Full text of Diaries of Henry Morgenthau, Jr. : Volume 72 : Part 2

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

195

MEETING ON INTERNAL REVENUE MATTERS

Present:

June 8, 1937
10:45 A.M.

Mr. Magill
Mr. Oliphant

Mr. McReynolds

Mr. Helvering
Mr. Shafroth

Mr. Ryan
H.M.Jr:

Now, what I want to do is this. I want to have
a frank talk and get a little here, a little there;
and everybody can take your shirt off - I mean his
coat off and roll up his sleeves. But I want to

get you people together and call a spade a spade,
and then we want to go places, see?

Now, I don't know whether you (Magill) want to get

yours off your chest first or not.
Magill:

As you will.

H.M.Jr:

What?

Magill:

Just as you will.

H.M.Jr:

Let's everybody - different people have different
things on their chest, and let's get them off. And
frankly, as far as I'm concerned, my main thing is,
I've been waiting here now for a number of weeks to
get this question settled as to where the responsibility
of - I don't know whether to say of the General Counsel's office - begins and ends, where Internal Revenue's
begins and ends; and I've been trying to get it settled
among yourselves. We're not getting anywhere, and it

isn't the most difficult thing in the world, and I'm
getting a little impatient, and if it can't be settled
this week by you men yourselves - you're all of age then I'll take a piece of pencil and paper and write
the ticket on Monday myself.

Oliphant:

This surprises me a good deal, because I thought we

were moving very rapidly on the basis of the last
conference with Magill towards a solution.
H.M.Jr:

Well, I got the impression "no" - that's why I asked
this meeting. I get a little here, a little there,
now, so I got the impression they weren't getting
anywhere. Each week I'm told that next week it will be

done, and I don't know how many weeks - I haven't got

196
-2-

my diary - I don't know how many weeks, but each

week it's been postponed till next week, and I don't
know why the thing should be put off each week.
We're all of age and

Helvering:

You want to speak very candidly, do you?

H.M.Jr:

You can't talk too candidly for me.

Helvering:

Well, Mr. Shafroth and I haven't been really able to
sit down together on this thing, and so we just talked
about this before we came in here.

Shafroth:

We've discussed it briefly on two other occasions
too, Mr. Helvering.

Helvering:

But Mr. Secretary, when you call for a thing that
takes a survey of the whole Bureau throughout all

the states - if I'm going to get that, then I've got

men
to reach,
b e cause I've got to keep them going,
see that
it
H.M.Jr:

Helvering:

What's that? I don't get that.
For instance, this thing

H.M.Jr:

What's that?

Helvering:

That is, all these farm evasions. The day this was
called for was the day Mr. Shafroth and I had - were
going to have a meeting.

H.M.Jr:

H.M.Jr:

Now wait a minute, let's be - that required sending
a telegram out, didn't it, to 38 men?
Yes, and form a unit over here to
But you didn't have to do that yourself.

Helvering:

Well, if I just told them to do this

H.M.Jr:

Well, that was a telegram that went out - was it

Helvering:

Friday?

Helvering:

Friday.

H.M.Jr:

Well, that was a 20-word telegram; and you didn't
get any answers till Monday.

197

-3-

Helvering: Yes, that's true.
H.M.Jr:

But
think that that would tie up the
wholeI shouldn't
works.

Helvering:

But I had to see that that was carried out, and
that's the way it's been. We had a tentative
conference to

Shafroth:

From the brief conversations you and I have had, I
think
are very
settledwe
between
us. close to getting the whole thing

H.M.Jr:

Look, today is Tuesday the eighth. I'm going to
leave town today at noon - I hope to leave; I won't
be back till Sunday night. Is it unreasonable to
ask that this particular thing that I am talking
about - there are three things on the agenda - is it
unreasonable to ask that that thing be settled by
Monday?

Shafroth:

Not as far as I'm concerned. I think we can get it
settled, don't you, Mr. Helvering?

Helvering: Yes.
Oliphant:

I want to say this. It is reasonable to get it.

I don't want you to get - I think you're misinformed
if you have a feeling that there is any reluctance
on the part of the people here to get together and
solve the problem. It seemed to be much clearer on
the basis of the last discussion with Mr. Helvering
and Guy, where we all - it was agreed that - I mean

Guy and Morrison
H.M.Jr:

I guess Mr. Helvering and Guy could do it all right.

Oliphant:

that Helvering and Shafroth could get together
and draw the thing up.

H.M.Jr:

No, I mean Helvering and Guy.

Oliphant:

But seriously, it is important, in a sense, for the
spirit in which the place is operated.

H.M.Jr:

Well, that's why I called a meeting, because I was
sensing that we weren't getting anywhere. I don't

198

-4-

know how many weeks it's been. Guy says he was

scheduled for last Friday, and I think it's the
third meeting we've had in this office.
Helvering: Well, one day Mr. Shafroth and I were all ready
and you (Shafroth) had to go to St. Louis for
something.

Shafroth:

Yes - Kansas City.

H.M.Jr:

Well listen, boys, is it fair to ask for a settlement by Monday?

Shafroth:

By Monday. Monday's O.K.

H.M.Jr:

I won't think up any bright ideas between now and
Monday, except what else we've got on the ticket.

Shafroth:

I think we can g et it ironed out by Monday, don't
you?

Helvering: Oh yes.
H.M.Jr:
Are you (Shafroth) going out of town this week?
Shafroth:

No.

H.M.Jr:

Are you, Guy?

Helvering:

No.

H.M.Jr:

Well then, we'll pray for a settlement by Monday.

Shafroth:

Settlement by Monday.

H.M.Jr:

Otherwise, papa does it. Huh? I will say this;
if I do it, I've got to start fresh, because I've
got to - I haven't - it isn't as though I had in mind
what I want, because I haven't. But I want this thing
settled, because I think we've got a lot of things, and
with this settled then we can all move as a team.

Oliphant:

The exact point at which it stands right now, as Guy
was drawing the thing - Morrison has drawn it up
and sent it over to me; I haven't yet had a chance

to look at it. They were going to sit down and lay

199
-5-

the two things down together and iron out the
differences.
H.M.Jr:

Well, are they ironed out?

Oliphant:

I couldn't get to it yesterday.

H.M.Jr:

When they iron out the differences - am I rushing

you too much?

Oliphant:

No. Now, we got together in Magill's office and
it was agreed, after we discussed the thing all the

Shafroth:

way around, that Phafroth and Helvering would get
together and draw the thing up.
What are you boys doing this afternoon?
We're doing that.

H.M.Jr:

Attaboy.

Shafroth:

Is that right? Does that suit you?

H.M.Jr:

Helvering: Yes
H.M.Jr:

After you fellows get something, then Oliphant wants

Oliphant:

Well, Morrison sent his over to me for any suggestions

to take a look at it.

before he took it up - before he put his draft along
with Helvering's in order to iron out the differences -

minor differences.
H.M.Jr:

Shafroth:

Well, are Magill, Oliphant and Shafroth agreed on this?
Yes, we're together.

H.M.Jr:

It's the question of Shafroth and Helvering getting
together?

Shafroth:
H.M.Jr:

That's right.
Well then, it looks as though you + if you fellows
get together this afternoon - today's Tuesday - the

chances of my getting something by Monday are pretty

good? Huh?

Helvering:

I think so.

200

-6-

H.M.Jr:

All right. I'm in dead earnest; if I don't get
something

Helvering: Well, I want to restate what Mr. Oliphant said.
There hasn't been any disposition to hold the thing
up at all.
No, I think that's very true.
Magill:
H.M.Jr:
But just for one reason or other - all very nice
excuses - there's been - it's just been a chain of
circumstances, that's all. What? Right?
Helvering: Well, that's so.
H.M.Jr:
All right. Now, do you (Magill) want to add anything
to this?

Magill:

No, I think you covered that perfectly. Subject to
getting the excise tax resolution through and the
tax investigation through Congress this week, I am
at your disposal, whenever you people can agree on

H.M.Jr:

I mean have I left anything uncovered? Mac, you want
to add your fine Italian hand?

McR:

Nothing to add. I think you've got it going at....

H.M.Jr:

What?

McR:

I think you'll get your answer by Monday.

H.M.Jr:

You think I'll write it Monday?

McR:

No, I think you'll get your answer by Monday and that

you will be satisfied with it.

H.M.Jr:

You think so?

McR:

I don't anticipate any difficulty.

H.M.Jr:

What are the odds on it?

McR"

I'll give you even money.

H.M.Jr:
McR:

I'll take you - 25 cents they don't.
You're betting they don't? Well, you'd just as well
pay me.

201
-7H.M.Jr:

25 cents.

Shafroth:

He's going to have to split with us if he wins, Mac.
If I lose, I'm going to collect a dollar apiece from

McR:

you boys.
H.M.Jr:

Magill:

You (Magill) want any piece of my 25 cents?
You're betting they won't?

H.M.Jr:

I'm betting 25 cents they won't.

Magill:

I think I've got to stay in a position of neutrality.
All right.

H.M.Jr:

Now, next thing, tax investigation. You want to
talk on that, Ryan?
Ryan:

Yes.

H.M.Jr:

Go ahead.

Ryan:

H.M.Jr:

Maybe Morrie should talk, but I'm glad to.
Well, the reason that I called on you instead of
Morrie was that - on account of the last talk I had
with you, and seeing the President.

Ryan:

Well, I'll be very glad to. I think I can give you

H.M.Jr:
Ryan:

the picture and I should.
I think you should.

I entered into this job in good faith, earnest and
enthusiastic. I had in the outset some qualifications
as to my ability to handle the job, but I wanted to
do my share and take the work on.

We got the files on Friday. Morrison and I started in.
started going over these files. The more I studied
the question, saw the problems arising, the more I
saw my unfitness for handling that job. I recognize
my shortcomings. My temperament isn't that of an

We called in several men in the shop down there and

202

-8-

investigator or a prosecutor. My temperament is
more along the line of weighing each side and seeing
each side. That's been my training. And in going
over these files I began to see each side of the
question.

I also began to understand what would develop as
any particular item was brought before the committee;

that is, all of the ramifications, the opposite side -

the combative side coming in and presenting their
picture. And seeing the great many questions that
might arise in the fight before the committee on this
particular item, I began to r ealize immediately my
shortcomings as far as the tax background is concerned,
the complete understanding of the tax laws and their

history, and the application of the laws over a broad
general field, realizing that the man that handles
this has to be able to work on his feet, think quickly
and accurately, and have far-seeing vision as to any
particular position on what might be said; that is,
the effect that it might have on the Bureau and our
general taxing situation.
I have been down here four months, I have worked hard,

and I have - my vision has been directed at one case
at a time. A good many cases have gone over the desk,
but I decide one thing at a time, and forget that,
and move on to the next problem. I haven't accumulated -

and that's one thing that's worried me; I think I've
handled my work fairly well in deciding each case, but

I haven't accumulated a very broad, sound background
upon which I can draw as far as the statutes are concerned,

and the regulations and the history behind them. Now,
that could be supplemented to a certain extent by having
able men around me; but nevertheless, the fellow that
leads off should have that certainty, he should have

that faith in himself, that he is able to handle any
situation of that kind that comes up. I lack that.

I also lack this temperament which it seems to me is
absolutely necessary for the successful handling of

this job. Certain fellows have a more or less judicial
temperament, and others love to get in and fight on
their feet and investigate and pull out and win their
point.

Do I make myself clear?

203
-9-

H.M.Jr:

entirely.

Ryan:

As to that?

H.M.Jr:

Oh yes.

Ryan:

Now, my - I'll repeat it again - my point of view

is to weigh each side and, if there are some dangers
on one side, to recognize them immediately and weigh

the thing, and if the dangers are too great or the
problems are too great, "Well," I say, "that fellow

H.M.Jr:

is entitled to this decision here."
Well, you see, as I say, this will be a confessional
meeting, see?

Ryan:

Yes.

H.M.Jr:

Now, Magill talked to me Saturday morning and told me

that Shafroth wanted to talk to me about this thing
and I should get hold of the two of you and give you
a pep talk. I frankly said I needed every ounce of
strength that I had to make this very delicate decision
that only one person could make, and that was how to

sell 800 million dollars worth of securities, and I

just couldn't spare any energy that I had Saturday to
talk to you two guys.

Ryan:

Well, Mr. Morgenthau

H.M.Jr:

No, and it was a very, very delicate decision. Well,

I happened to make the right one; but the day I'm
wrong - can't decide 800 million dollars wrong more

than once. So I told Magill perfectly frankly that
I couldn't do it. Therefore we're having this meeting
today, see? I mean I knew what was in your mind.

Ryan:

H.M.Jr:
Ryan:

And what I wanted to say was this, that if you feel
that way I wouldn't want you to take this job.
Well, I shouldn't - I mean we want this thing to be
a success, and the thing to do when you recognize a
weakness is to be perfectly frank.
It's much better to do it in this room and be
entirely frank
Why, certainly.

204
-10-

H.M.Jr:

than to start this thing; because you're going

to have opposing you the smartest tax lawyers in

America
Ryan:

H.M.Jr:

No question about it.

.who are going to fight every 32d of an inch.

Now, for example, the President told me that Sunday
arrived in town ex-Senator - what's his name?
Magill:

Hastings.

H.M.Jr:

Hastings, whose sole job has been - is to keep the
name of the Hughes firm from being made public; and
he's going to S tay here until he's - he either wins
or is defeated, see?

And - I mean this is the kind of thing that - it
doesn't have to be trained for, but it needs a

Johnny Mack who loves it, see? - who loves it and

is willing if necessary, if his back is against a
wall, to be just a little bit rougher than the

opposition. I've seen John Mack go through a case I mean he doesn't handle tax matters, but when he's

on his feet he can think a little bit faster than
the other fellow, and - because they'11 never know
what rough stuff he'll pull if necessary. I mean
that he'll be just a little bit rougher than the

opposition if necessary, and I've seen him pull stuff
that would just make a New York City lawyer who's
got ten years of the New York bar "refinement" but

who

formerly came from the states, just blush inwardly
when
John goes after him. Now, that's what this thing
needs.

Ryan:

And it also needs - I mean to have that you've got to

have a background of confidence of your general subject

matter.
H.M.Jr:

Well, this is the kind of thing that - I mean goes
against all of my training that I have had - I wouldn't
spend two seconds selling this job to anybody. I just
wouldn't spend two seconds - I wouldn't spend one
second trying to sell it to them. I mean either you
want to do it, see - you want to do it very, very much,
or you feel this way; then if you feel this way - then
I'd say you are constitutionally unfitted for it.

Ryan:

Yes, that's my impression, my judgment. I can go

205
-11-

farther, but that's

many other items.
H.M.Jr:
Ryan:

I mean we've got a good

I wouldn't spend one split second after your speech.
And I don't think any the less of you.

No, I'm not blushing about it at all. I went into

it in perfect good faith and that's my best judgment,

and it's sound judgment too.
H.M.Jr:

That's your best judgment, and I say that you are
constitutionally not the person.

Ryan:

Not fit for the job.

H.M.Jr:

No.

Ryan:

That's right.

H.M.Jr:

No. I'd say that the thing to do is to find somebody
who is itching to do the job. You've got to have
something of the Joan of Arc in you burning if you
want to do this thing. Now, I don't say that the
person who does this has to get rough, but if the
other side gets rough he has to have enough of this
thing in him that he can get just as rough as the
other side.

And I think the statement which I made last night in
answer to Mr. J. P. Morgan - the President discussed
it at great length and he said he was so glad I did,
because he said, as he put it, that J. P. Morgan is
a "sweetie," but he's living in 1890, and the American
people will not agree with him, the American people
will not agree with Mr. Morgan.
Oliphant:

They've moved forward.

H.M..

And that he is living in the 1890's; he's living on
a country estate in England.

I certainly had to get a laugh out of the new Prime
Minister; he said he's going to take the 600-odd
utility companies in England and knock their heads
together and he's going to tell which companies are
going to gobble which. Did you see that?

Helvering: No, I didn't see that.

206
-12H.M.Jr:

Yes,
Mr. Chamberlain said there's too many utility
companies.

Magill:

That's conservatism in England.

H.M.Jr:

He said, "We've got to divide up the territory, but
I'm going to tell which company's going to absorb
which.
rate." I want a good job and I want a low utility
Well, Ryan, I'm tickled to death that you said just
what you said, and I admire you for it, see, and that
doesn't mean that you are one bit less useful in the
work that you're doing, the work that we asked you to
come to do. But I think we've all got to put our

heads together to find somebody that wants to do it

and is fitted to do it. See?

MCR:

Of course, in the meantime your investigative end

is going forward. They aren't stopping that; that
can go on - full job.

H.M.Jr:

Magill:

Let's just leave that where it is, and we can come
back.
one other thing. You (Magill)
better I've
takegot
this.

I read that revenue agents' report - report of the

revenue agents' conference
H.M.Jr:

Magill:

Just talk the way you talked to me this morning.
and I was very much disappointed with it, because

as I got the situation it is about like this: You

remember Russell and Sherwood and McReynolds and

Wood and yourself (Helvering) and myself at one
time and another discussed this business of the

local procedure. The matter that lay closest to

my heart in the whole business was to prevent this
endless sending out of 30-day letters and then 60-day
letters which are insufficiently grounded and on
which our percentage of success is not so good.
Now, I assume the reason why those 30-day letters

get sent out as they do now and there are a lot of
points raised which aren't any good and which we
have to abandon, winning too small a percentage of
our cases, is because these examining agents make

207
-13-

these points that really aren't so hot, and which
could be prevented if the efforts of the examining
agents were more closely supervised, etc. And I
thought that we had all agreed upon a plan of pro-

cedure which we all thought would eliminate a good

part of that difficulty.

Now, I'm quite as agreeable as anyone to varying this

plan of procedure to suit local conditions in particular places where your manpower varies. But as I get
this report of this revenue agents' conference, what
happens is that we send out this preliminary letter
and suggest to these people that this is what we're
going to do and we'd like to have their ideas, and
they come in and have a meeting and prepare these

reports which are now sent out, or are going to be
sent out, in which they say everything is perfect the
way it is and we don't want to change a bit, because

to change it would be to spoil it. And so far as I

can see then, what you and I and McReynolds and every-

body else has done for the past four or five months

in trying to work this out, they simply throw in the
ashcan.

Now, the decentralization business, the idea of having
Dallas and San Francisco and New York embark upon a

program similar to Cleveland, is all right, but as I
see it we ought to do something much more far-reaching
than that. You've got all these other offices. And
I dislike two things. First, I dislike to see San
Francisco, Dallas, and New York set up on just the
same basis as Cleveland, without any change, when,
as I take it, we know now or ought to that there are

certain improvements which could be made on Cleveland.

And then, secondly, that, as I say - that all this
work which Wood and McReynolds and all the rest of us
have done, to try to improve this local procedure - we
had this conference of revenue agents take a look at
it and they say, "Well, we won't do that because to do
so might be to reflect on the examining agents," or

something of the kind. Well, as I see it, they need
to be reflected on, because their production record
isn't good.
Now, I don't particularly care whether we improve it
in the way that you and I worked out, or McReynolds
and Russell, or whether they improve it some other

208
-14-

way; but I do most strongly object to spending
several months working out a program and then
having them come down and say, "Everything is

perfect the way it is, so we won't change it."
I mean what's the use? I don't get it. I mean
I don't see why it should have worked out that

way. Do you (Helvering)?

Helvering: Well, I haven't studied that report in detail yet.
Magill:
Well, the whole thing - I read the whole report over
the weekend, and the whole report is the same old
story that "Everything is all right in the best of
all possible worlds; we got a fine bunch of fellows
and they're all doing their job perfectly, and if
they're just allowed to keep on the way they are,
everything will be rosy." Well, I'd be glad to
agree with them, except that as far as I can get
anything out of the record what they report just isn't
so. I mean the work isn't being perfectly done and

we're not winning as many cases as we should; we've
got too many deficiencies; we get too many 30-day

letters. I've been on the receiving end of these
30-day letters, and I know they laugh at them, because
in the big ones three out of every four points they
make, I would say, are simply silly; and they are silly
in a way that is, to my way of thinking, most discreditable to the Bureau, because in the ones that I

have surveyed, in practice the point they make is good I mean there is a deficiency and we know there is a
deficiency; returns are being made up these days

deliberately with deficiencies; taxpayers are generally
doing that. But the reason that the agent will give
as to why there is a deficiency is, as I say, just
silly, and we go to court on that reason and you g et
licked, and it ought not to be. The money is there

if we will go out and collect it.

Now, I don't know - that is one reason why I suggested

bringing up this point at this time - IThe
don't
know
what
thing
is in
is the proper procedure if that
kind of a bad shape because we have had this conference

and these fellows make these reports and they are all

mimeographed, and I suppose they 've gone out, haven't
they?

Helvering: Yes.

209
-15-

Magill:

Oliphant:

I don't know - and there you are - I don't know what
else better that you can do except that instead of
approaching them gently now and saying, "Well, this
is what we propose and we think this is a good idea,
and think about it," I suppose now what we've got to
do is hit them over the head with a ball bat and

say, "Whether you like it or not, this is what we're
going to do," and not to kid themselves into thinking
that what they're doing is so perfect.
I encountered the same attitude. I've been trying to
work two years on a proposed revision of the administrative set-up and among our lawyers I encountered

the general attitude "Well, everything is all right."

Magill:

I would understand it - I mean if there were some
difference of opinion between you (Helvering) and
me, or between Charlie Russell and me, or Bill
Sherwood and me, and they'd been telling me, "Well,
this thing that Wood has worked out and that Mac
has gone over and that you propose is all wet"

Helvering: Well, I really think so. I think it is the most
nonsensical thing I ever read.

H.M.Jr:

What is?

Helvering:

Wood's report. We couldn't possibly have enough men
to carry out his recommendations unless we get a ten

Magill:

million dollar increase in appropriation.
Well, then I - then I guess I've been kidding myself
because as I understood it these letters were all gone
over - Mac handled it - and

Helvering:

I'm only referring to that proposed set-up for examination in offices of the taxpayer by the agents of all
this matter.

Magill:

Well now, as I was going to say, I think Mac's got
to take the chair, because Mac worked these things
out on my behalf with Charlie Russell and with
Sherwood, and these letters went out. Now, as I
understood, everybody agreed that this was a good
idea. Now, maybe they didn't; maybe

Helvering: I may not have the same thing in mind you're talking
about.

210

-16H.M.Jr:

I don't know what the so-called Wood report is.

Magill:

Well. Herbert Wood, who is a tax lawyer - been in
the Bureau before - had been working for Mac for
some time before I came here. He had various proposals as to r eorganization and reform in the Bureau;
some of them I agreed with and some of them I didn't.
I went over it with Mac and then went over it with him

while you were in Florida; went over it with Russell
and Sherwood. Well, as I pictured it, we finally
arrived at a conclusion as to what we thought was a
workable procedure that would be an improvement over
what we had; and at that point I suggested that Russell

and Sherwood work out a letter which would go out to
the Internal Revenue agents outlining the changes which
we wanted to make, and the letter was worked out with
Mac.

There were, as I recall it, two sets of letters. One

letter was to go to the agents generally, and the
other was to go to the agents in San Francisco, Dallas,
and New York, where we proposed to put in this

H.M.Jr:

Well, what happened to them?

Magill:

Well, these letters went out prior to this Internal
Revenue agents' conference, and the idea was, as I
understood it, to tell them, "This is what we're going
to do. Now come down here and ask us any questions

about it that you want to, and then go back and put
them into effect."
McR:

I'll get copies of those things that have actually
gone.

H.M.Jr:

Just a second; wait a second. We're getting down,

if you don't mind - for the time that I got, it's
too much administrative detail, see? All I want to
say is this, and I'll say it here. I brought Magill
down to do a job; I'll back him a hundred percent,
see? It's a tough thing - I don't know - but I'm
willing to say this: I'll take it blind; just as the
Congressman from Massachusetts got you on your feet
when you got up there and he said, "Mr. Morgenthau

said when Mr. Magill testified three years ago that
he had his confidence and could talk for him. Is

that still true?" Well, it is still true, see?

211
-17-

Now, the way I feel is, up to now we have been smart
enough here in the Treasury to keep one jump ahead

of Congressional investigation, and I ee the writing
on the wall and I think there are a lot of things that
are here which are damn difficult to answer. And I
think if all of us in this room are smart enough, we
can keep one jump ahead of the Congressional investi-

gation.

(Has conversation on White House phone with

Charles West - separately transcribed)

Now, may I say, let's get order or precedence on

this thing. We've got our investigation and these
rush jobs; we've got to keep that thing moving, and
I'd almost say that thing would come first, wouldn't

you (Magill)?
Magill:

I'd say so.

H.M.Jr:

Then they're going to have this meeting this afternoon,
Helvering and Shafroth, and they're going to try to
get together this afternoon and tomorrow and solve

that thing. Then I would say if they get that, all
the time keeping this thing going, investigating,
getting that staff, then this letter which - I don't

understand what you fellows want - I would take that
up next, see, if you haven't got what you want, and

I take it that you (Magill) and Mac together run that
thing, because Mac wrote the letter, most likely. I
would say that just as soon as these two fellows get
together on this thing, which has been on the griddle,
I would take up that other thing.
Now, does that suit you?
Mag.ill:

Yes, fine. I think I

H.M.Jr:

Would you do it in that order? (To McReynolds)

McR:

Yes. I just want to say this. I think Mr

H.M.Jr:

Is that the order you'd like to do it in, because you
can't do too many things, and then there are these
things which I want Helvering to talk to me about
these other emergency things. Now, I think that
-

212
-18-

early next week we can get together and if these
agents aren't approaching our customers in the proper

way, I'd like to go into it myself, see? I mean if

Helvering:

McR:

they're not doing it the way we think
Don't get the idea that I'm defending everything
these agents do. Some of them are old, staid fellows
that have got certain prescribed rules they go by,
and you've got to jar them out of that.
I just want to make one short statement. Guy is -

the thing that he refers to, that he thinks is silly,

with the limitations we have on money and manpower

particularly, is merely an ideal, and that was grad-

ually sifted out of the I started Wood; I was

responsible for Wood putting that up as something to
work toward. That was gradually sifted out of the
program and worked into - back to where we thought

we could work it. And the letter - the reason I
started out a minute ago - I think the letter that

we had in mind and finally agreed on has actually
gone out, Ros.

Magill:

It's gone out. I think there is no question about

McR:

And it's gone since the conference.

Magill:
McR:

Well, what I'm - what worried me were these reports
in the conference.
I haven't seen those.

H.M.Jr:

But is this - has the letter gone out, the one that

that.

Magill wanted?

McR:

The one that he wanted.

Oliphant:

When did it go out?
Since the conference.

McR:

H.M.Jr:

Magill:

GO gt it. Have you sent?
I haven't seen the letter since the conference.

McR:

You saw the letter before. It's the same letter we

213
-19-

agreed on before, and I don't think it is necessary
to go into the thing here in detail, but
H.M.Jr:

Well, let Magill take a look at the letter.

McR:

I had it on my desk this morning. It just came back
from Guy this - yesterday evening.

Magill:
H.M.Jr:

What worried me was these reports of the conference.
But notwithstanding the conference...

McR:

The letters have gone out the way you wanted them.

Magill:
MCR:

Well, that's approaching it.
I think there's no difference.

H.M.Jr:

Let's hope not.
Now, you (Helvering) got something for me?

Helvering:

Well, we made a survey and we find not so many in
number in answer to these telegrams, but quite a

list of them here on that.

H.M.Jr:

May I look at it?

Helvering:

These top ones there are the ones we had returns in

H.M.Jr:

Well, let me do a little reading. "Returns in the
Washington Division, 35. Mr. DuPont deducted
$81,000 from his farm." This is the farm blanks,
you see. "Mr. Harry J. Haskell, of Wilmington, made
a deduction of $35,000." Well, they don't - "Miss
Helen White Eustis" - but they don't say how much,
do they? It's blank after that; I wonder what that

the Bureau on, and the others are by districts.

means.

Helvering:

Well, evidently, it's about $25,000, but the auditor
who found that report didn't jot down the amount.

H.M."r:

"Harold Rice, of Honolulu deducted
$60,000. Talbot Laska deducted $27,000. Charles
McManus, of Spring Lake, New Jersey, deducted
$32,000. Hamilton Keene deducted $37,000. William
Kincaid deducted $24,000.
Oh well

214

-20-

Magill:

Now, what's that, '35?

Helvering: '35, yes.
Well, I wonder if those losses perhaps don't
Magill:

appear on that 1040-F; because, you know, on
McManus, for instance - he was one of our cases

in the President's report, and he deducted
$125,000 on that chicken farm according to the
last information we had.

H.M.Jr:

Say, here's a peach. "W. R. Coe" - this is in
response to a telegram - "of Brooklyn, offices
at the Chrysler Building in New York" - has
anybody ever heard

Oliphant:
H.M.Jr:

He's a racing man, has a big string.
- "reported net tax income of $1,575,000 after
deducting a loss of $51,000 for operating a sheep
ranch in Wyoming and a horse-breeding farm in
Kentucky and a racing stable at Belmont."

Oliphant: That's he.
H.M.Jr:
"Mr. Kilmer, of Buffalo - net loss from operating
a farm, $118,000."

Magill:

That's a racing stable.

Oliphant:
H.M.Jr:

That's a racing stable, - Kilmer.
Harry Yates - I know him; he's got a Holstein farm -

Helvering:

That telegram perhaps should have been elaborated

took a loss of $54,000.

a little more, telling them to send in the amounts;
but all we asked in the telegram - well, there's
a copy - was the name and address.

Magill:

I'm curious about those because they are so small.

It would indicate that there must be more of this
incorporated country place business than what we

have known about.
H.M.Jr:

They don't give the amounts. "Ambrose Clark" isn't that Singer Sewing Machine?

215
-21-

Magill: I think so.
Helvering:

Well, all of those are in excess of $25,000, but
in sending the telegram we told them to give the

name and address of all those over $25,000, and
some of the agents wrote the amounts and some didn't.
H.M.Jr:

Samuel Riddle -

Oliphant:

Riddle farms.

H.M.Jr:

- $108,000 loss.

Magill:

Well, Guy, if you had a corporation - if you had a
corporation and you had a couple million dollars
of securities, and the income from the securities were
used to take care of the losses, all that would be
shown in a thing like this would be the net, wouldn't
it? In other words, you might be losing $250,000 on
your farm operations, but if you had $200,0 of
interest on securities which were going into the same

company, you'd only show a $50,000 loss.
Shafroth:

Put your
blank would show your loss. It would
have
to befarm
attached.

Magill:

I wonder if it would.

H.M.Jr:

Well,
losses.you can't find - there's no place for securities

Helvering:

The farm loss only shows the net.

H.M.Jr:

On
farm alone? I don't think you show it on the
farmthe
blank.

Magill:

I wonder if they'd figure it - I'm just feeling,

groping around here; there's something back of this;
there's more than meets the eye.

H.M.Jr:

Well now, the immediate thing, it seems to me, is
where we're at - Ros, you're up against it now - on
this chief investigator. Now, before we get on that,
is there anything as to this meeting - anybody want

to say anything? I've been doing a lot of talking.

Anybody got anything?

216
-22-

Helvering: I'd just like to ask one question about the set-up
of this proposition to handle this. Are you figuring
on having three - really three units, aren't you the investigating unit, and the fellows handling the
tax returns, and the attorney.
H.M.Jr:
Ask Magill that question.
Magill:
Well, I think that the picture we had had was this:
to have an investigating unit and an attorney, and
then you'd probably need an administrative head; but
I think that as we had it in our own mind whoever took
charge of the investigation should have associated
with him people who were able to do the auditing of
the returns.

Helvering: Well now, investigators generally - you take Mr.
Irey's unit; they know investigation if you tell them
what you want; they're good at that. But there's only
about six of his men - maybe I'm wrong - there's six
of them that I've depended on to go out and make
audits together with the investigation. When you
go beyond that, we don't have many men that know

about the auditing of returns. Now, if that's true,
I was just suggesting you ought to know, before we
start after anything, that the audit is correct on

it.

Magill:

Yes. Well, I think that's probably true. Of course,
as far as I've thought about it, the attorney, whoever
he may be, presumably takes these cases that we have
given him and such others as may occur to him, and

starts from that end. They commence to get the material
from the Bureau with respect to these particular instances and then the others that he may think about.

What I would really like to see is the sort of thing
I've been wishing we had for a month or two; that is,
I wish we had somebody from the Income Tax Unit who
had kept his eyes open for these things in the past,
who is a person of experience and could advise the
attorney or advise the investigator as to where he
might hope to look, what he might hope to find; now,
in other words, a person who is not only a successful
auditor but a person who's got a nose for these discrepancies that ought to be gone into. We need a

217
-23-

person with a good deal of initiative.
As far as the sheer auditing and seeing that the
attorney doesn't get his feet wet in what he's

presenting to the committee, I assume we'd have to
have several auditors associated with him to do
that job.

MCR:

Guy, in talking with Elmer, it is my understanding
that your special advisory group and Charlie Russell's
group have both already detailed to work with him some
of their - two or three of the very best men they have
got, right along the very line that Ros is talking about
now.

Magill:

Would that do it?

Helvering:

What I'm getting at is, you might have a certain case
and the man handling that case in the Bureau might be
a good auditor but he has no original ideas; and if
you had somebody who was a head of that under you to
choose men over there to do the work - maybe they've

done that - but I think you ought to have that unit.

McR:

Elmer has developed - he's got the contacts with
people - the two places in your Bureau where you'd
find them, and he told me yesterday that the man who
is attached

Magill:

Well, I wonder why wouldn't this be - could you ask
Irey to see what he has done and let me know whether
these men that he's been talking about to Russell
are satisfactory for this purpose or not. If they're
not, I'd be glad to know it and make other arrangements.

Helvering: We'll have to talk to Russell then. The last time I
had a conference with Irey, he was arranging this
space and all that kind of stuff.
McR:

Anderson's taking care of that.

H.M.Jr:

"ho is?

McR:

Anderson, one of Irey's men. I've arranged - rented
the space and ordered the equipment. Burford is going
to help Irey. Anderson is just taking over the routine
administrative detail. I got hold of Procurement, made
them dig up the equipment.

218

-24-

Magill:

Well now, does that care for that, because if it

doesn't, why

Helvering: Well, I'd like to find out just what they've done,
because I think you're going to find you call a
certain man over in your Unit there - Income Tax and he won't have a single bright idea. He's just
a good auditor on the figures before him. And I think
somebody over there who knows those men should be in
charge of that particular end of it.
I think you're quite right, because that's what we've
Magill:
found all along - difficulty locating the information.
McR:

It was my understanding from my last talk with Elmer
that both the head of the conference and the head of your Deputy in charge of Income Tax had already undertaken to designate somebody to help on this investigation, the best men that they could suggest with a view

to the qualifications that you are talking about. Now,
I think probably you'd be satisfied with the arrangements Elmer has made, but I think it would be an excel-

lent thing for you to talk to him about it.

Magill:
Helvering:

I don't know whether you have had this in mind or not,
be set up in some separate group or work with Irey?
No, I think the whole thing's got to work together.
But when you get in a case like - look at Ford's,
for instance; the fellow sits down and there's the
General Counsel's ruling of 1929 that the farm loss
is deductible. He audits the figures, makes the audit,
but he has no further

but let's bring it out. Do you think they ought to

Oliphant: Passes right over the interesting stuff.
Helvering: Passes right over the interesting stuff.
That's right. If you will check that with Irey and
Magill:
see whether that's all right or not - if it should

be done some other way, let me know and we'll do it.

H.M.Jr:

Well, if Oliphant, Magill and Mac could stay for
another minute to talk about another matter

Helvering: May I say just one thing right here in the room?

219
-25-

H.M.Jr:

Surely.

Helvering:

I've had two Senators and three Congressmen ask me,

"What's the matter with the Internal Revenue? Why

haven't you been doing the job?" This letter of
the President and all these things throws that interpretation; a lot of fellows interpret that on the
Hill that the Internal Revenue Bureau hasn't been
doing the kind of job it should, because things
wouldn't happen

Magill:

"ell, you know, part of that, Guy - what they're
trying to do is in part to excuse themselves, because
their other criticism is, "Why didn't we correct this
four years ago," and they're just looking around to
fine a place to put the blame.

Helvering:

Well, I just wanted to mention it, because you've got
to be on your guard about that.
I know, but listen, this is something very - they'11
try to smear everybody; don't you think that these
rich boys aren't going to spend plenty of money.

H.M.Jr:

Helvering: I don't care; I'd rather enjoy that, but
H.M.Jr:
"ell, after all, the Senate's got to explain, don't they,
why they didn't take the House bill last year. I
wouldn't let that worry me.

Helvering:

Oh, I'm not worrying about it. I'm just saying that
if the thing isn't watched pretty carefully, you're
going to have a full investigation of the Treasury
and especially the Internal Revenue.

Magill:

Well that, also speaking in the room, is one reason

why it is highly important for us to get a first-rate
attorney and get him started immediately.

Oliphant:

Get the jump on them.

Magill:

If it could have been Ryan, it would have been ideal,
because then you've got your own a ttorney coming up
and appearing before them right away and getting

started, and it can't be an investigation of the

Bureau.

Oliphant:

It won't be, if we grab it.

220

-26-

Helvering: Outside of time, I don't care how much they investigate it, but just the time that they have
All right, thank you.
H.M.Jr:
Ryan:

Goodbye.

221

Conversation with Charles West, Undersecretary
of the Interior, on White House phone, re HOUSING
H.M.Jr:

Yes, Charlie.

West. Ha, ha, ha!

June 8, 1937
11:10 A.M.

Oh, this is Charles "Housing"

-

-

-

Yes.

I'm not going to be bothered by anything. I only
Charlie West into a slum clearance. Don't forget,
though, as I walked into the President's yesterday,
you buttonholed me and said, "Henry, I'm willing
to do this now." Remember? - You did. I'll
never let you forget it.
had one worry, and that was to put Charlie House -

All I know from what Wagner told me was that seven
dollars a room was too high, see, and that he wants

something lower. Now, that's all I got out of

Wagner. - - No, no. - No, I do not.
No, I do not. -

The formula I worked out? - - You mean - you're
talking of the one in the President's handwriting.
Well, the one that I worked out is the one that I
am willing to stand on and recommend to the President
and to the country as a sound way to get low-rent
housing.

Okey-doke.

Now, the President, as far as I know - all that I
know from the President, his own lips, is that his
only objection to my plan was that it didn't give us

a cheap enough room, but - and then when I showed the
President his own memorandum, he said, "Well, what's

the matter with that?" And the only thing I've got
that he's committed to is to ten million dollars a
year. Now, does that check all around? - - What?

All right.

When those boys get through, they ought to make a
mural of you, McReynolds, and me; they ought to paint

a mural of you and me. - - O.K. But listen,
when they do I don't want our back towards the Court.
- All right. Thank you.

222

June 8, 1937
11:46 a.m.
H.M.Jr:

Hello?

Helvering:

Hello?

H.M.Jr:

Yes.

Oliphant:

Now, I wanted Guy Helvering to tell you this.

H.M.Jr:

Yes.

Helvering:

He's called me for advice and he sent the men out.
Mr. Dwight's representatives, two of them, were in
here to see me, and have presented a letter signed

by Dwight - there are several pages of it -

H.M.Jr:

Yes.

H:

Explaining his situation and how he's endeavored to

get this question settled before. They have presented me this letter; also a check which is the
entire tax on interest - two hundred sixty-seven

five naught six fifty.

H.M.Jr:

Well - ah - two hundred and sixty-seven what?

H:

$267,506.50.

H.M.Jr:

Yes.

H:

Also waivers of restrictions on the assessment of the

H.M.Jr:

Yes.

H:

The regular form. And then a compromise to be

H.M.Jr:

Yes.

H:

H.M.Jr:
H:

H.M.Jr:

tax and all that.

accepted settling the whole matter, - without any prejudice.
Yes.

This amount represents simply the tax for the 4
years under discretion.
Yes.

223

2

H:

About fifty-three, four or five thousand dollars
each year and the interest.

H.M.Jr:

Yes.

H:

Then he offered a compromise to have this all settled.

Now, I have refused to accept this letter. It's on
my
desk, but I refused to accept it under existing
circumstances.
H:

Yes.

-

H.M.Jr:

But they rather think that I should accept it.

H.M.Jr:

Who is they?

H:

These two attorneys - Mr. Brooks and Mr. Cuthill.

H.M.Jr:

Where are they now?

H:

H.M.Jr:

They just stepped out of the office while I was
talking to you.
Oh, well, I mean are you and Oliphant in the same
room?

H:

No, we're on the same line. I'm over at my office
and Oliphant is in his office.

H.M.Jr:

Well, are these attorneys working for the Treasury.
Oh, no. No, they're representing Mr. Dwight.
Oh, well, it so happens Magill is here himself in

Oliphant:
H.M.Jr:

my room.
0:

That's what I thought.

H.M.Jr:

You did.

0:

Yes.

H.M.Jr:

You smelled him?

0:

No, I've been trying to get him and they said he was -

H.M.Jr:

Oh.

224

3

I was trying to get it cleared up and I tried to get

0:

him.
My- notion is about it - Guy asked me for my
advice,

H.M.Jr:

Oh.

0:

I think the thing ought to be handled just as if it
was John Jones of Padonk, Iowa - just proceed to
handle it in the regular way.

H.M.Jr:

And how would that be?

Helvering:

Just accept this as an offering compromise.
Accept it as an offering compromise?

H.M.Jr:
H:

H.M.Jr:
H:

Yes.

For consideration as.

Yes, I mean for consideration as an offering compromise.

H.M.Jr:

0:

Yes. And what does that mean? What does that mean
to consider it - you mean you'll take it under consideration?

Yes, that's it.

H.M.Jr:

What do you do with the check?
Hello there?

H.M. Jr:

What do you do with the check?

Helvering:

Well, of course, if they offer us a check then we'd
send that to the Collector in New York for him to if later we accepted the offer.

H.M.Jr:

Well, what would you do if somebody else came in

and owed you for four years? Would you take the stuff
or would you check on the penalty?

H:

Well, that's a question in this case on account of
his 1932 return citing the - what this was; that is,
this interest on an amount of money he borrowed to
pay for an insurance -

H.M.Jr:

Oh, yes.

225

4

H.M.Jr:

In other words it is one of the cases.

H:

Yes.

H.M.Jr:

Well, supposing - supposing you - what - what's
the technical language - you accept it as what?

H:

Take it under advisement.

H.M.Jr:

Yes, I understand that. Now just a minute.
(Pause)

H.M.Jr:

Well, it seems that we all seem to think you ought
to take it under advisement.

H:

Yes.

H.M.Jr:

See?

H:

H.M.Jr:
H:

Well, if that's all right, it's Magill says definitely you should not accept it.
Well, we haven't. Mr. Secretary, they have a regular
offering compromise here attached to all the other
papers, -

H.M.Jr:
H:

Yes.

- in which it reads that these compacts for the calendar years '32, '33, '34 - '32, '33, '34 and '35 they run 56 thousand, 53 thousand, 57 thousand, and

62 thousand.
H.M.Jr:
H:

Yes.

That added together with the interest up to June 7,
yesterday, amounts to $267,506. Now that is all set
out in the open compromise - the offering compromise
reads $267,506.50 is hereby tendered
of thevoluntarily
said liability;

to wit, all tax deficiencies, interest thereon, and
penalties, if any.
H.M.Jr:

Yes, now, look - hello?
Yes.

226

5

H.M.Jr:
H:

H.M.Jr:
H:

H.M.Jr:
H:

If anybody else walked into your office you wouldn't
give them a yes or no on the spot.
Oh, no, no, no.

Well, I'd take it under advisement and let it go
through the mill just the way Oliphant said.
This fellow is from Podunk and I'd take it under
advisement and let your people look at it, and you
will let him know within a reasonable time. And
if he doesn't want to leave the check there, why
let him take it home. I wouldn't give him a yes or
no.
Well, I'm not going to do that.
Well, as far as -

I didn't want to accept it in my office at all,

unless we were free to give this consideration as
an offering compromise.

H.M.Jr:

Well, I mean I can only repeat what I said to you you take the whole matter under advisement.
Yes.

H.M.Jr:

Is that right, Herman?

Oliphant:

Oh, yes. That's right.
Well, Guy, I'm going to hang up. I don't geel that

H.M.Jr:

I can contribute any more.

0:

Well, I just thought you might be interested in it.

H.M.Jr:

Well, I am.

0:

And I wanted - I wanted Magill to know about it. He's
on the line, isn't he?
Well, we've got the loud speaker on.
That's fine.

H.M.Jr:

I am - I am particularly interested at this time.

0:

H.M.Jr:

227

6

0:

That's right.

H.M.Jr:

And I appreciate your calling me, and I've had my
lunch, and I'm going to leave here in two minutes.

0:

I thought you might leave us a good taste of it.
It's not quite big enough.

H.M.Jr:

(Laughter)

That is not my mouth; I mean the check.
(Laughter)
H:

Okay.

H.M.Jr:

Thank you.

Copa for SECRETARY

228

PLAIN

MG

London

Dated June 8, 1937.
Rec'd 12:55 p.m.

Secretary of State,
Washington.

Rush 359, June 8, 6 p.m.
FOR TREASURY FROM BUTTERWORTH.

The Chancellor of the Exchequer answered a number of

questions in the House of Commons this afternoon by the
following statement:
"I am glad of the opportunity of making a stat ement
with a view to removing some of the misconceptions which

have been prevalent. British monetary policy remains as
laid down by my predecessor in his statement to the
World Economic Conference in 1933 and in the declaration
by the delegates of the British Commonwealth at the same

conference and in the tripartite declaration of September last. No change in this policy is contemplated
or has come before the Imperial Conference. This policy
does not involve an obligation on us to buy gold at
fixed prices but it does involve the purchase or sale of
gold for the purpose of checking undue fluctuations in
exchange rates. We have never hesitated and will not
hesitate

229

Page 2,

MG

#359 from London

hesitate to buy and sell gold for this purpose. As
was made clear yesterday the arrangements made under the

tripartite declaration which require close contact between the respective treasuries have been working to the
full satisfaction of the governments concerned and no
modification or extension of these arrangements is under
consideration. Points of detail are under constant
review.

I am informed that the bulk of the recent offerings
of gold in the London market have been due to dishoarding".
The following supplementary, (that is extemporaneous)

questions and answers were then made: asked "Is it not

a fact that the purchases of gold by the Exchange
Equalization Fund were at a considerable discount and
does not that indicate that there has not been the wholehearted and complete cooperation between the authorities

here and the authorities in Washington we could have

wished and will he give an assurance that in future there
will be wholehearted and effective cooperation between
our authorities and those in Washington for the purchase

of surplus gold and that pending a final international
solution of this problem the British Government will do
everything in its power to maintain the sterling value
of gold

230

MG

Page 3,

#359 from London

of gold and commodity prices in the British empire".
Sir John Simon replied "As regards the second part of
the question as to whether the Government will do all
they can to maintain market prices the answer to that I
think follows quite clearly from the reply I have already given. As regards the more technical point of the
widening discount on the London market, that is, as the
honorable member knows a highly technical question. I
do not consider the circumstances have indicated any
want of cooperation. I am inclined to think and I am
advised that this highly technical question has had
attributed to it an importance which it does not merit".
Asked further "Have I understood correctly the Chan-

cellor in saying there is no indication of returning
to the gold standard and establishing a fixed relationship between sterling and gold" Sir John Simon said
"My statement was that we intended to continue on the
course we have followed and that there is no ground for
supposing we are contemplating a change. Ultimate future

questions will I think have to be considered when they
arise."
Asked whether it could be understood from his reply

that "We are to go on indefinitely buying gold we do not
want

231

MG

Page 4,

#359 from London

want in order to keep up the price of gold we have" the
Chancellor of the Exchequer said "I should make it quite

plain that if one is asked to make a new declaration I
see no occasion for a new declaration of policy and indeed
there is nothing new to declare".

The amount of gold at fixing was larger than had been

generally anticipated and the official purchases greater
than yesterday and the discount was 4 pence as against
2-3 pence. These developments have been unfavorably
commented upon in the City.

Although the rate doos not reflect it the City believes that pressure on the franc has increased of late
and considerable importance is attached to recent
weakness in French Government bonds the 3% perpetuals

being below sixty the lowest figure since the Poincare
franc was established.
BINGHAM
CSB

Copy for SECRETARY

232
PARAPHRASE OF TELEGRAM RECEIVED

FROM: American Embassy, Paris, France
DATE:

June 8, 1937, 5 p.m.

NO.: 756
FROM COCHRAN.

This evening I visited the Bank of France. The
French control's average daily losses last week until
Friday were 25,000,000 francs; they rose to 100,000,000
on Friday.

In London Saturday was a bad day for the franc. The
losses were around 100,000,000 france yesterday. Situa-

tion was exceptionally bad today, the control having
spent 260,000,000[amount questioned] francs by 5:30 p.m.

The gold and exchange reserves of the French stabilization fund were reduced to approximately 2,600,000,000

france. Should the next few days witness controversial
debates and uncertainties on the French financial program as seems probable - the reserves of the French control

may be 80 reduced that it will have to buy gold from the
Bank of France.
was

This evening Baudoin/called by Premier Blum for a

conference. There is suspicion on the part of friends
of Baudoin and Rist as to whether these two are still
pondering over the question of whether to resign from the
Technical Committee. I had a conversation with Professor
Rist a few days ago, at which time he mentioned this subject.

He significantly remarked that governments do not like to
see

233

-2see their technical advisers precipitate political crises,
while the advisers themselves do not like to continue as

such when their advice is not taken or when a futile situation prevails.
BULLITT.

EA:LWW

03113078
e

-

FEEL SENO

Copy for SECRETARY

234

PARAPHRASE OF TELEGRAM RECEIVED

FROM: American Embassy, Paris, France
EATE:

June 8, 1937, 5 p.m.

NO.: 752
FROM COCHRAN.

Since yesterday noon there has been serious deteriora-

tion on the French market. The only important buyer of
francs has been the French control, which yielded a large

amount of sterling at a quotation of 110.83. More offerings of forward franc with widening of discount. Rentes
down 95 centimes to 1.15 france in spite of purchases by
Caisse des Depots. Also weakness in French shares.

This deterioration of the market is the result of
uncertainty as to the tax program which the Minister of
Finance is submitting for consideration, and also of the
fear that shortly a political as well as a financial crisis
may develop because of the lack of resources of the Government for meeting financial requirements, and possible opposition to the program of the Government by the French
Parliament.

Finaly resigned as General Manager of the Bank de

Paris et des Pays Bas. This action is attributed directly
to differences with his President, Moreau. It is generally interpreted as being significant of the growing
distrust for the French New Deal on the part of responsible Paris bankers.
BULLITT.
EA:LWW

w
23 Wall Street

New York

June 9, 1937

Dear Mr. Secretary:

For your information I enclose a copy of
a statement which Mr. Morgan has made about taxes

from his home on Long Island. I felt sure that his
views had been misinterpreted, and I feel equally
sure that you will be glad to know it.
I am, my dear Mr. Secretary, with great
respect

Faithfully yours

Adess
The Honorable

The Secretary of the Treasury
Washington, D. C.

Enclosure

235

236

RELEASE Morning Newspapers, Thursday, June 10. 1937
Statement by Mr. J. P. Morgan.
My interview on shipboard with newspaper men last

Monday took place before I had seen President Roosevelt's
Message on income tax evasion, with Secretary Morgenthau's

letter. I am surprised at the interpretation that some
people seem to have put on my offhand remarks, for I
certainly have no sympathy with tax-dodging or tax evasion
and had no thought of defending such practices. What I

feel strongly is that when a taxpayer has complied with
all the terms of the law, he should not be held up to
obloquy for not having paid more than he owed.

June 9, 1937

not I2 1031

237

23 Wall Street
June 8, 1937

New York

Dear Mr. Secretary:

I am sorry for Mr. Morgan's remarks about

taxes to the ship news reporters in the fog down the

bay yesterday. They do not reflect the views of the
active partners, and I cannot believe they are Mr. Morgan's
considered views. Rather they seemed to be just the hasty
and irritable expressions of a sick man. Mr. Morgan is

too ill for his partners to confer with him seriously,
and this may preclude his or our making any public

expression of our real views. I have felt however
that this personal and private expression was owing
to you.

I am, my dear Mr. Secretary, with great
respect

Faithfully yours

Network
The Honorable

The Secretary of the Treasury
Washington, D. C.

238

CORRECTION

June 9, 1937

In paraphrase of section 8 of telegram No. 746, Paris, June
8, 1937, page 1, line 2, word . (omission)" should be deleted and

the phrase "ought to be kept in" inserted; also on page 1, line
4, delete "(omission)" and insert "hold".

239

Copy for SECRETARY

LMS

Itt

GRAY

London

Dated June 9, 1937

Rec'd 2:46 p. m.

Secretary of State,
Washington.

364, June 9, 7 p. M.
FOR TREASURY FROM BUTTERWORTH.

Although the amount of gold offered at fixing was com-

paratively small (160 bars) the discount continued at 4

pence. Several arbitragers state that the publication in
today's DAILY MAIL of an article by Professor Cassell

entitled "the price of gold should be cut" tended to weaken
the confidence engendered by the recent statements of the
President and the Chancellor of the Exchequer.
In the course of a luncheon conversation Graham Towers.

Governor of the Canadian Central Bank, expressed his perand confidential
sonal/view that the gold problem would sooner or later have

to be dealt with by the important trading nations particularly the United States and the British Empire and he was
inclined to the view that as soon as public opinion was

thought to be prepared for action a reduction in the price
of gold should be undertaken. In this connection he stressed
that since it could only be dealt with once it was necessary

to effect a sufficiently drastic reduction in the price to
put

240

LMS 2-No. 364, June 9, 7 p. m., from London.

put the annual gold production on such a basis that it
could be easily absorbed in the world's monetary system.
Towers considered that attempts to restrict supply
except by means of reducing the price were impractical.

In this connection he cited the difficulty which governments would meet in obtaining sufficient powers and/or in
enforcing the allocation of quotas among their own producers,
the stimulation to dishoarding which any such step would

effect and the fact that an attempt to impose a restriction
scheme such as had been employed in rubber and copper would

accentuate the commodity rather than the monetary aspect

of gold. Towers took the line that gold should be more than
a commodity; that whereas it could not be allowed to play

the domineering part it did in the 20's it could be a useful
servant and one should be willing to pay reasonable wages

for its assistance. Furthermore the alternatives to employing gold in the world monetary system were impractical
under present conditions.
Towers emphasized the estimate that current production

plus some dishoarding would mean that in the next five years
the world would have to absorb approximately eight billion

dollars of gold; that although France had lost some billion
dollars of gold since the depression, given the state of
Europe

241

LMS 3-No. 364, June 9, 7 p. m., from London.

Europe and the social revolution which is now taking place
there, it seemed unlikely that France would reabsorb the

whole of that amount in the next few years. It likewise
did not seem probable that the rest of the world would be
able to absorb more than a billion or so dollars in the
five-year period. Therefore one was faced with the problem
of who would take the rest and on what terms? As regards
Canade, he said, like the other dominions its gold-absorbing
capacity depended upon its balance of payments; that if
the next two years were very favorable, with good wheat
crops marketable at high prices, he could not imagine Canada
absorbing more than between 100 and 150 million dollars of

gold. No doubt South Africa would be able to take much

larger quantities and Australia might likewise be able to
take some. However except for the gold-producing countries
the doubt now cast upon the permanency of the present price

of gold meant that no responsible financial authority who
did not have gold profit up his sleeve would think of increasing his gold holdings for the present.
Towers seemed to expect a second wave of dehoarding

to be started from India in the not too distant future,
as the gold scare slowly penetrates that country. He mentioned that no one knew the amount of gold bullion held
in

242

LMS 4-No. 364, June 9, 7 p. m., from London.

in India, but since the turn of the century the net imports
of gold into India amounted to about 550,000,000 pounds,
and thus far India had only exported since 1931 some 40%

of that.

Other factors likewise tended to force gold out of
hoarding in India such as (1) the fact that elaborate gold
collecting organizations had been built up which depended

for their profit on dehoarding; (2) the gradual change in
the attitude toward hoarding not only due to the penetration
of normal banking methods but also the amenities of life
were gradually becoming more desirable than, say, a gold
bracelet.
Towers further emphasized the effect a continuance of
the uncertainty surrounding gold might have on recovery and

cited this as another factor weighing on the side of action
being taken sooner rather than later. At the same time
he pointed out the danger of commodity price deflation if
the gold price was reduced unless public opinion were care-

fully prepared, for the public had been given the idea that
commodity prices rose because gold had increased in value

and therefore they might well believe that the reverse was
true.
Towers particularly emphasized that the above were his
personal and confidential views.
BINGHAM
HPD

243

Please return to MR. LOCHHEAD

PARAPHRASE OF TELEGRAM RECEIVED

FROM: American Embassy, Paris, France
DATE:
June 9, 1937, 5 p.m.

NO.: 760
FROM COCHRAN.

There is growing flight from the franc, with "wi se"
domestic capital leaving. An estimate by market operators
was that French control has lost around three million

pounds today, pegging the franc against sterling at
110.90. Yesterday it was let slip from 83 to 110.90.
There is a tight money market, and it is rumored that
tomorrow noon the discount rate will be increased. There
is heavy intervention by Caisse des Depots to prevent
more than a few centimes decline in rentes. On October 4

of this year the holders of approximately six billion
france of the outstanding total of between eight and nine
billion france of the 3, 6 and 9-year Treasury bonds opted
on June 4 are to be repaid, which far exceeds the anticipation of the Treasury. The immediate tax and general financing plans of the Government have not yet been decided

upon. Tomorrow there will be debates in the Chamber on
a measure for giving the Government full customs powers,

and the rider preventing exchange control except by legis-

lative act is attached to this measure. There will be
debate in the Senate on the deficiency bills which called
forth the bitter attack by Flandin, before the Chamber
passed them.
The French

244

-2The French press, although reproducing freely the
statements by Simon and British press comments thereon,

has today been paying much more attention to the internal

financial situation than to the gold problem.
END SECTION ONE.

BULLITT.

EA:LWW

245

GRAY

RB

Paris

Dated June 9, 1937

Rec'd 2:35 p. m.

Secretary of State
Washington.

760, June 9, 5 p. m. (SECTION TWO)

LE CAPITAL, Paris, said today in a tone

representative of other French financial papers:
"The success of the subscription to the
American Treasury bonds exceeds the most optimistic

predictions. The issue of 800 million dollars in two
tranches of equal importance, one at one and three

eights percent and the other at one and three fourths
has been covered approximately sixfold. Monsieur
Morgenthau had to close the subscription books.
These magnificent results come from the same cause

as the influx of gold which has just raised such
(warm?)

warn arguments, that is the first class credit of
the United States and the solidity at every test
of the dollar which is on the way to steal the role
of gold as refuge for the whole world's capital."
Liamby has invoiced to Johnson Matthey 5,826,000
francs gold bars NORMANDIE. (END OF MESSAGE)
BULLITT
CSB

246

Wednesday
June 9,1934
closing
The problem of plugging loopholes in tax laws is a continuing
1

and ever-present

It is never settled by any particular legis-

lation. Tax administration today requires a succession of laws to
prevent the use of ingenious devices which distort the original
purpose of the act and which create what to the average man seem,
unethical and unwarranted avoidance of taxes.

This is not the result of activities on the part of any particular group of persons, who can be designated and eliminated. Nor

is it the result of concerted action on the part of taxpayers as a
whole. It is caused by pressures which come from deep-seated atti-

certain quarters

tudes in this country toward taxation. These attitudes and these
1

pressures must be realistically considered as part of the problem

of tax administration. I will describe them briefly because they
furnish the background against which tax administration must operate.

In the first place, we have developed in this country a large
and ingenious group of lawyers and accountants who make their living
by showing to people who can afford to employ them ways by which

maybe

they may pay the least possible taxes. This^ ie, of course, a
legitimate business. Nevertheless, by virtue of its highly competi-

tive character, it brings about the following situation. The
ordinary accepted standard by which the
wealthy taxpayer judges the
wavery
^

efficiency of his tax attorney is the amount that he can save in
taxes. The most ingenious attorney, therefore, becomes the most

247

-2-

Hefuls
that
successful and the most sought after. A His sole duty is toward his
client. If he is honest, he will not condone perjury but he feels
no moral or social responsibility to the Government. Therefore,
if he can invent a new scheme for circumventing the intent of tax

laws, which will be upheld by the courts, he is well within the
ethics of his profession, regardless of the unfortunate effect that

afflications

such a scheme will have upon the general administration of such
^

laws. We have now a bar of registered attorneys and tax accountants
numbering approximately 45,000. Against them are pitted some 2800

field agents actively engaged in tax investigations for the

fees
Government. The contest is, of course, unequal. The subsend
of
the eleven tax lawyer exceed# by thousands of per cent the pay of
his opponent employed by the Government. In this manner the most

resourceful brains of the legal world are engaged in actively trying

who vivined their early training from
award these an

to avoid taxes for their clients. Men, trained by the Government,

use the skill they acquire in that service against the younger men
who take their places, The Government then becomes a training

many
of
school for
its opponents.
1

in particular

I am not attaching any blame to anyone for this situation. I
1

am only pointing out that it exists and that it is one of the reasons requiring continual revision of the tax laws.

248

-3-

A second factor which creates the problem which now confronts

us is the fact that tax avoidance, as opposed to tax evasion, is

by many

considered
^ a legitimate and honorable aim. our general business

ethics permit an and upright to take advantage of any
possible toophole in the law without of moral guilt. .
The case of a man who uses complicated arguments to avoid his

gambling debts and that of tice individual who stretches the language f the Bankruptcy Act to avoid commercial debt is viewed by

the public in different light. Here there is a social force
which restrains respectable individuals from pashing legal techni-

calitied to the Limit. On the other hand, there is a generally
accepted doctrine that debt avoidance is respectable and only debt
evasion imporal Where private obligations are concerned, the same
people who now hire ingenious attorneys to cut down their taxes
would scorn to use the same subtle devices in avoiding payments to

their creditors. Here again I am simply calling attention to an
existing attitude. The ethics of tax avoidance have grown up out
of a variety of circumstances and the problem is not solved by

blaming anyone. It is only important to recognize those ethics as
an existing fact because they are a very important element in the
problem which faces the Treasury.

249

-4I hope that in the future an atmosphere may be created in
which men will hesitate to use ingenious devices to avoid the pay-

the

ment of taxes, Nevertheless, that happens to be our present attiof some persons
^
tude1 toward payment to the Government. In Other words, #f we are

*

realists, we will recognize that tax administration has become a
of

very intricate game in which the Government in the public mind fa fant

takes the position of the aggressor 16 spite of the fact that its
own forces are hopelessly inadequate as compared with those

arraigned against it.

A third factor in the situation is the difficulty of distinguishing, at least before a case is tried, between tax avoidance
which is supposed to be proper, and tax evasion which is supposed

to be immoral. I will not attempt to define these terms. Spathsing as a layman, tax avoidance seems to me to be any scheme which

does not require perjury, and in defense of which elaborate briefs
may be written. Tax evasion is any scheme which cannot be plausi-

bly supported. So hazy is the line between tax evasion and tax

avoidance that it is always possible to classify any complicated
scheme as tax avoidance, so long as there is no absolute certainty

that it will be adjudged invalid at the end of long litigation.

250

-5These attitudes have created what might be called the sporting

theory of tax administration. So long as these attitudes exist,
the process of tax legislation will be somewhat as follows: A law
will be passed; ingenious devices for circunventing its application

to individuals will be tried out. This will take time. Finally,
when sufficient of those devices have become current so that a great
loss in governmental revenue begins to appear, legislation will have

to be drafted specifically directed at the new tax-avoidance inventions which have appeared since the last law.

Today because of the variety of devices to avoid taxes, the

calls fw medial

situation hee bedome somewhere out of have That this is a recurring
1

situation is illustrated by the tax history of the last few years.
Prior to 1934, the provisions permitting deductions for losses resulting from stock sales had become one of the largest loopholes in

our tax administration. Ingenious use of these deduction provisions
permitted individuals to establish losses by exchanging stocks with

each other and calling the transaction a sale. Berhaps it - e
sale in the eyes of the law. However, it was the kind of a sale
which would never have taken place had it not been for the desire

to avoid taxes. That loophole was plugged in 1934. Since that date
new devices of even greater complexity and ingenuity have been

developed, imitated and copied until they are now in very general

251

-6-

use. As is usual in such cases it takes time before sufficient interest is created to demand reform. For example, in 1935 - two
#.

years ago - under my instructions, Mr. Robert Jackson called to the

many

attention of the Committee on Finance most of the methods of tax

evasion which are now the subject of this inquiry. The use of those
devices were then less serious obstructions in the collection of
revenue and nothing was done about them. Resort to them has now

increased to such an extent that some reform is imperative.

Of course the attitudes which create this continuous task of
circumventing new tax avoidance devices cannot be legislated away.

The immediate objective in the present emergency is practical tax

legislation. Nevertheless, I am hopeful that the continued publicity
which hearings of this sort give with respect to the game of tax
avoidance may help to create an atmosphere in tax administration in

which men will hesitate to use these artificial devices to avoid the
payment of taxes just as today they hesitate to use such devices to

escape the payment of private debts. an
attitude which I hope may make tax admini etn tion easier in the

future, the prectices of Mrs John D.

text
some

tion of like returns year after year discloses no attempte to push

the letter of the law to its limit, and no use of elaborate subter-

this

fuges or corporate forms for the sole purpose or avoiding his normal

look

252
-7-

tax burden. Perhaps continued publicity given to the more fantastic
methods of tax avoidance now considered legitimate may make such

an attitude the rule rather than the exception. This may be an
important by-product of public hearings on current tax devices.

I will therefore attempt briefly to describe in terms which

some

the average taxpayer may understand, the general character of the
a

methods now in use. One characteristic runs through all of them.

It is the creation of a multiple personality in the taxpayer. By
this device he ceases to be a single individual and becomes a whole
group of people, some of whom are earning money while others are

losing it. He divides himself into several people, sometimes incorporated and sometimes not. He purports to carry on business trans-

actions with his family at arms-length. Often he convinces himself
that these separate people actually exist. Each one of these
imaginary individuals into which the taxpayer divides himself deals

and trades with all the other imaginary individuals.

253

-8 The total result is a series of losses which would not have been
deductible for tax purposes had the taxpayer remained a single

personality. The different methods by which the parts of this
multiple personality deal with each other are varied and intricate.

We will attempt to classify them later. They are, however, of this
general character. A taxpayer creates a separate personality to engage

in an activity which is a hobby or a luxury or an ordinary living expense
or even a method of investing funds. He then charges the expenses and

the losses of such activity against himself. Thus, he is able to pay
interest to himself, to charge himself for vacations and pleasures, to
give himself pensions, to be his own insurance company and so on. These

transactions partake of the same unreal character as if a small taxpayer
as

incorporated his household kitchen La a restaurant and deducted the
expenses and losses from his taxable income because he had so few
customers.

Practically all of the devices which we will cite later would look
absurd if applied to persons of small incomes whose activities were
necessarily more restricted. They are important as tax-dodging devices

only for the very rich. Not only do they look absurd when applied to the
small taxpayer but they are also too expensive to be useful unless large
sums are involved.

The analogies which are used to support these devices are found in

the corporate structure by which business in this country is conducted.

254

The distinguishing feature, however, between the corporation used for
a business purpose and the corporation used for a tax avoidance purpose

is the fact that in the latter case were it not for the tax laws no such
corporations would have been formed.

The use of the corporate device in order to split a single man into

a number of personalities is often extraordinarily intricate. However,
of late some tax attorneys have felt that it was not necessary to go to

so much trouble. They have in effect split individuals up into different

racing stable

persons without bothering to incorporate. A rich man runs a farm as a

horse breeder

hobby. He calls himself a dirt farmer and in this character loses money

He
never makes a financial success asa horse heeder racin r
very heavily indeed. He is not fitted to be former because he demands
'A

^
A
too much luxury on his farm. This raises his expenses. He then charges

racing state

#

off the loss on his form against his income. No small taxpayer would

joef instructer

think of calling himself a professional golfon and then charge the

pupils

expense of his golf game against his income because he got no patronage.
A

However, we find an individual who in one capacity charters a pleasure
yacht to himself at a great loss and deducts it from his income because
though as a business man he is successful, as a professional yachtsman

he is a heavy loser. These instances are not yet as frequent as the use
of the complicated corporate personality which is harder to see through.
Nevertheless, unless legislative action is soon taken such pleasant
methods of taking vacations and getting rid of taxes at the same time

will be imitated and constitute a serious threat to the revenue.

255

-10- -

Few

None of these people or activities can be CAMed criminal. Most

^

of them have talked themselves into believing that the methods which

they use are socially legitimate. They profess complete personal

irresponsibility, contending that if their methods are wrong it is the
duty of the tax administration to ferret them out and to conduct long

and expensive litigation in order to determine their validity. The

shorting

individual believes that he is morally entitled to take

1

that he has nothing to lose and everything to gain by taking it.
The device of the multiple personality of the single taxpayer is
of course not the only loophole which requires immediate attention.

Mr. Magill, who will follow me, will undertake to classify the
principal ones for you in detail.
I will only summarize the principal schemes which are being devised,

copied and imitated today. They may be divided roughly into three

classes. First, there is the device of making the taxpayer a multiple
personality whose characters deal with each other, which we have just
described. H Second, there is a variation on that device by which the

taxpayer deals with his family at arms-length and creates taxable losses
out of the performance of personal obligations which he owes to them.

He takes his wife into partnership with him. He splits his income between
himself and his children instead of maintaining them # The third device
is one where the individual doing business in this country makes it appear

by a series of corporate personalities which he controls
he that he is
actually doing business abroad in some country where se. cannot be taxed.
N

In other words, transfers of title which might result in taxable income
are made to appear to have occurred outside of the United States.

256

- 11 -

We do not know how extensively this latter device is being

used. We do know that within the last two years, 585 foreign corporations have been formed which probably represent business interests in America. We do not know how many have been used for
tax avoidance purposes, but we do know that some have been so used.

We believe, however, that the use of this device is spreading.

In any event, even if it should prove to be not very extensively
used, just now it is most important that its possible growth be
stopped before vested interests arise which make it a still more

difficult problem to deal with in the future.
For these reasons I believe that the use of the multiple per-

largers
consider
sonality by the taxpayer has now reached
theshould
stage where
legisla
Hunde immerative

The process of fighting in the courts all the

different schemes which may be woven around this concept is too

slow for efficient tax administration. We intend to give examples
of a large number of extreme cases, not all of which would be up,

held by the courts but many of which are sufficiently plausible

so that they can delay and hinder tax collection. It is the

history of tax litigation that it takes years to finally outlaw a
tax avoidance device which once gets a foothold among tax attorneys.
In the meanwhile, the Government revenue is impaired in two ways.

First, by the actual loss of revenue involved in specific cases,

257
- 12 -

extenditure

of

and second, by the fact1thank the time and energy of the personnel

and the tax-enforcing agencies is so largely occupied in litigation.

It is true that many of the devices which we have referred to
are being limited and restricted by the courts. Nevertheless,

the situation is still sufficiently confused so that a great deal
of litigation is required because each case deals with only the

particular facts involved and distinctions in intricate situations
can always be made.

And what effect has the increasing use of these devices on

revenues? That, of course, cannot be exactly determined. Never-

theless, it is a substantial factor which is cumulative in effect,
just as the influence of a continued course of sharp practices in
bankruptcy cases tends to reduce the total dividends to creditors.
The nearest guess which we can make of the loss in revenues caused

by such practices in the tax field has been arrived at in the following way:

As you know, each November the Treasury Department is required

to make an estimate of the revenue of the Federal Government for

the balance of the current fiscal year ending on the following
June 30th. I need hardly say that the problem of estimating the
revenue is an exceedingly complicated one; and that some margin of

error in the annual estimates, resting as they do upon forecasts

258
- 13 -

of business conditions, prices, and a host of other factors, is

inevitable. I take great satisfaction in the accuracy of the reveme forecasts made since I assumed the responsibilities of the

office of the Secretary of the Treasury. The first estimate of
income tax receipts made under my supervision was for the fiscal

year 1935. Actual receipts for that year proved to be 4.6 per cent
greater than my estimate. In the following fiscal year, 1936,
actual receipts were only 1.5 per cent under my estimate for that
year. For the fiscal year 1937, the Treasury Department employed
the same methods and the same personnel in making the revenue estimates as had been employed in the two preceding years. When,

march 15th

total

therefore, the current income tax collections indicated that income
^
1

tax receipts for the fiscal year 1937 might be as much as 10.4 per
cent below the estimate made last November, I became greekly con-

cerned. I realized fully, as I am sure you do, that all the care
in the world could not always prevent a substantial error from

entering into our revenue estimates, for, as I have already said,
these estimates depend upon forecasts of the future; and the

capacity is not given to mere human beings to foretell the future
with accuracy. I was aware also that my predecessors in the
Treasury Department had over-estimated the Government's income tax

receipts in the three years 1931, 1932, and 1933, by 15.1 per cent,

7.3 per cent, and 13.3 per cent, respectively.

259
- 14 -

Nevertheless, I

decided to investigate

the details, so far as possible, of our March, 1937, income tax

collections. This investigation disclosed the following very significant fact: Collections in certain areas where there is a considerable concentration of wealth and income had not increased by

as large a percentage as had the total income tax receipts for the

country as a whole. In connection with this fact it is particularly important to note that dividends represent a larger percentage
of the net income of people with large incomes than they do for
people with small incomes. We knew that dividend disbursements
by corporations during the calendar year 1936 had increased ma-

terially over those of the preceding calendar year.
It seemed reasonable to suppose, therefore, that part at least
of the discrepancy between our original estimate of income tax receipts and the receipts that might be estimated on the basis of
our actual collections in March, 1937, might be due to a wider use
of various methods of tax evasion and tax avoidance. And, when

1 Under Secretary of the Treasury, Mr. Reened Magill, undertook

a field investigation of this possibility at my request, he found
much to support this conclusion.

260
- 15 -

Mr. Magill will describe to you in some detail the character of
his investigation. Necessarily, it was a quick survey, but the audit
of the 1936 returns will undoubtedly disclose additional data to enable
us to determine with greater accuracy the methods of avoidance employed

by some taxpayers. In this connection, it must be borne in mind that
the Bureau of Internal Revenue faces tremendous physical problems in

the audit of the returns and in its effort to prevent tax evasion and
avoidance. There were about 6 million returns filed for the taxable
year 1936, and it has been our experience in the past that only about
500,000 can be property audited with the force of about 3,000 men that
we have available.

I believe that it may be appropriate to say a few words regarding
the Bureau's progress in the last few years in connection with the making

of these detailed audits. Prior to 1935, the field investigations of
returns were not commenced until approximately 1 year after the filing

and were not completed until about 2 years after filing. At present,
field investigations are begun 312 months after filing and are completed

approximately 15 months after filing - an advance in the conduct of the

work of field investigations of approximately 9 months. is as
moorly current do the control and movement of returns will presentle

The collection of additional taxes, a substantial portion of which
represents recoveries in instances when tax avoidance or evasion has
been attempted, has constantly been increasing. Our revenue agents'

261

-16 - -

recommendations for the assessment of additional taxes increased from

$203 million in 1934 to $355 million in 1936. Experience has shown

that, through litigation or agreement with the taxpayer, about 70
per cent of these recommended additional taxes are ultimately collected

by the Treasury. For the first ten months of the present fiscal year,
agreements with taxpayers for the collection of additional taxes have

Commissioner

been secured amounting to about $130 million, and time1 Bureau hashilvering

informed me that he is confident *t will collect by agreements more
taxes during this fiscal year than it has ever collected in that manner

at any time in its history.

an a

Undoubtedly, prevention of tax avoidance and evasion would be aided

by examination
of greater
volume
of returns.
that
probably
about
750,000 returns,
rather than
the present
500,000,I think
deserve
yearly
audit. However, in consideration of the small personnel of the
Department compared with the very large number of accountants and

attorneys who are constantly engaged in the preparation of returns and

in the defense of the taxpayers' position, the record of the Bureau is
staiking. With our limited force, we must collect the maximum of revenue,
and we must do so in such a way that we are not years behind in our work.
These tax avoidance devices to which I have alluded have affected
revenues of the Government in the following ways:

(1) They create the belief that rich men with expensive attorneys

do not have to pay taxes. There is just enough truth in this to have
far reaching consequences on the morale of hundreds of thousands of

fully

262

- 17 taxpayers. No one can possibly calculate how many petty evasions
which can never be detected among 6 million returns are due to the

belief that cleverness rather than fairness is a proper criterion of
the taxpayer. Thus, tax ethics generally today are where business
ethics and trade practices were in the nineties.
(2) In the highly competitive situation which exists among expert
tax attorneys, plausible devices spread rapidly and tax evasion and

avoidance increases without anyone realizing the extent of the impair-

ment of tax administration until the end of the taxable year. Even then
an exact estimate of the effect of tax avoidance is impossible.
(3) Vested interests grow up in tax avoidance devices in the course

of time so that it becomes very difficult to change them after they
receive a semi-respectable standing. This factor makes quick action
advisable to decapitate new schemes before they achieve the force and

respectability of law.
(4) After tax avoidance devices have become an accepted part of
tax law, any attempt to change them is heralded as a persecution of the

some

rich. Today, for example, we are met by the charge made in many quarters
1

that this attempt on the part of the Treasury, forced on us by a gradual

since
the
research
accumulation of tax avoidance devices under the Revenue Act of 1934, is
an attack on wealth. Actually, anyone who gives the matter unbiased

consideration will realize that it is for the benefit of the rich to
plug loopholes in tax laws, since this raises more revenues without

raising rates.

263
- 18 -

We have used the example of John D. Rockefeller to illustrate

proper attitude toward tax collection. Rockefeller 10 not helped,
indeed he is injured by the general public impression caused by

the one of fantastic device to would taxes. The prevalence of the
devices we are going to describe has cast a suspicion on many rich
men who do not deserve such suspicion. There is certainly no possible advantage to the conscientious man of large income to allow
fantastic schemes of tax avoidance to continue.

(5) And finally there is a very important question of the
revenue. Those tax devices which defeat the intent of Congress but
which nevertheless are legal, cost the Government huge sums, which

Congress noves actually intended to give away Those tax devices
which are plausible, though not legal, create continual and expen-

sive litigation. No collecting agency can operate effectively if
it is hampered at every turn by law-suits.
The wholenreason for our appearance at this time is to assure
ourselves that we are going to receive every dollar that we counted

on for the fiscal year - in order that we may balance the
budget without coming to Congress with requests for new taxes.

I therefore consider At imperative to call these matters to

the attention of Congrees at this time. We will present the matter
in the following way

264
- 19 -

First, we will give you a general classification of the types
of tax devices which will form a framework for the specific cases
which will be presented later. We will then present in considerable
detail specific instances so that procedural methods to remedy such

situations may be considered in the light of the actual practices
now existing.

In the presentation of the various methods of tax avoidance
many cases will appear in which the Treasury has been unable to get

full information. There 11 be other cases discussed in which the
individuals named may desire to appear before the Committee volun-

tarily in order to rebut inferences which we have drawn from their
returns. If under these dircumstances witnesses are called or
voluntarily appear before the Committee, I would respectfully request that someone representing the Treasury be permitted to ask
them questions when the members of the Committee have finished.

June 10, 1937.

Memorandum In re: Settlement of cases pending
in Board of Tax Appeals.

In handling and settling cases which have been filed with
the Board of Tax Appeals, the following plan will be put into
effect:

As soon as a case is received in the Appeals Division, the
lawyer to wi:om the case is assigned will prepare for tho Chief
Counsel a statement of all the facts and questions appearing from
the file to be involved in the case, including such information as
has been obtained by the Technical Staff in those cases considered
in the ninety-day status. The memorandum will indicate matters which
it is apparent can be stipulated and those upon which a contest seoms
advisable. The attorney will, in the preparation of such memorandum,
obtain as complete a mastery of the case as is possible from the
study of the files and from all othor information then availablo.
The cases will then be handed on the following basis:

(1) Cases depending pri arily on questions of law or in
which the facts aro stipulated, will o retained in the General
Counsel's office.

(2) Special casos of unusual importance appearing to require
unusual and continuous prudential treatmont; i.o., such casos as the
Associated Gas & Electric case, the Mellon case, the askob-duPort

cases, etc., will he retained in the General Counsel's office.

(3) Cases involving special lit! at'en policy and not suscoptible of settlement because of a dosire to liti-ate the cuestion
involved to a final conclusion will be retnirol in the eneral Counsel's
office.

In re: Settlements
Page 2

(4) The balance and bulk of cases will be referred to the
Technical Staff for settlement and the gathering of material for

the defense.

(5) All cases will be set for trial as soon as possible
and the Technical Staff at the time of the setting will be notified
to return the case to the General Counsel's office thirty days
prior to the trial date.
(6) The General Counsel's office will not review or reexamine in detail a settlement made by the Technical Staff but will
check the file only so far as is necessary to vorify the accuracy of

representations which the General Counsel's office has to make to
the Board of Tax A peals in the stipulation closing the case. Where,
in the exceptional case, errors are thus encountered, the General
Counsel's office will call them to the attention of the Commissioner
of Intornal Revenue for further consideration.

(7) Cases not settled in the Technical Staff prior to return to the General Counsel's office will be tried or settled by
the office of the General Counsel.

(3) In returning the cases to the General Counsel's office,

there will be no formal recommendation of defense or no defense,
but a momorandum will be propared stating the negotiations which
have boen had relativo to settlement togother with a statement of
tho roasons why settlement was not effected.

(9) During settlement nogotiations in each of the offices,
the advice of the other will be freely sought as to matters within
its special competence.

(10) The cooperation of the Technical Staff and the

General Counsel's office in the field will continue as in the past.
(11) Recommendations by the Chief Counsel to the Department

of Justice for the prosecution of criminal cases shall be approved
ersonally by the Commissioner of Internal Revenue before oing
forward.

For

Commissioner 01 Internal Revenue.
APPROVLD:

Knsweee magies

Under Secretary of the Treasur

mar

Chief Counsel,
Bureau o." Internal Revenue.

267

ADDRESS OFFICIAL COMMUNICATIONS TO

THE SECRETARY OK STATE
WASHINGTON, D.C.

DEPARTMENT OF STATE
WASHINGTON

In reply refer to

FE 711.9411/25

260?
June 10, 1937

CONFIDENTIAL

The Secretary of State presents his compliments to
the Honorable the Secretary of the Treasury and, with

reference to this Department's letter of June 8, 1937,
in regard to Chinese loan negotiations with Great Britain,
encloses, for the information of the Secretary of the
Treasury, a copy of that portion of telegram No. 356 of
June 8, noon, from the American Ambassador at London,

which relates to the subject under reference.

Enclosure:
From Embassy London

No. 356, June 8, noon,

in part.

03/13038

SICH

Department of State
BUREAU

FE

DIVISION

ENCLOSURE
TO

Letter drafted
ADDRESSED TO

Treasury.

1-1088
#.5 GOVERNMENT PRINTING OFFICE

268

Excerpt from a telegram (No. 356) under
date June 8. 1937, from the American
Ambassador at London.

As regards Chinese negotiations for a loan in London,
Cadogan said the 2,700,000 pounds Canton-Meishan loan,

details of which had already been submitted to the various
consortium groups, although still under negotiation in the

matter of final security, was virtually settled. Meanwhile Kung's negotiations with Treasury had gone on but
were not completed. The Foreign Office understands Kung

will visit the United States and return to London about
mid-July during which time it is expected the negotiations

on this loan particularly in the matter of satisfactory
security will continue. Cadogan said that the other loans
proposed by the Chinese Minister for Railways were merely

remote possibilities and in any case in all these negotiations Kung also held the whip hand since even in the mat-

ter of railway loans the question of final security was
one which fell within his province.

43113039

269

1-37

FEDERAL RESERVE BANK
OF NEW YORK

DATE June 10, 1957.

FFICE CORRESPONDENCE
TO

FROM

CONFIDENTIAL FILES

SUBJECT TELEPHONE CONVERSATION

L. W. Knoke

WITH BANK OF ENGLAND.

Mr. Bolton called me at 11:40 today. They were having a

with French franc

rough time in London, he said. The gold business, for the moment,
although it had cast what just now looked like a permanent cloud
over the stock market (which seemed to be in for a permanent depres-

sion, had ceased to be a big influence in the foreign exchange market. The amount dishoarded daily had shrunk to somewhere from
300,000 to 400,000 pounds a day (compared with 1,500,000 to 2,000,000

pounds before). The amount still hoarded in London, Bolton guessed
at between 60,000,000 and 80,000,000 pounds. He promised to give me

more accurate figures later on if he could.
In France things were very bad: rentes were unsaleable but

for official support. If it were not for the latter his conjecture
was that they would not be quoted at all. The demand for sterling
was tremendous, probably 10,000,000 to 12,000,000 pounds for the

past three days. The position was as bad as it had ever been. It
was difficult now to think of it in any other terms than a crisis.
Nobody could picture exactly what might happen but things must come

to a breaking point very soon. The basis of it all was the French
Treasury position stimulated by rumors of tremendous increase in
taxation which had become necessary because of the complete inability
A

of the government to raise loans.
I asked Bolton whether he had sold more dollars in addition

to the $3,000,000 he mentioned in his cable this morning. He replied
that they were just watching the market as the franc rate might plunge
down at any moment. I mentioned that we had been buying sterling here

270
FEDERAL RESERVE BANK
OF NEW YORK

FFICE CORRESPONDENCE
To

DATE June 10, 1937.

CONFIDENTIAL FILES

SUBJECT: TELEPHONE CONVERSATION

L. W. Knoke

FROM

WITH BANK OF ENGLAND.

-2since opening having taken in so far about 1/4 million pounds,
and gained the impression that he considered that a helpful step.
Bolton inquired whether we had had any further news about

our Swiss friends. I told him no, but that I thought I might have
something for him in a few days. I mentioned, however, that according to a cable just received, another $12,000,000 worth of gold were
on the way here to be earmarked by us upon arrival. In reply to my

gold
question whether the Swiss, by any chance, had bought sterling in

London, Bolton said that, on the contrary, they had been selling.

LWK:KMC

03V13038

YAURA3HT

Copy for SECRETARY

271

RB

GRAY

London

Dated June 10, 1937

Rec'd 3:40 p. m.

Secretary of State
Washington.

368, June 10, 7 p. m.
FOR TREASURY FROM BUTTERWORTH.

My impression of the trend of the discussion of
the "gold question" which took place at the Tuesday
Club last night may be of interest inasmuch as the

members of that organization are influential. In
the first place although the "gold question" was interpreted to include nearly all the important current
economic and financial problems it was clear that there
was a profound and deep seated feeling that the supply
of that metal was in excess of the demand and that

important action in the monetary field for this as
well as other reasons would have to be taken in the not

distant future.
Secondly, despite Falk's attempt to remove the

price level from the field of discussion by emphasizing
that the problem arose not out of a deficiency but
through an excess of gold which was at the moment being
handled

272

RB

-2-#368, June 10, 7 p. m. from
London

handled by sterilization methods, it continued to play
an all important part. There was virtually unanimous
agreement that prices should rise slowly but none the
less surely and Henderson evoked every possible effort
by emphasizing the long term need of a higher level of

money incomes which in turn required rising prices in
order that the debt structure could be carried and that

in effect this meant and rightly so lower real incomes

for the rentier; "this is the way to swindle the rentier",
Incidentelly Henderson likewise took the line that the
price of gold would probably have to be reduced but that

this really meant stabilization and that should not occur
until prices had risen further.
Thirdly, there was rather general criticism of the
Bank of England's recent methods in operating the equaliza-

tion fund in allowing a discount to develop in the price
of gold on the American shipping parity and in this connection Sir George Schuster emphasized the suspicions which
this policy had evoked in the American banking community.

Likewise there was a fairly general appreciation of the
burden which the United States had in the main been carry-

ing and support for Great Britain playing a more active
part.

273

RB

-3-#368, June 10, 7 p. m. from London

part. Reference was frequently made to America's

"unenviable position" as the only enuine buyer of
gold; Coutts put it that "the dollar was not so much

tied to gold as gold was tied to the dollar". In this
connection Schuster reiterated the views which he recently

published on returning from his trip to the United States
which can be found in THE TIMES of June 3 and are worthy
of note.

Fourthly, the feeling was general that confidence
in gold as an international medium of value had been
somewhat impaired and incidentally its war chest value
had been reduced; probably the majority of those present
agreed with Brand that although the real problem was

distribution and that it was hard to see how stabilization would, ipso facto, prevent the stabilizing countries
from continuing to acquire the surplus gold, nevertheless,
a reduction in price would probably prove desirable if
accomplished jointly and swiftly with authoritative
assurances that it did not mean deflation.
Incidentally today's TIMES contains a letter from
Keynes which begins as follows:

"The gold problem presents two distinct aspects.
Should the dehoarding process, which was bound to occur
some day

274

RB

-4-#368, June 10, 7 p.m. from London

someday, cause the authorities to modify their existing
gold policy? Will the present price of gold cause an
excessive quantity to be mined over a period of years
and in the long run? The statements of Sir John Simon
and President Roosevelt answer the first question quite

clearly in the negative, and imply that the second question has not yet been considered but that both governments

will keep their hands free to deal with it in the light
of future circumstances. This attitude seems sensible.
Private dehoarding is a non recurrent event which has
been long foreseen, and the maximum amount is small

compared with the stocks already in the hands of governments; while no one can answer the second question until
we know how much gold output is going to increase, whether

war or fear of the fear of war will curtail the use of
substitutes for gold, whether the existing maldistribution of gold stocks is to continue indefinitely, at what
level money wages will settle down (particularly in the
United States), and whether we are going to find ourselves,
say three years hence, with good or bad employment.

Nevertheless, I believe that Sir John Simon could

help if he could be a little more explicit on certain
matters

275

RB

-5-#368, June 10, 7 p.m. from London

matters.

After emphasizing that Great Britain may actually
need all the gold it now has to offset abnormal foreign
balances held in London, Keynes concludes "if, on the
other hand, the figures indicate (which would be contrary
to my present expectation) that we have all the surplus
gold we can reasonably require and that additional purchases, though we make them for the common good, are

rather a nuisance, then let us modify the desire of
our policy accordingly. For example, this would
clearly indicate that the embargo on foreign lending
should be raised at once. It would be crack-brained
to complain of a surfeit of gold and at the same time
try to increase it by maintaining an embargo which dates
from the period when we had a deficiency. There are
also other ways in which we could reverse our former

efforts to find means of economizing the use of gold.
In particular we could ask the Dominions, India and
the Crown Colonies to reconsider their policy which was

at one time extremely helpful to us of handing their
gold reserves to us in exchange for sterling balances.
Australia is the outstanding example of this but for
the whole empire it amounts to a great deal. Indeed
it would

276
RB

-6-#368, June 10, 7 p.m. from London

it would be well for the Imperial Conference before
they disburse to consider whether they could not help

us to carry the weight of gold -- and this might be
desirable even if the amount of the gold is not offered
from the standpoint of the Empire as a whole -- by
exchanging their sterilizing resources for earmarked
(are?)
gold. Since many of them or gold producers they have
much to gain from the restoration of confidence which
this would undoubtedly effect".
One hundred thirty-seven bars were offered at

fixing of which the market took a fair proportion;
the discount was 3 pence. London continues to receive

pessimistic reports from Paris on the French outlook.
BINGHAM

CSB

Copy for SECRETARY

277

PARAPHRASE OF TELEGRAM RECEIVED

FROM: American Embassy, Paris, France
DATE:

June 10, 1937, 5 p.m.

NO.: 762
FROM COCHRAN.

Apparently the pressure on the French franc is as

heavy today as yesterday; French control is yielding
sterling freely at 110.90; widening to 3.20 in discount
on three-month francs against sterling.
The June 4 statement of the Bank of France showed a

decline of Treasury deposit account from one billion ten
million france to two hundred and ninety eight million;
credits to Government showed no increase. There was a

rise from 55.33 to 55.56 in coverage, due to deposits
dropping off a great deal. The discount rate has not
been changed.

Very uneasy atmosphere on the market continues, with

no clarification of (omission) government's financial
program, and with the recurrent fear that some drastic
move may take place over the weekend.

Communist deputy Thorez in a political speech last
night attacked by name Rist, Baudoin and Rueff whom he

accuses in their capacities of technical advisers of
collaboration with the capitalist interests in making
financial difficulties for the Government of France.
BULLITT.
EA:LWW

278
PARAPHRASE OF SECTION TWO, TELEGRAM NO. 762 of June 10,

1937, from the American Embassy, Paris.

The former British resident manager of the BIS, Porters, had lunch with me today. He is now the London representative of Standard 011, and had come to Paris to

look into French conditions. He said the French situation was worrying the City tremendously because of the

threat of a political crisis on top of a break down financially, with as yet no outstanding opposition forces to
step in and correct conditions.
The gold scare had not yet been eliminated in London,

he said, since even the article by Cassell which favors
a lowering in the price of gold of twenty percent had caused
a temporary flare-up with dumping of gold shares, and so
on, yesterday. According to Porters the British share
market has been hit so severely by the recent gold crisis
that he does not look for a real pickup before the summer
is over.
Porters referred to the diminution in housing construction, which if it were not for the armament program,
would be seriously felt.
At noon today Pennachio talked with Rowe Dutton, the

Financial Counsellor of the British Embassy. Pennachio

told me he found Dutton quite pessimistic over the financial outlook for France. He did not think that anyone
knew what to do to save the situation, yet he did not
expect a change in Government. Today Cobbold of the Bank

of England is in Paris consulting with Bank of France

officials

279

-2officials and with Dutton enroute to Basel for the week-end
meeting of BIS officials.
END OF MESSAGE.

BULLITT.

03V13038
i
EA: LWW

RAIL

2.2 6aM 1.57

280

FEDERAL RESERVE BANK
OF NEW YORK

FICE CORRESPONDENCE
CONFIDENTIAL FILES

L. W. Knoke

DATE June 11, 1937.
SUBJECT TELEPHONE CONVERSATION WITH
DE NEDERLANDSCHE BANK

Mr. de Jong called me at 10:28 today. In reply to my
question, he stated that everybody was very much worried about
Paris and nobody knew what was going to happen. There were all

kinds of rumors, the latest one to the effect that the French
Cabinet Minsters could not agree among themselves. The franc

being the center of attention today everywhere, the gold problem
has completely been forgotten. In Amsterdam, all markets, including the commodity markets, were calm and unchanged.

LWK:KMC

281

Copy for SECRETARY

PARAPHRASE OF TELEGRAM RECEIVED

FROM: American Embassy, Paris, France
DATE:

June 11, 1937, 11 a.m.

NO.: 766
RUSH

FROM COCHRAN.

STRICTLY CONFIDENTIAL.

This morning at 10 o'clock I visited the Bank of
France. The French control on Thursday lost 635 million
france in foreign exchange; it lost 398 million on
Wednesday, and 307 million on Tuesday. I had given the

figure as 260 million up to 5:30 p.m. on Tuesday in
my telegram No. 756 of June 8, 6 p.m. The gold and
foreign exchange balance of the French stabilization
fund was therefore approximately one and one-half billion
francs this morning.
END SECTION ONE.

BULLITT.

282
PARAPHRASE OF SECTIONS TWO AND THREE OF TELEGRAM NO.

766 of June 11, 1937, from the American Embassy, Paris.
The Bank of France statement to be issued next
Thursday as of June 10 will not show any new drawing

by the Treasury on its remaining credit of 2,200,000
francs with the Bank of France. The Treasury during
the past few days has been able to get the Caisse des
Depots et Consignations to purchase Treasury notes by

using the Caisse's ready cash resources. This practice
cannot go on much longer, but so far it has obviated
the necessity of the Treasury calling directly upon the
Bank of France for aid.
Today the debates on fiscal and financial policies
which began yesterday will continue in the Chamber and

Senate. Therefore the situation is uncertain and the
Bank of France expects that heavy pressure on the franc
will have to be met. There has been no emphasis in the

press on the serious financial situation of the Government, and there have been no important repercussions on
the public from the speeches made in the debates yesterday. These speeches will be summarized in a separate
telegram.

I was informed at the Bank that so far there is no
plan to take any new monetary action over the weekend.

The Basel meeting of the BIS officials will not be attended
by the Bank of France Governor. Governor Labeyrie is,
however,

283

-2-

which however, he had not withdrawing invitations to a dinner Basel

central banks issued to BIS colleagues, lest the in

change is become nervous and suspicious various
learn
absence.
will they meant
by of
hishis
remaining
in Paris. Only that on some Sunday
END OF MESSAGE.

BULLIT.

EA:LWW

FEDERAL RESERVE BANK
OF NEW YORK

DATE June 11, 1937.

FFICE CORRESPONDENCE
CONFIDENTIAL FILES

L. W. Knoke

OM

284

SUBJECT:

TELEPHONE CONVERSATION

WITH BANK OF FRANCE.

Mr. Cariguel called me at 11:17 today. They were having
a bad time in the exchange market. Yesterday had been heavy; today

was heavier still. So far they had today lost £5,500,000. There
were lots of new reports out but he himself knew absolutely nothing
definite. The government bond market was very good but that did
not mean much. The other security markets were idle. People in

Paris just now did not trust anything except currency and hoarding

was very definitely noticable. Last night everybody had felt certain that a cabinet change was inevitable. This morning, he was
told, there was no longer the same measure of certainty. There
would be no cabinet change over the weekend; of that there was
absolutely no question for the time being. The Expert Committee,
whose resignation had been rumored yesterday, was still functioning.
He himself had seen them this morning.

LWK:KMC

285
2.60M 1.37

FEDERAL RESERVE BANK
OF NEW YORK

DATE June 11, 1937.

FFICE CORRESPONDENCE
CONFIDENTIAL FILES

SUBJECT: TELEPHONE CONVERSATION

L. W. Knoke

OM

WITH BANK OF ENGLAND.

I called Mr. Bolton at 12:10 today. They were still sort
of pulling hard over there, he said. The position in Paris was,
in his opinion, if anything, a trifle worse than yesterday. Nevertheless, according to his information, no cabinet crisis was expected
in Paris over the weekend. At the moment, things looked perfectly
quiet on the surface (after a rather bad two hours between 12 and

2:30 o'clock) but to him it looked like a surface quietness which
might be broken at any moment. Some people in Paris seemed to

think that they could pull through for the summer; he himself did
not see how the French could get through if, as he understood, the
Government's solution of its troubles was to borrow more money from

the Bank of France by discounting Treasury bills. Once such borrowing became generally known in France, there would be a wholesale flight
from the currency and that would be too much for the Government to
handle. There was a very bad feeling there now and the present franc
market was just a one-way market.

I referred to yesterday's rumor that the Treasury had borrowed 2,000,000,000 francs from the Bank of France but that the

latter's statement had not shown this item. Bolton thought that that
could not be correct because he was sure that the Governor of the Bank

of France was not the sort of man who would remain in office and allow

his report to go out inaccurately.
LWK:KMC

286

GRAY

MJD

London

Dated June 11, 1937.

Rec'd. 1:15 p. m.

Secretary of State,
Washington.

371, June 11, 4 p. m.
FOR TREASURY FROM BUTTERWORTH.

At D. meeting at the British Treasury today with

Phillips and Bewley the latter stated that the Imperial
conference would probably issue a monetary statement in

essence reaffirming the 1933 declaration; it would not
deal with the gold situation.
Phillips said that no sooner had one thing begun to
end than another thing began to happen--that once again

a crisis was hovering over France. While we were dis-

cussing the French position in general terms Phillips
received a telephone report from the Bank of England's

equalization fund department to the effect that pressure
on the franc had been unusually heavy yesterday--"it was

one of the worst days they have had", and that the forward
rates on the franc are again widening. Phillips was

obviously disturbed at the prospect of receiving substantial amounts of French gold. I asked about how much
gold

287

MJD

2

No. 371, June 11, 4 p. m., from London

gold the French fund still had and he said that he was
attempting to obtain accurate information about it but
that he knew that although in the spring the fund had
been low he understood that the dishoarding of gold in
France had been persistent and continuous and the total

figure might be substantial. A reference to his statement
made at a previous meeting that thus far no one could be
found who would be willing to take Blum's place occasioned

the reply that if the crisis broke it now would not
matter whether any one was anxious to take Blum's place

or not; that the financial situation might well compel
action. In the course of the discussion it appeared
evident that Phillips was anxious to believe --though I
did not feel he was really convinced--that the scare
aspect of the gold dehoarding crisis was past. Be that
as it may, he did say that in his opinion no great change
in Indian dehoarding was to be expected (see in'contrast
Tower's view which probably reflects Bank of England

opinion, paragraph 5, my 364, June 9, 7 p. m.) . Phillips
took the line that gold would continue to come out of
India because of India's bad trading position, and particularly because the products which India imported had

all risen in price while India's exports such as jute
remained at a comparatively very low level. On the other
hand

288

MJD

No. 371, June 11, 4 p. m., from London

hand Phillips said he did not expect India even if her
foreign trade situation should rapidly change to become
an importer of gold; she might absorb her own production
but her hoarding would certainly in the first instance
be directed to silver at the present price.
The position in the gold market remains about the
same; 300 bars were offered at fixing today the major
portion of which was officially taken by the authorities
at a 3 pence discount.
The flight from the franc continues unabated with
late dealings particularly heavy. It is probable that
today!s losses will be found to be as large as yesterday's.
London is once again visited by Frenchmen desirous of

removing their funds from that country.
BINGHAM
HPD

03913038

289
RB

GRAY

Paris

Dated June 11, 1937

Rec'd 5:20 p. m.

Secretary of State
Washington.

768, June 11, 4 p. m.
FROM COCHRAN.

Chamber debate yesterday on the request of the
Government for full customs powers once more provided

Reynaud with the occasion to outline his views on the
general policy of the Government and Flandin with the

opportunity to present a close analysis of the bill under
discussion.

Reynaud pointed out that in spite of devaluation
French prices exceeded world prices which had led to

an invasion by foreign merchandise. He illustrated the
resulting damage to French industry by announcing that

orders passed in the textile trade during April 1937
did not even amount to one fourth of orders taken in
April 1936. He especially emphasized that the Government in envisaging increased tariffs had apparently
forgotten the tripartite monetary arrangement which
called for progressive reduction of quotas and of
exchange

290

RB

-2-#768, June 11, 4 p.m. from Paris

exchange control. At the moment when the entire world
was re-awakening economically France was proposing to

isolate itself, he said, and in this respect he referred
ironically to Bonnet's reported statement at San Francisco
that the principles of the policy of the French Government
as concerns improvement of economic relations conform with

the principles of the policy of the United States Government.

Turning to the financial problem Reynaud foresaw

considerable difficulties for the Government in raising
the necessary funds to pay its way. He referred in some
detail to statement attributed to Jouhaux last Sunday to
the effect that labor would maintain the present Government in office by force if necessary and condemned the
dictatorship of the masses in the Government.
END OF SECTION ONE.
BULLITT

SMS

NPL

291

RB

GRAY

Paris

Dated June 11, 1937

Rec'd 3:05 p. m.

Secretary of State
Washington.

768, June 11, 4 p. m. (SECTION TWO)

he urge the government to tell the workers the truth
about the situation and to make them understand that

continuation of the present policy would lead all to
disaster.
After a lengthy criticism of the Government's

policy and change of front relating to tariffs Flandin
insisted that full customs powers were not necessary,
that the protection required could be found in the
quota system and claimed that in reality the powers
demanded by the Government would undoubtedly be used

for combinations and bargaining to which he would refuse

to be a party. His reference to the decrees of October 2
last reducing tariffs and quotas led the Minister of
National Economy to protest that the gesture of customs
demobilization by France had not been followed by foreign
countries and therefore the government had to change its
policy
BULLITT
RR

CSB

292

GRAY

RB

Paris

Dated June 11, 1937

Rec'd 5:25 P. m.

Secretary of State
Washington.

768, June 11, 4 p. m. (SECTION THREE)

Before Senate yesterday approved bill providing
for adjustment of the 1936 budget the reporter of the
Senate Finance Committee, Gardey, and the President of

that Committee, Caillaux, took the opportunity of reviewing the financial problem which is evidently rapidly
coming to a head.
Statements and explanations furnished by Gardey

present considerable interest providing a picture of the
financial and economic situation which may be accepted

as bein, complete and accurate (?) the limited and therefore obscure explanations and statistics coming from other

official sources.
Gardey surveyed budgetary situation and declared

that for the current year probable deficit of the ordinary
budget will reach 9,000,000,000 francs. He recalled the
Government's attempt to solve the financial and economic
problem

293

RB

-2-#768, June 11, 4 p.m. from
Paris (SECTION THREE)

problem through vast public expenditures and summarized

results to date. Quoting fiscal revenue returns which
he considered the most certain of economic barometers

he found that indirect taxes were only 85,000,000 in
excess of estimates for the first four months of the
year and that receipts from the business turn-over tax
were 12 percent less than estimates in spite of higher
prices. He quoted statistics showing that the decrease
in unemployment during the past two months was not

appreciably more than during the same period of 1936.
The improvement noted early in 1937 in cars loaded had
not been maintained and the same was true regarding

maritime transport. Production had slightly increased
but improvement was chiefly confined to metallurgy.
Textile, paper, automobile, and rubber industries showed
substantial
BULLITT

SMS

NPL

294

GRAY

RB

Paris

Dated June 11, 1937

Rec'd 5:14 p. m.

Secretary of State
Washington.

768, June 11, 4 p. m. (SECTION FOUR)

diminution. Export trade was at a stand still. While
production in foreign countries had recovered to the
1929 level if not better in France, production was about

one third less than prior to the crisis.
Taking up the problem of the Treasury, Gardey

recalled Auricl's recent statement that 10,144,000,000
francs were required for the first quarter of 1937 and
20,133,000,000 for the rest of the year. Gardey could
not agree with this estimate and insisted that the budget
would be double that estimated by the Government and that

in his calculations Auriol had overlooked several payments

not to mention the railway deficit.
Funds available to the Treasury to meet its requirements were low. The respite afforded by the recent national
defense loan was exhausted. Regarding ways and means of

raising necessary funds, Gardey could not believe the
Government could possibly think of having recourse to the
Bank

295

RB

-2-#768, June 11, 4 p. m. from
Paris (SECTION FOUR)

Bank of France. The only way out was through borrowing

but the state was finding difficulty in this respect.
It could not issue the remainder of the national defense

loan and it was not easy to find takers for ordinary
Treasury bills.
Gardey briefly surveyed the effect of the policies
of the administration, the result to budgetary equilibrium
and to production and the failure of devaluation. The
result of the experiment of the Popular Front Government
was that the social structure of the country had been
endangered, increased costs of production would soon

undermine the social benefits acquired, and from the

financial point of view the state of the public finances
had become serious. The Government evidently realized

this situation and appeared inclined to return to
BULLITT

SMS

EMB

296

RB

GRAY

Paris

Dated June 11, 1937

Rec'd 5:35 p. m.
Secretary of State
Washington.

768, June 11, 4 p. m. (SECTION FIVE)

orthodox principles. However, unless this return was
accompanied by appropriate acts and the administration
remained its own master success would not be realized.
The present situation was abnormal and the country must

recover its good sense, tranquillity of mind, and must
return to work.
Any attempt to create new resources through any

fiscal or technical measure would in the opinion of
Gardey provide a brief respite. Everything had to be
recommenced -- the budget must be balanced and production

must be organized under the authority of an independent
government. There must be a return to social peace with

reciprocal respect for the right of labor and capital.
Auriol explained at some length budgetary receipts
and expenditures during 1936 and ways and means adopted

to procure funds for the Treasury. With respect to 1937
the Minister indicated that, contrary to the experience
of previous

297

RB

-2-#768, June 11, 4 D. m. from Paris
(SECTION FIVE)

of previous governments, the present administration

found great difficulty in placing short term Treasury
bills. On the other hand during the first five months
of 1937 the Treasury had issued 15,000,000,000 francs

of long or medium term loans, not including the British
credit of 40,000,000 pounds. However, the Government

realized the necessity to put an end to continued borrowing and M. Auriol declared to the Senate that "it was
by successive steps firmly decided upon and courageously

followed up that the financial and economic situation
could really be restored.
BULLITT

SMS

EMB

298

GRAY

RB

Peris

Dated June 11, 1937

Rec'd 5:41 p. m.
Secretary of State
Washington.

768, June 11, 4 p. m. (SECTION SIX)

The Minister then proceeded to quote a series of

statistics with the view of demonstrating that present
high prices did not risk defeating recovery and that
the index of wholesale prices in many instances in 1929
was higher than today.

He continued that notwithstanding claims to the
contrary revenue from taxation was satisfactory and
announced that for the first five months of 1937 revenue
from indirect taxes amounted to 11,996,000,000 compared

with estimates of 12,045,000,000.

Finally the Minister recognized that the situation
of the Treasury was a difficult one but in this respect
he once more invited attention to the burden of the railways and the necessity to maintain advances to the Depart-

ments and the Communists. He also bitterly complained of
efforts made in certain quarters and by certain newspapers
to destroy confidence in the Government and he pathetically
appealed

299

RB

-2-#768, June 11, 4 p. m. from
Paris SECTION SIX

appealed to the Senate and to public opinion to believe
that under such circumstances it would have been impossible

for any Finance Minister (#) and to halt export of capital.
However, M. Auriol did not take the Senate into his
confidence regarding his plans for raising necessary
funds for the Treasury but confined himself in concluding
his statement to the indication that the Government
intended to continue in its efforts to restore the situation. He said that in a few days plans would be placed
before Parliament (?) added that this would not be
sufficient unless expatriated and hoarded capital was
brought out for investment and that he believed this
possible if campsigns against the Government ceased.
BULLITT

SMS

NPL

(#) Apparent omission

300

RB

GRAY

Paris

Dated June 11, 1937

Rec'd 5:06 p. m.

Secretary of State
Washington.

768, June 11, 4 p..m. (SECTION SEVEN)

The debate concluded by a few observations from

Caillaux who suggested that Auriol had obviously attempted
to make the best of a bad case; that envertheless it was

evident that all was not well. He sternly took the
Minister to task for his ruinous policy. He awaited
in vain, helsaid, for an indication of ways and means
envisaged to raise the 25 to 30 billion francs required
NO

by the Treasury and warned the Minister of Finance that

if the plan now under preparation was to receive the
approval of the Senate it would have to be complete and

far reaching. Caillaux insisted that the situation was
serious and that the public was obviously aware of it.
The so-called consultations and attacks were the lot of
all governments and ministers and were not confined to
the Popular Front Government as Auriol appeared to believe.
END OF MESSAGE.
BULLITT
SMS

NPL

301

PARAPHRASE OF TELEGRAM RECEIVED

FROM: American Embassy, Paris, France
DATE:

June 11, 1937, 6 p.m.

NO.: 769
RUSH

FROM COCHRAN.

STRICTLY CONFIDENTIAL.

This evening at 5:45 I had a talk with the Bank of
France. My contact informed me that the pressure on
the franc today had been even heavier than it was yester-

day. It appeared from preliminary calculations that
the French control losses for the day would be approximately 100,000,000 francs greater than yesterday;

the figure was 635 million france yesterday. Deducting
today's losses would leave the Stabilization Funds
between

balance of gold and foreign exchange *********three-

fourths and one billion francs.

BULLITT.

EA:LWW

302
-COPY-

London, June 11, 1937.

MEMORANDUM FOR THE SECRETARY:

Subject: Narcotic Smuggling - Europe.
Hamburg.

I have just come from Hamburg where I have been making a survey of

the present situation. There is no question that Hamburg is one of the

most dangerous ports from the smuggling angle, for several reasons.
These are chiefly:

(a) It is a tremendous transshipment port at which vessels from
the Far East call frequently, said vessels carrying Chinese in their
crews. These Chinese hook up with the local Chinese in the smuggling
business such as the notorious Choy Loy.

(b) It is the terminus (lay-over) point of the United States Lines
and certain German ships in the trans-Atlantic trade. The lay-over
period is of several days duration, this period giving the narcotic
carriers in the crews time to make the necessary arrangements ashore.

(c) It is a port of egress, to some extent for opium from Yugoslavia.

(d) It, like Antwerp, has a large tough floating population of
crooks, among whom are the seagoing members (beach combers) of this

fraternity. Incidentally, Hamburg is a city approximately four times as
large as Antwerp, with a correspondingly larger underworld section.

I put Beers (he is now covering Hamburg) to work on an angle which

I think is important: The port, in the free-harbor warehouses, is a

storage point for stocks of opium, principally Turko-Yugoslav monopoly
stocks, Russian stocks to some extent it appears, and some Afghan stock;
in addition there is some Yugoslav non-monopoly opium stored there (premonopoly) In Hamburg there is an opium market which deals legitimately
(supposedly) with these stocks. I "sicked" Beers on to the opium market
brokers and the stocks in the free-harbor warehouse. I have a strong
hunch that we have missed a bet here. I feel that something funny is

going on This is borne out by the fact that two different independent
informers tell us that such is a fact. One of them states flatly that
she knows opium is coming out of one of the warehouses on the quiet and

going to the United States.

I went around with Beers, drank with him and his informers, and in

general watched him work. He is 0. K., end an able ally to Scharff. I

consider Scharff and Beers in a class by themselves as being much superior
to our other European narcotic personnel. This morning, before I took
the plane, Beers and I cooked up a scheme to take advantage of a break

303
-2-

which came our way last night. We found that & consignment of opium from
Hamburg was landed O. K. in New York but has not yet been disposed of there.
We had one of our informers tell the owner who is here on his ship about

a sure customer in New York. This customer, if our plans work out, will

be one of John Roberts' men. I will make the arrangement with the New York

boys as soon as I arrive there on the WASHINGTON, June 24. (The WASHINGTON

will beat the other ship to the States.)

I have dropped in here (London) on my way to Antwerp to look over the

personnel of the London office, looking for material suitable for transfer
to the narcotic side should it become advisable. Our European personnel

on the valuation side in general is not a very prolific field in this re-

spect as regards the Vienna office and not much better in the Berlin office.
There seems to be a dearth to some extent of "tough guys." After a short
stop at Antwerp to consult Wiley and Dyar, I will go to Paris where I sail
for home on the 17th.

Respectfully,
THOMPSON.

304

TREASURY DEPARTMENT

Washington

Press Service

FOR IMMEDIATE RELEASE,

No. 10-54

Friday, June 11, 1937.

Acting Secretary of the Treasury Taylor today announced the subscription

figures and the basis of allotment for the offering of 1-3/8 percent Treasury
Notes of Series D-1939 and of 1-3/4 percent Treasury Notes of Series A-1942.
Reports received from the Federal Reserve banks show that subscriptions
for the notes of Series D-1939 aggregate $2,499,000,000, and subscriptions

for the notes of Series A-1942 aggregate $2,496,000,000. Subscriptions for
both series of notes were allotted on the same basis. Subscriptions in amounts
up to and including $1,000 were allotted in full and those in amounts over
$1,000 were allotted 17 percent, but not less than $1,000 on any one subscription.
Further details as to subscriptions and allotments will be announced when
final reports are received from the Federal Reserve banks.

00000

305

JR

GRAY

Paris

Dated June 12, 1937
Rec'd 9 a.m.

Secretary of State,
Washington.

772. June 12, noon (SECTION ONE).
FROM COCHRAN.

Features of the debate on full customs powers which
was resumed in the Chamber yesterday related to (one)

declaration of spokesman for the Radical Socialists that
03/13038
his colleagues would refuse to vote the project of full
powers unless it were embodied in a general plan of
revalorization of agricultural products and (two) statement
by Paul Bastid, Minister of Commerce, that France intended

to remain faithful to the tripartite monetary arrangement.
With respect to the latter he said that the French Government remained convinced that the success of the policy
embodied in the common declaration was linked with the
development of international commerce but immediately

proceeded to emphasize that "it was evident that this
development did not depend upon France alone".

It is also noted from the official report that

BULLITT
CSB

306

MJD

GRAY

Paris

Dated June 12, 1937.

Rec'd. 11 a. m.

Secretary of State,
Washington.

772, June 12, noon. (Section Two)

in reply to a question as to whether he or Professor
Rist was really head of the Ministry of Commerce

Bastid was led to Explain the position of the Professor and the relations of the Rist Committee with the
Ministry of Commerce. The Minister said that the
role of Rist and his committee "was purely administretive". The role of the committee was to propose
solutions which (Bastid went on to say) the Minister
did not always accept "but in most cases he did
accept". In any EVENT Bastid assured the Chamber he

insisted upon taking upon himself all responsibility
for decisions reached and protested that claims made

that the Rist committee did nothing for protection or
for French production had no foundation in fact.
The debate on the full customs powers project
will be resumed in the Chamber of Deputies on Tuesday
morning next.

Early yesterday the debate on resolution
proposed

307

HJD --2-- No. 772, June 12, noon from Paris

(Section Two)

proposed by Regnier (Radical Socialist and former

Minister of Finance) perforce of the application of
the forty hour law to the hotel industry developed
into a veritable interpellation on the government's
social policy and wide notice is given in today's
press to defeat of Government's demand by 159 votes

to 129 for hostponement of consideration of Regnier's
project and to its final unanimous adontion by
Senate. Opinion appears to attach considerable

significance to this development from the point of
view of the stability of the Government.
Finance Minister Auriol yesterday gave statement
to DIESS denying runor that exchange control would DE
instituted. (End Message)
BULLITT
CSB

03V13038
01

308
Copy for SEGRETARY
GRAY

MJD

London

Dated June 12, 1937.

Rec'd. 9:30 a. M.

Secretary of State,
Washington.

376, June 12, 1 p. m.
FOR TREASURY FROM BUTTERVORTH.

i.s instructed I discussed the substance of my
375, June 12, 11 a. m., with Waley and Bewley of the
British Treasury. They Expressed appreciation that
this information had been conveyed to them and said

that their initial reaction was that in principle
they quite agreed that the adherents to the tripartion
monetary agreement ought not to take "difficult
individual or selfish courses of action". They state
that the British Treasury had no specific information
regarding Swiss operations in London; that they would
look into the matter and it would be discussed with
Montagu Norman and his assistants upon their return
from Basel where they might well have already touched
on the matter with Bachmann and others. Waley and

Bewley added that as soon as the British authorities
had had an opportunity to discuss the position they
would

309

MJD

No. 376, June 12, 1 p. m., from London

would communicate with ME again.

One hundred thirty bars were offered at fixing
at a wider discount, four one half pence SOME of

which represented official purchases.
BINGHAM
HPD

It

Copy for SECRETARY

JR

310

GRAY

London

Dated June 12, 1937

Rec'd 9:40 a.m.

Secretary of State,
Washington.
375.

June 12, 11 a.m.
FOR TREASURY, MONGENTHAU FROM BUTTERWORTH.

The following summary of the information which you
communicated to me by telephone yesterday afternoon is
cabled to you herewith for your records in accordance

with your instructions.
Cochran had been ordered to visit Dr. Bachmann on

Sunday to give him the following message from you "I am
displeased with the manner in which the Swiss have been
conducting their exchange operations in the United States

and I do not feel that the Swiss are living up to the
spirit of the tripartite agreement". .
You instructed me to seek an appointment at the
British Treasury and communicate the above to them and

you gave mc the following background information:
Cochran had seen Bachmann about a week ago.

Bachmann had not dealt with him in the open and above

board fashion; but he had referred to his dollar balances
and implied that in the absence of a protest he could
continue augmenting them.
The

311
-2-

JR #375, June 12, 11 a.m., from London.
The Swiss have been deearmarking their American

gold and increasing their dollar cash balances by
substantial amounts; for example, Thursday they sold
$5,000,000 of gold.

This recent practice had disturbed the Dutch. You
inquired whether I had read Cochran's telegraphic report

of his recent conversation with Trip and I replied that
a copy of this report had not been sent to London. You
then explained Trip's expressed reaction was that the
Swiss were not playing the game and that he mentioned

that his position "if something should happen" would be
made difficult if Bachmann were allowed to take this

precautionary attitude and he, Trip, did not follow the
same course.

Cochran is to communicate with the Dutch and the

Belgians, whose behaviour in this and kindred matters
has been exemplary, the message from you quoted above in

order that they should if they see fit take similar action.
In this connection you referred to the Bank of
England's query of Knoke: "What luck are you having with

the Swiss". I said that I understood the situation and
that I thought the above remark would give me just the
opening I needed.
You mentioned that if Bachmann should ask Cochran
what

312

-2-

JR #375, June 12, 11 a.m., from London.

what you suggested he do with his dollar balances,
Cochran was instructed to say that he should use these

funds to buy gold in the British market and bring the
gold if he wished to the United States and LEOVE it on
earmark.

BINGHAM
CSB

03/13033

Copy for SECRETARY

313

itt

PARAPHRASE OF TELEGRAM RECEIVED

FROM: American Embassy, Paris, France

DATE: June 12, 1937, 10 a.m.

NO.: 771
FROM COCHRAN.

I transmit the following in confirmation of the
telephone conversation with Secretary Morgenthau, who
telephoned me from New York at 6 p.m. on June 11.

The Secretary inquired about the French internal
situation. In answer I summarized my telegrams No. 766
of June 11, 11 a.m. and No. 769 of June 11, 6 p.m.
The Government I added could not have its financial and

fiscal program ready for consideration before the first
of the week, and there was little chance that a political
crisis would result before the measures were turned down

in committees or debated in Parliament, which at the
earliest could not be before the middle of the week.

The French stabilization fund in the meantime is losing

gold at such a rate that by Tuesday it will probably be
obliged to purchase gold from the Bank of France.
END SECTION ONE.

BULLITT.
EA:LWW

314
PARAPHRASE OF SECTION TWO, NO. 771 of June 12, 1937,

from the American Embassy, Paris.

The public statement of the Bank would not show such

a transaction until Thursday of the following (omission).
I was asked by Secretary Morgenthau whether I could
telephone a message from him to the Swiss National Bank

President, Bachmann. I told the Secretary I was proceeding to Basel on Saturday night and would be seeing Bachmann on Sunday, so he instructed me to deliver the following
message to Bachmann orally:

"The Secretary of the Treasury is displeased at the
way Bachmann has been conducting foreign exchange operations

in the United States. The Secretary does not feel that

Bachmann is living up to the spirit of the tripartite
agreement. The Secretary sincerely hopes that he will discontinue the practices which he has been following recently
The Secretary told me, in explanation of the above,
that the Swiss National Bank had on balance $45,000,000
with the Federal Reserve Bank of New York. It also had

the total of In

another $15,000,000 in United States Governments, thus making

their earmark account they have $11,000,000 gold, and on
the water they have approximately $12,000,000. They
withdrew another $5,000,000 from earmark on Thursday evening.
END SECTION TWO.

BULLITT.

315
PARAPHRASE OF SECTIONS THREE AND FOUR OF TELEGRAM NO.

771 of June 12, 1937, from the American Embassy, Paris.
Once I have given the above-quoted message to Bach-

mann I am to tell the Belgian and Dutch officials thereof,
with the Swiss
and suggest that if the same difficulties/are being experienced by them, they might let Bachmann know that they
conour with the message from Secretary Morgenthau. I

told the Secretary that while I was at Basel I would give
this word to Governor Franck of the National Bank of
Belgium. The Netherlands Bank Governor, Trip, will not

be at Basel, so either while I am at Basel or after my
arrival back in Paris on Tuesday morning, I am to telephone him at Amsterdam.

At nine o'clock on Monday morning I am to telephone
Mr. Morgenthau at the Treasury, from the Schweitzerhof

Hotel in Basel, to report the delivery of the messages
to Bachmann of Switzerland and Franck of Belgium. Through

Butterworth the Secretary is informing the British, who
have asked how we are getting on with the Swiss authorities
Secretary Morganthau felt that the Swiss would make

the Dutch, Belgians and others nervous if they continued
their present practice. He would have no objection, he

intimated, to the Swiss following the practice of the
Netherlands of selling gold against dollars in New York
and purchasing London gold. I was reminded by Secretary

Morgenthau that both the Central Banks give us full explanations

316

-2planati ons of transactions which are undertaken on the
market in our country.

I made reference to the trip I recently made to Bern,
saying that it had been made to seek the views of the Swiss
with instructions to indicate no American uneasiness regard-

ing their practices, and that I had made a simple recital
of my conversations in my telegram No. 713 of June 1,
10 a.m. Secretary Morgenthau said ,that after he had

received the Swiss explanation which I had cabled, he
expected to give Bachmann his answer in the words quoted
above, and added that this attitude was warmly indorsed
by the Federal Reserve Bank of New York.

At 10 o'clock on Saturday night I leave Paris
and on Tuesday morning I arrive back at 7 o'clock.
END OF MESSAGE.

BULLITT.

EA:LWW

317

June 14, 1937.
9:02 a.m.

H.M.Jr:

Hello Mr. Morgenthau
Hello Cochran.

C:

Yes.

H.M.Jr:

Ah - go ahead.

C:

I'm in a hotel here in Basel.

H.M.Jr:

Well all right.

Cochran:

C:

H.M.Jr:

The French are having another bad theory.
What's that?

C:

I say the French are having a very bad day.

H.M.Jr:

Yes.

C:

H.M.Jr:

The French are ready for a discount rate to 6%.
Yes, we got that.

C:

And they lost pretty heavily in the trading here.

H.M.Jr:

Yes.

C:

H.M.Jr:

And on this other matter I saw Bachman yesterday
morning at 10:30
Yes.

and gave him orally your message.

C:

H.M.Jr:

Yes.

C:

He said he'd tell his associate directors.

H.M.Jr:

Yes.

C:

And then I saw him again this noon at 12 o'clock.

H.M.Jr:

Yes.

C:

He gave me their message.

318

-2H.M.Jr:

Yes.

C:

He outlined the program which they have been following.

H.M.Jr:

Yes.

C:

They have a certain amount of gold.

H.M.Jr:

Yes.

C:

Two billion six hundred thirty-one million Swiss francs
of gold

H.M.Jr:

Yes.

in the bank

C:

H.M.Jr:

Yes.

C:

and they had decided some days ago on a policy
of not increasing the bank's holdings above that amount

H.M.Jr:

Yes.

C:

And they say on the other hand, they assure us that
the

they will not sell any of that and

amount

H.M.Jr:

Yes.

which appears in the bank statement.

C:

H.M.Jr:
C:

H.M.Jr:

Yes.

And they say that that figures out at 493 Swiss
Banks at present in Switzerland
Yes.

as against 286 in our country.

C:

H.M.Jr:

I see.

C:

And he says that they don't want to change the gold
to

price and - but they say that they cannot
hold any more gold than that on account of it being
prices - price of gold and of war and
then they gave me a statement as to the amount in

their stabilization fund.

H.M.Jr:

Yes.

319

-3C:

That's five hundred thirty-eight million.

H.M.Jr:

Yes.

C:

Ah - that's the total of the fund and of that they now
have four hundred and eight million Swiss francs foreign exchange.

H.M.Jr:

Yes.

C:

It's mostly dollars and a few pounds

H.M.Jr:

Yes.

and they have fourteen million in Swiss francs

C:

H.M.Jr:
C:

H.M.Jr:

Yes.

and they have one hundred and sixteen million
francs of gold
Yes.

C:

and their plan - ah - they're thinking of sending
the remainder of this to us.

H.M.Jr:

To whom?

C:

About one hundred and sixteen million Swiss francs -

H.M.Pr:

Yes.

C:

They - they propose sending this on over to us and

that's a little over twenty-five million dollars.

converting it into dollars over the next two or three

months.

H.M.Jr:

Yes.

C:

end they said that any gold that comes to the banks
from hoarding

H.M.Jr:
C:

H.M.Jr:

Yes.

ah - ah - would go through the fund, of course,

but would be sold in London.
Yes.

320

-4C:

They're sending gold in bars from Swiss - have it

H.M.Jr:

Yes.

C:

of that to us.

H.M.Jr:

Now repeat that - what they're going to do with this

C:

Ah - as their bank has to take in gold offered to them

H.M.Jr:

Yes.

already in London.

*hey will dispose of it there and not send any more

this last thought I don't get that.

by hoarders, some of which is already in London,

and some of which - coins and so on - is here

C:

H.M.Jr:

Yes.

C:

They - they will dispose of that on the London market.

H.M.Jr:

Yes.

C:

And they promised not to - to - to use our market
for the purpose.

H.M.Jr:

I see.

H.M.Jr:

They - they just wanted to use our market to dispose
of the remaining one hundred and sixteen million francs
of gold over two or three months.
Well why don't they leave it in gold here?

C:

Well they insist that they don't want to hold any

H.M.Jr:

Yes, well how about us?

C:

Well that's the point.

H.M.Jr:

Ah-ha, well anyway I won't argue over the telephone -

C:

C:

H.M.Jr:

more gold than that figure.

I'll just take the report.
I'll confirm it by wire

Yes.

321

-5....and he says that he was writing explaining
their whole position and to get his colleagues
to sign a letter with him this week to George

C:

Harrison and give me a copy.
H.M.Jr:

Well why send it to George Harrison. He's got

nothing to do with it.

C:

I mean that's what he told me.

H.M.Jr:

Well if you could get word to him - the letter should

C:

Yes sir, that's why I wanted to call you and explain

H.M.J.:

No, to me he should send the letter. George Harrison

come to me - not to George Harrison.

it this afternoon; I - I didn't want to tell him not
to do it
has nothing to do with it. It's to come through the
Swiss Government to me.

C:

Fine, I'll have him address it - want it addressed
to you or to me?

H.M.Jr:

No, it's to be addressed to me and let it come

C:

Diplomatic channels.

H.M.Jr:

Yes, this is between governments - it's not between

C:

All right.

H.M.Jr:

through diplomatic channels.

Central Banks.

I mean it's to follow the same - the same procedure
as the tripartite agreement.

C:

All right.

H.M.Jr:

Hello.

C:

Hello - yes.

H.M.Jr:

I mean it's - it's - he can deliver it to you but
it's - it's - it's from the Swiss Government to from the Swiss Treasury to me.

322

-6C:

All right, I'll get him to - to send it over the

H.M.Jr:

If you please.

C:

All right, sir.

H.M.Jr:

I mean I'm very definite on that.

C:

Yes, well I'll - I'll get - ah - these last

signature of his Minister of Finance.

H.M.Jr:

that Bewley just sent - ah Yes, well I'm very definite on that.

C:

I'll - I'll - I'll get ahold of him as soon as he

H.M.*r:
C:

H.M.Jr:

gets to Zurich. I'll call him from here, you see.
Yew, well how did he - how did he receive my message?

He'll write it for the signature of - fine - the

Minister of Finance addressed to you
Yes.

H.M.Jr:

and I'll send it to the diplomatic pouch.
Yes, but - ah - but - ah - when you get it cable me

C:

Surely, I'll - I'll cable a summary of it.

H.M.Jr:

Now how did he receive my message?

C:

C:

H.M.Jr:
C:

the contents.

He insists that he wants to ah - to
But he didn't take any objection to your delivering
that message?

Oh no - no. He said, "It's awkward not having more
frequent and more direct contacts" and I told him
that much misunderstanding would be obviated but let
us know what he plans to do

H.M.Jr:
C:

That's right.
and then go ahead and I told him how the Belgians
and the Japanese and so on outlined their programs
to us

H.M.Jr:

That's right.

323

- -7 C:

.....and that we put ourselves out to help the

Belgians and we had the French and the Dutch
H.M.Jr:

That's right.
when they had a problem.

C:

H.M.Jr:
C:

H.M.Jr:
C:

Now - ah

He said that after he talked with his colleagues
to-day
- if they had any change in their program
they'd let me know.

That's right.
So
I haven't told him yet the feeling from here, you
see?

H.M.Jr:

Yes, when will you be back in Paris?

C:

I'll be back there at 6:45 in the morning.

H.M.Jr:

Tomorrow morning?

C:

Yes, I leave here at 10 o'clock tonight.

H.M.Jr:

Yes, now just hold the wire a minute please.

C:

All right.
(Pause while short conversation is carried on in
H.M.Jr's office)

H.M.Jr:

Ah - the boys here say the letter should come over
Myers' signature.

H.M.Jr:

Over Myers' signature?
The Minister of Finance.

C:

Right.

C:

H.M.Jr:

That's right. Are - are the people there disturbed

over the French situation?

C:

They're very nervous over it.

H.M.Jr:

Ah-ha - ah-ha.

324

-8-

C:

The discount widens their

H.M.Jr:

Yes.

C:

And

H.M.Jr:

Ah-ha.

C:

Then this word that they had to raise the discount.

H.M.Jr:

Yes.

C:

And the - the

H.M.Jr:

Yes.

you know.

have come down; that makes a bad

impression in itself.

I - I can't confirm it

that they will vote increased taxes

and then ask the Bank of France to discount

C:

treasury paper
H.M.Jr:

Yes.

of the taxes.

C:

H.M.Jr:
C:

Yes.

They say five billion they may seek in taxes and get
authorization to take that much cash from the bank
while the taxes are coming in.

H.M.Jr:

O.K.

C:

And they said down here they don't know whether the

government will stand or whether it will be thrown
out.

H.M.Jr:

Ah - in talking to you from my farm I instructed you
to - after you returned to let the Belgians and Dutch
know of your conversation with Bachman. + overlooked

the fact that I - also, of course, you can tell the

French.
C:

I - I haven't told the French.

325

-9 H.M.Jr:

Well you - you - well I overlooked that fact.

C:

What's that?

H.M.Jr:
C:

H.M.Jr:
C:

H.M.Jr:
C:

You should tell them when you et back.
this noon - the Belgian All right, I told
he says they have had no difficulty.
Yes, well when you get back you can tell the French.

He told his assistant - the man that talks with
said that they had
Knoke and
taken about ten million dollars from them - that was
all.
Ah-ha.

And he said he would give my message to
and they would decide whether they should speak to
or not.

C:

All right, Cochran.
And they're talking this gold business down here

H.M.Jr:

All right.

C:

I'll give you a wire on it - get it off the first

H.M.Jr:

Thank you.

C:

And I'11 attend to the letter business this afternoon.

H.M.Jr:

Thank you.

C:

All right, sir, goodbye.

H.M.Jr:

Goodbye.

H.M.Jr:

strongly though.

thing in the morning.

326
June 14, 1937.
9:16 a.m.
Operator:

Go ahead.

H.M.Jr:

Hello

Knoke:

Good morning, Mr. Secretary.

H.M.Jr:

Ah - good morning - Knoke, I just talked with

K:

Yes.

Cochran. He had a talk with Bachman

and what Bachman has worked out - how much

H.M.Jr:

gold we have per capita and how much gold the Swiss
have per capita.
K:

Yes.

H.M.Jr:

And they have more gold than we have so they don't

see why they can't send us another twenty-five million
dollars. Ah - and which they have now in excess of

their per capita needs in their stabilization fund.

Anything over and above that comes out of dehoarding

they are going to s end to England but they're not
going to take any more gold.

K:

Yes.

H.M.Jr:

Well we're going to pass it on to the British right
away.

K:

H.M.Jr:

I see.

And he's writing me a long letter and he'll give
me a lot of figures and after we get them why - ah an - Archie will pass them along to you.

K:

Yes, I'd like to - ah - to - ah - check into it here.

H.M.Jr:

Yes, well he'll pass them along to you. He'll get

them to you by noon to-day; they're typing them out

now - it gives a lot of stuff.
K:

Yes.

H.M.Jr:

But

-2K:

H.M.Jr:
K:

H.M.Jr:

Are you satisfied with it all?
Not at all.
es.
It's a new way of solving the gold problem taking it
on a per capita basis.

K:

Yes.

H.M.Jr:

That's a beauty.

K:

327

I'd just as soon get prepared for all these various

arguments and be ready to answer them.
H.M.Jr:

Yes, now what about the French situation right now?

K:

There's - the only thing - I - I just saw from the

London cable that the demands for dollars, particularly

from Paris continues.
H.M.Jr:

Yes.

K:

Ah - the British - the French fund evidently is
supporting at the old rate 110.90 - ah - on - by Friday
night gold holdings, if the information that has come
in and this is correct, the gold holdings must have been

down to seven to eight hundred million francs,
H.M.Jr:

That's right.

K:

which would be just one more good - one more
day and they are out.

H.M.Jr:

Yes. Ah - well now - ah - let me ask you a question.
Can you work from here as well as you can from New
York for a day or so? I mean - what I'm thinking of
is I'd like to have you here tomorrow.

K:

Well - ah - yes, all right I'll be there tomorrow. I ah - I can't work quite as well but I think it's
worthwhile.

H.M.Jr:
K:

Yes, well I've got some things that - that I've got
on the hopper and I want you to sit in on them.

All right, sir.

328

-3H.M.Jr:

And will you tell - will you tell the governor?

K:

Yes.

H.M.Jr:

Ah - what do you do come down on the midnight?

K:

Ah

H.M.Jr:

Or will you come down this afternoon?

K:

Well I'll probably. Well I - I would prefer to
come down in the afternoon if I g et away here.

H.M.Jr:

All right, well the point is I'm going to start
at the office at 8:30 tomorrow morning.

K:

Yes.

H.M.Jr:

I'll start in at 8:30.

K:

That is 8:30 your time?

H.M.Jr:

Ah - Washington time.

K:

Washington time - all right, I'll be there at 8:30.

H.M.Jr:

I'll start at 8:30.

K:

Yes sir.

H.M.Jr:

Now - ah - the thing that I want you on particularly
is what will we do in case France puts in exchange
control or - ah - or - ah - devalues further, see?

K:

Yes.

H.M.Jr:

And - ah - ah - one of the things that I have in mind,
and I wish you'd be thinking over it - ah - is that
if they do that I'm considering as one of the plans ah - that we'll only buy gold through Central Banks.

K:

Yes.

H.M.Jr:

See?

K:

Yes.

H.M.Jr:

I mean then - then we can sit down each day and we
can say to England, "How much would you take," when

they offer it to us.

329

-4K:

Yes, that is another question you want for me to do.

H.M.Jr:

Yes - yes, but I mean if they do this thing I think
that will be the time to - to announce that we'll only
buy gold from Central Banks.

K:

Yes.

H.M.Jr:

Because if the crisis comes these private banks won't
take it anyway.

K:

No,
I think that is better than definitely demonstrating it.

H.M.Jr:

I know. Well - and this thing is coming to a head and
I think - I think that that's the way to handle it.
Whether the banks take it or not all - all - 50% of
these rumors come from the banks talking with their
Directors - "Should we or shouldn't we buy gold?"

K:

Yes.

H.M.Jr:

Well then it gets down to the question that we will
decide how much gold we'll buy each day from England
and France and then if Switzerland starts doing
anything then I'll say, "Well hell, we won't take it

K:

H.M.Jr:

that's all you keep it."
Yes. Now that's if the Swiss ship to you - if the
Swiss National Bank ships to us here that wouldn't
change the situation any you would take that gold
Well we - I don't know.

K:

But I mean according to what you - ah

H.M.Jr:

oh now - yes - yes but

K:

H.M.Jr:

You'd still be buying - an - the Swiss gold - that
problem wouldn't be solved that way because you'd
still be buying from a Central Bank.
But it takes out all these people sitting around in

the banks and board rooms - of bank board rooms discussing, "Should or shouldn't we buy this gold?"

Think it over.

330

-5K:

All right, sir.

H.M.Jr:

Think it over.

K:

Yes.

331

June 14, 1937

The Secretary spoke to the President over the phone

this morning at 9:20. He said, "Good morning, Sir. How
do
you know about Joan? She's getting along nicely. She
went to bed with a 102 fever. The fever went down, but
the blood count didn't look right SO we took her over and
they took out her appendix at Vassar Hospital. When the
President inquired who the surgeon was, HM,Jr. replied,
"Moffett. He evidently enjoys a very good reputation.
The President then asked if there was any more news

from Paris. The Secretary said, "I have been trying to
get Bill Bullitt since 7:30. Herbert Feis called me in

the middle of the night and read the message to me. It
looks as though Bullitt was under great pressure when he

sent it. They read it to me.

All that happened this morning is that the French increased their discount rate from 4% to 6% and there is nothing
showed up in foreign exchange to show that there will be a
collapse today. I talked to Cochran, in Switzerland, and

he had nothing new there and I did not bother you because
I had nothing to contribute and everybody assured me Friday

that it would be all right until Monday, so I said, 'Why
bother the President?' Well, La Belle France still has her
virtue, but not much gold!
I talked to Robert Jackson Friday night after Magill
had talked to him and he'is in Philadelphia today, and he
and Magill and Oliphant and I were scheduled to go out there
tonight to see him, to try to work on him, but he didn't say
yes and he didn't say no. But I will tell Magill to be at
your office at ten minutes of two.' "
The Secretary, after the conclusion of the conversation
said, 'The President wants to know, in case the Congressional
Investigation Committee should make a 'flub-dub' of the first
one or two cases, could we go ahead on our own and how would
we do it and I should ask Oliphant."

332
June 14, 1937.
9:37 a.m.
H.M.Jr:

Hello

Operator:

Congressman Doughton. Go ahead.

H.M.Jr:

Hello

Doughton: Hello Mr. Secretary, how are you?
H.M.Jr:
D:

Oh fine, how is everything down in North Carolina?

I haven't been down there lately. I sat here last
week trying to get your excise bill through the house.

H.M.Jr:

Well I see you did.

D:

What say?

H.M.Jr:

I see you did.

D:

Yes, we had a mean fight and that's what I wanted
to call you up about.

H.M.Jr:

Well I congratulate you on winning a mean fight.

D:

Well here's the situation; if we have to fight the
Chairman of Committee on Rules and then on some
amendments we have to crack the whip on the whole

organization I don't know how long we can be able

to get this bill through.

H.M.Jr:
D:

H.M.Jr:
D:

H.M.Jr:

Well - ah - how much

Darned old Carter made a mean bitter speech against
the whole bill you know
Yes.

and attacked it every way he could and then

voted against it and - ah - I had to amend that Cole
amendment - that fellow with the whip you know he
led and worked against it and voted against it and
voted his whole delegation against it and I don't
know what we're going to do if we don't get better
lineup down here with the leaders.
Well if you had it easy it wouldn't show how good
you are.

333

-2D:

H.M.Jr:
D:

How's that?

That just shows how good you are.

Well I know but you can't keep that up you know
because a lot of dissention will be down here
now
their - everybody that - so many people with

names all and I just don't know.

I just thought I'd tell you so that if anything can

be done at that end of the line to get our organization
straightened I thought you might take it up with Sam

Rayburn - he wouldn't have any influence with Boake
Carter
he in.
ought to have some with the whip because
he
putsbut
them
H.M.Jr:
D:

Well is there any complaint against me personally?
Against who?

H.M.Jr:

Me.

D:

What?

B:M.Jr:
D:

#.M.Jr:

Is there any complaint against me personally?
Oh no not against you personally but they're are
some just don't want to agree with something that
I don't know; the situation down here is not good.
Shall I build them a couple more Post Offices?
them

D:

We only beat/three votes down here you know on that
Cole amendment and that was a more desperate fight
than you ever saw.

H.M.Jr:

Well

D:

You see when your whip's against you and Chairman's
Rules Committee against you and even trying to get

them to change their vote but it shows you how close
it is; someone voted against them there trying to get
them to change their vote.

H.M.Jr:
D:

Well all I can say again I congratulate you on the
way - the masterful way in which you handled it.
Well I thank you and I appreciate that but we're going
to run into - I'm fearful if we don't get things lined
up a little better down here that some of these days
we're going to get into - going to get some of our
measures defeated; it looks mean to me.

334

-3H.M.Jr:

Ah-ha - well

D:

Just thought I'd tell you.

H.M.Jr:

I - well I appreciate you're calling and I appreciate

what you've done.
D:

Well thank you very much. I think we can get
started on this tax evasion business, won't we
tomorrow - day or two?

H.M.Jr:
D:

Ah - I understand Wednesday - somebody told me.

Well I thought - we have a birthday of the House
Members to-day

H.M.Jr:

Yes.

and I'm going to have a conference with

D:

Pat now at 10:30 about procedure.
H.M.Jr:

Yes.

D:

we ought to get started not later than Wednesday
IAnd
think.

H.M.Jr:

Well we're ready.

D:

You're ready at that end of the line, are you?

H.M.Jr:

Oh, we're always ready.

D:

Well that's - I believe you are. That's fine.

Well I'11 call you again.
H.M.Jr:

Thank you.

D:

Goodbye.

335
RE RESERVES ON FOREIGN DEPOSITS

Present:

June 14, 1937
9:40 A.M.

Mr. Magill
Mr. Oliphant
Mr. Taylor

Mr. White

Mr. Lochhead
Mr. Upham

Dr. Viner

Mr. McReynolds
Miss Chauncey

H.M.Jr:

I'm crazy to get off this blankety-blankety tax

business and get on my regular job, which is this

international thing, so I'll give you what - I just
talked to the President - what I got. You people no, you sit here; a little taxes won't hurt - won't
sour your disposition.

In the first place, he wants you (Magill) there at
ten minutes of two, see? And he asked me a legal
question, Herman, so I think you better be there
also. The point that he wants us to discuss at
that time is - I'm to call up Tommy Corcoran and
tell him to be there, and what the President said
is this. He expects to see Harrison and Doughton
at five o'clock this afternoon and go over the procedure, because it starts Wednesday morning. He
said, "I want you fellows to have all the lists ready

to go over." The reason he wants Corcoran there he knows the background of lot of these people, see?
(On phone) Hello. Ask the White House how to get
hold of Mr. Tom Corcoran.

Oliphant: R.F.C.
H.M.Jr:
(On phone) I think he's with the R.F.C., but ask the

White House operator and then put him on this phone.

Then he said, "Ask Oliphant to be studying the fact

that if they flub-dub - is the word to use - and

don't give us what we want, what would be the normal
procedure if we didn't have any committee for the
Treasury to go ahead on its own, see? What could we
do? Supposing we didn't have any Congressional
Committee; what would the Treasury do? Have Oliphant

336

-2-

study that. If we had no committee, how would we
go ahead and conduct this investigation, just as
though it's a regular Treasury operation?" See?

So the responsibility is on you fellows. I mean

have your names, why you want this person, see, and

have the - I think the best thing is to give it to
him verbally, and then a little memo - "Person

-

so-and-so, so-and-so." And then have something,
Herman, ready on that.

Then he said, "The thing is to start Wednesday and

then you be thinking - I suppose I've got

to

open this thing - what am I going to say when I go

up there Wednesday? And then the thing is an execu-

tive session, but whatever I say, I'd like to say it

as though it was a public hearing.
Magill:

How much do you want to say?

H.M.Jr:

Where's Herbert Gaston?

Upham:

He has lumbago this morning. He's not in.

Magill:

How much do you want to say - very much?

H.M.Jr:

Very little.

Magill:

Well, I'll give you something.

H.M.Jr:

Yes.

Magill:

So I then told the President that Magill and Oliphant
and I were scheduled to have supper with Robert
Jackson tonight, and going to try to give him the
works. He invited us to (words not understandable)
Is this out at Robert's?

H.M.Jr:

So if you people have nothing better to do and if
he does get back from Philadelphia, we'll go out
there.

Magill:

What time?

H.M.Jr:

Well, he's going to phone me from Philadelphia when

337
-3-

he leaves; but I suppose it will be 7:30. So
there's that.
Now, I'll have to take this thing cold when we go
in to see the President, because I won't have a
chance to

(On phone) Hello.
H.M.Jr:

Mr. Corcoran is on his way to the office.
(On phone) Well, leave word I want to talk to him.

Operator:

All right.

H.M.Jr:

Now, is there anything you (Magill) want to ask me

Operator:

Magill:

on this tax thing?
No, I don't think so. You've answered what I was
going to ask you. And the other thing is to get in
contact with the Senator right away on these excise
taxes.

H.M.Jr:

They don't dare not to
Anything else? - because I want to get on gold.
Anybody got anything?

Oliphant:

There's that letter.

H.M.Jr:

What's that?

Oliphant:

(Explains in undertones)

H.M.Jr:

Oliphant:

Herman, I don't know why we should write any letters.
Look, if we go out there
Leave it over until tomorrow.

H.M.Jr:

If we go out there we can talk about it. I have

Oliphant:

Well, we'll hold it.

H.M.Jr:

I mean I'd be much more apt to write a letter like
this: "I'm delighted to know that Igoe can win a case
if he puts the same amount of zeal into it that
What's his name, that racketeer that they gave $1200

something in the back of my head.

"

or $1800?

338
-4-

Oliphant: Malone.
H.M.Jr:

I mean it shows that if Mr. Igoe can put the same
amount of zeal into the racketeer case, that man

would be in jail today instead of getting off on
a fine of $1800. "I'm glad to know that Mr. Igoe
can do it when he wants to." That's the kind of
letter I'd write instead of one of these "bread-

and-butter" letters. I'd just

Oliphant:
H.M.Jr:

Oliphant:
H.M.Jr:

Oliphant:
H.M.Jr:

There's another angle I want to...
here is another angle too.
that I want to talk over.
In view of what's coming, I want to say, "Mr. Igoe's
a swell guy." Or the other thing - "I'm glad to see
that Mr. Igoe can see the handwriting on the wall.
I hope he can continue to read it." I mean something
along that line.
Well, I'd say there's another side.
Well, you fellows can't get me all worked up and
righteous one moment and then say suddenly - to
congratulate somebody like Igoe.

McR:

I wouldn't congratulate him.

Oliphant:

Now wait a minute, Mac.

McR:

Oliphant:
H.M.Jr:

Not on your life.
It all depends on whether or not this is the beginning
of cooperation.

"I'm glad to see Igoe can see the handwriting on the

Viner:

wall. I hope this is the beginning of a new life.
Yours sincerely, Henry Morgenthau, Jr."
He will cooperate only if you make it worth his

H.M.Jr:

Well, he's afraid of losing his job. Just think

while. Where will you get the cash?

that over, will you?

339

-5-

Oliphant:

Yes, we'll talk it over tonight. We'll talk about
the other side of it.

H.M.Jr:

Well

Oliphant:

I'm open-minded about it.

H.M.Jr:

Good. So am I. But not too open-minded.

All right. Now, you (Magill) are invited to sit in
on gold if you want to.

Magill:

Better go out and look up lawyers, I should say.

H.M.Jr:

You're invited to sit in if you want to.

Oliphant:

Do you want me in on it?

H.M.Jr:

Yes, I do.

Oliphant:

I'd like to send for Clarence Opper.

H.M.Jr:

(On phone) Have Clarence Opper come in, please.

Magill:

You'll want this statement, I suppose, by tomorrow,
won't you, or today?

H.M.Jr:

If I can take it home - if I don't sleep any better
than I did last night, I'll have plenty of time to
read it.

Oliphant:

Do you want the letter naming names, or

H.M.Jr:

I haven't got - I don't know what the thing

(On phone) Hello. - - Hello. - -

Yes.

Corcoran, I talked a little while ago to the
President and he's asked Magill and Oliphant to
be over at his office ten minutes of two to go
over names of possible counsel for the tax committee on the Hill, and he'd like you there at
ten minutes of two also. - - Thank you.
Magill:

Herman was just suggesting whether you wanted in

your letter names of individuals who resorted to
these devices, etc. You meant names of lawyers,
from what you said earlier.

340
-6-

H.M.Jr:

"ell, you've got two meetings. One of us is talking
about the Wednesday meeting on the Hill and the
other person is talking about the meeting with the
President; for the President we want lawyers. For

Wednesday's meeting I think you meant the names.

But all I want to say is, whatever is in the letter

is what I am perfectly willing to have made public.
I mean I don't want to say anything there that I know
that they - if they repeat, I won't be willing to say
publicly.

Magill:

Well, from the way the President has talked to me,

H.M.Jr:

I don't know. But we can ask him that.

Magill:

Yes. (Goes out)

McR:

I don't think you want names on Wednesday.

(Hands some papers to Secretary)

The

President asked whether you got that proposed legislation. That is a memorandum merely showing what it

does. I don't know any need for you to sign it.
The draft of the legislation that is there would do
what McIntyre told me that the President wanted to do.
I don't think they ought to do anything, but I've
merely carried

H.M.Jr:
McR:

All right.
merely carried out orders.
Your high school children were here.

H.M.Jr:

Are they?

McR:

They came in Friday.

H.M.Jr:

I'll see them right after press conference.

McR:

What time is your press conference?

H.M.Jr:

About 3:30, tell them.

MCR:

All right.
(McReynolds goes out)

341
-7-

(Harris comes in)
H.M.Jr:

Have we a bond market?

Harris:

Yes,
sir. It's generally unchanged. The new
issues

H.M.Jr:

How are the new notes?

Harris:

Same as closing - 8-10 and 7-8.

H.M.Jr:

Yes, all right.
(Harris goes out)
(Opper comes in)

H.M.Jr:

I hope you (Viner) are here for a few days.

Viner:

As long as you want me.

H.M.Jr:

That may be too long.

Viner:

Perhaps a little longer.

H.M.Jr:

There are two problems which we have today, and one

Oliphant:

Who?

H.M.Jr:

Blum. And the French cabinet meets at three today.

Viner:

Seems to me I spotted this pretty well, didn't I?
If you can get any satisfaction out of this, you're

H.M.Jr:

of them is, what could we do if the French either
put on exchange control or devalue further - now,
do one of those two things. Incidentally, Bullitt
said in his cable that Blum made up his mind he's
going to resign.

He said in this cable that

good.

Taylor:

You said it was going to be in August, Jake.

H.M.Jr:

When I was at Waikiki. They fixed it so I could
take care of the French before going to Waikiki.
Go to Waikiki after the deluge instead of before it.

Viner:

342
-8H.M.Jr:

Viner:
H.M.Jr:

Yes.

And incidentally, before I get started on this
thing, Win Riefler was here and he's going to come
as adviser to the Stabilization Fund, and I think
we'll all be very much delighted. He handled himself abroad beautifully - beautifully - and I think
he's going to be a real addition.
I think that's grand.
He handled himself beautifully. He couldn't come

today because he said he had to be there so his wife
could cry on his shoulder when she heard that the
house she wanted costs twice as much as they could
afford.

Well, there's one or two things; after all, we ought
to get busy today and decide what should we do. One
of the things I think we ought to do is to cancel all
orders on buying gold and only buy gold through central
banks. Then this question gets - I mean it's much
easier to handle it, because one of the great troubles
is, the Guaranty Trust calls a meeting of its directors
"Shall we buy gold?" They sit there for a day, discuss
the thing - will they buy gold. They have twenty
directors and they go out and they can talk to a
hundred people, and at the end of the day the Guaranty
Trust decide they won't buy gold.

Incidentally, you (Miss Chauncey) don't have to sit in
on this. I mean there's no use doubling up on you.
I'm glad you're back.
(Miss Chauncey goes out)

And I can't see - every time there's a crisis we have
the same thing - will the banks buy or won't they buy?
And I don't see what useful purpose they serve in the
present situation. And it is something that I have
wanted to do and I haven't had a good excuse to do.
But the thing I'd like to discuss is, is that the move
we want to make?

Then, for instance, it gets down - when England calls
up, they'll say, "Well, we had to take so much gold

343
-9-

today; we had to take ten million dollars. We'd
like to sell you so much." "All right." "How much

are you going to take?"

We had this conversation with Bachman today. Bachman

Viner:

says he's going to send us 25 million dollars more gold
because he's figured out the per capita gold that
Switzerland has got and the United States has got, and
they ve got more gold per capita than we have; so on
that basis he's going to send us 25 million dollars
more gold and all the gold that they get out of hoarding he's going to send to England. And his excuse
is that they've got more gold per capita than we have.
What's he going to take, dollar balances or sterling

H.M.Jr:

He's putting it all into dollars.

Viner:

Oh, dollar balances.
So we've got the immediate thing and I don't see much
else what we can do, because it gets down to a question

H.M.Jr:

balances?

of really - of England and ourselves, and the little
that Holland and Switzerland do doesn't make much

difference.

Now, after all, we're here and you're meeting and I
want you people to think about it, and if that's
right I want the papers drawn up and ready for whichever way they move. Now, other people may have better
ideas than I got, which is perfectly possible, see?
And Wayne, if you think wise of it, there is no reason
as these meetings go on why we shouldn't pull in
Goldenweiser and Gardner, see, and as we know where
we're at - see - I mean let them move along with us;
there's no use trying to educate them twice. But talk
to Marriner; he may want to sit in. But if he doesn't,
tell them that maybe beginning tomorrow I'd like to

have them sit in. But tell them what we're doing, will

you - what we're working on - and if he wants to send
Goldenweiser and Gardner over here, O.K. Will you
take care of that?
Taylor:

(Nods yes)

Oliphant:

Want anybody from the State Department?

344
-10-

H.M.Jr:

When we meet again. It's too early.

Taylor:

That would be more or less true of today's meeting
for the Federal Reserve people.

H.M.Jr:

Yes, I think so. Maybe we'll call a meeting for
ten tomorrow. See? But I wanted you - when do you
think
you want them? I don't think today - it's too
early.

Taylor:

I think today's a little early. See, you've got

Riefler
coming down, anybody else you want to come,
and
H.M.Jr:

Now, I had a couple good days with White and these

are the things that I'm interested in doing, exploring.
In conjunction with the Federal Reserve, I want the
legislation drawn up so that we can have them put up
a hundred percent reserve against foreign deposits
in member banks, but giving the Federal Reserve the
option that they can exempt accounts up to a certain
amount. And by that I mean to say, for instance,

they - before this all happened, 400 million dollars
was an average total amount that they kept for
working

Viner:

Reasonable working balance.

H.M.Jr:

a working balance. Now, I understand - this is
Archie's idea; he thought five to ten thousand dollars a merchant might perfectly well have to keep up to
$25,000 as a working balance to conduct his business.
Well, it wouldn't be very hard to have a quick survey
made, and let's say we exempt up to $25,000.

Viner:

Can't work that way.

H.M.Jr:

Why not?

Viner:

In this country the balances of foreign individuals
are not listed as individual balances, but as bank
balances, and they are not listed as to separate
individual balances except in the accounts of the

bank abroad. See? If a Dutchman wants $50,000 bank
balances in New York, the normal way in which he gets

it is to go to an Amsterdam bank and say, "I want a
$50,000 balance in New York." That bank says, "All
right," and arranges it, and adds $50,000 to its

345
-11-

deposits in the New York bank.
Lochhead:

Well, first of all, my question was

H.M.Jr:

Do you mind not arguing here? Either right or wrong one of you is right and one of you

Viner:

We probably - there is probably some other element

in it - in what Archie suggests, and - which would
bring us closer together.

H.M.Jr:

But there is a thought there, and if you could exempt
these smaller merchants, these legitimate fellows,
it would ease the pressure. See what I mean? Ease
the pressure tremendously - the objection to it. Now,
there is something which you can get together on.

I'm pretty well sold on the idea.
I am pretty well sold on the idea that we should have
some kind of legislation so that in case these fellows
transfer their funds into short-term securities there
is a method of - have a transfer tax.
And then, the third thing what's-his-name - is taking
care of - the 35 percent withholding tax on dividends.
So as far as I can see - I mean I'm not committed to
anything but those two things, and Magill's taking

care of the withholding tax. They sound very interesting to me, see?

In this thing comes another factor which will have to

be decided at the same time: What kind of short-term
money are we going to borrow? Seltzer is working on
that. Some of the people felt that if we began from
now to sell 90-day bills, which the banks need very

badly - there's a great shortage - that it would make
it too easy for the foreigners to take their accounts
out of the foreign balances and put it into 90-day

bills.

And of course, in increasing this rate from 26 to
a hundred percent, we want to make that permissive.
I mean that we can do it
Taylor:

Up to -

H.M.Jr:

Yes, in easy stages. Now - I mean

346
-12-

Viner:

I'd go further than that. I'd also get the right
to levy an excise tax on those foreign deposits,

because a hundred percent may not be enough to
stop them.

H.M.Jr:

Well, those are all points. As to the principles,
after a couple days' study on the thing I am sufficiently interested so that I want to explore it to
its limit, get the legislation drawn, and I want to
go full steam on this thing, see?
I have invited Knoke to come down tomorrow morning

to sit in, because he's a good man, I've discovered.
But there's the two things, and I don't see why they
won't go along simultaneously: What will we do if the
French do this thing? - this is as much as I've got

to contribute - and then, this question of handling this

gold.

Now, do you (Oliphant) see any legal difficulties to
this?

Oliphant:

(Nods no)

H.M.Jr:

Huh? Of course, this question of increasing excess
reserves would be a bill to be introduced - I think
should be introduced jointly by the Fed and ourselves.
I think it ought to go to Banking and Currency and I
think we ought to make a joint statement.

It always takes time in order for these things to clear
in my brain, and we had nice June weather up there, and
I had Harry White for two hours over at the farm while
he talked at me. And - now, we've got those lists of
those banks, and taking the national banks - is it
about down to 15 banks?

White:

13, I think - 13 or 15.

Oliphant: Which?
H.M.Jr:

The foreign deposits.

Lochhead:

13 member banks and 13 non-member banks - about 26

H.M.Jr:

banks take care of about one billion 500 million
out of one billion 600 million.
But the 13 banks

347

-13Viner:
H.M.Jr:
Viner:

That makes it harder rather than easier to deal
with.
Why?

It means that those banks are specializing in those
accounts and for them it's going to be - it may be

their disaster; they'd have to adjust their whole
affairs.
H.M.Jr:

Well, they're the biggest banks in the country.

Viner:

Nevertheless,
if it is as big as that, it may be
something that

H.M.Jr:

Well, we'll do it very slowly. Harry and I figured
that we'd do it a hundred million dollars at a time,
we'd do it in stages of a hundred million.

Lochhead:

After all this excess money

Viner:

But there isn't much excess money in New York now.

Lochhead:

There are excess foreign deposits if they've been
specializing.

H.M.Jr:

Now, don't forget, that's the reason the question of
bills is very important - so that they won't sell their
Governments. They'd have the 90-day bill to go into.
Do you get it? I mean if they've got enough 90-day
money, 90-day bills, they won't worry so much about
.their excess reserves. I saw a lot of bankers, and
the thing that keeps them on Uneasy Street is that
there is a - such a shortage of bills; if they had
90-day bills they'd quit worrying.
And then - now, J. P. Morgan - he would either have
to go out of business or become a national bank.

Viner:

Oliphant:

That's just what I had in mind.
I don't see why. We'd require J. P. Morgan to put

up a special deposit with the Federal Reserve equal
to the amount of foreign business he wants to do, and

keep making the deposit good.
H.M.Jr:

Well, if you don't mind, I disagree. I thought that

J. P. Morgan would come into the Federal Reserve and
become a national bank.

348
-14-

Taylor:

"hy not?

H.M.Jr:

I disagree with you (Oliphant) entirely.
I'm talking about the least that can be done.
But I do think the solution is relatively simple.
But it's a very great surprise to me - this thing
will get down to about 15 banks, and it's a great
thing for the Fed, because we've been all over this

Oliphant:
H.M.Jr:

thing, how we'd handle this thing, and - now, somebody had an idea, which I disagree with completely,
that they'd try to some day use this as a leverage
on the state banks. I wouldn't do it. We'd say,
"These foreign deposits can only be made with national
banks in the Federal Reserve System."

Taylor:

Member banks.

H.M.Jr:

Well, aren't all national banks

Taylor:

But if you had a member who wasn't a national, you

Viner:

You mean member banks, not national.

Taylor:

All national banks are members, but you've got some
members that aren't national.

Viner:

There aren't as many national banks as there are

A.M.Jr:

All right, then, member banks.

Viner:

A national bank must be a member bank.

H.M.Jr:

I'm talking about member banks.

see

banks in the System.

It's a great thing to get away from this place for

a little while.

I can't see anything the matter with this thing. I

Oliphant:
White:

H.M.Jr:

can't see - it seems to me it's a move to make
I think it's a good program.
There's one further point which I don't know whether

you want to have us consider.
Go ahead.

349
-15White:

And that is Wayne Taylor's proposal with respect to

this validating tax, which is part of this same

problem.
H.M.Jr:
White:

But you haven't thought that thing through.
Well, we've thought it through so that this group

H.M.Jr:

What you gave me over the weekend was predigested,

could push it a little if you want to.

ruminated on; this other thing, you said, wasn't
ready.

White:

But this would be one of the ways of getting

H.M.Jr:

O.K. What do you mean by validating?

White:

I'll explain it to you.

Viner:

I think the program is the right program; you have

H.M.Jr:

Viner:
H.M.Jr:

Viner:

to go to it before long. But I still am worried
about the general situation, its jittery nature now.
I was too before I got my 800 million.
Well, I wasn't thinking only of the Treasury immediately - perhaps the Treasury next year
Listen, old man, if this thing - if we can all agree,
or 90 percent of us can agree, see; I want a 90 percent
agreement on this thing. This is my responsibility;
this will or will not help the strikes, but it will
remove one less source of worry in the financial
picture. Now, the thing right now - I never made such
an exhaustive study of business as I did prior to this
financing, and the only thing I could find that was
wrong in the horizon was the strikes. Now, I made an
exhaustive check all over the country; take the strikes
away and this thing is all right. But take the strike
thing away and then you're right back on the gold thing
"What's Morgenthau going to do with this billion
dollars?" Now, under the smoke screen of the strikes
and everything, let's get our house in order. I mean
if we didn't have the strikes, this whole thing would
be concentrated on this thing.
That's right.

350
-16-

H.M.Jr:

Now, I've sat here - you've seen me work before -

until I could satisfy myself. Now I'm satisfied
that this is all right. Fortunately, the President

has enough confidence in me that he'd be willing to
wait and put no pressure on me, wouldn't let anybody
put any pressure on me, and we'll take - whatever
he's done - he must have told Wallace and the rest
of them to lay off. But it looks pretty good, this
does - this program that I'm talking about.
Viner:

When would you - have you got in mind about what

time that would be - the proposal would be submitted
to Congress?

H.M.Jr:

At once.

Viner:

Thinking of this month?

H.M.Jr:

I'd like to get it through just as fast as we can
work - just as fast as we can work. The bill
drafting on this thing is not a very difficult
thing.

Oliphant:

No, a good deal of work has been done on it.

H.M.Jr:

The bill drafting isn't difficult.
The hundred percent thing, I don't know how far

Viner:

Oliphant:

Eccles has gone, and in talking about it, if you
(Oliphant) will agree to talk to his counsel
If the English adopted the same thing, that any
outside bank that keeps reserves in sterling has
to have a hundred percent reserve - I mean that the
English bank has to have a hundred percent reserve
in gold, the problem would be largely solved.
You're not talking about hundred percent reserve in
gold. In gold?

Viner:

Well, ours would be hundred percent reserve at the

Lochhead:

It would be really in gold, because we'd really
release that amount of gold to match off the

Federal Reserve.
reserves.

351
-17-

H.M.Jr:

Jake, while we're talking, plus our own crowd that
I've got down, who do you think - any other brains

we should have?
Viner:

Williams.

H.M.Jr:

You want Williams here?

Viner:

I don't know anybody else that would be important,

H.M.Jr:

if Riefler's going to be here.

(On phone) Professor Williams of Harvard, please.

But I'll take that right after Bullitt. When's
Bullitt coming on? - - All right. Well, right

Viner:

after that, Professor Williams of Harvard.
And I'd ask Feis.

H.M.Jr:

Sure, when we get....

Viner:

I mean at any stage. But I'd get his judgment on
it.

H.M.Jr:

When we get going.

Now, what I'd like to do, if it's - is it agreeable
to you that - I don't sleep very late - I mean we
can do this thing in bits in - to start, say, 8:30
tomorrow morning. Anybody it isn't agreeable to?

What? Then we'll run through till we get tired,

then stop. I mean aren't you all awake and around

by 8:30?

Viner:

Oh sure.

H.M.Jr:

What?

Viner:

We can be.

Oliphant;

Pretty hot at 8:30.

H.M.Jr:

I couldn't sleep after five this morning. But let's
say 8:30. Huh? Is it all right with you, Wayne?

Taylor:

(Nods yes)

Oliphant:

We might go on daylight saving while we're doing this
job.

352
-18-

H.M.Jr:

Well, of course, that will - I'll say that I'll -

I'm going to stop at four, see? So if I start at
8:30 - I mean I'll stop at four. That gets me

while I'm the freshest. So we'll go from 8:30 to
ten, an hour and a half - no interruptions.
The reason I'm sorry - I don't want the boys hanging around my door while I'm doing this thing - isn't

Gaston coming down today?
Upham:

I'm afraid not.

H.M.Jr:

I'll talk to Marriner and tell him tomorrow morning,
or do you want him to be held off a little longer?
I think let Marriner be here at 8:30 tomorrow
morning - just as well. I mean I've done in my
own brain - I've done enough work on this thing,
see? Don't you think you'd have him in here?

Viner:

I'd have him participate as much as he wants to.
I'd let him know what the schedule is.

Taylor:

Say that the schedule is to start at 8:30 tomorrow

Viner:

And they're invited for as much as they want to be
in on the discussion. Remember - particularly if

Taylor:

morning.

out of this emerges a bill that both of you are

going to sponsor.
H.M.Jr:
Viner:

Well, there's two separate things.
I know, but one of them is a bill that both would
sponsor.

H.M.Jr:

Right, the hundred percent thing.

Taylor:

Part of the same picture. But the transfer thing -

H.M.Jr:

What about your validation of securities? That

Taylor:

that would go to Banking and Currency.

would go to Banking and Currency.

Well, I don't think so.

353
-19-

Oliphant:

They have some special circumstances, and the

Viner:

Banking and Currency - does that mean Steagall?

Oliphant:

Yes

Viner:

Is he easy to handle on this thing?

H.M.Jr:

Well, that's the reason, you see, this thing - I
don't think it will get mixed up into the business
of state banks versus national banks. Somebody had
the bright idea of trying to bring pressure to bear
on it, but that clears it out, you see. Steagall the only thing the matter with Steagall is, he's

transfer tax would go to Finance.

got nothing to do.

Viner:

of course, there will be this thing. It will be
the first bill - Federal statute, I think, that
imposes any sort of reserve requirements on non-

member banks.

Taylor:

This won't be on non-member banks.

Viner:

It won't be on non-members?

Taylor:

The non-member banks will not be able to have

White:

They have to become member banks if they want to

foreign deposits.

Viner:

hold foreign deposits.
That's where you'll get Steagall up.

Taylor:

Only 13 banks - this isn't his baby.

Oliphant:

I think it's the best - well, the most difficult
angle of the problem is the foreign balances; the
other three angles - I think it's the best bite

at that cherry that anybody's thought of taking yet.
H.M.Jr:

Don't think it's mine. I've been listening to this
thing now for months, but it's just a question of

so much fog I couldn't see. You (Upham) got anything

you want to say?
Upham:

No, I agree with that (Oliphant). I think it sounds

354
-20-

fine. I would think there might be some
unconstitutionality about prohibiting non-member
banks from holding foreign balances, but maybe
not.

Oliphant:

Not in view of the attitude of the Supreme Court
towards foreign relations.

Taylor:

Foreign commerce. That is if there ever was any.

Upham:

If it can be done, I should think it would be a

H.M.Jr:

I'd also tell Herbert Feis we're starting at 8:30

good thing.

tomorrow morning, see? So they can come or not,

as they choose.
Oliphant:

I'd be rather inclined to insist on it, because of
the foreign angle, because you know how it is when

we work things up and
H.M.Jr:

Well, I'm going to be different this time. If I
think it is right, the hell with the god damn
foreigners. Now, I told Herbert Feis that if he

pushed me into a corner on this thing and then he'd
be angry when I did do it - he wouldn't like it
Now, I can't sit here and always think about the
foreigner and Mr. Hull's trade treaties; god, we've
tied ourselves up in a double knot with these god

Oliphant:

damn trade treaties. And so what? I told them,
"Now, if I sell this to the President and Congress,
Mr. Hull and the rest of them can like it," and that's
just the way I feel.
I think they'11 probably go along with you on it.

H.M.Jr:

I can't always worry about what the man abroad thinks
about the American policy.

Viner:

They'11 think you've suddenly stopped being a sucker,

H.M.Jr:

Now, for the first time Eccles has changed; he's
keeping his mouth shut, and he's locked the trap
of that fellow over there - what's his name?

Taylor:

Thurston.

that's what they'11 think.

355

-21-

H.M.Jr:
Upham:

H.M.Jr:
White:

H.M.Jr:

Thurston isn't talking any more.
I haven't heard of him or seen him for months.
No one else has either.

This isn't the same thing.
I mean Mr. Eccles - you don't hear Elliot Thurston
any more slipping the stories out of the side of
his mouth.

Taylor:

Had a special issue of "muzzles" two months ago.

Viner:

Who was he talking to, press representatives or

H.M.Jr:

Yes. And if a person wants to be generous, Mr.
Eccles doesn't know about it.

Viner:

Well, be generous.

H.M.Jr:

I have been. And I'll say this: I think this

country is better. off. And when these phases
pass and we've / this solution, we will then look
back and if we are successful in handling this

thing, there's enough credit to go around for

everybody.

Viner:
H.M.Jr:

Oh, lots of it.
I don't see any use in prolonging this thing. I'm
waiting for Bullitt.
Now Wayne, you want to hold the meetings in your

office? I don't know of anything more important,
and Idkeep pushing this thing;- I don't see why
I have to hit it again before 8:30 tomorrow morning,
unless there are questions to be answered. I'll
be available after lunch. What?

Taylor:

That's all right.

H.M.Jr:

What do you (White) think?

White:

I think we'd like to see you once before you meet
the large group.

356

-22-

H.M.Jr:

Well, why not say depending on what time I come back
from the White House. Other than the White House,

I have only two meetings this afternoon. I've got
the press conference and I've got to see three

Taylor:

children. And what about Mr. Stamp?
Can't come tomorrow; leaves town.

Upham:

Sailing "ednesday.

H.M.Jr:

What?

Upham:

Sailing Wednesday, I think.

Taylor:

I'll call him at noon.

H.M.Jr:

I made this appointment

Viner:

He's a nice person.

H.M.Jr:

Is he? I don't like him.

Viner:

Don't you?

H.M.Jr:

But I'll see him.

Viner:

Tells better stories than American after-dinner

Tell him 3:20.

speakers.
H.M.Jr:

He isn't the type of English I like. I like lot of

Englishmen, but I don't like him; but I'11 see him.
Will you be here, Wayne?

Taylor:

At 3: - what?

H.M.Jr:

3:20, when Josiah comes.

All right, gents. I feel awfur good about it.
White:

Did you say you were going to see us before you meet
the large group?

H.M.Jr:

Yes, I will, sure.

357

June 14, 1937.
10:29 a.m.
H.M.Jr:

Hello.

Operator:

Ambassador Bullitt.

H.M.Jr:

Hello.

0:

Go ahead.

H.M.Jr:

Hello

B:

Hello Henry.

H.M.Jr:

How are you?

B:

Fine, how are you boy?

H.M.Jr:

Oh I'm pretty well. How is grandpa?
Everything turned out very nicely.

B:

H.M.Jr:

It did.

B:

Henry.

H......

Yes.

B:

when you call me for heaven's sakes tell your
people to call me over the direct French telephone.

H.M.Jr:

Over the French?

B:

You called again to-day over the English and that's
why it faded away - you couldn't get any good

connections at all and I've got this call through
the French phone.

H.M.Jr:

Is this on the French phone?

B:

This is on the French phone and there's the same

on this as there is on the British and the difference
is that in this case the French hear it and in the
other the British do,
H.M.Jr:
B:

H.M.Jr:

I get you. All right.
Don't let the British tell you there's no
It's just that they want to hear it.
I see.

358

-2-

B:

Now - ah

H.M.Jr:

I saw - ah - your cables of Saturday.

B:

Good.

H.M.Jr:

So - ah - I - is there - is the situation the
same as you described it?

B:

"n - it is precisely the same - ah - with several
changes which I can give you at once.

H.M.Jr:

Thank you.

B:

H.M.Jr:

Ah - the - ah - at noon to-day the Bank of France
suddenly raised its discount rates from four to
six per cent
Yes, we got that.

B:

Ah - you have that already?

H.M.Jr:

Yes.

B:

in an effort to stop flight of capital and

has also raised its present day rate from four to
six per cent.

H.M.Jr:

Yes.

B:

Ah - on the security market rentes were up from
but the general feeling was
that the improvement was due to official support.

H.M.Jr:

Ah-ha.

B:

Ah - they exchange market was pretty uneasy and

this and - our information is that the
yielded very large amounts of
the rate of 110.90.

H.M.Jr:

Ah-ha.

B:

Ah - the dollar is firm at .2247.

H.M.Jr:

Ah-ha.

B:

below

Ah - the forward rate on S terling is up two points
for one month and five points for three months.

359

-3H.M.Jr:

Yes.

B:

Ah - our information is that there's been no
surface; it's all on the flight
of funds.

H.M.Jr:

Yes.

B:

The - an - ah - I saw an extremely important gentleman
at luncheon to-day whom I shall see again this evening.
You're having supper with him tonight?

H.M.Jr:
B:

Yes.

H.M.Jr:

I know.

B:

And he was - he was extremely cheerful.
Oh fine.

H.M.Jr:
B:

Ah - full of smiles and so on.

H.M.Jr:

Ah-ha.

B:

Whether that means - ah - ah a prospect of laying

down
a burden of responsibility or not I do not yet
know.
H.M.Jr:

Ah-ha.

B:

I will let you know this evening.

H.M.Jr:

I see.

B:

In any case the single interesting development

is that

not to succeed.

might succeed. Our

H.M.Jr:

I see.

B:

Ah - they'd much rather have present encumbents

take responsibility for granted.

H.M.Jr:

Ah-ha.

B:

And, therefore, you have a comic situation in which
the best friends of the present encumbents are saying

"If he can't get out for God's sake stay in."

-4-

360

H.M.Jr:

Well that doesn't help much, does it?

B:

What?

H.M.Jr:

I say that doesn't help much, does it?

B:

No that's exactly - but that's exactly the situation.
Ah-ha. Well I suppose you'll let us know that

H.M.Jr:
B:

through cables.

Yes I will. I'll let you know tonight what is
developing.

H.M.Jr:

Well - ah - the your

B:

In the meanwhile the general public is entirely

unaware that things on the whole are as unpleasant
as they are.
H.M.Jr:
B:

H.M.Jr:
B:

Ah-ha.

And - ah - that is the present status.
Well that's just what I wanted to know.
Yes, there's nothing - there's nothing particularly
startling beyond the things that I've told you.

There's a cabinet meeting on now at which the matter
is being debated.

H.M.Jr:

Well thank you very very much.

H.M.Jr:

Not at all. How are you?
Oh I'm fine.

B:

How is the President, in good shape?

B:

H.M.Jr:

Yes, I talked to him this morning and I'm seeing
him at lunch and he sounded full of pep.

H.M.Jr:

All right, give him a little embrace for me.
I'll do that. Thank you.

B:

Good luck, Henry.

H.M.Jr:

Goodbye.

B:

Goodbye.

B:

361

June 14, 1937.
10:38 a.m.

H.M.Jr:

Cordell.

Hull:

What's going on?

H.M...:

"ell I just talked to Bill Bullitt on the telephone

H:

Yes.

H.M.Jr:

and he said, without mentioning his name, that
cheerful.

he had seen Blum and that Blum seemed much more

H:

Oh.

H.M.Jr:

And that the great trouble was that Blum's enemies
wanted him to stay in; his friends wanted him to
get out but that they can't find anybody to succeed
him.

H:

I see.

H.M.Jr:

And that

H:

Ah - Bill you know telegraphed us Saturday night
that he had decided to g et out.

H.M.Jr:

I know and Feis telephoned that to me late

H:

Yes sir, and I telegraphed it - I wired the
President on a little matter and I put that in

H.M.Jr:

Yes.

H:

Saturday night

without quoting Bill - I'll quote Bill

hereafter.

H.M.Jr:

Yes, that was a funny cable anyway.

H:

Yes.

H.M.Jr:

Because he gives that long cable and then at the

end he says the fellow's going to get out.

362

-2H:

H.M.Jr:

1es, I suppose that came - that sounded like it
came to him just as he was closing his telegram.
Yes, and it sounded as though he was under great
pressure when he wrote it.

H:

Yes - yes, 'hat's true.

H.M.Jr:

But - ah

H:

H.M.Jr:
H:

You tell the President that we - ah - ah - we were
just quoting Bill without saying so on that.

Well I - I
It would be interesting to see - I don't know what's

ahead over there - I

H.M.Jr:

Well we're watching it and - ah - I wanted to tell
you that we - we're - we're - very very confidentially
we're working very hard on this gold thing and we're
beginning to see light and I'm going to ask Feis to
sit in with us beginning tomorrow.

H:

Yes.

H.M.Jr:

And - ah - I think it's important and he
You're going to talk to - you're going to talk to -

H:

I guess he'll be around as he generally does - Stamp.

H.M.J.:

Who?

H:

Sir Josiah Stamp.

H.M.Jr:

Yes, he's coming in at 3:20

H:

Yes.

H.M.Jr:

but I'm going to keep my mouth shut and just

listen.

H:

Ah - you might ask some questions on that.

H.M.Jr:

DO you think so?

H:

Ah - you want to get their viewpoint; he's pretty
close in, you know.

363

3H.M.Jr:
H:

H.M.Jr:

Are you - are you seeing him?
Yes, he's at my door now.

Ah-ha.
ask him Well if there's anything that you want me to

H:

No, nothing - I have nothing

H.M.Jr:

No, I mean after you've seen him

H:

Yes.

H.M.Jr:
H:

.... if there's something that you think
exactly.
would be helpful.

H.M.Jr:
H:

I'm not going to discuss monetary things

H.M.Jr:

No.

you understand so I won't know.

H:

H.M.Jr:
H:

H.M.Jr:

But - ah - I feel much more cheerful on this question
of gold because I think we've got an answer.

I see. Well that's very interesting.
And I'm starting at 8:30 tomorrow and, incidentally,
Win Riefler got permission to act as Consultant
to the Treasury

H:

H.M.Jr:

Yes.

from his Institute.

H:

You begin to make some more headway?

H.M.Jr:

H.M.Jr:

I say we - I say Riefler - you know Win Riefler?
Yes sir, I know him.
Well he's got permission to act as Consultant to the

H:

Oh I see. That's fine.

H:

Treasury.

364

-4H.M.Jr:
H:

H.M.dr:
H:

H.M.Jr:

So he's going to sit in from now on.

Yes, that's fine.
DO - but I feel much more cheerful and I think

maybe within a week I'll have something.
All right, thank you Henry so much.
Goodbye.

365
June 14, 1937.
10:38 a.m.
H.M.Jr:

Mr. Williams.

Professor
Williams:

Yes.

H.M.Jr:

Morgenthau.

W:

Oh yes, Mr. Morgenthau.

H.M.Jr:

Where are you?

W:

I'm in Cambridge to-day.

H.M.Jr:

Oh. Now look I'd like very much to have your
advice and services for the next couple of days.

W:

Yes.

H.M.Jr

Do you suppose you could get down here tomorrow
morning?

W:

Well I could except that a- ah - I'm - I'm dated
for a Canadian-American Conference at Kingston,

Ontario, and I would need to call New York.
Mr. Young is Chairman of it.
H.M.Jr:
W:

Well I think this is pretty
I'd have to call him and clear it with him but

I think the answer would be, "Yes," I could come.

H.M.Jr:

Well I consider this important. I've got Knoke

W:

Yes.

H.M.Jr:

So if you don't mind.

W:

Yes, well I'll tell you what I'll do.

H.M.Jr:

Yes.

W:

I'll call New York this morning.

H.M.Jr:

coming down.

Yes, I'll - suppose I call Harrison and tell him
that I'd like you and Knoke.

-2W:

366

I wish you would because I think that would - he

knows about my plans.
H.M.Jr:

Righto.

W:

And then I'11 get in touch with you later in the day.
Ah - will you - well we're going

H.M.Jr:
W:

Maybe I can come down all right.

H.M.Jr:

Pardon me?

W:

H.M.Jr:

All right, in the morning.
Yes, I'm starting at 8:30 at the Treasury.

W:

Yes.

H.M.Jr:

8:30.

W:

And I'll come straight from the train.

H.M.Jr:

Righto.

H.M.Jr:

All right.
I'll call Harrison.

W:

Yes.

H.M.Jr:

Thank you.

W:

Goodbye.

H.M.Jr:

Hello.

W:

(The above Hello sounded like an afterthought but
it was too late as Williams had already hung up)

367

OFFICIAL COMMUNICATIONS TO

THE SECRETARY OF STATE
WASHINGTON D.C.

DEPARTMENT OF STATE
WASHINGTON

June 14, 1937.

My dear Mr. Secretary:

I enclose a paraphrase of cables Nos. 774,
775, and 776 received from Paris on June 12.
These, I understand, were communicated to you by
telephone Saturday evening.

Sincerely yours,

Enclosure:
Paraphrase of Nos.
774, 775 and 776

from Paris. June 12.

The Honorable

Henry Morgenthau, Jr.,

Secretary of the Treasury.

368
PARAPHRASE OF TELEGRAM RECEIVED

FROM: American Embassy, Paris, France

DATE: June 12, 1937, 5 p.m.

NO.: 774
RUSH

FOR THE SECRETARY.

STRICTLY CONFIDENTIAL.

In many telegrams for the past months we have pre-

dioted the demarche; this has now arrived, and at the

moment it appears that Blum will prefer to fall during
the week to come.

The probability is that on Monday the French equal-

ization fund will be drained of its last franc. Almost
no one in Paris knows this, and no panic exists. The
best informed bankers and politicans do not even know

that only about 750 million france remain in the equalization fund today. The Government moreover has been

able to conceal the fact that the loss yesterday was
approximately 750 million francs, and that it was 638
million francs the day before.
Last night I saw Blum for a brief time. Blum was
nervous and exhausted, yet he regarded the financial

situation as extremely critical at the present moment.
From Blum as well as from Auriol and Delbos I got the
impression that the Government had not yet decided whether

it would try to survive or would choose a favorable
issue

369

-2issue on which to go down.

Blum practically dared the Senate to throw him out

on the issue of the forty-hour law yesterday afternoon
but he receded from his position after an adjournment
of one hour.

I said to Blum today that I considered the financial

situation extremely critical. His reply was that "it is
more than critical; the end may come much more quickly

than anyone believes" Then he said with a gesture of
weariness and disgust: "I have had enough! Everything
that I have attempted to do has been blocked".
I questioned Blum as to whether a definite course
of action had been decided upon, that is, on what issue
he would choose to fall, and he said that a decision had
not yet been reached, but tomorrow it might be. Then
again he might wait until Monday evening to do 80.
There is to be a meeting of the Cabinet on Monday afternoon

at 3 o'clock at Blum's request. I was invited by Blum
to have dinner with him on Monday evening. He said he

would let me know definitely what he decided to do at
that time.
END SECTION ONE.

BULLITT.

-

370

SECTION TWO. No. 775 of June 12, 5 p.m.
Continuing my 774.

It is still barely possible that Blum may continue
in office for some time, in spite of his attitude today.
It would be preferred by the Radical Socialists and the
Center parties that Blum incur the onus of a resounding
financial orash rather than have him go down just before
that happened. The Prime Minister has nevertheless lost

his resilience and vigor to such an extent that I consider it probable that before the end of next week he

will be out of office.
Who will succeed Blum is by no means certain. The

leaders of the Radical Socialist party who hope to succeed
him are engaged in a multitude of intrigues just now.
For instance Herriot is leader of a group which has
the following project under consideration Should Blum turn in his resignation Lebrun would

first invite the President of the Senate, Jean Neney, to
form a government; this would be refused by Jean Neney.

Then Herriot would be invited to do so, and he would go
through the motions. Finally Herriot would make a deal
which would establish Chautemps as Prime Minister and the

Minister for Foreign Affairs would be Herriot himself.
There is equally vigorous intrigue on the part of
Daladier. Daladier would be preferred by (?) Chautemps.
Daladier has even managed to keep on friendly terms

with de la Roque, who is leader of the Crox de Feu. He
has said that he would use the army to shoot down ruth-

371

-2lessly any (?) who attempted to produce violent (i).
Should the new Prime Minister be Daladier, Delboa might

remain as Minister for Foreign Affairs; for Minister of
Finance both Flandin and Reynaud have been named(?).
END SECTION TWO.

BULLITT.

372

SECTION THREE. No. 776 of June 12, 5 p.m.
Continuing my 775.

Possibly a night's sleep will put Blum into a more
belligerent frame of mind. He may then acquire a few
additional billion france for the Treasury by drawing
on the Bank of France for gold, and by stripping various
savings organizations of the Government. He may thus be

able "to wriggle through", as he has said to me so often.
Even the great capitalists and the very bankers who
are now sending their money abroad and have an intense

dislike for Blum are loath to face the consequences of

having him forced out of office. I was for instance told
by Maurice de Rothschild the night before last that he
was convinced that Blum would not go out because the bank-

ing community did not want to face the disorders which
the fall would bring about.
A policy of retrenchment will have to be inaugurated
by any government which follows Blum's. For a government

of the Center to cut the interest rate.on the National
debt would be almost impossible, and to (?) the huge sums
now being spent for national defense would be equally

difficult. (?) public works and alteration of the new
"social laws" would be the only field (?) reduction of
government expenditures. Nation wide strikes and bloodshed will almost certainly be provoked by an attempt to

abolish or alter greatly the "social laws". The realization

373

-tion that to be (?) of France today is an extraordinarily
thankless task therefore dampens the desire of the Right
and Center to eliminate Blum.
The Government of France is living far beyond its
income, and no easy way out of the situation is presented.

I personally believe that Blum still holds the power for
making the ultimate decision as to the continuation or fall
of the Government. He had this afternoon decided to
resign from his position.
END OF MESSAGE.

BULLITT.

EA:LWW

374

June 14, 1937.

My dear Mr. Welles:

On behalf of the Secretary I am
acknowledging your letter of June 4th,
which encloses a copy of the message

transmitted by the British Government
to Sir Ronald Lindsay.
Sincerely yours,

H. S. Klots,
Private Secretary.

Honorable Summer Welles,

Under Secretary of State,
Department of State,
Washington, D. 0.
GKF/abe

Form 2181-B

TREASURY DEPARTMENT

o

OFFICE OF THE SECRETARY

EXPEDITE
6/11/37
4:35 p.m.

TO: MRS. FORBUSH

Mr. McHugh asked

me to ask you if an acknowledgment is necessary to the

attached letter.

mas

(He is holding rest of fie
for Miss Chauncey)

DESVBINEW

6/5/37

O

Mr. McHugh says that the Secy. said
O.
k. to file this.
mas

4716

was

in me Hugh
fitter of 5/31/37 from
R. C. Lindary British
Embassy referred to
Miss channely 6/2/37
MRS. FORBUSH
ROOM 470

JTD

ADDRESS OFFICIAL TO
THE SECRETARY OF STATE
WASHINGTON, D.C.

375
DEPARTMENT OF STATE
WASHINGTON

June 4, 1937

My dear Mr. Secretary:

I transmit herewith a copy of the
message given to Sir Ronald Lindsay for
his Government in reply to the memorandum

which the Chancellof of the Exchequer
addressed to you.

Sincerely 14

yours, Muly

Under Secretary.
Enclosure:
Memorandum,

The Honorable

Henry Morgenthau, Jr.,

Secretary of the Treasury.

376

MEMORANDOM

The message recently transmitted by the Chancellor
of the Excheques to the Secretary of the Treasury has

been read with interest. The confidence shown by
Ms. Chamberlain in thus communicating his appraisal

of the international outlook as seen by the British Govemanat and his observations is regard to the beazing

of various policies of this country upon that situation
are greatly appreciated.
Deeply concerned over the absence of a trustworthy

basis in international relations and the presence of a
constant mensoo to peace, this Government has been w

ing its utmost to formists and to bring about effective
application of a program which might serve to bring coun-

tries together on a more satisfactory basis than that
which now obtains. If this Government emphasises somewhat more than does Mr. Chamberlain the economic aspect

377

of the matters which he discusses, 11 does so because 11

genuinely believes that If trade relations between nations
can be broadened on lines and under conditions these 19
serves to advance economic welfare, existing polisiona
tensions would be thereby eased.
We therefore welcome the affirmation of Mr. Chamber-

lain that, although he believes that certain political
ambitions lie as the root of the economic difficulties in
Europe, he recognises the advisability of trying all preeticable means to ease the economic position. We realise

that because of the intertwining of economic and political
aspects of the present-day situation the British Govern-

ment fools that 11 must at all stages keep its actions in
the two fields closely related to each other.
This Government welcomes and of course wholly agrees

with Mr. Chamberlain's statement as regards the far

reaching effects that would follow the conclusion of a
commercial agreement between the United states and the

United Kingdom. In its reply to the British Government's
memorandum of April 13, the Government of the United

378

2
States gave full indication of its willingness to examine

every feasible possibility of arriving at satisfastory
terms for such - agreement. This Government believes

that it is wholly within the range of practical possibilities to negotiate a comprehensive trade agreement
between the two countries of such a character as would
have a most beneficial effect upon Anglo-American trade
and would, at the same time, serve as a model of the type
of contractual arrangements among nations that can and

will make for stable and prosperous trade conditions.
This Government is convinced that the memorandum trans-

mitted by 18 to the British Government on May 18 provides

a fair and feasible basis for such an agreement.

In this general field we see an opportunity for the
two Governments to work together without delay in making

a constructive move toward world peace, and nothing is
of more paramount urgeney at this stage.

with regard to the situation in the Far East, we

concer in the opinion that orderly stability is desirable

and we believe that measures which may be expested to

contribute toward ensuring harmonious cooperation for

the protection and development of the interests of all
the powers consemed in that area should be sought, and,
when and where discovered, be given support.

There are various matters in and with regard to the

Fax East in relation to which rights and obligations of
the United States and those of Great Britain are alike

also, various matters in relation to which the interests,
conseme and objects ves of the two countries have many

aspects in common. The principles of policy of the two
countries are expressed in the Washington conference

treaties, most of which treaties we regard as being still

legally in effect. one of the most important of those
principles is that of equality of commercial opportunity.
That principle has always had and continues to have this
Government's hearty support.

In the event of resort by any country or contribe
to measures of aggression in the Far East, we would expect

379

380

&
to endeavor to afford within the limits of our general
policy appropriate protection to our legitimate interests,
but we are not, as we assume the British Government would

not be, in position to state in advance what methods of

protection this country would employ. It is the traditional policy of this country not to enter into those
types of agreement which constitute or which suggest al-

liance. We feel that the governments principally in
terested in the Far East should endeavor constantly to
exercise a wholesome and restraining influence toward

conserving and safeguarding the rights and interests of
all concerned, and toward preventing friction and develop=
ment of tensions. We believe that consultation between
and among the powers most interested, followed by press-

dure on parallel lines and concurrently, tends to promote

the effectiveness of such efforts. As regards impairments
or threatened impairments in the Far Kast of common or

similar interests of the United States and of Great Systain,
we shall continue earnestly to desire that there may be

381

found entisfactory means for collaboration as is the past
between our two Governments.

We note the statement that in the opinion of the
British Government there are signs that Japan may realise

that the recent trend of its policy has not been to its
advantage and that Japan is contemplating a change in

the direction of better cooperation with her neighbors
in the Far East and with the powers which have great in-

terests there. It appears to us that developments within and among the principal countries of the Far East are

producing a trend toward or favorable to stabilization of

the general situation there. We feel that with regard to
Japan and China there are now actively at work within and

between those two countries forces operating in the direc-

tion of peace. We are not oblivious to the fast that developments in the Fax East may in due course call for the mak-

ing of new political agreements, but we are of the opinion
that as and when the time COROS to proceed with the negotia-

tion of such new agreements, the principles upon which they

382
-70

should advantageously be based could not deviate far from
those to which the interested powers are already committed

in treaties at present in existence.
During recent years the United States has fased -

as has the British Empire - serious problems arising out
of the sudden and marked expansion of Japanese trade. It
has been our aim and effort to devise means whereby the

interests of our own producers may be safeguarded and at
the same time there may be avoided, as far as possible,

restraint upon natural and reciprocally beneficial trade.
We have made substantial progress toward solving in a
autually satisfactory manner some of the problems involved,

and we are currently devoting constant attention to that

subject. It is our firm belief that progressive adjustment of trade problems in the For East, and elections,

would contribute to an improvement in political relations

in that region.
in general, as so our belief that the powers can

in all probability best contribute toward bringing about

383

conditions of stability and security in the For East by
endeavoring to cultivate good will and confidence by pro-

noting healthy trade relations and while closely observing the trend of events which from recent developments

may indicate that the peoples of the Far East are approaching a state of mind wherein those peoples will themselves
be able to peresive that pathways of cooperation are the
pathways of advantage. As circumstances permit we shall

be prepared as heretofore to give hearty support to
measures which may appear to give substantial promise

of contributing toward stabilization of the situation in
that part of the world.
In regard to the Chancellor's observations as so

the possible trends and results of pending neutrality

legislation in the United States, the Chanceller is of
course informed of the recent legislative enactment.

It may be pointed out that the Joint Resolution of
May 1, 1937 (Pub. Res., No. 27, 75th Gong., 1st seen.).
does not provide for the imposition of an embargo on

384

exporte of any commodities other than arms, ammition,

and implements of war. This legislation does not prohibit
exportation of other commoditions 11 morely provides that

if the President shall find that the placing of sestrictions on the export of articles from the United States to
belligerent states, et estera, is necessary to promote the
security OF preserve the peace of the United States or to

protect the lives or commerce of citizens of the United

States and shall so proclaim, it shall thereafter be uslawful to export such articles until the American interest

therein shall have baca divested, 1.0., until title shall
have passed to the foreign consignees. Similarly the

President is authorised to prohibit the transport of bel.
ligerente by American vessels of commodities designated by
him.

The resolution gives the President considerable dis-

erotion. It allows him to determine whether, in view of
the then existing situation, these provisions should be
invoked and permite him to make exceptions as to commerce

385

-10-

on lakes, rivers and inland waters, and on or over lands

bordering on the United States. It also pesmits his to
change, modify, or revoke in whole or in part any preslomation OF preslamations previously issued by him in
the given premises.
The Government of the United States is convinced

that, as regards all of the points raised in the Chaneellor's message, the exucial problem confronting the world

today relates to the guiding principles which will, in the
immediate future, underlie the basic policy and action of

the important nations in their international relations.
The possibility is clearly not procluded that the ideas
of national exclusiveness and its inevitable concomitant

of international hostility and strife, may become dominant

over a sufficiently large part of the earth to engulf the
entire world in a possible succession of destructive canfliets. on the other hand, the Government of the United
States fimily believes that an opportunity exists today

for directing national policies into a channel of political

386

-11and economic cooperation, based upon a common-oma

harmonization of national interests and upon a spirit

of autual friendliness and fair-dealing. In the achievement of this aim the Government of the United States 10

prepared to collaborate in every way compatible with its

legitivate sphere of action. It 10 convinced that the
British Government, astuated by the same desires, is

equally concerned with the imperative need of exploring
all possible avenues that may load to the same and.

Department of state,
Washington,

true

C.

387

June 14, 1937.
10:43 a.m.
George

Harrison:

Hello

H.M.Jr:

Hello George.

H:

Good morning, Henry.

-H. M. Jr:

How are you?

H:

H.M.Jr:

Well Itm first rate, thank you.
George, I would like to borrow the services of

Professor
Williams and Knoke - ah - for tomorrow,
see?

H:

Yes.

H.M.Jr:

And then when you come down Wednesday maybe by that

H:

time - ah - I'll have something that we may be able
to talk about something that we can get your advice on.
Yes, well Knoke will come then. I to him, of course,
to go ahead.

H.M.Jr:

Well we'd like Williams alos.

H:

Well now I don't know where I can get Williams.

H.M.Jr:

I called him up.

H:

H.M.Jr:

Oh you did get him.
He said he had something but my arrangements is - are

with him that I could use him as Professor of Harvard

if it doesn't interfere with the bank

H:

Yes.

and he said he had something in Canada

H.M.Jr:
H:

H.M.Jr:
H:

H.M.Jr:

Yes.

but he said held like to come down as long
as I asked him
Yes.

and he said he'd call the bank, so I said I'd
call you.

-2 -

388

Well I was afraid he hadn't left - afraid he might

H:

have left but if he hasn't that's all right.

H.M.Jr:

He has not.

H:

Yes.

H.M.Jr:

And then I - I - I - when would you come down?

H:

Well I've got to come down - I'm coming down tonight
anyway

H.M.Jr:
H:

H.M.Jr:
H:

You are.

because Eccles has got a meeting for us tomorrow

afternoon right after lunch.
I see. Well - ah - if you were here would you like

to sit in?
Yes, I'd like it very much.

H.M.Jr:

Well we start at 8:30 tomorrow morning.

H:

Well I may be there. (laughs)

H.M.Jr:

My office.

H:

All right, sir, first rate.

H.M.Jr:

Well that's - I mean we would be more than pleased

H:

Well if you would I'd like very much to be there.

H.M.Jr:

Righto.

H:

All right.

H.M.Jr:

Thank you.

H:

Goodbye.

to have you.

389
June 14, 1937.
11:30 a.m.
H.M.Jr:

Hello

Operator:

Senator Byrnes.
Hello

H.M.Jr:
B:

Hello Mr. Morgenthau.

H.M.Jr:

How are you, sir?

B:

Oh very fine. Say I - in view of the fact that

the - at least my understanding - I hadn't checked
Collector of Customs in your - I think it was the
30th District expires around July 31st

up on it that the Commission of Mr. Haas who was
H.M.Jr:

Yes.

B:
I

ah - if there's to be a reappointment there

imagine his name ought to come down before long.

H.M.Jr:

Yes,
either.it should. There's no reason why it wouldn't

B:

Is there any reason why it shouldn't come down?

H.M.Jr:

No - ah - I don't know why - they - they seem to

B:

Oh well that's fine.

H.M.Jr:

I'll see that it's sent up right away.

B:

wait until the last week or two but - ah - I'll I'll see that it's sent up right away.

Oh well that's fine Mr. Morgenthau. We're in a
snarl down here and God only knows what 's going to
happen; I - I wish we could get this program out
of the way and get out of here but if they were all
of my frame of mind we'd have immediate action on

all these bills.

H.M.Jr:

Right. There's no - I mean sitting at this end of
the avenue I don't - I think everybody's pretty well
made up their mind how they're going to vote.

-2B:

390

I don't know why it is that we can't sit down
at the table with someone in the Executive

Department and know exactly what this is and
then go
with
it. ahead and put it through and be done
H.M.Jr:
B:

Right.

After all, there's nothing - no finality - if

we make an error we can change it next year.
H.M.Jr:
B:

And we're sure - we'll make errors.
Why obviously and I'm not one who wants to hold

up his hands and say, "The world is going to the

dogs because we've made some error". We can cer-

tainly correct it if we do.

H.M.Jr:

Right.

B:

But they - we just drag along here so on a lot

of
stuff. Well I didn't mean to talk politics
to you.
H.M.Jr:

I know, well I'm always glad to hear from you
and I.11 give word to have Haas' name go right up.

B:

Oh all right, fine.

H.M.Jr:

Thank you.

Copy for SECRETARY

391

GRAY

JR

Paris

Dated June 14, 1937

Rec'd 2:25 p.m.

Secretary of State,
Washington.

781. June 14, 5 p.m.
FOR THE TREASURY.

The exchange market today was nervous and uneasy

and the fund again yielded large amounts of sterling in

order to hold the rate at 110.90. The dollar is firm
at 22.47. The forward rate for sterling moved up 2 francs
for one month and to 5 francs for three months.
At midday the Bank of France suddenly raised its

discount rate from 4 to 6 per cent in an effort to stop
flight of capital and also raised its 30 day rate from 4 to
6 per cent.
On the security market rentes were up from 50 to 80
centimes but according to our market contact the general

feeling is that the improvement was due to the official
supporters. Other securities also showed slight gains
although dealings were agitated.
While no official announcement has been noted in this

connection it appears likely that the Minister of Finance

will present his financial projects to a CouncilCabinet
of the

392

-2-

JR #781, June 14, 5 p.m., from Paris.

Cabinet late this afternoon, and to a Council of Ministers

tomorrow. If approved by the latter it is said that the
Government intends to lay its draft bill before the
Chamber tomorrow afternoon and to ask the Chamber Finance

Committee to examine it without delay. As the committee

will probably desire to hear the Minister of Finance it is
thought that its report will not be available before
Friday and that under these circumstances the Chamber may be

able to complete its first reading of the bill on Sunday
next. As the report of the Senate Finance Committee will
probably not roach the Senate before Thursday, June 24

final action by Parliament is not looked for before end of
the month.
BULLITT
KLP

03/11/038

Copy for SECRETARY

393
LMS

GRAY

London

Dated June 14, 1937

Rec'd 2:30 p. m.

Secretary of State,
Washington.

380, June 14, 6 p. m.
FOR TREASURY FROM BUTTERWORTH.

Pressure on the franc was not as great today as

during the latter part of last week. This was not so much
due to any easement effected through the increase in the

Bank of France rediscount rate but to the awaiting of the
French Government's proposals.

In the course of a conversation which he particularly
emphasized was private and strictly confidential Monick,

French Financial Attache, said that he could not but admit
that the position in France was becoming increasingly

precarious; that it was indeed sad to see the result of
fruitful labor dissipated and the contrast was dishearteningly vivid between the recovery going on in Switzerland
and Holland and the financial deterioration taking place
in France. Monick obviously felt that the Blum Government

in general and Blum in particular was losing authority
and control of the situation and he seemed to believe that

a definite crisis was inevitable. He was not at all sure
that this current movement would be the beginning of the
real

394

LMS 2-No. 380, June 14, 6 p. m., from London.

real crisis and he rather expected that various palliative
measures would be undertaken including perhaps the taking

of the gold profit up to 11 francs which would amount to
about 41 milliards. He expressed the further conviction
that Blum could not depart from the principles laid down
in the tripartite agreement; that exchange control was

politically out of the question and that therefore the
economic and financial policy of both this Government and
the new Government which must follow on any crisis was

to all intents and purposes fixed. On the other hand the
rate of exchange would have to be modified, for France

would no doubt have "to dive deep" and hold the franc at

a further depreciated level in order to attract back the
capital that had fled abroad and then gradually appreciate
the currency as conditions at home improved.

Monick particularly stressed the personal and con-

fidential character of the above.
BINGHAM
RR:WWC

395
Copy for SECRETARY
PARAPHRASE OF TELEGRAM SENT

TO: American Embassy, London, England
DATE:

June 14, 1937, 4 p.m.

NO.: 243
FROM SECRETARY OF THE TREASURY.
FOR BUTTERWORTH.

By telephone Cochran reported that he saw Bachmann

yesterday and again today. The Swiss told Cochran that
some days ago they decided on a program of not increas-

ing the holdings of gold of the Swiss National Bank, and

that they will sell in the London market any further
gold acquired by the Bank from hoardings. It is also
the plan of the Swiss Bank to dispose of the remainder
of the gold in their Stabilization Fund (amounting to
about $25,000,000) in the United States. We have made

no comment on this plan, pending receipt of confirmation

of this call.
HULL

EA:LWW

396
STRICTLY CONFIDENTIAL
PARAPHRASE OF TELEGRAM RECEIVED

NO. :

780

FROM:

American Embassy, Paris

DATE: June 14, 1937, 4 p.m.

I lunched with Blum today but there were 80 many

others present that I had no opportunity to ascertain
his decision. This evening I expect to dine with him
alone and be able to telegraph definitely. His aspect
of today was free of care and 80 greatly different from
that of Friday and Saturday that I am certain that he
has arrived at some decision but I am unable to say as
to whether it is a decision to fall on some politically
advantageous issue or to carry on with his fight. Blumel
and Moch, who are his two most intimate advisers, are
counseling him to act before the crash comes and abandon

the premiership. On the other hand, the Radical Social-

ists are so terrified of assuming responsibility for the
Government of France at the present time that they are

doing everything possible to retain Blum in his present
office. Advice is being given by Herriot, Chautemps and
Daladier to their followers to vote for any new taxes
that may be proposed by Blum, in the belief that such

measures will not be sufficient to stave off the financial

397

-2-

oial collapse and that Blum can be forced to take the
onus of the orash. Any statements which Blum may make

I shall telegraph to the Department tonight.
BULLITT

EA:HF:EB

398
June 14, 1937.
4:46 p.m.

H.M.Jr:

Hello

Operator:

Mr. Helvering. Go ahead.

H.M.Jr:

Hello

Helvering:

Hello

H.M.Jr:

Guy.

H:

Yes.

H.M.Jr:

Henry talking.

H:

Yes.

H.M.Jr:

Ah - when Mrs. Roosevelt brought up the question
about the broad - the money that the Broadcasting
Company paid - ah - who did I ask over in the
Bureau? The question was raised whether the money

would be paid directly to the Friends society,

you see, it didn't go to her at all. I got a
ruling on that from somebody over there.

H:

Well I - I don't get just what

H.M.Jr:

Well Mrs. Roosevelt goes on the air.

H:

Yes.

H.M.Jr:

Let's say they pay her - they - they pay her a
thousand dollars a night, let 's say.

H:

Yes.

H.M.Jr:

The money goes to the Society of Friends - the

H:

I see.

H.M.Jr:

It does not go to her.

H:

Yes.

H.M.Jr:

Quakers.

The Associated Press is asking about it. I remember
that we asked somebody to give me a ruling on it and
we said if the money was paid directly to the Society

of the Friends that - ah - ah - that she wouldn't have
to pay any tax. Have you any recollection of it?

399

-2-

Well it seems to me I have the Rules and Regulations -

H:

H.M.Jr:

gave a ruling on that if I'm not mistaken but I don't
recall right off-hand about it.
Well the - the AP is waiting for an answer.

H:

What?

H.M.Jr:

The Associated Press is waiting for an answer.
(Laughs)

H:

H.M.Jr:

Magill asked Charlie Russell and he can't remember

H:

Ah-ha.

Helvering:

but I - I know that we got a ruling on it.

Well let me - I'll try and get Mr. Saunders from the
head of Rules and Regulations. I think that's where

it was but I don't recall definitely about it. It
seems to me I remember something about that.

H.M.Jr:

Well will you look it up and - and will you let - ah -

H:

Yes.

H.M.Jr:

Please.

H:

All right.

H.M.Jr:

Will you let'Magill know.

H:

H.M.Jr:

ah - Magill know?

Yes, I'll find out if we can right away. I don't
know whether they've left down there or not but

Well please.

I'll try and get it right away.

H:

H.M.Jr:

Thank you.

4:57 p.m.
H.M.Jr:

Hello - hello

H:

Hello

H.M.Jr:

This is Henry talking, Guy.

400

-3H:

What?

H.M.Jr:

Henry Morgenthau.

H:

Oh, yes.

H.M.Jr:

Magill's here with me.

H:

Yes.

H.M.Jr:

Go ahead.

H:

I checked down there and there's nobody in the

H.M.Jr:

Yes.

H:

Those are what I call our subject cases.

H.M.Jr:

Yes.

H:

file room now.

And we - I told the - I got ahold of Mr. Briggs
who is the head of it but (laughs) he don't know
anything about the file. He don't recall any
specific ruling on that

H.M.Jr:

Ah-ha.

H:

but he said that the first thing in the morning
he'd have that file checked.

H.M.Jr:

Well I can't remember and Mrs. Roosevelt is out of

town for a couple of hours but I have a sort of
vague notion that they did talk to us - I know what
she does.

H:

H.M.Jr:

H:

H.M.Jr:
H:

Yes.

Ah - the broadcasting company let's say pays a
thousand dollars - the sponsor does, you see, to
have her go on the air
Yes.

and they pay that directly to the Society of

Friends.

Well, of course, it wouldn't be income to her anyhow.

401

-4

H.M.Jr:

Well - ah - she earns it but as I understand it

we
on itgave her a ruling. Now this is just my memory
Ah-ha.

H:

H.M.Jr:

that - ah - there have been other cases like
that and that she was told as long as the money was
paid directly to the Society of Friends that she would
pay no tax.

H:

Yes.

H.M.Jr:

But they

H:

Of course, they're trying to - I suppose somebody
is trying to put it under the heading that she should
receive that and then pay it out to them and only be
entitled to 15%.

H.M.Jr:

Yes, well when he comes in in the morning if they'll

H:

I'll - I'll check the whole file.

H.M.Jr:

Thank you.

H:

You bet.

H.M.Jr:

Thank you. Good night.

look it up, will you.

402
PARTIAL PARAPHRASE OF TELEGRAM RECEIVED.

FROM: American Embassy, Tokyo, Japan

DATE: June 14, 1937, 6 p.m.

NO.: 158
FOR SECRETARY MORGENTHAU.

According to Domei report appearing today in local

press, financial and business circles generally fear
that Finance Ministry "must eventually enforce" some
system of drastic financial control together with
managed economy to meet the budget problem caused by

the increase in military appropriations and the necessity
of raising a large amount for increased industrial production.

It is the opinion of the Embassy that any attempt
at present to describe the measures which are probably
under contemplation would be conjectural; these measures

were set forth in our telegram No. 138 of May 28.
It may be, however, that the appearance at this time of
the press report referred to above from a semi-official
source may have been initiated by the Government in order

to place upon the military the responsibility for contemplated inability of the Government to implement measures
for improvement in national economy because of the heavy

military budget.
GREW.

EA:LWW

403

June 14, 1937

ity dear Mr. Winchell:

Thanks for your nice letter of

June 9th.

If I had known in advance of
your Sunday night broadcast that you
were going to mention our financing,

I would have been encouraged to lower

the interest rate.

To be serious for a moment, in

these difficult times it is nice to

know that the Treasury can count on

Walter Winchell as a friend.

Yours sincerely,
Henry Morgenthau, Jr.

Mr. Walter Winchell,
Twentieth Century-Fox Film Corporation,

Beverly Hills, California.