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    "contentType": "document",
    "title": "Volume 190, May 16 – May 21, 1939",
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        "Henry Morgenthau, Jr. Papers",
        "Diaries of Henry Morgenthau, Jr."
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    "ocrText": "TREASURY DEPARTMENT\n201\nINTER OFFICE COMMUNICATION\nDATE\nMay 17, 1939.\nSecretary Morgenthau\nTO\nMr. 0'Connell\nFROM\nFor your information.\nAt to-day's hearing before the Temporary National Economic\nComittee the main witnesses were Edward Stettinius and Owen D.\nYoung.\nIn general their testimony was to the effect that neither\nof their companies will have any occasion, in the fore-seeable\nfuture, to tap available sources of investment capital, both\nsen being of the opinion that their respective companies will\ncontinue, 6.9 they have in major part in the past, to finance\nany program of plant expansion and improvement out of earnings.\nMr. Young also discussed some other problems including\ntaxes. He recommended against any undistributed profits tax\nexcept one aired at undistributed profits held for the purpose of\navoiding the payment of taxes on income, and on questioning\nindicated that he felt that as 6. practical proposition such A\ntax should only be made to apply to personal holding companies.\nBe indicated that he felt this type of tax was unfair to small,\nnew and growing concerns, and stated that in his opinion undistri-\nbuted profits tax did not operate to the disadvantage of large and\nwell established firms such as General Electric. He also took\nthe position that & capital gains tax is entirely undesirable at\nthis particular time, being of the belief that such e tax operates\nas 4. deterrent to risk sapital.\nHe stated that he 15 in favor of \"pump priming\" by Government\nif supplemented by affirmative Government action designed to stimulate\nprivate development in the field of industry, utilities, etc.\nThe hearing will continue tomorrow with further witnesses from\nindustry, including Mr. Sloan, Chairman of the Board of General\nMotors.\nRegraded Unclassified\n5/17/39\n202\nThe Bill now up for your consideration involves extension for\na two year period of the Stabilization Fund and of existing monetary\npowers relative to the devaluation of the dollar and the acquisition\nof newly-mined domestic silver.\nThis Bill differs from the general run of bills in several in-\nportant respects: It does not call for the expenditure of any public\nfunds; it does not create any new powers, nor does it involve the ex-\ntension of any powers of control or regulation of business or economic\nactivity. Lastly, it involves no conflict of interests as among\nvarious groups in the United States.\nIn most discussions of monetary problems, bitter conflict arises\nbecause there is one group that seeks through manipulation of the mone-\ntary mechanism a solution of economic problems, whereas snother group\nreacts so violently to such Utopian illusions that it fears to grant\nthe government any monetary powers whatsoever.\nI hope that in this discussion we can narrow down the questions\nin dispute to the real issues which are simple and I have the definite\n5/19/39 - Original sent to Senator Wagner (by special messonger)\nat 3:00 p.m.\nRegraded Unclassified\n5/17/39\n203\n- 2 -\nfeeling that case they are made clear much of the opposition which I\nhave heard raised will disappear.\nThe Bill, as you know, consists of two sections. The first calls\nfor an extension of the Stabilisation Fund; the second for an ex-\ntension of the powers to lower the gold content of the dollar and to\ncoin newly-mined domestic silver.\nWith respect to the first section, there is virtually no differ-\nence of opinion among the members of either House of Congress. There\nis almost unanimity of opinion on the desirability of continuing\nthe Stabilisation Fund.\nThis was not always the case. When in 1934 the Stabilisation\nFund was instituted considerable doubt was expressed in some quarters\nboth as to its utility and as to the wisdom of vesting the control of\n$2 billion in the hands of one man. It was felt that the Stabiliss-\ntion Fund might increase economic tencions and antagonisms; it was\nfelt that huge losses would result from its operations; it was believed\nRegraded Unclassified\n5/17/39\n204\n- 3 -\nthat the Fund would be employed to manipulate the monetary systems that\nit would be used for purposes not consonant with those stated in the\nGold Reserve Act; it was feared that a government agency with no ex-\nperience in such matters could be no match for professional speculators\nand would be a pawn for their manipulation and profit. No less a person\nthat Owen D. Young expressed the opinion in the hearings on the Gold\nReserve Act that stabilisation funds were a menace to business, a\nmenace to economic welfare, and might even prove a menace to peace.\nSuch were the fears and misgivings which were expressed in 1934.\nBut what does the record show? The Stabilisation Fund has been\nin operation for a period of more than five years and three months\nand the record shows that the Fund has in no way been employed for any\npurposes other than that indicated by Congress in the establishment\nof the Fund. Its uses have been specifically limited to stabilising\nthe exchange value of the dollar. Instead of increasing economic\ntensions and antagonisms the Fund has been employed to mitigate\neconomic tensions and to foster the collaboration of important\nRegraded Unclassified\n5/17/39\nED5\n- 4 -\ncountries. It has been one of the main instruments for mintaining\nthe stability of the dollar in a situation which demanded skill and\npatience.\nNone can doubt that the successful management and operation of\nthe Stabilisation Fund has fully vindicated the action of Congress\nin establishing it and in delegating its administration to the\nSecretary of the Treasury.\nThe five years during which this Fund was in operation included\nperiods in which currencies were subjected to tremendous pressure;\nperiods in which war scares sent as much or more money scurrying from\none country to another in a single month than has ever been true before.\nDuring September and October of last year, at the time of the Vunich\ncrisis, over a billion dollars of funds flowed to this country. with\nthe aid of the Stabilisation Fund we were able to keep the exchange\nuncertainties down to a minimm despite that enormous inflow and\ndespite the acute political crisis.\nÀs for the management of the Fund and the uses to which it has\nRegraded Unclassified\n5/17/39\n206\n- 5 -\nbeen put, Secretary Morgenthau has succeeded in handling the Fund in\na manner completely above suspicion and above criticism. Undeterred\nby the wildest rumors which have been deliberately circulated in the\ninternational press, and by certain individuals in this country, he\nhas inflexibly adhered not only to the spirit of the Act but to its\nexact letter. I an glad to have this opportunity publicly to con-\ngratulate Secretary Morgenthau upon his efficient and businesslike\nfulfillment of so enormous a responsibility and upon his successful\nhandling of $2 billion dollars.\nI an happy to observe that even the Republican House Committee\nreport on the money question recommended the continuation of the\nStabilization Fund which it found highly desirable. The only change\nit recommended with respect to the Stabilisation Fund is that there\nshould be less secrecy as to its operations.\nAs a matter of fact, the American public knows much more about\nthe condition and operations of its own Stabilisation Fund than does\nthe public of any other country having a stabilisation fund. The\nRegraded Unclassified\n5/17/39\n207\n- 6 -\ndemand for more detailed information on the operations of the American\nStabilization Fund can only be interpreted either as a desire\non the part of exchange speculators to obtain information which would\nenable them to operate at a profit against the Fund or as simply a\npolitical attempt to mislead the people to believe that the Administra-\ntion has something to hide.\nOur Stabilisation Fund is no more secretive about its activities\nthan are other stabilization funds. The secrecy surrounding the opera-\ntions of the Fund is not as great as many people suppose. Of the whole\nFund of $2 billion authorised by Congress, $1.8 billion remains in\ngold in the Treasury and appears regularly in the Treasury Daily State-\nment. In other words, complete information with respect to 90 percent\nof the Stabilisation Fund is reported to the public every day. The\nonly information withheld relates to the day-to-day operations of the\nworking portion of the Fund consisting of only $200 million. This\ninformation is not revealed to the public because it is of such a\nnature as to be of use only to the professional exchange speculators.\nRegraded Unclassified\n5/27/39\n208\n- 7 -\nIt 10 unfortunate that a few months ago there was circulation\nof TUROTS and considerable connect in the press to the effect that\nthe Fund was being used for purposes not indicated in the Act. to\nput an end to these unwarrented insimuations and baseless remore the\nSecretary voluntarily presented before the appropriate committees a\nbelance sheet of the Stabilisation Pund to date. He has stated,\nfurthermore, that be has no objection whatsoever to presenting a\nsimilar annual balance sheet each year and also to give Congress as\nwell as the President an annual report of the operations of the Fund.\nI therefore recomend that no change be made in the section of\nthe Bill extending the life of the Stabilisation Fund except to provide\nthat the powers shall expire on June 30, 1941 instead of January 15,\n1941 and also to provide that a copy of the samual audit of the fund\nshall be submitted to the Congress as well as the President.\nThe second section of the Bill extends for as additional two\nyears the powers vested in the President to fix the gold content of\nthe dollar and to provide for the unlisited coinage of silver.\nThese powers were first included in paragraph (b)(2) of Section w\nof the Act of May 12, 1933. This not gave the President authority\nto reduce the gold content of the dollar dom to 50 percent of its\n5/17/39\n209\n- 8 -\nformer gold content and contained no time limitation upon the exercise\nof such power. The Gold Reserve Act which was approved on January 30,\n1934 left unchanged the maximum amount to which the President could\nreduce the gold content of the dollar but provided that any reduction\nof the gold content of the dollar would have to be to at least 60 per-\ncent of its former gold content and also provided that the powers to\nrevalue the dollar and provide for unlimited coinage of silver would\nexpire on January 30, 1936 unless extended by the President for an\nadditional year.\nThe day following the enactment of the Gold Reserve Act of 1934\nthe President, by proclamation, reduced the gold content of the\ndollar from 25.8 grains of gold .9 fine to 15 5/21 grains of gold\n.9 fine, thereby reducing the gold content of the dollar to 99.06\npercent of its former gold content and increasing the monetary value\nof gold from $20.67 an cunce to $35.00 an ounce. The gold content\nof the dollar and the monetary value of gold has resained unchanged\nsince that date. On January 10, 1936 the President, by proclamation,\nRegraded Unclassified\n5/17/39\n210\n- 9 -\nextended until January 30, 1937 the time in which be could exercise\nhis powers relative to the content of the dollar and to the coinage\nof silver. By an Act of Congress, approved January 29, 1937, these\npowers were continued for an additional two and one-half years to ex-\npire on June 30, 1939. Section 2 of the Bill now before us for con-\nsideration would extend for an additional period the time during which\nthe President BAY - - not must - exercise such powers.\nIf the discussion on this section of the Bill is to be confined\nto its merits, the essence of the problem is simple. There are only\ntwo pertinent questions that need to be asked.\n1. What is the purpose of this power? and\n2. Why is it necessary to grant it to the President\nrather than have it retained solely by Congress?\nThe purpose of the Presidential power to lower the gold content of\nthe dollar to 50 percent of the old gold content is to assist in the\nstabilisation of the dollar in the foreign exchange markets of the\nworld and to protect the position of the dollar against the disastrous\neffects of competitive depreciation of foreign currencies.\nRegraded Unclassified\n5/17/39\n- 10 -\n211\nLet no make one fundsmental fact clear. It is impossible for w to nain-\ntain stability of the external value of the dollar unless foreign countries\ncooperate with regard to the same objective with respect to their currency.\nA dollar has a value in the foreign exchange markets only in terms of other\nforeign currencies. If the British let their currency decline, then the foreign\nexchange value of the dollar rises. An exchange rate 10 just what it indicates - -\na ratio between two currencies. When one of those two currencies declines,\nthen the other ipso facto rises, and when one rises, then the other ipso facto\nfalls. The United States cannot regulate the exchange value of the dollar by\nits own actions alone. The United States can stabilise the external value of\nthe dollar only if the other major countries of the world want to, or agree\nto, or are forced to, or are induced to, regulate their currency to keep in\nstep with ours - or if - regulate our currency to keep in step with their\ncurrency. To ignore this elementary fact is to miss the point of all stabil-\nisation operations and to misunderstand the functions and purposes of this Bill.\nHow does the possession of the power to devalue help to maintain stability;\nhow does it offer any protection to us against competitive depreciation of\nforeign currencies? By providing a defensive weapon which serves to help pre-\nvent other currencies from initiating a competitive currency war. When\nRegraded Unclassified\n212\n5/17/39\n- 11 -\nforeign governments know that the President has the power to reduce\nthe gold content of the dollar, they are deterred from trying to\nobtain a competitive advantage by depreciating their own currency.\nThis power fulfills exactly the same function in the sphere of\ncurrency stability and in the prevention of competitive attack upon\nour currency as does the possession of our strong Havy in the pre-\nvention of military attacks against our territory.\nSuppose that a foreign Government - let us call it Government I- -\nis eager to increase her exports, that it wishes to reduce the compe-\ntition of foreign producers in her own markets; that it, in short,\nseeks to improve her competitive position in the markets of the\nworld. One of the methods that any government say resort to in order\nto approach that objective is to permit its currency to depreciate.\nPractically all foreign governments can use this device without\nrestristion. Remember that the executive branch of practically\nevery country in the world can depreciate its currency through in-\nstantaneous administrative action. They need no new legislation.\nRegraded Unclassified\n5/17/39\n213\n- 12 -\nThey need no prior consent of the legislative body. They\nneed no prolonged public discussion. It is necessary only\nfor such a country to have a eabinet meeting on Monday night\nand on Tuesday morning confront us with a lower currency and\nipso facto with a more expensive dollar.\nThat not only can happen, it has happened - inmumerable\ntimes. This matter of currency depreciation is no abstract, far-\nfetched idea. It has been only too real; its effects are only\ntoo evident. By executive act a country can lower the price\nto foreign countries of all its products. By this one stroke\na foreign-made automobile, for example, can sell in the American\nmarket at 10, 20 or 30 percent lower than it sold the day before.\nBy this one stroke a foreign government can more than offset\nthe tariff schedule that Congress has so painstakingly\nRegraded Unclassified\n5/17/39\n- 13 -\n214\nbuilt up to protect domestic infustries. Nor do - have a single\n1sw in our statute books that adequately protects the domestic\nmarket against such acts. We have anti-demping lews; w have laws\nwhich protect us against discriminatory treatment but - have no\nlaws which promptly and effectively protect us against the competitive\ndepreciation of foreign currencies. The law now under consideration\nis our only prompt and effective weapon of defense in this regard.\nOur domestic manufacturer will find that the prices of the\ngoods be has been selling to country X is higher to his foreign\ncustomer by 20-30 percent. Be will find that he is forced either\nto reduce his prices or loss the business. Not only that but our\nexporters will find themselves suddenly confronted with the same\nhandicaps in third countries. The exporter who sells his goods in\nany other country in the world in competition with the nanafacturers\nof country I will find that his competitors can sell their goods in\nall markets at lower prices as a result of the depreciation. After\na passage of many months and years some of these disadvantages may\ndisappear, but during the lengthy period of adjustment we will suffer\nRegraded Unclassified\n5/17/39\n215\n- 14 -\nfrom the deflationary effects of our worsened trade position.\nNo must remember that when the currency of country I declines\nit sooner or later pulls with it other currencies because other\ncountries are forced to defend themselves either through increasing\nrestrictions on their inport trade by higher tariffs or more\nstringent quota provisions, or by depreciation of their currencies,\nor both. No country can for long stand the adverse and severe\neffects that follow the depreciation of an important compating\ncurrency without attempting effective counter measures. Therefore,\nwhen we speak of country X depreciating its currency we must bear\nin mind that that means currency depreciations of more than one\ncountry. The situation is such now that the depreciation of one\nimportant currency brings as many as 10 or 20 currencies along\nwith it. Last year when sterling depreciated by some 5 percent,\n20 other currencies went down with it.\nLet us trace briefly the consequences of that depreciation on\nthe American people. The exporter finds his foreign market our\nRegraded Unclassified\n/\n5/17/39\n216\n- 15 -\ntailed both in the countries which have depreciated and in third\ncountries. It means that automobiles made in Detroit, in Cleveland,\nin Kenosha, will lose in competition with automobiles of other\ncountries. It means that our wheat and cotton growers will find\nthat their products are less attractively priced than they were the\nday before. It means that the manufacturers of my State and your\nState will suffer losses of orders and will be forced to curtail\ntheir production.\nEven more serious is the effect on our domestic producers who\nare exposed to foreign competition. Our domestic market will be\nflooded with the goods of countries that join the depreciation\nparade. Our shoe manufacturers, our textile industry, our dairy\nindustry, our cattle growers, meat packers, lumber industry, and\nproducers right through the thousands of articles that 10 make\nin competition with foreign producers will be suddenly exposed to the\ncompetition of greatly decreased prices of imported goods.\nRegraded Unclassified\n5/17/39\n217\n- 16 -\nThe consequences of this sudden attack on our economy on these\nthree fronts must insvitably be falling prices, more unemployment,\ndecreased profits, decreased production, and decreased standards\nof living for the American people. That was the situation which pre-\nvailed in 1932. That is the situation which has confronted country\nafter country at varying times in the last twenty years and that is\nthe situation which we wish to prevent. We have, you will agree,\ntrouble enough in attempting to keep our domestic economy on an\neven keel. The have a sufficiently complex problem before us in\nattempting to attain a higher level of business activity without\nbringing about-more serious obstacles to overcome.\nI find it hard to understand the attitude of some of the\nSenators who are opposing this section of the Bill. They are the\nfirst to come to the defense of the American manufacturer when his\nAmerican market appears to be threatened by foreign producers. They\nare on record as favoring protection of American industry from low-\ncost competition from abroad and yet they are opposing a Bill which\nRegraded Unclassified\n5/17/39\n218\n- 17 -\nis the only effective defense we have against steps taken by foreign\ngovernments which would destroy our protective barriers. When the\ndollar rises in the exchange markets, depreciation of foreign\ncurrencies acts to cut down and even wipe out many of our teriff\nduties.\nFor example, we have a duty of 33-1/3 percent on certain types\nof woolen goods. Let us see what happens to that duty when a foreign\ncurrency depreciates. Let us assume that the sterling dollar rate\nis $5.00 and enough woolen goods to make a suit cost h2 sterling\nor $10.00, making the total cost to the American importer $10.00\nplus the 33-1/3 percent duty or & total of $13.33. Now supposing\nthat sterling depreciates to $4.00. The same ad valoren duty reasins\nin effect. The American importer of British woolens still pays\n33-1/3 percent but instead of the cloth costing $13.33 it costs him\n$10.66. In other words, the protection afforded the home producer\nby the duty, has been almost completely wiped out - and wiped out\nwithout donsent by our Congress. It amounts to a reduction in our\nRegraded Unclassified\n5/17/39\n- 18 -\n219\ntariff schedule imposed upon If by & foreign government. Depreciation\nof foreign currencies can be just as destructive to our domestic indus-\ntry as a wiping any of tariff schedules. In fast, it is even more de-\nstructive because, as I pointed out, it hits our exporters as well as\nour producers for the home market and it lowers the dollar prices of\nimports that pay no duty now as well as those that are subject to duty.\nJust how does the extension of this power give us protection against\nforeign currency depreciation? I wish I could say that the extension\nof the power to the President to devalue the dollar by some 9 percent\nof its old gold content is complete insurance against any competitive de-\npreciation by other countries. I wish we would have in this Bill complete\ndefense against such attacks. I wish that this Bill did give percent\ninsurance of a dollar stable in terms of all foreign currencies. But\nunfortunately the Bill offers no such absolute protection any more\nthan does our Navy offer absolute assurance that this country will\nnever be attacked. This Bill does, however, constitute an effective\nRegraded Unclassified\n5/17/39\n220\n- 19 -\nweapon in helping to prevent such a situation. It constitutes in\nfact the chief weapon. So long as we have this power other countries\nwill besitate a long time before embarking upon any competitive race\nfor depreciation. So long as W have this power another government\nwill pause before taking action. They will say \"what use is it for\nus to depreciate our currency when we know that the President of\nthe United States can meet depreciation of our currency by immediate\naction. And, should the President take such action he can neutralise\nor more than neutralize any action that we can take.\" The government\nof country X will say, \"if TO reduce our currency by 10 percent and\nif the President of the United States likewise reduces the dollar\nby 10 percent in terms of our currency, then NO are back just where\nwe started from, only worse, because TO have initiated a competitive\nwar against a powerful country and we do not know what the end will\nbe.\" Every foreign government will hestiate before taking such a step.\nIf not only will nake that foreign government hesitate but,\nMr. President, it has. Only last Fall the pound fall from $5.00 to\nRegraded Unclassified\n5/17/39\n221\n- 20 -\n$4.60 in a brief period and looked as though it would continue to\nfall. It was, of course, more than just the pound sterling falling.\nIt was the whole sterling bloc and a lot of other currencies that\nwere following sterling in the decline. The chief important currency\nthat did not decline was the dollar. As I said before, the decline\nof sterling and the failure of the dollar to decline changed the\nexchange rates. As sterling fell more and more complaints were\nmade of the adverse effects of this decline. It was reported to\nno, for example, that the American pulp producing industry appealed\nfor protection against the effects of declining sterling. This in-\ndustry said that they had been successfully competing with foreign\nand particularly with Finnish pulp producing companies in the markets\nof the United States and in several markets of the world. They said\nthey were able to carry on such profitable competition so long as\nthe pound sterling did not drop below $4.86, and so long as the\nsterling block including Finland, remained at proportionately the\nsum levels. But they stated when the pound dropped to around $4.60\nRegraded Unclassified\n5/17/39\n222\n- 21 -\nand Finnish currency declined with it the Finnish pulp producing\ncompanies were able to undersell American pulp producing companies\nin this country and as & result American pulp producing companies\nbegan to lose money and were faced with the necessity of laying off\na large part of their employees. That is but one instance which\nillustrates the effects of depreciated currencies upon American\nbusiness. The knowledge of those potential effects led the Secretary\nof the Treasury last Fall to indicate to the British Government bis\nconcern over falling sterling. He clearly indicated that any further\nsubstantial decline in sterling would create a new situation which\nwould call for reexamination of our situation. Be did not have to\ntell them that the President possessed the power to lower the gold\ncontent of the dollar; be did not have to tell them that the\nPresident had the power to neutralise overnight the effect of a\nlower sterling in the world markets. They knew it full well. The\nBritish press knew it and fears were expressed in the British press\nthat the United States might do just that. It was not necessary for\nRegraded Unclassified\n5/17/39\n223\n- 22 -\nthe Secretary to make any threats, to point to the President's powers\nbut to indicate what the United States might do. The British author-\nities were fully cognisant of those powers. I do not know what dis-\ncussions took place in the British Treasury. I do not know how much\nfurther the British pound would have fallen if the President did not\npossess the power to defend the dollar against such action. But I do\nknow that within & few days following the discussions of the Secretary\nof the Treasury with the British Treasury, the fall of the pound was\nhalted and it hasn't fallen from that point since, despite additional\ninternational crises and despite assertions by British industrialists\nand economists that a lower price of sterling would be of great\nassistance to them.\nI agree with many of you that this would be a far better world\nif no defensive powers were necessary, if we could again resort to\na state of fixed exchange rates in which there was neither danger\nnor expectation of alteration, just as I would agree with many of\nRegraded Unclassified\n5/17/39\n224\n- 23 -\nyou that this would be a far better world if W had no armies nor\nnavies and if all the nations lived together in peace and security.\nMuch as I wish and much as you wish such a state of affairs, I an\nsure none of you would use that hope as a justification for eliminat-\ning our army or for handing over our navy to some foreign government\nfor scrap iron. Unfortunately our policies must be shaped with due\nattention to the world in which we live and not in the world as we\nwould like to have it. Nor need I repeat to you Secretary Morgenthan's\nreiterated statement before both consittees that we would be the\nfirst to join in any international arrangements seeking to eliminate\nthe possibility of competitive depreciation. We have already joined\nin such an arrangement in the Tripartite Accord of 1936. In fact,\nthose of you who read the articles in the Saturday Evening Post de-\nscribing its achievement realize that this country took a leading\npart in the creation of that arrangement.\nThe essential point to greep in deciding whether you are going\nto vote for or against this Bill is that - are asking for this power\nRegraded Unclassified\n5/17/39\n225\n- 24 -\nnot because we want to devalue the dollar, not because we expect to\ndevalue the dollar, but because we want to avoid being confronted\nwith a situation which would make it necessary for us to choose\nbetween the alternatives of the devaluation of the dollar or to\nsuffer the effects of declining trade. To regard this power as &\npreventive which is far better than a cure. To regard this power as\nan essential instrument to put the United States on an equal footing\nin the international monetary field with the leading powers of the\nworld. Tie regard this power as a necessary accompaniment to our\nStabilisation Pund, as an essential background to the consummation\nand continuation of the Tripartite monetary arrangement which has\ndone so much to restrain the depreciation of currencies in the past\nthree years of international political and economic crisis.\nI might say at this point that the Tripartite Arrangement of 1936,\nwhich was an understanding between the United States, Great Britain\nand France, and to which three other countries adhered, was an\nimportant step towards adhieving stability in foreign exchange\nRegraded Unclassified\n5/17/39\n226\n- 25 -\nRegraded Unclassi\nmarkets and preventing currency wars. I do not believe that this\ninternational understanding, which has been soclaimed throughout\nthe world, could have been achieved without the powers granted to\nthe President by this legislation. This understanding could not\nhave been achieved unless the United States was on an equal footing\nwith the other major countries of the world; if the executive did\nnot have the same power that the executive branch of these other\ncountries have over the foreign value of their currencies.\nWithout the power to devalue our bargaining position would have\nbeen so weak that I doubt very much whether the arrangement could\nhave been consummated. We would have had nothing to offer. We\nwould have been in no position to give or receive a quid pro quo.\nllore than that, it is not at all certain that were we to permit the\npower to degalue tò lapse that we would be able to maintain the\nagreement should the disturbed international situation continue.\nThe effectiveness of the Tripartite Accord rests partly in the fact\nthat each of the three countries possess the power to further depre-\n5/17/39-2\n227\n- 26 -\nciate their currencies should circumstances in their opinion so\nvarrant.\nI turn now to the second question which may be asked about this\nBill. Why is it not sufficient for the power to be retained exclu-\nsively by Congress?\nDepreciation of a currency can be effectively administered only if\ngranted to the executive branch of the government and cannot be effec-\ntively administered by the legislative branch. In modern times, in\nmodern nations, it has always been the case that the Executive had ad-\nministered the law. Legislatures have usually given authority in advance\nor retroactive approval to action taken. This has been so because it\nwould be so inept and 80 destructive to ordinary economic life if the\nlegislature attempted to act on such monetary matters. For during any\ncrisis any disturbance would be intensified by continued debate as to\nnature of the action to be undertaken. Because of the complicated nature\nof each situation that may arise involving depreciation of currencies,\nRegraded Unclassified\n5/17/39\n228\n- 27 -\nRegraded Unclassit\nit is necessary that before Congress take action that it either rely\nupon the studies and the analysee of the executive branch of the\ngovernment or that it carry out its OWN analyses and its own studges\nwhich would be time-consuming and provocative of extended debate.\nJust what is the difference in practice between permitting the\npower to reside only in Congress and having that power shared by the\nexecutive branch? Let us take a specific instance. Let us return\nto the situation of last Fall when sterling was declining. Everybody\nknew that the President possessed the power to devalue further. Every-\nbody knew that if the well-being of the United States demanded it,\naction could be taken quickly. The President and the Secretary of\nthe Treasury could be relied on to adopt such monetary action as TM\nin the best interest of the people. What would have happened if the\npower was not delegated to the President? In the first place Congress\nwas not in session to discuss these things and it might have been necessary\nto convene it solaly for this purpose. But if Congress had been in\nsession there would have been prelonged discussions as to what action\n5/17/39\n229\n- 28 -\nto take. AS the discussion was being carried on the world would know\nthat Congress could make one of two choices - either to take no so-\ntion or to depreciate the dollar. Everyone would know that if the\ndollar were to be depreciated, there was one way in which they could\nmake sure profits. They could take their dollars and convert those\ndollars into foreign currencies, and into gold in foreign countries.\nThere would be a panie in the money markets as American and foreign\nholders of dollar balances and dollar assets evidenced their distrust\nin the dollar. Foreigners would liquidate their assets and their bank\naccounts in this country and rush either into other currencies or into\ngold. A tremendous outflow of gold from the United States would ensue.\nThe result would have been that Congress would have been forced to\nadopt the very depreciation which it had been only contemplating. The\nmore prolonged the discussion the greater the probability that such ac-\ntion would have to be taken. If Congress were eventually to decide to\nretain the status que the people speculating against the dollar\nwould merely send back the funds\nRegraded Unclassified\n5/17/39\n230\n- 29 -\nwhich had left the country. But in the meantine the panic and -\ncertainty would have impeded the legitimate commercial and financial\ntransactions carried on by United States businessmen with perhaps\ndisastrous effects on domestic business activity.\nIf Congress were to retain the power exclusively unto itself,\nthen foreign governments will no longer consider that power as\nbeing effective to meet emergency situations. They will no longer\nbe restrained from depreciation of currencies because they would\nnot expect that Congress will be able to act on monetary matters\nwith the requisite degree of preciseness and rapidity. So long as\nthe executives of some countries possess that power andthe executives\nof other countries do not possess that power, 80 long will competitive\ndepreciation be one of the devices which will be adopted by some\nforeign countries to achieve benefits for themselves at the expense\nof others.\nAs it happens the United States can justifiably claim that in\nits procedure with respect to the power to change the value of the\nRegraded Unclassified\n5/17/39-2\n231\n- 3 0 -\ncurrency it is more democratic than any other country. For in no\nother important country is there any statutory limitation on the\nextent of the power to devalue. No are the only large country in\nthe world which announces that it will not devalue its currency more\nthan 9 percent of its old gold content without prior permissive legislation.\nI would like to turn now to some major objections which have\nbeen advanced against this Bill.\nI heard it emphasised at committee hearings from those who\nopposed this legislation that the devaluation of the dollar in 1933\naccomplished no. good; that it did not contribute anything to sub-\nsequent recovery and that, therefore, the power to devalue the\ndollar should not be continued.\nAn examination of what took place in this country as well as\nin the other countries of the world between 1931 and 1936 makes it\nperfectly clear that dollar develuation in this country just as\ncurrency depreciation in other countries has been a vital factor in\nbreaking the downward spiral of business and prices in this country\nRegraded Unclassified\n5/17/39-2 232\n- 31 -\nand in other countries.\nLet us look at the record. In September 1931 Great Britain\nwent off the gold standard and her currency immediately began to\ndepreciate. During the next year sterling dropped from $4.86 to\na low of $3.25. The departure of England from the gold standard\nand the depreciation of sterling was preceded or accompanied by similar\naction on the part of some score of countries. Japan depreciated her\ncurrency by more than 60 percent; the United Kingdom, the British\nDominions, the Scandinavian countries, Argentina and other Latin\nAmerican countries depreciated their currencies by 40 percent or more.\nNow let us see what happened to prices in those countries. In\npractically every one of those twenty-odd countries whose currencies\nwere depreciating during that period prices which had previously been\nrapidly declining ceased to fall and in some cases actually rose.\nNow let us take & look at what was happening in the United States\nand in the other countries whose currencies were not depreciating\nRegraded Unclassified\n5/17/39\n- 32 -\n233\nduring this period. From the Fall of 1931 to the Spring of 1933\nwholesale prices in the United States fell more than 15 persent. The\nprices of farm products and the prices of imported goods fell more\nthan 25 percent. In France, Netherlands and Belgium prices were fall-\ning even more rapidly than in the United States; in Germany, Italy and\nSwitserland prices fell roughly about as much as they did in the United\nStates. In other words in those countries which did not lower the\nvalue of their currency prices continued to fall, business continued\nto decline, unemployment continued to increase, and trade continued\nto drop. Whereas in those countries whose currencies depreciated,\nthe deflationary spiral was brought to & halt.\nNew let us take the situation is the United States following the\nabandonment of the gold standard by the United States in April of\n1933 and the depreciation of the dollar which occurred thereafter.\nWe find that the wholesale prices in the United States rose almost\n30 percent from March 1933 to September 1934. Farm prices almost\ndoubled during that period.\nRegraded Unclassified\n5/17/39-2\n234\n- 33 -\nThe downward movement of prices, business, trade and employment\nwere stopped and recovery began. While this was happening in the\nUnited States those countries which continued to cling to the old\nvalue of their currencies continued to experience deflation. These\ncountries hung on until the Fall of 1936 when they likewise depre-\nciated their currencies. The same thing happened in those countries\nafter depreciation. Deflation ceased with the depreciation of their\ncurrencies.\nThere is nothing mysterious about this connection between depre-\ncistion of a currency and a rise in prices. In the first place your\nexports cost much less to the foreign importer; consequently be buys\nmore; there is an increased demand for your exports. In 1934, for\nexample, our exports were over 30 percent higher than in 1932 and be-\ncause of the increased demand there was a tendency for prices to sove\nup on all goods that are exported. In the second place all imports\ncost more. They cost more because it required more of your dollars\nRegraded Unclassified\n5/17/39\n- 34 -\n235\nRegraded Unclassi\nto buy a given amount of foreign currency than was true before\ndepreciation took place. In the third place all goods produced\nout of imported materials rose. And this helped prices of domestic\ncomodities to rise. In the fourth place business began to improve\nas a consequence of the stoppage of disastrously falling prices.\nMerchants no longer feared to increase their inventories and the\nincreased demand for goods made business better; put more non to\nwork and-betterebusiness ment better prices, particularly since\nthey were moving from a very low level.\nFailure adequately to recognize the important role played by\ndollar devaluation in breaking the back of the deflation in this\ncountry and of the decline in prices is due to the fact that many\npeople had the notion that there would be a rise in all comodity\nprices mathematically proportionate to the depreciation of the\ncurrency and that this situation not having occurred, dollar de-\nvaluation was deemed to have been a complete failure. The mere\n5/17/39\n236\n- 35\nfact that unwarranted claims were made for dollar devaluation is\nno sound reason for failing or refusing to recognise the important\nrole that currency depreciation in this country has played in\nstopping the rapidly expanding depression in this country.\nNo one familiar with events in the United States would claim\nthat the lowering of the value of the dollar was the only factor\nresponsible for the rise in prices and inauguration of recovery.\nObviously there were other forces at work. No one can say how\nmuch the depreciation of the dollar contributed and how such\nthe other factors contributed. All that we do know is that de-\npreciation was one of the important factors in the price rise.\nWe do know that deflation did not stop and recovery did not begin\nuntil we had begun to devalue the dollar. We also know that the\n- thing has happened in neet other countries.\nRegraded Unclassified\n5/17/39\n237\n- 36 -\nHad it happened in only one or two or three instances we might\nhave said it was merely coincidence but since it happened in\ncountry after country I think we can say with full justice that\nthe depreciation of the dollar in 1933 constituted an important\nfactor in the rise of prices that took place. However, the -\ndeniable fact that depreciation of the dollar in 1933 did cure\nthat particular situation does not mean that we want to apply\nthis power to every situation. Conditions change and each sit-\nustion has to be examined in the light of the special circum-\nstances. This Administration doesn't want the power because\nit expects to depreciate the dollar. The best proof of that\nis the fact that the Administration has not used this power\nthough it has had it for over five years.\nRegraded Unclassified\n5/17/39\n238\n- 37 -\nA second objection that has been raised 10 that this legislation\ngives dictatorial powers to the President. Obviously this is nonsense.\nCongress still retains in full the power to regulate the currency of\nthe United States. Characterisation of executive discretion on\neconomic matters as being equivalent or similar to the vast powers\nover life and liberty possessed by dictators serves only to confuse\nthe real issues. To call the power to reduce the gold content of the\ndollar by a limited amount dictatorial is to indict all the democra-\ncies of the world, since almost all the democracies have given that power\nand more to the executive branch of the government. Purthermore, to call\ndictatorial the existence of power in the executive which would increase\nthe efficiency of a democracy is really an attempt to discredit and\nundersine democracy and I personally an suspicious of many of those\nwho would restrict the administrative powers of the executive branch\nof the government by crying dictatorship. Such persons are really\nweskening the democratic processes of government. They weaken democracy\nby denying to a democratic government the capacity for quick decisive\naction in time of danger.\nRegraded Unclassified\n5/17/39\n239\n- 38 -\nAnother objection to this Bill is that the possession of the\npower to further devalue the dollar destroys business confidence by\ncreating uncertainty with respect to the future of the dollar. To\nno the contrary seens true. Instead of destroying the confidence of\nthe businessmen in the future of the dollar, I believe it operates to\nenhance it. This Bill is designed to promote stability in the exchange\nvalue of the dollar and it is a stable dollar that the businessam\nwants when he is planning for the future.\nThe businessman now lacks no confidence in the dollar. On the\ncontrary, the one place where the businessman displays more confidence\nthan in any other field is with regard to the soundness of the dollar.\nThis is true not only of American businessmen but of foreign business-\nmen and bankers as well, and they display their confidence in the way\nwhich matters most . by investing their funds in the dollar. I need\nnot remind you of the billions of foreign capital which have come to\nthis country to be invested in dollar balances and assets. The bonds\nof the United States Government which are payable in a certain musber\nRegraded Unclassified\n5/27/37-2\n240\n- 39 -\nof dollars simply and not in terms of gold are selling at their\nlowest interest rate in history. The banks in the United States\nwhose deposits are in terms of dollars are attracting more foreign\ndeposits than has ever been true before. Would foreign bankers buy\ndollars and keep their funds in dollars if they didn't have confidence\nin the soundness of that currency? Would the United States Government\nbe able to borrow on long term bonds at less than 3 percent & year if\nthe businessman and the bankers lacked confidence in the dollar?\nI would ask whether you know of a single instance in which a\nexporter has refused to sell his goods for three months, six months,\n& year, two years or five years, or has preferred to put his bill in\nany currency other than the dollar because he has lacked faith in\nthe dollar. He has lacked faith in other currencies and has there-\nfore insisted, wherever he had the choice, on making his bill payable\nin American dollars rather then in foreign currencies. This is true\nnot only of American exporters but it is even true of foreign exporters\nwho prefer to have their bills paid in dollars rather than in the\nRegraded Unclassified\n5/17/39\n241\n- 40 -\ncurrencies of their own country. I think that we can say that the\ndollar has now become the leading international currency. More and\nmore is business being set in terms of dollars because of the in-\ncreasing confidence in the future of the dollar. So great is the\nconfidence in the American dollar that we find millions of our paper\ncurrency leaving our shores to be employed in business transactions\nand hoarded in foreign countries. The Federal Reserve Board has\nstated that in the past two months alone over $70 million of American\npaper currency has left this country.\nThe best way to reduce business confidence in the dollar is\nto refuse to renew these powers. Why? Because what the business-\nman is afraid of is a repetition of instability in currency markets;\nrepetition of falling prices and of a deflationary spiral. From\npast experience the businessman knows that falling prices have\ndisastrous effects upon our economic system. He knows that at\nsuch a time national income declines, business profits disappear, the\nsecurity of loans is undermined, and the volume of business falls.\nRegraded Unclassified\n5/17/39\n242\n- 41 -\nThe informed businessman knows this well. And be knows that any\ngovernmental power which would help prevent such a situation is &\ncause for added assurance. The power to devalue thus constitutes\nfor the businessman an added assurance that prices will not decline\nbecause of depreciation of foreign currencies. I concede at once\nthat it is not a perfect insurance. I grant that notwithstanding\nthe possession of this power it is possible that other countries may\nbe driven to desperate expedients. Yet that merely underlines the\nfact that we should not undertake to curtail our powers in that\ndirection.\nAnother argument that has been used at great length by the\nopponents of this Bill is that there are no circumstances under\nwhich the use of each power would to justified - that for instance,\nduring the post-war period when muserous important currencies were\ndepreciating at an astronomical rate we were able to maintain pros-\nperity in this country without altering the gold content of the dollar.\nRegraded Unclassified\n5/17/39\n- 42 -\n243\nThis argument sounds plausible, especially when it is put forth by\nlearned economists who presentably are students of economic history.\nBut in looking into this matter I found that the situation was in no\nway comparable with 1932. The United States in those years was not\nat a competitive disadvantage in the international markets of the\nworld as a consequance of the depreciation of foreign currencies.\nDuring the war years prices in European countries rose much more than\nprices in the United States and at the same time the European curren-\ncies were pegged and not allowed to depreciate. Under such circumstances\nthe United States enjoyed a substantial competitive advantage in the\nworld markets. This competitive disadvantage of European currencies\nwas not entirely overcome during the years immediately following the\nmr. Despite the sharp depreciation of their currencies our competitive\nposition was not impaired principally because in those years prices within\nthe countries were rising almost as fast as their currencies were de-\npreciating. Our exports were being maintained at - high level, and\nwe were in a period of rising production and business prosperity.\nMore important, however, was the fact that European countries in the\nimediate post-war period were engaged in the vast task of economic\nRegraded Unclassified\n5/17/39\n244\n- 43 -\nand social reconstruction. While on the one hand they had an almost\nunlimited demand for American goods owing to the depletion of their\nproductive equipment resulting from the vast amount of destruction to\ntheir economic system in the war period they were unable to produce\nincreasing amounts for export. To compare present conditions with the\nperiod immediately after the World Wer gives a misleading interpreta-\ntion of both periods.\nAre there any circumstances which would justify the use of the\npowers granted to the President by this legislation? If the policies\nof foreign governments are carried out in defiance of any objection on\nour part and if their setion 18 not justified and is used solely for\nthe purpose of obtaining a competitive advantage over us, then - wight\nuse this power to protect our markets from imported products which come\nin over the tariff barriers and to protect American exporters to main-\ntain their markets abroad. It will be used solely for the protection\nof American business and because it will give additional stability to\ninternational trade and to international monetary relationships. But\nI believe that the more possession of the power will by iteelf probably\nbe sufficient to deter foreign governments from a course of action\nRegraded Unclassified\n5/17/39- L\n245\n- 44 -\nwhich might justify the President's using it.\nAnother question has been asked in this connection. If foreign\ncountries allowed their currencies to depreciate again, is the United\nStates going to follow suit? Whather or not the depreciation of a\nforeign currency injures the United States sufficiently for us to\ntake defensive action depende upon a number of factors. It depends\nupon the trend in prices in the United States and in the country that\nis depreciating its currency, as well as the importance of that par-\nticular currency with regard to United States interests. It depends\nupon the state of business and of our foreign trade, upon our balance\nof payments situation and the economic situation abroad, etc. There\nare a host of factors which need to be studied and taken into account\nbefore any decision can be reached as to whether or not it would be\nhelpful for the United States to act. There are many cases on record\nsuch as the depreciation of the franc in 1936 and 1937 which for\nreveral important reasons did not justify parallel action by the\nUnited States.\nRegraded Unclassified\n5/17/39-2\n246\n- 45 -\nContinuous study of the factors involved in international trade\nand in international monetary relationships is necessary in order to\nprovide a safe guide for action by the United States with regard to\nits currency. There is no danger that the executive branch of this\nGovernment would permit the dollar to automatically follow the\ncourse of other currencies. It has not done so in the past, and\nit has no intention of acting without due cause in the future.\nAnother argument used by opponents of the Bill is that the\nemergency situation which justified the granting of the powers to\nthe President has passed. It is hard to believe that anybody sup-\nposes that there is no international emergency. One need only read\na few reports coming from foreign countries to tell us that more\ncountries are planning exceptional measures to increase their export\ntrade and to prevent foreign countries from selling as much products\nwithin their own domestic markets. The emergency which justified\nRegraded Unclassified\n5/17/39-2\n247\n- 46 -\ngiving these powers to the Precident is an emergency that has grown\nin intensity since 1934 - - if an emergency existed in 1936, it -\nists a thousand-fold today.\nIt is sometimes said that the United States should serve as\na model for the rest of the world, that if the United States\nrigidly fixes the gold value of its currency, then other countries\nwould be 80 impressed by our example that they would follow suit.\nI an afraid that I can find little basis for this hope. It is like\nsaying that if the United States were to give up its navy other\ncountries would be 80 impressed by our desire for peace that they\nwould also give up their navies and the danger of war would evaporate.\nIt have heard it stated in committee hearings that depreciation\nof foreign currencies is not harmful to us because the American\nconsumer can then buy his imports at a lower price. It is admitted\nby those who take this position that depreciation of foreign currencies\nRegraded Unclassified\n5/17/39-2\n248\n- 47 -\nmay be bad for the exporter and bad for the domestic manufacturer\nwho sells for the home market, but they say these disadvantages are\ncompensated for by the fact that the American consumer gets his goods\nat a lower cost. But they forget an important fact. When that happens\nthe American consumer can buy his imported goods at a lower price only\nat & terrific cost to himself. Re does 60 at the sacrifice of re-\nduced national income, of falling prices and increasing unemployment.\nWhat availe his ability to buy goods at & lower price when he finds\nhe is out of a job? For example, when foreign currencies were de-\npreciating in 1932 the American working man could buy imported goods\nat prices lower than had been seen in this country for decades. Yet\nhe was much worse off than before because of the serious economic\nrepercussions that intensified foreign competition helped to promote.\nWhen we are prosperous we buy more imports. When we are in a depres-\nsion our imports drop. For example, in the year 1932 our importe\nRegraded Unclassified\n5/17/39\n249\n- 48 -\nhad fallen to less than half their former level notwithstanding the\nfact that imported goods were very low in price. Again 1938 our\nimports fell sharply and the reason was not that the price of in-\nported goods rose - they had not ricens in fact they fell a little -\nbut chiefly because we were in a recession.\nI have also heard another argument raised in committee hearings\non this bill - one that appeared to make an impression on some of\nthe committee members. This argument went as follows: Supposing\ncurrencies of other countries do depreciate - that advantage for\nthe foreigner lasts only for a short time. After a while the price\nadjustments will take place which will eliminate that advantage.\nThe adjustment will take place as follower In the country whose our-\nreney is deprecisting their prices will rise. In our country prices\nwill fall. And they will rise high enough in that country and fall\nlow enough in our country to offset the advantage obtained by the\ndepreciation.\nRegraded Unclassified\n5/17/39\n250\n- 49 -\nIn the first place, let me point out that this hypothetical\nchain of events is contrary to the facts. I could cite you a\nnumber of instances, but let us take the case of Japan alone.\nThat country depreciated its currency by 60 percent in the two\nyears from 1931 to 1933. Yet during that period prices in Japan\nrose alightly and not nearly enough to compensate for the effect\nof the depreciation. If price adjustments took place with such\na degree of rppidity as to offset any competitive disadvantages,\nthen no country would ever attempt to secure a competitive advan-\ntage by depreciation and the mumber of instances of currency depre-\nciation in history would be very small indeed. Moreover, even\nassuming that after a period of three or four or five years price\nadjustments do take place which correct the initial advantage of the\ndepreciating country, just see what is happening during that period\nin the other countries. Remember that the price adjustments take\nplace in part\nRegraded Unclassified\n5/17/39\n251\n- 50 -\nthrough falling prices. Do we want to have falling prices again\nin the United States? Are we willing to suffer a repetition of\n1931 and 1932 aerely to be the guines pige for an economist's\nlaboratory experiment - just in order to let the economists prove\nthat in the long run all things adjust themselves?\nThe section in this Bill dealing with the coinage of silver\nrelates, I would like to point out, only to the question of the\nacquisition of newly mined domestic silver. It is under this pro-\nvision that the President has issued the series of proclamations\npursuant to which the Government sequires newly mined domestic sil-\nver. The provision of the present Bill is not used to purchase\nforeign silver. It is under the Silver Purchase Act of 1934 that\nthe Government acquires foreign and other silver but not including\nnewly mined domestic silver.\nOne of the unfortunate aspects of consideration of this Bill\nbefore the various committees has been the attention which has been\npaid to this section of the Bill. Actually it is not a matter of\nRegraded Unclassified\n5/17/39\n252\n- 51 -\nmajor economic importance. Last year the Treasury purchased 65 mil-\nlion ounces of silver, for which it paid about $43 million and on\nwhich there was a seigniorage profit accruing of $43 million. It\nis evident at & glance that the economic importance of such an ex-\npenditure is quite secondary to the kind of problems I have been\ndiscussing with respect to the rest of the Bill.\nBut whether important or unimportant, the fact remains that the\ncoinage of domestic silver does not in itself constitute an economic\nloss to the United States. On the contrary, there are certain\neconomic advantages that flow from that program. In the first place,\nthe coinage of domestic silver does not cost the Treasury or the\npeople of the United States one penny. The silver is purchased with\nthe silver dollars that are coined from the silver acquired or with\nsilver certificates secured by the purchased silver. Not only is\nthe acquisition of silver not a loss, but there is, as you know,\na seigniorage profit of 64 cents for every ounes of silver acquired;\n64 cents which the Treasury can spend when the need arises; 64 cente\nRegraded Unclassified\n3\n5/17/39\n- 52 -\nwhich when spent makes it necessary to borrow that much less or\nmakes it possible to reduce the outstanding debt by that much.\nIn the second place, the acquisition of this domestic silver\nunquestionably adds to employment. I would not venture to say\nhow much. I think many of the claims that have been made in this\nrespect have been grossly exaggerated. Nonetheless, it cannot be\ndenied that same increase in employment, both direct and indirect,\nhas followed the purchase of domestic silver and that there have\nbeen beneficial indirect effects as well as direct effects. Were\nthe United States to cease acquiring domestic silver, there is no\nquestion but that there are certain communities in our Western states\nthat would suffer disastrously from the curtailed income in this\narea. Unemployment in this area would increase somewhat, and some\nmerchants in those commities would be hard hit. I would be the\nlast to claim that the acquisition of domestic silver is vital to\nour recovery program or to the maintenance of our national income,\nbut I would be equally the last to claim that it has no sconomie\nadvantagem.\nRegraded Unclassified\n5/17/39\n254\n- 53 -\nThere are some who concede this yet who fear that the addi-\ntional acquisition of $40 million worth of domestically mined\nsilver per year added to our monetary base is going to give rise\nto inflation. Last year this country added over $2 billion to its\ngold holdings. The monetary value of the silver acquisition was\nless than five percent, of this amount. In view of that fact, the\nclaim of those who fear that our acquisitions of domestic silver\nwill help bring about inflation, cannot be treated very seriously.\n255\nPrepared by: Mr. Seltzer,\nMr. Murphy,\nMr. Haas.\n256\nTREASURY DEPARTMENT\nINTER OFFICE COMMUNICATION\nDATE May 17, 1939\nSecretary Morgenthau\nTO\nFROM\nMr. Haas RR\nMA\nSubject: HOLC 2-3/4's of 1939-49\n1. Shall announcement be made on Thursday that the terms\nof the refunding offer will be made on Monday and the un-\nrefunded bonds redeemed on August 1?\nYes. The market 1s very strong and, barring serious\nEuropean disturbances, should be exceedingly receptive to\na refunding offer. In fact, the postponement of such an\noffer under present circumstances 18 apt to give rise to\nspeculation regarding the possibility that the Secretary\n16 in possession of some very unfavorable information not\nknown to the public.\n2. Shall the refunding issue be dated May 15 or June 1?\nThe argument in favor of a May 15 dating 18 that the\nfuture servicing and refinencing, if any, of the issue will\nbe farther removed from the regular Treasury financing date\nthan if a June 1 dating 18 used.\nAe against the May 15 and in favor of the June 1 dat-\ning is the possibility that the use of the former will make\nsome people think that the offering had previously been de-\ncided upan and then held up. The June 1 dating might appear\nsomewhat more customary.\nWe have no strong preference, but lean alightly toward\nthe June 1 dating.\n3. Maturity\ncalled for redemption in every year between now and 1952,\nThe existing HOLC debt structure permits bonds to be\nas may be seen from the following list of outstanding\nobligations:\nRegraded Unclassified\n257\nSecretary Morgenthau - 2\n(In millions)\n2-3/4's of 8/1/39-49\n$ 905\n3/8's of 5/15/40\n128\n5/8's of 5/15/41\n192\n2-1/4's of 7/1/42-44\n879\n3's\nof 5/1/44-52\n779\nIt would appear from an analysis of the Corporation's\nrequirements, contained in our memorandum of April 21, 1939,\nthat an issue maturing in 9 or 10 years, but callable sev-\neral years in advance thereof, would be wholly satisfactory.\nSuch an issue would likewise fit well into the Corporation's\nmaturity schedule 8.8 tabulated above.\nAttention should be called to the fact that such an\nissue will be exceedingly difficult to price closely; and\nthat an ample margin of safety should therefore be allowed;\nand for the following reasons:\n(a) The upward curve of interest rates 18 BO\nsteep during the first eight or ten years that it\nwould make a considerable difference in the price\nof the proposed issue if the market, by reason of\nthe low coupon, should evaluate it as an 8-, 9-,\nor 10-year issue, rather than, to its earliest call\ndate, 8.8 a 7-year issue. There are no strictly\ncomparable issues outstanding -- with similar call\nperiods and low coupons -- to serve as close guide-\nposts.\nThe Goldemith letter on the Government bond\nmarket 8. few weeks ago, in discussing the refunding\nof the HOLC bonds, called attention to the distinct\npossibility that B. 6-9, 7-9, or 7-10 year refunding\nissue might be evaluated by the market on the basis\nof the final maturity date rather than the period\nto the first call date, or for some period in be-\ntween. Further, officials of the New York Federal\nReserve Bank likewise report that discussion along\nthis line has taken place among some of the dealers.\nFor this reason, it would be highly desirable to\nobtain B. wide concensus of dealers on the probable\nprice basis of the refunding issue.\nRegraded Unclassified\n258\nSecretary Morgenthau - 3\n(b) The issue to be called is very widely\ndistributed, and even B. handsome premium is likely\nto leave & significant fraction untendered in ex-\nchange. A liberal premium 1s the more necessary\nbecause of the fact of this wide distribution.\n(o) If the exchange is made as of May 15,\nthe bond holders will be asked to give up their\n2-3/4 percent coupon two and a half months early,\nand two months early if the exchange 1s made 8.8 of\nJune 1. This sacrifice amounts to about 18/32 or\n16/32, respectively. In other words, in the pric-\ning of the new issue, an extra premium of such an\namount should be allowed to cover this sacrifice.\n(a) Operating in the opposite direction\nfrom the foregoing factors are the considerations\nthat the new issue will be B. refunding rather\nthan a new cash issue; that it will bear the low-\nest premium of any outstanding bond of comparable\nmaturity; and that banks will welcome an issue of\nsuch maturity -- considerations which should en-\nhance the attractiveness of the issue and cause\nit to sell on a lower yield basis.\nThe choice of precise maturity and coupon, with a view\ntoward setting a satisfactory probable premium, can better\nbe determined after observing the market during the next few\ndays.\nRegraded Unclassified\n259\nMay 18, 1939\n10:10 a.m.\nHMJr:\nHello - Walter Lippmann.\nWalter\nLippmann:\nYes.\nHMJr:\nHenry Morgenthau.\nL:\nHello, Henry.\nHMJr:\nHow are you?\nL:\nVery well.\nHMJr:\nI just wanted to tell you that I enjoyed reading your\npiece yesterday very much.\nL:\nOh!\nHMJr:\nThe one on reformers.\nL:\nOh yes, yes. Well, I'm glad you did.\nHMJr:\nAnd it gave me a good deal of -- of pleasure and\nsatisfaction.\nL:\nOh well, very -- I'm -- it's very nice of you to say\nthat.\nHMJr:\nAnd\nL:\nI -- I hope things are going along with some hope of\ngood results.\nHMJr:\nWell, we farmers are always optimistic, you know.\nL:\nYeah.\nHMJr:\nAnd I've been in worse fights than this.\nL:\nWhat's that?\nHMJr:\nI have been in more difficult situations than this and\nhave it have a happy ending.\nL:\nUh-huh.\nHMJr:\nAnd I'm still hoping that we will have a happy ending.\nL:\nI see. Well, good luck to you. I have a piece this\nmorning you might have a look at which is on the --\nmore or less the same lines.\n260\n- 2 -\nHMJr:\nI -- I didn't see that.\nin\nWhat's that?\nHMJr:\nI didn't -- in the -- in the New York Tribune?\nL:\nIt's in the New York paper and in the Washington Post\ntoo.\nHMJr:\nIt's funny, I -- I didn't\nL:\nYeah.\nHMJr:\nWell, I certainly will look at it.\nL:\nYeah.\nHMJr:\nWell, I just wanted to tell you how I felt.\nL:\nThank you very much.\nHMJr:\nAll right, Walter.\nL:\nGood bye.\n261\nMay 18, 1939\n10:15 a.m.\nHMJr:\nHello, Jesse.\nJesse\nJones:\nHow are you?\nHMJr:\nI'm all right, which 1s -- I had my back all strapped\nup, but otherwise I'm all right.\nJ:\nI see. Well, I called you yesterday -- you're answer-\ning my call?\nHMJr:\nYeah. Everything settled?\nJ:\nHuh?\nHMJr:\nEverything settled?\nJ:\nWell, I think we're in agreement on -- on Nicaragua,\nyes.\nHMJr:\nWell, this 18 in answer to your call.\nJ:\nAll right. I think we are in agreement. Now the -- of\ncourse the -- the Nicaraguans aren't in agreement. I\nmean, they haven't\nHMJr:\nYeah.\nJ:\nBut -- but as between State and Export Bank, we've got\nthe things all worked out.\nHMJr:\nI see.\nJ:\nThe -- each of us had to give a little bit.\nHMJr:\nUh-huh.\nJ:\nAnd so forth and I think the plan is all right.\nHMJr:\nWell\nJ:\nThe other thing I was going to talk to you about -- you\nmentioned the other day about wheat\nHMJr:\nYes.\nJ:\nMay wheat. Now, I talked to Henry Wallace -- I\ntalked to John Goodloe.\nHMJr:\nYeah.\n262\n- 2 -\nJ:\nAnd he explained to me that the -- they were taking a\ngood deal of wheat now.\nHMJr:\nYeah.\nJ:\nAnd I didn't -- I wasn't in a position to talk intel-\nligently to him about it. I didn't\nHMJr:\nI see.\nJ:\nBut I think that -- I did talk to Wallace and I -- I told\nWallace of your -- of your thought in the matter.\nHMJr:\nI'm sure\nJ:\nIt was more or less incidental and I -- had it in con-\nnection with another visit we had -- but -- but you had\nbrought it up and I was bringing it to his attention.\nHMJr:\nGood.\nJ:\nSo that's about all I could do about it, I guess.\nHMJr:\nWell, that -- that was all right. The -- we're going\nto try to do a job for Home Owners' Loan Monday.\nJ:\nWell, that's fine.\nHMJr:\nYes.\nJ:\nAre you going to do short term, or haven't you decided?\nHMJr:\nWell, I really -- the boys are talking between seven and\nten and I haven't got my teeth into it yet.\nJ:\nI see. All right. Well, thank you very much. I hope\nto see you soon.\nHMJr:\nI hope BO.\nJ:\nGood bye.\nH\n263\nMay 18, 1939\nTo:\nThe Secretary\nFrom: Mr. Hanes\nI had luncheon today with James H. R. Cromwell.\nHe told me that his senatorial aspirations were going\nto be decided upon next week.\nHe is down here showing a motion picture made from\nhis book entitled \"In Defense of Capitalism\" by James H. R.\nCromwell and Hugo E. Czerwonky. I went down to the Capitol\nwhere the film is being shown in the District of Columbia\ncommittee room, just by the floor of the Senate. It did\nnot prove anything to me.\nTwH.\n264\nTREASURY DEPARTMENT\nINTER OFFICE COMMUNICATION\nDATE\nMay 18, 1939,\nTO\nSecretary Morgenthau\nFROM Florence McGuire\nFor your information -\nAt the suggestion of Mr. McReynolds, I made a thorough check\nof the daily-calendar record kept by no as secretary to Herman Oliphent\nof all his collers and the nature of the calls, 80 that I might give you\nthe beckground history of Mr. Oliphant's relation with Ben Grey.\nMy records show that Mr. Oliphant net Ben Grey for the first\ntime at a surprise party given by Sherman Mittell for Lowell Mellett\net the Cosmos Club at 6:30 on March 9, 1938. Mr. Oliphant hed known\nMr. Mittell for some time and both Mr. Mittell and Ben Grey are con-\nnected with the National Home Library Foundation. I recalled when I\nSEW the article on Associated Gas & Electric Company case in the\nNew York Herald Tribune on May 17, 1939, that the only other time, to\nmy knowledge, that Mr. Oliphent saw Mr. Grey was at to luncheon on\nMarch 11, 1938 at the Carlton Hotel. Mr. Grey had asked Mr. Oliphant\nwhen he net him at the cocktail party on March 9, 1938 if he might\ncome to the office or have lunch with him sometime soon. Mr. Grey did\nnot divulge the nature of the question he would like to discuss with\nKr. Oliphant. I remember it because when Mr. Oliphant returned from the\nluncheon that day be was considerably upset by the fact that Ben Grey\nhad approached him about the Associated Gas & Electric Company case.\nMr. Oliphant had been scrupulously avoiding seeing anyone connected with\nthe case as he had been trying to channelize all interviews through\nCommissioner Helvering.\nMy memory is further substantisted by the fact that in the record\nthere 1s a memorandum to you from Mr. Oliphant under date of March 11, 1938\nwherein be set out for your information the identification of Ben Grey.\nThis he had dictated to me immediately upon his return to the office\nfrom the luncheon.\nI kept a record of all Mr. Oliphant's callors and the nature of\ntheir calls. But even apart from the record, I an confident, that\nMr. Oliphant never saw Ben Grey other then at the two times enumorated\nherein.\nJhis\nRegraded Unclassified\n265\nHA\nMay 18, 1939\nTo: The Secretary\nFrom: Mr. Hanes\nI went up to see Congressman John McCormack today at\n12 o'clock. He started out by saying that he was terribly\nconfused by the various conflicting reports which he has\nread in the newspapers. He said that he had gathered the\nimpression from his Boston papers that the so-called Harrison\nprogram was in direct conflict, or at least different in\nseveral respects, to the Treasury program. He said that he\nhad had no notice from either Doughton or Cooper of a meeting\nof the sub-committee to discuss the situation, but that\nMr. Doughton had announced at the Social Security executive\nsession that they would begin to talk general taxation fairly\nsoon. For that reason he was desirous of asking us whether\nwe favored the so-called Harrison program so that he would\nknow how to conduct himself should the sub-committee be called\nto discuss this problem.\nI told him that I had not discussed the Harrison suggestions\nwith you in detail, but that my own feeling was that it was good\nas far as it went. I told him that I personally was willing to\ngo much further but that I did not feel like muddying up the\nwater by making further suggestions when there was every reason-\nable prospect of reaching an agreement with the Senate Finance\nCommittee on the basis of Senator Harrison's memorandum.\nMr. McCormack said that his view corresponded with mine, that\nhe did not think the Harrison proposals did more than \"take a\nsmall bite at the cherry.\" He said again that he was willing to\ngo down the line for us and advocate any plan which we could agree\nupon. He was extremely cooperative in every respect, and said\nthat we could rely upon him for any assistance within his power\nto give. That's a pretty broad statement but I believe him when\nhe says it.\nJ.W.H.\nRegraded Unclassified\n266\nMay 15. 1939\nTo:\nthe Secretary\nFrom: Mr. Hanes\nI vent up to 000 Congressman John NoCormack today at\n12 e'clock. He started out by saying that be was terribly\nconfused by the various conflicting reports which he has\nread in the newspapers. Re said that he had gathered the\nimpression from his Boston papers that the so-called Harrison\nprogram vas in direct confict, or at least different in\nseveral respects, to the Treasury program. Be said that he\nhad had no notice from either Deughton or Cooper of a meeting\nof the sub-committee to disease the situation, but that\nMr. Doughten had announced at the Secial Security executive\nsession that they would begin to talk general taxation fairly\nsoon. For that reason he vas desirous of asking us whether\nwe favored the se-called Harrison program so that he would\nknow how to conduct himself should the sub-comittee be called\nto discuss this problem.\nI told him that I had not discussed the Earrison suggestions\nwith you in detail, but that *y own feeling vas that it vas good\nas far as it vent. I told him that I personally vas willing to\ngo much further but that I did not feel like muddying up the\nwater by making further suggestions when there vas every reason-\nable prospect of reaching an agreement with the Senate Finance\nCommittee on the basis of Senator Harrison's nemorandum.\nMr. McCormack said that his view corresponded with mine, that\nhe did not think the Harrison proposals did more than \"take a\nsmall bite at the cherry.\" Re said again that he was villing to\ngo down the line for us and advocate any plan which ve could agree\nupon. lie vas extremely cooperative in every respect, and said\nthat vo could rely upon him for any assistance vithin his pover\nto give. That's a pretty broad statement but I believe his when\nhe says 11.\nOreganal Socy\nas home 5/18/39\nI +5\nJWH:jr\nRegraded Unclassified\n267\nNov 18. 1939\nTo:\nThe Secretary\nFrom: Mr. Hanes\nI had luncheon today with James H. R. Cromvell.\nHe told no that his senatorial aspirations were going\nto be decided upon next week.\nHe is down here showing & motion picture made from\nhis book entitled \"In Defense of Capitalism\" by James E. 3.\nCromwell and Hugo 3. Caerwonky. I vent down to the Capitol\nwhere the film is being shown in the District of Columbia\ncommittee room, just by the floor of the Senate. It did\nnot prove anything to me.\nOriginal to socy\nas home 1/18/39\n4:45\nJVH:jr\nRegraded Unclassified\n268\nMay 18, 1939\nFOR THE SECRETARY:\nMike Flynn who was working up a story today on\nthe measures to be included in the next big spending\nprogram asked Senator Wagner about reports that Wagner\nwas considering a plan to spend the $1,800,000,000 from\nthe Stabilization Fund for housing. The Senator replied\nby saying, according to Mike, \"You've been talking to\nthe Treasury.\" Mike denied this and explained how he\ngot the report, whereupon Wagner admitted that he did\nhave some such 1dea and planned to talk it over again\n\"with the boys downtown\" during the next few days, but\nhe would not say who the \"boys downtown\" are. Mike says\nthat Wagner 1s in no hurry with the Stabilization Fund\nbill until he sees what can be done with this new idea.\nFrom Leon Henderson, Currie, and others, Mike has\na long list of spending proposals on housing, highways,\nrailroad equipment, etc., he will publish tomorrow.\nESD\nRegraded Unclassified\nTREASURY DEPARTMENT\n269\nINTER OFFICE COMMUNICATION\nDATE May 18, 1939.\nTO\nSecretary Morgenthau\nFROM E. H. Foley, Jr.\nFor your information\nThe hearings on our monetary legislation before the Subcommittee\nof the Senate Committee on Banking and Currency were completed today.\nIt is expected that the Subcommittee will report the legislation\nto the full Committee the first part of next week. Larry Bernard\nanticipates that the vote in the Subcommittee will be 5 for continuation\nof the power to revalue the dollar and 5 against the continuation of such\npower. There should be no difficulty in the Subcommittee in connection\nwith the continuation of the stabilization fund and the power to purchase\nnewly-mined domestic silver at a price higher than the world price.\nLarry Bernard believes that the Senators on the Subcommittee in\nfavor of continuing the power to revalue the dollar are: Smathers,\nByrnes, Miller, Bankhead and Barkley; those opposed: Adams, Brown, Glass,\nTaft and Townsend.\nWe anticipate that the vote on the continuation of this power in\nthe full Senate Committee on Banking and Currency will be 11 in favor\nand 9 opposed.\nE.N 7/2\n270\nMay 18, 1939\n10:18 a.m.\nOperator: Go ahead.\nHMJr:\nHello, Ross.\nRoss\nMagill:\nYes, Henry.\nHMJr:\nWhere are you?\nM:\nI'm down at the National Bureau of Economic Research.\nHMJr:\nOh.\nX:\nSitting in with Jake Viner.\nHMJr:\nOh! Have you\nX:\nI'm -- I'm alone now, if that's what you are\nHMJr:\nHave you seen Blough?\nM:\nYeah.\nHMJr:\nHas he left you?\nX:\nYes. He -- I saw him -- I had this meeting down here\nwith the committee on a fiscal study which they are\nmaking at ten o'clock.\nHMJr:\nYeah.\nM:\nBut I saw Blough at nine this morning.\nHMJr:\nYeah.\nM:\nAnd I think that statement 18 in good shape, Henry.\nHMJr:\nGood !\nM:\nAnd I -- I -- I would -- I hope that you can go ahead\nand give it. I think that it's & good Job and will do\nyou credit.\nHMJr:\nRight.\nM:\nThe -- the only questions I had about it were compara-\ntively minor ones.\nHMJr:\nYeah.\nRegraded Unclassified\n271\n- 2 -\nM:\nThere is one sentence, which, in the undistributed\nprofits tax portion -- which I think should be polished\nup.\nHMJr:\nRight.\nM:\nBut that's not a Job of any great difficulty and -- and\nI dare say Blough has already got it done.\nHMJr:\nFine !\nM:\nBut the rest of it, I think, is good. I think it has a\ngood ring to it and I -- and I think it will do a lot\nof good.\nHMJr:\nYeah. Well\nM:\nNow, Blough left me when I came down to this meeting to\ngo over to see Karl Shoup.\nHMJr:\nYeah.\nM:\nAnd I presume that he's in his office.\nHMJr:\nYeah.\nK:\nHe told me he was planning to call you sometime during\nthe morning.\nHMJr:\nThat's right.\nM:\nYeah.\nHMJr:\nHe's going to -- well, I just wanted to make sure how\nit was.\nM:\nYeah. Well, I think it's good. I -- I read it -- read\nit through from beginning to end quite carefully, be-\ncause I wanted to get again the -- the force of that\nfirst part.\nHMJr:\nRight.\nM:\nAnd and I think that -- I think you've really done\nan excellent -- job under very difficult conditions. And\nI certainly hope that you can hold the fort.\nHMJr:\nWell, I'm still holding the fort but the ground 18 sort\nof sinking from under me.\nRegraded Unclassified\n272\n- 3 -\nM:\nIt 18, eh?\nHMJr:\nBut we'll Bee -- but I just wanted to make sure you had\nseen it.\nM:\nI -- I said to Roy that -- I suggested to him to say to\nyou -- well, I'll say it to you directly. I -- you and\nI spoke about it when you were down in Georgia.\nHMJr:\nYeah.\nM:\nAnd that 18 that for what's it worth, in your discussion,\nbear in mind that -- certainly the greater part of what\nis contained in this statement\nHMJr:\nYeah.\nM:\nwe conveyed to the President way back in 1937.\nHMJr:\nRight.\nM:\nThis isn't some new thought.\nHMJr:\nNo.\nM:\nIt isn't the result of -- of Hopkins, or Harrison, or\nHanes, or anybody else.\nHMJr:\nI know that.\nM:\nNow, secondly, I think in the same statement it should be\nI wish we could get across to the man across the street,\nbut I don't -- I suppose it's impossible, that this is\nby no means a right-wing philosophy. I presume that\ncertainly 95 out of a 100 competent economists and\nthoughtful students would agree on this program quite\nobjectively, without any thought of partisanship or\npolicy, or anything else.\nHMJr:\nYeah.\nM:\nSo that it -- it isn't that somebody 18 trying to sell\nhim a bill of goods. This 16 the natural and proper\ndevelopment.\nHMJr:\nUh-huh. Well, ever so much obliged, and as things\ndevelop, I'll keep you posted.\nRegraded Unclassified\n273\n- 4 -\nM:\nWell, thank you, Henry. I'll be -- I -- I want to get\ndown to Washington sometime next week, but I'll be\naround here where you can get ahold of me the rest\nof this week.\nHMJr:\nThank you.\nM:\nGood luck to you.\nHMJr:\nGood bye.\nM:\nGood bye.\nMay 18, 1939\n274\nMORGENTHAU SAYS NOTHING NEW ON TAXES\nWASHN - SECY MORGENTHAU SAID TODAY THAT HE\nHAD NOTHING NEW TO ADD ON TAXES - THE SECRETARY\nSAID THAT HE DID NOT KNOW WHEN THE NEXT TAX\nCONFERENCE BETWEEN CONGRESSIONAL LEADERS AND\nTHE PRESIDENT WOULD BE HELD -\n1048\nMAY 18 1939\n11 51 A M\nMAY 18 1939\nADD MORGENTHAU\nWASHN - SECRETARY MORGENTHAU REFUSED TO\nCONFIRM CHAIRMAN DOUGHTON-S STATEMENT THAT HE\nIS IN AGREEMENT WITH CHAIRMAN DOUGHTON ON THE\nPROPOSED REVISIONS IN THE TAX STRUCTURE\n-0-\n275\n1050\nDear\nSEN O-MAHONEY SAYS CORPORATE TAX STRUCTURES\nTO BE CONSIDERED BY 00MB BY MONOPOLY\nCOMMITTEE AS INTEGRAL PART OF ECONOMIC\nPICTURE\nWASHN -\nMAY 18 1939\nADD 0-MAHONEY\n1059\nWASHN - SEN 0-MAHONEY CHAIRMAN OF TNEC\nSAID THAT THE CORPORATE TAX STRUCTURE AND THE\nADVISABILITY OF TAX CHANGES\nWILL BE CONSIDERED BY HIS COMMITTEE AS AN\nINTEGRAL PART OF THE NATION-S ECONOMIC\nMAY 18 1939\nPICTURE NOW BEING STUDIED BY THE GROUP\n-0-\n276\nTREASURY DEPARTMENT\nINTER OFFICE COMMUNICATION\nDATE\nMay 18, 1939.\nTO\nSecretary Morgenthau\nMr. O'Connell\nFROM\nFor your information\nTo-day's witnesses before the Monopoly Committee hearing,\namong whom were included the Chairman of the Board of the\nUnited Aircraft Corporation and Mr. Sloan, Chairman of the\nBoard of General Motors, testified to the same general effect\nas have previous witnesses, namely, that the corporations\nwhich they represent have not in the past and will not in the\nfore-seeable future, have any occasion to tap accumulated\nsavings. Both witnesses stated definitely that they were\nentirely able to finance any future expansion out of earnings\nand that they intended to do BO as a matter of business\npolicy.\nIt is my understanding that to-day's testimony completes\nthis phase of the investment study. The Committee recessed\nuntil Monday, at which time the problem will be approached\nwith a view to determining what happens to the savings of\nthose who save.\nRegraded Unclassified\n277\nGROUP MEETING\nMay 18, 1939.\n10:55 A. M.\nPRESENT:\nMr. Hanes\nMr. Foley\nMr. McReynolds\nMr. Gaston\nMr. Haas\nMr. Bell\nMr. Duffield\nMr. Lochhead\nMr. White\nMr. Graves\nMrs. Klotz.\nH.M.Jr:\nWhat have you got, John?\nHanes:\nJust as a matter of information, the Comptroller's\nOffice reports the First National Bank of Parksley,\nVirginia, as having deposits of about $260,000\ntoday.\nH.M.Jr:\nNational?\nHanes:\nNational Bank\nH.M.Jr:\nHave you got that stuff?\nGaston:\nYes, they are working on it.\nDuffield:\nI have nothing.\nFoley:\nI have nothing, Mr. Secretary.\nHaas:\nI have something, I want to talk to you about that\nemployment proposition, you know.\nLochhead:\nThe foreign markets are all very steady and quiet.\nThis is a religious holiday in Catholic countries.\nIt is Ascension Day, and the situation is more\nquiet than it has been for the last few days.\nWhite:\nYou asked about the reason for the sharp rise in\nItalian stocks -- 15 per cent on the annexation\nof Albania. We have looked through all the\nnewspapers and cables, and there seems to be no\nother explanation than the fact that there has\nbeen a successful outcome. The magnitude of the\n2 I I\n278\nrise began to some extent, with Munich. That is\nnot a very adequate explanation, but it 1s the best\nwe can get. I have a comprehensive memorandum here\nin regard to changes in the situation. When it\ncrops up again, we will be notified.\nH.M.Jr:\nI was asked in the press conference, but could not\ngive any explanation, as to the situation of\nGeneral Motors and International Harvester in the\nArgentine. Can you give me something on that?\nLochhead:\nThat was discussed at one of the Export-Import\nBank meetings. They cut down the quota on American\ncars. The American manufacturers were anxious to\nkeep that market, and, at the same time, the\nArgentine people were anxious to keep down the\ndistribution of American cars. What they aim to do\nis to allow them to increase their quota. General\nMotors and the other motor people will accept in\npayment Argentine government notes for two or three\nyears - a short term loan. They do not want to\ndo that, but they apparently figured it would be\nbetter to get a little credit that way. Incidentally,\nalong that line, at the Export-Import Bank, they\nare going ahead with that $500,000 for the bank.\nAs far as other credits are concerned, they simply\nstate that they will agree to consider other\npropositions up to $2,000,000. It is not a\ncommitment. They will not make any commitment at\nall, but they will agree to finance it. That is\ndue to the fact that they do not want to put\ncommitments on their books for specific amounts,\nbecause they have no authority to lend specific\namounts.\nH.M.Jr:\nWhat happened to my suggestion\nLochhead:\nI asked Lawrence Pearson yesterday in regard to\nthat, and he said he understood that Jones --\nH.M.Jr:\nHe 18 stalling.\nLochhead:\nBut the mere fact that they are setting up the\nbooks in this way, and not making definite commit-\nments, shows that they are not going very hard\nafter that.\nWhite:\nWhat do they call that kind of a loan?\nLochhead:\nThey call it & credit -- along the lines of a\nneed, and also with the details left rather open.\nspecific credit, but only to be used in 08.88 of\n- 3 -\n279\nH.M.Jr:\nEd, will you be good enough to get word to the\nAttorney General on the so-called motion picture\ncases that the earliest I will have a report will\nbe on the 22nd? I do not know whether it will\nbe in shape to forward to him or not, but I doubt\nit, as he 18 going out there and wanted to take\nsomething along on the 19th. I will not even\nreceive it until the 22nd and I have grave doubts\nas to whether we will have anything. If we can\nget it, we will give it to him. Is that right?\nGaston:\nThat is right. The St. Louis Post-Despatch had\na story about the income tax returns of three\nprominent members of the motion picture industry,\nand calling for an investigation, and named Daryl\nZanuck, William Goetz and Joe Schenck. He came\nto Elmer Irey with the story. Elmer did not give\nhim anything, but Marq Childs told him where to get\nthe story. He got it from Charlie Russell.\nH.N.Jr:\nWho is Charlie Russell?\nGaston:\nCharlie Russell is the former Deputy Commissioner\nin charge of the Income Tax Unit. He left somewhat\nover a year ago, and 18 now representing one or\nmore of those men.\nH.M.Jr:\nHe ought to know.\nGaston:\nMark Childe thought it was good authority when\nhe read the story.\n8.8.Jr:\nDan?\nBell:\nWe are just about completing the audit of the\nCommodity Credit Corporation. I believe their\ncapital 1s completely wiped out. They have addi-\ntional funds of $19,000,000, making a total of\n$119,000,000.\nH.M.Jr:\nI want to ask whether I should say \"Oh, boy!\"\nor \"Tsk,\" \"Tsk,\" \"Tek\"! (Laughter)\nWhite:\nThat was the audit for last year. Next year it\nwill be \"Oh, boy!\"\nBell:\nIn that connection, I find that the Commodity\nCredit is charging the borrower --\nH.M.Jr:\nThe bar?\n- 4 -\n280\nBell:\nIs charging the borrower 4 per cent interest.\nTheoretically, they are charging him 4 per cent\ninterest. The banks take these obligations for\none year and get 21 per cent, and the Commodity\nCredit, in theory, gets 1 ₂ for underwriting the\nloan, but what we are doing 1s selling B. one year\nobligation for 2è per cent. Then it is renewable\nunder certain conditions. I have not found out what\nthose conditions are, but I think it is something\nfor the stockholders to look into, that we are\nselling guaranteed obligations for one year at 2t\nper cent, which 1s a little out of line with other\nTreasury financing; but I will have the facts in a\nfew days.\nH.M.Jr:\nWhen you do that, will you also compare it with\nintermediate credits elsewhere?\nBell:\nThere 18 not, of course --\nH.V.Jr:\nWell, I have not looked to see what they could do\nwith one year paper, but certainly they do not\npay a half of one per cent.\nBell:\nThe last was 4/10th for six months.\nH.M.Jr:\nHow much?\nBell;\n4/10th for six months. That includes commission.\nH.E.Jr:\nOf course, this is & swell deal for the banks.\nBell:\nThat is right. That 18 a shrewd deal.\nR.V.Jr:\nWill you look into it?\nBell:\nYes; I am getting some more dope on it. I will\nhave it in a day or two.\nH.M.Jr:\nI hope you do.\nBell:\nWe have $20,000,000 of 2-3/4 Home Ownere' Loan\nbonds that we are going to refinance.\nH.M.Jr:\nHow much?\nBell:\nAccount. Don't you think we ought to sell those\n$20,000,000 in the Postal Savings Investment\nand get the rights and not exchange --\nH.S.Jr:\nWhat would you do with the rights?\nBell:\nWell, we will sell these bonds and put the money in\nB. 2 per cent obligation, and sell the rights on the\nRegraded Unclassified\n- 5 -\n281\nmarket, rather than take whatever 1s offered in\nexchange, which would certainly be less than 1-3/4.\nH.M.Jr:\n$20,000,000?\nBell:\nYes.\nH.M.Jr:\nI do not like to have those postal savings a\nGovernment guaranteed obligation, by any means.\nBell:\nWe have had them for some time.\nH.H.Jr:\nDid they go over easily?\nBell:\nVery easily. They went up this morning.\nWhite:\nYes. This morning the whole thing was 5/32; the\nrights about 2/32.\nH.M.Jr:\nYou are selling them out complete?\nSell:\nYes. The Attorney General has charge of the Alien\nProperty Trust Fund and he has recently -- well,\nfirst I should explain that each Bix months -- had\nthe duty of distributing the earnings of that in-\nvestment to the so-called beneficiaries, German\npeople, etc. That 18 quite a task, and in order\nto get out from under, he has recently had an\nexecutive order signed by the President, which\ndirects you to sell the securities of that Alien\nProperty Account, and put the money to the credit\nof the Trust Fund in the Treasury; but instead\nthere are no earnings there, so there 18 nothing\nto distribute, and there are only $13,000,000 of\nGovernment securities still out after this\nfinancing is over.\nH.M.Jr:\nDoes that sound all right?\nBell:\nThe only other thing I have is that I understand\nMr. Smith, Director of the Budget, is to write\nsome sort of a letter to the Appropriations\nCommittee. He does not know what kind of a letter,\nand I am wondering if you would have any information\nto help him out.\nH.M.Jr:\nAnd how long had you been Acting Director of the\nBudget?\nBell:\nFour years and 8. half, but he has only been such\nfor two months.\n- 6 -\n282\nH.M.Jr:\nIn the conversation at the luncheon on Wednesday,\nthe President said \"I see that Senator Russell\nsays this is not an increase this year over last.\nIs that correct?\" \"Well,\" I says\"my lawyers tell\nme it 18 370 plus, and I stand on those figures\nhere.\" The President says \"Well, if somebody has\nthe figures, send them up to the Hill.\"\nI am Just giving you what he said -- \"because they\ndon't know.\" \"Well, I take it what you want me to\ndo is to get word to the Director of the Budget\nthat he should send word up?\" And he eays \"Yes\".\nI says \"Would you like a copy?\" He says \"Yes, I\nwould like a copy.\" In the old days you would\nknow what to do and I take it you would send it\nto Chairman Taylor, wouldn't you?\nSell:\nYes; if it 1s going to the House, but as long as\nRussell raised the question, I suppose it would go\nto Glass, and send Taylor & copy.\nH.E.Jr:\nYes, but you have had messages like that before.\nBell:\nBut he has not. That 16 the difficulty.\nDoReynolds:\nI went around to see him and gave him all the\ninformation we hold. He was a little \"foggy\"\nabout it.\nBell:\nThe 372 -\nH.M.Jrt\nHave you the detsils?\nSell:\nYes, practically, I know what happened. You\nrealize that 372 18 over the President's budget\nestimate?\nH.K.Jr:\nI understand.\nBell:\nYes; 1940, but not over the 1939 appropriations.\nH.M.Jr:\nI understand.\nBell:\nI will take care of it, I think I can.\nE.M.Jr:\nI think the statement I made is perfectly clear.\nWeren't you at my press conference on that?\nHanes:\nNo - Oh, yes; surely. Yes, you were all right\non that.\n283\n- 7 -\nH.M.Jr:\nI said it was 370 over the President's budget\nestimate. You sat right here.\nHaned:\nAnd that was right, too.\nH.M.Jr:\nDon't you try to crawl out of that.\nBell:\nI think there is a difference between what you told\nthe President and what Russell said on the floor.\nH.M.Jr:\nYes, there is, surely.\nBell:\nHe says that 235 put in for parity payments takes\nthe place of 212 put in last year, and, therefore,\nthe two years are comparable. That is correct.\nH.M.Jr:\nI think everybody ought to be straightened out.\nBell:\nAll right. That 1s all I have.\nH.M.Jr:\nI think you should have something for me on the\nHome Owners' Loan in the morning.\nBell:\nWe will.\nH.M.Jr:\nYou get it, and we will start at 10 o'clock. Let\nus start first on the Home Owners' Loan.\nBell:\nVery good. I should explain that I have not seen\nMr. Hanes, as you asked me to. He was completely\ntied up yesterday.\nH.M.Jr:\nThat is not his story.\nBell:\nI went down, and he had gone to the Hill.\nH.M.Jr:\nThere 1s nothing particularly significant in\nthis cash income and outgo, as I have been looking\nat it, 1s there?\nBell:\nNo, I do not think so.\nH.M.Jr:\nCould you or somebody else give me the figures?\nHow about Straus? Hopkins asked me about that.\nBell:\nI will be glad to.\nMcReynolds:\nThe union people have been picketing the Commerce\nBuilding for the last couple of days.\nH.M.Jr:\nI thought they had settled that.\n284\n- 8 -\nMcReynolds:\nI have been having a little difficulty with the\nunion people myself lately, and I hope we won't\nhave any picketing around the Bureau, They want\nan official negotiating group in the Cafeteria\nAssociation. They have about 75 employees. The\nemployees themselves are not interested, but\norganizers for both the C.I.O. and A.F. of L.\nhave been insisting that the Labor Relations Board\nhold an election among those employees to designate\nthe negotiating group. I told them we could not\nhave B. hiring hall there, because we had to be\ncareful to exercise some supervision over who\nwas hired in that cafeteria. I got Eiker, who\n18 the district supervisor for the National Labor\nRelations Board coming in this afternoon to take\nit up again. He has already been in to see me.\nH.d.Jri\nHe 1s a good man.\ncReynolds:\nYes, and he 18 doing the best he can to quiet them.\nI talked to Gardner Jackson about it some time ago.\nAs far as the O.I.O. is concerned, they have\ngotten off our necks. They have not been coming\nin. As to the A.F. of L. if those fellows think\nthey are going to put a picket line in front of\nthe Bureau --\nS.M.Jr:\nHow about this fellow that Bill Green wanted left\nin Baltimore?\ncReynolds:\nI have talked to them. You don't get the same\nmeasure of common sense in the A.F. of L.\nH.K.Jr:\nDo.you want any help?\ncReynolds:\nI do not know what help anybody can give. Of\ncourse, we could let them go ahead and hold their\nelection. The only result would be that they\nunderstand that they cannot exercise any control\nover those fellows, and they admit it.\nH.m.Jr:\nDo you want me to get in on it?\nMcReynolds:\nNo; I just wanted you to know about it.\nH.M.Jr:\nYou just want me to hold your hand?\nCoReynolds:\nI did not want to bring it up to you sooner. This\nthing has been going on for six months, and I do\nnot expect anything to happen.\nH.M.Jr:\nIs the cafeteria any good?\nRegraded Unclassified\n285\n- 9 -\nMcReynolds:\nThe cafeteria is excellent, it is well run, but\nthis may result in our having to run the cafeteria\nagain ourselves. I do not want the publicity of\nthis picketing. It 1s a good cafeteria. It 1s\nrun by the employees association.\nMrs. Klotz:\nIt 18 very good.\nMcReynolds:\nThey run it themselves. They elect their own\npeople. They have good meals, and they are cheap;\nbut, after all, we cannot let those fellows\ncontrol the people who are working in the Bureau.\nThat cafeteria has to go on, or we would have to\nclose the Bureau. If they call a strike and close\nthe cafeteria, we would have to close the Bureau,\nand we have been running 24 hours a day there.\nH.M.Jr:\nWell, you keep me posted.\nMcReynolds:\nI will.\nH.M.Jr:\nOne other thing. Will you look up and ascertain\nwhen the law was passed which gave all of these\nspecial powers to the Assistant Secretary of War\nwhich he now has? Was it in this Administration\nor & previous administration, and under what\ncircumstances?\nMcReynolds:\nI guess it was when that position was created.\nH.M.Jr:\nIt is most unusual.\nBell:\nI think it was in the National Defense Act, when\na part of them were given to him.\nH.M.Jr:\nwill you look it up?\nBell:\nYes.\nH.M.Jr:\nAnd the circumstances. Why is he in charge of\npurchasing and why is the Assistant Secretary of\nWar in charge of national mobilization? Why do\nall those things go to the Assistant Secretary?\nBell:\nI think it was created at the time that they were\ntalking about industrial mobilization, and he\nwanted somebody to handle it particularly. That\nwas one excuse for creating the job.\nH.M.Jr:\nWas it done in Woodring's time?\nBell:\nNo; no.\n286\n- 10 -\nMcReynolds:\nNo, before Woodring.\nH.M.Jr:\nThis other thing is Just a little matter. I\nthink George should handle this, and I think you\nshould do this for me before lunch today.\nMiss Lonigan wants to sit in at my conferences.\nShe wants to know something about the effects on\nunemployment. Well, I don't want that. I think\nthe Directors have a meeting only once a week. I\nwork in the Treasury from 9 until 4:30, and I\ncannot get to them. If you two gentlemen can find\nwork to keep her busy from 9 to 4:30, I will give\nher about six months notice.\nMcReynolds:\nGeorge can give her work, if she will do it.\nH.M.Jr:\nShe writes a memo. to me about 4th grade statistics.\nShe cannot do the work of 4th grade statistics.\nHaas:\nShe did the last job I gave her the other day.\nH.M.Jr:\nAt any rate, she is here from 9 to 4:30. Those\nare the office hours for everybody except me.\nMcReynolds:\nCorrect.\nH.M.Jr:\nAll right. From 9 to 4:30 she is to be in her\noffice, and once a week --\nBell:\nTake that as an order?\nH.M.Jr:\nAnyway, will you please attend to that?\nMcReynolds:\nWe will.\nH.M.Jr:\nDoes anybody want to see me, because I am going\nhome at one o'clock, and I will not be back today.\n(Meeting concluded 11:30 A.M.)\n287\nMay 18, 1939\nMy dear Mr. Sproul:\nThe Federal Reserve Bank of New York in holding, subject\nto the order of the Secretary of the Treasury, for account of\nthe Board of Trustees, Postal Savings System. $8,000,000. face\namount of 2-3/4% Name Owners' Loan Corporation Bonde, ceries 3,\n1939-49, and instructions have recently been includ to transmit\nto your bank an additional $12,272,000. face amount of such bends\nfor this account.\nYou are hereby authorized to sell at the market from\ntime to time on and after May 22, 1939, in such amounts as, in\nyour opinion, are justified by market conditions, up to nn aggre-\ngate of $20,272,000 Home Owners' Loan Corporation 2-3/11% bonds of\n1939-49 for account of the Postal Sevings System. The bonds held\nby your bank in safekeeping, subject to the order of the Secretary\nof the Treasury, for that account may be released for this purpose.\nThe proceeds from the sale of these securities should be deposited\nin the Treasurer's account for credit of the Postal Savings System,\nsymbol No. 42-001. and the established procedure with respect to\nthe sale of securities for this account should be followed.\nVery truly yours,\n(Sgd) H. MORGENTHAU Jr.\nSecretary of the Treasury\nMr. Allen Sproul,\nFirst Vice President,\nFederal Reserve Bank of New York,\nNow York City.\nVTH:HBW\nRegraded Unclassified\n288\n10:30\nBRITISH EMBASSY,\nWASHINGTON, D.C.\nMay 18th, 1939.\nDear Mr. Secretary:\nWould you be 80 kind as to give\nme two or three minutes at some convenient\nmoment to allow me to present to you my\nnew Financial Adviser - Mr. G.H.S. Pinsent?\nIf you agree to this, perhaps you\nwould tell your secretary to communicate\nwith mine as to day and hour by telephone.\nYours very sincerely,\nR.C.Linday R.C.\nThe Honourable\nHenry Morgenthau, Jr.,\nUnited States Treasury,\nWashington, D.C.\nBRITISH EMBASSY\nThe Honourable\nUnited States Treasury, ,\nHenry Morgenthau, Jr.,\n289\nSHI\nWashington, D.C.\nNG 830PM MAY 1939 TON, a\nN 0\n0\n2 CENTS 2\nDOVINGE\nTAMES\nINVIED\n290\nJR\nGRAY\nM\nLondon\nDated May 18, 1939\nRec'd 2:25 pem.\nSecretary of State,\nWashington.\n704, May 18, 6 p.m.\nFOR TREASURY FROM BUTTERWORTH.\nthat\nOnE. I understand/Lloyds, with the knowledge and\nconsent of the Bank of England, is planning to take steps\nto SET up a company or trust in the United States which\nwill hold offsetting American assets against certain\ndollar insurance liabilities. This step is of course being\ntaken to avoid complications arising out of any action\nby the British Government in the EVENT of war to take\nover the dollar assets of British nationals and\ncorporations.\nTwo. Documents indicating the form and constitution\nof the continental assets realization trust referred to in\nparagraph numbered three of my 685, May 15, 6 p.m., are\ngoing forward by pouch, The moving spirit in this project\nis Leonard Ingrams a British subject who is head of the\nLondon branch of the Chemical Bank and Trust Company.\nIngrams states that the Chemical Bank is in no way\nconnected\n291\n-2- #70, May 18, 6 p.m., from London.\nconnected with this Endeavor; that the Bank of England\nhas given it its informal blessing; that hE has\nreceived assurances from the REICHSBANK that it will\n\"cooperate in Every way\".\nThree. The firmer tone of yesterday has continued\ntoday in the London stock Exchange, governments as well\nas equities being up, war loan for Example closing at\n93-9/16. The turnover however remains small. Dealings\nin the foreign Exchange market were few and far between\ndue to Ascension day. Of the 152 bars sold at gold\nfixing 39 were married, Samuel Montagu still being the\nonly big buyer.\nKENNEDY\nCSB\n02V13038\n232\n16ml\nPARAPHRASE OF TELEGRAM RECEIVED\nFROM: American Embassy, Paris, France\nDATE: May 18, 1939, 6 p.m.\n#\nNO.: 964\nCONFIDENTIAL.\nToday I was told by Paul Reynaud that he had almost\nconcluded arrangements through Mannheimer to consolidate\nall the French Government's outstanding short term obliga-\ntions, which amounted to around 6,500,000,000 francs.\nAbout 600,000,000 france of this amount he expected to\nrepay. The balance of approximately 6,000,000,000\nfrancs would be converted into obligations to fall due\nat the end of six years. Mendelssohn of Amsterdam and\nother Dutch banks and certain Swiss banks would take up\nthe obligations.\nThe Polish Ambassador and the Polish Minister of\nWar had asked Reynaud yesterday for an immediate advance\nof 2,000,000,000 francs. They said they wanted 1,000,000,000\nin free money, and 1,000,000,000 would be spent in France.\nReynaud hardly expected that there would be difficulty\nabout the 1,000,000,000 to be spent in France, but he\nwas still hesitant about the other billion. He felt that\nthe Polish were fully justified in their demand, and that\nto grant it would be in the interest of France. However,\nhe\nRegraded Unclassified\n293\n- 2 -\nbe had to exercise extreme caution not to upset his\nfinancial bark which was sailing 80 successfully at the\nmoment.\nI was asked by Reynaud whether the United States\nGovernment could not extend credits to the Polish Govern-\nment for cotton purchases. I said that I had already\nbeen approached by the Polish Ambassador in this regard,\nand that I understood that in the immediate future the\nPolish Minister of Commerce expected to take it up in\nWashington.\nIt is requested that this telegram be repeated to\nthe Treasury Department.\nBULLITT.\nEA: LWW\n294\nREB\nGRAY\n=\nLondon\nDated May 19, 1939\nRec'd 2:30 P. m.\nSecretary of State,\nWashington.\n712, May 19, 5 P. m.\nFOR TREASURY FROM BUTTERWORTH.\nOnE. The reaction of the London press to the Anglo-\nGerman discussions regarding Anglo-Caech financial assets\nand liabilities referred to in paragraph numbered two of\nmy 694, May 15, 9 p. m. is critical. The reports also\nare on the whole factually Erroneous. Wohlthat is not in\nLondon; the German representatives are Muller, von Susskind\nand Rutter. They met with Waley of the British Treasury\nand LEVER of the British committee of long and medium term\ncreditors yesterday and it was agreed that the talks were\nExploratory, designed to ascertain whether negotiations\ncould bE successfully undertaken. Waley states that the\nnot be\nGerman representatives were informed that if the matter could/\nhandled through negotiations the British Government proposed\nto pass legislation during this session of Parliament to\ntake over the impounded Czach assets and USE them to\nliquidate\n295\nREB\n2-#712, From London, May 19, 5 p.m.\nliquidate British claims. The British Treasury states that\nthe impounded assets total 14-1/4 million pounds. Against\nthis they want 6,000,000 pounds to satisfy the Bank of\nEngland's previous credit to Czechoslovakia (of which\n2-1/2 million pounds had actually been drawn before March\n15) and 3-1/4 million for the refugee fund. Besides this\nthere are other claims now totaling OVEr 13 million and\nincreasing daily; these claims have however not been\ncarefully investigated and it is Expected that a large\nnumber will prove to be bogus; furthermore they are\ncomputed at their face, unable to obtain, value at the\nofficial rate of Exchange prevailing prior to March 15.\nThe figure of impounded assets does not include about\nfive hundred thousand pounds of Czach gold which is\nsecurity for specific offsetting obligations.\nMy impression is that the British Treasury would bE\nreluctant to foster legislation to SEIME and distribute\nthe impounded Czech assets, not only because it would work\nhardship on Czech firms and individuals but also for the\nprecedent it would create.\nThe press has got hold of the fact that gold of the\nCzech National Bank was deposited with the Bank for\nInternational\nRegraded Unclassified\n296\nREB\n3-#712, From London, May 19,5p.m.\nInternational Settlements, which in turn holds earmarked\ngold here in its own name. The British Treasury's view is\nthat it cannot go into the question of the ultimate owner-\nship of gold hEld in London in the name of the Bank for\nInternational Settlements; that legally ownership 1a vested\nin that Bank and any question of disposition of its assets\nis a B. I. S. matter.\nTwo. In connection with the \"Van Zeeland Spanish\nloan project\" referred to in paragraph numbered one of my\n682, May 14, 9 p. ma, the Chancellor of the Exchequer\nreplying to questions in the HOUSE of Commons stated:\n\"So far as I am aware it is not the CASE that the\nSpanish Government have expressed any desire to borrow\nfrom this country and no approach on the matter has been\nmade to the Forsign Transactions Advisory Committee. There\nis. no probability owing to present conditions of it being\nfound possible to issue foreign loans of any substantial\namount in this market and accordingly the question of giving\nconsent to the raising of any loan by or on behalf of the\nSpanish Government does not arise. In these circumstances\non being consulted as to British financial institutions\nassociating themselves with an inquiry into the financial and\nEconomic\nRegraded Unclassified\n297\nREB\n4-#712, From London, May 19,5p.m.\nEconomic position of Spain His Majesty's Government Expressed\nthe view that this would bE inappropriate for the reasons\nabove stated and no British financial institution has\nassociated itself with the proposal.\"\nThree. The London Stock Exchange has been inactive\nbut lower today; likewise the foreign Exchange market has\nbeen almost idle with the British authorities supplying but\nfew dollars. Eighty-seven bars were sold at gold fixing\nat one-half penny premium, two were married, Samuel\nMontagu being the big buyer.\nKENNEDY\nHPD\n03V13018\noppy\nMain\nname\n- OFFICIAL COMMUNICATIONS TO\nTHE SECRETARY OF STATE\nWASHINGTON, B.C.\n298\nDEPARTMENT OF STATE\nWASHINGTON\nMay 19, 1939.\nMy dear Mr. Secretary:\nThere are enclosed for your confidential\ninformation paraphrases of two telegrams from\nAmbassador Bullitt with regard to the financial\naffairs of France and Poland.\nSincerely yours,\nstenbert teis\nHerbert Feis,\nAdviser on International\nEconomic Affairs.\nEnclosures:\nParaphrase, No. 964 of May 18\nfrom Paris.\nParaphrase, No. 961 of May 17\nfrom Paris.\nThe Honorable\nHenry Morgenthau, Jr.,\nSecretary of the Treasury.\n299\nPARAPHRASE OF TELEGRAM RECEIVED\nFROM: American Embassy, Paris, France\nDATE: May 19, 1939, 5 p.m.\nNO.: 968\nFOR THE TREASURY.\nPress reports from London to the effect that the\nGerman authorities want to get control over part of the\nCzech gold held in London are noted with interest here.\nToday an official of the French Treasury mentioned that\napparently the reports refer to that part of the Czech\nNational Bank gold reserves which had been deposited by\nthe Bank with the BIS, and which are deposited in London\nin the name of the BIS. In this regard it was recalled\nthat BIS assets are immune from confiscation. The Bank\nof France, this official said, does not hold any Czech\ngold. He said that only about 30,000,000 francs are\nheld in French private banks for Crech accounts. He\nadded that the invitation which the French Treasury sent\nout to French banks on March 20 last, effective March 15,\nto block all holdings or credits that may be on deposit\nwith them for account of Czech individuals or concerns\nis still in effect, and that for the time being no change\nis contemplated.\nEND SECTIONS ONE AND TWO.\nBULLITT.\nRegraded Unclassified\n300\nSECTION THREE of No. 968.\nReference my No. 955 of May 17, we were informed\nconfidentially by a Treasury official this afternoon that\nnegotiations between a group of Amsterdam banks, headed\nby Mendelssohn and the Nederlandsche Handelmaatschappij,\nand the French Government for & loan of 155 million\nflorins had been satisfactorily concluded. It was said\nthat the loan takes the form of six year French Govern-\nment bonds at an interest rate of four percent and that\nthese bonds are payable at the option of the holder in\nSwiss francs, dollars and in florins, at a fixed rate.\nSubscriptions may take the form of short-term French\ntreasury bonds previously issued on the Amsterdam market,\nor of cash.\nSECTION FOUR.\nAccording to LE TEMPS the Minister told the Chamber\nFinance Committee on Wednesday that the Government was not\nconsidering a loan to Spain for the time being, and that\nif Germany does not recognize Ozechoslovak debts, certain\nretaliatory customs measures will be taken against her\nby France. According to LE TEMPS, the Minister estimated\nthat approximately ten billion francs might be expected\nfrom the conversion of portion of the new loan issued\nMay 15th. The Minister finally estimated receipts of gold\nRegraded Unclassified\n301\n-2-\nat about 20 billion franos since last November.\nTrading on the exchange and security markets is\nvery dull and restricted. The guilder is stronger and\nrentes and most French securities showed fractional\nlosses.\nEND OF MESSAGE\nBULLITT\nBECEINED\nDPO/ es YAM\nTRONTHARE downer\ncome le on\nEA:DJW\ntrited - of - which\nQUINTUPLICATE\n302\nNO. 182\nSTRICTLY CONFIDENTIAL\nRangoon, Burma, May 19, 1939.\nSTRICTLY CONFIDENTIAL\nSUBJECT:\nYunnan-Burma railway and highway\nRECEIVED\nTreasury Department\nTHE HONORABLE\nJUN 24 1939\nTHE SECRETARY OF STATE,\nDivision of\nMonetary Research\nWASHINGTON, D.C.\nSIR:\nI have the honor to report that in the course of\na conversation with the Chinese Minister of Communice-\ntions, Chang Kia-Ngsu, on May 14th, he told me that he\nwas confident the British would build the Burna link\nof the Yunnan-Burma railway as soon as they were con-\nvineed that it was China's intention to complete the\nline in Yuman.\nThe Minister was an overnight guest of the Gover-\nnor of Burna in Maymyo (the summer capital) on route\nto Rengoon after a trip of inspection over the Yunnan-\nBurma highway, and he discussed with him the question\nof linking China and Burma by rail.\nThe Chinese official pointed out here that road-\nbed work was now being done on both the Yunnan-Burme\nroute and that of the proposed railway north from Yum-\nnanfu to the Yangtse River at Suifu, above Chungking.\nHe said that about a third of the materials required\nfor the Yunnan-Burma railway were now available in\nChina, and he expressed confidence in Chine's abili-\nty to obtain the remaining materials necessary under\nforeign\nRegraded Unclassified\nSTRICTLY CONFIDENTIAL\nforeign credits. He estimated that the line in China,\nRegraded Unclassified\nfrom Yunnanfu to the Burnan border, would have a longth\nof about 500 miles and would cost approximately\n4,000,000. He asserted that the decision to build\nfrom Yunnanfu to the Yangtze River had done away with\nFrench opposition to the Burma rail connection, as the\nFrench saw an advantage to them in the shorter route\nfrom the Yangtze to the sea via their railway from Yun-\nnanfu to Haiphong, Indoshina.\nRegardless of political developments in China, he\nsaid, the Chinese Government meant to construct the two\nrailways as rapidly as possible.\nHighway Not As Good is Expected.\nThe Minister of Communions also told ne that\nthe Yunnan-Burna highway was not as good as he had ex-\nposted to find it, but he added that his journey over\nit had enabled him to realize the difficulties involved\nin its construction. He said that the improvement of\nthe road would be continued, that if necessary labor-\ners from other sections of China would be recruited\nfor the work, and that every effort would be made to\nkeep the highway open for traffic during the rainy\nseason.\nIt is stated that relatively few mon are now at\nwork on the western portion of the Yunnan highway,\nand the reasons for this are said to be the approach\nof the rice-planting season and the prevulence of male-\nria in that part of the Province at this time of\nyear. For the same reasons working forces on the Bur-\nm section of the highway from Lechio to the border,\nwhich\nSTRICTLY CONFIDENTIAL\n304\nwhich are componed almost entirely of Yunnanese, are\ngreatly reduced, and some of the work marked for -\npletion before the opening of the rainy season has not\nbeen done. The rains of the southwest aonsoca have now\ncomenoed.\none of those who accompanied the Minister of can-\nmunications over the Yunnan-Burma highway and who come\nto Rangoon with him was Nr. Ta'n Po-ying, director of\nthe road.\nBurwese Opposition to Communications.\nBurness opposition to road and rail communioation\nbetween Burna and China, as manifested by the Burnese\npress and by Burnese politicians in the Legislature,\nwas one of the matters discussed by the British Gover-\nnor of Burma and the Chinese official at Maymyo, and\nwhen the latter met newspapermen in Rangoon he sought\nto dispel professed fears of an influx of Chinese as a\nresult of the provision of road and rail facilities by\ngiving out the following statements\n\"I an very surprised to learn that there\nshould have been such a misunderstanding. Yunnan\nis a vast province, with & sparse population of\n12,000,000 people. of this number, about seventy-\nfive per cent are women, children and aged people.\nTherefore the number of able-bodied men is only\nabout 3,000,000. since the outbreak of the pro-\nsent hostilities, Yunnan has been conscripting\nsoldiers and labourers. The construction of the\nYunnan-Burma highway and railway, and of the run-\nnon-szechuan highway and railway, requires the\nservice of many hundreds of thousands of people.\nThe number of labourers required for the develop-\nment of other economic projects is colossal, in\nview of all these facts, Tunnan may have to 100\ncruit labourers from neighbouring provinces.\nAfter the completion of the Yunnan-Burna reilway\nand the Tunnen-Usschuan railway, there will be 8\ncorresponding development of commerce md indus-\ntry, \" a result of which Tunnan people will have\neven Less insentive to emigrate into neighbouring\ncountries\nRegraded Unclassified\nSTRICTLY CONDITION 305\ncountries. I wish to requaint the public here with\nthese facts so as to prove that there is absolute-\nly no ground to entertein fears as to the probable\ninflux of Chinese labour into Burma.\"\nEffect of Auti-British Feeling.\nwhile there is some fear among Burmons of economic\nand other consequences in the event of heavy immigration\nof Chinese into Burma, the likelihood of which is stress-\nod by the Burness press, anti-Britiah reeling in Burne\nis to a great extent responsible for the opposition\nshown to road and rail oomunication with China. In\nthe Yummen-Burne highway and the transit through Burns\nor war materials for China, few Burnans conversant with\nthose dovelopments see more than measures in the inter-\nest and for the benefit of the British \"imperialists\".\nwith reference to the probability of increased earnings\nby the Government-owned Burra Railways and larger re-\nceipts by the Burns Customs, Burmano point out that\ndisbursements by the Burna Railways for personal ser-\nvices are chiefly to Auropean officials and Indian -\nployees (employment figures show 78 percent of Indians\nas against 17 percent of Burnane), and some profess to\nbelieve that any revenue gain to Government would be\nmore likely to result in reductions in the income tax\nof \"exploiting\" suropeen companies and of Indian nor-\nchants than in increased allotments for \"nation-build-\ning\" services. The indicated attitude of mally Burmans\nin that there 1a no possibility of material benefit to\nthem that would compensate for placing Durma in a posi-\ntion where it might become a victim of Japenese repri-\nsale.\n\"The Burness\", said Dr. Be sim, former premier of\nFurna\nSTRICTLY CONFIDENTIAL\n306\n+\npurma, discussing the Yunnan-Dumma highway in the House\nRegraded Unclassified\nof Representatives, \"have ceased to be a nation and have\nbecome merely 6 road\", and he went on to \"warn\" the\nHouse that the road \"presented a serious obstacle in\nBurme's struggle for independence\". It was, he assert-\ned, \"sending Burna into the international whirlpool\"\nand making it \"a pawn on the international cheseboard\".\nJapanese Influence Reported.\nThat Japanese interests are promoting opposition\nto Burmo-Chinese communications smong Burmose newspaper-\nmon and politicians is reported, and it would be use\nreasonable, under the circumstances, to doubt that there\nis some activity of this kind. In its issue of March\n15, 1939, the RANGOON GAZETTE (British daily in English)\ndisoussed \"the persistence with which the Burmese press\nhas been meintaining the outory against the development\nof communications with China\", and on the question of\npossible Chinese immigration said that no doubt some\neducated Bursons \"do fear that the more eany-going Bur-\nman would not be able to stand competition\". on the\nother hand, it continued, \"it is easy to nee in the\nagitation the hand of the Japaneso, to whom the Bur-\nmose newspapers are lending themselves naively to 0.0-\nsist their designs in China\". The newspaper camented\non assurances that have been given that Government\nofficers on the frontier are watchful, and that large\nnumbers of Chinese will not be permitted to enter Burna,\nand on the statement of the Chinese Minister or com-\nminications conserning labor conditions in Yunnan, and\nin conclusion said: \"Despite the activities of Jupa-\nnese\nnese propegands in this country, the future of Burna la\nmore suitably linked with the success of the Chinese\nthan with the triumph of Japanese aggression.\"\n\"Insult\" to Surmese Newspapers.\nBurnese newspapers lost no time in replying to\nthe RANGOON Gasette. on May 17th the NEW LIGHT OF\nBUIGLA (largest daily in Surmese) onlled the English\ndoily's sccusation of Japanese influence an \"insult\"\nto Burnese newspapers, \"beemuse it is not supported\nby any foots\", and said:\n\"B15 exporters and importers, mostly white-\nfeced persons, are the only persons likely to be\nbenefited by the development of ocmunications\nwith China. That is why they are annoyed at Bur-\nmans who are naturally anxious lost the Chinese\nimmigration becomes a source of denger to the\nBurnese race and the Buddhist religion.\"\nIn its issue of the sano date the Burness daily\nPROGRESS printed the following in nn editorial state=\nment:\n\"Bumose newspapers have courageously set\ntheir face against the development of communi-\ncations with China because they know that link-\ning of Burno with China by road and roil cannot\nbenefit Bumans sconomically. The RANGOON\nGARETTE, being the spokesman of Imperialists and\nforeign cepitalists, might advocate the develop-\nment of comminications with Chine but they should\nnot aporibe motives to trimese newspapers. It\nnaturally shows the mean outlook of those people.\"\nPolitical Party Addresses Governor.\nThe Myochit political party, of which the recog-\nnized hood is U Saw, former rudical Opposition and\ncivil Disobedience lender who now has the portfolio\nof Agriculture and Forests in the new Burner Ministry,\nhas sent to the Governor of Burna a letter, dated May\n16, 1939, in which it \"greatly deplores the non-\nobservance\nRegraded Unclassified\nSTRIGTLY\n+\n208\nobservance of ordinary parliamentary decorum by your\nExcellency's Government\" in not taking the people of\nBurna into its confidence in the matter of foreign\npolicy and attitude to the sino-Japanese conflict.\n48 the time of the arrival, in November, 1938, of the\nsteamer STANHALL with the first cargo or war materials\nfor Chine this political party wrote to the Governor\n\"conderming\" the transport of arms and ammunition\nacross Burma to China, and saking for a declaration of\npolicy. In its recent letter reference is made to an\narticle on the Yunnen-Buma highway and the projected\nrailway which appeared on May 4th in SHWE PYI DAN\n(Golden Country), a small daily newspaper now issued\nfor free distribution by the Bureau of Information of\nthe local Government, in which it was stated that the\n\"immediate object\" of the construction of the trade\nroute was \"the easy transport of war materials to China\"\nin connection with the prosecution of the war with\nJapan, and the communiontion declares that the action\nof the doverment of Burna in this matter is not far\nabove \"the actions of Italy and Germany in breaches of\ninternational faith, 00 severely condemned by the\nBritish\". The letter says that the party has the\n\"strongest condemnation\" for the action of the Defense\nDepartment of the doverment of Burma, \"controlled by\nthe British war office\", in adopting & policy of\n\"active intervention, without being a belligerent, in\nthe domestic conflicts of China and Japm\".\nCopies of the letter, it is stated, have been sant\nto the British Prime Minister and the loader of the\nOpposition\nRegraded Unclassified\nSTRICTLY CONFIDENTIAL\n309\nOpposition in the House of Commons, and to the MANCHES-\nTER GUARDIAN and the DAILY HERALD.\nReported Cession of Chinese Territory.\non May 10th the NSW LIGHT OF burma printed what\npurported to be a telegram from its \"special Tokio\ncorrespondent\", dated May 34, saying that it was 10-\nported an agreement had been reached by the British\nAmbassedor to China and the Chinese Government for the\ncession to Burna of part of western Yuman in return\nfor the construction of the now motor road and a rail-\nway at the expense of the British Government. It was\nsaid that a construction company would be formed with\nsix European and five Chinese directors, and that a\nChinese nemed Chan Koon Choon would be chairmen. The\nreport was promptly denied by the Chinese Consulate\nhere and later by the Government of Burns, and when the\nChinese Minister of Communications net newspapermen in\nRangoon he entered an emphatic denial. \"However anxious\nwe may be to develop sino-Burness communications\", he\nsaid, \"it is certainly not our intention to barter away\nany part of our territory.\"\nThe report of the Burmo-Chinese Boundary commis-\nsion, which was signed on April 24, 1937, and which\nwas then submitted to the British and Chinese Govern-\nments for any further negotiations or modifications\nthat night be considered necessary or desirable, has\nnot yet been formally approved by either Government.\nThe principal work of the Commission, which was headed\nby a Swies army officer appointed by the League of\nNations, was the demorcution of the boundary between\nRegraded Unclassified\nSTRICTLY Ind\n310\nBurms and China in the to States area. It is thought\nRegraded Unclassified\nthat a final agreement in regard to the boundary may be\na preliminary step to any definite action by British\ninterests in connection with the proposed Yunnan-Burne\nrailway.\nIncreased Attention to Burma Link.\nIncreased attention is now being given to the\nquestion of the construction of the Burma link of the\nYunnan-Burman railway. 4 spokeaman for the Burms Rail-\nways has told me that while the project has not boon\nsanotioned, it is being considered by the railway manage-\nment, by the Governor of Burns, and by the British\nForeign office. Chinese engineers contemplate a con-\nnection at a point on the border beyond the Kunlong\nferry of the Salween River, and a line from Lashio to\nthat point would be 110 or more miles in length. The\nBulween River is within Burma, and the bridge over that\nstream and ten or twelve miles of track beyond it would\nbe part of the Durnin link. Estimates of the cost range\nfrom 150,000 to 200,000 rupees ($52,500 to $70,000) a\nmile.\nRespectfully yours,\nAUSTIN C. 119421\nAustin C. Brady\nAmerican Consul\nDistribution:\n1. Original and four copies to Department,\n8. Copy to American Embassy, London.\n3. Copy to American Consulate General, Calcutta.\n4. Copy to American Consulate, Yunnanfu. 03V13038\n800\nACB/op\n⑉ bl INM.\nthe copy ot\nVIMBAIDT\nto\n-\n311\nRE: Home Owners Loan Bonds.\nMay 19, 1939.\n9:45 A. M.\nPRESENT:\nMr. Hanes\nMr. Bell\nMr. Lochhead\nMr. Haas\nMr. Seltzer\nMr. Murphy\nMr. Hadley\nMrs. Klotz\nH.M.Jr:\nGo ahead, Dan, and give me the financial picture\nof the Home Owners Loan needs, and so forth. Let\nus do it that way. I do not know what the picture\nis, you see.\nBell:\nThey have at the present time about $150,000,000 --\n$159,000,000 I think it 18, and they will have about\n$6,000,000 to meet in this June 1st financing that\nwe did two weeks ago. $6,000,000 of those are\nstill outstanding.\nH.M.Jr:\nThey are not going to do what some paper said they\nwere going to do -- sell some $6,000,000?\nBell:\nNo. As a matter of fact, you made the reservation,\nnot the Home Owners Loan; 80 it will have to come\nthrough you. They are getting in repayments at\nthe rate of $16,000,000 to $18,000,000 B. month,\nand they estimate that they will get in about\n$150,000,000 to $160,000,000 in 1940, and that\nwill cut it to about $200,000,000 in 1941. That\n18 the year in which the $195,000,000 will be due\nunder this two year financing of two weeks ago.\nThere 18 a call of yesterday that involves about\n$905,000,000 at two and three fourths percent,\n1939-1949 bonds, and whatever does not come in in\nthis refunding will be paid out of the cash\nbalance -- of course, if it does not exceed\n$150,000,000. It would be & good thing if\n$100,000,000 of them did not come in. We could\nthen pay off.\nH.M.Jr:\nThey are so widely spread?\n- 2 -\n312\nBell:\nYes; I think they are being gobbled up pretty\nfast. The banks have been buying them.\nH.V.Jr:\nAnd they have also been selling them.\nBell:\nThey are pretty widely held.\nH.M.Jr:\nI would not be surprised if $100,000,000 did come\nin in the first three days.\nBell:\nThat would be good, because we could use $100,000,000\nof the cash to pay off that indebtedness.\nR.V.Jr:\nYes.\nBell:\nThere has been talk on this issue of anywhere from\n5-8 to 7-10. 5-8 would be my preference, for several\nreasons.\nH. .Jr:\nWhich would be your preference?\nBell:\nThe five-year callable, eight-year maturities, but\nit 18 disadvantageous, for the reason that in the\ncall period, 1944, in the month of May, $2,000,000,000\n18 maturing, one billion and a half of guaranteed\nand $400,000,000 of Federal Land Banks. They come\nat different dates, May 1st and May 15th. The\nreason I would say that 1944 to 1947 1s B. good date\nis because these repayments should get large in\nthat period, or at least begin with that period,\nbecause they will certainly get en equity of\nfifty per cent or sixty per. cent, and there might\nbe some refinancing and paying by some Home Loan\nowners.\nAnother thing; they have this .44 call date.on\n$786,000,000. At the same time, if there is any\nchance to commercialize this Home Owners Loan,\nthat would be about the period when they would\ncommercialize 1t, and there ought to be B. good\nchance to get into this 5 per cent rate. There\n18 & drive on in Congress to reduce it. The Home\nOwners Loan, however, would like to see 7-10,\nbecause they wouldn't care if the rate went up\nto 1-3/4ths, because if you take 1 per cent, it\namounts to nine million dollars over the period,\nand put it on the books, you see. That 18 safe;\nbut I think 6-9 might be a middle ground and be\nvery good.\nRegraded Unclassified\n- 3 -\n313\nH.M.Jr:\nThat would probably be a 6-9.\nBell:\nA 6-9 -- 11, according to Hadley's figures, and\nstill have a point fourteen thirty-seconds, which\nwould include the interest, of course; 5/8s,\n1-3/8 --\nH.M.Jr:\nJust a second.\nBell:\nThe Home Owners Loan would be pretty well satisfied\nwith the 6-9. That is near enough.\nH.M.Jr:\nWhat rate?\nBell:\nOne and a half, and the 6-9 would sell for point\nfourteen thirty-second premiums.\nH.M.Jr:\nHow much?\nBell:\n101 and fourteen thirty-seconds.\nH.M.Jr:\nPoint?\nBell:\nYes.\nH.M.Jr:\nI do not follow that.\nHaas:\nNearly one and a half.\nH.M.Jr: Oh!\nBell:\nYes; one and a half.\nH.M.Jr:\nA point and a half.\nBell:\nIncluded in that 18 seven thirty-seconds interest.\nHadley: Less net loss.\n314\nMay 19, 1939\n10:12 a.m.\nHMJr:\nHello.\nOperator:\nMr. Sproul at Scarsdale, New York.\nHMJr:\nRight.\n0:\nGo ahead.\nHMJr:\nHello.\nAllan\nSproul:\nHello, Mr. Secretary.\nHmJr:\nHow are you?\nS:\nI'm feeling better.\nHMJr:\nGood!\nS:\nI was just about to go to town.\nHMJr:\nWe're sitting around here talking about this Home\nOwners' Loan.\nS:\nYeah.\nHMJr:\nHave you got any ideas as to the coupon and the yearage?\nS:\nWell, I've been talking by telephone with them as to\nwhat they've been picking up in the market, and the\ngeneral idea they seem to be getting is seven to ten\nyears and one and three quarters.\nHMJr:\nYeah.\nS:\nBut I've lined up four or five people for this after-\nnoon to have a talk with and will have some better idea\nafter I've talked with them.\nHMJr:\nNow, would you like to know the way most of the boys\nhere feel?\nS:\nYes, I would.\nHMJr:\nWell they feel -- most of them feel six to nine, one and\na half.\nS:\nSix to nine, one and a half.\nHMJr:\nYeah. The reason that they don't want a five to eight\nis they think there is too much coming due in five years.\nRegraded Unclassified\n- 2 -\n315\nS:\nYes, there's that forty-four maturity\nHMJr:\nYeah.\nS:\nof call day\nHMJr:\nSo they'd kind of like to skip it, and they're figuring\nthat there'd be a point and fourteen-thirty-seconds\npremium on the six to nine, one and a half.\n8:\nYeah, that's figured to the call day.\nHMJr:\nYeah.\nS:\nYeah.\nHMJr:\nWell, supposing -- I get back from Cabinet around four\no'clock, which is five your time.\nS:\nYeah.\nHMJr:\nSupposing I call you then. Will you still be there?\nS:\nYes, and I'll have had a talk with four or five people\nby that time and we'll run over this idea and let you\nhave what I think then.\nHMJr:\nAll right.\nS:\nAll right.\nHMJr:\nThank you.\nS:\nGood bye.\nHMJr:\nGood bye.\n- 4 -\n316\nBell:\nLess net loss of interest, 18 seven thirty-seconds,\nso that the most you are doing 18 to have rights\nof about one and ten thirty-seconds.\nH.M.Jr:\nThat is rich.\nBell:\nThat 1s rich, but those rights are worth one point\ntwenty-one.\nH.M.Jr:\nI do not know what are the rights. I do not want\nto be influenced.\nLochhead:\nI do not think it is & question of the rights being\ninfluenced 80 much. When you look at the chart\nand see what happened to this market in the last\nweek or so, it 1s hard to fix the price over a\nperiod.\nH.M.Jr:\nWhat has happened to these particular bonds in\nthe last week; how much have they gone up?\nHadley:\nThey have gone up about one-fourth to three-eighths\nof a point.\nH.M.Jr:\nIf we had done this a week ago, you say we could\nhave done it fourteen points better?\nHadley:\nYou are saving more than one-eighth of a point\nin interest.\nBell:\nYes; I think so. Those 6-9 would probably have\nbeen one and five-eighths the last two weeks.\nH.M.Jr:\nThat is why we waited; is that it?\nBell:\nThat 1s why we waited.\nH.M.Jr:\nYou could leave off the laugh.\nBell:\nThat 16 all right.\nB.M.Jr:\n7-10; how does that fit into our stuff?\nHadley:\nIt 18 in a rather crowded period. 6-9 hits an\narea that we hardly used at all 80 far\nH.M.Jr:\nWould it not be feasible, gentlemen, to give the\n5-10?\nHaas:\nA very risky question, because you have that long\nperiod.\n- 5 -\n317\nH.M.Jr:\nWell, how risky?\nBell:\nThere 18 quite & bit of talk in the market about\nthis low coupon bond bringing prices at maturity,\nwhich we do not believe, and which & lot of other\npeople do not believe, but there 18 that talk.\nH.M.Jr:\nWell, if they did, what would that be?\nBell:\nIt would be around par, I mean on the basis of par.\nWe have had this talk, and what they are paying\nfor their rights does not indicate that they\nbelieve it. They are just talking it. Aubrey\nLanston got out a letter this morning, in which\nhe calls attention to that, and he said it is not\naccording to the situation at all.\nH.M.Jr:\nLet us go around the room on this.\nJohn, have you idea?\nHanes:\nI was impressed by this situation. I believe Dan\nis right. There will be something in this period,\nthe five-year period. It seems to me to be not\nvery disadvantageous to us. You say one and one\nhalf billion, plus four hundred million?\nBell:\nYes, They are callable.\nHanes:\nThey are not payable?\nBell:\nThey are not payable. They are all callable in\nthat period -- $760,000,000 on May 1st, and\n$840,000,000 on May 15, of guaranteed and\n$720,000,000 not guaranteed on the 15th.\nH.M.Jr:\nAt what rate?\nHanes:\nOne and three eighths.\nBell:\nEliminating the interest it would give you the\n5-10. It gives a larger premium than the 6-8 at\none and a half.\nH.M.Jr:\nHow much premium?\nBell:\nOne point seventeen thirty-seconds. That 18 a\nhigher premium than the 6-9 at one and a half --\nthree thirty-seconds based on yesterday's market.\n- 6 -\n318\nH.M.Jr:\nThe 6-9 at one and a half.\nBell:\nYes.\nH.M.Jr:\nHow much premium?\nBell:\nOne point fourteen thirty-seconds. Does that\naccord with your prices?\nH.M.Jr:\nWhat about the 7-10?\nBell:\nThe 7-10 would have to sell at one and five-eighths,\nand that would be point seven thirty-seconds.\nH.M.Jr:\nWhat would it be?\nBell:\nIt 18 seven thirty-seconds less than the other.\nHanes:\nYou talked about the 7-10 at one and three-quarters.\nBell:\nThis 18 the market.\nHanes:\nYes.\nBell:\nThat would be a hundred and two and a quarter.\nHanes:\nThat is what they like.\nHadley:\nThat is what they like -- one and three quarters.\nH.M.Jr:\nLarry?\nSeltzer:\nI personally prefer a 6-9 because, as Dan has\npointed out, you have so many issues callable at\nthe end of the five years. You would be asking\nthe market to say that this 1s not 8 bona fide\nfive year issue. Instead of being a 5-8, it is\nreally a 6 or a 7-8. If you make it 6-9, you\nreduce that risk; you have something of it left,\nbut, at any rate, you have not a lot of issues\ncallable at the end of six years, as you have\nat the end of the five years.\nH.M.Jr:\nThe Home Owners Loan have one coming due in five\nyears?\nBell:\nIt 18 callable. That is three per cent,\n$786,000,000 bond issue.\nMurphy:\nThey also have one due --\n- 7 -\n319\nBell:\nYes; that is two and a quarter per cent, $800,000,000\ndue July 1, but that 18 callable in 142, and we are\nassuming that will be out of the way by '44. But\nhere you have a coupon that you have to worry about\nuntil some of the cash comes in, and I look upon\nany bond in this refund as & serial bond from call\ndate on, because you are getting Just enough in to\npay off that cash, unless your market is such that\nyou can call them and put them through, one, two\nand three years notes. You can call them and\nsave both ways.\nH.M.Jr:\nHenry?\nMurphy:\nI would like first to express some dissent from\nwhat Dan says. It seems to me that if the HOLC\nstill wants to develop its cash to put into coupon\nbonds, and if interest rates go up and up too\ngreatly, these bonds will hold below par.\nH.M.Jr:\nAt that time, under the low --\nMurphy:\nThe HOLC will retire these bonds, whether they like\nit or not.\nBell:\nThat will hold them right at par.\nMurphy:\nRight around par, but it will mean that the bond\nrequirements will be concentrated to their\nfinancial disadvantage in the lower coupon bonds,\nrather than in the higher coupon bonds.\nBell:\nI would not say at & disadvantage.\nMurphy:\nThey would like to retire the higher coupon debt\nfirst.\nBell:\nI think that would be so if the people would buy\nthem, if they had the purchasing power there, and\nturn them in on their mortgages.\nmurphy:\nI might also say that the revenue bonds shall call\nfor & premium of fifteen thirty-seconds to anyone\nwho, for some reason, should choose to turn them\nin, because they socrue the fifteen thirty-seconds\ninterest. I think the existence of this fifteen\nthirty-seconds justifies some liberality of pricing.\nIt makes the premiums that have been discussed\nlook a little more reasonable than they have\nhitherto.\n- 8 -\n320\nBell:\nWe recognize that, but, on the other hand, they\nare going to have difficulty in re-investing their\nmoney on August 1, which everybody 1e facing at\nthe present time.\ncurphy:\nI did not mean to say that you did not recognize\nit, but that is one of the highlights in my mind.\nAs to the 6-9 that Larry has Just mentioned, in\npricing, I might make the same remark, because I\nseem to visualize it as more of a possibility that\nthis talk about maturity might catch. Of course,\nI have no way of knowing whether it will or not;\nbut, of course, logically, people that talk about\npricing maturity are right. Our lowest coupon\ndirect Treasury obligation is B, two and 8 half, and\nthe lowest coupon bond issue of any kind outstanding\nis two and a quarter. Now, we are going over to\nB. new departure on this one here of one and three-\neighths. We have nothing like that in the Home\nOwners Loan coupons with the option call in it.\nThe force of habit 1s strong, but I believe the\nbond will be priced to optional call, anyway, and\nif it should be priced -- I will not Bay to final\nmaturity, but at some intermediate maturity, the\ndifference in your pricing would be just tremendous.\nH.ll.Jr;\nSelling at three-eights, that 19 the all time low,\nand, therefore, five or six years from now the\nchances are --\nbell:\nThey will not exercise the call, but they will let\nthem run to maturity because that 1s a low coupon.\nI think the market will look upon this bond as\na serial bond eventually. Therefore, the inter-\nmediate date 1s the one that might govern.\nSeltzer:\nOf course, this bond can take advantage of the\nmarket as being the lowest price available. That\nwill make it sell on a better yield basis.\nS.2.Jr:\nWhy?\nBell:\nBecause they do not like to pay a high premium,\neven though the yield is higher. It 18 a silly\nthing, but it is true.\nJr:\nGeorge?\nHass:\nI think 6-9, too.\nH.L.Jr:\nDo you want to expand on that?\n321\n- 9 -\nHaas:\nNo; but I will endorse that. I think it is very\nimportant that the premium given on this be taken\ninto account, with these risks in pricing, which\nare greater in this instance than they have been\nin most of your financing. So, to be conservative,\nI would lean towards liberal prices.\nH.M.Jr: Archie?\nLochhead: I like the 6-9. I think it is the most practical\nbond we have here. After all, on the 5-8, we\nwould have to give a better price. It 18 in this\nnarrow range, and I would not be afraid if they\nstarted prices at maturity. I prefer the 6-9,\nalthough the 5-8 gives a considerable saving in\ninterest, because it constitutes about a million\ndollars a year.\nH.M.Jr: A difference of one-eighth makes how much?\nHadley: A million dollars a year on nine hundred million,\nand on that basis I would prefer the 5-8, which\nwould fit into the market structure. I think the\n6-9 would work in smoother, and it gets into an\narea where we do not have any issues.\nH.M.Jr: The 6-97\nHadley:\nYes.\nH.M.Jr:\nDan?\nBell:\nWell, as I say, I prefer it for the reason stated,\nthat 1s, the 5-8. I have no real quarrel with\nthe 6-9. I think that ordinarily fits in with\nthe Home Owners Loan desires. They are looking\nat it from a ten year standpoint; but I have no\nquarrel with the 6-9.\nH.M.Jr:\nJohn, did you see this week's Time?\nHanes:\nNo.\nH.M.Jr:\nIt 18 a nice picture, but it does not help any.\nThere are so many people around town that would\nthrow a monkey wrench into these things.\nRegraded Unclassified\n- 10 -\n322\nLochhead:\nI will have White here.\nH.M.Jr:\nYes, will you?\nBell:\nAubrey Lanston says --\nH.M.Jr:\nAnd I would like to have you listen to this, John.\nBell:\nAubrey Lanston says 6g - 8t. One and a half per\ncent 18 more logical.\nH.M.Jr:\nThe only thing that troubles me that if we get\ninto the five year, it seems to me that we are\nrunning into a lot of Home Owners Loan stuff.\nAren't we?\nHadley:\nA month before that you had the one and 8 half\nbillion direct issue coming due.\nBell:\nNo; callable one and B. half billion. Three and\na quarter callable.\nH.M.Jr:\nIt looks to me a.B though that might be a good year\nto skip. Another thing, on the five year stuff,\nthe way I feel right now, we have not gotten out\na five year note in six months. In September we\nmight offer another five year note, and you will\nput another four hundred million dollars on that\ndate. We have not offered a five year note for\nsix months. Can I get one per cent for the Government\nHadley:\nAbout three-fourths.\nH.K.Jr:\nSo there you are. You know what I have done. If\nyou will look over it, I have only offered a five\nyear note every six months. That is what I have\nbeen trying to do, and so if a five year note\nwould be again due, it would put it into June,\n1944.\nHadley:\nThat would be the same as this.\nH.M.Jr:\nThat would be the same as this. I want to get\nthat low rate for the Government. While we are\nthinking about it, and this is just a thought --\ndo not take me too seriously --, but I am going\nto again raise the point of letting $50,000,000\na week of our bills run on and possibly going\ninto the market and getting $500,000,000 in money\nand putting a cap on this Government bond market,\nif we can borrow for the Federal Government\n- 11 -\n523\n$500,000,000 at three-fourths.\nHadley: Yes.\nH.M.Jr:\nIt would be cheap, would it not?\nHanes:\nFor what time?\nH.M.Jr:\nFive years.\nHanes:\nFive years.\nH.M.Jr:\nYou see, the thing keeps getting out of hand. We\nhave one billion and three of bills out; we have\n$500,000,000 worth five year money at three\nfourths. Now, if we issued that we would sort of\nput a cap on this thing, because they own half\nof those bills, don't they?\nBell:\nYes.\nH.M.Jr:\nThey own half of the bills.\nHadley:\nYou force the ratings out.\nH...Jr:\nBut I am just thinking of that. I can not go\nalong with you fellows on calling six months in\nadvance. Three months, yes, but I think when we\nbegin to call in six months -- just a second.\n(Insert telephone call at 10:12 A.M.)\nRegraded Unclassified\n12 I #\n324\nH.M.Jr:\nNow, we can come back at 4:15, you see, on Home\nOwners Loan. Why not ask whoever is handling this\nto come at 4:15:\nBell:\nAll right. I think that is the courteous thing\nto do.\nH.M.Jr:\nAsk Fahey or whoever he wants to have come at 4:15.\nBell:\nI think that is the courteous thing to do. It\nis quite a large issue, and they are interested.\nH.M.Jr:\nTell them what we have done this morning and invite\nthem over here at 4:15 today.\nBell:\nAll right.\nH.M.Jr:\nIs that all right, John?\nHanes:\nAll right.\nH.M.Jr:\nI would take it that certainly the majority seems\nto say 6-9 at one and a half; doesn't it?\nBell:\nThat is right.\nHadley:\nThat is right; 7-10 one and three fourths that they\nmentioned in New York is about a two and a fourth\npoint premium.\nH.M.Jr:\nIt 1s really funny. Here is New York asking for\nover a two point premium on this, and the last time\nthey wanted me to give them four thirty-seconds.\nBell:\nThe real money in trading is in these. Of course,\nthey are figuring that with the two and a quarter\nyou figure to call. They are figuring these bonds\nto maturity date at three-fourths.\nH.M.Jr:\nWell, we will come back at 4:15. You fellows know\nwhat we are thinking about.\n(Meeting concluded at 10:17 A. M.)\n125\nRE ECONOMIC MISSION TO VENEZUELA\nMay 19, 1939.\n11:05 A. M.\nPresent:\nMr. Hanes\nMr. White\nMr. Lochhead\nMr. Duggan\nMr. Briggs\nMr. Collado\nH.M.Jr:\nWhat I wanted to do was - I don't know whose\nfault it 18, it doesn't make any difference,\nbut Mr. Welles has asked that State and Treasury\nget together between now and tomorrow morning\non this blankety-blank Venezuelan thing. And\nthis thing has been back and forth and back and\nforth, and I just thought you people should go\nto some room and stay there until you got the\nthing settled, and then forget who wrote the\nfirst memorandum and what happened to it and all\nthe rest of it; and then when you've got some\nidea what you want to do, Mr. Hanes and I would\nlike to ait down and hear it.\nBut there's been BO much - the question of the\nmoney and all the rest of it. I don't know\nwhether we have the money or whether we haven't\ngot the money. Do you want to say?\nLochhead:\nWell, that's one of the problems that has come\nup. I think we practically don't have to go\ninto very much of a huddle to decide on it. We\nall figured it would be very fine for Mr. Williams\nto go down. I understood that the Federal Reserve\ncouldn't 888 it at all. Mr. Collado, you checked\nwith the Federal, didn't you?\nCollado:\nMr. Sproul called and said they didn't want to\nguarantee anything for this summer, in view of\nthe European situation.\nH.M.Jr:\nThere's no use my calling up John Williams and\nasking it as a personal favor. I don't want to\ndo it on that basis.\nLochhead:\nIf Mr. Welles could\nH.M.Jr:\nI mean rather than have Mr. Williams - I mean I\ndon't think it's important enough for me to say\n326\n- 2 -\nto Mr. Williams, \"This 1s a matter I want you to\ndo.\" Do you?\nDuggan:\nWell, Mr. Secretary, we were sort of hoping that\nhe could go down there for a month as head of\nthe mission, start things off, possibly leave behind\nDupree or somebody else to do the detail work.\nLochhead:\nI should think that Mr. Welles could convince\nGovernor Harrison that it was important. That would\nrelieve the whole situation. I think if we left it\nthat way, it would be all right with us.\nH.M.Jr:\nWell, Mr. Welles - that's just - Mr. Welles thinks\nthat I should call them. You've already sounded\nthem out?\nCollado:\nThis was about a month ago and at that time they\nsaid they couldn't make a commitment for this June,\nat that time, and that possibly later they could\nbut they didn't want to hold us up.\nH.M.Jr:\n(On phone) George Harrison, Federal Reserve of\nNew York, please.\nWe'll do it right now.\nLochhead:\nNow, the other question about men coming up. I\nnotice one question, for instance - they said they\nhad to make a....\nH.M.Jr:\nI can't hear you.\nLochhead:\nAbout Edwards that's been cleared.\nH.M.Jr:\nGo slower.\nLochhead:\nThat's been cleared. They now say in this memoran-\ndum that they will make a special arrangement with\nthe Venezuelan Government 80 that he'd be paid,\nBo that would clear up that point. It would also\nclear up the point about Mr. Shoup. You've asked\nbefore about Professor Shoup. We didn't want to\napproach him, didn't know what basis we could\napproach him on. But if he's going to be paid by\nVenezuela, I think it's perfectly proper to\napproach him and find out if he's agreeable.\n327\nMay 19, 1939\n11:09 a.m.\nHMJr:\nHello.\nOperator: Mr. Harrison.\nHMJr:\nHello.\nGeorge\nHarrison:\nHello.\nHMJr:\nGeorge\nH:\nYes, Henry.\nHMJr:\nHow are you?\nH:\nI'm pretty well, thank you.\nHMJr:\nGeorge, I have the people here from the State Depart-\nment and Sumner Welles was here yesterday asking me to\nget in touch with you about having John Williams go down\nto Venezuela.\nH:\nYeah.\nHMJr:\nOn the invitation of Venezuela's government -- at the\nhead of mission -- financial mission. Has anybody\nspoken to you about this?\nH:\nYes, they've spoken to us before about it and we've\ngone into it.\nHMJr:\nYes.\nH:\nAnd 'we thought it was awfully difficult for us to let\nWilliams go at that time.\nHMJr:\nYeah.\nH:\nAnd I thought it was all settled that he wasn't going.\nThen they asked about -- as I remember, they asked\nabout another man we've got here named Lamb.\nHMJr:\nLamb.\nH:\nSo they -- it may have been for a different purpose\nthey wanted him to go.\nHMJr:\nI don't know. Well\nRegraded Unclassified\n328\n- 2 -\nH:\nBut they -- they can have him for any purpose.\nHMJr:\nThey can have Lamb?\nH:\nYes.\nHMJr:\nWell, he can't get the mission?\nH:\nNo, no, no. No, he's not -- he -- he's not -- he's not\nthat high-geared.\nHMJr:\nWell, George, there may be -- I'm going -- they're\nsitting here -- now, I'm going to tell you, there may\nbe times in the next six months when I really want\nWilliams. See?\nH:\nYes.\nHMJr:\nSome international crisis where the U.S. Treasury may\nneed him.\nH:\nWell, frankly, Henry, I -- I felt this way, that it was\nimportant, this matter that the State Department wanted\nhim for, but John 18 so important on our problems in the\nevent that anything should happen\nHMJr:\nRight.\nH:\nin June, that I'd hate to see him get that far\naway.\nHMJr:\nYeah.\nH:\nAnd I had hoped that the State Department would balance\nthose two conveniences.\nHMJr:\nYeah.\nH:\nThat was really the way I wanted to do -- the way I felt\nabout it and the reason I think\nI haven't got into it myself at all. I've let Sproul\nand Williams handle it, but I think that the last thing - -\nthe way they left it was that he was out of it.\nHMJr:\nYeah.\nH:\nThat 18, for the time being, ;unless everything cleared\nup at the last minute and it looked to be more possible.\n329\n- 3 -\nHMJr:\nWell, I'll tell them how you feel. I -- I'm not going\nto make this one of these, shall I say, personal requests.\nH:\nYes.\nHMJr:\nBecause, as I say, something might happen in the next six\nmonths where we'd have to come to you and say we want to\nborrow him.\nH:\nSure. They don't know how long it would take, do they?\nHMJr:\nJust a minute, I'll ask them. Just a minute.\n(Brief pause)\nThey say from two weeks to a month.\nH:\nYeah. Well, I'll -- I'll talk to Williams. He's here\ntoday, and I'll talk to him again and see just how he\nleft it. I am, frankly, a little bit in the dark.\nHMJr:\nWell, would you, and -- the State Department are very\nkeen for him and of course I'd be delighted.\nH:\nYes.\nHMJr:\nNow, I'm calling Allan Sproul at five fifteen New York\ntime on the\nH:\nYeah.\nHMJr:\nHome Owners' Loan. I don't know whether you'll\nbe there or not.\nH:\nYeah. Well, I'll talk to him about it.\nHMJr:\nCould you leave -- if you're -- if you're there, I'll\ntalk to you and if not could you leave a memo for\nAllan to talk to me about it?\nH:\nYes, it's understood he's -- he's going to talk to you\nabout it.\nHMJr:\nYeah, and\nH:\nI'm -- I've got to go to Boston. I'm leaving on B. one\no'clook train for Boston.\nHMJr:\nOh!\n230\n- 4\nBut Sproul knows how I feel, and we've talked it over --\nhe and Maddy and I -- 60 that he'll give you our concerted\nviews anyway, Henry.\nHMJr:\nAnd you'll leave word on Professor Williams?\nH:\nWell, I'll -- I'll tell -- yes, I'll tell Sproul to\ntalk to you about that too.\nHNJr:\nVill you?\n#:\nYeah. Now, don't misunderstand, we would like -- any-\nthing at all that we can do to cooperate or help the\nState Department, because they've been fine with us.\nHMJr:\nI'll tell them that.\n3:\nAnd I won't say anything definitely now, but I think\nthat the -- our feeling here was, unless they've changed\ntheir minds -- that it's much safer to keep Williams\nhere for the time being.\nMMr:\nWell, I'll -- they say two weeks to a month to start it.\nH:\nYeah, but you see the trouble is they want us to commit\nourselves now, and something may happen next week.\nHMJr:\nYeah. Well, you -- you'll get word back to ne somehow\nor other today, will you?\nH:\nYes, I'll -- shall.\nHMJr:\nThank you.\nH:\nAll right.\n331\n- 3 -\nOur own man, Spiegel, we are perfectly willing to\nsend down. That cost would be borne by the\nTreasury. I think Mr. White agrees. We'd take\ncare of Spiegel.\nOutside of that I think....\nH.M.Jr:\nWhat are the loose ends?\nDuggan:\nI think that covers it, Mr. Secretary. The diffi-\nculty in the past has been that we wanted to try\nand do this under the authorization that we have\nto detail civilian employees of the Government, and\nwe were trying to find people in the Tariff Com-\nmission or Treasury or elsewhere that we could use.\nH.M.Jr:\n(On phone) Hello. (Conversation with Governor\nHarrison follows:)\n002\n- 4 -\nH.M.Jr:\nHe says that he wants to do everything he can to\ncooperate with the State Department - Professor\nWilliams 18 there today - but that he feels that\nhe 18 such an important man and with the situation\n80 critical in Europe, to have him - to make a\ncommitment now and to have him out of the country\nwhen they might need him tomorrow desperately -\nthey think he's too important 8. man to send out\nof the country. But he'll call him, he'll talk\nto him and let me know today. So we'll hear from\nWilliams.\nSo you fellows better put your heads together:\nif not Williams, who?\nHanes:\nAny other suggestion?\nH.M.Jr:\nGod, there must be somebody else besides Williams.\nLochhead:\nAnd the other suggestion - would it be all right\nwith you, Mr.. Morgenthau, if they got in touch\nwith Shoup to find out if he'd be interested. And\nabout Mr. Edwards\nWhite:\nI thought you were going to get either Mr. Ryder\nor Mr. Fox.\nDuggan:\nWe tried to. Mr. Fox - both of them turned the\nthing down. They weren't told they had to go by\nthe President.\nWhite:\nBoth of them were asked.\nDuggan:\nYes.\nWhite:\nRecently?\nDuggan:\nLast two weeks.\nCollado:\nJust now turned it down.\nH.M.Jr:\nWho are those fellows?\nWhite:\nTariff Commission.\nH.M.Jr:\nOh.\nRegraded Unclassified\n133\n- 5 -\nWhite:\nAnd both Mr. Ryder and Mr. Fox were asked to go.\nDuggan:\n(Node yes). No heavy pressure was put on.\nWhite:\nBut they were definitely and officially asked.\nDuggan:\nYes.\nH.M.Jr:\nWell, you see, I think, if I may say BO - I think\nthe State Department is being a. little bit unfair\nto the Treasury in that Mr. Welles seems to be\nunder the impression that we are the people that\nare dragging our feet on this thing, and I don't\nthink that we are - that that is quite 80.\nDuggan:\nNo, I don't think it is.\nH.M.Jr:\nWell, I wish you'd BAY something to him, will you,\nplease, because he seems to think that we are the\ndrag in this matter, that we're holding back on\nit. So if you wouldn't mind - I think it would\nbe better coming from you, I mean. It's perfectly\ntrue that I have not organized a special bureau\nto handle these things, the way he asked me to,\nbecause I'm not sold on it yet - that there 10\nenough work for & special bureau for this thing.\nAnd if you have this one mission we fuse around\nin both departments for a month trying to get\npeople. And I'm not sold that there is enough.\nAnd incidentally, while we're on this, the thing\nwhich I liked very, very much more was the sugges-\ntion which came from White's people, the idea of\ninviting members of the Finance Departments of the\nSouth American Republics to come up here and visit\nwith us for three to six months in the Treasury.\nNow, I'm very much sold on that. I mean I think\nthat's a swell idea and we could work out a sort\nof course and put them through the Treasury.\nDuggan:\nI think we could build on that.\nCollado:\n(Nods approval).\nH.M.Jr:\nNow, that thing.\nRegraded Unclassified\n34\n- 6 -\nWhite:\nTake them all. There are twenty-six countries.\nYou could pick the best man from each Treasury.\nIt would be quite & plum for anybody down there,\nand that would insure that at least we'd get\ncompetent material to work on.\nDuggan:\nI think that's an excellent idea.\nWhite:\nAnd I think it would accomplish infinitely more,\nboth from the point of view of the State Depart-\nment - in developing the kind of relations you\nwant, inculcating in those men the kind of mone-\ntary practices and fiscal practices that we all\nwould like to see them develop. And that would\nestablish contacts, because while they were here\nthey could go the rounds and you could do that\neach year with a new orop. Inside of five years\nit would be your men that would be running - I\nmean not running, but would be in the operating\nend of the Treasuries and Banks.\nH.M.Jr:\nYou see, I saw the effects of the Near East College\nin Constantinople when I was out there with my\nfather. At one time every member of the Bulgarian\nCabinet was a graduate of the Roberts College.\nAnd of course the influence - you just can't\nmeasure a thing like that. I mean every single\nmember of the Bulgarian Cabinet was 8 graduate of\nthe Roberts College.\nWhite:\nTo a much smaller degree, that's true of the Chinese.\nA great many of the Chinese, you Bee....\nH.M.Jr:\nI would say we could work out here - we could take\none man for six months, or two men a year.\nWhite:\nThis is from each country.\nH.M.Jr:\nYes, and run them through.\nDuggan:\nThat would be fine. We have secured legislation\nopening up the organized government schools: Army,\nNavy, Agriculture, Commerce, Interior, etc. At\nthat time you didn't have anything of an organized\ncharacter. But we could get together with you\nand set up something and then let these other\ncountries know. I think we could build on it.\nRegraded Unclassified\n335\n- 7 -\nWhite:\nWe could insist on the proper kind of material,\n60 that six months would go a long way, and the\nproper kind of preliminary training and experience.\nH.M.Jr:\nNow, I'll pass this along to you. Mr. Perkins\nwas at my house at tea time yesterday. Maybe you've\nseen him since he's back.\nDuggan:\nNo, I haven't, Mr. Secretary.\nH.M.Jr:\nAnd he came out with B. suggestion which was made to\nhim by the General in charge of the Panama Canal -\ntwo suggestions. One - what's the country just\nnorth of Panama?\nDuggan:\nCosta Rioa.\nH.M.Jr:\nWhich is - no, that isn't it. Which 1e the country\nthat has & military school that they are 80 proud\noff\nDuggan:\nGuatemala.\nH.M.Jr:\nGuatemala. Well, the American General says if we\ncould invite - somehow or other bring them up on\none of our boats - bring up on one of our transports\nthe cadets of Guatemala...\nHave you heard this?\nDuggan:\nWe've heard it. We would then have to bring the\ncadets of every other country, Mr. Secretary.\nH.M.Jr:\nWell, it wouldn't be 80 bad. And have them go to\nWest Point and the World's Fair.\nDuggan:\nMaybe the Coast Guard would send down for them.\nH.M.Jr:\nWe would if the Treasury could. Yes, that's the\nkind of thing. Bring these boys up there, let them\nspend a day or two in the barracks at West Point.\nLet them have a week down here. I'd be tickled to\ndeath. I mean it would inculcate into them some\nof the stuff that we have up here. Now, I'm all\nfor bringing these boys up here. I'd go the limit\nif the President would say, \"Bend & Coast Guard\nCutter down and bring them up and let them....'\nRegraded Unclassified\n136\n- 8 -\nLochhead:\nWe're sending & goodwill Coast Guard boat down to\nSouth America this year. Even though they didn't\ngive us any funds, we're squeezing it out. But I\ndon't think there's much more funds that you can\nsqueeze out for Coast Guard under that appropriation.\nH.M.Jr:\nWell, they could - there's the Panama Line, there's\nthe Army transport.\nDuggan:\nIt's a question, Mr. Secretary, of doing it for one\ncountry and not for another.\nH.M.Jr:\nSupposing all these cadets - arrange to let them go\nto West Point and Annapolis and the World's Fair\nand send them back.\nDuggan:\nGood thing. Quite expensive, though.\nH.M.Jr:\nFive hundred thousand dollars to Nicaragua is pretty\nexpensive, too.\nWhite:\nAccomplishes a lot less.\nH.M.Jr:\nIf you sit around here, we'll hatch a lot of ideas\nand I tell you - because I said Saturday....\nDo you men want to come back tomorrow and report\ntomorrow? We might be able to do this tomorrow.\nDuggan:\nSure.\nH.M.Jr:\nSo you fellows get together, do a little digging.\nIf not Williams, somebody else. When can you men\ncome back and report, because I told Mr. Welles\ntomorrow.\nDuggan:\nAny time that's convenient to you.\nH.M.Jr:\nLet's say 11:00 o'clock tomorrow.\nDuggan:\nAll right, sir.\nWhite:\nWould you like to report on the other matter too?\nH.M.Jr:\nThat's to report on how you'd accomplish this thing.\nDuggan:\nAll right. And I'd like to send over this afternoon,\nRegraded Unclassified\n337\n- 9 -\nif I might, the draft of these Nicaraguan documents,\nwhich are in good shape. Perhaps you'd have &\nchance to look them over.\nLochhead: The Export-Import Bank statement - this open-end....\nDuggan: The whole thing is all ready now, in draft form.\nH.M.Jr:\nIf you men could come back at 11:00 tomorrow and\ngive me a nice - all finished - nice red seals on\nit and everything.\n388\nTREASURY department\nINTER OFFICE COMMUNICATION\nDATE May 19, 1939\nTo Secretary Morgenthen\n3 P.N. Close\nFROM V. E. Hadley\nHOLC Refunding\n\"Rights\"\nComponsate\nof Premiu\n(1)\n(2)\nPresent\nInt. to\nRights\nPrice\nPremium\nInc. 1\nValue\n2-3/4% of August 1, 1939-49\n101.22\n1 pt.22/32\n17/32\n1 pt.5/32\nPossible New Issues\nComponsats\nof Premium\n(1)\n(2)\nOffering\nMarket\nInterest\nRights\nTerm\nCoupon\nIield\nPrice\nPrice\nPremium\nLOSS\nValue\n6-7\n1-1/4\n1.06\n100\n100.30\n30/32\n8/32\n22/32\n1-3/8\n1.06\n100-1/2\n101.17\n1 pt.1/32\n7/32\n26/32\nBee\n1-3/8\n1,08\n100\n101.14\n1 pt.14/32\n7/32\n1 pt.7/32\n1-1/2\n1,08\n101\n102.1\n1 pt.1/32\n7/32\n26/32\n6m8\n1-1/2\n1.26\n100\n101.13\n1 pt.13/32\n7/32\n1 pt.6/32\n609\n1-1/2\n1,27\n100\n101.10\n1 pt.10/32\n7/32\n1 Dt.3/32\n1-5/8\n1.27\n101\n102.1\n1 pt.1/32\n6/32\n27/32\n7-9\n1-5/8\n1,44\n100\n101.7\n1 pt.7/32\n6/32\n1 pt.1/32\n7-10\n1-6/8\n1,46\n100\n101.2\n1 pt.2/32\n6/32\n26/32\n1-8/4\n1,46\n101\n102.\n1 pt.\n5/32\n27/32\nRegraded Unclassified\n339\nMay19.1939\nTHE WHITE HOUSE\nWASHINGTON\nFrank Unitedy\nMemo minday\nin mores\nHall said at Cabinet\nto me univately that\nPres. told him Thurstay\nhe was for atax and\nneutrality program at this\nsession\nPres. said he and his\nwife hada in discussion this crunty\nand midnisht. When he got\nthru he gave me a searching look\n340\nMay 19, 1939\nMEMORANDUM TO:\nMr. John W. Hanes,\nUnder Secretary of the Treasury.\nWhiteface Mountain Turnpike Bonds\nThere appear to be some $1,035,000 of Whiteface Mountain\nHighway 4% Bonds due May 1, 1976, all of which are apparently\nheld by the Comptroller of the State of New York for the Canal\nDebt Sinking Fund. It is reported that Governor Lehman has re-\ncently signed a bill authorizing and empowering the Whiteface\nMountain Highway Commission to issue bonds in an amount not ex-\nceeding $1,900,000 to Fund bonds heretofore issued and to pro-\nvide additional funds for the construction of the World War\nVeterans Memorial Highway.\nSince apparently none of these bonds have ever been\nissued to the public, there is little information about them.\nThe Annual Reports of the Comptroller of New York showed the\nfollowing operating receipts and expenditures:\nTolls\n1936\n$51,000\n1937\n65,200\n1938\n65,600\nTotal\n$181,800\nMiscellaneous receipts restaurant,\ngift shop, etc.\n1938\n$ 15,600\nTotal Receipts\n$197,400\nRegraded Unclassified\n- 2 -\n341\nInterest on bonds outstanding\n1933\n$10,000\n1934\n20,000\n1935\n30,000\n1936\n36,500\n($28,733 of which came\nfrom toll receipts)\n1937\n41,250\n1938\n41,800\nTotal\n$179,550\nPersonal Service and Maintenance\nof Highway\n1936\n$ 6,650\n1937\n9,800\n1938\n20,000\nTotal\n$ 36,450\nPersonal Service and Maintenance in\nOperation of Restaurant\n1938\n$ 10,500\nRedemption of Bonds\n1938\n$ 15,000\nTotal Expenditures\n$241,500\nRegraded Unclassified\n342\nApparently, the toll receipts for the years 1936, 1937\nand 1938 amounted to some $181,800. Interest on bonds for\nthat same period amounted to $119,550; operating expenses and\nmaintenance for the same period amounted to $36,450; all of which\nindicates that three years' operation exclusive of an affiliated\nrestaurant resulted in covering charges approximately 1.16 times.\nFor the fiscal year 1938 the operating expenses were\n$65,600 from tolls (and $15,000 from the operation of the restau-\nrant). Expenses were $20,000 for personal service and main-\ntenance of the highway; $41,800 interest on bonds; and $15,000\nfor redemption of bonds. From these figures it would appear\nthat the receipts from tolls were sufficient to pay expenses,\nincluding the interest on the bonds and leaving about $4,000\nfor retirement of principal. To this $4,000 was added $5,000\nfrom the operating profit of an affiliated restaurant and gift\nshop, plus $6,000 from cash on hand for the retirement of\n$15,000 of principal.\nPreston ess Delano\n343\nMay 20, 1939\nFor the Comptroller\nIn 1933 the Statistical Division of the RFC made\nan analysis of forty toll bridges constructed during\nthe 1920's.\nThe bridges were operated by thirty-five bridge\ncompanies.\nThe estimates of net income to be realized from\nthese bridges were made in a number of cases by nationally-\nknown and reputable engineering firms, in some cases\nthe same firms that submitted estimates for the Penn-\nsylvania Turnpike Bonds.\nThe analysis made by the Statistical Division of\nthe RFC included a comparison of this predicted net\nincome with realized net income.\nIn the case of five of the thirty-five bridge\ncompanies studied, the net income during the early years\nof operation was equal to, or in excess of, the engineers'\nforecast. In the case of eight of the bridge companies,\nthe net income realized was less than the engineers'\n344\n- 2 -\nforecast but in excess of bond interest. In twenty-two\nof the thirty-five companies the realized net income\nwas less than the engineers' forecast and less than\nbond interest. The percentages hold good for both large\nbridge companies (those operating bridges which cost\nin excess of $3 million) and for small and medium-sized\nbridge companies.\nUpm Lepon\nOFFICE OF\nTHE COMPTROLLER OF THE CURRENCY\n345\nMay 20, 1939\nJ.W.H.\nFurther on the subject of revenue bonds\nmore or less comparable to the Pennsylvania\nTurnpike Revenue 3 3/4% bonds -\nP.D.\n346\nWAR DEPARTMENT\nOFFICE OF THE CHIEF OF STAFF\nWASHINGTON, D. C.\nPersonal\nMay 19, 1939.\nHonorable Henry Morgenthau, Jr.,\nSecretary of the Treasury,\nWashington, D.C.\nMy dear Mr. Secretary:\nOn about May 3d I received a request from you\nto locate an officer on the retired list who is qualified 88\na Transportation man for duty with the Transportation System\nunder the Chinese Government. With this information came the\nsalary and a further arrangement for life insurance.\nI have used every means we have to contact an\nofficer who might qualify and be willing to take the detail. A\nlarge number has been contacted and I can find no one who de-\nsires to be considered for the detail. I will still continue\nif you so desire and let you know if I find anyone.\nRegretting that I have been unable to find a man for\nyou, end with kind personal regards, believe me\nSincerely,\nMain Chief of Staff. brain\nRegraded Unclassified\nOFFICE OF THE CHIEF OF STAFF\nWASHINGTON, D.C.\nWASHIN 3\nPAYMENT OF DOSTAGE 1500\nOFFICIAL BUSINESS\n347\n9:15\nOFFICE\nSECRETARY OF THEASURY\n1939 MAY 20 AM 9 05\nTILKET DI 0277 RTMENT\nHonorable Henry Morgenthau, Jr.,\nSecretary of the Treasury,\nWashington, D.C.\nPersonal\n348\nMay 19, 1939\nPresent:\nMr. Hjalmar J. Procope, Minister\nfrom Finland.\nMr. Procope: Have you had time to consider\nthe question we discussed?\nHM,Jr: Yes and no. I did not know how\nserious you were about it. Is this something that\nyou really want an answer on?\nMr. Procope: Yes.\nHM,Jr: You put it up to me as what we would\ncall \"a trial balloon.\"\nMr. Procope: It was not a question I put\nbefore you on behalf of my Government.\nHM,Jr: Yes; that is what I thought. If\nthe question is \"Can your Government borrow in our\nmarkets in case of a war?\" I can tell you the answer\nis yes. If the question is \"Can your Government\nborrow from the United States Government?\", that is\nsomething I would have to get authority from Congress.\nWhich did you have in mind?\nMr. Procope: Let us say that now in the pres-\nent situation Finland should think that it needs to\nput defense forces on the basis of extraordinary\nstrength and that we need money for that purpose.\nLet us say, $50,000,000. Do you mean that there\nis no normal hindrance for our going out to borrow\nthat?\nHM,Jr: None.\nMr. Procope: Thank you for that. Is there\nRegraded Unclassified\n349\n-2-\nany possibility of getting a loan now in this\nmarket?\nHM,Jr: Oh, yes!\nMr. Procope: I had the impression that it\nwas very difficult.\nHM,Jr: I have not sounded out the market,\nbut if you ask me to I will do 80 at once.\nMr. Procope: The man who was with me the\nlast time, I had him sound out people in Wall Street,\nnot saying that it was for Finland, but in general.\nHM,Jr: Oh, that is different! You see,\nyour Government has & peculiarly favorable position,\nbecause you paid your debt. If you would say to me,\n\"Mr. Morgenthau, can the Government of Finland bor-\nrow $20,000,000, \"or whatever figure you had in mind,\nI can give you an answer by Monday.\nMr. Procope; Your opinion is that we can do\nthat?\nHM,Jr: Yes, but I want to go into the matter\nfurther. I cannot go to the Majority leaders in\nthe Senate and House on an \"if\", but if you would\ntell me to I would be glad to speak to our leaders.\nMr. Procope: In order for you to get author-\nity from Congress, do you have to introduce a b1ll?\nHM,Jr: I can go to the leaders and say that\nI want to know if a bill was introduced would the\nUnited States Government lend Finland BO much money?\nand I can get a yes or no.\nMr. Procope: I see. We are not quite ready.\nHM,Jr: The minute you are ready, you will\nget 24 hours' service from me, but until somebody\nsays \"Yes, we are ready\" why I just pigeon-hole it\nand wait.\nMr. Procope: Suppose you introduce a bill\nRegraded Unclassified\n350\n-3-\ninto Congress, is it both Houses?\nHM,Jr: Yes.\nMr. Procope: Is such an authorization given\njust only for one transaction for & certain amount?\nIs that given Just for that immediate transaction?\nIt cannot be given for the future?\nHM.Jr: No. An authorization for the\nUnited States Treasury to lend $50,000,000 on the\nbest possible terms to the Government of Finland\n....\nMr. Prosope: This cannot be given for one\nyear hence?\nHM'Jr: I do not know. It might be possible.\nWe can ask them. When you are ready for me to sound\nthem out, I will do so. I have already spoken to\nthe President about that. You are a business man.\nYou must tell me when you are ready to do business.\nMr. Procope: May I summarize. First, to\nlend on the market, short terms or bonds?\nHM,Jr: I would have to find out.\nMr. Procope: There are no restrictions?\nHM,Jr: On the contrary, we would give it\nour blessing.\nMr. Procope: What do you mean by blessing?\nHM,Jr: We want to demonstrate to the rest\nof the world that we appreciate what Finland has\ndone and, therefore, we want to be helpful.\nMr. Procope: You think that such a loan could\nbe placed?\nHM.Jr: I think SO. I want to make sure and\ncan give you a very quick answer.\nMr. Procope: You do not think the amount of\nRegraded Unclassified\n351\n$40,000,000 or $50,000,000 is too much?\nHM,Jr: No; I do not.\nMay I ask you a question? What proportion\nof that money would be spent in this country?\nMr. Procope: I cannot tell you.\nHM,Jr: You might ask.\nMr. Procope: You mean it would be easier?\nHM,Jr: If it is going to be a Government\nloan, that is important; if private, it 1a another\nmatter.\nMr. Procope: That will be one of the questions\nI will ask. The Government loan requires Congressional\nauthorization through a public bill. Is that intro-\nduced by you?\nHM,Jr: It would go either from the President\nor from me.\nMr. Procope: You do not think it 1s absolutely\nnecessary that the money would have to be used in this\ncountry?\nHM,Jr: I do not know. They might ask me.\nWe would do it a 100% Government loan or not at all.\nThe first question they would be would be where will\nthe money be spent and what for?\nMr. Procope: You do not think it is abso-\nlutely necessary to be spent here?\nHM,Jr: I would not want to say. It would\nbe the first time I will ask Congress for such a\nthing.\nMr. Procope: You had in mind a transaction\nfor the moment.\nHM,Jr: Yes. I do not know how they would feel.\n352\n-5-\nMr. Procope: You do not think it 1s impossible?\nHM,Jr: No. I do not. I would first have a\ntalk with them. Then if they would be friendly, I\nwould arrange to have you and they come to my house and\nyou could talk to them there.\nMr. Procope: I am extremely thankful.\nHM,Jr: You are the only representative of any\nGovernment I would say this to: We want to show our\nappreciation that you have paid your debt.\no0o-o0o\n153\nRE HOLC REFUNDING\nMay 19, 1939.\n4:15 P. M.\nPresent:\nMr. Hanes\nMr. Lochhead\nMr. Bell\nMr. Haas\nMr. Seltzer\nMr. Murphy\nMr. Hadley\nMr. Fahey\nMr. Pavesich\nH.M.Jr:\nDo you people have any preference?\nFahey:\nNo. Our feeling about it 1s that as far as we are\nconcerned it 1s our duty to fit in with your neede\nand your responsibilities here. That's the primary\nthing.\nOne thing about it is that - I was talking with\nMr. Bell about it, and I don't know how far it's\nbeen discussed with you - our feeling 18 that if\nthe Corporation 1e able to go along as well as it\n18 now - I mean under no better conditions than\nat present - that it ought to be possible to pretty\nnearly clean this thing up and liquidate it com-\npletely by 45 and 46, the point being this: we are\nconstantly gaining on collections - I mean getting\na higher percentage all the time. March was the\nhighest one we have ever had. More loans are being\npaid off in full all the time. There were more\npaid off in April than in any previous month. We\nought to be able to sell these properties in hand,\nand we feel it is good policy to do it about as\nrapidly 8.8 we can without breaking the market on\nproperty, and cover that money in.\nNow, in another three years these loans should be\npaid down to the point where it should be perfectly\npossible to transfer them to the private insti-\ntutions and get out of them, and within that time,\ncertainly by 45, to have sold all the property\nthat we have got on hand. In other words, that\nought to be the policy, to completely liquidate\nthe thing and get out of it just as quickly 88 we\ncan; and that it 18 better in the sale of property\nRegraded Unclassified\n354\n- 2 -\nto take in most instances - to take the loss now\nrather than let it drag along with the possibility\nof greater loss if you continue to carry this pro-\nperty in possession.\nNow, that's our general feeling about it, and that\nthat ought to be the objective and that it is well\nto keep that in mind in planning the financing.\nH.M.Jr:\nWell, let's hear what Allan Sproul says, shall we,\nbecause I said I'd call him at this time, see?\n(On phone) Allan Sproul in New York, please.\nHe was going to consult with the fellows, you see.\nThe way they've got it out here, this six to nine,\none and a half - after you subtract the interest\nloss, shows one point and three thirty-seconds\npremium; and the rightson the same basis they are\nselling at one point and five thirty-seconds\npremium. So either we're figuring it about right\nor the market's figuring it about right.\nThe reason - I guess Bell told you - we'd 8. little\nbit rather go six years to nine than five to eight,\nis to get over that - there are 80 many things\ncoming due in five years.\n(On phone) Hello. (Conversation with Allan Sproul\nfollows:)\nRegraded Unclassified\n255\nMay 19, 1939\n4:20 p.m.\nHMJr:\nHello.\nOperator: Mr. Sproul. Go ahead.\nHMJr:\nHello.\nAllan\nSproul:\nHello, Mr. Secretary.\nHMJr:\nWe've got -- everybody's listening to you on the loud-\nspeaker here.\n8:\nI see.\nHMJr:\nSo do you want to tell us what you found out?\nS:\nYes. I've been talking to these fellows all afternoon.\nThey say the market's present estimate, based on the\nprice of the call two and three quarters is about a\nseven ten year one and three quarter. Then they go on\nfrom there to a most optimistic -- saying you can do\n& good deal better than that; that you could do seven\nten years, one and five eighthe, six nine years, one\nand B. half and the most pessimistic saying that one and\nthree quarters for seven ten years is pretty thin and\nshouldn't -- nothing beyond nine years should be priced\nat one and three quarters.\nA good deal of the argument centers around whether they\nfigure the yield to the call date or to maturity and\nthey take two positions on that. Some say the market,\nunder present circumstances, will be figuring the yield\nto the call date. That's the way they're figuring yields\non other -- all other obligations. The other side says\nthat with B. low coupon -- such a low coupon, short\nmaturity obligations -- that the market will figure the\nyield to maturity, or particularly in case of the H.O.L.C.\nbecause they don't think that the corporation can pay off\nits outstanding higher coupon bonds between now and\nseven, eight and nine years; that therefore this new low\ncoupon issue will be allowed to run, and whatever is paid\noff will be paid off on the higher coupon issues, and\nthis one will be allowed to run to maturity. So that I\nshould say the -- the weight of opinion 18 on the side\nof figuring these yields to maturity although there 1s\ndefinite opinion on the other side too.\nWhen you come then to trying to figure an option on the\ncoupon -- with a three-year option you -- on any coupon\nyou figure, you get, it seems to me, two issue yields\nRegraded Unclassified\n356\na I I\nof the call date and two leaner yields of the maturity.\nNow, I think that's B0 on a seven ten or a six nine, or\na five eight. And, therefore, there's some advantage,\nI should say, if it's -- fits in with the outlook for\nthe corporation's income to making the spread two yearw\nrather than three, in which case you could cut the\ncoupons finer.\nHMJr:\nI see.\nS:\nThe way we figure it here, it's six eighths at one and\na half, or it's seven nine at one and five eighths, or\nan eight ten at one and three quarters, would be & good\ncompromise.\nHMJr:\nWell, Sproul, there's no sense in my recommending that\nthey pay above one and a half under the present market\nconditions.\nS:\nAbove one and B. half?\nHMJr:\nYes.\n8:\nWell, a six -- a six eight at one and a half would --\nwould show, we figure, one twenty thirty-seconds pre-\nmium to call date or twelve thirty-seconds/to maturity.\npremium\nHMJr:\nI see.\nS:\nAt six nine we figure would show one and & half -- at\none and a half per cent -- would show one and a half\npremium to call date -- that's figured to call date, and\nminus twenty-seven thirty-seconds as figured to maturity.\nHMJr:\nMinus twenty-seven\nS:\nYeah.\nHMJr:\nI see. Well now look, do what -- you've listened to\nthese fellows all afternoon. Now, boil it down and\nas of four twenty-five Eastern Standard Time, Washing-\nton, D. C., what do you recommend?\nS:\nWell, I -- how far out do you want to go?\nHMJr:\nWell, I -- I don't see any reason why they should pay\nmore than one and a half.\nRegraded Unclassified\n- 3 -\n357\nS:\nWell that's -- that limits the years you can put it out\nfor. If -- if you're not going to be able to pay off\nall of these outstanding higher coupon issues within\nthe next -- within the period, say, forty-five, forty-\nseven\nHMJr:\nWell listen, I don't have any crystal here 80 I can't\ndo any gazing for you.\nS:\n(Laughter) Then the thing to do, I should say, would be\nto get this out as long 8.8 possible and at 8,8 low a rate\nas possible. If there's going to be a pay-off in that\narea, then there's not such a need to push it out,\nHMJr:\nCome on -- come on, put it on the line, old man. Put it\non the line. What do you recommend?\nS:\nWell, I would recommend a six eight at one and a half.\nHMJr:\nI see. Well now, I tell you what we'll do. I haven't --\nsince this morning the majority of the people here want\nit -- the six year rather than the five year, you see?\nS:\nYeah.\nHMJr:\nThey want to get over that forty-four hump.\nS:\nRight !\nHMJr:\nAnd Mr. Fahey 1s sitting here and he agrees on that.\nHe wants to get over the forty-four, so we -- we want it\nto be a minimum of six years.\nS:\nYeah.\nHMJr:\nNow I don't see why they should pay more than one and a\nhalf, so it would be either six eight or six nine, de-\npending upon how these fellows figure it, 18 that right?\nS:\nThat's right.\nHMJr:\nAnd I can see where they are figuring that this is one\nand & half, the chances are they'll let it run to\nmaturity, that they might figure it to maturity.\nS:\nYes'.\nHMJr:\nWe'd be perfectly safe on & six eight, wouldn't we?\n8:\nAbsolutely!\nRegraded Unclassified\n- 4 -\n358\nHMJr:\nAnd it doesn't cost Mr. Fahey a dollar more at six\neight than a six nine.\n5:\nNo, he gets the -- gets the same\nHMJr:\nWell, the same coupon.\nS:\nThe same coupon.\nyear\nHMJr:\nAt the ninth/it might cost him\nS:\nThe ninth year, depending on what his situation is then,\nit might cost him money.\nHMJr:\nWell, neither he nor I are going to worry about the\nninth year. Are we?\nS:\n(Laughter) Nobody knows what it's going to be then.\nHMJr:\nYes. Now, let me just ask him a minute.\n(Brief pause)\nNow, just a minute. Supposing we make an appointment\nfor tomorrow at eleven thirty -- that's twelve thirty\nyour time. Are you going to be in?\nS:\nYes, I am.\nHHJr:\nWhat?\nS:\nYes, I am.\nHMJr:\nWell, supposing we say we'll meet again in this office\nand your office at eleven thirty tomorrow?\nS:\nAll right.\nHMJr:\nBut the way it looks -- you see, it'll be -- I -- My\nguess would be six eight or six nine.\nS:\nYeah.\nHMJr:\nJust a minute. (Talks aside.) Then we can see what the\nmarket does tomorrow.\nS:\nThere's no interest in shoving it out further.\nHMJr:\nWell, why -- why make the fellow pay one and five eighths\nor\nRegraded Unclassified\n359\n- 5 -\nS:\nWell, only if he's not going to be able to pay off more\nthan he has outstanding now in the other issues. The\nHMJr:\nWell\nS:\ntwo and a quarters and the threes.\nHMJr:\nWell, he could\nS:\nBecause if he -- if he's not going to be able to pay\noff any more than that when he gets out here six or\neight years he might have to do some refinancing again\nat a much higher rate.\nHMJr:\nWell, let me ask\n(Brief pause.)\nHe said -- he -- that doesn't worry him any.\nS:\nWell, he's the -- he's the Doctor on that.\nHMJr:\nYeah, he's got a hundred and fifty million dollars cash\nin his pocket now.\n8:\nWell, he may have to use some of that to pay off people\nwho don't turn in the two and three-quarters. We figure\nthat the\nwith 80 many pieces out there'll be --\nmay be quite 8. turn-in for cash.\nHMJr:\nIs there lots of buying going on? And swapping?\nS:\nNo, there's been some but not a great deal so far.\nHMJr:\nBut as of tonight, at six eight one and & half, you'd\nunderwrite that, wouldn't you?\nS:\nI would.\nHMJr:\nIt would go well, wouldn't it?\nS:\nI think 60.\nHMJr:\nWell, if Mr. Fahey comes in tomorrow and says he wants\nto go out further, then we'd have to go to one and five\neighths, wouldn't we?\nS:\nI should say 80, yes.\nRegraded Unclassified\n- 6 -\n360\nHMJr:\nWhat would that be then? What would be the yearage?\nS:\nWell, I should say seven nine on that.\nHMJr:\nSeven nine. Well\n(Talks aside)\nWell, he can sleep on it and -- and -- one eighth\nmeans a million dollars a year more to him\nS:\nYeah.\nHMJr:\non nine hundred million dollars.\nS:\nYeah.\nHMr:\nIt's just a question of whether he wants to spend 8.\nmillion dollars for an extra year.\nhe comes from\nNew England he says \"No\".\nS:\n(Laughter) Well, he might look at it as insurance\nfor him.\nHMJr:\nWell, He says, \"You Californians are much more optimistic\nS:\nWell, we've got\nHMJr:\nYou've got\nS:\ngotten burned a couple of times.\nPMJr:\nYou've got the sunshine and we've got the money.\nS:\nWell, we -- we're getting some of the money.\nHWr:\nO. K. Well, I'm ever 80 much obliged, and I'll talk to\nyou again eleven thirty our time tomorrow.\nS:\nFine.\nHMJr:\nThank you 80 much.\n8:\nGood night.\nRegraded Unclassified\n361\n- 3 -\nH.M.Jr:\nIs that all right?\nFahey:\nSure.\nH.M.Jr:\nBut you think about it and we'll think about it.\nIt gets down to either six-nine or seven-nine -\nwhether you want one and a half or one and five-\neighths.\nJohn, as to tonight, I don't know how you feel.\nHow do you feel?\nHanes:\nYou've changed your mind on the six-nine. You\nnow say you've got to go to seven-nine. You\nsaid six-nine, one and a half, this morning.\nBell:\nStill can get one and a half, six-nine. It 18 a\nlittle thin; that is, it is thinner than the\nsix-eight. I think it would still go.\nHanes:\nThat's all right, then.\nH.M.Jr:\n(To Kieley) Bring in Mr. Fahey's - these two\ngentlemen's hats, go they can go out this way.\nWe're swearing Ed Foley in.\nFahey:\nWell now, what about - have we got to hold &\nmeeting tomorrow to vote on this? That's what\nwe were planning?\nH.M.Jr:\nRight after 11:30.\nPavesich:\nAfter the meeting here.\nBell:\nGive us a resolution proposing these terms.\nFahey:\nWe've got to have the resolution after you settle\nit.\nH.M.Jr:\nWe'll settle it at 11:35.\nFahey:\nI see. It isn't necessary for us to come over.\nH.M.Jr:\nNo, I can telephone you if you want. That's right,\nyou're quite a distance away, aren't you?\nRegraded Unclassified\n362\n- 4 -\nFahey:\nI can come if you want me to. What I thought\nwas to settle it promptly tomorrow, have that\nBoard meeting and pass it.\nH.M.Jr:\nWe'll settle it between 11:30 and 11:45.\nFahey:\nWe'll pass the resolution and put the figures\non.\nH.M.Jr:\nThat's what we do with RFC: make the decision,\nand they hold the Board meeting and shoot the\nresolution over.\nFahey:\nThat's what we'll do.\nH.M.Jr:\nWill you let me know if you want any change on\nthe additional year?\nFahey:\nRight now I don't see any reason for it.\n363\nGROUP MEETING\nMay 19, 1939.\n9:30 A. M.\nPRESENT:\nMr. Hanes\nMr. Gibbons\nMr. Foley\nMr. McReynolds\nMr. Gaston\nMr. Haas\nMr. Bell\nMr. Duffield\nMr. Lochhead\nMr. White\nMr. Graves\nMrs. Klotz\nHanes:\nI would like to talk to you about the collector\nfor the state of Washington.\nGibbons:\nIs that the Internal Revenue Bureau?\nGaston:\nThe Internal Revenue Bureau.\nGibbons:\nOne Senator says one thing, and the other another\nthing. I do not know much about it.\nH.M.Jr:\nI guess everyone knows something about it, except\nme.\n(Mr. Hanes handed papers to the Secretary.)\nH.M.Jr:\nIs there anything else?\nHanes:\nThat is for ten o'clock.\nGaeton:\nAllen says he will write another item. He wrote\nthat himself, but it was not any invention of his.\nThree or four people in Justice told him about it.\nH.M.Jr:\nWhat is his attitude?\nGaston:\nNeutral, he claims.\nH.M.Jr:\nWhat else?\nGaston:\nNothing else.\nRegraded Unclassified\n- 2 -\n364\n(Mr. Foley handed a paper to the Secretary.)\nH.M.Jr:\nWhere did you get this?\nGibbons:\nI turned that over to Johnson.\nFoley:\nYes.\nMrs. Klotz: How did he get it in the first place?\nFoley:\nI thought he sent that to you.\nH.M.Jr:\nWho is that?\nGibbons:\nMcReynolds. Did you send that to me, Mac?\nMcReynolds:\nI do not know what it is.\nGibbons:\nOf course, the instructions are to Johnson to do\ncertain things. I gave it to Johnson.\nH.M.Jr:\nWhere did you get it?\nFoley:\nI think it came through Thompson.\nGibbons:\nThat is right.\nMrs. Klotz: It came to the office from Mr. Gibbons. At two\no'clock they got it upstairs.\nMcReynolds:\n\"Sent to Gibbons' office at 4.\"\nH.M.Jr:\nLet us have & copy made. I think in this case\nwe can have it photostated. I think Cairns\nshould be present with Johnson.\nFoley:\nI think so, too. I wanted to talk to the First\nSecretary, if that 18 your wish.\nH.M.Jr:\nYes.\nFoley:\nI was a little surprised when I saw it come right\nback.\nH.M.Jr:\nThat was not the agreement. It was that he should\nhold it.\nFoley:\nYes.\n365\n- 3 -\nH.M.Jr:\nAll right. I wish they would make an appointment\nto see this man this afternoon. Let Cairns\nbe present.\nFoley:\nYes.\nH.M.Jr:\nPlus the stenographer.\nFoley:\nYes.\nH.M.Jr:\nIt will be photostated.\nFoley:\nI think that Thompson already had it photostated.\nHe had a photostat with him. He wanted the original\nback this morning. He kept it and he should bring\nit up here. Thompson had it himself. It 18 not\nin the hands of any messengers, or anything of that\nkind.\nGibbons:\nI handed it right direct to Johnson. I was very\ncareful, as soon as I got it --\nH.L.Jr:\nHave you anything further?\nFoley:\nThat is all I have.\nWhite:\nNothing on the prospects of foreign trade.\nLochhead:\nNothing, except that Al Hopkins called up this\nmorning and said you wanted him on Monday, Tuesday\nand Wednesday, and he would rather come down then.\nH.M.Jr:\nHarry, just 8. minute. (Conference off the record\nbetween the Secretary and Mr. White.)\nH.M.Jr:\nSomebody has written in giving the economics of\nthat. Are you through, Archie?\nLochhead:\nYes.\nGibbons:\nAl Cohn is in town and he would like to see you\nsome time.\nGaston:\nHe came in last night. He has the Mayor of Los\nAngeles with him, and he would like to have you\nmeet the Mayor, if you have time.\nH.M.Jr:\nI can do it at 11:20.\n366\n- 4 -\nGaston:\nAll 11:10? right. I think he will be in this morning.\nE.M.Jr:\n11:20.\nDan?\nBell:\nThis is the letter that authorized the sale of the\nHome Owners Loan bonds. I fixed it up all right.\nIt is O. K. That is just a reminder.\nH.K.Jr:\nI consideration. told him we would put it in the icebox for future\nBell:\nThat 1s all I have.\nH.M.Jr:\nMac?\nMcReynolds:\nNothing, except to report that Herbert and I both\nwere very poor golfers yesterday afternoon, but we\ncouldn't spoil either the weather or our dispositions.\nMrs. Klotz: You should have seen them.\nH.M.Jr:\nDid you see them.\nMrs. Klotz: Before they left, they said \"Goodbye.\"\nMcReynolds: She said it was not considerate of me to come by\nand tell her \"Goodbye\".\nMrs. Klotz: He rubbed it in a little bit.\nH.M.Jr:\nI think I had better see that man on Monday at\n10:15. I will see him on Monday.\nMcReynolds: At 10:15 on Monday?\nH.M.Jr:\nAnd you be here.\n(Meeting concluded at 9:45 A. M. )\nPrepared by: Mr. Murphy\nMr. Lindow\nMr. Haas\n367\nTREASURY DEPARTMENT\n368\nINTER OFFICE COMMUNICATION\nDATE May 19, 1939\nTO\nSecretary Morgenthau\nFROM\nMr. Hass JOR\nSubject: Recent Financial Developments\nHIGHLIGHTS\n1. High-grade corporation bonds have not followed\nTreasury's in the ourrent move, and the spread in yield be-\ntween them is now the greatest in some years. (Charts I and II.)\n2. The largest private placement of corporate securities\non record occurred last week in the sale to fifteen insurance\ncompanies of $114.5 millions of 40 year 3-1/4's of the Common-\nwealth Edison Company.\n3. The spread in yield between British Consols and the\naverage of United States long-term Treasury bonds is now at\nits highest point since the Twenties, notwithstanding e. fair\nrecovery in the price of Consols from their orisis low.\n(Charts III and IV.)\n4. British short-term money rates, which had risen sharply\nat the time of the crisis, have now lost 8 little over three-\nfourths of their total rise since the first of the year.\nU. 8. Securities\nThe United States Government bond market continued during\nthe first half of May the extraordinary strength which it has\nbeen showing with few interruptions since the last week in\nFebruary. The average yield on all Treasury bonds with twelve\nyears or more to run until maturity or earliest call date\ndeclined further to 2.14 percent at the close on Wednesday,\na decline of 0.12 percent since May 1 and of 0.29 percent\neince February 25, when the average stood at 2.43 percent.\n(Chart I.) The Wednesday figure is a new all-time low for\nthis average, and every one of the issues included in it has\nmade 8. new all-time high in price during this month. The\nstrength in long-term direct Treasury obligations has been\nparalleled by a corresponding strength in the longer maturi-\nties of guaranteed obligations.\nRegraded Unclassified\n369\nSecretary Morgenthau - 2\nShorter-term obligations participated in the rise in\nthe market last week to a greater extent than they have\nsince the first week of the current move. The average yield\non 3 to 5 year Treasury notes, for example, which had declined\nonly from 0.53 percent to 0.45 percent between March 4 and\nMay 10, declined further to 0.37 percent at the close on\nWednesday. In interpreting this movement, it should be noted\nthat the yields of short-term securities normally swing in 8.\nmuch wider are than do those of the long ones, BO that in a.\n\"balanced\" movement of the entire market, the yields on the\nnotes would normally move several basis points for every one\non the bonds.\nThe short-term issues are already 80 high, it should be\nnoted, that all Treasury notes maturing prior to June 15, 1941,\nare selling on B. negative yield basis, and even the seemingly\nmodest premium of 8/32 bid for the new issue of HOLC 1 year\n3/8's absorbs two-thirds of the whole coupon-carry which these\nsecurities will earn during their entire life.\nHOLC 2-3/4's of 1939-49 -- the \"rights\" for the new\nHOLO issue -- advanced from 8. closing bid of 101-21/32 on\nlast Saturday to one of 101-23/32 on Wednesday. The bid on\nthis issue during Thursday rose above that for the end of the\nday on Wednesday, but Was off 1/32 at the close to 101-22/32.\nThis action is interesting, not merely 88 an indication of\nthe market's expectations with respect to the character of\nthe new HOLC issue, but also 88 an indication that the market\nhad never seriously doubted that the outstanding 16sue would\nbe called 88 of this August. Had such doubts been seriously\nentertained, the definite announcement of the call -- finally\ndissipating the chance of obtaining another six months coupon-\nearry -- would have caused a decline rather than a rise in\nthe price of the issue.\nHigh-Grade Corporate Securities\nHigh-grade corporation bonds have not followed Treasury's\nin the current move. As a consequence, the spread in yield\nbetween Treasury and corporation bonds, as shown in Chart I,\nhas been increasing steadily since the end of February, rising\nfrom 0.55 percent 88 of February 25 to 0.81 percent as of the\nclose on Wednesday.\nChart II, which gives & longer-term perspective on this\nyield on the Treasury bonds) it has now exceeded its previous\ndifferential, shows that (expressed as B. percentage of the\nRegraded Unclassified\n370\nSecretary Morgenthau - 3\npeak of early 1937, and 18 approaching closely the level of\nthe late Twenties. The peak in early 1937 was reached in\nprecisely the opposite manner from that in which the present\none has been attained -- namely, by a. precipitous decline in\ncorporation bond prices, while Treasury's held firm and even\nadvanced & little - and was rapidly liquidated by a dooline\nin the Treasury's corresponding to that which had already\noccurred in the corporates.\nWhatever the cause or likely permanence of the widened\ndifferential between Treasury and corporation bond yields, it\nhas greatly strengthened the technical position of the high-\ngrade corporation bond market and made it very receptive to\nnew issues, which have been put out with little difficulty,\nalthough in small volume, even during the most serious period\nof the European war scares.\nPosition of Insurance Companies\nThe sharp increase in the yield differential between\nTreasury and corporate bonde has presumptively increased the\nrelative attractiveness of the latter to all classes of in-\nvestors, but especially to insurance companies which are hard\nput to it to earn the \"bogey\" of an average return of 3 per-\ncent set in the computation of their policy reserves, and are\nnow confronted with a Government bond market in which the\naverage of all long-termsyields only 2.14 percent and the\nlongest issue on the board only 2.34 percent.\nNo shift in insurance company preference from Government\nto corporate bond issues has been apparent, however, in the\nweekly figures on new life insurance company investments pub-\nlished in the Wall Street Journal. These figures show, on\nthe contrary, that the life companies have been very good\npurchasers of U. B. Government securities during the current\nrise and relatively poor purchasers of corporates - their\npurchases of U. S. Government securities from the first of the\nyear through May 6 being about $93 millions in excess of the\ncorresponding period of last year and their purchases of corpo-\nrate securities about $43 millions less.\nThis discrepancy must be interpreted, however, in the\nlight of the past practice of insurance companies of acquir-\n1ng United States securities principally during their seo-\nondary distribution, but of acquiring other securities\nprincipally at the time of their original issuance. Viewed\nin this manner, the relatively low rate of acquisition of\ncorporate accurities on the part of insurance companies may\nRegraded Unclassified\n371\nSecretary Morgenthau - 4\nbe considered a8 evidence of a lack of opportunity to no-\nquire them rather than of a distasts for the acquisition of\nsuch securities, and this 1e confirmed by the fact that the\ninsurance companies have been excellent purchasers for such\ncorporates AB have come on the market.\nPrivate Placement of Commonwealth Edison Issue\nA rather spectacular evidence of insurance company appe-\ntite for corporate securities appeared last week in the form\nof the private placement with fifteen insurance companies of\n$114.5 millions of 40 year 3-1/4's of the Commonwealth Edison\nCompany. These securities were sold at 102 to yield the pur-\nchasers 3.16 percent - or about an even 1 percent more than\nthe average yield on long-term Treasury bonds as of the date\nof purchase. This purchase, which has not yet been reflected\nin the Wall Street Journal series, is equivalent to about\n60 percent of the total investments in corporate securities\nmade by the life insurance companies reporting to the Journal\nfrom the first of the year through May 6, the most recent date\navailable. This was the largest private placement of corpo-\nrate securities on record, and has created somewhat of a\nfuror among investment bankers, who Bee in it a change in\nfinancial technique likely to undermine their business.\nThe private placement of corporate bond lesues has been\ngrowing for sometime and reached an all-time high last year\nwhen about one-third of all corporate bonds were 80 placed.\nSince this change in practice has been induced largely by\nthe registration and other requirements of the Securities\nAct of 1933 and of the Securities and Exchange Act of 1934,\nit has naturally led to B. strong demand on the part of invest-\nment bankers that these Acts or their administration be re-\nlaxed. The SEC 18 studying this problem and, it 18 reported,\nmay soon make & report on it, perhaps recommending that pri-\nvately placed issues be subject to the same registration re-\nquirements 8.8 those offered directly to the public.\nBritish Securities and Money Markets\nThe spread in yield between British Console and the ever-\nage of United States long-term Treasury bonds is now at its\nhighest point eince the Twenties, notwithstanding & fair\nrecovery in the price of Consols from their orisis low.\nChart III compares the yield of the 2-1/2 percent British Con-\nsole with the average yield on long-term United States Treasury\nRegraded Unclassified\n372\nSecretary Morgenthau - 5\nbonds on & weekly basis, and showe that the disparity between\nthe two series has increased steadily since the first of the\nyear. During most of this period both series have been con-\ntributing to the growth of the disparity -- one rising and\nthe other falling. In the last two weeks, however, both\nseries have been rising, although the British series has not\nbeen as strong 8.8 the American. In Chart IV the figures are\nshown on a monthly basis, and it 1s seen that the differential\nis now higher than at any time since the commencement of the\nchart in 1927.\nRecent weeks have also witnessed a very sharp decline in\nthe rate on six-months bills in England, bringing the rate\ndown almost to the point where it was before the spectacular\nrise accompanying the spring war crises. Thus, between March 1\nand March 31, the rate increased from 0.66 percent to 1.69 per-\ncent, and then in the next two weeks, rose further to 2.38 per-\ncent. From this high point, it declined to 2 percent by the\nend of April, and by Wednesday of this week, it had fallen to\n1.13 percent.\nAttachments.\nRegraded Unclassified\nChart I\nCOMPARATIVE YIELDS OF AVERAGE OF ALL LONG TERM U.S. TREASURY\nAND AVERAGE OF HIGH GRADE CORPORATE BONDS\nYields Based on Saturday Quotations\n1938\n1939\nJAN FEB MAR APR MAY JUNE JULY AUG I SEPT. OCT. NOV as DEC T # JAN FEB MAR - APR \" MAY 18 \" JUNE - - JULY \" . AUG - SEPT. - se OCT. - \" NOV se \" DEC\n.\n\"\n*\nt\n,\nis\nse\n-\n\"\n:\n\"\n-\n*\n-\n\"\nI\n=\n29\n-\n10\nH\n-\n-\n-\ne\ninversed Scale\nInverted Scale\nPER CENT\nPER CENT\n2.2\n2.2\n2.4\nLong Term Treasury* (12 years an more - certificat sell desal\n2.4\n2.6\n2.6\n2.8\n2.8\nExcluding Rails\n3.0\n3.0\n3.2\n3.2\nCorporate\n3.4\n3.4\nPER\nPER\nCENT\nCENT\n80\n80\nSpread Between Long Term\nTreasury and Corporate*\n60\n60\n40\n40\nSpreed Excluding Rells\n20\n20\no\n#\nas\n-\n-\n.\n19\n#\n-\n-\n14.\n⑉\n=\nE.\n-\n\"\n.\n=\n.\nt\n.\nIf\n#\na\ne\n-\n:\n.\n#\n4\n,\n.\n-\n\"\n-\nan\n:\n=\na\n=\n1\na\n-\n⑉\n=\no\nJAN.\nPER.\nMAR.\nAPR\nMAY\nJUNE\nJULY\nAUG\nSEPT.\nOCT.\nNOV.\nDEC\nJAN.\nFEB.\n-\nMAR.\n2\n=\n1936\nAPR.\nMAY\n.\n#\nJUNE\nJULY\nAUG.\n:\nSEPT.\nOCT,\nNOV.\nDEC.\n1939\nDillare of the Secretary of - Truary\nNota lotset figures shown are for May 17\n- - indicates change - composition of Long Term Theasury average.\n- - - at -\nRegraded Uncla\nS\nCOMPARATIVE YIELDS OF AVERAGE OF ALL LONG TERM U.S. TREASURY\nAND AVERAGE OF HIGH GRADE CORPORATE BONDS\n1927\n1928\n1929\n1430\n1931\n1932\n1933\n1934\n1935\n1936\n1937\n1938\n1939\nPER CENT\nPER CENT\ninverted Scale\ninverted Scale\nMonthly Average of Daily Figures\n2.0\n20\n2.5\n2.5\nLong Term Treasury\n3.0\n3.0\n3.5\n35\n4.0\n40\nHigh Grade Corporate\n4.5\n(Including Rails)\n45\n5.0\n5.0\nMoody's Aoa\n5,5\n5,5\nPER CENT\n(Yisid)\nPER CENT\nDIFFERENTIAL\n2.5\n50\n2.0\nDifferential\n40\nAgo percentage of Yie/d on Treasury\n15\n30\n1.0\n20\nDifferential\n5\n(Yield)\n10\no\n1927\n1928\n1929\n1980\n1931\n1932\n1933\n1934\n1936\n1936\n1937\n1936\n1939\no\nNote Latest figures thom are for May \"\n- el - berery . - -\n- - -\nΓ-70-8\nRegraded Unclas\nCOMPARATIVE YIELDS OF AVERAGE OF ALL LONG TERM U.S. TREASURY\nBONDS AND U.K. 2½% CONSOLS\nWeekly. Average of Daily Figures\nChart III\n375\n1938\n1939\nJAN FEB $ MAR # APR is - MAY - \" JUNE = - JULY # \" . AUG. - . BEPT. if OCT. all - NOV. If as # DEC. - JAN. n . FEB. - - MAR. - APR 4 29 MAY 18 as JUNE a - JULY # # . AUG. if # SEPT - - OCT - as NOV # a DEC\nInverted Scale\ninversed Scale\nPER CENT\nPER CENT\n2.2\n2.2\nLong Term Treasury\" (10 years or more de earliert call date)\n24\n2.4\n26\n2.6\n2.8\n28\n30\n30\n3.2\n32\nU.K. 2½% Consols\n3.4\n14\n3.6\n3.6\n3.8\n3.8\n4.0\n40\n4.2\n4.2\nPER\nCENT\nPER\nCENT\n1.6\n1.6\n1.4\n14\n1.2\n1.2.\n1.0\n10\nDifferential\n.8\nB\n6\n6\n4\n4\n2\n2\no\n\"\n=\n.\nB\no\nit\n-AN\n, FEB is . MAR 19 # APR - ⑉ MAY H - JUNE \" \" JULY . \" 6 AUG \" a SEPT \" , OCT . \" NOV. 12 is - DEC H 1 JAN - 4 FEB - 4 MAR - . APR is \" MAY @ EF JUNE is 1939 - JULY a an - AUG is . SEPT - - OCT - \" NOV DEC\n1938\n\"Break - line indicates change - compension of Long Term Treasury average\n- of the Treasury\nNote: lotest figures shown are for May \"\nFO-126\n- - -\nCOMPARATIVE YIELDS OF AVERAGE OF ALL LONG TERM U.S. TREASURY\nBONDS AND U.K. 2½% CONSOLS\n1927\n1928\n1929\n1930\n1931\n1932\n1933\n1934\n1935\n1936\n1937\n1938\n1939\nPER CENT\nPER CENT\ninverted Scale\ninverted Scale\nMonthly Average of Daily Figures\n2.0\n2.0\n2.5\n2.5\nLong Term\nTreasury\n3.0\n3.0\n3.5\n3.5\n4.0\n4.0\nU.K. 2%% Consola\n4.5\n4.5\n5.0\n5,0\n5.5\n5.5\nPER CENT\nPER CENT\n1.5\n1.5\n1.0\n1.0\nDifferential\n5\n.5\no\n0\n5\n.5\n1.0\n1927\n1928\n1929\n1930\n1931\n1932\n1933\n1934\n1435\n1936\n1.0\n1937\n1938\n1939\nNota: Lotest figures shown are for May 17\n- . - - of the Income\n- - - - -\nFO-127\nRegraded Unclas\nMay 19, 1939 377\n10:54 a.m.\nOperator: Go ahead.\nHMJr:\nHello.\nHarold\nIckes:\nHenry\nHMJr:\nHello, Harold.\nI:\nMr. Yantis of the State of Washington is here.\nHMJr:\nYeah.\nI:\nAnd he's one of our kind of men.\nHMJr:\nRight.\nI:\nHe's an outstanding leader out there, really, on certain\nways.\nHMJr:\nYeah.\nI:\nAnd he'd like to talk to you about Collector of Customs\nHMJr:\nYeah.\nI:\nand I wish you'd talk to him if you could.\nHMJr:\nWell, the President -- a Collector of Customs?\nI:\nYeah.\nHMJr:\nOh, not -- because the President sent me a memo on\nCollector of Internal Revenue.\nI:\nNo, customs.\nHMJr:\nWhat's the fellow's name -- well, he's tied up with\nBone anyway.\nI:\nYeah, that's\nHMJr:\nNow, what'\nI:\nAnd you see the election of a Senator next year is\ninvolved in this.\nHMJr:\nYeah. What -- what's this gentleman's name?\n- 2 -\n378\nI:\nYantis -- Y-A-N-T-I-S.\nHMJr:\nHow long is he going to be here?\nI:\nWell, he's going to Philadelphia this afternoon. That's\nthe reason I called you right now.\nHMJr:\nNow, just a second. (Pause) Tell him 11:45.\nI:\nAll right, Henry, thanks.\nHMJr:\nNow, just a second.\nI:\nYeah.\nHMJr:\nI'm very much surprised and pleased to see what you said\nabout taxes yesterday.\nI:\nWell, I -- I -- well, good Lord, I've always believed\nthat, Henry.\nHMJr:\nAnd -- of course, I don't know what's going to happen\non that agricultural bill. I don't know what the\nPresident is going to do, but\nI:\nWell, I -- I think that when -- when Congress goes over\nthe budget, they ought to provide taxes to meet it.\nHMJr:\nBut I think Wallace 18 being very unfair, because he\njust takes it for granted that they are going to go\nover and it's up to me to raise\nI:\nWell, that -- precisely.\nHMJr:\nAnd I'm taking the position that until the President\ntells me that he wants to increase his budget figure,\nI'm going to sit tight.\nI:\nWhy, sure.\nHMJr:\nIsn't that fair?\nI:\nWhy, I would say 80.\nHMJr:\nHuh?\nI:\nI would think 80.\nHMJr:\nAnd then I told Wallace that and I told him another\nthing; I said, \"If the President says he wants to\nRegraded Unclassified\n- 3 -\n379\nspend 'X' millions of dollars more, then it's up to the\nPresident to say whether he wants it to go to Agricul-\nture, or Relief, or Public Works, or anything else.\nI:\nThat's right.\nHMJr:\nI said, \"Why -- why take it for granted that Agriculture\n1s going to get it\"?\nI:\nYeah, that's right.\nHMJr:\nWhat?\nI:\nThat's right.\nHMJr:\nWell, Henry doesn't like that, but I can't help it.\nI:\nYeah. It's all right, Henry.\nHMJr:\n0. K.\nI:\nAll right. Good bye.\n380\nMay 19, 1939\n5:26 p.m.\nAllan\nSproul:\nWell, I had to be here anyway.\nHMJr:\nOh !\nS:\nThis 16 on another matter. I am calling in behalf of\nGeorge Harrison and John Williams\nHMJr:\nYes.\nS:\non an inquiry from Mr. Sumner Welles.\nHMJr:\nRight !\nS:\nTheir feeling 18 that it's more important for John\nWilliams to stay here in view of uncertainties at home\nand abroad.\nHMJr:\nRighto.\nS:\nBut they'd be willing to help in any way they can -- to\nhelp the State Department people find a man for the job.\nHMJr:\nO. K. Now, if they have any suggestions, will you let\nme know?\nS:\nYes, I will.\nHMJr:\nThank you 80 much.\nS:\nAll right.\nHMJr:\nThank you.\nS:\nGood night.\n381\nTreasury Department\nDivision of Monetary Research\nDate\nmay 19 1938\n1\nTo: Mr. White\nFrom: Mr. Gase\nI have abstained from\nall criticiem and tried\nto state everything Hansen\nsays in are defensible a\nform as possible.\n382\nTREASURY DEPARTMENT\nINTER OFFICE COMMUNICATION\nDATE 519.39\nTO\nMr. White\nFROM\nMr. Gass\nSubject: Professor Alvin H. Hansen's Testimony on Savings and Investment\nbefore the Temporary National Economic Committee.\nHansen's analysis:\nThe basic point of Mr. Hansen's analysis is contained in the single\nsentence: \"It is the margin of income which 1s created by the capital\ngoods industries that fills the gap between prosperity and depression.\"\nThe high aggregate and unequal distribution of income in our society re-\nsults in a strong propensity to save. Income can be sustained at a high\nlevel only so long as savings are being used to make large capital outlays.\nVariations in the national income are induced mainly by variations in the\noutlay on plant, equipment, residential construction and other durable\ngoods.\nMr. Hansen makes it clear that when he speaks of income. consumption\nand investment, he is comparing the consumption and investment of the\ncurrent period with the income realized in the preceding period. of\nrealized income, part is spent on consumption and part in seved. The level\nof income will be reduced unless all that which has been saved is used\neither by the saver himself or by others for outlay on capital gooda.\nCapital outlays in excess of savings may take place; they are financed by\nthe expansion of bank credit.\nMoney spent on capital goods is referred to by Hansen as \"high-powered\"\nmoney. He regards this expenditure as having a special multiplier effect,\nEvery boom dies & natural death. During the boom, all the possibili-\nties created by the progress of technology and by the increased supply of\nproductive factors are exploited. When the boom is over, # there\nremains little that can profitably be done except to maintain the plant\nalready constructed.\" Investment outlets are exhausted.\nFive \"outlets for savings\" sustained income in the 1920's. These\nwere residential construction, public construction, foreign investments,\nconsumers' credit, and the automobile industry. \"These, as I see it, are\n1/ All of his statistical periods are annual.\nRegraded Unclassified\n383\nMr. White - 2\nthe five main props to the prosperity of the 1920's. Their income-\ncreating force was in large part spent by 1929.\nThe sustained unemployment of the 1930's #\n...\ncannot be explained\nin terms of ordinary business cycle analysis.\" The problem which the\n1930's posed in an acute form is essentially of a secular (or long term)\ncharacter. Our economy is undergoing basic structural changes. These\nchanges Hansen attributes principally, in this testimony, to the slowing\ndown of the rate of population growth, There is also some suggestion\nthat changes in technology and in the supply of natural resources play a\npart.\nHe however qualifies the suggestion that the whole economy is under-\ngoing a novel secular change by calling attention to the fact that even\nin the 19th century economic progress came in spurts and leaps, not at a\nuniform rate. Perhaps, he implies, we shall soon see new industries\nundertaking large investments. Even in 1936-1937 capital outlays on\nindustrial plant and equipment in mining and manufacturing industry were\nquite comparable to those of 1928-1929. Public utilities and railraods\nlagged behind, but: \"The important single gap, and I would like to stress\nthis, in the recovery of 1936-1937, was residential construction and in\npart commercial construction.\"\nIn illustration of his analysis, Mr. Hansen presented a series of\ntables and charts on gross national product, capital formation, and the\nvarious components of capital formation, covering the period from 1919\nthrough 1937. The more important of these tables and charts are based\non data prepared by Simon Kugnets for the National Bureau of Economic\nResearch,\nEansen's recommendations:\nHansen recommends three kinds of measures calculated to help maintain\na high level of income: (1) measures to increase the ratio of consumption\nto savings, (2) measures to stimulate private investment, and (3) measures\ninvolving an increase in federal investment.\nTo increase the ratio of consumption to savings, he recomends that\nthe social security taxes be reduced, While the contributory principle\nshould be retained, only part of the cost of social security ought to be\nmet from payroll taxes. The contributory system should be supplemented by\nFederal grants from taxes bearing primarily on savings. No large reserve\nshould ever be built up.\nRegraded Unclassified\n384\nMr. White - 3\nMore generally, Professor Hansen expresses strong opposition to\nall taxes bearing primarily on consumption. He implies that our tax\nsystem is becoming more regressive, saving that in 1938 about 50 percent\nof total Federal tax collections bore primarily on consumption while\nin 1929 only 30 percent fell into this category.\nHe calls attention to the difference between our method of finan-\ncing social security and that of the United Kingdom. Re cites figures\nshowing that, in recent years, the higher income groups in the United\nKingdom have paid all the general charges of government and, in addition,\ntransferred an amount variously estimated at 190,000,000 to L115,000,000\nfor social services to the poor.\nWith regard to the stimulation of private investment, Hansen makes\nonly one concrete recommendation. He advises that the guaranteed rate\nof interest allowed under the Federal Housing Act should be lowered\nfrom the present 5 percent to lower the costs of private residential\nconstruction.\nWith regard to public investment, Hansen gives his support to expen-\nditure both for self-liquidating and for non-self-liquidating projects.\nHe recommends the construction of more toll roads, toll bridges, etc.\nHe also recommends the establishment of 8 federal railroad equipment\nauthority, to purchase new equipment and lease it to the railroads on 8\nself-liquidating basis.\nHe rejects the view that the government should undertake only self-\nliquidating investments. \"There is danger that we stress too much\nthe merit of self-liquidating projects and loans. There are many\nopportunities for public investments of the greatest productivity which\ncannot be self-liquidating.\nIn the course of his testimony, Hansen outlines a. general financial\npolicy.\n(1) He advocates an increase in the income taxes bearing on\nthe income brackets up to $50,000.\n(2) He supports a cyclically balanced budget for ordinary\noperating expenditures: \"The ordinary run of the opera-\nting expenditures, which in modern times must include\nsocial service, relief and welfare expenditures, should\nbe balanced by tax receipts over an entire business cycle.\"\n(3) He recommends borrowing to finance self-liquidating public\nworks.\nRegraded Unclassified\n385\nMr. White - 4\n(4) He says that it is compatible with sound policy to finance\neven non-self-liquidating long-term investments out of\nborrowing, providing that provision is made for amortiza-\ntion out of tax receipts over the lifetime of the asset.\nBut he also implies that it is equally unobjectionable\nto pay for this kind of investment out of current taxes,\nprovided that the taxes fall primarily on savings.\n(5) He recommends that a national tax commission be appointed\nto formulate a long-term tax policy.\nAll together, Professor Hansen's analysis and the policy he derives\nfrom it look forward to a greatly increased federal responsibility for\nmaintaining a high level of income and a desirable balance between con-\nsumption and saving.\n386\nMay 19, 1939\nSecretary Morgenthau\nE. H. Foley, Jr.\nRe: Phea Whitley - Counsel to\nDies Committee.\nMr. Whitley is about 36 years of age and has been with the Dies\nCommittee only & for months. A native of Arkansas, he attended the\nUniversity of Arkansas, University of Virginia, and received his LL.B.\nfrom either Georgetown or George Washington here in the District.\nAfter leaving law school, he entered the Federal Bureau of Investigation,\nDepartment of Justice, where he served from 1928 to 1937. His record\nin F.B.I. was excellent - when he resigned he was in charge of the\nNew York office of the Bureau. Previously he had served as agent in\nvarious cities throughout the country. After leaving the F.B.I. in\n1937, Whitley opened & law office here in town. Shortly thereafter\nhe married a wealthy woman and moved to Miami, Florida. About six\nmonths ago he soved back to Washington and reopened the law office\nwhich he maintained until accepting the job with the Dies Committee.\nApparently Whitley has a good reputation among the people with\nwhom he associated.\n(Initialed) E.E. V., and\nRegraded Unclassified\n387\nDEPARTMENT OF AGRICULTURE\nHow\nCARD 1 )\nWASHINGTON\n70\nMay 19, 1939\nThe Honorable\nThe Secretary of the Treasury\nDear Henry:\nIn view of the President's conversation with\nthe Vice-President this afternoon, I made so bold as\nto write him as per the enclosed letter. I am also\nsending you herewith copies of the enclosures mentioned.\nSincerely yours\nHawallace\nSecretary\nEnc\n388\nMay 19, 1939\nThe President\nThe White House\nDear Mr. President:\nIn view of the conversation at cabinet ceet-\ning this afternoon with the Vice-President, it 00-\ncurred to se that you might be inserented in the on-\nclosed memorandum \"Internal Economic Progress vs.\nBuropean Unsettlement\". The Vice-President upened\nthe subject up for discussion in such a way that I\nwould suggest he might perhaps be interested in some\nof the points brought out in this particular memoran-\ndum.\nI as also sending to you again a memorandum\nwhich I sent you once before entitled, \"The Present\nJob of Government and Private Capital in our Descoracy\".\nYou may Just throw these memoranda into the\nwastebasket when you are through with them.\nRespectfully yours\n\" Hawalina ⑈\nSecretary\nEnclosures\n389\nTHE PRESENT JOB OF GOVERNMENT AND PRIVATE CAPITAL IN OUR DEMOCRACT.\nIn the 1920's 6.8 we went from depression to prosperity, private investment\nincreased by 5 to 6 billion dollars a. year. Private investment is of course\nessentially the same a.6 private debt. Widespread private investment, or debt,\ndoes not differ greatly from national debt except that often it is not paid\nbaok. The increase in private investment (or debt) gave us more production\nand more jobs and therefore more consumer purchasing power.\nSince 1930 private investment has been far below normal and the foderal\ngovernment has had to step into the breach. In A ompitalistic society like\nours, capital for investment must be supplied or the wheels stop turning.\nEither individuals must supply it, or the government must supply it - or both.\nSince 1930 federal indebtedness has been increasing at an average of\nabout 2,5 billion dollars a year. This is less than half of the annual in-\ncreases in private indebtedness during the 1920's, and together with debta of\ngovernment agenoies has hardly been sufficient to offset the shrinkage in\nprivate debte.\nA substantial part of the increased federal debt has gone to replace a\n15 billion dollar shrinkage in primate long-torm debts since 1930. Another\npart has gone to offset & 20 billion dollar shrinkage in bank loans. Add\ntogether the present private debts and the federal debt and you have a total\ntoday somewhat less than in 1930. (See tablo 1)\nWhile the government since 1930 has added less per year to the national\ndebt than did private enterprise in the 1920's, each dollar of government debt\nproduced more results in terms of increase in national income than did a dollar\nof private debt or investment in the 1920's. (See table 2)\nThe roal question about government debt is DOW how we are going to carry\nit, because with lower interest rates and a smaller private debt, the carrying\ncharges on both government and private debt in 1938 were 14 percent less than\nin 1930. (See tables S, 4, and 5) These interest payments took & somewhat\nsmaller share of the national income than in 1930 and 6. much smaller share\nthan in 1932. The real question is how the federal government may most effect-\nively invest and spend for productive and social purposes until such time as\nprivate capital can carry its fair share of the social load, now increased\nbecause of the entirely different world outside of the United States and by\nthe persistent unemployment problem within. Unemployment is the source of\nmany of our internal difficulties.\nAnother question with regard to government investment or debts is what of the\nnation gets for those expenditures. How do the tangible and social assets\ngovernment with the net government debt? One attempt to evaluate assets\nover 70 billion dollars at the end of 1938 and a not debt of 51 billion dollars.\nfederal and compare other government asseta (buildings, roads, ato.) shows of\n(See table 6)\nthinking immediately on the proper balance betwoon for\ngovernment surplue farmers private and displaced city people. The creation of these opportunities and its\nWe must and do some deep investments and upon DOW productive opportunities\nmost now effective the great at present is the right combination of services. primate\nis test and task of our democratic form of government, both\nand public investment performance in productive effort and socially desirable\nRegraded Unclassified\nTable If GOVERNMENT DEBTS, PRIVATE LONG-TERM DEBTS, AND BANK LOANS\nAND DISCOUNTS, U. 8., 1921-1938\n390\n(Millions of dollars)\ne\nLoans\nTotal\nI Grand total,\nState\nTotal\n# Private\nand dia-\nprivate\n.\nGovernment\nU.S. Gov-\nFederal\nand\nGovern-\n# long-\ncounts\nlong-term:\nand\nernment\nagencies\nlocal\nment\nI term\nall active\nand bank\n:\nprivate\n:\nbanks\n5\nloans\nI\n(June 30)\n(June 30)\n(June\n(Dec. 31)\n(June 30)\n1\n30)\n$\n:\nI\nI\n921\n23,737\n450\n8,476\n32,663\nIt 48,682\n28,776\n77,458\nI\n110,121\n922\n22,711\n730\n9,893\n33,334\nI\n51,200\n27,759\n78,969\n=\n112,293\n923\n22,008\n1,062\n10,598\n33,668\nE\n55,234\n30,287\n85,521\nI\n119,189\n924\n20,982\n1,231\n11,633\n33,846\n#\n60,166\n31,348\n91,504\n:\n125,350\n925\n20,211\n1,508\n12,830\n34,547\n=\n64,895\n33,757\n98,652\nI\n133,199\n926\n19,384\n1,659\n13,664\n34,707\n#\n69,861\n36,051\n105,912\nt\n140,619\n:\n#\n927\n18,251\n1,789\n14,735\n34,775\nI\n75,156\n37,314\n112,470\n:\n147,245\n928\n17,318\n1,866\n15,699\n34,883\n#\n80,121\n39,592\n119,713\n=\n154,596\n929\n16,639\n1,867\n16,760\n35,266\nI\n83,224\n41,433\n124,657\n#\n169,923\n1930\n15,922\n1,871\n17,985\n35,778\nIl 84,500\n40,510\n125,010\nIt\n160,788\n(931\n16,520\n1,885\n19,060\n37,465\n#\n83,131\n35,211\n118,342\nI\n155,807\n932\n19,161\n2,130\n19,330\n40,621\nI\n80,192\n26,090\n108,282\nI\n148,903\ne\nE\n953\n22,168\n3,279\n19,517\n44,954\nE\n75,594\n22,388\n97,962\nE\n142,936\n934\n26,480\n6,735\n18,823\n52,038\n-\n74,300\n21,431\n95,731\nE\n147,769\n355\n27,645\n10,177\n18,972\n56,794\n:\n72,831\n20,419\n93,250\n.\n150,044\n936\n32,756\n11,066\n19,212\n63,034\n&\n71,459\n20,839\n92,298\n=\n165,332\n937\n35,803\n10,547\n19,152\n65,502\nt\n70,335\n22,698\n93,033\nE\n158,635\n938\n36,576\n7,989\n19,170\n63,735,1\n70,000\n21,380\n91,380\nE\n165,115\n/\nInterest bearing debt of the U. 8. Government, P. 410, 1937 Report of the Secretary\nof the Treasury, except that data for 1938 were taken from U. S. Department of the\nTreasury. Total amount of outstanding securities wholly or partially exempt from Federal income\ntaxes of the (1) Federal Farm Loan System; (2) Federal Home Loan System, and the\n(3) Reconstruction Finance Corporation as reported on P. 466 of the Annual Report\nof the Secretary of the Treasury for 1937, except that data for 1938 from U. 8.\nDepartment of the Treasury and include debt of the newly created agencies, Commodity\nCredit Corporation and Federal National Mortgage Association.\nIncludes both long and short-term issues. Annual Report of the Secretary of the\nTreasury for year ended June 30, 1937, P. 466, except that data for 1938 are from\nU. 8. Department of the Treasury.\nTotal private long-term debt in the U. S., 1922, 1930 and 1934-1937 inclusive are\nDepartment of Commerce estimates, \"Long-Term Dabta in the U. s.,\" 1937 and Survey of\nCurrent Business, January 1939; estimates for 1921 from \"Private Long-Term Debt in\nD. 3.,\" National Industrial Conference Board. All other years prior to 1938 based on\nNational Industrial Conference Board data (same source) with adjustments by Agrioul=\ntural Adjustment Administration to bring into agreement with the Department of\nCommerce series. 1938 is preliminary Agricultural Adjustment Administration 1s estimate.\nLoans and discounts all active banks, Comptroller of Currency reports (1938\npreliminary).\nMAA, Division of Program Planning, Agricultural-Industrial Relations Section\nRegraded Unclassified\n391\nTable 2. INCREASES IN NATIONAL INCOME PRODUCED AND IN LONG-TERM DEBTS, U.S.\n1921-1927 and 1932-1938\n#\nLONG-TERM DEBT\nIncr.\n:\nState\nNational\nover\n: Federal\nand\ninoome\nbase\n: (inol.\nlocal\n1/\nyear\n#\nagencies)\nPrivate\nTotal\nbillion\nbillion\nI\nmillion\nmillion\nmillion\nmillion\ndollars\ndollars\n:\ndollars\ndollars\ndollars\ndollars\n1921\n52.6\no\n24,187\n8,476\n48,682\n81,345\n1922\n61.7\n9.1\n23,441\n9,693\n51,200\n84,534\n1923\n69.8\n17.2\n23,070\n10,598\n55,236\n88,902\n1924\n69.6\n17.0\n22,213\n11,633\n60,156\n94,002\n1925\n77.1\n24.5\n21,717\n12,830\n64,895\n99,442\n1926\n78.5\n25.9\n21,043\n13,664\n69,861\n104,568\n1927\n77.2\n24.6\n20,040\n14,735\n75,156\n109,931\nCumulative total\n-\n118.3\n---\n---\n---\n---\n1921-1927 increase\n:\n4,147(Dec)\n6,259\n26,474\n28,586\nRatio of cumulative increase in income to increase in long-term\ndebt, 4.14 to 1.\n1932\n40.0\n0\n21,291\n19,330\n80,192\n120,813\n1933\n42.3\n2,3\n25,437\n19,517\n75,594\n120,548\n1934\n50.1\n10.1\n33,215\n18,823\n74,300\n126,338\n1935\n55.2\n15.2\n37,822\n18,972\n72,831\n129,625\n1936\n63.5\n23.5\n43,822\n19,212\n71,459\n134,493\n1937\n69.8\n29.8\n46,350\n19,152\n70,335\n135,837\n1938\n60.0\n20.0\n44,565\n19,170\n70,000\n133,735\nCumulati ve total\n100.9\n---\n---\n---\nI\n--\n1932-1938 increase\nI\n23,274\n160(Dec)\n10,192(Dec) 12,922\nRatio of cumulative increase in income to increase in long-term\ndebt, 7.81 to 1.\n1 1921-1927, National Industrial Conference Board; 1932-1937, Department of\nCommerce; 1938, Agricultural Adjustment Administration estimates,\nIncludes both long and short-torm issues.\nMA, Division of Program Planning, Agricultural-Industrial Relations Section\n392\nTable 3.\nGOVERNMENT DEBT AND INTEREST CHARGES, ,U. S., 1921-1938\n(Million dollars)\nFederal\nI\nState and Looal\nI\nTotal Government\nInter-\nRate of #\nInter-\nRate of #\nInter-\nRate of\nDebt\n1\nest\n2\ninterests\nDebt\n14\nest\ninterest:\nDebt\neat\ninter-\n3\n:\n:\nest\n:\n(Pot.)\n#\n$\n(Pot.)\n(Pot.)\n3\n#\nI\n1921\n23,737\n1,030\n4.339\nI\n8,476\n380\n4.48\n32,213\n1,410\n4.38\n1922\n22,711\n963\n4.240\nI\n9,893\n452\n4.57\n6\n32,604\n1,415\n4.34\n1923\n22,008\n927\n4.214\nI\n10,598\n484\n4.57\n# 32,606\n1,411\n4.33\n1924\n20,982\n877\n4.180\n1 11,633\n532\n4.57\n= 32,615\n1,409\n4.32\n1925\n20,211\n830\n4.105\n#\n12,830\n585\n4.56\n= 33,041\n1,416\n4.28\n1926\n19,384\n793\n4,093\n: 13,664\n623\n4.66\n: 33,048\n1,416\n4.28\na\n#\n1927\n18,251\n723\n3.960\n#\n14,735\n672\n4.56\n: 32,986\n1,396\n4.23\n1928\n17,318\n671\n3.877\n-\n15,699\n716\n4.56\n: 33,017\n1,387\n4.20\n1929\n16,639\n657\n3.946\n#\n16,760\n763\n4.65\nI 33,399\n1,420\n4.25\n1930\n15,922\n606\n3.807\n#\n17,985\n818\n4.55\n5,\n33,907\n1,424\n4.20\n1931\n16,520\n589\n3.566\nI\n19,060\n863\n4.53\n: 35,580\n1,452\n4.08\n1932\n19,161\n672\n3.505\nI\n19,330\n874\n4.62\nI 38,491\n1,548\n4.02\nE\n#\n1933\n22,158\n742\n3.350\nI\n19,517\n878\n4.60\nI 41,675\n1,620\n3.89\n1934\n26,480\n842\n3.181\n#\n18,823\n844\n4.48\n5g\n45,303\n1,686\n3.72\n1935\n27,645\n751\n2.716\nI\n18,972\n833\n4.39\n19\n46,617\n1,684\n3.40\n1936\n32,756\n838\n2,659\nI\n19,212\n818\n4.26\n19\n51,968\n1,656\n3,19\n1937\n2.682\n19,152\n797\n4.15\n56\n54,955\n1,721\n3.13\n35,803\n924\nI\n1938\n36,576\n947\n2.589\n$\n19,170\n797\n(4.16)\nI\n65,746\n1,744\n3.13\nInterest bearing debt (June 30th) interest on which is exempt from Federal income\ntax, 1937 Anraial Report of the Secretary of the Treasury, P. 410, except 1938 is\nfrom U. S. Department of the Treasury.\nAmount payable at June 30th interest rate, 1937 Annual Report of the Secretary of\nthe Treasury, pp. 352 and 442, except 1938 is from U. 8. Department of the Treasury.\nJune 30th rate, 1937 Annual Report of the Secretary of the Treasury, pp. 352 and\n442, except 1938 is from U. 8. Department of the Treasury.\nDebt of state and local governments (on or about June 30th), interest on which is\nexempt from Federal income tax, 1937 Annual Report of the Secretary of the Treasury,\nP. 466, except 1938 is from U. 8. Department of the Treasury.\nDepartment of Commerce debt studies (other years interpolated) 000 P+ 178 \"Long-term\nDebts in U. S.,\" for 1922 and 1930, and January 1939 Survey of Current Business\nfor 1934-37 inclusive.\nAAA, Division of Program Planning, Agrioultural-Industrial Relations Section\nRegraded Unclassified\n393\nTable 4:\nPRIVATE LONG-TERM AND GOVERNMENT DEBT AND\nINTEREST CHARGES, U. S., 1921-1938\n(Million dollars)\nI\n: Total Gov't and\nPrivate\nI\nGovernment\n: private long-term\nLong-term\nInter\nRate of\n:\nInter-\nRate of\n:\nInter-\ndebt\nest\ninterest\nI\nDebt\n2\nest\ninterest\nI\nDebt\nest\n#\n1\n(Pot.) 1\n(Pot.)\nx\n$\n:\n1921\n48,682\n2,770\n5.68\nI\n32,213\n1,410\n4.38\nI\n80,895\n4,180\n1922\n51,200\n2,976\n5.81\nI\n32,604\n1,415\n4.34\nI\n83,804\n4,391\n1923\n55,234\n3,187\n5.77\n:\n32,606\n1,411\n4.33\na\n87,840\n4,598\n1924\n60,156\n3,471\n5.77\n:\n32,615\n1,409\n4.32\nI\n92,771\n4,880\n1925\n64,895\n3,725\n5.74\n:\n33,041\n1,415\n4.28\n1\n97,936\n6,140\n1926\n69,861\n4,017\n5.75\n=\n33,048\n1,416\n4,28\nI 102,909\n5,433\n1\n1\n1927\n75,156\n4,329\n5.76\n:\n32,986\n1,395\n4.23\n: 108,142\n5,724\n1928\n80,121\n4,623\n5.77\n:\n33,017\n1,387\n4.20\n: 113,138\n6,010\n1929\n83,224\n4,802\n5.77\n:\n33,399\n1,420\n4.25\n# 116,623\n6,222\n1930\n84,500\n4,862\n5.78\nI\n33,907\n1,424\n4.20\n: 118,407\n6,306\n1931\n83,131\n4,805\n5.78\n1\n35,580\n1,452\n4.08\n$ 118,711\n6,257\n1952\n80,192\n4,603\n5.74\n1\n38,491\n1,546\n4.02\nI 115,683\n6,149\n#\n1\n1933\n75,594\n4,324\n5.72\n1\n41,675\n1,620\n3.89\n* 117,269\n5,944\n1934\n74,300\n4,185\n5.63\n=\n45,303\n1,686\n3.72\n1 119,603\n5,871\n1935\n72,831\n3,987\n5.47\n2\n46,617\n1,584\n3.40\n: 119,448\n5,571\n1936\n71,459\n3,838\n5.37\nI\n51,968\n1,656\n3.19\nI 123,427\n5,494\n1937\n70,335\n3,713\n5.28\n=\n54,955\n1,721\n3.13\n# 125,290\n5,434\n1938\n70,000\n3,675\n5.25\n2\n55,746\n1,744\n3.15\n: 125,746\n6,419\nData in all columns for the years 1922, 1930 and 1934-1937 inclusive are Department\nof Commerce estimates (as of December 31st). Data for other years based on\nestimates contained in \"Long-Term Debts in the U. 5.,\" 1937 and Survey of Current\nBusiness, January 1939; the estimate for 1921 was taken from \"Private Long-Term\nDebt in U. s.,\" National Industrial Conference Board+ The National Industrial\nConference Board debt estimates in million dollars are: 1922, 50,694, 1930,\nDebt of Federal and of state and local governments, interest on which is exempt\n85,774 and 1934,76,757.\nP* 466. For details concerning interest charges and rates see Table III (Government\nfrom Federal income taxes, 1937 Annual Report of the Secretary of the Treasury,\nDebt and Interest Charges, U. S., 1921-1938).\nAAA, Division of Program Planning, Agricultural-Industrial Relations Section\nRegraded Unclassified\n394\nTable 5. Interest on specified 1921-1938 debts related to national income, U.S.\nInterest\ncharges on\nInterest\nprivate long-\nNational\ncharges as\nterm and\nincome\npercent of\ngovt debta 1\npaid out\nnatl income\nmillion\nmillion\npercent\ndollars\ndollars\n1921\n4,180\n53,644\n7.79\n1922\n4,391\n57,037\n7.70\n1923\n4,598\n64,501\n7.13\n1924\n4,880\n68,160\n7.16\n1925\n5,140\n72,580\n7,08\n1926\n5,433\n74,795\n7.26\n1927\n5,724\n75,685\n7.56\n1928\n6,010\n77,359\n7.77\n1929\n6,222\n79,704\n7.81\n1930\n6,306\n73,542\n8,57\n1931\n6,257\n61,609\n10.16\n1932\n6,149\n48,644\n12.64\n1933\n5,944\n46,089\n12.90\n1934\n5,871\n53,172\n11.04\n1935\n5,571\n57,564\n9.68\n1936\n5,494\n64,809\n8.48\n1937\n5,434\n71,013\n7.65\n1938 (P)\n5,419\n66,000\n8.21\n1939 (est)\n5,483\n71,000\n7.72\n1 See table 4.\n2 Agricultural Adjustment Administration series. Based on\nDepartment of Commerce and King's estimates of nonagricultural\nino ome plus Agricultural Adjustment Administration estimates of\nagriculture's contribution to the national income.\nAAA, Division of Program Planning, Agrioultural-Industrial Relations Section\nRegraded Unclassified\n395\nTable 6. Tangible Assets and net debt of all branches of government\n(billions of dollars)\nTangible Assets\nNet Debt\n(December 31)\n(Jane 30)\n1916\n5.7\n1916\n6.1\n1917\n7.3\n1918\n31.9\n16.4\n1919\n32.9\n30.3\n1920\n34.1\n30.6\n1921\n35.3\n30.8\n1922\n37.0\n31.3\n1923\n38.5\n31.1\n1924\n40.3\n31.0\n1925\n42.4\n31.4\n1926\n44.3\n31.2\n1927\n46.5\n31.0\n1928\n48.9\n30.9\n1929\n51.2\n31.1\n1930\n53.6\n31.4\n1931\n55.6\n33.2\n1932\n57.0\n37.0\n1933\n58.4\n39.7\n1934\n60.4\n41.6\n1935\n62.4\n43.7\n1936\n65.5\n48.0\n1937\n68,4\n50.9\n1938\n(71.0)\n50.8\nCentral Statistical Board.\n1938 estimate of tangible assets by Agricultural Adjustment\nAdministration based on trend of previous years.\n396\nInternal Because Progress W. European Unsettlement\nle Recovery this spring has been delayed. Vigorous business recovery\nshould now be under my, if the expectations of last fall had been\nrealised. Business moortainty this spring has been intensified by the\nrumers of ware and dangers of war abroad. This effect has been both\ndirect and indirect, through the chilling effect on business commitments\nof a weak and declining stock market.\nAs shown by the enclosed chart, there have been six recessions in\nindustrial stock prices since March 1. 1938. They have all been associated\nwith war orises abroad. The seisure of Austria, the mobilization of the\nCameho-Slovakia and French financial crisis, the crisis before Munich, the\npersecutions leading to the recall of our Ambassador, the dismissal of\nSchacht, the final absorption of Caecho-Slovakia and invasion of Albania\nare all registered as recessions in stock prices and to some extent retarded\nindustrial activity.\n2. Foreign crises will continue to underout business here. The inter-\nnational picture La still ominous, and may continue so for many months\nahead. In countries sush as the United States, the extent of industrial\nactivity reflects the free decisions of individual businessen, guided by\nsuch barometers 19 security markets, commodity prices, and ourrent sales.\nIn countries such M Germany and Italy, industrial activity can continue\non the basis of government orders and industry plans almost regardless of\ninternational undertainty. Merely by continuing a state of chronie crisis,\ntherefore, the totalitarian aggressors can check the economic progress of\nthe democracies at will with no cost to themselves. This process of\nRegraded Unclassified\n2 -\n397\ncoonomie warfare by unsertainty and threats - likely to continue\nindefinitely. So long as it does, it will serve as a brake to hold in\ndustrial activity here at less than it otherwise would be.\n3. Disappointing extent of prospective recovery. When the new program\nof public investment was proposed in the spring of 1938, it was anticipated\nthat that renewed stimulus to activity would provide a prompt check to\nthe recession, and would cause an upsurge in activity which would earry\nthrough 1939 and 1940. When additional relief appropriations were under\ndisoussion last fall, it was expected that industrial production would\naverage 105 to 110 for the last half of 1939. In view of the present\nsituation, those prognoses will have to be revised downward. While some\nrecovery during the rest of 1939 is still probable, it may be very mild\nin extent. It is doubtful if men will be put back at work, over 1939\nas a whole, any more rapidly than new workers are being added to those\navailable for employment. At the end of the year unemployment may, there-\nfore, still be as high as it was at the beginning.\nProspects for 1940 are even less promising, for the present budget\ncalls for a material shrinkage in the net investment of federal funds\nafter the turn of the year. The slight rise in industrial production seams\nhardly calculated to bring forth such a rise in private investment as to\noffset the prospective decline in governmental contribution to the nation's\nbuying power. in economic recession in 1940, which had been anticipated\nas possible in any case after two years of progress from the 1938 lows,\nmay therefore degenerate into another major resession, instead of nerely\na period of moderate readjustment.\nRegraded Unclassified\n398\n$ -\nThe increase in private investment from \"confidence\" because\nof tax changes and the like - libely to be insignificant, so long\nas current production is not booking, and so long as new initiatives\nare lacking to out losse investment in the fields still low - parti-\nsularly in residential and commercial construction, utilities and\nrails.\n4. Urgent need for a. broad vigerous program, now. If this situation\nis to be altered for the better, a DEW vigorous program must be initiated\nnow, so that it one get through Congress in time to become offective in\nlate 1939 and early 1940. Such a program must be sufficiently vigorous\nto provide a positive business expansion here regardless of the uncertain=\nties created by the manouverings abroad. It must show the dictators that\ndemocracies too can not to provide jobs and welfare for their people.\n5. Elements of a possible program. The Fiscal Policy Committee is now\nstudying the elements that night 60 into a new positive program. Their\nreport within a for weeks will present a carefully considered not of\nundertakings. In the meantine, the minimum elements of an affective\nprogram may be miggested as follows:\n1. Passage of the proposed bill establishing the\nFederal (Fiscal) Agency to finance self=liquidating\nprojects outside the budget, in such shape as to\nprovide for the financing of new projects as well\nM existing ones.\n2. Passage of a bill providing for a broad program of\nread and highway projects, on a self-liquidating\nscale based en excess taking, as recommended in the\nrecent report of the Buresu of Public Reads. This\nwould provide for immediate now expenditures of\n800 million to me billion dollars per year.\nRegraded Unclassified\n. 4 -\n399\n3, Passage of the necessary legislation to provide\nfor an immediate start en re-squipping the rail-\nreads, without waiting for milread recrganism-\ntion. This would provide new investment of 600\nto 800 million dellars por year, and correct a\nprospective bottleneck that right prove highly\ndisastrous in time of national emergency.\n4. Passage of legislation to provide for building up\na war-time reserve of essential industrial domostic\nproducts and materials of durable nature.\n5. Authorization for similar self-liquidating invest-\nment in the fields of farm tonant purchase, low-\neast housing, utility equipment, etc.\nRapid authorisation and initiation of a program along these\ngeneral lines would make it possible to guarantee an expansion in do-\nmand and business activity over the next couple of years, without any\nextra burden on the federal budget, and regardless of a continuation\nof \"jitters\" abroad.\nRegraded Unclassified\nEFFECT OF WAR TENSION ON U. S. STOCK MARKET\nAND INDUSTRIAL ACTIVITY\nWeekly averages of,\ndustrial Stock Prices (Standard)\nadustrial Activity (Commerce)\nWS Index of War Tension\n(U. S. D. A.)\n1\n2\nHitler's Weimar Speech\nU.S. recalls \"ambassador\"\nSchact dismissed\nAustria\nCzecho-Slo Absorbed - Albania Invaded\n40\nAnti-Jewish Deorees\nFrench Financial Crises\nFirst Czecho-Slo Crisis\n30\n3\n20\n10\no\nJu.\nJy.\nA\nS\no\nN\nD\nJ\nF\nM\nA\nM\nJ\nM\n7\n4\n3\n1\n5\n3\n7\n4\n4\n1\n6\n3\n2\n6\n1939\n1938\nRegraded Unclassified\n401\nMay 20, 1939\nTo:\nThe Secretary\nFrom: Miss Lonigan E.R.\nThe total number of WPA workers on\nMay 10, 1939, is 2,657,762.\nThe decrease from the week ending\nMay 3 to the week ending May 10 was\n76,293 workers.\n402\nWORKS PROGRESS ADMINISTRATION\nNumber of workers Employed\nUnited States\nMonthly W.P.A. Employment\nWeekly W.P.A. Employment\n1935\n1936\n1937\n1938\n,\n1\nN\nJ\n-\nM\nJi\n$\n#\nJ\nM\n1939\nJ\n1938\n1939\nM\na\n\"\nJ\n-\nM\nJ\n&\nN\nBILLIONS\n-\n-\n-\nJ\n$\nN\nMAR,\nMAY\nJULY\nSEPT.\nNOV.\nJan.\nMAI.\nMAY\nJULY\nSEPT.\nNOV.\nof\nWILLIONS\nMILLIONS\nor\nWORKERS\nor\nor\nMORKERS\nBORKERS\nWORKERS\n3,5\n3.5\n3.4\n3.2\n3.4\n3.2\n3.3\n3.3\n3.2\n3.2\n2.5\n2.8\n3.1\n3.1\n3.0\n3.0\n2.4\n2.4\n2.9\n2.9\n2.8\n2.8\n2.0\n2.0\n2.7\n2.7\n2.6\n2.6\n2.5\n1.6\n1.6\n2.5\n2.4\n2.4\n2.3\n2.3\n1,2\n1.2\n2.2\n2.2\n2.1\n2.1\na\n.8\n2.0\n2.0\n1.9\n1.9\n,4\n14\n1.8\n1.8\n1.7\n1.7\no\no\n1.6\n1.6\nJULY\nSEPT.\nNOV.\n-\n3\nN\nof\n.\nE\n4\n5\n#\nJ\nE\nW\n5\nN\nM\nM\ne\nal\nM\nE\nIf\nJAN.\nMAR,\nMAY\nJULY\nSEPT.\nNOV,\nMAR.\nMAY\n1935\n1936\n1937\n1938\n1939\n1938\n1939\nSOURCE: WORKS PROGRESS ADMINISTRATION\nOffice of the Secretary of the Treasury\nDivision of - and States\nWORKS PROGRESS ADMINISTRATION\nNumber of Workers Employed - Weekly\nUnited States\n403\nWeek ending\nNumber of Workers\n1938\n(In thousands)\nAugust 6\n2,993\nAugust 13\n3,017\nAugust 20\n3,039\nAugust 27\n3,067\nSeptember 3\n3,086\nSeptember 10\n3,102\nSeptember 17\n3,114\nSeptember 24\n3,120\nOctober 1\n3,129\nOctober 8\n3,137\nOctober 15\n3,167\nOctober 22\n3,201\nOctober 29\n3,245\nNovember 5\n3,263\nNovember 12\n3,258\nNovember 19\n3,244\nNovember 26\n3,216\nDecember 3\n3,185\nDecember 10\n3,139\nDecember 17\n3,083\nDecember 24\n3,021\nDecember 31\n2,986\n1939\nJamary 7\n2,967\nJamuary 14\n2,927\nJamuary 21\n2,898\nJanuary 28\n2,883\nFebruary 4\n2,966\nFebruary 11\n2,964\nFebruary 18\n3,010\nFebruary 25\n3,043\nMarch 4\n3,034\nMarch 11\n3,009\nMarch 18\n3,012\nMarch 25\n3,006\nApril 1\n2,976\nApril 5\n2,901 a/\nApril 12\n2,757\nApril 19\n2,750\nApril 26\n2,749\nMay 3\n2,734\nMay 10\n2,658\nSource: Works Progress Administration.\nReporting date changed.\nConfidential.\nWORKS PROGRESS AIMINISTRATION\nNumber of Workers Employed - Monthly\nUnited States\n1936\nNumber of Workers\n(In thousands)\n404\nJanuary\n2,926\nFebruary\n3,036\nMarch\n2,872\nApril\n2,570\nMay\n2,340\nJune\n2,256\nJuly\n2,249\nAugust\n2,377\nSeptember\n2,482\nOctober\n2,581\nNovember\n2,483\nDecember\n2,192\n1937\nJanuary\n2,138\nFebruary\n2,146\nMarch\n2,115\nApril\n2,070\nMay\n1,999\nJune\n1,821\nJuly\n1,569\nAugust\n1,480\nSeptember\n1,451\nOctober\n1,476\nNovember\n1,520\nDecember\n1,629\n1938\nJanuary\n1,901\nFebruary\n2,075\nMarch\n2,395\nApril\n2,582\nMay\n2,678\nJune\n2,767\nJuly\n2,967\nAugust\n3,067\nSeptember\n3,120\nOctober\n3,245\nNovember\n3,216\nDecember\n2,986\n1939\nJanuary\n2,883\nFebruary\n3,043\nMarch\n3,006\nApril\n2,749 a/\nSource: Works Progress Administration.\nConfidential.\nMonthly figures are weekly figures for the\nlatest week of the month.\nThey include certified and non-certified workers.\n405\nMay 20, 1939\n9:04 a.m.\nAllan\nSproul:\nHello, Mr. Secretary.\nHMJr:\nGood morning.\nS:\nGood morning.\nHMJr:\nI wanted to ask you how much oredence you put into this,\nthat the market 18 figuring the thing to the maturity\ndate.\nS:\nHow much what?\nHMJr:\nCredence.\nS:\nWell, I think there's a -- quite -- I put quite a bit\nof credence into it. Enough to make me feel that we\nought to go in between figuring the -- to the cell\ndate and figuring to the maturity date.\nHMJr:\nAnd -- and that means what?\n8:\nWell, that's why I made the suggestions I made last night\nto shorten the optional period from three to two years\nand to try a six eight at -- at one and & half or a\nseven nine at one and five eighths, or an eight ten at\none and three quarters.\nHMJr:\nYeah. Well, Fahey doesn't care about the seven nine.\nHe'd Just as leave have it six eight.\nS:\nYeah.\nHMJr:\nAnd he says he'll take his chances.\n8:\nYeah.\nHMJr:\nAnd\nS:\nI just -- I Just had B. session with Levy from Solomon\nBRothers and Hutzler, and he's emphatic on that point.\nMost -- he's the most emphatic of any that\nHMJr:\nWhat does he say?\nS:\nHe says that the bonds should be figured to maturity,\nthat that's the only way to price an issue; that's the\nway bonds are sold.\nRegraded Unclassified\n406\n- 2 -\nHMJr:\nWell, if you figure it to eight years, our boys say\nit figures about par eight thirty-seconds.\nS:\nIf you figure it\nHMJr:\nTo maturity, on eight years one and a half.\nS:\nNo, we figure that eight years one and & half would\nshow about -- a premium of about twelve thirty-seconds\nto maturity; one and twenty thirty-seconds to the call\ndate.\nHMJr:\nWell -- well, then that's that much better. How much\ndo you figure it par? How much?\n8:\nWe figure\nHMJr:\npar -- twelve thirty-seconds.\nS:\nTwelve thirty-seconds to maturity.\nHMJr:\nYeah,\nS:\nOn the six eight year one and a half.\nHMJr:\nAnd to the call date twenty, huh?\nS:\nOne -- one and twenty.\nHMJr:\nOne and twenty. Well if -- did -- did Levy argue that\nthere wasn't enough gravy in a six eight one and a half?\nS:\nWell, his argument was that it wouldn't be priced right.\nHe said it would go -- that you could force anything on\nthe market but it wouldn't weather as well as it should;\nit wouldn't carry through bad times as well a.8 it should.\nHMJr:\nWell, they have a rule -- Home Owners' Loan -- that any-\nbody can offer them these securities at par and they'll\nbuy them. You see\nS:\nWell, that's -- that certainly checks against any\nHMJr:\nIn settle -- in settlement of their mortgages, you see?\nS:\nYeah.\nHMJr:\nSo they -- if -- if they went below par, these people\nwould be paying off their mortgages and buying these\nbonds.\nRegraded Unclassified\n407\n- 3 -\nS:\nYeah.\nHMJr:\nSo there'd be a -- did you know that?\nS:\nNo, I didn't.\nHMJr:\nYes, they can take these bonds, as I understand it,\nand pay off their mortgages and get a hundred cents on\nthe dollar on the bonds.\nS:\nI see, so that you have a buying group made to order\nthere if they get down to par.\nHMJr:\nOh, yes, and -- tremendous because they figure, you know,\nthat -- well, every year they'll have I don't know how\nmany millions of these things maturing and the people\nnaturally will be in the market to buy them the second\nthey go below par.\nS:\nYeah.\nHNJr:\nSo there -- there's a permanent cushion there.\nS:\nYeah.\nHMJr:\nSo I should think that would influence you a little bit.\nS:\nWell it does -- it pretty near takes care of the pos-\nsibility of there being a bad break in them.\nHMJr:\nThere can't be because -- I don't know the exact figures.\nWait a minute, let me ask -- (talkes aside.)\nArchie says that Fahey's only worry is that he's going\nto have more money come due than bonds. Hello?\nS:\nYeah.\nHMJr:\nSo I -- everything was on the bullish side on this.\nS:\nOf course, that's -- an estimate in expection of what\nwill happen.\nHMJr:\nBut in any event, let -- let's say he only had twenty-\nfive million a year available for this purpose. That's\na tidy sum.\nS:\nYeah, that's quite & help.\nEMJr:\nAnd he's talking in much bigger figures than that.\nRegraded Unclassified\n408\n- 4 -\nS:\nYeah.\nHMJr:\nAnd of course we can't buy these for Postal Savings.\nS:\nNo.\nHMJr:\nSo I would think if there were twelve thirty-seconds\nmargin to the call date that that ought to be ample.\nS:\nTwelve thirty-seconds to maturity.\nHMJr:\nTo maturity.\nS:\nSo do I. I think a six eight one and a half would be\nall right.\nHMJr:\nAnd I'll -- I'll get word to them that whatever they\ndo in their publicity we should point out in the pub-\nlicity that these bonds can be used to pay off mort-\ngages so that the market will know that.\nS:\nI think they should do that.\nHMJr:\nRight.\nS:\nYeah.\nHMJr:\nWell, I'll be calling you again a little later.\nS:\nAll right.\nHMJr:\nThank you.\n409\nMay 20, 1939\n10:46 a.m.\nRonald\nRansom:\nHello, how are you?\nHMJr:\nHello, Ronald.\nR:\nI did not know whether our views had been asked on this\nH.O.L.C. financing or not. Marriner 18 out of town.\nHMJr:\nNo, but I'd be delighted to have them.\nR:\nWould you?\nHMJr:\nYeah. Now\nR: '\nWell, -- always a little hard put to -- to express views\nwhen they're asked and I'm particularly reluctant to\nexpress them when they're not....\nHMJr:\nWell, I tell you what you do.\nR:\nYeah.\nHMJr:\nWe're going to talk about it at eleven thirty.\nR:\nYes.\nHMJr:\nWould you come over?\nR:\nYes, can I bring Piser with me?\nHMJr:\nWho?\nR:\nPiser.\nHMJr:\nAnybody you want.\nR:\nThanks.\nHMJr:\nWill you do that?\nR:\nI'll be there at eleven thirty.\nHMJr:\nI -- I didn't know that the Fed. was interested. I'll be\nhonest.\nR:\nWell, we are not -- only insofar 8.8 there may be some\nresponsibility on us about the market. I've been dis-\ncussing with Piser his views as to\nRegraded Unclassified\n410\n- 2 -\nHMJr:\nWell, come on over -- come on over -- -- I tell you what\nyou do.\nR:\nYes.\nHMJr:\nSend -- why don't you send Piser over fifteen minutes\nearlier and let him talk to Bell?\nR:\nI'll do that.\nHMJr:\nSee?\nR:\nI'll send him over to Bell's office at a quarter past\neleven and I'll be at your office at eleven thirty.\nHMJr:\nYeah. I'm delighted you called me up.\nR:\nO. K. Good bye.\n411\nMay 20, 1939\n11:41 a.m.\nHMJr:\nHello.\nPat\nHarrison: Henry.\nHMJr:\nHow are you?\nH:\nWell, you -- you've got an engagement and you've got\nsome people in there?\nHMJr:\nThey'll be gone in ten or fifteen minutes.\nH:\nWell, I was going out to the Club and I thought if you\nweren't busy that I'd drop by there in about ten\nminutes.\nHMJr:\nIt would be a pleasure.\nH:\nAnd just talk to you and Johnny a minute.\nHMJr:\nIt would be a pleasure.\nH:\nAll right.\nHMJr:\nHe'll be here.\nH:\nAll right.\nHMJr:\nThank you.\n412\nRE HOLC REFUNDING\nMay 20, 1939.\n11:30 a.m.\nPresent:\nMr. Hanes\nMr. Lochhead\nMr. Bell\nMr. Haas\nMr. Seltzer\nMr. Murphy\nMr. Hadley\nMr. Kilby\nMr. Ransom\nMr. Piser\nH.M.Jr:\nIf these had been bills we were discussing, the\npossibility of letting half of them run off, some-\nthing like that, we'd have called you up first (to\nRansom).\n(Hanes comes in)\nHanes:\nGood morning.\nH.M.Jr:\nMeet Mr. Ronald Ransom, the forgotten man.\nHanes:\nHello, Ronald, glad to see you.\nH.M.Jr:\nWell, do you want to hear what - how we sit on\nthis thing now?\nRansom:\nYes, I would.\nH.M.Jr:\nWell, we've been talking around and the men up in\nNew York have been talking, and everybody agreed\nwe wanted to get beyond five years on account of\ntheir maturities and our maturities. So it's &\nsix-year something or seven-year something or\neight-year something.\nAnd then, on account of - the New York people, for\ntheir own interests, have thrown a little scare\ninto us because they - they tell us they're figuring\nthis thing to maturity instead of call date. They've\ngot us a little worried on that, because they'll\nsay, \"If you sell a one and & half, one and five-\neighths, why, you're going to let that run to\nmaturity because it's so damn cheap, you're not apt\nto get it again.\" So we've got to take that into\nconsideration.\n413\n-2-\nNow, naturally, wanting to be economical, not\nwanting to spend too much money, we try to get\nthe lowest coupon possible, at the same time\nfitting the maturity dates. Fahey says that as\nfar as he's concerned, six to eight years is all\nright, he isn't going to worry about the ninth\nyear.\nSo, after going around and around and talking to\nNew York several times, what it looks like is a\none and a half, six to eight years. Put nothing\nis settled. We can be unsold, sold on sode new\nmerchandise. DO if that doesn't look good to you,\nwhy, I'd be delighted to hear from you.\nRansom:\nOf course, our interest in it is simply due to\nour interest in the general Government situation.\nAnd in discussing it this morning, those Board\nmembers who were in town, with Mr. Piser, we did\ndevelop some ideas which I'll ask him to express\nfor you. They seem to us perhaps to be worth\ncalling to your attention, at least, under the\ncircumstances of the case. And I'll just ask him\nto tell you what conclusion we had reached on that.\nOf course, this is entirely informal. The Doard\nhasn't acted formally on it, the Open Market\nCommittee hasn't; it's just for what it may be\nworth to you.\nPiser:\nwell, taking the yields off the line that may be\ndrawn through the outstanding guaranteeds on a\nsix-year callable issue, I get a yield of sbout\none and twenty-two. And, considering the fact\nthat this is an exceptionally popular maturity with\nbanks, that it is an issue entirely in exchange,\nwith no cash, and that it will be E low-priced\nissue, which is generally very popular in the\nmarket, it seems to me that those three factors\ntend to bring down the yield at which such an\nissue would actually sell in the market. I am\nbasing that partly on the 1947 bonds, which are\nselling out of line with the '45 and the '48 issue,\nand also on the basis of the Home Owners Loan issue\nof 1942, which is selling out of line. Taking those\nfactors into consideration, I come out on E six-eight,\nfor example, with a yield of one twelve, and if that's\n414\n-3-\ngiven a coupon rate of one and a half percent,\nit would sell in the market at something over a\ntwo-point premium, which I think would be a very\nsubstantial profit to give the holders of the\nmaturing issue. It might have reaction on the\nSeptember and December rights, causing them to\njump up in price and perhaps disturbing the whole\nmarket.\nI don't place very much weight on the final\nmaturity of the issue, simply because it would -\nbecause the issue would sell at a substantial\npremium; even a one and three-eighths of six-eight\nyear maturity on the basis of the call date, I\nfigure, would sell at about a point and a half\npremium. So that under those conditions I don't\nthink very much weight would be given to the final\nmaturity.\nFor that reason, it seems to me that on a six-year\ncall B one and three-eighths coupon would be ample,\nand on a seven-year call date a one and a half\ncoupon would be ample. That's my story.\nH.M.Jr:\nWell, I appreciate it, but I think you've always\ngot to weigh what is fair and then weigh what is in\nthe minds of your customers. And, right or wrong,\nfor the first time they are thinking of the\nmaturity date. And, using one and a half as an\nexample, I'd put it down - I'd say, \"Well, I doubt\nif they're going to call that in six years; I think\nwe better figure that eight years, because along in\n144, '45, '46, one and a half percent will be so low\nthey won't be able to refinance it and they '11 let\nthe thing run its whole date.\"\nNow, maybe they're wrong, but, damn it, that's what's\nrunning through their minds. Now, you take your one\nand you get a minus return\nPiser:\nIf it's figured to maturity.\nH.M.Jr:\nYes, you get a minus return if you - and with a 900\nmillion dollar thing, I can't afford to take that\nchance. I made a million dollars for them by waiting\nRegraded Unclassified\n415\n-4-\none week. We can at least go one-eighth - you say\nwe can go at least one-quarter cheaper. Put if they\nfigure it that way, we'd be sunk.\n(on phone) Hello. (Conversation with \"llan\nSproul follows:)\n416\nMay 20, 1939\n11:45 a.m.\nHMJr:\nHello.\nOperator: Mr. Sproul. Go ahead.\nHMJr:\nHello.\nAllan\nSproul:\nHello, Mr. Secretary.\nHMJr:\nWell, we're waiting to hear from the mountain.\nS:\nWell, we've gone over it again and we still think a\nsix eight year one and a half, taking account of the\nmarket and what the corporation wants to do, would be\nabout the best bet.\nHMJr:\nUm-hm. Now, -- anybody been in since then to see you?\nS:\nWell, this morning I talked to Solomon Brothers, Dis-\ncount Corporation, First Boston Corporation, and they\nrange from -- Solomon pessimistic and wanting to give\nhigher rates, to the First Boston, which is very\noptimistic and suggests that six eight -- six and a\nhalf eight and a half at one and a half rather than a\nsix eight.\nHMJr:\nWhat do they suggest?\nS:\nA six and a half eight and a half year one and a half.\nHMJr:\nYeah.\nS:\nBut our view is that a six year eight year one and &\nhalf would hit the market better.\nHMJr:\nWho says 80?\nS:\nThat's our view after listening to all these people and\ntalking it over ourselves.\nHMJr:\nWell, Ronald Ransom 1s here. I wonder if he wants to\nask you anything. (Talks aside.)\nWell now, will you hold on a minute and we'll go around\nthe room, will you? After listening to everybody you\nthink six eight one and a half huh?\nS:\nYeah.\n417\n- 2 -\nHMJr:\nPiser thinks it may go to a hundred and two.\nS:\nWell, that's possible, although we figure that it's\nmore likely to go to a hundred and one and a half.\nHMJr:\nUh-huh. Well, now just a moment.\n(Pause)\nWell, everybody -- I don't know -- Mr. Ransom hasn't\nexpressed his opinion, BO I won't include him, but I\nguess we'll make it six eight one and a half.\nS:\nAll right, sir. We'll get a wire from you.\nHMJr:\nYeah.\nS:\nFine ! I think it'll go well.\nHMJr:\nWell, this -- this 18 something new -- this -- a bond\nat one and a half and I don't want to take any chances\non having these fellows figure to maturity in the minus.\nS:\nNo, and we'll take that into account - it's something\nnew, EL bond at one and a half with an optional feature.\nHMJr:\nYeah.\nS:\nAnd while I think cutting down the option that two years\nwill dispel a lot of that 1dea of figuring to maturity,\nthere's still some of it around.\nHMJr:\nO. K. Thank you.\nS:\nAll right, sir.\nHMJr:\nThank you very much.\nS:\nGood bye.\nHMJr:\nGood bye.\n418\n-5-\n(There follows the poll of opinion which H.M.Jr\nmade during conversation with Sproul:)\nH.M.Jr:\nWho doesn't think six-eight one and a half?\nJohnny?\nHanes:\nThat's - I think that's about the right answer,\nmyself.\nSeltzer:\nO.K.\nLochhead:\nI still prefer the six-nine, but I have no objection\nto the six-eight.\nMurphy:\nI prefer it.\nH.M.Jr:\nWhat?\nMurphy:\nI prefer the\n....\nH.M.Jr:\nPrefer what?\nMurphy:\nSix-eight, one and a half.\nH.M.Jr:\nSix-eight.\nHaas:\nSix-eight, one and a half. I think you'd rather take\nthe risk in the possibility of its going to two; but\nthat risk is better than going the other way.\nDell:\nI think it will go to two, Mr. Secretary, when the\nspread between guaranteed and direct Government\nobligations is closer together. They are now far\napart.\nBadley:\nSix-eight, one and a half, would be all right. 4%\nsix-nine would go, though.\nH.M.Jr:\nAnything?\nKilby:\nNo.\nH.M.Jr:\nDan?\nBell:\nI agree to that.\n419\n-6-\nH.M.Jr:\nDo you (Ransom) want to ....\nRansom:\nNothing more.\nH.M.Jr:\nWhat?\nRansom:\nNothing more.\n(H.M.Jr then finished up conversation\nwith Sproul)\n* * * * * *\nH.M.Jr:\nThank you. At least you know how we arrived at it.\nAansom:\nYes, exactly.\nMay 20, 1939.\nBy dear Senaters\nX have your recent letter without date commenting\non Section 4 of s. 501. You state that the purpose of this\nsection was to make the bonds of local public housing enthor-\nities, secured W a pledge of annual contributions under a\ncontract with the United States Housing Authority, available\nfor investment and underwritting by National banks and banks\ndifiliated with the Federal Reserve System. Tou express the\nhope that before I mis my statement of my views upon this\nmatter you will be given - opportunity to discuss 11 with\ná\nThe Comptroller of the Currency has given serious -\nsideration to this section and has conferred at length with\nthe Administrator of the United States Housing Authority\nregarding its effect upon National banks. After studying\nevery angle the Treasury has dome to the vary definite cos-\nclusion that Section 4 should be eliminated from the bill\nfor the reasons set out in the copy of the attached report\nwhich I contemplate sending to the Director of the Bureau of\nthe Budget in response to his request for my comments on the\nproposed legislation.\nIf, after you have read this report, you still with\nto confer with If I shall be glad to ⑉ you on the matter.\nVery truly yours,\n(Signed) H. Morgetsthau, It.\n5-20-30\nSecretary of the Treasury.\nSenorable Rebert 1. Taguer,\nUnited States Senate,\nFashington, D. C.\nBy hand\nEnclosures.\nRegraded Unclassified\n421\nfire\nReference is mde to Mr. Bell's letter of February 27, 1959, No-\nquesting as expression of the views of the Treasury Department with\nrespect to s. 501, 4. bill to amend the United States Housing Act of\n1957, and for other purposes, and enclosing e copy of e proposed re-\npart by the Administrator of the United States Housing Authority rela-\ntive to this bill.\nSection 1 of the Mill would authorize the United States Housing\nAuthority to enter into additional contracts which will provide for\nannual contributions aggregating not more than $45,000,000 per annua.\nUnder Section 2 the Authority is authorized to issue and sell its\nobligations in an amount not to exceed $600,000,000 in addition to\nthe amount of such obligations heretofore authorised, namely,\n$800,000,000. Section 5 would amend Section 2 (10) of the United\nStates Housing Act of 1937 defining the going Federal rate of inter-\nest. Section 4 of the Bill would persit national tanks and State\nsember banks of the Federal Reserve System to underwrite or purchase\nbonds of public housing agoucies which are secured by 6. pledge of\npayments under annual contributions contracts with the Authority,\nwithout regard to the limitations and restrictions provided in sec-\ntion 5158 of the Revised Statutes of 1875, as asended (U.S.C., Sup.\nIV, title 12, sec. 24).\nRegraded Unclassified\n422\n- 2 -\nThe Treasury is not in . position to comment upon the neces-\nsity for the enactment of sections 1, 2 and 8 of the proposed logic-\nlation since matters relating to the administration of the United\nStates Housing Act. of 1957, as aneaded, do not come under the juris-\ndiction of this Department. It is noted, however, that 8. 891 would\nauthorise as additional annual charge on the Federal Budget up to\n$45,000,000 por ennus for contributions to public housing agencies\nto assist in achieving and saintsining the low reat character of\ntheir housing projects. In addition, the United States Housing\nAuthority is authorized to issue and sell $800,000,000 more of its\nohligations, the proceeda to be used in making loans to easist in\nlow-ront housing or slum-cloarance projects, which obligations are\nfully and unconditionelly guaranteed by the United States as to the\npayment of both interest and principal.\nSection 4 of 8. 591 provides that The last sentence of pare-\ngraph Seventh of soction 5136 of the Revised Statutes, as assended,\nis asended by inserting before the colon, after the words 'obliga-\ntions of national mortgage associations', 6. comms and the follow-\nings for such obligations of any public housing agency (as defined\nin section 2 (11) of the United States Housing Act of 1987, as\nascunded) as are secured by a pledge of payments under an annual\ncontributions contract between such agency and the United States\nHousing Authority\".\nRegraded Unclassified\n423\n- $ -\nwith reference to this section the Administrator of the United\nStates Housing Authority, in his proposed report, states that, This\nsection would amend the Banking Act 00 that national banks and (to\nthe extent permitted by state laws) sembers of the Federal Reserve\nSystem will be enabled to underwrite or purchase bonds of public\nhousing agencies which are secured by a pledge of payments under an\nensual contributions contract with the USHA\".\nParagraph Seventh of section 5156 of the Revised Statutes of\n1975, as essanded (U.S.C., Sup. IV, title 12, sec. 24) provides in\ngeneral that national banks (the restrictions are also extended to\nState member tasks of the Federal Recerve System by section 9 of\nthe Federal Reserve Act, as emended (U.S.C., title 12, sec. 585))\nshall not deal is securities or stocks for their own account or\nunderwrite occurities or stock, but persits national banks to pur-\nchase for their own account *investment securities\", under lisits-\ntions and restrictions prescribed by the Comptroller of the Currency,\nprovided that a bank shall not hold for its own account the invest-\nnext securities of any one obliger or maker in excess of 10 per\ncostum of the bank's unimpaired capital stock and 10 per centus of\nits unimpaired surplus. Paragraph Seventh govides further that the\nlimitations and restrictions contained therein, ⑉ to dealing in,\nunderwriting and purchasing of investment securities, shall not age\nply to certain types of obligations, including \"obligations which\n424\n- 4\nare insured by the Federal Housing Administrator pursuant to section\n207 of the National Housing Act, if the debentures to be issued is\npayment of such insured obligations are guaranteed as to principal\nand interest by the United States\".\nIf the obligations of public housing agencies are *investment\nsecurities\" under section 5186 of the Revised Statutes and the regula-\ntions of the Comptroller of the Currency issued purcuant thereto, M+\ntional tanks could under existing les purchase for their own account\nobligations of & local housing e@Gacy la an amount up to 10 per centus\nof the unispaired capital and unter surplus of the bank. The of-\nfect of the amendment to section 5136, proposed by section 4 of 8. 501,\nwould be to authorise national banks (and State sentor banks of the\nFederal Reserve System, if not prohibited by State law) to underwrite,\nand to purchase for their own account, obligations of a public housing\nagency in unlimited asounts, since such obligations would be exempted\nfrom the restrictions contained in section 5188.\nThe Administrator of the United States Housing Authority states\nthat the assissent proposed by section 4 of 8. 501 *would place bonds\nof local housing authorities in the case category as certain obliga-\ntions Lasued in connection with private housing construction and 100\nsured by the Federal Housing Administration\". It my be implied from\nhis statement that obligations of public housing agencies should be\nexcepted from the restrictions in section 5156 because they are of the\nRegraded Unclassified\n425\n- 5 -\ncame character an cortain obligations insured by the Federal Housing\nAdministration pursuant to section 207 of the National Housing Act,\nwhich ere, at present, exempted from the restrictions in section 5136.\nThe mortgages insured by the Federal Housing Administration pursuant\nto section 207 of the National Housing Act, 88 amended (U.S.C., Sup.\nIV, title 12, see. 1715) are mortgages covering residential propertion\nhold by public or private agencies, for the purpose of rehabilitation\nof alum or blighted areas or providing housing for rent or sale, the\nrents or sales being regulated under housing laws or by the Federal\nHousing Adulnistrator, and such nortgages say involve a principal\nobligation as large as $5,000,000. It is these obligations which are\nexpressly excepted from the limitations and restrictions contained in\nsection 5156 of the Revised Statutes by the language thorein covering\n\"obligations which are insured by the Federal Housing Administrator,\npursuant to section 207 of the National Housing Act, if the debentures\nto be issued in payment of such insured obligations are guaranteed as\nto principal and Interest by the United States.\". The effect of that\nexception is to renove obligations insured under section 207 of the\nNational Housing Act from the restrictions contained in section 5136,\nincluding the 10 per centas limit on purchases by national banks, and\nfurther to remove thes from any restrictions contained in regulations\nLanged by the Comptroller of the Currency pursuant to section 5136.\nIn the opinion of this Department honds of public housing agencies\nRegraded Unclassified\n126\nRegraded Unclass\n- 6 -\nare not of the same character, in 80 far as security la conserned,\nas obligations insured persuant to section 207 of the National Hous-\nSag set. In cape of default by the mortgager under a mortgage is-\nsured pursuant to section 207, the nortgages is entitled to exchange\nthe mortgage for debentures which are fully and unconditionally guar-\nacteed as to principal and interest by the United States. It should\nbe noted that section 5136 of the Revised Statutes excepts oblige-\ntions insured under section 207 of the National Bounding Act, provided\nthat The debentures to be logged in seveent of such insured oblige-\nNone are guaranteed as to orincipal and interest by the United States.\".\n(Underscoring supplied) On the other hand, bonds of public housing\nagencies, which it is proposed, by section 4 of 8. $92, to except free\nthe restrictions contained in section 5136 of the Revised Statutes,\nPare secured by a pledge of payments under an annual. contributions come\ntract between such agency and the United States Housing Authority\".\nIt would seen clear that a pledge of payments ander as annual con-\ntributions contract, made pursuant to section 601 of the United States\nHousing ist of 1957, \" anouded (U.B.C., Sup. IV, title 42, sec, 1410),\nwould not be security equal in value to debentures \"guaranteed as to\nprincipal and interest w the United States\". The bonds of public\nhousing agencies are not obligations of the United States, nor are\nthey guaranteed as to the payment of principal OF interest by the\nUnited States. Section 10 of the United States Boaning Act of 1957,\n127\n- 7 -\nas ass red (U.E.C., Eup. IV, title 42, 100. 1410) provides that the\nUnited States Housing Authority sig Make annual contributions to\npublic housing agencies to assist in schieving and saintaining the\nlow-rent sharacter of their housing projects and the faith of the\nUnited States Le pledged . the payment of all annual contributions\ncontracted to be made by the Authority. Section 10 provides, further,\nthat premote under *nnual contributions contracts shall be pledged\nDE security for any loans obtained by public housing agencies to 48-\nsist in the development of the housing projects to which the annual\ncontributions rolate, provided that annual contributions shall first\nbe used to apply toward the payment of interest or principal or the\nnatures on any loan due to the Authority from the public housing\nagencias. Thus, under existing law conual contributions estimated\nand pu-14 by the Authority are pledged toward the payment of mublic\nhousing aguncies' bonds, fter natured primoipal and interest on loans\nowing to the Authority bire been paid. This constitutes the basic 20-\nowity for the payment of such bonds, and it is understood that under\nthe fina of contract which the Authority contemplates entering into\nwith ubile housing agencies it In intended that the annual contribu-\ntime will be enloulated in such & manner AS to be sufficient to\nemerties the principal and interest on the public housing agencies'\nbonds.\nSection 10 of the United States Housing Act of 1937, as amended,\nRegraded Unclassified\n428\n- 6 -\nin addition to authorizing the Authority to determine the anount\nof the annual contributions payable to each public housing agency\nto assist in achieving and maintaining the low-reat character of\nthe projects, gives the Authority very broad powers to modify a\ncontract covering annual contributions and to reduce the amount of\nor terminate such contributions. That section provides that where\n6 contract for ensual contributions is ande for A period exceeding\n20 years, the Authority shall reserve the right to reexasine the\nstatus of the housing project involved at the end of 10 years and\nevery 5 years thereafter. If the Authority Le of the opinion that\nchanged conditions 80 worrant it any modify the amount of subsequent\nenmual contributions payable to assist in maintaining the los-rent\ncharacter of the project.\nSection 15(3) of the United States Housing Act of 1937, AS\ncanded (U.S.C., Sup. IV, title 42, sec. 1415(3)) provides that\nthe Authority shall retain the right, in the event of 8 substantial\nbreach of the conditions contained in 42 contract with a public hous-\ning agency providing for the maintenance of the low-rent character\nof the housing project involved, to reduce or terminate the annual\ncontributions payable under such contracts. Also, in the event of\nthe acquisition of such project w a third party the annual contri-\nbutions shall terminate.\nAccordingly, under existing law the basic security for the bonds\nRegraded Unclassified\nof public housing agencies is the annual contributions payable by\nthe Authority to such agencies, which contributions are for the pa-\npone of misteining the los-rent character of the projects. Dodne\nthe law the Authority bas the power to change a contract providing\nfor ennual contributions and to reduce or terminate antiraly such\nannual contributions. Toun, the basic security for these public\nhousing agencies' bonds could be drantically altered.\nIt is understood that the Authority has prepared & proposed\nform of contract covering sunual contributions under which it 10\ncontended that any doubt as to Bir validity or continuance of the\nsanuel contributions as security for the public housing agency honds\n1a almost entirely aliminated. This suggested contract 10 al. very\ninvolved document, which It does not appoar necessary to discuss in\ndotail at this time. The contract ratoon a number of legal questions\nwhich it 12 understood are baling referred by the Authority to the\nAttorney General for an opinion.\nEven assuming that the Attorney General should hold that the\nproposed form of contract 10 logal, and accuring further that such\n6 contract would assure that the manual contributions payable to a\npublic housing agency would be sufficient to anortise the boade of\nsuch agency and that such ennual doctributions would not be reduced\nor terminated until such bonds have been retired, it inposible that\nin the future the form of contract could be changed too the Authority\nRegraded Unclassified\n430\n- 10 -\nin such a menner 46 to lessen the value of the annual contributions\nas accurity for a new bond Laove. Such 45 new brad issue night be\nof a different character then a previous issue, in EO for as the no-\nture of the security for the bonds was concerned.\nÀs already pointed out above, If section 5136 were usended --\nproposed in S. 591, not only vould actional banks be authorized to\npurchase for their own documt obligations of vublic housing agencies\n=1thout limit, but they would also be authorized to underwrite such\nobligations in unlimited counts. It should be resembered that, in\nenseting the Binking Act of 1933, It 108 clearly the intention of\nCongress to divorce the commercial benking business fre \"the bust-\nness of issuing, underwriting, selling, or distributing, it sholesale\nor retail, or through syndicate perticipation, stocks, bonds, doben-\ntures, notes, or other securities\". (Section 22 of the Banking let of\n1933, 0.0 unended (U.S.C., Sup. IV, title 12, sec. 378)) In ite report,\nthe Benste Comaittee on Bonking and Currency stated:\n\" . Wational banks were never intended to under-\ntake investment banking business on - Large scale,\nand the whole tenor of legislation and <dministra-\ntive rulings concerning them has been away from\nrecognition of such a growth in the direction of\ninvestment banking 16 legitimate. Nevertheless\nit has continued; and a very fruitful cause of bank\nfailures, especially within the past three years,\nhas been the fact that the funto of various insti-\ntutions have been DO extensively 'tied up' in long-\nterm investments.\" (Senste Report No. 77, 73rd Cong.\nlot Seas., Pe 8)\nRegraded Unclassified\n431\n- 11 -\nIf the bonds of public housing agencies were exampted from the\nprehibition against underwriting contained in section 5188, the re-\nsult night be the formation of a syndicate, including a number of\nnational banks, for the purpose of underwriting these bonds. It is\nbelieved that it would not constitute a destrable tondency for M-\ntional basks to participate in such an underwriting arrangement.\nIn view of all the facts, it is the opinion of the Treasury De-\npartment that it would be unwise to increase the existing exceptions\nto section 5186 of the Revised Statutes, by exempting from the re-\nstrictions and limitations contained therein the obligations of public\nhousing agencies. Accordingly, this Department is of the opinion that\nsection 4 of S. 591 should not be enacted.\nVery truly yours,\nSecretary of the Treasury.\nthe Mrestor\nBuress of the Budget.\nDistes typed 3.17.39 - 5.5.59\nRegraded Unclassified\n132\nFEDERAL RESERVE BANK\nOF NEW YORK\nMay 20, 1939.\nDear Mr. Secretary:\nThe three corporate security issues included in this week's total of\n$3,700,000 illustrate both the emall volume of such offerings and the ready de-\nmand which meets most offerings when sttractively priced. Three relatively\nsmall companies obtained funds; one by placing bonds privately with en insurance\ncompany, and the other two by public offerings which were oversubscribed the\nfirst day. The private placement was by the Continental Steel Corporation, for\nrefunding, and was en issue of debentures due in ten years, bearing the low\ninterest rate of 3 per cent. The two public offerings were for new capital pur-\nposes end were stock issues: the Tilo Roofing Company marketed $1,500,000 of\nconvertible preferred stock to yield 5 1/2 per cent, and the Mansfield Tire and\nRubber Company floated $200,000 of additional common stock.\nArrangements for a $22,500,000 private sale of refunding bonds of the\nIndiana and Michigan Electric Company are reported to be nearly complete. Two\nbond issues totaling $19,000,000, mainly for refunding, of the Houston Oil Com-\npany and Montena-Dakota Utilities Company, are scheduled for marketing next week;\nend two utility company bond issues totaling $25,000,000, also mainly for refund-\ning, have been placed in registration. Ae the above details indicate, prospective\nissues for the next three weeks are mostly for refunding and in small volume.\nRegistration of the $135,000,000 Pennsylvania Power and Light Company refunding\noperation is expected any day now. It will raise the level of flotations but make\nno contribution to borrowing for new capital.\nMunicipal awards continue to be sold quickly, even though the yields are\nbeing steadily lowered. Some borrowers have recently sold serial issues due in\n1 to 10 years at interest costs of from 1 1/4 down to less than 1 per cent.\nAwards this week totaled about $10,000,000.\nYours faithfully,\nAlbin Sproul,\nFirst Vice President.\nHon. Henry Morgenthau, Jr.,\nSecretary of the Treasury,\nWashington, D.C.\nRegraded Unclassified\n433\nReturn to Room 286\nMagr 23, 1989.\nDear Mr. Sproul:\nFor the Secretary I an acknowledging\nyour weekly letter dated May 20th, report-\ning on the corporate security issues for\nthe past few days.\nMr. Morgenthau very such sppreciates\nthe comments you pass on to his.\nSincerely yours,\n(Signed) H. S. Klotz\nH. s. Klots,\nPrivate Secretary.\nMr. Allan Sproul,\nFirst Vice President,\nFederal Reserve Bank\nof New York,\nNew York, New York.\nGEF/dbs\nf F\nRegraded Unclassified\n434\nMay 20, 1939\nHM, Jr called General Watson and said to\nhim, \"I am talking from home. I sprained my back.\nTo tonight's papers we are giving out a statement to\nbe published tomorrow morning that we are going to\nrefund $900,000,000 of HOLC bonds on Monday. Normally\nI would Just go ahead with a thing like this. Will\nyou tell that to the President? If I do not hear from\nyou by three o' clock, I will take it that he has no ob-\njections. I am recommending it.\"\nNA\n135\nEG\nGRAY\nLondon\nDated May 20, 1939\nRec'd 10:35 a.m.\nSecretary of State,\nAA\nWashington.\n720, May 20, 1 p.m.\nFOR TREASURY FROM BUTTERWORTH.\nAt the meeting yesterday afternoon of the American\nbrokerage houses in London, referred to in numbered\nparagraph 3 of my 694, May 16, 9 P.M., after a great\ndeal of discussion it was decided that a resolution\nshould bE conveyed to the Bank of England, the precise\nwording of which has not yet been determined. HOWEVER,\nI am informed it will Express the willingness of the\nAmerican brokerage houses to cooperate with the British\nmonetary authorities and to that End they will agree to\ncall the attention of clients to the Chancellor's request\nfor prohibition, that is if the prospective transactions\ninvolve the transfer of sterling into dollars and are not\nmeraly switches or the using of existing dollar balances.\nThe question of circulars was also discussed and it\nwas decided not to discontinue them because it might prove\ndifficult in that CASE to restart. HOWEVER, for the time\nbeing\nRegraded Unclassified\n436\n-2- #720, May 20, 1 p.m. from London\nbeing recommEndations of particular securities and predic-\ntions as to the trend of the last mentioned are to be avoid-\nEd.\nI might add that the practical test of the Efficacy\nof Simon's voluntary restriction on purchases of foreign\nsecurities will occur if and when the NEW York stock market\nbegins a definite upward movement. Even before Simon's\nstatement the volume of trading in American securities was\nat a very low Ebb, and since the first of the year London\nhas probably been on balance a seller at American common\nstocks. In any CASE there has been an abnormal growth in\nthe number of American brokerage houses in London from\nabout ten in 1931 to about thirty today. This development\nhas not been favorably regarded by the Bank of England.\nFor instance, in a conversation I had with Montagu Norman\njust before I sailed for America last November, he in-\nveighed against the London branches of American stock\nbroking houses which, contrary to British practice, went\nabout soliciting business and Encouraging the movement of\nfunds from London to the United States.\nKENNEDY\n07/11/19\nPEG:KLP\nRegraded Unclassified"
}