Volume 259, May 1 – May 3, 1940

DIARY Book 259 May 1 - 3, 1940 Regraded Uclassified - A - - Book Page Australia See War Conditions - B - - Banking Legislation Jones, Jesse: Amendatory legislation proposed by: Foley memorandum - 5/3/40 259 338 Business Conditions Economic Developments: Noble (Commerce Department) memorandum - 5/3/40 364 - C - Coast Guard See War Conditions - D - Denmark See War Conditions: Scandinavia - F - Finland See War Conditions Freight Shipments Haas memorandum - 5/2/40 198 - G - - General Counsel, Office of Progress report for April - 5/3/40 275 General Motors Ward, J. Carlton, Jr.: In charge of mission to France; wife accompanying - 5/3/40 413 See also Book 260, pages 141,144,151 Gold See War Conditions: Gold; United Kingdom Great Britain See War Conditions: United Kingdom Grumman Aircraft Engineering Corporation See War Conditions: Airplanes - I'- Book Page Indiana See Tax Evasion International Hydrographic Bureau See War Conditions: Gold Monaco Italy See War Conditions: China - J - Japan See war Conditions: United Kingdom Jones, Jesse See Banking Legislation - K - Kennedy, Joseph P. For letter to FDR, see War Conditions: United Kingdom , - M - McNutt, Paul V. See Tax Evasion: Indiana Monaco See War Conditions: Gold Monte Carlo See War Conditions: Gold - Monaco - N - Norway See War Conditions: Scandinavia - R - Research and Statistics, Division of Progress report for April - - 5/3/40 259 320 - S - Switzerland See War Conditions: Scandinavia Regraded Uclassified - T - Book Page Tax Evasion Indiana: McNutt, Paul V.: Corrected income statement, 1933-1938, showing $2,138 additional taxes - 5/2/40 259 179 a) HMr, Helvering, end Graves confer; Helvering: "No basis for criminal prosecution" Turkey See War Conditions - U - United Kingdom See War Conditions United States See War Conditions - W - har Conditions Agriculture: Resume of significant foreign developments - 5/2/40 261 Airplanes: Grumman Aircraft Engineering Corporation requests deferment of delivery of 80 F4F-3 airplanes to Navy so that they may be delivered to France - 5/1/40 11 Inquiry from Turkey concerning possible purchase of pursuits and dive bombers - 5/3/40 410 General Motors mission to France: Ward (J. Carlton, Jr.) in charge; wife accompanying - 5/3/40 413 See also Book 260, pages 141,144,151 Australia: Twenty dollar stocks listed to be sold and proceeds placed with Federal Reserve Bank of New York - 5/1/40 20 China: Italian Bank for Chine now in position to meet any emergency: Report of American Consulate General, Shanghai - - 5/1/40 27 Coast Guard: Supplemental estimates to the budget - 5/3/40 418 Exchange market resume - 5/1/40, et cetera 1,226,359 Finland: Population in area ceded to Russie moving within new boundaries of their fatherland: Report from American Minister, Helsinki - 5/1/40 24 Regraded Uclassified - W - (Continued) Book Page War Conditions (Continued) Gold: Monaco: International Hydrographic Bureau inquires concerning possibility of earmarking gold with Federal Reserve Bank of New York - 5/1/40 259 4 a) Federal Reserve Bank of New York opposed unless Government strongly insists; privilege should be reserved only for central banks or agencies similar thereto b) State Department probably would raise no objection c) Copy of request 7 1) Federal Reserve Bank of New York memorandum on Bureau 8 d) Federal Reserve Bank of New York informed HMJr agrees with their position - 5/4/40: See Book 260, page 13 e) Further correspondence: See Book 267, pages 258,259,292,293 Scandinavia: Denmark: Danish assets temporarily frozen in Switzerland - 5/1/40 32 Norway and Denmark: Philippine Islands, Alaska, Hawaii, Puerto Rico, and the Virgin Islands designated to administer Executive Order and regulations in connection with frozen funds; Secretary of Interior asked to inform proper officials - 5/1/40 16 Norway: Stocks and production of molybdenum, tungsten, et cetera 376 Securities Markets (High-Grade): Current Developments: Haas memorandum - 5/2/40 249 Strategic Materials: Smokeless Powder: HMJr, at Indian Head, told that by adding 175 men, making two shifts, 2,500,000 pounds more powder can be manufactured and made available by June 1, 1940 - 5/2/40 242 a) Charts and specifications brought back by HMJr 243 b) Navy agrees to release 379,380,382 Tin and Rubber: Welles' memorandum to FDR concerning increasing importance of - 5/3/40 383 Turkey: Inquiry concerning possible purchase of pursuits and dive bombers - 5/3/40 410 - W - (Continued) Book Page War Conditions (Continued) United Kingdom: Government Finance: Haas memorandum - 5/2/40 259 249 Payments Agreement to be made by British Treasury with Japan - 5/2/40 271 a) To prevent all sterling acquired by Japan from being disposed of on the free market Suggested answer to Kennedy's letter to FDR concerning gold, British-owned American securities, et cetera - 5/3/40 399 a) Copy of Kennedy's letter 405 United States: Clothing: Johnson's memorandum to FDR concerning lack of reserves - 5/3/40 388 Ward, J. Carlton, Jr. In charge of mission from General Motors to France; wife accompanying - 5/3/40 413 See also Book 260, pages 141,144,151 1 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE May 1, 1940. TO Secretary Morgenthau FROM Mr. Cochran CONFIDENTIAL The sterling rate weakened further during the morning session on reports of German successes in Norway, but during the afternoon it developed a slightly firmer tendency. The opening quotation was 3.49-1/2. It moved downward to a low of 3.48-5/8 just before noon-time. A high of 3.50-1/8 was reached in the early afternoon, and sterling closed at 3.49-5/8. Sales of spot sterling by the six reporting banks totaled 6 384,000, from the following sources: By commercial concerns L 181,000 By foreign banks (Europe and Far East) 6 203,000 Total 1 384,000 Purchases of spot sterling amount to 1 523,000, as indicated below: By commercial concerns 1 179,000 By foreign banks (Europe and Far East) L 344,000 Total 1 523,000 The Irving Trust Company reported that it had sold cotton bills totaling 1 3,000 to the British Control on the basis of the official rate of 4.02-1/2. The Guaranty Trust Company reported that it had purchased L 5,000 for for- ward delivery from the British Control at 4.03-1/2. The funds will be used to pay for shipments of rubber. The belga declined today to a low of .1682-1/2 at the close. The other important currencies closed as follows: French francs .0198-3/8 Guilders .5309-1/2 Swiss francs .2242-1/2 Canadian dollars 15-1/4% discount The Federal Reserve Bank of New York purchased 2,000,000 French france for account of the Royal Bank of the Kingdom of Yugoslavia. There were no gold transactions consumated by us today. Regraded Uclassified 2 2 The Federal Reserve Benk of llew York reported the following shipmente of gold from England, consigned to the Bankers Trust Commany, New York, for sale to the U. S. Assay Office: $1,456,000 shipped by Samuel Montagu & Commany, London, for account of the Amsterdam Bank, Amsterdam. 1,005,000 shipped by the Bankers Trust Company, London. $2,464,000 Total Two days noo, we reported a shipment of gold totaling $592,000 from Conada, sent by the Bank of Canada, Ottawa, to the Federal Reserve Bank for Account of the B.I.S. At that time, the disposition of the shipment was unknown. The Zederel Reserve Bank informed us today that this shipment had arrived and that they were earmarking the gold for account of the Central Reserve Bank of El Salvador, under instructions received by the Federal from the B.I.S. According to information received by us last October, the Solvedorean Bank had gold valued at approximately the same amount as the above shipment deposited with the Bank of Canada end pledged as collateral for certain dollar advances made to the former by the B.I.S. On the report of Anril 24 received from the Federal Reserve Bank of New York giving the foreign exchange positions of banks and bankere in its district, the total position of all currencies wes short the ecuivalent of $18,958,000, An increase of $483.000 in the short position. The net changes in the positions are BS follows: SHORT POSITION SHORT POSITION INCREASE IN COUNTRY APRIL 17 APRIL 24 SHORT POSITION England $ 5,723,000 $6,305,000 $582,000 Europe 8,691,000 8,542,000 149,000 (Decrease) Canada 337.000 (Long) 250,000 (Long) 87,000 (Decrease in Long Position) Intin America 551,000 621,000 70,000 Janan 3,350,000 3,251,000 99,000 (Decrease) Other Asia 505,000 504,000 1,000 (Decrease) All Others 8,000 (Lone) 15,000 (Long) 7,000 (Increase in Long Position) Total $18,475.000 $18,958,000 $483,000 The Bombay snot silver quotation worked out to the equivalent of 42.314. to 9/16/. In London. the price fixed for spot silver rose 3/8a to 21-7/16d. The forward quotation advanced 5/16d to 21-5/16d. The U. S. ecuivalents were 33.746 and 33.284. Handy and Herman's settlement price for foreign silver was unchanged at 34-3/46. The Treasury's purchase price for foreign silver was also unchanged at 35#- CONFIDENTIAL 3 - 3 - We made twenty-one purchases of silver totaling 2,633,000 ounces under the Silver Purchase Act. Of this amount, 775,000 ounces represented sales from inventory, and the remaining 1,858,000 ounces consisted of new production from foreign countries, for forward delivery. We also purchased 820,000 ounces from the Bank of Canada under our regular monthly agreement. In all probability, the unusually heavy offerings of silver reflected the Senate's debate of the Townsend bill forbidding future Treasury purchases of foreign silver. p.mg CONFIDENTIAL TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE May 1, 1940 TO Secretary Morgenthau STRICTLY CONFIDENTIAL FROM Mr. Cochran Mr. Knoke has telephoned me that the officers of the Federal Reserve Bank in New York are now considering the inquiry of the International Hydrographic Bureau in Monaco in regard to the possibility of earmarking gold in New York, and the privilege for selling the same. Knoke asked if the State or Treasury Departments had any definite preferences on this matter. When I spoke with Dr. Feis today he said he thought the State De- partment would raise no objection thereto. When I asked whether the State Department wanted an exception made in favor of such a step, he said he would consult Under Secretary Welles in the premises and call me back, I have not yet heard from him. Mr. Knoke stated that be and his colleagues felt rather strongly that an earmarked account should not be opened by the Federal Reserve Bank in favor of this international organization unless the Government strongly in- sists, and in that event a fiscal agency account would be preferred. As it is now, earmarked accounts are held only for central banks, the B.I.S., and for the Treasury of one country which has no central bank, The Federal Re- serve feels that this present exception would be unwarranted, since it would be giving a privilege for hoarding gold, as quite distinct from the facility for preserving gold for monetary stocks and purposes involved in the usual earmarking practice. Before getting these views from Knoke I had mentioned the question to Bernstein, whose first reaction was that we should provide a haven of refuge for the holdings of international organizations in which governments partici- pate. Mr. Bell took no firm position, but was heaitant about increasing earmarked gold in this country through opening up additional accounts. It should be borne in mind that American organizations do not have the facility for preserving their assets through holding gold in this country, H.M. May 2, 1940 Mr. Livesey telephoned ne at 10:15 this morning to the effect that a memorandum had been circulated to the interested officers in the State De- partment in regard to the question as to whether we should open an earmarked gold account for the International Hydrographic Buresu. Mr. Welles had ex- pressed the opinion thereon that he B&W no objection, but that the neasure seemed to be one to be determined by the Treasury and Federal Reserve. Through the Department of State, we contribute $5,790 annually to the support of the International Hydrographic Bureau. B.M.S. Regraded Uclassified w 5 2 donot know whether his signing las my ving to < and that of he Work General of Monses see my mim of 1/3/40). at my nate well you meant he Marled end Ulen ht in think it when 2 return ton m mh her in England lay widerstly did not Cup Lan you at he Ax of Enformed Gnk Regraded Uclassified 130 20M a-se INTEROFFICE ERAL RESERVE BANK 6 OF NEW YORK ROUTE SLIP TIME A.M. DATE mr M. Knoke DEPARTMENT DIVISION SECTION MARKS Data to be mailed to Mr Cochran OM USE THIS FORM INSTEAD OF OFFICE ENVELOPE Shiddy WHEN POSSIBLE. DEPARTMENT DIVISION SECTION SURE PROMPT AND ACCURATE DELIVERY ALL COMMUNICATIONS SHOULD BE DISTINCTLY LEO. 7 COPY INTERNATIONAL HYDROGRAPHIC BUREAU QUAI DE PLAISANCE MONTE CARLO 26th March 1940 Sir: The International Hydographic Bureau is anxious to obtain official information regarding the importation of gold into the United States of America. First, can such gold be shipped to the United States and earmarked for the International Hydrographic Bureau which is an international organization under the auspices of the League of Nations? Second, could this gold or a part of it be sold in the United States for dollars and if so, under what restrictions? The International Hydrographic Bureau has its entire reserve fund in gold bars which are now held in London in safe custody deposit in the bank for foreign account. The Inter- national Hydrographic Bureau is free to dispose of this gold and would normally leave this gold in London but unforeseen events arising from the war may necessitate other disposition of this gold. The Directing Committee would very much appreciate whatever information you can give them in this connection. 0 I am, Sir, Yours very truly (Signed) 1HE SECURITY John D. Nares TECHNICVT 1 OFFICE OE THE e MA 8 ЯЯА ONE IBEYSINA DELYUMENT BECEIVED Vice-Admiral President of the Directing Committee. The Director FEDERAL RESERVE BANK NEW YORK Regraded Uclassified FEDERAL RESERVE BANK OF NEW YORK B FFICE CORRESPONDENCE DATE April 1, 1940 Dr. Liddy SUBJECT the International Hydrographic ROM R. firms Buress, The International Hydrographic Bureen is one of a large number of International Bureaus which have sprung up since the Nague Conventions of 1909. The Internetional Hydrographic Bureen was founded in Leadon in 1918 and vos definitely established in 1921. It has the come status as Postal Union and the International Bureaus of Weights ad Heasures, Whaling, etc. Though placed under the direction of the League of Nations on October 2, 1921 the Buresu has no direct commection with the League. It dees not derive its funds from the League badget nor is it subject to it in astiers Me leting to its policy or work, (Early in the 20's it was desired to bring all International Bureaus and Organisations within the franswork of the League but this net with such opposition on the part of the individual bureens that m more could be achieved then the establishment of a advisory commection betwoen them and the League of Nations.) The object of the International Hydrographic Bureen is to establish a permant association between the hydrographic services of various maritime powers with a view to the improvement of conditions of maritime journies and transport, and in general to advance the science of hydrography. In 1958 the following countries ware members of the International Hydrographic Buresus Argentine, Australia, Brawil, United Kingdom, China, Demark, Bruador, Egypt, France, Japan Monage, Norway, Polend, Portugal, Siam, Spain, Broden, Walled States and Bruguay. The International Barem is run by a governing body. It derives its funds from contributions by the member organizations or statems these are fixed on the basis of the maritime importance of its nambers. The total budget is 1988 mombed to 177,000 gold france or roughly 50,000 dollars. In 1938 the obairess of the governing body of the Buress m Vice-Admiral J. Hares of the United Regraded Uclassified FEDERAL RESERVE BANK OF NEW YORK FFICE CORRESPONDENCE DATE SUBJECT FOM + Kingdom. The imerican member of the governing body was Rear Admiral W. 8. Grogley of the U.S. Havy. The International Hydrographic Burosu 1a required by statutes to hold conferences every five years, or more frequently if the majority of the members no specify. It held conferences in 1919, 1928, 1929, 1952, and 1957. The Buresm publishes regularly a Hydrographic Review, & Bulletin and special publics- tioms of 6. scientific character. It has very fine buildings and an interesting minim at Monte Carlo, Monaco. Apart from the fact that Monaco is & member of the Buress, there is no connection between it and the Principality of Monaco. In taking a decision regarding the request of the International Hydrographic Bureau to earmark gold it should be resembered that there are masrous other organisations of a similar character madowed with NO. snalegous legal status and entitled to the seme considerations. This statement is not intended to cast doubt on the usefulness of such organisations as to draw attention to their number. Further information on the International Hydrographic Buress right be obtained through the U.S. Hydrographic Bureau and from the Handbook of International Organizations published by the League of Nations. Our Library does not one this publication. RELAX Regraded Uclassified EXTRACT FROM 10 HANDBOOK OF INTERNATIONAL ORGANIZATIONS Geneva - 1929 INTERNATIONAL HYDROGRAPHIC BUREAU. BUREAU HYDROGRAPHIQUE INTERNATIONAL that: Monaco. 3, avenue du Port. pondation: 1919 definitely established in 1921. eject: To establish a permanent association between the hydrographic services of the various States; to co-ordinate their work with a view to rendering navigation easier and safer in all seas; to endeavour to obtain uniformity in hydrographic documents and to advance the science of hydrography. Mbers: The Governments of Argentina, Australia, Brazil, Chile, China, Denmark, Egypt, France, Germany. Great Britain, Greece, Italy, Japan, Monaco, Netherlands, Norway, Peru, Poland, Portugal, Siam, Spain, Sweden and United States of America. overning Body: President-Rear-Admiral A. P. NIBLACK (United States of America). Members: General P. DE VANSSAY DE BLAVOUS (France) and Captain L. TONTA (Italy). filer: Secretary-General-Commander G. B. SPICER-SIMSON, D.S.O. Trance: Contributions of the States members in proportion to their maritime importance. Budget of 265,000 gold france. etivities: First Conference held in London 1919, second at Monaco 1926. Statutory conference every five years, supplementary conference when required by majority of members; first supplementary conference April 1929. Publications: Reports of proceedings of the conferences; annual reports; special publications on technical subjects: Year- Book for 1928 and 1929. Historical Facts: This public international bureau was placed under the direction of the League of Nations by a decision of the Council of October 2nd, 1921. fficial Publication : The Hydrographical Review. Regraded Uclas 11 TREASURY DEPARTMENT PROCUREMENT DIVISION OFFICE OF THE DIRECTOR WASHINGTON one 50mm young 5/10 May 1, 1940 MEMORANDUM FOR THE SECRETARY There is attached hereto copy of confidential memorandum received from the Acting Chief, Bureau of Aeronautics, Navy Department, con- cerning a deferment on the part of the havy of the delivery of eighty (80) sirplanes manufactured by the Grumman Aircraft Engineering Corporation, Bethpage, L.I., New York. To date no definite information has been received concerning the award of a contract to Grumman referred to in the third paragraph of attached memorandum, although it is understood that the French are interested in the plane. att. Regraded Uclassified 12 NAVY DEPARTMENT BUREAU OF AERONAUTICS WASHINGTON April 30, 1940 MEMORANDUM CONFIDENTIAL For: Mr. H. E. Collins, Chairman, President's Liaison Committee. SUBJECT: Sale of Grumman Airplanes to French Government. 1. The Grumman Aircraft Engineering Corporation, Bethpage, L.I., New York, has requested deferment of delivery to the Navy Department of eighty (80) of the F4F-3 airplanes being constructed under Contract 68219 to permit acceptable de- liveries of similar planes to the Government of France under an order now being negotiated. 2, The Gruman Aircraft Engineering Corporation has been authorized to negotiate on the general basis of their proposal to the Bureau of Aeronautics which the Bureau considers satisfactory. The contractor offers, in compensation for the deferment of deliveries to the Navy, to reduce the price on each of the 80 airplanes by $2400, of which $800 is considered to be the pro rata share of the engineering expense on this model which is to be transferred to and borne by the foreign customer. The remaining reduction, amounting to $1600 per airplane, is considered to represent the expected reduction in cost of manufacture due to increased quantity. The contractor further has offered a series of changes in the airplanes for the Navy's acceptance, not as an addition to, but in substitution for, the reductions in price to whatever extent the Navy Department may elect. These changes provide improvements of the type and will be accepted in the combination and to the extent best suited to the Navy Department's particular needs. 3. The Bureau is advised that negotiations have been substantially con- cluded and that the manufacturer is in receipt from the Government of France of authority to proceed with construction of 81 airplanes in advance of execution of formal contract. /3/ M. A. Vitscher Copy to: Captain, USN. Rear Admiral Ray Spear (sc) USN, Acting Chief of Bureau Member President's Liaison Committee Aeronautical Board The Chief of Air Corps C 0 P Y Regraded Uclassified 13 THE UNDER SECRETARY OF STATE WASHINGTON May 1, 1940 Personal Dear Henry: With reference to your telephone call of yesterday, I find that the matter will be formally presented to the Department of Justice within the next few days through memoranda which are now being prepared by the War and Navy Departments 8.8 well as by this Department. Consideration of this entire question has brought out the fact, however, that the formal inclusion in con- tracts of the proposed clause binding sellers and buyers to refrain from the exportation of tin and rubber will be relatively ineffective since there will be no penalty which can be enforced in the courts. The officials who have been studying the matter believe that the main prob- lem is in securing the voluntary cooperation of All those concerned and they tell me that very good progress has already been made in that direction. They further state that the Amtorg Corporation in particular is now finding it difficult to secure either commodity in thie market. If there is anything further I can do to be helpful, let me know. Believe me Yours very sincerely Kalls The Honorable Henry Morgenthau, Jr., Secretary of the Treasury. Regraded Uclassified ADDRESS OFFICIAL COMMUNICATIONS TO THE SECRETARY OF STATE WASHINGTON, D.C. 14 DEPARTMENT OF STATE WASHINGTON May 1, 1940. In reply refer to A 840.51 Frozen Credits/45 The Secretary of State presents his compliments to the Honorable the Secretary of the Treasury and transmits, for an indication of the reply that may appropriately be made thereto, a copy of telegram no. 554, dated May 1, 1940, from the American Embassy at Paris, regarding funds blocked under Treasury regulations. Enclosure: From Paris, no. 554, May 1, 1940. 28 Regraded Uclassified 15 JR GRAY Paris Dated May 1, 1940 REC'd 12:05 pame Secretary of State, Washington. 554, May 1, 2 p.m. Halvard Bachke, formerly Norwegian Hinister in Washington, presently Norwegian Minister in Paris, has inquired whether the Department could advise him what steps are necessary to Effect the release of certain bank accounts in his and Mrs. Bachke's names with the Chase National Bank, Guaranty Trust Company and Riggs National Bank, which are now blocked. Please telagraph. BULLITT RR Regraded Uclassified 16 Regraded Uclassified MAY 1- 1940 By dear Mr. Secretary: There are enclosed herevith & number of copies of Executive Order No. 6560 of January 15, 1934, Regulations of November 12, 1934, Executive Order No. 8389 of April 10, 1940, the Regulations of the Secretary of the Treasury issued thereunder, cartein application, license and report forms, general rulings and an announcement to the press. is you know, the above-described Order and Regulations have imposed restrictions on certain transactions in Deaish and Norwagian property and have not up a. system of licensing transactions in such property. Pursuant to the authority conferred by section 5(b) of the Act of October 6, 1917, as amended, the restrictions of the Order and Regulations extend to persons and property within the United States and places subject to the jurisdiction thereof. If it has not already been done, it would be appreciated if the documents transmitted with this letter were forwarded to the United States High Commissioner in the Philippines and to the Gover- more of Alaska, Hawaii, Puerto Rice end the Virgin Islands. Valess you have 2020 objections, kindly inform the officials referred to in the preceding paragraph that they are designated " the Secretary of the Treasury pursuant to the authority conferred upon him by the Insentive Order If the persons to administer the above- described Order and Regulations la the places mmd. 17 - 2 - Sush officials should also be instructed as followse They are authorised to receive applications for licenses and to No quest applicants to file under eath with their applications any additional information which my be doesed appropriate. Where oir- constances require proupt action with respect to applications, such efficials are further authorized to grant licenses for transactions which are not inconsistent with thepurposes of the Executive Order, provided that such efficials are satisfied that the applications cover norml commercial and business requirements or reasonable travel- ing and other personal requirements, All other applications should be forwarded as expeditiously as possible to the Treasury Department at Washington, Special situations my be dealt with w cable w radio. Advise my be obtained by wash officials directly from the Treasury Department at Washington with respect to the grenting or denial of applications for liseases and with respect to other questions which my arise in the administration of the Order and Regulations. When ave plinations are forwarded to the Treasury Department the above-mand efficials will be prosptly advised whether the lisense to granted w denied. In order to smble the Treasury Department to advise - ing the granting or demial of lisenses, the efficials receiving cyplica- tions should number consecutively applications received w them Is cases in which such officials are authorized under these instructions Regraded Uclassified 18 - , - to issue licenses, Licenses my be granted in appropriate Cases as, for emaile, to business enterprises, ships' agents, - authorising not earoly individual transcations but all customsy treasmetions during one-week periods within fixed dollar limits. In mash cased licensees should be required to file reports prosptly at the and of each one-week period setting forth all of the transactions - sugmated during sush period. The above-mased officials are also authorised to receive all of the reports required to be filed by the Order and Regulations of April 10, 1940 and to Sales other appropriate action to earry out the provisions thereof. Copies of all licenses Issued and the originals of all reports filed should be treasmitted by sir mil to the Treasury Department at Washington and the Department should be kept advised of any setion taken to enforce the Order and of any stremstances which indicate violations thereof. The above-med officials should be requested to have copies of the new Executive Order and Regulations, together with Executive Order No. 6560 of January 15, 1934, and application and report form presptly propered and distributed to interested par- sons and otherwise brought to the attention of the public. In particular it should be mão clear that applications and reports my be filed with such officials rather then with a Federal Receive beak. Regraded Uclassified 19 - 4 - It also would be appreciated if you would have the High Commissioner in the Philippines promptly advise this Department whether the time within which persons is the Philippine Islands of file reports on Perms TFR-100 and TFR-200 is adequate. Under present regulations and instructions, ouch reports would lave to be filed n e before May 15, 1960. If you have any suggestions as to the - is which the Executive Order of April 10, 1940 and the Regulations issued thereum- der should be administered in the Philippine Islands, Alaska, Saveii, Pearte Rice and the Virgin Islands, I would velsome an expression of your views. Very truly yours, (hagued) H. Morgenthau, Jr. Becretary of the Treasury. The Honorable, the Bearetary of the Interier. Enclesures File to Mr. Thompson By Messenger 10 0 pam. 5/2/40 4-30-40 Regraded Uclassified 20 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE May 1, 1940 TO Secretary Morgenthau FROM Mr. Cochran STRICTLY CONFIDENTIAL When I read on the news ticker yesterday of Australian action with respect to United States dollar securities, I asked Pinsent by telephone if he had anything on this subject. He had nothing in addition to the news item. later in the day Mr. Officer of the Australian Legation tele- phoned me, saying that Pinsent had les him know 05 my interest in the Australian announcements, Consequently, he WILS sending me by messenger a memorandum on the subject. The original of this memorandum was sent to the Secretary's residence by me last night. There is attached a copy of a cablegram which the Federal Reserve Bank gf New York received yesterday from the Governor of the Commonwealth Bank: of Australia in regard to the step under reference. Mr. Knoke told me by telephone this morning that this was the first information received from the Australian Bank to supplement the request made some weeks ago, and reported to the Treasury, that the Federal permit the opening of a special account for the Commonwealth Bank of Australia into which the proceeds of the sales of United States dollar securities by Australia could be deposited. On checking at the State Department today, I found that there had been no correspondence or negotiations between the Australian Legation and the State Department in regard to this question of gale of securities, The three officers who said they were aware of no such negotiations were Mesers. Yeis, Minter (who handles the Australian desk) and Livesey. it 12:40 today Livesoy telephoned me that a cablegrem hat been received from our Consul General in Australia, and 1 now attach a copy thereof. We have no knowledge of the possible volume of securities involved other than the estimate given in the attached cablegram. The question arises as to whether we should at this date ask the Australian Legation to provide us with any pertinent information, or keep in touch with us in regard to their aperations. Z.M.S May 4, 1940 When I brought the Secretary to date last night on Australia security selling, he agreed that I should not make any protest to the Legation because of lack of advance information on the Australian plan. but that I should COD- tinue to keep in touch with the Legation and receive such information a.e Mr. Officer is now providing be in regard to Australian finances. Regraded Uclassified COE. 108.3 39M 3-43 ERAL RESERVE BANK INFORMATION COPY FOR Mr. Liody OF NEW YORK 21 INCOMING CABLEGRAM-SERIAL NO. 2955 RECEIVED April 10, 1040 Sydney, Apr. 30, 1940. Inderal Reserve Tank of New York Kee York No. 53 Your 24. Commonwelth Government published regulation today Itating 20 dollar stocks and requiring owners thereof to sell and pay dollar proqueds to Moderal Reserve Bank of Nov York at 360 York for the credit or Co monwealth Bank of Australia Sydney Vunber 3 Account. SAles must Ve completed within 6 months not loss than Smif withlin first 3 conths. Please treat this as authority to open necessary Number : Recount in the name of this bunk and credit payments thereto disbursement to be effected by duly authonticated cable nessages from this office or be draft signed by two officers as for existing account. Cable daily amount of each deposit and full name of beneficiary. Cable balance of account weekly. In order that code words for christian names and surnames may be available we suggest you use de monwealth Bank or Australia Private Telegraphic Code for these neasages. nn April 26 we posted you additional copy of this code with special appropriation not up opposite page 318. Please cable us when received. 7011 details including copy of regulation being forwarded by air mail. Governor Commonwealth Bank of Austrelia. CARE DIVISION MY Post.137 21 CORRECT Regraded Uclassified 22 HSM GRAY Sydney Dated May 1, 1940 Rec'd 7:23 8. n. Secretary of State, Washington. May 1, 5 P. m. By an order of the Commonwealth Treasurer gazetted yesterday Australian owners of 20 specified dollar stocks must sell them for United States currency within the next six months and pay the proceeds to the Commonwealth Bank's account in NEW York, after which the Commonwealth Bank will pay the Australian seller in Australian currency. Press report from Canberra states that eventually all non-sterling stocks will have to bE sold, and give $5,000,000 as an unofficial estimate of the amount to bE realized by yesterday's order. The Commonwealth Bank informed me confidentially that the order will not bE applied to American citizens residing in Australia. DOYLE NPL Regraded Uclassified 23 JR PLAIN London Dated May 1, 1940 Rec'd 12:05 p.m. Secretary of State, Washington. 1094, May 1. FOR TREASURY FROM BUTTERWORTH. 1. An Order in Council has been made dealing with those holdings of the stourities named in the two acquisition of securities orders of February 17 and April 13 which have not been transferred to the Treasury owing to their not having been previously registered with the Bank of England. The British Treasury is now empowered to acquire such holdings sither at the price stipulated at the time of the calling up order 07 at the current market price, "whichever bE the lower". 2. London press reports the Australian Government has issued D. proclamation requiring owners of 20 specified dollar stocks to sell half their holdings within three months and the remainder within six months. The TIMES correspondent estimates the resultant increase in Australian dollar balances in NEW York W ill be about 5,500,000. 3. In the city military events in Norway are over- shadowing all other considerations. KENNEDY 85 Regraded Uclassified 24 JR PLAIN Helsinki Dated May 1, 1940 Rec'd 10 a.m. Secretary of State, Wgshington. 212, first. Opening Diet debate government resettlement bill intro- duced yesterday Prime Minister said this perhaps first time world history that large population from area ceded foreign country without exception abandoned former homes moving within new boundaries their fatherland showing tenacity patriotism con- fidence national prospects capacity create satisfactory living conditions for them. Considering small population Finland fact diminished territory nevertheless provides space evacuated population important avoid losing eighth population but natural that transfer four hundred fifty thousand people and their reincorpora- tion gigantic task which specially in present conditions involves nearly insurmountable difficulties soluble only by state requiring cooperation sympathy sacrifices everybody but also initiative patience hard work evacuees. Transferred population has no legal right demand or receive compensation for its losses but having lost everything and performed its duty to the country has moral right expect Finnish state and people do all possible help them renew life. Hoped transfer land this purpose can be effected voluntarily far as possible but if this cannot be done rapidly enough or to sufficient extent necessary take compulsory measures. Agricultural 25 - 2 - Agricultural production must be unaffected by new measures rather increased. This involves question sume available for compensation how such capital levy can produce without causing serious disturbances national economy state finance taxpayers. Consequence var Finkand much poorer having lost considerable proportion best most enterprising men national income largely decreased consumption during var greatly exceeding normal. Government finances out of balance and for duration great power war possibility restoring balance through export industries most limited. Must seriously endeavor increase peoples income cannot close eyes present difficulties. Though Finland has form taxation called capital tax it is not really and is merely supplemental income tax. However reasonable capital tax is possible cannot be higher than permits rapid liquidation without imposing long term obligation on taxpayers. Mast be 80 ordered that little cash used and payments made in great part in kind accounts being balanced by kind of clearing whereby for instance loser real property obtains compensation in certificates useable purchase new land pay taxes. Discussing amount procurable capital levy Prime Minister said taxable wealth 1937 throughout country about fifty-eight billion marks including four one half billions pertaining ceded areas tax based on wealth exceeding 100,000 marks only. By reducing limit to forty thousand marks taxable wealth can probably be increased to sixty or sixty-five billions. Producing possible Regraded Uclassified 26 - 3 - possible tax four one half to five billions less deductible war losses so that perhaps three one half to four billions available. Compensable war damages estimated ten thousand six hundred millions including seven hundred millions to be carried by those receiving compensation. Hence considerable difference between losses and amounts apparently available requiring limitation compensation rate. Concluding Prime Minister said "better look facts and difficulties in the eye be satisfied with less but work on safe ground than with slogans wishful thinking excessive optimism. Firaly confident government bill will lead continued strengthening unity social structure national economy". Press announces debate resumed May three and that special committee working capital levy bill submitted report April thirty Finance Minister for consideration, SCHOENFELD DDM 27 PARAPHRASE OF TELEGRAM RECEIVED FROM: American Consulate General, Shanghai NO.: 372 DATE: May 1, 1940 Reference is made to the Department's telegram no. 183 of April 27, 1940, 2 p.m. It is now believed that the Italian Bank for China isin a position to meet without serious embarrassment any emergency which may arise from the situation in Europe. It is reported that forward transactions have been resumed on a somewhat restricted basis and that belligerent banks and brokers are being told that if the Italian Bank finds itself unable for any reason to meet directly its commitments on the due date, such commitments will be met through the Chase Bank. It is stated by the manager of the Chase Bank that although no definite arrangement has been made recently, he would be prepared, if Bo requested by the Italian Bank, to take over at any time the Italian Bank for China's sterling balances in London and its open com- mitments with nationals of belligerents in Shanghai. He states that when the Italian-Abyssinian conflict began the Chase Bank had made arrangements to perform this service for the Italian Bank for China and that he 28 he would expect that in case Italy became involved in the present war in Europe he would be requested to help in a similar manner as the Italian Bank for Ohina had made similar arrangements on several occasions since the Abyssinian conflict. In explanation he said that very friendly relations were maintained between the heads of the parent organizations of the two Shandhai banking institutions in New York and Rome, respectively. He considers that in view of the delicate situation in Europe the local financial operations carried on recently by the Italian Bank are no more than natural. However, he has promised that if any new developments of a probable major significance arise regarding the attitude of Italy toward the war in Europe, he will promptly inform this office. This message has been repeated to Chungking and Peiping. BUTRICK 29 JR GRAY Milan Dated May 1, 1940 Rec'd 1:12 p.m. Secretary of State, Washington. 19, May 1, 5 pelile FOR TREASURY DEPARTMENT. Today's prices as follows: 202. 75; 347. 75; 513 not listed; 989; 208. 75; 1664; 66. 50; 235. 50. Volume 84,075. Market improved prices rost slightly on confirmation of rumors that new fiscal measures less SEVERE than previously feared. Tomorrow holiday, Exchange closed. SHOLES CSB 30 REB GRAY Paris Dated May 1, 1940 Rec'd 2:45 P. I.I. Secretary of State, Washington. 560, May 1, 6 P. Me FOR THE TREASURY. Presumably because of the failure of the Senate to take any action in regard to the bill providing for the Establishment of a superior Export council in the Ministry of Commerce (as reported in the Embassy's telegram No. 433, April 5, 7 P. m.) the bill had previously received the approval of the Chamber the government has created such a body by means of a decree published in today's Journal Official. (END SECTION ONE) BULLITT KLP DDM Regraded Uclassified 31 JR GRAY Paris Dated May 1, 1940 Rec'd 3:38 p.m. Secretary of State, Washington. 560, May 1, 6 p.m. (SECTION TWO). The Minister of Commerce will act as Chairman of the Council, other members being the Under Secretary for Commerce, four representatives of the Senate and Chamber Committees on commerce and customs, Eight representatives of French industry and commerce and Eleven Government officials concerned with questions of trade, industry and finance. The weaker tendency on the securities market yesterday became more pronounced today in view of unfavorable rumors from abroad regarding the situation in Norway and the precautionary shipping measures adopted by Great Britain in the Mediterrancan. Rentes declined from 10 centimes to francs 1.10. LOSSES in other securities ranged from 2% to 5%. Scandinavian issues Especially were lower. Suez lost 570 points. END OF MESSAGE. BULLITT WWC Regraded Uclassified 32 JI GRAY Bern Dated Hay 1, 1940 Rec'd 7:20 p.m. SECRETARY of State Washington 29, lay 1, 6 p.m. Swiss Federal Council has issued a decree Effective April 27 temporarily freezing Danish assets in SwitzErland, requiring all direct or indirect payments by individuals or firms domiciled in Switzerland in favor of individuals or firms domiciled in Denmark to bE Effected through the Swiss National Bank (text forwarded by mail). This is a protective measure on behalf of Swiss creditors adopted as a result of interruption of free exchange payments to Switzerland from Denmark, and pending conclusion of an EXPECTED clearing agreement. Swiss authorities have been advised by their representative in Copenhagen that the Danish Govern- ment hopes to maintain trade relations with Switzer- land on previous scale (imports from Denmark in 1939, 25,000,000 33 -2-#29 May 1, 6 p.m. from Bern 25,000,000 francs; exports 20,000,000). Authorities here are sceptical as to whether this will prove possible. No similar action taken or said at present to bE under consideration by Swiss Government regarding Norway. HARRISON EHB 34 Treasury Department Division of Monetary Research Date To: From: Draft which Mr. White discussed with the Secretary at 3:30, on May 1, 1940 (at which time it was decided to go ahead with preparation of speech.) First Draft - 1 - 35 During this past year, and increweingly during the months since the outbreak of the European War, we at the Treasury have been receiving scores of inquiries about gold. The people of this country are perplexed. They are asking why so much gold is coming here. They want to know whether this 18 good or bad. They want to know if the future value of gold is in danger. They ask whether the United States will be able to use this gold or whe ther we shall be stuck with it. They wonder whe ther it wouldn't be better to import less gold. They are afraid that we may perhaps be paying too high a price for gold. They want to know whe ther we can reduce the inflow and whether we should if we could, and 80 on. Let me give you some of the pertinent facts. During the last six years we have acquired more ) (x IT gold than we or any other country ever possessed. ob 4/20/40 Regraded Uclassified 36 - 2 - Last year alone we received over #3 billion. This year, while almost all of the principal countries of the world have been losing gold, we have been getting it at the rate of #250 million a month. The United States Treasury now has in its vaults over $19 billion of gold a amounting to two-thirds of all the gold held by the combined Treasuries and Central Banks of the world! How can we account for 80 large an inflow of gold? The answer 1s at once disturbing and reassuring. It is disturbing because this drain of gold from foreign coun- tries results from a gravely distorted economic and political situation throughout the world. It is reassuring since that gold is coming here because the United States has peace, security, and social and political stability. Our economic position in the world is dominant and unchallenged and the large inflow of gold into the United States Ca 37 - 3 - is but the monetary reflection of that economic and social strength. There is a good deal of misunderstanding as to why gold keeps coming to the United States. Some people have expressed the view that it comes here because the United States stands ready to buy all the gold offered to us at a fixed price. But that obviously cannot be the explanation. We have been buying gold at a fixed price for virtually 150 years. Ever since 1792 - with only a 7 months' interlude -- we have been ready to buy at a fixed price all the gold offered to us. Some people again are under the impression that we are getting gold because we pay a higher price for it than other countries do. This also is an error. The price for gold is virtually the same the world over. When we convert our $35 price for gold into the currencies of other nations and Ca Regraded Uclassified 38 - 4 - make proper allowance for shipping, insurance, and other costs incidental to transportation, we find that the price we pay for gold is no more than other countries do. Any one can prove this for himself by a simple arithmetic computation. All he has to do is ascertain the price of gold in the terms of the currency of any other country, convert that price into dollars at current exchange rates, and add for costs of transporting gold. He will find that though the price for gold is given in sterling in London, in guilders in Amsterdam, and in pesos in Buenos Aires, etc., when converted into any common unit of currency the price for one ounce of gold is approximately the same the world over. I suspect that much of the confusion about the gold question arises from a misunderstandipg of the nature of gold transactions. Let me make myself clear. No Treasury or Central Bank goes out into the world markets to buy gold as a government buys army blankets, ob - 5 - 39 say, or office furniture or armaments. Gold plays a highly specialized role. It is international money. It moves from country to country not as a commodity but as a medium of international exchange. It 1s sold to buy the currency of the country of destination. When London, for example, senda gold to New York for sale -- what London wants 1s dollars. Similarly, when we sell gold to England, what we want is Sterling. Therefore, when people ask why foreigners send gold to the United States, they are really asking the question: Why do foreigners want so many dollars rather than their own or some other country's currency that gold is sent here to obtain dollars? Or, another way of asking the question, 1s: Why do foreign countries currently owe more cash to us than we owe to them? In the first place, we have sold more good and services abroad than we have purchased. From 1933 to 1937 our mer- chandise export surplus was not very large, averaging less Co Regraded Uclassified 40 - 6 - than $300 million per year. In 1938 and 1939, however, it has been about $1 billion a year. Secondly, a large portion of the dollars obtained by foreigners is kept on deposit with our banks. It is kept there for possible exchange gains from depreciation of their own currencies and for safekeeping because foreigners think America is a safe place to keept their money. Thirdly, another portion is used to make investments in American industry because foreigners think American business is a safe and profitable investment. For these two latter reasons alone, almost 3 billion of foreign funds have come to the United States in the past six years. And this is a great tribute to the soundness of America. We find, too, that Americans have been withdrawing their funds from abroad, and liquidating their foreign investments. During the past six years over 1 1/4 billion Co Regraded Uclassified 41 - 7 - 8 dollars of American capital has been repatriated. And this, too, has helped to swell the inflow of gold. Such was our position up to the war crisis. Since the war things have changed. Our export surplus 18 running at a much higher rate -- actually at double the rate of last year, while capital movements to the United States now have become a minor item. The net flow of foreign capital to this country has dropped this year partly because many countries are prohibiting outflow of capital and partly be- cause some of the belligerents are using up their dollar deposits and their holdings of American securities to pay for imports from the United States. This reduced inflow of capital, however, has been more than offset by the sharp increase in our net exports of goods and services arising directly out of war conditions; 80 that foreigners want on balance Just as many more dollars now as they did last year. That is why we have 80 large a favorable balance of pay- ments; that is why gold has been coming to this country. Cc Regraded Uclassified 42 - 9 - of course, it was and is always possible to greatly reduce this gold inflow. But we could do 80 only by sacrificing recevery. We could, for example, out our exports of commodities and services by & billion dollars or so a year, but by 80 doing we would throw hundreds of thousands of workers out of their Jobs and wholly disrupt agriculture. And we could possibly reduce the inflow of gold by increasing our pur- chases from abroad by another billion or 80 a year, but, again only if we permitted foreign goods to flood our home market at the expense of American farm and manufactured products. Another possible way of reducing gold flows would be to force the return of the foreign capital or an outflow of domestic funds. This would again spell trouble for us since we are here speaking in terms of billions of dollars, not millions. There is no possibility that mild measures designed Ce 43 - 10 - to make the dollar less attractive will have the effect of driving such capital out of this country; for there is virtually no other country to which billions can go with a degree of safety sufficient to attract such Bums. To be effective under prevailing circumstances our action would have to be drastic. It would have to be 80 drastic 8.8 to produce extremely disturb- ing effects on our security and financial markets and do permanent damage to the principle of mobility of capital throughout the world. For the United States -- the one safe haven for liquid funds, the one country that under existing conditions can best afford to permit unrestricted movements of capital -- a procedure of such character would, I believe, be an unwise move. With a return of normal conditions, however, much can be done to facilitate the repatriation of foreign funds now here. No. All the alternatives are definitely bad. I am sure you will agree with me that no responsible person would want to stop the inflow of gold at the price of Cc Regraded Uclassified 44 -.ll precipitating any of the serious consequences I have mentioned. And yet that is exactly what some people are advocating. Perhaps they don't know it, but that is just what they are advising us to do when they suggest that we stop buying foreign gold, or that we change the price we pay for gold, or that we wipe out our "favorable" trade balance. Take, for example, this proposal 80 frequently made to us that we stop buying gold. It has the charm of simplicity; all we have to do 18 prohibit gold imports by a Treasury order. Well, let us look at what would happen. The immediate reaction would be a sharp increase in the value of the dollar in terms of foreign currencies. For- eign currencies, in other words, would at once sharply depreciate and a chain of economic forces would be set in motion which would disrupt our domestic and foreign trade. Ca Regraded Uclassified® 45 - 12 - I will not go into the technicalities. Briefly this 18 what would happen. First of all American products would be much more difficult to sell in foreign markets. This would not apply 80 much to war goods -- airplanes, armaments, etc. -- but it would hit hard our export of hundreds of agricultural and industrial commodities not vital to the conduct of war. We would lose heavily in the very markets we will badly need when the war 16 over. Increased imports of foreign goods, at the same time, would react even more drastically on our domestic economy. It will be just those very items which compete with our domestic manufactures that will flood our home markets. We would not be encouraged to buy much more rubber or tin. But meat and dairy products, textiles, and hundreds of other manufactures would at once be subjected to greatly intensified competition from abroad. Furthermore, Americans who have investments abroad (we have some $7 billion) would find that they had suffered substantial losses overnight, just as foreigners with investments here would Oac Regraded Uclassified 46 - 13 - find that they had windfall gains overnight. So you 800 this simple and charming remedy 18, in effect, a proposal that would completely disrupt our foreign exchanges and our trade and greatly increase unemployment in this country. And 80 with the other naive proposals which some well-meaning citizens suggest as a remedy for our accumulating gold stocks. Shall we follow their advice and cut the price for gold? A moderate cut would be ineffective, and 8. cut sufficiently large to reduce our annual gold inflow by a billion or two would introduce the same conditions as would follow on a prohibition of gold imports. It would mean a serious decrease in trade and a big increase in unemployment. Shall we discriminate against certain countries in the purchases of our gold? Such a policy would not even have the virtue of effectiveness. There 16 no way in which you can differentiate one bar of gold from another bar, for gold Co Regraded Uclassified 47 - 14 - is one of the most homogeneous products in the world. ob- literate the mark of country of origin and you can no longer identify its source. Remelt it and it is salable anywhere in the world. The active cooperation of practically the whole world would be required to prevent any one country's gold from circulating, Obviously this would be impossible under any circumstances, let alone at 8. time such as this. Gold is an exceedingly specialized instrument of inter- national finance. Its value depends upon its unqualified use and acceptance as an international medium of exchange. For the United States to take any action which would diminish the utility of gold as an international medium of exchange would be little short of criminal irresponsibility. Our gold policy is carefully adjusted to the realities of a complex world situation. Examine any proposal submitted to us and you will clearly see that we have been pursuing the only course compatible with our national interests; that Cc Regraded Uclassified - 15 - 48 any change in that policy would have adverse effects on us and on the rest of the world. Of course, should basic conditions alter, should we be confronted with new and unforeseen economic and political developments, we shall necessarily react in such a way as will best protect American interests. -- It is to be pre- pared for precisely such contingency that we have insisted right along on maintaining flexible powers with respect to gold operations. -- But so long as the inflow of gold 1s due to the circumstances I have indicated, no change is called for. If we are to act in the public interest, we must follow the policy by which we have 60 far abided, tob sure, easily curtact of course, w can stop the flow of gold by selling on credit. Instead of accepting foreign gold in payment for the goods we sell, we can take I.O.U.'s. I assure you that we would have no difficulty in selling many billion dollars' worth of our goods and services on such terms. Foreign Co Regraded Uclassified 49 - 16 - countries would be only too delighted with such an arrangement. There may even be some here who prefer that the United States should receive the I.O.U.'s of foreign governments in place of their gold. As for me, I know of no good reason why we would be better off selling our goods for credit instead of cash. There is only one way in which we can appropriately and realistically work to reduce the inflow of gold, and that is by doing everything in our power to promote business recovery here, and by laboring to reestablish normal political and economic conditions abroad. With an increasing measure of prosperity here and with peace and economic stability abroad the gold problem will resolve itself. Our great export surplus will necessarily drop -- not because we shall sell less abroad but because we shall buy more as & result of increased busi- ness activity. Foreign capital will be gradually repatriated -- not because we drive it out but because it 18 attracted home Ce Regraded Uclassified 50 - 17 - by the reemergence of security abroad. Our investors will once again invest their funds abroad -- not because of the scarcity of opportunity at home but because of greatly enhanced opportunities for sound and profitable investments in other lands. And finally our tourists will spend hundreds of millions more in foreign countries. These are the developments which will automatically and gradually direct the flow of gold away from the United States. These are the developments upon which we must concentrate. We must concentrate on the promotion of further recovery here and peace and security abroad not in order to correct the gold situation, but because prosperity, peace and security are in themselves the supreme ends of policy. That their attainment will also solve the world's gold problem is only a by-product, albeit an important one. Co 51 - 18 - There is another aspect of the gold question that I should like to speak about -- the banking aspect. There are two diametrically opposed views with respect to our gold pol- 10y which in effect cancel each other out. One says that the inflow of gold by creating a vast base for credit expan- sion is promoting a runaway credit inflation. The other maintains that the Administration is retarding recovery by burying the gold in Fort Knox instead of putting it into active circulation. Now the fear that inflows of gold will bring about run- away inflation is based on theories no longer relevant to present-day ciroumstances. It used to be thought that the existence of any large volume of excess reserves in the banking system would lead to an inflation "irregardless". The events of the last few years, during which excess re- serves have amounted to many billions without any evidence of price inflation, consequently should have taught all Co Regraded Uclassified 52 - 19 - those willing to learn that inflation does not come about because of an increase in excess reserves. Run-away inflation is the product of powerful economic forces which are absent in the United States. This Administration is, of course, entirely aware of the undesirability of inflation. It will not permit an excessive bise in prices. If our present powers are ina- dequate to prevent it, new legislation can be easily ob- tained long before it 18 necessary to apply the brakes. We shall be fully prepared to act if and when an excessive rise in commodity prices appears imminent. It is ironic to find people preocoupied with the danger of price inflation at a time when we still have far too many idle resources and idle manpower. What we have to worry about, if anything, 16 not that prices are too high, but that they are not high enough. A moderate rise in Ce Regraded Uclassified 53 - 20 - prices would be beneficial to the farmers and producers of this country, it would stimulate employment and business recovery. Run-away price inflation can become a possibility only when our economy is approaching capacity, whe nl 1m- portant bottlenecks appear in employment and production; not before. The opposite view held by some critics that our gold policy leads to de flation 1s just as absurd. The gold imported is being used Just as much now as it ever was. We are not sterilizing the inflowing gold. We are not taxing to buy gold. We are not spending anybody's money when the Treasury purchases gold. Our gold purchasing is selfefinancing. Except for the gold held by the Stabilization Fund and certain other relatively minor amounts from the gold revaluation profits, there are gold certificates out- standing against all the gold in the Treasury. These cer- tificates constitute the major portion of the assets of Ce Regraded Uclassified - 21 - 54 Federal Reserve banks. Against these assets in the Federal Reserve banks there exist either Federal Reserve notes or deposits due to the commercial banks, which are their legal reserves. These reserves are held in turn against the demand and savings accounts of the public in the commercial banks. For every dollar of gold in the Treasury, therefore, the public holds at least one dollar of bank deposits or currency. Proposals have been made that one dollar of currency be placed into circulation for every dollar of gold in the Treasury instead of a check on government deposit. But the public would be neither better nor worse off if this were done. The additional currency thus placed into circula- tion would soon be deposited in the banks, and be re- turned to the Federal Reserve Banks as surplus currency. Therefore, this proposal is obviously of no significance. Ce 55 - 22 - the last proposal I want to deal with is that the Treasury restore the issue of gold coins. This suggestion is of very little importance. Even those who support it are aware that such gold coins would not circulate more actively and affect the domestic economic situation more than do the currency and bank deposits now in circulation against gold. The adherents of gold coinage, though they do not admit and may not even be aware of it, are merely asking to make gold coins available for private hoarders. All during the twenties there was very little gold coin in circulation, and such as there was was used mainly for gifts. For decades now the business of the country has been transacted by meane of bank deposits, paper money and subsidiary silver and minor coin. For the United States to start minting gold coine now would be to incur 8. needless expense and to militate against the effective regulation of the domestic monetary system in order to Co Regraded Uclassified 58 - 23 - cater to an irrational demand of private hoardere. Accordingly, I strongly believe in continuing to hold all the monetary gold in one central pool in the possession of the United States Government. I should like finally to turn to the question of the continued usefulness of the gold we have and the gold we are going to get. The matter seems to be troubling some people. Let me reassure you once and for all. Aa long AB there are independent nations, and BE long as there 18 international trade in goods and services, BO long will it be necessary to settle international balances. And gold is the moet effective, most efficient, and most economic medium for settling these balances. Gold 1s the interna- tional medium of exchange par excellence. Its acceptability 18 universal; its utility as international money survives changes in economic systems. It 1s used and needed just Ce Regraded Uclassified 57 - 24 - 88 much by the purest democracies as by dictatorships -- 88 much by capitalist economies ae by socialist economies. It is the refined instrument of international exchange of goods and services, as well as an essential ingredient in the more complex international financial transactions -- an instrument that has functioned without challenge for hundrede of years. Every foreign country wishes it had more of it; no foreign country likes to lose any of 1t; all countries accumulate it as soon as they can afford to do BO. And the fact that some countries find it possible to conduct the ir international trade without gold does not mean that they prefer to do so any more than people reeding by candelight do BO because they prefer candles to electricity. Gold does not lose its value because some countries are forced to resort to clearing arrangements, barter, import controls, and other substitutes. All these substitutes Oo Regraded Uclassified 58 - 25 - are admittedly a worse alternative. They are admittedly a method of conducting trade and finance which will only be adopted when a country does not possess adequate gold holdings. Governments resort wholly to these substitute methods for keeping a country's balame of payments in equilibrium only during times of great and prolonged stress and instability, and only when for one reason or another they have been unable to prevent a loss of practically all their gold holdings. All countries would like to have more gold, and the countries 6 which have the least are, you will find, countries which are striving most to add to their gold holdings. You hear much of the fact that Germany appears to conduct her trade without the use of gold. I think I as safe in saying that there probably isn't another country in the world which, notwithstanding its propaganda to the contrary, values gold more highly than does Germany and Ce 59 - 26 - which 18 more eager to accumulate gold at the first opportunity. Any person at all familiar with the workings of international trade and finance in countries like Germany and Japan whose gold holdings are not adequate will understand what I mean when I say tha gold 18 the most efficient, most satisfactory instrument of interna- tional exchange tha t has ever been developed. Gold is not only the best way to store foreign purchasing power, it not only constitutes one of the most effective war ste, but it is a medium of international exchange which is acceptable anywhere, any time, and in exchange for anything. To be sure, if the political picture of the world should undergo a drastic change in the future BO that instead of fifty or sixty independent nations there will exist only one or two groups dominated by ruthless powers, then international trade and finance may assume the character Ce Regraded Uclassified 60 - 27 - of domestic trade. There will cease to be independent monetary systems, as there will cease to be independent foreign policies. Balances between countries will be settled as balances between our states are settled now -- that is wholly by transfers of deposits. Under such cir- cumstances it may well be that gold will no longer be needed. But under those circumstances life will be 80 different, that the possible loss in the value of gold will, I am sure, be the least of our worries. Certain governments may boast of the day when inde- pendent democracies will disappear, I for one, have no fears that such boasts can be made good. I an as confident that gold will continue to be international money as I am that the majority of nations will succeed in maintaining their independence. With the return of peace and of normal economic and political relationships the barriers to the free flow of goods, capital, and services will be gradually de Regraded Uclassified 61 - 28 - lowered standards of living will once more resume their upward climb, and a more equitable distribution of the world's gold will take place. One word more -- The swap we made and are making in return for gold was not a bad bargain. It enabled us to increase employment and recovery. We have expanded our exports and encouraged our domestic industry. And not least of all we have acquired the safest physical asset in the world, an asset moreover which will play an essential part in reestablishing a permanent peace. Ce Regraded Uclassified 62 May 1, 1940 MEMORANDUM FOR THE SECRETARY: Attached is a summary report of the projects which have been worked on in the Division of Tax Research during April 1940. Roy Blongh Roy Blough, Division of Tax Research Attachment 63 Monthly report on projects in the Division of Tax Research April 1940 1. War and excess profits taxes An inventory of Congressional war finance proposals during the period 1920-1940 has been completed. A digest of these proposals is in preparation. The questionnaire on war and excess profits taxation prepared for transmission to foreign service offi- cers has been completed and submitted for review to the Office of the General Counsel and the Bureau of Internal Revenue. Other phases of war finance are under examination. (Mr. Ecker-R, Mr. Gordon and Mr. Mannen) 2. Life insurance companies In connection with a request from the Temporary National Economic Committee for information on the tax treatment of life insurance companies, a *Persons listed as working on the different projects do not include those who acted largely or exclusively in & consulting or reviewing capacity. In general, the person, if any, actively in charge of the project is listed first. 64 - 2 - study has been prepared of the treatment of life insurance companies under the income tax, capital stock tax and excess profits tax during the period 1909-40. This report has been forwarded to the Office of the General Counsel for review. (Mr. Shere and Mr. Mills) 3. Certificate plan for a processing tax A report has been prepared analyzing the provisions of H. R. 9273, 76th Congress, 3rd Session, which provides for a marketing certificate plan for agri- cultural commodities. The features of the new plan and those of the income certificate plan pro- posed last year were contrasted. (Mr. Ecker-R) 4. Mutual investment companies A report has been prepared reviewing the basis for the tax treatment of mutual investment companies in the light of the Securities and Exchange Commis- sion's findings with respect to their organization and operation. (Mr. Shere and Mr. Atlas) 5. Incentive taxation A report analyzing the provisions of 8. 3560, 76th Congress, 3rd Session, is being prepared. This bill provides for the imposition of a tax Regraded Uclassified E5 - 3 - which 1s reduced as the expenditure for labor used in business is increased. (Mr. Shere and Mr. Farioletti) 6. Income and estate taxes (a) Reports on the following subjects are in process: (1) Assets and income of corporations exempt from the Federal income tax under section 101 together with a Congressional history surrounding the exemption of certain types of corporations, the economic basis for each type of exemption and the effects of allowing tax exemption on the operations of such companies. (Mr. Shere and Miss T111) (2) The problems of special defense taxes with particular reference to the technical problems involved in the suggestion that a flat percentage increase in the present income and other taxes be imposed. (Mr. Shere and Miss Coyle) (3) Proposal to allow corporations with 5 or less shareholders to be treated for tax purposes as partnerships. (Mr. Mills) 66 - 4 - (b) Reports on the following subjects are in various stages of preparation but have not been actively prosecuted during the month: (1) Distribution of tax-exempt securities by net income brackets with particular reference to the holdings of such securi- ties by persons in high income brackets. (Miss Coyle) (2) The problem of illiquidity of assets and possible solutions under the estate tax. (Mr. Mills) (3) Powers of appointment and remainders under the estate tax. (Mr. Mills) 7. Statistics on pension plans Statistical data to indicate roughly the cost of pensions at various levels to the aged and the 111, together with the rates of various types of taxes which would be necessary to finance such pensions are in preparation. (Mr. Shere and Mr. Farioletti) 8. Articles, addresses, etc. (a) The following articles were published: (1) "The Treatment of Consolidated Returns under the Revenue Acts 1913-39" in the Regraded Uclassified 67 - 5 - Treasury Bulletin for April 1940. (Mr. Shere, Mr. Ecker-R, Mr. Zorach and Miss Hughes) (2) "The Evolution of the Federal Tax System" in Law and Contemporary Problems (publica- tion pending). (Mr. Blough) (b) The following articles are in preparation for possible publication in the Treasury Bulletin: (1) An article analyzing Statistics of Income data on dividends received by corporations. (Mr. Shere, Miss Coyle and Mr. Zorach) (2) An article on the number of partnership returns classified by size of net income and kind of business. (Miss Coyle) (o) An address on financial statements as a basis for Federal income tax reporting was delivered before the Columbia Accounting Institute. (Mr. Blough) 9. Inventory of tax proposale A preliminary draft of an inventory of proposals designed to produce additional revenue which have been considered by the Treasury from time to time has been completed and is now in the process of 68 - 6 - editing. A similar compilation of Treasury tax proposals other than those designed to produce revenue 18 in preparation. (Mr. Shere, Mr. Gordon and Mr. Zorach) 10. Tax chronology, 1919-27 A chronology of Federal tax rates covering the period 1919-27 18 in preparation. (Charts cover- ing the years 1913-18 and 1928-39 were previously prepared.) (Mr. Atlas and Miss Hughes) 11. Reviews of publications, etc. The following publications have been reviewed: (a) Page proof of the preliminary report, "Statis- tics of Income for 1938 compiled from individual income tax returns and taxable fiduciary income tax returns filed in period January through June 1939.' (b) Page proof of article for the Encyclopedia Britannica, "United States of America: National Finance." (Mr. Shere and Miss Hughes) 12. TNEC Pursuant to our agreement with Mr. Willard Thorp of the Department of Commerce, the Division re- viewed and discussed orally in conference their Regraded Uclassified 69 7 # I report on business taxation prepared by Mr. C. J. Hynning in connection with the TNEC study of corporation taxes. (Mr. Blough, Mr. Shere and Mr. Atlas) 13. Income Tax Study (WPA) The study of income tax returns carried on at Philadelphia with WPA funds since October 1938 1s continuing. A revised draft of the text for Section 1 of the study was prepared. (Mr. Shere and Miss Coyle) 14. Statistics In connection with the supervision of the techni- cal work of the Bureau of Internal Revenue several proposals for statistical tabulations from income and estate tax returns have been formulated and examined. (Mr. Blough, Mr. Shere and Mr. Campbell) 15. Correspondence The Division handled correspondence pertaining to tax problems. (Staff members) Regraded Uclassified foot draft used in 70 Deeny office 5/2/40 at 4:30 pm I am particularly pleased to be able to talk to you today because I am in such hearty accord with the purpose of this series of meetings, which I understand to be education for democracy. I applaud the initiative and the public spirit of the leaders of the Women's Division of the Democratic National Committee in making this notable convention possible. In considering your invitation it seemed to me that I might contribute most to stimulation of your thought on the problems of democratic government by talking to you about the money of the United States, and particularly about gold. I have chosen this subject because I think it 18 one in which all of you are interested; and it is one about which you may be 71 - 2 - asked a good many questions as the year proceeds. One thing you will hardly need to be told about our monetary system; that 1s, that the American dollar is the soundest unit of currency in the world. Its value 1s unquestioned here at home and it is not questioned anywhere else in the world. It is a solid rock of strength and stability amid all the monetary confusion created by aggression and war. It is more than a domestic currency; it has become in the last few years more and more an international currency. People throughout the world who are driven by disaster and fear to hoard currency prefer to hoard the currency of the United States, when they can get it. 72 - 3 - We have tried through many means to facilitate stability in the currencies of the world. An outstanding example which we initiated in is the Tripartite Accord of September, 1936. In all, six of the leading democracies of the world have subscribed to the principles of that Accord. Unfortunately, the progress we were making in the field of international finance and trade has been interrupted by the cataclysm in Europe. S One of the most striking development of these recent years has been the universal confidence in the American dollar as one of the very few certain things in a highly uncertain world. 73 - 4 - Some of our citizens who admit the strength of the dollar and the world's confidence in our currency, now suggest that confidence in our dollar has resulted in this country receiving too much gold. During the last 6 years we have acquired about $10 billions of gold from abroad. Why has so much gold come to the United States? In the first place, we have exported many billions of dollars' worth of goods and services in excess of the amounts we have imported. Secondly, large amounts of foreign funds have come to this country to be placed and kept on deposit with our banks. 74 - 5 - Foreigners have sent their funds here for safekeeping because of the peace, stability, and security which this country enjoys. Thirdly, foreigners have made large investments in American industries because they regard American business as a safe and profitable investment. Finally, Americans have been withdrawing their funds from abroad and liquidating their foreign investments in large sums because they prefer the dollar to any other currency. It is for these reasons that we have had so large and continuing a favorable balance of payments; ( it is for these reasons that gold has come and 18 continuing to come to the United States. Regraded Uclassified 75 - 6 - There 10 some confusion about the inflom of gold which arises from a misunderstanding of the nature of gold transactions. The United States does not go out into the world markets to buy gold. Treasuries do not buy gold 88 a government buys army blankets, office furniture or armaments. Gold is sent to this country to buy the dollars necessary to liquidate a balance or payments. Gold moves from country to country not as a commodity but as a means of payment, the one final medium through which international settlements are made. The continued acceptance of the gold that comes here is the only sound course of action open to us. There are, it 18 true, other courses of action theoretically possible, but they would all have disastrous consequences. 76 - 7 - Take, for example, the proposal so frequently made to us that we stop buying gold. It has the charm of simplicity. All that we have to do is to prohibit gold imports by a Treasury order. But let you abroad me tell what I think would happen. Dollars would ^ and sinou cirtly instantly become very scarce abroad and the foreigner haved find it much more inpense * buy who wished to buy American goods would find the cost and prohibitive. Foresample The British pound, the Canadian dollar, the French franc, the Dutch guilder would at once and sharply depreciate. A chain of forces would be set in motion which would disrupt our trade, seriously discourage what remains of world commerce and remove from world finance the strongest element of stability. Uclassified 8 77 The cessation of gold purchases would have mediate effects of great importance to us, the following three important effects. Firstly, the sale of American products in foreign markets would be made much more difficult. This would not apply so much to war materials, which foreign countries want so urgently, but it would hit hard our export of hundreds of agricultural and industrial commodities not vital to the conduct of the war. We would lose heavily in the very markets we will badly need when the war is over. Secondly, there would result an immediate flood of imports of cheapened foreign goods, which would deal an even more serious blow to labor industry and agriculture in America. The very Items which compete products with our domestic manufactures S would deluge our home But markets, In Meat and dairy products, textiles and 78 hundreds of other articles would at once be subjected to greatly intensified competition from abroad. Thirdly, Americans who have investments abroad would find that they had suffered substantial dollar losses overnight just as foreigners with investments here would find that they had windfall gains overnight. Regraded Uclassified 79 - 9 - Americans who have investments abroad would find that they had suffered substantial losses overnight, just as foreigners with investments here would find that they had windfall gains overnight. So you see this simple remedy 1s, in effect, a proposal that would completely disrupt our foreign exchanges and our trade. and greatly increase unemployment in this country. And so with the other naive proposals which some well-meaning citizens suggest as a remedy for our accumulating gold stocks. Shall we follow their advice and cut the price for gold? A moderate cut would be ineffective, and a cut in price sufficiently large to have a significant effect on the gold inflow would introduce the same conditions as would follow prohibition of gold imports. Regraded Uclassified 80 thisalso would - - cause our It would mean a serious decrease in 1 trade and a big increase in unemployment. Shall we, as some have suggested, discriminate our against certain countries in the 1 purchases of gold? Such a policy would not even have the virtue of effectiveness. The active cooperation of practically the entire world would be required to prevent any one country's gold from entering the world's markets and reaching the United States. Obviously this would be impossible even in normal times, let alone at a time such as this. Besides, the value of gold is proportionate to its unqualified use and acceptance as an international medium of exchange. To limit its acceptance would mean to reduce its usefulness. 81 ok - 11 - There 18 yet another alternative which has always been open to us. Instead of taking gold we again could have granted credit. Americans could have accumulated huge unsettled claims abroad. We have had experience with that system -- extensive experience -- in the decade that ended with the economic collapse of 1929. It is doubtful that Americans would want to that repeat the experience. For the excess of goods we shipped and for the dollar credits we granted we have taken gold in the last six years instead of promissory notes. The phrase "good as gold" still has real meaning in the world. I prefer the gold to pieces of foreign paper. I think most Americans do. agree with me. 82 M - 12 - Our gold policy 1s carefully adjusted to the realities of a complex world situation. There have that been many glib suggestions for changing 14. Examination of each of them has revealed, as in the examples I have mentioned, that in the effort to remedy fancied evils they would bring on real disaster. of course, should basic conditions alter, should we be confronted with new and unforeseen economic and political developments, the government will necessarily take such action as will best protect American interests. It 1s to be prepared for such contingencies that the powers with respect to gold operations have been kept flexible. Dearadod i M 83 - 13 - The Treasury 18 constantly observing, analyzing and studying the course of events in their relation to monetary problems in which this country is interested. But nothing has yet appeared which would warrant any change in our gold policy. There is only one sound way in which we can work to reduce the inflow of gold and to promote the return of at least a part of the wealth it represents to useful service in the lands from which it came. That way is to do everything in our power to contribute to the return of peace to the world and to encourage reconstruction and the restoration of normal trade. With the restoration of enduring peace and economic stability abroad the gold problem will solve itself. 84 M - 14 - Our great export surplus will drop, not because we shall sell less abroad but because we shall buy more. Foreign capital will be gradually repatriated -- not because we drive it out but because it is attracted home by the reemergence of security abroad. Our investors will once again invest their funds abroad -- not because of the scarcity of opportunity at home but because of greatly enhanced opportunities for sound and profitable investments in other lands. And finally our tourists will spend hundreds of millions more in foreign countries. These are the developments which will automatically and gradually direct the flow of gold away from the United States. These are the develop- ments upon which we must concentrate. 85 - 15 - We must concentrate on the promotion of further recovery here and peace and security abroad not in order to correct the gold situation, but because prosperity, peace and security are in themselves the supreme ends of governmental policy. That their attainment will also solve the world's gold problem 1s only a by-product, but an important one. I should like finally to turn to the question of the continued usefulness of the gold we have and the gold we are going to get. This 1s a matter that is troubling some people. Let me reassure you once and for all. As long as there are independent nations, and as long as there is international trade in goods and services, so long will it be necessary to settle international balances. Regraded Uclassified 86 - 16 - Gold 1s the international medium of exchange par excellence. Its acceptability 1s universal; its utility as international money survives changes in economic systems. It 1s used and needed just as much by the freest democracies as by the most rigid dictatorships -- as much by capitalist economies as by socialist economies. It is the refined instrument of international exchange of goods and services, as well as an essential ingredient in the more complex international financial transactions -- an instrument that has functioned without challenge for hundreds of years. Every foreign country wishes it had more of it; no foreign country likes to lose any of it; all afford countries accumulate it as soon as they can afford to do SO. Regraded Uclassified 87 - 17 - And the fact that some countries find it possible to conduct their international trade without gold does not mean that they prefer to do 80 any more than people reading by candlelight do so because they prefer candles to electricity. Gold does not lose its value because some countries are forced to resort to clearing arrangements, barter, import controls, and other substitutes. All these substitutes are admittedly worse alternatives. They are methods of conducting trade and finance which will only be adopted when a country does not possess adequate gold holdings. Governments resort wholly to these substitute methods for keeping a country's balance of payments in equilibrium only during times of great and prolonged stress and instability, 88 - 18 - H and only when for one reason or another they have been unable to prevent the loss of most of their gold holdings. All countries would like to have more gold, and the countries which have the least are, you will find, countries which are striving most to add to their gold holdings. They do so because they know that an adequate supply of gold promotes economic strength and furthers financial stability. To be sure, 1f the political picture of the world should undergo a drastic change in the future, so that instead of fifty or sixty independent nations there should exist only one or two groups dominated by ruthless powers, then international trade and finance may assume the character of domestic trade. 89 - 19 - There would cease to be independent monetary systems, as there would cease to be independent foreign policies. Balances between countries would be settled as balances between our states are settled now -- that is, wholly by transfers of deposits. Under such circumstances it might well be that gold would no longer be needed. But under those circumstances life would be so different that the possible loss in the value of gold would, I am sure, be the least of our troubles. Certain governments may boast of the day when independent democracies will disappear. I for one, have no fears that such boasts can be made good. payments 30 - 20 - I am as confident that gold will continue to be the medium of used as international payments as I am that the majority of nations will succeed in maintaining their independence. With the return of peace and of normal economic and the present political relationships barriers to the free flow of goods, capital, and services will be gradually standards their uphare derence cline nice sice and more resume equipale lowered distribution worlds gold will lake place good nee II exchange starte, managementle play role One word more -- The swap we made and are why making in return for gold is a good bargain for It us. has enabled us to increase employment and recovery. It has made possible the utilization of labor, capital, machinery and resources that would otherwise have been idle. We have expanded our exports and encouraged our domestic industry. And, moreover, we have at the same time acquired the safest physical asset in the world. Regraded Uclassified 91 - 21 - are I there may be some sincere people who have been disturbed by stories that this country had a monetary policy that threatens to cause loss to the nation. If you meet such people I hope you will reassure them. You may tell them that the greatest and richest country of the world has the best and soundest monetary system and that there is no reason to fear that it will not remain sound. We can feel entirely comfortable in the possession of a supply of gold with which we can meet future demands on our monetary system without any shock to our economy. We can be prepared also to play the part we ought to play in the reconstruction of the the world that must follow war's senseless destruction oOo 92 DEPARTMENT OF STATE WASHINGTON May 2, 1940 My dear Mr. Secretary: There are enclosed, for your information, copies of notes of April 26, 1940, from the British and French Ambassadors, giving assurance on behalf of their respective Governments that those Governments will be glad to keep this Government currently inform- ed on all matters which may be of interest to this Government concerning the performance of American- made aircraft under combat conditions. Sincerely yours, (s) S. Welles Acting Secretary Enclosures: Fr. British Ambassador April 26, 1940 Fr. French Ambassador April 25, 1940 (trenslation) The honorable Farry F. Woodring, Secretary of War. 93 BRITISH EXBASSY, No. 161 WASHINGTON, D. C. Sir, April 26, 1940. I understand that onc of the conditions set forth by the War Department in regard to the export of American manufactured air- craft, was the inclusion in each contract of a clause to the effect that the purchaser should supply accredited agents of the United Stetos Government with complete information relative to the suita- bility of the design, cquipment and combat performance, of the air- craft which are released for export. I have the honour to inform you that His Majosty's Government in the United Kingdom is anxious to coopcrate fully with the United States Var Department with a view to giving the latter all the infor- mation it may wish as to the performance under combat conditions of all American purchased aircraft. Powever, in view of all the military aspects bearing on the information desired by the United States War Department, it is felt that it would probably be more proper to avoid making the question of information a pert of the contractual obligation with the manufecturers. I have therefore been instructed by Pis Majosty's Principal Secretary of State for Forcign Affairs to suggest to you that in licu of the inclusion of any such contract provision, you accept the assurances of my Government that they will be glad to keep the United States Government's accrcdited agents currently advised on all matters which may be of interest to the United States Government as regards performence of American made -1- Regraded Uclassified 94 aircraft under combat conditions. They will also be glad to answer any questions on the same subject matter which the United States' accredited agents may wish to put forward. I should be grateful if you would kindly forward this com- munication urgently to the compctent authoritics. I have the honour to bc, with the highest consideration, Sir, Your most obcdicnt, hurble scrvant, LOTHIAN -2- 95 "ashington, April 26,1940 EMBASSY OF TPF FRENCH REPUBLIC IN THE UNITED STATES Mr. Secretary of State, I understand that one of the conditions set forth by the War Dopart- ment in regard to the export of American manufactured aircraft, was the inclusion in each contract of a clause to the effect that the purchaser should supply accrodited agents of the United States Government with complete information relative to the suitability of the dosign, cquip- ment and combat performance, of the aircraft which are released for export. I have the honor to inform Your Excellency that the French Govern- nent is anxious to cooporato fully with the United States War Department with a view to giving the latter all the information it nay wish as to the performance under combat conditions of all American purchased air- craft. However, by reason of the meny aspocts of the information ro- quested by the United States War Department, it is folt that it would probably be morc proper to avoid making the question of information a part of the contractual obligation with the manufacturers. I have therefore been instructed by my Government to suggest to Your Excellency that in licu of the inclusion of any such contract provision, I request you to accept the assurances of my Government that the agents accredited by the Amcrican Government will bc kcpt informed on all matters which may be of interest to the United States Government as regards performence of American made aircraft under conbat conditions. -1- Regraded Uclassified S6 The French authoritics will bc happy to answer any questions on the sanc subject matter which the accredited agents may wish to put forward. I should be grateful to Your Excellency if you would kindly forward this co munication urgently to the competent authoritics. Accept, Mr. Sceretary of State, the assurances of ny high consideration. C. de SAINT-QUENTIN -2- Regraded Uclassified 97 5-2-40 MORGENTHAU TO MAKE SPEECH TOMORROW ON GOLD QUESTION 11.10 WASHN - SECY MORGENTHAU ANNOUNCED TODAY HE WOULD ADDRESS THE WOMEN-S DIVISION OF THE DEMO- CRATIC NATIONAL COMMITTEE TOMORROW ON THE SUBJECT OF GOLD MR MORGENTHAU DECLINED TO DISCLOSE WHAT ELE- MENTS OF THE GOLD PROBLEM AND THE GOVERNMENT-S POLICY TOWARD IT WOULD BE INCLUDED IN HIS ADDRESS IT IS THE FIRST PUBLIC SPEECH MR MORGENTHAU HAS MADE IN NEARLY TWO YEARS AND IT IS PRESUMED THAT HIS DISCUSSION WILL BE COMPREHENSIVE -0- FROM CHICAGO 11:45 sell, May 2, 1940 (jhw) SECRETARY MORGENTHAUS TELETYPE DELIVERED PERSONALLY TO DR VINER AT TEN AM TODAY AND DR VINER REQUESTS FOLLOWING MESSAGE BE DELIVERED TO SECRETARY MORGENTHAU DRAFT SPEECH EXCELLENT IN TONE AND CONTENT AND TAKES CARE OF ALL ESSENTIAL POINTS. I WOULD BE INCLINED TO EMPHASIZE A LITTLE MORE THE POINT THAT AMERICAN POLICY WILL OF COURSE BE SUBJECT TO CHANGE IF DRASTIC CHANGES OCCUR IN WORLD ORGANIZATION AND THAT THE TREASURY IS KEEPING CLOSE AND CONSTANT WATCH ON THE SITUATION, BUT THAT IT IS ESSENTIAL THAT THERE BE NO SUBSTANTIAL MANGE IN PRESENT POLICY UNTIL THE COURSE OF WORLD AFFAIRS CAN BE MORE CLEARLY FORESEEN THAN IS NOW POSSIBLE. THE ONLY OTHER CHANGES I SUGGEST ARE TO SUB- STITUTE FOR QUOTE THE SIX LEADING DEMOCRACIES QUOTE SIX OF THE LEADING DEMOCRACIES TO PROTECT THE SUSCEPTIBILITIES OF SWEDEN CANADA, ETC., AND IN PARAGRAPH BEGINNING QUOTE ONE WORD MORE QUOTE TO BRING OUT THE FACT THAT THE PERIOD WHEN WE WERE EXCHANGING GOODS HEAVILY FOR GOLD HAS BEEN A PERIOD OF UNEMPLOYMENT OF RESOURCES 30 THAT EVEN IF THE COLD SHOULD BECOME UTTERLY WORTHLESS IT WOULD STILL BE ARGUABLE THAT WE HAD LOST LITTLE OR NOTHING AND EVEN HAD GAINED ON THE DEAL SIGNED JACOB VINER CALLAGHAN END OK WILSON END Regraded Uclassified 99 RE ADDRESS BEFORE WOMENS' DIVISION May 2, 1940 NATIONAL DEMOCRATIC COMMITTEE 11:15 a.m. Present: Mr. Eernstein Mr. White Mr. Gaston Mra Shanahan Mrs Klotz Mr. Schwarz H.M.Jr: The President loved it. White: What, in particular, did he like? H.M.Jr: He liked the whole thing. When I came in he said, *Did you get my message? I told you three times you had your nerve with you," and I said, "Yes, but I think you are going to like it." "Well, he said, "I don't know, it is kind of ticklish." So he started to read the thing and the one passage which particularly pleased him was the candlelight one, the reference to candlelight and electricity. I don't know who did it, but he liked it. Seston: That is Harry's. H.M.Jr: Now, he only made & couple of suggestions. He WBB very much interested and the same thing had happened to him that had happened to me. Mrs. Roosevelt had told him about the question that had been asked on gold and would he answer 1t, which he proceeded to do, and he said, "I hope, Henry, you told her the same answer that I did, If so I said, "Well, it 18 practically the same." The one thing he has in mind, end I will show you where he wants to get it in, is that the United States Government itself doesn't buy any gold. It is the business men and the 1m- porters, and 80 forth, and we actually don't buy any gold. That is true, isn't it? Baston: We give dollars for gold. H.M.Jr: Well, do we? White: The Treasury definitely does buy gold, but we can so word it that -- Regraded Uclassified 100 - 2 - H.M.Jr: But I mean, we are not buying it for our use, White: We could not go out in the market and buy gold the way we buy Army blankets or something of that sort. H.M.Jr: Well now, Mrs. Shanshan, this 18 what he wanted to get in there. He said, *What do we mean by the soundest currency in the world?" This is very rough, but I think I can get it over. We don't have to worry about his purchasing power because it is used first - we use money to in- vest in stocks and bonds and mortgages on houses and our money for that purpose has had practically B. uniform purchasing power. Also, on the outgo, where we pay off a mortgage or rent on & house or have payments to make on various things, it says the medium of exchange has approximately the same value in carrying out an obligation. White: Oh, I see what he means. Gaston: Stability of purchasing power. In the last six years it has had remarkable stability. H.M.Jr: And third, in foreign trade, reasonably stable in terms of goods for other nations that we have to buy or sell to them. Now, he wanted to get that in there in the beginning when we talk in terms of American dollars being the soundest unit of currency in the world. Then he wants me to say, "What do people mean when they talk about 8. sound currency?" Do you get the idea? Gaston: Yes. H.M.Jr: Do you think it belongs in here? Gaston: I think it White: We will see what we can do with it. I know what he would like to say, but it is one of those words that sounds nice until you examine it, but we can do something with it. H.M.Jr: A couple of things. They don't have to fear it is going to decline greatly in value, that it is going to become worthless, that its purchasing Regraded Uclassified 101 - 3 - power has been remarkably stable both here and abroad over the last six years. Well, when you do it, do it on B. separate page, because I am pretty well set in my mind on this thing, you see. Mrs. Klotz, make 8. note that this talk of mine is to be sent tonight to our Attaches in London, Paris and Berlin, but not to be sent until mid- night. It 1s to be sent by the State Department. On the top of page five, I wrote down that we were to make it plain that the Government itself does not buy. It is individuals in payment of miscellaneous items and not the Government. White: Yes, that was in the earlier draft. We had a paragraph that we can re-adapt to this. H.M.Jr: He kept saying, "This is good." I have seldom seen him 30 tickled. Gaston: Well, that 13 fine. I thought when we left here last night it was terrible, then I read it over this morning and I thought it was swell. H.M.Jr: I read it this morning at 6:30. I thought it was swell. Let me just read this thing out loud and see how it sounds. Incidentally, as soon as this thing 19 finished, all three of you go home. White: We will leave the Treasury. Whether we go home 1s another question. Gaston: How do you like ball games, Harry? H.N.Jr: "I have taken the liberty of departing from the topic --" Now, I don't want to start off with an apology. Gaston: I think that had better be changed. H.M.Jr: I told the boys this story. See how you like it. I told the newspaper men this story. Did I tell you my fish story? Regraded Uclassified 202 - 30)- Klotz: No, you didn't. U.M.Jr: Well, they asked me why we talked on gold in- stead of the budget and I said, "Well, I will tell you a story. This is what I thought I would say to the ladies. I don't want it written out. I will just do it. You will notice I am down for the debt. You may wonder why I em not talking about the budget instead of the gold." I said, "Let me tell you a little story. I attended a dinner for the visiting nurses the other evening and Dr. Lyons, who is president of the medical society --" Incidentally, he is the man who operated on me, terribly nice and very good looking. Elotz: Oh, really? H.M.Jr: Yes, just in passing. White: When are you going to get operated on? Klotz: I need an operation. H.M.Jr: One of the visiting nurses called on a poor home and when she visited this woman she said, "Before I can do anything for you, you will have to take a hot bath. Have you got a bathroom?" "oh, yes." "Where is it?" "Down the hall." "Have you got a bath?" "Yes." It doesn't have coal in it. White: It doesn't sound like the kind of story you should tell there. H.M.Jr: So the nurse went down and looked at the bathtub and it was full of water and 8 big fish was swim- ming in it and she said, "Well, you have got to get rid of that fish," and the woman said, "Well, we can't get rid of that fish until we ent 1t." Klotz: That didn't go over. H.M.Jr: It didn't go over? Well, I can't give a talk on the budget until I can digest it. White: Too subtle. Regraded Uclassified 103 - H.M.Jr: All right, we will not give it. White: But I think a. good story is the way to change this. Bernstein: I like the distinction you make. H.M.Jr: Harry, you and I know lots of good stories, but I don't think - we're not talking before a men's smoker. White: No, but I think some light tone to introduce that would be good. H.M.Jr: All right. I don't want to start with an apology in the first paragraph. "One thing you will hardly need to be told about our monetary system; that is, that the American dollar 1s the soundest unit of currency in the world. Its value is unquestioned here at home and it is not questioned anywhere else in the world." Then you are going to consider whether you want to put in the President's definition of what is & sound currency. Now, we are getting into the domestic field. I don't know whether you want that or not. The fact that he asked doesn't mean that I have to. White: I think we may be able to work out a couple of sentences related to gold which will fit in at that point. H.M.Jr: Pa Watson told me yesterday I couldn't give this speech. I am just - my point in saying that 1s that I don't have to do it. Bernstein: In 1933 when the President made 8. few speeches on gold, particularly in October and possibly also in his message to the World Conference, he treated this idea of stability of purchasing power from generation to generation and you may want to tie it in with what the President has said. 104 - 5 - White: If you make it from generation to generation, then it becomes economically sound. H.M.Jr: If I could quote from the President, as the President said -- White: We will comb his speeches and pick out a. couple of sentences related to gold at that point. I am pretty sure we ought to be able to find some. Gaston: For six years it has had that steadiness of pur- chasing power that he talked about. H.M.Jr: Well, you have got the idea, gentlemen. "It is a solid rock of strength and stability amid all the monetary confusion created by aggression and war. It is more than B. domestic currency; it has become in the last few years more and more an international currency. People throughout the world who are driven by disaster and fear to hoard currency prefer to hoard the currency of the United States, 1f they can get it." Instead of "if," I should think we should say "when." White: I think instead of "prefer to hoard," "prefer to hold. "Prefer to deal in." H.M.Jr: No, I like "hoard." White: When they can get it. H.M.Jr: "We have tried through many means to facilitate stability of the currencies of the world. An outstanding example of an effort which we ini- tiated --" Do you think it is immodest to say, "Which I initiated"? White: No. Say the Treasury initiated it. H.M.Jr: Then leave it "we." Klotz: You get the feeling of "we" through the speech. Regraded Uclassified 105 - 6 - H.M.Jr: "In all, the six leading democracies of the world have subscribed to the principles of that Accord. Further progress in the field of international finance and trade must be deferred by reason of the cataclysm in Europe.' White: I think it has to be something else besides "we, because that is too general. It seems to include the world. It either has to be the United States or this Treasury Department or this Administration or some thing. Gaston: I don't think you have spoken about "we" ex- cept as the United States anywhere through the speech. H.M.Jr: Well, I didn't necessarily initiate it, I mean, thinking in terms of - we sort of grew up with it. I wouldn't stress it. I mean, it sort of grew up, all three Treasuries were sort of in- volved. Bernstein: What I had in mind, 1f this is a speech to a group of politically-minded women who are going to go back and preach the gospel, I should think they would be interested in being able to say that either the "reasury or the Administration had initiated it. H.M.Jr: Why not just say - well, it is this Administration. Klotz: Well, it isn't, it is you. H.M.Jr: I did initiate 1t? Klotz: You did initiate it. H.M.Jr: All right. Put it down and argue about it. "One of the most striking developments of these recent years has been the universal confidence in the American dollar as one of the very few certain things in B. highly uncertain world. "Some of our citizens who admit the strength of the dollar and the world's confidence in our currency, now suggest that confidence in our Regraded Uclassified 106 - 7 - dollar has resulted in this country receiving too much gold. "During the last 6 years we have acquired about $10 billions of foreign gold.' "Foreign gold" or "gold from abroad"? White: "Gold from abroad." H.M.Jr: I throw these things at you. I am not going to argue, but 1f I feel strongly on anything, I will just say what I want. If you don't like it, don't use it. "Why has so much gold come to the United States?" The reason I say "foreign gold," there might be some gold sent abroad and come back here again. White: I think it 1s best not to carry private gold as foreign or domestic. H.M.Jr: I throw these things out and you can do anything you like with them. It might perfectly well be our own gold coming back again. "Why has 80 much gold come to the United States? "In the first place, we have exported many billions of dollars worth of goods and services in excess of the amounts we have imported. "Secondly, large volumes of foreign funds have come to this country to be placed and kept on deposit with our banks. Foreigners have sent their funds here for safekeeping because of the peace, stability, and security which this country enjoys. "Thirdly, foreigners have made large investments in American industries because foreigners think American business 1a a safe and profitable in- vestment. Finally, Americans have been with- drawing their funds from abroad and liquidating their foreign investments in large sums because they prefer the dollar to any other currency in the world. 107 - B - "It is for these reasons that we have had so large and continuing a favorable balance of payments; it is for these reasons that gold has come and is continuing to come to the United States. "The continued acceptance of the gold that comes here 1a the only sound course of action open to us." Klotz: Did you see this? H.M.Jr: I told them about that, thanks. "There are other conceivable courses of action but they would all have disastrous consequences. "Take, for example, the proposal so frequently made to us that we stop buying gold. It has the charm of simplicity. All that we have to do is to prohibit gold imports by B. Treasury order. But let me tell what I think would happen. The immediate reaction would be B. sharp increase in the value of the dollar in terms of foreign currencies." That is an awfully technical sentence, Harry. What I thought you might put there 1s, "As for example," and give e little example. White: We might try it. We would have to select the currency and we were reluctant to do that. H.M.Jr: Use the pound. White: Well, I will see, These two sentences are difficult. Caston: That could be stated similarly in another way. H.M.Jr: As I say, after all, it is very highly technical language. I was thinking of some simple example. "Foreign currencies, in other words, would at once sharply depreciate and a chain of forces would be set in motion which would disrupt our trade. 108 - 9 - "First of all American products would be much more difficult to sell in foreign mar- kets. This would not apply 80 much to war goods --airplanes, armaments, etc. --" You don't want to say there, "or is it obvious because they have to have these?" White: No, I think that should be stated. This would not apply - they have to have these. H.M.Jr: Yes, White: But when it comes to B. - they have to have those. Gaston: Their necessity 1a 80 great that they would probably pay any price they had to pay. H.M.Jr: Something like that. "....but it would hit hard our export of hundreds of agricultural and industrial commodities not vital to the conduct of war. We would lose heavily in the very markets we will badly need when the war is over. Increased imports of foreign goods, at the same time, would react even more drastically on our domestic economy. It would be just those very 1tems which compete with our domestic manufactures that would flood our home markets. We would not be encouraged --" I don't understand that sentence. "We would not be encouraged to boy much more rubber or tin." I don't understand what that means. White: The thought I had in mind there is that the goods that would flood our markets would be those that would compete with us. It wouldn't be tin and rubber that we don't produce. H.M.Jr: That isn't clear, Harry. White: No, it is not clear. We paragraphed that and put an additional sentence on that. "We would not be encouraged to buy much more rubber or tin. These are the commodities that we do not produce at home." We will have to fix that up. 109 - 10 - H.M.Jr: Incidentally, -- White: The next sentence makes it clear. H.M.Jr: Incidentally, one thing, in talking about the reasons the gold came here, the President used the subject which you used and dropped out, that one of the reasons why so much gold comes here is due to our high tariffs. White: Well, that is implicit in trade. We can say, "One of the reasons for our large excess of exports If H.M.Jr: "Excess --" White: "One of the reasons why we are --" B.M.Jr: "We import relative --" White: " that we are not importing more --" H.M.Jr: "....more " --" White: If that we are not importing more and therefore having such an excess of exports, is the high tariff schedule that we will name the Tariff Act of 1930.' H.M.Jr: He mentioned it and I am throwing it at you. White: It would have to EO in earlier. Gaston: It is a vital point in the picture. H.M.Jr: Yes, and he put his hand on it that we don't mention it. White: It isn't too sound, because our exports began increasing chiefly last year and this year and the tariff has been lowered steadily since 1934. H.M.Jr: Harry, I would be the last one to have you put in something that isn't sound. White: Well, we will get something. Regraded Uclassified t10 - 11 - H.M.Jr: Touche! But you agree that sentence is not water- proof? White: Right. H.M.Jr: The rubber and tin sentence is not waterproof? White: I see. Klotz: Right. H.M.Jr: Thank you. Harry looks a little tired this morning or my jokes are tired. "But meat and dairy products, textiles, and hundreds of other manufactures would at once be subjected to greatly intensified competition from abroad. Furthermore, Americans who have investments abroad would find that they had suffered substantial losses overnight, just as foreigners with invest- ments here would find that they had windfall gains overnight. "So you see this simple remedy is, in effect, B. proposal that would completely disrupt our foreign exchanges and our trade and greatly increase un- employment in this country. And so with the other naive proposals which some well-meaning citizens suggest as a remedy for our accumulating gold stocks. "Shall we follow their advice and cut the price for gold? A moderate cut would be ineffective, and a cut sufficiently large to reduce our annual gold inflow by a billion or two .." I don't like that "billion or two." It is 8. little flip. White: We have to make it B. large amount. H.M.Jr: Then say, "by several billions." I mean, kind of bandying around." White: They only have three. Gaston: I wouldn't put any figure in at all. - 12 - White: You have to put a large amount there, H.M.Jr: Don't do it the way it is. It is a little bit flip. "A billion or two, what 18 that, as Secretary of the Treasury?" White: I see. H.N.Jr: 0 would introduce the same conditions as would follow on a prohibition of gold imports. It would mean a serious decrease in trade and B. big increase in unemployment. "Shall we discriminate against certain countries in the purchases of our gold? Such a policy would not even have the virtue of effective- ness. The active cooperation of practically the whole world would be required to prevent any one country's gold from circulating. ob- viously this would be impossible under any cir- cumstances, let alone at B. time such as this. Besides, the value of gold depends upon its unqualified use and acceptance as an international medium of exchange. To limit its acceptance would mean to reduce its usefulness. "There is yet another alternative which has always been open to us. Instead of taking gold we could have granted credit. Americans could have accumulated huge unsettled claims abroad. We have had experience with that system -- extensive experience -- in the decade that ended with the economic collapse of 1929. It is doubtful that Americans would want to repeat the experience. "For the excess of goods we shipped and for the dollar credits we granted we have taken gold in the last six years instead of prom- issory notes. The phrase 'good as gold' still has real meaning in the world. I prefer the gold to pieces of foreign paper. I think most Americans do. "Our gold policy is carefully adjusted to the realities of a complex world situation. There have been many 611b suggestions for changing it. Examination of each of them Regraded Uclassified 112 - 13 - has revealed, as in the examples I have men- tioned, that in the effort to remedy fancied avils they would bring on real disaster. "Of course, should basic conditions alter, should we be confronted with new and unfore- seen economic and political developments, the government will necessarily take such action as will best protect American interests. It is to be prepared for such contingencies that the powers with respect to gold operations have been kept flexible. But nothing has appeared to date which would warrant any change in our cold policy. "There is only one sound way in which we can work to reduce the inflow of gold and to pro- mote the return of at least & part of the wealth it represents to useful service in the lands from which it came. That way is to do everything in our power to contribute to the return of peace to the world and to encourage reconatruction and the restoration of normal trade. With the restoration of enduring peace and economic stability abroad the gold problem will solve itself. Our great export surplus will drop, not because we shell sell less abroad but because we shall buy more. Foreign capital will be gradually repatriated - not because we drive it out but because it is attracted home by the reemergence of security abroad. Our investors will once again invest their funis abroad -- not because of the scarcity of opportunity et home but because of [reatly enhanced opportunities for sound and profitable investments in other lands. And finally our tourists will spend hundreds of millions more in foreign countries. "These are the developments which will auto- matically and gradually direct the flow of gold away from the-United States. These are the developments upon which we must concen- trate. We must concentrate on the promotion of further recovery here and peace and security abroad not in order to correct the gold situ- ation, but because prosperity, peace and Regraded Uclassified 113 - 14 - security are in themselves the supreme ends of policy." Now, what do you mean by that? White: They are the highest goal of any social activity. H.M.Jr: Or policy? White: It says, "supreme ends of policy." We could say, "supreme ends of government." H.M.Jr: No, I like "policy," but I just think - have it "policy" or "the government's policy." White: No, it has to be of policy in general. H.M.Jr: All right, leave it. Gaston: Would you want "higher" instead of "supreme"? White: I think "supreme" is the strongest word, and after all, it is peace and prosperity. H.M.Jr: No, it is all right. White: That 1s what we are chasing there. H.M.Jr: It is all right. "That their attainment will also solve the world's gold problem is only a by-product, but an important one. "I should like finally to turn to the question of the continued usefulness of the gold we have and the gold we are going to get. The matter seems to be troubling some people." White: Does that sound a little flip? H.M.Jr: Yes. "The matter is troubling some people." "Let me reassure you once and for all. As long as there are independent nations, and as long as there is international trade in goods and services, 80 long will it be necessary to settle 114 - 15 - international balances. Gold is the inter- national medium of exchange par excellence. Its acceptability is universal; its utility as international money survives changes in economic systems. It is used and needed just as much by the purest democracies as by dictatorships --" Harry, where is our pure democracy? White: The United States. Those women wouldn't deny it. H.M.Jr: What? White: Well, it is thought here that even if the democracy were pure, we would still leave - we have taken the two extremes. If by the purest democracies as by dictatorships." I suppose Norway was - no. I think it 1s permissible. Gaston: Well, you could say "plain democracies." R.K.Jr: It is all right. I don't like the "plain." "....as much by capitalist economies as by socialist economies." Instead of saying "socialist" I would just as lief say "bolshevist," What 1s the Russian Government, communist or bolshevist? Gaston: They call it socialist. White: The economic antithesis of capitalism is socialism. Bernstein: If you want a parallel word for "purest demo- cracy," how about "extreme dictatorship"? H.M.Jr: Extreme? Gaston: Extreme is good. B.M.Jr: I think that is B. good point. Regraded Uclassified 225 - 16 - White: Does that suggest possibly that we have a dictatorship here, but it is not extreme? Would that have that implication? Pernstein: Well, I think you are giving the two extremes, of fl pure democracy and an extreme dictator- ship. White: I think I should leave "purest" out 1f you have to put "extreme" in dictatorship. Well, we will argue it out. Klotz: I would. H.K.Jr: You would leave out the "purest"? Klotz: Yes, H.K.Jr: I don't like the words "purest democracies." There isn't such e thing. White: There isn't. It is an abstract. H.V.Jr: I would say it is used as much for the demo- cracies 8.9 by the dictatorships and leave out the word "purest." I don't think you are 8. "purist" when you use the word "purest." White: "Pure" is a strong adjective. I think it is desirable for effect to have an adjective for both of them, which we will try to get. H.V.Jr: 0. K. "And the fact that some countries find it possible to conduct their international trade without gold does not mean that they prefer to do so any more than people reading by candlelight do so because they prefer candles to electricity. "Gold does not lose its value because some countries are forced to resort to clearing arrangements, barter, import controls, and other substitutes. All these substitutes are admittedly 8. worse alternative. They are admittedly 8. method of conducting trade Regraded Uclassified 2+6 - 17 - and finance which will only be adopted when e country does not possess adequate gold holdings. Governments resort wholly to these substitute methods for keeping a country's belance of payments in equilibrium only during times of great and prolonged stress and in- stability, and only when for one reason or another they have been unstable to prevent a loss of practically all their gold holdings. All countries would like to have more gold, and the countries which have the least are, you will find, countries which are striving most to add to their gold holdings. "To be sure, if the political picture of the world should undergo a drastic change in the future so that instead of fifty or sixty in- dependent nations there should exist only one or two groups dominated by ruthless powers, then international trade and finance may assume the character of domestic trade. There will cease to be independent monetary systems, as there will cease to be independent foreign policies. Balances between countries will be settled as balances between our states are settled now -- that is wholly by trans- fers of deposits. Under such circumstances it might well be that gold would no longer be needed. But under those circumstances, life would be so different, that the possible loss in the value of gold would, I am sure, be the least of our worries." There is one definite change I would like. Instead of saying "the least of our worries," I would like to say "the least of our troubles." Gaston: Yes. It is more colloquial. E.R.Jr: I want one word of my own, please. "Certain governments may boast of the day when independent democracies will disappear, I for one, have no fears that such boasts can be made good. I am as confident that gold will continue to be international money a.a I am that the majority of nations will succeed in Regraded Uclassified 117 - 18 - maintaining their independence. With the return of peace and of normal economic and political relationships and barriers to the free flow of goods, capital, and services will be gradually lowered. "One word more -- The swap we made and are making in return for gold was not a bad bargain. It enabled us to increase employ- ment and recovery. We have expanded our exports and encouraged our domestic industry, And not least of all we have acquired the safest physical asset in the world. "I suppose there may be some sincere people who have been disturbed by stories that this country has EL monetary policy that threatens to cause the nation loss. If you meet such people, I hope you will be able to reassure them. You may tell them that the greatest and richest country of the world has the best and soundest monetary system and that there is not the slightest reason to fear that it will not remain sound. "We can feel entirely comfortable in the possession of EL supply of gold with which we can meet future demands on our monetary system without any shock to our economy. We can be prepared also to play the part we ought to play in the reconstruction of the world that must follow war's senseless destruction.' Herbert, the President is not interested in four ships for the Coast Guard to pick up nets. Gaston: Buoys in place of nets. Not even two? H.W.Jr: No; he said to inquire what you could buy or rent from existing fishing ships. As long 83 he isn't interested, let the Navy fight for it, see. If you will have this rewritten, he will give us the guns. Gastont Have it rewritten to cover only the guns? Regraded Uclassified 118 - 19 - H.M.Jr: Only the guns. Gaston: The most essential thing is the listening apparatus. H.M.Jr: Oh no, just leave out the four ships. Gaston: Of course, actually, this whole thing should be the Navy's responsibility of making pre- parations. H.M.Jr: He has had the thing for two hours. (Telephone conversation with Dr. Viner follows:) 118 - 20 - White: Do you want to get in touch with Mrs. McAllister? She very much wants B. preliminary draft. She called up a half dozen times yesterday. H.M.Jr: She gets it tonight when the press gets it. White: Is it necessary to tell her the change in topic? H.M.Jr: oh, yes. Is she back? White: Didn't she call up personally? Shanahan: It was the head of the publicity department. R.M.Jr: That is up to Chick Schwarz. I will tell Chick. He can handle the thing. Now, when do you fellows want to see me again? White: I don't think it will take more than a rather brief time. Whenever it 1s convenient for you. R.M.Jr: Does 3:00 o'clock rush you too much? I will hold 3:00 o'clock and if you are not ready at 3:00, I will see you when you are ready. Gaston: I think we will be ready. H.M.Jr: The only appointment I have this afternoon is at 4:00. Would you rather see me after 4:00? Let me do it this way. I am going home to rest. When I come back I will call you and see where you are. How is that? The only appointment I have is at 4:00 and it will take 15 minutes. (Mr. Schwarz entered the conference) This speech won't be ready until sometime after 4:00 and you have got to take care of these women. Schwarz: And the distribution? H.M.Jr: Did I tell you we wanted half a dozen seats? Schwarz: I took care of that. Γ2o - 21 - White: You are going to take care of the distribution? H.M.Jr: of the speech or the seats? White: He said the distribution of the women. H.M.Jr: Have the boys been asking any more? Schwarz: They are eager for it. H.M.Jr: I wouldn't tell them until 5:00. Schwarz: It is just as well to avoid the temptation.for any of the morning papers to predict it. H.M.Jr: When does the ship change over? Schwarz: The wire service is about 10:00 p.m. H.M.Jr: I mean for tomorrow. Schwarz: They close down about 3:00 a.m. H.M.Jr: Why not tell them they can't expect the thing before 6:00 tonight? Between 5:00 and 6:00. I have taken the liberty of departing from the topic which was originally assigned to no when I was asked to address this meeting, in order to talk to you about the maney of the United States - and particularly about gold. I do this because I think the subject is one in which all of you are interested; and it is one about which you may be asked a good may questions as the year proceeds. One thing you will hardly need to be teld about our memotary systems that 10, that the American dollar is the soundest unit of currency is the world, Its value is unquestioned here at home and it is not questioned anywhere also in the world. Regraded Uclassified - 2 - It is a solid resk of strength and stability said all the meetary confusion created by aggression and was. It is mere than a domestic currency) 18 has become in the last few years more and mere an international currency. People throughout the world who are driven by disaster and fear to heard currency prefer to heard the currency of the United States, If they can get it. Be have tried through many means to facilitate stability is the surrencies of the world. is outstanding emample of an effort which 90 initiated is the Tripartite Accord of September, 1936. In all, the six leading demecracion of the world have subscribed to the principles of that Accord. Further progress in the field of international finance and 1231 - , - trade must be deferred by reason of the estaslysm in Barope. One of the most striking developments of these recent years has been the universal confidence in the American dollar as one of the very few certain things in a highly uncertain world. Some of our sitizens who admit the strength of the dollar and the world's confidence in our currency, now suggest that confidence in our dollar has resulted in this country receiving too much gold. During the last 6 years 10 have acquired about 810 billions of foreign gold. By has 80 snob gold - to the United States? In the first place, w have experted many billions of dollars worth of goods and services in excess of the assunts we have imported. Regraded Uclassified - 4 - Secondly, large volumes of foreign funds have - to this country to be placed and kept a deposit with our banks. Foreigners have sent their funds here for safekseping because of the pease, stability, and security which this country enjoys. Thirdly, foreigners have made large investments in American industries because foreigners think American business is a safe and profitable investment. Finally, Americans have been withdrawing their funds from abroad and liquidating their foreign investments in large suss because they profer the dollar to any other currency in the world. It is for these reasons that 90 have had " large and continuing a favorable balance of payments) - 5 - it is for these reasons that gold has come and 10 continuing to como to the United States. The continued acceptance of the gold that comes here is the only sound course of action open to us. There are other conseivable courses of action but they would all have disastrous consequences. Take, for example, the proposal 80 frequently made to us that ve stop buying gold. It has the charm of simplicity. All that 10 have to do is to prohibit gold imports by a Treasury order. But let as tell what I think would happen. The immediate resction would be a sharp increase in the value of the dollar in terms of foreign currencies. Foreign currencies, in other words, would at once sharply depreciate and a chain of forces would be set in motion which would disrupt our trade. Regraded Uclassified - 6 - First of all American products would be much more difficult to soll in foreign markets, This would not apply w such to mp goods - airplanes, areasents, etc. - but it would hit hard our export of hundreds of agricultural and industrial commodities not vital to the conduct of was. We would loss heavily in the very markets no will hadly need when the war is over. Increased importe of foreign goods, at the case time, would reset even more drastically on our domestic economy. It would be just those very items which compate with our domestic manufactures that would flood our home markets, No would not be encouraged to buy such more rubber or tin. Regraded Uclassified - , - But seet and dairy preducts, textiles, and hundreds of other namefactures would at case be subjected to greatly intensified competition from abread. Further- more, Americans who have investments abread would find that they bed suffered substantial lesses - night, just as foreigners with investments here would find that they had windfall gains overnight. Be you me this simple ready 100 in effect, a proposal that would completely disrupt our foreign enchanges and sur trade and greatly increase unemploy- amt in this country. And - with the other naive proposals which - well-mensing citizens suggest as a ready for our accumulating gold stocks, Regraded Uclassified - B - Shall we fellow their advice and out the price for gold? & moderate out would be ineffective, and a out sufficiently large to reduce our annual gold inflew by a billion or two would introduce the - conditions as would fellow on a prohibition of gold imports, It would men a serious decrease in trade and a big increase in unexployment. Shall no discriminate against certain countries in the purchases of our gold? Such a pelicy would not even have the virtue of effectiveness, The active oseperation of practicelly the whole world would be required to prevent any one country's gold free circulating. Regraded Uclassified 128 - 9 - Obvioualy this would be impossible under my airea- stances, let alone at a time such AS this, Besides, the value of gold depends upon its unqualified use end acceptance as an international medium of exchange. To limit its acceptance would neen to reduce its usefulness. There is yet smother alternative which has always been open to us, Instead of taking gold we could have granted credit. Americans could have secumlated hage unsettled claims abread. We have had experience with that system - extensive experience - in the desede that ended with the somesic collapse of 1929. It is doubtful that Anoricans would mot to repeat the experience. Regraded Uclassified 30 - 20 - You the - of goods - shipped and for the dollar credito - greated # have tabes gaid in the last aix years instead of prendency notes. the phrase "good 40 - still has real meaning in the world, I profer the gold to pieces of foreign paper, I think met institute - Our gald palicy is carefully adjusted w the realities of & complex world situation, There have been may asib suggestions for changing are Imain- tion of each of the has revealed, as in the commples $ have national, that in the affert to resuly onlie they would bring as real dimates, or - should basic conditions alter, should - be confronted with - and unforcese emeric of political developments, the government ie 131 - 11 - will assecurily take such cotion as will heat protect American interests. It 10 to be prepared for such sestingemeins that the pewere with respect to gold operations have been hept flexible. M nothing has appeared to date which would varrent any change in or gold policy. There is only - cound my in which - can werk to reduce the inflew of gold and to promote the return of at least a part of the wealth 10 represents to useful service is the lands from which it - That may 10 to de everything in our person to contribute to the return of passe to the will and to reseatration and the resteration of narmal trade. with the posteration of enturing peaso and commis stability street the gold problem will solve itself. Regraded Uclassified 194 - as . w great - energine will - met I - small seal Loss chrose but becomes - shall buy - Tereign capital will be gradually repatriated . not because - drive 10 ent but I so to attented - w the - of security abroad. w Investore will - again invest their funds abroad - I y I 1 % I I I 1 I and I r I in I cound and profitable investments is other India. And family of tourists will opent hundredo of millions - is foreign contration. there - the developments which will - milically and gradually direct the now of - - true the United invoice Shore are the develope I I 1 1 8 # 133 - 15 - No met comminate on the premetion of further resevery here and passe and occurity abroad not in order to correct the gold situation, but because presparity, posse and security are in themselves the supreme onde of policy. that their attainent will also selve the world's gold problem 10 only a by-product. but an important - I should like fimally to turn to the question of the continued usefulnces of the gold we have and the gold w are going to - The matter - w be troubling - people. Let - reasons you - and for all. AS long M there are independent nations, and as 10mg M there 10 international trade in goods and services, 80 20mg will 10 be to settle international Regraded Uclassified 134 - 24 - balances. cald is the international medium of - change per emellence. The acceptability so universal, its utility as international may survives changes is commite systems. It is used and model just as much by the pureet democracios as by distaterships - as much by capitalist commission as by escialish commiss. It is the refined instrument of international enchange of goods and services, as well as an escential ingredient in the mere complex international financial transactions - as instrument that has functional without challenge for instrude of years. Beery foreign country wishes 10 had are of its as foreign country likes to less any of 10, all sentrice accumlate 10 as seen as they can afford to de ⑉ Regraded Uclassified 139 a 0 1 And the feet that - countries find 10 possible to contrat their international trade without gold 4000 not - that they profer to de ⑉ any - than people reading by sandlelight do 00 because they prefer candles to electricity. cold doos not Less its value because - countries are forced to resert to clearing arringe- membe, buyter, import esutrols. and other substitutes. All these adotitutes are edulttedly a - alter- mtive. They are admittedly a method of conducting trade and finance which will only be adopted then a country 4000 net process adoquato gold heldings. Governments resert whelly to these substitute methods for heeping a country's balance of payments in equilibrium only during times of great and prolemged Regraded Uclassified 138 - 18 - strees and instability, and only them the are reason w another they have bom unstable to prevent a less of practically all their gold holdings. All countries would like to have nore gold, and the countries which have the least are, you will find, countries which are striving most to add to their gold holdings. To be sure, if the political picture of the world should undergo a drastic change is the future as that instead of filly or sixty independent nations there should exist only eat OF to groupe deminated by retaless powers, them international trade sad finance my come the character of demostic trade, Regraded Uclassified 237 - 17 - There will coase so be independent monetary systems, as there will coase to be independent foreign pelicies. Balances between countries will be astiled as balances between our states are settled now - that is wholly by transfers of deposits. Under such sircumstances 11 might well be that gold would no longer be needed. But under those sircumstances, life would be 80 different, that the possible loss is the value of gold would, 1 - sure, be the least of our worries. Certain governments may boast of the day then independent democration will disappear, I for one, have no fears that such boasts one be mde good. Regraded Uclassified 130 - 10 - I - as confident that gold will continue to be international many as I a that the majority of nations will succeed is maintaining their independence. with the return of years and of normal economic at political relationships and barriers to the free flow of goods, capital, at services will be gradually levered. One word note - The emp too unde and are making is return for gold was m. a bad bergain. 20 emabled us to increase employment mé recevery. No have expended our exports mé encouraged our demostic industry. And not least of all we have sequired the sefest physical asset is the world. Dearaded ie 139 - 20 - X suppose there may be some sincere people who have boon disturbed by stories that this country has a memotary policy that threatens to cause the nationaless. If you neet such people, I hope you will be able to reasoure them. You my well them that the greatest and richest country of the world has the best and sevedent acactory system and that there is not the slighbest reason to fear that 10 will not remain sound. To on feel entirely confortable is the pessession of a supply of gold with which no can need future demands on our monetary system without say shock to our economy. Be om be prepared also to play the part no ought to play is the reconstruction of the world that must follow war's senseless destruction. Regraded Uclassified Treasury Department 140 Division of Monetary Research Date To: 5/1/40 From: Draft discussed at meeting in Secretary's office, 11:15 a.m., May 2, 1940. (This is the draft which was delivered at the Secretary's home by messenger the night before.) 149 I have taken the liberty of departing from the topic which was originally assigned to me when I was asked to address this meeting, in order to talk to you about the money of the United States - and particularly about gold. I do this because I think the subject 18 one in which all of you are interested; and it 18 one about which you may be asked 8. good many questions as the year proceeds. One thing you will hardly need to be told about our monetary system; that 18, that the American dollar 18 the soundest unit of currency in the world. Its value is unquestioned here at home and It 18 not questioned anywhere else in the world. Regraded Uclassified - 2 - It 18 a solid rock of strength and stability amid all the monetary confusion created by aggression and war. It is more than a domestic currency; it has become in the last few years more and more an international currency. People throughout the world who are driven by disaster and fear to hoard currency prefer to hoard the currency of the United States, if they can get it. We have tried through many means to facilitate stability in the currencies of the world. An outstanding example of an effort which we initiated 18 the Tripartite Accord of September, 1936. In all, the six leading democracies of the world have subscribed to the principles of that Accord. Further progress in the field of international finance and Regraded Uclassified 143 - 3 - trade must be deferred by reason of the cataclym in Europe. One of the most striking developments of these recent years has been the universal confidence in the American dollar as one of the very few certain things in a highly uncertain world. Some of our citizens who admit the strength of the dollar and the world's confidence in our currency, now suggest that confidence in our dollar has resulted in this country receiving too much gold. During the last 6 years we have acquired about $10 billions of foreign gold. Why has 80 much gold come to the United States? In the first place, we have exported many billions of dollars worth of goods and services in excess of the amounts we have imported. Regraded Uclassified 14 - 4 - Secondly, largely volumes of foreign funds have come to this country to be placed and kept on deposit with out banks. Foreigners have sent their funds here for safekeeping because of the peace, stability, and security which this country enjoys. Thirdly, foreigners have made large investments in American industries because foreigners think American business is a safe and profitable investment. Finally, Americans have been withdrawing their funds from abroad and liquidating their foreign investments in large sums because they prefer the dollar to any other currency in the world. It 18 for these reasons that we have had 80 large and continuing a favorable balance of payments; me the it plains belf dies not by indigites miallong - 5 Laymats not the given It 18 for these reasons that gold has come and is continuing to come to the United States. The continued acceptance of the gold that comes here 18 the only sound course of action open to us. There are other conceivable courses of action but they would all have disastrous consequences. Take, for example, the proposal 80 frequently made to us that we stop buying gold. It has the charm of st plicity. All that we have to do 18 to prohibit gold imports by a Treasury order. But let me tell what I think would happen. The imrediate reaction would be a sharp increase in the value of the dollar in terms of foreign currencies. Foreign currencies, in other words, would at once sharply depreciate and a chain of forces would be set in motion which would disrupt our trade. Regraded Uclassified 140 - 6 - First of all American products would be much more difficult to sell in foreign markets. This would not apply 80 much to war goods - airplanes, armaments, etc. -- but it would hit hard our export of hundreds of agricultural and industrial commodities not vital to the conduct of war. We would lose heavily in the very markets we will badly need when the war is over. Increased imports of foreign goods, at the same time, would react even more drastically on our domestic economy. It would be Just those very items which compete with our domestic manufactures that would flood our home markets. We would not be encouraged to buy much more rubber or tin. Regraded Uclassified 247 - 7 - But meat and dairy products, textiles, and hundreds of other manufactures would at once be subjected to greatly intensified competition from abroad. Further- more, Americans who have investments abroad would find that they had suffered substantial losses over- night, just as foreigners with investments here would find that they had windfall gains overnight. So you see this simple remedy is, in effect, a proposal that would completely disrupt our foreign exchanges and our trade and greatly increase unemploy- ment in this country. And so with the other naive proposals which some well-meaning citizens suggest as a remedy for our accumulating gold stocks. Regraded Uclassified 148 - 8 - Shall we follow their advice and cut the price for gold? A moderate cut would be ineffective, and a cut sufficiently large to reduce our annual gold inflow by a billion or two would introduce the same conditions as would follow on a prohibition of gold imports. It would mean a serious decrease in trade and & big increase in unemployment. Shall we discriminate against certain countries in the purchases of our gold? Such a policy would not even have the virtue of effectiveness. The active cooperation of practically the whole world would be required to prevent any one country's gold from circulating. Regraded Uclassified 149 - 9 - Obviously this would be impossible under any circum- stances, let alone at & time such as this. Besides, the value of gold depends upon its unqualified use and acceptance as an international medium of exchange. To limit its acceptance would mean to reduce its usefulness. There is yet another alternative which has always been open to us. Instead of taking gold we could have granted credit. Americans could have accumulated huge unsettled claims abroad. We have had experience with that system -- extensive experience -- in the decade that ended with the economic collapse of 1929. It 18 doubtful that Americans would want to repeat the experience. Doaradod t50 - 10 - For the excess of goods we shipped and for the dollar credits we granted we have taken gold in the last six years instead of promissory notes. The phrase "good as gold" still has real meaning in the world. I prefer the gold to pieces of foreign paper. I think most Americans do. Our gold policy 18 carefully adjusted to the realities of a complex world situation. There have been many glib suggestions for changing it. Examina- tion of each of them has revealed, as in the examples I have mentioned, that in the effort to remedy fancied evils they would bring on real disaster. of course, should basic conditions alter, should we be confronted with new and unforeseen economic and political developments, the government Regraded Uclassified 151 - 11 - will necessarily take such action as will best protect American interests. It 10 to be prepared for such contingencies that the powers with respect to gold operations have been kept flexible. But nothing has appeared to date which would warrant any change in our gold policy. There 18 only one sound way in which we can work to reduce the inflow of gold and to promote the return of at least & part of the wealth it represents to useful service in the lands from which it came. That way 18 to do everything in our power to contribute to the return of peace to the world and to encourage reconstruction and the restoration of normal trade. With the restoration of enduring peace and economic stability abroad the gold problem will solve itself. Regraded Uclassified 152 - 12 - Our great export surplus will drop, not because DO shall sell less abroad but because we shall buy more. Foreign capital will be gradually repatriated - not because we drive it out but because it is attracted home by the reemergence of security abroad. Our investors will once again invest their funds abroad - not because of the scarcity of opportunity at home but because of greatly enhanced opportunities for sound and profitable investments in other lands. And finally our tourists will spend hundreds of millions more in foreign countries. These are the developments which will auto- matically and gradually direct the flow of gold away from the United States. These are the develop- ments upon which we must concentrate. Regraded Uclassified 153 - 13 - We must concentrate on the promotion of further recovery here and peace and security abroad not in order to correct the gold situation, but because prosperity, peace and security are in themselves the supreme ends of policy. That their attainment will also solve the world's gold problem 18 only a by-product, but an important one. I should like finally to turn to the question of the continued usefulness of the gold we have and the gold we are going to get. The matter seems to be troubling some people. Let me reassure you once and for all. As long as there are independent nations, and as long as there 18 international trade in gooda and services, 60 long will it be necessary to settle international Regraded Uclassified 154 - 14 - balances. Gold is the international medium of ex- change par excellence. Its acceptability is universal; its utility as international money survives changes in economic systems. It is used and needed just as much by the purest democracies as by dictatorships - as much by capitalist economies as by socialist economies. It 18 the refined instrument of international exchange of goods and services, as well as an essential ingredient in the more complex international financial transactions -- an instrument that has functioned without challenge for hundreds of years. Every foreign country wishes it had more of it; no foreign country likes to lose any of it; all countries accumulate it as soon as they can afford to do so. 159 - 15 - And the fact that some countries find it possible to conduct their international trade without gold does not mean that they prefer to do 80 any more than people reading by candlelight do BO because they prefer candles to electricity. Gold does not lose its value because some countries are forced to resort to clearing arrange- ments, barter, import controls, and other substitutes. All these substitutes are admittedly a worse alter- native. They are admittedly a method of conducting trade and finance which will only be adopted when a country does not possess adequate gold holdings. Governments resort wholly to these substitute methods for keeping & country's balance of payments in equilibrium only during times of great and prolonged Regraded Uclassified 156 - 16 - stress and instability, and only when for one reason or another they have been unstable to prevent a loss of practically all their gold holdings. All countries would like to have more gold, and the countries which have the least are, you will find, countries which are striving most to add to their gold holdings. To be sure, if the political picture of the world should undergo & drastic change in the future so that instead of fifty or sixty independent nations there should exist only one or two groups dominated by ruthless powers, then international trade and finance may assume the character of domestic trade. Regraded Uclassified 15# - 17 - There will cease to be independent monetary systems, as there will cease to be independent foreign policies. Balances between countries will be settled as balances between our states are settled now - that 18 wholly by transfers of deposits. Under such circumstances it might well be that gold would no longer be needed. But under those circumstances life would be 80 different, that the possible loss in the value of gold would, I am sure, be the least of our worries. Certain governments may boast of the day when independent democracies will disappear, I for one, have no fears that such boasts can be made good. 158 - 18 - I am as confident that gold will continue to be international money as I am that the majority of nations will succeed in maintaining their independence. with the return of peace and of normal economic and political relationships and barriers to the free flow of goods, capital, and services will be gradually lowered. One word more - The swap we made and are agriel making in return for gold was net e bad bargain. It enabled us to increase employment and recovery. We have expanded our exports and encouraged our domestic industry. And not least of all we have acquired the safest physical asset in the world. Regraded Uclassified 158 - 19 - I suppose there may be some sincere people who have been disturbed by stories that this country has a monetary policy that threatens to cause the + & nation loss If you meet such people I hope you will be able to reassure them. You may tell them that the greatest and richest country of the world has the best and soundest monetary system and that there is no not the slightest reason to fear that it will not remain sound. We can feel entirely comfortable in the possession of a supply of gold with which we can meet future demands on our monetary system without any shock to our economy. We can be prepared also to play the part we ought to play in the reconstruction of the world that must follow war's senseless destruction. not task at in 160 A Day in the Treasury Your very able director, Mrs. McAllieter, has asked se to give you some idea of what we do in the Treasury. I believe that I can do that best by taking you behind the scenes and with the help of your imaginations let you experience a Day in the Treasury. The Treasury does many things besides col- lecting taxes. It spends money; it borrows money, prints money and engages in gold and silver trans- actions and makes the purchases of supplies for the Federal Government. The Treasury Department has been in the "Hacket-busting" game long before it became campaign-appeal material. For more than seventy-five years our agente have brought criminals to justice. Working efficiently and effectively Treasury agents run down amugglere, counterfeiters of our currency, violatore of our liquor laws, income tax lewo, and narcotic laws. The Treasury supervises national banks and examines your baggage when you return from abroad. It takes care of lighthouses; patrols almost every mile of our enormous ahore line at least once a day: helps boats in distress; enforces Regraded Uclassified 161 - 2 - the Tariff Act and neutrality legislation, keeps government accounts, and until this year took care of Public Health and construction of Federal build- ings, when under the Reorganisation Plan those services were departmentalised. We administer the two billion dollar stabilization fund and protect the internal and external value of the dollar. We even print postage stamps. You might wonder how no many activities can possibly be coordinated into one department. The secret is efficient personnel. An essential of good administration is to separate the important from the unimportant; policy from routine. Only if the less important and the routine are delegated to capable assistants is it possible to get through the day. An equally essential prerequisite of good administration is to select & staff of highly com- petent, loyal, and able assistante who will super- vise the routine work of the different branches of Treasury activity and are available for consul- tation on important matters of policy. I need not remind you ladies that some of our outstanding exec- utives in the Treasury are women. You all know Regraded Uclassified 162 - 3 - Mrs. Nellie Taylos Ross, Director of the Mint, and Mrs. Marion Benister, our Assistant Treasurer, to mention only two of the many women who hold impor- tant positions with us. Our official day begine at 9 o'clock but most of the executives are at their desks before that hour. During By years in Washington, I have been grateful for the habit, formed long ago, of getting up at half past six. This gives me an oppor- tunity to glance through the leading newspapers and finish examining the reports and documents which I took home the evening before. Often by seven-thirty I have talked to one or more of by assistants by telephone and it 1s not unusual for one of them to walk the two miles from my home to the office in order to discuss some problem which I any not have time to consider later in the day. Scheduled appointments in my office begin at 8:45 when Mr. Merle Cochran, the director of our two billion dollar stabilization fund reports on developments in the leading foreign money markets of the world. By that hour, Mr. Cochran has been in telephonic communication with our fiscal agent, Regraded Uclassified 163 - 4 - the Federal Reserve Bank in New York and with Treasury representatives in the leading financial centres of the world. It is his business to watch the world's money markets, and to bring to By attention matters of importance arising with respect to the silver, gold, and foreign exchange and capital markets. To- gether we plan the day's operations of the stabilisa- tion fund which, as you know, was provided for by Congress in the Gold Reserve Act of 1934 to prevent undue fluctuation in the value of the American dol- lar. Occasionally, connected with this operation. there are emergencies which require immediate action and there are times when it is necessary to call London or Paris to give instructions to our repre- sentatives in Europe. Remember that we start our day five or more hours later and therefore have that much advantage over the European Nations. At nine-thirty I hold a staff meeting which lasts from a half hour to an hour depending upon the kind of problems that come before us. This meeting is attended by a dosen or more of my assistants and advisors. I like to look upon Regraded Uclassified 164 - 5 - this group as a sort of Treasury Cabinet. It is not & formal cabinet but consists of those whose departments and bureaus are closest to the special problems of policy which confront the Treasury from day to day, and who are, therefore, in a po- sition to contribute most. There are & great many people who think that Treasury activities are confined to the high- ly unpopular sport of collecting taxes and who fear that when they hear from the Treasury it must be because there is something wrong with their income tax returns. To had an amasing example of that last week. One of the Assistant Secretaries called up an important business fire in Chicago to obtain some needed information. When the Washington telephone operator announced that the Assistant Secretary of the Treasury was calling, there appeared to be considerable to-do at the other end. After such delay Chicago re- ported that the President of the firm was out; the three Vice-Presidents were out too; everybody was out. Apparently there had been an exodus in the middle of & working morning and one lone Doaraded 165 - 6 - stenographer was holding the fort. About a half hour later the Attorney for the company anriously called back to find out what the Treasury Depart- ment wanted from his concern and was much relieved to know it was only some technical information. So the next time you get a telephone call from the Treasury don't run for your lawyer. I think you will be interested in what happens at one of my nine-thirty mestings. First, we hear the report of the Under Secretary. Some- times he will raise questions on preparation for a. bond flotation. Questions of rates, amounts, and timing must be settled before the United States Treasury goes into the market to borrow money. Actually, before a large financing operation 10 undertaken, many days are devoted to a careful 0T- amination of market prospects which in times like these involves analysis of the foreign situation. The Treasury's economic division always prepares preliminary reports on the money market in antio- ipation of conferences on a bond issue. All the government borrowing, including that of independent Regraded Uclassified 168 - 7 - agencies such as the Reconstruction Finance Corpora- tion and the United States Housing Authority, is undertaken with the cooperation of the Treasury to make sure there is no conflict in the money market and that the agencies are borrowing at the best available rate. The Under Secretary may have some questions pertaining to the national banks or the Federal budget. These matters are brought up in staff meeting for open discussion and considera- tion. Next, the Assistant Secretary in charge of the Coast Guard, Secret Service, Narcotics, and Enforcement of Neutrality Laws may wish to discuss the rounding up of smugglers shipping narcotics out of Marseilles to New York or the discovery of a new counterfeiting gang which has been turning out bogus fifty-dollar bills. It is interesting to note that since the enactment of the Marihuana Act of 1937. Treasury agents have destroyed over 20,000 acres of this wood which is used in the manufacture of drugged cigarettes. By thus destroying the source, we are stamping out the traffic and illicit use of Marihna- na. Regraded Uclassified 167 - 8 - Recently we closed a narcotic case which attained national prominence and which many of you may have read about in the newspapers. For some time our agents were aware of large quantities of drugs being smuggled into the country. Upon inves- tigation they discovered that these were being bought in Shanghai and the Japanese concession at Tientain, China, and were being shipped into this country via France. It was estimated that within approximately twelve months sufficient drugs had been smuggled through the Port of New York to supply a year's needs of 10,000 addicts or one-fifth of the drug traffic. The case was finally broken and resulted in the indictment of 30 persons among whom was & gengster best known by his aliss of "Lepke". In 1932 this man was the acknowledged leader of & well- organized and lucrative fur and garment racket. At the time of his indictment he was a fugitive from justice having forfeited bail of $10,000 on anti- trust charges. The Federal Bureau of Investigation offered a reward of $5,000 for his apprehension. The New York District Attorney raised the ante to Regraded Uclassified 168 - 9 - $30,000 "dead or alive", but Lepire eventually sur- rendered in August 1939. He is now serving a twelve-year sentence in a Federal penitentiary for conspiracy to violate the laws relating to narcotic drugs. be you know, the Treasury has & monopoly on the printing of our currency and it does not look favorably upon competition. Counterfeit notes totaling $365,367 were seised during 1939 by our Secret Service agents. Over $52,000 was confiscated in counterfeit coins. The losses to the public through counterfeit notes in circula- tion during 1938 amounted to almost $319,000. Dur- ing 1939 - due to the uncessing vigilance of Treas- ary agents - there was a thirty percent decrease in the circulation of phoney money. Another Assistant Secretary in charge of the Buresu of Internal Revenue and Taxation esy come to the staff meeting seeking advice on the closing agreement with some contractor who is doing business with the War or Navy Department under the Vinson-Tramell Act, which provides that any profit Regraded Uclassified 169 - 10 - in excess of ten percent of the total contract price on naval construction is to be paid into the Treas- ury. The Treasury also makes closing agreements between armament manufacturers and the Government. In this connection, we have established a new policy of publishing these agreements in full 60 that the public will at all times know the arrangements their Government is making. Very frequently there are important tax matters calling for discussion. As a principle of tax collection we have tried at all times to be fair. We have impressed upon the taxpayer that he can always get a hearing himself right in his own district. He does not have to come to Washington. We have de- centralized the Bureau of Internal Revenue so that there are offices in all the large cities where & BRD can go to iron out his difficulties. The Treas- ary does not permit any tax case to be nettled pri- vately or secretly. It was very shocking to some of us who came to Washington in 1932 to learn of the number of persons who try to defraud the Government in their tax statements. Our policy has been to let Regraded Uclassified 170 - 11 - the chips fall where they say and it has been main- tained regardless of how such influence a man or woman may have. It has been an incessant and never ending fight to run down fraud and eliminate illegal tax evasion. We find that, on the whole, men and women are becoming more conscious of their obliga- tione to support honest Government. Today the Federal Government 1e giving its citizene better service than ever before and most people are willing to pay their share for its upkeep. Remember we are still in the staff meet- ing. The General Counsel eay have some knotty prob- lem to lay before the group. He has 445 lawyers working under him. I believe this is the second largest legal staff in the country. I need not tell this sudience that 445 lawyers mean plenty of trouble, of course, only those legal matters involving policy or special decision are brought up at staff meetings. We always have cases pending before the Supreme Court or the Board of Tax Appeals or the Court of Customs and before the numerous Federal courte throughout the country. Regraded Uclassified - 12 - 171 Another subject which is likely to come up at the meeting is that of personnel. My Administra- tive Assistant has the job of looking after the person- nel problems of 73,000 employees and oftentines there are 08.608 which need special attention. The welfare of the people working for the Treasury is a. major con- sideration and we have a rule that if any employee feele that he is unfairly treated be can always come to no personally as a final court of appeal. Another duty of this Assistant is to investigate all persons applying for the more important positions in the Treas- ury. Then the Commissioner of Customs may naice & report. His Bureau is responsible for patrolling our borders, preventing smuggling, collecting import duties, and excluding improper literature and paintings. Inci- dentally, the largest single seirure of smuggled goods made by our Customs Service involved uncut dismonds weighing 3,395.61 karats at a domestic value of $286,346. These diamonds were concealed in & false compartment of a small overnight bag in the possession of a woman passenger on a transatlantic liner. The arrest of this woman disclosed the activities of an international diamond Doaradod 172 - 13 - smuggling syndicate which had been operating for over ten years in this country, England, France, and Belgium. The 0880 eventually involved fifty- five defendants located here and abroad. In the matter of protecting the public from obscene literature and pictures, the Treasury now has authorities on these subjects so that no real work of art is excluded on "Comstockian" grounds nor can indecent material get by under the guise of art. Another member at our staff meeting is the Director of our Division of Monetary Research who keeps us posted on current economic develop- ments and prepares reports on domestic and inter- national economic problems with which we have to deal. Dr. Harry White will tell you about this work in a. few minutes. Then we have the report of the Treasury representative on the Export-Impert Bank who gives us the status of negotiations of loans to various countries such as Finland, Norway, Sweden, and - China. He also assists. on matters pertaining par- ticularly to South America. With reference to the 173 - 14 - Export-Import Bank & strange case came before the Treasury Department last year which illustrates the ramification of Treasury operations. It involved the investigation of a disease on the China-Burma border that had been ravaging the country year after year. What interested the Treasury in that remote and inaccessible area was the fact that & loan had been extended to the Chinese Government and the repayment was in danger because shipments of trans oil to the United States over the new China- Burna highway were blocked. This tung oil provides the money for servicing the debt. It was impossible to maintain traffic in the wet season because of the prevalence of the disease. When it was brought to our attention, we got buay at once and had three United States Public Health Service men sent there to investigate the trouble. They discovered that the disease was malignant malaria and initiated steps to stamp out the epidemic. The Treasury was, of course, interested in having the loan repaid. The fact that by facilitating the repayment of the loan we were also saving thousands of lives made that particular task a very gratifying one. Regraded Uclassified 174 - 15 - The staff meeting is in reality a meeting of minds. Each person contributes from his knowledge and experience. Problems which are not solved are assigned to someone who will make a later report or call an inter-buresu conference. When the staff meeting is over each executive returns to his divi- sion or bureau or department and in turn gets reports from his assistants which he considers and discusses in much the same way as we did in my office. Each one has innumerable telephone calls, conferences, appointments, and a sheaf of correspendence. Every minute of the day is filled and for all of us the days are long. To give you an idea of the variety of prob- lems that come before me for policy decisions, I jotted down some items which happened to come up for consideration on a single day. Here they are: A loan project to Ecusder: the Annenberg tax case; proposed Argentine trade agreement; activ- ities of British and French Purchasing Mission; Bank for North and South America; Colombian debt settle- ment negotiations; plan to finance tin and tungsten exports from China to the United States; certificate Regraded Uclassified 175 - 16 - plan for agriculture; weekly report on business situation for the President; purchasing of stock piles of strategic materials; port delay of ship- ments of Red Cross supplies to Finland and a Tennessee Valley Authority financing proposal. These are in addition to the matters which may develop out of the staff meeting. You can readily 800 that B. job at the Treasury is not likely to put one in a. "rut". Frequently Senators and Congressmen drop in to discuss proposed legislation or some Treasury activity. Sometimes there are financial representatives of foreign countries who come to take up inter-governmental economic matters. All Government officials are, of course, subject to call from the President. I usually take advantage of the lunchson period and eat with members of my staff, or men from other Departments, or visitors, in order to discuss problems in a more genial or philosophical mood than would be possible in & more formal stoor- phere. Almost every Monday I lunch with the Presi- dent. We discuss urgent problems and the President Regraded Uclassified 176 - 17 - frequently assigns to no special duties, and I take this opportunity to discuss with him the special matters which he has asked me to look into. On Friday there is the Cabinet meeting for which prop- aration has to be made. On the international front the Treasury receives literally hundreds of cables, reports, and consular dispatches from all parts of the world each week. We get hundreds of plans propos- ing monetary and fiscal changes but most of them are crank panaceas. When one merits the President's attention, a report is prepared for him. You may be interested to know that, as befits a democratic government, we answer every letter - and we receive thousands each week. In this administration we have made it a policy when special problems arise to consult the best qualified persons in the country. When we have an extraordinary situation we call in the experts, as we did when complications were created by the European War. The great advantage of this procedure is that people from the outside frequently bring in fresh points of view. There are times when 177 - 15 - special banking and monetary problems warrant consul- tation and conferences with outstanding men in their respective fields. I remember one occasion when we called upon a dosen of the foremost financiers of the country. They responded immediately and gave unstintingly of their time and energy during & national emergency. It is very encouraging to realize how some of the most important men in the country in their respective fields gladly lay aside their own duties to come to Washington, sometimes on 8 few hours notice, to contribute, generally without pay, to the solution of the nation's prob- lems. The day at the office ends finding me - like many members of the Treasury staff - faced with the accumulation of the day's mail to sign. But this is not the end of our day's work. The reports I get are so voluminous and so numerous that I seldom get a chance to read them at the office during the day. They become my homework. Frequently Treasury officials have & conference after dinner or return to their offices to burn the midnight oil. Regraded Uclassified 178 - 19 - A Day in the Treasury is typical of any Government official's day. Unquestionably the United States Government asks a great deal of its workers but it also offers a stimulus which is tonic, and which year by year is drawing men and women of very high calibre into the Federal service. A day of effective service is possible only through the cooperation and the harmonized action of an entire department. I may be prejudiced, but I believe that we have attained an esprit de corps in the Treasury which is unsurpassed by any other Government agency. Regraded Uclassified 179 May 2, 1940 4:30 p.m. Present: Mr. Graves Mr. Helvering Mrs. Klotz HM,Jr: According to Mr. Graves, I see you have done it; settled. Mr. Helvering: Well, yes. We got some returns. HM,Jr: It kind of took my breath away. I did not know you were up to that point, but .... Mr. Helvering: Mr. Secretary, the principal thing I had in mind was to get this fellow on a sworn statement for those years that he absolutely had not reported his income. Now, of course ..... HM,Jr: You mean he did not report any income? Mr. Graves: For the years he was Governor. Filed no return at all. Mr. Helvering: And Mr. Graves will tell you we may have to give him every deduction he's entitled to. Mr. Graves: He has, in these 6 years, he had income which he should have reported, but did not, of $47,000. HM,Jr: He admits that? Mr. Graves: Signed a return showing that. HM,Jr: $47,000? Mr. Graves: $47,000. HM,Jr: Over six years? Regraded Uclassified 180 -2- Mr. Graves: Six years. There is the total of that thing by year showing source of his income, the amount report, amount he paid and amount of ad- ditional tax he is now paying. (Mr. Graves and HM, Jr discussed the attached chart ) HM,Jr: And you changed your mind and did nothing criminally about this? Mr. Helvering: I don't think there 18 any basis on which we could be successful in a criminal prosecution. HM,Jr: Excuse me. (To Mrs. Klotz) The next time I see the President I want to show him that (attached statement. ) Mr. Helvering: Now, understand, Mr. Secretary, that there 18 over $20,000 from the Sullivan firm. Mr. Graves: Mr. Hays. Mr. Helvering: That 18 not in this amount. He made a very vigorous protest about that going in and I think and Mr. Graves MS. Graves: We have no proof, Mr. Morgenthau. HM,Jr: That his father did not keep it? Mr. Graves: We knew his father passed some, if not all, on to McNutt, but NoNutt's claim throughout was the amounts he received from his father in that con- nection were in fact repayments of loans which he had made to his father. We were unsuccessful in our effort to find the checks. If we could have had our hands on the checks we would have had endorsements which would have been some evidence. The reason I told the boys they might withdraw on that was that McNutt said in effect "I will pay that if I have to, because you boys have ne, but you have no right to it and I will be paying it sinoly because you will have forced me." It did not seem to me the additional tax amount we Regraded Uclassified 181 -3- might get from him would justify proceeding against this man and he would apparently have a feeling we took it away from him at the point of a gun. We are not precluded against any further action that 1e indicated should we get additional proof. HM,Jr: But you are not investigating any more? Mr. Graves: Not investigating, but today we are having our hearing with Bowman Elder at Indian- apolis and while I have no confidence that anything will come out of that, there is always a possibility that Mr. Elder will talk about this anyway, which we are attempting to tax to him, for the reason he won't tell who he paid it to. HM,Jr: Let me ask you a question. You have been here 78 years. Do you know of any case where a Presidential appointee has been under similar cir- cumstances, that we have run into a Presidential appointee who had $47,000 income over 6 years that he failed to report? Mr. Helvering: No. I don't recall anybody. Had a Congressman. HM,Jr: Well, I think it is up to me to bring it to the President's attention. I don't know what he will do about it. I just want to say this. I did not know, this last time, that you were going to go in, take his money. The time before when you said you were going to see him you said that's what you were going to do. That's why I was kind of surprised. Mr. Graves: I am to blame for that. I tried to get a clearance, but I did not make myself clear. HM,Jr: You said you were going to see him and you said you were not ready and you postponed the meet- ing. Mr. Helvering: That's right. HM,Jr: Then I said before we settle I want to 182 sit down and talk, but we did not question it because you were not going to see him, the next day. Mr. Graves: That's right. We postponed it. HM,Jr: Then you had another meeting and I had it in my mind we would meet again. Mr. Graves: You may not remember when I was in here to meet Miss Knight, I stayed behind and told you I thought we were in position and we were meeting the next day and would proceed on that basis. HM,Jr: It did not ring the bell, but as I told you over the phone, I asked you two gentlemen to do it and you have full authority and if this 18 what you think is best, I am satisfied. Mr. Graves: It cuts off no other action that we might want to take. HM,Jr: What I told the President was this -- and watch the papers, if MoNutt begins to feed some more poison to the columnists, then by God! I am going to send for him and read the riot act to him. As the President said this morning, we have been very dignified about this thing and kept our peace, but if he starts blowing how he has always paid his tax then I think I will send for him myself. Mr. Helvering: Of course, when you think of that, 88 a salaried man, that's a pretty fair deficiency in tax especially in those years when he had from $6,000 to $13,000 income besides all these salaried things and failed to report it. HM,Jr: I know it. I would not want it on my record. O.K. gentlemen, I will be seeing you again. Mr. Helvering: Just like to report to you 8. little. We have been in & two day -- Monday and Tues- day and off yesterday to get some figures and all day today conference on Annenberg case. HM,Jr: A little birdie told me that. Regraded Uclassified 183 -5- Mr. Helvering: And we have not gotten very far. As 18 usual in cases like this, they want us to accept what was done after we started the inves- tigation and what they intended to do back in 1926, 1928, 1931 or whatever the particular instrument our consider- ation 1s. I think they realize by now that he owes considerable tax. HM,Jr: Well, when you get around to it and before you sign, will you give me a chance to listen? Mr. Helvering: Oh, yes. Of course I told the head attorney day before yesterday that his offer of $2,500,000 18 frivolous 8.8 far as we are concerned. HM,Jr: When you are ready and before you com- mit yourself, I would like to know about it please. o0o-o0o : TO: 184 6162.32 55.8.48 13916.10 14306.56 8639.72 3998.66 n8.175is 1448.89 5448. 47092.95 imported income From: MR. GRAVES Regraded Uclassified 185 CORRECTED NET INCOME AND ADDITIONAL TAXES 1933 1934 Item 1935 1936 1937 1938 Income from speeches 1,480.86 $2,341.77 $1,213.25 $1,319.50 $640.00 .... Dividends: K.V.B. Corporation 2,518.05 1,810.49 1,449.38 2,710.98 $1,373.66 Others 119.33 86.77 114.11 274.97 491.88 411.71 Other income: Poker winnings 650.00 300.00 200.00 473.00 398.00 Unidentified deposits 4,312.13 709.39 10,772.42 8,062.15 1,249.78 222.13 Interest received 12.50 255.83 544.87 754.16 717.52 Rents 120.00 100.89 Profit on sales of stocks ---- ---- ---- 2,512.69 1,284.92 (37.25) Taxable Salary as High Commissioner ---- ---- ---- 1,400.00 1,500.00 Total Income 6,562.32 5,968.48 14,366.10 14,756.56 8,929.72 4,288.66 Deductions 400.00 450.00 450.00 450.00 290.00 290.00 Net Income 6,162.32 5,518.48 13,916.10 14,306.56 8,639.72 3,998.66 Net Income Reported None None None None 3,432.67 2,016.22 Taxes paid None None None None 85.31 32.58 Additional Taxes 127.34 None 722.79 842.72 370.27 75.37 Penalties 31.84 None 180.70 210.68 None None Interest 46.79 None 178.86 157.98 47.19 5.08 Total additional 205.97 None 1,082.35 1,211.38 417.46 80.45 Summary Additional Taxes $2,138.49 Penalty 423.22 Interest. 435.90 2,997.61 Regraded Uclassified 186 May 2, 1940 12:19 p.m. H.M.Jr: Hello. Operator: Go ahead please. H.M.Jr: Hello. Arthur Purvis: Hello, Mr. Secretary. H.M.Jr: How are you? P: Very well, thank you. And you? H.M.Jr: I'm all right, and my decks are clear now. P: Oh, good. H.M.Jr: Mr. Purvis, I don't know whether you have anything that's pressing. Have you? P: There are one or two things that might be quite pressing but we don't -- we don't know the exact situation of them 80 that it might be later today before I'd quite know that. Is it -- would it be better next week from your view? H.M.Jr: Well, here's the point. This 16 what I've been fussing with. I'm giving a speech tomorrow on gold. P: Oh, yes. H.M.Jr: And it's finished and I -- I only talk -- I haven't talked in two years 80 it's very -- it isn't easy for me to do it. P: No, it -- I know, one has to sort of school oneself up to that. H.M.Jr: When one does it every week it's different. P: Yes, exactly. H.M.Jr: I'll be over there from 10:30 to around 11:00, but I could see you after that if you -- if it's important. 187 - 2 - P: Well, the only thing that I've found after speak- ing under those conditions 1s that there's a certain let-down that comes which really makes one dis- inclined for any discussions that you don't have to have. I don't know whether you feel that but I definitely felt that. H.M.Jr: Yes. P: And I -- might I therefore leave it this way, Could I -- could I, make up my mind -- say -- and telephone you this afternoon? H.M.Jr: Absolutely. Supposing P: Because I will try then, if we could, to leave it to Monday. Would it be possible on Monday? H.M.Jp: Well, I tell you what I'm going to do. Monday I expect to visit Allison. P: Oh, yes. H.M.Jr: I'm going out to Allison Monday. P: Yes, I see. H.M.Jr: But I will be back Tuesday. P: Yes. H.V.Jr: So it will be quite all right. e: Well now then in that case I'll try and leave it until Tuesday and if there were anything very important could I telephone you this afternoon and we might be able to dispose of it on the telephone. H.M.Jr: Surely. Now, I have this for you. If you people need smokeless powder badly P: We do, very. H.M.Jr: Well then, I can get you two and half million pounds from DuPont right away. P: Really? Regraded Uclassified 188 - 3 - H.M.Jr: Yes. P: Would you be willing to let us start that straight- away without waiting for the H.M.Jr: Yes. P: I'm sure it's going to come. H.M.Jr: Yes, but I mean when I say right away, within thirty days. I mean, if -- if you said you wanted it I can tell -- have an order to DuPont within -- well, I think say the first of June, beginning the first of June they can release at the rate of -- I think whatever -- 25,000 pounds a day. P: Is that it, 25,000 a day. H.M.Jr: Yes. P: That would be very valuable. H.M.Jr: But anyway I -- it -- at the rate of two and a half million pounds a year. I don't know what it 18 a day. P: Yes, quite. H.M.Jr: If that -- and then I wouldn't wait on the other. P: Very good, because I'm sure the other will come through. H.M.Jr: Well, if you want that P: We would like that. H.M.Jr: then I will start that in motion at once. P: Thank you very much. We will take that with the greatest pleasure. H.M.Jr: But I'll start that -- I went down to the Navy factory yesterday and -- and they are -- that's where I was yesterday. P: Yes. Regraded Uclassified 188 - 4 - H.M.Jr: And they can spare it because they can increase their own output. P: Very good. Oh, that will be excellent because H.M.Jr: They have a contract with DuPont for two and a half million pounds which they are willing to release. P: Very good indeed. H.M.Jr: Yeah. P: Thank you very much. Now then I'll -- I can tell our people then that starting about the first of June we will be able to deliver at the rate of two and a half million pounds per year. H.M.Jr: That's right. P: Thank you very much indeed, Mr. Secretary. H.M.Jr. O. K. P: Then if I could ring you again if there's anything very urgent and if not we leave it until Tuesday. H.M.Jr: If you want -- yes, if you want to call me the best time 18 between three and four our time here, Washington. P: Oh, of course, that's -- I've got to remember that. H.M.Jr: Standard time. P: That's between four and five with us. H.M.Jr: Right. P: Thank you very much indeed. H.M.Jr: O. K. P: Goodbye. Regraded Uclassified 190 May 2, 1940 MEMORANDUM FOR THE SECRETARY: Shipping Situation Remarkable strength in charter rates and prices for D. S. Flag tonnage was the sole tangible development to emerge from the near-chaos of the Pacific Coast freight and charter market last week. For the rest, the combination of war and flag uncertainties, a limited inquiry and an extreme scarcity of space, WSS too much for ordinary analysis. Conditions were too badly upset on both the carrier and the shipper sides. With only about 10 per cent of the world's tramp fleet left out of belligerent cont 01, shippers were afraid to make sales and commitments until they were sure of space, and besides, buying demand was not very sharp. There was growing concern, too, over unreliable charterers and purchasers. New world business was close to a. standstill until the atmosphere has cleared. Most interesting charter of the week was that of two Matson 5500-ton freighters for 18 months, bare boat. The rate, not confirmed, was widely reported as $3.50, B. new high. In any event, $5.50 could have been done easily on American time charters and private buyers seemingly were willing to pay $60 for U. S. freighters, in class and operating. The Scandinavian invasion has abetted the swing to U. S. ships for foreign commerce. Some very tentative quotations heard last week were: scrap to the Orient, $16 asked; lumber to North China, $30 to $35; wheat to Vladivostok, $14; lumber to Australia, $32 to 833; inter- coastal lumber, $19 to $20. Banil Marris Regraded Uclassified 191 TREASURY DEPARTMENT INTER-OFFICE COMMUNICATION DATE May 2, 1940 TO Secretary Morgenthau STRICTLY CONFIDENTIAL FROM Mr. Cochran I told Mr. Knoke by telephone this afternoon of our interest in finding out how much copper had been purchased by Italy in this country since April 1, 1940. Vr. Knoke immediately got in touch with his contact in the Guaranty Trust. The latter is going through their records to find out what payments for copper were ordered by the Italians during April, and also what copper credits were opened for Italy during the month. The Guaranty hoped to have this information available by next Monday. Knoke is making a similar request of the Chane Bank, the other institution in New York through which we are sware that the Italians have been making payments for copper. In regard to the day's transactions, Knoke stated that the Guaranty Trust had reported that a check had been drawn on it by the Banco Commerciale Italiano for $1,275,000 payable to the Copper Export Association, Inc. The Guaranty also reported a check drawn on it by the B.C.I. payable to General Motore Overseas Corporation for $60,000. Ky recollection is that Dr. White is providing the Secretary regularly with our Customs statistics showing exports of copper to Italy. If we desire earlier data, such as that which we are now receiving from banking sources, we could not be assured that we had complete information unless we canvassed the banking community. For the present, I think we should limit our in- quiries in banking circles to those institutions which we know are financing Italian purchases. On the other hand, we might contact the Copper Export Association and perhaps other copper exporters with the view to being kept currently informed by them. R.M.S Regraded Uclassified AAA 292 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE May 1, 1940 TO Secretary Morgenthau STRICTLY CONFIDENTIAL FROM Mir. Cochran I talked by telephone with Knoke this afternoon at 3:25. He said that there had really been no significant banking operations as reported to him, insofar as Italian accounts are involved. He mentioned the fol- lowing as transactions which had been brought to his attention, and which he relayed to us, but which he thought we would find of little interest: Chase Bank reported a transfer of $100,000 from their bank to Schroeder, made from the account of the Banco di Lavori to the account of the same institution with Schroeder. There was a check drawn by the New York agency of the Banco Commerciale Italiano to Ford for $50,000. There W&B a transfer from an Italian Insurance Company in Trieste to a bank in Zurich for $50,000. Two payments were ordered by the Italian Credit Institute to be made by the Chase and National City Banks, each in the sum of $200,000, on account of coupon payments for the Public Utilities Ministry in Italy. The Italian Credit Institute ordered a payment by the Chase Bank of $700,000 to Kennecott, under an old credit. This last transaction shows that Italy is still buying copper. I talked by telephone this afternoon also with Mr. Samuel Reber, the F.S.O. in the Department of State who handles the Italian desk. Ee stated that no cabled reports had been received from the Embassy in Rome today. He has promised to telephone me regularly whenever he has any fresh Italian information that he can pass on to us. R.M.S. copper they have bought fin april1 of out how much a 193 DOV JONES 10:35 (E.S.T.) May 1, 1940 MILAN STOCK MARKET Closing prices on Milan Stock Exchange follow, in lire: TODAY YESTERDAY Adriatic 202-3/4 202 Edison Electric 347-3/4 347-1/2 SIP 66-1/2 65-3/4 Merid Electric 368 369 Terni Electric 235-1/2 234 Unes Electric 14 70 14 60 Fiat 513 510 Montecatini 208-1/2 208-1/4 Pirelli Italian 1 664 1 665 Italcable 159 159 Bond Italian Conv3 I-25 1934 65 62 65 50 DOW JONES 9:55 (E.S.T.) May 1, 1940 ITALIAN EXCESS PROFITS TAX Rome - Italian Cabinet today decreed a special excess profits tax on earn- ings attributable to war conditions, according to Associated Press. The Tax, graduated from 10 to 60 percent, will be applied when the total annual earning exceeds 12,000 lire. VCNS 10:03 a.m. (E.S.T.) May 1, 1940 ROME - United States Ambassador Phillips called on Premier Mussolini and vas said to have been informed by Il Duce that no sudden change will be made in Italy's position relative to the war. Phillips called on Mussolini, it was said, to ascertain if possible what the Italian position is in the present international situation in view of the sharpened tone of Italian official and newspaper statements relative to the Allies. He spent 45 minutes with the Premier and after the meeting it was said that Mussolini advised him no sudden change in the present Italian position of non- belligerency is in prospect. 194 - 2 - VCHS 11:55 a.m. (E.S.T.) May 1, 1940 Increasing Allied-Italian friction, which resulted in the ordering of all British ships out of the Mediterranean, may cause tightening of blockade restric- tions on American exports to Italy, the United Press reports. That Italy is aware of the situation is indicated by dispatch of a special diplomatic envoy. Count Adolpho Allesandrini, to the U. S. to deal with problems of "Maritime Traffic." He will arrive in New York about May 9, according to the Italian Embasay. No details of his mission were revealed, but commercial shipping is the most important phase of maritime traffic with Italy so far as Italian needs are con- cerned. Italy's imports of important raw materials from sources other than America have been greatly reduced since the war. ******* VONS 2:04 p.m. (E.S.T.) May 1, 1940 Undersecretary of State Welles said today that the State Department was fol- lowing the situation in the Mediterranean constantly but that there Vas no change whatever in the U. S. position. Velles' comment was made in answer to questions regarding U. S. attitude in view of the British decision to route its ships around Africa rather than through the Mediterranean. Welles said that he had received no report from Ambassador Phillips on the latter's call on Premier Mussolini. ******* VCNS 4:33 p.m. (E.S.T.) May 1, 1940 Rome - Italy assured the U. S. and Great Britain today that she is not planning to enter the war at the present moment, it is said authoritatively. The assurance was said to have been given personally by Premier Musselini to William Phillips, U. S. Ambassador. Simultaneously & similar statement vas said to have been made to the British Charge D'Affaires. Sir Hoel Charles. by Foreign Minister, Count Ciano. CONFIDENTIAL 198 Confidential PARAPHRASE A telegram (no. 373) of May 2, 1940, from the American Consulate General at Shanghai reads substantially as follows: Text of message from American Information Committee sent through Manila amateur radio supplied at my request today by Committee Chairman 18 as follows: "Honorable Cordell Hull, Secretary of State, Washington, District of Columbia. Strongly recommend present as most strategic opportunity make loan China purpose stabilizing currency object forestalling further attacks against Chinese national currency through creation another puppet Central Bank operated by Japa- nese army and Wang Ching-wei Regime, Nanking. Thought certain Japanese planning exchange control here similar cases Tientsin which discriminatory American trade other interests here, elsewhere. Currency stabilization loan would bolster Chinese morale, preserve unity, maintain confidence people recognized Sino National Government. Such loan could be jointly managed under currency manage- ment agreement profitable both countries. American Information Committee". The 196 -2- The message was inspired by & conversation which certain members of the Information Committee had with Dr. Paul Monroe who passed through Shanghai last week-end homeward bound on President Pierce following a meeting of the Chinese Foundation in Hong Kong. He was of the opinion that the British fund was practically exhausted and unless something were done Shanghai there might be & complete collapse of Chinese currency. On April 28, the Committee was informed in confidence by Dr. Monroe that at that time there remained in the stabilization fund less than L1,500,000. Dr. Monroe was anxious that it not appear that the initiative had come from the Chinese authorities and he did not suggest that the Com- mittee send the telegram. However, the idea of the telegram grew out of the Committee's discussion and there 18 no doubt that the Committee was influenced by the fact that Dr. Monroe had talked recently in Chungking with General Chiang Kai-shek. Publicity given in Shanghai and in Washington to the recommendation, in advance of the receipt of the telegram by the State Department, implying that the existing stabilization fund being operated by the Hong Kong and Shanghai bank was almost exhausted encouraged heavy buying 197 -3- buying from the Control on May 1 which led the Control to refuse to sell on the morning of May 2 and caused the Chinese dollar to weaken considerably. The Committee failed to consult the Consulate General or local American bankers before sending this telegram or giving it local publicity and has only now (May 2) supplied copies of the telegram to the American Chamber of Commerce and American Association. ----- ⑉⑉ 198 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE May 2, 1940 TO Secretary Morgenthau FROM Mr. Haas MA Subject: Railroad freight movement for export. Export freight receipts hold at steady level The remarkable steadiness shown by receipts of export freight at New York over the past several months has continued through April. (See Chart 1 and table attached). In the past two weeks, it will be noted, the export receipts at New York have shown a rising tendency, contrary to the trend at other ports in this area. During the week ended April 27, an increase of 213 cars in export freight receipts at New York was offset by a decline of 309 cars in receipts at 9 other North Atlantic ports, leav- ing receipts in the North Atlantic area 96 cars lower for the week. Exports sharply higher The volume of freight exported from New York during the week ended April 27 was 733 cars higher than in the previous week, when exports were affected by the invasion of Scandinavia, according to figures derived from reported data. (See Chart 2). With the larger export movement, lighterage freight in storage and on hand for unloading at New York has declined slightly, the April 27 figures showing a reduction of 145 cars from the previous week. (See Chart 3). Regraded Uclassified 199 RECEIPTS OF FREIGHT FOR EXPORT AT NEW YORK AND AT NINE OTHER NORTH ATLANTIC PORTS Week ended Nine other North 1939-40 New York 1/ Atlantic ports Total ( In carloads ) October 28 3,707 November 4 3,562 November 11 3,547 November 18 3,334 November 25 3,497 December 2 3,435 December 9 3,922 1,548 5,470 December 16 4,088 1,658 5,746 December 23 4,848 1,602 6,450 December 30 3,856 1,104 4,960 January 6 4,000 1,251 5,251 January 13 4,056 1,433 5,489 January 20 4,060 1,557 5,617 January 27 4,389 1,825 6,214 February 3 4,274 1,498 5,772 February 10 4,617 1,590 6,207 February 17 3,974 1,637 5,611 February 24 4,550 1,667 6,217 March 2 4,577 2,388 6,965 March 9 4,059 2,448 6,507 March 16 4,072 1,845 5,917 March 23 4,424 2,033 6,457 March 30 4,150 1,492 5,642 April 6 3,979 1,551 5,530 April 13 3,957 1,866 5,823 April 20 4,133 1,557 5,690 April 27 4,346 1,248 5,594 1/ Source: General Managers' Association of New York, Daily Report of Operating Conditions in New York Harbor. 2/ Source: Association of American Railroads, Car Service Division, Report of Carload Freight for Export and Coastal Vessel Movement. Includes Searsport, Portland, Boston, Providence, Philadelphia, Chester, Wilmington, Del., Baltimore, and Norfolk (or Hampton Roads). Regraded RECEIPTS OF FREIGHT FOR EXPORT AT NEW YORK AND AT 9 OTHER NORTH ATLANTIC PORTS 1939 1940 NOV. DLC. JAN. FED. MAR. APR. MAY JUNE CARLOADS CARLOADS THOUSANDS THOUSANDS 5.5 5.5 5.0 5.0 4.5 4.5 4.0 4.0 NEW York 3.5 3.5 3.0 3.0 2,5 2.5 9 OTHER PORTS 2.0 2.0 1.5 1.5 1.0 1.0 .5 .5 200 0 o 28 11 25 9 23 6 20 3 17 2 16 30 13 27 11 25 8 22 NOV. DEC. JAN. FEB. MAR, APR. MAY JUNE 1939 1940 Chart 1 Office of the Secretary of the Treasury - of - - - C - 304 Regraded Ucla CARLOADS OF FREIGHT EXPORTED FROM NEW YORK * 1939 1940 NOV, DEC, JAN. FLO, MAR, APR. MAY JUNE CARLOADS CARLOADS THOUSANDS THOUSANDS 5.5 5.5 5.0 5.0 4.5 4.0 ~~~~~~~~~~~~~~~~~~~~~~~~~ 4,5 4.0 3.5 3.5 3.0 3.0 2.5 2,5 28 11 25 9 23 6 20 3 17 2 16 30 13 27 11 25 8 22 NOV. DEC. JAN. FEB. MAR. APR. MAY JUNE 201 Chart 1939 1940 . AS ESTIMATED FROM DATA or GENERAL MANAGERS' ASSOCIATION or NEW YORK. 2 Office of the Secretary of the Treasury - of - State C - 308 LIGHTERAGE FREIGHT IN STORAGE AND ON HAND FOR UNLOADING IN NEW YORK HARBOR . 1939 1940 NOV. DEC. JAN. FEB. MAR. APR. MAY JUNE CARLOADS I 7 CARLOADS THOUSANDS THOUSANDS 10 10 9 9 8 8 7 7 6 6 5 5 202 4 4 28 11 25 9 23 6 20 3 17 2 16 30 13 27 11 25 8 22 NOV. DEC. JAN. FEB. MAR. APR. MAY JUNE 1939 1940 e LARGELY EXPORT FREIGHT, BUT ABOUT 10% REPRESENTS FREIGHT FOR LOCAL AND OGASTAL SHIPMENT. FIGURES EXCLUDE GRAIN. Chart 3 Office of the Secretary of the Treasury - of - of I C - 303 Regraded Uclas 203 TELEGRAM SENT PLAIN May 2, 1940 AMEMBASSY, LONDON. 804, second. FOR BUTTERWORTH FROM THE SECRETARY OF THE TREASURY. Following is the text of an address Secretary of the Treasury is delivering 10:30 a.m., Eastern Standard Time, May 3, at Washington: Regraded Uclassified 204 CK ⑉2⑉ 804, May 2, to London. "I am particularly pleased to bE able to talk to you today because I am in such hearty accord with the purpose of this series of meetings, which I understand to be Education for democracy. I applaud the initiative and the public spirit of the leaders of the Women's Division of the Democratic National Committee in making this notable convention possible. In considering your invitation it seemed to me that I might contribute most to stimulation of your thought on the problems of democratic government by talking to you about the money of the United States, and particularly about gold. I have chosen this subject because I think it is one in which all of you are interested; and it is one about which you may bE asked a good many questions as the year proceeds. One thing you will hardly need to be told about our monetary system; that is, that the American dollar is the soundest unit of currency in the world. Its value is unquestioned here at home and it is not questioned anywhere Else in the world. It is a solid rock of strength and stability amid all the monatary confusion created by aggression and war. It is more than a domestic surrency; it has become in the last fEW years more and more an international currency. PEOPLE through- Regraded Uclassified -3- 804, May 2, to London 205 out the world who are driven by disaster and fear to hoard currency prefer to hoard the currency of the United States, when they can get it. WE have tried through many means to facilitate stability in the currencies of the world. An outstanding Example is the Triportite Accord which WE initiated in September, 1936. In all, six of the leading democracies of the world have subscribed to the principles of that Accord. Unfortunately, the progress WE WEI'E muking in the field of international finance trade lins been interrupted by the cataclysm in Europe. One of the most striking developments of those recent years has been the universal confidence in the American dollar as one of the VEry few certain things in = highly uncertain world. SOME of our citizens Who admit the strength of the dollar and the world's confidence in our currency now suggest that confidence in our dollar has resulted in this country receiving too much gold. During the last 6 years WE have acquired about 310 billions of gold from abroad. Why has so much gold COME to the United States? In the first place, WE have Exported many billions of dollars' worth of goods and SERVICES in EXCESS of the tmounts WE have imported, Secondly, large amounts of fortign funds have COME to this country to be placed and kept on deposit with our benits, Fortigners have sent their funús here for sofekeeping DECRUSE of the pence, Regraded Uclassified 804, May 2, to London, 206 stability, and security which this country enjoys. Thirdly, fortigners have made large investments in American industries because they regard American business as a safe and profitable investment. Finally, Americans have been withdrawing their funds from abroad and liqui- dating their foreign investments in large sums because they prefer the dollar to any other currency. It is for these reasons that WE have had so large & favorable balance of payments; it is for these reasons that gold has come and is continuing to COME to the United States, Gold moves from country to country not as El commod- ity but as a means of payment, the one final medium through which international settlements are made. The continued acceptance of the cold that COMES here is the only sound course of action open to us. There are, it is true, other courses of action theorstically possible, but they would all have disastrous consequences. Take, for Example, the proposal so frequently made to us that WE stop buying gold. It has the charm of simplicity. All that WE have to do is to issue an appropriatz-Treasury order. But let mE tell you what I think would happen. Dollars abroad would instantly become very scarce and more costly, and the foreigner would find it much more Expensive to buy American goods. For Example, the British pound, the Canadian dollar, the Regraded Uclassified 207 ⑉5⑉ 804, May 2, to London. the French franc, the Dutch guilder would at once sharply depreciate. A chain of forces would bE set in motion which would disrupt our trade, scriously discourage what remains of world commerce and remove from world finance the strongest Element of stability. The cessation of gold purchases would have the following three immediate Effects of great importance to us: Firstly, the sale of American products in foreign markets would be made much more difficult, This would not apply so much to war materials, which foreign countries want so urgently, but it would hit hard our export of hundreds of agricultural and industrial commodities not vital to the conduct of the war. WE would lose heavily in the very markets WE will badly need when the war is over. Secondly, there would result an immediate flood of imports of cheapened foreign goods, which would deal an oven more serious blow to labor, industry and agriculture in America. The very items which compete with our domestic products would deluge our home markets. lieat and dairy products, textiles and hundreds of other articles would at once be subjected to greatly intensified competition from abroad. Thirdly, Americans who have investments abroad would find that they had suffered substantial dollar losses Regraded Uclassified 208 #804, May 2, to London. overnight just ns foreigners with investments here would find that they had windfall going overnight. So you SEE this simple remedy is, in Effect, 4 proposal that would completely disrupt our foreign exchanges and our trade and greatly increase unemployment in this country. And 30 with the other naive proposals which some well-menning citizens suggest as a remedy for our socu- mulating gold stocks. Shall WE follow their advice and cut the price for gold? A moderate cut would bE ffective, and a cut in price sufficiently large to have a significant Effect on the gold inflow would introduce the same conditions as would follow prohibition of gold imports. This 4100 would cause a serious decrease in our trade and a big increase in unemployment. Shall WE, as some have suggested, discriminate against certain countries in our purchases of gold? Such a policy would not even have the virtue of Effectiveness. The active cooporation of practically the Entire world would bE required to prevent any one country's gold from entering the world's markets and reaching the United States. Obviously this would bE impossible EVEN in normal times, let alone at a time such as this. Besides, the value of gold is proportionate to its unq unlified use and acceptance no an international medium of exchange. To Regraded Uclassified 208 -7- #804, May 2, to London. limit its acceptance would mean to reduce ita usefulness. There is yet another alternative which has always been open to us. Instead of taking gold WE could have granted credit. Americans could again have accumulated huge unsettled claims abroad. WE have had Experience with that cyotEm -- Extensive Experience -- in the decrde that ended with the Economic collapse of 1929. It is doubtful that Americano would want to repeat that EXPERIENCE. For the EXCESS of goods WE shipped and for the dollar credits WE granted WE have taksh gold in the last six years instead of promissory notes. The phonest "good as gold" still has real meaning in the world, I prefer the gold to pieces of foreign paper. I think most Americans agree with ME. Our gold policy 10 carefully adjusted to the reali- tiec of = complex world situation. There have been many Glib suggestions for changing that policy. Excentriction of Each of these suggestions has revenled, us in the Examples I have mentioned, that in the Effort to mady fancied Evils they would bring on real disaster. of course, should basic conditions alter, should WE be confronted with new and unforeseen Economic and poli- tiecl developments, the government will necessarily take such action as will best protect American interests. It Regraded Uclassified 210 -8- 1/804, May 2, to London. is to bE prepared for such contingencies that the powers with respect to gold operations have been kept flexible, The Treasury is constantly observing, analyzing and studying the course of EVENTO n their relation to mone- tary problems in which this country is interested. But nothing has yet appeared which would warrant any change in our gold policy. There is only one sound way in which WE can work to reduce the inflow of gold and to promote the return of at least a part of the wealth it to useful SERVICE in the lando from which it CAME. The my is to do Everything in our power to contribute to the return of PECCE to the world and to Encourage raconotruction and the restoration of normal trade. With the restoration of enduring PEACE and Economic stability abroad the 3old problem will DOLVE itcelf. Our great export surplus will drop--not because WE shall sell lesu abroad but because WE shall buy more. Foreign capital will bE grad- unlly repatrinted -- not DECAUSE WE drive it out but because it is attracted home by the remergence of security abroad. Our investors will once again invest their funds abroad -- not because of the scarcity of opportunity at home but because of greatly enhanced opportunities for sound and profitable investments in other lands. And finally our tourists will spend hundreds of millions more in foreign countries. Regraded Uclassified 211 ⑉9⑉ #804, May 2, to London. These are the developments which will automatically and gradually direct the flow of gold away from the United States. These are the developments upon which WE must concentrate. WE must concentrate on the promotion of further recovery here and PERCE and security abroad not in order to correct the gold situation, but because prosperity, peace and security are in themselves the supreme Ends of governmental policy. That their attain- ment will also solve the world's gold problem in only a by-product, but an important one. I should like finally to turn to the question of the continued usefulness of the gold WE have and the gold WE are going to get. This is a matter that is troubling some people. Let me reassure you once and for all, As long as there are independent nations, and as long as there is international trade in goods and services, so long will it be necessary to settle international balances. Gold is the international medium of Exchange par EXCELLENCE. Its acceptability is universal; its utility as international money survives changes in Economic systems. It is used and needed just as much by the freest democracies as by the most rigid dictatorships -- as much by capitalist Economies as by socialist Economies. It is the refined 212 -10- 1/804, May 2, to London. instrument of international exchange of goods and SERVICES, as well as an Essential ingredient in the more complex international financial transactions -- on instrument that has functioned without challenge for hundreds of years. EVEry foreign country wishes it had more of it; no foreign country likes to lose any of it; cll countries accumulate it as soon no they can afford to do 80, And the fact that some countries find it possible to conduct their international trade without gold does not mean that they prefer to do so any more than people reading by condle- light do so because they prefer c ndles to Electricity. Gold does not loss its value because some countries are forced to resort to clearing arrangements, barter, import controls, and other substitutes. All these sub- stitutes are admittedly worse clternatives. They are methods of conducting trade and finance which will only bE adopted when C. country does not possess adequate gold holdings. Governments resort wholly to these substitute methods for keeping n country's balance of payments in Equilibrium only during times of great and prolonged stress and instability, and only when for one reason or another they have been unable to prevent the loss of most of their gold holdings. All countries would like to have more gold, and the countries which have the least are, Regraded Uclassified 213 -11- #804, May 2, to London: you will find, countries which are striving most to add to their gold holdings, They do so because they know that an adequate supply of gold promotes Economic strength and furthers financial stability. To be sure, if the political picture of the world should undergo a drastic change in the future, BO that instead of fifty or sixty independent nations there should Exist only one or two groups dominated by ruthless powers, then international trade and finance may assume the character of domestic trade. There would cease to be independent monetary systems, as there would cease to bE independent foreign policies. Balances between countries would bE settled as balances between our states are now settled -- that is, by transfers of deposits. Under such circumstances it might well bE that gold would no longer be needed. But under those circumstances life would bE 80 different that the possible loss in the value of gold would, I an sure, bE the least of our troubles. Certain goverments may boast of the day when independent domocracies will disappear. I, for one, have no fears that such boasts can bE made good. I am as confident that gold will continue to bE used as the medium of international payments as I am that the majority of nations will succeed in maintaining their independence. With the return of PEACE and of normal Economic and Regraded Uclassified -12- 804, May 2, to Londons 214 political relationships, the present barriers to the free flow of goods, capital, and SERVICES will be gradually lowered, and gold will inevitably play its indiapensable role in making that result possible. One word more -- the Exchange WE made and are making in return for gold is a good bargain for us. It has Enabled us to increase Employment and recovery. It has made possible the utilization of labor, capital, machinery and resources that would otherwise have been idlt. WE have expanded our exports and encouraged our domestic industry. And, moreover, WE have at the some time acquired the safest physical asset in the world. There are some sincere people who have been dis- turbed by stories that this country had C. monetary policy that threatens to cause loss to the nation. If you meet such people I hope you will reassure them. You may tell them that the greatest and richest country of the world his the best end soundest monetary system and that there is no reason to fear that it will not remain sound. WE can feel entirely comfortable in the possession of a supply of gold with which WE can meet future demands on our monetary system without any shock to our Economy. Vs own bE prepared also to play the part "/E ought to play : in Regraded Uclassified 215 -13- #804, May 2, to London. in the reconstruction of the world that must follow the senseless destruction of war." WELLES, Acting. (HF) EA:FL:MEG SEND SAME TO: Paris as Department's 329, second, for Matthews from the Secretary of the Treasury. Berlin as Department's 1141, S Econd, for Heath from the Secretary of the Traasury. 216 JR PLAIN London Dated May 2, 1940 Rec'd 1:30 p.m. Secretary of State, Washington. 1104, May 2. FOR TREASURY FROM BUTTERWORTH. 1. Even some of the initial supporters of Sir John Simon's budget proposals are developing into critics. For instance now the THES in an editorial states that the Chancellor of the Exchequer "hns to Explain why hs estimates our war expenditure during the current year at the alarmingly low figure of pounds 2,000 million". The TIMES also takes the view that the reasons for supposing that the rate of voluntary lending will be adequate have yet to bE clearly demonstrated. The aditorial concludes: "Indeed the more the budget is studied the more it appears to bE provisional both in its details and in its spirit and the more likely does another budget in the near future appear to DE." 2. In the course of 2. conversation the British Tradsury reviewed the status of its clearing and payments agreements 217 -2- #1104, Hay 2, from London. agreementss as follows: clearing agreements: (a) Spcin (recently concluded), (b) Italy (changeo under negotiation), (c) Turkey (will work well for a while), (d) Rumania (changes under negotiation). Payments agreements have been concluded with (a) Sweden, (b) Norway (which is being patched up to fit the existing circumstances), (c) Denmark (no longer operative), (d) Argentine. There is a temporary arrange- ment with Yugoslavia and it is hoped to negotiate a more formal agreement. There are also arrangements with Uruguay to ensure that the proceeds of imports from Uruguay are opent in the United Kingdom and the sterling area. There is a similar arrangement with Julgaria to ensure that the bulls of the proceeds of imports from Bulgaria are spent in the United Kingdom and the sterling area and an arrangmment with Hungary providing for a smaller proportion. It is the intention of the British Treasury to continue to make payments agreements of one type OF another, formal or informal as soon C.S. possible. MERNEDY DDM Regraded Uclassified 218 JT GRAY PARIS Dated May 2, 1940 Rec'd 4:22 p.m. Secretary of State, Washington. 566, May 2, 7 p.m. (SECTION ONE) FOR THE TREASURY, Additional changes in the Exchange control regulations are embodied in two decrees and an arrete published in today's Journal Official. The wording of Article II of the basic decree of September 9 prohibiting and regulating in time of war the export of capital, foreign Exchange operations and trading in gold (SEE despatch No. 5105, September 18, 1939) is amended so as to add to the opera- tions which the Government may regulate by decree "all cessions and arbitrages of foreign Exchange and currencies, hypothecations relating to real or personal properties or rights Existent abroad.' BULLITT LMS Regraded Uclassified 218 JT GRAY PARIS Dated May 2, 1940 Rec'd 4:52 p.m. Secretary of State, Washington. 566, May 2, 7 p.m. (SECTION TWO) Hitherto these regulatory powers were limited to operations relating to foreign stocks and bonds and other fortign pro- perty titles or EVIDENCE of indebtedness. A member of my staff called upon Dhavernas to Inquire as to the reason for this change in wording. Dhavernas, who had assisted in drafting the measure, said that the change was needed in order to give the foreign Exchange office "legal authority" to regulate these additional operations. HE pointed out that the instructions which have been issued by the office in regard to cessions and arbitrages of foreign Exchange and transactions in real and personal property situated abroad were in the form of notices to its "approved inter- mediaries" and hence did not POSSESS the full legal basis of a decree. BULLITT LMS Regraded Uclassified 220 JT GRAY PARIS Dated May 2, 1940 Rec'd 5:24 Pallla SECRETARY of State, Washington. 566, May 2, 7 paille (SECTION THREE) The decree of September 9 fixing the terms of appli- cation as amended of the afore mentioned decree (SEE Embasay's telegram No. 467, April 12, 7 p.m.) is canceled and replaced by a new one. The principal changes Embodied in it are that nationals of Francewho reside in the country (including foreign corporations, companies, Et octera, in so far as their Establishments in France are concerned) are forbidden: (a) to Effect either in France or abroad, arbitrage operations with belgas, Canadian dollars, United States dollars, Portuguese Escudos, Dutch florins, Dutch East Indies florins, Luxemburg francs, Swiss franco, and Argentine DESOS (known as "A" foreign correncies; (b) to carry on operations abroad relating for- Eign stocks and bonds issued or quoted in Argentina, Belgium, Canada, United States, the Netherlands, Luxemburg, Portugal, Switzerland, and the Tangier International Zone ( known as "D" countries); (c) to carry on any operations in France in "D" foreign securities when the prospective purchaser is a foreigner residing in France. BULLITT NK:LMS Regraded Uclassified 221 JT GRAY PARIS Dated liny 2, 1940 Rec'd 4:55 p.m. Secretary of State, Washington. 566, May 2, 7 p.m. (SECTION FOUR) In commenting on these changes, Dhavernas said that the decree dated April 9 forbidding all arbitrages in foreign Exchange with other foreign Exchange (SEE Embassy's telegram No. 467, April 12, 7 p.m.) had been "put through in a hurry" and had been found to bE "too hersh". Hence it was now amended so as to apply only to arbitrages with "A" foreign currencies. HE added: "VE do not care whether or not arbitrages are carried on between forsign currencies of minor importance". Similarly, hE said that the Foreign Exchange office wished to control the activities of French nationals in "D" foreign securities but that it had little interest in regard to their activities in other foreign securities. BULLITT NK:LMS Regraded Uclassified 222 JT GRAY PARIS Dated May 2, 7 pame Rec'd 5:18 p.m. Secretary of State, Washington, 566, May 2, 7 p.m. (SECTION FIVE) The Embassy has received numerous inquiries during the day on American stockbrokers having offices in Paris who consider that Article I paragraph one of today's decree fixing the terms of application of the above mentioned decree of September 9, would force them to stop taking orders from Americans and other foreigners residing in France to buy or SEll securities on the NEW York stock Exchange. This paragraph provides that "the acquisition of real or personal property and of any rights whatever situated abroad or Expressed in foreign currencies unless ceded by persons referred to in Article III (i.E. residents of France) and unless the operation bE carried out on French territory" shall be considered as exports of capital and hence pro- hibited unless authorized by the Minister of Finance. This wording is Exactly the same as that appearing in the original decree of September 9, 1939 which thus far has not prevented brokers from carrying out orders in behalf of foreigners Regraded Uclassified 223 -2- #566, May 2, 7 p.m. (SECTION FIVE) from Pari 8 foreigners residing in France. Furthermore, Dhavernas stated that the French Government did not intend to stop foreign residents of France from purchasing dollar securi- ties on NEW York provided such securities were purchased with pre-war dollar balances hEld in NEW York or through the reinvestment of foreign securities. BULLITT JRL:LMS 224 JT GRAY PARIS Dated May 2, 1940 Reo'd 5 p.m. Secretary of State, Washington. 566, May 2, 7 pame (SECTION SIX) The arrete of November 30, describing prohibited or authorized operations (Embassy's telegram No. 437, April 12, 7 p.m.) is canceled and replaced by a new arrete which embodies the various changes in the Exchange control regu- lations referred to above. Presumably in order to decrease the consumption of sugar, B. decree appearing in today's Journal Officiel provides that saccharine may bE used in the manufacture of sparkling wines, dessert wines, cider, spirits, liqueurs (Except those prepared for export) lemonades and drinks of coffee and tea. A Bank of France statement for April 25, which WSS published today, shows no further advances to the state while the note circulation declined 158,000,000 francs. Deposits in National (Postal) Savings Banks during the period April 1 - 15, amounted to 368,000,000 francs and withdrawals, 231,000,000. The EXCESS of deposits over withdrawals Regraded Uclassified 225 -2- #566, May 2, 7 p.m. (SECTION SIX) from Paris withdrawals since January 1 has been over 1,000,000,000 francs. The securities market turned upward today and re- covered a large part of yesterday's losses. (END OF MESSAGE) BULLITT JVR:LHS 226 TREASURY DEPARTMENT INTER-OFFICE COMMUNICATION DATE May 2, 1940 Secretary Morgenthan TO FROM Mr. Cochran confidential The foreign exchange market was quiet today. Sterling, after opening at 3.49-1/2. moved up to a high of 3.50-5/8 in the mid-morning and then returned to 3.49-3/4 by noontime. A slightly easier tendency was in evidence during the after- noon and sterling touched & low of 3.48-1/2 at the close. Sales of spot sterling by the six reporting banks totaled 1403,000. from the following sources: By commercial concerns 1 232,000 By foreign banks (Europe and Near East) 1 171,000 Total L 403,000 Purchases of spot sterling amounted to L255,000, as indicated below: By commercial concerns L 133,000 By foreign banks (Far East, Europe and South America) 1 122,000 Total 1 255,000 The following reporting banks sold cotton bills totaling 247,000 to the British Control on the basis of the official rate of 4.02-1/2: 1 38,000 by the Irving Trust Company 5,000 by the Guaranty Trust Company 3,000 by the Chase National Bank 1,000 by the Bankers Trust Company 1 47,000 Total The other important currencies closed as follows: French france .0197-1/2 Guilders .5309 Swiss francs .2242-1/2 Belgas .1682 Canadian dollars 15-1/4% discount The rate for the Swedish krona has exhibited & firm tendency in the last few days and today it vas quoted at .2383. CONFIDENTIAL 227 The Shanghai yuan rate fell one full cent in Shanghai today. from 5-31/324 to 431/324- The yuan also depreciated in terms of sterling, soving off 3/41 to 3-1/40. " against the previous post-September low of 4d. This currency has received frequent support from a. Shanghai control group during the last three or four years. We were informed that this control had stepped out of the Shanghai exchange market today. One New York banker expressed the opinion that it vas primarily Japanese speculative selling of the year against sterling which accounted for the pressure on the former currency. Other market opinion appears to be divided in regard to today's withdrawal of the Shanghai control. According to cable advice which we received from Shanghai a few days ago, majority opinion in Chinese financial circles vas to the effect that 8 large import excess was likely in the next two months and that this would result in & lower year rate. 1 nove despatch received from Shanghai today also states the market belief that China's contimuous unfavorable trade balance led the control to allow the yuan to find a new level which would be casier to maintain. A news report from London, on the other hand, notes that London banking circles point to recent satisfactory Chinese Customs returns as evidence that China's trade does not warrant 8. fall in the currency. The belief is therefore hold in London that the withdrawal of the exchange control from support of the yuan in all probability represents a strategic nove in the face of a wave of speculative welling. There were no gold transactions consummated by us today. The Federal Reserve Bank of New York reported the following shipments of gold: $ 8,431,000 from Canada, representing two shipments from Vancouver by the Bank of Canada to the Federal Reserve Bank of San Francisco, for account of the Bank of England, for sale to the U. 8. Mint. 5,520,000 from Italy, shipped by the Bank of Italy for ite own account to the Federal Reserve Bank of Nov York, for sale to the U. 5. Assay Office. $13,951,000 Total The State Department forwarded to us cables stating that the following gold shipments would be made: $2,728,000 from Italy, shipped by the Bank of Italy to the Federal Reserve Bank of New York. 1,760,000 from England, shipped by the Chase National Bank, London, to the Federal Reserve Bank of New York, probably for account of the Central Bank of Bolivia. (Both of the shipments recently made by the Chase National Bank, London, to the Federal were for account of the Bolivian Bank.) 45,000 from England, shipped by the National City Bank, London, to its head office in New York. 28,000 from England, shipped by Westminstor Bank, London. to the Chase National Bank, New York. CONFIDENTIAL 228 - 3 - 17,000 from England, shipped by the Westminster Bank, London, to the Irving Trust Company, Bow York. 5,000 from England, shipped by S. Japhet and Company, London, to the National City Bank, New York. 4,000 from England, shipped by S. Japhat and Company, London, to Jules and Anna Vischnisk, New York. $4,587,000 Total The disposition of the first two shipments listed above is unknown at the present time, and the others will be sold to the U. S. Assay Office at New York. The Bombay spot silver quotation vas slightly lower at an equivalent of 42.25#. In London, the prices fixed for spot and forward silver both rose 1/164 to 21-1/2d and 21-3/8d respectively. The U. S. equivalents were 33.814 and 33.354. Handy and Earman's settlement price for foreign silver Vas unchanged at 34-3/44- The Treasury's purchase price for foreign silver was also unchanged at 35#. We made five purchases of silver totaling 3,007,000 ounces of silver under the Silver Purchase Act. of this amount, 250,000 ounces represented sales from inventory, and the remaining 2,757,000 ounces consisted of new production from foreign countries, for forward delivery. H. M.S. Regraded Uclassified 229 May 2, 1940 11:13 a.m. H.M.Jr: Hello. Operator: Jesse Jones. There you are. H.M.Jr: Hello. Jesse Jones: Hello, Henry. H.M.Jr: How's Jesse? J: How are you? H.M.Jr: O. K. J: Now let me see, I had one or two things to talk to you about. H.M.Jr: Well, I'll lend you some money if you want it at the usual rate, 5 per cent. J: Oh, 5 per cent. H.M.Jr: Yeah. J: 10 per cent so the -- so the Fortune said that I was 10 per cent Jones. H.M.Jr: (Laughs) I see. J: I think they kind of raised the rate on me. H.M.Jr: Well, I lend it to you at 5 and you can re-lend it at 10, that's good business. J: That's right. I wanted to see you sometime, if I could, I think, this afternoon about some possible legislation, about how we're going to give you that money. H.M.Jr: Right. J: And 80 forth and 80 on. H.M.Jr: How would four o'clock be? 230 - 2 - J: That would suit me. H.M.Jr: Can I have Dan and Foley here? J: I'd like for you to, yeah. H.M.Jr: I'll have Dan and Foley here. J: 0. K. H.M.Jr: I'll be glad to see you. J: Goodbye. 231 May 2, 1940 11:57 a.m. H.M.Jr: Hello. Operator: Dr. Viner is ready. H.M.Jr: Hello. 0: There you are. H.M.Jr: Hello. Jacob Viner: Hello. H.M.Jr: Jake? V: Yes. H.M.Jr: My people are here that are helping me on this talk and you're on the loudspeaker. V: Yes. H.M.Jr: Any suggestions, criticisms, et cetera, et cetera? V: Did you get my wire? H.M.Jr: No. V: Why, I sent you a wire through the Secret Service. H.M.Jr: (Laughs) Wait a minute, let me...... V: And they said they'd get it right through. H.M.Jr: Here comes -- here comes Mr. McKay now. I've got it here. Can you hold on a minute? V: Yes. H.M.Jr: Do you mind if I read this out loud to my crowd? V: No. H.M.Jr: Just be a good boy for a minute, please. V: Yes. 232 - 2 - H.M.Jr: (Reads Viner's wire aside to group.) Well, Jake V: Yes. H.M.Jr: from you I would say that 18 one of the highest compliments any speech of mine has ever received. V: That's fine. H.M.Jr: So -- do you know what Harry White said? y: No. H.M.Jr: Always from now on our contact should be by teletype. V: (Laughs) Well, I -- I think it would have been just the same in any other form. H.M.Jr: I know. Well, I'm ever 80 much obliged. I appre- ciate -- I hope I didn't inconvenience you. V: Not at all. H.M.Jr: Jake, for your own information, I'm going to be in Chicago Saturday and Sunday and I'd like to have & chance to say hello. V: Will you have dinner with us Saturday night? H.M.Jr: I don't know what Henry 18 arranging. Would you -- could I find out from him? V: Yes. H.V.Jr: Supposing I -- I'll send him a V : Henry. H.M.Jr: What? V: It would include Henry. H.M.Jr: of course. I will send him a telegram. V: All right. 233 - 3 - H.M.Jr: That's very kind -- if I can't -- if he has made some other arrangements I'll tell you and then maybe I can...... V: All right. I'd like to see you anyway. H.M.Jr: I'd like to see you and Mrs. Viner. V: All right. H.M.Jr: Thank you, Jake. V: You're welcome. H.M.Jr: Goodbye. 234 May 2, 1940 12:13 p.m. H.M.Jr: Hello. Operator: Captain Harry Collins. H.M.Jr: Right. 0: Go ahead, please. H.M.Jr: Harry Harry Collins: Good morning, sir. H.M.Jr: I haven't read any memorandums in two days. You may have sent me one. What about those Pratt and Whitney engines that C: Mr. Secretary, I've been working steadily on that. I had quite a session yesterday with Wilson. H.M.Jr: You're not ready to report yet? C: No, sir, I am not because H.M.Jr: Well, you're not C: Major Lyons -- Major Lyons 18 at Dayton this morning. Brett has been out of town and only got back last night, sir. H.M.Jr: But you're not ready? C: I'm not ready on the answer, sir. H.M.Jr: O. K. 0: All right, sir. H.M.Jr: Thank you. C: Anything today? H.M.Jr: No. No, I called off Purvis. C: Aye, aye, sir. 235 - 2 - H.M.Jr: I'm doing a speech. C: Yes, sir. H.M.Jr: I got it out of my system. C: Yes, sir. Well, I'm working on another matter that I'll have for you as soon as I can get some more dope out on it. H.M.Jr: All right. Thank you. C: You're welcome, sir. Goodbye. 236 May 2, 1940 3:33 p.m. H.M.Jr: Hello. Operator: I have Colonel Burns. H.M.Jr: Thank you. 0: You're welcome. Go ahead, please. H.M.Jr: Hello. Burns: Hello, Mr. Secretary. This 1s Colonel Burns. H.M.Jr: Right. Have you heard from General Watson? B: About what, sir? H.M.Jr: About my going to Allison? B: Yes, sir. Yes, sir, I've heard from him and we're planning on being there early Monday morning. E.V.Jr: Right. Now, will you let Allison know that I'm coming? B: Yes, sir. H.M.Jr: I think the man's name out there 18 Evans. B: Evans, yes. Well, he's the Vice President of the General Motors and Kreuser 18 the man out there, but anyhow we'll let everybody concerned know. H.M.Jr: Right. B: At what hour will you be there, Mr. Secretary? H.M.Jr: Well, what I figured on, I ought to get there between nine and ten -- I don't know what time they're on. Is it -- are they on -- they are an hour ahead of us here, aren't they? B: Yes, sir. Well, hold on here. That's time ordinarily 16 one hour behind us but they're probably on day- light saving 80 I suppose it will be about the same. Uclassified 237 - 2 - H.M.Jr: Well, I'll try and get there -- it's midwest, 1sn't it, Central Time? B: Yes, sir. H.M.Jr: I'll try and get there between nine and ten. Now, if you could -- if I could -- if you could let Lieutenant McKay, who will be with me, who 18 here in the Treasury now, if you could let him know today or tomorrow who to advise. B: Yes, sir. We will. H.M.Jr: When we take off from Chicago we could phone some- body, you see? B: Yes, sir. We will. I'll make all the arrangements with Lieutenant McKay then. H.M.Jr: Will you? And also tell him what airport to land on. I'll be coming by plane, in my own plane, from Chicago. B: Yes, sir. H.M.Jr: What airport to land on and we could when we take off from Chicago we could have someone phone. B: Yes, sir. H.M.Jr: I'm not particularly anxious for publicity. B: All right, we'll keep it all under cover, Mr. Secretary. H.M.Jr: As best we can. Now, I thought on the way back -- General Brett will be with us, won't he? B: Yes, sir. H.M.Jr: That I'd like to stop at Dayton. B: Yes, sir. He's hoping you will do that. H.M.Jr: Yeah, I'd like to do that. B: Yes, sir. 238 - 3 - H.M.Jr: And he'll have all the figures I suppose of the orders that they have and how far behind and all the rest of that. B: Yes, sir. We'll have all of that. H.M.Jr: Fine. Thank you. I'll look forward to seeing you Monday. B: All right, sir, we'll be there. H.M.Jr: And Lieutenant McKay will be with me. He knows where I'm staying in Chicago and if you wouldn't mind contacting him. You know him, he's outside in my reception room. B: Yes, sir. Yes, sir, we'll be in touch with him. H.M.Jp: Thank you. B: All right, sir. H.M.Jr: Goodbye. 238 May 2, 1940 3:37 p.m. H.M.Jr: Hello. Operator: General Brett is out of the office for a few minutes. Can I have him call you? H.M.Jr: If you please. 0: Yes, sir. 3:42 p.m. H.M.Jr: Hello. General Brett: How are you, Mr. Morgenthau? H.M.Jr: Fine. B: Good. H.M.Jr: Am I going to have the pleasure of your company..... B: I have already requested my orders. I am leaving here Sunday afternoon, into Dayton that afternoon, and over to Indianapolis, I'll be there at eight. H.M.Jr: Wonderful. B: On the sixth. H.M.Jr: Monday, the sixth. B: Yeah. H.M.Jr: And I hope to stop at Dayton on the way back. B: That's what I'm planning for you to do. H.M.Jr: Fine. Is there more than one airport at Indianapolis? B: Yes, sir. You land at the Municipal Airport. H.M.Jr: Municipal Airport. 240 a I I B: Yes, sir, and if you'll wire Kreuser before leaving, he will meet you. H.M.Jr: Well, I spoke to Colonel Burns because evidently the White House spoke to him. B: Yes, sir. H.M.Jr: And I asked him to let Lieutenant McKay know who I should notify. B: Yes, sir. Then it will be very well. H.M.Jr: Because he'll be with me, but he's here now and B: Well, if you -- have you any idea right now exactly the time you'll land at Indianapolis? H.M.Jr: Well, I figure it will be somewhere around, between nine and ten Daylight Saving. B: Between nine and ten Daylight Saving. H.M.Jr: Yeah. B: Okey-doke. Well, I'll Bee that you are met. E.M.Jr: I'll be coming from Chicago. B: You'llbe coming from Chicago between nine and ten Daylight Saving on Monday, and I will see that they meet you and I'll be there waiting for you. H.M.Jr: Well, that isn't necessary. a: Well, I'll H.M.Jr: But we'll B: I'll plan to be there. I'll plan to be there at nine -- eight or nine and H.M.Jr: Well, we'll phone when we take off from Chicago. B: All right, sir. H.M.Jr: I'll have somebody phone. 241 - 3 - B: O. K. H.M.Jr: Who'll they phone to? B: What's that? H.M.Jr: Who should they phone to? B: Why, to the -- to Mr. Kreuser -- K-r-e-u-s-e-r. Allison Engineering, Indianapolis. H.M.Jr: Allison Engineering, Indianapolis. Well, that's easy and it's a Municipal Airport. B. Yes, sir. H.M.Jr: Well, I think we'll have a good trip. B: Yes, sir. H.M.Jr: I'm B: Then I'm counting on you going back to the Division with me. That is going back to the Division and taking a look there. H.M.Jr: Oh, definitely. B: Right. H.M.Jr: I want to do that. B: Yes, sir. H.M.Jr: Thank you 80 much. B: Thank you. 242 May 2, 1940 The Secretary talked with General Watson at 12:25. The gist of his conversation was as follows: HM,Jr referred to his speech on gold and said that the President had approved it and was de- lighted with it. He then said he had two things for him to handle: (1) HM, Jr was going to visit the Allison Engine Company at Indianapolis on this coming Monday. He would like to have General Brett make the visit with him. Colonel Burns should 80 also if Assistant Secretary Johnson wanted him to go. Secretary Mor- genthau will go from Chicago and be at Allison at 9 a.m., Monday morning. (2) The U. S. Navy has a contract with Du Pont for 2,500,000 pounds of powder. HM, Jr was told yesterday during his visit to Indian Head that by putting on 175 more men there, to make two shifts, they could manufacture 2,500,000 pounds more powder at Indian Head. They are only working one shift there now. If they put on this second shift the Navy then can tell Du Pont to release 2,500,000 pounds of powder to the English. The President had 0. K'd this this morning. It will be available within 30 days, that 1s, available as of June 1,1940. HM,Jr was down there yesterday and Assistant Secre- tary Compton and Admiral Furlong approved, but want the President to tell them to do it. r 243 May 1, 1940 The Secretary brought this material back with him today from a visit to Indian Head. 244 Hand, N.P.O. P.F. 6-15-82 soe) MANUFACTURE OF SMOKELESS POWDER NAVAL POWDER FACTORY, INDIAN HEAD, MD. I. PICKING AND DRYING HOUSE (COTTON). The cotton used is cellulose in the form of cotton waste, shredded cotton rage, or abort fibres from the cotton seed hulls, which has been given 22 through chemical treat- ment before receipt. This purified cotton is received in large, comprussed bales with burlap or paper covering. The bales are broken open and sections carried to the PICKER: The cotton is placed upon the apron of the picker, which conducts it hetween two horizontal toothed cylinders revolving at high speed in opposite directions, pulling in between them the cotton, tearing apart the knots and tangled lumps and then foreing the cotton to the DRIERS. DRIERS: The driers have an endless, galvanized-iron, screen belt of coarse mesh which carries the cotton along slowly in the path of air currents heated to about 200°F. The cotton passes thru the dryer in about 20 minutes, the moisture being reduced from about 7% to 1%. The cotton is weighed into cans and when cooled, carried to the NITRATING HOUSE. 2. NITRATING HOUSE. NITRATION: Two cans of cotton (32 lbs.) are emptied into a nitrating pot which contains 1600 lbs. mixed acid (sulfurie and nitric) at 33°C. The pots have revolving puddles which give a thorough agitation of the cotton and acid for 20 minutes. The cotton is converted into nitrocellulose containing approximately 12.60% nitrogen. This is called in the Navy "pyrocellulose". The charge (nitrocellulose and excess acid) is then run into a centrifugal wringer, below the dipping pot, where most of the spent acid is separated and later strengthened with fresh acid (fortifying) for use again. The nitrated cotton is caught in the basket whence it is forked into a trough of running water which carries it to the BOILING TUBS. 3. BOILING TUBS: These are cylindrical wooden tubs in which the nitrocellulose is boiled 40 hours with 5 changes of water, then carried to the 4. PULPING AND POACHING HOUSE: Here it is cut to a fine condition between knife edges in a PULPER and then further purified by 12 hours boiling with 8 changes of water and 10 cold water washings to POACHING TUBS holding 7200 lbs. of nitrocellulose. Each poacher charge repre- sents a lot of nitrocellulose. is given 34 number and samples taken for chemical tests, After SCREENING to remove coarse material, the nitrocellulose is pumped to the DEHYDRATING HOUSE, 5. DEHYDRATING HOUSE: The excess water is removed by the DEWATERER AND CENTRIFUGAL WRINGERS leaving about 26% moisture in the nitrocellulose. In this condition it goes to the DEHYDRATING PRESSES which press out the water replacing it with sufficient 95% alcohol for making the desired colloid when the ether is mixed with it in the MIXING HOUSE. A considerable quantity of dilute alcohol is collected from the dehydrating presses and sent back to the ether plant for recovery of the alcohol. 6. ETHER HOUSE: The alcohol is obtained by purchase. The ether is made from alcohol by the action of sulfuric acid on the alcohol at a temperature of 130°C. The ether is washed and purified in the distillation. All alcohol and ether residues recovered are here redistilled and made ready for use again. At present (1940) ETHER is also obtained by purchase 83 It is cheeper to buy on contract than to manufacture. Regraded Uclassified 245 Manufacture of Smokeless Powder. Page 2. 7. MIXING HOUSE: The dehydrated blocks are brought to the mixing house in covered cans and dropped into the revolving cylindrical screen of the BLOCK BREAKER where the blocks are thoroughly broken up and screened without appreciable loss of alcohol. The fine material is then immediately carried to the MIXERS where ether, carrying sufficient diphenylamine to make .50% of the dry nitrocellulose, is added and the material kneaded in the mixers until a proper colloid is obtained. This colloid is pressed into a block and carried to the PRESS HOUSE. 8. PRESS HOUSE: STRAINER (MACARONI) PRESS: This is a hydraulic press having in the bottom of the cylinder a brass plate thru which the colloid is forced coming out in macaroni-like strings. These strings are caught in the cylinder of a press below and reblocked to be carried to the die press. DIE PRESS: In the díe press, the powder is forced thru a die carrying pins of proper size for perforations and emerges in the form of a continuous cord which passes to a revolving disk CUTTER which euts the cord into grains of proper length. A different size die is used for the different calibers of powder. There is now a considerable excess of solvent (ether-alcohol) in the powder grains which is removed by drying in the SOLVENT RECOVERY AND DRY HOUSE. 9. SOLVENT RECOVERY: 50° The powder is placed in cans (3300 lbs. per can) thru which a continuous circula- tion of warm air at 12-19°C is made. This gradually takes up much of the excess solvent which is then condensed in refrigerating coils and collected in tanks for separa- tion at the ether plant. The powder is run out from the cans and carried in boxes to the POWDER PICKING HOUSE. 10. POWDER PICKING HOUSE: The powder is poured, a few boxes at a time, upon long tables with screen tops and carefully picked over by hand to remove all grains that are abnormal in size or appearance, The poor grains are sent to the reworking plant. The good powder is carried in boxes to the DRY HOUSES. 11. DRY HOUSES: 50" The powder is dried in bins by a circulation of warm air at not more than #C until the volatiles reach the amount required by the Navy specifications. This requires from 3 to 8 months depending upon the size of the powder. It then has to be blended and packed. 12. BLENDING TOWER: The lots vary in amount from 25,000 lbs. to 500,000 lbs. depending on the caliber of the powder. To make a lot uniform, it is blended by passing by gravity from bins in the upper (4th) of the blending tower over a distributing cone into bins on the 3rd floor. When it has all collected on this floor, it is again passed over a similar cone and collected in bins on the second floor, from which the powder is run into boxes standing on platform scales for weighing. A five jar sample is taken for complete chemical tests at the laboratory. 13. PACKING AND STORAGE: The boxes used are tested, galvanized iron or zine-lined wooden boxes with rubber- gasketed, metal covers, nearly all of which hold 110 lbs. of powder. Each lot of powder is given a designation, stencilled on the box, showing where it was made and the serial number of the lot of this particular caliber. 246 Manufacture of Smokeless Powder. Page 2. For example: IHHA Lot 40 means powder manufactured at Indian Head (IH) (or 14'/50 (HA) cal. gun and that it is lot 40 of this particular caliber. Various letters such as D for DuPont, I for International, etc., designate the different manufacturers. The last one or two letters indicate the caliber and are published in a table in the powder specifications, for example, H stands for as 14'/45, H.A. for a 14'/50;C stands for 6*/40, C.B. for 6'/50, C.C. for 6'/53, etc. 14. PROOF AND DISPOSITION: A firing sample for proof at Dahigren is selected from the lot of powder and the balance stored in a magazine until ordered shipped by the Bureau of Ordnance. On acceptance, the Bureau gives the lot of powder a service index number which is assigned in regular numerical sequence in the order of acceptance. These indexes are also designated by certain letters, for example SPDW 2132. The SP indicates smokeless powder, the D stands for diphenylamine (showing it is 25. stabilized powder,) the W stands for reworked; the number is the index number. Other letters used are R for rosaniline (used in 1908-09 as a colored indicator of the stability of the powder but has since been abandoned); B for a blend of two or more indexes, X for water dried (instead of the usual air drying), and F for flashless powder <D Regraded Uclassified UNITED STATES VAL OWDER FACTORY INDIAN HEAO, MARYLAND 247 FROM RAW MATERIALS TO SMOKELESS POWDER - SPERATION - nee SULPHURIC ACID PLANT - ETHER PLANT - NITRIC ACID PLANT ! REWORKING PLANT COTTON PURIFICATION PLANT POWDER PLANT (init " - PyNO LINE POWDER LINE APPIONIUM PICRATE 5 121 6 ! - - Regraded fied NAME 2014 CININEXX Hm атеничны i , "AVEN AMON 1 400 PACTOR POWER THANK so I or : AMOUNT TRANNU / WANG San