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DIARY Book 566 September 2 - 4, 1942 - -ABook Page 566 346 Airplanes Aircraft flight delivery - British Air Commission report - 9/4/42 American Banker Article commending Treasury for stability of 184 Exchange of HMJr's Buick for a Cadillac not possible - 103 Government bond market - 9/3/42 Automobiles (Treasury) Thompson memorandum - 9/2/42 a) Cadillac to be returned - 9/9/42: See Book 567, page 252 -BBank of America Olson (Governor of California) and HMJr discuss issuance of charter at present time - 9/4/42 320 -c-China Stabilization Fund: $1 million of sterling funds to be kept to meet current liabilities: This suggestion from British member of Board discussed in Treasury cable to Adler - 9/2/42 118 Commodity Credit Corporation Balance sheet (assets now exceed liabilities) discussed in White buse-Treasury-Agricultureacorrespondence - 9/4/42 Correspondence Mrs. Forbush's mail report - 9/4/42 321 325 Cuba See Gold Custome, Bureau of Arbitrary investigation of survivors of torpedoed British ships at Tampa, Florida, discussed in War Department correspondence - 9/3/42 201 a) Investigation done "at request of G-2" - Gaston states - 9/10/42: Book 568, page 14 E- Economic Stabilization Authority See Inflation Elliott, Harriet Thanks HMJr for consideration shown in connection with Deanship at University of North Carolina - 9/3/42 197 -7Book Page Financing, Government Agenda for HMJr's advisory group at 4 o'clock, September 2, 1942 Federal Reserve Bank presidents consulted concerning changes in present series of Tax Notes - 9/2/42 a) Answers Conference: present: HMJr, Haas, Heffelfinger, Murphy, Viner, Harrison, Burgess, Smith, Spencer, Brown, and Stewart - 9/2/42 Government Bond Market: American Banker congratulatory article - 9/3/42 566 21 22 23 34 184 Securities and Exchange Commission reprimanded by Treasury for announcement of regulations so timed that it interfered with Victory Fund efforts in connection with recent offering of 24% Bonds - 9/3/42 Conference with representatives of Executive Committee of Open Market Committee and Ransom in Washington 9/4/42 185 240,250 a) 2-3-year note - giving Victory Fund Committee every opportunity to sell and all non-banking purchasers an opportunity of full allotment discussed 1) Telephone conversations with Sproul and Williams 2) Recommendations of Discount Corporation, Devine, etc Government securities - recent changes in prices and yields: Haas memorandum - 9/4/42 258,264 268 269 War Savings Bonds: Payroll Deduction Plan: HMJr and Graves admit limitations of program and advisability of advocating compulsory savings - 9/2/42. a) HMJr's proposed statement before Senate 1 Finance Committee 2 1) For succeeding material, see Statements by H14Jr Taylor, Myron C.: Discusses with HMJr offer to wife of national chairmanship of Bond and Stamp Sales Committee of American Women's Voluntary Service 9/3/42 Payroll Savings Plan: Firms employing 100 to 499 persons - report on - 9/4/42 Sales report - July, August, and September, 1942 - 9/4/42 Ford Trucks See Lend-Lease 135,138,139 272 275 GGold Cuba: Purchase of $5 million of gold discussed in correspondence between Treasury and Cuban Embassy 9/2/42 (See also Book 573, page 100) 114 I- Book Page Inflation See also Revenue Revision: Spendings Tax Economic Stabilization Authority: Executive Order See also Book 558 Rosenman and HMJr discuss present draft: "the administrator shall only make such recommendations as he deems desirable to the Secretary of the Treasury" - discussion by HMJr and Rosenman 9/3/42 a) HMJr, Gaston, and Cairns discuss with Rosenman 1) Redrafts 1 and 2. 2) Cairns memorandum b) FDR's message: Tax portion as revised by Paul and Blough - 9/4/42 566 127 143 145,146 149 316 c) Cox-Lubin memorandum to Rosenman discussed by Treasury group - 9/18/42: See Book 570, page 141 -LLatin America Cuba: See Gold "Leaks" See Press Relations, Treasury Department Lend-Lease United Kingdom: British gold and dollar balance accomplishments of program reviewed in White letter for Chancellor of Exchequer (not sent) - 9/2/42 Manila-destined trucks (100 Ford) transferred to Lend-Lease requirements for New Zealand - 9/3/42 (See also Book 567, page 255) 110 198 -M- Military Reports British operations - 9/2/42, etc 120,206,208 "The War This Week, August 27 - September 3, 1942" - 211 "American Estimates of the Enemy" - Office of War 356 Office of Strategic Services report Information report - 9/4/42 Morgenthau, Henry, III Brigadier General Rodgers, Fort Riley, Kansas, asked for negatives of pictures of HMJr and HM,III - 9/4/42 N- New Zealand See Lend-Lease 323 - N - (Continued) New Hackensack, New York, Airport To be acquired by War Department and improved 9/2/42 Book Page 566 104 Historic Buildings: FDR's request that they be left discussed by HMJr and Patterson - 9/8/42: See Book 567, page 206 a) Patterson's assurance that they will not be disturbed - 9/9/42: Book 568, page 39 -0Occupied Territories Currency problem discussed by representatives of Treasury, Navy, Army, and State - 9/4/42 a) Agenda for meeting 212 237 -PPress Relations, Treasury Department Unauthorized Stories (not cleared through Schwarz): HMJr warne against - 9/4/42 247 a) HMJr again asks staff to be on watch 9/11/42: Book 568, page 84 Publicity (Treasury) See Press Relations, Treasury Department -RRevenue Revision For HMJr's statement, see Statements by HMJr Spendings Tax: Paul statement before Senate Finance Committee in Executive Session - 9/4/42 Walsh (Senator, Massachusetts) statement on plan Press comment on plan - 9/4/42 FDR's message: Tax portion as revised by Paul and Blough - 9/4/42 Consumer spending - Friedman memorandum - 9/6/42: Book 567, page 36 Congressional attitude reported unfavorable by George - 9/7/42: Book 567, page 39 a) Letter which was not sent to George: Book 567, page 40 b) Gaston letter (not sent) to George: Book 569, page 296 279,310 181 312 316 -SSecurities and Exchange Commission See Financing, Government Book Page Silver Conference between representatives of Treasury, War Production Board, and Metals Reserve Corporation 9/3/42 566 108 a) Disposition of 5 million ounces of ordinary silver discussed b) Treasury letter to War Production Board 9/11/42: See Book 568, page 183 Statements by HMJr For material in preceding books, see Financing, Government and Revenue Revision Senate Finance Committee (meeting in Executive Session): Additional taxes through a spendings tax which will supplement present Payroll Deduction Plan of War Savings Bonds program advocated a) HMJr and Graves admit limitations of program and advisability of advocating compulsory savings - 9/2/42 1) HMJr's proposed statement before 1 Senate Finance Committee b) Drafts 2. 1) Discussed by HMJr, Paul, Gaston, Kuhn, Stewart, Haas, White, Graves, and Blough - 9/2/42 c) Draft 3 2 10,55 72 87 d) Reading copy 1) Copies sent to all State Administrators of War Savings Staff 2) Copies to FDR, Wallace, etc a) Acknowledgments e) Public Statement - 9/5/42: Book 567, page 1 151,163 162 168 182 1 September 2, 1942 During the meeting last night, I asked Harold Graves to go into Mrs. Klotz's room with me as I wanted to have a quiet talk as to whether or not we should give up that part of the volunteer War Bond program which has to do with payroll deduction. I started the discussion by saying, "Harold, I got a memo today showing that only about 1,400,000 to 1,500,000 workers in approximately 14,000 concerns are having 10% deducted from their pay. Is that correct?" He said, "Yes." I said, "Aren't you having a great deal of difficulty getting the bulk of the workmen in this country up to 10%?" and he said, "Yes." I said, "With the constantly increasing amount we have to pay out for the war, isn't it a fact that under the volunteer plan we haven't been able to keep up with it?" and he said, "Yes." I then said, "Would you object very much if we abandoned the volunteer plan and go into either compulsory savings or post-war credit?" He said, "No, I have no objections. I only want you to be sure to get a good swap for what you are giving up. I said, "If I can get $4,000,000,000 of nonnegotiable, non-interest bearing securities through this tax on spending which would be refundable, isn't that a pretty good swap?" and he said, "Yes, it is." I said, "Harold, I want to tell you now that nobody could have done any more than you have done on this, and I appreciate enormously what you have done.' I said, "Furthermore, during this year the Treasury has been practically the only agency that has done anything to build up the civilian morale, and that you can never measure in dollars." Graves answered me by saying, "You have been more than kind to me all through this thing." Naturally, I felt very badly about having to make this decision, but I felt the time had come inasmuch as I promised both the President and Congress that if we didn't make good I would be the first to say so, and I think it is up to me to do so now. ########## 2 NOTE: This memorandum was dictated on the dictaphone by the Secretary at 6:30 a. m. this morning, Sept. 2. Herbert Gaston Perdinand Kuhn September 2, 1942, Secretary Morgenthau In my statement for tomorrow, I'd like to any something like this "Gentlemen, I told you if at any time that I was worried about the financing, I'd come before you and say so. I am here today. I also told you that if I wasn't satisfied with the volunteer plan, I'd come before you and say so. I am here today. I can assure you and through you the country that I can continue to raise the stupendous sums necessary to finance the war for the balance of the year, but after the first of the year I will need additional revenue in order to carry out my responsibility. I also feel that the present bill as it passed the House how does not sufficiently reach the mass of the purchasing power, and that we in the Treasury must carry out our share of the responsibility to close this gap. Therefore, I have asked to come before you today to make the following suggestions" - and then go ahead and make the suggestions, and give them (1) the figure, how much additional revenue will be raised, and (2) how much of an inflationary gap can be closed through this suggestion. Close by saying that the situation is extremely serious and I feel that in order to keep the country on a sound financial basis this coming year, I've pretty much got to have what I'm asking for today. If Congress will give me this, I feel that I can carry on in the coming year. Something along that line I think will do the trick. I wish that Kuhn and Gaston would drop everything that they are doing this morning in order to get this draft ready, and get somebody like Blough and Friedman to help them. Also, before I see it I'd like both Walter Stewart and Jake Viner to see 18. I'11 be ready for the last look at the first draft immediately after lunch. If possible, I'd like to have it before lunch to show it to Walter George. I think that that would be very helpful. 3 September 2, 1942 10:12 a.m. Operator: Go ahead. HMJr: Hello. Randolph Paul: Hello. HMJr: Yes. P: This is Randolph Paul. HMJr: Henry Morgenthau. P: I'm with Senator George.. HMJr: Yeah. P: and we've been discussing the situation, and the particular point I called you about at the moment was that he is tied up for lunch HMJr: Yes. P: and he doesn't know how to get hold of the people that are going to meet him, and he wondered if he could come down after the hearing and see you about five o'clock. HMJr: Surely. P: Is that all right? HMJr: Surely. P: Well, all right, let's leave it that way then. HMJr: At five o' 'clock? P: We'll be there then at five o'olook. HMJr: That's all right. All right. Incidentally, I've cleared it with the President. P: Oh, swell. HMJr: P: - HMJr: Yeah. P: Oh, fine. I'11 tell the Senator that. HMJr: Five o'olock. P: Okay. 5 September 2, 1942. 10:23 a.m. HMJr: Claude Hello. Wickard: Yes. HMJr: Claude. W: Yes, Henry. HMJr: For your own ear only.... W: What? HMJr: W: For your - confidentially. Oh, yes, I get it. HMJr: I feel quite encouraged after seeing the President W: Uh huh. HMJr: that - I think he's going to listen to you fellows and listen to the plan - hello W: Yes. HMJr: But I think that there's - I - oh, I think there's a 75 per cent chance. that he will go all out Monday night. W: He hasn't made up his mind yet? HMJr: No, I said a 75 per cent chance. W: Yes. HMJr: But that's only for you. For God's sake, don't W: tell anybody else. I won't. HMJr: But I thought I'd help you in your fight. W: (Laughs) Well, thanks very such. -2 HMJr: W: But I came out quite encouraged. I see. HMJr: Yeah. W: Well, thanks for calling. HMJr: Okay. W: You bet. 6 September 2, 1942 10:52 a.m. HMJr: Hello. Operator: Judge Rosenman is in a conference now. HMJr: Oh. Well, he left word he wanted to call me. Operator: Yes, I know, and now Miss Hack says he's gone into HMJr: Well, tell them to send a note in. Operator: All right. HMJr: Tell then to send a note in, please. Operator: Right. a conference. 10:56 a.m. HMJr: Hello. Operator: Judge Rosenman. HMJr: Hello. Operator: Go ahead. HMJr: Hello, hello. Judge Rosenman: Henry? HMJr: I'm holding butter. What are you holding? R: What? HMJr: I'm holding butter. What are you holding? R: In my mind's eye - ah - you know, Hedy. HMJr: Okay. (Laughs) 8 -2Hey, two things, first of all, I stayed behind and talked and I think you made quite a dent. I think R: he's pretty well convinced. HMJr: Oh, wonderful. It may change when that thing comes in, and (2) if you're going to be up there, you'd better be prepared R: HMJr: R: HMJr: R: some time or other to go over this tax portion of it. Well, I'd like to very much. I don't know whether you'll need Paul up there or not, but Well - well, I - I he has - he said it's too long now and he wants to talk about it generally. Well, you know he gets some general over-all stuff that may disagree with what you fellows are doing. HMJr: Now this isn't a bribe, see? But it's corn time at R: (Laughs) Yeah, well - well, I'm more interested in HMJr: (Laughs) Sez you. R: Yeah. (Laughs) Okay. Fishkill Farms. that than in Hedy Lamarr, I'll tell you that. HMJr: I'm not trying to butter you with corn, see? Yeah, well, I hope - I hope you are. Well, now let's leave it this way, if there's any R: Yeah, yeah. HMJr: Because I - I think if the President could get this R: Well, that - I think - I think he.... HMJr: God, I - I almost... HMJr: R: change you'll let me know, maybe I could put in my two bits again? behind him 9 -3R: ....and and I - IIstayed think behind to put in a couple of cents, HMJr: Yeah. R: ....I think unless they get at his again, he's all right. HMJr: I almost went down on my knees. R: Did you? HMJr: Almost. R: Okay. HMJr: Yeah. R: All right. (Laughs) HMJr: Thank you. R: Goodbye. 1st draft I saw Second Draft 10 3.45P.M. Seft2, I have come before you today in response to your standing invitation and in fulfillment of my promise to come up here at any time when I am seriously concerned as to the state of the nation's finances. When I appeared before this Committee on July 23rd, I expressed my strong conviction that the revenue bill then before you was inadequate to meet the Government's needs for additional wartime revenue. Since then, the obvious need for new revenue and new sources of revenue has grown far greater. Our original minimum recommendation of $8.7 billion of additional taxes now appears not only inadequate, from the revenue standpoint, but insufficient to give us the safeguards we need against inflation. Accordingly, I have come here today to propose additional taxes which will increase Treasury receipts out of current 11 -2income by an amount far in excess of the Treasury's previous recommendations, and will in addition exercise a strong restraining influence on consumer spending and therefore furnish an effective weapon for combatting inflationary increases in prices. My primary recommendation is for a new form of tax, a tax on spending. The tax would be divided into two parts. The first part, which might be called the normal spendings tax, would apply to all who spend for consumption goods more than $500 a year for a single person, $1,000 a year for a man and wife without dependents, and $250 a year additional for each minor dependent. This tax would be at the rate of ten percent -- not upon incomes, for incomes by themselves do not lead to inflation -- but upon actual expenditures on goods and services, and it would be 12 -3completely repayable after the war. For each taxpayer there would be established a post-war credit, without inter- est, for the entire amount of the tax paid. Thus this levy, in form a tax, would be in effect a compulsory saving provision affecting all consumers whose expenditures exceeded a minimum subsistence level. The second part of the proposal is for taxation at steeply progressive rates for persons spending over $1,000 for an individual, $2,000 for a married couple, and $500 for each minor dependent. The rates would be designed not primarily for revenue but for restricting expenditures and inducing true saving. For this purpose, the taxpayer would deduct expenditures for debt repayment, purchases of War Bonds and other forms of investment which are in themselves forms of saving and which should be encouraged in every way. 13 -4 In addition to this primary proposal I should like to recommend a further reduction of exemptions from the income tax to the level of $500 for a single person, $1,000 for a married taxpayer, and $250 for each dependent. These reductions are directly linked to our whole program for taxation designed to check inflation and to prevent a further rise in the cost of living. Together with the spending tax they would broaden the tax base so as to include $65,000,000,000 of individual incomes, or about two-thirds of all the consumer income in the country. The details of these proposals will be outlined to you by Mr. Paul and the members of his staff. We at the Treasury have been discussing them together, and Mr. Paul and his assistants will be speaking for me completely. 14 -5I should like to comment on only two aspects of these new proposals before I leave the floor to Mr. Paul. One concerns their relation to the War Bond program. I have remarked that the proposed normal spendings tax of ten percent, with full repayment after the war, is in effect a compulsory savings plan. We foresee that it will probably reduce in many individual instances the amounts which workers can afford to set aside for War Bonds under voluntary pay- roll deduction plans, but the proposal is intended to supplement and not to supplant the voluntary purchase program. It is our belief that the voluntary War Bond program has produced and will continue to produce a great contri- bution to the nation's war effort, not measured by the amount of funds raised. This is due almost wholly to the unselfish service that hundreds of thousands of men and 15 -6women throughout the country have given to it. It has en- listed the patriotic support of working people, of the leaders of their unions, of great industrialists, of bankers, of e ditors and publishers, of the motion picture and radio industries, including their star performers as well as their executives -- in fact, of representatives of all groups of the American people in all walks of life. They have responded as individuals and as patriots, and their work has been tremendously effective in selling more than $8 billion worth of Bonds since May 1, 1941, to about 25 million individuals. More than that, it has helped to arouse the people of the country to see clearly the crisis that confronts us, and particularly to cut down their spending and to save so that their fighting men may have enough. Reliable estimates by two Government 16 -agencies show that the rate of saving of the whole country has doubled in the past year. I believe that the voluntary War Savings program has greatly contributed to that result. It will, of course, be continued. The results, however, have been uneven, especially in the so-called payroll savings plan under which 20 million working men and women are already authorizing their employers to d educt a portion of their pay for the regular purchase of War Bonds. The employees of some companies have made enviable records, setting aside far more than ten percent of their pay; great Government departments, including the Treasury, can show almost 100 percent of their person- nel deducting over ten percent of the entire department's payroll; but other groups have not done nearly as well. 8. In these circumstances, I feel that the spendings tax is necessary as a supplement to the War Savings program, designed not only to add substantially to current Treasury receipts but to have a powerful effect in restricting spending. The rates at higher levels of spending are especially designed to cut into luxury spending and other expenditures for consumer goods that are not positively essential to the immediate well-being of the individual and the family. As I suggested a few moments ago, the danger we face is not produced directly by the rising national income. The evil we must control is the spending of that income in ways that compete with war production and drive prices upward. Our effort, therefore, must be to attack spending directly and at its root, not 17 82 18 only by withdrawing spending power from the individual but by imposing what is in effect a penalty on unnecessary spending. - 9 As the rate of war production mounts, the national income mounts and the funds available for consumer spending are increasing day by day while the supply of goods is dwindling. We must adjust buying to the goods actually being produced to meet the demand. The reason for this lies as much in the Government fiscal field as in the field of the prices which consumers pay. With all the amounts we have recommended for new taxes, including these present recommendations, there is still a great gap to be closed to meet our fiscal needs. We must borrow very large additional sums. Our problem -my problem -- is to borrow these amounts in such a way that they will not contribute to inflation. Inflationary pressure is created by consumer demand exceeding the supply of goods available. We are seeking in this proposal before you to attack the problem at the seat 19 10 20 of potential difficulty and to attack it drastically. It is generally conceded by those with whom I have talked that the approach through price regulation, rationing and other devices to control supply is not enough. I think we shall be doing very much less than our full duty if we do not deal with the problem effectively in the fiscal field. What I have presented is a method -- and the best method we have been able to devise -- for accomplishing this result. Sept 2. 1942 that 4 oclock Agenda for Secretary's Advisory Group I. Treasury Bills A. Should the weekly issue of bills be increased to $400 millions commencing with the September 16 issue? II. Tax Notes A. Should the changes in tax notes listed in the attached telegram be adopted? B. Should the rate of interest on tax notes be flat or graduated? If graduated, what should be the graduations? III. September Financing A. What issues should be employed for the financing? B. Should the amount to be sought by each issue be set in advance or determined by the proportion of subscriptions? C. Should subscriptions from nonbanking subscribers be allotted in full? D. Should the issue be open for a longer time than usual? If so, should it be open to banks for the full period? 21 22 2221 Exp. Loans August 27, 1942 To Presidents, Federal Reserve Banks: Boston, Mass. New York, N. Y. Philadelphia, Pa. Cleveland, Ohio Richmond, Va. Atlanta, Ga. Chicago, Ill. St. Louis, Mo. Minneapolis, Minn. Kansas City, No. Dallas, Temas San Francisco, Calif. BECAUSE OF POSSIBLE EFFECT ON CURRENT SALES FOLLOWING INQUIRY SHOULD BE TREATED IN STRIOT CONFIDENCE BY YOU AND OFFICIALS OF YOUR BANK STOP WOULD YOU PLEASE ADVISE ME BY WIRE NOT LATER THAN SATURDAY OF YOUR REACTIONS TO THE FOLLOWING PROPOSED CHANGES WHICH HAVE BEEN SUGGESTED AS IMPROVEMENTS IN PRESENT SERIES OF TAX NOTES STOP SERIES A NOTES CHANGE AMOUNT WHICH MAY BE TENDERED FOR TAXES FROM THELVE HUNDRED DOLLARS TO FIVE THOUSAND DOLLARS A YEAR AND INCREASE MATURITY TO THREE YEARS STOP SERIES B NOTES INGREASE INTEREST RATE FROM FOUR CENTS TO SIX CENTS PER MONTH PER HUNDRED DOLLARS STOP PERMIT REDEMPTION FOR CASH WITH INTEREST ON THIRTY DAYS NOTICE AFTER SIX MONTHS FROM DATE OF ISSUE STOP PERMIT NOTES TO BE PLEDGED AS COLLATERAL SOMEWHAT ALONG THE LINES PERMITTED IN THE CASE OF THE RESTRICTED 2-1/2'S OF 1962-67 STOP INGREASE MATURITY TO THREE YEARS STOP CASH REDEMPTION WITH INTEREST WOULD NOT APPLY TO BANKS ACCEPTING DEMAND DEPOSITS STOP THESE CHANGES WILL BRING RATE IN LINE WITH PRESENT MARKET CONDITIONS AND PROVIDE INGREASED FLEXIBILITY STOP ALSO THEY WILL PERMIT HOLDERS OF SERIES B NOTES TO PAY TAX INSTALLMENTS ENTIRELY IN CASH IF THEY so PREFER WHICH WILL FACILITATE WORK IN COLLECTORS' OFFICES. MORGENTHAU 23 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE September 2, 1942. TO Secretary Morgenthau FROM George Buffington GTS. In reply to your request, there follows a summary of telephone and telegraph communications from the various District Chairmen and Executive Managers of the Victory Fund Committees, regarding your wire of August 27. I. Boston. Agree that the segregation of the two functions would be desirable. (Telephone from Mr. Stubbs, Executive Manager.) II. New York. Still feel that the Victory Fund Committee should have full responsibility for the sale of F and G Bonds and do not consider the present arrangement either detracts or adds to the general confusion. (Telegram from Mr. Sproul and telephone from Messrs. Sproul and Payson. Assistant Executive Manager.) III. Philadelphia. Expressed an opinion favoring the segregation. (Telephone from Messrs. Williams and Bendere. Executive Manager.) IV. Cleveland, Mr. Fleming believes the decision desirable, while Mr. MacBain, Executive Manager, feels the decision needs further clarification. (Telephone calls.) V. Richmond. Mr. Anderson, Executive Manager, says their district was set up primarily to sell F and G Bonds and believes the decision will require drastic changes in their organisation setup. (Telephone.) VI. Atlanta, No comment. VII. Chicago. Look with favor on the decision, although have the impression the State Administrators are not in favor of the segregation because they have, without exception, received considerable help from the Victory Fund Committees. Believe some uniform explanation should be sent to organisation. (Telegrams from Young and Patton, Executive Manager, and telephone from Mr. Patton.) VIII. St. Louis. Concur in the decision, but feel a uniform notice should be sent to Victory Fund organization. (Telegrams and telephone from Mr. Davis.) IX. Minneapolis. Favorably disposed toward the clarification arrangement. (Telephone from Mr. Loudon, Executive Manager.) 24 -2X. Kansas City. Principal function seems to be in the sale of F and G Bonds and believe the decision will somewhat restrict their efforts, but when situation was explained over the telephone to Mr. Leedy, he seemed to view it favorably. (Telegram and telephone from Mr. Leedy.) XI. Dallas. Reaction favorable, but believe some uniform explanation should be sent to organisation. (Telephone from Messrs. Gilbert and James, Executive Manager.) XII. San Francisco. This district had not organised particularly to as- sist the War Savings Staff in the sale of F and G bonds: therefore decision will have little affect. (Telephone from Mr. Grunigen, Executive Manager.) 25 WO8G86WASH H51 STL 291202 MORGENTHAU 1942 AUG 29 PM I 20 AFTER DISCUSSING WITH BUFFINGTON YOUR WIRE YESTERDAY AND IN VIEW CHANGES IN TAX ANTICIPATION NOTES, FEEL 0 OF PROPOSED THAT THE DECISION TO DROP EFFORT OF VICTORY FUND ON F AND G BONDS IS ACCEPTABLE COURSE TO PURSUE. HOWEVER BELIEVE THAT FORM OF NOTICE TO VICTORY FUND COMMITTEES AND BE UNIFORM AND PROVIDED BY YOUR OFFICE IN EXPLANAFFENT OF THIS CHANGE. CHESTER C DAVIS NOTED BUFFINGTON PRES., P FRB OF STLOUIS. 26 NOIONL-LINE OBLON 1942 AUG 29 PM 12 03 V W63G97WASH GX49 CGO 29-1034 GEORGE BUFFINGTON, ASSISTANT TO THE SECRETARY TREASURY IN THE CIRCUMSTANCES BELIEVE IT ADVISABLE FOR YOU TO SEND PROMPLY TO EACH EXECUTIVE MANAGER SUGGESTION FOR A LETTER HICH THEY COULD SEND TO ALL VICTORY FUND COMMITTEEMEN COMMENTING ON SECRETARY'S WIRE REGARDING FUTURE WORK ON F AND G BONDS. IF EACH EXECUTIVE MANAGER MAKES HIS OWN EXPLANATION LACK OF UNIFORMITY MAY RESULT IN REPERCUSSIONS. PERHAPS LETTER SHOULD GO DIRECT FROM YOU TO ALL COMMITTEEMEN. NOTED UFFINGTON F F PATTON. DUA B 27 470 1942 AUG 28 PM 6 03 W25G73LONG WASH J127 KC 28 415 MORGENTHAU REFERENCE YOUR WIRE TODAY CONCERNING FUTURE ACTIVITIES VICTORY FUND COMMITTEES, I URGENTLY REQUEST THAT ACTION BE DEFERRED WITH RESPECT TO REMOVAL OF F AND G BONDS FROM FIELD OF ACTIVITY OF THESE COMMITTEES - PENDING CONFERENCE BETWEEN YOU AND DISTRICT CHAIRMEN. ORGANIZATION THIS DISTRICT HAS BEEN FORMED ON BASIS OF ACTIVITY COVERING F AND G BONDS AND EXCEPT FOR METROPOLITAN AREAS THE FAR GAR GREATER PART OF THE WORK OF OUR COMMITTEES IS IN THAT FIELD. SUBSTANTIALLY ALL BANKS IN THIS DISTRICT ARE REPRESENTED BY MEMBERSHIP ON COMMITTEES AND FINEST POSSIBLE SPIRIT BEING EVIDENCED BY ALL. SPLENDID COOPERATION EXISTS WITH ALL STATE ADMINISTRATORS OF WAR SAVINGS STAFF , ALL OF WHOM HAVE EXPRESSED ENTHUSIASTIC APPROVAL OF ASSISTANCE BEING RENDERED. MEETING OF PRESIDENTS OF FEDERAL RESERVE BANKS NOW SCHEDULED FOR SEPTEMBER 25-26 WHEN CONFERENCE OF THE KIND SUGGESTED COULD BE HAD. FEEL MATTER IS OF GREATEST IMPORTANCE BOTH TO TREASURY AND TO ORGANIZATION SO FAR AS THIS IS CONCER NOTED BUFFINGTON LEEDY PRESIDENT FRB OF KANSASCITY #SDISTRICT 28 W12 WASH B299 NY 28-519P MORGENTHAU 470 1942 AUG 28 PM 5 41 A YOUR WIRE TODAY. APPRECIATE DIFFICULTIES DIVIDED OPERATION WAR SAVINGS STAFF AND VICTORY FUND COMMITTEES IN SALE SERIES F AND G WAR SAVINGS BONDS, BUT DO NOT THINK THESE DIFFICULTIES WILL BE RESOLVED BY SUSPENSION OF JOINT EFFORTS IN THIS FIELD. PROBLEMS OF DIVIDED AUTHORITY WITH RESPECT TO PERSONNEL AS DISTINGUISHED FROM KINDS OF SECURITIES WILL STILL EXIST TO DETRIMENT OF TREASURY'S SELLING EFFORT. NO CONSIDERATIONS OF RS PAST T POLICY OR PRACTISE SHOULD BE PERMITTED TO ACCOMPLISH THIS RESULT. I RENEW MY RECOMMENDATION, THEREFORE, THAT EFFECTIVE AND WORKABLE DIVISION 18 ONLY TO BE FOUND IF SERIES E WAR SAVINGS BONDS ARE UT IN ONE CATEGORY UNDER WAR SAVINGS STAFF AND ALL OTHER SECURITIES IN ANOTHER CATEGORY UNDER VICTORY FUND COMMITTEES. THESE ARE TWO SEPARATE SELLING JOBS, EACH ONE BIG ENOUGH TO OCCUPY THE TIME AND ENERGY OF YOUR TWO SEPARATE COMMITTEES, AND DISTINCT ENOUGH TO EMPLOY, WITHOUT CONFUSION OR DUPLICATION OF EFFORT, TWO DIFFERENT KINDS OF SELLING ORGANIZATIONS. TO MOVE IN THE OTHER DIRECTION KMM NOW SEEMS TO ME TO BE A STEP BACKWARD NOTED BUFFINGTON SPROUL. G A G 29 R A #44G55WASH H82 STL 28-155 HON HENRY MORGENTHAU 1942 AUG 28 PM 3 03 SECY OF TREAS REPLYING YOUR TELEGRAM THIS DATE FEEL STRONGLY IT WOULD BE MISTAKE TO NOTIFY VICTORY FUND COMMITTEE OR REGIONAL COMMITEEES WITHOUT T E FULL AND SATISFACTORY EXPLANATION OF REASONS FOR REVERSAL OF POLICY. SO FAR AS I KNOW NO FRICTION WHATEVER EXISTS AT PRESENT TIME BETWEEN VICTORY FUND COMMITTEES AND THE STATE WAR SAVINGS BOND ADMINISTRATORS AND THEIR STAFFS IN THIS DISTRICT. ON CONTRARY STATE ADMINISTATORS ASSURE US COOPERATIVE EFFORT OF VICTORY FUND COMMITTEES HAS HELPED GREATLY IN F AND G VOLUME. HOPE YOU WILL SUPPLY RESERREXE RESERVE BANKS WITH MORE COMPLETE STATEMENT OF TREASURY POLICY AND REASONS FOR CHANGE IN ORDER THAT WE MAY KNOW HOW TO INSTRUCT COMMITTEES AND PLAN COURSE FOR FUTURE. CHESTER C DAVIS, PRES., FEDERAL RESERVE BANK OF STLOUTS. NOTED SUFFINGTON 30 W77G25WASH M37 DLS 29-1106A MORGENTHAU 470 1942 AUG 29 DM 12 29 REPLYING YOUR TELEGRAM AUGUST 28 THINK THAT THE ACTIVITIES OF BOTH THE VICTORY FUND COMMITTEE AND THE WAR SAVINGS STAFF SHOULD BE CLARIFIED. SUGGEST, HOWEVER, THAT ACTIVITIES OF BOTH GROUPS BE CONTINUED ALONG PRESENT LINES UNTIL PRESIDENTS OF VARIOUS FEDERAL RESERVE BANKS HAVE AN OPPORTUNITY TO FULLY DISCUSS MATTER WITH YOU. PRESIDENTS ARE PLANNING TO MEET IN WASHINGTON ON SEPTEMBER 28 AT WHICH TIME THE PROPOSED CLARIFICATION COULD BE CONSIDERED. IF THAT SUGGESTION IS SATISFACTORY TO YOU, PLEASE ADVISE; OTHERWISE WILL NOTIFY MEMBERS OF VICTORY FUND OMMITTEE IN THIS DISTRICT THAT THE COMMITTEE AS SUCH WILL NOT BE EXPECTED TO CONCERN ITSELF AFTER SEPTEMBER 1 WITH THE SALE OF WAR SAVINGS BONDS see aux GILBERT INSURANCE NOTED BUFFINGTON 31 1942 AUG 29 DM 12 43 W85G42WASH GX67 CGO 29-1120 470 HON HENRY MORGENTHAU, JR SECY OF THE TREASURY WITH FURTHHER REFERENCE TO YOUR WIRE REGARDING FUTURE VICTORY FUND ACTIVITY IN SALE OF F AND G BONDS, I BELIEVE IN TEMBER HESE COMMITTEES COULD DO EFFECTIVE WORK IF THEY WERE GIVEN OPPORTNITY TO WORK CONTINUOUSLY ON TAX NOTES IN SUGGESTED REVISED FORM YOUNG. NOTED 6. BUFFINGTON 32 W93G62WASH (LONG) H48 STL 29-1143 1942 AUG 29 DM 12 57 MORGENTHAU 39211 RETEL AUGUST 27 TAX NOTE CHANGES. APPROVE SERIES A CHANGES. INCREASE OF LIMIT TO FIVE THOUSAND DOLLARS A YEAR APPEARS ESPECIALLY DESIRABLE IN VIEW OF MUCH HEAVIER NXXX INDIVIDUAL INCOME TAX LIABILITY IN PENDING TAX LEGISLATION. APPROVE AND WELCOME SERIES B SUGGESTED CHANGES AS BEING IN RIGHT DIRECTION. INCREASE IN RATE NECESSARY UNDER PRESENT MARKET CONDITIONS. IF IT IS ANTICIPATED THAT CORPORATIONS WILL BUY NOTES ON MONTHLY BASIS IN THE AMOUNT OF THEIR CURRENT NET INCOME THE NOTES WOULD BE TURNED OVER ON AVERAGE OF ABOUT ONE YEAR AT QUARTERLY TAX DATES AND CONSEQUENTLY SEVEN OR EIGHT CENTS PER MONTH PER ONE HUNDRED DOLLARS WOULD APPEAR TO PUT RATE MORE IN LINE WITH RRSEX PRESENT MARKET FOR ONE YEAR SECURITIES. IF RATE WAS THUS INCREASED, HOWEVER, IT WOULD APPEAR ADVISABLE TO REDUCE THE AMOUNT OF INTEREST PAID IF REDEEMED FOR CASH BETWEEN SIX MONTHS AND ONE YEAR. PERMISSION TO PLEDGE NOTES AS COLLATERAL SHOULD DO MUCH TO STIMULATE SALES ESPECIALLY AMONG SMALLER CORPORATIONS BECAUSE OF UNCERTAINTIES REGARDING CASH NEEDS IN THESE TIMES. PROVISION FOR CASH REDEMPTION WITH INTEREST WOULD SEEM TO ELIMINATE ANY OBJECTION TO INCREASING MATURITY TO THREE YEARS. SINCE AGREE ING ON ABOVE AS POSITION OF THIS BANK, WE HAVE RECEIVED COPIES OF TELEGRAMS OF BOARD AND EXECUTIVE COMMITTEE OF OPEN MARKET COMMITTEE COMMENTING UPON PROPOSED CHANGES SENT YOU AUG 28. BELIEVE INTRODUCTION OF A GRADUATED SCALE OF RATES ON TAX NOTES WOULD GREATLY BROADEN MARKET FOR THEM IN THIS DISTRICT AND VICTORY FUND COMMITTEE WOULD WELCOME OPPORTUNITY TO PROMOTE WIDE DISTRIBUTION. DAVIS. R 33 1942 AUG 29 DM 49 12 E L 39204 91WASH B131 BOS 29-1243P ORGENTHAU E EPLYING YOUR WIRE AUG 27 CONCERNING TAX NOTES BELIEVE A s ROPOSED CHANGES VERY DESIRABLE. AGREE WITH : SUGGESTIONS IN U ETTER BOARD OF GOVERNORS TO YOU AUG 28 RELATIVE MORE R TTRACTIVE AND GRADUATED SCALE OF RATES FOR SERIES B PADDOCK. 34 September 2, 1942 4:10 p.m. FINANCING Present: Mr. Haas Mr. Heffelfinger Mr. Murphy Mr. Viner Mr. Harrison Mr. Burgess Mr. Smith Mr. Spencer Mr. Brown Mr. Stewart H.M.JR: Who is the mouthpiece? MR. HARRISON: Mr. Murphy, I think. MR. MURPHY: I am the secretary, Mr. Chairman. I merely recorded these decisions. On the first point it was the unanimous opinion of the group that the bill issue should be increased to four hundred millions on September 15. On the matter of the tax notes it was the opinion of the group, and I believe also unanimous, that the A note should be increased to five thousand dollars and should mature in three years. On the B note it was the opinion of the group that the rate should be increased to seventy-two hundredths percent; that the maturity should be increased to three years; and that the notes should be allowable as collateral. The group was opposed to graduating the rate on the notes and was opposed to paying interest on the notes tendered for any purpose other than the actual payment of taxes. 35 -2With respect to the September financing, the group believed that the financing should consist of an approximately two-year and an approximately four-year note, priced in accordance with the rate pattern; that the proportion should be two billion dollars for the shorter note and one billion dollars for the longer note. H.M.JR: One billion for the shorter? MR. MURPHY: Two billion for the shorter, and one billion for the longer. Allotment in full should be given to subscribers up to twenty-five thousand dollars and to all non-banking subscribers; but such subscribers receiving allotment in full should be required to hold the notes sixty days - this to be supported by an appropriate sanction, such as delayed delivery. The group felt that the remainder of the subscriptions not taken by such full allotment should be allotted to banking subscriptions; and that if perchance either note was oversubscribed by non-banking subscribers and parties subscribing up to twenty-five thousand dollars, that the allotment on banking subscriptions over twenty-five thousand dollars would be zero. H.M.JR: If it were oversubscribed, would it be prorated down? MR. MURPHY: No. The allotment in full would be guaranteed. MR. VINER: To preserve the right to close the books before, I think that was the suggestion - to get control on that. MR. MURPHY: The contemplation was that the issue would be open somewhat longer than two days. 36 -3 H.M.JR: Is that the story? MR. MURPHY: Yes, Mr. Secretary. MR. STEWART: And delivered with more clearness than was the case during the discussion, I might say. (Laughter) H.M.JR: It is very nice to have several hours as a filter. MR. HARRISON: There was some little compromising here and there, you know. H.M.JR: Have you gentlemen been in contact with the Fed? MR. HARRISON: Yes. H.M.JR: Did they give you lunch? time. MR. SMITH: They invited us for lunch the next MR. HARRISON: That was our fault. I called five minutes to one and got Ransom, who was at lunch at the time, and arranged an appointment for twofifteen. We were there almost an hour with them. H.M.JR: Who financed the lunch today? MR. HARRISON: I think Walter Stewart financed much of it. MR. STEWART: To be collected out of highballs before these bankers get away. (Laughter) MR. HARRISON: I think it is fair to say that as a result of our meeting with the Board, the Board itself put up a pretty strong argument for the 37 -4certificates, May certificates, rather than two issues of notes. One point was that it was an opportunity to fill out this quarterly cycle of certificates; that if you delayed much longer in putting out a May certificate it would become so short that you would have to reduce the rate too low to make it attractive or to become competitive with the bills. H.M.JR: Were you men at all impressed with the fact that they want to make this thing short so they can make it a bond issue in October? MR. BURGESS: Yes. We discussed that bond issue proposition at some length this morning, and I think we all have the feeling that very considerable efforts need to be taken to sell more bonds outside the banking system and that the Victory Fund Committee and others ought to be geared up to do that job. Now, we recognize that it is going to be hard to do the job October 1 in the style that it ought to be done; but a decision probably ought to be reached on that pretty promptly because it takes a month to get the wheels moving and get the lists ready, and so on. While there is a conflict with the date of the Community Chest drive, I think most of us felt you ought to go ahead on October 1 and have a bond issue. It cannot be the all-out one that we would like to have, but we will do the best we can. Make it a two-percent bond or a two and a quarter. We do not think that the four-year note would interfere with that, and it would tend to distribute this financing a little more outside the banks than the certificate and short note would. MR. SMITH: The Board, in suggesting the May 1 certificate, urged the fact that you need to fill 38 -5that place now or face a short certificate. I was in favor of that because of the desire to have something open of a short-term nature that would be easy to finance in October. I do not agree with what Dr. Burgess has said about the preparation for a campaign because I do not believe that you can prepare for any campaign in thirty days. I think the campaign in October must be a meager effort and will take sixty days or ninety days to make proper preparation; and of course during the month of October the re will be about four hundred community fund drives for a total quota of about a hundred million dollars. H.M.JR: You are a Community Chest fellow, aren't you? (Laughter) You are the head of it, aren't you, for the country? MR. SMITH: No, I am not the head of it. H.M.JR: Just the brains? MR. SMITH: Well, over the man power of the country. H.M.JR He doesn't deny it, gentlemen. (Laughter) MR. HARRISON: Not yet. (Laughter) MR. SMITH: Just on the question of man power during October, because the other Yellows will have to do the work. H.M.JR: He doesn't deny it. What do you know about that? (Laughter) I don't know. I am for doing everything that is humanly possible to get every dollar we can get out of people outside of the banks; but I don't know about this getting five or six billion dollars in a month, and so forth. The thing that I am afraid of is you work up all this enthusiasm and then you go 39 -6- into sort of a calm afterward and let down, and then you have to hit them again the following month. I don't know about the amount of energy. One says thirty days, the other says sixty days, to get ready for it. Then you do it, and let's say it is successful; then you skip a month and you are right back again. MR. SMITH: That is what is ahead of us. H.M.JR: I would just as soon do it every month. MR. SMITH: When I said sixty days or ninety days, it is because we have not set up the organization that is necessary to do that work. Once you get it set up you can keep it going. H.M.JR: Let me ask you fellows, the bank presidents - you happen to be grouped there together how I am going to go to your customers, the fellows that have a lot, depending upon the community, from twenty-five thousand dollars up to a million dollars - Mr. Brown mentioned a man who was sitting there with that money who, for reasons in hi s own mind, does not want to do anything about it. Now, how am I going to get that fellow to lend it to the Government? MR. SPENCER: These Victory Fund Committee fellows have got to go right up against him. I was talking to a fellow the other day, and he says, "The last time I had to subscribe to a hundred thousand. Nobody has told me I had to subscribe to anything yet. H.M.JR: You mean in the last war? MR. SPENCER: Yes. H.M.JR: Let me ask you this. Is it a Victory Fund fellow or is it the head of the institution? 40 7- Let's get personal and take your own institution. Let's say a fellow has a hundred thousand, and you know who it is and you can name him. There is this fellow. Now, who is the man who should approach him? Is it you, somebody from your board of directors, or an outside salesman? MR. SPENCER: It is all going to depend upon who he is. Our investment bond fellows have their lists. They are the fellows that have sold securities to the great majority of the people with money. To be sure, we have got money on our books that the investment fellow does not know anything about. Now, it is going to be up to us to handle that. I don't doubt but what we are going to make some people a little bit mad in going after them, but I think it has got to be done. H.M.JR: You haven't answered my question. MR. SPENCER: It will be ei ther myself or one of my officers, who know that account, who is going to go after him. H.M.JR: That is what I think. Now, let's be a little bit more - let's be frank with each other. Now, let's say that you say, "All right, I am willing to do that", with the result-MR. SPENCER: That somebody gets mad. H.M.JR: No. The deposits in your bank for one month go off two, three, four, or five percent. That would be a lot, wouldn't it? MR. SPENCER: Yes. H.M.JR: But I mean, say, from one to five percent. Now, are you and your board of directors I am just talking to you because you happen to be in my line of vision - I me an you as a man and you 41 -8being connected with the American Bankers, do you think the temper of the American bankers has arrived to that point that the presidents of these institutions are willing to go to these fellows? MR. SPENCER: A very large percentage. H.M.JR: Now, the savings banks have done it, and they have lost deposits steadily. They have done it through selling war bonds. But let's be frank, the national banks have not. MR. SMITH: Absolutely, Mr. Secretary. H.M.JR: If you have, you have kept it a dark secret. MR. SMITH: What is necessary to disclose that fact, except that we have sold in our little shop in E bonds ten thousand separate bonds? H.M.JR: That is not what I am talking about. MR. SMITH: Well, we sold-H.M.JR: Have your deposits gone off? MR. SMITH: Our savings deposits have. H.M.JR: Well, the total? MR. SMITH: No, because we are a commercial bank. The individual deposits have. H.M.JR: Have they? MR. SMITH: The corporate deposits. H.M.JR: Tom, I am not conscious - maybe it is because nobody has explained it. Maybe the mutual 42 -9- savings banks have done a better job in explaining what they have done. We are talking - I am not conscious of the fact. If you want, I will look at this fellow here. MR. BURGESS: Our savings deposits are off. H.M.JR: All right, now,Ifmnotconscious of the fact that the presidents of the national banks or the heads of the boards of directors have yet arrived at that point that they are willing to, if necessary, to get some of their very best deposi tors mad at them because they say to them, "Look, Jim, you have a hundred thousand dollars; by gosh, you have got to pay ten percent of it this time and buy Government securities and do ten percent a month. 11 MR. SMITH: That is because you have not been informed correctly. Now, how do you know that the savings banks have? I just wonder how that information gets in here. H.M.JR: Well, very simple. They have had one of their men with us constantly, and Henry Bruere happens to have been here yesterday. They have one of their men with us all the time. He is right here in Washington with us, a man by the name of Sparks. MR. SMITH: Take the Victory Fund Committees all over the country, take our district in St. Louis-MR. EDWARDS: Mr. Secretary, those savings banks did not tell you the whole story. Their deposits have been going off for five years. H.M.JR: Not in New York. MR. EDWARDS: They are less. The deposits of the mutual savings banks have been declining for five years. 43 - 10 - Now, as to what the national banks are doing, of course I have been in touch with a good many of them, trying to help you as much as I could in this work up here. If you will pardon a personal illustration, you take our bank; we have discontinued paying interest on any savings deposits above a thousand dollars. We only pay one percent on that first thousand dollars. We have advised all savings depositors to put that money into defense bonds, and during the last sixteen months we have sold in the neighborhood of nine million dollars of Government securities to the public, F's and G's and other market securities. During that same period we bought for our own account seven million; so we have at least sold the public more than we have had to buy. H.M.JR: But that man Mr. Brown menti to me a couple of months ago - is it all right to tell this story? MR. BROWN: Certainly. H.M.JR: He didn't tell me the name. I didn't want to know his name. It was some individual who had a couple of million dollars in his bank, as I remember it, wasn't it? MR. BROWN: Yes. H.M.JR: And that man just didn't want to invest it, dn't want to do anything. And there he has one man with a couple of million dollars in that bank. Now, what are we going to do with a fellow like that? MR. BROWN: For one thing you ought to have available in the market a supply of one, two, and three-year Government obligations. It does not make any difference in the over-all picture whether he buys them out of a new issue which you are going to put out next month or whether he buys on the market bonds or notes that will suit his requirements. 44 - 11 - Now, you have to get up more pressure on the part of the community. It is not only the question on the part of the bank presidents. It is the Victory Fund Committees and all that type of people, that they are failing in patriotism unless they buy some kind of a Government security; but it does not necessarily mean that they have to buy the security which is being currently offered that month and which may not fit their wishes. H.M.JR: Take thi S Mr. X and let's say he has a couple of million dollars. Now, how can we reach a man like that and get him to buy either outstanding issues or new issues? MR. BROWN: Well, it so happens that in the case of this particular man you are thinking of, he decided - I don't know through what process of reasoning - to put most of hi s money into Government bond issues. H.M.JR: He did? . MR. BROWN: Yes, but it was probably due to a psychological change and feeling that the war picture was much more desperate today than it was two or three months ago. H.M.JR: Has that happened to many of your large depositors? MR. BROWN: I think it has happened to a good many of them. MR. SPENCER: I think they are more willing to.go in. I have one case, for instance, where either a man or a wife died and they had to dig up a million and a half dollars inheritance tax. What hurt would the re be from here out if any of the bond issues could be used at par for inheritance tax? That would satisfy that individual right down to the ground. 45 - 12 - H.M.JR: We did make a change in that recently, didn't we? MR. BURGESS: You made a change in the tap. issue. It was a very great help. MR. SPENCER: But it had some strings on it, didn't it? MR. HARRISON: No, no, not on that aspect. MR. SPENCER: We sold him about half his require- ments on that, but he still did not like the bond, for some reason or other. H.M.JR: I thought that that did not have any strings on it. MR. HAAS: The bond had some strings - I mean, it had some restricted negotiability. MR. SPENCER: That was it, restricted negotiability. H.M.JR: But the F and G can both be used for debt duties, can't they? MR. SPENCER: Oh, yes, but you are talking about a hundred thousand dollars. I am talking about the larger amounts. I think that G bond is going to take care of a very large percentage of - well, certainly individuals, from here on. MR. SMITH: The responsibility for the sale of Government bonds to individuals lies with the selling organizations, of which the banks furnish a substantial part of the personnel. Now, a man will come into the bank and inquire. They know the men of means and solicit them. They go into the banks and inquire and they stir up the inquiries, and they get pretty full information, too. 46 - 13 - All over the country, from one end to the other, the banks are occupying important positions in those selling organizations. H.M.JR: You people feel, then, that this Victory Fund Committee the way it is set up can do the thing that I am talking about? MR. SMITH: When it has had time to get organized, to get oiled up. MR. BURGESS: I confess I am greatly troubled by the fact that two organizations, the Savings and the Victory Fund, are working partly parallel and partly in competi tion with each other. H.M.JR: That thing can be worked out. We keep trying all the time. That can be worked out. MR. SPENCER: I think with us the people that will do the big job on that selling are the investment bank fellows. I think the average commerci al bank man is an awfully poor sale sman. He has got to spruce up on selling Government bonds from a patriotism standpoint. He never was schooled in selling many securities in the past. MR. BROWN: Real pressure - what is going to make those people buy bonds is the pressure of public opinion as reflected in the newspapers and social attitudes and club circles. MR. SMITH: And stirred up by this. MR. BROWN: Stirred up by 8 ntinuous agitation. H.M.JR: Then maybe we had better have a drive. MR. SMITH: You are going to ultimately come to it. 47 - 14 - MR. BROWN: You have got to. MR. SMITH: We think you are going to have to have them at regular intervals. MR. HARRISON: And when you do, the fundamental question that has not been decided by either the Victory Fund Committees or the War Savings is the method of approach or coverage. Are you going to give the bond salesman, or whoever it is that is trying to sell bonds, a list of prospects, to whom he is to go, or are you going to organize by counties so that a group of men will cover everybody in a county? That was really the way they tried to do in the last war. I think, so far as I understand it - and I may be wrong - that most of the approach has been the prospect one rather than the over-all coverage by county. I don't mean this doorbell thing that we had, the pledges; but I me an a serious effort on the part of a group of people assigned to a county or a certain geographical area, to be sure that everybody is seriously approached for the sale of bonds in that area. I think ultimately the latter will have to happen because I don't know where you are going to get your lists of prospects. It might even cover this million- dollar fellow in Ned Brown's bank. The bankers themselves are not going to give out those names, I presume, except in rare instances. They don't do it. So even if you had the staff of salesmen they would not get that man as a prospect, but they would get him if they had an over-all coverage in the block or area. MR. EDWARDS: I don't know what the bankers are going to do generally. I have given the names out. I haven't told them how much money they had. MR. SMITH: If you have the organization they will get the names. They have a mysterious way of 48 - 15 - getting them. There is an understanding between the banks and their customers that they will not give out names; but they have a mysterious way of getting name s. But t hat will take time to get that going; however, it must be done. H.M.JR: Walter, do you want to add anything to this discussion? MR. STEWART: No. I am convinced-- H.M.JR: I am not talking about this. I am going back to this financing Murphy reported on. MR. STEWART: I am satisfied with the recom- mendations. H.M.JR: The two and the four? MR. STEWART: Yes. H.M.JR: Viner? MR. VINER: I like the recommendations as they are now. H.M.JR: Haas? MR. HAAS: I would like, if I may, to think about it a little bit. H.M.JR: Why not? That is what we are fighting for, aren't we, to give you a chance to think? For freedom? MR. HARRISON: I would not like to change the unanimous report at all, but to express the hope that the word "approximately" four years will be construed to be as near five as you can make it. (Laughter) That is so it will fit into your rate picture, and everything else. 49 - 16 - MR. BURGESS: That is really a question for the market fellows, to look at the market and see where it fits. H.M.JR: George, you put your number boys to work again and take a fresh look at it in the morning. Henry looks as though he can stand it. Are you going all right? MR. MURPHY: I am doing all right. MR. HARRISON: There is one thing we pointed out to the Federal Reserve Board as to one of the reasons we opposed the certificate. I don't know whether it made much impression on them. The figures that we got this morning from your own staff - they were just rough and not definitely accurate yet - show that you have maturi ties this next fifteen months of bonds, notes, bills and certificates of over thirteen billions and a half, not including the three billion seven of tax notes which can be called for payment. I think to recommend that you add unnecessarily to that immediate liability is a mistake. H.M.JR: That is the way I feel. MR. HARRISON: And I think that had a good deal of influence on most of us in our group. H.M.JR: That is the way I feel. Let me ask you gentlemen a question, whi ch you need not answer here unless you want to. You can go into a huddle on it. But take people like Senator Vandenberg, who seem to be under the impression that I have nobody advising me - I wondered whether you people think it would be wise, or not wise, to announce that this group comes down occasionally as informal advisor to the Secretary of the Treasury, and give out the names. You can talk it out among 50 - 17 - yourselves if you want to, and let me know. I am not ashamed to have it known. MR. SMITH: It is pretty generally known, if for any reason you should decide to announce it. That, I think, should be the governing thing, don't you? MR. SPENCER: I do. MR. HARRISON: You do what? MR. SPENCER: He should announce it if he feels like it. MR. SMITH: If he sees a reason for it - it is generally known. MR. HARRISON: I haven't any very definite opinion. I would do whatever you think would cause you the least embarrassment. H.M.JR: This wouldn't cause - I mean, the two sides are coming here. There is no reason to hide it, that is what I mean to say. MR. HARRISON: I think, frankly, that the greatest possible criticism - it is already known to the group from whi ch the criticism might come, and that is the Federal Open Market Committee. I think that they might have some feeling on it. H.M.JR: That doesn't bother me. MR. HARRISON: They already know it so that you lose nothing by that. The only question is whether it will verify Mr. Berryman's cartoon here. (Laughter) MR. SPENCER: Call him in next time we are down. H.M.JR: Well, I was just raising it. What do you think? 51 - 18 - MR. BROWN: Well, I think, certainly, as far as the members here are concerned, they have no objection to it. It is purely a question for you to decide as to which is most politically advantageous. I am using the word "politically" in the sense of public relationship. H.M.JR: B.M.? MR. EDWARDS: I agree with Mr. Brown. I think it is just whatever you choose to do about it. As far as we are concerned, I think these other gentle- men feel as I do, that we are very proud to have you ask us to come here and do whatever we can. It is just a question of what you want to do. MR. BURGESS: That is right. H.M.JR: What do you think? MR. BURGESS: I agree with that. H.M.JR: Well, the way you are coming in, I don't see why not say so, that is all - use the words "coming in on an informal basis to advise." MR. BURGESS: You can tack it onto the story about the new financing that you are considering, that you have talked it over with the Open Market Committee, with the Board, and also with other fellows. H.M.JR: Well, I will sleep on it, and if it is agreeable with you, if I decide I want to say something this week, is that all right? MR. HARRISON: I think the only thing that I would suggest that you consider from your standpoint is it would possibly be interpreted by the press and I think this you would have to avoid, if you can, in your statement - that you had organized 52 - 19 another committee or another board or another some- thing. There has been a good deal of talk throughout the country about all the different boards that are organized or different groups that are organized in Washington to do anything. But you can cover that in the form of whatever announcement you make. MR. SPENCER: Couldn't you make the announcement that this has been going on for some time, that it is nothing new? H.M.JR: Sure. I have not talked about it to any of our public relations people, but I will talk to them about it tonight. I did have it in mind. I am very much obliged to all of you. I don't think I need to ask you to stay over another day. I have got what is in your brain in mine. I under- stand from those people who have come here to visit that Washington is not the most pleasant summer resort. MR. BURGESS: It is all right today. MR. HEFFELFINGER: I think there was one point in the picture, that if the announcement was proposed on the tenth of this month - next week and we carried the payment date over to the twenty- fifth, that is a little longer than our usual period. Is there any objection to that? H.M.JR: From me, you mean? MR. HEFFELFINGER: No, from the banking standpoint. MR. SMITH: Announce the issue on the tenth and not accept payment until the twenty-fifth, isn't that the usual way? 53 - 20 - MR. HEFFELFINGER: That intervening week is the heavy payment tax week. MR. BURGESS: I think it is more important to get it out of the way for the October job. If you are going to do a job in October I think there is advantage in pushing this one along. MR. HEFFELFINGER: The beginning instead of near the end of the week. H.M. JR: That is something you can work out with the Fed. I personally don't care. MR. BURGESS: I do think it is desirable to reach a decision about that October job pretty promptly because there is a lot of work to be done if they are going to do a job on it. H.M.JR: Have we got to have an other group of movie stars down? (Laughter) MR. BURGESS: In October, if you want to. MR. HARRISON: Why didn't you invite us yesterday? (Laughter) H.M.JR: No, it was Monday. Is that what you fellows all want? (Laughter) MR. SMITH: We heard about your luncheon today - talk about a luncheon, we heard about it today! H.M.JR: So that is what you fellows want. Even the President of the United States sent a message over and asked why he wasn't invited. He sent this message, "You bring all these boards around to see me, and when you have somebody good looking you don't bring them around." Well, maybe that is what we need. (Laughter) 54 9-2-42 CHARLES E. SPENCER JR. THURSDAY AS REQUESTED . WILL BE WITH YOU NEXT WEDNESDAY AND W. RANDOLPH BURGESS "SHALL BE HAPPY TO BE WITH YOU IN WASHINGTON NEXT WEDNESDAY AND THURSDAY" B.M. EDWARDS "WILL TRY TO ATTEND YOUR CONFERENCES WEDNESDAY AND THURSDAY" E.E. BROWN - accepted by telephone call to Fitzgerald (was in town last week) TOM K. SMITH - accepted by telephone call to Fitzgerald (was in town last week) GEORGE L. HARRISON - telephoned Saturday afternoon that he was coming, but was having trouble getting train reservations and he might not be able to get here before 1 P.M. on Wednesday -- Fit,gerald is trying to get earlier accomodations for Harrison. 55 Draft # 2 1/1/20 I have come before you today in response to your standing invitation and in fulfillment of my promise to come up here at any time when I feel that a major decision must be made concerning the Treasury's financing program. When I appeared before this Committee on July 23rd, I expressed my strong conviction that the revenue bill then before you was inadequate to meet the Government's needs for additional wartime revenue. Since then, the need for new revenue and new sources of revenue has obviously become far greater. Our original minimum recommendation of $8.7 billion of additional taxes in the light of later developments has become not only inadequate, from the revenue standpoint, but insufficient to give us the safeguards we need against inflation. Accordingly, I have come here today to propose 56 -2additional taxes which will increase Treasury receipts out of current income by an amount far in excess of the Treasury's previous recommendations, and will furnish an additional effective weapon for combatting inflationary increases in prices. My primary recommendation is for a new form of tax, a tax on spending, to be divided into two parts. The first part would be a ten percent tax on the spendings of all consumers whose income is above a minimum subsistence level. This tax would be completely refundable after the war, and would therefore be in effect a compulsory lending saving provision. It would currently bring about $5 billion annually into the Treasury. The second part would be a spendings tax at a steeply progressive rate, designed not primarily for revenue but 57 -3for restricting expenditures and inducing true saving. This would produce about $1-1/2 billion additional revenue, but its effects would be still greater, to an extent that we can only guess, in restraining unnecessary spending and thus checking the greatest single factor making for inflation. In addition to this double-purpose proposal, I should like also to recommend a further reduction of exemptions from the income tax to the level of $500 for a single person, $1,000 for a married taxpayer, and $250 for each dependent. This would produce $1-1/2 billion additional revenue, and together with the spending tax it would broaden our tax base so as to include $65 billion of individual incomes, or about 2/3 of all the consumer income in the country. Taken in their entirety, our new 58 -4recommendations today would bring into the Treasury an additional amount about equal to the additional revenue provided by the Bill that is now before you. The details of these proposals will be outlined to you by Mr. Paul and the members of his staff. We at the Treasury have been discussing them together, and Mr. Paul and his assistants will be speaking for me with full authority. I should like to comment on only two aspects of these new proposals. One concerns their relation to the War Bond program. We foresee that the new spending tax will probably reduce in many individual instances the amounts which workers can afford to set aside for War Bonds under voluntary payroll deduction plans, but the proposal is intended to supplement and not to supplant the voluntary 59 -5purchase program. It is our belief that the voluntary War Bond program has produced and will continue to produce a great contribution to the nation's war effort, not measured entirely by the amount of funds raised. This is due to the unselfish service that hundreds of thousands of men and women throughout the country have given to it. They deserve the thanks of the nation for the magnificent work they have done, are doing, and will, I hope, continue to do, in encouraging the American people to put their dollars to work for their country. They have responded as individuals and as patriots, and their work has been tremendously effective in selling more than $8 billion worth of Bonds since May 1, 1941, to about 25 million individuals. More than that, the program 60 -6has helped to arouse the people of the country to the crisis that confronts us all and particularly has led them to cut down their spending and to save so that their fighting men may have enough. Reliable estimates by two Government agencies show that the rate of saving of the whole country has doubled in the past year. Ibelieve that the voluntary War Savings program has greatly con- tributed to that result. It will, of course, be continued. The danger we face is not produced directly by the rising national income. The evil we must control is the spending of that income in ways that compete with war production and drive prices upward. Our effort, therefore, must be to attack spending directly and at its root, not only by withdrawing spending power from the individual 61 -7but by imposing what is in effect a penalty on unnecessary spending. The reason for this lies as much in the Government fiscal field as in the field of the prices which consumers pay. With all the amounts we have recommended for new taxes, including these present recommendations, there is still a great gap to be closed to meet our fiscal needs. We must borrow very large additional sums. Our problem -my problem -- is to borrow these amounts in such a way that they will not contribute to inflation. Inflationary pressure is created by consumer demand exceeding the supply of goods available. We are seeking in this proposal before you to attack the problem at the seat of potential difficulty and to attack it drastically. 62 -8The control of prices is of course not exclusively a fiscal problem. But with full allowance for all that can be done through price regulation, rationing and other devices to control supply, I think we shall be doing very much less than our full duty if we do not deal with the problem as effectively as possible in the fiscal field. What I have presented is a method -- and the best method we have been able to devise -- for accomplishing this result. If the proposals we make seem drastic, I should like to say with all possible emphasis that I believe nothing less drastic will accomplish the results we must accomplish. This is no time for half-way measures. I do not merely recommend action on these bold lines, I request it and I urge it most seriously and with the 63 -9profound conviction that it must be done. 64 I have come before you today in response to your standing invitation and in fulfillment of my promise to come up here at any time when I feel that a major decision must be made concerning the Treasury's financing program. When I appeared before this Committee on July 23rd, I expressed my strong conviction that the revenue bill then before you was inadequate to meet the Government's needs for additional wartime revenue. Since then, the need for new revenue and new sources of revenue has obviously become far greater. Our original minimum recommendation of $8.7 billion of additional taxes in the light of later developments has become not only inadequate, from the revenue standpoint, but insufficient to give us the safeguards we need against inflation. Accordingly, I have come here today to propose 65 -2additional taxes which will increase Treasury receipts out of current income by an amount far in excess of the Treasury's previous recommendations, and will furnish an additional effective weapon for combatting inflationary increases in prices. My primary recommendation is for a new form of tax, a tax on spending, to be divided into two parts. The first part would be a ten percent tax on the spendings of all consumers whose income is above a minimum subsistence level. This tax would be completely refundable after the war, and would therefore be in effect a compulsory saving provision. It would currently bring about $5 billion annually into the Treasury. The second part would be a spendings tax at a steeply progressive rate, designed not primarily for revenue but -3- 66 for restricting expenditures and inducing true saving. This would produce about $1-1/2 billion additional revenue, but its effects would be still greater, to an extent that we can only guess, in restraining unnecessary spending and thus checking the greatest single factor making for inflation. In addition to this double-purpose proposal, I should like also to recommend a further reduction of exemptions from the income tax to the level of $500 for a single person, $1,000 for a married taxpayer, and $250 for each dependent. This would produce $1-1/2 billion additional revenue, and together with the spending tax it would broaden our tax base so as to include $65 billion of individual incomes, or about 2/3 of all the consumer income in the country. Taken in their entirety, our new 67 -4recommendations today would bring into the Treasury an additional amount about equal to the additional revenue provided by the Bill that is now before you. The details of these proposals will be outlined to you by Mr. Paul and the members of his staff. We at the Treasury have been discussing them together, and Mr. Paul and his assistants will be speaking for me with full authority. I should like to comment on only two aspects of these new proposals. One concerns their relation to the War Bond program. We foresee that the new spending tax will probably reduce in many individual instances the amounts which workers can afford to set aside for War Bonds under voluntary payroll deduction plans, but the proposal is intended to supplement and not to supplant the voluntary 68 -5purchase program. It is our belief that the voluntary War Bond program has produced and will continue to produce a great contribution to the nation's war effort, not measured entirely by the amount of funds raised. This is due to the unselfish service that hundreds of thousands of men and women throughout the country have given to it. They deserve the thanks of the nation for the magnificent work they have done, are doing, and will, I hope, continue to do, in encouraging the American people to put their dollars to work for their country. They have responded as individuals and as patriots, and their work has been tremendously effective in selling more than $8 billion worth of Bonds since May 1, 1941, to about 25 million individuals. More than that, the program 69 -6has helped to arouse the people of the country to the crisis that confronts us all and particularly has led them to cut down their spending and to save so that their fighting men may have enough. Reliable estimates by two Government agencies show that the rate of saving of the whole country has doubled in the past year. Ibelieve that the voluntary War Savings program has greatly con- tributed to that result. It will, of course, be continued. The danger we face is not produced directly by the rising national income. The evil we must control is the spending of that income in ways that compete with war production and drive prices upward. Our effort, therefore, must be to attack spending directly and at its root, not only by withdrawing spending power from the individual 70 -7but by imposing what is in effect a penalty on unnecessary spending. The reason for this lies as much in the Government fiscal field as in the field of the prices which consumers pay. With all the amounts we have recommended for new taxes, including these present recommendations, there is still a great gap to be closed to meet our fiscal needs. We must borrow very large additional sums. Our problem -my problem -- is to borrow these amounts in such a way that they will not contribute to inflation. Inflationary pressure is created by consumer demand exceeding the supply of goods available. We are seeking in this proposal before you to attack the problem at the seat of potential difficulty and to attack it drastically. -8The control of prices is of course not exclusively a fiscal problem. But with full allowance for all that can be done through price regulation, rationing and other devices to control supply, I think we shall be doing very much less than our full duty if we do not deal with the problem as effectively as possible in the fiscal field. What I have `presented is a method -- and the best method we have been able to devise -- for accomplishing this result. If the proposals we make seem drastic, I should like to say with all possible emphasis that I believe nothing less drastic will accomplish the results we must accomplish. This is no time for half-way measures. I do not merely recommend action on these bold lines, I request it and I urge it most seriously and with the 71 -9profound conviction that it must be done. 72 September 2, 1942 6:15 pm Present: Mr. Paul Mr. Gaston Mr. Kuhn Mr. Stewart Dr. Haas Dr. White Mr. Graves Mr. Blough Mrs. Klotz HM,Jr: (Reading Draft #2.) I don't like the words "compulsory saving". Mr. Paul: I think you are going to be called evasive if you don't come right out and say it. HM,Jr: Compulsory lending? Mr. Gaston: "Compulsory lending" is grand. Mr. Stewart: I don't think"compulsory lending" is any improvement. HM,Jr: (Interrupting the reading of the draft.) You cannot go up and ask for $61 billions additional taxes with that kind of statement. You just can't do it. I told the people two things: (1) if it ever came that I was worried about the financing, I would say so. I am worried. I want to say so. Another thing, if I wanted to give up the volunteer plan, I would say so. And those two things I want to say. 73 -2- Now, I tried it out on Walter George, who is certainly a conservative man, and his only reaction was "Put it in writing so you would know what you are saying", but he did not say I should not say it. This is what I wrote at 6:30 this morning: "Gentlemen, I told you if at any time that I was worried about the financing, I'd come before you and say so. I am here today. I also told you that if Iwasn't satisfied with the volunteer plan, I'd come before you and say so. I am here today. I can assure you and, through you, the country that I can continue to raise the stupendous sums necessary to finance the war for the bal- ance of the year, but after the first of the year I will need additional revenue in order to carry out my responsi- bility. I also feel that the present bill as it passed the House now does not sufficiently reach the mass of the purchasing power, and that we in the Treasury must carry out our share of the responsibility to close this gap. Therefore, I have asked to come before you today to make the following suggestions" -- and then go ahead and make the suggestions, and give them (1) the figure, how much additional revenue willbe raised, and (2) how much of an inflationary gap can be closed through this suggestion. Close by saying that the situation is extremely serious and I feel that in order to keep the country on a sound financial basis this coming year, I've pretty much got to have what I'm asking for today. If Congress will give me this, I feel that I can carry on in the coming year." Mr. Paul: As to one word in that, and that is "worried". "I want to express deep concern," but HM,Jr: But it's the idea, Randolph. I have gone up there. These people -- let me go through it once more again. These people have been more than generous and kind in their confidence in me. They have said to me, "All right, Mr. Morgenthau, all right. If you want to 74 -3- try out your volunteer plan, we will let you have your way. I said, "Gentlemen, if the time comes I am not satified, I will come up and say so." All right. I want to say so. They have not attacked me on the floor. They have shown that confidence. They have asked me, time and time again, can I finance this war and I said, "Yes. If the time comes I am worried, I will come up and say so. Now, they are entitled to have the straight thing, and the country is entitled to it. I would like to know, Gaston, senior, and Kuhn, second, why I am not permitted to say that. Mr. Gaston: As baldly as you have stated it there, it seemed to be the opinion of everybody we consulted it would be a mistake to say it. I realize that we tried it along a different line and I realize, after our conversation with you this morning, that that wasn't going to meet your desires and that we would probably have to do a complete re-write of the thing, but we have been consulting other people and I have had half a dozen people in my office most of the afternoon to get their views and we just have not got at approaching it from the other angle. I think that some modifications must be made in your presentation. I think you can't say you are worried about the situation. I have started to try to work out something I think itu would be perfectly safe for you to say. Jake Viner thought we should go into more detail and your statement should be along the line we drafted. Walter Stewart thinks otherwise. HM, Jr: For the minute, that does not bother me. Now, look. Maybe you people think that this thing that I am going up there tomorrow to suggest is a pink tea affair. don't. And what is motivating Henry Morgenthau, Junion, after ten months -- we started this thing last No- vember -- that I suddenly come up and ask for almost double taxes than I have ever asked for before, or revenue, whatever you call it. There must be something. I have been here 9 years. "Don't you know your job?" "Why do you suddenly come up? Why didn't you do it 2 months ago, or 6 months 75 -4- ago and why do you come up now with this very drastic suggestion -- as drastic as anybody in Washington can suggest -- at the last minute and say to us 'I want this'?" Now, you people have not had one advantage which I have had, that Haas and Stewart have had, that I have gone from one meeting to another on how I am going to raise $3 billions this month and $4 billions next month and $5 billions the month afterward. And I am worried. And what's the harm in saying so? I always took the attitude I would be much bluer, much blacker, about the financial situation than anybody else. I don't want to exaggerate the danger, but if we tell the people we face that with the result that -- it is 9 years that the Presi- dent put me in here when the bond market had gone to Hell; he could not sell any bonds, and from that day the bond market is all right, and I have always told him the worst news in the financial community. I have to have some reason for going up 2 months before election and tell them why. I just can't do it because I suddenly wake up on Saturday morning with a bad taste in my mouth and say "This is a bad day. I am made at the war and I am mada at the world, and I am going out and tax everybody to the limit." This is the most drastic suggestion that any member of Mr. Roosevelt's Administration has made. I would like to know of anybody in his Administration who would suggest it. Why am I doing it? There is nothing in that state- ment. Mr. Gaston: I thought there was in the original statement. HM,Jr: I differ with you. I have said Dr. Haas: I think one word would clear up -- a good deal of your worry is about the method. You haven't any doubt you could finance it through the banks and it would go HM,Jr: No, you are wrong, George. I think there is a limit to what you can do through the banks. 76 -5- Dr. Haas: There is ultimately, but we are nowhere near the time. thing. HM,Jr: But next year you begin to approach the You can't use this machinery Dr. Haas: It wi ill upset the whole country. HM,Jr: You can't pile interest-bearing certificates on interest-bearing certificates in the banks and pay interest. You can't do it in un unlimited way. This thing that I am suggesting tomorrow is. How did I get that way? There has to be justification for it. Now, just because I am positive, anybody else in the room can be just as positive, if they disagree. Roy, any energy left? Mr. Blough: I think you can indicate a great deal of serious concern about the manner in which this war is going to be financed and the effect of that financing on inflation without causing a bad break in the markets and a bad scare all over the country and it seems to me that it is entirely in the way in which it is said and it would not be desirable to indicate worry about your ultimate ability to finance the war, but I think you could indicate the greatest concern about the effect of this financing on the economic operation of the war if something isn't done about it, and that is the line that could be taken and wouldn't cause any cracks in the market and wouldn't cause any serious panic of feeling and at the same time would indicate that something serious was necessary. HM,Jr: Harry? Dr. White: Well, I am in thorough agreement with you that the thing ought to be short -- one page or a page and a half. I think the less you say, the better; at the outside, two statements very much like you said with a 77 -6- little dressing; (1) that the HM, Jr: French or Russian? Dr. White: One, that the future looks more uncertain than ever about the duration of the war; that the amount of financing to be done is increasing in prospect and that sound finance calls for looking ahead and a re-examination of the situation in the light of recent developments, and you think more money must be raised in a way which was not inflationary, and that you promised you would come to them when you felt the pros- pects were disturbing, and you feel the prospects are disturbing and "I am before you now." I wouldn't make any bones about it. I wouldn't expand it. I would just make that statement. Secondly, you said you would come before them when you felt something more was needed than your voluntary savings plan. It has not done enough and it is necessary to supplement it by others which are drastic, as the times call for. You might add it will cut into your volunteer savings program, but the net result will be an increase from sources needed, namely, sources that make for inflation. The program is drastic; the times are drastic. Period. I wouldn't say anything -- I wouldn't say anything about the success of your bond program or the voluntary savings program or anything about inflation. That could all very -- a good deal of it, could go in Randolph's preliminary statement. HM,Jr: Harold? Mr. Graves: While I have not examined this at all except that part which relates to the bond HM,Jr: But you have heard me read it. Mr. Graves: I would like to say that I hope nothing will be said that will unnecessarily affect the bond program. 78 -7- HM,Jr: You are talking now about War Bonds. Mr. Graves: And I liked Mr. Kuhn's statement, which I read, because it obviously would be calculated to HM,Jr: May I interrupt you? I would like to say that part which has to do with War Bonds -- I think the War Bond people, starting with you and from you on down, that's the least I can say for them. They are entitled to an explanati on and a pat on the back. I am not arguing about that. You can rest on your oars on that. But as one of my group Mr. Graves: I like what Mr. Blough had to say. HM,Jr: May I say this for Kuhn. I think that part on the War Bonds, he said beautifully. Mr. Kuhn: That was Herbert. Mr. Gaston: And Ferdie. HM,Jr: Partnership of Gaston and Kuhn. That part I would like to say. It gets down to a question, why am I doing so and so and so. Mr. Graves: I think Blough expressed my opinion about it. It would be best for your concern to relate to methods merely. I think it would be very unfortunate if the thing were said in such a way as to give people the impression that there was any doubt about the ability of the Treasury to finance the war, one way or another. a war. Dr. White: There is never any problem about financing There isn't any Government in the world that can't finance a war and no Government has ever stopped a war be- cause of lack of finance. Obviously, it is a question of 79 -8- how he will finance, and that's what he's concerned about, and we can make it in such a way it will not look panicky at all, but just the prospect of more uncertain -- don't know how much we need to borrow; the interest burden is piling up, and conservative financing makes it necessary to look ahead. Can be said in a reasonable tone, very simple, very briefly. I don't think any panic would arise. Dr. Stewart: Frankly, I am not very clear on the answer to your question why you appear at this time. It is not self-evident. I think you have to make a case. I think there is tied up in your statement an emotion which is merely your own; that is, you have come to a decision which is very difficult to come to. I see no reason to communicate that emotion to the Committee. That is private to you. You have had a hard time to make the decision and you have waited over a period of two or three months to see if the voluntary would succeed. Any way you phrase toit, it involves a lot of courage. You are no longer willing risk it on the volunteer basis. But that thing which you feel very strongly, there is no point in transferring it to the Committee. You don't want the Committee to share your worry. You want them to take partnership with you in making the decision. Make an emphatic statement. It ought to be clear to them that it is drastic and that you have come to it reluctantly, but you have come to it with finality. I don't think the details should go in, but the mood should go, and Paul should handle all details. But I don't think the panicky feeling --- you don't feel panicky now, but you want them to share a decision with you, but they are not supposed to be worried. You come to them and tell them you have made up your mind. I would not communicate my worry to them. It's a hard job and a hard responsibility to take. HM,Jr: Now that we are on the basis of Freud. Let's say that you are right for a minute. Having come to this 80 -9- decision through worry -- great worry -- it was, as you say, one of the most difficult decisions I have ever had to make -- let's say for a minute you are right; I should not transfer that worry which went into the making up of the decision to the Committee. How can I answer your question it is not clear why I come up there at this time to do this. Dr. Stewart: I think that is communicated in a mood rather than In effect. If they cross-examine you, the only answer I have been able to think of is you are passing from one phase of war financing into an entirely different one. The volume of spending power has increased. You have carried out a program by using unused reserves so you can make a case without saying a definite date, one month or two months ago. I think this is an acknowledgment that there are limitations to what you can do in financing the war with peace time economy. HM,Jr: What I am bringup is transition from a peace- time method to a war-time method. Dr. Stewart: That's one way of putting it. White: And putting our financing on a real war timeDr. basis. Dr. Stewart: I am not sure that is necessary. I agree with Harry, the briefer you make it, the better. thing. HM,Jr: You (Stewart) don't mind my repeating some- I liked it. Going home last night at 11 o'clock Walter Stewart said one of the things that pleased him the most was that at last he found himself in complete agreement with Harry White and it made him, Walter Stewart, very happy and he was very sincere, and I am being sincere, and I thought itit.was a nice remark, and I thought you both would appreciate In view of what you say, do you think what Gaston and Kuhn have written is adequate? 81 -10- Dr. Stewart: I think the very last page of what was written is in the mood for it. HM,Jr: I have not read it. Dr. Haas: I think, Mr. Secretary, that your reason for coming up is in terms of the greatly accelerated expenditures and the reason there is because war production has gone up and it is obvious to you, as stated in your letter to Senator Vandenberg in April, which you may have forgotten, that something like this would be necessary later on because of the increased expenditures. You are going up to Congress. Because of the magnitutde of these figures, you can't use peace-time mechanism for financing and prevent inflation. This happens to be a drastic change in the devices you used, because you are taking such a large portion of your national income into the economy, but I would put it on the terms that you are using new equipment, but don't see anything uns ound in the Nation's finance, but you need this equipment to continue to keep it on a sound basis. Many letters have come into the Treasury inquiring whether the Government debt will be paid off and I am apprehensive that we would frighten those people in any way. Mr. Paul: I can say in two sentences what I think. He is right and the effort should be on the method of financing. I think Harry is right that the statement should be very short. I agree completely with Stewart. There is no black and white explanation. You have to communicate a mood. I think the phraseology you used "to transfer from peace time to war time" is a little dangerous because we have been at war 8 or 9 months, but generally I agree with you and I liked your statement of partnership -- that here, from now on, Congress and we are in partnerships on this thing. We have known about these magnitudes for months. They will tear us to pieces there. It was months and months ago that we increase the Budget $14 billions and they will just tear us to pieces if we 82 -11- make a case. A case could be made there for the idea that you have been very anxious to be right in your position and you have, perhaps, done a little waiting, but now the time has come when the Finance Committee is in Executive session and there is no more time to be lost. You have not lost any time by not having gone up 2 or 3 months ago, but now the Bill is approaching the place where try to no more time can be lost. It's the communication, really, of a mood, and the shorter it is the less can be written in editorials which will be very hostile. Herbert? HM,Jr: 0. K. Mr. Gaston: I think everything that has been said here indicates a statement of more than one page. I have been worried from the standpoint of your going up there and frightening not only the Committee, but frightening the country on the financial situation. And the other thing was anything that would look like repudiation of the volunteer savings campaign. But I don't think you need the detail of the proposal. I started and I wrote this under some difficulty and it's just an approach to your idea. (Reading). "We have come before you today to present a program to raise substantial additional sums to finance the war effort. I intend to leave the details of the pre- sentation to Mr. Paul and his associates and to limit myself to a few words about the gravity of the situation as I see it and the imperative need for legislation along the lines we are S uggesting. "We have financed without disturbance and with what I feel to be a minimum of inflationary effects the huge war expenditures we have been called upon to make. But the very success of the production program in turning out immense quantities of goods for the war effort increases the dimensions of the fiscal problem we have to face. We 83 -12- "have to contemplate expenditures of 80 billions in the present fiscal year, while the revenue in sight on the basis of the tax bill now before you is only approximately 24 billions. "We have sought and will continue to seek funds from those sources where borrowing will have the least inflationary effect, and have done so with what I believe to be most gratifying results. We can foresee with confidence provision for the Government's fiscal needs for the remainder of this calendar year. "But I come before you today to tell you frankly that I need your help in the form of legislation which will enable me to meet the much greater problem of the next year with the same degree of confidence. "We come before you with legislation which has a double purpose. The first purpose is to draw into the Treasury substantial additional funds out of the earnings and savings of the people. The second purpose is even more important. It is reduce consumer spending directly by withdrawal of funds otherwise available for expendi ture and to reduce it also indirectly by creating a strong tax incentive to saving. The measures we propose are two: first a tax on consumer spending which will reach into the lowest in- come groups above the level of bare subsistence incomes and will provide high penalty rates for luxury spendings; second, a further lowering of the exemptions from the income tax applying to family income. "The two proposals will touch incomes aggregating some 65 billions of dollars and will draw into the Treasury funds otherwise available for consumer spending in an amount estimated at about seven billion dollars. But of this total some four and a half to five billions, al- though raised as a tax, will be treated not as revenue but as a debt to the individuals from whom it was collected, 84 -13- "to be repaid after the war. "Revenue is not the sole purpose, nor even the primary purpose, of either of these proposals. Their main purpose is to restrict consumer spending so that we may avoid the perils of inflation in the huge financing program that we have ahead of us in the next year and those to follow." " HM,Jr: I think it is very good. Dr. White: Two thoughts could be -- but very briefly -- one is that your program is designed not only to raise revenue in ways to prevent inflation, but it is also speci fically directed toward reduction of expenditures. The Second point is, I don't think you can get away from the statement -- and this is the most dangerous point you are trying to skirt around -- and that is "I have given the program of payroll - voluntary - savings as complete a test as possible and I have come to the point where I feel it is not adequate and ne eds to be supplemented. Why not state that? There is no harm in that. You say you have given it 8 months' trial. It has not produced adequate results. Mr. Gaston: We said substantially that. HM,Jr: Let me say this: I get excited. I naturally was surprised that after asking that the thing be eliminated it still was there. I hope I was not rude to you. Mr. Gaston: Quite the contrary. HM,Jr: But I could not understand why, having asked, I did not ask for a condensation; I asked that the thing be eliminated. Mr. Gaston: We realized that this needed a different approach and a different ending and we just could not get 85 -144 to it. Mr. Kuhn: There were two instructions we went away with and th is was the result. And then the third instruction was to consult quite a number of people, all of whom were unanimous in feeling you could not say you were worried about the state of the Nation's finances, and that's why this was brought to you in that form. HM,Jr: Let me ask this. We have to put it to bed tonight. Mr. Gaston: It can be done. I will go ahead and complete a draft. Mr. Kuhn: It can be done. HM,Jr: When can I see you and Kuhn. Mr. Gaston: If anybody else is going to be around we really ought to check some statements. I imagine it will be about 9 o'clock before we -- 8:30 or 9. HM, Jr: I will be sitting home. Mr. Kuhn: Wouldn't it help if the Secretary looked at the last page? Mr. Gaston: Page 8. HM,Jr: I think if I could have Gaston and Kuhn working on this and then I will be home. Come up to the house. That's all. Mr. Gaston: All right. HM,Jr: We agree, so there can be no misunderstand- ing, reference to the plan will be out - description. Mr. Gaston: We will have to say something about what you are proposing. 86 -15- HM,Jr: What I can say, Herbert, is (reading) "My primary recommendati ion is for a new form of tax, a tax on spending, to be divided into two parts. The first part would be a ten percent tax on the spending of all consumers whose income is above a minimum subsistence level.' I thought "My primary recommendation -wait a minute. Beginning with page 3, "In addition to this double-barrel proposal, I should like also to recom- mend a further reduction -- do you think that has to go in? Mr. Gaston: No. HM, Jr: Or does it? Mr. Gaston: I think we can say in one short para- graph the three things you are r ecommending and the pur- pose to which they are directed. You are proposing two things: a tax on spendings, in two parts, and a reduction of the exemptions. The purpose of these is all directed to the same end -- intended to reach a certain amount of consumer expenditure - restrict spending. HM,Jr: Well, after this thing, certainly Kuhn and Gaston, who are intelligent fellows Mr. Gaston: "Quote". HM,Jr: What? Mr. Gaston: "Quote". HM,Jr: No, how I feel. And I will await peacefully your arrival at the house. Thank you all very, very much. 00o-o0o 3d draft 9-10 P.M. 87 Soft 2,1942 Statement of Secretary Morgenthau before the Senate Finance Committee, Thursday, September 3, 1942. We have come before you today with a program to raise substantial additional sums to finance the war effort. I intend to leave the details of the presentation to Mr. Paul and his associates and to limit myself to a few words about the gravity of the situation as I see it and the imperative need for legislation along the lines we are suggesting. Up to this point we have financed without disturbance and with a minimum of inflationary effects the huge war expenditures we have been called upon to make. But the very success of the production program in turning out immense quantities of goods for the war effort increases the dimensions of the fiscal problem we have to face. 88 -2We have to contemplate expenditures of $80 billion in the present fiscal year, while the revenue in sight on the basis of the tax bill now before you is only approximately 24 billions. The Treasury has sought and will continue to seek funds from those sources where borrowing will have the least inflationary effect, and we have done so with what I believe to be most gratifying results. We can foresee with confidence provision for the Government's fiscal needs for the remainder of this calendar year. But I am here today to tell you frankly that I need your help in the form of legislation which will enable me to meet the much greater problem of the next year with the same degree of confidence. The legislation which we are preparing has a double 89 -3purpose. The first purpose is to draw into the Treasury substantial additional funds out of the earnings and savings of the people. The second purpose is even more important. It is to reduce consumer spending directly by withdrawing funds otherwise available for expenditure and to reduce it also indirectly by creating a strong tax incentive to saving. The measures we propose are two: first a tax on consumer spending which will reach into the lowest income groups above the level of bare subsistence income and will provide high penalty rates for luxury spending; second, a further lowering of the exemptions from the income tax applying to family income. The two proposals will touch incomes aggregating some 65 billions of dollars and will draw into the Treasury 90 -4an estimated seven billion dollars otherwise available for consumer spending. But of this total some four and a half to five billions, although raised as a tax, will be treated not as revenue but as a debt to the individuals from whom it was collected, to be repaid after the war. Revenue is not the sole purpose, nor even the primary purpose, of either of these proposals. Their main purpose is to restrict consumer spending so that we may avoid the perils of inflation in the huge financing program that we have ahead of us in the next year and those to follow. It can be expected that the new spending tax will reduce in many individual instances the amounts which workers can afford to set aside for War Bonds under 91 -5voluntary payroll deduction plans. In present circumstances we can no longer afford to rely entirely upon voluntary lending. The present proposals are intended, therefore, to supplement the voluntary purchase program. It is our belief that the voluntary War Bond program has produced and will continue to produce a great contribution to the nation's war effort, not measured entirely by the amount of funds raised. This is due to the unselfish service that hundreds of thousands of men and women throughout the country have given to it. They deserve the thanks of the nation for the magnificent work they have done, are doing and will, I hope, go on doing, in encouraging the American people to put their dollars to work for their country. The voluntary War Bond program will, of course, be continued. 92 -6Our present and urgent problem -- my problem -- is to borrow the great amounts that will be needed to finance the war effort in ways that will not contribute to inflation. Inflationary pressure is created by consumer demand exceeding the supply of goods available. We are seeking in these proposals before you to attack the problem at the seat of potential difficulty and to attack it drastically. The control of prices is of course not exclusively a fiscal problem. But with full allowance for all that can be done through price regulation, rationing and other devices to control supply, I think we shall be doing very much less than our full duty if we do not deal with the problem as effectively as possible in the fiscal field. 93 -7What I have presented is a method -- and the best method we have been able to devise -- for accomplishing this result. If the proposals we make seem drastic, I should like to say with all possible emphasis that I believe nothing less drastic will accomplish the results we must have. This is no time for half-way measures. I do not merely recommend action on these bold lines, I request it and I urge it most seriously and with the profound conviction that it must be done. CONFIDENTIAL 94 WAR DEPARTMENT THE CHIEF OF STAFF WASHINGTON September 2, 1942. The Honorable, The Secretary of the Treasury. Dear Mr. Secretary: Thank you for your letter concerning your trip. I hope that it has given you some indication of our Army side of the war effort. Colonel Phillips informed me, on his return, that you were somewhat concerned about the presence of soldiers of the Japanese race at Fort Riley, Fort Sill, and Fort Bragg. I have had this situation investigated and found that there are about one hundred soldiers of the Japanese race at each of the posts who form part of the station complement and are assigned jobs as truck drivers, laborers, and similar duties. Each individual has been carefully checked as to his loyalty, but at the same time they are kept under surveillance at each post. The Post Commanders are getting good work out of these people and are very desirous to continue the utilization of their services. In light of the above findings, I am confident you will agree with me that the continued use of these soldiers for the purposes and under the conditions stated is desirable. Faithfully With warm regards, you yours, CONFIDENTIAL W 95 September 2, 1942 Dear General Harmon: The photographs which you so kindly sent will help to remind me of the deeply impressive day I spent with you and your mon at Fort Bragg- I wrote to General Marshall the other day that I was particularly struck with the fine training and spirit of your command, and that you seemed to have what it will take to defeat the enemy. The more I try to sort out my impressions of a crowded tour, the more I feel that you are entitled to great credit for what you have accomplished. Let me tell you again how much I appreciate all the courtesy and helpfulness which you and your fellow officers showed to me. My best wishes will go with you and the men of your command wherever you may be serving. Sincerely, (Signed) H. Morgenthau, Jr. Major General E. N. Harmon, A. P. O. 252, Fort Bragg, North Carolina. Mr Kudn 9/4/42 m <_96 HEADQUARTERS SECOND ARMORED DIVISION OFFICE OF THE DIVISION COMMANDER A.P.O. 252, Ft. Bragg, No. Carolina, August 24, 1942. Hon. Secretary of the Treasury, Washington, D. C. My dear Mr. Secretary: Enclosed herewith are a few pictures which were taken during your recent visit to the camp of the 2nd Armored Division. The photographs clipped together are pictures of the review which you missed due to a mis- understanding of orders by the Post authorities. We enjoyed your visit very much and were sorry that you could not be with us a longer period of time. Hope you can call in on us again and stay a little longer. With kindest personal regards, CH.Harmon E. N. HARMON, Vajor General, U. S. Army, Commanding. 97 September 2, 1942 Dear Mr. Diets: The motion picture stars' rally every way that I should like to send a special word of thanks to you, as one who helped greatly in arranging it. here Monday was such a success in I have seldon seen anything here in Washington to equal the enthusiasm and the spirit of the around. If each of the stars does as well on the September tour of the country, the industry's drive can hardly fail to be a success. Sincerely, (Signed) H. Morgenthau, Jr. Mr. Howard Diets, 1540 Broadway, New York City. FK/ogk copies to Thompson CONFIDENTIAL 98 UNITED STATES SAVINGS BONDS Sales Since May 1, 1941, by months On Basis of Issue Price (In thousands of dollars) Series E Series F Series G Total Total : : : : : : Offices Banks : Post : : Month : 1 $ ly 42,836 40,788 50.558 40,725 $ $ 349,818 57,745 61,729 94,717 76,878 $ 100,581 $ 37,817 $ 211,420 102,517 145,274 117,603 28,876 27,359 20,318 183,134 169,498 127,685 314,527 342,132 265,606 105,241 122,884 109,475 341,085 18,099 22,963 18,978 33,272 108,987 124,866 105,035 154,242 232,327 270,713 233,487 528,599 vember 38,117 41,634 37,997 cember 103,154 67,123 81,250 71,478 237,930 nuary 158,469 86,938 86,278 83,802 508,942 311,051 251,321 242,858 667,411 397,989 337,599 326,660 77,559 51,820 41,070 40,003 315,576 253.391 179,223 163,839 1,060,546 108,005 105,907 116,721 103,951 313,826 327,316 391,396 350,016 421,831 433,223 508,118 453,967 42,465 41,041 73,691 52,268 170,060 159,681 319,053 191,020 634,357 633,945 900,861 697,255 $1,245,883 $3,445,575 $4,691,458 $ 627,599 $2,936,710 $8,255,767 ptember tober oruary rch ril ne ly gust Total ice of the Secretary of the Treasury, ivision of Research and Statistics. ree: 703,200 557,892 530,502 September 2, 1942. All figures are deposits with the Treasurer of the United States on account of proceeds of sales of United States savings bonds. Figures have been rounded to nearest thousand and will not necessarily add to totals. CONFIDENTIAL yy UNITED STATES SAVINGS BONDS - TOTAL Comparison of September sales to date with sales during the same number of business days in August and July 1942 (At issue price in thousands of dollars) Cumulative sales by business days : : : September : sales August : : daily : : September : Date July : September as !percent of August : September 1942 $ 19,162 $ 19,162 1 Office of the Secretary of the Treasury, Division of Research and Statistics. $ 26,267 $ 28,418 73.0% September 2, 1942. Source: All figures are deposits with the Treasurer of the United States on account of proceeds of sales of United States savings bonds. Note: Figures have been rounded to nearest thousand and will not necessarily add to totals. CONFIDENTIAL 100 UNITED STATES SAVINGS BONDS - SERIES E Comparison of September sales to date with sales during the same number of business days in August and July 1942 (At issue price in thousands of dollars) : sales : September : daily September Cumulative sales by business days : September as July August !percent of August : : : : Date September 1942 1 ( $ 11,634 $ 11,634 Office of the Secretary of the Treasury, Division of Research and Statistics. $ 14,044 $ 15,821 82.8% September 2, 1942. Source: All figures are deposits with the Treasurer of the United States on account of proceeds of sales of United States savings bonds. Note: Figures have been rounded to nearest thousand and will not necessarily add to totals. CONFIDENTIAL 101 UNITED STATES SAVINGS BONDS - SERIES F AND G COMBINED Comparison of September sales to date with sales during the same number of business days in August and July 1942 (At issue price in thousands of dollars) August July : : : : sales September : daily Cumulative sales by business days : : : Date September September as :percent of August tember 1942 $ 7,528 $ 7.528 1 Office of the Secretary of the Treasury, Division of Research and Statistics. $ 12,222 61.6% $ 12,597 September 2, 1942. Source: All figures are deposits with the Treasurer of the United States on account of proceeds of sales of United States savings bonds. Note: Figures have been rounded to nearest thousand and will not necessarily add to totals. 102 Sales of United States savings bonds CONFIDENTIAL September 1, 1942 Compared with sales quota for same period (At issue price in millions of dollars) : : : : : : : : : 1 2 3 4 8 9 12 14 15 16 17 18 19 21 22 23 24 25 26 28 29 30 $ 19.2 to date $ 19.2 to date $ 21.8 34.5 55.5 81.0 98.3 16.6 26.4 35.6 42.2 51.1 81.9 116.6 140.5 143.3 168.8 193.4 220.6 239.2 58.1 67.8 76.7 84.4 90.1 201.4 236.6 270.1 305.0 329.3 272.7 288.2 307.6 327.2 350.1 365.4 99.7 105.0 112,1 119.2 125.7 130.5 372.4 393.2 419.7 446.4 475.8 495.9 399.6 415.7 436.2 457.1 481.4 497.4 141.0 147.0 155.2 163.4 171.0 176.6 540.6 562.7 591.4 620.5 652.4 674.0 532.7 549.2 570.0 188.7 195.5 205.0 721.4 744.7 775.0 5 10 11 108.7% : $ 6.9 : $ 7.5 : $ 7.5 : quota Daily : 77.9% date : as & of Sales : Sept. 1 : Sept. 1 : to date : $ 14.9 : date to Quota, Office of the Secretary of the Treasury, Division of Research and Statistics. Source: Actual sales figures are deposits with the Treasurer of the United States on account of proceeds of sales of United States savings bonds. Figures have been rounded and will not necessarily add to totals. Note: Quota takes into account both the daily trend during the week and the monthly trend during the month. : : quota Daily to Total Actual sales as % of : : date : $ 11.6 as % of : : date to : $ 11.6 to Sept. 1 : Sept. 1 : to date : : Daily : Quota, : : Sept. 1 : Sept. 1 : to date Date : Actual sales : Sales : Sales : : Quota, Actual sales Series F and G : Series E quota 88.1% September 2, 1942. 103 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE September 2, 1942 TO FROM Secretary Morgenthau Mr. Thompson I have looked carefully into the possibility of exchanging your Buick for the Cadillac, but regret that apparently there is no legal way to accomplish this. Under rulings of the legal officers, in an exchange of this nature there must be an appropriation available to pay for the article acquired by exchange, this being so because of a well-established rule under Decisions of the Comptroller General that in the absence of an exchange statute (which is absent in the present case), an appropriation must be charged for the full price of the article acquired, the trade-in value of the article disposed of being covered into Miscellaneous Receipts. Our appropriation for the car for the Secretary of the Treasury provides only for "maintenance and repair", no purchase authority being included. Specific authority to purchase is included only every three or four years when a new car is authorized. And 104 THE WHITE HOUSE WASHINGTON 2 September 1942 My dear Mr. Morgenthau: For your information I am attaching a memorandum which I recently received from Captain Ralph Davison, the Assistant Chief of the Bureau of Aeronautics. This appears to be the latest information on the New Hackensack airport. Sincerely yours, John he Geo JOHN L. McCREA Captain, U.S. Navy Naval Aide to the President Attachment The Honorable Henry-Moxgenthau, Jr. Secretary of the Treasury Washington, D. C. 105 reply address not the signer of but Bureau of Aeronautics, Department, Washington D.C. teler to Na Aer-PL-3-LG N1-9(1-875) A2-13(1) NAVY DEPARTMENT BUREAU OF AERONAUTICS WASHINGTON MEMORANDUM 28 August 1942 For: Captain John L. McCrea, USN, Naval Aide to the President, The White House. 1. Under date of 22 June 1942, the Commanding Officer, Naval Air Station Anacostia, submitted a memoran- dum to you relative to the hazardous flight conditions at the New Hackensack, New York, commercial airport. This memorandum you forwarded to the Bureau of Aeronautics to make representations to the Civil Aeronautics Administration for remedial action. 2. The Civil Aeronautics Administration has now ad- vised this bureau by recent letter of its inability to remedy the hazards of the field, but has stated that it believed the War Department would shortly acquire the field. 3. The bureau has verified the fact that the War Department will shortly acquire the field, in connection with flight indoctrination to be given U. S. Military Academy cadets at nearby West Point, and the bureau has been verbally informed that the War Department will improve the field so as to eliminate the dangerous obstructions surrounding the field. Davon Copy to: CO, NAS Anacostia, D.C. Treasury Department 10 Division of Monetary Research Date Sept. 2, 1942 19 To: < Mr. White From: Mr. Gass In further expansion of the last paragraph of this memorandum - which I have not thought it necessary to include in the memorandum inself I am informed by Mr. Neal that he spoke yesterday to both Mr. Randolph Paul and Mr. Roy Blough about the Treasury's spending tax proposal. He says that both Mr. Blough and Mr. Paul made it clear to him that the spending tax would probably have a compulsory saving feature. 107 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE September 2,1942 TO Mr. White FROM Mr. Gass Subject: The Wall Street Journal story of September 2 on the "Spending Tax" Mr. F. W. Neal, the author of the September 2 story on the spending tax, spoke to me briefly on September 1 about the spending tax. I gave him no information which went beyond what Senator George had already said in public. Mr. Neal asked what we meant by a spending tax. I indicated that it was a tax on consumption, excluding saving, having exemptions for dependents and with graduation. He asked how the amount of spending would be calculated. I indicated that account would be taken of income and the net change in capital assets. Spending would therefore be derived as a residual. He asked whether any part of the spending tax might be treated as compulsory saving. I replied that it had been suggested that part of the tax might be made a post-war rebate and 'that this suggestion was under consideration. Mr. Neal asked no questions with regard to the expected yield of the tax or the rate schedule which the Treasury might propose. He may have received more precise information on the character of Treasury plans from someone in the Treasury. However, his story, as it appears in the Wall Street Journal, may be merely an intelligent reporter's filling-in of the details from such fragments of information as had already been publicly announced. Mr. Neal has been a strong advocate of compulsory saving all along and therefore he readily made forced saving the "hub" of the whole plan. 108 September 3, 1942 MEMORANDUM FOR THE FILES Subject: Minutes of meeting in Mr. White's office on the disposition of 5 million ounces of ordinary silver, September 2, 1942. Present: Mr. White, Mr. Du Bois, Mr. Brenner, and E. M. Bernstein for the Treasury Mr. McGregor and Mr. Murphy for W.P.B.; and Mr. Warfield of Metals Reserve Corporation Mr. White opened the meeting with a question on the shortage of silver for war purposes. Mr. Marphy said that there would be no shortage now if all domestic silver is made available. Mr. White mentioned the desirability of making sure that low-priced foreign silver went into war production on Government account. The question arose of whether newly-mined domestic silver would be delivered to the mints or to the market. Mr. Bernstein pointed out that the largest single refinery is already taking advantage of the Treasury's postponement of delivery and is offering silver to the market. The best hope would be that all the refiners would be eager to take care of their commercial customers and would provide them with newly-mined domestic silver instead of delivering such silver to the mint. Mr. Murphy said that some silver might be sent to the mints in order to force a shortage so that the price would be revised upward to 80 or 90 cents. Mr. White said that if any considerable amount of newly-mined domestic silver is delivered to the mints we would look into the reasons. Mr. White inquired about the possibility that silver held by fabri- cators with low priority ratings would be made available for essential uses after October 1. Mr. Marphy pointed out that there was no compulsion in the conservation order for them to sell although such compulsion could be applied by the W.P.B. It was hoped that the price of 45 cents may induce fabricators with low priority ratings to dispose of the silver that they were not permitted to use. Mr. White raised the question of the disposition of the 5 million ounces of ordinary silver. He said that the Treasury had thought that it could be sold through the Metals Reserve Corporation at 45 cents an ounce without any cost or loss to Metals Reserve. Mr. Warfield said that the Metals Reserve Corporation was not ordinarily engaged in selling silver and that it would prefer to have the Treasury do it. 109 -2- Division of Monetary Research Mr. White raised the question of what need there was to have the Metals Reserve do it, and the only reason presented was that it might have a bad psychological effect to have silver coming out of the Treasury as it would encourage silversmiths to put on a drive for more silver from the Treasury. Mr. White said that he did not regard that argument as impressive although it may have merit. Mr. Murphy expressed a preference for having the Metals Reserve undertake this transaction although he admitted that W.P.B. could provide the Treasury with a list of suppliers holding high priori ty ratings for war purposes totalling 4.9 million ounces. Mr. Warfield then pointed out that it would take longer for Metals Reserve to sell than for the Treasury, because they would have to go through the process of setting up on their books the necessary accounts for the purpose. However, if the Treasury or W.P.B. insisted on having Metals Reserve handle it, he would like to have an opinion that the Treasury was empowered to dispose of the silver and he would like to have a statement of the cost of the silver to the Treasury and assurance that no loss would be suffered by Metals Reserve. Mr. Murphy stated that he would like to reconsider the question with W.P.B. officially, and if necessary have a letter sent from Mr. Nelson to the Secretary indicating a preference, if there is one, for having the transaction go through Metals Reserve. E. M. Bernstein EMB Treasury Department 11 Division of Monetary Research Date Sept. 2, 19420 o: Miss Chauncey The Secretary decided that his letter should not be sent at his time. H.D.W. MR. WHITE Branch 2058 - Room 2141 111 TREASURY DEPARTMENT WASHINGTON Dear Mr. Chancellor: During the past 18 months this Government, as you know, has taken many steps to assist the British Treasury in building up a gold and dollar balance and in maintaining that balance at a level deemed necessary for the efficient prosecution of the war. The completion of several arrange- ments between the Army and the British Supply Council in North America makes this an appropriate time to review the accomplishments of this program. The total of United States Government purchases of British armament facilities, contracts, and products now amounts to over $400 million as follows: Cash refunds or relief from commitments (In millions) Transfers of facilities 1. Tennessee Powder Company 2. Machine gun plants $21 24 Buffalo Arms Company Colts Patent Firearms Company High Standard Manufacturing Co. Kelsey-Hayes Wheel Company 3. Todd shipbuilding facilities 12 Todd-California Shipbuilding Corp. Todd-Bath Iron Shipbuilding Corp. 4. Other facilities for which purchase agreements are being negotiated: 45 New Jersey Powder Company Packard Motor Car Company Curtiss-Wright Corporation General Motors Corporation Pullman Standard Car Mfg. Co. Pressed Steel Car Company Lima Locomotive Company Republic Steel Corporation Western Cartridge Company Remington Arms Company VICTORY BUY WAR BONDS STAMPS $102 112 -2Transfers of contracts 1. Machine guns $ 28 Buffalo Arms Company Colts Patent Firearms Company High Standard Manufacturing Co. Kelsey-Hayes Wheel Company 2. Tennessee Powder Company 6 The terms of this transfer called for cash refunds of $6 million and relief from commitments of $29 million. How ever, the Treasury understands that the British contract for the product of this plant was not a firm commit- ment, and we have not, therefore, included the $29 million. 3. New Jersey Powder Company 49 4. Vultee Airplanes 12 5. Remington Arms Company 33 6. Savage Arms Company 25 7. Mack Trucks, Incorporated 4 8. Pressed Steel Car Company 6 The preliminary contract for this transfer calls for payments not to exceed 89 million. It is expected that the total payment will be about $6 million. 8. Ordnance contracts 84 Under the terms of this transfer the War Department has agreed to the take-over of some 44 British contracts for ammunition, explosives, and tanks, aggregating $84 million. $247 Payment for materials diverted from British contracts for the uses of the United States. 1. Aircraft items An additional payment on these items is expected when the values of the materials diverted are finally determined. Grand Total $ 70 - 70 $419 113 -3 - The cooperation of the War Department, the Maritime Commission, the Lend-Lease Administration, and the Defense Plant Corporation has made possible the completion of this program. Very sincerely yours, Secretary of the Treasury Sir Kingsley Wood, The Chancellor of the Exchequer, London, England. 114 SEP 2 1942 My dear Dr. Herrera-Aranges This is in reply to your letter of August 23, 1942, enclosing an informal letter to the Secretary of the Treasury from the Imbassador of Cuba entering an order for approximately 85 million of gold. The Treasury has taken all of the necessary stops for the sale of this amount of gold to the Cuban Governmont as req ested in these letters. Sincerely yours, (Signed) H. n. White H. D. White Assistant tel the Secretary Dr. Reoul Herrere-Arange, Second Secretary, Cuban Tebasay, 2630 Sixteenth Street, Washington, D. c. 9/2/42 115 C 0 P Y EMBAJADA DE CUBA Washington, D. C. August 13, 1942. Mr. Harry D. White, Assistant to the Secretary, Treasury Department, Washington, D. C. My dear Mr. White: With reference to my telephone conversation of yesterday, and pursuant to the suggestion made by Mr. E. M. Bernstein of your Department, I beg to enclose an informal letter addressed to the Secretary by the Ambassador, entering an order for the purchase of approximately $5,000,000.00 in gold, pursuant to the agreement of July 6, 1942. Sincerely yours, /s/ Raoul Herrera-Arango Raoul Herrera-Arango Secretary of Embassy 116 EMBAJADA DE CUBA WASHINGTON.D.C. August 13, 1942. INFORMAL Honorable Henry Morgenthau, Jr., Secretary of the Treasury, Washington, D. C. Sir: Pursuant to the agreement of July 6, 1942, under which the Government of the United States undertakes to sell gold to the Government of the Republic of Cuba from time to time under stated conditions, and to the instructions received from my Government, I hereby beg to enter an order for the purchase of approximately $5,000,000.00 in gold, said gold to be earmarked for the account of the Treasury of the Republic of Cuba at the Federal Reserve Bank of New York. My Government would wish, if this be agreeable to the Government of the United States, to make payment for this "gold at the Havana branch of any American Bank which the Treasury may designate, upon receipt of notice of earmarking and total cost thereof to the Cuban Government. Sincerely yours, Aurelio F. Concheso Ambassador. 117 Sept. 2, we Mr. Minoray Ms. white will you please send the attached cologram to the - - China. RE:1e:9/2/42 118 September 2, 1942 TO Min, Chim. FROM Secretary of the Treasury Reference your estile of August 24, TP-55, regarding Central I of China application. (a) treasury is not sure that 18 materials purpose of supportion made by British - of the Board that as million of the starting assets of the Board should be kept to - - liabilities. IS is not close as to the signifience in this - of the difference between liabilities insured during the post for months and liabilities to be insured during the earing months, particularly since the of the Board for starting already - its assets. Please inform - w able - to your reastion to this properal of the British mater. IS will be resulled that in abiles of - 2 to you and of Jame 36 to Mr. Yes is was pointed - that the Treasury I that the Board would ask we its dollar Sumila for the purchase of starting will the starting assets had boom abouted. (b) Treasury would 1the to have were detailed - of Central Beak's application, instating application for signature. state morting of Bank's application will memoritate milling - the 5. s. contribution of w million and since the dollar assets of the Board will be 1 to purchase starting. The Secretary must obtain this information to Me obligation to Compress. 187/eta was 119 Distributed tet Secretary (3.N.B.) Mr. Bell Mr. Paul Mr. White (Friedman) Mr. Friedman Mr. B. Bernstein Mr. E.M. Bernstein Mr. Dietrick (From K. Ayers - Rm. 217) 120 NOT TO BE RE-TRANSMITTED COPY NO. 13 BRITISH MOST SECRET U.S. SECRET OPTEL No. 305 EGYPT. During the 2nd September the main enemy forces were concen- trated in the area southwest of ALEM EL BUEIB with their flanks protected by an armoured screen. Our main forces remained in their battle positions all day without being engaged. Enemy mechanical transport columns wore engaged continuously by our artillery and by our mobile forces in the south. Our ground troops confirm the excellent results of the R.A.F. bombing which together with the artillery fire caused many casualties and fires and kept the enemy mechanical transport on the move. During the night 2nd/3rd enomy Inagers were attacked and the R.A.F. had most successful bombing on the best target yet seen in a locality about ton miles southwest of ALEM EL BUEIB. At first light on 3rd our armoured patrols pushed forward into close contact with the enemy protective screen and at 1330 air reconnais sance reported a general enemy movement westward in three main columns in the back area. In the forward aroa the enomy withdrew slightly. Our forces continue to harass him from all sides. OPTEL No. 306 Information received up to 7 A.M., 4th September, 1942. 1. AIR OPERATIONS WESTERN FRONT. Night 2nd/3rd. KARLSRUHE 170 aircraft dropped 190 tons of H.E. and 180 tons of incondiaries including 54 4,000 lbs. and 56 2,000 1b. bombs There was only slight haze and crows wore able to pin-point the objectivo. Fires were well concentrated and towards the end of the attack very largo fires were roported blazing in the centre of the town and in the docks with smoke rising to a great height. Defences were slight to moderate and there were for night fighters. 3rd. Five enemy aircraft crossed our coasts. Spitfires destroyed one and damaged another. 3rd/4th. Eleven bombara woro sont to attack EMDEN. Two are missing. EGYPT. 1st/2nd. Enomy tanks and transport woro continuously bombed and considerable damage was inflicted on mechanical transport. TOBRUK was also bombed. A 2,500 ton ship southbound off DERNA was hit by torpodo and another ship in the same convoy by bombs. 2nd. 167 bombor and 507 fighter sorties were flown. Enomy concentrations wore subjected to ton attacks. Fourtoon onomy aircraft true shot down, seven probably destroyed and seven damaged by fighters and four moro were destroyed by anti-aircraft. Ten of our fighters are missing but four pilots are safe. 3rd/4th. Our aircraft attacked an acmy convoy off DERNA hitting a destroyer and a tanker. 121 -2- MEDITERRANEAN. 1st. U.S. bombers hit a ship at HERAKLION, CRETE. 2nd/3rd. Naval aircraft scored two torpedo hits on an escorted 5,000 ton vessel off CAPE SPARTIVENTO (ITALY). The ship was later reported aground. Wellingtons hit a 4,000 ton tanker off the West Coast of GREECE. BURMA. 31st. U.S. medium bombers with fighter oscort attacked barracks warehouses and the railway terminus at MYITKYINA. 2. HOME SECURITY Yesterday morning two 500 KG bombs dropped from a low level at SELSEY bounced and exploded in the air damaging 100 houses and causing 27 sorvico casualties. Four H.E. bombe were dropped on a railway station in SOMERSET blocking the main Great Western Line for a short time. SEP 8 1042 122 OFFICE OF STRATEGIC SERVICES WASHINGTON. D. c. September 2, 1942 The Honorable The Secretary of the Treasury Washington, D. C. Dear Henry: The attached is a summary of the Weekly Intelligence Report issued by the British Ministry of Information for the week of August 28. Sincerely, Bill William J. Donovan Director 123 SECRET Developments on Industrial Resources The delivery of an unstated number of new type 50 locomotives from Germany to Roumania and thought to be in 1. the order of several hundred, is said to be assured. Also, Roumania is to receive 60,000 tons of rails from Germany. Reports, in which the details are vague say that rail freight traffic between Turkey and Bulgaria via the Maritza Bridge without transshipment at the border has 2. been reestablished. 3. Germany is now sending two to three locomotives a day, and 42 freight cars every other day. As yet it is not known whether this is under the Clodius agreement or under earlier arrangements. 1100 locomotives which the Germans requisitioned from the French have been taken over from the Nord region. 4. 5. The Montecatini aluminum plant has been having difficulty with the petroleum coke which it has been receiving from Germany for electrode purposes. Italian petroleum coke has been sent to Germany for processing. The ash content has been found 80 high as to impair seriously the usefulness of the material upon its return. An intercept shows that Krupp is redesigning locomotive bearing lubrication ducts to avoid clogging which was experienced last winter on the Russian front. 6. In synthetic oil manufacture the substitute for a cobalt catalyst is sintered iron ore of a special type. 7. In May Germany imported about 4000 tons of this, and in June 6,851 tons. The plant for the special treatment required by this ore is of the type which is required for nickel refining. It is thought that the Oppau Nickel refinery has a capacity just sufficient for handling Petsamo ore. -28. 124 There are reports of French machine tool instal- lations being dismantled and shipped to Germany, and they are particularly prevalent in regard to the Renault works. These are regarded with reserve by M.E.W. 9. Under the new decree, passenger travel on German railroads is to be confined to that essential for war pur- poses. On the other hand, the freight position seems slightly easier and although goods will not be needed for some months, shippers have been urged to move them before the harvest season. Developments Regarding Shipping 1. It has been announced by the Germans that they will move idle cargo handling machinery from Holland to Baltic State ports where installations were destroyed by the retreating Russians. In July a cargo of rails was shipped to Nemours from Marseilles, perhaps for construction purposes on the trans-Saharan line. Reports on the rate of present con2. struction, if any, of such a line are unsatisfactory and conflicting. Intercept source indicates that the French ship Nevo arrived in Marseilles via North Africa in August 3. having left Hanoi in July. Cargo particulars are not available. All German coal for Finland and Sweden must pass through Rotterdam. This may be designed to increase the 4. carriage of Swedish iron ore to Rotterdam in addition to easing German coal transport problems. SECRET 125 September 3, 1942 10:04 a.m. Robert Rouse: Good morning, sir. HMJr: How are you? R: Pretty good, and you? HMJr: I'm all right. Look, Rouse, do you think I ought to have some of these bond people down tomorrow or wait till Tuesday? From New York. R: I think it might be a good idea to have them down HMJr: You do think BO? R: tomorrow, sir. Yeah, because it - you want time to make up your mind afterwards rather than be hurried on Tuesday, you see, Monday being a Labor Day holiday. HMJr: Well, now I can give you - can you come? R: Yes, I can come. HMJr: All right, well, let's say I give you from ten to R: Right. HMJr: How's that? R: Good. HMJr: Well, could we - now I would like to see the dis- R: Yes. eleven, and from eleven-fifteen to twelve. count fellows HMJr: ....and I would like to see, what' s-his-name R: Devine? HMJr: Devine. R: Yeah. 126 -2- HMJr: And I'11 leave the rest to you. All right, sir. How about outside New York? Your committee pretty well covers that, doesn't 1 77 Oh, I think so. R: Yeah. HMJr: R: HNJr: I don't think bringing in Detroit helps much. R: No. HMJr: What? R: No, and you've got Boston and Chicago and St. Louis in your other group. HMJr: Yeah, yeah. And I'd allow these fellows.. R: Twenty minutes? HMJr: Twenty minutes, yes. R: Right. HMJr: That means I can see three in an hour. R: Well, I'11 - I'll confirm who is coming and the appointments later. HMJr: Yeah, would you - would you mind - no, you've got the Fed.- Let Lieutenant Commander Stephens know. R: HMJr: All right. Good. Give it to him. R: Yeah. HMJr: Thank you. R: Right, sir. 127 September 3, 1942 10:5 58 a.a. HMJr: Hello. Operator: Judge Rosenman. HMJr: Hello. Judge Rosenman: Hello, HMJr: Sam? R: Yeah. HMJr: What you all doing? R: Where are you? HMJr: Here in the Treasury. R: Well, (laughs) did Mrs. Klotz tell you I phoned? HMJr: Yeah. R: oh, well HMJr: R: Then I got this, and I wondered if I could just walk across with it, because I'm all by myself. Everybody's on the Hill. I need a little advice. I don't understand it. Well, yes, except that I - I got to go in with him. He's seeing the four farm leaders today, and then the HMJr: R: What time? At - at eleven, and then at eleven-thirty he's going to see the labor leaders, and I got to be in with him on both. HMJr: Yeah, well, when - what - what are you doing at lunch time? R: Well, at lunch I have a date. I'11 - why don't I give you - do you want to make it sometime this afternoon, because we're not leaving now till tonight. It's been changed. 128 -2HMJr: R: Oh. Yes, I mean the only appointment I can't change is from three to three-thirty. Well, Henry, why - why don't we make it at - well, let's see what's convenient. Two o'clocki HMJr: Two o'clock? R: All right. HMJr: Where will it be? R: By that time you'll have seen Randolph, won't you? HMJr: R: HMJr: Well, I don't know. He's on the Hill. Well, do you want to make it later, because it there really isn't any sweat on it. Why don't you talk with him first? Well, if I could make it - could I R: Because we're not leaving now until after dinner. HMJr: What are you doing around four? R: Four o'clock? It's clear so far, yeah. Want to make it at four? HMJr: Four - four o'clock would be perfect. R: All right. HMJr: Well, as near as I can make out - have you got a second? R: Yeah. I see - you see, what - I tell you what happened. HMJr: Yeah. R: He got a very tough letter from Budget, you know. HMJr: Yes. R: and last night at about eleven o'clock when we finished on the thing today, he said, "Let's see the Order in its present form." He started to go - he really went through it for the first time 129 -3HMJr: R: Yeah. and when he came to this thing, P told him just what the facts were, that Smith was kicking and had sent them a letter, and he said he remembered the letter and he'd read it HMJr: R: What was Smith kicking and he wanted to take out that part about fiscal policy, and so then he - he really worded it the way it is now. HMJr: R: But and he put in - I said, "The same thing would apply to Ecoles as, applies to Henry," so he wrote in that member of the Reserve Board - Governor of the Reserve Board. HMJr: Yeah, but what I don't understand, Sam, is this, and maybe - should I worry or shouldn't If Do you think R: No, I think it's all right, Henry. HMJr: Well, let me just take one second. R: HMJr: R: HMJr: I mean if you want my opinion, I think it's okay. Well, I - I'm asking you now.... What this does is to exempt you from directives, and merely says that with respect to you and Ecoles on - how's he got it - public revenues Well, let me just read, because it looks - the way I read it, it looks as though it singled us out. May I just take one R: HMJr: Yes. there's one word there - "but the administration activities relating to the national economics shall remain with the departments and agencies now responsible for such activities, but such administration is to conform to the direct policies issued by the administrator, except with respect to the public revenues... and so forth. Now cont. 130 -4HMJr: (cont.) R: this - 'the administrator shall only make such Secretary of the Treasury." It's the word "desirable" - I don't understand it. recommendations as he deems desirable to the Well, he can - shall only make such recommendations as he thinks should - well, desirable - what he thinks ought to be done. HMJr: R: Well, he could - that means he could tell me anything. Well, only recommendations. But the idea of the except business 18 that you - you see, it says that you should follow policy - that all should follow policy except you and Ecoles. HMJr: Oh, and that is he. R: That was the intention of it. HMJr: Well R: You see, where it says everybody else - the ad- HMJr: Yeah. R: ministration - the administrative details are left with the different departments but as to policy everybody has to follow Mr. X, and then it says except that as to revenues, etcetera - the theory is you don't have to follow that policy, and all that he can do is make recommendations to you. HMJr: R: You think it's all right. I think it's all right, but we could put in some words that - well, that - I was thinking of a way of putting in that you don't have to follow the recommendations if you don't want to - I mean, that - that would be a strange language in an Order. HMJr: Well, what I was thinking - of such recommendations. R: Yeah. 131 -5HMJr: I - I mean, I'm not a lawyer R: Yeah. HMJr: ...."to the Secretary of the Treasury and to the - "as I, the Secretary of the Treasury, deem desirable." Do you see what I mean? R: Well, no, that isn't - that wouldn't be - that wouldn't be right if it was - the purpose of this is to say that if he says to Leon, "You got to raise the price" HMJr: Yeah. that Leon's got to do it, you see.... R: HMJr: R: Yeah. that the prices have to be raised. Now if he says to you, 'You got to issue a three per cent bond instead of two per cent bonds, that's merely a recommendation which you don't have to follow. HMJr: R: HMJr: Well That - that's the - that's the purpose of it. Well, this is language, and if you could let me come over at four, will that be a firm appointment? R: Four o'clock, yeah. HMJr: Is that firm? R: 1 Right. And if - have Randolph try to get up some language which is - which - which he thinks is better. HMJr: Uh huh. R: You understand the purpose of it? HMJr: R: I now do. I didn't before. Yes. Well, now if that language - that's midnight language and it may not be the best. What the President wanted to out out was the statement that cont. 132 -6 Rt (cont.) you alone were responsible for fiscal policy because that's what Budget complained about. And that's a major scrap that shouldn't be settled in an Order that has nothing to do with it. HMJr: No. R: That's what he wanted to take out. HMJr: R: Well, they claim - they claim they're responsible to Well, it's - it's a long memo. They claim they have a joint responsibility. HMJr: R: HMJr: R: I see. And that ought to be settled some time, but certainly not in a parenthesis in an Executive Order. I agree with you. So - but - but you understand the purpose of this now is to say that so far as you and Eccles are concerned on fiscal policy, he doesn't issue directives to you but only recommendations. HMJr: Yeah. R: You got that? HMJr: I got it. R: Now if you want to change the language in a way that will do that, I'm sure the President won't mind. HMJr: I got that. And you will - we'll be over at four and if the boys aren't satisfied, I'11 R: Let them - let them suggest some changes in language and I - I can pass on that in a minute. HMJr: Right. R: Okay. HMJr: We'll be there at four. 133 -7R: All right. HMJr: Thank you. R: Okay. 134 September 3, 1942. 11:37 a.m. HMJr: Huntington to be left alone with Mr. Paul on the Hill. I've got to have somebody that functions in the General Counsel's office. Cairne: Well, I'll come right up and HMJr: Well, I mean here something has broken. I've been trying for one - since eleven o'clock to locate somebody. Bernstein's away, you're out of the office, the Executive Order has come over from the White.House vitally affecting the Treasury, and nobody's here. C: I left a man at my desk, and Mr. Tietjens is in charge. HMJr: Well, Tietjens - what the hell does Tietjens C: Well, I'11 be there. HMJr: What are you doing over at the Art Gallery? C: HMJr: know about this? The meeting has just adjourned. I represent. Well, I mean what - what - I mean I'm left here absolutely flat with nobody. C: Well, I'11 be there in two minutes. HMJr: All right. C: I'11 come right up. 135 September 3, 1942 4:56 p.m. Operator: HMJr: Myron Go ahead. Hello. Taylor: Mr. Secretary. HMJr: Yes. T: How are you? HMJr: Fine. T: This is Myron Taylor. HMJr: How do you do? T: I wanted to get a little information. Mrs. Taylor has been asked in New York by the Woman's Voluntary Service Organization to accept the National Chairmanship of the Bond and Stamp Sales Committee of the National - of the Woman's Voluntary. Before she undertakes to do much about it, in talking it over HMJr: T: HMJr: Yes. she decided that she would like to know whether this activity by the Woman's Voluntary is acceptable to the Treasury Department, and if she went into it, she would first try to discover a chairman of each State Yes. among the Woman's Voluntary Organization to T: act in each State to promote the sale of bonds and stamps. Now is that consistent with what you are already doing, and HMJr: T: HMJr: Well do you favor it? ....I - I can't tell you off-hand, but if you could - where could you be reached tomorrow forenoon? 136 -2T: I'll be in the Mayflower until I go to Mr. Berle's office at half-past ten. HMJr: Mayflower? T: Yes. HMJr: Well, I'11 have Miss Elliott, who is in charge of T: Yeah. HMJr: T: HMJr: our women, you see phone you before ten-thirty tomorrow morning. All right. I - I can't answer you myself, but Miss Elliott of the University of North Carolina, who's with us.... T: I wonder if it would help if I sent to you today a copy of the letter that Mrs. Taylor addressed to Mrs. King and Mrs. MacLean in which she raises this question HMJr: T: HMJr: Good. and then you'11 have everything before you before she telephones. We'11 put it all into a package, and Miss Elliott will - will phone you tomorrow morning at the Mayflower T: It would suit me better if she phoned around two- thirty. HMJr: Well, why don't you - why don't you - at the Mayflower? T: Yeah. HMJr: At two-thirty? T: Yeah. HMJr: I'11 tell - I'll ask her to phone you at twothirty at the Mayflower. 137 -3 HMJr: Or three o'olock, either one that suits her. Well, let's say two-thirty. T: What's her name? T: T: Miss Elliott. Elliott. HMJr: Yes. T: And how are you? HMJr: I'm fine. T: Good. HMJr: I'm fine. I don't know - I can't tell you, but she can. I think if everything is all right, Ido.think it would be a fine thing for your wife to HMJr: T: Well, I don't want her to get into it too deep in something, you know, that HMJr: T: HMJr: No. that's going to make a lot of hard work and trouble, but Yeah, I think it would be a fine thing, but I - I don't want to - we have Miss Elliott in charge of all women activities on War Bonds and I'd like to have her clear it. T: All right. Thank you very much. HMJr: Thank you. T: Goodbye. 138 ciginal to Miss Ellistt September 8, 1942 Myron Taylor phoned the Secretary this afternoon, and said that Mrs. Taylor had been asked in New York by the Woman's Voluntary Service Organisation to accept the National Chairmanship of the Bond and Stamp Sales Committee of the Woman's Voluntary. Before Mrs. Taylor undertakes to do much about it, she decided that she would like to know whether this activity by the Woman's Voluntary is acceptable to the Treasury Department, and if she went into It, she would first try to discover a chairman of each State among the Woman's Voluntary Organisation to act in each State to promote the sale of bonds and stamps. Mr. Taylor asked whether this was consistent with what the Treasury is already doing and whether Mr. Morgenthau favored it. The Secretary said he couldn't tell him off-hand, but he would be glad to have Miss Elliott call him tomorrow. It was agreed that Miss Elliott should phone Mr. Taylor tomorrow at 2:30 at the Mayflower. Mrs. Taylor has written a letter to Mrs. King and Mrs. MacLean in which she raises this question, and Mr. Taylor will send the Secretary a copy of this letter. Miss 189tt 9/9/42. Dear Mr. Secretary: Herewith the letter I referred to in our conversation this afternoon. Mymn. Myrón C. Taylor Washington,D.c. September 3, 1942. 140 COPY MEMORANDUM OF THANKS TO MRS. TAYLOR from THE AMERICAN WOMEN'S VOLUNTARY SERVICES The Board of Directors met yesterday at their monthly meeting and they were overjoyed that you are interested and have accepted the National Chairmanship for our bond and stamp sales. They want to help you in every possible way and asked that I, as Chairman, personally convey to you the fact that the entire Board is overjoyed and stand firmly behind you to help in any way they can. July 8 1942 (By telephone to Mrs. Taylor's Secretary) Isabella Greenway King, Chairman. 141 COPY Murray Hill 3-0835 AMERICAN WOMEN'S VOLUNTARY SERVICES, Inc. New York City 181 Madison Ave. Office of the President Defense Division Mrs. Alice T. McLean July 9 1942 Air Raid Protection Uniforms & Insignia Other Defense Activities Mrs. Myron C. Taylor 16 East 70th Street New York City My dear Mrs. Taylor: At the request of our Board of Directors I am hereby appointing you National Chairman of A.W.V.S. War Savings Staff of the U. S. Treasury Department. We are delighted that you are willing to undertake this important phase of our work for us, and feel confident of its national expansion and success under your guidance. I can't tell you how happy I am personally to think of working so closely with you. It will be a joy to have you taking an active part in our `organization. Yours sincerely, (Sd) ALICE T. MOLEAN, President. 142 COPY 598 Madison Avenue NRoom W 1203 York September 2 1942 Mrs. Isabella Greenway King, Chairman of the Board, American Women's Voluntary Services, Inc., 181 Madison Avenue, New York. My dear Mrs. King, I am writing this letter to make more clear my position as National Chairman of the War Bond and Stamp Sales project of the American Women's Voluntary Services, Inc., my appointment having been covered by your message of July 8 1942 reciting the action of its Board of Directors, and by the letter of Mrs. Alice T. McLean, President, dated July 9 1942, appointing me National Chairman of A.W.V.S. War Savings Staff -- copies of which are attached hereto. My understanding of the appointment was that my authority was to select candidates for State Chairmen of the Bond and Stamp Sales in each State, wherever a Chairman had not bee n appointed. I would submit and recommend the names of these candidates to you and through you to the Directors of the A.W.V.S. for approval, and with this approval the women in question would be appointed Chairmen by your office and would proceed to organize the sale of War Bonds and Stamps in their respective States. After the approval and appointment by you of these State Chairmen it would be the duty of our office to maintain contact with them, to encourage them in organizing their local units, etc., and then to report to you at proper intervals the results of these state-wide efforts. It was not my thought or intention that this office should make contact with particular groups within the States when once a Chairman was selected and appointed. That would be the duty of the State Chairman. Also it is my understanding that the Bond and Stamp sales activity within the American Women's Voluntary Services has been encouraged and approved by the United States Treasury Department. Before proceeding further with my activities, I feel that my understanding of the matter as covered by the above paragraphs must be clarified and given further written approval by you and the Directors of the American Women's Voluntary Services and by the Treasury Department. Most sincerely yours, (Mrs. Myron Taylor) 143 learn September 3, 1942 MEMORANDUM FOR THE SECRETARY'S DIARY: Secretary Morgenthau, Mr. Gaston, and Mr. Cairns saw Judge Rosenman at the White House at 4 o'clock today with respect to the proposed Executive Order creating an officer to be known as the Economic Stabilization Administrator. Judge Rosenman was handed the attached Redraft No. 1, which Judge Rosenman, after reading, stated was satisfactory. However, Secretary Morgenthau remarked that Judge Rosenman was a friend of the Treasury and requested Mr. Cairns to show him the attached Redraft No. 2. Judge Rosenman said he thought Redraft No. 2, for his purposes, was better than Redraft No. 1 since it was less of a red flag. He said he would prefer to use No. 2 if it was entirely satisfactory to Secretary Morgenthau. Secretary Morgenthau reread No. 2 and said that it was entirely satisfactory to him. Judge Rosenman then stated that it would be used without change in the Executive Order. Mr. Cairns told Judge Rosenman that the reason for redrafting the President's language, as it appears in the original draft of the Executive Order, 144 -2was that the language was ambiguous. As the language now appears, it might mean that the Administrator was not under a duty to make recommendations to the Secretary, but that he could make such recommendations as seemed to him desirable. These recommendations might be binding since the Executive Order did not state that he could not issue directives to the Secretary. Judge Rosenman said he thought the point was well taken and he would adopt the redraft. Judge Rosenman added that as the Secretary knew he was, of course, opposed to the exception as a policy matter. He said that Leon Henderson was raising the devil because the Secretary was excepted and he knew that others, such as Jesse Jones, would raise the devil when they heard of it. /duriting ton Caims Attachments. REDRAFT NO. 145 3. The guiding policy of the Administrator and of all departments and agencies of the Government shall be to stabilize the cost of living and to insure the fair and equitable distribution and allocation of materials and commodities, including agricultural commodities, and it shall be the duty and responsibility of the Administrator and of all departments and agencies of the Government to cooperate in the execution of such legislative programs as may be necessary to that end. The administration of activities related to the national economic policy shall remain with the departments and agencies now responsible for such activities, but such administration shall conform to the directives on policy issued by the Administrator, except that with respect to public revenues, borrowings, credits, taxation and public finance, the Administrator shall not issue directives pursuant to this Order, but shall only make recommendations to the Secretary of the Treasury, and to the Board of Governors of the Federal Reserve System. 146 REDRAFT NO. 2 3. The guiding policy of the Administrator and of all departments and agencies of the Government shall be to stabilize the cost of living and to insure the fair and equitable distribution and allocation of materials and commodities, including agricultural commodities, and it shall be the duty and responsibility of the Administrator and of all departments and agencies of the Government to cooperate in the execution of such administrative programs and in the development of such legislative programs as may be necessary to that end. The administration of activities related to the national economic policy shall remain with the departments and agencies now responsible for such activities, but such administration shall conform to the directives on policy issued by the Administrator, except that with respect to public revenues, borrowings, credits, taxation and public finance, the Administrator shall only make recommendations to the Secretary of the Treasury, and to the Board of Governors of the Federal Reserve System, pursuant to this Order. 147 September 3, 1942. 5:06 p.s. HMJr: ....in all this excitement. Rosenman wants me today and everything else, should the President to tell Paul that in the light of what we said say anything night, you seeabout taxes in this message Monday Huntington Cairne: Yes. HMJr: and if heyou should -- he's already sent something over, see -- C: Yes. HMJr: he could give it to me tomorrow afternoon when I go up to the country, and I could take it with me, you see? C: Yes. HMJr: And I could deliver it to Rosenman. You - are you following me? C: Well, I'm a little mixed up. HMJr: For the President's Labor Day speech C: Yes. HMJr: Paul has already supplied him with material on taxes. C: Yes. HMJr: Now in the light of what I said today on the Hill, does Paul want to change it any? C: I see. HMJr: And if he does, would he rewrite it C: I see. HMJr: ....and give it to me tomorrow afternoon to take up to Hyde Park. 148 -2C: Fine. HMJr: Okay? C: Fine. What time are you leaving? HMJr: Well, you better tell him three o'clock. C: All right, fine. HMJr: See? C: Fine. I'11 tell him. TREASURY DEPARTMENT 149 INTER OFFICE COMMUNICATION DATE TO FROM Secretary Morgenthau September 3, 1942 Mr. Cairns The Executive Order creates an officer to be known as the Economic Stabilization Administrator. That officer will be a Special Assistant to the President and will be in the Office for Emergency Management. There is also created an Economic Stabilization Board to advise the Administrator. You will be a member of that Board. The Administrator will have complete control of policy in connection with the general economy of the country, including purchasing power, profits, prices, wages, rationing, cost of living, saving, movement of labor, private credit, subsidies, and related matter. The Order provides that until otherwise determined by the Administrator all wage rates shall be frozen, except that adjustments may be made to meet rising costs of living, to eliminate sub-standards of living, to correct serious inequalities, and to make adjustments 150 -2for increased productivity of workers. Increases in salaries above $7500 are frozen even tighter. The Administrator is given control over the fixing of prices and allocation of agricultural commodities, the prices not to be fixed below parity. The Administrator may order any department or agency of the Government to exercise any powers which it has in order to carry out the orders of the Administrator with respect to wages and agricultural commodity prices and allocations. HC 151 September 3, 1942 Reading copy of the Secretary's statement before the Senate Finance Committee, meeting in Executive Session, when he proposed the Spendings Tax. 152 I have come before you today with a program to raise substantial additional sums to finance the war effort. I intend to leave the details of the presentation to Mr. Paul and his associates and to limit myself to emphasizing the gravity of the situation as I see it and the imperative need for legislation along the lines we are suggesting. Up to this point our huge war expenditures have been financed in an orderly way and with a minimum of inflationary effects. But the more successful the war production program becomes, the greater are the dimensions of the fiscal problem we have to face. 153 -2We have to plan for expenditures of eighty billion dollars in the present fiscal year, while the revenue in sight on the basis of the tax bill now before you 18 only approximately twenty-four billions. The Treasury has sought diligently and will continue to seek funds from those sources where borrowing will have the least inflationary effect, and we have done so with what I believe to be most gratifying results. We can foresee with confidence provision for the Government's fiscal needs for the remainder of this calendar year. 154 -3But I am here today to tell you frankly that I need your help in the form of legislation which will enable me to meet, with the same degree of confidence, the much greater problem of raising the necessary funds for next year. The legislation which we are proposing has a double purpose. The first purpose is to draw into the Treasury substantial additional funds out of the earnings and savings of the people. The second purpose is even more important. It is to reduce consumer spending directly by withdraw- ing funds otherwise available for expenditure, and to reduce it also indirectly by creating a strong tax incentive to saving. 155 -4The measures we propose are two: first, a tax on consumer spending which will reach into the lowest income groups above the level of bare subsistence income and will provide high penalty rates for luxury spending; second, a further lowering of the exemptions from the income tax applying to family income. The two proposals will reach into incomes aggregating some sixty-five billions of dollars and will draw into the Treasury an estimated six and one-half billion dollars otherwise available for consumer spending. 156 -5But of this total some four and a half billions, although raised as a tax, will be treated not as revenue but as a debt to the individuals from whom it was collected, to be repaid after the war. Revenue is not the sole purpose, nor even the primary purpose, of either of these proposals. Their main purpose is to restrict consumer spend- ing so that, as far as possible through fiscal means, we may avoid the perils of inflation in the huge financing program that we have ahead of us. 157 -6It can be expected that the new spending tax will reduce in many individual cases the amounts which workers can afford to set aside for War Bonds under voluntary payroll deduction plans. In the face of present conditions we can no longer afford to rely entirely upon voluntary lending. The new proposals are intended, therefore, to supplement the voluntary bond purchase program. It is my belief that the voluntary War Bond program has produced and will continue to pro- duce a great contribution to the nation's war effort. This is due to the unselfish service that hundreds of thousands of men and women throughout the country have given to it. 158 -7They deserve the thanks of the nation for the magnificent work they have done, are doing, and will, I hope, go on doing, in encouraging the American people to put their dollars to work for their country. The voluntary War Bond program will, of course, be continued. Our present and urgent problem is to borrow the great amounts that will be needed to finance the war effort in ways that will not contribute to inflation. Inflationary pressure is created by consumer demand exceeding the supply of goods available. The Treasury 18 seeking in these pro- posals to attack the problem at its roots and to attack it drastically. 159 -8The control of prices is of course not exclusively a fiscal problem. But with full allowance for all that can be done through price regulation, rationing and other devices to con- trol supply, I think that we, who are jointly responsible for tax policy and legislation, shall be doing very much less than our full duty 1f we do not deal with the problem as effectively as possible in the fiscal field. What I have presented is a method -- and the best method the Treasury has been able to devise -- for accomplishing this result. 160 -9If the proposals we make seem drastic, I should like to say with all possible emphasis that I believe nothing less drastic will accomplish the results we must have. This is no time for half-way measures. with the fullest respect for the Committee on Finance, but with a strong sense of our joint responsibility in these critical times, I do not merely recommend bold action along these lines; I request it and I urge it most seriously, and with the profound conviction that it must be done. 161 Harold Graves September 3. 1942 Secretary Morgenthau I think you should send a telegram of my statement in full to the forty-eight State Administrators. I would send it in the form of a day letter and would file it at ten-thirty this morning. Sent 9/3/42 ANDARD FORM No. 14 COPY FROM Mr. Graves Office - Off. of Sec. IMPROVED BY THE PRESIDENT MARCH 10, 1926 162 BUREAU TELEGRAM CHG. APPROPRIATION OFFICIAL BUSINESS GOVERNMENT RATES Expenses of Loans - War Savings Staff. 10-1730 (Following DAY LETTER to go to all State Administrators of September 3, 1942 War Savings Staff. ) Following is full text of Secretary's statement this morning before Senate Finance Committee: Quote. (See attached copy of Secretary's statements.) Unquote. Please note specially that there is no intention of superseding or abandoning any aspect of voluntary plan for purchase of War Bonds. Stop. While proposal for new taxes if adopted will undoubtedly tend to reduce bond sales, the effect will be to increase rather than reduce the need for promotion efforts by War Savings Staff. Stop. Furthermore, adoption of these taxes is by no means certain, and if adopted they will in no case be effective before January 1 and possibly not until later. Stop. At an early date we intend to have conference of War Savings Staff representatives from all States to discuss problems growing out of pending tax proposals, and in meantime we hope that there will be no abandonment of your efforts in any direction. Stop. Please acknowledge by letter. Stop. Regards. HAROLD N. GRAVES Assistant to the Secretary. 163 Statement of Secretary Morgenthau before the Senate Finance Committee, Thursday, September 3, 1942. I have come before you today with a program to raise substantial additional sums to finance the war effort. I intend to leave the details of the presentation to Mr. Paul and his associates and to limit myself to emphasizing the gravity of the situation as I see it and the imperative need for legislation along the lines we are suggesting. Up to this point our huge war expenditures have been financed in an orderly way and with a minimum of inflationary effects. But the more successful the war production program becomes, the greater are the dimensions of the fiscal problem we have to face. We have to plan for expenditures of $80 billion in the present fiscal year, while the revenue in sight on the basis of the tax bill now before you is only approximately 24 billions. The Treasury has diligently sought and will continue to seek funds from those sources where borrowing will have the least inflationary effect, 33-9 164 -2and we have done so with what I believe to be most gratifying results. We can foresee with confidence provision for the Government's fiscal needs for the remainder of this calendar year. But I am here today to tell you frankly that I need your help in the form of legislation which will enable me to meet, with the same degree of confidence, the much greater problem of raising the necessary funds for next year. The legislation which we are proposing has a double purpose. The first purpose is to draw into the Treasury substantial additional- funds out of the earnings and savings of the people. The second purpose is even more important. It is to reduce consumer spending directly by withdrawing funds otherwise available for expenditure, and to reduce it also indirectly by creating a strong tax incentive to saving. The measures we propose are two: first, a tax on consumer spending which will reach into the lowest income groups above the level of bare subsistence 165 -3income and will provide high penalty rates for luxury spending; second, a further lowering of the exemptions from the income tax applying to family income. The two proposals will reach into incomes aggre- gating some 65 billions of dollars and will draw into the Treasury an estimated six and a half billion dollars otherwise available for consumer spending. But of this total some four and a half billions, although raised as a tax, will be treated not as revenue but as a debt to the individuals from whom it was collected, to be repaid after the war. Revenue is not the sole purpose, nor even the primary purpose, of either of these proposals. Their main purpose is to restrict consumer spending so that, as far as possible through fiscal means, we may avoid is the perils of inflation in the huge financing program that we have ahead of us: It can be expected that the new spending tax will reduce in many individual cases the amounts which workers can afford to set aside for War Bonds under voluntary payroll deduction plans. In the face of 166 -4present conditions we can no longer afford to rely entirely upon voluntary lending. The new proposals are intended, therefore, to supplement the voluntary bond purchase program. It is my belief that the voluntary War Bond program has produced and will continue to produce a great contribution to the nation's war effort. This is due to the unselfish service that hundreds of thousands of men and women throughout the country have given to it. They deserve the thanks of the nation for the magnificent work they have done, are doing, and will, I hope, go on doing, in encouraging the American people to put their dollars to work for their country. The voluntary War Bond program will, of course, be continued. Our present and urgent problem is to borrow the great amounts that will be needed to finance the war effort in ways that will not contribute to inflation. Inflationary pressure is created by consumer demand exceeding the supply of goods available. The Treasury is seeking in these proposals to attack the problem at its roots and to attack it drastically. 167 -5The control of prices is of course not exclusively a fiscal problem. But with full allowance for all that can be done through price regulation, rationing and other devices to control supply, I think that we, who are jointly responsible for tax policy and legislation, shall be doing very much less than our full duty if we do not deal with the problem as effectively as possible in the fiscal field. What I have presented is a method -- and the best method the Treasury has been able to devise -- for accomplishing this result. If the proposals we make seem drastic, I should like to say with all possible emphasis that I believe nothing less drastic will accomplish the results we must have. This is no time for half-way measures. With the fullest respect for the Committee on Finance, but with a strong sense of our joint responsibility in these critical times, I do not merely recommend bold action along these lines; I request it and I urge it most seriously, and with the profound conviction that it must be done. 168 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE TO FROM Mrs. Klotz September 3, 1942 Secretary Morgenthau I would like to send a copy of my statement and of Paul's statement to the big group around town - the President, the Vice President, the Cabinet, and the heads of all independent agencies. A letter should go to the President, the Vice President, and the members of the Cabinet. To the rest, just attach my card. This is to be done before I go on the Hill. I'll sign them. Certainly the one to the President I want to be done before I go on the Hill. This is being done- 169 September 3, 1942 My dear Mr. President: I am sending you herewith e copy of the statement I am making today before the Senate Finance Committee proposing a spendings tax. I am also enclosing a copy of Mr. Randolph Paul's statement. Yours sincerely, (Signed) H. Morgenthau, Jr. The President, The White House. Del. by SS Agent 9/3/42 at 10:25 File in Diary 170 September 3, 1942 My dear Henry: I am sending you herewith a copy of the statement I am making today before the Senate Finance Committee proposing a spendings tax. I am also enclosing a copy of Mr. Randolph Paul's statement. Yours sincerely, (Signed) Henry Hon. Henry A. Wallace, The Vice President. By Hand (Short) 9/3/42 10:30 a.m. 171 September 3, 1942 My dear Cordell: I am sending you herewith a copy of the statement I am making today before the Senate Finance Committee proposing a spendings tax. I - also enclosing a copy of Mr. Randolph Paul's statement. Yours sincerely, (Signed) Henry Hon. Cordell Hull, Cecretary of State. By Hand (Veach) 9/3/42 10:30 a.m. 172 September 3, 1942 My dear Henry: I am sending you herewith a copy of the statement I am making today before the Senate Finance Committee proposing a spendings tax. I am also enclosing a copy of Mr. Randolph Paul's statement. Yours sincerely, (Signed) Henry Hon. Henry L. Stimson, Secretary of War. By Hand (Veach) 9/3/42 10:30 a.m. 173 September 8, 1942 My dear Frank: I am sending you herewith a copy of the statement I am making today before the Senate Finance Committee proposing a spendings tax. I am also enclosing a copy of Mr. Randolph Paul's statement. Yours sincerely, (Signed) Henry Hon. Frank Knox, Secretary of the Navy. By Hand (Veach) 9/3/42 10:30 a.m. 174 September 3, 1942 My dear Harold: I am sending you herewith a copy of the statement I am making today before the Senate Finance Committee proposing a spendings tax. I also am enclosing a copy of Mr. Randolph Paul's statement. Sincerely yours, (Signed) Henry Honorable Harold L. Ickes, Secretary of the Interior, Washington, D.C. By Hand (Veach) 9/3/42 10:30 a.m. 175 September 8, 1942 My dear Frank: I am sending you herewith a copy of the statement I am making today before the Senate Finance Committee proposing a spendings tax. I also am enclosing a copy of Mr. Randolph Paul's statement. Sincerely yours, (Signed) Henry Honorable Frank C. Walker, The Postmaster General, Washington, D.C. By Hand (Short) 9/3/42 10:30 a.m. 176 September 3, 1942 My dear Claude: I am sending you herewith a copy of the statement I am making today before the Senate Finance Committee proposing a spendings tax. I also an enclosing a copy of Mr. Randolph Paul's statement. Sincerely yours, (Signed) Henry Honorable Claude R. Wickard, Secretary of Agriculture, Washington, D.C. By Hand (Short) 9/3/42 10:30 a.m. 177 September 3, 1942 My dear Francis: I am sending you herewith a copy of the statement I am making today before the Senate Finance Committee proposing a spendings tax. I also am enclosing a copy of Mr. Randolph Paul's statement. Sincerely yours, (Signed) Henry Honorable Franois Biddle, Attorney General of the United States, Washington, D.C. By Hand (Short) 9/3/42 10:30 a.m. 178 September 3, 1942 My dear Frances: I am sending you herewith a copy of the statement I am making today before the Senate Finance Committee proposing a spendings tax. I also am enclosing a copy of Mr. Randolph Paul's statement. Sincerely yours, (Signed) Henry Honorable Frances Perkins, Secretary of Labor, Washington, D.C. By Hand (Short) 9/3/42 10:30 a.m. 179 September 3, 1942 My dear Jesse: I am sending you herewith a copy of the statement I am making today before the Senate Finance Committee proposing a spendings tax. I also an enclosing a copy of Mr. Randolph Paul's statement. Sincerely yours, (Signed) Henry Honorable Jesse Jones, Secretary of Commerce, Washington, D.C. By Hand (Short) 9/3/42 10:30 a.m. 180 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE TO FROM Secretary Morgenthau September 3, 1942 Mr. Paul You will be interested in the attached comment by Senator Walsh on the Treasury's proposal on spendings tax. RSP. 181 September 3, 1942 C 0 P Y STATEMENT OF SENATOR WALSH The Treasury's proposal is entitled to careful study and should not be rejected because it is a new and untried Tax Plan. Aside from the rates which may necessitate some revision downward the Plan has the merit of effectively combating inflation, checking spending, and would provide a large increase in the Federal Revenue, which is absolutely neces- sary if the Government finances are to be kept in a sound basis during the war emergency. 182 THE SECRETARY OF STATE WASHINGTON September 3, 1942 Dear Henry: I wish to thank you for your letter of September third enclosing a statement which you are making today before the Senate Finance Committee proposing a spending tax and also a copy of Mr. Randolph Paul's statement, both of which I look forward to examining with interest. With best wishes, Sincerely yours, The Honorable Henry Morgenthau, Jr., Secretary of the Treasury. 183 THE SECRETARY OF THE INTERIOR WASHINGTON C OFY SECURITY September 3, 1942. Dear Henry: Thank you for sending me a copy of your statement prepared to be made before the Senate Finance Committee today. So far as I have been able to judge this proposal has been sound and I hope for you better luck than you have had to date. Sincerely yours, Secretary of the Interior Hon. Henry Morgenthau, Jr., The Secretary of the Treasury, Washington, D.C. 184 SWIHART & CO NASSAU ST., N.Y.C. CO. from the AMERICAN BANKER of Sept. 3. 1948 SPEAKING OF GOVERNMENTS By SEYMOUR PERKINS, JR. If the rest of the branches of the Government could effect a stabilization of prices such as the Treasury Department has made in the Government market, our fears of inflation would be quickly dissipated. However, the regulation which has tax, versus Treasury 21/sa, 53/49, on a clamped down the Treasury market no 1.36% basis after the 21% surtax. If the doubt has been lot easier to accomplish taxable bonda are stopped at par the than is other felds Everyone ap- tax-exempt bonds cannot go down too far without making the present yield pears satisfied with the 21% long-term rate with lower coupons for the shorter dated maturities. While some may have spread even more in favor of the 21/20, 1958/49. wanted higher yields, they have the It also argued that banks will have wisdom of the Treasury's ideas. Insti- to buy so many Governments that their tutions have realised that Interest rates earnings will be increased to a point bad to be fixed, or the war financing where they will have to pay taxes anywould stall. way. For reasons of stabilization it is true Accordingly, where many institutions were nervous about entering subscrip- tions for new cash issues when the Treasury used to give away from one to three points with allotments never the large institutions may somewhat cur- tail their move from taxable securities to tax-exempta. Therefore, at times, the market supply-those bonds coming amounting to more than 15% Now you from tax-exempt institutions may more cents $1,000 certificate exempts, the visible supply which is now have the same institutions putting in for than sufficient to take care of the delarger commitments with premiums mand for tax-free bonds. This is ap. amounting to only about 100-4/32nda parently taking place now. However, and allotments running up to 523. In feel that if the current yield spread any more favorable to the taxone case it only a premium of eight The Treasury and the Federal Reserve Board have built up much confidence overhanging the market will quickly vanish in the Government market that even the layman not only is beginning to under stand the necessity for stabilization of interest rates, but also the power our Government has to control them. Furthermore, we believe that as soon as the new tax bill is settled with the resulting higher taxes, there will be a scramble to buy tax-exempt securities. Capital Ration Tax-Exempt Bonds As the banks take on more Govern. ments for war financing, the old capital For the past few weeks tax-exempt bonds have been in supply demand for the taxable One reason is that many Institutions which have tax problems are waiting for the new Treasury financing. But there has also been another theory circulating among Government bond circles which is extremely interesting. The idea has been advanced that banks have all the tax-exempt bonds which they want and have no extra cash with which to buy more. This condition will continue to ratio of 1 to 10 is becoming more and outmoded However, it has been pointed out previously in these columns that the ratio might well be 1 to 20 if all the additions to a bank's portfolio over the 1 to 10 ratio were confined to Treasury bills, certificates, and notes maturing within two years. Preston Delano, Comptroller of the Currency. will give his point of view on the question in an article appearing in the "United States Investor" of exist for the duration, because the Fed- September 5. He points out that the nature and quality of the assets rather eral Reserve will only free enough re quired reserves to take up the fixed ratio determines the proafforded by the capital structure. does not mean that he would a benign eye upon under- issues: vis, the recent cut in require ments of 2% New York and Chicago which was just about enough to tide these two districts the last certificate issue and subsequent loan calls The above argument true in so fax goes. There who had sought as many bonds they were able under previous reserve requirements, but funds released from time to time, reason to believe that capitalised Institutions. He feels, howthat banks should continue to buy Government obligations to help the war though their capital ratio is than 1 to 10. That means the increases should be in short-term obligations. Here we see the Federal Reserve Board, the A. B. A. and the Comp- troller getting together on the future will continue to tax-exempt holdings. war financing. In brief, under 10-year We favor tax-exempt for the obvious reason being maturities for banks. per annum. That by 1947 ap- Insurance companies bought six million Governments the week of August retired at the rate billion proximately $16% billion of the present That weekly Treasury tax-exempt securities be refunded paid or now favor billion outstanding. of in in the 45% bills continuing to attract sisable subscriptions, $872 million That the market is doing nothing and will not until the next offering taxes year Tis Said: of the That certificate offering would probably be most popular now, but a re- tax-exempt bond would appear duction in the coupon would not help in 21/6. 72/67, at 101-5/32, to cent able. This comparison between after the proposed 45% tax, getting country distribution as the re%% did That New York City has lost about $97 million notes, 65/50, at 110-3/32, to yield 1.643, after mostly 1943 and 1944 maturities, since the proposed 21% surtax. Another example: Treasury 2s. 1951/- 49, yield 1.083. after the proposed 45% the week of July 29. But during that same time they have added $135 million bills and 8276 certificates 185 SEP 3 1942 Dear Mr. Parcell: Thank you for your letter of August 31, 1942, regarding the proposed rule governing certain security transactions. It was unfortunate that your communication, dated July 29, 1942, addressed to the securities industry. was received by them on or about the date they were notified of an impending Treasury offering. The request for COMments from the industry by August 12, 1942, contained in your communication, had the effect of retarding the sales effort of the Victory Fund Committee in connection with the recent offering of registered 24% bonds. To avoid an occurrence of similar incidents in the future, I think it advisable that the Commission determine the Treasury financing schedule before sending out any communication which might interfere with the program. Sincerely yours, (Signed) H. Morgenthau, Jr. Mr. Ganson Purcell, Chairman. Securities and Exchange Commission. Philadelphia, Pennsylvania. File returned to Buffington's office direct Photostat file in Diary GB:dwb 9/3/42 SECURITIES AND EXCHANGE COMMISSION WASHINGTON OFFICE OF THE CHAIRMAN August C1, 1942. The Honorable Henry Morgentnau, Jr. Secretary of the Treasury Washington, D. C. My dear er. Secretary: Recently officials of the Treasury Department brought had communicated with the Department relative to a rule recently suggested by the Commission's staff for adoption and circulated for commont, a copy of which is enclosed. No were advised that these dealers stated at the time that their efforts to sell United States Covernment sonds in conjunction with the "Victory Fund" program were being seriously Campered because of the necessity for considering this proposed rule. I discussed these reports at the time wi th my collcagues on the Commission when we considered the suggestion that we communicate to certain Coaler organizations our desire not to interfere in any way with the current financing program of the Treasury. We, OI course, have every desire to avoid to our attention the Fact that certain dealers in securities interierence wi th any of the Government's financing programs, particularly during time o1 war, but because of the circumstances, we did not feel that it was necessary to make such an assertion to the groups indicated and so advised your representatives. 1 stated at the time, however, that I would address a full communication of our views and the background of the proposed rulc to you so that you night have it upon your return to Washington. 1 regret to say that other pressing problems have prevented me from writing this letter sobner. This suggested rule was originally mailed to members of the securities industry and to other interested persons on July 29, 1942. To date WC have received a substantial number of comments, many oi which were in opposition to the proposed rule, but in only a very few cases has there been any mention whatsoever of possible interference wit h the sale of Government bonds. -2The Commission's staff proposed title rule as the result of its many years of experience in policing the 30-called over-the-counter markets. the Commission itself has taken no position either for or against the rule and will dispose of the proposal solcly on its Acrits. In line with its usual practice it solicited suggestions and comments. When the Securities exchange Act of 1934 was enacted its principal emphasis was on regulation of national-securities exchanges, their members, and their trading practices. Since at that time little was known concerning the over-the-counter market, Congress entrusted to the Commission the task of informing itself concerning the practices of that market and imposed upon it the duty of adopting rules which would give the public similar protection to that surrounding exchange trading. The Commission, since its formation, has studied the over-tho-counter market continuously. From time to time it has proposed amendments to the Securities Exchange Act to facilitate the regulation of that market; those amendments have been adopted by Congress. The Commission has also pro- mulgated certain rules and regulations under its general rulemaking powers which were designed to protect investors from loss due to the employment of fraudulent, manipulative or deceptive devices by over-tho-counter dealers in the purchase and sale of securities. The Commission has become increasingly aware of a prac- tice which is growing in the over-the-counter market for dealers to buy from or sell to their customers at prices bearing no reasonable relationship to prevailing market prices. This practice is indulmed in by many over-the-counter dealers. not only in connection wi th the purchase and sale of securities which are traded exclusively in the over-the-counter market, but also in connection with transactions in securities which are listed on national securities exchanges. As a result of the discovery of this practice, the Commission in the past two years has instituted many proceedings against dealers for the purpose OI revoking their registrations and tous denying them the right to engage in the securities business by the use of the facilitics o.' Interstate commerce and the mails. It is strongly urged on the Commission that adequate protection of the public In matters of this kind requires the adoption of appropriate regulations by this Commission which will make availaolo to customers current information about market prices to enable them to make an informed and "intelligent judgment in each transaction O purchase and sale. The practice of buying and sellin at prices bearin no reasonable relationship to the prevails market, is believed to thrive during periods when persons NO are uninformed concerning security markets have in their possession extra sums of cash. Securities 'rauds Flourished in the .lus.1 perion of the last war. That reason nione, it is argued justifics the Commission in taking some action at Chis CAME to cralicate a practice which is growing to alarmin proportions. Where is substantial basis for the belief that thG-unscrupulous securitics dealers who are able to take a.vantage 01 Chier customers' ignorance of the prevailing market for the security .alt in, threaten the proper Tulfillment of the "ccasury's program For the sale of Government bones, including Chose bon S which are sold in small unnoninations. not only LLO they Interfore with the sale of new securities oeing offered by the Government, but they also switch persons w.o are already holders o. older Government issues out O. those Issues and into second-rade securities. For example, the Commiss.on has recently Instituted a proceeding against a dealer in which the charges are as Tollows: Two elaerly, uninformed Investors word persuaded by a dealer to scll a United States Government sona on the represents- tion that the dealer would invest the proceeds in a security which would provinc a better yielo an increase more rapidly in value. As a result of the dealer's effort, those two investors sold their bon and immediately purchased Tro the dealer certain cecond-grade bon S. Althoug:1 these bonds wore then offered in the Market at 17 1/4, the two trusting investors were charged 22 1/4 por bond, oy 10PC Chan JON above the quoted market price. In another recent case 0.10 Commission has proceeded against a dealer wherein it is charmed that 10 followed the practice of switching his customers from Government Son S to second-grade securities at prices materially mi dior- Shan tic provailing market. In this latter case SONO of the Government bonds which customers were persuaded to cell were savings bonds in denominations GS small as 75, will others were regular Government issues. These cases are by no means unique. As I have stated before, there is increasing eviuence that unless the Commission takes some affirmative sten to protect uninformed numbers of the public more and more of the excess cash held by in iviluals today will be taken from LACK by unscrupulous security dealers. In view of the foregoing, which lives but a thumb-nail sketch of the situation, I all sure that you vill agree that more assertions that consiucration or adoption of the proposed rule will have adverse effect upon the sale of Government bonds should no cause us to abandon ali efforts to arrive at a solution of the problem which confronts us. many of the objections being urred arainst the ausption of this rule are reminiscent of those made at the time of the passage of the Securities Act an t..c Securities exchance Act. .ou will recall that in Chosc Mays the cry wont up that the enactment of these statutes would Freeze tic capital Markets and thus prevent the fulfillmont of the President's recovery program. Certainly those who can Fine time to lovote tio:selves to perpetrating the kinds ol practices described above are in no position to complain that a consi opation of this proposed rule is an unwarranted Intrusion upon their time. I also wish to point out that the National Association of Securities Dealors, WITH a membership 01 over 2000 dealers, has now pencing before this Commission a proposed amenument to its by-laws Imposing a Minimum capital requirement as a qualification .or membership. nce the Association urges that the protection of C I C public and of the industry itself demands C:1C approval of this rule by this Commission, it is obvious Clat that Association finds nothing in the present scene which prevents Lakin the necessary time to aiford adequate protection For investors. .oreover, the Commission has not yet adopted this rule; it is morely engaged in soliciting constructive criticism which will facilitate the Graftin of 9 rulo designed to cradicate cvil practices with the least possiblo disruption to legitimate over-t:e-counter transactions. The rule is still in the discussion stare 210 in an effort to obtain the views of all interested persons, Line Commission has extended the time l'or filing SUCA CO ments to September 15, 19.2. I trust that you will arree that 6.10 Uno expended in such di scussions should not interfore in U.TC sligitest with the marketing of Government bones. Very sincerely yours, arram Pmall Ganson Purcell Chairman Enclosure. 190 July 29, 1942 SECURITIES AND EXCHANGE COMMISSION Trading and Exchange Division Proposed RULE x-isci-io DISCLOSURE OF MARKET PRICE (a) General Provisions. - The term "manipulative, deceptive, or other fraudulent device or contrivance" and the term "fraudulent, deceptive, or manipulative act or practice" as used in Sections 15 (c) (1) and 15 (c) (2), respectively, of the Act are hereby defined to include any act of a dealer designed to effect a sale to or a purchase from a customer, by such dealer, of any security, unless such dealer, at or before the completion of each such transaction, discloses to such customer in writing (1) (A) the best independent bid and asked prices for the security at the time of the sale or purchase which the dealer is able to ascertain upon the exercise of reasonable diligence; or (B) the best independent bid or asked price at such time, if the dealer, after the exercise of reasonable diligence, is unable to ascertain both a bid and an asked price; or (c) if neither such a bid nor such an asked price can be obtained after the exercise of reasonable diligence, the price at which the dealer was able to acquire the security in that bone fide transaction which is closest in point of time to the proposed sale to or purchase from the customer, but which is not more remote than sixty days prior to such proposed sale or purchase, provided, however, that if the dealer has had no such transaction he shall make the disclosure required by paragraph (2) hereof; and (2) if the disclosure is made pursuant to (B) or (c) of paragraph (1) hereof, the fact that after the exercise of reasonable diligence he was unable to ascertain a current independent bid or asked price, or both, as the case may be. (b) Nothing in this rule shall be understood as preventing any dealer from stating in the written notice required by paragraph (a) hereof (1) that the bid and asked prices so disclosed apply to an amount of the security less than that sold to or purchased from the customer, if such be the fact; (2) that the information pertaining to the bid and asked prices disclosed to the customer has been obtained from sources believed to be reliable, if such be the fact, but that he is not able to state that a transaction could be effected at the disclosed price or could not be effected at a better price; and (3) any other fact, not inconsistent with the purposes of this rule, which the dealer may wish to disclose. (c) Records To Be Kept. - Every dealer who makes a disclosure pursuant to paragraph (a) (1) of this rule shall make and preserve a record of (1) the -2 - 191 information so disclosed; (2) the date and time as of which such bid and asked prices were current; (3) the sources of the information disclosed: and (4) the date and time such information was obtained. (d) Exemptions. - This rule shall not apply to the following: (1) any transaction in a security during the thirty-day period following the date on which the security is first publicly offered, provided that a registration statement is in effect as to such security under the Securi- ties Act of 1933, as amended, and provided further that the dealer, in connection with such transaction, gives to the customer the prospectus required by that Act; (2) any transaction effected on a national securities exchange; (3) any transaction which is a part of a secondary distribution ap- proved by a national securities exchange and which is effected during the course of such distribution; and (4) any transaction in an exempted security, provided, however, that no transaction in an exempted security which is a direct obligation of or an obligation guaranteed as to principal or interest by a State or any political subdivision thereof or any agency or instrumentality of a State or any political subdivision thereof or any municipal corporate instrumentality of one or more States shall be exempt from the provisions of this rule unless such transaction occurs in the course of a public offering of such security by the issuer thereof. 423067 192 4 QUESTION How do you propose to finance the deficit without inflation? ANSWER 1. If we are to avoid inflation, the deficit must be financed out of savings. 2. Savings of individuals during the second quarter of 1942 were at the annual rate of over $24 billions, according to the Department of Commerce. This is the largest in the history of the country by a wide margin, more than twice what they were a year ago. Savings of corporations, plus the amount of their depreciation and depletion reserves, will add substantially to this figure. 3. The increase in savings has been created largely by the restrictions required by the war effort. As our war effort increases, savings and taxes, or both, must continue to rise in order to permit the deficit to be financed in a noninflationary way. This requires new restrictions on consumer spending. It is precisely the necessity for such additional restrictions which brings me here today. 4. It 18 impossible to say in advance what will be the exact securities by which these funds will be channeled into the Treasury and who will be the immediate purchasers of the securities. To the extent that individuals choose to save by buying War bonds, War bond sales will be increased. To the extent that they choose to repay debts held by banks, or to accumulate savings in the form of bank accounts, insurance, etc., Government securities will be sold to banks, insurance companies, and other institutions. In any case, however, the sales will be noninflationary as long as they are backed by an equivalent amount of bona fide savings. CONFIDENTIAL 193 UNITED STATES SAVINGS BONDS - TOTAL Comparison of September sales to date with sales during the same number of business days in August and July 1942 (At issue price in thousands of dollars) August : : : sales September July : Date Cumulative sales by business days : : September : daily September as :percent of August : : September 1942 $ 19,162 $ 19,162 $ 26,267 $ 28,418 24,558 43,720 65,032 52,687 1 2 Office of the Secretary of the Treasury, Division of Research and Statistics. 73.0% 67.2 September 3, 1942. Source: All figures are deposits with the Treasurer of the United States on account of proceeds of sales of United States savings bonds. Note: Figures have been rounded to nearest thousand and will not necessarily add to totals. CONFIDENTIAL 194 UNITED STATES SAVINGS BONDS - SERIES E Comparison of September sales to date with sales during the same number of business days in August and July 1942 (At issue price in thousands of dollars) September August : : : sales Cumulative sales by business days : September : daily July : : : : Date September as :percent of August tember 1942 $ 11,634 $ 11,634 $ 14,044 $ 15,821 14,748 26,381 36,222 30,701 1 2 ffice of the Secretary of the Treasury, Division of Research and Statistics. 82.8% 72.8 September 3, 1942. ource: All figures are deposits with the Treasurer of the United States on account of proceeds of sales of United States savings bonds. Note: Figures have been rounded to nearest thousand and will not necessarily add to totals. CONFIDENTIAL 195 UNITED STATES SAVINGS BONDS - SERIES F AND G COMBINED Comparison of September sales to date with sales during the same number of business days in August and July 1942 (At issue price in thousands of dollars) : September : September : : : sales Cumulative sales by business days August : : daily July : : Date September as :percent of August : ptember 1942 $ 7,528 $ 7,528 $ 12,222 $ 12,597 9,811 17,339 28,810 21,986 1 2 fice of the Secretary of the Treasury, Division of Research and Statistics. 61.6% 60.2 September 3. 1942. ource: All figures are deposits with the Treasurer of the United States on account of proceeds of sales of United States savings bonds. Note: Figures have been rounded to nearest thousand and will not necessarily add to totals. 196 CONFIDENTIAL Sales of United States savings bonds September 1-2, 1942 Compared with sales quota for same period (At issue price in millions of dollars) : : 9.8 17.3 16.6 26.4 35.6 42.2 108.7% 104.2 Quota, to Sales Sept. 1 : Sept. 1 : to date to date date $ 19.2 $ 19.2 $ 21.8 24.6 43.7 51.1 81.9 116.6 : : : $ 6.9 Daily : $ 7.5 : $ 7.5 : quota : date : as % of : to Actual sales : : : : 34.5 55.5 81.0 98.3 date : Sept. 1 : to date Total : : 26.4 77.9% 76.5 : $ 14.9 : $ 11.6 : : : 14.7 : quota to : $ 11.6 date date Daily : Sales : Daily : as % of to to Sept. 1 Quota, : : Sept. 1 : Sept. 1 : to date Date Series F and G Actual sales : Sales : : Actual sales : Quota, : Series E as % of quota 88.1% 85.5 140.5 1 2 3 la 5 8 9 10 11 12 14 15 16 17 18 19 21 22 23 24 25 26 28 29 30 143.3 168.8 193.4 220.6 239.2 58.1 67.8 76.7 84.4 90.1 201.4 236.6 270.1 305.0 329.3 272.7 288.2 307.6 327.2 350.1 365.4 99.7 105.0 112.1 119.2 125.7 130.5 372.4 393.2 419.7 446.4 475.8 495.9 399.6 415.7 436.2 457.1 481.4 497.4 141.0 147.0 155.2 163.4 171.0 176.6 540.6 562.7 591.4 620.5 652.4 674.0 532.7 549.2 570.0 188.7 195.5 205.0 721.4 744.7 775.0 September 3. 1942. Office of the Secretary of the Treasury, Division of Research and Statistics. Source: Actual sales figures are deposits with the Treasurer of the United States on account of proceeds of sales of United States savings bonds. Figures have been rounded and will not necessarily add to totals. Note: Quota takes into account both the daily trend during the week and the monthly trend during the month. 197 Sensing margenilian. my dear m. 197 g must Thank you for the in desearding may in which you agreed to m. Jackson's request y his m also it jassible for him li ex Hair my situation to the B o and of Trusting y the university 21. has hem a same experience to mach mite ms. man gen than and also is have an opfortunity to know you. samsune you that I will do my heat to make a success of reagensi hillin which you have given is me. must cardively Seftinue 3'42. is ann't what 198 TREASURY DEPARTMENT PROCUREMENT DIVISION OFFICE OF THE DIRECTOR WASHINGTON September 3, 1942 MEMORANDUM TO THE SECRETARY: There is attached Treasury Department Requisition No. 11, for your signature. The requisition will be used to seize 100 Ford Truck Chassis to be utilized in filling Lend Lease requirements. The Chairman of the War Production Board approved the allocation of these truck chassis August 29, 1942. clifton E. Director of Procurement gitter Enclosure FE PORVICTORY BUY BILL 199 REQUISITION BY THE UNITED STATES OF AMERICA UNDER ACT OF OCTOBER 10, 1940, AS AMENDED Treasury Department Req. No. 11 DA-TPS-No. TO: Mr. John W. Knox, Procurement Officer, San Francisco, California In the interest of National Defense it has been determined necessary that the articles or materials listed below be requisitioned and taken over for the use or operation by the United States or in its interest: 100 Ford Truck Chassis, described as follows: Cases - Nos. 7077/7103 Nos. 1/8 - 26/31 - Total 27 cases 34/57 - 76/99 - 100/124 151/169 - 175/176 - 226/232 Nos. Nos. Nos. Nos. 25 crates 201/225 251/254 011 255/256 Enamel 170/174 Closed cabs on skids Nos. 1117 - 1121 - Nos. 21769/21773 1139 - 1140 14851/14920 - 21751/ 21768 Wheels & Auto Parts No. No. No. 1126 1138 Nos. Nos. 276 - 277 278 - 279 No. 7161 115 cases 177 All the above are marked Ford Manila or M.T.S. Manila. 4 drums 2 pails 5 unboxed 9 cases 88 bundles 1 crate 1 carton 1 case 2 bundles 2 cases 1 case 284 Total 200 -2- You are authorised and directed to take possession of above described articles or materials and to furnish receipt for the same in the name of the United States, and to inform the Director of Procurement, Procurement Division, Treasury Department, 7th and D Streets, S. W., Washington, D. c. of your action in execution of this requisition. All persons having any claim to or interest in any of the above-described articles or materials are directed to give notice of their claims at once to THE SECRETARY OF THE TREASURY, Washington, D. C. who will prescribe the form and manner of filing such claims. Washington, D. C. Sept 10 , 1942 (sgd) Secretary of the Treasury. 201 September 3, 1942. MEMORANDUM TO: Secretary Morgenthau FROM: Mr. Gaston With reference to the attached letter from General Strong: (1) We are ordering an immediate investigation of the incident at Tampa on August 15. (2) We have no power under the law to grant complete freedom from Customs examination to anyone except those persons for whom a request for free entry is made by the State Department and their designation as diplomats or distinguished visitors. We can, however, instruct Col- lectors of Customs to treat members of the British armed forces with all possible courtesy and to facilitate and expedite their examination, reducing it as closely as possible to a formality. This is, I believe, the general practice at all our ports, but we will renew and emphasize these instructions. (3) We cannot speak positively about the Tampa inci- dent until we get a report, but I cannot conceive that Customs officers there would carry on so rigorous an examination as is indicated except upon some request or indication from the other investigative services that a rigorous examination for their purposes was desired. This sometimes happens, but I don't know of any instance in which it has happened in the case of soldiers of a friendly country in uniform. (4) We will get out special instructions for the most considerate treatment possible of rescued seamen and others in distress, but we have not heretofore received any reports indicating any lack of consideration for persons in this category. CONFIDENTIAL 202 WAR DEPARTMENT WAR DEPARTMENT GENERAL STAFF MILITARY INTELLIGENCE DIVISION as WASHINGTON September 3, 1942. The Honorable, The Secretary of the Treasury. My dear Mr. Secretary: Reference our telephone conversation of yesterday, I am in receipt of a report which indicates a most regrettable procedure in handling a British ship which docked at Tampa, Florida, on August 15. On board was personnel of the British Navy, Army, Air Force, and some 40 odd recruits for the Canadian Army, which personnel arrived for transshipment or transiting the United States for destinations in the British Empire. In addition there were approximately 60 survivors of the British Mercantile Marine whose ships had been torpedoed in the Caribbean. An R.F.A. Corporal, Patrick Kane, No. 536744, Fleet Air Arm from Trinidad, was promptly transferred to a Tampa hospital. The remaining military personnel was individually subjected to a thorough investigation lasting from half an hour to an hour by the Immigration Service, by the F.B.I. and, I am ashamed to say, by one or more members of the M.I.S., and largely on matters which, in my opinion, were immaterial if not stupid. Thereafter they were taken in hand by the Customs and, in some cases, completely stripped and searched in a most humiliating manner. The British Staff Captain, B.D.O. Jones, pointed out to the Customs officers concerned that he would accept responsibility for them as they were part of a draft officially advised from Washington and whose names he had on a list compiled by the D.E.M.S. Staff Officer in Trinidad. Captain Jones' appeals appeared to be of no avail, and unfortunately he did not have the background or the force on which to register an official protest. The Merchant Seamen, both officers and men, were subjected to the same examination and many were kept standing as much as 10 hours in the ship's alleyways, although many were still suffering from the effects of the torpedoing of their ships. One of these officers, the Captain of the S. S. WEIRBANK, was in a particularly PORVICTORY nervous condition but he was treated in exactly the same way as the Seamen. BUY I am informed that the British Vice Consul is sending in an official report on the matter to the British Embassy here. CONFIDENTIAL 203 CONFIDENTIAL In my opinion, the procedure followed at Tampa is not only a scandal and a disgrace but which, if repeated, is apt to cause resentment and ill feeling not only to the prejudice of our good relations with Great Britain, but also may seriously jeopardize our war effort. It certainly does not take a great effort of imagination to realize the howl that would go up in our press were American troops landing in England, or in Egypt, subjected to the same treatment on the part of the British authorities. I am very strongly of the opinion that any inspection or examination by Immigration, Customs, F.B.I., Military or Naval Authorities of members of the British Armed Services arriving at ports in the United States, either for transshipment or transiting the United States for destinations in the British Empire, is not only unnecessary but, under the circumstances, is highly undesirable. It does appear necessary, however, that such personnel be properly identified and vouched for by the British authorities. In consequence, I have arranged with the British Military Attache that, in the future, this office be notified of the prospective arrival of members of the British Armed Services in this country, and that the British authorities have a staff officer present at the Port of Debarkation to identify such personnel and to furnish such certificates covering their status as may be required by the departments of this Government concerned. Upon the receipt of such information in this office I shall be very glad to notify such officer in your department, as you may see fit to designate, in order that such personnel may be exempted from Customs examination. May I express the hope that you can find a way to issue such instructions to the personnel of your department that will accomplish the end desired. In regard to British Merchant Seamen who are survivors from torpedoings at sea and who arrive at a port in this country for transshipment to destinations in the British Empire, I hope that similar arrangements can be made as result of identification and certification by a British Consulor Officer. Very sincerely yours, GEO. V. STRONG, Major General, A. C. of S., G-2. CONFIDENTIAL 204 STRICTLY CONFIDENTIAL INDIA FOR THE FILE September 3, 1942 Mrs. Klots called me today and asked me to advise the State Department and the JDC of the decision of Mr. Paul relative to the request by the JDC for permission to authorise its Shanghai representative to borrow funds locally for relief purposes in Shanghai. I telephoned the JDC offices in New York. Mr. Hyman and Mr. Levitt were both out of the city on vacation and I spoke to Miss Morrissay, Assistant Treasurer, the only officer of the organisation available. I advised her of the decision not to authorise the transaction and told her that I would be glad to confirm the decision to Mr. Hyman or Mr. Levitt when they returned. I also telephoned Mr. James E. Henderson of Mr. Green's office in the State Department and advised him of the decision not to authorise this transaction. I asked him to notify Mr. Welles and Mr. Joseph Green accordingly, which he said he would do. JWPehleingt 9/3/42 Seey 205 SEP 3 1942 My dear Mr. I wish to refer to the agreement dated January 3. 1942, relative to the purchase of 602,000 fine every - of cold by the Secretary of the Treasury from the Government of the Union of Sevies Socialist Royabiles, against which advence of $80,000,000 was made ea January 5. 1948. I take pleasure in enclosing for your information two copies of the assay report of the United States Hims at Deaver, Colorado, giving as analysis of the gold which was deposited at Beaver on August 10. 1942 for the account of the Secretary of the Treasury. You will observe from the enclosed report that the shipment, after welling and upon assey. was determined to centain 160.691.139 fine tray our of gold and to have a value of $5,604,189.87. After the deduction of the assess of $14,221.27. representing the motting charge of $160.00 plas the 1/46 healthing change of $14,060.47. the not value of the gold was $5,609,968.60 This amount of gold has born applied by the Treasury against the - of gold agreed to to you chased by the Secretary of the treasury water the agreement of January 3. 1948. Sincerely yours, (Signed) H. Morgenthau, Jr. Secretary of the Treasury. His Brooklency Naxia Litvinoff, Ashassadar of the Union of Sevior Socialist Boyablies. Basleoures. Initialed: RH FD EMB HDW AFL 11:10:5/29/42 206 NOT TO BE RE-TRANSMITTED COPY NO. 13 BRITISH MOST SECRET U.S. SECRET OPTEL No. 303 EGYPT. 2nd. There was no material change in the general situation but the main enemy columns are reported to have withdrawn slightly to the South. In this area a large concentration of enemy M.T. was seen and harassed all day fro the air and by our troops from the South. OPTEL No. 304 Information received up to 7 A.M., 3rd September, 1942. 1. NAVAL Last night one of our motor torpedo boats raided a light house in the CHANNEL ISLANDS and took 7 prisoners. ATTACKS ON SHIPPING. From 29th August to 1st September inclusive 19 ships were reported torpedoed between 24th and 31st August. A Norwegian and Pana- manian ship in homebound convoy in North Westorn approaches. 3 U.S. ships in convoy off the Canadian coast. One British, 1 Norwogian and 2 Dutch ships in the WEST INDIES. A British and a Dutch tanker in convoy in the CARIBBEAN. A large U.S. tanker north of the AZORES. A British and a Dutch ship in homebound convoy southwest of CAPE FINISTERRE. 2 British ships in FRESTOWN area. A British ship in the INDIAN OCEAN and another off coast of NEW GUINEA. A British ship was also torpedoe in the MEDITERRANEAN but reached port in tow. A British ship WILD mined off LOWESTOFT and a Norwegian bombed off FALMOUTH, but both were beachod. 2. MILITARY RUSSIA. The Germans continue to make slow progress in their advance on STALINGRAD from the South West. In the CAUCASUS fierco fighting is in progress in the region of the KLUKHOR PASS in which considering the difficult torrain fairly large enomy forces are engaged: The German forces advancing through the other passes consist of small groups. The ap ronches to TUAPSE and NOVOROSSISK are being firmly hold. 3. AIR OPERATIONS WESTERN FRONT. 1st/2nd. SAARBRUCKEN. Nearly 90% of the bombore sont out attacked the objective. About 430 tono of H.E. and incondiaries were dropped in about equal proportion. H.E. included 54 bombs of 4,000 1bs. and 80 of 2,000 lbs. There was no haze. Flare dropping was accurate and helpful. Little opposition from enomy fightors, A.A. or soarchlights. Evidently n most successful attack. A Whitley obtained a direct hit on tanker at ST. NAZAIRE. 207 -2- 2nd. Single Mosquito bombed COLOGNE, ESSEN and OSNABRUCK and oil in- stallations near GHENT. Two F.W. 190's were shot down into the channel by 2 Spitfires. 2nd/3rd. 202 aircraft were sont out - KARLSRUHE 199, soamining 3. 8 aircraft are missing. Visibility over KARLSRUHE was good. 4 enomy aircraft fle over YORKSHIRE, one of them was destroyed by fighters off SCARBOROUGH and another crashed in ESSEX. EGYPT. 31st/lst. Our bombers attacked TOBRUK Harbour, landing ground near EL DABA and enomy M.T. in the Southorn sector. 1st. Although dust storms hampored operations our escorted light bombers flow a number of sorties against tanks and M.T. in the Southern sector. Beaufighters attacked eastbound M.T. between GAMBUT and SIDI BARRANI, many vohicles were destroyed or damaged. 10 enemy aircraft were destroyed by fighters and A.A. 5 were probably destroyed and 16 damaged. We lost 16 aircraft. BURMA. 29th. Allied bombors attacked LASHIO Town and aerodrome. 208 NOT TO BE RE-TRANSMITTED COPY NO. 13 BRITISH MOST SECRET U.S. SECRET OPTEL NO. 311 Following is supplementary resume of operational events covering period 27th August to 3rd September, 1942. 1. NAVAL NORTHERN WATERS. The Pocket Battleship ADMIRAL SCHEER is reported again in Northern Norwegian waters. It is possible that this ship has returned from & cruise in Arctic and North Russian waters and that it was this ship which carried out the bombardment on DICKSON ISLAND, KARA SEA on the 25th. The Battle Cruiser SCHARNHORST still in Baltic is considered now ready again for service. There was a heavy raid on ARCHANGEL on 31st. MEDITERRANEAN. There was considerable activity by both submarine and aircraft against enemy shipping during period 28th August to 3rd September in- clusive. 10 ships are claimed sunk or seriously hit and 4 others also damaged. An enemy destroyer is also claimed hit. A recent air reconnaissance showed the third LITTORIO Class Battleship at TARANTO. SUBMARINE WARFARE. U-boat attack was still directed against Atlantic convoys and shipping in the West Indies area. Two Atlantic convoys were attacked during week and 5 ships sunk. Provisional figures for the week ending 30th August - 20 ships sunk by submarine. Aircraft assistance despatched to two convoys attaked in the Atlantic proved notably effective. During the week ending 2nd September, there were 23 attacks on U-boats by aircraft and 19 by surface craft of which 3 by aircraft and 5 by surface craft are considered promising. FRANCE. 2 French merchant ships totalling about 12,000 tons reached CASABLANCA from NEW YORK on 27th. RUSSIA. In the Black Sea Russian Naval Aircraft have carried out a series of attacks on landing craft in enemy occupied ports and a force of Russian Cruisers is reported to have bombarded THEODOSIA on 27th. TRADE. Imports in convoy into the United Kingdom for the week ending 30th August were 670,000 tons including 166,000 tons of oil. 2. MILITARY EGYPT. After a period of comparative quiet fighting broke out on the morning of 31st August when German forces including Armoured Formations pushed forward against the Southern flank of the Eighth Army. On the following day the enemy columns swung Northwards towards the central sector. The object of this attack appeared to be the capture of the high ground running Northeast from ALAM EL BUEIB. This attack was not pushed home and on the next day the enemy remained concentrated Southwest of ALAM EL BUEIB and since then has withdrawn. The enemy was continually harassed during his withdrawal by our light mobile forces. Our Artillery and Air Force pounded enemy M.T. with good results. FAR EAST. CHINA. The Japanese have withdrawn along the CHEXIANG-KIANGSI Railway and the Chinese have reoccupied a distance of some 200 miles between NANCHANG in the West and KINWHA in the East, both of which places remain in Japanese hands. The Chinese reoccupation of this stretch of line was occasioned by the Japanese withdrawal and not by any Chinese major offensive. BURMA. Some re-grouping of Japanese fordes is taking place at AKYAB and on the ASSAM-BURMA Frontier. Reliefs have been brought from RANGOON since according to reports-the discipline and morale of the Japanese Garrison at AKYAB was low. There are no indications of troop movement in the FORT HERTZ area in UPPER BURMA. The principal Japanese Garrisons are in the MANDALAY Area to which they withdrew during the Monsoon. JAPAN. 10 Divisions are believed to have been formed in JAPAN in December, 1941, and to be now ready for service overseas. Forces in JAPAN are therefore estimated at 16 Field Divisions, and the Japanese Army at 85 Divisions. 209 3. AIR OPERATIONS WESTERN FRONT. Bomber Command kept up our night offensive against German industry by flying 1,028 sorties during which more than 1900 tons of bombs were released, including 4 bombs of 8,000 pounds, and 198 of 4,000 pounds. The main objectives were KASSEL, NUREMBERG, KARLSRUHE and the SAAR. Attacks were favoured with good weather and fires started by "Pathfinders" sent on ahead and the flares dropped by them added greatly to the success of the operations. KARLSRUHE had not previously experienced a heavy attack. Coastal Command sent out 228 sorties on anti-submarine operations in addition to some Biscay patrols by Bomber Command. Our Air/Sea Rescue Service during August carried out 35 rescues and saved 114 Allied personnel. Every aircraft sighted by the Rescue Service was saved, in some cases at a considerable distance from our coasts. MEDITERRANEAN. Our activity over the battle area compared in intensity with the peak effort of last May and June. Our light bombers met hoavy opposition from anti-aircraft fire and enomy fighters but were well protected by our fighter escorts. The enemy also displayed considerable activity over the battle area and many heavily escorted Stuka formations were intercepted by our fighter patrols and often forced to jettison their bombs. 13 JU 87's and 15 fighters were shot down by our aircraft as well as 15 more enemy aircraft by our A.A. fire Axis bombers from CRETE made 2 night attacks with 80 and 50 aircraft respectively on our aerodromes south of ALEXANDRIA. 4 aircraft on the ground were destroyed and 10 damaged. 3 enemy bombers were shot down. It is estimated that Allied aircraft sank 2 and damaged 11 ships on the ITALY-AFRICA supply route or in Axis occupied harbours. These figures include a Destroyer damaged and 2 large tankers and one smaller one set on fire. Fighters carried out offensive operations over SICILY. 4. EXTRACTS FROM PHOTOGRAPHIC AND INTELLIGENCE REPORTS ON RESULTS OF AIR ATTACKS ON ENEMY TERRITORY IN EUROPE. SAARBRUCKEN. A newspaper report on 19th August states that in order to repair the worst of the damage workers from many other districts have had to be brought into the town. DIEPPE. A reliable source reports that German Staff Officers have stated that the R.A.F. plan was bold and well executed and that R.A.F. aggressiveness gave them the most difficult defence problem in this type of raid. They fear that in the future heavier bombs may be used on a larger scale. They admit about 170 aircraft lost during the attack. MAINZ. It is reported that 400 people were killed and many more injured. 40,000 have been evacuated, 30,000 of whom, nearly one third of the popu- lation, were homeless. GENERAL: In DUISBURG, the July raids are said to have dislocated the GERMANY-ITALY coal traffic for a wook. The effect of the attacks on BREMEN has created a problem for the housing authorities, especially in the case of Focke Wulf "orkers since, owing to the extent of destruction to the workers' dwellings, a large proportion have had to be housed in emergency hutments totally unsuitable for winter conditions. 5. OPERATIONAL AIRCRAFT BATTLE CASUALTIES METROPOLITAN AREA ENEMY BRITISH Dest. Prob. In the Air 1/7 Constal 10 109 Fighters Miscellaneous 10 8 Fighters Bombers 10 2 20 16 9 82 2 Bombers Total Damaged Dest. Nil 11 1 27 210 -3MIDDLE EAST Including MALTA BRITISH ENEMY 12 3 1 U.S. Fighters 38 Others 1 Bombers Fighters Miscellaneous Dest. 20 23 Damaged 7 11 12 29 5 Nil 1 Total Dest. 1 Bombers (incl. Prob. On the Ground 3 In the Air 51 4 Total 48 19 44 1 crew and 9 pilots are safe. Of the above totals, 10 were destroyed, 2 probably destroyed and 1 damaged by A.A. NOTE: No account is taken of enomy aircraft destroyed on the ground in any theatre, or of British naval aircraft casualties. 6. HOME SECURITY Estimated casualties for week ending 6 A.M. 2nd - Killed 92, seriously wounded 91. 211 NUMBER 47 SECRET OFFICE OF STRATEGIC SERVICES THE WAR THIS WEEK August 27-September 3, 1942 Printed for the Board of Analysts Copy No. 6 The Security fels heavy V SECRET AUGUST 27-SEPTEMBER 3, 1942 Office of Strategic Services THE WAR THIS WEEK Although the Nazis are closing their pincers about the inner defenses of Stalingrad, the reduction of that city may still involve a costly siege. In both the Groznyi and Black Sea sectors the German drives have slowed, and a final decision in the Caucasus (if that is the Nazis' intent) still lies some weeks in the future. Rommel's long awaited blow has fallen in the southern sector of the Egyptian front, but it is not yet clear whether this is a serious thrust for the Delta or a drive for limited objectives. The Germans continue to press Laval for concessions in Africa and Metropolitan France. Laval is pliant, but the Minister of Marine, Admiral Auphan, is reported to have resisted Nazi demands both for a Franco-German defense agreement on Africa and for the surrender of French mer- chant tonnage. Internal tensions in Spain appear to be mounting. In the Far East the Japanese are executing extensive withdrawals in China and have suffered further reverses in the Solomons and at Milne Bay in New Guinea. Indeed recent Allied successes in the southwest Pacific have notably strengthened our position there. Some observers meanwhile interpret these Japanese withdrawals and the sudden resignation of Foreign Minister Togo as pointing to an early attack on Siberia, but these forecasts are still definitely in the realm of speculation. The important urban centers in India are beginning to return to a more normal life, but a settlement is not yet in 1 SECRET a sight and a general civil disobedience campaign remains distinct probability. The Siege of Stalingrad The Germans have now reached the inner defenses Stalingrad. On the north, south, and west they are approx. imately 15 miles distant from the city. Except for the river to the east, the defenders are in a state of siege, harassed continual day and night air attacks. North of Kletskaya however, they have succeeded in recrossing the Don behind the German lines. As yet there is no sign that Stalingrad is about to fall. The accompanying map indicates that in the past three weeks the Germans' progress has been notably slower than in the earlier phases of their offensive. Five weeks ago the is vaders had already occupied most of the Don bend. Three weeks ago their mechanized columns had come up against stubborn Soviet resistance in the Kletskaya area and had penetrated south of the river beyond Kotelnikovo. A week ago they had reached the Don along its whole course and had established a new bridgehead north of Stalingrad. Now, with their pincers closed on the city, the Nazis may be facing a costly siege. Anapa and Novorossiisk; the Trans-Caucasus With the fall of the small port of Anapa, the slow German advance on the Black Sea littoral may be within three miles of Novorossiisk The siege of this latter city has probably already begun. A greater menace to the Soviet position OD the Black Sea coast, however, appears in the report that crack German mountain units have taken the Klukhor pass on the Sukhumi military highway. Such a move might represent an effort to outflank the Soviet defenders of the Black Sea ports by striking at Sukhumi south of the moun2 SECRET tains. On the other hand, the seizure of the pass might be a purely defensive effort to protect the southern flank of the German divisions driving east toward Groznyi from a possible Russian surprise incursion. Around Groznyi the Soviet defenses have again slowed the German advance, which is apparently nearing Gudermes. And even beyond Groznyi the Russian's will be favored by the low foothills between Gudermes and the Caspian. The fall of Gudermes, however, would cut off the rail and pipe line connections of the Groznyi area. Despite the threat to the passes over the western Caucasus mountains, it is still likely that the main battle for the Trans- Caucasus will occur in the east around Makhach-Kala or Derbent, perhaps not until several weeks from now. And by that time the passes of the Caucasus will be filling with snow. According to a source ostensibly with German staff connections, the Nazis are already dissatisfied with their progress in Russia, and feel that the Trans-Caucasus cannot be taken this year. Their goal is now to capture Stalingrad and to reach the Caspian, and thereafter to cut off so far as possible the resources of the Trans-Caucasus from the rest of Russia. Already German columns from Elista have probably reached the Caspian from the Kuma River to the mouth of the Volga. This advance across lightly defended territory may represent simply an effort to protect the north flank of the Nazi drive in the Groznyi area. The Black Sea Fleet With the present menace to the whole west Caucasus shore, attention has once again centered on the Russian Black Sea Fleet. If the Caucasus is entirely lost, this fleet would face two alternatives: internment in a Turkish port or scuttling. In 1918 the Russian sailors of the Black Sea Fleet preferred to 3 SECRET SECRET blow up their ships rather than to hand them over to Germans. In the opinion of a Soviet observer, the Fleet's the tradition is now so strongly rooted that it would never surrender, even inasthe most situation, but would again act exactly it did in hopeless 1918. According to the same observer, the fleet includes the old battleship Parizhskaia Kommuna (launched, 1911), the cruisers Krasnyi Kavkaz (1916), Krasnyi Krym (1915), and Chervonaia Ukraina (1915), the aircraft carrier Stalin (193722 planes), and numerous destroyers, submarines, torpedo boats, and smaller craft, most of them built in the last five years. Its Commander-in-chief is Admiral Philip S. Oktisbrski, who rose from a stoker through the ranks to the command of the Black Sea Fleet in 1938. Well known as one of the builders of the Soviet Pacific Fleet, he supervised personally the defense of Sevastopol (according to the Russian press) and was the last commanding officer to leave the fortress. An active member of the Communist Party, he is in high official favor, and is considered one of the "strong men" of the regime. The Russian Center and the North In the Rzhev sector, General Zhukov's month-old counter- offensive, while forced back around Medyn, has taken Zubtsov and reached the defenses of Rzhev. But it has and a locomotive repair shop, was, in the opinion of a wellplaced American observer in Finland, the most successful bombing in this war or in the Winter War which preceded it. Other reports from Helsinki suggest that the Germans have sent several of their mountain divisions from North Finland to the Caucasus, and have replaced them with three newlyformed mountain divisions of older men. A possible further sign of a manpower shortage on the Eastern Front is the report that the Nazis are now training Finnish volunteers for service with the Wehrmacht-or perhaps as replacements for the Jaeger battalions of Finns now apparantly fighting with the Germans on the southern Russian front. In the much-bombed seaport of Murmansk, Soviet morale is evidently still comparatively high. According to a Russian sailor just arrived in this country, the people of Murmansk have become so used to air raids that the work in the port does not stop during bombardments. All young men being in the army, it is the old men and women who unload the ships. Special brigades remove ruins and clean up the streets after air raids. With meat and fish practically nonexistent, the average meal consists of a plate of soup and a piece of bread. Although greatly depressed by the Russian reverses in the Caucasus, the people of Murmansk hail every Allied convoy with joy and still feel that they may eventually win the war, our observer concludes. failed to crack the main German defensive system and may already have spent its force. In the opinion of some American military observers, Zhukov's losses in men and matériel have been out of all proportion to the ground he has gained. American journalists-permitted for the first time this year to visit the fighting lines on the central fronthave, however, seen little evidence of these heavy casualties. Last week-end's air attack on Helsinki, which scored direct hits on a branch telegraph office, a large military warehouse, Rommel's Offensive in Egypt On the night of August 30 Marshal Rommel attacked on the southern sector of the Egyptian front. While British press releases suggest that his immediate objective may be certain strategic desert ridges, military observers here do not exclude the possibility that this may be a major offensive. In this attack, which IS led by his two German armored divisions, Rommel is using the bulk of his veteran German 4 5 SECRET SECRET desert fighters, and has in immediate reserve an Italian Supporting motor transport is concentrated in the sector. The German armored columns apparently advanced southern through the British minefields, but there is as yet no indica. tion that they main British positions or overcome any have majorpenetrated British forces. It is as yet too early to judge the character of the action. If Rommel were to break through, he might either strike directly at Alexandria and establish there a new base for Sicily, destroying at least 10 aircraft, in addition to those damaged. Near Eastern Quiet Egypt proper remains quiet. Prime Minister Nahas, on the sixth anniversary of Egyptian Independence Day, made an outspoken address in which he professed Egypt's loyalty to the British and looked forward to the triumph of the directly at Cairo across smooth and open desert. democracries. Serious differences are reported, however, between the Egyptian Chief of Staff, who is supported by King Farouk, and the Minister of War, who has the backing Decline in Enemy Air Activity of the Prime Minister. The Chief of Staff's loyalty to the Government is questioned by the War Minister, and one supplies; or he might swing south of the rocky trough that runs eastward from the Qattara depression and strike observer believes that the situation might reach a point where In the air the enemy has been relatively inactive prior to this attack, apparently reflecting a desire to conserve either planes or gasoline or both. Meanwhile Allied air forces have continued their heavy attacks on enemy ports, shipping, and supply lines. These raids, together with submarine action, have taken an increasing toll of enemy shipping and may have been the cause of Rommel's twice delaying his offensive. It is assumed that despite certain shortages, Rommel must have sufficient supplies to sustain active operations; and there are indications that a strategic reserve is being built up in the Mediterranean area for possible use in either Egypt or Northwest Africa. Bombing attacks on Malta and air activity in the whole Mediterranean theater have lately been sharply reduced. The ships of the convoy that arrived at Malta in mid-August were unloaded without interference from Axis planes. The failure of the enemy to attack suggests that Axis strategists may have felt that the expenditure of planes was not justified even for so important a target. Meanwhile Malta's reinforced fighters took the offensive and raided the airdromes of 6 the British would be forced to intervene with the King in support of the Government. Little new information is available concerning the AngloFrench dispute in the Levant. De Gaulle and Casey have failed to arrange a meeting, and De Gaulle has declined Churchill's request that he hurry back to London to discuss the situation, stating that conditions did not yet allow him to depart from Syria. Rommel's attack in Egypt puts De Gaulle in an unfortunate position: to precipitate a conflict in the Levant now would undoubtedly provoke a serious reaction in the Anglo-American attitude toward the De Gaullist cause. In Turkey an improvement in relations with Russia has been reported. The new Turkish Ambassador was apparently most cordially received in the Soviet. On the other hand at least one Turkish paper has treated with concern an article by Professor Renner of Columbia stating that the Allies must not again repeat the error of denying Russia an outlet through the Dardanelles. Repercussions of this entirely unofficial article even appeared in Turkish Government circles, one observer believes. 7 SECRET SECRET The Germans and Dakar The defenses of French West Africa and the transfer tc th Nazis of merchant tonnage controlled by Vichy were discussed by Laval and high German representatives at Nevers August 27, according to a well-placed informant. Admiral Laval. Auphan, Minister of Marine, and other officials accompanied The Germans sought Vichy's agreement to a military observer or control commission at Dakar, in return for per mitting the French further to strengthen the defenses there the Atlantic islands and then Dakar as convenient bases for the transfer of troops from Brazil across Africa to Egypt. At Nevers the Germans apparently also demanded a total of 200,000 tons of merchant shipping. Our source suggests that Laval will consent to turn over the 70,000 tons of shipping now interned in French ports which belongs to countries at war with Germany; but Laval may try to avoid turning over the balance in French shipping, for a time at least. Admiral Auphan, our informant states, strongly opposed the surrender of French tonnage. Our informant also believes that the Germans offered to arrange a general Franco-German agreement for the defense of French North and West Africa. Although Laval is m ported to have approved this proposal, Admiral Auphan, objecting that such a pact would invite Anglo-American attack, apparently threatened to resign. Laval was obliged to put aside for the time being the proposed defensive pact, but is believed by our informant to have consented to the sending to Dakar of some kind of German observer or com- mission. The Germans are reported to have sought to send a Stuks squadron to Dakar at an earlier date, but Boisson, the Governor General, while willing to have the planes, threatened to resign if German pilots came with them. Boisson is understood now once again to have proffered his resignation, presumably in connection with Laval's new negotiations Pétain, however, has ordered him to continue at Dakar Meanwhile General Barreau, the Commanding Officer in Collaboration Measures at Home In support of collaboration at home, Laval is said to have sent the Germans a telegram of congratulations following the Dieppe affair, and to have signed the Marshal's name as well as his own (it is not definitely known whether this was with or without Pétain's consent). While Laval might well con- sider this an easy way of gratifying the Axis at no cost, evidence of further material collaboration appears in the report that French powder factories at Bergerae, Toulouse, and Angoulême (the first two in Unoccupied France) will produce nitrate cellulose for the Germans after October 1. One informant believes that German orders now amount to 80 to 90 percent of industrial production in France. Laval is apparently planning partially to meet German demands for labor by the deportation, first of Jews, and then of other foreign groups. Despite strong pleas from the Vatican and the United States, Laval has apparently not Dakar, and a man considered very friendly toward America, is expected to go on indefinite leave, to be replaced by $ naval officer of unknown sympathies. The German controlled press has been giving increasing one source. From Occupied France come reports of con- Lately it has accused the United States of planning to seine centration camps in which several thousand Jewish children have been isolated and their identification papers destroyed. attention to the Allied "menace" to Northwest Africa relented in his reported plan to expel 10,000 or more foreign Jews who have fled to France illegally since 1936. More than 3,000 have already been sent to Germany, according to 8 9 SECRET SECRET In what may be an effort to show that he is nevertheless attached to republican institutions, Laval has authorized the creation of "advisory" departmental councils. At the same time, however, he has swept away the last vestiges of Parliamentary control in a decree abolishing the Senate and the Chamber of Deputies. These bodies had long been prohibited from assembling except by special convocation, but they had apparently been meeting informally, to the annoyance of Vichy. Advices suggest that Laval may now reorganize the sentiment. purely consultative National Council as a sop to Republican Internal Tension in Spain Current tension between the Monarchists and the Falange is greater than at any previous time, according to a reliable and well placed observer, and the possibility of an explosion can not be ignored. The immediate issue is the bomb episode reported last week, in which prominent members of the Falange were allegedly implicated. Several resignations of high government officials are expected, among them that of the War Minister, Varela, a man of Royalist sympathies The Franco press has been agitating about the need of loyalty to the Party at this time, and political unrest is general, according to diplomatic sources. A number of prominent Royalist leaders have come to Madrid. Franco's prestige and moral standing are reported to have suffered severely from his failure to condemn the Bilbao outrage, and his relations with the Army may become further strained if the death penalty is not imposed on the offenders. Barcelona has also been declined, according to diplomatic sources. Nor was the German economic mission successful in attempting to go over the heads of the Spanish negotiating committee. There is no indication, however, that the latter made much headway in its trading with the Nazis. Japanese Withdrawals Japanese campaigns in the Far East were generally char- acterized by withdrawals during the past week. As the Chinese advance in Chekiang continued, it was evident that the Japanese were undertaking a wholesale evacuation of the areas which they had only recently conquered. In the southeastern Solomons, after a hard skirmish with Allied air power, Japanese naval forces-apparently either unwilling or unable to press the fight decisively-withdrew. At Milne Bay in New Guinea, where a Japanese landing party ran into an Allied trap, they again withdrew. Only in the Gilberts, where they already are in possession of Makin Island, did the Japanese move forward. Here, apparently against no opposition, they extended their control southwestward to include Nauru and Ocean Islands. In the Aleutians too the Japanese recently have been increasingly active, possibly indicating plans for further offensive moves, but as yet these have not been made. Japanese planes have been sighted around Atka Island, which lies 60 miles or more eastward from Adak Island. Adak itself was previously the easternmost area in which the Japanese displayed any marked interest. Signs of increased activity at Kiska are not wanting, and may even indicate the arrival of reinforcements. Some straws indicating resistance to German demands have come from Madrid. Spanish authorities are reported to have refused entrance visas to some 50 Germans who would have been appointed to auxiliary services of the German Embassy. A Nazi request for the removal of the Captain General of Fighting on the Middle Melanesian Front Aside from the continuing air duel, fighting on the Middle Melanesian front is now restricted to the rugged area around 10 11 SECRET SECRET Kokoda in New Guinea, 60 miles across the Owen Stanley Range from Port Moresby. Ground units clashed end of the railroad, in Kiangsi, the Japanese have fallen back here this week, and Japanese pressure has increased. sharply Rein- on their base at Nan-ch'ang, where the Chinese claim to have forcements continue to arrive in the Salamaua area. While an overland drive to Port Moresby is still not carried the fight into the suburbs. In Kwantung province, other Japanese withdrawals have opened the way for a Chinese advance southward along the Hankow-Canton rail- impossibility, the security of this base has been greatly an road. strategic inlet at the southeastern tip of New Guinea dominates the China Strait, virtually the only channel through Japanese Plans: Siberial strengthened by our new position at Milne Bay. This the barrier reefs and islands which extend eastward from the New Guinea mainland to Rossel Island, easternmost of the Louisiade Group. With Milne Bay and the southeastern The evidences of Japanese withdrawals in China and reverses on the Middle Melanesian front, the appearance of Solomons in our possession, a successful Japanese advance o second-rate planes in the latter theater, and finally the Port Moresby by sea is unlikely. On the contrary, the Japsnese position in Middle Melanesia takes on an increasingly defensive aspect. sudden resignation of Foreign Minister Shigenori Togo may Allied air successes in this area have been particularly notable. Japanese attacks on our newly-gained air base at Guadaleanal have been repulsed with heavy losses to the Japanese and inconsequential casualties for the defenders At the Japanese air base near Buna on New Guinea, 10 Zeros were caught taking off: six were destroyed, two damaged. By August 29 Allied airmen at Rabaul were encountering Zeros of an old type, slow and unable to obtain altitude, and our airmen upper hand. in this theater appeared definitely to have the Withdrawals in Southeastern China Hard on the heels of the withdrawing Japanese, Chinese troops reoccupied Chekiang's two most important airport towns-Ch'u-hsien, on the Chekiang-Kiangsi railroad, and Li-shui, northwest of Wenchow. Chungking announces that its forces are now approaching the railroad city of Chin-hus (Kinhwa), where another airfield is situated. At the western 12 all point to the long expected attack on Siberia. Chinese officials, who have been somewhat puzzled as to the meaning of the Japanese withdrawals, now apparently are convinced that the troops are being sent north. Some 60,000 Japanese formerly in Chekiang, they believe, have been sent to North China. General Joseph Stilwell, now in India, has himself subscribed to the Siberian thesis, according to newspaper despatches. The Resignation of Togo Togo's resignation especially has been widely interpreted as presaging the Siberian attack. Justification for this view is derived from the part which Togo is reputed to have played in easing Russo-Japanese relations during his term as Ambas- sador at Moscow (1938-1940), and from the fact that Japan has avoided difficulties with the Soviets while he has been Foreign Minister. Other observers point out, however, that Togo's resignation might just as well point to the opposite conclusion. His career has been marked by German influence. His wife is German, his college studies at Tokyo Imperial Uni13 SECRET versity were primarily devoted to German literature, been Ambassador to Germany, and he was regarded of the prime engineers of the anti-Comintern pact. resignation might, therefore, be construed with equal logic His as indicating developments in Japan displeasing to friends Siberia. of Germany-such as a Japanese decision not to attack These observers also point out that Togo's relinquishment of the Ministry of Foreign Affairs may amount merely to further step toward the elimination of civilian influence in & the cabinet. Until further events shed light on the reasons SECRET Economic Conditions in Japan Passengers on the Gripsholm reported a variety of shortages in Japan. There was a severe shortage of fish in the first three months of 1942, attributed by some observers to scarcity of gasoline. Rice and sugar have been put under rationing system, as well as salt and meat. Leather is extremely hard to get, and there is a shortage of paper. The a clothing rationing allowance of one hundred points allows few for the shift, these observers feel that speculation as to the purchases, a winter kimono alone using up 48 points. Drugs and medicines are scarce. The observers felt, however, that the drastic efforts which have been made to bring financial significance of Togo's resignation must remain pure guesses. machinery under control, to increase taxes and prevent infla- In the past week, meanwhile, no changes have been reported in military dispositions along the Siberian border. tion have been to a degree successful, and that there is a general Japanese willingness to live up to regulations. The Japanese are fully organized for their war effort. Moreover, these observers believe that Japan is succeeding in consolidat- Japanese Treatment of Americans There seems to have been neither rhyme nor reason in the variations of treatment of Americans in Japan and Japanese occupied territory, according to a competent observer who has had opportunities to talk at length with many of the passengers on the exchange ship Gripsholm. In Tokyo for instance, some American citizens were imprisoned, some were interned in a camp, others were interned at home, and still others were left free to move about the city. Some Americans in Shanghai were allowed the freedom of the city, while others were kept in solitary confinement. Some citizens had all property seized outright, while others had their holdings carefully listed and filed by Japanese authorities. There was an obvious animus against newspaper correspond- ents and a grudge against certain missionaries in Korea, but in very few of the other cases was there any evident reason for the particular type of treatment meted out. 14 ing her economic position in the conquered territories, and that she is growing stronger month by month. Japanese Concept of the War Informed observers on the Gripsholm believe that the racial aspect of the war, the task of "throwing the white barbarians out of Eastern Asia," is not to be disregarded as an element in the Japanese concept of the war. Although few of these observers would attempt a purely economic explanation of the war, many of them stressed the importance of the Japanese feeling that Japan must win a wide area which is as nearly as possible self-sufficient, and which provides all materials necessary for the waging of war. With but few exceptions however, these observers felt that in addition to racial and autarchic concepts, the Japanese were influenced by a mystical conviction of the mission of Japan, and the assurance that Japan was divinely called to bring order into Eastern Asia. 15 SECRET SECRET The only observers pointed out whodefeat. hold such a faith can be disabused of itthat by those complete Pause in India and in the present emergency has appealed for conciliation. Now with a former information chief of the Government of India as its new editor, the Statesman will become little more than an official mouthpiece. Although outbreaks and sabotage are continuing in the countryside, urban and manufacturing centers in India are apparently beginning to return to normal. The East Indian Railway has resumed restricted service between New Delhi and Calcutta under military guard. Passengers report, how. ever, that along one stretch of road between Gaya and Mogul Serai every station has been burned. At Calcutta, mica production, a few weeks ago curtailed by a half, now appears to be returning to normal, while about 10 percent of the factory hands who have been on strike have returned to work Nevertheless, in the textile industry there have been further walkouts. At Madras, the two largest textile mills, both of which had important army orders, have shut down, while at Calcutta 6,000 of the 7,000 employees of a large cotton mill have gone on strike for what are described as "purely political reasons." With the suppression of Gandhi's Harijan, the Government has now banned virtually every important nationalist journal in India. Against these press restrictions, the All-India Conference of Newspaper Editors, meeting at New Delhi, has vigorously protested. Although the Government has refused to relax the censorship, reports from New Delhi suggest that a new arrangement will provide for the precensorship of news by local Government advisers in consultation with local press representatives. Under this arrangement, some newspapers Actually the political situation in India has improved very little, and a general civil disobedience campaign is still threatening. Compromise proposals advanced thus far have not gone to the root of India's difficulties. A plan suggested by Sir Firoz Khan Noon, Defense Member of the Viceroy's Executive Council, for dividing India into five autonomous dominions, is simply the Moslem League's idea of Pakistan reduced to its logical absurdity, according to an observer in New Delhi. Such a proposal-providing for a federation of India as unworkable as that of the United States under the Articles of Confederation-would please neither Congress nor Moslem League. Nor have these two parties as yet come any nearer to a mutual understanding-despite a report to the effect that the Vice-President of the Moslem League has asked Jinnah to begin negotiations with Gandhi. Meantime, a resolution adopted by the Working Committee of the Hindu Mahasabha-the organization of Orthodox Hindushas called for the immediate independence of India and the formation of a national government consisting of representatives of all parties, threatening drastic action if the British reject these proposals. Hispano-American Neutrality Pact? The retiring Argentine Ambassador to Spain is returning may resume publication. to his country with the draft of a neutrality pact to which In Calcutta, however, official pressure has evidently forced the resignation of the editor of the Statesman, India's leading the adherence of Spain, Portugal, Argentina, and Chile will be sought, according to unconfirmed information received from Buenos Aires. The pact presumably is a last-minute paper. Although British-owned and edited, the Statesman has always shown an understanding of Indian nationalism Axis-inspired move to counteract the effects of Brazil's 16 17 SECRET declaration policy before ofRios' war, visit especially Portugal, and to fix Chilean reatest alarm at the prospects of the Cardenas President to theinUnited States. Rios' visit meanwhile has been debated in the Chilesa Senate-a debate which produced the first discussion Chilean foreign policy during the current Chilean Congress of One Senator asked whether, if Chile were going to break with the Axis, it would not be better to do so before the President's trip, thus avoiding any appearance of yielding to pressure from Washington. No conclusion was reached, and the cussion. Senate has voted to hold a secret session for further dis nent, indulging in one of its rare attacks on the ex-P hose popularity with the rural masses it has I espected. Despite earlier controversy concerning the possi ude of the new Defense Minister toward the United can be stated conclusively that General Cárdenas committed to the most vigorous prosecution of 1 t can thus be anticipated that Mexico's positive o ions to the war effort will be notably stepped up, of both military preparation and political vigilance. Cardenas Reenters Mexican Politics The appointment of ex-President Cárdenas as Minister of National Defense marks a significant turning point in both the domestic and international activities of the present Mexican Government. Cardenas, who is expected to have complete control of the Army, Navy, and Air Force, becomes the most powerful figure in Mexico, next to President Avils Camacho. The uneasy balance of power which has characterized the present regime from its inception now moves decidedly to the left, for Cardenas represents more truly and effectively than any other person in Mexico the combined forces of organized labor, the agrarian reform movement, and the liberal and radical elements from every walk of life. The return of Cárdenas to national prominence can be expected to instill confidence in the Avila Camacho Govern- ment on the part of Mexico's rural population, which is suffering considerably because of economic dislocations brought on by the war and consequently has become prey to the defeatist, anti-government and anti-Yankee propaganda of the fifth column. The weekly El Sinarquista, for example, which has been rather successfully exploiting the poverty18 and hunger of Mexican peasants, expressed the 1 SECRET SECRET Pooling of Equipment Uniformity of planning on a large scale notably influences the distribution of quipment. A pooling system of freight cars already is in operation throughout territory of the German National Railroads and in the Protectorate. This ool now includes 1,100,000 cars. About 6,000 locomotives and more than 00,000 freight cars have been commandeered from the dominated countries or ased from Italy and from neutral countries. APPENDIX I THE GERMAN TRANSPORTATION SITUATION Production Step-Up Since the outbreak of war in 1939, many observers have predicted the collape of the German transportation system, which has been operating under great, Even when the increasing demands on the distant Eastern Front are considered To increase this pool, Germany has made remarkable efforts to step up locomotive nd freight car production. At the outbreak of the war 31,000 locomotives were vailable in the areas now operated by the National Railroads and in the Protectoate, many of them over-age. In the three years from 1939 to 1941, 2,900 loconotives were built. A British report on equipment production estimates the resent annual locomotive capacity in Germany and the occupied countries at 1000-2,500. It is possible, however, that these figures may still need to be evised upward. Polish intelligence sources report that Julius Dorpmüller, Minster of Transport, has announced to the industry a new annual construction program of 7,500 "simple type" locomotives. While such a figure may seem starling at first glance, it is probably not impossible that after careful preparation the however, there is no evidence at present that would indicate an imminent been down, according to an analysis by the Central European Section of the Office Strategic Services. On the contrary, it is conceivable that the volume of In's can be still further augmented without serious impairment of the Axis war effort The factors which favor the German position are: first, Germany's absolute domination of the continental rail network, which has made possible the pooling of freight cars and locomotives for common use where and when they are no needed; second, new construction of equipment, the production of which my now considerably exceed previous estimates; third, the reorganization of railing management within Germany itself; and finally, the solution-partial st leadthe admittedly difficult problem of personnel. Industry in Axis Europe could treble production, on the assumption of an expanded lant capacity, mass production methods, and a three-shift work day. Sufficient material and labor probably are being made available; reports from various sources Indicate that equipment production has been given priority equal to that for Aircraft, tanks, and submarines, and that skilled workmen are even being recalled from the armed forces. On the debit side of the ledger is the current British air offensive, the results which cannot yet be evaluated in detail. Present bombings are probably serious interfering with transportation in certain areas, and further efforts systematically to disrupt German traffic and transportation may in time produce substantial results. At the beginning of the war 820,000 freight cars were available in the area now operated by the German National Railroads and in the Protectorate. It estimated by the British that by 1941 production in Germany and the occupied territories had increased from 12,000 to 195,000 per year, and that a further increase may be expected in 1942. In spite of locomotive and car shortages, Unification Under German Control At the beginning of 1938 the German National Railroads operated 33,790 min of line. Territorial annexations to the Reich have increased this mileage to 47,781 which up to date have been undeniable, the war-time demand has been met, and the supply probably will increase in the near future. and in addition 6,373 miles in the Government General of Poland and the Prs tectorate of Bohemia and Moravia are either under German management if subject to close German supervision. In occupied Russia about 18,000 miles railroad have been converted from five-foot to standard gauge. Division manage ments, composed principally of German railroad officials but acting under military command, control operations in this area. German methods of management operation, and maintenance have been introduced on all these lines, therely integrating as a whole. them in a unified network and increasing the efficiency of the system Traffic Regulation On the lines operated at present by the German National Railroads, freight traffic was 36 percent higher in 1941 than in 1939. To cope with this traffic, passenger train service for civilians has been curtailed in Germany by about 50 percent, with even greater restrictions reported from other areas. Restrictions In other subjugated countries-as well as in Hungary, Rumania, and Bulgaria- management and operation are closely supervised by German authorities The methods are very flexible. In some countries supervision is concentrated at headquarters of the railroads, in others German officials are stationed at strategi points throughout the organization. In the whole of Axis Europe Germany the controls a railroad system of 164,000 miles, almost all of it standard gauge operated on a unified plan. the of this magnitude have had a decisive effect on the railroad operations throughout continental Europe, where in normal times passenger train mileage considerably exceeds the freight train mileage. (In the United States, peacetime passenger train percent.)mileage was about 45 percent of the total, in Germany it was nearly 65 Freight traffic is regulated as to volume, distribution, and flow through a system priorities and traffic regimentation This system includes strict regulations for increasing the average carload and for speeding up loading and unloading. In 1941 the average freight train load was 12 percent higher than in 1938. of set 20 21 SECRET SECRET Reorganization of Railway Management in Germany APPENDIX II Germany has long been divided into three areas, in each of which & CHINA AND THE WAR-A COMMUNIST VIEW agency under the supervision of the Ministry of Transport (known as Oberbetricle special leitung) had the right to make suggestions to the 31 Division Managements actual operating units in the railroad organization. Following the general the of concentration of power in the present German administration, the authority of these agencies was recently strengthened. They were elevated to General betreibsleitungen, their managers were promoted from Directors to Presidents and the Presidents were empowered to issue binding orders to the Division Managements. effect has been a more efficient and more uniform handling of operating andThe traffic matters in large areas. (The following statements of General Chou En-lai, representative in Chungking the Chinese Communist Party, were made to an American who was recently in Chungking. General Chou is recognised by authoritative American observers of as one of present-day China's most important political thinkers. He lives virtual isolation in Chungking, separated from social contact with other Chinese by reason of his party connections and the threat of official disapproval, and cut off by distance from his fellow Communista in northwest China. His views are presented here primarily for their interest as a reflection of Chinese Communist opinion.) In addition, new agencies have been created to allocate and coordinate the tasks assigned to the various modes of transportation. Diversion of shipments to waterways is encouraged, and even enforced in particular cases, with the result that waterways traffic in 1941 was 21 percent greater than in 1940. The completion of the Midland Canal in 1938 established a direct connection between the Ruhr and central and eastern Germany, and the opening of the Adolph Hitler Canal in 1940 improved the situation in Upper Silesia. These developments have substantially reduced the pressure on the railroads Truck transportation never played a great role in Germany (only 360,000 trucks were registered before the war), and it has now been almost wholly dis continued because of the fuel situation. This has contributed to & slight extent in increasing the burden both on rail and water transport. The Chinese War Effort Asked whether Chinese Communists are satisfied with the Chinese war effort, General Chou distinguished two phases in the struggle with Japan. During the first two years, there was fierce fighting on many fronts, and the Central Government devoted its primary attention to military affairs-training troops, mobilising the masses, and improving military organization. Although the Chinese lost many men, their armies became steadily stronger. During the past three years, on the other hand, the Japanese attack has weakened, and most of the fronts ave been relatively calm. Accordingly, the Central Government has paid little attention to the training of men in the modern technique of war and has been mainly concerned in disciplining the Communists. Only at such points as the Japanese actually attack, will Chinese troops fight. Attitudes Toward Britain and America The Problem of Personnel Before the war the German railroads had a staff of competent employees, but many of these have since been lost to the armed forces (especially to railroad and prisoners of war, as well as 90,000 other foreigners. This personnel policy may have affected the safety and reliability of operation in the Reich to some extent, but at the same time it has been an important factor in maintaining German control of the whole network of conquered Europe. 22 General Chou said that historically Chinese authorities have developed their own way of dealing with British and Americans. When Britain had a strong it other technical units of the armed forces), and an increasing number of railroad men have been needed for work in the occupied areas. At home these employees have been replaced by less reliable persons. The 1,200,000 persons at present the service of the German National Railroads include 80,000 women and 20,000 position in the Far East, the Chinese were careful to preserve friendly relations. Now that the British have been defeated by the Japanese, Chinese authorities take a contrary attitude, and even fail to treat the British as allies in a united war effort. In reaction to the traditional arrogance of the British, anti-British sentiment in China is welling up. Towards the United States, Chinese leaders have a different attitude. They consider that Americans in general know very little about China, and that the United States is easy prey for help, materials, and money. American generosity even excites some contempt. For example, when the United States Government gives loans and raises the question of terms, the Chinese now demand that there be no conditions-a loan must be a gift for their five years of fighting. It the United States refused to give help, the Chinese Government would threaten to make peace, but General Chou went on to say that there is no danger at all of China's making peace. Incidentally, he said, resistance has become a good business, since help is so easy to get. [Editor's note: Since the loss of Burma. the problem of supplying China has become notably difficult.] 23 in SECRET Probable Consequences in China of a Russo-Japanese War Soviet influence on the Chinese Government is negligible, said General Chou If the Japanese become involved in Siberia, Japanese armies in China will be deprived of offensive power. General Chou did not think that regular Chinese troops would attack Manchuria, but rather that the Chinese Government would utilize the new situation precipitated by Soviet-Japanese hostilities to make trouble at home. The Chinese Communists expect the Central Government to order them to attack the Japanese in Manchuria. When this order comes General Chou said, the Chinese Communists will ask for supplies to strengthm their military position. It is unlikely that these supplies will be forthooming The Communists can not attack without them. The Central Government will accuse the Communists of disobeying orders and will then send troops against them of China Chinese "Imperialism" Because the western imperialist powers have been expelled recently from some their territories, one now hears, General Chou said, of Chinese "imperialism" It is impossible, however, to conceive of an imperialistic in the present stage of Chinese economic development and while the pathetic disorganization now existing continues. China possesses large armies, but her military power is immobile. How then can China engage in military expansion southward? On the contrary, China after the war must discover a method of securing equal rights for herself in the South Seas. Peace Aims of the Chinese Communists China's first object must be to drive out the Japanese, said General Chou. All plans for the post-war future are illusory. Victory will be achieved only through democratization of China. Chinese economic democracy means state ownership and control of railways, arsenals, banks, and mines. But China is large. Ha productive capacity can be increased by giving play to private capital Without this it will be impossible for China to become a modern progressive economy. Only through private enterprise can advances be effectively accomplished outside the sphere reserved for nationalized enterprise. 24 S. . GOVERNMENT PRINTING OFFICE 1941