Full text of Diaries of Henry Morgenthau, Jr. : Volume 87 : Part 2

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Fin
229
September 7, 1937.
11:28 a.m.

H.M.Jr:

Hello

0:

Dr. Burgess is busy on a long distance call. I'm
waiting for him.

H.M.Jr:

Thank you.

11:33 a.m.
H.M.Jr:

Hello

0:

Dr. Burgess.

H.M.Jr:

Thank you.

0:

Go ahead.

B:

Hello

H.M.Jr:

Yes Randolph.

B:

Yes sir, well it's a little slow.

H.M.Jr:

So I gather but personally I consider when the

stock market is off five points I think that our
little show is going very well.

B:

H.M.Jr:

I think you're doing very well on the whole.

I think I - I - I mean I think our show is going

very well.
B:

Yes. Now I've got an order in - we're going to
buy some of these rights if they get down so we
can get them at 5.

H.M.Jr:

At 5.

B:

I thought we'd just have a little block in there
if anything happens.

-2-

H.M.Jr:

"h-ha - as a gamble.

H.M.Jr:

Yes. Well because I think they're cheap at that
price and I think we ought to - they oughtn't to
go much below that point; I think it may look bad.
The rights go down to five.

B:

Yes.

H.M.Jr:

Have you bought any yet?

B:

No.

H.M.Jr:

How many are you willing to buy?

B:

B:

Oh - ah - we can buy quite a little - we can - ah that 1-1/4 note, of course, is - is going quite well.
What do you call quite a little?
Oh I don't know - I haven't talked with my associates
but we could start in and buy at that price,I think.
we can use them against Treasury bill maturities -

H.M.Jr:
B:

H.M.Jr:
B:

Well what do you do, walk around the desk and then

talk to yourself?
(Hearty laughter) No, I'd have to call up Ronald
before I went over.

H.M.Jr:

230

Oh I see. well if you - if you begin to buy let
me know, will you?

B:

All right, yes - yes.

H.M.Jr:

If you - if you get any let me know.

B:

Yes, all right.

H.M.Jr:

Thank you.

B:

Very good.

Fin
231
September 7, 1937.
2:04 p.m.
H.M.Jr:

Hello

0:

Dr. Burgess.

B:

Well Hello sir.

H.M.Jr:

Hello Randolph.

B:

Well
it looks as though they were closing just a
touch above the lows.

H.M.Jr:

Just a what?

B:

Just a touch above the lows - a 32d or two better
than the lows

H.M.Jr:

Yes.

but it's not a very cheerful market.

B:

H.M.Jr:

No I don't - I - well personally I think it's

remarkable that the government bonds have done

as well as they have.

I think it's giving pretty good account of itself

B:

H.M.Jr:

in the face of this general market.
The last I saw, the stock market was off over
six points.

That's right, it's been lousy; it steadied off in

B:

the middle of the day and then it took another

nosedive
H.M.Jr:

Yes.

-

B:

H.M.Jr:

so that it's been very lousy.
Well what I'm doing is I'm having a little meeting
in my room at 4:30 Washington time

B:

Yes.

H.M.Jr:
B:

at which time we'11 have the report
Yes.

-H.M.Jr:

232

and then I'd like to talk to you then.

B:

All right, I'll be here.

H.M.Jr:

Pardon me?

B:

I'11 be here.

H.M.Jr:

I'd like you to stay there.

B:

Yes.

H.M.Jr:

And then we can decide if we want to close tomorrow

night or let it go over till Thursday night.

B:

Yes. I don't think you're going to have many
turn-ins to-day.

H.M.Jr:

You don't.

B:

No, very few.

H.M.Jr:

Ah-ha.

B:

Most of them will wait. The argument for waiting
is that we've been accused sometimes of unfairness
to the investor in not giving him a chance. A
fellow who is up in New Hampshire or some place is
just coming down and he has to get his stuff out of
his safe deposit box and make his arrangements and
a lot of them get shut off

H.MmJr:

I see.

B:

.....1f you close it too fast.

H.M.Jr:

Well the boys looked up and, as far as I can find
out, we've never closed it less than three days.

B:

I think that's true

H.M.Jr:

And

B:

but I think we can do it Thursday night

all right.
H.M.Jr:

Ah-ha. Well

233

-3-

That's fair enough and I don't think you're
going to get it any worse than this anyway.
(Laughs) I don't think so either.

B:

H.M.Jr:

(Laughs)

B:

I don't - I

H.M.Jr:

If you have a couple of days we're more apt
to get a better day before we get through.
I don't see how it can be any worse.

B:

H.M.Jr:
-

B: -

No.

H.M.Jr:

Ah- you didn't have to buy anything?

B:

Ah - I just told

- well I couldn't get

you a few minutes ago that we bought a million
and a half on an exchange - ah - at par 5.
H.M.Jr:

Ah - what did you swap?

B:

We swapped some June 139's.

H.M.Jr:

Oh.

B:

There's somebody wanted some

H.M.Jr:

Well -

B:

and in that way they could give us some at
five but those are the only ones that have been

H.M.Jr :
B:

H.M.Jr:

available at that price.
Well that has no significance has it?
No not the slightest really.
And you say it did close a little bit up from
the bottom?

B:

Well just a touch; the bonds were a 32d or two
higher than the

-4-

H.M.Jr:

"ell they'11 continue trading for a while, won't
they?

B:

Yes they will.

H.M.Jr:

What?

B:

I'm sorry to say they will.

H.M.Jr:

Well supposing you call me at about five minutes

to four your time, will you?

B:

All right.

H.M.Jr:

Five minutes to four your time.

B:

All right.

H.M.Jr:

Thank you.

B:

Very good.

H.M.Jr:

Thank you.

234

.

235
September 7, 1937.
2:18 p.m.
H.M.Jr:

Hello

Feis:

Henry, how are you?

H.M.Jr:

Well they certainly celebrate your return and
mine, don't they?
They certainly do.

F:

H.M.Jr:

Yes.

F:

They'11 have to start a new war somewhere, won't they?

H.M.Jr:

Well
(laughs) you mean the one - what do you call
a war?

F:

(Laughs)

H.M.Jr:

Please write me a memorandum on what is a war.

F:

Well that's what I wanted to talk to you about.

H.M.Jr:

Yes.

F:

Ah - I mean it seriously, Henry.

H.M.Jr:

Yes.

F:

Ah - I sat - there's an all-morning conference over
here bearing on that subject and I thought - felt the Secretary suggested we ought to know whether
you had anything on the fire that might be involved
and vice-versa.

H.M.Jr:

I - I don't know what you mean "if I had anything
on the fire".

F:

Well (laughs) anything that would be affected by

action - neutrality statute.

H.M.Jr:

Well I have a - I have a memorandum here which says

just what we would have to do in case the President
invoked it.

-2-

F:

Say that again now, Henry.

H.M.Jr:

We have a memorandum - I've had a memorandum

236

prepared what would fall on the Treasury in case
the President invoked the Neutrality Act

F:

H.M.Jr:

Yes.

that?

and - ah - would you care to have a copy of

F:

Yes.

H.M.Jr:

What?

F:

Very much.

H.M.Jr:

Very much. Well I'll tell Oliphant to send it over
to you.

F:

All right.

H.M.Jr:

How's that?

F:

All right. Now you - ah - I mean if you want I

can report to you where the matters seem to stand

over here.
H.M.Jr:

I wish you would.

F:

Well whenever you say.

H.M.Jr:

Oh you mean you're ready to report to-day?

F:

I'd rather not do it over the telephone although
it's not very much.

H.M.Jr:

Well - ah

F:

Would your - would your arrangement with one of
those governments be - ah - involved at all?

H.M.Jr:

Tell you what - why don't you come - ah - if I
gave 30 minutes, would that be enough?

F:

Too - well you can do it in 15, Henry.

-3H.M.Jr:

Well I'll be free at 4 o'clock.

F:

I think probably it might avoid something
unanticipated if I did.

H.M.Jr:

Supposing you come at 4 o'clock.

F:

I'll be there at four.

H.M.Jr:

And I'll have Oliphant here because he's been

F:

All right.

H.M.Jr:

Please.

F:

Right.

H.M.Jr:

Thank you.

F:

Goodbye.

handling it for me.

237

Fin
September 7, 1937.
2:58 P.M.
H.M.Jr:

Hello

0:

Dr. Burgess.

Burgess:

Hello sir.

H.M.Jr:

Hello - Burgess?
Well the
doornail.

B:

market was as dead as a

H.M.Jr:

Dead as a doornail.

B:

NO change in the quotations from the close that
we could find.

B:

Well is that a good or bad sign?
Why I think that's a good sign.

H.M.Jr:

Good sign.

B:

I think so.

H.M.Jr:

Ah-ha.

B:

Now - ah - we have only the 27 million of sub-

H.M.Jr:

Ah-ha.

D:

Didn't expect to have any

H.M.Jr:

Ah-ha.

H.M.Jr:

238

scriptions so far.

H.M.Jr:

And that is 17 for the short and ten for the long ten and a half for the long.
17 for the short.

B:

Yes.

H.M.Jr:

And how much for the long?

D:

Ten and one half.

H.M.Jr:

Ah-ha.

B:

-2-

So if they just keep up that ratio we're all right.

B:

(Laughs)

H.M.Jr:

I see.

D:

(Laughs) They got a good start.

H.M.Jr:

Ah-ha. Well - ah - any explanations in the Street
for the fall of the market?
No, they think it's the European news - they think
it's war news.

B:

H.M.Jr:
B:

-

"n-ha.

I was just in seeing the press to-day. I thought
I'd pester them about this thing.

H.M.Jr:

Who?

B:

The press - the boys of the press.

H.M.Jr:

Yes.

B:

And they think it's all war stuff.

H.M.Jr:

Ah-ha.

B:

of course, the Amsterdam market did the same thing

H.M.Jr:

Ah-ha.

B:

H.M.Jr:
B:

H.M.Jr:

and London did a little of the same thing
Ah-ha.

not quite as severe
Ah-ha.

but it's clearly war scare.

B:

H.M.Jr:
B:

All right.
Although
there is talk that - ah - of - of
industrial reaction.

H.M.Jr:

Ah-ha.

B:

That is they - there is some expectation that
business won't be so good.

H.M.Jr:

I see.

239

-3B:

240

I haven't been able to find any real basis to that
but there's some talk about it.

H.M.Jr:

Well -

B:

There's - ah - some estimates around the street

that New York will get 75 for the short and 25 for
the long and outside they might get 50-50.

H.M.Jr:

I see.

B:

Other than that we'll be perfectly satisfied,
won't we?

H.M.Jr:
B:

Perfectly.

I don't think it will do quite that well if business

keeps up this way but tomorrow is another day.
H.M.Jr:

Yes.

B:

Now I think the general agreement is that we'd like
to see it open for three days.

H.M.Jr:

You do.

B:

And close it Thursday night.

H.M.Jr:

Well you don't mind waiting till 5:30 your time.

B:

Well I very seldom go home before then so I guess

I can't complain, can I.

H.M.Jr:

Well to-day would be a bad day to go home early.

B:

Yes (Laughs)

H.M.Jr:

Might think you were running away.

B:

That's right. (Laughs)
I'll call you up sharp 5:30.

H.M.dr:
B:

Very good.

H.M.Jr:

All right.

Fin
241
RE CLOSING ON RIGHT TO EXCHANGE
IN SEPTEMBER 15 FINANCING

Present:

September 7, 1937
4:30 p.m.

Mr. Taylor

Mr. Bell

Mr. Gaston
Mr. Lochhead
Mr. Haas

Dr. Viner
Mr. Harris
Mr. Kilby
H.M.Jr:

Who's got the reports - Bell and what's-his-name,

Gaston:

the young fellow who always has the reports?
Kilby.

H.M.Jr:

Have you had any inquiries about what's going to
happen?

Gaston:

Have I had?

H.M.Jr:

Yes.

Gaston:

The boys wanted to know if we could give them any
clue to the amount of refunding today or any announce-

ment as to closing. I told them I didn't have any
information yet. Several of the boys asked.
H.M.Jr:

(On phone) Mr. Burgess in New York.
Any more market?

Harris:

Just talked to them. Still five, seven. Seemed to

be a better tone, although quotes haven't showed any
improvement. They say there are several bids around,

that one Chicago bank is bidding for the rights at
five and that one - the First Boston reported that,
but that is not - asked not to be quoted on it.
-

H.M.Jr:

On what?

Harris:

That the Chicago bank was bidding on the rights at
five.
(Phone conversation with Burgess follows:)

242
September 7, 1937.
4:35 p.m.
H.M.Jr:

Hello

0:

Dr. Burgess. Go ahead.

B:

Hello sir.

H.M.Jr:

Ah - how does it look now?

B:

It looks about the same as at the close; the
very little trading after the market had closed.
prices were just about the same and there was

H.M.Jr:

Ah-ha.

B:

There's one other interesting thing - there was
a bid around for some of the rights at par 6 which
is just a little better than the dealers had been
quoting.

H.M.Jr:

I see.

B:

It had been par 5.

H.M.Jr:

Where did that come from?

B:

Somebody said Chicago but I don't know exactly.

H.M.Jr:

Ah-ha. Did they buy any or are they just bidding?
No, they're just bidding but I imagine they bought

B:

some though. (Laughs)

H.M.Jr:

(Laughs) I see.

B:

Ah - but that's no - there's no great change here
so far. Now we didn't get any more subscriptions
in so that the 17 million total I gave you - 27
million is the whole total.

H.M.Jr:

Yes. Well how do you feel about closing?
I would announce closing for Thursday night.

B:

H.M.Jr:

You would.

B:

Yes.

-2H.M.Jr:

Ah-ha.

B:

I don't think you can leave them less time than
that and I don't think you need to leave them
more.

H.M.Jr:

Ah-ha.

B:

Now there's only one of them that I use for a
longer closing - that's Levy.

H.M.Jr:

Yes.

B:

He says that you ought to give him more time;
that conditions might improve and you'd get more

243

conversions into the note - into the long note.
On the other hand, if you delay I think it looks
a little bit weak as though you hadn't gottten

conversions
and you've got to do something to force
them in

H.M.Jr:

Ah-ha.

and if you make an announcement tonight that

B:

H.M.Jr:

B:

you're closing the books Thursday night that gives
them two days and yet you start it moving.
Ah-ha. Now - ah - did anyone tell you about my
idea - Itd like - I thought of sending out telegrams
to all the Members of the Federal Deposit Insurance
telling them when the closing would be.
Ah - just so you'd be sure that they get the notice,

you mean?

H.M.Jr:
B:

Yes.

I don't think you need too. That is, we've had
this before and you see they all get notices from
the Reserve Banks. You see we send out notices to

H.M.Jr:

Yes but do they go to non-members?

B:

Oh yes.

H.M.Jr:

They do.

244
3-

B:

You see, the non-members are in the different
branches of the government.

H.M.Jr:

Ah-ha. You don't think it's necessary?

B:

No I really don't. Each Federal sends out stuff,
you see?

H.M.Jr:

Do
you think it might be interpreted that I was
scared?

B:

Yes I think anything unusual now might - might

H.M.Jr:
B:

attract attention.
Ah-ha. Well I don't want to do that.

Yes. I'm sure it reaches them because you know
on these exchanges we've had 90 days - I understand
they are 96% conversions which shows that it reaches
everybody.

H.M.Jr:

I see. Now Kilby came in - just a minute let me see what he's got. (Conversation aside
with Kilby) I had to ask him three times - I
couldn't believe it.

B:

(Laughs)

H.M.Jr:

23 on the short and 25 on the long.

B:

Well now that 1 S the rate you ought to continue.

H.M.Jr:

Yes.

B:

Just keep up the way you're going and you're

all right.

H.M.Jr:

I asked him three times.

B:

(Laughs)

H.M.Jr:
B:

Bell's stuttering.
(Laughs) Well I'm afraid it doesn't mean much.

-4H.M.Jr:
B:

H.M.Jr:
B:

H.M.Jr:

B:

Well
(Laughs) I could give you a lot worse
figures.
(Laughs)

And those would worry you. When they're good
they don't mean anything.

That's right. (Laughs)
Oh you fellows up there, you're hard to please.
Well
I think - now just hold on a minute will
you please?
Yes.

( Conversation aside with someone)
H.M.Jr:
B:

H.M.Jr:
B:

H.M.Jr:
B:

Ah - it's unanimous here that we announce tonight

we'll close Thursday night.
Well that's swell.

Yes.
We all feel that the news couldn't be
any worse.

I think that's right, yes. The - ah - sharpers

tell me that the stock market has not reached the
selling climax to-day.
It has not.
No they say we have never reached the climax in
one day.

H.M.Jr:

Ah-ha.

B:

Sounds like a lot of baloney to me.
Ah-ha. Well - ah

H.M.Jr:
B:

H.M.Jr:

They also tell me this is the biggest decline ah - since things went off the gold standard.
As a - as a market forecaster, I'm a bond expert.

245

-5B:

(Hearty laughter)

H.M.Jr:

How's that?

B:

Same here.

H.M.Jr:

What?

B:

Same here.

H.M.Jr:

246

We'11 all subscribe to that, eh?

B:

Yes.

H.M.Jr:

Well - ah

B:

Well
I'm going to reserve my formal congratulations
until tomorrow.

H.M.Jr:
B:

H.M.Jr:
B:

Oh you better wait till Thursday.
(Hearty laughter)

All right, we'll get out the notice from here.
Very good.

H.M.Jr:

Good night.

B:

Good night to you, Henry.

247
-2H.M.Jr:

That's all right. Herbert, do your duty. I

simply would say that for the first day - would

you say "under the circumstances"?
Gaston:

I would just say that "the Secretary announced
that the books on the exchange offering would
close Thursday night at the close of business"

and let it go at that.
H.M.Jr:

O.K.

Bell:

Right.

H.M.Jr:

All right.

Taylor:

Lochhead:

You don't want to say that early subscriptions
indicated an even split between the two?
without qualifications.
Less details the first day.

Bell:

23 and 25, and he (Taylor) wants it about even.

H.M.Pr:

Anybody got anything else?

Gaston:

I don't think we'll send this radio to the Press

Bell:

Radio Bureau, would you?
H.M.Jr:

No.

Taylor:

The wire's dead.

Bell:

Yes, no wire to the banks.

248
GROUP MEETING

Present:

Mr. Magill
Mr. Taylor

September 7, 1937
9:30 a.m.

Mr. Lochhead

Mr. Oliphant

Mr. Bell
Dr. Viner

Mr. Haas

Mr. Gaston
Mr. McReynolds
Mr. Upham

H.M.Jr:

Well, the first reports on our financing look

as though it will go pretty well. I just talked

to Dr. Burgess on the telephone. War news hasn't

helped it any, but we tried to make it bombproof.
The rights are still selling up where they were.
Looks as though the premium on the five-year two
might be a little more than on the 15-months.
Bell, I wish that you and Taylor would let me know
this afternoon - check with New York - if we're going
to close tomorrow night, I might want to tonight send
right from the Treasury a telegram to every member
of the Federal Deposit Insurance banks, notifying
of this closing, because it is such short time that
these little state banks, out of the way, they'11
never get it. It doesn't cost so much when you
consider what's involved. I'd like Gaston to help
make it a very courteous telegram - wish to let
them know that they can advise their customers the
right to exchange will close midnight the 8th; send
one out - a telegram to everyone on the Federal
Deposit list.
Bell:

Of course, you know, we don't have to close because

of the shortness of time; it is news that is liable
to

H.M.Jr:

Sure, what's the sense of fooling around for more
than two days?

Bell:

That's what I'm afraid of, that a lot of them will
wait until the third day, and the third day will be
bad news.

H.M.Jr:

Oh, I'm going to close tomorrow night. I don't want

249
-2-

some state bank to say, "You closed and we never

were notified." Now, so - until the Federal

Reserve machinery gets in motion - why not send

it? If I end it, I don't want to use the Army
Union and Postal. they can get the list ready. It
and Navy telegraph system; I want to use Western

costs $7,000 to send the telegram to 15,000 banks 50 cents apiece, about. I don't want some bank to

Bell:

write in - "Well, I wasn't notified.' Huh?
All right.

H.M.Jr:

And Mac can see that the telegraph room gets ready.

MCR:

Supposing they write the list and we don't use it and address it. If they could address it and put in
the name of the President of the bank
- get the
list from Crowley. And if that could be done - I
don't want to use the Government telegraph system;
I want to give half to Western and half to Postal, it just saves some small institution from saying,
"Well, we didn't know." What? Mac?

I'll have it. I can find out about the list of the

names of the presidents of the banks, how available

H.M.Jr:

Upham:

that is, whether we can get that out promptly. You
folks will have to dig up the wording of the telegram
and we'll see that it gets out.
Don't you think, Cy, some small bank in Iowa - they're
not going - there isn't a newspaper that carries that
in time.
I know it will help the banks, because they do claim
they can't act promptly because they have to get

it from the newspapers.
H.M.Jr:

And the state member banks - do they notify them?

Gaston:

Oh, you have asked them?

H.M.Jr:

No, I haven't. I want you to.
Oh yes, I will.
All right. Now, who wants - who's got anything?

Gaston:

H.M.Jr:

I'd ask the Radio News to carry it tonight.

250
-3-

Oliphant:

I've got some personnel problems, some very interesting ones, for you.

H.M.Jr:

Oliphant:

Is that Shafroth and Ryan?
Yes. And another one.

H.M.Jr:

And another one.

When do you want to bring me up-to-date, Ros?
Magill:

Any time.

H.M.Jr:

I mean when will you be ready to talk?

Magill:

I'm ready now, at your pleasure.

H.M.Jr:

O.K.

Do you (Taylor) want to call up Ransom and tell
him that I'd rather have him for lunch tomorrow
instead of today. And does he want to bring anybody

with him? Huh? I'll put it down for tomorrow, one

o'clock.
Taylor:

All right.

H.M.Jr:

Well, supposing you (Magill) come in at 10:30.

Magill:

All right.

H.M.Jr:

George?

Haas:

I've just got a few things. Here's this memorandum

on the
H.M.Jr:

Oh, grand. Now, who else gets that?

Haas:

Anybody you wish.,

H.M.Jr:

Well, who wants it?
What is it?

Bell:
H.M.Jr:

It's a memorandum on how the small man can or can not
finance himself.

251
-4Haas:

I should think it would have some relation to Ros.

Viner:

I'd like to see it.

H.M.Jr:

Take notes on who wants it, George.

Haas:

I've only got two now, Mr. Taylor and Mr. Magill.

Oliphant:

Bell:

I'd like to see it.
I'd like to see it as a matter of interest; I'd
like to read it. You (Lochhead) get it and I'll
read it.

-

Lochhead:

Let me have a copy and I'll let Dan read it. Only

Viner:

Pass it on.

H.M.Jr:

Cy wanted one. Give one to Riefler; he'll be here

Haas:

And I'll give one to Herbert.
Incidentally, I'd like to compliment your organization
on that financing memorandum. I think it was excellent.
Thank you; I'll tell them about it.
There's one - there's two other things. One is
that there is going to be a budget summation. The
estimates - I gave them to Danny unofficially, but
they haven't officially cleared the Treasury. You
haven't reviewed them. Last time you asked Ros to
do it.

H.M.Jr:
Haas:

one will do.

tomorrow.

H.M.Jr:

What's the business forecast?

Haas:

Oh no, it's the - each time a new budget summation
is put out, we review all the estimates again. We
have done that. Which took us four weeks.

Magill:

What have you done with the Commissioner?

Haas:

I didn't get that.

252
-5-

Magill:

I said, to what extent have you cleared with the

Commissioner of Internal Revenue?

H.M.Jr:

Last time he didn't agree with our estimates.

Haas:

I haven't contacted him at all. I didn't want to
do that. I thought it would be better to run
through you.

Magill:

If you like, I'd be glad to look them over. Would

you?

H.M.Jr:
Haas:

I would. I think we ought to avoid being shy.
I think Helvering ought to be in at the meeting
that's called.

H.M.Jr:

Well, if it's agreeable to Magill I'd like him to
handle it for me. I don't see anything particularly
in it for me. I think Taylor ought to sit in on it.

Magill:
Bell:

What's your deadline?

I've got to clear this whole budget summation in
three days - when the President is here, and I
understand that will be the 16th, 17th, and 18th.
I'm going to spend all tomorrow morning with the
Secretary on it.

H.M.Jr:

Thursday.

Bell:

Oh, Thursday, that's right.
He and I are working together on it Thursday

H.M.Jr:

morning.

Bell:

Magill:

So the deadline is certainly Saturday of this week
for any further revision.
Why don't - try to see the Commissioner, say, this
afternoon? Is that all right with you (Taylor)?

Taylor:

(Nods yes)

H.M.Jr:

All right. And then if there is anything - well,
I'm going to leave it this way, if you don't mind.

I think - because I remember the last time I pinned

the responsibility on you, and then when it left
your hands - you and Taylor went to Bell, and I

253
-6-

worked with Bell direct.
Magill:
H.M.Jr:

I don't know about that last part, but that's

about the

I think that's about right. After all, Bell

was seeing it as Director of the Budget and not
as a member of the Treasury, so when it leaves the
Treasury it ought to have your (Magill) O.K., and
then it goes to the Director of the Budget. Right?
Will you assume that responsibility?
Magill:

I will.

H.M.Jr:

What else, George?

Haas:

Some time when you have a minute you might want to

look over those business charts and daily charts,
which you haven't seen for a while. I can give you
a business memorandum today too, if you want it.

H.M.Jr:

All right. Don't - hold on to that business memorandum. I want you to give it to me personally.

I'll try to fix up a time. Is that clear to you?

Haas:

That's clear to me.

H.M.Jr:

Now, how near ready are you to giving Magill this
tax stuff?

Haas:

He has it. I have a copy for you; I'll have it

H.M.Jr:

But he has it?

Hass:

He has it all bound up in ribbons.

H.M.Jr:

When did he get it?

Haas:

Oh, I could have got it to him an hour or two
earlier, but he told me he didn't want it until

trucked in.

today.

Magill:
H.M.Jr:

I gave him until today. George would have had it

on September 1, as stated.

But you (Haas) came through.

254
-7-

Viner:

George ought to give him a deadline now on reading

H.M.Jr:

All right. Well then, you've got it, huh? Well

it.

then, George has made good on two things, hasn't he?
That's something.
Viner:

Haas:

I read one of them; I thought it was swell.
There's certain things in his financing memorandum
that have to do with this gold question. I think
you (Viner) might like to read it.
I'll give you a copy.

H.M.Jr:

I mean there's a first part of it - there's certain

H.M.Jr:

things there about excess reserves and that sort of
thing which I think would be helpful. was to me.

All right, George. Now, the only other thing which

I understand is still undone is that memorandum which
I gave to Mr. Taylor and which was given me by
Stewart McDonald; it has to do with his complaint
against Home Owners Loan. When do you think that
will be done?

Haas:

H.M.Jr:

Maybe the way to get that thing out is to say when

you want it. We'll get it.

Haas:

No, I'm not - under the new system I don't give you
a date; I ask you when you think you can do it
comfortably. Comfortably.
Could I look over my situation?

H.M.Jr:

Tell me tomorrow.

Haas:

O.K.

H.M.Jr:

Tell me tomorrow when you can do it comfortably,
without using sweat shop methods.

McR:

And without hiring too many new ones.

Haas:

Be quiet, Mac.

Bell:

Is that the same thing as the President's letter
dealt with?

-8-

Taylor:
H.M.Jr:

It's all the same thing.
I don't know about the President's letter.

Bell:

Don't you?

H.M.Jr:

No, what's that?

Taylor:

Mr. Daiger wrote a letter - a memorandum for Mr.
Eccles, and the President took the memorandum and
wrote to us and Mr. Eccles.

H.M.Jr:

Well then, if he wrote it - he's working for

255

Stewart McDonald, so it must be the same angle.

Well, just before I left Stewart McDonald handed

me a memorandum which I handed to Taylor, and

Taylor handed it to George Haas. Now, at the
staff meeting tomorrow morning George will tell
us when he will give us something on it.
Now, Jake, if you could this morning - you know what
I want, Jake - and suppose you could sort of - no
reason why you shouldn't talk with anybody in the
Goldenweiser group, and suppose you be ready to talk
to me by three. I mean we could sit down and chin

about it. What?

Viner:

Sure.

H.M.Jr:

Now, would you rather put the thing down in writing,
your own impressions, first? Is that crowding you
too much, to have a preliminary talk at three?

Viner:

You mean give you a little memorandum at three

H.M.Jr:

and then talk to you about it?
Yes, and talk to me about it. What?

Viner:

All right, I'll do that.

H.M.Jr:

This is all terribly confidential, but for those of

you who weren't here, we have moved pretty fast the

last couple days, and we're thinking very seriously
of discontinuing sterilization of gold for the time
being. If we do it we want to announce it next
Monday. And then right after that - there's no
particular hurry on the question of 9-months bills;
that will come afterwards, but we

-9-

Viner:
H.M.Jr:

256

Let me get this straight. No further sterilization
for the time being, or is it desterilization?
No, I hadn't thought of that. I'd just thought of
stopping the sterilization - of just stopping the
sterilization, - in my own mental reservations, until
the first of January, but in the announcement I wouldn't
give it any time limit. Just stop the sterilization.

You'll find that their figures show that between now
and Christmas excess reserves will go down to between
two and three hundred million, with three or four of
the big banks in New York minus. See?

And the thing that broke so nicely was that Ransom
approached me on behalf of himself and Eccles.
They approached me, and they wanted - they felt that
the thing to do was an open market operation, but

Ransom feels that it wouldn't be effective. But we

feel that - here I feel from what I've got that if
that was done it might call the turn of things -

might force crops, might force a change on corn,
and everything else - I mean the whole business.

The thing is just too tight; it's getting tighter
all the time.

And they admit that it will go down to two or
three hundred million dollars. Now, if we can
put 250 to 400 million dollars more gold to work
between now and the first of January, it will
just ease that situation. I told Ransom, "I'm
not going to wait once we make up our minds that
we're right, see?" But they've got a very tight

situation and it's getting tighter all the time.

Oliphant:
H.M.Jr:
Viner:

Very spotty distribution of the excess too.
Oh yes, and it hits the big New York banks the
hardest; that's where it's going to hit them.
Have they given any thought at all to their
lowering their reserve requirements?

Taylor:

No.

Viner:

They think that's out of the question. That seems
to me the most logical move.

257
-10-

Taylor:
Bell:

They're talking about open market operations.
They'd buy governments first.

Viner:

Why not the other?

Bell:

I don't know; that's the way they're thinking.

H.M.Jr:

Well, I don't want to - what I'd like - I don't

want to argue; I'd much rather have you put your
own thoughts down in writing.

Viner:
H.M.Sr:

I just want to know what's in the air.
Well, I haven't - I think the Board is meeting
this morning. But as far as - if Goldenweiser
is free there's no reason why you shouldn't go
over and talk to him, see? But I'm not going
to have - it's either - it's one of those things
that have to be done, and I'm not going to have

one of these long rows.
Oliphant:

Not under the new regime.

Viner:

They tell me Goldenweiser is away.

Bell:

He was last week. Away on vacation. He may be

H.M.Jr:

All I want - I want it absolutely confined to the
Federal Reserve Board here. I don't want to talk
to anybody in the Federal Reserve of New York. That
includes Williams; I don't want to talk to Williams.

back - Labor Day.

Federal Reserve Board, Treasury, nobody else.
Cy?

Upham:

(Nods nothing)

H.M.Jr:

If we do this, then I may want you to make one of
your swings around the country after the announce-

ment, talk to the banks, explain it to them, get

their reaction. See? If we do it. I mean I'd want

you to maybe leave here next Sunday to make two or

three weeks' swing through the country, going out
and explaining what we re doing, getting their
reaction.

258
-11-

And the interesting thing - they all say we
want to sell a one-year certificate. Then you
say, "All right, when should we sell it?" And

there isn't anybody can tell me when the banks
want them. They all say the country banks want
them, but do they want them weekly, monthly,
quarterly? Nobody knows. Here's a man like
Ransom admits he doesn't know. Now, if he
doesn't know, what chance is there for me to
know? See what I mean?

What I don't want to do, Cy, is to sell something
that they tell me in New York that the country
banks want, when maybe it's the last thing in the
world the country banks want. In other words,
if we're going to change our bills to 90-days,

discontinue 9-months, what do the country banks
want? I want to get it fresh, firsthand? I don't
want to have the New York crowd tell me that's

what they want and find it is just what they don't
want. See? I mean they seem to think they're just
staying awake nights waiting for a one-year certificate. Maybe it's the last thing in the world that
they want; and the only way to find out is to go
out and ask them.

Have you had any vacation?
Upham:

Oh yes.

H.M.Jr:

Is your mother all right?

Upham:

Yes, she seems better.

Lochhead:

There's nothing new since 1 saw you before.

Oliphant:

What's the general news? Is Bonnet going to lick

Lochhead:

What's that again?

Oliphant:

Is Bonnet going to lick his job?

Lochhead:

There seems to be very general doubt as to what

the job?

real progress they've made. The main point is,
though, that they have managed to gain slightly

259
-12-

in their gold reserve since he went in. But
the decree period is over now and they're watching
to see what he'll be able to do.
Viner:

But he's done well considering the circumstances.

Lochhead:

Considering the circumstances, I think he has
done very well.

H.M.Jr:

They have an excellent tourist trade.

Oliphant:

Have they?

H.M.Jr:

Mrs. Klotz says they have a wonderful tourist trade.
George, you go right along on this thing - your
crowd - this question of whether we should stop

sterilization or not.

Haas:

I have already started.

H.M.Or:

I want you to move right along.
Dan?

Bell:

I told you shortly after you left we got a letter

from Mr. Aldrich on the Sinking Fund, and we
acknowledged it, said that you were away and we'd

take it up with you as soon as you got back. I
have a rough draft of a reply which I will clear

with Herbert and also with Herman before we send

it to you; but I hope to get it out this week. It

is quite a lengthy document, and he raised a good

many questions.
H.M.Jr:

You thought it was coming from Ogden Mills.

Bell:

I think it has all the earmarks of Ogden Mills'
language, and he's on the Board of Directors,
so I'm sure it's Ogden Mills' letter. And the
interesting part of it, it was mailed from Darkharbor,
Maine, while Aldrich was on vacation, and I don't I know very well he didn't dictate it.

Viner:

You're sure? That's the Chase National Bank?

260
-13-

Bell:

Yes.

Viner:

Don't you think that's B. M. Anderson?

Bell:

No, I think it's Ogden Mills, because in his (Aldrich)
conversation with me he said that the Board of Directors
of the Chase National Bank was worried about our

policy in respect to Sinking Fund.

Viner:

I'd like to have a look at it.

Bell:

He's on that Board.

The other thing is the matter of information I've
dug up - the situation with respect to loans made
by the Resettlement Administration. They have made
about 151 million dollars in loans up to July 31;

52 million, 500 thousand of those loans have matured,
and they have received 23 million, 500 thousand on

account.
H.M.Jr:

About 50 percent.

Bell:

Yes. There's 29 million dollars of loans matured
but not paid, and there's 98 million dollars unmatured. It's about - a little less than 50 percent
collections.

H.m.dr:

What do we do, send a bill to American Molasses
Company?

Bell:

I doubt if that will be paid. It's better than I

Viner:

Yes, I'm surprised at the figures.
Recovered into the Treasury, 23 million dollars;
it's pretty good.

Bell:
H.M.Jr:

Bell:
H.M.Jr:

thought it was.

Well, that's all right. What else?
That's all.
All right.
Dan, when I sit down with you Thursday, one of the
things - if you could do, or have someone do it, have

261
-14-

it prepared - I'd like if we could to take a look
at the first sixty days on a cash basis; I mean

just to check it. I mean how much cash has gone
out, and eliminate the revolving funds; then compare
the first sixty days with the same sixty days last
year. Do I make myself clear?
Bell:

Uh-huh.

H.M.Jr:

What?
Put it on a strictly - I mean just let's
eliminate

McR:

Just money actually spent out of appropriations.

H.M.Jr:

Let's just eliminate the revolving fund; then
oughtn't to be very difficult.

break it down into regular and emergency. That
Bell:

No, it's all on the daily.

H.M.Jr:

Yes.
Mac?

McR:

I haven't got anything. Really, I'd like a chance -

will you have a chance some day this week?
H.M.Jr:

Yes.

MCR:

Nothing particularly urgent, but a few things that
have happened that I'd like to tell you about.

Most of them are done.
H.M.Jr:

Good.

MCR:

And a few things that I'm holding for you to see.
I suppose that Minnesota Collector is all cleaned
up. Magill took that, I suppose.

H.M.Jr:
Upham:

Congressman called in Saturday on that.

Magill:

Is he still there?
Yes, he's still there. I think Guy gave him a

Gaston:

deadline until Wednesday of this week that he'd
have to come in.

262
-15MCR:

I got hold of Steve Gibbons - Jim Farley's been
calling him about it - I gt hold of Steve and
said, "If you let the boss come back and see that

fellow is still in, somebody's going to burn."
And Jim finally got around to the point where
he's washed his hands of it; he said he can't
get his resignation. But Guy called him in the
other day and I understand that he gave him a

deadline.
Gaston:

I think it was Wednesday.

MCR:

And he's ready to see him go - that is, Jim Farley.

H.M.Jr:

When is the deadline?

Gaston:

I think it's Wednesday; not absolutely certain.
That's another deadline. But apparently we've got
Jim Farley in the frame of mind where he is willing
to recommend to the President that he fire this fellow.
So that's the situation.

McR:

H.M.Jr:

It's just where I left it.

McR:

Well, for all practical purposes.
(Hearty laughter)

Except Jim Farley's frame of mind.
H.M.Jr:

Well, the last time Jim - just before I left, Jim

had his secretary call me up and he wanted me to
know that he couldn't do anything because this judge
who was now the boss of Minnesota was in the hospital
how could I expect him to make up his mind?
And my Collector at Cleveland?
MCR:

Oh, you have a Collector at Cleveland.

H.M.Jr:

Same one?

MCR:

No, he's out, and you've got a new one. Everybody
agreed on him - was a good man, selected, endorsed
by both Senators.

-

263
-16-

H.M.Jr:

Now what will we do with the other two fellows -

McR:

I think we'11 just clamp down on them. I wasn't

H.M.Jr:
McR:

Customs and Secret Service men?

willing to act.
Put them on the list; I'll get around to them.
There's one more thing that I thought I'd tell you
before you - you've probably found out otherwise,
saw it in the paper; we have a new Register of the

Treasury.
H.M.Jr:

So I understand.

Taylor:

I reported on that.
"id you tell him that you signed the papers while
you were kicking and squealing? That's what he's

McR:

told me.

H.M.Jr:
McR:

Gaston:

Well, the last one was President of the American

Magicians Society.

This one is a dentist. Herman insists that we set
up a clinic for him.
We're going to announce this closing for tomorrow
morning's papers?

H.M.Jr:

Well, I'll talk to Burgess. I want to get all the

machinery set. We can give it out tonight for tomorrow morning's papers.

Gaston:

You don't want any press conference today?

H.M.Jr:

Oh no.

All right. I'd like Herbert to stay a minute.

264

Chronology of Important Events
in China

.

From July 1, 1937 to September 7, 1937.

(A detailed chronology is being maintained

and is available.)

265
FAR EASTERN EVENTS

July 1 - July 8, 1937: The Amur Incident (Russia-Japan)
Soviet ship sunk in the Amur River by Japanese as a result of
disputed ownership claims to islands in the Amur River--the boundary

between Manchukuo and Russia. Both sides mass sea, land and air

forces but incident is settled when both agree to withdraw. Ownership of the islands remains unsettled.

July 8, 1937: The Lukouchiao Incident (North China-Japan)
Unexplained Japanese troops 10 miles west of Peiping clash at
Marco Polo Bridge with Chinese troops. Slight casualties on both

sides. Both sides claim to be "protecting their rights".

July 9 - July 19, 1937: Period of Negotiation
Japan meeting with unexpected resistance from Nanking government.

Shifts the basis of her demands from "an apology from Nanking" to a
demand for a purely local settlement. Japanese "demands" stiffen
during period of negotiation (see p. 3 and p. 12 - Peiping dispatches).
On the 19th, General Sung Cheh-Yuan, commander of the 29th Army, makes

independent agreement with Japan to withdraw his troops. At Nanking
Japan asks for demilitarization of North China.

Intermittent fighting of increasing intensity in the Peiping area
during this period. Japan rushes reinforcements to area increasing
her strength from 7,000 on July 8th to 16,000 on July 16th. Severe
clashes on the 14th and 15th. Movement of 100,000 Manchukuoan troops

toward Tientsin; one complete division (20,000) dispatched from Tokio

on July 15th.

July 20 - July 26, 1937: Increasing tension
Nanking rejects the independent settlement of General Sung.
The 37th division of the 29th Army rebels from General Sung's orders
and engages in new clashes with Japanese troops. Japan presents six
major Chinese-Japanese "issues" to Nanking (see p. 21) and Japanese
military extremists advocate 9 reasons for war (see p. 24).

July 27 - July 29, 1937: Both sides declare for "war"
Negotiations break down. Active war preparations on both sides.
Nanking pledges support to North China and starts moving troops.
Important pledges of aid to Nanking from war lords of Shantung and
from General Mao Tse-Tung, Chief of the Chinese Communist Armies.

266

-2Severe fighting at Peiping, Fengtai, Tungchow and Langfang.
Systematic destruction of Tungchow by planned Japanese attack using
airplanes, bombs, artillery and machine guns. First major engagement of the undeclared war. Surprise attack by Chinese on Japanese

at Tientsin. Japan begins systematic airplane destruction of cities
surrounding Peiping. 2 American marines killed in Peiping.

July 30 - August 5, 1937: War in North China
Chinese troops mass at Nankow Pass: Japanese troops outside of

Kalgan. Japan calls up army reservists on August 5th (reported years
called back to 1927). Nanking receives pledged support from war
lords of all important China provinces, including the Chinese Soviets.
No accurate estimate of army strength on either side. Skirmishes
throughout Peiping-Tientsin area.
August 6 - August 9. 1937: War fear spreads to Central China
Japan announces intention of controlling North China as far south
as Yellow River. Chiang Kai-Shek announces China will yield no more
territory to Japan. Foreign diplomats (on advises from Japan) advise

their nationals to leave central China. Chinese refugees flee from

Nanking to Shanghai.

August 10, 1937: The Hungiao Incident - at Shanghai
1 Japanese naval officer and 1 seaman killed by Chinese when
they attempt to enter Hungjao military airdrome outside of Shanghai.
1 Chinese gendarme wounded. Conflicting Chinese and Japanese stories
of the incident.
August 11 - August 12, 1937: Tension at Shanghai

Investigation of incident and negotiations aided by foreigners.
Mayor Wu of Shanghai meets Japanese demands but on August 12th

27 Japanese warships, 12 destroyers, 1 light cruiser and 2 aircraft

carriers massed at Shanghai harbor. 500 - 1,000 Japanese sailors landed.
Chinese regular troops marched into Shanghai.

August 13 - August 14, 1937: Fighting in northern Shanghai
Japanese naval forces on patrol fought with Chinese in civilian
garb. Japanese forces estimated at 8,000; land, sea, air reinforcements being rushed in.

-3- -

267

August 15 to date: Outstanding events in Shanghai
August 15- 863 killed, 1,140 wounded by Chinese bombs which fell
on the Cathay and Palace Hotels.

- 3 Americans killed.
- Foreign concessions north of Soochow creek bombed.

August 21- U.S.S. Augusta hit by airbomb of undetermined origin.

1 killed; 18 injured.

August 22- One-third of International Settlement ablaze. (Yangtzepoo
district). Chinese Chapei, Japanese Hongkew destroyed.

August 24- 400 dead, 1,000 injured in air bombing of business
district at Sincere and Wing On department stores.
Anthony Billingham of New York Times severely wounded.

- Secretary Hull urges belligerents to refrain from war.
Reaffirms American policy as expressed in Washington
Pact (1922) and Kellogg-Briand Pact of Paris.
August 26-

Japan orders blockade of Chinese coast as far south as
Hong Kong. Foreign shipping exempted.

August 27- British Ambassador severely wounded by Japanese fliers.

- Japan serves notice foreign shipping may be included in
blockade.

August 29- Japanese bomb Nantao - Chinese district adjoining French
concession.

August 30- British note to Japan demands formal apology for shooting
of British Ambassador, punishment for those responsible
and assurances of non-occurrence.

- Russia-Chinese non-aggression pact announced.
August 31- U.S.S. President Hoover bombed by Chinese planes.
7 members of crew injured.

- China appeals to League of Nations - blames Japan on
4 counts (see pp. 65-66)
September 2-Japan begins systematic plane attacks along 2,000 mile
front from Nankow in north to Canton in south.

-4-

268

September 4- American nationals urged to leave China. Warships will
be provided.

September 6- Japan launches big offensive on whole Shanghai front.
Chinese lines firm.
- Japan extends blockade to whole China coast; exempts

Tsingtao and leased foreign territory.

- President Roosevelt warns Americans to leave China or

remain at their own risk.

September 7- Tokio responds to British note but refuses to accept
responsibility for the wounding of the British Ambassador.
Great Britain offended. Summons cabinet.
- China will invoke League Covenant; perhaps under Article SVII
(which provides for conflicts between League members and
non-members) which because of its severity may cause
"trouble" at Geneva.

The situation in Shanghai today:

Shanghai is a shambles. Business is paralyzed, property destroyed
and foreigners in increasing danger. Neither China nor Japan has gained
a distinct advantage. Chinese resistance has been unexpectedly strong.
The area of conflict has widened to include the Nanking-Shanghai district
with heavy concentrations 20 miles north of Shanghai at Luiko. Foreign
observers on September 2nd admitted for first time China has a chance
of success. The "big push" launched by Japan at Shanghai on Sept. 6th
has so far netted Japan no major success.
Estimates of Japan's strength in Shanghai vary. Probably 100,000
regular army troops have been sent, of whom not more than 60,000 have
been landed (estimate of September 7th). Landing troops has been one

of Japan's main difficulties because of the water hazards in the whole
area and determined Chinese resistance.

Chinese strength in Shanghai estimated at approximately 200,000 all regular army troops.
The situation in North China today:
Chinese resisted Japanese at Nankow Pass from August 7th to

September 1, 1937. News from North China entirely controlled by
Japanese. Peiping-Tientsin area controlled by Japanese with government of Peiping now in Japanese hands.

--

269

Estimates on September 1, 1937 were 120,000 Japanese regular troops
in North China with approximately 100,000 Manchukuoan troops. These

latter (according to reports difficult to confirm) have shown strong
signs of revolt against Japan.

Chinese troops estimated (by Japanese sources) at 200,000 on
September 1st and 400,000 on September 7th. (There are no Chinese or
foreign estimates.)
Japanese admit unexpected resistance in North China. Chinese

sources claim their armies control the area 20 miles south of Peiping
and south from Tientsin, beginning at Machang.

The next major battle in the north will probably be near Machang
(south of Tientsin and on the main route from Nanking to North China),

where the Chinese are entrenched and the Japanese concentrating.

TREASURY DEPARTMENT

270

INTER OFFICE COMMUNICATION

DATE September 7, 1937.

TO

Secretary Morgenthau.

:

FROM

Jacob Viner

Subject:

Excess Reserves.

I believe that there is a strong case for taking action
aimed at bringing about a substantial increase in the existing level

of excess reserves. I have at no time been convinced that it was
desirable to make a drastic decrease in excess reserves while business

activity was still at a depression level, and it is still my opinion
that in general brakes should not have been applied before it was
desired actually to check forward movement. In any case, the manifestations of prospective tightness of money, the virtual cessation
of new security issues, the decline in bond and stock prices, and

the signs that a substantial reduction in business activity is impending make this an appropriate time to restore abundant excess reserves

to the banks. The issues in question, therefore, are

(a) the amount of increase in excess reserves which is desirable,
and

(b) the choice which should be made as between the several available methods of increasing the excess reserves.

As to the amount, I believe that it would be a good working
rule that the excess reserves of the system should not be permitted to
fall below $1,000,000,000 as long as increase in business activity at
a greater rate than the rate of increase pervailing - if any - was
desired, and that the money market should gradually be taught that a
fall in the reserves substantially below $1,000,000,000 was to be regarded as a signal that the control authorities thought contraction was
necessary, and would take whatever steps were necessary to bring it
about if it did not occur spontaneously.
The usable methods of increasing excess reserves available

at present are: (1) reductions in rediscount rates of the reserve banks;
(2) open-market purchases of governments by the reserve banks; (3) re-

duction in the federal reserve requirements; and (4) cessation of

sterilization of gold inflows and (5) desterilization of the "inactive"
gold. These will be commented on in the order in which they are listed

above.

-2(1)

Reductions in Rediscount Rates.

This is a desirable move, but as the rates of most
of the banks are now down to 170, the possibilities in
this direction have already been exploited to their
practical limits. This method, moreover, has, and has
ha in the past, very limited effectiveness, because the

member banks, since 1922, have shown a persistent and

marked reluctance to become indebted to the federal reserve banks, except on a very temporary basis or when
they were in real distress, and when for any reason they
have become indebted, they have looked upon their indebtedness as a claim on their reserves, so that while technically
their reserves may have increased as the result of such
borrowing, psychological y the effect on their lending
policies was null or nearly so.
(2)

Open-market Purchases.

Open-market purchases would have a direct and im-

mediate effect on excess reserves, corresponding fairly
closely in amount to the amount of the purchases. They
would result in a transfer of holdings of governments
from the member banks to the federal reserve banks, thus
increasing the earnings of the latter and, by reducing
the earning assets of the former, forcing them to seek
other security and commercial loan investments. Openmarket purchases would also, of course, tend to raise
the prices of government securities. In case of undesirably rapid credit expansion, the process could
readily be reversed. The only important objection to

open-market purchases under the present circumstances
that I can see is that the bankers and the money-market
public in general associate open-market purchases closely

with Treasury finance, and almost invariably interpret
them as directed by a narrow and short-run view of
Treasury interests rather than by long-run general market
considerations. I would think it inadvisable, therefore,
to increase substantially the holdings of government$ by
the reserve banks until such progress has been made toward budget balancing and genuine reduction of the debt
as convinces the money market that there is no longer any

real danger of inflation resulting from Treasury deficits.
(3) Reduction in the Fede al Reserve Requirements.
I would recommend this met od as the most desirable
one of those now available for increasing excess reserves.
It would be the one least closely connected with Treasury

271

272

-3finances and therefore least likely to be interpreted as

dictated by narrow Treasury considerations. It would demonstrate to the public that the reserve requirements were a

reversible and potentially flexible instrument of credit
control. It would have a relaxing effect on bank credit

throughout the country, and not merely in the financial
centers. It would be more favorably received by the public,
I believe, than would the use of any of the alternative

methods.
(4)

Cessation of Sterilization of Gold Inflows.
This would operate to increase excess reserves to the

extent of the inflow of gold. Since it is impossible to
forecast this inflow, there would be little basis for pre-

diction of the extent or the timing of the increase in excess
reserves resulting therefrom, and banks would undoubtedly

wait for actual results on their reserves before expanding
their loans or investments. It would represent a reversal
of a practice of recent origin, and would therefore be interpreted as the correction of a mistake rather than as the
routine and sound application of a reversible control device.
Since gold flows are unpredictable, and since sterilization
is a Treasury operation, while credit control is primarily
the responsibility of the federal reserve system, I think

there is a great deal to be said for continuing sterilization
operations as a routine practice, leaving it to the federal
reserve to provide the needed flexibility in credit control.
Otherwise, possibility of conflict of policy, and operations
at cross purposes by Treasury and federal reserve, could

arise too easily and with possibility of great damage. There
is no connection now between gold flows and the volume of

credit needed by the country for purposes of either internal

prosperity or international equilibrium. Sterilization

breaks the otherwise automatic connection between gold flows

and national volume of credit, and is therefore under existing conditions a logical procedure if practiced as a regular
routine. It would be a mistake, I think, to abandon this
routine, as long as the gold situation continues to be abnormal - which will be a long time - and as long as other
means of credit control are available.

(5) Desterilization of the Inactive Gold.
Assuming that the federal reserve authorities were willing
to lower the reserve requirements or to carry out open-market
purchase, I would see no adequate reason for desterilizing the

-4 inactive gold. But if they are unwilling either to lower

the reserve requirements or to conduct open-market purchases,
I would recommend desterilization of, say, $500,000,000 of

the inactive gold while continuing to sterilize subsequent
inflows of gold. This would make sterilization the routine
procedure, and desterilization of previously-sterilized gold
a special intervention with definite credit-control objectives
and of definitely prescribed quantitative dimensions. The
desterilization would thus continue to be the normal practice,
and desterilization would become merely an available, flexible
instrument of credit control, used ,AS far as the public need
know, only when and because it seemed to the credit control
authorities the most suitable of the various instruments
available.

Summary of Recommendations:

(1) Action to be taken to increase excess reserves
to approximately $1,000,000,000.

(2) Instrument to be used, in order of desirability
I. Lowering of reserve requirements.

II. Open-market purchases

III. Desterilization of inactive gold.

IV. Permitting future inflows of gold to
increase excess reserves.

273

274
RE TREASURY POSITION ON POSSIBLE
INVOCATION OF NEUTRALITY ACT IN
SINO-JAPANESE WAR

September 7, 1937
4:00 p.m.

Present:

Mr. Taylor
Mr. Oliphant
Dr. Viner
Dr. Feis

H.M.Jr:

Well, we're at your service, Mr. Feis.
Well, it's just within this room. The Secretary (Hull)
is going to talk with the President first chance he
gets about the possible application of the Neutrality
Act. No decision has been reached, but events seem
to be moving in that direction, and there are many
reasons for believing that if it is to be done it is
best done rather promptly. And the question therefore
arose as to whether the Treasury had any business on
hand with either of the belligerents that might be

Feis:

affected by such action. That was Question One.

Question Two, whether, since invoking Section One

of the Act would bring into operation also Section

Three of the Act, the Loan Finance Section - whether
there was any preliminary planning that ought to be
done there. Those were the two questions.
H.M.Jr:

Well, Mr. Oliphant has prepared a memorandum. He

had plenty of time to prepare it, because he was
ready last Friday because I cabled him, asked him gave him a week's notice to get ready, feeling in
my bones that this would come. So we're ready.
As a matter of fact, interpreting what Mr. Oliphant
says, the Treasury can do two things. Inasmuch as
our transactions with China originated prior to any
trouble, anything that you do with the Neutrality

Act - I might say - I first make this sweeping statement, that it can be so interpreted legally, lawfully,
that anything that you do under the Neutrality Act
will not affect any position of the Treasury now.

Right?

Oliphant:
H.M.Jr:

That's true of the Neutrality Act, but not of
international law.
That is true of the Neutrality Act.

275
-2-

Oliphant: True of Neutrality Act, but not of international law.
H.M.Jr:

Feis:

Now, it would be a discretionary policy whether we
decide to continue to buy gold and silver from
Japan and China - purely a policy matter.
Mere purchase of gold and silver - that's not a

Oliphant:

so it is in the very nature of it a policy question.
Can I go - sort of go over it?

Feis:

Would you, yes.

Oliphant:

The Neutrality Act has no application at all to the
Treasury, the Treasury being part of the sovereign
and the sovereign not having been mentioned in the
Act. So we just wipe out the Neutrality Act.

loan transaction which would come under the Act,

The second thing we have to consider is the general

principles of international law. What conduct on
our part, under general principles of international
law, would be unneutral action? Now, from our standpoint I divided those this way. We can continue buying and selling foreign exchange in the ordinary
course, where the purpose is not to advance a line
of credit to one of the belligerents - assuming you
have declared a state of war to exist; that is what
brings this international law into operation - but
merely to protect the dollar. Now, second, we can't
make loans, can't advance credit under the principles
of international law; and that would be true, under
the authorities, even though you had the prior agreement to make the loan - situation where you have a
treaty, and so forth, you're bound to make the loan if in making the loan the advancement of credit would
be an unneutral act.
But now, when you come to the final thing - Can you
buy their monetary metals? - there's just no precedent
on that; that's wide open, and you could decide that it seems to me you can make your international law
by taking one position or the other, depending upon
what as a matter of policy you want to do, so far as
what the courts would finally decide to be an unneutral
act is concerned, not talking at the moment about
whether or not Japan would object.

276
-3-

Feis:

There seems to me to be intermediate ground there.

The invocation of the Act preventing private individuals
from doing certain things would necessarily have to
be taken into account in considering the decision
of the Treasury of doing similar things.

H.M.Jr:

No.

Feis:

It is that that seems to us to have more bearing
than that vague body of violated and contentious
rules that goes by the name of international law

in this field.

"et me explain what I mean. You ban loans to the
belligerents by private individuals. If, having
done that, the Government extended loans, it certainly would have to take into account in the de-

cision the fact that it had prevented individuals
from doing it.
Oliphant: Well, as I read the international law authorities,
it would be an unneutral act for the Government to
make the loan, so that would be out.

Feis:

I certainly am not prepared to dispute what is or
is not international law. I can only give you my
own observation that every discussion that I have
sat in at with the lawyers on what was or was not

international law in this field of neutrality before you're finished, the lawyers' case goes completely to pieces. They usually refer to the pro-

posals made at some conference which were only accepted

by part of the conference, and there's been - it's
been just as frequently violated as observed. I
doubt whether you'd find anything of accepted doctrine
on this matter of loans to belligerent governments
that would entitle it to the term of law.

I put the same matter this way - which comes down to
being something of the same thing - that if you did
make a loan - the Treasury - to either belligerent
government, under any but very special circumstances
it would be apt to be regarded by the other government
as an unneutral act, just as the financing of the
rebels in Spain by Italy and Germany is of course
regarded by the Spanish Government.

H.M.Jr:

May I interrupt you a minute, if you don't mind.
I mean at 4:30 I've got to decide what we're going to

277
-4-

do about our present financing and if you want

to continue the discussion of the further tech-

nicalities, I want you to go now. But I'd like to

say something which is not technical, if I may.
Pee what I mean? I mean this thing can go on for
hours.

Feis:

Sure.

H.M.Jr:

And Mr. Oliphant is available, Mr. Taylor and Mr.

Viner are available. Am I right?
Now, I'd just like to say something if you don't
mind, see? Whether you invoke the Neutrality Act
or not - what I am going to say - I mean I don't
think it will stop Japan from doing what she is
doing now. I mean - let me give you my thought.
I mean she's going to go right on just the same.
Congress has placed the responsibility on the
President of the United States - I mean to do
certain things under the Neutrality Act; and I
suppose Mr. Hull advises whether he should or
shouldn't, and you're coming over to find out how
it would affect us, and I appreciate the courtesy don't misunderstand me.

Feis:

That was the chief thing.

H.M.Jr:

And these gentlemen are at your service for as
long as you want.

Now, the seed that I'd like to plant with you is
this, that if the President and Mr. Hull get to the
place that they want to do something to stop this
thing, then I've got a plan which I think is perfectly legal, and that is - haven't had a chance
to talk about this, but I want to drop the seed -

that if France and Great Britain and ourselves should

agree that we wouldn't buy any more foreign exchange
from Japan, or gold, and give no reasons and no

explanation of any kind, but just don't do it - just
don't do it; and if they ask me, "I don't know, I
just don't know; I haven't - I just don't understand
it - an - there must be some misunderstanding" overnight those people can't buy their raw materials.

It is effective at once. At once! And we can do it!

278
-5-

We've got the power, we've got the instruments,
we've got the agreement, we can do it. And
nothing in writing, nobody can make you talk,
nobody can do anything. What the hell is Japan
going to do?

Oliphant:
Taylor:

H.M.Jr:

Now, if you people get to the point that you want
to stop this god-damn thing, I believe - and if
the President and Mr. Hull want me to do it - that
in one week I can have it for them. And Mr.
Oliphant can tell me whether I can get away with it.
No question about the legality.
You can do that at any time.

I just don't explain. And this thing is effective
at once. It's just like the study I made on oil
for Italy for the President. If they had held that
oil sanctions meeting in Geneva, they could have
stopped Italy. She didn't have the oil. The others
didn't have the guts to do it. Here we stand while
they cut off our noses, as if we've got to do it.

And we suffer by it. Why not retaliate and simply
freeze this thing and say to these people, "Gentlemen,
we're very sorry, we haven't got the foreign exchange
to give you."
Japan on January 11 of this year, without saying
anything, put in a notice that they wouldn't give
anybody foreign exchange, and how long did it last?
On January 11 they wrote - we got the cables; they

put it on January 11 of this year, and for Idon't know
from Japan. We didn't say it was an act of war.

how many weeks nobody could get a dollar's exchange

Nobody could get it. We sent cables over - "When
do you think you're going to pay our merchants?"

"After a while." It ran through till "pril. We

didn't say it was an act of war. Could our merchants
get paid? They could not! They put in exchange control and they're "sorry, gentlemen, but - SSS - we
haven't got the exchange." And I think it ran from
January 11 to somewhere in April. You couldn't get remember? - seven thousand was the limit, wasn't it?
Feis:

I've forgotten.

279
-6-

H.M.Jr:

Did anybody say anything? Not a word.

Oliphant:

No, nobody suggested that was an unfriendly act.

H.M.Jr:

Not a word.

Feis:

I don't know which of two ideas you have in mind,
one that would involve the refusal to make available

in return for a yen or gold - an - dollars, pounds,
francs - is that the idea, or is it the other one,
the shutting off payment for the purchase of Japanese
goods, which is, I think

H.M.Jr:

No, we just don't - when they want to buy dollars

and pay us with yen, the dollars just aren't avail-

able.
Feis:

Well, that - I was trying to find out which of those

H.M.Jr:

We just don't make the dollars available. Just the
way - we just do what they did - I think it was
January 11 or - either January 7 or January 11 the
yen weren't available.
Couldn't get yen at any price.
Couldn't get them at any price. We simply say,
"Gentlemen, the dollars aren't available."
During that period they weren't looking for yen;

Oliphant:
H.M.Jr:
Feis:

two ideas

they were looking for dollars and pounds.

H.M.Jr:

It's the idea of furnishing them with the wherewithal
to buy supplies; that's the idea. Now, whether you
do it the one way or the other, it's the idea of giving
them the necessary foreign exchange with which to buy
materials. You can't do it alone, but under the
tripartite agreement we could do it, work the thing out
and have it ready in a week.

Feis:

Well, that, as you say, goes much farther than

H.M.Jr:

Well, I know, but I don't want to get into a long
lengthy discussion on this very fine point, see; but
as I say, these gentlemen are available for just as

280
-7-

Feis:

long as you want to discuss it. But I do want
to plant that seed with you.
Would I be safe in reporting that as far as the
Treasury considers at the present minute, the
application of the Neutrality Act would not
embarrass its arrangements with the Chinese

Government?

Oliphant:

H.M.Jr:

That's true; that is because they have this gold
on earmark. I don't think we could formally advance
credit under that arrangement without raising that
question of international law.
If they wanted to borrow.

Feis:

But if they want to sell us that gold or want to
export it
we've got to do it.
That's the first main question.

H.M.Jr:

We have to do it, because as I understand - and

Oliphant:

We ought to recognize it.

Viner:

We ought to.

H.M.Jr:

As between governments.

Viner:

But the other question, as to whether we could go
ahead and advance credit against that gold, is

Taylor:
H.M.Jr:

I've studied this thing - even if we were at war
with China and her gold was earmarked here, we'd
recognize it.

more delicate.

Feis:
H.M.Jr:

It is not a matter of law, though; it is a matter

of policy.
It's purely a matter of Treasury ruling. I mean
the only thing we have to decide is, against the
50 or 60 million dollars they've got with us, would
we want to lend them money against that? Now, if
we say "No," then all they've got to do is sell it.
And incidentally, they haven't used a dollar of it.

-8-

Feis:

281

That's the only thing.
As to the second question, Two, if they wanted to
move rather promptly - none of the obligations that
would fall on the Treasury, whether a loan or with
other departments - something to be worked out under
Section Three - you wouldn't need much time. That's
the control of credit by private concerns.

H.M.Jr:

Who has

Oliphant:
Feis:

Well, that's up to the Attorney General.
Well, that's something.

H.M.Jr:

Who has that machinery?

Feis:

There was a small committee at work just before I
went away that now has a preliminary report. Wayne,
you were on that.

H.M.Jr:

Well, who runs that machinery?

Feis:

Well, everyone on the committee - the committee's
report has not been put in - everyone on the committee
was unanimous in the idea that the main part of the
task would have to be carried by the Attorney General.

But it might be advisable - might or might not be
advisable to establish some system of reporting, both
for that purpose and also as a very useful government
record as to what was going on.

H.M.Jr:

Well, if you put this thing into effect tonight,

as far as the United States Treasury is concerned,

it doesn't embarrass us the slightest; we're ready,

and we can comply tonight.
Viner:

I think I'd bear in mind there that we might want
to use some of the exchange control machinery to

operate the neutrality restrictions.
Oliphant:

You mean that the Attorney General might.

Viner:

Yes, might want to use our machinery.

H.M.Jr:

Well, I haven't studied it. I mean when we had
exchange control, they set it up.

-9-

Viner:
H.M.Jr:

Taylor:

The power is still there, you see, and the
reporting requirement

I should think you'd want to do it through the

Treasury; I don't know.

From the conversations we had over there, the

preliminary conversations, why, it didn't seem to
me that - and to most of the other people - that
it would be particularly useful to invoke that.

282

FEDERAL RESERVE BANK
OF NEW YORK

OFFICE CORRESPONDENCE
CONFIDENTIAL FILES

L. W. Knoke

m Lahhead 283
DATE September 7, 1937.

SUBJECT: TELEPHONE CONVERSATION WITH

BANK OF ENGLAND.

Mr. Bolton called at 10:80 today. They had had a heavy day
in London, he said, with the franc under very heavy pressure since
opening. Cariguel must have lost a great deal of foreign exchange.
Sterling had likewise been under attack and so far he had sold
$6,000,000 at about 4.95 1/2 with two-thirds of the day gone. What
Loding's

prompted time weakness of the foreign exchange market were primarily

two factors: Firstly, the belief that the Japanese reply to the
British was an excuse rather than an apology and secondly, the dog
fight going on between Russia and Italy in which France might conceivably become involved because of her pact with Russia. But over

and above it all, as far as France was concerned, it was quite evident
from many sources that there was a very pesimistic feeling in existence about her whole position, not only because of the fear of a
possible war but because of the internal French situation. This
pessimistic feeling had existed for some time, even since Bonnet had
tried to clean up. The rich Frenchman had not and was not now bringing his money back to France. The underlying weakness in the French
position was by now so well known that whenever there was some aggrava-

tion of international politics a movement away from the franc, specula-

tive in origin, was promptly started. On the other hand, even when
conditions internationally had, from time to time, seemed to have improved in recent months, there had been no indication of repatriation
of French funds.

The Bussians had become quite heavy sellers of gold again.

28

FEDERAL RESERVE BANK
OF NEW YORK

DATE September 7, 1937.

FFICE CORRESPONDENCE
CONFIDENTIAL FILES

SUBJECT: TELEPHONE CONVERSATION WITH

L. N. Knoke

b

OM

BANK OF ENGLAND

-2-

For the last eight days or se they had sold in London at the rate
of £2, ,500,000 a week; this amount was now being stepped up to about

£4,000,000. In explanation of these sales, they had, in their usual
evasive way, simply stated they needed the foreign exchange.

LWK:KMC

Q3VI202H
TEST
THINTHANGO

285
PARAPHRASE OF TELEGRAM RECEIVED
FROM:

American Embassy, Paris

DATE:

September 7, 4 p.m.

NO.:

1255
FROM COCHRAN.

As a result of international political developments
the Paris exchange market is nervous. Supporting the
franc at 132.96 to 94, considerable sterling was yielded
by the French control. It is said that the British control sold $6,000,000 this morning and that Lazard was an
important buyer. On the market belief that Van Zeeland,
special
in the/parliamentary session opening today to hear his
case, will be given a vote of confidence by a good
majority, the belga was firmer. The market is convinced,
however, that Van Zeeland's prestige has suffered and

that it is inevitable that he will resign before long.
Rentes were lower today and the forward frano was

more offered over the weekend. An unofficial estimate
has been made that since its creation and until today
the French fund for supporting rentes has spent 700,000,000
france.

The uneasiness today over the French monetary and

financial outlook is increased by the following domestic

factors, in addition to the international situation:
The

286
-20

The general increase in the cost of living and partioularly the rise in prices over the weekend of milk and
bread, the prospect of conflicts between Socialists and
Radical Socialists as the time for local elections draws
near, a slight unemployment gain, deficiency in the production of French coal and a price increase for imported
and domestic coal, the threat that labor troubles will
break out again, the high cost of the last Treasury loan,
and the weakness of the Treasury position as shown by
borrowing from the Bank of France.

I had a call today from Pennachio of the Bank of

Italy. Pennachio has just returned from a holiday in
Italy. He told me that there was such a heavy foreign
tourist trade there that hotel accommodations were

inadequate and that there would be a rise in prices.
Pennachio said he was informed that because of the

French labor situation, Italian automotive manufacturers
who have branch factories in France are considering

closing their plants.
BULLITT

EA:EB

287
PARAPHRASE OF TELEGRAM RECEIVED

FROM: American Embassy, Paris
DATE:

September 8, 5 p.m.

NO.: 1259
FROM COCHRAN

The French control is still yielding sterling at
132.97. Rentes down further and forward franc more
offered due to Hitler's renewed demand for colonies and
in

to causes mentioned/yesterday's cablegram. On the Paris

market as on other important markets, shares are declining. The pathetic impression caused by Van Zeeland's
appearance before Parliament has weakened belga. Today's

press denied recurrent rumors that Schacht may retire from
the Ministry of Economics and possibly from the Reichabank.

Late this afternoon I received a phone call from Beyen at
Basel that General Manager Quesnay had drowned; the details

are lacking.
I received a call this morning from Doctor Oscar

Busch bearing a personal letter of introduction from President Bachmann of the Swiss National Bank. Doctor Busch

orally presented his plan for an international gold pool in
which the United States would be expected to lead. He said
he was going on to Brussels and showed me a similar letter
of introduction to Van Zeeland.
BULLITT
EA:DJW

288
September 7, 1937.
8:40 a.m.

0:

Go ahead.

H.M.Jr:

Hello

Jim

Hello

Farley:
H.M.Jr:
F:

H.M.Jr:
F:

How are you?

Pretty well, I thank you. How are you?
Oh I'm very well.
Good. Hey, Henry, why don't you sign that damn
list so we can get it out of the newspapers
tomorrow morning.

H.M.Jr:

Well I'll tell you why - because I don't - I

suppose you know it that - that the financial
community is more jittery than they've been in
years and to come out the morning before our
financing that we're going to spend 23 million

dollars I think is just silly.

F:

Why you're crazy.

H.M.Jr:

Well I think you are.

F:

Why?

H.M.Jr:

Well why should we come out with a big expenditure

F:

H.M.Jr:
F:

program the day before our - our financing. Give
me a good reason to do it.
Well my God - everybody - every district in the

United States - it's a Labor Day - it's a good
thing from Labor's point of view.
Well listen

Twenty - Henry, twenty-six million dollars isn't
a drop in the bucket.

-2H.M.Jr:

289

If - listen, you try to do the financing. You

talk to the people there - they say they won't

buy anything. Have you talked to anybody down
F:

Well that isn't my business; I never talk with
them.

H.M.Jr:

Well it's my business and the President goes
away and he says, "Henry, you do it". He says,
"It's easy" and the people come down - they go
down there and they say they won't buy anything.

F:

Well, of course, I think it's all silly not to
do it; I don't give a damn personally but I think
it's silly not to do it right away.

H.M.Jr:

Well that's the only reason - I think to have a
story like that breaking the day before our

financing is - is - just - you - ah - Jim - ah if you'll - I think I'm a fairly truthful person;

F:

I don't exaggerate; I don't know any time in years
that the financial community is so shell-shocked
as they are right now.
Well why is that?

H.M.Jr:

What?

F:

Why is that?

H.M.Jr:

Oh you know, they're always either in the cellar
or on top of the roof and they're simply scared
too death and I've got 817 million dollars coming
due and it seems to me, if you don't mind my saying,
that this is a very unimportant thing and I think
our financing is very important.

F:

Well when would you release this?

H.M.Jr:

What?

F:

When would you release this?

H.M.Jr:

Just as soon as our financing is passed.

-3-

F:

230

Well all right I don't give a damn then but I think I may be all wrong from my point of view; I don't
think it need - I think from the communities they've
been waiting for this; it's usually done right after
the Congress adjourns

H.M.Jr:

Well if they'd have done it the way we used to do it ah - when I was here we did it the day after Congress
adjourned.

F:

Well I know but we had to wait until the President
signed the bills

H.M.Jr:

Well

F:

and then we were ready to do it - unfortunately
you weren't here and there wasn't anybody else over

H.M.Jr:

there to do it. You were the one to take the responsibility.
Well - ah - when I was here we all - we were ready;
your people were ready; we did it the day after Congress - always - the Monday after.

F:

Yes, well we waited; we were ready as soon as he had

signed the Appropriation Bill.

H.M.Jr:

Right.

F:

The damn thing should have gone out last week, to

H.M.Jr:

Well I agree with you but now because they didn't,

F:

be truthful about it.

I think to have it just the day before my financing,
with everybody so terrifically nervous, I think
it's an unnecessary risk.

Well all right, I don't - let it go then I don't
care.

H.M.Jr:

Now that's - that S the facts and if - if - if -

once we should not put over our government financing -

ah - it would hurt everybody. They're terribly,
terribly frightened up there.

231

-4F:

Well let it go - I don't care - it's all right
with me.

H.M.Jr:

All right, Jim.

F:

O.K.

H.M.Jr:

Thank you.

2921/f

TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE

To

Secretary Morgenthau

FROM

Mr. Magill

September 8, 1937

I believe you will be interested in the attached brief summary
of the principal changes effected by the Revenue Act of 1937, approved
by the President on August 26, 1937.

am

293
I. Domestic Personal Holding Companies.
The problem of domestic personal holding companies has been met

by the new law, principally, by an increase in the rate of surtax.
Under the old law the rates ranged from 8 to 48 percent on the undis-

tributed income of these companies, while under the new law the rates
have been increased to 65 percent on the first $2,000 of undistributed
income and 75 percent on the balance. The rates of surtax are now so

high that together with the normal tax on corporations, they will equal
the highest surtax rates applicable to individuals. This being so,
the utility of domestic personal holding companies as incorporated

pocket-books is almost completely done away with. The other substantial changes that have been made in the treatment of domestic personal
holding companies are (1) the denial of the former unlimited deduc-

tion for charitable contributions which is now restricted to 15 per-

cent of net income and (2) the denial of the deduction allowed under
the prior law of 20 percent of the income of these companies as a
reserve and (3) the denial of the deduction formerly allowed for capi-

tal losses. Also under the old law in defining personal holding

company investment income, rents were excluded, and that being so,
closely held companies that were really personal holding companies

might escape surtax by investing a sufficient amount in rents. Under
the new law rents are included in the definition unless these rents
constitute more than 50 percent of the gross income of the company.

This exception was put in to prevent the taxation of bona fide real
estate operating companies as personal holding companies.

II. Incorporated Yachts, Country Estates, Etc.
In order to prevent personal holding companies that own
incorporated yachts and country estates from getting the benefit of
operating losses which are really personal expenses, the present law
provides that the expenses of operation and maintenance of such
properties, to the extent that they exceed the rent received from
such properties, shall be disallowed, unless it is shown to the satisfaction of the Commissioner that the property was actually held in
the course of a business carried on bona fide for profit.

III. Incorporated Talents.
To take care of such cases as the Laughton case, the new law

provides that if an individual owns directly or indirectly more than

25 percent of the stock of a personal holding corporation and the
corporation derives a profit from hiring out his services, then such
a profit shall be considered personal holding company investment in-

come. The result of this provision is that an individual such as

Laughton would in effect be taxed at least as much and in most cases
considerably more by having his salary or his compensation paid to
his personal holding company than if he had his salary paid to him-

self directly.

-2-

294

IV. Artificial Deductions for Losses from Sales or Exchanges of
Property.

Under the old law losses are denied in cases of sales of property between members of a family or between a shareholder and a corporation

which he controls. The new law, in order to prevent other artificial

deductions for loss on sales of property, also denies losses between two
corporations controlled by the same person; between a corporation and an
individual who together with his partner owns more than 50 percent of the
corporation; between an individual and a trust which he created; between
two trusts created by the same individual and between a trust and a
beneficiary.

V. Artificial Deductions for Interest and Business Expense.
Under the old law some individuals attempted to take advantage of
the difference in operation between the cash receipts method of reporting income and the accrual method of reporting income to obtain artificial deductions for interest and business expense. For example, a
debtor who is on an accrual basis would get a deduction for accrued interest which was not actually paid while the creditor who was on a
cash basis did not, of course, report as income the accrued interest
which was owed to him. The new law meets the situation by denying
the deduction for accrued interest or business expense where such interest or expense is owed to a person not dealing at arm's length with
the debtor. unless the debtor pays this amount within two and one-half
months after the end of the taxable year.

VI. Multiple Trusts.
The new law has partially taken care of the problem of multiple
trusts by denying the previously allowed $1,000 exemption to all trusts
to accumulate income.

VII. Foreign Personal Holding Companies.

The new law radically changes the treatment of foreign personal
holding companies. The scheme of taxation is in general to treat the
income of the foreign personal holding company as the income of its
stockholders and to tax the stockholders upon their proportionate shares
of such income whether or not such income is actually distributed.
Provisions have been included so that the general scheme can be carried
out even where there is a chain of foreign personal holding companies.
In order adequately to enforce the new provision with respect to foreign
personal companies the new law provides for the filing of information
returns by officers, directors and stockholders and also for returns by
persons who have advised or counselled in the formation of foreign personal holding companies.

295

-3VIII. Non-resident Aliens.
Under the old law non-resident alien individuals not having an
office or place of business in the United States were taxed at the flat
rate of 10 percent which was withheld at the source. In order to
equalize taxation between domestic tax payers and non-resident aliens
having large incomes in the United States, the new law provides that
non-resident alien individuals having net incomes in excess of $21,600

from sources within the United States shall file a return and pay the
tax on such income that would have been paid by citizens or residents.
The $21, 600 figure was selected because incomes of $21,600 are at the

present time taxed to citizens or residents at about 10 percent.

Rm

296
TREASURY DEPARTMENT

Washington

Press Service

FOR RELEASE, MORNING NEWSPAPERS,

Wednesday, September 8, 1937.
9/7/37.

No. 11-11

Secretary of the Treasury Morgenthau announced last night that

the subscription books for the current offering of 1-1/4 percent
Treasury Notes of Series E-1938 and of 2 percent Treasury Notes of

Series B-1942 will close at the close of business Thursday, September

9, 1937. This offering is open only to the holders of Treasury Notes
of Series A-1937, maturing September 15, 1937.

Subscriptions placed in the mail before 12 o'clock midnight,
Thursday, September 9, will be considered as having been entered before

the close of the subscription bocks.
Announcement of the amount of subscriptions and their division
among the several Federal Reserve districts will be made later.
-000-

September 8, 1937.
9:09 a.m.

297

Ronald
Ransom:

Yes Mr. Secretary.

H.M.Jr:

Hello Ransom - how are you?

R:

I'm fine, thank you.

H.M.Jr:

Ransom, in order that I can get myself ready,
how far are you people along?

R:

I was going to call you this morning and tell
yesterday but we couldn't have it until 5 o' 'clock
because several of them were still out on their

you that we were having a meeting of the Board
Labor Day week-end.

H.M.Jr:

I see.

R:

I also talked to Marriner twice yesterday

H.M.Jr:

Yes.

and again last evening after I got home.

R:

H.M.Jr:

Yes.

R:

His present plan is to leave Utah by plane
tomorrow and be here Thursday.

H.M.Jr:

Yes.

R:

Both he and I think that the situation justifies

a thorough exploration of the whole problem by
not only the Board but quite possibly by the
federal open market committee if we have your
approval of discussing the matter with them because
they have a relation to it, as you know, that might
have an important bearing on what we do. Now our
plan was to have these conferences over this week
and Marriner asked me last night to ask you if he
and I could have an appointment with you on Friday
morning, the idea being that the Executive Committee
of the Open Market Committee would meet on Friday
afternoon and the whole committee would meet on
Saturday and the Board would have an opportunity

to survey the situation on Thursday. All of that
is not wholly the result of your conversation and

-2mine but the fact that both Marriner and I
think that this stock market situation and its
possible reactions on the bond market ought to
be considered by the Board and we should try to
decide on policies which have some relationship
to the situation as it has developed over the
last week or ten days

H.M.Jr:
R:

Yes.

and, that being the case, all I can say is
that - ah - we can't give you anything on it
today that - I'd rather be perfectly candid with
you - his thoughts and mine are not altogether
the thoughts of the Board at the present moment.

H.M.Jr:

Well I'll tell you

R:

There isn't any conflict there isn't a crystalliza-

H.M.Jr:

tion of thought as yet.
Well let me put it this way.

R:

Yes.

H.M.Jr:

You're coming over for lunch, aren't you?
Yes and I think I'm coming along because I don't
believe Mr. Broderick's going to be available

R:

as I hoped yesterday he would be.

H.M.Jr:

Well now will you be perfectly frank - do you

R:

I would prefer to.

H.M.Jr:

You would.

R:

Yes.

H.M.Jr:

All right, then I'll see you - then supposing
we talk it all over
All right.

R:

H.M.Jr:

want to see me alone or do you

because - ah - the plans that you have mapped

out don't quite suit mine because I have an

appointment with the President Saturday afternoon.

298

299

-3R:

Oh I see. Well then we could - ah - don't you
think it might be wise then for Marriner and me
to see you Thursday afternoon.

H.M.Jr:

Yes, very much so.

R:

All right.

H.M.Jr:

Yes.

R:

I - I think and he thinks too that it's a situ-

H.M.Jr:

ation requiring action and then it becomes a
question as to what action - which line of action
is the most advisable in the public interest.
All right, well supposing you and I have lunch

R;

Today and then we - I will tell him that you

alone today.

and I - that he and I can see you Thursday

afternoon.
H.M.Jr:

Right.

R:

Then we could have a meeting of the Executive
Committee of the Open Market Committee on

Friday morning. I think I'll call that anyway
because I think we're going to have a little
problem with this bond market.

H.M.Jr:

Ah-ha.

R:

Marriner and I do not want this new issue to

H.M.Jr:

No.

R:

H.M.Jr:
R:

fall through their present prices

and we - ah - it's hard as hell, to be
frank with you, to get quick action in a situation of that sort.
I see.

That's when I almost lose the little religion
I've got because people seem to want to act after
the event rather than ahead of it and I always like
to take these things in advance.

300

-4H.M.Jr:

Well, perfectly frankly, I don't know whether I
want to wait beyond Monday.

R:

H.M.Jr:

No I don't think so. Neither do Marriner nor I.
Yes, and I - I mean - well I'll talk to you about
it at lunch but I don't think I can sit around
here for a couple of weeks while

R:

H.M.Jr:
R:

H.M.Jr:
R:

No I don't either, Mr. Secretary, and I'll say
this - if we haven't got a better answer or an
answer that you think is a better answer you won't
have any trouble selling Marriner the idea that
action is necessary because we both think it is.
Well -

And we think Monday - Marriner and I both feel
that Monday is the deadline.

"hank you very much - I'll see you at 1 o'clock.

All right.
All right, fine.

Fin
301

September 8, 1937.
9:21 a.m.

H.M.Jr:

Hello

0:

Dr. Burgess.

Burgess:

Good morning.

H.M.Jr:

Good morning.

B:

Well there hasn't been any great change from
last night; the prices are about the same and
the rates are quoted 57.

H.M.Jr:

Ah-ha.

B:

Ah - market's steady; no great amount of offering.

H.M.Jr:

Ah-ha - well - no news is good news.

B:

H.M.Jr:

That's right, yes.
Yes. If you buy any or do anything will you
let me know?

B:

All right.

H.M.Jr:

You're going to keep your order in?

B:

Yes - yes, we're all ready to act.

H.M.Jr:

All right, I don't think - I think as far as the
Press was - I - I don't - I think it was all right.

B:

I think so, yes.

H.M.Jr:

Yes.

B:

And I think people will make up their minds to-day
and we'll get a good majority of turn-ins.

H.M.Jr:

Yes. All right, we'll watch it.

B:

Very good.

H.M.Jr:

Thank you.

302
September 8, 1937
9:30 a.m.

GROUP MEETING

Present:

Mr. Magill
Mr. Bell

Mr. Gaston
Mr. McReynolds

Mr. Oliphant
Dr. Viner

Mr. Riefler
Mr. Taylor

Mr. Lochhead
Mr. Upham

H.M.Jr:

Well, who's got anything that they want to clear
with me before I start?

Magill:

Well, I have a letter
I forgot to tell you your Assistant Secretary Roche
left the day before you arrived because the president

MCR:

of her concern out in Denver died. She asked me to
apologize for her.

H.M.Jr:
MCR:

H.M.Jr:
Gaston:

Little late message, but I accept it.
It wasn't her fault.

No, I wasn't criticizing her.
would you like to see that Post Office list before
we release it? I was planning to let it go Friday
morning.

H.M.dr:
Gaston:

H.M.Jr:

Magill:

O.K., I don't want to see it.
Your signature - you have to sign the original.
Let it go for a while.
Here's a letter from Secretary Wallace to you,
enclosing a letter which he wants you to sign
with him, addressed to the President, suggesting
that the Federal Trade Commission ought to make

a study of this price maintenance legislation
which is tacked onto the District of Columbia

tax bill. It doesn't quite seem to be in my

303
-2-

H.M.dr:

bailiwick. I don't know whose it is.
It's Oliphant's pet.

Bell:

Little late - should have been studied before the

H.M.Jr:

That's Oliphant's, a pet of Oliphant's. Am I

Oliphant:

I've got a man working on it.

H.M.Jr:

Anything else?

Magill:

Here's the memorandum you wanted on the tax bill.
(Hands to Secretary) Ought to have a covering

tax bill.

right?

H.M.Jr:

letter on it, but
That's all right.

Magill:

Does anybody else around here wish a memo of

H.M.Jr:

In high school English.

Bell:

Yes, I'd like to have a copy.

Viner:

Mimeograph it.

Magill:

That's all.

H.M.Jr:

Herman, I haven't forgotten you.

Oliphant:

Nothing except that.

H.M.Jr:

Herbert?

Gaston:

Nothing.

H.M.Jr:

Well, who has something? Who wants anything?

the principal provisions of the new tax bill?

Now, what I thought I'd do was this - to bring you
men up-to-date, I called up Ransom and talked a couple
times yesterday to Eccles, and Eccles is flying back get here tomorrow morning. And he wants to have lunch

304
-3-

with me alone, and he - oh, they're all up in the

air. But this isn't the time to fool around and
he says that Eccles - well, I'll know more after
I've had lunch. what I thought I'd do - I thought
we could start in at 10:30 and try to at least
clear our own minds. So I'd like to have Riefler
and Taylor and Viner and Lochhead and Haas, White,

Cy, at 10:30.

Haas:

Seltzer? He's been working on it.

H.M.Jr:

All right, Seltzer. And then - Idon't know whether
you have had a chance to have it clear in your mind at 10:30 we can run through it. I have nothing
else this morning. And at least let's try - I got
a very good memorandum from Viner last night - to
see where we're at.

But I'm not going to - I'm not going to spend a lot
of time arguing with the Federal Reserve Board. I

mean it always gets down to making up their mind.
I mean they're going to call the Open Market Committee

and the Board and there's going to be all this stuff.

I think it's very simple.
Bell, you're invited if you want to. I just didn't

want to tie you up. Won't get anywhere this morning
anyway.

Bell:

I'd like to sit in, but I think I better prepare for

H.M.Jr:

All right. Well, that's all. I think if you - the

that conference tomorrow morning.

quicker you get together - as far as the bill business
goes, that can all wait, but this thing - I think we
ought to clear our own mind.

Viner:

Put it down 1, 2, 3, 4 in order.

H.M.Jr:

But he thinks something must be done.

Viner:

Should be done.

Haas:

Mr. Secretary, you asked me this morning to set a
date on that study.

H.M.Jr:

what study?

305
-4Haas:

On the Building and Loan.

H.M.Jr:

Yes.

Haas:

I went over it with the boys and the staff, and
November 1 is a date we can have it done, and
probably a little before, if it need be done earlier.
It is quite a sizable job and the boys have been
working on it. Murphy and Lindau are burnt out and
I had to send them away for ten days. I mean that's
one thing that delayed me.

H.M.Jr:

What's Lindau been working on?

Haas:

He's been working on - 3h, he did quite a little
work during the summer on this capital gains
taxation.

H.M.Jr:

Lindau?

Haas:

Un-hun. He worked with Shere on that.

H.M.Jr:

Well, what do you think, Wayne? November 1 seems

Taylor:

I talked to George and the boys yesterday and I

a hell of a way off.

H.M.Jr:

don't think they can get it done much before that.
All right, November 1.

Taylor:

It'

H.M.Jr:

All right, November 1.

Taylor:

By the way, did you talk to Mac about Lucius

Haas:

Yes, he's away.

McR:

He's away, but he'll be available as soon as he gets

H.M.Pr:

The other thing of general interest - yesterday I

Wilmerding?

back.

transferred Harold Graves from the work he's been

doing to take charge of the administrative reorganization of Internal Revenue.

306
-5Gaston:

Someone taking over his

H.M.Jr:

Yes, Irey will - no one else. Very informal,

?

very loose. And Irey will do what Harold Graves
was doing as the coordinator. of the various units.
It gives him - he's the best man available that
we have to do the work. Mac says he thought about

it before, so then I knew it was good. So that

made it unanimous.

I have nothing else. See you all at 10:30.

307

Informal memorandum briefly outlining the principal
provisions of the Revenue Act of 1937.
NOT FOR GENERAL CIRCULATION

I. Domestic Personal Holding Companies.
The problem of domestic personal holding companies has been

met by the new law, principally, by an increase in the rate of
surtax. Under the old law the rates ranged from 8 to 48 per cent
on the undistributed income of these companies, while under the
new law the rates have been increased to 65 per cent on the first
$2,000 of undistributed income and 75 per cent on the balance.
The rates of surtax are now so high that together with the normal

tax on corporations, they will equal the highest surtax rates ap-

plicable to individuals. This being so, the utility of domestic

personal holding companies as incorporated pocket-books is almost
completely done away with. The other substantial changes that have
been made in the treatment of domestic personal holding companies

are (1) the denial of the former unlimited deduction for charitable
contributions which is now restricted to 15 per cent of net income
and (2) the denial of the deduction allowed under the prior law of
20 per cent of the income of these companies as a reserve and (3)

the denial of the deduction formerly allowed for capital losses.
Also under the old law in defining personal holding company investment income, rents were excluded, and that being so, closely held
companies that were really personal holding companies might escape

surtax by investing a sufficient amount in rents. Under the new
law rents are included in the definition unless these rents constitute more than 50 per cent of the gross income of the company.

This exception was put in to prevent the taxation of bone fide

real estate operating companies as personal holding companies.

II. Incorporated Yachts, Country Estates, Etc.
In order to prevent personal holding companies that own
incorporated yachts and country estates from getting the benefit
of operating losses which are really personal expenses, the present
law provides that the expenses of operation and maintenance of

such properties, to the extent that they exceed the rent received
from such properties, shall be disallowed, unless it is shown to
the satisfaction of the Commissioner that the property was actually
held in the course of a business carried on bona fide for profit.

308

-2 III. Incorporated Talents.
To take care of such cases as the Laughton case, the new

law provides that if an individual owns directly or indirectly

more than 25 per cent of the stock of a personal holding corpo-

ration and the corporation derives a profit from hiring out his
services, then such a profit shall be considered personal holding
company investment income. The result of this provision is that
an individual such as Laughton would in effect be taxed at least
as much and in most cases considerably more by having his salary
or his compensation paid to his personal holding company than if

he had his salary paid to himself directly.

IV. Artificial Deductions for Losses from Sales or Exchanges of
Property.

Under the old law losses are denied in cases of sales of
property between members of a family or between a shareholder and

a corporation which he controls. The new law, in order to prevent

other artificial deductions for loss on sales of property, also

denies losses between two corporations controlled by the same person; between a corporation and an individual who together with his
partner owns more than 50 per cent of the corporation; between an
individual and a trust which he created; between two trusts created
by the same individual and between a trust and a beneficiary.
V.

Artificial Deductions for Interest and Business Expense.

Under the old law some individuals attempted to take advantage of the difference in operation between the cash receipts
method of reporting income and the accrual method of reporting
income to obtain artificial deductions for interest and business
expense. For example, a debtor who is on an accrual basis would
get a deduction for accrued interest which was not actually paid
while the creditor who was on a cash basis did not, of course,
report as income the accrued interest which was owed to him. The
new law meets the situation by denying the deduction for accrued
interest or business expense where such interest or expense is
owed to a person not dealing at arm's length with the debtor.
unless the debtor pays this amount within two and one-half months
after the end of the taxable year.

VI. Multiple Trusts.
The new law has partially taken care of the problem of
multiple trusts by denying the previously allowed $1,000 exemption to all trusts to accumulate income.

303

-3VII. Foreign Personal Holding Companies.

The new law radically changes the treatment of foreign
personal holding companies. The scheme of taxation is in general to treat the income of the foreign personal holding company
AS the income of its stockholders and to tax the stockholders
upon their proportionate shares of such income whether or not
such income is actually distributed. Provisions have been included so that the general scheme can be carried out even where
there is a chain of foreign personal holding companies. In order
adequately to enforce the new provision with respect to foreign personal
helding companies the new law provides for the filing of information returns by officers, directors and stockholders and also for
returns by persons who have advised or counselled in the formation
of foreign personal holding companies.

VIII. Non-resident Aliens.
Under the old law non-resident alien individuals not having
an office or place of business in the United States were taxed at
the flat rate of 10 per cent which was withheld at the source.
In order to equalize taxation between domestic taxpayers and nonresident aliens having large incomes in the United States, the
new law provides that non-resident alien individuals having net
incomes in excess of $21,600 from sources within the United States
shall file a return and pay the tax on such income that would have
been paid by citizens or residents. The $21,600 figure was selected
because incomes of $21,600 are at the present time taxed to citizens
or residents at about 10 per cent.

ooOoo

310
September 8, 1937
10:30 a.m.

RE TIGHT MONEY MARKET

Present:

Mr. Taylor

Mr. Lochhead
Mr. Haas

Mr. Riefler
Mr. Upham

Dr. Viner
Mr. Seltzer
Mr. White

(Haas hands memorandum to Secretary)
Haas:

The message starts on page 3. First two and a
half pages there

H.M.Jr:

Alternative message?

Haas:

That's right.
(Secretary reads memorandum)

H.M.Jr:

Well, let me ask this. If my memory serves me
right, the Federal Reserve people, when they were
over here, said that by Christmas they thought
the excess reserves would be down to around 200

Haas:

or 300 million dollars. Is that right?
I think that

H.M.Jr:

Well, anyway - I've got a pretty good memory - I

Haas:

H.M.Jr:

think that is what they said.
I think they told you that in a memorandum.
Of course, this desire to do this thing, as far
as I'm concerned - I want to make it perfectly
plain - has had nothing to do with the stock market,
whenever we talked about this thing. The drop in
the stock market had to take place; it doesn't
influence me a bit. I mean it's a thin market; if
something good happens, it would just as well go

Riefler:

back in a couple days. But that is not one of the
motivating things.
It is divorced from this.

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H.M.Jr:

Riefler:
H.M.Jr:

Viner:
H.M.Jr:
Viner:

Yes. But I think I don't - I got a memorandum
from Viner; have you had time to think about this?
I've been trying to think hard the last two hours.
Well, why don't we do this? Why don't you state the

case as you see it, Jake? Do you want this memorandum
to read from?

No, I don't need it.
All right. Why won't that clear the atmosphere?
First, I think-it would be desirable - don't think
the necessity is extremely urgent - desirable to
build up the excess reserves to a larger amount
than they now are, or are going to be prospectively
in the absence of such a ction. And in the way of
light upon the manner in which banks seem to be
acting with respect to their reserve position, I
am inclined to believe that until their actions get
back to a pre-1929 basis, and as long as we still
think there is still need for expansion, that one
billion dollars is to be regarded as not excess of
excess reserves - something in that neighborhood;

perhaps 700 million; the figure doesn't matter and that they ought to be built up now - desirable

to build them up now so they are somewhere in that

neighborhood.

Then, Leaving that and assuming for the moment

that we are in agreement on that, the question is

now ought they to be built up. Now, after all, that
is primarily the choice of methods and is the Federal
Reserve responsibility, and I would prefer, in general,
assuming that there was a wide range of alternative
methods, a method which wouldn't involve the Treasury

in the responsibility of daily watching something new
and making up its mind and coming daily to decisions.
In other words, it is a Federal Reserve operation, and
I would prefer, other things being equal, that the
instrument you used should be one that they control,
so that they should manipulate it from day to day,
week to week.

From that I come to the conclusion that we oughtn't

to touch our sterilization operations, we ought to

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continue them just as they were before. When

we went into them, part of the logic was that
we prevent by our sterilizing operations an
arbitrary interference with the volume of credit
in this country and that we create a level
platform for the Federal Reserve to operate on,
and that the day-to-day decisions or the periodic
decisions would be made by them as to the amount
of credit in the country, and not by us; that
something we happen to have control over was
interfering with the normal course of their operations and we were neutralizing that interference.
So that would be my argument against abandoning the

sterilization. I think it was a desirable move
at the time, that it continues to be, under existing
circumstances, a desirable move, that we oughtn't to
reverse it, oughtn't to abandon it, ought to go on
just as we have been doing with respect to sterilization.

Then that means that if the excess reserves are to
be built up, some other method is to be used.
think there would be no argument here that you
can't do anything with rediscount rates. I mean
what could be done has been done, and the effect
is merely nominal. So that leaves open market
operations and reserve requirements. Now, my
feeling as between those two is not very strong,
but I have felt all along, perhaps mistakenly, that
the reserve requirements should be regarded as a
I

flexible instrument, that there should be a willing-

ness to lower them and raise them on very short notice
and in small amounts, and that the choice between
them and open market operations should be made in

the light of the circumstances at the moment -

sometimes both, perhaps, might be used simultaneously and that they have advantages - I mean the reserve

rate changes have advantages over open market opera-

tions; that they affect almost immediately and
directly the whole banking system and not merely the
money market; and that there are times when you want
to affect the money market, where that is where you
want to contract or want to expand particularly,
and at such times the open market operations have
their first impact and their main impact for some time
in the big money markets.

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Now, at the present time it is true that New
York shows the signs of being tight, but I think
the country banks which have the excess reserves
now are just as tight in their own feeling as the
New York banks are, because they now want excess
reserves and they don't think they have more than
they need. And I include by country banks sizable
banks in large cities. So that I would say that the
New York banks are probably now getting back to the
pre-1929 psychology, when they don't need themselves
large excess reserves, where their routine banking

policy is to use up all their funds nearly to the
limit; but I don't think the country banks - including

by that, remember, big banks in big towns - have gotten
to anywhere that psychology yet. So that I am not

sure at all that the picture of the distribution of

excess reserves is an accurate picture of the state of

banking psychology.

In other words, I feel, from just a little conversation with a few people, that banks that have what
are excess reserves in the total don't feel as if they
have excess reserves; they feel as if they have no
more cash than they need for safe operation. So
that that would be my argument for an operation that
spreads itself over the country and is not merely
concentrated in big money markets.

Seltzer:

250 million be enough then; that is, if you propose

Viner:

As to the amount, there I'd much prefer to have the

raising it to a billion.

judgment of the Federal Reserve people; they must

have been watching it. I think they realize now that
when they raised the excess reserve requirements they
had not given sufficient attention, if any, to the
possibility that banks might have a different attitude
toward reserves from what they had in 128 and '29.
But they must have been giving thought to that, and

that is a technical, expert judgment that well-informed
people ought to make, and I don't pretend to have that.
Remember this, too, that when you say 200 million or
250 million will be enough if - you see, the Secretary
told me that Federal Reserve had reported to him that
they expected the reserves to be down to 250 or 300

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Seltzer:

millions by Christmas, and therefore I am thinking in terms of a 500 or 700 million operation.
That is, seasonally they expect them to go down
to 200 million. What would you do, reverse the
procedure after that?

Viner:

I'd reverse the procedure without hesitation. I

understand that there are people who think that
the reserve rate change ought not to be used that
way.

Seltzer:

I am one of them.

Viner:

I, on the contrary, think it is a very desirable and
very logical instrument - like to see even small
changes made in it, move it by one percent or two
percent. I'd like to see experimentations with it.
I think it's been clumsily used so far, and used with
too abrupt changes as to amount and too slow changes
as to time. In other words, the amount was - time was
too long and the amount too large of change. And I'd
like to see it develop into a flexible instrument.
You want to take away all the fixed rules of banking.
The bankers like fixed rules. The banker likes to
know the rules of the game he is playing. If you're

Seltzer:

going to say to him, "Your reserves this week are so
much; I don't know what they' re going to be next

week," I don't think that's very healthy.

Viner:

Why not?

Seltzer:

The banker has a pretty hard time now as it is.
Capital funds are way down in proportion to his
deposits. He feels that some of his assets are
so slow that he has to keep a lot of cash around,
so ne keeps excess reserves. Now, you tell him, "In
addition we may double or further raise these reserves.

Viner:

No, no, you can't raise them any further.
Well, you drop them and he'd say, "That drop isn't a
real drop because in a couple months from now they're
going to raise them again."

Seltzer:

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Viner:

You're assuming he's going to conduct his operations
on the basis of not being able to vary his volume
of outstanding business.

Riefler:

I'd like to see the banks reenter the Federal

H.M.Jr:

Reserve on the rediscounts.

We have all agreed over the weekend that you can't

force that - I mean it's just a - it's one of those

things that have to happen. I mean nobody can make
them go to the Federal Reserve.

Riefler:

There is no occasion for it yet. They're not going
into the rediscounts until they have used up their
excess reserves, and they haven't used them up yet,
so there would be no occasion.

H.M.Jr:

I don't know whether you men know, but over the

weekend for the first time they sold some of their

own paper - the banks did - to ease them over Labor
Day.

Riefler:

The acceptances?

H.M.Jr:

Yes.

Riefler:

Good.

H.M.Jr:

For the first time they did that. That only cut go
them off a half of one percent. Why should they
in to discount at one percent? I'm no expert at
banking, don't pretend to be; but at least I know
when a fellow can borrow money at a half of one

Viner:

percent, he isn't going to discount at one percent.
And in general I'd include the sale of acceptances;

H.M.Jr:

it's been, unfortunately, too minor a factor. I'd
like to see it
Well, it just started now.

Lochhead:

In addition to the acceptances, of course, they've
got a great amount of short-term Government paper

yielding less than one percent, and they're going to
use that before they discount. They don't have to

sell - just let their bills run off.

Riefler:

The rate structure hasn't reached any such point yet
as to give them any rediscounts.

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H.M.Jr:

Jake, let me put it this way. What we want to do
now is to make a constructive move which will give
confidence. That's what we'r trying to do, isn't
it, huh? I just question whether changing the
reserve requirements at this time - whether they
won't say to themselves, "My god, don't these
fellows know their own business down there?" I
mean I wonder if it would give confidence if we
change the reserve requirements - I mean if that's
the way to give them the most confidence.

Viner:

Well, it depends.- - if you look on reserve requirements

as a basic part and an enduring part of our credit
structure, as a definite fixture, or you look on it
as a thermostatic control. It's been months now how long has it been? - since they - it was February;
it would be more than half a year. And I'd like to
see them regard a change, say, twice in a year in the
reserve requirements - not by 50 percent change, you
see, but a change of some proportions - as not by any
means an abnormal phenomenon.

Riefler:

But then, you're not - there is another point in that,
Jake; there is another point on that. A bank doesn't

like to operate knowing that its reserves are manipulated from Washington. If you buy open markets the
individual bank officer may read about it in the paper
that the Federal Reserve is buying Governments and that
the funds released are finding their way - they are
coming into his town as a result. But he says,
"God damn it, the paper says that the Government
is doing it, but as far as I can see my customers
are building up their balances, I've got money to

lend." It's a very different psychology than if he
happens to have more money to lend through a direct
intervention that he can see right before him. The

one thing gives him confidence that he is gaining
at the expense of his competitors, therefore can take
a chance, therefore can go further. But the other
just seems arbitrary - "Now I have so much reserves;
tomorrow it may be half as much" - it's arbitrary,
it makes him cautious, he doesn't like it.

Viner:

Supposing that you had a billion dollar open market
purchase spread - assuming that they could do it
quickly, which they'can' but supposing they could
and did it in New York - and here is a sizable bank,

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-8-

let's say, in Springfield, Illinois. What would

cause - when would the flow of funds resulting from
it come to that bank?

Riefler:

Sizable bank in Springfield - be amazing how quickly
it would reach there.

Viner:

What's that?

Riefler:

Be amazing how quickly it would reach there. If
it's a bank dependent on some one crop or something
like that, no, it wouldn't, it would be very slow.
what would be the process? It jast asking. Whose
funds would come into that bank? Yoursee, if you're
assuming that it is investors that sell - say, the
type of investor who sells and buys because of the
small change in rate or in price, as the large
institutional investor - they're not in Springfield
or its banks, and I don't see customers' money coming
in for a long time, and through very indirect channels,
to that Springfield bank because of open market

Viner:

operations.

Riefler:

But it always has. That's the - it's amazing how

Viner:

You mean the process has been traced back to open
market operations?

Riefler:

It's amazing, taking the whole group of reporting
banks - awful rapid.

Viner:

Yes, but that's grouped together; it's the First
National of New York, the First National of Boston
and of Chicago, that actually
No, that would hold good if you took them individually.
Well, I don't know the facts there.
I think - I don't know, but I'd be very much surprised - I'll know after lunch and that's going to
clear it - but I'm willing to bet three tc one that
the one thing that the Federal Reserve will not want
to do is to change their reserve requirements.

Riefler:
Viner:
H.M.Jr:

Viner:

quickly that bank has excess reserves.

Four to one.

318
-9White:

Ten to one.

Seltzer:

It is the most expensive thing from the Treasury
standpoint.

Viner:

I'd
say that's an illegitimate consideration in
this.

H.M.Jr:

What I want to say is this. You haven't heard
me make my speech since I'm back, but I've got a
new attitude. If I make up my mind, with the
assistance of you people, that I am right, I'm
going to go ahead and I'm not going to wear myself
out physically trying to convince the Federal
Reserve about something that I think the Treasury
should do. See what I mean? It just - I mean it's
one of the things that made me so tired before I
left - that three-week dog fight with the Federal
Reserve, first on this gold sterilization and then
to go in and do something in the open market operation. So what I am saying is this: if everybody
in the room thought that the one thing that we
should do was to get them to change their reserve
requirements, all right, I'm willing to go at them;
but if that is the highest hurdle that they have to
overcome and there is some better method that the

ma jority want, I'd rather consider that method.

But I think that you'll find - you know, after all

Eccles is flying back tonight to get here tomorrow

morning; we know how important they consider face

saving is. I mean we're - I just can't imagine it,

can you?

Viner:

No, because I think they'11 want to protect their

H.M.Jr:

You like to teach pure economics, but, on the other
hand, you've got to remember that we are all creatures

face.

of biology, and that you just can't

Viner:

One thing I

H.M.Jr:

You just can't wave aside the human element; that's

what I mean. I'm just wondering; let's put it this

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way, if you don't mind: does anybody here feel
the way Viner does, that from the standpoint of
what we are trying to accomplish, reestablish
confidence, ease the strain on the money market,
that our first line trenches should be a fight to
get the Federal Reserve to change their reserve
requirements?

Viner:

White:

Viner:
White:

I'd like to make my position clearer. You see, I
wouldn't think in terms of a fight. I think that
your only right at this moment, unless it involves
a desterilizing operation, is to give them advice on
request. I don't think that you have a right to
take a very decided position as to what tool they
shall use or as to what they shall do for credit
control purposes, unless it involves definitely
some operation that is your responsibility.
I disagree flatly.
I'd say absolutely there - after all, they can't
share that responsibility with you in that way.
Neither can the Secretary share the responsibility
which he has for his fiscal operations and others
which are directly concerned.

Taylor:

Let's put it this way, another way. If by any

H.M.Jr:

Say that again.
If the Federal Reserve did propose changing reserve

Taylor:

chance the Federal Reserve did propose altering
the reserve requirements

requirements at this time, what would the position

of the Treasury be?
H.M.Jr:

Bé only one answer - "Amen."

Riefler:

It's their responsibility.

H.M.Jr:

I'd say, "I only have one request, gentlemen. Please

White:

Well, I didn't think we were considering that
possibility.

announce it at once." That's all.

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H.M.Jr:

That's the only request I'd make - "Please do it

Seltzer:

Wouldn't you rather use some of your instruments?

H.M.Jr:

Wait now, he didn't ask me that. He asked me, if
they wanted to do this, what would be the attitude
of the Treasury? There could only be one answer -

White:

H.M.Jr:

at once."

"All right, gentlemen, fine."
I didn't think that was the question at issue.

No, but that's the question Taylor asked me. He
wanted to clear the atmosphere. You (Taylor) asked
me and I gave you a straight answer. Right, Wayne?

Taylor:

No, I'd be inclined to argue with them on that.
I wouldn't, if that's what they wanted to do. What?
I mean it is particularly
Let's say, or ask questions as to why they had

H.M.Jr:

It's easy to answer a question so, because I know

Taylor:
H.M.Jr:

Haas:

picked that one.

they aren't going to do that. What?
Here's one point in this discussion about what
instrument to use. In the Board's statement in

announcement of the increase in reserve require-

ments, they described this instrument in the
terminology or the inference that it was a rigid
thing; then they pointed out that you have a
flexible instrument, the open market operation.

So they'd be in a tight box to come out of; it
would be such a sharp reversal.

Viner:
H.M.Jr:

Viner:

Taylor:

I don't expect them to do it, you know.
Well, there are all kinds of people who disagree
fundamentally with the position Jake took.
I think the general preponderance of opinion is

against me.

I happen to be one of them. I think the worst

thing you can do is mess around with the reserve

requirements.

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H.M.Jr:

Well, who has a copy of the statement? Would
you (Upham) get a copy of the statement which
we gave out when we sterilized gold.

Upham:

Surely.

H.M.Jr:

Taylor:

Please. Be careful nobody sees you get it.
It is just because bankers happen to be funny

Viner:

I believe in educating them.

H.M.Jr:

Let's just put that on the shelf for the moment.
I mean we haven't disposed of it - just on the

people.

shelf.

I'd like to hear a discussion as between what
you gentlemen think is best, not from a Treasury
standpoint, but from the financial community whole community - whether we should add a definite
amount of gold from our sterilization fund or we
should just stop sterilizing until further notice.
I'd like to hear arguments on that.
White:

I'd like to support that latter position.

H.M.Jr:

All right, go ahead.
I think that - and we are in agreement on that in

White:

the Division - that it would be more effective in
restoring confidence in the expectation that money
would not be tight in the future if the bankers
knew that incoming gold was no longer going to be
sterilized. If they felt further that we had reached
the conclusion that the situation warranted some
change in policy, I feel that the Treasury ought not
to be separated from the public community in identifying
the interest served. I think the Treasury point of
view is the public point of view and I Del that what
is best for the Treasury is best for the public. And
I feel that the Treasury was called upon or volunteered
to cooperate and reduce the excess reserves at a time
when it was felt they were much too high, even though

it was an expense to the Treasury, which is to the
public; that at the moment the need for that ceases,
the Treasury ought to be the first one out, that the

Treasury, which is the public, ought to be the first

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to be relieved of the burden which they undertook
when it was necessary. And for the reason of the
burden, for the reason that it would be more effec-

tive in restoring confidence, I think that we ought
to not sterilize further importations of gold for
the time being.

H.M.Jr:

Well, let me argue with you a minute on the other
side. Getting back to this question of confidence,
which gives more confidence? As I talk to Viner,
you have scales here that are out of balance, and
you've got to add so much to one side of these scales

to bring it in balance; that is, you've got to add
gold to make it work. Now, if we decide that X

hundred millions of dollars of gold be added, then
bring the scales in balance, and let the public know
after careful study on the part of Federal Reserve

they feel that X hundred millions of dollars will do

the trick until after the first of the year - or we

announce we have stopped sterilizing gold, and then

White:

they say, "Well, how long and what is your plan after
the situation has corrected itself and gold continues
to come in?" And I say, "I have no plan."
Well, I think that Jake's statement that we don't
want to watch this from day to day - I think I would
agree with him - but I would also agree that we don't
have to watch it from day to day. The situation we
have been watching in the main - we have arrived at
the conclusion that the time has come to alter the
policy, which we foresaw when we initiated it, and

for the time being gold will

(Upham comes in with statement on

H.M.Jr:

sterilization)
Let's all be, if you don't mind, as intellectually

honest as possible, and if you don't mind my saying,
you're mixing two things.

White:

Namely?

H.M.Jr:

You're mixing the question of the cost of sterilizing
gold to the Treasury and to the public - that's the
one thing, the temporary embarrassment in having to
borrow - that's Problem One. The other problem is

that we are facing a tight money market. I think

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White:

H.M.Jr:

White:

H.M.Jr:

they are two distinct problems.
I do too.

And if you don't mind, I think that you're mixing
the two problems, and I think that they are two
distinct problems. One is the tight - what is the
best thing to do to relieve the money market? The
question of gold sterilization, the mechanism, the
cost to us and the public - that is something else.
That is a separate problem. Well, on the basis of
the first, I think it will restore more confidence
than open market operations, because
What will restore more confidence?

White:

The cessation of sterilizing imported gold - an
announcement to the effect that we cease to sterilize
imported gold; that it will be more spectacular
because it will attract more attention than would
the only other policy that I think would be invoked,
namely, the open market operation, because I don't
think the Federal Reserve Board is going to do the
other at all.

H.M.Jr:

What about this other thing of adding X millions
of dollars?

White:

That I would have a different objection to, the
objection being that the implication would be that
the Treasury isn't certain of its policy; that if too
much gold was coming in from their point of view, why
didn't they stop sterilizing it two months ago, three
months ago, why are they doing it now? The situation
hasn't changed materially from three months ago.

Taylor:

Oh yes.

White:

Well, how would you answer the question that if
you are now putting back 300 million, why didn't we
do it two months ago?

H.M.Jr:

Because the Federal Reserve and ourselves didn't

realize that we were going to face this tight
situation around Christmas time three months ago.
It's got nothing to do with sterilization; purely
the question of supply and demand of money; nothing
to do with sterilization.

324
-15White:

It would appear to me that we are sort of going
back a step if we are adding to the reserves;
though I should prefer, if it were politically
possible, to take more gold and not add any more,
I think it would give the impression that Treasury
policy is more carefully being drawn and followed,
that there is no hesitation, no uncertainty, if
instead of retracing our steps we merely change

H.M.Jr:

our future policy.
We are not changing our policy on sterilization
at all. We're going right ahead and sterilizing.
But in order to help out the Federal Reserve and
the banks of the country, we're going to give them
3, 4, 5 hundred million dollars worth of gold.
The sterilization policy isn't going to be changed.
Because the policy, as you announced it - it was a
flexible one in the public statement.
I've shifted my position since Sunday due to Jake.

White:

In other words, you're going to be requested, and

H.M.Jr:

Haas:

as a result of the request you will take that action.

That has more merit.
Taylor:

It is "in consultation with," just the way the

Viner:

In fact, I'd say it would be inexcusable unless

H.M.Jr:

original announcement read.

made that way.

Mind you, this whole thing started with a request.
See, Harry?

Let's just - let me go over this ground once more.
I mean I've changed my stand. What I want to do
is - I mean this would be a lovely time for me to
stop sterilizing gold and then when Congress met

again put the burden, force the issue. Well, I
don't think that that's very good long distance
diplomacy. I don't want - know what the answer
is; in the meantime all this chitter-chatter of
"What they going to do?" - now, as far as we're
concerned, our sterilization policy hasn't changed.

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I'm not worried about it. I thought it was the
right thing to do; I still think it is the right
thing to do. But Mr. Federal Reserve - due to
action on their part, increasing these reserves,
they find themselves in a very tight situation,

and they want us to put 3, 4, 5 hundred million
dollars worth of our gold to work, and we accede
to that request.

Now, the way I look at it - the way I look at it I'm not laying down any law, we've got lots of time the way I'm looking at it, I think there's just two
ways to do this thing with the Federal Reserve. One
is that they do open market operation, or, two,
that they ask us to put in a certain amount of gold,
and I think it is a decision that they've got to
make. But I've gone - I've leaned far away from this
thing of stopping the sterilizing, because I think
that would add uncertainty and that would look as
though we didn't know what we were doing. It says
here: "Too much deflation is being charged by some

critical officials, but these are not identified

with the group characterized above. Money-tightening
moves by the Federal Reserve are the main target of

criticisms aimed at the second group.' And banks'
reserve requirements is what they mean. And I think
Eccles is rushing back - he knows he's in a spot
and he wants to make sure that his interests are
protected when the thing is announced, and I don't
blame him. I don't blame him. If I was in his
shoes, I'd be on the phone every day, just the way
I was in March.

Viner:

Mr. Secretary, I'd like to hear somebody discuss
the open market operations. We have said something
about the others.

H.M.Jr:

All right, let somebody take that.
Possibly I can discuss it just from watching the
operation. They authorized the purchase of 250
million dollars some time ago, you remember, when
it was a question of whether or not we should put
gold in or whether we should do open market operations. The order was put into the market, and from

Lochhead:

the way it was executed the market immediately

326
-17-

realized that there was no heart in it at all,
and the market just simply threw up their hands,
didn't pay any a ttention to it, because there

was no forceful method used; and as far as it goes 250 million authorized - they haven't bought a
hundred million out of the 250. I understand they
authorized another 200 million.
Viner:

Does the public know when they authorize?

Taylor:

No.

Viner:

They don't know?

Lochhead:

Yes, the market knows. They are advised.

White:

It is published, but the public isn't aware.

Viner:

The money market public doesn't know.

Lochhead:

Yes, they know.

H.M.Jr:
Lochhead:

Well, nobody knows that they took this action.
Before, with the 250 million

H.M.Jr:

There's no formal announcement.

Lochhead:

they announced they were going to go into the
open market. The public immediately watched for
the open market operations, and after a day they

simply said, "They have no intention of going into
the open market."

Viner:

Let me ask this question. Supposing that the banks
felt - the Reserve Banks - that they were being
pressed into the open market operations by the
Treasury and had no heart in it; supposing, now, the

initiative came from the Board itself, would they
act differently?

H.M.Jr:

No, the request came from the Board before.
The Board has less influence with them than we have.

Upham:

I would think that was true.

Lochhead:

Is that right?

327
-18-

H.M.Jr:
Upham:

H.M.Jr:
White:

When I say the Board, I say certain elements there they have less influence than we have.

I'd say that was correct.
I mean they'd do it quicker for me than for them.
Isn't there a fundamental conflict of interest when
you ask the Reserve Banks to engage in open market

operations? As you watched their operations the

last time, wasn't that evident, from the day-to-day

operations?
Viner:

I didn't know.

Taylor:

Only be interpreted one way, regardless of what

scenery was given it at this time, Jake, and that

would be that the Federal Reserve Bank had come to
the rescue of the Government bond market.
Viner:

That's the thing that I was - I hadn't thought of
this at all, but that was the thing that I'm just
wondering about - whether open market operations

weren't the type of operations which are associated

in the public mind with coming to the relief of the

Treasury.

Taylor:

Particularly at this time it would only be interpreted

White:

Whereas the Secretary's suggestion, which I am more

one way.

in accord with, would have us coming to their aid

with a lump sum.
Taylor:

You can do it in terms of your figure of reserves
that you're talking about - as the proper amount
of reserves for the banks at this particular period.
Let's say it's a billion dollars, if that's what you
think. All right, you've got your 750; you know
they're going to go down during the fall but that
immediately after the first of the year they're going
to come back. So you can take the amount which after

the first of the year will give you your billion
and be a little on the safe side and explain it in
that way, and I think you'll get a good reaction from

it.

-19White:

Won't the Federal Reserve Board prefer the lump
sum to the other?

Taylor:

On
yes, obviously, the lump sum is preferable to
them.

White:

Because that means the control remains in their

Taylor:

A week ago, why, simply desterilizing - I mean not
sterilizing any more for a period might have been

328

hands.

enough, but I don't think it's enough at the present
time. I think you have to pick your lump sum, and

you can a rrive at your lump sum by the mathematics
given.

H.M.Jr:

Well, they!ve got to give us the mathematics, got
to write the formula.

Taylor:

Absolutely, and it's probably going to be somewhere

H.M.Jr:

I'd recommend more, to be on the safe side.

Taylor:

In terms of this billion reserves after the first

between 250 or 300.

of the year.

Viner:

Perhaps it ought to be 800 or 1200; I don't pretend

H.M.Jr:

I mean whatever figure they did, I'd just tell them
automatically to add a hundred million, just to be

to be

safe.

(On phone) Hello, Burgess. (Has conversation with

Burgess, time 11:14)

God, that man was blue this morning.
Viner:

Big selling from England, is that it?

H.M.Jr:

They all knew General Motors was around - the

biggest block next to Federal - What would they do
with it, who was going to absorb it, could they
take it? It's the damnedest underground thing;
just as soon as they do something, they all call

each other up. It's a great game.

329
-20-

Taylor:

The telephone's a wonderful instrument.

H.M.Jr:

What?

Taylor:

The telephone's a wonderful instrument, isn't it?

H.M.Jr:

Sure is.

Lochhead:

(Miss Reynolds brings in charts
and clippings)
Right after 11 o'clock the market turned down
rather suddenly, so they were looking for heavy
declines at the end of the second hour

H.M.Jr:

The 2-7/8s are up 4-32ds.from the low and the
2-1/2s are up 2-32ds. from the low.
Where were we?

Lochhead:

We were speaking about using the open market

operation. The other objection to the open market
operation would be the reluctance of the System to
add to their portfolio of Government bonds.

H.M.Jr:

I don't - I want you fellows - if you would go and
kind of clear the atmosphere. You (Riefler) still
haven't talked, have you?

Riefler:

H.M.Jr:

Well, my feeling about the thing at long range is
that I'd like to avoid a situation in which the
Federal and the Treasury are constantly having to
decide on policy. Now, if the sterilization is
going to go on, it ought to go on very gladly; and
let them handle their problem, and we're simply
taking off this load automatically. And we should

be proud of it if we're going to go on with it at
all; if we're not going to go on with it or are
worried about what it is doing to us, then this is
a very good chance to get rid of it, it seems to me.
That is my first
I don't want to be noble about it, but I want to
impress on you people that I think it would be a
cowardly thing for us this moment to get rid of

sterilization if I didn't in my own mind have

330
-21-

something to replace it which would be as good

or better. I mean I don't want to use this

particular emergency, when these Federal Reserve
boys are down and depressed or they are not

thinking - I mean I don't get the feeling that
they are thinking - I don't want to jump them,
in other words. I'd like from now on very much
to be able, say, looking forward six months to a
year, if possible - now, I'm not worried about
this sterilization policy, and I have yet to hear
someone tell me something that is as good. Now,
when someone has got something that is good, all

right. But I don't think the sterilization

policy is up at this moment for consideration.

It's the money market; that's the question. It's
the money market situation in New York right now,
and it's not the sterilization policy, and I'm not
worried about it and I don't - I'm not thinking
about it particularly. I mean that isn't the problem.

The problem is, what can we do to help the Federal
Reserve with the money market situation, and what

is the best way to do it? And that's the problem.
Now, is that stating it? Can I be any more honest
with you people than that? Jake?

Viner:

I think that's right.

H.M.Jr:

Can I be any more honest?

Viner:

No, and I think that's the proper point of view.
Isn't that complete intellectual honesty?
Feeling that it can stand on its own feet and
feeling that if two or three months from now it

H.M.Jr:
White:

should be stopped, you'd have the courage to do

so.

H.M.Jr:

White:

I've demonstrated that I've got the courage to do
the thing if we thought it was right. I mean we've
done it here again and again. And the President has
demonstrated his confidence in me in that he won't
talk to me about it, he won't let anybody else talk
to me about it.
I'm almost convinced, but let me ask one question.

331
-22-

H.M.Jr:

That's the President's attitude. He won't talk,
he won't let anybody else talk to me about it. He

could start sending people over when they approach
him - "Go see Morgenthau" - but he doesn't. Go
ahead.

White:

H.M.Jr:

Supposing that the war situation in Europe gets
worse - I mean the fears - and supposing you get
within the next four months something like 200 or

300 million a month. Do you feel that at that time
what you do now would matter, would prejudice you
in what you could do then, that you could then in
addition say that the time has come to stop the
sterilization program?
My dear Harry, there is absolutely no correlation
between the two things. They have nothing to do
with each other.

White:

Well, except that you are now taking this measure
to reduce your inactive account at a time when you
can say we did not do it to reduce our inactive

account, but we did it for the monetary situation;
whereas, if you do it later because too much gold
is coming, then you might have other reasons.

H.M.Jr:

Then my answer to you is, let's face the problem
we face and do it openly and honestly. What?

Riefler:

Let's put it this way. If the Federal Reserve
should feel in a few months that the situation had
turned very sharply and they wanted to reduce excess
reserves by 500 million, would we resterilize

H.M.Jr:

Don't push me too hard.
Let them sell Governments.

Seltzer:
H.M.Jr:

That's pushing me too hard. He's got the answer.
Let them sell some of their bonds.

Seltzer:

That's just what I was saying. Let them sell their
Governments.

H.M.Jr:

You know I'11 never bluff you fellows; I'll say I

can't answer you. But if you wanted me then to take

332
-23-

back that 500 million, I don't think I - I think
that's asking me to be a little bit too much of

an angel.
White:

That's why I

H.M.Jr:

Don't you agree? Or a "sucker." Which would be

White:

H.M.Jr:

Haas:

the word? I think that would be pushing a little
bit too hard.

It is desirable to stress, not too strongly, that

you are doing this because they asked you.

Well, after I s ee this man I'd like to see you people
at three o'clock. Then I'll tell you what he's got
to say, and then we can secretly begin to draft our
own statement the way we'd like to have it.
Can I put up a hypothetical question? I think it
would help the thing. The way I've considered this
is this, that if under the Treasury or under the
Federal Reserve, or at least under one head all these
powers were centered, then you have a list of them
and you'd make your decision that you'd want some
more excess reserves; under those conditions, which
method would you choose? And I think that's the
way

H.M.Jr:

Excuse me. (Gives some instructions to messenger)
Now could you repeat that?

Haas:

Yes, I'll be glad to.
In my thinking of it I put myself in this hypo-

thetical framework of assuming that all the powers

which are now concentrated in the Federal Reserve

and in the Treasury were under one person's control;
then you have made up a decision, or I assume that

you have already, that some increase must be made

in excess reserves. You have then a list of the
possible methods. Under those conditions, if I

were the head, or any one of us here were the head,
what would we do, what method would we pick out?

It seems to me when you look at it that way there
is only one method, and that is the one you suggest.
I may be wrong on that, but most of Jake's arguments
were to a large extent dependent on the existing

333
-24-

machinery. But I think we have to assume there

Viner:

is perfect cooperation. That's what we told the
public, that we're working as if it were under
one head, the cooperation is so perfect.
Well, I must say that my main argument for avoiding
a drain on the inactive account, although I prefer
that much to stopping sterilizing operations, was
what you say, that I'd prefer as far as possible to
keep internal credit control operations as Federal
Reserve operations, and therefore I'd say I agree
with you that if there was - I think I'd agree with
you; I'd want to think a little more - that I'd
prefer a drain on the inactive account to the other
devices if the same authorities were operating all
the devices.

H.M.Jr:

Gentlemen, if you don't mind, would you continue

discussing this, and I'll see you here at three
o'clock, and at that time I'll let you know which
way the land lies.

334

TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION

DATE September 8,1937
TO

FROM

Secretary Morgenthau
Mr. Haad

Subject: Desirability
of Treasury action to increase excess
reserves
I.

The Case for Action

1. Regardless of the fundamental merits of the increases
in reserve requirements and the gold sterilization program, as
general policies, under the circumstances in which they were
adopted, the logic of events has since demonstrated that their
full application is having an excessively harsh impact upon
the progress of recovery.
To argue that predepression experience indicates that
$750 millions of excess reserves 1s more than ample to maintain
credit conditions favorable for business expansion is to ignore
the concrete evidence about us. Bond prices have been declining, with only intermittent recoveries, since last December.
Moody's Investment Service estimates that during the first
seven months of 1937 new securities issues for new productive

purposes by corporations and municipalities totaled $781 millions, as compared with about $2 billions during the first
seven months of each of the years 1922 to 1927, inclusive.
The mere maintenance of the current level of business

activity, to say nothing of the attainment of higher levels,
would seem to require a substantial gain in the volume of new
flotations for productive purposes. The experience of the
past clearly indicates that a firm or rising bond market is
required for substantial new flotations, for a falling market
does not take new issues well. The fact of the matter is that
for several months now the country has been undergoing a mild
deflation. During. the first six months of 1937, the aggregate

demand deposits of all member banks declined by $1,753 millions.
Commodity prices have been falling for some weeks. Short-term

interest rates are stiffening.
2. At this stage of our business recovery and in

view of our enormous volume of liquid resources, there

would seem to be no good reason why anything approaching

a credit stringency should be in prospect. Yet this is
what faces us this winter. The greater part of the $750
millions of existing excess reserves is held by country

-2 -

335

banks, whereas the New York City member banks, who com-

prise the primary money market of the United States,
possess only $133 million (as of September 1st). Against
the latter amount may be weighed the $2,353 million of
bankers balances ($1,829 million of domestic banks) carried with the New York banks, balances which are subject
to rapid withdrawal. The New York banks may be expected
to suffer the main impact of the currency demands this
fall and winter, which may exceed $500 million; and they
may also be expected to face the larger part of such
seasonal expansion in commercial loans as will take place.
To meet these demands, the Federal Reserve officials propose that the New York banks employ the rediscounting
facilities of the New York Reserve Bank, rather than
liquidate securities; and the same is proposed for banks

in other districts that experience strain this winter.

Rediscounting may indeed be resorted to, but it is
difficult to conceive of a widespread resort to rediscounting in the face of (a) the general reluctance of
bankers to go into debt; (b) the expensiveness of rediscounting - 1 to 1 percent - when Treasury bills can be
sold at a sacrifice of less than .75 percent in yield,
when bankers bills can be sold at one half of 1 percent,

and when Federal funds can be purchased at one quarter or

one half of 1 percent. If rediscounting takes place in
any volume it would seem inevitable that it would be accompanied by a noticeable firming of short-term interest
rates and a continued weakness in bond prices.

3. If short-term interest rates do rise noticeably,

New York City banks may expect further withdrawals of

balances by their correspondents, adding to the strain on

the principal money market.
4. The volume of excess reserves appropriate to the
American banking system today is larger than that appro-

priate in the past for several reasons. (a) The prohibition
a far less effective use of funds in the banking system,
for it eliminates the strongest motive to send idle funds

against the payment of interest on demand deposits leads to
where they are most needed. Aggregate excess reserves of
substantial amounts may therefore coexist with regional
shortages, particularly in the primary money market.

(b) The ratio of capital funds to deposit liabilities of

- -3- -

338

American banks is now at the lowest level since 1920.

Larger reserves act as a safety factor in such a situation. (c) By reason of the doubling of reserve requirements each dollar of reserves now has only one half of
the credit supporting power that it had previously. (d)
The probability that commercial loans will not soon again
regain their former volume and that a greater proportion
of bank assets will therefore be held in the form of in-

vestments and longer term business loans likewise suggests

that banks will need to maintain a larger volume of reserves
for liquidity purposes.
5. For some time past, intelligent bankers have been
very keenly aware that, under the programs being followed
by the Treasury and the Reserve authorities, the credit
situation could move and was moving in only one direction:
tightness. They were told, in effect: "We shall mop up

more than half of your excess reserves by administrative
increases in requirements; we shall see that you get no
new reserves as the result of gold imports or newly mined
gold; we shall, indeed, reduce the volume of excess reserves
every time a dollar of new gold is acquired; and a moderate
credit expansion, plus the waste of some reserves by poor
distribution, will quickly exhaust the power of the member
banks to expand credit further without borrowing from the
Reserve banks.

The answer of the New York banks was a net liquida-

tion of $1,251 millions of Government securities between
June 30, 1936, and September 1, 1937. Part of this selling
was absorbed by interior banks, many of which, unfortunately,
now show a loss on these purchases; a loss which may make

them less willing to absorb further liquidation by the
II. Alternative Methods
It seems clear that the factors making for this
situation should be reversed as quickly as possible. Six
alternatives appear to be open:

New York banks.

(1') The Federal Reserve Board could reduce the
reserve requirements. There are two reasons why this

method should not be resorted to now. Firstly, a
reversal of the Federal Reserve policy so soon after
its inauguration will mean a loss of prestige to the
Board and an increase in the uncertainty with respect
to future monetary policy. Nothing has happened since
the Board has taken action which the Board could use
as an excuse for this reversal. Nothing has happened
that they might not have foreseen. Secondly, raising
the reserve requirements is too powerful and crude an
instrument to be used frequently. The Board itself has
stated that if it becomes necessary to modify reserve
requirements they would resort to the more delicate
instrument of open market operations.

337

-4(2') The Federal Reserve banks may add to
the System's excess reserves by purchasing Government securities in the open market. This would
have the advantage from the Reserve banks' stand-

point of simultaneously enlarging the power of the
Reserve banks to contract bank reserves in the
future. The fact that the operation would be so
patently reversible would be a disadvantage from
the market's standpoint. And the fact that this
operation would do nothing to reduce the Treasury's
interest-bearing debt would be a distinct disadvantage from the Government's standpoint.

(31) The Treasury could announce the tempor-

ary suspension of its gold sterilization program.

This would have the double advantage of notifying
the market that it would no longer be called upon
to absorb Treasury securities issued to finance

gold acquisitions, and of notifying the market that

excess reserves would be increased by every dollar
of newly acquired gold.

(41) The Treasury could transfer gold certificates representing some $300 millions or more of
gold in the Inactive Gold Account to its balance
with the Federal Reserve banks and proceed to employ
these funds in lieu of additional bill issues; or,
alternatively, for the redemption of special issues
held by Government agencies and trust funds, which,
in turn, could use the proceeds to purchase Government securities in the open market. This likewise
would have the advantage of reducing the interestbearing public debt. It would have the further
advantage of permitting a definitely known addition
to the excess reserves of the banking system
(except, of course, for such amounts as will get
into the hands of non-member banks).

(5') Combination of (31) and (41).
(6') Use of several hundred millions of the
Stabilization Fund to purchase Government securities. The particular advantage of this method
would be the fact that the operation would be
reversible.

-

336

-57. In sterlizing more than $1,300 millions of
newly acquired gold, the Treasury has performed a highly
expensive service to the Federal Reserve authorities. This
service has involved the creation of additional interestbearing debt of substantially the full amount of the sterilized gold and it has further involved a rise in interest
rates on other Treasury borrowings by reason of the increased total demands of the Treasury upon the market. If,
now, it is agreed that the banking system required an addition to the volume of excess reserves, sound public policy
would seem to require that the Treasury should be the first
to be relieved of the financial burden when the need for
reducing excess reserves no longer exists.

Further, the public reaction to this source of supplying a needed increase in the volume of excess reserves
would be far more favorable to an increase brought about by
additions of Government securities to the portfolio of the
Federal Reserve System.

339
September 8, 1937.
11:13 a.m.

Burgess:

Things look a little better on our offering this

morning.
H.M.Jr:

They did?

B:

Yes.

H.M.Jr:

God you were low this morning.
What's that?

B:

H.M.Jr:

God you were low this morning.

B:

Was I low this morning?

H.M.Jr:

Oh boy, I - you sounded as though you had taken

B:

No, is that so?

H.M.Jr:

Yes.

B:

I'm sorry.

H.M.Jr:
B:

H.M.Jr:
B:

H.M.Jr:
B:

H.M.Jr:
B:

a dose of Pluto water and it hadn't worked.

(Laughs) All right.
I was feeling all right.
All right.
I've just been talking with the discount boys.
Yes.

(Laughs )

Well let's have it - what's happened.
Well the rights are still quoted 57 by some but
they're quoted 67 by others

H.M.Jr:
B:

Yes.

and they've been moving at - at 5 and 6.

There have been a number of buyers in the

market; the Equitable's been buying, the Travelers
insurance

-2H.M.Jr:

They're buying the five years?

B:

Yes,
stuff. that's right, they're buying the five year

H.M.Jr:

Fine.

B:

So that's been moving; been some bank buying too.

H.M.Jr:

Ah-ha.

B:

Ah - this block of 26 million that the General

Motors has.
H.M.Jr:

Oh yes.

B:

It's all cleaned up.

H.M.Jr:

No?

B:

Yes.

H.M.Jr:

What's happened to it?

B:

Well the Discount bought 5 million and moved it

H.M.Jr:

Yes.

B:

on to some other customer

and the - ah - and the Bankers took the
20 million and sold it to one of their customers.

H.M.Jr:

Ah - a commercial customer?

B:

Well it was reported as a foreign customer.

H.M.Jr:

A foreign customer.

B:

A foreign account - no one would know just who it
would be but the report was that they were going

to convert it into 2's.

H.M.Jr:

Into 2's.

B:

Now our biggest

340

-3-

H.M.Jr:

341

So I mean that - that General Motors is out of
the way?

That's cleaned up, yes.

B

H.M.Jr:
B:

They sold all their stuff.
That's right - that's right.

H.M.Jr:

Ah-ha.

B:

And the rights, as I say, look a little better.
These one and three quarter bonds.

H.M.Jr:

Yes.

B:

One and three quarter notes for June - ah - March

H.M.Jr:

Yes.

B:

.....ah - look a little bit better. They'11 quote

at 27 - 29 - that's up 2/32d's.

H.M.Jr:

I see.

B:

And the bond market looks just a little bit better.

H.M.Jr:

Ah-ha.

H.M.Jr:

So that - ah - there's a little better feeling now.
Well isn't that fine.

B:

Yep.

H.M.Jr:

Isn't that fine.

B:

A little more cheerful. Now our figures on con-

B:

H.M.Jr:
B:

H.M.Jr:

versions here.
Yes.

I haven't got the last minute but the figures show

37 on the short and 28 on the long.
Yes.

4-

342

B:

I'm
expecting some more figures in just a minute
on that.

H.M.Jr:

Ah-ha.

B:

The - the First National Bank converted its 8 million
into long.

H.M.Jr:

Ah-ha.

B:

National City 15 short, five long.

H.M.Jr:

Ah-ha.

B:

So that's more on the long, a better balance on
the long

H.M.Jr:
B:

H.M.Jr:

What are you going to do with your - ah - 78
million again?
We got 70 million.

B:

What are you going to do with that?
We'll do 50-50 again.

H.M.Jr:

Ah-ha.

BE

We 1 re holding off till we saw how it went and
so on.

H.M.Jr:
B:

(Hearty laughter)
Well no I mean whether

H.M.Jr:

Oh (More hearty laughter)
you need help on something.

B:

B:

Oh (still laughing)
For your benefit.

H.M.Jr:

Yes.

B:

You wouldn't think we'd really just do it for

H.M.Jr:

our own benefit, would you?

-5-

H.M.Jr:
B:

H.M.Jr:
B:

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

343

Oh no. (Laughing )

We wouldn't do anything like that.
Oh no. (Increased laughing)
(Hearty laughter)

(Very hearty laughter)

You (laughing so much he can't talk) all right,

Randolph.
B:

(Hearty laughter) Well we haven't had to support

your market. It's been taking care of itself nicely.
H.M.Jr:

I see.

B:

Those - those little orders that you sent down

from Government Life and so on were nice and we

used them to advantage.
H.M.Jr:

Did you use them all up?

B:

Not quite yet, no.

H.M.Jr:

Want some more?

B:

Ah - we don't need them specially.

H.M.Jr:

Ah-ha.

B:

And your all right.

H.M.Jr:

All right.

B:

H.M.Jr:

I think there's advantage in not having too big a
premium quoted here on these because you get
better distribution in Insurance Companies. They
like to buy them around - a little over par whereas
if they were quoted a quarter or half a point premium
they'd probably stay out.
Ah-ha. Well I wasn't down at any time but it's
nice to hear you give me that stuff.

-6B:

Well I think - I think by tonight we'll have a
pretty good report.

H.M.Jr:

And
thatitsort
doesn't
? of information spreads very rapidly,

B:

Oh you bet your life.

H.M.Jr:

Ah-ha.

B:

Yep. Of course, the stock market is behaving
better to-day.

H.M.Jr:

It is.

B:

It's about the same as last night, really.

H.M.Jr:

Well what about all those sharks who told you

B:

H.M.Jr:

we'd have another reaction?

Well no they said - they said that you hadn't
reached the selling climax yet
I see.

and wouldn't unless you had a drop to-day.

B:

H.M.Jr:

Ah-ha. There was big selling from England

yesterday.
B:

I guess there was.

H.M.Jr:

Yes.

B:

Don't know why.

H.M.Jr:

Ah-ha.

B:

Didn't make any sense to me anyway.

H.M.Jr:

Ah-ha. Well I'll talk to you again a little

B:

All right, sir.

later.

344

345
-

7

H.M.Jr:

Thank you very much.

B:

Yes sir.

H.M.Jr:

Goodbye.

B:

Goodbye.

346

September 8, 1937.
2:40 p.m.

H.M.Jr:

Hello

0:

Dr. Burgess.

Burgess:

Hello sir.

H.M.Jr:

Well how did you close up?

B:

Why - ah - it closed pretty well.

H.M.Jr:

Ah-ha.

B:

The - the bonds were just a touch better; there was

H.M.Jr:

Yes.

B:

And the Devine's were splurging around a little bit.

H.M.Jr:

Devine is.

B:

H.M.Jr:
B:

H.M.Jr:
B:

a little covering there I think.

The notes were a little better than last night right
through the list.
Yes.

And our notes - our rights have closed 68.
Well that's not bad.
A thirty-second up from this morning and from last

night's close.
H.M.Jr:
B:

Ah-ha.

Quite a number of transactions going on. I've got
the figures here for 3 o'clock.

H.M.Jr:

Yes.

B:

They show on the short bill 77 million

H.M.Jr:

Yes.

B:

and on the long one 58.

-2-

H.M.Jr:

347

Well what do you know about that.

H.M.Jr:

It's pretty darned close.
58 of the long.

B:

Yes.

H.M.Jr:

And how much of the short?

B:

77.

H.M.Jr:

Oh. Well I imagine - that's just New York, isn't it?

B:

B:

That's just New York, yes.

H.M.Jr:

Yes.

B:

And, of course, that's very incomplete so far.

H.M.Jr:

Yes - yes.

B:

But it's pretty good, I think. The Metropolitan

There will be more coming in.

Insurance had 17-1/2 of the short and 10 of he
long.

H.M.Jr:
B:

Ah-ha.

The Prudential came in for 10 of the short and 9
of the long.

H.M.Jr:

Ah-ha.

B:

And the others, I think, they're gaining this

morning.

H.M.Jr:

Well are those conversions or purchases?

B:

Those are - well they're both.

H.M.Jr:

Both.

B:

H.M.Jr:

They're part one and part the other.
Ah-ha. Well I don't think we have much to worry
about now.

-3B:

I think we're pretty much on ice now.

H.M.Jr:

After all with the

B:

Unless we have something terrible happen tomorrow

H.M.Jr:

Yes.

I think we're all right.

B:

H.M.Jr:
B:
-

Well I don't see what worse could happen.

(Laughs) Well if they shoot somebody over there
or something - looks as bad as war or something

like that.

H.M.Jr:

The stock market seemed to behave pretty well.

B:

It behaved better, yes.

H.M.Jr:

Yes.

B:

H.M.Jr:

Quite a lot better.
I sent you down an order for 5 million just to have
it - ah - in case of need.
Yes we're glad to get that; we won't need to use it
right away I think.
Well I - I didn't want you to use it

B:

No.

H.M.Jr:
B:

except in case - ah - just to have it there.

H.M.Jr:
B:

Yes that's what Wayne said.

H.M.Jr:

Yes.

B:

Yes.

H. M. Jr:

All right.

B:

Very useful though. It's nice to know you have it.

348

349

-4
H.M.Jr:

That's right.

B:

Yep.

H.M.Jr:
B:

H.M.Jr:

Well
something that - how late will you be
thereunless
tonight?

Oh I'll be here till five or something - 5:30.
Well I'll call you. I'm going to go - try to go for

a horseback ride about 4:15 which is 5:15 your time.

B:

H.M.Jr:

Yes.

I'll
seeI'11.call
whether
we can get our figures by then and
then
you.

B:

Very good.

H.M.Jr:

All right.

B:

Well I think - I think it's pretty satisfactory.
I think so, I'm very well satisfied.

H.M.Jr:
B:

H.M.Jr:
B:

H.M.Jr:

Yep, that's good.

I think for the - for the market to behave the way
it did entirely on it's own speaks for
Yes, that's right.
ah - with everything else I think shows
remarkable strength.

B:

I think so.

H.M.Jr:

Yes - yes. All right.

B:

First rate.

H.M.Jr:

Goodbye.

B:

Goodbye.

350
RE TIGHT MONEY MARKET

Present:

September 8, 1937
3:00 p.m.

Mr. Taylor

Mr. Lochhead

Mr. White

Mr. Haas

Mr. Seltzer

Mr. Riefler
Dr. Viner
Mr. Upham

Mr. Gaston

H.M.Jr:

To boil down the gist of my conversation with Mr.
Ransom, it was that he and Mr. Eccles as of today
feel that there are four* devices which can be used,
and one is using open market operations and the
other is putting a block of desterilized gold into
the picture. And the way the matter stands as of
today, they are very anxious to use open market
operation, because Mr. Eccles feels that if What are they there for? What does the Federal

Reserve exist for? - and that this is the device
to use, and if they can't persuade their agents
in New York to use this method, it is about time
that they knew it. I told nim l'd like to have two
or three days to think it over; that I had decided
that as between stopping sterilization and using
a block of gold, I was for a block of gold, because
there was no reason at this time to bring up the

sterilization program, which pleased them very much.

I also told them that I thought the situation was
sufficiently serious that I hoped they wouldn't use
this crisis - I didn't use the word "crisis" - this
situation as a battleground to decide who is going
to win out as between the New York Bank and the
Federal Reserve Board. I said I thought it was a
very unfortunate time to pick to have a fight now.
I said, "You know very well you can't settle that
in two days; it's a matter of weeks or months.'
I said, "Eventually you will undoubtedly win out,
but I think it's a pretty poor time to pick to have
a battle between New York and yourself."

I said, "Furthermore, the device that you should
use is to change the action which you took, namely,

raising your requirements; of course you lower it.

* Secretary evidently meant two.

351
-2-

"Well, the public, and so forth." I said, "Well,

that's just the way I feel about the open market
operation, buying a couple hundred million dollars
worth of bonds. Everybody is going to interpret
it that you do it because we asked you to." He
said, "Of course, we ought to be able to use it any

time, and people shouldn't take it that way." He
said, "It's all true, but it's a matter of cooperation." Extremely friendly.

Mr. Eccles is leaving some time tonight, will get
in some time tomorrow; I'll see him. They called
a meeting of the Board for Friday morning, called
the Open Market Committee here for Saturday in case
they decide to do the open market. But you can see
they very much want to do the open market way.
But at least it looks as though, if the situation
calls for that, we are down to one of two ways,
which makes life much simpler.

Did you gentlemen have a chance to see the memorandum

left with me? Everybody see it? Yes or no.

White:

I didn't.

H.M.Jr:

Pass it around to anybody who hasn't seen it.
(Geston comes in)

Now as to the immediate thing - I don't know whether

you people know it or not, but it's closed pretty
well today; our rights are a little bit better than
they were yesterday. We ve got some very big institutions buying, insurance companies and banks - I
mean Metropolitan Life, the Equitable, First National
of New York - people like that are buying. Lot of
them are buying the five-years too. And the market

is taking care of itself.

Now you've had two or three or four hours to think
this thing over. What do you gents think? What do

you (Riefler) think?
Riefler:

I think that we came down pretty much to those two
alternatives; they seem to be the ones in the

picture. And of the two - they put funds in the

market in about the same place.

352
-3-

H.M.Jr:

A little louder.

Riefler:

Desterilizing half a billion or buying open
market - the net advantage of desterilizing is
that it would at the same time decrease the
published figure of the public debt, which would
have a constructive influence. And Wayne feels
that if you use the funds to take up the Sinking
Fund, you could use them on longer term bonds,
leaving the amount of bills in the market unchanged,
which would seem to be quite important. I don't
think we ought to be decreasing the amount of
short-terms at the present time with the proportion
of long-terms, but that the proportion of long-terms
ought to be decreased rather than short.

Viner:

You're taking for granted that the Federal Reserve

H.M.Jr:

would buy bills if they
Well, I don't know if they would
buy bills.
I think so.

Riefler:

Yes.

Viner:

A lot of bills to buy.
It would drive the rate down to zero. I think it

Riefler:
Viner:

Riefler:

needs if anything more bills and fewer bonds.

H.M.Jr:

Well, may I ask you this? As to the fundamental
situation, have you come to the conclusion something
should be done? That's the first question.

Riefler:

Me personally?

H.M.Jr:

You personally. I mean have you been here long enough?

Riefler:

No, I'm not convinced that something has to be done.

H.M.Jr:

Oh gosh, now

I think it will do no harm to do something. I mean
that's about the way my feeling is.

353
-4-

Riefler:

I feel that the business situation is going to
remain sluggish for about six months. I think

there are a great many fundamental factors to do
that. And when you put in your gesture of ease
to pick the thing up - it seems to me somewhat of

a toss-up; if you do it now you will have a - I
think what I would expect is you would have a
moderate balancing off during the fall, without
any strong pick-up, because I don't think the
underlying situation will be with you; if you
did it after Christmas, I think the underlying
situation will be more with you, you get more
striking results from what you do. I think it is
something of to toss-up personally.

H.M.Jr:

Well now, listen, if New York banks go down to

Viner:

What about financing? Aside from business

minus, that's not helping anything.

Riefler:

activity, what about financing?
New financing? + don't expect a great deal this

Viner:

But whatever might occur

Riefler:

I think you get your pressure now. The financing if you postponed it three months, took it when the
business situation was more apt to take a turn,
concentrating the financing of that period, after
a period of three months in the fall which is pretty

fall.

rocky, you would then have a more sudden turn for the

H.M.Jr:

Riefler:

better. I don't think you're going to get a great
turn for the better this fall in any case.
Well, I'll put it - the way you feel now, supposing
we did nothing.

If you do nothing, I think you'll have a - you'll
have as critical a - a critical period in the

money market until short-term rates come up to the
point where they do come into the Federal over the
discount rate; I would expect them to come in and

stabilize at that level. As you said this morning,
there is no occasion yet for them to be coming in,
so you've got a readjustmert of the short-term rate

going on.

354
-5-

H.M.Jr:

I couldn't help smile a little bit when Mr. Ransom
said Mr. Eccles had one of the most flexible minds
he knew. To snow you how flexible he is, he's got
this idea that if he fixes the upper and lower
limits, the money rates will have to stay fitted
into those brackets. Well, I didn't want to say
anything. I mean he's so flexible, he gets this
fixed idea that if he says for three months it should
be so much on the 90-day bill, it's got to S tay there.
Well, you just can't do it - I don't think. And he's
got that.
And I think that the two of them will get their
heads together and I think they're going to come
in with the idea to bull this through and have it
out with New York. I don't want the details and I
don't want to know it, but they've just got another
one of these misunderstandings with George Harrison.

Riefler:

What does New York want?

H.M.Jr:

Harrison came in here. He says he's got an understanding with New York banks that they won't sell
any of their long-terms, but if they need any money

they'll sell their bills. I took it like that. I

said, "Now listen, any such understanding, if it
ever got out, would do the Treasury tremendous harm,
and the thought that the banks can't sell when they
want to must not be permitted to get out." And I
said, "Furthermore, no bank is going to live up to
it." I said, "They must feel that the Government
is thoroughly liquid.' Do I quote it about right
or overstate it, Wayne?

Taylor:

(Nods no)

H.M.Jr:

And I'm just fearful that these boys want to bull
this thing through because they are sore. I don't

know - Wayne can tell you - but something happened
again between Harrison - Harrison said he said one

thing and they said he said the other. I mean the

important thing is the misunderstanding has again

left soreness there - am I right? - and I think he's

coming back after having three weeks of a rotten time
and being on the phone a couple hours a day, and just

try to fight. He's not going to take it out on me.

355
-6-

Riefler:

What does Harrison want to do?

H.M.Jr:

He doesn't want to do anything.

Riefler:

Oh, he doesn't want to do anything.

H.M.Jr:

No one has discussed this thing. We very carefully
kept it out. But when he came down here, Harrison
felt - and the only New York bank I talked to - he

didn't seem particularly worried at this time,
although three months ago he was very anxious to
have 90-day bills, saying that the 90-day bill would
permit him to get in and out more easily. And now
ne - that was in June; well, if they worried in
June, they ought to worry a great deal more in
September.

I read your memorandum, George, all through; got

lots of time these days.

Well, here's a memorandum from Herbert Gaston, from

Herbert Swope. Do you mind if I ead it?
Gaston:

Not at all.

H.M.Jr:

"Herbert Swope called me to ask me to pass on to

you his belief that the Federal Reserve Board ought
to scale down reserve requirements immediately,

reversing its previous action.

"He has talked to a considerable number of men, not
speculators, he says, including his brother Gerard
and several members of the board of the stock exchange
who are not of the speculative element. He had also
talked to B. Baruch.
"Gerard Swope told him G E was receiving cancellations showing the stock market scare had already

spread into industry. H B S said some pretty wild
stories are afloat including one that the Administration feels sure we will get into war and for that
reason is saying little about the general situation.
"He said he realized this was purely a Reserve Board
matter but said the business world looked to you to
be able to bring about level-headed action in a

crisis.

356
-7-

"He said he would make still further inquiries
and call me again. He thought the psychological

effect would be good rather than bad because it
would show that the Government has controls which
can be used either way and does not hesitate to use

Taylor:

them to restrain a break as well as to stop a rise."
Now, on top of that, in addition to that, Gay has had
several talks - of the stock exchange - with
Thingumabob on reducing the marginal requirements.
And of course, I didn't say much but I listened.
But it seems to me that the stock exchange has got
nothing to do with this thing, and frankly - I mean
I know I can talk to you people - I mean I think
that right now I don't know if you - they seem to
kind of have their tail between their legs, they
want to fight somebody, want to justify themselves.
I mean it isn't a very healthy atmosphere to think
in. I think we've got to be awful careful. Am I
right? I'm talking about the Reserve Board.
Yes, the thing is - this beginning of new difficulty
between the New York Bank and the Board is very
apparent.

H.M.Jr:

And here comes Ray Tucker, whom I have not seen,

with a lot of stuff about Eccles and the Federal

Reserve, and Eccles put all these things across

while I was out of town. Well, all of that stuff

we didn't mingle with.

"Now that crops are moving and private industry

expanding, the banks have been flooded with demands

for short-time loans. But because of the increased

reserve requirements, they have been selling Government bonds instead of borrowing from the reserve or

other institutions on their commercial paper. That

has depressed the price of Federal securities and
hampered the Treasury's early Fall financing. So the
frown on the Morgenthau countenance was deeper than
the Grand Canyon when he landed at the capital after

a fast flight from San Francisco." (From the National

Whirligig, by Ray Tucker, September 8)

Well, all that won't help Mr. Eccles' temperament.

There's a lot of truth in it. So I guess we've just

Probably Governor Ransom

357
-8-

got to sit, and he'll be in here tomorrow
afternoon, tomorrow night. Certainly, even
for Mr. Viner's piece of mind, I can't be more
philosophical, judicial, unique, unusual,
unrecognizable.

Viner:

I must say I'd be inclined, if at all possible,

to let them make a free and uninfluenced choice
as to the methods they want to use, even if they
prefer some other methods.

H.M.Jr:

Wait a minute, Jake, that's where we differ. If
it were the 15th of August I'd agree with you a
hundred percent, but it's the 15th of September.
Now, all right, they have the thing; then - let's
say they get it through the Board to do an open
market operation - and then they start to fight.

Viner:

That's no method at all.

H.M.Jr:

Pardon me?

Viner:

That's no method at all.

H.M.Jr:

But I'm willing to wager two to one thats what
they'11 do. Then they begin to fight, and that

thing spreads. And I think it's part of the thing.

Those things get out.

Now can we go any further? Let me put the question

this way. who favors a block of gold from the
sterilization fund?
(All raise hands except Viner)

H.M.Jr:

Which way are you (Riefler)?

Riefler:

I think I favor the block of gold.

H.M.Jr:

Who favors open market operation?

Viner:

As compared with the block of gold.

H.M.Jr:

I'll put the question another way. Who favors the

block of gold as the most effective method?
(All raise hands except Viner)

358
-9-

H.M.Jr:

Who favors the open market as the most effective? (Nobody)
Who favors the Viner method?

Upham:

I think I'd go about half.

H.M.Jr:

I don't know what the Viner method is.

Viner:

Reserve requirements - that's what I prefer.

H.M.Jr:

Oh, reserve requirements.

Riefler:

This is on the assumption of no difference between
the Federal Reserve and the Treasury.

H.M.Jr:

I said it just out of devilment. The reserve
requirements - I said it first just out of
devilment.

Viner:
H.M.Jr:

I'm not surprised. They won't do it.
It's unheard of! - the public, and the public, and
the public1

Viner:

Then I'd say this too, that the question isn't as
simple - if we were to release the block of gold
and buy long terms, I think I'd prefer that to
open market operations by buying bills; and you may
say that's the real choice, and there I'd be inclined
to say the gold block.

H.M.Jr:

Use gold and buy long-terms - we?

Viner:

We, yes, for the Sinking Fund.

H.M.Jr:

You mean of an equal amount.

Riefler:

Put the money in that way. Put the money in the

market that way.

Viner:

That's Wayne's way.

Riefler:

That's what I was voting for.

H.M.Jr:

You mean instead of ,spending it....

Viner:

Instead of using it to buy bills.

359
-10-

H.M.Jr:

Why do you have to do

Viner:

Or stop the flotation of bills - just put it into

H.M.Jr:

Nothing.

Taylor:

The market needs the bills.

Viner:

Keep on floating the bills.

H.M.Jr:

This is a new thought.

Seltzer:

Of course there is some question as to whether the

Taylor:

It needs them anyhow.

Viner:
H.M.Jr:

That is a fifth variant, anyhow.
You mean instead of letting bills run off, buy

Taylor:

Eases pressure on the market.

Viner:

I don't think it relieves pressure on the market,
but it eases the market certainly and makes it

the cash balance and let bills run off. What
else would you do with it?

market is going to need more bills this fall.

long-terms.

sweeter.

Taylor:

And you use that amount of gold to retire the
debt. when you said you were going to sterilize
it, why, you

White:

Mr. Secretary, I'd like to raise

Gaston:

We were careful not to say bills, you know, but
to say obligations.

White:

Mr. Secretary, there is a question I'd like to
raise. At the time the bill was passed with
respect to the Stabilization Fund, the specific
powers were given that when you did need the

funds you could invest them in bonds. The argument,
I think, that had been advanced here was that you

360
-11-

never did that because it would increase excess
reserves to an extent which wasn't desirable at

the time. In view of the situation, couldn't a

reexamination of that take place and you completely,
on your own, or with consultation with them, decide
that now is a good time to invest some of those funds
in
bondsat
without
thelong-term
other matters
all. raising the question of
Taylor:
Lochhead:

H.M.Jr:

Harry, you have to deposit that gold in the Fed in
order to get the money with which to invest in bonds.
It's the same thing.
It's the same thing.
One of the strengths of the Stabilization Fund is
that every once in a while some crackpot says we
should use it to stabilize the Government bond

market, and I always tell them "No." I think it
is one of the strengths of the Fund. I mean I've
been terribly tempted at times to dip in, but I
never gave in. And this thing that Wayne - this

makes good sense, but I can't
Lochhead:

Another thing, it would deplete the Stabilization
Fund if you tie it up in Government bonds - makes

it ineffective.

H.M.Jr:

Well, this thing would make a very pretty mixture oh boy! - and it would do it so much nicer than the
other thing.

Viner:

What did Ransom have in mind? He had in mind

H.M.Jr:

He didn't think that through any more than I had.

White:

We were talking this morning and we felt that the
magnitude of the sums involved, in view of the

that you buy bills with it, I think.

general situation, ought to be at least a half a
billion dollars, and that any attempt to talk in
terms of 200 or 300 would put the whole matter on
a plane which is not justified by the present
situation.

H.M.Jr:

Well, I told them I'd let them mention the sum,
but I just suggested that they be generous. I
said they'd have to mention the sum.

361
-12-

Riefler:

I think they'11 decrease the sum, if possible.
The thing that affects the bond market is the
long-term rate, and the rise in short-term rate

doesn't bother anybody unless it impinges on the
long-term rate.

H.M.Jr:

I think I'll call Ransom, because he talks to
Eccles every hour; I'll say this has been suggested to me and if he talks to Eccles he can
pass it along.
(On phone) Mr. Ransom, please.

Taylor:
Viner:
H.M.Jr:

is that your (Taylor) idea?
I think so.
that's where I heard it.
That's the beauty of talking these things over.
You keep improving all the time. And that's the
disadvantage of Eccles' flying in here after being

up all night, and trying to decide this thing
tomorrow afternoon.

Viner:

Well, I don't think the urgency is such that he
couldn't have a full day's rest.

H.M.Jr:

Oh yes, but unfortunately I am due at Hyde Park

Friday afternoon and our annual picnic for the
President is on Saturday, so I wouldn't get back
here again until Monday. I mean it's unfortunate

for Eccles, not for me. But their whole damn staff
is away.

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

September 8, 1937.
3:30 p.m.
H.M.Jr:

Hello.

0:

Governor Ransom. Go ahead.

H.M.Jr:

Hello

Ronald
Ransom:

362

I've just finished talking to Marriner and he's

coming in on the plane that gets here about 10:30
tomorrow morning and he asked if he could have an
appointment with you at 3 o'clock. His reason for
doing that was his fear that the plane might be a
little late and that he wanted to have a chance to

run over the situation with his own staff here.

H.M.Jri

That's all right.

R:

That suit you?

H.M.Jr:

3 o'clock it is.

R:

He and I will see you at 3 tomorrow afternoon.

H.M.Jr:

Now I just want to - are you going to talk to him
again?

R:

No, not unless it is necessary.

H.M.Jr:

Well there has been a suggestion made to me which

R:

Hello

H.M.Jr:

Hello

R:

Yes.

H.M.Jr:

There's been a suggestion made

R:

Yes.

is very interesting and if you could get it to him
so that you and he could be thinking about it, see?

which is very interesting

H.M.Jr:
R:

Yes.

-2H.M.Jr:

and that is this, that if we use the device
of the block of gold, see

R:

Yes.

H.M.Jr:

363

that instead of letting - ah - not borrowing

more money through bills, you see
R:

Yes.

H.M.Jr:
R:

that we use that money - that gold
Yes.

H.M.Jr:

by buying long-term government.

R:

I see.

H.M.Jr:

For sinking fund purposes.

R:

Use the gold to buy long-term governments.

H.M.Jr:

For sinking fund purposes.

R:

Yes.

H.M.Jr:

You see?

R:

Yes.

H.M.Jr:

Retirement.

R:

Yes.

H.M.Jr:

You see?

R:

Yes.

H.M.Jr:

And then continue the same amount of bills outstanding.
And continue the same amount of bills outstandYes.

R:

ing.
H.M.Jr:

Yep.

R:

All right. I'll get that idea to him because it's

well worth thinking over.

-3H.M.Jr:

You - you see what I mean?

R:

Yes.

H.M.Jr:

R:

H.M.Jr:

364

We put out - ah - several hundred million dollars
worth of gold - now how are we going to put it to
work?
Yes.

We could either let our bills run off and stop
borrowing or we could take this money and buy

long-time governments for the sinking fund
R:

Yes.

H.M.Jr:

retire them and continue to borrow our short

term money.
R:

You could continue to borrow your short-term money

using less gold for the purpose of buying long-term
governments for your sinking fund retirement
H.M.Jr:
R:

H.M.Jr:
R:

H.M.Jr:
R:

That's right.
......and get it to work that way.
That's right.
Well there was one other suggestion that developed
in my conversation with Marriner, which I have just
finished having, that you have free gold now in your
working balance of about 180 million
Yes.

and someone had suggested the possibility that

that might be utilized - ah - for the purposes we
had in mind. I haven't had a chance to suggest that
to you for consideration.

H.M.Jr:

Well only 100 million of that is free gold in the

R:

Yes.

sense that it didn't come from gold through devaluation

H.M.Jr:

and all the gold we have acquired through devaluation is ear-marked for debt retirement

R:

Yes.

-4365
H.M.Jr:

eventually

R:

Yes.

H.M.Jr:

You see?

R:

Yes.

H.M.Jr:

And

R:

All the gold that you have - that you have
acquired

H.M.Jr:

By devaluation.

R:

By devaluation.

H.M.Jr:

I'm pledged to use that for debt retirement.
You're pledged to use that for debt retirement.
Yes. Now of that 180 there is only 100 of it as
what we call really free gold.

R:

H.M.Jr:
R:

Only 100 that's free. Well that - that puts a
somewhat different complexion on it. Marriner
didn't think much of the suggestion. It came

from one of the other Membmers of be Board.
H.M.Jr:
R:

H.M.Jr:
R:

H.M.Jr:
R:

H.M.Jr:

Yes.

He just didn't - he had an idea that it was darned
less than 180. That was the figure that appeared
on the writing.

Well - ah - but of that, only 100 is what we call which is gold
I see.

......which has not been acquired through devaluation.

I - I see.
But this other idea - I mean I just got it and I
wanted you to have as much time to digest these
things.

-5R:

Yes, thank you very much and I will put that in the

H.M.Jr:

And you can see what that would do to long-term
government markets.

R:

H.M.Jr:

Yes, well let me think that one over and I'll have
him thinking it over on his way back.
That's right and then I:11 see you and Marriner at
3 tomorrow.

R:

3 tomorrow - fine.

H.M.Jr:

Thank you.

R:

Goodbye.

366

367
-13-

H.M.Jr:
Haas:

Might as well give him all the time necessary.
I think the Sinking Fund is about 600 millions

behind too now. Isn't that right?

Taylor:

Yes.

Viner:

And there's been some criticism recently.
Maybe that figure would be a reasonable one to
establish as the amount - what the Sinking Fund
is behind; be a good reason for selecting 600
rather than

White:

Viner:

Edging it up.

Haas:

Gives you a logical reason for getting that much.

H.M.Jr:

Well, what else has anybody got?

Taylor:

Did a little work on the bills this morning. I'

Haas:

Whenever the Secretary wants it. Do you want it

think - how soon going to be ready there, Harry?

before you go?

H.M.Jr:

Don't need to rush you - I mean I think we ought

Taylor:

You're as far as you can go on this one now, until

H.M.Jr:

What?

Taylor:

We have gone as far as we can, I think.

H.M.Jr:

Viner:

It seems so to me. I don't think we can go any
further, do you (Viner)?
Haven't gone anywhere at all. I'm not even up on

H.M.Jr:

What question?

Viner:

The bills.

H.M.Jr:

No, we don't mean bills.

to kind of concentrate on this thing.

we hear from the boys.

the question.

368
-14-

Taylor:

We're talking about the gold.

H.M.Jr:

What I would like from you people - if you have a

little time, to work out an agenda for me for
Sir Frederick Phillips.
White:

I have one.

H.M.Jr:

You ready, Harry? I wish you'd show it to these

Taylor:

by the way, Trentham called me.

H.M.Jr:
Viner:

Just so you don't run out of
Run out of talk.

H.M.Jr:

...gas.

Taylor:

He's coming in a minute tomorrow morning to talk

H.M.Jr:

gentlemen. I'd like that.

about Sir Frederick's visit.
Yes. I think that's about all.

369

September 8, 1937.
3:30 p.m.
H.M.Jr:

Hello.

0:

Governor Ransom. Go ahead.

H.M.Jr:

Hello

Ronald
Ransom:

I've just finished talking to Marriner and he's

coming in on the plane that gets here about 10:30
tomorrow morning and he asked if he could have an

appointment with you at 3 o'clock. His reason for
doing that was his fear that the plane might be a
little late and that he wanted to have a chance to
run over the situation with his own staff here.
H.M.Jr:

That's all right.

R:

That suit you?

H.M.Jr:

3 o'clock it is.

R:

He and I will see you at 3 tomorrow afternoon.

H.M.Jr:

Now I just want to - are you going to talk to him
again?

R:

No, not unless it is necessary.

H.M.Jr:

Well there has been a suggestion made to me which

is very interesting and if you could get it to him

so that you and he could be thinking about it, see?
R:

Hello

H.M.Jr:

Hello

R:

Yes.

H.M.Jr:

There's been a suggestion made

R:

Yes.

which is very interesting

H.M.Jr:
P:

Yes.

-2H.M.Jr:

and that is this, that if we use the device
of the block of gold, see

R:

Yes.

H.M.Jr:

370

that instead of letting - ah - not borrowing

more money through bills, you see
R:

Yes.

H.M.Jr:
R:

that we use that money - that gold
Yes.

H.M.Jr:

by buying long-term government.

R:

I see.

H.M.Jr:

For sinking fund purposes.

R:

Use the gold to buy long-term governments.

H.M.Jr:

For sinking fund purposes.

R:

Yes.

H.M.Jr:

You see?

R:

Yes.

H.M.Jr:

Retirement.

R:

Yes.

H.M.Jr:

You see?

R:

Yes.

H.M.UT:

And then continue the same amount of bills outstanding.

R:

Yes. And continue the same amount of bills outstanding.

H.M.Jr:

Yep.

R:

All right. I'll get that idea to him because it's
well worth thinking over.

-3H.M.Jr:

You - you see what I mean?

R:

Yes.

H.M.Jr:

We put out - ah - several hundred million dollars
worth
of gold - now how are we going to put it to
work?

R:

Yes.

H.M.Jr:

We could either let our bills run off and stop

R:

Yes.

H.M.Jr:
R:

371

borrowing or we could take this money and buy
long-time governments for the sinking fund

retire them and continue to borrow our short
term money.

You could continue to borrow your short-term money

using less gold for the purpose of buying long-term
governments for your sinking fund retirement

H.M.Jr:

That's right.
......and get it to work that way.
That's right.

R:

Well there was one other suggestion that developed

H.M.Jr:

Yes.

H.M.Jr:
R:

R:

in my conversation with Marriner, which I have just
finished having, that you have free gold now in your
working balance of about 180 million
and someone had suggested the possibility that

that might be utilized - ah - for the purposes we
had in mind. I haven't had a chance to suggest that
to you for consideration.

H.M.Jr:

Well only 100 million of that is free gold in the

R:

Yes.

H.M.Jr:

and all the gold we have acquired through devaluation is ear-marked for debt retirement

R.

Yes.

sense that it didn't come from gold through devaluation.

-4H.M.Jr:

372

eventually

R:

Yes.

H.M.Jr:

You see?

R:

Yes.

H.M.Jr:

And

R:

All the gold that you have - that you have
acquired

H.M.Jr:

By devaluation.

R:

By devaluation.

H.M.Jr:
R:

I'm pledged to use that for debt retirement.
You're pledged to use that for debt retirement.

H.M.Jr:

Yes. Now of that 180 there is only of it as

R:

Only 100 that's free. Well that - that puts a

what we call really free gold.

somewhat different complexion on it. Marriner
didn't think much of the suggestion. It came
from one of the other Members of the Board.

H.M.Jr:
R:

H.M.Jr:
R:

H.M.Jr:
R:

H.M.Jr:

Yes.

He just didn't - he had an idea that it was darned
less than 180. That was the figure that appeared
on the writing.

Well - ah - but of that, only 100 is what we call -

which is gold
I see.

which has not been acquired through devaluation.

I - I see.
But this other idea - I mean I just got it and I
wanted you to have as much time to digest these
things.

373

-5R:

Yes,
thank you very much and I will put that in
the

H.M.Jr:

And you can see what that would do to long-term
government markets.

H.M.Jr:

Yes, well let me think that one over and I'll have
him thinking it over on his way back.
That's right and then I'll see you and Marriner at

R:

3 tomorrow - fine.

H.M.Jr:

Thank you.

R:

Goodbye.

R:

3 tomorrow.

Fin
374

September 8, 1937.
4:13 p.m.

H.M.Jr:

Hello

0:

Dr. Burgess. Go ahead.

H.M.Jr:

Hello Randolph.
Yes sir.

B:

H.M.Jr:

Kilby's
brought the stuff in four banks yet to
be heardjust
from.

B:

Yes.

H.M.Jr:

The shorts are 123 the long 97 - total 220.
Long 97 - very good, isn't it?
I think it's very good and I should think that as we

B:

H.M.Jr:

hear from Kansas City and St. Louis, Cleveland and
B:

H.M.Jr:
B:

Atlanta it might bring up the long.
Yes, I should too.

Yes.

Well I think that's very good. One of the banks that
sold us tonight didn't hang out the flag.

H.M.Jr:

They did?

B:

I think that's a little favor to them.

H.M.Jr:

What bank was that.

B:

That was Frederick Gill of Manhattan.

H.M.Jr:

Oh really.

B:

Yes so this picture is all right.

H.M.Jr:
B:

h-ha.
But the market behaved beautifully all day.

-2H.M.Jr:

And how was it towards night.

B:

Well it - it was better.

H.M.Jr:

Better.

B:

H.M.Jr:

Just a touch better.
Just a touch better.

B:

Ah
- these things are selling at 68; there are a
few sales at 7.

H.M.Jr:

Pardon me?

B:

Your two bids are out at 7

H.M.Jr:

Good.

H.M.Jr:

For the rights.
Good. well I'm - I'm cheerful.

B:

Well so am I.

B:

H.M.Jr:
B:

All right.
I think it's very nice.

H.M.Jr:

Ah - goodbye.

B:

Goodbye.

375

376

334
Financing

Secretary Morgenthau

September 8,1937

Extracopy

Mr. Haas

Subject: Desirability
of Treasury action to increase excess
reserves
I. The Case for Action
1. Regardless of the fundamental merits of the increases
in reserve requirements and the gold sterilization program, as
general policies, under the circumstances in which they were
adopted, the legio of events has since demonstrated that their
full application is having an excessively harsh impact upon
the progress of recovery.
To argue that predepression experience indicates that
$750 millions of excess reserves is more than ample to maintain
credit conditions favorable for business expansion is to ignore
the concrete evidence about us. Bond prices have been declining, with only intermittent recoveries, since last December.
Moody's Investment Service estimates that during the first
seven months of 1937 new securities issues for new productive

purposes by corporations and mmicipalities totaled $781 millions, as compared with about $2 billions during the first
seven months of each of the years 1922 to 1927, inclusive.
The mere maintenance of the current level of business

activity, to say nothing of the attainment of higher levels,
would seem to require a substantial gain in the volume of new
flotations for productive purposes. The experience of the
past clearly indicates that a firm or rising bond market is
required for substantial new flotations, for a falling market
does not take new issues well. The fact of the matter is that
for several months now the country has been undergoing a mild
deflation. During the first six months of 1937. the aggregate

demand deposits of all member banks declined by $1,753 millions.
Commodity prices have been falling for some weeks. Short-term

interest rates are stiffening.
2. At this stage of our business recovery and in

view of our enormous volume of liquid resources, there

would seem to be no good reason why anything approaching

a credit stringency should be in prospect. Yet this is
what faces us this winter. The greater part of the $750
millions of existing excess reserves is held by country

377

335
2banks, whereas the New York City member banks, who com-

prise the primary money market of the United States,
possess only $133 million (as of September 1st). Against
the latter amount may be weighed the $2,353 million of
bankers balances (81,829 million of domestic banks) carried with the New York banks, balances which are subject
to rapid withdrawal. The New York banks may be expected
to suffer the main impact of the currency demands this
fall and winter, which may exceed $500 million; and they
may also be expected to face the larger part of such
seasonal expansion in commercial loans as will take place.
TO meet these demands, the Federal Reserve officials propose that the New York banks employ the rediscounting

facilities of the New York Reserve Bank, rather than
liquidate securities; and the same is proposed for banks

in other districts that experience strain this winter.

Rediscounting may indeed be resorted to, but it is

difficult to conceive of a sidespread resort to rediscounting in the face of (a) the general reluctance of
bankers to go into debt; (b) the expensiveness of rediscounting - 1 to 18 percent - when Treasury bills can be
sold at a aerifice of less than .75 percent in yield,
when bankers bills can be sold at one half of 1 percent,
and when Federal funds can be purchased at one quarter or
one half of 1 percent. If rediscounting takes place in
any volume it would seem inevitable that it would be ascompanied by a noticeable firming of short-term interest
rates and a continued weakness in bond prices.

3. If short-term interest rates do rise noticeably,

New York City banks may expect further withdrawals of
balances by their correspondents, adding to the strain on
the principal money market.
4. The volume of excess reserves appropriate to the
American banking system today is larger than that appro-

priste in the past for several reasons. (a) The prohibition
against the payment of interest on demand deposits leads to
far less effective use of funds in the banking system,
a for it eliminates the strongest motive to send idle funds

where they are most needed. Aggregate excess reserves of
substantial amounts may therefore opexist with regional

shortages, particularly in the primary money market.

(b) The ratio of capital funds to deposit liabilities of

0

378

335

American banks is now at the lowest level since 1920.

Larger reserves act as a safety factor in such a situation. (e) By reason of the doubling of reserve requirements each dollar of reserves now has only one half of
the credit supporting power that it had previously. (a)
The probability that commercial loans will not soon again
regain their former volume and that a greater proportion
of bank assets will therefore be held in the form of investments and longer term business loans likewise suggests
that banks will need to maintain a larger volume of reserves
for liquidity purposes.
5. For some time past, intelligent bankers have been
very keenly aware that, under the programs being followed
by the Treasury and the Reserve authorities, the credit
situation could move and was moving in only one directions

tightness. They were told, in effect: are shall mop up

more than half of your excess reserves by administrative
increases in requirements; we shall see that you get no
new reserves as the result of gold imports or newly mined
gold; we shall, indeed, reduce the volume of excess reserves
every time a dollar of new gold is acquired; and a moderate
credit expansion, plus the waste of some reserves by poor
distribution, will quickly exhaust the power of the member
banks to expand credit further without borrowing from the
Reserve banks."

The answer of the New York banks was a net liquida-

tion of 81,251 millions of Government securities between
June 30, 1936, and September 1, 1937. Part of this selling
was absorbed by interior banks, many of which, unfortunately,
now show a loss on these purchases; a loss which may make

them less willing to absorb further liquidation by the

New York banks.

6. It seems clear that the factors making for this
situation should be reversed as quickly as possible. Six

alternatives appear to be opent
(1') The Federal Reserve Board could reduce the
reserve requirements. There are two reasons why this
method should not be resorted to now. Firstly, a
reversal of the Federal Reserve policy so soon after

its inauguration will mean a loss of prestige to the
Board and an increase in the uncertainty with respect
to future monetary policy. Nothing has happened since
the Board has taken action which the Board could use
as an excuse for this reversal. Nothing has happened
that they might not have foreseen. Secondly, orude raising
the reserve requirements is too powerful and an
instrument to be used frequently. The Board itself has
stated that if it becomes necessary to modify reserve
requirements they would resort to the more delicate
instrument of open market operations.

379

33#

(2') The Federal Reserve banks may add to
the System's excess reserves by purchasing Govern-

ment securities in the open market. This would

have the advantage from the Reserve banks' stand-

point of simultaneously enlarging the power of the
Reserve banks to contract bank reserves in the
future. The fact that the operation would be so
patently reversible would be a disadvantage from
the market's standpoint. And the fact that this
operation would do nothing to reduce the Treasury's
interest-bearing debt would be a distinct disadvantage from the Government's standpoint.

(3') The Treasury could announce the temper-

ary suspension of its gold sterilization program.
This would have the double advantage of notifying
the market that it would no longer be called upon
to absorb Treasury securities issued to finance
gold acquisitions, and of notifying the market that
excess reserves would be increased by every dollar
of newly acquired gold.

(40) The Treasury could transfer gold certif-

icates representing some $300 millions or more of
gold in the Inactive Gold Account to its balance

with the Federal Reserve banks and proceed to employ

these funds in lieu of additional bill issues; or,
alternatively, for the redemption of special issues

held by Government agencies and trust funds, which,
in turn, could use the proceeds to purchase Government securities in the open market. This likewise
would have the advantage of reducing the interest-

bearing public debt. It would have the further
advantage of permitting a definitely known addition
to the excess reserves of the banking system
(except, of course, for such amounts as will get
into the hands of non-member banks).

(5') Combination of (3') and (41).
(6') Use of several hundred millions of the

stabilization Fund to purchase Government securi-

ties. The particular advantage of this method

would be the fact that the operation would be
reversible.

380

338
7. In sterlising more then $1,300 millions of
nowly acquired gold, the Treasury has perferned a highly
expensive service to the Federal Reserve authorities. This
service has involved the ereation of additional interestbearing debt of substantially the full amount of the sterilised gold and st has further involved a rise in interest
rates ea other Treasury berrowings by reason of the inereased total desands of the Treasury upon the market. If,
now, is is agreed that the banking system required an asdition to the volume of excess reserves, sound public policy
would seen to require that the Treasury should be the first
to be relieved of the financial burden when the need for
reducing excess reserves notlanger exists.

Further, the public recetion to this couree of supply-

ing a needed increase in the volume of excess reserves
would be far sere favorable to an increase brought about by

additions of Government securities to the portfolio of the

Federal Reserve system.

381

TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE

Sept. 8, 1937.

Secretary Morgenthau

TO

Mr. Haas

FROM

Subject: Japan's gold shipments to the United States, and
Japan's and China's balances in the United States
Japan

1. Net gold imports from Japan from January 1 to
September 1, 1937

Gold on the water

$130,000,000
23,000,000

2. How much gold has Japan left to ship?
Probably about $340 million. We do not know exactly.
We know only the last published figures of the Bank of
Japan which for August 7 were $395 million. Since then,
they have shipped to us $61 million, and have probably received from domestic mines and hoards about $6 million,

leaving a net figure of $340 million.

3. The Bank of Japan has no balance with the Federal
Reserve Bank of New York, nor does it have any gold
on earmark here.

4. Far Eastern deposits as reported by the New York
agencies of Japanese banks as of August 25 are

The Yokohama Specie Bank showed an overdraft of

7,525,000
8,085,000

According to Lochhead, as far as he can learn from
New York there are virtually no Japanese balances other
than those indicated above held in New York. The weekly
reports submitted by banks, bankers and brokers to the
Treasury give only the balance for the whole "Far East"
(which includes China, Japan, Netherlands, East Indies,
Straits Settlement, and Philippine Islands). These show
a total balance with United States banks other than in

the Federal Reserve Bank of New York of about $168,000,000.

During the past month this total has risen about $15,000,000.

382

Secretary Morgenthau - 2
China

1. Central Bank of China's balance with the Federal
Reserve Bank of New York, September 1

$ 18,066,000

Balance with the Federal Reserve Bank of New York

has increased slightly - about $150,000 - during
August.

2. Gold held for earmark for the Central Bank of
China, September 1

Gold held on earmark for the Central Bank of China
has been unchanged during the past two months.

TO Dogg

49,946,000

TREASURY DEPARTMENT

383

INTER OFFICE COMMUNICATION

DATESEPTEMBER 8, 1937

Secretary Morgenthau

TO

III

Mr. Haae

FROM

Subject: The war and our trade with China and Japan.
Conclusions

1. We will lose most of our trade with China during
the war, but the loss of that trade is unimportant
to the United States.

2. In the absence of application of the Neutrality
Act, or of a boycott against Japanese goods, our
trade with Japan will increase.
3.

We don't need Japanese products but Japan must
have the goods she buys from us.

4. A sharp reduction in our purchases from Japan,

particularly of raw silk, would seriously injure
Japan at this time.
5. Retaliation on our trade by Japan would not hurt
us much.

6. An embargo by the United States on Japanese imports, or a widespread boycott by the public,
would not hurt Japan enough to cause her to cease

military operations in China, but it would go a
long way toward destroying her ability to wage a
prolonged campaign.

384

Secretary Morgenthau - 2
The War and our trade with China and Japan

We will probably lose most of our trade with China
during the duration of the war. Japan can and probably
will completely blockade China's ports. She may permit

non-military items to enter in foreign ships, but China
will not be able to spend any of her precious foreign ex-

change assets on goods not needed for the conduct of the war.

1. Our trade with China is unimportant to us.
China takes 2 percent of our exports - $47 million
out of $2.5 billions. The chief items we sell to China are
aircraft, leaf tobacco, petroleum products, iron and steel
manufactures, chemical products, machinery and automobiles,
but the amount of those items that China buys from us is so
small a proportion to our total exports of those commodities
(with the exception of our aircraft which in 1936 amounted to
$7 million out of a total export of $23 million), and so
insignificant a portion of our total production that the loss
of the Chinese trade should have no disturbing effect on
business here. Our cotton exports to China which were 1mportant five years ago have gradually declined to the vanishing
point. Last year they totalled about $1 million. A few firms
may be hard hit, but the loss of the entire Chinese market
will hardly be noticed in our total trade.
Our imports from China are likewise unimportant to us.
They constitute only 3 percent of our total imports and none
of the items are essential to our industry. Tung oil, furs
and skins, bristles, carpet wool, raw silk and oilseeds are
important items of import. All of these can be obtained elsewhere or have satisfactory substitutes. Antimony and tungsten two important minerals - are produced chiefly in China. We do
not import large amounts, yet they are essential to our steel
industry. These two minerals are produced chiefly in southeastern China, and exports should be easily shipped out of
China by rail through French-Indo China.

2. Japan takes about 8 percent of our total exports.
The war will most likely increase our trade with Japan
unless the United States takes steps to restrict it either
by an unofficial boycott, or the application of the Neutrality
Act.

385

Secretary Morgenthau - 3

The chief item is raw cotton. It makes up almost half.
our exports to Japan - $88 millions out of $204 million in
1936. Other important items are oil, iron and steel products,

machinery, automobiles, copper, and chemicals. These are items
which Japan will use in greater abundance during war time.
3. We are Japan's best customer.
Our purchases from Japan are more than double those of

her next best customer. In 1936 the United States took 22 percent of all Japan's exports; British India took 10 percent;
China, 6 percent; Great Britain, 5.5 percent, and Germany,
1.3 percent.

Our chief purchase from Japan is raw silk, which constitutes 55 percent of our total imports from Japan (our imports
of rayon from Japan are negligible). The other items are
relatively small.
Below is a list of the leading items that we buy from
Japan:

Perilla oil 5 mil. dollars Camphor
Materials for
Tea

=

Earthenware

II

#

1

2
II

11
#

1

II

21

hats and bonnets
China and porcelain
Rapeseed oil

#

Tunafish

5

II

Crabmeat

m

#

Cotton cloth

1 mil. dollars
1

1.3 #

4. Can we get along without Japanese goods?

Yes. Aside from silk, there are two items that are indispensible to us. One is Agar-Agar, used in a culture medium
in bacteriological work. The amount of imports is only

$600,000, but there seems to be no satisfactory substitute and
Japan has a complete monopoly of the seaweed out of which it is
made. The other item is Ho 011 - which comes from camphor trees
found only in Formosa, used in the making of perfumes. Natural
camphor still is a Japanese monopoly, but since 1933 a synthetic
camphor has been developed which is interchangeable with the

natural projects.
Of course, there is a host of low-priced novelties and
trinkets, Christmas decorations, and very cheap rubber and

knit goods which do not bulk large in total value, but play
an important role in Woolworths. Deprivation of these items
would doubtless be annoying to the children but might be a
boon to the parents.

386

Secretary Morgenthau - 4

Raw silk is the one item of major importance to us
that we get from Japan. Over 90 percent of our raw silk
comes from Japan. The silk industry (including silk knit
goods, hosiery) employs over a quarter of million people,
and the value of their product 3/4 billion dollars. However,
the bulk of the labor and equipment could be adapted after
a while to rayon yarn. Rayon yarn could be imported from
numerous countries until production here was stepped up.
The net loss to labor and the silk industry would not be
nearly 80 great as appears at first blush. The chief sufferers will be those who adore real silk hosiery and underwear.
5. Would the loss of the United States market hurt Japan
seriously?

Yes. It would strike Japan a severe blow. We take more
than one fifth of Japan's exports, and about all of the items
we buy from Japan we can get along without. For the most part,
what Japan doesn't sell to us, she won't sell to other countries. Better quality (and higher-priced) American products
will almost wholly replace Japanese goods used here except
for silk, the substitute of which would be the cheaper rayon
and cotton.

The loss to Japan of the American market for her silk
will be particularly harmful to Japanese economy. Though
raw silk constitutes only 15 percent of Japan's exports,

silk culture is 80 important in Japanese agriculture that
an embargo on raw silk would seriously curtail the already
extremely low standard of living of Japanese farmers. Two
million families in Japan depend upon silk raising for a substantial part of their cash income.
The loss to Japan of much needed foreign exchange added

to the blow to her farmers would hurt her considerably. She
would, of course, retaliate.
6. Would retaliation by Japan hurt us seriously?
Retaliation by the Japanese would take the form of
increased restrictions on our goods, but since most of our
exports to Japan are essential to her such restrictions would
be expensive to her. Doubtless American exporters would lose
substantial business in Japan, but a large part of what they
lose in their sales to Japan will be made up in additional
sales to other countries. Japan must have cotton, oil, scrap
iron and copper, and if she increases her purchase of these
items elsewhere, the United States will share in the increased
sale of those commodities indirectly.

387

Secretary Morgenthau - 5 Nearly one-half of Japan's cotton comes from the United
States and were other countries able to supply Japan with
her cotton needs it would be a serious blow to American cotton growers, as Japan takes more than one-fourth of our raw

cotton exports. But there are no other major sources of
long staple cotton which can supply Japan during the next
year without leaving some other countries' needs that would
have to be satisfied by American cotton. The total consumption of cotton may decline a little notwithstanding Japan's
need for raw cotton for export and for army needs. Japan
would substitute silk for cotton consumption at home, probably
more than Americans would substitute cotton for silk. Unless
subsidized by the government some loss would unquestionably

be sustained by our cotton growers, yet there is no validity
in the claim that the loss of the Japanese market would curtail our cotton exports by anything like Japan's present purchases
of American cotton.

Altogether, a cessation or sharp reduction of our trade
with Japan would hurt Japan critically but would constitute
only a minor loss to the United States.

388

TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE

September 8, 1937.

Secretary Morgenthau

TO

FROM

Mr. Haas MORE

Subject: Does the Neutrality Act affect purchases of gold from
Japan or the sale of dollars to China?

In the event of a declaration by the President of the United
States of a state of war between China and Japan:

1. Can the Federal Reserve Bank of New York, acting for the
Treasury, provide dollars in exchange for yuan in accordance with
the terms agreed upon in July, 1937?
Section 3 (a) of S. J. Resolution 51, as amended May 1, 1937

states that:

"

it shall thereafter be unlawful for any

person within the United States to purchase, sell,
or exchange bonds, securities, or other obligations
of the government of any belligerent
orstate
to make any
named in such proclamation

loan or extend any credit to any such government,

political subdivision etc.

There are two - and possibly three - reasons why it appears
to me to be perfectly legal for the transaction indicated above to
take place.

(a) The Act applies specifically to a "person" and
person is defined in the Act to include "partnership, company, association, or corporation as

well as a natural person". It would seem ( to a
layman) that the Treasury Department does not

fall under any of those categories.

(b) The transaction described in our agreement with
China does not constitute a loan, nor does it con-

stitute an extension of credit. It is, in fact, as

well as nominally, a sale of dollars for yuan. As

a protection against any possibilities of an exchange

loss, gold is required to be left here as collateral.

It is an exchange transaction which, though of
assistance to China, would seem to be neither a "loan"
nor an "extension of credit".

389
Secretary Morgenthau - 2 -

(c) The Act provides that: "If the President shall find
such action will serve to protect the commercial or
other interests of the United States or its citizens,

except from the operation of this Section
ordinary commercial credits and short time obligations
in aid of legal transactions and of a character

he may

customarily used in normal peace time commercial trans-

actions". It may be held that even if the purchase of

yuan exchange is regarded as a loan or extension of

credit that such loan or extension of credit is of a
type which the President under the above conditions may
except. Much depends upon the use of the dollars obtained by China.

The interpretation of the law by the legal staff should have, naturally,
much more weight than our opinion.

Assuming legality, whether or not we should sell China dollars
under the terms indicated is a matter in which the decisive considerations are political and not economic. The economic aspects are
relatively unimportant.
2. Can we purchase gold from Japan?

There appears to be nothing in the Neutrality Act which
prohibits the purchase by the Treasury of gold from a belligerent
country. The Act does prohibit the extension of credit by a bank to

a belligerent in anticipation of receipt of gold.

The important non-legal fact to bear in mind with respect to
purchases of gold from Japan is that any restriction upon the international movement of gold to the United States at this time cannot
help but have an adverse psychological influence on the usefulness and
value of gold as a medium of international payments. Were the United
States to refuse to accept gold from a belligerent country it might
accentuate the uneasiness felt by holders of gold toward the future
value of gold as a medium of international payments.
It would be a matter of very little concern to Japan whether

she is able to sell her gold in this market or not. If Japan cannot
sell her gold to us, she can with very little extra charge ship the
gold to London and sell it there. Should she wish it, she could
always buy dollars with the sterling so acquired.

FEDERAL RESERVE BANK
OF NEW YORK

330

FFICE CORRESPONDENCE
CONFIDENTIAL FILES

m frohhead
DATE September 8, 1987.

SUBJECT: TELEPHONE CONVERSATION WITH

L. W. Knoke

BANK OF ENGLAND.

Mr. Bolton called me at 11:40 today and stated that things

were a little bit quieter in London today. There was practically no
local demand for dollars and only small inquiries came from the
continent. His sales today were about a half million dollars, so
that he had a such easier day than yesterday.

Bolton spoke at some length about the situation in the
Far East and seemed to be interested in the working of our Neutrality

Act. I explained to him that, as far as I know, this act would become
effective only upon issuance by the President of a proclamation. I

mentioned that, as far as I could observe, feeling in this country
was very definitely anti-Japanese. Bolton said the same applied to
and the
London where people held most pessimistic views regarding the finan-

cial situation in Japan. I referred to this morning's Tribune which
stated that British banks had refused to extend further loans to Japan
against shipments of gold. Bolton did not think that this was correct
simply because British banks had never made such advances against gold,

so that there could be no question of refusing to continue them. I
stated that I was under the impression that some of the banks here had
made advances to the local office of the Yokohama Specie against gold

in transit to San Francisco Belton replied that in that way the
Japanese had probably raised credits in London too. Today it was difficult to get rid of any Japanese bills at all. A house bill such as,
for instance, Mitsui on Mitsui, could probably not be placed even on a
2 1/2% basis. Credit to Japan seemed to have disappeared in the market

completely. I sectioned that I had, in a recent number of the Statist

FEDERAL RESERVE BANK
OF NEW YORK

FFICE CORRESPONDENCE

DATESeptember 8, 1937.

CONFIDENTIAL FILES

Lee N. Knoke

331

SUBJECT: TELEPHONE CONVERSATION WITH

-2-

BANK OF ENGLAND.

or Economist, seen the total of Japanese bills given at £3,000,000.
This figure, Bolton thought, was probably an underestimate. Foreign
exchange contracts for forward delivery, Bolton said, were no longer
accepted in the London market from Japanese banks.

I then inquired what the Japanese were doing with the
sterling which they were now acquiring with the proceeds of the gold

shipped to us. Did they use it to build up balances or to repay accumulated indebtedness, or just what? Bolton replied that they had
no information at all. If they asked the Yokohama Specie they probably
would not get the true answer anyhow. However, he suspected that the
Japanese needed most of the proceeds of the gold shipments for the pur-

pose of meeting current requirements. In other words, that these sterling amounts were used by the Japanese exchange control which was faced
with an enormous pressure on the exchange due to the large Japanese pur-

chases of raw material. Besides meeting current requirements, Bolton
thought the Japanese had also been forced to reduce their indebtedness

in the London market. The longer this war in China continued, the more
quickly Japan would have to trade on a cash basis in London. I mentioned
that the Japanese had quite recently again stepped up their gold ship-

ments and that we had, within the last few days, been notified of three
additional shipments of close to $6,000,000 each, which had left Japan
on September 4, September 7 and September 8, respectively. I inquired

ISC. 3.2 60M 1.37

392

FEDERAL RESERVE BANK
OF NEW YORK

FFICE CORRESPONDENCE
CONFIDENTIAL FILES

DATE September 8, 1937.
SUBJECT: TELEPHONE CONVERSATION WITH

L. V. Knoke

ROM

-3-

BANK OF ENGLAND.

whether his arrangements with the Japanese with regard to the dollar

sales by the latter were still in force and Bolton replied that the
Japanese continued to give him first call on any dollars that they
had for sale. This arrangement, he continued, had enabled him to
keep most of the Japanese dollars out of the London market.

LWK:KMC

03/13028
932
e

FOO: INVOICE

393

September s, 1937.

Dear Dr. Hangs

I returned to the office after my vacation

to find your letter of July 13th awaiting - and

also the beautiful not of porcelain bowls which
I as most happy to have as a monente of your

visit. I - particularly pleased, however, by
your own photograph and that of President Chiang

Kai-shak, and I want to thank you for all these
courtesies.

You may be sure that I share your warm good

wishes for the continued friendship between our
two countries.

I hope that your visit was a pleasant one
and that you will return soon.
with all good wishes,
Sincerely,
Signed) H Morgenthau, Jr.

Dr. H. H. Kung,
Central Bank of China,
15 The Dand,

Shanghai, China.

Photos will be framed.

Cc to 48

our/abs

MINISTRY OF FINANCE

The Waldorf Astoria
New York City.

July 13, 1937.

The Honourable Henry Morgenthau, Jr.

Secretary of Treasury

Washington, D. C.

Dear Mr. Secretary,

On the eve of my departure from your country, I wish
to thank you or the courtesy and hospitality which you
were good enough to extend to me during my recent visits in
Washington. I appreciate deeply the delightful opportunity
of meeting you and of exchanging views with you personally
on matters concerning the common interests of our two
countries.

My Government and people are indebted to you for the
ready cooperation you have in the past extended to us which

has contributed to the success of our monetary reform.
Such cooperation, adopted in the interests of both nations,
has already resulted in an appreciable increase of SinoAmerican trade.

I have now to thank you for making possible further

progress in our cooperation through the new arrangements

which you and I had the satisfaction to make. May I express
the hope that this will further enhance the happy friendship
existing between our two peoples and contribute to the
movement for international monetary stability which your
Government champions.

Under separate cover, I take pleasure in sending you
a copy o my photograph and, on behalf of President Chiang
Kai-shek, a copy of his photograph, which I hope will serve
as momentos of my enjoyable visits with you. I am sending
you also a set or four Chinese porcelain bowls with covers.
With these tokens of remembrance, please accept my best
wishes and highest considerations.
Sincerely yours,

A
H. H. Kung.

395
September 9, 1937
9:30 a.m.

GROUP MEETING

Present:

Mr. Magill

Mr. Oliphant
Mr. Taylor
Mr. Gaston

Mr. Haas
Mr. Upham

Mr. Bell

Mr. McReynolds
Mr. Lochhead

Mr. Riefler
Dr. Viner

H.M.Jr:

Good speech.

Taylor:

Thanks.

H.M.Jr:

Now, Wayne's going - you're going down to your

Taylor:
H.M.Jr:

I think so.
Possible for you to stay (to Magill)?

Magill:

Sure. When?

H.M.Jr:

This week-end.

Magill:

Sure. Want me to stay over the week-end?

H.M.Jr:

I'd like you to be here until Saturday noon.

Magill:

All right.
Till Saturday noon - till 12 o'clock.
All right.

H.M.Jr:

Magill:

home tomorrow?

Magill:

Is there a one o'clock train?
I'm sure there is.

H.M.Jr:

I want Wayne to get away.

H.M.Jr:

My plans are these. I'm seeing the President
tomorrow afternoon, I'm seeing him Saturday
afternoon. Very confidentially, he's considering
coming back Sunday night, so maybe I can see him

on the train. If he comes back Sunday night,

336
-2-

chances
are I'll have a chance to see him three
times.
Herbert?
Gaston:

My ex-boss (Herbert Swope) called me up again late
yesterday afternoon, and more of the same thing.

He had gone back and asked some other people whether

they thought there would be a bad psychological reaction
from any drastic action on reserves, whether they might
think that the Administration took a very serious view
of the situation. He said no responsible man took

that view of the situation at all; they all thought

it would be very helpful if the Federal Reserve Board
would cut reserve requirements to the 75 percent point

of last March. And he also said that it would be very
helpful - of course, knew that we had nothing to do

with that - it would also be very helpful if the

S.E.C. would reduce the margin r requirements from 55

to 45, because he said about 80 percent of brokers'
accounts were frozen and that was withholding from
the market a very considerable buying demand of
people who would otherwise average up their accounts.

H.M.Jr:

Well, the Federal Reserve said, so that you people,
for your general information - see, this morning,

I'm working with Bell - have an interruption for

press conference; forgot about that.
Bell:

What time is the press conference?

H.M.Jr:

10:30.

Bell:

Want to start before that?

H.M.Jr:

What do you think?

Bell:

It's up to you.

H.M.Jr:

Start right after it.

Bell:

No more than get started. Start about 11.

H.M.Jr:

Quarter of 11 sharp, how's that?

Bell:

Very good.

397
-3-

H.M.Jr:

Sharp quarter of 11. Then I'm having Jesse Jones

for lunch; I'd like Mr. Taylor there please. And
three o'clock Mr. Eccles. So that's the program
for today.

Gaston:

I suppose you noticed that the Tribune had a story
that four out of six Government economists took an

unfavorable view of the fall situation; that Leon

Henderson, who is quoted at some length, was the
only one who would be quoted as pessimistic.
H.M.Jr:

I don't know how many economists here are talking.

Gaston:

They're all anonymous anyway; they preserve their
anonymity.

Viner:

Why, Henderson isn't an economist.

H.M.Jr:

What is Henderson?

Viner:

He's a social worker - Sage Foundation.

Bell:

Was Secretary Wallace one of them?

Gaston:

If he is, he's one of the six anonymous.

Bell:

He announced a 16 million bale program and said that
the exports are good.

H.M.Jr:

Now, did anybody get any different thoughts before
I see Mr. Eccles? Anybody got any different thoughts
other than what we talked about last night?

"et me sketch it for the benefit particularly of
Bell. The way we feel - first place, we're going to
ask him what he's got to say, see? Then, the plan
that the Treasury likes the most is for us to deposit
X hundreds of millions of dollars worth of gold,
sterilized gold, and then not borrow, and spend it
through not borrowing any new money. See?

Bell:

(Nods yes)

H.M.Jr:

That is contrary to the suggestion made that we use
it to buy long-term Governments. Now, the reason

I don't like that is this - for sinking fund purposes -:
after thinking it over, we would use artifical support

398
-4-

of the Government market. If, let's say, we buy
300 million dollars worth of long-term Governments,
then we've got to start in borrowing new money
through selling more long-term Governments. It
just doesn't make sense.

Haas:

And pay premiums to sell them.

H.M.Jr:

It just doesn't make sense.

Bell:

You're making the premium by buying.

Haas:

Give selling commission to sell them.

H.M.Jr:

The reason - some of you might be interested - why

I threw aside the idea of stopping sterilization,
was that I felt that this was a tight money market
problem and had nothing to do with S terilization, and
that if we stopped sterilizing then the question of

sterilization is up, good, bad, or indifferent. I
don't want to raise it; it isn't on the firing line.

On the other hand, if we simply deposit a block of
gold, we are doing that to help out the money market
situation, which is the problem. And why meet that
problem by bringing up another problem?

Gaston:

It also demonstrates more clearly that the Government has controls which it can use in an emergency

and is willing to use them.

H.M.Jr:

I mean this is the way I look at it. If my memory
serves me right, your (Bell) program called for
300 million dollars worth of new money between now
and the 15th of December.

Bell:
H.M.Jr:

Bell:
H.M.Jr:

That's right.
Is that right?
Yes, sir.
Well, they will ask for 300 million dollars worth

of gold at least, so that would mean we have to borrow
no new money between now and the 15th of December,

and we spend it that way. Check? I mean instead of

borrowing new money, we'd spend 300 million dollars

worth of sterilized gold, and all you'd have to do is

399
-5-

turn over this 50 million a week.
Bell:

Check on that.

H.M.Jr:

I've been thinking of this thing. Then I think

if we don't have to borrow any new money that's
the most natural way to let the market recover,
of itself rather than going in and buying 300
million dollars worth of long-term Governments.
The more I think, Wayne, about this, the more I
Taylor:

prefer this way. Don't you?
Well, I can still see other reactions that you
might get. - mean I merely pulled this other
one out of a hat because it was

H.M.Jr:

I know, but this thing - let's put it on the

Taylor:

positive side; you don't see any objections?
No, no. Your only objection would be that you
were using the sterilized gold instead of financing,
see, and somebody's going to say that. Well, that's
up to you.

H.M.Jr:

Well, that's all right. That's the worst they can
say.

Taylor:
H.M.Jr:

I think that's the worst they can say, and of all
the other things I think that's the least objection-

able thing.
Put we're not using gold from the devaluation part

Gaston:

of it. Herbert, don't you think that's about the
least thing they can shoot at us on that, the least
criticism, if we do it this way?
I think so, yes.

Viner:

I don't think there's going to be any worry about

Bell:
H.M.Jr:

criticism. I think they generally expect you to
take a control move. You've got a mechanism, why
not use it?
I don't think anybody's worrying about sterilized
gold or desterilized gold.
But this is a result of many conferences during the

400
-6-

last few days and you get it fresh. How does it
sound to you?

Bell:

Well, I'd prefer to stop sterilization and use

H.M.Jr:

But, Dan, of that you haven't got over a hundred

Bell:

the 200 million dollars worth in the General Fund free gold, working balance.

million dollars of gold that was not from devaluation.
But the hundred million increase since you started

devaluation is the result of retirement of National

Bank notes, which you said you earmarked for that

purpose, and you are entitled to put that back into
the market.

H.M.Jr:

Bell:

But, Dan, if I stop sterilizing now - that's an

entirely different problem.
Well, I think it shows you have a flexible program
on sterilization which you can stop or start any
time you want to.

Bell:

Perfectly true, but the problem right now
We talked about desterilizing as gold went out of

H.M.Jr:

But, Dan, the problem right now is one of action of

Bell:

Do you really think tightness of the money market is
causing this situation? After all, there is between
800 and 900 million of excess reserves. There was

H.M.Jr:

the country.

the Federal Reserve Board, tight money market.

only one person at our conferences in New York who

said the reserves were a factor in the market.

H.M.Jr:

Sure, they want a tight money market.

Bell:

Well, after all, the bond dealers want action.

H.M.Jr:

They want tight money.

Bell:

Well, that's just the way it strikes me.
That's what I brought it up for. Take your time on it.

H.M.Jr:

This Federal Reserve Board will never make up their
mind this week, see, and they may insist on using

401
-7-

open market operation. Well, if they do, I don't
know what I can do about it.

Bell:

I'll tell you what they should do; it's their

H.M.Jr:

True.

Bell:
H.M.Jr:

It's their problem.
True, but they've got it down now - they say there's

Oliphant:

They have?

H.M.Jr:

Yes. That is, talking to Eccles and Ransom, those
two. But, Herman, do you get my idea of not bringing
up the sterilization problem at this time?
Oh, I see a real advantage in this way of doing it.
If you do it by buying bonds, it looks too much like
an open market operation. But this way you've got a
perfect control of the amount and the timing, and I

Oliphant:

problem - the reserves.

one of two ways, either open market or a block of gold.

think that answers the objection of Wayne.

Taylor:

I don't think it's a serious objection.

Oliphant:

You borrowed this money and bought the gold. In
effect you're spending your balance. Suppose you
run your balance down; nobody would say that was
smart.

H.M.Jr:

Taylor:
H.M.Jr:
Taylor:

Bell:

I think we get the minimum of criticism and I think
a lot of people will pat us on the back.
I think it is terribly important to use the block
rather than to stop S terilizing, Dan.
Well, Dan has to have time to think it over.
I'11 argue with you about that.
Well, you've got in principle some of the same
elements in your sterilization and depositing of
the gold that you have in desterilizing and buying
Governments, see?

402
-8-

Taylor:

The main thing is that they don't know how much

Bell:

Well, you've got some of the same elements in
both, because if you desterilize and buy Governments, you've got to borrow again to replace the
Governments; now, if you desterilize, you've got
to use some of the same funds to buy back Governments. Some of the same elements.

H.M.Jr:

Well, Dan, it isn't fair to just throw it at you.

Bell:
H.M.Jr:

That's just the way it strikes me.
Cy, what do you think about it? Had time to think

Upham:

I'm inclined to be pretty thoroughly in agreement

it will be.

about it?

with you, although I still think that Federal

Reserve ought to reduce reserve requirements. But

if that's impossible, why, I think this is all

H.M.Jr:

right.
I think that we should all stop war too. I think
they are both just about - got an equal chance on
both.

Upham:

That is probably true.

H.M.Jr:

I think they are both logical too. But lacking

Oliphant:

that - I mean they just haven't got the courage
to face the public and say, "We're going to reduce
reserve requirements." Just won't do it.
I want to amend what I said; that is my basic
thought. I think that the Administration has

made one major financial blunder and that wasn't
made by the Treasury, it was made by Federal
Reserve; that's where you ought to start.
H.M.Jr:

Well, you can't - it's impossible; as I say, it's
just like - it is also very logical we should stop
fighting - I mean war.

Archie?
Lochhead:

About this program?

-9-

403

H.M.Jr:

About this program.

Lochhead:

Of course, the way it shapes up, I'd rather see
the block of gold. I think you'll probably end
up with the authorization to increase open market
purchases, the way it's shaping up to me. It's
always hard to get a decision to do something.
It's always easy to do nothing, to get the authorization. I don't think you're going to get much
further with the Board.

H.M.Jr:

Well - I mean they don't quite realize that they're
dealing with a new person, and I think they find
it's quite different. I mean it's absolutely clear
in my mind what the proper thing to dois. I mean
they can't argue with me, they can't fight with me.
I mean if they want to mess around on this thing I mean I just - now that it's clear I'm going to talk
to the President, and if they're going to start
fooling around like that I'll tell them that the
President of the United States will take the responsibility, and let them mess around. If he wants to
take the responsibility, let them fool around with

open market operations. They 've had this authorization since what, March? Any child, any mathematician,
could see that this thing was coming. I mean why wait
until the 9th of September to discuss this thing?
It should have been started the first of August. Huh?

Taylor:
H.M.Jr:

I think that would have been a nice time to start it.
Sure. I mean I'm just going to tell the President,
"If you want these people to mess around, if you
want a real reversal, all right." But I can say considering the human element, I think - leaving Dan
out for the moment, I think we can say we've got a
pretty uniform opinion that this is the best method.

Viner:

Leaving out the fact that the technically correct
thing would be to lower the reserve requirements barring that, this is, we think, the best. Right?
I'd prefer open market operations, but I'm not very
strong - but I'd prefer a Federal Reserve operation;
that's the point. I think there ought to be some
attempt to present it as a Federal Reserve problem in fact, the Treasury, if possible, not involved, not
mentioned, etc. This situation has developed certainly

404
-10-

not because of Treasury operations, and it is

their function to correct it, and as far as possible
I'd prefer a device which gives it all the atmosphere
of a Federal Reserve operation. But you can handle
your method so that the Federal Reserve is brought
very clearly into the picture, and they certainly
would do it that way so as to give the impression as
bluntly as you can that this is done as a Federal
Reserve measure.

H.M.Jr:

Now, in that memorandum, one of the things you put

on your list - those that are working on this thing I want to ask Phillips what the English are going to
do about the 40 million pounds French railroad loan.
I mean that ought to be on that list. See? I mean
that's very important. What are the English going to
do about that?

Lochhead:

In connection with this memorandum that went out just
now, francs have been under pressure all morning.
About 372 yesterday, down to 368 2 today. Knoke was
speaking to the Pank of England just before it went
out, and he said they have had an impression France

had lost about five million dollars in that market
the first two hours, that the pressure was not

particularly new. While he was talking he had news
that they had broken another point and France advised

they had lost another five million dollars besides
of gold in the London market and four million dollars
worth of dollars - they don't know how it would be
translated yet - and he felt that the crisis was
developing - felt that a major crisis was developing;
had no news of outstanding events, but the pressure

was becoming strong.
H.M.Jr:

Taylor:
Lochhead:

Taylor:

That's like spring and autumn; every Decoration Day

and every September we have that. It's true. I
mean I can't get - we - you can't help the French
help themselves; that's the main problem.
All that means is, down she goes.

It means also, of course, that there is going to

be more gold coming here; now the turn will be coming.

They're backing away from it fairly fast if you let it
break that fast.

405
-11Lochhead:

Until they do stop it, it means - any support they
give means more gold coming that way.

H.M.Jr:

George, will you get me the articles of Mr. Brandt
of the London Times, on gold; I'd like to have
them.

I don't like these people dropping in and - I can
talk business, but Herbert Feis broke in on me last
night and

Viner:

What time did they stay?

H.M.Jr:

At 10:30 I stood up, pulled an Oliphant on them.
Except I was one hour late.

Oliphant:

Yes, one hour late.

H.M.Jr:

Herbert Feis, after you fellows left, wanted to
use my little sitting room as a place to pump Mr.
Brandt on the foreign policy of Great Britain, and
I wasn't interested.
Mac?

McR:

(Nods nothing) I can't tell you what - I wouldn't

bother you now.

Bell:

How about silver?

H.M.Jr:

It's very. easy. We can start loaning them money
and taking their paper.

Bell:

Mac, you're only interested in silver.
Dan, sharp quarter of 11. Mr. Oliphant, would you

H.M.Jr:

stay a minute.

Fin
406

September 9, 1937.
9:35 a.m.
H.M.Jr:

Oh I'm fine.

Burgess:

That's good.

H.M.Jr:

How are you?

B:

Fine. Everything looks rosy this morning.

H.M.Jr:

Ah-ha.

B:

The rights are quoted 7-9.

H.M.Jr:

Yes.

B:

Ah - the stocks and bonds - the notes and the bonds

are both fractionally higher

H.M.Jr:

Ah-ha.

the stock market is very much more cheerful

B:

H.M.Jr:
B:

H.M.Jr:

Ah-ha.

so everything looks all right.
Good. Well I think it's safe at my Press Conference,
which is in an hour, to say that the issue is a
success, wouldn't you say so?

B:

Ah - well I - I'm not sure I'd say it yet. It's - it's
almost surely that.

H.M.Jr:

Well what would you say?

B:

I'd simply say it looks - it looks all right.

H.M.Jr:

It's going well?

B:

Yes, going well.

H.M.Jr:

It's going well.

B:

Yes.

H.M.Jr:

What?

2B:

Yes, that would be a little restrained.

H.M.Jr:

All right.

B:

Take
it as a matter of course it's going very
nicely.

H.M.Jr:

It's going satisfactorily?
Yes, that's all right.

B:

H.M.Jr:

How's that?

B:

(Hearty laughter) Very good.

H.M.Jr:
B:

What? It's going satisfactorily.
With that little gesture, you know.

H.M.Jr:

What?

B:

With that little gesture, you know. (Laughs)
And can I also say it's the first time in three

H.M.Jr:

407

days that Burgess has laughed?

B:

(Laughs) No, I've been laughing every day. (Laughs)

H.M.Jr:

Up your sleeve.

B:

I feel better this morning though.

H.M.Jr:

Up your sleeve, though.

B:

(Laughs) No.

H.M.Jr:

All right, Randolph.

B:

Say you know the Board's having a meeting Saturday,
did you?

H.M.Jr:

Yes.

B:

Of the Committee?

H.M.Jr:

Yes.

-3 B:

And so on.

H.M.Jr:

Yes.

B:

Yes.

H.M.Jr:

I may want to talk to you later in the day.
All right, very good.

B:

H.M.Jr:

Yes.

B:

Fine.

H.M.Jr:

Thank you.

B:

Goodbye.

408

409 Fin
September 9, 1937.
10:26 a.m.
H.M.Jr:

Hello

0:

Dr. Burgess. Go ahead.

H.M.Jr:

Hello

Burgess:

Hello sir.

H.M.Jr:

Ah - I just - I'm having my Press Conference in

three minutes and I wanted to check with you once

more.
B:

Yes.

H.M.Jr:

Ah - I - I'm going to say that the - the conversion
is going satisfactorily.

B:

Yes.

H.M.Jr:

Can I say more than that? I don't think it's
necessary.

B:

I think that's all right.

H.M.Jr:

Yes.

B:

As a matter of fact the - ah - maturing notes are
now worth a quarter of a point.

H.M.Jr:
B:

Well why don't I be a little bit more enthusiastic?
Ah - well I don't think I'd be too enthusiastic.

H.M.Jr:

All right I'll - I'll say it - it - the conversion

H.M.Jr:

is going - ah - ah - satisfactorily.
I think that's the way to do it.
I think so.

B:

If you look too joyful it looks as though you were

B:

surprised.

H.M.Jr:

No, it's going satisfactorily.

B:

(Laughs)

-2-

410

H.M.Jr:

Ah - I'd be glad to see my March - you know the
thing that surprised me in this break is that those
March 42's didn't go down further.

B:

I thought they would - I thought they'd lose as much
as half a point maybe.

H.M.Jr:

Yes. Ah - who's doing the buying to-day?
Ah - of the rights you mean?

B:

H.M.Jr:

Well yes.

B:

Well the - the Travellers Insurance just bought
five million of each; I think a number of banks
are buying;

H.M.Jr:

Yes.

B:

.....

H.M.Jr:

Yes.

B:

Everybody knows now that it's - ah - that it's probably

a number of insurance companies.

going to be all right

H.M.Jr:

Yes.

and they made up their minds to that over night

B:

H.M.Jr:

Yes. .

so - on the basis of what happened yesterday -

B:

so that now they think they're desirable.
H.M.Jr:

Yes. All right - ah - ah - I'll be talking to you

B:

Fine.

H.M.Jr:

Thank you.

B:

Goodbye.

H.M.Jr:

Goodbye.

later.

Fin
September 9, 1937.
11:40 a.m.
H.M.Jr:

Hello.

0:

Dr. Burgess.

Burgess:

Hello sir.

H.M.Jr:

Well how does she look right now?

B:

Well it's just a little bit easier.

H.M.Jr:

Ah-ha.

B:

There's nothing to be concerned about, I think.
Ah-ha. Ah - .....

H.M.Jr:

H.M.Jr:

The rights have leased off.
What's that?

B:

The rights have eased off to 7-9.

H.M.Jr:

Yes.

B:

They were 8-9.

H.M.Jr:

Well -

B:

But it's all right.

B:

B:

What I said didn't hurt, did it?
No - that's all right.
Perfectly dignified.
I think so, yes.

H.M.Jr:

Yes.

B:

Yep.

H.M.Jr:

And - ah - how are the March 42 notes?

B:

Ah - they 're doing very nicely. They're 30 to par.

H.M.Jr:
B:

H.M.Jr:

411

-2H.M.Jr:

412

30 to par. Well that's all right.
And I know there's some

B:

H.M.Jr:

Now - ah - still some buying going on?

I think so, yes.

B:

H.M.Jr:

Ah-ha.
Ah - we'll get our usual conversion,
won't we?

B:

I think we're bound to now, yes.

H.M.Jr:

Did you - you didn't buy any bonds for us to-day.
Nope - not yet.

B:

H.M.Jr:
B:

And actually you never bought any rights; you never
had to - you made that one swap, didn't you?
We made one swap - a million and a half.

H.M.Jr:

Yes and that's all.

B:

Now there's one block that a dealer is holding that

I'm watching a little bit. If that gets heavy we

may take that over but
H.M.Jr:

A block of rights?

B:

Yes.

H.M.Jr:

How much has he got?

B:

He's got about 12 million.

H.M.Jr:

Really?

B:

I think he'll sell them though. He'd be better if

H.M.Jr:

Would you mind telling me which dealer?

B:

That's Sullivan.

H.M.Jr:

I see - 12 million?

B:

Yep.

he sold them in the market.

-3H.M.Jr:

You want him to sell them?

B:

I think it's better to sell them. I think it's

413

better - ah - for the market to be just as natural
as possible and then nobody can accuse us of

H.M.Jr:

That's right.

B:

.....

H.M.Jr:
B:

H.M.Jr:

of having padded it up, you see?

Well can't he sell 12 million?
I think he can, yes.
Ah - you don't turn yours in until the last hour,
do you?

B:

No we'll - we'll put them in this afternoon.

H.M.Jr:

Ah-ha. Are there many coming in?

B:

Ah - well here's the sheet I just go up to 12 o'clock.

H.M.Jr:

Yes.

B:

Ah - not very many yet; eight million of the short
and four of the long this morning.

H.M.Jr:

I see.

B:

Brings us up to 91 on the short and 74 on the long.

H.M.Jr:
B:

H.M.Jr:

I see.

It's a pretty good relationship, isn't it?
Yes. Well they never turn them in till the last
minute, do they?

B:

Oh no, they just trot them in the last minute.

H.M.Jr:

They wait till the last hour, eh?
That's right, yes.

B:

414

-4H.M.Jr:

I see - 12 - we've got two more hours to go.

B:

Yes.

H.M.Jr:

Yes. All right.

B:

Very good.

H.M.Jr:

Thank you.

Fin
415
September 9, 1937.
12:39 p.m.
H.M.Jr:

Hello.

0:

Mr. Madison. Go ahead.

H.M.Jr:

Hello

Madison:

Hello.

H.M.Jr:

This is the Secretary speaking.
Hello Mr. Secretary.

M:

H.M.Jr:

How are you?

M:

Fine, thank you. Did you have a nice vacation?

H.M.Jr:

Oh a wonderful vacation.

M:

I always wanted to go out there.

H.M.Jr:

I asked for you if Burgess was at lunch. I wondered
how this has been going the last hour.

M:

Ah - the last figure I had is one o'clock

H.M.Jr:

Yes.

M:

.... and they had a total of 116 million of the

shorts and 90 million of the long.

H.M.Jr:

Ah-ha.

M:

At 200 and

H.M.Jr:

they're waiting until the last minute.
Well what I want you to tell Dr. Burgess as soon as
he comes back - the last 15 minutes of the market
watch it - that it don't play any tricks on us.

M:

I didn't quite get that.

Ah - they're coming in they're speeding up a little bit but we know that

-2H.M.Jr:
M:

H.M.Jr:
M:

H.M.Jr:

The last 15 minutes that the market is open
Yes.

from a quarter to three to three watch it very
closely. Now you've got orders there
Oh yes.

You've
orders - I - I want the bond market to to closegot
firm

M:

Yes. I'm - I'm in a fine position now and - ah

H.M.Jr:

How is that?

M:

Well I've got this 5 million additional.

H.M.Jr:

416

Yes, well that's what I'm calling up about and I
want you to use it - I mean I - I don't want a
sloppy bond market the last 15 minutes

M:

I'll watch that very carefully.

H.M.Jr:

because they sell 50 or 100 bonds and they

go off two or three thirty-seconds and it has an
influence on the whole thing.
M:

Oh yes. I'll watch that very carefully and I'11
keep an open wire.

H.M.Jr:
M:

I mean I'd like - I'd like to keep it - I mean don't

hesitate to use that the last 15 minutes.

No sir, I'll not.

H.M.Jr:

I mean I'd - I'd like it to close up a thircy-second,
if possible.

M:

Yep.

H.M.Jr:

See?

M:

Yep.

H.M.Jr:

Abd - ah has Solomon Brothers got rid of any of

their rights?

417

-3M:

No they've got - they've got about 6-1/2 left.

H.M.Jr:

Well an hour ago they had 12.

M:

Yes
- yes - that's what he told me just a few
minutes ago.

H.M.Jr:

Ah-ha.

Ah - I don't think it will hurt him to take the ah - to take the - to take the short note.

M:

H.M.Jr:

Yes. What are the rights bid right now?

M:

Ah- 7 is the - is the general bid.

H.M.Jr:

Seven.

M:

Seven, yes.

H.M.Jr:

And any - any - what are they bidding on the short

M:

Ah - six generally.

H.M.Jr:

Six.

M:

Yes.

H.M.Jr:

Well don't you think that's a comfortable margin?

H.M.Jr:
M:

Yes, I - I - we're very much pleased that they've
stayed above that price. We felt that if they that if they went lower or any higher that - ah there would be influences that wouldn't make the
issue look quite as good
I see.

in the actual

.

M:

and long - the new one?

Don't you

agree with that?
H.M.Jr:
M:

Well - ah - that's getting down to pretty technical
fine points - I don't know.
Well, yes.

-4H.M.Jr:
M:

H.M.Jr:
M:

418

I mean I wouldn't weep if it had gone up another

three or four thirty-seconds. - Yes - yes.

But - ah - your perfectly happy as it stands now.
Oh yes, perfectly happy and it's going nice and
the sentiment is good and we're getting more of

the 2% notes than we got. Here in New York we
get 56% of our subscriptions in the short and 44%

in the long which I - up to now which I think is
quite satisfactory.
H.M.Jr:

Yes and the country will most likely

M:

The rest of the country will even it up.
Right, which I think is very good. But don't
hesitate to use that 5 million the last 15 minutes.

H.M.Jr:
M:

All right, sir.

H.M.Jr:

And I'd rather use it and have them criticize us

M:

That's all right.

H.M.Jr:

You understand what I mean.

M:

I - I understand you, sir.

H.M.Jr:

Thank you.

M:

All right sir.

H.M.Jr:

Goodbye.

tomorrow but use it.

Fin

September 9, 1937.
2:03 p.m.

H.M.Jr:

Hello

0:

Dr. Burgess.

H.M.Jr:

Thank you.

0:

Go ahead.

H.M.Jr:

Hello

B:

Hello sir.

H.M.Jr:

Yes Burgess.

B:

It's most all right.

H.M.Jr:

Swell.

B:

They're up one to three from last night.

H.M.Jr:

Oh grand.

B:

And the rights closed 6-8.

B.M.Jr:
B:

H.M.Jr:

Swell.

So everything's all right.
Well I can 't tell you how much I appreciate
your assistance.

H.M.Jr:

Well sir that's all right we're silent partners.
No - no this isn't jesting I really mean it,

B:

Well thank you very much, Henry.

H.M.Jr:

Because we're really very short-handed here and

B:

Randolph, tremendously.

I always get first-class men. After all I have

no Under Secretary
B:

H.M.Jr:

Yes.

.....and I lean very heavily on you and it's

been a tremendous

419

-2-

B:

Well
I'm way.
delighted that you do and glad that you
feel that

H.M.Jr:

Yes -and - ah - well this one's behind us.

B:

And I congratulate you officially now (laughs)

H.M.Jr:

Well -

B:

It was

H.M.Jr:
B:

H.M.Jr:
B:

H.M.Jr:

Well
it was - ah - as I told Wayne this morning
we never leave a stone unturned

That's right, yes.
and then the Morgenthau luck - ah - still
is with us - I mean

Well it wasn't luck; you did the right thing.
No well now - I mean in this way - we did the
right thing but supposing we had the 8 point drop
to-day instead of Tuesday.

B:

That's right, yes.

H.M.Jr:

That's what I mean.

B:

Yes, that's right.

H.M.Jr:

I mean we could have done everything we wanted

B:

I'd a lot rather have the worst day first.

H.M.Jr:

Yes. Supposing we had the 8 point drop to-day.

B:

Yes that would have been bad.

H.M.Jr:

It would have been very bad.

B:

Yep - yep.

H.M.Jr:

Well again thank you very much.

B:

Well sir you're very welcome.

H.M.Jr:

Good night.

B:

Goodnight.

to.

420

421
RE TIGHT MONEY MARKET

Present:

September 9, 1937
3:00 p.m.

Mr. Taylor
Mr. Haas
Mr. Riefler
Dr. VinerMr. Eccles'

Mr. Ransom,

H.M.Jr:

The reason I phoned was I WES hoping to get away

from here at four to go up to the country to make
my appointment with the President, see? So

Ransom:

I've tried to bring him up-to-date as completely
as I could by telephone and again this morning. I
don't know just what point

H.M.Jr:

I asked these gentlemen to meet with me from the

Eccles:
H.M.Jr:
Eccles:

Treasury so we'd save time. In the first place,
I want their judgment. You know them all and you
have as much confidence as I have, if not more so.
And it saves a little time if we can have the discussion face to face instead of my talking to you
and going out to talk to them.
That's all right. You're going away anyway.
I'm leaving at four o'clock.
And as I understand it, you won't be back until
Monday.

(Harris comes in)

Harris:

here is no change in the market since the close.
Still same good tone. New issues are quoted on the
inside six to seven. of course most of them are not
quoting their rights now because you can't get
delivery on them. And the total in New York that
they have gotten so far today is 178 million plus
152 million last night, which makes 330 million; and
that doesn't include the System, 71 million. That
would make about 400 million in New York.

Ransom:

May I ask how they are divided between the two
maturities?

422
-2-

Harris:

Yes. Today it's been 104 on the short and 74

Eccles:

How much on the short?

Harris:
Taylor:

72 and 50. And that makes it probably two-thirds
against the one-third on the 100 percent. 104 and 75.
That's pretty good.

Eccles:

How did the stock market do?

Harris:

Closed up about three points.

H.M.Jr:

And all the Government bonds were up, some of them

million on the two's. And last night was about
72 on the short and about 50 million on the long.

quite considerable.

(Harris leaves)
Eccles:

Well, Ronald has - I've been in touch with him

Saturday and then Tuesday - Sunday and Monday were

holidays - twice Tuesday and twice yesterday. I left

last night at 8:40 this time.

Now, as you know, we - after talking to him about

the situation, it appeared to both of us that we
ought to have a meeting of the Board, also the full
Open Market Committee - the sooner we did it the
better. What I'd like to discuss today, preliminary

to those meetings, would be to have you give us what
program that you would like to carry out, and we can

discuss that, so that - I'd like to be able to go
before the Board and also the Committee and discuss
it thoroughly and fully, so that we can - I assume
that you would be available, I can get you on the
phone, or couldn't I, on Saturday or Sunday?

H.M.Jr:
Eccles:

H.M.Jr:

Yes, Beacon 211.

If need be, so that we would be ready by Monday to

make such announcement as was agreed upon.

Well, I don't - the way I feel, I think, if you

-

don't mind, I don't want to - "My dear Alphonse"

but Mr. Ransom asked to talk to me on Sunday about
this money market situation. Now, you people have

got the information and I really think that in this

423
-3-

case the initiative should come from you folks.

I mean, granted that it ought to be a joint operation and a joint move, and something which we both
agree is good for the country.
Eccles:

Yes,
means.I think that should be the approach by all

H.M.Jr:

But as to the basic needs of this, I think that the
facts have to be established by the Federal Reserve
System - first as to basic needs and then as to the
alternatives. I really think that you should set
something up.

Eccles:

All right.

H.M.Jr:

Eccles:

I'm not sparring, but I mean I feel that
Well, neither am I.

H.M.Jr:

I think that's the way it ought to come. I mean

we haven't got the machinery, unless we went to the

Federal Reserve System and said, "What is the money
market situation, what are the needs between now and

the first of January?" I think I know, but first I

think you want to establish your facts and then the
methods of handling it afterwards. Now, Idon't know
whether you people have got your facts here or not.
Ransom:

Well, I think, Mr. Secretary, that I covered it in a
preliminary way with you Sunday morning and then by
the memorandum prepared by Mr. Piser which I left

with you yesterday, gives us a pretty clear picture
of what we can expect.

H.M.Jr:

Why don't you sum up our conversations, if you would.

Ransom:

Yes. So far as excess reserve positions

H.M.Jr:

Why don't you sum up our talks, what you have said
to me, where we stand, where we arrived at.

Ransom:

On Sunday morning I called to the Secretary's atten-

tion the fact that our survey of the situation
indicated that we could expect a definite decline
in the excess reserve position of the banks of the
country during the period between now and the end

of the year. I pointed out that that would perhaps

424
-4-

be relatively more acute in New York, as the
money center, than it would be in the rest of
the country, and that we had to recognize the
fact that that had a bearing on the Treasury
refinancing which was then under discussion,

and also a bearing on the question of the policy
to be followed by the Board and perhaps by the
Treasury also in the intervening period between

now and the first of the year.

The Secretary pointed out to me that he was very

glad to have an opportunity to discuss that; that
a good many of the same thoughts had occurred to
him and that he was considering, in relation to
that situation as it developed, the advisability
or not of a discontinuance of the sterilization
program.

I then suggested to him that both you and I, Mr.
Eccles, had had in mind the fact that some

mechanism should be devised which would meet that

situation as it developed, and informed him that on
Saturday morning, in the meeting of the Executive

Committee of the Open Market Committee, I had myself

suggested action on a proposed resolution which I

had prepared which would mean an open market opera-

tion of not less than 200 million dollars in shortterm maturities for the purpose primarily of supply-

ing the lack of excess reserves which we knew would
develop - believed would develop - and also of

putting a ceiling on the bill rate for the purpose
of maintaining a more orderly condition in the market
during that period. And he and I discussed the
possibility of that as a mechanism and the discontinuance of the sterilization program as a mechanism
which might achieve the same objective.
Later on and after another conversation with him
and several telephone conversations with you, I
found that both you and he had reached this much of
a common ground: that as between a discontinuance

of the sterilization program and a program which

would desterilize a certain block of the sterilized
gold, you both felt that you would prefer the
desterilization rather than a discontinuance of the
policy, for reasons which I think all of us are
thoroughly familiar with. And on yesterday, in the

-5-

425

further discussion with the Secretary, he and
I agreed that we were down to the point where
we were to choose between two alternatives, either

that program of a desterilization of a certain

amount of the gold by the Treasury, or an open
market operation, about which I think he had some
mental reservations both as to effectiveness and
also as to perhaps the wisdom of the move at this

particular time.

So that when I telephoned you last on yesterday I
could report to you that we at least had reached
the point where we were considering a choice
between these two, and also pointed out to you that
the Secretary felt that he should make any announcement he made on the subject not later than Monday.

And I found a rather interesting - in a rather

interesting way to me, that you had reached the
same conclusion independently of him, and that you
both felt that there was no reason to delay a

decision on this matter longer than that; that we
might as well decide before the event rather than
after the event and come to some sort of a conclusion about it.

Now, I have not felt at liberty, in view of what
the Secretary said to me, to discuss it with anybody
other than the members of the Board and the chiefs
of our divisions, because I did not feel that at the
time the Secretary wanted it carried to the Open
Market Committee, and I haven't

H.M.Jr:

And I haven't talked to anybody outside of the
Treasury, because I didn't want any rumors while
the financing was going on, I didn't want to muddy
the waters; and so, outside of the small intimate
group in the Treasury, nobody knows anything about

it.

Ransom:

So I would say that both you - that the Secretary

and you, Mr. Eccles, and I have all felt that this
was just as appropriate a time as any other to

consider this problem and decide whether we could
adopt a mechanism which would meet a situation which

inevitably is going to develop.

426
-6-

H.M.Jr:

To show you that there isn't even a whisper of
a leak, I had my press conference at 10:30 this

morning, and not a word about the Federal Reserve

or ourselves - not a question.

Ransom:

Well, it is rather amusing that this might have
caused some newspaper comment except for the fact
that the press construed Mr. Eccles' return as

related to whether or not the Board would reduce
the marginal requirements on the stock market, and

they were perfectly satisfied with that. But a
lot of people are still puzzled to

Eccles:

New York is very curious; they are very anxious to
find out.

H.M.Jr:

They tried to do a little pumping with me, but they

Ransom:

Tried it with me. Does that sum up

H.K.Jr:

I would say that you could get a job with the
Associated Press at any time as a star reporter.

Ransom:

Thank you.

H.M.Jr:

The only thing I'd say is this. In our conversation that we first had on Saturday - Sunday - in Mr.
Magill's room, if you remember, you did say - you
first said that frankly you were worried, you and

got nowhere.

Mr. Eccles, and that you thought it should be an
open market operation.

Ransom:

Yes.

H.M.Jr:

Then I said, "Well, we've tried that now various
times and the great trouble is that they always
carry it out without any enthusiasm, and I am fearful
that at this time it can't be done fast enough to
get the effect that it needs, and therefore I think
that doing something with gold would be more effec-

tive." I mean I think that's the only possible is that right?
Ransom:

Yes.

H.M.Jr:

And you said, in talking for yourself, that you

more or less, without committing yourself, agreed
with me.

427
-7-

And then the other thing, which entered into the
only other discussion, was
Ransom:

Certainly agreed with you, if I may interrupt,

that I thought the open market operation was one
about which we had to make up our minds to act and

to act with decision in the future if we were going
to have it effective; that it was always the problem
of getting it effective and I thought that this time
we could make it effective.

H.M.Jr:

The only other thing, I think in discussing it
yesterday - I think you mentioned the fact that
if you couldn't make the open market operation,
what was the use of having a Federal Reserve

Board, and I said that I felt that this time

might be a little unwise to use as a battleground

to reach as important a decision as whether the
Federal Reserve Board was worth while or not, but
I thought maybe some time when things weren't quite

so critical that the battle would have less reverberations; that is, I thought it wasn't an awfully
good time to pitch a battle.
I think that's the whole thing, and as we brought
it along we discussed the thing, and, considering
the human elements, I think that my crowd and
myself are largely in agreement. Each one has a

way that they think they'd rather see it done if

you could eliminate the human element, but inasmuch
as we are what we are, we are pretty much in agreement that the choice lies between those two methods.
Now

Eccles:

Well

H.M.Jr:

And I might just add one other thing. The reason

that I put aside the question of stopping sterilization of gold was that I felt that the question of
sterilizing or not sterilizing isn't the problem;
that the problem right now is that we are facing a
tight money market, and the question of gold
sterilization isn't up. And that's why - I mean
if we stopped sterilizing at this time, why, then
we'd be handling two problems, and I think if we
handle one problem at a time it's enough.

428
-8Ransom:

Yes, and if you stop sterilizing, you'd obviously
be
using a long-range mechanism for a short-range
purpose.

H.M.Jr:

True. I mean the question of to sterilize or not
to sterilize - that question isn't up.

Taylor:

And it might be six months before you - all other
things being equal, before you got the amount in
there that was necessary to do the job, whereas this
way you can put in whatever it is that you want to
put in, if you decide to use that mechanism, then go
ahead and accumulate again.

H.M.Jr:

Eccles:

Then, if we stop sterilizing, it adds another
uncertainty, and that's the last thing we want to
do. Now, that's the whole thing.
Well, I've thought a good deal about it continually,
and, just briefly reviewing the background, because
after all I think that always has a bearing on the
problem, at the time that the Treasury started
sterilization, at the time we increased reserve
requirements, shortly thereafter, we knew that it
would create a situation with the banks whereby the
excess reserve that was left in the System after
our increase in reserve requirements, with your

sterilization program in effect, would fluctuate
only with the increase or decrease in the amount
of currency in circulation and the increase or
decrease in the amount of credit extended by the
banks. In other words, we had sort of shut the
doors. We recognized that during a year's period

the amount of reserves would fluctuate due to, very

largely, those two factors: at the quarterly periods,

where it would be more, and the fall and holiday

period, which would be the periods when there would

be a lack of stability in the short-term market,
in the short-termrate; and that the open market
function was a device - either that or the estab-

lishment of a Government bill-buying rate, which we
have been discussing for some time and which I
haven't gotten very far up to date, would tend to

meet this situation; that is, a bill-buying rate
or an open market rate that was more or less
mandatory in nature, based upon a formula.

429
-9-

Now, just speaking in this room, you know that
particularly the Reserve Bank people, and New

York in particular, are - resist in every way

possible, or are extremely loath to take away
from them discretionary power, which the establishment of a bill-buying rate would tend to do.

By establishing the bill-buying rate what I had
in mind was that it would be like the acceptance
rate, only it would apply to Government bills.

The justification for that is that we don't have

any large amount of acceptances - that is, the
banks don't - and what acceptances do exist are
owned largely in New York, and are owned by a
small - even a small number of the banks in New

York. And therefore, in the absence of a large
amount of acceptances, establishment of a billbuying rate - we put a top upon the interest rate;
the banks would not have to show borrowings, which
there is apparently a great loathness - a great
objection to at this time. If we established, say,
a bill-buying rate of a half of one percent on
paper with a certain maturity - possibly a 3/8
and paper of a lower maturity, that would put a
top on the rate on bills and would put the banks
throughout the country in a position of selling
bills to the Reserve System at a rate that we would
-

assume would be satisfactory to the Treasury and
would assure at all times an ample supply whenever
a supply of funds was needed for the short-term
market, and it would more or less work automatically.

Now, that was the one thought. Now, the other one I recognize that the open market has not worked
well, as you have indicated, the way we have worked

it in the past. To go into the open market and buy
particular issues of bonds that are weak tends to
put into the Reserve System long-term securities
which, in view of the amount they have, is not
desirable because it would tend to freeze the
portfolio beyond a point that I think it might
be advisable to do. Excess reserves can be created
by the purchase of short-term bills, and they could
these bills would be - if we could buy directly
from the Treasury as most central banks can, why,

-

430
-10-

we could take care of that; we could buy directly
then let those securities - sell them at the market

and give such funds at such rate as we desired and
as the reserves increased, when currency came back

into circulation. That's what the Bank of England
does, but we can't do it so we've got to go to the
market and do it.
The proposal that Mr. Ransom and Piser discussed

was this, in the general principle: that we would

instruct the New York Bank, acting for the Open
Market Committee, to buy bills not exceeding a

certain maturity until such time as the reserve
in New York City - the excess reserves, that gives
you the money market picture, which after all is
your short-term market - until such time as the
excess reserve would not be less than, say,

200 million; and that would be for any week, it
wouldn't mean that it was a question of - it would
have to average that for the week, or until the rate
was not exceeding one-half of one percent or less.
The difference between that and the bill-buying
rate would of course be that it would apply immediately to the money market.

That is, of course, in effect an open market opera-

tion. It is a little bit different than an open

market operation left up to the discretion of the
managers to buy as and when they want, and such
issues as they want, and it doesn't relate to the

rate. Now, after all, the rate is the important
thing in the short-term market, and to try to talk
about artificial - about normal rates in the shortterm market at EL time when you are proposing an

easy money policy is, it seems to me, perfectly
ridiculous. There isn't a normal rate; you make
the rate in the short-term market by the amount of
reserves. That's what tends to make the rate.

So that we could definitely fix a top to your
short-term rate that would be, I think, satisfactory,
and it would work immediately and it would work

effectively, if we could get it through. Now, I
don't know that we can.

431
-11-

H.M.Jr:

It just doesn't ring a bell here at all.

Eccles:

Well, I'm just giving you the
I don't think you can do it. If you don't mind
my saying, I don't think you can do a single thing
that you say. What is this putting a limit on a

H.M.Jr:

rate business? My god, you reduced the rate a
half of one percent; it was absolutely meaningless.
And this thing - you think you can put money - the

bill market in a narrow groove and it's going to
stick there.

Eccles:

You can buy bills and fix your rate.

H.M.Jr:

Well, the rates on our bills - up to - what was it,
three weeks ago - we were selling these tax dates
at around a fifth of one percent, and it began
to shorten.

Eccles:

It began to shorten when the excess reserves dropped
down to somewhere less than a hundred million.

H.M.Jr:

May I ask a question? Have you just closed your

mind to this question of putting in a definite
amount of gold?

Eccles:

No, I haven't closed my mind. I'll argue both sides

H.M.Jr:

I mean have you just put it to one side?

Eccles:

My mind isn't closed on it at all, and it may be
the desirable thing to do. It has some arguments
in favor of it. And don't think for a minute that in my
arguing or presenting these other ideas that I am
doing it with the idea of eliminating the question
of desterilizing a certain amount of gold. I am

of it.

merely reviewing and pointing out the consideration
that we have given to the question of maintaining

a top to the short-term bill rate, which after all

is the money market instrument today, in the absence

of our ability to buy bills directly. It is more or
less of a getting around that prohibition.

432
-12-

Now, getting to the question of desterilization,
30 far as the Treasury is concerned I have a good
deal of sympathy with your position, and I think
I might feel exactly the same way if I was in your
position. So long as you are sterilizing gold you
are increasing, of course, the debt, and it appears
in the amount of the deficit. Politically and
publicly, that tends to create a position which
is not altogether desirable.

The portfolio at the present time is two billion
five hundred million.
H.M.Jr:

Marfiner may I interrupt you again? You don't
see it from my standpoint at all. I'm not worrying
about my position; my position is all right. We
are not worrying about the gold. I'm not worrying
about the debt. There is no heat on me. I mean I
don't - I mean, that is, if the heat's on me, which

it isn't - the heat isn't on me. The heat's on if you want to call it that, the heat's on the

Federal Reserve Board because you created this

situation.

Now, we're not worrying about the public debt. I've
just concluded another financing, made two percent

for five years; that's not exorbitant. I mean I'm
not worrying about my position at all. I can go

on and raise my money. I don't have to raise much

money between now and December, and I can raise what
Taylor:

I need in December. I'm all right.
Just to interrupt you, we're trying to look at this your approach and the Treasury's approach should be
as if all these instruments belonged in the same
place. Then, what do you do? Which is going to
have the best effect?

H.M.Jr:
Eccles:

Viner:

But it isn't a question of the shoe pinching the
Treasury, because it isn't.
Well, it isn't pinching the Reserve System.
I think the problem is what ought to be done for
the national credit structure, and it's primarily
a

Federal Reserve problem. We want to cooperate.

433
-13-

Eccles:

Well, outside of the question of Treasury financing,
there is no pinch in the short-term money market.

H.M.Jr:

Marriner, I don't think you know what conditions are.

Eccles:

Oh yes I do.

H.M.Jr:

I don't think you do.

Eccles:

The bank rates today are by far the lowest they
have ever been, and now they are - so far as
commercial borrowing is concerned, agricultural
borrowing is concerned, or any borrowing for

business purposes - collateral loans - the call
rate is one percent - there's no problem with
reference to commercial paper or commercial borrowing or agricultural borrowing of any kind
today. The rates today are not a deterrent in
any sense of the word.

So far as the Treasury is concerned, I recognize
that the one percent discount rate in New York and
one and a half outside has hardly been touched, and

the Treasury short-term debt is high. It is perfectly

natural that banks are not going to buy Treasury bills
at a half or three quarters and discount at one or
one and a half percent. And the rate is high for the
purpose of Treasury financing, especially at a time
when you have to - when the debt is increasing.
Therefore, the problem is not the problem of the
need of credit for business generally, as far as
commercial bank or bank credit is concerned.

Haas:

How about capital?

Eccles:

Well, that

H.M.Jr:

Now, Marriner

Viner:

Let's hear what the problem is.

Eccles:

Capital is a very different problem from this, and
I want to say something on the question of capital
market which doesn't necessarily relate to this
problem. You can't provide a capital market through which means long-term credit - what capital market

434
-14-

means - through having the pressure of excess

reserves so great that banks will increase their
holdings of long-term securities, especially
because that puts them in a position - the banks
increase their holdings of long-term securities
then because there is nothing else to do, at a
rate that later on may show them a very substantial
loss, which would create a problem not only for the
Reserve System, for the F. D. I. C., but for the
Treasury.

Therefore, I think that the thing that we've got
to consider is, after all, the short-term bill
rate and the commercial paper rate, etc., and the
question of the discount; one percent and one and a
half percent is an effective discount rate so far

as commercial borrowings are concerned, or agricultural borrowings.

H.M.Jr:

But nobody uses them.

Eccles:

They don't have to use

H.M.Jr:

I mean why not make it three-quarters of one percent,
make it a half of one percent, and get down to
realities. I mean as long as commercial paper is

sold at a half of one percent, what different does
the discount rate make at one half percent or one
and a half or five percent?

Eccles:

Well, commercial paper is sold at three-quarters or the best paper - and a good deal of the paper is
at one percent.

H.M.Jr:

The banks are selling their own paper at a half of
one percent - over Labor "ay.

Viner:

Bankers' acceptances.

Eccles:

Bankers' acceptances - an acceptance rate of one

half of one percent. And bankers will sell those
acceptances when they get under pressure for

reserves, rather than the discount rate. They have
darn few acceptances. But if you had a rate for
bills like you have for acceptances, they would sell
bills and it would assure you a bill market.

435
-15-

H.M.Jr:

Marriner, why don't we face this thing?

Eccles:

I think I am.

H.M.Jr:

Well - and talk about the reserve requirements.
I mean that's what started this whole thing.

Eccles:

All right, I'll do that. If today we hadn't used

all of the power we had to increase reserve requirements, there isn't the slightest question but what
we would have long since been under pressure to use

that power in order to sterilize gold rather than
have the Government borrow to sterilize gold. By

using the reserve requirements that we have used,
we have put on the banks the expense of sterilization; that is what we have done to the fullest extent
that we can.

H.M.Jr:

I don't get that at all. The Treasury's paying the
expense of sterilization.

Eccles:

No, we have - the banks are paying it to the extent
that we have sterilized gold up to three billion
dollars.

H.M.Jr:

They're not paying any of it. They're not paying

Eccles:

Maybe we can clear it this way. They are paying it
in that their reserve requirements - they've got

any of it.

less money by the amount of the increased reserve
requirements than they had before; that much money

H.M.Jr:
Eccles:

is tied up, so they're paying it. The banks are
paying it.
Well, that doesn't

We talked a while ago about increasing reserves on
foreign balances. Why? Why would we have any

justification to increase reserves on foreign

balances as long as we had not increased reserves

entirely on domestic balances? We wouldn't go to
Congress for legislation for power to increase
reserves on foreign balances, which we feel jus-

tified in doing in order to be able to S terilize
part of the incoming gold without having to borrow
to do it.

-16-

Viner:
Eccles:

436

I think there are more weighty reasons.
What is it?

Viner:

There are more weighty reasons than that for having
these increased reserves against foreign deposits.

Eccles:

What were they?

Viner:

Partly to discourage their coming here.

Eccles:

That wouldn't discourage them.

Ransom:

They don't pay this bill.

Eccles:

The bank pays it. They wouldn't unless you put it
up to a hundred percent. It would force it out of
the banks into the market.

H.M.Jr:

Look, I'm finding myself doing something I don't
want to do; I don't want to argue about this thing.
I mean there isn't any use arguing. I've gone just
as far as - in a very calm way with Mr. Ransom as I

could go. There is no use going any further. It's
down to one of two choices. I don't want to - it
would irritate you, Marriner, and I don't want to
irritate myself.
In the discussions that Ransom has had with me and

I've had with him - I understand he's checked them

all - reported them all to you; and as far as we

went it was down to a question of a choice of one

Ransom:

of two things. Is that right?
That's correct. I think it might be helpful, Mr.
Secretary

H.M.Jr:

I don't see what's to be gained in my irritating
Marriner or his irritating me.

Eccles:

I don't see why we should irritate each other by
merely discussing this thing.

H.M.Jr:

Well, it always ends up that way, unfortunately,
and I suppose it's my fault.

Ransom:

I think the

437
-17-

H.M.Jr:

But it just - we've got a very critical situation;
I told Ransom I'm not going to sit here and argue

about this thing for a month; I'm just not going to

do it. I'm not going to get irritated about it.
Ransom:

I think it might throw some light on the situation,
as long as Mr. Eccles hasn't been here, if you
would run over the critical situation just as you
see it, as you have with me.

H.M.Jr:

It's just that I think that these things, the way
see them, are always a question of state of
mind; it's what people are afraid of. You can't

any more today get a man in Wall Street to tell
you why he's got the worst case of the jitters he's
had in two or three years - he can't explain it,
but the fact is he's got it. And believe that
the people there - that they are worried about this
thing, that they are smart enough that they see that
these New York banks are going down to zero in their
reserve requirements and that they're going to get

themselves in shape, and they 've sold - there's this
constant selling of Governments, and there's no bottom
to it, there's nothing that any of us can do, following
the methods that we have. There is this constant

selling by the banks. I think they've sold over
billion dollars, isn't it, in the last 12 months,
and they will continue to sell. And I don't believe
that by going in and buying one or two hundred
million dollars worth of bills you're going to have
any effect, because I don't believe it's going to
a

reestablish the confidence in the Federal Government
and I think we've got to do something which is going
to give them confidence.

And 1 think that the thing, as near as I can make

it - that one of the things that they're as much
frightened about as anything else is this constant
tightening of money, selling of governments, more
selling of governments; and it's just a vicious
circle and it goes around. The thing that I think

we have to do is to do something promptly, something
that we can agree is of economic value, nothing
foolish, something that we can defend, something

that the public will accept or something that they
won't interpret wrong due to lack of education,
and to give these people back some confidence.

438
-18-

Now, I think it's one of the - as I say, it's

a bad case and I think talking about some new

device or of putting these various bills into a
framework and thinking that they are going to

stay there or talking about something like that -

I just don't think the people are - I don't think
it's going to have any effect at this time.
When Mr. Eccles spoke to me about this thing six

months ago, I said, "It's very interesting; let's
try it." He couldn't get it across, and I don't
think that at this time if we simply did that and

then told the people in New York to go ahead - my
god, you've had orders down there to buy and they've
always got a good excuse not to buy, and if you do
buy they just say you're supporting the Government
bond market. Now, you can't make an unwilling horse
drink.

Ransom:

I might say the thing that would make that unwilling
horse drink quickest was the idea that the Treasury
was going to desterilize. I think the mere suggestion
of that would be more effective in obtaining a result

from an open market operation inaugurated by the Board
and carried through by the Open Market Committee than
perhaps any argument which the Chairman or I or anybody

else had available to us last spring when we were dis-

cussing it.

Viner:

Do you mean that if the Treasury were to say that
"unless you do that, we'11 do this"?

Ransom:

Yes. Well, I don't - let's don't put it that way,
Dr. Viner. Let's say that the Treasury and the

Board are considering which of these mechanisms

will produce the best result, and so far as Mr.
Eccles and I are concerned - I don't hesitate to

speak for myself and say that I think the New York

market needs and is going to need excess reserves
that they haven't got between now and the year end.
Viner:

That's the problem, isn't it?

Eccles:

I agree with you. I have recognized that for a long

Ransom:

That, J know, is Mr. Eccles' view of it.

time.

439
-19-

Eccles:

That they should maintain these excess reserves
at a stable amount throughout the year and that

these periods should be met by flexibility, and

that the excess reserves should not be allowed to
fluctuate widely in the money market.
Taylor:

Why don't you do it this way, Marriner? You've
got four choices which are up for consideration

when you talk to your Board and when you talk to
your Open Market Committee. One is straight open

market. Two is this bill rate.

Ransom:

Taylor:

Which can be tied with it, can be joined.
They are part of the same thing.

Then, putting in a block of gold or stopping

sterilization.

Eccles:

Or a combination.

Ransom:

Still another.

Viner:

There's another.

Taylor:

And the last one the Treasury doesn't want to do.
Of course, your other one is changing your reserve
requirements.

H.M.Jr:

Which should be Number One.

Ransom:

I'd like to discard it first.

H.M.Jr:

That's Number One - change the reserve requirements.

Eccles:

If we did that you certainly couldn't go and ask

Just as soon put it at the head of the list, because

for power to increase reserve requirements on

foreign balances; neither could you justify a
continued sterilization at the expense of the
Treasury rather than pass it over to the banks
by increasing reserve requirements.

Taylor:

well, all right

Eccles:

Do you agree?

440
-20-

Taylor:

Well, I don't think it's necessary to comment on
I think if you list your - say, five choices, or it. six
choices,
- granting
that something ought to
be
done:saying
all right,
pick it.

Viner:

In other words, which would you rather do, and
what would you do if you were a free agent to
choose from all of these devices?

Taylor:

If
hadlet's
all five
ofyou
them,
say.of them instead of having three

H.M.Jr:

Simply call me up and say, "Henry, we have had a
two-day session - or three days or four days - and
this is the conclusion we have come to."

Taylor:

The Treasury agrees that something has - ought to
be done and is prepared to cooperate.

Viner:

I think the position is this, as I understand.

The Treasury, as it sees the picture, believes
the Federal Reserve ought to do something. If it
is decided that what ought to be done is something
that we happen to have under our control, and if

H.M.Jr:
Eccles:

they request us, we'll be glad to do it.
Well, I take it that Marriner Peeles wouldn't come
here if he didn't think that something should be done.
Well, I have felt right along that something should
be done. You won't get any argument with me on that.
I feel that these reserves that we have should be
maintained where they are and that there should be
excess reserves in that New York money market at all

times of a sufficient amount to insure a low rate
on your short-term financing. I don't think there is
any question about that.

Now, when you get to the question of your long-term
financing, the New York-banks, and I think banks in

general, are not going to increase their holdings

of bonds. I doubt very much if it is desirable for
them to do so. The question is, will other big
investors, the big investors in the capital market,
buy bonds? Now, that depends upon several factors:
first, the rate; next, the fiscal situation; and

next, the general economic situation. The insurance
companies and the savings banks and other institutions
that have funds for investment are the ones that should

-21-

441

and must be relied upon largely - investing public
generally - to furnish capital for the capital
market; that would include your long-term bonds.
We as a reserve system are primarily interested

in the short-term market for, first, the Treasury
financing, which is first and foremost certainly
at a time of deficits, and secondly, maintaining
a rate that will help to stimulate and not retard
commercial and agricultural borrowing.

Now, that is absolutely essential, and we would
adopt - we are pledged to an easy money policy,
and I haven't changed my view a bit in that regard.
Ransom:

May I interrupt you to say that our problem has

always been - since the Board reached the decision
that an easy money policy was desirable, the Board's

real problem has been to maintain it.

H.M.Jr:

Well, I'm terribly glad you said that. I mean if you don't mind, I've got to talk plainly - I mean
you talk an easy money policy, but while you talk it
the money rates get harder all the time.

Ransom:

Correct; there is no argument. I would like to add
as a postscript to what I have said that with a full
conviction on my own part that it is essential for

many reasons that we should do all we can to maintain
an easy money policy at this time, I still think that
the increase in reserve requirements was necessary at
the time we made it, but that, having made it, we

have then got to be advised of the fact that the
situation is developing along certain lines from

that point on, and meet those developments to the

best of our ability, in cooperation with the Treasury,
just as I feel that the Treasury has all along been
trying to help us carry that policy through to execution.

H.M.Jr:

Now, if you don't mind - personally, I like to do

these things easily and gently, and so forth and so

on; and, Marriner, if you don't mind, don't try me

out as a sounding board but try out your own board,
and it would be much easier on me and we can continue

our friendship. But the trouble is - don't try me as
a guinea pig.

442
-22Ransom:

H.M.Jr:

He's tried this on his own board.
Just don't use me as a guinea pig. I'm available,
just go back and when you're ready to talk I'll be

my phone is Beacon 211, we're there, and you fellows

there. And the only advice that I've got, if I may,
is that as far as I'm concerned I'm not going to push
you, and if it is difficult to make up your mind,
Tuesday is still there and Wednesday is still there.
That's the only thing. As far as we are concerned,
I think Monday would be a swell day, but if it's going
to be difficult, the sun will still rise Monday, Tuesday
and Wednesday.

Eccles:

We can make it up just as well Monday as Tuesday and
Wednesday.

H.M.Jr:

All right, but I don't want you to feel that I've set

Eccles:

I'd just as soon have you set one.

H.M.Jr:

Well, it's not up to me. If you fellows can't make

Eccles:

I wish you'd set a deadline.
May I ask a question and then have it omitted entirely

Ransom:

any deadline. See, I haven't set any deadline.

up your mind by Sunday, God bless you, take Monday.

from this memorandum, simply because it does influence

my own personal decision. Suppose it is impossible
to reach a decision, a Board decision, that is in line
with what I know to be Mr. Eccles' and my own thought
at the moment; that is, that something should be done.
Suppose the Board should think that nothing should be

done. Suppose the Federal Open Market Committee feels
that nothing should be done - there may be differences

of opinion - and in that event we report, as we would
have to report, that, although Mr. Eccles and I might
feel that action was highly desirable in this situation
and at this time, there would be no action.

H.M.Jr:

Put that you and Mr. Eccles and I are in accord as
individuals - would you add that?

Viner:

If you reached a deadlock, would you be willing to
report to us that as far as you two were concerned,
your opinion was such and such?

443
-23Ransom:

Yes.
I can only speak for myself, not for Mr.
Eccles.

Eccles:

Viner:

Yes, that is exactly the way I feel, and I told
Ronald to tell you that.
That's what I told you.
Would you do it for the record, for the internal

Taylor:

You can't have a record of that.

Viner:

No.

H.M.Jr:

Ransom, I think what you're - to be fair to yourself
and myself, if that situation should arise, it isn't
very different than what it was before, except at
that time Eccles was only speaking for himself; and
he said to me, "Henry, if I can't get an agreement
with the Board, I'll make a statement with you publicly

Ransom:

record?

Eccles:

as Marriner Eccles." Isn't that right?
That's right. I told the Board that, I told the

Ransom:

Yes, and it produced results.

H.M.Jr:

Ransom and Eccles and H.M.Jr can come to an agreement,

Open Market Committee that.

if you want that card up your sleeve. But at that
time I just - may just say, Eccles was very keen to

do it publicly.
Eccles:

Well, I think you have to, and I'd want you to do
it publicly. I mean it doesn't do the country any
good to have me say, "Henry, old boy, I'm with you,
but for god's sake don't tell anybody."

Ransom:

Well, if I'm with you I don't mind telling you.

H.M.Jr:

Do you check with me, Wayne? Am I going too fast?

Taylor:

Well, I think that's not quite necessary yet.

H.M.Jr:

He wants this for trading purposes.

Ransom:

I want one other thing.

444
-24-

H.M.Jr:
Eccles:
Ransom:

I'll give you anything you want, God bless you.
I did that before for trading purposes.

This one question, I think, is very important.
Do you feel that action is necessary in the
present circumstances?

H.M.Jr:

Yes, I do.

Ransom:

That I understood from you Sunday.

Eccles:

Well, I agree with that.

Ransom:

J understood that when you called me Tuesday - not

H.M.Jr:

only was action necessary, but rather prompt action.
I do.

Ransom:

Now, with that to back us up

H.M.Jr:

How about you, Marriner?

Eccles:

I agree. The trouble is that you haven't a tight
situation because you have 700 million excess
reserves - nearly 200 million in New York - but

it's the constant propaganda that before the end of
the year we're going to do nothing, nobody's going to
do anything.

Viner:

Mr. Eccles, money can be tight while cash is on
hand if you think there's going to be a claim on
that cash tomorrow.

Eccles:

That's exactly right; that's what the situation

H.M.Jr:

Summing up, talking for myself, I feel that something
should be done and done promptly. I didn't - the
reason I said you don't have to do it Monday is that

Viner:

is now.

I don't want you people to feel - Eccles flies back
overnight, takes the physical effort, and I don't
want him to feel that I'm holding a pistol to his
head, because I'm not; but I think the situation is.
But I don't think it's a Treasury situation basically.
I think it's a general economy situation.

-25-

445

H.M.Jr:

Well, I

Viner:

I think that ought to be clear in this discussion:
that the Treasury doesn't need any help at the
moment.

H.M.Jr:

Exactly, and - excuse me, did you want to say something else? I didn't mean to cut you off. Finish
your thought.

Viner:

It seems to me important that we should - I myself;
I don't know what you think - but I don't think
that the Treasury can't stand the rates now. The
Treasury is financing on easy terms, your credit
situation is going to ease, the budgetary estimates
and so on are such that I don't see any prospects of

a tight squeeze on the Treasury at all. But I do
think that the economy needs certain action now and
that therefore that is primarily a Federal Reserve
responsibility; that the Treasury will have reper-

cussions from any adverse effect on the economy and

therefore has that secondary consideration, and
therefore the Treasury should cooperate with you to
the utmost, should welcome consultation in this way,
and should welcome, if you so prefer, your saying

in taking any action that you take it in consultation
with the Treasury. But it is not an action directly
intended to improve the situation for the Treasury.
We don't need it.

Ransom:

I might say, Mr. Secretary, that I am fully in

agreement with Dr. Viner, and because I am so fully
in agreement with him I have felt that we should use
every effort that we can use to remedy this situation
by an open market operation rather than a Treasury

operation, if it can be done.

Viner:

That's my position.

Ransom:

Now, if it can't be done, then I'll say to you as
a member of this Board that I think the Treasury would be fully justified in taking action to relieve a situation which is not a question of a pinch on the Treasury
or a problem of Treasury financing, but one which
relates to the condition of the money market as it
exists today.

446
-26-

Viner:

Well, may I ask a question that may clarify it.
Supposing that you try to get an open market
operation through with the Board and fail. We
have an instrument that we can use to meet a
purpose which is primarily a Federal Reserve

purpose. I don't think we ought to use it for
that purpose until it is clear in every way that

we are using it at the wish of the Federal Reserve
Board. Now, you can probably carry a decision
through the Board that you can't carry through the
Open Market Committee. Shouldn't you then, as a
resolution of the Board, ask us, or be authorized
to enter into consultation with us about a
desterilization operation?
Eccles:

That should be between the Board and the Treasury,
and

Viner:

And not the Open Market Committee.

Eccles:

We had no idea of bringing the Open Market Committee

Viner:

Rather than a personal statement by the two of you.

Eccles:

I very, very much prefer it.
Very much prefer it.
We're thinking alike, and I want to say this: that
this is the time, again, when I think that the results
will be accomplished if the Board and the Treasury
present a united front. That was my plea all last
March and we finally got it. And I think it's just
as important now. And all these little squirts that
write these articles about the differences between

Ransom:

H.M.Jr:

into that.

the two - I mean I just wipe them aside and don't
pay any attention to them. I mean action counts
louder than any columnist can write.

Ransom:

Well, I think the record over the past year demonstrates the cooperation on the part of the Treasury
with the Board and the Board with the Treasury; the
record speaks louder than anybody else.

H.M.Jr:

Riefler, did you want to say something?

447
-27-

Riefler:

Jake has said most of what I wanted to say. It

seems to me from the point of view - the Treasury

financing is out of the way; if you did absolutely
nothing, the bill rate would rise to the discount
rate in New York, which would be one percent, and

you are perfectly willing to pay one percent for any
funds you need.

Eccles:

But are you?

H.M.Jr:

Sure.

Viner:

Don't care at all on the short-term rate.

Riefler:

There is a case for doing something, but - and I
do think this, although I have had some doubts
before: the situation has changed rapidly since
last March, when somewhat restrictive action on
an exuberant market was indicated. The business
situation is sluggish, there's been no new financing;
such regular demands for capital from your regular
capital institutions - savings institutions - as
come into the market are being met in general by
buying bonds sold by the banks - Treasury bonds.

And - I mean it is in that sense - the new financing
that the market will be able to absorb - that you
are helping the long-term market if you do something.

Eccles:

Don't you think that the banks would continue to
sell bonds when they get strong, as they go up, as
the rate drops? with the general world picture,
the banks prefer more short and less long.

Taylor:

They should.

Eccles:

Then what Win is talking about is a situation that
we can't meet by open market operation. When the
bonds get weak, as they are now, and you have a

sufficient amount of funds and there isn't any
pressure on the banks, they are less likely to
sell bonds, of course. At the same time, when the

bond market becomes strong again, they have profits
in those bonds. Even though you have a substantial

amount of reserves, the very banks with the
reserves - now, we have plenty of instances of

banks which have had an abundance of reserves selling bonds when they got up to a certain point because

they felt that the long-term market did not justify

continuing to hold bonds at those rates.

448
-28-

Now, that seems to me to be the situation. I
think this, that a one percent rate on Treasury
bills, even though the Treasury is willing to pay

it, is undesirable because it would tend immediately

to reflect itself in other rates, in the intermediate

and in the long-term rates at this time, and the best
way to take the pressure off of the intermediate or
the longer securities would be to of course keep your
short-term rate at this time on Treasury bills at
lower than one percent.

I don't know whether you agree with me or not.
Viner:

I don't disagree, but I'm not convinced; I don't
see it as clearly as that. I think there are possibilities of operating on the rate so that you get
a different rate structure, with the long-term rates
kept down and any increase in interest rates which
must occur being in the average rate over all the

maturities. I think that the present differential

seems to me offhand to be a rather abnormally large
one, and that a return to more normal conditions

Taylor:
H.M.Jr:

could, I think, very well take place without any
substantial stiffening of the long-term rate through
a stiffening of the short-term rate.
We thought that back in the spring and it didn't
work that way.

Do you mind - excuse me - what I'd like, unless
there is something else and unless Mr. Eccles wants
to ask me something - now, you (Ransom) asked me

two questions, I gave you cleancut answers, didn't
I? You (Eccles) want to ask me something?
Eccles:

Yes. I'd like to ask this. If we go before the

Board, we've got to have a proposal. Now, Idon't

know what I can propose other than the two methods

that I have discussed here - the bill rate, and,

say, the open market operation, or the open market
rate along the line of making it a mandatory,
automatic order so that they have to buy when a

certain situation develops with reference to the

reserves. In other words, when reserves in New York

get to a certain point, they automatically buy; that
is, they buy bills. Now, I don't know of anything

449
-29-

else to discuss in the way of a program with them
now. I mean so far as we're concerned, if the
problem is ours to meet the general business or
economic needs, that is the way I would see we

should undertake to meet it. I've seen that for
some time.

If, on the other hand, the Treasury is anxious and
very desirous of being relieved to some extent for

a time - I'm just saying if that's the case - if
that isn't, it's another story - if that isn't the
case - as I understand, that isn't, that's not a
factor.

What we do when we buy - we increase our portfolio
H.M.Jr:

to give the reserves.
What's the use, Marriner? Asking me a thing like
that after an hour's conversation! There's never

any use talking to you, Marriner. I try to be nice,
and then after my telling you with all sincerity
that that isn't my object, you've got the audacity
to put it up to me that you want me to be relieved
of some gold. I mean Jesus Christ, I sat here for

one hour and talked to you man-to-man as intelligently
as anybody could and after one hour you want to know

whether I want to be relieved of some gold. I say

it's an insult for you to ask me a question like that.

It's an insult!

Eccles:

You said to me that the proposal I make is unsatisfactory.

H.M.Jr:

I say it's an insult to my intellectual honesty,
after one hour, to ask me if I want to be relieved
of any gold. This man (Ransom) can

Eccles:

I proposed something and what did you say? You said

Viner:

No, not the open market operation.

H.M.Jr:

Marriner, we never understand

Viner:

If you can work it satisfactorily, if you get it

it was unsatisfactory - both methods.

through for a reasonable amount, and

450
-30-

Eccles:

The record will show that the Secretary said that

it was unsatisfactory, that he didn't think it was
fast enough, he didn't think it would do the job.
And now, if that's the case and that is unsatisfactory to him, then what am I to do? Now, I can't am 1 going to go before the Board and say that
the Treasury is dissatisfied with an open market

H.M.Jr:

operation, that they want to desterilize a block
of gold? That's what I want to know here. And
there isn't any need of - these matters can't be
settled in a few minutes, and it seems to me that if
we're going to get along we've got to do it without
passion and without getting irritated.
Well, why shouldn't I get irritated?

Eccles:

There's no justification for it.

H.M.Jr:

Oh yes there is.

Eccles:

No there isn't. You get irritated every time I come
over here and present anything, and I'm getting just
as tired of it as anybody else.

H.M.Jr:

Well, maybe it's

Eccles:

Maybe the thing for me to do is get up and walk out,
because I'm getting god-damn sick and tired of it.
You two fellows have got to agree whether you like
it or not. I mean there's something more important

Viner:

than the feelings of either of you, and that is the

Eccles:

good of the country.
If I can't come over here and sit down and talk
peaceably and quietly without having the Secretary
jump all over me, then damned if I'm going to take

it.

H.M.Jr:

Well, may I ask you - after one hour's conversation
and having every conversation that I have had with
Mr. Ransom - after one hour you come back and say,

"Is it that the Treasury wants to be relieved of
some of this gold?"

-31-

Eccles:

451

I didn't get the impression from Mr. Ransom to the
effect that you didn't, and I wouldn't blame you

if you did. There would be nothing amiss in it.
As
a matter
In other
wordsof fact, it may be perfectly justified.

Viner:

Mr. Eccles, I think possibly we might like to be

relieved ordinarily. But I think we think that

there is something more important than the conven-

ience of the Treasury at stake, and that is the

national economy.
Eccles:

I am not arguing that it is being done solely for

that purpose. What we need to do is get reserves.
Now, the question is, do we want to get the eserves
through the Treasury desterilizing 200 million or
300 million or some amount of gold, which builds
up reserves, or do we want to get it by the System

increasing its portfolio?

Taylor:

That's your problem.

Viner:

Mr. Eccles, as I understand the position here

Eccles:

Do you care, is the Treasury indifferent as to the
method? Let me ask this. Are they indifferent as
to the method?

Ransom:

Taylor:

May I - let me interrupt everybody.
It isn't a question of the Treasury wanting to be

relieved of gold; it's a question of what the
effect on the market would be.

Viner:

Which would be the more effective device if you
had nothing at all to consider but the mechanical
effect?

Eccles:

I think they would be equally effective.

Ransom:

Marriner, let me put something in the record. I

have talked to both you gentlemen - one over the
telephone and one here in Washington.

Eccles:

You talked to me here in Wshington this morning too.

Ransom:

Yes, I did. I have a very definite impression have that

I think is correct that both of you gentlemen
exactly the same objective, that you both are facing

452
-32-

and trying to deal with identically the same

problem understood alike by both of you; that the
question of whether or not the method of relieving
a situation does some subsidiary thing such as

relieving the Treasury is relatively unimportant,

because I am sure from what you have said to me today
and over the telephone and what the Secretary has

said to me that the problem is one of relieving a
tight situation in the money market, which you want

to relieve in the public interest.

Now, the devices by which that can be accomplished

we have reduced to just two. Now, I don't take it
from anything that the Secretary has ever said to
me that he would be at all reluctant to say "God
bless you" if we could say to him, "We can carry
on an open market operation which will accomplish

that result."

H.M.Jr:
Ransom:

Absolutely.
Yes. On the other hand, I know from having talked

to you that you believed that if we can't accomplish
it through an open market operation, you could say
to the Treasury, "God bless you, desterilize part
of this gold," and relieve the same problem. Now,
there isn't any difference of opinion whatsoever
between you.

H.M.Jr:

The first - there is no difference, and the first

day that you and I talked you said that this thing
should be done through an open market operation.
I said that we have tried it and I doubted whether
it would do it on account of the people you had to

work with, and I thought you'd have to do something
about gold, and you said, speaking only for yourself,

that thought I was right. Now, if you people

can and if you Ican
getattempted
the results,
say,
haven't
"God do you bless it you." but I'd the

only thing that I am trying to get across here is - and
I want to apologize to you, Marriner. Please!

Eccles:

Well, all right.

H.M.Jr:

I'm sorry. I was rude. Please accept my apology.

I shouldn't do it.

453
-33-

I mean but at no time have I in any way intimated

inside of this office, with my own crowd, that the

gold problem was the thing. And the reason I
switched away from the question of discontinuing

the sterilization of gold - I said that thing was

not up.

Now, if you people want - Marriner can call me up
Sunday and say, "Henry, I can assure you that we
can do this thing through open market operation"

-

fine! But I just said that on account of the human

element - I have said I doubt whether you can jam it

through, and I don't think you've got the time. And
I even said to you I would regret to see, when the
situation is so serious, that this would be the time

to pitch this battle as between the Federal Reserve
Board and New York. Now, that's the whole thing.
But if you people think you can do it and you - we

say that we believe it's your job to do it - and
you think you've got the instrument to do it, there's
only one thing that 1 can say and that is "O.K."

Viner:

Mr. Secretary, may I ask one question?

H.M.Jr:

I've really got to go. I'm fighting daylight. The

Viner:

May I ask one question of you.

H.M.Jr:

There's no lights on that field.

Viner:

One question.

H.M.Jr:

Yes.

Viner:

If Mr. Eccles is unable to get, or is having diffi-

sun sets at 6:17.

culty with his Open Market Committee, would you

authorize him to say that he has consulted with
you and you have given him to understand that if the
Board asks you to desterilize some gold you will be

prepared to do it? That's a little stronger than
the other way, where you were able to tell them
that you have consulted in advance.

H.M.Jr:

Mr. Eccles can tell the Board that he's been over
here and that if he asks the Treasury will/ desterilize
a certain amount of gold, we'll be glad to comply
with the request.

454
-34-

Eccles:

Well, I can tell you now that I think the position
that maybe a majority of the Committee will take I think you (Ransom) will verify it - they will say
that there is no need for an open market operation
increasing the portfolio, and neither is there a
need for desterilization; and that the Open Market

Committee would refuse to carry out an open market

operation, and possibly a majority of the Board you may have difficulty getting them to take the
responsibility of asking the Treasury to desterilize.
H.M.Jr:

Now, I think that that is very possible.
Marriner, when it comes to this question, if you
agree in principle I'll do anything reasonable to
bridge the gap.

Eccles:

Now, the way I got this thing over before, and I
think it's necessary now

H.M.Jr:

I'll bridge the gap any way that you suggest.
.is to say that I - or that Mr. Ransom and I and
the Treasury, see, are not satisfied with the present
money situation and don't think it meets the problem

Eccles:

from a standpoint of the needs of the economy at the

present time, and that we want to carry out this kind
of an operation, think it should be done, and that
if the Board and the Committee, or the Committee,

feel that they don't want to do either, then the

Treasury, together with ourselves, are going - or

we are going to recommend, see, as the only means

of meeting it - whether they'11 do it or not is
another story, but as the only means of meeting it
the desterilization of a fixed amount of gold; and
that we would like to join with the Treasury in a
statement to the effect that they are doing this for
a fixed amount in order to meet a situation, which

is considered preferable, we'll say, or wise in
lieu of increasing the portfolio. In other words,

it's in lieu of that.

H.M.Jr:
Eccles:

We're together and I can be gotten on the phone.

I mean it's - this is going to be the same
All I want to do is just get an understanding of
where we are when we're here.

455
-35-

Taylor:

I think you're going a little too far on that at
this stage,toMarriner,
position
do it. and I think it weakens your

H.M.Jr:

Wayne, I've got to go I If you fellows want to,

Eccles:

I think we should, and we should continue this

you can go into Wayne's office.
discussion.

MEMORANDUM OF THE DAY'S ACTIVITIES

September 9, 1937
To:

Secretary Morgenthau

From:

Mr. Magill

1. Treaties on exchange of tax information
Mr. Eldon King discussed the present situation in respect to
negotiations with foreign countries looking toward treaties providing
for the exchange of information to assist in the improvement and
collection of taxes. Canada has informally agreed to exchange infor-

mation with us and to negotiate a treaty definitely providing for the
exchange. Evasion of taxes by the nationals of the two countries will
be made much-more difficult if the two tax administrations assist each

other in this way. France is interested in a similar treaty and Italy

and the Netherlands have expressed some interest. I asked Mr. King to
proceed with the preparation of a draft treaty with Canada; and to
prepare a letter to Italy and the Netherlands looking toward negotia-

tions and to follow up our last letter to France on the subject.

Mr. King would like to make a trip to Geneva to attend the meeting of the League of Nations Fiscal Committee on October 11th, at
which time the model treaties looking toward the elimination of double
taxation and the prevention of tax evasion will be considered. Although

I think it would be desirable for us to obtain the information which

could be had by informal discussions with the foreign representatives,
I am not sure that Mr. King is the best man to represent us. The
difficulty is that we probably have no other person in the Bureau who

could be sent. I want to explore the possibility of utilizing such

other representatives as the United States may have in Geneva.

2. Procedure on refunds
Messrs. Oliphant, Helvering, Shafroth, Ryan, and myself discussed
the refund procedure, and in particular the steps which might be taken
to eliminate duplication of effort between the Income Tax Unit and the

General Counsel's Office. It was agreed by all that if settlement had
been arranged by a taxpayer covering several tax years and if in one of
them a refund was involved, the review division of the General Counsel's
office should put the refund through without delay unless there were
manifest errors on the face of the claim. It was further agreed that
the review division should not attempt to review engineering or valuation questions not legal in character. Mr. Shafroth was instructed to
hold a further conference with the Commissioner and Messrs. Mooney and

Hathcock and to instruct the latter two men to draft an order for the
division of labor between the two offices.

456

-

457

3. Capital gains
Mr. S. Stanwood Menken of New York called upon me this afternoon
to say that he expected to see the President Monday and to urge upon

him the repeal of the provisions of the income tax applicable to
capital gains. Mr. Menken said that he understood from various friends
of the President's that the President was favorable to the repeal.

Mr. Menken's suggestion was that the loss of revenue should be made
up by an increase in surtaxes applicable to unearned or investment

income. He is to advise me later of the results of his conference
with the President. I was noncommittal as to the Treasury's attitude.

pm

FEDERAL RESERVE BANK
OF NEW YORK

OFFICE CORRESPONDENCE
TO CONFIDENTIAL FILES
FROM

L. W. Knoke

DATE September 9, 1937.
SUBJECT TELEPHONE CONVERSATION WITH
BANK OF ENGLAND.

I called Mr. Bolton at 10:20 today to inquire as to the
cause of the weakness of the franc. There was nothing very different
in the picture today, he thought, except that the refusal by Germany
and Italy to attend tomorrow's conference in Switzerland had rather
upset the European markets. The fact that, according to this morning's
statement of the Bank of France, the Treasury had increased its borrowings from the Bank, also seemed to have displeased the market. (I

pointed out that the amount was too insignificant to really cause disturbance; Bolton agreed but thought that it just showed how the bear
operators were ready to make everything serve their purpose.) Accord-

ing to the European press there were a number of little strikes breaking out again in France, indicating general labor unrest and efforts
for higher wages to meet the increased cost of living. This, he thought,
might furnish another explanation for the weakness of the franc although

it was difficult, of course, to put ones finger on any one factor. I
mentioned that I just read a report on the French situation forecasting
that next month's elections in France would show a further trend to the
Left and that the Radical Socialist party would probably be the heaviest
loser. Bolton seemed to agree that, caught between the Left and the
Right, the Redical Socialists were doomed in France, just as the Center
parties had disappeared in other European countries. Whether, however,

France would swing to the Left or to the Right, he thought it very diffi-

cult to tell. Without wishing to criticise the French, Bolton thought
their control operations had recently helped to increase the pressure
against the franc in that substantial support had been given the French

459

FEDERAL RESERVE BANK
OF NEW YORK

DATE September 9, 1937.

OFFICE CORRESPONDENCE

SUBJECT TELEPHONE CONVERSATION WITH

CONFIDENTIAL FILES

L. W. Knoke

FROM

BANK OF ENGLAND.

-2government bond market and that the exchange market had utilised the
additional funds, obtained from the French Treasury as a result of the

latter's purchases of government bonds, to increase its purchases of
foreign exchange. Whilst we were talking a major movement seemed to

be developing in the market in London and Paris; at least Bolton interrupted to say that he had just received word that the French, in
addition to the £1,000,000 spent early this morning in support of the
franc, they had just spent another £1,000,000 within the last few
minutes and that the British had been forced to sell dollars on a
large scale, such sales amounting to about $4,000,000, in a very short
while.

Discussing our markets, I mentioned that from preliminary reports available the recent weakness in the stock marked seemed in no
way to have been caused by heavy selling from abroad, but emphasized

that it was too early to form a definite opinion. Bolton replied that
in London they were convinced that today American stocks were cheaper

than ever before.

LWK:KMC

FEDERAL RESERVE BANK
OF NEW YORK

OFFICE CORRESPONDENCE
CONFIDENTIAL FILES

L. W. Knoke

460
DATE September 9, 1937.

SUBJECT: TELEPHONE CONVERSATION WITH
BANK OF FRANCE.

I called Mr. Cariguel at 10:57 today. They were having
a hard day, he said. For several days there had been no evidence
of commercial buying in the French market of foreign exchange; on

the contrary, indications that the market activity was entirely of
a speculative character had been increasing. As a result of this observation they had today come to the conclusion to let the market have

the foreign exchange it wanted, but, at a price. Naturally, they could
do this within a limit only. At the moment they were trying to get
the market under control; it was quieter at 134 1/2 but he did not know
how long that would last. Since opening this morning, they had sold

over £3,000,000 of sterling in support of the franc. I asked whether
the speculative activity had been caused by the international situation

and Cariguel thought by the international as well as the internal. As
a matter of fact, he added, he was now asking himself whether internal

difficulties were not more important than the external.
Cariguel was too busy for me to keep him on the telephone for

any length of time and I only made him promise that he would not forget
to call me incase something further of interest developed in Paris.

an LWK:KMC

461
FS

CODAT

Paris

Dated September 9, 1937
Rec'd 12:53 p.m.

Secretary of State,
Washington.
RUSH

1263, September 9, 4 p.m.
FROM COCHRAN.

French control has yielded unusually big amount of
sterling on chaotic Exchange market today but did not
hold the rate and selling of francs has increased as
sterling passed 134. For a while intervention was
through Sociate Generale and Lazard and then through

operations of Bank of France itself. At 3:30 intervention
appeared to have been withdrawn. Spot franc is thus weak
against all currencies and discount versus three months

sterling has reached five and one fourth. Rentes down.
Bank of France statement as of September second

showed further advance of Eight hundred million francs

to the state, deposits down over one billion and circulation up one and three-fourths billion; coverage

fifty-two point naught one versus fifty-two point thirtyfive.

While international situation has of course influenced
Paris Exchange market adversely the real cause of today's
weakness

462
FS

2-No. 1263, September 6, 4 p.m. from Paris

weakness is in my opinion domestic. To the unfavorable
French internal factors which I have mentioned this WEEK

should be added the further revelation in the Bank of
France statement that in spite of peak tourist season and

increase in tax returns Treasury is now obliged to resort
heavily each WEEK to Bank of France to finance its current
needs (with no unusual maturities to take care of just
now).
RR:CSB

BULLITT