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Volume 79, July 15 – July 31, 1937
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Volume 79, July 15 – July 31, 1937
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Henry Morgenthau, Jr. Papers
Diaries of Henry Morgenthau, Jr.
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DIARY
Book 79
July 15 - July 31, 1937
- B - -
Book Page
Belgium
See Stabilization
Bids, Collusive or Identical
See Purchasing, Government
Brazil
Conferences at 2:45 P.M. and 3 P.M. - 7/15/37
LXXIX 30,33
a) Joint statement as given to the press - 7/16/37
49
Butterworth, William W.
HMJr writes Secretary of State of extreme usefulness
during period immediately following Blum's resignation - -
7/19/37
117
- C - -
Canada
Taylor reports to HMJr that the Canadian tax treaty is
being held up pending a discussion of the withholding
rate in the proposed tax bill - 7/30/37
211
a) Hull's memorandum
220
- F -
Foreign Capital: Restriction of Inflow
Memorandum from Eccles to FDR - 7/31/37
226
- G -
Gold
See U.S.S.R.
# Yugoslavia
- H - -
Holland
See Stabilization: Netherlands
- J -
Japan
American Embassy, Tokio, reports on Government proposals
to revalue specie reserve of Bank of Japan and to set up
a special account with resulting funds - 7/21/37
150
Regraded Uclassified
- M -
Book Page
Martha's Vineyard
See Nantucket, Island of
- N -
Nantucket, Island of
Labor controversy ties up steamship service; HMJr
telegraphs Governor Curley of Massachusetts since
state authorities are not without power in situation,
there is no law to permit Coast Guard to transport
supplies - 7/16/37
LXXIX 82
a) HMJr tells 9:30 group strike was settled
twelve hours after reply to Governor of
Massachusetts
110
Neutrality Act of 1937
Oliphant memorandum to HMJr concerning phrase "it shall
thereafter be unlawful **** to purchase, sell ****
bonds, securities **** of the government of any
belligerent state ***** - - 7/15/37
51
- P -
Purchasing, Government
Oliphant memorandum to HMJr concerning opinion of
Attorney General with regard to the duty of Director of
Procurement Division with respect to rejection of
collusive bids - 7/15/37
57
- R -
Russia
See U.S.S.R.
- S -
Stabilization
Belgium:
Van Zeeland, Paul: Cochran reports on copy of informal
memorandum Van Zeeland, after returning from United
States, is submitting to French and British -
7/20/37
145
Cochran visits Belgium in connection with HMJr's
memorandum to Switzerland - 7/24/37
176
Regraded Uclassified
- S - (Continued)
Book Page
Stabilization (Continued)
France:
Further difficulties
LXXIX 87,88,90,94
108,162,169
a) Butterworth report
92
b) Cochran reports improvement, and annoyance of
British that French control permitted franc-
sterling rate to drop - 7/27/37
193,197,205
Cochran reports that Fournier has been made Governor
of Bank of France and Labeyrie honorary Governor -
7/20/37
144
Cochran reports on Bonnet's statement to press with
regard to plan for second series of financial messures -
7/21/37
152
Cochran and Butterworth asked to report in Washington -
7/21/37
156
Second series of financial measures embodied in eleven
decrees published in Journal Officiel - 7/31/37
207
Netherlands:
Cochran visits Netherlands in connection with HMJ='s
memorandum to Switzerland - 7/24/37
176
Switzerland:
Cochran reports that Rueff has informed him French approval
of HMJr's contemplated reply to Switzerland is ready and
will be sent after conferring with British - 7/17/37
106
HMJr tells Cochran cables from British and French have been
received and he wishes Cochran to go to Switzerland and
present memorandum verbally to head of Swiss Treasury and
head of Central Bank and then proceed to Belgium and
Holland - 7/19/37
119
a) HMJr so informs Butterworth - 7/19/37
125,128
Butterworth reports that Monick has shown him copy of
French reply respecting Bachmann letter - 7/20/37
148
Cochran reports on visit to Switzerland, Belgium, and
Holland 7/24/37
176
Switzerland
See Stabilization
- U -
U.S.S.R.
For resume of conferences on gold, 4/11/37-7/17/37,
see Book LXIV, page 79
Further memorandum from Ambassador Davies regarding difficulties
in Soviet gold mining industry (report of Harry R. Wilson,
an American mining engineer with the Soviet Gold Trust) -
7/17/37
96
A 1 I
Van Zeeland, Paul
See Stabilizations Belgium
- I
Tugoslavia Conference concerning inquiry about gold purchases - 7/15/37
12
a) Proposed letter to Knoke
15
Regraded Uclassified
1
July 15, 1937
I called Butterworth on the telephone; told him if
he did not understand the cable of last night and wanted
to see the letter from Switzerland, he could call up Cochran
on the telephone and tell him to read it to him and I wished
him to tell the English and told Cochran to tell the French
that I wanted an answer on my desk if possible not later
than Monday morning.
Regraded Uclassified
Copy for Secretary
2,
JR
GRAY
Paris
Dated July 15, 1937
Rec'd 9:25 p.m.
Secretary of State,
Washington.
985. July 15, 6 p.m.
SECTION ONE.
FROM CO.CHRAN.
This afternoon I delivered to Rueff the draft
communication set forth in the Department's 339, July 14,
9 p.m., and also the introduction contained in the
Department's 340, July 14, 11 p.m. I let Rueff have a
copy of the letter of June 17 from the Swiss monetary
authorities and gave him orally other pertinent background
information. Rueff said that he would bring this matter
to the attention of the Minister of Finance as soon as
the latter returned from a Cabinet meeting and that he
would discuss it also with the Bank of France. Rueff
promised to have an answer for me on Saturday.
French control this morning offered 127.97 for
sterling but got very little at that figure since the
market offered a higher price and turned to such an extent
that the control later yielded sterling at 128.06. French
rentes were down from 1.30 to 2.75 francs. Bank of France
statement as of July 8 showed no change in gold holdings
or
Regraded Uclassified
3
of
JR #985, July 15, 5 p.m., from Paris.
or in advances to the state. Deposits were down
1,458,000 francs. Coverage 48.23 versus 47.53. Japanese
continued to sell dollars. Exchange traders of two leading
Paris American banks expressed the opinion that it is
this Japanese selling of dollars rather than return of
French capital from New York.
BULLITT
SMS:EMB
Regraded Uclassified
4
PARTIAL PARAPHRASE, SECTION TWO OF NO. 985 of
July 15, 1937, from Paris.
to Paris or London that is most importantly respon-
sible for the weakness in the dollar. One of them remarked
that some speculation had perhaps developed as for instance
on the part of a leading French bank with offices in London
and New York which was selling dollars but that the inter-
vention today of the British control to buy dollars had
probably checked this. The general atmosphere on the Paris
market is not good considering the dissension that was re-
vealed in the Socialist ranks at Marseille with respect to
supporting the Chautemps Government, the latest speech of
Jouhaux against capital, continuing strikes in the hotel and
restaurant industry, and the market rumor that Bonnet might
resign if he could not shortly make more progress toward
improving the French financial situation.
This afternoon while I talked with Rueff he admitted
that the market was not good, but he said the Government
would not intervene toward improving the situation until
Bonnet had taken action which is contemplated for the
near future toward improving the situation of the Treasury.
My contact explained that 30 far the decrees had been
toward balancing the ordinary budget. Reducing the extra-
ordinary expenditures would be the next step above envisaged.
Rueff thinks that after this is done the market will be more
respective
Regraded Uclassified
5
- 2 -
respective toward steps envisaged for intervention therein
by the Government if this may prove necessary to start
a pickup in the securities of the Government.
END OF MESSAGE.
BULLITT.
03413078
TRUE
TRANSPORTED
N/A - NAME TWO They
EA:LWW
Teer
Regraded Uclassified
6
DDM
GRAY
LONDON
Dated July 15, 1937
Rec'd 9:50 a.m.
Secretary of State
Washington
474, July 15, 1 p.m.
FOR TREASURY FROM butteryorth.
I have obtained a copy of the note which Bonnet sent to
Simon on July 6th in reply to Simon's note of July lst (text
of which is to bE found in the latter half of my 424, June 30,
11 p.m.). Simon's note of yesterday contained in my 473,
July 14, S Date: 13 in response to Bonnet's nots of July 6th,
a translation of which is as follows: "The Minister of Finance
thanks the Chancellor of the Exchequer for the two messages
which he was good Enough to send, and for the declaration
made by him in the House of Commons on June 30.
KE is fully prepared to proceed with the consultations
which Sir John Simon suggests and hopes that the British
Government will make known to him the date which they con-
sider opportune. (END SECTION ONE).
BINGHAM
GVI
KLP
7
JR
PLAIN
London
Dated July 15, 1937
Rec'd 10:05 a.m.
Secretary of State,
Washington.
474. July 25, 1 p.m. (SECTION TWO).
The Chancellor of the Exchequer has noted (A D ores
et deja ou observer) that the equalization fund intended
to maintain its regulating influence on the movements of
the franc; it will do the same in the future, this action
will be facilitated by the healthy financial measures which
the French Government has in view and which have as a
result the practically complete re-establishment of the
budgetary position, this situation should thus permi
maintenance of the greatest possible equilibrium in the
movements of the franc, the French Government considers
that in this way it will have done all it possibly could
in order to prevent the decisions which the Government has
been compelled to take from having an adverse effect on
foreign exchange in international markets.
However the Minister of Finance 1s not in a position to
reply in a precise manner to the question put in the last
sentence of the communication from the Chancellor of the
Exchequer. French monetary policy is entirely directed
towards maintaining the greatest possible stability of the
franc
Regraded Uclassified
8
-2-
JR #474, July 15, 1 p.m. (SECTION TWO) from London.
franc but it is not possible to make 8 commitment in
this matter which would impose upon that policy restrictions
analogous to those which the French Government has just
abolished. The Minister of Finance cannot foresee the
factors which will influence the exchange market in the
future nor in what sense these factors will make themselves
felt and he does not feel justified in exposing the
French Government to the risk of finding itself one day
in the position of having again to modify the limits imposed
on the fluctuations of its currency taking particularly
into account the needs of its economy and the international
situation.
The French Government is convinced that these
assurances will constitute a more sound and practical
basis of cooperation than would arise out of a precise
engagement. M. Georges Bonnet proposes however as soon
as his financial decrees shall have been promulgated to
come and salute Sir John Simon in order to be able to
discuss with him the problems which arise out of the
tripartite declaration".
BINGHAM
HPD
Regraded Uclassified
July 15, 1937.
9
9:49 a.m.
H.M.Jr:
Yes
Mr. Knoke:
Good morning. I Just spoke to Paris. There
wasn't much said but I thought it might interest
you. They told me they had been able since
reopening to sell a total of 3 billion francs.
H.M.Jr:
Just a minute. 3 -
K:
3 billion francs and about one hundred and
fifteen million dollars.
H.M.Jr:
One hundred and fifteen million.
K:
Yes.
H.M.Jr:
Dollars, that they had sold.
K:
They had sold or they had accumulated that
many in the foreign exchange to that extent.
H.M.Jr:
Well, that's wonderful isn't it?
K:
Yes, - I'm satisfied.
H:M.Jr:
Yes.
K:
Today there is nothing - 80 fer nothing
doing.
H.M.Jr:
Uh-huh.
K:
I thought you'd be interested in the following:
That it was generally believed in Paris,
Carigeul said that the market - that all markets
would be very quiet during the summer.
H.M.Jr:
Good.
K:
Yes, I thought you would like that.
H.M.Jr:
Yes.
K:
That was about all he had to say, the connection
was very poor 80 I thought I'd let it go at that.
H.M.Jr:
That's right.
K:
The second was the point that you raised the
other day, - the reason for the strength of
sterling.
Regraded Uclassified
10
-2-
H.M.Jr:
Yes.
K:
I've asked - I've told Lochead what I have
been able to find out here, there's been
nothing new, nobody has furnished anything
more satisfactory in the way of an explanation,
but the market has acted more quietly, BO
maybe those were flurries that had no particular
significance.
H.M.Jr:
Yes. Nothing doing today?
K:
Nothing doing today, Bo far.
H.M.Jr:
Well, you people are working on this Brazilian
thing, aren't you?
K:
Oh, yes. I just turned it over - the lawyers
are working on it at the moment.
H.M.Jr:
All right.
K:
But there's one more thing I want to mention,
an editorial in the Sun,
H.M.Jr:
Yes.
K:
You asked me at the time to get in touch with
them. Well - 80 I took it upon myself to talk
to the Sun and the following day I talked to -
at the Press conference here, explained to them
that the editorial was based on entirely mis-
leading information.
H.M.Jr:
Yes.
K:
It was misleading in its whole meaning and I
think everybody agreed that it was.
H.M.Jr:
I see.
K:
But that doesn't mean that the Sun will come out
with another editorial.
H.M.Jr:
No, but they stopped it.
K:
Yes, but - they haven't referred to it all since,
H.M.Jr:
Well, that's all right. Thank you - no that's
all right. That's for instance like the editorial
Regraded Uclassified
11
-3-
in today's Tribune, I don't ask you to try to
get that corrected.
K:
Well, I haven't read it yet. They haven't
mentioned it to me.
H.M.Jr:
Well, that's just political but this other
thing they are technically wrong.
K:
Yes.
H.M.Jr:
And there's quite a difference between asking
and trying to - all I want you to do is to give
them the right information, and then they cando
as they please.
K:
Well, we discussed it at great length at the
meeting and I think everybody agreed.
H.M.Jr:
Well, thank you very much.
K:
O.K.
H.M.Jr:
Goodbye.
K:
Goodbye, sir.
Regraded Uclassified
12
RE YUGOSLAVIAN GOLD DEALINGS
July 15, 1937
11:35 a.m.
Present:
Mr. Lochhead
Mr. white
Mr. Riefler
Mr. Williams
Dr. Viner
Mr. Opper
Opper:
The letter (to the Brazilians) is to be signed by
you.
H.M.Jr:
Now?
Opper:
You can either sign it in advance or hand it to them,
or have the thing sent.
H.M.Jr:
We'll sign it here at three o'clock when they come in.
Opper:
1 see. Now, I haven't prepared any letter in reply
for them, because the whole thing is set up on the
basis of your making an offer to them and delivering
this letter. We could prepare just an acknowledgment
on their part of having received the letter, which
Riefler:
Which would give them something to sign.
Opper:
...would give them something to sign. It would have
no
H.M.Jr:
That's all right.
Opper:
I'll give them something to sign.
H.M.Jr:
Well, who's this boy Carneira?
Opper:
Let him prepare something like that?
H.M.Jr:
Sure.
I just signed a document to send you to England in
October.
Opper:
I have it right here, but I'm still not counting on
going.
H.M.Jr:
Why?
Regraded Uclassified
13
-2-
Opper:
Well, they can't apparently agree on a date.
Viner:
I'll go with you.
Opper:
You'll go - oh, with me? Oh, I want to have some
fun over there.
H.M.Jr:
(Laughs) That's strike one.
Viner:
Want to keep an eye on you.
H.M.Jr:
That's strike one for Clarence.
Viner:
I'll show you how to have fun over there.
Opper:
Your kind of fun and mine aren't the same.
H.M.Jr:
You ready to do the Slavs? And don't suggest any
more countries around here. Who pulled that brilliant
one last night - "How many countries are there left?"
Viner:
Opper; he would. We ought to be doing the preparatory
work on Nicaragua; you know they're under way.
H.M.Jr:
It's too late; they missed the boat.
(Group reads proposed letter to Knoke re
Yugoslavian inquiry about gold purchases,
copy attached)
H.M.Jr:
Did anybody ever see their diplomatic representatives
here?
Lochhead:
Never came in on the Yugoslavs.
H.M.Jr:
Well, I don't want to argue with them; it's all right
with me.
Lochhead:
The only thing I would say is that Number Two is a
little bit incomplete. You say "the purchase of gold
in this country, whether for export or earmark, is
regularly permitted only to treasuries or central
banks of those countries that have stated their
adherence to the tripartite declaration." I'd say
their adherence to the tripartite declaration, and to
have signified their readiness to furnish gold to us on
terms satisfactory to us. They couldn't just say they
adhere to the declaration and then purchase gold auto-
matically. They also
Regraded Uclassified
14
-3-
H.M.Jr:
Don't tell me Harry's slipping.
Opper:
Well, I really don't think it's - while what Archie
says is true, you - if you don't do that, it doesn't
make any difference if you do Number Two.
Lochhead:
But supposing they just came along and said they sub-
scribed to the tripartite.
Viner:
If they offer to subscribe, we tell them what the
conditions are.
Opper:
Then I should think you might very well want to
make that arrangement with them.
H.M.Jr:
What do you come in here and fight for? This isn't
the place to fight. Well, get that any way you want
it. That's all right; I'll sign it.
Lochhead:
The main thing - go through diplomatic channels.
Viner:
And conform to supplementary arrangements. How about
that, Opper?
H.M.Jr:
Well, bring it back here at 2:30 and I'll sign it.
But get it right.
Viner:
Was that necessary?
H.M.Jr:
No, but I just want to fool you; I'd like to have you
bring in something where I don't make any suggestions.
How are you coming, Clarence? Going to be ready at
three?
Opper:
Well, that's up to the Brazilians now; we're all set.
We don't have anything else.
Regraded Uclassified
15
Dear Mr. Encluse
I refer to your letter of June 30, 1937. enclosing a
letter to you from the National Bank of Tugelavia dated
Jane 18, 1937. requesting information with respect to the
privilege of purchasing gold is the United States.
You might appropriately call their attention w the
following: (1) earmarking privileges are already smil-
able to the Bank of Tugeslavial (2) the purchase of gold
in this country, whether for export or earnark, is regi-
larly permitted only to treasuries or central banks of these
countries that have stated their adherence to the tripartite
declaration; (3) by special arrangements with the Treasury,
negotiated through appropriate diplomatic chamele, other
countries my be greated similar privileges.
Sincerely.
Mr. L. W. visa pres.,
Federal Reserve Bank of New York,
New York, New York.
Regraded Uclassified
16
July 15, 1937.
Dear Mr. Knokes
I refer to your letter of June 20. 1937, emelosing a letter
to you from the National Bank of Inguslavia dated June 18, 1937,
requesting information with respect to the privilege of purchasing
gold in the United States.
You night appropriately call their attention to the fact that
(1) the privilege of depositing gold with the Federal Reserve Bank
of Now York for retention by it under earmark is already available
to the Bank of Tugoslavia: (2) the purchase of gold in this country,
whether for export or carmark, 10 regularly permitted only to
treasuries or central banks of these countries that have stated
their adherence to the tripartite declaration and who have made
acceptable reciprocal arrangements with this country.
with respect to any special arrangements which they night wish
to seek, you have already stated in your eable to Belgrade of
November 13 that! "...we are advised by the Treasury that 10
would be necessary for the matter to be taken up by the Treasuries
of the respective governments through diplomatic channels".
Sincerely,
Mr. be ". Knoke, Vice President,
Federal Reserve Bank of New York,
New York, New York.
JV:AL:00:WR:JW:HDW:fa
Regraded Uclassified
17
July 25, 1937.
Dear Mr. Knokes
I refer to your letter of June 30, 1937. enclosing a letter
to you from the National Bank of Tuguslavis dated June 18, 1937,
requesting information with respect to the privilege of purchasing
gold in the United States.
You night appropriately call their attention to the fast that
(1) the privilege of depositing gold with the Federal Reserve Bank
of Now York for retention by it under earmark is already available
to the Bank of Tugoslavia; (2) the purchase of gold in this country,
whether for export or earnark, is regularly permitted only to
treasuries or central banks of those countries that have stated
their adherence to the tripartite declaration and who have made
acceptable reciprocal arrangements with this country.
With respect to any special arrangements which they night wish
to seek, you have already stated in your cable to Belgrade of
November 13 thats
"...we are advised by the Treasury that 11
would be necessary for the matter to be taken up by the Treasuries
of the respective governments through diplomatic channele".
Sincerely,
Mr. L. V. Knoke, Vice President,
Federal Reserve Bank of New Tork,
New York, New York.
JV:AL:CO:WR:JW:HDW:fa
Regraded
Uclassified
18
July 15, 1937.
Dear Mr. Knoket
I refer to your letter of June 30, 1937. enclosing a letter
to you from the National Bank of Tugeslavia dated June 18, 1937,
requesting information with respect to the privilege of purchasing
gold in the United States.
You might appropriately call their attention to the fast that
(1) the privilege of depositing gold with the Federal Recerve Bank
of New Tork for retention by it under earmark is already available
to the Bank of Tugeslaviat (2) the purchase of gold in this country,
whether for export or carmark, is regularly permitted only to
treasuries or central banks of those countries that have stated
their adherence to the tripartite declaration and who have made
acceptable resiprocal arrangements with this country.
with respect to any special arrangements which they night wish
to seek, you have already stated in your cable to Belgrade of
November 13 thats ".... are advised by the Treasury that 10
would be necessary for the matter to be taken up by the Treasuries
of the respective governments through diplematic channels".
Sincerely,
MF. be ". Knoke, Vice President,
Federal Secerve Bank of New York,
New York, New York.
JV:AL:CO:WR:JW:HDW:fa
Regraded Uclassified
COPY
19
July 15, 1937.
Dear Mr. Knoke:
I refer to your letter of June 30, 1937, enclosing a
letter to you from the National Bank of Yugoslavia dated
June 18, 1937, requesting information with respect to the
privilege of purchasing gold in the United States.
You might appropriately call their attention to the
fact that: (1) the privilege of depositing gold with the
Federal Reserve Bank of New York for retention by it under
earmark 1s already available to the Bank of Yugoslavia;
(2) the purchase of gold in this country, whether for export
or earmark, 18 regularly permitted only to treasuries or
central banks of those countries that have stated their
adherence to the tripartite declaration and who have made
acceptable reciprocal arrangements with this country.
With respect to any special arrangements which they might
wish to seek, you have already stated in your cable to Belgrade
of November 13 that: "...we are advised by the Treasury that
it would be necessary for the matter to be taken up by the
Treasuries of the respective governments through diplomatic
channels".
Sincerely,
Mr. L. W. Knoke, Vice President,
Federal Reserve Bank of New York,
New York, New York.
JV: AL: CO: WR: HDW: fa
Regraded Uclassified
COPY
FEDERAL RESERVE BANK
20
OF NEW YORK
June 30, 1937.
S1R:
I enclose copy of a letter dated June 18, 1937, received
from the National Bank of Yugoslavia, requesting that we obtain a
license for that bank to purchase gold in the United States for
subsequent sale here or free export from here.
A similar request was made of us by the bank by cable
of November 13, 1936, reading "No. 18 Please buy gold bars for about
$120,000. Charge our account and deposit with you gold bars", in
reply to which we cabled to Belgrade on November 13, "Referring
your cable No. 18 we are advised by the Treasury that it would be
necessary for the matter to be taken up by the Treasuries of the
respective governments through diplomatic channels".
There 1s enclosed herewith a brief memorandum prepared
by our Research Department, setting forth some data regarding the
bank, our relations with it and details of foreign exchange regu-
lations now in force in Yugoslavia.
If the request of the National Bank of Yugoslavia is com-
plied with, the gold would be earmarked in its name in our vaults.
It is requested that your decision be communicated to us at your
early convenience.
Respectfully,
(Signed) L. W. Knoke
L. W. Knoke,
Vice President.
The Honorable,
The Secretary of the Treasury,
Washington, D. C.
Ence.
Regraded Uclassified
COPY
Belgrade.
21
TRANSLATION
June 18, 1937.
FROM Banque Nationale du Royaume de Yougoslavie
0
Federal Reserve Bank of New York
Ref. No. 150694
We beg to inform you that we expect to have occasion to
buy and sell in America from time to time gold against dollars, with
the privilege of being able to dispose of and export it freely.
As we are aware that special legislation concerning gold
transactions exists in America, we take the liberty of asking that
you obtain for us from the competent authorities the necessary auth-
orization pertaining to the purchase and sale of gold, with the
privilege of freely disposing and exporting each parcel purchased.
We hope that you will obtain this authorization without
trouble, especially since the transactions which we might have to
carry out in America would not be considerable in comparison with
the gold transactions of other countries in your market.
If, however, you should not be in a position to obtain
this authorization for us, we should appreciate your letting us know
to whom we should turn in this matter.
For your guidance, transactions in foreign exchange and
gold in our country are not free, but are subject to the restrictions
laid down by regulations of the Finance Ministry.
Will you kindly let us know 88 soon as possible the results
of such steps as you take in this matter.
Regraded Uclassified
COPY
NATIONAL BANK OF YUGOSLAVIA
22
The National Bank of Yugoslavia is the central bank of
Yugoslavia and has had an account on our books since 1927. Up
to the time when exchange control was established in Yugoslavia
in October 1931, the Bank was on the gold exchange standard.
The cover for its sight liabilities (notes and deposits) 1s still
held in gold metal and in convertible foreign exchange, subject
to & present minimum required reserve of 25 per cent in these
assets. At last report (June 8, 1937) its actual reserve ratio
was 28.1 per cent. As against & further requirement that 50 per
cent must be held in gold metal, nearly the whole of the reserve
was BO held at last report.
For several years past the National Bank of Yugoslavia
has been paying a premium of 28.5 per cent in dinars for gold and
gold exchange, the latter including United States dollars. Al-
though the gold content of the dinar has not been redefined since
the establishment of exchange control, a decree dated January 15,
1935 permitted the Bank to write up ite stock of reserve assets
in accordance with this premium for purposes of calculating the
ratio of reserves to liabilities.
During the year 1935 the National Bank of Yugoslavia
lost $10 million of gold metal. It regained $5 million of gold
in the course of the year 1936, and acquired an additional $2
million of gold in the first four months of 1937.
The exchange control law requires that all export transao-
tions be subject to governmental license, and that certain imports
from countries with which Yugoslavia has no clearing or compensation
agreements be also subject to license. (The United States has no
23
- 2 -
exchange agreement with Yugoslavia.) Exporters are required
to offer to the National Bank one-third of the exchange proceeds
of their exports, the other two-thirds to be sold in the open
market. It is understood that the open market rate closely ap-
proximates the official rate, which 1s nominally quoted in New
York at 2.33 cents. Parity is 2.982 cents since January 1934.
June 30, 1937.
FEDERAL RESERVE BANK
OF NEW YORK
24
FFICE CORRESPONDENCE
DATEJULY 15, 1937.
CONFIDENTIAL FILES
CONVERSATION WITH
L. I. Knoke
BANK OF FRANCE.
I called Mr. Cariguel at 10:20 today. They had not operated
at all so far today, he said. The market was a little perturbed over
the external pelitical situation. I asked whether he was satisfied
with the amount of gold and foreign exchange they had been able to
get in since July 1. Cariguel replied that the three billion france
they had managed to sell looked to him pretty good. As regards the
future, he stated that it was generally thought over there that
their markets would be very quiet during the summer.
I made reference to the continued discount on francs for
forward delivery. Cariguel stated that they were not disturbed over
that although naturally they were not particularly pleased with 1t
either. However, it could be readily explained, firstly by the tight-
ness of the money market, secondly, by the fact that they had
sended to the French banks to refrain from operations in forward france
except for strictly commercial purposes, which necessarily semt that
sellers of forward france found it difficult to find buyers, thus de-
pressing the forward rate. It seemed to his that this state of affairs
was bound to continue as long as their trade figures showed such 8 heavy
excess of imports over exports.
I commented that recent developments in the Lendon gold market
to as were very encouraging. Cariguel replied that the fact of the matter
was that it was extremely difficult to buy gold in London, the supply
there having practically dried up.
The commection being very poor, I miggested that we had
better est short and promised I would call his again in & fee days.
LUK:ENC
25
JR
GRAY
London
Dated July 15, 1937
Rec'd 1:40 p.m.
Secretary of State,
Washington.
475. July 15, 6 p.m.
CONFIDENTIAL.
FOR treasury FROM BUTTERWORTH.
I delivered this morning the message to the Chancellor
of the Exchequer contained in your 300 July 14, 9 p.m.,
and 301 July 14, 11 p.m.
At a meeting this afternoon which had been previously
arranged with Philipps and Waley I found occasion to
mention that you would appreciate it if an answer could
conveniently be made by Monday. (In accordance with your
telephonic : instruction I also telephoned Cochran in order
that a similar request be made.of Bonnet).
Philipps stated that with the French Parliament out
of the way and given the decree making powers which would
be in force until the end of August in his opinion the
Chautemps Government should with any luck be safe until
October. He said that from what they saw of French exchange
operations they estimated that the French fund had only
obtained between 20 and 25 million pounds of gold; that in
their opinion this did not represent returned capital but
was
26
-2-
JR #475, July 15, 6 p.m., from London.
was almost entirely the result of covering operations.
Philipps' plans are still somewhat indefinite but
his general intention is to leave England the latter
part of August and go straight to Lake Louise where he
expects to meet his sister who is returning to England
from the Far East via Canada. She is to sail from New
York on September 22 and therefore Philipps assumes that
he will make his way from Lake Louise to Chicago and thence
direct to Washington arriving there during the week-end
before the 20th of September, the date of your meeting with
him.
BINGHAM
CSB
Approved by the President
27
July 15, 1937
Regraded Uclassified
Draft.
The following joint statement is made by the Secretary
minister
of the Treasury and the Finance of Finance of Brazil:
The Secretary of the Treasury of the United States of
America and the Minister of Finance of the United States of
Brazil are entering into an agreement under which:
1. The United States undertakes to sell gold to Brazil
at such times and in such amounts 8.8 the Brazilian Government
may request, up to a total of $60,000,000.
2. The United States will make dollar exchange. avail-
able to the Government of Brazil or its fiscal agent, under
conditions which safeguard the interests of both countries,
for the purpose of promoting exchange equilibrium.
The agreement 18 designed to promote the development
of conditions favorable to the maintenance of monetary equilib-
rium between the two countries and to facilitate the establish-
ment by the United States of Brazil of a central reserve bank
8.8 B. part of the program of the Brazilian Government for 10-
proving the financial structure of the Nation to meet the needs
of its expanding economy.
In recent years there has occurred a notable improvement
of the trade and financial position of Brazil. It is a matter
of gratification both to the Secretary of the Treasury and the
Finance Minister that this favorable development of the Brazilian
economy makes feasible at this time this important step.
Regraded Uclassified
-2-
Both the Secretary of the Treasury and the Minister
of Finance are pleased to have had this opportunity to ex-
tend the field of cooperation between their countries and,
in accordance with their conversations, the Secretary of
the Treasury stands ready to supply such technical assistance
as Brazil may care to avail itself of in connection with the
organization of the new bank.
Regraded Uclassified
30
RE BRAZILIAN AGREEMENT
July 15, 1937
2:45 p.m.
Present:
Mr. Lochhead
Mr. White
Mr. Opper
Mr. Williams
Dr. Viner
Mr. Riefler
Mr. Gaston
H.M.Jr:
Have they seen this (letter to Brazilians)?
Opper:
They have a copy of it, yes, sir. That is, Mr.
Carneira has. I think by this time he's probably
shown it to the Minister.
H.M.Jr:
Did you find out which Carneira?
Opper:
I don't think it's Primo.
H.M.Jr:
As a matter of fact, you take - (on phone) tell Mr.
Gaston we're waiting for him - as a matter of fact,
their idea was quite different. They expected to
take gold and give us a note for it, something like
that. This is the Williams plan - not Harvard, but
Williams.
White:
It's the plan consisting that when they buy something
you expect them to pay for it.
Viner:
If the press start asking you questions about it,
don't expand on it.
H.M.Jr:
You mean don't laugh?
Viner:
That would be all right. But I still think we
haven't had our innings with Feis yet, who still says
this is an important agreement.
H.M.Jr:
He thinks this is an important agreement.
Riefler:
We said so in the statement, didn't we?
H.M.Jr:
Well, I'll tell you this; it didn't take Sumner
Welles very long to catch on. They think it's very
Regraded Uclassified
31
-2-
important - enough that he called me up and said
he got their agreement through based on this one.
I mean, you know, they expected all this trouble,
and I spoke to him and suggested, "Say, now, we're
going to do this" - or rather, wouldn t do it
unless they came through on the other one; and
they're all finished, cleaned up.
Williams:
Well, I think the central bank part is important,
and I think it is very important for us to have a
connection with the creation of that bank. I think
that is important for our standing in Latin America.
Riefler:
More than that.
H.M.Jr:
Do you fellows want to go over with me, just for
fun? Would you enjoy it?
Gaston:
Would you care to have either Naster or Frank King
go over there, or do you think they would make a
H.M.Jr:
Oh, absolutely. And my personal photographer, a la
Kung.
Now, what's this?
White:
That Yugoslavian letter.
H.M.Jr:
Oh.
(Signs letter)
What would we do if the Brazilians asked for tech-
nical assistance?
Viner:
I'd send Williams down, and somebody else from the
"ew York Bank, and somebody from the Board.
Williams:
Getting good all right.
White:
They did say that they would leave some economists.
here.
Opper:
"hat, no lawyer?
H.M.Jr:
Did you hear what Clarence said? Clarence said they
want to get something done.
Regraded Uclassified
32
-3-
Viner:
I don't see what we have against the Brazilians.
H.M.Jr:
I'll say this, you came through - kidding the lawyers -
you're on time today.
Lochhead:
You don't realize how he had to get other lawyers
to come through.
Opper:
They gave us some swell cooperation.
Lochhead:
They did.
H.M.Jr:
Who's going to let these fellows know abroad what
this amounts to? Anything we can tell them? Taylor
usually lets them know. They get the press release.
You still haven't done any business, Archie?
Lochhead:
Not a thing.
H.M.Jr:
Marvelous, isn't it?
(Brazilians arrive; rest of
transcript written up separately)
Regraded Uclassified
33
MEETING WITH BRAZILIANS
July 15, 1937
3:00 p.m.
Present:
Dr. Arthur de Sousa Costa
Ambassador Caffrey
Mr. Carneira
Mr. Lochhead
Mr. White
Mr. Opper
Mr. Williams
Dr. Viner
Mr. Riefler
Mr. Gaston
Dr. Feis
H.M.Jr:
Has the Minister had a chance to see this?
Costa:
Yes, I have.
H.M.Jr:
Is it acceptable?
Costa:
Yes.
\Secretary signs letter and hands to Costa)
H.M.Jr:
Well, I hope it brings both of our countries prosperity.
Costa:
Thank you, with all the kindness I have.
H.M.Jr:
Now, who's going to read this (Brazilians' acknowledg-
ment)?
Carneira:
As a matter of fact, it is the English translation....
Opper:
I have what should be the translation of the reply.
H.M.Jr:
Well now, this is in force now, isn't it, the minute
I sign it.
Opper:
Yes. We're communicating it to the Federal Reserve
Bank today.
H.M.Jr:
Now the only other thing we'll have to do is have
our pictures taken.
Costa:
All right.
H.M.Jr:
How long will the Minister be in the United States?
How long will you stay?
Uclassified
34
-2-
Costa:
I think a week more, or ten days more.
Carneira:
The Minister will go tonight to Dallas.
Costa:
Next Tuesday I think we go to New York.
H.M.Jr:
I leave here Monday.
Costa:
Yes?
H.M.Jr:
This is my last business now for a month. No more
business for a month.
Costa:
When are you going out?
H.M.Jr:
I leave here Monday.
Costa:
Monday.
H.M.Jr:
I think the lawyers did very well to get this through.
Costa:
Yes.
Carneira:
Much quicker than....
H.M.Jr:
We have to have lawyers here and lawyers in New York
to do it.
Well, when do you report down there, Mr. Caffrey?
Caffrey:
I'm leaving here tomorrow, but I'm sailing - next boat
is the 31st; it gets there the 12th. I'm going to try
to catch two or three days of cool weather before I
move into - I like the tropics, but I like a few days
of this too.
H.M.Jr:
Rio isn't really the tropics, is it?
Caffrey:
Oh yes, I would say SO.
H.M.Jr:
I've never been in the tropics; I've got that yet to do.
Carneira:
We're looking forward to next year.
H.M.Jr:
I hope so.
Regraded Uclassified
35
-3-
Caffrey:
Glad to have you come down, Mr. Secretary.
H.M.Jr:
Well, I told them I'd like to come down in January,
February.
Caffrey:
That's the worst time of the year; that's mid-summer.
Carneira:
This time would be preferable. It's our time - it's
our good season.
H.M.Jr:
You see, there's five in my family and it's quite a
big family to move, and they don't all fly; that's
the trouble.
Costa:
I want to ask you another favor, to express for
myself to all the technicians and all the lawyers
my appreciation for the kindness which they have
shown. But I do not leave until the technicians -
I ought to talk with them.
H.M.Jr:
You want to talk with them; you mean this afternoon?
Costa:
No, not this afternoon; but next week in New York,
I think, I can meet with that Williams. You (Williams)
are in New York next week.
Williams:
What day will you be getting there?
Costa:
I'll be getting there next Tuesday.
Williams:
I have to give a lecture at Wellesley Institute
Tuesday morning and be there Wednesday morning.
Costa:
Wednesday morning.
Williams:
That be all right?
Costa:
What time?
Williams:
Any time.
Costa:
In the Bank?
Williams:
In the Bank.
H.M.Jr:
We can go to Mr. Hull's, but I thought it was cool
here and we have mother five or ten minutes. He said
Uclassified
36
-4-
to be there at 3:30. And I don't think the State
Department is air-cooled, is it?
Costa:
No, it's not air-cooled.
Feis:
Two offices - one office, the Secretary's office.
H.M.Jr:
We have another five minutes; we might as well sit
here.
Regraded Uclassified
(7-15-37)
37
My dear Mr. Winisters
he & result of recent conversations with you end other
representatives of the United States of Brozil, I 18 today author-
ising the Federal Reserve Bank of New York, an fiscal agent of the
United States of America, with the object of building up the mone-
tary stocks of gold and stabilizing the currency of the United States
of Brasil and of supplying the United States of Bresil with United
States of America dollar exchange from time to time 48 may be required,
to enter into the following arrengement with you, or such fiscal agent
of the United States of Brazil of say be designated for that purposes
*1. to, the Federal Reserve Bank of New York, as fiscal
agent of the United States of America (hereinefter called
the United States), undertake to sell to you, from time
to time, in such smounts and et such times 68 you request,
upon payment of the price provided by section 44 of the
Provisional Regulations issued under the Gold Reserve Act
of 1934, AB the same may be in effect at the time of each
such sale, gold in the maximum amount of $60,000,000, 000⑉
puted et the price st which such gold is so purchased by
you. Immediately upon the consumention of each such sale
the gold so sold will be onrearked by us for your accounts
Regraded Uclassified
38
2
"2.
90, as fiscal agent of the United States, will purchase
from you, from time to time as requested by you,
Brasilian milreis, the milreis 30 purchased to be
credited to us (as fiscal agent of the United States)
on your books in e special account to be opened in the
name of 'Federal Recerve Bank of New York as Fiscal Agent
of the United States'. Upon receipt by us of advice from
you by cable that this account has been credited with a
stated amount in Branilien milreis, we shall in turn credit
you on our books in a special account to be opened in such
name as you any designate in an amount in United States
dollars equal, st the then prevailing buying rate of exchange
in Bex York for cable trensfers in milreis on Rio de Janeiro,
to the amount in milrois so credited to us on your books.
Interest on such special milreis account is to be credited
thereto monthly at 8 rate per ennus one-half of 18 above the
average of the Federal Reserve Bank of New York's rediscount
rate during the sonth immediately preceding.
"3.
The total amount of milrois purchased by us from you and
standing to our credit on your books as aforessid, to-
gether with the interest accrued thereon whether credited
or not, shall not at any time exceed in the hygrogate the
39
- 3 -
equivalent of United States $60,000,000 computed at the
rate at which such milreis are to be repurchased from
us by you pursuant to the provisions of the next succeed-
ing paragraph hereaf.
"4" You agree that any or all milreis purchased by us from
you and standing at any time to our credit on your books
as aforessid, shall be repurchased (in United States
dollars) by you from us at such times as say be autually
agreed upon when such milreis are purchased from you to
us, at the same rate or rates of exchange at which such
milreis were purchased from you by us. Milreis is the
amount of the interest accrued on, and whether or not
credited to, such special milreis account shall be per-
chased (in United States dollars) by you from us at any
time, and from time to time, upon our request, at the
same rate or rates of exchange at which the milreis upon
which such interest has accrued were purchased from you
by us. In the absence of any such request milreis in
the amount of such accrued interest shall be purchased
(in United States dollars) by you from us at said rate
or rates of exchange at the end of each successive ninety
day period from and after the date hereaf and upon the
termination of this arrungement.
Regraded Uclassifi
40
- 4 -
$5.
As security for the performance of your agreement
hereimabove not forth you agree that an amount of
gold at all times equal (when calculated at the
price from time to time provided by section 42 of
the Provisional Regulations hereina bove referred to)
to the dollar equivalent of the milrois credited on
your books as purchases by us, together with the
interest thereon, and computed at your repurchasing
rate specified above, will be and hereby is pledged
to us by you end will be left by you in our custody
free of any lien or encumbrance other than that here-
in net forth and you agree that you will and you do
hereby authorise and request us to set saide such
gold from time to time and to hold it subject to the
terms of this agreement.
"The cost of insurence and any other reasonable and
necessary expenses insurred, by us with respect to any
gold pledged to us under this paragraph 5 (including,
but without limitation thereto, transportation and
storage expenses) will be charged by us to your account
on our books under advice to you.
"In the event of your failure to repurchase such mil-
reis (including interest) as bereina bove provided, you
de further authorise us, as pledges aferesaid, to sell
Regraded
41
- 5 -
to the United States, at the price provided by section
42 of the Provisional Regulations hereinshove referred to,
ES the more may be in effect at that time, so much of
such gold 60 hold under pledge at any time, and from time
to time, and to apply the proceeds thereof, less any
reseonable and necessary expenses incurred by de in
respect of such gold (including, but without limitation
thereto, expenses of sole, transportation, storage, and
insurance) in such menner, " may be necessory to seve us,
08 fiscal egent of the United States, end the United
States, haraless from any loss by reason of any feilure
on your part to repurchase said milreis (including
interest) 48 hereinabove provided.
"It is understood sad agreed that our obligation, as
fiscal agent of the United States, to purchase my
esount of milrois pursuant hereto shall be conditional
and dependent upon the prior performance by you of the
obligations and things to be performed and done by you
under this agreement.
"6. It is understood that you will take such further action
" any be reasonably requested by us to effectuate the
purposes and intent of this arrangement.
Regraded Uclassifie
(7-15-37)
c
0
P
42
T
My dear Mr. Ministers
As n result of recent conversations with you end other
representatives of the United States of Brasil, I - today author-
ising the Federal Reserve Bank of New York, as fiscal agent of the
United States of merica, with the object of building wp the -
tary stocks of gold and stabilising the currency of the United States
of Brazil and of supplying the United States of Brasil with United
States of America dollar exchange from time to time as my be required,
to enter into the fellowing arrangement with you, or such fiscal agent
of the United States of Brazil as my be designated for that purposes
"1. so, the Federal Reserve Bank of Nev York, as fiscal
agent of the United States of America (hereimafter called
the United States). undertake to sell to you, from time
to time, in such anounts and at such times as you request,
upon payment of the price provided by section of the
Provisional Regulations issued under the Gold Reserve lot
of 1934, M the case my be in affect at the time of such
ench sale, gold in the maximum amount of $60,000,000. -
puted at the price at which such sold 10 m purchased w
you. Immediately upon the consumnation of each such sale
the gold w mld will be earnerized w us for your account.
- 2 -
43
$2.
we, as fiscal agent of the United States, will purchase
from you, from time to time as requested w you,
Brasilian milreis, the milrete so purchased to be
credited to us (as fiscal agent of the United States)
on your books in & special account to be opened in the
name of 'Federal Reserve Bank of New Tosk as Fiscal Agent
of the United States'. Upon receipt by we of advice from
you by cable that this account has been credited with a
stated amount in Brasilian milrois, 90 shall in turn credit
you on our books in a special account to be opened is such
name as you may designate in all amount in United States
dollars equal, at the them provailing buying rate of exchange
in New York for cable transfers in milreis on Rio de Janeiro,
to the amount in milrois no credited to us on your books.
Interest on such special milrois account to to be credited
thereto monthly at a rate per - one-half of 1% above the
average of the Federal Reserve Bank of New Tork's redisooms
rate during the month imediately preceding.
"3. The total ement of milrois purchased by us from you and
standing to our credit on your books as aforesaid, too
gether with the interest accrued thereon whether credited
or not, shall not at any time exceed in the aggregate the
Regraded Uclassifie
44
- 3 -
equivalent of United States $60,000,000 computed at the
rate at which such milrois are to be repurchased from
w by you purenant to the provisions of the next uncosed-
ing paragraph hereef.
You agree that my or all milrois purchased by us from
you and standing at any time to our credit on your books
M aforesaid, shall be repurchased (in United States
dellars) by you from " at such times as my be antually
agreed upon when such milreis are purchased from you by
me, at the SAMO rate or rates of exchange at which mch
milrois were purchased from you by w. Milrois in the
mount of the interest accrued on, and whether or not
credited to, such special milrois account shall be -
chased (in United States dellars) w you from us at any
time, and from time to time, upon our request, at the
DATE rate or rates of exchange at which the milrois upon
which much interest has account were purchased from you
W w. In the absence of my such request milrois in
the and of such accrued interest shall be purchased
(in United States dollars) by you from If at said rate
or rates of exchange at the and of each successive sinety
day period from and after the date heres! and upon the
termination of this arrengment.
Regraded Uclassified
- 4 -
45
"5.
As security for the performance of your agreement
hereinabove set forth you agree that as amount of
gold at all times equal (when calculated at the
price from time to time provided w section k2 of
the Provisional Regulations bereinabore referred to)
to the dellar equivalent of the milreis credited on
your books as purchases by us, together with the
interest thereon, and computed at your repurchasing
rate specified above, will be and hereby is pledged
to us w you and will be left by you in our custody
free of any lien or encumbrence other than that here-
is not forth and you agree that you will and you do
hereby authorise and request us to net acide such
gold from time to time and to hold it subject to the
terms of this agreement.
The cost of insurance and my other reasonable and
necessary expenses insurred w us with respect to my
sold pledged to us under this paragraph 5 (including,
but without limitation thereto, transportation and
storage expenses) will be charged by us to your account
on our books under advice to you.
"In the event of your failure to repurchase ruch mil-
refe (including interest) M hereinabove provided, you
40 further authorize us, as pledges aferesaid, to sell
46
- 5 -
w the United States, at the price provided w esotion
he of the Previsional Regulations hereinabove referred to,
as the - may be in effect at that time, so such of
such gold so held under pledge nt any time, and from time
to time, and to apply the proceede thereof, less any
reasonable and necessary expenses insurred by us in
respect of such gold (including, but without limitation
thereto, expenses of sale, transportation, storage. and
insurance) in such manner, as my be necessary to save us.
as fiscal agent of the United States, and the United
States, harmless from my loss by FOAGOR of any failure
on your part to repurchase said milreis (including
interest) as hareinabove provided.
"It is understand and agreed that OUR obligation, as
fiesal seent of the United States, to purchase my
- of milrois purcuant herete shall be conditional
and dependent upon the prior performance by you of the
obligations and things to be performed and done w you
under this agreement.
*
It is unterstood that you will take each further action
as my be reasonably requested by us to effectuate the
yurposes and intent of this orrangement.
Regraded
w I I
47
eye Our obligations herennder shall terminate on
July 15, 1942, subject to earlier termination at
any time on 30 days' notice with respect to para-
graphs 1 or 2 hereef, or the entire agreement, as
specified in such notice. Any termination, -
ever, shall not affect any of our rights or any of
your obligations herounder, all of which shall -
time in effect until you shall have fully performed
your said obligations."
Very truly yours,
(Signed) B. Norgesthau, Jr.
Secretary of the Treasury.
JUP:CVO:BJ 7/25/37
Non. Arthur do Sousa Conta,
Minister of Finance of Brasil.
Regraded Uclassified
48
- 6 -
"7. Our obligations hereunder shall terminate on
July 15, 1942, subject to earlier termination at
any time on 30 days' notice with respect to para-
graphs 1 or 2 hereof, or the entire agreement, as
specified in such notice. Any termination, how-
ever, shall not affect any of our rights or any of
your obligations horeunder, all of which shell con-
tinue in effect until you shall have fully performed
your anid obligations."
Very truly yours,
(Signed) H. Morgenthau, Jr.
Secretary of the Treasury.
JWP:CVO:BJ 7/15/37
Hon. Arthur de Souse Costa,
Minister of Finance of Brasil.
JUL 15 1937 (IN Secretary's hand writing)
Regraded Uclassified
TREASURY DEPARTMENT
43
Washington
FOR RELEASE, MORNING NEWSPAPERS,
Press Service
Friday, July 16, 1937.
No. 10-78
7/15/37
The following joint statement is made by the Secretary of the Treasury
and the Minister of Finance of Brazil:
The Secretary of the Treasury of the United States of America and the
Minister of Finance of the United States of Brazil are entering into an
agreement under which:
1. The United States undertakes to sell gold to Brazil at such timos
and in such amounts as the Brazilian Government may request, up to a total of
$60,000,000;
2. The United States will make dollar exchange available to the
Government of Brazil cr its fiscal agent, under conditions which safeguard
the interests of both countries, for the purpose of promoting exchange
equilibrium.
The agreement is designed to promote the development of conditions
favorable to the maintonance of monetary equilibrium between the two countries
and to facilitate the establishment by the United States of Brazil of a
central reserve bank as a part of the program of the Brazilian Government for
improving the financial structure of the Nation to meet the needs of its ex-
panding economy.
In recent years there has occurred a notable improvement of the trado
and financial position of Brazil. It is & matter of gratification both to
the Secretary of the Treasury and the Finance Minister that this favorable
development of the Brazilian economy makes feasible at this time this important
stop.
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Both the Secretary of the Treasury and the Minister of Finance are
pleased to have had this opportunity to extend the field of cooperation between
their countries and, in accordance with their conversațions, the Secretary of
the Treasury stands ready to supply such technical assistance as Brazil may.
care to avail itself of in connection with the organization of the new bank.
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TREASURY DEPARTMENT
51
INTER OFFICE COMMUNICATION
DATE JUL 15 1937
TO
Secretary Morgenthau
FROM
Herman Oliphant
Re: Neutrality Act of 1937.
A question has arisen concerning the applicability of section 3
of the Neutrality Act of 1937 (Pub. Res. No. 27, 75th Congress) to
the Government of the United States. More specifically, does the
phrase "it shall thereafter be unlawful for any person within the
United States to purchase, sell, or exchange bonds, securities, or
other obligations of the government of any belligerent state or of
any state wherein civil strife exists, *** or to make any loan or ex-
tend any credit to any such government, **** apply to this Government
whenever the President shall have issued a proclamation under the
authority of section 1 of the Act? It is believed that such prohibition
does not apply to the Government of the United States.
It may be stated at the outset that the definitive interpretation
of the Neutrality Act, being a question of law which would necessarily
involve several Departments, is a matter which would be appropriate for
the determination of the Attorney General. Sections 354, 356 and 361
of Revised Statutes of 1878, (U.S.C., title 5, sections 303, 304 and 306).
The following discussion is intended for the use of the Treasury
Department, pending such definitive interpretation.
- 2 -
52
The prohibition in section 3 of the Neutrality Act relating to the
purchase, sale or exchange of securities of belligerent governments and
the making of losns to such belligerents, is a prohibition upon "any per-
son within the United States." The term "person" is defined in section
15 to include "a partnership, company, association, or corporation, as
well as E. natural person." There is nothing in the Act to indicate that
Congress intended to include the Government of the United States within
that definition. Indeed, the fact that Congress also specifically set
forth in section 13 of the Act & definition of the term "state" as includ-
ing "nation, government, and country", is & rather clear indication that
there was no intention to include e government within the definition of
the word "person."
There is good authority for the principle of statutory construction
that the sovereign is not bound by statutes that may tend to diminish any
of its rights and interests unless the sovereign is named in the statute
by special and particular words. The rule was ell stated in Dollar Savings
Bank V. United States, (1873) 86 U.S. 227, 239, as follows:
"It is a familiar principle that the King is not bound by any
act of Parliament unless he be named therein by special and
osrticular words. The most general words that can be devised
(for example, any person or persons, bodies politic or corporate)
affect not him in the least, if they may tend to restrain or
diminish any of his rights and interest. He may even take the
benefit of any particular act, though not named. The rule thus
settled respecting the British Crown is equally applicable to
this government, and it has been applied frequently in the dif-
ferent States, and practically in the Federal courts." (Under-
scoring supplied.)
In United States V. Herron, (1873) 87 U.S. 251, 263, it wes stated:
** * * when at statute is general and any prerogative, right, title,
53
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or interest would be divested or taken from the king, in such
a case he shall not be bound unless the statute 1s made by ex-
press words to extend to him, * * *,
"Sanctioned as that principle is by two express decisions
of this court, it would seem that further discussion of it is
unnecessary, as it has never been questioned by any well-consider-
ed case, State or Federal, and is founded in the presumption that
the legislature, if they intended to divest the sovereign power
of any right, privilage, title, or interest, would say so in ex-
press words; and where the act contains no words to express such
an intent, that it will be presumed that the intent does not ex-
ist."
See also Davis V. Pringle, (C.C.A. 4th, 1924) 1F. (2d) 860, 865;
affirmed, (1925) 268 U.S. 315.
To adopt & construction of the general terms of the Neutrality Act
which would divest the sovereign power of & right or privilege which it
otherwise possess, would be contrary to the rule of statutory construc-
tion above mentioned.
Not only is the Government not specifically mentioned in section 3
of the Neutrality Act, but, as above pointed out, the word "person", as
contrasted with "state", has been so defined as to preclude the possibility
that the prohibition was meant to apply to the Government of the United
States.
Section 3 of the Neutrality Act as finally enacted is couched in
language somewhat different from that in the House bill (H.J. Res. 242, 75th
Congress), but means the same thing, and covers all of the House bill.
(Conference Report No. 725, 75th Congress, page 12.)
Section 5 (that pertaining to financial transactions) of H.J. Res. 242
is practically a restatement of section 2 of Public Resolution No. 74, 74th
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54
Congress (49 Stat. 1152), which extended and amended the Joint Resolution,
approved August 31, 1935 (49 Stat. 1081). The prohibition against financial
transactions with belligerents first appeared in Public Resolution No. 74.
When that legislation was under consideration the Committee stated:
"We feel that this will safeguard and prohibit any credits
or transactions undertaken to be cerried on in this country by
a belligerent country during any warfare. * + ⑉ (House Report
No. 2001, 74th Congress, underscoring supplied.)
However, it should be pointed out that the phraseology now under con-
sideration is clear and unambiguous and resort my not be had to committee
reports and congressional debates in an effort to impart a different mean-
ing to the words. Duplex Printing Press Co. V. Deering (1920) 254 U.S. 443,
474; Penn R. R. Co. V. International Coal Co. (1912) 230 U.S. 184, 199. Such
aids, are only admissible to solve doubt and not to create it. Railroad Com-
mission V. Chicago B. & Q. R. Co. (1922) 257 U.S. 563, 589. The phrase "any
person within the United States" presumably WELE used deliberately by the
Congress in the statute, and also the word "person" was defined in section 13
thereof. Nevertheless, the foregoing statement by the Committee on Foreign
Affairs, while not admissible under strict rules of evidence in a court of
law, is indicative of the spirit of the legislation, and it might possibly
be contended that, when Congress enacted the legislation, it had in mind an
absolute prohibition of financial transactions of every character in the
United States (except ordinary commercial end relief transactions) includ-
ing those of the Government.
The Johnson Act (48 Stat. 574) by its terms specifically exempts 8.
public corporation created by or pursuant to special authorization of Congress,
or a corporation in which the Government of the United States has or exercises
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55
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a controlling interest through stock ownership or otherwise. The
neutrality legislation contains no such specific exemption and, accord-
ingly, the contention might be made that a government created or con-
trolled corporation would be subject to the prohibition contained in
section 3. Such question, however, is not herein considered and no
opinion is rendered thereon.
Theyher
TO:
miss Chauncey
56
7-15-37
as you probably know, the
memorandum from mr. Oliphant
Secretary saw theattached
and signed the letter referred to-
to the attorney General andonesto these
admiral peoples Copies of
sent by special massanger todaynt. the
letters are also a attached. They were 2:52PM
General Counsel w to
got of you should desire a copy of
adminal Peoples, please let as know.
in the first paragical of the letter to
The original of this goinionwas sent thesery.
may 19, 1937.
From: MR. OLIPHANT
HBacks
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57
INTER OFFICE COMMUNICATION
DATE
JUL I 5 1937-
TO
Secretary Morgenthau
FROM
Herman Oliphant
I have before me, by reference from your office, the letter
of the Attorney General on June 30, asking your approval of the pub-
lication of his opinion to you of June 30, 1937, concerning the duty
of the Director of the Procurement Division with respect to the re-
jection of collusive bids. I recommend that the Attorney General
be edvised that there is no objection to the publication of this
opinion, and a draft of a letter to the Attorney General to this ef-
fect and for your signature is attached hereto.
The portion of the Attorney General's opinion material in
this connection reads as follows:
"I think I may go so far, however, as to say that if the
Director should be convinced that all bids received in
response to an invitation therefor are the result of
collusion on the part of bidders and that the Government
thereby has been deprived of benefits conferred upon it
by Section 3709 of the Revised Statutes, supra, and his
convictions are supported by evidence so clear and con-
vincing 8.5 to lead a man of ordinary judgment and prud-
ence definitely to the same conclusions, it would be his
duty to reject all of the bide."
It is to be observed, parenthetically, that the duty to reject
all bids implies also, of course, the absence of legal power in the
Director of the Procurement Division to bind the United States by con-
tracts sought to be consummated by an acceptance of such identical
bids.
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58
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It is to be further noted that the Attorney General, after
concluding that the Director of Procurement has the right to re-
ject bida when he is convinced that ell bide received are the re-
sult of collusion, states:
"Whether it is his duty to reject all bids in every in-
stance in which he is convinced that they represent col-
lusive action between the bidders is a question difficult
to consider in the abstract. It has been the uniform
practice of the Attorneys General to decline to render
opinions on abstract questions and one of the reasons
underlying it is the impossibility of attempting to antici-
pate every specific set or combination of facts which the
future may present. The duty of the Director of Procure-
ment in & particular situation in large measure would
depend upon the facts peculiar to it, and no definite
rule should be laid down in advance binding him in all
possible future factual contingencies."
In view of this opinion of the Attorney General, instructions
to the Director of the Procurement Division are necessary, and, from
the foregoing review of the opinion, the instructions consonant with
it should provide for the reference of cases to the Department of
Justice whenever evidence of collusion is present.
Chiphang
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53
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JUL 15 1937
Secretary Morgenthau
Herman Oliphant
I have before ne, by reference from your office, the letter
of the Attorney General on June 30, ssking your approval of the pub-
lication of his opinion to you of June 30, 1937, concerning the duty
of the Director of the Procurement Division with respect to the No
jestion of collusive bids. I recommend that the Attorney General
be advised that there 10 no objection to the publication of this
opinion, and & draft of a letter to the Attorney General to this of-
fect and for your signature is attached herete.
The portion of the Attorney General's opinion material in
this connection reads as follows:
"I think I may go DO far, however, as to Bay that if the
Director should be convinced that all bids received in
response to an invitation therefor are the result of
collusion on the part of bidders and that the Government
thereby has been deprived of benefits conferred upon it
by Section 3709 of the Revised Statutes, supra, and his
convictions are supported by evidence 80 clear and com-
vincing as to lead & man of ordinary judgment and prud-
ence definitely to the same conclusions, it would be his
duty to reject all of the bids.
It is to be observed, parenthetically, that the duty to reject
all bids implies also, of course, the absence of legal power in the
Director of the Procurement Division to bind the United States by -
tracts sought to be consumated by an acceptance of such identical
bids.
60
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- 2 -
It is to be further noted that the Attorney General, after
concluding that the Director of Procurement has the right to re-
jeet bids when he is convinced that all bide received are the re-
sult of collusion, states:
"Whether it is his duty to reject all bids in every in-
stance in which he is convinced that they represent col-
lusive action between the bidders is & question difficult
to consider in the abstract. It has been the unifore
practice of the Attorneys General to decline to render
opinions on abstract questions and one of the reasons
underlying it is the impossibility of attempting to antici-
pate every specific set or combination of facts which the
future may present. The duty of the Director of Procure-
ment in a particular situation in large measure would
depend upon the facts poculiar to it, and DO definite
rule should be loid down in advance binding him in all
possible future factual contingencies."
In view of this opinion of the Attorney General, instructions
to the Director of the Procurement Division are necessary, and, from
the foregoing review of the opinion, the instructions consonent with
it should provide for the reference of CODOS to the Department of
Justice whenever evidence of collusion is present.
(Egual)
HO:von
7/14/37
5
Enc.1
61
JUL 15 1937
My dear Mr. Attorney Generals
Receipt is acknowledged of your opinion under date of
June 30, 1937, relating to the duty of the Director of the
Procurement Division in relation to the rejection of collus-
ive bids and your letter of even date asking approval of the
publication of this opinion.
There is no objection to such publication. For your
information, I enclose copy of the instructions which have been
given to the Director of the Procurement Division in accordance
with your opinion.
Very truly yours,
(Signed) H. Morgenthou, Jr.
Secretary of the Treasury
The Honorable
The Attorney General of the United States
Inc. 1
HO:von
5/7/14/37
5
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62
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JUL 1 a 1931
My dear Admiral Peopless
For your information and guidance, I transmit herewith copy
of ay request to the Attorney General for his opinion on the matter
of collusive bidding on Government contracts, the opinion of the
General Counsel which accompanied that request, and the opinion of
the Attorney General in response to my request.
On reference to the General Counsel, I 48 advised as follows:
"The portion of the Attorney General's opinion
material in this connection reads as follows:
"I think I say 80 80 far, however, as to say that if
the Director should be convinced that all bide received
in response to an invitation therefor are the result of
collusion on the part of bidders and that the Government
thereby has been deprived of benefits conferred upon it
by Section 3709 of the Revised Statutes, sunra, and his
convictions are supported by evidence so clear end con-
vincing 48 to lead a BAD of ordinary judgment and prad-
enco definitely to the cumo conclusions, it would be his
duty to reject all of the bids.'
"It is to be observed, parenthetically, that the duty
to reject all bide implies also, of course, the absence of legal
power in the Director of the Procurement Division to bind the
United States by contracts sought to be consumated by an coopt-
nace of such identical bids.
"It is to be further noted that the Attorney General,
after concluding that the Director of Procurement has the right
to reject bids when he is convinced that all bids received are
the result of collusion, statess
"Whether it is his duty to reject all bide in every 10-
stance in which he is convinced that they represent one-
lusive action between the bidders is a question difficult
to consider in the abstract. It bas been the uniform
practice of the Attorneys General to decline to render
opinions on abstract questions and one of the reasons
underlying it is the impossibility of attempting to antici-
Date every specific set or combinstion of facts which the
future my present. The duty of the Director of Promise-
sent in - particular situation in large measure would
63
- 2 -
depend upon the facts peculiar to it, and no definite
rule should be laid down in advance binding him in all
possible future factual contingencies.'
"In view of this opinion of the Attorney General, in-
structions to the Director of the Procurement Division are neces-
sary, and, free the foregoing review of the opinion, the instruc-
tions consonant with it should provide for the reference of cases
to the Department of Justice whenever evidence of collusion is
present."
In accordance with the Attorney General's opinion, you are in-
structed to proceed as follows:
Hereafter, all cases in which there is evidence that bids, other-
wise acceptable, are the result of collusion, should, before any bid is
accepted, be referred through the usual channels to the Department of
Justice for determination whether & finding of collusion by the Dirce-
tor of the Procurement Division would be supported by evidence 80 clear
and convincing as to lead a man of ordinary judgment and prudence def-
initely to that conclusion.
All cases of identical bids would, in the absence of satis-
factory affirmative evidence that no collusion was present, fall within
the foregoing instruction.
Very truly yours,
(Signoo) IT: Member, Jr.
Secretary of the Treasury.
Rear Admiral Christian J. Peoples,
Director of Procurement,
Washington, D. c.
shbk
7/15/37
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64
Regraded Uclassified
Office of the Attorney General
Washington, D. c.
June 30, 1937.
The Honorable,
The Secretary of the Treasury.
My dear Mr. Secretarys
Reference is made to your letter of May 19, 1937, in
which you state that "In the administration of the Procurement
Division in the Treasury Department, the Director of Procure-
ment is faced, from time to time, with a situation in which all
the bids on & Government contract are identical and the Director
is convinced, in view of the surrounding circumstances, that the
price offered was arrived at as a result of collusive action
upon the part of the bidders," and request my opinion upon the
question "whether, under such circumstances, the Director is
under a duty to reject all of the bids."
Section 5709 of the Revised Statutes (U.S.C., Title
41, Sec. 5) requires that all purchases and contracts for sup-
plies or services of the Severnment shall be made "by advertise-
ment a sufficient time previously for proposals respecting the
same." The purpose of this statute is to secure to the Govern-
ment the benefits which flow from competition and to prevent
collusion and fraud in the letting of contracts. 21 Ops. A. G.
65
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Regraded Uclassified
3041 22 id. 1, 6g 36 id. 33, 37.
Collusion between bidders, the consequence of which 10
to deprive the Government of the benefits flowing from competi-
tion, is, therefore, in violation of this Act, McMullen V.
Hoffman, 174 U. S. 6391 and when the Director of Procurement
is convinced that all bids received are the result of such col-
lusion, unquestionably he has the right to reject them. In re
Salmon, 145 Fed. 649, 652-653.
Whether it is his duty to reject all bids in every
instance in which he is convinced that they represent collusive
action between the bidders is a question difficult to consider
in the abstract. It has been the uniform practice of the Ate
torneys General to decline to render opinions on abstract
questions and one of the reasons underlying it is the imposs-
ibility of attempting to anticipate every specific set or com-
bination of facts which the future may present. The duty of the
Director of Procurement in a particular situation in large
measure would depend upon the facts peculiar to it, and no
definite rule should be laid down in advance binding his in all
possible future factual contingShies". This is especially true
in view of the consideration that the Director clearly has the
right and the power to reject all bids when, in his opinion,
the interest of the Government BO requires. I think I say go
60 far, however, as to say that if the Director should be 000->
66
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vinced that all bids received in response to an invitation
therefor are the result of collusion on the part of bidders
and that the Government thereby has been deprived of bene-
fits conferred upon it by Section 3709 of the Revised Stat-
utes, supra, and his convictions are supported by evidence
so clear and convincing as to lead & san of ordinary judg-
sent and prudence definitely to the name conclusions, it
would be his duty to reject all of the bids.
The question whether the Director of Procurement,
if he should be convinced in a specific instance that some
of the bids received are collusive and others are not, should
reject all of the bids or should reject only those deemed to
be collusive and weigh the others, is not presented in your
letter and is not passed upon herein. This question, also,
would be difficult, if not impossible, to consider in the
abstract, being susceptible of decision only in the light of
the facts presented by particular cases as they arise.
Respectfully,
(Signed) Homer Cuanings
Attorney General.
67
GROUP MEETING
July 16, 1937
9:30 a.m.
Present:
Mr. McReynolds
Mr. Bell
Mr. Lochhead
Mr. Upham
Mr. Gaston
Mr. Gibbons
Mr. Haas
Miss Roche
Miss Chauncey
H.M.Jr:
Mac?
McR:
Nothing.
H.M.Jr:
I'm just going to say again - I mean you people will
hear about it - that no one should even think they 're
going to put anybody on the Stabilization Fund without
first going to Mac and then having them come to me and
the person come with them in person. I won't go any
further than that - I've had my morning blow-up - so
Mac will see some of you later. And Archie watches
that for me very carefully. All right.
Dan, when you going to be ready to talk to me?
Bell:
Right after this meeting if you want.
H.M.Jr:
Swell. You (Lochhead) and I have had our talk.
Lochhead:
You got the note; your bonds are moving along
nicely this morning.
H.M.Jr:
Yes. If you and Bell will stay a minute afterward,
I'll talk to you.
What are you (Upham) doing in between the tax things?
Upham:
I believe you told me I wouldn't have any spare time.
I'm going to the funeral this morning.
H.M.Jr:
I still say, what are you doing between the tax things?
Upham:
Oh, a number of things.
H.M.Jr:
Catching up?
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68
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Upham:
Yes.
H.M.Jr:
I want to tell you now, publicly, in this room, I
think we got 2 very fine press, and I think a lot
of credit goes to you for handling them on the Hill.
Upham:
Well, we had a very fine press, but I don't think
it's attributable to me,
H.M.Jr:
At least, you made them - you were nurse to them.
"fter all that time, we've got to credit that to
somebody, don't we, Herbert?
Gaston:
Yes, I think Cy is the victim.
:
McR:
Cy says ne is always the victim.
Gaston:
He's the fellow that's been making all kinds of
trouble out in my shop, bossing my people, meking
them work overtime, so he's the fellow to blame.
Upham:
Without authority, too.
Gaston:
No, ample authority.
H.M.Jr:
Now, Mac, if after I've seen Bell and Lochhead I could
have a little talk with you, maybe we could fix Miss
Roche up by turning her down or approving, one way or
the other. Right after I see these people. You want
to argue with me alone or before Miss Roche? Or how
do you want to do it?
McR:
No, I'm delighted to have Miss Roche present. We
want Miss Roche present.
H.M.Jr:
We'll give Bell whatever time he needs; then 1f you'll
come back.
Gibbons:
You're going to Honolulu. We haven't reappointed the
Collector of Customs out there yet - little trouble,
but I think he's clear.
H.M.Jr:
Wouldn't that be a good excuse for me to charge my
expenses to the Government?
Gibbons:
That's perfect.
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H.M.Jr:
Go out there to clear up the situation.
Gibbons:
But you leave it to Mac and Harold Graves and myself.
I haven't had a chance to dissect the report.
H.M.Jr:
why didn't we pay - I already paid for my ticket.
who am I leaving it to?
Gibbons:
Mac and Harold Graves and I.
H.M.Jr:
Well, for gosh sakes do it before I get out there.
Please settle it before I arrive.
Gibbons:
He's just a crazy fellow, but nothing on him, you know.
H.M.Jr:
Just crazy! (Laughs)
Gibbons:
He's absolutely - I'm warning you now. You've met
him, haven't you, Herbert?
Gaston:
No, I didn't meet him.
Gibbons:
He's a newspaperman, by the way,
H.M.Jr:
He's not one of these economists, huh?
Gibbons:
He's not an economist.
He's not that crazy.
(Hearty laughter)
McR:
George (Haas) thought he was crawling out from under.
H.M.Jr:
You're all right.
Haas:
I can take it; I've had a vacation.
H.M.Jr:
All right.
Gibbons:
That reminds me of Wayne Taylor one night; the women
were talking bridge and Wayne said, "They sound like
economists, don't they?"
H.M.Jr:
Well, I'll leave it to you and Mac and who else?
Gibbons:
And Graves.
H.M.Jr:
All right.
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Gibbons:
He gave out a lot of stuff. He just likes to give
out statements about that coordination out there -
supposed to be confidential.
H.M.Jr:
I should worry!
Gibbons:
Nothing to
H.M.Jr:
Any other big problems?
Gibbons:
Not a thing
H.M.Jr:
I see you lost - they've got a candidate in New York.
Gibbons:
They picked him out apparently.
H.M.Jr:
All right. Well, in a pinch I'm for Gibbons for
Mayor.
Gibbons:
Anybody take that job is crazy.
H.M.Jr:
All right.
George?
Haas:
I have nothing this morning.
H.M.Jr:
Herbert?
Gaston:
Can't think of anything.
Roche:
Did Mr. Hopkins tell you about our conference yester-
day? He said he would. It was very interesting.
We had a conference with practically all the people -
all the representatives - that is, in the Federal
Government - on health, and some of the outside
people. It was really very gratifying to find what
a change had come about in the year since we had called
a conference particularly for trying to work out a
national health program on which all these different
factions could get into agreement, and we succeeded
in doing so - practically the first time it's ever
happened. Everybody's had a different angle of
approach. We felt quite cheerful.
H.M.Jr:
Did Harry talk about more taxes?
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Roche:
No, we aren't going to have any more taxes.
H.M.Jr:
You'd be interested that Harry Hopkins spends most
of his time now telling us that we should balance
our budget,
Roche:
Harry's got a perfect formula. He says not to run
any more taxes and he thinks we've got to balance
the....
Bell:
That's the reason there is perfect a greement; all
the money came out of the Treasury.
Roche:
He was fine about it.
H.M.Jr:
The only part of Harry's program that I can't under-
stand - in one breath he talks about raising about
ten billion dollars for taxes, and in the next breath
he says, "Of course, no matter how much you appro-
priate, they will always spend it. So you can't
economize as long as you appropriate or raise the
money. The two things just don't "gee." But, in
the meantime
Roche:
Barring out the economics of the situation, we were
all in agreement.
H.M.Jr:
In the meantime, I think we might say that Bell and
I feel more comfortable than we have at any time
heretofore. Isn't that right?
Bell:
That's right.
McR:
Harry's all right, if there wasn't any such thing as
arithmetic; that's the only thing that troubles Harry.
H.M.Jr:
You didn't happen to read Mrs. Roosevelt's column
last night?
Roche:
I did.
H.M.Jr:
Wasn't that nice?
Roche:
Lovely. There have been several very nice ones. I
loved the one the other evening about the children.
Regraded Uclassified
72
-6-
H.M.Jr:
Sure, she's partial to the family. Funny thing, the
New York Telegram didn't run that; they just dropped
that. Too often.
You'll get another chance at me all Monday.
Bell:
You'll be here Monday?
H.M.Jr:
Oh yes.
Did you hear the funny message the President sent
over? I wanted to know if there. would be a Cabinet
meeting this afternoon. They told Gaston - how did
he put it?
Gaston:
"ell, Mac (McIntyre) first told me he wasn't sure,
he thought there wouldn't be any; then he talked to
the President and he said he was wrong, that the
President wasn't fully certain, but he thought there
would be, but so far as the Secretary was concerned
that there would be one.
Roche:
Oh, lovely.
H.M.Jr:
As far as I was concerned, there was a Cabinet meeting.
Roche:
Preferential treatment.
H.M.Jr:
All right.
Regraded Uclassifie
73
July 16, 1937.
9:55 a.m.
H.M.Jr:
Hello.
Operator:
Mr. Burgess.
H.M.Jr:
Good morning.
W.R.Burgess: Are you enjoying your last day?
H.M.Jr:
What's that?
B:
Is this your last day?
H.M.Jr:
No, I'll be in again Monday.
B:
I see.
H.M.Jr:
Now,
just gave me that schedule
of yours.
B:
Yes.
H.M.Jr:
And - the first schedule sounds like the sensible
one, and that is - barring some unforeseen
incident that we try to make up our mind Saturday
and Sunday.
B:
Yes.
H.M.Jr:
The 4th and the 5th and get on
B:
Well, I'm very glad that you feel that way,
because I'm very - I believe I can talk about
it.
H.M.Jr:
Well, - there's no question in my mind barring
something unforesen eventually we can have it.
B:
Well, we've always got a little leeway on it.
H.M.Jr:
I get back on the 2nd, I'm going to have a plane
there so I ought to get into Washington - I
ought to get into Washington Saturday afternoon.
B:
Yes.
H.M.Jr:
Now, and I think the suggestion that Taylor go up
to New York - spend a couple of days there -
B:
Yes.
Regraded Uclassified
74
-2-
H.M.Jr:
Is good.
B:
Yes.
H.M.Jr:
Now if it's an easy one and everything looks
in good order then I don't see any sense in
bringing down any of these Government bond fellows
hello
B:
Any of these so-called experts.
H.M.Jr:
So-called experts. Now I'm on the steamer and
got a code and two or three days before I land
you can begin to send the stuff 80 I can sort
of - get the feel of it, you know.
B:
Yes, that's a good 1dea. Yes.
H.M.Jr:
And if it looks a little tricky we might ask
some of those Government bond dealers to come
down here Saturday night,
B:
Sure, we can do that.
H.M.Jr:
If it doesn't look tricky, why you and Bell
and Taylor and myself can fix it.
B:
Yes.
H.M.Jr:
See,
B:
Yes. But I can stay up here until they close
the market on Saturday or nearly that, and then
plan to be in Washington Saturday night.
H.M.Jr:
That's right.
B:
Yes.
H.M.Jr:
And I'm allowing myself an extra day's time
on account of not getting in here, you see.
B:
Yes.
H.M.Jr:
I mean I'm counting on from Thursday to
Friday and of course if they can't come through -
you know in fifteen or sixteen hours if necessary.
B:
Yes.
H.M.Jr:
So, I think that that's the way to do it.
Regraded Uclassified
75
-3-
B:
Well, I agree and I'm very glad you feel that
way.
H.M.Jr:
Right.
B:
And I think that's a good schedule and we can
work it out very nicely.
H.M.Jr:
Yes. Now I want to give you an order to sell
some Government bonds.
B:
Yes.
H.M.Jr:
You know, we've got in the Stabilization Fund
twenty million of those 2 and 7/8ths and I'd
like to - sell five million.
B:
Yes.
H.M.Jr:
I want to get a net to us of one hundred and
one, or better.
B:
Yes, a hundred one or better.
H.M.Jr:
I'm in no particular hurry.
B:
Yes.
H.M.Jr:
But when there's a demand I Just kinda - let
them go out, see.
B:
That's 8 good idea.
H.M.Jr:
We've got twenty of those and ten of the two
and a. half.
B:
Yes.
H.M.Jr:
And that's a little bit more than I need.
B:
Yes.
H.M.Jr:
So, as the market 18 hungry, see - why I'd sell
five million, - 80 that it'll net us a hundred
one or better.
B:
Yes. Well - I think that's a very good thing
to do - as far, in view of the market as well
as your organization.
Regraded Uclassified
16
-4-
H.M.Jr:
Well - I'm glad to be able. There's no
particular - I mean, there's no excuse for us
having that many, you see.
B:
Yes.
H.M.Jr:
And the - as the market 1s hungry for them,
why I'd feed it out.
B:
The market has been much better the last few
days. It looks as though it were getting on
its feet really.
H.M.Jr:
You want to watch that daily statement of
merchant expenditure, if you see it. It's
away off, you know, compared to last year.
B:
Yes.
H.M.Jr:
Have you noticed 1t.
B:
Yes, I have.
H.M.Jr:
You might draw attention of some people to it,
because under the new set up it stands up -
you see it's -
B:
Yes.
H.M.Jr:
And it's running about forty per cent less than
last year at the same time.
B:
Yes.
H.M.Jr:
The merchant's expenditure.
B:
That's a good sign.
H.M.Jr:
What?
B:
That's a good sign.
H.M.Jr:
And the fellows haven't caught on to it
particularly.
B:
No. Well I'll be taking
H.M.Jr:
Well, you get out the daily statement and
you'll see it.
B:
Yes,
Regraded Uclassifie
77
-5-
H.M.Jr:
I haven't got it before me. Wait a minute -
let me show you Just exactly what I mean -
Just a second. Hold on a minute.
B:
Yes, I'll have one in front of me in just
9. second.
H.M.Jr:
Sub-total of the emergency expenditure - see
through the 13th, is eighty five million - Hello.
B:
Yes, I'm opening it up.
H.M.Jr:
And last year same thing was one hundred and
thirty two million. - Hello.
B:
Yes.
H.M.Jr:
See.
B:
Yes. Recovery and relief.
H.M.Jr:
Pardon me.
B:
It's recovery and relief - eighty five and
a hundred and thirty two.
H.M.Jr:
Yes.
B:
Yes.
H.M.Jr:
Shows a big drop.
B:
That's right.
H.M.Jr:
And there's no revolving fund to speak of in
that, you know.
B:
No, and when you look at the total, of course
it's revolving fund.
H.M.Jr:
It's depleting.
B:
That's Just like the revolving fund.
H.M.Jr:
But this is the thing, recovery and relief
eighty five against a hundred and thirty two.
B:
That's right, and the recovery in accordance
with the revolving fund will - that's just the
way it happens to fall.
Regraded Uclassified
78
-6-
H.M.Jr:
It happens to fall.
B:
As it goes on during the year that will build up.
H.M.Jr:
Yes.
B:
Probably better than last year, won't it.
H.M.Jr:
We hope so, very much 80.
B:
I should think it would.
H.M.Jr:
But that thing, you might happen to call their
attention to it.
B:
Yes, well I will. I'll take it in.
H.M.Jr:
All right, thank you. If you've got anything
Monday, give me a ring.
B:
O.K.
H.M.Jr:
And we'll leave it this way. Dan 18 sitting
right here with me now.
B:
Yes.
H.M.Jr:
So we'll leave it on that basis.
B:
Well, that's very nice. I'm very much pleased
about it.
H.M.Jr:
And as a matter of fact whether I was in Hawaii
or Timbuctoo we couldn't handle it any
differently.
B:
That's right.
H.M.Jr:
What?
B:
That's right.
H.M.Jr:
We couldn't handle it any differently.
B:
We could still function.
H.M.Jr:
What?
B:
We could still function.
H.M.Jr:
I hope 80.
Regraded Uclassifie
79
-7-
B:
Even if you're in Hawaii.
H.M.Jr:
Yes. Well, it's that things are 80 different
than they were - I mean, after all from the
15th of March until to date it's three months,
we've Just been through hell down here.
B:
I'll say BO.
H.M.Jr:
And - I think everything 18 coming our way
now and I think we could - we've earned a
little of it.
B:
Well, that's fine. Say, what does the
Argentine attache want to see me about, do
you know?
H.M.Jr:
He most likely wants to ask you about Brazil.
B:
I see.
H.M.Jr:
See.
B:
What'll I tell him.
H.M.Jr:
Why, you can tell him -
B:
Tell him it's in the press.
H.M.Jr:
As Will Rogers says all you know is what you
see in the papers.
B:
That's right, yes.
H.M.Jr:
All right.
B:
All right.
H.M.Jr:
Goodbye.
B:
Goodbye.
Regraded Uclassified
80
July 16, 1937
Between 1:05 & 1:30 p.m.
H.M.Jr:
Good morning Knoke.
Mr. Knoke:
Yes, Mr. Secretary.
H.M.Jr:
The French seem to be having a little tough time of
it.
K:
Yes, I understand the market has turned because of
considerable opposition to Blum at the recent
Socialist Congress.
H.M.Jr:
Opposition by Blum?
K:
To Blum
H.M.Jr:
To Blum
K:
By the Socialist Congress.
H.M.Jr:
I see.
K:
That is given as the internal reason, externally
the peak of the Spanish situation, -
H.M.Jr:
The Spanish
K:
nervousness, yes - the Spanish.
a
H.M.Jr:
Oh, we just got a cable in here saying there's/lot of
Japanese selling of collars.
K:
Why that of course is a continuation.
H.M.Jr:
Yes.
K:
That has continued now for weeks already, I don't
think that affects the sturdy franc rate.
H.M.Jr:
Uh-huh.
K:
I think that explains the strength of sterling
which again is up to 4 - above 4.97.
H.M.Jr:
What would the Japs be doing, selling dollars, buying
sterling to settle
K:
Yes, - yes, they are converting the proceeds of their
gold shipments to us into sterling and used the
sterling in connection with their foreign trade
requirements.
Regraded Uclassifie
81
-2-
H.M.Jr:
Well that's all right for us, is it?
K:
Oh yes, there is nothing - it is perfectly proper -
employment of those funds. We are just giving an
order to the market here to sell sterling at 7 - 3/8
H.M.Jr:
Uh-huh. Can you sell any of that?
K:
Why it's a bit too early - I gave the order about
five minutes ago - the market at 7-1/8 just now.
H.M.Jr:
I see. Tell me - any gossip on our Brazilian deal.
K:
None at all - but - none at all - but I must say,
I've been terribly busy on our Hungarian troubles
and -
H.M.Jr:
Yes
K:
You've got Hungarian troubles.
H.M.Jr:
You've got Hungarian troubles. You will go into
foreign field.
K:
Yes. -
Well, that is - no, that is simply
we are collecting
at the rate of five
percent per annum.
H.M.Jr:
Well, you are doing better than we are on the War
debt anyway. The only difference is I don't worry
about the War Debt, I forgot about it.
K:
Yes, but we have stockholders you see.
H.M.Jr:
I see.
K:
and Board of Directors.
H.M.Jr:
O.K.
K:
Thank you, sir.
H.M.Jr:
Goodbye.
Regraded Uclassified
82
JULY 16, 1937
HON. CHARLES F HURLEY
GOVERNOR
BOSTON MASSACHUSETTS
CONFIRMING OUR TELEPHONE CONVERSATION THIS MORNING
AS YOU REQUEST IT BEING EVIDENT THAT THE STATE
AUTHORITIES ARE NOT POWERLESS TO COPE WITH THE
SITUATION THE UNITED STATES COAST GUARD IS WITHOUT
AUTHORITY IN LAW TO TRANSPORT SUPPLIES TO NANTUCKET
AND MARTHA'S VINEYARD
my
This was rent to the Prisidents our thone by
Col. in my presence, and I heard
The the wire was then instruct signed by arm. waeeche T
Insident mesntyer, Cal medntyn to disputched approvist
of Goo. Hurly.
mrs
16 July 3)
Regraded Uclassified
Treasury Department
83
TELEGRAPH OFFICE
1937 JUL is AM 7 44
4w M 210
BOSTON MASS 1244A JUL 16 1937
HON HENRY MORGENTHAU JR
BOSTON MASS AT THE PRESENT TIME THE ISLANDS OF NANTUCKET AND MARTHAS
VINEYARD OFF THE MASSACHUSETTS COAST ARE SERIOUSLY HANDICAPPED BY
A LABOR CONTROVERSY WHICH HAS RESULTED IN THE DISCONTINUANCE OF
STEAMSHIP SERVICE FROM THE MAINLAND STOP TRANSPORTATION AT THE
PRESENT TIME IS BY AIRPLANE AND SMALL CRAFT STOP I AM ADVISED BY
THE ATTORNEY GENERAL OF THE COMMONWEALTH THAT OWING TO THE FACT
THE NY NH AND H RAILROAD COMPANY IS IN PROCESS OF REORGANIZATION
Regraded Uclassified
84
Treasury Department
4w/2
TELEGRAPH OFFICE
BY VIRTUE OF A PETITION FILED IN THE DISTRICT COURT OF THE UNITED
STATES FOR THE DISTRICT OF CONNECTICUT AND SINCE THE NEW ENGLAND
STEAMSHIP COMPANY OPERATING STEAMSHIPS BETWEEN THE MAINLAND AND THESE
ISLANDS IS CONTROLLED BY THE SAID RAILROAD IT IS IMPOSSIBLE FOR ME
TO TAKE ADEQUATE MEASURES TO RELIEVE THE SITUATION WITHOUT INTERFERING
WITH THE PROPERTY NOW UNDER CONTROL OF THE FEDERAL COURT STOP IN
ORDER TO AVERT A POSSIBLE FOOD SHORTAGE AND TO PROTECT THE PUBLIC
THERE MUST BE PROMPT RESUMPTION OF PUBLIC TRANSPORTATION FACILITIES
FOR THE SHIPMENT OF FOODSTUFFS MEDICINE AND OTHER ESSENTIALS STOP
THEREFORE I WOULD RESPECTFULLY URGE THAT COAST GUARD BOATS BE
STATIONED AT WOODSHOLE NANTUCKET AND MARTHAS VINEYARD FOR
Regraded Uclassified
Treasury Department
85
TELEGRAPH OFFICE
4w/3
PUBLIC TRANSPORTATION AND THE TRANSPORTATION OF FOODS MEDICINE AND
OTHER ESSENTIALS VITAL TO THE EXISTENCE OF THE PEOPLE OF THESE
ISLANDS
CHAS F HURLEY GOVERNOR OF MASSACHUSETTS
722A
Regraded Uclassified
85
NDARD FORM No. 14A
TREASURY DEPARTMENT
PPROVED BY THE PRESIDENT
MARCH 10. 1926
WASHINGTON
TELEGRAM
CHARGE TREASURY DEPARTMENT. APPROPRIATION FOR
OFFICIAL BUSINESS-GOVERNMENT RATES
Coast Guard
(The appropriation from which payable must be stated on above line)
. . PRINTING - -
2-14117
Home Charles 1. Harley
July 16, 1957.
Covernor of Massachmeetts
Boston Massachusetts
Telegram addressed to Secretary referred to no stop This is to advise you as
studying matter and will either telephone or telegraph you this afternoon.
(Signed) Stephen B. Gibbons
STEPHEN B, GIBBONS
Assistant Secretary Treasury.
SBG:NE
Regraded Uclassified
87
PARAPHRASE OF TELEGRAM RECEIVED
FROM: American Embassy, Paris, France
DATE: July 16, 1937, noon
NO.: 988 RUSH
FROM COCHRAN.
This morning at 10 o'clock I called at the Bank of
France. A strong pressure against the franc developed
during the half hour I was there. The French control
was obliged to yield over six hundred thousand pounds ster-
ling in spite of raising after the opening rate for sterling
to 128.36 from the previous 128.06. My contact told me
that since the change in Policy on the first of July the
stabilization fund has acquired slightly more than three
billion French france of gold and foreign exchange on
balance. They could give no particular reason for the
frano's weakness today beyond those factors mentioned yes-
(section?)
terday in the final sentence, second paragraph of my telegram
No. 985.
My market contact telephoned me at 11$40 to tell me
that the rate had moved to 128.60 and that (?) control
unable to stip the franc decline appeared to have withdrawn
from the market for the present at least.
BULLITT.
EA:LWW
July 16, 1937
Between 1:05 & 1:30 p.m.
88
H.M.Jr:
Good morning Knoke.
Mr. Knoke: Yes, Mr. Secretary.
H.M.Jr:
The banks seem to be having & little tough time of
it.
K:
Yes, I understand the market has turned because of
considerable opposition to Blum at the recent
Socialist Congress.
H.M.Jr:
Opposition by Blum?
K:
To Blum
H.M.Jr:
To Blum
K:
By the Socialist Congress.
H.M.Jr:
I see.
K:
That is given as the internal reason, externally
the peak of the Spanish situation, -
H.M.Jr:
The Spanish
K:
nervousness, yes - the Spanish.
H.M.Jr:
Oh, we just a cable in here saying there's a lot of
Japanese selling of dollars.
K:
Why that of course is a continuation
H.M.Jr:
Yes.
K:
That has continued now for weeks already, I don't
think that affects the sturdy franc rate.
H.M.Jr:
Uh-huh.
K:
I think that explains the strength of sterling
which again is up to 4 - above 4,97,
H.M.Jr:
What would the Japs be doing, selling dollars, buying
sterling to settle
K:
Yes, - yes, they are converting the proceeds of their
gold shipments to us into sterling and used the
sterling in connection with their foreign trade
requirements.
Regraded
Uclassified
89
-2-
H.M.Jr:
Well that's all right for us, is it?
K:
Oh yes, there is nothing - it is perfectly proper -
employment of those funds. We are just giving an
order to the market here to sell sterling at 7 - 3/8
H.M.Jr:
Uh-huh. Can you sell any of that?
K:
Why it's a bit too early - I gave the order about
five minutes ago - the market at 7-1/8 hit Just now.
H.M.Jr:
I see. Tell me - any gossip on our Brazilian deal.
K:
None at all - but - none at all - but I must say,
I've been terribly busy on our Hungarian troubles
and -
H.M.Jr:
Yes
K:
You've got Hungarian troubles.
H.M.Jr:
You've got Hungarian troubles. You will go into
the foreign field.
K:
Yes.
-
Well, that is - no, that is simply
we are collecting
at the rate of five
percent per annum.
H.M.Jr:
Well, you are doing better than we are on the War
debt anyway. The reason we didn't because I
don't worry about the War Debt, I forgot about it.
K:
Yes, but we have stockholders you see.
H.M.Jr:
I see.
K:
and Board of Directors.
H.M.Jr:
O.K.
K:
Thank you, sir.
H.M.Jr:
Goodbye.
Regraded Uclassified
Copy for Secretary
30
PARTIAL PARAPHRASE OF TELEGRAM RECEIVED
FROM: American Embassy, Paris, France
DATE: July 16, 1937, 6 p.m.
NO.: 991 FROM COCHRAN
Reference my 988, July 16, noon.
French control had not reentered exchange market by
3:30 this afternoon. Francs seemed to be finding ite
own level between 128.80 and 128.85 to the pound. Forward
francs offered at 6 1/2 for three months against sterling.
Rentes heavily down from 2.50 to 2.90 francs.
I have had discussions about the movement today with
the Bank of France, with Pennachio, and with officers and
traders of two Paris-American banks. The movement is
attributed by all to be due to actual flight of French
Cabinet from political situation revealed by Marseilles
Convention and from social situation revealed by renewed
thr eate of labor and growing strikes. In view of such
financial conditions my contacts do not Bee that measures
which Bonnet has undertaken 80 far can accomplish much.
There is practically an end to short covering of francs.
An official of the Bank of France estimated that 90 percent
of French capital abroad is gaining no interest. This
amount represents the remnants of French fortunes which
owners are not willing to risk back in France while there
is trouble in the streets and threats of Left political
disturbances.
At 5:00 o'clock my market contact reported that
sterling
Regraded Oclassified
91
- 2 -
sterling had jumped from 128 3/4 to 129 1/2 without a
single offer. The French control entered the market at
that point to sell pounds. The late evening thus wit-
nessed a very nervous condition on the Paris exchange
market.
BULLITT.
EA:LWW
Regraded
92
LMS
GRAY
London
Dated July 16, 1937
Rec'd 2:02 p. m.
Secretary of State,
Washington.
480, July 16, 7 p. m.
FOR TREASURY FROM BUTTERWORTH.
City has been somewhat perplexed concerning the sudden
outward flow of funds from France today, which has been ac-
companied by a decline in the spot rate and a rapid widening
in tao forward rates. The demand from Paris WAS for sterling
not dollars; the great volume of trading occurred in the
forenoon.
Reliable estimates obtained from exchange brokers in
a position to know indicate that Japanese sales of dollars
for sterling in this market during the past five weeks
aggregate between 30 and 35 million dollars. Incidentally,
there is considerable discussion in the city of the causes
of the recent weakness of the dollar, but in contrast to
such previous periods of the weakness it has occasioned
little unfavorable comment.
BINGHAM
GW:CSB
Regraded Uclassified
carsa OFFICIAL COMMUNICATIONS TO
THE SECRETARY OF STATE
93
WASHINGTON, D.C.
DEPARTMENT OF STATE
WASHINGTON
July 17, 1937.
My dear Mr. Secretary:
I enclose one copy of paraphrase of telegram
No. 990 of July 16, 1937, from the American Ambassador,
Paris, containing a strictly confidential report of
a conversation which he had with the French Minister
of Finance.
Sincerely yours,
Twing
Enclosure:
No. 990 of July 16
from paris.
The Honorable
Henry Morgenthau, Jr.,
Secretary of the Treasury.
Regraded Uclassified
94
PARAPHRASE OF TELEGRAM RECEIVED
FROM: American Embassy, Paris, France
DATE: July 16, 1937, 5 p.m.
NO.: 990
STRICTLY CONFIDENTIAL FOR THE SECRETARY OF THE
TREASURY.
Today I asked Bonnet how he could explain this
morning's sudden fall in the franc. Bonnet' explained
that he thought its weakness was caused unquestionably
by the conclusion which people had reached regarding
the Marseille vote of the Socialist Congress, which
actually meant that one-third of the Socialist party
favored immediate deposing of the present Government; the
others favored waiting for three months before doing so,
unles their program should be accepted by the present
Government. It was impossible, under these conditions,
to expect Frenchmen to have sufficient confidence in
the franc's future to repatriate large amounts of capital.
Bonnet said that 60 far as he was concerned he would
never be a part of a Government which because of Treasury
difficulties could be overthrown. It was his intention to
continue increasing taxes and reducing expenditures. If
the Socialists would not accept this program he would fall
on the political adversitions issue.
He was confident that the Government could count on
being able to continue until October or later, because
every one in France wanted their summer taxxs holiday.
I
Regraded Uclassified
95
- 2 -
I questioned Bonnet as to what he expected direct
and indirect expenditures for military purpose would be
this year and mentioned a figure of 30 billion france;
Bonnet's reply was that it would not be that much, but
it would be well over 25 billion.
He continued by saying that the French people today
had to recognize one fact, and that was that the only
way the present financial expenditures could be kept up
was by diminishing the franc's value 80 that there was
no gain to anyone.
Bonnet expressed the belief that the 40-hour law
had been premature and in its present form could not be
applied to France without bringing ruin to the country.
He explained that owing to the workings of this law it
would not be possible in France this year to produce
sufficient coal for the needs of France, and it would
be necessary for the country to purchase approximately
3,000,000,000 francs worth of coal abroad in spite of the
much higher prices of foreign coal.
From my conversation with Bonnet I gathered that he
intends to try to make himself the successor of Poincaré
ae the franc's defender and perhaps succeed Chautemps if
some day the Socialists should withdraw from the Government
on the political issue of lower expenditures and higher taxes.
EA:LWW
BULLITT.
conts OFFICIAL COMMUNICATIONS TO
THE SECRETARY OF STATE
96
é di |
DEPARTMENT OF STATE
WASHINGTON
n reply refer to
12 861.6341/82
July 17, 1937
STRICTLY CONFIDENTIAL.
My dear Mr. Secretary:
With reference to my previous letters forwarding
to you certain information which has been received from
the Embassy in Moscow concerning the Soviet gold indus-
try, I am enclosing a copy of a strictly confidential
despatch forwarding a memorandum of statements made by
an American mining engineer formerly employed by the
Soviet Gold Trust in regard to conditions in the Soviet
gold industry.
Sincerely yours,
Enclosures:
From Moscow, No. 401,
June 23, 1937,
with enclosure.
The Honorable
Henry Morgenthau, Jr.,
Secretary of the Treasury.
Department of State
UREAU
Eu
DIVISION
ENCLOSURE
TO
Letter drafted 7/15/37
ADDRESSED TO
Secretary of the
Treasury
" " PAYATING netter
1-1087
Regraded Uclassified
97
No. 401
Moseow, June 23, 1937.
Subject: Transmitting Memorandum Regerding
Difficulties in the Soviet Gold Mining
Industry.
STRICTLY CONFIDENTIAL.
The Honorable
The Secretary of State,
Washington.
Sir:
1/
I have the honor to forward as an enclosure to
this despatch a memorandum regarding production dif-
ficulties in the Soviet gold industry as outlined by
Mr. Harry R. wilson, an American mining engineer who
has been employed by the Soviet Gold Trust. Reference
is mode in this connection to the Imbassy's telegram
No. 129 of June 22, 11 p.m.
Mr. wilson has been employed by the above-mentioned
trust since March 1930, and has worked in most of the
important precious metal mining districts in the goviet
Union.
Regraded Uclassified
98
- 2 -
Union. He has spent two years in Kazekhstan at two
different mining enterprises; over & year and 4d. half at
Darasum in the Lestern Siberian Oblast, as well SB a con-
siderable time at Ridder, and other mines near the Sin-
kiang-Mongolism border.
Mr. Wilson, together with Kr. J.D. Littlepage, also
an American mining engineer who has worked in the Soviet
Union for & number of years, have been for the last two
years the only foreign engineers employed by the Soviet
Gold Mining Trust. It is interesting to note in this
connection that during this last year Mr. Littlepage, who
was previously connected with gold mining operations, has
been transferred to the base metal division of the Soviet
mining industry, thus indicating that the authorities are
endeavoring to cloths the gold industry in still further
mystery.
Mr. wilson has been known to a number of the offi-
cers of the Embassy since 1934, and it is believed that
his judgment in regard to the present situation may be
given considerable weight.
Respectfully yours,
A troo copy of
the sigged origi-
nal hls
Loy i. Henderson
Chargé d'Affaires ad interim
Enclosure:
1. Strictly Confidential Memorandum of State-
ments made by Mr. Harry R. Vilson, an Ameri-
can Wining Engineer, to Mr. Durbrow, Third
Secretary of Embassy, June 18, 1937.
863.4
ID/ble
Regraded Uclassified
Emolosure No. 1 to Despatch
99
No. 401, dated June 23, 1937,
from the American Embassy,
Moscov, U.S.S.R.
Regraded Uclassified
STRICTLY CONFIDENTIAL.
MEMORANDUM OF STATEMENTS MARE BY MR. HARRY R.
WILSON, AN AMERICAN MINING ENGINEER, TO MR. DURBROW,
THIRD SECRETARY OF EMBASSY, JUNE 18, 1937.
Mr. Harry R. Wilson, an American mining and metallurg-
ical engineer, who has been working for the Soviet Gold
Trust since March 1930, called today to advise the Embasey
that he was leaving the Soviet Union permanently.
The following is a summary of the statements made by
him in regard to the latest developments in the Soviet
mining industry:
Although I returned to the Soviet Union only about
six weeks ago after & four-months' holiday in the United
States, I have learned from many sources, and particularly
from friends of mine with whom I have worked during my long
stay in this country, that because of the arrests, trials,
end executions which have taken place during the last siz
to twelve months, the mineral production in general, and
particularly the gold production, has boen gradually bus
steadily falling off. Before my departure in January
1937 for my vacation in the United States, I had been work-
ing for almost a year in the ersenic gold combine at
Dzhetygara, Kazakhstan, where I had an opportunity to
learn something about the activities of the so-culled
Trotskiists.
For instance, when I arrived in Dzhetygara I round
a now director, a man about 35 years of ago, who had been
sent by the Gold Trust from Moscow to build up the produe-
tion at the combine which at that time was in a very dis-
organized condition. I found this director to be one of
the
100
- 2 -
the most capable and efficient engineers that I had ever
encountered in my seven years in the Soviet Union. In
less than E year he reorganized the combine, substentially
increased the production, and in general bent every effort
to make the plent 69 efficient as possible. I know that
he often worked sixteen hours a day and gave every Indica-
tion of not only being loyal to the organization for which
he was working, but of being anything but a "wrecker".
Finally, after the combine at Dzhetygers had been organized
properly, this director vne transferred to a mining com-
bine under the Volga Gold Trust. Two months after he
had taken up his new duties he W&S arrested and sentenced
to ten years' imprisonment "for being e Trotskiist wrecker".
His brother was arrested a short time before him in another
part of the country and shot for the same reason. A1-
though it is possible that during the short time he WAS
in his now post he may have come under the influence of
so-called wrecking orgenizations, I do not believe that
he WEB connected in any way with such an organization,
and I know from my own experiences with him that he we
not only extremely capable but an apparently loyal Soviet
citizen.
I give this example as one which I know of person-
ally, but from conversations I have had with many of my
colleagues since my return to Moscow, 1 have learned that
there have literally been hundrede of arrests throughout
the mining industry about which nothing has been mentioned
in the press, apd that many or the persons arrested have
actually been executed as alleged Trotskilsts. My friends
have informed no that these arrests have definitely of-
feated the gold production during the past siz or oight
Regraded Ublessified
- 3 -
101
months; I can well believe that this is true if the ou-
thorities have arrested certain of the persons whom my
friends allege have met with this fate, since most of these
persons were some of the most officient engineers in the
Gold Trust.
Although I realize that there may be many contributing
factors to the present spidemic of arrests, I feel, on the
basis of my experiences during the past year, that 8 cer-
tain amount of the so-called wrecking activities have been
due, at least in part, to the resistance of the workers
to the Stakhanov movement.
I was in Darasum in the fall of 1935 when attempts
were first made to popularize the movement there. At
the first meeting organized at the nine to inaugurate the
Stakhanov movement I was surprised to learn that not one
of the workers reised his hand when the Party leader first
asked for volunteer Stakhamovites. Finally, by appealing
to the actual Party members in the meeting, who were thus
more or less forced to volunteer, the chairman of the meet-
ing was able to enlist the consent of a large part of the
workers to join the movement.
I was at Dzhetygara in the spring of 1936 when the
final steps in the organization of the stakhenov novement,
the raising of the norms, were put into effect. From
that time on I was continuously aware of the fact that
many, if not 5 large majority, of the workers were SI-
tremely dissatisfied with the attempt to speed up pro-
duction. On the basis of those observations I feel that
many of the so-called acts of sebotage on the part of
workers and higher officials are really due to the latent
resistance to the Stakhsnov movement.
Not
Regraded Uclassified
102
- 4 -
Not only have many persons in the verious trusts
throughout the country been arrested or diamissed, but
I have now learned, contrary to the information I ob-
toined six wooks ago, that Mr. Serabrowski, the former
head of the Gold Trust and now Viee Commissar for Reavy
Industry in Charge of the Non-ferrous Metels Industry,
is egain being attacked, and it is quite possible that
he will be forsed out of his present position. When I
first returned to Moscow about six weeks ngo I learned
of the attacks in the press against Mr. Serebrovski, and
made inquiry through many of my acquaintances here whether
because of much attacks kr. Serabrovski would be relieved
of his post. I was assured at that time that such was
not the case and that be had been able to explain satis-
factorily the shorteomings of which he had been accused.
It appears, however, that in the last two or \hree weeks
the attacks have been resumed and efforts are being made
to force Mr. Serabrovaki to resign his position.
In this connection I have also learned that the new
head of the Gold Trust has been doing everything in his
power to discharge or have transferred to other work all
of the keymen who had been the assistants to Mr. Sera-
brovaki.
In regard to ay own case, I use informed a few days
ago that the Soviet authorities had decided that they
would no longer need ay services and, therefore, desired
to break the contract which I had signed in December
1936 prior to my departure for the United states. at
that time I told the officials of the Gold Trust that it
was possible I would not return to work in the soviet
Union. However, despite the expression of my desires
Regraded Uclassified
103
- 5 -
is this regard the officials begged me to reconsider
my decision and return for at least one more year. I
finally advised them that if they so desired I would
sign 8 contract which would contain provisions to the
effect that I could breek the contract in the event that
I decided not to return to this country. While I vas in
the United States the Gold Trust officials communicated
with me on several occasions urging me to hurry back to
assume my duties. I arrived in Moseow the first week
in May and since that time have been awaiting orders.
Finally, approximately two weeks ago, I was told that the
Gold Trust had decided that they could no longer use my
services. I have therefore been making arrangements to
return to the United States. Under the stipulations of
my contract the authorities are to pay my expenses on
the return trip to the United States, as well as my salary
until By arrival at my home plus an extra month's salary
as penalty for having broken the contract.
Although the officials of the Gold Trust claimed
that they were breaking the contract since they no longer
needed By services, I em convinced that this decision was
made in connection with the drive which is now being made,
apparently by the People's Commissarist for Foreign 18-
fairs, to force most foreigners to leave the country.
Although the Gold Trust officials did not, of course, eon-
firm my suspicions in this regard, they did their best to
hint that this was the real reason for breaking the con-
tract.
Im the course of the conversation Mr. Durbrow asked
Mr.
Regraded Uclassified
104
- 6 -
Mr. Wilson if he had any 1dea as to the total gold
production in the Soviet Union. Mr. Wilson replied
that, although he had worked in most of the gold producing
districts in the country, from Kazakhstan to the Far East,
he had never been told nor had he been able to estimate
in any way the total gold production. He stated that this
information was perhaps more closely guarded from him than
from other persons not in the same position to verify any
data he might obtain. He added; however, that from such
hints as he had heard and from his own personal observa-
tions, he believes that the total gold production in 1936
could not have been more than $300,000,000. In this
connection he stated that he could not sate definitely
whether this figure was greatly exaggerated or actually
represented the amount produced.
Regraded Uclassified
Copy for Secretary
105
ML
GRAY
London
Dated July 17, 1937
Rec'd 9:11 a. m.
Secretary of State
Washington
482, July 17, 1 P. m.
FOR TREASURY FROM BUTTERWORTH.
The depreciation of the franc continued today, the
rate moving dcwnward at times by 25 to 50 centimes between
deals, The French authorities did not attempt to give de-
cided support.
I had a word with Waley who stated that they had been
informed by the French Financial Attache that a further SET
of decrees would bE issued next WEEK designed "to rectify
the cash position of the Treasury" and that it was hoped
that these would tend to restore confidence.
Waley also stated that a reply in support of the letter
to Bachmann will bE forthcoming by Monday.
BINGHAM
WWC:KLP
Regraded Uclassified
IUE
PARAPHRASE OF TELEGRAM RECEIVED
FROM: American Embassy, Paris, France
DATE: July 17, 1937, 2 p.m.
NO.: 998
FROM COCHRAN.
I make reference to the first paragraph of my tele-
gram No. 985 of July 15, 6 p.m.
At noon today Rueff told me that his office had been
drafting a memorandum which entirely approved the monetary
principles formulated in the communications which Secre-
tary Morgenthau contemplated sending to the monetary author-
ities of Switzerland. Today he had planned to make this
reply available to me. However, he explained that Monick
had telephoned him from London this morning to the effect
that the British were preparing their memorandum in this
same regard. It was thought best for the French and the
British to confer on this point. According to Monick,
Rueff told me, the British would hand their reply to my
colleague in London on Monday at one o'clock. At the same
hour, Rueff promised he would give me the French reply
as it may be finally drafted after consulation with the
British authorities.
BULLITT.
EA:LWW
Regraded Uclassified
107
PARAPHRASE OF TELEGRAM RECEIVED
FROM: American Embassy, Paris, France
DATE: July 17, 1937, 12 midnight.
NO.: 997
FROM COCHRAN.
Since July 14th was a holiday Paris banks
excepting Bank of France and other state institutions were
open this forenoon. There was no official exchange market
but unofficial trading showed a very nervous and upset
situation. Franc declined to 132 to the pound.
I talked with the Bank of France at 12 noon. My con-
tact told me that yesterday the pressure against the franc
had developed BO strongly that it would have cost the
control too dearly to hold the rate at 29. The policy
therefore has been to intervene at each half point to
purchase some france and see if movement could be brought
to a halt. The control lost nearly two hundred million
French francs yesterday. Some four million francs were
done(?) at New York yesterday evening. There was no
official intervention in Paris this morning, but the Bank
of England was acting for the French in London. The British
reported purchases of twenty-five million france by 12 noon.
In London dollars were being offered against sterling. The
sudden weakening of the franc shooked the French financial
press. There have been given no further reasons for this
weakening, other than those I have already submitted to you.
BULLITT.
SA:LWW
Regraded Uclassified
FEDERAL RESERVE BANK
OF NEW YORK
108
FFICE CORRESPONDENCE
DATE July 18, 1937.
CONFIDENTIAL FILES
SUBJECT: TELEPHONE CONVERSATION WITH
L. I. Knoke
BANK OF ENGLAND.
In Mr. Boltom's absence, Mr. Hawker called no at 10:10
today to keep us up to date on resent developments in France which,
he thought, must look a bit mixed to us from this distance: up to
last Thursday the franc had been well supported because of bear
covering. There had, however, been no sign of real repatriation.
On Wednesday, at a meeting at Marseilles, of the Socialist Congress,
Blum received a two-third majority vote. The first impression on
the public was a favorable one. On second thought, however, the uar-
ket turned bearish and vas very weak on Friday and Saturday and con-
tinued so today although yesterday Blue insisted that the Secialist
party was going to do its best to get things straightened out. This
latter statement did not have such affect, however. The French Con-
trol seems to be trying now to model its policy on the British policy;
that is rather than to stand up like a wall, gradually to give way
before pronounced tendencias. This necessarily had led to a great
deal of confusion. Personally, he thought the French would do better
if they tackled the problem with a little more energy. Until some-
thing constructive was dane by the French Government, it was probably
correct to say that no rate vas the right rate. The market had not
been particularly setive. This morning's short-lived resetion was
due entirely to covering on the part of those who had sold short on
Friday and Saturday. As far u the dollar was concerned, continued
rumors about the American Government's intention to report to the
French Government on French holdings in this market seemed to be the
dominent factor. Every time he talked to anybody on this nather, he
found apprehension.
Regraded Uclassified
FEDERAL RESERVE BANK
OF NEW YORK
109
FFICE CORRESPONDENCE
DATE July 18, 1987.
CONFIDENTIAL FILES
SUBJECT: TELEPHONE CONVERSATION WITH
L. W. Knoke
BANK OF ENGLAND.
- 2 -
In the gold market there was no dishoarding at the moment.
The gold which came into the market was newly mined gold. They (the
British) had been operating in an endeavor to keep gold prices at
parity or above and had taken a good deal of notal offered by other
central banks, thus preventing it from getting into the market and
prices from going to a discount. At the moment there was a great
deal of covering-in by people who want short of gold when the gold
scare was at its height. The market w decidedly healthy now and
it seemed safe to say that fear of 8 reduction in the price, if it
had not entirely disappeared, was certainly dorumt for the moment.
Dollars continued to be offered by the Japanese. Is this
connection, I acationed that we had just been advised of a further
shipment of 70,000,000 yea, which, " were told, use being effected
for the same purpose as heretofore, that is to take care of Japan's
unfavorable trade balance.
LUK:KMC
Regraded Uclassified
110
GROUP MEETING
July 19, 1937
9:30 a.m.
Present:
Mr. McReynolds
Mr. Bell
Mr. Upham
Mr. Lochhead
Mr. Gibbons
Miss Roche
Mr. Haas
Mr. Gaston
Mr. Oliphant
B.M.Jr:
well, 12 hours after we said "No" to Governor
Hurley of Massachusetts, the shipping strike was
settled. And I want to say, Steve, while I'm gone
don't let the Coast Guard go into any strike area,
unless - it doesn't go unless it's over the Presi-
dent's signature, and I don't care what anybody at
the White House tells you. Do you get that?
Gibbons:
We had to decide exactly - Herman was out
H.M.Jr:
When you get McIntyre and Jimmy Roosevelt and Steve
Early all trying
Gibbons:
I didn't pay the slightest a ttention. I got Bernard
and Waesche in and I said the only question in my
mind was that 77-B - they're in bankruptcy - I didn't
know, from a legal standpoint, whether we had to go
in there, whether they were under Federal jurisdic-
tion. That was the only reason.
H.M.Jr:
I don't care whether they're under 77-B or 101-A.
Gibbons:
Well, Herman had said, of course, that we're legally
responsible.
H.M.Jr:
well, I don't want the Coast Guard to go into any
strike section unless the President personally orders
it.
Gibbons:
It would be running diametrically to his opinions.
A.M.Jr:
You heard what he said when he put it up to them.
He said, "Let them use E rowboat." And then 12 hours
afterward the thing was settled.
Gibbons:
Well, the State of Massachusetts could hire their own
equipment 1f they wanted to. It wasn't interstate
Regraded Uclassified
111
-2-
commerce; it was intrastate, you know.
H.M.Jr:
All right. Mac?
McR:
Nothing but Stabilization Fund appointments whenever
you want to find time. Nothing pending that amounts
to anything on that.
H.M.Jr:
Have they cleared with this fellow (Lochhead) ?
McR:
Well, he has got the adjustment on the two boys you
agreed to. He's got the letters ready on those.
H.M.Jr:
Well, bring them all in together.
McR:
I've got the whole story whenever you want them.
H.M.Jr:
10:30.
MeR:
10:30. O.K.
H.M.Jr:
Bell?
Bell:
I don't believe I have anything, Mr. Secretary.
H.M.Jr:
If you will stay a minute behind, and if - do we get
out a daily statement today?
Bell:
Uh-huh.
H.M.Jr:
What?
Bell: :
Yes, sir.
H.M.Jr:
Have they seen - you haven't got one in your pocket?
Bell:
No, it won't be out until about one o'clock.
H.M.Jr:
(on phone) Will Mr. Bell's office send down the
latest daily statement for him, whatever the latest
one is, and send it into my room, please.
Did you see the editorials in the Wall Street Journal?
Bell:
No.
H.M.Jr:
Can't find it. - - Here it is - "Liquidated Treasury
Assets." I think we ought to answer that.
Bell:
(Looks at editorial)
Regraded Uclassified
112
-3-
H.M.Jr:
Cy?
Upham:
I have nothing.
H.M.Jr:
How's the corn crop in Iowa?
Upham:
Let's see, knee-high by the fourth - I expect it's
just about beginning to have silk.
H.M.Jr:
Good. Going out and take a look at it?
Upham:
Thought I would.
H.M.Jr:
Check with Magill.
Lochhead:
Nothing new. I have a man over at State Department.
All those cables aren't in. Butterworth's final cable
isn't in yet. But I've got the man staying over there.
H.M.Jr:
Your (Gibbons) candidate is having a little trouble.
Gibbons:
Yes, he is.
H.M.Jr:
I thought you had that all fixed up.
Gibbons:
They won't let me fix it.
H.M.Jr:
"hat?
Gibbons:
They won't let me fix it. About six months ago is
the time it should have been fixed.
H.M.Jr:
Who's going to be the leader on the Hill in the Senate?
Gibbons:
I think Barkley.
H.M.Jp:
Who?
Gibbons:
I think Barkley. I don't think they'll let....
H.M.Jr:
Anything else?
Gibbons:
I've got to settle about Doyle. Something's come
up. I'm going to order him here - the Collector at
Honolulu.
H.M.Jr:
No you don't, no you don't.
Regraded Uclassifi
113
-4-
Gibbons:
Well, I've got to talk to you before
Oliphant:
Write Mrs. Gibbons about it. Let your daughter
settle it.
Gibbons:
I'm ordering him on here.
Roche:
Keep him away while you're there.
Gibbons:
He ought to be given an opportunity to answer some
charges against him.
d.M.Jr:
Listen, have him come up. Let's talk it now.
Gibbons:
Well, he disclosed - we sent B Customs agent out
there, Sheehan - he told a woman that he'd been
drinking with about this and she was very close
friends - I don't know whether she's an addict -
with one of the largest drug traffickers in the
Islands; and sne told this fellow; and Doyle had an
undercover man who was going to make a buy from this
large drug trafficker. The drug trafficker went around
to the undercover man's house, shot him, left him for
dead, then went out and committed suicide. Now, that's
a nice
I'd heard about this but never knew that it
was in writing.
H.M.Jr:
Well, perfectly frankly, I do this thing 18 hours
a day and I'm not going to do it in Honolulu.
Gibbons:
Beg pardon?
H.M.Jr:
I mean I'm not going to do it. I spoke to London at
a quarter of six this morning. I'm not going to do
this thing in Honolulu.
Gibbons:
Of course.
H.M.Jr:
I mean I was on the transatlantic at 8 quarter of six.
Gibbons:
Well, it's not your problem until I make the recom-
mendations to you.
H.M.Jr:
Well, you fellows handle it. I've got the machinery
here.
Regraded Uclassified
114
-5-
Gibbons:
The point I want to tell you - I'm going to bring
him....
McR:
He didn't want you to be disappointed when you got
there.
Gibbons:
When you get there, you don't know anything about
it; it hasn't reached you.
H.M.Jr:
Well, I don't know.
Gibbons:
No, you don't want to - it's not your problem at
all up till I make a recommendation and you don't
agree with me, one way or the other. That's the
organization of it.
H.M.Jr:
But you don't want to give me the name of the woman
that he went drinking with?
Gibbons:
Well, yes, I can.
"oche:
I wouldn't be so sweeping in my statements, quite.
H.M.Jr:
All right.
Gibbons:
But when you get there you don't know a thing about
it.
H.M.Jr:
That's easy. All right, thank you. See that he sails
soon, will you please.
Gibbons:
I'll send a message right away, as soon as I get
back.
H.M.Jr:
Madam Roche?
Roche:
Nothing.
H.M.Jr:
Sure?
Roche:
Nothing.
H.M.Jr:
All right.
Haas:
I have nothing this morning.
H.M.Jr:
Georgie, going to give me 8 last shot on whether
we're going to have a business slump?
Regraded Uclassified
115
-6-
Haas:
Yes, sir, at 11 o'clock.
Oliphant:
That is, a slump.
Haas:
That's when it's due.
H.M.Jr:
All right, I'll take it personally. Here's your
last chance if you're going to have a summer slump -
11 o'clock.
Haas:
We've got the June index down to 115. It looks
pretty good.
H.M.Jr:
All right.
Herbert?
Gaston:
I don't believe I have anything.
H.M.Jr:
How's your grandchild standing the heat?
Gaston:
All right.
H.M.Jr:
All right. They're still here?
Gaston:
No, no, they went back.
H.M.Jr:
They went back, huh?
Oliphant:
Well, let's all root for Barkley, because otherwise
we get King as head of the Finance Committee.
H.M.Jr:
So I read.
I'm not sure I'm going tonight. My oldest boy isn't
feeling well. I won't go for an hour or two. I may
still have to go Wednesday.
Gibbons:
Are all the children going with you?
H.M.Jr:
Yes.
Gaston:
Will you be able to catch that same boat?
H.M.Jr:
Yes, I just checked; it doesn't leave until Saturday
night. I can leave here Wednesday, catch a train
Thursday out of Chicago, and be in Los Angeles
Saturday noon.
All right.
Regraded Uclassified
116
-7-
Gibbons:
what seems to be his trouble here?
H.M.Jr:
Well, he took his typhoid inoculation; I don't
know whether it's that; running a 102 fever.
Regraded Uclassifi
d
117
July 19, 1937
My dear Mr. Secretary:
I want to take this opportunity to tell
you how extremely useful Mr. Butterworth, of
The American Embassy staff at London, was to
the Treasury during the period immediately
following the resignation of Mr. Blum.
Mr. Butterworth's presentation of the
Treasury's instructions to the British
Treasury were carried out with diligence and
intelligence.
Sincerely yours,
(Signed) H. Morgenthau, Jr.
The Honorable
The Secretary of State.
118
July 19, 1937
My dear Mr. Butterworth:
I am inclosing herewith a copy of my
letter to the Secretary of State which I
thought you might like to see.
There is nothing I can add to this
letter other than to say that I was en-
tirely satisfied with the manner in which
you represented the United States Treasury
before the British Treasury.
With kind regards,
Sincerely yours,
(Signed) H. Morgenthau, Jr.
Hon. William W. Butterworth, Jr.,
Second Secretary,
United States Embassy,
London, England.
Regraded Uclassifie
119
July 19, 1937
3:27 P.M.
Operator:
Go ahead.
H.M.Jr:
Hello
H. Merle
Cochran:
Hello
R.M.Jr:
Hello, Cochran?
C:
Hello Mr. Secretary.
H.M.Jr:
Can you hear me?
C:
Yes, very well.
H.M.Jr:
All right. Now we've got your cable and we've
got the British, see.
C:
Yes.
H.M.Jr:
Now I'd like you, tomorrow night, to go up to
Swizterland, see.
C:
Yes, sir.
H.M.Jr:
And see the head of the Treasury and the head of the
Central Bank and read them my memorandum.
C:
Yes, sir.
H.M.Jr:
In other words give it to them verbally, see.
C:
Yes.
H.M.Jr:
And tell them that if that's acceptable to them, that
we're prepared to have them send any amount of gold
that they want to send.
C:
Yes, and tell them ....
H.M.Jr:
Tell them if our memorandum meets with their approval
C:
Yes
H.M.Jr:
We - we'll stand ready to accept any amount of gold
that they wish to send us.
C:
I see, if their memorandum - if our memorandum meets
with their approval.
Regraded Uclassified
120
-2-
H.M.Jr:
Yes. We stand ready to accept any amount of gold
they wish to send us.
C:
Yes
H.M.Jr:
See
C:
H.M.Jr:
Pardon me?
C:
That holds true of conversion.
H.M.Jr:
Well, I wouldn't bring it up. I mean - we don't -
we don't - a bill from the expense - the principle
laid down in my memorandum, see, why they can go
ahead and send any amount, at least - we don't ask
anything else, see.
C:
I see.
H.M.Jr:
See.
C:
Yes, sir.
H.M.Jr:
And if they can't say here, they want to sell some
of it or so forth, and so on, why that's up to them,
As long as they adhere to the principle in that
memorandum.
C:
I see.
H.M.Jr:
See.
C:
Quite.
H.M.Jr:
Now, do you think you can sell that?
C:
Beg pardon?
H.M.Jr:
Do you think you can get that across?
C:
The only thing that's a little difficult with them -
I might have - the fact that the memorandum ....
H.M.Jr:
What's that?
C:
I am afraid I might have to leave them a copy of
the memorandum
Regraded Uclassifie
121
-3-
H.M.Jr:
Well, you decide that when you get there. I'll
leave that to you.
C:
H.M.Jr:
That's all right.
C:
cannot advise them that
would refer the message to his
H.M.Jr:
Well, if you could leave it to them verbally,
you could leave a copy of the memorandum or if they
want it formally, you could leave it formally.
C:
I think it would be best, if it's agreeable that
we read it to them and then leave them a copy of
the memorandum.
H.M.Jr:
Well, I'll let you decide that.
C:
The only thing they would have to approve the
principles in that statement.
H.M.Jr:
That's right.
C:
Yes, sir.
H.M.Jr:
Then after you've done that I would like you to go
on to Belgium and do the same thing there, and do
the same thing in Holland.
C:
Do the same thing in each of the other countries?
H.M.Jr:
Yes, - and I'll ask the State Department to send you
instructions to that effect tonight.
C:
All right, sir.
H.M.Jr:
See.
C:
Right.
H.M.Jr:
And then leave - tell - inform - inform the French
what our program is.
C:
Right, sir.
H.M.Jr:
Tell the French Treasury that this is the way we are
going to proceed.
c.
All right, sir.
Regraded Uclassified
122
-4-
H.M.Jr:
And if you want to tell them we're taking their
advice that's all right with me too.
C:
All right.
H.M.Jr:
What?
C:
All right.
H.M.Jr:
And I'm going to inform the British that you are
going to go ahead and that we are taking their
advice in this matter.
C:
And then you want me to let them know that we
with the British, or do you prefer
that I did not mention that?
H.M.Jr:
Oh no, that's all right. They know it anyway.
C:
I see.
..
H.M.Jr:
They should. Never any harm to tell them what they
know.
C:
All right. Fine.
H.M.Jr:
You see, I'm all ready for my vacation.
C:
"ell, I'm awfully glad you're getting away.
H.M.Jr:
C:
This thing I can put across all right.
H.M.Jr:
Well, I'think SO. We had the best advice. I see
your friend, the Columbia professor, passed out.
C:
Yes. Ohtyes, yes.
H.M.Jr:
They'll have a hard job finding another one like him.
u:
I think they will.
H.M.Jr:
When they made him, they threw the mold away.
C:
As a matter of fact, you know, they were thinking
of
H.M.Jr:
What's that?
123
-5-
C:
I say, shouldn't say it now when he's gone, but that
paper was thinking very seriously of naming their
correspondent.
H.M.Jr:
Uh-huh.
C:
For one of their defendants
H.M.Jr:
Yes. Well, if you'll go ahead on this trip and then
send me, when you get back, a cable giving me the
results, and then also write me E personal letter
about it.
C:
All right, a cable and a personal letter.
H.M.Jr:
Right. All right Cochran.
C:
And - then you'll be getting away tomorrow, will you?
H.M.Jr:
No, I am going to leave in about an hour,
C:
Well, best of luck to you, I hope you have E good
holiday.
H.M.Jr:
Thank you. This is the last piece of business that
I do.
C:
All right. And now - you mentioned that thing about
the trip, well arrange that at any time that's suitable
to you please.
H.M.Jr:
What trip?
C:
My trip home.
H.M.Jr:
Oh - well, we communicated that to the State Depart-
ment today and asked them to get off a cable at once
on that.
C:
I see.
H.M.Jr:
Oh you've had - you've had a cable, have you?
C:
No, not yet - but what I wanted you to feel that no
time is preferable to do that, just as good one time
as the other.
H.M.Jr:
Yes, well that is, as far as I can tell now, that
would be a good time for us.
124
-6-
C:
All right.
H.M.Jr:
All right, Cochran.
C:
Well, goodbye and good trip.
H.M.Jr:
Thank you.
C:
Goodbye.
H.M.Jr:
Goodbye.
Regraded Uclassified
July 19, 1937.
3:49 P.M.
125
H.M.dr:
Hello
Operator:
Butterworth
H.M.Jr:
Right.
Operator:
Go ahead.
H.M.Jr:
Hello
Butterworth: Hello, Mr. Secretary
H.m.Jr:
Butterworth?
B:
Yes, sir.
H.M.Jr:
Now, I just got through talking to Cochran.
B:
Yes, sir.
H.M.Jr:
And I told him that we are going to ask the State
Department to send him a cable and he is going to
leave tomorrow night for Switzerland and present
this note of mine. Now, he can decide after he
gets there whether he is going to give it to them
verbally or give them a copy or formally or informally,
but anyway he's going to present them that note, see.
B:
Yes, sir.
H.M.Jr:
And then tell them that if they agree to the
principles in that note
...
B:
I beg your pardon, I didn't get that.
H.M.Jr:
If Switzerland agrees to the principle laid down in
that note, why we stand ready to take any amount of
gold they care to ship us.
B:
Aight.
H.M.Jr:
See?
B:
I see.
H.M.Jr:
And then he's going on to Belgium and Holland and
give them each a copy also.
B:
Right.
Uclassifie
-2-
126
H.M.Jr:
He is also, of course, telling the French.
B:
Right.
H.M.Jr:
And you can tell our English friends that we've
accepted their advice, we are going to do It in
this manner.
B:
I see.
H.M.Jr:
So that ought to please them.
B:
Belgium and Holland?
H.M.Jr:
Belgium, Holland and Switzerland.
B:
And Switzerland.
H.M.Jr:
Of course, I take it that we notified England through
you.
B:
Right
H.M.Jr:
And we've notified France, you see.
B:
Right.
H.M.Jr:
So that takes care of that.
B:
Unquestionably, but Cochran is to use his own dis-
cretion as to whether he presents it formally or in-
formally?
H.M.Jr:
That's up to him to decide after he gets up there.
B:
Right.
H.M.Jr:
He thinks that the Swiss will want at least a piece
of paper even though it isn't signed, see.
B:
Yes, sir, I -
H.M Jr:
I think that's unimportant but we worked on that a
long time and every word in that was carefully
weighed and -
his opinion
Operator:
Hello
H.M.Jr:
Hello
Operator:
"ashington?
Regraded Uclassified
127
-3-
Operator:
You have cut off Secretary Morgenthau.
Operator:
You are still connected
Operator:
Hello - hello - Mr. Morgenthau
H.M.Jr:
Talking
Operator:
He's still on the line operator.
Operator:
Operator:
Well operator you are on a business circuit.
July 19, 1937
128
4:42 P.M.
H.M.Jr:
Hello
Operator:
Mr. Butterworth again.
H.M.J.:
All right. Hello
Operator:
H.M.Jr:
Go ahead
Operator:
Go ahead
H.M.Jr:
Hello
B:
Hello, sir.
H.M.Jr:
Did you get that all, Butterworth?
B:
Not it all, I -
H.M.Jr:
I'll repeat it.
B:
I got Belgium, Holland and Switzerland.
H.M.Jr:
Yes.
B:
H.M.Jr:
Pardon me?
B:
is there anything else?
H.M.Jr:
No, except that you have presented the note to
England, haven't you?
B:
Yes, I have, sir.
H.M.Jr:
What?
B:
Yes, I have and
H.M.Jr:
Well, I take it that after Cochran has presented it,
that the United States Government has laid down a
policy, as far as the United States Government is
concerned.
B:
Exactly.
H.M.Jr:
And we consider as far as money belonging to the
other Governments in the tripartite agreement,
129
-2-
we have announced a new policy.
B:
Quite.
H.M.Jr:
You see.
B:
Yes
H.M.Jr:
And, of course, as far as the British are con-
cerned they have always followed that policy.
B:
Yes
H.M.Jr:
So, there's nothing new as far as they are con-
cerned because they are always followed that and we
have followed with them.
B:
Exactly.
H.M.Jr:
So, I mean, we'd always keep our money with the
Bank of England and we asked the Bank of England
to invest it for us.
B:
That's right.
H.M.Jr:
So, there's nothing new there.
B:
Nothing
H.M.Jr:
But we feel that in establishing this policy that
over a period of time it may be a very important
one.
B:
quite.
H.M.Jr:
And I lay a great deal of importance on it.
B:
Right.
H.M.Jr:
But as I say, as far as the British Treasury and
ourselves are concerned it is nothing new because
all of our money is on deposit with the Bank of
England.
D:
Right.
H.M.Jr:
And they follow the same policy with us.
7"
Right.
130
-3-
H.M.Jr:
Now, I think you'll find that after a while that
they'll be very glad to be able to say to the French,
why don't you do the way United States Government
does, but I'm not going to worry about it.
B:
Right, sir.
H.M.Jr:
All right.
B:
And I hope you have a very pleasant vacation.
H.M.Jr:
Thank you, I'm leaving in an hour.
B:
That's good. Goodbye.
H.M.Jr:
Goodbye.
Jclassified
131
PARTIAL PARAPHRASE OF TELEGRAM RECEIVED
FROM: American Embasey, Parie, France
DATE: July 19, 1937, 4 p.m.
NO.: 1003 FROM COCHRAN
Paris exchange market very nervous and thin. Sterling
rate has fluctuated between 130 1/2 and 132 7/8 with French
control intervening intermittently to lower pound but appar-
ently not willing to spend enough to hold the rate. Dollar
rate has likewise varied considerably. Forward franc still
discounted 5.65 franos for three months against sterling
but not heavily offered. Rentes up 1.20 to 2.90 france.
T
Over the week end Bonnet gave an interview announcing
on Tuesday the Council of Ministers will be asked to approve
another set of decrees. These will presumably effect re-
duction in extraordinary expenses. Bonnet also intimated
that he would shortly give his attention to the Government
security market. This statement was probably responsible
for improvement in rentes today. Blum gave speech stress-
ing Socialist support of Chautemps Government.
This noon at the Ministry of Finance there was little
optimism about the situation. They plan to get out the
second set of decrees and then try to improve the market
for rentes. Fear was expressed by the official with whom
I talked that before the situation improves significantly
it will get worse. Higher pay demande by Government -
ployees in the face of the new increase in cost of living
are expected to cause embarrasement.
BULLITT.
EA:LWW
132
London, July 20, 1937.
My dear Mr. Secretary:
As requested I am enclosing, for your
files, a memorandum indicating my peregrina-
tions on behalf of the Treasury immediately
prior to and during the last French "crisis".
Sincerely yours,
Walton
The Honorable
Henry Morgenthau, Jr.,
Secretary of the Treasury.
MEMORANDUM
133
Wednesday, June 23. Discussed with several British
banking firms their attitude towards Chautemps Government,
the result of which may be found in my No. 401, June 23,
6 p.m.
Thursday, June 24. Likewise discussed French situation
with several British and American banks and with exchange
dealers and had a telephone conversation with Waley; see
my 45, June 24, 7 p.m.
Friday, June 25. Waley telephoned to say that Simon would
make an important statement in the House of Commons this
afternoon; that Washington had been directly informed, and
he offered to give me a copy of it in advance. I
explained that I had already planned to hear the debate in
the House of Commons; see my No. 406, June 25, 1 p.m.
Saturday, June 26. City quiet. Reported press reaction
to Chancellor's announcement increasing Exchange Equaliza-
tion Fund by £200,000,000; see'my No. 411, June 26, 1 p.m.
Monday, June 28. Attended House of Commons to hear Simon
defend proposal to increase the Exchange Equalization Fund,
and later telephoned several British and American banks
and exchange dealers regarding exchange movements; see my
No. 412, June 28, 7 p.m.
Tuesday, June 29. Conferred separately with British
Treasury and French Financial Attaché regarding French
situation
Regraded Uclassifie
situation and reported results in No. 413, June 29, 1 p.m. 134
At 1:30 p.m., Mr. Morgentheu telephoned requesting
that information be obtained from the British Treasury
on two points: (1) Cochran had reported from Paris that
the French had told him that the British had agreed to
make a statement that they regarded the French as acting
within the confines of the Tripartite Agreement.
Mr. Morgenthau was sceptical and wished confirmation.
(2) Although he had obtained the cooperation of New York
banks in following the same procedure as they used last
September, namely, only to handle legitimate commercial
franc transactions, he had not been able to obtain any
assurances from the French regarding conversion of any
francs thus acquired into gold. He therefore wished to
know what arrangements if any the British had made in
this connection. Furthermore he wished to assure the
British that he would not act without prior consultation.
Conferred with the British Treasury and at about
4 p.m. telephoned Mr. Morgenthau the answers to his
queries, namely, first, that the British Treasury had
made no commitments to the French Financial Attaché or
any one else to the effect that Simon would make a
statement that the French were acting within the Tri-
partite Agreement; furthermore, that the British had
stated they certainly would not act except after
consultation with us. Secondly, reported that the Bank
of England had suspended quotations and dealings in spot
francs and had arranged with the Bank of France that
the latter should provide any francs required to meet
maturing
Regraded
Uclassified
-3-
maturing contracts in London at 110.55 to the pound;
135
that the Bank of England would not on its own account
buy francs until it received the same information that
we desired. I likewise passed on the information that
the British had made clear to the French that while they
were prepared to follow the above procedure on Tuesday
and Wednesday, they could not continue 80 to do beyond
that time.
I also gave Mr. Morgenthau the two messages from
the Chancellor of the Exchequer which are attached
hereto as ENCLOSURE A.
At about 5 p.m. the British Treasury telephoned and
informed me that Mr. Morgenthau had telephoned Sir John
Simon directly and recounted the conversation.
At about 5:30 the Overseas Telephone Service informed
me that Mr. Morgenthau intended to telephone at 9:15 p.m.
About 6 o'clock British Treasury telephoned to ask
whether I could call at 8:30 p.m.; that they felt that
8. clear understanding between Washington and London had
not yet been reached and that another message was
necessary. In my No. 416, June 29, B p.m. I reported that
such a message would be forthcoming. Called at the
Treasury at 8:30 and discussed the position briefly with
Phillips and Waley, and transmitted the message by
telephone at 9:15 to Mr. Morgenthau and, at his request,
telegraphed it for purposes of confirmation (No. 417,
June 29, 11 p.m.).
Wednesday, June 30. Reported in No. 420, June 30, 2 p.m.
that
-K-
that London press contained reports from Paris alleging
136
that Bonnet had stated Tuesday night before the French
Finance Committee that both the British and American
Treasuries had agreed that his proposed measures fell
within the confines of the Tripartite Agreement.
Conferred with British Treasury about this matter, who
instructed Rowe-Dutton, British Financial Attaché at
Paris, to investigate and later gave me a copy of his
cabled reply, which I passed on to Washington in No. 423,
June 30, 6 p.m. Also contained in No. 420, June 30,
2 p.m., is a summary of the French reply to the British
communication to them (see ENCLOSURE A) which I obtained
from Monick.
British Treasury gave me the proposed answer to B
question which Sir John Simon would have to make in the
House of Commons before 4 o'clock, and asked for its
immediate approval by Mr. Morgenthau, and also asked that
I explain to him why Simon was under pressure to make &
statement. Telephoned Mr. Morgenthau, gave him the
statement and explained the necessity, which was real,
for Simon's statement. Mr. Morgenthau approved and
requested that statement likewise be telegraphed (No.
422, June 30, 6 p.m.). Informed British Treasury of
Mr. Morgenthau's approval of statement, also conferred
with British Treasury and with French Financial Attaché
as indicated in my No. 421, June 30, 6 p.m. Incidentally
this telegram also contains a warning to our Treasury that
the French have reversed their position and that it may
be
Iclassifi
be expected that the British will do likewise shortly and
137
therefore that we must be prepared to aot quickly.
At about 8 o'clock, called at the British Treasury, at
their request, and discussed the whole position and was
given 8 statement to forward to Mr. Morgenthau.
Incidentally this statement, which had not yet been typed,
was in the handwriting of Phillips, Waley and Montagu
Norman in about equal parts. In Mr. Morgenthau's temporary
absence from Washington in Wilmington, I talked with
Assistant Secretary Taylor and confirmed the statement in
telegram No. 424, June 30, 11 p.m., inasmuch as the con-
nection was very poor. Explained to British Treasury
that Mr. Morgenthau could not return to Washington before
9 p.m. their time, which is 3 p.m. London time. While
I waited, Simon, Montagu Norman, Phillips and Waley con-
ferred and decided that in view of the French representa-
tions and the precarious character of the position, it was
necessary to have our decision, regardless of the fact
that it could not arrive before the early hours of the
morning. At the request of the British Treasury I
accompanied Waley to the residence of the French Financial
Attaché, and was present when Waley made B. statement to
him which I had previously approved. This statement may
be found as ENCLOSURE B.
Telephoned Taylor about midnight and explained the
desirability of having 8. decision that morning, and arranged
that the reply be telephoned to my house.
Mr. Morgenthau telephoned at about 5:30 a.m. and gave
me
-9-
138
me 8. message for Simon. Briefly discussed this message
with him and obtained discretionary powers to arrange
about publicity should the British accept it as the basis
of their reply. As instructed by Mr. Morgenthau
Cochran telephoned from Paris at 6 a.m. to give me the
benefit of such information as he had.
As previously arranged, I telephoned Waley shortly
after 6 o'clock and read him the message; his only comment
was: My goodness! my Guiness: He called shortly there-
after for the message. We discussed the matter then
and again about 10 o'clock, when I called at the British
Treasury at his request. On both occasions I reiterated
to him his arguments regarding the desirability of quick
action, and suggested as the most practical means of
meeting the situation that Mr. Morgenthau's suggested text
be accepted as the public statement and that the British
text be sent as a personal communication from Simon to
Bonnet. I pointed out how much more important the franc
rate was to the British than to us, and that therefore
it was in their interest to bear importantly the burden
of representations in the matter of the French exchange and
budgetary position. At about 12:30 a.m. the British
Treasury sent for me and handed me a message from Simon
to Mr. Morgenthau (ENCLOSURE C). At about 1 o'clock I
telephoned this to Mr. Morgenthau, who authorized me to
request Cochran, by telephone, to send the note in his
name to Bonnet. This I immediately did and after two
other telephone conversations with the British Treasury
and
139
-7-
and with Mr. Morgenthau a compromise was reached on the
question of when the two notes would be published,
namely, at 3:15 London time.
Thursday, July 1. In the afternoon called on the Guaranty
Trust Company, which usually acts for the French Govern-
ment in such crises periods to inquire about their
operations. Also had a word over the telephone with
the British Treasury. The results of both inquiries
are embodied in my No. 427, July 1, 6 p.m.
W. W. Butterworth.
WWB/WJK
Message from the Chancel
Exchequer to Mr. More
140
ENCLOSURE A
I am sending the following reply to the French Govern-
ment. I have adopted this attitude in view of the serious
situation in France and the uncertainty how far they can
enforce that decision when gold has been abandoned.
I
should be very glad to learn your general feelings on the
matter as soon as possible.
The Interim Reply.
I am eagerly awaiting information as to the steps which
the French Government are taking to liquidate the budget
deficit which our own past experience has proved to be of
importance in restoring confidence.
I understand the intention of the French Government
to be to abandon their present gold limits and not merely to
suspend them, subject to an application to return to them
later. I note also their statement that the communication
was made under Paragraph 3 of the Tripartite Agreement but
I do not see how there can be any effective consultation
at this stage when a decision has been reached and is about
to be communicated to the French Parliament. Nevertheless,
I feel bound torecord my regrets that the decision has taken
this form. Whatever grounds may exist in present
conditions for temporarily suspending the gold limits, I
consider that their permanent supercession may have serious
consequences
Regraded Uclassified
-2-
141
consequences and I need time to consider the repercussions
of the decision on the Tripartite Agreement in consulta-
tion with the United States Government before saying in
what form and under what conditions it will be possible for
it to remain in being.
Personal Message from the Chancellor of the
Exchequer to Mr. Morgenthau.
I may be asked in Parliament this evening whether
I regard the decision of the French Government to suppress
the upper and lower gold limits as 8 departure from the
Tripartite Monetary Agreement. In that case I shall reply
that events have shown that the readjustment of the franc
in September, 1936 was not entirely successful in
reestablishing a lasting equilibrium between the economic
systems of France and those of the United States and Great
Britain. I have not been informed at what limits the
French Government hope to establish the franc and naturally
decisions of this importance require time for thought and
consultation. For the moment I limit myself to saying
that I have been assured by the French Government that it
is not their intention to seek any exchange advantage and
that they are anxious to continue close cooperation with the
Governments of the United States and United Kingdom, as
called for by the Monetary Agreement.
Parliamentary reply ends.
The Chancellor will be grateful for an early reply.
Regraded Uclassified
ENCLOSURE B
142
The Chancellor of the Exchequer has made very special
efforts to send a reply today to M. Bonnet, despite the
fact that he has been on the Front Bench in the House of
Commons almost continuously since he received M. Bonnet.
-1e has tried to get in touch with Mr. Morgenthau, whom
he wished to consult, but finds that Mr. Morgenthau will
be absent from Washington until 9 p.m., that is, 3 a.m.
London time.
The Chancellor hopes, through the agency of Mr.
Butterworth, to get in touch with Mr. Morgenthau during
the night and to send a reply to M. Bonnet as soon as he
has done SO.
ENCLOSURE C
143
Message for Mr. Morgenthau from
the Chancellor of the Exchequer.
I am most grateful for your message. I fully agree
with you as to the importance of preserving the beneficial
effects of the Tripartite Declaration.
I am sending to Monsieur Bonnet a message in the
terms which you suggested and am telling him that I
understand that you are sending a similar message, and
that I suggest that, if Monsieur Bonnet desires and if
you agree, the two messages should be released simul-
taneously at 5 p.m. (our time) for publication. I
should also like to have your consent to state in the
House of Commons at any time after 3 p.m. this after-
noon that I have sent this message and you have sent B.
similar message.
At the same time I am sending to Monsieur Bonnet
8. confidential, personal message on the lines of the
draft communicated to you yesterday, with the substance
of which, I gather, that you are in general agreement.
The possibility of maintaining with the French authori-
ties the full measure of cooperation envisaged in the
Tripartite Declaration and the prestige of that
Declaration in the eyes of the world must, I feel, depend
on the franc being kept relatively stable at a reasonable
rate, and I feel that you would agree for me to tell
Monsieur Bonnet frankly of my conviction on this point.
Regraded Uclassified
144
JR
GRAY
Paris
Dated July 20, 1937
Rec'd 3:15 p.m.
Secretary of State,
Washington.
1014. July 20, 5 p.m.
FROM COCHRAN.
Paris exchange market continued agitated today.
French control 1a said to have lost sterling holding franc
around 132-7/8. Dollar continues quite weak against
sterling. French rentes are up around 1.50 francs on
report that Government is constituting a fund of some
three billion francs to use for boosting Government
security prices through official purchase and on prospect
of new economy decrees being published tomorrow.
Announcement was made this noon that Labeyrie is
named honorary governor of the Bank of France, first
Undergovernor Fournier is promoted to governor, second
Undergovernor Guiraud becomes first Undergovernor and
Boisanger who has been serving as chief of staff for
Bonnet becomes second Undergovernor. Fournier has served
the Bank of France long and faithfully and is known as a
good technical central banker (END SECTION ONE).
BULLITT
CSB
Regraded Uclassifie
145
PARAPHRASE OF SECTIONS TWO, THREE, AND FOUR OF NO. 1014
of July 20, 1937, from Paris.
This morning Maurice Frere called on me. He had
left with leading French officials, including Rueff,
Alphand and Bonnet, a copy of an informal memorandum which
Premier Van Zeeland had instructed Frere to submit to
the French and to the British. He told me that last week
while he was in London he had secured the approval of the
British Treasury, Board of Trade, Economic Adviser, and
even of the Prime Minister to the memorandum he had given
them. The French officials are BO busy this week, he said,
with all their financial work, that he will have to come
baok to paris to get the French reply some day next week.
The following explanation of the memor andum was
offered by Frere. After returning from the United States
Van Zeeland thought the appropriate procedure would be
to obtain the approval of France and Great Britain, which
countries requested him to undertake his present task in
international economics, to a plan for initiating definite
international
steps toward solving the/problems of an economic nature.
I was privileged to glance at the memorandum, which in its
introductory paragraph referred to the first paragraph
of the Tripartite Monetary Agreement of last September.
With this text as inspiration, the memorandum suggested
that official representatives of Great Britain and France,
which two countries are parties to the Tripartite Agreement
and
Regraded Uclassifie
145
- 2 -
and also they nominated van Zeeland to his present task,
should be joined by a similar United States representative to
work out together after due consultation the steps toward
at world program which can be taken next now. In the mem-
orandum there was a reference to the trade policies of the
United States, particularly reduction of barriers to inter-
national commerce as an essential part of the plan. The
present plan is to submit the memorandum to the United
States for approval if the French agree to it.
My contact informed me that there did not seem to
be any hope of getting Italy and Germany to enter definitely
8.8 founders of the plan. However, they do not want to put
Italy and Germany in a position of opposition through creat-
ing any sort of B. closed organization between democracies.
The original parties would be the three tripartite countries
and they would keep Italy and Germany informed of develop-
ments. They do not think there will be much difficulty
in procuring the adherence of the Oslo countries. In order
to go further it would be necessary for certain countries
to eliminate exchange control or liberate their economic
systems in other ways. At first perhaps progress could
be made with Austria, Hungary, Pland and Czechoslovakia.
There would be particular difficulties in Italy, and the
last to be knowing brought into the agreement would be
Germany.
Regraded Uclassified
147
- 3 -
Germany. In order to hold out come offer of assistance
toward countries with closed economy entering the more
liberal circle, Frere 1s reviving his idea of some years
ago of suggesting that a emall percent (say one or two)
of the gold holdings of central banks or treasuries be
deposited with some central institution, preferably the
BIS. Such a fund could then be utilized in helping
countries to reduce their articial barriers to movements
of trade and exchange. I mentioned to Frere the fact
that in the United States there was a. bad press reaction
to the idea attributed to Van Zeeland of having the coun-
tries which hold plenty of gold, particularly Great Britain
and the United States, make such gold available to such
countries as Germany and Italy through the BIS. He replied
that his plan 18 entirely different, 8.8 it is on a broad
scale and includes all important treasuries or central
banks.
I refer to telegram No. 350 of July 19, 6 p.m., from
the Department. Tonight I leave for Switzerland, the
Netherlande and Belgium. I have made appointments with
appropriate officials in these countries. On Saturday
morning I shall cable a report of my trip.
END MESSAGE.
BULLITT.
EA:LWW
148
MM
PLAIN
London
Dated July 20, 1937
Rec'd. 3:55pm.
Sccretary of State
Washington, D.C.
490, July 20, 9pm.
cortidential FOR TREASURY FROM BUTTERWORTH.
Monick called to show me a copy of the French reply
respecting the Bachmann letter and at the same time gave
his personal and confidential view of the situation in
France. Te felt that the new decrees would, for the time
being, bring back a measure of confidence but that the
budgetary position was such that another period of un-
cortainty was bound to come especially in view of the
auturn refinancing to ameliorate which Bonnet would be
increasingly compelled to take steps that would run
counter to the Socialist program and this in turn would
create political uncertainty and react on the franc.
Monick stated that he still stood by his previous remarks
reported in No. 380, June 14, 6pm, and that a definitive
crisis was inevitable and he believed that the battle
against exchange control had not yet been completely won.
In his opinion when the next crisis occurred another and
yet more formidable attempt would be made to impose an
exchange
149
nun 490, July 20, 9pm. from London. -2-
exchange control system in France. He said that unfortunately
exchange control as an inevitable eventuality was gaining
adherents in France. I had a word with Waley who said that
they knew nothing of the new governor of the Bank of France
but that any change was for the better; in any case this
appointment together with the new decrees should insure a
period of calm for the holidays.
BINGHAM
WWC
CSB
JR
GRAY
150
Tokyo
Dated July 21, 1937
Rec'd 9 a.m.
Secretary of State,
Washington.
215. July 21, 4 p.m.
FOR ThE SECRETARY OF THE treaSury.
Domot reports that the Government proposes to introduce
the
in the session of/Diet opening July 23 legislative measures
,
to authorize the Government to revalue the specie reserve
of the Bank of Japan and to set up 2 special account with
the funds resulting from a revaluation of the specie
reserve. While complete details have not been published,
it is understood that the special account is to finance the
Government purchase of gold bullion and export shipments of
specie and will also be used to stabilize the yen.
Assuming that the Bank of Japan's specie reserve
amounts to 500,000,000 yen under the statutory valuation.
of five yen per momme the reserve will probably be revalued
at thirteen yen per momme which will bring the total value
of the specie reserve up to 1,300,000,000 resulting in a
book profit of yen 800,000,000. Of this amount 210,000,000
yen loaned by the Bank of Japan to the Government will be
deducted from the profit of 800,000,000 and the net amount
of 590,000,000 will be transferred to the Treasury. With
this
151
-2-
JR #215, July 21, 4 p.m., from Tokyo.
this latter fund the Government will set up the special
account.
Financial observers pointed out that the proposed
revaluation is merely a formal arrangement since the
Government virtually revalued the specie when it raised
the gold purchase price in line with the free gold bullion
market in Londor some time ago and consequently the plan
will have no influence on the exchange law. Regarding the
special account the same observers are of the opinion that
there exist other basic factors affecting adversely the
international position of the yen and proposed establishment
of the special fund cannot be expected to operate to improve
the fundamental situation.
Further details will be reported when the proposed laws
are published.
GREW
KLP:C3B
Uclassified
152
RB
GRAY
Paris
Dated July 21, 1937
Rec'd 3 p. m.
Secretary of State
Washington.
1020, July 21, 6 P. m.
FOR TREASURY.
In a statement made to the press last evening Bonnet
briefly referred to the second series of financial measures
envisaged which earlier in the day nad been examined by a
Council of Ministers and later on by different members of
the Government and Fournier, the new Governor of the Bank
of France. The decisions taken will probably be published
in the Journal Official of tomorrow or Friday.
Bonnet recalled that the first series of measures
creating eight billion francs of new resources had covered
the deficit on the current ordinary budget. However, he
explained this was not enough and that it was necessary
to lighten the heavy burden which the Treasury had had to
support during the past few years. Therefore a plan to
this end covering the period up to the end of 1938 had been
drawn up to which all members of the Government had agreed.
Under
Regraded Uclassified
153
RB
-2-#1020, July 21, 6 p. m. from Paris
Under this plan Bonnet said the special budget appropriations
for 1938 covering national defense, public works, et cetera,
would amount to fifteen one half billion francs. He pointed
out that this plan reflected the Government's desire to
proceed with caution as concerns the public finances and
at the same time to avoid slowing up economic activity.
Bonnot continued, and the results already achieved
could not fail to have favorable results
(END SECTION ONE)
BULLITT
HPD
Regraded Uclassified
154
JR
GRAY
Paris
Dated July 21, 1937
Rec'd 2:50 p.m.
Secretary of State,
Wishington.
1020. July 21, 6 p.m. (SECTION TVO).
on the credit of the state and announced that with the view
of hastening the moment when this improvement should be
reflected in higher quotations for Government securities
the administration has decided to constitute a fund "to
support and regulate" rentes. He said that the action of
the rentes fund closely coordinated with the stabilization
fund, would minimize speculative movements and favor the
policy of cheap money essential to economic revival.
In conclusion Bonnet insisted that the meesures already
taken would have an immediate effect. The Charges of the
Treasury would be reduced by 6 billion francs for the
last months of the year 1937 and by 25 billions for the
year 1938. He predicted that if the country would show
its confidence in the Government and would continue to
work orderly and pescefully it would overcome prevailing
difficulties.
According to statements in the press the fund envisaged
for the support of rentes will be financed by profits of
about eight billion francs arising from revoluation of the
gold
155
-2-
JR #1020, July 21, 6 p.m. (SECTION TWO) from Paris.
gold reserves of the Bank of France on the basis of 43
milligrams of gold per franc but no official statement
has been noted in this respect.
The exchange market was very nervous and jumpy today
awaiting more precise information regarding the Government's
intentions. Sterling opened at 132.75 and closed around
this figure after touching 131.60. The dollar closed at
26.63 after 26,40.
After gains ranging from 1.50 francs to 2 francs
rentes finally closed at about the same level as yesterday.
(END ME.SAGE).
BULLITT
CSB
156
TELEGRAM SENT
BB
GRAY
July 21, 1937
B P. m.
AMEUBASSY
PARIS (FRANCE)
359.
FOR COCHRAN.
The Secretary of the Treasury requests that you
arrenge to return to Washington to be present shortly
before or on October 4. This is satisfactory to the
Department if agreeable to the Ambassador.
HULL
WJC
FA
Regraded Uclassifi
TELEGRAM SENT
157
RB
GRAY
July 21, 1937
8 p. m.
AUSWBASSY
LONDON (ENGLAND)
311.
For Buttorworth.
At the request of Treasury, and provided it is
sati:factory to the Ambassador, you are instructed to
proceed to Washington, D. C., for consultation with the
Treasury Dopartment not lator than September 20, 1937.
Transportation exponses and por diem to Washington, D.C.,
and return London authorized subject Travel Regulations,
chargeable to Treasury Department. Report dates and
inform DADO.
HULL
WJC
EA: HF
FA. HM
FP
BA
EU
Regraded Uclassifie
158
CABLE
textax Paris
Dated July 22, 1937.
Extract from #1025
to Secretary of State
It will be agreeable to me to have Cochran, who is
now in Amsterdam, return to Washington before or on October 4.
Bullitt.
FEDERAL RESERVE BANK
OF NEW YORK
153
OFFICE CORRESPONDENCE
DATE July 22, 1937.
to
CONFIDENTIAL FILES
SUBJECT: TELEPHONE CONVERSATION WITH
L. V. Knoke
FROM
BANK OF FRANCE.
I called Mr. Cariguel at 11 a. a. They were having B
fairly heavy day today, he said. Unfortunately, the press was
not goods the French press from the political point of view and
the British press from the economic viempoint. He seemed to resent
the continued discussion in the British press, even in such papers
as the Times, of a franc rate of 150 to the pound. Naturally, the
reaction of that on the public was most unfavorable; talks of that
kind offered no inducement for the public to buy French francs.
Today's operations would probably result in a loss of about £2,000,000
of foreign exchange and gold, but with that, they would, as he put 1t,
"only touch" gains recently made. He explained that the last few days
prior to today, they had gotten away with selling very little of their
reserve, with the result that a good deal of what had previously been
taken in was still retained.
I referred to Mr. Fournier's appointment and to the good re-
ception it second to have received overywhere. I mentioned that the
press here looked upon it as a move in the direction of conservation,
which Cariguel thought it undoubtedly was. Personally, he seemed to
be well pleased with Mr. Fournier's appointment.
LUK,ENC
Regraded Uclassified
160
July 22, 1937.
My dear Mr. Secretary:
In the absence of Secretary Morgenthau, I am
acknowledging with thanks receipt of your letter of
July 17th with which you transmitted copy of a con-
fidential despatch forwarding a memorandum of state-
monts made by an American mining engineer formerly
employed by the Soviet Gold Trust in regard to con-
ditions in the Soviet gold industry.
Sincerely yours,
(Signed) Dayne 0. Taylor
The Honorable,
Cordell Hull,
Secretary of State.
Uclassifi
161
THE WHITE HOUSE
Regraded Uclassified
o
Washington
y
JUL 27 1937
My dear Mr. Administrator:
I have allocated from the appropriation is the Imergency
Relief Appropriation Act of 1937 $52,500,000 to the War Depart-
ment, Corps of Engineers, representing funds by the
Var Department Civil Appropriation Act of 1938 for the 02-
alusive use of that Department on flood control projects.
I as advised that, although the Mar Department Civil Appro-
priation Act made available $7,500,000 of the foregoing alloon-
tion on flood control projects in the lower Mississippi Valley
free from the restrictions and limitations of the Emergency
Helief Appropriation Act of 1937. the Corps of Engineers can
use these funds under such restrictions and limitations, and
that they can use $15,000,000 of that allocation on flood
control projects elsewhere which can be 50 prosecuted. I an
therefore charging $22,500,000 of the foregoing alloontion
against the funds reserved for the Works Progress Administra-
tion for obligation during the fiscal year 1938. The and
you were authorised by KY letter of July 1, 1937, to obligate
in each quarter of the fiscal year 1938 will therefore be
reduced by $5,625,000.
It in desired therefore that you approve such projects
relatived by the Mar Department for operation with the fore-
going funds as can be prosecuted under the provisions of the
Emergency Relief Appropriation Act of 1937.
Sincerely yours.
(Signed) FRANKLIN D.
Generable may L. Hopkins,
Administrator, Works Programs
Administration
JR
GRAY
162
Paris
Dated July 22, 1937
Roc'd 2:10 p.m.
Secretary of State,
Washington,
1026. July 22, 5 p.m.
FOR treasury.
Transactions on tho exchange market today wore again
carried on under hoctic conditions and with wide fluctuations
especially -3 concerns storling which at onc timo roached
135, The fund is now holding it at 133.60 and V/C are told
by our market contact that the fund has yiolded very large
amounts of storling in an offort to bolster the market.
The dollar now stands at 26.82 after 27.10.
Thore was some improvement In the rontes market and
gains ranging from 60 contimos to 1.50 france were rocorded.
The Bank of France statement dated July 15 published
today is fairly satisfactory. Gold holdings are unchanged.
Commorcial advances down 1,193,000,000. No increase in
itom under advances to the Government. Noto circulation
down 229,000,000. Doposits 491,000,000. Troasury account
increased by about 730,000,000. Ratio of gold cover 48.58%
compared with 48.23%. (END SECTION ONE).
BULLITT
CSB
Copy for Secretary
163
RB
GRAY
Paris
Dated July 22, 1937
Rec'd 4:25 D. m.
Secretary of State
Washington.
1026, July 22, 5 p. m. SECTION TWO.
In a communique issued last evening Bonnet announced
that the Government had decided to create a fund to support
Government securities which would be financed by the pro-
ceeds of the revaluation of the gold reserves of the Bank
of France on the basis of the lower limit provided for by
the monetary law of October 1 last, namely, 43 milligrams
gold per franc. Henceforth he said in addition to the
substantial amounts which the amortization fund applied
to the purchase of state socurities the rentes fund would
also operate and would have at its disposal more than six
billion francs. He insisted that the measure was perfectly
sound and that it corresponded to the spirit of the con-
vention concluded with the Bank of France on September 25
last which laid down that profits from revaluation would
be applied to the amortization of the public debt.
He proceeded to explain that in order to make clear
its
Regraded
Uclassified
164
RB
-2-#1026, July 22, 5 p. m. from
Paris SECTION TWO
its desire to clear up the statement of the Bank of France,
the Government had agreed to pay over to the bank the un-
used portion of the rentes fund at the end of operations
to cover advances of the bank to the state and furthermore
that upon its liquidation the proceeds of the stabiliza-
tion fund would be devoted to the same object to the extent
of the rentes holdings of the rentes fund.
BULLITT
CSB
Regraded
Uclassified
165
RB
GRAY
Paris
Dated July 22, 1937
Rec'd 3:20 P. m.
Secretary of State
Washington.
1026, July 22, 5 P. m. (SECTION THREE)
Bonnet further announced that amortization of the
perpetual loans and reimbursement of advances made to
the state were the two essential aspects of the convention
which were examined yesterday by the general council of
the Bank of France. The Minister continued that the
measures which he had outlined were analogous to those
already applied in several countries of America and
Europe, notably in Belgium, and that they had contributed
to the improvement of the public credit.
The Minister concluded by announcing that at its
mooting yesterday the Bank of France had authorized the
Governor to sign the convention whose terms will be embodied
in a decree law to be published on Friday morning in the
Officiel.
The new Governor of the Bank of France, M. Fournior,
took office yestorday. Rumors are denied that Jouhaux,
Prosident of the Labor Confederation, intended to resign
from the
Jclassified
166
RB
-2-/1026, July 22, 5 p. m. from
Paris SECTION THREE
from the Board of the Bank.
The new economy decrees may not as expected be issued
immediately. The impression is gained from the press that
while agreement in principle has been reached upon the new
measures, divergence exists between members of the Govorn-
ment on several points.
In possession of indications of the main lines of
the socond series of financial measures envisaged by the
Government most financial shoots agree that the Ministor
of Finance has shown courago in his decisions and that
the plan represents an approciable
BULLITT
CSB
167
RB
GRAY
Paris
Dated July 22, 1937
Rec'd 3:30 P. m.
Secretary of State
Washington.
1026, July 22, 5 p. m. (SECTION FOUR)
effort. Furthermore the belief apparently prevails in
many quarters that a fair measure of success may be looked
for as a result of their application provided that the
Minister of Finance will not be hampered by extreme Left
exigencies and influence of a nature to compromise the
return of confidence. In this respect the lack of a system
as evidenced for instance by the action of the exchange
market is evidently causing preoccupation and it is especial-
ly stressed by financial observers that financial technique
alone will not suffice.
Writing in AGENCE ECONOMIQUE of today Paul Reynaud
warns that the rentes fund must be oporated with prudence
in viow of actual conditions of inflation. He points out
that restoration of confidence is essential and that French
economy must be put on its fect. Otherwise ho fears that
the rontos fund might suffer the same fato as the exchange
stabilization
Uclassified
168
RB
-2-#1026, July 22, 5p. m. from
Paris SECTION FOUR
stabilization fund which lost 10 billion francs gold in
trying to hold the franc above the lower point fixed by
law.
END MESSAGE
BULLITT
CSB
Regraded
Uclassified
169
Mii
GRAY
Paris
Dated July 23, 1937
Rec'd. 1:35pm.
Secretary of State
Washington, D.C.
1030, July 23, 5pm.
FOR TREASURY.
The franc has bEEn somewhat stendier in todays
Exchange market which has not been very active. Sterling
has been up to 133.35 but the fund is now holding the
rate at 133.20 without too much difficulty. The dollar is
at 26.75 after 26.82 and is rather bid. The forward rate
for sterling has strengthened to 2.50 francs for one month
and to 6.50 francs for three months.
Little or no change is recorded in rentes.
The decree Establishing the rentes fund, the text of
the convention between the Ilinister of Finance and the
Bank of France and decision relating to operation of the
rentes fund were published in the Journel Official of today.
Raison d'etre of the rentes fund is briefly Explained
in the preamble which stresses that the security market has
became Extremely vulnerable to speculative novements on
account of marked absence of normal investment buying and
it is pointed out that this is particularly true 0.8
concerns
170
mm 1030, July 23, 5pm. from Paris. -2-
concerns government securities, "the present low prices
of which are in no way justified by the actual financial
difficulties of the Government". The hope is Expressed
that the removal of this menace will greatly contribute
to the reeotablishment of the credit of the state.
The preamble confirms that the resources of the fund
will be provided by the revaluation of the gold holdings
and available noidings of foreign currencies of the Bank
of France on the basis of 43 milligroms gold per franc,
"an operat on which will constitute the first step towards
the fixation of the new gold content of the National
currency". The preamble concludes textually as follows:
"Furthermore, this revaluation will DE mde under the
conditions laid down in article one of the convention of
September 25, 1936, approved by the Lionetary law of
October 1, 1936. The utilization of the profits of
revoluation will also conform to (End Section One).
BULLITT
VAIC
CSB
171
RB
GRAY
Paris
Dated July 23, 1937
Rec'd 3:50 p. m.
Secretary of State
Washington.
1030, July 23, 5 P. m. (SECTION TWO)
the spirit of the convention in question because under the
terms of Article 3 of this convention these proceeds may
only be utilized for the amortization of the public debt.
Nevertheless the Bank of France could have rightfully
insisted at the time of the discussion of the convention
which will follow the fixation of the new gold content
of the franc provided for by the same article, that the
advances granted by it to the Treasury should be reim-
bursed by priority; thus it appears logical to grant a
right to the bank of issue on the proceeds of liquidation
of the exchange stabilization fund to the extent that the
initial appropriation of the rentes fund at the termination
of its operations will not have been devoted to the reim-
bursement of the said advances."
The essential provisions of the six articles of the
decree establishing the rentes fund may be summarized as
follows
Regraded Uclassified
172
RB
-2-#1030, July 23, 5p. m. from
Paris SECTION TWO
follows:
With the view of regulating the rentes market a fund
is created which is authorized to buy and to sell perpetual
or redeemable rentes and long medium term treasury securities
(Article 1).
The fund will be operated by the amortization fund for
the account of and under the responsibility of the public
treasury (Article 2).
The oporations of the fund may be terminated by a
decree issued upon the proposal of the Minister of Finance
and approved by a council of ministers.
BULLITT
RR
CSB
Regraded Uclassified
173
MM
GRAY
Paris
Dated July 23, 1937
REC'd. 2pri.
Secretary of State
Washington, D.C.
1030, July 23, 5pm. (SECTION THREE).
at that time the renteo held by the fund will bE inmediately
conceled. Any each belance remaining will bE utilized to
reimburge advances rade to the Treasury by the Bank of France
under the conventions dated June 10, 1936 and June 30, 1937
(article 3).
Under the convention between the Minister of Finance
and the Bank of France (which is dated July 21, 1937) it in
agreed that the bank will proceed to the revaluation of its
gold holdings and of its available holdings of foreign
exchanges under the conditions laid down in Article One
of the Convention of September 25, 1936, but upon the basis
of the weight of 43 milligrams gold per franc. It is also
agreed that the additional profit reculting from this
revaluation will bE utilized for the Endownent of the rentes
fund. Finally the convention lays down the conditions upon
which the proceeds of the rentes and otabilization funds
shall bE disposed of at the termination of their respective
operations. (END OF !!ESSAGE).
BULLITT
WVC/CSB
114
Cabinot Meeting - July 23. 1937 - 2
P.M.
Present:
The President, Vice President, Measrs. Mull, Cussings.
Woodring, Parley, Ickes, Repar, Visa Perkins,
Mr. Magill, Admiral Leaby, Mr. Wilson.
The President said he had been talking to the newspaper men and
to several Senators and Congressmen. He had told them the outlook was
hopeful to realize the main objectives of his court program. The court
had displayed more liberality in its spring decisions, and bills to
reform procedure in the Federal courts would go through.
He said that it is up to the Congressional leaders to get busy and
put through a program of legislation now; or to meet in October and do
so then. The next regular session should be short, and not much more
than the regular appropriation bills should be passed. The record this
year is not good - only the appropriation bille, neutrality legislation
and one other important bill. Congress ought not to want to & to the
country on such & record.
The Vice President said that in his 34 years he had never 1002
such wesk leadership of the majority in Congress. He mentioned the
Speaker and the Rules Committee. Bills making additional appropriations
above the bodget were going through without adequate consideration of
the consequences.
The President said that he was determined to balance the budget,
and that if the appropriations exceeded the estimates, be would call
Congress back in October either to out down appropriations previously
made, or to pass additional taxes to balance the outgo. Re could only
veto about so many bills. He spoke particularly of the vote overriding
his vete of the bill as to farm interest rates: and the appropriation
for vocational education being tacked on to one of the appropriation
bills.
Mr. Ball said the situation in China looked somewhat better, with
probabilities of a settlement by local leaders. Spain still looked
hopeless. In answer to the President's question. Admiral Leahy said
gune placed around the Bay of Oibralter could boabard the British off
the rock: gane across the Straits could not be affectively used for
this purpose, since they would be 25 miles away.
I reported the situation in the tax loophele bill; It is probable
that 11 can be whipped into shape and promptly passed. It will not
cover such territory, but will be drastic. Cushions carrot be inserted
without injuring its effectivemens. The President said younger Congress-
sea had criticized Meesrs. Deaman and Parker for associating with
vealthy lawyers and taxpayers. I said the oriticies had 20 north as
to Beaman, who in thoroughly non-partizen. The Vice President said
enyone would have & hard time to convince the House that Boaman 10 not
Regraded Uclassified
- 2 -
1/5
entirely honest and non-partises; that be does not interfere on ques-
Regraded Uclassified
tions of policy. I said Parker was regarded as a radical by the Mellon
group! I thought him an honest conservative. The Vice President said
he was put in by Senator Cousens: he thought Parker was all right.
Admiral Leahy reported that the Cruiser Omaha, now stuck on a
bar, night be gotten off if good weather prevailed or might be lost.
Mr. Reper read a telegram from George Falmer Putnam, asking the
Navy to prosecute the Earhart search, and to invite the British and
Japanese to help. It was decided to ask our own and their officers
to keep a lookeut, but that we could not intensively search the areas
nentioned since 10 did not have the shipe there.
The President said indications were that crops this year would
be large and next year probably 80. Business conditions were good with
high farm prices. The large crope would probably bring prices down,
unless some affirmative steps were taken by the Government.
I VAS asked to find out from Wayne Taylor whether there were
further shipments of gold out of the United States: the President may
want to make a statement next week. I was also asked to find out from
Admiral Weesche what Coast Guard cutter would next be retired, to ...
whether it can be obtained for Mr. Reper's use for scientific purposes
in Alaskan waters, to determine the migratory habits of the salmon.
It is thought the salmon come from Alaskan rivers to the high seas,
where they are being caught by the Japanese. The President wants us
to control the catch if we can.
...
After the meeting I spoke to Mr. Farley about the Studebaker
Company's proposals to amend the undistributed profits tax. I said
it was very unlikely that any amendments to that tax would be made
before fall. Re said that he had no particular interest in the situa-
tian, and would advise Mr. Vance of the Studebaker Company that probably
nothing could be done at this time.
Notes taken by Under Secretary Hoswell Magill.
RM:ce
1/6
PARAPHRASE OF TELEGRAM RECEIVED
FROM: American Embassy, Paris, France
DATE: July 24, 1937, 10 a.m.
NO.: 1034 FROM COCHRAN.
In accordance with Department's instruction, tele-
gram No. 350 of July 19, 6 p.m., the night of July 20
I left Paris and the next morning arrived in Bern. There
I called at the Swise National Bank at 10 o'clock, by
appointment. The President of the Bank, Bachmann, was
on his annual vacation. The officer in charge, Weber,
received me. Schnyder retired at the end of June.
I read the draft communication from Secretary Morgen-
thau contained in telegram No. 339 of July 14 to Weber
and asked him to make such notes 8.8 he wanted to on the
first two paragraphs of the draft. I gave Weber an un-
headed and unsigned memorandum containing the remainder
of the message beginning "We who have joined in the tri-
partite accord" and ending "share this interpretation of
its implications". I told Weber that I had given the
draft communication to the French authorities, and that
Bonnet had expressed his agreement with the general prin-
ciples concerning gold policy which this draft proposed,
and that Bonnet said these were indeed the policies which
guided them in their relations with the tripartite coun-
tries.
I also told Weber that my colleague in London had
-
given
1/7
- 2 -
given the draft to the British, and that the Chancellor
of the Exchequer had said he did not disagree with the
general principles set forth in the draft which corres-
ponded to the procedure ordinarily followed by the British
themselves.
I explained that I had come personally to deliver the
message to Weber because it might be most satisfactory
to have informal discussion. Furthermore, I added, the
British preferred that we should not endeavor to codify
too precisely and formally at this early date the tri-
partite principles.
I reminded Weber that Bachmann had on at least two
occasions suggested to me that it would be desirable to
have the club countries arrange a meeting of experts with
a view to arriving at XX a common understanding and to
draw up a set of rules for the member countries to follow.
The United States thought it still unnecessary or at least
premature to have such & meeting, but we did think that
now that the end of the first year of the Tripartite
Agreement is almost here, enough time had elapsed to
permit the formulation and setting down of some general
principles; this initiative was taken toward this end.
My contact was cognizant of the instinctive reluo-
tance of the British to put anything on paper; he thought
that this beginning of the United States was a useful
service.
Regraded Iclassified
1 ( 8
- 3 -
service. Weber felt that it was much more satisfactory
for me to come and talk to him about it than to write
formal letters to his people. He asked me some important
questions regarding the exchange of notes under the
American proposals which I shall set forth later in this
telegram.
Weber said that personally he found the general
lines of policy 86 enunciated acceptable. I said that
if the Swies could approve the American memorandum, the
American authorities would stand ready to accept any amount
of gold they wanted to send to our country. After my
first conversation with Weber, and before we met again
for lunch, Weber consulted with his colleague Rosey
who took (emission). Schnyder's place a few days ago.
When we met again Weber said that he found Rosey shared
his views on the question discussed. Meyer, the Swiss
Minister of Finance, was away from Bern for a few days,
but Weber promised to consult with him as well as with
Bachmann and his other colleagues as soon as he could.
Should they agree to accept the American interpretation
of principles of the Tripartite Agreement as set forth
in Secretary Morgenthau's draft, the Swies will write me
an informal letter to this effect; it will be approximately
15 days before such 8 communication could be sent. In
considering Weber's observations it should be remembered
that he cannot bind his bank by his own statements.
My
1/9
- 4 -
My contact expressed his gratification at seeing
the two arrangements which the American Treasury has recently
made with China and Brazil. These operations were ideal,
he thought, because they effected distribution of gold
from an overstocked center for the purpose of strengthen-
ing currencies and helping central banks. A close watch
is being kept by the Swise on American studies and decisions
regarding the forcing out and keeping out of excessive
foreign capital since the same problem to even a greater
degree faces them in view of the fact that the per capita
holding of gold in Switzerland is much higher than it is
in our country.
In Weber's opinion the main source of present unrest
for currencies and floating capital is France, which is
the source of a great part of the Swiss glut of capital.
The London gold market was recently upset more by the
French movement of gold to London than by either dehoard-
ing or influx of new gold, and it led to the necessity of
increasing the equalization fund of the British. Should
there be repatriation by the French of a good part of their
holdings from the American market, the "hot money" situation
would be importantly lessened and perhaps cease to exist.
As to the French outlook, however, Weber is not optimistic.
Until confidence 18 restored he thinks there will be further
depreciation,
180
- 5 -
depreciation, and as yet he sees no evidence of this.
Weber believes that in view of the French danger it is
continually and increasingly necessary that the other
club countries keep in close contact and cooperate with
each other.
Personally Weber said he 1s sympathetic to the idea
of concentrating investments by a central bank in a foreign
market with the central bank of that market; deviations
on the Swise market
from that policy/had embarrassed his bank, and he said
we could count on his bank to cooperate with us in this
regard.
I was asked by Weber whether I thought his bank should
discontinue holding balances with the Chase and other New
York banks of this type. For reply I referred him to the
phrase of my memorandum "such balances should in the main
be kept with the central bank". He said this formula had
been followed by his bank because its deposite in New
York outside the Federal Reserve Bank were insignificant
compared with those with the Federal Reserve. He asked if
it would be permissable for the Swiee bank to buy United
States Treasury bills through New York private banks with
which it has deposite. I said that it was the sense of
the Treasury communication that such purchases should be
made through the Federal Reserve Bank after appropriate con-
sultation
181
- 6 -
sultation as this Bank 1e the Treasury's fiscal agent.
I was reminded by Weber that whenever the American
Treasury gats out a new security issue the terms thereof
are cabled by the New York Federal Reserve Bank to the
Swise National Bank 8.6 well as to other central banks;
he accepted this as an "invitation" to subscribe to the
securities. I did not make use of this interpretation
but emphasized the need for consultation.
My contact told me that for the present at least
the urgency for his bank to convert gold into foreign
exchange has lessened. The Swies in recent days have made
a dollar loan to Argentina for the International Telephone
and Telegraph. For this operation they sold gold for
dollars, just as they did for earlier Czech and Italian
credits which I previously reported. The demand for gold
coins for hoarding purposes outside of Switzerland has,
furthermore, been increasing recently. During the past
few days the Swiss fund has disposed of some 4,000,000
Swiss france of Napoleons and other gold coins for hoard-
ing by Far Easterners and by French people. Such gold
will definitely not be melted into bars soon and reappear
on the market. Therefore at present because of the fore-
going and other reasons the Swies bank has no need to send
gold to the United States nor to convert into dollars
any more of the gold held in New York under earmark.
Weber
Regraded Uclassified!
182
- 7 -
Weber said he hopes such early necessity can be avoided.
However he asked in this connection whether, in
case Switzerland avoided(?) a credit to Denmark for instance
where dollare are required we would prefer that gold be
sold on the London market for dollars, or whether we would
want them to sell gold on our market against dollars.
Confidentially, he said, the British had let the Swies
Bank know that it could get dollars in London against gold
if they wanted them. The Swiss franc is actually being
held etable against the dollar rather than against sterling
because of this fact. Weber thought that the United
States might prefer the operations on its own market.
He does not think such a case will arise in the near future,
and if the question did come up he would discuss it with
us.
The need of the Swies Bank to have a rather large
working balance of foreign exchange was stressed by Weber,
in view of the degree to which Switzerland is dependent
upon foreign markets for foodstuffs and for raw materials.
It 18 considered that the dollar is the safest and most
useful currency to hold. The Swiss stabilization fund,
it should be remembered, does not have an outlet like the
American and British funds by "sterilizing" gold through
Treasury bill operations. Thus the Swies have greater need
for insuring immediate liquidity.
I was
Regraded Uclassified
183
- 8 -
I was asked whether it would be too much for 40
percent of the Swiss dollar holdings in New York to be
invested in United States Treasury bills. I said that
if he put too large a part of his dollars into securities
he was obviously working against the principle of liquid-
ity which he had given as the reasons for converting the
gold of the Swise fund into dollars; he agreed that there
must be some percentage above which they should not go
and said if and when any new operations are considered
he will consult us.
In summary, Weber personally finds the general
lines of Secretary Morgenthau's memorandum acceptable
but we must await the decision of his colleagues. The
Swiss in practice however, have more dollars on the Ameri-
can market than would generally be accepted to constitute
"working balances" alone. They actually and confidentially
look upon these dollar reserves as their "war chest" and
do not want to diminish the amount.
I visited the American Legation at Bern, and re-
counted my visit to Bigelow.
On July 22 at noon I was received at the Bank of the
Netherlands in Amsterdam by President Trip and his direc-
tors (omission) and Beaufort. I explained the reason for
my
184
- 9 -
my visit showed the (?) them the memorandum quotation
[this part is badly garbled] from the telegram No. 339
of July 14 from the Department.
I was spoken to very frankly by Trip, and his colleagues
supported him on every point. The Dutch officials were
bitter over the manner in which the French again lowered
their currency without giving any advance information to
them about it. These officials were
pessimistic about the French outlook. Consequently they
see uncertainty continuing in the international monetary
sphere.
The fact that he had been consulted about the memor-
andum was appreciated by Trip, particularly my paying
him a visit, even though he had reservations concerning
it. Trip said that the United States and Great Britain,
the two important members in the club, could, as France
had, take decisions independently and then notify (omission).
However, he felt that before reaching such decisions the
interests of the minor members should be considered if
the idea of a coperative club is to be continued. Should
the larger powers conceive plans to fit only their own
situations and their own convenience, then the Dutch would
simply have to reserve freedom of action for themselves.
Trip began analyzing the memorandum by saying that
his fund and bank were certainly doing their part in ab-
sorbing
185
- 10 -
sorbing and holding gold, as is clearly indicated by
the statistics. However he does not consider that it
is fair to ask the monetary authorities of the minor
countries which adhered to the Tripartite Agreement to
refrain from transferring their gold into foreign curren-
cies 80 long as the two major powers are not willing to
give a definite commitment as to maintaining the price
of gold. If we were all back on the gold standard, Trip
said, it would be a different situation. He realizes
that under the present circumstances the American gold
price can be changed quickly without any assurance that
the Dutch would be warned or consulted.
I was reminded by Trip that as a result of his bank
listening to the Bank of England's entreaties to cooperate
through holding sterling in September, 1931, 30,000,000
florins were lost by the Dutch Central Bank. If before
the American currency crumbled the Dutch bank had not dis-
posed of its dollars, he said the lossee therefrom would
have been around 40,000,000 florins. He does not look
for any early change in the price of gold but at the same
time he sees how quickly situations change. Gold was in
demand a few months ago but since April both private and
official hoarders have been casting out gold. If in view
of
Regraded
186
- 11 -
of this situation his Government and his Bank officials
may have cause to doubt the future price of gold, Trip
1s not willing to subscribe to any undertaking which would
restrain him from spreading his risks. He added that
gold has not been sold by his Bank, and insisted that he
will not resort to camouflage. He was thinking, I know,
of the sale by the Swies central bank of gold to the BIS
to get dollars for one or more of the foreign credit
operations of the Swiss, the gold eventually going to
New York. He frankly told me that recently he has not
been converting as much of the dollars and sterling which
he acquires in holding the florin steady into gold as
he formerly had done. Most of the gold which Dutch hoarders
had has now been disposed of by them. The dollar weakness
at the same time results in Trip taking large amounts in
spite of his progressively lowering the price which he
pays therefor. Presumably the weakness of the dollar comes
largely from gold sales by the (7) outsiders who cannot
be controlled by the club.
Any foreign balances, Trip agrees, should in the main
be kept with the central bank of the country in which they
are. He said that he does keep some dollars with the Guaranty
Trust which acts for him in assembling dollars, but when
the amount thereof becomes considerable he passes them on to
the
Regraded
187
- 12 -
the Federal Reserve Bank.
Trip has reservations on the point "essentially
8.5 working balances" since he has no definition of this
phrase. Ordinarily he would understand working balances
to mean the minimum funds which should be kept free and
on hand to meet normal market requirements of the currency
in which they are held. In the actual circumstances de-
scribed above he does not pretend to be satisfied with
keeping BO small a sum in dollars. He frankly stated he
considers the dollars a deposit of reserves beyond a work-
ing fund. To this extent his operations are on the "gold
exchange" standard.
Therefore, if the American Treasury's message means
that such countries as the Netherlands will be obliged to
hold gold to the exclusion of all but "working balances"
of foreign exchange, Trip wonders if the American Govern-
ments invitation to invest funds in the United States may
not become more reserved. It is Trip's idea that B. central
bank has to earn some money; if it holds everything in gold
it deprives itself of the opportunity to purchase securities
which bear interest. He would like to buy American Treasury
bills if they are attractive to his bank. He has made such
purchases through the Federal Reserve Bank of New York BO
far and has met with no objections to such purchases. He
fears however that the message under reference may mean that
objections
Uclassified
188
- 13 -
objections may be imposed by the (?) and that should he
subsoribe to the memorandum he would then be precluded from
investing in such bills through the channel as yet unused
by him of private banks in the United States.
Those who are familiar with Trip's operations with
central banks in the BIS, in the "gold bloc" and now in
our club must know that he plays the game according to the
principles laid down. However, he is accustomed to par-
ticipating in the making of those rules. I am convinced,
knowing his honesty and his stubbornness, that if rules
were dictated which he could not conscientiously shoulder
he would drop out of a game. Trip expressed the hope that
we might all go ahead cooperating and consulting together
without attempting too much cadification of principles
while there is BO much shifting in the monetary field.
Trip promised that he would discuss the matter with
the Minister of Finance. I called at the Ministry of
at the Hague
Finance/on the afternoon of July 22, and left my card and
a copy of the memorandum with Mr. de Wilde, the assistant
of the new Minister. I was unable to keep the personal
appointment which Trip had arranged with the Minister for
me because of 8. train delay.
I went to the American Legation at The Hague and ex-
plained to Wilson and Cabot the mission I was on.
On July 23 I called on Governor Franck of the National
Bank
189
- 14 -
Bank of Belgium, at Brussels. I told him the purpose
of my visit and gave him a copy of the memorandum. His
Bank, he said, was still holding a large amount of gold,
but he remarked that recently the influx had diminished.
Several important Belgian corporations had, on the other
hand, taken some gold and foreign exchange from his bank
recently to pay dividends or loans abroad.
A. part of the memorandum 1s not directly pertinent
to the situation in Belgium. No Treasury bill investments
on the New York market have been made by the Belgian
National Bank. Only small balances in dollars are main-
tained by the Bank. This Bank is quite agreeable that as
at present the Federal Reserve Bank should hold such
balances. Franck would not be willing, however, to bind
himself to deal exclusively through the Bank of England
80 far as London was concerned. For generations big bank-
ing and commercial firms in Antwerp with which the central
bank has close dealings have had private correspondents
in London, and the Bank Bovernor would not think it reason-
able that he should be called upon to cease his business
with those London institutions, especially since no ob-
jection thereto is offered by the Bank of England.
The reserves of the Belgian National Bank are importantly
gold reserves. He is of the opinion that the world gold
price
Regraded
130
- 15 -
price has not yet been permanently settled. Franok
is opposed to any club member attempting to shift its
gold load onto the shoulders of another member. However,
he is not willing, 80 long &s there is no general return
to the gold standard and in particular since there is
no assured fixity of the gold price - with 8. 24 hour
basis for monetary policy - to undertake not to convert
part of his gold into foreign exchange and hold the latter
as reserves if it is indicated from circumstances and de-
velopments that the interests of the National Bank of
Belgium would be served thereby.
The Belgian Bank Governor expressed pleasure at having
the good working relations which he enjoys with the authori-
ties of the United States, and particularly the arrangements
with by which he purchases dollars for the Federal Reserve.
He wants continuation of the spirit of cordial cooperation
within the framework of the Tripartite Agreement, but he
believes that during the present disturbed period this can
be achieved better by permitting the club members as much
freedom of action judged and required by their own situa-
tions as possible, rather than by trying prematurely to
lay down rules which as yet have not been generally accepted
in practice or on paper, and which might make it difficult
for the lesser members in particular to adhere faith-
fully to their club undertakinge and obligations.
The
191
- 16 -
The Minister of Finance, de Man, was away on vaca-
tion but Franck promised to discuss the matter with him.
I went to the American Embassy at Brussels and ex-
plained my Belgian visit to Sussdorff and Miss Willis.
I had a talk too with Maurice Frere, but learned nothing
to add to my telegram No. 1014 of July 20. Last night
I got back to Paris.
END MESSAGE.
BULLITT.
EA:LWW
192
RB
GRAY
PARIS
Dated July 26, 1937
Rec'd 3:10 p. m.
Secretary of State
Washington.
1050, July 26, 5 P. m.
FROM COCHRAN.
Paris exchange market rather slow. French was able
to buy some sterling at from 133.05 to 132.97. Dollar
market thin with further weakness of this currency against
sterling following Japanese sales and recrudescence of
press story that United States is planning program for
international reciprocity on tax information. Paris
observers romark upon heavy load of dollars being placed
upon Dutch market while neither British nor American
control appears to be proventing fluctuntions. British
financial press is stressing advantage to Dutch of tying
florin pound. French rentos apparently had to be supported
officially to hold Friday's levels. Forward franc better.
l'oney very tight.
BULLITT
I/C
HPD
193
PARAPHRASE OF TELEGRAM RECEIVED
FROM: American Embassy, Paris, France
DATE: July 27, 1937, 11 a.m.
NO.: 1053
FROM COCHRAN.
At 10 o'clook this morning I called at the Bank of
France. Yesterday, I was told, the French control ex-
perienced a good day, gaining in foreign exchange about
160,000,000 francs. This gain for yesterday reverses the
trend of last week when it experienced heavy losses. At
the end of last week the balance of foreign exchange on
band in the fund was approximately two and three-quarter
billion francs. The control had purchased around 250,000
pounds by 10:30 this morning, and from appearances it
promised to be a quite favorable day.
Confidentially I was informed that last week the
British were annoyed when the French control permitted
the franc-sterling rate to drop. On Friday Cobbold of the
Bank of England came to Paris. Officials of the Bank of
France, supported by the French Ministry of Finance, explained
to the British that
END SECTION ONE.
BULLITT.
EA:LWW
184
PARAPHRASE OF SECTION TWO, telegram No. 1053 of
July 27 from Paris.
the French control was merely following the example set
by the British control. In other words, the French control
had not tried to stop a major capital movement but had
assumed the duty of trying to keep the currency from flue-
tuating sharply. The British asked the French whether
they had in mind any definite point at which they would
make a firm stand. The French then reminded the British
again that the Prime Minister of Great Britain had always
refused to set a definite point for sterling depreciation.
Officials of the Bank of France insist that French psy-
chology demands a fixed gold parity, but that at present
there must be no move to establish this until experience
has shown what the proper rate should be.
I found a better spirit at the Bank, following Four-
nier's replacing Labeyrie. Officials of the Bank think
that Bonnet is moving as boldly and correctly as could
be expected in the circumstances. Nevertheless, they
feel that there may be a tendency to overestimate con-
crete results that can be achieved through the program
which new legislation and decrees are now setting forth.
These officials realize that sharp difficulties may be
witnessed in the autumn, when the tourist season is ended
and when heavy treasury maturities fall due. The Bank
is particularly III worried about the very unfavorable
balance of trade. However, it is believed that from now
until
195
- 2 -
until October during the holiday period there may be
occasional fluctuations in the franc but no serious diffi-
culties. This would, however, depend upon the maintenance
of social order and political recourse.
END MESSAGE.
BULLITT.
EA:LWW
Regraded
for Secretary
196
JR
GRAY
Paris
Dated July 27, 1937
Rec'd 1:10 p.m.
Secretary of State,
Washington.
1057. July 27, 4 p.m.
FROM COCHRAY.
REference my 1053, July 27, 11 n.m. Trend of Paris
Exchange market turned shortly before noor and French
control become 2 stiler of sterling at 132.96 to 99.
Market 11/2 not big but observers think control lost Exchange
on balance for the day. Dollar errotic with Amsterdom
having to absorb fair quantity and apparently with some
important selling thereof from Sweden. French rentes about
EVER, End of month money very tight. Economy decrees
and definite plans for reorganization of French Reilways
still awaited.
BULLITT
HPD
Copy for Secretary
197
JR
GRAY
Paris
Dated July 28, 1937
Rec'd 1:05 p.m.
Secretary of State,
Vashington.
1064. July 28, 5 p.m.
PRO. COCHRAN.
French control had fairly successful day on a calm
market acquiring starling at from 132.89 to 86. There
has been a demand for spot francs for end of settlement
and forward rate is also better. Since Yokohama Specie
Bank in London offered no dollars today market has followed
its lead and dollar has strengthened.
Press article from Brussels in Today's AGENCE
RCONOMIGUE denies report from London that BElgium is
already feeling trade competition from France following
recent franc depreciation insisting that Belgian Economy
is in good shape while French outlook 18 still uncertain
and prices rising. Incidentally Prench authorities are
already weakening in their fight against Elevation of
prices and permitting certain EXCEPTIONS.
Bank of Italy representative tells me Italian hotels
and tourist resorts are already packed to capacity go there
is no worry over any pagsing advantage that French currency
depreciation
198
-2-
JR #1064, July 28, 5 p.m., from Paris.
depreciation may give local tourist trade.
European financial press lauds motives behind letter
of Belgian King but inclined to doubt practicability of
its suggestions.
BULLITT
HPD
Regraded Uclassified
FEDERAL RESERVE BANK
OF NEW YORK
169
FICE CORRESPONDENCE
DATE July 29, 1957.
CONFIDENTIAL FILES
SUBJECT: TELEPHONE CONVERSATION WITH
L. W, Knoke
BANK OF ENGLAND.
I called Mr. Bawker at 9:16 today.
Discussing the dollar market, he stated that the Japanese
had recently changed their technique and, at least temporarily,
stopped their aggressive selling of dollars, es a result of which
the dollar rate had improved a little from 4.98 1/8 to 4.97 s/s.
I inquired what his opinion was as to the future of the dollar market
and he replied that this primarily depended on two things: (1) Our
attitude towards hot money, and (2) The activity of the Japanese in
the dollar market. I explained that, according to our information
the Japanese were continuing their rather heavy shipments of gold
to San Francisco and, that being so, they would probably also continue
to be buyers of sterling as undoubtedly their sterling requirements
were large because of their substantial purchases in the sterling
area. Ordinarily, of course, Hawker continued, during the next few
months there should be a seasonal demand for dollars in connection
with the financing of our cotton and grain shipments. Their only
interest had been to keep arbitrageurs away and to avoid having a
completely disorderly market. Apart from that, they could 100 but very
little difference between 4.90 and 4.98 for the pound.
I inquired about the French situation and Hawker enswered
that fundementally it was unchanged. The appointment of Fournier as
Governor had been generally welcomed because he was a good usn with
strong views and a great deal of technical knowledge. It was due to
this appointment that the French method of operating in the exchange
market had recently bom changed, and decidedly for the good. The
FEDERAL RESERVE BANK
200
OF NEW YORK
FFICE CORRESPONDENCE
DATE July 29, 1937.
CONFIDENTIAL FILES
SUBJECT: TELEPHONE CONVERSATION WITH
L. W. Knoke
BANK OF ENGLAND
- 2 -
French Fund had gained some foreign exchange. #evertheless, he was
a little doubtful as to the future, particularly because the recent
improvement in the frane rate had very definitely been due to bear
covering and not to repatriation. He was not pessimistic, but cer-
tainly not optimistic either. Nobody was ready in France to bring his
soney back until he saw that a definite effort towards improving the
economic conditions of the country was made and proved mocessful.
Everything, as heretofore, depended upon the political situation in
France and some people seemed a bit doubtful as to whether the steps
taken by Bonnet would do the trick.
LWK:KNC
(COPY FOR MR. LOCHHEAD)
FEDERAL RESERVE BANK
OF NEW YORK
201
OFFICE CORRESPONDENCE
DATE July 29, 1937.
Regraded Uclassified
CONFIDENTIAL FILES
SUBJECT TELEPHONE CONVERSATION WITH
L. 1. Knoke
BANK OF FRANCE.
I called Mr. Cariguel at 11:10 today. Since the beginning
of the week, he said, it had been very good sailing for them, the
market having moved their way. As a result, he was satisfied "for
the time being*. Ris intake of foreign exchange had been *quite ap-
preciable* recently, running about £1 1/4 million & day. It looked
to him as though they would have a fairly quiet summer.
I made reference to this morning's newspaper reports to
the effect that the French Fund had entered the market as buyers of
future francs. Catiguel confirmed this but added that they had not
done such.
I inquired whether he could give no some information on
the following:
"Does there exist a convention between the Governor of the Bank
and the Minister of Finance, dated September 28, 1936, author-
1sing the Bank to convert into gold, notes presented in winimum
mounts of 5,000,000,000 france? If there was such a convention,
had the text been published and was it obtainable. Was the
5,000,000,000 franc provision still in fores despite paragraph 2,
Article 2 of the Monotary Decree of July 1, 1937, which says that
the conditions of convertibility into gold shall be fixed "by a
decree issued by the Comeil of Ministers'.'
Cariguel replied that he did not know of much a convention although
there eight be one. Finally, he premised he would look into the netter
and call no up tomorrow. I suggested that there was no such hurry about
it and that 18 would be emply mfficient if be - se his sarver at his
FEDERAL RESERVE BANK
OF NEW YORK
202
OFFICE CORRESPONDENCE
DATE July 29, 1957.
CONFIDENTIAL FILES
SUBJECT TELEPHONE CONVERSATION WITH
L. 1. KNOKE
BANK OF FRANCE.
- 2 -
convenience, sometime in the future.
I then requested that he let no have a copy of the Journal
Officiel of May 22, 1937, containing laws and statutes of the Banque
de France, arranged under topical headings. This, he said, he would
let me have with pleasure.
I made reference to his cable No. 200 of October 15, 1936,
reading *Kindly convert into gold which you will keep in our earmarked
gold account & all dollars which you buy for our account 8" and in-
quired whether these instructions were still in foree. I explained
that the reason for my asking was that recently, in one or two cases,
he had not, contrary to his usual practice, given us specific instrue-
tions to convert. Cariguel replied that he was sware of this and
that be had refrained from cabling because the emount involved was
so mall. At any rate, be confirmed that the instructions given in
his cable No. 200 were still is force.
I sentioned that I vas going away on my vacation tomorrow
night and suggested that be call Mr. Sproul if, or any time during
the next four works, he wanted to get in touch with us by telephone.
LUKIKMC
Regraded Uclassified
Copy for Secretary
203
MG
GRAY
Paris
Dated July 29, 1937.
Rec'd 1:32 p.m.
Secretary of State,
Washington.
1073, July 29, 4 p.m.
FROM COCHRAN
Franc sterling rate has varied from 132.83 to
132.905 with control acquiring a small amount of sterling
on balance after being obliged to mell at 90. French
rentes and socurities practically unchanged. Thore
appears to have been official Fronch control intervention
in forward franc each day this week, markot observers
reporting that a different bank was used each day,namely,
Banque Bolgo, Monday; Comptoir, Tuesday; Lagard, Wednesday
and Society General today.
Bank of France statoment as of July 22 showed no now
advances to the state. Covorago 48.90 versus 48.58.
Arbitration on bank clorks wages has boon sottled but
situation not yot satisfactory.
Feature of today's trading is further weakness of
bolga. Rumor continuos that bolga will have to follow
Fronch franc bocause of closo compotition botwoon the two
countries
Regraded Uclassified
204
MG
Pago 2 #1073 from Paris
countries. Salos of bolgas 30 far apparently originate
with Bolgians who are solling thoir currency short or
buying socurities.
Bolga has not boon holped by criticism of Promier
Van Zooland and of National Bank of Bolgium arising out
of Promior's post boing loft vacant in the bank after ho
quit the undor-govornorship for tho Cabinot. Governor
Franck yestorday gave at a spocial charcholders mooting
an explanation of the dolay and of tho allogod division
of Van Zooland's salary among the other directors after
he no longor recoived it.
BULLITT
KLP
WWC
Regraded Uclassified
205
JR
GRAY
Paris
Dated July 30, 1937
Rec'd 4:35 p.m.
Secretary of State,
Washington.
1085. July 30, 6 p.m.
FROM COCHRAN.
Paris exchange market fairly active today with French
control acquiring sterling at 132.80 and for a while
yielding a lesser amount at 85. Control apparently again
operating in forward francs through Comptoir. Paris
American Bank today purchased $900,000 for the control.
Rentes practically unchanged. While control is sequiring
a little foreign exchange and period of seesonal quiet is
here, basis sentiment of market 18 not good. Council of
Ministers met today to pass on Economy decrees which may be
issued tomorrow. Belga continues to weaken to gold export
point with respect to most countries. Swiss franc a little
more offered. Bank of France in confidentially approaching
individually those Paris banks which have opted repayment
on 1934 Treasury bonds which mature October 5 seeking their
agreement to accept in payment Treasury bills running
from perhaps one to one and ons-hulf years. These bonds
are mostly in the hands of banks and repayment was opted
for
Regraded Uclassified
206
-2-
JR #1085, July 30, 6 p.m., from Paris.
for approximately 6.4 billion francs thereof.
FRANKFURTER ZEITUNG attributes to Wall Street a rumor
that American Treasury is negotiating with Peru, Chile
and Colombia gold arrangements and credits similar to those
consummated.
BULLITT
SMS:RGC
03216028
- -
/
Regraded Uclassified
207
JR
GRAY
Paris
Dated July 31, 1937
Rec'd 10:12 a.m.
Secretary of State,
Washington.
1091. July 31, noon (SECTION ONE).
FROM COCHRAN.
The second geries of financial measures decided upon
by the Chautempn Government were embodied in Eleven decrees
published in the JOURNAL OFFICIEL of today's date.
The extent and substance of these decrees were Explained
to the press last evening by Bonnet in the following
terms:
"The measures just decided upon complete the plan to
restablish the financial situation. The first series of
measures had provided for C. sincere balance of the ordinary
budget.
The present decisions related to the special budget,.
and fixed Expenditures under this heading for 1938 at
11,100 francs for the military program, 3,590,000,000 for
public works, and 2,300,000,000 for the pension fund.
Thus, next year, the Government would have to (3ID
SUCTION O.B)
BULLITT
KLP
208
1v/
GRAY
Paris
Dated July 31, 1937
Rec'd 11:10 a.m.
Secretary of State
Washington
1091, July 31, noon. (section two)
borrow about sevent een billion francs for its own requirements
and one and ono half billions for advances which it would
have to make but which were reimbursable.
F rthermore during 1938 the railways, the City of Paris,
the Department of the Seine, Algeris and the colonies would
have to borrow about seven one-half billion francs.
This total was substantially 1698 than that claimed by
certain newspapers and also put forward in Parliament as
concerns requirements over and above budgetary revenue for
1938. It was even less than he had himself put for this
object during the Parliamontary debate on full financial
powers. If (see page nino of Embassy's despatch number 781
of July 2, 1937. )
Turning to the local budgots Bonnot explained that
measures had beon taken to provide additional resources and
that the authoritios had been requested to balance their
budgets.
Regraded Uclassified
209
lw 2, No. 1091, July 31, noon (soction two) from Paris
budgots. A committoe would be sot up to coordinate the
transport services of the City of Paris and the Department
of the Soino,
As concorns the railways, rato of intorost incroases
and roorganization would roduce operating doficit by about
six hundred million francs. Dotails of roorganization
still under consideration. (ond soction two).
BULLITT
HPD
Uclassified
210
JR
GRAY
Paris
Dated July 31, 1937
Rec'd 11 a.m.
Secretary of State,
Washington.
1091. July 31, noon ( SECTION THREE ).
In conclusion Bonnet stressed the effort made regarding
the special armament and public works budget for 1938.
Eleven and 2 half billions would bE applied to military
squipment which VICE one and B half billions more than 1937.
Furthermore, public works in hand would be carried out and
no undertaking would be halted.
Finally Bonket invited attention to the fact that the
program of the ChautEmps Government una b:ing carried out
methodically with the unanimous approval of the entire
Cabinet clong the lines envisaged by himself and by Chautemne
The ordinary budget WAS balanced and the special budget
brought down to a reasonable level. During the last few
days the fall in the forward rates of foreign currencies
the marked improvement in rentes, the resumption of
subscriptions to Treasury bonds indicated that the country
understood and was prepared to make the effort necessary to
restore the financial situation.
(ED 07 NESSAGE)
BULLITT
KLP
Regraded Uclassified
211
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE
July 30, 1937.
TO
The Secretary
FROM
Mr. Taylor
Shortly after I returned to Washington I called Marriner Eccles
and discussed with him what should be done in view of the present
situation which existed in Congress, and particularly in relation
to the Tax Bill, regarding the amendment to the Banking Act providing
special treatment for reserves against foreign deposits. In turn,
we had a long discussion with Roswell Magill in which the present
status and possibilities of altering the treatment afforded aliens
were covered in detail. It was agreed that anything representing a
comprehensive treatment covering capital gains was impossible at
this Session and would merely interfere with the possibilities of
treating loopholes.
It was further established that the Canadian Tax Treaty was
being held up pending a discussion of the withholding rate in the
proposed Tax Bill. A ratification of the Canadian Treaty has taken
on new importance in connection with the negotiation of the British
Trade Agreement and in addition affords a possible model for the
exchange of information between governments as to the holdings of the
respective citizens of these countries. Therefore, the position of
the Treasury in agreement with the State Department and Mr. Eccles
is that the Canadian Treaty should be ratified if possible at this
Regraded
212
2 -
Session and Senator Harrison has been so notified by Mr. Magill,
and in turn, this morning by Mr. Kent on my instruction.
On Monday of this week I again discussed the situation with
Mr. Eccles and reminded him that he and I had the duty to inform
the President of the existing situation and to ask him if under the
circumstances he still wished to proceed with the Banking amendments
and whatever Taxation Program was possible to affect the movement
of funds to this market. He eventually was successful in making a
brief appointment with the President yesterday. The previous evening
Magill, Eccles and I had dined together and again reviewed the
situation. Eccles on that evening took the position that he would
support the Banking legislation if the withholding rate on foreign
individuals was increased to say 25%, or to the equivalent of the
British rate, and if the existing discrepancies favoring foreign
corporations were eliminated. The following morning I informed Feis
that this was apparently the schedule, depending, of course, on
Congress' actions. Feis objected violently and said that the State
Department could not agree to a flat increase of the withholding
rate on individuals on account of the injustice which it would
impose on small holders of American securities, and that he
officially requested a rediscussion of the situation before any-
thing was suggested to the Joint Committee on tax evasion.
At 12:30 P. M., Mr. Eccles and I called to fill our appointment
with the President and it was apparent that a hitch had developed
and we were originally asked to put off the appointment until the
schedule cleared up. After some discussion with McIntyre during
Regraded Uclassified
213
- 3 -
which Mr. Sccles explained the fact that our request for an appoint-
ment was to receive instructions as to the President's wishes in
view of the new situation, we saw the President for a few minutes,
McIntyre having made it plain that the State Department had interposed
an objection. After a brief outline of the existing circumstances,
the President stated that he wished to proceed with the Banking Bill
and a moderate gesture in the form of an increase in the withholding
rate at this Session, and that the following action should be taken:
That Mr. Sccles and I should arrange with Messrs. Harrison and
Doughton to appear before the Joint Committee and to describe the
relationship between the loophole taxation and the taxation of aliens
and the proposed banking amendment; that if the Committee agreed
arrangements should then be made with Magner and Steagall to introduce
From the floor the Banking Bill as a companion to the tax loophole
bill when the tax bill was being voted on; that Harrison and Doughton
should indicate that they were familiar with the 8111 and are in favor
of it as a companion piece of legislation. At this point McIntyre
indicated that the State Department had objections to the withholding
rate. The President then instructed Eccles and myself to rediscuss
the situation with the State Department in order to explain to them
that the flow of funds and gold into this country represented a special
situation with which the President wished to deal at this Session.
I expressed the opinion that it would be much better to obtain
the general agreement of the State Department, but in case we were
not able to obtain it, then we would report back the situation. We
then arranged an appointment with Secretary Hull and Dr. Fais for
Regraded Uclassified
214
- 4 -
three o'clock for Magill, Eccles and myself. This meeting lasted
until approximately five o'clock. The point of view of the State
Department and of Mr. Eccles was fully developed. Mr. Magill had to
catch & train before the conversation concluded. The Treasury point
of view was expressed as follows: That the Treasury would cooperate
in every way and ondeavor to get the Canadian Treaty ratified at this
Session; that the technique of exchange of information was probably
useful and could act as an additional deterrent to capital coming to
this market; that the banking legislation was in itself desirable and
that a gesture in the form of an alteration of the withholding rate
was also desirable, but that inasmuch as the question of capital gains,
etc., would not be considered at this Session, that the increase in
the withholding rate in itself was not particularly important other
than an indication of the fact that we had not forgotten the subject.
The conference closed with the Secretary of State stating that
apparently there was disagreement between the State Department and
the financial people as to the significance and effect of an increase
in the withholding rate, regardless of the amount, and that he wished
to disclaim any responsibility for any difficulties which might develop
in connection with our negotiations with Great Britain and other
countries if any increases were enacted, but that naturally if the
President wished to proceed after this situation had been known to
him that he would make no further attempts to block the matter. Feis
had expressed an even stronger point of view, but had left the meeting
before its conclusion.
215
in I 1
After the meeting I walked back with Kent and Eccles and we agreed
that Kent should inform Senator Harrison that we were in favor of the
Canadian Treaty and that any rates which would be proposed would not
be at such great variance with the Treaty rates as to emphasize the
discrimination in favor of Canadian citizens; and that I would explore
the situation further with Feis before we reported back to the
President, but that meanwhile Eccles should attempt to make an
appointment with McIntyre so that we could report the meeting in the
State Department and ask for further instructions.
Last evening I had a long conversation with Feis and he tentatively
agreed to ratification of the Canadian Treaty and an increase in the
individual withholding rate to say 15% and the removal of the
discrepancies in the foreign corporation provisions. This morning
I told Kent of this development, but that he should not tell Senator
Harrison of this exact development until I had rediscussed it with
Socles and the White House. I immediately called Eccles and he stated
in general that unless the withholding rate were increased to say
25% he would not feel that he could support the banking amendment as
a companion measure, and that the banking measure would not be effective
if only a moderate increase in the withholding rate on foreign
individuals were passed at this Session, and that in view of all
the circumstances it was probably better to let the matter go over
until the next Session. I then suggested that he redieouss the
situation with his board and staff inasmuch as circumstances had
changed materially since his board had taken the position that it
216
- 6 -
could only support the banking legislation if effective tax
legislation, particularly subjecting foreigners to capital gains tax,
could be passed at this Session: that whereas I realized his own
position that I would appreciate it if he reviewed the situation before
W9 again discussed the matter with McIntyre or the President. He said
that he would do 50 and later informed me that we had a meeting with
McIntyre for 3:45 this afternoon.
While I was dictating this memorandum Kent called me from the
Capitol to say that whereas Harrison himself was willing to recommend
that the Canadian Treaty be passed that members of the Joint Committee
would not in his opinion do 30 until the question of the new rates had
been cleared up; that the Committee had adjourned until 9:30 Tuesday
morning, and that it would be very desirable to have the entire program
ready at that time.
After the cabinet meeting I met Ecoles in McIntyre's office and
we reported the situation to him briefly. He then went in to see the
President and on his return asked me to write a memorandum to the
President outlining the situation and the position of the Treasury,
State Department and Federal Reserve Board, and to get it in his hands
in time for the President to be able to read it over the week-end.
Marriner Eccles said that this was agreeable to him. That evening
I wrote the memorandum, 8 copy of which I attach with the exception
of the section described as the position of the State Department. I
called Feis that evening to inform him of the situation and he stated
that he felt the Secretary himself should express the opinion of the
217
- 7 -
State Department and that he would arrange to have me meet the
Secretary the following morning in time to incorporate the State
Department's views.
I completed the memorandum the following morning and read the
section outlining the Federal Reserve Board's position to Marrinor
Ecoles on the telephone. I also reviewed for him the Treasury's
position and that of the State Department. He agreed to the state-
ment which I incorporated but decided that he wished to send an
amplifying memorandum to the President. I told him that that was
entirely agreeable to me. He later read me the statement and for-
warded me a copy of it on Monday morning. I attach a copy of his
memorandum and the signed copies of the position of the State Depart-
ment. At approximately 12:30 I was able to send the completed memo-
randum to the mail plane which was leaving at 1 o'clock to deliver
important mail to the President on the Potomac.
On Monday we heard nothing from the White House during the morning,
and inasmuch as it was necessary to state the Treasury's recommendations
to the Joint Committee at 9:30 on Tuesday morning, I finally called
McIntyre at about 4:30 and asked him if he had any instructions. He
asked me to hold the wire and on his return said that the President
had said that inasmuch as we were apparently in almost complete
agreement that we should proceed with the program. I told McIntyre
that I did not feel that this was exactly the case as he would find
if be would look up the memorandum of which he had a copy. He said
he would do so and that he would call me back later. At about five
218
- 8 -
minutes of 6 o'clock he called me and told me that the President
did not feel that he could take the matter up personally at this
late stage and asked me to obtain an agreement between the Federal
Reserve Board and the State Department. I told him that on account
of the time element, I did not believe that this was possible and
that I would recommend to Magill on his return in the morning, that
the Treasury should attempt to obtain the ratification of the Canadian
Agreement and as much of the program which I had indicated that the
Treasury might be prepared to recommend as appeared practicable, but
that we would make no effort to force the issue or do anything which
would interfere with obtaining domestic loophole legislation at this
Session, or with the ratification of the Tax Treaty. He then told me
that if he were doing it hinself he would approach the question in
exactly this way. I called Marriner Ecoles and described the situation
to him and he was agreeable to this approach but emphasized the
desirability of a statement being made that the Administration had
certainly not forgotten the question of "hot money" and the taxation
of foreigners, but that a more comprehensive program would be
embodied on general recommendations to be mde in the fall.
I finally called Feis about a. quarter of eleven last night and
told him the latest developments. This morning I brought Magill
up to date as much as possible. He then called me from the Capitol
shortly before one o'clock and told me that the Committee was
apparently willing to recommend the so-called Vinson proposal which
maintained the existing withholding rate of 10% on individuals but
required all non-resident aliens with income of say $21,000 to file
213
- 9 -
returns and to be subjected to taxation on their American income
at the same rates as imposed on Americans, but that this recommendation
was contingent on the agreement of the State Department, and also that
the conditions and treatment represented by this recommendation and
the provisions of the Canadian Tax Agreement should be reconciled and
explained before either matter could be acted on by the Committee.
I called Feis and he informed me that he would have a written
memorandum describing the position of the State Department on these
two questions in my hands not later than five o'clock so that when
Magill presented the matter again tomorrow morning, the position of
the State Department would be a matter of record.
well.
1.
220
DEPARTMENT OF STATE
ADVISER ON
INTERNATIONAL ECONOMIC AFFAIRS
July 31, 1937.
A substantial increase in the present withholding tax
on the investments of non-resident aliens would fall most
directly on the investments of the neople of those countries
with whom we have been developing the most close relation-
ships in the economic and monetary sphere, and with whom
we are most closely cooperative - e.g., Great Britain,
Canada, France, Switzerland, Holland and Belgium. It would
affect the interests of many thousands of investors in
these countries whose individual holdings are small and of
an investment character.
Consequently
(1) It might well affect adversely the future of the
tripartite monetary agreement. This is not only because
of the potential complaints by those affected, not only
because such action would be taken as a sign of the inten-
tion to pursue an unnecessarily drastic policy, but also
because it would be deemed as new interference with ordi-
nary capital movements. In short, it would weaken the
sense on the part of other countries of obligation toward
the tripartite agreement.
(2) It might adversely affect the attempts to extend
the
Regr aded Uclassified
- 2
226
the trade agreements program - particularly current nego-
tiations with the United Kingdom,
(3) It would be used to justify action on the part of
other countries to levy unjustly heavy taxation against
American investments abroad which totaled many billions.
The position of this investment in many countries 1s already
much jeopardized.
(4) It would make much less or completely end the
possibilities of getting cooperation with the treasuries
of other countries in dealing with the problem of tax
evasion, both by Americans and by non-resident aliens.
On the other hand, drastic action, affecting adversely
important and desirable American interests, is not now neo-
essary to cope with the problems of foreign deposits and
essentially speculative foreign operations in this country.
Such problems can be handled by more direct means, which
have the advantage of avoiding highly undesirable collateral
Suchastion
effects.
$ is not necessary to make reasonably effective
banking legislation increasing reserve requirements on
foreign deposits.
A very small increase in the withholding rate would
indicate the concern of the American Government. The 10
percent rate (which 1s in addition to other American taxes
applied at the source) I believe already corresponds to
an income of substantial size.
Weighing these considerations, only action of & very
moderate character would be justified; and action of another
character
Regraded Uclassified
222
- 3 -
character might, through its direct and indirect effects,
greatly impair the whole effort of international economic
and monetary cooperation in which we have been engaged.
Lastly, the line of policy indicated by our dis-
cussions with the Canadians would appear to offer a much
more satisfactory solution in all respects.
EA: HF: LWW
Uclassified
2.
223
DEPARTMENT OF STATE
ADVISER ON
INTERNATIONAL ECONOMIC AFFAIRS
July 31, 1937.
The position in regard to the tax treaty with Canada
is as follows:
The tax treaty with Canada would lower the with-
holding rate from the present 10 percent to 5 percent.
The Canadian Government has now assured us officially
that immediately upon the passage of the treaty it would be
willing to enter into continuous discussion with the Ameri-
can Government designed to work out the revision and sup-
plementation of the treaty along the following lines:
(a) The fullest possible cooperation between the two
treasuries designed to check evasion, not only by non-
resident aliens, but by Americans using private holding
companies, etc., on a reciprocal basis.
(b) The revision of the rate whereby the low rate would
be retained for the many thousands of Canadian investors
who receive a small sum from American investors, and the
application of the same tax schedules to the larger Canadian
income receivers as though they were Americans - this to
be made effective through Treasury cooperation.
The benefits of such an arrangement would be many:
(1) Public opinion would be favorable. The thousands
of small investors would pay & suitable rate, while if they
were
Regraded Uclassified
224
- 2 -
were taxed very heavily they would have a sense of injus-
tice. On the other hand, the large investors would pay the
American scale.
(2) Government revenues would be increased by the
checking of evasion.
(3) A basis will be created by which we could treat
with other governments, thereby ending the risks of dis-
crimination and controversy in this field.
The opportunity exists to work along the general lines
of the Canadian tax treaty to build up with other countries
a series of tax agreements which would supplement the
tripartite monetary agreement and our trade program, and
at the same time probably produce more revenue.
The contrary course - an abrupt and substantial in-
crease in the withholding tax - would have opposite con-
sequences.
Greeshee
EA: HF: LWW
Regraded Uclassified
BOARD OF GOVERNORS
225
IT = @@@@@@@@@@ NEARAS THE /
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON
OFFICE OF THE CHAIRMAN
July 31, 1937.
Dear Wayne:
Attached is a copy of the memo-
randum for the President which I read to you
over the telephone.
Sincerely yours,
Honorable Wayne Taylor,
Treasury Department,
Washington, D. C.
Regraded Uclassified
226
July 31, 1957.
MEMORANDUM:
TO
-
The President
FROM
-
Chairman Eccles
The problem of foreign capital inflow, or hot money, as you
have aptly called it, has been under consideration for more than
nine months. That the problem was serious and that something
should be done about it was publicly recognized last fall when you
appointed a committee to study the matter and make recommendations.
The sembers of the Board and I have felt for several months
that the situation could and should be dealt with promptly both by
increasing substantially the withholding tax as well as by imposing
a capital gains tax on equity securities, and that if these steps
were taken to discourage capital from coming here, and foreign de-
posits already here from being invested, then it would be in order
to supplement the tax legislation by a bill giving the Reserve
Board authority to raise reserve requirements on foreign deposits.
However, the Board feels, and I concur, that legislation increasing
reserve requirements on foreign deposits would be entirely illogi-
cal unless coupled with an effective tax program.
During the past year more than four billions of gold have
been sterilized by the actions of the Treasury and of the Reserve
Regraded Uclassified
227
- 2 -
Board. The Treasury has been criticised for increasing the public
debt to buy gold and the Reserve Board has DOW exhausted its
authority under the law to absorb gold by increasing reserve re-
quirements.
While these actions dealt with the effects, nothing has been
done to discourage the inflow up to now, larguly because of the
opposition of the State Department, which has been ready and
willing at all times to discuss the problem, but has felt all
along that the suggested methods of dealing with it by taxation
would interfere with the trade agreements program, including the
pending negotiations with the British and the retification of the
Canadian treaty.
In view of this, and considering the present situation in
Congress, which would make it difficult to obtain adequate legis-
lation now, and the fact that the gold movement has abated, at
least temporarily, I believe that it would be preferable to defer
action altogether until Congress meets again in January, and then
if the situation requires it, to adopt & comprehensive tax pro-
gram as well as the proposed banking legislation.
If the Treasury considers it desirable to enact the tax
measures now proposed, of course, I would not object. However, I
do not believe that this program is adequate to have an important
effect on foreign capital inflow and investment in this country,
particularly as it affects the stock market, and that it will not
be considered as such more than & gesture after all that has been
said upon this subject.
Regraded Uclassified
228
July 31, 1937.
Memorandum for
THE PRESIDENT
In compliance with the request transmitted to ne yesterday
by Secretary McIntyre I shall summarize briefly the situation
affecting the tax loophole legislation, the taxation of non-
resident aliens and the "companion" legislation which would
grant to the Federal Reserve Board power to increase reserve
requirements on deposit balances maintained in this country by
non-resident aliens.
I shall also summarize the positions of the Treasury
Department, the Secretary of State and the Federal Reserve Board,
The hearings of the Joint Committee on Tax Avoidance have
been concluded except for a final meeting to be held on Tuesday,
August 3rd, at 9:30 A. M. At this meeting the Committee's Report
will be approved and the only unfinished business, namely, the
changes to be recommended in the tax treatment of non-resident
aliens, will be agreed upon. The Committee has been informed by
representatives of the Treasury that the changes to be recommended
by the Treasury at this Session will be simple and that the rate
of withholding and other provisions will neither represent too
Regraded Uclassified
- 2 -
223
great a variance from the existing 10% withholding rate for
individuals nor from the provisions of the Canadian tax tresty,
in particular the 5% withholding rate for individuals. Senate
action on the Canadian tax treaty has been withheld pending an
examination of the tax avoidance situation. The Treasury believes
that the exchange of information and the close cooperation between
the tax authorities of the countries envisaged by the Canadian
Treaty itself and the suggested supplemental working agreements
offer a useful method of dealing with alien capital which comes to
this country in order to hide from the tax authorities, and that
when, as and if similar reciprocal arrangements can be negotiated with
other countries the movement of fugitive capital of this character
to this country will be discouraged. The Treasury believes that
every effort should be made to obtain ratification of the Canadian
Tax Treaty at this Session.
The Treasury is confident that a reasonably satisfactory
though limited tax loophole bill can be passed at this Session,
but that there is little chance for basic revision of the legisla-
tion dealing with the taxation of non-resident aliens. In fact an
exhaustive study of this subject by the Joint Committee on Tax
Avoidance or the full Ways and Means and Senate Finance Committee
might well militate against the success of the domestic tax loophole
legislation.
The Treasury believes that it should be possible to obtain
ratification of the Canadian Tax Treaty, and a moderate increase in
the withholding rate for individuals from 10% to 15%.
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The Treasury is also prepared to recommend to the Joint
Committee an increase in the rate of tax on non-resident foreign
corporations on fixed and determinable income from United States
sources from the present rate of 10 per cent on dividends and
15 per cent on interest, rents, royalties, annuities, compensation,
etc., to a flat rate of 22½ per cent. These taxes are collected
by withholding at the source. This rate would be the same as
the normal tax rate under existing law on income from United
States sources of foreign corporations carrying on & trade or
business or having an office or place of business in this
country. In order to prevent attempts by foreign corporations
to qualify as resident corporations and thereby obtain the
benefit of the 85 per cent credit for inter-corporate dividends
merely by establishing an office in this country, it will be
necessary to include in the above recommendation an amendment
to limit the classification of resident foreign corporations to
those actually engaged in trade or business here.
The Treasury is also prepared to suggest the elimination
of the provision of existing law which exempts from taxation
interest paid on foreign bank deposits.
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While the Treasury does not feel that these proposals deal
with the situation adequately, it is prepared to recommend them
to the Joint Committee with the reservation that more comprehensive
treatment will be embodied in the general tax revisions which will
be presented to the next Session. The present proposals obviously
do not differentiate between large and small alien holders of
American investments, nor do they take into consideration the
existing exemption of non-resident aliens from capital gains taxes,
but they will doubtless serve as a significant gesture to non-
resident aliens, indicating that this country is not a permanent
happy hunting ground for itinorant international speculators.
I shall not. attempt to discuss the details of the proposed
"companion" legislation which would grant to the Federal Reserve
Board power to increase reserve requirements on deposit balances
maintained in this country by non-resident aliens. The Treasury
believes that this legislation is desirable in itself and represents
a definite forward step in the international as well as the iomestic
credit and monetary fields. It believes that the principle of treating
foreign balances on what might be described as a segregated basis
should be established as soon as possible.
While the Treasury clearly recognizes the relationship between
foreign balances and foreign investments, it is prepared to recommend
the banking legislation on its own merits whenever the opportunity is
offered.
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On June 24, 1937, the Federal Reserve Board adopted the
following confidential resolution:
In view of the fact that the gold inflow in recent months
has been exceptionally large and may continue, and in view of the
further fact that the inactive gold account of the Treasury is now
in excess of a billion dollars and the public debt has increased
accordingly, the Board feels that the situation impels it to favor
legislation granting the Board additional power to absorb excess
reserves resulting from additions to the stock of gold by increas-
ing reserve requirements on deposit balances maintained in this
country by non-resident aliens.
The Board is of the opinion that the injurious effects
upon the domestic economy that would result from an unchecked in-
flow of gold would be such that the Board and the Treasury should
seek a solution of the aspects of the problem which affect the
domestic situation.
The Board fully realizes, however, the difficulty of
accomplishing the desired ends and considers it essential if the
Board is to employ effectively this additional power that:
(a) The Treasury maintain in its inactive
gold account approximately the present amount;
and
(b) Effective tax legislation be enacted
to discourage foreign investment in American
securities either through the inflow of new
capital or through the use of balances already
in this country.
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233
Chairman Eccles and the Federal Reserve Board have
reviewed all the factors involved in the existing tax situation
and the possibilities for comprehensive legislation at this
Session. Chairman Eccles while not opposing the tax recommendations
which the Treasury is prepared to make, believes that they will not
be of a character to meet the requirements of the Board as outlined
in the final paragraph of the confidential resolution and there-
fore he is opposed to the introduction of the proposed "companion"
banking legislation at this Session. Chairman Eccles feels that
the relation between the tax treatment of alien investors and
the treatment of foreign balances is so close that it is undesirable
to alter the treatment of foreign balances if comprehensive and
effective tax legislation cannot be enacted simultaneously.
The position of the Secretary of State is as follows:
A substantial increase in the present withholding tax on
the investments of non-resident aliens would fall most directly
on the investments of the people of those countries with whom we
have been developing the most close relationships in the economic
and monetary sphere, and with whom we are most closely cooperative -
e.g., Great Britsin, Canada, France, Switzerland, Holland and Belgium.
It would affect the interests of many thousands of investors in these
countries whose individual holdings are small and of an investment
character.
Consequently
(1) It might well affect adversely the future of the
tripartite monetary agreement. This is not only because of the
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potential complaints by those affected, not only because such
action would be taken as a sign of the intention to pursue an
unnecessarily drastic policy, but also because it would be deemed
as new interference with ordinary capital movements. In short,
it would weaken the sense on the part of other countries of
obligation toward the tripartite agreement.
(2) It might adversely affect the attempts to extend the
trade agreements program - - particularly current negotiations with
the United Kingdom.
(3) It would be used to justify action on the part of
other countries to levy unjustly heavy taxation against American
investments abroad which totaled many billions. The position of
this investment in many countries is already much jeopardized.
(4) It would make much less or completely and the
possibilities of getting cooperation with the treasuries of
other countries in dealing with the problem of tax evasion, both
by Americans and by non-resident aliens.
On the other hand, drastic action, effecting adversely
important and desirable American interests, is not now necessary
to cope with the problems of foreign deposits and essentially
speculative foreign operations in this country. Such problems
can be handled by more direct means, which have the advantage of
avoiding highly undesirable collateral effects. Such action is
not necessary to make reasonably effective banking legislation
increasing reserve requirements on foreign deposits.
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A very small increase in the withholding rate would in-
dicate the concern of the American Government. The 10 per cent
rate (which is in addition to other American taxes applied at the
source) I believe already corresponds to an income of substantial
size.
Weighing these considerations, only action of a very
moderate character would be justified; and action of another
character might, through ito direct and indirect effects, greatly
impair the whole effort of international economic and monetary
cooperation in which we have been engaged.
The position in regard to the tax treaty with Canada is as
follows:
The tax treaty with Canada would lower the withholding rate
from the present 10 per cent to 5 per cent.
The Canadian Government has now assured us officially that
immediately upon the passage of the treaty it would be willing to
enter into continuous discussion with the American Government
designed to work out the revision and supplementation of the treaty
along the following lines:
(a) The fullest possible cooperation between the two
treasuries designed to check evasion, not only by non-resident
aliens, but by Americans using private holding companies, stc.,
on a reciprocal basis.
(b) The revision of the rate whereby the low rate would
be retained for the many thousands of Canadian investors who
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receive a small sum from American investments, and the application
of the same tax schedules to the larger Canadian income receivers
23 though they were Americans - this to be made effective through
Treasury cooperation.
The benefits of such an arragnement would be many:
(1) Public opinion would be favorable. The thousands of
small investors would pay of suitable rate, while if they were
taxed very heavily they would have a sense of injustice. On the
other hand, the large investors would pay the American scals.
(2) Government revenues would be increased by the checking
of evasion.
(3) A basis will be created by which WO could treat with
other governments, thereby ending the risks of discrimination and
controversy in this field.
The opportunity exists to work along the general lines of
the Canadian tax treaty to build up with other countries S series
of tax agreements which would supplement the tripartite monetery
agreement and our trade program, and at the same time probably
produce more revenue.
The contrary course - an abrupt and substantial increase in
the withholding tax - would have opposite consequences.
Faithfully yours,
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