Full text of Diaries of Henry Morgenthau, Jr. : Volume 73 : Part 2

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195

STATEMENT OF SECRETARY NORGENTHAU

BEFORE THE JOINT COMMITTEE ON TAX EVASION AND AVOIDANCE

THURSDAY, JUNE 17, 1937.

The problem of closing loopholes in tax laws is

continuing and ever-present. It is never settled by any

particular legislation. 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 seems unethical and unwarranted
avoidance of taxes.

This is not the result of activities on the part of any
particular group of persons. 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 attitudes in certain

quarters toward taxation. These attitudes and these pressures

must be realistically considered as part of the problem of

196

-2tax 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 group of ingenious lawyers and accountants who make their
living by showing to people who can afford to employ them

ways by which they may pay the least possible taxes. This
may be a legitimate business. Nevertheless, by virtue of

its highly competitive character, it brings about the
following situation. The ordinary accepted standard by which
many wealthy taxpayers judge the efficiency of the tax
attorney is the amount that he can save in taxes. The most
ingenious attorney, therefore, becomes the most successful

and the most sought after. He feels that his sole duty is

toward his client. If he is honest, he will not condone

perjury but he feels little moral or social responsibility

197

-3to 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 18 well within the ethics
of his profession, regardless of the unfortunate effect
that such a scheme will have upon the general application
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 Government. The contest is, of
course, unequal. The fees of the 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 actively in trying to avoid
taxes for their clients. Among these are men who received
their early training from the Government, and who use the

198

-4skill they acquired in that service against the younger
men who take their places. The Government then becomes

a training school for many of its opponents.
I am not attaching any blame to anyone in particular

for this situation. I am only pointing out that it exists
and that it is one of the reasons requiring continual
revision of the tax laws.
A second factor which creates the problem which now

confronts us is the fact that tax avoidance, as opposed to
tax evasion, is considered by many a legitimate and
honorable aim. 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

199

-5ethics 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.

I hope that in the future an atmosphere may be

created in which men will hesitate to use ingenious
devices to avoid the payment of taxes. Nevertheless, that
happens to be the present attitude of some persons toward
payment to the Government.

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. So hazy is the line between
tax evasion and tax avoidance that it is always possible to

200

-6classify 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.
These 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 circumventing 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 situation calls for remedial legislation. That

201

-this is a recurring 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. 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 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 -

202

-8under my instructions, Mr. Robert H. Jackson called to the
attention of the Committee on Finance many of the methods

of tax evasion which are now the subject of this inquiry.
The use of those devices was then a less serious obstruction
to 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 which men will hesitate

to use these artificial devices to avoid the payment of

203

-9taxes just as today they hesitate to use such devices to
escape the payment of private debts. The great body of

citizens already display the same attitude toward their
obligations to the Government that they display toward

their private obligations. An examination of their returns
year after year discloses no attempts to push the letter

of the law to its limit, and no use of corporate forms
or other elaborate subterfuges for the sole purpose of
avoiding their normal tax burden. Perhaps continued
publicity given to the more fantastic methods of tax
avoidance now considered legitimate may make such an

attitude more nearly universal. This may be an important
by-product of public hearings on current tax devices.

I will therefore attempt briefly to describe the
general character of some of the methods now in use in

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- 10 terms which the average taxpayer may understand. 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 transactions 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.

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- 11 -

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 attemot 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 incorporated his household kitchen as a
restaurant and deducted the expenses and losses from his
taxable income because he had 80 few customers.

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- 12 -

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. 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.

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- 13 -

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 persons without bothering to incorporate.
A rich man runs a racing stable as a hobby. He calls
himself a horse-breeder - and in this character loses money

very heavily indeed. He never makes a financial success
as a horse-breeder because racing demands too much luxury

on his farm. This raises his expenses. He then charges
off the loss on his racing stable against his income.
No small taxpayer would think of calling himself
a golf instructor and then charge the expense of his golf
game against his income because he got no pupils. However,

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- 14 we find an individual who in one capacity charters a

pleasure yacht to himself at a 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.
Most of these people 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

209

- 15 -

validity. The individual believes that he is morally
entitled to take the sporting chance and 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.

The Under Secretary of the Treasury,

Mr. Roswell 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 which I have just

described of making the taxpayer a multiple personality
whose characters deal with each other.

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- 16 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 take 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 that hs is
actually doing business abroad in some country where he

cannot, be taxed. In other words, transfers of title which
might result in taxable income are made to appear to have

occurred outside of the United States.

211

- 17 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. It is
most important that its 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 personality by the taxpayer has now reached the
stage where Congress should consider corrective legislation.

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

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- 18 of a large number of cases, not all of which would be
upheld 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, once it gets a
foothold among tax attorneys. In the meanwhile, the
Government revenue is impaired in two ways; first, by the
actual loss of revenue in specific cases; and second, by the
expenditure of the time and energy of the tax-enforcing

agencies in litigation.
It 1s true that many of the devices which we have

referred to are being limited and restricted by the courts.
Nevertheless, the situation is 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.

213

- 19 And what effect has the increasing use of these
devices on revenues? That, of course, cannot be exactly

determined. Nevertheless, 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 estimate 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

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- 20 -

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

inevitable. I take great satisfaction in the accuracy

of the revenue forecasts made since I assumed the

responsibilities of the office of 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, therefore, the March 15 income tax

collections indicated that total income tax receipts for
the fiscal year 1937 might be as much as 10.4 per cent below
the estimate made last November, I became concerned. I

215

- 21 -

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.

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

216

- 22 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 1 ncomes. We knew that dividend
disbursements by corporations during the calendar year

1936 had increased materially 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 Mr. Magill

217

- 23 -

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

Mr. Magill will describe to you in some detail
the character of his investigation. Necessarily, it was a
quick survey, and the further 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 probleme 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 audited with the force of about
3,000 men that we have available.

- 24 -

218

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 one year after filing and

were not completed until about two years after filing.
At present, field investigations are begun 3 months after
filing and are completed 151 months after filing - an
advance in the conduct of the work of field investigations
of approximately 9 months.

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' 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

219

- 25 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,
amounting to about $130 millions, have been secured, and
Commissioner Helvering has informed me that he is confident

that the Bureau will collect by agreements more taxes

during this fiscal year than it has ever collected in that
manner at any time in its history.
Undoubtedly, prevention of tax avoidance and evasion
would be aided by an examination of a greater volume of

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

220

- 26 attorneys who are constantly engaged in the preparation

of returns and in the defense of the taxpayers' contentions,

the record of the Bureau is good. 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 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

221

- 27 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 increase without anyone

realizing the extent of the impairment 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

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- 28 -

heralded as a persecution of the rich. Today, for example,
we are met by the charge made in some quarters that this

attempt on the part of the Treasury, forced on us by a
gradual accumulation of tax avoidance devices since the
passage of 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. 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.

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- 29 -

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

never actually intended to give away. Moreover, they create

continual and expensive litigation. No collecting agency
can operate effectively if it is hampered at every turn by
law-suits.

For these reasons, I considered it imperative to
call these matters to the attention of Congress at this
time.
00o

224
meeting RE FRENCH CRISIS
Present:

June 18, 1937
9:00 A.M.

Mr. Taylor
Mr. Opper

Dr. Viner

Mr. Riefler

Mr. White
Mr. Lochhead
Mr. Haas

Mr. Oliphant

H.M.Jr:

Wayne, the floor is yours.

Taylor:

we have two representatives, Messrs. Opper and

White:

White. I guess, Clarence, you'd better start with
that thing that you have there.
Well, these are just the papers that follow along
after the statement of alternatives. Is there a
possibility that Harry's comes first?
Well, they both come together. Yours fits in at

Taylor:

Well, I guess maybe that goes first (to White).

Opper:

each point.

(White hands attached memo to Secretary)
H.M.Jr:

(After reading) Well, let's take Case One. "France
wherever held." Well, that's a - would she call it

ceases to sell any gold under any circumstances and
a gold embargo?

White:

It would be called a gold embargo on exports.

H.M.Jr:

Well, anyway - but you talk about a gold embargo,

White:

Yes

H.M.Jr:

I mean why don't you say that instead of "France

White:

Because it is capable of being misunderstood. An

don't you?

ceases"?

embargo on gold might be an embargo on all gold

225
-2-

exports, might be that no individual could take
gold out of France, and so forth.
H.M.Jr:

You said "ceases to sell any gold under any cir-

White:

I meant the Government of France.

Taylor:

cunstances and wherever held.'

The October 13 statement, which ties back into it,
specifically says that governments' stabilization
funds which offer to sell gold to us under conditions
which you deem to be in the public interest - and

that's the reason for that.

R.M.Jr:

I see.

"(a) Statement issued dropping France from October

13th list, i.e., the new list would not contain

France." You mean you'd issue a new statement.

Opper:

That statement is prepared and ready. If you'd like
to have it read, Clarence has it.
How long is it?
About eight lines.

H.M.Jr:

Read it.

White:

H.M.Jr:

Opper:

"In lieu of the statements of the Secretary of the
Treasury of October 13, press release #867, and

November 24, 1936, press release #895, naming the

countries complying with the conditions specified
for the purchase of gold from the United States for
immediate export or earmark, the Secretary of the

Treasury today named the following countries as

complying with such conditions, as set forth in his
press release #866 of October 13, 1936, as supplemented
by his press release #894 of November 24, 1936." And
then the four countries are listed without including
France.

H.M.Jr:

"(b) Federal Reserve Bank of New York to be notified

of such action and instructed to notify the Bank of
France." Well, don't want to see those.
"(c) Such action is not a repudiation of the tripartite undertaking.'

226
-3-

You mean as a whole? It just drops
Taylor:

That
adds to that public declaration, which is the
general policy.

H.M.Jr:

But it would drop France as a member.
Not necessarily.

Taylor:
Lochhead:

As a member entitled to receive gold.

H.M.Jr:

Receive gold from whom?

Lochhead:

From us.

H.M.Jr:

You mean she could take gold out of here?

Lochhead:

I say that stops her from taking gold away from us,
having access to gold, but it does not drop her from

the original tripartite; the original tripartite

H.M.Jr:
Viner:

agreement made no mention of gold.
I see.

I don't agree with that myself. I say that we don't we still don't have to declare that sne is not a

member of the agreement.
H.M.Jr:

Well,
that's what I'm - then you're arguing on the
same side.

Viner:

lle don't have to make a declaration that she is not
a member of the agreement, but in fact she has not
lived up to what has become of the agreement. That
is, she wouldn't be in good standing, but we needn't

say she is no longer a member.

Well,
you're on the opposite and we're on the same
side.
Viner:

I think so, yes.

H.M.Jr:

The question I raise is this. The question I raise if we publish this new list, I take it that that does
not - I mean we're declaring France out of the tripartite agreement, is that right?

227
-4-

(Viner, Taylor, and Oliphant nod yes)
H.M.Jr:

Then the next question I raise - what facilities
of the tripartite agreement are left to her?

Opper:

Consultation and exchange of information.

Oliphant:

And her duty to do what she can to maintain exchange

White:

rates and all the rest of the undertaking.
And our recognition that she has not violated it;
that is, our lack of public statement that she has.

Viner:

What obligations do we have to her?

Oliphant:

Our reciprocal obligation to do what we can to

H.M.Jr:

Well, that brings up the point, would we have that

Taylor:

No.

H.M.Jr:

Well then, what is there left to stabilizing exchange?

White:

Well, you can

H.M.Jr:

Just a minute, please.. What is there left? Put

maintain exchange rates.

day-to-day operation as between the two banks?

it this way - I mean what does France do to hold up

her end?
Viner:

That's the question I asked. I think all that came
afterwards became part of this tripartite agreement.
I like to take them all together and also to assume
that France undertook at the time to make arrangements with us that would be satisfactory, and that
when she even by force of circumstances was forced

out of them, we may still grant her all the privileges of the agreement if we want to, but we are
under no obligations to do so.

H.M.Jr:

I'm still going to drive on this point. France takes
action on her part, independent action, I take it,
without consultation with us - and there is nothing
said in here as to whether this is done with or
without consultation. That's left out.

228
-5White:

If she does anything without consultation, she is

H.M.Jr:

Then put that in under (a). Under (a) there should
be "with consultation" and "without consultation."

violating it.

That should be included.

White:

H.M.Jr:
White:

H...Jr:

That should be in there. We took it for granted.
You can't take it for granted.
You're right.
I think that's the essence of the whole thing. If
she does it with consultation, then she is living
up to the thing. "With consultation" means she would
ask our permission. Well, supposing we said, "Under
the circumstances there is nothing else you can do."

Then this is all right. But supposing she does it
without consultation; then what is there - why should
she remain in the club? Let's argue that way.
Riefler?

Riefler:

(Nods nothing)

4.M.Jr:

What? I mean I think I would put it here "Possible
action." I don't like that sentence, but anyway
well, that's mine.
Well, I don't like it. I mean it's too many words
and I don't think it says anything. It either should

White:

A.M.Jr:

be more or less.

White:

It could be less.

H.M.Jr:

well, it either should be more or less. Under that
would be (a) 1 - "with consultation," and then we do
certain things; (a) 2 - "without consultation." Now,
if she does this thing without consultation, then I.Clarence, I think that our declaration should be
something else; then I think we should just announce
she is out.

Opper:

The thing I was thinking was that this cuts through

all these different alternatives. You might put a

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-6-

statement at the end.
H.M.Jr:

Taylor:
H.M.Jr:

Let's just insert that. Let's discuss
All of these are with consultation.
Well, let's put it in, but have an alternative in
each case, "without consultation."

Viner:

Does "with consultation" have a definite enough meaning

H.M.Jr:

I'll explain what I mean: that they will either send

in this instance?

for vochran or have the Ambassador come in and say,

"We are proposing to do the following thing within

24 hours."
Viner:

And give us a chance to suggest to them that there
might be something else they might do?

H.M.Jr:

Yes. But they've got to give us 24-hour notice under

white:

That would be notification. I take it consultation

Viner:

....to argue with them.

H.M.Jr:

Right. But if they give us the right to consult - but
I think if they should move without that, then I'd say
they were definitely out. Let's say they do give us

the agreement.

would give us an opportunity

the right, and then we don't agree; then they go ahead.
Should we still - then they are still E member of the
tripartite agreement. Then what are our obligations
to them?

Oliphent:

Before we leave that other point, may I ask, does the
tripartite agreement as such contain provision for
24-hour notice? I don't remember that:

Opper:

No.

Taylor:

No.

H.M.Jr:

Well, I mean I've said it - I've said that as far as
we're concerned, publicly, that the tripartite agreement is only on 24-hour notice.

230
-7Oliphant:
Jr:

Well, that's a little different. But at no place
in the tripartite or any of the parts
well, there was something put in on that thing which
they didn't like, if you remember; the French wanted
it out - that thing; there is some definite verbiage
in there which leaves that impression.

Loonhead:

That was the purchase and sale of gold - October 13.

Oliphant:

Just trace a little history. It's a little confused.

H.M.Jr:

well, what does the subsequent arrangement on the
exchange of gold - what does that say? Anybody got

I'd like us to go back to the morning after the
tripartite agreement was consummated and refresh
our recollections as to what the picture was then.
The tripartite agreement was worked out, released,
and so forth. Then, much later, we took up the
question "Now, on what conditions and to whom will
we release gold?" And it was in connection with that
Later arrangement to release gold to particular countries that we worked out this plan whereby we'd
operate with them, commit ourselves to them on a
24-hour basis, and stipulating for 24-hour notice.
Now, certainly if they didn't give us 24-hour notice,
that would be a repudiation of that subsequent
arrangement, but it wouldn't be - I mean there's a
difference there, you see.
that?

Opper:

General statement?

Read it. which is the one where we engage to exchange
gold?
Opper:

That's the October 13. You recall there were two of
them; the first one applied to England and France;
that was October 13.

H.M.Jr:
Opper:

Let's have that.
"Supplementing the announcements made by him on

January 31 and February 1, 1934, to the effect that
the Treasury would buy gold, and on January 31,

1934, referring to the sale of gold for export,
the Secretary of the Treasury states that hereafter,

231
-3-

and until on 24-hour notice this statement of
intention may be revoked or altered, the United
States will also sell gold for immediate export
to or

Jr:

Oliphant:

That's all I want. That's where it is.
If I may add just one other piece of history to
get it clear, that thing was followed by an exchange

of correspondence between the banks whereby we worked

out another 24-hour thing, and Lochhead can tell you
what that is.

Viner:

As I interpret the situation, the subsequent a rrangements were necessary in order to implement the
original statement, and the whole business is the
tripartite agreement, rather than the original document.

H.M.Jr:

Just E moment

Viner:

And including all the customs and understandings that
have developed under it.

H.M.Jr:

would you mind repeating?

Viner:

AS I understand it, these later agreements were foreshadowed by the original statement, which N E S intended was a statement intended to be followed by arrangements,

and that the later arrangements, plus the original
agreement, plus the understandings and conversations,
together form the tripartite arrangements, and not any
particular document and the particular words in that
particular document. That's my understanding. And
therefore, if the later arrangements were foreshadowed
by the original agreement, and if the spirit of the
original agreement would not have been carried out
if these arrangements had not been reached, then a
violation of those arrangements, unless we grant that

the circumstances were such to force it or make it
acceptable to us, is a violation of the tripartite
agreement. I admit that is an interpretation. I
don't mean I can show it to you or demonstrate it.
Perhaps that's a wrong way of looking at it, but it's
the way I look at the whole business, and I think it's
the way the public looks at it.

232
-9-

You remember, don't you, Jake, that there is no
reference in here, in the October 13 statement,

Opper:

either expressly or by implication, tying this thing
up with the signatory countries to the tripartite
declaration. The Secretary could add ten countries
to that list who had nothing to do

Viner:

A.Jr:

Opper:

out actually we asked for statements from other
countries, we tried to get statements from other
countries that they would subscribe to that
original statement.

Well, they joined it, they did subscribe. The
three countries that came in subsequently - they
did subscribe to the other.
That is perfectly true, and it was your policy at
that time not to extend this privilege of October
13 to anybody who didn't subscribe.

H.M.Jr:

That's right.

Opper:

But nevertheless, the document is such and the

Jr:

program stated in it is such that if you decided
that you wanted now to extend it to ten other countries who were not signatories, or subscribers, to
the tripartite declaration, it seems to me it would
be inconsistent with the framework of this to do
anything else; if you felt you ought to do it, you
could do it.
Let's say Japan was knocking at our door. The first
thing we would say to then - "Would you subscribe to
the September 26 document?"

Mylor:

Principles.

Principles. That would be the first thing. "Now,
you do or you don't. If you do, all right, then

we'll give you the same privileges we have given
Holland and Belgium, provided that it is agreeable
to England and France." Now, we agree that any more
members - we only consult England and France as to

whether they come in, and we couldn't go through all
this rigmarole; but in each case we would consult the
original two members, which were England and France.
But we wouldn't let anybody come in unless they subscribed to the principles of September 26.
(Oliphant goes out)

233
-10Viner:

+nat's the way I like to interpret that whole

series of arrangements.

H.M.Jr:

That's the way I understand it.

Taylor:

The principles are the important thing, and then the
technical arrangements, which very likely will vary
with each country.

Viner:

And, as time goes on, with circumstances.

Taylor:

Or mechanics which implement it, but are not neces-

H.M.Jr:

Well now, is the atmosphere clearer? Do we under- -

sarily a fundamental part of the tripartite agreement.

Taylor:

stand each other? Then it gets down to this thing
again, this important question of "with consultation."
If France should consult with us about a gold embargo
or limiting - say, the discontinuance of
Buying between points - that's the thing which she

H.M.Jr:

Supposing she can't continue to do that. I mean

is doing, see?

that's just what you're talking about here. Do we

simply announce that we have revoked the October 13
arrangement, or do we go back and say she is not
even 8 member of the September 26 arrangement?
Inylor:

You have your option.

Viner:

You have your option, I'd say, and you ought not to

Taylor:

...Jr:

decide that, I'd say, before
If you want to kick them out, you can; if you don't,
you don't have to.
Well, I would say that we'd kick them out of the
September 26 thing only as an extreme measure, leave
that as absolutely - with the hopes that if we cancel
the October 13 privilege, circumstances may come so
she might be able to come back again. Huh?

Taylor:

(Nods yes)

H.M.Jr:

Now, who disagrees with that thought?

234
-11white:

I don't disagree with your conclusion. I think
if you wished to kick them out - I think the case

might - E stronger case might be made than what
Viner did, that you wouldn't have as adequate grounds

Opper:

as you made out. But since that isn't the point at
issue, there is no need of discussing it.
I don't disagree with the conclusion either, but I
want to suggest that there are still alternatives
there. I guess there are at least two. One is that

nothing is said about the September 26 statement;
that is, simply an announcement that they are no
longer on the October 13 list. The other is that you
make an affirmative statement, so to speak, to set at

rest the international question, and say that you
don't regard them as out of the September 26 agreement.

H.M.

of course, the circumstances surrounding whatever

Taylor:

all, if France did this, they'd say, "Well, Mr. Morgenthau, do you approve of what France has done?" "Well,
the chances are I don't." "Well then, why do you leave
her in the tripartite agreement?" "Well, we are in
nopes that she will see the light and come back."
That she'll get well.

H.M.Jr:

France does will help to make up one's mind. But
by Leaving her in, one assumes a definite obligation,
and it also can be condoned by the public - I mean it
can be interpreted by the public that we condone a
movement in the direction - in a direction which is
adverse to what we have been working for. I mean I
think that has to be considered very thoroughly. After

Now, who would have to sign this document here, Case
One?

Opper:

You mean the press release. Well, theoretically, it
could be issued by you and it wouldn't have to be
signed by anybody.

H.M.Jr:

Did it read "with the approval of the President"? How

Opper:

This is identical with the form of the previous statement. But you did get the approval of the President

was it done before?

to all those papers before you issued them.

235
-12-

Taylor:

But he doesn't have to have it.

...Jr:

I beg pardon?

Taylor:

You don't have to have it.

H.M.Jr:
Opper:

H.M.Jr:

Did the October 13 have the President's approval?
Our office copy has his approval.

I see. Well, I think I understand and I'm ready to
One? All right.
I wish Herman would sit in. I'm not going to go
over this thing more than once. I mean
I don'tWhere's
know
(On
phone)
what he's doing, but I only
go on Case Two. Does anybody want to talk to Case

Mr. Oliphant? He went out quite a while ago.
Will you (Opper) go out and tell Mr. Oliphant I
don't care what it is, I'm not going to have this
thing interrupted by anybody; I'm the only one that's
going to take any interruptions.
(Opper goes out)
What does "ag noc" mean?

White:

....Jr:

It's explained in the next sentence - special arrange-

ments in each case.

"If France imposes an embargo with ad noc arrangements" what does that term mean?

No regular arrangements, each shipment and sale

involving a special trade.

(Oliphant and Opper return)
H.M.Jr:

Herman, we may pass over something, and

Oliphant:

I'm sorry, but that was the final statement.

H.M.Jr:

Well, I mean a week from now I'd say
Excuse me. Ten o'clock is approaching very rapidly.

Oliphant:

236
-13H.M.Jr:

But I mean I'm the only one that can interrupt.
Now, where were we?

Taylor:

Case Two.

H.M.Jr:

"If France imposes an embargo with ad hoc arrangements, arrangements which involve the purchase and

sale of gold only on terms arranged for each transaction." I still don't - I mean this language is the
most involveti language I've ever read.

White:

Well, we can simplify it.

H.M.Jr:

(on phone) Hello. (Conversation with Cochran
follows:)

237

210
June 18, 1937.
9:38 a.m.
Cochran,

Hello.

H.M.Jr:

Good morning.

C.:

Good morning, Sir.

H.M.Jr:

Now Cochran -

C:

HUH!

Merle H.:

H.M.Jr:

- I handled the question that you put to me in

the following manner.

C:

Huh!

H.M.Jr:

Hello.

C:

Yes.

H.M.Jr:

In the first place I discussed it with your

Superior and with mine, and then I sent for

the British Ambassador and told him the whole

story.
C:

Yes.

H.M.Jr:

And asked him to advise me what were the wishes

C:

Yes.

H.M.Jr:

Now, I'11 read you over the phone what - the word

C:

Yes.

H.M.Jr:

"Please inform Mr. Morgenthau that Mr. Norman's

of the British Treasury.

I have from the British Treasury, see !

suggestion arose from the fact that it will be
necessary to give very close attention in the
immediate future to the French position on which

we are very much in the dark. #
C:

Yes.

H.M.Jr:

"From the amounts of gold which have passed

to us in the last six days it is obvious that

they are losing gold at extremely heavy rate even

for them."

238
-2-

234

Yes.

C:

H.M.Jr:

"Governor of the Bank of England, who had seen

Mr. Cochran at Basel, suggested if he could find
it convenient to visit London, his opinion on
the situation in Paris would be most valuable.
The Treasury concurred and said that they would

be most glad of opportunity of discussion of
position informally with Mr. Cochran, if it suited
his convenience. Chancellor hopes that Mr. Morgenthau sees no objection."

Hello. I can't understand that.
Hello.
C:

Hello:

H.M.Jr:

Did you get that?

C:

Yes, I - I didn't take it down - I have the
sense of it.

H.M.Jr:

Yes. Now, under those circumstances I am perfectly
willing that you do go to London on Monday.

That, that I do

C:

That you do go.

H.M.Jr:
C:

H.M.Jr:
C:

H.M.Jr:

Yes.

I want you to file me your cable from London,
whatever information you get there.
I see.

And I also - when you get through - I want you to
tell Butterworth entirely what happened.

C:

All right.

H.M.Jr:

And I am telling Butterworth that you're coming.

C:

Fine.

H.M.Jr:

I'm asking him to cooperate with you when you

C:

Fine.

H.M.Jr:
C:

arrive there.

Futhermore, on the return of Mr. Bullitt, I wish

him also informed.
I see.

239
-3H.M.Jr.

240

See?

That's all right.

C:

H.M.Jr.

Now - look - have you got your instructions I, I want them carried out just as I'm giving them
-

to you.

0:

I, I didn't get that ---

H.M.Jr:

Hello.

C:

Hello.

H.M.Jr:
C:

And I'd like you to carry out these instructions
just the way I'm giving them to you.
All right. Let me get that straight once more. You
want me to file the cable at London.

H.M.Jr:

Yes.

C:

To let Butterworth know just what I've done.

H.M.Jr:

Yes.

C:

And to let Bullitt know when he comes back.

H.M.Jr:

That's right.

C:

All right.

H.M.Jr:

Hello.

C:

Huh!

H.M.Jr;

Just a minute. And - yes, I'm asking Mr. Butterworth to offer you every cooperation on your
arrival there.

C:

Surely.

H.M.Jr:

And

80 there won't be any possible mis-

understanding.
C:

H.M.Jr:
C:

You want anything that I get; whether it's
on banks or anything else - you want it filed there.
That's right.
Because, just between us, I still have the feeling
that it's something beyond that

240

ZE

-4H.M.Jr:

What's that?

C:

I still have the feeling that they may bring up

H.M.Jr:

That's all right. I trust our Embassies.

C:

Fine. Fine.

something besides the French situation.

H.M.Jr:

I mean I'm not going to have Mr. Norman casting any

doubt on any American Embassy.

Well, I--I think that's the right thing.
H.M.Jr:

And I have complete confidence in our Embassies

and their staffs.

put up to me.

C:

H.M.Jr:
C:

Pardon me?

I say I put it up to you just as it was put up to
me.

H.M.Jr:

Yes, and I've, and I've spent a lot of time on

C:

Yes, I know you have.

this.

C:

Now, when you go over - a
I can leave here

H.M.Jr:

Pardon me?

C:

I shall leave here Sunday noon.

H.M.Jr:

All right. Now you use your judgment when you go

H.M.Jr:

noon.

over there.

and get the night train back.

C:

H.M.Jr:

Yes.

C:

That may - might make it pretty difficult for me

HM.Jr:
C:

H.M.Jr:

.

file my message from London

Now listen Cochran, please don't argue on that.
I'm sorry.

Please don't argue on that. And - a - a - as I
say, when you get over there, I'm not going to -

241
-5-

242

you just gotta use your head, that's all.
Fine.

C:

H.M.Jr:

I'm leaving that part to you.

C:

Yes.

H.M.Jr:
C:

But as to this other, I have definite reasons
why I want it done just the way I've asked you to.

All right. I'll take it up exactly that way.

H.M.Jr:

But as to what you do and what you say and what

C:

.

H.M.Jr:
C:

H.M.Jr:
C:

H.M.Jr:

you hear, I've got - I didn't hear that last.

I say, as to what you do and what you say I have
complete confidence in you.

All right, Sir.
But as to this mechanics, I have definite reasons
why I want it this way.
I'm sorry
I say, as to the mechanics, I have definite reasons
why I'd like you to handle it the way I suggested

it.

C:

H.M.Jr:
C:

I understand absolutely.

See. And if it's sufficiently important, why don't

hesitate to use the telephone from London.

All right. But, but the chances are that they'1
keep me busy there that day, and I'll file the

cablegram the last thing, and then come back 80 as
to be here Tuesday morning.

H.M.Jr:

Right.

C:

Wish you the best of luck.
here is pretty bad.

H.M.Jr:

What's that?

C:

I say, the situation here may get worse over the
week-end.

H.M.Jr:

Yes. I mean, I wouldn't let you go if I didn't
have complete confidence in you.

242

38

-6C:

H.M.Jr:

(Laughter) I know it.
And I'm, I'm not trying to tell you what to say
or what you shouldn't say.

I know, and I shall listen - that'11 be a main

C:

thing.

H.M.Jr:
C:

That's, that's right. Well, good luck.
All right, Sir. I'll be back here Tuesday
morning then.

H.M.Jr:

Anything you want to tell me about the French

C:

The, the only thing 18 that the Senate Finance

H.M.Jr:

Yes.

C:

Yesterday afternoon.

H.M.Jr:

Yes.

C:

But

situation?

Committee received this measure
yesterday evening.

to give the
full power. They want the Government to state

definitely what they intend to do.
H.M.Jr:

Yes.

to stop speculations and fraud.

C:

H.M.Jr:

Yes.

C:

Blum and Auriol are supposed to have sent word

this afternoon that they would not be satisfied
with any measure which would limit them. See.

H.M.Jr:

I see.

C:

They want the full authority as

in the

Treasury.
H.M.Jr:

Yes.

C:

So now they try for a compromise.

H.M.Jr:

Yes.

C:

And the bill probably will be debated tomorrow.

H.M.Jr:

Yes.

243

244

-7-

It is possible that the debate might be postponed

C:

until Monday.

H.M.Jr:

Yes. Now, Hello.
Yes.

C:

H.M.Jr:

The important thing that we want 18--1f it, if you
have, can give us hints as to possible course, if
any, that the French may take.

C:

Just now I can't - they

H.M.Jr:

I didn't get that.

C:

stabilizing
and getting the ten billion

H.M.Jr:

Would you mind repeating that please?

C:

I say, it seems that they have dropped to their

authority

H.M.Jr:

Yes.

C:

Their motive is to devalue to the full limit.

H.M.Jr:

Yes.

C:

To forty-three milligram.

H.M.Jr:

Yes.

C:

That's twenty-two point ninety-six to the dollar.

H.M.Jr:

Yes.

C:

And take the profit which they could

H.M.Jr:

Yes.

C:

and also

And the Senate doesn't want them to have such full
authority,
H.M.Jr:

I see.

C:

And the Senate is also against

you know

they pledged themselves not to put on exchange
control.

H.M.Jr:

Yes.

244
245

-8-

But they will

C:

H.M.Jr:

close supervision.

Yes.

C:

Perhaps put a heavy tax on holdings in France,

H.M.Jr:

I see.

Upon accounts and deposits, and so on, that will
tax the amount of foreign exchange sold.

C:

H.M.Jr:

Yes.

C:

And the Senate is afraid to let them
have 80 much power.

H.M.Jr:
C:

Well. Now Cochran

There's been trouble over the Ministry of
Finance, because I just had word five minutes

ago that Rueff was out.

H.M.Jr:

Oh, really.

C:

Yes. His Assistant was fired last week.

H.M.Jr:

Really.

had had difficulties with Auriol.

C:

H.M.Jr:
C:

H.M.Jr:
C:

H.M.Jr:
C:

H.M.Jr:
C:

Yes.

And the story today is that he's out, but I haven't
confirmed it, I just got it five minutes ago.
Well, 18 Rist no longer a member?
both quit last Saturday.
No, Rist and
Oh, my !

So they, they both got off.
Ah, that's too bad.
And it had a bad effect.

H.M.Jr:

Yes.

C:

Then the other thing I had - just a moment.

245

248

-9-

Oh, they, they told me very confidentially this

C:

morning, that the Bank Statement which comes
out a week from yesterday

H.M.Jr:

Yes.

that is, it gives the condition of, They
as ofsay,
yesterday - will show no gold loss.
they told me that it's no trick, but that they are
over a certain profit; that they are paid

C:

some profit on the fund, but I don't know whether
they've converted that into gold some place or
what. But any way, they're going to present the
Bank Statement showing any gold loss to be

H.M.Jr:
C:

H.M.Jr:

Well, who do, who are they trying to fool?
(Laughter) I don't know.

Yes. All right - Cochran, I got your letter,

and I extended that arrangement July 1st, for

twelve months.
C:

Oh, fine. Thanks a lot.

H.M.Jr:

Right.

C:

And I'll carry this through just as you have said.

H.M.Jr:

If you please.

C:

Even if they put in something that's entirely

foreign I'll put it all in the cable and not hold
out anything.

H.M.Jr:

If you please.

C:

All right, Sir.

H.M.Jr:

Thank you.

C:

All right.

H.M.Jr:

Thank you.

C:

Good-bye.

H.M.Jr:

Good-bye.

246

-14-

Oliphant: Rueff out?
Yes. We'll have what's-his-name in a minute H.M.Jr:
Butterworth will be on in a second.

I don't know, Cochran - he's a little "old-maidish"
about some of this stuff. I don't want him to go
to Great Britain and have the American Embassy

in London feel that he hasn't got enough confidence -

he's got to go over to Paris and file his cables.
mean after all that's - I don't want anybody to say
I haven't got enough confidence in our staffs. I
mean that's up to Mr. Hull. and I think the American
Ambassador to Great Britain would say, "That's
an awful slight, Morgenthau. I knew he'd say - I
knew he wouldn't want to do that. I get the damnedest he thinks of the most wonderful reasons why he shouldn't
file them in Belgium and Holland; he had to work on the
train, and his notes weren't in shape. I know why
he's doing it; he doesn't want this stuff to leak.
But on the other hand, it's kind of tough on these
I

Ambassadors.

(On phone) why am I kept waiting so long for London?
Operator:

one has to get Mr. Butterworth.

H.M. Jr:

I'm just teasing.

Operator:

I thought you were.
(Hearty laughter)

Oliphant: Good girl.
Lochhead: The fact that they have their statement fixed so as
not to show any loss next week

Viner:

That's why Rueff went out, probably.
Remember the statement I got from New York; that's

tochhead:

was they faked the statement.
On the other hand, it means they don't have to do

Taylor:

why Rist went out; his last reason, specific reason,
anything over this weekend. A lot of them were afraid

247
-15-

the statement would cause so much trouble, and

now they draw a deep breath and fight it out
in Parliament on another day.

Taylor:

That's the same kind of thing as not letting
Basle know until after they had gotten there that
Labeyrie wasn't coming up there. I mean it's the
same thing.

H.M.Jr:

Well, I'll get down to this thing in a minute. You
boys got it in nice shape. It all gets down to this
thing. Let's say that - just while we're waiting I don't know whether this is covered - let's say the
Bank of France doesn't make an honest statement. Is
that any of our

Lochhead:

*ell, we don't know whether it is or not.
You can't contest their statement.

Taylor:

Gentlemen are still gentlemen.

Viner:

And their bookkeeping is their own business.

Taylor:

How do you know?

Oliphant:

Isn't it marvelous, when you start to think of it,
that the corruption of public officials continues
abroad just like the tariff does in this country.
Well, talking on that, reading my statement this
morning, I loved the thing that they gave me, the
sporting attitude toward taxes; I think that that's
grand. You know, the Tribune couldn't find a single

Taylor:

H.M.Jr:

thing wrong with it from the news standpoint.

Oliphant:

I didn't read the Tribune. I saw the Times.

S.M.Jr:

Did you see the Times? The Tribune had not 8 single
sarcastic thing in it. And all Boak Carter could
say last night was, "The Treasury appeared on the

Hill, they said they're going to give the names,
we'll see what we will see." That's all he said.

Well, anyway, we'll go on while we're waiting for
Butterworth. "If France imposes an embargo" - we've

got. that ad hoc stuff; I think that was a kind of a
whine.

248
-16-

Oliphant: It's a bear.
H.M.Jr:

Have you passed that?

White:

No.

H.M.Jr:

"Arrangements which involve the purchase and sale

of gold only on terms arranged for each transaction."

(To Kieley) If anybody should call Mr. Oliphant, let

him know, will you, because they may need him on this
thing.

"Arrangements which involve the purchase and sale

of gold only on terms arranged for each transaction."
You mean they only do it on each single transaction?
Taylor:

No regular pattern. In other words

Oliphant:

Like Costs Rica.

H.M.Jr:

Well, there's no argument there.
Case Three. "If France declares an embargo on exports
of gold to all countries but undertakes to treat club
members as they are treated now with respect to gold

"to all countries, but
purchases and sales."
undertakes
" - I mean they exclude club members,

is that it?

White:

Yes.

H.M.Jr:

"There are two possible courses of action that might
be taken by the Secretary. (a) Do nothing and make
no statements. (b) Do nothing but issue a statement

to the effect that France's course of action is in
accord with the tripartite undertaking."

Viner:

They then put themselves in the same position we are

H.M.Jr:

That we' are in?

Viner:

We now - that's the way we operate.

Taylor:

with the exception that we do make special arrangements.

in now.

243
-17Viner:

PO we?

Taylor:

(Nods yes)

Viner:

DO we? Have we, do we?

Taylor:

I'm talking about non-club countries. we do make

white:

DO could they if the government wished to.

Taylor:

Yes, but that would be the one difference in the

Viner:

even that mightn't be there.
Case Four. "If France " Anybody got anything on

H.N.Jr:
Opper:

special arrangements.

pattern.

this?

I just wanted to say that in the event you did want
a written statement to the effect that there had

been no change, we have one here.
H.M.Jr:

A written one. I see. I question that.

Opper:

Just to be ready in case you did.

Taylor:

Depends on the consultation. If you and the British

and the French agree that a written statement which
would be uniform was desirable, you could do it that
way.

Viner:

The French might press you for such a statement.

H.M.Jr:

They might want it very badly.
Most likely would.

Viner:

Beg pardon?

H.M.Jr:

Most likely would.

Viner:

they would, yes.

H.M.Jr:

Four. "If France imposes an embargo on the export
of gold

phone) Hello. (Conversation with Butterworth
follows:)
(On

250
June 18, 1937.
10:45 a.m.
H.M.Jr:

Hello.

Operator:

Mr. Butterworth.

H.M.Jr:

Thank you.

Operator:

Go ahead.

H.M.Jr:

Hello. Hello.

Butterworth:

How-do-you-do, Sir.

H.M.Jr:

Hello, Butterworth?

B:

Butterworth speaking.

H.M.Jr:

Can you hear me?

B:

Yes, Sir.

H.M.Jr:

Butterworth, a - When Governor Norman was, met

Cochran in Basel he sounded him out about
coming over to have lunch at the Bank of England.

B:

I see.

H.M.Jr:

He subsequently telephoned him and asked him to
come next Monday

.

H.M.Jr:

Yes.
.

B:

implying that he had consulted with the

Treasury.
B:

H.M.Jr:

I beg pardon, I can't hear you.
That he had consulted with the British Treasury.

B:

Yes.

H.M.Jr:

But he wanted it surrounded with all kinds of
secrecy.

B:

H.M.Jr:

Yes.

So, I told the whole story to Sir Ronald Lindsay

and asked him to give me his advice.
B:

Yes.

251
-2H.M.Jr:

That
I wanted it - as Sir Ronald put it - from
the horse's mouth direct.

B:

Yes.

H.M.Jr:

So, he cabled for instructions, and they, they,

B:

Yes.

H.M.Jr:

"Please inform Mr. Morgenthau that Mr. Norman's

B:

H.M.Jr:

and sent me the following message.

suggestion arose from the fact that it will be
necessary to give very close attention in the
immediate future to the French position on which
we are very much in the dark. From the amounts
of gold which have passed to us in the last six
days, it is obvious that they are losing gold
I can't hear you.
"From the amounts of gold which have passed to us

in the last six days, it is obvious that they are

losing gold at extremely heavy rate even for them."
B:

Yes.

H.M.Jr:

"Governor of Bank of England, who had seen Mr.

Cochran at Basel , suggested if he could find it
convenient to visit London, his opinion on the
situation in Paris would be most valuable.
II

B:

H.M.Jr:

Yes.

"The Treasury concurred and said that they would

be most glad of opportunity of discussion of

position informally with Mr. Cochran, if it suited

his convenience.
B:

H.M.Jr:

Right.

"Chancellor hopes that Mr. Morgenthau sees no

objection.
B:

Yes

H.M.Jr:

Well, under those - under the - in view of that

B:

Right.

H.M.Jr:

To keep you informed

B:

Right.

statement I have asked Cochran to be there Monday.

-3.M.Jr:
B:

H.M.Jr:

252

To file his cable in London
Yes.

To let you see it, and I'm asked to, to, and I'm
asking you to offer him full cooperation while
he's there.

B:

Right. That's fine. I shall be delighted to do

H.M.Jr:

Now, do you - anything you want to ask me about

B:

anything I can.
that?

No, nothing - I, I presume that, that I will go
to the Treasury th him, but not to the Bank of
England.

H.M.Jr:

A - yes, I mean, if they invite you to the Bank
of England, of course go; and if they go to the
Treasury, I should think you would go.

3:

Right.

H.M.Jr:

A - a - I was very careful to tell them, Sir

B:

H.M.Jr:

Ronald, that I was, I had a representative there
who he knew, who was carrying on our, who was
representing us entirely satisfactorily.
Good. Well, that was very kind of you.
And that - I told him that.

B:

Yes. Well, that's very kind of you.

H.M.Jr:

So, if he goes to the Treasury, of course you go

along. And

B:

Yes, well

H.M.Jr:

And any information which you have please, which

B:

H.m.Jr:

would be helpful, please give it to them.
Oh, I will then - I mean, I'd be delighted to do
anything I possibly can.

Now, by the word this morning

H.M.Jr:
B:

I don't hear you.
Phillips has gone there for the weekend.

-1H.M.Jr:
B:

H.M.Jr:
B:

Pardon me?

I say, I had a word with Waley this morning.
Yes.

Phillips has gone away for the week-end.

H.M.Jr:

Yes.

B:

To the country

H.M.Jr:

Well, that, Well that isn't news, is it?

B:

I beg pardon?

H.M.Jr:
B:

253

That isn't news, is it?
(Laughter) No, that's not news. But Phillips

has talked to Mr.
and in turn, we're going to speak to him
again this afternoon, and I probably shall
have another word with Waley this afternoon
about the Swiss position.

H.M.Jr:

Yes.

B:

Ah, there's one thing more I'd like to suggest.

H.M.Jr:

Please.

B:

In that connection - is - I haven't found it out

from the British Treasury, but from informal
inquiries that I've been making with some of
my market contacts, it seems quite possible
that there may be other Central Banks, among
the smaller countries, who are likewise doing

a little selling. Now, I don't know that that's

happening
H.M.Jr:

But they're not members of the tri-partite agreement.

B:

No, they're not.

H.M.Jr:

Right.

Still it seems to me that it's an important thing
that both countries have to bear in mind.
H.M.Jr:
B:

Well, that's all right.
if, if it 18 the question of the dry
rot spreading, and the other smaller Central Banks

254
-5-

unloading some of their, at least some of their
excess gold on us.

H.M.Jr:

Yes. Well, I have no doubt that, that they'11 try
it.
There's a classic story that floats around the
City of London - I remember hearing it when I first
came here - and it has to do with Tripp's prede-

B:

cessor.

....rr.
B:

H.M.Jr:

With Tripp?

Tripp's predecessor.
At Basel.

B:

No, no, as Head of the Dutch Central Bank.

H.M.Jr:

Yes.

B:

I think his name was

H.M.Jr:

Yes.

B:

And he's alleged to have rung up
at the Bank of England, in the bad days of 1931,
and asked him about the pound.

H.M.Jr:

Yes.

3:

And he received the answer that the pound was as

strong as Gibralter. And as a result of that he
but as a result of that the
and as a result
Dutch Central Bank
took the title from Tripp.
of that
didn't

H.M.Jr:

I, I get it.

B:

Do you understand it?

....Jr:
B:

I understand the 18-- perfectly.
It's a matter of record about the French losses.

H.M.Jr:

Yes.

B:

About the French losses in 1931, too.

H.M.Jr:

Yes.

255
-6B:

with that general feeling in mind, if there should

be a sort of confederate movement, among the smaller

Central Banks, to sell some of their gold, and I'm
not sure that some of them haven't been although I
can't obtain proof about them.

H.M.Jr:
B:

I see.

It might be a movement that it would be sound for
us to have, to keep our high on

B:

That's right.
and to discuss with the British.

H.M.Jr:

Not yet.

B:

the Bank of England would know definitely
what the Austrian, Hungarian and the
country people have been doing in the way of their

H.M.Jr:

gold.
H.M.Jr:

Well now just hold the wire a minute. Just hold
the wire a minute.

Hello.
B:

Yes, Sir.

H.M.Jr:

There's no ques-

B:

I don't hear you.

H.M.Jr:

There's no question but what they' ve been doing it,

see
B:

Yes.

H.M.Jr:

But it isn't a particular sort of worry to us at

3:

Good.

H.M.Jr:

And I would rather that you did not bring it up
because I don't want them to think that we're
worrying about that particular phase at this time.
I didn't say a word to them and I didn't intend to
until I had a word with you first, Sir.

B:

H.M.Jr:

this time.

No, I wouldn't do it.

256

-7Thanks.

B:

H.M.Jr:

But, do I gather from the fact that Mr. Phillips
has left for the week-end that he is not worrying,
or does it just mean that he has left for the weekend?

B:

H.M.Jr:
B:

(Laughter) I think he's just left for the week-end.
Yes.

They said at the British Treasury this morning they showed me

H.M.Jr:

Pardon me?

B:

They showed me

H.M.Jr:

Yes.

B:

The British Treasury's

H.M.Jr:

I see.

B:

their man in Paris.

latest report. He's

in Paris, and

and quite frankly he didn't know what was going
to happen in the Senate, but that he thought that

H.M.Jr:

Well, the latest gossip from Paris is that Rueff
is out.

B:

Yes.

H.M.Jr:

And you know that Rist is out.

B:

H.M.Jr:

Yes, I'd heard that.
The men in the
Yes. Now just a minute.
room here say that I can point out to you the

reason that we are concerned about what the Swiss
have been doing is because they are a Club member.

B:

Quite.

H.M.Jr:

And that is quite different than some, what some
other Central Bank is doing to another Club member.

B:

I quite understand you.

257
-8H.M.Jr:

You see?

B:

Yes, I understand.

H.M.Jr:

And the thing that we will fear is - I mean that

Holland who, and Belgium who have been behaving

extremely well

B:

H.M.Jr:

Quite.

might say, "Well, why should we continue

3:

this way if Switzerland can get away with it"?
(Laughter). Yes, I, I

H.M.Jr:

You see? And

-

-

anything else you want to

ask?

H.M.Jr:

No, that's all, Sir.
Well, well that's that.

B:

Thank you very much.

H.M.Jr:

Good luck.

B:

258
-18Lochhead:

H.M.Jr:

Here's a short cable from Cochran; it's not necessary
to read, except that he emphasizes that they will hold
to the tripartite agreement, says they have no intention of getting away from that.
I'm glad to see any balance back to over a billion
dollars. Didn't look so good down there.
All right, gentlemen, we'll now go ahead.
Four. "If France imposes an embargo on the export of
gold with a new pattern of the sale of gold, that new
pattern may take one of many forms. Irrespective of
the form it can take, there are two main alternative
courses which the Secretary can pursue:

"(a) He can decide that new terms of sale of gold
are such as are in the interests of the public.
Such decision would be followed by the necessity
for no action unless the Secretary wished to make
a public statement as in Three above.

"(b) If the Secretary were to decide that the new
terms were not in the public interest, he could
pursue one of two courses:

"(1) He could adopt the procedure identical with
that outlined under One.
"(2) He could introduce an intermediary step - namely,
to suggest to France what might be done to modify
the terms of sale so as to make them satisfactory to
the United States."
what could be a new pattern?
Taylor:

Settlement once a week, or once every month, or
once every two years.

Oliphant:

Or once over the weekend.

H.M.Jr:

Five. "If France abolishes her stabilization fund,
but permits the Bank of France to sell gold, (a) The

Secretary of the Treasury would have to request that
the French Government guarantee the gold operations of

the Bank of France with us; (b) A new list of countries
complying with conditions of the November
24th get
orderthat.
I don't
would be issued to include France."

259
-19Viner:
Opper:

Oliphant:

That's of the Belgian type. That would put France
in the Belgian type; we would put her on that list.
The form that this takes
You remember we discussed this, that that would leave Great Britain
sticking out like a sore thumb. So the form we
discussed is a restatement of the five countries
coming in under the two statements together, one
or the other, without separating them.
One or the other. Otherwise you'd have Britain
alone
under
the first and the other four countries
under the
second.

Taylor:

Window dressing.

H.M.Jr:

I see.

"Actions taken by the French Government involving
exchange control - some restriction on the purchase
and sale of foreign exchange.

"Case Six. The imposition of a limitation on the
right of United States to acquire francs.
"Inssmuch as the Secretary stated that all efforts

should be made to keep France in the club, and since

it is agreed that the wording of the tripartite state-

ment permits him to do so, no consideration is being
given herein to the question of whether he might also

be justified in taking the position that France had
departed from the tripartite declaration by adopting
exchange control.

"Any other form of exchange control. Action as in

Case Six.

"Increase
Six.

in import quotas. Action same as in Case

"Exchange Depreciation. Should France revalue at a

White:

rate lower than that agreed upon last fall or if it
permits franc exchange to depreciate below that
limit" - well then, she is out.
Well, it was at that point that the discussion did

not terminate, and I wasn't sure there was agreement.

260
-20H.M.Jr:
White:

Taylor:

Oliphant:
Taylor:

H.M.Jr:

Well, that's the whole purpose - I mean that's
absolutely the fundamental thing. What?
I would agree; but there is some disagreement.
They're out so far as October 13.
Unless they bring themselves back in again.
However, if you and the British and the French
decided that at this new level they would continue

to live up to the purposes, etc., of the tripartite
agreement, why, you could say that that was satisfactory to you, if you wanted to.
Now listen, Wayne, either they live up to this thing

or they don't. Now, if you begin to let people become

"demi-mondaine"-is that the word?
Viner:
H.V.Jr:

Fine word.

(To reporter) Ask Dr. Viner for the spelling; he

knows it.

Now, what I started to say, the question was, when
would France lose her amateur standing and become
a professional?

Oliphant:

well, that's a difficult

H.M.Jr:

What?

Oliphant:

That's a difficult question of judgment, based on
now hopeful you wanted to be, and how cooperative
you wanted to be, in letting her salvage anything she
possibly could of her present situation, because in
view of the weakness

Viner:

Well, it would seem that under the original tripartite
agreement, if you think you can still keep it alive
in any real sense, you might say "Anything goes," and
I say you're helping France now and you're just giving
up anything that you gained in signing the original
tripartite agreement. There are those two points of
view, you see.

261
-21-

Oliphant:

The whole tripartite agreement, if I may observe,
was motivated by the circumstances of France at that

time, which was tottering, and to save that political

situation in Western Europe.
Hass:

Oliphant:
Hass:

I remember at that time, Mr. Secretary - you recall
And the situation now needs tolerance and patience
even more than at that time.
You recall

Taylor:

What you really have is recurrence of the conditions
which were present at the time that you engaged in
the original one, and France did drop X amount and
you took her back in.

H.M.Jr:

But with the big difference that she's had the benefit
of e devaluation and spent it.

Taylor:

Yes.

H.M.Jr:

All right.

d.

Now she's right back where she WES at that time.

Taylor:

Well, here's the situation. You want to keep this

Taylor:

Viner:

No, she's worse off.
from being as disastrous as possible, and you're
right back where you were. You can take her back
in, let her do what she thinks necessary to save

herself, just as you did before, if you want to.
I think there is something very important involved
here and that the question is not one of cooperation
with France. You can cooperate with her very generously without admitting that she had stayed within
the original tripartite agreement, by making a new
one but saying the old one was a real thing while it
lasted; or you may say you'll cooperate with her by
saying, "On yes, under the circumstances France is
living up to it; and even if they aren't within the
agreement - that doesn't mean that it wasn't a step
forward.

But remember now that that tripartite agreement wasn't
merely aid to France. We didn't merely say to the

262

-22-

world, "We have helped France." What we said to
the world was, "We have made a new monetary set-up."
And I think to me that was a historical moment, and

it would be without point to gut it now; and I think
we can remain just as generous to France without gutting
that tripartite agreement, no matter what state France

falls in.

Just a minute - I'll give you a chance in a minute,
George.

Now, do I understand from that statement that you can

go so far as to drop France out but still keep the

spirit of it?

Viner:

I would say that in the light of the new French cir-

cumstances we have to make a new agreement, and that
is the new agreement.

H.M.Jr:

"ith France.

Viner:

With France. But not to say that the new arrangement

is quite under the terms of the old, and that no

adjustments are necessary.
Oliphent:

If you are willing to negotiate a new one when the
other partner of the club says you can - the difference
between that and saying you have breached the original
one is a difference of words. The difference between
those two things, as I see it, is - considered briefly,
is a difference of form and not substance.

H.M.Jr:

Now, George?

Hars:

I would say - you recall when we discussed it, and
also the press conference following, the Secretary
took pains, great pains, to emphasize that the essence
of the agreement was - the first thing that they kept
in mind always was the internal economy of the different
countries; you find that emphasized in the agreement;

secondly was the rigidity of exchange. So I'd say if

France got into difficult that they'd still be within

the scope of the original agreement, and making adjustments which were contemplated in the original tripartite agreement, and that were kept open not only for
their benefit but for our benefit. I remember at that
time we didn't want to emphasize too strongly that we
were going to a rigid exchange basis; and the British

261

263
-23-

came back and didn't use "stability" of exchange;
they used "equilibrium" and they take that broader
term to include internal as well as external
relations.
Yes, but George, here's the thing. When these things
happen, you can apply them to your own personal
experiences. I've been doing business with the
commission man - awfully nice fellow personally,
very honest. He's lost a lot of money and one of
the banks is closed. I've been hoping that held
be able to get back. He hasn't got enough working
capital. He owes the city back taxes. He owes his
new bank. when I did business with nim, he'd be
months behind in his payments. Well, I had to make
the decision, would I do business with him today or

would I not. I did business with him for ten years perfectly nice fellow and always kept his word. But

had ne so exhausted his capital and gotten in such bad
shape that I couldn't do business?
Now, when the French - when we talked with them last

September, they still had that cushion, that extra
cushion of devaluation. They also had the question
of foreign markets, and the question of their status
with their own people; the French people hadn't lost
any money; would they regain sufficient confidence
in the Government to invest in Government securities?
Look what happened in Belgium
"ould they get
after devaluation, and the way they got new foreign
markets, new trade. They went ahead, they kept their
price levels in relation to the new monetary picture,
and they got the advantage and they went ahead. Well
now, France had Belgium's example. And Holland made
its ad justment; they've gone ahead. And the French
haven't.

Now, I think we're in a sort of position here of
international finance that we've got to just make
up our minds that if we continue to carry France let's say sne devalues lower than the present announced limit; is she an asset that is worth preserving to the spirit of the tripartite agreement,
as against this - let's call it the Schacht system?
I mean can we - are we strong enough, England and
ourselves, to carry it?

264
-24Oliphant:

A bulwark against Fascism is worth preserving,

and
that's the thing lying back of the tripartite
agreement.

No, I don't agree with you on that, Herman. No,
this is a matter now - I mean I think it's the
other way. The tripartite agreement saved France
for the time being and did save her from Fascism,
but in weighing this thing - I mean I think we've
got to think in terms of finance; can we carry it?
I mean she might not necessarily - she might go
Communist; she might go Communist - but I mean I
think we've all got to make up our minds. I don't

think it makes much difference what France would be

doing, and we would go on doing business; we'd still
be doing business. I mean I'm not going to give the
answer today. I don't know what's going to happen.
But if she begins to make false statements, and so
forth and so on - I mean always depending on what

sne does. I think this is a very important question
and it gets down to a question of intuition and hunch
and that sort of thing. But don't misunderstand me;
as I said earlier, we will do everything to bend
ourselves to do it, and I have very much in my mind
the fact that this is a liberal form of government
and democracy, and one of the few that is left.
But there's a lot of awful nice people in business,
and you may be very fond of them, but you just can't

save them because they're such poor business people.
You know that.
Oliphant:
Jr:

That's right.
See what I'mean? There isn't any - I mean I might

have them as friends and say, "Get out of business

and I'll put you on allowance," but I refuse to
finance their business.

Taylor:

Of course, we haven't been financing their business;

H.M.Jr:

I know, my simile might not be any good.

Oliphant:

Well, it makes the point. I have the feeling - I can't
get it out of my mind - that as we sit here there are

we've been on a casn basis.

two Frances, and

265
-25-

Just wait one second.

Taylor:
H.M.Jr:

(To Kieley) Mr. Taylor will come to the phone in
five minutes. Do you (Taylor) mind?
Not a bit.

I'll tell you what I want to ask you. I WES considering calling - do you people think that we ought
to tell the British Treasury that we're going over
various methods and plans, etc., in case the French
- about the French?

Oliphant:

Well, that's what the British Treasury, in effect,
told you there, didn't they, in that document?

H.M.Jr:

Yes

Oliphant:

That they were going over the situation and wanted to
talk to Cochran.

Viner:

Isn't it obvious that what you're doing - telling
them is you're doing your job; they didn't merely
tell us they were working on this, they told us

H.M.Jr:

they wanted to talk to one of our representatives.
Take the call and tell them (British Embassy) we are
sending Cochran, if that's what he's asking. And
would you mind calling up Herbert Feis and telling
nim that we've sent formal instructions to Cochran

to go to London. And tell Sir Ronald I don't - I

won't acknowledge receipt of his letter unless he

wants me to; does he want a formal acknowledgment -

I don't take it that he requires it - but does ne

want a formal acknowledgment? What?
Taylor:

Un-huh. (Goes out)

H.M.Jr:

Please.

Oliphant:

As I started to say, as I sit here and talk about
this thing, I keep reminding - we all do - that
there are two Frances. First, there are these very
mortal men that at the moment have power there, and
we have watched them do all sorts of foolish things
and all sorts of silly things and stupid things, and

266
-26-

we see how much better other households are managed,

like Belgium and Switzerland, etc., etc. But there
is that other France, and that is the France of those
millions of people constituting the French nation,

which do constitute a tremendous bulwark against the
spread either of Communism or Fascism. And, regardless of the limitations, the defects, and so forth,
of the particular men that happen to be in the saddle

Viner:

over there at the time, it seems to me that back of
that is that other thing. And of course, if France
blows up, Britain and ourselves will be doing business
at the same old stand, but it will be a different
world if there are only two, as opposed to three.
Mr. Secretary, I wouldn't want to be understood that
I would wish us to take an ungenerous attitude toward
France. I'd be willing to go much farther than this
country is at all willing to dream of going in helping
her, like a big loan, etc. But whether they violate
the tripartite agreement or not - I'd separate those
two things: a generous attitude toward France, and the
tripartite agreement. There are other countries in
the agreement too, and it looks toward a purpose which
hasn't peculiarly got France in mind. So that I'd say
the two are separate questions, to me. We can be generous to them and at the same time not get ourselves
in the position of saying that something quite out of
the spirit of the original tripartite agreement was
in that spirit. I'd like to see both, a keeping within
the spirit and the occasion of the - the historical
occasion of the original tripartite agreement, and a
generous attitude toward a democratic France; the only

qualification I'd put is that it should still stay
democratic.

Opper:

I think there is a difference, just as Jake says,
between the two questions, but isn't possibly the
difference the other way around? That is, you've
been discussing, Mr. Secretary, the question of what is
the more natural thing to do with respect to any
specific action by France; and obviously, that is a
decision which you will have to make when you know
what that action is. But there is a more fundamental
question which I take it was the original question that
was discussed here, and that is, does it necessarily
follow that because France, after consultation with
Great Britain and the United States, and as E result

267
-27-

of the internal situation and in order to maintain
France as one of the subscribing countries, and with
these same policies and documents, drops below the
present range and into a new range which is agreed

on among the countries - does it necessarily follow
from that that France has violated the September 25
declaration? And of course, I say the September 25
in distinction from the October 13, because of course
the October 13 would be out.
Just 8 minute. (On phone) Mr. Knoke, please, New

York.
Opper:

Bear in mind that, although it is true we knew the
range at the time the September 25 declaration was

made - we knew the range - we would have been prepared

to accept a worse range from the S tandpoint of the
relationship of the currencies; and the fact that we
asked to find out the range before we would sign the
agreement merely meant that the only way we could find
out whether the range was satisfactory to us was to
know what it was. In other words, you'd want to know
it WAS a right range.

Lochhead:

Well now, I feel - I think I'd like to come to some
other stuff. I think we've gone as far as we can,
and you men have done what I have asked you to do,
and I'd like to stop here, because I want to stop at
11 o'clock and there's a couple other things to do.
I think we can be pretty sure they won't ask to cut
below the range at this time.

...Jr:

If you've done what I have asked

White:

Just this one word, that there is a more important point
that we have - we should take up with respect to France,
and that is what we ought to do in case France does in case it appears that France may have to slip below

that line. That's a very different problem from

what

That's among those things.
White:

M.Jr:

Yes, but we've been considering the question of
technical arrangements and legalities, and I want to
introduce the broader question of policy.
That's what we've been talking about

268
-28-

Oliphent:
H.M.Jr:
White:

H.M.Jr:
white:

what is the policy but
for the last hour and three quarters.
I don't think we've been talking about the question
as to what we should do actually in the case we are
confronted with a situation in which France finds it
difficult and likely to be impossible to hold the
exchange rate at that level and it begins to slip.
Now, there are certain things we can
What have we been talking about here for the last
nour and three quarters?

We have been merely stating what action we would take

with respect to the tripartite undertaking and with
respect to orders and regulations and S tatements.
I think there is a broader field of action that is
incumbent upon us to consider.

H.M.Jr:

what is it?

White:

Well, I think it would

H.M.Jr:

(On phone) Hello. (Conversation with Knoke follows:)

263

June 18, 1937.
11:03 a.m.
H.M.Jr:

Hello.

Operator:

Mr. Knoke.

H.M.Jr:

Hello.

Knoke:

Good morning, Mr. Secretary.

H.M.Jr:

How are you, Knoke?

K:

Fine, thank you.

H.M.Jr:

Knoke.

K:

Yes.

Are you talking to Cariguel to-day?
No, I haven't tried to, Mr. Secretary, because
everything is 80 nice and quiet.

H.M.Jr:
K:

H.M.Jr:

Where?

K:

Here and in London.

H.M.Jr:

Yes. Well, I wondered if you could get from

him some kind of an assurance or hint whether anything'11 happen before Monday.

K:

Well, all, all right, I'll call him.

H.M.Jr:

Do you mind?

K:

No, not a bit.
I talked to Cochran earlier and Rueff 18 out.

H.M.Jr:

He's out now.

K:

H.M.Jr:

Yes. And see if you can get something out of
Cariguel, he always talks very frankly.

K:

Whether anything 18 likely to happen before Monday?

H.M.Jr:

If you please.

K:

Yes. All right, Sir.

H.M.Jr:

Thank you.
(Break

-

Conversation with Secretary Hull)

270
-29-

(Taylor returns)
Jr:

Well, Wayne?

Taylor:

He wanted to know if the message that you had re-

H.T.:

Well, I sent L copy of Lindsay's letter to him.

Taylor:

ceived was satisfactory. I said that it was completely and that Cochran would be instructed to go.
I told Feis the same thing. de said that the
Secretary had already asked him the question and
that he had called in for me.

any don't - should I call Hull? I think I'd better.
Yes. And instructions will be prepared, that is to
say, if agreeable to the Ambassador - I mean our
Ambassador; that there won't be any question about
the t.

....Jr:
+sylor:

How do you mean?

Well, that's the form that they use in their

instructions - "if agreeable to the Ambassador."

.....rr.

The American Ambassador?

Loehhead:

The Ambassador to Great Britain, it would be.

Viner:

Bingham.

REES:

If he's not there, the Counselor acts.

Taylor:

I told him about the instructions that you had given
to Butterworth and also to Cochran - and to inform

....Jr.

Bullitt.
All right? Feis all right on that?

Taylor:

Yes. I just gave a complete record as you gave it.

...Jr:

Right.

Taylor:

Sir Ronald was very pleased that you were sending

...Jr:

Well, Harry, have you got the answer to what you think

Cochran.

we should do if they d evalue?

(On phone) Hello. (Conversation with Hull follows:)

271

June 18, 1937.
11:03 a.m.
Operator:
H.M.Jr:

Hello.

Operator:

Secretary Hull coming on.
( (Waiting)

H.M.Jr:

Hello
Hello

H.M.Jr:

Sorry, she said she had him right there.
Well, you can call me.

Operator:

All right.

Hull:

Hello

Operator:

Just a moment please.

H.M.Jr:

Hello.

Hull:

Hello Henry.

H.M.Jr:

Good morning.

H:

What's going on?

H.M.Jr:

Well, I sent you a copy of my letter from Sir

Operator:

Ronald.

H:

Yes.

H.M.Jr:

And - which I thought was very nice.

H:

Yes.

H.M.Jr:

And - I think it works out beautifully, don't
you?

H:

H.M.Jr:

Yes, I just - I was afraid that fellow would get

peeved if we went the other way, but if we get by
it'11 be good and just the same.
Well, it looks as though we got by.

-2-

272

Yes.

H:

H.M.Jr:

And I had Taylor call Feis to confirm that

H:

Now if - yes - now if our man -

H.M.Jr:

Cochran should go to London.

Yes

H:

He's got a marvelous chance there to do some real

H.M.Jr:

Yes

cross examining

H:

of the Bank of England., and pick up incidentally, some things that we might not get out

of the Government.
H.M.Jr:
H:

H.M.Jr:
H:

Yes.

So I hope that, I hope that he will prove to be a
real cross examiner, without intent
to do so, but in the interest of the general
solution of things.
Yes. Well
He might get you some real information in there
about the attitude, you understand, of the Bank
of England which is, which 18 a factor in the
situation.

H.M.Jr:

Oh, yes. Well, I just wanted to let you know
direct.

H:

Yes.

H.M.Jr:

And see whether you were satisfied.

H:

Oh, yes, I - that was the only thing. I just

H.M.Jr:

Fine.

didn't want to throw away his influence.

All right
H.M.Jr:

Thank you.

273
-30Viner:

What he has just asked you to do isto instruct

Cochran to find out from Norman why he is opposing

or is cool about the possibility of a trade
agreement.

..Jr:

And I should do that? I knew what he was doing, and
I wouldn't ask that any more than I would let them

use Butterworth to sit in on a debt negotiation with

what was it, Czechoslovakis?
Taylor:

Hungary.

Hungary. I mean we've got something here which is
good ,for the government, and

Viner:

....Jr:

I wasn't arguing; I was just
I know, I know, I know. Do you (Riefler) think I'm

wrong?

Riefler:

No.

H.M.Jr:

I mean would you weight Cochran down with

Riefler:

No, on no.

Viner:

I certainly wouldn't have done it on your own
initiative; if ne had asked it, you couldn't have
said "No" or it would have been difficult to have

said "No."

...Jr:

(Smiling) Jake, I didn't know what he meant; I
didn't know what he was getting at.

Viner:

I didn't either.

White:

I merely wanted to call your attention to the fact
that we have not yet directed our attention to positive

action to meet & situation which might have very
serious repercussions all the way around; and clearly
I wouldn't want to raise the issues now, because I
would want an opportunity to defend them, because I

know they would be received with skepticism and

coolness. But I think our attention ought to be

directed in those channels.

274

-31-

...Jr:

But you haven't said anything yet.

hite:

All I said was that
I don't want you to argue. I want you to tell me

H.M.Jr:

what you think, and nobody else will argue with you.
What do you think? I mean give me E cleancut statement; you've raised it. What would you advise me to
do this morning if in ten minutes the thing came over
that France has gone - devalued below the agreement?

hite:

well, by that time it would be impossible to follow

H.M.Jr:

Well, are you going to make E long statement?

White:

Huh?

H.M.Jr:

Are you going to make a long statement?

white:

Of my position at present?

H.M.Jr:

Yes.

White:

It will take several minutes.

H.M.

well, I'd rather not.
Well, that's why I

White:

H.M.Jr:

white:
H.M.Jm:

nite:
R.M.Jr:
White:

H.M.Jr:

out what I am going to say.

I mean if it's going to take ten minutes, and then
That's right, and therefore I am merely indicating
that there is more that is yet to be
Have you stated it to these people?
No.

will you state it afterwards to them?
I intended to.
will you? The thing that I want to get on
Please, is this. I feel - you know, after all, the Brazilian
Finance Minister arrives tonight - Costs?

275
-32sylor:

Costs Souza.

.Jr:

Costa Souza.

Now, I don't suppose any of you have thought - have
you got anything for me - how are we going to sell

Brazil X million dollars worth of gold on the install-

inite:

ment plan, and how are they going to make use of it,
etc.? Anybody got anything for me?
lie worked on it.

...Jr:

Have you submitted it to these people?

White:

Well, Taylor's had a memorandum on it; have to go

over it again.

...Jr:

Tell....

White:

It's up to Mayne.

Tyylor:

We're not ready.

...Jr:

Viner:

All right. Well, Viner and Riefler are going home
tonight, be back Tuesday morning. If you could give
them each E statement on this, they might be willing
to take it along with them. I think before they
leave tonight they ought to have something so they
can be thinking about it.
If possible.

...Jr:

What?

Viner:

If it is feasible, humanly possible.

ante:

We can tell them about it.

H...Jr:

Well, anyway, I want to talk about the Brazilian
thing. And I want to plan on the Chinese; why
shouldn't we buy their 50 million ounces of silver
that they've got here? Can I just say "No"? Have
we any suggestions to make to them about gold?

Lochhead:

Jr:

13 million ounces first, before the
Pardon me?

276

-33-

They'11 probably bring up the question of the
13 ounces which they're holding in commercial
banks. That's the excess they rushed out of

Lochhead:

Shanghai at the time the Japanese were stepping

pretty strong.

And what about the 50 million?

.M.Jr:
Lochhead:

I say they might approach you first on the 13
million.

Oliphant:

Where's the 50 million?

It's up at Selby, where they're smelting silver -

Lochhead:

San Francisco.

e've got Dr. Kung coming, we have Souza Costa.

H.M.Jr:

Well, we don't do anything until he shows up. After
all, we're entitled to our weekend.
And we still don't know what he's going to talk
about. We think we do.

Taylor:
H.M.Jr:

I'm all mixed up.

Taylor:

You also have Mr. Casey.

H.M.Jr:

what's he?

Taylor:

He's the Finance Minister of Australia?

R.M.Jr:

Where does he come in?
,

Taylor:

Be in tomorrow.

H.M.Jr:

That's news to me. I think you know - tell you

something terribly funny that happened. . I suppose

some of you got invited to the Chinese - the 30th,

is it?

Lochhead:

The 28th.

H.M.Jr:

(To Kieley) "hen are the Chinese giving their

Kieley:

meeting - luncheon?
The 28th.

277
-34H.M.Jr:

And I'm giving mine the 29th?

Kieley:

A dinner, yes.

H.M.Jr:

And when is the Roosevelt wedding, the 30th?

Lochhead:

The 30th.

H.M.Jr:

Just make sure that I don't make any engagement
on the 30th.

Now, anybody take a shot at me - anything they got.

Riefler, you're so quiet, I'm worried.
Riefler:

Don't be worried.

H.M.Jr:

Now, I had lunch last evening - supper - with our
two consultants. And incidentally, do you (Viner)
want me to put in the paper that your position that you're consultant? They keep calling you
something different.

Viner:

I don't care. I'd just as soon you didn't say
anything if you could avoid it. Let me down
easy if you can't avoid it.

H.M.Jr:

They looked into my mouth, felt my pulse, felt

my blood pressure, and it seems from what I talked

that the next move their way is - and I'll leave it
to you - is to try to get our staff and the Federal

Reserve staff together with Mr. Eccles somewhere
else.

Taylor:

Well, that's -.I check on that.

H.M.Jr:

Then there's a question of method, as to how to do
that. I haven't changed much f rom the sort of a
general plan that we discussed last evening when
we broke up, that if we can have a statement of
what the Treasury position is, why, I can talk to
him and say, "Now, here is the Treasury position,

which differs quite materially on certain points
from yours. For the sake of convenience, I have

written that down," and not have the two S taffs
present when that goes on; and then try to arrange

that the two staffs will meet on the basis of what
the Treasury position is, with him out.

278
-35Viner:

I think that's doing what he's done, you see.
It's facing the other side with an ultimatum or
declaration, whereas we want to sort of render
obsolete that speech of Eccles the other morning,
sort of get it out of the picture. If we introduce another one which isn't like his, then the
staffs are obliged to consider - they consider
ours as something we can't change. We want to
get under Eccles.

H.M.Jr:

Supposing I call up Marriner, or you (Taylor)
call him up, and say, "You know, Marriner, we've
got some things over here we're working on, and
we'd like to invite certain members of your staff

over. Is it agreeable?" That's all. Because he

said when he left here, could he call on any people
from us. Well, we've got certain things, and we send

for some of his people. He'll say "Yes." Then tell

him who we want.
Taylor:

In view of that show yesterday

H.M.Jr:

well, listen, Wayne, take these boys back and - but

I think it's very important that these people get

together with Goldenweiser and Gardner and what's-

his-name.

Riefler:

Currie.

H.K. Jr:

Currie.

Viner:

I think the less important we can make that session

of yesterday morning, the better it is for the

Treasury and the Government.
H.M.Jr:

I can call up in my innocence; I can do this thing
in a very casual way. Let me handle it, will you?
DO you mind?

Taylor:
Viner:
H.M.Jr:

Not a bit.
I wouldn't lose the advantage that we haven't had
any position so far.
(On phone) Hello (Conversation with Knoke follows:)

279
-2Operator:
Knoke:

Mr. Knoke.

I just had Cariguel. He sounded kinda worn out

and gloomy.
H.M.Jr:

Yes.

K:

I asked whether I could sleep - to, to safely

sleep over the week-end; he said he thought so.
He had no news of anything that could happen,

that might happen politically, and as far as the
foreign exchange market was concerned, and the
franc rate, he had no hint or no suggestion that
anything was planned.
H.M.Jr:

Well, that's that.

All right.
Beacon
211. Well,
K:

Beacon 211.

H.M.Jr:

Yes.

All

K:

H.M.Jr:

I'll hope tonight to be at

What, what is - what is your home telephone number?

K:

New Rochelle 1895.

H.M.Jr:

New Rochelle

K:

1895.

H.M.Jr:

18

K:

95

H.M.Jr:

Eighteen - ninety-five.
That's right.

K:

H.M.Jr:
K:

H.M.Jr:
K:

H.M.Jr:
K:

All
it? right - that was before the Cuban War, wasn't
(Laughter) That was what?

Before the Spanish - the year before Bryan.

That's right. (Laughter)
All right.
Oh, no - yes, yes the year before Bryan -

that's right.

-3H.M.Jr:
K:

All right. 195
I asked about Rueff. He said he understood 80
but nothing, there was no confirmation.

H.M.Jr:

All right.

K:

Nor was there an official communique on Rist

H.M.Jr:

Yes. All right.

and

K:

That's it.

H.M.Jr:

Thank you very much.

K:

bod-bye.

280

281
-36Taylor:

H.M.Jr:

Taylor:

I don't think so, because I tried every way
possible yesterday in that two-hour session to
get the two staffs together, and he took the
position that that would serve no useful purpose.
Do you mind letting me try it?
I'd like to talk to our crowd before you do that,
because it's - I mean after trying to do that for
two hours, with all the cards on the table, I don't
think that it is particularly a wise thing for you
to go back of the returns there, even if you
weren't there.

Riefler:

would 8 gossip session between me and Goldenweiser

Taylor:

Not in any way. We've got to act pretty soon on
this foreign balances business; I don't think you've
got an unlimited amount of time.

Viner:

Bryan says he wants to see me this afternoon and

H.M.J.:

If Wayne feels strongly, I don't want to butt in.
I think that any one of the fellows can do any of
the talking that you want to, but it can't be
I mean if I said I thought that session went very

Taylor:

Riefler:

be out of order?

I'm going to see him for two minutes at 2:45.

badly

H.M.Jr:

You mean just as you have lunch with him?

Riefler:

Yes. That I thought it went very badly, and what

H.M.Jr:

That's all right. I think I could call him up and

White:

Oliphant:

Was wrong with it.

I'd say, "You know, we're working on some of this

stuff; we'd like to have some of you people sit in.'
Providing he is
Wayne, may I talk to you just a minute about it?
would mind if I talked to you just a minute about
it? and you forgive me if I'm a little petty. It strikes
an elementary rule in diplomatic negotiations,

me and as that's what this is, not to allow the thing to come

282

-37-

to blows. Now, as Jake points out, they have
stated their position; we have so for not stated

our position. If you once get Eccles in the room
and state your position, why, then you're going
to have to use a club, because then you have
blocked all

H.M.Jr:

Oliphant:
Taylor:

Viner:
Taylor:

H.M.Jr:

Which means what? - that if I call
I meanget the technical staff together and not
strike - take your position at
We tried to do that for two hours yesterday.
But Eccles was there; that's the trouble.
I think when Jake - anybody else can talk without
having it clear through, let's say, me to Eccles,
or the Secretary to Eccles.

I think you're wrong. I think I could call him up -

I mean good humor, etc., and I'd say, "Now, I've got

my people over

"

Viner:

Say we want to go over the technical problems.

H.M.Jr:

No, I'd say just - I've done this before - I'd say,
"Marriner, before calling up Goldenweiser and some
of his people, I'd like to know whether it's agreeable to you to have some of them come over. We're
in the midst of a discussion and I'd like to have
Goldenweiser and some of his crowd sit in." And

Viner:

he wouldn't say anything. Listen, let me try it.
Honestly, I think it's much better to have Win or
Jake Viner go through this business that they suggest
and not have you introduced into it at all at that
particular time.
I tend also to agree that if we are trying to keep

Taylor:

Keep out the men whose positions are important.

R.M.Jr:

O.K., you (Riefler) have lunch with Goldenweiser.

Taylor:

him out, we ought at the same time

If we differ, who cares.

283
-38-

Riefler: All right.

Riefler:

But then, that doesn't get you anywhere. You're
not going to have any meeting this afternoon, and
these fellows - I think you're wrong, but if you
feel strongly, I don't
well, would I

H.M.Jr:

Listen, would you fellows go back in Wayne's room

H.M.Jr:

and talk it over, and whatever the crowd agrees is
agreeable with me.

284
The possible actions which the French Government may take are listed
below. The measures which the Secretary can take in response to such action
are indicated in each instance.
Drafts of the verious orders and announcements, that might have to be
used in each instance have been prepared by the legal staff. The content
of these preliminary drafts have been agreed upon in conference, but there
has not yet been time to agree on the exact wording.

It WS.S generally agreed that in each case of action or inaction (including
contemplated statements) we would consult with the British Treasury and if
possible with the French Treasury before taking action pertaining to the tripartite
undertaking, and the sale and purchase of gold. It was also agreed that other
"club" members would be advised of such action as we might wigh to take.
A

Possible actions involving purchase and sale of gold for export.

I. FRANCE CEASES TO SELL ANY GOLD UNDER ANY CIRCUNSTANCES AND WHEREVER HELD.

Action to be taken by Secretary.
(a) Statement issued dropping France from the October 13th

list, i.e., the new list would not contain France.

(b) Federal Reserve Bank of New York to be notified of such
action and instructed to notify the Bank of France,

(c) Such action is not a repudiation of the tripertite undertaking.
II. IF FRANCE IMPOSES AN EMBARGO WITH AD HOC arrangements I.E., ARRANGEMENTS
WHICH INVOLVE THE PURCHASE AND SALE OF GOLD ONLY OIL TERMS ARRANGED FOR EACH
TRANSACTION.

Action to be taken by the Secretary same as in Case I above.
III.

IF FRANCE DECLARES AN EMBARGO ON EXPORTS OF GOLD TO ALL COUNTRIES BUT UNDERTAKES TO TREAT "CLUB MEMBERS" AS THEY ARE TREATED NOV WITH RESPECT TO GOLD
PURCHASES AND SALES.

There are two possible courses of action that might be taken by the
Secretary.

(a) Do nothing and make no statements.
or

--

285

(b) Do nothing but issue a statement to the effect that
France's course of action is in accord with the
tripartite undertaking.
The statement could be either

(1') An oral one to the press, or
(2') A written one.
IV. IF FRANCE IMPOSES AN EMBARGO ON THE EXPORT OF GOLD WITH A NEW PATTERN OF
THE SALE OF GOLD; THAT NEW PATTERN MAY TAKE ONE OF MANY FORMS:

Irrespective of the form it can take, there are two main alternative

courses which the Secretary can pursue:

(a) He can decide that new terms of sale of gold are such as are

in the interests of the public. Such decision would be fol-

lowed by the necessity for no action unless the Secretary
wished to make a public statement as in III above.
(b) If the Secretary were to decide that the new terms were not
in the public interest, he could pursue one of two courses:

(1) He could adopt the procedure identical with that outlined under I.
(2) He could introduce an intermediary step - namely, to
suggest to France what might be done to modify the

terms of sale so as to make them satisfactory to the

United States.

V. IF FRANCE ABOLISHES HER STABILIZATION FUND - BUT PERMITS THE BANK OF FRANCE
TO SELL GOLD.

(a) The Secretary of Treasury would have to request that the French
Government guarantee the gold operations of the Bank of France
with us.

(b) A new list of countries complying with conditions of the
November 24th order would be issued to include France.

286

3-

B.

Actions taken by the French Government involv-

ing exchange control - i.e., some restriction

on the purchase and sale of foreign exchange.
CASE

VI. THE
OF A LIMITATION ON THE RIGHT OF UNITED STATES
TOIMPOSITION
ACQUIRE FRANCS.

Inasmuch as the Secretary stated that all efforts should be made
to keep France in the "club", and since it is agreed that the wording
of the tripartite statement permits him to do so, no consideration
is being given herein to the question of whether he might also be
justified in taking the position that France had xtasked departed
from the tripartite declaration by adopting exchange control.
CASE VII. ANY OTHER FORM OF EXCHANGE CONTROL.

Action as in Case VI.
CASE VIII. INCREASE IN IMPORT QUOTAS.

Action same as in Case VI.

C

Exchange Depreciation
CASE IX. SHOULD FRANCE REVALUE AT A RATE LIVER THAN THAT AGREED UPON LAST

FALL OR IF IT PERMITS FRANC EXCHANGE TO DEPRECIATE B ELOW THAT

LIMIT

287
June 18, 1937.
10:45 a. m.
H.M.Jr:

Hello.

Operator: Mr. Butterworth.
H.M.Jr:

Thank you.

Operator: Go ahead.
H.M.Jr:

Hello. Hello.

W. W.

Butterworth:

How do you do, sir?

H.M.Jr'

Hello, Butterworth?

B:

Butterworth speaking.

H.M.Jr:

Can you hear me?

B:

Yes sir.

H.M.Jr:

Butterworth, a - When Governor Norman was, met
Cochran in Basel he sounded him out about

coming over to have lunch at the Bank of England.

B:

I see.

H.M.Jr:

He subsequently telephoned him and asked him to
come next Monday

B:

H.M.Jr:

Yes.

implying that he had consulted with the

Treasury.

H.M.Jr:

I beg pardon, I can't hear you.
That he had consulted with the British Treasury.

B:

Yes.

H.M.Jr:

But he wanted it surrounded with all kinds of

B:

secrecy.
B:

Yes.

H.M.Jr:

So, I told the whole story to Sir Ronald Lindsay

B:

Yes.

and asked him to give me his advice.

-2H.M.Jr:
B:

H.M.Jr:

That
I wanted
it - direct.
as Sir Ronald put it - from
the horse's
mouth
Yes.

So, he cabled for instructions, and they, they,
and sent me the following message.

B:

H.M.Jr:

Yes.

"Please inform Mr. Morgenthau that Mr. Norman's

suggestion arose from the fact that it will be
necessary to give very close attention in the

immediate future to the French position on which
we are very much in the dark. From the amounts

of gold which have passed to us in the last six

B:

days, it is obvious that they are losing gold
I can't hear you.

H.M.Jr:

"From the amounts of gold which have passed to us

in the last six days, it is obvious that they are

losing gold at extremely heavy rate even for them."

C:

Yes.

H.M.Jr:

"Governor of Bank of England, who had seen Mr.

Cochran at Basel, suggested if he could find it
convenient to visit London, his opinion on the
situation in Paris would be most valuable. If

B:

Yes.

H.M.Jr:

"The Treasury concurred and said that they would

be most glad of opportunity of discussion of

position informally with Mr. Cochran, if it suited

his convenience."
B:

Right.

H.M.Jr:

"Chancellor hopes that Mr. Morgenthau sees no

objection."

B:

Yes

H.M.Jr:

Well, under those - under the - in view of that

B:

Right.

H.M.Jr:

To keep you informed

B:

Right.

statement I have asked Cochran to be there Monday.

288

-3H.M.Jr:

To file his cable in London

B:

Yes.

H.M.Jr:

289

To let you see it, and I'm asked to - to - and I'm
asking
you to offer him full cooperation while
he's there.

B:

Right. That's fine. I shall be delighted to do

H.M.Jr:

Now, do you - anything you want to ask me about that?

B:

anything I can.

No, not hing - I, I presume that, that I will go
to the Treasury with him, but not to the Bank of
England.

H.M.Jr:

A - yes, I mean, if they invite you to the Bank
of England, of course go; and if they go to the
Treasury, I should think you would go.

B:

Right.

H.M.Jr:

A - a - I was very careful to tell them - Sir Ronald that I was, I had a representative there who he knew,

who was carrying on our, who was representing us

entirely satisfactorily.

B:

H.M.Jr:

Good. Well, that was very kind of you.
So, if he goes to the Treasury, of course you go

along. And -

N:

Yes, well

H.M.Jr:

And any information which you have please, which

would be helpful, please give it to them.

Oh, I will then - I mean, I'd be delighted to do

B:

anything I possibly can.

H.M.Jr:
B:

H.M.Jr:
B:

Now, - -

by the word this morning

I don't hear you.
Phillips has gone there for the week-end.

230

-4H.M.Jr:

Pardon me?

B:

I say, I had a word with Waley this morning.

H.M.Jr.

Yes.

B:

Phillips has gone away for the week-end.

H.M.Jr:

Yes.

B:

To the country

H.M.Jr:

Well, that - well that isn't news, is it?

B:

I beg pardon?

H.M.Jr:
B:

H.M.Jr:

That isn't news, is it?
(Laughter) No, that's not news. But Phillips

has talked to Mr.
and in turn, we're going to speak to him
again this afternoon, and I probably shall have
another word with Waley this afternoon about the
Swiss position.
Yes.

Ah - there's one thing more I'd like to suggest.

B:

H.M.Jr:

Please.

B:

In that connection - is - I haven't found it out
from the British Treasury, but from informal
inquiries that I've been making with some of

my market contacts, it seems quite possible
that there may be other Central Banks, among
the smaller countries, who are likewise doing a

little selling. Now, I don't know that that's
happening

H.M.Jr:

But they're not members of the tripartite agreement.

B:

No, they're not.

H.M.Jr:

Right.

B:

Still it seems to me that it's an important thing

H.M.Jr:

Well, that's all right.

that both countries have to bear in mind.

-5-

291

if - if it is the question of the dry rot

B:

spreading, and the other smaller Central Banks un-

loading some of their, at least some of their excess

gold on us
H.M.Jr:

Yes.
it. Well, I have no doubt that - that they'11 try
There's a classic story that floats around the
City of London - I remember hearing it when I first
came here - and it has to do with Tripp's predecessor.

B:

H.M.Jr:

With Tripp?

H.M.Jr:

Tripp's predecessor.
At Basel.

B:

No, no, as Head of the Dutch Central Bank.

H.M.Jr:

Yes.

B:

I think his name was

B:

H.M.Jrl Yes.
B:

And he's alleged to have rung up
at the Bank of England, in the bad days of 1931,
and asked him about the pound.

H.M.Jr:

Yes.

B:

And he received the answer that the pound was as

strong as Gibralter.
Anda as
a result
ofthe
that he
but as
result
of
that
didn't
and as a result
Dutch Central,Bank took the title from Tripp.
of that

H.M.Jr:

I - I get it.

B:

Do you understand it?

B:

I understand the is- - perfectly.
It's a matter of record about the French losses.

H.M.Jr:

Yes.

B:

About the French losses in 1931, too.

H.M.Jr:

Yes.

H.M.Jr:

292

-6With that general feeling in mind, if there should

B:

be a sort of confederate movement, among the smaller

Central Banks, to sell some of their gold, and I'm
not sure that some of them haven't been although
can't obtain proof about them.
1

H.M.Jr:
B:

I see.

It might be a movement that it would be sound for
us to have, to keep our high on

B:

That's right.
and to discuss with the British

H.M.Jr:

Not yet.

B:

.... the Bank of England would know definitely
what the Austrian, Hungarian and the
country people have been doing in the way of

H.M.Jr:

H.M.Jr:

their gold.
Well now, just hold the wire a minute. Just hold
the wire a minute.

Hello.
B:

Yes, Sir.

H.M.Jr:

There's no ques- ....

B:

H.M.Jr:

I don't hear you.
There's no question but what they've been doing it,
see

B:

Yes.

H.M.Jr:

But it isn't a particular sort of worry to us at

B:

Good.

H.M.Jr:

this time.

And I would rather that you did not bring it up
because I don't want them to think that we're
worrying about that particular phase at this time.

B:

I didn't say a word to them and I didn't intend

H.M.Jr:

No, I wouldn't do it.

to until I had a word with you first, sir.

293

-7Thanks.

B:

H.M.Jr:

But, do I gather from the fact that Mr. Phillips
has left for the week-end that he is not worrying,
or does it just mean that he has left for the weekend?

(Laughter) I think he's just left for the week-end.

B:

H.M.Jr:

Yes.

B:

They said at the British Treasury this morning they showed me

H.M.Jr:

Pardon me?

B:

They showed me

H.M.Jr:

Yes.

B:

The British Treasury's

H.M.Jr:

I see.

B:

.... and quite frankly he didn't know what was going

their man in Paris.

latest report. He's

in Paris, and

to happen in the Senate, but that he thought that
H.M.Jr:

Well the latest gossip from Paris is that Rueff
is out.

B:

Yes.

H.M.Jr:

And you know that Rist is out.

B:

H.M.Jr:

Yes, I'd heard that.
Yes. Now just a minute. The men in the room
here say that I can point out to you the reason
that we are concerned about what the Swiss have
been doing is because they are a Club member.

B:

Quite.

H.M.Jr:

And that is quite different than some, what some
other Central Bank is doing to another Club member.

B:

I quite understand you.

294

-8H.M.Jr:

You see?

B:

Yes, I understand.

H.M.Jr:

And the thing that we will fear is - I mean that
Holland who, and Belgium who have been behaving

extremely well

B:

H.M.Jr:

Quite.

might say, "Well, why should we continue

this way if Switzerland can get away with it"?

B:

(Laughter). Yes, I, I

H.M.Jr:

You see? And anything else you want to ask?

H.M.Jr:

No, that's all, Sir.
Well, well that's that.

B:

Thank you very much.

H.M.Jr:

Good luck.

B:

295
June 18, 1937,
11:03 a. m.
H.M.Jr:

Hello.

Operator: Mr. Knoke.
H.M.Jr:
L. W.

Hello.

Knoke:

Good morning, Mr. Secretary.

H.M.Jr:

How are you, Knoke?

K:

Fine, thank you.

H.M.Jr:

Knoke.

K:

Yes.

H.M.Jr:
K:

Are you talking to Cariguel today?
No, I haven't tried to, Mr. Secretary, because
everything is so nice and quiet.

H.M.Jr:

Where?

K:

Here and in London.

H.M.Jr:

Yes. Well, I wondered if you could get from

him some kind of an assurance or hint whether
anything'11 happen before Monday.

K:

Well, all - all right, I'll call him.

H.M.Jr:

Do you mind?

H.M.Jr:

No, not a bit.
I talked to Cochran earlier and Rueff is out.

K:

He's out now.

K:

H.M.Jr:
K:

Yes. And see if you can get something out of
Cariguel; he always talks very frankly.
Whether anything is likely to happen before Monday?

H.M.Jr:

If you please.

K:

Yes. All right, Sir.

H.M.Jr:

Thank you.
(Break --- Conversation

with Secretary Hull.)

296

-2Operator: Mr. Knoke.
Knoke:

I just had Cariguel. He sounded kind of worn out

and gloomy.

H.M.Jr: Yes.
I asked whether I could sleep - to - to safely

K:

sleep over the week-end; he said he thought so.
He had no news of anything that could happen,

that might happen politically, and as far as the
franc rate, he had no hint or no suggestion that

foreign exchange market was concerned, and the
anything was planned.
H.M.Jr:

Well, that's that. All right. Well, I'll hope to-

K:

Beacon 211.

H.M.Jr:

Yes.

night to be at Beacon 211.

All

K:

H.M.Jr:

What - what is - what is your home telephone number?

K:

New Rochelle 1895.

H.M.Jr:

New Rochelle

K:

1895.

H.M.Jr:

18

K:

95.

H.M.Jr:

Eighteen - ninety-five.
That's right.
All right. That was before the Cuban War, wasn't

K:

H.M.Jr:

it?

H.M.Jr:

(Laughter) That was what?
Before the Spanish - the year before Bryan.

K:

That's right. (Laughter)

H.M.Jr:

All right.

K:

297

-3K:

H.M.Jr:
K:

Oh, no - yes - yes the year before Bryan - that's
right.

All right. 195_.
I asked about Rueff. He said he understood so but
nothing - there was no confirmation.

H.M.Jr:

All right.

K:

Nor was there an official communique on Rist
and

K:

Yes. All right.
That's it.

H.M.Jr:

Thank you very much.

K:

Goodbye.

H.M.Jr:

298

June 18, 1937.
11:03 a. m.
Operator:

H.M.Jr: Hello.
Operator: Secretary Hull coming on.
(Waiting)
H.M.Jr:

Hello

-

Hello.

Operator: Sorry - she said she had him right there.
H.M.Jr:
Well, you can call me.

Operator: All right.
Cordell
Hull:

Hello.

Operator: Just a moment please.
H.M.Jr:

Hello.

Hull:

Hello Henry.

H.M.Jr:

Good morning.

H:

What's going on?

H.M.Jr:

Well, I sent you a copy of my letter from Sir

H:

Yes.

H.M.Jr:

And - which I thought was very nice.

H:

Yes.

H.M.Jr:

And - I think it works out beautifully, don't

Ronald.

you?
H:

Yes, I just - I was afraid that fellow would get

peeved if we went the other way, but if we get by
it'11 be good and just the same.

H.M.Jr:

Well, it looks as though we got by.

H:

Yes.

299

-2 H.M.Jr:

And I had Taylor call Feis to confirm that

Cochran should go to London.

H:

Now if - yes - now if our man -

H.M.Jr:

Yes

H:

He's got a marvelous chance there to do some real
cross examining

H.M.Jr:

Yes

of the Bank of England, and pick v.p incidentally,
some things that we might not get out of the Govern-

H:

ment.

H.M.Jr:
H:

H.M.Jr:
H:

H.M.Jr:

Yes.

So I hope that, I hope that he will prove to be a
real cross examiner, without intent to do so, but
in the interest of the general solution of things.
Yes. Well
He might get you some real information in there
about the attitude, you understand, of the Bank
of England, which is, which is a factor in the
situation.

Oh, yes. Well, I just wanted to let you know
direct.

H:

Yes.

H.M.Jr:

And see whether you were satisfied.

H:

Oh, yes, I - that was the only thing. I just

H.M.Jr:

Fine.

H:

All right

H.M.Jr:

didn't want to throw away his influence.

Thank you.

300
PARAPHRASE OF TELEGRAM SENT

TO: American Embassy, Paris, France

DATE: June 18, 1937, 1 p.m.
NO.: 283
FOR THE AMBASSADOR.

Cochran is requested by the Secretary of the Treas-

ury to go to London for discussions with officials of the
Bank of England and Treasury.

This visit is believed advisable by the Department,
and provided it is agreeable to you, authorizes Coohran
to go to London.
The Department has been informed that Secretary

Morgenthau suggested to Cochran that he cooperate fully

with Butterworth in these conversations, that the conversations be reported by cable from London, and that

upon his return to Paris he inform you fully of what
transpired. The Department believes these suggestions
advisable.
HULL.

EA:LWW

301

GRAY

LMS

London

Dated June 18, 1937
Rec'd 4:15 p.m.

Secretary of State,
Washington.
RUSH.

392, June 18, 9 p. m.
FOR SECRETARY MORGENTHAU FROM BUTTERWORTH.

I was handed at the British Treasury late this
evening the following message which Sir John Simon

desired to be transmitted to you. At the same time
it was caqually (repeat casually) mentioned that the
first draft of this message had contained a suggestion

that if you so wished it the British Treasury would
consider anew their attitude but that Sir John eventually
decided to eliminate this passage because he considered
that it was always to be understood in communications
with the American Treasury that he was willing to
discuss and reexamine any decision affecting mutual
concerns which he might have taken.

"The Chancellor of the Exchequer is grateful to
Mr. Morgenthau for letting him know the position which
he took up with the Swiss. Sir John Simon much regrets
he could not send an earlier reply.
The

302

LMS 2-No. 392, June 18, 9 P. m., from London.
The Chancellor emphasizes that he fully recognizes

the advantage of insisting from time to time that mem-

bership of the club carries responsibilities as well
as privileges, and that on this point there is absolutely
no difference of opinion between himself and Mr. Morgonthau.

The Treasury have thought a great deal over the
question whether it would serve the purpose which they
and Mr. Norgenthau have in common for them to follow
up his message by a similar message from them to the

Swiss. On the whole, they have come to the conclusion

that it would not be either easy or wise for them to do
so.

The Treasury agree that it might prove very embarrassing that the Swiss should have chosen just at

this time to dispose of a part of their gold. But
they think that in fairness to the Swiss it must be
borne in mind that the gold was acquired under different and perhaps unexpected conditions as recently as

last Autumn. So far as this market is concerned, the
Treasury have no complaint to make as regards the procedure adopted by the Swiss, and they have no direct
knowledge of the motives which prompted the recent

sales. Thus they feel that it would not be very easy
for

303

LMS 3-No. 392, June 18, 9 P. m., from London.

for them to take up the question with the Swiss.
Moreover, they doubt if it would be, on the whole,

helpful for them to do so. They feel that it may be
useful to show, both inside and outside the club, that
gold still finds a ready market. If they were to add
their own representations to those which Mr. Morgenthau

has already made, they fear that the Swiss would be

likely to conclude that this is not so".
BINGHAM
HPD

304

GRAY

LMS

Paris

Dated June 18, 1937

Rec'd 5 p. m.

Secretary of State,
Washington.

815, June 18, 5 p. m.
While it seemed yesterday that the chances were
in favor of a compromise being reached between the

Senate and the Government on the full powers bill,
subsequent developments have created a situation fully
as serious for the Government as that which faced it
in the Chamber.

The full powers bill was tabled in the Senate
by Minister of Finance Auriol yesterday afternoon and
was immediately sent for examination to its Finance
Committee. This body summoned Auriol for a hearing

and it was subsequently reported that his .explanations

were found to be evasive and far from convincing. The
Finance Committee is believed to have taken the posi-

tion that unless it could obtain satisfactory answers

to its questions it would not be willing to grant the
Government special powers except to check speculation
and prevent tax evasion. The Committee demanded in

fact a new text in this sense. The opinion is general
that

305

LMS 2-N No. 815, June 18, 5 P. m., from Paris.

that the Prime Minister, who is now before the Finance

Committee to state his case, will not consent to any
such request.

It was expected that the Senate would meet to-

morrow afternoon at 3:00 o'clock to start the debate

but the press is now of the belief that in view of the
failure of the Finance Committee and the Government

to come to an agreement on the text of the bill it will
take a longer time than was originally thought to
reach a compromise, if indeed any compromise can be

reached. It is now possible that the measure may not
be debated in the Senate until early next week.
BULLITT
SMS:RGC

306
PARTIAL PARAPHRASE OF TELEGRAM RECEIVED

FROM: American Embassy, Paris, France
DATE:
June 18, 1937, 6 p.m.

NO.: 816
FROM COCHRAN.

Paris exchange market was fairly steady this forenoon, at noon French control lowered from 110.90 to

110.88, the price at which it would give sterling and
the demand therefor immediately increased. Rentes did

not continue yesterday's spectacular rise.
This afternoon there was a rumor that Rueff was to
be displaced as Director of the Movement of Funds Section

of the Ministry of Finance. It was said that no announcement was to be made until a successor might be found who

would carry out instructions without trying to put across
too many of his own ideas. Last week Maxime Robert, prin-

cipal assistant director to Rueff, was replaced by a young
man who is said to have the qualifications just mentioned.
Rist and Baudoin, as I previously reported, resigned from
the Stabilization Fund Committee last Saturday. Should
Rueff now leave the Government, of the original four
appointed to the Committee Labeyrie would be the only one

left.
The Bank of France told me this afternoon in the

strictest confidence that no gold loss will be shown on
the June 17 statement, which is to be made public on June 24.
I joked

307

-2I joked about such a statement, but they quickly assured

me that there was no "trick". They said that to date there
had been a profit from the operations of the fund, which
together with "revaluation" of certain holdings obviated the
necessity of revealing any loss by the fund.
In my daily reports I have given you an account of
the extent to which gold has been drawn from the Bank the

first three days of this week. Thursday's loss I am told
was about half that of the day before. It is probable that
the losses today are heavier than they were yesterday.
A close and well-informed contact - who is not a French
official - assured me two days ago that no gold loss would
be shown on the Bank's statement, and I said I could not
believe such a thing. However he was convinced the information was correct which he had to the effect that the
Soviet Government had made available approximately one-

half billion francs of gold to France in this time of
emergency. The Russian story is lent some credence by

the vague statement about "profits" and "revaluation".
END SECTION ONE.

BULLITT.

308
GRAY

LMS

Paris

Dated June 18, 1937

Rec'd 5:22 P. m.

Secretary of State,
Washington.

816, June 18, 6 p. m. (SECTION TWO)

Senate Finance Committee after yesterday's session

published a communique indicating that after having
heard the Minister of Finance on the measure for full
financial powers it had decided to request the Govern-

ment before going further, to present a bill limited to
action against speculative abuse and against fraud.
The press this evening reports that Auriol has in

reply written a letter to President Caillaux of the
Senate Committee insisting upon the text of the bill as
voted by the Chamber (quoted in my 809, June 17, 4 p. m) .
The session of the Senate this afternoon was adjourned
early because of death of former President Doumergue.

It is possible that the committee may get a report out
to the Senate in time for the latter to begin debate
thereon sometime Saturday. Efforts toward compromise
are being made this evening.
This forenoon the Chamber adopted the full customs
powers

309

LMS 2-No. 816, June 18, 6 p. m., Sec. 2, from Paris.
powers bill with the amendment against exchange control.
Press reports Minister of Finance of the Netherlands
has permitted Netherlands Bank upon application thereto

to give unrestricted exemption from the exportation prohibition on gold coins and gold bullion imposed September 26. (END MESSAGE)
BULLITT
CSB

310

June 18, 1937

After Cabinet today, the Attorney General and the
Postmaster General and HM,Jr conferred on the attached

and the Postmaster General wants a week on it.

Memorandum in the President's handwriting:

"H. C.

J. A. F.
H. M. Jr.

311

will you talk this over

together and then speak to not
F.D.R."
C

TH SECRETARY OF THE TREASURY
ASHINOTON

0

P

Y

MEMORANDUM FOR THE PRESIDENT:

You recently suggested consideration be given the reappointment of

Joseph olf as Collector of Internal Revenue at St. Paul, innesots, and
accordingly I have bad the usual investigation made.
Wolf was appointed originally as Collector on August 1, 1933, and
served both in that capacity and as Democratic National Committeemen until
September 30, 1954, when be resigned as Collector to devote his entire
time to the duties of Committeemen. Fe continued in this position until
June, 1976. James R. Landy WAS appointed Collector on June 15, 1935, to
succeed Folf, who endorsed him for the position.

The investigation has disclosed there was an understanding between

"olf and Lendy that at some certain time in the future when olf desired

reappointment as Collector, Landy would resign and make way for such reappointment. A meeting was held at the home of Mr. Adolph Bremer of
St. Paul in March, 1935, at which Wolf and Landy, with others, were present.
It was at this meating that the errangement etween Holf and Landy was
discussed and the agreement entered into. According to the statement of
Landy, after Welf and the others had left the room, Mr. Adolph Bremer

indicated to Landy that, in view of Wolf's lack of funds and his con-

siderable office expenses, something should be done for him. He states
it was figreed between Mr. Bremerand himself that Landy would pay Holf
$75.00 a month. Following his appointment he did make such payments for

a period of one year beginning July 1, 1955. photostatic copies of the
checks in question are in the files and Holf admits that he received them.
He maintains, however, that these sums represented payments to the Democretic campaign fund. However, nine of the checks were deposited of in the his

personal bank account, and, so far as could be ascertained, all
expenses of the State democratic office were paid from the special account
of Raths, the treesurer.
In June, 1956, Landy and Holf, with others, again met at the home in ofbe

Adolph Bremer and there discussed the question of Landy resigning be would

Mr. favor of Tolf. Landy insisted his understanding had been had that been in office
he

permitted to remain as Collector for two years. AB Wolf both state

about be refused to resign. Landy and
only that the latter one year, offered to return the $900.00 received at from B later Landy, date but
this offer was declined. Landy testifies further that to pay him
influential and wealthy citizens of Minnesota offered would have

certain the sum of $8,500, which represented the amount of money be

312

-2earned as Collector from that time to the end of the two-year period,
end to return to him the $900.00 which he had paid Wolf. Landy states
that he also refused this offer.
The investigation also developed evidence that Holf had received
various sums of money from applicants whom he endorsed for postmaster-

ships during the year 1953. Wolf asserts that all of these contributions

were media voluntarily and maintains that the payments were used for
political purposes and were not income to him personally. He states
that records and receipts were not always kept and admits that some of
the funds were deposited in his personal bank account, but maintains
that most of them were deposited in the bank account of Mr. Raths as

treasurer and were used to pay expenses of Wolf's political office.
with one exception, these alleged offenses occurred more than three

years ago, and are, therefore, barred by the Statute of Limitations in
so far as the application of law is concerned.
However, it is definitely determined that Wolf did recommend Landy
for appointment as Collector; that at that time there was an understanding between them that Landy would relinquish the office to Holf at some-

time in the future; and further that Landy did pay to Wolf the sum of
$75.00 per month for a period of one year. These offenses are in direct
violation of Sections 149 and 150 of the United States Criminal Code,

which sections prohibit the payment or receipt of any moneys in connection
with the recommendation for or appointment to a Federal office. The

sections noted are set out in full on the attached sheet.

Obviously Wolf cannot be considered for appointment as Collector;
furthermore, Landy should be immediately removed from the position which

he holds. It is my recommendation that this be done and that all of the
facts in this 0830 be submitted to the Attorney General.
/s/ H. MORGENTHAU, JR.

Secretary of the Treasury

April 30, 1937

313
C

0

Y

Section 149:

"Payments made for influence exerted in

procuring appointive public office prohibited.
It shall be unlawful to pay or offer or promise
to pay any sum of money, or any other thing of
value, to any person, firm, or corporation in
consideration of the use or promise to use any
influence, whatsoever, to procure any appointive

office under the Government of the United States
for any reason whatsoever. (Dec. 11, 1926, C. 5,

Section 1, 44 Stat. 918.)"
Section 150:

"Payments received for influence exerted in

obtaining appointive public office prohibited.

It shall be unlawful to solicit or receive from
anyone whatsoever, either as a political contribution, or for personal emolument, any sum of money

or thing of value, whatsoever, in consideration of
the promise of support, or use of influence, or for
the support or influence of the payee, in behalf of

the person paying the money, or any other person, in
obtaining any appointive office under the Government

of the United States. (Dec. 11, 1926, C. 3, Section 2,
44 Stat. 918.)"

HE WHITE HOUSE
PENALTY FOR PRIVATE USE TO AVOID

OFFICIAL BUSINESS

PAYMENT OF POSTAGE $300

314

472
The Honorable

The Secretary of the Treasury,
Washington, D. C.

315

GRAY

JR

London

Dated June 19, 1937

Rec'd 9:15 a.m.

Secretary of State,

#

Washington.

393.
June 19, 1 p.m.
FOR TREASURY FROM BUTTERWORTH.

City continues to await news of political developments

from Paris but is inclined to believe that the franc will
open on Monday morning at the forty-three millogram level.
Incidentally this morning London press carries the following
report "the Dow-Jones Service learns from Washington that the

United States is apparently willing to give Monsieu Blum two

types of aid in the latter's effort to repatriate French
capital. In the first instance the Treasury is prepared
to recommend to Congress much heavier taxation on foreign

capital; and, secondly to help France in locating and
identifying French funds in the United States so that such
funds can be taxed by France. The latter proposal may be a
forerunner of C. general inter governmental exchange of

information on alien investments".

I am confidentially informed that two bullion firms
namely Mocatta and Goldschmidt, and Johnson and Massey have

again decided to cense shipping gold to the United States
on their own accounts since their representativesreturned
have just

316

-2JR

June
19, 1 p.m., from London for Treasury from
Butterworth.

returned from a recent visit to the United States where they
gained the definite impression that the reaching of the

billion dollar level in the sterilization account would
occasion a reconsideration of America's attitude regarding
gold. others who have heard of the decision of these firms
have been somewhat affected by their point of view. Therefore,
if the billion mark is passed without consideration, change
or indication of contemplated change it may tend to augment
confidence.

In this general connection I am sending by post three
articles which appeared in the TIMES of June 16, 17 and 18
on the gold problem by Robert Brand, C. Director of the

Bank of England. Whereas it cannot be said that these

articles reflect the British Government's attitude, I happen
to know that they were discussed by Brand with both the
Treasury and the Bank of England before publication.
BINGHAM

WWC

317

SPECIAL GRAY

JR

Paris

Dated June 19, 1937

Rec'd 9:25 a.m.

Secretary of State,
Washington.

819, June 19, 10 a.m. (SECTION ONE).
FROM COCHRAN.

There is reproduced herewith the text of a letter
in English received today signed Bachmann and Schnyder

of the Swiss National Bank and by Meyer, Chief of the
Swiss Department of Finance and Customs.

"Zurich 17th June 1937. Mr. Horace Merle Cochran,

First Secretary of the American Embassy, Paris, for
transmission to Mr. Morgenthau, Secretary of the United
States Treasury, Washington. Dear Sir: We beg to

refer to the personal conversation which the first
undersigned has been privileged to have on the 12th
and 13th instant in Basel with Mr. Horace Merle Cochran,
First Secretary of the American Embassy, Paris.
In connection therewith we have the honor to give
you in agreement with the Swiss Department of Finances
and with regard to the declaration made on October 19,

1936, to the Secretary of the United States Treasury
the Following information.
One

318

-2-

JR #819, June 19, 10 a.m. (SECTION ONE) from Paris.

One. The Swiss National Bank adheres to its

Policy of foreign exchange by buying and selling gold
and foreign exchanges according to its declarations
in the agreement of October 19, 1936.
(END SECTION ONE).

BULLITT
KLP

319
SPECIAL GRAY

JR

Paris

Dated June 19, 1937

Rec'd 9:35 a.m.

Secretary of State,
Washington.

819, June 19, 10 a.m. (SECTION TWO).

Two. Owing to the dependency of Switzerland upon

the foreign markets of row materials and foodstuff and to
the great amount of short term foreign debts of the country
the Swiss National Bank deems it necessary at the present

time to dispose of a fund of foreign exchanges of the
equivalent of about 500,000,000 froncs in order to meet at
any time all the engagements resulting therefrom.
Three. According to its statement of June 15, 1937,
the Swiss National Bank possesses gold for 2,624,000,000

francs, i.e, about 650 francs per head of the population and
foreign exchanges for 20,000,000 francs.
The equalization fund consisted on that' day of 117,000.00

france in gold, 412,000,000 froncs in foreign exchanges
17,000,000 froncs in other balances.
Therefore, it would be necessary to convert in the
coming weeks some further 120,000,000 froncs of gold in
foreign exchanges.

Four. The gold which has flown to the bank from the
dishoarding in our own country has successively been sold

by us on the free gold market in London and the foreign
balances

320
-2-

JR #819, June 19, 10 a.m. (SECTION TWO) from Paris.

balances thus obtained have been utilized to meet the
current demands of foreign exchanges.

We intend to proceed likewise in the future.
Believe us to be dear sir, yours very truly, Banque
Nationale Suisse. (signed) G. Bachmann, (signed) Schnyder.

Eidg (?). Finanz-U. Zoll Departement. (signed Meyer)".
(END !CRSGAGE) . .

BULLITT
KLP:HPD

321

GRAY

FS

Paris

Dated June 19,1937

Rec'd 9:45 a.m.

Secretary of State,
Washington.

820, June 19, noon. (SECTION ONE).
FROM COCERAN.

Finance Cormittee yesterday by 18 votes to 6 with

10 contensions agreed to substitute the following text
for the project adopted by the Chamber on June 15.
"Project of law designed to provide the government
with necessary powers to check speculative maneuvers likely

to Endanger savings, the currency and public credit.
Sole Article. During the ordinary session of 1937

and at the latest until July 31. 1937, the Government is
authorized to take by decrees, decided upon in Council

of Ministers, measures intended directly and exclusively to
forestall and to repress speculative maneuvers likely to
Endanger savings, the currency and public credit.
This authorization Expressly excludes:
(OnE) Any measures intended to Establish Exchange

control and notably to Establish tariff rates or
BULLITT
WWC

322

GRAY

KLP

Paris

Dated June 19, 1937.

Rec'd. 11:30 a.m.

Secretary of State,
Washington.

820, hine 19, noon (SECTION TWO)

customs prohibitions applicable to currencies, bank notes

and securities; to prohibit, to limit, to control or to
suspend settlements in France in foreign currencies or in

gold and generally speaking all transfers of capital in
French or foreign movable securities, made for any purpose
whatEver between France and foreign countries EXCEPT as

concerns the functioning of Existing clearing arrangements;

to prohibit, to limit, to control or to suspend dealings
in and free quotations of foreign currencies on French

territory, as well as the free disposal by moral or
physical persons of foreign or French securities, whether or
not these securities carry Exchange guarantee or Exchange
option;

Two. Any measures modifying the parity of the franc as
determined by the monetary law of October 1, 1936.
Three.

323

-2820 from Paris - Section two.
Three. Any measures intended to impose new EX-

penditures on the state on collectivitiEs or on public
bodies, to create new posts or new public services or
establishments; to bind the state or a public establishment
through nationalization, participation or guarantee in cases
not provided for by Existing
( END SECTION TWO)

BULLITT
WWC:HPD

GRAY

JR

324

Paris

Dated June 19, 1937

Rec'd 9:50 a.m.

Secretary of State,
Washington.

820, June 19, noon. (SECTION THREE). .

legislation.
Four. Any measures constituted a forced loan, forced
consolidation or forced conversion of the public debt or of
private debts.
Five. Any measures intended to modify laws and
conventions which govern the relations between the State
and the Bank: of France.

The decrees issued in application of the present law

will be published in the Journal Official and submitted for the
ratification of the Chambers within three days. These decrees
will cease. to have executive force after the expiration of

one dating from their publication if the decision of
ratification has not been taken before this date".
Paragraph numbered one above reproduces the essential

provisions of Article one-0 of the full powers of the
bill approved by the Chamber yesterday. The text was
embodied in the Embassy's despatch No. 710 of June 8, 1937.

It will be recalled in connection with paragraph five
above quoted that article three of the agreement of
September 25, 1936 between the Minister of Finance and

the Bank of France provides as follows:
BULLITT

325

RB

A portion of this telegram

be closely paraphrased
before being communicated
to anyone. (c)

must

Paris

Dated June 19, 1937

Rec'd 1:27 p. m.

Secretary of State
Washington.

820, June 19, noon (SECTION FOUR).

(GRAY) "the proceeds of the complementary revaluation, which

may take place later in consequence of the fixing of the

new gold content of the franc shall be allotted to the
Government in conditions to be specified in a later agreement.

The said proceeds together with the proceeds of the

liquidation of the exchange stabilization fund may not be
appropriated otherwise than for the redemption of the
national dobt".
There has thus developed a clear-cut difference between

the government which insists upon at least as full financial
powers as the Chamber voted it and the Senate Finance Com-

mittee which desires to restrict such powers. Debate in
Senate will come this afternoon. Government apparently
intends to force decision on special powers question before
Monday.

Press

326

-Press reports that Senate Finance Committee yesterday

studied letter of resignation of Rist and Baudoin. I have
been informed by friends that it was reported the members

of the Committee agreed to destroy the letter and not divulge its contents. Rumor is already leading to surmises
as to allegedly improper operations in Treasury securities
which the Government sought to impose upon the Stabiliza-

tion Fund. However at present I cannot confirm any of
this.

Today the press has a report from New York that the

American Treasury will aid France through taxing foreign
holdings in the United States, and through giving information regarding French funds on the American market to
the French Government.

Today there is a rumor current that Rueff is not only
being dismissed from the Movement of Funds Section, but

he will either be given a minor position in the Morocoan
Bank or completely "revoked" as a public official.
At 12:30 today I had a talk with the Bank of France.
Yesterday the French control had a fairly heavy day. Today

the control is supporting the franc through British control
at London with markets closed.
Reference is made to telegram No. 283 of June 18, 1 p.m.,
from the Department. on Sunday morning at 10:30 I leave

Paris for London. I will stay at Claridges Hotel. On Sunday

night I will see Butterworth. It is my hope that I can

327

-3arrange for interviews and file cablegram at London in time
to catch the ten o'clock train on Monday night. I expect
to reach Paris Tuesday morning at nine o'clock.
END SECTIONS FOUR AND FIVE.
END MESSAGE.

BULLITT.

EA:LWW

328

TO

SECRETARY OF STATE

DEPARTMENT OF STATE
WASHINGTON

June 21, 1937.

My dear Mr. Secretary:

I enclose for your information a copy of
telegram No. 824 of June 21, 1937, 11 a.m., from

the American Embassy, Paris, transmitting a political
report.

Sincerely yours,
Enclosure:
From Paris,
No. 824.

The Honorable

Henry Morgenthau, Jr.,
Secretary of the Treasury,
Washington, D. C.

.

Department of State
EA
I

DEVISION

ENCLOSURE
TO

Letter drafted
ADDRESSED TO

TREASURY

--

329
JR

Paris

Dated June 21, 1937

Rec'd 9:25 a.m.

Secretary of State,
Washington.
RUSH.

824, June 21, 11 a.m.

The Blum Government fell at 2:30 this morning,

following a lengthy conference at the Hotel Matignon
between the political leaders and the Prime Minister, The
Cabinet then went directly to the Elysee Palace and tendered

its resignation to President Lebrun.
The Senate met at 10 o'clock last night and following
a heated debate rejected the compromise text of the

representatives of the Left parties by a vote of 168 to 96.
It then adopted by 198 votes to 82 the text which had been
revised by its Finance Committee during the day. The Prime
Minister intervened in the debate in a passionate appeal
for the passago of the compromise text. His intervention
however only appeared to stiffen the resistance of the
Sonate. Caillaux, President of the Finance Commission,
in a caustic reply recalled the Senate's constant desire
to collaborato with the Popular Front Government. He
felt that the Government had deceived the Senate when

it had devalued the franc after a promise that there

would be no devaluation. He criticised the
application

330
-2-

JR #824, June 21, 11 a.m., from Paris.
application of the forty hour week a social reform which
the Government had also promised to apply gradually and
not rigidly C.S had been done.
The Senato then adjourned and the Cabinet members

proceeded to the Hotel Matignon from where the Government's

resignation WC.S announced at 3 o'clock this morning by

Campinchi, head of the Radical Socialist Parliamentary
group.

Chautemps has now accerted the mandate of attempting

to form 2. Government and consultations are in progress. It
is doubtful whether anything very definite will be known
before the afternoon. It is probable that the new government

will still be based on a popular Front majority and that
several members of the last Cabinet including Blum will be
included therein.
BULLITT

HPD

331

GRAY

RB

Paris

Dated June 21, 1937

Rec'd 3 p. m.

Secretary of State
Washington.

828, June 21, 6 p. m. (SECTION ONE). .
FOR THE TREASURY.

Comparative calm prevailed on the exchange market

today and transactions were not on a large scale. The
exchange fund hold sterling at 110.89 and we are told
by our market contact that the fund probably yielded

about half a million pounds. The dollar is quoted at
around 2.44.

The security market was irregular. After showing
some strength at the opening rentes lost from 25 centimes

to 1 franc.
The forward rate for one month sterling strengthened
to 34 and the three month rate to 51
BULLITT

CSB

332
GRAY

JR

Paris

Dated June 21, 1937

Rec'd 3:05 p.m.

Secretary of State,
Washington.

828, June 21, 6 p.m. (SECTION TWO) .

The toxt of the Bill of the Senate Finance Committee
transmitted in telegram No. 820, June 19, noon, was adopted
by the Sensite on Saturday afternoon by 238 votes to 52.
However later in the same day the Chamber rejected the

Senate decision and by 346 votes to 248 confirmed its

approval of the text voted by it on June 15.
A compromise text worked out by the delegation of the
Left parties and accepted by the Government was presented
to the Senate Finance Committee yesterday morning. This

compromise text contained certain restrictions of the
full powers demanded by the Government. It excludes
devaluation, compulsory conversion and exchange control

(as did the text voted by the Chamber on June 15). However
it also excluded any increase in numbers of government
employees, compulsory consolidations and customs charges on

foreign securities and requisition of securities. Nevertheless
this did not satisfy
BULLITT

HPD

333

GRAY

JR

Paris

Dated June 21, 1937

Rec'd 3:20 p.m.

Secretary of State,
Washington.

828. June 21, 6 p.m. (SECTION THREE). .

the Senate Finance Committee which held that under the text

as it stood the Government could consider itself authorized
to modify the relations between the Senate and the Bank of
France to proceed to compulsory loan issues and to make

profound transformations in the economic regime of the country.
The Sonate Finance Committee therefore amended the

compromise text in such a way C.S to exclude the Government

from applying customs duties or prohibitions to gold and
from restricting free dealings in gold and in French or
foreign securities either between France and foreign
countries O2 within France itself. Furthermore a provision
was included to prevent the Government from modifying the

laws and conventions which regulate its relations with the
Bank of France. Thus amended the bill came before the
Senate in the evening when the reporter of the Senate Finance

Committee cont nded that the project left the Government

with large possibilities of action and at the same time
accorded with the imperious rights of Parliament.
BULLITT
CSB

334
GRAY

RB

Paris

Dated June 21, 1937

Rec'd 3:30 p. m.

Secretary of State
Washington.

828, June 21, 6 p. m. (SECTION FOUR)

Auriol refused to accept the amendments. He contended

that if the "sixty billion francs" of French capital sent
abroad was invested in French securities and returned to
the French market the financial problems of the Government

would be solved. He begged the Senate to believe that he

had done his duty under very difficult circumstances. He
recalled that from the beginning he had sought international
collaboration and he was proud that he had negotiated and

signed the tripartite agreement "which was well thought of
by all and regarded as "the possible germ of useful collab-

oration in the international domain". After briefly surveying the difficulties encountered by him the Minister
bitterly complained "that he had recently been abandoned
under painful circumstances by men whose duty was to resist
and to defend themselves as well as the Government" As far

as he himself was concerned "he could not resign himself to
boing reduced to impotence when it was necessary to fight" or

to be obliged to betray ideas which it was BULLITT
HPD

335

y for SECRETARY

GRAY

RB

Paris

Dated June 21, 1937

Rec'd 4:17 p. m.

Secretary of State
Washington.

828, June 21, G P. m. (SECTION FIVE)

his duty to defer. The Senate could ask anything of him,
he concluded, except that.
After Dlum had pleaded for the adoption of the com-

promise text and after the intervention of Caillaux the
compromise text was rejected by the Senate by 168 votes
to 96. The Upper House then adopted the text as amended

by its Finance Committee, by 198 votes to 82. At midnight
the sitting was suspended to 1:30 this morning. When the
House reassembled the Chairman announced that he had

received a message from the Government that it had decided

"not to pursue the discussion of the financial project" and
thereupon the Senate decided to adjourn sine die. (END
MESSAGE)

BULLITT

CSB

336
THE SECRETARY OF STATE
WASHINGTON

DEPARTMENT OF STATE
WASHINGTON

June 21, 1937.

My dear Mr. Secretary:

I enclose for your information one copy of
each of the following telegrams from the American

Embassy, Paris, reporting on the bill for full powers
in financial matters which is now before the French
Government:

No. 821 of June 19, 1937, 3 p.m.
No. 822 of June 20, 1937, noon.

Partial paraphrase of No. 823 of June 20,
1937, 7 p.m.
Sincerely yours,

Enclosures:

As listed.

The Honorable

Henry Morgenthau, Jr.,
Secretary of the Treasury.

Department of State
BUREAU

EA

DIVISION

ENCLOSURE
TO

Letter drafted
ADDRESSED TO

TREASURY

1-1011

EV

337

sms

Paris

Dated June 20, 1937

Rec'd 5:18 p.m.

Secretary of State,
Washington.

323, June 20, 7 p.m.
REFERENCE out 822, June 20, noon.

This has been a day of feverish negotiations among
the political groups and parliamentary committees.

The rEprEsEntatives of the Left groups in the
Chamber this morning drafted a compromise text for
the full powers bill. The Senate which was to MEET at
3:00 o'clock postponed its meeting until 6:00 d clock

to give time for further consideration by its Finance
Committee and by the Government. WE were told early

in the afternoon by a member of the Cabinet that agreement was in sight.
HOWEVER, new difficulties arose and the Senate's

session as again been postponed, this time until
9:30 tonight.
END OF SECTION ONE
BULLITT
sms

338

PARAPHRASE OF SECTION TWO OF TELEGRAM NO. 823

of June 20, 1937, from the American Embassy, Paris.

A person close to the Prime Minister has just told us

that Blum will not agree to any text which will restrict
the use of full powers beyond the limitations which the
Chamber inserted in the bill it voted. A change in phraseology would be acceptable, but not a change in substance.

The Senate, it was added, (and particularly the Radical
Socialist members thereof) is showing signs of apprehension

over the situation the fall of the present Government might
involve, such as a general strike. We have been informed

that the question of confidence will not be put before
the Senate by Blum because he contends that the Chamber of

Deputies has given the Government its vote of approval,

and that since the people directly elect the members to
the Chamber, they are the only body before whom the question

of confidence can be raised. It is still doubtful as to
what the outcome of the issue will be.
END OF MESSAGE.

BULLITT.

EA:LWW

339

RB

Paris

Dated June 19, 1937

Pec'd 1:32 p. m.

Secretary of State
Washington.

821, June 19, 3 p. m.
Embanny's 815, June 18, 5 p. m.

Developments in the situation are as follows:
Yeste. day the Senate Finance Committee after receiving

a letter from the Minister of Finance declining to set forth
the exact purposes for which the full powers would be used,

prepared and adopted by a vote of 18 to 6 a bill limiting
the exercise of full powers exclusively to measures against
speculation, and expressly excluding by detailed provisions
the setting up of exchange control devaluation, forced conversion, or any modification in existing arrangements between
the State and the Bank of France. This text reveals, as
it was doubtless intended to do, entire lack of confidence
in the Government. In view of the adoption of the foregoing
text Elum who had been expected to appear before the Finance
Committee yesterday afternoon did not appear.

A further development of interest was the adoption by
the Chamber

340

-2-#821, June 19, 3 p. m. from Paris

RB

the Chamber of an amendment to the bill requesting full
powers in customs duties which repeats verbatim many of

the restrictive clauses of the above mentioned bill of
the Senate Finance Committee. The Radical Socialist

deputies voted for this amendment, while the Socialist and
Communist deputies voted against it.
The discussion in the Senate is scheduled to begin at

4 o'clock this afternoon. It seems to be generally believed
that Eltim will not raise the question of confidence and
that the Senato will adopt the bill proposed by its Finance
Committee. The discussions would then revert to the Chamber

at their session to be held to-night.
The Government appears to be pressing for an early

decision and it is said that Blum has let it be known that
if full powers are not voted by Monday morning in a form
acceptable to the Government, the Government would no longer

take the responsibility of remaining in office.
BULLITT

DDM

WWC

341

EDA

PARIS

Dated June 20, 1937
Received 9:10 a.m.

Secretary of State
Washington

822, June 20, noon.
The Senate met yesterday afternoon and after a heated

debate in which the Prime Minister intervened adopted by

238 votes to 52 a modified bill which rejects the Government's demand for plenary powers to deal with the financial

crisis. The Senate bill limits the powers of the Government
to measures exclusively and directly designed to suppress

speculation and fiscal fraud. It also bans all forms of
exchange control and inflation and embodies a series of other

specific prohibitions.
The Chamber then met last night at 10 onclock and

completely disregarding the Senate's modified bill proceeded

to pass by 346 votes to 248 the original version of its
plenary powers bill which it had adopted last Wednesday and
which the Senate had in turn ignored.
The Senate met this morning and its Finance Commission
is now occupied in a pro forma examination of the unacceptable Chamber bill and also of a "compromise" bill bysubmitted

342

EDA - 2 - # 522, June 20, noon from Paris
by Chautemps. Blum and Auriol are to appear before the
Senate Finance Commission this morning. The Senate will

then reconvene at three o'clock this afternoon and if a
compromise is reached which now appears doubtful the

Chamber will again meet at six o'clock this afternoon.
BULLITT
EMB:NPL

343
GRAY

JR

London

Dated June 21, 1937

Rec'd 3:35 p.m.

Secretary of State,
Washington.

396. June 21, 7 p.m.
FROM COCHRAN.

Referring to Department's 283, June 18, 1 p.m.
Arrivod London Sunday evening and discussed visit
with Atherton and Butterworth showing them above mentioned

instruction.
I went to the Bank of England at 11 Monday morning

the hour Governor Norman had fixed. He told me that he

had asked Sir Frederick Philipps to come to the bank to

lunch with us. He said he would not participate in my
talks with philipps. I raised the question as to Butterworth
joining U.S. Until Philipps arrived the Governor chatted with
me over questions which we had discussed at Basel a week
ago but he added nothing to supplement his statements which

I have already reported.
Philipps came to the bank an hour before lunch time.

I explained that I was here officially and cooperating with
our Embassy. He said he first desired to ask me some
questions about France on which subject he presumed the
Embassy

344
-2-

JR #396, June 21, 7 p.m., from London.
Embassy here could not contribute. We had received word
of the fall of the Blum Government and exchanged ideas as

to what might follow. I told philipps in reply to his
question that the French had not approached us for

financial or monetary advice. He asked if they were
seeking an arrangement with us to give reciprocal
information in regard to investments on our respective
markets. I told him the French had mentioned this to me
after the signing of their agreement with Sweden but that
nothing had so for come of it. He said that it would be

contrary to established British policy for them to give
France this type of agreement. I said that I thought an
agreement on our part with France would not assure the :
return of French funds from the United States to France so
long as Frence can consummate no arrangements with such

countries as Great Britain, Switzerland, the Netherlands
and Belgium.

philipps is particularly interested to see how much

gold the French will be willing to lose in support of the
franc.

At luncheon I met a number of Bank of England officials

and guests but there was no significant conversation. After
lunch I telephoned Butterworth and he joined Philipps and
me. Philipps brought up the gold question. He said
there
seemed

345

-3-

JR #396, June 21, 7 p.m., from London.

seemed to be developing two different views: (1) some
people think no action with respect to gold should be
considered before prices have risen further and times are
more prosperous; (2) others think that the gold problem
must be facod eventually so it is preferable to hasten a

settlement thereof lest the uncertainty of the situation
retard economic recovery. Philipps favored the first view.
Philipps thought that British realization of improved
economic conditions should tend to dissipate gold worries.
He asked whether American officials favored either of the

above views. I could give only personal opinions since I had
no official information beyond the public statements of the
President and the Secretary of the Treasury. I did not see

our present price situation calling for any immediate action.
I thought there might be an increase in public comment on our
gold sterilization policy now that the fund has passed the
billion mark. Philipps' questions were so posed as to
reveal his hopo I believe that we might not precipitate
action. I found him less concerned over the matter than I
had found Norman at Basel.

I mentioned to Philipps the view of Trip C.S set forth
in his annual report to the Netherlands Bank and as shared
somewhat by Franck and Bachmann on control of gold production.
Philipps

346

-4-

RB #396, June 21, 7 p. m., from London.

Philipps does not believe control would be effective. He
minimizes the early effect on production of a lowering of
the gold price on the ground that the Soviets will continue
to produce irrespective of the price and that South African
and some other producers would merely work higher grade ores.

Philipps opposed any unilateral decision on gold.
He thought the financially important countries should act

in concert, in case action is ever necessary, lest their
exchanges be upset. He saw no reason for drawing Russia

into any discussions. He said he was glad to have had the
talk with Butterworth and me since the Chancellor of the
Exchequer would be getting around to answering Secretary
Morgenthau's message.

After we had said goodby to the Governor and then

dropped philipps at the Treasury, Butterworth and I compared
notes and found that neither of us knew what message was
involved.

Returning to Paris tonight.
BINGHAM

CSB

347

OFFICIAL COMMUNICATIONS TO

THE SECRETARY OF STATE
WASHINGTON, D.C.

DEPARTMENT OF STATE
WASHINGTON

In reply refer to

June 21, , 1937

FE

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 10, 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. 394 of
June 21, 2 p.m., from the American Ambassador at London,

which relates to the subject under reference.

Enclosure:
From Embassy London

No. 394, June 21, 2 p.m.,

in part.

Department of State
FE

BURSAU

ENCLOSURE
TO

Letter drafted
ADDRESSED TO

Treasury.

FRINTING

OFFICE

1-1058

348
JR

London

Dated June 21, 1937

Rec'd 12:34 p.m.

Secretary of State,
Washington,

394. June 21, 2 p.m.
Cadogan sent for me this morning and handed me a

"very confidential" memorandum regarding Kung's currency

loan. negotiations here. Inasmuch R.S he is, according to the

radio bulletin, due to arrive in Washington in a few days

I am cabling text in full.
"The Chinese Minister of Finance Dr. Kung. during his

recent visit to England raised the question of the issue in
London of a currency loan for China. Discussions in regard

to this proposal are still in an early stage but His
Majesty's Government in the United Kingdom desire to inform

(>) confidentially of their course as they are anxious that
in matters of this kind there should be close consultation
between the governments principally concerned.
Two. His Majesty's Government are disposed to view

Dr. Kung's proposal W ith favor provided that it forms part
of a well considered program for maintaining the stability
of the Chinese currency and for the execution of a sound

financial policy on the part of the Chinese Government.
They feel that the carrying out of such a programme
is
essential

349
-2-

JR #394, June 21, 2 p.m., from London.

essential in the interests of China and is to the advantage
of all countries which trade with China and intend to
cooperate in her economic developments.

Three. In particular His Majesty's Government attach
importance to the establishment in China of an independent

and non-political central reserve bank. The principles for
the setting up of a central reserve bank have already been
adopted by the Chinese Government and it is satisfactory to

note that Dr. Rung has stated his intention of putting

these principles into practical effect without delay. In
discussing the question of a currency loan it was made clear
to Dr. Kung that His Majesty's Covernment regard it as very

important that satisfactory legislation for a central
reserve bank should be put into force as soon as possible

and that it would be essential that this step should have
been taken before the issue of any currency loan.
Four. The programme envisaged would of course include

provisions as to the disposal of the proceeds of a currency
loan. The sterling would be sold by the Chinese Government to
the central reserve bank and would be used by the bank solely

for foreign exchange transactions in order to maintain the

stability of the Chinese currency. It would clearly not be
desirable that the Chinese dollars thus received by the
Chinese Government from the central reserve bank should be
available

350
-3-

JR #394, June 21, 2 p.m., from London.
available for current budget expenditure and the programme
would provide that these dollars should be used by the
Chinese Government gradually over a period for the
redemption of existing domestic bonds which would have

the effect of improving the credit of the Chinese Government

in their own internal market. It would also be part of the
program that the Chinese Government should pursue a policy

of balanced bridget.

Five. Provided that a currency loan formed part of a
well considered program on these lines His Majesty's Govern-

ment felt that they could themselves view it with favor
and could hope that the proposal would be viewed sympathetically by the United States Government and the other governments concerned. But it was made clear to Dr. Kung that
His Majosty's Government could not express any opinion as
to whether and on what terms a loan could be successfully
issued in the London market and that this must depend on

negotiations with the financial institutions concerned.
Six. Dr. Kung proposed that the loan should be
secured on the maritime customs revenue in which connection

His Majesty's Government stated that they would expect an
assurance that the existing system of the maritime customs
would be continued. They here emphasized the importance

of the resumption of the recruitment of foreign personnel.
Seven

351

-4-

JR #394, June 21, 2 p.m., from London.

Seven. The discussions with the financial institutions

concerned are still at an early stage and it is not yet
clear whether the Chinese Government will be in a position
to offer security which the market would regard as adequate
evon for C comparatively small currency loan of say not
more than pound 10,000,000 to pounds 20,000,000. (If the
total were more than pounds 10,000,000 only pounds

10,000,000 would be issued in the first instance).
Discussions on this point are understood to be continuing.
Eight. Should these discussions be successfully
concluded it is understood to be the desire of Dr. Kung to
issue a currency loan in the autumn. In this connection
the question of the consortium has of course to be recalled
into account. His Majesty's Government trust that they will
shortly receive from the French and Japanese Governments,

as they have already received from the United States

Government, an intimation that they agree to negotiations

between the groups for the dissolution of the existing
consortium by mutual consent. In that event it may be
expected that the consortium will have been dissolved before
the Autumn and no question of a formal decision by the group

will be involved; but it would of course continue to be
the policy of His Majesty's Government to keep in close
touch on the matter with the other three interested
governments

352

-5-

JR #394, June 21, 2 p.m., from London.

governments. In the alternative event of the consortium
not having been dissolved by the Autumn His Majesty's
Government trust that the United States Government would

find no difficulty in using their influence with the
United States group to secure the consent to the issue
in London of a currency loan as part of a well considered
program on the lines described above".
BINGHAM

353

TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE

June 21, 1937

Secretary Morgenthau

TO

FROM

Mr. Heas

Subject: The Business and Price Situation,
Week Ended June 18, 1937.
Summary

Business sentiment has been adversely effected this
week by discouraging news on the strike situation, accompanied by renewed declines in the stock and commodity markets.
The New York Times business index has declined further
to 107.1 for the week ended June 12, as compared with 107.8

for the previous week. (See Chart i.) It reflects a greater
than seasonal decline in automobile production, cotton mill
activity, carloedings, and power output, which are partly
offset by en improvement in the rate of steel operations.
Our expectation of a recession in business beginning
this month is strengthened by the continuation of the steel
strike, by a greater than seasonal decline in automobile
production for the third successive week, and by a further

decline in building construction. The favorable agricultural
outlook, on the other hand, and a well-maintained level of
retail buying, particularly in rural areas, provide encouragenent for the longer-term outlook.
Review of the Week's Developments

The continuation of the steel strike appears the most
unfavorable development of the week. The strike situation
is an unfavorable factor chiefly because the inability of
business men to see clearly how the present labor difficulties will be settled is tending to upset business confidence
and is causing a postponement of industrial buying. Fresh

strikes and threats of strikes in industries where the labor
problem was thought to have been settled appear especially
disconcerting.

The steel and textile industries illustrate the effect
of present uncertainties on new buying. Sales of steel out

of warehouses are declining faster than seasonally, according

-2-

354

to reports from iron and steel Jobbers, because too much
uncertainty over the industrial and labor outlook has made
consumers unwilling to buy. Machine tool makers also report

a lack of new orders recently due to unsettled conditions in

manufacturing centers. Textile merchants are showing concern

over the strike situation, since it is effecting the movement
of their goods. Increasing requests for deferring of deliveries of goods, it is reported, have been found due in nearly
ell cases to a slump in business in strike communities, and
to a feeling of uncertsinty over the labor outlook among
merchants in industrial centers.
Automobile production during the current week has shown

greater than seasonal decline for the third week in succession. This week's index of 115.0 compares with a figure
of 121.8 for last week. A strike in a plant making cylinder
blocks for the Chevrolet car was an important factor.

=

Building construction activities initiated so far in

June, as indicated by current reports, show the smellest
gain over 1936 of any month this year. The total for June,
on present prospects, seems likely to show less than the
13 percent increase over last year recorded in May. The
decline in rate of gain was first apparent in March, when
it dropped to 16 percent as compared with 33 percent in

February. Sharply rising construction costs, and loss of
confidence due to general labor uncertsinties and the drop
in security prices are blamed for the decline.

Steel operations, according to the Dow-Jones index, rose
1 point to 16 percent of capacity for the week ended June 14,

88 the result of an increased rate of operations in independent plants. (See Chart 1.) New orders of the U. S. Steel

Corporation for the week ended June 10 made a more favorable

showing, recovering to the level prevailing before the sharp
slump in orders of the previous two weeks.

Stock prices declined to new lows this week, as the
effect of an increased volume of selling on the strike news
and the French monetary crisis was exaggerated by the thinness of the market. An upturn of 6 points in the Dow-Jones
industrial average following the news of Government intervention in the steel strike testified both to the market
thinness on the unside and to the importance of the labor
situation as a market factor. An increased volume of foreign
selling on the decline added to the pressure on the market.
(See Chart 2.)

-Commodity prices also reached slightly below their low

levels of the previous week. Divergent trends in different

commodities have begun to appear, however, which may indicate

a slowing up of the decline. Wheat, rubber and sugar showed
independent strength. Unfavorable crop news from Canada
and other wheat countries, together with the recent price
action, suggest that wheat may be one commodity that has

established its low for the year.

355

June 21, 1937
356

STEEL INGOT PRODUCTION

PER

CENT

Per Cent of Capacity" (Dow Jones)
100

37

:

80

36

60

40

JAN.

APR.

JULY

OCT.

BUSINESS ACTIVITY - N.Y. TIMES
PER

CENT

Seasonally Adjusted
Est. Normal=100

110
'37

36
100

90

80

JAN

APR.

JULY

OCT.

C -142

Office of the Secretary of the Treasury

Diveise of - and Stadiation

June 2J 1937

2

STOCK PRICES AND FOREIGN TRADING
IN DOMESTIC STOCKS

357

Daily Movement, Dow-Jones Industrials
and Foreign Net Purchases and Sales

DOLLARS

190
190

192
192

Prices
TH

183

138

134
184

HHH

180

180

176
176

172

172

168

DOLLARS

163

MILLIONS
DOLLARS

WILLIONS

Net Purchases

4

4
0
0

4
4

Net Sales

8
28

21

8

14

7

31

5

24

17

2

10

9

24

30

23

16

69

19

12

JUNE
MAY

APRIL

3

MARCH

1937

DOLLARS

Total Weekly Foreign Trading, Weeks Ending Wednesday

MILLIONS

WILLIONS
40

40

Net Purchases

20

20

J
0

20

Net Sales
20

40
23

30

16

31

3

1937

of Empard and

JUNE

APRIL

MARCH

the Secretary of the Treasury

26

JAY

P 149

A

24

7

17

10

28

5

24

21

2

14

9

19

12

40

June 22, 1937.
9:10 a.m.
Lochhead:

H.M.Jr:

358

Magill and McReynolds are here.

I see. All right. Put Magill on, please. Is

Miss Chauncey there?

L:

No, Miss Chauncey isn't here. I turned this on

H.M.Jr:

Well, that's all right. Put

for the recorder though.
Mr. Magill

L:

Buzz for Miss Chauncey.

H.M.Jr:
L:

All right, I'll buzz for Chauncey.

Magill:

Good morning.

H.M.Jr:

Hello Ros.

M:

How are you Henry?

H.M.Jr:

Well, I'm a little under the weather.

M:

That's too bad.

H.M.Jr:

And I'll stay indoors for another day anyway.

M:

Oh, yes. Well do it by all means.

H.M.Jr:

The Doctor's coming again at ten - and look me
over again at ten.

M:

Yes.

H.M.Jr:

A - I wanted to talk to you before you went up

on the Hill and see if there is anything I can help.
Yes. I don't think so today - we, the program is
to go ahead with this foreign insurance company

device
H.M.Jr:

Right.

M:

.

H.M.Jr;

Yes.

and Leming of

.

put it on.

M:

I think it'11 be all right.

H.M.Jr:

Yes.

office is going to

-2-

359

I hope I can get the Committee to adjourn for until Thursday.

M:

H.M.Jr:

Well, I'd make a definite effort.

M:

Yes, because

H.M.Jr:
M:

H.M.Jr:

I'd just tell them you're not ready.
I think we can do that.
Yes.

M:

Yes.

H.M.Jr:

Which is the truth.

Yes - certainly is.
H.M.Jr;

And that would - that gives us a chance.

M:

Yes.

H.M.Jr:

And the next day - next week, if we're still

M:

Yes.

H.M.Jr:

We can do it Monday, Tuesday and Wednesday

M:

Yes.

at it, we can give them a three day show

and then stop. Something like that.

H.M.Jr:
Yes.

H.M.Jr:

You know?
Yes.

H.M.Jr:

I'd just tell them - and you can quote me -

saying that we're not going to do what we did
last year, work the people 80 that everybody
cracks up.

M:

H.M.Jr:

All right. I'll tell them that.
Yes. You can tell them that last year they did
it and, and that, and that we just can't do it
and do all the other work that we've got.

M:

Yes.

H.M.Jr:

And - if you want to you can bring in the foreign
situation, and if they say, "Well, what have you got?",

-3-

360

- - well, you're in on it and I've consulted
you, etc., and so on.
Yes.

H.M.Jr:

I don't expect to go to Heaven anyway.

(Laughter) I think you - - I - I surely hope

you don't right away, but I should think your
long-time chances would be good.

H.M.Jr:

M:

H.M.Jr:

Yes. Well - 80 - and then what I thought I'd do
is this - that - - you'd be back from the Hill
most likely about a quarter of one?
I should think so - or before.
Well. I'm not going to call again until about a
quarter of one, and the people can meet in my
office at that time and I'll talk to them.

All right, Sir, I'll plan to be here at a quarter
of one.

The people who are in the office now can be in
there again at a quarter of one.
M:

Yes. I don't think there's anything else to

H.M.Jr:

What I want to do is - McReynolds can - if anybody

has anything he can bring it over. I want to see
him anyway, and he can come over now - and there
is only thing; I understand Von Zeeland
wants to see me Thursday. Well, I'd give him tell Kieley to give him a tentative appointment -is Miss Chauncey listening?

M:

Yes, she's here.

H.M.Jr:

Well, he can give him a tentative appointment for
11 o'clock, Thursday.

H.M.Jr:

All right. She's got it down.
But they'11 have to tell him it's tentative, and
if they say why, you can say, "The Secretary is
not feeling well".
Yes.

H.M.Jr:

See?

M:

All right. We've got it.

361
-4-

H.M.Jr:

- now, let's talk to Professor Taylor.

And

All right, I'll put him on.

M:

Taylor:

Hello.

H.M.Jr:

Wayne?

T:

Yes, Henry.

H.M.Jr:

Now, you get your boys together and clear that
100% tax business, see, 80 that if by strange

circumstances the Federal Reserve Board should

agree to it, you could meet with them this afternoon and go ahead. Now, I- I'm just going to

rely on you, and Viner, and Riefler, and Lochhead,

and White - see?
T:

Yes.

H.M.Jr:

And if you -- if, if four out of the five of you

T:

All right.

H.M.Jr:

And I'd like four out of five to agree, and
whether the - - the thing that I

can agree, I'll be satisfied - see?

is the principal and - oh, I remember there was
something, I forget now, that White mentioned to
me - there, there unimportant.

T:

That's right.

H.M.Jr:

And I remember there's one thing he questioned

T:

Yes.

H.M.Jr:

and I said, "Well, leave something in so that
Senator Glass has got something to object to
that we can give in to". See?

So, I'd try to get them in this afternoon, and
you fellows will just have to carry on, and I've
got confidence in you - and go to it - that's
all. And I hope that I won't be laid up more
than a day or two.

Well, we certainly hope so. All right - we'll
take care of that. I don't know whether the
Board will be ready by this afternoon

H.M.Jr:

Well if they are, if they are - I - the people

I mentioned is yourself, and Lochhead, and White,

and Riefler, and Viner.
T:

Right.

362
-5H.M.Jr:
T:

H.M.Jr:

Now if you can - you ought to be able to get

four out of five to agree - don't you think so?
I would think 80.
And on that basis

Might even get all five.

T:

H.M.Jr:

What?

T:

(Laughter) Might even get all five.

H.M.Jr:

Well, that would be too much, knowing the five.
Yes (Laughter)

T:

H.M.Jr:

T:

(Laughter) I haven't lost my sense of humor.

After all, if four were together Jake would
want to be the one agin it.
(Laughter) Well, maybe we'd better start with
him and find out what he thinks.

H.M.Jr:

All right. But I'll talk again at a quarter of

T:

All right. Now, I've got - you've heard about

one.

this message from the French Ambassador?

H.M.Jr:

I have not.
"The French Ambassador would like to see Mr.
Morgenthau today before 12 o'clock, and would

like to be advised at residence before 10 o'clock."
Well, you tell the French Ambassador, "I'm very
sorry, but Mr. Morgenthau is home - he is not well,
and that Mr. Taylor will be very glad to see him".

T:

Yes, Sir. The British have received your message
through Mr. Mallett.
Yes.

H.M.Jr:
T:

And

H.M.Jr:

How do you know that?

T:

Because they told me. (Laughter)

363
-6H.M.Jr:
T:

H.M.Jr:

When did they tell you?
Last night.
Oh !

But I
H.M.Jr:

Did they call you, or call on you, or telephone
you?

No, I - I went over there late in the afternoon

T:

H.M.Jr:

and played t ennis.
I see.

T:

And I received that message then.

H.M.Jr:

From whom?

T:

From the Ambassador.

H.M.Jr:

I see.

T:

And he said that there was no answer yet, but
that very thankful and just - and there was one
on the way.

H.M.Jr:

Oh, I - I loved Cochran and Butterworth each
asking them if they knew what the message was.
You saw that in Butterworth's cable?

H.M.Jr:

No, I - I let - I haven't seen that cable yet.
Well, I was doing that while lying here - I read

T:

Yes.

H.M.Jr:

I'm, I'm still one ahead of you, but by noon

T:

T:

H.M.Jr:
T:

H.M.Jr:

that.

you'll be two ahead of me.
Well, we'11 see.

And that's all right, but you see the bunch
One thing, you know, that - of interest
there is that he keeps being mentioned as the
possible Minister of Finance.

God help France !

364

-7-

T:

H.M.Jr:

(Laughter) Well, he's been it before. (Laughter)
Well, if you don't mind, when you have him
there, would you mind having Miss Chauncey there
to take notes?

T:

I'd be delighted to have Miss Chauncey there to

H.M.Jr:

Thank you.

take notes.

T:

Now just a minute. Miss, Miss Chauncey wants

H.M.Jr:

Yes.

to talk to you.

Miss

Chauncey:

Mr. Oliphant is here now and he'll tell you what
I had to tell you Mr. Morgenthau.

H.M.Jr:

All right.

Oliphant:

Hello.

H.M.Jr:

Yes, Herman.

0:

At three g'clock yesterday afternoon the Judge
sentenced D. M. Smith to eighteen months in

the penitentiary on the first count

H.M.Jr:

Yes.

and eighteen months on the second count

0:

to run concurrently

H.M.Jr:

Yes.

80 he goes to the penitentiary for
eighteen months. Fined him $10,000 on the
third count

0:

M.Jr:
0:

H.M.Jr:
O:

H.M.Jr:

Yes

$10,000 on the fourth count, and $5,000

on the fifth count.
Yes.

So he got eighteen months in the penitentiary
and a $25,000 fine.
And how much does Bruce Kramer get?

365
-8-

(Laughter) Well, I haven't seen his contingent
contract yet. I suppose he's working on a
percentage basis. He may - I don't think he'11

0:

get much of that eighteen months.
H.M.Jr:

(Laughter)

0:

(Laughter)

H.M.Jr:

(Laughter) 0-0 - boy !

0:

Oh, well that's something
That's something

H.M.Jr:

to feel good about, isn't it?

0:

H.M.Jr:

Yes.

O:

Yes, that's a piece of the bacon.

H.M.Jr:

Well, via Mrs. Shafroth, Mrs. Morgenthau to me,

0:

Yes .

H.M.Jr:
0;

H.M.Jr:

Mr. Shafroth is ready to resign, but he'11 do it
how, when - it's agreeable to me.
Yes, I'd like to talk to you about that.
Well, I - I'm not going to see anybody until the
Doctor says I can.

0:

Oh, until he says you can, huh?

H.M.Jr:

And Mac is coming over in a few minutes, and

0:

Yes

H.M.Jr:

I, I want - for today - until the Doctor
says o.k. I want to see just
Well, I'd like just to say this to you now

.

0:

H.M.Jr:

Yes

0:

I have some suggestions for somebodybut
else
in whenthe

ever we want to talk about it

H.M.Jr:

meantime.
.Well

0:

Hello.

366
-9H.M.Jr:
0:

H.M.Jr:

It's one of your Assistants and I don't do any-

thing until I talk to you.

I know, but I thought - I was going to say
that in the meantime I'd like to talk to Morrie
on the basis of his carrying on for the present.

Well, I - we can't - I'd put it this way to him -

between my own crowd we don't want him to resign

now because it would look terrible.

0:

H.M.Jr:
0:

Well, may I handle it with him?
But for Morrie's sake, of course we don't want an
abruption, an abrupt
Well, my thought is - now Morrie is pretty badly
broken up. I'd like to send Morrie away for a
couple of weeks' rest

H.M.Jr:

Yes

0:

little bit.

H.M.Jr:

That's all right.

0:

May I handle it with him?

H.M.Jr:

It would be a favor to me if you did.

0:

Thank you.

H.M.Jr:

Because whenever he comes, his wife is coming
with him to see me

0:

Yes.

H.M.Jr:

. . And then I'd like for him to carry on for a

- - and if he could get away and
I don
go up to Cape Cod for a couple of weeks it'd be
fine.

0:

Well, I'd like to suggest that to him.

H.M.Jr:

All right.

0:

H.M.Jr:

I'll see him this morning.
Now what I told the boys is that I'd call again
at a quarter of one

-10-

367

Yes.

0:

H.M.Jr:
0:

H.M.Jr:

And
askthat.
you fellows to do the best you can,
and I- just
that's

Well, you're on the bridge, we're up in the ropes;
everything is going to go fine.
Well, don't get seasick.

0:

(Laughter)

H.M.Jr:

Or dizzy.

0:

H.M.Jr:
0:

H.M.Jr:
0:

H.M.Jr:

Oh - we might get dizzy.
You tell that fellow McReynolds I want to see
that baby.

By the way, will you - the next time I see you,
will you tell me about being dizzy - I've got a
story I want to tell you.
Do what?

Tell me about being dizzy - I've got a story I
want to tell you.
All right. Tell Miss Chauncey to go out of the
room.

0:

(Laughter) I can't do it.

H.M.Jr:

All right.

0:

Good-bye.

H.M.Jr:

Tell Mc - Tell McReynolds

0:

H.M.Jr:

He's listening
that he should come on over - I want to see him.

0:

All right - I'll send him over.

H.M.Jr:

Thank you.

0:

Good-bye.

H.M.Jr:

Hello.

0:

Hello

H.M.Jr:

It's room 516.

0:

516

-11H.M.Jr:

Yes.

0:

Right.

H.M.Jr:

All right. Good-bye.

368

369

June 22, 1937
11:30 a.m.

Meeting in Mr. Taylor's office with Ambassador Bonnet and
Mr. Jules Henry.

Mr. Taylor: The Secretary is very sorry. He has not
been feeling well for two or three days and the Doctor made
him go home and stay there. I think he will be all right
by tomorrow.

Ambassador: I wished to see Mr. Morgenthau because I

think that I shall leave Washington tomorrow morning to go

to France.

(The Ambassador continued his conversation in French.)

Mr. Henry: Do you wish me to translate?

Mr. Taylor: I got it.
Ambassador: (Again speaking in French.)

Mr. Taylor: Well, I will express for him all the good
If you find that that is the thing to do, why we

wishes.

wish you every success and if you don't, we will welcome you
back here.

Ambassador: I think so. I hope so, because my wife
She does not go to Paris. (Next remarks in
will stay.
French.)

Mr. Taylor: You think that that situation will remain
more or less as it is. You will be there in about a week.
Ambassador: (In French.)
ing

Mr. Taylor: All through this period, that's been workvery satisfactorily. We have been keeping in touch with

the situation with him through our Embassy on the other side

because they are SO much on the ground there.

Mr. Henry: (Translated Mr. Taylor's remarks for the
Ambassador.)

Ambassador: (In French.)
ally?

Mr. Taylor: In other words, you have accepted provision-

370
-2-

Mr. Henry: Tentatively.
Ambassador: Tentative. Yes. (Rest of remarks in
French.)

Mr. Henry: He would have full powers in the direction
of the French finances and economy. That's the condition.
Ambassador: (Speaking in French.)

Mr. Taylor: Well, you know that you will get all the

cooperation that we can offer.
Ambassador: (In French.)

Mr. Taylor: Perhaps. We haven't talked to him yet about
that, but there are so many other factors that enter into it
that when people talk about the over-valuation or under-valuation of currency today, that means so many different things
and its -- people talk about under-valuation of the dollar.
None of the standards which formerly applied to what people
would call under-valuation or over-valuation are present in
the situation which causes gold to flow here at the present
time. If those old rules, if you can call them rules, were
active, why gold would be flowing out.
Mr. Henry: (Translated Mr. Taylor's remarks for the Ambassador.)

Mr. Taylor: So it's a question of definition and you

have to go into the underlying situation before you can determine whether certain currencies are or are not, whatever
way you want it to work out.
Ambassador: My family will telephone to Mme. Taylor.
-000-000-

departure, Mr. Taylor explained
that the
Ambassador
had said he has
accepted the
After
the Ambassador's
of Minister
post of of

Minister of Finance provided that the post
Public Economy is also placed under him and also providing broad
that as Minister of Finance he is given extremely powers. be
He is sailing tomorrow and he hopes that the situation can

371
-3-

worked out, but that he is leaving Mme. Bonnet here, so
that it might indicate that there was some doubt in his mind.
The Ambassador said that the problem was repatriation

of sufficient French capital to permit them to carry on in
orderly fashion; that the French policy was definitely to
continue the Tripartite Agreement. The Ambassador also said
that Van Zeeland had indicated to him that certain currencies
were still overvalued. (Mr. Taylor replied to this statement
as recorded on page 2 of this report.)
The Ambassador did not have anything in mind except to

inform the Secretary of his departure and explain the circumstances to him and pay his respects, etc.

372
PARAPHRASE OF TELEGRAM RECEIVED

FROM: American Embassy, Paris, France

DATE: June 22, 1937, noon

NO.: 830
FROM COCHRAN.

This morning at 9 o'clook I got back to Paris.
At 11 o'clock I visited at the Bank of France. Yesterday 169 million franos were lost by the French stabilization fund. This morning the market was uneasy, but

operators were still 80 uncertain of the outlook that they
hesitated to open transactions. The French fund had
yielded 159,000 pounds by 11 o'clock.

At the Bank I was told that the reason for the heavy

offerings of dollars against sterling since last Friday
was the press report from the United States that the
Government would help the French through taxing foreign
funds on the American market, and through giving France

information regarding holdings in the United States by

French people. The fact that dollars have been sold against
sterling (repeat sterling) seems significant. On several
occasions I have reported to you vari ous opinions to the
effect that should such an arrangement be made by the United

States with the French, it would not result in driving back
funds to France so long as confidence is not inspired by
the French situation itself, and 80 long as other capital
countries, particularly those near France, had no similar
agreements

373

-2agreements.

It is the opinion of my contact at the Bank of France
that the French public does not realize the truly chaotic
condition of the finances of the country. Little hope for
resolving this chaos is offered by Chautemps and such

collaborators as are 80 far suggested. The Governor of

the Bank of France is still Labeyrie, and he has given no

indication that he will resign from that position. Director of the movement of funds section of the Treasury is

still Rueff. It is rumored in the press that Rueff may
be appointed French financial attache at Washington.
BULLITT.

EA:LWW

374

June 22, 1937.
12:46 p.m.

Chauncey:ofI one.
understood he was going to call again at a quarter
0:

I see. I was just wondering because

C:

Wait a moment please.
Mr. McReynolds might know.

0:

(Pause)

No, we'll wait a few minutes.

C:

0:

C:

Magill:
M:

Magill:

All right.
All right.
Well we heard on this fellow Lemming - ah - he's

a very - slow - very careful performer.

Yes.

I - if they had let him take his own way why he would
have done very well. They let him take his own way for
about an hour

M:

Magill:

M:

Magill:

Yes.

and then they began popping questions at him and

hurrying him and so forth and - ah - I think they got
a little bored with him at the end. He didn't quite
finish up.

Well that's all right.
But I think on the whole that it went satisfactorily.
Ah-ha.

Magill:

Ah - I had a little brush with Treadway at the beginning
which was almost over before I knew what it was all
about

M:

I see.

375

-2-

Magill:

and
between
it wound
upDickson
in a fightVineor?
-

and cooper - each of them spitting at each other.
Yes.

M:

Magill:
M:

Magill:

So I guess that was that.
Well from what you - you would never say it was perfect.
From what you say I'd say it was very good.

(Laughs) I don't know whether it's very good. If - ah but if - I don't know what the papers will say because
I don't know how well they got it.
Well -

M:

Magill:

We couldn't give them any press releases to-day because

it - ah - Lemming was doing it orally and

That's all right.

M:

Magill:

and they may pan us a bit - ah - Upham was running

around like a chicken with his head off but - ah
Why?

M:

Magill:

he all hot and bothered because he couldn't
Well give them was the releases and couldn't do this and and couldn't

do that and I told him, to calm him down

M:

Well you were present when I talked to - to Upham.

Magill:

Yes.

M:

Magill:
M:

And I told him we gave him this job and this is his

cross; let him bear it.
Yes, well that's the thing.

said something about working through you've the
And night. he and also I said, "Fine, that's the first time

done it in a year

Magill:

(Laughs)

may have to do it some more nights".

M:

He

Magill:

looked and you at me and he said, "That's right".

(Laughs) How you feeling this noon?

-3-

376

Well I'm a little better. The doctor told me that I

M:

should go home tomorrow morning

Magill: Yes.
and stay there the rest of the week.

M:

Magill: Yes.
He called up Dr. McIntyre, the President's physician,

M:

and told him he was ordering me home.

Magill: Yes.
And he said that I should try and just handle
emergencies for the rest of the week.

M:

Magill:
M:

Yes. I - I'd like to see you before you go but then
that's one of those things I suppose.
Well you're all going out to that golf thing, aren't
you?

Magill:

Well I'm - I'm - I'm not. I don't know - ah

M:

You're not?

Magill:

Well how can I? I mean

Well then if you're not maybe I can see you after

my supper, if I feel all right.

Magili:
M:

I wish you could.
Provided you promise to be cheerful.

Magill:

Ah - I'll spend the afternoon going around the building getting some dirty stories.
(Laughs) No, that isn't my idea of being cheerful.

Magill:

(Laughs)

M:

Well - ah - all right. Now what I'd suggest is to

balance the week that - that the people meet in your
office every morning around 9:15 or so, see?

Magill:

Yes.

--

377

I mean people who are in the room now.
Magill:

Yep.

Plus Herbert Gaston, if he's well and I call that my
or Mr. Gibbons - I mean they don't contribute anything

Kitchen Cabinet. There's no use having Miss Roche
and there's no use of having them, see?

Migill: Yes.
M:

And I think they ought to meet again around 4 o'clock

in the afternoon at your office

Magill: Yep.
and then check twice a day.
Magill:
M:

9:15 and 4.

Well I - I use that time as being possibly convenient
to everybody, see?

Magill: Yes.
M:

Because you've got to get up on the Hill and 9:39 is
too late

Magill: Yes.
and 9 o'clock is too early for some of them.
Magill:

By the way we have - we have to go on tomorrow and I

M:

All right.

didn't see any way out of it

because Lemming didn't finish up

Magill:
M:

Magill:

I see.

and I didn't think we could very well continue

over another day.

M:

Fine.

Magill:

I think he's got to finish up.

-5-

378

Well
I'm feeling
to itbit.
I'll try and see you
after ifsupper
for aup
little
Magill:

Good I wish you could.

Now is - I heard on the radio that - that - ah - Wayne's
friend, Bonnet, is Minister of Finance?
Magill:

Do you want to talk to Wayne?

M:

Yes.

Magill:

All right.

Taylor:

Hello
Hello Wayne.

M

Ah - he is tentatively Minister of Finance.
(Laughs) What do you mean tentatively?
(Laughs)

T:

Like they asked me yesterday, "Was I going to relax

M:

my gold release" and I said, "I wish we could all
relax" . What do you mean tentatively? If he could
get there in time and there's still a Cabinet?
Well he retains his post as Ambassador

H.M.Jr:

Yes.

also tentatively
H.M.Jr:

Yes.

and he's leaving Madam Bonnet here.

Leaving her here as a hostage, eh?

Yes, however, he's taking the first boat, which is
tomorrow and he has accepted on two conditions.

Yes.

One, that he given very broad powers
M:

Yes.

-6-

379

and, two, that he is also given either charge of
or the actual post of Minister of National Economy in
addition to the Minister of Finance.
I see, like Director of the Budget, eh?

Well it's - it's a different set up.
Oh.

Ah - that means, as I get it, the - ah - equivalent of
National Planning Board, etc., which is a Cabinet post.
Yes, well now - ah - is there anything on that that I
should do or see or know or

No, I don't think so.
Well isn't it just as well that I hadn't - couldn't see
him?

Ah - yes it was - what he wanted to do was to say goodbye

and explain what he was doing and I - ah - tried to do

the necessary and Miss Chauncey can - ah - tell you

whether I was courteous enough.

Well did you kiss him on both cheeks?

No, I didn't.
Can Miss Chauncey testify to that?

Yes. (Laughs) But I wished him every success if that

was what he wanted to do. (Laughs) That we would be
delighted to see him back if he wanted to come back so
who could do more than that.
Yes.

And he mentioned particularly - ah - tripartite
agreement.
Good.

^h - that was sentimental in the first policy in general.
Now - well I think that's - does anybody - you're going
out tonight, aren't you to that golf?

--

380

I don't think so.
You don't? (Laughs) Why?

Well
- ah - I just don't think I'm going to be able
to.
Oh, do you want to come around when Ros does, if he
does?
Yep.
What?

I - I think so.
All right.
Now - ah - Von Zeeland - why we can send that tantative
engagement tomorrow - we want to cancel that, eh?
Tomorrow? It was Thursday.

T:

I mean Thursday, yes.

Yes, unless he - unless he - tell him that you'd be
there.

Yes.

What I'd do is to call up the State Department and

simply say that I'm not feeling well and that the
doctor has ordered me to take a rest for the rest
of the week.

T:

Yes - ah - are you going out of town?

M:

I'm right at the farm. I'm going to leave at 10 o'clock
tomorrow morning.

T:

Yes, well I'll tell him that.
I'd just tell him the truth that I'm - the doctor
said I must rest for the balance of the week

T:

ME

Yes.

and that I hope that I'll be well enough to
come back Monday.

-8-

381

Yes,
well I'll - I'll tell him that. I explained the
other circumstances to them
Yes.

and they understood that.

Well, incidentally, if McReynolds' listening, he should
please notify - have Kieley notify the White House
I'11 not be there for dinner tomorrow night and that I'll
not - ah - at Mrs. Hull's dinner - whatever my social
engagements. are.

hhh.
M:

I know I accepted one - luncheon from Hull and the
White House tomorrow night - all off.
And the boys have been working on

Well it makes me awful tired, Wayne, unless it's
important.

No, it isn't.
Well let's can it.
O.K.

Now the only thing - I do want to insist that McReynolds
goes out this afternoon because he's planned it and
there's no reason why he shouldn't go.

He's - he's going out.
Good and - I mean I'd feel disappointed if he didn't
go.

He says he would too. (Laughs)

All right, and tell Magill the only other person that
I'd add to the Kitchen Cabinet is Gaston, if he comes
back.

Right.

Who is present so I'11 just know.

-9-

382

Dan, Archie, Herman, Mac - Miss Chauncey.

Well the people that - isn't Oliphant there?
Yes.

Right. Now does Bell want to say anything? I want to
kid Bell. Put him on a minute.

All right.
Bell:

Hello

Hello Dan.
Yes.

F

Don't tell me my President isn't smart when he invited
you to go down on the boat with him.
Why?

He knew how to get you down there.

Well I declined it.

B:

No
Yes.

On the boat?
Yep.

B:

You're not going on the boat?

No, I'm not going. I asked to be excused and he said

B:

O.K.

Oh really?
Yes.

B

:

Because Mac said you first asked to be excused but when
he asked you to go down on the boat - ah

383

- 10 -

Oh no, that was in the original invitation.
Oh, I didn't know that.

Yes, I thought it was a little too political.
Well you know what I told McReynolds.
B:

Yes.

I thought it unfair to a Civil Service employee to
ask you to go.

3:

Well I put it up to the President that way that I
thought it was a little embarrassing to me and unless
it was an official request
Yes.

that I didn't care to go and I'd like to be
relieved and he said, "Fine, I think you're absolutely
right".
M:

Dan is there anything that I can help on or do you
want anything?

B:

sh - no, I just wanted to tell you that unless you've
seen the income tax slip this morning that it hits it
right on the line.
I've seen nothing.
Ah - up to the 21st our estimate was 480 million
Yes.

and the actual collections 480,378.
Grand.

So I guess we're going to get the 515 all right.
Well may I just say this to the group that's in the

room. I'm going away for these few days having complete confidence in the people who are in the room.

B:

Thank you.

- 11 -

384

And I'm sure that you all can carry on and I will call

up once a day, see?

That will be at 9:15.
That will be at 9:15 and only once a day and if there's
anything important you people can put it up to me but

I will call once a day.

O.K. Anybody else you want to talk to now - Mac - Archie?

B:

Only if - ah - if they want me.
B:

Just a moment - Mac wants to say something.

M:

Please.

McReynolds: May I sign your name to that Wannop letter?
M:

Yes, please.

All right, I've got it rewritten.
All right. Now listen Mac.
Yes.
M:

When you go out there I hope you win a golf bag

or a silver cup or something.

MCR:

(Laughs) Well I wasn't really planning to go and
play golf.

I'd feel badly if you didn't go.
O.K. I'll go.
Anybody else?

No, I think everybody's set.

Well - well I'll call up in the morning.
MCR:

O.K.

M:

Everybody's left?

- 12 -

M:

No, they're all right here.
All right, well wish me good luck.

McR:

We certainly do.

M:

All right.

MCR:

Goodbye.

M:

Goodbye.

McR:

385

386

JR.

A portion of this telegram

Paris

before being communicated

Dated June 22, 1937

must be closely paraphrased

to anyone. (B) (c)

Rec'd 3:30 p.m.

Secretary of State,
Washington.

834, June 22, 6 p.m. (GRAY)
FROM COCHRAN.

Foreign exchange market has not been favorably impressed

by simultaneous publication of formation of Cabinet and by
outlook for the continuance of the popular front government

with leadorshi therein morely moved from the Left to the
Right section. Bonnet as prospective Minister of Finance
with possibly Finally (the banker who lately quit the Banque
de Paris et Pays Bas) as his adviser receives a better
welcome in the press than on the market. Sterling became
strongly sought around noon and the Bank of France yielded

at 110.89 throughout the afternoon. Discount on forward
franc widened. Rentes improved when fear that Communists

might participate in the Cabinet WOS dispelled.
D llars continued to come from New York for conversion
into sterling. One Paris American bank today took 42 bars of
gold from London market for sale to National Bank of Belgium

and the latter institution is said to have also bought gold
directly at London. (END GRAY)

387

-3I have been given to understand, in strict confidence,
that recently the Austrian National Bank has sold gold to

the BIS and is holding the proceeds in dollars. It is
also reported that the Bank of Nicaragua sold gold to the
BIS, requiring the proceeds for commitments in dollars
and sterling.
During the past few days the Governor of the Bank of

France, Labeyrie, has been questioning officials of the
Bank of Italy in Nancy on the working of the exchange

control system in Italy.
BULLITT.

EA:LWW

388

Paris, June 22, 1937.

Dear Mr. Secretary:

I have pleasure in transmitting
herewith, for possible addition to your
own files on the Tripartite Agreement.
an abridged translation of the Report of
the Governor of the Bank of Italy at the

Annual General Meeting of the Shareholders,
held in Rome on the 31st March, 1937, which,
on page 6, refers to the Agreement of
September 25, 1936, and consequent steps

as "the first honest attempt towards wide
international cooperation which has been

made since September, 1931."

Faithfully yours,
H. Merle Cochran,

First Secretary of Embassy.
Enclosure.

The Honorable Henry Morgenthau, Junior,

Secretary of the Treasury,
Washington, D. C.

389

July 8, 1937.

Dear Mr. Cochran:

The Secretary has asked me to thank

you for your letter of June 22nd, which
encloses on abridged translation of the
Report of the Governor of the Bank of
Italy at the Annual General Meeting of

the Shareholders, held in Rome on March

31st. He also has received a copy of the
pamphlet entitled, "Monetary and Economic

Situation of U. S. A. 1925-1937", which
you sent him with your personal card.
He is glad to have both of these publications for his own records.
Sincerely yours,

H. S. Dists,
Private Secretary.

Hon. H. Merle Cochren,

First Secretary of the

United States Rubassy.
Paris, France.
GEF/dbs

390

BANCA D'ITALIA

ABRIDGED TRANSLATION OF THE

REPORT OF THE GOVERNOR
AT THE

ANNUAL GENERAL MEETING OF THE
SHAREHOLDERS
HELD IN ROME ON THE 31st MARCH, 1937.

YEAR 1936.

Gentlemen,

World economy, particularly during the last months of the year General Remarks

1936. has shown a further improvement as compared with the
previous year, contributory causes being the Tripartite Monetary
Agreement and the alignment of the currencies which formed
the gold bloc.

It appears that the recovery is only partly due to a return
to more healthy economic conditions: it is rather the result of
temporary State intervention, of artificial credit expansion, and of
huge expenditure on armaments.

It must be noted, moreover, that the rise in world prices, which
is due to the gradual re-establishment of equilibrium between demand
and supply is of greater benefit to countries producing raw materials,

whereby importing countries are more and more compelled to
forgo, as far as possible, the importation of raw materials and foodstuffs, and to make use of the stocks accumulated in previous years.

This is noticeable in the comparatively small expansion in international trade.

On the other hand, it is only through the clearing of the international political horizon that the improvement noticeable in the
past year can be consolidated by genuine factors of lasting economic
progress.

Agricultural production, which closely affects economic conditions, has been unsatisfactory in certain countries, owing to unfavourable climatic conditions. Unemployment, although reduced,
is still at a fairly high level ; international trade has not increased
pari passu with production, and has continued to be hampered
by the instability of exchanges, especially up to last September,
by the lack of medium and long-term capital movements, by the
dietates of nationalistic policies, and, for a good part of the year, by
the exceptional obstacle of " sanctions."

The bitter struggle for predominance in the exchange market,
with its far-reaching consequences and fluctuations from one to the
other of the three most important world monetary centres, has
certainly influenced the psychology of the 'saving " masses and of

4

5

those engaged in the various branches of economic activity. For
those in possession of assets, unrest, lack of confidence and often
panic have for too long alternated violently with short periods of

pressure was noticeable in the high margin on forward rates and in
the gold losses, which greatly reduced the reserve of the Banque de

calm to allow of the re-establishment of a period of tranquillity in the
immediate future.

the French people themselves, and causing in their turn increased

The uncertainty and instability of the principal financial markets

France. (1) These circumstances, largely due to the action of
internal financial and economic difficulties, helped to cause the
French Government to propose to Parliament, on the 25th September,
the reduction of the gold content of the frane, after having obtained

were accompanied by a similar situation in international political
relations, thus retarding still further the return of confidence which

from the United States and Great Britain the assurance that they

is essential to the re-establishment of normal economic relations.

would co-operate for the success of the operation.

The monetary events of the past year can be compared, for
importance and its far-reaching consequences, with those of 1931,

As a result of the law of 1st October. 1936, the French frane
has lost its character of a currency having a fixed gold content
and has assumed temporarily the nature of a managed currency,
between two limits corresponding to a gold content of 49 and of 43

but, whereas the departure from the gold standard of sterling opened
up a period of diverse systems of money control and of acute international economic contrasts, which resulted in a shrinkage of trade,
the alignments which have taken place after five years seem to be
the first step towards a less unstable relation between the internal
and the external purchasing power of the various currencies.

The features of the foreign exchange market were in the early
part of 1936 the attacks on the currencies of the gold bloc, the defence
of which required large exports of gold, and later a process of adjust-

ment, following on the currency alignments. In the first period the
weakness of the currencies of the gold bloc contributed to the strength
of sterling and dollars, which, as the result of their respective monetary
policies, maintained with considerable stability the positions attained
in 1934.

The Belga has also been mainly stable in the period under
review, during which the gold standard was resumed by re-establishing,

as from the 31st March, the convertibility into gold of the notes of
the National Bank at a parity depreciated by 28 per cent. as compared
with that fixed in 1926. Shortly afterwards, however, Poland, owing to
commercial difficulties, was compelled to break away from the gold
bloc, by introducing strict exchange control.

The attention of the international market remained, however,
mainly concentrated on the French franc, which was subjected to
heavy pressure, particularly between May and June. In spite of
the intervention of the British and American Exchange Equalisation
Funds, for the purpose of minimising the spot rate fluctuations, the

milligrammes of gold of a fineness of 900/1000, involving a depreciation at the rate of 25-19 and 34-35 per cent. respectively, as compared
with the frane of 1928. At the same time an Exchange Equalisation
Fund was set up, with 10,000 million gold franes at the new parity,
obtained through the re-valuation of the gold reserve of the Banque
de France.

The features of the Swiss frane and of the Dutch guilder in the
first period of 1936 were similar to those of the French frane, since
the international exchange market felt that the above currencies
would be unable to maintain their gold parity if it should be abandoned
by the French franc. In fact, as from the 27th September, the Swiss
france was moved from a fixed gold parity of 290-32 milligrammes of
fine gold to a variable parity between 215 and 190 milligrammes
of fine gold, involving a depreciation of 25-94 per cent. and 34-56
per cent. respectively. As a result of the re-valuation of the gold
reserve of the National Bank an Exchange Equalisation Fund was
set up, amounting to 538-6 million Swiss francs. Hoiland, following
the English example, confined its action to placing an embargo on

the export of gold and created a similar fund, amounting to 300
million guilders in Treasury Bills.

In face of the action taken by the countries which formed
the gold bloc, the Italian Government, as will be seen later. after
(1) A premium on forward sterling in Paris on the one month quotation reached . maximum forward
dollars of 36-76 reached per cent. the in highest June and level was of 23:47 35-29 per per cent. cent. in September in May and whereas June, and the was premiumon reduced to 25-27

per cent. in September

6

7

the greatest possible equilibrium in the system of international
exchange should be maintained," and they insist on the necessity
of a common action to relax progressively the present system of

mature consideration, re-established on the 5th October the gold
value of the lira on the same level, as compared with the principal
foreign currencies, as had been fixed in the stabilisation law of the
21st December, 1927, and which had been affected, with damaging

quotas and exchange controls, with a view to their abolition.

results fo our country, by the subsequent devaluation of all the above.
mentioned currencies. After the re-establishment, on the new basis

Conversations which have since taken place, with the object
of defining technical conditions for co-operation between the signatory
countries, especially in connection with gold movements, led to fresh

which reduced by about 41 per cent. the gold content of the lira, of
the parity of 19 lire to the dollar, the Government have reserved the
option (as in the United States of America) to carry out, if necessary,
a further devaluation of 10 percent.

agreements, founded on the principle of reciprocity, by which the
United States have declared that they are willing to sell gold to the
exchange equalisation funds and foreign Treasuries, and/or fiscal
agents operating on behalf of such Treasuries and guaranteed by
them, provided that they, in turn, are prepared to sell gold to the

As regards the minor currencies, the following features may be
mentioned a further devaluation by 15-99 per cent. of the Czechoslovakian crown and of 27-536 per cent. of the Roumanian leu : the
adoption of the pound by Greece and Turkey as the basis of their
respective currencies: and also the adoption by the Latvian lat of

United States at the price, and on the conditions, which are regarded
by the United States Treasury as best suited to the public interest.
With the recent changes which have taken place in the currency
systems, the exchange equalisation funds have acquired a paramount

the sterling basis.

an apparently independent position, though in reality connected
with sterling-a connection which was in fact established in 1934
and maintained in the two years 1935 and 1936) a new grouping,
which is the first honest attempt towards wide international cooperation which has been made since September, 1931. This agreement is better defined as a monetary truce, since, while the desire
is expressed to foster those conditions which safeguard peace and

will best contribute to the restoration of order in international
economic relations,' it is said immediately after that the Government of the United States and the Government of Great Britain, in
their policy towards international monetary relations, must take
into full account the requirements of the internal prosperity of the
United States Republic and of the British Empire, while the French
Government will naturally take into account similar considerations
regarding the economic needs of France and of its over-seas posses-

sions." It is always subject to these considerations that the contracting parties express their intention to act in such a way that

influence over international financial relations. The available
means and the operations of the funds are kept in the greatest secrecy.
(

The agreement concluded on the 25th September, between the
United States, Great Britain and France, to which other countries
which aligned their currencies have adhered in principle, including
Belgium, has substituted for the old conflict between the currencies
of the sterling bloc and of the gold bloc (while the dollar maintained

Every precaution is taken to prevent speculative activity in the
exchanges, and the path is left open for fresh adjustments of the
value of currencies to national economic requirements and to isolating

the home money market from the influences of the international
market. It remains doubtful, however, whether the exchange equalisation funds can always easily check exchange speculation, if, for
more or less well founded reasons, there is a general gain or loss of
confidence in any particular currency : nor. on the other hand would
it be possible to alter frequently and unilaterally the value of any
currency without causing retaliations on the part of others in order
to neutralise, at least partly, its effect.
Considering more recent events, especially in connection with
international capital movements, and money rates, the process for
the settlement of the various currencies on a sound basis, both internal
and external, seems still far from finality, while the final stabilisation
rates of certain European currencies are still uncertain, and the
relation between the value of dollars and sterling still remains to be
definitely fixed. It may be noted, however, that the extreme contrasting tendencies have been considerably narrowed down. (1)
(1) The sterling rate in New York, which had risen to over 5 dollars, fell suddenly, after
the

continental alignments, to close upon the old parity of 4-861.

8

9

Whereas the production of gold is increasing, (1) contrary to
the most reliable anticipations of a few years ago, a steady migration
of the metal towards the countries having a favourable balance of
payments, or whose currencies, owing to the particular circumstances

of the time, enjoy special confidence, is going on. This causes a
disturbance in the export, as well as in the import, markets. In
1936, while the outflow of gold from the countries of the gold bloc
contributed towards causing the fall in the respective currencies
the influx into the United States has become a cause of great concern
and has accelerated the process of credit expansion. (2)

money market a slight rise in the short-term rates has taken place
as opposed to a fall in the medium and long-term rates, (1) owing
to the investment of available funds in the money market and to the
action of the Treasury in promoting the funding of the floating debt.
Also in London the discount rate has remained unchanged, at
2% The monthly averages of money rates have been fairly steady,
with a hardening in June and December of a seasonal nature, (2)
Credit has further expanded and month by month in the year 1936
the banks' statements have shown new high records in the volume of
deposits.

The silver market. although having been less disturbed than
in the years 1934 and 1935, still remains unstable. While production
has further increased, (3) the United States Treasury have reduced
their purchases at home and in the countries with which special

On the other hand, in the countries which formerly belonged to
the gold bloc, the financial market, though directed towards a policy
of easy money, was affected by the trend of the exchanges and by the
outflow of capital.

agreements have been concluded

The discount rate of the Banque de France was subject to wide
fluctuations, reaching a maximum of 6% in May and June, with a

The markets which were not subject to monetary disturbance
maintained great liquidity, since, in order to meet contingencies
and for financial reasons, a policy of easy money has been pursued
The low rates of interest have caused a further development in the
activities of private enterprise and enabled the Governments to

minimum of 2 per cent. in the last months, the market rates

obtain on easy terms the necessary loans.

In New York the official discount rate of the Federal Reserve
Bank has remained unchanged at 11 per cent. The steady inflow of
gold and the increase in the Federal Public Debt, which in 1936 rose
from 30-6 to 34-4 thousand million dollars, have brought about, in
spite of efforts to check it, a credit expansion in which the elements of

inflation are not lacking. It should be noticed, however, that in the
(1) The world output of gold in the past year amounted to 1,089,000 fine kilogrammes as
against 964,000 fine kilogrammes in 1935.

(2) In the first nine months of 1936 in France a net outflow of gold of 1,061,000 fine kilogrammes was recorded while the United States and Great Britain during the whole year recorded
net inflow of 992,000 and 1,040,000 fine kilogrammes respectively.
The present gold movements, as is known. are not ao dependent on trade as on capital that

movements, According to the calculations of the United States Treasury it rockoned into

between January, 1933. and September, 1936 there has been a net inflow of foreign capital
the United States of 2,282 million dollars.

(3) The world production of silver in 1936 amounted to 7-8 million fine kilogrammes against
6-3 million fine kilogrammes in 1935

fluctuating accordingly.

It was almost the same in the Dutch market, although money
rates remained at a considerably lower level than in France whereas
the Swiss market was very slightly affected by the monetary events
and the rates became easier. (3)

The New York Stock Exchange has been definitely on the rise
the improvement in economic conditions, the high dividends, and the
large money resources have contributed towards a progressive rise
especially in shares.

In London the collapse of the gold bloc, by enhancing the hope
of a new era of development in world trade, accelerated the Stock
Exchange boom which had been in progress in the preceding months,
thanks to the favourable trend of domestic economic development.

The French Stock Exchange was affected by the uncertainty
of the economic and financial position. The prices of home securities
were weak, until the de-valuation took place, but, after the alignment,

a definite rising tendency set in, especially in the case of equities
and foreign securities.
(1) (2) and (3) (See Table on page 10).

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11

1001

SHIPS

Italian economy in 1936 assumed a particularly national The Italian Market
character. Well fitted for the effort to overcome obstacles and
difficulties in the way of attaining its great goal, in the first part of
the year, it had, in the realisation of the Imperial idea of Mussolini,
the best inducement to prove itself worthy of the new and wider
field of endeavour.

The economic siege and the hard fought and gloriously won war
have created powerful forces, indicating the soundness and the possibilities of the economic structure, which was not weakened but well
tempered by the struggle in which every Italian felt himself engaged.

The Italian market in every branch has followed the line of
action which was clearly set. finding in itself such financial and
economic resources as made possible the triumph due to the bravery
of the fighting forces and to the faith and discipline of a strong and
laborious people.

The Fascist Government regulated in every field, by timely
decrees, the life of the country, and the party leaders, assisted by
corporative and syndical bodies, were active in the performance
of tasks of the highest value, which are still being carried out, and
are specialising in the delicate task of price control.

Economic developments thus show evidence of a firm and
constant will, aiming, in accordance with the " plan " drawn up by
the Duce, at establishing gradually and methodically the country's
economic structure on a basis which will finally ensure the greatest
possible national economic independence.

Sanctions have given the most decided impetus towards the
achievement of this plan and the economic life of the nation now
proceeds within the framework of an organisation which is no longer
imposed by special contingencies but has become normal in its
development.

In the period of sanctions the scarcity of means of international payments imposed a reduction in the supplies of raw materials
and goods from abroad. However, by utilising stocks, by technical
alterations, by exploiting every national resource, and making use

of agricultural and industrial by products, the home manufactures

12
13

engaged in meeting the exceptional military requirements, in addition

to the normal needs of the population, were able to maintain a

supply of foreign currencies required for the import of the necessary
raw materials. In view, moreover, of the difficulties and the expense

satisfactory level, although various branches have been seriously
hit by the shrinkage in exports.

of market dislocations imposed on the export industries by the

By the timely provisions for reducing the foreign indebtedness
of Italian banks and for attaining the largest measure of liquidity
at home, it has been possible to face the financial sanctions and to
meet all the credit needs of the home industries.
Subsequently, when international trade was resumed, and through

the currency alignment, Italy was able to take part in the progress
which has been made in world economy.

Signs of improvement in internal conditions are in fact visible,
apart from the monetary factor, in the tendency towards the reestablishment of equilibrium between prices and costs, the greater
confidence in investments, the considerable rise in deposits, due

chiefly to the creation of fresh savings, the improvement in the
stock markets, the satisfactory industrial output, the development
in domestic trade, and the revival of tourist traffic.
Foreign Trade

An interesting aspect of economic events in Italy in 1936 is
shown, as already mentioned, by the trend of foreign trade, excluding

trade with Italian colonies, The above trend is shown by the total
value of imports, which, between 1935 and 1936, fell from 7-7 to 5-8

thousand million lire, and the value of exports, which showed a
smaller fall from 4.5 to 3-8 thousand million lire. At first sight these
may appear favourable figures, since they show that the adverse
balance of visible trade has been reduced from 3-2 to 2-3 thousand
million lire, namely, by about one-third.

Analysing them, however, the effects of sanctions, which
were enforced wholly or partially by the countries which took about

one-half of the total exports, are apparent. After the contracts
concluded prior to the 18th November, 1935, had been carried out,

Italian exports to sanctionist countries, subsequent to January,
1936, were reduced to negligible figures.
At the same time, the war requirements called for large supplies

from abroad, and for limitation, in other then war industries, of the

sanctionist bloc, it is apparent that a large adverse balance of visible
trade was inevitable.

The effects of this hard fought war on two fronts were met,
and minimised first by the imposition of counter-sanctions, consisting
of the repeal of existing trade agreements with sanctionist countries
and the strict check on imports from them, through the adoption of
the licence system, by which imports were reduced to less than half
their normal level. Moreover, trade was increased with non-sanctionist
countries, in particular Germany and the United States, The maintenance of a large interchange of goods with these two countries
was an element of the greatest importance for the resistance of Italy
at the time of the sanctions.

The action of the State and the initiative shown by exporters
were effective in securing, with the victory in the field. the victory
of the Italian people on the sanctionist front, which was sealed by
the repeal of sanctions in the month of July.
From the moment trade negotiations were resumed with former

sanctionist countries, with the exception of the U.S.S.R., which
resulted in agreements regulating Italy's trade by clearing arrangements on a parity basis, with a margin in Italy's favour whenever
old indebtedness remained to be settled. As a result, trade was
immediately resumed, with considerable benefit to Italian exports,
which received further valuable assistance from the alignment of
the lira. Imports have also shown a decided tendency to rise, owing
to the larger quotas which were granted, in view of the generally
improved exchange position and also of the desirability for not
curtailing further the supply of raw materials for industries other
than war industries, and, moreover, owing to the necessity of filling
gaps in home agricultural output.

Thus, at the end of the year Italy's foreign trade has decidedly
revived. The expansion of exports will now depend to a large extent
on the improvements in the technique of production and trade organisation, and on the direction of foreign trade policy.

15

14

Agriculture

An unfavourable feature affecting the economic position of the
country was the poor harvest, due to adverse climatic conditions, of

most of the crops. In particular, the production of cereals was
affected, and the wheat, rye, oats, barley and rice crops sank to the
lowest levels of the last decade. Maize, however, gave a better yield,
since conditions in the later part of the season were more favourable

for that crop. The food requirements of the country which could
only to a limited extent be satisfied by a larger use of home grown
beans and potatoes, had to be met by additional imports, especially
of wheat. from foreign countries, The Government have taken steps
to relieve the distress of the farmers in the most seriously affected
districts, by granting credit facilities and organising pools for the sale
of agricultural produce at standard prices, in order to ensure a reason-

able remuneration to the farmers for their goods. The pooling of
wheat was made compulsory by legislation, and for other cereals
voluntary pools were arranged. The marketing of rice was regulated
by the Ente Nazionale Risi. The industrial crops, particularly hemp,
flax and cotton, gave more satisfactory yields, thus contributing to
the national economic independence. For these too legislation was
enacted for regulating the areas under cultivation and for pooling
the crops under the control of the appropriate corporative bodies.

The crop of sugar beet, in spite of the larger acreage sowed was
unsatisfactory.

Legislation was also enacted as a result of the very poor crop
of olive oil, requiring the grading of home produced oils and reducing
the excise and import duties on oil-seeds. As regards wine, measures
were taken for utilizing, if necessary, a portion of the surplus 1935

stocks for distillation purposes. At the time of the new vintage,
the grapes used for the manufacture of household wine were exempted

from excise duty, and under a new Decree, which has recently been

approved by the Cabinet, measures have been adopted for the
regulation throughout of wine production.
A new department has been set up at the Ministry of Agriculture

and Forestry for agricultural planning, the marketing of produce
and financing it : this affords further evidence of the particular
importance which the Government attaches to agricultural problems.
Industry

During 1936 industrial activity, stimulated by the needs of the
moment and by the pressure of sanctions, was marked, as already

mentioned, by a definite tendency towards the attainment of the
greatest possible economic independence.

This line of action required the modification of the industrial
plant and of technical processes, in order to secure the fullest exploitation of national resources, which enabled certain industries
mainly devoted to the export trade, to meet the difficulties imposed
by sanctions. Thus, certain branches of the mining industry and
those making use of products of the soil for manufacturing purposes,

were busily engaged also during the period of the sanctions, in
manufacturing goods to replace those formerly imported from abroad.
The Government, assisted by the syndical organisations, adopted
timely measures for helping the technical transformation of industries
which were not sufficiently developed to meet national requirements.

Action was especially directed towards the development of coal.
mining and towards promoting the production of synthetic liquid
fuel, the use of various agricultural products or by-products for the
production of alcoholic fuel, the development of crops for the supply

of raw materials for making cellulose, and the use of other raw
materials, in order to extend the production and use in the textile
industries of natural and artificial Italian fibres. (1)
The need for making the fullest possible use of the industries
which are most essential for national defence induced the Fascist
Government to extend State control to them. With the same object
in view, steps were taken to exploit and co-ordinate more effectively
the national sources of electric power. (2)
The well-planned re-organisation of national economy has found
a powerful instrument in the control of the creation of new industrial
plant and the expansion of existing plant. This task, which had been
(1) Among the bodies which have been created for the exploitation of national resources,

the following may be mentioned the Azienda Carbon Itali (coal). the Arienda Italiana Petroli
Albania (oil), the Azienda Nazionale Idrogenazione Carburanti (petrol). the Azienda Minerali
Metallici Italiani (metals). the Ente Nazionale per In Cellulosa per Carta (cellulose and paper)
(2) Particular importance attaches to the provisions of the Royal Decree Law No. 886 of
the 16th April, 1936 by which Central Electricity Board was net up, with the task of controlling
all activities concerning the production, distribution and use electricity, and the which studying may and be

carrying out of all provisions for ensuring an increase of the available electric power

needed in case of war. and of promoting and regulating the civil mobilisation of all electricity
enterprises
The Board has been given full powers of control over these enterprises, which may also tech- be

exercised by the appointment of officers for disciplinary purposes For the execution of its
nical tasks, an office for the mobilisation of electric power has been ant up. including .
body of observers for surveying the output, distribution and use of electricity.

special

17
16

entrusted by the law of 1933 to a special Board, has now been trans.
ferred to the Corporations which are more competent to appreciate
the problems concerning each economic branch of economic activity,
not only as regards immediate requirements, but also with a view to
the possibilities and necessities of the future.

has re-established freedom in the distribution of profits by Companies.
The progressive taxation is intended to avoid speculative fluctuations
in share values and to oblige the directors of limited Companies to
refrain from the policy of making too lavish distributions of profits to

Similarly, under the Royal Decree Law No. 1296 of the 16th
April, 1936, and the Royal Decree Law No. 1689 of the 11th May,
1936, the existing voluntary consortiums, as well as special bodies
and institutions which had been set up to regulate certain branches
of production, (1) were placed under the control of the respective

No. 1548 of the 25th July, 1936, aimed at making more effective

shareholders.

The audit changes which were enacted by the Royal Decree Law

Corporations, so as to ensure that their action should conform to the

the control exercised by Auditors.
Another measure enacted by the Royal Decree Law No. 163 of
the 4th February, 1937. regulates the re-valuation of plant on the
basis of the currency alignment, forbids the total or partial distribution of the proceeds of such re-valuation, or their use for increasing

general policy.

the capital of the Companies. The proceeds of such re-valuation

In the year 1936 there was a net increase of 125 limited Companies

Limited Companies

with a paid-up capital of 710 million lire : on the 31st December,
19,353 Companies were in existence with a capital totalling 44-8
thousand million lire. The average capital of each Company is
thus 2.3 million lire, which is slightly higher than it was at the end
of 1935.(2)

Important provisions affecting Companies were enacted in 1936,
especially as regards the income tax assessment, the dividends and
audit.

As regards the fiscal provisions, the Royal Decree Law No. 1231
of the 8th June, 1936, introduced a new basis for, tax assessment
subject to adjustment according to the actual results. The same law
provides for the taxation of untaxed reserves of previous years, if
and when distributed to shareholders, allowance being made for certain
expenditure.

Regarding dividends, the Royal Decree Law No. 1744 of the 5th
October, 1936, by which a progressive tax on dividends was imposed,
(1) The Istitute Cotoniero Italiano (cotton). the Ente Nazionale della Moda (fashiona) Nazionale the

Azienda Minerali Metallici Italiani (metals) the Camera Agrumari (citrus fruit). the Ente Nationale
Serico (silk). the Ente Nazionale Risi (rice), the Azienda Carboni Italiani (coal). the Ente
per la Cellulosa e per is Carta (cellulose and paper). the Ente Nazionale per l'Artigianato
Pierole Industrie (handicraft and small industries), and others.
which
(2) The amount of new capital issued by limited companies was 2,962 million lire of line
only 354 million were in respect of 1,976 new companies, and the balance of 2.680 million reductions was

in respect of increased capital of existing companies On the other hand. capital of 1,851
amounted to 2,252 million lire, of which 925 million lire were due to the winding-up In the
companies, whilst 1,327 million lire were written off the capital of existing companies. mining
various categories the most important increases affected chemical nompanies (443 million) most important

companies (290 million), metallurgical companies (145 million lire) whereas the
reductions were for banks (145 million lire) and financial companies (194 million lire).

may be placed to reserve and are not subject to the progressive tax
on dividends enforced by Royal Decree Law No. 1744, of the 5th
October, 1936. The above measures are intended to ensure that the
balance sheet of Companies shall not be inflated by premature revaluation of their assets.
The trend of bank deposits in the year 1936 has been favourable. Deposits
The total amount thereof rose in the year from 61.5 to 68-9 thousand

million lire. Of the latter amount 8-2 thousand million lire were
held by public law credit institutions, 9-7 thousand million lire by
public law banks, 10-5 thousand million lire by other joint stock
banks, 19-3 thousand million lire by the larger savings banks, and
21-2 thousand million lire by the Post Office Savings Bank.
The importance of the rise in deposits as an index of the economic

recovery is shown by the fact that the increase has not only taken
place in the case of ordinary savings banks and the Post Office Savings
Bank, but also in the case of the joint stock banks.

After a lengthy period of steady shrinkage in business, Stock Stock Exchange
Exchange activity revived considerably during the last months of
the year 1936 the volume of transactions rose to the same level as
that reached in the middle of 1935 and the prices of shares rose to
nearly double the lowest quotations touched in June, 1932.(1)
(1) The more active shares were those of the electrical motor car and rayon companion
Between December, 1935, and September, 1936 the rise in prices was alow and well
distributed among all groups whilet from September to December 1936 is became wifter and

moved from one the other. The general index of share values calculated by Professor
Bachi. group per to in September 28-77 in December 1936, higher whilet than the
in December. Among the most affected were four of the five textile groups,

was 12-55 cent. and per cent.

industrial groups serving exclusively the home market, which had not fallen substantially
in previous periods, were less affected

18

19

The above trend was brought about by higher internal prices
and in the case of certain industries, particularly the textile industry,
by the better openings for export trade as a result of the repeal of
sanctions, and by the conclusion of new commercial agreements.
Moreover, the re-valuation of industrial plant cannot be disregarded
as a psychological factor. The influence of the progressive tax on
dividends has been scareely noticeable, since it was partly set off
by the repeal of the limitation of dividend distributions above 6%
Dividends distributed in 1936 gave an average yield slightly
below 5% and, in the case of bearer shares (owing to the 10% tax)
rather less than 41% based on the value of shares in December of that

year. (1) On the other hand, the yield on Government securities
is slightly above 5% This is due to the requirement of last October
of a cash margin of 25% for contango operations, in order to curtail
speculation.

according to the indices of the Central Statistical Institute, of 7.7
per cent. in wholesale prices, 9-3 per cent. in retail prices and 7-8
per cent. in the cost of living. Further rises, of 5-6, 5-5 and 4-1 per
cent. respectively, have taken place between September, 1936, and
February, 1937.

The rising tendency has been checked by the severe price control

exercised by a special Board, which was created in October, 1935,
as part of the Executive of the National Fascist Party. This Board,
which was formed with the object of preventing violent movements
in the domestic market and unjustifiable rises in the cost of living
during the exceptional period of the Abyssinian War and of the
economic siege, has extended its control subsequently to all commodi-

ties, by virtue of Royal Decree Law No. 1746, of the 5th October,

Owing to such provisions, the amount of cash transactions
has increased, being mainly in respect of Government securities,
whereas transactions in shares are almost entirely for contango
settlement (2)
Price Levels and
Cost of Living,

Between September, 1935, prior to the beginning of the Abyssinian
War, and September, 1936, when prices of certain commodities were
fixed subsequent to the alignment of the lira, there was an increase,

In Italy, as well as in many other countries, the trend of wholesale prices and of the cost of living has shown during 1936 a constant
tendency to rise, which has been maintained during the first months
of 1937. On the Italian market this tendency, which was the outcome
of the rise in world prices and in the exchange rates, began to be
noticeable during the second half of the year 1934.
(1) Professor Bachi calculates the following yields on Government securities and on shares
which have paid a dividend in the last twelve months
Yield (per cent.)
1936

July

August
September
October
November
December

--

On Government

On Quoted

Securities

Shares

4-63

5-20

4-69

5-15

4-63

5-45

5-21

4-89

Difference

0-55

0-46

0.20

5-12

4.86

4.78

This decree, which formed part of the legislation respecting the
the alignment of the lira, contains drastic regulations for avoiding
unjustifiable and excessive rises in prices, especially in those commodities and services which primarily affect the cost of living, and for
safeguarding thus the purchasing power of the lira and the welfare
of the less well-to-do classes.

The regulations apply to prices of commodities, to rents of all
kinds, and to services, each group being separately considered As
regards commodities, it is forbidden to sell these at prices higher
than those fixed by the Central Price Control Board and by its subordinate Provincial Inter-syndical Boards, and, in cases where prices
are not so fixed, at a price higher than that ruling in the month of
September, 1936. In the case of rents of town houses and country
estates, no increase was permitted for a period of two years, and a
similar limitation applied also to the prices of certain essential services
such as water. electricity, gas, transport and freights.

0-82

0-32

S-10

1936.

0-32

trast

(2) In 1936 cash transaction in bonds amounted to 860-5 million lire and contange cent.
actions to 3,508-4 million lire, so that cash transactions were in the proportion of 19-7 per
of the total

contange

In the same period cash transactions in shares amounted to 47.2 million liro and cent
transactions
of
the total reached 5,084.3 million lire, so that the cash transactions were only 0-9 per

Prices, however, have not been definitely fixed in every case,
allowance having been made for readjustments due to actual and
unavoidable increases in costs,

21

20

The Central Price Control Board may, therefore, authorise and
regulate such adjustments as may become necessary, with the COoperation of the Syndical organisations, who examine the demands
for price revisions, which have to be submitted to the Central Board.
A greater elasticity is permissible for those commodities which
are not in general use or which may be regarded as luxuries, There
has been, therefore, a tendency to equalise the returns in industry
and commerce, since the drastic regulations concerning the prices
of commodities in more general use are offset by lesser restrictions
on the prices of more expensive commodities, and in particular of
those commodities the importation of which from abroad is permitted.
In order to make the above regulations effective, heavy penalties
have been prescribed, and in certain cases applied to those guilty of
illegal hoarding, and all attempts to cause an artificial shortage of
commodities in more general use, by camouflaging their nature, have
been severely punished.
The Budget

The ordinary Budget for the financial year 1935-36 closed with
an actual deficit of 1,550 million lire, or 1,657 million lire less than had
been estimated. The ordinary Budget does not include the appropriations for extraordinary requirements in East Africa, which, in
the course of the financial year, amounted to 11,135-5 million lire. (1)
For the present financial year, the estimated surplus of 20 million

lire in the ordinary Budget, is the result of financial proposals,
indicated in the last Report, for the purpose of increasing receipts

by 2,323 million lire, mainly in respect of the larger yield from
excise duties and business taxes which were subject to various

adjustments. It should be noted, however, that subsequent provisions, which were necessary in the light of changed economic conditions, such as the reduction in the sale price of petrol and other
mineral oils after the repeal of .. sanctions and the reduction of
customs duties and the abolition of the ad valorem duties after the
alignment of the lira, will result in reducing the estimated additional
yield from these taxes.(1)
Special mention should be made of the readjustment which is
taking place in the accounts of the State Railways, for which in the
past year a deficit of 900 million lire had been estimated By an

increase of about 600 million lire in receipts, due to improved
traffic returns, and the reduction of about 300 million lire in
expenditure, the position should be balanced in the present year.

The net increase of 646 million lire in expenditure for the
financial year 1936-37, as compared with the previous financial
year, is due almost entirely to the interest on the 5 per cent. Consolidated Loan, which was issued to meet the special requirements
in East Africa.

From the above estimates it is reasonable to hope that the
adverse Exchequer cash position will not be too unfavourable, since,

if certain items of expenditure expand and certain revenues are
curtailed, there should be larger yields from direct taxation, businesis
taxes and excise duties, as the result of increased manufacturing

activity through the revival of domestic trade, rising prices, and the
fuller assessment of incomes. Moreover, fresh receipts will accrue
from the progressive tax on dividends of limited Companies, which
(1) The following are the details of the foregoing taxation changes

(1) The extraordinary appropriations for East Africa were made and distributed as follows

September 5th, 1935 No. 1676
October 21st, 1935, No. 1855

December 9th 1935 No. 2112
January 6th 1936, No.
February 6th 1936 No. 181
March 9th 1936 No. 409
April 16th 1936 No. 593
May 11th, 1936 No 839
Total

Ministries

(millions of lire)

Decree

us

un

...

-

1,000

Colonies

2,500

War

30

1,000
640
1,530

950

and by-products, which was estimated 645 million lim. will show fall with

Appropriations

Total Amount
June 27th, 1935, No. 1044

(a) The yield of the increased duties on petroleum petrol, enade oils, lubricating result oils

ALLOCATIONS TO MINISTRIES

APPROPRIATIONS

(millions of lire)

the

4,667-3

08

Foreign Affairs
Home Affairs

329-7
12.7

Finances

However, the repeal the of ad colores Customs duties, and the reduction of Customs duties on

commodities in more general use.

(c) A licence tax on imports, the yield from which was estimated at 180 million lire.
(d) Various provisions relating to business taxes including . transport tax to balance at 832

1,440-5

the railway budgets the net additional yield from which is estimated

2,045

11,135-5

duty on artificial textile fibres: the from increased which excise was estimated duty on at 613 million lire.
electric power, above the additional items will yield also be affected by subsequent provisiona, such an

1,350

Air

the object of limiting the consumption of these products during the economic
siege.

(b) The increased Customer duties on cotton, wool enal and coke consumption the new excise of

3,650

1,125

Navy

of the subsequent reductions in the duties. which had also been heavily raised

million lire.
Total

11,135-5

22

23

will be operative for the financial year of the Companies in being on
the date of publication of the Decree instituting the tax (5th October,
1936).(1)

Special importance attaches to the fiscal reform effected by the
Royal Decree Law No. 1639 of the 7th August, 1936, by which,
in addition to a requirement for the closer assessment of incomes and
of transfers of capital, in order to ensure a more equitable distribution
of the fiscal charges, the whole system is adjusted on Corporative

lines and the Syndicates have to co-operate with the Revenue
Authorities. Accordingly, incomes are assessed in the light of the
individual's occupation, based on the average yearly income earned
by persons engaged in each Corporative activity. The law empowers
local assessors to establish, in collaboration with the Syndical bodies,
uniform standards of assessment subject to individual fluctuations.
Under the new order it will be possible, therefore, on the one hand
to check evasion and to assess incomes and transfers of capital with
greater exactitude, and, on the other, the taxpayer will not be liable
to unjustifiable assessments by the Revenue Authorities.

Moreover, by requiring all taxpayers to establish a domicile
for taxation as well as for civil purposes and by setting up a fiscal
register, on which the names not only of the actual but also potential
taxpayers are inscribed, a better basis for fiscal inquiry and for the
ascertainment of actual tax-paying capacity has been ensured.(2)
The estimates for the financial year 1937-38 include an increase
of about 3,500 million lirei expenditure as compared with the previous
year. Of this amount, over 1,200 million lire, are accounted for by

the new permanent charges for organising and developing the
territories in Italian East Africa, charges which increase fourfold the
expenditure of the Colonial Office. Further, an increase in expenditure

of 941 million lire falls upon the Finance Ministry, chiefly in respect
of additional interest on Public Debt. The armaments programme,

especially for the Navy and the Air Force, which was necessitated by
the international situation, has brought the total of ordinary expenditure on the armed forces, from 4,800 to 5,500 million lire.
A net increase of receipts of 285 million lire is estimated, as com-

pared with the financial year 1936-37, chiefly on account of the
extraordinary real estate duty and of the increase, on a conservative
calculation, of certain items of revenue based on their present yield
and on the visible signs of gradual recovery.
In order to meet the expenditure required for Empire develop Real Estate Loan
ment and for further defence requirements, real estate has been called
on to make its contribution, since, although to some extent affected

by the crisis, it now enjoys better conditions and benefits from the
consequences of the currency alignment. The Royal Decree Law No.
1743, of the 5th October, 1936, authorised the issue of a 5 per cent.
redeemable loan, to be paid off in 25 years by drawings, beginning
from the 1st January, 1938. Owners of real estate, with few exceptions,
are required to subscribe to the loan for an amount equal to 5 per
cent. of the value of the property owned, which is calculated, after

deducting existing mortgages, on the basis of the rateable value
assessed in 1936. They are also liable to a special duty for a period of

25 years, which is fixed at the rate of 3-50 per mille of the value
assessed as above.

The loan has been so arranged as to ensure a perfect relation
between the annual yield of the special duty and the sum required
by the Exchequer for meeting the interest and sinking fund on that
part of the loan to which subscription is compulsory. Immediate
remission of the duty may be secured by a cash payment of 90 per
cent. of the amount to be subscribed, while, subsequently, remission
can be obtained at any moment by surrendering the bonds. Immediate redemption has undoubted advantages for the tax-payer,
both because it reduces considerably the total burden of the duty
and because the value of the property is automatically higher.

(1) So far no very substantial increases are included in the supplementary estimates The

most important are those due to the requisition of wool the of material
lire), the purchase of material and maintenance of
(06 for the War Ministry (48 million
(124 million lire), supplies animals works

in home territory (22 million the
the million lire), the purchase of liquid fire), and public solid works fuel for in the the Caserta Navy (28 district million (34-7 lire). million defence lire).

and contribution the contribution to the National Insurance Institute for Ex-Service Men policies (30 million lire).
to the National Fascist Social Insurance Office for family subsidies (320
million lire).

(2) Among fiscal measures mention should be made of the now national body which has been
created for collecting municipal excise duties,

This operation has been facilitated by the authority given to all
banks to allow advances against the new bonds up to 90 per cent.
of their face value, within the limits of 10 per cent. of their available
funds and by the authority given to the Banca d'Italia to grant on

24

25

similar terms advances to other banks. It is reasonable to expect that
such advances will not lead to a heavy increase in the circulation of

The past year was of exceptional importance with regard to The Money Market
the defence of the lira, in view of the complex economic and financial

notes, both owing to the liquidity of the banks and to the facilities

problems which arose. These were solved, thanks to the special

available for these requirements.

On the other hand, the banks which have received such advances

must remember that their repayment must be made partly out of
existing savings and partly out of fresh savings, and that, therefore.
in addition to the sums which their customers will be gradually
repaying, they will also have to set aside a certain portion of the

organisations already in existence, for a considerable time.

The Under Secretary of State for Trade and Exchanges, as a
result of the extension of his functions, was in a position to regulate
Italy's trade relations with other countries, and under the Royal
Decree Law No. 1131 of the 8th June, 1936, his jurisdiction was
extended to Italian East Africa.

funds available from other sources,

The National Institute of Exchange, having been in its turn
The numerous owners of property valued at less than 10,000
lire are exempted from compulsory subscription. Thus, the small
land-owner has not been made liable for a charge which he would

converted into an executive organ of the Under Secretary, was finally

have found very burdensome.

confirmed as the sole controller of foreign exchanges and gold, as
well as administrator, on behalf of the Treasury, of foreign credits

Owing to the exemptions which have been allowed and to
the basis of the valuation, the average yield of the loan should be
substantially less than 5 per cent. of the total value of the private
real estate in the country.

Ponds

March, and the 23rd June, 1936, by which its functions were

and securities subject to requisition. In the course of this reorganisation the Committee of the Institute was dissolved and its
functions were transferred to a new Board, while a new Technical
Committee was set up, presided over by the Governor of the Banca

The Banca d'Italia is contributing towards the success of the
operation not only by making advances to banks without the
necessary means, but also by enabling its local branches to make
direct advances in cases where the local banks are unable to meet

d'Italia, for examining the demands for exemption and all

the demands of their customers.

to be entrusted, on the technical side, to the Inspectorate for

In order to assist in the financing of the general land reclamations
scheme, the Treasury has been empowered by the Royal Decree Law
No. 2370 of the 19th December, 1936, to issue special registered
bonds called 15 Credit Certificates for Financing Land Reclamation."
By means of these bonds those entrusted with reclamation work will

Exchange Operations of the Banca d'Italia. The latter has also been
concerned with the carrying out of the Royal Decree Law No. 1614
of the 28th August, 1935. by which the handing over to the Institute
of foreign credits and foreign or Italian securities issued abroad
was made compulsory. The Inspectorate has received altogether
about 70,000 declarations and has sent out over 74,000 demands.

be able to market without difficulty the annuities owing to them
as a State contribution.(1)
the (1) Prime The bonds will be issued within limita which shall be fixed every six months by Deceme
on receiving the Minister on the basis of the annuities due from the State which the commentment 1937 the
of

Reclamation

reorganised under Decrees of the Finance Minister, dated the 4th

limit has bonds, return to the Treasury. For the first six months of the year

the Decree of the 18th 1937, at 400 million

anitiam and are exempt from are redeemable all in 30 years, bear interest at the rate effects of 3 and per cent. purposes per
equivalent The been to bonds other fixed which Government by present and future February, taxation, being to all lire. and

The securities, of which they enjoy all the guarantees privileges

them to security, banks or and to insurance companies are authorized to take over such bonds all and financial to -

operations which may be include necessary. them in their legal reserves and to transact therewith

controversial matters concerning the compulsory handing over of
foreign credits and securities.

The task of enforcing the foreign exchange regulations continued

The regulations for the handing over of foreign assets were
completed by the Royal Decree Law No. 1631 of the 7th August,
1936, which required Corporations or persons of Italian nationality
owning foreign credits or securities, of which they had come into
possession after the 28th August, 1935, to surrender them at current
rates and prices. Subsequently, by the Royal Decree Law No. 2197

27

26

The National Institute of Exchange, in agreement with the

of the 28th December, 1936, it was deemed desirable to exempt
from the obligation of surrendering such assets Italian citizens who
were re-establishing their residence in Italy or foreigners having
acquired Italian citizenship after the 8th January, 1937, and also
Italians residing in Italy possessing foreign securities received as
dowry or inherited from foreigners.

Inspectorate for the Defence of Savings and the Granting of Credit
Facilities, has given instructions concerning the rates of interest
to be allowed on such accounts, and the use to which the funds
therein deposited may be put.
At the same time, foreigners and residents abroad have also been

Moreover, since the alignment of the lira required an adjustment

entitled to open free deposits" in which foreign as well as Italian

of the exchange rate in the case of foreign credits and securities
still due for surrender under the Royal Decree Law No. 1614 of the
28th August, 1935, the above Decree provided that, as from the

securities may be held, provided that these are purchased by means
of a remittance in a freely transferable foreign currency, or by using
balances held in a "free account."
In accordance with precedent, the Finance Minister has been
authorised to issue 1 to 3-year Treasury Bills in foreign currencies,
to be placed abroad. The above Bills, according to the Ministerial
Decree of the 6th March, 1937. may be issued in United States dollars,
sterling, Swiss francs, French franes, guilders, and Swedish kronor.
Moreover, in order to increase the receipts from the invisible
item represented by visitors to the country, the Royal Decree Law
No. 410, of the 20th March, 1936, authorised the National Institute
of Exchange to issue special Tourist Letters of Credit, Orders for
payment for Reimbursement of Tourist Services and Tourist Cheques,
non-transferable, drawn in lire upon the Institute itself, for delivery
against payment in freely transferable foreign currencies.
The service of the issue of Tourist letters of credit and cheques

6th October, 1936, the current rate of exchange should apply.

Finally, in order to assist in the recovery of foreign trade
relations, the same Decree allowed commercial companies, corporations and firms, the scope of whose activities was mainly in foreign
countries, to maintain accounts in foreign currencies and use for their

own trade requirements foreign balances or proceeds of foreign
securities, from the surrender of which to the Institute they had
been exempted.

With the same object, the Royal Decree Law No. 1 of the 11th
January, 1937, has established a system for enabling exporters to
receive advances from the banks on sums due to them from foreign
countries, to be settled under clearing arrangements.

In the past year, progress has been made-either in normal
course of events or through special agreements concluded with the

abroad was entrusted to banks and touring agencies, while the
regulation of the operations was entrusted to specially authorised

various countries-in thawing the frozen lire balances owned by
foreign holders, which had been blocked under the Decree of the

banks and agents in Italy.

16th November, 1935, in the so-called old lire accounts.
Moreover, as from the 1st December, 1936, foreigners and residents
abroad have been entitled to open with the banks who are agents

of

originally fixed at a discount of about 25 per cent., as compared with
the official rate, while, after the alignment of the lira, there has been
a margin in favour of the Tourist Lira, of about 61 per cent., which
has recently been raised to about 10 per cent.
Appropriate regulations have fixed the daily maximum amounts
of Tourist Lire which each person may use (1) and the procedure for

for the Institute or which work under the auspices of the Banca

d'Italia, free accounts in lire or foreign currencies, which are
not subject to any restrictions whatsoever, either for payments
in Italy or for the conversion of the lire into other currencies.(1)
(1) Free accounts may be composed of the following
(a) Remittances in freely transferable foreign currencies
(b)

Remittances

in

Italian

token

and

bank

notes

coins

(e) Remittances of drafts in lire or foreign currencies issued by members of the

the re-exportation of the unused Tourist cheques and letters of

Italian diplomatic and consular services abroad
(d) Amounts
collected in lire for consular rights or dues by representatives of foreign
countries
in

credit, as well as of unspent lire.

Italy

limits were fixed for each person over four years of age at 250 lire Nazionale per day. Fancista which
(1)Theholders
of hotel coupons of the Federazione 1937.

(e) Remittances of drafts in lire or foreign currencies issued in respect of banker
supplies

Alberghi reduced Turismo, to 200 or lire to for 150 lire for holders of other tourist coupons In February

(/) Foreign currencies payable by banks in urgent cases without special authority

the above limite were raised to 350, 300 and 250 tourist lire respectively. cheques can obtain the refund in foreign

(g) Amounts in foreign currencies transferable abroad, duly authorised by the National
Institute of Exchange

(4) Cheques, orders of payment or giro conto drawn upon another free account
(i) Amounts in respect of imports from countries with which clearing arrangements

are not in force, subject to special authorisation of the National Institute
Exchange,

The National Institute of Exchange fixes, with the approval
the Finance Minister, the rates for Tourist Lire. These were

(2) Holders of tourist letters within of the credit limit and of 1,250 lire per person, which in February, cent. to cover 1937,
currencies was raised of to unused 1,500 lire. sums at the selling rate for tourist lire, with a deduction of per
of

commission and expenses.

28

29

On the other hand, it has proved necessary to restrict the
return to Italy of Italian currency and bank notes and lira securities
of all kinds, and of coupons thereof. Thus, under a Decree of the
25th May, 1936, it was forbidden to introduce from abroad into
Italy, Italian currency or bank notes by mail, or to introduce lira
securities or coupons in any other form than by a mail remittance
to the Banca d'Italia or to one of the banks who are agents for the
Institute. Moreover, travellers were forbidden to export or import
more than a certain amount of Italian currency either in the form

In the years 1927-28, by the stabilisation of the two leading
Latin currencies, the period of monetary uncertainty following the
War seemed at an end but world economy had not shaken off
the effects of the previous general inflation of currencies and credit.
The expansion of paper money had its effect on investments
and purchasing power, causing a rise in world gold prices to about
50 per cent. above the pre-war level. The crisis which came in the
autumn of 1929. and subsequent developments showed the artificial
nature of what had appeared to be a position of natural equilibrium.

of notes or coins.(1)

The fall in prices, the slowing down of economic activity and

At the same time, the Institute granted greater facilities for
the supply of foreign currencies to those who have to travel abroad.

the difficulties in the way of international trade, gave rise to problems

(2)

of the maintenance of outlets for export trade, of preserving the
earning capacity of business enterprises, and of reducing the growing

The Alignment of
Lira.

burden of indebtedness. Owing to these difficulties the two great

An event of paramount importance in 1936 was the provision

English-speaking countries were forced, in 1931 and 1933, respectively,
to abandon the gold parities of their currencies, many other countries
following suit.

of the Royal Decree Law No. 1745 of the 5th October, 1936, by which

the gold content of the lira was reduced from 0-07919 to 0-04677
grammes fine.

Further similar problems had to be solved in those countries
which had remained faithful to gold and which found themselves

As already mentioned, the above provision was due to monetary
events and to the trend of the markets in recent years.

placed in a particularly disadvantageous position owing to the trend
of prices and the dislocation of international trade, largely dominated
by the countries with a depreciated currency.

(1) Persons entering or leaving Italy may not bring into or take out of the country more than
300 lire in bank notes of denomination not exceeding 100 lire and currency notes, not more than

50 lire in Italian coin. Further limitations apply to the inhabitants of the frontier 2008 who,
on account of their work or other reasons, must frequently cross the border.
(2) The supplies of foreign currencies for persons travelling abroad must be entered in
passport and special form must be filled in for the necessary control

the

Banks who are agents for the National Institute of Exchange may supply travellers direct of
up to the equivalent of 2,150 lire Other authorised agents may supply up to the equivalent
not more than 500 lire per person Larger supplies must in any case be authorised in advance
the National Institute of Exchange
The quotas which have been fixed with countries with which tourist agreements have been
by

concluded

are

the

following:-

(a) AUNTRIA-Austrian schillings to the equivalent of 2,650 lire.
(b) GERMANY.-Registered marks or other means (tourist or hotel coupons) up to the
equivalent of 2,650 lire, which can be increased to 3,000 lire by reducing accordingly

the amount in lire which the traveller in entitled to have.

(e) SWITZERLAND Foreign currencies to 2,150 liro, tourist and hotel coupons,

entered in the for a 1,000 lire. plus

to to which betraveller
the passport
up further
of 3,500
Italian a
lirewarm
currency
not
in entitled,
sothe
that
altogether
three

exceeded The same person may not obtain the above supplies more than

lire by reducing accordingly the amount of lire which the traveller is entitled

have

raised

to 3,000 lire by reducing accordingly the amount in lire which the

entitled to have.

content, and it may be said, in fact, that the stability of the gold
content of a currency is only important because it expresses simply
and approximately the basis of the stability of that currency, measured
in commodities and in other currencies. This was the experience

of long periods of economic normality, during which the value of
currencies moved very slightly.

But if, in those days of limited fluctuations in prices and of

times in one year.

(d) HUNUARY.-Registered pengões up to 2,650 lire. which may be raised to 3,000 to

(e) FRANCE-Foreign currencies and coupons up to 2,650 lire which may traveller be is

Due consideration should be given to the fact that trade
relations are more dependent upon the stability in prices and
exchange rates than upon the stability of the currency's gold

normal trade relations, confidence in the gold standard was consistent

with the stability of internal and international trade relations,
after the fall of the pound, and still more after the fall of the dollar,

30
31

there is no doubt that the traditional conditions attached to fixed
gold content currencies was broken.

For about five years the value of gold has swiftly appreciated
in terms of commodities and it has become most unstable as a measure

of values, The purchasing power of currencies with a fixed gold
content has increased and this appreciation of purchasing power
in terms of commodities has, as the result of devaluation of other
currencies, led to a rise in their exchange rates,
The provision of the 5th October. by which the gold content
of the lira was reduced by 40-94 per cent., re-establishes the equilibrium which existed at the time of the previous stabilisation, both
in the relation between the lira and other currencies and between
internal and world price levels.

In fact, on the new gold basis, the change in home prices as
compared with the year 1928, expressed in gold, is in close conformity

with the average changes which have taken place in the leading
foreign markets. Thus, the handicap on Italian exporters who
were affected by the fact that the fall in internal gold prices during
recent years had been much smaller than in the countries where
currency depreciation had taken place has been eliminated.(1)
Moreover, the alignment of the lira should considerably improve the
yield from Italian shipping freights and from remittances of Italians
abroad, both in lire and in foreign currencies, items which are of
great importance for Italy's balance of payments.
The special conditions under which the adjustment of the gold
content of the lira has taken place should not, however, lower the
internal and external purchasing power in terms of commodities
and exchange rates of the currency below the levels corresponding
to the period which immediately followed the previous stabilisation.
At the present gold prices the purchasing power of the new lira
exceeds by over 30 per cent. the purchasing power of the lira of 1927
in respect of commodities of international use.
September (1) In the trade agreements concluded with former sanctionist countries up to last of

(France, Norway, zzechodovakia and premiums at the rate
in favour of Italian while, on the other hand,

tion 10 per duty cent. of have 20 per been fixed exporters, Sweden) compensating compense were

cent was charged to Italian importers. The above premiums and duties

cancelled at the time of the alignment of the lira.

In the domestic market the rise over the 1927 level is more than
25 per cent. in the case of wholesale prices and about 20 per cent. for
retail prices. There is thus a considerable margin for the inevitable
adjustment of prices within the limits of the purchasing power of the
1927 lira. However, the position needs to be carefully watched, so
that rising world prices or the course of local events may not reduce

too much or too quickly the above margin. The currency, which.
by virtue of the strict control over international movements of
merchandise, gold and capital, has been partly released from the
traditional rules governing the gold reserves, is now dependent on
the wise management of the monetary and financial policy rather than
on automatic control.
Article 4 of the Decree altering the gold content of the lira the The Bank's Revaluation Reserve of

provided that the proceeds of the re-valuation of the gold reserve
of the Banca d'Italia should go to the State. The above provision
was carried out under the Royal Decree Law No. 43 of the 4th
January, 1937, and the proceeds have been credited, as from the
5th October, 1936, to the Treasury account with the Banca d'Italia,
as in the case of the 1927 stabilisation.
the

In conformity with Sub-section III of the Royal Decree Law No. Reform Bank's of

375 of the 12th March, 1936, the new statutes of the Banca d'Italia
were drawn up and approved under Royal Decree Law No. 1067
of the 11th June, 1936, which was substituted for the previous one
of the 21st June, 1928, No. 1404.

In last year's report an outline was given of the reform by which

the Bank, either directly or through associated institutions (the
Istituto Mobiliare Italiano, the Syndicate for advances against
industrial securities, the National Institute of Exchange, the
Inspectorate for the defence of savings and the granting of credit
facilities) was entrusted with the control of the money market, of
the exchange, of capital and credit, and of banks and banking
operations.

The Banca d'Italia, from a limited company of private share.
holders, has been transformed into a public body and its capital of
300 million lire has been subscribed, under Article 20 of Royal Decree
Law No. 375 of the 12th March, 1936, by savings banks, public law

credit institutions, public law banks and insurance companies. The

Statutes

33

32

300,000 shares of 1,000 lire, which constitute the new capital, have
been entirely taken over by the consortium referred to in the above

the nomination and appointment of the officers who serve in the

Decree, which was formed on the 9th April, 1936, under the

These innovations, and others of a minor character, which
are contained in the new statutes, are aimed at combining simply
and effectively the independence of the Bank with the security
of public interests, and mark fresh progress in the direction of
greater departmental elasticity and managerial centralisation

chairmanship of the Governor of the Banca d'Italia. The savings
banks which were already shareholders were allotted new shares
to the full amount of their existing holding.
Under the new statutes the shares are transferable between
authorised shareholders, subject to the permission of the Board.
The powers of the Bank are vested in the General Meeting of
Shareholders, the Board of Directors, the Committee, the Governor,

the Director-General, and the Deputy Director-General The
General Meeting may be attended by shareholders holding not less
than 100 shares, with the right of one vote for every 100 shares up to
500 and an extra vote for every further 500 shares, the position of the
smaller shareholders thus being more favourable, as compared with
the larger ones, than was the case under the old Statute.
The Board of Directors, which, prior to the reform consisted of
31 members, of whom 26 were appointed annually by the local boards
of the chief branches of the Bank, and 5 by the General Meeting, now
consists of i5 members, who remain in office for three years, and of
whom 12 are appointed by the branch meetings of shareholders, and
3 by the Insurance and Credit Corporation. Thus, the opportunity
for regional representation has been maintained, together with the
new principle of corporative representation.

local branches.

Conven-

The alterations which, in the last few years, have taken place in tion Financial with the

the ratio of reserve to the circulation of notes, and in the credit
and debit position between the Bank and the Treasury, have required

that new arrangements should be made regulating the financial
relation between the Bank and the State. These were approved by
the decree of the Finance Minister dated the 31st December, 1936.

As from the 1st January, 1936, the circulation tax on notes will
be at the rate of one-tenth of the official discount rate, with a minimum
of I per cent., the circulation being calculated after the deduction
of the whole amount of the reserve in gold, or its equivalent held by
the Bank and the notes issued for advances to the Treasury.
The limit for temporary advances to be granted to the Treasury
has been increased from 450 to 1,000 million lire, allowance being
made for larger advances against Treasury Bills whenever exceptional
State requirements arise.

The Committee consists now of 5 members, compared with 11
under the old order. and it includes 4 Directors selected at the first

At the same time the Treasury has been relieved from keeping
at the Bank a fixed amount of 50 million lire in respect of Treasury
services. The concession to the Banca d'Italia of collections and
payments and other services on behalf of the Treasury, which was
renewable every two years and expired on the 31st December, 1936,

meeting of the Board in each year and the Governor. The office of

has now been extended until the 31st December, 1950, and the Bank's

Chairman of the Board has been suppressed.

yearly remuneration from such services has been raised from 21-9
million to 30 million lire.

The Governor, the Director-General and the Deputy-Director
General are appointed or dismissed by the Board, and both appointment and dismissal must be approved by a Royal Decree, proposed
by the Prime Minister, in conjunction with the Finance Minister,
subject to the approval of the Cabinet.
There are considerable changes which affect the administra- for
tion of branch offices: the Board of Directors is now responsible

It has also been arranged that the State shall receive all net
profits after the allocation of 20 per cent. to ordinary reserve, the
payment of a 4 per cent. annuity to the Real Estate Mortgage Institute
(formerly belonging to the late National Bank) a 6 per cent. dividend
to the shareholders, and, finally, a further 20 per cent. for a special
reserve fund with the approval of the Finance Minister.

State

35

34

The Royal Decree Law No. 376 of the 12th March, 1936, relating
to medium and long-term credits, provided for the making of additional
regulations for the necessary alteration of the statutes of the Istituto
Mobiliare Italiano and the Syndicate for Advances against Industrial
Securities, which was set up as an independent section of the former,

and of the Institute for Industrial Reconstruction

Consequently, by the Royal Decree Law No. 1042 of the 25th
May, 1936, the whole assets of the financial section of the Institute
for Industrial Reconstruction, now dissolved, have been transferred
to the liquidation section, the latter having undertaken all outstanding
financial operations and the repayment of the capital of the former
section within a period of twenty years. Under the Royal Decree
Law No. 957 of the 28th May, 1936, the new statutes of the Istituto
Mobiliare Italiano and the Syndicate for Advances against Industrial
Securities have been promulgated. They came into force as from the

of latter years its character as a purely international institution,
free from all political influences in the conduct of its banking and
monetary policies.

In this the central banks of the leading world markets with
the same aims and with the same obligations and rights. These are
essential conditions for enabling the Bank, in a future which to-day
appears not far distant, to attain in the fullest degree the objects
for which it was founded.
and

As already stated, the shares in the capital of the Banca d'Italia Shareholders Sharew

can only be held in registered form by savings banks. "public law
credit institutions, and banks and by insurance companies.
On the 31st December, 1936, the institutions holding the 300,000
shares were constituted as follows:88 Savings Banks

9th June, 1936.

11 Public Law Credit Institutions
and Banks

The scope of the above institution has been extended by
increasing to twenty years the maturity of the loans which the

10 Insurance Companies

Istituto Mobiliare Italiano may grant, and by increasing the amount
which the Syndicate may re-discount at the Banca d'Italia within
limits which shall be determined by Orders of the Finance Minister.
Bank for Interna.
Settlements

The position of the Bank for International Settlements did not
show any substantial change in the year 1936 and very slight alterations are apparent in the various items of its balance-sheet.(1)
The almost universal tendency towards the abandonment of the
automatic system of currency control made more desirable frequent
intercourse between the monetary authorities of the leading countries
and the use of a common centre where important gold transactions
could be effected without the interference of private interests.

The Bank for International Settlements has met the above
requirements. If the various monetary events which have occurred
since its creation have necessarily curtailed its activities, still the
Basle Bank, keeping faith with the letter and the spirit of its statutes,

has been able to maintain throughout the political complications
(1) The total assets and liabilities of the Bank have changed from Swiss Fre. 1936. 656,405,137

on the 31st December 1935, to Swise Frx 616,283,626-38 on the 31st December,

Total 109 Shareholders

185,056 shares
68,444
46,500

300,000 shares

At the end of 1936, of the 500,000 shares forming the old capital
of the Bank, 487,821 had been repaid.
The cash turnover of the Bank for the year 1936 amounted to Cash Displacement

594,129 million lire, an increase of 28,903 million lire on the previous
year. Receipts aggregated 297,356 million lire and outgoings 296,773
million lire, as against 281,530 and 283,696 million lire respectively
in 1935.

The circulation of banknotes on the 31st December, 1936, Circulation
totalled 16,525-1 million lire, of which 1,480 million lire represented
the total amount sent to the branches of the Bank in East Africa.
Moreover the Bank held 756-5 million lire in coin and currency
notes issed by the State.

Bank money orders and demand drafts outstanding at the same
date amounted to 725-7 million lire whereas the deposits in current

37

36

account totalled 705-8 million lire. Thus, the total liabilities requiring
reserve cover amounted to 17,956-6 million lire.

improvement in the economic position, since in other countries it
was caused to a large extent by purely negative factors, such as
disguised inflation for unproductive objects and the return of capital
not seeking investment but looking for safety after the monetary

On the 20th March the figures were as follows
Notes in circulation, including
remittances to East Africa 15,871.3 million lire
State coin and currency notes
held by the Bank

687-3

adjustments of the autumn.

The comparison shows, moreover, that the issue of notes in
Italy has been maintained in close relation to productive activities
and to the actual needs of the country, thus safeguarding the
confidence which, thanks to the constant vigilance of the issuing

"

These figures are given officially in order to complete the figures

disclosed at the meeting of the Insurance and Credit Corporation
and subsequently at the meeting of the Fascist Grand Council, They
assume greater significance when the exceptional circumstances of

bank, is inspired by the notes.

In conformity with the provisions of Article 4 of the Royal

the past year are considered.

Decree Law No. 1745 of the 5th October, 1936, the reserve of gold or

The Empire has been gained through the gigantic effort of the
whole nation under the guidance and by the will of the Duce : productive activities in every section have made the largest contribution
towards the achievement of this goal, while the economic siege was
an attempt to deprive the country of every weapon, and, in fact, to

its equivalent held on the 30th September, 1936, has been re-valued
on the new gold basis fixed by Article 1 of the same Decree.

On the 31st December, 1936, the reserve held by the Bank Reserve

against notes in circulation and other sight liabilities amounted to
4,012-6 million lire, as follows:Gold in hand(1)
Balances abroad

At the end of the year the circulation of notes had not
substantially increased actually, as compared with the pre-war

On the 20th March. 1937, the above figures were unchanged.

In 1936, there was a further development of the use of gold
as a means of settling international differences. Its holding and

Also, apart from the realisation of Imperial aims during the
past year, it should be noted that in most countries during 1936

use have been confined still further to central banks, to the Exchange

the circulation of bank notes has considerably expanded.(1)

Equalisation Funds, and to Governments for the purpose of meeting

trade and financial deficits: whereas the importance of gold as a

Although in all cases this development was caused by higher
price levels, the increased volume of trade, wages and salaries, it
may be said that the larger note issues were only partially due to an

basis for the internal credit of the nation is becoming more and more
merely symbolic.
of

(1) The following table shows the percentage rate of increase in the note circulation
1936

1935

in millions

Banna Italia (Lire)
Bank of England (E sterling)

Reichsbank (Rm.
Bank of France (Fru.)

Federal Reserve Bank (Dollars)

16,296-3

16,525-1

411-7

467-4

4.285-2
81.150-2

4,980-1
89,341-9

3,709-1

4.278-8

62.8

4,021-6 million lire

period, taking into account the changes in the value of the currency,
the increased population, and the higher standard of living, it may
be regarded as having been reduced

certain leading countries at the end of 1936, as compared with previous year
31st December, 31st December

3,958.8 million lire
..

starve it.

Change per cent.
1-40

13-53

The classic rules of the gold standard, which functioned in
normal times before the War in certain countries, have proved to
be inoperative and inapplicable in the attempts to apply them
extensively in most countries in the period 1925-31.

16-22
10-09

15-36

(1) Since 1928 the gold deposited in London during the War has not been included

39
38

The system has proved to be too rigid it lacks the necessary
elasticity to cope with the economic changes and to overcome crises
or check booms. That the gold points should be fixed solely on the
cost of insurance, freights and money rates may be reasonable in

conditions of balanced trade if prices are stable, and in exchange
markets in which only legitimate business and not speculative business
is carried out. Otherwise, the restricted margin for fluctuation leads

to frequent alternating movements of gold, which cause, in addition
to lack of confidence and alarm, sudden credit restrictions which bear
unfairly on economic life without discouraging speculation.
So much respect was paid to the sacred rules of the gold standard
that, though feeling its drawbacks, no one in the past had dared openly

to remedy them. Indirect measures, with a limited scope and with
no practical effect, were adopted. The different usages of the various
gold markets permitted at times a widening of the gold points by the
delivery of gold bars not acceptable on markets to which they were
being sent, the melting and refining costs thus having to be added to
the costs, or through using gold coin instead of bars. By these means
it was possible to gain time and to allow for exchange fluctuations

within wider limits, without touching the reserves. Many central
banks, in fact, covered with the formula (which has no longer any
significance) minting rights," the margins between the buying and
the selling price of gold, in order to gain greater freedom of action in
managing the exchange rates.
Experience has shown that such palliatives are of no use when
there are other deep-rooted causes of monetary disturbance they

are equally inadequate for absorbing the shocks of widespread
economic changes, the course of which it is impossible to check.

Although the relation of a currency to a fixed gold content
is necessary as a yardstick to ensure confidence for savings and for
national economic developments, there must, however, be sufficient
margin for smoothing out the constant changes and alterations which
are taking place in the varying factors which affect the international
value of that currency.

The price levels in various countries are not, nor can they be,
constant and fixed seasonal factors and temporary influences must

find vent in slight exchange fluctuations rather than in an increase
or reduction of the national gold reserve. In this way these factors,
instead of reacting on the credit basis, will affect directly the external
purchasing power of the currency, which is called the exchange, and
thus re-establish the balance quickly and effectively.
If, however, the exchange should become abnormally strong or
weak, then, and only then, should the authorities who are responsible
for the management of that currency intervene with all the means at
their disposal, in order to effect the necessary adjustment, either by
Customs policy or by any other means at the disposal of the State
for regulating economic conditions.
The Bank's credit with the State for 146,321 Kilogrammes of Treasury Hank. Liabilities
to

the

fine gold deposited at the Bank of England during the War has not
been altered and remains at the figure of 1,772-8 million lire. This
gold is not included in the reserve.
Temporary advances to the Treasury, made in accordance with

Article 21 of the Decree of the 31st December, 1936, amounted
at the end of the year to 1,000 million lire, and the extraordinary
advances against Treasury Bills to 2,000 million lire.

On the 31st December the amount of Bills discounted was Investment
1,266-7 million lire : advances against securities granted by the Bank
were 1,599-3 million lire, and deferred payments at the clearinghouses 21-2 million lire whereas the Government or Government
guaranteed securities owned by the Bank amounted to 1,523-3

million lire. Thus the interest-earning investments of the Bank
totalled 4,420-5 million lire.
The official discount rate, which had remained at 5 per cent.
since the 9th September, 1935, was reduced to 4} per cent. on the
18th May, 1936. The average rate for discount operations carried out
in 1936 was 4.69 per cent.
Institute for
Industrial Recon-

Following a special agreement entered into under the aegis of
the Treasury, in accordance with the terms of Article 6 of Royal struction
Decree Law No. 376 of the 12th March. 1936, and of Royal Decree
Law No. 1042 of the 25th May, 1936, for the final settlement of the

41

40

relation between the Bank and the Institute for Industrial Recon.
struction, the amount owed by the latter to the Bank on the 31st
December, 1936. was 4,708.1 million lire.

operate as have been created and are organised for that purpose,
and it will prevent any over-lapping, which may cause a resumption
of the banks' participation in industries and the consequent freezing
of their assets.

It should be mentioned that, in order to carry out the necessary
banking reconstruction between the years 1931 and 1934, recourse
had also to be made to the issue of notes corresponding to the figure
above recorded. This figure would have been greatly exceeded if, as
wasmentioned by the Finance Minister at the meeting of the Insurance
and Credit Corporation on the 23rd February last, the management

of the Institute for Industrial Reconstruction had not, from the
start, called upon public savings through various issues of bonds,
and carried out important contango operations. In this way it was
possible to defer and restrict recourse to the note circulation of the
central bank.

In the above section the Istituto Mobiliare Italiano is now active

in meeting to the fullest extent actual requirements, as was
authoritatively recognised at the last session of the Insurance and
Credit Corporation, with the valuable co-operation of the Syndicate
for Advances against Industrial Securities, and the united efforts
of the two institutions have proved of the greatest advantage in
securing a more rational and economic distribution of medium term
credit.

Through the active and close co-operation with the branches

difficulties arising out of the world crisis, to attain the object for

of the Banca d'Italia, the Istituto Mobiliare Italiano is placed in
contact with industrial undertakings even of medium and lesser
importance in every district and is able to perform thoroughly its

which the Institute for Industrial Reconstruction had been created,

valuable work.(1)

On the other hand, it was not possible, in a period of economic

namely, the speedy liquidation of a large number of institutions and
firms, among which it should be noted that many were called upon to
make important efforts to meet the war requirements in East Africa
and to carry out the programme of national defence.

The Institute for Industrial Reconstruction was thus obliged,
as was largely the case with the late Liquidation Institute, to nurse
a large number of enterprises under its control through credits
guaranteed by the State.

It is to be hoped that the programme which has been constantly

aimed at by the management of the Institute for Industrial Reconstruction will be realised.

Mention should be made of the fact that, by the creation of the
Inspectorate for the Defence of Savings and the Granting of Credit
Facilities, the danger of a repetition of past mistakes, which had

required the intervention of the State and brought such heavy

The premises owned by the Bank, which under its new constitu- Premiers

tion represent a capital investment of the Bank, are entered in the
1936 balance-sheet at 138-1 million lire.
The activity of the Inspectorate for the Defence of Savings and Control over Banks

the Granting of Credit Facilities has in its first year already been
the object of an exhaustive report att the last session of the
Insurance and Credit Corporation. It will suffice here to mention that,

in carrying out its vast and delicate tasks, the Inspectorate has
constantly availed itself of the various services, and especially
of the branch organisation of the central bank, which enabled it to
carry out effectively its control over the activities and position
even of the less important banks in the smallest centres.

As regards the technical advice which it has been required
to give, the central bank, when examining the demands for the
opening of new branches by banks, has followed generally the principle

burdens upon it, would be eliminated
(1) On the 31st December, 1936 the outstanding Industrial Securities business of amounted the Intitute to 1,950 Mobiliare million Italiano lire,

The Inspectorate is to-day alert and sees to it that, in the section

relating to medium and long term credit, only such institutions

and whilet the further Syndicate operations for Advances involving against 390 million lire were in course of completion

43

42

of favouring such openings only in those centres which had no
banking services whereas it has expressed disapproval of the opening

of new branches in those centres which were already sufficiently
provided with other bank offices. Experience has on many occasions

shown that these new banking branches would not be able to carry
out useful work in connection with the actual requirements of the
various centres, but would have ended by encroaching upon the
activities of existing banks, thus intensifying competition which, in
the public interest and to ensure the full attainment of the objects
set out in the Law, it is desirable to discourage.(
Further efforts have been made to eliminate, through amalgamation or absorption, banks which served no useful purpose or were in
a precarious condition, and to close the less efficient or redundant
branches.(2)

In 1936 nine applications were made for opening new banks
and three obtained the required authority. In this field the central
bank, when expressing its opinion, recommended the creation, in
(1) In 1936, 113 applications were made, by which 56 banks 28 banks and 28 savings
banks- asked for permission to open 244 branches. The competent Ministries first, and sub
sequently the Inspectorate authorised the opening of 103 branches, as compared with as in the

the centres unprovided for, of typically local banks which, as long
as they are carefully and economically run, can carry out most useful
work, for which they are particularly suited. in respect of the more
modest industries, tradesmen and small owners. It has been proved
that, where such banks are lacking, usury in its various forms may
easily rear its head.
In the Register which has been set up at the Inspectorate six
banks have obtained the authority to collect deposits, and 135
banks have been struck off.(1)

Altogether, on the 31st December, 1936, the number of banks
operating in Italy was 2,099, working in 3,944 centres through 7,755
counters, whilst 815 banks were in course of liquidation.

During the past year the offices of the Bank carried out 149
inspections, 38 of which were made in order to ascertain whether
the terms of the Bank cartel were being observed. which brings the
number of total inspections, carried out since the provisions for the
safeguarding of savings were first enforced, to 3,430.

previous year.

14 banks have been authorised to carry out tax collecting functions and to extend their

activities in neighbouring districts,

(2) In 1936 the applications for absorption or amalgamation numbered 28 involving as
bonks Up to the present 11 of the above applications have received the prescribed authorisation
Other applications on which the Banca d'Italia gave the technical advice for which it is
competent concerned :-

The changing of a partnership into a limited company -

1 application, which was rejected
The taking over of branches of banks which were being wound-up :28 applications concerning the taking over of 445 branches of banks of which
413 were admitted

The Profit and Loss Account for the year 1936 shows the following Account Prefit and Loss

results :-

Lire

Gross Profits

Expenditure and Losses

320,036,915-42
248,791,692.36

Net Profit

71.245.223-06

The transfer of branches

110 applications of which 98 were authorised

Authority to grant agricultural credits or their extension to other districts :
27 applications, of which 16 were agreed to :
The assumption of responsibility for the winding-up of other banks:
applications, of which 2 were granted;
Increase of capital application, which was rejected:
Change of name :-

: applications, both granted

Applications for the granting of loan facilities exceeding the limit of one-fifth of out the
bank's of resources amounted in the year 1936 to 57. involving sum of 127,518 million line,
which 43 applications, involving sum of 109 million lire, were admitted
Out of 11,041 cases in which loan facilities exceeded the prescribed limits involving an

(1) 81 at the conclusion of legal proceedings for compulsory winding-up

judgment withdrawn

192 on the of deed of arrangement or compulsory winding-up
11 on account of authority to receive deposits having been
14 on account of absorption by other banks
10 on account of cossation of business

aggregate force, only FRIED 27 remained of 6,259-3 on million the 31st lire, December when the 1936, laws with for the total safeguarding of 76.6 million of savings lire, . carra reduction into

of 19-2 million lire as compared with the 31st December, 1935.

45

44

The gross profits arise from Discount Operations
Interest on Advances
Interest on the Deferred Payments
at the Clearing Houses

Interest on Current Accounts
Various Commissions

Profits on Foreign Business
Miscellaneous Profits
Interest on Government Securities
Income from Real Estate

Lire

122,494,661-28
109,571,571-31

1,465,375-82
9,684,126-11
15,179,390-81
631,833-68

14,448,035-86
33,652,671-82

Profits arising from the liquidation of late Note-issuing Banks
Total

Expenditure and taxes are as follows :Administration Expenses
Directors' Fees, etc.

Transport of Specie and other
Values

2,784,626-41
320,036,915-42
Lire

101,239,326-59
1,772,873-20

1,414,683-29

33,169,927-97

Depreciation of Bills against
Losses, etc.

Temporary Staff Pension Fund

Compensation on Re-paid
Shares

Total Expenditure
Net Profit
Total

20 per cent. to the ExtraEstate Mortgage Institute),

Various Taxes

Pension Fund

Reserve Fund

460,000-00

10,583,019-00

Contributions towards Employees'

20 per cent. to the Ordinary

9,664,622.32

Printing of Notes
House Property Account
Foreign Business Expenses
Unpaid Bills
Various Amortisations
Interest and Annuities
Charities and other Contributions

1936

ordinary Reserve Fund
To the Credito Fondiario (Real

Interest on Colonial Branches
Fund

In accordance with the terms of Article 54 of the Statutes, Dividend
of the Ministerial Regulations and at the suggestion of the Auditors,
the Board of Directors of the Bank have decided to submit to the
General Meeting the following distribution of net profits for the year

2,269,209-67
16,309-78

Lire

14,249,044-61

14,249,044-61

formerly belonging to the
late National Bank, being
interest at the rate of 4 per

cent. in respect of the
reserve transferred to the
Banca d'Italia in the year
1913

281,060-00

To the Shareholders at the
rate of 6 per cent. on the
paid-up capital for 7 months
(1st June to 31st December,
1936)

Balance of Profits to the State

10,500,000-00
31,966,073-84

6,891,876-11

35,869,557-34

Total net Profit

71.245.223-06

18.693.752-51

2,500,000-00

The results of the past year, which are submitted for your Conclusion
8,873,606-90
10,000,000-00
3,000,000.00
12,497,550-00

248,791,692.36
71,245,223-06
320,036,915-42

approval, are characterised by the satisfactory trend in a period
marked by the greatest events in our history.

The foundation of the Empire, a necessity for the life of our
people and for their progress, imposes on our existence a standard
which is the reflection of the genius who conceived it and animated
it, and who is our guide through every obstacle towards the great
goal set by the age-long traditions of our race.

46

Within the framework of the nation's economic life, which is
to-day wider, safer and more full of promise, we feel the necessity
of expressing our deep gratitude and profound devotion to His
Majesty, the King of Italy, Emperor of Ethiopia, and to the Duce,
the tenacious and untiring builder of the greatness of our country.

V. AZZOLINI,
Governor.

BALANCE SHEET,
31st December, 1936.

PROFIT AND LOSS ACCOUNT.

49

48
(

43rd YEAR.

BANC ITALIA.
PAID-UP CAPPER 300,000,000.

BALANCE SHEET St December, 1936-XV.-E.F.
LIABILITIES

ASSETS

16,525,123,550.00

L.

Gold in Hand

in circulation

L

Balances Abroad

"
Total Reserve

725,684,216.33

64,780,164 Drafts Outstanding

705,843,271.23
4,021,601,431 errest Accounts

L.

Total Sight Liabilities
Gold deposited abroad, due by the State

-

Cash in Hand

17,956,651,037.50

L

1,772,798,105

300,000,000.00
14,100,878.54

-

Inland Bills

Reserve

520,198,335.03

posit Accounts

Bills for Collection

7.983.504-73

easury Current Account

Against Government Securities and MortAdvances to Customers

L. 1,599,273,209.53

gage Bonds

Against Silk and Coccons

Internal Debt Sinking Fund Office Current Account

19,483.35
1,599.01

-

L

Investments (Government Securities owned by the Bank)

12,972,583.80
1,532,291,811.61

liabilities

71,245,223.06

Profits for the Year

-

Cr. Accounts in the Kingdom :
Deferred Payments at Clearing Houses
Other Accounts

L.

21,254,808.19
35,532,944.60
56,782,754

"

L

1,000,000,000

Advances to the Treasury-Temporary

-

2,000,000,000

Extraordinary, against Treasury Bills

"

Premises

138,098,433

-

4,708,097.53

Credit with Institute for Industrial Reconstruction

..

1,546,444.631

Other Assets

L.

10.424.443-304

-

and other valuables deposited

Securities and other valuables deposited

..

57,997,906,198.03

L.

57,997,906.198

287.447.041.counts

Amounts written off in past years

287.447.941.51

-

L.

written off in past years

20,424-443-374-33
37,573,462,823.70

L.

"
TOTAL
TOTAL

L.

58,285,354.139

L

58,285,354,139-54

51

50

PROFIT ANOSS ACCOUNT
YEA 6 XV.-E.F.
Cr.

Dr.
L

..

foreign business

-

+++++++++

..

other valuables
Printing of notes
House Property Account
Stamps and commissions on

..

Additional Income-Tax

-

Real Estate Tax
Bank Shares transfer tax

1,414,683.29
10,583,019.00
2,209,200.07

..
..

Weights and measures

132,519,639.93
10,024,978.05

less: re-discoustacarriedforward

etits from

16,309.78

Interest on advances

business

122,494,661.28

450,393.02
9,975,770.05
1,844,927.58
1,194,044.80
1,347,291.00

15,179,390.81

Interest, discount and exchange profits on foreign

631,833.68
14.448.035.80

business, less re-discount charges
Other profits

273.474.994-87

Interest on investment of Colonial Branches Fund

investments

13,652,671.82
0,664,622.32
400,000.00

L

Interest on Government Securities
Revenue on real estate

Profits

33,169,927.97

Profits arising from the liquidation of late note

2,784,626.41

issuing banks

580,386.22

Contribution for Govern-

11,149,501.93

Commissions

1,250.20

Stamp duties

109,571,571.31

L.

Interest on Cr. accounts

from

control tax

ment supervision
Other tributes

45.951.359-95
86,368,279.98

L.

117,295,421.53

150-495-3469
..

Income Tax

previous year
Year's discounts

17,145,202.99

-

drafts

1,772,873.20

Year's

-

Circulation tax on notes
Circulation tax on demand

Re-discounts brought in from

101,239,320.59

..

Transport of specie and

"
"

Administration
Board of Directors, etc...

46,561,920.55

200,000.00
1,313,992.51

-

Unpaid bills

6,801,874

L

Amounts written off

15,869,555

Interests and annuities
Charities and other contributions

18,601
2.50

8,873.

Contribution to Employees' Pension Fund

10,000,000

Depreciation of bills against losses, etc.

Temporary Staff Pension Fund

3,000,000
12,497,550

Compensation on reimbursed shares

248,791,600
L.

71,245,213

Net profit to be divided

TOTAL
TOTAL

DISTRIBUTIO

NET PROFIT
14,249,044.01
14,249,044.01
10,500,000.00

L

To ordinary Reserve Fund
Extraordinary Reserve Fund
Dividend to Shareholders at the rate of 6% for seven months (L. 35

281,060.00
31,966,073.84

Annual contribution to the Reserve Fund of Credito Fondiario
To the Treasury

TOTAL NET PROFET TO BE DISTRIBUTED

EMILIANI MARINO.
Nas: ADOLFO
STRINGHER Drago.
Auditors

L.

71,245,223.04

VINCENZO AZZOLINI.

Audited and found correct on the 10th March, 1937-XV.

ARTON VITTORIO
CORTERI ARTURO.

320,030,915.42

L

L.

Governor

GUIDO PIERON,
Chief Accountant