The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
DIARY
Book 87
September 1 - September 9, 1937
-ABook Page
Appointments and Resignations
Moore, Carl E. (Collector of Internal Revenue,
Cleveland, Ohio)
Resignation and appointment of new man announced by
McReynolds at 9:30 meeting - 9/7/37
LXXXVII 262
-BBusiness Conditions
See Money Market ("Tight")
-CChina
Chronology of important events, 7/1/37--9/7/37
Kung thanks HMW and presents him with portraits of
himself and Chiang Kai-shek, and a set of porcelain
bowls
264
393
Chinese-Japanese Situation
See also Neutrality Act
Haas memorandum giving resume of entire situation,
past and future - 9/4/37
156
Haas memorandum: "China's and Japan's balances in
United States and Japan's gold shipments to United
States" - 9/8/37
Haas memorandum: "The war and our trade with China and
Japan" - 9/8/37
Haas memorandum: "Does the Neutrality Act affect purchases
of gold from Japan or the sale of dollars to China?" -
381
383
388
9/8/37
-EExcess Reserves
270
Viner memorandum - 9/7/37
Conference: present: HMW. Taylor, Lochhead, Haas, Riefler,
Upham, Viner, Seltzer, and White - 9/8/37
a) Viner memorandum (page 270) discussed
b) Haas memorandum (page 334) discussed
310
-FBook Page
Farley, James A. (Postmaster General)
See Financing, Government
Financing, Government
See also Money Market ("Tight")
9/15/37 - Conferences: Burgess, Taylor, Matteson, and
Bell with Guaranty Trust Company (Garner and Kraft);
First National Corporation (Pope and Love); Savings
Banks Association in New York State (Ihlfeldt and
Johnson): Dime Savings Bank (Benson) and Equitable
Life Insurance Company (Parkinson); Bankers' Trust
Company (Tompkins): Morgan-Stanley Company (Morgan
and Young); Chase National Bank (Aldrich and Green);
National City Bank (Rentschler and Blair); Devine
and Company (Devine) C. F. Childs Company (Swihart):
Bank of Kanhattan (Baker and Gill); Manufacturers'
Trust Company (Park): Bank of New York and Trust
Company (Traphagan); Travelers' Insurance Company
(Baker): Central Hanover Trust Company (Davison and
Collingsworth); Irving Trust Company (Hutchins);
Salomon Brothers and Hutzler (Levy): and Discount
Corporation (Mills and Repp) - 9/1/37 and 9/2/37
a) Consensus of opinion: short-term note of
between 1-3 years, the 1-year or 15-month note
at 12% and the 3-year at 1-5/8%, and a 7-year
to 7a-year bond at 2g%, preference leaning
LXXXVII 1
toward the 7-year bond
b) Preferences of banking institutions listed
Harris memorandum on "Suggested Issues" - 9/2/37
Conference; present: hMr, Taylor, Bell, Haas, Lochhead,
and Harris - 9/4/37
a) Bell "brings HMW up to date"
b) Conferences with New York bankers discussed
c) Haas memoranda read (pages 92, 101)
Open Market Committee confers with Treasury - 9/4/37
a) Burgess thinks division between a 15-month note
and a 5-year bond would be $350 and $450 million;
15
16
41
61
115
if a 15-month note and a 7-year bond, he estimates
$300 million of the longs
HMJr confers with Levy (Salomon Brothers and Hutzler):
Devine (C. J. Devine and Company): and Mills and Repp
155
(Discount Corporation) - 9/4/37
(For Bell memorandum, see page 220)
HMJr's letter to FDR asking for an appointment to discuss
next financing - 9/5/37
182
185
a) Answer
HMJr's letter to FDR announcing proposed note issue and
reminding FDR that notes may be issued only with approval
of the President - 9/5/37
a) Answer
183
186
- F - (Continued)
Book Page
Financing, Government (Continued)
Conference; present: HMJr, Taylor, Bell, Lochhead, Haas,
Gaston, Seltzer, Murphy, Harris, Ransom, Harrison, and
Burgess - 9/5/37
a) HMJr reports that Levy (Salomon Brothers and
LXXXVII 196
Hutzler) feels if country had its choice, it
wouldn't buy anything
(See also Government Bond Market)
b) Decision reached: "A five-year two and a 15-months"
(page 206)
FDR approves offering two series of notes: one 15-months;
the other, five years - 9/6/37
Authorization of issuance of notes signed by FDR - 9/6/37
Announcement of offering - 9/7/37
a) Burgess reports on progress - 9/7/37 and 9/8/37
b) Closing of subscription books - 9/8/37
Conference concerning closing on right to exchange in
211
214
215
223,224,229
231,238,301,
339,346,374
296
241
September 15th financing - 9/7/37
Sinking Fund: See also Book LXXVIII, page 1
Authorship of letter received by Treasury discussed at
9:30 meeting - 9/7/37
259
a) Signed by Aldrich but Bell thinks letter was
written by Ogden Mills
Farley told by HMJr he will not sign statement showing that
Government is going to spend $23 million at exactly the
288
time of announcement of September financing - 9/7/37
France
See Stabilization
-
Gold
See Chinese-Japanese Situation
II U.S.S.R.
Government Bond Market
See Money Market ("Tight")
-H18
Hawaii Story of Morgenthau visit from "Paradise of the Pacific"
-JJapan
See Chinese-Jananese Situation
-LBook Page
Legislation Desired by Treasury
Oliphant report - 9/3/37
LXXXVII
43,49
-MMoney Market ("Tight")
See also Excess Reserves
Financing, Government
"
If
HMJr's letter to FDR, in connection with Government financing,
refers to tightness of New York money market and desire of
Eccles and Ransom that Federal Government step in 9/5/37
a) HMJr's memorandum - 9/5/37
HMJr asks Viner to come to Washington - 9/5/37
- 9/5/37
Riefler "
If
182
209
188
191
"
If
II
Ransom tells HMW he thinks situation justifies thorough
exploration by Board of Governors and also possibly
Open Market Committee - 9/8/37
Conference; present: HMJr, Taylor, Lochhead, White, Haas,
Seltzer, Riefler, Viner, Upham, and Gaston - 9/8/37
a) HMJr reports conversation with Ransom
297
350
b) Riefler thinks there are only two alternatives for
putting funds in the market in about the same place:
desterilizing $0 billion or buying open market
1) All favor desterilization except Viner
c) Herbert Swope memorandum indicating his belief that
Federal Reserve Board should scale down reserve
requirements immediately, considered
d) Ransom reports on conversation with Eccles (in Utah)
Conference; present: HMr, Eccles. Ransom, Taylor, Hans,
Riefler, and Viner - 9/9/37
357
355
362
421
-N-
Neutrality Act
Feis and HMJ discuss position of Treasury should Neutrality
Act be invoked - 9/7/37
Conference concerning Treasury position if Neutrality Act
is invoiced in Sino-Japanese war; present: HWr, Taylor,
Oliphant, Viner, and Feis - 9/7/37
-Open Market Committee
See Financing, Government
235
274
-PBook Page
Philippine Islands
Story of Morgenthau visit from "Paradise of the Pacific" LXXXVII 18
Phillips, Sir Frederick
See also Stabilization
Brief biography prepared by Butterworth
179
-RRevenue Act of 1937
Magill memorandum giving brief summary of principal changes
effected by Revenue Act of 1937, approved by FDR on
August 26, 1937 - 9/8/37
292,307
Russia
See U.S.S.R.
-S-
Stabilization
Market movements resume - 9/2/37
28,30,32,
34,36,38
a) Situation in Mediterranean and Far East and effect
thereof discussed by Bolton and Knoke; Butterworth;
Cochran
Market movements resume - 9/7/37 a) Bolton
b) Cochran
France:
Journal Officiel carries last series of about thirty
decrees - 9/1/37
Phillips (Sir Frederick) visit:
Possible publicity discussed by Butterworth - 9/2/37
283
285,287
21
27
-TTax Avoidance and Evasion
See Revenue Act of 1937
"Tight" Money Market
See Money Market ("Tight")
-UU.S.S.R.
Further report from American Embassy, Moscow, on Soviet
gold industry - 9/3/37
53
Fin
TREASURY DEPARTMENT
WASHINGTON
CONFERENCES BY DR. BURGESS, MR. TAYLOR,
MR. MATTESON AND MR. BELL WITH THE FOLLOWING REPRESENTATIVES OF THE NEW YORK FINANCIAL INSTITUTIONS ON THE FORTHCOMING TREASURY
FINANCING
Mr. Garner and Mr. Kraft,
Guaranty Trust Company,
September 1, 1937,
10:10 a.m.
Essential that we have two issues. Indications are that
the Treasury will have to issue one fairly short maturity and can
possibly go into an intermediate bond for the second. They prefer
a two-year note but realize that September, 1939, is already filled
up 80 they suggest a three-year (September 15, 1940) at a rate of
1-5/8% They figure that this would sell on about a 1.55% basis
or 10/32. They say that we could also sell a five-year note
(September 15, 1942) at 2% but that possibly the Treasury would
not want to go this high on a note which is fully tax exempt. They
do not hesitate to recommend a 7-1/2 year bond (March 15, 1945)
with a coupon of 2-1/2% They believe that the banks would buy
the five-year 2% note and they also believe that the banks would
buy the 7-1/2 year bond, They are quite certain that the insurance
companies would buy the bond and that possibly the country banks
would be interested. They do not feel that a ten-year 2-3/4% would
go at all.
Commenting on general market condition$, they feel that
the market recession in the late spring went too far and then on
the recovery it went too far the other way so that this present
market is more of an adjustment. There has been no extreme liquida-
tion in the present market but it is more of a complete lack of
interest which has created a thin market. They think there might
be some preparation at this time for fall trade; they are not concerned with the present Reserve situation. There is no indication
that the present Reserve situation is causing any pressure on the
market.
2
-2There was then quite a discussion on the present Treasury
bill policy of six and nine months. This is not so important in
this financing but for the record, they are much in favor of adjusting our present maturity to sixty days and tax payment dates and
ridding the market of the nine-month bills. They feel that if the
Treasury wants security of this kind, it should resort to one-year
Treasury certificates.
Colonel Pope and Mr. Love,
First National Corporation,
11:00 a.m.
There was a general discussion of the market situation
and the attitude of certain investment policies of institutions
with which they had come in contact. They feel that the market at
this time has a much better tone and that it will no doubt improve.
They have been in touch with some New England institutions and
many of them were following a policy of investing 90% of their
money in governments and after a meeting of the Board of Directors
as to what to do with the other 10% would wind up by investing it
also in governments.
They thought it was a mistake for the Treasury to consider
putting out only a two or three-year note. This would have the
tendency of forcing the longer term bonds up through scarcity.
They believed in the policy of extending the debt over as long a
period as possible. While in Chicago two weeks ago there was some
talk of a ten-year 2-1/2% bond, and at that time they thought it
was worth consideration; now, however, the period of maturity will
have to be reduced. They thought that a 7-1/2 year 2-1/2% bond was
highly desirable and would help the market. There should be a choice
of two securities, one the bond and the other a short-term of two
or three years. It would be very difficult to put all of the refunding into one issue. It was their thought that a three-year note at
1-5/8% would go well.
They had contacted one prominent banker in the West who
usually leans toward a short-term security, but this time said he
would exchange his 3-1/4's for a 7-1/2 year 2-1/2% bond rather than
a three-year 1-5/8% note, but that he would much prefer to either
of these a five-year 2% note. Obviously he was thinking of his
earnings.
3
-3In their inquiries as to the present market situation they
have received divided opinions. Some have the opinion that the
market is still going down and others that it will go up after the
September financing. The concensus of opinion is, however, that
there will not be very much activity in the market for some months.
Colonel Pope expressed a personal opinion to the effect that he
thought the market would be dull for some months to come.
They estimated that about $75,000,000 of the maturing issue
is held by corporations. They know that General Motors holds
$26,000,000 and are satisfied that it will not go into any security
with a maturity longer than two years, but if this corporation or
others do not like the issue offered they will, no doubt, sell their
holdings in the market and take advantage of the premium on rights.
They feel that a five-year 2% note would pull more subscriptions
than a 7-1/2 year 2-1/2% bond, but they believe that from the standpoint of the Treasury the issuance of a bond at this time would look
much better and that we could expect as many as $300,000,000 in sub-
scriptions for this security. They feel that the insurance companies
will buy the bond. They said that there was a great deal of talk
in the Street about a one-year 1% security but it was their opinion
that this would look weak from the standpoint of the Treasury and
might interfere with the nine-month bills.
There was then some discussion of Treasury bills. They also
indicated that the Treasury bill program should be changed some time
in the near future. They are of the opinion that the Treasury should
put out a security like a one-year certificate for which the country
banks can subscribe. These banks are not now familiar with the bidding
on discount bills and the discount on the bills is so small that the
dealers
city beside will not go to the expense and trouble of telephoning the
country banks about this security.
Mr. Ihlfeldt and Mr. Johnson,
Savings Banks Association in New York State,
12:00 o'clock.
They said that there was about $10,000,000 of the maturing
security held by the Savings Banks of New York State: That there
was about $5,000,000 held by the Central Savings and Trust Company.
They said that the Savings Banks were not at the present time buying
governments and what few they are buying are for a term averaging
less than ten years. They say that their deposits have not increased
during the past year because they believe a lot of the Savings Banks'
funds are going into building and loan association Government guaranteed
4
-4shares; that there was very little money now being loaned on
mortgages. They do have some excess funds for investment but they
are unwilling buyers of governments. They indicated that it was
their belief that all of the Savings Banks which hold the maturing
issue would take anything offered in exchange rather than sell the
rights. They seem to be waiting for an increase in interest rates.
They thought that probably the Savings Banks would prefer a seven
or eight-year bond over a five-year note. Certainly they would
prefer this over a three-year note. Savings Banks of the State of
New York now hold $1,100,000,000 of Government securities, of which
approximately 12% is in the various note issues. They thought that
if the banks would take any bond offered they would hold it and it
would not find its way back on the market immediately after its
issuance. They thought the Treasury could issue a three-year 1-5/8%
note and that it would sell for about par and 10/32. An additional
issue of the notes issued last June would also go (1-3/4's of 1942
or 1-3/8's of 1939).
Upon being asked what other factors in the situation were
operating to reduce savings deposits, they named the Savings and
Loan guaranteed shares, United States Savings Bonds and the increase
in the sale of life annuities.
Speaking for the Central Savings Trust Company, they would
prefer the three-year 1-5/8% note for the $5,000,000 which it holds.
They were of the opinion that the Treasury could get no secondary
market from the savings institutions.
Luncheon Conference,
1:00 p.m.
With Governor Harrison, Mr. Benson
of the Dime Savings Bank, and
Mr. Parkinson of the Equitable Life
Insurance Company.
Just prior to luncheon and while we were waiting for
Mr. Parkinson, we had quite a discussion with Mr. Benson and he gave
about the same story as Mr. Ihlfeldt and Mr. Johnson on the savings
bank situation. He has $1,500,000 of the maturing notes and would
prefer a five-year note or less. He says that the only investment
money that he is now getting are the funds coming in from the liquidation of mortgages and, of course, their earnings. There are no increases of deposits. His mortgage rate is now 5% and he is losing
5
-5some of his investments to life insurance companies which are offering
a 4 to 4-1/2% rate. He, of course, would like to convert some of
his cheap Government bonds into 5% mortgages, but this apparently
is not working out very well. He has $14,000,000 in cash and says
that most savings banks are in the same position. They have lots
of cash but will not go into long term maturities. He thought that
a seven or 7-1/2 year 2-1/2% bond would go and that the savings banks
might buy some of them; but that a five-year 2% note or less would be
preferred - more as a temporary investment.
At the luncheon Mr. Parkinson said that he would not want
notes for his company. He has none of the maturing issue. If we
were offering a bond for cash, he would subscribe to the bond and
he would probably buy a seven-year 2-1/2% bond if it is issued. He
thought other life insurance companies might also furnish secondary
markets for such a security. He explained that while insurance
companies would go into a security of this kind at this time, it
does not meet their required earning minimum; that his company is
on a minimum earning requirement of about 3.08. He thought other
insurance companies were on no less and probably a higher basis.
It can be seen, therefore, that any investments of insurance companies
in a 2-1/2% security is more or less of a stop-gap and something to
give them liquidity and a small return while awaiting other investment
possibilities. There was no question but what the insurance companies
had plenty of cash - as insurance business had increased and
they were getting large receipts from repayments of loans on policies.
He was asked what he thought of the present situation in the money
market. He replied that the present dullness of the bond market was
due to bad news from abroad, the continued unbalanced budget, and
continued rumor concerning the policies of the Administration on
reducing the price of gold. He said this rumor was still prevalent
and only this morning he had heard about it again from St. Louis.
Mr. Tompkins,
Bankers Trust Company,
2:15 p.m.
Mr. Tompkins started out by saying that the Treasury should
have two issues. He feels that we should venture into the longer term
say seven or eight years, as he thinks there is a present
demand for this kind of security. Then we should have a short-term
note which would be a sure thing. He would prefer a two-year 1-3/8%
6
-6or possibly 1-1/2%. He thought that the combination suggested of
a two-year note and a seven-year bond would assure success in this
refunding operation. He felt that the reserve situation at the
present time is a factor in this market and that the fall demand is
now beginning to show up. Indications are that it will require about
$500, 000,000 cash over present requirements to take care of it.
There is also some talk about the call rate being increased to 2%
factor in this situation is the world condition which makes the
market nervous as they expect bad news at any moment.
He believes that there is a sufficient demand for the sevenyear bond; that the banks will hold them as an investment, and we
need not expect many of them to be thrown back on the market. He
thought a three-year 1-5/8% note would go but would not be as sure
as the two-year 1-1/2%. His definite recommendation is a two-year
1-1/2% and a seven-year 2-1/2% bond.
Mr. Morgan and Mr. Young,
Morgan-Stanley Company,
3:00 p.m.
They explained that they were corporation security dealers
and that they did not know that they could give us much information
about the Government bond market. They were willing, however, to
comment on the present market as they see it from the standpoint of
dealers in corporate securities. At the present time there is no
tone whatever to the market. There are no corporate issues of any
consequence pending because most people are waiting for the June 30
Audited Earnings Statements of corporations. They have found that
the insurance companies will buy corporate securities but they must
be attractively priced before they will be interested. The peculiar
thing about it is that the insurance companies will buy a long-term
corporation bond but apparently would not go into Government bonds
of a maturity longer than ten years. Another factor in the situation
at the present time is that private investors are buying good preferred
stocks instead of bonds. They refer to commercial bankers as "scalpers"
in most any bonds at this time. In other words, commercial bankers
do not want bonds for investment purposes but they merely buy these
securities for the immediate profit and then the securities soon
find their way back onto the market, thus having a depressing effect.
They find that the demand for loans is increasing although there are
no large volumes of issues at the present under consideration. There
are some refunding operations coming up before the first of the year
which aggregate over $100,000,000.
7
-7In this forthcoming Government financing they have asked
themselves the question: Who would buy the two securities talked
about in the Street - one a 5-year 2% note and the other a 7-year
2-1/2% bond. They say the banks will certainly take the notes and
possibly individuals because of the tax-exempt feature. They thought
that the insurance companies and some banks would take the bonds
because of the rather attractive coupon for a short-term security.
There is no doubt but what there will be substantial buying in the
market of the bond.
They both agreed on this.
Mr. Aldrich and Mr. Green,
Chase National Bank,
3:30 p.m.
Mr. Aldrich thought the Treasury might try additional
issues of the 1-3/4% of last June and, say, the 2-3/4% bonds of 1945-47.
He said it had been suggested in the Street that we have a 15-month
1% but he feels that this would not go and if it was tried should
be 1-1/8% He also said that from the standpoint of the Treasury
this looks weak to issue such a short-term security. As to a 5-year
2% note the banks would certainly come in rather heavily. If there
is to be a bond, he would prefer the period 1943 to 1945. He called
attention to the fact that the 3-3/4% of 1943-45 are selling on about a 2.29% basis; that any security put in 1944 or 1945 would
probably, after a few days, sell on a basis of 2.40% to 2.45% at the
present market.
He has found no tendency in his bank to increase loans and
there are some indications that loans are actually decreasing. He
is not alarmed about the reserve position as a reduction in the
discount rate has made it a simple matter for the banks to borrow
from the Federal Reserve Banks.
He finally wound up by saying that he thought that a 3-year
1-5/8% note would go welland the Treasury might do the whole job with
that.
Conference between Mr. Taylor and
Mr. Bell and Mr. Gordon Renschler,
President of the National City Bank,
and Mr. Blair, Vice-President, at
Mr. Renschler's home.
9:00 P.M.
Mr. Renschler was enthuiastic for a 7-year 2-1/2% bond.
He called attention to his previous recommendations that the Treasury
8
-should try to put all of its long-term financing on a basis of 10
years at 2-1/2%, constantly rolling over the maturing issues for a
10-year period. In view of his recommendation in this connection, 5
he feels that a Toyear 2-1/2% bond is even better" than the one he
had previously suggested. He also is in favor of a 3-year 1-/8%
note which would give the holders of the maturing issue a choice
of securities. He told us that not only would his bank subscribe
to the bond for the amount of its holdings of the maturing issue
but that it would buy rights in the market to exchange for the bonds.
He also said that the Home - Insurance Company, of which he is
director, would buy $10,000,000 of these bonds. Said that he
thought the bonds would be ideal for the insurance companies, There
was some discussion of the 1-year 1-1/8% or 1-1/4% but he did not
have the feeling that some of the others had on the next day about
the short-term security. He thought that it was not necessary
for the Treasury to go down as low as the one year or 15 months.
His bond man, Mr. Leo Kane, had submitted to him a memorandum in which he stated that 7-year 2-1/2% bond and the 3-year
1-5/8% note would suit the requirements of the National City Bank,
9
Mr. Devine,
Devine and Company,
September 2, 1937,
9:30 a.m.
Mr. Devine said that he would prefer two issues of any one
of the following Treasury notes:
15 months at 1-1/8%
2 years at 1-1/2%
3 years at 1-5/8%
4 years at 1-3/4%, questioning the latter and
that this might have to be increased to 1-7/8% He thought that
the one and four years are the best; possibly you could do a two-
year and a four-year. After all, they are close together. He
stated that the General Motors Corporation hns approximately
$27,000,000 of the maturing notes. He is quite certain that it
will want cash. The First of Beltimore has about $30,000,000 and
it will probably want an issue of 1940 and not longer than 1941.
He named certain banks in New York City which had more than
$100,000,000 and he doubts very much whether they would take any-
thing beyond the 4-year period. (The banks named, however, indicated
that they would be interested in a 7-year bond.) He says he just
can not see a bond or a 1942 note. We have got to be careful not
to issue a security that will hang heavy on the market and then
it will be the unpleasant duty of the Federal Reserve System or
the Treasury to support the whole market. He says he has shopped
around in the last two or three days among several of the banks
and dealers and he gets a very definite sentiment for the short
note. He thinks the Treasury has got to put out a 15-month se-
curity in order to be sure that its offering will be a success.
Mr. Swihart,
C. F. Childs Company.
9:45 a.m
Mr. Swihart says that he can not see anything beyond three
years. In his talks all over New York and throughout the country
only one has mentioned a bond. Few have talked 1-7/8% and a 2%
five-year note and he only had one suggestion of a 7-year 2-1/2%
bond. There are no buyers of Government securities in the present
market. He suggests the following Treasury notes for consideration:
15 months at 1-1/4%
2 years at 1-1/2%
3 years at 1-5/8%
5 years at 1-7/8%
He feels that the banks would take a 7-year 2-1/2% bond but that
the bonds would soon be back on the market and then we would see
10
- 10further declines in Government securities. He feels that short
term rates are definitely going higher and questions whether we can
hold the higher rate securities from declining when the short term
rate advances. He does not question but what we can convert the
whole amount of the maturing issue into a 3-year note. He knows
of one banker who has $50,000,000 of the maturing issue who will
not go over a 3-year note. He has talked with the Metropolitan
Insurance people and he said they would not be interested in anything
over three years.
Baker
Mr. Parker and Mr. Gill,
Bank of Manhattan,
10:00 a.m.
They said there are two thoughts at the present time: The
New York attitude is for a short term security and the outside New
York attitude is for a longer security. Their feeling is that the
Treasury should stick to one issue, say a three-year 1-5/8% note.
This is a generous rate and they thought that the whole market would
go up with that issue, whereas if we offer two issues the lower premium
will bring the higher premium down to it and thus have a tendency to
depress the whole market. Their bank has a feeling that rates are
going up. There is now a definite tendency for commercial loans to
increase and their bank's loans are now up 31% over last year.
Mr. Park,
Manufacturers Trust
10:45 a.m.
He feels that the Treasury should issue one or two notes.
He does not think that a bond issue would be received very well. He
thought that a 15-month 1% note would sell on about a 6/32 premium and
that a 1-5/8% 3-year note would sell on a 16/32 base. When he came
into this conference he was definitely of the opinion that we could
not go over 1940, but when he was asked his opinion as to a short note
and a 7-year 2-1/2% bond, giving the holders of the maturing issue a
choice, he replied that he had not looked at it from that standpoint
but thought that that was a good suggestion and had a lot of merit in
it. As the conference progressed he became more enthused about the
short note and intermediate bond. He thought we might get as much
as $250,000,000 or $300,000,000 in bonds. He does not feel that the
bond would depress the market and he did not feel that any of them
11
- 11 -
would take the bond merely for the profit involved. He thought the
insurance companies and larger banks would certainly take the bond to
a limited extent and the insurance companies, in view of their large
cash balances, might even furnish some secondary market for them. He
concluded by saying that he was definitely of the opinion that the
Treasury should issue a 1-year 1% or a 3-year 1-5/8% note and a
7-year 2-1/2% bond. He thought the combination of either of these
short notes and the bond of this maturity and coupon would be ideal
for the market.
Mr. Traphagan,
Bank of New York and Trust Company,
11:30 a.m.
He feels that the Treasury is forced to do something short
this time. A long term bond would completely disrupt the bond market.
He thought that a 3-year note at 1-5/8% would go and that we should
offer but one issue. He does not feel that the money market is going
to get tight as many in New York do. He finds that the average banker
of today is trying to find a way to get out of long bonds, certainly
those with a maturity of beyond 10 years. He is afraid that if we give
an option to take a 3-year note or a 7-year bond and if the bonds do
not go well, it would hurt the whole market. He does not hesitate to
recommend one issue of 3-year Treasury notes at 1-5/8%.
Incidentally, he is very much in favor of the 9-month
Treasury bills and he has found that some out-of-town banks like them.
He feels that short term rates may go up some and as more Treasury bills
are put out corporations may come into the market for these bills. This
would cause a temporary deflation in bank deposits but as the proceeds
of the bills are put out by the Treasury this situation would be cor-
rected.
Mr. Baker,
Travelers Insurance Company,
12:10 p.m.
He feels that the Treasury is compelled to resort to very
short maturities. His first suggestion would be to issue additional
amounts of the securities offered in June with an option. He said the
Treasury might go to a 5-year note at 1-7/8%. He feels, however, that
the insurance companies do not want any more governments and that they
will not buy them only as a stop-gap. He had some figures which showed
that the cash balances in the life insurance companies at the present
12
- 12 time are about $500,000,000, down about $250,000,000 from last year,
and that the investments in government securities are up about
$800,000,000. This cash balance is below normal for the past 3 years
but prior to that time two to three hundred million dollars was about
the average balance.
He says that there are other investments coming along now
with much more attractive yield than governments and that the insurance
companies are turning to this field. They are not, therefore, much
interested in anything that the Treasury does on September 15. Dr.
Burgess asked him if he would be interested in the bond of 7 years at
2-1/2% which had been suggested. He said that he might be interested
in this and he thought it might attract some of the insurance companies'
cash. He said that on the way to the bank he was looking at the list
and thought that a 1-year 1-1/8% or a 4-year 1-3/4% or 5-year 1-7/8%
would go. In conclusion he said that he thought the choice of the bonds
and a short note would represent a good program. He did not feel that
the bond would be a depressing factor and that we might expect as much
as $300,000,000 in exchanges on the bond alone, the balance of the issue going to notes.
Mr. Davison and Hollingsworth
Central Hanover Trust Company.
12:15 p.m.
These were the most pessimistic representatives that we interviewed. They were very definitely of the opinion that a bond would completely upset the market. They thought we must confine our offering to
two issues of a short-term character, one a 15-month note at 1-1/4%
He said that yesterday they would have said 15-months at 1-1/8% but the
change overnight would make the rate 1-1/4% in order to insure its success. They thought that the 5-year note of last June was a mistake. It
has clearly been a speculative issue from the very start. They thought
one very good suggestion was to put the whole issue into a 15-month note
at 1-1/4%. The corporations that hold the maturing securities, such as
General Motors, would exchange it for the 15-month security and hold
them until maturity, but he did not feel that any of the corporations,
particularly General Motors, would go over 2 years. As far as their
bank is concerned they have no particular choice as between the 15-month
1-1/4% and the 3-year 1-5/8% and that they probably would go 50-50 on the
two issues. Mr. Davison wound up by saying, however, that it would be
less disturbing to the whole bond and security market if we would have
just one issue.
13
- 13 Mr. Hutchine,
Irving Trust Company,
2:30 p.m.
He said his bank has none of the maturing issue but they
have about $100,000,000 maturing in 1939. While he realizes that
for the Treasury to issue a security around this date would conflict
with their holdings, it seems clear that there will have to be two
issues put out. He prefers a 15-month 1-1/4% and 3-year 1-3/4%. He
is quite certain that a bond would depress the present market,
probably as much as a half a point. He says that the Government
securities which the bank holds averages a maturity of about 2 years.
He is quite strong against a bond at this time and is also against
a 5-year note. He thought that the insurance companies, trust estates
and some of the banks would take a bond and that if the Treasury is
insistent upon an intermediate bond he would suggest that it be a
15-month note and a 7-year bond. Because of its policy, his bank
would very definitely not buy these bonds, but he would recommend
them to his customers.
Note: In considering the statement of the representative
of the Irving Trust Company we should not lose sight of
the fact that the policy of this bank is to hold govern-
ment securities of an average maturity of not more than
2 years and that it is definitely against holding any
bonds at all.
Mr. Levy
Solomon Brothers and Hutzler
3:00 p.m.
Mr. Levy feels it has got to be short, a choice of the
3-year 1-5/8% or a 4-year 1-3/4% note. He does not know who would
buy a 7-year bond and if the Treasury wants something longer he would
be more in favor of a 5-year 2% note than a 7-year bond. He would
issue two securities, giving the holders a choice at the rate and
term above indicated.
Mr. Mills and Mr. Repp,
Discount Corporation.
3:30 p.m.
Their conversations with the various banks indicate that
the opposition to the suggested bond issue does not come from those
who have the maturing issue, but comes from those who hold those
bonds that mature around 1943 to 1945. The last hour of the market
14
- 14 -
today has turned against these issues, which indicates that the
market is reflecting some of the discussions. He thought that
there was one very important factor in this whole situation which
no one is talking about in their discussions of this subject, and
that is that the Treasury is paying off $350,000,000 maturing
Treasury bills around September 15 with cash. This certainly
will create a tremendous vacuum in the market and will make that
money available for investment. They can not see what the banks
are going to do with this except to buy Treasury notes and the
shorter term bonds, and that any bond that we issue at this time
would come in for its share of that investment. They feel that
the Treasury will be surprised at the number of banks which will
take a seven-year 2-1/2% bond. They also feel that the savings
banks will come in much heavier than indicated by the representatives
of New York Savings Banks, as they are light on maturities around
1944.
Another very definite factor in the situation is that the
maturing security has a 3-1/4% coupon and the institutions that
have that security will want to replace it with as high a coupon
as it is possible to obtain. Therefore, the 2-1/2% bond will be
attractive to them from an earning standpoint.
They feel very definitely that the issue has got to be a
double header. We are now exposed to foreign news, much of which
is bad, and the Street is very blue. They feel, therefore, that
we have got to have one short term note which will be certain of
success and to which all the banks can run in case we get extremely
bad news over Labor Day. In their opinion this should be a 15-month
1-1/4% note. They feel that no matter what happens in the world
situation while this security is open for subscription, this issue
will be safe. They feel that a 2-year 1-1/2% note is bad because
it falls on the same date as the 1-3/8% of September, 1939, and may
have a tendency to throw this security below par. The other security
to be offered would be the 2-1/2% seven-year bond. They feel that
the shorter maturity will sell on about par and nine to fourteen
thirty-seconds, whereas the 2-1/2% seven-year bond will sell on
about a 2.40 basis, or about 21/32. They say that the maturing
issue is fairly well scattered over the country with about seventy
million dollars in the hands of insurance companies, thirty million
dollars in Baltimore, three hundred million dollars in New York
City banks and a great deal of it is in the hands of small country
banks. They feel that the small country banks will certainly want
the 2-1/2% earnings. The corporations that hold the maturing security
will, of course, want the 15-month note. They were enthusiastic
for these two issues, that is, a 15-month 1-1/4% note and a sevenyear 2-1/2% bond.
15
- 15 -
SUMMARY
At the beginning of these conferences I believe that we
had a very definite feeling that a short note issue of fifteen
months' maturity was objectionable and that it would be a very
definite sign of weakness on the part of the Treasury. In view
of the fact that some of those interviewed stressed the foreign
news as a factor in the market and for this reason made a suggestion
that we have a 15-month issue for safety purposes and that in addition we offer a seven-year 2-1/2% bond with the idea that whatever
goes into this maturity will be just that much advantage to the
Treasury, many of our first objections were removed.
The concensus of opinion seemed to be that the Treasury
could issue a short term note of between one and three years, the
one-year or 15-month note at 1-1/4% and the three-year at 1-5/8%,
and a seven to 7g-year bond at 2-1/2%, preference leaning towards
the seven-year bond. The first day of our conferences brought
only one or two suggestions for the 15-month 1-1/4% note, but at
the second day's conferences, probably because of the turn in
the market overnight, it was the concensus of those interviewed
that a 15-month 1-1/4% note would have to be one of the securities
to be offered. There was a strong feeling that whatever was issued
of the notes and the bonds that the larger proportion of the subscriptions would go into the note, but that we would get anywhere
from $200,000,000 to $350,000,000 in the bond.
16
- 16 -
Preference of banking institutions listed
1 yr. to
15 mo.
3 year
4 year
5 year
7 year
Guaranty Trust Co.
1-5/8%
2-1/2%
First National Corp.
1-5/8%
2-1/2%
Savings Banks Assn.of NY
1-5/8%
2-1/2%
Prefer
Dime Savings Bank
2%
Equitable Life Ins. Co.
Morgan-Stanley Co.
Prefer 2-yr
1-1/2: 3-yr
1-5/8 will go
2-1/2%
2-1/2%
(Some short note)
1-5/8%
Chase Natl. Bank
Devine & Co.
2-1/2%
(No notes desired)
Bankers Trust Co.
2-1/2%
1-3/4
1-1/8%
to
1-7/8
Child & Co.
1-1/4%
1-5/8%
(one issue)
Bank of Manhattan
1-5/8%
Manufacturers Trust
1-5/8%
Bk. of NY & Trust Co.
1-5/8%
2-1/2%
2-1/2%
Travelers Ins. Co.
Central Hanover Tr.
1-1/4%
Irving Trust Co.
1-1/4%
1-3/4%
1-5/8%
Solomon Bros. & Hutzler
1-3/4%
2-1/2%
Discount Corp.
Natl. City Bank
1-1/4%
1-5/8%
2-1/2%
Child & Co.
Devine & Co.
Discount Corp.
Natl. City Bank
Irving Trust Co.
Chase Natl. Bank
Bank of Manhattan
Bankers Trust Co.
Dime Savings Bank
Travelers Ins. Co.
Guaranty Trust Co.
Morgan-Stanley Co.
Central Hanover Tr.
Manufacturers Trust
First National Corp.
Bk. of NY & Trust Co.
Solomon Bros. & Hutaler
Equitable Life Ins. Co.
Savings Banks Asan. of N.Y.
One
Year
1-1/8%
1%
1-1/4%
1-1/4%
15
1-1/4%
1-1/8%
1-1/4%
Months
2
Year
1-1/2%
1-1/2%
1-3/8%
3
Year
1-3/4%
1-5/8%
1-5/8%
1-5/8%
1-5/8%
1-5/8%
1-5/8%
1-5/8%
1-5/8%
1-5/8%
1-5/8%
1-5/8%
1-5/8%
1-5/8%
4
Year
1-3/4%
1-7/8%
1-3/4%
1-3/4% to
2%
2%
5
2%
Year
1-7/8%
1-7/8%
Suggested for September 15 Financing
7
Year
2-1/2%
2-1/2%
2-1/2%
2-1/2%
2-1/2%
2-1/2%
2-1/2%
2-1/2%
Year
2-1/2%
7
2-1/2%
"
"
.
-
-
-
-
5 yr. 2%
Note
either one
1 yr. 1-1/4%
4 yr. 1-3/4%
3 yr. 1-3/4%
3 yr. 1-5/8% and
3 yr. 1-5/8%
3 yr. 1-5/8%
3 yr. 1-5/8%
3 yr. 1-5/8%
4 yr. 1-7/8%
2 yr. 1-1/2%
1 yr. 1-1/2% and
1 yr. 1-1/4% and
.
Preference
-
-
-
-
-
-
71 yr. 2-1/2%
7 yr. 2-1/2%
7 yr. 2-1/2%
7 yr. 2-1/2%
7 yr. 2-1/2%
Bond
18
Story from "Paradise of the Pacific" - Steptember, 1937.
"Henry Morgenthau, Jr., Secretary of the Treasury,
Mrs. Morgenthau and their three children--Robert, Joan
and Henry III--arrived in Honolulu aboard the 'Lurline,'
July 29. 'I'm here for a vacation, and have nothing to
say,' explained Mr. Morgenthau. He kept his promise.
Seldom have as affable and attractive visitors sojourned
in Hawaii. Governor Poindexter honored Hawaii's dis-
tinguished guests on August 2 with a dinner-party;
Mrs. Morgenthau was luncheon-guest of Mrs. W. F. Dillingham, August 3; on August 4 the Secretary sent nationwide
congratulations to the Coast Guard on its 147th Birthday;
Mr. and Mrs. Alexander G. Budge entertained the Morgenthaus
with dinner and dance at Waialae Golf Club on August 4;
Mr. Morgenthau and his two sons sailed August 5 aboard the
Coast Guard Cutter 'Taney,' for the Big Island of Hawaii,
while Mrs. Morgenthau and Joan aviated to the same destination.
The Morgenthaus were guests at Kona Inn for several days,
hiking, fishing, and visiting points of interest from August 6.
Visited Forbe's Kukaiau Ranch; on August 7, a wild pig hunt;
next day they were guests at Ronald K. von Holt's Kahau Ranch;
spent eleven hours fishing off the Kona Coast and landed a
small ono, laughinly remaking that he had made as good a fish-
19
ing record in Kona waters as President Roosevelt; on the
11th motored to Kawaihae to view the cattle loading of
Parker Ranch beef; next day to Volcano House and luncheon
guest of George Lycurgus; while in Hawaii the Secretary
sent his heartiest good wishes to the American Legion
assembled at Hilo; after about a week returned to Honolulu;
on the 10th Mrs. Morgenthau was honored with a luncheon by
Mrs. W. F. Dillingham at La Pietra; Pearl Harbor Yacht Club
had the Morgenthaus as guests at a luncheon, Commodore C. W.
Dickey, Past Commodore Earl Thacker and Vice Commodore R.
Alexander Anderson being the hosts; August 15 found them as
luncheon guests of Mr. and Mrs. W. F. Dillingham at their
Mokuleia home where they spent the week-end; on Friday,
August 20, Major General Andrew Moses held a magnificent
review in honor of Secretary Morgenthau at Schofield. The
Morgenthaus were guests of Shirley Temple and her mother
and father at the Royal Hawaiian Hotel and the Secretary
danced with Shirley. Secretary Morgenthau and his family
visited the Pearl Harbor (Waimomi) Navy Yard and Ford Island
(Mokuumeume) on August 18 as the guest of Rear-Admiral Orin G.
Murfin. All the activities of the Yard, Submarine Base, and
Fleet Air Base were inspected. Admiral and Mrs. Murfin were
hosts to the distinguished guests at luncheon the same day.
Only a few of the many courtesies, entertainments, and other
ceremonies held in honor of the welcome guests are listed above.
Their schedule called for them to depart on the "Lurline' on
20
August 28. We enjoyed their visit and know they did.
Come again Mr. Secretary and your family."
21
CODAT
RB
Paris
Dated September 1, 1937
Rec'd 2:15 p. m.
Secretary of State
Washington.
1230, SEptEmbEr 1, 5 p. m.
FROM COCHRAN.
Paris Exchange market rather active. French Control
acquired SOME sterling at 132.82 and 81. Dollar very
much bid against sterling and British Control yielded
dollars. DUE to political crisis centering around National
Bank of Belgium with prospect of a special session of
Parliament next Tuesday to hear Premier Van Zeeland's
story, belga has been further offered and gold Export
point to NEW York reached. French Control has been buying
belgas. REntES irregular; Internationals upset by Far
East situation. Market Expects reduction of Bank of France
discount rate tomorrow from four to three and one-half percent.
In the JOURNAL OFFICIEL today Chautemps Government
published last series of about thirty decrees under financial
powers
22
-2-#1230, September 1, 5 p. m. from
RB
Faris
powers granted by Parliament June 30 which Expired
August 31st.
(END OF SECTION ONE)
BULLITT
DDM
PEG
23
CODAT
RB
Paris
Dated September 1, 1937
Rec'd 3:45 p. m.
Secretary of State
Washington.
1230, September 1, 5 p. m. (SECTION TWO)
Many of the new measures are of secondary interest.
Those of importance provide 1 cr tl.: reorganization of the
French railway companies through the creation of a national
company, for the Extension of the suppression of the ten
percent levy on interest payments to such other public
security issues as the postal administration, Credit
National, railways, etc., for the approval of a convention
with the Credit National and for certain fiscal attenuations.
The conditions relating to the creation of the
national company to administer the different railway lines
are Embodied in a convention bEtwEEN representatives of
the latter and the Government dated August 31. Under its
terms the national company will COMMENCE to administer the
different lines dating from January 1, 1938. The concessionary compenies will turn over all of their casets to
the national company "EXCEPT private domain". At the EX-
piration of the life of the company in 1982 its assets will
be
24
-2- #1230, SEptEmbEr 1, 5 p. m.
RB
from Paris (SECTION TWO)
be turned over to the state without compensation. The
concessionary companies will receive from the national
company annuities corresponding to the statutory interest,
to guaranteed dividends and amortization and to shares.
Furthermore the concessionory companies will receive shares
of a nominal value of about six hundred ninety-five million
francs in return for assets transferred by them. The State
will receive shares and will OSSESS fifty-one percent of
the capital. In the board of directors the State also will
have the majority of votes and the merged railways will be
under the control of the Ministry of Public Works.
END SECTION TWO.
BULLITT
SMS
EMB
25
CODAT
RB
Paris
Dated September 1, 1937
REC'D 3:15 p. m.
Secretary of State
Washington.
1230, September 1, 5 p. m. SECTION THREE.
The convention with the Credit National is of
importance and interest. It will 1.5 recalled that this
institution Was organized under the cerms of the law
promulgated on October 10, 1919 to facilitate payments
to those who had suffered damage from the war (SEE Embassy's
despatch No. 716 of June 9, 1937). Under the terms of
present arrangement Credit National will pay OVER to the
Treasury from proceeds of loan issues one billion francs
in 1937 and three billion francs in 1938 to meet outlays
for public works.
The decree relating to fiscal attenuations is
obviously intended to Encourage the return of French capita]
from abroad in that as concerns increase in revenue from
securities and movable capital the State undertakes not to
compare general income tax declarations made in 1938 with
those furnished for Earlier years. Furthermore that holdings abroad repatriated before January 1, 1938 will not be
subject
26
RB
-2-#1230, September 1, 5 p. m. from
Paris SECTION THREE
subject to any penalization or inquiry on the part of the
administration.
END OF MESSAGE.
BULLITT
SMS
NPL
27
GRAY
MBo
London
Dated SEptEmbEr 2, 1937
REC'D 9:11 a.m.
Secretary of State,
Washington.
571, September 2, 1 p.m.
FOR SECRETARY MORGENTHAU FROM BUTTERWORTH.
CONFIDENTIAL.
I had a word about possible publicity with Sir
Frederick Phillips who sails as previously reported on
the EMPRESS OF BRITAIN September 4. Phillips hopes
successfully.to avoid any publicity but should he be
called upon to make SOME explanatory statement to the
press prior to his arrival in Washington he intends to
say something to the Effect it is considered by both
treasuries desirable that there should be direct contacts
from time to time between officials having no specific
mission in order to facilitate the work which WE have in
common.
JOHNSON
KLP
FEDERAL RESERVE BANK
OF NEW YORK
FFICE CORRESPONDENCE
CONFIDENTIAL FILES
L. W. Knoke
me frohhead
28
DATE September 2, 1937.
SUBJECT TELEPHONE CONVERSATION
WITH BANK OF ENGLAND.
I called Mr. Bolton at 9:30 today. Briefly reviewing the
past month, he said that things had been very quiet except for the
last few days. The dollar had been steady partly because they had
taken all the Russian gold off the market in the last fortnight as
well as the dollars offered by the Japanese against gold shipments
from Tokyo to San Francisco. Today, he continued, the position looked
quite different. Whereas London had up to now shown really very little
anxiety over the international situation, although it had been worried
from time to time, yesterday and this morning it got a real fit of the
blues due to the attack by a torpedo on a British warship and this
morning on a British tanker. For the time being the situation in the
Mediterranean entirely overshadowed that in the Far East and there
was a very definitely pessimistic outlook developing in England. This
would, in his opinion, undoubtedly mean an increase in demand for
dollars.
The situation in Paris, Bolton said, was a little bit better.
During the month of August Cariguel seemed to have lost practically
no foreign exchange but, on the contrary, probably gained small amounts.
The Government's decrees had been taken fairly well and it was largely
a question of whether the Chautemp Government would hang together or not.
London, so far, had no decided feeling as to whether any progress had
been made in France with regard to political stability. No great developments need be expected in France until the Chamber met again, which would
probably be the first week in November. French elections, scheduled to
3.2.60M 1-57
DATE September 2, 1937.
FFICE CORRESPONDENCE
SUBJECT TELEPHONE CONVERSATION
CONFIDENTIAL FILES
WITH BANK OF ENGLAND.
L. W. Knoke
ROM
23
FEDERAL RESERVE BANK
OF NEW YORK
-2take place the middle of October might give quite an indication as
to the political trend, particularly so because the Electoral
College would be drawn at practically the same time. The movement
away from Blum's socialist party would surprise nobody although
there were no indications as to the direction in which such movement would be.
LWK:KMC
03V13038
8
932
YAUSAIRT
30
GRAY
FS
London
Dated September 2, 1937
Rec'd 2 p.m.
Secretary of State,
Washington.
572, September 2, 6 p.m.
FOR TREASURY FROM BUTTERWORTH.
DUE to political developments, real and imagined,
little business was transacted in the foreign Exchange
market although there was a tendency to sell sterling for
dollars OVEr and above the usual seasonal movement.
In a conversation with Clay at the Bank of England
it was ironically emphasized that the. declines in the
American security markets today WERE occasioned by nerVOUSNESS over the Far East situation while the London
markets were similarly moved by the Mediterranean situa-
tion. Clay stressed the fact that there was little
speculation on Either side of the Atlantic, that COMMERcial and industrial and employment reports WERE uniformly
good and that the only major obstacle lay in the political
field. While not disturbed at the moment he thought it
possible that if a long period of nervousness was Engendered by European or Far Eastern political developments
the course of recovery might be decidedly affected; that
"the
31
FS
2-No. 572, September 2, 6 p.m. from London
"the markets probably could not stand a long period of
nervousness of the type, for Example, felt a few months
ago during the gold scare".
I gather that the pessimism of Governor Norman over
the international political situation is due not so much
to any apprehension of imme diate adverse developments but
by reason of the fact that in his opinion there are hardly
any favorable signs on the political horizon to indicate
progress towards pacification in the near or intermediate
future.
KLP:WWC
JOHNSON
32
CODAT
EDA
PARIS
Dated September 2, 1937
RECEIVED 6:19 p.m.
Secretary of State
Washington
1236, September 2, 5 p.m.
FROM COCHRAN.
Paris Exchange market nervous today on news of
torpedo attacks on British ships in Mediterranean.
French control had bad day, one Paris American bank alone
selling 400,000 pounds sterling at 132.88 for the controls
account. Rentes down about 70 centimes and market un-
satisfactory in spite of announcement this noon of reduction of Bank of France discount rate from four to
three and a half percent, rate against securities from
five to r'our and a half and thirty day advances from four
to three and a half.
Bank of France statement as of August 26 showed
increase of 1,340,000,000 francs in advances to government under authority decreed June 30, 1937. At same time
-
Treasury current account amounts to only about 20,000,000
francs more than preceding WEEK. Coverage 52.35 versus
53.14.
SMS:NPL
BULLITT
FEDERAL RESERVE BANK
OF NEW YORK
m yachlead
33
FFICE CORRESPONDENCE
CONFIDENTIAL FILES
L. W. Knoke
DATE September 3, 1937.
SUBJECT: TELEPHONE CONVERSATION
WITH BANK OF FRANCE
I called Mr. Cariguel at 10:07 today but found him very
uncommunicative. Things were not as good as before, he said. Yesterday he had to support the franc by the sale of about £400,000,
today of about £500,000. Nevertheless, on balance since the beginning
of July, he had gained and was satisfied. I asked how the future
looked to him and he replied not so very good; the external situation, as well as the internal, was a little disturbing although the
internal situation was better than it had been some months ago.
Nothing of much importance was likely to happen in France before the
Chamber met early in November. I tried to sound him on the political
situation in France but had no success at all. Their stock market
was heavy; the money market continued to find it difficult to supply
the Treasury with its regular requirements. "That is the old trouble."
LWK:KMC
34
FS
CODAT
Paris
Dated September 3, 1937
REC'D 1:40 p.m.
Secretary of State,
Washington.
1244, September 3, 5 p.m.
FROM COCHRAN.
I called this morning at Bank of France on Cariguel
who had just returned from two WEEKS holiday. I found
that Mediterranean situation had resulted in considerable
pressure on both franc and sterling. Up until 11 o'clock
the French control had today yielded approximately four
hundred thousand pounds and the British control had lost
two million dollars. My friend added that the Paris
market had been adversely affected by the release yesterday of information to the Effect that the state had
drawn upon its account with the bank to the EXTENT of
one billion three hundred forty million francs.
During the past two and one half WEEKS the French
stabilization fund gains on foreign Exchange were just
about offset by losses but the general condition of the
fund is good since it contains close to the limit of
ten billion francs in gold and foreign Exchange, As
has been SEEN in the past this amount is not, however,
sufficient
35
FS
2-No. 1244, September 3, 5 p.m. from Paris
sufficient to hold the market very long in the face of
international or domestic disturbances or heavy speculation.
KLP
BULLITT
36
PARAPHRASE OF TELEGRAM RECEIVED
FROM: American Embassy, Paris
DATE:
September 3, 5 p.m.
NO.:
1244
SECTION TWO FROM COOHRAN
It is expected that shortly there will be an announcement of a five, ten, fifteen year offer of French Treasury
bonds at 94 bearing five percent and totalling two and
a half billion francs. There are preliminary indications
that in part this operation will consolidate recently
issued Bonnet bonds and perhaps raise some new funds to
apply on paying off unconverted balance of Germain Martin
bonds which mature on the fifth of October. On rumor
of above prospect rentes opened weak today and in order
to hold the market, heavy intervention was required.
Throughout the day spot franc continued weak, with
forward discount widened and French control losing sterling
at 132.92 to 95. Nervousness is being caused by the
possibility of Fiat strike spreading to other automotive
works. The National Bank of Switzerland continues to
lose gold slightly and to gain foreign exchange. Although
no definite clarification of the Belgian situation can be
expected before the end of next week, the Belga has improved
in sympathy with the dollar.
Referring
37
-2-
Referring editorially to Secretary Hull's declaration
to rhe effect that the opening of international trade should
relieve situation now giving rise to armaments and war,
AGENCE ECONOMIQUE says that the financially and economically
strong United States could help in this direction by a
generous solution of war debt problem and by again opening
the American money market to foreign issues.
BULLITT
EA:FL:DJW
38
PLAIN
FS
London
Dated September 3, 1937
Rec'd 1:50 p.m.
Secretary of State,
Washington.
578, SEptEmbEr 3, 7 p.m.
FOR TREASURY FROM BUTTERWORTH.
Although the London security market Exhibited less
nervousness than yesterday the foreign exchange market
continued under the influence of political developments
and consequently again dollars WEPE more than seasonally
in demand. The French fund supported both the spot and
forward franc through sales of sterling.
There is quoted below an article by the city Editor
of the TIMES inasmuch as his EXPRESSED attitude is not
dissimilar from that of British Treasury and the city
generally.
"The Bank of France yesterday further reduced its
discount rate by one half per cent to three and one half
per cent. This cheapening of money had no observable
Effect on the exchange and it was looked upon like the
last reduction on August 3 as another gesture of official
confidence. The French bourse like the London stock
Exchange was more affected yesterday by the incidents in
the Mediterranean and the Far East than by domestic
EVENTS;
33
FS
2-No. 578, September 3, 7 p.m. from London
events; indeed French rentes WERE lower on the day. The
Emergency powers to legislate by decree which were given
to the French Government have now Expired and the
Chautemps-Bonnet programme of financial rehabilitation
may therefore be said to have ENTERED upon its second
and more important phase. The first phase has involved
the passing of a great many decrees covering practically
the whole range of French Economic life and the Government
may certainly claim to have made the most serious attempt
yet SEEN to arcure a complete rehabilitation of French
finance. The Government can also claim to have met with
SOME SUCCESS. They have arrested the flight of capital
and they have laid down a comprehensive policy which if
faithfully pursued will undoubtedly vastly improve the
condition of French finance. The programme has involved a
further devaluation of the franc to about 133 though
further devaluation may be necessary, for the wholesale
price level in France has risen in the past fifteen months
from 372 to 589--the imposition of new taxes direct and
indirect, wide Economies, a drastic cutting down of public
works schemes and a plan for railway nationalization
which was certainly necessary in order to reduce the
heavy and growing railway burden on the budget.
Government securities have made only a relatively
slight response to all these measures of recovery though
they
40
FS
3-No. 578, September 3, 7 p.m. from London
they have included the establishment of a rentes Equalization fund and the removal of the ten per cent Laval tax
on the interest derived from rentes. On June 28 when
M. Bonnet actually took office three per cent rentes
stood at 69.60; the current quotation of 74.45 shows a
rise of only SEVEN per cent. This indicates that it is
still too soon to judge the results of the ChautempsBonnet plan. Of course the programme would be completely
upset if under political pressure the Government had to
resume their social reform and restriction policy for that
would wreck the plans for restoring Equilibrium in French
Economic life and stimulating her production and trade on
sound lines. So far there has been no return worth mentioning of French capital and if the programme of rehabilitation in the SECOND phase SUCCEEDS in bringing any sub-
stantial amount of capital back to France then it will
be possible to say that the great problem of restoring
confidence has been solved. Meanwhile French capitalists
have been given to understand that if they bring back
their capital by the End of the year no penal measures will
be taken against them. But clearly the capital that has
been sent abroad will be in no hurry to return pending a
clearer indication than it is possible to obtain today of
the results of the Government's policy."
KLP
JOHNSON
Fin
41
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE: September 3, 1937
To
FROM
Secretary Morgenthau
M. A. Harris
Market Basis
Suggested Issues
Premium
NOTES
1-1/4% (12-15-38) (1-1/4 years)
1.02
9/32nds
1-5/8% (9-15-40) (3 years)
1.50
12/32nds
1-3/4% (9-15-40) (3 years)
1.50
23/32nds
1-3/4% (9-15-42) (4 years)
1.62
16/32nds
2% (9-15-43) (5 years)
-
24/32 to 30/32nds
BONDS
3-1/2% (9-15-44) (7 years)
2.40
20/32nds
Treasury Bonds
3-3/88 1940-43 (Jun)
3-3/88 1941-43 (Mar)
3-1/48 1941
3-3/8s 1943-47
3-1/48 1943-45
3-1/4s 1944-46
1944-54
7-3/48 1945-47
3-3/48 1946-56
1946-48
3s
1946-49
3-1/88
4-1/48 1947-52
2-3/48 1948-51
3-1/8a 1949-52
2-1/28 1949-53
2-3/4s 1951-54
1951-55
3s
1955-60
2-7/88
4s
2-3/48 1956-59
Closing Bid
Prices Aug,9th*
105.28
106.22
106.20
107.19
106.31
106.30
112.16
103.11
111.
104.30
105.25
117.
101.18
105.19
99.3
100.20
103.20
101.15
100.15
Closing Bid
Net Change
Current
for period
Yield
Prices Sept,3rd
-.21
105.7
105.18
105.20
106.2
105.14
105.9
110.20
101.25
109.2
103.14
103.31
115.16
99.30
-1.4
-1.0
-1.17
-1.17
-1.21
-1.28
-1.18
-1.30
-1.16
-1.26
-1.16
-1.20
-1.19
-1.21
-1.16
-1.16
-1.15
-1.17
104.
97.14
99.4
102.4
100
98.30
42
1.44
1.74
1.75
2.25
2.28
2.38
2.40
2.50
2.56
2.56
2.61
2.50
2.75
2.74
2.69
2.82
2.82
2.87
2.82
Treasury Notes
3-1/48 9/15/37
2-5/8a 2/ 1/38
3s
3/15/38
2-7/88 6/15/38
2-1/20 9/15/38
1-1/23 3/15/39
2-1/88 6/15/39
1-3/8s 9/15/39
1-3/88 12/15/39
1-5/8s
1-1/28
1-1/28
1-1/2s
1-3/88
1-1/48
1-3/45
3/15/40
6/15/40
12/15/40
3/15/41
6/15/41
12/15/41
3/15/42
100.20
101.5
101.22
102.4
102.5
100.30
102.1
100.21
100.21
101.
100.20
100.18
100.16
100.1
99.26
100.23
- 12
100.8
100.27
101.11
101.22
101.24
100.12
101.15
100.3
100.2
100.12
100.2
99.30
99.28
99.16
- .10
- .11
- .14
- .13
- .18
- .18
- .18
- .19
- .20
- .18
- .20
- .20
- .17
- 26
99.
- .23
100.
-
0.51
0.42
0.67
0.78
1.25
1.28
1.32
1.35
1.47
1.47
1.52
1.54
1.51
1.49
1.75
*Closing prices the day before the recent decline began.
Av. price of
Treasury Bonds
April 1 (year's low point)
June 5 (Saturday before announcement of June
financing)
August 9 (recent high point)
September 2
Av. yield on
Treasury Bonds
103.04
2.70
104.74
105.54
104.12
2.51
2.40
2.56
TREASURY DEPARTMENT
43
INTER OFFICE COMMUNICATION
DATE SEP 3 1937
TO
The Secretary
FROM Herman Oliphant
Re: Legislative Report
Summary of This Report. Attached is the final chart on the progress of
our legislation (other than internal revenue) in the first session of the 75th
Congress, which indicates that out of 32 bills recommended to Congress during
the session 22 have been enacted into law and 10 are still pending. This compares favorably with the 1936 session when 21 bills were enacted and the 1935
session when 19 bills were enacted. The status of the Government Reorganiza-
tion Bills is also indicated on the chart because the Legislative Section of
this office expended a great amount of time and effort in performing the legal
work (drafting bills, preparing supporting data, committee reports, etc.) in
connection with those bills. Of the 10 Treasury-sponsored bills which were
left pending in Congress, 6 have passed one House and two of those six have
been reported in the other House. These pending bills, of course, do not die
as they would at the end of the last session of a Congress, but continue next
session from the point they reached at the end of the session just completed.
Detailed statement of status of pending bills.
(1) The Omnibus Customs Bill. This bill contains many complicated
and technical amendments to certain administrative provisions of the Tariff
Act of 1930. H. R. 6738 was introduced by Mr. Doughton on April 28. Thereafter extensive public hearings and executive sessions were held before the
Ways and Means Committee lasting over five weeks. On August 3 the Committee
,
44
-2-
reported a clean bill (H. R. 8099) which was passed by the House on August 19
and sent to the Senate where it is now pending before the Senate Finance Committee.
(2) Increase the Efficiency of the Coast Guard. This bill is designed
to provide a selective system for weeding out incompetent Coast Guard officers.
The Senate bill (S. 2575) passed the Senate on August 7. The House bill
(H. R. 7486) was reported by the House Merchant Marine and Fisheries Commit-
tee on August 10. Attempts by Chairman Bland during the closing days of Congress to secure the passage of the bill by unanimous consent and by suspen-
sion of the rules were unsuccessful, but he informs us that the bill will be
passed by the House on his Committee's first calendar Wednesday call after
Congress convenes in January.
(3) Forfeiture Bill. This bill provides for the seizure and forfeiture of vessels, vehicles, and aircraft used to transport narcotic drugs,
counterfeiting materials, and firearms. The House bill (H. R. 6281) was referred to a subcommittee of the Judiciary Committee which reported the bill
favorably to the full committee. The full committee considered the bill but
failed to report it out principally, we believe, because the bill vests the
power to remit and mitigate forfeitures in an administrative officer, the
Secretary of the Treasury. The sentiment in the House Judiciary Committee
has for a long time been opposed to administrative remission and mitigation.
After a bitter fight in 1935, the Committee amended our proposed" Liquor Law
Repeal and Enforcement Act so as to vest in the courts the power to remit
and mitigate forfeitures incurred under the internal revenue liquor laws.
It may be necessary to agree to a similar amendment to the present bill in
45
-3-
order to get it out of the House Committee. We were somewhat unfortunate in
having the companion Senate bill (s. 2389) referred to a subcommittee of the
Judiciary Committee headed by Senator Burke who was in the thick of the court
fight throughout the entire session. We do not anticipate much difficulty
next session on the Senate side as Senator Burke has virtually assured us
that he will get prompt action on the bill.
(4) Extension of the Keyes-Elliott Area. The Senate bill (s. 2339)
was opposed by the District Commissioners who desired an amendment which
would have required the Secretary of the Treasury to obtain their approval
before closing any streets in connection with the acquisition of land and
the construction of Federal buildings thereon. Senator King refused to report the bill unless an agreement could be reached between the District Com-
missioners and the Treasury Department. Shortly before the end of the session a compromise amendment was agreed to. Thereupon Senator King reported
the bill and secured its passage. The House bill (H. R. 1653) was introduced on January 5, but in view of the controversy over the Senate bill it
was not considered advisable to attempt to secure action on it.
(5) Preference in United States Proceedings. This bill provides
for the granting of preference on Federal district court dockets to customs
and internal revenue fraud cases. The Senate bill (S. 2386) was passed on
August 6. The House bill (H. R. 6282) was referred to a subcommittee of the
Judiciary Committee and several executive sessions were devoted to consider-
ation of the bill. The sentiment of the subcommittee was not favorable to
the bill and no action was taken upon it. However, it is felt that it may
be possible during the next session of Congress to persuade the committee to
46
report this legislation favorably.
(6) Commemorative Coins. This bill (H. R. 8036), which was introduced by Congressman Cochran of the House Coinage Committee, may be con-
sidered as a substitute for the Treasury-sponsored bill (s. 1895) which provides for the striking of commemorative medals in lieu of coins. The Cochran
bill, in effect, repeals (with three exceptions, including Representative
Lewis' Antietam bill and Senator Glass' Norfolk bill) all coin acts enacted
prior to the effective date of the bill. This bill passed the House on
August 2 and is now pending before the Senate Banking and Currency Committee.
(7) Checks on Philippine and Puerto Rico Trust Funds. This bill
exempts public debt funds of the Philippine Islands and Puerto Rico from the
operation of section 21 of the Permanent Appropriations Repeal Act 1934.
It was not introduced in the House because of the strenuous objection voiced
last year by the House Committee on Expenditures in the Executive Depart-
ments to the identical bill which was then pending. The bill was introduced
in the Senate (S. 1644) but the Banking and Currency Committee took no ac-
tion on the bill.
(8) Philately Bill. This bill would permit, with certain limitations, the reproduction of illustrations of foreign and United States postage stamps and would provide for the publication by the Government of &
stamp catalogue. The Senate bill (S. 2550) passed the Senate on August 14
but the House bill (H. R. 8235) was not reported until August 20, too late
to be acted upon by the House.
(9) Replacement of Federal Reserve Notes. This bill would authorize the destruction of the Federal Reserve notes of the Series of 1928 and
47
-5-
their replacement at the expense of the United States with Federal Reserve
notes of the Series of 1934. The House bill (H. J. Res. 377) was introduced
on May 24 and was referred to the House Banking and Currency Committee. Nu-
merous public hearings were held on the bill at which the legislative representatives of the Treasury appeared and, upon the request of the Committee,
Chairman Eccles of the Federal Reserve Board testified. The hearings were
marked by bitter political controversy among the members of the Committee
upon the gold policy of the Administration and the Republican members of the
Committee warned the Chairman that they would carry the fight to the floor
of the House. Moreover, certain Democratic members of the Committee con-
tended that the Federal Reserve Banks should pay for the 1934 notes out of
their surplus. Because of this conflict in the Committee, Chairman Steagall
was reluctant to attempt to secure action on the bill and after some months
delay, the bill was crowded into the background by the Committee's consider-
ation of the Housing bill.
(10) District of Columbia Credit Unions. This bill would transfer
the jurisdiction of District of Columbia Credit Unions from the District
Commissioners and the Comptroller of the Currency to the Farm Credit Admin-
istration. The House bill (H. R. 7265) was introduced on May 27 but it was
impossible to secure action on the bill because the District Committee was
heavily loaded with District legislation. In addition, the transfer of Mrs.
Norton from the chairmanship of the District Committee to the chairmanship
of the Committee on Labor resulted in temporary disorganization of the District Committee.
48
-6-
During the past session the Department conducted legislative business
with about 23 of the 43 committees in the House and about 19 of the 33 com-
mittees in the Senate, and representatives of this office appeared before 13
committees of the House and 10 of the Senate.
harman Ohishant
49
TREASURY LEGISLATION
(other than internal revenue)
75TH CONGRESS, 1st SESSION
A. Bills Enacted
STATUS
1. STABILIZATION FUND, Extension of
Approved January 23, 1937; Public No. 1.
2. FLOOD AREAS, Allocation of funds for
Approved February 24, 1937; Public Res. No. 7.
3. C. F. POTTS AND C. H. BARKER, Relief of
To authorize payment to Potts and Barker of the Coast
Guard, the sums of $150.26 and $125.73, respectively,
Approved April 1, 1937; Private No. 19.
4. ORDNANCE MATERIAL, Purchase of by C. G. officers
Approved April 15, 1937; Public No. 34.
5. GUY F. ALLEN. Relief of
To allow credit to the accounts of Allen for $126.40,
representing the disallowed portion of $138 paid by
Approved April 15, 1937; Private No. 43.
6. PROFESSORS BILL
Approved April 16, 1937; Public No. 38.
for damage to personal property resulting from fire.
To authorize Coast Guard Officers to purchase
articles of ordnance material (small arns) in the same
sanner as such articles may be purchased by officers
of the Army, Navy, and Marine Corps and others.
him for certain air transportation.
To establish & permanent instruction staff (five professors and three civilian instructors) for the Coast
Guard Academy; and to create a Board of Visitors to
consist of members of committees handling Const Guard
matters.
7. CAPTAIN EUGENE BLAKE, COAST GUARD, Relief of
To authorize the Secretary to pay to Phillip Hudson
Phillips, the sun of $750 in satisfaction of a judgment in that sum secured by Phillips against Captain
Approved April 16, 1937; Private No. 44.
Blake on October 12, 1934.
8. FOREIGN DECORATIONS, Acceptance of by C. G. Officers
Approved May 14, 1937; Private hes. No. 1.
To authorize various Coast Guard officers to accept
certain foreign decorations and diplomas.
9. EXCHANGE OF LAND. DALLAS, TEXAS
Approved May 25, 1937; Public No. 115.
To provide for the exchange between the United States
and the Union Terminal Company of certain properties
in connection with the Parcel Post Building site at
Dellas, Texas.
10. RETIRED COAST GUARD OFFICERS, Adjust rank of
(1) To abolish the rank of commandant on the retired
Approved June 9, 1937; Public No. 142.
list and substitute in lieu thereof the rank of rear
admiral (upper half) or (lower half) depending on
whether the officer involved served actively with
upper half or lower half rank and pay, and (2) to
abolish the rank of commodore on the retired list and
substitute in lieu thereof the rank of rear admiral
(lower half).
11. INSURANCE BILL
To provide a revolving fund for reimbursement of losses
on shipments of valuables by Government agencies.
12. APPROPRIATION FOR INSURANCE BILL
Joint Resolution appropriating $500,000 for the establishnent of "The Fund for the Payment of Government Losses in
Shipment", authorised by the Insurance Bill.
13. JOHN L. SUMMERS ET AL.. Relief of
Approved July 8, 1937; Public No. 192.
Approved July 1, 1937; Public Res. No. 50.
Approved July 8, 1937; Private No. 208.
To allow in the accounts of Summers, former disbursing
clerk, Frank White, G. F. Allen, H. T. Tate, and W. O.
Woods, former Treasurers, the sums of $5,241.47,
$57,507.72, $643.00, $14,664.94, and $107,833.29, respectively, representing disallowances in their accounts.
14. STRIP STAMP BILL
To amend the stamp provisions of the Bottling in Bond
Act.
Approved July 9, 1937; Public No. 198.
50
-2
STATUS
Approved July 30, 1937; Public No. 234.
15. ENLISTMENTS IN THE COAST GUARD, ETC.
To authorize extensions of enlistments for 1, 2, or 3
years; to permit detention of enlisted men beyond their
terms of enlistment when necessary in the public interests; to extend to personnel (not civil) the facilities
of the Public Health Service; additional minor provisions.
Approved August 2; Public No. 238.
16. MARIHUANA BILL
To control the sale, possession, etc. of marihuana.
Approved August 12; Public No. 267.
17. SECOND OFFENDERS BILL
To increase the punishment of second, third, and subsequent offenders against the narcotic laws.
Approved August 14; Public No. 284.
18. OATHS. Renewals of
To dispense with renewals of oaths of office for
every change in status where the public interests
will not be jeopardized.
Approved August 14; Public Res. No. 59.
19. JAMES R. SMITH BEQUEST
To authorize the acceptance of the bequest to
the United States contained in the will of the
late James Reuel Smith of Yonkers, N. Y.
Approved August 14, Public No. 291.
20. MINOR COINAGE METAL FUND
To increase from $400,000 to $600,000 the Minor
Coinage Metal Fund, a revolving fund available
for the purchase of metal for minor coins.
Approved August 14; Public No. 288.
21. ESCHEAT BILL
To amend the Adjusted Compensation Payment Act,
1936, to provide for the escheat to the United
States of payments to deceased veterans, which payments would otherwise escheat to the particular
State or country.
Approved August 21; Public No. 335.
22. SILVER DEPOSITORY AT WEST POINT
To authorise the construction of a silver
depository at West Point.
B. Bills Pending in Congress
STATUS
Action taken
Committee
1. OMNIBUS CUSTOMS BILL
Ways and Means
To amend certain administrative provisions of
the Tariff Act of 1930; to remedy existing defects in Customs laws, etc.
H.R. 6738 intro. Apr. 28, extensive public hearings and
executive sessions before subcommittee; bill reintroduced
as H.R. 8099 on Aug. 2 and reported out on Aug. 3; passed
House Aug. 19.
2. INCREASE EFFICIENCY OF COAST GUARD
To provide for voluntary and involuntary retirement of officers of the Coast Guard. Involuntary retirement is to be brought about by action
Senate Commerce;
House Merchant Marine
and Fisheries
Judiciary, both Houses
To provide for the seizure and forfeiture of
vessels, vehicles, and aircraft used to transport narcotic drugs, counterfeiting material,
firearas, etc.
4. KEYES-ELLIOTT AREA, Extension of
To smend the Public Buildings Act to include
within the N.W. area (within which bldg. sites
may be acquired by the Secy.) the area west of
19th St., N.W., bounded by New York Ave., N.W.,
E. St., N.W., and the Potomac River; also squares
122, 104, 81, 59, 58, 44 and 33.
5. PREFERENCE, UNITED STATES PROCEEDINGS
To grant preference, as to hearing and trial,
to proceedings involving fraud upon the revenue of the United States.
passed Senate Aug. 7; H.R. 7486
intro. June 11, pub. hearings
and executive sessions, reported Aug. 10.
of the President upon the recommendation of a
Personnel Board convened for that purpose.
3. FORFEITURE BILL
S. 2575 reported July 22,
H.R. 6281 intro. April 9, pub.
hearings and executive sessions
before subcommittee, reported
by subcommittee to full commi
tee; s. 2389 intro. May 10.
House Pub. Bldge.
and Grounds
Senate District of
Columbia
Judiciary, both/Houses
S. 2339 intro. May 3, pub. hearings, reported and passed Senate Aug. 14; H.R. 1653 intro.
Jan. 5.
S. 2386 passed Senate August
6; H.R. 6282 intro. April 9,
executive sessions before sub-
committee.
51
Action Taken
Committee
6. COMMEMORATIVE COINS
House Coinage
To prohibit the further coinage of commenorative Senate Banking and
Currency
coins. (This may be considered as a substitute
H. R. 8036 passed House Aug. 2,
referred to Senate Banking and
Currency.
for the bill (S. 1895) providing for the striking
of commemorative medals in lieu of coins).
7. CHECKS. PHILIPPINE AND PUERTO RICO TRUST FUND
To amend section 21, Permanent Appropriation
Senate Banking and
Currency
S. 1644 introduced February
19.
Repeal Act, in order to prevent the covering into the Treasury of amounts of checks on account
of public debt operations of the Philippine Islands and Puerto Rico, which are not presented
for payment within the prescribed period (end
of fiscal year following fiscal year of issue).
8. PHILATELY BILL (Stamp Catalogue)
Judiciary, both Houses
S. 2550 intro. June 19; passed
Senate Aug. 14; H.R. 8233 reported Aug. 20.
House Banking and
H.J.Res. 377 intro. May 24,
public hearings.
To permit, within certain limitations, the reproduction of illustrations of foreign and U.S.
postage stamps; to provide for the publishing by the Government of a stamp catalogue; and
to prohibit the sale of plates.
9. REPLACEMENT OF FEDERAL RESERVE NOTES
Authorizing the destruction of Federal reserve
notes of the Series of 1928; and their replacement by Federal reserve notes of the Series of
1934, or a later series, at the expense of the
Currency
United States.
House District of
10. DISTRICT OF COLUMBIA CREDIT UNIONS
To transfer the jurisdiction of District of Col-
H.R. 7265 intro. May 27.
Columbia
umbia Credit Unions from the Commissioners of
the District of Columbia and the Comptroller of
the Currency to the Farm Credit Administration.
GOVERNMENT REORGANIZATION BILLS
75TH CONGRESS, 1st SESSION
1. ADMINISTRATIVE ASSISTANTS TO PRESIDENT
To authorize the President to appoint not to
exceed six administrative assistants.
2. REORGANIZATION ACT OF 1937
To authorize the President to reorganize agencies of the Government; to establish the Department of Welfare; and to bring the independent
regulatory commissions within the President's
budgetary control.
3. REORGANIZATION OF ACCOUNTING AND AUDITING
AGENCIES
on Government Organization.
H.R. 7730 intro. June 30 and
reported July 1. Passed House
July 27 and referred to Senate
House Select Committee
H.R. 8202 intro. Aug. 9 and re-
on Government Organiza-
ported Aug. 10. Passed House
Aug. 13 and referred to Senate
House Select Committee
tion.
House Select Committee
on Government Organiza-
Select Committee on Government
Organization.
Select Committee on Government
Organization.
H.R. 8276 intro. Aug. 18 and
reported Aug. 19.
To amend the Budget and Accounting Act, 1921, by tion.
bringing the General Accounting Office within the
executive branch of the Government, clarifying
jurisdiction of General Accounting Office, authorizing Attorney General to render opinions as to
jurisdiction of General Accounting Office, and establishing the office of Auditor General with power
to make an independent audit of the fiscal transactions of the Government as an agent of Congress.
House Select Comm ittee H.R. 8277 introduced and reTo abolish the Civil Service Commission, and es- on Government Organiza- ported August 18.
tion.
tablish a Civil Service Administration and to
4. CIVIL SERVICE ACT OF 1937
provide for the extension of the classified civil
service and the provisions of the Classification
Act of 1923.
5. REORGANIZATION ACT OF 1937 (SENATE)
This is an omnibus bill which deals with all of
the subjects covered by the four House bills
above, there being, however, some variation
in detail between its provisions and those of
the House bills.
Senate Select Committee S. 2970 introduced and reporon Government Organisation.
tod August 16.
52
September 3, 1937
Oliphant's memo of this date on possible
situations in event the Neutrality Act were invoked
is attached to diary entry of December 2, 1937.
See also his memo of July 15, 1937 (filed
that date in the diary) on the same subject.
(0x79.p.51)
ORNECIAL COMMUNICATIONS TO
THE SECRETARY OF STATE
WASHINGTON, D.C.
53
DEPARTMENT OF STATE
WASHINGTON
September 3. 1937
In reply refer to
Eu 861. 6341/89
My dear Mr. Taylor:
with reference to my letter of July 30, 1937,
and previous letters transmitting certain information
in regard to conditions in the Soviet gold industry,
I am enclosing a copy of a further confidential despatch on that subject which has been received from
our Embassy in Moscow.
Sincerely yours,
For the Secretary of State:
muci
B. saye
Assistant Secretary
Enclosure:
No. 466, from Moscow,
August 3, 1937.
The Honorable
Wayne Taylor,
Acting Secretary of the Treasury.
Department of State
BUREAU
Eu
DIVISION
ENCLOSURE
TO
Letter drafted 9/2/37
ADDRESSED TO
Hon. Wayne Taylor
U.S. GOVERNMENT office
1-10am
FOR SECRETARY MORGENTHRU
54
10. 466
Moscow, August s. 1957.
Subject: Transmitting Memorandum Regarding
the Soviet Gold Industry.
STRICTLY CONFIDENTIAL.
The Honorable
The Secretary of State,
Washington.
Sir:
I have the honor to forward as an enclosure to
1/
this despatch, a memorandum on the Soviet gold industry
based on statements made by Mr. August Chopp, who, un-
til recently, had worked for the Soviet gold mining industry for approximately seven years. Reference is
made, in this connection, to the Enbassy's despatches
No. 401, of June 23, 1937, No. 418, of July 3, 1937,
and No. 445, of July as, 1937, relative to the same
55
-2 subject.
It will be noted that Mr. Chopp states that the
Soviet authorities calculate that the theoretical average
cost of production for one gram of gold should amount to
12.40 paper rubles. If this figure is correct, it is
believed that it will be of considerable interest in connection with calculating gold mining costs in this country, which are naturally paid for in paper rubles.
The Department's attention is drawn to the statement made by Mr. Chopp in the memorandum to the effect
that the ZAPSIBZOLOTO did not submit a completely ac-
curate report on its 1936 IF oduction and that this trust
did not actually complete the year's plan until about
the middle of January, 1937, despite the fact that they
had reported to the central authorities that the plan
had been completed earlier. Reference is made, in this
connection, to the statement in the Moscow PRAVDA of
July 5, 1937, to the effect that a false annual report
had been submitted by the ORMEDZOLOTO (ORSK State Trust
for Copper and Gold Mining). A translation of this
article was enclosed with the Embassy's despatch No. 445
of July 23, 1937.
Furthermore, it will be noted that Mr. Chopp stated
that the BALEI gold mining trust was the largest
producer
It will be recalled that the world price for
gold is about $1.18 per gram.
56
producer in the Soviet Union at this time.
Respectfully yours,
Joseph E. Davies
Enclosures:
1. Memorandum, as noted.
863.4
ED:
Original and four copies to the Department.
A true cop)
the signed orig
Our
(
Enclosure No. 1 to despatch
No. 466 of August 3, 1937,
from the American Embassy,
Moscow, U.S.S.R.
July 14, 1937.
STRICTLY CONFIDENTIAL.
MEMORANDUM OF STATEMENTS MADE BY MR.
AUGUST CHOPP, AN AMERICAN CITIZEN WHO HAS
BEEN WORKING FOR THE SOVIET GOLD TRUST FOR
A NUMBER OF YEARS, TO MR. DURBROW, THIRD
SECRETARY OF THE EMBASSY.
The following is a summary of the statements made
by Mr. August Chopp, an American citizen who has been
working for the Soviet gold industry for over seven
years, when he called at the Embassy on July 14, 1937.
Reference is made, in this connection, to the statements
made by Mr. Chopp at the Embassy on June 30, 1937,
regarding the difficulties in the Soviet gold mining
industry, which were forwarded under cover of the
Embassy's despatch No. 418 of July 3, 1937:
In connection with his previous statements regard-
ing the cost of production of gold in the Krasnoyarsk
district, Mr. Chopp on this occasion explained in more
detail regarding the production costs at the Berikuli
mines, where he was last employed.
According to Mr. Chopp, the Soviet authorities calculate the value of gold at 1.29 gold rubles, and 12.40
paper rubles, per gram. The former figure being, of
course, approximately the world price for gold, that is,
about $35.00 per fine ounce. The second figure, aocording to Mr. Chopp, represents the value of a gram
of gold in paper rubles as used by the Soviet authorities
57
-2-
58
in calculating the theoretical production costs in paper
rubles of a gram of gold.
In connection with the second figure, he explained
that it represents the calculated theoretical average
cost in paper rubles for producing one gram of gold in
the Soviet Union based on the average costs of production for all gold mining enterprises in the country.
He added, for instance, that the cost of producing a
gram of gold at the Balei mines east of Lake Baikal,
which, he states, are the largest producers in the
Soviet Union at the present time, is much lower than the
above quoted figure, while the cost of production in the
Krasnoyarak district is higher than the average. In
this connection he again pointed out that, according to
the 1937 plan, the cost of production of gold at the
Berikuli mines was fixed at 17.60 rubles per gram, but
because of the fact that the yield from this mine fell
off considerably, the actual cost during the first part
of 1937 amounted to approximately 51 rubles per gram.
Because of this large increase in cost, the chief engineer and his assistants had been accused of wrecking
activities, and arrested.
Mr. Chopp further explained that what he terms
the official rate of exchange for purchases at the socalled "Gold Stores;" namely, 9.60 paper rubles for one
gold ruble, is based on the above-mentioned gold and
paper ruble values for one gran of gold which give a
ratio of approximately 9.60 paper rubles for one gold
ruble.
-:ruble. In this regard he added that the advantage in
buying commodities in the "Gold Stores" is that the
quality is usually much higher in these shops than in
the ordinary State stores and that the selection is invariably much greater, thus explaining why the holders
of coupons good for purchases in the "Gold Stores"
usually demand approximately 15 paper rubles for one
gold ruble worth of goods when buying commodities for
others not in possession of such coupons.
Commenting on the article which appeared in the
Moscow PRAVDA on July 5,1937, regarding the difficul-
ties in the gold industry and in which it was stated
that the ORMEDZOLOTO (ORSK State Trust for Copper and
Gold Mining) had submitted a false annual report for
1936, Mr. Chopp stated that to his certain knowledge
the ZAPSIBZOLOTO (Western Siberian Gold Trust), the
trust for which he was working, had also not submitted
a completely accurate report on its 1936 production.
According to Mr. Chopp the head of the trust, under
pressure from the authorities in Moscow who demanded
and expected an early report that the trust had com-
pleted its 1936 plan, submitted a report indicating
that the plan had been fulfilled when in reality such
was not the case. The report was based on ore "in
sight" but which had not actually been mined or had not
actually been brought to the surface. He added that the
discrepancy was not very great but that actually the
plan had not been fulfilled until about the middle of
January, 1937. In connection with this matter he pointed
out
59
out that the present head of the GLAVZOLOTO (The Chief
Gold Administration), Mr. Peryshkin, was until recently
the head of ZAPSIBZOLOTO, and was one of the party
members who had been taken to task in the above-mentioned
article in PRAVDA.
Regarding his statement that the Balei mines are
the largest producers of gold. in the country, Mr. Chopp
stated that although he had never visited or worked in
these mines, he had been reliably informed that they had
now surpassed the production of the Alden and Lena fields.
According to information received from a foreign 001league who had recently worked in these mines, some of
the veins in the Balei district contained pockets of
ore which yielded 1.6 percent gold per ton.
ED:
03/13038
TEST 272
THEMTRA930 YRUSA3HT
so
Fin
61
RE SEPTEMBER 15 FINANCING
Present:
September 4, 1937
9:35 A.M.
Mr. Taylor
Mr. Bell
Mr. Haas
Mr. Lochhead
Mrs Klotz
Mr. Harris
H.M.Jr:
Now Mr. Bell, I think before we get to New York would you mind sketching for me, bringing me
up-to-date as to where we are, with the present
bill program; you know, just what the financial
picture is, and the balances.
Bell:
O.K. Well, we estimated that we'd go out of
August with 804 million dollars with the bill
program that we carried through; we had about
820 million.
H.M.Jr:
Yes.
Bell:
This contemplates that we put 150 million dollars
in Treasury bills out in September, with maturities
H.M.Jr:
September, how much - 150?
Bell:
150.
H.M.Jr:
Yes.
Bell:
maturing in December. That will make a total
of 500 million maturing in December.
H.M.Jr:
Oh, these are December bills.
Bell:
Yes, sir.
H.M.Jr:
Right.
Taylor:
We've got one more of those to go.
H.M.Jr:
Yes.
Bell:
Well, one more to announce, two more to be paid
for - 8th and 15th.
-2-
Taylor:
Yes.
Bell:
This schedule that I have here also contemplates
going right on with Treasury bills after the 15th
and continuing through October, which would make
300 million additional money maturing in March.
H.M.Jr:
Yes.
Bell:
And I believe maybe - and I think Wayne probably
will agree to this - that that schedule ought to
be pushed forward two weeks.
H.M.Jr:
A lapse?
Bell:
Yes, sir, get two vacant dates in there so it will
give the market a chance to absorb what we have put
out, plus a chance to reinvest the 350 million we
are paying off; and that will certainly help the
market for those two weeks.
Taylor:
We can stay out for two weeks - be very helpful.
Bell:
I think so.
H.M.Jr:
I'm going to raise the thought that we don't
announce any more than 450, unless you fellows are
committed to it.
Taylor:
We're committed publicly to do five hundred into
December.
Bell:
That's right.
H.M.Jr:
Supposing we say that after my return, when I see
the figures, I change the - my mind. Would that
let you fellows down?
Taylor:
Not a bit.
H.M.Jr:
Huh?
Taylor:
Not a bit.
Because if it's 300 into March I'd rather build
H.M.Jr:
that up a little bit; we'll need it more in March.
62
63
-3-
Bell:
Yes, sir, that's right.
H.M.Jr:
We'll
need it more in March. Let's.just keep
that in our mind.
Bell:
I think we could very well eliminate the 15th.
I don't think it would go against what you (Taylor)
have already said. You said "contemplated."
Taylor:
No, I said it definitely.
Think it over. I don't want to do the slightest
H.M.Jr:
Bell:
H.M.Jr:
thing that would embarrass either of you.
It might help the market some.
Think it over, Wayne. If I said anything, I'd
say "after consultation with Taylor and Bell, the
three of us have come to the conclusion that
-
see? What?
Bell:
Well, anyway, that program
Taylor:
It is something to - I think that Burgess and
Harrison and those fellows would be better judges
of that than I am.
H.M.Jr:
The main thing - I don't want to do anything publicly
to undo anything that you have done. See what I
mean? You get me.
Bell:
Well, with that program I estimated that our
balances would be, end'of September, 819 million,
H.M.Jr:
Just a minute. End of September, how much?
Bell:
819 million.
H.M.Jr:
819.
Bell:
End of October, 784 million.
H.M.Jr:
784.
Bell:
End of November, 644 million.
H.M.Jr:
644 million.
64
-4-
Bell:
Now, that contemplates 75 million dollars a month
for gold.
H.M.Jr:
It's been running more than that.
Bell:
Around 115, 120 million in August. Now it looks
as though there might be a little coming from the
East - I mean England.
H.M.Jr:
Taylor:
H.M.Jr:
I sent you (Taylor) that radio
Yes, sir, the boys have got that for you.
Incidentally, does anybody know whether, if the
President invoked the Neutrality Act, could we still
continue buying gold from Japan?
Taylor:
Yes. We can do really what we want to on that.
We've got a legal opinion - memorandum for you
on that subject. You can call it off if you want
to, not do it, but it is entirely discretionary.
H.M.Jr:
Bell:
Well, if we took 50 million less now, that wouldn't
be - just build that up into March. As a matter of
fact, it'd be nice to have 500 million dollars worth
of bills coming due in March, wouldn't it?
Yes, sir.
H.M.Jr:
What?
Bell:
Yes, it would. And you could extend your bill
issues into November rather than stopping them at
the end of October. See?
H.M.Jr:
Now, with the exception of gold you have figured
everything at its worst?
Bell:
Well, figured about the way it runs. We hit it
pretty close in August. Emergency was about the
same. Got a little more unemployment trust than
we figured; that's where the balance went up.
H.M.Jr:
Your free gold, I see, is 161 million. That has
nothing
to do with the gold from devaluation, has
it?
Bell:
Yes, some of it.
65
-5H.M.Jr:
Well, you've got down 141.
Bell:
Oh no, that's the gold that was piled - part of
it is the increment, but as we redeem National
Bank notes it comes out of the increment and goes
into free gold. You see, up under the first one
there you have 141 million; that will be reduced
and your 161 increased as your National Bank notes
are redeemed.
H.M.Jr:
Bell:
If I spend the 161, that wouldn't be spending the
gold resulting from the devaluation, would it?
Well, to the extent that we redeem National Bank
notes out of the General Fund.
H.M.Jr:
How much would that be?
Bell:
Well, let's see now; I think there is possibly 60
million dollars of National Bank note gold in that
161 million, since December 22.
H.M.Jr:
December?
Bell:
That's the day you started your sterilization
H.M.Jr:
policy.
About a hundred million dollars
Bell:
As I recall, there was a hundred million dollars
free gold at the time we started this policy.
H.M.Jr:
Has anybody advocated spending that?
Taylor:
H.M.Jr:
Taylor:
Bell:
I think before the fall is over you're going to
have to look at the gold thing again as far as
the reserve picture goes.
You mean it's a little too close?
In spots it is very close.
I'd like to see you, while this gold is lagging the imports of gold are lagging, stop the sterilization
policy; say that what is coming in is more or less
normal.
66
-6-
Taylor:
Bell:
H.M.Jr:
Bell:
I think you'd get quite a lot of sympathy for
that.
We've got a billion
three.
A billion, 335 million, plus your billion eight
in the Stabilization Fund - three billion dollars
in gold locked up, which certainly can meet any
export demand.
Taylor:
They've got a damn tight potential situation up in
that New York district there.
Bell:
Taylor:
Well, they won't admit it.
Well, I don't know.
Bell:
One or two of the banks are in
H.M.Jr:
Would a hundred million dollars help any?
Taylor:
I think if you do what Dan is talking about
Bell:
Taylor:
H.M.Jr:
Taylor:
H.M.Jr:
first...
first, which is to say, "All right, this is
enough sterilization, and then let's see what
happens" - just let it ease in.
I think it would help everything a lot. Well,
we'll kind of - I mean I don't know how bad the
business recession is, but it certainly - the stock
market indicates it was pretty bad.
Not getting any new orders; I don't say not getting
any, but it's slowed up. Your price structure, of
course, has encouraged that, because you've had
falling commodity prices and the boys aren't
replacing. But inventories - I mean your retail
trade is good; there hasn't been any slowing up
in that appreciably at all.
Where's George?
67
-7-
Taylor:
He's here.
Bell:
Taylor:
I haven't seen George for a week.
I've been seeing him.
H.M.Jr:
Might as well sit in on this, huh?
Bell:
He has a memorandum here.
H.M.Jr:
(On phone) Ask Mr. Haas to come in - and Mr.
Lochhead, please.
Nobody else, is there?
Taylor:
Larry Seltzer, etc.
H.M.Jr:
I don't want too many here.
Well now, do you want to give me what you heard in
New York?
Taylor:
I think the best thing on that is just to have
Dan read these notes.
Bell:
If you want me to.
H.M.Jr:
All right.
Bell:
The first conference we had was on the morning
of September 1, with Mr. Garner and Mr. Kraft,
of the Guaranty Trust Company. They said that
it was "essential that we have two issues. Indications are that the Treasury will have to issue
one fairly short maturity and can possibly go into
an intermediate bond for the second. They prefer
a two-year note but realize that September, 1939,
is already filled up, so they suggest a three-year
(September 15, 1940) at a rate of 1-5/8% They
figure that this would sell on about a 1.55% basis
or 10/32. They say that we could also sell a fiveyear note (September 15, 1942) at 2% but that possibly
the Treasury would not want to go this high on a note
which is fully tax exempt. They do not hesitate
to recommend a 7-1/2 year bond (March 15, 1945) with
a coupon of 2-1/2%. They believe that the banks
would buy the five-year 2% note and they also believe
68
-8-
that the banks would buy the 7-1/2 year bond.
They are quite certain that the insurance
companies would buy the bond and that possibly
the country banks would be interested. They do
not feel that a ten-year 2-3/4% would go at all.
"Commenting on general market conditions, they
feel that the market recession in the late spring
went too far and then on the recovery it went too
far the other way so that this present market is
more of an adjustment." That was on the morning
of the first, see?
H.M.Jr:
What bank is this?
Taylor:
Guaranty Trust.
Bell:
"There has been no extreme liquidation in the
present market but it is more of a complete lack
of interest which has created a thin market. They
think there might be some preparation at this time
for fall trade; they are not concerned with the
present reserve situation. There is no indication
that the present reserve situation is causing any
pressure on the market.
"There was then quite a discussion on the present
Treasury bill policy of six and nine months. This
is not so important in this financing, but for the
record they are much in favor of adjusting our
present maturity to ninety days and tax payment
dates and ridding the market of the nine-month
bills. They feel that if the Treasury wants a
security of this kind, it should resort to one-year
Treasury certificates."
H.M.Jr:
Excuse me - why did they say 7-1/2 years?
Taylor:
Started off saying 7-1/2, then they changed to 7.
You'll see that at the next day's conferences they
Bell:
Taylor:
all drift into a 7-year bond.
The reason for it being that you've got '44 a rather
H.M.Jr:
Wasn' t
heavy optional year, see?
(Lochhead and Haas come in)
69
-9-
Bell:
And too, the 7-1/2 was sweet enough on the first
day.
H.M.Jr:
Bell:
What was the bonus year? '45, wasn't it?
That will only be about four or five hundred
million; by the time you reach '45 it will
probably be all out.
(Mrs Klotz comes in)
Bell:
This is Colonel Pope and Mr. Love, of First
National Corporation.
"There was a general discussion of the market
situation and the attitude of certain investment
policies of institutions with which they had come
in contact. They feel that the market at this time
has a much better tone and that it will no doubt
improve. They have been in touch with some New
England institutions and many of them were following
a policy of investing 90% of their money in governments and after a meeting of the Board of Directors
as to what to do with the other 10%, would wind up
by investing it also in governments.
"They thought it was a mistake for the Treasury to
consider putting out only a two or three-year note.
This would have the tendency of forcing the longer
term bonds up through scarcity. They believe in the
policy of extending the debt over as long a period
as possible. While in Chicago two weeks ago there
was some talk of a ten-year 2-1/2% bond, and at that
time they thought it was worth consideration; now, however, the period of maturity will have to be reduced.
They thought that a 7-1/2 year 2-1/2% bond was highly
desirable and would help the market. There should be
a choice of two securities, one the bond and the other
a short-term of two or three years. It would be very
difficult to put all of the refunding into one issue.
It was their thought that a three-year note at 1-5/8%
would go well.
"They had contacted one prominent banker in the
West who usually leans toward a short-term security,
but this time said he would exchange his 3-1/4's
70
-10-
for a 7-1/2 year 2-1/2% bond rather than a
three-year 1-5/8% note, but that he would much
prefer to either of these a five-year 2% note.
Obviously he was thinking of his earnings.
"In their inquiries as to the present market
situation they have received divided opinions.
Some have the opinion that the market is still
going down and others that it will go up after
the September financing. The concensus of
opinion is, however, that there will not be
very much activity in the market for some months.
Colonel Pope expressed a personal opinion to the
effect that he thought the market
would be dull for
FIX
some months to come.
"They estimated that about $75,000,000 of the
maturing issue is held by corporations. They
know that General Motors holds $26,000,000 and
are satisfied that it will not go into any
security with a maturity longer than two years,
but if this corporation or others do not like the
issue offered they will, no doubt, sell their
holdings in the market and take advantage of the
premium on rights. They feel that a five-year
2% note would pull more subscriptions than a
7-1/2 year 2-1/2% bond, but they believe that
from the standpoint of the Treasury the issuance
of a bond at this time would look much better and
that we could expect as many as $300,000,000 in
subscriptions for this security. They feel that
said that there was a great deal of talk in the
the insurance companies will buy the bond. They
Street about a one-year 1% security but it was their
opinion that this would look weak from the standpoint
of the Treasury and might interfere with the ninemonth bills.
"There was then some discussion of Treasury bills.
They also indicated that the Treasury bill program
should be changed some time in the near future.
They are of the opinion that the Treasury should put
out a security like a one-year certificate for which
the country banks can subscribe. These banks are
not now familiar with the bidding on discount bills
and the discount on the bills is so small that the
city banks will not go to the expense and trouble of
71
-11-
Taylor:
telephoning the country banks about this security."
In other words, they lack information because the
city banks will not telephone.
That ought to be "dealers."
Bell:
What?
Taylor:
That ought to be "dealers" instead of "city banks."
"City dealers," huh? I guess you're right.
This is Mr. Ihlfeldt and Mr. Johnson, who represent
the Savings Banks of the State of New York, and took
Mr. Miller's place, who was sick.
Oh, Miller, yes.
Bell:
H.M.Jr:
Bell:
Taylor:
Bell:
And they also represent the Central Savings Trust.
Yes, that's what they are.
But they were taking Miller's place.
"They said that there was about $10,000,000 of the
maturing security held by the Savings Banks of
New York State; that there was about $5,000,000
held by the Central Savings and Trust Company."
H.M.Jr:
How much?
Bell:
Ten million dollars. Very small.
"They said that the Savings Banks were not at the
present time buying governments and what few they
are buying are for a term averaging less than ten
years. They say that their deposits have not
increased during the past year because they believe
a lot of the Savings Banks' funds are going into
building and loan association Government guaranteed
shares; that there was very little money now being
loaned on mortgages. They do have some excess funds
for investment but they are unwilling buyers of
governments. They indicated that it was their belief
that all of the Savings Banks which hold the maturing
issue would take anything offered in exchange rather
than sell the rights. They seem to be waiting for an
72
-12-
increase in interest rates. They thought that
probably the Savings Banks would prefer a seven
or eight-year bond over a five-year note. Certainly they would prefer this over a three-year
note. Savings Banks of the State of New York now
hold $1,100,000,000 of Government securities, of
which approximately 12% is in the various note
issues. They thought that if the banks would take
any bond offered they would hold it and it would
not find its way back on the market immediately
after its issuance. They thought the Treasury
could issue a three-year 1-5/8% note and that it
would sell for about par and 10/32. An additional
issue of the notes issued last June would also go
(1-3/4's of 1942 or 1-3/3 of 1939).
"Upon being asked what other factors in the situation
were operating to reduce savings deposits, they named
the Savings and Loan guaranteed shares, United States
Savings Bonds and the increase in the sale of life
annuities.
"Speaking for the Central Savings Trust Company,
they would prefer the three-year 1-5/8% note for
the $5,000,000 which it holds. They were of the
opinion that the Treasury could get no secondary
market from the savings institutions."
H.M.Jr:
Excuse me just a second. How are our Baby Bonds
going?
Taylor:
All right.
H.M.Jr:
What rate?
Taylor:
We did just over 31 million in August.
H.M.Jr:
What did we do last year?
Taylor:
26.
Bell:
Running about 7 million a week, aren't they, Wayne -
Taylor:
Yes. August was pretty good; I mean considering
everything. Considering everything, it was as good
a month for a dull period, with a bad market, as we
a little better.
73
-13-
have had.
H.M.Jr:
Please don't - I haven't asked today what the
foreign exchange is doing. Not interested in
today's market. I'll learn about it tonight.
Go ahead.
- - How is it?
Lochhead: Quiet.
Bell:
This is the luncheon conference with Governor
Harrison and Mr. Benson of the Dime Savings Bank
and Mr. Parkinson of the Equitable Life Insurance
Company.
"Just prior to luncheon and while we were waiting
for Mr. Parkinson, we had quite a discussion with
Mr. Benson and he gave about the same story as Mr.
Ihlfeldt and Mr. Johnson on the savings bank
situation."
H.M.Jr:
Is that Parkinson?
Bell:
No, this is Benson of the Dime Savings. We were
waiting for Parkinson to show up and we had this
little discussion.
"He has $1,500,000 of the maturing notes and would
prefer a five-year note or less. He says that the
only investment money that he is now getting are the
funds coming in from the liquidation of mortgages
and, of course, their earnings. There are no
increases of deposits. His mortgage rate is now
5% and he is losing some of his investments to life
insurance companies which are offering a 4 to 4-1/2%
rate. He, of course, would like to convert some of
his cheap Government bonds into 5% mortgages, but
this apparently is not working out very well. He has
$14,000,000 in cash and says that most savings banks
are in the same position. They have lots of cash
but will not go into long term maturities. He thought
that a seven or 7-1/2 year 2-1/2% bond would go and
that the savings banks might buy some of them; but
that a five-year 2% note or less would be preferred -
more as a temporary investment.
"At the luncheon Mr. Parkinson said that he would not
74
-14-
want notes for his company. He has none of the
maturing issue. If we were offering a bond for
cash, he would subscribe to the bond and he would
probably buy a seven-year 2-1/2% bond if it is
issued. He thought other life insurance companies
might also furnish secondary markets for such a
security. He explained that while insurance com-
panies would go into a security of this kind at
this time, it does not meet their required earning
minimum; that his company is on a minimum earning
requirement of about 3.08. He thought other insurance companies were on no less and probably a higher
basis. It can be seen, therefore, that any investment
of insurance companies in a 2-1/2% security is more or
less of a stop-gap and something to give them liquidity
and a small return while awaiting other investment
possibilities. There was no question but what the
insurance companies had plenty of cash as insurance
business had increased and they were getting large
receipts from repayments of loans on policies. He
was asked what he thought of the present situation
in the money market. He replied that the present
dullness of the bond market was due to bad news from
abroad, the continued unbalanced budget, and continued
Taylor:
Bell:
rumor concerning the policies of the Administration
on reducing the price of gold. He said this rumor
was still prevalent and only this morning he had heard
about it again from St. Louis."
That's the only person who mentioned gold all the
time we were there.
I don't know whether you (Taylor) told the Secretary
the story, but you probably did.
This is Mr. Tompkins, of the Bankers Trust. He
"started out by saying that the Treasury should
have two issues. He feels that we should venture
into the longer term -- say seven or eight years,
as he thinks there is a present demand for this
kind of security. Then we should have a short-term
note which would be a sure thing. He would prefer a
two-year 1-3/8% or possibly 1-1/2%. He thought that
the combination suggested of a two-year note and a
seven-year bond would assure success in this refund-
ing operation. He felt that the reserve situation at
the present time is a factor in this market and that
75
-15-
the fall demand is now beginning to show up.
Indications are that it will require about
$500,000,000 cash over present requirements
to take care of it. There is also some talk
about the call rate being increased to 2%. Another
factor in this situation is the world condition
which makes the market nervous as they expect bad
news at any moment.
"He believes that there is a sufficient demand for
the seven-year bond; that the banks will hold them
as an investment, and we need not expect many of
them to be thrown back on the market. He thought
a three-year 1-5/8% note would go but would not be
as sure as the two-year 1-1/2%. His definite recommendation is a two-year 1-1/2% and a seven-year
2-1/2% bond."
Now this is Mr. Morgan and Mr. Young.
H.M.Jr:
How old is Morgan?
Bell:
How old is he? I'd say 55.
Taylor:
No, he's about - he might be 35.
Bell:
35?
Taylor:
Yes.
Bell:
Oh, is he the younger fellow? He looked older.
H.M.Jr:
He's a son; he should be young.
Taylor:
35 is the maximum, Dan.
Bell:
Which one was Morgan?
Taylor:
The one with the black coat.
Bell:
The one that sat next to me?
Taylor:
Yes.
Bell:
I wouldn't take that man to be 35. Would you, looking at him?
16
-16-
Bell:
Well, he'd just been to a funeral and was all
dressed up in a black coat.
I'd put him in - I'd say the fellow Young was
Taylor:
Both about the same age, be my guess.
Taylor:
Bell:
35. Maybe I had them mixed.
"They explained that they were corporation security
dealers and that they did not know that they could
give us much information about the Government bond
market. They were willing, however, to comment on
the present market as they see it from the standpoint
of dealers in corporate securities. At the present
time there is no tone whatever to the market. There
are no corporate issues of any consequence pending
because most people are waiting for the June 30
Audited Earnings Statements of corporations. They
have found that the insurance companies will buy
corporate securities but they must be attractively
priced before they will be interested. The peculiar
thing about it is that the insurance companies
will buy a long-term corporation bond but apparently
would not go into Government bonds of a maturity longer
than ten years. Another factor in the situation at
the present time is that private investors are buying
good preferred stocks instead of bonds. They refer
to commercial bankers as "scalpers" in most any bonds
at this time. In other words, commercial bankers
do not want bonds for investment purposes but they
merely buy these securities for the immediate profit
and then the securities soon find their way back
onto the market, thus having a depressing effect.
They find that the demand for loans is increasing
although there are no large volumes of issues at the
present under consideration. There are some refunding
operations coming up before the first of the year
which aggregate over $100,000,000.
"In this forthcoming Government financing they
have asked themselves the question: Who would buy
the two securities talked about in the Street one a 5-year 2% note and the other a 7-year 2-1/2%
bond. They say the banks will certainly take the
notes and possibly individuals because of the taxexempt feature. They thought that the insurance
17
-17-
companies and some banks would take the bonds
because of the rather attractive coupon for a
short-term security. There is no doubt but
what there will be substantial buying in the
market of the bond. They both agreed on this."
Next, Mr. Aldrich and Mr. Green, of the Chase.
H.M.Jr:
Winthrop?
Bell:
Yes.
H.M.Jr:
Did he come around? Where did you see all these
Taylor:
In the Federal Reserve Bank, Dr. Burgess's office.
H.M.Jr:
Burgess present?
Bell:
Yes, all the time.
"Mr. Aldrich thought the Treasury might try additional issues of the 1-3/4% of last June and, say,
fellows?
the 2-3/4% bonds of 1945-47. He said it had been
suggested in the Street that we have a 15-month
1% but he feels that this would not go and if it
was tried should be 1-1/8%. He also said that from
the standpoint of the Treasury this looks weak to
issue such a short-term security. As to a 5-year
2% note the banks would certainly come in rather
heavily. If there is to be a bond, he would prefer
the period 1943 to 1945. He called attention to the
fact that the 3-3/4% of 1943-45 are selling on about
a 2.29% basis; that any security put in 1944 or 1945
would probably, after a few days, sell on a basis of
2.40% to 2.45% at the present market.
"He has found no tendency in his bank to increase
loans and there are some indications that loans are
actually decreasing. He is not alarmed about the
reserve position as a reduction in the discount rate
has made it a simple matter for the banks to borrow
from the Federal Reserve Banks.
"He finally wound up by saying that he thought that
a 3-year 1-5/87 note would go well and the Treasury
might do the whole job with that."
H.M.Jr:
3-year?
18
-18-
Bell:
3-year 1-5/8.
H.M.Jr:
That's '40.
Bell:
September '40.
H.M.Jr:
Yes.
Bell:
H.M.Jr:
This is a conference with Gordon Rentschler and
his Mr. Blair in Rentschler's home.
Was Rentschler ill?
Bell:
No, we went there to eat.
Taylor:
We went out there to spend the night out there.
H.M.Jr:
Burgess too?
Taylor:
No.
H.M.Jr:
Where is his place?
Taylor:
Out at Long Island.
H.M.Jr:
What sort of a place has he got?
Taylor:
Very nice.
H.M.Jr:
Must be a rather big one.
Taylor:
54 acres.
H.M.Jr:
Family around?
Taylor:
Yes. Really got a lovely place out there.
"Mr. Rentschler was enthusiastic for a 7-year
23% bond. He called attention to his previous
recommendations that the Treasury should try to
put all of its long-term financing on a basis of
10 years at 22%, constantly rolling over the
maturing issues for a 10-year period. In view
of his recommendation in this connection, he feels
Bell:
that a 7-year 22% bond is even better than the one
he had previously suggested.
H.M.Jr:
He never told us that.
79
-19-
Bell:
What?
H.M.Jr:
He never told us that.
Bell:
I didn't remember it either. I thought perhaps
he'd told it to you some other
H.M.Jr:
No.
Taylor:
He says that awful hard - that he told somebody.
Bell:
Yes, but I don't ever recall.
"He also is in favor of a 3-year 1-5/8% note
which would give the holders of the maturing issue
a choice of securities. He told us that not only
would his bank subscribe to the bond for the amount
of its holdings of the maturing issue, but that it
would buy rights in the market to exchange for the
bonds. He also said that the Home Insurance Company,
of which he is director, would buy $10,000,000 of
these bonds. Said that he thought the bonds would
be ideal for the insurance companies. There was
some discussion of the 1-year 1-1/8% or 1-1/4% but
he did not have the feeling that some of the others
had on the next day about the short-term security.
He thought that it was not necessary for the Treasury
to go down as low as the one year or 15 months.
"His bond man, Mr. Leo Kane, had submitted to him
a memorandum in which he stated that 7-year 2-1/2%
bond and the 3-year 1-5/8% note would suit the
requirements of the National City Pank."
H.M.Jr:
He said he'd also go out in the market and get the
rights.
I didn't get the impression of what Mr. Aldrich
said they'd do.
Bell:
They have none of the notes.
H.M.Jr:
Oh. But he wouldn't go out and buy?
Bell:
No, and he wanted you to do a 3-year 1-5/8 for
the whole refunding operation, and then - well,
the impression was that he wouldn't have the
80
-20-
H.M.Jr:
fluctuation around, that he would bring the
two securities together.
Frankly, he was the least impressive of any of
the people we talked to.
I was going to ask you.
That's right.
I was going to ask you. I've never talked to him
about a market. I mean I've talked to Rentschler;
Rentschler is always on his toes; but I wonder what
sort of impression Aldrich made.
He wouldn't let his bond man talk very much. He
did most of the talking.
No, that bond man finally talked some.
No, but you didn't feel Aldrich was on his toes.
No, and it's the one bank up there that's not
getting any new business. I have his statement
here, which is very interesting to me. I didn't
see any new loans coming in, and so on and so on;
in fact, they were losing some.
Everybody else had the other feeling, that loans
are going to increase this fall.
I read that with the meaning that they are just
not getting the business.
But Rentschler, on a 3-year and a 7-year - he'd
Bell:
That's what he said.
Taylor:
H.M.Jr:
Bell:
H.M.Jr:
Bell:
Taylor:
H.M.Jr:
Taylor:
Bell:
Taylor:
Taylor:
go right after it.
That was the first day.
H.M.Jr:
Did you see him again?
Bell:
No. This is the end of the first day's conference
now. Now we begin with the second day, and your
market had changed. The first one was Devine in the
-21-
81
morning, and he had just gotten back from a
vacation and only been in the market two days,
and he chopped around quite a bit.
"Mr. Devine said that he would prefer two issues
of any one of the following Treasury notes: 15
months at 1-1/8%, 2 years at 1-1/2%, 3 years at
1-5/8% 4 years at 1-3/4%, questioning the latter
and that this might have to be increased to 1-7/8%
He thought that the one and four years are the
best; possibly you could do a two-year and a
four-year. After all, they are close together.
He stated that the General Motors Corporation
has approximately $27,000,000 of the maturing
notes. He is quite certain that it will want
cash. The First of Baltimore has about $30,000,000
and it will probably want an issue of 1940 and not
longer than 1941. He named certain banks in New
York City which had more than $100,000,000 and he
doubts very much whether they would take anything
beyond the 4-year period. (The banks named, however,
indicated that they would be interested in a 7-year
bond) ." One of them was the National City Bank, which
he knew wouldn't want anything.
"He says he just can not see a bond or a 1942
note. We have got to be careful not to issue a
security that will hang heavy on the market and
then it will be the unpleasant duty of the Federal
Reserve System or the Treasury to support the whole
market. He says he has shopped around in the last
two or three days among several of the banks and
dealers and he gets a very definite sentiment for
the short note. He thinks the Treasury has got to
put out a 15-month security in order to be sure that
its offering will be a success."
This is Swihart, of C. F. Childs Company.
"Mr. Swihart says that he can not see anything
beyond three years. In his talks all over New
York and throughout the country only one has mentioned a bond. Few have talked 1-7/8% and a 2%
five-year note and he only had one suggestion of a
7-year 2-1/2% bond. There are no buyers of Govern-
ment securities in the present market. He suggests
the following Treasury notes for consideration:
15 months at 1-1/4%, 2 years at 1-1/2%, 3 years at
82
-22-
1-5/8%, 5 years at 1-7/8% He feels that the
banks would take a 7-year 2-1/2% bond but that
the bonds would soon be back on the market and
then we would see further declines in Government
securities. He feels that short term rates are
definitely going higher and questions whether
we can hold the higher rate securities from
declining when the short term rate advances. He
does not question but what we can convert the
whole amount of the maturing issue into a 3-year
note. He knows of one banker who has $50,000,000
of the maturing issue who will not go over a 3-year
note. He has talked with the Metropolitan Insurance
people and he said they would not be interested in
anything over three years.
"Mr. Baker and Mr. Gill, Bank of Manhattan.
"They said there are two thoughts at the present
time: The New York attitude is for a short term
security and the outside New York attitude is for
a longer security. Their feeling is that the
Treasury should stick to one issue, say a threeyear 1-5/8% note. This is a generous rate and they
thought that the whole market would go up with that
issue, whereas if we offer two issues the lower
premium will bring the higher premium down to it
and thus have a tendency to depress the whole market.
Their bank has a feeling that rates are going up.
There is now a definite tendency for commercial loans
to increase and their bank's loans are now up 31%
over last year.'
This is Park, of Manufacturers Trust.
the feels that the Treasury should issue one or two
notes. He does not think that a bond issue would be
received very well."
H.M.Jr:
Who's this?
Bell:
H.M.Jr:
Park, of Manufacturers Trust.
He's a smart fellow.
Taylor:
Yes.
83
-23-
Bell:
Wait till you get this now. "He thought that
a 15-month 1% note would sell on about a 6/32
premium and that a 1-5/8% 3-year note would sell
on a 16/32 base. When he came into this conference
he was definitely of the opinion that we could not
go over 1940, but when he was asked his opinion as
to a short note and a 7-year 2-1/2% bond, giving the
holders of the maturing issue a choice, he replied
that he had not looked at it from that standpoint
but thought that that was a good suggestion and had
a lot of merit in it. As the conference progressed
he became more enthused about the short note and
intermediate bond. He thought we might get as much
as $250,000,000 or $300,000,000 in bonds. He does
not feel that the bond would depress the market and
he did not feel that any of them would take the bond
merely for the profit involved. He thought the
insurance companies and larger banks would certainly
take the bond to a limited extent and the insurance
companies, in view of their large cash balances, might
even furnish some secondary market for them. He concluded by saying that he was definitely of the opinion
that the Treasury should issue a 1-year 1% or a 3-year
1-5/8% note and a 7-year 2-1/2% bond. He thought the
combination of either of these short notes and the
bond of this maturity and coupon would be ideal for
the market."
In the conference he completely switched.
Taylor:
That happened quite a few times.
Bell:
Mr. Traphagan, of Bank of New York and Trust.
"He feels
H.M.Jr:
I've never met him.
Lochhead:
He's a bond man.
Bell:
He was a bond man - now Vice President.
Lochhead:
Yes, but a bond man primarily.
"He feels that the Treasury is forced to do something
short this time. A long term bond would completely
Bell:
disrupt the bond market. He thought that a 3-year
84
-24-
note at 1-5/8% would go and that we should
offer but one issue. He does not feel that the
money market is going to get tight as many in
New York do. He finds that the average banker of
today is trying to find a way to get out of long
bonds, certainly those with a maturity of beyond
10 years. He is afraid that if we give an option
to take a 3-year note or a 7-year bond and if the
bonds do not go well, it would hurt the whole
market. He does not hesitate to recommend one
issue of 3-year Treasury notes at 1-5/8%."
H.M.Jr:
Three years, 1-5/8.
Bell:
That's the general recommendation.
"Incidentally, he is very much in favor of the
9-month Treasury bills and he has found that some
out-of-town banks like them. He feels that short
term rates may go up some and as more Treasury
bills are put out corporations may come into the
market for these bills. This would cause a temporary
deflation in bank deposits but as the proceeds of
the bills are put out by the Treasury this situation
would be corrected."
We add those there just for your information;
has very little to do with the financing.
Next is Baker, of Travelers Insurance.
"He feels that the Treasury is compelled to resort to
very short maturities. His first suggestion would
be to issue additional amounts of the securities
offered in June with an option. He said the
Treasury might go to a 5-year note at 1-7/8%
He feels, however, that the insurance companies
do not want any more governments and that they will
not buy them only as a stop-gap. He had some figures
which showed that the cash balances in the life
insurance companies at the present time are about
$500,000,000, down about $250,000,000 from last year,
and that the investments in government securities
are up about $800,000,000."
That's an interesting figure.
H.M.Jr:
Say that again.
85
-25-
Bell:
That the cash balances of all the life companies
now are about $500,000,000 and last year they were
about $750,000,000, and that their investments
in governments have gone up about $800,000,000.
in a year.
H.M.Jr:
That's where our stuff has gone.
Bell:
Somewhat.
H.M.Jr:
Yes.
Taylor:
The banks have liquidated, and here's $800,000,000
of it. It's something that the banks have liquidated,
and here is approximately $800,000,000 of it.
H.M.Jr:
Which would make you think that the insurance
Bell:
Taylor:
Yes, I think they might.
Wait till you hear what this fellow says.
H.M.Jr:
Who's this?
Taylor:
This is Baker of the Travelers.
Bell:
He's pretty smart too.
"This cash balance is below normal for the past
3 years but prior to that time two to three hundred
million dollars was about the average balance.
companies might take a 7-year at 2.
"He says that there are other investments coming
along now with much more attractive yield than
governments and that the insurance companies are
turning to this field. They are not, therefore, much
interested in anything that the Treasury does on
September 15. Dr. Burgess asked him if he would be
interested in the bond of 7 years at 23% which had
been suggested. He said that he might be interested
in this and he thought it might attract some of the
insurance companies' cash. He said that on the way
to the bank he was looking at the list and thought
that a 1-year 1-1/8% or a 4-year 1-3/4% or 5-year
1-7/8% would go. In conclusion he said that he thought
the choice of the bonds and a short note would represent
a good program. He did not feel that the bond would
be a depressing factor and that we might expect as much
as $300,000,000 in exchanges on the bond alone, the
86
-26-
balance of the issue going to notes.'
Taylor:
And he afterwards said to Matteson, whom he had
lunch with, that he'd buy the bond and that he
would switch out of some of his short stuff into
the 22% bond.
Bell:
Oh, he did?
Taylor:
Yes.
Bell:
I didn't get that.
Davison and Hollingsworth, of the Central Hanover
Trust.
"These were the most pessimistic representatives
that we interviewed. They were very definitely
of the opinion that a bond would completely upset
the market. They thought we must confine our
offering to two issues of a short-term character,
one a 15-month note at 1-1/4%. He said that yesterday
they would have said 15-months at 1-1/8% but the change
overnight would make the rate 1-1/4% in order to
insure its success. They thought that the 5-year
note of last June was a mistake."
H.M.Jr:
Which was?
Bell:
The 5-year note last June - 1-3/4.
"It has clearly been a speculative issue from the
very start. They thought one very good suggestion
was to put the whole issue into a 15-month note
at 1-1/4% The corporations that hold the maturing
securities, such as General Motors, would exchange it
for the 15-month security and hold them until
maturity, but he did not feel that any of the corporations, particularly General Motors, would go over
2 years. As far as their bank is concerned they have
no particular choice as between the 15-month 1-1/4%
and the 3-year 1-5/8% and that they probably would go
50-50 on the two issues. Mr. Davison wound up by say-
ing, however, that it would be less disturbing to the
whole bond and security market if we would have just
one issue."
87
-27-
Hutchins, of Irving Trust.
"He said his bank has none of the maturing issue
but they have about $100,000,000 maturing in 1939.
while he realizes that for the Treasury to issue
a security around this date would conflict with
their holdings, it seems clear that there will
have to be two issues put out. He prefers a 15-month
1-1/4% and 3-year 1-3/4%. He is quite certain that
a bond would depress the present market, probably
as much as a half a point. He says that the Government securities which the bank holds average a
maturity of about 2 years. He is quite strong against
a bond at this time and is also against a 5-year note.
He thought that the insurance companies, trust estates
and some of the banks would take a. bond and that if
the Treasury is insistent upon an intermediate bond
he would suggest that it be a 15-month note and a
7-year bond. Because of its policy, his bank would
very definitely not buy these bonds, but he would
recommend them to his customers."
And I add a note here: "In considering the statement of the representative of the Irving Trust
Company we should not lose sight of the fact that
the policy of this bank is to hold government
securities of an average maturity of not more than
2 years and that it is definitely against holding
any bonds at all."
Mr. Levy of Solomon Brothers. He was very short.
"Mr. Levy feels it has got to be short, a choice
of the 3-year 1-5/8% or a 4-year 1-3/4% note. He
does not know who would buy a 7-year bond and if
the Treasury wants something longer he would be more
in favor of a 5-year 2% note than a 7-year bond. He
would issue two securities, giving the holders a
choice at the rate and term above indicated."
H.M.Jr:
How many more pages have you got?
Bell:
I've got one or two more.
Mills and Repp, of Discount.
"Their conversations with the various banks indicate
88
-28-
that the opposition to the suggested bond issue
does not come from those who have the maturing
issue, but
H.M.Jr:
The opposition to what?
Bell:
Well, the suggested 7-year bond.
"
does not come from those who have the maturing
issue, but comes from those who hold those bonds
that mature around 1943 to 1945. The last hour of
the market today has turned against these issues,
which indicates that the market is reflecting some
of the discussions. He thought that there was one
very important factor in this whole situation which
no one is talking about in their discussions of this
subject, and that is that the Treasury is paying off
$350,000,000 maturing Treasury bills around September
15 with cash. This certainly will create a tremendous
vacuum in the market and will make that money available
for investment. they can not see what the banks are
going to do with this except to buy Treasury notes and
the shorter term bonds, and that any bond that we issue
at this time would come in for its share of that investment. They feel that the Treasury will be surprised at
the number of banks which will take a seven-year
2-1/2% bond. They also feel that the savings banks
will come in much heavier than indicated by the representatives of New York Savings Banks, as they are light
on maturities around 1944.
"Another very definite factor in the situation is
that the maturing security has a 3-1/4% coupon and
the institutions that have that security will want
to replace it with as high a coupon as it is possible
to obtain. Therefore, the 2-1/2% bond will be attractive to them from an earning standpoint.
"They feel very definitely that the issue has got
to be a double header. We are now exposed to
foreign news, much of which is bad, and the Street
is very blue. They feel, therefore, that we have
got to have one short term note which will be certain
of success and to which all the banks can run in
case we get extremely bad news over Labor Day. In
their opinion this should be a 15-month 1-1/4% note.
They feel that no matter what happens
"
89
-29-
H.M.Jr:
Bell:
Excuse me; what rate did they give the 15-months?
One and a quarter.
"They feel that no matter what happens in the world
situation, while this security is open for subscription this issue will be safe. They feel that a
2-year 1-1/2% note is bad because it falls on the
same date as the 1-3/8% of September, 1939, and
may have a tendency to throw this security below
par. The other security to be offered would be the
2-1/2% seven-year bond. They feel that the shorter
maturity will sell on about par and nine to fourteen
thirty-seconds, whereas the 2-1/2% seven-year bond
will sell on about a 2.40 basis, or about 21/32.
They say that the maturing issue is fairly well
scattered over the country with about seventy
million dollars in the hands of insurance companies,
thirty million dollars in Baltimore, three hundred
million dollars in New York City banks and a great
deal of it is in the hands of small country banks.
They feel that the small country banks will certainly
want the 2-1/2% earnings. The corporations that hold
the maturing security will, of course, want the
15-month note. They were enthusiastic for these two
issues, that is, a 15-month 1-1/4% note and a seven-
year 2-1/2% bond."
This is just a summary: "At the beginning of these
conferences I believe that we had a very definite
feeling that a short note issue of fifteen months'
maturity was objectionable and that it would be a
very definite sign of weakness on the part of the
Treasury. In view of the fact that some of those
interviewed stressed the foreign news as a factor
in the market and for this reason made a suggestion
that we have a 15-month issue for safety purposes
and that in addition we offer a seven-year 2-1/2%
bond with the idea that whatever goes into this
maturity will be just that much advantage to the
Treasury, many of our first objections were removed.
"The concensus of opinion seemed to be that the
Treasury could issue a short term note of between
one and three years, the one-year or 15-month note
at 1-1/4% and the three-year at 1-5/8%, and a
seven to 7-year bond at 2-1/2%, preference leaning
towards the seven-year bond."
30
-30-
H.M.Jr:
Repeat that.
Bell:
"The concensus of opinion seemed to be that the
Treasury could issue a short term note of between
one and three years, the one-year or 15-month note
at 1-1/4% and the three-year at 1-5/8%, and a seven
to 72-year bond at 2-1/2%, preference leaning towards
the seven-year bond. The first day of our conferences
brought only one or two suggestions for the 15-month
1-1/4% note, but at the second day's conferences,
probably because of the turn in the market overnight,
it was the concensus of those interviewed that a
15-month 1-1/4% note would have to be one of the securities to be offered. There was a strong feeling that
whatever was issued of the notes and the bonds that
the larger proportion of the subscriptions would go
into the note, but that we would get anywhere from
$200,000,000 to $350,000,000 in the bond."
H.M.Jr:
Finis?
Bell:
That finishes it.
That's a very good report. You certainly saw
H.M.Jr:
everybody.
Bell:
We saw about 19 people.
H.M.Jr:
There's only one person you didn't see, and that's
Ecker, the Chairman of Metropolitan.
He isn't in town.
Bell:
H.M.Jr:
No, but he'll talk to me; he's a very intelligent
fellow. He controls the largest block of capital
in America.
Bell:
We were going to see him.
Taylor:
Burgess and Matteson talked to his man.
H.M.Jr:
Well, the old man himself came down here - I've
only seen him once - and that boy is smart.
The other one that isn't included in here, whom we
Taylor:
didn't talk to but who talked to Burgess, is the
First National, and they are all for a 7-year bond.
91
-31-
They were the first people that thought of it.
Bell:
Jeff Coolidge telephoned down and suggested
Taylor:
A bond.
Bell:
A bond.
H.M.Jr:
I think that's a very comprehensive report. Must
Taylor:
Very interesting.
Bell:
H.M.Jr:
Very tiresome, but interesting too.
They stuck right to the issue, didn't throw in a
Taylor:
There was a lot of other conversation.
Bell:
I ignored that.
Taylor:
Which Dan didn't include here for obvious purposes.
There was a mention of a balanced budget once in a
Bell:
have been hard work.
lot of other stuff.
while.
(Five minute intermission)
Haas:
Here is our memorandum.
H.M.Jr:
How long is that?
Haas:
Oh, you can jump down to here (page 8) . The other
H.M.Jr:
While I'm reading this, who do we want in here at
11 of our own people? Seltzer?
Haas:
I suppose so.
Taylor:
Harris. Henry Murphy?
H.M.Jr:
I don't think so.
is just a sort of review.
92
-32-
H.M.Jr:
Haas:
H.M.Jr:
Haas:
H.M.Jr:
Haas:
(On phone) Have Mr. Seltzer and Mr. Harris, who
is with Mr. Lochhead, both in here at 11 o'clock.
I don't think we want Murphy.
Don't want to get too big a crowd.
I think I'm going to read this, if you don't mind.
You've all read this, have you?
Wayne has had the first edition.
You read it out loud. Then everybody will get the
benefit of it.
"The September financing will consist entirely of
the refunding of $817 millions of maturing notes.
These notes are held very largely by banks, prin-
cipally the larger banks, with a fair sprinkling of
holdings by other financial institutions, dealers,
and corporations. There is a normal tendency for
maturing notes to be concentrated in the larger
financial institutions, but this issue has the reputation of being very well distributed.
"An attempt to replace these notes entirely by a
bond issue would tend to force the pace of the transfer of Government obligations from banking to nonbanking holders, and might result, at worst, in a
further break in the market, and at best, in a soggy
technical position. It is concluded, therefore, that
a large part, at least, of the securities offered in
exchange for the September notes should be of a
character definitely suitable for retention by the
banks now holding the maturing issue.
"It appears to be clear that a bond issue offered
in exchange for the maturing notes would not prove
attractive for continued retention by all of the
present holders, many of whom, it is believed, would
particularly welcome a rather short-term note. A
5-year note issue would be unlikely either to attract
the latter type of holder, or institutions seeking the
higher coupon rate that would be associated with a
bond offering. While the 42 year note issue sold in
June has behaved relatively well, it was originally
priced rather liberally in view of the yields then avail-
able on adjacent issues."
93
-33-
Then we go through and discuss the various
alternatives and what we are really doing is
just running through our thinking on the thing.
H.M.Jr:
Well, I wouldn't do that. I'd rather - do you
mind giving me your conclusions?
Haas:
H.M.Jr:
The conclusions? Well, I can do that orally.
I think it would be much better. Is there stuff
in there I should read? Let me keep it on my
desk.
Taylor:
H.M.Jr:
Haas:
I think there is.
All right.
We fussed around with it in our shop. As a matter
of fact, I think it is the most difficult financing
situation that we have had any experience with.
Unlike some of the other situations, there doesn't
seem to be any answer which is crystal clear, or any
two alternatives. If you take the different possibilities, each one of them has some advantage. However, as we weighed over the different possibilities,
particularly in view of the information which Mr.
Taylor and Dan received from New York, we began leaning towards that short note, that 15-months note, and
the 7-year 22% bond. It has some real advantages.
When you give that option it practically assures
success, and you've got so many uncertain factors
that you don't know which way they're going to swing.
If you get a break, it certainly will look better
for the Treasury if you have offered a bond, and you
may get several hundred million dollars in the bond
offering. If you take the longer term notes rather
than the short one, you take on some additional
risk. In addition to that, you have the great piling
up of maturities in the two and three year position.
H.M.Jr:
You're open in September '40.
Haas:
Well, in that year you already have almost three
H.M.Jr:
billion. Then you have to put this on top of that.
"hy do you fellows all pick 15 months. What's that
date?
94
-34-
Bell:
That's open.
Taylor:
It's the only open date.
Oh, it's the only open date. How much have we got
H.M.Jr:
Bell:
Haas:
coming due in '38 already?
We've got a billion nine now; that's of notes, and
this would make - if we put it all in there, would
make it two million seven.
And the two and three - each of those would run both of them are now around three billion dollars.
With this 817 on top, if you just offered one
note
H.M.Jr:
Well, I don't think anybody would want to offer
one. I think that's out. I'd give an option.
mean I wouldn't make it one. That would be a
mistake, don't you think?
I
Lochhead:
Right.
Haas:
I think the real advantage here is to provide an
offering which on the face of it looks better for
the Treasury and you've got a shuttle basis so that
if the situation gets tight you swing over to the
note. The worst that can happen is that you sell
very few bonds, but the issue goes. If the situation
clears over, it allows you to sell more bonds. It's
not ideal, but all in all it seems to me that that
is the combination which I'd favor.
H.M.Jr:
Just to digress a minute, do we know whether that
last German issue went over? Last I saw, it was
one-seventh subscribed.
Taylor:
H.M.Jr:
The State Department cabled yesterday to get a
report on it. They hadn't had one.
Of course the last British issue wasn't subscribed.
Haas:
We at first, Mr. Secretary, abandoned all consideration of a bond. We thought it was out.
Bell:
(Handing Secretary paper) This is giving the banks
notice that they may not expect the information before
95
-35-
12 o'clock tomorrow. Give them a rest.
(Secretary signs)
H.M.Jr:
Taylor:
Of course, perfectly frankly, a 15-month note I mean to me it seems so
If it was that alone, without the other one, it
would look awful.
Haas:
Look awful bad.
Taylor:
If you do the 15-month note in combination with
another note, it looks bad; but if you do it with
the bond, it gives you about as good a picture
as you can get out of a very messy situation.
H.M.Jr:
Well, as of last night's closing of 11 15-months,
Taylor:
8 or 9.
Lochhead:
8 or 9 32ds.
Taylor:
Now, there is one other thing that I think is important in this choice.
H.M.Jr:
Yes.
Bell:
I'd say from 7 to 10.
Haas:
Yes, that's what it is.
Taylor:
Until they have actually made their turn-ins, your
premium is going to be controlled by the short one,
how much sweetness is there in that?
see?
Bell:
On your rights.
Taylor:
Yes.
H.M.Jr:
What are the rights selling at now?
Bell:
8 to 10.
H.M.Jr:
Well, I wouldn't expect too much.
Taylor:
In other words, that's going to hold it down. Then,
96
-36-
when they have actually made the shift, all other
things being equal, the bond's going to go away
from you, you know.
H.M.Jr:
You mean go up?
(Harris comes in)
Taylor:
Go up. And that would be the best of all the
Bell:
That's exactly what you want.
H.M.Jr:
Harris, on a 15-months note, how much do you
Harris:
Nine thirty-seconds. I have some figures on it.
things that could happen - would work well.
figure there is in it?
(Hands paper to Secretary)
Bell:
When we started these conferences, I think Wayne
and I both thought the 15-months issue was out, but
as we swung around to a short note and a bond, we
could see a lot of advantages in the 15-months for
safety purposes.
H.M.Jr:
The other thing is you've got to have this open
for three days.
Have we - we did it before.
Taylor:
If we can shorten it to two days, it would be very
H.M.Jr:
We did that once.
Bell:
I don't recall. I think we did.
Taylor:
We talked to Burgess about shortening it to two
days, and he said he'd think it over before he
Taylor:
desirable.
came down.
Bell:
He didn't like it very well.
Taylor:
If you get bad foreign news on the last day, if
you had a three-year note, you'd have some cash
turn-ins.
97
-37-
turn-ins.
H.M.Jr:
Three-year note?
Taylor:
But on the one and a quarter you wouldn't.
H.M.Jr:
Two days is plenty. What the hell - only need one
day to make up their mind.
Taylor:
H.M.Jr:
But if the news happens to be good, you're going
to have quite a swing to the bonds on the last day.
But it's going to be entirely dependent on the news
of that particular day.
Well, the time to announce when we close is Tuesday
night. Tuesday night we'll have to say when the
thing will be closed.
Bell:
I'd like to see it two days.
H.M.Jr:
But you boys think today that the market is so
shaky that we have to have that safety factor of
the 15-months.
Haas:
Not that it is so shaky, but the market is sensitive
to developments and there is a possibility for some
developments taking place.
Bell:
here just isn't any market now.
H.M.Jr:
Taylor:
You don't give much sweetness to that note, do you?
You don't need to.
H.M.Jr:
What we're thinking of doing - what we announced -
Harris:
I might say that there is a very good demand for
those maturing notes. This morning they are up
two thirty-seconds, quoted 19-12.
H.M.Jr:
Which maturing notes?
Harris:
The September 1-3/8s.
H.M.Jr:
The September what?
Harris:
The September 1-3/8s.
is to cut the present bill series, issue no more.
98
-38-
H.M.Jr:
They're up what?
Harris:
Up two thirty-seconds, quoted 10-12.
H.M.Jr:
That's good.
Taylor:
Damn right. That's the first time that there's
Harris:
It has a premium of about eight thirty-seconds that
they place on the privilege to exchange them.
I didn't know there was any market. Is the stock
H.M.Jr:
been any such indication.
market open today?
Haas:
Oh yes, this morning.
Bell:
I think the Board turned down the idea of closing it.
H.M.Jr:
Lochhead:
Is Reynolds back? What's her married name?
Was it Mrs. Betts?
Harris:
Betts. B-e-t-t-s.
(Mrs. Betts brings in chart and clippings)
H.M.Jr:
Good morning, Mrs. Betts.
This is why the market went up - "Secretary
Morgenthau, bronzed by a month in Hawaii,
Taylor:
H.M.Jr:
"
Yes, sir.
The Federal Reserve - are they still on our switchboard, or have they moved off?
Harris:
They've moved off.
H.M.Jr:
Have they?
Harris:
Yes, so now we're down on our own trunk lines.
H.M.Jr:
I sent Marriner a congratulatory telegram on the
opening of the building. I happened to remember it.
But he never acknowledged it. August 5th, wasn't it?
Bell:
Looks nice at night. Fountains running on each side,
lights and grill work in front of the door.
99
-39-
Taylor:
It's about as well-designed a building as I've
H.M.Jr:
What I like about them is that they spent sufficient
money to landscape it. Most buildings in Washington
ever seen.
aren't landscaped.
(Secretary reads bond chart)
Harris:
H.M.Jr:
I'd say the market is really unchanged this
morning. There's nothing doing at all. The bid
quotes are practically unchanged.
I wonder what the price of gold is today?
Lochhead:
In London?
H.M.Jr:
Yes.
Lochhead:
Slightly under parity - 8476. We got something
from London yesterday - I mean it came in today about three million dollars worth, through the Fund.
Well, it's just as well to have the market open.
But you say it's unchanged? What are the maturing
H.M.Jr:
notes again?
Harris:
H.M.Jr:
Bell:
Harris:
Bell:
H.M.Jr:
The 3-1/4's are up two thirty-seconds.
They do some little business, though.
That's a little above what the premium would be on
the 15-month note.
Not after you discount your interest.
Take off your interest for 15 days, it's about right.
How about the privately - the commercial bonds? How
are they acting?
Haas:
A little bit better than ours.
H.M.Jr:
A little bit better than the Governments?
Haas:
Uh-huh.
100
-40-
H.M.Jr:
Is that a good or bad sign?
Haas:
Well, I'd say it was
Harris:
There are no prospects for any corporate financing
Haas:
Taylor:
H.M.Jr:
next week at all - any large issues coming out.
I'd say that's a plus sign.
Well, it gives you a better technical condition,
if that means anything.
How are the holdings of the - shelves of the bond
dealers?
Bell:
Very good. Burgess said the technical position
of the dealers was fine.
Harris:
They are short on the notes.
Taylor:
They are all even on the bonds - slight short posi- tion in notes.
H.M.Jr:
And now is the buying of securities by foreigners?
Lochhead:
Still slightly on the buying side, but there is
not enough to make much difference; it can swing
to one side or the other without making more than
a million dollars difference. But still slightly
buying.
Fin
TREASURY DEPARTMENT
101
INTER OFFICE COMMUNICATION
DATE September 4, 1937
Secretary Morgenthau
TO
IIA
FROM
Mr. Haas
Subject:
September Financing
I.
Money Market Developments During the Past Quarter
A. Changes in Prices and Yields
There has been surprisingly little net change in money
rates and bond yields during the past three months. Moderate
June declines in the prices of both short- and long-term obligations were followed by substantially greater increases in
the month of July; but since the first week in August, the
market has turned down again abruptly (see accompanying
charts). The negligible character of net changes during the
past three months may be seen in the following comparisons:
:
90-day bankers' acceptances
4-6 months prime commercial paper
Call money
273-day Treasury bills
Treasury notes, 1-3/8 percent,
September 15, 1939
Price
Treasury notes, 1-3/4 percent,
March 15, 1942
Price
Long-term Treasurys
High grade corporates
#
Yield or price
:
June 1*
:
Rate or security
September 2
7/16
1/2
1
1
1
1
56
**
(100-5/32) **
**
1.71
1.30
.62
1.31
(100-4/32)
1.72
(100-6/32)*
(100-4/32)
2.63
3.32
2.67
3.28
Or date closest thereto for which the data are available.
June 15.
Secretary Morgenthau - 2
102
B. Bank Loans and Investments
Bank loans during the past quarter have continued the expansion renewed last spring. The commercial, industrial, and
agricultural loans of weekly reporting member banks increased
by $346 millions, and their total loans by $387 millions, between June 2 and August 25, 1937.
This loan expansion took place at the expense of the bond
holdings of banks, in substantial measure. The total investments of weekly reporting member banks between the two dates
previously cited declined by $230 millions, of which $55 millions was accounted for by declines in holdings of direct
interest-bearing public debt, $22 millions of guaranteed
Federal obligations, and $153 millions of other securities.
This decline in holdings of direct interest-bearing Federal
obligations took place during a period when the aggregate volume of such securities available for bank investment increased
by approximately $895 millions.*
During the week ended September 1, reporting member banks
in New York City recorded an increase of $31 millions in
brokers' loans, and $17 millions in commercial, agricultural,
and industrial loans. The latter increase is the fifth successive weekly expansion in such loans reported by these banks.
During the week, they reduced their holdings of United States
Government securities by $7 millions.
C. Excess Reserves
Bank liquidation of investments in amounts equal to a
large proportion of their increases in loans (60 percent for
weekly reporting member banks) took place despite the maintenance during the quarter of excess member bank reserves varying
between $700 millions and $960 millions. The distribution of
excess reserves, however, was notably uneven during most of
the quarter. The excess reserves of New York City banks, in
particular, were drawn down to relatively small proportions on
several occasions.
Banks have done very little rediscounting with the Federal Reserve banks in order to obtain more reserves, for they
have found it cheaper to meet temporary requirements by
*
Includes aggregate increase in direct interest-bearing public
debt except United States Savings Bonds, Adjusted Service Bonds,
Postal Savings Bonds, and special issues to Government agencies
and trust funds.
103
Secretary Morgenthau - 3
borrowing the excess reserves of other banks -- 80-called
Federal funds. Nevertheless, during the week ended
September 1, there was an increase of $5.2 millions in bills
rediscounted, bringing the total for the twelve Federal Reserve
banks to $23.7 millions on September 1.
D. Discount Rate Reductions by Federal Reserve Banks
On August 21, the Board of Governors of the Federal Reserve System announced reductions from 2 to 1-1/2 percent in
the discount rates of the Chicago and Atlanta Federal Reserve
banks, to take effect immediately; on August 23 and August 26,
similar reductions were announced for the Minneapolis and
Richmond Reserve banks, respectively; on the latter date, a
reduction from 1-1/2 to 1 percent was announced in the discount
rate of the Federal Reserve Bank of New York; and reductions
from 2 to 1-1/2 percent were announced for the Dallas, St. Louis,
Boston, San Francisco, and Kansas City Reserve banks during
the past few days. In connection with the first of these an-
nouncements, the Board issued the following statement:
"The Board of Governors has approved the ac-
tion of the directors of the Federal Reserve banks
at Atlanta and Chicago in reducing the discount
rate from 2 percent to 1-1/2 percent, effective in
the Sixth and Seventh Federal Reserve Districts,
respectively on August 21, 1937.
"The Board's approval was based upon the view
that the reduction of discount rates at this time
would assist in carrying out the System's policy of
monetary ease and make Federal Reserve bank credit
readily available to member banks for the accommoda-
tion of commerce, business, and agriculture, without
encouraging member banks to borrow outside of their
districts or to liquidate their portfolios in order
to be in a position to meet the needs of present or
prospective borrowers.
"The reduction in discount rates, which has had
little or no practical effect during the period when
excess reserves were abnormally large and widely distributed throughout the System, brings the rates into
closer relation with the interest rate structure generally prevailing, and affords to member banks the
benefit of rates, on advances made by the Federal
104
Secretary Morgenthau - 4
Reserve bank, which are in line with those avail-
able in the money market. During the extended
period when excess reserves of the banking system
were between two and three billions of dollars,
the occasion did not arise except in rare instances
for member banks to borrow from the Federal Reserve
banks, and the discount rates were accordingly inoperative as a practical matter.
"As a result of the continued progress of the
recovery movement, demands of agriculture, industry,
and commerce for bank accommodation have steadily
increased and at the present time are augmented by
seasonal requirements, particularly with relation
the action of the Board in increasing reserve requirements, remain at an unusually high level
approximately $750,000,000 at present for the System
as a whole, they are distributed preponderantly
to crop movements. While excess reserves, following
among the country banks and not in the money centers.
"The reduction of the discount rates in the
two large agricultural districts of Atlanta and
Chicago should serve to assist the member banks to
utilize credit directly available in these districts
in order to meet banking requirements in connection
with crop movements and business needs.
"It 1s the Board's view, therefore, that at
this time the Federal Reserve System can best discharge its public responsibility and promote the
continuance of recovery by making it possible for
member banks to obtain accommodation from Federal
Reserve banks at rates which will encourage them
to employ their funds to meet the needs of agriculture, industry, and commerce.
E. Federal Reserve Open-Market Portfolio
During the 14 weeks ended September 1, the Federal Re-
serve banks reduced their holdings of Treasury bills by
$12 millions, and increased their holdings of Treasury notes
and bonds by $6 millions each. During the last week of this
period, Treasury bill holdings were reduced by approximately
$1 million and bond holdings were increased in the same
amount.
105
Secretary Morgenthau - 5
II. Current Situation in the Money Market
As has been pointed out, the market for short- and
long-term Governments, as well as other obligations, has
turned sharply weaker during the past few weeks, and current sentiment appears to be pessimistic. The recent weakness in the market and the accompanying pessimism are, no
doubt, due in part to the conflict in China and to the absence of visible improvement in the Federal budgetary situation. In our opinion, however, the more important causal
influences are to be found in the prospective play of supply and demand in the short- and long-term money markets
during the next several months.
(1) Excess reserves of all member banks, which amounted
to about $1,816 millions immediately after the increase in
reserve requirements in August of last year, had been reduced to about $750 millions on September 1 of this year.
While the latter figure is large relative to any experience
prior to 1933, it is small relative to the experience of
the past several years. Banks, by and large, moreover,
have not recovered from the liquidity complex engendered
by the depression and the banking collapse. The fact that
the relation between their capital funds and their deposit
liabilities is now at the lowest point recorded since 1920
(see Table I) provides a cogent practical consideration
that supports and accentuates their desire for liquidity.
The existing amount of excess reserves, moreover, is
very unevenly distributed in the banking system. Most of
such reserves are held by country banks, where they have
been relatively sterile, while excess reserves in the primary money markets are very low. On August 4, the excess
reserves of the principal New York City banks reached a
low of only $40 millions and the rate on Federal funds
rose for a time from one-fourth to one-half of 1 percent.
On September 1, the excess reserves of the principal New
York City member banks aggregated $133 millions.
(2) From January 1934 until December 1936, gold ac-
quisitions by the United States Treasury constituted the
principal source of increase in member bank reserve accounts. Since the institution of the Inactive Gold Account on December 21, 1936, this source of increase for
member bank reserves has been cut off, and the banks are,
therefore, the more inclined to husband their present excess reserves, at least until money rates become definitely
more attractive. Moreover, full sterilization of newly
Secretary Morgenthau - 6
106
acquired gold acts positively to reduce excess reserves
because such acquisitions increase the deposit liabili-
ties of banks without adding at all to their reserves.
(3) During the year ended June 30, 1937, the total
loans of all member banks increased by $1,743 millions.
The total loans and investments of the banks, however, increased by only $481 millions. The difference was in large
part due to a decrease of $981 millions in their holdings
of United States Government securities (direct and fully
guaranteed).
The tendency for loans to increase and for such increase to be offset by a decrease in investments, principally Governments, has been much greater in the largersize banks, and has been most important in the New York
banks. The reporting member banks in New York City increased their total loans by $761 millions between June 30,
1936, and September 1, 1937, but decreased their total
loans and investments by $686 millions, the offsetting
items being a decrease of $1,251 millions in United States
Government obligations (direct and fully guaranteed) and
$196 millions in other securities.
This expansion in loans is still continuing and should
be seasonally accelerated in the fall. It is most vigorous
in New York City, where excess reserves are relatively the
least. The prospective continuing expansion in loans, while
possibly exaggerated by many bankers, provides an additional
and important incentive to member banks to conserve their
free reserves.
(4) Many bankers expect a substantial reduction in
their reserves as a result of the normal seasonal expansion
in money in circulation this fall and winter. Last year,
money in circulation rose by approximately $500 millions
between the middle of August and Christmas week. During
the week ended September 1, currency in circulation increased by $37 millions and may show a further increase
this week because of the Labor Day holiday requirements.
The greatest increases will occur in the Christmas shopping season. This year promises to see an exceptionally
heavy crop movement at good prices, and the seasonal expansion in circulation may easily exceed last year's increase. Such an expansion, unless offset by other factors,
would result in a dollar-for-dollar decrease in bank reserves, and, as previously noted, total excess reserves of
all member banks approximate only $750 millions at this time.
107
Secretary Morgenthau - 7
(5) While insurance companies, savings banks, and other
institutional investors possess considerable funds available
for investment, their demand is being met in part by the securities liquidated by commercial banks. The latter, we
have seen, have been sellers, rather than buyers, on balance,
for some time, of Governments and other securities; and it
appears likely that this will continue to be the case during
the next several months. Further, these institutional and
private investors have been absorbing not only the securities
liquidated by commercial banks, but they have also been absorbing the continuing increase in the interest-bearing public debt. It should be noted that this absorption has beenof
taking place in fairly satisfactory fashion. This source
investment demand cannot be relied upon to counteract shortterm market weakness, however, because these investors tend
to invest their funds most freely during periods of market
stability or even strength.
Secretary Morgenthau - 8
108
III. Alternative Financing Media
The September financing will consist entirely of the refunding of $817 millions of maturing notes. These notes are
held very largely by banks, principally the larger banks,
with a fair sprinkling of holdings by other financial institutions, dealers, and corporations. There is a normal tendency for maturing notes to be concentrated in the larger
financial institutions, but this issue has the reputation 01
being very well distributed.
An attempt to replace these notes entirely by a bond
issue would tend to force the pace of the transfer of Government obligations from banking to non-banking holders,
and might result, at worst, in a further break in the market,
and at best, in a soggy technical position. It is concluded,
therefore, that a large part, at least, of the securities
offered in exchange for the September notes should be of a
character definitely suitable for retention by the banks now
holding the maturing issue.
It appears to be clear that a bond issue offered in exchange for the maturing notes would not prove attractive for
continued retention by all of the present holders, many of
whom, it is believed, would particularly welcome a rather
short-term note. A 5-year note issue would be unlikely
either to attract the latter type of holder, or institutions
seeking the higher coupon rate that would be associated with
a bond offering. While the 4-3/4-year note issue sold in
June has behaved relatively well, it was originally priced
rather liberally in view of the yields then available on adjacent issues.
A. 15-month 1-1/4 percent note:
On the basis of the present market, or one somewhat worse,
the issue that would appear to have the clearest sailing would
be a 15-month 1-1/4 percent note maturing December 15, 1938.
The outstanding 2-1/2 percent notes that mature three months
earlier are selling to yield .77 percent*, and the 1-1/2 peryield 1.23 percent. If the subject issue were to sell on a
cent notes that mature three months later are selling to
yield basis midway between those of the two adjacent issues
1.00 percent -- it would command a premium of 10/32, a very
liberal premium for such a short-term note issue. It would
* All current quotations and yields are as of the close of
September 3.
10S
Secretary Morgenthau - 9
command a premium of 6/32 even if a worsening of the market
caused it to sell on a 1.10 percent basis. On the other hand,
limiting the exchange offering to a 15-month note might arouse
unfavorable comment to the effect that the Treasury had been
forced to confine its offering to a very short-term note issue
because of the unsatisfactory condition of the money market.
B. Joint offering of 1-1/4 percent 15-month note and
2-1/2 percent 7-year bond:
The possibility immediately arises to mind, therefore, of
making a joint offering of a 15-month note and a longer obligation.
Many non-banking institutional investors, particularly
insurance companies, are likely to be more attracted to a
2-1/2 percent short-term bond issue than to either a lowcoupon short-term note or a 5-year note. In the eight offerings for cash of Treasury bonds and notes (four of each) beginning with those of March 1936, the direct subscriptions
of insurance companies have shown a distinct preference for
bonds (see Table II), a preference which is more marked when
consideration is also given to their purchases of these offerings from banks and dealers on secondary distribution. These
investors may not participate substantially in the direct exchange subscriptions for the September offering, but the
knowledge of their demand for bonds should tend to make a
medium-term bond offering attractive to those note holders who
expect to resell the new securities which they obtain on exchange subscriptions. This consideration would not hold nearly
80 well for a long-term bond because many investors doubt the
maintenance of the present relatively low level of interest
rates.
The joint offering, if the relative amounts of each security were made optional with the subscribers, would retain
for the Treasury that section of the demand which is confined
to a very short-term instrument, and would nevertheless leave
open the opportunity for the refunding of a considerable portion of the maturing notes into bonds. The relative pricing
of the jointly offered issues would naturally be such as to
encourage subscriptions for the bonds; for a distinctly
lesser premium is ordinarily required for short-term notes
than for longer obligations. The greater probable premium
offered to the bond subscribers may be considered in the nature
of an underwriting and distributing fee to those subscribers
who make their subscriptions with the intention of reselling
the securities to other investors.
110
Secretary Morgenthau - 10
A 7-year 2-1/2 percent bond issue, maturing September 15,
1944, should sell, in the present market, on a yield basis
between 2.30 and 2.40 percent. The current yields of the outstanding issues of nearest comparable maturities are the
following:
3-1/4's of October 1943-45 - 2.28
2.36
3-1/4's of April 1944-46
-
4's
of December 1944-54 - 2.37
On a 2.30 percent yield basis, the premium would be
1-9/32; on a 2.35 percent yield basis, 31/32; on a 2.40 percent yield basis, 21/32; and on a 2.45 percent yield basis,
10/32.
The year 1944 now contains no maturities, although the
3-1/4's of 1944-46 and the 4's of 1944-54 begin their callable periods in that year. Because the preceding several
years will probably contain substantial note maturities, and
because an issue with a single fixed maturity date is likely
to prove especially attractive to the market under present
conditions, there would appear to be no adequate reason for
making the bonds callable prior to the final maturity date.
The principal risks in-a joint offering of this character
are that a preponderantly large proportion of the subscriptions
might be made for the notes, which would occasion adverse comment; or that the bonds might be priced so much more attractively
than the notes as to cause a greater volume of subscriptions
for the former than could readily be digested during secondary
distribution.
C. A 2-year or 3-year note:
The principal objection to a 3-year note issue at this
time is the fact that the existing note maturities of 1940
already amount to nearly $3 billions; and would be raised to
$3,670 millions if they were increased by an additional
$817 millions. The situation with respect to a 2-year note
is even worse in this regard; for the existing note maturities
of 1939 would be raised to more than $4 billions if increased
by $817 millions.
As between a 2-year and a 3-year note, the advantage
would appear to be altogether in favor of the 3-year note. In
Secretary Morgenthau - 11
111
addition to the greater concentration of note maturities in
1939 than in 1940, there is the further fact that no open
quarterly financing date exists in 1939, whereas September 15,
1940, is now open. Further, the note issue maturing
September 15, 1939, which is outstanding in the amount of
$427 millions, is selling at too small a premium (4/32) to permit the use of additional notes of this issue to refund the
notes maturing next month. Despite the increase in aggregate
note maturities involved, the use of a 3-year note maturing
September 15, 1940, for the September refunding operation
merits very careful consideration. Such an issue would require
a coupon rate of 1-3/4 percent and in the present market should
command a handsome premium. The outstanding 1-1/2 percent
notes that mature three months earlier are selling to yield
1.47 percent; and the outstanding 1-1/2 percent notes that
mature three months later are selling to yield 1.51 percent.
At the midpoint between the yields of these two issues, a
3-year 1-3/4 percent note would sell to yield 1.49 percent;
and on this basis would command the ample premium of 24/32.
On a yield basis of 1.55 percent, the premium would still be
19/32; and on a 1.60 percent yield basis the premium would be
14/32. It would appear, therefore, that a 3-year 1-3/4 percent note, unless the market suffers a very drastic break,
would command a sufficient premium to assure the success of the
issue. As indicated above, its principal drawback is that it
would involve a further concentration of the heavy note maturities now scheduled for 1940.
D. A 4-year note either alone or optionally with 15-month
note:
A 4-year note maturing in 1941 would obviously be a more
desirable financing medium for the Treasury than a 15-month
note maturing December 15, 1938 -- other things being equal;
the difficulty is that other things in this case are very
different indeed. A 4-year note is not likely to be welcomed
with much greater enthusiasm than a 5-year note. It would
not meet the demands of those who seek a note of near-termon
maturity, who would be attracted to a 15-month note; and,
the other hand, it would not carry a coupon rate, such as
would be borne by a 7-year bond, which would attract institutions and others seeking higher yield.
The outstanding 1-3/4's of March 1942, are selling to
yield 1.74 percent. Between this issue and that of June 15,
1940, all the intervening note maturities are currently selling below par, and this fact makes their market yields
112
Secretary Morgenthau - 12
unreliable as a measure of a probable premium of a new issue
designed to mature during this period. The effect of the
discounts at which the 1941 note maturities are selling in
obscuring the relationship between maturity and yield may be
seen in the fact that the December 1940 maturity, selling at
99-31/32, yields 1.51 percent, whereas the notes maturing
one year later, which are quoted at 99-2/32, are selling to
yield only 1.48 percent. It would appear that the probable
yield basis for a 4-year note issue could not be safely estimated at anything under the market yield of the March 15,
1942, note maturity -- currently 1.74 percent. A 1-7/8 percent 4-year note would command a premium of only 16/32 on
this yield basis -- which would be rather thin in view of
the character of the issue and the present market.
If a 2 percent coupon were to be employed, the probable
premium, on a yield basis of 1.74 percent, would be 1 point
which would be ample in the absence of strikingly unfavorable
international news.
There remains the alternative of a joint offering of
1-1/4 percent 15-month notes and 1-7/8 or 2 percent 4-year
notes. This alternative merits consideration. If, however,
further assurances can be had from New York with respect to
the receptivity of the market to a 7-year 2-1/2 percent bond,
it would appear that the joint offering of the 15-month note
and the 7-year bond would be preferable. The latter type of
offering is apt to provide a better secondary distribution;
and the fact that the entire refunding operation is not confined to notes would be interpreted by the market as an indication of confidence.
Attachments
113
Table I
Total Deposits and Total Capital Funds
All Member Banks
Total
:
capital :
funds
:
:
:
(Millions of dollars)
:
:
June 30
Total
deposits
Capital funds
per dollar of
deposits
(Cents)
1920
1921
1922
1923
1924
25,372
23,325
25,517
27,053
29,530
3,853
4,133
4,214
4,367
4,486
15.2
17.7
16.5
16.1
15.2
1925
1926
1927
1928
1929
32,420
33,724
35,351
36,060
35,893
4,690
4,832
5,147
5,625
6,180
14.5
14.3
14.6
15.6
17.2
1930
1931
1932
1933
1934
38,139
36,268
27,864
26,587
31,012
6,543
6,166
5,317
4,441
4,731
17.2
17.0
19.1
16.7
15.3
1935
1936
1937
34,938
40,706
41,490
4,770
4,904
5,019
13.7
12.1
12.1
Table II.
Allotments on Cash Subscriptions to Treasury Offerings of Bonds and Notes,
March 1936 to June 1937, Inclusive, by Classes of Subscribers
(millions of dollars)
Treasury Bonds
Treasury Notes
1-1/2's : 1-3/8's : 1-3/8's : 1-3/4's : 2-3/4's : 2-3/4's : 2-3/4's : 2-1/2's
A--1941 : B-1941 : D--1939 : A--1942 : 1948-51 : 1951-54 : 1956-59 : 1949-53
(3/15/36) (6/15/36) (6/15/37) (6/15/37) (3/15/36) (6/15/36) (9/15/36) (12/15/36
354.9
295.3
281.3
248.8
273.9
280.0
164.7
321.4
Dealers and Brokers
76.0
27.8
29.2
56.3
115.3
83.2
51.0
85.5
Individuals
31.2
14.9
7.0
19.4
83.2
77.7
90.7
51.6
Savings Banks
28.2
14.2
18.3
18.0
38.9
33.6
22.7
42.6
Insurance Companies
43.5
25.5
32.5
45.8
101.9
85.8
62.7
107.5
7.9
11.1
6.9
20.7
12.7
29.2
38.3
35.9
17.1
45.1
32.2
74.8
4.5
5.7
5.2
17.2
12.8
11.6
94.5
6.5
5.4
8.7
113.3
27.2
20.2
26.3
628.3
434.9
426.4
426.2
726.5
670.5
469.7
750.5
Banks and Trust
Companies
Other Financial Institutions and Investment Corporations
Corporations organ-
ized for profit
Trust Accounts
All Others
Total
More complete breakdown not available.
115
MEETING WITH EXECUTIVE COMMITTEE OF
FEDERAL RESERVE OPEN MARKET COMMITTEE
Present:
September 4, 1937
11:00 a.m.
Mr. Taylor
Mr. Bell
Mr. Lochhead
Mr. Seltzer
Mr. Harris
Mr. Haas
Mr. Ransom
Mr. Harrison
Mr. Burgess
Mr. Piser
Mr. Broderick
Mr. Williams
Mr. Thomas
Mr. Szymezak
H.M.Jr:
Well, I've been getting all the rosy reports about
Government financing.
Szymezak:
Everything is lovely.
H.M.Jr:
Everything lovely. Things are picking up.
I think we usually start - open our meeting with a
prayer from Brother Bell.
Bell:
It will be a prayer, I think, this time.
We are going into September with about 820 million
dollars in our balance, and the present schedule
of Treasury bills contemplates 150 million dollars
additional money in September for maturity in
December. That would make a total of 500 million
dollars of Treasury bills maturing around the 15th
of December. That schedule will permit us to go
out of September with 700 million dollars in our
balance. Then, contemplating that we would have
about 300 million dollars of additional Treasury
bills some time between now and the first of December
for maturity in March, we would go into December with
about 640 million dollars in our balances. And that
contemplates 75 million dollars a month for gold and
the paying off of 350 million dollars of Treasury bills
on September 15. That is about the picture.
116
-2-
Do you want to mention anything about the Treasury
H.M.Jr:
Burgess:
H.M.Jr:
bill program at this time?
Yes. In talking it over with the men this morning,
I want to suggest that we don't offer any more
December bills - I mean stop now, leave it at 450.
That is, not offer any more next week.
Bell:
Not offer any more next week.
That would be one issue less.
H.M.Jr:
We've got enough money, and the way the program is
now we only figured on 300 million for March 15,
and we could use more money on March 15, because
the tax receipts will be heavier and we could handle
Harrison:
it better there. And this would run the rate up
pretty high on us. We could say we didn't need the
money just now - might help a little bit.
I think you're right.
I'm in favor of that.
H.M.Jr:
I mean I - I wonder if anybody can see anything -
Burgess:
any objections to doing it.
Bell:
We have announced a program up to September 15.
Burgess:
You can always say your cash position is such that
you don't need the additional amount.
H.M.Jr:
I want to say for the men here in the Treasury that
it was my suggestion to make it 500, so I'm simply
reversing myself, nobody else.
I think it is undoubtedly true that the pressure
of these additional bills the last couple weeks,
which is a little more than the market anticipated,
has been a very important factor in pushing those
rates up, and if the market learns now, or at the
Burgess:
same time you make this announcement about the
financing, that you aren't taking any bills, I think
it would be helpful.
117
-3-
Taylor:
How long would you stay out? To the first of
Burgess:
That is not necessary. I think you can judge a
good deal by the market. I wouldn't commit
myself on that.
H.M.Jr:
But I just thought the thing seems to be kind of a little uncertain, and if we could just - I mean
50 million dollars less we're going to take out
October?
might give it a little bit better tone. How do
you people - Board members feel?
Ransom:
I think that is quite sound.
All right.
Broderick:
It will help.
H.M.Jr:
We don't need the cash. We really don't. As a
matter of fact- I think I'm right - Bell, didn't
about 50 million more come in, something like that?
About 20 million. We contemplated an 800 million
dollar balance and we got about 20 million dollars
Szymezak:
Bell:
more.
H.M.Jr:
Well then, shall we decide that we'll have no more
of these December bills? Anybody object to that?
Ransom:
I think it would be very helpful.
H.M.Jr:
Burgess:
All right, that is Decision Number One.
That's a good start.
Bell:
Excellent.
H.M...
Well now, do you want to add anything?
Bell:
No, I think that's all.
H.M.Jr:
Well, George, you and Randolph are going to give
a report.
Harrison:
I think Randolph better give it. I'd like to say -
no, I'd rather reserve my comments until after he
reports factually on what has been happening in the
markets, which would be a good way to start.
118
-4-
H.M.Jr:
Before he starts, I want to say that Mr. Taylor
and Mr. Bell gave me their report. They met with
19 different groups in two days. And it has helped
me a lot to get that report this morning. So - I
mean I've got that picture; but I wouldn't say the
picture was a unanimous one. What?
Burgess:
No.
H.M.Jr:
I mean it didn't
Burgess:
There is rather more difference of opinion than
H.M.Jr:
If you would
Burgess:
Well, about the condition of the market. I think
usual.
that in the language of the marketplace, one might
say that in the second half of August we have had a
secondary reaction from the decline which took place
in the spring. In the spring we had a general liquidation of the Government market and of the general bond
market, a severe general liquidation. From early in
May or late April we had a recovery from that liquidation over an extended period, which reached a peak
along early in August. And then we had - which is
rather natural in markets, if you think of it in
those terms - a secondary reaction.
H.M.Jr:
Now, as to the character of that reaction, it was
more an absence of buying than it was pressure of
selling. There were some sales, but in general it
was an absence of buyers. The insurance companies
have been out of the market for a long time, and
will only come in sporadically; they have talked
about waiting for a three percent rate. The out-oftown banks - there have been a few buyers, but the
banks in principal cities have tended to reduce
their Government holdings. That is, the tendency
of the past year for banks to work out gradually
has been continued, but not in any such precipitation
that is, this secondary reaction has not been a severe
reaction of the type of last spring.
May I interrupt you? What do you feel the motivating
factor has been?
-
119
-5Burgess:
Well, I think there are two, Mr. Secretary.
H.M.Jr:
I'd like to go into a little bit more detail than
I have usually, because I've got to soak this stuff
up.
Burgess:
It seems to me there are two major bases for this
secondary reaction. of course, the background
picture is that whenever any market has behaved
as the bond market did last spring and then has
recovered a good part of the way, you look for a
secondary reaction; but there is always some
specific cause of it. I think in this case primarily
it is sympathetic with a general reaction in all
markets, including commodity markets, bond market,
and stock markets. Your stock market reaction was
delayed later than your bond market somewhat, and
reached great severity and liquidation - again in
a very quiet market, but with quotations slipping
away because there weren't buyers. You had war
news from Spain and from China. You had a generally
pessimistic atmosphere, partly due to the fact that
security dealers had not been able to make profits;
they made continuous losses, and under that atmosphere
they are afraid to make commitments - one of fear.
So there is extremely little speculative commitment
in securities; there is very little in the way of
speculative commitments in anything right now. In
real estate, in commodities, it is a period of reac-
tion, if you will, from two years of generally rising
security markets and optimism and so on.
Now I think that is the fundamental basis of this
market.
H.M.Jr:
Burgess:
Does that go for inventories too?
Yes, that goes for inventories. You have had a
period of accumulation of inventories. Now I think
you've got a period where those inventories are
piled up and people want to work them off - certainly
true in textiles, probably true in a lot of other
lines - reluctance to go ahead. Also in terms of the
marketplace, it is perfectly natural that after a
period of two years of upward movement you get a period
of pause, even though, in fact, the business picture
seems to be coming along pretty well.
120
-6H.M.Jr:
Well, what is the latest figure on the Federal
Haas:
114, isn't it?
114 - that's for the month of July; probably will
Thomas:
Reserve index?
be not much - probably be about the same in August;
can't tell yet, because we don't know about the
textile situation.
H.M.Jr:
As I remember, Goldenweiser gave me a guarantee
Thomas:
it wouldn't go below 115. That's close enough.
I think his statement was that no three months would
average below 115. Probably will be slightly below may round off to 1142 or something like that.
Burgess:
Now, that general background seems to me to be the
primary cause of this secondary reaction - the primary
cause. Now, the second seems to me to be the money
position. Almost every autumn since 1931, over every
autumn, really, we have had some hesitation in the
markets at this point because of banks looking ahead
to the autumn season and wondering how they are coming
out on their reserve position, etc.; and that has been
true this year. Perhaps that factor has been more
effective this year than usual; as a matter of fact,
the effect on the market has been less than it was
in '34 and '35. We had very little in '36.
But there has been a good deal of discussion about the
autumn requirements for funds - a good deal of talk
among the banks of putting themselves in a position
so they could meet whatever demand develops. I think
that has probably been overplayed somewhat, and that
the requirements for funds have been accentuated over-accentuated in advance. But that is the second
item - motivating immediate factor, I think, in the
market.
Now, as to the character of the decline, as I said
before
H.M.Jr:
May I interrupt you at that point? When you are
talking about your money needs, is there any particular spot or any particular banks who are
-7-
Burgess:
operating - I mean pretty close up to reserves?
Well, the New York banks in general are operating
H.M.Jr:
"Reasonably" - what do you call "reasonably"?
Burgess:
Well, some days they are over, some days they
are under. In general they have averaged, most
121
reasonably close.
Harrison:
of them, a little over. At times they have bought
Federal funds. Now, they haven't been tight enough
so that they have had to sell bank bills. They have
a portfolio of some 200 million of bank bills which
they would sell if the pressure were severe. But
so far the bank that was under has always been able
to buy Federal funds at a quarter of one percent.
Or a half.
Burgess:
Well, a few times, but not many.
H.M.Jr:
But are any of them - what are the total redis-
Piser:
25 million, I think, is the latest figure.
Harrison:
Ours went up 2 million dollars last week. There
Thomas:
24 million was the latest figure.
H.M.Jr:
What was it about a month ago?
Thomas:
H.M.Jr:
About 15 - four weeks ago it was 15.
And four weeks before that.
Thomas:
Well, roughly
Piser:
Around 10, I think.
Of which about 8 million was New York. But there
Harrison:
counts with the Federal Reserve System?
is a tendency toward increase.
has been real evidence, certainly in our district,
and I think in some other districts, of an expansion
of loans. Having in mind a discussion of the New
York money market, I made a survey of the 25 largest
banks in New York, and the figures showed that so-
called commercial loans (and it's pretty hard definitely
to define them) have gone up from a billion four to a
122
-8-
billion nine in twelve months; that is an
increase of about 39 percent. That increase
is fairly well distributed throughout the New
York banks. The increase is probably more than
that in percentage, because of the fact that our
figures of a year ago included certain items that
are now excluded from the same figures. But each
of the individual banks is reporting increasing
demand, especially from larger companies, national
corporations, for funds - companies that haven't
borrowed for five, six, seven years.
H.M.Jr:
What do they do with the money?
Harrison:
Buying inventory, due to increased volume of
business. The Endicott-Johnson people are borrowing
now to buy for the first time in six years; borrowed,
I think, ten million dollars last week. The tobacco
companies are all buying tobacco; business is holding
up pretty well. Some of the chocolate companies are
buying cocoa because their business has been good.
And all through the whole list that seems to hold
good.
H.M.Jr:
Harrison:
Well, that's helpful.
Oh, very, very helpful. But looking at it as one
of the factors in the market, you are approaching the
fall season with the New York banks realizing, and
all banks realizing, that we will have an increase
in currency demand between now and Christmas of some
five hundred million dollars; probably that's about
what it was last year for the same period. There is
evidence of increased demand for harvesting crops;
due to the fact that crops are so much larger, they
are requiring more help to harvest. They are borrowing from their banks to harvest and move their crops.
And then, on top of that, is this very definite
widespread evidence of an increase in demand for
commercial loans. All of which is good. But they
form a part of the banking mind as to what their
position may be at the end of this year.
The System has made some estimates that, whereas
excess reserves right now are around seven hundred
to 750 million dollars - I forget the exact figure
123
-9-
now - it is not impossible they may be reduced
to around 300 or 350 million before the end of
the year, for the System as a whole. You might
find New York going down to a pretty nearly even
basis possibly before Christmas. But that's not
bad. It is a seasonal pressure which you always
have, that the banks expect, and that corrects
itself immediately after the turn of the year,
when currency begins to come back again. The
problem therefore is, how should the money market
take care of itself during what we call a temporary
period, taking care of the seasonal demand for
credit and for currency?
I think it is very clear that if the New York
market reserves do go down, say, to an even basis
and certain banks need funds, they will not then
be in a position to buy reserves from another mem-
ber bank, and it is likely that they will have to
borrow. I hope they will. It would be in my
judgment a healthy situation if they do.
Ransom:
There has also already been some inter-bank borrowing from correspondent banks in some districts
other than New York; I don't know what the situa-
tion is there.
H.M.Jr:
Well, with that in the offing - they make their
money by that - I mean if they see something like
that three months off, it must make them very
cautious as to their commitments about Governments.
Harrison:
I think our reduction in rediscount rate will be
helpful in assuring them that they can go ahead
with their commercial business, because they won't
be so uneasy about the necessity for borrowing if
it should arise.
Szymezak:
Harrison:
In that connection, George, haven't you talked to
some New York banks and haven't they promised you
that they would borrow instead of selling Governments?
I save talked to practically all the banks in New
York, trying to make them see the picture as a
money market rather than as an individual bank.
For instance, the National City said, "We have
124
-10-
accumulated a large volume of short Treasury
bills hoping that we will be able to take care
of our requirements, allowing bills to run off."
I said, "That's quite right and proper from the
point of view of an individual bank, but suppose
that every bank in New York is in the same situation;
are you all going to allow bills to run off or sell
Governments, or are you going to borrow?" And the
quite unanimous judgment of all of them was that
if and when that situation should develop, they'd
be perfectly willing and free and glad about borrowing, especially now that we've got our rate down,
rather than to liquidate assets. And I am very
encouraged about the situation, because what has
happened is what we have expected and hoped would
happen at some time. Be much more healthy. And
as long as they realize that they've got a central
temporary dip, realizing that they will get out of
it again after the turn of the year, there shouldn't
bank to which they can go to take care of a purely
be any substantial disturbance to the money market
as a result of it.
H.M.Jr:
Burgess?
Burgess:
Well, I think a word further might be said about
the technical position of the market. First, as
to the character of the selling. There is some
evidence in what we have had to do, - as you know,
we have stood by to try to keep an orderly market.
H.M.Jr:
I don't know what you've been doing.
Burgess:
During this period we have had only to go into the
bond market for approximately seven million dollars;
and we were able to sell - that's all for longer
bonds - against that, we were able to sell two million
dollars of shorter bonds; so that we have only had to
extend our bond position by five million dollars.
H.M.Jr:
Does that show up that you own five million dollars
more?
Burgess:
No, we let Treasury bills go to that amount.
H.M.Jr:
No.
125
-11-
Burgess:
So that indicates it wasn't a very severe,
precipitous, disorderly occasion, because our
operations have been thus limited, and I think
we have had all the time a reasonably orderly
market.
Now, this chart here is very interesting on the
technical position, comparing the yield on Governments with the yield on corporate bonds, - the
second chart and the third chart - showing that the
spread between the yields on Governments and the
yields on other bonds is narrower than it has been
for a good many months. You can put it another way
by saying that early in March the market was in a
poor technical position in relation to other bonds,
and now it is in a very good technical position;
that is, Governments are cheap compared with the
other bonds at the moment.
Now, also bearing on the technical position is
the dealer position; that position is very well
liquidated. They hold nothing in the way of bonds
or long notes. They are just zero.
H.M.Jr:
Are they short on anything?
Burgess:
Well, they were a little short on notes - about
10 million dollars short on notes.
Harris tells me this morning that the maturing
3-1/4's are up two thirty-seconds.
H.M.Jr:
Burgess:
(Nods yes)
H.M.Jr:
You (Harris) might get the close on that. Which
is better than having it go off two thirty-seconds.
What?
Harrison:
Very.
Burgess:
Been very quiet this morning, but up, as you say,
two thirty-seconds.
H.M.Jr:
That, as I say, doesn't do any harm. What?
Burgess:
No, I think that's all right.
126
-12-
Harris:
They closed 12-10, the other notes unchanged, and
the bonds one thirty-second up to two thirty-seconds
off. Volume is two hundred thousand.
Burgess:
That's the smallest volume on a Saturday for a
H.M.Jr:
Practically frozen, isn't it?
Burgess:
Just stopped - people have practically stopped
trading until the issue comes out.
I think I ought to add - I was naming these causes
a minute ago - I think I ought to add some other
things that are mentioned in the market pretty
frequently. One is the budget, and the market has
been a little discouraged about that lately. I don't
know how big a factor it's been, but they mention it.
Another I was rather surprised to get from the
President of an insurance company was uncertainty
about gold as the cause of lack of buyers in the
long time.
Government market. All of which, I think, are factors
in the effect that this spread between the yields on
Governments and corporates is not as wide.
H.M.Jr:
Well, the rumors on gold was one of the things that
wore me down to a nervous minimum - one of the things
they do not worry about in Hawaii.
Sinclair:
Your pants were renewed.
H.M.Jr:
Well, I think one of the things that somebody has
to do, and when I see the President I'm going to
talk to him about it, is that we ought to give out
an A-B-C statement on the budget in language so a
high school child can understand it; because cer-
tainly in the papers that I have been reading, if
I didn't know the facts, the impression that it gives it's just so complicated that people don't understand
Harrison:
it.
I think there's a lot of truth in that.
H.M.Jr:
I think a very careful statement has to be prepared.
If the President doesn't want to do it, I'd be
delighted to do it. Very, very simple - not more
than 15 minutes - give it very simply. After all,
127
-13-
these different funds and everything else it's impossible for the newspapermen to understand it. Huh?
Bell:
I think the usual newspaperman, particularly
A. P., is confined to a few words in his story,
and it hits the high spots and the totals, and
he never explains why a total is up, which was
what should have been explained in the July
figure.
H.M.Jr:
Well, the falling off in our emergency expenditures
Bell:
That's right, and that's a factor in the July
Harrison:
H.M.Jr:
Mr. Secretary, one or two fellows say an interesting thing, that the rumors about the budget
are somewhat substantiated by the fact that the
Treasury hasn't seen fit to somewhat reduce its
balances; that the fact that you still continue
to run such big balances indicates a measure of,
not nervousness, but caution on your part which
you wouldn't need to exercise were you so sure
about the budget. Now, there might be something
in that. You're going to reduce it fifty million
dollars; I'm glad to hear that.
Well, of course, June 15 we cut down so close that
Szymczak:
But they didn't interpret it that way.
Didn't think that way.
H.M.Jr:
No. There you are.
Szymczak:
Mr. Secretary, you don't want to get out a statement
on the gold question, the price of gold?
H.M.Jr:
I don't think it's necessary. I haven't seen gold
is over a third, isn't it?
figure never mentioned.
they might have thought the budget was balanced.
(Hearty laughter)
mentioned.
128
-14-
Szymczak: Well, they are still talking about it.
Lochhead:
The gold figures that came out last week - the
headlines said that there was high production;
then when you went back and looked at the
percentages you saw the percentage was very
moderate, and the Russian situation seemed to
have quieted down considerably.
H.M.Jr:
I think I'm very fortunate in the period I've
been away as far as gold went - extremely quiet.
Szymczak:
Starting to come in some now, mostly from Japan.
Taylor:
No.
Lochhead:
Well, Japan is still - about 22 or 23 million on
H.M.Jr:
How much have they got left?
Lochhead:
Well, I don't know, of course, how much they can
take off
H.M.Jr:
What are your (Haas) figures on that?
Haas:
About 340 million or something like that figure;
that's very rough.
H.M.Jr:
Left?
Haas:
Uh-huh.
Lochhead:
Besides that, they've got the other; haven't
devalued at all.
H.M.Jr:
Do they still maintain their Financial Commissioner
Lochhead:
Yes.
H.M.Jr:
But this Financial Attache is located in London,
isn't he?
Taylor:
He covers, supposedly, three places.
Harrison:
They have a representative of the Bank of Japan in
the water from Japan.
in New York?
129
-15-
New York first, and then the Yokohama Specie
acts for the Government.
H.M.Jr:
Who?
Harrison:
Yokohama Specie.
H.M.Jr:
Well now, with that very brief summary, have you has
it jelled in your mind what you think we ought
to do?
Burgess:
Well, I think it's one of the toughest questions
we have had; there's more difference of opinion.
The market hasn't coordinated on a single recommendation, as it sometimes has, and I think the same
is true of the rest of us - more difference of view.
I think even at the New York Bank there is more difference of opinion between our officers than usual.
My own leaning is toward - well, first, I think
everybody agrees on one thing, or most everybody
agrees - there wasn't complete agreement - that we
ought to give these holders an option of two obligations. $817,000,000, which is a good substantial
figure - we could do it all in a very short note;
that would probably be a mistake, be too conservative, be depressing on the market. We ought to give
an option. Then we can have an anchor in a short
note so we know we will complete the conversion;
then we could step out beyond that into some longer
obligation.
Now, as to the thing that would be sure-fire for
your first option. The two things that we discussed
were a 15-month note, where there is a free date that's December, 1938 - or a September '40, a threeyear note. I think the market has felt that anything
up to three years would go very well, and our feeling I think as we started this, our feeling was that a
three-year note could be used as the anchor, that
that would be perfectly safe as the anchor issue,
and then go out beyond for the other issue, confident
that no matter what happened the three-year note would
be taken. Since we had that view, the market has
weakened some, it has slipped away a little bit,
there's been a good deal of uncertainty, and I think
-16-
130
the view now is that our anchor issue should
be shorter than three years.
Now, what are the options on that? The two-year
maturity is a little difficult, because we have
on each tax date within two years or in that
environment another fairly substantial maturity
up to four or five hundred million dollars. We
have just sold - that is, in June - a two-year note
maturing in September, 1939, and that is all not
fully digested as yet. You can see it in the quotation; the yield basis indicates, in comparison with
the nearby maturities, that it isn't quite digested.
So that while a two-year maturity would be pretty
safe, it just happens that that two-year one isn't
very good, and that drives us back a little further,
and you'd be perfectly sure-fire for your anchor
issue on a 15-month note.
Now, if you take that as the pivot, say, with that
you are sure of the conversion, then the question is
what other option you can offer that would be reasonably attractive in the market, that would attract
the people that want a little more yield, would
attract the investors a little more, that you could
take a chance on, wouldn't care perhaps just how many
took it. And the options on that, I think, are a
three-year note as the most conservative thing, the
four-year note as the next most conservative, a fiveyear note at 2% as stepping out a little further,
and then, stepping out further, say, a 7-year bond.
Now, the appeal as you lengthen your maturity and
raise your coupon - the appeal to investors is a
little greater, the appeal to banks is a little bit
less, so you take a little more of a chance. On the
other hand, you make an appeal to a little different
type of buyer, and you - of course, looking backward,
you affect the Treasury position by refunding it
longer or shorter. Generally speaking, there is a
good body of opinion that the Treasury short-dated
debt is pretty husky and you want to step out as
far as you can.
My own personal leaning has been that you could
afford to take a chance on the bond plus the short
131
-17-
note, and if you only got conversions of two
or three hundred million, why, all well and good,
you've done that much stepping out and that would
furnish some leadership in the market. Be a much
H.M.Jr:
stronger program than to do it all in short.
Well, if we only got two or three hundred, wouldn't
they consider that pretty poor?
Burgess:
Well, it wouldn't be brilliant, but it might be
better than doing the whole thing short, which they
would say was a confession of weakness. Now, I think
there's room for a good deal of difference of opinion
on that and much to be said for the next most courageous
thing; that would be a 15-months and a five-year note.
H.M.Jr:
A what?
Burgess:
A five-year note.
"hat's the rate on the 15-month?
Szymezak:
Burgess:
One and a quarter. That's a generous coupon, but
it would guarantee the success of the issue.
H.M.Jr:
There isn't much margin there. The boys figured it
nine thirty-seconds.
Burgess:
Yes, but on a short obligation that's pretty good.
Your yield has to change a good deal for each
thirty-second in price. So that isn't cutting it
thin. The market suggested anywhere from 1-1/8 to
1-3/8, but I think more mentioned 1-1/4 than any
other figure.
If you want to be still more conservative, do a
one-year and a four-year. If you want to go to
the last breastworks and make it sure and doubly
sure, take a 15-month and a three-year. Just a
question of
H.M.Jr:
How much weight can the market give to this 350
Burgess:
million dollars we're going to pay off?
I don't think very much.
H.M.Jr:
What are they going to do with that money?
132
-18Burgess:
Well,
I don't think we've got very much light
on that.
H.M.Jr:
Of course, we're talking almost as though we were
going after new money instead of a refunding.
Burgess:
Yes. I think it is very important that this is a
H.M.vr:
well, of course, that is something we can't help.
Yes. Well, that is an argument for the success
of a longer issue with a higher coupon.
Let's go around a little bit and see - put the
Treasury people last. Professor Williams?
Burgess:
H.M.Jr:
Williams:
3-1/4 coupon and that a lot of people are dependent
on this for earnings.
I don't feel that my opinion is really worth very
much.
H.M.Jr:
Williams:
Well, let us decide that.
You're talking about the market and the feel of
things. I almost feel that I don't know too much
about it. I don't know how to judge between, say,
a five-year note and a 7-year bond. I have a little
leaning for the note as against the bond. I think
it is primarily on the score that under these conditions I am rather afraid of putting any more bonds
into the banks; if we have trouble, it will be in the
bonds. I think I am looking at it from a central
bank point of view; that is, frankly, so far as our
function is concerned, I feel that the more bonds the
banks have, the less freedom of action we have. And
from that point of view, I would rather not feed the
banks any more bonds, under these conditions. If
your budget were balanced and you were reducing your
debt, I think I'd feel differently about it. If I
felt that the bonds were going to investors rather
than to banks, I'd be all for the bond. But I don't
know if that would be the case or not. I don't know
enough about the market.
H.M.Jr:
You know those figures that the men picked up on the
increase in the holdings of the insurance companies have you heard those figures?
133
-19-
Williams: No.
800 million in a year.
Taylor:
H.M."T:
In their Government portfolio - increase.
Thomas:
Figured 500 million in the first half of this
year.
Broderick:
Bonds or notes, Wayne?
Taylor:
Didn't say.
Williams:
I think in my thinking about it, much depends on
that - as to who would be the buyer. I don't like
to think of banks taking bonds that they might feel
afterwards they'd have to dump. Now, if we knew the
banks would take the bonds and lock them up, again,
I'd feel differently. All other things being equal,
I think I would be in favor of the Treasury's seeking
out as long maturities as possible. I think that is
desirable from the Treasury point of view. Otherwise,
you've got a large volume of financing that you are
continually confronted with. If you put out a bond,
you can more or less forget it. But don't know
whether the banks, in so far as they would be the
buyers, would lock the bonds up or not, or whether
they would tend to come back on the market. I've
heard a great deal of discussion in University circles
about the difficulties of central banking under these
conditions, where the banks have large portfolios of
bonds, and I think there is a lot in it. And I was
much concerned about that last spring, and that, I
think, is my reason for being somewhat afraid of the
bonds.
As I said, my fear would be entirely removed if the
buyers were non-bank investors or if the banks would
lock them up, and I would feel differently at a little
later stage, after we have balanced the budget and
there is some prospect of reduction of debt. But
with this uncertainty about money rates ahead of us,
I wouldn't like to put the - let us say the Federal
Reserve System in the position of having recommended
a thing which would then more or less compel them to
take actions in support which they might not otherwise
have to take or want to take.
134
-20-
H.M.Jr:
Well, let me ask you this. Looking forward not
just for the next two or three days, but looking
forward as far as you reasonably can into the future, do you see anything, as far as general
business conditions go, that we should worry
about? I don't mean today; I mean looking forward for ten, twelve months.
Williams:
Well, since getting back from vacation the first
of the week, I've been thinking about that a good
deal. I think that the business feeling is somewhat
less confident than it was. They were looking for
a dip in the summer, then a pretty strong revival.
Now there seems to be some feeling of uncertainty.
I think it is natural enough right now, between
seasons. They are looking for new orders. If the
new orders come in, why, they '11 feel fine. In
perhaps another month, if they don't come in, I
think they'11 feel quite a bit sicker than they
do now. Right now they feel uncertain, more than I
think they would normally.
H.M.Jr:
Did we have more than a normal summer recession?
Williams:
I don't think so. I think the summer recession
was perhaps less than the people feared. But
whether the recession is going to continue, I don't
know. There is some reason for thinking that it
might. We had, as I picture it, about a six months
period of undue accumulation of inventories during
the winter season and until the early spring, and
we were, I think, all of us rather concerned about
the price spirals appearing and inventories accumulating. And we thought, well, if that went on, we'd have
to stop it either by monetary or non-monetary means.
There was a good deal of discussion. Then it did
stop. It went into a period, I think, of liquidation
of inventories, which is still going on. People are
working off old orders and trying to work off their
inventories.
Now, how long that is going to run, nobody is able
to say; you can't prophesy, any more than you could
prophesy last September what was going to happen
in the last six months. We used to talk about it,
whether it would run for a month or two, or for a
longer period; we just couldn't say.
135
-21-
That's the feeling that I have now. I think the
fundamentals in the business situation are perfectly
all right. I mentioned two broad fundamentals: that,
prior to the beginning of this year, or, say, last
fall, we had been having a pretty strong revival in
business, accompanied by E good deal of stability
of prices and wages, and then that gave way to the
price spirals accompanied by wage increases, and the
wage increases went beyond the price increases;
there's been a very sharp upward movement of wages
this year. I think business is now beginning to
think more than before about profit margins, whether
they are in danger of being cut down; of course, they
have been in some industries. On the whole I don't
think it's happened, because volume has kept up and
they have been able to absorb the cost increases.
That, I think, is the fundamental situation, and I
don't see that there is anything especially to worry
about, if volumes are sustained.
Then there is the position in some of the heavy
industries. It seems as though right now you are
having some hesitation in railroad buying because
of their wage situation and the fact that you're
going to have some discussion of wages there; there
may be a rather protracted period of negotiation.
And it seems as though there is some hesitation in
the building industries, owing to a run-up of costs.
I think the demand is there and that sooner or later
it will break through, and if we got it in any one
of those major fields, or in a combination of them building, railroads, public utilities - that we'd
ride right along. But there is enough of a question
now, take it all in all, so that I don't think people
are so confident about the next three months as they
thought last June, looking forward, they were going
to be. Now, maybe that will change in a month; so much
depends on whether or not new orders come in.
H.M.Jr:
Thank you.
Broderick:
Mr. Secretary, the note issue appeals to me - the
15-months, with the option for a longer period -
three, four, or five years. While there is something
to say in favor of a bond, seven or eight years, in
order to give the permanent investors an opportunity
to get a diversification in their portfolios, while
136
-22-
it would appeal to quite a few institutional
investors, I think the psychological effect of
a bond issue at this time would not be good,
because there is a very general feeling that there
will be a gradual transfer of long-term issues,
of bonds, from banks to investors, and by adding to
the longer-term bond issues now it would simply
reduce the prospect of that transfer being made.
Personally I think the note issue would go over
better and would be more successful and have a
better effect on the market.
Broderick:
You know this note issue maturity isn't owned
entirely by the banks.
I know that.
H.M.Jr:
General Motors, for instance, has considerable.
Broderick:
As the issues are put out, I think they are taking
the note issue, but I think those who want diversification in their portfolios will take a three, four
or five year issue just as quick as they'11 take
a seven or eight year issue. And the use of bonds
would not have a very good effect marketwise at
this time. For that reason the notes appeal to me.
H.M.Jr:
One or two notes?
Broderick:
One or two - 15-months with the option of three,
H.M.Jr:
Burgess:
four, or five years; that is, either three years
or four years or five years. I don't know the
rates; a three-year would be 1-5/8, I guess.
Four-year, 1-3/4, five-year, two.
H.M.Jr:
Thank you.
Do you (Thomas) want to say something?
Thomas:
I'd rather wait until the Board members
Ransom:
I have a very decided opinion, Mr. Secretary, that
this is not an opportune time for a bond issue.
It seems to me the suggested bond issue, which is
in fact only two years longer than the longest note
issue which has been suggested, would not be construed
137
-23-
as a sign of strength. It would appear to me as
evidence rather of weakness than of strength. And
the only argument that I have heard advanced in
favor of a bond issue which makes any impression
on me at all is the fact that it would cost the
Treasury more and offer better earnings to investors.
And it does not seem to me at the present time that
there is any necessity in the world for the Treasury
getting out of the area of note issue in order to do
this refinancing. And I think that, as a matter of
fact, if you adhere to your field of note issues,
you can give the holders of this maturity an option.
I think that the 15-month note would certainly be
desirable. I was rather surprised at the rate that
Dr. Burgess suggested of 1-1/4. That's gone up
considerably since the last meeting of the Committee.
But of course, I realize that there has been a
definite firming and it might be necessary to put
it at that point.
Then I think it is a question as between the four
or five year note. It would seem to me that perhaps
a four and three-quarter year note would land it on
a very safe place.
Now, I am also impressed with the feeling that
we might have a more difficult situation to take
care of if we get into the bond field at the
present time, in preventing disorderly conditions
which may result from the tighter excess reserve
position of the New York banks over the period
between now and the first of the year. I think
we must recognize the fact that they are getting
closer to what they consider a tight position; it
doesn't seem to me to be a tight one at all. Of
course, the System has recently made a reduction
in its rediscount rate which will tend to help that
situation; perhaps it may be more, if Mr. Harrison's
powers of persuasion are as potent as I hope they
will be. At the same time, I do not think that a
7-year bond at this time would do much more than to
disturb the situation, and I think we've got to
recognize the fact that banks are liquidating their
bonds as the demands for commercial loans come in,
which is good and desirable, what we all want. But
I don't think that this is the time or the situation
in which it is necessary for you to get out of the
138
-24-
note issue. It just doesn't appeal to me at all,
and I was tremendously surprised when the suggestion
was made.
H.M.Jr:
That adds a little bit more pepper to the pot. I
mean I - I can hear these fellows - I'll hear some
of them this afternoon - two and a half percent it's the coupon that attracts.
Ransom:
I don't think it will reach that point.
Sinclair:
Well, I think that the sure - probably the conservative thing to do would be to keep within the
five-year note issue. I think in our district,
as was the case in June, we probably would have a
possible demand of two characters - shorter note
and longer note. It is interesting to me to note
that within our district in the last year our country
banks have increased their Government holdings, and
in the shorter term Government bonds even in the last
six months our country banks have increased their
holdings slightly. Our city banks have within the
year - their holdings of Governments are about the
same they were a year ago - little bit greater - but
within the last six months they have increased somewhat. Our country banks' excess reserve position is
still comfortable, on the average - about 25 percent
reserves. There is a tendency in our city banks for
their excess reserves to decrease, go down from
around 20 percent to 12 - 10 or 12 percent.
I feel, on the other hand, that there would be in
our district probably some small amount of investor
demand for a bond of seven or eight years' maturity,
and I think that is probably primarily because of the
rate.
Our business conditions indicate an uncertain situa-
tion in the fall. I think already there is some
indication of a slight hesitation in our retail and
our distribution figures. So far, industrial figures
show - are being maintained primarily upon past
orders. There is a little uncertainty as to future
orders; whether that will change in the next month
or so remains to be seen.
133
-25-
Take our insurance companies. I think one of our
insurance companies would be interested only in
a short-term; two others would be interested either
in a long-term or possibly in the short. I think
our savings funds would be interested in notes, four
or five year notes. So that our own view is to keep
within the note issue of the two characters, although
I do believe that the bond would meet some demand.
Szymezak:
It seems to me if we have positive assurance that the
banks would borrow at the Federal Reserve Bank rather
than sell their holdings when the reserves decreased,
or if we had positive assurance that they would hold
the bonds to be sold if they were 7-year bonds, then,
of course, it is quite logical to presume that the
Treasury would want to go into the longer term
obligations rather than the shorter term obligations.
But it seems next to impossible to get that positive
assurance, and a 7-year bond would seem to me to depress the bond market so that, even though we may have
a verbal assurance from the banks that they would hold
these 7-year bonds, they would perhaps be selling the
other bonds, which would depress the general bond
market and naturally depress these bonds. and it
seems, therefore, that the two notes, either a four
or five year note together with a 15-month note,
would be most logical.
H.M.Jr:
Harrison?
Harrison:
Well, I think that in the pronouncement of principle
I agree with John Williams that if the Treasury can
extend its maturity by selling bonds to investors who
will hold them, it should do so rather than pile up
any more short-dated debt. I agree also with him
that it is a mistake to have banks take any more bonds
than is necessary, for this reason: that while you
might get an agreement or an understanding that
through a given period they wouldn't unload bonds to
adjust their reserve position - whether you got the
agreement or not, they can't do it all at once anyway nevertheless, looking ahead over a long period of
time, I think it is clear that the banks want gradually
to reduce their holdings of long-term bonds, especially
as their demand for commercial credit goes up. We have
been through a period of years when we have had huge
excess reserves and no commercial demand. The result
140
-26-
was the banks just had to employ their funds in
bonds to make a living. But as they see an
opportunity to make a living as bankers doing a
commercial banking business, they would prefer
to do it that way, and we, as central banks, would
rather have them do it that way. And I should think
the Treasury would rather see investors take bonds
than the banks anyway.
Now, ten days ago I wouldn't even have thought of
a bond, I didn't hear anybody thinking of that.
I have been very much surprised, frankly, that there
has been so much discussion of a bond, even though
there is considerable difference of opinion about
this 7-year 2-1/2% bond. In view of that preponderance of opinion, or to the extent of that opinion,
I think it is fairly safe to say that you would sell
a respectable amount of the bonds if you put them
out. The only question in my mind is how long they
would stay put and how much of a secondary market
you would have. And if there is that secondary
demand for a seven or eight year bond, isn't there
now adequate opportunity for those investors to
buy them in outstanding issues? So I don't think you
can justify the opinion that there is now a huge
investment demand for a 7-year bond at par. Query,
therefore, whether if the great percentage of these
notes are held by banks and banks do take them because
of the premium, whether they would over a long period
of time be expected to hold onto them or whether when
the first opportunity comes of a strengthening bond
market they wouldn't unload; and we have found by
experience that whenever the bond market goes up,
recognizing the general desire of banks ultimately to
get out of long-time bonds, somebody begins to sell,
and the minute they do it it gets out in the market
and it spreads out to the country that New York is
unloading bonds. It is a very unfair criticism of
New York, because I think they are doing what any bank
investor might be expected to do. But nevertheless,
it is a fact and you have these periodic depressions
started by the fact that somebody in New York, we'll
say, starts to sell a particular issue of Government
bonds for some reason.
H.M.Jr:
Can I interrupt you? I personally would consider it
141
-27-
a great sign of weakness if we were to try to
hold the banks to any such agreement. I'd consider
it a
Harrison:
A great mistake.
H.M.Jr:
...a great mistake, and since I've been here we
haven't attempted to do anything like that, and I
wouldn't want to.
Harrison:
H.M.Jr:
You shouldn't, and nothing I've said this morning
should be construed as favoring it.
Just as soon as they feel the Governments are
frozen assets, I'd begin to worry.
You can see what happens. They've got all these
bonds now, some 14 or 15 billions of them, and
Look what they sold since July 1 - I mean look at
Harrison:
Sold about a billion.
H.M.Jr:
Oh, more than that.
Bell:
About a billion.
Harrison:
It's a lot, and I think it's extraordinary how the
Government bonds have held up in the face of that
liquidation. I think it's the insurance companies -
H.M.Jr:
Harrison:
the number of bonds they've sold.
they 're the fellows that stepped in and saved the
day.
H.M.Jr:
Harrison:
Again, as a matter of policy, as Secretary of
the Treasury, I never would want any agreement
with anybody that they couldn't sell.
My only attempt - I just say that as a money market
they've got to realize that when there is a scraping
of the box in the market as a whole, then the market
has got to consider whether they want to disorganize
themselves as a financial community by trying to
liquidate long-term investments rather than trying
to use the natural resource of going to the Federal
Reserve to borrow for a short period.
142
-28-
H.M.Jr:
But you can not drive them into it.
Harrison:
No, you can not, and that does not mean either
that the minute they get a chance on a rising
bond market they won't gradually tend to liquidate.
H.M.Jr:
Isn't there that old prejudiced belief that borrowing
from the Federal Reserve is a sort of sign of weak-
ness?
Harrison:
When Federal Reserve was first organized, we thought
they'd never get them to borrow, and then there was
a period, through the war and subsequently, when it
became quite the thing. Now we've just got through
borrow, and on my trip I found a general reluctance
on the part of the banks to consider borrowing again.
a period of excess reserves where nobody had to
But I think they' 've got to consider it and it should
become the fashion, and as soon as that comes about
the System and the country will be much healthier.
H.M.Jr:
But you and I can not make it the fashion.
Herrison:
That's right. I can say this with some degree of
assurance, though: that, without any commitments,
they may change their minds - the New York banking
community as a whole, assuming excess reserves get
to zero and they can not buy reserve funds from one
another. I think that at that point, rather than
try to force long-term assets on an unwilling market,
they will borrow, for two reasons: first, because
very quickly they'd find they couldn't dispose of
their long-term assets all at once, and second,
because whether as a result of our talks or their
own consideration of it, they do accept a certain
responsibility for the money market, that they' ve
got to take care of it in the right fashion rather
than the wrong fashion over a temporary period.
Well, that being so, I've got great question about
the long-time bond myself. I really think you'll
sell it and you'll sell a respectable amount, if you
issue it. I don't know how long it would stay put,
and when they begin to liquidate, query, whether
you wouldn't start another period of the liquidation
of Governments that causes all the heartaches. And
I'd rather not add to that situation unless it were
necessary to do it. That being so, I should think
143
-29-
the more conservative attitude would be to stick
H.M.Jr:
Harrison:
to the notes this time. In spite of my agreement
with John Williams that if we could only be sure
they were going out in the hands of investors the
bonds would be the logical issue, I don't think they
would go in the hands of enough investors, as opposed
to banks, to try the risk.
I don't think in this general discussion we've taken
note of the fact that, including Sunday, we're selling
a million dollars worth of ten-year bonds every day,
in the Baby Bonds. I mean Taylor tells me we're
averaging about seven million dollars worth a week.
That's going out like clockwork.
It may be, though, that that very thing means you
haven't got as much of a demand for these proposed
bonds.
H.M.Jr:
But I mean this idea of putting money in the hands
of permanent investors. How many of those come back
on us?
Taylor:
It's a very small percentage. Of course, the very
nature of them, the fact that they are fully registered, that you have to go through this rather
elaborate performance, means
Ransom:
What is the total outstanding now?
Taylor:
Sinclair:
Billion two plus.
Lot of that in banks?
Taylor:
No; there was a time when as high as six percent
Harrison:
I wonder how much bank demand there might be for
Bell:
4 million came back in July - 4 or 5 million a
H.M.Jr:
was, and it's a little less than that now.
it if you raised the limit.
month, on the average.
Well now, let's see, who hasn't had a chance?
Are you through, George?
144
-30-
Harrison:
Yes, that's all. I think this is a devil of a
decision. I would love to put out a bond issue
if I thought it would stick. But we have had such
recent evidence of the desire of banks to get rid
of bonds as soon as they can that I auna little
worried about dumping any more bonds/the market,
because I think they are still anxious to dump them
as soon as the opportunity affords itself of trying
to get rid of them.
H.M.Jr:
Of course, this one-year note and 7-year bond
remind me of trying to sell a woman a long petticoat
and a knee-length skirt. I mean the things don't
seem to kind of match up. It looks as though we're
trying to get our styles kind of
-
Harrison:
Except
that you're selling to entirely different age
women.
Burgess:
You're feeding a different market.
H.M.Jr:
That's what we're hoping for; that's our hope.
Harrison:
That we don't know. If I were really sure that you
had a broad market
H.M.Jr:
That's a pious hope.
Ransom:
Mr. Secretary, I'd like to ask Mr. Thomas and Mr.
H.M.Jr:
Piser if they
Please. We'll keep our home talent for the last.
Thomas:
On the recent money market situation we have been
impressed by certain developments, particularly the
tendency of the large New York City banks to sell
their bonds, their long-term obligations; they have
done so every time they have gotten short of reserves
or anywhere near short of reserves. And those banks
that are short might sell them to adjust their reserve
position. Other banks don't buy them because they
know this pressure is on the market. Whereas you
can say that they are selling them in order to get
funds to make loans, the fact is that they have sold
more investments than they have made loans. So that
the total loans and investments of these large city
145
-31-
banks have been going down and their deposits have
been going down. This decline in deposits hasn't
been true for the country as a whole, and it isn't
as bad as it looks from the weekly bank figures,
but there has been a decline in deposits, which is
a sort of depressing factor, at least psychologically.
It is not so bad when it represents simply investors
holding the money idle, buying bonds from banks, but
it has been the situation.
Harrison:
Thomas:
Due to the fact, is it not, that banks have sold
more investments than they have increased loans.
Yes, they have sold more investments than they
have increased loans; that is, the large city
banks. Not true of the country banks. One factor
in that is that the large city banks, as Governor
Harrison pointed out, bought very heavily of long
bonds in '36 at a time when short money rates were
so low and they were worried about their earnings.
They went out and got all they could get of the
bonds, practically all the Treasury was issuing at
the time. They bought them rather heavily. Now
that short rates have gotten up a little bit, they
are rather less inclined to buy bonds and they are
more willing to shift from the long to the short.
And whereas the lowering of the discount rate is a
factor, still short rates have to rise quite a little
bit more before there will be any inducement from the
rate standpoint to borrow. They might borrow tem-
porarily, but they might still be a little hesitant
about that.
Harrison:
That is not necessarily true, is it, Mr. Thomas,
with commercial loans at one and a half.
Thomas:
Not true with commercial loans, no, but as long as
Harrison:
Put it differently. It is not true so long as their
they've got these short bills
average yield on all investments and loans is over
the bank rate.
Thomas:
Well, I don't know; I think they'd rather get rid
of the short stuff which was below the bank rate,
rather than borrow at the bank rate.
146
-32-
Harrison:
If
it were for the long rate, but not for the
short.
Thomas:
Your judgment on that would be much better than
mine. Now, you can't expect banks to borrow rather
than sell long-term securities when their long-term
securities are low in price. At a time like this,
when they've got a profit on them, there is a tendency
for money rates to rise; it is a little too much to
expect them to borrow in order to hold them when they've
got more of them tian they think they ought to have
anyhow. So it looks to me as though there is going
to be a continuation of this tendency to reduce their
holdings of bonds. And if there is an investment
demand for.bonds, then let the investors buy those,
it seems to me, rather than have the Treasury issue
more of those at this time, because what will happen
is that the banks who hold these notes will exchange
them and there will be a tendency for them to turn
around and sell them on the market.
H.M.Jr:
The notes?
Thomas:
No, the bonds; if they exchange the notes for bonds,
they are likely to want to sell them, and that will
be another depressing factor on the bond market.
So I should think whereas the banks might be more
willing to hold notes - difference between five and
seven years - I don't know whether it makes a great
difference, but it is a step in what seems to me to
be the wrong direction at this time.
H.M.Jr:
To go to the 7-years.
Thomas:
Yes, to go to the 7-year bond.
As to the business situation, I think Professor
Williams' analysis is correct and I have great
confidence in the future of business. But I think
the next two or three months are going to be very
uncertain, particularly in the textiles. With a
decline in the price of cotton, I can't see much
buying of cotton goods and therefore some hesitation
in production until the price of cotton goods has
adjusted itself to the new level of all cotton prices.
So that we are likely to get a temporary r ecession
147
-33-
Harrison:
there in the textiles, which will hold things
back only for a short while. In the long run
that ought to work out, but it does look like
a factor that will bring down our indexes and
make the situation look not so favorable in the
next month or two, if not longer.
One of my directors is head of a textile business.
He says that he went to a bank only last week to
borrow money to carry goods which he had already
manufactured and had sold to other dealers, distributors who were not in a position to take them.
Had he forced the contracts, he would probably have
forced them into bankruptcy, so he borrowed money to
carry the goods for a temporary period - something
that he had contracted for, but can't liquidate.
H.M.Jr:
On which he will lose money.
Harrison:
He doesn't know yet, but he thinks it will work
H.M.Jr:
Are you (Thomas) through?
Thomas:
Yes.
H.M.Jr:
out all right.
Well, to sum up, you wouldn't go beyond the five
years.
Thomas:
I would not.
Piser:
As has been said before, we are in a period where
banks have been rather steadily liquidating Govern-
ment securities, particularly bonds, in the last few
months. And banks still hold very large amounts of
Treasury bonds; I think it is something like two
billion dollars more than they held a year and a
half ago. With those large amounts of Treasury
bonds, they are apparently anxious to sell on every
opportunity. It seems to me, with this substantial
amount that is overhanging the market, it would be
particularly unfortunate to add to the supply of Treasury bonds at this time. I think that might lead to
a wave of liquidation of Government bonds perhaps
not of the magnitude we had last March, but at least
of substantial proportions.
The other point I would like to make is that if a
148
-34-
bond issue should be subscribed in small amount,
I think that might be taken as a sign of weakness
and that there was not a substantial market for that
type of bond. On the other hand, if a large amount
is subscribed, say three or four hundred million
dollars, it seems to me a substantial portion of
that might come into the market immediately on the
part of those banks or others who had bought the
bond for an immediate profit.
So I think in either event it might lead to a
rather weak market for all Treasury bonds. So I
would be in favor of the 15-year note and either
a four or five year note, and preferably I should
think a four year note.
Ransom:
15-months note.
Piser:
15-months note and four or five year note, preferably the four-year note.
Harrison:
That's a bad price, though, isn't it - the four-
H.M.Jr:
What's four years and nine months now?
Burgess:
That would be within three months of the issue
year note?
you put out last June. That's my objection to
that. Plaster the market immediately.
H.M.Jr:
Would you rather have five years?
Burgess:
Rather have the five; it's much less damaging to
H.M.Jr:
What's the rate on five years?
Burgess:
Two percent.
H.M.Jr:
How does that figure out - five year, two, or seven
year, two and a half - which way is it cheaper to
the market.
the Government?
Burgess:
"hen you figure the tax exemption to the states and
private holders who would get some portion of the
note, you don't know how much, I don't think there
is as much difference as it looks on the surface;
nobody can quite tell.
-35-
H.M.Jr:
Which way does it look?
Burgess:
I think undoubtedly the seven year money would
cost you something more than the five year money,
143
but it is less than half of one percent.
H.M.Jr:
Now, before I ask, is there anybody - Ransom, do
you want to call
Ransom:
No one else, Mr. Secretary.
H.M.Jr:
Taylor?
Taylor:
I think that your 15-month note is indicated and
that has to be your pivot issue. After listening
to the various people that we talked to up in New
York, I became convinced that there is a market
for this 7-year 2-1/2. I am very surprised to find
that that was so. I think that for those particular
people who go into that bond it will stick, that
any liquidation which comes along in the future and I entirely agree with the things that have been
said about the tendency to liquidate long-term bonds will be in the longer-term Treasuries; it won't be
H.M.Jr:
Taylor:
in this particular maturity.
It will what?
It will be in the long-term Treasuries, it won't
be in whatever is done in this. So that I don't
think you will have a messy market situation on this
particular 2-1/2, if you do it.
H.M.Jr:
Bell?
Bell:
Well, I agree on what Mr. Taylor said. I'd prefer
three-year 1-5/8 and a 7-year 2-1/2, but I think
a
for safety reasons we are forced into a 15-month 1-1/4.
they would buy a substantial part of this 7-year bond,
and one bank went so far as to say it would not only
exchange its notes for the bond, but it would go out
and buy the rights, and that it would lock them up
We did get from the New York people statements that
and hold them.
The only thing that worries me about the 7-year bond
is, supposing we only get 200 million dollars of
exchanges, how will the market interpret that? If
150
-36-
we could arrange some way so that the market would
interpret it the other way, that it is a distinct
advantage to the Treasury to have even 200 million
That does worry me a little,
in the 7-year bond
as to just how the market will interpret that. I
do hate to see two notes - 15 and five.
Harrison:
You mentioned a minute ago General Motors. Didn't
someone of those bankers advise us that they had
heard that the General Motors bloc of 20 millions,
whatever it was
Taylor:
Bell:
Broderick:
Thomas:
Bell:
Piser:
They wouldn't buy anything longer than two years.
We got that from four or five different places.
And that is only natural. They've got that money
in there for short-term purposes.
They carry it merely to get interest on their
deposits; same as a time deposit.
To what extent does that permit them relief from
the undistributed profits tax?
I don't know, but I assume General Motors had it
in these short notes for a purpose of that kind.
In regard to intermediate maturities, there is
two and a half billion of Treasury bonds callable
in '44. One of those bonds
H.M.Jr:
How much?
Piser:
Two and a half billion. One of them is a four
percent issue, which I think you will undoubtedly
want to take up at that time, and the other is a
3-1/4, which may be refunded at that time. This
would, of course, add to that large amount of
callable stuff.
Harrison:
There may be cheap money then.
H.M.Jr:
George?
Haas:
I haven't got very much to add, Mr. Secretary.
My leaning is toward Mr. Taylor's and Mr. Bell's
151
-37-
version, except that I don't feel very strongly
towards the bond. I think it is a very close
decision; I don't think it would make very much
difference which was done. I think from the
Treasury point of view, particularly when you
have this 1-1/4 note as your option, that if there
is a market for the 7-year 2-1/2 bond, my preference would be to take the bond. But I don't feel
strongly. I'd just as soon have two notes. I
think the key to the whole situation is this question whether or not there is an investment market
for this short-term bond, and I switched over I was first thinking in terms of a combination of
notes - and after hearing Mr. Taylor's and Mr.
Bell's discussion that they had in New York, I
was willing to go over to a - to take a combination
of the short note with the bond. I don't think it's
close - I think it'is close.
H.M.Jr:
You mean the decision.
Haas:
Yes.
H.M.Jr:
Archie?
Lochhead:
Well, I don't know; of course, since Mr. Taylor
came back and spoke about that 7-year bond - that
hadn't entered much into my calculations before.
I thought that after all this is only a refunding
issue, we're not borrowing new money, and my leaning
was toward a straight five-year note - not split it
up. However, if you're going to split between two
notes, I would rather split to a note and a bond I mean I'd rather see the whole amount in the fiveyear issue, or else, if you were going to split, then
I think there is sufficient investors' demand for
a 2-1/2% bond. After all, the maturing notes carry
3-1/4%; lots of people have been carrying it for a
long time and are probably looking for the yield, and
it may be that we should consider them and give them
an opportunity. I don't think the banks will buy them
if they don't want to buy them. I wouldn't issue the
7-year bond for the whole 800. I think if the banks
are trying to liquidate, they're not going to bid
for more bonds, and they 11 take the notes.
Ransom:
Unless they have a temporary profit in them.
152
-38Lochhead:
But you can't tell just where the profit will be.
There's not necessarily going to be a bigger profit
on the bonds than on the notes, and I think they'11
probably take the notes.
Lochhead:
Is that all, Archie?
That's all.
H.M.Jr:
Seltzer?
Seltzer:
If Mr. Harrison had been as receptive to a 7-year
bond as Dr. Burgess - that is, been as confident
of the receptivity of the market to it - I'd be in
favor of that combined with a 15-month note issue,
H.M.Jr:
because the Treasury would be in a much stronger
position with that kind of a joint offering than
H.M.Jr:
with two notes, and because I think a fixed maturity
of 7 years would have a special attraction to the
market; we haven't issued any such for quite a while.
But with all this doubt about the reception of a
7-year bond, I think we have to play it safe and try
a 15-month plus a four-year note.
You're going to be very safe.
Seltzer:
What?
H.M.Jr:
I say you're going to be very safe.
(Hearty laughter)
Harrison:
I must confess that my reluctance about the bond is
not one of principle but more of a hunch that you
are apt to get a secondary reaction. Now maybe I'm
all wrong. These gentlemen have been much closer in
touch with those fellows they were conferring with
on Wednesday and Thursday than I was; I wasn't in
with them much. But query, whether there is enough
difference to the Treasury to justify the uncertainty
as to where those bonds are going. In other words, I
think there is something in Piser's point of view that
you might lose either way. If you don't sell many of
them, it is a reflection on the offering; if you sell
too many of them, then you are under the risk of the
unloading afterwards.
153
-39H.M.Jr:
Harris?
Harris:
Well, for once I don't have any definite opinion
about it; but I rather lean to the note in preference
to the bond - five-year note. I think it fits in with
the Treasury maturities very well; we only have that
one issue in '42. And the bond market, for once,
since the recent decline started - I've never seen
such a uniform decline throughout the bond market;
it's been a point and a half, a point and threequarters, through all the bonds, which to me indicates not so much selling as lack of buying. It's
a general markdown.
H.M.Jr:
Have the notes gone down a point?
Harris:
Gone down anywhere between 20 and 30 thirty-seconds.
H.M.Jr:
Who has some afterthoughts?
Harrison:
I have those on the 15th.
H.M.Jr:
Last time we were so good we absolutely within a
Burgess:
dollar got a fifty-fifty division, didn't we?
I don't think you'll get that this time, even with
H.M.Jr:
What would you guess if you had a 15-month and a
Burgess:
350 and 450.
H.M.Jr:
Which is the 450?
Burgess:
The shorter one. I think you'd get more of the
H.M.Jr:
And if we had 15-months and a 7-year bond?
Burgess:
300 million of your longs.
H.M.Jr:
That many?
Bell:
That would be a huge success.
the five-year note.
five-year - what would be the division?
shorter.
154
-40-
Burgess:
Pretty nearly that many.
H.M.Jr:
Anybody got any afterthoughts?
Bell:
Supposing we only got a hundred million of the
bonds, Doctor, how would the market interpret it?
Burgess:
Think it was kind of sour.
Bell:
Personally, I'd think it was to the Treasury's
Harrison:
That's just the point.
Bell:
That wouldn't worry me any - I mean from our
Broderick:
Ransom:
Dan, is this the time for an experiment?
That would be our worry, wouldn't it?
Bell:
(Laughs)
H.M.Jr:
Well now, do you (Burgess) have some appointments
Burgess:
Three, four, and six o'clock.
Well, I tell you. Mr. Ransom, you're Acting
H.M.Jr:
Ransom:
advantage. But I don't know how the market
standpoint.
for me this afternoon?
Governor, aren't you - I mean Chairman.
Mr. Harrison is Chairman of the Executive Committee
H.M.Jr:
in place of Mr. Eccles.
Are you (Harrison) going to be in town tomorrow?
Harrison:
I wasn't, but I will.
H.M.Jr:
I thought if you and Mr. Ransom could come around,
say, 10:30 tomorrow morning - could you?
Ransom:
Yes, indeed.
H.M.Jr:
Burgess, will you be here?
Burgess:
I'll be here continuously.
Then I think if you gentlemen will come at 10:30
H.M.Jr:
tomorrow morning - it gives us about an hour and
a half to talk things over once more.
Fin
155
September 4th, 1937
Today HM,Jr conferred with Mr. Levey of Solomon Bros.
on the September 15th financing.
Mr. Levey recommended a 3-year 1/58% bond maturing in
1940 and a 7-year 21% bond. As an alternate, he recommend ed
adding to the present issue of the 2-3/48 45-47.
Mr. Devine, of C. J. Devine & Co., Inc., recommended
a 15-months and 3-year bond, and, as an alternate, a 5-year
2% or 8 4-year 1/78a. As an altern te, he recommended
a 5-year 2% or a 4-year 1/78s bond.
TREASURY DEPARTMENT
156
INTER OFFICE COMMUNICATION
DATE September 4, 1937.
TO
Secretary Morgenthau
FROM
Mr. Haas
Subject: The Sino-Japanese situation.
The Chinese-Japanese war is on. It is no longer a local conflict
as was the 1931 seizure of Manchuria, the 1932 battle in Shanghai,
the 1933 seizure of Jehol, and the 1935 grab of portions of Hopei and
Chahar. For the first time the Central Government of China is using
its armies to resist Japanese aggression.
a
Japan is now treating the situation not as a series of isolated
local incidents, but as a large scale campaign involving the use of
her military forces along a thousand-mile front extending from Kalgan
in the North to Shanghai in the South. Japan probably has over
200,000 troops on Chinese soil exclusive of 200,000 Manchoukuan
troops, and has already called to the colors sections of her reservists.
Though war has not yet been declared, Japan has ordered a
blockade of all Chinese official and private shipping along the
entire Chinese coast, and is bombing numerous cities several hundred
miles in the interior.
I. What is likely to happen in China before next summer?
II. How will the economic interests of the United States be
affected during the struggle?
III. What will be the effect of the application of the Neutrality Act?
IV. What role will the interested powers play in the war?
I. WHAT IS GOING TO HAPPEN IN CHINA BEFORE NEXT SUMMER?
There are four possible eventualities:
1. The rapid conquest by Japan of the whole of North China and
of all the important cities in the East of China, with a peace
settlement imposed upon the Central Government of China.
2. The rapid conquest of those areas but non-acceptance of
peace conditions by the Central Government of China, with a continua-
tion of the warfare, though in a less acute form, in the West,
Central and South of China.
157
Secretary Morgenthau - 2 -
3. Failure of the Japanese to attain their military objectives
with anything like the rapidity they expected. Spring will find
Japan with her whole army and navy involved in the Chinese war.
4. Entrance of other foreign powers into the war.
Which of these alternatives is most likely depends in part on
the relative military effectiveness of the two contending forces and
on the military strategy involved. On that subject the judgment of
economists is of little value and we venture no opinion. There are,
however, other factors - economic and political - which are at
least as important as purely technical military considerations in
shaping the final outcome. These are considered below:
1. Can Japan finance the war?
war.
Japan must have both domestic and foreign funds to finance the
(a) Internal financing.
Internal financing of the war presents no insuperable problem
for Japan for at least a year. If the war with China spreads to wider
fronts, as it gives every indication of doing, the cost of such a
war during the next twelve months can not be less than 5 billion yen
and may rise to 8 billions. Japan already has appropriated 22 billion yen for the conduct of the war in addition to the ordinary
military budget of 1.5 billion yen, and it is very doubtful whether
theymonths.
expected
few
operations on a very large scale to last more than a
The Government will have to borrow the major portion of the
additional 5 to 8 billion yen needed. Revenue from taxes will increase, both because of heightened business activity at rising prices
and higher, as well as new, taxes. But the Government would never
finance the war through taxation. No government in modern times
every has; nor is any government likely to do so. To finance a
major war chiefly through taxes is a most cumbersome and inefficient
device, and for Japan would after a short time go a long way toward
stirring up serious trouble at home.
158
Secretary Morgenthau - 2-a -
The total national revenue from taxes last year was about
2.5 billion yen, or almost one-sixth of her national income. To
raise an additional 5 to 8 billions by taxes would be preposterous.
The real burden of the expenditures cannot be shifted - except
in so far as foreign credits are obtained - but the imposition of
that burden must be camouflaged by borrowing and the printing press.
Japan will be able to raise 5 to 8 billions in the next year
without the least danger of either financial collapse or wild inflation. Some rise in prices there will be, since the diversion of
savings from non-military to military production will not be nearly
enough, and since Japan will not be able to greatly increase production,
even under the stimulus of war demand. She already was experiencing
a scarcity of labor this summer and additional men under arms will
in large part offset additional labor hours. Prices therefore will
rise, but not enough to justify fears of a runaway inflation. The
note issue and deposits in Japan total about 13.5 billion yen,
indicating roughly that the velocity of income circulation is around 1.
If, therefore, Japan borrows via the Central Bank and printing presses
as much as 5 billion yen this year, prices will at most rise several
percent a month. It may have even a lesser effect. In France during
the first six months of the Great War the note circulation rose from
6 to 10 billion francs without causing any such rise in prices. But
even if prices did rise at the rate of five percent a month in Japan,
for the next year at least such a price rise will not seriously
interfere with Japan's ability to conduct the war in China.
Nor will Japan have any trouble this next year insuring the
absorption by the banks and by the public of another 5 or 10 billion yen. She now has a total national debt of about 11 billion yen,
which is a little less than her national annual income. The national
debt of the United Kingdom is considerably greater than her national
income, while that of France is double her income. A country during
wartime can easily bear what might justly be regarded during times
of peace as intolerable financial burdens. With strict exchange
controls, patriotic appeals, increasing control over industry and
prices and complete control over the banking system, Japan can and
will, virtually, force the absorption by the Central Bank and the
public of government securities.
153
Secretary Morgenthau - 3 -
(b) External financing
In order to conduct a major military offensive in China,
Japan must import certain basic war materials and finished military
goods. Japan has already accumulated large stores of oil, iron,
steel, cotton and other materials. Her import surplus during the
first seven months of 1937 has jumped to 700 million yen as compared
with 250 million for a comparable period last year. But if the war
is to continue, Japan will need to purchase considerable quantities
of war materials. More than that, Japan will have to continue to
import raw materials which are necessary to produce the goods she
expects to export. An examination of the character of her exports
and of her needed raw materials leads to the conclusion that Japan
must import between two and three billion yen (at current prices)
of goods during the next twelve months in order to conduct her war
without important shortages.
Can she pay for three billion yen imports during the next twelve months?
Yes, easily.
(a) She has approximately 1,200,000,000 yen in gold.
(b) To this must be added foreign exchange held by various
Japanese banks; probably between 100 and 200 million yen.
(c) She will produce about 100 million yen of gold during the
next twelve months.
(d) She can likewise liquidate that portion of her foreign holdings that is not in war areas and thereby raise another hundred million.
That totals about 1.5 billion yen and leaves about 1/2 to 1 Superscript(1) billion
yen to be raised with her exports. During the first seven months of
1937 Japan exported goods to the amount of 1.7 billion yen. Even
allowing for loss of China's market - only 6 percent of her exports
go to China - and for increased prices due to the increased cost of
imported raw materials, Japan will have little difficulty selling a
billion and a half yen of exports during the next twelve months.
Japan will, if necessary, heavily subsidize her exports in order to
procure essential imports.
Secretary Morgenthau - 4 -
There is no doubt that even if Japan is unable to borrow to
finance any of her needed imports she will be able to import what
she must have during the next twelve months and pay for it. Not
only will she be able to pay for her needs during the coming year,
but she will most likely not have to use up all her gold and foreign
exchange in the process.
In addition to her cash foreign resources, Japan may be able to
secure credits from Germany and from England. Germany will doubtless
be eager to help Japan by selling her surplus and obsolescent war
material which can be of use to Japan. Germany would probably be
willing to sell a large portion of such material on credit. Even if
Germany were to obtain 50 percent of the proceeds of the sale in
gold or foreign exchange for some of her exports to Japan it would
definitely be to her economic advantage to do so.
As for England, her ability to extend credit to Japan will not
be the limiting factor. Political considerations will be paramount.
Whether or not Japan will be able to obtain credit in England is at
present uncertain. Everything depends upon the direction which
British policy in the Far East takes.
Japan begins the war with a Government foreign debt of 1.3 bil-
lion yen and a total foreign debt of 1.8 billion yen. Annual interest
payments on the external debt amount to $25 million which Japan
ought to be able to maintain. If the worst comes to worst, it can
cease payment of interest on foreign loans, though it would not do so
if there were any chance of its raising further loans from abroad.
Therefore, it may be concluded that Japan can finance a major
war with China for at least a year.
2. Can China finance a major war?
(a) China has, and will have, sufficient foreign exchange to buy
all of the foreign goods that she will be able to bring in through
the Japanese blockade for at least the next twelve months. Government
of China banks now have probably about 500 million yuan of gold and
foreign exchange and about 340 million yuan of silver. In addition
to the silver bullion held by banks, it has been estimated that there
are more than 1,100 million ounces of silver in China, of which
500 million ounces are in non-monetary form and 600 million ounces
in silver dollars. Although it is true that all of this silver will
not be available to the Government, because a part of it will be in
160
161
Secretary Morgenthau - 5 -
territory occupied by the Japanese, and because a part of it will
not be dehoarded even under the patriotic stimulus of defending
China, a good proportion will be made available.
The foreign value of China's silver stocks depends upon the
United States Secretary of the Treasury. Were China to attempt to
sell any substantial portion of her silver stocks on the London
market without the co-operation of the U. S. Treasury, the price of
silver would drop precipitously.
However, even without including the potential foreign value
of her silver stocks, China will have adequate supply of foreign
exchange to purchase such imports as she will be able to obtain
through the Japanese blockade. The supply of foreign exchange arising from her remittances from Chinese living abroad will doubtless
be well over a half billion yuan. Last year they amounted to
320 million yuan. It is reasonable to expect that the remittances
will be much larger under the patriotic appeals for assistance,
combined with money-raising by non-Chinese throughout the world.
In addition to this supply of foreign exchange is the amount
she can obtain from her exports - at least another 100 million yuan.
In 1936 Chinese exports amounted to slightly more than 800 million
yuan. Under war conditions, with a blockade of the Chinese coast,
it is unlikely that China will be able to export more than one-fifth
of this amount. The minimum total of foreign funds thus available
to China during the next year is about one billion yuan. It is
extremely unlikely that China will be able to import that much. The
imports of China during 1936, including an estimate of smuggled
imports, amounted to only 1,100 million yuan. 68 percent of the
recorded imports entered China through the ports of Shanghai and
Tientsin. A part of this. trade can be diverted to other points of
entry which may remain open, but owing to the effectiveness of the
Japanese naval blockade of the coastline, and the army blockade of
the Northeast border, imports will be greatly reduced over the
level of last year.
Japan may permit the entry of non-essentials on foreign
boats, but China is in no position to spend its foreign funds on
non-essentials.
Even should China be able to import more than 1 billion yuan
of goods she will doubtless be able to finance it. In the first
place, she will be able to get something out of her silver stocks.
In case of dire need she would,as a last resort, throw it on the
162
Secretary Morgenthau - 6 -
market with or without the co-operation of the U. S. Treasury. Or
she could pledge it for credits obtained in foreign countries. (It
is reported that she already has a hundred million franc loan in
France to be secured by silver pledged in London.) Lastly, an
unknown amount of financial assistance can be and doubtless will be
supplied China by Soviet Russia. Russia will probably extend un-
limited credit to China for the purchase of munitions of war. The
extension of credit may well cover both purchases from Russia and
purchases which China may be able to make in other countries.
Altogether, China will be able to pay for or finance all
the imports she can run through the Japanese blockade or obtain
through other avenues of transportation
(b) Will China be able to finance the domestic needsof war
for the next twelve-month period without difficulty?
China, incomparably less than Japan, cannot rely upon
voluntary public loans and taxes to finance the war over a twelvemonth period. She will doubtless soon resort to borrowing from the
Government banks without any intent of maintaining a sound currency.
Sound currency practices must inevitably give way in China in the
face of her critical struggle for national existence. There is
danger of a rapid rise in prices after the first few months of the
war. While the sharp inflationary movement cannot be controlled
indefinitely, control during the first year of warfare should not be
difficult, particularly since both the Central Government and
provincial governments will soon resort to requisitions of supplies
for the army at fixed prices.
In conclusion, it can be stated that with China, as with
Japan, the war will not stop for lack of funds - at least during the
next year.
3. Can Japan obtain raw materials necessary to conduct an
effective major war?
Yes, she can, so long as she is fighting only China.
Japan mines 90 percent of her coal, but she must import petroleum,
iron ore, rubber, copper, tin, zinc, aluminum, phosphates, nickel
and some other less important raw materials. But not only must
Japan import raw materials for articles consumed at home; she also
163
Secretary Morgenthau - 7 -
needs raw materials for her exports - primarily raw cotton, raw
wool, and wood pulp for her rayon industry. Without the maintenance
of her exports she would be unable to carry on the war.
Japan imported 1.7 billion yen of raw materials in 1936 and
1.1 billion in the first five months of 1937. Much of these enormous
imports in 1937 were for the purpose of accumulating stocks. She
has six to eight months' stock of oil, at least a two months'
stock of cotton, and has been accumulating stocks of essential
metals. Her stocks of antimony and tungsten are unknown, but as she
must have been anticipating war with China, she must have sufficient
stocks of these metals on hand. It is true she is facing a world
market in which prices of many, though not all, raw materials are
rising. But on the basis of a 2 to 3 billion total import for the
next twelve months, together with her present stock of material,
Japan will have no difficulty in procuring all the raw materials
she needs for the prosecution of the war in China.
4.
Can China obtain materials necessary to conduct the war?
Herein lies China's chief weakness in her fight with Japan.
China is largely dependent upon foreign sources for the basic raw
materials, particularly iron and steel, but will not be able to
get much through the blockade. The existing stocks of raw materials
in China is probably not enough to keep its army supplied with even
a fair degree of efficiency for more than a few months. The
technical equipment of the Chinese armies is low at the present time,
and may be expected to deteriorate rapidly as the war progresses.
If the war extends over a period longer than a year, and if
China is able to retain the major part of its territory, she may be
able to develop some hitherto unexploited natural resources in the
interior and in the West. Such a development is problematic; at
best, it would be relatively primitive in its methods and slow in
showing results. Industrialization is a slow process, and the development from primitive conditions cannot be a major factor within a
year.
Unless China is able to obtain equipment and war material from
outside sources she will be fighting against greatly increasing
odds after a few months. Almost all of her enormous resources of
man power will be virtually ineffective against Japan before next
spring unless she imports substantial amounts of war material. Since
164
Secretary Morgenthau - 8 -
she will be unable to obtain such imports by sea, the crucial question
for China if the fighting does not end before spring is the amount
of material that can be transported overland from the Northwest and
from the South. On this the information of the War and Navy Departments should be of great significance.
5. Can Japan provide an adequate supply of foodstuffs for her
population and for the army?
Yes. The Japanese Empire is virtually self-sufficient in food.
Manchoukuo exports enough food to Japan to more than make up for
the small food import surplus. It exports large amounts of beans
and bean oil to Japan proper and millet to Korea which sends most
of its rice product to the mainland. The small excess of food
imports over food exports is thus not a serious matter from Japan's
point of view.
The main foods of the Japanese are rice, barley, soya beans
and marine products. Rice is by far the most important ingredient
in the Japanese diet - accounts for 60 percent of the total food
consumption and the Government starts the war with a stock of rice
of over 2,000,000 tons. All the cereals needed by Japan are produced in the Japanese Empire except for wheat, one-third of which is
imported.
Japan is the largest producer of fish in the world. In fact, it
exports one-fourth of its total catch. Although Japan produces only
100,000 tons of meat a year, it doesn't consume much meat in peace
time. The army ration of meat has already been increased. This
increase can easily be obtained by substitution of more fish for
meat in the civilian diet, or, if necessary, by slaughter of a
portion of her stock of cattle.
However, there are several factors operating to create difficulties for the Japanese in the maintenance of food supplies which
will operate within a year to reduce the already very low food diet
of the Japanese people to a serious minimum.
(a) Soldiers have to eat much more than the scanty
average food allowance.
(b) With the conscription of so many thousand peasants,
agricultural production and the yield of the fishing industries
would probably fall. Germany which had a much more advanced
165
Secretary Morgenthau - 9 -
agricultural technique found that during the war years,
its wheat harvests and potato yield decreased considerably.
(c) Much of Japan's fishing is conducted in Russian
waters where there it has been a fruitful source of dissension in the past. In view of the Sino-Soviet Pact, the
Soviets are not likely to become more lenient in the
terms they grant Japanese fishing men.
(d) If Manchoukuo became at all involved in the war,
the Manchoukuo supply to Japan would be in danger.
Nevertheless, there is little ground for expecting that there
would be any acute food problem in a war in which an army of from
one-half a million to a million men were involved, But the greater
the number of troops Japan enrolls, the greater Japanese food consumption and the smaller Japanese food production will be. If the
war becomes protracted beyond a year, the food problem will become
much more serious as depletion of stocks, diminution of productivity
and rising prices would almost certainly lead to a significant lowering
of the standard of living in the rear and in such circumstances morale
would be more difficult to maintain.
6.
Can China obtain enough food to continue military resistance to
the Japanese invasion?
Yes, though there are bound to be severe food shortages among
the non-combatants in and near the areas of fighting. China normally
imports only a small proportion of its food supply -- 100 million
yuan in 1936. China has large food-growing areas away from the coast,
and the sources of supply will not be interfered with until next year
at least by the Japanese military advance enough to seriously weaken
China's ability to fight this winter. Almost the whole of the interior
of China is locally self-sufficient in the matter of food. The Chinese
population can, if necessary, subsist on smaller quantities of food,
as they have frequently in the past. Widespread famine over large
areas is so common in China that a reduction in the food supply is
not so serious as it would be in Japan.
7.
Will the conduct of the war impose 80 great an economic burden
as to create serious internal instability in Japan?
The burden of the war on the Japanese people will be great.
The total national income is less than 15 billion yen.
166
Secretary Morgenthau - 10 -
Under the stimulus of war demands that income will probably increase
somewhat (after allowance has been made for price increases). Labor
hours can be lengthened; the reserves of labor -- older and younger
persons -- can be drawn upon, and obsolete equipment can be employed.
Yet for Japan the increased output from these sources will not be
great. There already was a scarcity of labor this summer, and a
half million men will soon be called to the colors. Therefore, the
5 to 8 billion yen added expenditure for the war will cut the real
national income consumed by the people by anywhere from a fifth to
a third, no matter how such expenditure is financed at home. So
large a cut from a standard of living already extremely low constitutes a terrific burden, but it has been amply demonstrated that a
people during time of stress will accept such burdens for a long period
without creating serious disturbances. As long as the army in the
field is not suffering heavy defeats and has some spectacular victories
to show, serious domestic disturbances are unlikely for some time to
come.
8.
Will the morale of the Chinese people be maintained under the
increasing economic burden imposed by the war?
Yes. Accustomed as the Chinese people are to an extremely low
standard of living they will tolerate even further reductions in a
war against Japan. Numerous press reports from China comment on the
growing strength of anti-Japanese feeling among the coolies, who in
the past have been usually indifferent to China's military activities.
The Central Government for the first time is embarking on a
popular war of national liberation in which she has the active backing
of the vast majority of the population. The process of political and
economic unification will be hastened in the conduct of such a war,
and with a few battles such as the present battle for Shanghai to
show to her credit, the prestige of the Central Government will increase more and more. If Chinese opposition disintegrates it will
not be because of the effect of the burden of the war on the standard
of living of the masses. It will be either as a consequence of continued Japanese victories, or terrific destruction of Chinese life
and property, or treachery on the part of pro-Japanese Chinese
leaders.
Secretary Morgenthau - 11 -
9. How will Japan's foreign trade be affected by war?
The value of her total trade is more likely to increase than
decrease. Although she will attempt to restrict her imports to those
raw materials which are essential for the conduct of the war and for
the maintenance of her export materials the net effect on the total
will be small. Her imports of raw cotton, wool, iron, steel, oil
and rubber alone accounted for two-thirds of her total imports. in 1936. To
these items must be added numerous others which would bring the total
of absolutely necessary imports not far from 80 percent of the total.
Furthermore, Japan will wish to purchase additional war materials for
the conduct of the war. It is reasonable to assume, therefore, that
Japan's net purchases during the next twelve months will not be below
22 billion yen.
So far as her exports are concerned, little change from present
amounts need be expected. China's purchases, which will, of course,
cease, only amount to about 6 percent of Japan's total exports. Japan
will make every effort to maintain her export market, even by subsidizing her exports.
It is very doubtful whether Japan will attempt to depreciate
the yen in order to increase her exports. (1) A depreciated yen
will proportionately increase the price of her imported raw materials
and war materials; (2) with a system of strict exchange controls she
can promote her exports more efficiently through subsidies than
through the cruder method of depreciation; (3) it would likely
engender retaliation in the form of increased barriers to her goods.
10. How will China's foreign trade be affected?
The normal foreign trade of China will practically disappear.
The occupation of the Northern cities by the Japanese and the
destruction of the industrial commercial center of Shanghai will in
itself seriously curtail China's ability to produce export commodities.
The naval blockade of all her ports and the Japanese army control over
a large portion of the Northern border will complete the process.
China's exports will be reduced to those few goods which can be sent
over land to the South and the West. At most this will amount to
about 150 million yuan a year.
Her normal imports likewise will almost disappear. In addition
to the physical handicaps of obtaining goods through the Japanese
168
Secretary Morgenthau - 12 -
blockade and through the extensive land routes which will remain open
there will be the restriction imposed upon the importation of goods
not needed for the conduct of the war. China will have little money
to spend on non-essential foreign imports, while Japan will prevent
the importation of goods which are essential. How much of an import
trade can be developed through the overland routes which will remain
open from Soviet Russia and from French Indo-China and Tibet is
uncertain, but their total during the next year is not likely to be
large. This question has far greater military significance than
economic.
II. HOW WILL THE ECONOMIC INTERESTS OF THE UNITED STATES BE
FECTED DURING THE STRUGGLE?
1. How would our trade with Japan be affected?
If Neutrality legislation is not applied, or widespread boycott
not inaugurated, our trade with Japan will not suffer. In fact, our
exports to Japan will probably increase as a consequence of the war.
During the first six months of 1937 our exports to Japan were
$165 million, or an increase of almost 80 percent. The kind of goods
which Japan buys from the United States - raw cotton, oil, iron,
copper, and machinery - are those which Japan would use in greater
abundance during wartime.
Our imports from Japan will presumably remain unaffected. Japan's
need to obtain foreign exchange will insure no interference with the
production and sale of export commodities. Our imports, therefore,
will depend upon the domestic situation within the United States. Our
imports from Japan, therefore, may increase during the next year along
with our increasing national income.
2. What will happen to our trade with China?
With respect to our trade with China, the situation will differ
radically. Our sales to China last year were about $47 million. Our
imports were about $75 million. With a Japanese blockade in effect
in all the ports, our exports to China will drop sharply. China will
have neither the purchasing power nor the desire to import anything
but food and materials absolutely necessary for the conduct of the
war, while Japan will unquestionably prevent war materials from entering through the Eastern ports. Possibly some of the exports can
elude the embargo by being shipped through French Indo-China, but
the total of such amounts must inevitably be small because of the
transportation difficulties. Our imports from China will likewise
be greatly reduced, though possibly not to the same extent because
the limiting factor would be transportation difficulties and not a
lack of demand for Chinese products.
163
Secretary Morgenthau - 13 -
3. How much will American investors lose?
The loss to American investors from a continuation of the struggle
will not be negligible. Americans have about $200 million invested
in China -- most of it represents investment in plants and equipment.
If the war spreads much more the bulk of that will disappear.
Our investments in Japan are double those in China, but in the
case of these investments the bulk consists of obligations of the
Japanese Government and corporations. The value of these is for the
time threatened. Should the fighting be prolonged into next year
without substantial victories by the Japanese, these securities will
unquestionably fall heavily in value.
In addition to the loss to American industry incurred by curtail-
ment of exports to China, and to the American investor by the
reduction in the value of his foreign holdings in the Far East, there
must be added the potential loss to the United States Treasury through
the possible effect on the price of silver as a consequence of China's
need for foreign exchange. Should the war continue for another year
we will be confronted with two unpleasant alternatives. China will
be forced to liquidate some of her silver holdings and we, then, will
be faced with the choice of purchasing such amounts of silver as
are necessary to maintain the price, or of permitting the price of
silver to decline precipitously.
British investors have much more to lose from the continuation
of the war than American. British investments in China total about
12 billion dollars, while her holdings in Japan are probably much
greater than ours. In addition China's trade is at least as
important to the British Empire as it is to us.
III. WHAT WILL BE THE EFFECT OF THE APPLICATION OF THE
NEUTRALITY ACT?
The conclusion reached above that our trade with Japan will not
be affected is based upon the assumption that there occurs no boycott
of Japanese goods and that the President does not declare a state of
war between China and Japan. Neither of these possibilities are
remote. There is already on foot a demand that Japanese goods be
boycotted and it is entirely possible that the sympathy which
Americans feel for China's struggle to maintain her national
independence is such that a reduction of the purchase of Japanese
commodities to the extent of 10 to 20 percent of our imports may
result. In the event of such a development it is to be expected
170
Secretary Morgenthau - 14 -
that Japan will retaliate by shifting some portion of her purchases
from the United States to countries that are less unfriendly. A
more serious development and one that is even more likely is the
proclamation of a state of war by the President between China and
Japan.
The Neutrality Act may impose three major restrictions on com-
mercial relations with belligerent countries:
(1) It prohibits the exportation of certain goods;
(2) It may introduce the "cash and carry" plan of
shipments;
(3) It prohibits the extension of loans or the financing
of other than those transactions regarded as normal
commercial transactions.
1. The importance of the first restriction depends upon the
list of commodities included the embargo of the export of arms,
ammunition or "implements of war" to belligerent countries. A large
portion of our exports to Japan consist of commodities which do not
necessarily fall in those categories, e.g., raw cotton accounts for
almost half of the total; oil, iron, copper, and machinery constitute another large portion of our exports to Japan. How much of
these items will be included depends upon the extent to which the
President regards them as "implements of war". It is therefore
impossible to say how much the invocation of the Neutrality Act
will curtail our exports to Japan. The possible range of prohibition is very great, inasmuch as the definition of the term "implements of war" may be either broadly or narrowly interpreted by the
President.
2. The "cash and carry" provision of the Neutrality Act will
be ineffective in creating transportation difficulties. China has
no navy with which to interfere with the shipment of goods to Japan
and China's air force will be able to accomplish little in that direction. Japan will have little difficulty importing whatever goods she
cares to buy from the United States.
3. The third prohibition is likewise unimportant. The financing
of normal and ordinary commercial transactions through the extension
of credit by Americans can be excepted by the President. Neither
Japan nor China has in recent times borrowed substantial sums in the
United States. Therefore, the prohibition will bring about no
171
Secretary Morgenthau - 15 -
reduction in the amount of goods sold to either country or any sig-
nificant loss of interest.
Even had Japan the right to borrow here, it is very doubtful
whether her credit during the period of war would be sufficient for
purposes other than usual commercial transactions. It is very doubtful whether American investors would be willing to lend any large
sums to the Japanese Government or to Japanese concerns during the
period of hostility. It therefore may be stated that whether we
lose much or little by application of neutrality legislation depends
entirely upon the President's interpretation of the phrase "implements
of war".
IV. WHAT ROLE WILL THE INTERESTED POWERS PLAY IN THE WAR?
1. How far will Soviet Russia go in assisting China?
Soviet Russia is much more involved in the Far East than it
is in Spain. The assistance which it has given to the Spanish Govern-
ment in her conflict with the rebel forces will unquestionably be
very small compared to the assistance she is ready to give to help
China defeat Japan. China is in effect fighting Russia's war and
Russia fully realizes that every additional blow administered to
Japan will make her own position that much stronger. Not only is
Russia desirous of gaining China's friendship but she is obviously
eager to inflict as much damage upon Japan as possible. Soviet
Russia may, therefore, be expected to give all the aid that she
possibly can short of being brought into the war. The limitation
upon Soviet Russia's support of China will be the physical one of
transportation of material. How much material Russia can transport
to China through the lines of communication that will exist during
the next six months we do not know. Doubtless our Army and Navy
Departments are informed on this point.
2. Will Japan tolerate such assistance as Soviet Russia will
give to China?
She will, of course, do everything she can to prevent shipment of material from Soviet Russia to China short of carrying the
campaign into Russian territory. It would be absurd for her to
declare war on Soviet Russia because of assistance to China unless
the Japanese army leaders regarded their position as so desperate
they would have nothing to lose by attempting to bring about a world
war in which they might gain effective allies in Europe.
172
Secretary Morgenthau - 16 -
3. What assistance can Japan expect from Germany?
(a) Economic. As was indicated above, Germany will be only
too willing to sell to Japan her surplus and obsolescent war materials,
and to provide much of these materials on credit in return for gold
or foreign exchange on part of such sales. Such assistance may be
considerable, but will not in any case be decisive.
(b) Political. In view of the fact that Russian assistance
to China may have a crucial effect on the war, there is nothing Japan
would like better than to see Germany increasing her pressure in
Eastern Europe. The more Russia's attention is diverted from the
Far East, the easier Japan's task in China will become.
No matter what the secret terms of the German-Japanese Agree-
ment of 1936 were, it is unlikely that Germany will go to war with
Russia at this juncture. But it is probable that the tension in
Central Europe will increase in the near future, though not enough
to divert all Russian assistance from China.
German political assistance to Japan will thus take the
form of still further complicating the European picture, thereby
leaving Russia and England less free to act in the Far East.
4. Where does England really stand?
England's Far Eastern policy has not yet crystallized sufficiently for us to answer this question with the information available. Doubtless the State Department is in a better position to
judge the trend of English foreign policy. Some indications are the
comparatively mild note of protest sent to Japan after the Japanese
shooting of its Ambassador to China, and the passive acceptance of
the destruction of the property of its nationals in Shanghai.
It appears that at most England's policy will be negative;
it will not press China's appeal to the League of Nations, if any-
thing the reverse; it will not make loans to China. It is in a
position where it must concentrate all its attention on Europe and
the Empire.
If England does not adopt a purely negative policy, the
most likely alternative is that it will come to a secret agreement
with Japan, in which her interests in China and the Far East will be
173
Secretary Morgenthau - 17 -
nominally protected. In return for this protection she may allow
Japan to get credits in England and also sabotage Chinese appeals for
diplomatic action at Geneva and elsewhere.
The adoption of a negative policy by England would, of
course, help Japan much more than China.
5. Is the war likely to spread?
The possibility of the spread of the war to include a foreign
power exists, of course, but the probabilities do not yet appear great.
England and the United States will go to great lengths to
stay out, even to the extent of overlooking numerous "incidents"
which could easily provide the apparent justification for the use of
military force. It is Soviet Russia and Germany who are the likely
entrants.
Soviet Russia has everything to gain by postponing war with
Japan so long as China is putting up an effective fight. However,
should the Chinese defense disintegrate rapidly, whether because of
the lack of material, or other causes, Soviet Russia will be faced
with the difficult choice of helping China with her military forces
or being confronted with a victorious and more aggressive and more
effective Japan. So long, however, as China is making an effective
resistance, Soviet Russia will much prefer to aid her in any way
she can, short of going to war herself with Japan. An attack on
Japanese forces by Soviet Russia will in the present world situation
most likely bring Germany in the picture. Before Soviet Russia
would seriously contemplate running that risk, Chinese resistance
would have to be on the verge of collapse.
The situation with the other likely entrant - Germany - is
likewise dependent upon the course of events in China. Germany is
not directly involved in the hostilities with China. She has much
to gain so long as Japan is waging a successful campaign, but there
is no danger that she will assist Japan in China with military forces.
There is danger, however, that with continued Japanese successes
the possibility for a successful venture of her own in Europe will
become increasingly attractive. Germany is quite prepared to fish in
troubled waters, and should Japan be achieving success in her
Chinese venture the probabilities of a German move against
174
Secretary Morgenthau - 18 -
Czechoslovakia and/or Austria become great. If Japan achieves a
decisive and rapid victory the moment may be propitious, in Germany's
opinion, for a joint attack with Japan against Soviet Russia.
It would appear then that the peace of the world is tied up
with China's ability to win or to prolong its resistance to Japanese
aggression. It is our opinion that a Japanese victory increases
greatly the chances of a general world war.
Fortunately for the peace of the world, events of the past week
in Shanghai give promise of a more effective Chinese resistance than
was anticipated in most quarters.
TREASURY DEPARTMENT
175
INTER OFFICE COMMUNICATION
DATE September 4, 1937
TO
FROM
Secretary Morgenthau
Mr. Haas
VA
The Sino-Japanese Situation
Summary
The Chinese-Japanese war is on.
I. What is likely to happen in China before next summer?
The answer to this question depends on economic and political
as well as on military factors. Some of these economic and political factors are considered below.
1. Can Japan finance the war? Yes.
(a)
Internal financing.
The cost of the war may be anything from 5 to 8 billion yen, whereas Japan's national income is not
more than 15 billion yen. Even so, the burden will
not be intolerable for the first year of the war and
the Government can, if necessary, resort to the
printing press and to forced loans, as well as to
increased taxes.
(b) External financing.
Japanwill have to import between 2 and 3 billion yen
for the next year but she will be able to do so
because she will have a gold and foreign exchange
reserve of a billion and a half yen and she will be
able to export enough to more than cover the remainder.
2. Can China finance a major war?
(a) China will have adequate supplies of foreign exchange
to purchase such imports as she will be able to obtain
through the Japanese blockade.
(b) China will have to resort to the printing press and
the requisitioning of supplies at fixed prices; but
she will not stop the war for lack of internal fundsat least during the next year.
Secretary Morgenthau - 2
116
3. Can Japan obtain raw materials necessary to conduct an
effective major war?
Yes, she can so long as she is fighting only China. Japan
has been accumulating stocks of raw materials and will have
no difficulty in procuring all the raw materials she needs
for the prosecution of the war with China during the next year.
4. Can China obtain the materials necessary to conduct a war?
Herein lies China's chief weakness as she is largely dependent
on foreign sources for basic raw materials and her access to
them is cut off by the blockade. Her only hope is to be able
to get sufficient war material over difficult land routes.
5.
Can Japan provide an adequate supply of food stuffs for her
population and the Army?
Yes. The Japanese Empire is almost self-sufficient in food
and can for the next year at least purchase abroad such
additional amounts as she may need to keep the population
from dire want.
6. Can China obtain enough food to continue fighting?
Yes. The interior of China is locally self-sufficient and
if the worst comes to the worst the Chinese people will live
on even smaller quantities of food than they have been. Many
thousands may die of starvation as they frequently have in
the past but the war will not be checked by virtue of any lack
of food.
7.
will the conduct of the war impose so great an economic burden
as to create serious instability in Japan?
No. The drop in the Japanese standard of living will be considerable but as long as there are no serious military setbacks the decline in the standard of living will be accepted
by the majority of the population.
8.
will the Chinese people continue to fight under the increasing
economic burden imposed by the war?
Yes. The Central Government is fighting a popular war and most
of the Chinese are accustomed to frequent long periods of
critical distress -- famines, floods, civil wars.
177
Secretary Morgenthau - 3
9. How will Japan's foreign trade be affected by war?
Japan's net purchases during the next twelve months will not
be below 2Ã million yen in spite of the elimination of all
importe not essential to the waging of the war or to the
maintenance of the export market. Japan is not likely to
depreciate the yen in order to increase her exports. She will
prefer stricter exchange control and export subsidies to
depreciation.
10. How will China's foreign trade be affected?
The normal foreign trade of China will almost disappear.
II. How will the economic interests of the United States be affected
during the struggle?
1. How would our trade with Japan be affected?
Without neutrality legislation or boycott our trade with Japan
will not suffer. Japan will buy just as much, if not more,
from us.
2. What will happen to our trade with China?
It will drop precipitously.
3. How much will American investors lose?
American investors have about $600 million invested in Japan
and China and the longer the war lasts the smaller the value
of these investments will become.
III. What will be the effect of the application of the Neutrality Act?
Boycott. Widespread boycott imposed by public opinion may cut
our purchases of Japanese imports.
The extent to which the application of the Neutrality Act would
affect our trade with Japan would depend on the President's dis-
cretionary interpretation of what goods fall into the category
of "implements of war".
178
Secretary Morgenthau - 4
IV. What role will interested powers play in the war?
1. How far will Soviet Russia go in assisting China?
As far as she can short of being directly involved in the war.
2. Will Japan tolerate such assistance as Soviet Russia will give
to China?
Yes. Unless her position becomes desperate.
3. What assistance can Japan expect from Germany?
Some economic assistance and political assistance in the form
of diverting Russia's attention from the Far East to Central
Europe.
4. Where does England really stand?
Nobody knows. She is most likely to adopt a purely negative
policy which would help Japan much more than China.
5. Is the war likely to spread?
Not for the present. The two most likely entrants are Soviet
Russia and Germany and Soviet Russia prefers to help China
without going to war, whereas Germany is more likely to make
trouble in Central Europe than begin a direct attack on Soviet
Russia.
It would appear then that the peace of the world is tied up with
China's ability to win or to prolong its resistance to Japanese
aggression. It is our opinion that a Japanese victory increases
greatly the chances of a general world war.
178
London, September 4, 1937.
MEMORANDUM
Sir Frederick Phillips, K.C.M.G., C.B., is fiftythree years of age, having entered the British Treasury
twenty-nine years ago. His official position is termed
"Under Secretary of His Majesty's Treasury."
In commenting on the British representation on the
Economic Committee of the League, it was once said in
Geneva that the British Government had first sent Sir
Basil Blackett who had the face of an angel and the
manners of a tank, then substituted Sir Otto Niemeyer
who had the manners of a tank, and has now sent Sir
Frederick Phillips!
It is true that Phillips is as blunt and taciturn
as he is honest and intelligent. He can be luoid,
facile and even brilliant on paper but, despite oocasional attempts to overcome it, he is usually reserved,
inarticulate and often commonplace in conversation. His
colleagues in the British Treasury and in the other
British Government departments understand, even if at
times they do not particularly like, these character-
istics /
-2-
180
istics and respect him for his judgment and consistent
ability. In many ways Phillips is the "roast beef of
Old England" and possesses the tenacious virtues and
narrow defects of his type. He himself is quite class
conscious and thinks of himself not at all as Knight
Commander of St. Michael and St. George but rather as
the son of an obscure teacher in an equally obscure
secondary school. At the same time he is a decided
individualist in his thoughts and in the conduct of
his work; his approach to people is straightforward
and sincere and his approach to problems is straightforward and empirical.
There is good reason to believe that Mr. Neville
Chamberlain has the highest regard for Phillips'
judgment and there is no reason to believe that Sir
John Simon will not be equally appreciative of his
services. Because of his steadiness, his consistency
and reticence he is more highly regarded by his fellow
permanent officials than the more brilliant but erratio Economic Adviser to the British Government, sir
Frederick Leith-Ross who, incidentally, is not technically an official of the British Treasury but of the
Board of Trade. It is even said that the basis of
the cordial relationship between Phillips and Montagu
Norman lies in their mutual dislike and distrust of
Leith-Ross, but it is hard to determine whether Phillips
really /
181
-3-
really dislikes Leith-Ross or merely regards him with
contemptuous amusement. In any case, it is evident
that although they work together a good deal, they
do so of necessity. The above has a bearing on the
fact that this trip to the United States is the type
of journey which in the past Leith-Ross has more
frequently than not undertaken as the representative
of the British Government. It is therefore an opportunity for Phillips to obtain open recognition of the
responsibilities which are his in fact.
As regards the United States, Phillips knows but
little that he has not read in books. As a result of
perhaps a painful intellectual process, he has in
recent times convinced himself that it is in the best
interests of his own country that there should be
close collaboration between the United Kingdom and the
United States, and he will do what he can to promote
it in his own field.
15W53
W. W. Butterworth.
182
COPY
September 5, 1937
My dear Mr. President:
It was extremely difficult this time to make
up my mind as to what was the best kind of securities
to offer the holders of the maturing notes, as the
advice that I received was very muddled. However,
having made the decision, I now feel confident that
the financing will be a success.
The money market in New York is extremely
tight and will get more so as the crops begin to move.
I have reason to believe that this is not displeasing
to the New York bankers. Mr. Ransom, Acting Chairman
of the Federal Reserve Board, approached me today in
behalf of Mr. Eccles and himself, and they both feel
that we must do something to ease the money market at
once. I am in complete agreement with them as to the
need of some action on the part of the Federal Government. I am hopeful that by the end of the week we
will be in agreement as to what the best program should
be. I would like to have an opportunity to lay it
before you on Friday, the 10th, as I think we should
announce it on Monday, the 13th.
When I see you I also would like to have a
general talk with you and have you bring me up-to-date
as to what has happened during my absence. Possibly
you will find time to take me for a drive, and we can
go and look at our Washington Hollow property.
With kind regards, I remain, as ever,
Very sincerely yours,
(Signed) Henry Morgenthau, Jr.
Honorable Franklin D. Roosevelt,
The President,
c/o Mr. Rudolph Forster,
The White House,
Washington, D. C.
HMJr:bn
183
COPY
September 5, 1937
CONFIDENTIAL
Dear Mr. President:
On September 15, 1937, about $817,000,000 of
Treasury notes will mature, and to provide for that
maturity, I propose, subject to your approval, under
authority of the Second Liberty Bond Act, approved
September 24, 1917, as amended, to offer for subscription two series of Treasury notes, both to be
dated September 15, 1937. The offering will consist
of fifteen-month 1-1/4 percent notes and five-year 2
percent notes. These issues will be open only for the
exchange of the maturing notes and cash subscriptions
will not be invited.
The authorizing act provides that notes may
be issued only with the approval of the President.
Accordingly, I trust that the proposed issues will
meet with your approval. It is my intention to make
public announcement of the offering on Tuesday,
September 7.
Faithfully yours,
(Signed) Henry Morgenthau, Jr.
Secretary of the Treasury
The President,
The White House.
APPROVED:
ELK:M
Fin
184
September 5, 1937
My dear Mr. President:
It was extremely difficult this time to make
up ay mind as to what was the best kind of securities
to offer the holders of the maturing notes, as the
advice that I received was very muddled. However,
having made the decision, I now feel confident that the
financing will be & success.
The money market in New York is extremely tight
and will get more so as the crops begin to move. I have
reason to believe that this is not displeasing to the
New York bankers. Mr. Ransom, Acting Chairman of the
Federal Reserve Board, approached me today in behalf of
Mr. Eccles and himself, and they both feel that we must
do something to ease the money market at once. I am in
complete agreement with them as to the need of some action
on the part of the Federal Government. I am hopeful that
by the end of the week we will be in agreement as to what
the best program should be. I would like to have an
opportunity to lay it before you on Friday, the 10th,
as I think we should announce it on Monday, the 13th.
When I see you I also would like to have a general
talk with you and have you bring me up-to-date as to what
has happened during my absence. Possibly you will find
time to take me for a drive, and we can go and look at
our Washington Hollow property.
With kind regards, I remain, as ever,
Very sincerely yours,
Honorable Franklin D. Roosevelt, (e) Henry Morgenthau,
The President,
c/o Mr. Rudolph Forster,
The White House,
Washington, D. C.
HMJr:bn
NAVAL MESSAGE
185
(NAVY DEPARTMENT)
To
From PRESIDENT OF us
Released
SECRETARY OF THE TREASURY
by X - R; Y - R.
(Signature)
5 SEPTEMBER
Date
I
To
NITE to
ROUTINE to
VOLUNTEER
PRIORITY to
9995 FEEL SURE FINANCING WILL GO THROUGH SATISFACTORIEY DOMESTIC
SITUATION EXCELLENT SORRY NO STATEMENT POSSIBLE 1845
TOR IN COBE ROOM 1999 5 SEPTEMBER 1937
Lifes
of
CONFIDENTIAL
NAVAL MESSAGE
186
(NAVY DEPARTMENT)
From PRESIDENT OF US
Released by
To
X - R; Y - R.
SECRETARY OF THE TREASURY
5 SEPTEMBER 1937
Date
To
Telephoned to
NITE to
ROUTINE to
XXXXX
PRIORITY to
The
Secretary
12:20
an
al 9/6/37
copy of Reply attached
0005 ON ACCOUNT OF STORM SOUBT IF POUCH WILL REACH ME BEFORE
MONDAY AFTERNOON I WILL SEND RADIO OK AND LATER SIGN APPROVAL
IF YOU WILL SEND CODE MESSAGE OF TERMS BOND OFFERING 2135
TOR IN CODE ROOM 2310 5 SEPTEMBER
WHITE 17
CONFIDEN
0549-1
187
September 5, 1937
TO THE PRESIDENT
S S POTOMAC
VIA NAVAL COMMUNICATIONS
THE NEWSPAPERS TUESDAY MORNING WILL CARRY ANNOUNCEMENT
OF TREASURY FINANCING PERIOD THE FINANCIAL COMMUNITY
HAS ONE OF THE WORST ATTACKS OF THE JITTERS THAT I HAVE
SEEN IN A LONG TIME PERIOD IF YOU HAVE MADE UP YOUR MIND
THAT YOU ARE NOT GOING TO CALL AN EXTRA SESSION OF
CONGRESS AN ANNOUNCEMENT FROM YOU TO THIS EFFECT IN
MONDAY'S MORNING NEWSPAPERS WOULD COME PSYCHOLOGICALLY
AT THE RIGHT TIME PERIOD WOULD APPRECIATE ANSWER KINDEST
REGARDS
HENRY MORGENTHAU JR
188
September 5, 1937.
11:25 a.m.
H.M.Jr:
Hello
Viner:
Hello Henry.
H.M.Jr:
How are you?
V:
How are you?
H.M.Jr:
Oh I'm simply fine.
That 's grand.
V:
H.M. Jr:
I - I'm a new man.
V:
That's grand. You need to be.
H.M.Jr:
Well I am.
V:
That's fine.
H.M.Jr:
Where are you?
V:
I'm at Westchester County.
H.M.Jr:
Are you on a party line.
No, a private wire.
V:
H.M.Jr:
V:
Ah-ha. I - I'd like very much to see you Tuesday.
I'll be there at 9 o'clock. I'm coming in - I'll
be in - ah - in fact Monday evening.
H.M.Jr:
Do you want us to have a room for you?
V:
At the Hay-Adams Monday night.
H.M.Jr:
(Aside to someone: "Hay-Adams - a room for Dr. Viner
Monday night)
H.M.Jr:
Wayne Taylor says would you like to stay with him.
-2-
183
V:
Ah
well I'm
- ah - you mean - ah - yes that-would
be arriving
nice.
H.M.Jr:
He says would you like to go out there?
Yes, I surely would
V:
H.M.Jr:
H.M.Jr:
(Aside to Taylor: He accepts.)
He says his rates are cheaper.
V:
His rates are cheaper?
H.M.Jr:
Yes.
V:
Well
that's fine. Ask - ask him if I'll be able
to match for dinner there?
H.M.Jr:
H.M.Jr:
(Aside
to Taylor: "He said he'll match you for
the dinner".)
All right - I'm - I'm - we'll have an interesting
week. I've got some stuff that we want to do this
week.
V:
H.M.Jr:
I'm sure.
I'm
afraid to say about it over the phone but you
can
V:
All right, well it's a private wire.
H.M.Jr:
Well you can be thinking about it.
V:
All right.
H.M.Jr:
The - ah - Fed's fortunately approached me - they're
worried about the tightening money market, see?
V:
Yes.
H.M.Jr:
And what I'd like to do is - ah - discontinue, for
the time being, sterilization of gold.
Ah-ha - all right, I'll be thinking about that.
V:
H.M.Jr:
See?
V:
Yes.
-3-
H.M.Jr:
And we want to stop selling nine months and six
months
V:
H.M.Jr:
V:
Yes.
.....and sell 90 days and one year certificates
Ah-ha.
and tax bills.
H.M.Jr:
V:
Ah-ha.
H.M.Jr:
See?
V:
All right, I'll be thinking about that.
H.M.Jr:
That's - that's what we've got in mind.
All right, well you tell Wayne Taylor that I - I
arrive about half past eight and I'll - I'll take
a taxi right out.
V:
H.M.Jr:
V:
H.M.Jr:
You'11 be there about 9 o'clock.
Yes. Now what's his address again?
H.M.Jr:
(Aside to Taylor: "What's your address?")
5101 Tilden Street.
V:
5101 Tilden Street.
H.M.Jr:
It's beyond the American University.
V:
H.M.Jr:
V:
Yes. All right, I know.
All right.
All right, I'll be there Monday evening and be at at the Treasury Tuesday morning.
H.M.Jr:
Swell.
V:
All right.
H.M.Jr:
Goodbye.
V:
Goodbye .
130
191
September 5, 1937.
11:27 a.m.
H.M.Jr:
Hello
Hello
H.M.Jr:
Hello - Winn Riefler.
R:
Yes. Did you have a good vacation?
H.M.Jr:
Oh fine.
R:
That's grand.
H.M.Jr:
I'm feeling very well.
R:
Good.
H.M.Jr:
Ah - look - do you suppose you could be down here
first thing Tuesday morning?
R:
Ah - what day?
H. M.Jr:
Tuesday.
R:
Tuesday.
H.M.Jr:
Yes.
R:
Well I don't think so - I can get there Wednesday
morning. I'm packing the books and the car tomorrow
morning and starting - chauffeuring them down to
Princeton.
H.M.Jr:
I see.
R:
Would Wednesday do?
H.M.Jr:
Yes, but - ah - where - where are you now?
R:
I'm up in Cape Cod.
I see.
H.M.Jr:
R:
It's a two day trip.
-2-
H.M.Jr:
Oh yes. Well
R:
There's nobody else that can take them.
H.M.Jr:
Pardon me?
R:
There's nobody else that can take them.
H.M.Jr:
Why, you mean nobody can drive them?
R:
Yes.
H.M.Jr:
R:
H.M.Jr:
R:
Ah-ha. Well - ah - Wednesday will be all right.
All right.
If you could get here fairly early.
Yes, I'll get there - just as soon as I get to
Princeton I'11 come on.
H.M.Jr:
Listen, are you on a private wire?
R:
Yes.
H.M.Jr:
Let
tell you confidentially what I've got in
mindme
- hello
R:
Yes.
H.M.Jr:
192
Ah - the money market situation is very bad; it's
(Federal Reserve) worried about it - I mean it looks
as though they'd run down December to only two or
three hundred million excess reserves, see? - for
the country - hello
getting tighter all the time. Ah - the Fed's
R:
H.M.Jr:
Yes.
Now what I want to take up and decide this week is -
1. Shall we, for the time being, discontinue the
sterilization of gold.
R:
Yes.
H.M.Jr:
Two
R:
Yes.
-3H.M.Jr:
Stop selling our nine months' and six
months' bills and sell 90 day bills
R:
Yes.
H.M.Jr:
R:
H.M.Jr:
ah - bills due on the tax date
Yes.
and for the country banks the one year
certificates.
R:
What month for the country banks?
H.M.Jr:
A one year certificate.
R:
Yes, one year.
H.M.Jr:
See? And - ah - the Fed has approached me and
they're very anxious to do something and - ah they want to - they're going to make up their
mind this week because I told them if we're going
to do it and have any effect we ought to - ah announce it on the 13th - Monday.
R:
H.M.Jr:
Yes.
Ah - the - the money market in New York is very
bad and it will get worse steadily and I think it's
up to the federal government to do something.
R:
H.M.Jr:
R:
H.M.Jr:
Yes.
So you might be turning that over in your mind.
Yes I will.
Ah - they're willing to go in and use the open
market operations but - ah - ah - ah - Ransom
agrees with me that he doesn't think it would
be effective
R:
H.M.Jr:
Yes.
and - ah - I think that for the time being if
we just stop sterilizing gold - ah - I think it would
have a very good psychological effect
R:
Yes.
193
4-
H.M.Jr:
with the big crop movements on just at
this time. What's your curbstone opinion?
Well I'll think it over; I think it may be the
thing to do; I'11 think it over.
R:
H.M.Jr:
Well you turn it over, will you?
I'll give you my best.
R:
H.M.Jr:
And - ah - when you come down figure on spending
a couple of days, will you?
R:
Yes.
H.M.Jr:
How do you feel?
R:
Oh I'm grand.
H.M.Jr:
Have a good summer ?
R:
Had a grand summer.
H.M.Jr:
All right, well
R:
We're in the midst of a Northeaster right now.
H.M.Jr:
Oh really?
R:
H.M.Jr:
Oh a terrific storm just beating around us here.
Well there's no disagreement as to the - ah - money
market situation, see?
R:
Yes.
H.M.Jr:
It's a question of "What can the federal government
-
do"?
R:
Yes.
H.M.Jr:
When I speak of the federal government I mean
Federal Reserve and ourselves. All right?
R:
All right.
194
-5-
H.M.Jr:
O.K.
R:
O.K.
H.M.Jr:
Goodbye.
R:
Goodbye.
195
Fin
RE SEPTEMBER 15 FINANCING
Present:
Mr. Taylor
September 5, 1937
10:30 a.m.
196
Mr. Bell
Mr. Lochhead
Mr. Haas
Mr. Gaston
Mr. Seltzer
Mr. Murphy
Mr. Harris
Mr. Ransom
Mr. Harrison
Mr. Burgess
H.M.Jr:
Well, for the benefit of those who were not here
yesterday afternoon, Mr. Levy came in, from Solomon
Brothers and Hutzler, and said that if New York had
its choice, it wouldn't want to buy anything.
Burgess:
Didn't he say his customers?
H.M.Jr:
Well, his customers.
Burgess:
He meant all over the country, not just New York.
H.M.Jr:
He recommended a 15-month 1-1/4 and a 7-year 2-1/2.
But for the first time that I have ever seen him
down here, he was wobbly in what he did believe.
I mean usually he comes in here and in about 15
or 20 words - "I'd do this" - but he was quite
wobbly in what he did think, and he stayed the
longest he had ever been here; he was here an hour,
and when he left I didn't really know what he thought..
Mr. Devine came in next and he was extremely emphatic
that we shouldn't do anything over five years; said
it would be just suicide to do anything - no advantage, nothing in it for the Treasury to do anything
over five years. He said that he spent a great deal
of time on it, stayed awake until three o'clock, trying to make up his own mind; he came to the decision
that under no circumstances do anything over five years.
For dinner we had the president and secretary of
Discount Corporation, and they were wildly enthusiastic that we do a 7-year 2-1/2. Go over big!
Unheard of that we shouldn't; that they talked to
the three or four most conservative banks in New
York and they'd all buy 2-1/2s; that if the, conservative banks didn't buy 2-1/2s it would be a great
mistake.
197
-2-
Now, I took the position from the start that I
didn't want to sell a 7-year, and as the evening
went on they dropped little remarks like, "Well,
whatever you do, when you sell a 7-year, you've got
to leave it open four days." "Why?" "Well, give
them plenty of time."
Well, little things like that which they dropped
as the evening went on made us feel that maybe
7-year 2-1/2 wasn't so hot. I think we shook them
a little bit. But certainly before they talked to
us they were very much for it.
I talked for half an hour to Mr. Rentschler. He
wanted a 15-month and a 7-year. I went over the
whole business situation with him, and he said,
looking ahead six months, that he felt pretty
confident on business. Little bit worried about the
railroad situation and the building. But to my
great surprise he said that his customers were in
excellent shape as far as inventories were concerned;
in fact, inventories were low. He said the inventory
position of his customers was in excellent shape.
I asked him about China. He said American business
men stood to lose no money as far as capital investments were concerned, but they would lose expected
profits.
I then told him what I had in mind on a five-year.
He said a seven. Ididn't want to do seven and told
him I didn't want a 7-year hitting me in the face
on the first of December, when I was considering the
next financing. He said, "Well, all I can do - tell
you is that if you decide to do a five-year two you
will have an excellent secondary market. All your
trust funds will go into it, and they should consider
it an attractive security. We'll put all our trust
funds into that security - for them." And when I
got through talking to him, he felt that the 15-month
and the five-year would be an excellent program.
So that brings it down to this morning. Maybe
somebody else's brains have been working during the
night; if so, I'd be glad to hear them.
198
-3-
Harrison:
I haven't changed on the questions of principle
involved at all. On the practicalities, there is
H.M.Jr:
Harrison:
H.M.Jr:
Seltzer:
a pretty even split. That being so, you've got a
choice, from the market point of view, whether you
do the seven or the five-year note. And in weighing
that decision, I should think you would try to figure
out what if any additional advantage or how much
additional advantage there is to the Treasury in
putting out a 7-year bond, even if it would go.
My own opinion still is that if I were in your
position I think that I would figure that there is
not enough additional advantage to you in putting
out the 7-year bond to run some risks involved and
to go counter to pretty definite advice of half your
market that that won't go as well as a note. I think
that if I had to decide right now I would decide on
the 15-month note and the five-year note. I'm not
sold on a five-year note particularly - the experts
know better whether it should be a four-year or fiveyear - but I should think a five-year note would go,
and if you got a good rate for it - fits in well I'd prefer the five-year to a four-year.
You prefer which, the five-year?
I would prefer the five-year to a four-year, provided the experts here feel that that rate fits
in properly with the rest of the rate structure;
as it appears to me, it does.
Anybody talk if you like. Seltzer?
Well, I would prefer a 7-year bond to a five-year
note. I think the real choice is between a fouryear note and - a 1-7/8 four-year note, and the
7-year bond, for this reason. If you shy away from
the bond, it is because you are doubtful, the market
doesn't look promising. Well, I don't think the
five-year note is so very ttractive either, and
if I am going to play for safety, I'd play a little
more for safety with a four-year note. Further, it
is easier to price. We haven't got any fixed point
there to price a five-year two percent. Our longest
note maturity is a four and a half year note. If we
price a four-year note at about a little better than
what the four and a half year note is selling, we're
sure to command an adequate premium.
199
-4-
Bell:
Bell:
What will your four-year 1-7/8 note sell for?
About a half point.
"hat would your two percent sell for?
Harris:
I estimate somewhere between 24 and 30 thirty-seconds.
Murphy:
You'd be much surer of your premium on the four,
wouldn't you, Mr. Harris?
H.M.Jr:
Sure of what?
Murphy:
I think you'd be much surer of your estimate of
the premium on the four than on the five.
I don't think you would.
No, I don't either.
Seltzer:
Burgess:
Harris:
Burgess:
I think the longer note, with the larger coupon,
attracts the type of customer who doesn't care
whether it's four or five particularly, and I
think that putting the 1-7/8% note in there at
the autumn of '41 would have a much more unfortunate
effect on the '41 notes and on the March '42. You
see, you've got a 1-3/4 selling at par. If you put
in something with a three months' or six months'
earlier maturity at that rate, that 1-7/8 is going
to wreck that March '42. Now, this other would be
six months beyond that, which justifies a considerable
difference in rate, so I think it would affect it much
less severely.
Then, your program of maturities fits a five-year
note very much better. You've got in '41 maturities
of two and a quarter billion, and as you count the
callable stuff, much of it carries 3-3/8, and you've
got nearly three billion dollars already in 41,
whereas '42 is very small both on the maturity and
the callable amount. It is your one open year.
I think the primary question is what is going to be
the effect on the market.
Seltzer:
@hat premium do you think a five-year two would
command?
200
-5Burgess:
Well, at the start, a half point. I think after
it had been out a while it would have some spring
in it, might do a little better.
Harrison:
Randy, what premium would the 7-year 2-1/2 carry?
Burgess:
Well, it figures about three-quarters, but of
course it wouldn't do that quite.
Bell:
21, the Discount boys figure.
God, they were good last night.
I've never seen them better.
H.M.Jr:
Bell:
H.M.Jr:
You know, Mills can't stand much and I always
give him one extra cocktail; then he gets good,
begins to tell stories out of school; always
tells us a few stories out of school.
Harrison:
H.M.Jr:
Mr. Secretary, on the basis of the information
you've got now, do those who favor the 7-year bond
think that the program of a 15-month note and a
five-year note would not go?
Oh, everybody thinks a 15-month and a five-year
would go.
Harrison:
Would go?
H.M.Jr:
Oh yes.
Harrison:
And what are their arguments against that program?
H.M.Jr:
Well, you do it, Burgess. You can do it better than
Burgess:
Well, first that the 7-year bond refunds some of the
short-dated debt into something longer than five
years - a very considerable school of thought in
the market that thinks that is very desirable,
is a little worried about the five, and the amount
of the short-dated debt. And that is based on a
lot of fiscal experience, of course. When a
government gets a closely piled up short-dated debt,
it's a dangerous thing.
1 can.
201
-6-
Secondly, I think, the feeling that over a term
of years the government is going to need to distribute this debt to others than banks, and a
7-year bond is more apt to get distribution over
a period of years than a note is. The note is
more apt to be held by the banks and keep them
loaded down. I think those are the two ma jor
reasons.
The third is that we have been piling notes into
that note market pretty fast; we have been putting
them in there steadily, and there are a lot of
notes outstanding - there's the four and a half
years, two of the four and a half years; whereas
that intermediate bond market is quite a separate
market from the long-term bond market and has had
nothing put into it for a year and a half, and is
probably in shape to receive something. The investment banker fellows tell us that that is a maturity
which investors are rather looking for in there.
I think those are the arguments for it. Now
Harrison:
Put it the other way around. Do those who favor
the 7-year bond feel that there is any less likelihood of the five-year note going well?
Burgess:
No.
Harrison:
I mean putting it - there is so much talk now
about a 7-year bond; would there be apt to be
disappointment to the point where it would reflect
on the five-year note?
I think we've got evidence along that line, but I
would say the bulk of the evidence was that a
five-year note would go a little better.
I think they feel that a 7-year bond is the more
courageous step for the Treasury to take.
That's another point. They
Burgess:
Bell:
Burgess:
Taylor:
I think there's a question, if it's 300 of one
and 350 of the other - in other words, a difference
of about 50 million - that your chances of selling
50 million more 2-1/2s are about that way; in other
words, - well, it isn't any more than that.
202
-7-
Harrison: I see.
Burgess:
I think two points ought to be made. Levy thought
that you'd sell more of the bond than you would of
the note. Most of the others have felt the other
way
Harrison:
Burgess:
That's what I wanted to get.
that there's a little better chance for the note.
Another point of view is that expressed by Parkinson,
president of the Equitable Life. He said to me
some time before he left the office - I guess you
fellows weren't there at that time - he said, "You
fellows always put out what the banks want; I hope
some day you'll put out what the investors want. I
know what you'll do. The bankers will get at you,
make you put out some short stuff. But the insurance companies would like something adapted to their
needs, and the bond would be of that character.
I think that always the pressure comes on us most
strongly to do what the banks want, rather than
what the investors want.
Harrison:
I agree.
H.M.Jr:
Well, there is no pressure on us to do a five-year.
Well, there is a pressure against the 7-year, though.
Is against it?
I say there is some pressure against the bond. I'm
not presenting those arguments as mine, although I
Burgess:
H.M.Jr:
Burgess:
think my own judgment is
Ransom:
Is that banker pressure against the bond?
Burgess:
Yes, I think so.
Well, isn't Parkinson really answered by the
opportunity to buy 44-44s even though they are
at a premium? If he is determined that the Treasury
ought to give him an opportunity to get a bond about
that year, about that maturity and that yield, is
Harrison:
the fact that that issue is selling at five points
203
-8-
premium, or whatever it is, such a deterrent
that he wouldn't buy those, but would buy the
seven 2-1/2s?
Burgess:
It isn't just that. If he went out on the market
- you can't
and tried to get that maturity
get large blocks of those readily on the market.
For an insurance company to go out and try to get
blocks
Harrison:
We could get them. I know where to get some blocks.
Burgess:
That is, of course, the obvious answer to make to
them - that there are some bonds available on the
market, to go and get them there. I am convinced
that the five-year note will go a little better
than the bond. I think it is a little safer
program. I think that either would go, but that
H.M.Jr:
Burgess:
the note is the safer and the more conservative
thing to do.
Just repeat that again.
I say I think the five-year note will go a little
better than the bond will. I think you can do
either, but if you want to make the program a little
safer, a little more conservative, in view of this
autumn's problems, I think the five-year note is the
one to pick.
Harrison:
Well now, making a prognosis for the future, what,
have we got ahead of us? Some uncertainty, which
both Williams and Thomas referred to yesterday, in
business; the likelihood that it will go along pretty
well through the spring - leveled out now, but will
probably pick up in the spring; but we all know
that there is apt to be some pressure upon the money
market during the next few months, if only on account
of the demand for currency. In addition to the
possible influence of that demand for currency on
the money market, you have great political uncertainties all over the world, and nobody can anticipate
them. I don't think anything very much dreadful is
going to happen myself. But if there isn't any
great difference between the 7-year bond and fiveyear note and the five-year note is much more conserva-
tive, I think you've got a pretty important factor in
204
-9-
making your decision that way rather than the
less conservative way.
H.M.Jr:
One thing I forgot to mention - the fact that
we were not going to ask for any more money, we
were going to stop selling the December bills;
I was surprised how enthusiastic they were about
that information, particularly the Discount boys.
Burgess:
(Laughs)
Tay: lor:
They had special reasons.
Harrison:
Were they more enthusiastic than the Federal
Reserve?
H.M.Jr:
Yes. They've got 78 or 79 million dollars worth
of those bills. But it seemed to - I mean they're
so hungry for a little good news - I mean it's
almost pitiful. God, these fellows in New York they're always either in the cellar or on the roof;
I never saw anything like it; and there is never a
particularly good reason why they're either in the
cellar or on the roof.
Harrison:
And there is always an express elevator between the
two.
H.M.Jr:
And the express elevator seems to go down faster
than it goes up.
Burgess:
That's right; that's historically accurate.
Harrison:
I never expected to hear myself in this room
arguing against a bond as against a note, or against
a bond in favor of a note, when there is a basis of
opinion that would support the bond. But with all
these other factors, apart from the money return to
those who would be getting the 7-year bond, it seems
to me that you've got enough influences against the
bond to justify your discounting a little of the
opinion that advises you to issue the bond.
H.M.Jr:
Of course, we save money on the note.
205
-10-
Harrison:
What's that?
H.M.Jr:
We save money on the note.
Harrison:
And you save money on it. I don't think that is
necessarily a deciding factor if you've got a
real market that will stick on your bond.
And another deciding factor is that the Federal
H.M.Jr:
Reserve Board here in Washington seems to be
unanimous in favor of a note.
Harrison:
Well, I'm in agreement with the Board, but for,
I think, probably different reasons.
Ransom:
That might simply mean that there were more than
one set of good reasons, George.
H.M.Jr:
Ransom:
But I want to - I don't see any particular reason
at this time to disagree with the Board. In fact,
I think there are a good many reasons why the
Treasury and the Board think alike at this time.
Certainly that's our opinion, Mr. Secretary.
H.M.Jr:
Pardon me?
Ransom:
I say that is certainly our opinion.
H.M.Jr:
Well, I can't - unless somebody has something new
to offer - Wayne?
Taylor:
No, I'm for it. I'm for the 1-1/4 and the five.
H.M.Jr:
Dan?
Bell:
That's the way I feel; I switched last night.
H.M.Jr:
George?
Haas:
I'm happy with the five-year note and the short.
H.M.Jr:
Archie?
I think the other one would go, but, all other
things being equal, I am certainly for the 15-month
and the five.
206
-11-
Murphy:
I'm agreeable on the five.
I'm agreeable to the five.
Seltzer:
Why, five-year doesn't sound as good to me as a
Lochhead:
four-year note if you're going into notes; and
as against the five-year note I'd prefer the
7-year bond.
Harrison:
Can you price a four-year note as well as you
can price a five-year note?
Seltzer:
Better, I think.
I thought the other way around. And I think that
Harrison:
Lochhead:
H.M.Jr:
Harris:
would be the deciding factor in my mind; I'd take
whichever one you could price easier.
Statistically you might be able to price the fouryear better, but as a practical matter you might
be able to price the five-year better.
Let's see, I've asked everybody but Harris.
It's agreeable to me. I prefer the 1-1/4 and the
five-year note.
Harrison:
You prefer the what?
Harris:
Five-year note.
H.M.Jr:
Well, let's decide now; we might as well get to
work on this thing. Be a five-year two and a
15-months, and if you (Bell) give me the letter
I'll sign it, and Forster is waiting at the White
House.
Harrison:
Randy, you're not disappointed, are you?
Burgess:
No, I'm entirely satisfied. I'm amused that a week
and a half ago, ten days ago, the Secretary asked
me, two days after I gt back from my holiday, to
give him a preliminary bet on what the financing
should be, and I talked to Wayne about it and we
finally sent him a cablegram suggesting that it
should be a one-year one and a five-year two.
207
-12-
H.M.Jr:
One-year one
Taylor:
One-year one and a five-year two.
Harrison:
And I don't think enough has happened between
Burgess:
Judgment is better probably in the Adirondacks
H.M.Jr:
I'd say that was that. Now, if you all will get
then and now to justify a sound change.
than it is in New York.
in touch with the Chinese and the Japanese and ask
them to be good
Burgess:
Seltzer:
H.M.Jr:
Burgess:
Taylor:
Burgess:
H.M.Jr:
Taylor:
Nothing material has happened overnight, apparently.
You want an armistice over the weekend.
Personally, I would say that this is as near
bombproof as any issue could be. I don't see I'm not going to worry about it.
I'm glad, Mr. Secretary, that we explored the
question of bonds, at least made a sally into it,
although we had to fall back on the first lines of
defense, because I think there is a good deal to be
said for it.
And I tell you what it's going to do; it's going to
make that two go better, other things being equal.
They're going to say, "This is a very conservative
program.' Everybody will be for it. If we had done
the other, a lot of them would have been for it,
but half of them would have been against it; they
would have said, "The Treasury is stepping out a
bit and taking a chance." This way they'11 like it.
They don't expect it, but they'11 like it.
I was thinking of it from another aspect, that you
have had so much conversation about a 15-month 1-1/4
and a three-year 1-5/8 that all this talk that you
could sell the 2-1/2 whereas these others thought
you couldn't go b eyond three years - they will have
been conscious of the possibility of the 2-1/2 and
they'11 go for the two, where otherwise they wouldn't
have.
208
-13-
Harrison:
Taylor:
Harrison:
H.M.Jr:
Burgess:
I think that is true. I think it's been very
helpful propaganda. There's only one fellow going
to be wholly disappointed, and that's George Davison.
You kind of helped him too.
But he might well feel this is better than what
he might have got, just as you say.
Ified.
think so far as I'm concerned I'm entirely satis-
I think your bond market will get a little lift
out of it too. You see, the bond market has discounted having another short bond put in there.
I think that intermediate market will get a little
lift from it.
H.M.Jr:
Well
Harrison:
Are we dismissed, sir?
H.M.Jr:
That's right. Thank you very much.
203
MEMORANDUM
(Dictated in presence of Messrs. Taylor,
Haas, and Lochhead)
Sunday
September 5, 1937
Mr. Ransom asked to see me alone this morning.
He said that he and Mr. Eccles were in complete agreement
that, in view of the tightening money situation which we
were facing this fall, some action would have to be taken,
and they were ready to cooperate in any way with the
Treasury that we both thought best. I think he said that
yesterday or in the last day or two the Board has just
passed a resolution authorizing Federal Reserve of New
York to buy 200 million dollars worth
securities, as an open market operation, with the idea
of easing the tension.
Again talking for himself and Eccles, he said
that they were unalterably opposed to a 7-year bond.
I told him that in the short time I have been
back I felt that something must be done, and done very
promptly, with regard to the tightening of the money
situation; that I doubted that any open market operation
would take care of the situation, as the Federal Reserve
of New York would not carry it out with sufficient
enthusiasm to convince anybody.
He said that Eccles had in mind setting for six
months or a year a price at which bills could be
rediscounted. I said that that would all be helpful over
a long period, but that it wouldn't take care of the
immediate situation. I furthermore said that their
reducing their discount rate from 1 to 1 percent, for
reasons which I couldn't understand, was interpreted as a
bearish move, and that people as a result had sold their
bonds; that it might be helpful some months hence, but
certainly as far as the immediate situation was concerned
it was ineffective. He agreed absolutely with me.
I said that I had been giving this matter some
thought and talking it over with my people here, and
that we believed the thing to do was to discontinue the
sterilization of gold for the time being; that if we did
that from now until the first of January, I believe
somewhere between 250 and 350 million dollars worth of
210
-2-
9-5-37
gold would come in during that period, that is, between
the 15th of September and the 1st of January; that whatever
we did, we should do it together jointly, and promptly.
He said, "Talking for myself only, I believe that
your suggestion would be more effective than an open
market operation." I said, "If we're going to do it,
we ought to do it on the 13th of September. Can you get
ready by then?" He said, "Yes." I said, "Are you sure?"
He said, "Absolutely. I'11 start Tuesday."
He said, "What about your bill program?" I said,
"Well, we're ready to discontinue the 9-months and 6-months
and sell sufficient 90-day bills and tax bills."
He said, "What about one-year certificates?" I
said, "We're ready to do that." I said, "You know on what
date the country banks would like to have them fall due."
He said, "No, I don't know, but I'll find out."
He again repeated; he said, "Something has to be
done about the money market." And I repeated that "if it
is going to be done, it ought to be done this coming week,"
and again asked him if he could get ready, and he again
assured me he could.
I said this to him: "Now, I believe that if we
make this move promptly, it may make a difference of
one cent in cotton and it might make as much difference
as ten cents in corn and ten cents in wheat at this time."
H. M. Jr.
Fin
NAVAL MESSAGE
(NAVY DEPARTMENT)
PRESIDENT U.S.
From
Released by
N-M TH
Date
6 SEPTEMBER 1937
To
211
SECRETARY OF THE TREASURY
(Signature)
To Telephoned to
NITE to
ROUTINE to XXXX
PRIORITY to
12 noon Dept 6-193
D.L.
dads I HEREBY APPROVE YOUR OFFERING THE SERIES NOTES ONE
FIFTEEN MONTHS THE OTHER - YEARS FRANKLIN . ROOSEVELT 1995
TOR CODE ROOM 1015 6 SEPTEMBER
WHITE 18
CONFIDENTIAL
212
NAVAL MESSAGE
(NAVY DEPARTMENT)
From
PRESIDENT U.S.
Released by
X-M Y-M
Date
6 SEPTEMBER V1937
To
SECRETARY OF THE TREAUSURY
(Signature)
To elephoned to
NITE to
6-193
ROUTINE to
PRIORITY to
XXX
JEL
9996 TWO SERIES OF TREASURY PROPOSED YOUR LETTER OF
FIVE SEPTEMBER, 1937 DULY APPROVED 1:00 P.M. MONDAY
6
SEPTEMBER, 1937 1355
TOR CODE ROOM 1415 6 SEPTEMBER
WHITE 20
CONFIDENTALE
PRIORITY
STANDARD FORM No. 14A
APPROVED BY THE PRESIDENT
MARCH 10. 1926
(
FROM
VIA NAVAL COMMUNICATIONS
TELEGRAM
OFFICIAL BUSINESS GOVERNMENT RATES
The White House
213
Washington
TO: THE PRESIDENT:
FROM SECTY. MORGENTHAU.
"SEND CONFIDENTIAL CODE"
GOVERNMENT
TO: THE PRESIDENT:
ON BOARD THE U.S.S. POTOMAC:
131264
SEPT, 6, 1937.
TREASURY OFFERING TWO SERIES OF TREASURY NOTES, BOTH IN EXCHANGE
FOR THE THREE AND ONE QUARTER PERCENT TREASURY NOTES OF SERIES "A
NINETEEN THIRTYSEVEN".
ONE SERIES DESIGNATED"E NINETEEN THIRTYEIGHT" WILL BEAR INTEREST
AT THE RATE OF ONE AND ONE QUARTER PERCENT AND WILL MATURE IN
FIFTEEN MONTHS ON DECEMBER FIFTEEN, NINETEEN THIRTY EIGHT.
THE OTHER SERIES, DESIGNATED"SERIES B NINETEEN FORTYTWO"WILL
BEAR INTEREST AT THE RATE OF TWO PERCENT, AND WILL MATURE IN FIVE
YEARS ON SEPTEMBER FIFTEEN, NINETEEN FORTYTWO.
MORGENTHAU.
12:59 a.m.
214
September 5, 1937
CONFIDENTIAL
Dear Mr. President:
On September 15, 1937, about $817,000,000 of Treasury
notes will nature, and to provide for that maturity, I propose,
subject to your approval, under authority of the Second Liberty
Bond Act, approved September 24, 1917, as amended, to offer for
subscription two series of Treasury notes, both to be dated
September 15, 1937. The offering will consist of fifteen-month
1-1/4 percent notes and five-year 2 percent notes. These issues
will be open only for the exchange of the maturing notes and
cash subscriptions will not be invited.
The authorising act provides that notes may be issued
only with the approval of the President. Accordingly, I trust
that the proposed issues will meet with your approval. It is
my intention to make public announcement of the offering on
Tuesday, September 7.
Faithfully yours,
10) Henry Morgenthau, Jr.
Secretary of the Treasury
The President,
The White House.
APPROVED: signed) Franklin D. Roosevelt
Sept 6 p.m.
ELKIN
215
TREASURY DEPARTMENT
Washington
FOR RELEASE, MORNING NEWSPAPERS,
Tuesday, September 7. 1937
Press Service
No. 11-9
9/5/37
Secretary of the Treasury Morgenthau announced today the offer-
ing, through the Federal Reserve banks, of two series of Treasury
notes, both in exchange for 3-1/4 percent Treasury notes of Series
A-1937, of which $817,483,500 mature on September 15, 1937. Both
series of notes will be dated and bear interest from September 15,
1937. One series, designated Series E-1938, will bear interest at
the rate of 1-1/4 percent, and will mature in 15 months on December
15, 1938. The other series, designated Series B-1942, will bear
interest at the rate of two percent, and will nature in fivo years
on September 15, 1942. The notes will not be subject to call for
redemption before maturity.
Exchanges will be made par for par, and the offering of each
series of notes will be limited to the amount of maturing notes tendered and accepted in exchange therefor. Cash subscriptions will not
be received.
The Treasury notes will be accorded the sane exemptions from
taxation as are accorded other issues of Treasury notes now outstand-
ing. These provisions are specifically sot forth in the official
circular issued today. The notes will be issued only in bearer form
with coupons attached, in the denominations of $100, $500, $1,000,
$5,000, $10,000 and $100,000.
Subscriptions will be received at the Federal Reserve
banks and branches, and at the Treasury Department, Washington,
and should be accompanied by a like face amount of Treasury
-2notes of Series A-1937, maturing September 15, 1937, with the
final coupon due on September 15 detached.
The right is reserved to close the books as to any or all
subscriptions at any time without notice, and, subject to the
reservations set forth in the official circular, all subscrip-
tions will be allotted in full.
Special Treasury bills aggregating $350,600,000, which
mature immediately after September 15, and about $168,400,000
interest on the public debt, which becomes due on September
15, will be paid from the cash balance.
The text of the official circular follows:
216
217
UNITED STATES OF AMERICA
TREASURY NOTES
1-1/4 percent
Serios E-1938
Duo December 15, 1938
2 percent
Series B-1942
Duo September 15, 1942
Both series dated and bearing interest from September 15, 1937
TREASURY DEPARTMENT.
1937
Office of the Secretary,
Department Circular No. 578
Washington, September 7, 1937.
Public Debt Service
I. OFFERING OF NOTES
1. The Secretary of the Treasury, pursuant to the authority of the Second
Liberty Bond Act, approved September 24, 1917, as amended, invites subscriptions,
at par, from the people of the United States for notes of the United States in two
series, designated 1-1/4 percent Treasury Notes of Series E-1938 and 2 percent
Treasury Notes of Series B-1942 respectively, in payment of which only Treasury
Notes of Series A-1937, maturing September 15, 1937, may be tendered. The amount
of the offering under this circular will be limited to the amount of Treasury Notes
of Series A-1937 tendered and accepted.
II. DESCRIPTION OF NOTES
1. The notes of Series E-1938 will be dated September 15, 1937, and will
bear interest from that date at the rate of 1-1/4 percent per annum, payable on
a semiannual basis on December 15, 1937, and on June 15 and December 15, 1938.
They will mature Decomber 15, 1938, and will not be subject to call for redemption
prior to maturity.
2. The notes of Series B-1942 will be dated September 15, 1937, and will
bear interest from that date at the rate of 2 percent per annum, payable semiannuall
on March 15 and September 15 in each year. They will nature September 15, 1942, and
will not be subject to call for redeription prior to naturity.
3. The notes shall be exempt, both as to principal and interest, from all
taxation (except estate or inheritance taxes, or gift taxes) now or hereafter
-imposed by the United States, any State, or any of the possessions of the United
States, or by any local taxing authority.
4. The notes will be accepted at par during such time and under such rules
and regulations as shall be prescribed or approved by the Secretary of the
Treasury in payment of income and profits taxes payable at the maturity of the
notes.
5. The notes will be acceptable to secure deposits of public moneys, but
will not bear the circulation privilege.
6. Bearer notes with interest coupons attached will be issued in denominations of $100, $500, $1,000, $5,000, $10,000 and $100,000. The notes will not be
issued in registered form.
III. SUBSCRIPTION AND ALLOTMENT
1, Subscriptions will be received at the Federal Reserve banks and branches
and at the Treasury Department, Washington. Banking institutions generally may
submit subscriptions for account of customers, but only the Federal Reserve banks
and the Treasury Department are authorized to act as official agencies. The
Secretary of the Treasury reserves the right to close the books as to any or all
subscriptions or classes of subscriptions at any time without notice.
2. The Secretary of the Treasury reserves the right to reject any subscrip-
tion, in whole or in part, to allot less than the amount of notes applied for, to
make allotments in full upon applications for smaller amounts and to make
reduced allotments upon, or to reject, applications for larger amounts, or to
adopt any or all of said methods or such other methods of allotment and classi-
fication of allotments as shall be deemed by him to be in the public interest;
and his action in any or all of these respects shall be final. Subject to these
reservations, all subscriptions will be allotted in full. Allotment notices
will be sent out promptly upon allotment.
218
--
213
IV. PAYMENT
1. Payment at par for notes allotted hereunder must be made or completed
on or before September 15, 1937, or on later allotment, and may be made only in
Treasury Notes of Series A-1937, maturing September 15, 1937, which will be ACcepted at par, and should accompany the subscription.
V. GENERAL PROVISIONS
1. As fiscal agents of the United States, Federal Reserve banks are authorized and requested to receive subscriptions, to make allotments on the basis and
up to the amounts indicated by the Secretary of the Treasury to the Federal
Reserve banks of the respective districts, to issue allotment notices, to receive
payment for notes allotted, to make delivery of notes on full-paid subscriptions
allotted, and they may issue interim receipts pending delivery of the definitive
notes.
2. The Secretary of the Treasury may at any time, or from time to time,
prescribe supplemental or amendatory rules and regulations governing the offering,
which will be communicated promptly to the Federal Reserve banks.
HENRY MORGENTHAU, JR.,
Secretary of the Treasury.
Fin
TREASURY DEPARTMENT
WASHINGTON
September 7, 1937
CONFERENCE BY THE SECRETARY OF THE
TREASURY, ASSISTANT SECRETARY TAYLOR
AND MR. BELL.
With Mr. Levy,
Solomon Bros. & Hutzler,
September 4, 1937.
Mr. Levy said that he had been feeling out the market.
He had seen a great many people since he had talked with Mr.
Taylor and me in New York on Friday. He had found a great deal
of sentiment for the 7-year 2-1/2% bond. There had been some
discussion on the 15-month 1-1/4% note but he felt that this
was ridiculous. He would certainly issue the 7-year bond and
he feels that we would get a minimum of $200,000,000 which
would be all to the good. Says that it does not make much difference what you do, if news from abroad is bad, you will be
criticized for the offerings. On the other hand, if the news
from abroad is of a better tone than we have been getting in
the past few days, there will be more conversion into the bonds
than into notes.
He says we cannot go on putting out short dated debt
and feels that this is the time to step out a little further.
The Street is talking about a 3-year 1-5/8% note and has a
strong feeling for the 7-year 2-1/2% bond. The Secretary asked
him if he would underwrite a program of this kind and he said
he would very definitely. He stated that as an indication as
to how the bonds will go, there is some guide in the fact that
there is considerable buying at this time in the Home Owners'
Loan 2-1/2% 1942-44's. These bonds can be looked upon as a
1944 maturity and in view of the low coupon would be about the
same as the suggested 7-year 2-1/2% He feels that there has
been very little liquidation in the intermediate market. The
fact that the bonds went off on Thursday and Friday should not
scare the Treasury as they went off while talks were on in
New York about the financing. This was perfectly natural and
under conditions of this kind bonds always go off more than the
notes.
220
221
2-
He then suggested that we might consider putting out
an additional issue of 2-3/4% 1945-47's at 101 which is now selfing on the market at around 101-3/4. We all thought this a good
suggestion. There are two arguments against it, one, the reluctance
on the part of the banks to put a premium on their books and, two,
the optional call date. It does, however, take care of the matter of a small amount of subscriptions on the bonds. If there is
a small subscription or a new issue, it might be bad from the
standpoint of the market; whereas, if there is a small subscription
on the part of an outstanding issue, it would not look so bad.
Before he left he said that a 15-month 1-1/4% note would be sure
to go. The banks and some corporations want this maturity.
With Mr. Devine of
Devine and Company,
September 4, 1937.
He said that he thought the Treasury should not attempt
a bond at this time. The long-term market is very thin and the
volume is very small. He cannot at the present time sell a block
of bonds. Any offering of bonds of intermediate maturity date
would hurt the present premium bonds. His suggestion is that we
issue a 15-month 1-1/4% and a 3-year 1-5/8%. We can go to a
4-year with a coupon of 1-7/8% or a 5-year with a coupon of 2%.
Checking with large New York banks he feels that the sentiment is
for the 15-month 1-1/4% and a 5-year 2%. The Metropolitan
Insurance Company has $35,000,000 of the maturing securities and
he believes that it would take a 5-year 2% note but that it would
not take a 7-year 2-1/2% bond. He only found one bank in Chicago
and only one in St. Louis interested in the 5-year 2%. When asked
as to how he felt the subscriptions would be divided, he said that
$500,000,000 would go into the short and $300,000,000 would go into the 5-year 2% note. If he had the decision to make, he would
not go beyond 1942 for this operation; he certainly would not go
into the 1945-47 period. He does not feel that it would be fair
to the market and to the Treasury to issue a 7-year bond. This
market is not over-sold but it is just plain rotten. Everyone
seems to be waiting for money rates to tighten. Says that the
7-year 2-1/2% is preferable to the additional issue of 2-3/4% of
1945-47 at 101 because of the objections on the part of the banks
to the premium and to the optional call date.
He feels that if you offered a 15-month 1-1/4% note and
a 7-year 2-1/2% bond, you would get more bonds under this proposal
than if you substituted an additional issue of 2-3/4% 1945-47 at
101. He definitely recommends a 15-month 1-1/4% and a 5-year
2% He insists these will go and go well. That we will get
$500,000,000 subscriptions to the 15-month and $300,000,000 of sub-
scriptions to the longer.
222
3-
Dinner conference Saturday
with Mr. Mills and Mr. Repp
of the Discount Corporation.
They were very enthusiastic for the 15-month 1-1/4% note
and 7-year 2-1/2% bond. They were even stronger for this proposal
than they were on Friday at the conference with Mr. Taylor and me.
They argued at some length that this proposal if adopted by the
Treasury would help the market immensely and would be a courageous
step on the part of the Treasury. The Secretary then told them
that we were not offering any additional bills for a while and that
the issue sold on Friday last would be the end for some time of
the issue of $50,000,000 each week. They said that this would be
excellent news for the market and they were now even stronger for
the 7-year bond.
While they were strong for this security throughout the
conference, they always came back to some qualification or some
protective measures which would be necessary to adopt in order to
insure complete success of the whole operation. This, I believe,
threw some doubt into our minds as to whether we should adopt the
bond at this time. I believe as we came out of that conference,
we were more certain that a bond should not be offered but that it
should be a 15-month and a 5-year note.
swis
Fin
September 7, 1937.
8:50 a.m.
H.M.Jr:
Hello
0:
Dr. Burgess.
H.M.Jr:
Thank you.
0:
Go ahead.
H.M.Jr:
Good morning.
Burgess:
Good morning, sir.
H.M.Jr:
Well I thought the papers treated us very nicely.
I thought they handled things very well.
B:
H.M.Jr:
B:
Yes.
It's too early to tell much yet. The dealers
I ve talked with like it all right; they say
they won't make trouble about it.
H.M.Jr:
Ah-ha.
B:
It's too early to say what the rights will be.
H.M.Jr:
Well supposing I call you about 10:15 your time.
B:
That's a good time.
H.M.Jr:
Would you have something?
B:
Yep, I'll have something.
H.M.Jr:
10:15.
B:
Yep.
H.M.Jr:
B:
Thank you.
Very good.
223
Fix
September 7, 1937.
9:30 a.m.
H.M.Jr:
Hello.
0:
H.M.Jr:
Dr. Burgess.
Hello.
B:
Hello sir.
H.M.Jr:
Yes.
224
Well they - they all certainly like it.
B:
H.M.Jr:
Yes.
B:
They're still indeterminate yet as to the rights -
H.M.Jr:
they're quoted anywhere from - ah - nine on the
big side to 10 or 12 or 13.
Which is that - for the 15 months?
B:
No, that's the rights. That's maturing
H.M.Jr:
Oh yes.
B:
That was quoted Saturday 10 and 12
H.M.Jr:
Yes.
but it's right around the same as what
B:
it was Saturday
H.M.Jr:
Ah-ha.
and - ah - it isn't really possible to
size it up yet.
B:
H.M.Jr:
B:
Ah-ha.
The stock market you know is off a point and a
quarter
H.M.Jr:
Ah-ha.
on - on the European news.
B:
H.M.Jr:
Yes.
-2-
B:
Ah
H.M.Jr:
Well I'11 call you a little later.
225
H.M.Jr:
It's really pretty hard to tell very much now.
All right.
It seems to be all right, as far as you can tell.
All right. Thank you.
B:
Very good.
B:
H.M.Jr:
B:
Fin
September 7, 1937.
10:34 a.m.
H.M.Jr:
Hello
0:
Dr. Burgess.
H.M.Jr:
Hello Burgess, how is she going?
226
B:
Well it's a little bit softer than I could wish.
H.M.Jr:
Ah-ha.
B:
The - ah - the rights are quoted 7.9 which is about
3/32ds off from Saturday.
H.M.Jr:
Yes.
B:
There's - ah - there's been quite an active market
in rights;
H.M.Jr:
Ah-ha.
B:
them.
some selling but always somebody to buy
H.M.Jr:
Good.
B:
At least there is a firm bid at these prices.
H.M.Jr:
You haven't had to do anything?
B:
No, we haven it done a thing.
H.M.Jr:
Good.
B:
Now the bond market is just slightly off
H.M.Jr:
Ah-ha.
B:
......a thirty-second or two; one or two issues
more than that and the notes are off a little bit.
H.M.Jr:
Ah-ha.
B:
Of course, that was bound to be true.
H.M.Jr:
Yes.
-2-
B:
H.M.Jr:
Of course, this - ah - this Russian and Italian
thing didn't do the market any particular good.
No. What are the old 3-1/4 notes selling at?
B:
Oh that's - that 79 premium.
H.M.Jr:
Well that's all right.
B:
Yes that's enough - it's - it's a premium.
H.M.Jr:
Yes.
B:
227
Now - ah - you get all kinds of gossip - ah one - one conversation is that General Motors
is talking about converting their 25 million into
1-1/4.
H.M.Jr:
Yes, well that would be
B:
Ah - those people are just waiting and studying
the market
H.M.Jr:
B:
H.M.Jr:
B:
H.M.Jr:
B:
H.M.Jr:
B:
H.M.Jr:
Ah-ha.
and trying to decide what to do.
Well I'm anxious to close the books tomorrow night.
Ah - I think that's awful close.
Well you were thinking about it.
The market feels that it needs three days, I think.
Well
I was just talking to - to Mills about that
Well I - I won't decide until after the market
closes.
B:
O.K. well we'll talk it over here right carefully
then
H.M.Jr:
All right.
-3 B:
and see what we think.
H.M.Jr:
All right.
B:
Very good.
H.M.Jr:
Goodbye.
228