and then just add a P.S. I would be glad to receive suggestions from you on what we do next. If Of course, the thing that bothers me is, here between the State Department and ourselves we get into a two-by-four row, and their attitude is, to hell with Chiang Kai-shek, it is to see which fellow can be the smarter. MR. BELL: It really wasn't a row at all, and I was quite surprised to get that letter, because I thought that when they left our conference the other day that while they preferred to have Section Two in, they thought the situation justified our going ahead. MR. SOUTHARD: Mr. Bell, as it turns out Mr. Hamilton's performance at the meeting was in part - it was his performance - it was one in which he was right either way it went. He told you he thought Two should stay in, but then he just passively agreed that all right, it could stay out. MR. WHITE: There is another alternative, Mr. Secretary. H.M.JR: Well, there isn't much alternative now. MR. WHITE: A different kind of letter. He hasn't seen that letter. H.M.JR: No, no. "I have your letter of March 9 expressing your opinion that it would be desirable to retain in the Agreement Article Two of the draft first presented to Soong. 170 -3"It is my view that decisive considerations governing the five hundred million as well as the desirability of retaining the provision for consultation and exchange of information, are political in character. "From the point of view of protecting the financial interests of the United States and of safeguarding the most effective economic use of the financial aid, the retention of Article Two would be desirable. However, the Treasury was unwilling to take the responsibility of seriously affecting the great political and psychological value of this financial aid by insisting upon the inclusion of this provision in view of the reactions of Generalissimo Chiang Kai-shek, as indicated in the letter from Dr. T. V. Soong to this Department. "I construe your letter to mean that you believe that from a political point of view the retention of Article Two is desirable. Accordingly, unless you advise me to the contrary, I propose to reply to Dr. Soong that, after having taken the matter up with the State Department, it is the view of this Government that Article Two should be retained __" No I would stop there. I would stop right here and say, In view - from T. V. Soong to this Department," then a new paragraph, and simply say, "In the light of our telephone conversation, I would be very glad to receive suggestions from you as to how to proceed from this point.' You see, "In the light of our telephone conversation, I would be very glad to receive suggestions from the State Department how we should proceed. You can say, "In the light of the political nature of this loan and in view of our telephone conversation, I would be glad to receive suggestions. In the light of the political nature of this loan - " have you said that it is political? MR. BERNSTEIN: We can work that out, Mr. Secretary. I think we have your idea clearly enough. H.M.JR: He said, "We can redraft Article Two, you see, and go back to Chiang Kai-shek again." Well, I simply want to say, "In view of the light of your - will 171 -4you suggest meus what - what the State Department would like totosee do you next?' MR. WHITE: Does that leave that paragraph in in which you say, We would like as much financial paragraph protec- tion as possible"? MR. SOUTHARD: The essential part is left in, and you have said the other in your telephone conversation, after all. You have already said orally the harsh stuff at the end. H.M.JR: I have said that. I simply said, "You tried to pull a fast one on us. In nine years I have never tried to do that." "Well,"I said, "all right, you people want it in, and you say that you think we could go back to Chiang Kai-shek again - " you can get my conversation. You had better get my conversation, you see. MR. WHITE: Well, I think it is true that the inclusion of that part in the letter makes this a smart letter. I think you are quite right; and if you leave that part out, and merely ask them specifically for-suggestions, is it, you are asking for? MR. BELL: How to proceed from this point. H.M.JR: Now, he said over the phone, "You will see we can go back to him - " He said, 'You haven't tried to go back to him again." I said, "No, because I thought that that was the whole purpose of the loan, and I didn't want to risk this thing. He said, "Well, you have always had protection before. I said, 'This loan is unique. If I say so, I think I was pretty good. I mean, he got mad, and the surprising thing is, you see, where I have a little advantage over these fellows, I very rarely get mad these days. The only trouble is that when I get mad, I get results, and it is very bad for me, Bernie. I get Well, that is the way to get it," but the other day at mad, and then Bernie does me a beautiful job, and I say, 172 -5Cabinet I was amazed at Welles. In a very quiet way Henry Wallace said something about some planes in South America and that Rockefeller has consulted with Welles. Welles said, "It isn't so. So the Vice-President was very firm. He said, "Sumner, Rockefeller says he posi- tively has." "It absolutely is not so," to the Vice- President. The Vice-President said, "I am sorry, there times like that. In other words, his nerves were like Donald Nelson's the other day. They are beginning to go. must be some misunderstanding." And he said it three MRS. KLOTZ: But toward the end he was very sweet. H.M.JR: He got worried. So I think this. We can write the thing, asking them what we should do next. If you people will come in about two thirty, I will be ready for you. Anybody question my procedure? MR. SOUTHARD: It sounds excellent. H.M.JR: Anybody question it? Bernie? MR. BERNSTEIN: No, I think it is fine. H.M.JR: Now if after all they want to go back he said they are going to redraft Article Two and send it back-MR. SOUTHARD: It is their responsibility. H.M.JR: It is their responsibility, and he has asked it. MR. SOUTHARD: And it should be their responsi- bility. That is the whole point. .M.JR: Well, this is a very tricky thing. "The matter is, of course, one with regard to which responsi- bility lies primarily with you and the President. In my opinion retention of Article Two in the draft presented to Dr. Soong should be left in." 173 -6MR. BERNSTEIN: And then on the next page, they said you had considered the economic and political aspects. H.M.JR: I said, "Look, Summer, you just lift this one sentence out and let it stand by itself, and there is nothing left for me to do, and I am just as anxious as you are, as Secretary of the Treasury, to have protection, but I am also more interested in pleasing Chiang Kai-check." MR. BELL: That will look beautiful ten years from now. MR. SOUTHARD: That is a perfect letter for that purpose. H.M.JR: Well, he is trying to make the record so we go back-- MRS. KLOTZ: That is what you said to him, he is trying to make a record. H.M.JR: And that is what he got angry about. I think we can use this first part and simply say, "In the light of our conversation, we would be very glad to receive suggestions from you as to how we should proceed from here. MR. WHITE: With a phrase that we fully appreciate that we need to act very quickly. MR. BELL: Soong is calling me this morning. I haven't called him back. H.M.JR: Oh yes, in the thing he said, "What is the use?" Just because they have a holiday on Thursday, "What is the use of hurrying?" MR. BELL: Gosh, they have lost Rangoon. I should think it would be pretty important. H.M.JR: All right, put in something about - you can say, "I feel that no time should be lost. 174 -7- MR. WHITE: That is right. After all, this is already-- H.M.JR: " I would say, "I feel that no time should be lost. MR. WHITE: Chiang Kai-chek has given his answer over ten days ago. H.M.JR: Now, I keep this. Have you people got the stuff? This is for my record. Now, don't "yes" me. MR. SOUTHARD: Oh, no. H.M.JR: Because, after all, we are talking about the whole Chinese-Indian situation, gentlemen. Bernie, the Chinese-Indian situation is what we are playing for, and I am perfectly willing to crawl on my hands from here to the State Department if I could save China and India. MR. SOUTHARD: That was the only question that came up in our minds yesterday, what would happen if the State Department insisted on keeping Article Two in. Wouldn't we then be willing to do it. MR. BELL: Well, we are just as anxious as they are, Mr. Secretary, to have Article Two, but we had to bear in mind all of this situation over there, and that is the reason we didn't want to ask Soong. H.M.JR: Well, that is what they should be doing. If you see my conversation, I think you will be pleased with it, and Welleson second thought - he is nobody's fool. We will throw this right back in his lap, and it is his responsibility, and believe me, he is not going to let me say that we lost Chiang Kai-chek because Sumner Welles wanted to protect the financial interests of this country. MR. WHITE: Well, that is exactly what this letter it puts him on that spot. 175 -8H.M.JR: But, Harry, I don't like to do business that way in these times. MR. WHITE: Well, we didn't start this, Mr. Secretary. There was no intention on our part of doing this. When we got this letter from them, which we felt left no out-H.M.JR: Right. MR. BELL: And we are in a position where-- H.M.JR: If you bring this back to me at two thirty, see. I want this for my files. MR. BELL: We are in a position where we feel that we can't talk to Soong, because he telegraphs it right back to the Generalissimo. Everything you say to him goes back. H.M.JR: I told him, I said - he said, "Well, you have never asked him.' I said, "Well, we sent this thing back to him, and this came back." You will see. I knew my taxes, and he wasn't - at first he was very, very brusk, and then he kind of ran off into honey. 17G STRICTLY CONFIDENTIAL My dear Mr. Nelles: I have your letter of March 9, 1942, expressing your opinion that it would be desirable to retain in the Agreement Article II of the draft first presented to Dr. T. V. Soong. It is my view that the decisive considerstione governing the 8500 million financial aid to China, as well as the desirability of retaining provision for consultation and exchange of information, are political in character. the II financial of safeguarding use of would was unwilling to seriously psychology From the point of view of protecting the upon of ical affecting financial value the be inclusion desirable. interests of the the take aid, this most great the of the financial of However, responsibility effective this political retention the provision United aid the economic by of and States Treasury Article insisting in of view and the reactions of Generalissimo Chiang Kai-shek, as indicated in the letter from Dr. T. V. Soong to this Department. I construe your letter to mean that you believe that from a political point of view the retention of Article II is desirable. Accordingly, unless you advise me to the contrary, I propose to reply to Dr. Soong that, after having taken the matter up with the State Department, 177 -2- it is the view of this Government that Article II should be retained in the Agreement since it is "reflective of the cooperative spirit which underlies the common war effort of the two countries and might be of some assistance to the Chinese Government in resisting pressure from any group in China which might advocate an unwise use of any part of the funds made available". Since I feel that the time is of essence and that we should consummate this agreement wd th out delay, I would appreciate an answer from you on this matter as soon as possible. Sincerely yours, Secretary of the Treasury. The Honorable Summer Helles, Under Secretary of State. HDW:BB:FAS:dmh 3-9-12. 178 TREASURY DEPARTMENT Washington Press Service FOR RELEASE, MORNING NEWSPAPERS, No. 30-61 Tuesday, March 10, 1942. 3/9/42 The Secretary of the Treasury announced last evening that the tenders for $150, 000, 000, or thereabouts, of 91-day Treasury bille, to be dated March 11 and to mature June 10, 1942, which were offered on March 6, were opened at the Federal Reserve Banks on March 9. The details of this issue are as follows: Total applied for - $471,349,000 Total accepted - 150,194,000 Range of accepted bids: High - 100, Low - 99.938 Equivalent rate approximately 0.245 percent Average Price - 99.942 0.229 " (17 percent of the amount bid for at the low price was accepted) -00o- 179 March 10, 1942 11:20 a.m. FINANCING Present: Mr. Viner Mr. Bell Mr. Stewart Mr. Buffington Mr. Murphy Mr. Haas Mr. Lindow H.M.JR: All right, Bell. MR. BELL: I suppose yesterday we went over all of that material that we need to, didn't we, George? MR. HAAS: Yes, the Secretary asked us to look into this reserve thing and mention some specific criteria. Henry has got some suggestions on that. H.M.JR: Did you talk to Eccles? MR. BELL: Yes, and I didn't get very far. He argued for an hour but wound up by saying that he would give it consideration and be prepared to talk again in a day or two. I told him you would probably want to talk to him before we went ahead here very much further and that that would be one of the problems we would have to discuss, and he said all right, he would be prepared to discuss it, but he argued very strenuously against it. H.M.JR: Why is he opposed to it? 180 -MR. BELL: He said he didn't think you could fix any minimum. One minimum one time might not be a good minimum for another time. He thought that wasn't the problem at all, that what you are interested in is keeping a good market and seeing that you can finance 2 this program within the range of rates that you fixed. He said two and a half was the limit and then it is up to the Federal Reserve to see that the market is in such shape that you could all the time finance within that limit, and he thought that that was their responsibility, and t hey would have to assume that. Now, whatever level of reserves would be required, they would have to see that they were there. That is his main argument. H.M.JR: Well, you have worked on this? MR. HAAS: Henry has got some suggestions. H.M.JR: Let's hear them, Henry. MR. MURPHY: Here is a chart you can look at. We have a chart which shows the recent movement of excess reserves and the long and short rates so that you will have the factual background. We have worked up as possible bases for a definite agreement three alternative bases. First, increase excess reserves by at least three hundred million a month until total excess reserves exceed five billion and excess reserves in New York City is two billions, these levels to be maintained thereafter. The figures might be changed, but that is one type of a basis of agreement we might have. Another type is, the Federal Reserve banks to purchase an amount of Govern- ment securities equal to twenty percent of the net increase in total open market securities. This to continue until the levels of excess reserves specified in one have been attained. This level of excess reserves to be maintained thereafter. The twenty percent would not only offset the increases in reserve requirements due to bank consumption but would also provide a continuing backlog to increase the supply of excess reserves, and the one that we are inclined to - the type of basis that we are inclined to prefer is the third. Increase excess reserves by at least three hundred million in every month, in 181 -3which the long-term taxable average is more than two thirty or the money as long-term taxable average is now - now yield two forty-seven, so if an agreement of the last type were made using those figures, they would agree to increase excess reserves by three hundred a month until either the '67-'72's had gone up - had gone up until they yielded only two forty or the long-term - both that and the long-term average had fallen in yield to two thirty. That would provide an objective criteria and would prevent further disputes if it is expressed this way in figures. H.M.JR: Well, you couldn't tie into that something for the short-term rate too? MR. MURPHY: Well, the idea is that the short-term rate would be kept flexible at such a level as would support the long-term rate, that the long-term rate would be the only stated objective and the immediate impact of the excess reserves would be on the short- term rate and that will propagate itself out to the long-term rate. H.M.JR: You feel sure of that? MR. MURPHY: I feel sure that that would be the tendency. I have no idea what short-term rate would be necessary to maintain a given long-term rate. H.M.JR: This is the idea of my mechanical pari- mutuel, is it? MR. HAAS: That is right. H.M.JR: It is not bad, Henry, for overnight. (Laughter) What would you do in two nights? MR. STEWART: Go down to two percent, wouldn't you? H.M.JR: It is not bad. MR. BELL: That would mean the total excess reserves of about five billion? 182 -4MR. HAAS: Well, this other one - you have no top on the third suggestion. You just look at the rates and see what is necessary. MR. MURPHY: They might not have to buy any if the rates-MR. BELL: Were between two forty and - on the long-term? MR. MURPHY: Yes, if the rate was below two forty on the '67-'72's and two thirty on the long-term. MR. BELL: Below two forty? MR. MURPHY: If the rate was below two forty. The price of course would be higher. MR. BELL: That is what I was thinking. What does that mean in terms of prices for '67-'72, about one something premium? MR. MURPHY: Two and a half. MR. BELL: Oh, really? MR. MURPHY: I haven't figured it out in price. H.M.JR: At first blush that number three looks very interesting. MR. BUFFINGTON: I was just wondering if there was any assurance that the three hundred million increase a month would necessarily keep those rates at those levels. MR. LINDOW: It wouldn't tie in. The three hundred wouldn't have anything to do with the third one of tying into the rates. The third one is independent, in which, if the rate goes to a certain point, you have to buy three hundred. MR. HAAS: Next month they have got to do it again. 183 -5MR. LINDOW: Three hundred more? MR. HAAS: That is right. H.M.JR: What would you think if you simply said "increased reserves by that amount, leaving the amount blank, which will attain the following results"? MR. VINER: I think that that seems to me desirable except that they technically could keep that agreement by making very, very slight purchases at a rate which doesn't correct the situation, you see, and I take it that this three hundred million minimum is an attempt to force them to act not necessarily sufficiently but at least actual minimum degree of action. MR. LINDOW: That is right. MR. VINER: And yet I think that is too rigid. I think you would have to work out something between those two whereby the obligation is for sufficient action but where you don't tell them how much is sufficient. MR. MÜRPHY: Well, that would be sort of like keep- ing buying silver until the proportion were one-quarter in the monetary reserves, but no statement as to how soon that objective had to be attained or how much progress you had to make on it in any given month. MR. VINER: Well, I would prefer their weekly rate, you see. A lot can happen in a month. Theoretically here they would have to keep on for a month. I would prefer a weekly rate. MR. STEWART: How would it be to have a combination of the weekly rate of purchase with an amount to be maintained in New York City? Then you would have an amount of purchase in the open market aimed at the maintenance of a given rate, whatever rate is decided, and until excess reserves in New York City are maintained at a certain level of excess. MR. VINER: Well, there you would have the problem 184 -6that what you were doing was too much for one purpose. MR. STEWART: But there is some limit. It conceivable, you see, that through excess maintain reserves There even youis couldn't the rate. It is conceivable. some place at which you might stop, but you wouldn't stop until had level. built up excess reserves in New York City to a you certain VINER: I see, yes. Whichever one is reached first, MR. then? MR. STEWART: Yes. MR. BELL: Henry, in our discussions with the Board, we have referred to long-term two and a half's as falling in the early '60's. Would we need a yield rate of two thirty - between two thirty and two forty on the '67-'72's to get a security in the early '60's on a two and a half basis, market security? MR. MURPHY: Well, of course we-- MR. BELL: You could do better than that, couldn't you? MR. MURPHY: You could put out another '67-'72. MR. BELL: Yes, if you had the price you just suggested, you could put out another '67-'72 and wouldn't we be satisfied if the yield on the '67-'72 is kept between two forty and two fifty? MR. MURPHY: Of course it is two forty-seven right now. It seemed to me that it was necessary that it be boosted - the price be boosted enough to provide an element of insecurity to the holders, such as Mr. Stewart was suggesting yesterday. If the yield of the '67-'72's is lowered enough, the price was raised enough so that the holding of them represents a real risk as compared to the short-term money, you have got a better change of maintaining your pattern of rate and a less chance that they will be considered to be demand money. You remember that when we were discussing the ten basis points range 185 -7 of fluctuation in the meeting in your office yesterday morning, it was said that that couldn't be around two fifty. It probably couldn't even be from two forty to two fifty. It would have to be a level which maintains your two and a half percent rate and still maintains the essential insecurity of long-term securities, and therefore the superiority of short-term money. MR. BELL: We said we couldn't maintain a level between two forty and two sixty. In other words, it couldn't be ten points each side of two fifty. It has got to be some place below two fifty. MR. MURPHY: I don't think it could have two fifty ment that two fifty is the floor and then we allow rates to fall to exactly that floor, then long-term money is as one of its ends either, because if we make a commit- a safe commitment. If your floor is two fifty, it seems to me your range of fluctuation has to be perhaps from two thirty-five to forty-five in order to provide a constant - always have a risk in your long security. Does that implement your point? MR. STEWART: Yes, the amounts I don't know, but that is the logical-- MR. MURPHY: I mean the general idea. H.M.JR: Well, personally I think we have made a little headway, but I just want to throw this to you so that you people don't think you are working up to a crescendo and then find that there isn't going to be any. It is going to be practically impossible for you people to get me to join -the Federal Reserve on a statement on the two and a half percent rate. Do you mind if I quote you, Walter? MR. STEWART: No. I don't remember what I said. H.M.JR: Walter Stewart said what I would be building up - he didn't use the word, "a Frankenstein", but I used it, he said would be building up another gold standard so 186 -8 when we went off the two and a half percent rate it would become a thing of great financial importance just as when weso went off the gold standard. Am I putting it correctly far? MR. STEWART: Yes. H.M.JR: And why do it, and it would be tying my hands. Isn't that what you said? MR. STEWART: Yes. Tying your hands so long as long-termfinancing is concerned. Then you would have to look for other alternatives. H.M.JR: Now, I just - one reason Roosevelt put me into the Treasury was to untie his hands on the gold standard, and I don't see why it is necessary or wise, in view of the changing situation every day, for me to join anybody in a statement that two and a half percent is going to be the rate, because you can't do it. Now, you can grope toward it and, if they have come along on a formula like that, we can approach it, but all my instincts cry out against doing it. I have been that way now for how many months? MR. BELL: Well, we first approached it in November, I think. H.M.JR: Yes. I am afraid you fellows just - I work on instinct, which I suppose is based on accumulated experiences. When you get a hardheaded fellow like Walter Stewart who does everything with a slide rule and has no emotions, and he arrives at the same conclusion inde- pendently, I just want to let you know - I mean, if you think, well, we are going to come up toward that, and when we get to this point, this is what we are going to do-- MR. STEWART: May I make an observation there? H.M.JR: Do you want to claim you have got emotions? MR.. STEWART: I fear that I haven't got any. I 187 -9understand the instinct of freedom. The real question of analysis is how much freedom have you got? Because any one would like to have what he wants and preserve his freedom. You already have some commitments, both in the market on your long-term securities and some commitments on your restricted issues, and I think the subject of inquiry is not what you would like, but the degree to which you haven't got a free hand:already. You have got a structure of rates, part of which you are committed to on these restricted non-negotiable securities, part of which are in the market already, so that the margin of freedom that you have is not as - without consequences is not as wide. H.M.JR: Well, I know I am surrounded by a fence, but why make the fence higher and why charge it with electric current? MR. STEWART: If you say why make a statement, that I am in sympathy with. I must say, for myself, I am very dubious about the advisability of a statement to a public which you cannot be sure when you make it that you are going to fulfill it without foregoing other advantages. H.M.JR: What? MR. STEWART: I agree with that. H.M.JR: Statement or no statement? MR. STEWART: No statement. A policy which conceivably could be worked out with the Federal Reserve, but to my mind, no statement. MR. VINER: You may recall that I have always been reluctant to recommend a statement, particularly a very definite one, but I have been converted to the belief that you will have more freedom if you do make a statement like the one that has been discussed here in which you say that the Treasury plans not to finance at higher rates than two and a half, but don't say anything about maturities, and that you won't have a program without 188 - 10 - the statement to the public, because the Federal Reserve and Treasury don't work quickly enough together and harmoniously enough together and one or the other of them doesn't keep its understandings to the other faithfully enough so that you will have anything to count on unless you have protected it by a statement to the public, and I really think that you ought to be seriously concerned as to whether you can sell securities to the banks without pressure if you don't give them assurances that they are not going to have capital losses. H.M.JR: Well, I am sorry, but that doesn't make it that doesn't make a dent. I would like to go along, gentlemen, with you. I would like to have you explore this for me at once, see. This is the thing which would make the two and a half percent thing realistic, wouldn't it? MR. BELL: Probably it would. I don't know that it is-- H.M.JR: Well, let's put it this way. This is the way I would like to approach it. Now, I know you have got something tailored in the short-term. I know you have got something ready in the long-term. I am ready to go to town any day on that. MR. BELL: Well, I think we ought to get going on that, whether you do the other thing or not. If we are going to make a statement, the Federal was going to join us, and we would come out at the same time and say, "Here is a short-term and a long-term security that would pick up these current available funds. " H.M.JR: Well, Dan, I will not start launching this plan of having the Federal Reserve start selling these securities until I can get an agreement with them on excess reserves. I make that as-- MR. BELL: You mean you won't go along with a short- term issue? H.M.JR: No. 189 - 11 MR. BELL: Until you have something on the other. H.M.JR: Yes, because we have got another financing coming along out veryfirst. closely, and I want to get this thing straightened MR. HAAS: Isn't the stronger statement action in any case? H.M.JR: Yes. Get this understanding, something like what you fellows have worked out, and then come along and announce - what is it, a five year? MR. BELL: And a twenty. H.M.JR: Five and a twenty. And then I am per- fectly happy. I am doing a little horse trading, but the Fed is very anxious to be designated as a medium to do this. The five year, that is. Do they want to do the twenty, too? MR. BELL: Yes. H.M.JR: And I am not doing anything that I don't believe in, but before we do the five and the twenty, I want an agreement on excess reserves. MR. BELL: I am not sure you can't do the securities-- H.M.JR: No, I don't want to do it. If you don't mind, I won't do it, because the Fed are crazy to do the thing. Eccles is crazy to do it. You have to trade with Eccles and this is the time to make a bargain with him. MR. BELL: It is going to take a long time. H.M.JR: I thought they said they were ready to do something on this. MR. HAAS: They agreed - you name the pattern and they will support it. They say all they are suggesting 190 - 12 is a mechanical way of implementing that understanding. MR. VINER: There is a big step between supporting a principle and accepting a formula. MR. BELL: There is a. lot of difference in that and what they suggested. H.M.JR: I will tell you what I am willing to do. I don't want to be dogmatic. I want to be fair. Give this thing a trial and re-examine it every month based on the record. That is fair, isn't it, Walter? Try it for thirty days and then each month we will have a meeting and re-examine it and see what happens. MR. STEWART: My impression is that the agreement - that this number three, if it could be put in such form, that the only difference was that you are not going to make a statement. Then it seems to me you have got some essentials reserved here. You can make modifica- tions in three which would meet part of their requirements if the purpose is to maintain a volume of reserves adequate to support a long-term rate of so and so. Then that is what they are asking for, but they are also asking for a statement. If you say, we are just not making any statements, and then couple it with the other two, it might look a good deal like a program that you have talked over, without the statement. MR. BELL: I think they will contend that it isn't necessary to have the '67-'72's at that yield level to maintain this two and a half rate. MR. STEWART: I think so too. I think there may be merit in that. MR. BELL: There may be some-- MR. STEWART: But they would be on the other side prepared to say they would do such things in the market as were necessary to maintain some rate. Then you have a difference as to which rate it is you are trying to maintain and whether you make a statement. 191 - 13 MR. BELL: Well, they agreed with us the other day in a conference that long-term securities meet in the early sixties, which means twenty years, at two and a half percent, and that they were prepared to go along on a program of that kind, and I think they would contend that you don't need three and a half million dollars in reserves to maintain that. H.M.JR: Well, this thing that - the interest rates and their movement, there is a definite tie-up between the two. There is your history. I mean, it is conclusive. I mean, I sense these things, and then they come along and give me some data to back up my - what I sense. It proves it definitely, doesn't it, Henry? MR. MURPHY: Yes. H.M.JR: Definitely. I mean, this isn't just - and, Dan, I will not go through another financing with the excess reserve situation the way it is in New York, the way it was last time. I won't go through it again. I feel very, very strongly on this thing. I will not go through another thing like that. MR. BELL: Of course, one thing Eccles would like to see is a short-term rate of a half, and he says that when you get that, you are going to get a lot more funds than you have had heretofore out of the country, and not just in New York. H.M.JR: Well, could I do this, to let Eccles know? I am very quiet on the phone. Let me call him up and say that you people are meeting with me this afternoon. Supposing you meet with him. I want to get as much as I can out of Stewart, see, and let me tell him that I feel this thing very strongly, and if I am wrong, supposing they go out on a program and do this for me, and I am wrong. Well, then I am wrong. I mean, their reputation hasn't been hurt and my reputation hasn't been hurt. Can you see any harm in their trying this thing? MR. VINER: Oh, I think it would be something gained if you had an agreement. I am not saying you must have 192 - 14 - the statement. I would suspect - you can't be sure. You can't be confident that they are going to work any as it is made won't a one. They won't on a principles to satisfaction rests such pledge accept statement this rigid unless of work your rigid. one They which unless there is a statement to the public which imposes a compulsion on both of you to carry out your agreement. H.M.JR: Well, let me just-MR. VINER: Also, it may be hard to work it without the statement, because I am not an expert in the sense of the market, but from what I gather, the bankers are really expecting that if you are going to ask them to buy a lot more Government Bonds that they are going to get some kind of assurance that the bonds are not going to have sharp fluctuations. H.M.JR: Look, Jake, I just went through on a tax thing - I made a statement. In fact, I didn't make it, Sullivan made it. It was in regard to what you could or couldn't deduct in the way of your taxable income, sec. They gave it a certain interpretation. We didn't mean that, but that is what they gave. So, I have were you present? MR. VINER: Yes, I was here. H.M.JR: You were there. You saw what I went through, and against the Treasury's better interests, I said, "If this is the way you understand it, gentlemen, I will go along," didn't I? MR. VINER: Yes. H.M.JR: Now, that was on an interpretation which they gave something that a mouthpiece said for me. Now, I am coming out myself and say something, and I never can live it down if time should change. I mean, something can - look, I keep going on the theory ever since I have been here, that the unexpected can't happen, and it has happened every month, something. Since I have 193 - 15 been here, we have been fortunate enough that the public has confidence in the Treasury. Now, it could lose this confidence. I might make a misstatement inadvertently, or the President might, and we might lose it, and these fellows go out on a sit-down strike. This country might be invaded, and then it gets down to saying, "Well, the only way that you can borrow the money is through making the rate attractive. God, they did it in the last war. What did they pay? How high did they go? MR. BELL: Four and a quarter percent on their bonds and they went six percent-H.M.JR: And here I am hamstrung with this statement facing me where I could get the money at three, but I can't get it at two and a half, or I could get it at five. MR. VINER: I think what they are telling you now is that really you can get it at two and a half, but can't get it at four. H.M.JR: Well, I don't believe it. That is what I don't believe, because I have gone through it, and I know that at a price - I mean, if these fellows come in here and say, "Mr. Morgenthau, we will let you have money for nine months at two and a quarter percent and you can have it. Then they come along and say, "We will let you have long money for eleven months. I have been all through that. But, you are taking away from me the attractiveness of an interest rate. There must be other wars where people paid ten or fifteen percent when they were losing a war. There must be plenty. You fellows that have been in universities all your lives, you must know plenty of examples where countries were losing a war where they had to pay-- MR. VINER: Well, I would argue that they gained nothing by paying that, that the rate of interest has little to do with-- MR. BELL: With the supply. 194 - 16 MR. VINER: with the supply of funds, and that wouldn't - I certainly wouldn't get a pattern on the basis that - well, if the funds are coming in slowly, we will tempt them in by raising the rates. I think I on non-banking funds to a certain extent, yes, but on the banks, no. I would say that the rate that you pay to the banks ought to be figured out in terms of what they need in order to maintain a healthy position, but the funds they have to give you, they can't keep them out, and they themselves will be more comfortable, and their position will be stronger if you don t raise the rates. MR. STEWART: They are comfortable so long as the guarantee is kept. MR. VINER: As long as there is assurance in the market that the guarantee can be kept. H.M.JR: Did you want to say something? MR. BUFFINGTON: No. I know so little about all this. I shouldn't express an opinion, but I don't see how you can avoid the fact that the old law of supply and demand works. In other words, I know of funds today that would come out on a three percent market. MR. VINER: Banking funds? MR. BUFFINGTON: Yes. MR. VINER: What are they doing? MR. BUFFINGTON: They are just there. They are taking the best they can get in places where they can get it, and holding idle funds where they can't get it, but I think that business funds and banking funds both-- MR. VINER: Well, business funds is another story. H.M.JR: Excuse me. Who told me at Chicago how many accounts had over a million dollars in--? MR. BUFFINGTON: It wasn't me. 195 - 17 H.M.JR: Well, somebody told me the number of accounts that they had in their bank of over a million dollars of individuals, cash, just lying there. I think some- body told me - oh, I guess it was Ned Brown. Was it Ned Brown? Do you remember that story? MR. BELL: Yes. MR. VINER: Well, they must be expecting the rate to raise. MR. HAAS: Yes, that is it. MR. VINER: That is what makes the funds idle. MR. STEWART: That is not all of it, Jack, there is a rate at which given the surtaxes it isn't worth bothering with the papers. There is another rate which makes it worthwhile. And the option of doing nothing is always open to them. On the general argument, I am in agreement with the Secretary. H.M.JR: Well, you go back - it isn't quite the same. You did business, when you were in business - you were in a venture business, and you had to have a high return to venture your money. If you couldn't get a high return, you wouldn't venture your money. Is that right? MR. STEWART. That is right. H.M.JR: Well, this is to a lesser degree the same thing. MR. BELL: I think you are in a war, Mr. Secretary, and I think you are-MR. STEWART: They look upon the rate of interest as being essentially a monetary factor which can be maintained under a monetary mechanism, and that the money which comes from the banks does not have to have adjust- ment with reference to anything that is called saving, or the amount of money that is going to come out, and it is 196 - 18 - possible to take a commitment, given the Reserve System cooperation, and they say as far as the banking system is concerned that is quite-- MR. BELL: We are talking about controlling prices all along the line, and I think it would be unconscionable to the American people to pay more than two and a half percent to finance this war. H.M.JR: I agree with you, but let me look up some of these speeches in which he said through cheap money he could put people back to work. Did he? MR. BELL: That is another era. H.M.JR: No, Dan, excuse me. MR. HAAS: He helped. H.M.JR: Now, wait a minute. What? MR. HAAS: It helped. H.M.JR: But wait a minute. The point - but it didn't solve unemployment. MR. HAAS: But it might have been worse if he hadn't done it. MR. MURPHY: Two and a half percent might not win the war either, but it will help. H.M.JR: Well, you very seldom see me as rigid as I am on this thing. Now, it isn't going to break Mr. Eccles' back or his theory or anything else if we say to him, "Look, let's try this thing. I feel this way very, very strongly. I am going to ask you to try it. And let's see what happens to the record here and everything else. Let's try it and see what happens." I would like to call him up on the phone and just tell him very quietly how I feel. Could he see you people, and I would like to meet with him Thursday afternoon and try to settle this thing between now and Thursday afternoon. 197 - 19 MR. BELL: Would you agree-- H.M.JR: There are two honest differences of opinion. Using Viner as the example, Viner says that the interest rate is not the controlling factor, that it is the people scared-- MR. VINER: For banks. H.M.JR: And, I differ with you. And I also say I will not go into another financing unless this excess reserves situation has changed. MR. BELL: Would you be willing to agree here that the two and a half percent is an objective without making any public statement, in other words, among ourselves-H.M.JR: Yes. MR. BELL: O.K. MR. VINER: There is no - I don't see yet any urgency-- H.M.JR: Yes. MR. VINER: .of the statement-H.M.JR: Dan. MR. VINER: as long as the pattern-- H.M.JR: Yes. MR. VINER: isn't broken. MR. BELL: Well, the urgency of the statement is that you get a lot of people outside saying, "Well, why doesn't the Treasury have a program? What is this program of financing thirty-nine billion dollars next year? Have they got any pattern?" A lot of people raise that question. Now, the Fed says-- 198 - 20 - H.M.JR: I read that. MR. BELL: That is what we want. Maybe it came from the Fed, I don't know. But they say when the Treasury establishes that pattern, we are going to get behind it and see that it works to the full extent of our ability. H.M.JR: That is why I raised the question about publishing the stuff yesterday. I read the same article you did. MR. BELL: It has been out. A lot of people on the Street have been in to see me, and they say, What is your pattern for financing this thing? Is it just going to be an issue every other month of any type that you can put out at that time, or are you going to say to the public, 'Now, this is what you can expect'?" H.M.JR: Well, Dan, answering your question as to the object, I have given you my answer. MR. BELL: That is right, you have, and I am satis- fied with that. H.M.JR: Are you satisfied? MR. BELL: Yes. H.M.JR: Will you fight for that on that level? MR. BELL: Yes, and they will go along with that on that two and a half objective. They may not go along with the way of achieving it like Henry put it down on paper, but they will go along with that objective. MR. HAAS: It will leak out anyway. Maybe that is the most effective way of doing it. MR. BELL: Well, that is an effective way. H.M.JR: All I have got to do is send for Randolph Burgess and Mr. Stonier the way I did the other day 199 - 21 and then the whole thing down to the very adjectives appeared in the Wall Street Journal. It was the most disgusting performance I ever saw. If I seem a little terse today, I can't sing it, but I paid my income tax today. (Laughter.) Boy, oh boy, oh boy, as Donald Duck says. It is a good thing to have Donald Duck around. MR. BELL: I hope you think back when you go to put in the ten percent withholding. H.M.JR: It is a good thing to have old Donald Duck around. I can also understand-MR. BELL: Think of next year. H.M.JR: That is the thing. This thing comming now when we are talking about next year makes this year look good. I think we are going to take in boarders if we can deduct it as expenses, and this year of all years, my farm had to make money, Jake. MR. VINER: Well, you could get a new accountant. No gentleman's farm makes money. H.M.JR: This year of all years we had to average so much on our strawberries. MR. VINER: That is why I say you ought to get a new accountant. H.M.JR: Just this year the farm had to make money. (The Secretary held a telephone conversation with Mr. Eccles as follows:) 200 March 10, 1942 12:06 p.m. HMJr: Hello. Operator: Chairman Eccles. HMJr: Hello. Marriner Eccles: Hello. HMJr: Good morning, Marriner. E: Good morning, Henry. HMJr: How are you? E: HMJr: E: HMJr: I'm pretty good. Marriner, I've been sitting around here with my advisers on this question of financing. Yes, sir. And we've reached a certain point where we'd like to meet with your men, you see? E: Yeah. HMJr: And I've got some notions which I'd like them to pu: up to you. I don't think we're 80 far apart as to the objective, you see. E: Uh huh. HMJr: But frankly, the last financing, that excess reserve thing bothered me tremendously, you know. E: HMJr: Yeah. Particularly the New York situation, the fact that a quarter of all the reserves were with the Guaranty and they sat back and did next to nothing. So I'd like them to present our viewpoint to you on a kind of a trial basis, you see? And then I thought if between now and 201 -2next Thursday at three o'clock, at least we could come as close as possible - at least know where our differences were. Then I'd like to meet with you. E: HMJr: E: On Thursday. Yeah. Are you going to be here Thursday? Yes, sir. HMJr: Would three o'clock be good for you? Thursday? E: Let's see. Yeah. I'll set Thursday - three o'clock is okay. HMJr: E: HMJr: E: Well, now, my men can come over this afternoon to see you. Well, I wouldn't have time to get Sproul here; but I guess that wouldn't be necessary then. Well, he could come down tomorrow. Then we could work right through until Thursday until we got the thing settled. I'd like him here Thursday, because it's very important, because he understands this problem possibly as well or better than any of us, and 18 very - we've got to depend a good deal, of course, upon the - as long as the New York bank HMJr: is our agent in the operation, why it's pretty important that they be in the picture. Well, would you like to meet with our boys this afternoon? E: Yes, I would. Then let's see now - unless we could meet tomorrow HMJr: E: I tell you with them, I could get Sproul down tomorrow afternoon and we'd meet tomorrow afternoon with them and meet with you Thursday. How would that be? HMJr: Well, with this - Walter Stewart is just here 202 -3for today. Oh, yes. E: HMJr: And he happens to see the thing the way I do, 80 I'd like you to get the benefit of his thoughts. Yes. E: HMJr: I mean, if you just would get his ideas today. Yes. Well, I'd like very much to get them if he isn't going to be here tomorrow - I'd like E: very much to have his point of view. HMJr: E: Well, he's not going to be here tomorrow. He isn't? Well, then - who did you - I can come over there or they could come over here, either way. Who did you want me to meet with? HMJr: E: HMJr: Well, it would be Bell and Viner and Stewart and some of Haas' people, and Buffington. Uh huh. And they'd be glad to come to you - any way they '11 come over to you. E: Well, now, what I thought - let's see - gosh I wish we could get Sproul here. I might be able to get him to take a plane and come down HMJr: Yeah. if we met later this afternoon. Well, what E: time would they like to meet this afternoon? HMJr: Well, Stewart leaves - (talks aside) when do you leave? E: Stewart leaves at five. At five. Well, we ought to meet by three anyway. HMJr: Yes. E: Hadn't we? 203 -4HMJr: E: HMJr: E: Yes. Well, I'11 tell you what to do. I'11 come over there. There's possibly got; and if that's okay fewer of us than you've Fine. .....I'11office. come over there and we'll meet in Dan's HMJr: Right. E: And I'll get Sproul if I can, and if I can't why I don't know who I'11 bring over. But I'll come over and bring somebody. HMJr: E: HMJr: E: Righto. And three o'clock then. Right. Then we'll figure three o' clock on Thursday with you. HMJr: That's right. E: All right, then. Fine. HMJr: Thank you. E: Good-bye. HMJr: Thank you. 204 - 22 - H.M.JR: I am seeing you, Dan, at two thirty on the Chinese thing. They can't laugh off that chart that those boys prepared showing the influence of the Federal Reserve increase in excess on the money market, and I frankly, Dan, - I would like this week if possible this thing settled ofMR. BELL: We would like to have it settled too. H.M.JR: I agree in principle on the two and a half as an objective. I think every effort should be made. I don't want to commit myself publicly to it. I feel very, very strongly; I would like something done about the reserves on some kind of a formula basis and then on the other thing, these two issues; as soon as those two things are settled, I am willing to go ahead at once and use the Federal Reserve, but I don t want to move until those things are settled. And here is the point- MR. VINER: How much of this may we tell Eccles? H.M.JR: Everything. And supposing I am wrong. Well, how much damage is done if he has bought three or four hundred million dollars worth of stuff? MR. BELL: Well, at the end of the next twelve months he will have a good deal more than that. H.M.JR: But I mean, supposing I am wrong? Eccles will say, "Well, I did it because Morgenthau insisted. We told him he was wrong, but in order to humor him, we did it." And if, on the other hand we are right, it is a joint operation and I keep my mouth shut. I don't think that that is unreasonable, Jake, do you? MR. VINER: Well, I don't see any problem on that. If they increase their excess reserves, the only ill effect I can see that it might have is an inflationary effect at a time when we don want it, but that is easy to correct at this time. 205 - 23 to--' H.M.JR: Well, you can say, "Morgenthau wanted MR. VINER: But, they will not want a rigid formula. I think myself that they probably will feel that they have a duty not to accept a rigid formula handed to them from another agency, but they are obliged to use their judgment, and my guess is that I would want to read the of do thethat. law, and their counsel would tell them theytext can't H.M.JR: Well, you can have it verbally. MR. BELL: You mean they can't legally enter into a rigid arrangement. to doMR. it. VINER: No, I doubt whether they have the right H.M.JR: Their word is good enough for me. MR. VINER: The point is you can talk to them too rigidly. They may feel you are trying to put them in a vise where they won't be in a position to use their own judgment as the law requires them to. MR. HAAS: Well, wouldn't that be their judgment? MR. VINER: I wouldn't show them anything as definite as that. H.M.JR: Look, I am willing - all I am asking is to make an earnest start, and I am willing to have consultation at any time. I think we should consult anyway once a week, whether we have something to consult about or not. MR. BELL: We have been doing a lot of consulting right along. H.M.JR: Furthermore, you can tell them, "Morgenthau wanted to do it through regulations, and we think we have persuaded him not to do it through regulations, which is correct. I mean, I wanted to change it. Now, we have 206 - 24 - argued them of that and let them do it this way. Let them think that this is my first position, and this is my second position, which is true, Dan. My first position, Ihave regulations. fellows me point. Do you feel can go wanted this got to do down it to through this Now, you you in thing and represent me without stultifying yourself? MR. BELL: Oh, sure. I am all right. I don't feel badly about this. H.M.JR: You don't feel you would have to stultify yourself? MR. BELL: No, sir, as long as the objective is what we are after, and we get strong action toward the objective, and I think there has been some doubt in all of our minds as to whether this should be a public statement; and when we discussed it last, we thought maybe that you could make this statement before the Ways and Means when you discussed the debt limit. Well, we didn't have time, so we dropped that idea. Now, even if you are going to make it public, I think we would have to still decide what would be the occasion. You just can't come out with a public statement like this. You have to have some sort of an occasion on which to do it, and that is what we were looking for. Now, on the support of the market, you say that it is a joint undertaking. I wonder if we are going after this objective - should it be a joint undertaking in the market? Because we are using borrowed money, and their going ahead alone is much more effective. H.M.JR: Well, I am open to argument on that. I will take advice on that. MR. BELL: I think if we start out on that program, that they ought to do it alone. H.M.JR: But, let them ask for it, you see. MR. HAAS: There is one more supplement-- 207 - 25 H.M.JR: I am open to argument and advice on that. MR. HAAS: There is one more thing, Dan, which hasn't been mentioned which I think the Secretary should have brought to his attention. In order to carry on these open market operations to the extent to which they will have to bebill carried on, you have no objection to increasing the issue? H.M.JR: No, that is all right. MR. STEWART: How long an experimental period do you have in mind? H.M.JR: Three months? ing. MR. BELL: Until after, certainly, the next financH.M.JR: Wouldn't that be on-MR. STEWART: Yes. H.M.JR: Am I unreasonable, Walter? MR. STEWART: I don't think so. H.M.JR: Do you think I am, Jack? MR. VINER: No, not at all. I don't think this is an easy problem to answer. MR. BELL: That is right. MR. VINER: And I think we are - I don't really think that there is very great difference of opinion. There are a few little edges of difference here, and I don't think there are great differences of opinion in the Federal Reserve. MR. BELL: I think we are together on fundamentals. It is probably the mode of carrying it out. 208 - 26 I think you might have a difference in theMR. rateSTEWART: here. MR. VINER: I hadn't thought about that. H.M.JR: Again, I want to move in the direction of more - what did I want? I mean, I want the banks to have more reserves, isn't that what I want? MR. STEWART: Yes. With an objective, but not necessarily too restricted of ideas between the two. a formula and with the exchange MR. VINER: I think there is one more point on which there may be room for disagreement, and that is the question as to the very short-term rates, and as to whether or not they can go up without affecting the long term rates, whether they should be allowed to go up. H.M.JR: Well, that is again - but one thing I would like, and I just thought of it, so it isn't uppermost in my mind. Otherwise, I would have mentioned it earlier. Eccles has told me, sitting there, again and again, the responsibility of financing the war is mine. I recognize that. "But, we will do everything we can to help you," he said. So, in the final argument with him, remind him that he said that the final responsibility is mine. MR. BELL: Well, he has often said that. H.M.JR: But, he has said that, and he does recog- nize that. As I have said again and again, we sit around and ask Eccles' advice on a financing; and if the financing fails, I can't publicly say, "I took Mr. Eccles' advice or the Federal Reserve Board's advice, and that is why it is a failure," and he does recognize that the Secretary of the Treasury has got to finance this war, and certainly we haven't been trying to bulldoze him into anything; but in the final analysis, and I say I am mentioning it last because I just thought of it, it is my responsibility, and I do feel this thing very, very - and if I am wrong, that is that. 209 - 27 MR. BELL: You know, if this two and a half twentyyear security that we are suggesting here works, you won't have many more long-term issues as a public offering, because the funds won't accumulate except rather slowly, and the things that you offer hereafter will have to fit the bank's portfolio. In other words, it will be within the twelve years. We hope to simplify the financing, but we are not sure we will. 210 Alternative Bases for Agreement on Excess Reserves (1) Increase excess reserves by at least $300 millione a month until total excess reserves exceed $5 billions, excess in New York City $2 billions; these and levels to be reserves maintained thereafter. (2) The Federal Reserve Banks to purchase an amount of Government securities equal to 20 percent of the net increase in total open-market securities, this to continue until the levels of excess reserves specified in (1) have been attained; this level of excess reserves to be maintained thereafter. (3) Increase excess reserves by at least $300 millions in every month in which the long-term taxable average is more than 2.30 percent, or the 2-1/2's of 1967-72 yield more than 2.40 percent. (The long-term taxable average is now 2.36 percent, and the 2-1/2'B of 1967-72 now yield 2.47 percent.) March 10, 1942 211 March 10, 1942 MEMORANDUM FOR THE SECRETARY'S FILES Conference in Mr. Bell's Office March 10, 1942 2 P. M. Present: Mr. Bell Mr. White Dr. Viner Mr. B. Bernstein Mr. Southard Mr. Friedman Meeting was called to draft a letter in reply to letter received from Undersecretary Welles. Dr. Viner and Mr. White submitted draft letters and on the basis of these a letter was drawn up. It was agreed at the meeting that a history of the loan should be written. Letter received from Dr. Soong containing changes in the Agreement suggested by Dr. Kung was distributed. 212 MAR 10 1942 My dear Mr. Helles: I have your letter of March 9, 1942, in which you question the desirability of eliminating Article II from the draft of the Agreement presented to Dr. T. V. Soong. I would welcome any provisions in the financial arrangement with China which would protect the financial interests of the United States, as well as promote the most effective economic use of the funds by the Chinese. If there were not overbalancing political and military considerations, I would insist upon the retention of Article II of the original draft, and even inclusion of stronger provisions. But it has always been agreed at meetings between State and Treasury Departments that the purposes of the financial aid were predominantly political, diplomatic, and military. These considerations therefore have determined the formulation of the terms of the Agreement which was submitted to the Chinese. As you know, the first draft handed to the Chinese Government included Article II calling for consultation and exchange of information. However, in view of General- issimo Chiang Kai-shek's reactions to Article II, and of his request that it be omitted, communicated to us in the letter from Dr. T. V. Soong to t is Department, the Treasury was unwilling to risk jeopardizing the important political and military value of this financial aid by insisting upon the retention of Article II in the Agreement and therefore raised that question with the State Department. In light of the fact that the determination of the inclusion or the exclusion of Article II turns almost wholly on questions of political character, and in view Sent at 6 P m to Sing's house for then to State dight by Secut Service Agt Montgomery 3/10/42 213 -2 of our telephone conversation of today, I should like to have you advise - as to what our next step should be in replying to the Generalissimo. Since I feel that time is of the essence and that we should consummate this Agreement without delay, I would appreciate an answer from you on this matter as soon as possible. sincerely yours, Secretary of the Treasury. Honorable Summer Welles, Under Secretary of State. 214 C 0 P Minister for Foreign Affairs Y Republic of China March 10, 1942 CONFIDENTIAL Dear Mr.Sell Following my letter of March 3rd containing the observations of Generalissimo Chiang Kai-shek on the draft loan agreement, I have now received a message from Dr. H. H. Kung suggesting some further changes. These final suggestions however, as you will see, are principally changes in draftsmanships (a) Preamble (6) Instead of the words "will safeguard the unity", substitute the words "will promote the welfare". (b) Preamble (7) Include the phrase "other than those supplied under the Lend-Lease Act" after the words "Meet military needs". (c) Article I. It is desired to name the Minister of Finance as the channel of the Chinese Government to implement the terms of Article I. (d) Article II. The second sentence is retained in the form of the original draft. Instead the words "by the two contracting parties" are added to the first sentence of Article II, after the words "is deferred". I are enclosing several copies of the draft with the suggested changes. I hope you and your colleagues will be good enough to give your kind consideration to the above points. Yours sincerely, (agd) T. V. Soong T. V. Soong Mr. D. W. Bell Under Secretary of the Treasury Treasury Department Washington, D. C. SUGGESTED DRAFT CHANGES 215 WHRREAS the Governments of the United States of America and of the Republic of China are engaged together with other nations and peoples of like mind, in a cooperative undertaking against common enemies, to the end of laying the bases of a just and enduring world peace securing order under law to themselves and all nations and WHEREAS the United States and China are signatories to the Declaration of United Nations of January 1st 1942 which declares the t "each government pledges itself to employ its full resources, military or economic, against those members of the Tripartite Pact and its adherents with which such government is at war"; and WHEREAS the Congress of the United States, in unanimously passing Public Law No. 442 approved February 7, 1942 has declared that financial and economic aid to China will increase China's ability to oppose the forces of aggression and that the defense of China is of the greatest possible importance, and has authorized the Secretary of the Treasury of the United States with the approval of the President, to give financial aid to China and THEREAS such financial aid will enable China to strengthen greatly its war efforts against the common enemies by helping China to (1) Strengthen its currency, monetary, banking and economic system; (2) Finance and promote increased production, acquisition and distribution of necessary goods; (3) Retard the rise of prices, promote stability of economic relationships and otherwise check inflation; (4) Prevent hoarding of foods and other materials; (5) Improve means of transportation and communication; (6) Effect further social and economic measures which promote the welfare of the Chinese people; and (7) Meet military needs other than those supplied under the Lend-Lease Act, and take other appropriate measures in its war effort. In order to achieve these purposes, the undersigned being duly authorized by their respective Governments for that purpose, have agreed as follows: -- 216 ARTICLE I The Secretary of the Treasury of the United States agrees to establish forthwi th on the books of the United States Treasury & credit in the name of the Government of the Republic of China in the amount of 500,000,000 U.S. Dollars. The Secretary of the Treasury shall make transfers from this credit, in such amounts and it such times as the Government of the Republic of China shall request through the Minister of Finance to an account or accounts in the Federal Reserve Bank of New York in the name of the Government of the Republic of China or any agencies designated by the Vinister of Finance. Such transfers may be requested by and such accounts at the Federal Reserve Bank of New York may be drawn unon by the Government of the Republic of China either directly or through such persons or agencies BE the Linister of Finance hall authorize. ARTICLE II The final determination of the terms unon which this financial sid is given, including the benefits to be rendered the United States in return, is deferred by the two contracting parties until the progress of events after the war makes clearer the final terms and benefits which will be in the mutual interest of the United States and China and will promote the establishment of lasting world peace and security. In determining the final terms and benefits full cognisance shall be given to the Resirability of maintaining a healthy and stable economic and financial situation in hina in the post-war period as well as during the war and to the desirability of promoting mutually advantageous economic and financial relations between the United States and China and the betterment of world-wide economic and financial relations. ARTICLE III This agreement shall take effect as from this day's date. March 10, 1942 217 March 10, 1942 2:40 p.m. AID TO CHINA Present: Mr. Bell Mr. White Mr. Viner Mr. Bernstein H.M.JR: Is it different? Where does it begin to get different? MR. BELL: The whole letter is different. MR. WHITE: Right after "My dear Mr. Welles." (Laughter) H.M.JR: Where you say "I would insist," make it, "I would have insisted." MR. BERNSTEIN: I think that phraseology has been changed a little bit, Mr. Secretary, to meet this last suggestion. H.M.JR: Yes. "I would have," " don't you think? MR. BERNSTEIN: Where it says "continue to insist"? H.M.JR: No, I said, "If there were not overbalancing political and military considerations, I would insist " upon," and so forth. Make it, "I would have insisted. MR. WHITE: I don't think you should be the judge of that, Mr. Secretary. That is what you are asking them to judge, because you still can insist if they say so. 218 -2- H.M.JR: Oh, I see. Well, I say, "In all my participation and in my testimony before the House and the Senate." " MR. VINER: Well, that is changed. MR. WHITE: We have changed that, and I think it is better. MR. BELL: We have said, "in our conferences between the two Departments." H.M.JR: Well, I would certainly say something about my testimony before the House and Senate. MR. VINER: But here your - they are supposed to know what the purposes are, too. You are throwing it back on them. H.M.JR: All right. It is all right. MR. BELL: Well, we have changed it a little. H.M.JR: Well, when it is ready somebody-- MR. BELL: It will be ready in five minutes. H.M.JR: When it is ready if somebody can walk it in to me. 219 My dear Mr. Welles: I have your letter of March 9, 1942, in which you question the desirability of eliminating Article II from the draft of the Agreement presented to Dr. T. V. Soong. I would welcome any provisions in the financial arrangement with China which would protect the financial interests of the United States, as well as promote the most effective economic use of the funds by the Chinese. If there were not overbalancing political and military considerations, I would insist upon the retention of Article II of the original draft, and even inclusion of stronger provisions. But it has always been agreed at meetings between State and Treasury Departments that the purposes of the financial aid were predominantly political, diplomatic, and military. These considerations therefore have determined the formulation of the terms of the Agreement which was submitted to the Chinese. As you know, the first draft handed to the Chinese Government included Article II calling for consultation and exchange of information. However, in view of General- issimo Chiang Kai-shek's reactions to Article II, and of his request that it be omitted, communicated to us in the letter from Dr. T. V. Soong to is Department, the Treasury was unwilling to risk jeopardizing the important political and military value of this financial aid by insisting upon the retention of Article II in the Agreement and therefore raised that question with the State Department. In light of the fact that the determination of the inclusion or the exclusion of Article II turns almost wholly on questions of political character, and in view 220 -2 of our telephone conversation of today, I should like LO have you advise me as to what our next step should be in replying to the Generalissimo. Since I feel that time is of the essence and that IN we should consummate this Agreement without delay, I would appreciate an answer from you on this matter as soon as possible. Sincerely yours, (Signed) L. Morgesthaw its Secretary of the Treasury. Honorable Summer Welles, Under Secretary of State.