Volume 73, June 15 – June 22, 1937

DIARY Book 73 June 15 - June 22, 1937 Regraded Uclassifie Book Page Appointments and Resignations Wolfe, Joe: Resppointment of Joe Wolfe as Collector of Internal Revenue, St. Paul, Minnesotas FDR asks Attorney General, Postmaster General, and HMJT to confer once more - 6/18/37 LXXIII 310 - B - Bank for International Settlements Cochran reports on meeting - 6/15/37 1 s) Main business that of studying requests of National Bank of Hungary for three-year extension of Bank for International Settlements and Central Bank credits with 1% interest and w repayment b) Genuinely pessimistic point of view on conditions in France 0) Swiss situation discussed with Bachmann; Cochran three times repeats HMJr's message, making it clear this is official d) Prior to sailing of Paul Van Zeeland for United States, Marcel Van Zeeland asked Jacobsson to prepare memorandum on gold situation; after revision, Niemeyer will circulate to Central Bank governors and Cochran is promised copy 1) Lowering price of gold is favored in this memorandum 2) Cochran understands Marcel Van Zeeland does not favor this; favors rather increasing cash requirements of commercial banks and increasing coverage requirements of Central Banks e) Cochran learns from within Bank of International Settlements that Central Bank of Finland has been largest seller of gold against dollars through Bank for International Settlements f) Governor Rooth, of Swedish Riksbank, sees no need for Sweden's taking any immediate monetary action g) Governor Norman feels that great care should be exercised in accepting arguments put forward by certain financial journals and writers, in London particularly, against changing price of gold, since direct interest in gold mining is held by these journals; efforts to control production of gold also opposed by Norman b) Governor Norman's assistant, Cobbold, particularly condemns Paul Einsig, of London Financial News, as being unfair in comment Regraded Uclassified - C - Book Page China For resume of conversations between HMJ: end Chinese delegation, see Book LXXVIII, page 190 American Embassy, London, reports on Chinese loan negotiations with Great Britain - - 6/21/37 LXXIII 347 Cocoanut 011 See Philippine Islands - E - Einsig, Paul (London Financial News) See Bank for International Settlements - F - Finland See Bank for International Settlements Foreign Capital: Restriction of Inflow See Gold France See also Bank for International Settlements II If Stabilization Blum Government falls - 6/21/37 329 Ambassador Bonnet calls to say goodbye leaving for France - 6/22/37 369 - G - - Gold See also Bank for International Settlements Conference between Treasury and Federal Reserve; present: HMJr, Taylor, Oliphant, Lochhead, White, Viner, Opper, Bell; Eccles, Goldenweiser, Williams, Gardner, Harrison, Knoke; Feis - 6/15/37 85 a) Matters to be discussed include sterilization, handling of foreign deposits, question of taxing aliens who invest in United States, et cetera; reserves against foreign deposits to be discussed this morning (Ten questions to be discussed on page 115) b) HMJr also tells group about visit of Sir Josiah Stamp - H - Hungary See Bank for International Settlements Regraded Uclassified I Book Page Italy Annual report of Bank of Italy presented on 3/31/37 a) Cochran cells attention to comment on Tripartite Agreement as "first honest attempt towards wide international cooperation made since September, 1931" - 6/22/37 LXXIII 388 - If - Norman, Montagu (Governor, Bank of England) See Bank for International Settlements - P - Philippine Islands HMJr asks War Department whether or not it has advised Quezon in any way on excise tax on cocoenut oil which the courts have decreed should be turned back to the Islanda - - 6/15/37 35 a) Woodring out of town; Craig answers "no" - War Department feels this is a matter for State end Treasury Departments to handle Conference with Quezon; present: HMJr, Taylor, Feis, and Opper - 6/15/37 41 a) HMJr reports to Hull on conference; Feis present.. 38 Poland Ambassador and Counselor of Polish Legation call on HMJr to introduce Sokolowski, here to arrange possible commercial agreement with United States - 6/15/37 20 - R - Riefler, Winfield To be Special Consultant with Treasury - 6/15/37 75 - 8 - Shafroth, Morrison Resignation discussed by HMJr and Oliphant - 6/22/37 365 Smith Company, E. M. E. M. Smith's offer to plead guilty to all counts in the two indictments now pending, made on condition that indictments against other defendents be dismissed, approved by FDR and HMJr; Department of Justice BO 56 notified - 6/16/37 Oliphant reports on sentence to HMJr: eighteen months in penitentiary and $25,000 fins - 6/22/37 364 Regraded Uclassified - 8 - (Continued) Book Page Stabilization See also Bank for International Settlements France: See Cochran resume 6/13/37-July, 1937 - Book LXXVI Emergency bill authorizing Government up to 7/31/37 to take measures necessary for reconstruction on public finances, laid before Chamber - 6/15/37 LXXIII 19 a) American Embassy, Paris, reports on conversation with Blum concerning these powers - 6/14/37 30 b) Bullitt reports on dramatic special session of Chamber of Deputies and passage of bill 346-247 - 6/16/37 154 c) For text of emergency bill, see page 175 d) Crisis arises during consideration of bill in Senate - 6/18/37 304,308,321, 332,337 e) Blum Government falls - 6/21/37 329 Cochran reports continued heavy pressure on franc - 6/15/37 67 Meeting with regard to French crisis; present: HMJr, Taylor, Bell, Oliphant, Lochhead, Opper, Upham, Viner, and Riefler - 8:45 A.M., 6/16/37 11? a) Conversations with Cochran HMJr tells Hull of Montagu Norman's desire that Cochran visit England without American Embassy in Paris knowing of it - 6/16/37 139 a) Hull advises clearing with FDR b) FDR advises that British Ambassador be told and Sir John Simon asked his wishes; HMJr BO informs Hull - 6/16/37 146 c) Conference with British Ambassador and Trentham; Feis and Taylor present - 6/16/37 158 d) Montagu Norman's answer - 6/17/37 168 e) Hull's instructions to Cochran through American Embassy, Paris, to proceed to London - 6/18/37 300 f) Cochran's report from London - 6/21/37 343 1) Fall, of Blum Government discussed American Embassy, London, asks for information concerning report under Washington date-line that France may be forced to withdraw from Tripartite Agreement presumably due to institution of 8. control system - 6/16/37 157 a) Hull told United States has had no intimation of such intention 165 Second meeting on French crisis; present: HMJr, Taylor, Opper, Viner, Riefler, White, Lochhead, Hass, and Oliphant - 9 A.M., 6/18/37 224 (Possible actions by French Government on page 284) a) Conversation with Cochran 237 b) y . Butterworth 250 c) . - Knoke 269,279 d) . Hull 271 Regraded Uclassified - S - (Continued) Book Page Stabilization (Continued) France (Continued) Ambassador Bonnet calls to say goodbye - leaving for France - 6/22/37 LXXIII 369 Cochran reports on exchange market movements - 6/22/37 372 Formation of Cabinet unfavorably impresses foreign exchange market - 6/22/37 386 Switzerland: Butterworth reports on Swiss transactions in London - 6/15/37 64 Sir John Simon informs HMJr he is in complete sympathy with stand on Switzerland - - 6/18/37 301 Text of letter signed by Bachmenn and Schnyder, of Swiss National Bank, and by Meyer, Chief of Swiss Department of Finance and Customs, transmitted by Cochran to HMJr - - 6/19/37 317 Stamp, Sir Josiah See Gold Statements by HMJr Before Joint Committee on Tax Evasion and Avoidance - 6/17/37 179 Sweden See Bank for International Settlements Switzerland See Bank for International Settlements " Stabilization - T - Tax Evasion Oliphant's memorandum in response to FUR's request as to possibility of Treasury Department conducting tax investigation in disregard of Joint Resolution No. 155, giving two possibilities - 6/16/37 50 - D - U.S.S.R. For resume of conferences on gold, 4/11/37-7/17/37, see Book LXIV, page 79 Conference; present: HMJr, Troyanovsky, Taylor, and Feis - 6/15/37 24 a) Russian Government wishes to know whether it's now 6. question of a special agreement between two countries with regard to gold market or merely one about information for production of gold 1) HMJr replies merely exchange of information now, possibly leading to agreement later on State Department memorandum concerning Soviet participation in international arrangements dealing with sale of Soviet timber and sugar in world market - 6/15/37 76 Regraded Uclassified - V - Book Page Van Zeeland See Bank for International Settlements - W - Wolfe, Joe See Appointments and Resignations Regraded Uclassified PARAPHRASE OF TELEGRAM RECEIVED FROM: American Embassy, Paris, France DATE: June 15, 1937, 9 a.m. NO.: 788 FROM COCHRAN. This morning I returned from Basel where on Satur- day(?) and Monday the BIS directors met. The routine business for the most part consisted of studying requests of the National Bank of Hungary for extension for three years from the eighteenth of July of BIS and Central Bank credits with one percent in- terest and four and three-quartere percent repayment. The Governor of the Bank of France, Labeyrie was not in Basel, and (?) Under Governor Fournier and French director Brincard left Basel. Thus indirectly the French bankers contributed to the uneasiness at Basel regarding the situation in France. During Monday this uneasiness was augmented by news that France had widened the dis- count on the forward franc, as well as the news that Stabilization a very heavy day was had by the fabulous fund, and that at noon the Council of the Bank of France had decided to raise the discount rate to six percent (from the previous 4 percent rate). The Central bankers at Basel continue to be gen- uinely pessimistic over the outlook for France, even should Parliament give the Government a respite through approval of a new tax program and arrangement in some way for additional Regraded Uclassified - 2 - additional funds to be made available from the Bank of France. For several months these bankers have been con- vinced that B. Blum Government with Communist support cannot inspire the confidence necessary for recovery in France. It is their belief that a continuation of this Government in office will only make 8. more serious crash eventually. The Central Bankers are particularly skeptical over the efforts of Vincent Auriol to punish flight capital. They think that fears of capitalists will only be aggra- vated by his endeavors. Yesterday Quesnay, who is General Manager of the BIS and who usually has some plan in mind, could make no suggestion for a definite program which would alleviate the present situation in France. The big necessity, he realizes, 18 to get capital to return to France. However, he said, it was under the Doumergue and Laval Governmente that much of the capital left France and capital would not itself start back merely because of reformation or re- placement of the present government. At this meeting at Basel the gold question was un- officially discussed even more seriously than at meetings held before. On Sunday morning at 10 o'clock I gave orally to the Swiss National Bank President, Bachmann, in Regraded Uclassified 3 - 3 - in the presence of Pferminger, his assistant, the verbatim message from Secretary Morgenthau (and which was quoted my in/telegram No. 771 of June 12). I was told by Bachmann that he would get in touch with his two joint managere Schnyder and Weber, and that on noon Monday he would give me their reply. I saw Bachmann and Pferminger at 12 o'clook on Monday, and had a telephone conversation with Bachmann late in the evening (Bachmann had returned to his bank in Zurich in the middle of the afternoon) in order that one point might be cleared up. I summarize below the explanation given by Bachmann of their position. Bachmann will pre- pare immediately for the approval of his associates at a meeting this coming Thursday, & letter to be addressed to the Secretary of the Treasury of the United States and to be signed by Meyer, Minister of Finance, confirming and expanding the explanations which were given to me. I am to receive the letter by mail for forwarding in the diplomatic pouch. The Swise National Bank, Bachmann said, had recently definitely decided that END SECTIONS ONE TO FOUR, INCLUSIVE. BULLITT. EA:LWW Regraded Uclassified PARAPHRASE OF SECTION FIVE OF TELEGRAM NO. 788 of June 15, 1937, 10 a.m., from paris. the gold certificate holdings of the Bank should not exceed 2,631,000,000 Swiss francs, which figure now appears in its statement. They had fixed a price for purchasing gold, he said, after the Swiss franc had actually left the gold standard last Fall. He does not want to change this price. The Bank furthermore does not intend to sell any of the gold in the total indicated above. Therefore it will not give any cause for uneasiness through allowing its statement to show a decline in the amount of gold held. The Bank believes that the amount mentioned above is the maximum that it should hold because of the danger of a European war, and the danger of the world price of gold being lowered. As of June 11, Bachmann said, the holdings of the 538 million Swiss frano stabilization fund were: Gold, 116 million france; END SECTION FIVE. BULLITT. EA:LWW Regraded Uclassified 5 PARAPHRASE OF SECTION SIX OF TELEGRAM NO. 788 of June 15, 1937, from Paris. foreign exchange, 408 million france; Swies france, 14 million, Decision was reached that it would be this bank's policy to convert this fund which was orig- inally in gold entirely into foreign exchange, principally dollars, and sterling to a slight extent. Such gold as might be received from the public would pass through this fund for conversion into foreign exchange without the bank's statement showing the transaction. The Bank, with this policy in mind, has been shipping gold to the United States and that gold has been converted into dollars. The program Bachmann had envisaged would be to send the remaining 116,000,000 france gold (some 30,000 kilograme) to the New York Federal Reserve for conversion into dollars over B. two or three months period. Recently an attempt has been made by Bachmann to influence the Swiss banks to sell directly on the London market for their own account such gold as they or their clients desire to dehoard without the Central Bank handling it. With regard to the gold being purchased by the Central Bank, Bachmann said this comes in the form of bars held in London by Swiss, or from domestic hoarding in coins. In the future he will try to dispose of all of this gold on this side of the ocean, at London for the most part. He could not say how much gold the Swies are still hoarding. Regraded Uclassified 6 - 3 - An attempt is being made by Bachmann to get some of the excess of foreign capital out of Switzerland, and to this end he had encouraged two foreign credits, one to the Bostal System of Czechoslovakia in the sum of 50 million Swise france, and another in the same amount to Italy by the Credit Suisse and the Swies Banking Cor- poration. During my conversations with Bachmann I repeated three times the message from Secretary Morgenthau, and made it definitely clear to him that this was an official message which I had been asked to communicate to him. Bachmann pressed me for my personal opinion. I told him that he had been quite wrong in undertaking operations on our friendly market without giving us an indication of of what he had in mind and without a previous basis understand- ing and possible exchange of views. I mentioned that after the alignment of last autumn his Government had been the most insistent for a definite return to the gold standard, and that in fixing a buying and selling price for gold his Government had taken somewhat of an initiative. I said that I believed they were working definitely against the idea of preserving the gold standard if they as a olub member, took steps which could be interpreted as meaning that Regraded Uclassified 7 - 3 - that faith on their part in the future of gold wad lacking. The Federal Reserve's official statement, I mentioned, shows the decline of earmarked gold deposits held by central banks with us, and the already nervous situation would be aggravated if observers in Europe and the United States should learn that a club bank is heavily disposing of gold. I also reminded him that the program which he is following since May means that the sterilization of Swiss gold is being financed by the United States Treasury. The answer made by Bachmann to this was that according to their figures the amount of gold per capita of population only in the United States was/286 Swies france, whereas the amount per capita in Switzerland was 493 Swiss francs. Officials told me at Basel - and they knew nothing of my errand with Bachmann - that Bachmann had last week through seven separate channels been endeavoring to dispose of gold. No one doubts that the Swiss central bank, as well as private banks, is nervous over the future gold price. During the forenoon on Monday I informed Governor Franck of the National Bank of Belgium of the message which I had delivered to Bachmann. Franck said that 80 far his Bank had not been asked to take gold from Switzerland, 80 he had no ground for protest to Bachmann along the line Regraded Uclassif 8 - 4 - line we took. The Netherlands Bank President, Trip, was not in Basel, 80 I talked with Dejong his substitute. Dejong is the official of the Netherlands Bank who actually handles dealings in exchange. I was informed by Dejong that his Bank had taken only about ten million dollars in gold from the Swiss National Bank when the latter had indicated that dollars were what it needed. END SECTIONS SIX TO ELEVEN, INCLUSIVE. BULLITT. EA:LWW Regraded Uclassified 9 PARAPHRASE OF SECTIONS TWELVE TO TWENTY-SIX OF telegram No. 788 of June 15, 1937, from paris. In my disoussi on with Dejong I spoke very frankly regarding the Swiss situation. I intimated that there had been no pressing need for dollars on the part of the Swise, con- sidering that they had ample resources in the United States. Dejong promised that he would give Trip a complete picture of the matter. I should add that when Bachmann was explaining to me his policy of granting credite to Czeohoslovakia and Italy he said that these transactions involved having dollars. The loans themselves were in Swise france, but dollars were needed by both borrowers and he preferred to provide the dollars rather than let the borrowers dump on capital markets large amounts of Swies francs. I checked up on the dates of the credits to Italy and Czechoslovakia, and I am convinced that such dollars as Bachmann had needed for this purpose had already been provided before the recent important conversion took place of gold into dollars left his(?) Federal Reserve Bank of New York. Shortly before the meeting on Sunday, Schaoht arrived by plane. He went back to Berlin by air immediately after the meeting on Monday morning 80 as to be present at the dinner given for Chinese Minister of Finance Kung. I had no private conversation with him, merely exchanging greet- ings. Schacht did not have much to say to anyone at Basel this time. I had a talk with Hechler, his assistant, who told Regraded Uclassified 10 - 2 - told me that 88 to the German domestic situation there was nothing new but that recent developments in Soviet Russia naturally were of much concern to the German people. He told me that the reports had been entirely premature which were to the effect ERIE that Schacht will come to Paris again toward the end of the month to sign a Franco-German commercial treaty. Prior to the sailing of Paul van Zeeland for the United States his brother Marcel, who is still in the BIS, asked that Jacobsson prepare B. memorandum on the gold situation for the Prime Minister. A fourteen-page memorandum was prepared by Jacobsson which Marcel gave to Paul; Jacobsson permitted me to read this memorandum. After Jacobsson finishes revising it, it will be circulated confidentially by Niemeyer to member central bank governors. The promise was made that I should confidentially receive a copy. Jacobeson alone takes responsibility for the document, which gives arguments in favor of first maintaining gold at its IF esent price, second controlling the production of gold, and third, lowering the price of gold. The third alterna- tive 18 definitely favored in the memorandum. The argu- ments advanced are that the price for gold established during the crisis should be considered only an emergency step, and that now as prosperity returns the various fac- tore should be studied and a revision downward be made in the price if the balance of evidence weighe in favor of lowering the price. It would be envisaged that the original parties to the tripartite agreement and other important Regraded Uclassified 11 - 3 - monetary states make an announcement of reduction simultaneously. Marcel van Zeeland himself, from what I heard at Basel, 16 not in favor of changing the price for gold. He thinks there are numerous steps which could be taken toward alleviating the situation, suoh as increasing the cash requirements of commercial banks and increasing the coverage requirements of central banks. It was also Quesnay's opinion that before taking such a drastic step 8.8 lowering the gold price or controlling production various measures should be tried out. Quesnay believed that the rise in prices would eventually narrow the profit margin between the cost of production and the market price of gold to such an extent that production would level off or might even start to fall off. We should in the meantime work for a better distribution of gold stocks. Reference was made by Quesnay to the plan which he attributed to British origin of the United States and possibly Great Britain making available by loan through the BIS to France and other needy countries gold which now has to be sterilized by the United States and Great Britain. I questioned Quesnay as to whether such a suggestion was being actively presented by anyone just now, and he said that it was not. I was told by President Beyen of the BIS that in the past the best opinion of the world had almost invariably been wrong on gold. He did not think we should at the present time hasten to any decision that we have too much Regraded Uclassified 12 4 gold on hand. In his mind it would not be feasible to have international control of production. If our situation 18 just artificial, he said, it would only be made more 80 by resort to production control. He insisted that there is still an acute situation arising from the gold scare. He told me that with the exception of the Netherlands Na- tional Bank, all of the small central bank clients of the BIS had been through the BIS seeking dollars. I mentioned that I understood gold had been shipped to the United States by the BIS. These had been arbitrary transactions, he said. Beyen could not indicate to me which countries had been selling gold against dollars through the BIS. How- ever, I learned from within the Bank, in strictest con- fidence, that the largest seller had been the Central Bank of Finland and that sales had also been made by the Reichsbank. [Note: I learned this morning at the Bank of France that gold had been sold against dollars by the Reichsbank to the Bank of France yesterday.] Constant study of the gold situation is favored by Beyen, but he counsels against haste in decision. During one of the conversations I had with Dejong he remarked that while dollars had been extensively bought by the Netherlands Bank, which usually were quickly con- verted into gold, recently they had held some dollars without Regraded Uclassified 13 - 5 - without converting them into gold. A week ago when I waa in Amsterdam, Termsulen, a private banker, complained to me that Dutch hoarders of gold had to send their gold to London for sale or release it on the (?) market at Amsterdam, since Trip did not feel obliged to absorb gold directly but preferred to work into gold through the dollar. I had a talk with Governor Rooth of the Swedish Rike- bank. He said that he could 860 no need for Sweden taking any immediate monetary action. Should there be an important rise in American and world prices before autumn, Sweden would then have to take up the question of upward revalua- tion of its crown, but before autumn no action will be taken. By that time Rooth hopes that he will know whether any action is to be taken by the Americans and the British. He expressed the sincere hope that independent action upon the gold price will not be taken by anyone. Important amounts of dollars and sterling are constantly carried by Governor Rooth. Governor Rooth told me that Governor Ryti of the Bank of Finland had said that for another year and a half Finland could continue without upward revaluation of its currency. Under present tendencies, Rooth said, be did not believe Sweden could go that long. When either Sweden or Finland acts, he thinks simultaneous action will be taken by the other country. He emphasized that he believes it 16 Regraded Uclassified 14 - 6 - 18 more important to maintain permanent the international exchange relation between ourrencies than the gold price. From his conversations with Governor Franck Rooth gained the impression that Franok was trying to purchase as little gold as he possibly could. At the time I had a direct conversation with Governor Franck, he asked whether I had seen fit to comminicate to our Secretary of the Treasury his views upon gold produc- tion control, and whether any reaction thereto had come back to me. Franck remarked upon the diversity of opinion among governors of central banks and staff members of the BIS on the question of gold. I had lunch today in Paris with Yangita, the Bank of Japan representative at the BIS. He was en route to Lendon from Basel. Tangita told me that France and Japan were having similar financial experiences. The main diff- erence in their problems W&B that in France it was the workers who are demanding excessive expenditures by the Government, and in Japan it was the Army. Lowering the gold price 18 favored by Yangita provided simultaneous action is taken by all important nations. This morning at the Bank of France I told Cariguel of the message which I had delivered to Bachmann from Secretary Morgenthau. I Regraded Uclassified 15 - 7 - I had several talks with Governor Norman. He told me in the first conversation that 8.8 yet be had not found occasion to discuss the gold problem with the new Chanceller of the Exchequer Simon, BO that it would be his purely personal views he expressed, and not accepted British policy. He told me that he was more worried than ever over the gold question. He does not Bee that there will be an early let-up in the flow of gold towards the United States and to the London market. He had made attempts to pass on some gold to central banks which needed it, and $50 could not be got rid of. Most all central banks, he said, are passing on gold, and as a result the two markets which are equipped and feel obliged to take it must face the problem of absorbing gold in large amounts. It is his belief that the estimates in the press 8.8 to the pro- portion of gold that has come out of hoarding to date have been exaggerated. In London and European centers, he said, there is still a large quantity to be released, and of the total amount of gold which India has absorbed during the past 35 years, only one-third has come back out. Norman told me that we should be very cautious about accepting arguments which certain financial journals and writers have put forward, in London particularly, against changing the price of gold, since a direct interest in gold mining 18 held by these journals and individuals. Governor Regraded Uclassified 16 - 8 - Governor Norman could not see anything further that the American and British could do in the way of making statements to calm the present uneasiness over the price of gold. of course, he said, the situation would be quisted if the United States and Great Britain would make & joint statement that they would guarantee to accept during the next five years at the prices now obtained all gold that may be offered to them, but he, as Governor of the Bank of England, certainly had no appetite for much more gold, particularly at the price now prevailing. Without any suggestion on my part he said that some people were condemning Bachmann for disposing of his gold where he could get rid of it. Norman said that if anyone felt nervous about any gold they had, it was much better to permit him to go ahead and get rid of it rather than try to keep him from doing that. He expressed the opinion that there must be a. limit to the extent to which our country will be willing, at the present price, to absorb gold. He made favorable remarks about the degree to which the American and British Stabilization Funds have cooperated during this difficult period in their day to day opera- tions. He regarded as particularly valuable the exchange of information on public statements. He feels at the same time that cooperative study of longer term problems is needed. Regraded Uclassified 17 - 9 - I made an incidental remark to Norman on the importance of the influence on American governmental opinion, as well as public, that might result from our efforts to achieve a trade treaty with the British. He said that at the present time he did not think there was the slightest chance that a. treaty could be obtained. Efforts to control production of gold are opposed by Norman. It is hie belief that a threat in the direction of demonetization of gold is already developing through the big movement of gold to the United States. He thinke that the tendency toward demonetization would be increased rather than lessened by artificial steps to control gold. The world economic system, in his opinion, is 80 out of balance that even 1f the United States should itself lend B. half billion dollars gold to each of a dozen needy central banks, it would not help importantly to effectively die- tribute gold. The metal would be so distrusted by some that they would sell it immediately. Such an unstable situation prevails in other countries that they could not hold the gold and it would move back towards our country. I made mention to Norman of the criticism in the press of the extent to which a discount had developed on the price of gold in London. He insisted that such comment was entirely foolish. There would certainly be no move- sent out of London if there were discount. He said that it Regraded Uclassified 18 - 10 - it would not be fair to expect his bank to compete with arbitrageurs to the extent of reducing the discount below a figure which the arbitrageurs might consider as rep- resentative of the profit margin which in the circumstances could be expected by them. When the arbitrageurs did not want to take the gold, he was willing that the Bank of England should take it, but he did not favor competing with them for it. I also had a conversation with Norman's assistant, Cobbold. He talked about this point, and particularly condemned Einzig of the LONDON FINANCIAL NEWS 8.8 being very unfair and unmindful of the fact that at one time a discount of more than one shilling existed since both our currencies have been depreciated without attracting any comment critical of the management of the British Stabilization Fund. I had a conversation with Sir Edward Cook, who is Governor of the Bank of Egypt. He was at Basel as a visi- tor. July 12 had been set a6 the date for the next meet- ing of the BIS. END OF MESSAGE. BULLITT. EA:LWW Regraded Uclassifie CA Gray PARIS 19 Dated June 15, 1937 RECD 9:50 Dame Secretary of State Washington. 787, June 15, 11 palls VRGE COCHRAN This afternoon the Government laid an Emergency bill before the Chamber which reads in translation as follows: "Sole article. The Government is authorized up to July 31, 1937, to take by decrees authorized by the Council of Ministers the measures necessary for the reconstrrction of public finances an well as the protection of savings of the currency and of public credit. These decrees will be submitted for the ratification of the Chambers within the three months following the prom- ulgation of the present law or in any Case immediately following the first meeting of the extraordinary session of 1937." LE TEMPS of this afterioon from which the above text is taken published a communique issued by the Government denying that it had planned to demand authorization to borrow 10,000,000,000 francs from the Bank of France; furth- ermore denying that the Government intended to impose new taxes n such products as petrol, sugar, coffee, and chicory. This newspaper also confirms the rumor of this morning that Baudowin and Rist had resigned from the Exchange Fund Committee BullIpt S.S EMB Regraded Uclassified 20 June 15, 1937 10 a.m. Present: Ambassador Potocki, of Poland Mr. Wankowicz, Counselor Mr. Sokoloweki Ambassador: We just came to see you to introduce Mr. Sokolowski, who 1e here for a short visit and he has had very successful talks with the State Department, pre- liminary talks, for a possible commercial agreement be- tween Poland and the United States, and he's just leaving today and he's sailing on Saturday, and he will express for himself how satisfied he 1s with his visit to Washington and his meetings with Secretary Hull and others. Mr. Sokolowski: I should like to say there was also one of the Treasury men, Mr. Johnson, because we are very interested in the methods of application of duties on im- ported goods and then to certain additional duties. Those are rather complicated, which have been very carefully studied by us because it 18, I think, in a very large part, the working of the agreement. So we have thought that perhaps it would be good that we should have an official here and to have here some of our representatives of Chamber of Commerce, so that it may work easier and smoothly. HM,Jr: It would be most acceptable. Mr. Sokolowski: I think it would be very practical, because in our country there 18 certain enyness about the legislation. In Europe we have not such. We have other metnode, and those regulations might represent some diffi- culties. Say here he will pay $10.00 and then it's $15.00 or $12.00, the duties, 80 it 18 important to have here such an understanding BO the thing may work out 80 far as it can smoothly. HLl,Jr: I am not familiar with the details of the trade treaty, but I take 1t we are talking about where Customs come in on it. Is it Mr. Johnson of Customs? Mr. Wankowicz: Yes. Regraded Uclassified 21 -2- HM,Jr: of course, we will do everything we can to help make the agreement work successfully. Ambassador: Thank you very much. HM,Jr: I know when I was in Farm Credit, four years ago, I started in with Polish r.ye and we have had Polish rye ever since, one way or the other. Mr. Wankowicz: I had the pleasure to talk with you then. HM,Jr: HM, So whatever we can do to make the agreement work well, we will be most pleased to do BO. Ambassador: Thank you very much. HM,Jr: That has not been ratified as yet? Ambassador: No. No. It was only preliminary talk and they were every day. There were sort of graphs made. Mr. Sokolowski is leaving for Warsaw and he 1s very pleased of having the meeting here and having a broader view of the situation. He's coming back and this 1s his first visit to the States. HM,Jr: Have you had a chance to travel? Mr. Sokolowski: No. I have been here only about ten days 80 we have had much to do. We have twice a day sessions. HM,Jr: All I can say is when the agreement is accom- plished, we will try not to make it difficult. Ambassador: Thank you very much. HM,Jr: We will give it the friendliest interpretation possible. Ambassador: If I may tell you, we have had long talks in New York on our private debts and Mr. Wankowicz, if you ould allow him, might explain in few words how matters stand Just now. HM,Jr: If you please. Mr. Wankowicz: I should not take too much time. I say Regraded Uclassified 22 -3- only that you remember, Mr. Secretary, I came here last year when I told you that we were forced to stop our trans- fer for many reasons which were out of our power. We were very sorry. And we went and we started, B. few weeks later, to talk with our agents, which was quite successful, and we finished our talks in February, the 21st, this year, and we published notice and we have now, for one year and a half, provisional arrangemet in which we propose to look for a 60- lution of some percentage in cash or funding bonds for this amount or 41% new loan, Anyhow we had this arrangement for one year and a half, and even now I go to Poland and we in- tend to work further and I hope we accomplish the new com- mission and we start just to talk further about something definitive. HM,Jr: Who do you talk to in New York? Mr. Wankowicz: We talk to the fiscal agent of our loans, Mr. Clark and Mr. White, very fine, both gentlemen, and they know very well the job that we have and we have very nice re- lationship. And of course some day we will finish our ar- rangements. But anyhow I am very pleased to tell you that today we have in spite of settlement of the thing, because even all our coupons were paid then -- you will excuse me if I strike this point, but we are quite proud, Two loans were not defaulted when we signed. Now we hope that this year we will go as smooth as last year and maybe we will do something which will be permanent, which I should like very much. Ambassador: I Just came back from Poland and I saw economic conditions were much improved. Mr. Kwistkowski, who is Finance Minister of Poland, advised me he is trying to arrange settlement of possibly all these debts which are due, private and public 83 well, and I think in due time If conditions still improve we will be able to come to a final agreement. HM,Jr: What happened to Mr. Hitler's speech on Saturday? Ambassador: I did not see it. HM,Jr: He did not make 1t, did he? All our papers were full of it, Ambassador: well, I did not seo it at all. Regraded Uclassified 23 -4- Mr. Wankowicz: No. No, I think that was postponed. HM,Jr: That's much less excitement. Ambassador: There 1s always the Danzig question which 1s difficult to handle on account of our situation and on account of the League of Nations which is involved in that matter because of the great Nazi population on the Danzig, 80 it has to be handled very carefully, but I don't think on the whole there is any reason for any war there; surely not in Europe. HM,Jr: You don't think so? Ambassador: No, I don't think SO. Certainly big arma- ments going on, but I don't see any war now for quite a long time. HM,Jr: And the Spanish situation? Ambassador: It's sort of localized. Germany at the same time 18 very careful not to provoke world war now be- cause she knows that that would not help her certainly. She 1s in a bad economic situation and she lacks a lot of things and I don't think she can go to war for a long time. HM,Jr: But you come back feeling that war is not 1m- minent? Ambassador: No; certainly not. HM,Jr: Let's hope BO. Ambassador: Very kind of you, Mr. Secretary, that you receive us, HM,Jr: Thank you for coming in. 000-000 Regraded Uclassified 24 June 15, 1937 10:30 a.m. Present: Ambassador Troyanovaky Mr. Taylor Dr. Feis Ambassador: I have answer from Moscow about our con- versetions. They wanted to know whether it talks about special agreement or only about information. My Govern- ment wanted to know whether now it's a question of special agreement between our country and your country about the gold market or only about information about production of gold. HH,Jr: At this stage I only had in mind the question of exchange of information. Ambassador: Uh-huh. HM,Jr: Possibly leading up to some agreement later on. Ambassador: The opinion of Moscow is that the most important side of this gold problem 16 gold market, not BO much production. In our country we can regulate rigidly all exportation and we are ready to talk about this side of this problem -- I mean about gold market and our exportation of gold and anything connected with it, but they think that gold production 16 completely a domestic problem in our sys- tem of relations. HM,Jr: Now let me see if I understand this. Your Government feel that the question of marketing of gold in the world's market Ambassador: Yes. HM,Jr: PUT is a matter which you are ready to discuss. Ambassador: Yes. HM,Jr: But the question of production of gold 18 an an internal matter? Ambassador: Yes. Regraded Uclassified 25 -2- HM,Jr: Is that what I am to understand? Ambassador: Yes, because we have already many agree- ments similar, not completely the same, about different markets -- sugar and timber -- when the question of our ex- portation is certain, but our internal domestic production 18 completely outside of this. HM,Jr: Well, I would say that that's something that I would like to think over. Ambassador: All right. HM,Jr: And talk about. Ambassador: Uh-hun. HM,Jr; With other people of the Government, Ambaesador: Uh-huh. HM,Jr: I might say that the message you bring is an encouraging one. Ambassador: I think 80. HM,Jr: Yes, I think it 18 an encouraging one. Ambassador: And we are ready to sell to your Government if you want the dollars. We are interested in the price of gold -- the better the price, the higher the price, the better for us, of course, and we are ready to discuss any possible agreement in this way, in this line, but we are ready to sell to your Government the gold for dollars even if you don't want to have gold exported from our country. We are ready to dis- cuss the possibility of deposit of gold in some place without exportation. Any agreement. HM,Jr: Let's see if I understand. What you are Bug- gesting is that you are ready to discuss the question of selling the gold to us direct for dollars? Ambassador: Yes. And we are ready to discuss the pos- sibility not to export gold, but to make deposit of gold in certain place, in our bank, in your name, and to get the dollars Regraded Uclassified 26 -3- if you want, of course, without sending the gold to the world market. HM,Jr: I see. In other words, earmark the gold in Russia? Ambassador: Yes, in Russia. We can put it in your name or any agreement that you want in order to regulate the movement of the gold. HM,Jr: The movement of the gold. Anything you want to ask, Dr. Feis? Dr. Feis: No, sir, Mr. Taylor: I suppose that would apply to some third country. It would be a transfer of earmarks to some place else. This question of earmark either in Russia itself or in, let's say, Switzerland. HM,Jr: You mean Russian gold? Mr. Taylor: Yes. I did not mean that you meant to confine that Ambassador: It 16 not necessary. I understand you can transfer it to any place you want. HM,Jr: Would that also include bringing the Russian gold -- depositing it here and earmarking it here? Ambessador: Yes; yes; of course. HM,Jr: Bringing it here, also? Ambassador: Uh-huh. Dr. Feis: I have one question. Did I understand the Ambassador to say his Government regards the question of gold production -- presumably of gold stocks -- as a domestic question but 1s disposed to discuss the question of movement to the world market? Ambassador: Yes. Regraded Uclassified 27 Dr. Fels: Is that only in connection with an agree- ment or is the Government disposed to discuss movement of Russian gold, of Soviet gold, into the world market now? HM,Jr: I don't get it. Do you mind doing it again? Dr. Feis: There 1s the matter of exchange of informa- tion, and then the matter of possible agreement regarding 2014. Well, short of an agreement, thinking only of ex- change of information, if I understand the Ambassador's reply correctly, his Government does not feel disposed to exchange information regarding gold production or stocks. HM,Jr: That's all right. Dr. Feis: Is it ready to discuss movement of gold on to the world market? Ambassador: Yes. I think we are ready to discuss the question of information and even the question of an agreement. Dr. Feis: I did not know whether you were prepared to discuss exchange of information. Ambessador: Of course; I think BO. HM,Jr: Information on gold leaving Russia. In other words, the Russian Government 1a ready to discuss anything that has to do with golà once it leaves your borders, but what gold stocks you have inside of Russia 1e an internal matter. Ambasssador: The same as other agreements we have on sugar, timber mainly. We are ready to discuss this side of the movement, outside of the borders. I think it is most important for you. HM,Jr: Yes. I think your message 1s very encouraging, but you have moved B. little bit too quickly for me. Ambassador: (Laughing.) HM,Jr: So I am not ready to give you en answer, because I did not know how you would answer us. Ambassador: All right. It's a serious problem and Regraded Uclassified 28 -5- cannot be settled in two minutes. HM,Jr: It's very serious, Ambassador: If you are ready to have any agreement, I want to have some suggestions, in general lines; maybe not in detail -- but 1f you can work out some foundation, main lines of the suggestions of the agreement for our dis- cussion, if you want to get an agreement. HK,Jr: You might be thinking this over, If we dis- cuesed gold, we might also want to include silver, Ambassador: I don't know; probably yes. My personal opinion, it is probably yes. HM,Jr: I Am Just raising it now. If we took gold, we might want to include silver. Ambassador: Yes. Why not? Yes, All right. HM,Jr: Because, take in the two metals, we might Just as well discuss the two, I think. Ambassador: What do you think about the French situation? HM,Jr: The information this morning that came over the news ticker 18 that they are going to propose to their Parlis- ment a new tax plan. Ambassador: But they will not abolish the agreement with you? HM,Jr: We have received no such information. Their Minister of Commerce was supposed to have made some statement yesterday, but I don't think that their Minister of Commerce would be authorized to speak. But we have no information AB to anything, and the news ticker carry the story that they have a new tax program which they will put up to Parliament to raise enough money to meet their deficit, but it's A situs- tion that has to be watched hourly. Ambassador: All right. HM,Jr: Thank you very much, Mr. Ambassador. 000-000 Regraded Uclassified - OFFICIAL COMMUNICATIONS TO 29 THE SECRETARY OF STATE WASHINGTON, B.C. DEPARTMENT OF STATE WASHINGTON June 15, 1937. My dear Mr. Secretary: I enclose for your information a copy of paraphrase of strictly confidential telegram No. 785, 786, 787 (in three sections) of June 14, 1937, from the American Embassy, paris. Sincerely yours, Enclosure: No. 785, 786, 787 from Paris, June 14, 1937. The Honorable Henry Morgenthau, Jr., Secretary of the Treasury. Regraded Uclassified Department of State EA REAL DIVISION ENCLOSURE TO Letter drafted ADDRESSED TO TREASURY. el 1-100 Regraded Uclassified 30 PARAPHRASE OF TELEGRAM RECEIVED FROM: American Embassy, Paris, France DATE: June 14, 1937, 11 p.m. NO.: 785, 786, 787, RUSH. STRICTLY CONFIDENTIAL FOR THE SECRETARY. I refer to my telegram of June 14, No. 780. I was informed by Blum this evening that unanimous decision was reached by the Cabinet this afternoon to demand full powers to regulate all financial matters by decree laws tomorrow in the Chamber of Deputies, and later in the week in the Senate. Blum told me that when he had left me at luncheon he had not known how his Cabinet would react and there- fore had not known what to say to me. This afternoon when he made his proposal to the Cabinet, among certain Radical Socialist Ministers there was a sentiment to refuse to go along with him on this measure. This after- noon he had nearly fallen. Blum had suggested after a discussion that the Rad- ical Socialist Ministers Chautempe, Daladier and Delbos should have a conference and should meet him, Auriol, and Paul Faure for a definite decision on the matter. Follow- ing these conferences decision was reached by the Cabinet for unanimous support of Blum in his demand for full powers. Blum Regraded Uclassified 31 - 3 - Blum was confident that full powers would be given to him by the Chamber of Deputies, but abstentions of Rad- ical Socialist deputies would reduce his majority. It was his hope that at a night session tomorrow, Tuesday, full powers would be voted him by the Chamber of Deputies, and by Thursday or Friday of this week he believed the bill would reach the Senate. It 18 highly probable, he said, that full powers would not be voted by the Senate, and that his Government would no longer be able to stand. No one except the intimate circle of the Cabinet, Blum asserted, knows about the decision taken, and he asked me to keep secret except from my Government what he had told me. He went to see Jean Neney, President of the Senate, to tell him about the decision after I left him this evening. I questioned the Prime Minister as to what use he would make of the full powers should they be given to him. His reply was that he would publish two decrees at once. First the franc would be stabilized and the announce- ment made that no matter what the cost it would be maintained at a fixed rate. I asked whether that meant he would approach the British and American Governments with B. view to Regraded Uclassified 32 - 3 - to obtaining stabilization agreements; he had no inten- tion of doing this, he said. His second decree would forbid the export of capital from France. It was hie feeling that this was not con- trary to the provisions of the Tripartite Agreement. He could see no other way of preventing the flight of capital from France, and it was absolutely essential to stop it. I asked the Prime Minister what else he had planned to do. Auriol, he said, would propose an increase in railroad rates, postoffice rates, increase in tobacco monopoly rates, and many minor tax increases. The only other person present at dinner was Madame Blum who said that she believed the only motto for the Prime Minister today was "l'audace, l'audace, toujoure l'audaoe". Blum concurred in this. During the evening Blum was entirely at ease and happy on the whole. My impression W&B that he was composed due to his expectation that the Senate would reject his proposals and soon he would be rid of the responsibility of Government, rather than due to & hope that the full powers for which he will ask would be granted. END OF MESSAGE. BULLITT. EA:LWW Regraded Uclassified 33 June 15, 1937. 11:20 a.m. H.M.Jr: Hello Operator: Mr. Branch. H.M.Jrb Hello Harlee Branch: Hello Henry, how are you? H.M.Jr: I'm all right for an old man. B: Well you're not getting old are you? H.M.Jr: Very fast. B: Well I hope you'll do something to block progress in that direction. H.M.Jr: Yes. B: Henry. H.M.Jr: Yes. B: I've got a matter here and one that Mr. Farley and all of us are interested in. Ab - we've got a young lady that we're interested in who is in your service over there. H.M.Jr: Yes. B: A Miss Evans. She's with your Accounts and Deposits Service. H.M.Jr: Yes. B: And you're letting a number of people out because your work has fallen off, as is the case in other government departments. We hope that if there is anything you can do to retain her that you'll do it. E.M.Jr: Will you mind talking to Danny Bell; I don't inter- fere in that at all. B: Has Bell - has Bell got this? Regraded Uclassified 34 - 2 - H.M.Jr: Yes. B: There's a man named Bartelt seems to be the head of it but I didn't know him at all. H.M.Jr: Well Bell's the boy. B: Well I'll be glad to do that and I thank you for referring me to him. H.M.Jr: I - - I - I mean that's happening every day and I'm not B: I know it is. H.M.Jr: and I'm not interfering. B: I know. Well thank you, Henry. H.M.Jr: Not at all. B: Thank you. Regraded Uclassified 35 June 15, 1937. 11:22 a.m. H.N.Jr: Hello Operator: Secretary Woodring is in Kansas for about ten days. General Craig is acting. H.W.Jr: Well let me talk to Craig. 0: All right. (Short pause) H.M.Jr: Hello 0: General Craig. Go ahead. H.M.Jr: Hello General? Craig: General Craig speaking. Good morning Mr. Secretary. H.M.Jr: How are you? C: Fine, sir. H.N.Jr: General, the Army has asked me to see President Quezon at 11:30. C: Who - who asked you to sir? H.M.Jr: Ah - just a minute. General Burnett. C: Oh yes, he's the intra-bureau man. H.M.Jr: Ah - do you know anything about this - ah- ah cocoanut oil money? C: I'm really - I'm really, yes sir, I know in general what it is and it's - the Courts have said it shall be turned back - excise taxes to the Philippinos. H.M.Jr: Well has the Army taken any position officially in advising the President on this? C: No sir. No sir. Regraded Uclassified 36 2 - B.W.Jr: Well, of course, I'm in an embarrassing position. I don't know just what - ah - President Quezon is going to ask and I understand that General Burnett did not wish to accompany him. C: Well General - they were here, Mr. Secretary, and he asked me about it and I told him that that was a matter which - ah - which was one to arrange between his government and probably the State or the Treasury Department or both. It is something that we haven't a thing to do with and he wants the money, of course, and I told him that it was my opinion that the matter was one of arrangement between his government and ours. 1.8.Jr: Well did you indicate to him, in any way, as to whether the United States Government should or should not pay it to him? C: None the slightest. H.W.Jr: I see. = No sir. H.M.Jr: Well that helps. C: None the slightest. H.N.Jr: Ah - C: I just merely indicated to him that the matter was one which - with which the War Department had nothing to do and it might not even be asked its opinion. B.M.Jr: I see. Well - ah - thank you very much. C: Yes sir, I - I intimated to him that it might be the State Department. It is a matter of something that is not military at all. H.M.Jr: Ah-ha. C: And might be the State Department but it might be also the Treasury or both. H.M.Jr: Well I have a representative of the State De- partment here and he's going to be here at 11:30 with me, Regraded Uclassified 37 - 3 - C: Yes sir, well Quezon is on the way over to you now. H.M.Jr: Thank you very much. C: Yes sir. H.M.Jr: Goodbye. C: Goodbye. Regraded Uclassified 38 June 15, 1937. 11:23 a.m. H.M.Jri Hello. liull: Henry, what's going on? H.M.Jrs Well I've had Herbert Feis over here most of the morning H: Yes. H.W.Jr: and we just have finished a very exciting conversation with the President of the Philippines. 11: Oh I see. H.M.Jr: And he's terribly excited because we're holding up his cocoanut money H: Ah-ha. H.M.Jr: and he claims that it isn't fair; that it was objections on the part of the Treasury which is holding it up. H: Oh I see. I hadn't heard anything about it. H.M.Jr: Well I didn't either until he walked in here. H: Yes, H.M.Jr: Now I'm glad Feis was here and he could tell you because I told Mr. Quezon that the State De- partment and the Treasury would try and make up its mind in a day or two and give him whatever the opinion of the United States government was H: Ah-ha. H.M.Jr: and that we, the Treasury, was simply a depository for his money. B: Yes. H.M.Jr: But I think it is fair to tell him and give him all the legal reasons why the thing is held up. I think it - it certainly puts me personally on the spot. Regraded Uclassified 39 a I I H: I see - I see. I didn't know anything about It. H.M.Jr: Well I didn't either and Herbert Feis is here and he says its all news to him. H: Yes. H.M.Jr: But I - I do think - ah - I'm ready to cooperate and I want to cooperate but I think we've got to give the man an answer. B: Yes - 'yes, of course. H.M.Jr: I mean we've got 55 million dollars of that cocoanut money on deposit. H: Yes, well that - ah H.M.Jr: And I called up General Craig because Woodring was away and the Army takes the attitude this is none of their business. H: That is the business of the H.M.Jr: The State and Treasury. H: The State and the - well the Treasury is just a depository, isn't it? H.M.Jr: That's all. H: Well I didn't - I don't know - I'll - I'll see whether its our business - whatever function we've got we'll function. H.M.Jr: You mean it isn't up to us to think of reasons why we shouldn't tell him. R: Yes, I'll look into it. H.M.Jr: I'd appreciate it and then we had a very interesting talk with a Russian Ambassador and Herbert Feis sat in on that and he sat in on our talks on gold. H: Yes. H.M.Jr: So I'm glad you let him come-over and he'll give it to you. Regraded Uclassified 40 - 3 - H: Well thank you. H.M.Jr: It's very helpful to have him here. H: Well he's - he's a capable fellow. H.M.Jr: He's all right. H: Well thank you, Henry. H.M.Jr: Thank you. Regraded Uclassified 41 June 15, 1937 11:30 a. m. Present: President Quezon Mr. Taylor Dr. Feis Mr. Opper Mr. Quezon: Good morning, Mr. Secretary HM,Jr: Well, how was your stay abroad? Mr. Quezon: Very nice. It was quiet. I think the most "saintly" visit that I ever made to Europe WRS this time! HM,Jr: Where were you in Europe that It was quiet? Mr. Quezon: I was Just in Paris. If I may, I would like to speak to you of the purpose of this visit. As you know, the Courts decided that that Act which provided the return to the Philippine Government of the excise tax on oil 1s conetitutional. And there is money now in the Treasury Department and I should like to have that money in the Philippine Treasury where, in my opin- 1on, it belongs. I was told by Mr. Sayre that there seems to be some difficulty offered in the Treasury Department and I Just would like to know what, and why? HM,Jr: No. Our position 18 this. Before you sailed, you wrote me a letter on April 26th, and pending your return I have been really waiting to hear from you. Now, the posi- tion that you take today, I take it, 18 you would like to have the money. Mr. Quezon: Yes, sir. I was told by some officials of the State Department that the thought 1s in the mind of you people that this money has been granted to the Philip- pines on one condition, namely, that it should not be spent for the benefit of the cocoanut planters, eitner directly or indirectly, and that they are afraid that if this money Regraded Uclassified 42 -2- wee turned over to the Philippine Government that we would violate, that we might violate, that condition imposed by Jongress, and while 1f we had done that at the time when the payment of this money to the Philippine Government could have boon stopped by Congress enacting B. law prohibiting the full return to the Government of that excise tax, now that the money has been accumulated we would be pleased to have that $50,000,000. I E&E told that 18 the reason there WAB some doubt in the Treas- any Department and that you were contemplating, before deliver- Ing this money to the Philippine Treasury, submitting the case to Congress again. Jr: No. I don't know Just who gave you this, but my position has been that I have been waiting for your return. Now you save come back, but what I would like to ask is, give me 8 day or two to talk to the State Department and find out what they have in mind, and the thing for us to do 1s to give you An answer from the Government, not from one Department. I talnk, that's why I asked that Dr. Feis be here, BO that we would nute it as easy as possible for you and not say one Department saye this and another Department says this, Mr. Queson: Mr. Secretary, I want to put my cards on the tAble. I can understand that there may be some fear of the responsible officials of this Government that we might spend this money contrary to that restriction imposed by Congress. I want to eay that in the first place there 18 not the slight- est ground for that feeling, because I do not propose to recom- mend to the Legislature, and under our Constitution the Legis- Inture cannot appropriate funds except upon the recommendation of the Chief Executive, and if they do and I vetoed It, it re- guires three-fourths of the vote of the Legislature to over- ride my veto, whereas in ordinary cases two-thirds is enough to override. I do not propose to recommend that that money be spent, lirectly or indirectly, for the benefit of the cocoanut pro- ducers. I want to spend it for the benefit of the Philippine people as a whole, but if I wanted to do it I would not because WE have 60 meny things that require to be done that that money CPF be spent in the interests of the country much more advan- tageously than spending it for the benefit of a particular group, so that there 18 not the slightest fear of that, and I hope my word is good enough to give you that assurance, but If It wasn't, I Am willing to enter into this understanding Regraded Uclassified 43 -3- with you people, although the law -- I want to say in the first place, I want to say that in my opinion this money should 80 to the Philippine Treasury and the Philippine Leg- 1 lature ought to have the right to spend it in any way it pleasued provided it does not spend it in the interest of the cocoanut planters directly or indirectly, but I am will- ing to go further and agree with you that I will submit the plan of how I intend to spend that money to this Government se that the Government may be assured before the Legislature act that we are not spending it, indirectly or directly, for the benefit of those people. I am willing to do that. HM,Jr: Well, frankly, I have not studied it. I had your letter which you were kind enough to write no. Your maney 10 here. I haven't spend It. And I was ewaiting your return. Mr. Quezon; But, Mr. Secretary, there 18 one point I would like to call to your attention. This, to me, 1s of great importance, because it means more than that money. It means the future, the maintenance of the present very friendly attitude of the Filipinos to the Government of the United States. For the last two years there has been & growing fear in the mind of my people that the Congress of the United States is not very friendly, enacting legislation at the behest of private industry that was injurious to the Philippines. So for, this feeling has not affected the mental attitude of my people towards the United States, because they knew that the President has always fought every attempt on the part of some Committee of Congress to enact such kind of legislation. There- fore, their faith 16 in the Government. After we secured from Congress, with the help of the Treas- ary Department -- I am going to be very frank with you, Mr. Secretary because there 1s no use of talking with mental reser- vations; in the first place, I don't know how to do that -- with the help of the Treasury WG secured enactment of law for payment of funds which we lost. Then, later on, Congress refused to appropriate the money and we found that the Treas- ary Department was no longer interested in helping us to get that money. Now, if objection is offered to the payment of this money or If the payment of the money is delayed, my good- ness gracious! our people will think that we are dealing with en enemy Government instead of a friendly Government and I sm Regraded Uclassified 44 beginning to feel that way myself. I am speaking the mind of my people 88 I am speaking my own mind. I am Just be- insing to feel we have no friends in the United States. Lot's quit and let's separate at least as long as we are friends and not separate after we are no longer friends. America has been a friend to the Philippine Islands for thirty-five years, very wonderful work recognized and ack- nowledged by the Philippines and it has created a feeling 2° gratitude. They ought to be interested in preserving that, Even If we part company in the political field, we want to preserve that sentimental attachment. HM,Jr: I think there 18 every wish here Mr. Quezon: We are really thinking you are trying to find every opportunity to klck us about. We are Just human. You created this feeling of gratitude because you were kind and thoughtful and helpful. Well, the minute you began to be the opposite, the human reaction is noticeable. HIL,Jr: Well, as far 8.2 I know, there has been nobody sho has talked to me and certainly I have talked to nobody mo has anything but the kindliest feeling and appreciate what the friendship of the Philippines means to us and we have every desire to keep it and I wouldn't jump to any con- clusions about this cocoanut money until I have the time -- 10's Governmental; it's not Treasury. We are simply a bank. And if the Government will simply make up their mind what they want to do, the money ia here and it ian't for us to put any ules or regulations around this money. It's here to your credit and just as soon as the Government says this Is what we want to do, we will sign a check in five seconds, but ns far RB I know -- you see, you come in today at a quarter of twelve, say, it's june 15th, and the last I had from you was "pril 26th. Now I have simply been waiting for an expression anlyou have been very frank, and if you will give me a reason- able amount of time, I will try to be equally A8 frank and to the point, but this is the first indication that I have had that you were ready for the money. So If you will be Just A little patient and give us a few days to turn about Mr. Quezon: Yes, Mr. Secretary, I "111 be at your dis- DOSH1 any time. HV, Jr: I sssure you there will be no time lost. I will 45 -5- bring it to the President's attention at once and Feis will bring it to the attention of Secretary Hull at once and I will urge them that the Government make up its mind what they want to do. We are simply a bank and the money 18 there. Mr. Quezon: All right, Mr. Secretary. Thank you very much. And as I said, I am willing to cooperate in the sense that the Government of the United States has some suggestions as to how in their opinion this money could be spent to the greatest advantage of the Philippines themselves, I will be very happy to cooperate in that. HM,Jr: Thank you very much. 000-000 Regraded Uclassified 45 MALACAÑAN PALACE MANILA THE AMBASSADOR HOTEL NEW YORK CITY April 16th 1937 My dear Mr. Secretary: Reference is made to rior correspondence on be half of the Government of the Commonwealth of the Philip- pines, the latest letter being addressed to you on December 19, 1936, by the Honorable Quintin Paredes in connection with cocoanut oil tax payments to the Phill ine Treasury under Section 602 $ of the Revenue Act of 1934. I em at the present time contemplating action looking toward the deposit in the name of the Treasury of the Philippine Commonwealth of any such payments with the Secretary of the Treasury of the United States pursuant to the Act of June 11, 1934, 48 Stat. 929 (U.S.C. Title 48, Sec. 1157), and Act 4128 of the Tenth Philippine Legisla- ture approved October 15, 1934. Inasmich as I am going to Europe in a few days and will not return to the United Sta- tes until the end of May I request that any funds that may be due and available for payment to the Philippine Covern- ment pursuant to the above-mentioned Act be held status quo until my return. You may consider this letter to be in lieu of prior correspondence above referred to. Very truly yours, Mann 4m PRESIDENT OF THE PHILIPPINES The Honorable The Secretary of the Treasury (Through the Honorable The Secretary of War Washington, DO) Regraded Uclassified 47 MEMORANDUM OF THE DAY'S ACTIVITIES June 15, 1937 To: Secretary Morgenthau From: Mr. Magill 1. Excise tax extension Senator Harrison succeeded in obtaining & favorable report on the resolution to extend the excise taxes, without amendment except a change in the period of extension from two years to one year. Senator Vandenberg's motion providing for hearings was defeated 6 to 7: a series of amendments by Senator La Follatte to increase the surtax rates and lower the exemptions were defeated on a tie vote7 to 7: and Senator Bulkley's amendment to increase the excise tax on paper-book matches was defeated. At the same meeting the Senate Finance Committee reported favorably H.R.6215, repealing section 148(a) of the Revenue Act providing for publicity of corporate salaries in excess of $15,000; and S.2473 elimi- nating the oath on income tax returns. Senator Harrison hopes to put the excise tax extension through the Senate within a week. 2. Tax investigation I had two long conferences with Senator Harrison and Mr. Doughton regarding the procedure, the second conference being attended by Robert H. Jackson. The two chairmen indicated that their idea was that the committee should have no counsel and that the Treasury should pre- sent its information by means of statements of Treasury officials cog- nisant of the facts. They felt that taxpayers should be invited to ex- plain their cases if they wished, but that witnesses should not be called or subpoenaed. Regraded Uclassified - 2 48 We told them that we were quite sure that this plan differed com- pletely from the President's and that he desired that witnesses be called and the evidence presented in that way. Senator Harrison said that the President had never made any such suggestion in his numerous conferences with them. The two chairmen felt that if the material was presented as they had in mind there was no need for counsel except to advise the Treasury in the organization of the material. To agreed that I should advise the President of their understanding and that we should ask the President to see us in order that the pro- cedure might be fully agreed upon. I had luncheon with Robert Jackson in the Department of Justice and there met the Attorney General. He told me that he could not possibly spare Jackson for a job of this kind, since his work in the Department was too important. The Attorney General suggested that Thurman Arnold would give us all his time and Mr. Jackson said that Arnold would be glad to do BO. I, therefore, arranged for Arnold to come back to the Treasury with me and start to work as chairman of a directing committee consisting of Measrs. Arnold, chairman; Irey. Tarleau, Kent and Mechem. This committee is to prepare statements for you and me; to go over the evidence and prepare statements with respect to each of the various items which will be delivered by various officials in the Bureau, such as Messrs. Helvering, Russell, Shafroth, Irey, etc. In my conversation with the President over the telephone at 3:45 P.M., after I informed him that the Committee did not wish to call witnesses and take testimony as he had planned, he suggested that the Treasury might proceed with ten days of hearings, making the statements in the Regraded Uclassified 49 - 3 - form desired by the Committee, We might then inform the Committee that there were a mimber of other cases with different angles which the Committee should have in order to present a fair picture. Ye might then take a week or two of adjournment and present these other cases. He thought we could probably persuade the Committee to hear witnesses in some cases even though not in all. He felt that we should insist that when witnesses appeared the Treasury must have counsel to cross- question. Regraded Uclassified TREASURY DEPARTMENT 50 INTER OFFICE COMMUNICATION DATE TO Secretary Morgenthau FROM Herman Oliphant Responding to the President's request for the law as to the possibility of the Treasury Department conducting a tax investigation in disregard of the Joint Resolution No. 155, there are, from B legal standpoint, two possibilities as follows: 1. The President, in discharge of his Constitutional duty to recommend to the consideration of the Congress such measures as he could shall judge necessary and expedient, direct the Treasury Department to make whatever investigation he deema necessary to provide himself with the information needed or appropriate for formulating such recom- mendations. He can direct the Treasury Department to hold public hearings and to gather information and suggestions from people general- ly. He would be authorized to implement such an investigation by an Executive Order under Section 257(a) of the Revenue Act of 1926, making were open for inspection such tax returns as required by such investigation, and to use the returns thus opened for inspection in the examination of a witness called in such investigation. The limitation on the President's power thus to make tax returns open for inspection is that he may not permit inspection of returns for arbitrary and trivial pur- poses, but for appropriate official purposes in particular classes of chses when deemed in the public interest. Such investigation BE is Regraded Uclassified 51 or I I outlined above for the limited purposes stated in the President's message to the Congress would constitute such an appropriate official purpose. In such an investigation there would be no nower to summon witnesses or documents. 2. The Commissioner of Internal Revenue could conduct this tax investigation by calling a properly selected list of taxpayers "for the purpose of ascertaining the correctness of any return or for the purpose of making a return where none has been made." He could employ compal them to produce books and papers, and he could examine them in open hearings. He could require the attendance of any employe of è texpayer end any third person having knowledge in the premises. Be would have power to administer oath and could go into the appro- priate Federal district court to enforce his subpoena. Such examination of taxpayers and third persons by the Commissioner have heretofore been conducted in secret, but there is nothing in the law to require this. An investigation so planned and conducted would be subject to certain minor limitations which need not be detailed here since none of them would constitute any insuperable obstacle. Homman Oliphens Regraded Uclassified 52 Regraded Uclassified Secretary Morgenthen Hersan Oliphant Responding to the President's request for the law as to the possibility of the Treasury Department conducting a tax investigation in disregard of the Joint Resolution No. 155, there are, from a legal standpoint, two possibilities as follows: 1. The President, in discharge of his Constitutional duty to recommend to the consideration of the Congress such measures as he docied shall judge necessary and expedient, direct the Treasury Department to make whatever investigation be deems necessary to provide himself with the information needed or appropriate for formulating such recom- mendations. Be can direct the Treasury Department to hold public hearings and to gather information and suggestions from people general- iv. He would be authorised to implement such an investigation by an Executive Order under Section 257(a) of the Revenue Act of 1926, making are open for inspection such tax returns as required by such investigation, and to use the returns thus opened for inspection in the examination of 8. witness called in such investigation. The limitation OIL the President's power thus to make tax returns open for inspection is that be may not permit inspection of returns for arbitrary and trivial par- posss, but for appropriate official purposes in particular classes of cases when deemed in the public interest. Bush investigation as is - 2 - 53 outlined above for the limited purposes stated in the President's message to the Congress would constitute such an appropriate official purpose. In such an investigation there would be no power to summon witnesses or documents. 2. The Commissioner of Internal Revenue could conduct this tax investigation by calling & properly selected list of texpayers "for the purpose of ascertaining the correctness of any return or for the purpose of making a return where none has been made." He could employ compel them to produce books and papers, and be could examine them in open hearings. He could req ire the sitendance of any employe of a taxpayer and any third person having knowledge in the premises. He would have power to administer oath and could go into the appro- priate Federal district court to enforce his subpoens. Such examination of taxpayers and third persons by the Commissi ner have heretofore been conducted in secret, but there is nothing in the lew to require this. An investigation 80 planned and conducted would be subject to certain minor limitations which need not be detailed here since none of them would constitute any insuperable obstacle. HO Typed 6/16/37 Regraded Uclassified 54 June 15, 1937. 11:48 p.m. Operator: Go ahead. Hello H.M.Jr: Hello - Roswell? Magill: I'm up here at the Capitol, Henry, I just got through and I'm talking to the two men. H.M.Jrs Yes. M: I couldn't get Jackson to come up; he wouldn't do it. H.M.Jr: Yes. M: Ah - it's perfectly clear that they were not thinking in terms of having any counsel; what they were thinking in terms of is - was for me to do all the presenting on the part of the Treasury H.M.Jr: Yes. 24: so I went all over that with them and told them that we - ah - I thought we had to have somebody from outside; it was very important to start it off right and so on and they all agreed to that. H.V.Jr: Yes. M: Ah - then I said we ought to have a further conference and I thought you and the big chief ought to be in. H.M.Jr: Yes. i Ah - they said no they didn't want to get him in; they wanted to get their own ideas straight first and they finally met with the idea that I could get Jackson up here at 12:30 H.M.Jr: Yes. M: and go over it with him at that time. H.M.Jrp Yes. ": Now if we're going to sell them the compromise here why that's the time at which you've got to do it. H.M.Jr: Yes. Regraded Uclassified 55 - 2 - u: So I thought I'd go on down from here to Justice and get ahold of Jackson and bring him back. II.M.Jr: Yes, you better phone him you're coming. M: Yes, well I - he's expecting me to come. H.M.Jr: Oh. M: At some such time as this. H.M.Jr: I see. M: Now do you think of anything else we should do? H.M.Jr: Not another thing. M: All right, well I'll get ahold of him and try to get him up here. H.M.Jr: Thank you. %: Goodbye. Regraded Uclassified Mr. Oliphat 6/16'17 "I. visirota vill notify Justice in the Smith case. McGuire Regraded Uclassified approve Serforth d by the President and smyself TREASURY DEPARTMENT -l INTER OFFICE COMMUNICATION 10.15A.M. Janes -937 DATE June 13, 40 TO Secretary Morgenthau FROM Heruan Oliphant Attached hereto is & telegram from the United Stites District Attorney at Los Angeles, transmitted to the Treasury Department by the Department of Justice with the request for our recom endotion in the matter. This telegram is E. 9. Swith's offer to pleed guilty to all counts in the two indictments now vending against him. This offer is nade on condition that\the indictments against the other defendents in this group of tex coses be dismissed. We are advised that E. M. Smith, if permitted to plead guilty 8.8 stated above, will renew his offer to pay the full tax (when de- termined by the appropriate agency-presumably the Board of Tax Ap- peals) together with interest and penalty, and, when he comes before the judge for sentence on his plea of guilty to the criminal charges, will state to the court that he is not trying to escepe his taxes but has made the foregoing offer. I have before me the recommendation of Mr. Shafroth that this offer to plead guilty be accepted, and 8 memorandum from Mr. Irey stating that he has consulted his three men who have worked on the case and joins them in the opinion that this is a good offer and should be accepted. I concur in recommending the acceptance of this offer. It Regraded Jclassified - 2 - constitutes a real victory. Mr. Smith is, of course, at liberty to make any offer to settle his civil liability which he cares to and to state to the judge considering his sentence that he has done so, There is no way we could or should prevent this. The condition that the indictments against the other 23 defendants be dismissed is not unreasonable under the circumstances. In this group, E. M. Smith was 4 wealthy and powerful man dominating it. We will, of course, proceed to collect any taxes which any of these other defendents may owe, and VI will do what we can to see that a vigorous presentation is made to the judge that E. M. Smith be given & substantial sentence on his plea of guilty to the criminal charges. Chaphels Enc. 1 noted men Regraded Uclassified ATTORNEY GENERAL WASHINGTON 280 E CRNEY LOS ANGELES TO ATTORNEY GENERAL ATTENTION MORRIS TAX ON INTERN E DOHERTY COUNSEL FOR E M SMITH ET AL BEING PRESENT AT THE TIME OF BICTATING THIS TELETYPE OFFERS ON BEHALF OF E M SMITH A DEFENDANT IN THE TWO INDICTMENTS NOW PENDING AGAINST HIM AND OTHERS TO PLEAD SAID E M SMITH GUILTY TO ALL COUNTS IN THE TWO SAID INDICTMENTS UPON THE CONDITION THAT I BE AUTHORIZED TO DISMISS ALL COUNTS AGAINST ALL REMAINING DEFENDANTS STOP I RECOMMEND THAT I BE GRANTED THE AUTHORITY TO MAKE SUCH DISMISSALS UPON SUCH PLEA AND UPON EITHER THE SENTENCE OF E n SMITH BY THE COURT OR THE OCCURRENCE OF SUCH OTHER EVENT IN THE PROCEEDINGS AS WILL PRECLUDE THE GRANTING OF A MOTION BY THE DEFENDANT TO SET ASIDE SUCH PLEA OF GUILTY ON THE PART OF E M SMITH STOP THIS OFFER DOES NOT CONTED XXX CONTEMPLATE THE SETTLEMENT OF THE CIVIL TAX LIABILITY OF ANY OF THE DEFENDANTS BUT I FEEL YOU SHOULD KNOW THAT DE- FENDANTS COUNSEL EXPECTS TO MAKE OFFER OF PAYMENT OF CIVIL LIABILITY TO TREASURY DEPARTMENT ON SAME TERMS AND CONDITIONS SUBMITTED TO THE PARTMENT OF JUSTICE IN LAST OFFER OF I COMPROMISE AND TO MAKE A STATEMENT CONCERNING SAME TO THE COURT AT TIME OF SENTENCE AS A PLEA FOR MITIGATION OF PUNISHMENT PEIRSON M HALL DE ACK PLS JUN141937PM RECEIVED Regraded Uslas Memorandum to: Mr. Oliphant From: Mr. Shafroth In re: E. 11. Smith Date: June 15, 1937 Attached hereto is tolegrem from United States District Attorney at Los Angeles setting forth offer of E. M. Smith to plead guilty on condition that indictments against other defondants be dismissed. As Smith is the party res onsible for the plan and the one who profited by it, it sooms to no that the offer should be accepted. The Department of Justice would like our recon- mendation in the matter. in Encl. TREASURY DEPARTMENT WASHINGTON OFFICE OF MISSIONER OF INTERNAL ADDRESS TO - AND REFER June 15, 1937. Memorandum for Mr. Oliphent: You telephoned to this morning to the effect that a telegran had Yee received from United tates Attorney Hall at Los Angeles, in which be stated that Mr. Dougerty, Attorney for the 3. M. Smith Company, had proposed to him that his client would plead milty to the counts in the indictments against him with the un.orstanding that the inlictments against the other individuals involved would be dismissed; further that the taxpayer would again present to the Treasury Department his offer of $1,500,000.00 and on agreement to pay such addi- tional texes, penalties end interest 86 might be found due by the Board of Tax Appeals. I have discussed this matter with Mr. I. W. Carpenter, the attorney in the General Counsel's office who handled the case, Mr. Relph R. Reed, Special Agent in Charge of the Intelligence Unit at Los Angeles and Mr. I. W. Gowdey, Assistant Special Agent in Charge who conducted the investigation of the care. We BIH all agreed that the offer is a satisfactory one and should be accepted with the unierstanding, of course, that 8 full presentation of the facts in the case will be made to the court by the procecuting officer at the time sentence 18 to be passed. TET Regraded 62 PARAPHRASE OF TELEGRAM RECEIVED FROM: American Embassy, Paris, France DATE: June 15, 1937, noon. NO.: 791 RUSH. FROM COCHRAN. This forenoon I visited the Bank of France. The French stabilization fund in Monday's exchange trading lost 685 million francs foreign exchange and gold. This forenoon, up to ten-fifty-five o'clock, the losses had been 110 million French francs, with very heavy pressure. The transactions this morning wiped out the last of the gold and foreign exchange in the Stabilization fund, which has had therefore to begin taking gold against franos from the Bank of France. My contact told me that financial circles are con- vinced that before the end of the week the Blum Government will fall no matter what measures may be introduced in the French Parliament. Exchange control for France has consistently been favored by Governor Labeyrie, but during the past few days he is not known to have made any new recommendations with regard thereto. It 18 said that yesterday he submitted to Prime Minister Blum a long memorandum in which he accused the "200 families" of undermining the French Gov- ernment. Up Regraded Uclassified 63 - 2 - Up to the present the Bank of France has not received confirmation of the rumor that Rist and Baudoin had re- signed from the technical committee of the Stabilization Fund. The Bank of France just telephoned me (at 12:30 noon) that at noon both Rist and Baudoin failed to appear for the daily meeting of the exchange experts, which strengthens the belief that they resigned from their posts. BULLITT. EA:LWW 64 LMS GRAY London Dated June 15, 1937 Rec'd 3:02 P. m. Secretary of State, Washington. 382, June 15, 7 P. m. FOR TREASURY FROM BUTTERWORTH. With reference to your 243, June 14, 4 P. m., I have made indirectly some inquiries in the bullion market and find that the Swiss have recently resumed gold sales here in substantial amounts and were today sellers of gold. The city LS receiving very confused reports from Paris and although dealings in franc futures have stopped in Paris, in London one month's francs are at a 3 point dis- count while 3 months are at a 6 point discount. The gen- eral attitude of the city and the British press towards the French situation is well expressed in an article in today's FINANCIAL TIMES which after enumerating the palliatives which might at the moment be indulged in con- cludes: "They can only straighten out the difficulties of the Treasury for the time being. What the Government requires most of all to restore financial stability is the return of the 65 LMS 2-No. 382, June 15, 7 P. m., from London. of the hundreds of milliards of francs which have found voluntary exile in New York, London, Amsterdam and else- where. To do this it must restore confidence in the currency. And this is largely a question of internal economic policy. So long as the program of social reform stifles enterprise and burdens trade and industry with such liabilities as to put them out of effective competi- tion. th Treasury returns will continue to fall below estimater and the foreign exchange weaken. The effects even of a further devaluation of the franc would not avail against the persistence of the United States factor, The danger of - renewed flight of capital is greater than it was in VI.OW of the fact that French investors, distrustful of the price of gold and the fall in commodities are seeking liquidity mainly through the medium of United States dollars, From the international as well as from the domestic standpoint therefore M. Blum is carrying a heavy responsibility for reasonable economics and sound finance", The Chancellor of the Exchequer was asked in the House of Commons this afternoon whether he was aware that the surfeit of gold coming to London could be redistributed throughout the world and British export trade greatly increased by allowing the public issue in London of loans to 66 LMS 3-No. 382, June 15, 7 P. Me, from London. to foreign borrowers, provided that British investors were prepared to lose their savings by uncreditworthy foreign borrowers defaulting again on their obligations as shown in the annual reports of the Council of Foreign Bondholders; and whether he would consider that aspect of the remedy for unwanted gold as a reply to the demand for raising the embargo on foreign lending. Sir John Simon replied that foreign lending on B. large scale may no doubt tend to reduce the movement of gold towards this country but the possible field of such lending was much restricted, He agreed that the making of loans to uncreditworthy borrowers was not a process from which good could result; it was the business of the lender to distinguish between creditworthy and uncredit- worthy applicants for loans and it was not the function of the foreign transactions advisory committee to settle that point. BINGHAM RR:WWC Regraded Uclassified 67 LMS GRAY Paris Dated June 15, 1937 Rec'd 5:27 P. m. Secretary of State, Washington. 795, June 15, 5 P. m. FROM COCHRAN. Pressure on franc continues very heavy this afternoon with French control still yielding sterling at 110.90. Discount on forward franc has widened to 51 francs for three months. Money 1s very difficult to find. Bank of France is scrutinizing rigidly all discount operations. Rentes down 65 centimes to 1.30 france. All French share! weak and internationals in strong demand, Suez being up 1,000 francs. Council of Ministers met this morning at 9:00 o'clock and adopted the proposal which was approved by the Cabinet, After the meeting, Minister of Finance Auriol made an answer to the press. According to the news ticker he said that while the Government had been endeavoring to work at extreme speed in the formulation of its policies, a speculative offensive had in the meantime developed. Now it has become so serious that the program cannot be held up pending a long parliamentary debate. The Government Regraded Uclassified 68 LMS 2-No. 795, June 15, 5 P. m., from Paris. Government desires to restore public finances and strangle speculation. With these two aíms, Auriol said, it had been decided to seek authority to take by ministerial de- crees all measures necessary for the improvement of public finances and for the protection of savings during a limited period. The decrees would be submitted for ratification within three weeks at an extraordinary session of Parlia- ment. lie said that this proposal would be submitted to the Bureau of the Chamber at 3:00 o'clock this afternoon with emphatic recommendation that the speculative offen- sive must be checked. Auriol pointed out certain indices showing recovery. From the report which I have seen he said nothing about advances from the Bank of France to th Government. The definite terms of the bill were not dis- closed. Because of the significance which has been attached to it by certain foreign press correspondents, there is provided herewith a translation of an item in AGENCE ECONOMIQUE today which summarizes what it considers the principal points of the speech which M. Bastid, Minister of Commerce, made at the inauguration of the International Congress of Exchanges. "Following the measures taken with respect to quotas and the lowering of customs tariffs decided upon last October Regraded 69 INC 3-10, 795, June 15, 5 P. may from Paris, October we have had the impression in France that this liberal gesture remains without echo from abroad. We have had the impression that we are trading 'one way only'. Opinion is disturbed by the increase of our im- porte and by the deficit of our commercial balance. This has given rise to a campaign which has been felt in the Truber for n. return to protection and the abandonment of 100ml moasures taken last antumn. This is a state of 1.10 thich de cannot disregard and it is necessary that this should be understood beyond our frontiers especially by our friends who signed the tripartite arrange.. ment, It in ossential that the determination of the Govern- ment not to enclose itself in an autarchic system, which the diversity of our metropolitan and colonial products would render perhaps less difficult than for other coun- tries, be supported by the active collaboration of other governments; otherwise French opinion will no longer understand and no Government will be able to resist re- awakening irotectionism". In connection with the declarations attributed to Bastid, ACCISE ECONOMIQUE of today contends that the policy by the Government has been exactly contrary to the prin- ciples of liboralism envisaged in the arrangement of September 70 LMS 4-No. 795, June 15, 5 P. m., from Paris. September last and that it is not surprising that under such circumstances it is forced to turn to a policy of autarchy. Bank of France has invoiced to Federal Reserve Bank of New York for account of B I S 50,456,000 francs gold, steamship PARIS. BULLITT SMS:EMB Regraded Uclassified 71 146ASURY GROUP ON GOLD AND RELATED QUESTIONS June 15, 1937 4:20 P.M. Present: ars Klotz Mr. Taylor Mr. Lochhead Mr. Opper Ar. White Mr. Bell Dr. Viner Mr. Riefler B.A.Jr: Now Wayne, what do you want to say? Taylor: Nothing. Remember you told me that you'd like to see the crowd at four, after you got back, just to H.2.Jr: Well, ir there are no other Are you (Riefler) up-to-date? Riefler: Roughly, I think. H.W.Jr: All right. Have they kept you occupied? diefler: Uh-nun. H.A.Jr: Roomed your feet on some desks? What? Hiefler: All over. G.M.Jr: All right. Taylor: Not in connection with that bill, but I think maybe you'd better tell that story, Clarence, about Mr. Hester's session today. Opper: Well, I get it second-hand, of course. On Friday we were notified tnst the Banking Committee of the House wanted to nola nearings on the joint resolution sent down to provide for payment to the Federal Reserve banks of expenses in connection with the 1928 currency that we asked the banks to destroy. We decided that probabilities were that they'd try to make E field day of that on asking questions on the Treasury's monetary and gold policy, and so forth; so Hester went down with 2 statement which dealt only with that bill itself and the purposes of it, and he went through, I think, 8 rather difficult session this worning staving off questions; but he didn't - whenever ne got a question that got into monetary policy and had nothing to do with the bill, he said that of course he hedn't prepared himself on that, because ne was simply directing his 72 -2- attention towerd the four corners of that bill. and apparently the thing went off all right - but a good deal of fencing - Patman and Luce princi- pally. n.M.Jr: That's all right. The only thing - other reason I really wanted to get you people together W&S this: that if it is agreeable to you, moved and seconded by Dr. Viner, we will meet et 8:30 tomorrow morning, and I think we ought to. Mrs Klotz: They all look so pleased. Viner: I'm sitting here so they won't H.M.Jr, Here's this last telegram. Have you people seen this one? Bell: Question in order? H.M.Jr: This is June 14, 11 P.M. Bell: Question in order? H.d.Jp: No. Bell: I just wondered now long you were going to live at the Hay-Adams. Mrs Klotz: At the Carlton. E.M.Jr: Oh, at the Carlton. (Hearty laughter) bell: He just steps across the street and here's the Treasury. H.M.Jr: "I was informed by Blum this evening unanimous decision was reached by the Cabinet this afternoon to demand - I'd just B5 leave make it a quarter of nine; I don't cere. "I was informed by Blum this evening unanimous decision was reached by the Cabinet this afternoon to demand full powers to regulate all financial matters by decree laws tomorrow in the Chamber of Deputies, and later in the week in the Senate." This is Cochran, this is not Bullitt. 73 -3- "Dida tolo me that when he had left me at luncheon DE nbc not known how his Cabinet would reset and interefore had not known what to say to me. This vfternoon when ne made his proposal to the Cabinet, smone certain Redical Socialist Winisters there W&S = sentiment to refuse to go along with him on this measure This afternoon ne had nearly fallen." are <lotz: #do? Blun. He #8S out smiling - fallen, risen again. "Blum had suggested after B discussion that the Radical Socialist Winisters Cheatemps, Dalacler" - please bear with me on my French - "End Delhos should have a con- Terence and should meet him, Auriol, and Peul Faure for 2 definite decision on the matter. Following these conferences uerision was reached by the Cabinet for unanimous sup ort of Blum in his demand for full powers. Blum was confident that full powers would be given to him by the Chamber of Deputies, but E bstentions of Hapical Socialist deputies would reduce nis me jority. "It was nis nope that at & night session tomorrow, Tuesday, full powers would be voted him by the Chamber of Deputies, and by Thursday or Friday of this week he believed the bill would reach the Senate. It is nighly probable, ne said, that full powers would not be voted by the Senate, and that nis Government would no longer be able to stand. "No one except the intimate circle of the Cabinet, Blum asserted, knows about the decision taken, and he asked me to keep secret except from my Government what he had told me." I've seen this thing. What's-his-neme gave it to us this morning, didn't he? Well, I don't snow, but I think everybody might be thinking what will happen if they devalue further or put on exchange control, whatever they, Looks as though this is going to be the week. That's about all I got to say. I'm sorry you (Riefler) weren't here this morning. 74 -4- Riefler: I'm sorry too. H..,Jr: But you'll have - I imagine they'll be back at us Thursday. I have nothing; anybody want to ask me any questions? Jake? Vinor: would you care to talk about the question of limiting purchases to central banks? You had it on your mind. Jr: Well - I mean I nad that move in mind, in Case of - if France left the tripartite, but I'm not in shape to 60 any length in the discussion this afternoon or this evening. To keep you people posted, the Russian Ambassador has Informed us that lie is ready to tart a discussion on the control of - export of gold outside of Russia. He feels that what their amount of production of gold in Russia - that is an internal matter, but he is rendy to discuss gold once it leaves their borders. So that is something. White: It's not enough. d...Jr: That's all you'll get. Write: To begin with. E.X.Jr: You won't get any more. White: I think SO. B. .Jr: No, you won't. That's the way they've worked on sugar, that's the way they've worked on lumber, that's their policy. Well, anyway, that's what ne said; I thought it was pretty good. Inylor: Ought to be able to arrange to send Herry over there as D special investigator. It's a nice place right now. White: Shooting too many people. Viner: Maybe that's what Wayne had in minu. (Hearty laughter) 75 -5- White: A public denial is in order. Isylor: Harry was shaking his head about it - "That's not enough." I mean if he wants to go over there and get some more H.M.Jr: You made nim & diplomat this morning. White: Now they want to shoot me. H.M.Jr: No, now we want to make you E general. Bell: He'd have to be a general so as to get shot. H.M.Jr: Well, I hope that both Viner and Riefler can S tay / around for a couple days. Can you (Riefler)? Miefler: Yes, sir. H.M.Jr: And may I say I'm delighted that you could come, and you will be most useful. diefler: I wish I could have gotten here; I would have been here 1f I could have had the message. H.M.Jr: de's going to be here for a couple years. What's the difference if we start half E day late? Now if it's agreeable to verybody, I'll be here et 8:30 tomorrow morning. Bell: I'll be nere. Opper: Nobody nas any objections to that, Mr. Secretary. OFFICIAL COMMUNICA TO 76 THE SECRETARY OF STATE WASHINGTON c. B.C. c. DEPARTMENT OF STATE WASHINGTON June 15, 1937. My dear Mr. Morgenthau: In compliance with your request transmitted through Dr. Feis, I am attaching hereto 8 memorandum giving such information as is available in the Depart- ment concerning Soviet participation in international arrangements dealing with the sale of Soviet timber and sugar in the world market. Sincerely yours, Robert F. Kelley Enclosure: Memorandum. The Honorable Henry Morgenthau, junior, Secretary of the Treasury. 77 MEMORANDUM Soviet Participation in International Arrangements Dealing with the Sale of Soviet Timber and Sugar in the World Market. TIMBER The Soviet Government was 8 signatory to a conven- tion known as the European Timber Exporters Convention concluded at Copenhagen, Denmark, in November 1935, which had for its purpose the voluntary limitation of sawn softwood to be exported to European countries. This Convention entered into effect December 11, 1935. Previous attempts to reach an agreement limiting European timber exports had met with no success due to the position of the Union of Soviet Socialist Republics. Therefore the participation of the Soviet Union represented 8. change of policy on the part of the Soviet Government considered to have been motivated by purely commercial considerations based on the low price received for timber exports. By this agreement the total quantity of sawn softwood to be exported by the participating countries in 1936 was fixed at 3,850,000 standards. The quotas fixed for the partici- pating countries were as follows: Sweden 78 - 2 - Sweden 820,000 Finlend 1,005,000 U.S.S.R. 950,000 Poland 313,000 Czechoslovakia 96,000 Austria 275,000 Yugoslavia 168,000 Rumania 223,000 Total 3,850,000 An Executive Committee consisting of six members was formed of which Sweden, Finland and the U.S.S.R. each had one representative, the other five countries having three joint representatives. This Convention which was concluded for one year was renewed for 8 further period of one year at E general conference which took place at Stockholm on October 1, 1936. The above quotas remained unchanged, with the addition of a quota of 127,000 standards for Latvia, which had not participated in 1936 and an increase of 23,000 standards to the Rumanian quota. In addition to the sawn lumber convention, the U.S.S.R. concluded in October 1936 an agreement with Finland concern- ing the exports of pitprops. By this agreement it is ex- pected that the pitprops exports of these countries, which together supply about 85 per cent of the entire European exports, will be reduced in 1937 by about 20 per cent. SUGAR 79 - 2 - SUGAR The Soviet Government was 8 signatory to the Inter- national Agreement Regarding the Production and Marketing of Sugar signed in London on May 6, 1937. Under this agreement the Soviet Government agreed to limit its net exports of raw sugar tel quel to the so-called free market to the amount of 230,000 metric tons per annum for the five years of the agreement. Exports to Mongolia, Sinkiang and Tana Tuva are specifically not included in this quota. In the agreement the Soviet Government gave notice that during the quota year beginning September 1, 1937, it will not make use 01 11,500 tons of its basic quota. The agreement also contained general statements of intention on the part of the signatory governments in regard to the advisability of preventing the accumulation of excess stocks, the reduction of disproportionate fiscal charges on sugar, encouragement of consumption, etc. With refer- ence to these expressions of intention, at the time of signing the Soviet delegate wrote in above his signature the following statement: "It is understood that in view of the fact that the U.S.S.R. is 8. state governed on B. planned principle, Chapter 5 of the Agreement dealing with stocks and all the other Articles in the various Chapters of this Agreement which in any manner refer to internal produc- tion, do not apply to the U.S.S.R.". On 80 - 4 On the general council which was set up to administer this agreement, the Soviet Government has five votes out of a total of 100 and in naddition will be represented for three out of the five years of the agreement on an Executive Committee of nine members which will exercise any powers delegated to it by the Council. It would appear that while the Soviet Government is willing to participate in agreements with other countries regarding the regulation and control of exports to the world market, it will not undertake, 88 was shown by the statement of the Soviet delegate in signing the Sugar Agreement, any commitment under such agreements which would affect or restrict the operation of its internal economy. 81 memoriandum Soviet Participation in International Arrangements Dealing with the Sale of Soviet Timber and Jugar in the World Market. TIMBER The Soviet Government nos signatory to a conven- '100 known 19 the European Timber Exporters Convention concluded nt Copenhagen, Denmark, in November 1935, which had for its purpose the voluntary limitation of PSWN softwood to be exported to European countries. This Convention entered into effect December 11, 1935. Previous attempts to reach as agreement limiting European timber exports had met with no Buodess due to the position of the Union of Soviet Docialist Republics. Therefore the participation of the Soviet Union represented a change of policy on the part of the Soviet Government considered to have been motivated by purely commercial considerations leged 05 the low price received for timber exports. By this agreement the total quantity of sawn softwood to be exported by the participating countries in 1936 was fixed nt 3,850,000 standards. The quotas fixed for the partici- pating countries were no follows: Swedes Regraded Uclassified 82 - 2 - Sweden 820,000 Finland 1,005,000 U.S.P.R. 950,000 Poland 313,000 Cwechoolovakia 96,000 Austria 275,000 Yugoslavia 168,000 Rumania 223,000 Total 3,850,000 An Executive Committee consisting of six members was formed of which Sweden, Finland and the U.S.S.R. each had one representative, the other five countries having three joint representatives. This Convention which wha cocoluded for one year was renewed for a further period of one year et n ceneral conference which took place at Stockholm on October 1, 1936. The nhove quotas remained unchanged, with the addition of 8 quota of 127,000 standards for Latvin, which had not participated in 1936 and an increase of 23,000 standards to the Rumanian quots. In addition to the sawn lumber 00 vention, the 0,0,5,R, concluded in Octoher 1936 an agreement with Finland concern- ing the exports of pitprops. By this agreement it 1s ex- pected that the pisprops exports of these countries, which together supply about 85 per cent of the entire European exports, will be reduced in 1937 by about 20 per cent. 83 - 3 - SUGAR The Soviet Government was B signatory to the Inter- national Agreement Regarding the Production and Marketing of Sugar si ned in London on May 6, 1937. Under this agreement the Soviet Government agreed to limit its net exports of raw sugar tel quel to the so-called free market to the amount of 230,000 metric tons per annum for the five years of the agreement. Exports to Mongolia, Sinkiang and Tane Tuva are specifically not included in this quota. In the agreement the Soviet Government ave notice that during the quota year beginning September 1, 1937, it will not make use of 11,500 tong of its basic quota, The agreement also contained general statements of intention on the part of the signatory governments in regard to the advisability of preventing the accumulation of excess etocks, the reduction of disproportionste,fiscal charges on sugar, encouragement of consumption, etc. With refer- enoe to these expressions of intention, at the time of signing the Soviet delegate wrote in above his signature the following statement: "It is understood that in view of the fact that the U.S.S.R. is a etate governed on & planned principle, Chapter 5 of the Agreement dealing with stocks and all the other Articles in the various Chapters of this Agreement which in any manner refer to internal produe- tion, do not apply to the On 84 in the general council which was set up to administer this agreement, the Soviet Government has five votes out of a total of 100. and insddition will be represented for three out of the five years of the agreement on an Executive Committee of nine members which will exercise any powers delegated to 1t by the Council. It would appear that while the Joviet Government 10 willing to participate in agreements with other countries regarding the regulation and control 0: exports to the world market, it will not undertake, 88 WRS shown by the statement of the Boviet delegate in Jigning the Sugar Agreement, any commitment under such agreements which would affect or restrict the operation of its internal economy. Regraded Uclassified 85 RESERVE MELTING RE June 15, 1937 GOLD XBD RELATED ,DESTIONS 8:40 P.M. resent: Mr. Taylor. Mr. Oliphant Mr. Lochhead Mr. White Dr. Viner Mr. Goldenweiser. Mr. Opper. Mr. Williams- Mr. Gardner Mr. Knoke' Mr. Eccles. Mr. Harrison Mr. Bell- Mr. Feis (Eccles comes in) H...Jr: O.A., we'll start now. We won't wait a minute longer. Sit down, Mr. Chairman. Eccles: Good morning. n...Jp: Well, I don't think we'll wait any longer. There are a few missing people. The reason that I ASKED for this meeting WES that I think oIL of us nave been doing 8 lot of thinking about this gold question, and we have had various conversations, Eccles and I, and I know ne's been working with his staff end we've been working with ours; and over the weekend I sort of concentrated on the thing, got it clear in my head, and I thought that I'd seriously discuss it with you people and see if we can't work out a successful plen. Now, I just went to tell you what we have in our mind. There 15 the question of the handling of the gold, sterilization, and the handling of the foreign deposits, and the question of texing aliens who invest here. Now this morning, we can make 8 start, if it is agreeable to you, and talk about this question of reserves against foreign deposits, and I'll just - we have jotted down in the agenda ten things; maybe I better just read through the ten and then we can open the discussion. There will be a few more people coming. Regraded 86 -2- And may I say at the start, I am fully convinced chat this is 8 joint problem that we have to nandle together, see? "A. Should we try to get legislation permitting an increase in reserve requirements against deposits for foreign account? "1. To what maximum? 2. Should there be any exemptions? For example, $5000 to $10,000 or $25,000 on individual accounts, or more for bank recounts? "3. Should such deposits be held only by member banks, or should any bank be permitted to carry them ES now? "4" Should deposits for foreign account be exempt from the F.D.I.C. fee? "5. What should be the method of operation? The sequence of steps? "6, If reserve requirements against foreign deposits are increased, ought the Treasury issue three-month bills, or doesn't it matter much? "Bow soon should we try to cet the legislation? "Should we consult other club members before seeking legislation? "Should we a ttempt to get other club members to adopt somewhat similar measures?" Roughly, those are some of the questions we'd like to reise. I might say in passing that I've gone far enough with this 1dea of handling sterilization of golo through an increase in reserve requirements egainst foreign deposits - interests me very much; otherwise I wouldn't ask you people to come down. I also think it night be interesting for you people to know in passing that Sir Josian Stemp W&S in - I think he saw Mr. Eccles yesterday - and he asked me if I had any message to take back. It reminded me that last time, two years ago, I told nim just what I 87 -3- thought of England, and I told him this time I only had pleasant words. He asked whether I thought we should do anything together about gold, so I said I'd rather not discuss it. 80 he said, "Would you mino if I made a comment?" I said, "No." "Well, it seems to me the sensible thing for you to do is to increase reserve requirements sgainst foreign deposits and in that way distribute the load." And I thought that was very interesting, coming from him. (Harrison comes in) S.V.Jr: Marriner, I've outlined - would you like to say something? I wean is it agreeable to you that we concentrate on this question of - or on these things first, or is there something else you'd rather take up first? Engles: No, I certainly think that is a very important part of any program, and of course there is the question of taxation and Jr: May I - excuse me one minute - I want to say that Mr. Riefler is coming and from now on is acting as a consultant to our stabilization fund. Lecles: It seems to me that this is an important part, cer- tainly, of any program, and it would seem in order to consider whether it is just as well to mention the tax aspects of the program along with it; it seems to me it is all involved. It is ES important to do something to discourage capital coming here as it is to take care of the sterilization of such capital if It does come, and the idea of increasing reserves against foreign deposits tends to of course meet the problem created by capital coming here to the extent that it will be discouraged from coming. And I think it should be done. H.A.Jr: Well, may I just say this, that we see that right now - I mean as far as We have gone, there are three things. There is the discouragement of foreign capital through a tax program, which we can take up any 1 there is this question of increasing reserve require- ments against foreign deposits; and there is a third thing, the question of if they should transfer their deposits 88 -4- [ccles: To a Reserve bank? d.V.Jr: No, I mean transfer their deposits into short-terms - the question of possibility of 2 transfer tax to discourage that. And that's why we brought up the question what kind of bills. But in order to make зоде neadway, if it is agreeable to you, we thought we'd like to concentrate this morning on this ques- tion of whether or not it would be wise to do one - as one leg of the stool, this Question of excess reserves. Is that agreeable to you? necles: Inat's agreeable to me. williams: I'd like to ask one guestion bout it. I think your lost remark may be contained in your answer. What happens when there is E transfer of 8 foreign deposit, say E transfer from Bank & to Bank B? I should think your excess reserve problem would be recreated for you right there, you see, because it would no longer be E foreign deposit. It would 10 from the bank of origin to B second bank, and there it has, it seems to me, the same value ES the reserve. Am I wrong about that? Garuner: From a foreign deposit to a domestic deposit, not from 1. to B. williams: From one bank to à second bank; it becomes a domestic deposit in the second bank. Cordner: If it were É !oreign deposit in the second, it would be the same, but trensferred from foreign to domestic It becomes comestic. Viner: But how can it be transferred from foreign to comestic? villiams: Foreigher buying 8 security, foreigner buying goods from an American. Viner: Well, if ne buys goods it's another story. mhite: Then it's no longer i. foreign deposit. (illiams: what nappens there, Harry, is that it creates an excess reserve. White: That is part of the problem. Uclassified 89 -5- Williams: Any kind of transfer, so long LS it is from foreign account to domestic account, recreates your whole problem. Unite: Except it isn't 8 tronsfer; it is 2 change in the nature or the deposit. Viner: Change in the ownership of deposits. Williams: That's the transfer. Recles: Yes, but if the deposits Williams: See, your problem is recreated. Viner: what you are saying, John, is what happens if we acquire E favorable trade balance on trade account. Williams: If they pass from the foreign deposit to the domestic, you see, and there is no increase of reserve require- ments on domestic deposits right away, you've fot your excess reserve problem. White: But this is designed to work both ways. Billiams: Inst's why I said your last remark covers that maybe; I don't know - the transfer tax. White: Or (-ven if the transfer tax is insufficient, if you have the foreign deposits being built down by virtue of expenditure or by virtue of purchase of securities, then there is snother shift which needs to be met by some action. illiams: That's right. Viner: I don't think we've thought about this other one of a favorable trade balance. @hite: No, we don't worry about that. Gardner: No, but if you discourage them buying securities by a transfer tex or some other form of texation, that dis- couragement still leaves them with some income on the securities. They may transfer from deposits into securities nevertheless. Having done so, the sterili- zation problem is fully recreated. Regraded Uclassified 30 -0- Williams: That's right; having done so, you've got your problem all over again. white: That's quite right. (Peis comes in) Eccles: Dia you have some proposel to submit on it? Have you worked something out? H.M.Jr: Well, we simply feel, as I say - you know what our proposal is on the taxes; our proposal on the taxes is B 35 percent withholding tax on all lividends of aliens, giving the elien E right to submit an income tax report, and if his income - and it is sub jected to exactly the same tax as that of 8 United States citizen, and if his tax is less than 35 percent, we refund him the difference. Locles: That's not on dividends, that's on income. H.M.Jr: On income. Recles: All income in this country. 8.2.Jr: Yes. We treat him Just exactly the same as we do our own citizen. And on that basis the State Depart- ment is perfectly willing to go .long. Right? Fels: It would be happier with 25 percent, but I guess it has no choice. H....Jri we're Es one-price house, Herbert. We had you all fixed on the 35 percent. Feis: No. 1.1.Jr: On yes, I got the Secretary on record; Mr. Hull Feis: I guess ne's easier than I. B.W.Jr: Well, you too. Feis: But certainly on the idea - there is no trouble in the idea; just E question of the rate. Harrison: Does that apply to pre-existing ownership, Mr. Secretary? Regraded Uclassified 91 -7- @.M.Jr: How do you meun? Harrison: I mean it applies to all income from capital here; it doesn't apply to future movements of capital. Vincr: Is it all income, the proposal? B.M.Jr: Well, when we nave it I'd ratner have Magill here and carry that; I mean I'm not prepared. Now, is this discussion going to be so short on this Question of increasing Eccles: well, tals is E pretty involved uestion. There's 8 great many aspects to it, and I was just wondering if you had some memorandum, if anybody had worked out a proposal, or if they wanted us to do that. The have had no consideration of H...Jr: well, here's the thing. White is ready to answer any questions on this thing. Let enybody 8SK any questions they want to. You (White) went to state the position, the argument for it? Then Let them go after it. Is that all right, Marriner? necles: Yes, sir. d.s.Jr: Can you get going on this? Tell why you think It's a 6000 thing and also point out the weak points. white: Setting aside the possible differences. in the pro- cadure or the differences in amounts with respect to exemptions, with respect to whether it shall be all members - members only that shall be permitted to have foreign deposits or whether it should be all banks - setting aside all those questions, merely treating the thing in the large, there appear to be the following advantages for some such measure. In the first place, it will place the burden of carry- ing E large portion of the insctive account, and possibly all - one cannot say for certain, because it depends on matters which will appear in the dis- cussion - it places that burden on the banks, who in turn may if they wish pass it on to some of the depositors in the form of a small service charge, if and when the reserve requirement reaches a certain 92 -8- point. By SQ doing, by permitting the Treasury to issue gola certificates against the inactive account, gradually and In such proportions 23 will not disturb the volume of excess reserves which exists at any one time, we remove one very important source of criticism against the Agmini, tration mone- tary policy, further, tend to take away some of tal support for the growing attitude of lear and con- zern over the whole cold problem. I don't mean to say for 8 moment that that solves it; I merely say that the existence of that inactive account, for which the Government nas to borrow to maintain, Is receiving much more attention, and they jump from that into the whole question of gold; and you have repeated criticism with respect to digging up gold in one hole, paying for it, paying to maintain it, and sticking it in another hole. Thirdly, the proper conduct of that arrangement will to some extent, to 8 rather substantial extent at B point, support the Government's obligations, bill market particularly. That is not É matter of prime importance; it is merely one of the additional factors. Fourtuly, it may act 08 a mild deterrent. Alone it wouln't possibly be more then a very mild deterrent, but if accompanied by some other device, it may be; 1f mde part of E larger program, it could be made - it could fill out the picture or becoming some its- couragement to further inflows of capital. Fiftnly, it serves to insulate to a considerable extent the domestic economy against inflows and outflows of gold. Obviously, this would work both mays, as John suggested when he came in; that is, we are merely considering It from the point of view of what happens when the balances are being built up. //hen the balances are being reduced, either because of movement into securities or because of more favorable balance of payments, then you have to take steps which will serve to take care of the excess reserves thus created. I think those are probably the principal methods - the principal sovantages for the procedure. There are other minor suvantages. 93 -9- aarrison: voes it apply to all deposits? ..nite: well, that is sometaing open to discussion. mrrison: You don't allow C an & normal working balance? ults: I spoke of exemptions, end we were in Pavor of some exemptions. Now, what those exemptions shall be, whether tuey shall be $10,000 or $25,000, whether they shall be exemptions on individual accounts or whether NE shall permit 2 bank deposit to nave E: Larger exemption, is something that let's hope ne'll develop from this discussion. Regies: You Sall something about the assistance to the bill market. In what manner would it assist the bill market? unite: well, depending upon what point the reserve require- ments reach, there will be B point at which It will ba essential - at waten you pay drive some of the deposits out into the bill market, if you don't have the transfer tax. Eccles: On jes. White: And if that is so, then the demand for bills will. be in excess of the sale for bills, which may be necessitated by the need of banks to get more cash. M.M.Jr: May I just interrupt one minute. That is one of the reasons way I am anxious to concentrate on this ques- tion, because, if you (Eccles) remember, you and I saia we'd talk sbout bills; then when we got into the bill thing and when we got into this, we SAW that you couldn't consider tue one without the other. And we thought that before we decided what our next method of raising money through bills would be, we'd have to discuss this. What we'd like to do, if you people are willing - we'd like to sit every day on this thing for & week, if possible, and see if we can come to some conclusion. I thInk it would be a mistake to settle what our bill policy is going to be end not have this. Then the other thing - ES you notice, they are getting quite sctive on the Hill and when we pass our billion dollar point - I mean they're going to get more active, and the inflationary crowd is getting busy, and commodity 94 -10- prices are falling. and we'll have Senator Glass recommending going back to the old gold standard, '26 and 127, 80 I think the time has come that the Auministration has got to make de move. And what we'd like to no, if the Federal Reserve end if the people who alvise us concur - we'd like to sit right straight through this week and see if we can't come to a conclusion. I mean we're ready to do it, end these people that we've asked to come down - Jake Viner's ready; not that de's here, ne said he doesn't care how long he stays. Viner: I don't now. illiams: 1 was going to Canada. A.M.Jr: and Williams WBS - he much prefers Washington to vanada. Gurdner: On the bill market, Herry, wouldn't there be more support to the bill market if these funds remained on deposit? Then they'd carry themselves; if they 60 out into the bill market, the Treasury has to sell more bills to sterilize them. White: No, I think you'll fini, again with the given assump- tions - I 38y at & certain poInt - E certain point is researed at which - and this presupposes an appropriate management of the fund in such B way, as I say, not to disturb the other excess reserves which will be brought into play. Billiams: Isn't it true, in so for as they buy tills or anything else, for that matter, you've got your excess reserve problem, so then the Treasury has to sell more White: I say there is B certain range, a certain point some- where, let us say, roughly, for the sake 01 discussion, between 50 and 75 percent, in which you've got the movement increasing in one direction, in which the demand is In excess of flow. If they have 50 percent reserves, for example, if they draw down their balances, they can use part of that 50 percent cash, which is thus liberated, whereas the movement out utilizes a hundred. I mean there is 8 - you reach a range in which what you say is true, and you reach a range before that in which the situation is different. But I 95 -11- wouldn't say that is B mejor consideration. Tiner: Well, the proposal would be admittedly incomplete If it didn't nave some transfer proposition to deal with the bills. nite: It would be if the purpose were to discourage funds, but 1f the purpose were merely to eliminate a large portion of the inactive fund, that need not be so, unless there's a grest deal more gold that comes into the purchase of long-term securities. |errison: Mr. White, isn't what you're trying to do really to discourage capital from coming over here for capital investment, and not money from coming over here for trade purposes, and doesn't the hundred percent reserve - I'm just asking a question because I haven't thought it out - doesn't the hundred percent reserve run the risk of discouraging foreigners from doing business with us for trade as much 58 from sending it over nere for ultimate capital investment? Ingior: Not necessarily. Harrison: No, not necessarily, but doesn't it tend to make this an unsttractive place for foreigners to put money for trade purposes? Now, let's stick to that alone. And especially if, LS B result of the law, you indicate, for instance, that banks might recompense themselves by : service tax or something, it is just adding to the cost of doing business in America. White: Only in so far LS there is - service charge applied does the maintenance of bank balances here for the purposes of conduct of trade become slightly discour- aged, - let's put it that way - depending, of course, upon the size of the service charge. But there are two things to be said about that. first, that is one reason we were talking about exemptions. If a sufficient exemption could be per- mitted SO as to take care of B reasonably substantial volume of deposits here, to take care of normal commercial balances, that would be one way of helping to meet that. Regraded Uclassified 96 -12- Secondly, I tairk It must be maje clear to the staff that there are two objectives. They may be combined or they may rest independently on different bases. One is to eliminate so for ES the United States is concerned, or reduce rather, the problem created by the inactive account. Now, that can be uone without in any way - without significantly, let's say, ciscouraging any inflow of cepital. The second is a different problem and a more difficult problem to handle, und A more comprehensive problem, which might also involve the first; namely, the discourage- ment of further inflows. Now that's & separate problem. You see, you wouldn't get that except to the extent of the service charge, and you wouldn't even get It then unless - I mean you wouldn't get it effectively unless you combine ith tost some other portion of the program which 1a being sug- gested. But there are two separate problems, end even if the secono were out of the picture just for the moment AS a basis of discussion, the first itself, I think, would justify some such step, even though you might never reach a hundred percent; in fact, there is much to be said, probably, for not doing it. Golden:: The level of percentage are you contemplating? nite: well, let's say, tentatively, supposing you gradually approach somewhere between 60 and 75, for the first purpose. Now, I'm not speaking or the second; for the second purpose, there would be B. different range. For the first purpose, if you approach gradually between 00 and 75, and if you didn't have 8 transfer tax - as you approach 75, and the opinions would differ - you may feel that you might approach it at 65 or 60; that's a matter of discussion and greater familiarity with the psychology of the investor - at that point you'r get E movement out of deposits. Golden. : What do you mean by gradually approaching? White: When I say gradually approach, I mean that you might preliminarily set what figure you are shooting at, but the schievement of that figure would be & gradual approach, because I think that we all felt, in dis- cussing it, that above all we should not do anything to disturb the volume of excess reserves or the money market, I mean the thing should be handled in such b way as to create 68 little disturiance as possible. 97 -13- Doluen.: You mean you'd give a period of time. White: Not only É period of time, but it could be in small amounts; it might be a hundred million at a time, possibly. E.O.Jp: We also - if I may interrupt 2 minute - thought of it in terms of E hundred million because that would give us E chance to let the banks adjust their excess reserves and also judge on the bill market more cerefully. If We did it in lits of & hundred million, as near LS we could estimate, it would disturb the picture 8S little as possible; do El hundred million and then wait, then до snother hundred million. Golden. You mean that you would release from the inactive account a hundred million at B time is the reserves against those deposits increased correspondingly. white: And the cooperation of the Board would be necessary, very definitely, at some point in that picture, where there is a niatus or & lapse, or there is apt to be, et which they might engage in minor open market operations to smooth over the transitional period for a brief period of time. Taylor: But you would be thinking in terms of being able to increase it to a hundred percent. In other words, your flexibility would be that full. White: The legislation would give us that, but the actual operation, I think, would depend on which of these two objectives you are shooting et, for the moment. Golden.: what you are considering is discretionary legislation giving somebody authority to raise the requirements against foreign deposits up to 2. hundred percent. Milte: Now, to raise the reserve requirements up beyond 75 and 35 and 90 without some restraint of the movement from deposits into other forms of high-grade short- term securities might be to defeat the purpose which you are schieving. Golden.: May I ask now you arrive at the joint at which it will defeat itself. 98 -14- nite: I say that 13 a matter of difference of opinion, and it is knolly 2. matter of subjective evaluation of at what point will the banks place E service charge. After all, the depositor doesn't move nis funds out until ne nes to pay something for it. 80 it's 5 question of when certain binks will place E service charge on certain accounts; secondly, how much. The B.D.I.C. has El charge of 1-12 of one percent on deposits, which includes these deposits. Non, as the reserve requirements increase, that charge becomes 8 greater burden on the remaining portion, with the exception of the private banks, non-insured banks, which don't pay that. That is one of the factors to be considered. 0.00Jp: May I just st this time give them the information that we nove as to where the money is. I think the would be helpful to them. I mean now many banks. nite: we got it from the Federal Reserve Bank of New York. H.N.Jr: But the other people may not know it. White: A preliminary, rother rough, figure - about 26 banks nold about 95 percent approximately of the total, and of those 26 banks I think that there are 12 or 13 tost are non-member banks, including the private benks, and so those banks alone have very little reserves, less than a nundred - about B hundred million; at least it was about B nundred million :bout E week ago. But your problem centers around virtually those 26 banks. or course, there are banks scattered throughout the country which, ES Archie pointed out, have small accounts from immigrants or some such, who would be Interested In this 65 well ES the banks in New York. But the bulk or the volume is contained among those 26 banks. Locies: would it be all right, 88 these reserve requirements were increased, to desterilize to that extent, and the Fund would continue to buy gold just ES you are doing et the present time - all gold coming in - end then would desterilize from the insctive goln fund to offset whatever action was taken to increase the reserve uirements against foreign balances. Anite: Yes, 50 tast you wouldn't affect the volume of excess reserves. Regraded Uclassified 99 -15- Itylor: You wouldn't have to do it exactly, Marriner. Lectes: No, I mean approximately that would valte: That's the objective. secles: 4> difference of a hundred million or 30 wouldn't make much difference. of course, the mechanics of the thing are pretty complex. The practical Appli- cation of it is what worries me E good deal. The identification of foreign accounts - and, of course, for the larger accounts it wouldn't be & difficult problem, particularly the balances of foreign central banks and the balances of foreign commercial banks, and I suppose certain big corporation balances. Viner: But this shouldn't apply to central bank deposits If they keep it recles: or course, if they are in the Federal Reserve they are already sterilized. But what I have been wondering is whether WE could accomplish the same purpose in E more simple manner by uiring either all or such portion 25 we may Retermine of the balances of central banks, and also other foreign banks, to be carried in the Reserve "ystem and not disturb the commercial balances, llow, 1 taink that would - it would depend, of course, to wast extent the foreign balances are carried in the accounts or banks and central banks. If those ac- counts represent a substantial proportion of foreign balances, it would greatly simplify the problem by some such : requirement, because you would be dealing with e comparatively few institutions and you would not in that manner disturb in any way the - B lot of the normal accounts, and you woulen't have the job of determining what balance would be permitted to any account, which in itself is D difficult admin- istrative problem. I would like to see this. What me want to accomplish primarily is to be able to sterilize or to increase these reserves to B sufficient amount to enable the Treasury to desterilize future scquisitions of gold, at least up to 8 very substantial figure. It is certainly to be hoped that within B year's period some 100 -16- more permanent solution will be met, nno in tue - this is an interim period to relieve the Treasury from borrowing money for the purpose or sterilizing. I will be even franker than that, and I am ranker tasn you; but we'd like to remove the political pressure and possible un ise legislation to get us by - well, 1f we coulo get by for six months so tast We can see this taing more clearly. And there are other things, if you non't mind, which I'll mention which are in the offing, which will be helpful. The Finance Minister of Brazil is on nis way up. 01 course this whole toing is very, very considential. when the President was nown there, he talked about the possibility of selling them some gold on the Installment plan. That meets us with the question of the redistribution of gold. We have Dr. Rung coming; don't know what he wants. ine Cubans are nere wanting us to nelp thes. We are making some assdway with the Russians. 80 - I mean every thing looks towards some solution, so that this taing is - the thing that I am afraid of is that people like Thomas and Dies in the House will use tuis gold sterilization of the Treasury ES an excuse to make us do something inflationary to stop the sessonal drop in commodities; and they fix it up in 8 procage and the Treasury mustn't borrow any more money, and they make us stop sterilizing. And of course, the crowd doing it is the old infla- tionary crowd, and all you've got to ão is look at the price of cotton or wheat and you cansee what's motivating them. I'm not sttempting to do anything more than something which the economists and technicians will tell us is sound, and something that we won't regret, but at least is E step forward End at the same time will take this pressure off us to do something which would be very unsound. I mean I can't be any more frank than that. I don't want to do this or any other thing that may be suggested unless everybouy, or at least a majority or two-thirds of the people, agree is 8 sound step, something that we won't have to go back on, end which will also aisturb the financial centers to B minimum. But I want to be ES frank ES that. I believe we have 101 -17- to think something out. I think Nt con. I went to say something for those that came nere Late, and that's sbout 3ir Josish Stamp, who was in to See me. de asked if ne could take back any message from me US to what I wanted to do on the gola question, and I sald I WES sorry, I diun't went to ciscuss that. "wodld you mind if I discussed 1t?" I said, "Not at all." Then ne seid, "Well, I think & novement WE ought to make on both sides of the waters is to make the commercial banks share this responsibility Ata the -reasuries of sterilizing gold." And lie sald, "I talnk we ougut to do it in England and I think you paynt to du it in the United States. I think it's the answer to 8) lot of questions. us course, the United States nas uone - I told nim this; he raises the same point - I tola his, "If Englind mill du what the United States nes done, and also the whole sterling area, the problem 01 the exist- ine cald supply would be pretty well solved. The question of further production is another question." Jr: I didn't want to interrupt you, but I wanted to say very, very frankly - I always try to - that what we are talking about - I've got negotiations which we have on now; we have our negotiations; I'm encouraged - but I think what I'm trying to talk about is something to do now which is sound economically and in every way sound, but - and then Ister Warriner, see, as After all, if Herbert Feis doesn't mind my using him BS En example, the State Department will be moving heaven and earth trying to get E trade treaty with England, and you can only move them so fest; it isn't E thing you can do in weeks; when we begin to tolk with England on this thing, it is E matter of months. But in the meantime it is to be hoped that WE might go part way - I mean on our own, independent of action of any other country. No.: I'll stop. litte: Can I direct remarks to his (Lecles) last suggestion? I don't know whether you (Lccles) were through or not. Were you? Looles: tell, what - this action, it seems to me, is designed to meet 6 temporery problem, and il it can be simplified to meet the thing for the next six or eight months, then we can cross whatever bridge that confronts us st that 102 -18- time. -e beven't had big chance to study this other, on the possibility of dealing with certain Classes of accounts, large accounts, by requiring either all or & portion to be corried in the Reserve system, whether that would be practical or not I con't know, but i: it is and 1f it involves 8. sufficient amount, say E possibility of 8 billion Collers of further terilivation, it would relieve the Treasury of the need of any borrowing, certainly, until e get a chance to get other legislation, if need be, next January and February. Whatever WE can do that ill be the essiest of sdministration and will cause the least disturbance to the normal banking fune- tion by foreigners, certainly I think we ougnt - should try to 10 it. NOW, what were you going to say, White? Along that suggestion, I agree with you that anything that sould maxe for si plicity should be sought for. I'm not sure tust the suggestion that you tentatively offer would make for simplicity or for complexity. In the first place, you raise the difficulty of segregating the type of deposits. I en wondering whether - If these large deposits were by central banks, the problem would be very simple, but there are very small amounts from central banks in the Reserve bonk. Consequently, it would become a uestion of segregating amon bank deposits and individuals. Now, in the first place - Jack (Viner) raised this point, tast E great many of the individuals abroad carry accounts which are in effect bank deposits nere; that is, they are carried here in the name of some foreign bank; so that you vould have the problem oi sttempting to unscramble a bank's particular deposits into what were individuals' and what were its own deposits. lecles: wouldn't attempt that. I think that's only the case in France, isn't it, where they make dollar deposits. The English - that isn't true in England. And I wasn't only thinking of central banks; I WAS thinking of all the commercial bank balances which are carried in the banks here. Now, we ought to be able to get - have you 60t an idea, George, of what those balances amount to in total? Geruner: They're in the hundred millions, and they're probably about a billion. we know they're 700 million at least Regraded Uclassified 103 -19- 600 we snow they are probably more than is billion, because me don't get the reports of the non-members, the private banks. "aite: Ihose bank balances are compounded, 08 I understand it, made up of individual Accounts abroad. reclus: "B could answer that. It would be merely that the Uniances are carried nere, for instance, in the name of the foreign bank, and the American banks, US to 2110 that money belongs to, use Vinor: For your exemption, if you start segregating them and say that E certain percentage must be kept with the Federal Reserve, then they will do the unscrembling " and senu them over as individual deposits. Leeles: Inst is true to some extent, but you say - AS I under- stand iL, the only place mere that situation exists is in France, End there's no banks outside of France that are taking dollar deposits et 611, And that, as I understand it, involves è comparatively small mount. And if we dia this and the French depositors mo are making dollar deposits in France - the book, of course - the French bank vould either nave to absorb any cost tnst was put on, and I imagine the Reserve System vould want to put some cost on, becruse there would be some expense involved. Viner: I think English banks, Ewiss banks, take dollar deposits. I've had dollars with English banks, Harrison: They do it indirectly. If I'm DE Britisher and I've got i dollar obligation coming due in 90 days, I buy future dollars end the bank sells them by Collers. Iccles: There would be some loss to the banks of those funds, and they would open up individual a ccounts nere. I think that any legislation might give the power to the Board to require the transfer of these balances to the Reserve System or also to require an increase in reserves on all foreign balances. The fues would be that you would then White: The insivioual that shifts would always know Eccles: well, if too much of that is aone, way, WE can require the reserve, the proposition that we have discussed. 104 -20- I think that the law should be sufficiently broad and flexible so that the problem can be Jeelt with, no matter what shifting transpires. infos: Hould you want to point out wherein it makes it simpler? So far 88 issue of gold certificates is concerned and its effect on the market, etc., it appears to me that that problem would be identical; any simplicity which exists would exist by virtue of segregation of accounts. I am not sure it is in the direction or simplicity. It may be in the cirection of favoring commercial accounts, but I am wondering whetner it isn't in the cirection of complexity and not simplicity; I'm not sure. Recles: Well, the other would be terrific. You've got 2). lot of foreign accounts, various names, and the possi- bility of evasion would be very great. illiams: wouldn't WE have to run E foreign exchange commercial department? Viner: You'd have to operate those accounts. illiams: Be B tremendous thing. You's take over the whole foreign exchange market if you take over those balances. Viner: Then your bank would become an importent bank. Lecies: You could require giving the worrd the power to not only increase reserve requirements on foreign balances - all foreign balances, but to also - the right to class- ify them and increase the reserve account of certain balances more than other balances. In other words, you could take foreign banks, both central banks and commercial banks, and you could require that the reserve requirement against those balances be, say, a hundred percent, whereas the reserve requirement against other balances you may do nothing about. In other words, just a requirement to make E blanket increase covering all balances, I don't think it would Williams: But that's not - 8.5 I understand it, you are now dis- cussing the elternative; that is White's proposal. Either you increase the reserve requirements or 105 -2/- require that the balanced be neld in the Federal. Now, the objection to holding them in the Federal is that you really have to take over the whole foreign exchange set-up unless you confine it to central banks, In which case there's nothing to it. Legies: But them, you could require that reserves against foreign bank a ccounts could be increased uy to a nunored percent - tast 1s, the other proposal - without necessarily increasing the reserve require- ments against other balances Et all, noving the right to increase them if the situation apprented. That, or course, would be dealing with only a part of the foreign balances, but it would be desling with that part that represents fully half or all the foreign balances that are nere at the present time, and they would be comperatively few in number and very large in amount, so that tue problem of policing them would be very much simpler than if you made it cover every balance. An immigrant's got c 9mall balance in some bank througnout the country here. Well, technically, E reserve has got to be carried against that. Lachneed: we'd figure out exemptions to take cure of that. Errison: Mr. Secretary, may I BAK B question? 11.1.Jp: That's what we're here for. derrison: Let's assume, for instance, that there are a billion dollars of foreign deposits in this country. H...Jr: Don't you want to use the accurate figure? waite: Billion eight. Garuner: roreign bank deposits - you mean deposits by foreign banks, as distinct from Foreigners incividuelly. darrison: I want to get a mathems tical equation here, and it starts easier with E billion. Or let's put it dif- ferently; suppose there were a billion vollars of foreign deposits in New York City; that means they are carrying, I will now say, 25 percent reserve against that billion. Regraded Uclassified 106 -22- andie: Only if they are in member banks. abrrison: All right, I'll simplify It by soing that for, then. Supposing there ore El billion dollars of foreign balances in member banks in New York City, and they are carrying 250 millions of reserves with us now. IT you slap a hundred percent reserve requirement on, that means they got to put 750 millions more in the Federal Reserve Bank out of the New York market, which nes now only got a hundred to two nuhdred millions. Now the plan, as I would understand it, would be to desterilize proportionately S.O ES to build up those excess reserves. H.m.Jr: Dollar for dollar. aurrison: Dollar for dollar, but you couldn't, SEE, determine it in such & way 28 to put 750 millions back in New York. Viner: Or back to the same banks. inrrison: Or beck to the same banks. It would go all over the country. And there is your bill THE cast running, and what are you going to do to your Treasury bill the rket if you take excess reserves out of New York, make them deficient; even though you try to put it back dollar for dollar, you don't put it back into the locality or into the banks from which you take it. Don't you ruin the bill market? d.1.Jr: Well, that's just why I figured tast I didn't want to discuss with the Federal Reserve the question of the future bill market until this WES settled, 1f possible. derrison: I should think if you Gid this, you'r have to do something very drastic about bills. Is there some fallacy in that? darumer: 750 would be used either to purchase bills or in lieu of flosting new bills. Harrison: But who would purchase them? Garuner: Treasury. 107 -23- Harrison: out not 1f you require the hundred percent reserve, toey won't. Geruner: The process of desterilizing would be one by which you either repurchased bills in the market in order to replace the funds in the banks, or failed to flost new issues and instead used this 750 BS Treasury cash. Apprison: Even then you do not restore the reserve position of the New York banks. Viner: The regional distribution of reserves and the regional distribution of balances do not go together. ine real problem, to me, is that of the individual banks. The funds may flow back to the same region, but are there any banks which would be made vulner- able by this arrangement because they operate largely on foreign ba Lences? dorrison: Mr. White, 110W much of tnst - you say the 26 banks, the 13 are members and 13 non-members - LOW such of the percentage of the deposits were in the 13 non- member this, so you remember? thite: I couldn't say. I'd like to get that figure, in any case. Harrison: Have ME any right to require E hundred percent reserve of non-member banks? White: Not under existing legislation. B.W.Jr: You weren't here when I read off my list. In this thing we made it one or the other. Now, Opper's been studying this, and Opper: Well, the legal problems involved there would not be insuperable. That 1s, yourd be dealing there with the Government's right to control foreign commerce. It would be a little more difficult problem if you tried to Forbid non-member banks from holding foreign balances at all. H.W.Jr: That's the other. And then the thing, Eccles, that you and I have got to decide on that particular phase is about our friend Steagall and the question of the state banks and non-member banks - which is easier, see? 108 -24- accies: What? S.V.Jr: Which is on easier way to nanule it? Ecoles: Well, you've got to cover the non-member banks. or course, you defeat the program completely if you don't. And the question of getting - increasing reserve requirements, getting power to increase reserve requirements of the domestic banks would be insuvisable with the present banking set-up without unification; they'd slip out of the System. Mr. Potmen, in his bill, makes the suggestion that the Reserve Board be given power to designate the reserve requirement of non-members as well as member banks. I doubt that Golden.: At the option of the banks, though, Mr. Chairman. Lecies: What? Golden.: His proposal is to make it at the option of the banks; that if they want to have the privilege of borrowing from the Fe eral Reserve banks, then they've got to keep their reserves. Otherwise, they don't. ancles: I understood that they have the right to dotnat. Well, in any case, that field isn't open to us, because that would be on endless legislative job, to get unifi- cation. So that all we've got now is this field; that is one thing that seems to me is pretty certain - dealing with .oreign balances - and I think will et a good oeal of sympathy on the Hill. There would be no political problem in connection with this. It is purely 8 question or what we think is the right thing to do and the practical wey to handle the situation. 4.1.Jr: If you don't drag in the question of members and non- member banks and make that an issue. Golden.: Mr. Secretary, the fact is that under existing law the Federal Reserve Board nes authority to impose marginal uirements on non-member banks. That right has been contested, but it is existing law. H.W.Jr: That's a good point. Regraded Uclassified 109 -25- opper: There's E few little further frills that they put on that, and that was the use of the mails and any instrumentality of interstate commerce, which 1s the way they got by that. Of course, you might do the same thing in connection with this. darrison: But the thing would be futile, I should think, unless you could make this applicable to non-member banks in some way or other. Jr: And talking for myself, the Treasury, we'd be very glad to add to snother precedent giving the Board additional control over all banks. I mean we'd be glad to be B party to that. Viner: There is also the problem of insured and uninsured. Come of these banks are uninsured. Ecoles: Some of the non-members; none of the members. Jr: Which ones are they? Viner: These foreign banks - all these foreign banks are uninsured. Harrison: You take this list here. The Chase Bank, for instance, has about 280 millions of foreign deposits now. Some of that is probably time, against which they carry 6 percent, and some of it is demand, against which they carry 25 percent; SO that 1f you made 8 hundred percent reserve requirement it would increase a minimum of 75 percent of that total. Now, for the Cause Bank that would make B very, very difficult position, taking that bank 8S an individual bank. coles: llow many bills have they got? They's let the bills run off and other banks would buy bills. It wouldn't change the total reserve picture. It resolves itself, George, in the problem of making effective the existing excess reserves, and to the extent that you - we can't treat the excess reserve problem purely by taking into account the position of the individual bank. derrison: You can il he is one or your principal buyers of bills. Look what you're going to do to nim. 110 -26- Lecles: He'll quit buying bills to the extent that his reserve re uirement is increased, but somebody else will get that excess and will have either iale money or they'll buy bills with it. It 1s merely E shifting of position and that is happen- ing all the time. dorrison: WEll, but ES you start you don't create any addi- tional excesses; it's all minus then, and you 20 down that amount, say 750 million. Viner: We might create 8 cushion beforehand, just to safe- guard that. Surdner: You could start desterilizing any time. Viner: I taink the thing to 00 would be to start desteriliz- 1nE E few days before this increase in reserve requirements became effective, so that the thing could be cushioned. mite: but that doean't vulte meet the Governor's Question Wholly. nis problem is that an individual bank wight be confronted with the necessity of getting rid of so many assets that it would be confronted with a serious problem, even though the excess reserve situstion, as a mole, remains as is. Herrison: Ana the question of secondary distribution of those assets. hite: out I think what might be said is that all these banks tast have these large foreign deposits have & very Large portion 01 very liquid assets, ani if this proposal is carried out - see, you speak of E hundred percent reserve; there is no intent to suddenly Jump to that. It would be done with sufficient gradualness so that - of course, they're going to - they'll have to get rid of some of their earning assets. Dochnesd: They'll be hurt in profit and loss more than their reserves. Ecoles: You can increase this st the rete of 8 hundred millions at a time. White: Yes. 111 -27- Looles: and you wouldn't increase the reserve requirements first; you'd do that - you'd delay that; that would come second. White: Init's the cushion. lectes: That's the cushion. Gardner: If this came at a financing date, the Treasury Just wouldn't flost any bills on the first occasion. Hurrison: I WRS trying to see what bills white: he're trying to get the exact status of some of those large banks - what those holdings are. we'll have them this morning. Unless you have them already there Harrison: I haven't got these broken down into bills. The Chase JaS got 0.0 million of governments. White: But you don't know what breakdown. darrison: They have a very substantial amount of bills. Walte: their problem would be very simple. Decles: don any ave got call Loans? They've got those asrrison: I'm not thinking of the individusl banks from the point of view of the bank, but rather litte: Its repercassions. darrison: Its repercussions on the bill DI rket and liquidation of assets to take care of the increase in reserves. White: On the till market, I think that would be Quite ade- quately taken care of because the sssumption is that the fund would be appropriately menaged, And the appropriateness depends on the cusnioning effect one the proper time, so that there will not be that result that you fear and that we all feel would be undesirable. H.M.Jr: Well, may I say this - what I'd like to do, 1f it's agreeable I've got, unfortunately - I've got 2 112 -28- sort of tough schedule. I neve the Polish Ambassador - ans who's this can from their Department of Commerce? beior Under Secretory. H. Jr: And the Russian Ambessador. And President Quezon at 11:30; before I see Quezon, I've got to fini out what the Army wants. Do you (feis) want to sit in on any of those or not? Eais: Ine Russian, I would like to. H.T.Jr: The Russian - all right. Non, what I think we've got to be careful about is going out of here. I have this room below here, and met I'd like to do - I mean I don't anot how you feel, Ecoles, and some of the rest of these people, how much more time you can give it this morning. What I'd like - just now would you suggest we con- tinue the discussion today, leading up to another meeting tomorrow morning - what would you suggest? Eucles: Well, I'd like to suggest that you let us - this is quite & Job Harrison: Right. Becles: something that - I think I'm in favor of bringing it to a conclusion just as Quickly as it can be done, but darrison: I think what you should do is get a memorandum of the Viner: Go into a lot of unnecessory detail in that. darrison: But you can't decide on which alternative you want to adopt without details. You might have to do that with each one of the alternatives. Decles: I WES going to say that I'd like - I wish you'd let us see if we can't develop something. H.V.Jr: All right. 113 -29- Loglos: Now, Dr. Currie, who isn't here because I didn't know just what passe of this WUS going to be dis- cussed this morning, has possibly given more thought and study to this porticular phase of the problem, 36 we have essigned aim this job. I'd like to get one of our attorneys to also work along with some of the people on our staff with the idea of seeing what we can develop. Now, I believe that if we could Lake some of our group and White and Opper, somebody mere, And let's - :fter we've used time to spend E day or two on it, and then let them I taink we can sit sround like this and we really won't get very for. definder You don't think you'd be ready tomorrow morning? Locles: I don't think SO. I'd 14ke to say day after tomorrow, give them this afternoon and tomorrow to give the thing a little more Then they ought to have something tentative in view of this discussion. I think we've sat E sort of - I've got 1. sort of better suggestion. Jr: well, will you let Taylor know whom you'd like to have from the Treasury to sit in on this, and anybody aere is available. Isylor: And when. Sccles: Now, wast do you think of that ides, Dr. Goldenweiser, the suggestion ve made; vast do you think of that? Golden. You mean of getting together and studying Locies: deving our people spend this afternoon and tomorrow so 68 to just formulate some tentative plan with some alternatives, and then get together with such people here as are available in the Treasury - just e small group, say three or four people from our shop and three or four here, to bring in before our group this program and the alternatives, with the arguments for ano against. Let's see what they, under the circumstances, would feel would best meet the situation, if they can get together on it, and then with suen modifications or alternatives as seem to be possible. Then, it seems to me, we'd have a basis upon which we could possibly make E decision. Harrison: I don't think there is & chance of getting anywhere 114 -30- until you take up each alternative and go right straight on down by steps and see where you come out, from the point of view of the banks, the money market, and the Treasury bill market. H.M.Jr: That is why I held up - there's no use settling this bill market question until Eccles: well then, we don't want that meeting tomorrow, do we? H.M.Jr: I don't think SO. 115 Agenda Should we try to get legislation permitting an increase in reserve requirements against deposits for foreign account? 1. To what maximum? 2, Should there be any exemptions? (For example: 15000 ro 10,000, or 25,000 on individual accounts, or more for bank accounts?) 3. Should such deposits be held only by member banks? or Should any bank he permitted to carry them 88 now? 4. Should deposits for foreign account be exempt from the F.O.I.C. fee? 5, "hat shoul be the method of owation? The sequence of steps? 6. If reserve requirements against foreign deposits are in- creased, ought the Treasury issue three-month bills, or doesn't it matter much? 7. "ho should be granted necessary powers to raise reserve requirements - the Federal Reserve Board or the Treasury? 8. Bow soon should we try to get the legislation? 9. Should we consult other "club members" before seeking legislation? 10. Should we attempt to get other "club members" to adopt somewhat similar neasures? B. Should we purchase foreign gold only from Treasuries, Central Banks (and designated agents)? Regraded Uclassified 116 THEASURY DEPARTMENT Washington FOR IMMEDIATE RELEASE, Press Service Tuosday, June 15, 1937. No. 10-60 Secretary of the Treasury Morgenthau today announced the final subscription and allotment figures with respect to the current offering of 1-3/8 percent Treasury Notes of Series D-1939 and 1-3/4 percent Treasury Notos of Series A-1942. Subscriptions and allotments were divided among the several Federal Ro- serve districts and the Treasury as follows: Federal Reserve 1-3/8% NOTES, SERIES D-1939 1-3/4% NOTES, SERIES A-1942 District Total out- Total mib- Total sub- Total sub- scriptions scriptions scriptions scriptions received allotted received allotted Boston 8 243,693,700 3 41,492,000 $ 221,147,200 $ 37,726,500 New York 1,225,023,700 208,394,700 1,252,004,900 213,044,700 Philadelphia 119,060,500 20,308,200 159,076,500 27,125,200 Clovoland 156,021,900 26,616,000 145,593,100 24,996,700 Richmond 75,511,900 12,890,000 83,870,000 14,369,300 Atlanta 53,640,200 10,898,000 67,950,700 11,673,100 Chicago 252,494,100 43,260,800 253,458,800 43,444,100 St. Louis 64,465,700 11,427,400 67,016,100 11,807,000 Minnespolis 18,269,900 5,106,500 20,536,200 3,550,000 Kansas City 50,117,500 8,631,000 37,376,400 6,428,000 Dallas 42,164,500 7,243,700 40,268,300 6,925,700 San Francisco 188,135,500 32,013,500 147,511,500 25,110,000 Tronsury 750,000 127,500 516,700 89,700 TOTAL $2,499,349,100 $426,494,300 $2,496,326,400 $426,290,000 Regraded Uclassified 117 REBYING RE FRENCH CRISIS June 16, 1937 8:45 6.M. Present: Mr. Taylor Mr. Bell Mr. Oliphant dr. Lochhead Mr. Opper Mr. Upham Dr. Viner Mr. Riefler (Secretary talking on phone to Mr. Cochran as conferees entered; conversation follows:) 118 June 16, 1937. 8:40 a.m. Cochran: Good morning Mr. Morgenthau. R.M.Jr: How are you? is All right, thank you. I'm calling from my home because I have one special thing to take up with you. M.H.Jr: Go ahead. = I can tell you first about the French situation. B.M.Jr: Well that's what I'm calling up about. : Ah - this morning at 6 o'clock the Chamber passed the bill giving special powers to the government. B.U.Jr: Yes. C: And they amended it to give him such powers only during the present period of parliament. M.K.Jr: Well how long does that last? C: Officially until July 14th. 11.3.Jr: Until when? C: July 14th. H.M.Jr: July 14th. . C: And they have also specified that the must be controlled between the limits fixed by the monetary law last October. B.M.Jr: Say that again. C: That no exchange control is to be a code, U.S.Jr: Say that again will you please. C: They must meintain the Franc within the parity - within the limits fixed by the French monetary law of October 1st. H.N.Jr: I see. 119 - 2 - C: And they must not resort to exchange control. H.M.Jr: They must not. C: They must not. H.M.Jr: I see. C: So that may upset some of his plans a little. E.V.Jr: Ah-ha. C: But I sent you a telegram on that. F.M.Jr: You sent me a telegram. C: Yes, it left this noon. H.M.Jr: Ah-ha. C: And the bill goes to the Senate tomorrow. U.M.Jr: What's that? C: The bill goes to the Senate tomorrow R.M.Jr: Yes. C : and the chances are a little better than 50-50 that it will be passed. H.M.Jr: It will. C: Not because they have faith in it solving the problem H.M.Jr: Yes. C: but on the contrary they're afraid to turn the government out under any circumstances. H.M.Jr: Say that again please. C: They are afraid to turn the government out. H.M.Jr: I see. C: They would rather let him use this special power, which he has requested H.W.Jr: Yes. Regraded Uclassified 120 - 3 - C: they - that will probably cause more trouble. F.M.Jr: I see. C: And then see what comes, B.M.Jr: I see. Well - ah - ah - do you see anything that may happen within the next 24-48 hours? C: I do not because the Senate will get the bill tomorrow so there might be a discussion of it tomorrow night. 11.M.Jr: Yes. C: But there - nothing can happen before then. K.M.Jr: That's before Thursday night. C: Thursday night, yes. 8.2.4r: I see. C: And on the other matters which I wanted to tell you is this. H.M.Jr: Yes. C: If you have received my last cablegram describing my Basel trip you may have seen that I had a number of conversations with Governor Norman. H.M.Jr: Well I had not seen it. C: Well it should all be this morning. F.M.Jr: Well there's only one section in. , C: Oh I see, well it - it was all cabled yesterday. H.M.Jr: What? C: It was all cabled from here yesterday. E.V.Jr: Well I'll get C: Anyway in this I gave a lot of views which he expressed very frankly to me. H.M.Jr: Good. 121 I I C: But he insisted that they were just his personal views. H.V.Jr: That's all right. C: And in one place he said that he thought the two governments had been cooperating together very well on the , that is, the two M.M.Jr: Wait a minute. I - I didn't get this thought. Repeat it. 8 He thought that during this troubled period of the scare that the Americans and British H.M.Jr: Yes. C: had been cooperating very well as far as the day to day operations, which are handled by telephone, are concerned. E.N.Jr: Yes. C: SO that the need for cooperative study of longer term problems. U.M.Jr: I see. C: that this - our country 1s going to continue to H.M.Jr: He what? C: That this gold question is going to the both of us. B.V.Jri Yes. C: And he said that - he asked me if you could send some technical person over to discuss matters with them II.M.Jr: Ah-ha. C: And I said well I was quite sure you would not send anyone unless you had some indication as to what they were thinking about and that, considering the nervous atmosphere, you wouldn't risk the publicity until you found that there might be some chance 122 - 5 - C: And I said well we don't want any publicity to this H.X.Jr: Yes. Ct and he said, "That's why I have approached you ". And I told him - I said, I have my colleagues in London that I can talk to at any time. And he said, well I'm just speaking for myself now but, he said, I'm going back to London and, he said, I want to get in touch with you sometime later , that is, the Treasuries are interested but, he said, if I do get in touch with you, he said, it will a preliminary idea with the idea that H.M.Jr: Ah-ha. Now Cochran. C: What? E.M.Jr: Is this in your cable? C: No, I'll - I'll tell you just why B.M.Jr: Oh. C: because he said we do not want this to get to your Ambassador but to me. H.U.Jr: Oh. C: He said - he said I - he said I don't want to em- barrass you by speaking too frankly H.V.Jr: Yes. C: but, he said, he talks too much. H.M.Jrt Ah-ha. C: And that's why I called you from my home R.W.Jr: I get you. : because it would put me in an embarrassing position and I really believe they actually have something they want to say. 123 - 6 - N.M.Jr: Well I - I'll ..... c: He would rather keep it out of this Embassy and out of all the Lmbassies. A.M.Jr: well I understand and when I - - and when I...... C: He wents to keep it entirely out of his Embassies. ....Jr: Yes, well Cochran - nello - nello Operator: Hello H.V.Jr: An - Miss Spangler. !werntor: Yes sir. S.H.Jp: de's disconnected. Hello. 0: Yes, I'll get him right back. 124 -1A- (Following cut-off conversation with Mr. Cochran) He said he didn't want Bullitt to know it, that Bullitt talks too much. If you can't get it, that's going to be good - - I mean whoever's making a record of this for them Viner: It wouldn't be easy. Have to strain. Jr: (To Operator) Are we talking on the French phone or Lnglish phone? Operator: You're talking on the English phone. He called you and ne requested it. ...Jr: Who? Operator: Mr. Cochran - via London. H.W.Jr: Uh-nuh, I see. Operator: de called you at 7:30 and I told nin to call you at the office at eight. B.M.Jr: Yes, I know, well, I always say that these things never come out of a clear sky. I'm not going to answer right away. I mean I've got € fellow on the water right now. . Viner: I'd prefer that you start talking with the Treasury rather then H.W.Jr: Yes, well that's just the way these central banks I mean Cochran wanted to write a letter the other day to George marrison and to Governor Franck; ne wented to Regraded 125 -2- write E letter. We went all through this business and had all this trouble of establishing this thing between governments, and I'm going to keep those cnannels open. He got that after days and days and days. The last time Norman was here, ne fished sround about coming nown. They phoned from the British Embassy and said, "Governor Norman is asking to be invited to luncheon, sking now he canget an invitation. That do you recommend that we do?" Well, if Governor Norman comes to Weshington, he knows how to get an invitation; he doesn't have to worry about tast. Khen he got back to England, he said he came over especially to see me and was unable to arrange it. The British Embassy said, "Norman wants to see you." Have we passed the depth of our depression on revenue? Hell: Probably not. Looks like today might be a little short. H.d.Jr: Really short? How short? Bell: On, 15 million. H.N.Jr: You mean minus? Bell: Uh-huh. H.4.Jr: Really. Bell: I think we'll pick it up though; still have nopes. They never come in twice slike. H.M.Jr: Has anybody got a program worked out for me - the steps, the legal papers necessary, alternative plans, in case France should put on an exchange control or devalue further? Has anybody worked that out? Taylor: working on it. H.N.Jr: But you have nothing for me this morning. Taylor: It isn't finished yet. n.M.Jr: what? Taylor: It isn't finished. H.W.Jr: (On phone) Hello, Mr. Cochran. (Conversation follows) Regraded Uclassified 126 - 6 - June 16, 1937 8:53 a.m. R.M.Jr: Hello 0: Mr. Cochran. H.I.J.: Thank you. 0: Go shead. 1. .Jr: Hello :: Hello I lost you in the middle of the ocean. C: Yes. a.d.Jr: Well I understand about this gentleman seeing you and saying he'd like C: I told you about the invitation to come over? H.M.Jr: No. Regraded Uclassified 127 7 C: He telephoned me this noon and said that he wanted to refer to our conversation at Basel and to tell me that he would be very glad if I could have lunch with him at the Bank in London on next Sunday. He said that if I would tell him that I was coming over he would make certain appointments for me with people whom he thought I should see, both in the forenoon and afternoon on Monday. I told him that I would have to speak to my chief before I could say anything and that if I did come it would just be for lecture and for anyone to talk to me whom he suggested but that I could say nothing until I talked with you. 11.11.Jr: Yes. C: And I think you understood that they said they did not want this thing to go through the Embassies. H.M.Jr: I understand. 8 I mean there - they're are matters, he said, that there are certain things there which they would have difficulty in agreeing on among themselves and, he said, they didn't want any suspicion of conversations arising whatever. H.W.Jr: Ah-ha. Well I've got to think this over - I can't give you a snap answer. C: I understand but I didn't know how else to get it to you. H.M.Jr: Well this is the proper way, C: Yes. H.M.Jr: This is the proper way. C: In my telegram I just made H.A.Jr: Yes, this is the proper way to do it. C₁ Cooperative study on longer term problems. H.M.Jr: Yes. 128 8 I I Cr I didn't mention anything about your sending someone from Washington or letting me go over. The Governor wanted to talk to his own people in the Treasury before he went any further. H.M.Jr: Ah-ha. C: He'll talk to them now and phone me this noon. E.K.Jr: Ah-ha, well let me think this thing over and you - I'll - I'll give you an answer one way or the other within 24 hours. C: All right, fine. H.M.Jr: Thank you. C: I should tell you that my Chief is away right now. He went on this morning. R.Y.Jr: He went where? C: On a tour of southern France. B.Y.Jr: Ah-ha. C: to P Marseille, and so on. F.M.Jr: Ah - what's the idea of that? C: Inspecting Consulates for some reason. Well it's a good time to do that, isn't it? C: Well anyway he's not here. H.M.Jr: All right. C: But this other I'll have to leave from here and call you. I - I'm up in the air as to how you'd want to handle it. H.M.Jr: Well I'll say this - I - I certainly won't give you any instructions without talking, in confidence, to Mr. Hull first - hello. Regraded 129 - 9 - C: It should be to him personally. H.M.Jr: I understand. C: That's right. B.N.Jr: So whatever order you get from me, it will have been cleared with Mr. Bull. C: Surely - surely. R.X.Jr: So you'll be protected on that. : Fine. H.M.Jr: Do you understand? C: All right, then you can send me one, if you do send me, a cable or a letter or telephone or H.M.Jr: Telephone. 0: Telephone. B.M.Jr: Yex, but I won't - I will discuss it with Mr. Bull. C: Surely - surely. 7.9.Jr: Yes. C: All right, I'll be here all the time. M.M.Jr: Do they feel the same way about the Embassy in London? C: Well he said we - I said you can take it but I have a colleague who does the same thing and he said, well you see more of your Chief than he does and he said we'd rather keep this out of the Embassies. H.W.Jr: I see. C: I don't think they feel quite as strongly about the one there as they do about this one. H.M.Jr: Ah-ha. C: But to put it through that Embassy if I couldn't put it through this one. Regraded Uclassified 130 - 10 - H.M.Jr: Well it's safe to use the telephones because the only persons that can listen in are governments. C: That's right. H.M.Jr: So - ah - ah - so I would say it was perfectly safe. C: I think so, yes. H.M.Jr: All right. C: Goodbye. H.M.Jr: Goodby. Regraded Uclassified 131 -3- I ant to let this thing kind of PASS further through my own brain. You get the thing; 1 mean It's a - I mean Norman is injecting himself into this thing. After all, ne doesn't set the policy. Pretty difficult decision for us to make. It N6S very difficult to hear the telephone con- versation. Could you give us the (ist of it? H. .Jr: The whole point is this. Norman sees Cochren - this is what I get out of it - :nd he says, "Now, & lot of problems" - seeing him in basle - "we've got F lot of problems and I wish that the United States could send somebody over to talk things over with us sno see where we can get." Cochren spys, "We can't send anybody over; too much publicity." Lie says, "Well, we don't want publicity over it, but I wisa you's think it over. Maybe you could code, or somebody." Now, no FOBS back - non I'm Just thinking for myself - 6088 book to London, talks the taing over with als 500 people and with the Treasury, and again ASKS would ne come over there and lieve lunch with the british, ano that ne'll make appointments for him to see people. DO he now tells nim ne's to lking things over further, and so he (Cochran) says, "Way don't you see Butterworth? He's all right." ne stys, "NO, ne isn't sufficiently close to Morgenthau. ..E went to see you.' Is tast about the way you people got it? Mipnant: That's the picture. H.S.Jr: Now we've got the situation of - well, it wouldn't be very much different than it would be over nere, except that Lecles doesn't work that way on this foreign thing; he leaves nimself entirely out of the picture; or if ne gets a letter, ne doesn't enswer it without sending it over. We get full cooperation over here. but ir ne'd start seeing people fróm Great Britsin without letting DE know or letting the Lubossies know, and all lize tast, I'O he pretty damn sore. You snow will t my reaction is? I think I'm going to 386 the British Ambasss to come and I'll telk to 132 -4- nim about this; then he can send word to Sir John Simon that, Joes Sir John Simon want this? Viner: You're not disclosing to nim that you've received this S.M.Jr: On no, tell nim no facts. Baylor: you've got to tell him. anclinesd: Norman states ne's Viner: Norman's teken it Vip with nis Treasury people. No, the Ambassy's the Viner: It's a respectable thing then. 6.4.Jr: The Embassy he's objecting to is our Embassy. He's objecting to Bullitt. Paylor: No, Norman 010 what de should have done - absolutely. Viner: Inst's what I was worrying about; It seems so strange. 11.1.dr: I wouldn't take his word for it. I mean I wouldn't sena Cocoran over there unless Sir John Simon invites aim to come over. Oli,mant: Particularly since you sent a message to nim; other- wise you might leave nim up In the air. White: Absolutely. Olipnent: ne'd say, "What is this? You If White: They can extend the invitation. Viner: Couldn't you operate this wey? You'd tell Norman that you'll send nim over after informing Chancellor that ne is coming at his request. H.d.Jr: No, I woulun't send him over there - I wouldn't send nim over there unless Air John Simon asked for him. Taylor: This time you can have it confirmed. 133 -5- S.1.Jp: "Is it agreechle to -ir John to have ft Taylor: I wouldn't 286 for L direct Invitation. viner: No. ulte: Way should they object to giving a direct invitation if they want to see him? Viner: Makes it too important. mylor: Certainly ask for confirmation. After you have undertaken to communicate with Sir John directly, I con't see JOW you can leave nim out of this without making him feel foolish. R.M.Jr: (on phone) Leove word, the minute Mr. Hull comes in I'd like to talk to nim please. well now, listen, children, has anybody got anything for me on what we're going to do in case France moves? laylor: (Nods yes) Have to see the move first. 6.1.Jr: Oh no. mylor: well, we've got All these 98 different things. H..,Jr: Well, let's put it this way: Move One - if the French do love One, the United States can do A, B, C; if the French make Move Two, the United States can uo 1, 2, 3. Inct's the say I'd like it. And there's only about three moves the French can make, and if the French do one of theo, then I want you fellows to come in and say, "All right, let's talk over the things WE can do as counter-moves to this." I don't want to wait; we've got another 24 hours to do this thing. I'd like very much to have the :lternative things that the French might do, and then the alternative things that we might do to offset that. Now, that's not sking for too much. Injlor: WELL, that's been done for some time. H.M.Jr: Well, where is it? 134 -0- mille: Well, we started out and there were four things that we thought they might reasonably do, Then we discussed those; I don't know whether we all came to S formal conclusion, but the gist of the conversation H.M.Jr; I don't went 8 formal conclusion. I simply want to put cown on one piece of paper Move One on the part of France and then the alternatives; don't have to agree on the alternatives, just agree there are alternatives. Then Move Two - alternatives. I mean I'd like to Comiliarize myself. Then, PS you SEW the other any, once I get the technique of the thing, then I cantegin to put my brain on it. But until I see it that way - see, I want it so I can study it. White: Give us B little time to out it in that form. I want it in that form. And on each alternative taing I ant to have the legul papers ready and finished. Olipasnt: Finished one ready. ....Jr: Ready for the President's signature, if you don't mind, Herman. Clipmant: Everybouy's initials except the President. H.C.Jr: Everybody's initials except the President. Oliphant: All right. naite: When 00 you want it? ....Jr: AS soon LS the human brain can prepare it; ES soon 68 the numan brain can prepare it. Mylor: Well, there is one fundamental uestion involved there, and that is, you can stretch this thing pretty far. That's my opinion, that you can. Cen't you, Clarence? You mean our action in connection with the tripar- tite? Taylor: Yes, depending on whether you want to keep them in 135 -7- the club or whether you want them out. G..,Jr: That's enother alternative. milor: sart's the only one. .... No. No. listen, don't - if you don't mind, con't argue with me. You've got this - argue with these Tellows and get it down to the various possible Item tives and then men you Are ready to talk but I'd very much like to have it that ray. Do you want to 136 - do you understend what I want? Vinor: No, I Jon't. decedr: You on't? Viner: i.o, I taink that I'd follow that (Taylor's point), that we can leave them in and say, "Your action Isn't in conflict " 0.5.Jr: 40 it both. we're not taking any action; they're going to take the action. nity: The question is simple, Jake: what are tne alter- natives and what are the merits of each slternative step? dillar: Non listen, you're Prolessor Rist, und Viner: I don't see the legal side. enter That nas to be brought in. Viner: Simply what I don't understand is now these alterna- tives would leed to any legal action. 5.2.Jr: They certainly would, if you rescinued the right of private banks to bring in gold. 011phant: Or if we embargoeu the movement or gold. call.Jr: Listen, you're Professor kist just sitting on that committee. Lychhead: Professor nist is off the committee now. Regraded Uclassified 136 -8- Venue: I NBS until yesterday. "ell, they've put him off and they've just employed Dr. Viner to take his place, (no you're sitting there, ENG but are the tuings tast you would edvise them to do? Inst's the my I'd approach this thing. Then - first from the stendpoint or god economics, and then, what are the things they might no because they are forced by politiesl pressure. Or because tuey Jion't nove Jeke. Viner: Or in spite or nim. d...Jr: And having decided what the French might do in these circumstances, then wast could we 40 to take care of ourselves? Now, I don't SEE how L. person can state the problem any clearer than that without my sitting down here and doing the thing myself. Now, my pro- position Le - SQ for I have 210 engagement tonight and I'll keep it open; you (Isylor) got any enga /ement tonight? ThySics (Nous no) Do you want them in or do you want them out? -hot's the H.A.Jr: Do I want them in or went them out? I want them in just as long às they can keep in it. legior: You cen tretch the rules a mile. S.M.Jr: But can they live up to them without Paylor: Yes Jan.Jr: explore it, will you? Explore It. or course I went them in. Re want to keep it going 13 Long as pos- sible. Tylor: Well then 6.2.Jp: I mean that's been the whole objective. Viner: That answers it. Inst simplifies our task E great deal. d...Jr: In talking with the President nere two weeks ago, ne WES saying that ne is very much discouraged about this - what you call trade treaties, and the Regraded Uclassified 137 -9- results, and all this thing, and all ae could see WES that the world WEB moving, que to the expense of armaments - moving graduelly toward one form of exchange control after another, and it would only be a questiona time before they would all be on tast basis, and england and ourselves would be left to do business with each other on one king of 2 besis, the the rest or the world, with their internal economies, left on il basis to do business within themselves and a little bit with each other. He said, "That's the way we're drifting. what me going to 40 about It?" My snawer is, if France goes - it goes toward the Schacht method, that is - and Jepan does - Just tottering on the eage of it - way, I'd say It WES bad denicine. After all, the longer we can keep France goins, I think it's better for our system of doing trade. regIor: It will be on crutches, ....... Pardon ...E? It will be on crutches. Jr: one's been on crutenes. Mylor: Yes, but on the fourth foot, In addition to the nine legs. des.dr: To answer your direct question, if the decision WES mine, I'D say I'd like to do everything We cen within the spirit of the 18W, and I's even go so far - I'd beno it a little bit to keep it going. I'd bend it & little bit to keep them going. What? Risfler? diefier: I agree Afth that. ....Jr: what? iefler: I agree. R...Jr: Anybody want to say snything? Well, gentlemen, when you're ready - I'll keep tonight Olignant: It's probably tonight, then, 1s it? I don't know what these fellows can be able to have. I know I'm crezy to do it tonight, but I'll hold it open and Regraded Uclassified . 138 -10- (hite: I think we can come to & conclusion before tonight, because we have covered E great deal of the ground already. M.M.Jr: Are our two advisers comfortable? Did you (Riefler) see the statement in the Tribune today? liefler: No. H.m.Jr: Bee Mether that's agreeable to you. Regraded Uclassified 139 June 16, 1937. 9:20 a.m. H.M.Jr: Hello 0: All right. Yes. H.M.Jr: Hello - Cordell. Oh just a moment please, Mr. Secretary. U.M.Jr: Hello 0: He'll be on in just a second. H.M.Jr: Hello Hull: Hello, Henry. H.M.Jr: Cordell. H: What's going on? M.M.Jr: Well I'd like to talk to you - ah - as between us officially but privately, see? P; Yes. H.W.Jr: And, as I say, if I may talk to you confiden - ah - ah - Cochran called me a little while ago E: Who did? H.V.Jr: Merle Cochran. H: Oh yes. H.M.Jr: and said that he had had a talk with Norman in Switzerland. H: Yes. H.M.Jr: Montague Norman. H: Yes. Regraded 140 - 2 - E.E.Jr: And Montague Norman wanted to know whether he, Cochran, could come over to London H: Yes, H.".Jr: and talk things over with them so Cochran said, well you've got Butterworth over there why don't you talk to him so he said , no we feel that you're closer to Morgenthau and we'd like to talk to you but he said I'm only talking for myself. He said I haven't discussed this matter with other people. Ah-ha. E.W.Jr: But he said I'll let you know. So this morning he called him up on the telephone. He said, ¹ve talked it over and we'd like you to come over Monday and have lunch at the Bank of England but he said we're very anxious to keep this out of the channels of the American Embassy in Paris. Ah-ha. H.M.Jr: He said we want to keep it very quiet and we don't want Bullitt to know about it. Ah-ha. H.M.Jr: And he said - ah - but if you can come over we'd like it and we'd have appointments for you in the morning and in the afternoon so Cochran said under those circum- stances he'd call me up and wanted to know what's what SO I said that I would talk it over with you and see how you feel Yes. (1.M.Jr: and then after that I thought I'd ask - get the President's advice. Well now we've got this situation, Henry. We have to talk you know, in our own circles sometimes, very frankly. H.M.Jr: Yes. nh - Bill - ah - ah - I suppose is closer to the President than any of us in the State Department by far. I don't mean by that that there's any friction in any way but you understand what I mean. H.W.Jr: Yes. Regraded Uclassified 141 DQ I I His An - he's - ah - so he spreads out over Europe some little Yes. and feels, I think, that he's got that side - ah - that right. 9.7.Jr: Yes. Now - ah - if he should ever find this out why I - of course, the British think that he's not friendly to them. S.M.Jr: I see. That's what they think and that is French-German S.M.Jr: Yes. Now I'm not pressing on those things but that's what they think. CANADA Ah-ha. 11: The only thing is if - ah - if he finds that - that we're keeping things from him there around his office - I don't know - I think you'll have to let the President pass on that. If the President should give instructions but even then my - my view is that it's always best just to let one of our fellows know where he's at the head of things in a given place. H.W.Fr: Yes. And especially if he's liable to find it out. T.".Jr: Yes (laughs). Now that's the point. T.M.Jr: (Hearty laughter) Yes. R.M.Jr: In other words (still laughing) proceed with the best policy if you know you're going to get caught. Regraded Uclassified 142 - 4 Yes sir, that's the point I'm making. (More hearty laughter) Yes. (still more hearty laughter) Yes. Well I found that to be true also. Yes. Ah - well I'll tell you. I'm seeing the President in a little while and before I saw him I wanted to talk to you because I never would do anything like that without first talking to you. Well this is - I - I'm just trying to be helpful, you understand, I'm - I'm a 100% in my relations all along the line. Because, as I told Feis yesterday, when Mallett left Yes. B.W.JP: I sent a message to Sir John Simon Yes. R.C.Mr: - I don't know whether he told you. Yes, he told me about it. So I feel this way that - ah - maybe Norman wants to horn in on this thing and I'd better keep my channels open with Sir John Simon on that other angle, you see? Yes - yes. Homedr: But the thing that came to my mind was that I - if you thought well of it - that I'd ask the British Ambassador to come down here and tell him this is what's happened. Now my contact over there is with Sir John Simon and I'd like them to advise me what they - how they'd like to Uclassified 143 - 5 - St Well now that's another point - that's another point. I think if - ah - if Norman should meet up - up in Swit erland or any of those places where they often meet Yes. should meet Cochran and they have any kind of a conversation - that's one proposition or if - 1f Cochran just unofficially and individually should meet and talk with this fellow, Norman, that's another - that's all right but If ho's to have - if we are to authorise him to go over Yes. and make him a part of the government situation to talk with Norman without the British - the regular British officials knowing about it you get into trouble. Yes, and then, of course, the other thing - ah - the last couple of months Butterworth has been doing very well. Yes, of course. Butterworth's been doing very well. Yes, I'd be - I would want - I think it's better - I believe, the more I think, that Cochran could say now we want - we're glad to talk with any of you anytime in a way but we have to have regard for this broader situation - this gold metal situation That's right. I don't particularly like it. without getting wires crossed. I don't like it - I don't like it very much. I think that Norman probably just wanted to go over a lot of odds and ends in the general financial situation. No, he has the gold thing in mind. Well that's what I - I meant that as the in the conversation. N.M.Jr: Yes. Regraded Uclassified 144 9 1 1 To talk it over perhaps with a view of - ah - spadework in advance of some possible suggestion relating to the governments - just some informal general talk, you know. Yes. it He - he probably had that in mind. Well if he has there's no reason why it should be concealed from the governments. R.C.Jr: No. E: That's the way I see it. I - I - I - I - - I don't - I just don't react kindly to it. III Well it's best to have - ah - - just to let the impression get out that - whether this 1s intended for governmental purposes. Then the governments will have to - if it's - if it's preliminary spadework - exploratory work - H.R.Jri Yes. B: - ah - then there's no reason why the government shouldn't know about it. That's right. H: Yes. Well - H: And then we'll be glad to talk, you understand, and then Cochran will be glad to talk with him. Yes. PI Yes. T.7.3p: Well I - I - I won't do anything without talking to you further. Well that's - ah - - that's my impression about it right now. E.W.Jrt And - an don't forget that I'm still on the Philippine hot spot. Regraded Uclassified 145 - 7 - H: Yes, I'm talking that out this morning. H.M.Jr: I'm cooking in cocoanut oil. H: Yes sir, well I've done that; had that myself and I'm glad for somebody else to have the same experience. R.M.Jr: Thank you very much. 9: (Laughs) H.M.Jr: (Laughs) H: Goodbye. Regraded 1 Iclassified 145 June 16, 1937. 11:53 a.m. M. .Jr: Hello 0: He'll be right on. @M.Jri Hello - hello (Long pause) 0: Do you want me to ring you when he comes on? S.V.Jrt No, I'll wait. Tell I'm talking on this wire. 0: All right, I'll tell him. S.A.Jr: Hello - hello Bull: All right, Henry. H.M.Jr: Cordell. H: Yes. H.M.Tr: I talked to the President about this request of Montague Norman H: Yes. T.U.Jr: and we thought that the thing to do is to just tell the British Ambassador the whole story and ask him to ask Sir John Simon what he'd like us to do, see? II: Well that's the other way around - I - it just occurred to me - here's - here's what I had in mind - B.N.Jr: Yes. E: Ah - Montague Norman has changed his attitude and got more economic - ah - ah - understanding - arrangements between the two countries and here's another thing that we might on and he's been doing some valuable work, of course, from what ve heard. I've had no communication with him at all except people who and tell me what he said. Ah - it just occurred to me that he might, in the future, go if we keep him feeling all right. If we should talk up to tell him that we've had to consult the government 147 2 The what? This is the British government - that the British government would have to be consulted and know about this - ah - and then he'd go straight to the British government and we could tell the British government. Then - ah - matters that he wouldn't feel that we had ignored him and gone straight to the government. Well he acted so peculiarly when he was over here before and my relationship with the British Treasury is so good that I want to keep that. Well I wouldn't - we wouldn't think about talking to him, of course, without the British Treasury knowing it. Well I don't - and then this idea of not letting Bullitt know and all that - ah Well that - you know I suggested that Bullitt should. Yes, I know you did. No, I don't - an I'm not - I was just suggesting this because if Norman, who has been working for our program the last few weeks, should suddenly wake up and find that we have gone to the governments - London, Paris and around on his individual - for an individual conference with this fellow he might feel that - ah - ah - out of sorts or he might not but it was just to avoid that. Well this isn't - I'm - I'm sorry. I've asked for 1t and if you don't mind Well it's all right. I'm just giving you my reason for the other thing. Well, of course, I suppose you think I've talked to Feis. I haven't talked to Feis. Hull: Yes. T.M.Jr: So I mean I'm getting it from you first-hand. Regraded Uclassified 148 B1 Well this is what I - yes - anyhow this 1s - this is - I'm giving you the reason for what I said at first blush this morning when you called. Yes, well the point is this. I reverse it. Supposing Eccles asked to see somebody here in connection with this Great Britain and didn't let me know about it and wouldn't let it go through the State Department or anything else - how would we feel? Well if we - 1f the fellow he spoke to said, no I can't come to you without my Movernment knowing it H.M.Jrs Yes. you go to your government - ah - you go to the government and that would be - and then we can talk. Yes. Ah - that's what I was trying to get. Well:- hen he comes to him and says - I mean - I put it up - we've got to collaborate with governments and Central Banks and to talk up - I'm not in a position to accept your invitation without your government knowing about it. Now what do you say about that? And he says, well I'll take it up with my government or he'll say, that's all right and then we'll - and then we've made our record. M.M.Jr: Well, frankly, it gets down to I don't want to talk to Norman. Its I sec. And the President doesn't either. Yes. H.M.Jr: Now that - that gets right down. We want to keep our lines open to the British Treasury. Well, of course, this would mean - this would mean the British Treasurer would come - the only thing - you know the Treasury and the Bank over there don't work well together on some things. Regraded 143 M.M.Te: Yes, that's just it. And - ah - that - this would keep us - we'd say, we can't talk through the bank unless the government first knows all about it and tells us what it's pleasure is in that respect. Yes. Now, of course, if you want to take it up first with the government why that's all right. H.M.Jr: Well I went over and talked to the President and that's the way he felt. Yes, well then - then that's their side of it, of course. And - ah - I - I feel that way too. Yes, well then that's still theirside I was just - the only thing I ve had so much trouble trying to get help over there on our Trade Agreement and to get the Bank of England in behind it. I'm just watching to avoid - to avoid getting that Well then - That's a minor matter. No it's not a minor matter but on the other hand I don't want to - knowing that the last couple of months that the British - that the Bank of England has made several suggestions Yes. with which the British Treasury didn't agree with Yes. I don't - I feel I can serve my government best by keeping my relations with the British Treasury as friendly as they are now. Well that's - of course, I would - my feeling hasn't been entirely wrong but I had exactly that thing in mind just as much as you do. Regraded Uclassified 150 5 # . N.M.Jr: Yes, and I don't want to offend them. 162 Yes, and the only reason I'm - I'm giving this comment is so you'll have the whole picture. R.W.Jr: Well I asked for it Cordell and I told you I wouldn't do anything without calling back. Yes, well I'm 100% in on anything you and the President decide on - E.W.Jr: And, if you don't mind, I - I - I'd like to do it this way unless you say B: Oh I'm not going to - of course, anything the President says why we're 100% behind him and 0.M.Jr: And the other thing that influences me is the fact that Mallett carried this message, which was delivered about three days ago. Ah - ah - who carried it? Mullett, the Consul of the British Embassy. B: Oh. 11.2.Jr: Carried this message to Sir John Simon that I'd like to talk to him. Yes. II.M.Jr: Now before I get an answer if I start talking to Norman through Cochran Mt You see - well I don't make myself clear at all. My proposition is not to anymore think about talking to Norman than you're thinking about talking to him. The only difference is I would tell Cochran - I'd have Cochran to tell that to Norman that we couldn't think about talking to him without his government knowing the whole thing and expressing to us what it's pleasure is. H.M.Jr: I see. D: That's the point I'm trying to put over. S.M.Jr: I see. - 6 - 151 H: Then - and then we would have good faith with the government and Norman would have found it out directly instead of through - instead of the other way around, Jr: I see. B: Now you get - of course, the President had to take the other view of the matter - why that's 100% all right. H.M.Jr: Well, listen - and may I digest it? n: Yes sir. E.M.Jr: All right, thank you very much. 152 PARAPHRASE OF TELEGRAM RECEIVED FROM: American Embassy, Paris, France DATE: June 16, 1937, 1 p.m. NO.: 802 FROM COCHRAN. At 10:30 this morning I visited the Bank of France. Yesterday the French Stabilization Fund lost 670,000,000 francs pegging against sterling at 110.90; this morning no heavy pressure on the franc had yet developed. Better opening for Rentes and French shares. The bill for special financial powers for the Govern- ment, quoted in my telegram No. 797 of June 15, 11 p.m., W&B accepted by the Chamber this morning after amendments which state that the authority the Government is to re- ceive 18 "to maintain the franc at its parity under the terms of the monetary law of October 1, 1936 and to rule out exchange control". The bill is limited to the dura- tion of the present ordinary session of Parliament. This session usually terminates by the fourteenth of July. On June 17 the bill will go before the Senate. Presumably the amendments would hamper Blum's action if, as reported, he had planned to prohibit capital ex- ports and to effect definite stabilization of the frano. Should the latter be attempted against the warnings of leaders such as Reynaud and Flandin, it will undoubtedly be Regraded Uclassified 153 - 3 - be in order that the Stabilization Fund may be terminated by Blum, who would utilize its 10,000,000,000 francs and perhaps another 7,000,000,000 francs profit that would come from franc devaluation to the lower limit and then stabil- ization. The Bank of France would then have the job of defending the new rate of the franc with the gold re- sources at its command. The Bank of France statement which will on June 34 show heavy gold losses will undoubtedly lead to further worry by the public. BULLITT. EA: NcL Geay. 154 Paris. Dated June 16, 1937. RECEIVED 1.07 p.m. Secretary of State, Washington, 804, June 16, 4 p.m. In a dramatic special session of the Chamber of Demittes which opened at midnight and lasted until 6 0'cloc:- this morning the Prime Minister's bill nolding for plenary powers until "July 31st to decree all meas- ured deemed appropriate to restore public finances and to prevent speciation and attacks against the currency and public credit was passed by the Chamber by 346 voted to 247. During the afternoon the Communists met and issued a resolution in which thay declared the intention not to vote for the bill on the grounds that some of the revenue which the government intended to procure (partic- ularly with respect to increases in indirect taxation) would mean a blow to the laboring classes and an increase in their cost of living. The resolution closed with the statement that the Communists WETE ready to assume all their responsibilities in a "reinforced" government thus clearly implying their willingness to accept cabinet po- sitions in a remodeled front populaire government. The Radical Socialists also registered decided opposition to the bill, bullitt. RR :WWC Regraded Uclassified 155 LAW GRAY Paris Dated June 16, 1937 Rec'd 3:09 P. To. Decretary of State, Washington. 804, June 16, 4 P. m. (SECTION TWO) muriag the debate despite severe attacks on the Gove, mer's by Flandin and Reynaud, which under more nor- mel iremstances might well have brought about its downfall, it became evident that Dlum's appeals for con- fidence addressed during the evening to the various groups in his ajority might prove successful, All de- pended, however, on the Communists who up to the last moment through their leaders Duclos and Thorez categorical- ly refused to change the decision. It W&B the sudden and totally unexpected Communists' volte face at 4 o'clock this morning that enabled the Prime Minister to obtain his majority vote of confidence of 99. Twenty Radical Socialists voted against the bill. Political observers appear at a loss to explain the reasons which induced (?) (?). The bill with certain modifications particularly the introduction of the clause stating that the Government would maintain the franc at its present parity and would avoid exchange control now goes to the Senate where it will Regraded Iclassified 156 LMS 2-No. 804, June 16, 4 P. m., Sec. 2, from Paris, will be tabled tomorrow. While there is strong opposi- tion to the bill in the Senate where a bitter debate will take place either tomorrow or Friday, there are many who believe that the Blum Government met its real test in the Chamber of Deputies and that the Senate in view of the abovo-mentioned modifications and the desire to avoid a political crisis at this juncture may pass the bill by a narro. margin. 13:20 1231.(E) BULLITT CSB 1 157 110 Plain London Dated June 16, 1937 Rec'd 2:20 p.m. Secretary of State Washington RUSH 386 June 16, 8 p.m. 70h FROM BUTTERNORTH _cwl_y, on bohalf of British Treasury, has called my attention to British United Press report published late this afternoon under Washington dateline to the effect that Fronch Representative there has intimated that France may be forced to withdraw from Tripartito Agreement pre- sumably due to institution of a control system. British Treasury would appreciate receiving any information in this connection which American Treasury may have. BINGHAM HFD 158 June 16, 1937 3 P. n. Present: British Ambassador Mr. Trentham Dr. Feis Mr. Taylor HM,Jr: The reason that I asked you to do me the courtesy of coming down was this: I have, through the Doperation of yourself and your staff, established what : concider a very fine relationship with the British Treas- any. I think it has been most important to your Government and mine. I want to keep it. Ambassador: Yes. HM,Jr; Did you know, when Mallet left, I sent a message to Str John Simon? Ambassador: Yes. H.l.Jr: This morning I got a message which, franky, I don't know just now to handle. And that's what I want to tell you about. AB you know, every month they have this meeting of the Bank at Basle, the Bank of International Settlements, and Sir Montague Norman goes over there and we have our Mr. Coonren, who is in Paris, and he goes there B.S a very unofficial observer. Well, he met Sir Montague Norman and they elways talk things over and ne said that he wished the United States Government would send somebody to London to talk things over with him. Cochran naturally did not know how to answer it and seld he would simply think it over, This morning, Sir Montague Norman telephoned Cochran in- viting him to come to London for lunch at the Bank of England #: Monday. Ambassador: Next Monday? UU Jr: This coming Monday. 153 -2- Anbessador: Yes, I could not get it very well over the telephone, but jathered -- and this is what I wasn't sure of -- that 21 DAC consulted with the Treasury, but I could not understand JY22 the telephone whether he had or had not. Cochran pointed nut that we have Mr. Butterworth in London who calle on the every Friday and Sir Montague Norman said, No; that st winted to see Cochran and that he wanted this kept entirely not of All embassies and all diplomatic channels and that he felt Coonran was closer to me; therefore, he would like to see him. Well, in the first place, in my mind, 1s my relationship with Sir John Simon, also my relations 1p with 10r. Chamberlain when he was Chancellor of the Exchequer. Ambassador: Yes. HH,Jr: The fact that the whole Tripartite Agreement 18 hosed on relationship between Governments and not between private central banks; the fact that over the laet couple of months we have had suggestions from the Bank of England, from Clay, their economic advisor, which when 1t was put up informally to the British Treasury they completely disagreed; that nothing that I have done with your Government or ever will do or anything that they have done has been anything except Just across this table, man to man, I think it's mont important we keep it that way. Ambassador: Yes. HM,Jr: You saw the letter I received from Mr. Chamberlain and my answer. I don't want to do anything to offend Sir Montague Norman, but if anybody had to be offended I would rather offend him than the British Treasury. Furthermore, if I let Cochran go without telling the British Treasury they would say 'Vr. Morgenthau just sent us this message; he must be very impatient that he can't wait until he Just gets an answer.' On the other hand, if you could advise me that it 18 quite all right as far 28 the Britisn Treasury goes to have Jochran 80, then I would have no obj ection. Ambassador: I see. HM,Jr: But I can't let him no without disclosing it to 180 --- the British Treasury and first finding out whether it's agreesble to them, even If I offend Sir Montague Norman through doing it. Ambassador: Above all things, you don't want to cross tice wires. HS,Jr: Not let me tell you what happened two years 16?. Sir Montague Norman was here in New York, He talked to Mr. Eceles oni said, How do I go about to see Mr. Morgen- tanu? (I may be 8. little rough in my memory.) He said, If you want to see him, Just ask. Well, he didn't want to had, 60 when Bewley came to see me, up to Cape Cod, I asked him, I sald, How would you handle a situation like this? and the answer I got was, Well, if Str Montague Norman wants to 500 you, he knowe now to do it. He can call up the Embassy and ask them to arrange it. Then when Sir Montague Norman 50% back, he took the occasion to tell friends so it came back that the only reason he came to America was to see me and he had been unable to see me. Now, I am telling it to you Just the way I feel and, frankly, I want some advice. Ambassador; I see. Yes. I see, Mr. Trentham: May I offer some. I feel perfectly con- vinced that the relations between Mr. Norman and any Chancellor of the Exchequer are SQ close -- he goes to the Treasury several times a day to see the Chancellor -- that there could be no possible objection to a meeting between Mr. Norman and Mr. Cochran. That 1E my view. Ambassador: That would be my own view too, Mr. Trentham: I am perfectly certain of it. HM,Jr: Well, it's only Wednesday. You would have time to find out. Ambassador: Oh, yes! I think ED. HM,Jr: You see, Sir Montague Norman, I am sure, does not snow that Mr. Mallet took a message. Anbassador: No. No, probably not. Heonly landed proterday. He only got to London yesterday. Regraded Uclassified 161 -1- And amone other things, I told Mr. Mallet that If there WAS going to be any conversation, I wanted it right cot and not -- you see, there have been different hinte the INDS two or three months, BQ much 80 that I am confused. Ambassador: Yes, Yes. HM,Jr: And what Clay thinks at the Bank of England 16 not what the British Treasury thinks. And what Clay has seen saying for the lest couple of months le not the anne 83 the British Treasury. Ambassador: Yes. Yes. HM,Jr: And if you will remember, at the time of -- let De get this straight -- check my memory, Wayne -- if I remen- our rightly, when the French wanted to do that so-called dellar-pound loan and they wanted a depository here, as I renember it there was that crossing between Montague Norman and Sir Frederick Leith-Ross, wasn't there? Mr. Taylor: I don't remember, HM,Jr: As I remember it, I think Montague Norman didn't want it and Sir Frederick Leith-Ross went to Paris and tried overything he could to get it across. Ambassador: We didn't hear anything about that. Mr. Trentham: News to me. HM,Jr: If you are right, it's fine. All your Govern- ment can say is that I am -- I want them to feel that I an leaning over backwards to make sure that there can be no mis- understanding. Ambassador: You want it straight from the horse's mouth. HM,Jr: A8 I say, I don't want to offend Sir Montague Norman. If he has some ideas he can contribute, fine! But my relationship, after all, 18 with the British Treasury. Ambassa 101 Yes. That's quite plain. Mr. Trentham: Yes. HM,Jr: Now, we have time. If I could hear Friday 162 -5- corning, if that 1s not asking too much. Ambsesador: We will send e telegram off tonight and toey will get it the first thing tomorrow morning. HN,Jr: He wanted to surround it with complete secrecy; Idn't want it to go through the Embassy. As far 88 we are concerned, we can keep it secret here, but it's a little dif- ficult, Dr. Feis: May I say on that point, as regards not go- the through Embassies, I know Mr. Huld feels that of course .r. Bullitt would have to know about this. H!",Jr: Idid not went to say that. All right, I wi 11 Lay that, In the message, Sir Montague Norman 251d that he 111 not want Ambassador Bullitt to know anything about it. Ambassador: I see. Oh, yes! HM,Jr: And the position that Mr. Hull has taken, whom I have consulted about this, is that Mr. Cochren has the po- sition of Counselor, and while he is detailed Just the way you (Trentham) are to work with the Treasury, he 16 part of Lne State Department's staff and he's under Mr. Bullitt and Lae point I think you (Feis) make (I overlooked 1t) is if Jochran does GO to London, Ambassador Bullitt will have to know about it. Ambassador: Yes, Clearly, Dr. Fels: I don't know whether it's necessary to say tais and I don't believe Mr. Hull meant that Mr, Bullitt would have to be informed about the substance of the conver- sation, out merely about the errand and its general purpose. Ambassador: And it adds some point. Hill,Jr: Coohran said I can't even cable you; I have to telephone you, because Sir Montague Norman says I must not even tell my Ambassador. (At this point the Ambassador and Mr. Trentham left, Dr. Feie remaining.) HIL, Jr: (To Dr. Feis) I know this is not what Mr. Hull wented me to do, but knowing what he did want I wish you 163 -6- would tell him Just what I said and I don't think the way I have put it ought to make an enemy of Sir Montague Norman Dr. Fels: No. On my own observation of Sir Montague Yormen, I don't know who has told Mr. Hull that Mr. Norman 1e an active and useful factor for trade agreement, but I 10 decidedly skeptical. Mr. Hull, as I understood it, sug- ested as n. first step, which was to say to Cochran: tell Sir Contague that you will have to consult and in the course it that consultation you feel sure tnat your Government will want to ascertain whether it's sgreeable to the Treasury. : think D. Hull was merely suggesting that intermediate step. HIL,Jr: Do you think I handled it ell right? Dr. Feis: Yes, I do. That's because I personally do not greatly sstimate Mr. Montague's part in international affairs, but Secretary Hull has somewhat divergent judgment CC that. May I say another thing about Clay. It so happens that Henry Clay 16 one of my very oldest English friends. Inere 1e no more simple, direct, well-wishing Englishman *live. He is an economist of & sort of quiet gentility and feels himself quite free in talking with someone like myself who 80 over there, talking in terms of his personal judgment not necessarily the Bank's Judgment and 80 I think perhaps vinen considering anything ever wired regarding Clay's Judg- sent, you would want to take it 28 his own. HIl,Jr: Policy, 0.5 far BE stabilization 1s concerned, LE set in the British Treasury and they undoubtedly have their came troubles with the Bank of England, behind the scene, 88 PO do here with the Federal Reserve, and they always will have. Dr. Feis: The only report on that comes from this very fellow Clay. A year ago he said, I can describe precisely what the relationship 18. The Treasury gives us liberty within designated sums -- my memory of the sum he mentioned was $30,000,000 -- either way; beyond that we don't consult; approaching that point, we go to the Treasury for instruction. Hil,Jr: With Mallet just going there, taking this message, why should we let Sir Montague Norman stick his nose into this taing? I want to do business with the British Treasury. Dr. Feis: I have no qualms because of my estimation of Regraded Uclassified 164 -7- Montague Norman's role. The Secretary has qualms because of hie own estimation. In my personal judgment, I am satis- fied. o0o-o0o Regraded Uclassified 165 EDA TELEGRAM SENT GRAY June 16, 1937 5 p.m. AMENBASSY LONDON (england) 246. Your 386, June 16, 8 p.m. FOR FROM SECRETARY MORGENTHAU. Please inform Bewley that we have had no intimation from the French Government of any intention of withdrawing from the Tripartite Agreement; nor as a matter of fact has the subject been discussed with any French representa- tive. HULL HF EA:HF:LWW BECEIVED JUN 1- 1237 TREASURY DEPARTMENT Office of the So Transas Insurant N - Regraded Uclassified 166 IIC Plain London Dated June 16, 1937 Rec'd 2:20 p.m. Secretary of State Washington RUSH 386 June 16, 8 p.m. 70) WASTEY FROM BUTTERNORTH Joniey, on behalf of British Treasury, has called my attention to Fritish United Press report published late this afternoon under Washington dateline to the effect that French Par reconsative there has intimated that France may be forced to withdraw from Tripartits Agreement pre- simpbly duo to institution of a control system. British Treasury would appreciate receiving any information in this connection which American Treasury may have. BINGHAM HPD Regraded Uclassified 167 PARAPHRASE OF TELEGRAM RECEIVED No.: 805 From: American Embassy, Paris Date: June 16, 1937, 5 p.m. FROM COCHRAN Paris exchange market nervous with prices varying considerably but more quiet than for past few days, Con- trol had to yield fair amount of sterling. Rentes did not hold their opening gains. International shares lost heavily. According to our market contact, gold is still being sold at London by the Swise National Bank. There is again 8. rumor going around here that within a week the United States will reduce the price of gold to $32. However, today gold is generally being bid, Thirteen bars of gold were shipped by Paris American Bank to the Belgium National Bank from the London market. The Paris American Bank, however, found that the Belgium National Bank is also shipping gold from London, thus not leaving much opportunity for outside arbitrage arrangements, Operators of the market here are of the opinion that chances are about even for Blum's financial measures to pass the Senate. BULLITT EA:EB Regraded Uclassified 168 BRITTEN ESTRASEY, WASHINGTON, D.C. June 17th, 1937 My dear Mr. Morgenthau, As agreed with you I telegraphed to the Chancellor of the Exchequer immediately after our interview yesterday on the question which you raised, and have just received a reply from him reading as follows:- "Please inform Mr. Morgenthau that Mr. Norman's suggestion arose from the fact that it will be necessary to give very close attention in the immediate future to the French position on which we are very much in the dark. From the amounts of gold which have passed to us in the last six days it is obvious that they are losing gold at extremely heavy rate even for them. Governor of Bank of England who/ The Honourable Henry Morgenthau, Jr., United States Treasury, Washington, - - C. Regraded Uclassified -2- who had seen Mr. Cochran at Basle suggested if he could find it convenient to visit London his opinion on situation in Paris would be most valuable. The Treasury concurred and said that they would be most glad of opportunity of discussion of position informally with Mr. Cochran if it suited his convenience. Chancellor hopes that Mr. Mo genthau sees no objection." I much hope that this message will clear your doubts. Yours sincerely, R.C. Ling Regraded Uclassified 170 PARAPHRASE OF TELEGRAM RECEIVED FROM: American Embassy, Paris, France DATE: June 17, 1937, 1 p.m. NO.: 807 FROM COCHRAN. This morning at 11 o'clock I had & talk with the Bank of France. Yesterday about half the amount (of 670 million francs) of what was yielded the preceding day was lost by the French Stabilization fund. The three months discount of the frano against sterling had declined from 6.50 to 4.00 this morning. Quiet but fairly steady opening for sterling, with money very scarce. I mentioned to my Bank of France contact that this morning traders had a rumor that France would withdraw from the Tripartite Agreement. He said he had not heard any official suggestion in this regard. As soon as study of official text of debate proceed- today ings in Chamber 1s finished/, we will cable re Blum's reference in debate to France and tripartite agreement. Today the Finance bill is to be considered by the Senate Finance Committee, and probably tomorrow there will be discussion in the Senate in answer. It 18 expected that there will be a tendency on the part of the Senate to modify the powers sought in the Chamber bill. Most 1/1 - 2 - Most confidentially information has come to me that the Bank of France shipment of gold on the PARIS to the Federal Reserve Bank of New York represents a further stop of the BIS to liquidate its own holdings of gold. So far I have not made any attempt to confirm this report with any responsible BIS official. The press here carries an item from the London FINANCIAL NEWS of today which predicts that the third article by Brand to appear in the London TIMES tomorrow will strongly recommend that the gold price be reduced. BULLITT. EA:LWW Regraded Uclassified 172 DRS GRAY London Dated June 17, 1937 Rec'd 2:40 P. m. Secretary of State, Washington. 390, June 17, 6 P. m. FOR treaSury FROM BUTTERWORTH. British Treasury expressed appreciation for the Information contained in your 246 of June 16, S P. m. With reference to the last sentence of your 243, June 14, 4 P. m., I might mention I have an appointment with British Treasury tomorrow noor. In this connection Exchange Telegraph ticker report may be of interest: The Netherlands Bank in agreement with the Minister of Finance has decided to grant unilateral exemption from the embargo on the export of gold. This measure does not affect the monetary policy in any way but will give pri- vate holders of gold an opportunity to sellion the London market which would tend to climinate the existing dis- count relative to the Amsterdam gold price. 11 The Chancellor of the Exchequer was asked in the House of Commons this afternoon whether he was aware that Sweden during the war refused to accept gold for payment of goods on the ground that Sweden was not sure that other 173 LMS 2-10. 390, June 17, 6 P. m., from London. other countries after the war would accept gold in payment for foreign goods purchased by Sweden; if he would endeavor to obtain guidance whether the United States Government would accept large volumes of gold or dollar exchange ob- tained from gold from Great Britain in payment for goods and services should Britain in time of war be able to offer only 3014 as the means of payment. Sir John Simon re- plied "according to my information it is not the case that Sweden 1 rin, the war refused to accept gold in payment for her goods. Swedish currency was allowed to rise above its normal Vu. ue. I am not disposed to accept the view that gold appears likely to lose Its importance as a medium 0. international exchange. In any case I should not consider the action suggested in the last part of the question appropriate". Asked whether in order to increase confidence in the sterling exchange position the Chancellor would give a rough estimate of the total of Sritish short term obliga- tions to overseas creditors and the amount in the hands of responsible British authorities of gold available as a reserve against these obligations, Simon replied "I am not in a position to give any formal estimate. It is very difficult to draw a line between short term obliga- tions to overseas creditors such as deposits and foreign holdings Regraded Uclassified 174 LMS 3-110. 390, June 17, 6 P. m., from London. holdings of British securities which might be realized and the proceeds withdrawn, putting some strain on the exchanges as the withdrawal of foreign deposita, but from such information as is available I am satisfied that any increase in our liabilities in the last six years includ- ing the increase in our liabilities to other parts of the Empire has been more than covered by the growth in our reserves". For the condition six years age see MacMillan Com- mittee report. On the while the new profits tax announced last night or 5% on trade and business profits with exemptions to professions, public utilities and special area industries has been well received. In 8 full year the yield is estimated at pounds 25,000,000 and the duration is limited to the five years of the armament borrowing program. In the new proposels British Government has met many of the objections raised against the old: by taxing absolute profits instead of gross profits it clears itself of the charge of letting off the persistently prosperous while fleecing those who have brought their businesses through hard times to great expectations and those who have started new businesses at a venture; it is easily computed and collected. However, this has entailed dropping also any attempt to tax differentially those who have profited largely out of the rearmament program. BINGHAM CSB Regraded Uclassifi Copy for SECRETARY 175 LMS GRAY Paris Dated June 17, 1937 Rec'd 3:30 P. m. Secretary of State, Washington. 809, June 17, 4 P. m. TROM COCHRAN. The coxt of the emergency bill siving government full fir Lcial powers has today beeu made available In the report of Chamber debate of June 15, it reads at ollows: "I" order to maintain the franc at its parity under the term.: of the moretary law of Occober 1, 1936, and to avoid exchange control the Government is authorized during the ordinary session of 1937 and at the latest up to July 31, 1937, to take by decrees approved by the Council of Ministers the measures necessary for the restoration of public finances as well as for the pro- tection of savings of the currency and of the public credit without being able to proceed to forced conversions. These decrees will be submitted for ratification by Parliament within three months of the promulgation as the present law or in any case BULLITT RR:CSB Regraded Jclassified 176 F.DA GRAY PARIS Dated June 17, 1937 Received 6:45 p.m. Secretary of State Washington 809, June 17, 4 p.m. (SECTION TWO) soon after the opening of the Extraordinary Session of 1937". (The amendment prohibiting forced conversions did not appear in first press reports). It is noted that several references were made in the debete to the tripartite arrangement. The most important in this connection was the assurance of the Minister of Finance that the Government "would not take measures that would place the principles of the arrange- nent in danger". Much notice has been given in the press to Blum's statement in this connection. Textually he said referring to the action to lead expatriated capital to re- turn to France: "This has nothing to do with the tripartite agreement. This arrangement in fact concerns free dealings in and negotiation of capital between countries and this is El question of French sovereignty which no international agreement can limit for the reason that it is the French law Regraded Uclassified 177 EDA - 2 - #809 June 17, 4 p.m. from Paris law only which is sovereign as concerns the French, their persons, and their property wherever in the world it has pleased them to hide it". It does not appear from an examination of the official report that a reference was made to stabilization by the Government. However, Paul Reynaud who is a member of the Chamber Finance Committee revealed that the Minister of Finance had stated to this body earlier in the day "that it was very probable that the Government would stabilize" and in this respect Reynaud was at pains to recall to the Chamber that on February 4 last, the Minister of Finance had definitely agreed that France was not ripe for such an operation as the pound was free and French economy wad was not prepared. Reynaud warned the Chamber that stabili- zation would be "pure folly" in view of the present state of world conditions and especially conditions in France. Sterling has continued in fair demand throughout the day with control holding sterling rate at 110.90. Dollars were offered from New York presumably on account of American strike. Bank of England took part of gold offered at London. Price was such that Bank of Belgium was not called upon to take gold. International shares lower; French shares irregular. Feature of Paris market has been jump in French rentes from 2.25 to 3.40 francs. Investors 178 EDA - 3 - #809, June 17, 4 p.m. from Paris Investors believe Government will under proposed full financial powers force French banks, Insurance companies and certain other business concerns to invest part of their reserves in rentes and other Government securities. Hence the rise. Bank of France statement as of June 10, showed no significant changes. Coverage 55.64 versus 55.56. Banking circles fear Government may devise scheme for forcing those having foreign currency deposits in banks in France to convert them into francs. END OF ESSAGE. BULLITT NPL:EMB Regraded Uclassified 179 STATEMENT OF SECRETARY MORGENTHAU BEFORE THE JOINT COMMITTEE ON TAX EVASION AND AVOIDANCE THURSDAY, JUNE 17, 1937. The problem of closing loopholes in tax laws is continuing and ever-present. It is never settled by any particular legis- Intion. Tax administration today requires a succession of laws tc provent the use of ingenious devices which distort the original purpose of the act and which croate what to the average man seems unothical and unwarranted avoidance of taxes. This is not the result of activities on the part of any par- ticular group of persons. Ner is it the result of concerted action on the part of taxpayers as a whole. It is caused by pressures which come from doop-seated attitudes in certain quartors toward tax- ation. These attitudes and these pressures must be realistically considered as part of the problem cf tax administration. I will describe them briefly because they furnish the background against which tax administration must operate. In the first place, we have developed in this country a group of ingenious lawyers and accountants who make their living by showing to people who can afford to employ them ways by which they may pay the loast possible taxes. This may be a legitimate business. Nevertheless, by virtue of its highly competitive character, it brings abcut the following situation. The ordinary accepted standard by which many wealthy taxpayers judge the efficiency of the tax attorney is the amount that he can save in taxos. The most ingenious atterney, therefore, becomos the most 180 - 2 - successful and the most sought after. He feels that his sole duty is toward his client. If he is henest, ho will not condone perjury but he feels little moral or social responsibility to the Government. Therofore, if he can invent a now scheme for circum- venting the intent of tax laws, which will be upheld by the courts, he is well within the ethics of his profossion, regardless of the unfortunate effect that such a scheme will have upon the general application of such laws. We have new a bar of registered attor- neys and tax accountants numbering approximately 45,000. Against thom are pitted seme 2800 field agents actively engaged in tax investigations for the Government. The contest is, of course, unequal. The fees of the tax lawyer exceed by thousands of per cent the pay of his opponent employed by the Government. In this manner the most rescurceful brains cf the logal world are ongaged actively in trying to avoid taxes for their clients, Among those are men who received their early training from the Government, and who use the skill they acquired in that service against the younger non who take their places. The Government then becomes a training school for many of its opponents. I am not attaching any blane to anyone in particular for this situation. I an only pointing out that it exists and that it is one of the reasons requiring continual revision of the tax laws. 181 - 3 - A second facter which creates the problem which now confronts us la the fnot that tax avcidance, as opposed to tax evasion, is considered by many a legitimate and honorable ain. Where private obligations are concerned, the same people who new hire ingenious attorneys to cut down their taxes would scorn to use the same subtle dovices in avoiding payments to their creditors. Hore again I an simply calling attention to an existing attitude. The ethics of tax avoidance have grown up out of a variety of circun- stances and the problem is not solved by blaming anyone. It is only important tc recognize those ethics as an existing fact because they are a very important element in the problem which faces the Treasury. I hope that in the future an strosphere may be created in which men will hesitate to use ingenious devices to avoid the pay- nent of taxes. Nevertheless, that happens to be the present atti- tude of some persons toward payment to the Government. A third factor in the situation is the difficulty cf distin- guishing, at least before a case is triod, between tax avoidance which is supposed to be propor, and tax evasion which is supposed to be innoral. I will not attempt tc define these terms. So hazy is the line between tax evasion and tax avcidance that it is always possible to classify any complicated schene as tax avoidence, so long as there is nc absclute certainty that it will be adjudged invalid at the end of long litigation. Regraded 182 - 4 - These attitudes have created What might be called the sporting theory of tax administration. So long PS these attitudes exist, the process of tex legislation will be somerhot PS follows: A law will lie opssed; invenious devices for circumverting its co lication to individuals vill be tried out. This "ill take time. Fically, hen sufficient of those devices have become current so that r great loss to overndental revenue be ins to epient, legislation "ill have to De drafted specifically directed at the ner trx-nvoidence inven- tions thich ve Appeared since the lest law. Today because of ti:e variety of devices to avoid taxes, the situation calls for remedial legislation. That this is a recurring situation io illustrated by the tax history of the last fer years. Prior to 1934, the provisions permitting deductions for losses re- sulting from stock sales hed become me of the largest loonholes in our tex administration. Incemions use of these deduction: provisions permitted individuals to establish losses by exchanging stocks with BAC.: other pud calling the treasaction F: sale. Envever, it TTS the kind of a sale which my er have tellen nince had it not been for the desire to avoid taxes. That loophole ITS in 1934. Since that date new devices of even reater complexity and inversity have been developed, imitated and copied natil they are :0" in very remoral 183 1 - 5 - use, As is usual in such cases it tokes time before sufficient interest is created to demand reform. For example, in 1935 - two years ago - under my instructions, Mr. Robert H. Jackson crlled to the attention of the Committee on Finance many of the methods of tax evasion which are now the subject of this inquiry. The use of those devices vas then a less serious obstruction to the collection of revenue and nothing was done about then. Re- sort to then has now increased to such an extent that sorie reform is imperative, Of course the attitudes which create this continuous tast of circumventing new tex avoidance devices cannot be legislated away. The immediate objective in the present emergency is practical tax legislation. Nevertheless, I an hopeful that the continued publicity which hearings of this sort rive with respect to the game of tax avoidance may help to create an stmosphere in which men will hesitate to use these artificial devices to avoid the payment of taxes just as today they hesitate to use such deviços to escape the payment of private debts. The creat body of citizens already display the same attitude toward their obligations to the Government that they display toward their private obligations. An examination of their returns year after year discloses no attempts to push the let- ter of the law to its limit, and no use of corporate forms or other elaborate subterfuges for the sole purpose of avoiding their normal Regraded Uclassified to: burdet. Perharps continued blicity -iven to the 070 Testretic 184 methods of trz evoidence 701 considered le dtinste VY melse such n.i attitude . ore nearly universal, This my be an important by- product of while horrings 0.1 curvent try devices. I vill therefore attempt briefly to describe the carrel character of some no the methods not 1.) use in terms wich the evene "E. terpayer mey understand. One diverstoristic rus through all of then. It is the creation of n multiple personality in the Depreser. By this device he ceases to be : sin-le individual and becomes P. whole group of poople, some of réson are eartin money mile others pre losing it. Te divides Minself into several Degola, sometimes i'car- wrated not sometimes not. Fe purports to carry on business trying- actions 11th his family at ours-longth. Often he convinces himself that these separate people actorlly exist. Encl. one of these iveringry individue's into thich the taxpayer divides himself deals and traies with All the other top (incry individuals. The totel result is D series of losses which would not have been deductible for tax purposes and the texpayer remained D single personality. The different methods by which the parts of this multiple personality deal -ith each other nee varied phd intricate. We will attempt to classify then later. They eve, Edwever, of tis energ) character. A texpayer crostes F. negarate personAlity to en : e in as activity which in P hobby or n or PM ordinery United exponse or even a T 1 of investing funds. He then CUTTES the expenses nad the looser of such activity meniust hirself. Tes, he is able to pay interest to Mimself, to charge himself for vocations ená pleasuros, to vive hirmelf pensiges, to be his 0122 insurance company 000 so on. These trensactions portake of the and wreat diveracter na if - stell terpoyer incorporated his household litchen Its - restourant and deducted the end lonner from his tranble income because he had so few customers, Regraded Uclassifie - 7 - 185 Pructically all of the devices which WG will cite Inter would look absurd if applied to persons of small incomes whose activities were necessar- ily more restricted. They are important as tax-dodging devices only for the very rich. Not only do they look absurd when applied to the small taxpayer but they are also too expensive to be useful unless large sums are involved. The analogies which are used to support these devices are found in the corporate structure by which business in this country is conducted. The distinguishing feature, however, between the corporation used for a business purpose and the corporation used for a tax avoidance purpose is the fact that in the latter case were it not for the tax laws no such corporations would have been formed. The use of the corporate device in order to split a single man into e mumber of personalities is often extraordinarily intricate. However, of late some tax attorneys have felt that it was not necessary to go to so much trouble. They have in effect split individuals up into different persons without bother- inc to incorporate. A rich man runs a racing stable as a hobby. He calls him- self VB. horse-breeder and in this character loses money very heavily indeed. He never makes a financial success as a horse-breeder because racing demands too much luxury on his farm. This raises his expenses. He then charges off the loss on his racing stable against his income. No small taxpayer would think of calling himself a solf instructor and then charge the expense of his golf game against his income because he got no pupils. However, we find an individual who in one capacity charters a pleasure yacht to himself at a loss and deducts it from his income because though as EL business man he is successful, as a professional yachtsman he is a heavy losor. These instances are not yet as frequent as the use of the complicated corporate personality which is harder to see through. Neverthe- less, unless legislative action is soon taken such pleasant methods of tak- ing vacations and getting rid of taxes at the same time will be imitated Regraded Uclassifie 186 B I I and constitute & serious threat to the revenue. Most of these people have talked themsolves into believing that the methods which they use are socially legitimate. They profess complete personal irresponsibility, contending that if their methods are wrong it is the duty of the tax administration to ferret them out and to conduct long and expensive litigation in order to determine their validity. The individual believes that he is morally entitled to take the sporting chance and that he has nothing to lose and everything to gain by taking it. The device of the multiple personality of the single taxpayer is of course not the only loophole which requires immediate attention. The Under Secretary of the Treasury, Mr. Roswell Magill, who will follow me, will undertake to classify the principal ones for you in detail. I will only summarize the principal schemes which are being devised, copied and imitated today. They may be divided roughly into three classes. First, there is the device which I have just described of making the taxpayer a multiple personality whose characters deal with each other. Second, there is a variation on that device by which the taxpayer doals with his family at arms-length and creates taxable losses out of the per- formance of personal obligations which he owes to them. He takes his wife into partnership with him. He splits his income between himself and his children instead of maintaining them. The third device is one where the individual doing business in this country makes it appear by a series of corporate personalities which he controls that he is actually doing business abroad in some country where he cannot be taxed. In other words, transfers of title which might result in taxable income are made to appear to have occurred outside of the United States. Regraded Uclassified 187 - 9 - To do not know how extensively this latter device is being used. We do know that within the last two years, 585 foreign corporations have been formed which probably represent business interests in America. We do not know how many have been used for tax avoidance purposes, but we do know that some have been so used. We believe, however, that the use of this de- vice is spreading. It is most important that its growth be stopped before vested interests arise which make it a still more difficult problem to deal with in the future. For these reasons I believe that the use of the multiple personality by the taxpayer has now reached the stage where Congress should consider corrective legislation. The process of fighting in the courts all the different schemes which may be woven around this concept is too slow for efficient tax administration. We intend to give examples of a large number of cases, not all of which would be upheld by the courts but many of which are sufficiently plausible so that they can delay and hinder tax collection. It is the history of tax litigation that it takes years to finally outlaw 2. tax avoidance device, once it gots a foothold among tax attorneys. In the meanwhile, the Government revenue is impaired in two ways; first, by the actual loss of revenue in specific cases; and second, by the expenditure of the time and energy of the tax-enforcing agencies in litigation. 188 - 10 - It is true that many of the devices which we have referred to are being limited and restricted by the courts. Novertheless, the situation is sufficiently confused 80 that & great deal of litigation is required because each case deals with only the particular facts involved and dis- tinctions in intricate situations can always be made. And what effect has the increasing use of these devices on revenues? That, of course, cannot be exactly determined. Nevertheless, it is a substantial factor which is cumulative in effect, just as the influence of a continued course of sharp practices in bankruptcy cases tends to reduce the total dividends to creditors. The nearest estimate which we can make of the loss in revenues caused by such practices in the tax field has been arrived at in the following way: AE you know, each November the Treasury Department is required to make an estimate of the revenue of the Federal Government for the balance of the current fiscal year ending on the following June 30th. I need hardly say that the problem of estimating the revemie is an exceedingly complicated one; and that some margin of error in the annual estimates, resting as they do upon forecasts of business conditions, prices, and a host of other factors, is inevitable. I take great satisfaction in the 189 - 11 - accuracy of the revenue forecasts made since I assumed the responsibilities of the office of Secretary of the Treasury. The first estimate of income tax receipts made under my supervision was for the fiscal year 1935. Actual receipts for that year proved to be 4.6 per cent greater than my estimate. In the following fiscal year, 1936, actual receipts were only 1.5 per cent under my estimate for that year. For the fiscal year 1937, the Treasury Department employed the same methods and the same personnel in making the revenue estimates as had been employed in the two preceding years. When, therefore, the March 15 income tax col- lections indicated that total income tax receipts for the fiscal year 1937 might be as much as 10.4 per cent below the estimate made last November, I became concerned. I realized fully, as I am sure you do, that all the care in the world could not always prevent a substantial error from entering into our revenue estimates, for, as I have already said, these estimates depend upon forecasts of the future; and the capacity is not given to mere human beings to foretell the future with accuracy. I was aware also that my predecessors in the Treasury De- partment had over-estimated the Government's income tax receipts in the three years 1931, 1932, and 1933, by 15.1 per cent, 7.3 per cent and 13.3 per cent, respectively. Regraded Uclassified 130 - 12 - Nevertheless, 1 decidod to investigate the details, so far as possible, of cur March, 1937, incone tax collections. This investigation disclosed the following very significant fact: Collections in certain areas where there is a con- siderable concentration of wealth and income had not increased by as large a percentage as had the total incone tax receipts for the ocuntry ns a whole. In connection with this fact it is particularly important tc note that dividends represent a larger percentage of the net incone of people with large incomes than they do for poople with small incones. 70 knew that dividend disbursements by corporations during the calendar year 1936 had increased materially over these of the procoding calendar year. It seened reasonable to suppose, therefore, that part at least of the discropancy between our original estimato of incone tax receipts and the receipts that night be estimated on the basis of our actual collections in March, 1937, night be due tc a wider use of various methods of tax evasion and tax avoidance. And when Mr. Magill undertook a field investigation of this possibility at ny request, he found much to support this conclusion. Regraded 191 - 13 - Mr. Magill will describe to you in some detail the character of his investigation. Necessarily, it was a quick survey, and the further audit of the 1936 returns will undcubtedly disclose addi- tional data to enable us to determine with greater accuracy the methods of avoidance employed by some taxpayers. In this connection, it must be borne in nind that the Bureau of Internal Revenue faces tremendous physical problems in the audit of the returns and in its effort to prevent tax evasion and avoidence. There were about 6 nillion returns filed for the taxable year 1936, and it has been cur experience in the past that only about 500,000 can be audited with the force of about 3,000 men that we have avail- able. I believe that it may be appropriate to say a few words regarding the Bureau's progress in the last few years in connec- tion with the making of these detailed audits. Prior to 1935, the field investigations of returns were not connenced until approximately 1 year after filing and were not completed until about 2 years after filing. At present, field investigations are begun 3½ months after filing and are completed 15) menths after filing - an advance in the conduct of the work of field investigations of approximately 9 months. The collection of additional taxes, a substantial portion of which represents recoveries in instances when tax avcidance or evasion has been attempted, has constantly been increasing. Our revenue agents' Regraded Uclassifi 192 - 14 - recommendations for the assessment of additional taxes incroased from $203 million in 1934 to $355 million in 1936. Exporience has shown that, through litigation or agreement with the taxpayer, abcut 70 per cont of these recommended additional taxes are ultinately collocted by the Trensury. For the first ton months of the present fiscal year, agreements with taxpayers for the collection of additional taxes anounting to about $130 million, have been secured, and Convissioner Helvering has informed ne that he is confident that the Bureau will collect by agreements more taxes during this fiscal year than it has ever collected in that nanner at any time in its history. Undeubtodly, prevention of tax avoidance and evasion would be nided by an examination of a greater voluno of returns. I think that fully 750,000 returns, rather than the present 500,000, descrve yearly audit. However, in consideration cf the snall personnel of the Department compared with the very large number of accountants and attorneys who are constantly oneaged in the proparation of returns and in the defense of the taxpayers' contentions, the record of the Bureau is good. With our limited force, the nust collect the maximin of revenue, and 76 must do SC in such a way that 70 are not years behind in cur work. These tax avoidance devices to which I have alluded have affected revenues of the Government in the following ways: (1) They crente the belief that rich nen with expensive atterneys to not have to pay taxes. There is just enough truth in this tc have far reaching consequences on the morale of hundreds of thousands of Regraded 193 - 15 - taxpayers. No one can possibly calculate how nany potty evasions which can never be detected anong 6 million returns are due to the belief that cleverness rather than fairness is a proper criterien of the taxpayer. Thus, tax ethics generally today are where business ethics and trade practices were in the nineties. (2) In the highly competitive situation which exists anong expert tax atterneys, plausible devices spread rapidly and tax evasion and avoidance increase without anyone realizing the extent cf the inpair- nent of tax administration until the end of the taxable year. Even then an exact estimate of the effect of tax avoidance is inpossible. (3) Vested interests grow up in tax avcidance devices in the course of time BC that it becomes very difficult to change then after they receive a seni-respectable standing. This factor makes quick action advisable to docapitate new schenes before they achieve the force and respectability of law. (4) After tax avoidance devices have becone an accepted part of tax law, any attempt tc change them is heralded as a persecution of the rich. Today, for example, we are net by the charge nade in some quarters that this attenpt on the part of the Treasury, forced on us by a gradual accumulation of tax avoidance dovices since the passage of the Revenue Act of 1934, is an attack on wealth. Actually, anyone who gives the natter unbiased consideration will realize that it is for the benefit of the rich to plus loopholes in tax laws, since this raises more revenues without raising rates. The prevalence of the devices Regraded Uclassified 194 - 16 - 178 are going to describe has cast a suspicion on many rich mon who do not deserve such suspicion. There ia certainly no pcesi- ble advantage to the conscientious nan of large incone to allow fantastic schenes of tax avoidance to continue. (5) And finally there is the very important question of the revenue. Those tax devices which defent the intent of Congress cost the Government huge sums which Congress never actually in- tended to give away. Morecver, they create continual and expensive litigation. No collecting agency can operate effectively if it is hampered at every turn by law-suits. For these reasons, I considered it imperative to call these matters to the attention of Congress at this time. --фе-- Regraded Uclassified