Full text of Diaries of Henry Morgenthau, Jr. : Volume 51 : Part 2

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192
January 8, 1937.

In re: Closing agreement in the case of
Osaka Shosen Kabuishiki Kaisha,
17 Battery Place,

New York, New York.

Approved by the Secretary January

1937.

The liability involved in this case was for corporation
income and profits taxes for the year 1920. The taxpayer is

a

Japanese corporation operating steamships between Japan and

the United States and various other countries. Its principal
office is in Osaka, Japan. Its main office in the United States

is in Tacoma, Washington. A brief history of the case showing
the taxes and income reported on the taxpayer's returns, the

assessments and payments of taxes and the income and tax

liability as finally determined is as follows:

A tentative return was filed March 15, 1920, which did
not disclose the amount of the taxpayer's income but estimated
the tax to be $200,000.00, of which amount $50,000.00 was then
paid, and an additional $50,000.00 was paid on June 15, 1921.
On September 14, 1921, the taxpeyer filed its completed return

for 1920 disclosing a net loss of $431,315.67. However, in

view of taxes previously paid, the Commissioner made an assessment of $100,000.00 against the corporation on October 29, 1921.

While the revenue agents, upon reaudit of the return (which disclosed a loss of $431,315.67) upon the basis of information
available to them in this country, approved the taxpayer's
adjustments disclosing a net loss in the amount claimed in the
return, the Bureau upon further audit computed a net income of
$121,725.44 and a tax of $34,243.40. These adjustments
resulted in an over-assessment of $65,756.60 but no refund is
contemplated inasmuch as the amount of the overpayment

($65,756.60) is to be applied to a deficiency in taxes due for

1918.

The original completed return which was approved by the
revenue agents in report dated November 15, 1924, reflected the
income of the corporation upon a basis which undertook to
comply with the provisions of the 1918 Revenue Act which, under

rulings of the Attorney General, require the income appropriate
to outgoing shipments to be included as income from the sources
within the United States. Ina amuch as the gross operating incame from the sources within the United States as so determined
$4,760,881.18 constituted 11.67458 per cent of the total
gross income from all sources ($40,779,866.51) the taxpayer
computed its expenses chargeable against such income as 11.67458

per cent of its gross operating expenses ($44,718,453.18) or
$5,220,691.57. To the operating income from the sources within

-2-

193

In re: Closing agreement in the case of
Osaka Shosen Kabuishiki Kaisha.

the United States there was added interest received of $28,494.72,
thus making the total income from the sources within the United
States $4,789,375.90. Since the expenses exceeded the income by
$431,315.67 the taxpayer claimed a net loss had been sustained
in that amount.

Inasmuch as it had been the practice of the Department

to audit cases of this kind in accordance with the provisions of

Treasury Decision 3387 dated August 23, 1922 (see attached copy
of memorandum from Acting Commissioner Nash to Acting Deputy

Commissioner Allen dated July 1, 1927, which was approved by the
then Secretary of the Treasury) the Bureau rejected the taxpayer's
computation as disclosed by the return and made the computation

of net income and tax liability in accordance with the said
Treasury Decision. It should be observed that the Treasury
Decision was also applied in the case of this taxpayer for the

years 1918 and 1919, which was settled by the Bureau with the
approval of the Secretary. Under the Bureau's computation
a net income of $121,725.44 was disclosed with a resulting tax
of $34,243.40 and an overassessment of $65,756.60. The overassessment was reviewed and approved by the Income Tax Unit

and the Review Division of the Office of the Assistant General
Counsel for the Bureau of Internal Revenue, and the closing
agreement has been reviewed and approved by the Commissioner of

Internal Revenue and the Chief Counsel, Bureau of Internal Revenue.

194

January 8, 1937.

In re: Final Closing Agreement in the case of Matamores Citizens'
Water Company, Matamoras, Pennsylvania, approved by the

Secretary January 1937.

The liability involved in this case is for corporation income and excess profits liability for the calendar year 1935. A schedule showing the net
income and tax liability reported on the original return, the net income, tax
liability, and the amount of the deficiency determined by the Bureau upon
final audit is as follows:
Reported on Original Return

Finally Determined

Calendar year
1935

Net

Loss

($3,451.97)

Tax

Liability
None

Net

Tax

Income

Liability

Deficiency

$14,558.64

$2,489.40

$2,489.40

104.69(previous-

(ly paid

$2,384.71

On December 30, 1935, the taxpayer sold all of its assets consisting of
accounts receivable and plant. On its original return for 1935 the taxpayer
reported a loss of $4213.32 from this transaction but on its amended return

reported no gain or loss. The revenue agent, after a field investigation of

the taxpayer's accounts, computed a gain on this transaction of $10,833.74,
due to the disallowance as a deduction from the sale price of the mortgage
bonds, the mortgage bonds having previously been included in the cost. The
revenue agent also increased the operating income shown on the amended return
from$761.35 to $3724.90 due to miscellaneous adjustments such as the disallowance of deductions for interest and taxes which, on the accrual basis,

were allocable to the years prior to 1935. The Agent's findings were re-

viewed and approved by the Review Division of the Income Tax Unit in Washington and by the Bureau Technical Staff in Washington.

The Bureau policy with respect to final closing agreements, under Section
606 of the Revenue Act of 1928, is covered in Mimeograph 4149 dated February
9, 1934. This mimeograph authorizes the acceptance of a closing agreement where,

after proper tax determination, a corporation is in process of dissolution and

195
-2-

desires a closing agreement in order to wind up its affairs. The present
taxpayer having consented to and paid the additional taxes determined by
the Bureau and being in process of dissolution by order of the Court of

Common Pleas of Pike County, Pennsylvania, the closing agreement is
approved.

196

January 11, 1931

Mr. Bell had the Secretary sign these papers today.

1S7

Dear Mr. President:
Section 10 of the Gold Reserve Act approved January

30, 1934, establishes the Stabilization Fund in the amount of

two billion dollars out of the increment resulting from the
reduction in the weight of the gold dollar, and provides that

an annual audit of such fund shall be made and a report there-

of submitted to the President. In accordance with this direction, there is transmitted herewith e detailed audit of the
fund covering the period June 30, 1935, to June 30, 1936.

The administrative supervision of this fund has been
under my immediate direction, and all transactions thereunder
have had either my approval, the Under Secretary's or the Fiscal Assistant Secretary's. of course you know the financial
transactions in this fund are not subject to review by any

other officer of the Government. In view of this fact, I have

appointed e committee of three Treasury officials who are not
connected in any way with the office having supervision of the
administrative accounts to make an independent audit. The re-

port is, of course, strictly confidential, and I suggest that

when you have looked it over it be returned to the Treasury for
safe keeping until the fund has served its purpose, at which
time the complete record may be made public.

Faithfully yours,

Secretary of the Treasury

The President,

The White House.

DWB:MLS 1/11/38

1S8

Date

The undersigned, one of the members of the Board of
Trustees of the American National Red Cross Endowment Fund,

does hereby authorise and approve the following resolution:
VOTED:

That the Washington Loan and Trust Company,

Treasurer of the Board of Trustees of the

Endowment Fund of the American National Red

Gross be instructed by the Secretary or

Assistant Secretary for the Board, to invest

a total of approximately $120,000.00 obtained
from the called American Telephone and Telegraph, 5% bonds of 1965, in the Federal Farm
Mortgage Corporation, 3 1/4% bonds of 1964-44.

Member, Board of Trustees,
Endowment Fund,

American National Red Cross.
e

199

January 11, 1936

Bullitt told the President Saturday (January 9) that

the French said to the Germans, "For God's sake, don't land
any more troops in the Morrocco, but we do not mind if you
land them in Spain. If

200

January 11, 1938

Congressman Kleberg brought in to me a copy of a
letter from Congressman West where he made charges against
Frank Dow. These charges were given to Mr. Gibbons in
July, 1935, and Congressmen Kleberg and West claimed that
they never had an answer.

I turned the matter over to Gibbons and told him to
give me an answer in 24 hours. I have also informed

McReynolds about it.

201

Monday ,January 11, 1937

Mr. Allan Sproul, First Vice President, and Mr. L. W. Knoke,
Vice President of the Federal Reserve Bank of New York, came to the

Treasury this morning at the request of Secretary Morgenthau to discuss a question which had recently arisen concerning a letter they
had dispatched to the Swiss National Bank covering gold transactions

in this market before their letter had received the approval of the
Treasury Department.

Secretary Morgenthau said that this was the first time that any
question had ever arisen between the Federal Reserve Bank of New York

and the Treasury Department in the past three years and that he wished

to have the question thoroughly discussed so that there would be no

possibility of any misunderstandings of this nature in the future.
Mr. Oliphant, Mr. Opper, and Mr. Lochhead of the Treasury Department

were requested to discuss the whole question and report back to the
Secretary at 2:30 P. M. The discussion centered around the memorandum

which Mr. Oliphant had submitted to the Secretary covering the dispatch
of the letter in question, and which letter Mr. Opper contended contained
statements which were inaccurate and without authority from the Treasury.

The discussion as to the accuracy of the statements in the letter were of
a legal nature and Mr. Knoke and Mr. Sproul contended that they had ample

authority to make the statements they did because of previous rulings on
these subjects already received from the Treasury Department. Mr. Opper,

202

-2

on the other hand, felt that it would have been better to have certain
statements slightly changed before they were passed on to the Swiss
Bank.

The real background of the whole transaction apparently was the
fact that the Federal Reserve Bank of New York had requested Treasury

approval, not only of the letter which they proposed to forward to the
Swiss Bank, but also of a cable inquiry which they had also received
from the same source. Action on these matters by the Treasury had been
delayed for over two weeks and Knoke, of the Federal Reserve Bank, grow-

ing impatient at the delay, and anxious to answer their correspondence,
had stated that he was not going to wait any longer but was forwarding

their reply without further consultation with the Treasury.
The letters addressed to Governor Harrison of the Federal Reserve
Bank of New York by Bachmann of the Swiss Bank, which the Federal Reserve

Bank had at first refused to forward to the Treasury as having no bearing
on the questions asked, were given to the Treasury and it was explained

by the Federal Reserve officials that if these letters had been asked for
immediately by the Treasury Department they would have been furnished with-

out question and their original refusal to forward them was due to the
fact that the matter had been delayed so long that they did not wish to
prolong the answer any further.

At 2:30 the group reported back to the Secretary and advised that
agreement had been reached as to procedure to be followed in the future

and that as a result of the meeting a greater degree of cooperation between
the Federal Reserve Bank and the Treasury would undoubtedly result.

203
-3-

The Secretary stated that he wished it clearly understood that
any letters received by the Federal Reserve Bank relating to their

duties as fiscal agent of the U. S. Treasury should at all times be
available to the Treasury, to which both Mr. Sproul and Mr. Knoke
agreed completely.

The Secretary also stated that he wished all inquiries received
from the Federal Reserve Bank in regard to Treasury policy which were
passed on to the Treasury by the Federal Reserve Bank to be answered

within twelve hours, and wherever it was impossible to give a complete

answer to such inquiries, the Bank making the inquiry was to be notified
that their questions were being studied and an answer would be dispatched
to them as promptly as possible.
Secretary Morgenthau charged Mr. Lochhead with the responsibility
of notifying him whenever an answer to such inquiries was delayed beyond

the period of twelve hours.

A. Lochhead

204

Mrs. William Brown Meloney
H.M.Jr:

Hello?

January 11, 1937
12:00 P. M.

Hello?

Mrs.

Meloney:

H.M.Jr:
M:

I'm all right, Mrs. Meloney.
I wanted to ask your help.

H.M.Jr:

My help?

M:

Yes.

H.M.Jr:
M:

Well, if I can give it to you without breaking the

law, I'll give it to you.

I knowthe
you
will, and I'm not going to ask you to
break
law.

H.M.Jr:

I'm disappointed.

M:

Lady - You're disappointed?

H.M.Jr:
M:

H.M.Jr:

Yes

I suppose everybody asks you to break it.
(Laughs)

I want you to - I know that what I'm asking is reasonable, and there's a way to do it. I just wanted to do

it - know how to do it. Lady Rhondda is on her way
over here on the Aquitania.
H.M.Jr:
M:

H.M.Jr:

Yes

She's had the flu and she's become worse on the ship.
Yes

The ship's a day late arriving.
H.M.Jr:

Yes

Her assistant editor over there is Miss Stanhope
who is here - has just had a wireless saying - asking
her to please try to clear luggage and to get to her
on the ship, and to get on the pier and ask for the

205

-2doctor
her.
H.M.Jr:
M:

and the doctor will take her immediately to

Yes

What
can I do to expedite that and simplify it for
her?

H.M.Jr:

Well now, how do you -

M:

She's a very great person.

H.M.Jr:

How do you spell her name?

M:

What's that?

H.M.Jr:

How do you spell her name?

M:

H.M.Jr:

R - h - o - n - d - d - a - Rhondda.
R - h - O - (phone clicks) Hello?

M:

Yes

H.M.Jr:

R - in - o - n - d - e?

it:

(Someone in room: No, as in Daniel)
D as in Daniel.

H.M.Jr:

Yes

M:

Or Denver.

H.M.Jr:

Yes

M:

And a second d - 2.

H.M.Jr:

Well

M:

H.M.Jr:

R-h-o-nAll right

M:

- double d - a.

H.M.Jr:

Now, when does she get in?

M:

What?

206

-3H.M.Jr:
M:

H.M.Jr:
M:

H.M.Jr:

When does she get in?

She's due to arrive on the Aquitania, and it's one

day late.
Oh.

So it won'
Well, who can my man contact with up there, so that
they know how to handle it?

M:

Who - whom - to whom shall I go?

H.M.Jr:

You don't have to go to anybody. I'll have them come

M:

Oh, you'll have somebody - aren't you a darling.

H.M.Jr:

Are you at the Tribune?

M:

What?

H.M.Jr:
M:

H.M.Jr:

to you.

Are you at the Tribune office?
No, I'm over in the Graybar Building. I have two
offices.
Well - well, give me your number and I'll have
somebody call you in 15 minutes.

42102, but if - there's a Tribune phone
on the desk too, which is just as easy.
H.M.Jr:

Well, which number should they call you on?

M:

Well, Pennsylvania 64000 - that's the easiest.

H.M.Jr:
M:

H.M.Jr:

M:

Pennsylvania 64000.

That's the Herald-Tribune.
Somebody will call you in the next 15 minutes. Now,
what she wants is when she gets off she wants to get

off the dock and be taken care of, is that it?
Yes. She's ill, she's been quite ill, and Miss Stanhope
and I were taking charge of getting her to a hospital
if she needs - if that's what she needs.

207

-4H.M.Jr:

Well, whatever you want - I mean on the dock we'll

take - take care of her and see that she's treated
well.
M:

H.M.Jr:

Well, you're a darling.
And somebody will call you in 15 minutes.

M:

That's
fine. I'll be in Washington myself on Wednesday
night and Thursday -

H.M.Jr:

Good.

M:

H.M.Jr:
M:

H.M.Jr:

- and I hope to see you.
I hope so too.
And your beautiful lady.

Thank you. They'11 call you within the next 15

minutes.

M:

Well, bless you.

H.M.Jr:

All right.
Goodbye.

208

January 11, 1937
12:06 P.M.

H.M.Jr:
Harry

Hello?

Durning:

Hello, Henry.

H.M.Jr:

How are you?

D:

Oh, all right, outside of a little bit of a cold.

H.M.Jr:

Are you home?

D:

No, I'm down at the office, down at the Customs House.

H.M.Jr:

O.K. Do you know Mrs. Meloney of the Herald-Tribune?

D:

will I call her?

H.M.Jr:

I said do you know her?

D:

Yes, I think I do. She's the one that writes those

H.M.Jr:

Well, she runs their magazine section. She's a friend

D:

Yes.

H.M.Jr:

Her number is Pennsylvania 64000.

D:

64000.

H.M.Jr:

And the Lady Rhondda - R - n - O - n - d - a

D:

Yes

H.M.Jr:

articles?

of Mrs. Morgenthau's.

... coming in on the Aquitania, and she's sick.

D:

Yes

H.M.Jr:

And they want her - when she gets on the dock they're
going to have her doctor meet her.

D:

Yes

H.M.Jr:

And they want to get her off quickly, see?

D:

All right, I'll get in touch with Mrs. Meloney right
away.

209
:

-2H.M.Jr:
D:

H.M.Jr:
D:

H.M.Jr:
D:

H.M.Jr:

I told her you'd call her in the next 15 minutes.

I'll call her right now.
She's very nice, and she happens to be a Democrat,
and though - although she works -

All right, Henry, I'll go right to work on it and -

do you know what boat she's coming in on?
The Aquitania.
The Aquitania.

But all she wants is that when she gets to the dock

that she get off as quickly as possible.

D:

All right. It's all taken care of.

H.M.Jr:

I thank you.

D:

All right, fine.

H.M.Jr:

Bye.

210

January 11, 1937

2:35 P.M.

Operator: Go ahead.
Senator

Vandenberg: Hello, Mr. Secretary.
H.M.Jr:

Hello, how are you?

V:

I'm all right, how are you?

H.M.Jr:

Never better.

V:

Optimistic and everything?
Ah - comfortable.

H.M.Jr:
V:

Oh, you always are.

H.M.Jr:

Comfortable. I wouldn't - that's the best I can
describe it.

V:

H.M.Jr:
V:

I want to ask you something about your legislation

to extend your two billion dollar plaything.
Yes, sir.
The existing law says that - ah - let me see, the
language is that the decision shall not be subject
to review by any other officer of the United States.
Do you construe that to mean that Congress isn't
entitled to ask you what you did with the money?

H.M.Jr:

Ah - now, let me - I wouldn't want to give a legal
opinion. I am under this impression: That I report
to the President of the United States, see?

V:

You do that.

H.M.Jr:

I do that.

V:

Yes.

H.M.Jr:

Now, I've given him an audit - well, one audit to
June 30, 1935, and tomorrow I'm giving him the audit
to June 30, 1936.

V:

Yes

211

-2H.M.Jr:

Then when I appear before the Committee on Appro-

priations I have told them what the position of the
Fund was and what our costs were and - off the record and the - both parties were satisfied, see?

V:

Yes

H.M.Jr:

Your Republican member on the Committee of Appropriations

V:

H.M.Jr:

V:

was entirely satisfied; asked me some questions and I
told them the exact situation. I've done that three
years running.

Ah-ha, but the - the actual operation of the Fund itself
is not open to inspection.
As I understand it - and - as I say, as I understand
it, I give this report, which is an independent audit,
to the President of the United States
Yes

H.M.Jr:
H.M.Jr:
V:

H.M.Jr:
V:

H.M.Jr:

and to nobody else.

V: Yes.

Now, I - I - I believe that's correct.
Well, that's the way I read the law, and But I'm not a lawyer, I'm just a....
Well, I congratulate you.
I accept it.

V:

Yes

H.M.Jr:

I'm just a - you know, small town country publisher.
I understand - farmer.

V:

H.M.Jr:
V:

Might I ask this, as long as I've been perfectly
frank: Do you think that's all right?
I think - no, I think that somewhere in connection
with that money

H.M.Jr:
V:

Yes

regardless of - even if the Lord himself were in

212

-3charge of it - there's no reflection on anybody's
integrity - I think that somewhere along the line,

that much money - a report ought to be made to
Congress on what's been done with it.
H.M.Jr:

I see.

V:

Don't you?

H.M.Jr:

Ah -

V:

Now, I'll concede that you can't run a Stabilization
Fund on the billboards and that you can't let folks
know what's going on while it's going on. But after
it's over, why shouldn't that fund be just as
meticulously reported to Congress as any other?

H.M.Jr:

Well, as a matter of fact, I do. I do give a report

to the Committees on Appropriation and up to now they've

been perfectly satisfied.
V:

Well, of course, they - you mean the House Committee?

H.M.Jr:

Yes, yes.

V:

Well, they're much easier satisfied than I am.

H.M.Jr:

An - well, maybe they have more confidence in the

V:

(Laughs) Well -

H.M.Jr:

Lord too.

(Laughs)

H.M.Jr:

- they might, but I'm rather cynical on everything.
I see. Well, thank God I'm not.

V:

An -

H.M.Jr:

Well now

V:

- you have less reason to be.
Also true.

V:

H.M.Jr:
V:

(Laughs) No

H.M.Jr:

Well now, look -

213

-4V:

H.M.Jr:

Huh?

- let's - let's - let's see here; what I'd like to do
is I - I'm - I think you'll con- - admit or - I mean

you want to see the Fund extended.
V:

H.M.Jr:

Well, suppose, for instance - suppose I wanted to
know whether or not you used the Fund at any time to

buy silver. Is - am I entitled to inquire?
Well, I tell you what you're entitled to, see? If -

I would say this: If the Senate and the House would
appoint, say, five members from the Senate and the
House - five from the Senate and five from the House,
three and two, you know -

V:

H.M.Jr:

Yes

- I'd be delighted to come up there, put both my reports
on the table, and answer any questions that you want to

ask.
V:

Well, of course, that wouldn't - that wouldn't be safe ah - because it would - it would leak. There isn't any
question

H.M.Jr:
V:

H.M.Jr:
V:

H.M.Jr:

No, no, but it would answer that - the question as to
my integrity.
Well, nobody's questioned your integrity.
No, but I meant

It's a question of judgment.
Well, any - well, any, any question - I mean if they if - if the Vice President would appoint five members,
three - or any way he wanted, and the House would do
the two, I'd be glad to come up there and answer any
questions anybody wanted to ask and give them the

documentary support.
V:

I don't believe you're entitled to do that under the
law, old man.

H.M.Jr:

Well

214

-5V:

That's my quarrel with the law.

H.M.Jr:

Ah-ha. Well - well, what have you got in mind?

V:

Only - only that finally, when the whole thing is
washed up, that a complete detailed report should
be filed with Congress precisely as - in connection
with every other dollar that

H.M.Jr:

No argument on that.

V:

Huh?

H.M.Jr:

No argument on that.

V:

H.M.Jr:
V:

H.M.Jr:

Well, then, I guess I can't fight with you.
I - I think you're right; I think it should be.
Well, that's fine. Much obliged to you. I - I always
have difficulty in getting into a quarrel with you.
Well, and - but you never have any difficulty reaching

me.
V:

H.M.Jr:

That's correct.
No, I have no argument; I think when the thing is
finished and wound up, there should be a final report

made to Congress.
V:

Thank you very much, old man.

H.M.Jr:

Thank you, sir.

V:

Goodbye.

215

I.E.G. Report - Undistributed
Profits Tax
January 12, 1937

Secretary Morgenthau's letter to the President referring to

ICC annual report recommending certain taxes which are inconsistent with principles on which President's message to

Congress of 3/3/36 was based.

January 26, 1937

Letter from Joseph B. Eastman with draft of letter to the
President. (Note: This correspondence although addressed
to Secretary Morgenthau reached the WhiteHouse in some mys-

terious manner. See ICC letter to Magill under date of 2/3.)
January 28, 1937

The President's memorandum "To Mac" advising him to tell

Carroll Miller that he (the President) has this proposed
letter and before the ICC sends it to him Miller had better
see the President.

February 3, 1937

Letter to Mr. Magill from Oliver E. Sweet, Director, Bureau
of Finance, ICC, sending Mr. Magill a copy of the correspondence listed above under date of January 26.)
February 9, 1937 (9:50 am)
HM,Jr's telephone call to Mr. Miller suggesting he send over
the messeneger who was supposed to have delivered the letter
of January 26th to the Treasury because HM,J Jr is positive it
never came to the Treasury.

February 9, 1937 12:45 p.m.)
HM,Jr's telephone call to Chairman Miller, reporting messenger
had been here and could not determine where he had delivered
it. HM,Jr suggested they both drop the discussion. on how the
letter got to the White House by mistake.

216

Page 2.

February 10, 1937

HM,Jr's telephone call to Chairman Miller that messenger
had been back to the Treasury today and now thinks he left

the letter with Mr. Bell of the Budget and Mr. Bell has

that letter in his files.

February 11, 1937

Magill's memo to the Secretary. He hasjust read the copy
of the letter of January 26th and has referred the draft

to Mr. Kent. Neither the letter addressed to the Secretary
of the Treasury nor draft of letter to the President was
ever before in his possession and so he could not have discussed it with Mr. Sweet. Magill thinks Treasury should
have opportunity of expressing its views if the letter has
now gone to the President.

February 18, 1937

Mr. Kent's memo to Oliphant. Cannot find that ICC spoke
to Mr. Lask, Head of Legislation and Regulations Division
of IR, but obviously bad judgment was shown by IR in not
insisting that the ICC suggestions be cleared formally
through the Secretary, although this does not absolve ICC
from impropriety of speaking on such important matter without
clearing it with the head of the Department.
February 19, 1937

M,Jr's letter to Mr. Eastman; pressure of business and

delay in receipt of his draft letter has prevented him
from responding more promptly to his suggestion of a conference. Would like to see him end of next week.
February 20, 1937

Mr. Eastman's letter to the Secretary apologizing for fact
letter went astray. He will hold himself in readingness
to discuss their annual report with Secretary.

217
THE SECRETARY OF THE TREASURY
WASHINGTON

21

file

January 12, 1937

+5
My dear Mr. President:

I deem it my duty to call to your attention certain portions of
the Annual Report to the Congress of the Interstate Commerce Commission,

which was released to the press on Tuesday, January 5, 1937, in which
that body recommends vital and far-reaching changes in the undistributed

earnings tax, imposed by the Revenue Act of 1936, as it affects railroad

corporations coming within the jurisdiction of the Commission. I am informed that such official action upon an important legislative matter
was taken without prior reference to the Emergency Council. Although it
relates to an indispensable revenue measure, the report was prepared and

published without the courtesy of consultation with the Treasury Department. Moreover, its recommendations relating to taxes are inconsistent
with the principles upon which your Message to the Congress under date
of March 3, 1936, was based.

It seems unnecessary to point out in detail how prejudicial it

will be to the integrity of the Administration's tax program and to the
proper discharge of the responsibilities of the Treasury Department with
respect to the revenues should the action taken by the Interstate Commerce Commission be allowed to establish a precedent for similar uncoordinated action by other branches or agencies of the Government.
In summary, the Interstate Commerce Commission in its Annual Report

for 1936 states that the undistributed profits tax runs counter to the

218

-2Administrative policy of encouraging the creation of sinking funds for

the retirement of obligations prior to maturity, and will hinder the
refinancing of additions and betterments out of earnings. Of the
eighteen reorganization plans filed with the Commission to date, seven-

teen contain provisions for sinking funds. The surtax on undistributed
profits will, according to the Report, unduly penalize the roads with
such plans. The Revenue Act of 1936 exempts from the surtax amounts

paid out or reserved for retiring funded debt or withheld from stockholders under written contracts of a certain kind executed prior to May
1, 1936. The exemptions do not apply in such cases if the contract was
entered into subsequent to April 30, 1936. The Report states that roads
which were financially sound and executed such contracts would gain exemption of such funds from the surtax, but those weaker roads reorgan-

ised subsequent to April 30, 1936, would be subject to the full amount
of the surtax on amounts placed into a sinking fund or withheld from
stockholders. It is emphasized by the Commission that railroads repre-

senting 70,041 miles, or approximately 27.7 per cent of the total operated mileage in the United States, are either in receivership or seeking reorganization.
Some of the important considerations which the Commission's Report
does not mention are:

(1) The Report does not point out that the Revenue Act of 1936

specifically provides that domestic corporations, which for any portion

219

-3of the taxable year are in bankruptcy under the laws of the United States

or are insolvent and in receivership in any court of the United States or
of any State, Territory, or the District of Columbia are exempt from the
surtax on undistributed profits. Railroads which are in such a predicament are, therefore, fully exempt from the surtax on undistributed profits.
(2) The Commission's Report did not point out that reserves for
improving property, retiring funded debt, emergencies, and insurance against
obsolescence may, within reasonable required limits, be accumulated under

the present law without payment of an excessively increased tax including

both normal and surtax. Moreover, the Report did not point out that the
substantial annual depreciation deductions taken by railroads, exempt from
normal as well as surtax, provide a means for recoupment of depreciable
assets.

(3) Further, the Commission's Report did not point out that it is
possible for railroads to obtain additional funds for debt retirement, expansion, or other purposes through the payment of dividends in securities

of the corporation, or through the offering of rights to the stockholders
to subscribe for additional securities. Through the issuance of such

rights, the railroad may obtain the reinvestment in its business of capital
equal to all or any desired proportion of the current earnings that have
been distributed in dividends and use proceeds to retire debt.
(4) The Report did not mention that under previous tax laws, the
Revenue Acts of 1934 and 1935, railroads filing consolidated returns had

220
-4- to pay a flat tax rate of 15-3/4 per cent, as contrasted with the present law admitting them to a graduated rate running from 8 per cent to
a maximum of 15 per cent.

Finally, the Commission stresses the penality to which certain

financially weaker roads may be subjected. It is inaccurate, of course,
to describe the surtax as a penalty. As your Message pointed out, two

major objectives of an undistributed profits tax are to equalize the
burden of taxation upon business profits as between corporations on the

one hand and individuals and partnerships on the other, and to seek equal-

ity of tax burden on all corporate income, whether distributed or withheld from the beneficial owners. The surtax is the method by which such

equalization is accomplished. To legislate in favor of any minority of
the roads would release the majority that are admittedly financially
sound from just payment of the undistributed profits tax. This would,
in effect, be a form of preferential treatment denied to other taxpayers,
corporate and individual, tantamount to a group subsidy. If the public
interest requires that financial aid be extended from the public treasury
to some of the weaker roads, it would seem wiser policy that it be done

directly and openly rather than under the guise of special tax favors.
I have the honor to request that the opportunity be afforded me
at your convenience to discuss the questions presented by the Commission's
Report with you and the Chairman of the Commission.

Faithfully yours,

The President,
The White House.

not sent to

221

general tites
JAN 12 1937

ity dear Mr. President:

I deen it ay duty to call to your attention certain portions of
the Annual Report to the Congress of the Interstate Commerce Commission,
which WILD released to the press on Tuesday, January 5, 1937, in which

that body recommends vital and for-reaching changes in the undistributed

earnings tax, imposed by the Revenue Act of 1936, as it effects railroad

corporations coming within the jurisdiction of the Commission. I am informed that such official action upon an important legislative matter
was taken without prior reference to the Emergency Council. Although it
relates to an indispensable revenue measure, the report was prepared and

published without the courtesy of consultation with the Tressury Department. Moreover, its recommendations relating to taxes are inconsistent
with the principles upon which your Message to the Congress under date
of March 3, 1936, was based.

It seems unnecessary to point out in detail how prejudicial it

will be to the integrity of the Administration's tax program and to the
proper discharge of the responsibilities of the Treasury Department with
respect to the revenues should the action taken by the Interstate Comaerce Commission be allowed to establish & precedent for similar uncoordinated action by other branches or agencies of the Government.
In summary, the Interstate Commerce Commission in its Annual Report

for 1936 states that the undistributed profits tax runs counter to the

222

-2Administrative policy of encouraging the creation of sinking funds for

the retirement of obligations prior to maturity, and will hinder the
refinancing of additions and betternents out of earnings. of the
eighteen reorganisation plans filed with the Commission to date, seven-

teen contain provisions for sinking funds. The surtax on undistributed
prefits will, according to the Report, unduly penalise the roads with
such plans. The Revenue Act of 1936 exempts from the surtex amounts

paid out or reserved for retiring funded debt or withheld from stockholders under written contracts of . certain kind executed prior to May
1, 1936. The exceptions do not apply in such eases if the contract was
entered into subsequent to April 30, 1936. The Report states that roads
which were finencially sound and executed such contracts would gain 6Xemption of such funds from the survey, but there wanker ronds reorgan-

ised subsequent to April 30, 1936, would be outject to the full amount
of the surtax on amounts placed into is sinking fund on withhold from
stockholders. It is emphosized by the Commission that reilroads representing 70,041 miles, or approximately 27.7 per cont of the total open-

ated mileage in the United States, are either in receivership or seeking reorganization.
Some of the important considerations which the Commission's Report
does not mention area

(1) The Report does not point out that the Revenue Act of 1936

specifically provides that domestic corporations, which for any portion

223

-3 of the taxable year are in bankruptcy under the laws of the United States

or are insolvent and in receivership in any court of the United States or
of any State, Territory, or the District of Columbia are exempt from the
surtax on undistributed profits. Railroads which are in such & predicasent are, therefore, fully exempt from the surtex on undistributed profits.
(2) The Commission's Report did not point out that reserves for
improving property, retiring funded debt, emergencies, and insurance against
obsolescence may, within reasonable required limits, be accumulated under
the present law without payment of an excessively increased tax including

both normal and surtax. Horeover, the Report did not point out that the
substantial annual depreciation deductions taken by railroads, exempt from
normal as well as surtax, provide a seans for recoupment of depreciable
assets.

(3) Further, the Commission's Report did not point out that it is
possible for railroads to obtain additional funds for debt retirement, 0%
pansion, or other purposes through the payment of dividends in securities

of the corporation, or through the offering of rights to the stockholders
to subscribe for additional securities. Through the issuance of such
rights, the railroad may obtain the reinvestment in its business of capital
equal to all or any desired proportion of the current earnings that have
been distributed in dividends and use proceeds to retire debt.
(4) The Report did not mention that under previous tax laws, the
Revenue Acts of 1934 and 1935, railroads filing consolidated returns had

224

-4to pay a flat tax rate of 15-3/4 per cent, as contrasted with the presant law admitting them to a graduated rate running from 8 per cent to
& seximum of 15 per cent.

Finally, the Commission stresses the penality to which certain

financially weaker roads may be subjected. It is inaccurate, of course,
to describe the surtex as a penalty. As your Message pointed out, two

anjor objectives of an undistributed profits tax are to equalize the
burden of taxation upon business profits as between corporations on the

one hand and individuals and partnerships on the other, and to seek equal-

ity of tax burden on all corporate income, whether distributed or withhold from the beneficial owners. The surtax is the method by which such

equalisation is accomplished. To legislate in favor of any minority of
the roads would release the majority that are admittedly financially
sound from just payment of the undistributed profits tax. This would,
in effect, be a form of preferential treatment denied to other taxpayers,
corporate and individual, tentamount to a group subsidy. If the public
interest requires that financial aid be extended from the public treasury
to some of the weaker roads, it would seem wiser policy that it be done
directly and openly rather them under the guise of special tax favors.
I have the honor to request that the opportunity be afforded me
at your convenience to discues the questions presented by the Commission's
Report with you and the Chairman of the Commission.

Faithfully yours,
(Signed) my genthan. Jr.
The President,
The White House.

HO 1/12/37

From Eccles,

H

225

January 12, 1937

PROSPECT FOR MONEY RATES

Money rates have been exceptionally low in recent years as a conse-

quence principally of two factors: (1) the large supply of funds seeking
profitable use, and (2) the small demand from acceptable borrowers. During
the past year the commercial demand for funds has increased and at the same

time funds at the disposal of banks have been reduced by Federal Reserve

action. Further changes in this direction may be expected this year, but
the supply of funds in the hands of banks and of investors is so large that
the increased demand can be met without a marked advance in rates.

Further reduction in excess reserves of member banks, if it occurs,
will probably result in some stiffening of short-term open-market money

rates, but even after this advance the rates will be below levels which
in earlier years would have been considered abnormally low. While the
demand for capital funds by corporations may be expected to increase,

Treasury offerings will be small and the supply of funds held by insti-

tutions and individuals awaiting investment is large. It is to be ex-

year
yields, will show little or no increase in the next six months.

pected, therefore, that long-term money rates, as reflected in bond

Short-term rates

In recent years the principal open-market short-term rates, as shown
in the following table and on the chart, have been below 1 percent, with

bankers' bills and Treasury bills generally at below 1 of 1 percent. The

226
- -2- -

lowest level reached by bankers' bills before 1930 was 2 percent in 1924,

The rate on call loans with stock exchange collateral, until recent years
the most important open-market rate, declined to 1/4 of one percent in
1935, but has been pegged since last May by New York City banks at one

percent. There were only six scattered years in the period from 1890 to
1930 when this rate averaged below 2 percent and it was never below one
percent. Commercial paper, which for more than half a century has been
a popular medium for investment of short funds by country banks, now sells

at a rate of 3/4 of one percent; the lowest quoted rate prior to 1930 was
3 1/8 percent in 1924.
MONEY RATES IN NEW YORK CITY
Jan.

Dec.
1936

Bills, 90-day unendorsed
Prime commercial paper, 4-6 months
Stock exchange call loans

Federal Reserve funds (interbank loans)

U. S. Government obligations - yields
Treasury bills
Treasury notes, 3-5 years
Treasury bonds, long-term
Customers' loans
Federal Reserve bank
Rediscount rate

Buying rate for 90-day endorsed bankers' bills

3/16
3/4

1934

1/2

1 1/4 - 1 1/2
1

1

1/8

1/8

0.21
1.04
2.27

0.67
3.11
3.50

2.43

3.58

1 1/2
1/2

2

1/2

227

-3-

It is clear that prevailing short-term open-market money rates
are abnormally low. These low rates have been largely the result
of the large volume of excess reserves held by banks. Absorption

of a large part of these reserves will eliminate this cause of low
rates and will probably result in a moderate rise of open-market
money rates.

But the rise should not be large. Even after an increase in
reserve requirements by the full amount permitted under the law

there will still be about $700,000,000 of excess reserves. It is
probable that the call money rate will not rise above one or 1 1/2
percent, because at such rates outside funds which are plentiful

will be attracted. The plentiful supply of outside funds will also
act as a check on the increase in commercial paper rates.
The rate on bankers' acceptances, which is now 3/16 of one

percent on 90-day bills, will not rise above the buying rate of the
Federal Reserve bank which is 1/2 of one percent. Any higher market

rate would make it profitable to sell bills to the Reserve banks.

228

-Treasury bills, which now provide the most important medium for
liquid investment in the money market, are largely held by New York

City banks. The rate on these bills might be expected to rise above
the prevailing extremely low level. A slight increase has already
occurred in recent weeks, reflecting in part increased offerings by
the Treasury and in part anticipation of higher money rates in case
of increased reserve requirements. It is doubtful, however, whether

this rate would rise above 3/4 of 1 percent, in view of the popularity

of the bills as a short-time investment, especially in view of the fact
that bankers' bills cannot go above 1/2 of 1 percent.
Some increase in yields on Treasury notes has occurred in recent

weeks, partly because of the likelihood that exchange rights on future
issues will be smaller in coming years than they have been in the past
and perhaps partly because of adjustments of reserve positions. The
shorter-term Treasury bonds, which have been selling on a yield basis
of about 1 percent, have also been affected somewhat, but in view of

the large amount of liquid funds that will still be held by banks outside of New York and by others than banks, no substantial rise in these

rates is anticipated.
Rates charged customers by banks should not be in the least affected
by increased reserve requirements. These rates have been slow in coming
down and may continue to show a downward tendency, notwithstanding increased borrowing by customers.

229
-5 - -

It appears, therefore, that only moderate advances in short-time
rates may be expected in the near future, even if reserve requirements
are further advanced. Beyond the next six months the course of rates

will depend chiefly on the rate of business activity and the need for
further restraining action by monetary authorities.
Long-term rates

Yields on high-grade long-term bonds have in recent years been at

the lowest levels of this century. Long-term United States Government
bonds have sold on a yield basis of less than 2 1/2 percent, notwithstaning the largest volume of Government debt on record. The lowest level
reached by these bonds in the 'twenties was 3 1/4 percent; pre-war rates

are not comparable because all bonds then bore the circulation privilege,
which was of considerable value. The highest grade corporate bonds are

selling on a 3 1/8 percent basis, compared with a low level for the
twenties of about 4 1/2 percent, and about 4 percent in the years around

the turn of the century.
Long-term rates have been affected recent years by the volume of
excess reserves held by banks. With the abundant supply of available
funds and the small demand for loans banks have bought large amounts of

securities, particularly Government obligations, and bank holdings of se-

curities are now the largest on record not only in total amount but also
in proportion of total bank assets. Member bank holdings of Treasury

bonds and other securities amount to about 40 percent of their total
loans and investments.

230

-6Reduction in excess reserves, together with increased demands for

bank loans, might be expected, therefore, to lead to some sale of securities by banks and this would tend to depress their price and increase the

yield. There are, however, other factors in the situation which might
offset this influence.
The first of these is the abundant supply of investment funds still
available outside of banks. Insurance companies, other institutional
investors, corporations, and individuals are holding large idle deposits
awaiting investment. Restoration of confidence and improved corporate
earnings resulting from continued business recovery should lead to active
investment of these funds. Many investors, who have been awaiting the

return of what they might consider as normal interest rates, are gradually

deciding that it is better to put funds to use at prevailing rates than
to hold them idle.

Another factor tending to prolong low bond yields is the likelihood
of a reduction in the supply of United States Government obligations available in the market, because of purchases by the Treasury for investment of

special funds, especially the social security funds, and eventually because
of debt retirement.

It is not likely that long-term rates will rise substantially until
short-term rates approximate or exceed long-term rates. So long as banks
can obtain larger yields on long-term obligations than on short-term paper

they will not be anxious to switch. Records of the past indicate that longterm rates may decline or show little change while short-term rates are in-

creasing. Since a substantial rise in short-term rates is not anticipated
in the next few months and a rise to the present level of long-term rates is

.

-7not to be expected until the credit situation requires vigorous action
by the Federal Reserve authorities, little increase in long-term rates
may be

expected within the next Sew year months.

231

OPEN MARKET MONEY RATES
PER CENT

PER CENT

7

7

6

6

5
5

Commercial
Paper
4

4

U.S. Treasury Bonds
( Long-term )
3

3

Bankers
Acceptances
2

Treasury Notes

2

(3. - 5 years )

1

1

Treasury Bills

o

1927

1928

1929

1930

1931

1032

o

1933

1934

1935

1936

37

233
MEETING OF THE COMMITTEE ON BANKING LEGISLATION

January 12, 1937

Present: Secretary Morgenthau
J. F. T. O'Connor

10:15 A.M.

Leo T. Crowley

Marriner Eccles
Daniel W. Bell
Jesse Jones

Cyril B. Upham
Crowley:

In the Banking Act of 1935 there were certain provisions made regarding liquidations, and the thought
that we have in our mind - we do not want to interfere
with anything that Mr. O'Connor wants, but we do not
want anything to interfere with us. And we recommended
last year that the enabling clause be put in there to
the effect that nothing in this Act would affect
Section 12 of the Federal Reserve Act of 1935, regarding the powers given to the Federal Deposit Insurance

Corporation. And this deals with liquidation of
closed banks and stockholders and things like that,
which in our judgment is perfectly all right providing
it is restricted to banks closed prior to January 1,
1934, because the banks that have closed since January
1, 1934, were insured banks. And the thing that we
want is that enabling clause in there that protects
the Federal Deposit Insurance.

Now, there is a disagreement between Mr. O'Connor

and ourselves as to whether it should go in. But
our argument is that if it is not necessary it does
no harm, and if it is necessary it is a good provision.
O'Connor:
Which one of the bills is that?
It deals with the allocation of expenses.
Crowley:
O'Connor:
Which one? Here's the first - Capital Requirements.
Now, is that
Crowley:
We see no objection that that be included in the
legislation.
O'Connor: Let's take it up here. It has nothing to do with
capital requirements for conversion?
Crowley:
No, we don't care about that.

234

-2O'Connor:

Just so we can get them straight on this memorandum.
Now, the next one is Liability Upon Shares of Common
Stock of National Banking Associations Resulting from
the Conversion of a State Bank into the National

System. Nothing to do with that.

Crowley: No.
O'Connor:

That's the second. Then Number Three - Dividends
on Common Stock. Nothing to do with that.

Eccles:

I had something to say on Number Three.

O'Connor:

Well, let's clear up this first.

Crowley:

What we care about is

Upham:

It's Number Five on Page 3.

Eccles:

Number Five.

O'Connor:

Well, I have another one.

Upham:

Next page. You are on Page 2, Dividends on Common

Eccles:

Regulatory Powers, next page, 3.

O'Connor:

Page 2, Number Three.

Upham:

No, Page 3, Number Five, is the one that Mr. Crowley

Jones:

H.M.Jr:

Stock.

is referring to.
He was going to read that finally. I'm sorry, I

thought we'd get clear on these and
What Mr. O'Connor wants to do is to go over every
one and you (Crowley) check the ones that you

O'Connor:

Now, on Page 3 is this Number Four - Fees for
Examination of Credit Unions.

Crowley:

We don't care for that.
Number Five is Regulatory Powers. Now, is that

O'Connor:

where you

235

-3Crowley:

We'd like to have in the Regulatory Powers that

O'Connor:

Crowley:

Oh. That applies to Five, Leo?
That's right, on Page 3.

O'Connor:

Now, on Page 4, Apportionment of Salaries.

Crowley:

Now, wait a minute. That's National Bank rules and

any regulatory power to be given is - it doesn't
affect the legislation of 1935. In other words,
what we want, gentlemen - we don't want any powers
now that are going to give any right or regulation
that cancels powers given to us in 1935. If this
is legislation that deals with things prior to
Federal Deposit Insurance, that is perfectly satisfactory, but not since.

things like that. Then we get over into Salaries.
The only thing that we say - we don't care what you
allocate in the way of salaries to your own offices
or to the receiverships that you had prior to 1934,
but we want no salaries allocated to our receiverships

since January 1, 1934, because that is an expense that

we carry.
Jones:

You want no - no additional salaries? You are supposed

Crowley:

Yes, we do carry it.
Then you don't want additional.

Jones:

Crowley:
Jones:

Crowley:

to carry it?

That's right.
In other words, you don't want the two offices allocating salaries against one receivership.
How he allocates his expense throughout his offices
is none of our business.

Now, that - the simplest thing to us is that if you
will just simply put in that clause in there that
nothing in this Act will affect Section 12 of the
Federal Reserve Act of 1935 as far as Federal Deposit
Insurance is concerned, that will take care of our end
of the thing.

236

-4O'Connor:

Well, of course, I think Mr. Crowley's statement is
probably too broad. What he says - that we carry
the expense of the receiverships - that, of course,
is not a fact. The expense of receivership is borne
by the receivership trust and Congress has imposed
upon the Comptroller's office certain duties and
responsibilities with reference to the receivership
trust, because the change is that the Comptroller
shall appoint the Federal Deposit Insurance Corporation, and then with elaborate detail the statute goes
on. Therefore, it is the trust that pays the expense.
Now, whatever expense is incurred by the Comptroller's
office has got to be paid by the trust, and the same
with the Federal Deposit; whatever expense is incurred

there, it's got to be paid from the trust.

Now, from Mr. Crowley's statement, the Comptroller
H.M.Jr:

O'Connor:

H.M.Jr:

'Connor:
H.M.Jr:

shall have no power for allocating or charging any
expense against a trust for which he is responsible.
Let me ask you a question just for my information,
see? This question of issuing - letting the
Comptroller have powers to issue rules and regulations, see? - is that something new?
That is new to this extent, Mr. Secretary: that we
found a number of cases where we don't want to have

a specific statute, but we feel we ought to have - to
be able to adopt a rule or a regulation. For instance,
let me give you a concrete illustration. At the present
time, a National Bank can keep the key of the owner
or renter of a deposit box in the bank, so that the
bank or the employees may have access to that. We
feel that in no case should 2 National Bank have any
control or even be able to receive the key of that
depositor. If he keeps it in there - we have had a
lot of claims filed, we have had a lot of trouble.
Well, let me ask you this. If you are given this
authority to issue these rules and regulations, they
in effect become a law, don't they?
Yes, sir.
Well, why - if Congress is going to give that authority, why shouldn't that authority be given to the
Secretary of the Treasury?

237

-5O'Connor:

Oh, I'd rather have it there.

H.M.Jr:

What?

O'Connor:

I'd
rather. That would be satisfactory to me, perfectly.

H.M.Jr:

I mean why shouldn't - I mean as far as I know there
is no other of the 17 agencies we have that can issue
rules and regulations. Take Customs, for instance.
The Commissioner of Customs can't issue a rule and

H.M.Jr:

regulation without submitting it to me for my approval.
That would be satisfactory to us, Mr. Secretary.
Isn't that right, Bell? I mean the Commissioner of

Bell:

Yes

H.M.Jr:

What?

Bell:

That's right.

H.M.Jr:

They go out as Treasury decisions, don't they, huh? Treasury rulings?

Bell:

Well yes, that's right. But they have regulations,

H.M.Jr:

H.M.Jr:

But the authority rests - with the Secretary of the Treasury.
Well, wouldn't that possibly ease this situation off

O'Connor:

Sure.

Crowley:

You mean the two (pointing to O'Connor and himself)?

H.M.Jr:

Yes

Crowley:

No, that don't do it.

H.M.Jr:

What?

O'Connor:

Bell:

Customs

too, which are issued, but you usually approve them.

a little bit?

238

-6Crowley:

For this reason. The Federal Reserve Act of 1935
gave to the Federal Deposit Insurance certain rights.
Now, we are not interested in what regulations or
powers the Comptroller has for his own office, but
we don't want any misunderstanding that anyone's got

a right to regulate that's going to affect the

Federal Deposit Insurance Corporation, other than unless you change the law.

Now, as far as receiverships are concerned, that's
been a controversial thing for a long time. We
haven't been entirely in accord. However, we

haven't had any difficulty in getting along. But
eventually that's got to be faced to determine the
definite powers. But in the meantime, until you get
in the place that you are going to face a lot of
these things, all we ask is that you don't permit
anything that is going to make this any more conflicting than it is now. When Congress gives the
right to do certain things, I don't think we ought

to regulate - to in some way misconstrue what Congress
intended.

Jones:

In administration?

Crowley:

In administration.

Eccles:

Now, this thing can be simplified so simply. If
there is nothing in this bill that conflicts - and
we aren't asking for anything at all - if there is
nothing in there that does conflict, then we want it.
Let me give the language that I think ought to go in.
Now, we are interested to the same extent, because
the Federal Reserve Board has the responsibility of

issuing regulations, and of course all National Banks
as certain state member banks, and in going over this
matter with our Board and staff this is what we have
to say about it:
are members of the Federal Reserve System, as well

"Specific matters which may be made subject to the
proposed regulatory power should be expressly set

forth in the law, and the regulatory authority should
apply to no others."

239

-7 Now, that is - now, if you don't do that, see, then
this is an alternative suggestion:
"If, however, a broad and a general regulatory
authority is to be given to the Comptroller of the
Currency, it should be qualified with the proviso

that the Comptroller shall have no power to make
rules and regulations covering matters which under
the law are within the jurisdiction of other establishments of the Government, and that any regulations
prescribed by the Comptroller pursuant to the proposed authority should not be in conflict or inconsistent with regulations issued by other Governmental
establishments."

Jones:

Now, that would cover F.D.I.C. and all. It's general.
You don't think that would be consistent with your
suggestion, Jefty?

Eccles:

I don't know. I haven't given it any thought.
Otherwise, with three agencies, at least, we know -

0' Connor:

Now, Marriner, that's on Five, isn't it?

Eccles:
O'Connor:

That's on Five, yes.
I want to make a note. And will you let me have
Well, Leo, does that meet
your suggestion there?
yours or not? Does that meet your

Crowley:

I think it does. I want to study that a little bit.

O'Connor:

Oh yes, of course.

H.M.Jr:

I think we'd want to study it.
Henry, I'd suggest that these three boys get together
by themselves and see if they can't reconcile their

O'Connor:

Jones:

maybe more - issuing regulations

views.

H.M.Jr:

On this particular point?

Jones:

Yes, and then come into the Committee with something

where they are in agreement, if that is possible.

240

8O' Connor:

I think we can shorten it a little more. Mr.
Crowley's point on whatever particular section here all of them, for that matter - if that is covered by
Marriner's point, that - and is agreeable to the
Treasury over here - well, that will clear up then
all the objections that the Federal Deposit Insurance Corporation has.

H.M.Jr:

Well, the only point, as I say - you have agreed
to that - if any agency which is in the Treasury
gets the authority from Congress to issue rules and
regulations - I mean I want it to go over my signature. I mean I don't want an agency in the Treasury
issuing rules and regulations that I don't have the
control over. I either want the agency in the
Treasury or out of it.

Jones:

You mean to have it approved by and with the consent

H.M.Jr:

No, just read the way all the other authority

Eccles:

That means that somebody else, an Assistant Secretary,

H.M.Jr:

No, just have it read that rules and regulations - I
don't know what the legal language is, but I mean -

of the Secretary.

could do it.

I mean there might be perfectly well some other
Secretary of the Treasury or some other Comptroller,
and the Comptroller issue regulations which would be

absolutely - I'd be opposed to it, but I'd have
nothing, I couldn't stop it.
So I simply say that as long as the Comptroller's
office is in the Treasury and we are going to get
authority to issue rules and regulations, I want that
authority to rest with the Secretary of the Treasury;
that's all. And so far as I know, I don't - we
haven't - there hasn't been any conflict so far.
I'm sure the Comptroller won't object to that.

O'Connor:

Oh no. In other words, Mr. Secretary, on Regulatory

Powers - now, if that is introduced, then the point
there is that whatever regulatory powers are given

should in usual language be issued under the Secre-

tary of the Treasury. Is that it?

H.M.Jr:

Yes.

241

-90' Connor:

Now we've got that out of the way.

H.M.Jr:

Then you are going to consider Eccles' suggestion
as to his language.

'Connor:

That's right.

H.M.Jr:

So that whatever the Treasury regulations are should

Eccles:
H.M.Jr:

not be in conflict with any other regulation of any
other financial agency of the Government. Isn't
that boiling it down, Eccles?
Yes. Within the jurisdiction or in conflict with
other establishments of the Government.

Well now, Mr. Crowley wants to study that, Mr.
O'Connor wants to study that, and why don't we
say that - that Mr. Jones' suggestion of you three
people studying it, and let us study it with
O'Connor and then if we are all in agreement we'll

just report back it is cleared.

O'Connor:

H.M.Jr:

Well now, Mr. Secretary, to carry out your thought
on this Regulatory Powers, just so - we don't want
to be inconsistent with the present law. Would you
ask Congress to amend all the other statutes?
Because there is a great amount of that. For
instance, I'll give you a very important one where
Congress imposes a duty upon the Comptroller of the
Currency to issue regulations with reference to the
securities purchased - that can be purchased by the
Bank for investment purposes. Now, there is a
great many of those statutes which have been there
for sixty years or more, and to be consistent, I
just wanted to point out the
Well, it's never been raised with me before, but
I have never felt since I've been here that the
relationship between the office of the Comptroller
of the Currency and the rest of the Treasury is
satisfactory, because it is different from anything
else in the Treasury.

And the way I feel is like it is in this Federal

Alcohol Control when the question came up as to
how to handle Federal Alcohol Control. I mean my

position with the President is that "Please either

put it in the Treasury or definitely take it out."

242

- 10 This man Alexander is there. He's there now.
Congress passed a law creating a Commission.

The President never filled the Commission, so

therefore it is still there. He has to submit all

his salaries and all his appointments just the way
the others do. He holds the hearings on his rules
and regulations and they send them up to me and

I've got to sign them, but I can't participate in
the hearings. I can't participate in the hearings.
Isn't that right, Dan?

Bell:

I don't know, now.

H.M.Jr:

Well, it is. I can't. I can send a man there. In

one case I did send a man - this is just in the
family - and they wouldn't even let him sit up at
the table. He had to go out of the room and find a
chair to find a place to sit. So I went to the
President. "Now please, if you want me responsible
for Federal Alcohol Control - either give it to us,

make it a part of the Bureau of Internal Revenue,
or kick it out and make it an independent Commission,

O'Connor:

because I can't be responsible. And I feel that if
it is going to raise - I am satisfied to leave it as
it is, but if we are going
That's what I wanted to call your attention to, Mr.

H.M.Jr:

If we are going to change it, I'd like to make it

Jones:

H.M.Jr:

O'Connor:

H.M.Jr:

Secretary.

either independent or an integral part of the Treasury.
That's the Comptroller's office.

That's the Comptroller's office. I either want to be
really responsible or not. I mean you, for instance -

you can't appoint an Examiner.
Not without your approval.

unless I sign it.

O'Connor:

Or an Assistant Examiner; I can't appoint an Assistant

H.M.Jr:

But, on the other hand, you can do a lot of things over

Examiner.

243

- 11 which I have no control.
O'Connor:

That's right. Like the one I mentioned and a

H.M.Jr:

Now, up to now there's been no conflicts.

O'Connor:

Never.

H.M.Jr:

But the day might come when there would be, and the

great many others.

O'Connor:

responsibility on both you and I is too heavy to
have this uncertain authority.
That's right.

H.M.Jr:

And if we are going to go into it at all, I'd rather

O'Connor:

H.M.Jr:

clean it up one way or the other.
That's why I wanted to call your attention to the
fact that
I mean I've had this out with the President and on Federal Alcohol Control. We have had it out,
and my position there has been absolutely either

Eccles:

put it in Internal Revenue or kick it out.
Your position on this is to clarify your relation

H.M.Jr:

If we are going to go into it, I'd like to clear

Bell:

tion three years ago?"
It seems to me this question

H.M.Jr:

I mean.I didn't - this isn't - I want to say to

also on this point, but on the whole issue

up our whole relationship - our whole relationship,
because some day there might be a very important
thing come up and the President might perfectly well
send for me and say, "Why didn't you do so and so?"
And I'd have to answer that I didn't have the authority,
and he'll say, "Why didn't you bring that to my atten-

0' Connor I didn't know this was coming up, but you've
asked me if you do the one regulation -

O'Connor:

Yes

H.M.Jr:

- how about all the others. If you want the answer to

244

- 12 -

the question, if we do this we ought to do it all.
O'Connor:

That's why I wanted you to know that there were a

H.M.Jr:

Dan?

Bell:

It seems to me this prohibition here against issuing

great many others.

regulations in conflict, as far as the Treasury is
concerned should work both ways. No one else should
issue regulations in conflict with those of the
Treasury. It is as strong one way as it is the other.

Eccles:

Well, except here you are asking for

H.M.Jr:

No, I think that's a very good point.
Except you are asking for a change in broad regulatory

Eccles:

powers.

Bell:

Well, there should be coordination.

Eccles:

Well, so far as I know, we don't have power to

H.M.Jr:

No, I think he's right, that both the Federal Reserve
and the Federal Deposit Insurance can't issue regulations
which are in conflict with the Comptroller's office.
That is a good point.
The regulations we can issue are specific. Now, what
you are getting to here is getting away from specific
regulatory powers into the field that it becomes
general. Now, I would say that if we were asking,

Eccles:

or the Federal Deposit Insurance Corporation or any
other agency were asking, for general powers with

Crowley:

reference to issuing regulations, then it should also
have that specific language. I don't object to having
that language now, even though there is no real
necessity for it.
Well, the only right of regulation we have, Marriner,
is the right of regulation where it is definitely
specified in the law. That's the regulation that
we have; you have too.

Eccles:
Crowley:

That's right.
Now, I have no objection in the world that - we

245

- 13 -

certainly wouldn't have any right to issue a
regulation that would conflict with something
that you people have already issued regulations
on. But we ought to try to be uniform; that's
my point.

H.M.Jr:

May I say at this point - I should have said this
thing at first, and that is - and I did interrupt
for one minute - and that is this: I think when
we get through with this that we want to decide
do we want any banking legislation this year.
Now, that - that, I think - I just want to raise
that whole question before we leave here today,
and - do we want any banking legislation?

O'Connor:

I think that is very important.

H.M.Jr:

What?

OtConnor:

H.M.Jr:

I think that is very important.
I wanted to say that at the beginning, but I didn't.
But I want to say now that I don't - I'd like to
reserve the right when we get through this morning
to raise that point. Do we want any banking legislation?

Jones:

Now, with all the interruptions, will you please go on?
That's very pertinent.

H.M.Jr:

What?

Jones:

That's very pertinent.

H.M.Jr:

I want to have the right to raise that question at

O'Connor:

the conclusion of this meeting.

Well now, the only other one, Mr. Secretary, that
I have is the banking code - or is the building and
loan code. Now, the Governor has - he's got some
other suggestions.

Eccles:

Well, just one. There is this regulatory matter
and the other. No need of taking time up there
because I think our fellows canget together with

reference to Provision Three, Dividends on Common

Stock.

246

- 14 O'Connor: Oh yes.

That's rather technical. It gets down to a question
of definition of surplus funds and undivided profits.
There is also the question of the bad debt definition.
''Connor: Yes.
Eccles:
Now, of course, we are interested in it, as I say,

Eccles:

because these banks are all members and we have a

joint - we use your examinations and we have a joint

relationship in connection with it. And I would suggest in connection with Three, then O'Connor: Three, yes.
Eccles:

- Dividends and Common Stock, that we might get

O!Connor:

Now, Mr. Secretary, on the Dividends, there is the
only point that my office is concerned about, and
it concerns a great many of the National Banks. The
statute provides that the National Banks may declare
a semi-annual dividend. A great many of the banks National Banks - have been declaring quarterly dividends. Frankly, we can't see any reason why a bank
shouldn't declare a dividend whenever they want to

together and see if we can't agree on some modification there. The only thing we had - this regulatory
one was the only one that we had any strong objections
to. On the other one we have suggestions that we
think are desirable.

declare it. But they keep writing us and we can't
say, "Go ahead and declare it," because of the law.
Now, I have letters in there now from a couple of

National Banks asking me what is going to happen.
Well, I can't say, "Go ahead and declare them anyway,"
when the law says they may declare them semi-annually.

Now, that is the only one point my office is concerned
about.

Jones:

That's been - how long did you tell me that's been
in vogue?

O'Connor:
Jones:

About fifty years.
About fifty years. Now, they've been doing it...

247

- 15 O'Connor:

Many of them, yes, because they are afraid of the

Jones:

But many banks declare quarterly dividends, and

O'Connor:

You're the worst transgressor I got.
The point we've got has nothing to do with that.
When everybody else is through, I've
gotthat's
one the
And
suggestion and that's all
point you raise, that the President has some very
important legislation that he wants to get through
and I think that the banking legislation ought to

Eccles:
Jones:

Comptroller.

many - I'm guilty in that myself, and you called
my attention to that. We pay them in December
for the whole year.

wait until that's finished.

Eccles:

You mean before it is introduced?

Jones:

Yes, before it is introduced. I think we ought to

H.M.Jr:

Well, may I say right along that line what we did.
After all there was this emergency legislation. I
think it's the first time, certainly since I've been
in Washington, the three agencies walked up on the
Hill together in complete accord. We saw all the

work together in the meantime, get an agreement, if
we can, on these things.

Democratic leaders. Conference lasted two hours.
We got everything which we were entitled to and left
them with a smile on their face.

Jones:

Yes, everybody happy.

H.M.Jr:

Now, it was unique in my experience. It's never happened, I mean, before that we were able to go up
there, the three agencies.

Eccles:
Jones:

Two hours getting a unanimous agreement. That was
Not a discord.

H.M.Jr:

And we walked off and left a complete good taste in

their mouths - "Well, at least here's three agencies" and it's questionable whether the President will have to

248

- 16 -

lift his little finger, whether they'11 call up

anybody at the White House to bother. Now, I
think that before we went the President knew
exactly what we were going up for and it had his
approval.

Now, I think before we do this thing we ought to
be in complete agreement if possible, then submit

a boiled-down memorandum to him - maybe he'll see

us - and maybe say, "Now, Mr. President, this is
what we've agreed on. Here's what we can't agree
on." What are issues, see?
Jones:

H.M.Jr:

Jones:

And not do that, Henry, until these things - not
just these emergency things, but these other bigger
No, I want to be fair to these gentlemen. I think
as soon as we have an agreement, then I'd submit it
to him. Then it's up to him to say.
I mean I don't want to say - using Crowley as an
example, because he wasn't in on this - let's say
that Crowley needs something. I mean I think it's
up to the President to decide. "Now, Crowley, you
wait until after the first of February until we
get these other things and then we'll get to that.'
Or he may say, "No, go ahead. It's all right. Introduce your bill."
Well, I understand at our last meeting that everybody
agreed that we could get along without legislation,

but some was desirable. That's my point. If the

H.M.Jr:

Well, I know what you've got in your mind, and from

Jones:

He must say.

H.M.Jr:

He must say, yes; that's all. We are not differing
except that I don't feel that, as an impartial chairman,
if we come to an agreement - as soon as we come to an
agreement, I should submit it to the President. That's

my own Treasury interest I'd rather wait. But I am
chairman of a meeting and as such I should be impartial and I simply say that if we can agree on what
we want, then I think we should let the President
say, "Boys, I'd like you to wait," or "Go ahead."

what I'm supposed to do.

249

- 17 Jones:

I think that's entirely right. I reiterate what

I think from this standpoint: the things that he
is primarily interested in and that he thinks are
important should be well along.

H.M.Jr:

As Secretary of the Treasury, I agree with you, but

as chairman as soon as we've come to an agreement I

Jones:

Crowley:

feel I've got to give it to him and let him decide.
Well, I have agreed to that right along.
Well, isn't the first thing, Mr. Secretary, that we've
got to agree on - and that is what - Mr. O'Connor
has his legislation and Marriner has his - as to
whether we are going to have any legislation at all,
or not, whether it is important that we have it.
Now then, if it is important that we have it, then

these bills that have been analyzed for both those
organizations - and here we set Federal Deposit in
the third position, right in the center. Now, if
Federal Reserve is going to ask for things that are
going to strengthen its position, and the Comptroller
is going to s sk for certain things that are going to
strengthen his position with reference to Federal
Deposit - because we are in this position: under the
law we are acting under now, the Federal Reserve and
the Comptroller admit banks to their system and we
automatically insure them; but all we do is go around
with a pack on our back and pay out the losses.

Now, if we are all going to be content to sit here and I am perfectly willing, if there is some particular
technical legislation that does not in any way affect
Federal Deposit Insurance - I am perfectly willing to
go along. But this last page here in our mind definitely affects Federal Deposit Insurance and we
just can't sit back and
O'Connor:

What page?

Crowley:

This Shareholders' Agent, on page 5.

H.M.Jr:

Will you discuss that while I leave you for a minute?
(Secretary leaves room)

Crowley:

I don't know what you've got, Mr. Chairman. Do you
have to have your legislation?

250

- 18 Eccles:

Well, we don't just have to have it, but we want it.
We feel that this first one is very necessary and
desirable - Separation of offices of Chairman and
Federal Reserve Agent. We put these Chairmen on an
honorary basis, but they are tied to the office of
Agent by certain statutory provisions. Now, as long
as a man is Chairman and Agent, then he feels that
he's got statutory obligations that he shouldn't
have as an Agent.

Now, for instance, in New York, Mr. Young, who is
Vice Chairman up there - we'd like - we've talked
to some - just between us - about having him take
the Chairmanship. Well, he won't take the Chairman-

ship as long as the Agency is tied to it, because of
the statutory requirement of the Agent, you see.
And we've got several others like that and we've
agreed that

Jones:

Say that again. He won't take the Chairmanship as
long as the Agency is -

Eccles:

The Federal Reserve Agent.

Jones:

- the Chairman and Agent is one.

Eccles:

Now the Assistant Agent holds the collateral. It is
E clerical job. I mean the Agent is a clerical job
and the Assistant always does it.

Jones:

That's words.

Eccles:
Jones:

That's right, but the statutory requirements
You're just talking about words. He's talking about

Eccles:

Well, it's in the law.

Jones:

It's in the law, but it doesn't change anything.

Eccles:

Jones:

words.

Now, what we'd do is the Assistant Agent would be

Agent and the Chairman would be only Chairman and
not Agent.

No big objection to that.

251

- 19 Eccles:

I talked to Senator Glass about it last year before

we had - we had no legislation.
Jones:

Eccles:
O'Connor:
Upham:

is that all you're asking for, that one?
No.
If we are going to put that other in, we've
got another one.
We'd better wait until the Secretary gets back.
I think Mr. Crowley expected to discuss this last
one on page 5.

Crowley:

Well, on the Shareholders' Agent, it is just a
case of where if we will all agree to put that one
clause in there, that will take care of any difficulty
we have. We don't want to interfere with his operation
prior to January 1, 1934; I mean we're not interested
in that.

Jones:

While we are waiting on the gentlemen, can I see you
a

minute (to Bell)? (Bell and Jones go aside and

talk)
Eccles:

Did you read our legislation, Jefty?

O'Connor:

I'm sorry to say I didn't.

Eccles:

Did you, Leo?

Crowley:

Yes, sir, I

O'Connor:

I'm sorry.

Crowley:

The one where you are going to reduce the capital
requirements of State banks and also the provision

for those in competition with the State banks

Eccles:

You mean branch banking?

Crowley:

Yes, branch banking and capital - branch banking,

mostly. That's going a long ways back. We're going
back to meet the States in place of the States going
to

Eccles:

How you going to meet - bring the States up to meet
you?

252

- 20 Crowley:

We aren't going to improve our position by going
back and meeting them. Now, the Comptroller has
his minimum requirements, and while he doesn't get

all the banks in the world, he gets - any bank with
reasonable size capital, he's going to get it.
(Secretary returns)

H.M.Jr:
Crowley:
O'Connor:

Got it all fixed?
All fixed.
Now, Mr. Secretary, the question which you raised that probably ought to be decided first, because

then we can dispose of a lot more. Now, I'll
state the position, as I see it, from our office.
I am very much interested in the building and loan
code for the District, and that doesn't concern any
of the other agencies. And I just want to say that
I - at least, I think the Treasury's responsibility
is to submit a bill anyway to Congress, because we
recommended it with your approval a year ago, and
then in July this big smash-up came of a building
and loan. Now, our responsibility is done when we
dump it over there. Now, that is about the building
and loan.

Now, secondly
H.M.Jr:
O'Connor:

Now, you mean - give the ones that you think are
really important.
That's the most important.

O'Connor:

What item is that on your list?
That's the last one.

Upham:

No, no, it's on page 4.

O'Connor:

Number Seven on my list.

H.M.Jr:

I mean that you consider really important.

O'Connor:

I want to get E bill to put the responsibility in

H.M.Jr:

253

- 21 Congress and the Treasury steps out of it. Now,
the other agencies have no interest at all in that
bill except the Treasury, because Congress has put
the supervision of building and loan associations
under the Comptroller.

Jones:

O'Connor:

Jefty, just a minute. This is Credit Unions here.
Yes, that's what I'm coming to. But this is 7 on
page 4.

Jones:

Go ahead, all right, I'm sorry.

O'Connor:

Now, a very small bill, but an irritating little
situation is Credit Unions in the District. That

doesn't concern any other agency except the Treasury
and the law provides that the Comptroller must examine

the credit unions in the District and make a charge
of
five dollars.

Now the credit unions have grown now so their assets

are upwards of a million dollars or more, and the
office cannot examine at five dollars, and the only
thing we have asked is to be paid the actual cost
of examination or take it away. But we have no funds
here and I am using National Banks' funds to do something I am not sure that we should do. But what can
you do? The duty is there.
Now, Carter - Senator Glass last year was very much

in favor of that. And the Public Counsel for the
District, or whatever he is called, came up to argue
with him and Glass said to him - he said, "Well, who
do you think should pay it?" He said, "You've got
the unions. All he is asking is to be paid the cost
of examination. "Now," he said, "I don't want to
listen to a man that comes up here and makes an
argument like that."
Now, that one
H.M.Jr:

That also affects the District?

O'Connor:

Yes, sir.

Jones:

How big a problem is that?

O'Connor:

Well, it's quite a problem. They 've got now about
how many?

254

- 22 Bell:
'Connor:

I don't know, but I assume most every department
has their credit union. The Treasury has one.
And you've got to examine them.
We've got to.

H.M.Jr:

Nobody guarantees them?

O'Connor:

No, no.

Bell:

It's an employees' organization.

H.M.Jr:

Well, we've got certain responsibilities and certain

Bell:

It's in Farm Credit.

Upham:

That's right.

Eccles:

Why don't they examine them?

Bell:

Well, they do, I think, but Mr. O'Connor is in charge
of all banking operations here.

Jones:

Are you directed or committed or authorized?

O'Connor:

I am directed to do it. No choice about it. No, if
I had, I wouldn't even bother with it. I'd just step
out of the picture.

Jones:

I see.

O'Connor:

Now, that's that. Now, the only other one, Mr.
Secretary, that I'd be interested in having is just
the amendment on the payment of dividends, leaving
the statute exactly as it is with the exception of
giving the right to the banks to pay dividends as
the directors

H.M.Jr:

H.M.Jr:

Well, they are doing that now.
Lot of them won't do it.
I mean lot of them are doing it.

O'Connor:

Oh yes.

O'Connor:

supervision.

255

- 23 -

O'Connor:

Well, that isn't something that you
That's right.

H.M.Jr:

What?

O'Connor:

O'Connor:

That's right.
But they are - it's being done.
That's right. By a great many of them.
So I wouldn't say....
No, can't say that is necessary.

H.M.Jr:

All right.

O'Connor:

Then that's my - if I can then get those two bills,

H.M.Jr:

Now, those are the

O'Connor:

That's right.

H.M.Jr:

Those are the two things you feel you have - you are

H.M.Jr:

H.M.Jr:
O'Connor:

H.M.Jr:

building and loan and Credit Unions

charged with responsibility and can't meet it.

'Connor:

That's right. That's the only thing, and if the
other agencies - if that's all right with them,
then I'm out of the picture.

Eccles:

Except those two.

H.M.Jr:

H.M.Jr:

I think that's more than fair.
That's what I'll do.
I think that's more than fair.

Jones:

(To Eccles) Are you g enerous?

Eccles:

It isn't a question of being generous.

H.M.Jr:

What?

Eccles:

It isn't a question of being generous.

O'Connor:

256

- 24 H.M.Jr:

Do you mind my interrupting? Because I know yours
is so much bigger. Do you mind just a second?

Eccles:

Go ahead.

H.M.Jr:

Is there anything that you feel that you've got to

Crowley:

No, we'll go along.
You'll go along

H.M.Jr:

have (to Crowley)?

Crowley:

With nothing, providing that is the general policy.
You are willing to ask for nothing if O'Connor - and
still see O'Connor ask for those two things?
That's right, sure.

H.M.Jr:

What?

Crowley:

Sure, sure.

H.M.Jr:

H.M.Jr:

So your position will be that
That's not anything that we object to.
There is nothing that you have that is as

Crowley:

That's right, that's right, we'll go along with

H.M.Jr:

Then, now, the whole thing rests with Marriner.
That's the way I wanted it.

Eccles:

H.M.Jr:

Well, there is some of this
(Laughing) I thought you'd look at me.
He didn't hear that.
I said that's the way I wanted it.

Upham:

With a managed currency.

Crowley:

Been laying for you, Marriner.

Eccles:

That's all right. That won't be the first time.

Crowley:

H.M.Jr:

Crowley:

H.M.Jr:
Jones:

those two and not ask for anything.

257

- 25 Bell:

He's still a diplomat.

Jones:

The average fellow, when you tell him the story, you
think he is listening to you, but he is waiting to
get through so he can tell one.

H.M.Jr:
Eccles:

Now, Marriner, the floor is yours.
This Number One here - Separation of offices of
Chairman and Federal Reserve Agent - that is very
necessary. That - we have put all these Chairmen

H.M.Jr:

You haven't got any memorandum for us, have you?

Upham:

Eccles:

He had it revised and I don't have copies of the
revision, so
We haven't drafted the legislation. We have just

H.M.Jr:

stated what it is.
But I mean this is the last one?
This is the last one. The Board's been over this one.
I assume there's no objection to this first one.
That doesn't conflict with anybody else, does it?
But is there something that is

Jones:

Is it necessary?

Eccles:

It is.

H.M.Jr:

Why?

Eccles:

Before we had a highly-paid Chairman; we had a
Governor. They changed the damn set-up last year,

H.M.Jr:
Eccles:
Jones:

Bell:

didn't complete the job, and in the rush of things
this is just one thing that was dropped out.
Well, you've been operating on it, though.

Eccles:

We haven't got a Chairman in several places.

Jones:

Well, if you had a paid Chairman he could be the Agent.

Eccles:

Yes, but we don't want a paid Chairman. We've been

258

- 26 fighting to - we've got them on an honorary basis,
Now, you
and the minute WE get 12 paid Chairmen
see, the law - the President now in the law is the

Chief Executive Officer - made these Governors
Presidents and Chief Executive Officer, and we have

transferred most of the functions of the Chairman's
office to the banks, so as to get away from the
cleavage - terrible cleavage - Chairmen here and
Governors here. We had a constant cleavage.

Jones:

I don't see any objection to that if you're going to

Crowley:

Well, I think this, Jesse, that that isn't anything

Eccles:

Number Seven is Dividends of Federal Reserve Banks.

Crowley:

Eccles:

have banking legislation.

particularly, but you've got to go on down through
there, because this won't in itself cause a row, but
how big a row will you get as you get down the list.
Now, as it is today, the Board has nothing to say
about dividends. These various Federal Reserve
banks declare a dividend; it's six percent cumulative.
They've always paid a flat six. Some of them individ-

ually haven't made it. Now, if one pays it and the
other doesn't, it raises hell.
Now, what we want to propose is that it be a four
percent cumulative, see, and the Board then be given
the power with reference to the other two, so that
if they make it and feel they should pay it, O.K.,
but at least you've got a fixed four percent instead
of the six percent.
Should that be controversial particularly?
Well, it would be controversial as far as the member
banks are concerned. The member banks would want six
percent mandatory. Now, what we want to do with it is
put it on a flat four percent basis, and then the Board
wants the discretionary power as to whether or not the
other two should be paid. That gives us a little bit
of leeway, so if we go through bad times as far as
income is concerned

Jones:

There seems to be no objection to that one if you
have banking legislation.

259

- 27 H.M.Jr:

But is Eccles making the separation? There's two the things that we have no objection to and then the
things that he feels he's got to have.

Jones:

He's got to have the first one.

H.M.Jr:

What?

Jones:

The first one.

H.M.Jr:

Well

Eccles:

Yes, I think so.
Supposing you don't get it. You'll function just the

H.M.Jr:

same.

Eccles:

I suppose we could have gone along the last twenty
years without

H.M.Jr:

I wouldn't - if you don't mind my saying so, I
wouldn't put that in "must" legislation.
Well, why - what objection could there be to asking
for legislation this year? What reason do we have
to expect it will be easier next year to do it?
Well, Marriner, isn't this the thing that we have
all got to face on legislation eventually: That the
Banking Act of 1933 and the Banking Act of 1935 did
certain things. Now you've got Government reorganization coming along here, which undoubtedly will
sooner or later affect the banking set-up. Now, if
we were going to sit down and work out legislation
that we all would like to see, make it more efficient
for the operation of the bank supervision and bank
chartering, why, there are a lot of things that we'd
love to have. So if there's something that you need
particularly to meet your emergency, why don't you
take that and then try and leave it alone until we

Eccles:

Crowley:

all determine what this whole Government reorganization amounts to?

Eccles:
H.M.Jr:

It doesn't mean anything as far as banking is con-

cerned. I can tell you that right now.
I'll answer your question, Why isn't this year as
good as next year? I think this year is as good as

260

- 28 next year, but I think that some time somebody's
got to decide a lot of fundamental banking legis-

lation and I don't think that we are prepared for
that. And the position that I take as Secretary
of the Treasury is this: that I think until we are
prepared to really make the fundamental things a
lot of us are thinking about, that we should ask
for the minimum for fear that Congress will introduce some kind of legislation and pass it which we
may not feel is in the best interests of the
financial agencies. Now, that is my whole position.

Now, we've been doing a lot of sparring around here.
We haven't got down to fundamentals here. And I

think until the President will give us a lead or
direct us to go at this thing thoroughly, my whole
feeling is we should ask for the minimum. That's
the - and this year or next year or the third year,
I mean - and I think if we introduce some Congress
is going to introduce a lot and we are going to get
something which might be quite harmful. That's the
whole thing.

Eccles:

Of
Don't you think we might, if we introduced
course, you've always got the danger of additions

and amendments if you've got anything. My thought

is if we are going to have any at all and if we
can confine the legislation to that which does
not interfere with and cannot be controversial so
far as the other agencies are concerned Now, I
recognize so far as the Congress itself is concerned,
any legislation we may introduce, don't care what it
is, somebody on the Hill might object to it. But so
long as the legislation that I may propose - that Lec
and Jefty have no objection to it - or the legislation
that we may propose, we may have no objection - that
it is - it would be of a non-controversial nature from
an Administration standpoint. If we are going to have
any at all - and I can't see any objection to including
that type of legislation.
I agree with you that where it gets into fundamentals
of our banking set-up you've got to leave it alone or
not have any at all.

O'Connor: Well now, Marriner, let me answer from my point.
Eccles:

I would prefer to have absolutely none, just forget

261

- 29 the thing and go along, if we are going to have

to go through everything like that, but I did want

to get some of these
Crowley:

Now, these things - all that Jefty wants is that
Credit Union and that wouldn't be a hell of a lot
for him to absorb, and the building and loan - they've
lived for 30 or 40 years of that. We'll go along
with you without any - the three of us go without
any legislation.

Eccles:

For how long?

Crowley:

Well, there's no use of going into this banking
legislation until you go in knowing, as the Secretary
says, where in the devil you're going.
Well, this Chairman and Agent thing - we're in a
tough spot on this thing.
Listen, Marriner, you'll be in a great deal tougher
spot if some of those boys up there suggest some
of the things that they've got in mind and pass it.
Well, they won't; not much chance.
Mr. Secretary, my legislation will not go before the
Banking and Currency Committee. It goes before the
District Committee. And last year it was passed in
the House - the Credit Union by the District Committee.

Eccles:

H.M.Jr:

Eccles:
O'Connor:

Upham:

No, it's not banking legislation.

Jones:

That's your Credit Union and building and loan?

O'Connor:

Yes, sir, it's a District matter.

H.M.Jr:

That throws another new light on it; I think he
should have it if it doesn't go before Banking.

Jones:

That is something.

'Connor:

And last year it actually - the Committee on the
District in the House passed the Credit Union.
Then that makes it simpler. Do we want to propose
any legislation to go before Banking and Currency?

H.M.Jr:

262

- 30 -

Eccles:

For the time being I would say no.
Well, you mean not this session.

Jones:

I mean for 60 days.

Eccles:

Well, that's all right. That suits me.

Jones:

I mean just let the thing go for 60 days.

Eccles:

What we've got to do

H.M.Jr:
Eccles:

Well, 60 days is the first of March.
That's right, the first of March.

Jones:

I mean you can meet again and put it off 60 more days.

Jones:

(Hearty laughter)

O'Connor: I knew it was something. I knew it was coming along
some place.

H.M.Jr:

Now let's just sum up that we are all agreeable
that these two things, building and loan and Credit
Union, should go up before the District Committee,
and outside of that

Eccles:

We defer action.

H.M.Jr:

we defer action and we meet again on the first of
March.

Eccles:

Unless one of us thinks for some reason his

Jones:

The tenth of March.

H.M.Jr:

Why?

Eccles:

Well, that's close enough - the first.

H.M.Jr:

You say first and you say the tenth.
I suggest the tenth of March. You can get them any

Jones:

time.

263

- 31 H.M.Jr:
Jones:

Well, let's make it the first.
All right, I'll do that with you like I agree with

my wife - we make it unanimous; I agree with her.
Eccles:

We've got certain legislation here that I'd hate to
get .through this session without, and I'm willing
to wait 60 days for it.

H.M.Jr:

Well, Marriner was willing to postpone it for this

Eccles:

No, I want it; no, sir.

H.M.Jr:

You were ready to give it up for this session.
No, I wasn't.
I expected that he'd get good-natured and forget

Eccles:
Jones:

Eccles:

session, and you said

it entirely.
Well, I'll be practical. All the Board and staff

H.M.Jr:

members are - there's certain of this legislation
they are pretty strong for.
It's swell to be able to have a Board and a staff.

Jones:

To hide behind.

Eccles:

Well, that's right. Take - here's one for instance,

H.M.Jr:

the establishment of discount rates. The damn law
says every 14 days. These Reserve banks - it puts
them up against a position here of calling special
Board meetings every 14 days, instead of regular
meetings at a weekly day. Every 14 days - once it's
Monday, next time it's Tuesday - it makes it incon-

venient and they all kick.
Well now, we are subject to call, at Mr. Jones'
suggestion, the first of March. Subject to call.

264

January 12, 1937.
11:20 a.m.

Glass:

H.M.Jr:

I'm fairly well and hope you are.
I'm fine. Senator - two things - we just adjourned
a meeting of our Committee on Banking here - you know
the head of the various agencies.

G:

Yes.

H.M.Jr:

And I think you'll be pleased to learn that we've

decided that we would not introduce any more legislation and we'd have another meeting on the 1st of

March.
Yes.

G:

H.M.Jr:

But there's two exceptions - there's two pieces of
legislation which do not go to your Committee.
Something which the Comptroller wanted that has to
do with the District - one is the Building and Loan the confirmation and the examination of these Credit
Unions.

G:

H.M.Jr:

Yes.

And those two things - he's charged with that responsibility and that would go to the District Committee
and we all felt that inasmuch as he was charged with

that responsibility he ought to be able to clear that

G:

up. I don't think anybody will object to that.
I don't think so.

H.M.Jr:

But with that exception we adjourned and decided

we'd not bring any more legislation up on the Hill
and then we'd have another meeting on the 1st of
March and talk it over again.

G:

All right.

H.M.Jr:

I thought you'd be pleased to hear that.

G:

Yes - that's - that's all right.

H.M.Jr:

G:

Now - ah - we got word from the Clerk up there that
there was going to be a meeting of your committee
tomorrow at 10 o'clock.
Yes.

-2-

H.M.Jr:

265

And I wondered if you wanted anybody from the Treasury

so we could get ready, if you wanted us.

G:

I - I may and if I do I'll let you know.

H.M.Jr:

Would you?

G:

Yes.

H.M.Jr:
G:

H.M.Jr:

So that we could have a little time to get ready.
Yes, all right I'll let you know before the day is out.
Thank you very much.

266

January 12, 1937.
11:23 a.m.

Operator:

Dr. Burgess.

H.M.Jr:

Hello

0:

Go ahead.

H.M.Jr:

Hello.

Burgess:

Hello sir.

H.M.Jr:

Burgess, I hear we have some wide swings in our

B:

government market?

Well not very. The intermediate bonds have been
off some this morning.

H.M.Jr:

Well they said some of them.

B:

You can admit this then right along.

H.M.Jr:

Yes.

B:

Of course the whole answer is the uncertainty about

H.M.Jr:

Yes.

these excess reserves.

H.M.Jr:

I think
Well why don't you tell them what you're going to do.

B:

Oh well (hearty laughter)

B:

H.M.Jr:

(Laughter)

B:

Well I think we ought to. (Laughter)

H.M.Jr:

Well what are - how much in are you on the 32nds $50,000?

B:

Oh well we're going in about $50,000 - yes.

H.M.Jr:

About $50,000.

B:

We haven't actually bought anything this morning.

H.M.Jr:

I see.

-2B:

He says that there's bids in right through with

H.M.Jr:

Well the people tell me here there's some as much

B:

Oh well that's just paper.

H.M.Jr:

Paper.

the market.

B:

H.M.Jr:

as 10/32ds.

That's just on paper.
Ah-ha. There's nothing to get disturbed about.

B:

No - no - it's very quiet.

H.M.Jr:

Ah-ha.

B:

H.M.Jr:
B:

H.M.Jr:
B:

It's very quiet.
All right.
We'll see that their bids in there run regularly.
All right now make up your mind what you're going
to do on excess reserves.

Well I think Marriner ought to
I think we ought to decide what they're going to do.

H.M.Jr:

Yes.

B:

That's the Federal Reserve Board. We've got nothing

H.M.Jr:

Oh - oh - oh.

B:

to do with that.
(Laughter)

B:

You're just the Fiscal Agents for the Treasury.
That's right.

H.M.Jr:

O.K.

H.M.Jr:

B:

(Laughter)

H.M.Jr:

All right.

267

268

-3B:

(Laughter)

H.M.Jr:

(Laughter) All right, Burgess, goodbye.

B:

Goodbye.

Fin
MEMORANDUM RE PREFERENCE ON SMALL SUBSCRIPTIONS

269

1/12/37

Advance announcement in the last several offering circulars of
the Secretary's intention to make allotment in full on cash subscriptions for amounts up to and including $5,000 developed a definite and
extensive abuse, in that multiple subscriptions for $5,000 were entered
through various sources by many subscribers for the purpose of obtaining greater allotments than the subscribers would have been entitled

to on a straight percentage basis. Subscriptions in the preferred

class totaling $55,000,000, $64,000,000 and $95,000,000 were entered

for the bond offerings in March, June and September of this year, manifestly far in excess of any possible legitimate investment requirements.
At a conference of Federal Reserve bank representatives held at
the Treasury on May 12, 1936, opinion was divided as to preferential

allotment - about half of the banks favoring a retention of the existing arrangement and others favoring no advance announcement on this

point, decision to be made by the Secretary after subscription figures
were reported. One bank suggested a reduction in the amount of preference
and another favored an increase.
Prior to the December financing the matter was again discussed
informally with the representatives of several of the Federal Reserve
banks and on November 23 Mr. Bell, Mr. Broughton and Mr. Kilby discussed
the question with the Secretary. Dr. Burgess was consulted in the

course of this discussion. Allotment on a straight percentage basis,

with no preference, was suggested. The Secretary, however, wished to
be free to determine the basis upon which he would make allotment and,

therefore, the offering circular was so drafted as to permit whatever

action he might determine upon.

on December 2 Dr. Burgess and Mr. Matteson of New York, Mr. Sihler

of Chicago, and Mr. Arnold of Cleveland, met with Mr. Bell, Mr. Broughton
and Mr. Kilby to discuss various aspects of the coming issue, principally
with respect to the matter of preference on small allotments and measures
whereby uniform treatment might be accorded subscribers in the several
Federal Reserve districts, to the end that subscribers wherever situated
might as nearly as possible be restricted to reasonable and legitimate
requirements.

In the absence of any advance announcement in the December offering
and with about the same volume of total cash subscriptions as in September,
subscriptions for $5,000 and less declined from $95,000,000 to $74,000,000.
This was an improvement over September but still evidenced material padding

and, accordingly, the Secretary allotted in full subscriptions for $1,000
and under. Subscriptions in this class totaled but 3,300,000, which would
indicate complete freedom from padding in this lower bracket.

swB

Lawrence H. Seltzer

Prepared by:

Assistart Director of

Research and Statistics

m

Fin

DATE

TO

FROM

January 12, 1937

Secretary Morgenthau

Mr. Haas GA

Subject: The Trend of Short-Term Money Rates

1. Treasury Bills
During the first four months of 1936, the average cost to the
Treasury of 273-day Treasury bills ranged from .07 to .13 percent per
annum. Beginning on May 2, coincident with a doubling in the volume of
the weekly bill offerings, the average rate on the 273-day issues rose
almost uninterruptedly for several weeks, reaching .24 percent for the
issues of June 13 and June 20. Immediately thereafter, when the volume of the weekly bill offerings fell back to $50 millions, the average
rate declined rather abruptly to .07 percent for the issues of July 4
and July 11.

On July 14, the Federal Reserve Board announced an increase of 50
percent in the required reserves of member banks, to take effect on
August 15. The average bill rate thereupon rose to .12, .22, and .23
percent for the next three succeeding weekly issues, respectively. An
irregular decline followed, the average rate reaching .08 percent on
November 21, 1936.

During the past six weeks, the average cost to the Treasury of
bills has risen again -- coincident once more with an increase of $50
millions weekly in the volume of the offerings (the increased amounts
being for shorter periods than the usual 273-day issues). The average
rates of the 273-day issues of December 26, 1936 and January 9, 1937.

.29 and .33 percent, respectively, were higher than those of any of the
previous issues of 273-day bills since the series of this maturity was
started on March 2, 1935. The rise in the last six weeks has been
accompanied by considerable public discussion of the probability of a
further increase in the required reserves of member banks some time in

January or February.

2. Treasury Notes
The average market yield of Treasury notes with maturities of
1 to 2 years was .089 percent on January 11, 1936, and .398 percent

on January 9, 1937.

There was also an increase in the average market yield for Treasury
notes with maturities of 2 to 3 years -- from .504 percent on January 11,
1936, to .977 percent on January 9, 1937.

Treasury notes with maturities of 3 to 5 years, on the other hand,
declined in average market yield from 1.202 percent to 1.173 percent

between these dates.

270

271
Secretary Morgenthau - 1/12/37 - 2

The market yields of all three of these maturity classes of

Treasury notes have increased somewhat sharply since the end of
November, when public discussion of a prospective increase in reserve
requirements of member banks was becoming widespread. Between

December 5, 1936 and January 9, 1937, the increases in the market
yields of these three maturity classes of Treasury notes have been as
follows:
1 to 2 years
2 to 3 years
3 to 5 years

.192 percent

.319 percent
.244 percent

3. Bankers' Acceptances, Call Money, and Commercial Paper.
The average rate on 90-day bankers' acceptances in New York City,
which had been .13 percent since November 1934, rose to .16 percent in

July 1936, and to .19 percent in August, at which level it has since

remained.

Call money rates have remained unchanged at 1 percent since the
middle of May 1936, when they were raised from . 75 percent.
Open-market rates in New York City on 4 to 6 months prime commer-

cial paper, as reported in the Federal Reserve Bulletin, have remained
unchanged at .75 percent since about the middle of January 1935.
4. Factors Operating to Stiffen Short-Term Money Rates.

The principal factors operating to stiffen various classes of

short-term money rates are the following:

(1) Increased and prospective further increases in
member bank reserve requirements: Treasury bill rates appear
to be particularly sensitive to this factor, because a large
part of the net burden of increased reserve requirements falls
upon the New York City banks, which provide the principal market for Treasury bills. Not only do the New York City banks
normally carry a relatively smaller volume of excess reserves
than other member banks, but, because of their large holdings
of deposit balances of other banks, which have to draw upon
such balances when reserve requirements are increased, the New

York City banks receive a double impact from any increases in
reserve requirements.

272
Secretary Morgenthau - 1/12/37 - 3

The confidential report of December 10, 1936, of the survey
made by the Federal Reserve Board on the distribution of excess
reserves among member banks during the first half of November in-

cludes the following statement: "In the aggregate the member
banks in New York City have substantial excess reserves, amounting to $734,000,000 during the first half of November 1936.

However, a survey made as of November 4, 1936 of the reserve
position of the 75 largest weekly reporting member banks showed

that at that time the reserve balances of one of the largest

New York member banks were insufficient by $29,000,000 to meet a

33-1/3 percent increase in reserve requirements. Three other
New York banks, somewhat smaller, had reserves insufficient by
$30,000,000, $22,000,000 and $17,000,000, respectively, to meet

such an increase. This, of course, is entirely apart from the

fact that some of these banks would have to provide additional
reserve funds not only to meet the increase in their own reserve
requirements but to meet withdrawals of balances by country correspondents.

It is natural to expect that New York City banks, among
others, have begun to adjust their position with respect to the
prospective further increase in required reserves; and that this
factor would operate to stiffen the rates on Treasury bills.

(2) Altered prospects of Treasury financing: The increase
in the market yields on short-term Treasury notes may be attributed in part to the prospective further increases in reserve
requirements and in further part to the growing prospect that
some or all of these notes may be paid off in cash at maturity
rather than refunded into similar or longer-term obligations.
The yields of our short-term note issues in recent years have
reflected not only the level of short-term interest rates as such,
but also the anticipated premiums that would be enjoyed by note

holders as the result of the Treasury's practice of offering such
holders preferential or exclusive allotments to refunding issues
priced below the market. The growing realization that a reduction in the volume of the available amount of public debt secur-

ities is likely to take place in the near future -- in advance

of the achievement of a strict budget balance -- has diminished
the premiums which the market is willing to pay for the prospect
of preferential allotments to refunding issues.

In this connection, the First Boston Corporation, one of
the largest Government bond houses in the country, took the
unusual step of declaring, in a letter to its customers dated
November 28, 1936, in part as follows: "It appears, therefore,

273
Secretary Morgenthau - 1/12/37 - 4

that any premium paid for special privileges through the turn-

ing in of maturing obligations for refunding obligations is a
decided gamble in the case of all those maturing on and after
September 1937. and probably only somewhat less of a gamble

for those maturing in April 1937."

It is significant to note, as was previously brought out,

that the average yield of Treasury notes of 1 to 2 years' maturity and of 2 to 3 years' maturity have increased over the

yields of approximately a year ago, whereas the average yield

of those with maturities of 3 to 5 years has declined. It is
the shorter-term notes which would naturally reflect most
sharply the diminished prospect of refunding on favorable
terms.

(3) Increased commercial demand for bank credit: Between
January 8, 1936 and January 6, 1937. the "other loans" of weekly reporting member banks increased by $932 millions, or 19 per-

cent. This increase, reflecting a larger aggregate volume of
business, and larger inventories incident to such increase, as
well as incident to the recent rise in commodity prices and a
threatening labor situation in certain lines, may be expected
to continue, after allowance for seasonal adjustments.

(4) A general feeling that the spread between short-term
and long-term rates has been and is unduly wide, and that the
narrowing of this spread will take place more largely through
a rise in short-term rates than by a further pronounced decline
in long-term rates: Long-term rates are inherently stabler
than short-term rates. There have been frequent periods in
the past when short-term rates have fluctuated substantially
above and below long-term rates without pronounced effect upon
the latter.

It is interesting to note, both in this connection and in

connection with the preceding discussion of the improvement in
the Government's finances, that during the decline in the bond
market, which began at the end of November 1936, the longerterm Treasury obligations have given the best market performance. For this purpose, we may divide the outstanding Treasury

bonds into three classes: First, those due or callable by 1941;
second, those due or callable between 1942 and 1945, inclusive;

and third, those not due or callable until after 1945.

274
Secretary Morgenthau - 1/12/37 - 5
Between December 5, 1936 and January 9. 1937. the average

yield of the first class increased by .221 percent; the aver-

age yield of the second class increased by .113 percent; and
the average yield of the longest-term obligations increased by
only .004 percent. Even after allowance for the inherently

greater fluctuations in yield of shorter-term obligations as
against longer-term obligations, the superior behavior of the

longer-term bond issues during this period has been significant.

The foregoing review indicates that there are factors
operating toward somewhat higher short-term money rates. There

is no evidence as yet that these factors will be of sufficient
strength in the near-term future to produce more than a moder-

ate further rise in such rates. And there is no evidence whatever as yet of any near-term prospective increase in longer-term
rates.

275

January 12, 1937.

MEMORANDUM:
Re:

Legislation recommended by the

Comptroller of the Currency in his
annual report to Congress for the

year ending October 31, 1935, which

it is proposed to introduce at the
coming session of Congress.

The legislation recommended by the Comptroller of the
Currency, which it is proposed to introduce at the coming session
of Congress, appears to be the same as that included in H.R. 12,447
and S.4510- S.4515, inclusive, 74th Congress, with the exception

of the proposals relating to the building and loan code for the

District of Columbia.

It is not within my province, nor is it my desire, to

criticize legislation proposed by the Comptroller of the Currency
which affects only the administration of his duties in the supervision of national banks. My sole interest in these proposed
amendments is that they shall include provisions which will clearly and definitely state that they in no way supersede, conflict
with, or limit the existing powers of the Federal Deposit Insurance
Corporation.

My suggestions relating to the legislation proposed
last year were presented in my testimony on May 11, 1936 before
the Committee on Banking and Currency of the House of Representa-

tives, a copy of which is submitted herewith.
No comments have been made previously relative to the

proposal that the Comptroller be authorized to issue whatever regulations he deemed necessary for the performance of his duties,
inasmuch as the House Committee had eliminated the provision.

Since this proposal is to be re-introduced it is requested that
it include a provision to the effect that no regulations to be

issued under the proposed authority would in any way conflict with
the existing powers of the Federal Deposit Insurance Corporation.

LEO T. CROWLEY,

Chairman.

276
December 18, 1936
MEMORANDUM:

Re: Legislation recommended by Comptroller of
the Currency in his annual report to Congress

for the year ending October 31, 1935, which it
is proposed to introduce at the coming session
of Congress.

1. CAPITAL REQUIREMENTS FOR CONVERSION. In many cases, state banks

have heretofore effected the elimination of losses and depreciation on securities and have made adjustment of their capital structures by the reduction of their common capital and by the issuance of capital notes or debentures. These capital notes or debentures were issued because the laws of
the state did not permit the issuance of preferred stock by such state banks.
These capital notes or debentures do not constitute capital within the meaning of the provisions of the national banking laws. In some of these cases,
the amount of common capital of the state bank is not sufficient to meet the
requirements of the national banking laws as to the necessary amount of capital of a state bank converting into a national banking association, but the
aggregate of such common capital and capital notes or debentures would be
sufficient.
It is proposed that Section 44 of the National Banking Act (Section 5154, United States Revised Statutes) be amended to provide that, for
the purpose only of authorizing the approval of the conversion of a state
bank into a national banking association, the Comptroller of the Currency
may treat capital notes or debentures as capital in those cases where the
Comptroller of the Currency is assured, prior to his approval of the conversion, that preferred stock will be issued by such state bank as soon as the
same has been converted into a national banking association, whereupon the

capital notes or debentures of the bank, which are bills payable insofar as
national banking associations are concerned, would be retired. It is not
difficult to procure such assurances. The Comptroller's office has devised

a very successful method of procedure to accomplish this end. Such method
has been employed to effect the substitution of preferred stock for such
capital notes or debentures in certain conversion cases where the state bank
had sufficient common capital to meet the requirements of the national banking law but where the Comptroller required assurances that the capital notes
or debentures of the bank would be retired and preferred stock issued in
lieu thereof.
2. LIABILITY UPON S ARES OF COLMON STOCK OF NATIONAL BANKING ASSOCIATIONS RESULTING FROM THE CONVERSION OF A STATE BANK INTO THE NATIONAL

SYSTEM. Under the provisions of Section 5151 of tie Revised Statutes of
the United States and Section 23 of the Federal Reserve Act, the holders of
shares of common stock of a national banking association are individually
responsible for the contracts, debts and engagements of the association

(the so-called double liability). Section 22 of the Banking Act of 1933

provided that the liability imposed upon the holders of shares of common
stock of a national banking association by the provisions of Section 5151
of the Revised Statutes of the United States and Section 23 of the Federal
Reserve Act, shall not apply with respect to shares in any national banking
association issued after June 16, 1933. Section 304 of the Banking Act of
1935 provided that the liability imposed upon the holders of shares of common stock of a national banking association by the provisions of Section
5151 of the Revised Statutes of the United States and Section 23 of the

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277
Federal Reserve Act, shall cease on July 1, 1937 with respect to all shares
issued by any national banking association which shall be transacting the
business of banking on July 1, 1937, provided the notice required by the

said Section 304 shall first have been given. It is clear, of course, that

shares of common stock of a national banking association chartered subsequent

to June 16, 1933 are exempt from the so-called double liability, But it is

not clear that shares of common stock of a national banking association resulting from a conversion would be shares "issued" after June 16, 1933 and,

therefore, exempt from the so-called double liability. And, if such shares

are not shares "issued" after June 16, 1933 then compliance with Section 304
of the Banking Act of 1935 (six months' notice by publication of intention
to terminate such liability) would be necessary for each converted national
banking association even though the conversion were approved by the Comptroller subsequent to July 1, 1937.
While the matter has not been determined by the courts, the
United States Supreme Court (Michigan Ins. Bank vs Elred, 143 U.S. 293) held
that the conversion of a state bank into a national banking association does

not destroy its identity or its corporate existence) that it is not a closing

of business but simply a continuation of the same body, with the same officers
and the same stockholders the same property, assets and business of banking

under a changed jurisdiction. In order to fix the liability of the holders
of shares of common stock of a converted national banking association on a

parity with the holders of stock of a newly chartered national bank, it is

proposed that the liability imposed upon such shareholders by the provisions
of Section 5151 of the Revised Statutes of the United States and Section 23
of the Federal Reserve Act, shall not apply with respect to shares in any such
association resulting from the conversion of any bank incorporated by special
law of any State or of the United States or organized under the general laws
of any State or of the United States into a national banking association after
July 1, 1937.
3. DIVIDENDS ON COMMON STOCK. The matter of the payment of divi-

dends on shares of common stock of national banking associations causes many

inquiries to be made, indicating considerable confusion in the minds of bankers
as to the meaning of some of the language of the statute. The responsibility
for the declaration of dividends on shares of stock of a national banking association rests with the board of directors. The question of the soundness of
the provisions of the statute that dividends may be declared only semi-annually
has been raised to a very considerable extent. The terms used in the present
law (Sections 5199 and 5204 of the Revised Statutes) are not defined. When
the so-called double liability was removed from the common stock of a national

bank by the provisions of Section 304 of the Banking Act of 1935, it was provided (Section 315 of the Banking Act of 1935) that the surplus of the bank
should be increased until it reached the amount of the bank's common capital.
In the present law it is provided that dividends may be declared semi-annually
and that before the declaration of a dividend on its shares of common stock,

the bank shall carry not less than one-tenth part of its net profits of the
preceding half year to its surplus fund until the same shall equal the amount
of its common capital.

Sections 5199 and 5204 of the United States Revised Statutes pertain to the matter of the payment of dividends on shares of common stock of
a national banking association and, necessarily, have to be read together.
It is proposed that Section 5204, United States Revised Statutes, be repealed
and that Section 5199 be restated so as to include the substance of both
Sections 5204 and 5199 with some changes as herein indicated.
To avoid ambiguity the terms used in the new Section 5199 should

be defined. It is proposed that the definition "net addition to profits"

should spell out the item that has been used by the Comptroller's office for

- -3years to determine the sum that must be transferred to surplus in order to
meet the requirement that ten per cent of the net profits be transferred to
surplus before the declaration of a dividend on shares of common stock, and
that the definition "bad debt" be liberalised so as to eliminate the inequi-

278

ties in the present statute. It is also proposed that statutory bad debts

be disassociated from losses and that the transfer of ten per cent of the
net addition to profits to the surplus of the association be disassociated

from the payment of dividends on shares of common stock. Excessive statutory

bad debts would continue to operate as a limitation upon the ability of the
association to pay dividends on its shares of common stock. The transfer of
ten per cent of net addition to profits for each six months' period to surplus until the surplus equals the amount of the common capital of the association should be made mandatory irrespective of whether or not a dividend
is declared upon shares of common stock of the association for such period.
It is also proposed that dividends on shares of common stock may
be declared by the board of directors at any time they deem expedient, pro-

vided the association has sufficient undivided profits then on hand, instead
of seni-annually only as now provided by statute. In keeping with the policy
of building up the surplus of each national banking association to the amount
of its common stock to compensate for the elimination of the double liability
on the holders of shares of common stock it is likewise provided that the

surplus of a national banking association may not be reduced below the amount

of its common capital, except for the purpose of charging off losses or for
the purpose of paying dividends in common stock in accordance with the pro-

visions of Section 5142 of the Revised Statutes of the United States (Divi-

dends payable in shares of common stock).
4.

FEES FOR EXAMINATION OF CREDIT UNIONS. Under the provisions

of the Act of June 23, 1932, the Comptroller of the Currency is required to
make examinations of credit unions incorporated under the said act. These
credit unions are increasing in number and in the volume of their assets.
The rate of compensation fixed by the present law is insufficient to pay
the actual costs of such examinations and, as a consequence, part OI the
cost of examinations of credit unions is being paid for by national banking
associations. This amendment provides that the credit unions shall be assessed by the Comptroller for the actual cost of making the examination required under the act.
5. REGULATORY POWERS. Congress has heretofore granted to the Board

of Governors of the Federal Reserve System, the Board of Directors of the
Federal Deposit Insurance Corporation and the Securities and Exchange Commission certain regulatory powers. The Comptroller of the Currency has no

authority to issue rules and regulations except as to the definition of the
term "investment securities", and except as to limiting and restricting the
purchase of "investment securities" by a national banking association for
its own account.

The numerous changes in the provisions of law relating to national banks during the past few years necessitate interpretative rulings
by the Comptroller of the Currency. The Comptroller of the Currency is in
closer contact with the Congress and the committees thereof than are those
persons who are directing financial institutions which are under the supervision of the Comptroller and, consequently, the Comptroller of the Currency
is in a position, through the issuance of regulations when necessary, to
carry out the intent of Congress in enacting banking laws. It is proposed
that the Comptroller of the Currency should be authorized and empowered to

make such rules and regulations as may be necessary and proper to enable

him effectively to perform the duties, functions or services imposed upon
him under the provisions of the laws relating to national banks.

-46. APPORTIONMENT OF SALARIES. The salaries of the first and

second Deputy Comptrollers of the Currency are fixed by law as a part of
the expense of the examination of national banks and are paid from assessments levied by the Comptroller of the Currency upon national banks. The
Comptroller of the Currency is authorized by law to apportion the salary
of the third Deputy Comptroller of the Currency in accordance with the
duties performed by him. At the present time one of the most important

functions of the Bureau is the liquidation of national banks in receivership and the first Deputy Comptroller of the Currency is devoting his efforts exclusively to that function.
It is proposed that the Comptroller of the Currency should
be authorized to apportion the salaries of the Deputy Comptrollers and of
other officers and employees of his Bureau who are performing duties in
connection with more than one administrative division or branch of his office to the end that the apportionment of such salaries among the funds
under the control and supervision of the Comptroller would be fair and
equitable.

7. BUILDING AND LOAN CODE. The present code of laws of the Dis-

trict of Columbia respecting building and loan associations is very inadequate from the viewpoint of both the associations and the supervising authority. The present code does not prescribe sound practices for the conduct
of the business of such association, but leaves the determination of the
manner in which the business shall be conducted to the associations themselves through empowering them to determine such matters by by-law. The
terms used in the present code are not defined. The supervising authority
is powerless to take any corrective steps prior to the insolvency of an as-

sociation. There is no authority for consolidation or for the appointment
of a conservator therefor. There is no requi rement for reserves. Building

associations may charge premiums or membership fees which premiums or member-

ship fees are sometimes used for the payment of promotion expenses. Funds
may be withdrawn at any time and fixed rates of interest are paid on various
accounts. The public, generally speaking, do not understand that when they
pay money into building and loan associations they are subscribing for shares
of stock, nor that when they borrow money from building associations they
have no set-off for the amount paid in in amortization of the amount borrowed
against the face amount of the debt to the association.

A draft of a proposed code of laws for building and loan associations in the District of Columbia, which was prepared prior to the appointment of a receiver for Fidelity Building and Loan Association, is now in the
hands of the General Counsel of the Treasury Department for study. The experience of the Comptroller's office in administering the receivership of
Fidelity Building and Loan Association has disclosed certain other weaknesses

in the present law. It is also desired to include certain provisions recently

considered and approved by the National Association of Building and Loan Super-

visors. As soon as the new draft incorporating the additional features has
been completed by the Comptroller's office it will be forwarded to the General
Counsel of the Treasury Department for consideration.

While this particular piece of legislation may not be of any

special interest to other banking agencies of the Government, and would concern only the Secretary of the Treasury and the Comptroller of the Currency,

by reason of the latter's jurisdiction over these associations in the District

of Columbia, the matter is referred to in this memorandum by reason of the
fact that the last report of the Comptroller recommended the enactment of a
new code of laws for the District of Columbia in respect to buildingand loan

associations. It is proposed that the new building and loan code for the District of Columbia should give to the Comptroller of the Currency such powers

as are proper to enable him, as the supervising authority, to control the or-

279

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280

ganization of new associations, to properly supervise such associations as
going concerns and to facilitate the reorganization or liquidation of insolvent associations,
Amendment to Section33 of the Act of June 30, 1876

(Title 12, U.S.C. Sec. 197) not included in the last
report of the Comptroller of the Currency to Congress

but introduced in the last Congress and known as
Senate Bill 4510.

8. SHAREHOLDERS' AGENT. Under the present law, whenever all claims

of the creditors of a national bank in receivership shall have been paid,

and all expenses of the receivership shall have been provided for, the Comp-

troller of the Currency is required to call a meeting of the shareholders of

such association for the purpose of determining whether the receivership

shall be continued for the benefit of the shareholders, or a liquidating
agent elected by the shareholders for that purpose. Under the present law
many administrative difficulties have been encountered, the solutions of
which are important to the Comptroller's office by reason of the large num-ber of receiverships being supervised by him, the constantly increasing number of which are reaching the stage where, under the law, the shareholders'
meeting must be called by the Comptroller. The manner provided in the present law for the electing of a shareholders' agent has proven to be inequitable in many cases, in that a large shareholder who has not paid his assessment may, and sometimes does, control the election of the shareholders' agent,
electing himself as such agent and paying himself A salary that consumes a
major portion if not all of the returns to the agent from the ;liquidation of
the balance of the assets in his hands.
Without disturbing the method now provided by law for the pro
rata distribution of the proceeds of the assets among shareholders after those
shareholders who have paid assessments have been paid in full, the proposed
amendment should provide that in event the assets are not sufficient to completely reimburse shareholders who have paid assessments levied upon them,
the percentage of aggregate liability upon such assessment paid in by each
shareholder shall, as nearly as possible, be equalized in that where some of
the shareholders have paid greater percentages of their assessments than other
shareholders, the shareholders paying such greater percentages shall, in each
case, first be progressively reimbursed the excess of their payments over
those of said other shareholders, to the end that after such adjustments of
excess percentages have been made, all shareholders shall have due them the
same percentage of unreimbursed assessment, and thereafter reimbursement shall

be made to all shareholders upon a pro rata basis. It is proposed that this

amendment should provide that whenever all claims of creditors of a national
banking asseciation in receivership shall have been paid the full amount of
such claims, together with interest thereon at the rate of three per centum
per annum, and all expenses of the receivership shall have been provided for,
the Comptroller of the Currency may continue, through a receiver, the liquidation and collection of the assets of such association and of unpaid assessments on shareholders, or the Comptroller of the Currency may call a meeting
of shareholders for the purpose of electing an agent and an executive committee;
such agent to conduct the liquidation and collection of the assets for the
benefit of the shareholders of the association in accordance with law and under
the supervision of the executive committee, which shall consist of not less
than three shareholders elected by the shareholders.
L.A. KELLY

281
L-475
CONFIDENTIAL

LIST OF SUGGESTED AMENDMENTS TO THE LAWS AFFECTING
THE FEDERAL RESERVE SYSTEM

SECTION 4 OF THE FEDERAL RESERVE ACT

Separation of offices of Chairman and Federal Reserve Agent. An amendment authorizing the Board in its discretion to designate one
of the class C directors to serve only as Chairman of the board of
directors of the Federal Reserve bank and to appoint a different person, who need not be a director, to serve as Federal Reserve Agent.
In such event, relieve the Chairman of all statutory duties except
those of director and the duty of presiding at meetings of the board
of directors. The amendment would be so drawn that the requirement
of tested banking experience would not apply to the separate position
of Chairman. Also an amendment authorizing an Assistant Federal Reserve Agent to perform the duties of the Agent during a vacancy in

the latter's office as distinguished from the absence or disability

of the Agent and eliminating the requirement that an Assistant Agent
be a person of "tested banking experience".
SECTION 7 OF THE FEDERAL RESERVE ACT

Dividends of Federal Reserve banks. - An amendment forbidding
the Federal Reserve banks to pay more than a four per cent cumulative

dividend, except that, with the consent of the Board, they may pay
an additional non-cumulative dividend up to two per cent.
SECTION 9 OF THE FEDERAL RESERVE ACT

Capital requirements. - An amendment modifying the capital requirements for admission of State banks to membership in the Federal
Reserve System so as to place such requirements on the basis of capital adequate in the judgment of the Board of Governors in relation
to deposit and other corporate responsibilities rather than upon
arbitrary requirements based on the population of the place in which
located; together with a similar amendment to the law regarding cap-

ital requirements for the organization of national banks, substituting,
of course, in the latter case the judgment of the Comptroller of the

Currency for that of the Board of Governors. However, there should
be retained the requirement that no national bank may be organized
with a capital less than $50,000 in any case and no State bank may
be admitted with a capital less than $50,000 except in those cases
where a capital of $25,000 is sufficient under the present law.
Also an amendment to provide that a State member bank or a

national bank having branches shall have capital adequate in relation

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L-475

to its deposit and other corporate responsibilities, in the judg-

ment of the Board of Governors or the Comptroller of the Currency,
as the case may be, provided that such capital shall be not less

any case amount State law

same of branches in in bank's

branches operating in the than located. the number required by places of which State the banks

are Such provisions would take the place of the

present capital requirements specifically prescribed by the law for

member banks having branches.

SECTION 9 OF THE FEDERAL RESERVE ACT

Waiver of membership requirements. - An amendment to make ef-

fective immediately, instead of in 1941, the Board's authority to

waive requirements for admission to membership for the purpose of

facilitating the admission of any State bank which is required to

be a member in order to continue in an insured status.
SECTION 10 OF THE FEDERAL RESERVE ACT

Chairman and Vice Chairman of the Board of Governors. - An
amendment providing that the Chairman (and Vice Chairman) of the
Board of Governors shall be designated by the President to serve

as such for a term of four years or, if the Chairman (or Vice

Chairman) has less than four years to serve as a member of the
Board, then for the remainder of his term as a member of the Board.
The amendment should also provide that whenever the term of the
Chairman (or Vice Chairman) as such expires and he elects not to
continue to serve as a member of the Board, the provision of the
second paragraph of Section 10 of the Federal Reserve Act that mem-

bers of the Board shall be ineligible for two years thereafter to

hold any office, position, or employment in any member bank, shall

not apply.

SECTION 11 OF THE FEDERAL RESERVE ACT

Assignment of duties. - An amendment authorizing the Board of
Governors to assign to designated members of the Board or its representatives, under rules and regulations prescribed by the Board,
the performance of specific duties and functions, not including the
determination of national or System policies, the power to make
rules and regulations, or any power which under the Act is required
to be exercised by a specified number of members of the Board.
SECTION 11 OF THE FEDERAL RESERVE ACT

Facilitating hearings by the Board. - In connection with all
hearings conducted by the Board regarding the removal of directors
and officers of member banks, the expulsion of State banks from the

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L-475

Federal Reserve System, the revocation of voting permits, and similar matters, an amendment giving the Board authority similar to that
possessed by the Federal Trade Commission, the Interstate Commerce
Commission and other administrative agencies to have testimony
taken by one or more members of the Board or by such trial examiners

as it may designate, and authorizing the Board or its designated
representatives to administer oaths. Also an amendment authorizing
the Board to prescribe rules governing the procedure in such hearings and permitting the service of notice in such cases by registered

mail.

SECTION 12A OF THE FEDERAL RESERVE ACT

Membership of Federal Open Market Committee. - An amendment
changing representation of Federal Reserve banks on open market

Committee so that there will be four representatives, each of whom
will be elected by a group of three Federal Reserve banks, and one
representative at large elected by the Presidents of the twelve Federal Reserve banks. Require that all representatives of Federal
Reserve banks on Open Market Committee, including alternates, shall
be Presidents of Federal Resorve banks. Make it clear that in electing such representatives each Federal Reserve bank has one vote instead of each director having one vote. Prescribe method of election.
SECTION 14(d) OF THE FEDERAL RESERVE ACT

Establishment of Discount Rates by Federal Reserve Banks. - An
amendment which would eliminate the requirement that each Federal

reserve bank shall establish discount rates every fourteen days, but
would require instead that each bank shall establish such rates at
least once during each month or oftener if deemed necessary by the

Board.

SECTION 16 OF THE FEDERAL RESERVE ACT

Penalty for paying out notes of another Federal Reserve bank. An amendment repealing the provision which prevents a Federal Reserve
bank from paying out notes of another Federal Reserve bank.

284
STATEMENT OF HON. LEO T. CROWLEY, CHAIRMAN, FEDERAL DEPOSIT
INSURANCE CORPORATION, ON H. R. 12447 BEFORE THE COMMITTEE ON
BANKING AND CURRENCY OF THE HOUSE OF REPRESENTATIVES, MONDAY

MAY 11, 1936.

Last year this Committee and the Senate Banking and
Currency Committee held extensive hearings and gave careful o on-

sideration to the revisions of the law necessary to enable the
Federal Deposit Insurance Corporation to discharge its duties

efficiently. As a result, Title I. of the Banking Act of 1935
was enacted, providing for the powers and duties of the Corpora-

tion, both as insurer and as receiver of national banks. We do
not understand that this Committee intends in any way to change

any of the provisions of the law governing the operation of the
Corporation which were enacted last year. However, several sec-

tions of the pending bill are so worded as possibly to create
uncertainty on the question of whether the powers of the Corporation
are being changed or diminished by implication.

While the enactment of the bill in its present form
might be held not to affect rights and powers of the Corporation,

the determination of this question involves a question of statutory
construction which can readily be avoided by the insertion of a

provision specifically stating that the bill shall not in any way
affect or diminish the Corporation's powers.
Section 1

Section 1 of the bill under consideration provides that
the Comptroller of the Currency in fixing salaries of employees

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285

who are now or hereafter may be under his direction by virtue of any
provision of law and whose salaries are payable from funds under his
control and supervision derived from assessments levied by him or as
otherwise provided by law , may apportion their salaries among various
funds where services are rendered in connection with more than one

administrative division or branch of the duties imposed by law upon
him in any capacity.

The attention of the committee is called to paragraph (1)
of subsection (m) of Section 12B of the Federal Reserve Act, as
amended, which provides that the Corporation as receiver of a closed

national bank "shall have the right to appoint agents to assist it in
its duties as such receiver and that all fees, compensations, and expenses of liquidation and administration thereof shall be fixed by the
Corporation, subject to the approval of the Comptroller of the
Currency, and may be paid by it out of funds ooming into its possession as such receiver."

It is not clear whether the draftsman of section 1 of the
pending bill intended that it should apply to the receivership activities of the Federal Deposit Insurance Corporation. In the pending
bill no specific reference is made to Section 12B of the Federal
Reserve Act. However, the enactment of this section as an amendment

to the existing statutes pertaining to national bank liquidations
might be construed to imply the repeal or modification of those provisions of paragraph (1), subsection (m) of Section 12B which give the
Corporation the right to employ agents and fix their compensation.

-3-

This would serve only to deprive the Corporation of rights now

given to it by Congress to appoint agents to assist it in its duties
as receiver and to fix the fees, compensation and expenses of such
employees. Because of the provision in subsection (m) of Section
12B of the Federal Reserve Act, giving the Comptroller of the Currency the right to approve any fees, compensation or expenses so

fixed by the Corporation as receiver of a national bank, his office
already has full authority to protect the interest in national bank
receiverships of all creditors other than the Corporation.
Section 4

Section 4 of the bill under consideration provides that
whenever all the assets of an association which has been placed in
the hands of a receiver shall have been distributed by the Comptroller
of the Currency in accordance with the provisions of Section 5236 of
the Revised Statutes of the United States, the Comptroller of the
Currency may call a meeting of shareholders of the association to
vote upon the question of whether the receiver shall continue to wind

up the affairs of the association or an agent shall be elected for
that purpose. In lines 11 to 14 on page 9 of H. R. 12447, reference

is made to the distribution of the assets of the association in the
hands of a receiver "by the Comptroller (of the Currency) in aocordance with the provisions of Section 5236 of the Revised Statutes

of the United States" and to the payment in full of all claims "by
the said Comptroller."
Paragraphs three and four, subsection (L) of Section 12B
of the Federal Reserve Act, as amended, now provide that whenever

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287

any insured national bank shall have been closed by action of its
board of directors, or by the Comptroller of the Currency, as the
case may be, on account of inability to meet the demands of its

depositors, the Comptroller of the Currency shall appoint the
Corporation receiver for such closed bank, and no other person shall

be appointed receiver of such closed bank. It is further provided
that it shall be the duty of the Corporation as such receiver to
realize upon the assets of such closed bank and to wind up the af-

fairs of such closed bank. The Corporation is specifically directed
to retain for its own account such portion of the amounts realized

from such liquidation as it shall be entitled to receive on account
of its subrogation to the claims of depositors, and to pay the depositors and other creditors the net amounts available for distribution to them. With respect to such closed bank, the Corporation, as

receiver, is given all the rights, powers, and privileges now possessed by or hereafter granted by law to a receiver of an insolvent
national bank.

Section 4 of H. R. 12447 can be construed as superseding
the above-mentioned provisions of subsection (L) of Section 12B of

the Federal Reserve Act. We have no objections to any of the pro-

visions of the pending bill insofar as they apply to receiverships
contracted for by the Comptroller of the Currency prior to January

1, 1934. However, as previously stated, we are sure that neither
this Committee nor the Comptroller of the Currency intends to affect
the existing powers of the Federal Deposit Insurance Corporation as

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receiver of national banks which fail subsequent to January 1, 1934.

We also believe that it is not the desire of this Committee to leave

its intention in this respect subject to any doubt. It is therefore
respectfully suggested that the Committee write into the bill a

clause to the effect that nothing therein contained shall alter or
affect in any manner the existing powers of the Federal Deposit

Insurance Corporation as receiver of a national bank. It is also
suggested that following the words "notwithstanding any other pro-

visions of law," in line 10, page 2, there be inserted the words,
"and except as herein otherwise provided," in order that the suggested clause excepting the Corporation might be given full effect.
We have not discussed the provisions of the second
paragraph of Section 1, commencing with line 4 on page 2 of the
pending bill, as we understand the Committee has already determined

that this paragraph shall be stricken. The Corporation would
recommend against the enactment of this provision as drawn and if

the Committee intends to give further consideration to the paragraph

the Corporation desires an opportunity to present its objections at
length at a further hearing.

289
1933

FEDERAL DEPOSIT INSURANCE CORPORATION

WASHINGTON
OFFICE OF THE CHAIRMAN

MEMORANDUM:

Re: Legislation recommended by the Comptroller

of the Currency in his annual report to

Congress for the year ending October 31,

1935, which it is proposed to introduce

at the coming session of Congress.

The legislation recommended by the Comptroller of the

Currency, which it is proposed to introduce at the coming session of
Congress, appears to be the same as that included in H. R. 12,447 and
S. 4510 - S. 4515, inclusive, 74th Congress, with the exception of the
proposals relating to the building and loan code for the District of

Columbia.

It is not within my province, nor is it my desire, to

criticize legislation proposed by the Comptroller of the Currency which
affects only the administration of his duties in the supervision of
national banks. My sole interest in these proposed amendments is that

they shall include provisions which will clearly and definitely state
that they in no way supersede, conflict with, or limit the existing

powers of the Federal Deposit Insurance Corporation.

My suggestions relating to the legislation proposed last year
were presented in my testimony on May 11, 1936 before the Committee on
Banking and Currency of the House of Representatives, a copy of which
is submitted herewith.

No comments have been made previously relative to the proposal
that the Comptroller be authorized to issue whatever regulations he
deemed necessary for the performance of his duties, inasmuch as the
House Committee had eliminated the provision. Since this proposal is

to be re-introduced it is requested that it include a provision to the

effect that no regulations to be issued under the proposed authority
would in any way conflict with the existing powers of the Federal Deposit

Insurance Corporation.

LEO T. CROWLEY,

Chairman.

290
December 18, 1936
MEMORANDUM:

Re: Legislation recommended by Comptroller of
the Currency in his annual report to Congress

for the year ending October 31, 1935, which it
is proposed to introduce at the coming session
of Congress.

1. CAPITAL REQUIREMENTS FOR CONVERSION. In many cases, state banks

have heretofore effected the elimination of losses and depreciation on securities and have made adjustment of their capital structures by the reduction of their common capital and by the issuance of capital notes or debentures. These capital notes or debentures were issued because the laws of
the state did not permit the issuance of preferred stock by such state banks.
These capital notes or debentures do not constitute capital within the meaning of the provisions of the national banking laws. In some of these cases,
the amount of common capital of the state bank is not sufficient to meet the
requirements of the national banking laws as to the necessary amount of capital of a state bank converting into a national banking association, but the
aggregate
sufficient. of such common capital and capital notes or debentures would be
It is proposed that Section 44 of the National Banking Act (Section 5154, United States Revised Statutes) be amended to provide that, for
the purpose only of authorizing the approval of the conversion of a state
bank into a national banking association, the Comptroller of the
notes or debentures as capital in those
may Comptroller
treat capital of the cases where Currency the
Currency is assured, prior to his approval of the conversion, that preferred stock will be issued by such state bank as soon as the
same has been converted into a national banking association, whereupon the
capital notes or debentures of the bank, which are bills payable insofar as

national banking associations are concerned, would be retired. It is not
difficult to procure such assurances. The Comptroller's office has devised

a very successful method of procedure to accomplish this end. Such method
has been employed to effect the substitution of preferred stock for such
had capital notes or debentures in certain conversion cases where the state bank
sufficient common capital to meet the requirements of the national banking law but where the Comptroller required assurances that the capital notes
or
lieudebentures
thereof. of the bank would be retired and preferred stock issued in
2. LIABILITY UPON S ARES OF COLMON STOCK OF NATIONAL BANKING ASSOCIATIONS RESULTING FROM THE CONVERSION OF A STATE BANK INTO THE NATIONAL

SYSTEM. Under the provisions of Section 5T5T of the Revised

and of
Section
23
of the
Federal
Reserve
the
of
shares the
United
States
stock
Act,
Statutes
holders
of
common of a national banking association are individually
responsible for the contracts, debts and engagements of the association

(the so-called double liability). Section 22 of the Danking Act of 1933

provided that the liability imposed upon the holders of shares of common
stock of a national banking association by the provisions of Section 5151
of the Revised Statutes of the United States and Section 23 of the Federal
Reserve Act, shall not apply with respect to shares in any national banking
association 1935 issued after June 16, 1933. Section 304 of the Banking Act of
provided that the liability imposed upon the holders of shares of common stock of a national banking association by the provisions of Section
5151 of the Revised Statutes of the United States and Section 23 of the

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291

Federal Reserve Act, shall cease on July 1, 1937 with respect to all shares
issued by any national banking association which shall be transacting the
business of banking on July 1, 1937, provided the notice required by the

said Section 304 shall first have been given. It is clear, of course, that

shares of common stock of a national banking association chartered subsequent

to June 16, 1933 are exempt from the so-called double liability, But it is
not clear that shares of common stock of a national banking association resulting from a conversion would be shares "issued" after June 16, 1933 and,
therefore, exempt from the so-called double liability. And, if such shares
are not shares "issued" after June 16, 1933 then compliance with Section 304
of the Banking Act of 1935 (six months' notice by publication of intention
to terminate such liability) would be necessary for each converted national

banking association even though the conversion were approved by the Comptroller subsequent to July 1, 1937.

While the matter has not been determined by the courts, the
United States Supreme Court (Michigan Ins. Bank vs Elred, 143 U.S. 293) held
that the conversion of a state bank into a national banking association does

not destroy its identity or its corporate existence) that it is not a closing
of business but simply a continuation of the same body, with the same officers
and the same stockholders the same property, assets and business of banking

under a changed jurisdiction. In order to fix the liability of the holders
of shares of common stock of a converted national banking association on a

parity with the holders of stock of a newly chartered national bank, it is

proposed that the liability imposed upon such shareholders by the provisions
of Section 5151 of the Revised Statutes of the United States and Section 23
of the Federal Reserve Act, shall not apply with respect to shares in any such
association resulting from the conversion of any bank incorporated by special
law of any State or of the United States or organized under the general laws
of any State or of the United States into a national banking association after
July 1, 1937.
3. DIVIDENDS ON COMMON STOCK. The matter of the payment of divi-

dends on shares of common stock of national banking associations causes many
inquiries to be made, indicating considerable confusion in the minds of bankers

as to the meaning of some of the language of the statute. The responsibility
for the declaration of dividends on shares of stock of a national banking association rests with the board of directors. The question of the soundness of
the provisions of the statute that dividends may be declared only semi-annually
has been raised to a very considerable extent. The terms used in the present
law (Sections 5199 and 5204 of the Revised Statutes) are not defined. When
the so-called double liability was removed from the common stock of a national
bank by the provisions of Section 304 of the Banking Act of 1935, it was provided (Section 315 of the Banking Act of 1935) that the surplus of the bank
should be increased until it reached the amount of the bank's common capital.
In the present law it is provided that dividends may be declared semi-annually
and that before the declaration of a dividend on its shares of common stock,

the bank shall carry not less than one-tenth part of its net profits of the

preceding half year to its surplus fund until the same shall equal the amount
of its common capital.

Sections 5199 and 5204 of the United States Revised Statutes pertain to the matter of the payment of dividends on shares of common stock of
a national banking association and, necessarily, have to be read together.
It is proposed that Section 5204, United States Revised Statutes, be repealed
and that Section 5199 be restated so as to include the substance of both
Sections 5204 and 5199 with some changes as herein indicated.
To avoid ambiguity the terms used in the new Section 5199 should

be defined. It is proposed that the definition "net addition to profits"

should spell out the item that has been used by the Comptroller's office for

292

-3years to determine the sum that must be transferred to surplus in order to
meet the requirement that ten per cent of the net profits be transferred to
surplus before the declaration of a dividend on shares of common stock, and
that the definition "bad debt" be liberalised so as to eliminate the inequi-

ties in the present statute. It is also proposed that statutory bad debts

be disassociated from losses and that the transfer of ten per cent of the
net addition to profits to the surplus of the association be disassociated
from the payment of dividends on shares of common stock. Excessive statutory
bad debts would continue to operate as a limitation upon the ability of the
association to pay dividends on its shares of common stock. The transfer of
ten per cent of net addition to profits for each six months' period to surplus until the surplus equals the amount of the common capital of the association should be made mandatory irrespective of whether or not a dividend
is declared upon shares of common stock of the association for such period.
It is also proposed that dividends on shares of common stock may
be declared by the board of directors at any time they deem expedient, provided the association has sufficient undivided profits then on hand, instead

of seni-annually only as now provided by statute. In keeping with the policy
of building up the surplus of each national banking association to the amount
of its common stock to compensate for the elimination of the double liability
on the holders of shares of common stock it is likewise provided that the
surplus of a national banking association may not be reduced below the amount

of its common capital, except for the purpose of charging off losses or for
the purpose of paying dividends in common stock in accordance with the provisions of Section 5142 of the Revised Statutes of the United States (Dividends payable in shares of common stock).

4. FEES FOR EXAMINATION OF CREDIT UNIONS. Under the provisions

of the Act of June 23, 1932, the Comptroller of the Currency is required to
make examinations of credit unions incorporated under the said act. These
credit unions are increasing in number and in the volume of their assets.
The rate of compensation fixed by the present law is insufficient to pay
the actual costs of such examinations and, as a consequence, part OI' the
cost of examinations of credit unions is being paid for by national banking
associations. This amendment provides that the credit unions shall be assessed by the Comptroller for the actual cost of making the examination required under the act.
5. REGULATORY POWERS. Congress has heretofore granted to the Board

of Governors of the Federal Reserve System, the Board of Directors of the
Federal Deposit Insurance Corporation and the Securities and Exchange Com-

mission certain regulatory powers. The Comptroller of the Currency has no

authority to issue rules and regulations except as to the definition of the
term "investment securities", and except as to limiting and restricting the
purchase of "investment securities" by a national banking association for
its own account.

The numerous changes in the provisions of law relating to national banks during the past few years necessitate interpretative rulings
by the Comptroller of the Currency. The Comptroller of the Currency is in
closer contact with the Congress and the committees thereof than are those
persons who are directing financial institutions which are under the supervision of the Comptroller and, consequently, the Comptroller of the Currency
is in a position, through the issuance of regulations when necessary, to
carry out the intent of Congress in enacting banking laws. It is proposed
that the Comptroller of the Currency should be authorized and empowered to
make such rules and regulations as may be necessary and proper to enable
him effectively to perform the duties, functions or services imposed upon
him under the provisions of the laws relating to national banks.

293

6. APPORTIONMENT OF SALARIES. The salaries of the first and

second Deputy Comptrollers of the Currency are fixed by law as a part of
the expense of the examination of national banks and are paid from assessments levied by the Comptroller of the Currency upon national banks. The
Comptroller of the Currency is authorized by law to apportion the salary
of the third Deputy Comptroller of the Currency in accordance with the
duties performed by him. At the present time one of the most important

functions of the Bureau is the liquidation of national banks in receivership and the first Deputy Comptroller of the Currency is devoting his efforts exclusively to that function.

It is proposed that the Comptroller of the Currency should
be authorized to apportion the salaries of the Deputy Comptrollers and of
other officers and employees of his Bureau who are performing duties in
connection with more than one administrative division or branch of his office to the end that the apportionment of such salaries among the funds
under the control and supervision of the Comptroller would be fair and
equitable.

7. BUILDING AND LOAN CODE. The present code of laws of the Dis-

trict of Columbia respecting building and loan associations is very inadequate from the viewpoint of both the associations and the supervising authority. The present code does not prescribe sound practices for the conduct
of the business of such association, but leaves the determination of the
manner in which the business shall be conducted to the associations themselves through empowering them to determine such matters by by-law. The

terms used in the present code are not defined. The supervising authority
is powerless to take any corrective steps prior to the insolvency of an association. There is no authority for consolidation or for the appointment
of a conservator therefor. There is no requirement for reserves. Building
associations may charge premiums or membership fees which premiums or membership fees are sometimes used for the payment of promotion expenses. Funds

may be withdrawn at any time and fixed rates of interest are paid on various
accounts. The public, generally speaking, do not understand that when they
pay money into building and loan associations they are subscribing for shares
of stock, nor that when they borrow money from building associations they
have no set-off for the amount paid in in amortization of the amount borrowed
against the face amount of the debt to the association.
A draft of a proposed code of laws for building and loan associations in the District of Columbia, which was prepared prior to the appointment of a receiver for Fidelity Building and Loan Association, is now in the
hands of the General Counsel of the Treasury Department for study. The ex-

perience of the Comptroller's office in administering the receivership of

Fidelity Building and Loan Association has disclosed certain other weaknesses

in the present law. It is also desired to include certain provisions recently

considered and approved by the National Association of Building and Loan Super-

visors. As soon as the new draft incorporating the additional features has
been completed by the Comptroller's office it will be forwarded to the General
Counsel of the Treasury Department for consideration.

While this particular piece of legislation may not be of any

special interest to other banking agendes of the Government, and would concorn only the Secretary of the Treasury and the Comptroller of the Currency,

by reason of the latter's jurisdiction over these associations in the District
of Columbia, the matter is referred to in this memorandum by reason of the
fact that the last report of the Comptroller recommended the enactment of a
new code of laws for the District of Columbia in respect to buildingand loan

associations. It is proposed that the new building and loan code for the District of Columbia should give to the Comptroller of the Currency such powers

as are proper to enable him, as the supervising authority, to control the or-

294

-5ganization of new associations, to properly supervise such associations as

going concerns and to facilitate the reorganization or liquidation of insol-

vent associations.

Amendment to Section33 of the Act of June 30, 1876

(Title 12, U.S.C. Sec. 197) not included in the last

report of the Comptroller of the Currency to Congress
but introduced in the last Congress and known as
Senate Bill 4510.
8. SHAREHOLDERS' AGENT. Under the present law, whenever all claims

of the creditors of a national bank in receivership shall have been paid,

and all expenses of the receivership shall have been provided for, the Comp-

troller of the Currency is required to call a meeting of the shareholders of
such association for the purpose of determining whether the receivership

shall be continued for the benefit of the shareholders, or a liquidating
agent elected by the shareholders for that purpose. Under the present law
many administrative difficulties have been encountered, the solutions of
which are important to the Comptroller's office by reason of the large num-

ber of receiverships being supervised by him, the constantly increasing number of which are reaching the stage where, under the law, the shareholders'
meeting must be called by the Comptroller. The manner provided in the present law for the electing of a shareholders' agent has proven to be inequitable in many cases, in that a large shareholder who has not paid his assessment may, and sometimes does, control the election of the shareholders' agent,
electing himself as such agent and paying himself a salary that consumes a

major portion if not all of the returns to the agent from the liquidation of
the balance of the assets in his hands.

Without disturbing the method now provided by law for the pro
rata distribution of the proceeds of the assets among shareholders after those
shareholders who have paid assessments have been paid in full, the proposed
amendment should provide that in event the assets are not sufficient to completely reimburse shareholders who have paid assessments levied upon them,
the percentage of aggregate liability upon such assessment paid in by each
shareholder shall, as nearly as possible, be equalized in that where some of
the shareholders have paid greater percentages of their assessments than other
shareholders, the shareholders paying such greater percentages shall, in each
case, first be progressively reimbursed the excess of their payments over
those of said other shareholders, to the end that after such adjustments of
excess percentages have been made, all shareholders shall have due them the
same percentage of unreimbursed assessment, and thereafter reimbursement shall

be made to all shareholders upon a pro rata basis. It is proposed that this

amendment should provide that whenever all claims of creditors of a national
banking association in receivership shall have been paid the full amount of
such claims, together with interest thereon at the rate of three per centum
per annum, and all expenses of the receivership shall have been provided for,
the Comptroller of the Currency may continue, through a receiver, the liquidation and collection of the assets of such association and of unpaid assessments on shareholders, or the Comptroller of the Currency may call a meeting
of shareholders for the purpose of electing an agent and an executive committee;
such agent to conduct the liquidation and collection of the assets for the
benefit of the shareholders of the association in accordance with law and under
the supervision of the executive committee, which shall consist of not less
than three shareholders elected by the shareholders.

L.A. KELLY

295
L-475
CONFIDENTIAL

LIST OF SUGGESTED AMENDMENTS TO THE LAWS AFFECTING
THE FEDERAL RESERVE SYSTEM

SECTION 4 OF THE FEDERAL RESERVE ACT

Separation of offices of Chairman and Federal Reserve Agent. An amendment authorizing the Board in its discretion to designate one

of the class C directors to serve only as Chairman of the board of
directors of the Federal Reserve bank and to appoint a different person, who need not be a director, to serve as Federal Reserve Agent.

In such event, relieve the Chairman of all statutory duties except
those of director and the duty of presiding at meetings of the board

of directors. The amendment would be so drawn that the requirement
of tested banking experience would not apply to the separate position
of Chairman. Also an amendment authorizing an Assistant Federal Reserve Agent to perform the duties of the Agent during a vacancy in

the latter's office as distinguished from the absence or disability

of the Agent and eliminating the requirement that an Assistant Agent
be a person of "tested banking experience".
SECTION 7 OF THE FEDERAL RESERVE ACT

Dividends of Federal Reserve banks. - An amendment forbidding
the Federal Reserve banks to pay more than a four per cent cumulative

dividend, except that, with the consent of the Board, they may pay
an additional non-cumulative dividend up to two per cent.
SECTION 9 OF THE FEDERAL RESERVE ACT

Capital requirements. - An amendment modifying the capital requirements for admission of State banks to membership in the Federal
Reserve System so as to place such requirements on the basis of capital adequate in the judgment of the Board of Governors in relation
to deposit and other corporate responsibilities rather than upon
arbitrary requirements based on the population of the place in which
located; together with a similar amendment to the law regarding cap-

ital requirements for the organization of national banks, substituting,
of course, in the latter case the judgment of the Comptroller of the

Currency for that of the Board of Governors. However, there should
be retained the requirement that no national bank may be organized
with a capital less than $50,000 in any case and no State bank may
be admitted with a capital less than $50,000 except in those cases
where a capital of $25,000 is sufficient under the present law.
Also an amendment to provide that a State member bank or a

national bank having branches shall have capital adequate in relation

296

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L-475

to its deposit and other corporate responsibilities, in the judg-

ment of the Board of Governors or the Comptroller of the Currency,
as the case may be, provided that such capital shall be not less
in any case than the amount required by State law of State banks
operating the same number of branches in places in which the bank's
branches are located. Such provisions would take the place of the
present capital requirements specifically prescribed by the law for
member banks having branches.
SECTION 9 OF THE FEDERAL RESERVE ACT

Waiver of membership requirements. - An amendment to make ef-

fective immediately, instead of in 1941, the Board's authority to

waive requirements for admission to membership for the purpose of

facilitating the admission of any State bank which is required to
be a member in order to continue in an insured status.
SECTION 10 OF THE FEDERAL RESERVE ACT

Chairman and Vice Chairman of the Board of Governors. - An
amendment providing that the Chairman (and Vice Chairman) of the

Board of Governors shall be designated by the President to serve

as such for a term of four years or, if the Chairman (or Vice

Chairman) has less than four years to serve as a member of the
Board, then for the remainder of his term as a member of the Board.
The amendment should also provide that whenever the term of the
Chairman (or Vice Chairman) as such expires and he elects not to
continue to serve as a member of the Board, the provision of the
second paragraph of Section 10 of the Federal Reserve Act that mem-

bers of the Board shall be ineligible for two years thereafter to

hold any office, position, or employment in any member bank, shall

not apply.

SECTION 11 OF THE FEDERAL RESERVE ACT

Assignment of duties. - An amendment authorizing the Board of
Governors to assign to designated members of the Board or its representatives, under rules and regulations prescribed by the Board,

the performance of specific duties and functions, not including the
determination of national or System policies, the power to make
rules and regulations, or any power which under the Act is required
to be exercised by a specified number of members of the Board.
SECTION 11 OF THE FEDERAL RESERVE ACT

Facilitating hearings by the Board. - In connection with all

hearings conducted by the Board regarding the removal of directors
and officers of member banks, the expulsion of State banks from the

297

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L-475

Federal Reserve System, the revocation of voting permits, and similar matters, an amendment giving the Board authority similar to that
possessed by the Federal Trade Commission, the Interstate Commerce
Commission and other administrative agencies to have testimony
taken by one or more members of the Board or by such trial examiners

as it may designate, and authorizing the Board or its designated
representatives to administer oaths. Also an amendment authorizing
the Board to prescribe rules governing the procedure in such hearings and permitting the service of notice in such cases by registered
mail.

SECTION 12A OF THE FEDERAL RESERVE ACT

Membership of Federal Open Market Committee. - An amendment
changing representation of Federal Reserve banks on open market

Committee so that there will be four representatives, each of whom
will be elected by a group of three Federal Reserve banks, and one
representative at large elected by the Presidents of the twelve Federal Reserve banks. Require that all representatives of Federal
Reserve banks on Open Market Committee, including alternates, shall
be Presidents of Federal Reserve banks. Make it clear that in electing such representatives each Federal Reserve bank has one vote instead of each director having one vote. Prescribe method of election.
SECTION 14(d) OF THE FEDERAL RESERVE ACT

Establishment of Discount Rates by Federal Reserve Banks. - An
amendment which would eliminate the requirement that each Federal

reserve bank shall establish discount rates every fourteen days, but
would require instead that each bank shall establish such rates at
least once during each month or oftener if deemed necessary by the
Board.
SECTION 16 OF THE FEDERAL RESERVE ACT

Penalty for paying out notes of another Federal Reserve bank. An amendment repealing the provision which prevents a Federal Reserve
bank from paying out notes of another Federal Reserve bank.

298
STATEMENT OF HON. LEO T. CROWLEY, CHAIRMAN, FEDERAL DEPOSIT
INSURANCE CORPORATION, ON H. R. 12447 BEFORE THE COMMITTEE ON
BANKING AND CURRENCY OF THE HOUSE OF REPRESENTATIVES, MONDAY,

MAY 11, 1936.

Last year this Committee and the Senate Banking and
Currency Committee held extensive hearings and gave careful con-

sideration to the revisions of the law necessary to enable the
Federal Deposit Insurance Corporation to discharge its duties

efficiently. As a result, Title I. of the Banking Act of 1935
was enacted, providing for the powers and duties of the Corpora-

tion, both as insurer and as receiver of national banks. We do
not understand that this Committee intends in any way to change

any of the provisions of the law governing the operation of the
Corporation which were enacted last year. However, several sec-

tions of the pending bill are so worded as possibly to create
uncertainty on the question of whether the powers of the Corporation
are being changed or diminished by implication.

While the enactment of the bill in its present form
might be held not to affect rights and powers of the Corporation,
the determination of this question involves a question of statutory
construction which can readily be avoided by the insertion of a

provision specifically stating that the bill shall not in any way
affect or diminish the Corporation's powers.
Section 1

Section 1 of the bill under consideration provides that
the Comptroller of the Currency in fixing salaries of employees

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299

who are now or hereafter may be under his direction by virtue of any
provision of law and whose salaries are payable from funds under his
control and supervision derived from assessments levied by him or as
otherwise provided by law, may apportion their salaries among various
funds where services are rendered in connection with more than one

administrative division or branch of the duties imposed by law upon
him in any capacity.

The attention of the committee is called to paragraph (1)
of subsection (m) of Section 12B of the Federal Reserve Act, as
amended, which provides that the Corporation as receiver of a closed

national bank "shall have the right to appoint agents to assist it in
its duties as such receiver and that all fees, compensations, and expenses of liquidation and administration thereof shall be fixed by the
Corporation, subject to the approval of the Comptroller of the
Currency, and may be paid by it out of funds coming into its possession as such receiver."

It is not clear whether the draftsman of section 1 of the

pending bill intended that it should apply to the receivership activities of the Federal Deposit Insurance Corporation. In the pending
bill no specific reference is made to Section 12B of the Federal
Reserve Act. However, the enactment of this section as an amendment

to the existing statutes pertaining to national bank liquidations
might be construed to imply the repeal or modification of those provisions of paragraph (1), subsection (m) of Section 12B which give the
Corporation the right to employ agents and fix their compensation.

300

-3. -

This would serve only to deprive the Corporation of rights now

given to it by Congress to appoint agents to assist it in its duties
as receiver and to fix the fees, compensation and expenses of such

employees. Because of the provision in subsection (m) of Section
12B of the Federal Reserve Act, giving the Comptroller of the Currency the right to approve any fees, compensation or expenses so

fixed by the Corporation as receiver of a national bank, his office

already has full authority to protect the interest in national bank
receiverships of all creditors other than the Corporation.
Section 4

Section 4 of the bill under consideration provides that
whenever all the assets of an association which has been placed in

the hands of a receiver shall have been distributed by the Comptroller
of the Currency in accordance with the provisions of Section 5236 of
the Revised Statutes of the United States, the Comptroller of the
Currency may call a meeting of shareholders of the association to
vote upon the question of whether the receiver shall continue to wind

up the affairs of the association or an agent shall be elected for
that purpose. In lines 11 to 14 on page 9 of H. R. 12447, reference

is made to the distribution of the assets of the association in the
hands of a receiver "by the Comptroller (of the Currency) in accordance with the provisions of Section 5236 of the Revised Statutes

of the United States" and to the payment in full of all claims "by
the said Comptroller".
Paragraphs three and four, subsection (L) of Section 12B
of the Federal Reserve Act, as amended, now provide that whenever

301

-4any insured national bank shall have been closed by action of its

board of directors, or by the Comptroller of the Currency, as the
case may be, on account of inability to meet the demands of its
depositors, the Comptroller of the Currency shall appoint the
Corporation receiver for such closed bank, and no other person shall

be appointed receiver of such closed bank. It is further provided

that it shall be the duty of the Corporation as such receiver to
realize upon the assets of such closed bank and to wind up the af-

fairs of such closed bank. The Corporation is specifically directed
to retain for its own account such portion of the amounts realized
from such liquidation as it shall be entitled to receive on account
of its subrogation to the claims of depositors, and to pay the depositors and other creditors the net amounts available for distribution to them. With respect to such closed bank, the Corporation, as
receiver, is given all the rights, powers, and privileges now possessed by or hereafter granted by law to a receiver of an insolvent
national bank.

Section 4 of H. R. 12447 can be construed as superseding
the above-mentioned provisions of subsection (L) of Section 12B of
the Federal Reserve Act. We have no objections to any of the pro-

visions of the pending bill insofar as they apply to receiverships
contracted for by the Comptroller of the Currency prior to January
1, 1934. However, as previously stated, we are sure that neither
this Committee nor the Comptroller of the Currency intends to affect
the existing powers of the Federal Deposit Insurance Corporation as

-5receiver of national banks which fail subsequent to January 1, 1934.

We also believe that it is not the desire of this Committee to leave

its intention in this respect subject to any doubt. It is therefore
respectfully suggested that the Committee write into the bill a

clause to the effect that nothing therein contained shall alter or
affect in any manner the existing powers of the Federal Deposit

Insurance Corporation as receiver of a national bank. It is also
suggested that following the words "notwithstanding any other pro-

visions of law," in line 10, page 2, there be inserted the words,
"and except as herein otherwise provided", in order that the suggested clause excepting the Corporation might be given full effect.
We have not discussed the provisions of the second
paragraph of Section 1, commencing with line 4 on page 2 of the
pending bill, as we understand the Committee has already determined

that this paragraph shall be stricken. The Corporation would
recommend against the enactment of this provision as drawn and if

the Committee intends to give further consideration to the paragraph

the Corporation desires an opportunity to present its objections at
length at a further hearing.

302

303

TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION

DATE January 12, 1936
TO

Secretary Morgenthau

FROM

M

Mr. Haas

At 11:30 this morning you called me on the telephone and requested that I have prepared a memorandum on the trend of money

rates, with particular reference to short-term bills, etcetera.
You asked that I have this ready for you tomorrow morning.

#9

M

Mrs Kletz Section should go to 7.0.K 304
with note from me. 10mg
PARAPHRASE OF TELEGRAM RECEIVED

FROM: American Embassy, Paris, France

DATE: January 12, 1937, 9 a.m.

NO.: 38
FROM COCHRAN.

This morning I returned from Basel where on Sunday

and Monday the BIS directors had their meeting. Most of
the discussion centered upon drafting an amendment to
the statutes which was made necessary by the plan for

separating the offices of Chairman of the Board and Presi-

dent of the Bank. I described this plan in my telegram
of December 15, 10 a.m., No. 1255. The directors did not

vote on a final texts, but in informal discussions they
agreed on all important points. At the February meeting
texts will probably be adopted.
I had a conversation with Trip, in which he told me
definitely that after the close of the present business
year he would not continue as Chairman of the Board. It
has been arranged that Beyen shall be made President, and

Trip thinks it best that the two principal positions of the
Bank should not be held by men of the same nationality. He
reminded me that his acceptance of his present position

had in the first place been with the understanding that
his incumbency was temporary and provisional.
END SECTION ONE.

BULLITT.
EA:LWW

305

SECTION TWO. No. 38 of January 12, 1937, from Paris.
Mention has been made of Sir Otto Niemeyer as

the most likely successor to Trip as the Board's Chairman. I was told by Governor Norman that for the present
he would not name a successor to Porters who was British
resident manager of the B.I.S. and who resigned last
June. Governor Norman said that there were too many

resident officers now, and that in his opinion there
should be reorganization of the Bank in such a manner that
central banks would no longer nominate their own nationals

to posts within the B.I.S., and leave the appointment of
every one to the immediate direction of the Bank. Discussion took place in this regard when amendments were
being given study this weekend.

There is feeling by the Italians and Germans at least

that a quite friendly attitude toward the British is held
by Beyen. Beyen, the French think, will eventually get
rid of the French General Manager, Quesnay. Therefore
there is some concern lest there be too much control by
the British should Niemeyer become Chairman of the Board,
and with Beyen as President, Jacobsson a Swede as head of
the Economic Section, and Norman holding in abeyance the

naming of a British manager until developments show what

caliber of officer may be required for the position.
An attempt is being made by Schacht to safeguard or improve

Hechsler's position; the latter is German assistant manager.
Preference was expressed by the Italians at seeing Bachmann
of Switzerland become the Board's Chairman rather than Sir
EA:LWW

Otto Niemeyer. END SECTION TWO.

BULLITT.

306
PARAPHRASE.

SECTION THREE. No. 38 of January 12, 1937, from Paris.

Some gossip is heard that the British, by the date
of the annual meeting, will try to have Governor Rooth
of Sweden made a B.I.S. director again. Should this
happen, the French will insist that a director be appointed
to represent Poland or Czechoslovakia, and Germany will
want one from Austria or Hungary.

Inquiry was made by several with regard to the pos-

sibility of the United States participating in the B.I.S.
officially. One of the Bank of England's young officers
has just finished a three months' stay at the BIS. A
similar representative from the Bank of Italy has arrived
to pass few months' service there. Yanangita, the Japanese director, urged upon me the desirability of having
an American in the BIS. He insisted that to avoid
European politics an American should be the chairman.

I had a conversation with Trip, who told me that the
recently consummated arrangements for gold reciprocity between the United States and the Netherlands were working

satisfactorily. He said he had been earmarking gold in
New York with dollars which he acquired in suppressing

his currency. He said that the operation was expensive,
and added that the Federal Reserve handling charge was

the reason for his not pegging his rate at a depreciation
of 20% but pegging it at 19.5 instead.
The Swiss Governor, Bachmann, spoke of his gold ship-

ments to New York. He again inquired regarding the pos-

sibility

307

-2sibility of Federal Reserve Bank of New York accepting
his earmarked gold at some central bank on the Continent.
Bachmann and Trip had a discussion of their technical

problems. I believe that either Bachmann or Trip or
perhaps the BIS will ask the Federal Reserve whether the
Dutch could cede some of their earmarked gold in New

York to the Swiss who want to build up a stock there.
The Swiss could then ship gold to Amsterdam from Bern,

thus avoiding shipping gold across the Atlantic. I was
asked by Bachmann to give him any data I may obtain from

time to time regarding plans of the United States on gold
sterilization. Bachmann said he himself was facing a
problem somewhat like the American problem, and he wanted

to benefit from the experience we have. The remark was

made by Trip that the equalization fund of the Netherlands

was following a policy quite similar to that which the
American Treasury is now inaugurating. The B.I.S. resident officers incidentally told me of their desire to
cooperate with the United States in effecting certain
gold deals in behalf of central banks in countries which
are party to the six-power reciprocal arrangement. They
plan to seek more exact information from the Federal

Reserve 80 that undue delays in formalities attending their
operations may be avoided. The United States is suffering from too much gold, they say, and they are anxious
that

308

-3that distribution of it be made. The BIS, they state,
is accepted agent of numerous central banks in effecting

gold operations, and really useful bilateral service could
be rendered by it in the continuation of this work.
The view which Governor Franck of Belgium previously

expressed to me that countries with any sort of exchange

control or restrictions should not be admitted to the
technical benefits of the tripartite arrangement is shared

by Governor Trip also. It is the opinion of both officers
that no countries should be added to the present six,
but that the BIS should be the medium for gold transactions
with the remainder at least of Europe.
Reference is made to my telegram No. 1296 of Decem-

ber 28, 11 am. In that telegram I gave the reasons as
advanced by Rooth why Scandinavian central banks are at

present not inclined to adhere to the tripartite arrangement. In confidence I was given by my Swedish contact
at Basel the following two reasons which probably had
much to do with the attitude taken by Rooth and perhaps
that of some of the other Scandinavian Governors although

they could not reveal them in a letter:
First: Rooth fears that the Swedish Socialist Government might be too prone to follow the example of

the United States if the tripartite declaration should
be adhered to by Sweden. In other words, Rooth desires

to maintain the independence of his Bank in so far as is

309

-practicable. Rooth thinks that in the United States the
trend is for the Treasury to have more and more control
over the currency and over credits. He feels that while
this may not be so dangerous in the United States, in his
own country it would not be at all desirable, nor would
it be desirable in certain of the Scandinavian countries,
in view of the fact that power is in the hands of the
Socialists.

Second: Rooth feels that there has been too large
a depreciation of the Swedish crown. He believes that there

is a real possibility that his country may find it desirable to move the rate up about six points 80 that the crown
is devalued just to the same extent as sterling and so

there will be restoration of old parities.
In Sweden it has been found that with the present devaluation they are having to pay too much for raw materials
from foreign countries. Swedish exporters are even in
favor of an upward readjustment of the crown, and they

prefer that it be done now while the profits from their
business are still sufficient to permit such a move, and
if it were done later there might be more serious internation
al competition.
Rooth and Ryti of Finland had a discussion on the
foregoing; the Finnish currency has also been depreciated
below sterling even further than the Swedish crown, and
Finland is facing about the same situation as Sweden.
My

310

-5My contact said he would not be at all surprised if Sweden
and Finland may soon move toward raising the exchange value

of their respective currencies.
Under the present circumstances, Rooth and Ryti do

not feel that they can properly adhere to the tripartite
arrangement. These governors want their hands left free
to move their exchange (?) even though the move may be up-

ward and not in the downward sense against which a strong

position was taken by the tripartite agreement.
END SECTIONS THREE TO SIX, INCLUSIVE.
BULLITT.

EA:LWW

311

SECTION SEVEN. No. 38 of January 12, 1937, from Paris.

The Governor of the Bank of Italy, Azzolini, invited
me to dinner Sunday night. He entertained all the foreign
delegations except the Germans, who were the guests of

Beyen in spite of the fact that German tactlessness incident
to the Dutch royal marriage had made Dutch representatives

unhappy. I was told by the Italians that they had had a.

fine winter tourist season. Their trade balance as lately
revealed by the Minister of Finance was quite encouraging,
and they had had satisfactory results from subscriptions
to the recently announced loan for consolidated Italian

shipping. The Italians were, furthermore, pleased with

pacification of Ethiopia, and with the setting up of Italian
enterprises to develop that territory. The rumor was
denied that part of the shipping loan was being taken by

British interests.
Concern over the French budgetary and treasury sit-

uation was expressed to me by the Dutch, Swiss, Italians,
Germans and British. I was asked by Trip whether I had
obtain

heard anything of French effort to a loan
from Mendelssohn. Norman told me that a rumor was again

current that British banke were being approached by the
French Treasury for a second credit from them. He again
said that he was opposed to the idea of such a banking
credit since it would solve nothing - which remark he had
volunteered in December. It is my understanding that a
few weeks ago when the French raised the question of a
second

312

-2second credit with the British, the French were advised

to liberalize their own gold and other related policies
so that capital
which already exists in France might be
invested
in
government securities. It was pointed
out that should London make such a loan, the actual fact
would be that the French Treasury would be paying the British bankers for lending back capital which had fied from

France to England. Further appeal to the British can be
conceived, since on December 15 the French took steps which

they considered as appropriate liberalization of policy,
and since they have not yet had satisfactory results therefrom.

I had a talk about French facilities for borrowing with
Cobbold of the Bank of England; Cobbold acts as Liaison

Officer with the Bank of France, and he visited Paris en
route from London to Basel. He believed I was inclined

to be overly optimistic in regard to the French Treasury
being able to meet immediate needs through treasury bills.

He is of the opinion that in spite of steps recently taken
to widen the Paris stock market to relieve the situation,
French investors and banks will refuse to absorb a sufficient additional amount of such bills. Less pessimism
was expressed by Niemeyer regarding France than was ex-

pressed by his British colleagues, Cobbold and Norman.

Niemeyer realizes that in France there has been some real

economic and social recovery. He thinks that if the
present

313

-3 present Government has the necessary courage, it may pos-

sibly pass successfully through its financial difficulties.
I was told by Niemeyer that on the thirteenth of
January he sails on the BERENGARIA for New York. He will

be accompanied by Secretary Reid of the British Council of
Foreign Bondholders, the two of them to confer with Reuben

Clark of the Foreign Bondholders Protective Council in
New York. My contact said he was anxious to arrange for
some sort of closer cooperation between the two organizations

vis-a-vis their common debtors; he thinks that such cooperation and constant consultation would be of benefit to both

the United States and England. Britain's obvious desire,
incidentally, to work in harmony with the United States in
future foreign lending may prove to be perhaps Great Britain's
strongest reason for regularizing her war debt position
and removing the ban of the Johnson Act on foreign lending.
I was assured by Niemeyer that he was going to New York

solely for the purpose of visiting Clark, although he would
of course see Governor Harrison, who is a friend of his.
He does not want any publicity lest it be reported that he
is on some trade mission or war conference.
END SECTIONS SEVEN AND EIGHT.

BULLITT.
EA:LWW

PARAPHRASE.

314

SECTION NINE. No. 38 of January 12, 1937, from Paris.

I had a separate conversation with Schacht. He made

reference to his article in Foreign Affairs on the question
of colonies for Germany. I asked whether he had made any

progress in this regard with the French and the British.
to Paris

The French attitude, he said, after his visit/late last
summer, was satisfactory; the Germans had found it entirely
possible to have direct conversations with the French.

The British, he said, had not yet given a definite or
formal answer to Germany's plea for raw material resources
although he had been most discouraged by Eden's attitude

and the British rebuff to the French approach on this

subject after Schacht's visit to Paris. Schacht reminded
me of the Hitler Government's sincere offers for disarmament and peace. One after another of these offers, he
said, including that of limiting the army to 300,000 men
had either been totally ignored or had been refused. He
told me he thought they might be making their last offer

in the outstanding offer for peace in return for colonies.
Great Britain and the world, he said, should understand

that the Hitler Government is firmly established, and if
there is any attempt to humble Germany the German people

will be solidly behind it.
Schacht said again that it is not possible to have
world
effortspeace without German peace. He emphasized the
EXPRESS and aims of the United States toward peace. He
expressed

315

-2expressed the hope that the United States would not let
slip the opportunity which he says is now ours, particularly

the President's, to take the lead in solving the outstanding questions of Europe, and primarily Germany's problems.
The idea of a Washington conference was mentioned by

Schacht; I asked him why in Washington, and he replied that
the United States has now the world's leadership and the

wealth to make it effective so that other nations should
be called to Washington for conference and discussion.
I asked Schacht whether he had been told the scheme which

had been suggested to me that day by one of my earnest

Central Bank friends; i.e., for Germany to borrow from

the United States to buy neutral territory from England
and for the latter to apply the proceeds of the sale upon
British war debt to us. This suggestion was made by
Yanagita (Japan). The reply of Schacht was that he was
not suggesting the measures that should be taken; however,
he hopes that we would take advantage of Runciman's visit

and that of another distinguished Britisher - Niemeyer,

I assume - to indicate to the British that we are interested
in a final and happy liquidation of the problems facing
Germany.

Schacht's Basel representative, Heschler, told me that
the atmosphere created by press accusations of German

activities

316

-activities in Morocco had disgusted Schacht. This subject
was discussed at length by Schacht and Norman. According
(Heschler)

to Heschler, Schacht told him/that the whole press story
was a pure fabrication, that Germany had sold certain supplies
to France and the latter could not pay in cash; consequently
there was some activity in France shipping to Germany in
a barter for such supplies, ores, and other materials
which could be obtained in Spanish Morocco. The affair
was no more than that. Niemeyer remarked, in discussing

the article of Schacht's in Foreign Affairs, that the two
raw materials which are needed most by Germany, rubber and

wool, are not commercially available in the colonies which
Schacht is seeking.

February 8 has been set as the date for the next
meeting of the B.I.S.
END OF MESSAGE.

BULLITT.

EA:LWW

317

PARAPHRASE OF TELEGRAM RECEIVED

FROM: Tokyo, Japan

DATE: January 13, noon
NO. 5
RUSH

I refer to Department's No. 3 of January 11, 5 p.m.
(1) Conditions in Japan have not as yet become

serious, although the present financial situation is less
favorable than it has been for some years past. At the
end of 1936 the national debt rose to well over ten billion
yen (over eleven billion yen if the external debt is calculated at the present rates of exchange), but for a nation
the size and power of Japan, this amount does not appear
Easy money rates prevail.

to be excessive./ The note issue today ( one billion,
four hundred and thirty-eight million yen) is covered
to about 66% by the specie reserve and there has been

little or no currency inflation. The visible foreign
trade balance for 1936 was unfavorable to Japan by one

hundred, thirty-four million yen, but a favorable invisible
trade balance (amount as yet undetermined) partly offset
this.

(2) Atfairly strong financial position is indicated
by the above factors, but the following unfavorable factors
have been weakening and will weaken that position further:
(A) Difficulties have been experienced by the Government

318
-2-

ernment in disposing of the issues of 3 1/2% deficit bonds
of the present fiscal year and the market price fell below
the issuing price in November.

(B) The 1937-38 fiscal year budget which is greatly
increased will require the issuance of almost one billion

yen additional deficit bonds, and it will probably be
necessary for the government to exert pressure on the

trust companies, banks, et cetera, to force them to buy the
1937-38 issues.

(0) The fact that the banks are not able to dispose
of the bonds to the public as fast as they acquire liabilities in respect to the bonds makes for dangerous inflation
of credit.
(D) The import excess for 1937 will probably be
larger than for 1936 as Japanese exports are meeting increased opposition abroad, while imports of raw materials
will increase because of the demands of the munitions and

allied industries. This will cause further pressure on the
yen.

(E) Although the amount of the Yokahama Specie

Bank's foreign exchange reserves abroad is not published,

foreign bankers in Tokyo are of the opinion that those
reserves (formerly three or four hundred million yen) have
been seriously impaired, due to efforts to maintain the
yen

319
-3-

yen at one shilling and two pence in 1936. Therefore,
it will become more and more difficult for the bank to

maintain the value of the yen at the figure above stated.
(3) The factors show the government's difficulties in
regard to the value of the yen and the price of bonds.
Since the February 26 incident, there has been steady
pressure on the yen and in December last this pressure became 80 great, when coverage had to be found for unusually

large cotton purchases, that the yen declined. This weakness together with the fear of the further pressure which
would result from large speculative imports which were ex-

pected in anticipation of the projected increased tariff
rates, were the causes for announcing and putting into
force on January 8 the foreign exchange control regulations
(which are tantamount to an import licensing system). It
has been explained by the Finance Ministry that the exchange

control regulations are aimed against speculative imports
and will not be employed to curtail necessary legitimate
imports of raw materials such as wool and cotton, and with
the further design of spreading imports over the year so
as to avoid sudden heavy pressure on the yen. However, the

imposition of the regulation shows clearly the yen's weakness and the scarcity of funds with which to stabilize
foreign

320

-3a-

foreign exchange.

(4) It is the general opinion of competent observers that the financial situation in Japan is steadily
growing worse, being perhaps less sanguine at this moment

than at any time in the recent history of Japan.
The

321

-4The chief reason for this is the abnormally large proposed budget for 1937-38 which is over thirty percent
larger than the budget for the present fiscal year.
The budget with its inevitable additional burden of deficit structure's weakness. The Japanese nation, through
this budget and succeeding budgets which promise to be

even larger, will have burdens thrown upon it faster
than the increasing economic resources can take care of
them. Observers believe that the Government consequently

will not be able to escape difficulties in maintaining
the price of Government bonds and in sustaining the yen's
value at one shilling two pence. Announcement has been
made by the Yokohama Specie Bank of its intention to

hold the yen at this value largely it is believed because
of the fear that should the yen fall to new low levels
increased opposition abroad to Japanese exports will be

raised. It is believed, however, that Japan is in no
pressing danger of a financial collapse. There is prevailing opinion that the Government will take further artificial measures much along the lines of the steps which Germany

has taken to sustain its financial structure, which measures

will be designed especially to maintain the value of the yen
and the price of Government bonds. It is believed that the
Government

322

-5ment will succeed through such artificial measures in

preventing a dangerous crisis in the near future, although
it will not be able to avoid a considerable measure of
credit inflation accompanied by a rapid price rise.
(5) I have given above a general discussion of the
present financial situation in Japan. Should the Treasury
desire more specific and detailed information, an attempt
to obtain the necessary data will be made by the Embassy.
END MESSAGE.
GREW.

EA:LWW/DJW

January 13, 1937

323

The Secretary asked me to advise Mr. Eccles that he (the

Secretary) is hopeful that the FederalReserve can reach a definite
decision for announcement not later than February 1st as to whether
or not they are to increase excess reserve requirements at this

time. If their decision is in the affirmative, the Secretary is
hopeful, I was further to inform Mr. Eccles, that the effective
date will be not later than February 15th so that two weeks can
elapse prior to any announcement by the Treasury with respect to
March 15th financing.

I went to see Mr. Eccles and gave him this information,

stating that the Secretary feels that the market is a little jumpy
and that there are a good many comments to the general effect that

the uncertainty as to Federal Reserve Action is the main disturbing feature in the market.
Mr. Eccles was disposed to think that the Treasury would
have no particular financing problem on February 15th and need

not be specially worried about the state of the market so far
as Treasury financing needs are concerned. He referred to the
difficulties that are always made in getting the two groups -The Federal Reserve Board and the Open Market Committee -- to

reach a decision. He discussed some possibilities of reaching a
decision by the 15th of February or announcing a decision on

the 1st or the 15th as being effective 6 weeks later.
I again represented the Secretary as hopeful that the
schedule as suggested by him might be carried out and Mr. Eccles
agreed that it could and would be done. He said he would be prepared to enter into a preliminary discussion at luncheon on next
Tuesday.

324
-2-

I suggested that he might want to find out at once what
the actual reserve position of all banks is and he said he
would call Mr. Smead at once on that.
Mr. Eccles discussed one or two other matters. He is
of the opinion that the substantial price rise in some commodi-

ties is growing out of labor trouble. He referred particularly
to the strike on the Pacific Coast and the situation in the
lumber industry saying that there is a good bit of forward
buying based upon expectation of further price increases.
He referred to the report of the President's Committee on
administrative management and said that some inquiries were
being made as to whether the Federal Reserve was to be grouped
under the Treasury.

I told him that I doubted that that was contemplated for
the present but that the report might serve to arouse suggestions
on the Hill for a monetary authority more closely identified
with the Government than the Federal Reserve system now is.

He said that personally he had no great interest in
whether the Federal Reserve was grouped with the Treasury or
not.

During the course of the conversation Mr. Eccles expressed

his pleasure that the Treasury was only offering fifty million
of bills each week now, saying that he wanted to see excess

reserves increase just at this time.
Upm.

325

GENERAL MOTORS CORPORATION
EXPORT DIVISION
GENERAL MOTORS BUILDING

CABER ADDRESS
AUTORKPORT"N
ALL CODES USED

BROADWAY AT 57TH STREET

NEW YORK, N. Y.

January 13, 1937
The Honorable Henry Morgenthau

Secretary of the Treasury
Washington, D. C.

My dear Mr. Secretary:

Mr. Mooney telephoned me from Washington this noon, following his very

pleasant conversations with you, to tell me of the interest you had expressed in the monetary situation as it is currently manifesting itself
in Japan, and to ask me to give you whatever information I could bearing intimately on the subject.
It happens that we have been in close cable contact with our Osaka

office within the past few days, as we are continuously, and the opinions
set forth below give weight, therefore, to the knowledge made available
to us by our representatives on the ground, as well as to the interpretations provided by our financial officers back here.
The recent emphasis put upon the exchange restrictions prevailing in
Japan relates, of course, to a development which is not new in itself,
since these restrictions have been in actual effect for a number of years.
Under this prevailing system, free exchange may be procured only for
imports of bona fide merchandise shipments, with other demands, such as

the remittance of profits, requiring special government license in all
cases. The implication of the newly published ordinance, as we see it,
is that a much sharper control and supervision of exchange transactions
will be exercised by the authorities in the future, but we have no direct

evidence, actually, that this will result in any reduction in the total

amount of exchange allocated. In our own business, as a matter of fact,
we have been led to believe that exchange will be granted for importations of merchandise and for other purposes equivalent to the exchange
requirements in the period 1935-1936, and it may well be, if this indica-

tion is typical, that the general intention of the ordinance is to keep

demands for total exchange at their present level, and not necessarily
to curtail them.

It is not surprising, in any event, that developments are taking on their
present complexion, because for well over a year a number of things have

326
The Honorable Henry Morgenthau

-2-

January 13, 1937

conspired to put the yen under definite pressure. There is, in the first

place, the Japanese adventure in Manchukuo, which has resulted in a tremendous drain of capital from Japan to this area for commercial expansion,

and from which no return is yet apparent; and there is also the inordinately high cost of administration, both civil and military, which prevails
within Japan itself. The army and navy have, for a number of years, been
obtaining an increasingly large share of the annual budget, and the military
institution has gradually assumed a more dominant position in the Japanese
economy, reaching its greatest ascendency, perhaps, in the military coup

d'etat of February, 1936, when certain ministers, including the conservative
Minister of Finance, were assassinated.

Following this development, the yen broke away from sterling and depreci-

ated sharply. Although it seems that the military lost appreciable ground
on this occasion, it does not appear to have constituted a complete defeat
for them, because the most recent budget figures, published within the
last month, show that 46% of the budget is still dedicated to the armed
services. To offset the latest increases in the budget, an effort to raise

revenues is now being made by new and heavy taxation, the effect of which
might well be calculated to drive substantial amounts of capital away from
the country - a thing which has actually tended to happen, and which would
normally make stricter application of the exchange regulations desirable
from the Japanese standpoint.
The yen has subsequently recovered, of course, but an influence tending
now to weaken it further, and to increase the demand for stricter exchange
regulations, has been Japan's recent heavy purchasing of cotton, which was

itself undoubtedly stimulated by a desire to anticipate both a possible
further depreciation of the yen and the imposition of tighter exchange
controls.

The present Finance Minister of Japan has announced that the recent ordi-

nance strengthening these controls is aimed solely at stabilizing the
yen, presumably at its present level. There is some reason to believe,
from this and other evidence available, that the sounder elements in

Japan, as represented by the commercial interests and the parliamentary

group, may be gaining strength at the expense of the military, and if this
is so it should react favorably to the stability of the currency which is

ostensibly being sought. The collateral evidence in this regard - if it

may be considered as evidence at all -- is the recent softening of Japan's
attitude toward Russia and China, and the reciprocal stiffening of the
attitude of Russia and China toward Japan, as well as the hurried negotiation of the pact which Japan has recently concluded with Germany. If this
evidence is valid, it provides ground for belief that Japan may have reached
the end of her tether; that she may realize this herself equally with other
nations, and that this realization may serve to induce a less profligate
national finance, which could well reflect favorably, in the future, upon
the value of the yen. This development may, on the other hand, indicate
merely that Japan is pausing for breath today in an effort to put her house
in better order.

The Honorable Henry Morgenthau

-3-

January 13, 1937

327

However this may be, the future outlook on the course of the yen is inherently pessimistic by reason of the precerious fiscal situation prevailing internally in Japan. This is a basic consideration which will continue to affect the current trend in the value of the Japanese currency,
however stringent the exchange regulations imposed may be. It seems clear

that the greatest danger to the yen, quite apart from current foreign
demands upon it, originates from the fact that the public debt has now
passed what was once called the danger limit of 10 billion yen, as compared

with a figure of 6 billion five years ago, and it is extremely doubtful
that permanent stability of the currency at its present level, or even

at a lower level, can possibly be achieved when each budget year produces

new deficits which are financed by "red ink" bonds to the increase of the
national debt. Far from relieving this situation, any increase in foreign
exchange restrictions to a point that would seriously interrupt Japan's
intercourse with the rest of the world would tend to have the opposite
effect of inducing isolation, with its consequent attenuation.
This approach relates itself, basically, to the conception we hold here
that the value of any national currency is determined predominantly by

conditions within the country itself. We hold also, incidentally, that

the currency action which any country may take, in the way of depreciation
or manipulation, is of genuine importance only within the domestic confines
of that nation itself, and that any tendency to look upon such monetary
action as being designed primarily to secure a "competitive" trading advantage in foreign commerce is quite fallacious.
hope this broad sketch of the situation with respect to the Japanese
yen, as we have been able to appraise it from the information available
I

to us here, will be of interest to you. If there are any specific points

on which you think we could furnish additional information, you may be

quite sure that the facilities we possess are entirely at your service.
Sincerely yours,

Edgar W. Smith

328

STABILIZING THE EXCHANGES

By

James D. Mooney

Vice-President in charge of Overseas Operations,
General Motors Corporation

Address at International Dinner, Automobile Manufacturers Association
Ritz Carlton Hotel, New York
November 16, 1936

329
STABILIZING THE EXCHANGES
By

James D. Mooney

Mr. Chairman and Gentlemen:

I have been asked by your dinner committee to make a few remarks

on the international situation, and particularly on the processes that
are being undertaken to stabilize the exchanges.
Now, ordinarily, after-dinner speeches on economic subjects are

rather boring. But this subject, stabilizing the exchanges, has possibilities for trying your patience that are simply appalling.
I estimated the other day, for example, that it would take me

five hours to outline the preface or preamble to this subject for you, It
would take several hours to relate the exchange history of the past fifteen years and the trials and tribulations of the American foreign trader
as he tried to get his money back into dollars without suffering huge
exchange losses. It would take me at least three hours to give several
countries abroad the right kind of hell for not letting the Americans
have any exchange at all.

Altogether, I estimated that it would take me 19 hours and 20
minutes to cover the subject properly for you.

At this point I decided to go on the 50-50 principle, like the
French cook who was asked how he made his rabbit stew. He replied, "I

use half rabbit and half horse-meat; you know, 50-50, one rabbit, one
horse."

330

-: 2 :Now, as I said, I have decided to go on this 50-50 principle,

too, and leave out half of my speech, - I mean the 19-hour half. In
other words, I shall do my best to tell you what I can of stabilizing
the exchanges, -- in 20 minutes.

We are extremely fortunate tonight in having with us, for this
discussion, the Honorable Wayne C. Taylor, Assistant Secretary of the
Treasury.

Those of us who have known Mr. Taylor during the past several

years have found him, as a Government official, refreshingly experienced
and sound. He has gained his knowledge of foreign trade and exchange

problems by practical contact on the ground, both in the United States
and abroad.

I was told that this would be a private dinner, and that we

could all take our hair down without fear of the inquiring reporter.
Accordingly, Wayne, I am going to speak to you very frankly about some
of these problems that have been bothering us for so many years.
I happened to be in Europe at the time the announcement was

made of the gold bloo devaluation and the so-called stabilization pact.

The official statements I read on the other side were all very optimistic,
and the impression was successfully created that a decided step forward

had been taken toward stabilizing the exchanges. Frankly, I was a bit
skeptical about this, because the announcements were not very satisfying

as to the technique to be provided for accomplishing this promised sta-

bility. My skepticism was increased by conversations I had later with

331

-: 3:some of the government officials most intimately concerned with the fate

of their respective currencies.
I visited with Doctor Schacht in Germany: Mr. Van Zeeland,

Premier of Belgium; Mr. Colijn, Premier of Holland; Professor Bruins,

President of the Netherlands Clearing Institute; Mr. Charles Rist, Vice
Governor and Economist of the Bank of France; Sir Frederick Leith-Ross,
Number One Man of the British Treasury: and Professor Clay, Economic

Adviser of the Bank of England. I am not going to bore you with the de-

tail of these conversations, but the gist of what I gathered is this:
No attempt will be made to keep the exchanges stable, except

within narrow limits and over short periods of time, What all of these
countries are really thinking about is their own internal economic salva-

tion first of all; with actual cross-rate stability coming in a bad second, France and England, as well as Holland, have doubts about the rate

at which their currencies should be pegged, in relation to gold. They

are net sure about their price levels in the situation.

The English say definitely that if sterling begins to drift
away from gold, they will not try to stop that drift. The Dutch will use
their equalization fund only as a means, as they express it themselves,
of rapping on the knuckles any speculators who might be tempted to "bear"

the florin. One of the most interesting expressions of any of these men
was that of Mr. Rist, of France, who took a position of extreme skepticism
toward some of the theories that are supporting the policies of the many
countries who have embarked. upon the so-called managed currency adventures.

332

-: 4 :-Now, Mr. Taylor, in order to be as brief as possible, I should
like to present to you a summary of a few of the axions, or fundamentals,

or principles, or whatever you want to call them, that we foreign traders
have picked up during fifteen years of experience and observation of the
various paper money experiments that have been tried by all the governments throughout the world.

There are certain axioms in the situation, as they concern us
here in the United States, Mr. Taylor, and I should like to pass them
along to you for what you feel them to be worth. In other words, I am
going to place myself in the position that Will Rogers took with the Amer~
ican Navy during the World War. You will remember that the Navy Department was very keen on getting suggestions for doing away with the menace

of German submarines, Will Rogers, it seems, pointed out to the Navy that,

inasmuch as it is impossible for a submarine to operate in boiling hot
water, they could do away with the German submarines by boiling the Atlantic
Ocean. One of the admirals asked Rogers, "Yes, Will, but how can we boil

the Atlantic Ocean?" And Will Rogers replied, "Well, Admiral, I'm giving

you the big idea, - of course, you will have to work out the details."
Now, Wayne, I'm going to give you generally what we consider the

big idea in this currency stabilization situation, and leave it to you to
work out the details.

1. All of the experiments that have been conducted in
paper money have one thing in common - they are a

flight from the realities of gold and gold prices.

-:5:2. No country has ever gone off gold or ever does go

off gold actually or factually. It may go off gold
contractually; that is, it may refuse to redeem its
paper currency at its face value in gold, but this
does not change in the slightest degree the funda-

mental attitude of the Government or its citizens

toward the attractive qualities of gold itself.
Whether a nation is "on gold," or "off gold," it is
a very significant fact that gold always has been,
and still is, the common denominator of all international exchange transactions. In other words, gold
is the medium of exchange among paper moneys.

3. The real prices of world commodities - wheat, cot-

ton, copper, oil, etc. - are gold prices. These
prices are still governed, on a world basis, by the
supply and demand for gold and the supply and demand

for commodities, Internal paper prices of these
world commodities in any country are a by-product of
these world prices: they are determined automati-

cally by the gold value of that particular country's
paper money.

4. The rate of exchange between the paper moneys of any

two countries can be stabilized only when each country's

333

334

-: 6 :paper money is stabilized in terms of gold. Equalization funds can "peg" cross-rates over compara-

tively short periods of time and within certain
narrow limits, but the exchange rates of two paper
moneys cannot actually be kept stable unless each

paper money itself is kept stable in terms of gold.
5. A paper money cannot be evaluated by offering to buy

gold in terms of that money. Actually, it is the
offer to buy the paper money, the offer to redeem

the paper in definite terms of gold, that evaluates

it.
6. A debtor country cannot stabilize its currency unless it exports annually more than it imports, by the
amount of its annual external debt charges.

7. A national currency cannot be permanently stabilized
unless the national budget is balanced,

8. The lack of stable exchange rates is not the cause of
upset trade conditions in the international markets
any more than high temperature is a cause of smallpox. The high temperature is only a symptom. Lack
of stable exchange rates is a symptom, too: the
smallpox of our present-day international trade and

335

--: 7 money conditions is economic nationalism.

9. It is futile to discuss international agreements
for the stabilization of exchange rates of paper
moneys, until such time as the stress can be taken

off gold for the discharge of international obligations,

The stress on gold can be relieved only by making

it possible to discharge these obligations more
freely in goods or services. In other words, when
we begin to convalesce from the disease of economic
nationalism, when goods again are as "good as gold"

for paying debts, then, and only then, shall we find
it possible to keep the exchange rates stable.
10. When goods flow freely again across international
boundaries, when national budgets are balanced, and

when internal price levels are brought into equilib-

rium by fighting rising industrial costs, then, and
only then, can paper moneys be stabilized in terms
of gold. And only when the various paper moneys are

stable in terms of gold can they be stabilized in
terms of one another.

336

-:- 8 :Finally, it has been a damned nuisance to have to speculate in

the exchange rates, and we, as foreign traders, will be very grateful for
any action that will tend to remove this nuisance. Far more important
than this, however, we need continued help in blazing away at the quotas,
exchange restrictions, embargoes, and excessively high tariffs that have
so effectively clogged up the whole international movement of goods.
Our American motor cars have taken a terrific beating from these

restrictions during the past few years. We ought to be exporting three
or four times as many automobiles as we are exporting today. The American

motor car is the most desirable product that has been offered by any coun-

try for export during the past generation, and literally millions of
people abroad are eager to own and operate an American automobile. But

the whole fabric of international trade has been so badly broken down

that this highly desired product is excluded from a very large part of

the world today. It is either shut out entirely, or it must be offered
at such extremely high prices that it is beyond the average buyer's reach.

I say, in all seriousness, that because this is so, the sales of American
motor cars abroad are not one-fourth of what they should be.
In conclusion, Gentlemen, I presume you would like me to say

to Mr. Taylor, on your behalf, that the automotive industry will be very
happy to continue to support the U. S. Treasury and the State Department

in the excellent efforts that are being made to S traighten out this badly
muddled-up exchange and paper money situation.

337

GROUP MEETING

Present:

January 13, 1937

9:35 A.M.

Mrs Klotz
Mr. McReynolds
Mr. Upham

Mr. Bell

Mr. Haas
Mr. Gibbons

Mr. Gaston

Mr. Oliphant
H.M.Jr:

Good morning.

All:

Good morning.

H.M.Jr:

Miss Roche not here?

Mrs Klotz:

No. Mr. Taylor isn't.

H.M.Jr:

I spoke to Taylor.

Oliphant:

Is he ill?

H.M.Jr:

Yes

Oliphant:

Is it the flu?

H.M.Jr:

I spoke to Mrs. Taylor. She said sort of fluish, yes.

Oliphant:

Manning has a temperature of 102 - yesterday.

H.M.Jr:

Really?

Oliphant:

Flu.

H.M.Jr:

Mac?

McReynolds: Nothing except that, subject to your approval, I am
taking the train at half past six tonight to see my
daughter break a bottle tomorrow morning - come back
tomorrow night. Be back Friday morning, be gone one
day.
H.M.Jr:

Good. What's in the bottle?

McReynolds: Well, I don't know.

338

-2Bell:

They won't let him know. That's wise.

McReynolds: Just because Dan's a "sissy" doesn't mean
H.M.Jr:

Coast Guard's a sissy - is that what you said?

McReynolds: I say Dan's a sissy.
H.M.Jr:

Oh, Dan's a sissy.

McReynolds: Dan's a sissy. He has no interest in what's in
the bottle.
H.M.Jr:

Well, besides that, anything else?
McReynolds: No. No, there's nothing. This chap who was in here
yesterday went away. He says he's going to wait
around until he finds out what happened. I told him
H.M.Jr:

that was all right.
Griffith?

McReynolds: Yes. He made no protest when we told him that nothing

would be done until we got this answer; said investigation would be made and a tactful reply.

H.M.Jr:

All right.

Upham:

Nothing, Mr. Secretary.

H.M.Jr:

(To Bell) You want to stay afterwards, we'll talk
bills?

Bell:

Yes

H.M.Jr:

Have you got your memorandum for me?

Hass:

H.M.Jr:

Yes, sir.
Supposing you and Bell stay and we'll talk about

Haas:

All right. I have nothing else.

Gibbons:

There's a memorandum typed on that Kleberg matter

that.

that I talked on to West two or three times. Tom

Gorman investigated a fellow; Farley and Stevenson,

339
3-

agents, were up to see him. The only record I
have putting myself in writing was a telegram

to him asking him when he'd be here in Washington,
see? The whole thing was gone through very
thoroughly.

H.M.Jr:
Gibbons:

You're going to see him yourself?

I wanted to talk to you. I didn't want to do it

without you talking to Kleberg or getting Kleberg's
clearance. I'll go up and see him.
H.M.Jr:

Was he interested in

Gibbons:

This same fellow Tom is down there to be made head

of this district of Senator Connally - called me up
again, and Kleberg was in here the other day, said
they were getting tired of our transferring Republicans from the Canadian border down to Texas. It
so happens this fellow Bailey is undoubtedly a
Democrat. He was born in Missouri, appointed under
the Wilson administration.

McReynolds: Transferred from the West Coast.
Gibbons:

Yes. But you'll have the memorandum. It's about I tried to boil it down - it's about four pages long.
But that will be typed in the next 20 minutes.

McReynolds: Tom probably is the poorest - probably the poorest

of all the Border Patrol men that they can take to
give a responsible place; he's just terrible.

H.M.Jr:

While we are on that, Farley called me up and said
that he was calling all the Cabinet to tell them
that any appointments in Texas - that the Vice
President wants to be informed and consulted as
National Committeeman of Texas.

Gibbons:

Oh, uh huh.

H.M.Jr:

So will you keep that in mind. I think that somebody - I'll have to go up myself. Who's the head of
the Border Patrol under Gorman? This Border Patrol
fellow - what's his name?

McReynolds: They've moved that a couple times.

1.

340

-4H.M.Jr:

No, the fellow - he was in the Legal Division and

Gibbons:

You mean Shamhart?

we took him and

McReynolds: Shamhart.

H.M.Jr:

He was born in Tennessee and raised in Florida.
Well, is he a Democrat?

Gibbons:

He says that the only time he ever voted in his

H.M.Jr:

If you'll remind me, I'll have to take Shamhart
up there and let him sit down with the V.P. and

Gibbons:

life was for Woodrow Wilson in 1916.

explain what we're doing.

Gibbons:

Oh, I've got a matter on my desk I've been wanting
to talk to Garner about, changing a port down there,
which

H.M.Jr:

Fine.

the economic conditions of the country have

Gibbons:

changed.

H.M.Jr:

Yes.

Gibbons:

Well then, this thing - he of course probably might
have forgotten - this man West has a cousin over in
the Bureau and she's been - she's 66 years old, and
within the last 10 or 15 years she's been admitted to
the Bar and she wants a legal position. And even
Moyle - Moyle told her in his frank way, he said,
"You're too old to be a lawyer." He said, "You
ought to do something else."

H.M.Jr:

Didn't know there was any age limit.

Gibbons:

I shouldn't know either, but he meant to start in.

Oliphant:

West has been in to see me about that a couple times,

Gibbons:

on yes, she's

but it isn't the thing to do at all.

341

-5H.M.Jr:

And incidentally, if anybody comes to talk to you
about an appointment for Collector of Internal
Revenue in Georgia, you better keep out of it.

Gibbons:

Refer him to Chip Robert?

H.M.Jr:

No, no. But there's a fight on between Russell
and George and I'm handling it with the White

House.

Gibbons:

Yes.

H.M.Jr:
Gibbons:

I told them, a fight between United States Senators,
I'm going to let the White House handle it.
Jim Farley spoke to me about that the other day
before he went away. He said to be very careful
if anybody called up.

H.M.Jr:

Yes, and they say the two Senators are diametrically
opposed to each other.

Gibbons:

Now, on his launching he wants me to go down with
him. Of course, Miss Roche is not here; Wayne is

ill.

H.M.Jr:

You better stay.

Gibbons:

I'll stay here.

H.M.Jr:

O.K.

Gibbons:

He can break the bottle without me.

H.M.Jr:

No, you better stay here. Anything else?

Gibbons:

Nothing else.

H.M.Jr:

Herbert?

Gaston:

Well, on that same subject, I - I thought I'd like
to get away tomorrow to do some outside work.

H.M.Jr:

What do you have?

McReynolds: It's down in Charleston.

342

-6Gaston:

I have some appointments I'd like to fill down

H.M.Jr:

What's the joke?

Gibbons:

He's going down to the launching.

Gaston:

I was going to go down to the launching.

Gibbons:

He can read my speech.

H.M.Jr:

Are you serious?

Gaston:

Well, if - I'd like to go if there's anything -

H.M.Jr:

There's nobody here. I mean I'm all by myself.

there in Charleston.

unless you think otherwise.

I mean there's Wayne away and everybody else - and

with Mac away.
Gaston:

H.M.Jr:

Sure, it isn't necessary.
Will there be another one there? How many will there
be?

Gaston:

Oh, this is just one launching down at Charleston.

H.M.Jr:

What day is the launching?

Gaston:

Tomorrow.

McReynolds: He'd have to go on the same train I go on tonight.
Gaston:

I'd have to go tonight and come back Friday morning.

H.M.Jr:

Well, if you don't mind, Herbert

Gaston:

H.M.Jr:

All right, I don't mind at all.
I don't want - I don't think it's - I'm not going

Gaston:

Yes, yes.

H.M.Jr:

I'm carrying all I can.

Gaston:

Right.

to get so short-handed.

343

-7H.M.Jr:

You don't care, do you?

Gaston:

No, not at all, sir.

Oliphant:

Somers sent his Clerk of Committee in last night
to see Mr. Clinton Hester, and the obvious purpose

was to tell Mr. Hester that the reason - (this
portion inaudible to reporter) - is he just didn't
know anything about it at all.
H.M.Jr:

Who?

Oliphant:

Somers.

H.M.Jr:

Who's going to go there?

Oliphant:

You are. You're to have the written invitation

H.M.Jr:

Oh.

Oliphant:

That's all. It's merely a question of he just

H.M.Jr:

Somers?

Oliphant:

Yes, and he wants to find out about it. The only
alternative would be for somebody - but I'm sure
that - that you - but you could decide to answer

H.M.Jr:

No, I rather look forward to it. I think it's all

Oliphant:

You'll get your usual letter of invitation.

H.M.Jr:

Just an executive session?

Oliphant:

Executive session.

H.M.Jr:

Well, you see right there, if nothing else

from the Committee for 10:30 tomorrow.

doesn't know anything.

right.

see, Herbert?

Gaston:

Yes.

H.M.Jr:

What?

Gaston:

Yes.

You

344

-8H.M.Jr:

Now just a minute. There is a press conference
tomorrow and we'll have to shift that. Press
conference when, 10? This meeting is at 10?

Oliphant:

10:30. You'll have to shift it.

Mrs Klotz:

Friday.

H.M.Jr:

If the boys want to see me, would you want to

make it today, or make it - I can do it 9:30
tomorrow or 10 o'clock Friday. Why not
10 o'clock Friday?

Gaston:

I think that would be better. They don't like

H.M.Jr:

Well, 10 o'clock Friday.

Mrs Klotz:
H.M.Jr:

Would they rather have a 10:30 meeting?
What's the usual time?

Gaston:

10:30.

H.M.Jr:

All right. The Weights and Measures in the House
are going to have a Committee meeting at 10:30

9:30 very well.

tomorrow, Dan.

Bell:

Have you been called?

H.M.Jr:

Yes. It's an executive.
That's right.
And I think that you'd better go along with me.

Oliphant:
H.M.Jr:

And you (Mrs Klotz) let Lochhead know - Arch
Lochhead, see? And you (Oliphant) go. Who else?

Oliphant:
H.M.Jr:

Bell:

I think I'll take Opper with me. He's never attended

one of those and I'd like for him - if it's satisfactory with you, I'd like to.
(To Bell) Would you have that usual little page?
I'm getting up some material.

345

-9H.M.Jr:
Gaston:

And Herbert, I guess you might go too.
(Nods affirmatively)

H.M.Jr:

And I'll tell you what let's do. Let's meet in
the office here tomorrow morning at 9:30 and have
a little dress rehearsal.

Oliphant:

I might say in that connection the most useful
thing to give the Committee is what the Committee
can use on the floor in explaining.
I don't see we can give them much of anything.

H.M.Jr:

Oliphant:

I mean I don't think - the effort is not going to
be to get the confidential stuff. The effort is
going to be to educate them what they can say in
defense of it when it comes up on the floor.

H.M.Jr:

Bell:
H.M.Jr:

I think what I'll do is what I did up before
Appropriations, explain the thing. I talked

about an hour, didn't I?
Yes, sir.
And give them in confidence the figures that I
gave those people up there. Now, I say, "Now,
gentlemen, you ask me any questions you want and
I'll answer what I can. What you need in the way
of information, see?" But now, this is one subject
that I do know if I know anything, and let's just
see how we get along.

Oliphant:

Unless you prefer to do it, it won't be necessary
for you to volunteer those figures.

H.M.Jr:

Well, every time I've done it they liked it. And

Oliphant:

Told you afterwards.

H.M.Jr:

I don't see - I know when we were up on the Hill
the other day with the Speaker and Joe Robinson who was it told me that the Speaker said he
was tickled to death. Bankhead.

Oliphant: Yes.

346

- 10 H.M.Jr:

And I don't mind kind of having them leak out. If

I did, I wouldn't give them out. I think it's
something to be proud of.

Oliphant:

But the purpose is to educate some of them.

H.M.Jr:

Well, let's meet at 9:30 and we can ask each

Upham:

It was two weeks in advance, yes.

Gaston:

15th of August was

Upham:

two weeks before it was
First of August to
effective. We've got the exact dates.

H.M.Jr:

other questions, and that's all then.
Cy, I wish that you'd go over and have a little
talk with our friend Eccles, see, and ask him when
he's going to make up his mind on excess reserves,
because the market is getting awful shaky all over,
see? Now, when they announced last time didn't
they announce it on the 15th of July to take effect
first of August? Is that what it was?

No, it wasn't August, it was July. I think he
announced it the 15th of July effective the first
of August. Well, you might tell him for me that
as far as the Treasury is concerned the deadline
is the first of February effective the 15th of
February. See?

Upham:

Very well.

H.M.Jr:

Because then that only gives us - 15th of February that only gives us two weeks to allow financing for
the first of March. I don't think he realizes that.
So, in other words, between now and the first of
February I really would like him to make up his
mind. Do you think that's an unreasonable request?
No. I thought you would make that request last
time we discussed it at lunch and he said he
wouldn't know until the first week of February.

Upham:

H.M.Jr:

That's why I'm changing.

Upham:

I think you ought to, yes.

347

- 11 H.M.Jr:

I mean that that is why I am changing, because

Upham:

that was my recollection, that he wasn't going to
talk to us again about it until after the first
of February. Now, what I am saying to him is
I'd like - I mean I can't - I'd like if - we told
him that January and February would be clear, but
he's got to announce on the first of February
effective the 15th of February, and then that only
gives the market two weeks to shake down until the
first of March.
I should think so.

H.M.Jr:

Don't you think so, Dan?

Bell:

Yes, they certainly have got to do something pretty

H.M.Jr:

The market is in a churn and every newspaper has

soon.

reference to it. Here's in the Tribune - I'll give
it to you. It might show it. I think they are
sensible to that stuff too. It says here: "The
belief, held for a while, that the Treasury would
sell additional bills to sterilize gold imports has
nothing to do with the increase of the rate, for it
is now rather well established that for the time

being repayments by banks from war-loan deposits

constitute the preferred mechanism. Increased
charges on the bills are due entirely to the reserve
requirement puzzle."

Haas:

You might well want to hold up Cy's talking to him
until you see this memorandum. I mean for half an
hour. The reason I say that is Goldenweiser sent
over a study which they made of the New York situa-

tion, which is a little tight, and that probably has

got Eccles in a corner.
H.M.Jr:

I asked Eccles to send me over a memorandum.

Haas:

Oh, what - maybe I've got it.

H.M.Jr:

I asked him to send me over a memorandum on short
term, on money rates.

Haas:

Oh, I see.

348

- 12 H.M.Jr:

(To Upham) You might call him up.

Haas:

Goldenweiser had a meeting and they had it up.

H.M.Jr:

Call him up and ask him where that thing is.

Upham:

Surely.

H.M.Jr:

And at Haas' suggestion I'd put off calling Eccles
until I have a chance to talk with Bell and Haas.
But I've got this in my mind and I just think maybe today isn't the day. But let's see what Haas
has got on his mind. But I asked him to send me
this memorandum on money rates and if the thing is
in existence I'd like to have it while Bell and
Haas are here. Because - I don't know whether you
people have noticed, but the last two weeks there
has been a sharp drop in the New York Times business
index - very sharp drop - and if that goes two
weeks more
And in talking yesterday to Burgess,
he says - I mean when you get to the bond market
jumps up or down 10, 12, 13 thirty-seconds in a
day, it's all due to this uncertainty over here at
the Federal Reserve Board. I mean that's what
Burgess said.

Upham:

You don't want to give Mr. Eccles any expression
of your view as to whether he should do this?

H.M.Jr:

NO, all I will say is - what I am saying is I'd
like to be talked to before the first of February.

Upham:

Yes.

H.M.Jr:

I'd like to be talked to before the first of February.
As a matter of fact, I'd like to have him ready to
talk something about it next Tuesday. Let's put it
that way: I wish he could begin to discuss it with
me next Tuesday.

You know, the worst thing - I mean we've been through
this thing now so long - the worst thing is when people
can't make up their mind which direction they're going,

I mean. and with this strike situation in Michigan
and if that thing should extend, those fellows over
there have just got to make up their mind.

It's very nice, Mr. Eccles keeps saying he could make

349

- 13 -

Oliphant:

up his mind if it wasn't for his Board and staff.
But you get it - I mean when you talk to him, of
course, all I am asking is that he talk to me
before the first of February as to my limit. He'd
have to have two weeks; then we need from the 15th
of February until the first of March to let the
bond market settle down. All right.
Now, Crouter, a special man in Justice, is going
out to Chicago to look into the whole Malone case from Jackson's office.

H.M.Jr:

Good.

Oliphant:

He came up. And there's a motion for change of
venue. They're trying to get away from Judge Barnes,

the best Federal judge in the country. Barnes will
rule on the change of venue. Crouter will be out
there in the meantime.

H.M.Jr:

Who's asking the change of venue?

Oliphant:

The defendants are - the lawyers.

The other question is about the meeting with the

Committee on Banking and Currency. Did Glass want
us to do anything?

H.M.Jr:

The only thing I've got is from you.

Oliphant:

You called him.

H.M.Jr:

He said if he wanted us during the day he'd let me
know, and I haven't even called.
Well then, there's going to be no witnesses at all,

Oliphant:

merely an executive.

I heard that Bulkley was going to have a lot of fun
out of Glass, going to ride him for his opposition
in the executive meeting - that Bulkley was going to
have some fun out of him.

Gaston:

Better look out or they '11 get Glass stirred up.

H.M.Jr:

Yes, they'11 get their fingers burned.

350

- 14 Oliphant:

That's what I was afraid of. That's the reason I
mentioned it. Leave Glass alone and he's all right.

H.M.Jr:

Well

Oliphant:

I don't think anything's indicated.
I don't know. No use worrying about it. I mean
whatever is said is said, and Fate will take care

H.M.Jr:

of it. Just have to wait.

Oliphant:

That's all then.

Haas:

I've got one other thing, which will take

H.M.Jr:

You're going to have - you and White are having
lunch with me. You and White are having lunch at

a quarter of one. I can't walk, but I can eat.
I'll give you plenty of time.

Haas:

O.K.

Oliphant:

Well, at that time they can describe to you this
set-up. And their new men on taxation - they were
over here with a well-developed plan for the use
of the tax mechanism for control of foreign
securities.
It wasn't well-developed at the end.
We don't want Marriner to shoot prematurely on that,
because it is a very serious thing from the Bureau
standpoint, like that Associated Gas thing.
Do you want to tell him, Bell, or don't you think
you can, what Eccles did in the way of trying to
get information. Would you tell him that?
Well, I don't know how far he went. I haven't
been able to get in touch with Corry Gill. But
Jesse Jones showed me an original of a letter
yesterday which Eccles had sent to him, asking
for the fiscal policy of the Corporation over the
next six months, how much its expenditures will

Haas:

Oliphant:
H.M.Jr:

Bell:

amount to, how much its revenue is expected to be
on repayments, and how much do they intend to sell

of the P.W.A. securities, all of this information

351

- 15 being needed because of the Federal Reserve

Board's control over the money market. That's
H.M.Jr:

all.
Well, the point is that all of that information
is furnished to the Treasury and if Eccles wants
that kind of information the place to get it is
from the Treasury.

Bell:

As a matter of fact, we furnish it to Eccles'
organization as a total picture of Treasury
operations.

H.M.Jr:

We do?

Bell:

Yes, sir. Every time we have a meeting of the

H.M.Jr:

Who's Peyser?

Bell:

He's one of Goldenweiser's men who works on
Treasury financing.

H.M.Jr:

Well, I don't want to do it now at the time, but one
of these days I want to take up the question anyway
of the information that goes out of the Treasury to
the Federal Reserve and from the Federal Reserve to
us. I think it ought to flow through one channel,
because every time I am always hearing of more stuff
and I don't think they know over there half the stuff

Open Market Committee, I furnish Peyser the program
for three months, knowing the - what the Treasury
balances will be each month, beginning and end.

they get.

Bell:

Well, the same information that is furnished to
Peyser is furnished to the Open Market Committee
here. He merely gets it in advance so that he and
Goldenweiser can discuss the matter.

H.M.Jr:

You might think it over, Cy, when you go over,
whether you'd rather have me say something to
Eccles, see? He's stepping over the authority
that he has, inasmuch as he's getting it anyway.
I mean he's definitely stepping into our field.
Think it over whether you want me to say it or
whether you say something, because it's embarrassing

for you, it isn't for me. Think about it.

O.K.

352
BOARD OF GOVERNORS
OF THE
of

FEDERAL RESERVE SYSTEM
WASHINGTON

OFFICE OF THE CHAIRMAN

January 13, 1937.
Dear Henry:

I am enclosing a revised copy of a letter I have
sent to Stewart McDonald covering the extension of Title II
of the Housing Act. The letter is an outgrowth of his request that I accompany him to the White House when he went

to discuss the matter with the President. I decided against
that procedure and he then suggested I give him a letter
stating my views which he could use in his discussion with
the President, which I told him I would be glad to do. That

is the reason for the letter.

He subsequently thought that it would be desirable
to send copies to Chairmen Wagner and Steagall of the Senate
and House Banking and Currency Committees, respectively, so

that it could be used by those Committees in connection with
consideration of the extension. As that would be equivalent
to making it public and he desired to have it made public, I
felt that I should make some changes in the original draft of

the letter as I had first written it for him to use when he

talked to the President. I have accordingly withdrawn the
letter in the form in which he showed it to you and have given
him the revised draft as enclosed. Inesmuch as he is going to
see the President in the morning and at your suggestion, I have
asked McDonald to hold up public release of the letter as well
as the sending of copies to Wagner and Steagall until after his
conference with the President.
The above is by way of explaining to you how the

letter came to be written in the first place and then revised
in its present form.
Sincerely yours,

Thermar
Honorable Henry Morgenthau, Jr.,

Secretary of the Treasury,

Washington, D. C.
enclosure

1-14copin
me Beel
m uplam

353

January 13, 1937.

Dear Mr. McDonalds

Because I regard the continuance of the guaranty in

Title II of the Housing Act as one of the most important
measures toward averting the dangers of an acute housing

shortage and consequent real-estate inflation within the
next few years, I am writing to urge you to take whatever
steps you appropriately can to obtain early action by Congress
that would relieve mortgage-lending institutions of their present uncertainty as to whether the guaranty will be continued.

My own interest in the question is twofold. In the
first place, as the Treasury representative on the President's

Committee on Housing in 1934, I had an active part in develop-

ing the mortgage-financing provisions of the Housing Act. In
the second place, the very nature of my present position requires no to be concerned with mortgage credit no less than

with other forms of credit, and with any situation that

threatens, as an acute housing shortage would, serious repercussions and dislocations throughout the social and economic
structure.
My reasons for attaching great importance to the continuance of the guaranty and the further encouragement of insured-mortgage financing under the provisions of the Housing

Act are, briefly, as follows:

1. However ample the insurance reserves of the Mutual
Mortgage Insurance Fund may prove to be at some later date, the

Act has been in operation for far too short a time for the
guaranty to be dispensed with as early as July 1 next, which is
the limitation now prescribed in the statute.
2. The Housing Act and the State enabling acts supplementary thereto constitute the only means by which all the
important groups of mortgage-lending institutions can make loans
up to 80 per cent of the property value and with an amortisation
period up to 20 years. Except as to loans made pursuant to this

legislation, the only institutions which in general are author-

ised by State or Federal law to make long-term real-estate loans
for a relatively high percentage of the property value are the
building and loan associations.

354

-23. In the absence of authority granted by the Housing
Act and related State laws, the lending powers of the commercial
banks and trust companies, the mutual savings banks, and the

life insurance companies with respect to first mortgages on real
estate would be greatly restricted. Since these three groups
hold, however, the great bulk of institutional funds now on hand
and legally available for mertgage lending, they can become, in
common with the building and loan associations, increasingly isportant factors in remedying the housing situation by continuing
and enlarging their activities under the Housing Act.
4. Failure to encourage a wider use of the system of
mortgage financing provided for in the Housing Act would invite,
during a period of increased building activity, a return to
practices that the Housing Act was especially designed to overcome-namely, the making of a 50 or 60 per cent short-term first
mortgage (the misnamed "renewal" mortgage), followed by a second

mortgage and frequently by still further liens. This unrealistic
and hazardous method of financing involves enormous costs that at

the outset are often concealed in an unduly high price paid for
the mortgaged property.

5. The uniformity of lending powers under the Housing

Act, and the safeguards afforded all institutions exercising
those powers, puts the several important groups of mortgage-

lending institutions on an equal basis that does not otherwise
exist, increases their effectiveness in dealing with the housing
emergency, and at the same time protects borrowers against exorbitent and hidden charges for mortgage loans.

It is my considered judgment that, until a sufficient
volume of housing has been constructed to meet the existing
shortage and the additional desand resulting from population

growth and business recovery-that is, until the threat of an

acute shortage within the next few years has been removed-the
guaranty now provided in Title II of the Housing Act should be
continued as a matter of prudent and practical governmental

policy. Furthermore, since the guaranty as it now stands is applicable only in the case of houses completed prior to July 1 next,

prompt action to continue it is imperative if Title II loans for

now construction are not soon to be abruptly curtailed.

I think it would also be helpful to the housing situation at this time if the service charge of 1/2 of 1 per cent
per annum, which lending institutions are permitted to make on

355

-3Title II loans in addition to the 5 per cent interest charge,

were eliminated. The interest rate of 5 per cent, as a maximum,
seems to me to.be.fair to borrower and lender alike for this
type of loans but in view of the substantial progress which you
have made under Title II during the past year, as well as in
view of the rates currently prevailing on investments generally
and on mortgages which do not have the protection afforded by
the Housing Act, I believe that an ample supply of funds would

now be forthooming for Title II loans without the additional
inducement of the service charge.

With kindest regards, I am
Sincerely yours,

M. S. Eccles,
Chairman.

Honorable Stewart McDonald, Administrator,
Federal Housing Administration,
Washington, D. C.

JMDsb

to

356

January 13, 1937

At the request of the Secretary I 'phoned to John
H. Fahey to inform him of the fact that Mr. Stewart McDonald
is submitting through the budget a recommendation for legislation that the Government guarantee of debentures issued

under Title II of the Federal Housing Act be extended until
June 30, 1939 and that Mr. Morgenthau has withdrawn his

objection and that if Mr. Fahey wants to protest to the
Bureau of the Budget he should do so promptly.

Mr. Fahey said that it had been agreed at the last
meeting of the heads of the lending agencies that the HOLC
and the FHA would get together and determine a program and

that, moreover, the President was desirous of having a
committee agree upon a program to be submitted to him.
The present action, in Mr. Fahey's view, is a departure

from that agreement and he objects to it. He also thinks
that it is a mistake to extend the guarantee. He said that
he would have Mr. Webb and Mr. Russell get in touch with
Mr. Bell.

Mr. Bell has been informed as to this.
Upm.

357

TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION

111
DATE JAN 13 1937

TO

Secretary Morgenthau

FROM

Herman Oliphant

A conference was held at the Treasury on January 11, to discuss the matter of the letter to the Banque Nationale Suisse about
which I gave you a memorandum on December 30. There were present
Messrs. Sproule and Knoke of the Federal Reserve Bank of New York,
and Mr. Lochhead, as well as Opper and myself.

It developed at that conference that the incident in question was due largely to the failure on both sides to take into consideration the situation at the other end; and it was generally

agreed that had both the Federal Reserve Bank and the Treasury repre-

sentatives acted differently, the situation would not have arisen.
I have every hope that the conference will prove valuable in improving the cooperation between the two institutions.

It also developed that, contrary to our previous understanding,
the letter to the Swiss Bank had never been mailed. Some discussion
on the subject of the correctness of the Federal Reserve Bank's proposed reply indicated that there was a difference of opinion as to

whether their letter could definitely be termed incorrect, but as a
practical matter it was agreed that the letter would be redrafted

and forwarded in redrafted form to the Federal Reserve Bank for their
consideration as soon as possible, and for transmission to the Swiss
Bank when its form has been agreed on. For your information, our
draft was communicated to them the first thing on the morning of
January 12.

I believe you can now consider this incident closed.

homes Oliphand

358

TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION

DATE December 30, 1936

TO

Secretary Morgenthau

FROM

Herman Oliphant

CHRONOLOGY OF EVENTS CONNECTED WITH
INQUIRIES MADE BY BANQUE NATIONALE
SUISSE OF FR BANK OF NEW YORK.

1936

September 15 Swiss bank writes FR bank making certain inquiries as to per-

missible dealings in gold.

September 25 Letter received by FR bank.
(approx.)
October 13

FR bank cables acknowledgment indicating reply will be delayed.

December 14

Treasury receives excerpt from FR bank's proposed reply, with
request that we inform FR bank whether proposed reply is correct.

December 21

Legal Division, having difficulty in checking reply, requests

December 22

Lochhead telephones FR bank asking for text of inquiries.

December 28

Knoke, of FR bank, telephones Lochhead refusing to forward

December 28
(Same day.)

FR bank sends reply to Swiss bank's inquiries without clearing
with the Treasury, although knowing the Treasury had requested

Lochhead to ask FR bank for text of Swiss inquiries.

inquiries.

the text in order to be in a position to reply to the FR bank's

request for approval.
December 29

Lochhead informs FR bank that we insist upon receiving text of
Swiss inquiries,as you suggested in conference with him and Opper

December 30

Treasury receives text of Swiss bank's inquiries from FR bank,
accompanied by the FR bank's December 28 letter, this being

the first intimation to the Treasury that FR bank had replied.

It appears, particularly in the light of the text of the Swiss inquiry, that in several significant respects the FR bank's reply is incorrect

or unauthorized, and conceivably may mislead the Swiss Central Bank as to the

Treasury's policy or, worse yet, bind the Treasury to a policy to which it
has not consented.

Obviously, this matter is of such importance that I do not want to
proceed further without specific instructions from you.

Herman Olphones

359
Sen. James Byrnes

January 13, 1937.
10:11 a.m.
H.M.Jr:

Hello

Operator:

Senator Byrns.

H.M.Jr.

Thank you. Hello

Byrns:

Hello

H.M.Jr:

Hello - Jimmy Byrns.

B:

H.M.Jr:

Yes sir, how are you, Henry?
Fine. How are you?

B:

Fine. Now you're calling me because I telephoned
you yesterday afternoon, aren't you2

H.M.Jr:

That's right.
Well I called you because I had just read that

B:

Brownlow report.

H.M.Jr:

Oh yes.

B:

And you are charged or credited as the case might
be or as the individual case might be with adjustor abolishing the General Accounting Office and I'm
so heartily in favor of it that I wanted to find
out whether the statement was correct.

H.M.Jr:

That I'm to blame or to get the credit?
Yes (hearty laughter)

B:

H.M.Jr:

No - no.

B:

No?

H.M.Jr:

No - I've really had nothing to do with it.

B:

H.M.Jr:

Well that

I can't take either the blame or the credit. I - I -

I'm so used to getting the blame that I'll have to
take it but no I don't deserve the credit or the blame.

-2B:

H.M.Jr:

I wanted to give you the credit for that.
No, I'm sorry.

B:

I thought that you were and did you

H.M.Jr:

No.

B:

H.M.Jr:
B:

H.M.Jr:
B:

H.M.Jr:

360

Well I was going to talk with you because I'm
one of the few fellows up here
Well we're very much interested but we - I'm - I
very carefully kept out of the whole thing.
You have.

Very carefully.
I think that the thing should have been done long
ago and it's duplication of legal work and extraordinary power is given to a fellow who has no
officials who agree with his attitude at all-it's I just didn't know that the President was going to

approve abolishing it but I'm so much in favor of it
that I just wanted to find out who is in favor of it
and I want to get together with them.
Well this - well what we did do for the Brownlow
Committee - we did loan them two of our people, who
were experts on this thing, to work with them and
maybe that's where the idea came from.

B:

That's most likely. Who did you lend?

H.M.Jr:

Well we loaned them - ah - ah - ah McReynolds and

B:

Hester.

H.M.Jr:

Yes.

B:

That's about where it came from.

H.M.Jr:

And those two people - we just detached them and I

ah - ah - a lawyer by the name of Hester.

told them that when they left here to work for them
they were working for the President and that they would
be detached on that and they should work for the
Committee - they're working for the President of the
United States.

B:

Right.

.. 3 -

H.M.Jr:
B:

H.M.Jr:

361

But they did work on that phase of it.
Well I think the thing ought to be in the Treasury.
I think you're right on that.
But it was McReynolds and Hester who were loaned to
the Committee.

Yes.

B:

H.M.Jr:

and they did that - they worked on that particular part.

B:

Yes.

H.M.Jr:

And maybe that's the way

B:

That's about how it got there, yes.

H.M.Jr:

But that's - I mean I don't know whether it is a
secret or not but - but they made that particular
study because they were familiar with it.

B:

Well that's where it came from.

H.M.Jr:

What?

B:

I know that there'll be lots of opposition

H.M.Jr:

Yes.

to recommendations up here but I

B:

H.M.Jr:
B:

But if you want any special information
Yes, I want the information - I want information
showing the duplications of activities and business I remember being told once there that the purchase

of land - in the Agricultural Department they first
have an investigation of a lawyer in the field and
then the Solicitor's office in the Agricultural Department pass upon the titles of the land.

H.M.Jr:
B:

H.M.Jr:

Yes.

Then when they get through they next go to the Department of Justice. The Department of Justice next
passes upon it..

That's right.

-4B:

H.M.Jr:
B:

H.M.Jr:

362

and it goes to the Treasury where it's approved.
Then, if the Treasury approves, they have to send it
over to General Accounting and General Accounting
refuses to accept the legal purchases of the Department of Justice or the Solicitor of the Department
of Agriculture but insist upon the investigation of
title by lawyers in General Accounting

That's allright
It isn't a damn bit excusable - the duplication
I happen to know about it and I think that's just

what does happen.
H.M.Jr:

Well that's outrageous - upon a mere statement.
Well the two men down here that know the most about
it are Bell and McReynolds.

B:

All right.

H.M.Jr:

And both of them are available anytime you want them.

B:

B:

H.M.Jr:

Fine, I'll get hold of them when this thing gets in.
Both - both - either Bell or McReynolds are entirely

familiar with it.

B:

Allright, Henry, how are you getting on?

H.M.Jr:

H.M. r:

I think all right - how do you think?
Fine - fine.
(Laughs) All right.

B:

Well you know whenever you don't know that you've

B:

H.M.Jr:
B:

H.M.Jr:

got any particular part in your anatomy you must
be all right and we don't hear a damn thing about
you so the Treasury must be all right.
Well I - I - no news is always good news.
Yes (hearty laughter) Goodbye.
Thank you, goodbye.

363

January 13, 1937.
10.35 a.m.
H.M.Jr:

Hello.

Good morning Mr. Secretary, how are you?
H.M.Jr:

How is Stewart MacDonald?

MacD:

Well I've had a bad case of flu. This is
my first day back at the office.

H.M.Jr:

Oh for heaven's sake.

MacD:

And I understand Wayne Taylor is in the same fix.

H.M.Jr:

That's right.

MacD:

But in the meantime something has to be handled

H.M.Jr:

pretty promptly and I was wondering if you wouldn't
let me come over and see you in reference to present
our point of view on the extension of this government
guaranty on the debentures under Title 2.
Well Dan Bell talked about that yesterday.

MacD:

Yes, I know he did.

H.M.Jr:
MacD:

I'd like to wait until Wayne is back on it because
he's been sort of handling it.
Well the only thing was this - that I have to go
to see the President tomorrow on it. I've been to
see the President once before and he told me what he
wanted to do which was this; prepare a - just a short
message on it and he would have it done by joint
resolution

H.M.Jr:
M acD:

Yes.

and I spoke to some of the members of he
committee - ah Senate Committee and they wanted to

tack it on to this RFC bill which is being - which
they're having in conference to-day.

H.M.Jr:

Yes.

MacD:

Now the point was that if we could do it, Mr. Secretary, it has to be done immediately for the reason

that - ah - in the latter part of this month there

will be in attendance here a big conclave of

-2-

364

anti-lobbyists who will use all efforts they can to
lobby against it, principally people in the old mortgage
company who are hanging out for the old regime and the
old high interest rates and commissions and everything

else and we're afraid if we don't get the thing out of
the way before they come along why - ah - they'11
probably stymie it for a long time and already we're
beginning to have a hold-up in building construction
on account of it. Now you could readily understand
if you were going to buy a 40-acre addition to a
prominent city in the United States and lay it out

with streets and sewers and sidewalks and waterworks
and everything like that and schools and whatnot which

a great - great many of our people have that you
wouldn't want to go ahead and buy that lot and do all
that work unless you knew that by next July you'd still
have the Federal Housing facilities available to you.
So already we're beginning to get notices from banks
that they're not going to make any further building
construction loans until this matter is cleared up and
I would certainly appreciate it if. you could see your
way set to let my attorney and myself come over there
and see you for a few minutes on it.

H.M.Jr:

Well supposing you come at 11:45.

MacD:

I appreciate that very much.

H.M.Jr:

O.K.

MacD:

Thank you.

365
January 13, 1937
11:40 A.M.

H.M.Jr:
Carter

Hello?

Glass:

Mr. Secretary?

H.M.Jr:

Yes, sir.
Recalling that you suggested to me yesterday that these
bills of O'Connor relating to the examination of trust
companies here in the District and credit unions -

G:

H.M.Jr:

Yes.

- go to the District Committee, they don't go to the

G:

District Committee.

H.M.Jr:

Oh, don't they?

G:

No, they were referred to the District Committee last
year and Senator Fletcher had them re-referred to the
Banking and Currency Committee.

H.M.Jr:

Well, I didn't -

G:

They're purely banking matters.

H.M.Jr:

I didn't know that.

G:

They're purely banking matters, and they ought to come

H.M.Jr:

Well, I just took O'Connor's word for it, and I -

G:

H.M.Jr:
G:

to the Banking and Currency Committee.

Well, he don't know what he's talking about.
Well, of course -

That isn't strange. There are plenty of people that
don't know what they're talking about. I'm among the
number.

H.M.Jr:
G:

Well - ah But I know what I'm talking about now.

366

-2-

G:

Well, I know you do, but I just - ah Well, I'll call O'Connor and tell him about it.

H.M.Jr:

Ah -

G:

They - they were referred to the District Committee
last year and Mr. - Senator Fletcher had them

H.M.Jr:

H.M.Jr:

re-referred to the Banking and Currency Committee.
Well -

G:

They're banking matters, you know.

H.M.Jr:

Yes. Should you - do you want me to tell him that?

G:

No, I'll tell him.

H.M.Jr:
G:

H.M.Jr:
G:

You'll tell him.
Yes, or you can tell him either. It doesn't make
any difference.

No, it's - I'll do whatever you - it's - it's up to

you, so I'd much rather you -

Well, I - I've got to call him anyhow, so I'll tell
him.

H.M.Jr:

All right. Now, may I ask how our bills fared this

G:

Well, they were - they will be referred to the

H.M.Jr:
G:

morning?

Sub-Committee -

Yes

- that has banking legislation in charge, as soon

as a Sub-Committee is appointed, and I'm going to

suggest to Senator Wagner to appoint a Sub-Committee

right away so that we can dispose of the bills on
Tuesday of next week.

H.M.Jr:

Oh, I was under the impression - I think your Clerk
told somebody down here that you were going to meet
at 10:30 this morning.

367

-3G:

Well, we did.

H.M.Jr:

Oh.

G:

We did, and reported the R.F.C. bill, because there

H.M.Jr:

Oh.

G:

The other - all other bills were referred to this

was no objection to it at all.

Sub-Committee when appointed.
H.M.Jr:

Oh.

G:

And Wagner, you know, is ill.

H.M.Jr:

I see.

G:

And he asked me to act for him.

H.M.Jr:

I see.

G:

And I'm going to try to get in communication with him
today -

H.M.Jr:

I see.

G:

- and have the Sub-Committee appointed right away -

H.M.Jr:

Ah-ha.

G:

- and turn the bills over to them.

H.M.Jr:

Oh.

G:

So that I hope to be able to report on Tuesday of next

week.

H.M.Jr:

Report them out, you mean?

G:

Yes. I hope so.

H.M.Jr:

On next Tuesday?

G:

Yes.

H.M.Jr:

Well, that'11 be fine.

368

-4-

H.M.Jr:

I - I think perhaps it would be well for you to come
up and you could help us explain the bills.
I'll be very glad to.

G:

Huh?

H.M.Jr:

I (11 be very glad to.

G:

G:

H.M.Jr:
G:

H.M.Jr:
G:

H.M.Jr:

Very well. I'll let you know, Mr. Secretary.
I'll be very glad to.
You needn't entertain any apprehensions about it.
They're going to be passed, I think.

You - I - I needn't worry about it?
I don't think so.
Ah-ha. No, if - if you'll indicate to me that you'd
like to have me come up there, why, I'll be delighted.

G:

All right, I'll - I'll communicate with you.

H.M.Jr:

Thank you.

G:

Goodbye.

H.M.Jr:

Goodbye.

369
January 13, 1937
11:54 A.M.

Operator:

Go ahead.

Burgess:

Hello.

H.M.Jr:

Hello, Burgess.

B:

Oh, hello, sir. Well, I just wanted to tell you how

H.M.Jr:

Please.

B:

They opened up - well, yesterday, you know, we bought

H.M.Jr:

Yes

B:

They were a little weakish.

H.M.Jr:

Yes

things are going.

a million and a half.

Now, today I tried stiffening up the orders a little
bit because I thought they had gone far enough so we
could afford to buy a little more, and it - it went
off three or four or five thirty-seconds. We bought

B:

about a million three, and now it seems to have
primed up a bit.

H.M.Jr:

I see.

B:

There's some other bids coming in, above ours.

H.M.Jr:

I see.

B:

So I think this - this decline for the moment is is steadied off.

H.M.Jr:

Good. Well, thank you.

B:

If there'11 be anything very exciting, I'll let you

H.M.Jr:

Please.

B:

- but you really don't need to worry about it, I think.

H.M.Jr:

Thank you.

B:

Very good.

H.M.Jr:

Goodbye.

know -

370
THE COMPTROLLER OF THE CURRENCY
WASHINGTON

hei

January 14, 1937.
Dear "enry:

Thanks for your telephone call yesterday. Senator Glass
called me and told me of his conversation with you, which

was the same as you stated.

The Senator said that the credit union bill had gone to
the District of Columbia committee in the Senate in the last
session of Congress but that he got the Senate to re-refer it
out of that committee and put it in the banking committee

where he believed it belonged. I called his attention to the
fact that in the House the bill had gone to the District of
Columbia committee and there was no objection on the part of
the banking and currency committee of the House and that the
bill was unanimously reported out for passage and would have
been passed by the House except for a slip on the calendar.

I told the Senator that it was not our position, and I
am sure you are of the same opinion, that we should in any way
suggest to either the Senate or the House to what committees

legislation should be referred as that was a matter entirely
for the Senate and the House, but that I merely stated the
facts to the Secretary when the two bills were under discussion.
The Senator seemed quite pleased, particularly when I told
him that when the legislation Was ready to be introduced I
would go up and discuss it personally with him. He did not

indicate any objection to either bill, in fact he enthusiasti-

cally approved the credit union bill last year. He seemed very
much pleased that there was little possibility of other banking
legislation being recommended by the Treasury and emphatically

expressed himself as opposed to other legislation. He did

this voluntarily.

Cordially yours
J. F4 T. O'CONNOR

Cusaw
JERRY
1-15-37
emptroiler

Honorable Henry Morgenthau, Jr.

Secretary of the Treasury

371

TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION

DATE January 14, 1937.

TO

Miss Chauncey

FROM

Mr. White HPW.

Subject: Conference with Mr. Keeler of the Department of Agriculture
with respect to draft of Secretary Wallace's paper on
"America's creditor position".

1. On December 29, 1936, the Secretary asked me to examine

the draft of a paper prepared by Secretary Wallace for the "London
Telegraph" on the creditor position of the United States, and to
report any suggestions or criticisms on the monetary phases of the
paper to the Secretary.
2. An examination revealed some doubtful interpretation of
data and some statistical errors. I so reported to Secretary
Morgenthau, who suggested that Secretary Wallace might like to
have Mr. Ezekiel go over the paper with me. The Secretary telephoned Secretary Wallace and the latter stated that Mr. Ezekiel
was out of town but would be glad to have Mr. Wheeler go over the

material with me.

3. In the late afternoon Mr. Christy, of the Department of

Agriculture, informed me that Mr. Wheeler was out of town and the
Secretary had asked him to discuss the draft with me but that he
would be unable to do so and was asking Mr. Keeler, of the Department of Agriculture, to see me about it. Mr. Keeler subsequently
came to my office and we discussed suggestions for changes in the

analysis. Mr. Keeler stated that he concurred with my criticisms

and suggestions and would so advise Mr. Christy who, in turn, would
take the matter up with Secretary Wallace.
I reported to Secretary Morgenthau the gist of the conversa-

tion I had with Mr. Keeler.

Memo from Miss Lonigan reporting 372

an error in information furnished HM,Jr.
Would prefer to explain in person.

Home
I'll
US

GLEOT

TV

373

TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION

DATE January 14, 1937
TO

FROM

The Secretary
Miss Lonigan

I have to report an error in the information I gave you about the

map on Federal expenditures in the drought area.

The conclusion was correct that some families were receiving over
$200 in one month. The statement was also correct that the map showed
areas of excessively high payments from Federal programs. My error was
in combining into one, two separate parts of the study of drought areas.

One of them gave figures for relief families only, the other gave
averages based on the total population only.

The map referred to the study of payments made in three years,
1933-1936. The black counties were those in which payments averaged

$175 per inhabitant or about $875 per family of the general population.

It is not possible to tell what was the average for families receiving

aid, nor what were the highest payments made to such families. There
is
no doubt,
that it was extremely high. The figures do not
include
PWA orhowever,
CCC.

There is also a current study of funds received by relief families
from one or more programs since July 1936. It is not yet complete. They
have schedules of families receiving $200 or more, in July or August,
which I saw. Expenditures rose rapidly after August, so that duplications
should have increased rather than decreased. This study excludes AAA and
soil conservation payments, and Resettlement grants.

While describing the current study to me, the WPA demonstrated it with
the map that I gave you. I confused them in my mind. However, there is

no justification for my confusing them. The conclusions stand, but the
evidence for them is much less direct than I had hoped.

The current study of relief families will be much more complete in
about three weeks. It may furnish the evidence we want at that time.
Mr. Bell can do nothing now to draw out these current figures any
earlier than that. I am to let him know as soon as they are about complete.

Confidential my

374

Minutes of Meeting held at the White House, January 14, 1937

Present: The President
Secretary of the Treasury Morgenthau
Carroll Miller, Chairman, Interstate Commerce Commission
Herman Oliphant, General Counsel, Treasury Department
George C. Haas, Director of Research and Statistics,
Treasury Department

The President read the letter which Secretary Morgenthau had
written him regarding a statement in the Interstate Commerce Commission's
1936 Annual Report concerning the effects of the operation of the undis-

tributed profits tax particularly with regard to weak railroads.

Following the reading of the letter the President began the discussion by calling attention to the importance of coordinated action among

the Departments and agencies in the executive branch of the Government.
He explained that he had set up the National Emergency Council and had

met with its members each week for two years for the purpose of bringing
about better coordination. He pointed out that when those meetings were
abandoned, the Director of the Budget issued a mimeographed letter to all
Departments and agencies asking that certain matters be cleared through
the National Emergency Council. At that time Mr. Eastman, who was then
Chairman of the Interstate Commerce Commission, objected to this procedure.
The President said he called Mr. Eastman into conference and outlined to

him the purpose of the request. The President also said that at this conference he had agreed to certain exceptions in certain matters.

The President then called attention to the now plan for reorganization
of the executive governmental activities and said this would in no way interfere with the judicial functions exercised by the independent agencies.

The President explained further, in regard to the matter of the undistributed profits tax and the statement contained in the Interstate Commerce
Commission's Report, that in view of the Treasury Department's connection
with fiscal affairs, the Interstate Commerce Commission should have con-

sulted with it in this matter.

The Secretary stated that newspaper correspondents and others who are

strongly opposed to the undistributed profits tax are quick in picking up
adverse criticism of this sort in an attempt to create an issue, in which
statement the President concurred.

Mr. Miller said he had no alibi to offer, that the Treasury should, no
doubt, have been consulted. He said he was not particularly familiar with
affairs relating to finance, as that part of the work was handled by another division of the Interstate Commerce Commission, but that he would

investigate this particular statement in the annual report, and also the

exceptions in the matters to be cleared through the National Emergency
Council to which the President agreed in his conference with Mr. Eastman.

575

375

-2The President asked Mr. Miller to explain to the Commission that the
proposed governmental reorganization plan did not contemplate the abolishment of the Interstate Commerce Commission. The President mentioned the
Food and Drug Administration in the Department of Agriculture, which for
years has been operating under the Secretary of Agriculture, and called

particular attention to the fact that this body had judicial functions

similar to those of the Interstate Commerce Commission; that their func-

tions were not interfered with by the Secretary of Agriculture, and that
this agency, under its Cabinet officer, was functioning very satisfacto-

rily.

Secretary Morgenthau asked the President what he thought could be

done to correct the impression which was created by the statement in the
Interstate Commerce Commission's Report. The President suggested that the
press might be informed that there was to be a conference between the
Interstate Commerce Commission tax experts and Treasury tax experts.

Mr. Oliphant said we must guard carefully against giving the impression
that this whole tax matter is to be reopened; that the Act was again to
be discussed on its merits. The President and Secretary Morgenthau agreed
that this impression should not be given to the newspapers.
Mr. Miller said he had questioned the statement regarding the undistributed profits tax when the annual report was being discussed, but that
inasmuch as it was not in his particular division, he had not pressed the
matter. Mr. Miller further pointed out that the Interstate Commerce
Commission had the mandate of Congress to consider the welfare of the
railroads and keep them out of receivership if possible, although person-

ally he felt that the general railway situation over a period of time

might well be benefitted if some of the weaker roads did go through receivership reorganization.

The President said to Mr. Miller that he must realize it was impossible to have two classes of taxes for the railroads, one for the weaker
and one for the stronger railroads.
On leaving, Secretary Morgenthau suggested that in meeting the newspapermen Mr. Miller do the talking.

(The group then left the President and on leaving the Executive Office
was met by the newspapermen.)

Mr. Miller told the newspapermen that the meeting was called to disouss the statement in the 1936 Annual Report of the Interstate Commerce

Commission regarding the undistributed profits tax in relation to rail-

roads, which was not shown to the Treasury before it was issued, and that
no conference had been held with Treasury officials before the report was
issued. He further indicated that the Interstate Commerce Commission experts were to meet with Treasury officials on this matter. He repeated
that the Treasury had not seen the report before it was issued. One of
the correspondents asked the Secretary about the outcome of the proposed

conference. The Secretary said he thought if they got together that the

376

-3Commission would find it had nothing to worry about. Fearing that this

would be taken by the correspondents to mean that the Treasury would 80code to the Commission's position, the Secretary went back into the correspondents' room and corrected any possible misunderstanding. One of the
press correspondents there called Secretary Morgenthau's attention to
the statement in the President's Budget Message to the effect that there

would be no tax bill this year except to renew expiring taxes, and asked
if the proposed conference would change that situation, to which query
Secretary Morgenthau answered "no."

377

January 14, 1937

Mr. Oliphant told the Secretary today that in
connection with the miscellaneous paintings which
Mr. Mellon is donating, he, Oliphant, is going to
say to Ned Bruce that "I talked the matter over with
the Secretary and he said that since you are handling
the matter directly with the President that neither
of us has any suggestions to make."

-the

378

Telephone conversation between Ned Bruce and Mr. Oliphant Jan. 14, 1937.
(Transcribed by V.O'Neale)

Oliphant - Hello, Bruce?
Bruce

- Yes. Hello. How are you?

Oliphant - Fine. That was a fine ride we had yesterday.
Bruce

- Did you hear that one about why Tugwell left the Government

to join a molasses company? They say it was due to the fact

that he preferred "taffy" to "epitaphy".
Oliphant - I spoke to Henry about the other thing. He told me to say

this to you: Since you were handling the matter directly with
the President, neither of us would have any suggestions to
make.

Bruce

- Well, Herman, I was thinking I might take it up with David Bruce.

Oliphant - All I can say, Ned, is that since you are handling it directly
with the President, neither of us would have any suggestions to
make about any phase of the matter.
Bruce

- Should I talk to Bob Jackson about it?

Oliphant - I can only say what I have already said, old man. I wouldn't
have any suggestions to make.
Bruce

- All right, Herman.

Oliphant - Let's get together again sometime soon.
Bruce

- Fine. Thanks for calling.

to
1/13/37

379

January 14, 1937

The Secretary talked on the telephone to Cochran

in Paris last night and told him to sail for the United

States on Saturday. The Secretary also spoke to

Judge Moore and asked him to send Cochran a cable

confirming these orders.

380

January 14, 1937
10:50 A.M.

H.M.Jr:

Hello?

Operator:

Senator Glass hasn't reached his office yet.
Oh. All right, never mind. See whether Mr.

H.M.Jr:

Operator:

Eccles is at his office.
All
right. You don't want to talk to Senator
Glass?

H.M.Jr:

Well, yes, I do between now and the next fifteen

Operator:

All right.

H.M.Jr:

But not after five minutes past eleven.

Operator:

I see.

H.M.Jr:

Because I've got to go to the White House at a

Operator:

All right.

H.M.Jr:

Ask Upham to come in and get me Marriner Eccles on
the wire.

Operator:

All right.

H.M.Jr:

Please.

minutes.

quarter after.

(Pause)

H.M.Jr:

Hello?

Operator:

Operator.

H.M.Jr:

What about

Operator:

He's at the hotel. I'll have to get him there.

H.M.Jr:

Thank you.

Operator:

Chairman Eccles.

H.M.Jr:

Thank you.

Hello?

381

-2Operator:

Go ahead.

Eccles:

Hello?

H.M.Jr:

Hello?

E:

Hello.

H.M.Jr:

Marriner.

E:

Good morning.

H.M.Jr:

Good morning. How are you?

E:

Fine. How are you this morning?

H.M.Jr:

Oh, pretty well. Not taking on any unnecessary fights.

I got your letter last night in regard to that Federal

Housing E:

Yes

H.M.Jr:

- and I appreciate your writing me. I wanted to tell
you - Stewart McDonald, when he spoke to me about this,
after - he showed it to me after we'd decided that we'd
go along with him, see? -

E:

Yes

H.M.Jr:

- just as he was getting up to leave. But he didn't
tell me that he'd asked you to write him such a
letter.

E:

Well, what he wanted me to do was to go up to the

White House.

H.M.Jr:

Yes

E:

You see?

H.M.Jr:

Yes

E:

He'd been pressing me pretty hard to go over there with
him -

H.M.Jr:

Yes

E:

- because of my interest in the thing, and I told him

382

-3that I would.
H.M.Jr:

Yes

E:

And then as I got to thinking the matter over -

H.M.Jr:

Yes

E:

- I told him that I couldn't see how I could possibly do that; that would involve me and we'd in the discussion of the thing, whether he - whether
he asked me as a substitute, or whether I said that
I couldn't possibly go to the White House but I might
get him a memorandum.

H.M.Jr:

E:

H.M.Jr:
E:

Well, what, you see, he told us was that, as I got
it - at least I got this impression yesterday - was
that they were going to give out your statement or
you were going to give it out, Yes

- in advance of his seeing the President.
Well, of course, I didn't know yesterday that he
was going to see the President at all.

H.M.Jr:

And you can see from the White House standpoint that

E:

Yes

H.M.Jr:

Or for McDonald.

E:

Yes

H.M.Jr:

And my whole point was that McDonald should see the

that wouldn't look so good, or from yours either.

President, let the President make up his own mind

first.

E:

Yes. Well Which I think I - the - the whole thing, of course - nothing was

H.M.Jr:

No

E:

H.M.Jr:

given out -

383

-4E:

- and the whole thing came about more or less not

H.M.Jr:

So I gathered.

E:

And - and of course I was interested in - in the

through my initiative at all.

thing just as I state - the letter states very
frankly my view.

H.M.Jr:

Sure. Well now -

E:

And if he - if he would give that - he could use
that with the President.

H.M.Jr:
E:

Well, there's nothing to worry about. I mean it's
the first time he asked to
I know, but there's a question in my mind now whether

I should give it out at all even though he sees the

President.
H.M.Jr:

Do you want my advice?

E:

Yes

H.M.Jr:
E:

I wouldn't do it.
Well, it - I think maybe that's good advice. But
at least, my thought was that if he'd see the

President, he uses the memorandum, and he uses the

memorandum on the Hill, the darn thing gets out
anyway.

H.M.Jr:

It's all settled anyway, because Bell was over there
yesterday after this meeting, told them over there

that Fahey was opposed to it - this is confidential -

E:

Yes

H.M.Jr:

Jimmy Roosevelt went in to see the President and told
him that Fahey was opposed to it, and the President
said, "Forget it. Let Fahey come over and talk about

E:

it, but," he said, "we're going to go through with it."
Yes. Well, then - then - then if the President feels
that way about it.... Of course, I thought the President might take this position on it, as he sometimes

384

-5- does:
now, you go ahead and do what you can
on it."Well
I won't
H.M.Jr:

Well, he simply

E:

"If you can get it through, it's all right with me."

H.M.Jr:

E:

Well, I don't know about that, but I know it's
cleared through the Budget, and [told McDonald that
he could tell the President that I'm for it.
Well, that'11 help a lot.

H.M.Jr:

And -

E:

Well now, my thought was that if the President just
simply says, "Well now, McDonald, it's all right with
me; you do the best you can," and ne himself, of

course, takes no part in it or says nothing and it's
up to Stewart to fight it through

H.M.Jr:
E:

I don't think you'll find it that way.
Well,
if it was, then I'd be willing to help Stewart
out.

H.M.Jr:

That's something different.

E:

See? That was my thought, because Fahey and that
crowd of Building and Loan people who are associated

with him is going to - they would try to - they'd
try to upset it.
H.M.Jr:

E:

H.M.Jr:
E:

H.M.Jr:

Yes, but if McDonald sees the President this morning
and
theall.
President says, "I'm going to support you,"
that's

Well, if he says - if he says that, then of course
it's over with.
That's right.
Then there's no need of doing anything about it.
Yes. But if this letter would come out in advance,
it'd look badly for everybody.

385

-6E:

Well, of course, when I talked to McDonald about
the
thing, he didn't know that he was going to see
the President.

H.M.Jr:

Oh.

E:

Didn't know when he was going to be able to see

him at all, and he was getting a lot of pressure

from - from these Building and Loan people, and so
forth.

H.M.Jr:
E:

I think you'll find that by this afternoon McDonald
will
be in the clear.
Well, I've told McDonald to not release that letter
at all, to use it with the President, but to - not
to release it until he takes the matter up with me
again, after he sees the President.

H.M.Jr:

O.K.

E:

So that's the way it sets now, and - and I don't think
there'll be any release to it, unless something unless there's - the situation changes.

H.M.Jr:

Well, I appreciate your writing me anyway.

E:

Well, thanks for calling.

H.M.Jr:

Goodbye.

E:

Goodbye.

386

January 14, 1937
2:08 P.M.

Carter
Glass:

Hello?

H.M.Jr:

Henry Morgenthau, Jr.

G:

Senator Glass.

H.M.Jr:

How are you, sir?

G:

How are you?

H.M.Jr:

I'm pretty well. Senator, I read in the paper one

G:

extension of our fund, and I wanted to ask your
advice whether you thought it would be any use my
talking to him or should I wait until next Tuesday.
Well, I want to try and get the thing through before

of them stories that there was some one Senator up
on your Committee that might be opposed to the

next Tuesday.

H.M.Jr:

Pardon me?

G:

I want to try and get the thing through before next
Tuesday.

H.M.Jr:
G:

I see.

There is one or more - one or more of the Senators who
want to have public hearings on the thing.

H.M.Jr:

I see.

G:

I don't see any necessity of it myself, but if I could

H.M.Jr:

Yes

G:

- tomorrow or Monday, I'd like to have you come up.

H.M.Jr:

Well, I'm at your service. As - as I understand it,

call the Committee -

I was to appear in the House this morning at 10:30

before Ways - Ways - the Coinage Committee.
G:

Yes

387

-2H.M.Jr:
G:

H.M.Jr:

But they couldn't get their Republicanmembers.
Yes

So they're supposed to put it over till 10:30
tomorrow, -

G:

H.M.Jr:

Yes

- but I haven't heard from Congressman Somers

yet, -

G:

Yes

H.M.Jr:

- so I'm keeping myself free for him at 10:30 tomorrow.

G:

Yes

H.M.Jr:

But outside of that, any other engagement I have I'll
cancel if you'll let me know.

G:

H.M.Jr:
G:

H.M.Jr:
G:

Very well, I'll let you know what I propose to do
about it. I have a telegram from Senator Wagner,
who is Chairman of the Committee but ill and can't
attend to it, authorizing me to go ahead with it, so
I'll let you know some time this afternoon or first
thing in the morning what we're going to do.

If I might take the liberty to say so, I think it'd

be unfortunate to have it public.
Well, I don't see any necessity of having it public.
No. But I'm not going up there to see anybody unless
you tell me to do so, see? In other words es, I don't see any necessity of seeing that party.

H.M.Jr:

And -

G:

But it may be - it may be desirable to have you talk
before the Committee in executive session.

H.M.Jr:
G:

H.M.Jr:

Well, I - I'm - the way I look at it, you're Chairman

and I'm putting myself in your hands.
A 11 right.

And I'll do anything you say, but I'm not lobbying for

388

-3the bill. I'm not seeing anybody, see?
G:

H.M.Jr:

All right, all right.
All right, sir.

G:

All right.

H.M.Jr:

Thank you.

389

January 15, 1937
9:14 A.M.
H.M.Jr:

Hello?

Mrs. McDaniel (of Senator Glass's office): Yes, sir.
H.M.Jr:

Henry Morgenthau, Jr.
Mr. Secretary.

M:

H.M.Jr:

Is this Senator Glass's office?

M:

Yes, and this is Mrs. McDaniel talking.

H.M.Jr:

Miss who?

M:

Mrs. McDaniel.

H.M.Jr:

Oh, Mrs. McDaniel -

M:

Yes

H.M.Jr:

- I'm afraid there's a misunderstanding.

M:

Yes

H.M.Jr:
M:

H.M.Jr:

I spoke to the Senator myself yesterday about two
o'clock.

Yes, sir.
And told him that I was available any time except

10:30 this morning, when I had an appointment
to be - appear before the House on Weights, Coinage,

you know.
M:

Oh, you did?

H.M.Jr:

Yes

M:

Well -

H.M.Jr:

I said I'd cancel

M:

- it must have escaped him, because I had dinner up

H.M.Jr:

Pardon me?

there last night.

390

-2 M:

I say it must have escaped him, because I had dinner

with him last night at the hotel, and he asked me to
phone you the first thing this morning, the minute
you got to the office.
H.M.Jr:

Well, I told him - I said, "Senator, I'll cancel any
appointment I've got but one, and that's the one in

the10:30."
House and they've asked me to come there Friday
at

M:

Well,

did you ever Now, let me get in touch with

him and he'll call you, Mr. Secretary.

H.M.Jr:

Do you mind? Because I - I - I don't - I couldn't

very well call up Congressman Somers and call it off
there.

M:

I see. Well, I'll - I'll get in touch with him right

away and he'll call you.
H.M.Jr:

You see, I had the letter yesterday from Somers
inviting me to come up there and we accepted.

M:

I see.

H.M.Jr:

Now, I told Senator Glass any other time except that.

M:

H.M.Jr:
M:

And I'll bet it just escaped him entirely.
All right.
Because that was the last instruction he gave me

last night -

H.M.Jr:

Well, I guess

M:

- was to call you the first thing this morning.

H.M.Jr:
M:

If I hadn't done it myself, I could blame somebody

else, but I can't.

(Laughs) But you did it.

H.M.Jr:

Yes

M:

Well, all right, sir, I'll get in touch with him right
away.

H.M.Jr:

Thank you.

M:

And he'll call you.

391

January 15, 1937

9:47 A.M.
H.M.Jr:

Hello.

Carter
Glass:

This is Mr. Glass.

H.M.Jr:
G:

This is Henry Morgenthau, Jr.
Mr. Secretary.

H.M.Jr:

Yes, sir.

G:

No use being disturbed about the matter of this

meeting. I don't think it will be necessary for
you to appear there at all, and if so we can turn
H.M.Jr:

the meeting to suit your convenience.
Well -

G:

I'm in hopes of having -

H.M.Jr:

I would say, sir, that I - I - I don't know - I

G:

H.M.Jr:
G:

certainly
Is
that toocould
late?get there by - the latest, 12 o'clock.
Well yes, the Senate meets at 12 o'clock. I don't
think it will be necessary for you to be there at
all.
You think you can report it out without me?

I think I can report it out without you being there,

but if there are members of the Committee who insist
upon the hearing, which I shall insist will be an
executive session H.M.Jr:

Yes

G:

- why, we can defer it, that's all.

H.M.Jr:

Well, when - when would suit you, then?

G:

What's that?

H.M.Jr:

What day would suit you?

G:

Well, I had contemplated going home this evening. In

392

-2 fact, I had contemplated going home last night but
for
thiso'clock.
meeting, and I'll be back Monday morning
at 10
H.M.Jr:

Well, if - if - if they want me, I'm available

G:

Very well. If they want you -

H.M.Jr:

Yes

G:

any time Monday.

- the likelihood is we'll want you at 10 o'clock

Monday morning.
H.M.Jr:
G:

Well, I'll put that down.
And I'll let you know. I - I understood you to say

that you were expecting to hear further from Somers -

Somers.

H.M.Jr:
G:

H.M.Jr:

Well then, we - I did and I got a letter yesterday
afternoon.

Yes, well I didn't know that.
Well, I - I didn't know it either, but he asked me
to hold 10:30 for today -

G:

Yes

H.M.Jr:

- pending his Republicans filling their meeting -

G:

Yes, and I - I - you told me you expected to hear from

their Committee.

him and I supposed you'd let me know when you heard
from him.

H.M.Jr:

Well - well, I didn't - I didn't know that - I was

G:

Yes

H.M.Jr:

And so I didn't think there was any hurry, you see.

G:

Well, there is no real hurry about it -

H.M.Jr:

Yes

under the impression from some person that if we
came up on the Senate, it'd be Tuesday, you see.

393

-3 G:

- because there's not going to - in my judgment,

H.M.Jr:

Well -

G:

H.M.Jr:
G:

H.M.Jr:

there's gcing to be no difficulty about it at all.

At any rate, I'11 communicate with you after the
meeting today and let you know exactly what to
expect and when to expect it.

Well, if - if - I'll be with Somers, because I
got his letter; it came in last night.
Yes

And - ah - at least, it was on my desk the first
thing this morning when I walked - when I walked
in here. It was dated yesterday, so I suppose it
got in last night.

G:

Yes

H.M.Jr:

And I'll - I'll wait then and keep Monday clear.

G:

All right.

H.M.Jr:

Thank you.

G:

All right. Goodbye.

394

January 15, 1937
1:58 P.M.

Operator:

Can you speak to Mr. Miller now?

H.M.Jr:

Yes

Operator:

I'll get him.

H.M.Jr:

Hello.

Operator:

Chairman Miller.

H.M.Jr:

Hello.

Carroll

Go ahead.

Miller:

Hello, Mr. Secretary.

H.M.Jr:

Good morning.

M:

This - the Commission has appointed Commissioner

Eastman to confer with you in regard to this tax
matter.

H.M.Jr:

Yes

M:

And I wonder if you could let us have a copy of

your letter to the President.

H.M.Jr:

Surely.

M:

Shall we send over for it?

H.M.Jr:

No, I'll send it. I'll - I'll have a copy made and

M:

Well, if you will, please. And then you'll hear from

H.M.Jr:
M:

send it over to you.

Eastman in a few days, when he's ready.

I'll have it over to you within the hour.
Is that satisfactory to you?

M:

Entirely.
All right. Thank you, Mr. Secretary.

H.M.Jr:

Thank you.

M:

All right.

H.M.Jr:

395
January 15, 1937

2:05 P.M.
George

Harrison:

Henry, I'm in town and I was wondering whether it
would be convenient for you to see me any time
this afternoon.

H.M.Jr:

Well, George, I'm going before the Committee on
Banking and Currency at 2:30.

H:

Ah-ah.

H.M.Jr:

I was up there for two hours solid this morning.

H:

Oh, I see.

H.M.Jr:

Before the House. This afternoon your friend
Carter Glass has me up there.

H:

Oh, I see. Well, then I won't bother you. I'll

call you in the morning in case - are you going to

be there tomorrow morning?
H.M.Jr:

Well, I'll be at home.

H:

Oh well, I see .....

H.M.Jr:

Have you got my number?

H:

North 8988, isn't it?

H.M.Jr:

8898.

H:

8898.

H.M.Jr:

Give me a ring around 9 o'clock.

H:

May I do that?

H.M.Jr:

Are you up at Carey's?

H:

Yes

H.M.Jr:

O.K.

H:

That's 8898.

H.M.Jr:

8898.

H:

I'll call you in the morning then.

H.M.Jr:

Please.

H:

First rate.

396

January 15, 1937

4:14 P.M.
Senator

The best way to do that is when we adjourn there,
James F. Byrnes: McNary objecting to filing the report, Joe will
move just to meet formally there tomorrow.
M.Jr:
B:

Yes.

And there - instead of going into the - the Senator
right now, I thought I'd wait, because the best -

the best thing to do would be to let him file the
report tomorrow, and then that's all we're going to
do, just meet to get this report.
H.M.Jr:
B:

H.M.Jr:
B:

So you'll leave it as it is.
And then this. Let's - we're going to meet, and
when he files it he can ask unanimous consent to
take it up. If McNary objects, as I imagine he
will - he's taking the position that it ought to
follow the rule and stay over, you see.
Yes, then it comes up Monday.

Then it would fix it - our - we'd accomplish our
objective to have the thing on Monday.

H.M.Jr:
B:

So you'll leave it as is.
And the best thing is to - possibly to let it go

through and stir up less trouble than if we go
asking exceptions. Of course, there's no reason
for the hurry. I think when you're getting Monday,
we'd be doing all right.

H.M.Jr:
B:

H.M.Jr:

But you - but you're not going to change Glass now?

No, I think I'm just going in there to - to talk with
him to urge to - when the Clerk files it,
is going ahead to file the report.
Yes

B:

Therefore it'd be put on the calendar tomorrow, and
if he can ask for its consideration, if McNary chooses
to give it, all right, and if he don't, why, then
at most we'll be over to Monday.

H.M.Jr:

Swell.

397

-2B:

That's - that's the best idea.

H.M.Jr:

Well, it's darn nice of you to call me up.

B:

You made a fine statement this morning.

H.M.Jr:

Ah -

B:

You made - and I don't hesitate to say that I told

Adams you made a darn sight better statement than
I've heard you heretofore make before the Committee.

H.M.Jr:

Thank you.

B:

And - and the - an -

H.M.Jr:

Well, Jimmy, listen, a fellow can make a better

B:

Of course.

H.M.Jr:

statement when you've got three years behind you.

And we've been skating on thin ice the last three
years, and when I go up there, I - I haven't had
so much to

B:

Oh well, nobody loves a cross-examination. I never...

H.M.Jr:

No, but

B:

H.M.Jr:

B:

I've seen lawyers - I've seen lawyers go on the witness stand and suffer terribly on cross-examination.

But it - it gives a fellow a lot of backing to know
that - well, hell, you can say, "Look what's happened
in the last three years."
You made a good statement there on that thing. You
got a fine statement.

H.M.Jr:

Well

B:

Evidence of - of justi- it justifies confidence in

H.M.Jr:

Thank you.

B:

Fine, goodbye.

H.M.Jr:

Goodbye.

the future by what you've done.