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Volume 122, May 1 – May 3, 1938
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Volume 122, May 1 – May 3, 1938
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Henry Morgenthau, Jr. Papers
Diaries of Henry Morgenthau, Jr.
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DIARY
Book 122
May 1 - May 3, 1938
Regraded Uclassified
B * #
Book Page
Bank Examinations
Memorandum concerning majority agreement on classification
of loans (slow, doubtful, and loss) - 5/2/38
CXXII
1
Conference; present: representatives of Treasury, Federal
Reserve Board, Federal Deposit Insurance Corporation,
and Comptroller of Currency's office - 5/3/38
247
a) Slow column considered
b) Appraisal of bonds considered
253
c) Profits from certain securities to be impounded
in special account where they are unavailable
for dividends, considered
255
Business Conditions
Haas resume - 5/2/38
12
a) Charts
18
o I #
Commodity Credit Corporation
See Financing, Government
- F -
Federal Housing Administration
See Housing
Financing, Government
Commodity Credit Corporation: Final subscription and
allotment figures - - 5/2/38
8
France
See Stabilization
- G -
Germany
For attitude toward France, see Stabilization: France
- H -
Housing
Federal Housing Administration resume of activity - -
5/3/38
242
- N -
New York City
HMJr informs Attorney General stipulation with regard
to sale of old building is satisfactory to Treasury - -
5/3/38
241
Regraded Uclassified
- P -
Book
Page
Poland
White memorandum on economic situation, political
situation, et cetera - 5/3/38
CXXII
270
a) M.p.
294
- S -
Self-Help
Woodrum 'phones HMJr concerning allocations under
Works Progress Administration - 5/3/38
164
Stabilization
France:
Daladier-Bonnet pleasure at London visit - 5/2/38
25
Choice between exchange control and retreat of
currency communicated to Cochran for information
of United States Treasury by Marchandeau - 5/2/38
29
Conference; present: HMJr, Taylor, White, and Lochhead -
5/2/38
33
a) HMJr describes telephone conversation with
Kennedy
1) HMJr tells Kennedy he does not wish "to be
used as catspaw for British"
b) White memorandum on French situation and
United States attitude toward further depreciation
of franc
36
c) German attitude toward France as a country of no
further importance explained by Halifax to
Kennedy and thus to HMJr
42
d) Conference to be held at HMJr's home at 8:30 P.M.;
HMJr asks State Department to send Feis and
Pierrepont Moffat (Chief, European Division)
45
e) Telephone conversation with Welles
49
f) Conversation with Bewley
54
g) Conversation with Cochran
56
1) Cochran told to tell Marchandeau HMJr shocked
at lack of consultation 8.8 arranged for by
Tripartite Agreement
FDR's message of agreement in position taken by HMJr -
5/2/38
68
a) For HMJr's messages to FDR, see pages 105,198
Conference at HMJr's home at 8:30 P.M.; present: HMJr,
Taylor, Lochhead, White, Feis, and Bewley - 5/2/38
73
a) Cable to Cochran concerning conference with
Bewley and suggestion to British that United
States take no action until after consultation
and examination of French decree - Midnight, 5/2/38.
111
Butterworth cables HMJr of conference with Sir Frederick
Phillips after French Ambassador had sought interview
with Chancellor of Exchequer to present Aide Memoire -
5/2/38
112
Regraded Uclassified
- S - (Continued)
Book Page
Stabilisation: France (Continued)
Conference; present: HMJr, Taylor, Oliphant, Gaston,
Lochhead, White, Harrison, and Knoke - 5/2/38
CXXII 117
a) Conversation with Cochran
122
b) Cable from Cochran after conversation with
Rueff at Ministry of Finance
159
Conference with French Ambassador; present: HMJr, Feis,
Taylor, and Lochhead - 5/3/38
168
Cable from American Embassy, Paris, explaining attitude
of various French parties toward exchange control -
5/3/38
185
Butterworth transmits main points of Kennedy's talks
with Chancellor of Exchequer and Prime Minister -
5/3/38
188
a) British Government opposed to imposition of
exchange control by France
b) British as annoyed as United States about
French action; British will do nothing unless
United States agrees
Conference; present: HMJr, Taylor, Lochhead, White,
Gaston, Oliphant, Harrison, and Knoke - 3:30 P.M., 5/3/38
192
Newspaper representatives ask HMJr for conference - 5/3/38
200
Cochran told to inform French Treasury United States will
continue to do business under Tripartite Agreement on
Wednesday, May 4th - 5/3/38
201
Conference with French Ambassador and Financial Attache -
4 P.M., 5/3/38
206
a) HMJr explains United States will need another
twenty-four hours
Bewley informed United States needs another twenty-four
hours - 5/3/38
216
Butterworth also informed United States needs snother
twenty-four hours - 5/3/38
223
a) Butterworth reports on reaction in London press
236
French decrees reported by Cochran - 5/3/38
230
- T -
Taylor, Myron C.
Appointed by FDR to Intergovernmental Commission on
Refugees - 5/1/38
51
Regraded Uclassified
The majority agreement with respect to the classification
of loans is that the three columns in the examination report
now known as slow, doubtful, and loss will be continued.
Their present form, and that of the instructions to examiners
8,2 to the type of loan to be included in each of the three
columns, will remain the same as at present. It 1s proposed
to label these three columns by the roman numerals I, II and
III. At the top of each page upon which this tabulation
occurs, there will appear the roman numeral I and following
it a definition of the type of loan which is included in the
column; there will also appear roman numeral II followed by
the single word "doubtful"; and there will also appear the
roman numeral III followed by the single word "loss".
Where there is of recapitulation of the columns now known
as slow, doubtful and loss, the same device will be used, 1.0.,
the use of the three roman numerals as symbols with the accom-
panying explanation of what is included under that. As now,
on the recapitulation page only the totals in columns II and
III will be included in figuring the net sound capital of
banks.
(It should be noted that this agreement would
result in the complete elimination of the
word "slow" from losn classifications.)
May 2, 1938
Regraded Uclassified
The minority position with respect to the classi-
fication of loans in the examination report is that
the column now known as "slow" should be eliminated
from the pages upon which it now appears and that pro-
vision be made elsewhere in the report, under a
heading "Loans Listed for Information or Comment", or
other suitable heading, for listing, with appropriate
comment, not totaled and not included in any recapitu-
lation, such loans as the examiner feels should be set
out for the information of the directors and proper
officers of the bank, with the clear understanding that
such loans are not being classified as doubtful or loss
and are not necessarily to be regarded as criticised
assets.
May 2, 1938
Regraded Uclassified
April 28, 1938
In 1934 with total loans in 5,275 national banks of
$7,740,596,000, national bank examiners classified 27 per
cent in the slow column.
In the last half of 1937 with total loans in 5,267
national banks of $8,933,216,400, national bank examiners
classified only 9.81 per cent in the slow column.
Year
Slow
Doubtful
Loss
1934
27%
4%
2.9%
1935
16%
2%
.8%
First half of 1937
10.68%
1.14%
.65%
Last half of 1937
9.81%
1.06%
.49
Regraded Uclassified
The majority agreement with respect to the appraisal
of bonds is
1. That depreciation in stock and defaulted
bonds be classified as loss and that
securities in these groups (III and IV)
be listed and priced in the report of
examination. (The minority does not
disagree on this point.)
2. That depreciation on securities in
group II and in the fourth grade of
general market obligations in group
I be deducted in the report in com-
puting the net sound capital of the
bank, and that securities in these
classifications be listed and priced
in the report of examination.
3. That depreciation in all group I
securities except the fourth grade
of general market obligations be
disregarded and that these securities
not be priced in the report of exam-
ination.
4. That unrealized appreciation be not
allowed.
5. That of premium on bonds purchased at
a premium be amortized.
Regraded Uclassified
5
The minority position with respect to the appraisel
of bonds is
1. That only depreciation in stocks and
defaulted bonds be classified as es-
timated loss, and that securities in
these groups be listed and priced in
the report of examination. (This is
in accordance with the views of the
majority.)
2. That securities in groups I and II be
not priced, and preferably be not
listed, in the report of examination.
A complete list of all securities,
however, should be attached to the
report of examination sent to the
Supervisory authorities.
3. That depreciation, other than in stocks
and defaulted bonds, should not be taken
into consideration in computing "net
sound capital." On the other hand, it
can not be affirmatively stated that
depreciation in any securities constitutes
sound capital. Therefore, the minority
feels that the schedule showing a compu-
tation of net sound capital be eliminated
from the reports of examination.
4. That unrealized appreciation be not
allowed.
5. That a premium on bonds purchased at
a premium be amortized.
May 2, 1938
Regraded Uclassified
6
The majority agreement with respect to the
treatment of net profits from the sale of securi-
ties is that until adequate reserves against the
securities account have been built up, all such
profits should be impounded and be unavailable
for any purpose other than to take care of losses
resulting from the sale of securities.
May 2, 1938
Regraded Uclassified
7
The minority position with respect to the treatment
of profits from the sale of securities is that
1. Estimated losses should be charged
off.
2. Banks should be required to estab-
lish and maintain adequate reserves,
including reserves against the
securities account.
3. Banks should not be required to
earmark individual items of profit,
regardless of source.
4. Speculation should be severely
criticised and penalized.
May 2, 1938
Regraded Uclassified
8
TREASURY DEPARTMENT
Washington
FOR IMMEDIATE RELEASE
Press Service
Monday, May 2, 1938.
No. 13- 19
The Secretary of the Treasury today announced the final subscription
and allotment figures with respect to the current offering of 3/4 percent notes
of Serios C of the Commodity Credit Corporation.
Subscriptions and allotments were divided among the several Fedoral
Resorve districts and the Treasury дв follows:
Federal Roservo
Total Cash
Total Cash
Total Exchange
Total
District
Subscriptions
Subscriptions
Subscriptions
Subscriptions
Roceived
Allottod
Received
Allotted
(Allotted in full)
Boston
$
135,107,000
$ 10,856,000
$ 2,655,000
$ 13,511,000
New York
1,006,296,000
80,584,000
17,770,000
98,354,000
Philodolphia
78,770,000
6,327,000
70,000
6,397,000
Cleveland
98,577,000
7,943,000
1,730,000
9,673,000
Richmond
61,069,000
4,919,000
1,145,000
6,064,000
Atlanta
47,355,000
3,916,000
1,100,000
5,016,000
Chicago
136,750,000
11,141,000
15,915,000
27,056,000
St. Louis
49,292,000
4,046,000
6,930,000
10,976,000
Minnoapolis
19,429,000
1,631,000
1,010,000
2,641,000
Kanses City
28,541,000
2,325,000
2,455,000
4,780,000
Dollas
28,809,000
2,360,000
4,225,000
6,585,000
Snn Francisco
140,641,000
10,994,000
3,425,000
14,419,000
Treasury
8,750,000
700,000
-
700,000
TOTAL
$1,839,386,000
$147,742,000
$58,430,000
$206,172,000
000
Regraded Uclassified
9
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE: May 2, 1938
To
Secretary Morgenthau
FROM M. A. Harris
A short review of the U, S, Government
security market during the past week
Prices of U. S. Treasury bonds generally were steady to slightly
essier during the first two days of the past week, but subsequently re-
sumed the upward movement, closing at new highs for the year on Saturday.
During most of the week the market was rather quiet, with interest
centered in the long maturities, but on Saturday the market was quite
active. Reports indicate that a large part of the strength on Saturday
was due to an article sppearing on Dow-Jones ticker. This article briefly
stated that the Treasury had redeemed 3 million special non-market notes
for the Postal Savings System to supply the System with cash rather than
by selling open market issues of government securities. Thus the
Treasury, by this action, was refraining from checking the bond market,
A similar article appeared on Dow-Jones today (Monday) when it was
learned that the Treasury had redeemed 10 million of these notes for the
Federal Deposit Insurance Corporation.
Net gaine by intermediate and long issues ranged from 6/32nds to
11/32nde while the three shortest issues were small fractions lower.
According to the average price of the 11 issues not due or callable
within 8 years, Treasury bonds are more than 2 points above the April 1
low, and the highest since March, 1937.
Regraded Uclassified
10
The Treasury note market was very quiet and neglected. Quotes on
any one day did not vary over 1 or 2/32nds and, for the week as a whole,
are unchanged to 3/32nds lower with the exception of the 1 3/4s due
December, 1942 which are 1/32nd higher.
Corporate Bond Market
High grade issues continued in fair demand although volume of turn-
over remained light. A further increase of about 1/4 point occurred in
Moody's combined AAA bond price average, placing the average about 1 5/8
points above the recent low, but 2 3/4 points below the January, 1938
high.
In the second grade market further ground was lost, particularly in
the rail group where most of the selling was centered. Losses in the
industrials and utilities were confined to small fractions while the
losses by rails ranged to several points. Moody's combined BAA average
decreased about 1/2 point.
Dealers' Portfolio
Total holding of direct government securities and guaranteed issues
by dealers declined $11,400,000 during the past week. Changes in the
individual groups, as shown below, were small.
(in millions of dollars)
Holdings
Holdings
Apr. 23
Apr, 30
Change
Treasury bonds
49.3
51.6
+ 2.3
If
notes (1 year)
36.3
33.7
- 2.6
H
.
(1-5 years)
60.8
64.1
+ 3.3
#
bills
3.9
0.1
- 3.8
H. O. L. c. bonds
14.5
6.8
- 7.7
7. Γ. M. C. bonds
6.1
3.2
- 2.9
170.9
159.5
-11.4
Regraded Uclassified
11
Treasury Accounts
There were no sales made in the New York market for investment
accounts during the past week. However, the following purchases were
made:
$ 188,000 2 7/8% Treas. bonds of 1955/60 a/c District of Columbia -
Teachers Retirement Fund
1,000,000 2 7/8% Treas. bonds of 1955/60 a/c Government Life Insurance
Fund
System Account
The only transaction in the market by the Federal Reserve System
during the past calendar week was the replacement of $39,656,000 Treasury
bills maturing last Wednesday by purchase of a similar total amount of
13 other issues of bills.
Regraded Uclassified
12
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE May 2, 1938
TO
Secretary Morgenthau
FROM
Mr. Hass BA
Subject: The Business Situation
Conclusions
€
While the current trend of business activity 88 shown by
published indexes continues to decline, various basic trende
which give advance indication*ef a turn in the business situa-
tion show definite improvement: (1) new orders have increased
substantially during March and April: (2) the production in
certain consumers' goode industries has turned unward; (3) a
general rise in bond prices initiated by recent monetary moves
has brought greater confidence to the security markets, and
paved the way for an increased volume of new capital flotations.
The time which will elapse before these trends, if contin-
ued, will bring an upturn in the published business indexes
will depend upon certain influences which are tending to retard
recovery: (1) the continued liquidation of inventories 1s
tending to prevent an immediate translation of new orders into
production; (2) the memory of recent losses from anticipatory
buying 16 making businessmen unusually cautious in their cur-
rent buying policies; (3) an increased threat of labor
difficulties, uncertainty over commodity price trends, and the
prospect of reduced agricultural incomes later in the year,
tend to cloud the business picture and hold back business
initiative.
The conflicting trends between general business indexes
like that published by the New York Times, and indications of
underlying business movements such as our recently-constructed
new orders index, arise largely from the fact that the general
index reflects business which originated perhaps a month or
more previously. At the top of 8. business cycle, unfilled
orders may keep activity at a high level for several months
after actual business has turned downward. Similarly, at the
bottom of & cycle the continued liquidation of inventories
may keep industrial activity depressed for some time after the
actual turn in the underlying trend, the time depending some-
what upon public sentiment regarding price trends.
Regraded Uclassified
13
Secretary Morgenthau - 2
The general outlook
An upturn in business activity next fall 18 widely ex-
pected, based on the belief that Government spending will at
that time be getting under way, that the change to new models
in the automobile industry will be followed by & revived new-
car demand, that inventories will have been reduced to normal
or below normal, leading to a stepping up of industrial pro-
duction, and that the cumulative effects of recent monetary
moves will have strengthened commodity and security prices.
Such an upturn would not be likely to occur suddenly, however,
but preliminary evidence of B. reversal of trend should be
apparent several months in advance. Following the initiation
of the Government's recovery program, one should be able to
determine from sub-surface indications whether the program 18
taking hold, regardless of the immediate trend in general busi-
ness indexes.
Is business making such a turn? Evidence has appeared
in at least three important directions indicating an under-
lying improvement, which should later be reflected in the
published indexes of business activity.
(1) Probably the most fundamental indication of actual
business is that provided by new industrial orders. These
improved sharply during March, and have shown 8 further improve-
ment in April, after announcement of the recovery program. We
have constructed a composite monthly index of new orders from
data received from companies reporting confidentially to the
Treasury and from various published data, weighted by the
relative importance of each industry. This index, which 18
the only composite index of new orders available, is presented
in Chart 1, in comparison with the F.R.B. adjusted index of
industrial production. It will be noted that the trend of new
orders which turned downward last spring, initiating the fall
business decline, stopped its decline in January and February
and turned sharply upward during March.
The unadjusted F.R.B. index of manufactures, which ex-
cludes mining, provides a somewhat better measure of the actual
trend of business activity, since seasonal Justmente fre-
quently obscure underlying tendencies. In Chart 2 we show this
index in comparison with our index of new orders. It will be
Been that the peak in the unadjusted index of manufactures WRB
reached in April, 1937, shortly after the peak in new orders,
and that an upward movement accompanying the increase in orders
has already begun.
Regraded Uclassified
14
Secretary Morgenthau - 3
In Chart 3 we show a breakdown of the new orders index 8.8
between different industries, arranged to indicate the relative
contribution of each industry to the total. At the top of the
chart & comparison is made between the trend of new orders and
the New York Times adjusted index. The tendency of the latter
index to be misleading at a time when business 18 reversing its
direction is clearly indicated by its making a new high last
August, when the basic trend of business as shown both by our
new orders index and by the F.R.B. index of manufactures had
several months previously turned downward.
(2) Consumers' goods industries are recognized as normally
being first to revive after 8. business recession. Certain in-
dustries in the consumers' goods group have already started a
recovery, after reaching their lows several months ago. In the
following table we show recent index figures for these indus-
tries, seasonally adjusted, together with the low point and
date:
Low
:
Month of
:
February
March
:
low
:
Wool goods
51
November
61
54
Boots and shoes
84
November
116
120
Tobacco products
155
November
157
160
Silk goods
69
December
88
100
Cotton goods
82
January
85
89
Rubber tires
56
February
56
61
(3) An upturn in bond prices has begun, following the
increase in excess bank reserves by recent monetary moves.
Commenting on the initial rise in Government bonds, the Well
Street Journal stated that the real problem at that time was
"to improve materially the more speculative bonds and stocks,
to induce a better market for 'venture' money. This money
will build the houses and industrial plants that will relieve
the Government of the necessity for deficit financing." The
rise has since spread to municipal and corporate bonds and to
the speculative issues. It 1s thus tending to restore confi-
dence in the security markets, and to pave the way for an in-
creased volume of new capital flotations. (See Chart 4).
Regraded Uclassified
15
Secretary Morgenthau - 4
The fact that industrial production has for some time been
running at a lower level than apparent consumption suggeste
that inventories are being steadily reduced, and that eventually
an upturn in production will be required to satisfy even present
recuirements.
The steel situation
An illustration of the current low level of production in
relation to actual orders is seen in a comparison of steel
orders with steel production. New orders received by the
U. 5. Steel Corporation have increased for three successive
weeks, the latest figure representing an order volume equivalent
to about 45 percent of capacity. The operating rate during
April has remained practically unchanged around 32.5 percent,
suggesting either that shipments are Being mode from inventories
or that unfilled orders are accumulating.
During the past three weeks the orders received by the
::. S. Steel Corporation have been about 40 percent in excess of
production. Since it appears entirely unlikely that the
Corporation 1s shipping 40 percent more than its production,
the excess orders must represent some accumulation of unfilled
ordere that may later be reflected in increased activity. Dur-
the the current week, although operations decreased in certain
steel districts, the important Chicago district showed a gain
of 4 noints to 34 percent of capacity, largely because of in-
creased railroad and automobile demand, and operations in the
"zeeling region were un 11 points to 68 percent of capacity.
Although some improvement in steel demand from the auto-
nobile industry is reported recently, this industry continues
to operate largely on inventories built uo a year ago. It
antears that the inventories accumulated last summer were large
enough to carry the companies through practically an entire
senson with scarcely any additional buying. A general shutdown
by the automobile companies for extensive model changes, ex-
pected to begin about July 1, should have no unfavorable effect
on steel activity, since they have been buying practically no
steel. On the contrary, it 1s believed in the steel industry
that the automobile companies will begin stocking steel products
for their new models around that time.
Time of unturn not definite
While an upturn in business has usually followed rather
promptly after 8 marked upturn in new orders, certain influ-
ences at present are tending to postpone the beginning of
recovery. Of major importance is an apparent tendency to
Regraded Uclassified
16
Secretary Morgenthau - 5
continue the liquidation of inventories, and to continue a hand-
to-mouth buying policy, on the fear of still lower prices. One
may well question whether business 18 not making the same mis-
take in following & policy of extreme liquidation as it made
last year in following a policy of inventory accumulation on
the belief in inflation. Nevertheless, 80 long e.B this con-
tinues it will prevent new buying from being reflected immedi-
ately in increased industrial production.
Businessmen are doubtless unusually cautious in their
present buying policies because many were severely "burnt"
last year in buying too much, and are taking oare not to re-
peat the experience. Furthermore, they are letting inventories
run down because small inventories seem normal at the present
low level of sales, and seem good business" when prices are
declining.
The clouding of the business outlook by the recent out-
break of labor troubles, by uncertainty over the outlook for
agricultural buying in view of declines in agricultural prices,
and by general uncertainty over the price outlook, are further
factors tending to keep the underlying improvement from being
immediately reflected in increased business activity.
The price situation
The failure of commodity prices to show more improvement
after announcement of the recovery program, and their declining
tendency during the past week, appear to indicate that the
inflationary aspects of the program have for the time being
been overshadowed by other influences. Apprehension over the
ultimate effect of the spending program in raising taxes appears
in particular to have had some dampening effect on public
sentiment, Judging from the stress placed on this section of
the program in editorial comment and financial reviews.
The attitude of buyers now appears to be that of awaiting
definite evidence of price and business improvement before
revising their present oautious buying policies. The New York Cot-
ton Exchange Service expresses the general feeling in saying that
"while sentiment in the cotton trade has improved 88 a result
of the recovery program, neither the fear of inflation nor the
confidence of business in profit possibilities 1s sufficiently
widespread to start heavy anticipatory buying.'
The current reaction of the public to the recovery program,
however, has no necessary relationship to their later reaction.
While the prospect of further deficit spending may unfavorably
Regraded Uclassified
17
Secretary Morgenthau - 6
affect sentiment temporarily, before the spending has had
time to affect industrial demand, its eventual effect should
undoubtedly be to increase prices. In the meantime, the
two monetary measures will continue to work mechanically
toward this end, despite the fact that their immediate psy-
chological effect has been relatively small.
In the stock market, the drying up of activity on the
decline this week provides some encouragement to those who
believe that the more important trend at the moment 1s up-
ward. Surprisingly good earnings statements of the two lead-
ing steel companies, indicating that their "break-even" point
in the first quarter was around 36 per cent of capacity,
tended to improve sentiment. General upturns in the stock
market are often anticipated by individual groups which turn
up against the general trend. The aircraft group recently
has shown independent strength because of its current high
rate of operations and the possibility of an increased ex-
port business, and stocks in this group are now selling at
close to their highs for the year.
The longer term trend
Although the evidence cited appears to indicate 8 turn
in the underlying business trend, and provides the basis for
our optimism over the business outlook, it does not suggest
how extensive the upturn may be when it occurs. If new fac-
tors should arise to prevent private enterprise from taking
over the reins after an initial period of Government pump
priming, it is possible that a short recovery may be fol-
lowed by a further recession. To make sure that no failure
occurs in the critical period of transition from Government
spending to private spending, such as occurred in 1937, all
possible avenues for private spending should be opened 8.8
rapidly as possible. The transition may then be made grad-
uslly, under a carefully planned program, while business 1s
in B. strong forward movement.
Regraded Uclassified
COMPARISON OF NEW ORDERS WITH INDUSTRIAL PRODUCTION
1933
1934
1935
1936
1937
1938
PER
PER
CEMT
CENT
(MEM ORDERS)
(IND. PROD.)
160
135
New Orders
1936 . 100
140
125
120
115
100
105
80
95
60
BS
Industrial Production, F.R.B.
1923 -'25 = 100
40
75
20
65
0
55
1933
1934
1935
1936
1937
1938
Chart 1
Office of the Serviary el the Travy
Division of - - Relation
51
Regraded Uclassified
COMPARISON OF NEW ORDERS WITH FACTORY OUTPUT
1933
1934
1935
1936
1937
1938
PER
PER
CENT
CENT
(NOW ORDERS)
(FACTORY OUTPUT)
160
135
140
125
New Orders
1936 : 100
120
115
100
105
80
95
60
B5
Factory Output
1923 -'25 = 100
40
75
20
65
o
55
1933
1934
1935
1936
1937
1938
Chart 2
Office of the Security of the Transay
I - 52
Birth of of Name
Regraded Uclassified
Regraded Uclassit
NEW ORDERS AND BUSINESS ACTIVITY
1936
1937
1938
-
.
.
J
$
M
J
M
M
J
$
.
di
-
M
al
&
-
FEB
T
I
PC#
CENT
(wer ORDERS)
CENT
(BUSINESS ACTIVITY)
150
120
Business Activity, Veskly
N.Y. TIMES, ESTIMATED NORMAL =100
140
112
120
104
100
96
BQ
88
lat.
New Orders, Monthly
60
1936 100
BO
40
72
of
M
M
à
5
#
a
.
-
J
5
M
4
M
-
-
$
a
1936
1937
1930
New Orders Grouped by Industries
WEIGHTED ACCORDING TO RELATIVE IMPORTANCE
1936
1937
1938
1936
1937
1938
PERCENTAGE
PERCENTAGE
PRODUCE
POINTS
IRON AND STEEL
POINTS
TEXTILES
POINTS
65
65
25
25
60
$
20
20
55
35
15
is
50
50
io
10
45
45
5
5
40
$
0
o
1936
1937
1938
30
50
35
BS
BUILDING MATCHIALS
25
25
30
30
20
20
25
25
15
is
20
20
10
10
15
15
5
5
10
ID
0
0
1536
5
5
1937
1938
15
15
ELECTRICAL EQUIPMENT
o
0
10
1936
1937
1938
10
25
25
AUTOMORILES
5
5
2
20
o
o
1936
1937
is
IS
15
1938
15
PAPER AND PAPERIOARD
10
10
10
10
5
5
5
5
o
o
0
1936
1937
1938
1936
o
1937
15
TT
15
15
1938
TT
IS
RAILWOAD EQUIPMENT
MISCELLAMEDUS"
10
10
10
10
5
5
5
-
o
o
0
a
1936
1937
1938
1936
1937
1938
*INCLUDES MACHINE TOOLS, AMRICALTURAL EQUIPMENT 4MD OTHERS
Office - the Sensary of the Treasury
- of - -
$3
Client
BOND PRICE COMPARISONS
21
104
U.S. GOVT. BOND AVERAGE
U.S. GOVT.
K
100
no
DOW-JONES
100
40 BONDS
40 BONDS
90
110
10 UTILITIES
80
10 INDUSTRIALS
90
-UTL.- UTL--IND--HIGH-GRADE R IND. 1011 GRADE JOOK RALS
100
110
10 HIGH-GRADE RAILS
100
100
80
8
10 SECOND-GRADE RAILS
70
40
SECOND-GRADE RAILS
60
30
50
20
DEF AULTED RAILS
DEFAULTED RALS
40
10
o
1937J F M A M J J A S 0 N D '38J F M A M J
FROM BARRON'S WEEKLY, MAY 2, 1938
Regraded Uclassified
TREASURY
DEPARTMENT
MAY 2 193382
LIBRARY
PAGE 409
MOODY'S STOCK SURVEY
Copyright, 1938. by MOODYS INVESTORS SERVICE. 65 Broadway. New York
VOLUME 30, No. 18
MAY 2, 1938
ESTABLISHED 1909
Published Mondays. Subscription rate $100.00 per annum. with Moody's Bond Burvey $150.00 per annum
matered M second-class matter January 6, 1986, at the post office at New York. N. Y., under the Act of March 8, 1873.
Stock Review and Outlook
Lack of tangible evidence of business improvement
The other side of the argument is that while
and a succession of unstimulating earnings reports
earnings are low in relation to prices in many in-
discouraged sentiment and depressed prices most of
dividual cases, such a condition is inevitable at
ast week.
depression bottoms; that we have had sufficient
Although the markets may vascillate indecisively
deflation to permit a recovery slowly to get under
or a further period and at times show greater weak-
way, wherefore the stock price level will come to
less, the important investment consideration is that
be justified in no great length of time, since stock
usiness is making a slow turn for the better, as a
prices must reflect the future as well as the pres-
esult of which the next longer trend in the markets
ent; that some basically good things are happen-
hould be upward.
ing from a political standpoint, such as the tax
revision which is being undertaken, the increasing
trend in Congress to act in such a way as to en-
Stock Market Position
courage business, and the breaking up of the solid
Although the month of April enjoyed a rebound
New Deal front: that, in the meantime, the longer
tum the pessimistic market which was seen at the
range fear of inflation (whether justified or not)
nd of March, stock prices have continued to move
tends to prevent liquidation of stocks and that an-
mcertainly, The price level seems to be affected
other factor tending to support the stock price
level is the extraordinarily low level of money
OW by hopeful, now by fearful sentiment,
rates, which makes for 50 little incentive for in-
There are possibilities that before any really
veators to switch into fixed-income securities.
ronounced trend gets under way, the market will
further influenced by the less cheerful side of
hings, At least no one should be surprised if a
As long as recovery does not make its appear-
eactionary tendency should prevail for an inter-
ance-as long, that is, as the indexes of industrial
tening period as it did last week.
activity show no gain-the more pessimistic view
may, at any point, tend to have the better of the
There are two distinct schools of thought within
argument in the market itself. That is why re-
he financial community which seem to be hold-
actionary trends of intermediate duration should
hg continuous debate on the present situation. The
FAS optimistic contends that present earnings do
ot at all justify the present price level of stocks,
IN THIS ISSUE
PAGE
but the labor and political situations together pro-
Agricultural Implement Industry-Outlook
411
de no inspiration for an early revival in business
Fairbanks, Morse & Co. Common
415
etivity and that, basically, the deflation in prices
First National Stores, Inc. Common
41%
nd wages which we have already had is insuffi-
Link Belt Co. Common
414
sent to make 8 solid or healthy base from which
Mesta Machine Co. Stock
414
ecovery could proceed. Therefore, so this point
Review of Previous Recommendations
416
If view holds, stocks must decline so as to become
Stock Market Position
409
hore in line with the present rate of earnings.
Union Pacific R.R. Co. 4 Per Cent. Non-Cumulative
Preferred
415
Regraded Uclassified
MOODY'S STOCK Stam
MAY 2. 1988
PAGE 411
Piem 410
Associal reasons why such a. movement
of prosperity. So that when assumal corrections
The langer lible go on, the nearer to freition
DEBT unit TAINO an WEEKET
emerge from the present environment have
are made it is difficult to say whether, for example,
will como the government spending program and
set forth from time to time, here, over the part
March will prove to have been higher OF lower
the better the inventory position will by. Conse-
or seven weeks.
than April.
quently, it seems . very excellent possibility that
There is a propensity to any, at this time, the
1
spring recovery has failed and that the are par
To have other than a slow, rounding bottom, it
the real low point in business is either June past OF
would seem necessary that a period of violent wage
la at this time immediately upon Us.
of revival cannot be expected before automn. is
point of view la frequently expressed in print 4d
and price cutting should not in or that name other
RINI
i
-
depresant should appear, BO that . new sharp
Periods such as the present are extremely trying
by word of mouth. But to have recovery
able by fall, is would neen that the cyclical botter
drop in business activity would first occur, But
to the stock investor's patience, A year ago no such
of depression should be occurring now, or not Iss
wage and finished goods price cutting does not
paychological difficulties beast him. The typical
senm lo be occurring and the evidence from indus-
Investor was then pretty fully content M to how
than June at latest.
things were going, even though, in actuality, he
Although it is not suggested that We must is
trial areas is that general and widespread wage
present instance follow precedenta, It is intense
até cutting is not in night and that, in many lines,
stood at the edge of a steep decline.
IMI
to note that in past experience business eycle a
he efficiency or productivity of labor has increased
Today when no declaive movements are occurring
in either direction and when pessimiatic forebod-
points have been far more frequently
reatly over the past few months. All of which
Ings tend at time to overcome the market, he would
in the first half of the entendar year,-and is
uggests that the present price and wage level is
199
- to stand in no such real danger. Be may have
early part of the first half-than at any other to
eing frozen into the structure for the present and
temporary anguish when these more hopeless
Thus the setual record of important cyclical La
a way which will not induce manufacturess to
moods overtake the market, but from # basic stand-
points of depressions since 1854 (excluding
efor operations on the expectation of reducing
point the market seems to be in the promoss of
Civil War period), according to the Annalist
bata by the ware-rate route.
Yes
an irregular and confused turning for the better.
of Business Activity, is as follows:
take
1623-Marm
Petruary
surprise DII doe. If the old lowe of & month ago
should be tested, It would The perfectly normal.
Industry Prospects
In a slow, rounding bottim, which is the and
That the market will lest the old low points is
turn we seem likely to have in the present altorn
not of course, at all a foregone conclusion. But
the month which turns out to be the lowest will
Under this heading áre discussed each week the
Two Important factors have operated to produce
n is . possibility based an the sluwness with which
extremely hard to recognize except later un,
dustry or industries which are currently com-
the great increase la Implement company earnings
bosiness activity appears to be turning around.
hindsight. Ever since January the movemento
anding the inturest of investors, or which for
in the years alnon 1932. First and most important
There la no question but that A lack of dynamic
business indéxes, from month to month, have
sportant reasons should Tue considered by in-
WAS the improved comomie status of the farmer,
upward force exists in the present environment.
at very gradual angles The percentage chenn
intors.
resulting partly from political favor, und second,
And go new energy of this rapidly moving sort
from month to month has been of a magning
the successful and efficient motorization of smaller
has bero supplied by the Government's spending
which might appear at any stage, even in il pers
type implements, especially tractors.
program. even though the not effect of re should
Agricultural Implement Industry
From 1982 to 1987 total farm cash income of the
be 4 stimulus.
l'arninge of agricultural Implement manufactur-
nation increased from $4.8 billions to $8.5 billions
assos OF STUGE PRICE
(Dow-Jose Averages)
75 may be expected to show smaller declines this
and during the same period net cash income of
par than will the earnings of most industrial
farmers rose from $1.5 billion to about $4.5 billions.
Noverthetens, M between the two viewpointa, the
impanies, but as A group, implement manufac-
The curves of total cash income and net cash in-
more hopeful doe la the more logical. Current Mrs-
Irera "ppear to have less to gain in volume of
come of farmers are shown on an accompanying
lags statements do not in many cases, of course,
uniness and increased earnings (with business no-
chart.
make pleasant comparisons with existing stock
overy) than do many other groups. The shares of
Purchases of agricultural implements and pros-
price levels, but during all depressions the price-
10 leading companies are regarded as reasonably
parity of implement manufacturers fluctuate with
earnings ratios become abnormal in no direction
Heed in the current market on the basis of 1937
net Income rather than with total cash Income, In-
or the other. Deficite are the rule in such times,
-
bd probable 1988 results, and these etocks may be
samuch as implements are highly deferable itams
yet no one pays to have stocks taken off his hands.
spected to participate in any hroad rise in the
and are bought in years when a good surplus to-
although that would be the logical process If price-
UNITED
16
ock market, but as compared with shares in such
mains after farmers' total production expenses
eurologs retion ware to remain uniform.
dustries as building, Industrial machinery, elec-
which are relatively inflexible in some important
The real question, therefore, is whether recovery
0
Heal equipment, stool and motors, the stocks ap-
respecta. n. may be observed that the curve of
#
ne
auf
1934
1935
004
1937
1928
will Indeed develop before long. The economic and
or preciation. to offer less promise of growth and capital
earnings of eight implement companies In the chart
No. Last data plaired is Aurti a -
"Agricultural Implement Industrial Activity vs.
Regraded Uclassified
MOODY'S STOCE State
MAY 2, 1938
PAUL 112
PAGE 418
indexes of prices paid by farmers for articles a
AGRICULTURAL DEPLIMENT INDUSTRY ACTIVITY FL
Parmers Expenditures and Exports" (shown on
chased and prices received by farmers for produces
PARKING AND EXPORTS
Activity a the industry may be reasonably well
OREY 412) more closely parallels the curve of net
100
maintained for some further period, but some de-
sanh income than the curve of total cash income.
sold.
The Indox of prices received by farmers in the
cline in activity is indicated for later in the year.
both of which are shown in the graph "Total Farm
first three months of 1938 averaged 98 a -
PARMERS' EXPORTURES**
It la not believed that there will be any drastic
Cash and Net income and Net Purchasing Power
- HOLLAND
tranted with an average for the first three month
sa
decline in the purchase of machinery, hut it be
NO
400
Per Capita."
of 1937 of 129. In contrast the inder of pricess
probable that the conjunction of favorable factors
Agricultural implement company earnings In-
by farmers averaged 126 in the first quarter
that resulted in the large volume and good earn-
cressed in each of the five years following 1952
ings in 1937 may not be repeated for some years.
in 1929 eight agricultural implement manufactur-
1988 as compared with an average of 181 for W
100
FLANT activités
EXPORTS
40
first three months of 1937. The ratio of palm
we
Farmers stocked up heavily on machinery in
one earned is total of $76.0 millions, but In 1982
RELLARE
received to prices paid measures the purchase
recent good-income years, and although the new
showed a combined deficit of millions In
power of farm prices and this index of purchase
small tractor developed in recent years may con-
1967 earnings of companies had recovered
a
power declined from D8 in the first quarter of E
tinue to experience a good demand for a consider.
is
tos
Lan $60.00 millions.
to 78 in the first quarter of 1988. This decline
solum
-
able further period, the industry will not have for
The qualtion ni the tarmer has deberturated over
of course, be offact to some extent by the lare
the next several years at loant the benefit of the
the part twelve months. It is tyuito early to etti-
40
huge replacement demand which existed several
male farm income for 1038, but on the LANE of
volume of marketings.
&
21
-
5)
EL
3/
32
33
"M
31
38
E
years age.
wridenve available it ACETON not anreasonable to
Farm income shows 9. seasonal increase In
Intieve that total farm cash income in 1928 may
March to October and the next six months
listo of - vertal in toplement before
Profit margins in the industry are not readily
all Type) TO E Department of Agrinditure),
the firm für machinary, tractime
to 11 billion E below 1937. This would Dr.
bring about sime improvement in the position
ascertainable, but doubtless these have been nan
the farmer, especially with general bnainess
rowed by higher costs in this industry as elsewhere.
divide - Regurs Retwoon 87 billions and 17.5 billions.
provement, but that total farm Income for 11
It in Interesting to observe the impairment of finan-
Indicative nif the changed position of the farmer
M compared with a year age are the changes in
will be below that of 1937 appears reasonably
ain. In the first three months of this year benefit
cial condition experienced by the leading compa-
aymenta of $108 millions were below benefit pay-
nies in 1987. In the attached table of "Comparative
Statistica" it may be seen that each of the ecm-
COMPARATIVE IMPLEMENT STOCKS
sents of $207 millions in the first three months of
M37, but increased benefit payments over coming
panies reported lower ratios of current asseta to
Bills
bonths are virtually assured.
current liabilities at the end of 1937 as compared
Compl
F
be
-
-
No
with 1936 and each reported an increase in inven-
Under the new AAA the scope of Government
tories in 1937. All but one of the companies no
as
a
M
11#
us
201
==
Mill
M
nancial support to agriculture in enormously in-
ported nn increase in receivables. These trends are
1.)
36-F
us
37.7
e
==
No
MS
reased and should tond to stabilize total farm in-
the natural reflection of a period of active business
et
i
4d
41
M
DEL
ILF
117.37
NO
iss
:
:
1
BLA
fill
NOT
IM
time Only a combination of an extremely plenti-
Me
de
Mia
DA
==
De
100
IFS
at harvest and a poor industrial situation could
DE
i
41
0,00
us
RI
NE
DI
TLM
Elt
RD
wer this year's farm receipts below the figures
TOTAL PARD DASE ARD any INCOME and DE
the
:
JULY
43
Le
E
и
111
:
111
to
--
HI
42
N2
"
as
It
un
aus
NO
15.
IN
stimated above.
FUNCRASING POWER 703 CAPITA
ILE
I
et
es
the
Le
OF
ID
11
11
BLT
sur
E
-
NIT
UP
La
NE
MLU
TAS
led
2,15
(2)
The farm implement industry has thus far felt
sur
130
:
CARD
us
as
THE
=
be
111
M.H.
5,40
220
CASH
INCOME
et:
130
DE
en
ET
i
HJ
HI
NO
un
30.18
3.20
own
MM
he effects of recession to a far less extent than
1.318
13.6
DE
MT
NJ
su
su
RJ
na
ILN
183%
it
-
«
and
us
a
IN
Init
MI
85
F.B.
2,50
un
ave most industries. An index of factory employ-
hent in agricultural Implement factories, for in-
NET CASH INCOME
(#)
TM
all
"
et
2.8
an
IR
NO
16%
altrout
iti
-
et
not
:
IR
167
1.1
790
DE
NN
es
INI
=
=
SUP
101
lance, declined from October, 1937 to February,
BENEFITS
III
-
WE
DI
DI
19 st
en
NO
AN
III
as
#
DA
14
=
DAS
LEE
All
na
IM
un
hill
PURCHASING POWER
T
THE
11
AT
10
41
244
M.4
938, by only 26 indes points as compared with
i
9.5
144
2.75
mill
-
rise from November, 1936, to October, 1987 of
DOLLARS
PURCHASING POWER
no
2
"
DE
DA
il
11
is
-
RI
DO
139
-
11%
"
LO
N
-
164
17.13
0.38
AN
tedex points, and a rise from September, 1934.
a
PER CAPITA,
310
5
DE
110
NO
-
IL#
IN
OF
00
=
14
111
the
72.00
10 it
NO
14.
is
O
Hd
:
:
:
ne
ne
-
October, 1937, of 120 index points. At a time
-
y
14.
as
15
14
all
#J
a
31.00
in
5
as
in
hen many industries are back to 1985 and even
so
PM
IM
4.4
DE
13
11
1.5
na
LE
for
31
INCOME or DOLLARS
tra
15
EM
mi
N
DE
=
1.9
и
94 levela, maintenance of activity above 1936
#
IS
19.5
DE
512
1.0
434
$
57%
without
B4
=
en
D
+I
vots constitutes evidence of unusual resistance
mores
B
DE
=1
sur
NM
NH
114
344
14.1
#3
ET
a
94
BE
185
THE
45.42
E
:
=
il
i
01
16
e
5.30
the forces of depression. The reasons are that
E
me
M
10 industry is reaping the benefits of the large
900215
school
HIB
time
-
any
HM
N
x
11
a
22,
n
-
-
P
ar
34
M.
R
for
-
and
-
(ric)
nein
Le
date,
10-50%.
rm income of last year and that farmers have
Yis
Time
and
-
a
au
dall,
-
be
-
form
pin
name
date,
encouraged by a favorable planting season
Nota
Impre
für
cuit
being
11.
Department
of
-
a
1
have
to
seu,
22%-20%
id assurance of liberal Government aid.
timin wf statistics Purnishing - Inventore par capital La - tel the les
Other
Sexna
are
settinated
for
Mondy's
for farm family - of living sauf Mr farm pepelation
Regraded Uclassified
MOODY'S STOCK Suiver
MAY of 1988
P&OE 415
PAOR 414
ingre of the Industry a 1988 may be reasonably w(l)
pany's products with betterment in general times-
and have not gone sufficiently (sr to cause any
maintained. The stocks at recent prices are M
ness conditions.
lined in probably not generally expected at this
apprekansion with respect to the financial standing
considered unduly high and de not embody mm
The company was in strong financial circum-
time, 89 may be gathered by the relatively low
of the companies, but may have sume future effect
than-average market risk, inst the strong sugges
stances at the end of last year. Current assets were
prices prevailing for the stock issued. However,
on servings in the event that business volumes
tion that the industry passed a cyclical book
$14.7 millions, current liabilities $2.7 millions and
as indicated below by the comparisons n° operating
Autline nure then anticipated.
1937, which may not again be approached for
working capital $12 millions. There are outstand-
revenues and net operating Income for the first
la view of the relatively favorable start the in-
dustry had in 1838, the good resistance it has
period of years, indicates that shares in companie
ing 709,177 shares of common stock and 82,776
quarter of 1988 with previous surresponding peri-
in other Industries, which show promise of cycling
shares of 6½ per cent. preferred stock.
ods, there la nothing in earnings reported (1) Isr
shown these far to depressed business conditions.
revival over the future. offer more interesting
The company la in a type of business that la
this year to indicate that satisfactory results will
and the usual lag shown in farmire purchases of
vestment opportunities at the present time
expected 4a alrow excellent growth over A period of
not be obtained by Union Pacific during the eur-
implements (as compared with farm income) earn-
rent year.
years and for purposes of espital appreciation dur-
Operative
Ing a period of eyelical business iniprovement the
First DM
Revenue
not Opening
show holds considerable interest and attraction
Fund Suarter in
Individual Stocks
First Quarter IM
Fine Quarter 1995.
04.827,000
2341.00
Find Quarter 1904.
2,097,000
Union Pacilic Rollroad Company
First Quarter 1509.
of all other employees were Increased 10 cente
First Quarter na
No.000
27.705,00
Media Machine ['umpang Stock
hour. The increased overhead AR a result of high
Per Cent Non-Cumulative Preferred
The company's financial position is unquestion-
The company oppears M required ni
wages and salaries and expanded plant are
The stork applore affrictive at - leavis
white strong. At the end of February Invt. current
- of - tow/ine will
expected to weigh unduly on the company INVOT
for - and purvices a
- (rem improving pearred readi-
-
assets were $45,298,000 including $6,091,000 cash,
the - aft bulleved to der em
period of time, but the probable resultant lowern
compared with current liabilities of $18,609,000. to
- opportunities (er involvement for españal nge:
of profit margins and the improbability of an read)
Total
Last
Report
addition, there was an investment of #163,787,000
HIT
!
recurrence of the sizable orders received by to
Uniss Paultie R.H. Co.:
will
Fayment
Prim
in Moehs and bonda of non-affiliated companies, in:
neel
-
company from practically all the leading -
4th Nan-Cum. PAL
$17.74
8100
*82.00
es
cluding close to $20,000,000 in United States Gov-
HAPPY
TM
un
are -
-
companies in recent years suggest that
Bank Mankine Dr.:
able time may elapse before carnings can
Just how quickly Investment sentiment can
ernment bonds. All of these amounts are highly
stock
BALTO
11,00
XXM
hange is well Illustrated by Union Pâcific Bail-
substantial in relation to abnual fixed charges
1937 levela.
amounting to $14,255,000 and annual proferred
Fair
Link Helf CALT
The financial position of the company at the
load Company 4 Per Cent. Non-Cumulative Pro-
dividend requirements of $3,994,000.
Comman
1.00
0.00
an
of last year was adequate: surrent assets were
(erred Stock. A little over a year ago this Issue
The dividend nn Union Pacific Ballroad Company
Mesia Mushine Company is une of the largest
millions, current liabilities M2 millions and at
jold at 100, . new high record price for all time:
4 Per Cent. Non-Cumulative Proferred Stock is
manufacturers of inavy machinery for girl mill
ing capital $5.6 millions. The company will hei
recently it sold % low na 60-the lowest level re-
considered well protected and likely to be paid in
operations. Recent years have witnessed n. number
no from improving general business condille
borded since 1933 and a price below which the stock
had years as well M good. At this time, that is, at
of large instatiations of new plants by steel com-
anticipated over the balance of 1988, but IL us
Las sold on only a few occasions since it was issued
prices in the 60's, attractive somi-investment value
publics, especially plants for the production of Bght
lieved that the ascurities of other companies
about 40 years ago.
is offered and purchase la recommended.
start. Strata Machine has benefited directly from
niore favorable Investment opportunition
From an earnings standpoint the proferred stock
this expension program As evidenced by the sharp
the Union Pacific Railrond Company la situated
relavery in earnings in recerit years. Earnings jicr
Link Helt Company anlls to practically all mail
well as, if not stronger than, most railroad
first National Stores, Inc. Common
share of stock were $1.47 in 1984, $3.11 in 1985,
(acturing industries. The company makes product
runds of good quality, This Is, perhaps, best in-
Exeminge of the - Appair to be - 0 long
$4.26 in 1986 and $1.07 in 1937.
designed to lower costa and increase the efficiell
licated by the fact that fixed charges and pro-
divistment that and and unlikely to to greatly
Unflited orders of the company were $14.4 mil-
of manufacturing operations. Conveying. elevéit
forred dividend requirements were warned about
related hgt e period of
and transmission machinery, used for various
997. NS times un the average in the seven years 1991-
mant An eachange from the state PM
lions et the and of 1936, reached A. peak of around
other añove is recommended.
24 millions on June 80, 1987, fell to around $21
sembling and distributing operations are the -
millines As of the end of September and were $13
pany's most important products.
Plant Fixed Charges Barned
use
LI4
-
(
un
Total
las
Received
424
240
E
12
10
1507
Time
3500
Parmiet
Price
Earnings expanded from 04 cents per about
Lift
3.M
Reducted Per Dividends Charges Named and
Prom
millions at the end of the year.
121
Share
1,98
177
1%
152
1934 to $1.29 in 1935, to $2.97 in 1956 and
forma Stuck
of
Pre-
LA
XLOB
Pirst National Class,
Last your the company mude important addi-
$17.76
too
Common
MAI
Despite the current low level of business and - the is
84.17
$2.10
tions to plant capacity and last spring in common
1987. Undoubtedly earnings for 1988 will be
10.00%
É
Into
with many other companies raised wages. It was
below those recorded for 1987 (earnings for
first quarter of the current year were equal 111
hour railroad earnings that are being reported.
Fairbenks, Moxe Our
here is not much question but that Union Pacific
Common
reported last summer that the capacity of the com-
EAD
1.48
2.00
B%
pany's plants had been increased 20 per cent dur-
cents per share compared with $1.01 per dun
KIII this year earn fixed charges and preferred
7um I Critinal perment = verify - March L
leg the proceding year and that expenditure of
the comparable quarter of 1987), but the intell
ividend requirements and possibly M much as $6
First National Stores, Inc., for the fiscal year
another Il million for expansion would be required
competitive situation in must industries and
share on the common stock, the dividend rate
ended March, 1938, will probably report the small-
before the end of the year. Last March common
(long range) increasing burden of labor -
BAT has been in effect since 1932, That results for
est earnings for many years. The trend of earnings
Tabor was raised to 64% enta an hour and rates
promise an early revival in demand for the
current year will be as satisfactury as just ont-
by quarters for the first nine months of the com-
pany's fiscal year is shown un the following page.
Regraded Uclassified
Moom's STOCE Summ
MAY of 1038
PAGE 416
PAGE 417
FIRST NATIONAL DE QUANTERLY un SET INCOME -
environment of challs all suggest limiter
rent year will net be M Inverable - TIME Um case is on
participation by the company in - period of to
first quarter, any desp abould be moderate,
The past resard of the company shaws as impressive
Three - jos
MOLES
will
dustries gevival and relatively limited appreciation
particularly since the empany has Sees able to maintain
Herd of growth and is la confidently believed that with
Months to legt- =
mas
good entral 0982 operating expenses. Third
a return to more favorable general Studenes conditions
- Months 16. Dec. an
TELOME
prospects for the common shares.
quarter earnings, the larget of my single periud, will
the company will sgain exhibit the previously evidement
the Months
in
Department
$
"If works - to in Security Desire 4. e. - THIT - and a - wills - -
Fairbanks. Moree & Compunite business follows
be dearmined to a degree by weather on-
upward trund of rales and earnings.
closely the trend of general business conditions
ditima. Laut 3047 lower temperature during the park of
A dividend of 50 centa per share will be paid May 20
The company in a prominent New England
the los season mand a large percentage drop to line
to common, stockbolders of record May 4. The stock -
cory chain system which at last reports operated
BO that with general business butterment the on
revenues.
last promismented to the Survey of April 18, 1088 (page
pany's earnings may be espected to expand. The
During 1957, $1,870,000 YM spent for property widl.
438) and mustly mid as RESL.
2,473 matte, of which 458 were markets. The va-
stock is regarded M one of the more attractive for
Liema while funded debt TM reduced by $240,100 to Birth
favorable profit showing in 1987 was I reflection
380,400. Preferred and common stocks remained meteringed
Unlied mised. States Steel Corporation Common-Retation is no
of higher operating costs and expenses, such as
investment for capital appreciation during a period
of $26,815,000 and $10,414,000, respectively. Working
wages, social security taxes and other taxes and
of cyclical betterment
capital was again reported at approximately $2,900,000.
United Mates Sted Corporation's report for Be first
to order of importance (be company's sever
Smilar to previous dividend action, a quartarly pay-
quarter of 10ml FILL about M expected. With rate of
a highly competitive price atructure willin the gm-
net of $1 was made on the preferred be March is
operations everaging 22.5 per rent. in the first quare
only field. The received in general basiness also
divisions of activity comprise the manufacture not
Arrears DOW amount to $19.50 per share. The stock over
nil LORE, - compared with average operations of 82.6 per
sale of (1) Diesel and other internal combustime
recent menths Esse fortanted within . recy narrow Fungs,
ent. in the first quarter of 1957, the corporation reported
had (Le affect
Formerly declines In wholesale food prives wid-
engines: (2) seales; (B) electric motors, generation
from 4 market standpoint are moderate and -
- operating profit of $11.3 millima, ME compared with any
shierable price movery should be - as business anivity
operating prant of H53 millions a pear age, and . THIS
used grocors' margins to a fair estent, but recently
and magnetos: and (4) pumps and pump equip
le general rerives The shares, releval proviously in the
loss of $1.2 trillies as compared with . net prafit of
the INVOICE competitive situation has resulted la
ment. The company also manufactures railral
Stock Survey of December 27, 1937 (page 00), are suw
DM millions for the Art three months of 1987.
adling at 45%.
equipment and A diversified line of home and farm
Il la interrating to observe that depredation, depletion
lower selling prices quickly following lower whole-
and chrolesome was $3.9 millions less than Be amount
sale prices, without benefit to grocers' margins of
appliances.
General Illotors Corporation Common-1 inlicy "/ relation
charged off in the first quarter of 1007. Had this amount
The company in in strong financial circumatanos
a Normanded,
equalied that Tast year, the loss after Interest for the
profit
Capitalization consists of $5,661,263 Debenture 4a.
General Matore reported net Insume of 88.2 millions
The probability la that March quarter carnings
1986, 10,958 shares of 0 Par Cent- Preferred Stou
for the first quarter of 1959 as emplayed HILL $44.8
millions. first quarte of 1988 would have trass In - of es
will continue to reflect the unfavwaide trand Inc-
millions reported for the first three months of 1037.
Directors last missing déclared a regular dividend of $1.70
much M Live adverse Tactives present ID 1937 confinue
(convertible into 21/2 community shares until Pels
Dollar volume of sales was 25.6 per neil. below - year
- share un the 3,602,811 sharm of preferred stork,
in form The company. which ensistitutes & highly
ary 28, 1939) and 598,326 shares of common.
4m. Depreciation diarges were Sture than II milition
After allowance for preferred dividends, first quarter
Any improventent in general business condition
grinkler than to the Est quarter of 1089, more this If
1908 results were organi to $ defielt of 97 emis per share
afficient unit in its Beld, may derive some benefit
millions greater than in the first quarter of
of common stack as compared with $3.06 - sizure email
From AB improving business situation later in the
should nnd quick reflection in the eales and -
Fine quarter LOSS earnings were equal to 14 cimia pas
in the first quarter of 1987, I deficit of = cente per share
year. but the narrow profit margin resulting from
ingo of Fairbanks, Morm & Company and appre
share M compared with - cente -
reported for the first quarter of 1936 and . deficit of #1
intensity competitive conditions. the inherent als-
clation of the comman shares during . period of
share named in the first quarter of last year.
canta per above reported for the first quarter of 1986
The stock was last recommended in the Survey of
well reunded industrial recovery could RETER
March 21, 10AM (pare 482) and recently seld et
Shipesents were less than half those of 4 pear ago-
billity of males the persiatent Fise to operating ex-
1,666,244 tona la the thre months to March It, 1988 as
pensin and the relatively unfaverable political
substantial proportions.
Regulator Company
compared with 3.698,041 - in the first quarter of 1087,
stork qualifies for MI - of the - allmetive
The corporation's reserd for the first three months of
-prities available in the plantricul eyuspment
LOSE Indicates grand centrol of expecies in the free of
First quarter operations of the sumpany companyed (ID-
difficult operating conditions and magnita early emergence
Review of Previous Recommendations
favorably with them of . your age. Sales decided as
of the eurporation to # profitable lessis with general bust-
- Improvement.
per cent., mü, 20 por mL and operating
profit vas but $18,000 - compared with $624,000 reported
The common theres are among the more attractive
for tie Erst three months of 1977. Depressible su
stocks for orgital appredation during a pariod of eyeflest
Howel Corporation state qualizione (a)
- securred in general business activity. Gress -
$H,000 greater than & pear ago.
improvement. They were last recommended la the Survey
I
to the Fish QUATINY of 1997 nowel . gin of should
Street importied free -
After other Income and are and alliverance for in
of March 28, 1938 (page 471) and recentifs wold 4b 42ML
xent. depresion FM again larger than In 9
Terred dividend requirements, the emepany reported .
- for the first Cires conside of IRRL I after
period of IMG, total income - mill
deñeit of B. centa per share of remisms stock fur the first
Westingboner Kimirle & Manufacturing Company Common-
indepred Chdesi to 4 dellare of IT senta
any, net after charge have been equal 50 F
Utine months of 1988 to compared with 00 missing per
The along qualifies for retention.
- - alone This contrast with BELIDA,000 M.
dure proferred - against $1.50 in the faurth -
whare named in the first quarter of 1897,
The company reported net profit after depreciation and
prime for the - persur of LEST, - - the
of the provide year. A. brinf statement for Ma -
Largely vu the poer showing a reflection of
Tederal income taxe of $2,051,000 for Use Are quartes
- in 83.01 per share of -
quarter of 1988 Indicates forther improvement in -
able business eunélions, but almo is It to be resulized that
of LOAN ne compared with $5,342,000 named to the first
Operations is Me first quartive of this par everaged
and total Incres though the estent
-
Mile the first quarter of the year 3a normally abs least profit-
three months of 1957. These earnings were esquisi to 78
14.0 per milk, of Repacity as compared with 66.7 per eint.
andre THE very small. Net after fixed sente was -
in the Most quarter of 1637, and 67.) PPT net, la the
the for the sumpany, Products of the company are for
omta par share and $2 per share - ermbined partici-
la 31.18 et share: net in the corresponding pariel of 17
most part adapted la house heating apparatus, de-
pating preferred and common stares for the respective
partner of 1997, Unfilled orders - Mard, 31 -
was to $1.02 pir
DO millions as compared with 1916 ext/llone an Deam-
Times refenues for the treive months ended M/M
Forms the quarters of the year, with the result that normally
mand for which la unally consentrated in the third and
periods. Undlied orders at the and of March more 858.8
millions - compared with $50.8 millions at the end of
for ai and BATJ millions - March 31. 1037.
The sivà - Test recommendad to like Survey of
11. 1999 smounted to $18,102,000, a gain of I DAY
profitable and half of the year in far and away the mure
1957 and $73.7 millions at the end of March, 1987.
Mind " - 470). A - price FM
NM Income appreximated $1,540,000, or $5.47 - -
The stock was last recommended In the Survey of April
4d proferred, and compared with $1,554,000, or $0.45
a 1988, (page 439) and recently add at 7115.
line Public Service Company 44. Pre
share - reported for the corresponding 1097 period.
is wirloud.
Since eperations and subjective had - afferial
Earnings of Us Contral Elimate his Service Company
- astend during the mill minths of LOST by -
have Twick - well émplée the include that
conditions alma the Ohio River, IL is quite presible
Mind me - /meriure - - and - - of - - the of this publics The / information lane
samings fer the - quarter of - of
Pactual - IIF - party atthoughts - - 341 Natire affecting Prais, - when Interned of the - main treated. Options Thes - - Individual hand parting and - included - -
Regraded Uclassified
5-2-34
23
Extract from the President's Message to Congress on March 10, 1933,
expressing his thanks for its action on the Banking legislation,
"TC THE SENATE AND HOUSE OF REPRESENTATIVES:
"The Nation is deeply gratified by the immediate response given yesterday by
Congress to the necessity for drastic action to restore and improve our banking
system. A like necessity exists with respect to the finances of the Government
itself which requires equally courageous, frank and prompt action.
"For three long years the Federal Government has been on the road toward
benkruptcy.
"For the fiscal year 1931 the deficit was $462,000,000.
"For the fiscal year 1932 it was $2,472,000,000.
"For the fiscal year 1933 it will probably exceed $1,200,000,000.
"For the fiscal year 1934, based on the appropriation bills passed by the
Inst Congress and the estimated revenues, the deficit will probably exceed
$1,000,000,000 unless immediate action is taken.
"Thus we shall have piled up an accumulated deficit of $5,000,000,000.
"With the utmost seriousness I point out to the Congress the profound effect
of this fact upon our national economy. It has contributed to the recent collapse
of our banking structure. It has accentuated the stagnation of the economic life
of our people. It has added to the ranks of the unemployed. Our government's
house is not in order and for many reasons no effective action has been taken to
restore it to order.
"Upon the unimpaired credit of the United States Government rest the safety
of deposits, the security of insurance policies, the activity of industrial enter-
prises, the value of our agricultural products and the availability of employment.
The credit of the United States Government definitely affects those fundamental
human values. It, therefore, becomes our first concern to make secure the founda-
tion. National recovery depends upon it.
"Too often in recent history liberal governments have been wrecked on the
rocks of loose fiscal policy. We must avoid this danger.
"It is too late for a leisurely approach to this problem. We must not wait to
not several months hence. The emergency is accentuated by the necessity of meeting
great refunding operations this spring.
"Wo must move with R. direct and resolute purpose now. The members of the
Congress and I are pledged to immediate economy."
Regraded Uclassified
24
Extract from the Radio Address of President Roosevelt,
broadcast from the White House, Thursday evening, April 14, 1938.
****** I can hear your unspoken wonder as to where we are headed
in this troubled world. I can not expect all of the people to understand
all of the people's problems: but it is my job to try to understand those
problems.
"I always try to remember that reconciling differences can not satisfy
everyone completely. Because I do not expect too much, I am not dis-
appointed. But I know that I must never give up -- that I must never let
the greater interest of all the people down, merely because that might be
for the moment the easiest personal way out.
"I believe we have been right in the course we have charted. To abandon
our purpose of building a greater, B. more stable and a more tolerant America,
would be to miss the tide and perhaps to miss the port. I propose to sail
ahead. I feel sure that your hopes and your help are with me. For to
reach & port, we must sail -- sail, not tie at anchor, sail, not drift."
--000--
Regraded Uclassified
25
JR
GRAY
London
Dated May 2, 1938
Rec'd 11:15 a.m.
Secretary of State,
Washington.
RUSH.
362, May 2, 4 pame
FOR TREASURY FROM BUTTERWORTH.
The London press has played down the financial
aspects of the Anglo-French discussions, However, the
first paragraph of an article by the Paris correspondent
of the SUNDAY TIMES may bE of interest in connection
with my 356, April 29, 9 p.m.:
"Monsigur Daladier and Monsieur Bonnet have COME
back greatly pleased with their London visit. At least
in a general way if not on EVERY single point. Monsieur
Bonnet was a little disappointed that financial questions
such as the future of the franc and the Tripartite
Agreement should not have been discussed and that his
pet proposal concerning Anglo-Trench purchases of
foodstuffs and raw materials on Danube -- a development
of 8 Stresa plan of 1932 for a Danubian Economic federation
-- should not have been discussed.more conclusively".
Incidentally
Regraded Uclassified
26
-2- #362, May 2, 4 p.m., from London,
Incidentally an official in a position to know tells
mE that it was through a Cabinet indiscration on the
PLANER
part of Bonnet that the press learned of the Anglo-French
"purchases of armament and raw materials with a certain
amount of pooling of financial resources (TIMES April 29)"
and that the arrangements thus far agreed to are not
nearly so far reaching as Friday morning's press reports
would indicate.
KENNEDY
KLP:CSB
Regraded Uclassified
27
JR
GRAY
London
Dated May 2, 1938
Rec'd 12:50 p.m.
Secretary of State,
Washington.
563, May 2, 6 p.m.
FOR TREASURY FROM BUTTERWORTH.
Fortign exchange and gold market were virtually
inactive, avaiting the issuance tomorrow of the French
decrees.
KENNEDY
DDH:CSB
Regraded Uclassified
28
E. 11 60M 9.37
FEDERAL RESERVE BANK
OF NEW YORK
FFICE CORRESPONDENCE
DATE May 2, 1988.
CONFIDENTIAL FILES
SUBJECT: TELEPHONE CONVERSATION WITH
L. 8. Knoke
BANK OF FRANCE.
OM
Mr. Cariguel called no at 2 o'clock and asked how the
franc was behaving. I told him that business was almost at a stand-
still, the rate being 506 1/4 (162.87) Would I please call him at
his home (Carmot 4388) if there were any appreciable change in the
situation? I promised to do so.
LWK:EW
03V13030
8801 BYW
YRUZA38T
-
- any - und
Regraded Uclassified
29
REB
GRAY & SPECIAL GRAY
Paris
Dated May 2, 1938
Rec'd 3:35 p. m.
Secretary of State,
Washington.
RUSH
683, May 2, 5 p. m.
STRICTLY CONFIDENTIAL FOR THE SECRETARY OF THE
TREASURY FROM COCHRAN.
Minister of Finance Marchandeau sent word for
me to come to his office this afternoon at 4 o'clock,
Upon my arrival hE read to me a message which hE wished
communicated to Secretary Morgenthau at once. Rueff,
who was also present, took the message in French and I
took it down in English. Rueff and I then compared our
copying and agreed on the following translation.
"The French Government is obliged to inform anew
the Government of the United States of America that the
Expensive Effort made by the stabilization fund,
particularly during the recent period, can not longer
bE maintained. The French Government is therefore
obliged
Regraded Uclassified
30
REB
2-#683, From Paris, May 2,5p.m.
obliged, despite the fact that it has decided to impose
from this WEEK a new and important tax effort on the
country, to choose between Exchange control or the
retreat of its currency. The rate at which the French
Government has decided to stop is around 175 francs
for one pound, with the will to lower progressively
this figure in corrulation with the Economic improvement
which it EXPECTS from its decrees.
(END SECTION ONE)
WILSON
CSB
Regraded Uclassified
Cable 683, Paris, dated May 2, 1938: Sec. 2, line 2: "18,000,000 should
be 18,000,000,000 france"
-
PARTIAL PARAPHRASE OF DECTION TUO, TELEGRAM NO. 683
of May 1, 1938, from Paris.
31
The French Government recalls that from the first of
last July taxes have been increased by 16,000,000 france and
that thereby it has shown its will to defená its ourrency
by all possible means and that it remains still attached
to this view within the framing of sonstary liberty. It
nopes therefore that in these conditions the setback which
1% is obliged to decide upon will appear to the Government
of the United States of America no entirely in conformity
with the provisions of the Tripartite Agreement."
The Minister of Finance told me that he would appres-
into having the reaction of Secretary Morgenthau to the
above statement as soon as 11 is possible for him to let
us know. I asked Marchandesu when the rate would be noved
to 175 and he replied "tomorrew"; this will be one of
several steps which are to be taken tomorrow simultaneously
with the publication of certain decree laws. I asked
the Minister whether the terms of the national defense
loan would be made known tomorrow. His answer was that
he was not sure whether they would be tomorrow or the day
after. In any circumstances, he insisted, it is not
possible to hose the present frans rate and that 11 is
absolutely necessary to let 12 nove to 175 to the pound.
END MESSAGE.
WILSON.
EA,IND
Regraded Uclassified
32
REB
GRAY
Paris
Dated May 2, 1938
Rec'd 3:25 P. m.
Secretary of State,
Washington.
685, May 2, 6 P. m,
FROM COCHRAN,
Paris exchange market has been quiet all day
with the franc between 162 and 163, without any appearance
of intervention by the Franch control. Forward francs
against sterling have improved from 5 to 41 for three
months and from 3 to 2.40 for one month. Entire tendency
is to await governmental decress which WETE drawn up
by Cabinet this morning, are bEing studied now by
Council of Ministers and will be promulgated in the
Journal Official beginning tomorrow. There is gossip
on the market that the new national defense loan will
bE a 5% issue at 97.
WILSON
CSB
Regraded Uclassified
33
RE: FRENCH MONETARY SITUATION
May 2, 1938.
5:00 P. M.
Present: Mr. Taylor
Mr. White
Mr. Lochhead
Mrs. Klotz
H.M.Jr:
For the record, I called Ambassador Kennedy
this morning and asked him if he knew what had
gone on between the French and the English when
the French visited - made their visit last week.
He said he had absolutely no information other
than what Bütterworth had sent me, and he said,
"I go over all of Butterworth's cables with him
very carefully." He said, "I am lunching with
the Prime Minister Tuesday, and is there anything
you'd like me to find out?" I said, "Yes, I
don't want to be used as a cat's paw by the
British in their relations with the French, end
I want to be very careful in what I do with
regard to the Tripartite Agreement, and I wish
you'd try and find out from Mr. Chamberlain just
what his attitude is." Ambassador Kennedy said
that he would do that and would immediately
telephone me after his lunch.
Around noon Mr. Cochran, at Paris, called me and
tol me he was sending me the information in
Cable No. 683. I told him that I couldn't give
them a couple hours' answer; that this was too
important, and I said, "Furthermore, they are not
asking my advice - they are simply telling me what
they are going to do." Cochran then said - he
said, "At no time have I pressed the French
Treasury as hard as I have during the past ten
days for information." I said, "That is quite
right, and never have I pushed you as hard to
get the information," and Cochran said, "I was
unable to get anything."
Now, on the eve of their taking steps in regard
to their currency, they ask that I, within a
couple hours, give them an answer. I said to
Cochran, "Furthermore, until we see what their
decrees are, we can't make up our mind what we
are going to do."
That's that. Now I had White's memorandum which I
read very carefully. Give him (Hickman) that
(White's memorandum) to put in as a part of the
record.
Memorandum follows
Regraded Uclassified
34
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE April 30, 1938
TO
Secretary Morgenthau
FROM Mr. White
Mr. Lochhead has not seen this hurried memorandum but
he heard the conclusions and said he agreed with them in the
main, especially as they are merely a basis for further dis-
cussion here.
With more time we could have shortened and polished the
memorandum but there is a summary statement appended should
you be disinclined to read the several pages.
Regraded Uclassified
35
SUMMARY
Conclusion
1. Further depreciation of the franc is not justified.
2. Further substantial depreciation of the franc entails
serious dangers to France and to international currency
stability.
3. Further substantial franc depreciation would greatly
weaken the effectiveness and future usefulness of the Tri-
partite Accord if France is permitted to remain as a "Club"
member.
4. Imposition of exchange control over non-commercial
transactions (for the purpose of (a) preventing the franc
from falling to much lower levels, (b) safeguard present
gold holdings, (c) avoiding additional trade barriers) is,
in our opinion, the best of bad choices now confronting the
French Government.
Recommendation
1. We recommend for your consideration an answer to
the British Treasury which would indicate, in such manner
that the two portions of the answer cannot be separated, that
(a) Continued substantial depreciation of the franc
would constitute in our opinion a violation of the
Tripartite Accord.
(b) We would not regard the imposition of exchange
control over non-commercial transactions 8.8 a viola-
tion of the Tripartite Accord.
2, We recommend further that, if feasible, France be
notified of our position, and that the possibility be con-
sidered of making our position public.
Regraded Uclassified
36
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE April 30, 1938.
TO
Secretary Morgenthau
Mr. White
FROM
Subject: What should our answer be to the British Treasury
BE to our attitude toward further depreciation of
the franc?
1. Depreciation of the franc during the past year has not
improved the French economic position nor has it solved
her acute exchange problem.
The franc exchange has fallen 30 percent since last
April (from 4.496 to 3.087) yet her economic problems re-
DE1n LT least as acute this Spring as they were last Spring.
It is true th t her international competitive position
has improved during the past year but this improvement has
been completely outweighed by other developments, which
operate to maintain her unfavorable balance of trade at 8.
dangerously high level. Her unfavorable balance is running
about the same this year 28 it was last year, and leet year
she had an unfavorable balance of 18 billion france, as com-
pared with 10 billion in 1936, 5 billion in 1935 and 1934.
2. Neither the domestic nor the international underlying
economic situation in France justifies & further reduction
in the franc rate.
There is no price deflation in France, which in itself
might justify resort to further depreciation &B 8 means of
reversing the price trend. Prices have remained stable in
Frence during the past six months despite declining world
prices,
Her international competitive position, all pertinent
espects considered, has substantially improved since last
year, The fact that her unfavorable belance of trade con-
tinues at a dangerous level has been due not to an unfavor-
Able exchange or price position, but rather to other factors
connected with international domestic and political situation.
Prepared with the aid of Mr. Classer.
Regraded Uclassified
37
Secretary Morgenthau - 2
3. There is no reason to believe that further depreciation
to the figure of 190 to 200 (mentioned in the cable) will
of itself solve France's economic or exchange difficulties.
If the franc keeps falling sharply not only will her
present difficulties continue but new end serious dangers
will be introduced into the situation.
(a) Intermittent and prolonged depreciation of the
currency sooner or later reaches e point at which the
rate of fall becomes increasingly rapid and may even
go beyond the control of the Government. In our opinion
France is rapidly approaching the rate and conditions
of decline which make this danger real and near. This
danger 1s particularly acute because of the disturbed
international situation and because the French Government
will attempt to conserve its gold resources as a war
chest.
(b) The franc rate 18 rapidly approaching a level which
may be regarded by other countries exposed to French
competition as involving an attempt to secure an unwar-
ranted international competitive advantage. Sooner or
later it may initiate another round of competitive de-
preciation and extended use of multiple currencies which
would wipe out many of the advantages arising out of the
existence of the Tripartite undertaking.
4. Further substantial depreciation of the franc in the near
future would have the grave danger of discrediting the
Tripartite Accord 8.6 an instrument designed to aid inter-
national monetary stability - unless France were dropped 8.8
8 "club member".
Not to drop France from the "club" with the franc dropping
to much lower levels would be to greatly Jeops rdize the future
usefulness of the Accord. It were better under those circum-
stances both for France and ourselves to drop France from the
"club" and later readmit her when she gives satisfactory evi-
dence that the franc will be stabilized at levels satisfactory
at that time.
5. How can France solve the acute stage of her present
crisis? There are three ways open to her:
(a) Floating a loan on the British market.
This is E. possibility, but such a loan to France
could be successfully floated only with the active pro-
motion end encouragement of the British Government.
Regraded Uclassified
38
Secretary Morgenthau - 3
This encoure ement will be forthcoming only at B. poli-
ticel price -- & price which will probably greatly in-
crease France's political dependence upon England both
with respect to her internal as well as external affairs.
How successful such a loan would be in relieving
France's immediate problem would depend upon the size
and terms of the loan. On the basis of past experience
it is safe to say that only a very large and long term
loan will do the trick.
(b) She can continue to attempt to hold the franc above
165 at & cost of substantial amounts of gold and with
the aid of greatly increased obstacles to imports.
It 1e quite clear that she will not permit herself
to lose much more gold at this time, end her ability to
hold the franc at present levels without losing much
gold has been substantially reduced by the amount of
telk going on of letting the franc fell to a level much
lower than the present one.
This has been the method which France has been using
to hold the franc. The decline in the past month indi-
cates the hopelessness of sole reliance on this method.
France has been raising import duties on items not
involved in trade reements, and if she means to con-
tinue to attempt to hold the franc without aid of ex-
change control ehe may resort to an extension of import
restrictions by either or both higher teriff and smaller
invort quotas.
(c) The imposition of exchange controls.
If France 1s to impose exchange controls over non-
commercial transactions it would probably be wiser for
her to do 80 at something a little lower than the present
rates; or, what may be even more desirable from her point
of view, to permit the franc to drop to possibly 170 or
175 (to the pound) and then push it back to B. higher
figure -- say 165 to 160 -- holding it there with the aid
of effective exchange controls. In the maneuvering down
to low levels and then up again, the French Stabilization
Fund can make & handsome profit if operated properly and
can, moreover, administer some severe losses to speculators
in the franc. However, the present French Government is
either opposed to adoption of exchange controls, or is of
the opinion that it would violate the Tripartite Accord.
Regraded Uclassified
39.
Secretary Morgenthau - 4
Conclusion
1. or the three ways open to France to attempt to solve
her scute exchange situation, the imposition of exchange
controls over non-commercial transections (for the purpose
:: (a) preventing further substantial declines in the franc,
(b) safeguarding her present gold holdings, end (o) avoiding
ciditional berriers to trade) seems to ue now, 88 1t has in
the past, to be the best of the bad choices confronting her.
Notwithstanding the administretive difficulties such a pro-
cedure involves if it 13 to be successful, we believe it 1s
possible for the French Government to develop exchange con-
trols within E reasonable time sufficiently effective to
hold the franc gt somewhere near present levels.
The position, it seems to us, that we can logically take
now 1s that we would regard anything more than a very moderate
drop in the French franc within the near future BB 8 violation
of the Tripartite Accord (we have in mind a point somewhere
between 165 to the pound -- or 3 cents --, to 170 to the pound -
or 2.94 cents).
If France knows this ahead of time she will make every
effort to keep the franc from falling below that level because,
for France to be read out of the Tripartite Accord at this
juncture would incre se the pressure against the franc end make
it even more difficult than ever for her to borrow abroad or
stabilize her currency. In addition fear of inflation at home,
and domestic disturbances will become much intensified with
the rise in domestic prices following further sharp deprecis-
tion of the frenc.
2. Unfortunately the present French Cabinet (as well 8.8 pre-
vicus ones) seem to be definitely opposed to adopting exchange
controle on non-commercial transactions. We do not know whether
the continued weakness of the franc has altered their attitude
on this matter. In any case if we are to take the position that
further substantial declines in the franc will rule them out of
the "club" we must provide them with an alternative course of
action. We have no intention of investing large sums in france.
France can not float large loans here. The only alternative
ve can offer to France 16 the privilege of adopting exchange
controls over non-commercial transsctions. Indicating to
France that she can adopt such controls without being dropped
from the "club" would be consistent with our earlier position.
Regraded Uclassified
40
Secretary Morgenthau - 5
It therefore appears wise that should we state our posi-
tion again it should be phrased in & manner which will leave
no room for either doubt or equivocation. You might even
consider the pros and cons of making such B. statement public.
You remember you thought of that possibility in a previous
French crisis. Certain objections which existed then would
seem to have disappeared in the 11ght of developments.
3. It 1s barely possible all the important cabinet members
of the French Government may not clearly understand that she
oan impose exchange controls against non-commercial transac-
tione without violating the Tripartite Accord either in spirit
or in letter. It 18 even possible that England in sttempting
to pursue certain political ende may somehow or other have
studiously given her the impression that adoption of exchange
controls at this juncture would be regarded as a violation
of the spirit of the Tripartite Accord.
(It is significant to remember that Bonnet's position has
been against exchange controls on the grounds that it would
violate the Tripartite Accord. You will remember the position
he took when he wes Finance Minister and the way in which he
tried to inveigle you to make E. statement to that effect.)
4. But it may well be asked if we drop France from "club"
membership unless she holds the franc rate at somewhere near
present levels, aren't we;
(a) Removing an important prop now sustaining France
in her role 2.8 a first-rate power and 8.8 E. democracy?
(b) Helping France to disintegrate economicslly?
(c) Driving France to greater dependence on Chamberlain!
To drop France from "club" membership would unfortunately
have effects in the above directions. But the very knowledge
that those may be the consequences will impose great pressure
upon France to prevent the franc rate from dropping to levels
which would rule her out of the "club". If France could do
so only by securing aid from Great Britain, France would doubt-
less be willing to pay a very large political price.
But France has the alternative of edopting exchange con-
trols. If France is made clearly to understand that the adop-
tion of exchange controls 1s not in our opinion S violation
Regraded Uclassified
41
Secretary Morgenthau - 6
of the Tripartite Accord, we may accomplish two purposes
by taking the position that she will be dropped from the
group If the franc drops more than very moderate amounts
from present levels.
(a) We will keep France in the "club" and thereby
avoid the dangers listed above.
(b) We will be helping France to adopt what appears
to be the only measure that has & reasonable chence
of checking further and dangerous declines of the franc
and of safeguarding her gold holdings, and of reducing
her reliance upon trade restrictions.
Tentative Recommendation
Te suggest for your consideration the feasibility of
sending to England an answer to her inquiry which would state
our position 8.8 being somewhat as follows:
(1) We would regard anything beyond A very moderate
reduction in the franc from present levels in the near
future 2.8 constituting a violation of the Tripartite
Accord.
(2) That we feel if France finds it necessary to adopt
effective exchange restrictions against non-commercial
transactions 8.8 a necessary instrument to prevent Eer
exchange from falling we would not regard such action
as 3 violation of the Tripartite Accord either in spirit
or in letter.
It is essential that both points be made together. There
1s the grave danger that should we indicate to England only
that our position is that we would regard a reduction in the
franc rate below B very moderate amount 88 8. violation of the
Tripartite Accord without repeating our attitude on the matter
of exchange controls that England may be tempted to use that
inform tion to force France to accept England's wey out, which
may net be wholly in accord with our objectives.
It would be preferable if we could let the French know
our attitude on both points directly 80 that there could be
no possibility of misunderstanding. If, however, you find
it inadvisable to let the French know directly, I think it
12
very important that the information given to the British
should be couched in such terms as to make it impossible for
them to separate our attitude on both matters, or to in any
way enable them to use one portion of the information for their
own purposes.
(There 1s the possibility that by Tuesday the French will
have approached us directly in which case we will be able to
let the French know directly as well 88 the British.)
Regraded Uclassified
42
- 2 -
I - the thing that bothers me is this: I don't
know whether the French can pull themselves out of
this situation or not. But I hate to be party to
giving them a death blow, especially where, for
years, we have nursed them along.
Kennedy also told me that Halifax, the Foreign
Minister of England, had told him that the Germans
had, in their own minds, just wiped the French
out as a country of any importance, and from now
on they are just not even going to think about the
French. They don't even think they are worth
while to bother with.
Furthermore, I don't think - that if we should
decide to say that through this action on the part
of the French, that out of the Tripartite - that
we could take such a step without consulting the
President, and furthermore, I don't see why we
can't wait a couple of days. We have nothing to
lose.
Another thing Cochran told me - he is cabling me
an analysis of a statement by Professor Rist, in
which Rist has made a very careful analysis of
what he thinks the franc should be. As I
remember, Professor Rist said "Around a hundred
sixty-two francs to the pound."
All right, Wayne Chatfield Taylor.
Taylor:
Present. We've got - you mean, in view of these
other things that have happened, these drafts
probably you don't need.
H.M.Jr:
Have you agreed on one?
Taylor:
I don't think so.
Lochhead:
We agreed on one for discussion on the basis of
Butterworth's cable, but of course this other cable
throws it out.
Taylor:
It's 190 to 200, but this stuff supercedes it.
H.M.Jr:
(Over telephone.) Secretary of State Hull, please.
Lochhead:
I don't think we can agree to allow an action of
this kind to be forced on the Tripartite members.
Regraded Uclassified
43
- 3 -
H.M.Jr:
What do you mean by that?
Lochhead:
For them to say "We are depreciating."
H.M.Jr:
(Holds side conversation with Mrs. Klotz.)
(Over telephone.) Tell Mr. Upham if he doesn't
know who's coming in tomorrow he can come in and
talk with Mrs. Klotz if he wants to check. Please.
Well, see if Mr. Sumner Welles is there.
The Secretary of State left.
(To Mr. Lochhead., ...at were you going to say?
Lochhead:
In other words, even if the facts or conditions
might make us lean toward going along with the
French to a hundred seventy-five, we couldn't set
a precedent to allow them to do their business in
that way without giving us a chance to express an
opinion on it. Then, if they leave it down to
a hundred seventy-five the one point that comes
up tomorrow is that - afternoon time - they may
give us an order to sell francs in this market on
the basis of one seventy-five, and we hand them
gold
H.M.Jr:
Do what?
Lochhead:
Give them gold.
M.M.Jr:
Give them gold?
Lochhead:
Yes.
M.M.Jr:
Well, we could do something like this: We could
say, "Yes, we'll do this, but this doesn't commit
us to any future action.
Lochhead:
And secondly, we would have a chance to consult
with the British before we did it, because they
would have to make a decision before they'd do
it.
H.M.Jr:
(Over telephone:) Hello. He's in or out? Who
says that? Well, he left word with his secretary -
any time - you get his secretary and tell her I
want to talk to him, and see if she gives you the
same answer.
Regraded Uclassified
44
Well, that point can be covered by saying -
by saying, "Well, now, we're going to do this
today; what we're going to do tomorrow we
don't know." See?
(Over telephone:) Hello. It's all right. Let
it go.
Taylor:
I don't think one or two days makes any difference.
H.W.Jr:
I don't either.
Taylor:
I think we've got to feel our way along here, be-
cause it's going to be a damned serious thing if
we decide to drop them out, and having nursed
them as long as we have, why, certainly, I don't
think we ought to take the initiative in kicking
them out, but we will probably find that the British
will or will not have decided what they want to do.
H.B.Jr:
Who is Chief of the European Section?
Taylor:
Moffat - Pierrepont Moffat.
M.M.Jr:
All these people
(Over telephone:)
Cancel my call for Mr. Welles and see if Mr.
Pierrepont Moffet is in, will you please? Pierre-
pont Moffat, in the State Department.
Lochhead:
What I don't like about it is their actions -
saying they have to do it, and they are going to
do it tomorrow, for this reason; for today the
franc was not under any particular pressure.
We've not had any word whether the gold lost
for them this morning. However, in this market,
the franc tightened up a little bit and we sold
B. few francs this afternoon. It indicates that
there is nothing pressing.
H.N.Jr:
The two things bothering me - the first place, of
Bullitt walking in here and trying to sell me the
idea of letting the French seek their own level -
I was amazed. Number two - that the French bankers
have been banking on this thing, and the thing
happens.
Lochhead:
I mean, in other words, right now
Regraded Uclassified
45
- 5 -
Taylor:
They picked one seventy-five, too.
Lochhead:
....
right now, with the frank the way it is, if
they can continue to hold the franc at one sixty-
two for several days - because these boys are so
short that you can tell it was Dreyfuss that
bought a small amount of francs, so you can tell
how hard pressed they are.
H.M.Jr:
(Telephone:) Is there anybody in the office of
the Secretary of State. See if there's anybody
in the office of the Secretary. I don't care if
it's the charwoman - I'll talk to her. If there's
anybody in the office of the Secretary of State.
Please.
Taylor:
Going to be working late.
H.M.Jr:
(Laughing) I'm kind of hollow, but I'll get
warmed up, after coming down from eight thousand
feet.
.shame I'm back now in Washington.
Joe Kennedy says, "How is it over there in the
United States?" I said, "Up on the farm it's
beautiful." He says, "Any change from just the
way it was?" I said, "No, Joe, just the way it
was when you left. He said, "I've got the best
job in the world."
Klotz:
He thinks SO.
H.M.Jr:
(Telephone.) Hello. All right. Hello. Who is
this, please? All right. Now look - I tried to
get Mr. Hull, without success; I tried to get
Mr. Sumner Welles - he's too busy to talk to me;
I tried to get Pierrepont Moffat - he's not avail-
able. Now, at eight-thirty tonight, at my house,
I'm having a discussion in regard to the Tripartite
Treaty, in lieu of cable number 683, which just
came in. Mr. Feis can come at nine o'clock. I
think it's important enough that Mr. Pierrepont
Moffat is there to give me the political background.
Well, I think it's important enough, because quite
frankly, if you will look at 683 - I mean, they've
put the gun right to our head and I've got to
make up my mind tonight and tomorrow. Pardon me.
Well, it's - it's not necessary; either he will or
won't come. It's 2211 Thirtieth - off Massachusetts
Avenue, so he doesn't go to Georgetown. It's
2211 Thirtieth, off Massachusetts. Herbert Feis
Regraded Uclassified
46
- 6 -
said he could get there at nine. I said, "No,
this is terribly serious - I'm giving up my
evening, and I want help." Yeah. Right.
Lochhead:
Was that the charwoman?
Rentschler - he seemed to know what it vas all
about.
This is a tough nut to crack, gentlemen; this
isn't an easy one, and believe me, I'm going to
play my cards awfully carefully, and if I can't
I'm going to make the British talk first, and I
don't see why we can't.
What I would think about, is this - the possibility -
between now and eight thirty - of drafting some
kind of an answer, which would let them know we
are displeased. Would we put them on a twenty-
four hour basis? We'll sort of serve notice on
them - see? Simply say, "Now, this comes as a
great surprise - we have been asking for ten
days; you don't give us a chance to consult.'
Doesn't the thing say "consult"? This is not
consultation; this is telling us. "In view of
that fact we feel that we ought to Inform you
that from now on that the Tripartite is on a
twenty-four hour basis until we can evaluate
this thing." See? Now, even still - I could
even still get Cochran and tell him to tell those
boys that. See?
White:
I think the second is better.
H.M.Jr:
What?
White:
I thinx the second is better - to tell Cochran.
S.H.Jr:
I don't like this, in view of this. I want them
to know we consider we are on a twenty-four hour
basis until I can make up my mind. And then I'd
like to ask Cochran - "Does Marchandeau know of
the things that I told Blum?"
Lochhead:
(Nods "Yes.") It's the way.
White:
What indications do they give that they can support
it at that level? There is absolutely none there.
We find ourselves in the position of being let down
into places we don't want to go. Not even the
slightest suggestion here of what they are going to do.
Regraded Uclassified
47
- 7 -
H.M.Jr:
(Telephone:) Put in a call for Cochran, please.
Utmost secrecy. Is the French phone open - if
the French phone is open, all right. If not, it
doesn't matter. Will you stand by till I go,
please. Yes. Oh. Oh, well, it isn't necessary
to have Mr. Pierrepont Moffat! Let me - oh -
oh, well then, tell them all right - we won't need
Mr. Moffat, then. o: K.
Mr. Feis has prepared himself; he's had a discus-
sion with Hull, Welles, and Moffat, so he's pre-
pared.
White:
Then, there is an amazing
.....
Taylor:
"The French Government is therefore obliged, despite
the fact that it has decided to impose from this
week a new and important tax effort on the country,
to choose between exchange control or the retreat
of its currency."
White:
It is an amazing decision, because if we have a
choice
Taylor:
Their choice.
Lochhead:
Well, but they don't say what kind of exchange
control.
White:
They are choosing between the two.
Taylor:
They are choosing between the two and they've
chosen this.
White:
The assumption is they can hold it at that and drop
the exchange control at one sixty, or something
like that.
Lochhead:
All the figure of one seventy-five means - it's
nothing magic - its immediate effect - let the
boys cover in their position and take another
look at that position.
H.M.Jr:
Well, look! What harm can there be to serving
notice on them? That we are on a twenty-four
hour basis on this thing until I get a chance?
Lochhead:
No harm at all.
Regraded Uclassified
48
- 8 -
Mr.
H.M.Jr:
I know - if he goes in to see/Marchandeau -
"The Secretary of the Treasury, quite frankly,
is shocked at this message; he hasn't had a
chance to evaluate it; he won't make any changes
before Tuesday, but he wants to inform you that
any action that he takes Tuesday does not mean
that he is approving the step that you are taking."
Taylor:
That's 0. K.
Lochhead:
Did you want to make any effort to let the British
know of that decision before the market opens.
H.V.Jr:
Oh yes. We'll do it the same way.
(Telephone:) Find out where Bewley is and tell
him, if he's anywhere around, I want to talk to
him, please. Have you put in the call for Cochran?
It seems to me that after all, it's like a contract
sales agency - the fellow suddenly changes his
commission from ten per cent to fifteen per cent.
Well, he serves notice - "After tomorrow I am
going to charge you fifteen per cent commission."
Well, then I do business - well his business is
acceptable, but if I serve notice I'll do business
for Tuesday but I don't know what I'll do Wednesday,
that protects me - it's the same thing. If you're
a representative for a house and you're selling
on a commission and you were doing it at ten per
cent and suddenly say, "No, it's going to be fifteen
per cent"--I don't know but what it's a point of
common law, if you do business then, that it
extends a contract for & year, and you accepted,
but if I say, "I'll do business one day on that
basis, but I don't know whether I will do business
on Wednesday."
White:
It seems to me you're in position that you can't
do anything but that, because if you were to do
anything else you areconfronted with one or two
alternatives.
H.M.Jr:
(Telephone.) Tell Oliphant to come in please.
What? He was here all day wasn't he? O. K.
All right.
He's as bad as the men in the State Department.
Regraded Uclassifie
49
6 D. I
Klotz:
(Over White House telephone:) Hello. Just a
moment. Mr. Welles.
H.M.Jr:
Hello. Hello Summer. Uh-huh. All right, Sumner,
anything you say goes with me. Sumner, I'm terribly
upset over this French situation, and I don't know
whether you saw the last cable that came in. Well,
it's the one where they served notice on us that
they are going to go to a hundred seventy-five
francs - this Marchandeau. Well, you want to
read it and then call me back - because I - I am
thinking of taking - doing something now. I'll
wait until you've read it.
Incidentally, the former President of United States
Steel
.... (inaudible - talking to Mrs. Klotz....)
foreign office in Berlin, and got black marks and
everything else. I mean, he knows the business.
Taylor:
Who?
H.M.Jr:
The former head of United States Steel.
Taylor:
Myron Taylor. Oh yes.
H.M.Jr:
He's marvelous - wonderful. I mean, they can't
laugh that fellow off.
Taylor:
Oh no.
Lochhead:
So far as taking - some of those business fellows
get into public service.
Il.M.Jr:
I - I - the more I think of it, - I mean, I always
out these things down in a practical application.
(Telephone.) Hello. Thank you. Hello Summer.
Sumner, this is what I am thinking of doing, via
Cochran. We want to take several days to think
this over and also, naturally, talk with the
British. I talked to Kennedy today; he knew nothing;
he said he was having lunch tomorrow with
Chamberlain. What they are doing, they are changing
the rules. What I was thinking of doing - I've
got a call in for Cochran - is to say this: "Please
call up Mr. Marchandeau and say I was very much
surprised that he notified me and didn't consult
with me. I'll carry out the agreement on Tuesday,
but I am making no promises what I'll do on Wednes-
day or the day after." In other words, it's like
Regraded Uclassified
50
10 I I
I told the people here - you have on agent sell-
ing at ten per cent commission. Well, he serves
notice on you he's going to charge fifteen. You
80 ahead and do business, and you more or less
accept the contract. If I simply serve notice on
Mr. Marchandeau I will do business with him for
one day, but I want several days to think this
over, does that make horse sense to you? Yes.
That's right. That's right. I spoke to Cochran
today and Cochran said that at no time since he's
represented the Treasury has he pressed so hard
for information and received none, during the last
ten days, except denials. He said, "I never
pushed them so hard to get information and with-
out success." Under the Tripartite they are
supposed to consult with members, but - no chance
to consult - they tell us what they are going to
do and, naturally, when it comes to say - if we
should decide to say, "You're out of the Tripar-
tite" - but I wouldn't want to do anything like
that without first talking with you and Mr. Hull
and getting the President's consent. It doesn't
mean that we acquiesce. Well, no, and they have
nothing. No, because Kennedy said that he goes
over Butterworth's cables very, very carefully
and he has nothing. They know nothing, and don't
even know what was agreed to when the French
went over last week. They knew absolutely nothing.
The way I look at it, what harm can come to the
United States Government by just outting these
people on notice? No. And on the other hand, If
we do business with them for tomorrow and execute
their orders, then it looks as though they could
very well say, "You did business; what right
have you to break it?" and the people in my shop
here agree with me. All right. Well, I'll go.
8h, I can't - well, the thing I don't know - the
thing that we don't like here is that the French
bankers have known this was coming; they knew
the rates and they have unquestionably speculated
on it at exactly the rates that have happened.
That doesn't smell very good. See, they have made
money out of this thing consistently. Now there
Is a way out; there's a way out to say that the
Tripartite, to save the trade treaty, and that is
they could out it on the movement of capital and
not on goods. We feel very strongly that they would
get somewhere on that basis, but why they don't
Uclassifi
51
- 11 -
do it just doesn't make sense to us, see? Right.
Now Feis is coming tonight, and I understand he's
talked with Mr. Hull and you. Well then, he's
talked to Mr. Hull. But I thought I'd shoot on
this. And then we'll see tomorrow what happens,
but after all, I can't undertake a thing like
this lightly.
Incidentally, I am simply delighted at the appoint-
ment of Myron Taylor. I thought that was a wonder-
ful selection. Yes. Yeah. Yeah. Well, he
felt he couldn't do it physically, but he's just -
he made up his own mind - I mean, I didn't have a
thing left out of it, but he felt he couldn't do
it physically. I agree with you. Thank you.
(Hangs up telephone.)
(To Mrs. Klotz:) What was that call (during above
conversation)?
Klotz:
Bewley's out playing tennis.
H.M.Jr:
I'm warming up.
White:
Mr. Secretary, do you think there's any chance of
a misunderstanding of this cable? I read it over
again. There is this possible interpretation
which would change the situation. It says, "The
French Government is therefore obliged, despite
the fact that it has decided to impose from this
week a new and important tax effort on the country,
to choose between exchange control or the retreat
of its currency." It doesn't say it's going to
retreat from its currency. It may be - this is
a possibility - that this one seventy-five is
not what they regard as a retreat but what they
regard in connection with exchange control.
H.M.Jr:
He had a big fight with them over the word'retreat.'
He said the word 'retreat' - the French word
'retreat' in English does not mean retreat. He
explained that - Cochran said a true translation
would have been "devaluation."
(Telephone.) Hello. Bewley, will you be available
through the Embassy? Can I call you? Well, it
will be after eight-thirty. Pardon - I can't hear
you. Well, do you have people on duty at the
Regraded Uclassified
52
- 12 -
Embassy at night? I mean, if I call and leave
a message? Well, it would be after eight-thirty,
and if I did want you it would be really important.
See? So, if you would, please. Thank you.
He's dining out at Herzog's. I don't know - all
of this thing - I mean, here what we are talking
about is the balance of power of Europe, and
everybody's so busy
Oh golly! I'll never
learn.
(Over telephone.) Well, what about - you haven't,
huh? Six.
Lochhead:
....
past twelve - daylight saving over there -
six hour difference.
H.M.Jr:
(Telephone.) Oh, are they trying his home; have
you got his number?
Klotz:
Don't realize he may be asleep.
Taylor:
I don't know - the Rue - is that a good place?
Lochhead:
After all these calls I think you're learning -
I mean, they are not going to let them force you,
in one hour. I think you shouldn't be required
to answer in a couple hours.
H.M.Jr:
I do feel - I do feel that I want to serve notice
on those people. You (Lochhead) raised the point.
"All right. We'll do business with you on Tuesday;
I don't like it; I don't know what I'm going to
do, but the fact that we do business doesn't
commit us to anything."
Taylor:
That is - I think that is just right.
H.M.Jr:
0. K.
Taylor:
And that gives you two days, three days, or a week
to look it over.
H.M.Jr:
Sure.
White:
I am still troubled about this interpretation.
You will have a chance to check up, won't you?
Regraded Uclassified
- 13 -
53
H.M.Jr:
Cochran said that "retreat" is not a true trans-
lation; that "devaluation" would be more nearly
correct.
Taylor:
This other part here helps answer that, Harry,
where it follows: "The rate at which the French
Government has decided to stop is around 175 francs
for one pound, with the will to lower progressively
this figure in correlation with the economic
improvement which it expects from its decrees."
I mean, it's what they were talking about in some
of their earlier cables - shrink down a long way
and fight back. This is exactly what he's talk-
ing about. He went into that in some detail.
Lochhead:
I'd love to be an operator, working on this over
in France - get your position - you cover up at
175 tomorrow and let it go back again, and sell
out again if it goes back to 170 or 165.
H.M.Jr:
(Holds side conversation with Mrs. Klotz.)
Well, what I think I'll do is - I think I'll go
home and then - go home and tell them, if I can
get Cochran at six - I can handle this just as
well from my house, except that I can't make a
record, but that's all right - I'll make Cochran
make a record, and I'll tell them - (Over
telephone:) Release Mr. Upham and tell him to
pick me up at home tomorrow morning at eight-
thirty. Doesn't Cochran's phone answer - is that
the trouble? Oh well, I'm going to go - well, I'll
let you know when I go.
I think that's the thing, and if we can't get him
on the phone, we can write a cable along these
lines.
(To Hickman:) And incidentally, Naster is coming
to the house tonight, see, and will you arrange for
somebody - that they should send a typewriter -
so that he can have a typewriter, paper and carbon
at the house. You know how to do that?
Hickman:
Yes sir.
H.M.Jr:
That's all. Anybody think of anything else? I
think that's all.
Regraded Uclassified
54
Monday
May 2, 1938
5:22 p.m.
HMJr:
Hello.
Operator:
I have Mr. Bewley.
HMJr:
Oh. Thank you.
0:
Go ahead.
HMJr:
Hello.
T.K.
Bewley:
Hello.
HMJr:
Hello, Bewley.
B:
Yes.
HMJr:
This is Henry Morgenthau.
B:
Yes.
HMJr:
I may need you tonight.
B:
All right.
HMJr:
Where will you be - available - through the
Embassy can I call you?
B:
Ah - what time will you be likely to call ...
?
HMJr:
Well to be -
after eight-thirty.
B:
After eight-thirty. Ah - well, I was going to
dine out at the restaurant tonight
...
HMJr:
Pardon me - I didn't hear you.,
B:
Well, I was going to dine out at Hugge's
Restaurant, but I think you'd better catch me
at the Shoreham - I'll be back there by eight-
thirty.
HMJr:
Well, do you have people on duty at the Embassy
at night?
B:
Ah - the messenger will be here.
HMJr:
I mean if I call and leave a message - ?
Regraded Uclassified
55
- 2 -
B:
Yes, you could leave a message at the Embassy.
I'll ring them up and find out.
HMJr:
Well, it would be after eight-thirty and if I
did want you it would be really important.
B:
Yes. All right.
HMJr:
See?
B:
Yes.
HMJr:
So ...
B:
All right, I'll keep in touch with him.
HMJr:
If you would, please.
B:
Yes.
HMJr:
Thank you.
B:
All right.
Regraded I Iclassifier
56
Monday
May 2, 1938
5:42 p.m.
HMJr:
Hello.
Operator:
I have the overseas operator.
HMJr:
Who?
Operator:
Go ahead.
HMJr:
Hello.
Overseas
Operator:
Yes, sir.
HMJr:-
This is Mr. Morgenthau.
4
0.0.:
Yes, sir.
HMJr:
Haven't you got any circuit to Paris?
0.0.:
Yes, we have a circuit to Paris, Mr. Morgenthau,
but you want the maximum privacy and we have to
line the circuit up ith it.
HMJr:
I'll take any circuit you've got.
0.0.:
Well, the circuit is now lined up 1th the maximum
privacy and the call 111 be coming through in
about three minutes.
HMJr:
I'll make you a bet that it doesn't.
0.0.:
You want to bet me it doesn't?
HMJr:
Yes.
0.0.:
Oh, (laughs) you know it ill if I say it ill.
HMJr:
Well. All right. I want you to in though.
(Laughs)
0.0.:
(Laughs) What 111 you send me - I mean, how
much are you betting?
HMJr:
(Laughs)
0.0.:
(Laughs)
I'm taking you up on it.
HMJr:
All right. If it comes through in three minutes
you get a box of candy.
Regraded Uclassified
57
- 2 -
0.0.:
Good. All right.
HMJr:
Well, what - wait a minute -
0.0.:
(Laughs)
HMJr:
What's your name, so I know who to send it to?
0.0.:
I'll see what I can do and then if
the call goes through, well -
HMJr:
You tell Miss Spangler who is my operator.
0.0.:
(Laughs)
HMJr:
All right.
0.0.:
O.K.
HMJr:
Thank you.
(Short pause)
HMJr:
Hello.
Operator:
It looks like you loose.
HMJr:
Hello.
Operator:
Here he is.
HMJr:
Thank you.
Operator:
Go ahead.
HMJr:
Hello.
H. Merle
Cochran:
Hello.
HMJr:
Hello, Cochran.
C:
Yes, Mr. Secretary.
HMJr:
I'm at the Treasury.
C:
Yes.
HMJr:
And I have your cable now, you see, and before
telling you what I have in mind we wanted to ask
you particularly about that word "retreat" -
Regraded Uclassified
58
- 3 -
"...to choose between exchange control or the
retreat of its currency..."
-
You told me
that that was not a correct translation from the
French.
C:
Well, I mean when he said that, Chancellor
he said the military effects - I mean when I
questioned the word -
HMJr:
Yes.
C:
And I said "depreciation" and he said, "No,
drawback."
HMJr:
"Drawback?"
C:
Yes.
HMJr:
Well...
C:
In another place where I used, "setback"...
HMJr:
Yes.
C:
...
they used the word "reprieve"
HMJr:
Yes. Well, - ah - this isn't - we've only had
a preliminary talk, but - have you got a pencil?
C:
Yes, Sir.
HMJr:
Well, this is the thought that I had in mind: -
ah - that you should let Mr. Marchandeau know
tomorrow morning the very first thing ...
-
C:
Yes.
HMJr:
that I am shocked at his message.
C:
You what?
HMJr:
I'm shocked.
C:
Uh huh.
HMJr:
Surprised.
C:
Yes.
HMJr:
I am shocked. Ah - that under the Tri-partite
Treaty we are supposed to consult...
Regraded Uclassified
59
- 4 -
C:
Yes.
HMJr:
I don't consider this consultation.
C:
Uh huh.
HMJr:
That's number two. Ah - number three, I have not
got time to decide what the United States Treasury
ill or 111 not do. Hello.
C:
Yes, I'm here.
HMJr:
Therefore if they give us orders tomorrow to buy
or sell francs for their account.
C:
Yes.
HMJr:
...we will execute those orders on Tuesday. But
by doing so we don't want them to think that we are
acquiescing...
C:
Yes.
HMJr:
...in their plans.
C:
Yes.
HMJr:
That it will take us a number of days to decide
just what we are going to do.
C:
Yes.
HMJr:
We wish to naturally consult - underline consult -
with the British.
C:
Yes.
HMJr:
But, pending that consultation we ill carry on
the orders for Tuesday.
C:
Yes.
HMJr:
But what we will do after that we don't know but
will let you know in plenty of time.
C:
I see.
HMJr:
Now, would you mind repeating that please, as you
understand it?
Regraded Uclassified
60
- 5 -
6
I'm to let Marchandeau know in the morning as
soon as I can see him that you were shocked -
that you were surprisedat this message.
HMJr:
Yes.
C:
That under the Tripartite that the people involved
are supposed to consult.
HMJr:
Yes.
C:
You do not consider this a consultation.
HMJr:
Yes.
C:
That you have not time - this Country is not
giving time to decide what the Treasury Department
will do.
HMJri
Yes.
C:
And to say that will execute any orders that may
be given to buy or sell on Tuesday but this does
not mean that you acquiesce. You ill consult
with the British on Tuesday.
HMJr:
Yes.
C:
Underscore consult.
HMJr:
Yes,
me
C:
And then you will let them know through /in due time.
HMJr:
That's - you got it El hundred percent right.
Now, - ah - in order to save me time and expense..
C:
Yes.
EMr:
I ish you would call Butterworth.
C:
Yes.
(MJr:
And give him this message, that I have given you;
and tell him to get it to the British Treasury
the very first thing, see?
C:
The message that ... ?
HMJr:
That I have just given you.
Regraded Uclassified
61
- 6 -
C:
Yes. Yes. Let him give that to the British
Treasury.
HMJr:
Yes. But I want you to get him still tonight.
C:
Yes. All right.
HMJr:
Now, furthermore, I am sending for Mr. Bewley.
C:
Yes.
HMJr:
The Brit ish Financial Attache and telling him
just what I'm telling you.
C:
Yes.
HMJr:
You see?
C:
Yes.
HMJr:
But I'd like you please to call Butterworth
still tonight and tell him what I've told you.
C:
All right.
HMJr:
Now, just a minute - see if I've overlooked
anything.
C:
Did you want me to get the French tonight.
I can still get Rueff but I doubt if I can get
Marchandeau.
HMJr:
Yes, I would make a distinct effort to get Rueff
tonight.
C:
All right.
HMJr:
Now, just a moment please.
C:
All right.
(Short pause)
HMJr:
Hello.
C:
Hello.
HMJr:
Now one other question, which has nothing to do
with this message.
C:
Yes.
Regraded Uclassified
62
- 7 -
HMJr:
Have you any way of knowing that the information
when I put up that question
....
C:
Yes.
HMJr:
... to Mr. Blum ...
C:
Yes.
HMJr:
in regard to exchange control, did he ever
give that information to anybody else? - I
mean did he pass that to the rest of the cabinet?
C:
...
about that.
HMJr:
Hello.
C:
-
sent a telegram a day or two after I called
up, you know, that the Governor of the Bank had
called me up
HMJr:
Yes.
C:
And he asked me a certain question.
HMJr:
Yes.
C:
And I wouldn't reveal the nature ...
HMJr:
Yes.
C:
of my talk with the head man.
HMJr:
Yes.
C:
Now whether he ever told him any more or not, I
don't know.
HMJr:
Uh huh.
C:
But it's never come to me from any source,
HMJr:
Yes.
C:
... that this man had revealed it.
HMJr:
Yes. Well..
C:
That's the only time - when he was there at the
bank.
Regraded Uclassified
- 8 -
63
HMJr:
Yes. Well, I'm not - this is simply for
you to use in case they say anything.
C:
Yes.
HMJr:
If we had had time to consult, see?
C:
Yes.
HMJr:
I might have been able to make a constructive
suggestion.
C:
Yes.
EMIr:
But they haven't given me that opportunity.
C:
No.
HMJr:
You see?
C:
Yes.
HMJr:
Now, let me ask your advice. Do you think that
what I am telling you in the message, do you think
that's - it's all right?
C:
Yes. I mean we shouldn't just take this without
letting them know that we're a little unhappy
about it. Now that's the question.
HMJr:
Well, I'm more than a little unhappy.
C:
Well, I'll put 1t, "more than a little."
HMJr:
No - - I am shocked.
C:
Yes.
HMJr:
And we just simply - if I carry out their orders
tomorrow without saying anything they might perfectly
well feel that I am acquiescing.
C:
Yes. Well, I think we should not let them feel that.
HMJr:
Well. All right. Well....
C:
It's a grand idea to get in touch with one or both
of them yet tonight.
HMJr:
Yes. Well, you think this makes sense, don't you?
C:
I what?
Regraded Uclassified
64
- 9 -
HMJr:
You like this message?
C:
Yes, 1 think it's all right.
HMJr:
All right. Well, then - make an effort to get
either to Marchandeau or Rueff and then get
Butterworth on the telephone at his home.
C:
Yes. I'll call the French first.
HMJr:
Oh, yes.
C:
Yes.
HMJr:
And if you want to call me back - I'm home tonight.
C:
You're home there?
HMJr:
Yes.
C:
All right. I'll see - if they have any message to
get right back why I'll call you.
HMJr:
Yes. But you've got it ....
C:
I won't call you.
HMJr:
And before calling you I discussed this in detail
with Summer Welles, and he's in hearty approval
of the action I am taking.
C:
You've been in touch with him?
HMJr:
Yes. And he heartily approves of what I'm doing.
C:
Yes. Yes.
HMJr:
Summer Welles.
C:
Yes. Fine.
HMJr:
Yes. He heartily approves.
C:
Yes.
HMJr:
O.K.
C:
Surely.
HMJr:
All right.
C:
No, the only point I made this afternoon - or that
I tried to make - was that their action here
Regraded Uclassified
65
- 10 -
through that little play which they made
preparatory to going over to London ...
BMJrt
Yes.
C:
has made this franc almost psychologically
inevitable, I mean, this rate.
HMJr:
Yeah.
C:
Even though it may not economically at present.
But I say all of that difference in them is
from a better approach to us on this.
HMJr:
Yes. Well, the thing that Summer Welles said,
every time you've asked them about this they've
denied it.
::
Yes.
HMJr:
And for ten days they've been denying it.
C:
And he not only denied it to me but when Wilson
saw h1m he got the same story.
HMJ=:
That's right.
C:
I mean he was thrown in contact with him.
HMJr:
That's right.
&
At the same time we knew all the time - I knew
it through the banker
HMJr:
Yes.
C:
that's the little fellow you know
HMJr:
Yes.
C:
Ah - was betting on this.
HMJr:
Sure.
C :
And also that the man who is interested in silver
you know - Patenotre.
HMJr:
Oh, Indo Chine?
C:
-
didn't understand that it was going to come
to this.
Regraded Uclassified
66
- 11 -
HMJr:
He understood what?
C:
That there was going to be a one hundred and
seventy-five franc.
HMJr:
Ah - that's the Indo Chine?
C:
No, Patenotre.
HMJr:
Oh yes. Oh yes. Oh yes.
C:
You remember that message?
HMJr:
Oh yes, very clearly.
C:
Yes.
HMJr:
Well, as Archie Lochhead and I said, we wish we
were in business on the other side of the water.
C:
I certainly agree.
HMJr:
It must be lots of fun and very profitable.
C:
Yes. For some people here certainly made a clean-
up, I can tell you that.
HMJr:
Yeah. Well, I don't want to be party to it.
C:
Well, I assure you I'm not a party to it.
HMJr:
What?
C:
I say I'm - I can assure you that I'm not in ...
HMJr:
Oh, no, no, no, no, Cochran, don't even say that
joking. Because I wasn't even by inference sug-
gesting any such thing.
C:
That's all right.
HMJr:
No, no, no, no, no - not even by inference.
C:
No - please.
HMJr:
No. All right.
C:
Fine. Well, I'll get in touch with - with them
yet tonight.
HMJr:
No, I was talking about the government.
Regraded Uclassified
67
- 12 -
C:
Surely.
HMJr:
All right.
C:
Fine. All right. Well, I'll get busy on Butterworth
and Rueff both.
HMJr:
O.K. Goodbye.
C:
Goodnight.
Regraded Uclassified
68
CONFIDENTIAL
CONFIDENTIAL
FROM: PRESIDENT U.S.
TO : SECRETARY OF TREASURY
0003 AS FAR AS I CAN MAKE OUT THE ACTION PROPOSED BY FRANCE
IS WEAK AND GETS NO WHERE IN THE LONG RUN. I AGREE WITH YOUR
LINE OF THOUGHT. OFFHAND IT SEEMS TO ME THAT SUPERVISION OF
CAPITAL MOVEMENTS AND GOLD CONTROL SIMILAR TO BURS WOULD
OFFER A MUCH MORE PERMANENT SOLUTION. AND IF THAT FAILS THEN
A MORE DRASTIC FORM OF EXCHANGE CONTROL. I HOPE SIMAON AND
YOU WILL HAVE A PLEASANT TELEPHONE CONVERSATION 2125
TIME OF RECEIPT CODE ROOM 2150
2 MAY
DISTRIBUTION:
SECRETARY OF TREASURY
PARAPHRASE
Regraded Uclassified
CONFIDENTIAL
69
COPY
FROM: PRESIDENT U. s.
TO:
SECRETARY OF TREASURY
gigings AS FAR AS I CAN MAKE OUT THE ACTION PROPOSED
BY FRANCE IS WEAK AND GETS NO WHERE IN THE LONG RUN.
I AGREE WITH YOUR LINE OF THOUGHT. OFFHAND IT SEEMS
TO ME THAT SUPERVISION OF CAPITAL IDVEMENTS AND
GOLD CONTROL SIMILAR TO OURS WOULD OFFER A MUCH MORE
PERMANENT SOLUTION, AND IF THAT FAILS THEN A MORE
DRASTIC FORM OF EXCHANGE CONTROL. I HOPE SIMON AND
YOU WILL HAVE A PLEASANT TELEPHONE CONVERSATION 2125
TIME OF RECEIPT CODE ROOM 215$
2 MAY
DISTRIBUTION:
SECRETARY OF TREASURY
Regraded Uclassified
70
CONFIDENTIAL
COPY
FROM:
PRESIDENT U. 8.
TO:
SECRETARY OF TREASURY
apps AS FAR AB I CAR MAKE OUT THE ACTION PROPOSED
BY FRANCE IS WEAK AND GETS NO WHERE IN THE LONG RUN.
I AGREE WITH YOUR LINE OF THOUGHT. OFFHAND IT SEEMS
TO ME THAT SUPERVISION OF CAPITAL MOVEMENTS AND
GOLD CONTROL SINILAR TO OURS WOULD OFFER A MUCH MORE
PERMANENT SOLUTION, AND IF THAT FAILS THEN A MORE
DRASTIC FORM OF EXCHANGE CONTROL. I HOPE SIMON AND
YOU WILL HAVE A PLEASANT TELEPHONE CONVERSATION 2125
TIME OF RECEIPT CODE ROOM 215#
2 MAY
DISTRIBUTION:
SECRETARY OF TREASURY
Regraded Uclassified
CONFIDENTIAL
71
COPY
FROM:
PRESIDENT U. S.
TO:
SECRETARY OF TREASURY
and AS FAR AS I CAN MAKE OUT THE ACTION PROPOSED
BY FRANCE IS WEAK AND GET3 NO WHERE IN THE LONG RUN.
I AGREE WITH YOUR LINE OF THOUGHT. OFFHAND IT SEEMS
TO ME THAT SUPERVISION OF CAPITAL IDVENENTS AND
GOLD CONTROL SIMILAR TO OURS WOULD OFFER A MUCH MORE
PERMANENT SOLUTION, AND IF THAT FAILS THEN A MORE
DRASTIC FORM OF EXCHANGE CONTROL. I HOPE SINON AND
YOU WILL HAVE A PLEASANT TELEPHONE CONVERSATION 2125
TIME OF RECEIPT CODE ROOM 2155
2 MAY
DISTRIBUTION:
SECRETARY OF TREASURY
Regraded Uclassified
72
FROM PRESIDENT U.S.
TO: SECRETARY OF TREASURY
0003 AS FAR AS I CAN MAKE OUT THE ACTION PROPOSED BY FRANCE
IS WEAK AND GETS NO WHERE IN THE LONG RUN. I AGREE WITH YOUR
LINE OF THOUGHT. OFFHAND IT SEEMS TO ME THAT SUPERVISION OF
CAPITAL MOVEMENTS AND GOLD CONTROL SIMILAR TO OURS WOULD
OFFER A MUCH MORE PERMANENT SOLUTION., AND IF THAT FAILS THEN
A MORE DRASTIC FORM OF EXCHANGE CONTROL. I HOPE SIMON AND
YOU WILL HAVE A PLEASANT TELEPHONE CONVERSATION 2125
Regraded Uclassifi
73
RE PRESION MONETARY SITUATION
May 2, 1938.
8:30 p.m.
Present:
Mr. Taylor
Mr. Lochhead
Mr. White
Mr. Feis
(later)
Mr. Bewley
"
)
Whatever the time is now, 8:30, Cochren telephoned me
from Peris; ne had been in to see Rueff and delivered
my message to Rueff. Rueff took it in to Marchandeau,
MIO evidently WES in bed. After B conference, Rueff
came out and said he was disturbed that I felt upset;
that nis message to me was one of principle, no
instructions have been issued, and that he very much
wanted me to consider that his message WAS one of
consultation. Then, as I remember it, Cochren
reminded Rueff that repeatedly they had informed him
that they were not going to 175 frencs to the pound
and ne had passed this information along to ne,
Rueff then went back and had another consultation with
Marchandeau and came out and made this Toviso: that
no instructions would be issued unless some unforeseen
pressure made sction imperative before they could get
5 reply from me, but in any event they would communicate
first with Cochran; but that Merchandeau urged me very
strongly to try to get my answer to nim as Quickly as
possible.
Tylor:
I von't think that does any harm at all.
Garahead:
I think the first that you gave them tonight was still
the best one.
Now let's just see, I've got to send this to the
President. Want e piece of paper to give to Mr.
Bewley when he comes. You fellows help me.
The following is the message that I gave to Cochren,
8 § best I can remember it:
"1. Please inform Mr. Marchandeau that I W&S very
much
11
mite:
"Shocked" WBS the word you used.
Grandr:
H
snocked end surprised
"
Regraded Uclassified
74
-2-
laylor:
" and surprised," meaning that ...
H.M.Jr:
"... shocked and surprised at the message which
Marchandeau sent me.
"2. That I did not consider that under the tri-
partite agreement that we had been consulted,
but that he had simply informed us,
"3. That we would execute any orders on Tuesday
that we received from the French to buy or sell
francs for their account, but that in doing so we
in no-way acquiesced in the new French proposal,
and, while I agreed to do this Tuesday, that we
were not committed beyond Tuesday.
"4" That before we committed ourselves in any way
I wished to consult with the British."
*****
H.M.Jr:
That's the whole story, and if we had spent one whole
day we might change five words.
White:
I did spend a few hours.
H.M.Jr:
What?
White:
I did spend a few hours.
H.M.Jr:
Isn't that
....
White:
Ies, that's all right.
H.W.Jr:
Incidentally, did McReynolds ever get out your order?
White:
Yes, the order creating the two different divisions.
H.M.Jr:
Yes,
Lochhead:
I got a photostatic copy. Copy came around to my
office. Don't know how much publicity was given to
it.
H.M.Jr:
I kind of like this, Wayne. Huh? Think I'll go back
to the farm tomorrow and get another one.
Taylor:
Well, I tell you, we are now in process of consulting
Regraded Uclassifie
75
-3-
with the British, see? This 1s good, I think, only
until we have had a chance to do SO.
White:
It's good for a couple of days.
Taylor:
It is until we have had a chance to do what we say.
"Before we commit ourselves in any way, I wish to
consult with the British." Well, this is the start
of doing that.
H.1.Jr:
I called up the White House about cables and they said
the later I send them down tonight the better; said
after ten o'clock nobody sent any cables from the
President, so they could receive them and get them
off.
So what I thought we'd do - that afterwards we'd fix
up E message, not necessarily of advice, but - you
see, I sent that one - you (Lochhead) sent that one
on Saturday, didn't you?
Lochhead:
Yes.
H.M.Jr:
Well then, we'd send this next one, the one that came
in from Marchandeau and my answer, and then the one from
the British, you see. And then I could say to the
President and myself, "I'm now going to wait to see
what happens."
White:
Going to send their answer to that?
H.V.Jr:
No, I'm going to get all off tonight what happened 8.9
of tonight.
unite:
Yes, their answer to that, which includes Cochran's
reply to that.
H.M.Jr:
That's right. And then say to the President, "Any
suggestions you have I'll be glad to receive." What?
white:
I'd like to call your attention to two paragraphs
here on page four. Page four.
Lochhead:
Of the British.
White:
Yes, of the British.
H.M.Jr:
Yes,
Uclassific
76
-4-
White:
One peragraph beginning with: "Nevertheless, this
would constitute the first occasion when a tripartite
country had deliberately depreciated its currency as
an instrument of policy and there was no blinding
the fact that it directly contravened the provisions
of the tripartite agreement."
I would question that very definitely - that it
contravenes the provisions. It depends on why they
depreciated their currency, because they depreciated
their currency directly as a matter of policy one of
the earlier times. What would constitute a violation
would be any attempt to depreciate their currency in
order to get a competitive advantage.
Taylor:
Well, I think that's just words, Harry.
H.A.Jr:
herry, if they belleve this,
white:
Then why are they saying what they are?
H.N.Jr:
If they believe this, then why do they say
white:
that it's all right with them?
R.W.Jr:
Any do they say
"hite:
they're not going to take exception, which is
equivalent - 8 little different way of saying, "It's
all right."
Then another thing
Sochhead:
Excuse me, Harry. This paragraph on page four was just
a conversational paragraph, it was not 8 paragraph that
they gave to the French. This is not a part of their
reply to the French.
White:
I say if they believe that
Lochhead:
After all, this is the message. The other is Just some
side comment.
But Harry is right in pointing it out. This is what
they think, on page four; and then the message to the
French doesn't check.
Regraded Uclassified
77
-5-
white:
And the paragraph below that - second one below.
"However, he said he thought exchange control was
the greater evil but he did not conceal that he
X
had no great confidence in this being the final
depreciation." That is, he recognizes
H.W.Jr:
Which is all the more reason to stall.
White:
Yes, I think so. I think there are two things
involved that require careful thought.
B.W.Jr:
I think what the British are doing is this: taking a
leaf out of my book, hoping to Heavens that we'll kick
the French out and save them the trouble. Huh?
Taylor:
Well, I think that there may be something in that, but
then - I wonder whether we would do it. That is
White:
Well, there must be some limit to this thing.
H.V.Jr:
Must be what?
white:
Some limit to this thing. " ... exchange control
was tae greater evil but ne did not conceal that he
X
had no great confidence in this being the final
depreciation." 175 is not the final depreciation -
185, 200 - and yet it's better than exchange control.
I don't understand that at all.
A.V.Jr:
Well, I think what you've got to understand is that
it is terrifically important to the British to have
military cooperation just now with the French, and
at the same time the French come to these boys and
say, "O,K., you want us to keep the franc at 160; well,
lend us some money."
Tylor:
"way it on the line." Sure.
H.1.Jr:
Sure.
White:
Well, that's why I don't understand why they don't come
back and say, "Why, you can keep it at 160 by imposing
exchange control."
Taylor:
Well, I think you'll find, Harry, that when you get
the political background and so on, which is also
Regraded Uclassifi
78
-6-
brought out in some of the other - in the earlier
cables, that this crowd that's in has just as strong
2 commitment against exchange control as the previous
government did.
White:
They're opposed to it.
Taylor:
Yes. Therefore, it's tied up with the existence of
this government.
Lochhead:
I would say one of your important paragraphs is the
first paragraph on page four - "that it contained
severe tariff and 'readjustments' which in some
respects were as, if not more, serious to Great
Britsin than the proposed currency action.' Now,
that's where you're likely to have some trouble.
White:
Can't violate the tripartite merely because they do
that.
Lochhead:
The statement of the tripartite was that you would
not take action that would harm trade.
White:
But they hoped it would have that effect - the spirit -
but you'd have a hard time in demonstrating the letter
of it.
Lochhead:
When you have Dr. Feis over tonight, that's probably
the paragraph that ne's going to
....
Taylor:
I think that's the paragraph we ought to be damn well
interested in.
H.M.Jr:
What's that?
Tuylor:
First paragraph on top of page four - much more than
the rest of them.
White:
We haven't seen their decree which includes that.
H.V.Jr:
what page is this?
Lochhead:
Page four of the British cable.
Toylor:
British Treasury says they haven't been told either.
"He said that the French had not revealed to the
Regraded Uclassified
79
-7-
British Treasury the whole of their decree program
but that it contained severe teriff and 'read justments. 11'
miss:
They have that information, which we didn't have.
Lochnesd:
I'm El little bit surprised that the British came over
as fast as they did.
Taylor:
I'm not.
Document:
You mean on account of their other consideration, the
political consideration.
Taylor:
Bet your life.
Cochnesd:
And the fact tast they don't want exchange control
means they'd have to put up some money, and they're
dodging out.
x
Taylor:
Thot's right. And if you go back to Bonnet's - what
we have, the information that Bonnet gave to Sir
Jonn and SO on about the alternatives, see - and
remember, he was damn smart in saying that.
Colte:
Well, apparently, the opposition of the French group
to exchange control is not what has caused Phillips
to oppose it, because he says he thinks it is &
greater evil; so he wouldn't recommend it in any
case.
Toylor:
All right, Barry, but what you have is your choice of
three things which are put up to the British: 1. To
hold it at 160, and so on. "We've got to have help.
Will you give us 8 credit?" You see? "Will you take
francs?" All those things that Bonnet put up.
Then Bonnet says, "Well, of course, there are two
schools of thought in this cabinet, and one of them
believes in letting her go to 190 to 200." He says,
"I believe the other one, but in order to do that I've
got to have something laid on the line."
And in addition to that you have all these military
things. And you have the fact that this government
is committed against exchange control. Therefore,
they feel they can work with this government better
Regraded Uclassifie
80
-8-
than they could work with some of the ones that they
had before. So they'll take anything that this crowd
tells them, except putting up some money.
Lochhead:
Mr. Bewley.
H.M.Jr:
He's not coming in. I'm going to see him 8 couple
minutes. I'll explain to him we're not quite ready.
(H.M.Jr. goes out)
Taylor:
I don't think they've got any choice.
White:
Who?
-
Taylor:
Saying yes on this.
white:
Saying yes on this British cable?
Taylor:
The British usven't got any choice.
Lochhead:
1 still think if we had a chance to talk to them first,
before we gave the answer, we would have done the
same thing we did, stall them a day.
Taylor:
They've stalled.
Locanead:
Oh well, they - it's one of these things - they may
have stalled them, but they've done it in such language
that the French would wiggle out of it. I think they
have hard work convincing an outsider because they
didn't stall them in the statement; they've stalled them
in supplementary
Taylor:
I'm talking about what they have done already. They
haven't given this answer to them. Read the first
page.
(H.M.Jr. returns)
Jr:
What I thought we could do - we could do this thing
in a way - in two bites. I think we could show Bewley -
let him read in here Cochran's cable which came in, then
my answer, then Cochran's telephone message to me, and
then the message I got from his (Bewley) government,
which came in as far as we're concerned, last.
Regraded Uclassified
81
-9-
Tgylor:
Yes, it did.
H.d.Jr:
Last. Then I'd make my little speech to him that I've
got to have time to think this thing over.
Taylor:
You see, here's one - the first page - they've done
exactly the same thing that you have, see?
B.M.Jr:
Yes. Well - and my suggestion to the British is that
they do the same 85 we do until we can think this
thing over; do it on a day-to-day basis and keep the
French on the hot spot until we get & chance to see
the decree.
Tey lor:
Say we're consulting.
8.8.Jr:
Until we see the decree. See?
Now, in talking we've got to keep in mind the salient
points so we can send Butterworth E cable tonight,
Cochren E cable, sná the President. We've got to do
it all tonight, regardless of difference in time.
I don't see why we should Wait for Feis. Got so damn
many cables to get off. You know Feis, he's never on
time.
Taylor:
I think we can certainly
...
It takes him time to read this thing.
Taylor:
Got Bewley here, nsven't you? I think you can certainly
tell him what you're doing and that you suggest that,
inasmuch as we're not ready, why, maybe they can wait e
little bit.
H.A.Jr:
Get nim in here, will you (Lochhead)?
(Lochhead goes out for Bewley)
We'll let nim sit here.
Taylor:
He could not give him a definite answer until after he
had consulted Washington, you see? So that gives you
8 chance to both stall.
(Lochhead returns with Bewley)
Regraded Uclassified
82
-10-
H.M.Jr:
Let me tell you - I'll try to do this thing now in
the order in which it happened, as near as I can get
it. Well now, this came in first. You can read that
if you want to; make some notes, it's all right.
Now, that came in and then as a result of that message
1 phoned Cochran and I typed that out for you - I told
him to communicate that to Marchandeau.
Bewley:
Yes.
H..Jr:
And then as a result of that Cochran went in about
one o'clock this morning and saw Rueff, and Rueff
said that Marchandeau had gone to bed but he'd go in
and see him, which he did. And I wrote this down
over the phone. And Marchandeau said, oh, this
message to me, which I guess you'd call an aide
memoire, because you'll see that you people got the
same thing in a minute - this message was just one
of principle and no instructions had been issued
and they very much wanted it to be considered a
matter of consultation. Then Rueff came out and
gave that message to Cochran. Then Cochran reminded
him how for the last ten days we have been 8 sking them
what they were going to do and every time we asked
about this 175 francs which have been rumored and the
French speculators are playing, they had always flatly
denied it. Well, there was some argument about that.
8o Rueff went back again and saw Marchandeau, then
came back with this; what he had said the first time
Was all right, but if any unforeseen pressure made
action imperative before my reply comes, they would
first communicate with Cochran if they had to do
something. In other words, they were hedging, you see.
The first time they said, now, this was simply 8 matter
of principle, no instructions had been issued, they
wanted us very much to consider this B matter of -
that they were consulting. Then he goes back and has
another talk. Then he comes out and says, "But if
something unforeseen happens, we'll go ahead, but
we'll tell you first." Then, after this,
Do you want to write it down?
Bewley:
No, it's all right. I can remember this. Just make
8 note of it.
Regraded Uclassified
83
-11-
H...Jr:
... that thing I gave you was the only - and
incidentally, I did that from memory, just my own
memory on the telephone.
Then in comes this, which was delivered to me at
8:30.
You (Lochhead) haven't got the one that came in on
Saturday there, have you?
Lochhead:
The one from Paris?
R...Jr:
No, the one from London.
laylor:
The one from London on Saturday.
H.M.Jr:
This will supersede that.
Taylor:
Oh yes.
H.M.Jr:
this is to give him the background.
Taylor:
Well, he may have it.
(Lochhead hands requested cable to H.M.Jr)
H.E.Jr:
Well now, this - I don't know whether they - how
much they keep you informed, but here's one
Dewley:
They told me about Bonnet's interview, but that's all
I have.
H.V.Jr:
The four propositions that Bonnet put up
Bealey:
Three, weren't there?
8.M.Jr:
No, four. I take it this supersedes that. Right?
Bewley:
I would assume SO.
d.M.Jr:
In cabling you might say that I consider that what
is happening tonight supersedes that.
Bewley:
Yes. May I just see that to see that the two are
exactly the same.
Regraded Uclassifie
84
-12-
H.W.Jr:
Please.
Bewley:
Oh yes, this is the same one exactly. Well, the
end of it - the end of it I haven't got, but the
rest of it
H.M.Jr:
It's all in there; but take 8 look at it.
I remember Number Four was the only thing that
bothered us.
Lochhead:
Uh-huh.
Bewley:
I wasn't given the figure of 190 to 200.
H.Y.Jr:
Hun?
Bewley:
I wasn't given the figure of 190 to 200 here.
H.M.Jr:
Well, now you've got the whole thing.
berley:
Yes.
H.M.Jr:
Now, if you don't mind my saying, I think the verbal
part, the conversation between Sir Frederick Phillips
and Butterworth is a little bit different than what
he sent the French. I mean because in this thing he
says here - he says here - he says here on 4: "Never-
theless, this would constitute the first occasion when
a tripartite country had deliberately depreciated its
currency as an instrument of policy, and there was no
blinding the fact that it directly contravened the
provisions of the tripertite agreement." You see?
Now ....
Bewley:
Yes.
8.3.Jr:
Now, that's what he's telling me, but he doesn't tell
that to the French.
(Feis comes in)
Feis:
Sorry I'm just so late. I really couldn't help it.
H.V.Jr:
Harry, take Herbert Feis and just bring him up to date,
so I don have to do it twice. Do you mind? Would
Uclassifie
85
-13-
you just take - would you mind going with him B
minute?
(White and Feis leave)
Bewley:
If he didn't tell the French the same - but in the
telegram to me I certainly got the impression he had
told the French that. That was the telegram - if I
had it with me - but it certainly was in the telegram
that ne had sent that to the French.
d.M.Jr:
Well, you read nere
Taylor:
This nasn't been sent to the French yet.
Bewley:
This new one, no, but I mean in his conversation.
H.V.Jr:
This is El draft of an side memoire to the French.
Bewley:
oh, I see, what he's going to send.
H.K.Jr:
This is the proposal. But in nis conversation with
Phillips they say that they think this is contrary -
I menn on page four WUS where I was reading - second
paragraph.
Bealey:
Yes, it doesn't eltogether - "Majesty's Government
are prepared in the circumstances not to take
exception to what is proposed as being inconsistent
with the tripartite agreement." You feel that we
ought to take exception?
G.M.Jr:
No, no, I'm just
Syndey:
On, there is a contradiction, I agree.
E.V.Jr:
I simply say, in this cable - in this proposal of what
he seys to the French and then what he says on page
four - that there is
Fewley:
I agree they aren't the same.
B.W.Jr:
No.
Bowley:
Well, I suppose they may have felt that it was con-
tradictory, but that if it was going to be done in
Regraded Uclassified
86
-14-
any case, there was no point in saying 30. I don't
know.
H. .Jr:
Well, that is, of course, what your government and
ours are consulting about now.
Dewley:
That's right. Well, this, after all, hasn't gone.
H.N.Jr:
No, no. I'm going to wait a minute until Herbert comes
in.
I love the French saying, "Well, we haven't got our
instructions yet."
1
-
(White and Feis return)
What's this? I haven't seen this one?
Taylor:
Oh yes, but I thought it WES smusing in view of the
bedside conversation, you see.
H.T.Jr:
Oh. Yes.
well, this - we'll consider you part of the family,
and Herbert Feis has got the right to make faces at
me, see? So you've got this message now which I've
sent to Marchandeau and his answer.
Bewley:
Yes.
A. . Jr:
That ne's going to wait. My telling him vlso that
we're going to consult with the British. My also
telling them that we will act for them tomorrow,
but what we will do after Tuesday we don't know.
Healey:
Yes,
Frankly, I don't see how either the British Government
or our government can act intelligently on this until
we have a chance to see the decrees, see?
Eawley:
ies,
no.Jr:
And I'd like to weit. I don't see what we've got to
lose by it. I think we've got everything to gain.
Now, that's the way I feel.
Regraded Uclassifie
87
-15-
Bewley:
Of course, I suppose the French may want to issue the
decree simultaneously with our
....
H.M.Jr:
The decrees are out.
Bewley:
The decrees are out, are they?
H.M.Jr:
Cochran told me they were out one o'clock this morning.
Bewley:
But nothing about the franc?
H.M.Jr:
Well, I can only repeat. Excuse me, have you got a
cable there - on the back - may I see it? All I can
say is what he said, that no instructions had been
issued.
Bewley:
I see. About the franc.
H.M.Jr:
Yes. That's Marchandeau at one o'clock this morning.
Bewley:
You think that when the decree is out it will be
essier to decide?
H.M.Jr:
Well, you notice that - now, for instance, he says
White:
On top of page four.
H.2.Jr:
Well, I'd put it this way. The French - what they
propose to do with the franc is only a part of a
whole plan, and after we have seen the decrees and
have had a chance to study them, we'd have some chance
to make our best guess as to whether they can hold the
franc to 175.
Boxley:
Yes.
U.C.Jr:
Whether they're not going to let it go to 200. So
if, for instance, after studying it we say, "Well,
this is only just a short resting place, and she's
going to go to 200, and If - well, let's just say
that we know we won't stand for 200; we might just as
well say no at 175 if we feel she's going to go to 200
anyway.
Bewley:
Yes.
H.M.Jr:
I mean here's a whole program. It's like the President
Regraded Uclassified
88
-16-
sends a message to Congress, which he did two and a
half or three weeks ago, and he has & whole program.
One part of it - "What do you think of this?" I
mean until you see the whole program how can you
evaluate it? That's the way I feel.
SewIey:
Yes.
H.2.Jr:
And We feel here that we have everything to gain by
stalling for a day or two, and we don't see what we've
got to lose.
Bewley:
Yes.
R.M.Jr:
And I don't know - of course, this part here - if you
want to make a couple notes - this part here - this
came in today at - it left Paris st 3:35, arrived here
at five. "The Minister of Finance told me that he
would appreciate having the reaction of Secretary
Norgenthau to the above statement ES soon as it is
possible for him to let us know. I asked Marchandeau
when the rate would be moved to 175 and he replied
'tomorrow'."
Bewley:
Uh-huh. But then, subsequently they have withdrawn
that, as I understand it.
8.2.Jr:
On account of the message that I sent.
Dewley:
Yes, yes. Well, are you proposing to telegraph back
to Butterworth or
H.W.Jr:
Well, what I'm going to do is this.
Bewley:
or shall I telegraph the Treasury, or shall we do
both?
H.M.Jr:
I'd like you to, and then I'm going to tell - I'm
going to send Butterworth a summary of where the
thing stands.
Bewley:
Yes.
B.N.Jr:
As of tonight.
Bewley:
Yes.
H.V.Jr:
You see?
Regraded Uclassifi
89
-17-
Bewley:
Yes.
R.N.Jr:
But I don't think it would do any herm if you'd send
a cable and we'd send one to Butterworth ES well.
Bewley:
on yes, I'll send a cable, certainly.
H.M.Jr:
Because it's an advantage for me to have you here just
as it is to have Butterworth there. I'd send E cable.
Now, the other thing which I thought I'd like to feel
my way on is this. I frankly think that, from the
French standpoint, leaving any other country out of
the picture, this is & stupid move. It isn't going to
be any good. They have never asked our advice. And
this theory which has been reported to us again and
again, that if you let the franc seek its own level -
and this is the theory - let's say 200, that when it
reaches that the French investor will think, "Well,
this franc is so cheap," that they'l send back their
money. Well, to use the vernacular, I think that's
just the bunk.
Now, the amazing thing to me is that the French haven't
out in what I called - like to call a modified exchange
control, which is 8 supervision over the movement of
capital, but not exchange control affecting trade.
In other words, if a man wants to send some - whatever
you want to call it, bad money or frightened money, out,
purely to move his capital out, why, they don't super-
vise it. You people have a method of supervising it.
We have a method of supervising it here, and we do it.
We have, 65 you know, a volunteer reporting.
Bewley:
Yes.
A.M.Jr:
And I'm sure if we suddenly saw B lot of money moving
out we'd seriously consider stopping it, and I'm sure
you would also.
Bewley:
Yes. We have no method of doing it at present. I
mean we have control of foreign loans but we have no
control of sending money abroad to buy stocks.
H.W.Jr:
But you have of foreign loans.
Bewley:
Oh yes.
Regraded Uclassified
30
-18-
H.M.Jr:
I mean we accept volunteer reporting; that's all we
have.
Be leys
I think we have elways rather argued against that with
the French, on the ground that once they begin they
X
won't stop. I mean once they begin
H.2.Jr:
Well, that's what + want to - that's what 1 want -
I'm sending out 05 B feeler.
Belay:
Yes.
8. .Jr:
I personally feel that as alternatives - as between
letting the franc drop to the invisible, which is
evidently what they have in mind, and then our
having - the two E overnments' having to say to these
people, "We're terribly sorry, but this is competitive
depreciation End we'll have to ask you to step out
until you get your house in order" - I mean that's the
way It's going, and very rapidly, in that direction -
I mean it's just ES clear - or the possibility of
our saying, "Well, look here, old man, why don't you
think of putting in some kind of control on the move-
ment of capital?" Now, the question is, which will
put the French on their feet? I frankly don't think
that this way that they are suggesting will, and I
taink that in the not too distent future we will have
to ask them to step out, which I would do with the
utmost regret - I mean we have seen them through one
trouble after another, and it is terrifically important
to keep them going, and certainly we don't want to add
anything to their troubles. And the other way is that
they have - we have no assurances, but the other way
is that if they did put in what I call modified control
of their movement of capital, I feel, and the people in
the Treasury feel, that the chances of success in
trying that are better than what they are talking
about.
BerGey:
Yes, I think we have always - in fact, I know we
have for the last year rather taken the opposite
view, because there are two arguments against it,
One is that once you begin controlling movement of
capital, the chances of capital that has already gone
abroad returning are rather small, because they'd feel
it WBS under control and they would not be able to use
it freely again; the other being that once you begin
Regraded Uclassifie
91
-19-
to control, like in Germany, you get more and more
completely limiting control,
H.V.Jr:
All true. But we're faced with the real facts now,
and we've got the two things. Here we see the franc
going down and down, and the chances are two out of
three that it will go to 175 to 200. Incidentally,
the part that I don't like about it is that there is
a group of French bankers that have been saying it's
going to 175, and 175 has been the figure for two
weeks, and they've been gambling on that.
Begley:
Yes.
H..Jr:
I don't like that. We don't do business that way here,
and you people don't do business that way. But they
picked the number and that's the number, and, by golly,
that's where she's going. Now, 1f she goes to 175, the
chances are she'll go to 200, and then there isn't much
left, I think, for both of us to do except to ask them
to step out. Now, seeing that, do we want to consider
the possibilities of suggesting the other alternative,
although it isn't something - I mean we have gone so
for with the Scandinavian countries - I mean at differ-
ent times they have talked to us, but we've been so
high-minded about exchange control. Because Denmark
has exchange control - "Why, we're very sorry, we can't
talk to you." That's how high-minded we've been about
it, see?
realey:
Yes.
H. .Jr:
I mean they've been - you know, talked different
times. But we find ourselves doing B lot of things
today that we wouldn't even have done a year ago, and
here's the situation. And there was B remark which
I don't know - I think - I'm not sure; I don't want to
be held to this - but I had the impression that somebody
in the British Treasury dropped a remark to Butterworth -
as I say, I haven't checked my cables - that this thing
that I'm talking about would not be too repulsive to
them. Now, I haven't read my cables, but I just had an
impression.
Anybody check me on that? Well, I got that impression
from some place. Now, I don't know where. I don't know
where I got it from. But don't count on that, because,
92
-20-
as I say, I haven't read my cables back.
Bewley:
Well, when I left England - well, that's six weeks
now - the attitude certainly was that we were afraid
that exchange control was pretty likely, but we
regretted - we'd rather see them fight without it.
Things have gone further since then, and the attitude
may have changed.
...Jr:
Do you get what's going through my mind?
Derley:
Oh yes, I do.
...Jr:
Well, that I!d like you I'm not going to attempt
to put that in H cable to Butterworth, because we'd
be up here all night arguing about words. And
therefore I'm going to let you (Bewley) have a
sleepless night. I mean
Berley:
Oh yes, I'll give them that.
...Jr:
I meen If you could - I mean ''ve
Fewley:
Oh yes, that's quite clear.
E...Jr:
You get that. And I think, say, pending that thought,
we'd be more than willing
...
Then another thing
is, I couldn't give 8 final answer anyway until I've
heard from the President. I can give 8 final answer,
"Yes, this is all right," but if, for instance, we
wanted to take positive action and say, "No, we're
very sorry, 8 entlemen, this is not within the tripar-
tite, " I'd have to - I mean I'd have to communicate
with the President, and that might take I don't know
how long to get an answer.
(eley:
Yes. Yes. In the meantime, you would - your suggestion
really is that we shouldn't send any answer.
B.2.Jr:
Yes, that's my - yes.
bewley:
Or if the English send an answer, it should only be a
provisional answer, because they haven't had an
opportunity of getting your final view. You probably
prefer that we should send no answer at all.
5.5,Jr:
Well, what I had hoped we could do when WE do send an
Regraded Uclassifie
93
-21-
answer - I hoped We could send the same answer.
I did send this one before I heard from you people,
but certainly
Bewley:
Oh well, after all, that's
;
....
B. .Jr:
I mean when you read that - through your cable, I'd
say your people would sign that one.
Dowley:
Oh, certainly.
What?
Oh, certainly. Certainly, yes,
That's just what the first page of the cable from
Butterworth - that's exactly what did happen, which
was, "The Chancellor of the Exchequer had reminded
the French Ambassador that the tripertite agreement
W&S a triangular matter and that he could not give
nim B definite answer until after he had consulted
Washington."
Enviey:
That's the same.
Taylor:
That's exectly what we said.
H. .Jr:
I'd like to stop and ask Herbert Feis whether he
thinks I'm going too fast, or does he have any
suggestions? He hasn't had a chance to talk.
Fels:
I'm not sure that I yet
Can I ask one
question first? Is that message in that cable from
Butterworth - has it been delivered actually to the
French?
Taylor:
On no, that's the point that I was making. Sir John
Simon simply told whoever it is he's talking to, the
French Ambassador - did a little grumbling end said
that he has to consult with us before he gives en
answer. That's on the first puge. The quoted part
is a suggested answer. Now, over on page five
Pels:
Well, I understand that. Well then, I must confess,
Henry, I think - I don't see anything to be gained by
not going at once and promptly as far as that message
Regraded
94
-22-
goes. You've got in the Daladier government the
first promising government you've had in France
for a long time. I think probably it stands more
chance of making headway in getting that thing in -
French affairs in stable order than any government
they have had. I don't think they're seeking
deliberate advantage in competitive depreciation.
These fellows face a terrific load in expenditure on
competitive armsment, and they've spent all they had
in their fund over the last thirty days in trying to
keep the franc eround 160. They haven't done it. I
don't think there is the slightest chance that they
can do it, and by opposing the move to 175 what I
think you're doing is giving them B choice between
losing a lot more gold, which I think would be unwise,
or immediately going into exchange control - modified
exchange control. I don't think I'd force them into
that at once.
I'd let them go down, and if the British can take it -
and they must have gulped when that message was
drafted - I think I'd take 1t. And then I'd continue
right with the ides that you have expressed and
outlined to Mr. Bewley, with which I wholly agree -
tast they should introduce B modified system of control.
I believe they 'll need both. I'd give them everything
I could give them.
H.W.Jr:
Well, the only place we differ is, do you think we
ought to take the 1752
Feis:
Right now, just the way the British would take it -
and the tone.
H.W.Jr:
This is so fest - I know Bewley so well I don't mind
discussing these things in front of him. I couldn't
get anybody when this all - but I could get Sumner
Welles, and I told him about this message. And before
I sent this message to Marchandesu, I read it, talked
it over - and Summer Welles heartily approved it.
To1s:
Well, luckily - and this is rether cross-wise - before
you telephoned it I had discussed it with Mr. Hull at
quite some length, thinking that it was important to
discuss with Mr. Hull.
95
-23-
H.M.Jr:
Well, I couldn't get Mr. Hull.
Feis:
Welles doesn't know the background of this stuff,
and
paym
Bewley:
Well, I don't know that it's my business, but I'd
rather like to back up what Herbert says. It seems X
to me - but I'm not - it's your position, not mine.
H.L.Jr:
It's all right. I've asked for it and, as I say,
we're being - sort of a family affair here. But
I'm sorry, I don't agree in the sense of ES of
tonight. All I'm saying is, as of tonight I want
time. I want time to see these decrees, I want time
to study these decrees. I don't want to tell the
French I want to go to 175 francs. I'm in disagreement
with what Herbert Feis says there. We've gone along
inch by inch. There's such 8 thing ES making the
tripartite agreement just a laughing stock in the
sense it becomes useless. No one has been more
patient with the French than I have. I usually take
the attitude that you gentlemen are taking tonight, and
you people in England have been usually B little bit
stiffer than I nave, and this is the first time that
our roles are reversed - for the first time.
Fels:
That's right.
H..,Jr:
What?
Feis:
That's right.
H.W.Jr:
But this time my Treasury people and myself are all
in agreement on this, because we had a chance in the
Treasury to talk this thing over. But it's always
been the other way around.
Now, all I'm saying tonight is this, that if you'll
tell Sir John Simon that as far 88 I'm concerned I
want more time, maybe my message to Marchandeau will
nave the effect that he will not put it in and maybe
he won't have to put it in. We didn't have any indi-
cations today that they had any trouble holding the
franc.
Cochnead:
No, it was 8 very small market. Didn't seem to have
Regraded Uclassified
96
-24-
any difficulty on the other side. We didn't get
any final figures. But in our market at the close
the franc WES strong, and we had to sell francs to
keep them from going up this afternoon.
H.V.Jr:
There was no indication
And ES I say - all I'm
saying - and this gives me a chance to talk it over
with Mr. Hull and to think. This is terrifically
important, and I'm just not going to commit myself.
Non, I'm willing to go nlong for tomorrow, and we'll
see what happens, and tomorrow morning's papers here
will have the decrees and we can read them and study
them.
Diviey:
Yes.
And if the franc continues at the rate it is and -
I mean maybe they'll feel differently tomorrow.
Trylor:
or course, there is this one thing about it, that -
suppose - let's say that they have 20 rate tomorrow
of, say, 163 or 165, or whatever it may be, and then
for some reason things don't act very right and you
have 0 slide; way, then you're in twice as bad shape
68 if - and then you decide that that's All right.
R. . Jr:
Well - yes,
30,2001
You're just in twice ES bed shape, or they're in just
6.8 bad shape, as if they go to the bottom of what
they're talking about now - and starting out with
tais "hurrsh," with the new decrees, the new rate and
SO on, they might be able to get it up 1) little bit
from there. But If by stilling around for 6 couple
days they don't get the full effect of it, why,
Christ knows what will happen; then you do E° down
on the other side.
nell now, I'm just - I'm not going to budge tonight.
I mean I'm just not going to budge.
melor:
well, I wasn't suggesting that you should, but I think
you ought to have that very much in your mind. If you
just fuss around here and everything Isn't right with
them
H.S.Jr:
There isn't any - ES far as E matter of handling their
money, they're not handling it any better than anybody
Regraded Uclassified
97
-25-
in the French Government has handled it in the
last three years. I mean they're not handling it
one b1t better today than they were B month ago,
- year 760, 02 two years ego. I mean mover - the
inside ring are still in control - I Bein is for SS
Simnces are concerned. what?
Yes, yes.
mayne,
You say the be hkers already knew the figure of 175.
Oh, there's no question of it. And I'm just going to
m.rk time for a day or so. And I would very much
Lite you to get that cable off.
wh yes, I will.
You anow exactly not I feel. I'm sorry that I didn't
are All canne to tale to Herbert Feis before, but
these cablus nave sopt coming in :nd WE asd to keep
almoting. I didn't nave All chance to talk it over
one, fronaly, I've made up my mind. And I think what
IN 11ke to do - we should 30 is to continue to consult
hourly until MB can see = little daylight. Because
Servers knows, for vast is it, two years, three years
..OW, we've done the Poy Scout deed with the French
Jn their franc, Aliu they Just won't do the courageous
thin themselves, that's all.
licro, would you like to . 3k me anything else?
471
No, I think it's 11 pretty clear.
Jr:
DO you vant to
Tast's the history - I naven't got the exact history
of what the French said : bout it. They originally
told you they were going to drop it to 175 tomorrow.
I thought I gave you that. I thought I showed it
It was that which you said this 488 the answer to. Yes.
This is the - the history 13 this. This comes in, end
98
-26-
we have what your government undoubtedly has, in
which they say the "French Government is obliged
to inform anew the Government of the United States
of America" so forth and so on. It's that message.
"The rate at which the French Government has decided
to stop is around 175 francs for one pound, with
the will to lower progressively this figure in
correlation with the economic improvement which
it expects from its decrees."
Bewley:
Yes.
H.K.Jr:
Based on that, I phoned this message back, and then
got their reply
Bewley:
I think I got that.
H.M.Jr:
announcing, well, they nsdn't done anything about
it and they wouldn't - that they did went to consult.
Bewley:
Yes, yes. I think I've got that.
8.V.Jr:
And then, after I've done this All with the French,
in comes 8 message from your people. And now what
I'm saying is, I'd like to have E couple days to
think this over.
Bewley:
Right.
H. .Jr:
And I can't tell what will happen. Nobody can tell.
And we've begged them to tell us now for two weeks.
For two weeks we've begged them. And there was that
one time when I sent for you when nobody could see
Marchandesu. Remember?
Bewley:
Yes, I remember.
E.
Jr:
And from that time on we just begged them to tell us ,
and we've gotten constant rumors they were going to do
175 francs, and they've constantly said they won't.
And now in the efternoon they suddenly say, "We're
going to do it tomorrow morning." Now, I just don't
like it. Now, that may be the sign of & very strong
government, but I beg to differ with my friend and
adviser, Mr. Herbert Feis. I love to be on the
opposite side; for three years I've been on his side,
I've taken the side he has.
99.
-27-
Mylor:
My hunch is they're going to do it snyhow.
d.2.Jr:
I agree with you.
Taylor:
Yes.
H.M.Jr:
I agree with you. I agree with you.
Bawley:
Yes, I would think SO,
Trylor:
And they're also going to do it tomorrow anyhow.
H.M.Jr:
Maybe.
Mochhead:
In other words, the franc may go to 175 tomorrow and
they won't put up any opposition to it. On the other
hand, it may not go down. They'll not just notify
the market that it's going to be 175, but they won't
put up any resistance if it does start to 60 towards
175.
Taylor:
Well, nowever it gets there. But they'll start that
off with this program, so that they've got E place
that they can jump from rather than a place that they
have to deteriorate to.
White:
Not tomorrow - I don't think.
8.2.Jr:
Well, anyway, this is the best I can give you.
Dewley:
That's all quite clear.
H.s.Jr:
I have the responsibility in the absence of the
President of the United States. I've got to take
responsibility. I can't consult him. And this is
the best that I can do. Just pray for the best.
Pewley:
Would it be possible for me to borrow E couple of
those (cables)?
R./.Jr:
Would you mind
....
Sewley:
I could easily return them.
4.V.Jr:
That's entirely up to Feis. Feis, you'll have to
pass on that. It's the property of the State Depart-
ment. I can't tell you.
100
-28-
Belley:
Well, I read them, but
I would be very glad to
return them to you.
Dels:
I can't - I'm not acquainted enough
Deviey:
Well, I don't very much mind.
well, it's their property, and they're very strict
ribout it.
Timiny:
No, sir, I can manage ell right. I Just wanted a
little ...
SAY Lon:
There 1s one - on the last page, there is one point
here. This is quoting Phillips. "He hoped that
Simon would not be asked a Question in the House of
Commons tomorrow, that no doubt he would be on
"ednesday und that if it vas agreeable he would
reply along the lines indicated in the text quoted
above." In other words, you're - I don't know how
long you can stall off over there on answering
a Parliamentary question.
Just depends on who 8SKS it. If it's a Conservative,
you can ESK him not to esk the question. If it's a
member of the Opposition, you cen't very well - more
or less got to inswer it. Got to enswer it the best
you can.
...Jr:
I know what I'd answer.
Way:
Say, "The matter is under consideration.'
Sey, "I'm conferring."
Fortey:
You can always find on answer.
B.W.Jr:
I'd say, "I'm conferring."
"Well, does that mean that you're thinking of breaking
the tripartite?"
"Well, I'm just conferring."
-may:
Yes.
d.A.Jr:
I don't know what the answer would be, which I don't -
I mean If we're asked.
Regraded
101
-29-
Feis:
If the story spreads that the tripartite agreement
is going to break, they won't be able to hold the
franc at 175.
S.V.Jr:
Well, I don't have to see the press until Thursday.
I won't see them until Thursday.
EATS:
That's what has me disturbed.
H.V.Jr:
well, I won't see them until Thursday, and there will
be no leeks from the Treasury, and if they ask us
we can truthfully say that the tripsrtite is still in
force, which is the thing that I enswer about once
every two weeks when the rumor comes up. About every
two weeks. "Well, it is still in force ES of today" -
which will be true. It comes up regularly once or
twice & month.
reviey:
Light I read those two telegrams through once again?
(Feis hands Bewley cables)
Feist
This is the part I'm raising my hano ab ut. "Phillips
went on to ,uote Monick to the effect that the French
n: tional income was now not more than 220 milliards
while state and nicipal uirements were 115
millierds."
n...Jr:
Herbert, that's your government. That's your present
French Government.
It is my present French Government. It is also
my favorite lecture over the past three years about
France, Mexico, and the United States - that I've
delivered periodically for three years past, "Such
a condition could not 60 on indefinitely and unless
rectified would continue to require the remedy of
depreciation. Phillips pointed out that of course
the figure 220 milliards did not depend solely on the
price level but on the state of business activity
multiplied by the price level.' And that leads
directly into the conclusion that you suggest.
What?
Fels:
Thet during an interim period at least, while they're
Regraded
102
-30-
getting their affairs in order, there ought to
be some control over capital movements. I mean
it leads right into that conclusion.
H.M.Jr:
Well, if the British would say to us, "Of the two
alternatives, we prefer a limited. - let's use
"supervision over capital movements."
Feis:
That's better.
H...Jr:
See, get away from the exchange control, If they'd
come back and say, "All right, of the two alternatives
we'll take supervision of capital movements," and we
could get that to the French and get that to them in
the next 24, 36 hours, I think that would be a step
in the right direction.
Toylor:
I don't think there is much a rgument about that. But
these fellows have a commitment against it. That's
one of the things.
Well, it's just toobad that the L'Indo Chine crowd
should lose & little money.
Feis:
I hope his message to the Chancellor of the Exchequer
will draw a reply whether the French have any commit-
ments to the British about any supervision.
deviey:
vommitment? Not at all. They've advised - I mean each
successive Minister of Finance has always said - including
the present government - they're not going to institute
exchange control. I mean nothing more than that. I
think I can tell you definitely - nothing more than
that.
H.S.Jr:
Feis is a suspicious cuss.
Bewley:
I think you've always asked them. Always said the
same thing. They can't be
Taylor:
They've said it to their own people. That's now they
got in.
Feis:
But that's the difference. Have they also given it in
the form of a pledge to the British Treasury?
103
-31-
I.S.Jr:
What the British should have done - I mean this
facetiously now - is, say, "All right, we're willing
to have a Frenchman command the two armies, provided
you have an Englishman command the two treasuries."
yeis:
An excellent idea.
H.S.Jp:
what?
Feis:
Excellent idea.
H...Jr:
I think you people overlooked something.
inylor:
well, I think Bonnet almost suggested that, but he
had a price that he put on it, you see.
Fels:
The rest of that first cable from Paris is what
you're looking for, aren't you?
Bowley:
No, the rest of the English message, just to see
I don't overlook anything.
(Secretary goes out)
Feis:
Cochren delivered that message, BS I understand it,
and have we got & report of that conversation?
Taylor:
Yes.
Fels:
In cable or over the telephone?
Taylor:
Over the telephone.
Feis:
And the substance was that Marchandeau said he would
not put the franc at 175.
laylor:
Had given no instructions, and that she wouldn't until
2 situation developed which was unforeseen.
Lochheed:
He first put up that he wanted us to understand this
message about 175 as merely a question of consultation
rather than ES E statement that they had already given
instructions on.
Bewley:
Will you be telegraphing also to Butterworth tonight
or sending any reply to Butterworth tonight?
104
-32-
Taylor:
Probably give him a summary.
Bewley:
Yes.
Taylor:
But no - no instructions other than
....
Bewley:
I mean the British Treasury will be making his life
miserable by bringing up certain things tomorrow
morning.
Taylor:
Well, we'll send him something tonight.
Bewley:
Yes. Well, I'd better go off and begin dropping my
stuff, I think.
(Secretary returns)
A.V.Jr:
You all right?
Bewley:
Yes, sir. I'll go off.
H.W.Jr:
All right, and we'll get our cables off.
You got a car?
Bewley:
Yes, I've got a car.
H.M.Jr:
I can get you one.
Bewley:
No, I've got a car.
(Bewley leaves)
H.M.Jr:
Now we'll get this started and then we can do a little
arguing afterwards.
This is for the President of the United States. This
has to go tonight.
(Dictates attached cable to President)
Regraded Uclassified
105
1930,
FOR THE PRESIDENT OF THE UNITED STATES
STRICTLY CONFIDENTIAL
ALCEIVED THE FOLLOWING MASSAGE NAY 2, 5 P.d. FROM COCHRAN,
PARIS:
"STRICTLY CONFIDENTIAL FOR THE SECRETARY OF THE
TREASURY FROM COCHRAN.
"MINISTER OF FINANCE MARCHANDEAU SENT WORD FOR
de TO COME TO HIS OFFICE THIS AFTERNOON AT 4 O'CLOCK.
UPON MY ARRIVAL HE READ TO ME A MESSAGE WHICH HE
WISHED COMMUNICATED TO SECRITARY MORGENTHAU AT ONCE.
RULFF, WHO WAS ALSO PRESENT, TOOK THE MESSAGE IN
PRENCH AND I TOOK IT DOWN IN ENGLISH. RUEFF AND I
THEN COMPARED OUR COPYING AND AGREED ON THE FOLLOWING
TRANSLATION:
"The FRENCH GOVERNMENT IS OBLIGED TO INFORM
ANES THE GOVERNMENT OF THE UNITED STATES OF
AMERICA THAT THE EXPENSIVE EFFORT MADE BY
THE STABILIZATION FUND, PARTICULARLY DURING
THE RECENT PERIOD, CAN NOT LONGER BE MAINTAINED.
THE FRENCH COVERNMENT IS THEREFORE OBLIGED,
DESPITE THE FACT THAT IT HAS DECIDED TO IMPOSE
FROM THIS WEEK A NEW AND IMPORTANT TAX I/FORT
ON THE COUNTRY, TO CHOOSE BETWEEN EXCHANGE
CONTROL OR THE RETREAT OF ITS CURRENCY. THE
RATE AI WHICH THE FRENCH GOVERNMENT HAS DECIDED
TO STOP IS AROUND 175 FRANCS FOR ONE POUND,
WITH THE WILL TO LOWER PROGRESSIVELY THIS
FIGURE IN CORRELATION WITH THE ECONOMIC
IMPROVEMENT MHICH IT EXPECTS FROM ITS DECREES.
"*THE FRENCH GOVERNMENT RECALLS THAT FROM THE
FIRST OF LAST JULY TAXES HAVE BIEN INCREASED
BY 16,000, 000 FRANCS AND THAT THEREBY IT HAS
SHOWN ITS WILL TO DEFEND ITS CURRENCY BY ALL
POSSIBLE WEANS AND THAT IT REMAINS STILL
ATTACHED TO THIS VIEW WITHIN THE FRAMING OF
MONETARY LIBERTY. IT HOPES THEREPORE THAT IN
THESE CONDITIONS THE SETBACK WHICH IT IS OBLIGED
Regraded Uclassified
106
-2-
TO DECIDE UPON WILL APPEAR TO THE
GOVERNMENT OF THE UNITED STATES OF
AMERICA AS ENTIRELY IN CONFORMITY WITH
THE PROVISIONS OF THE TRIPARTITE
AGREEMENT.'
"THE MINISTER OF FINANCE TOLD ME THAT BE WOULD
APPRECIATE HAVING THE REACTION OF SECRETARY
MORGENTHAU TO THE ABOVE STATEMENT A8 800N AS
IT IS POSSIBLE FOR HIM TO LET US KNOW. I
ASKED MARCHANDEAU WHEN THE RATE WOULD BE
MOVED TO 175 AND HE REPLIED 'TOMORROW'; THIS
WILL BE ONE OF SEVERAL STPPS WHICH ARE TO BE
TAKEN TOMORROW SIMULTANEOUSLY WITH THE PUBLICATION
OF CERTAIN DECREE LANE. I ASKED THE MINISTER
WHETHER THE TERMS OF THE NATIONAL DEFENSE LOAN
WOULD BE MADE KNOWN TOMORROW. HIS ANSWER WAS
THAT BE WAS NOT SURE WHETHER THEY WOULD BE
TOMORROW OR THE DAY AFTER. IN ANY CIRCUMSTANCES,
HE INSISTED, IT IS NOT POSSIBLE TO HOLD THE
PRESENT FRANC RATE AND THAT IT IS ABSOLUTELY
NECESSARY TO LET IT MOVE TO 175 TO THE POUND."
ON RECEIPT OF THAT TELEGRAM I TELEPHONED THE FOLLOWING
MESSAGE TO COCHRAN, WHICH Hi DELIVERED 1 L.V. MAY 3
TO MARCHANDEAU:
"PLEASE INFORM 1. MARCHANDEAU THAT:
"1. I #LS VERY MUCH SHOCKED AND SURPRISED AT
THE MESSAGE WHICH MARCHANDEAU SENT ME.
"2. I DID NOT CONSIDER THAT UNDER THE
TRIPARTITE AGREEMENT WE HAD BEEN CONSULTED,
BUT THAT HE HAD SIMPLY INFORMED US.
"3. W2 WILL EXECUTE ANY ORDERS ON TUESDAY THAT
WE RECEIVE FROM THE FRENCH TO BUY OR SELL
FRANCS FOR THEIR ACCOUNT, BUT IN DOING 80
WE IN NO WAY ACQUIESCE IN THE NEW FRENCH
PROPOSAL, AND, WHILE I AGREED TO DO THIS
TUESDAY, WE ARE NOT COMMITTED BEYOND
TUBSDAY.
"4" BEFORE WE COMMIT OURSELVES IN ANY WAY, I
WISH TO CONSULT WITH THE BRITISH."
107
-3-
ON RECEIPT OF THAT MESSAGE MARCHANDEAU SENT WORD
TO ME THAT NO INSTRUCTIONS HAD YET BEEN ISSUED IN
REGARD TO LETTING THE FRANC GO TO 175 TO THE POUND
AND THAT HE WISHED THAT I WOULD CONSIDER THAT HE
NAC CONSULTING ME UNDER THE TRIPARTITE AGREEMENT;
HOWEVER, THAT IF UNPORESEEN PRESSURE SHOULD DEVELOP
ON TUESDAY AGAINST THE FRANC THIS MIGHT MAKE IT
IMPERATIVE FOR THE FRENCH TO TAKE ACTION.
LATER IN THE EVENING I RECEIVED THE FOLLOWING CABLE
FROM BUTTERWORTH:
"STRICTLY CONFIDENTIAL FOR THE SECRETARY OF THE
TREASURY FROM BUTTERWORTH.
"SIR PREDERICK PHILLIPS SENT FOR ME TONIGHT TO
SAY THAT ABOUT SEVEN O'CLOCK THE FRENCH
AMBASSADOR BAD SOUGHT AN INTERVIEW WITH THE
CHANCELLOR OF THE EXCHEQUER TO PRESENT THE
FRENCH AIDE MEMOIRE.
"AT THE SAME TIME MONICK, FRENCH FINANCIAL ATTACHE,
HAD CALLED UPON HIM,
"PHILLIPS SAID THAT HE UNDERSTOOD A COPY OF THE
FRENCH AIDE MEMOIRE WAS LIKEWISE BEING PRESENTED
AT WASHINGTON.
"THE CHANCELLOR OF THE exchequer HAD REMINDED THE
FRENCH AMBASSADOR THAT THE TRIPARTITE AGREEMENT
WAS A TRIANGULAR MATTER AND THAT HZ COULD NOT
GIVE HIM A DEFINITE ANSWER UNTIL AFTER SE HAD
CONSULTED WASHINGTON.
"PRILLIPS HANDED ME THE FOLLOWING DOCUMENT WHICH
HE SAID HAD BEEN APPROVED BY SIMON IN SUBSTANCE
BEFORE IT WAS ACTUALLY DRAFTED BUT OF COURSE NOT
IN PARASEOLOGY:
"HIS MAJESTY'S GOVERNMENT HAVE STUDIED THE
AIDE MEMOIRE LEFT BY THE FRENCH AMBASSADOR
WITH THE CHANCELLOR OF THE EXCHEQUER ON THE
2ND MAY AND REGRET TO LEARN THAT DESPITE THE
ADDITIONAL TAXATION THEY HAVE DECIDED TO
IMPOSE THE FRENCH GOVERNMENT HAVE REACHED THE
CONCLUSION THAT IT IS NOT POSSIBLE TO DEFEND
THE CURRENT RATE OF THE FRANC BY THE USE OF
THE EQUALIZATION FUND.
Uclassified
108
-4-
**AT THE SAME TIME THE FRENCH GOVERNMENT HAVE
NO DOUBT MATURELY CONSIDERED ALL POSSIBILITIES
AND HAVE THE RESPONSIBILITY FOR REACHING A
DECISION.
HIS MAJESTY'S GOVERNMENT NOTE THAT IT IS
THE INTENTION OF THE FRENCH GOVERNMENT TO
ACHIEVE AS THE EVENTUAL RESULT OF THEIR
POLICY A RATE CORRESPONDING TO THE ECONOMIC
POSITION OF FRANCE WHICH WILL GIVE TO FRANCE
NO COMPETITIVE TRADE ALVANTAGE.
"'IT IS FOR THE FRENCH GOVERNMENT TO DETERMINE
WHAT IS THE BEST PROCEDURE FOR ACHIEVING
STABILITY AT BUCH A RATE, AND HIS M/JESTY'S
GOVERNMENT ARE PREPARED IN THE CIRCUMSTANCES
NOI TO TAKE EXCEPTION TO WHAT IS PROPOSED
AB BEING INCONSISTENT WITH THE TRIPARTITE
AGREEMENT THOUGH THEY FEEL IT RIGHT TO MAKE
I1 CLEAR THAT THEY DO NOT REGARD PRESENT
ECONOMIC CIRCUMSTANCES AS JUSTIFYING / RATE
MORE FAVORABLE TO THE FRANC THAN ABOUT 160.'
"PHILLIPS POINTED OUT THAT PARAGRAPH THREE AMOVE
DID NOT ARISE OUT OF THE FRENCH AIDE MEMOIRE BUT
OUT OF BONN I'S STATEMENT REPORTED IN PARAORAPH
NUMBERED FOUR OF MY 356, APRIL 29, 9 P.M.
"PHILSIPS ALSO SAID THAT NOT: SHOULD BE TAKEN OF
THE FACT THAT THE REPLY DID NOT CONTAIN AN
UNES, UIVOCAL YES TO THE "URSTION IN THE LAST PARAGRAPE
OF THE AIDE MEMOIRE, THAT THE STEPS 'ENTIRELY
CONFORMED TO THE TERMS OF THE TRIPARTITE ACCORD'.
PHILLIPS WINT ON TO QUOTE MONICK TO THE EFFECT THAT
THE FRENCH NATIONAL INCOME HAS NOW NOT MORE THAN
220 MILLIANDS WHILE STATE AND MUNICIPAL RES UIREMENTS
SERE 115 MICDIARDS; THAT SUCH j CONDITION COULD NOT
no ON INDEFINITELY AND UNLESS RECTIFIED WOULD
CONTINUM TO BROUIRE THE REMEDY OF DEPRECIATION.
"PHILLIPS POINTED OUT THAT OF COURSE THE FIGURE
220 MILLIARDS DID NOT DEPEND SOLELY ON THE PRICE
LEVEL BUT ON THE STATE OF BUSINESS ACTIVITY
MULTIPLIED BY THE PRICE LEVEL.
Regraded
109
-5-
"HE SAID THAT THE FRENCH HAD NOT REVEALED TO THE
BRITISH TREASURY THE WHOLE OF THEIR DECREE PROGRAM
BUT THAT IT CONTAINED SEVERE TARIFF AND "READJUSTMENTS"
WHICH IN SOME RESPECTS WERE AS, IF NOT MORE, SERIOUS
TO GREAT BRITAIN THAN THE PROPOSED CURRENCY ACTION.
"nevertheless, THIS WOULD CONSTITUTE THE FIRST
OCCASION WHEN A TRIPARTITE COUNTRY HAD DELIBERATELY
DEPRECIATED ITS CURRENCY he AN INSTRUMENT OF POLICY
AND THERE WAS NO BLINDING THE FACT THAT IT DIRECTLY
CONTRAVENED THE PROVISIONS OF THE TRIPARTITE
AGREEMENT.
"AS INDICATED IN PARAGRAPH ONE OF MY 335, APRIL
22, 8 P.M., PHILLIPS HOLDS THAT THE SUITABLE RATE
IS NOT 175 BUT BETWEEN 155 AND 160 TO THE POUND.
"however, HE SAID HE THOUGHT EXCHANGE CONTROL WAS
THE GRLATER EVIL BUT HE DID NOT CONCEAL THAT HE
HAD NO GREAT CONFIDENCE IN THIS BEING THE FINAL
DEPRECIATION.
"I ASKED WHITHER IN HIS OPINION i GOOD FACE COULD
BE PUT UPON THE FRENCE ACTION OR WHETHER THE
TRIPARTITE ACCORD WOULD IN EFFECT DISAPPEAR INTO
A TISSUE OF FICTIONS.
"HE SAID, SPEAKING PERSONALLY, IT SEEMED A LARGE
ORDER AT THE moment TO RENRITE THE DECLARATIONS AND
THAT HE BELIEVEL THAT The FRANC WOULD GRADUALLY
MOVE :0 THE INDICATED LEVEL, THE LEAKS FROM
GOVERNMENTAL SOURCES IN PARIS BEING WHAT THEY WERE.
"HE HOPED THAT SIMON WOULD NOT BE ASKED A QUESTION
IN THE HOUSE OF COMMONS TOWORROW, THAT NO DOUBT HE
WOULD BE ON WEDNESDAY AND THAT IF IT WAS AGREEABLE
HE WOULD REPLY ALONG THE LINES INDICATED IN THE
TEXT QUOTED ABOVE.
"PUILLIPS SAID THAT HE DID HOPE THAT IT MIGHT BE
POSSIBLE FOR WASHINGTON TO REACH A DECISION
TONIGHT BUT IF NOT THE CHANCELLOR WOULD VERY MUCH
APPRECIATE IT IF REPLY COULD BE RAD EARLY TOMORROW.
"AN ADDED REASON FOR AN IMMEDIATE REPLY LIES IN THE
FACT THAT THE AMBASSADOR HAS AN APPOINTMENT TO SEE
SIR JOHN SIMON AT NOON TOMORROW."
Regraded Iclassified
110
-6-
ON THE RECEIPT OF THIS CABLE WY CONFERRED AT MY HOUSE
WITH MR. BEWLEY, BRITISH FINANCIAL ATTACHE. I SENT
WORD TO BIR JOHN SIMON VIA MR. BENLEY THAT THE UNITED
STATES TREASURY WISHED TO DELAY ANSWERING THE FRENCH
UNTIL WE HAD SEEN A FULL COPY OF THE DECREES WHICH
THEY ARE SUPPOSED TO ISSUE ON MAY 3 AND THAT FURTHERMORE
I WOULD NEED TIME TO GET THE BENEFIT OF ADVICE FROM THE
PRESIDENT OF THE UNITED STATES.
I FURTHERMORE ASKED THE BRITISH WHETHER THEY WOULD NOT
RATHER BEE THE FRESH PUT IN A SYSTEM OF SUPERVISION OVER
CAPITAL novements, RATHER THAN SEE THE PRANC CONTINUE
TO FALL. I ASKED BEWLEY TO TRY TO GET AN ANSWER FOR ME
ON THIS QUESTION PROMPTLY.
IN THE TREASURY NE SERIOUSLY JURSTION THE WISDOM OF
CONTINUING TO 00 ALONG WITH THE FRENCH IN THEIR PROPOSED
POLICY OF PERMITTING THE FRANC TO SEEK ITS OWN LEVEL.
IT WOULD BE MOST HELPFUL IF YOU WOULD CARE TO EXPRESS
YOUR OWN OPINION IN REGARD TO THIS MATTER.
HENRY MORGENTHAU JR.
Regraded Uclassified
111
ME
TELEGRAM SENT
May 2, 1938
12 p.m.
MEMASY
PARIS (PRANCE)
MUSH
247
FOR COCHRAN FROM THE SECRETARY OF THE TREASURY.
HAVE fully informed BEWLEY this Evening of course
of interchanges today between myself and French
treasury. Have suggested to British that WE take no
action until opportunity afforded for further
consultation and examination of text of French decree.
I also asked BEWLEY informally to ascertain
whether the British Treasury did not think that
introduction by the French Government of modified
supervision of capital movement might not bE preferable
elternative policy for the French Government to pursue
rather than prospective continued decline of franc.
I withheld direct comment upon Simon's message as
conveyed in Butterworth's 364 of May 2.
HULL
(HF)
EA:HF:EDA
BAME TO: Amembassy, London, England as Department's
No- 183, May 2, midnight.
Regraded Uclassified
112
fee perma of last page
EDA
PLAIN
LONDON
Dated May 2, 1938
RECEIVED 6:10 p.m.
Secretary of State
Washington
RUSH
364, May 2, 11 p.m.
STRICTLY CONFIDENTIAL FOR THE SECRETARY OF THE
TREASURY FROM BUTTERWORTH.
Sir Frederick Phillips sent for me tonight to say
that about SEVEN o'clock the French Ambassador had
sought an interview with the Chancellor of the Exchequer
to present the French aide memoire.
At the same time Monick, French Financial Attache
had called upon him.
Phillips said that he understood 8 copy of the
French aide memoire was likewise being presented at
Washington.
The Chancellor of the Exchequer had reminded the
French Ambassador that the tripartite agreement was B.
triangular matter and that he could not give him a
definite answer until after he had consulted Washington.
Phillips handed me the following document which
hE said had been approved by Simon in substance before
it
Regraded Uclassified
113
EDA - 2 - #364, May 2, 11 p.m. from London
it was actually drafted but of course not in phraseology:
"His Majesty's Government have studied the aide
memoire left by the French Ambassador with the Chan-
cellor of the Exchequer on the 2nd May and regret to
learn that despite the additional taxation they have
decided to impose the French Government have reached
the conclusion that 1t is not possible to defend the
current rate of the franc by the USE of the Equaliza-
tion fund.
At the same time the French Government have no
doubt maturely considered all possibilities and have the
responsibility for reaching a decision.
His Majesty's Government note that it is the
intention of the French Government to achieve as the
Eventual result of their policy a rate corresponding to
the Economic position of France which will give to France
no competitive trade advantage.
It is for the French Government to determine what
is the best procedure for achieving stability at such
a rate, and His Majesty's Government are prepared in
the circumstances not to take EXCEPTION to what is
proposed as being inconsistent with the tripartite
agreement though they feel it right to make it clear
that
Regraded Uclassified
114
EDA - 3 - #364, May 2, 11 p.m. from London
that they do not regard present Economic circumstances
as justifying a rate more favorable to the franc that
about 160"
Phillips pointed out that paragraph three above
did not arise out of the French aide memoire but out
of Bonnet's statement reported in paragraph numbered
four of my 356, April 29, 9 pame
Phillips also said that note should bE taken of
the fact that the reply did not contain an unequivocal
yes to the question in the last paragraph of the aide
memoire, that the steps "entirely conformed to the
terms of the tripartite accord". Phillips went on to
quote Monick to the Effect that the French national
income was now not more than 220 milliards while
state and municipal requirements were 115 milliards:
that such a condition could not go on indefinitely
and unless rectified would continue to require the
remedy of depreciation.
Phillips pointed out that of course the figure
220 milliards did not depend solely on the price level
but on the state of business activity multiplied by the
price level.
HE
Regraded
Uclassifi
Cable 4364, London, dated May 3, 1938: Page 4, line 3: Insert word
"quota" before "readjustments", will then read "quota readjustments".
EDA - 4 - #364, May 2, 11 Dame from London.
115
HE said that the French had not revealed to the
British Treasury the whole of their decree program but
that it contained severe tariff and "readjustments" which
in some respects were as, if not more, serious to Great
Sritain than the proposed currency action.
NEVERTHELESS, this would constitute the first
occasion when a triportite country had deliberately
depreciated its currency na an instrument of policy
and there was no blinding the fact that it directly
controvened the provisions of the tripartite agreement.
Aa indicated in paragraph one of my 335, April 22,
8 person Phillips holds that the suitable rate is not 175
but between 155 and 160 to the pound.
HOWEVER, hE said hE thought Exchange control was
the greater Evil but hE did not conceal that he had no
great confidence in this being the final depreciation.
I asked whether in his opinion a good face could
bE put upon the French action or whether the tripar-
tite accord would in Effect disappear into a tissue
of fictions.
HE said, speaking personally, it seemed a large
order at the moment to rewrite the declarations and that
hE believed that the franc would gradually move to the
indicated level, the leaks from governmental sources
in
Regraded Iclassified
116
EDA - 5 - #364, May 2, 11 p.m. from London
in Paris being what they were.
HE hoped that Simon would not bE asked a question
in the House of Commons tomorrow, that no doubt he would
bE on Wednesday and that if it was agreeable hE would
reply along the lines indicated in the text quoted above.
Phillips said that hE did hope that it might bE
possible for Washington to reach a decision tonight
but if not the Chancellor would very much appreciate
it if reply could bE had early tomorrow.
An added reason for an immediate reply lies in the
fact that the Ambassador has an appointment to BEE Sir
John Simon at noon tomorrow.
KENNEDY
NPL
Regraded Uclassified
one of funcifial
as
no instrur ctums
had been issued
wanted it to be
unsidered consultation
if unforsen hersone
made action imperation
before my reply comes
they would cemmunical
with you
Regraded Uclassified
117
RE FRENCH MONETARY SITUATION
May 3, 1938.
9:30 a.m.
Present:
Mr. Taylor
Mr. Oliphant
Mrs Klotz
Mr. Gaston
Mr. Harrison
Mr. Knoke
Mr. Lochhead
Mr. White
H.M.Jr:
(On phone) Put in a call for Cochran over the
French phone - utmost secrecy, whatever they call
it, please.
This is the story, briefly, of what's happened -
rather rapid thing. I mean sometimes we ask
you (Harrison) down and nothing happens; sometimes
we ask you down and by the time you get down lots
happens, see? But I'll try to give it to you
chronologically.
Harrison: Yes, sir.
H.V.Jr:
I don't know whether you've had a chance to see
the cables.
Harrison:
No, I haven't.
H.V.Jr:
Have you (Knoke)?
Knoke:
Yes, I saw them.
H.V.Jr:
Yesterday afternoon ....
(White comes in)
Hello, Harry, sit down.
....
Marchandeau sends for Cochran and tells him
that "Tuesday morning we're going to put the franc
to 175."
Harrison:
That's today.
H.M.Jr:
That's today. And I get this thing and I'm upset,
and I call up Cochran and say, "In the first place,
I'm very much upset over this message and I don't
feel that this comes under the spirit of the
Regraded Uclassified
118
-2-
tripsrtite, because they haven't consulted, they're
telling us; and furthermore, I can not give them an
answer, which they have asked for by tomorrow
morning, because I have to consult with the British."
Cochran gets that message to Marchandesu at one
o'clock in the morning, when he's in bed, end via
Rueff ne tells Cochran that "Well, we haven't given
any orders; that's just en expression of policy.
On, we want to consult very much. No orders have
gone out." And then Cochran argues with them and
tells them, "Now, we've been tsking you this for two
weeks and you constantly said you're not going to go
to 175," and gets into an argument with Rueff, and
stueff goes back to refresh his memory with Marchendeau,
Add Marchandesu says, "hell, tell Cochran that we will
not 20 to 175 unless the pressure gets so great that
wordbox have to go, but then if we do have to go we'll call
ug Mochran and tell you we're going to do it. But
please :sk Mr. Morgenthau to hurry."
'ell then, when I get back here I fin: + message from
old John Simon, with 2 draft - they have also gotten
this дessage - and with E draft of their communique
or aide memoire, whatever you call it, to the French,
which says to the French every way possible, "WE
Jon't like this, but we'll 60 : long and hold our
nose." And then in the latter part of the cable
he goes on to tell us that ae considers that by doing
tals thing the French have broken the triportite
agreement.
luen I send for Bewley and tell him that I con't give
oir John Simon an answer by noon on Tuesday and that
I've got to have time to think this thing over; that
I agreed with the English there's no economic reason
for the French to go to 175; that if they go to 175
It won't be long before they 80 to 200, >nd the t this
Isn't going to answer any purpose; and tast I think
we've got everything to goin by stalling. I don't see
anything to gain by giving them a yes or no.
He seys, "Well, do you want me to say to Simon that
you don't want him to send that message?"
I said, "No, I'm not saying that. But I'd like to have
time to think this over. And furthermore, I can't say
Regraded Uclassified
119
-3-
to the French, 'You're out of the tripartite'
without consulting the President, and that may
take a couple days to get an answer."
"But while we're talking," I said, "I want to make
the suggestion to you people fl - how did I put
this? I said this - I asked Bewley informally to
ascertain whether the British Treasury did not think
the introduction by the French Government - we got a
new one here - of modified supervision of capital
movements - which I think is a "honey" - might be
preferable - I mean the way of describing exchange
control - whether modified supervision of capital
movements might not be preferable to the alternative
policy, rather than the prospective continued
decline of the franc. See?
In other words, I'm saying to the British, "Before
we agree to this, what would you think of suggesting
to the French that they put in some kind of supervision
over movement of capital, because we think that if
they did that they'd get control of their situation,
if they did it properly, whereas this other thing is
just going to let the thing go down and down."
I didn't use this example there, but I used it with
Feis and the others. I said that when Italy went
into Ethiopia and bombed civilian populations, they
shocked the world and it W&S a new kini of werfere,
but nobody seid anything. Then they've done it in
Spain, they've done it in China, and now if somebody
suddenly says, "Oh my, isn't it terrible, this
bombing!" - "Why, what's terrible? That's modern
warfere." I said, "If we simply let the French 80
down and drop this franc I don't know where, then the
Japanese start to do it, you wouldn't say that it - why
get excited about us doing it?" I mean you establish
a custom. And I said, "The only thing that the tri-
partite has done is to stop competitive devaluation
in the world." And we did. We stopped it, didn't we?
Now, Bewley let us know that the British didn't like
that thought. But he passed it along. I mean he's
a good reporter.
Up to this have I missed anything?
Cochhead:
(Nods no)
Regraded Uclassified
120
-4-
R.V.Jr:
Now this is the part you don't know. At five
o'clock this morning Ambassador Kennedy called
me. He was very much excited and thought that I
W&S making B terrific mistake by advocating
exchange control for France, and that we are
simply urging France to follow in the footsteps
of Germany.
So I said, "Well, I'm very sorry, I don't agree
with you.
and ne seid, "Well, I'm going over to see Sir
John Simon in B little while, and I want to know
what the arguments are." So I gave them to him,
stressing the fact that there comes a time when the
people of the United States very well may ask the
,uestion, "Well, how long is Morgenthau going to tie
up with u country which is permitting its currency
to continue to depreciate? He continues to be 8
partner with a country for three years; ne's been
practicing loose fiscal policy." And I said, "The
time will come when they can't help but criticize
us for continuing to be e partner.'
80 I tolu Aennedy - I seid, "After all, this thing
mayens four times B year, and every time 122 to now
I've had to take the position, 'Let's go along with
the French and streton this thing,' and the English
nave elways wanted to break off,' and I said this
708 the first time the roles were reversed.
Me said, "Well, that's & good point."
"tio we've thought this thing over very carefully, and
we feel that if the French would do this, this offers
to solution, while permitting them to let the franc
seek its own level NE think offers no solution. And
we've thought this thing over very cerefully and this
Is what we'd like to offer."
"Nell, that's going to adá to the troubles over here."
I said, "I can't nelp it. We're not adding; the
troubles are there. But the time has come for us
to think of the United States and the moral - the
morale of our own finencial structure. I mean es
Regraded Uclassified
121
-5-
long - I mean there comes e time, in my opinion,
where 1f we continue to be a weak partner - B partner
with a very weak country that's followed very loose,
bad fiscal policy, sooner or later we get painted with
the same brush.'
That's what I think. Now God knows nobody wants less
than I to shove France over the precipice. But I
think there does come a time when we've got to think
of ourselves.
8o Kennedy said ne'd go over and 88 soon as he saw
them he'd call me back. But after all, they'll get
the message straight. I'm sure Kennedy will deliver
it. Furthermore, I gave it to Bewley, and Bewley
will give it just 88 I gave it to him. But the
unfortunate thing 1sthat before Bewley left Bewley
ned the same idea that Kennedy had, in this way:
Bewley was under the impression that it was much
better to let the franc go, just let it go. I don't
know whether that's the State Department's philosophy
or not.
(on phone) Hello. - Fine. (Conversation with
Cochran follows:)
Regraded Uclassified
122
Tuesday
May 3, 1938
9:41 a.m.
HMJr:
Hello.
Operator:
Mr. Cochran.
HMJr:
All right.
0:
Go ahead.
HMJr:
Hello.
H. Merle
Cochran:
Hello.
HMJr:
Good morning.
C:
How are you, Mr. Secretary?
HMJr:
Oh, wonderful? How are you?
C:
Oh, a little bit groggy this afternoon.
HMJr:
Well, - what's happened?
C:
I just phoned to the
- the secretary is
getting back
.....
HMJr:
Wait a minute. Who did you see?
C:
I say, I was at the Bank of France this noon.
HMJr:
Yes.
C:
Have you received my cablegram on that?
HMJr:
Listen, old man, I - - I - in the first place
there's six hours difference and then you've got
to add about six hours more and by that time I
get your cable.
C:
I see.
HMJr:
Yeah.
C:
When I was out there at twelve o'clock...
HMJr:
Yeah.
Regraded Uclassified
123
2
C1
they had yielded fifty-four thousand pounds.
HATE:
Well that
C:
And the rate had gone from one sixty-three and
one half when the banks opened - it had gone
from there to one sixty-five.
HMJr:
Yeah.
C:
And while I was there London telephoned
HMJr:
Yes.
C:
and said that there was a pretty fair demand
there for sterling against francs ...
HMJr:
Now just hold the wire a minute - just wait a
minute.
C:
All right.
(Short pause)
HMr:
Right, Thank you. (Secy speaking to someone in
his office.)
HMJr:
Hello. We closed the window.
C:
Yes,
HMJrt
Now, as I understand it up until noon they lost
fifty thousand pounds.
C:
Yes.
HMr:
Well, that's not much.
C:
No. And they instructed London to spend one
hundred thousand pounds to hold it around one
sixty-five.
HMJr:
Uh huh.
C:
The order was given while I was there.
EMJr:
Yes.
:
I was talking to our friend who was on the phone
with London when the Governor himself came in
and gave the instruction.
Regraded Uclassified
124
- 3 -
HMr:
I see.
C:
And the rate now is one sixty-four seven eight
to one sixty-five.
HMJr:
Well, that's - that's ....
C:
They've held it there steadily and my market
friend the Guaranty said that there is not -
well, they're doing quite a bit but nothing too
big.
HMJr:
Uh huh.
C:
I mean a fair amount. But they are holding it
there where they stopped it this noon.
HMJr:
Well, that doesn't seem very expensive, does it?
C:
Well, I haven't any figures since I was there, but
of course
HMJr:
Well, weren't they pleased?
C:
Well, the Governor was very anxious to know what
your answer was going to be.
HMJr:
Uh huh.
C:
See they told him about this last night.
HMJr:
Well now, you got my cable didn't you?
C:
Yes, yes, I have that.
HMJr:
And did you talk to Butterworth this morning?
C:
Ah - I phoned him and he also had your cable.
HMJr:
But did you give him those
....
C:
I gave him the whole information.
HMJr:
You gave him all the information?
C:
All the information of our two conversations.
HMJr:
Yeah.
C:
Then I sent you a cable concerning the conversations
of last night.
Regraded Uclassified
125
- 4 -
HMJr:
Well I guess after you talked to Butterworth
Mr. Kennedy called me up.
C:
Yes.
HMJr:
Very much excited ...
C:
Yes.
HMJr:
because he didn't like my suggestion - to
the British.
C:
Ah -
HMJr:
I mean the one in my cable two forty-seven.
C:
Yes. Yes.
HMJr:
See?
C:
Yes.
HMJr:
But I asked him please to let it go as I instructed.
C:
Uh huh.
HMJr:
See?
C:
Yes.
HMJr:
I mean a lot of people have got this rather old
fashioned conception of exchange control, I mean
old in the sense that - maybe six months old.
C:
I don't hear that.
HMJr:
Well, I say some people don't quite understand
just what exchange control may or may not be.
C:
I see.
HMJr:
But I am going to sit tight now until I hear from
the British.
C:
You've had no reply from them yet?
HMJr:
Well, I couldn't - I most likely won't get any
until about six or eight o'clock tonight at the
earliest.
Regraded Iclassified
126
- 5 -
C:
I see.
HMJr:
You see, if London sends me a cable at eleven
o'clock their time the earliest I can get it
is eight o'clock Washington time.
C:
Yes.
HMJr:
And that's what happened yesterday.
C:
Yes,
HMJr:
So I doubt if I'll get anything from them tonight.
C:
I see. The Treasury here has not called me at all.
HMJr:
Well ...
C:
I've had no word from them today and I got this
latest rate just while we've been talking you see.
HMJr:
Well, I'll call you again this afternoon, oh -
let's see - ah - is eight-thirty a good time for
you?
C:
It's a good time, yes. I'm home then.
HMJr:
Well I'll call you after eight o'clock - what
time is in Paris now, four?
C:
Ten minutes to four, yes.
HMJr:
Well, we have - there's six hours difference now
you see.
C:
Six hours, yes, with daylight saving
....
HMJr:
Well, I'll call you after eight o'clock and you'll
be at home.
C:
All right. I'll be there.
HMJr:
Yes. All right, Cochran. That's all.
C:
Good.
Goodbye.
HMJr:
Goodbye.
Regraded
127
-6-
H.2.Jr:
Well, think? that brings us up to date. Now, what do you
Harrison:
Well, I - realizing what the subject of this meeting
probably would be, I've been thinking it over a lot
on the way down. I had a short talk with Knoke
yesterday a fternoon. And my general impression, I
think, is slightly different from yours.
H.M.Jr:
O.K.
Marrison:
And I know you wouldn't want me to be anything but
perfectly frank.
Hondr:
Just a minute.
(On phone) Hello. - Put him on. - O.K.
Kennedy's calling now. See, he's had lunch with
Chamberlain.
Merrison:
Oh, I see.
011phant:
Chamberlain, not Sir John.
H.S.Jr:
well, he was to call on Sir John and have lunch with
Chamberlain.
Harrison
I think the exchange rate is not an object in itself.
It is a reflection of internal conditions in one
country as related to conditions in other countries.
And the trouble with the frenc, as I see it, is not
that it is too high or that it is too low, and not
really that they haven't had exchange controls, but
rather that they have not done a job at home
economically.
H.V.Jr:
Complete agreement. There's no argument.
Harrison:
And that what they ought to be doing is to clean
house, because the three-cent franc is too low, I
think, if they've got a sound economy, end it's too
high if they don't do something at home. And nobody's
smart enough now to say where it ought to go in
either one of those events.
Therefore, I should like to think that you might
Regraded Uclassified
128
-7-
perhaps take the position that you will fire them
from the tripartite if they don't clean house at
home; and by that I mean taxes and increased pro-
duction and all the things that they need to do to
repair their economy. And I was just wondering -
I'm B little fearful whether your cable might not be
construed as E cure in itself, whereas you don't
mean that; the cure is this internal problem that
they've got. Now, it may be that some sort of
modified supervision of capital movements 1s E
corollary to or supplement to these other things;
but I think the main objective should be their
courageous attempt to do something with their own
economy comestically, which I think they heven't
Jone.
30:
There's no disagreement between us. But you've got
the - you get 2 cable boday, or yesterday, the way
I -10, sho they want 2 definite answer - "Will you
20 Flang?" Where is tant communique, the part that
has - the French communique. I don't want to try to
perspurise it. "Will you go along with us? We'll
let the thing 80." And I've got to say, "I want to
stall, " "I'LL 20 -long,' or "I won't." I hrd three
Viternatives. Non, under those ...
Net Xr. - reyd the communique loud. I only had
taree, see? > 110 I chose the one, "I went to stall."
Well, I think to t's cuite all right. And I think
if they 're smart they stall until after this
Rome meeting 1. over anyway, because if there is
going to be any disintegration in the French
Josition prior to the settlement of Whatever these
talks are about in Rome, they're going to expose
themselves to the - to very strong attack, morally
anyway, from both the Itelians and the Dermans.
which country?
Harrison:
The French. I think that if - for instance, supposing
you and the British decide to fire them from the tri-
partite today. I think that would be the worst possible
position, politically, that the French could be put in
vis-u-vis Germany and Italy, especially with this
meeting going on. And therefore I think you're a
gousend to them in suggesting tast they stail. I
Regraded
129
-8-
think they ought to stall, especially if the
alternative means they're going to be fired from
the tripartite. That ought not to happen, from
their standpoint - I shouldn't think they'd want
it to happen until after this Rome meeting is
over. I think you're quite right in stalling.
AS I interpret your cable, though, I think it implies -
at least I thought it implied - that you'd be willing
to go along provided they put on a limited supervision
of capital movement - "and I don't know that I'd go
along even if you did that.
d...Jr:
That's something different.
Now, have you(Lochhead) got it?
Lochnesd:
Do you want the cable - the first one that
S.L.Jr:
The one Cochren sent me yesterday a fternoon.
wochhead:
The one Cochran sent us yesterday afternoon.
H.V.Jr:
Just the French message.
Lochhend:
"The French Government is obliged to Inform anew the
Government of the United States of America that the
expensive effort made by the stabilization fund,
particularly during the recent period, cen no longer
be maintained. The French Government is therefore
obliged, despite the fact that it has decided to
Impose from this week 8 new and important tax effort
on the country, to choose between exchange control
or the retrest of its currency. The rate at which
the French Government has decided to stop is ground
175 francs for one pound, with the will to lower
progressively this figure in correlation with the
economic improvement which it expects from its
decrees.
"The French Government recalls that from the first
of 18st July taxes have been increased by 16
million" - there's a Question mark on that, what
that figure should be - "16 million francs, and
that therefore it has shown its will to defend its
currency by all possible means, and that it remains
still attached to this view within the framing of
Regraded Iclassified
130
-9-
monetary liberty. It hopes therefore that in
these conditions the setback which it is obliged
to decide upon will appear to the Government of
the United States of Americo as entirely in
conformity with the provisions of the tripartite
agreement."
That's the end of the message. Then Cochran goes
on to say, "The Minister of Finance told me that
he sould appreciate having the reaction of Secretary
Morgenthau to the above statement as soon US it is
possible for him to let us know. I "sked Marchandeau
men the rate would be moved to 175, and he replied
'tomorrow'. This will be one of several steps which
are to be taken tomorrow simultaneously with the
publication of certain decree laws.
"I Asked the Minister whether the terms of the
national Defense loan would be mode known tomorrow.
His answer was that he was not sure whether they
would be tomorrow or the day after. In the circum-
standes, ne insisted, it 1s not possible to hold the
present frane rate, End that it 13 absolutely necessary
to let it move to 175 to the pound."
well, I don't know whether that's typically French
DE typically German, that message.
what I'm setting At is, we don't have time - let
ne be frank; at the same time I don't want to be
alscourteous - to philosophise about the internal
situation In France. I mean we're faced - they put -
for two weeks we've begged and implored them to tell
..S met they're going to do, and every time we go
there - Cochran says, "At no time have I put SQ much
pressure on them" :- at no time has he put so much
pressure on the French, see, and every time he goes
tuey say, "We don't know, but we sssure you we're
not going to let it go to 175." And then they give
de two hours' notice to do this.
Now, I say, having no choice and not being able to
run the French political thing, and not wenting to
run it, not being able to run it - I have the choice,
1.S I say, to nswer that message by saying, "I'm
sorry, you're out," or "O.K., we'll go along with
Regraded Uclassified
131
-10-
you, 11 or "I want to stall. And, in stalling, have
you considered an alternative?" Now, that's what we
have. See what I mean?
Knoke:
But, Mr. Secretary, is that really an alternative?
Isn't it really just exactly the same thing as
exchange control? I don't care what you call it -
modified supervision over capital movements, or
R.T.Jr:
Just as an alternative.
mite:
Exchange control over non-commercial transactions.
L.A.Jr:
The alternative is to go along with this group in
the French Cabinet who wint the French franc to
fall, they think, to B level so low that it will
attract the Frenchmen because it is cheap and they'll
begin to buy and she'll go back up again. Now, that's
tals one school of thought, see? And that's the school
of thought which - I gravely question whether the
United States Government wants to go along with them.
No., the other alternative is, if they feel they've
got to do something, the suggestion which I made -
do they want to put on a modified exchange control?
See?
Marrison:
with E view to keeping the franc
...
R.W.Jr:
on, I'm not going to mention that.
Merrison:
I NBS just Mondering what your
U.S.Jp:
on, I agree with you.
AS long es there is some indication, some assurance
we have that steps are being taken that appear to us
to have some reasonable opportunity for preventing
the franc from sliding indefinitely
And it
is all very well to wish for fundamental economic
changes; we quite agree with you. But in the first
place, you're not going to get them just this way.
They've had that fight for it least three years. And
In the second place, as you suggest, even if they
sttempted to make those changes, one of the
preliminary requisites to give them B breathing
spell might be to hold the franc stable by use of
Regraded Uclassified
132
-11-
exchange controls over these non-commercial
transactions.
And I think that 6S between the French situation
on exchange control and the German situation on
exchange control, the comparison is wholly out of
order. The Incentive to get capital out of Germany,
the reasons for which exchange control were imposed,
were entirely different than in the French situation,
and the assumption that France is going the way of
Germany merely because she imposes exchange control,
I think, is little short of nonsense. It disregards
wast has happened in other countries, it disregards
the difference between the French situation and
Germany, it disregards the particular situotion
which France is in, and furthermore it disregards
the kind of exchange control which the Secretary
has suggested they put on.
So that I, though I think you're quite right in
saying that they must correct their fundemental
situation before toey can hope to maintain indef-
initely the stability of the franc - I think all
we can ask or expect is some kind of reesonable
assurance as against the alternative course of
letting it slip to & point it which it will be
chesp; because, even though it 1a cheap at 200,
it is not RS cheap at 299 is it is at 300, and
it will be still cheaper at 400. If any way,
that's the may Cermany went. If the assumption
is that & currency reaches 8 point et which it is
cheep while you're not correcting the underlying
forces and while you're permitting speculating
movements in exchange - why, there is no bottom.
80 it seems to me that those of us who are asking
that we get some assurance that they will do some-
thing that we can expect they will do, not that we
hope they will do, are wanting them not to go the
way of Germany.
H.M.Jr:
(On phone) Hello. (Conversation with Kennedy
follows:)
Regraded Uclassified
133
Tuesday
May 3, 1938
9:58 a.m.
HMJr:
Hello.
Operator:
Ambassador Kennedy.
HMJr:
Hello.
Joe
Kennedy:
Hello, Henry.
HMJr:
How are you?
K:
How do you feel now?
HMJr:
Fine. I love to have you call me in the middle
of the night.
K:
If anybody did that to me I wouldn't
even speak to them.
HMJr:
Ah - (Laughs) you'd do more
K:
That's a hell of a trick, I know, and
I don't do it as 8. rule. I thought I'd better have
a word with you before I went over and saw him and
I'm glad I did.
HMJr:
Yeah.
K:
I saw him at twelve o'clock..
HMJr:
Yes.
K:
And then after I - well, I stayed with him until
one o'clock and then I went over and saw the
Prime Minister.
HMJr:
Yes
Mill
Now, first of all, let me - let me tell you exactly
what their plan
is - they're just as sore, at
least they say they are, that this thing is going on,
as you are.
HMJr:
Yeah.
K:
They do not believe in exchange control because
they believe that that is only the beginning of
the end; that - that France won't stay around
and see if we do have exchange control because,
Regraded
134
- 2 -
he says, these fellows are - will start public
shopping and doing everything else and they'll
immediately go to a hundred and seventy-five
control. and you'll get the disadvantages of exchange
HMJr:
Yes.
It
At that time I used the argument that you gave me;
I said, well that makes a pretty lousy
affair if we contact them at all".
HMJr:
Yeah.
K:
And their answer to that was that it wasn't the
most attractive situation in the world
...
HMJr:
Yeah.
=
But, after all, what are you going to do. Mr.
Hitler walked in on Rome today and he's going
to bust this thing wide open - ah - because it
isn't going to cost anybody any money to let
them go along and it's going to hurt England a
hell of a lot more than it's going to hurt America.
HMJr:
That's right.
K:
Because of the trade effects. And it isn't going
to cost any money. They believe that the psychological
effect would be very bad if it were busted up.
HMJr:
Yeah.
K7
Particularly at this time.
HMJr:
Yes.
K;
I mean I think
so I went over
and saw the Prime Minister.
EMJ::
Well, wait 8 minute, wait minute.
&:
... exchange control would be very serious because
of the type of people that they are.
UMJr:
Wait a minute, Joe.
Is
Yes.
Jclassified
135
- 3 -
What you've been telling me now is your conversa-
tion with Simon?
is
That's right.
mair:
Now you're going on to your one with Chamberlain?
KL
That's right.
HMJY:
0. K.
No, and Chamberlain said that the situation was
just about that; he said that exchange control
was a great - was a very serious thing because
it was the beginning of the end and it was against
all the policies that we've been trying to advocate.
HMJet
Yeah.
It
That is, trade and all that sort of thing and that
there were many potential governments behind the
scene and one minister - one government would be
in there and they'd go along a certain way and then
the next group would come in and they'd turn on the
bucket another way.
HMJ7:
Yeah.
E:
And he thought that the greatest argument of course
was that - he said they were going to
- to go back to Simon, Simon said that they expected
a great deal of trouble with their trades people
here because he thought that France was going to
get probably some added advantage and be able to
sell a good deal of goods here as detriment to the
British much more than affecting the United States.
HMJrt
That's right,
Kt
I told that to Chamberlain and he said of course
that was true, that they had these troubles but
that he thinks that now he has 8 chance to work
on the Government financially and that - and
especially he thinks that because of Hitler's
visit to Rome it would be almost & calamity if at
this time these fellows broke up. Now, particularly
when it wasn't going to cost any money.
HIMI:
Uh huh. Well, did you get the impression from
136
4
HMJr=
Uh huh. Well, did you get the impression from
Mr. Chamberlain that he was absolutely opposed
to this suggestion?
That he was?
HMJrs
That he was?
K:
That he was opposed to exchange control?
HM/r:
Yes.
K:
Yes,
EMIr:
You did?
K:
I don't think that he opposed it - as a matter of
fact there's no question about it - if you - that
they won't do anything unless you agree to it.
HMJr:
Uh huh.
K:
I'm convinced of that. Simon made that fairly
clear. He said, "After all, this is - this is
as much Morgenthau's baby - and more than it is
enybody else's, because he was the fellow who
first put it into effect and he is the fellow
who up to this time has kept it going."
HMr:
That's right.
Xs
But, on the other hand, he said, "We won't do
anything
-
he sald that when Bonnet
came over there the other day he gave him a quick
send off on it - he didn't give it to him very
very definite, he said, "This is something we
will have to take up in a couple of days.
HMJr:
Yes.
it
He showed me a copy of the letter that he delivered
to Bonnet as he got into the plane.
HMJTE
Got what?
K₂
I told him that this was a complete getting away
from the agreement; that they had no right to do
any such a thing and I suggested that if you agree
to this what are the possibilities of saying to
these fellows that they - as an excuse for this -
Uclassified
137
in # I
that they must put their house in order if they
expect to get any cooperation from the United
States and England.
EMJr:
Who said this?
K:
I said how about making that suggestion as coming
from you if you agree to it.
HMJri
Yeah.
K:
I said that you couldn't make it strong enough as
far as we were concerned.
HMTr:
I see,
Ks
I said, "As far as we're concerned, we're not going
to lose any money, it isn't going to cost us anything."
HVJr:
Un huh.
K1
"But, it's E question whether you want to do it."
But both of them, both Simon and Chamberlain, and
they didn't have time out to get together because
I just walked out of one door and walked into the
next - ah - felt that psychologically it would be
a terrible thing to throw a bomb shell into the
world. Simon thought that it would knock the hell
out of their market here
HMrt
Yeah.
X:
But Chamberlain viewed it not so much from the
financial aspect but from the aspect that he says
he wouldn't want to have Mr. Hitler open a telegrom
and say, "Tri-partite Agreement broken up," and
hand it to Mr. Mussolini.
EMJr:
That's.right.
:
That's exactly what he said.
HMJr:
He did?
in
Yes,
RMJr:
Well, now, sh - I - what you're telling me 10
most useful..
Regraded Uclassified
. 138
- 6 -
K:
Yes.
HMr:
got to be the
of the Treasury people
and - ah - you know what's happened with the franc
today?
K:
No. What's the last on it?
HMJr:
I mean I've got it.
*
K:
One sixty-five?
HMJr:
Yes. But let me tell you what's happened . - ah -
I just talked to Cochran before you called.
K:
Yes.
HMJr:
And up to that time it only cost the French fifty
thousand pounds.
Missing
Yes.
HMJr:
And they had given an order to the Bank of England
to defend the franc up to a hundred thousand pounds.
K:
Yes.
HMJr:
But up to this - up to about noon it only cost them
fifty thousand and they were holding it around a hundred
and sixty-five.
K:
They're holding it because of you.
HMJr:
I - ....
K:
They're holding it because they don't want anything
to happen until you make up your mind.
HMJr:
Well, now, Joe, this is what's going through my mind,
because I sent this all off last night - to the
President . - he's got it by now, see?
K:
Yeah.
HMJr:
Because I sent him - oh - pages on this whole thing,
see?
K:
Yeah.
HMJr:
Supposing we mark time another day
139
- 7 -
Lt
Yesh.
EMJrt
And the French continued to hold the thing where
it is
&:
Yeah.
HMJr:
That wouldn't be the worst thing, would it?
K:
Well, I don't think it would do any harm. We can
Just say -
I'd be glad if you sent over this
suggestion here - follow-up to the President because
I think the political repercussions here he ought
to know as well as the financial ones.
HMJr:
Well, I'm conscious of those and don't worry, the
State Department has pointed them out to me very
sharply, these
K:
I haven't talked to them about this at all.
HMJr:
No, but I say they - they had a representative at
my house last night all evening.
5
Oh, I see.
HMJr:
Well, I mean I always ask them to. See?
K:
I see, yes.
HMJr:
I mean, whenever I have these meetings I always
have a representative sit in so that Hull knows
what's going on.
M
Yes.
HMJri
So I mean there's no crossing of wires.
Kt
Right.
HMJr:
I mean, they know what I've done - everything up
to this minute. But, what we've got to do is
to weigh the whole situation and I'm not - I'm
fully conscious how serious this thing is.
R:
Yes.
HMJr:
But, I'm also of the firm belief that if the French
let it go a hundred and seventy-five or let it go
two hundred it's only going to be question of a week
or a month before we will have to act and then - ano
then what?
Regraded Uclassified
140
10 # *
Well, I mean of course Chamberlain's answer to
that was - I gave him the same argument - Chamber-
lain's answer to that was: well, if that happens -
if you bust it up now you know the worst has happened -
there isn't anything else that you can do.
HMJr:
Yes.
Er
Whereas if you go ahead with this situation and try
to carry it on you might get something better - you
may get an improved condition. He says if there is
an 1dea of fatalism about the possibility of making
any deal in Europe why we might just as well all
finish off because there's no hope for us - under
existing conditions unless we can make some deal.
Well, of course night I said this rather facetiously to
Bewley, but I hope he repeated it. And that is
when the English and the French got together and
agree that in case of a war it'll be a French
General in charge of all the armies - why didn't
they suggest that an Englishman should be in charge
of the two banks.
K:
Yes. (Laughs)
HMJrs
What?
K:
(Laughs) I think
HMJrt
But, of course ...
X:
That's a job. I think they realize that they've
got a hell of a lot of trouble but he believes that -
he's hoping that he'll get a national government in
there.
HMJr:
Uh huh.
22
And that they will try to do something. If they
don't do anything the dollar falls but Chamberlain's
theory is on the basis that he's going ahead on
the Italian and the Irish is that as long as they're
in there working to try and do something that the
worst hasn't happened.
HMJr:
Yeah.
M
Let it go to hell then - then it - then it has
happened and then to hell with everything.
Regraded
Uclassified
141
- 9 -
HMJr:
Yeah. Well, I'm going to do the best I can and
I'll think it over very carefully.
Kt
All right, Henry. There's nothing further you'd
want me to do?
HMJr:
Ah - now let ne just think a minute - let me
ask the people in the room whether they've got
anything. Would you mind waiting a minute?
K1
Surely. Go ahead.
RMJr:
No. We'll work on this thing and I - Mr. Rull
is calling me now and I am going to talk to him
and see what he's got.
K:
I see.
HMr:
And I'm going to talk it over with him. And in
any case, Joe, I'm not going to take any positive
action until I hear from the President.
X:
O. K., Henry.
HMJr:
And the argument which you advanced - the one
that Chamberlain advances - that by waiting we
might get something better and by taking
of action now why we
K:
We'd put it in the archives.
HMJr:
Yes. That's a good argument.
K:
Yes, that's a very good one, particularly with
Hitler in Rome.
a
HMJr:
That's/good one.
M
Yes.
HMJr:
But how long is Mr. Hitler going to stay in Rome?
=
Well, they don't know. Of course, they made no
commitment to the French but of course he's working
like hell to try and get something done here.
HMJr:
Yes.
K:
And 1f he doesn't do it, Henry, it won't make any
difference whether you get that place over there
or anything, you can just go right up on that farm.
This place is only three leagues off of first base
anyway.
Regraded Uclassified
142
- 10 -
HMJr:
Uh huh.
K:
For instance they're just - they're - under cover
they're going to be just like us.
HMJr:
Who?
K:
England.
HMJr:
How do you mean like us?
K:
Right in the S -house.
HMJr:
I see,
K:
Yeah. You know what I've been talking about for
months?
HMJr:
Yeah.
K:
Yeah. Well, that's it. That's what we - I told
you we were going in it.
HMJr:
Uh huh.
K:
Well, they just wrote a nice article about you
over here.
HMJr:
They did?
K:
I just read a nice article about you.
HMJr:
Where is that, Joe?
K:
Oh, in a paper here. Somebody sent me a clipping.
It said you were going to be a great statesman
now that you were - you were going nutty trying to
keep the United States Government money sound.
HMJr:
All right. Send it over to me.
X:
All right.
HMJr:
I got a scrap book for funny articles.
K:
(Laughs) All right.
HMJr:
0. K.
K:
All right. Well, I'll tell Chamberlain that I'm
waiting to hear from you.
Rear
143
- 11 -
HMJr:
That's right.
K:
O.K.
HMJr:
Thank you.
K:
Goodbye.
Regraded Uclassified
144
-12-
Oliphant:
What's Chamberlain's prescription?
H.W.Jr:
Mr. Kennedy's choice of language has not improved
by association with the King and Queen of England.
If he didn't know - I apologize for you, Mrs. Klotz.
I'm sorry. But I should know by now.
Harrison:
At least you know what he means.
Lochhead:
He's been
....
white:
He'll have the King and Queen speaking that way
in 8 year.
Oliphant:
What's Chamberlain's prescription for keeping Hitler
from handing that message to Mussolini?
H.M.Jr:
Yes.
Oliphant:
"hat is it?
H.M.Jp:
What Mr. Chamberlain says to me is this: "Let this
thing slide, drift."
Oliphant:
Stall.
H.V.Jr:
"Do nothing, just go along with them with the hope
that out of this something better will come."
Oliphant:
Well, he withdraws his suggestion of his message
closing with them.
H.S.Jr:
Oh, his message
....
Oliphant:
Didn't go.
H.D.Jr:
No, no, his message goes along. In their message ney
go along. You read nis message. The Anglish message
to the French says they go along.
Ollphant:
I thought the final paragraph seid that
....
B.M.Jr:
No, no, definitely go along.
Harrison:
But that hasn't been sent.
White:
That hasn't been sent.
H.M.Jr:
No.
Uclassified
145
-13-
Serrison:
And ne's not going to send it until he gets agreement
with you.
E.V.Jr:
That's right. It's my baby now.
mite:
Mr. Secretary, I don't think the issue is whether
we should - exclusively or simply whether we should
kick them out now. I think that no one here has had
that feeling for the moment. It's a \uestion ES to
whether the answer shell be couched in such terms
that, if we do keep them in, 83 I tnink in view of
the political situation we might well consider doing -
that it should be couched in such terms that we'll
De putting some kind of pressure on them. 1 don't
tnink we can ask them to put their house in order,
because they might turn around and ask us to put
our house in order. But we can put it in such terms
68 to give us some kind of assurance that they feel
it's going to stay at that level, and at the same
time give them the very definite impression that
they're getting near the end of their rope. That
is, it's not E Question of kicking thea out 30 much
as of establishing the principle on which we're going
to fight. It isn't - the 175 doesn't worry us; it's
their talk of 200 and their tale of that principle
which the Secretary enuncisted, that they re going to
let it go so low until it sttracts E return of
capital. It is that philosophy that we don't like.
(on phone) Hello. Secretary of State Hull.
Apprison:
well, isn't this want you would all prefer, both
you End the British? I don't care how you word
it. That for the time being the French keep the
franc about where it is, whether they 00 it through
exchange control or whether they do it through the
use of the gold, and to maintain that position until
after events in France, whatever they are, determine
whether the franc should be 150 or 250. In other
words, it might be one or the other, end nobody is
smart enough to determine now which it should be.
And that therefore, until their situation is clarified,
we taink that they should use all powers at their
command, whether gold or some modified exchange control,
in order to maintain the status quo for the time being.
And don't put yourself in the position of telling them
which thing they should do to attain that jective,
Uclassified
146
-14-
because you don't know whether exchange control
will do it or whether they've got enough gold to
do it.
mite:
All we want is some assurance that they're doing
something that seems reasonable to us - gives us
some reasonable assurance that they'll be able to
nold it.
H.S.Jr:
(On phone) Hello. - Thank you.
You know, I could just sit tight and sby, "Well now,
let's do nothing for snother day."
Derison:
Fay Enother what?
B...Jr:
For enother day. Yousee, the word I sent to them
was, "We'll do business with you for Tuesday, but that
doesn't commit us beyond Tuesday." I mean I'd say,
"We'll do business for Wednesday and 80 =1ong on 8
day-to-daj besis." And then if, for instance, they
should find it only costs them fifty to & hundred
thousand pounds, maybe they can control this thing
ES is, but if they find they can't and then they
run up this thing, say, X number of francs, then I
can still rudgingly give in. I mean just as
long 18 they're afraid of me, they're going to con-
tinue to fight. Now, when they feel that - the time
they re going to stop fighting is when it gets very
expensive; then the thing gets very expensive end
they let the thing go - then they can say, "Mr.
Morgenthau, what you going to do about it?" Well,
then, I'll say, "I guess there's nothing I can do
about it." O.K. I don't see way I'm not In a strong
position just sitting tight, saying, "Well now, I'm
very sorry, I've still got to think this thing over.
I'll do business with you Wednesday." And maybe
Wednesday it won't cost them anything.
Caston:
You cen't et this time agree that E deliberate
decision to retrest to 175 is within the spirit of
the tripartite agreement at this moment.
Waite:
I think that is the position to take, with one
qualification. I can't help but feel that there
is something a little bit strange about the
Regraded Uclassified
147
-15-
situation. I'd like to be assured that they know -
the French know, not the British - that the French
people who are now in control of the government
know how you feel about exchange control. It's not
that you're telling them, but merely that they should
know your views. Maybe they do. I'm just a little
unhappy over the thought that maybe they don't, that's
all. If they know that, then I think you can sit tight
from day to day just as you outlined.
01iphant:
Sit tight if you knew they knew.
white:
The decision is theirs, after all.
Docuhend:
The first section of Cochran's cable just came in.
S.M.Jr:
I don't went to bother with it.
Harrison:
I fear that what your position is at the moment,
in the light of present circumstances - that you
would consider it contrary to the spirit of the
tripartite agreement if they let the franc go to
175.
Geston:
Deliberately.
Marrison:
Deliberately, without reason. And that you would
not consider it contrary to the triportite agreement
if, in an effort to keep it about where it is, they
used exchange control, or used the gold or anything
else.
Oliphant:
If they used exchange control of abnormal capital
movements.
Nuite:
On non-commercial transactions.
H...Jr:
On non-commercial.
Jliphant:
Abnormal capital movements - non-commercial trans-
actions.
Harrison:
But not put yourself in the position of saying that
you think that exchange control will do the trick.
White:
No, we have never taken that position.
Regraded
148
-16-
Oseton:
You wouldn't think it a violation if they should seek
a special means for the moment of controlling abnormal
movements of capital.
marrison:
That it would be contrary if they deliberately let the
franc go to 175; that it would not be contrary if,
in their effort to keep it where it is, they should
resort to exchange control.
Gaston:
Special devices.
white:
That's exactly the way we framed one of the answers.
H.M.Jr:
Just to give you - I mean this, I think, is rather
interesting. Oh, I got the wrong thing. You (Harrison)
would love to see that. That's Eccles' - nis latest
recovery program. But it's not for sale.
Arrison:
I hope it hasn't been bought.
6.1.Jr:
This is the last page which I sent the President.
I said this:
"On the receipt of this cable lé conferred at my
house with Mr. Bewley, British financial a ttsche.
I sent word to Sir John Simon via Mr. Bewley tnat
the United States Tressury wished to delay answering
the French until we had seen a full copy of the
decrees which they are supposed to issue on May 3,
end that furthermore I would need time to get the
benefit of advice from the President of the United
States.
Now, you see - "I furthermore asked the British
whether they would not rather see the French put in
E system of supervision over capital movements,
rather than see the franc continue to fall. I
asked Bewley to try to get an answer for me on
this question promptly.
"In the Treasury we seriously Question the wisdom
of continuing to go along with the French in their
proposed policy of permitting the franc to seek its
own level.
"It would be most helpful if you would care to
express your own opinion in regard to this matter."
149
-17-
I mean, in other words, I haven't decided anything.
Harrison:
I feel this, that the publication of these decrees
ought to strengthen the franc, and I came to the
Treasury early this morning and saw Wayne Taylor
and said I wouldn't be surprised if the franc was
strong today, and he said that WES B poor guess.
But I would think after these decrees are absorbed
and understood, the French franc ought to absorb
direction. some strength, because they're going in the right
Loghness:
They had the figure set for 175. They were going
to step in and cover st 175.
1,102:
Everybody's brother knew tnat.
4.1,Jr:
You see, that's the thing that doesn't click with
what Governor Herrison says. The normal thing would
be to get this thing aná see the French franc streng-
thened. Instead of that, they announced these
decrees, which ought to be good if they were carried
out, and then they themselves pulled the plug. On
one hand they say, "We're going to do something to
strengthen our own internal economy, but we don't
believe this and we're going to let the franc weeken
and we're going to make the franc weaken."
How, I'm playing a b1g gamble, and I think that -
ES I said to the boys last night, that we've got
everything to gain and every day we have #e throw
more. light on this picture.
And this isn't the answer that I exectly expected
from the British, because after all the German
Army end the German planes aren't hanging over our
heads, thank God, but they are over the British.
Then, if the British get sufficiently worried about
this, they might even make a constructive suggestion,
which they haven't. I mean when you get right down
to it, they can say the tripartite agreement is my
baby - thank you very much, I'm very proud of it! -
but she's two and a Half years' old, or whatever it
1s, and if this means so much to the peace of Europe,
why doesn't England say something and do something?
White:
Do something.
150
-18-
H./.Jr:
Now, furthermore, no one has said, "What about
Belgium?" Poor Belgium - what does this mean to
Belgium, 175 to 200?
White:
She's getting in steadily worse position.
11.1.Jp:
What does it mean to the poor Belgians? I mean I'm
just not yet convinced that this thing is 88 serious
15 It is, unless this is just a continuation of
England's attitude toward Ethiopia, England's
attitude toward Spain, England's sttitude toward
the far East - "Let things drift. We'll muddle
through. Now, we'll just muddle through."
Perrison:
Well, isn't this your program, Mr. Secretary, in
fact: you sit tight and get the French to sit tight
on the theory that the more you stall the stronger
your position will be either to prove that the franc
is going to stay where it is or to justify your
going along with the British and saying, "All right,
If this means - if this is the only alternative left,
we'll go along with you." AS Isee it today, I feel
that to tarow the French out of the tripartite would
be the last thing you went to do, of those three.
Well, I think I agree with you on that.
suite:
There's no - been nobody asking for that now.
I taink White's made a good point, and that is that
ve've got the French financial attache here und way
don't I tell nim of this message we've sent to the
British?
Bitchent:
Any harm in reviewing the whole discussion with Blum
and all the rest of it?
White:
Idon't think it's necessary.
01154ant:
Gives nim the background.
Inytor:
No, I don't think you can tell him that you've made
the suggestion to anybody else.
R.d.Jr:
No, because Blum felt this; ne said ne didn't went me to
Regraded Uclassified
151
-19-
wet my feet; that was his attitude on this thing.
So he felt it was a mistake to let them know I made
the suggestion. Therefore he told it to nobody.
Then, if that is true, I should return the same
courtesy and not tell anybody, because they might turn
on Blum and say, "So, if you had only used this, so
and so, everything would have been all right."
Harrison: What's the franc today actually?
Lochhead:
165 to the pound - $.0302.
H.N.Jr:
(on phone) Hello. - Thank you. (Conversation
with Hull follows:)
Regraded Uclassified
152
Tuesday
May 3, 1938
10:25 a.m.
Cordell
Bull's
Secretary: Oh, the Secretary's coming right on. Just a moment
please.
HMJr:
Hello.
Hello.
Cordell
Bull:
Hello.
HMJr:
Hello, Cordell.
H:
How are you feeling?
HMJr:
I'm pretty well. And you?
H:
All right. Yes, I was over in Judge Moore's office.
I didn't know you'd called.
HMJr:
That's all right. How's Mrs. Hull?
8:
Why, pretty fair. We had ten to twelve days
...
HMJr:
Yes.
H:
... of solid rest.
HMJr:
Cordell, this French thing is boiling.
8:
Yes.
HMJr:
And I've had a long talk - one at five o'clock this
morning - your friend Mr. Kennedy called me.
H:
I see.
HMJr:
And he just called me again.
H:
Yes.
HMJr:
And I've talked also with Cochran and I'd like very
much to have a chance to talk to you - just the two
of us. Now, what would be a good time for you? I'd
be glad to come over any time that suits you.
H:
Yes. Well now, I've got John Bourse unfortunately
coming in here on the
Brand matter at
eleven o'clock.
Regraded Uclassified
153
- 2 -
RMJr:
Well.
H:
Ah..
HMJr:
How about - have you anything right after lunch?
H:
No. I could get in here; 'say, at - three?
HMJr:
Three?
H:
Would three be all right?
HMJr:
I'll make it all right.
H:
Well, or we could make it a quarter before three.
HMJr:
Whatever you say. Three o'clock?
H:
Three o'clock.
HMJr:
At your office?
H:
Yes.
HMJr:
I'll be there at three o'clock.
H:
All right, then.
HMJr:
And, in the meantime I'm just going to sit tight.
H:
Yes. I see.
HMJr:
Unfortunately, the thing is getting hotter - the
Wall Street Journal man just got this message from
his New York office that the French Premier announced
that the stabilization of the franc rests with the
decision with London and Washington.
H:
I see. Yes. Well, I guess the thing is pretty
lively over there.
HMJr:
Yes.
H:
Well, all right, Henry.
HMJr:
I'll be over at your office at three o'clock.
H:
Three o'clock.
HMJr:
Thank you.
Regraded Uclassified
154
-20-
Can't wonder about the franc not being strong in
the light of that kind of stuff.
C.R.Jr:
..ell - I mean on account of the difference in time,
it doesn't make much difference. I mean the day is
nver in burope, I mean we might just :3 nell
Take time.
:- Urs Klotz) Tell Mr. Altmeyer that on account
or the international situation tart =111 have to
be called off.
HItogether? For today, you men.
Yes, I can't 386 him.
You know, they're such bibies, though. On the eve
01 innouncing these Internal Lets which are designed
to strengthen the franc and normally should strengthen
it, to let it lenx out that they're loing to let it go
to 175 - one nand is then playing upsinst the other.
non, this franc would have been strong and it not been
for all those deliberately insyired lesks.
min;
They're even talking of 200; tat is, there has been
mention of 200 Trescy, -nu there is no assurance
that that talk of 200 won't begin to grow Agence in
wnother few weeks or 8 month.
Invoice
Has It been official talk?
From Kennedy's talk, 1f you should seno 5 message
to them today that we can not now agree that to
let the franc go is within the spirit of the tri-
partite agreement - that's the KEY you feel today,
you usy feel differently some other day - and that
ne feel, that being so, if they sant to stay in the
tripertite agreement they augat to use all means
available, which means their gold or perhaps some
kind of exchange control if they went to do it, in
un effort to keep within tue tripsrtite sgreement,
which vould show that you would not rule them out
1f they used some kind of exchange control - that's
what they want to know, end you just sit tight on
that. And I think you could get message like that
Regraded Uclassified
155
-21-
off today or tomorrow, es you see fit. And that
would make them then stall for time themselves, and
it would at least carry them over this meeting in
Rome which the British are so much worried about.
Lochhead:
George, you know, the terrible thing from an operator's
viewpoint is to look at this market, know the market
is terribly short on francs, then see this program
set, and they put out the decrees that should streng-
then the franc and et the same time drop it to 175,
then allow it to come back again. In other words, it's
B. perfect set-up for the man that's got the short
position to cover in, wait for his position again.
The whole thing is set up as a paradise for the
speculators.
Harrison:
And the speculators in francs are not just the pro-
fessionals either.
commesu:
Yes. Now, BS I ay - I didn't go as far as you went.
I'm just saying that as an exchange man, without
going any further.
unite:
Professionals are defined differently in France.
H.1.Jr:
well, look, let me just esk you this. In advance
of seeing Mr. Hull, do you think I ought to talk
to the French? I think I better nold everything,
because the day is gone as far 25 Burope is concerned,
isn't it?
Harrison:
I don't know whether in your tolk with Cochran he
got the impression that he should tell the French
that you're going to sit tight today.
H.I.Jp:
Oh yes. Oh, in my message to him I say that very
definitely.
Harrison:
I see. I didn't know that.
Jr:
Well, I mean in my message I say here:
"Please inform Marchandeau that:
"1. I was very much shocked and surprised at the
message which Marchandeau sent me.
Regraded Uclassified
156
-22-
"2. I àid not consider that under the tripartite
agreement we had been consulted, but that he had
simply informed us.
"3. he will execute any orders on Tuesday that we
receive from the French to buy or sell francs, but
in doing 30 we in no way acquiesce in the new French
proposal, and, walle I agree to do this Tuesday, we
sre not committed beyond Tuesday."
Date I was wondering now - it WES late over there and
touy've got to make their plans and orders for
tomorrow.
I thin. that further cable that came over merely
strengthens your original decision, which Was to go
in this particular instance very slowly and before
you take L move be sure that you've got il concensus
of opinion.
I Mas wondering whether that cable should be renewed
for toworrow.
I think it will be cone tonight.
extend
And is the time you _0 that, get in this other idea
of informine thea, if you iant, to the effect that
you roula not consider it contrary to the triportite
Lf, in their effort to as Intain their present position,
taby should decide to jut in exchange control.
In fect
any time you can see nto (French Ambassador) tuis
norning?
sure.
what time?
out that bank thing short - the bank thing. I want
him to bring Beaulieu with nin. How long do you think
8 ought to give nim? I think the French Ambassador
unrter of 12?
Regraded Uclassified
157
-23-
H.
quarter of 12. And will ne bring Beaulieu with him?
Twolor:
Yes.
H. . Jr:
I used this example to Mrs. Morgenthau in explaining
this thing. I said, "It's like you've got 8 confi-
Gential clerk that you know is going to the cash
drawer and helping himself, but you don't say SO.
But he's constantly taking E little more and little
more, and the longer you wait to fire that fellow,
the more difficult it is." Now, we know that they've
been doing this thing. They've been going to the
cash drawer, they've been steeling 2) little on the
side, and the longer we sit there and sequiesce the
more difficult it is for us suddenly to get noble and
say, "You can't do that." I mean it's just - well,
that cashier can say, "Well, Mr. Morgenthau, you
knew I Was going to the casn drawer; you stood by
and watched me go to this cash drawer for two years.
Now, suddenly overnight, you get up on your high horse
and you get moral on de end say, 11 won't stand for
it!" I mean it's - you soon become B. partner of the
fellow who's going to the cash arawer.
So the French Ambasssdor is coming down.
any lor:
Bonnet called nim from Paris and asked nim to come
down and express to you the great importance, et
cetera, and explain the background rnd so on.
H.S.Jr:
(On phone) Secretary Hull, please.
hoomesa:
Apropos of your (Harrison) remarks, the Secretary
said yesterday that we were working for the wrong
government.
Marrison:
working for what?
The Secretary said, after looking this all over, he
and decided we were working for the rong government.
Got John Lewis coming in at 11, so I can't move it up
much.
(on phone) Hello. - Who's there? - Let me
talk to
Hello, Renearrd. Hello, Renchard.
-
-
Good morning. - Since talking to Mr. Hull, the
Regraded Uclassified
158
-24-
French Ambassador has asked to come down. He's
coming at a quarter of 12 with a direct message
from Bonnet. I'd like Mr. Hull to have a repre-
sentative here. - Well, that's up to Mr. Hull.
Have Mr. Hull have somebody here at a quarter of
12. - Thank you.
Huh?
Harrison: Good stuff.
H.M.Jr:
He said, "Do you want Dr. Feis?"
I said, renable. to Mr. Hull."
Well, I tell you what I'd like you people to do,
if you wouldn't mind. Think you (Harrison) will be
available from half past three on?
Harrison:
(Nods yes)
H.M.Jr:
"ill you come back, and after seeing Hull we can talk
this thing over again. Suppose you drop in here at
half past three. If I'm not here, just come in here
and sit down.
Harrison:
All right, sir.
Regraded Uclassified
159
PARAPHRASE OF TELEGRAM RECEIVED
FROM: American Embassy, Paris, France
DATE: May 3, 1938, 10 a.m.
NO.: 688
RUSH
FROM COCHRAN.
After I had had a telephone call from Secretary
Morgenthau, I saw Rueff at the Ministry of Finance shortly
after twelve midnight.
I told Rueff that I had communicated Minister Mar-
chandeau's message to Secretary Morgenthau. I said that
the latter had instructed me by telephone to give the
following message to the Minister of Finance -
First. The message had been a shock to him.
Second. Under the Tripartite Agreement the parties
thereto are supposed to consult, but that such notice by
Minister Marchandeau was not, in Secretary Morgenthau's view,
consultation.
Third. In the circumstances Secretary Morgenthau
had not yet had time to consider what position the United
States Treasury would take.
Fourth. On Tuesday the American authorities would
continue to buy or sell on orders received from the French
authorities but that this should not be interpreted as
meaning that the Treasury acquiesced.
Fifth. On Tuesday he would consult with the British.
Sixth. In due course he would advise the French as
to what he had decided to do. END SECTION ONE.
WILSON.
LOW
Regraded Iclassified
160
Rec'd 10:54 a.m.
SECTION TWO, NO. 688 of May 3, 1938, from Paris
Rueff made a note of these points both in English and
in French. I made reference to Marchandeau's statement
to me some days ago that 175 was only 8. speculators'
rate, and said, furthermore, that since that time I had
had no definite information from the Ministry of Finance.
He insisted that until on Sunday he himself did not know
of Marchandeau's decision.
After this Rueff went into the private apartments of
Marchandeau, which are in the same building as the office
of the Minister; the Minister was in bed by that time,
but Rueff gave him the message from Secretary Morgenthau.
When Rueff came back he said that the Minister had
intended his decision upon the 175 rate to be more or less
in principle and was not to be applied until he had had
a reply from Secretary Morgenthau. He had issued no in-
structions to put this decision into effect.
Then I asked Rueff whether I could inform the Bec-
retary of the Treasury immediately that Marchandeau would
not give instructions on Monday to push the rate to 175
pending word from Secretary Morgenthau. I brought to Rueff's
attention the fact that he was present when the Minister
had goken with me in the afternoon, and that there had been
no misunderstanding the Minister's statement that on Tuesday
he would put the plan into effect. On this point I was 80
positive that Rueff before he answered went again to the
Minister.
KA:LWW
END SECTION TWO.
WILSON.
Regraded Uclassified
161
PARAPHRASE, SECTION THREE NO. 688 OF MAY 3, 1938 FROM PARIS
He told me when he came back that the Minister meant his
approach to be a genuine consultation. He said he will
take no steps to put his contemplated plan into operation
before he has word from the Secretary of the Treasury;
however, he asked that the latter assist him by making
such reply as soon as he could. I said that they should
expect no reply on Tuesday morning. A safeguarding
statement was put in by the French that if unforessen
pressure made action imperative before they get the reply
of the Secretary of the Treasury, they would communicate
with me.
After I had this talk with Rueff I came to the
Embassy and at 2:15 this morning reached the Secretary
of the Treasury by telephone, and gave him the information
set forth above. I also told Secretary Morgenthau that
the decrees to be issued this morning - releases on
which were being distributed while I was at the Ministry
of Finance - would include an 8 percent increase on all
of the federal taxes in France.
In accordance with the request of Secretary Morgen-
thau, I have this morning talked with Butterworth on the
telephone and I gave him a summary of the foregoing.
I mentioned to Butterworth that I had received the
Department's telegram No. 247 of May 2, midnight, and
learned that the same message had been sent to him.
END SECTION THREE.
WILSON.
EA: INV
Regraded
Cable #683, Furie, anted May 3, 1938: Sec. 4, 2d paragraph, line 5:
:hsert in place of (omission) "and have expressed". Will then read
PARIS
'enthorities, and have expressed ay"
I haven't 88 yet had time to study the
162
which appeared this morning, but I will give a summary
later.
Re the Department's 247, second paragraph. I venture
to recall that the Daladier Government came into office
on a. platform in which control of capital movements was
opposed. I have set forth in various messages the belief
of French and other monetary authorities, (omission) my
own personal opinion, that it would not be effective to
have control of capital movements in France if only of
a modified character, and that even if such control were
made drastic the desired ends would not be achieved.
There has been an exodus from the country of most of the
liquid capital, and control methods would not induce it
to return. It is hard to conceive of exchange control
measures being efficiently and effectively administered in
a country where currency speculators appear to enjoy close
relations with officials of the Government and where fiscal
evasion has reached a high state of expertness. In the
industries and securities of France, there should be really
good opportunities for investment. The Government which
is now in power, or some other French Government, eventually
will have to create the atmosphere necessary for revival
of confidence and capital repatriation. It will be a
tremendous responsibility, in my mind, to presume to suggest
Regraded Uclassified
163
- 2 -
to the French Government that any system likely to end up
in exchange control be introduced in France.
END MESSAGE.
WILSON.
EA:LWW
-
will
Regraded Uclassified
164
Tuesday
May 3, 1938
10:44 a.m.
HMJr:
Hello.
Operator:
Congressman Woodrum.
HMJr:
Hello.
Congressman
Woodrum:
Mr. Secretary.
HMJr:
How are you?
W:
Fine. I'm sorry that there was a little mixup
down here yesterday. Miss Lonigan came over without
any notice to us and we were. just loaded up to the
hilts.
HMJr:
Well, what happened anyway?
W:
Sir?
HMJr:
What happened?
W:
Well, we didn't have a chance to get her in for a
personal hearing, but I asked her - I asked Mr.
Shields to arrange for her to come over and to let
me talk with her and get a statement from her.
HMJr:
Fine.
W:
I'll bring it before the committee. Now, the
situation is this; I looked into it...
HMJr:
Yeah.
W:
We already have the authority in the bill - we had
it. in this year and we'll have it in next year - for
them to do this work.
HMJr:
Fine.
W:
WPA has the authority to make alocations for that
self-help work if they wish to do so.
HMJr:
I see.
W:
So what we've got to do is to sell Harry Hopkins
on the idea.
Uclassified
165
- 2 -
HMJr:
That's what it is.
W:
You see what I mean?
HMJr:
I get you.
R:
But I'm going to have her come down. We didn't.
know she was coming and we had LaGuardia and
John L. Lewis and William F. Green and all that
bunch on our neck, you see?
HMJr:
Well
W:
And a lot of congressman too. So we were just
sweating blood.
HMJr:
Well, I think that
W:
I was sorry that she - ah - ...
HMJr:
Well, Mr. Woodrum, may I say this?
W:
Yeah.
HMJr:
I talked to Aubrey Williams last night.
W:
Yeah.
HMJr:
And God knows, I've done enough for those fellows
for their organization and I personally - nobody
else - I personally called him either two or three
times and made the arrangement. See?
W:
Uh huh.
HMJr:
And then he goes and I think - forgets about it.
W:
He didn't follow through on it you say?
HMJr:
He didn't do anything. He said he told Corrington
Gill but Corrington Gill told Miss Lonigan he didn't
know anything about it.
Wt
No, I don't he did.
HMJr:
What?
W:
I don't th ink he did know anything about it.
HMJr:
And - ah - then they tried to imply that you weren't
in favor of it, see?
Regraded
Uclassified
166
- 3 -
Tr
Oh, well, I - - I couldn't take her right when
she came over without notice; we didn't have any
1dea she was coming until she showed up at the
committee room and we had
...
HMJr:
Well
W:
You know the situation when you've got people like
HMJr=
I know. I didn't for the minute because after all,
while we don't see each other very often when we do
it's always been very pleasant.
W:
Oh, you know it.
HMJr:
And right from the first day I came to town you've
always treated me like a gentleman.
W:
Well, I'm here for that purpose.
HMJrs
And I've tried to reciprocate. But I did think
there was - I agree with you I don't think that
the Hopkins people want it.
W:
No, we didn't have any idea that Miss Lonigan was
coming up until she showed up at the committee that
morning and we had this schedule made up there just
pressing us to report this bill, you know.
HMJ:
Yeah.
W:
And, as I told - but I'll tell you this, that
there won't anything be lost over it
HMJr:
No.
W:
because I'd rather talk with her personally
about it...
HMJr:
Yeah.
%:
...and get a little statement and I'll talk with
the committee about it
HMJT:
All right.
W:
But, after all, the thing 1s going to revert
back to Hopkins and what his attitude on it is
bill now that they can go ahead with those projects.
going to be because we have authority in the
Regraded Uclassified
167
- 4 -
HMJr:
Fine. Well, may I Just explain my position
once more. This takes care of a group of people;
the poor devils aren't being taken care of in any
other way.
V:
Yeah.
HMJr:
And that's my only interest.
W:
Well, I think - I quite agree with you and I think
it's a very fine thing.
HMJr:
And your people down in Richmond have got one of
the finest demonstrations I ever since and I've
been there.
W:
Yes.
HMJr:
And it's a wonderful demonstration, - and they're
taking care of these people at a minimum cost.
W:
Yes.
HMJr:
And, right there in Richmond they've demonstrated
it can be done.
W:
Sure.
HMJr:
Now that's my only interest.
W:
Fine. All right. Well, I'm going to get in touch
with Miss Lonigan and we'll look after it Mr.
Secretary.
HMJr:
I'm very much obliged.
W:
You betcha. All right, sir.
HMJr:
Thank you.
Regraded Uclassified
168
MAY 3, 1938
11:45 an
Présent:
The French Ambassador
Dr. Feis
Mr. Taylor
Mr. Lochhead
Mrs. Klotz
HM,Jr: I thought your Financial Attache would
De with you.
Ambassador: He 1s away from Washington. I ex-
pect him certainly this afternoon, but yet I did not
succeed in getting him.
HM,Jr: I am at your service.
Ambassador: Well, sir, as I told you, I got n.
telephone message from Mons. Bonnet about 10 0' clock
this morning in which he asked me to ask you for an
audience in reference to a certain message, which I do
not know the exact contents of, but which has been
brought to your attention by your Financial Attache
in Paris.
HM,Jr: Mr. Cochran.
Ambassador: The French Government gave him a
message for you. The French Government thought that --
he did not tell me what it was -- it was indispensible
and that he would like to know at the earliest date what
you think about it and he asked me to telephone him back
after I had seen you what your impression is, if you can
tell me something, but the reason I do not know what it
is about is that Mons. Bonnet was very discreet on the
telephone, which was wise.
HM,Jr: Yesterday afternoon we got a message from
.r. Marchandeau (Cable 683). I think if you (Mr. Lochhead)
will let the Ambassador read that part of the message it
would be helpful.
(Ambassador read Cable 683)
Regraded Uclassified
169
-2-
HM,Jr: After receiving that, Mr. Ambassador,
I phoned Mr. Cochran -- it must have been about 12
o'clock last night, Paris time -- and told him that
I was -- what were the four things I told him?
Mr. Lochhead: (gave the Secretary Cable 688
from Cochran.)
HM,Jr: You (the Ambassador) might just as well
see this (Cable 688) because this is Cochran repeating
to ne what his instructions were. That took place at
midnight last night, French time.
(Ambassador read Cable 688)
HM,Jr: Mr. Cochran got that message to Mr. Mar-
chandeau between 12 and 1 clock last night and then
telephoned me back in which he said as a result of that
message that the orders had not yet gone out to put the
frano down to 175.
Ambassador: Uhm.
HM,Jr: What they must have done, they must have
withdrawn the orders, because in the earlier cable they
said they were doing this and yesterday, last night at
one o'clock, Mr. Marchandeau must have withdrawn.
Well, today the franc has been around 164-165 and
we Just gets orders today to support the franc. It's
roughly, today, between 163-164 to the pound and we have
been told that the French are not having great difficulty
to keep the franc at that rate.
Ambassador: Uhm.
HM,Jr: Now, of course we have tried, ever since
the new Government has been in we have asked repeatedly
what their plans were and repeatedly they told us that
they did not know and every time 175 francs would come
up they would say no; there is nothing to that. I don't
think I need tell you that I have demonstrated a number
of times that I want to do everything that I can, within
the United States law, to help your Government.
Ambassador: Uhm.
Regraded Uclassified
170
-3-
HM,Jr: These aren't Just idle words. I have
done it again and again. We have stretched this thing
until the Tripartite -- until she almost broke.
Frankly, I was very much disturbed last night be-
cause I felt that if the French Government had this in
mind they should have consulted with us, which I thought
that they had not. I am simply telling you this. Now,
right at this moment I have no message for Mr. Bonnet or
for Mr. Marchandeau. We are studying this matter very,
very carefully and we have not lost our interest in being
helpful to your Government whenever possible. We are
still Just as anxious to be as helpful as we ever were.
This has come so suddenly that we don't know Just how to
evaluate it. We have not yet had an opportunity to have
an answer from the British.
Ambassador: Uhm.
HM,Jr: I doubt whether I get an answer before to-
night or tomorrow because of the difference in time. I
have not yet heard from them. We only heard from them
late last evening, 80 in view of the sudden announcement
and proposal, rather, of announcement, I just need a little
time and certainly before I come to any final decision I
will want to confer with your Government.
Ambassador: Yes.
HM,Jr: I will want to confer before I come to a
decision.
Ambassador: Uhm.
HM,Jr: But I do that think in as important a de-
cision as this, all three Governments should have ample
time to study the proposal, particularly in view of these
new decrees, which we still haven't got copies of. I mean,
the papers carry brief notice and we have not had a chance
to read them and if these proposals are what they seem,
then I should think the French franc would strengthen.
And it Just doesn't make sense that coming out with these
very strong financial decrees, you say on the one hand we
you say 'but the franc should weaken' and I can't make the
are going to collect taxes, 8% more, and on the other hand
two things fit.
Regraded Uclassified
171
Ambassador: From what I infer, I think we are
now just at the limit and if you made us to take a
higher one it might be over. They can't make a stand.
Mons. Bonnet told me on the phone that he thought this
thing was indispensible; that they had no choice be-
tween what he apparently said in his message, that 18,
establishing a control of exchange, or Just let it drop
to 175, which we hope that she should be able to lower
her rate in effect of new decrees and if he should,
what I think you call some Mal---- (French word) she
might not be required to go into control of exchange.
HM,Jr: Is that marginal recovery?
Ambassador: We would say in fencing
Dr. Feis: Elbow room.
Ambassador: If you are fencing, you would say
you may retreat when you step forward again.
HM,Jr: I think, Mr. Ambassador, I need more
time, I have not had a chance to hear yet definitely
from the English and I have not had a chance to hear
from the President.
Ambassador: Uhm.
HM,Jr: And if I have anything in mind I will
call you at the Embassy and ask you, if you don't mind,
that you come back.
Ambassador: Oh, yes. Certainly.
HM,Jr: But please tell Mr. Bonnet that my inter-
est in France is just as great as it ever was, but he 1s
making it a little more difficult for me.
Ambassador: Yes. I understand that you want
proper consultation. That the notice given was not con-
sultation and that you have of course in the course of
consultation first to know the point of view and second
to study the French Government which may be repercussions
of new decrees.
HM,Jr: The French Government may feel differently
tonight if they go through today and let's say, either
Regraded
172
⑉5⑉
it does not cost them anything or they may gain a little
francs. They may feel different tonight about this
matter than they did last night before the decrees were
out. Now Mr. Lochhead, who has charge of our Stabiliza-
tion Fund, up to this moment we have had no request to
iuz or sell francs. Absolutely dead. And if we went
through that way today, let's say it did not cost you
anything at the end of the day, your Government might
feel differently.
Ambassador: Yes.
HM,Jr: I appreciate it has been costing them an
onormous sum and naturally I am sympathetic.
Ambassador: Yes.
HM,Jr: But I can't help but question the efficacy
of permitting the franc to continue to fall. If that 19
coing to give you stability
Ambassador: I was under the impression that the
Stabilization Fund has exchanged some resources. Cur
Exchange Fund 18 not exhausted.
Mr. Lochhead: No, they should not be exhausted.
I think they still even have a little on balance since
the time the new Government came in besides their previ-
ous resources.
HM,Jr: We have quite a lot of gold here belonging
to the French.
Mr. Lochhead: I don't know over there whether
they would call it Stabilization or General Fund. They
use it for stabilization, but I can't say whether it 18
Bank of France gold ornot.
HM,Jr: Supposing President Roosevelt comes out
with a new program and we think it is going to be very
helpful and immediately on the morning of the announce-
ment we start to push the Government bond market down!
It seems to me that you would be wanting to do Just the
opposite. You would want to show a strong franc to
show that this is the reception that the world 18 giving
to these new decrees. Well received and you have &
strong franc. Instead of that the Government wants to
automatically push it down. I can't understand it. I
Just can't understand it.
Regraded Uclassified
173
-6-
Ambassador: Just from what I understand, he
wanted more or less to step backwards to be able to
step forwards afterward. But of course what Mr.
Poincare did in 1926, don't you think at first he
lowered the exchange more certainly considerably be-
low the point that he got eventually afterwards?
HM,Jr: That was a long time ago. A lot of
things have happened. You see, this has been going
on for three years and you have lost 21 billions gold.
But, as I say, what might have looked very black at
midnight last night, maybe this afternoon it may have
& little silver lining.
A mbassador: Yes.
HM,Jr: So, if you would permit me and if I have
some message, I will get in touch with you after four
o'clock.
Ambassador: Please, certainly.
HM,Jr: I can reach you through the Embassy?
Ambassador: Oh, yes. I will be at the Embassy.
As soon as Leroy-Beaulieu will be in Washington, of course
he will come to see me and I will send him to you.
HM,Jr: If he Just would stay at the Embassy be-
cause we phoned him yesterday and asked him to be here
today.
Mr. Lochhead: He had already left. Apparently
he was coming down by motor and the weather was none too
good.
HM,Jr: I see. All right, sir.
Ambassador: Yes, I think he is motoring and the
landscape is more congenial than the landscape on the
international sea of exchange.
I am very gratefulto you for your welcome and I
will send back your message. I will tell Mr. Bonnet.
HM,Jr: Thank you verymuch and my personal regards.
Regraded Uclassified
174
-?-
(The Ambassador left.)
HM,Jr: What's this story about the Financial
Attache?
Hr. Lochhead: We telephoned yesterday morning.
His office said he was already on his way back to Wash-
ington because he wanted an appointment tomorrow after-
noon. Then we got hold of the Embassy this morning.
They said he's motoring down.
HM,Jr: At least, I am going to sit tight. Mr.
Sewley will undoubtedly have a formal answer for me.
It will not, undoubtedly, come in until late tonight.
After I see Mr. Hull tonight, I will say to them 'I need
nnother 24 hours to think it over and we will continue
to do business with you on Wednesday, but I need another
24 houre to think it over.' Now, if during the next
24 hours these fellows -- and the franc stays where it
la and it does not cost them very much or if they should
be lucky and gain a little bit, may be they will change
their mind and I need BO much elbow room, but you fellows
(State Department) need not worry over there. Certainly
I will not take the move of putting them out without giv-
ing you people all the chance in the world to talk. I
will not do it without first cabling the President, which
I have not, and I am more than willing to play the Democra-
cies to the end. I realize the terrific stakes. I wish
I trusted Bonnet, which I don't. I wish they would not
give out statements like they did, that they are waiting
on the English and ourselves, which they gave out; came
over from Paris. And that does not help matters any.
Now the amusing thing, in view of the worst news
domestically -- we have had steel off again this week,
automobiles down, everything the worst -- our market 19
up 1½ points. Now if that makes sense, I would like to
know it. Isn't this worth while gambling with another
day, Just to sit tight?
Dr. Feis: Yes. I don't think you are gambling.
I can't see that you are injuring the situation by pro-
ceeding as you have proceeded.
HM,Jr: And I did not in any way tip my hand; let
them know I was disturbed. I want to think it over;
still feel kindly disposed and stillvent to do it, but
Regraded
175
-8-
Dr. Feie: The only conceivable way in which
that method of procedure might have an adverse effect
16 If these fellows had in mind a ---- (French word)
technique, moving way down, devaluing, strengthening
there with the hope of stimulating considerable inflow
of capital at that point in covering. I suppose that
technical manouever is past. But that's secondary
and whether it would have worked or not, I don't pre-
tend to say. Just speaking not as State Department,
but as an economist, I think the only fact that 1a not
getting enough attention is that one fact that Monick
cited in his cable -- national income of 200 milliards,
total obligation of 110-115 milliards and largely, I
think, influenced by American thought, these fellows
AS part of their program had in mind something that
would further move up prices and the total flow of in-
come while leaving costs where they were except for the
new decress and they may have decided on cutting the
franc as one element in the general economic program.
That's the one technical consideration and against that
I can see
HM,Jr: If they had that in mind yesterday was one
day they must have known it. They could have gotten this
thing Saturday. This is what we want to put over. We
will put our cards on the table.
Dr. Feis: The only excuse is the terrific confu-
aion in the Cabinet. But I wholly agree that from their
own point of view, perfect misery, and there is no damage
being done by this.
HM,Jr: Is France today the France of Poincare? Is
the strength there?
Dr. Fels: The Job of trying to bring capital back
to France and getting French production operating 1s in-
finitely more difficult than in Poincare's times. I don't
know whether any Government can pull it off. I fear not.
HM,Jr: Well, all I can say is as of 12:15, I think
we are all right so far and when I go over to see Mr. Hull,
by three, we will know more about this situation. Maybe
there will be a note in from the English. There may be B
telegram in from the President. Now it's too early to
tell whether it's good or bad, but from our standpoint it
certainly wasn't bad.
Regraded I
176
-9-
Mr. Lochhead: And I don't think it has cost
them anything to do it today. If it had cost them
to keep the rate at 165, it would have been different.
Dr. Feis: That's the exchange point of view.
HM,Jr: Our market is up 1.87. Certainly there
are no leaks.
Dr. Feis: They have finally decided that recovery
has begun.
HM,Jr: Are you going out moderately cheerful?
Dr. Feis: I do. plead for & little more attention
to the economic possi bility alongside the exchange aspect.
HM,Jr: And don't forget economics at home too.
This 1s the way I feel. These fellows have been
going to the till so long and we have been kind of closing
our eye, but if we keep letting them go to the till, after
a while if I suddenly get moral and say, You can't keep
going to that drawer' he will say, 'You have been letting
me ão it for & year. Why do you suddenly get on your
high-horse?' The longer I wait, the more difficult it
1s to keep them from going to that drawer and after a while
I become a partner in that drime.
Mr. Taylor: You have been that for a long time.
HM,Jr: No. They have played pretty well within
the rules.
Dr. Feis: And I think one of the ironical aspects
of it is I can make a far better care for their action in
going down to 175 than they have ever made to you.
HM,Jr: That's what burns me up. And what burns
me up is they are so blankety-blank stupid that they don't
take the method of really controlling this thing by going
after these people who send their money out and send it
just to escape.
Mr. Lochhead: Exchange control in the general market
was well expressed by
-- that it took 2500
Regraded Uclassified
177
-10-
honest Germans to run an honest exchange in Germany and
he did not think there were 300 honest Frenchmen.
HM,Jr: And on that basis, I should go along and
trust them.
Mr. Lochhead: My point is you can't bar it out be-
cause you are afraid of their honesty.
Dr. Feis: If this arms race continues to mount, they
must control capital movements. There is no alternative.
HM,Jr: All right. Let's say that they should do it.
Dr. Feis: I right along have said that they should
do t.
HM,Jr: Well, in the meantime, you can buy a franc
at 3.03 instead of -- what would it be at 175?
Mr. Lochhead: About 2.88.
HM,Jr: 3.03 is the Morgenthau franc!
o0o-o0o
Regraded Uclassified
This was 178
followid you
call for
Regraded Uclassified
179
May 3, 1938
Present:
Mr. Taylor
Mr. Lochhead
Dr. White
(After Mr. Bewley had departed.)
HM,Jr: Well, we had & long balaver with the
French and they said, What do you want to know? I
said, I want to know why you are doing this. The
only superficial reason you are doing this is for
trade advantage. 'On, my God; no!' Then, Why
are you?
They are going to telephone back and maybe we
will get a reason. Bewley SAW reason and I said,
At least we have gained a day and a day gained 18 A
day goined. Tomorrow, I don't know.
In view of that cable which came in from
Wilson, which says that the Communists and Extreme
Redical Socialists are the only people who want ex-
change control (Feis let me ready 1t, but he did not
have copies -- Wilson sends a caole that the only
people "no will go along on exchange control are the
Communists and Extreme Radical Socialists, end that
you can't get that out of this Government. What's
the use of saying -- it would be like saying to Mr.
Roosevelt, Unless you rive 10 your trade treaty, me
won't do 50 and SO. While Cordell Hull and Presi-
dent Roosevelt are here, we won't give up the trade
trenty.
Mr. Taylor: They have political commitments
so it's impossible for them to do it.
HM,Jr: I don't see, Harry, I think the last
24 hours, if I say so myself, I don't think we have
lost a lot.
Dr. White: No. I think up to now, I all will-
ink to concede a chance. You are in a more difficult
situation by view of the fact that everybody else is
taking a different attitude.
Uclassified
180
-2-
Mr. Taylor: I think you have done just right.
I think tomorrow you have got to get around to saying
a little more, because you scared hell out of them,
which is fine. That's exactly right. Now, after
they know and tell you what they will tell you, which
is not going to add anything to your own knowledge,
they are going to say, This technical type of
move that you made when you felt it was good to de-
sterilize gold to give a fli-up to other measures.
That's what I am guessing.
Dr. White: There is this possibility: that
in attempting to answer your question they may find
that their answers are not so good. They themselves
may find difficulty
Mr. Taylor: It does not make any difference.
Dr. White: I agree the delay has been all to
the good. There is a slight possibility that today
they did not lose much, with every reason why they
should. They can't say 'tremendous pressure'. Then
why did you lose only 60 or 70,000 pounds?
Mr. Taylor: 700,000 pounds.
HM,Jr: That 1s not an awful lot.
Dr. White: But they can't keep that up steadily.
They still can't say that there is tremendous pressure
on the franc. Therefore, they must give some other
reason, and that would be difficult.
Mr. Taylor: As I said before, you soared hell
out of them, and that's fine. That's Just what they
need.
Dr. White: Do you expect anything more tonight)
HM,Jr: I am expecting a call from Butterworth.
000-000
Regraded Uclassified
Pages 181 through 184
May 5. 1938, now in Book 123, pp. 348 A-D
Regraded I Iclassified
185
PARAPHRASE OF TELEGRAM RECEIVED
FROM: American Embassy, Paris, France
DATE: May 3, 1938, noon
NO.: 689
STRICTLY CONFIDENTIAL FOR THE SECRETARY AND
UNDERSECRETARY.
I refer to the suggestion made in telegram No. 247
from the Department, paragraph two, and also to the last
paragraph of telegram No. 688 of May 10 a.m., from
Cookran. I venture to submit the following for your
consideration.
Any measure for exchange control has been consistently
opposed by the Radical Socialist Party, which forms the
backbone of the present Government as well as the Center
parties which are supporting the Government. Support for
the exchange control idea is found only among the Bocial-
ists and to & lesser degree among the Communists. I
personally believe that 8. large majority of French opinion
is convinced that to begin exchange control would be but
to begin measures of restraint which would lead to an
economic and financial dictatorship; the latter in turn
would inevitably lead to a dictatorship in the political
field. Whether or not I an right in this opinion 18 not
the question; what is important is that this opinion is
widely and sincerely held, and it accounts for the deep-
rooted hostility towards anything along the exchange control
idea.
If I judge rightly, what the present Government wants
Uclassified
186
- a -
to do is to create conditions which would restore confidence.
Thus there would be attraction for essential capital to
return to France from abroad. Such measures as would
create psychological obstacles to the repatriation of funds,
as for example the appearance of a beginning of exchange
control, would obviously be contrary to the policy of
creating confidence.
WILSON.
EA:LWW
Regraded Uclassified
187
PARAPHRASE OF TELEGRAM RECEIVED
FROM: American Embassy, Paris, France
DATE: May 3, 1938, noon
NO.: 690
RUSH
FROM COCHRAN
At a rate of 163 1/2 to the pound exchange trading
opened at Paris banks. I was told by two traders that
the series of deorees which was published this morning
had been disappointing to the market, and that there had
developed a nervous condition on the market.
At twelve noon I visited at the Bank of France. The
control by that hour had given 54,000 pounds. The rate
had moved to 165 and there was an apparently growing
demand for sterling. While I was at the Bank of France
the Bank of England telephoned and reported that in London
B. rumor was circulating that there was imminent an
important change in French monetary policy. In an
effort to hold the rate to 165, the French control in-
structed the British control to sell 100,000 pounds.
While I was at the Bank of France the Governor,
Fournier, came in. He was quite nervous and asked when
they could expect Washington's reply. Officials of
the Bank of France realized that the decrees had received
a poor reception.
WILSON.
EA:LWW
Jclassified
188
1:0
GRAY
London
Dated May 3, 1938,
Rec'd 12:25 p.m.
Secretary of State,
Vashington.
RUSH
306, May 3, 5 p.m.
FOR TRIBURY FROM BUTTERNORTH.
For nurvoses of record there is briefly set forth
below the main points of the Ambassador's telephone
report of his conversations with the Chancellor of the
Exchecuer and the Prime Minister:
(OnE) The British Government is definitely against
the imposition of an exchange control by France, that
they are opposed to it not only because it cuts across
basic liberal principles but because they do not believe
the French can work such a system. In their view it
would mean the worst of both worlds, for despite Exchange
control the franc in their opinion would be depreciated
any way.
(THO) The British maintain that they are just as
annoyed 28 WE are about the French action, but they are
prepared
Regraded Uclassified
189
Page 2, #366 from London
prepared to overlook it because they are profoundly
convinced that it would be a grave mistake for political
as well as financial reasons to break up the Tripartite
Agreement, particularly on the occasion of Hitler's
visit to Hussolini. They point out that British trade
will bE much more adversely affected than American trade
and that "it won't cost us any money"to acquiesce in
the French action.
(Three) At the same time the British state that they
will not do anything unless WE agree and they Expressed
the hope that n our reply to the French WE would urge
France to take steps to put her house in order.
The Dritish want very much our answer by this after-
noon or toni tht.
KENNEDY
CSB
Regraded Uclassified
t
190
JR
GRAY
London
Dated May 3, 1938
Rec'd 1:30 p.m.
SECRETARY of State,
Washington.
RUSH.
367, May 3, 7 p.m.
FOR TREASURY FROM BUTTERWORTH.
British Treasury states that French are pushing
them for an answer and that they in turn while not
desirous of pushing us would like to know whether
our reply can bE EXPECTED this Evening.
KENNEDY
DDM:CSB
Regraded Uclassified
FEDERAL RESERVE BANK
191
OF NEW YORK
OFFICE CORRESPONDENCE
DATE May 3, 1938.
CONFIDENTIAL FILES
SUBJECT: TELEPHONE CONVERSATION WITH
D. J. Cameron
BANK OF FRANCE
ROM
Mr. Cariguel called me at 1:40 p.m. and asked what was
doing in the market. I told him that at the moment 500,000 france
were offered at 302 3/4 and that sterling was 498 13/16. He asked
what the London-Paris cross-rate would be at those rates and I told
him about 164.75. He then asked me to hold the wire for a minute
and then came in again and asked me to alter his order to buy francs
for today from the basis of 165.13 to the pound net to him, to 165.12
net to him for up to 10,000,000 francs and 165.88 net to him for an
unlimited amount. I told him that we would be glad to comply with
his wishes. He then asked that we call him at his home (Carnot 4338)
if anything of importance should happen.
Regraded Uclassified
192
RL FRENCH MONETARY SITUATION
May 3, 1938.
3:30 p.m.
Present:
Mr. Taylor
Mr. Lochhead
Mrs Klotz
Mr. White
Mr. Harrison
Mr. Knoke
Mr. Gaston
Mr. Oliphant
M.M.Jrs
I saw Mr. Hull, and Mr. Bull had just seen Feis,
who brought him up to date, and he said, after
talking to Feis and thinking it over himself - he
said he'd continue on a short-time basis in a
manner in which I protect all my rights and walt and
see what would happen. And we discussed the thing -
whether we should say, "Good until cancelled" or
simply say, "We'll do business with you on Wednesday."
And he thought that was a very good way, to notify that
we'd do business on Wednesday. But we need more time.
And pray and hope something will happen which will give
us a little light. And he thinks we've got nothing to
lose by waiting and we may get E. lucky break. Very
quiet - and that's the way he feels about it. Per-
fectly satisfied, and complimented me on what I've
done up to date, and felt that so far what we had
done was to hold them up close with a tight rein,
and that till three o'clock this afternoon it was
good.
So I thought what I would do - I would call up
Cochran and Butterworth and tell them that we'll
do business for them till Wednesday and I haven't
heard from the President yet and I'm just waiting
to see what happens, need more time. Then, in order
to be courteous all around, we'll let the French
Ambassador know. If he wants to come down, it's all
right.
Lochheed:
Beaulieu was outside.
H.W.Jr:
would you (Kieley) call up the French Ambassador and
say if he could come right down I'd be pleased to
see him, and the same for Mr. Bewley of the British
Embassy, please.
Regraded Uclassified
-2-
193
(Gaston and Oliphant come in)
H.M.Jr:
I was saying, Mr. Hull simply said the thing to do
was to sit tight, do business for another 24 hours,
and hope that we get a lucky break.
Oliphant:
Been no additional information since we met this
morning, has there?
H.M.Jr:
No.
I think I'd take a message like this for the President.
"President of the United States. ..." - is there
any covering message which would, make it easier?
Taylor:
You've got that summary from
....
H.M.Jr:
Yes, Butterworth.
Taylor:
... Butterworth.
H.M.Jr:
All right.
"For the President of the United States." Send
cable number 366.
"The following cable from Cochran gives you a brief
summary of what the French - the Bank of France did
today." That's 693.
"After discussing this whole situation with Cordell
Hull, we have decided to notify the British and the
French that we will continue for another 24 hours.
"Hull and I feel that we have everything to gain by
going along another day without coming to any decision,
and that by doing so possibly we may get a lucky break.
"I would be pleased to receive any suggestions that
you have to help guide me in this extremely difficult
situation."
(Copy of message in final form is attached)
Harrison:
May I make a suggestion?
H.M.Jr:
Sure.
Harrison:
Has he got, or has he got any way of getting, the
impression that you got from Kennedy today about the
Regraded Uclassified
194
-3-
attitude of the British?
8.M.Jrt
Yes, that's in the cable. That gives a summary - that
the British Government is against the imposition of
exchange control.
Harrison:
That cable goes to him.
H.M.Jr:
Oh, I'm giving him everything.
Harrison:
Because I thought that was important, what they said
about Rome.
I have one thing in mind that I've been thinking over
during lunch, especially in view of that pressure
they have brought to bear - that the French action
on whether the franc should be lowered or not would
depend on British and American decisions. And that
is that you, in protection of yourself and the whole
international situation - that you want to be sure
not to be maneuvered into the position of being the
one fellow to break it up.
Now, the British, while they are just as sore as
you are, have shown an inclination - "Well, let's
go ahead with them this time anyway," and they've
pointed out to you as forcefully as they can through
Kennedy the implications of what might happen if the
tripartite is broken up now. And I should think you
want to be careful not to be maneuvered, either by
the French or the British, into the position of being
the one to break up the tripartite, after all the
patience you have shown all these years, just at this
ticklish time.
H.M.Jr:
I agree again.
Harrison:
But I was wondering whether that slant in any message
you give to the President might not let him know the
line along which you are thinking. I think it is
the nub of the question at the moment - more political
than it is financial. That's just a thought. I
Knoke:
I don't think reference to Rome appears in Butterworth's
cable, does it?
Lochhead:
Yes, I think he speaks about it.
Uclassified
195
-4-
H.M.Jr:
agreement, particularly on the occasion of
Hitler's visit to Mussolini. They point out that
British trade will be much more adversely affected
Harrison:
Kennedy was pretty vigorous on that this morning;
made all his emphasis on that.
White:
That was on the assumption they might be dropped.
No such action 13 being taken. Everything is being
frozen just as it 1s. Therefore, I don't quite see
the danger that you speak of. That is, there is no
action being taken here. By not enswering that letter,
that does not indicate that they're being dropped; so
that you can take any action tomorrow that the occasion
warrants in the light of that tomorrow, but failure
to take such action today does not make that danger
more imminent.
Harrison:
I agree with you, but I'm wondering whether the French
might not say that"we decided on our own account, and
studying our own situation, that it was necessary for
us to let the franc go; we put it up to the British
and the British have probably indicated in their own
way that they wouldn't mind their doing so, and that
they wouldn't think that was cause for breaking up of
the tripartite. Now, 8 failure to answer even for 24
hours might be construed by the French as judgment on
our part that we're not going to allow them to do what
they think is necessary, and that the cost of their
going ahead without our approval is withdrawal from
the tripartite.
Whiter
I suspect that they're so eager to have the Secretary's
good wishes and cooperation and to remain in, that
they'll give notice of any such intention, and they'd
hesitate to do it.
Harrison:
I'm inclined to agree with you, but that's the only
possible risk.
Ollphant:
The fact that the Secretary suggested an alternative
to the British which the French might follow tended
to put the ball - the hot potato back on the English
lap. Now, is your point that, since no suggestion
of an alternative had been made to the French, we
haven't put the hot potato back on the French?
Harrison:
Back on the French at all.
Regraded Uclassified
196
-5-
H.M.Jr:
Well - I mean if
Harrison:
I don't know about what you said to the French
Ambassador.
H.M.Jr:
Nothing, nothing. I had the lovely job of having
him come in here, and he had gotten a telephone
message from Bonnet, who said, "For Heaven's sake
go down and see Morgenthau, tell him I think he's
a nice fellow." And he said, "I'm awful sorry,
Mr. Secretary, I don't know what it's all about."
So we fished out one cable after another and he
did his home work here. I'm not exaggerating.
" I don't know a thing - what it's about, except
1 was to come down and see you and express Mr.
Bonnet's " so forth and so on. So I let him
read it and I said, "Mr. Ambassador, we're thinking
this over and if we come to a decision or have
anything we'll let you know. But I'm giving the
matter very serious consideration."
Now, if I put in at the end there, "Mr. President,
I'm watching my step to see that I don't get tagged
with the blame" - well, the President knows me by
now. I think I'll go one better. That very last
paragraph - I'll cut it out entirely, because in the
first telegram - cut it all out.
Gaston:
I had the same objections that Harry didn't express
to the last half of that sentence.
H.M.Jr:
What?
Gaston:
It seems to indicate that you had no plan of your
own.
White:
This morning you said you might consider the possi-
bility of indicating to the French financial attache
a postponement
H.M.Jr:
Oh, I kind of think that in view of all the opposition
all the way around, that is unnecessarily putting my
neck out.
White:
It does increase the risk.
H.M.Jr:
I mean taking what - then there's the chance of these
Regraded Uclassified
197
people - now, if you're going to think about who's
going to be blamed, I have made the suggestion to
the British, the British have turned me down. Now,
I made the suggestion to Mr. Blum as a matter of
record. If Mr. Blum didn't want to leave that record
in the Treasury
out I think that may be,
under circumstances, going a little bit too far.
White:
Would it change the matter any 1f you could put it in
somewhat the same terms as you put the French - instead
of recommending, suggest.
H.M.Jr:
It's too late. We'd have had to start that way.
Furthermore, the British don't want to go along.
White:
Of course, they make it difficult, if they don't
want it to work.
H.S.Jr:
Not only they don't think it will work, but the
American Ambassador in London is vehemently
opposed to it. And I haven't read it, but Mr.
Cochren, they tell me, has filed a cable here
that he's vehemently opposed to it.
Taylor:
Everybody's turned us down on it.
White:
O.K., I just wanted to make sure that I understand
your position.
H.V.Jr:
You're right, and if I had started de novo, it
might Put it this way: if the French had
given me a chance to catch my breath, instead of
notifying me five, six o'clock Monday afternoon
they were going to do this thing Tuesday morning,
then I could have started out; but they didn't give
me a chance, and they can't turn themselves. Since
then has come in this cable from Wilson over there,
saying that on a parity basis they can't do it.
Regraded Uclassified
198
May 3, 1938.
FOR THE PRESIDENT OF THE UNITED STATES
STRICTLY CONFIDENTIAL
RECEIVED LONDON: AT 12425 P.M. FOLLOWING CABLE FROM BUTTERWORTH,
"FOR TREASURY FROM BUTTERWORTH.
"FOR PURPOSES OF RECORD THERE IS BRIEFLY SET FORTH
BELOW THE MAIN POINTS OF THE AMBASSADOR'S TELEPHONE
REPORT OF HIS CONVERSATIONS WITH THE CHANCELLOR OF
THE EXCHEQUER AND THE PRIME MINISTER:
"(ONE) THE BRITISH GOVERNMENT IS DEFINITELY AGAINST
THE IMPOSITION OF AN EXCHANGE CONTROL BY FRANCE, THAT
THEY ARE OPPOSED TO IT NOT ONLY BECAUSE IT CUTS ACROSS
BAGIC LIBERAL PRINCIPLES BUT BECAUSE THEY TO NOT
BELIEVE THE FRENCH CAN WORK SUCH / SYSTEM. IN THEIR
VIEW IT WOULD MEAN THE WORST OF BOTH WORLDS, FOR
DESPITE EXCHANGE CONTROL THE FRANC IN THEIR OPINION
WOULD BE DEPRECIATED ANY WAY.
"(TWO) THE BRITISH MAINTAIN THAT THEY ARE JUST IS
ANNOYED AS ** ARE ABOUT THE FRENCH ACTION, BUT TREY
ARE PREPARED TO OVERLOOK IT BECAUSE THEY ARE PROFOUNDLY
CONVINCED THAT IT WOULD BE À GRAVE MISTAKE FOR
POLITICAL AS WELL 28 FINANCIAL REASONS TO BREAK UP
THE TRIPARTITE AGREEMENT, PARTICULARLY ON THE OCCASION
OF HITLER'S VISIT TO MUSSOLINI. THEY POINT OUT THAT
BRITISH TRADE WILL BE MUCH MORE ADVERSELY AFFECTED
THAN AMERICAN TRADE AND THAT 'IT WON'T COST US ANY
MONEY' TO ACQUIESCE IN 182 FRENCH ACTION.
"(THREE) AI THE SAME TIME THE BRITISH STATE THAT THEY
WILL NOT DO ANYTHING UNLESS XE AGREE AND THEY EXPRESSED
THE HOPE THAT IN OUR REPLY TO THE FRENCH DE WOULD URGE
FRANCE TO TAKE STEPS TO PUT HER HOUSE IN ORDER.
"THE DRITISH WANT VERY MUCH OUR ANSWER BY THIS
AFTERNOON OR TONIGHT."
Regraded Uclassified
199
-2-
THE FOLLOWING CABLE FROM COCHRAN GIVES YOU 1. BRIEF SUMMARY
OF WHAT THE BANK OF FRANCE DID TODAY:
"AT HALF-PAST FIVE I HAD h TALK WITH THE BANK
OF FRANCE. CONTROL'S INTERVENTION FOR THE DAY UP
TO THAT BOUR HAD COST BETWEEN 600,000 AND 700,000.
THE RATE RANGE HAD BEEN BETWEEN 164 1/2 AND 165 FOR
THE MOST PART. AFTER THREE O'CLOCK THE DEMAND FOR
STERLING HAD QUIETED DOWN. CAUSE OF FRANC SALES WAS
PARTLY FROM DISAPPOINTMENT OVER THE INEFFECTIVE
CHARACTER OF THE DECREES, AND PARTLY BY FEAR OF
OPERATORS THAT THERE WILL BE CONTINUED DECLINE IN
THE FRANC EXCHANGE RATE.
"BESIDES THE OPERATIONS DESCRIBED ABOVE, THE CONTROL
BOUGHT BELGAS IMPORTANTLY FOR MATURITIES 07 FRENCH
RAILWAY LOANS."
AFTER DISCUSSING THIS WHOLE SITUATION WITH CORDELL HULL
WE HAVE DECIDED TO NOTIFY THE BRITISH AND THE FRENCH THAT
WE WILL CONTINUE FOR ANOTHER 24 HOURS.
BENRY MORGENTHAU JR.
Regraded Uclassified
Mr. SecreTary:
200
we know That The
French franc is To be devalued
and BriTish
depending upon u. ^" proval
and ThaT The Freuch and BriTish
Ambassadors were here This
afternoon. will There be an
announcement or will you Talk
To us for background ?
51. V.Times
11.4. Y. Herald-Tribune
Associated Press
Central news
Regraded Uclassified
201
Tuesday
May 3, 1938
3:57 p.m.
HMJr:
Hello.
H. Merle
Cochran:
Hello, Mr. Secretary.
HMJr:
How are you?
Cochran.
C:
Yes, sir.
HMJr:
Will you notify the French Treasury that we will
...
C:
I don't hear you.
HMJr:
Will you notify the French Treasury
C:
Yes.
HMJr:
...that we will continue to do business with them
on Wednesday and - in their behalf - under the
Tri-partite Agreement?
Hello.
C:
...with them on their behalf?
HMJr:
Yes. I mean we'll continue to operate under the
Tri-partite Agreement in their behelf on Wednesday.
C:
Yes.
HMJr:
And that I am giving this whole matter very serious
consideration but I need at least another day to
think it over.
C:
I see.
HMJr:
See?
Hello.
C:
Yes.
HMJr:
And for your own information I've come to this
decision after a personal conference with Mr. Rull.
Hello.
C:
Hello.
HMJr:
I mean this is the combined view taken by both Mr.
Hull and myself after he and I had a conference by
ourselves for a half an hour.
C:
I see.
Regraded Uclassified
202
- 2 -
HMJr:
See?
C:
Yes.
HMJr:
Now, would you mind repeating what the message
is please?
C:
I am to inform the French Treasury that you will
continue to do business with them on their
behalf on Wednesday.
HMJr:
I'm sorry. We've got a bad connection. Will you
repeat please?
C:
I am to inform the French Treasury here
that
you will continue to do business with them on their
behalf on Wednesday.
HMJr:
Yes.
C:
That you are giving the whole matter very serious
consideration
HMJr:
Yes.
C:
And that you will require one more day.
HMJr:
At least one more day.
C:
At least?
HMJr:
Hello.
C:
Yes.
HMJr:
I need at least another day.
C:
Require one more day to reach your decision.
Right.
HMJr:
Hello.
C:
Hello.
HMJr:
I say I need at least another day.
C:
At least another day.
HMJr:
Yes. I mean I may not reach a decision by Wednesday
night. See?
Regraded Uclassified
203
- 3 -
C:
But you need at least another day?
HMJr:
Yes.
Now, another thing. Hello. Hello.
C:
Yes.
HMJr:
Cochran.
C:
Yes.
HMJr:
Please caution them to be very careful in their
statement - ah - not to try to throw the blame
one place or another - ah - outside of France.
C:
I didn't get that.
to please caution
...
HMJr:
The French Treasury.
C:
Yes.
HMJr:
To be very careful in their publicity - I mean -
there was a statement that came across on the
ticker ...
C:
Yes.
HMJr:
...
that the French Treasury was waiting for
England and the United States to make up their
minds.
C:
That's on the ticker, is it?
HMJr:
Yes.
C:
Is that so?
HMJr:
Now I want to caution them to be careful
C:
Yes, sir.
HMJr:
... as to the official leaks - do you get me?
C:
Yes, yes.
HMJr:
I want them to be careful. Now, I mean, we're
doing the very best we can but I don't want them
to try to put out stories which will try to place
the blame on either England or the United States.
C:
Surely not, no.
Regraded
204
- 4 -
HMJr:
And I can play that game also.
C:
Right.
HMJr:
But I don't want to. See?
C:
Well I'll get in touch with them yet tonight.
I haven't talked with them today.
HMJr:
Yes.
C=
They did not call me so I thought it better to
wait until I had some word from you.
HMJr:
Well now, you've got the message.
C:
Yes. Yes, I have it.
HMJr:
And we'll see what happens tomorrow.
C:
All right, sir.
HMJr:
And - now just wait one minute.
C:
Yes.
(Short pause)
HMJr:
Hello.
C:
Yes, sir.
HMJr:
Up to this time, which is four o'clock, we've only
had to buy one million and a quarter of francs all day.
C:
One million and a quarter?
HMJr:
That's all.
C:
Yes.
HMJr:
Which you might say is nothing.
C:
Yes. Well, at six o'clock I sent you a wire giving
you the latest figures which I had
HMJr:
Yes.
C:
That it had cost them at least six or seven hundred
thousand pounds.
Regraded
205
- 5 -
HMJr:
Yes. We got that.
C:
You have that?
HMJr:
Yeah.
C:
That is the right figure.
HMJr:
Yeah.
C:
And I sent you a cable on the decree summarizing
that. You probably saw it in the press too.
HMJr:
Uh huh.
C:
They're not letting anyone talk much in this press
group.
HMJr:
Uh huh.
C:
They're fairly current but they're not startling
enough; they re not important enough to make anything
swing in the trend.
HMJr:
Uh huh. Well, we'll hope for the best for tomorrow.
C:
All right, sir. And I'll get this message to him
tonight and that's all.
HMJr:
Thank you.
C:
All right. Good night.
HMJr:
Good night.
Regraded Uclassified
206
May 3, 1938
4:05 p.m.
Present:
French Ambassador
Mr. Leroy-Beaulieu (Financial Attache)
Mr. Taylor
Mr. Lochhead
Mrs. Klotz
HM,Jr: Did you (Mr. Leroy-Beaulieu) have a nice
drive down?
Mr. L-9: A little hot.
HM,Jr: Mr. Ambassador, me have been thinking
about this all day and I went over and talked to Mr.
Hull about the matter and we need at least another 24
hours. That's after thinking about it all day. We
need at least another 24 hours. So if you would con-
vey that message to them, I would appreciate it.
Ambassador: Yes. I will phone. May I add
anything or ask anything that you want to be more com-
pletely informed on.
HM,Jr: No. They evidently took adequate means
to take care of the franc today and I just would 11ke
to -- after all, they took at least two weeks to study
this, 80 I think if we take several days that isn't ask-
ing too much time on as important a matter as this. I
mean, I have dropped everything today to devote myself
to this.
Ambassador: Uhm.
HM,Jr: And it's 80 important that I can't just
decide.
Ambassador: Uhm.
HM,Jr: And with the President away, I have not
heard from him. I have had no communication from him.
And so I hope they will continue tomorrow as they did
Regraded Uclassified
207
-2-
today. I mean, your Government to support the franc.
Ambassador: of course, that may be somewhat
more difficult for them tomorrow if something has leaked
out.
HM,Jr: Unfortunately, of course I don't know
where, but the news service carried the report that
France was waiting on Great Britain and the United States
to make up their mind.
Mr. L-B: When did you see it?
HM,Jr: Mr. Lochhead can look it up and get you
the exact time.
Mr. Taylor: Around noon.
Mr. Lochhead: It was in the news report of the
Dow Jones, Wall Street Journal, that the French Treasury
had stated that they were waiting for the British and
American Treasuries to make up their mind as to a lower
franc. They mentioned "lower level".
Mr. L-B: The news came from Paris?
Mr. Lochhead: Came from Paris.
Ambassador: When?
Mr. Lochhead: This morning.
Ambassador: Since or before I saw you?
Mr. Lochhead: Probably just at the same time.
HM,Jr: You (Mr. Lochhead) can find a copy of it
and give it to the Ambassador.
Kr. Taylor: I think it was before you were here
because when I came out of the office one of the boys
came and showed it to me.
Ambassador: Uhr.
Mr. L-B: There is no special point on which you
would like to have further information?
Regraded Uclassified
208
-3-
HM,Jr: No. They have Just tonight cabled us
copies of the decrees. We "111 see those tomorrow. We
have not seen those yet, but they tell me they are on
their way and will be here tomorrow morning.
Mr. L-B: I nee.
Ambassador: This morning I wonder whether I was
wrong. I asked you first there were several things you
wanted to make clear. One of them of course is the de-
crees, the economy of the new decrees. The second thing
was what exactly was the state of the Stabilization Fund
and which you hope the French Government con reasonably
поре to keep the franc at its actual level taking into
account the effect of the new decrees
HM,Jr: Pardon me. I did not ask about the
Stabilization Fund. You asked us did we know how much
fund was left in the Stabilization Fund.
Ambassador: No. Exactly that 18 the certain
matter I was perhaps wrong. I was under the impression
that you were not quite sure that the French Government
was obliged to bring the franc to a level, to a lower
level.
HM,Jr: That's perfectly true. I question the
recessity.
Ambassador: Yes.
HM,Jr: I questioned the necessity of simultane-
ougly with the announcement of these decrees of forcing
the franc down to 175. I still question it.
Mr. L-B: You mean to say, Mr. Secretary, that
you doubt, or question, that the Fund has not got enough
money to support the franc at its present level?
HM,Jr: Please get this straight. I am not ques-
tioning how much money is in the fund; not questioning
what they can do with the fund, or anything about the
fund. Now I did not raise the question about the fund.
That's -- I mean, if I want to know how much money is in
the fund I could ask, if I thought I had the right to.
I did not ask how much money or what the fund will do
209
-4-
or anything about the fund. What I do Bay 18 I do
want to study that by foreing the franc down to 175,
are you outting in the practice of competitive deval-
untion. I mean, are you doing it for & competitive
advantage which, under the Tripartite Agreement, we
agreed not to do. In other words, are you putting
it down to 175 in order to get trade advantage?
Mr. L-B: Oh, no, I don't think 90.
Ambassador: Oh, no. I don't believe that,
but from what Mons. Bonnet said he did it because they
really had to choose between continuation of devalua-
tion
Rr. L-B: I think, Mr. Secretary, they did it --
of course, they are trying to do it and they are asking
you what you think, because nothing 1a done, only because
there has been so much talk about it and if they do it
there will be return of capital, but no talk about trade
advantage.
HM,Jr: Talking 88 Governments and not as individ-
unla, the fact -- I can say this, as one Government and
not as one individual -- the fact that that does not make
sense to me as a Governmental action 1s what bothers me.
I am not talking as an individual, but AB a Governmental
action it does not make sense. And that's what is both-
ering me and, therefore, I am questioning what 16 the
resson for forcing the franc down to 176. After all,
78 have other members. Belgium. What does this do
so Belgium? What does this do to Holland? And the
agreement -- after all, the spirit of the Tripartite
Agreement was to stop this competitive devaluation for
trade advantage. That was the spirit and that was the
idea. Now on three hours' notice the French Government
proposes to drop it from 160 to 175 and I, who may be
affected the least by it and who could stand it the most,
ask why and I still have not been able to answer it to
myself. Now, the fact that you are suddenly going to
drop it and let it come back, again talking as myself, Just
does not make sense and I can't convince myself. Maybe
after I have 24 hours to think about it, maybe we will
decide it's all right, but in the meantime I have not
bad a chance to hear from him and we simply -- normally
If you are going to do a thing like this on Monday, they
Regraded
210
-5-
usually notify us on Friday and 770 get a couple of
days to think this over, but to give you two or three
.ours on a move as unusual as this 18, the Government
just does not have time to think. If the French Gov-
ernment can throw any new light on this thing, it will
be most helpful.
Mr. L-B: Yes.
Hi.Jr: It will be most helpful.
Ambassador: The reason I mentioned stabilization
fund has perhaps nothing € do with the question which I
YES reising. It was 1f the French Government had not
at the present time the means of keeping the franc BO
high. I don't know what our rates might be from a tech-
nical point of view.
HM,Jr: I don't want to raise that question.
Ambassador: But if it 18 a question of general
policy, is it a question of being practical or is it
impossible.
HM,Jr: If the French Government says this is a
carefully thought out plan which we can put through and
I can become convinced of it, far be it from me to tell
the French Government how to administer their affairs,
but that's just what I am trying to weigh and trying to
think over and it's a very unusual action and, 88 I say,
we can afford to be unselfish about it because the franc
going to 175 to the pound would not have an important
effect on our economy, but it's just the example that it
sets to other countries. And whatever the period is --
two or three years now -- all currencies have been more
or less stabilized, due to the Tripartite Agreement, and
as soon as one Government breaks away there is no telling
how many will follow suit because they will say 'If the
French Government can do it, why can't we?' Then we
start all over again, each country lowering its currency
until we have complete financial chaos and to say you
are going to drop to 175 and catch the speculators and
push it back to something else -- the unfortunate part
is for two weeks the speculators have been saying it is
coing to 175. Not 174 or 176, but 175. For two weeks
Carchandeau has been denying that. But the speculators
Regraded Uclassified
211
-6-
have been consistently saying 175. And 175 it is.
Now these speculators knew what it was going to be
and for two weeks they have said 175 and for two
weeks Mr. Marchandeau has vehemently denited it, but
it turns out to be 175.
Mr. L-B: I see your point.
HM,Jr: One of the things we all agreed upon
was we wanted to do away with the international spec-
ulator in foreign exchange and I can't help but think
this plays right in his hand, and that's why I need
more time.
Mr. L-B; Yes.
HM,Jr: As I say, in our country here, uo to 8.
minutes ago, we dealt in 1,250,000 frances. That's
all the francs that have been done today, which is
nothing. And there is no speculation on this side
and I wish you would tell that to Mr. Bonnet. 1÷ mil-
lions. That's nothing. So whatever speculation 18
taking place is not in the United States.
Mr. Lochhead: And 1,000,000 of that 11 millions
was French order.
HM,Jr: The French Government.
Mr. Lochhead: Well, came from French sources.
Ambassador: That's one million dollars?
Mr. Lochhead: No; 1/2 millions france.
HM,Jr: Of which, Mr. Lochhead said, 1,000,000
came from France, 80 you might say there was practically
no dealing here. So the speculation was not on this
side. We are watching it very closely to see that they
do not take advantage.
Mr. L-H; Mr. Secretary, I have not got anything
official to tell you, but I should like you to have in
mind that we are not doing that for trade purposes be-
cause I know it is not the aim of the French Government.
You know there has been much talk in financial circles
Regraded
212
-7-
all over the place telling us to the pound 200 francs,
go we have let it drop unwillingly from 130 to the
present level. From 130 to 165. So perhaps the
French Government thought if it could hold it more
closely on the new basis, on a new level, from finan-
cial point of view
Mr. Lochhead' I don't think you can pick out
175 as being a good figure. They are already talking
200.
HM,Jr: They are talking 200. And please, Mr.
Ambassador, don't go away with the thought that any
barticular figure, whether it be 175 or 165 or 185 or
200, we are not interested in any one figure. We are
interested in mutual stability. We are not going to
pick a number.
Hr. L-B: I see.
Hil,Jr: We are only interested in getting finan-
cial stability, including Belgium, Holland and Switzer-
land, and I wish I could convince myself that by letting
it drop you people can snap it back again. Because we
started this thing around 125. It's gotten steadily
worse Steadily worse. And from the figures and es-
timates that we have, you people to do business don't
need 175 francs.
Mr. L-B: You think the franc is already under-
valued more or less?
HM,Jr: We can't make any estimates to show that
you need 175 to do business outside of France. I mean,
that at a lower frano that you would not have favorable
foreign exchange. Do you think you need 175?
Mr. L-B: Well, I think it is not the external point
of view believing the franc is at present overvalued at
its present value, but I don't know. If from internal
point of view, of debts of the country and roads, it
may be.
HM,Jr: That's the situation. We need at least another
24 hours to think about it.
Uclassified
213
-8-
Ambassador: Of course we are going to telephone
Bonnet. I am a bit concerned. I don't know I can
tell Bonnet what more of explanation or information he
could give you to help you making your minds up.
HM,Jr: He might give me an explanation why he
wants to force the franc down. What 1s the reason for
wanting to force the franc down.
Ambassador: You have not got sufficient explan-
ation about it.
HM,Jr: No.
Mr. L-B: I shall telephone him.
Ambassador: We will telephone both and ask for
detailed information, because I think about the general
policy certainly I assume that the French Government
1s not trying to win advantage for its trade.
HM,Jr: The question 18 why, Mr. Ambassador, why
are they doing it? If it 1s not for trade advantage,
then why?
Mr. L-B: I will tell you, Mr. Secretary, only
from the point of view of the balance of payments for
the time being
HM,Jr: Pardon me, but you say they are talking
200. I know they are talking 200. They say 175.
I an in the foreign exchange business. I say, 'Well,
I ruess I will wait. I guess it's going to 200.' And
it "oes to 200 end maybe it will go to 300. Where 18
this thing going to stop?
Ambassador: I think it will stop eventually.
We have an economy program. For example, our salaries
of all officials in the country have been reduced by
half. Since one year we did not get any increase. So
I think it 1s general economy, because we have enormous
debt, armament expenses. It is not a rosy situation,
but I think we can face it.
Mr. L-B: And I think, Mr. Secretary, that they
are doing it more from technical point of view. You
Regraded
Uclassified
214
-9-
mentioned, very Justly, before what happened to the
franc within the last year. Gradually it went down.
And every Minister of Finance when he came into power
Gaid he would try to keep the franc at its present
level and meanwhile he could not check speculation
and the franc went down and down. I think the acting
Minister wants to keep it now to A level and perhaps
they think there is more chance of keeping it at this
level now if they have a little margin to fluctuate.
HM,Jr: Mr. Ambassador, maybe it will be help-
ful if you will talk to Mr. Bonnet and Mr. Marchandeau
and get it first hand. But what's bothering me -- and
possibly if you will explain that to them, they will
give you fu rther explanation. And, 8.8 I told you
this morning, my attitude 1s one of wanting to be help-
ful. I have been helpful. I want to continue to be
helpful. But this is something which was sprung on
me so hastily that we have not had time and I have not
had time to hear from the President and so, therefore,
I am asking that we be given another 24 hours or 48
hours to think this thing over.
Ambassador: And that you should like to be more
informed of the general plan, of the economy plan, and
also more or less I think your reservation 18 that it
is not sliding and the speculator will force our Govern-
ment on to 180 or 200 and so on. I certainly will
appeal to Mr. Bonnet that he should explain.
HM,Jr: With all our troubles in the Far East,
they have been very careful not to let their currencies
slide and if this continues in France, some of the
countries in the Far East will say 'The United States
does not say anything about the French. Why can't we
start.' And they are in much worse shape than some
of the European countries. But, I mean, since the
Tripartite, no country has tried competitive devalua-
tion and that's something to keep. I have gone all
through this. I have every reason to want to continue
to be helpful and there is nothing which would make
me -- the last thing I want to see is this thing break
up. Everything that I have, official and personal
18 to see this continue. So if you people can only
give me a reasonable explanation.
Ambassador: What was the date of the Tripartite?
215
-10-
Mr. Lochhead: September 1936.
Ambassador: Yes. I wonder if it was made as
a political experiment since. I don't think it has
proved a financial succes.
o0o-o0o
(The Ambassador and the Financial Attache left
and were immediately followed by Mr. Bewley. Trans-
cript of conversation between HM, Jr and Bewley, is
separate from this and follows immediately.)
Regraded Uclassified
216
May 3, 1938
Present:
Mr. Bewley
Mr. Taylor
Mr. Lochhead
Mrs. Klotz
HM,Jr: I am sorry to have kept you (Bewley)
waiting.
Mr. Bewley: Not all
HM,Jr: But unfortunately the French don't advise
their Ambassador here what's going on and he is told to
come to see me and I have to go to school with him. Really!
Mr. Bewler Yes.
HM,Jr: You have heard nothing?
Mr. Bewley: I sent off a long telegram last night,
but I have had no reply.
HM,Jr: All right. I will be very brief. I can
boil down in 30 seconds what I have been taking 30 minutes
to say.
After going over this matter very carefully, we
want at least another 24 hours to think this over. No. 1:
we have not heard from the President of the United States.
No. 2: I have not heard directly from your Government,
although Mr. Kennedy called me after he had seen Sir John
Simon and had lunch with Mr. Chamberlain. And you might
tell your Government that we think there 18 everything to
be gained by taking another 24 hours to think this over.
We don't see that we have anything to lose.
Mr. Bewley: Yes.
HM,Jr: And they told Mr. Kennedy that they don't
like this idea about exchange control.
Mr. Bewley: They told him that?
Uclassified
217
-2-
HM,Jr: Yes. I am not going to press it.
On the other hand, they did maintain the franc today.
Mr. Bewley: I see, It was 166,
HM,Jr: 165. And it cost them 5-600,000
pounds, which 18 not excessive, is it
Mr. Bewley: No.
Hil,Jr: And they did the large sum in our market
of 1÷ million francs, of which 1 million came from
France, so on our side me actually did 350,000 francs
end that's the total business we have done today, so
matever is going on is not over here and, as I say,
I have asked these ventlemen 'Can they give me an ex-
planation of why they want to force it down?' and I
said, talking as one Government to another, it does
not make sense. Now, they are going back and telephone
Bonnet and Marchandeau and maybe we will cet something
tomorrow, but we feel here we want another 24 hours
and, as I say, possibly your people will have something
or not. But that's the whole story.
Mr. Bewley: Yes. All right.
HM,Jr: And, as I say, in the meantime they have
pluyed the game.
Mr. Bewley: Yes. Oh, yes.
HM,Jr: And they have kent the franc around
164-165 and I don't think it mas too expensive.
Now, also for your information, I tolá them that
I did not like the messare which came out over the ticker
st noon, supposedly from the French Minister of Finance,
that they were waiting to hear from the British and our-
selves. Now, I told them I don't 11ke it. Although
ve don't play the game that way, If they push us too
nord we can make a few statements too, but please try
to refrain trying to tmg anybody. And I sent that to
them.
Mr. Bewley: Yes.
Regraded Iclassified
218
-3-
HM,Jr: Isn't that the whole story!
Mr. Taylor: Yes.
Mr. Bewley: You are awaiting replies from all
th ree: from the President, from us and also from the
French?
HM,Jr: That's right. They had nothing but
'please go down and see Mr. Morgenthau and say he's a
nice fellow, but I don't know what it's all about.
30 we had to let them read the cables. So they sold,
'That bothers you?' I said, not being personal, it
does not make sense. Are you doing it for trade ad-
vantage'? 'Oh, no. Oh, no. That's not 1t.'
'Then why are you doing it if it is not for competive
trade advantage? What's the reason?' Well, of
course, they could not answer because they did not
know and that's a perfectly fair question.
Mr. Bewley: Yes.
HM,Jr: I said, the spirit of the Trinartite
will prevent the world from continuing in & race of
connetitive currencies. That has been stopped and,
I said, in all the troubles in the Far East they have
not depreciated their currency. Which is true.
Mr. Bewley: Oh, yes.
HM,Jr: And I said 1f they gee that the French
ret away with it, why wouldn't they start it.
30 we simply feel here that we can't see that
ne are losing anything either for you or for ourselves
by sitting tight and in the meantime by having a stiff
upper lip they did hold 1t.
Mr. Bewley: Yes.
HM,Jr: They did hold it. Now, maybe if we are
again stiff with them, they will hold it again tomorrow
and the first thing tomorrow maybe they will like it.
Mr. Bewley: They may if the figure of 175 is not
already too widely known.
Uclassified
219
HM,Jr: I went BO far as to say that another
thing, I said, I don't like, for two weeks the inter-
national speculator has known it 18 to be 175. Not
174. Not 176, but 175, and, I said, for two weeks
Mr. Marchandeau has vehemently denied it is going to
be 175, but, I said, it is 175. Now, I said, we all
agreed it was the international speculator in foreign
exchange that we wanted to put out of business and to
show he's not operating on this side, we did 11 million
francs today of which 1 million was French sources.
He's not operating on this side. And, I said, I don't
like it.
S₀ I would say, to use the American venacular,
I got plenty off my chest. And up until half past
four the thing has worked.
Mr. Bewley: Yes.
HM,Jr: Now, maybe tomorrow when we wake up, we
will find it is 175, but as some of our people came in
with these decrees, you would normally expect the franc
to strengthen. That would be the normal thing.
Mr. Bewley: That would be the normal thing.
HM,Jr: But "we wanted elbow room; we wanted
175 and then have it bound back like Poincare did."
I said, 'Well, this 18 not the France today as it was
at that time.
We had a friendly chat. I aired my
views.
May I ask you, do you see that we have anything
to lose in what has happened up to today?
Mr. Bewley: No.
HM,Jr: That we gained a day?
Mr. Bewley: We certainly have gained & day. I
feel dubious at the end because I think when you want
175 you eventually get to 175.
HM,Jr: I agree with you, but getting to 175 is
there any assurance we will not go to 2001
220
-5-
Mr. Bewley: Not at all.
HM,Jr: And if we had given in easily?
Mr. Bewley: Of, if we had not made a fight.
HM,Jr: But as I say, as of tonight I did get
get action for your Government and ours. Tomorrow
I asy look silly.
Mr. Bewley: I youldn't say you would look silly.
HM,Jr: And it's in both our interests.
Mr. Bewley: I think 80.
HM,Jr: And if the message had gone grudgingly
avrecing to this -- it may go that way anyway!
Mr. Bewley: I will try to get you an answer to-
morrow.
HM,Jr: We don't enjoy this. It. worries me sick.
I have done nothing else today, all day long. I realize
the full importance of trying to keep the French above
water, terrifically important, and as I told them I am
doing everything I can to help.
By the way, Bewley, I em going to the French Em-
bassy tonight for dinner. I am leaving at about a
quarter of eight. If you get anything will you let
me know. It will be helpful because unquestionably
they will do business there.
Mr. Bewley: If I have anything, I will certainly
pass it on to you.
000-000
After the departure of Hr. Bewley, Dr. White
onne in, and the following conversation took place:
HA,Jn: Well, we had a long palaver with the
French and they said, What do you want to know? I 321d,
I want to know why you are doing this? The only super-
ficial reason you are doing this is for trade advantage.
Regraded Uclassified
221
-6-
"Oh, my God! No!" Then why are you? They
are going to telephone back and maybe we will get a reason.
Bewley was in and I said, At least we have gained & day
and a day gained 18 a day gained. Tomorrow, I don't know.
In view of that cable which came in from Wilson
which says that the Communists and Extreme Radical Social-
1sts are the only people who want exchange control (Feis
let me read it, but he did not have copies) -- Wilson
sends a cable that the only people who will go along on
exchange control are the Communists and Extreme Radical
Socialists and that you can't get that out of this Gov-
ernment. What's the use of saying -- it would be like
saying to Mr. Roosevelt, Unless you give up your trade
treaty we won't do so and so. While Cordell Hull and
President Roosevelt are here, we won't give up the trade
treaty.
Mr. Taylor: They have political commitments BO it
is impossible for them to do it.
HM,Jr: I don't see, Harry, I think the last 24
hours, if I do say 80 myself, I don't think we have missed
a lot.
Dr. White: No. I think up to now I am willing
to concede a chance. You are in a more difficult sila-
ation by view of the fact that everybody else is taking
a different attitude.
Mr. Taylor: I think you have done just right. I
think tomorrow you have got to get around to saying a
little more because you scared hell out of them, which 18
fine. That's exactly right. Now after they come and
tell you what they will tell you, which is not going to
add anything to human knowledge, there are going to say,
This 18 the same technical type of move that you made when
you felt it was good to desterilize gold to give a fl1-up
to other measures. That's what I am guessing.
Dr. White: There is this possibility: that in
attempting to answer that question they may find that
their answers are not so good. They themselves may find
difficulty ...
Mr. Taylor: It does not make any difference.
Dr. White: But if in a couple of days it still
222
-7-
remains at that, I agree they will most likely go
down and I agree the delay has been all to the good.
Slight possibility that today they did not lose much
with every reason why they should. They can't say
tremendous pressure. Then why did you lose only 60
or 70,000 pounds?
Mr. Taylor: 700,000 pounds.
HM,Jr: That 1s not an awful lot.
Dr. White: But they can't keep that up steadily.
They still can't say that there 13 tremendous pressure
on the franc. Therefore they must give sqme other reason
and that would be difficult.
Mr. Taylor: As I said before, you scared hell out
of them and that's fine. That's Just what they need.
Dr. White: Do you expect anything more tonight?
HM,Jr: I am expecting a telephone call from Butter-
worth.
o0o-o0o
Regraded Uclassified
223
Tuesday
May 3, 1938
5:09 p.m.
HMJr:
Hello.
Operator:
I have Mr. Butterworth.
HMJr:
Thank heavens.
0:
All right. Go ahead.
HMJr:
Hello.
Wr. Walton
Butterworth: Hello.
HMJr:
I hope I didn't get you out of bed.
W:
No, you haven't, sir.
HMJr:
Ah - but if I did I'd only be getting even W ith
the Ambassador for what he did to me this morning.
W:
(Laughs)
HMJr:
But there's no reason to take it out on you.
W:
Well, that's all right, sir.
HMr:
Butterworth, after spending all day practically
on this French matter and after having a long talk
with Mr. Hull
...
W:
Yes.
HMJr:
we feel we need at least another twenty-four
hours.
W:
Uh huh.
RMJr:
You see?
W:
Yes.
HMJr:
And that - in the first place we haven't heard
directly from the English, I mean - although we
did hear through the Ambassador and we've got -
we have no word from the President, see?
W:
Yes.
Regraded Uclassified
- 2 -
224
HMJr:
And the French did defend the franc today and it
did stay around a hundred and sixty-five although
to do it.
it cost them six or seven hundred thousand pounds
B:
Yes.
HMJr:
But the interesting thing was there was practically
no here. business in the French franc on this side over
B:
Yes.
HMJr:
They actually transacted - - did a million and a
quarter francs.
B:
Yes.
HMJr:
With the one million order came from France.
Now that was all the business that was over here.
B:
Yeah.
HMJr:
We feel that as of tonight we think what's happened
is worth while. I mean, in other words, that the
French have gone back and have defended the franc
at not too great a cost to them.
B:
Yes.
HMJr:
And we feel that we've got everything to gain by
waiting another day.
B:
Uh huh.
HMJr:
And the message I'd like you to give the British
Treasury is that we want at least another twenty-
four hours to think it over.
B:
Uh huh.
HMJr:
See?
B:
Yeah.
HMJr:
And that we think that - well, that's that,
anyway.
B:
Uh huh. All right. I'll pass that on to them.
225
- 3 -
HMJr:
Any suggestion you want to volunteer?
B:
No, sir. You've gotten that confirmatory
telegram that I sent?
HMJr:
Yes we've gotten all of your telegrams now.
B:
I just wanted it to be
- I thought you would
rather like to have it confirmed ...
HMJr:
Yes...
B:
..that way.
HMJr:
That's right.
B:
And now I told them that we're most anxious to
get that word
and I take it that we will
consult with them before either of us send a
message to Paris.
HMJr:
Ah - consult with them?
B:
Yeah.
HMJr:
Oh yes.
B:
I should like to tell them that.
HMJr:
Before we do anything definite.
B:
Let's see, his telephone number for tonight would be -
you see, the French
HMJr:
Who gave you his tele- - what is his telephone
number?
B:
Phillips.
RMJr:
Yes.
B:
And so I am to telephone him as soon as I hear from
you.
HMJr:
Yes. Well that's the message. And if...
B:
All right, I'll tell him.
HMJr:
Now, wait a minute. The French Ambassador called on me...
Uclassified
226
- 4 -
in
Yes,
HMJr:
And he wanted to know why we were waiting.
B:
That's right.
HMJr:
And I said because we did not have any information
which satisfied me as to why they had to depress
the franc. Hello.
B:
Yes.
HMJrt
I said, "There's nothing which you've given me
which makes sense and you've given me no reason
why you should push the franc down to a hundred
and seventy-five. Now, if you can give me a good
reason I'd like to have it." And Bonnet called him
and told him to call on me. Do you see? Hello.
B:
Yes.
HMJr:
And now he's gone back to telephone Bonnet that
that's the way I feel.
B:
Right.
HMJr:
Now, maybe out of that we'll get something and
maybe they'll realize that they can't give us
any good reason.
B:
Yeah.
HyJr:
I said that - "Is your reason that you want a
competitive trade advantage?" He said, "Oh, no,
no, no! - no such idea." I said, "Well, then
what is your reason?" I said, "Frankly it just
doesn't make sense."
B:
Yeah.
EMJr:
And I said nothing about that suggestion which I
made -- you know ...
B:
Yeah.
HMJr:
about exchange control.
B:
Yeah.
BMJr:
I said nothing to them about that.
Regraded Uclassified
227
- 5 -
B:
Good.
HMJr:
But I said, "I want a good reason".
B:
Yeah.
HMJr:
So that's that. And also, you might tell Mr.
Phillips that I told them I was not pleased with
the fact that a statement was made to the press
by the French Treasury that they were waiting to
hear some word from Great Britain and ourselves.
B:
Uh huh.
HMJr:
And I cautioned them not to start a newspaper
barrage on us.
B:
Yeah.
HMJr:
That I didn't like it.
B:
Uh huh.
HMJr:
So that's that. And I've made no statement to
the press and will make none.
B:
Good. Good.
And consider twenty-four hours - can you make it
slightly less than that in the sense taking into
consideration the time element here?
HMJr:
Well, I can'd do that, Butterworth, because I've
already told the French that we wanted at least
another twenty-four hours.
B:
Uh huh. All right.
HMJr:
I'm sorry there's six hours difference but I can't
help it.
B:
All right. That's perfectly all right.
HMJr:
All right.
B:
I just asked you the question that they put to me.
HMJr:
I know. Well, you'll have to take it like a man.
(Laughs)
Regraded Uclassified
at 228
- 6 -
B:
(Laughs) That's right.
HMJr:
All right. (Laughingly)
B:
And allow for the implication shall we say.
HMJr:
(Laughingly) All right.
B:
Goodbye, sir.
HMJr:
Goodbye.
Regraded Uclassified
229
PARAPHRASE OF TELEGRAM RECEIVED
FROM: American Embassy, Paris, France
DATE: May 3, 1938, 6 p.m.
NO.: 693
RUSH FROM COCHRAN.
At half-past five I had & talk with the Bank of France.
Control's intervention for the day up to that hour had cost
between 600,000 and 700,000. The rate range had been
between 164 1/2 and 165 for the most part. After three
o'clook the demand for sterling had quieted down. Cause
of franc sales was partly from disappointment over the in-
effective character of the decress, and partly by fear
of operators that there will be continued decline in the
franc exchange rate.
Besides the operations described above, the control
bought belgas importantly for maturities of French railway
loans.
WILSON.
EA:LWW
Uclassified
230
REB
GRAY
Paris
Dated May 3, 1938
Rec'd 8 P. m.
Secretary of State,
Washington,
692, May 3, 4 P. m. (SECTION ONE)
FROM COCHRAN.
Journal Official this morning published text of
SEVEN decrees relating respectively to the budget,
production, credit, oprning of credits for a special
program of national defense, control of foreigners,
integration of credits into the general budget, and the
delivery of a tourist card for foreign visitors.
Journal Officiel also published decree closing loan
Issue of March 9 for the pension fund and a decree
providing for the opening of subscriptions to six
month and one year Treasury bonds bearing interest at
the rate of 3.25% and 3.50% respectively.
Memorandum accompanying these decrees Explains
necessity to reintegrate into the general budget
EXPENSES of a permanent character which are Emboditd in
the special armanent and public works budget and in the
Treasury
Regraded Uclassified
231
REB
2-#692, From Paris, May 3, 4 P. m.
Treasury accounts. Emphasizing the necessity to
administer public funds with prudence it is pointed out
that the SERVICE of the public debt and national defense
alone represent 67% of eppropriation of the ordinary
budget.
To meet the Existing special situation it is con-
sidered that special methods must bE adopted notably
D. uniform increase of B% of all taxes and revenue
assessed payable to the state with the exception of
customs duties (it is indicated that later on a revision
of the customs tariff may bE decreed). The Government
considers this special contribution should immediately
provide resources required by the Treasury. It is
Expected that the measure will produce 3,200,000,000
francs.
(END SECTION ONE)
WILSON
NPL
EMB
Uclassified
232
LMS
GRAY
Paris
Dated May 3, 1938
Rec'd 9:50 p. m.
Secretary of State,
Washington.
692, May 3, 4 P. m. (SECTION TWO)
Memorandum then Explains machinery under which
more strict control and Examination will bE made of the
administration of budgetary appropriations and of the
Execution of the budget.
Considerable space is devoted to decree relating
to production. It is stated that fiscal charges absorb
forty per cent of the national revenue. Therefore pro-
duction must bE increased and decrees to this End provide
for the spending up of certain branches, measures favor-
ing the industry, for construction of dwellings chiefly
through providing for low interest rates, for adjustment
of the forty-hour law, and certain fiscal reductions
for those Employing capital in industrial improvements,
social constructions, Et cetera.
Regarding credit the Government recognizes that no
important progress towards increased production is pos-
sible unless funds are made available to this End.
Therefore
Regraded Uclassified
233
No. 692, May 3, 4 p. m., SEC. 2, from Paris. -2-
Therefore the relevant decree embodies measures to
facilitate advances to the ensemble of French Economy,
including Enterprises working for the state. Acceptance
of drafts is rendered obligatory. Present measures
Enabling state contractors to mobilize their credits
are reenforced.
It is explained that decrees providing for open-
ing of credits for special program of national defense
relate to measure proposed by the Blue Government but
which was never approved by Parliament, The credit
authorized totals 4,712,000,000 francs.
WILSON
EMB:NPL
Regraded I Jclassified
234
EDA
GRAY
PARIS
Dated May 3, 1938
RECEIVED 10 p.m.
Secretary of State
Washington
692, May 3, 4 p.m. (SECTION THREE).
Regarding decree for controlling foreigners in-
France, it is stressed thatmensures decided upon are
necessary for the security of the country, the general
Economy of France and the safeguarding of public order.
It is stressed, however, that decree in no way modi-
fies regular conditions of ACCESS into France, nor
modifies the traditional regulations of hospitality.
MERSURE provides notably that all foreigners staying
in France more than two months must obtain either an
identity or tourist card. Penalties in the way of fines
or imprisonment are provided for fraud practiced in
securing entry or for failing to procure necessary
card. All fortigners now in France must comply with
new law before May 31 next.
The decree providing for the Reinteg ratios of
credits into general budget involves about 8,000,000,000
francs,
The
Regraded Uclassified
235
EDA - 2 - #692, May 3, 4 p.m. from Paris Section three.
The final decree fixes the conditions under which
foreign tourists may obtain special cards Entitling
them to reduced prices for gasoline. The reduction
is 60 centimes per liter limit 20 liters daily and
maximum quantity of 600 liters.
According to the press the second series of de-
crees of the Daladier Government will bE issued next
WEEK and will principally concern strike statutes.
(END OF MESSAGE).
WILSON
NPL:EMB
Regraded Uclassified
236
JR
GRAY
London
Dated May 4, 1938
Rec'd 6 a.m.
Secretary of State,
Washington.
RUSH.
368, May 4, 11 a.m.
FOR TREASURY FROM BUTTERWORTH.
As instructed by telephone I conveyed to Phillips
late last night the message that no decision could bE
Expected for at least another twenty-four hours.
This morning's London press contains reports
from Washington of the conferences at the Treasury
and of the comings and goings of the British and French
representatives. This has contributed to an increased
pressure on the franc which has all the carmarks of
the beginning of a movement that will carry it towards
the 175 mark anyway.
As of possible interest there is quoted below
an EXCERPT from an aditorial in today's TIMES: "Most
of the financial problems would bE solved if the French
capital which has fled the country could bE Induced
to return and bE put to fruitful work in France. As
was
237
-2- 368, May 4, 11 a.m., from London.
was shown in Nonsieur Blum's memorandum no less than
80,000,000,000 francs has been sent abroad during the
past three years leaving a gap which could not bE
filled by the craation of new money since this was
spirited away as fast as it was created. There is thus
a vicious circle to break; capital is not likely to
return until business in France improves to the point
of providing opportunities for profitable -- and safe--
investment while business revival demands the investment
of capital. What is needed is an act of faith and this
can only bE EXPECTED as the response to bold and
comprehensive measures restoring confidence in the
future. The decrees now issued are no more than the
first step of the Government's programme. They SEEM
a most useful installment but it would bE premature to
attempt to estimate their Effect until the whole plan
is disclosed".
KENNEDY
DDM
Jclassified
238
MEMORANDUM 07 THE DAY'S ACTIVITIES
May 3, 1938
To:
The Secretary
From:
Mr. 'agill
1.
Extension of Los Angeles Experiment
After my conference with you I called Mr. Graves and
saked him to outline plans for a New York Settlement Unit similar
to the one which has been operating in Los Angeles, Mr. Graves
2025 ba would have his plans ready in E few days. Be will prepare
B. stallar outline for a unit at Chicago, He thinks, however,
that the two additional units ought not to be announced simul-
taneously.
2,
Chairmen Arundell of the Board of Tax Appeals
I gave Mr. Arundell the substance of your suggestion
list M see the President regarding the reappointment of members
of the Board whose terms are about to expire. Arundell is doubt-
ful about the desirability of speaking to the President in view
of the fact that he bimself is one of the four men whose terms
expire. I made it clear to hin that since the Board was an in-
dependent agency and he is Chairman of it, he should consider
bether he does not owe an obligation to his fellow members to
present the matter of reappointments to the President.
3.
Mr. William S. Dana
I have a twelve page opinion from Mr. Oliphant on the
object of Mr. Dana's tax case, about which Mrs. Rocsevelt wrote
cludes you that the action of the Internal Revenue Agent at Brocklyn, M.Y.,
to in February and again on April 13th. Mr. Oliphant con-
was correct in proposing additional income taxes on account of the
incore and capital gains of a certain trust. The facts are them quite
Involved and 30 is the law applicable to them. Do you want
superized for Mrs. Roosevelt; or de you think that B. general letter and
is anough, indicating that Mr. Olighant has gone into the case
assures you that it has been correctly handled.
Pm
Uclassified
MEMORANDUM OF THE DAY'S ACTIVITIES
May 4, 1938
239
To:
The Secretary
From:
Mr. Magill
1. Legislative work
Mr. Oliphant and I discussed the reorganization of the tax legis-
lative work occesioned by Mr. Kent's resignation. I should like to
discuss the proposed set-up with you at your convenience. Our thought
is that Mr. Tarleau should head E. small group of men to work on the
major questions of tax legislation, and that the routine and detailed
questions should continue to be handled by the Legislative Division
in the General Counsel's office. Mr. Tarleau and his group will work
under my immediate supervision. The Treasury tax regulations will con-
tinue to be prepared by the Legislative Division, but will pass through
Mr. Tarleau for his approval before they are presented for signature
to you or myself.
2. Economic research and taxation
Mr. Blough has spent the greater part of the day with Mr. Shoup
reviewing plans for the reorgenization of the tax research work. I
goont some time with the two men also, suggesting some major problems
to be considered. Mr. Blough will be here tomorrow morning if you
could find time to see him.
3. Other callers
Mr. Basil O'Connor called to ascertain the present state of the
commitics tax and proposes to submit additional memoranda this summer.
Mr. Joseph Burns, who successfully prosecuted the tax fraud case against
the attorney and accountante for Ringling Brothers Circus, came in to
discuss the problems he ran into. Mr. James M. Nicely, Vice President
of the Guaranty Truet Company, believes that consumption is now out-
running production in a number of industries and that there is a reasonably
good chance of an upturn in three or four months from now. He had had
lunch with Tom Corcoran who told him that he had managed the successful
campaign of Senator Pepper in Florida; and that he did not think the
spending program would materially assist in promoting business recovery.
fim
Regraded Uclassified
240
MEMORANDUM OF THE DAY'S ACTIVITIES
May 5, 1938
To:
The Secretary
From:
Mr. Magill
1.
The Tax Bill
The Conference Committee this morning went over.
the more troublesome amendments of the tax bill. One amend-
ment, a very difficult one affecting inventories, remains
to be drawn. The Conference Committee will meet again
Saturday morning to conclude its work. Senator Harrison hopes
to take up the Conference Report in the Senate on Monday.
Rm
Regraded Uclassified
241
MAY a 1998
My dear Mr. Attorney Generals
Receipt is acknowledged of your letter of April 29,
1938, enclosing draft of a proposed bill in equity against the
City of New York for the specific performence of an agreement
with the City in connection with the acquirement of the now
post office site in New York City and the vecating of the old
post office building, together with a copy of the proposed
stimulation in such suit.
I desire to advise you in behalf of the Director of
Procurement and myself, that the stipulation submitted is
satisfactory to us and that we will carry out its terms as to
the sale of the old building if the stipulation La entered into.
Very truly yours,
(Egred) H. Bleegenthan, It.
Secretary of the Treasury.
The ticnersble,
The Attorney General of the United States.
TAX:VIS - 5-2-30
Regraded Uclassified
242
May 3, 1938
SMALL HOME MORTGAGE INSURANCE
During the week ending April 30, Mortgages Selected for Appraisel
with one small office not reporting, numbered 4,877 amounting to
$22,349,695. For the corresponding week of 1937, 3,613 Mortgages
were Selected for Approisal amounting to $15,224,773. for the past
week approximately 52 per cent, or 2,518 mortgages covered new
homes to be constructed, and during the week construction was
started on 1,601 new smell homes.
LARGE SCALE HOUSING PROJECTS
The attached table gives the status of insurance of Large Scole
Housing Projects as of April 30, showing 18 projects valued st
ap roximately $19,000,000 in operation; 20 projects valued at
$16,500,000 with loons closed and under construction; and 22
projects valued at approximately $25,000,000 with financing ar-
ranged If of that date. Two of this latter group are under con-
struction st the present time.
PROPERTY IMPROVEMENT LOANS
As of April 30, more then 2,100 lending institutions were re-
porting notes for insurance covering advances made for improve-
sent to existing properties or for now construction, and during
the week ending April 30, 8,047 notes for $3,918,790 were ac-
cepted for insurance. For the month of April, 28,117 notes for
$13,578,533 were reported and accepted for 1nsu ence.
Regraded Uclassified
243
FEDERAL HOUSING ADMINISTRATION
WASHINGTON, D.C.
WARREY TOLING or DETAILS OPERATIONS
For 1938 and correspending Period of 1927
HOME MORTGAGES SELECTED FOR APPRAISAL
1938
1937
Yesk Reding
Xa.
Ant.
Is.
Jan. 8
1,256
$ 5,483,164
1,967
$ 8,555,650
e
15
1,504
6,531,200
2,286
9,566,850
-
23
1,711
7,299,975
2,167
9,447,137
.
29
1,888
8,160,840
2,372
10,091,713
Feb. 8
1,982
8,571,895
2,306
9,721,165
e
12
1,988
8,787,105
2,701
11,068,008
.
19
2,219
10,025,800
2,765
11,764,009
# 26
2,775
13,100,250
2,835
11,747,964
Mar. 5
3,099
17,613,402
3,244
13,685,800
.
12
4,470
20,386,711
3,405
14,176,560
.
19
4,697
21,293,061
4,085
16,879,710
e
as
4,863
22,568,219
3,476
14,970,048
Apr. 2
4,713
21,414,849
3,617
15,366,435
-
9
5,037
23,242,102
3,516
15,414,023
-
16
4,485
20,388,480
3,481
15,296,425
-
R
5,076
32,994,647
3,796
16,027,136
e
30°
4,879
22,349,595
3,613
15,234,773
. One laswing office report not received.
Regraded Uclassified
1 244
FEDERAL HOUSING ADMINISTRATION
WASHINGTON, D.C.
VISITY OF STATEMENT
for 1830 at carresponding Period of 1937
MONTGAGES ACCEPTED ZOR INSURANCE
1930
1952
Yesk Inding
à
à
jm. 8
943
# 4,035,500
1,463
$ 5,821,275
- 15
1,101
4,542,900
1,756
7,341,015
. 22
1,058
4,445,500
1,767
7,438,500
# 29
1,329
5,501,500
1,880
7,660,250
Feb. 5
1,099
4,431,000
1,811
7,434,100
-
12
1,172
4,649,900
1,778
7,410,850
#
19
1,194
4,837,100
1,869
7,702,650
. 36
1,033
4,350,200
1,867
7,524,500
Mar. 5
1,589
6,905,400
2,291
9,092,600
e
12
1,905
7,601,400
2,135
8,947,600
- 19
1,883
8,288,400
3,388
9,781,500
# 26
2,290
9,995,200
2,497
10,296,300
47. a
2,642
11,601,700
2,602
10,856,298
.
9
2,967
12,703,400
2,698
10,661,685
. 16
3,256
14,330,625
3,660
10,919,110
.
23
3,751
16,514,000
2,922
12,069,160
. 30°
3,497
15,636,300
2,861
11,800,100
- One insuring effice report not received.
Regraded Uclassified
245
RODDING MORTHAGES COMMITTED
Commletive through April 30, 1111
RAME OF PROJECT
NO. OF
STATUS
LOCATION OF PREMIUM
FAMILY
CAPITALIZATION
une
ANOUNT 8 MARTGAGE
in Operation Projects Desplated
City
State
000-00001
Cologial Village, Ins.
Arlington
Va.
000-00002
Colonial Village, Est.
276
Arlington
I 1,188,600
é
$ 275,000
000-00005
Falkland Properties, Ins.
$
silver Oyetag
1,00,000
M.
1,440,000
000-00006
Colonial Village Miltim
178
Arlington
1,100,000
Va.
$40,000
000-00008
Inventment Village
256
Waskington
105,000
D.E.
TES,000
000-00006
Palkland Addition
421
Bilver Hyring
2,090,000
M.
1,860,000
000-00007
fermil Buskinghes Community
501
Arlington
1,010,000
è
1,228,000
000-00008
Pirst Community
1.60
Arlington
449,022
7a.
$28,000
062-00001
Bousing Ca. of Dundalk
810
Bultimore
2,230,000
M.
1,885,000
023-00001
272
Odsopes Palle Bouring Carp.
1,084,488
Fulls
Mass,
800,000
1M
160-00001
Chester Crest
Plantmont
277,000
D.T.
190,000
034-00001
Ela Terms
279
Tork
1,802,340
1,180,000
è
45
033-00001
Mediville Housing
Modwills
185,344
é
141,000
202
048-00001
Country Club Apartments
Oreanshere
1,008,000
N.C.
800,000
or
053-00002
University Apartments
Durham
671,000
285,000
N.C.
114
073-00001
Linwood Oulunial
Indianapelia
655,000
Lad.
800,000
$9
003-00001
Drawn True Manor
200,000
189,000
is
265
052-00001
Crossett Bousing
1,397,000
Crossett
1,000,000
Art.
199
18
440,124
220,000
4,224
$14,570,800
Loans Closed - =Under Conftruction
000-00010
Third Community
Arlington
Va.
200
062-00002
Dreams Lending
$ 641,500
$ 850,000
Amapolis
á
BE
052-00008
sorthwood
560,000
290,000
Mitians
Mil.
300
031-00001
1,607,600
Mostivey Court
1,480,000
Known
ked.
ETO
140-00005
1,315,000
Garth Limited Div.
1,008,000
Searedale
N.T.
160
150-00004
1,010,000
Ingrook United Div.
778,000
Scaredale
N.Y.
188
018-00001
TFT,000
Second Gardes by
$20,000
Jackson Beights
N.Y.
230
034-00008
1,081,000
Marberth Apartments
$50,000
Brookline
¿
114
061-00001
549,000
Lisited Dividend Rensing
430,000
Atlanta
Ga.
174
086-00008
800,000
Myrtis Apartamote
440,000
Charlotte
N.C.
72
600,000
058-00004
Twin Castine
200,000
B.C.
124
660,000
042-00007
Maleigh Apartments
400,000
Raleigh
N.C.
lls
TRO,TOO
058-00008
575,000
Courts
Raleigh
N.C.
147
TOB,000
051-00001
580,000
Gilmour Courte
Yes
158
620,500
680,000
DTL-00001
Granville-Soyne
Chicago
ni.
196
977,700
150,000
073-00002
lieu Altergy Housing
slave Albergy
Ind.
NO
180,000
180,000
072-00003
South Licered Colorial
Intianapolis
Ini.
as
$24,200
200,780
085-00001
Mechassett Village
St. Louis
M.
554
8,016,000
1,600,000
112-00001
Cole's Maner
Dallas
in.
98
$32,771
300,000
114-00001
liver Cabe
in.
134
720,000
$11,000
20
TOTAL PREMIUM PAYING
se Projects
$27,144,750
Financing Arranged
017-00001
Forest Curporation
Bartford
Com.
52.
$ 150,500
$ 16,000
+000-00009
home
Greenhelt
M.
10
40,750
$8,000
031-00002
General learney
Energey
I.J.
109
648,000
$10,000
011-00003
English Village
Creaford
12.
(H)
58,000
475,000
031-00004
Linden Housing
N.J.
204
1,200,000
150,000
031-00006
waleigh Corp.
Atlantic City
B.d.
87
280,000
180,000
014-00001
Grandyle Village
Buffalo
N.T.
289
1,074,000
1,480,000
016-00002
Third Garden by
Beights
N.Y.
270
1,805,000
1,100,000
018-00008
Quanna Boulevard
Lamp Island
N.Y.
S40
2,992,000
1,300,000
*140-00008
*Clanwood Apartments
Toolover
N.T.
307
1,780,000
1,580,000
100-00005
Larchmont Ourdane
Laratment
a.T.
384
1,175,000
1,650,000
034-00003
49th Street
Opper Darly
è
48
1,900,000
1,480,000
034-00004
Park Place
Barrialung
è
117
495,000
580,000
034-00005
fail Some hayors Carp.
Philodelphia
è
118
$20,000
600,000
034-00008
Margate Housing
Upper Darly
Pa.
DR
194,075
101,000
050-00009
Macrywood
0.00 Paint
B.C.
$
807,000
138,000
052-00002
Lardment
surfell
7a.
172
818,000
653,000
051-00003
Court
Bilmi
è
M
411,000
$20,000
051-00004
Reterview Apartments
Pertamenth
é
TO
802,000
140,000
043-00001
Larraque Clastangy Villap
Columbus
Ohio
$60
1,480,000
1,000,000
111-00001
Glass Gardess
Les Angeles
Callf.
1,040
3,800,000
3,800,000
127-00001
Medison York Bouning
Seattle
Tesh.
304
1,640,000
1,000,000
22
5,156
$26,002,725
$19,247,000
Additional Conditments
=
$10,184,600
TOTAL COMMITMENTS tasue
# Projecte
. Construction com to promote.
Includes I project for $1,180,000 refinemed.
Division of -
Instudes 1 project under restruction
Operatdag Statistics Section
No. kg special
Uses
Uclassified
246
WEEKLY VOLUME OF HOME MORTGAGES SELECTED FOR APPRAISAL
AMOUNT REPORTED BY INSURING OFFICES AT END OF EACH WEEK
MILLIONS OF DOLLARS
MILLIONS OF DOLLARS
30
30
1938
1937
25
25
20
20
15
15
10
10
5
5
o
0
B
15
VIA
NO
5.
12 19 36
5
12
IS
25
AP
9
16
23
30
7
14
as
28
.
If
18
25
e
9
is
23
30
6
a
20
27
3
10
IT
=
I
e
16
22
29
5
12
19
as
3
io
17
=
31
JAN
FEB
MAR
APR
MAY
JUN
JUL
AUG
SEP
OCT
NOV
DEC
Regraded Uclassified
247
RE: BANK EXAMINATION POLICY
May 3, 1938.
11:00 A. M.
Present:
Mr. Taylor
Mr. Gaston
Mr. Upham
Mr. Davis
(Federal Reserve Board)
Mr. McKee
IT
"
n
Mr. Paulger
#
BY
"
Mr. Crowley (F. D. I. C.)
Mr. Smythe
11
Mr. Nichols
"
Mr. Folger
(Comptroller's Office)
Mr. Diggs
"
"
Upham:
We have three major things that we discussed
every afternoon last week trying to get an agree-
ment on. The first one was with respect to the
treatment of the slow column which now appears
in bank examination reports, in which certain
loans in the bank are placed and classified; and
the problem there was whether to eliminate the
column altogether, whether to change the name,
or what to do with it; and we got a majority
and a minority report on that, which are the
first two documents that you have. I think,
perhaps, to place the two positions before you,
I might as well read those.
"The majority agreement with respect to the
classification of loans is that the three columns
in the examination report now known as slow,
doubtful, and loss will be continued. Their
present form, and that of the instructions to
examiners as to the type of loan to be included
in each of the three columns, will remain the
same as at present. It is proposed to label
these three columns by the roman numerals I,
II and III. At the top of each page upon which
this tabulation occurs, there will appear the
roman numeral I and following it a definition
of the type of loan which is included in the
column; there will also appear roman numeral II
followed by the single word 'doubtful'; and
there will also appear the roman numeral III
followed by the single word 'loss'.
248
2
"Where there is & recapitulation of the columns
now known as slow, doubtful and loss, the same
device will be used, i.e., the use of the three
roman numerals as symbols with the accompanying
explanation of what is included under each. As
now, on the recapitulation page only the totals
in columns II and III will be included in figur-
ing the net sound capital of banks."
There's been a good deal of criticism of that
word "slow." In 1934, as a result of an examin-
ing conference, instructions were sent out to
examiners that "slow" doesn't mean slow. Since
then I think there's been some change in the
type of loan.
Davis:
May I ask a question, Mr. Secretary?
H.M.Jr:
Please,
Davis:
What do you mean by "a definition of the type",
after roman numeral I?
Upham:
That will - Mr. Folger and Mr. Nichols, who
constitute the majority in that case, are work-
1ng on a definition of just the type of loans
to be included in that column, and it conforms,
substantially, to instructions sent to examiners
in 1934, following this conference. That 1s,
the principal distinction being that they are
not slow loans. They are not to be put in
there because of their maturity - because they
have been renewed. They are loans that are
subject to criticism, - the quality of loans
rather than the maturity of them.
Now, the minority position on this slow column:
"The minority position with respect to the
classification of loans in the examination
report is that the column now known as 'slow'
should be eliminated from the pages upon which
it now appears and that provision be made else-
where in the report, under a heading 'Loans
Listed for Information or Comment,' or other
suitable heading, for listing, with appropriate
comment, not totaled and not included in any
recapitulation, such loans as the examiner feels
249
- 3 -
should be set out for the information of the
directors and proper officers of the bank, with
the clear understanding that such loans are not
being classified as doubtful or loss and are
not necessarily to be regarded as criticized
assets."
The majority had a feeling that generally speak-
ing, the majority of bank examiners put too
few rather than too many loans in the column
now known as slow. They believe that there
are 8 good many loans in banks which are not
properly classified as doubtful or loss, but
which should, nevertheless, be criticized.
They felt that bankers expect and want the
opinion of the examiner on this type of loan
and that the bankers expect and want a recapitula-
tion of the loans now included in the slow
column. They don't believe that good bankers
object to this classification practice except
the use of the word "slow" and they don't feel
that bankers are deterred from making good loans
by this classification.
The minority, on the other hand, felt that
bankers are deterred from making many acceptable
loans by reason of the practice of bank examiners
in classifying them as slow. They feel that
totally, this classification, in recapitulating
it, alarms bank directors unduly, and they make
the point that since all the assets of the bank
are rediscountable with the Federal Reserve,
that no loans other than those that are definitely
doubtful or loss should be criticized, and they
feel the inclusion of this slow column is
deflationary.
The third page gives you a little history of
the slow column in 1934, so far as national
banks are concerned. Twenty-seven per cent of
the loans were included in the slow column,
and then we had that bank examination conference
in which new instructions were sent out to
of loans in the slow column has declined materially
examiners, and you can see that the percentage
from twenty-seven to less than ten, while at the
same time the doubtful and loss have gone down.
250
4
MoKeer
Does that indicate to you that that's brought
about liquidation? by the different classifications and not
Upham:
Well, I
McKee:
Can any of you answer?
Folger:
Largely, I would say. Largely by the classifica-
tion, change in the
McKee:
the approach?
Folger:
Due in part to both, some liquidation, and the
change in the classification.
McKee:
All you've got to look at, Gus, is the total
of your loans outstanding.
Folger:
There were more in 1934. The total loans were
larger in 1934. I mean larger now than in 1934.
McKee:
You're comparing seven billion, seven hundred
forty million against eight billion, nine hundred
thirty-three million.
Davis:
Don't you think lots of loans were slow in 1934
than what was meant by slow in 1936? I mean,
don't you have to make some allowance - these
figures aren't as significant when you get
in the comparisons of the country, as they
appear to be prima facie.
McKee:
The thing we're talking about is more prevelent
in the smaller bank, and I do know that a lot
of those assets were refinanced by the Home
Owners' Loan Corporation, and a lot of other
Government financing, that eliminated those
assets from the portfolio, so your slow class-
ification has come - the shrinkage in it is
as much from liquidation and refinancing as
anything else, if a proper analysis is made of
it.
Crowley:
I don't think it makes any difference whether
it was twenty-seven per cent in 134 or twenty-
seven per cent now. I think, in general, that
your recapitulation program and your improvement
in assets did move into a better position, lots
251
- 5 -
of loans marked slow, and there's been & lot
of liquidation, but the thing that you're
getting at here is essential. Your old "slow"
column, presumably, was sort of a dumping
ground for slow assets and assets of an
unsatisfactory nature. Now what they are try-
ing to do is disregard the criticism of the
so-called slow item, but yet that's a good
item, as it can be paid, and that's what they've
tried to arrive at, and that's the reason
they are getting away from the word "slow" and
the definition will work out so that the
items included in item one will no longer be a
slow item - will be an item - not a bankable
item. That's what you're getting at, isn't
it, Gus?
Folger:
One that requires attention.
Crowley:
So that this analysis doesn't particularly get
at what we want.
McKee:
No, I'm not paying any attention to analysis.
Upham:
The tentative definition for that column.
H.M.Jr:
I'm acting as impartial Chairman. I mean, is
the Comptroller's Office going to sit there and
take that?
Folger:
I've just said that the instructions that went
out have cause a great many - since that time
a great many loans that were ultimately collectible
and had been classed as slow, they have since
been left out of the report of a great many
such loans.
McKee:
But your analysis wouldn't prove to you whether
the assets were still in the bank or not,
because if they are considered good you don't
list them.
Folger:
As long as they are collectible.
Diggs:
But before 134 they were in the slow column.
McKee:
That's right.
Diggs:
But they are not in the slow column today.
252
- 6 -
McKee:
You today. don't know whether they are in the bank
Davis:
That doesn't mean that is due solely - as this
table makes it appear.
Diggs:
Except that we don't know whether they are
listed today. We do know that we're two-
thirds column. less than we were in '34 on this slow
Davis:
We want to point out that that might be due
to something else, but we don't know.
McKee:
I just like to know where all the Government
credit has gone then, if it hasn't gone to
help some of these banks out.
Diggs:
It's gone into some of it, yes, but not all
of it.
Crowley:
I don't know if this argument has anything to
do with what we're trying to do anyhow. We
all know there is reason for amounts to be
charged off, and things like that; we know there's
been a recovery in certain types of collateral
loans that have put those loans in better shape,
but that's got nothing to do with what we're
trying to arrive at here.
Folger:
This work was done in 134 after the crash and
after the reorganization program was completed.
Upham:
If I may say a word, without taking sides,
John, the reason I put that in was not to
prove that the change that came in 1934 brought
about that reduction, but to indicate that
now, at the end of 1937, there isn't a
tremendous percentage of the banks' loans
classified as slow, and not so much validity,
perhaps, to the criticism of that column as
in 1934. That was my point.
McKee:
May I add, before you lose your chain of thought
that the figures that you are predicating your
nine-point-something percentage on, today are
reports of examinations. A lot were made prior
to this recession, see, so you don't know what
253
- 7 -
the new classification is going to look like.
Davis:
Mr. Chairman, may I make one point, without
extensive discussion, just in the form of a
question? Now if we don't question the state-
ment that was made, supporting the majority
position, that good bankers don't object to
the slow column and don't consider it retarding
their making sound loans - if we don't question
that, it won't be considered that there isn't
anything to be said on the other side, will
there, because I think in the Treasury - my
attention has been called to one study made in
the fourth district - the Cleveland district -
which shows that more than half of the national
bank reports indicated they did feel they're
still cramped by the use of the 'slow' bank
examination policy. I just want to make that
statement.
Diggs:
What is the report in the district in Chicago?
Did - what did it show? Did you study that
also?
Davis:
My attention was not called to that, but if
you wish to go into that you can easily get
those figures.
Upham:
What it shows has been a matter of some dis-
agreement in the meetings that we have had.
McKee:
It seems to me there are three differences -
shall we keep the column or eliminate it
entirely?
H.M.Jr:
Is that the only thing you have?
Upham:
Oh nol We have two other things. The fourth
page is the majority agreement with respect to
the appraisal of bonds.
"1. That depreciation in stock and defaulted
bonds be classified as loss and that securities
in these groups (III and IV) be listed and priced
in the report of examination." (The minority
does not disagree on that so far as defaulteds
and stocks are concerned.
254
- 8 -
II and in the fourth grade of general market
"2. That depreciation on securities in group
obligations in group I be deducted in the
report in computing the net sound capital
of the bank, and that securities in these
classifications be listed and priced in the
report of examination.
"3. That depreciation in all group I
securities except the fourth grade of general
market obligations be disregarded and that
these securities not be priced in the
report of examination."
List them but give no market price.
"4" That unrealized appreciation be not
allowed.
"5. That a premium on bonds purchased at a
premium be amortized."
Now, the minority position with respect to the
appraisal of bonds is:
"1. That only depreciation in stocks and
defaulted bonds be classified as estimated
loss, and that securities in these groups be
listed and priced in the report of examination."
That is in accordance with the views of the
majority with the exception of the word "only."
"2. That securities in groups I and II be
not priced, and preferably be not listed, in
the report of examination. A complete list
of all securities, however, should be attached
to the report of examination sent to the Super-
visory authorities.
"3. That depreciation, other than in stocks
and defaulted bonds, should not be taken into
consideration in computing 'net sound capital.'
On the other hand, it can not be affirmatively
stated that depreciation in any securities
constitutes sound capital. Therefore, the
minority feels that the schedule showing 8
computation of net sound capital be eliminated
from the reports of examination."
Uclassified
255
- 9 -
The majority. fourth and fifth are the same as the
H.M.Jr:
In both cases are the minority the same?
Upham:
In both of those cases the minority are the
same - the Federal Reserve. In both of those
cases the F. D. I. C. and the Comptroller's
Office are the majority.
Crowley:
Cy, will you explain just what the difference
is between the minority and majority, in your
own way.
H.M.Jr:
A good point.
McKee:
Can't we go through this report and come to
that?
Upham:
And the third thing we took up is the matter
of taking profits from certain securities and
impounding them in a special account where they
3
are unavailable for dividends. "The majority
agreement and in this case the majority
is the Federal Reserve and the F. D. I. C.:
"The majority agreement with respect to the
treatment of net profits from the sale of
securities 1s that until adequate reserves
against the securities account have been built
up, all such profits should be impounded and be
unavailable for any purpose other than to take
care of losses resulting from the sale of
securities."
H.M.Jr:
Who is the minority?
Upham:
The minority is Mr. Folger - Comptroller of
the Currency.
"The minority position with respect to the
treatment of profits from the sale of securities
is that:
1. Estimated losses should be charged off.
2. Banks should be required to establish
and maintain adequate reserves, includ-
ing reserves against the securities
account.
256
- 10 -
3. Banks should not be required to ear-
mark individual items of profit,
regardless of source.
4. Speculation should be severely
criticized and penalized."
H.M.Jr:
Before we get into the thing, may I thank the
gentlemen for the many afternoons' hard work
they put in, - and now, if you'll answer
Mr. Crowley's question.
Crowley:
In the first place, Cy, as I see this thing,
there is very little difference in the spirit
of what these three men have tried to agree
on. It's just a difference of how far we should
go. For instance, in the loss item, 'or the
slow item, there's no difference of opinion,
as I get it, as to what kind of an item ought
to be so-called "criticized" item.
What the Federal Reserve disagree with us on
is that they do not wish to carry that to the
final analysis of the condition of the bank.
They want to put that in the examination for
supervisory purposes, but not send that to the
Board of Directors.
Paulger:
That wasn't my position. We did expect to
put in the report another page which would
include these items. They were not to be
totaled because they would include other things
besides criticized items, but that would be in
the report of examination,
Crowley:
I would - do you mean
.....
Paulger:
Special items, or special comments.
McKee:
Criticized, not as to value maybe, but criticized
as to overloads.
Crowley:
But that is 8 criticized item, though, John.
McKee:
It is mentioned, to be brought to the attention
of the Boards for their consideration and dis-
posal.
Davis:
Not necessarily criticized.
Regraded Uclassified
257
- 11 -
Crowley:
As far as we are concerned, you can't have a
bank examination and not call this damned thing
as you see it. We're perfectly willing to
cooperate in and eliminate this slow item.
That's good. You can't hold a Board of Directors
responsible for the operation of a bank and
sue them for negligence and things of that
character unless you give them the complete
picture of the institution. We're perfectly
willing, and we are in accord, of sitting down
and working out a definition, but we do feel
that whatever criticized items are shown by
the examination, they should go to the Board
of Directors of the bank, that they may know
the situation.
Davis:
There's no difference on our part, of that
position. I think Mr. Paulger made that clear.
Crowley:
Then we're all clear on that.
Folger:
There seems that there is a difference there
to me - quite a difference. Mr. Paulger doesn't
agree to show any total of that class of paper.
Paulger:
That's right.
Folger:
- didn't want the report to show how much of
that classification of paper there is in the
bank.
Paulger:
May I say a few words on that?
H.M.Jr:
Please.
Paulger:
In the list of criticized assets are three
columns, slow, doubtful, and loss, and in the
recapitulation of criticized items are three
columns, the totals of slow, doubtful, and loss,
and the doubtful and loss columns are the only
ones that are used in applying, as a deduction
to the net sound capital position. In other
words, the slow column is included with the
slow assets, but is not used for any particular
purpose, other than to list them.
The bankers complained about this - having this
slow column included in the criticized assets
in the recapitulation, and to get away from
258
- 12 -
this criticism that - we think that these loans
can be listed on another page, not totaled and
not included. The objective would be the same;
there is nothing lost; the loans are all called
to the attention of the bank just as they were
before, but it gets away from the criticism
that has been made for years of including this
slow classification, and we feel that the
cange could be advantageously made to meet the
criticism and still the objective would be
reached.
Folger:
Where has this criticism come from that you
speak about?
McKee:
You (Folger) haven't heard of it?
Folger:
Very little of 1t.
McKee:
You find it mostly, Mr. Comptroller, from the
smaller banks throughout the country.
Folger:
You don't have many of them.
McKee:
I think I knew a little about banking before
I went on the Federal Reserve Board.
Folger:
The Federal Reserve doesn't have so many of them.
Paulger:
Of course, that's been criticized for years.
It hasn't been just for the last two or three
years.
Crowley:
We're all agreed, then, that we're going to
eliminate
McKee:
No, we don't agree. Don't fool yourself, and
don't try to fool me - you're talking one thing
and writing something else, Leo.
Crowley:
But John, if you can't believe your examiners
are going to carry out the spirit in which you
agree here - they won't carry out the thing
you agree to .....
McKee:
You can't rely on the spirit of the examiner.
You've got to be more specific than in the
past in giving instructions to the examiners.
Regraded
Uclassified
259
13 I I
Mr. Paulger, please - that the word 'slon'-
changing the word 'slow', 1f the column is to
stay in, is advantageous, and what the majority
agreed upon, he'd go along with, if the column
is to remain. As the majority sees it, to
eliminate the slow column. put in an extra
page, simply means that the examiner would
use that page then as a catch-all; instead
of having twenty-seven per cent of the loans
listed in the report of examination as in 1934,
you have a gradual build-up of a great many
of the loans in the bank which we are trying
to eliminate now as presumably criticized items.
The whole thought
McKee:
You're trying to eliminate them, did you say?
You want to get them out of the bank?
Nichols:
We feel there are errors on both sides; that
a great many examiners are not putting in the
slow column what they should, and, on the
other hand, a great many examiners are putting
in the slow column 1tems they are not supposed
to - that are not slow and shouldn't go in that.
McKee:
John, don't you think, then, you're not putting
what you should in the doubtful column. Is
that what you're trying to get at?
Nichols:
No. Instructions are, when you have an examiner
and he can't make up his mind as to whether
or not there is a loss, it is doubtful. If
he's a lazy examiner and is going to use the
doubtful column just to hurry the examination
along, and not give the right values to it -
the doubtful column is never used except in
case of estates, litigation, certain technical
matters to the loan that he can't really
determine - rarely used except where the
examiner can not possibly determine the per
cent or the proportion of loss. Now, by the
same token, proposed by keeping this - keeping
this in, with the nomenclature changed, that
we will eliminate a great many items of the
banks that now have that word "slow," which
leaves the examiner and the banker to misunder-
stand what the loans are in that column. We
feel that for the examiner to sum up his find-
ings of the bank for the Board of Directors he
260
- 14 -
must tell him of the loans bordering on
"doubtful," of elements obtained in them, and
unless something is accomplished - done - it's
going to pass from that slow column which we
propose to name number one (I), into the doubt-
ful, and it must be maintained in order for the
examiner to really show the picture of the bank
he's examined, and the conscientious examiner
is going to do it anyway. And it certainly
should be summarized.
H.M.Jr:
All right
Nichols:
Have I stated our position?
Folger:
Yes, you have. We know from experience, that
the banks that become insolvent - ninety per
cent, or more, of such insolvency is caused
by an accumulation of poor assets.
McKee:
You could start back one step further.
Folger:
It could become solvent over night and the
examiner could classify it as doubtful or loss.
The bank - hardly any banker would make that
kind of B. loan. But when you get a report
showing nothing in the report except what the
examiner considers doubtful or loss, you can't
tell anything about that bank; you can't
determine the policies; you can't tell whether
it's a good bank, a poor bank, or one whose
policies are right or wrong.
McKee:
Outside of the confidence you have in the
examiner, you can't tell about the other
assets he doesn't list.
Folger:
If you don't know the examiner you can't tell
about that.
H.M.Jr:
What I'd like to do, gentlemen is this: I've
got this report Mr. Upham prepared - he said
it is not unanimous. I've asked certain people
to come in and study it, in the banking
business, and I'm going to get their advice
tomorrow. If it's agreeable to you people, I
wonder if you'd care to come back Friday
morning at eleven o'clock, and see if I'd be
able to travel the road and make up my mind -
Regi aded Uclassified
261
- 15 -
my mind is still open. These people are coming
in tomorrow; I'm going to put this thing up
to them and see what they think, and try to
get it across to them, and after they have
seen 1t, I thought that we'd report back to
you, what their advice is to me. Then we can
go over it again. Does that seem fair? Huh?
Now as I understand it, these rules and regula-
tions, as far as they go, really gets down to
the Comptroller's Office and the F. D. I. C.
I mean, they make the rules and regulations.
Is that right?
Folger:
(Nods "Yes.")
H.M.Jr:
And the Federal Reserve hasn't any rules and
regulations.
McKee:
As to what?
H.M.Jr:
As to bank examinations.
McKee:
Yes.
H.M.Jr:
Have you?
McKee:
Member state banks.
Upham:
Binding upon both national banks and state
member banks?
Davis:
That's as an investment - not as 8. procedure.
H.M.Jr:
Well, with that exception - I mean, if these
two people could get together - carrying out -
with the exception of state members, what two -
with the exception of the examinations, of
which the Federal Reserve is possible .....
Crowley:
Mr. Secretary, let me say, I know you're anxious
to get to your appointment. I think that there
is very little difference between the Federal
Reserve concurring with us here; if we could
sit down with them and let us iron this thing
out in our own way. We may have to have a
battle royal here but there's not very much
difference of opinion here that I think
eventually we can get together. And on the
securities end of the thing there is practically
262
- 16 -
no difference between the three of us; we are
practically in accord on that, Gus, with the
exception that we say - that Gus says he
doesn't want to earmark individual items of
profit, but he's for the adequate reserves,
and that is, practically speaking, what we're
all trying to get at, Mr. Secretary.
Folger:
There's very little difference there, with
the so-called profit on bond sales, but there
is a great difference, Mr. Crowley,
H.M.Jr:
May I interrupt just a moment. If you gentlemen
are so inclined to adjourn to Mr. Taylor's
room, I know that he'd be delighted to offer
you the services of his room, but I'm just
going to tell you, as far as I'm concerned, I
won't come to any decision until I have a chance
to talk to you gentlemen again, see? And if
it would be agreeable to come back
And if you fellows want to go into Taylor's
room and take your coats off, why, God bless
you.
Regraded Uclassified
263
The mjerity agreement with respect to the alassification
of loans is that the three columns in the examination report
now known as slow, doubtful, and loss will be continued.
Their present form, and that of the instructions to examiners
" to the type of loan to be included in each of the three
columns, will remain the same as at present. It is propesed
to label these three solume by the reman numerals I, II and
III. At the top of each page upon which this tabulation
occurs, there will appear the roman mineral I and following
it a definition of the type of loan which is included in the
column; there will also appear roman mmerel II followed by
the single word "doubtful"; and there will also appear the
roman numeral III rellowed by the single word "loss".
Where there is a recapitulation of the columns now known
as slow, deubtful and loss, the same device will be used, 10000
the use of the three roman numerals as symbols with the nooom-
each
panying explanation of what is included under that. As now,
on the recapitulation Dage only the totals in solumns II and
III will be included in figuring the net sound capital of
banks.
(It should be noted that this agreement would
result in the complete elimination of the
word "slow" from loan elassifisations.)
May =. 1938
Uclassified
264
The minority position with respect to the alassi-
fisation of loans in the examination report is that
the column now known as "slow" should be aliminated
from the pages upon which it new appears and that pro-
vision be made elsewhere in the report, under a
heading "Ieans Listed for Information or Comment", or
other suitable heading, for listing, with appropriate
comment, not totaled and not included in any recapitu-
lation, such leans as the examiner feels should be set
out for the information of the directors and proper
officers of the bank, with the clear understanding that
such leans are not being classified as deubtful or less
and are not necessarily to be regarded as criticised
assets.
may 8, 1938
Regraded Uclassified
ML 265
April 20, 1958
In 1954 with total leans in 5,275 national banks of
$7,740,596,000. mational bank examiners classified 87 per
cast is the slow column.
In the last half of 1937 with total leans is 5,267
national banks of $5,933,216,400, national bank examiners
classified only 9.81 M cont in the slew column.
is
Year
Slow
Doubtrul
Less
1934
87%
w
2.9%
1985
16%
X
.8%
First half of 1987
10.68%
1.14%
.68%
last half of 1957
9.61%
1.06%
499
Regraded Uclassified
in
266
The majority agreement with respect to the appraisal
of bonds is
1. That depresiation in stock and defaulted
bonds be classified as loos and that
securities in these groups (III and IV)
be listed and priced in the report of
examination. (The minority doos not
disagree on this point.)
2. That depreciation on securities in
group XX and in the fourth grade of
general market obligations in group
I be deducted in the report in son-
puting the net sound capital of the
bank, and that securities in these
elassifications be listed and priced
in the report of cramination.
3. That depresiation in all group I
securities except the fourth grade
of general market obligations be
disregarded and that these securities
net be priced in the report of oxas-
instion.
4. That unrealized appreciation be not
allowed.
8. That a prenium on bonds purchased at
a premium be amortized.
Regraded Uclassified
267
The minerity position with respect to the appraisel
of bonds is
1. That only depresiation in stocks and
defaulted bonds be classified as us-
timated loss, and that securities in
these groups be listed and prised in
the report of examination. (This is
in accordance with the views of the
majority.)
2. That securities in groups I and II be
not priced, and proferably be not
listed, in the report of examination.
A complete list of all securities,
however, should be attached to the
report of exumination sent to the
Supervisory authorities.
3. That depresiation, other then in stocks
and defaulted bonds, should not be taken
into consideration in computing "not
sound capital." On the other hand, it
can not be affirmatively stated that
depreciation in any securities constitutes
sound sapital. Therefore, the minority
feels that the schedule showing a comple-
tation of net sound capital be climinated
from the reports of examination.
4. That unrealised approciation be not
allowed.
B. That a premium on bonds purchased at
a premium be amortized.
May 2, 1985
Regraded Uclassified
263
The majority agreement with respect to the
treatment of net profits from the sale of securi-
ties is that until adequate reserves against the
securities account have been built up, all such
profits should be impounded and be unavailable
for any purpose other than to take care of losses
resulting from the sale of securities.
May 2, 1958
Regraded Uclassified
. 269
The minority position with respect to the treatment
of profits from the sale of securities is that
1. Estimated losses should be charged
off,
2. Banks should be required to establish
and maintain adequate reserves, includ-
ing reserves against the securities
account.
3. Banks should not be required to carmark
individual items of profit, regardless
of source.
4. Speculation should be severely criticised
and penalized.
May 2, 1938
Regraded Uclassified
270
Pay 3, 1938.
Er. Tayler
Mr. White
Subjects Poland
Summary
1. Economic Situation
Area and population. The area of Poland is 150,000 square miles, or
almost that of California.
The population of Poland continues to increase rapidly. It is now
34 million and 10 increasing at the rate of one-half million & year.
Over two-thirds of the population is engaged in agriculture. Ons-
third of the population consists of minorities - Ukrainians, Jess, Rus-
sians, Germans - and sustained attempts to Polonise them have not been
very successful.
Poland is fairly rich in natural resources but the national produc-
tivity 1s extremaly low. Fifty percent of the land is arable; 22 percent
is under forests and 18 percent is pasture land. She is predominantly an
agricultural country. The land is fertils and rich in timber. Poland 16
also fairly rich in mineral resources, being a large producer of coal,
lead, sinc, salt and potash, having sisable reserves of oil and iron ore.
She produces no gold and little silver. She has to import cotton, wool,
hides, copper, rubber and other tropical products. Lack of capital no-
tards her industrial development and the exploitation of her natural No-
sources. The social and economic organization of agriculture is extremely
backward, and the standard of living 10 extremely low, her national income
in 1929 being under $3 billion.
Recovery w alow in coming to Poland: the depression lasted for six
years and was intensified 1.5 the pursuit of a deflationary policy.
There are no signs of a recession yet. Industrial production and the
volume of foreign trade continue to rise and unless the world economic
situation deteriorates in the near future there is DO reason to expect any
change for the were.
Esport prepared eldefly by 8. Adler
Edited by n. D. White and E. classer
5/3/38 - Original to Mr. Taylor.
Regraded Uclassified
271
97. Taylor - 2
Why did not Foland devalue during or before 1936? Foland is
the only mmber of the gold bloo which had not devalued at the end
of 1936. In spite of the heavy drain of gold, considerable social
unrest and the importance of her foreign trade to her, Poland refused
to devalus, largely because
(a) She had already taken steps which were partially effective
substitutes for devaluation such as introduction of exchange
control, suspension of foreign debt service, export subsidies
and clearing agreements;
(b) Poland had already carried through a sharp and painful
process of deflation, the advantages of which it did not want
to forego;
(c) The disastrous experience of previous inflations
1919 and 1923-1924 - enhanced the fear of devaluation and
made it politically difficult;
(d) The world recovery in agricultural prices was rapidly
diminishing the strain on the Polish economy.
Poland's gold and foreign exchange holdings fell by 70 percent
from the end of 1929 to July 1936, when they reached a low point of
374 million sloties. This decline is due to the withdrawal of foreign
and domestic capital and a series of unfevorable balances of payments.
Since then the Bank of Poland's position has improved and it now has
456 million sloties ($86,200,000) of gold and foreign exchange. In
addition there is reason to believe that the Government has concealed
gold resources held at the disposal of the army.
The sloty exchange rate is stable with narrow limits at 18.9 cents.
Prior to our devaluation the sloty was worth 11.2 cente. Notes in cir-
culation and hank deposits have both risen steadily in the last three
or four years, but are not unduly expanded.
Poland, despite 8 curtailment of expenditure of over 25 percent
and its rigidly deflationary Dolicy, only succeeded in balancing its
budget in 1936. Budgetary expenditures for 1936 and 1937 averaged
about 2.3 billion sloties per s'nus. Almost half these expenditures
were on areaments.
Poland's foreign trade declined by 66 percent from 1929 to 1934,
but has since experienced a considerable revival. Poland's balance of
less 80 as the progressive industrialization of the country and the
trade, which was customarily favorable, is tending to become less and
development of the areasent industry in the "triangle" involve heavy
importations of capital goods and machinery.
272
Mr. Taylor - 3
United States trade with Poland 1a of negligible significance
to WIII but constitutes almost 10 percent of Poland's foreign trade.
Preliminary conversations for a trade agreement are continuing, though
serious obstacles erist.
Poland's balance of payments 1s characteristic of that of a debtor
country and her net adverse balance for 1934 and 1935 was over 100 mil-
lion sloties which was set by transfers of gold and currency. Owing to
the strain on her economic position, Poland adopted exchange control in
April 1936 and suspended foreign debt payments in June 1936.
United States-Polish balance of payments for 1937 vas unfavorable
to Poland by about $2 million. Poland is not meeting its full interest
obligations to the United States. (American holdings of Polish dollar
bonds are estimated at $68,000,000.)
What are Poland's economic prospects? Poland's economic welfare
ie largely tied up with the course of world agricultural prices and the
possibilities of war in Europe. is long as world agricultural prices
are maintained, Poland's economic position is comperatively secure. But
the long run prospects are not encouraging. Poland needs foreign capital
but will have increasing difficulty in obtaining it because of (a) the
general political uncertainty, (b) Poland's bad record in seeting debt
obligations, and, (e) her policy of nationalizing or turning over to her
nationals foreign investments in Poland.
2. Political Situation
The Polish political system 18 a dictatorship, tempered by mild
and Innocuous doess of democracy. The President's powers are as broad
as those of the 90jm but the most powerful single person in Poland is
not the President but Migly-Ryds, the Inspector-General of the Army.
Is the internal political position stable? Not very, The existence
of a large body of unemployed in the city and of land-bungry, impover-
taked and indebted peasants in the country is not conducive to political
stability, but there 18 no reason to expect any rapid change for the worse.
last year the National Unity Movement, which ns then pro-Pascist in
character, was launched in order to concentrate all political activity
within one pro-Goverment party. Dat it failed to obtain popular support
and has since been reorganized, on a more moderate basis. The two chief
parties of the opposition, the Peasants' Party and the Socialist Party,
function under a large number of legal restrictions.
Poland is in an extressly vulnerable position from & military point of
view, It lies across the great eastern European plain between Germany and
Russia. of its 3,500 miles of land frontier, 1,000 miles border Germany
and 800 miles, Russia. Its heavy industries are especially exposed to
attack in care of var, being concentrated in Upper Silesia on the German
frontier. She 10 surrended on all cides by countries which are potential
memies and st best lukevare friends.
273
Mr. Taylor - &
What are Poland's relations with France? From 1921 the Prance-
Folish Alliance van the mainstay of Poland's foreign policy. Put the
vacillations of French foreign policy in the last for years and the
increasing strength of Cermany have weakened Poland's tiee with France.
Poland obtained - loan of $121 million from France in 1936 to be ex-
pended on rearnaments. Nonetheless, future developments may compel
her to abandon the political conditions probably attached to the loan.
Poland now has non-aggression pacts with its two most power!ul
neighbors, Gergany and Russia. The pact with Germany was concluded in
1934 and the one with Russia, in 1932. Prior to the consumention of
these pacts her relations with both countries had frequently been
strained. One of the terms of the Versailles Treaty, which it had
particularly shjected to, was the creation of the Polish corridor and
the subsequent treatment of the German minority in Poland had only
served to exacerbate German sunceptibilities. Relations with Russia
had been even more distant. Poland had only averted defeat in its
war with Ruesia in 1921 as a result of last minute French assistance,
and the activities of the Communist International constituted a porma-
nent threat to Poland's internal stability.
Put circumstances are such that it is becoming extremely difficult
For her to develop and maintain cordial relations with both countries.
Poland has been steadily drawing closer to Comany since 1934.
The conclusion of the non-aggression pact marked a turning point in
Polish Foreign policy. Poland, like Germany, has refused to partici-
pate in multilateral agreements, because it is opposed to the freezing
of the status que. It has settled many of its outstanding issues with
Germany. Its present Foreign Minister, Colonel Josef Back, is notor-
iously anti-Russian and anti-French and pro-Nasi. In recent years
Poland has been pursuing a policy parallel to that of Germany with re-
spect to Csechoslovakia, with which country its relations have become
increasingly embittered.
Tet there is also evidence pointing in the opposite direction. It
is hardly likely that Poland would have received 80 large & loan from
France (1936) without & pledge that it would not be used against France's
allies, though the pressure of events may obviously vitiate the pledge's
effectivement. Dansig, the minority question, and certain economic 100
suss are still outstanding points of difference between Termany and
Poland. Above all, the expansion of Germany is a threat to Poland's
very national existence.
274
the Taylor - 5
Why did Poland force the resumption of diplomatic relations with
Lithuania this March? Since the Polish seigure of Vilna in 1920 there
have been no diplomatic relations between Poland and Lithumnis. The
most obvious explanation of this Polish action vis-a-vis in Lithuania
16 that she was exploiting the general political uncertainty in Europe
arising from the Cerman invasion of Austria. None of the great powers
were willing to assert enough pressure to deter Poland. Thether this
action WAS carried out with or without Germany's tacit consent cannot
be known for certain, though the former appears plausible.
That is Poland's foreign policy likely to be in the near future?
Prom every point of view it is to the interest of Poland that peace be
preserved. But as the possibility of war between Germany and Russia
increases, Poland must decide what her policy will be in the event of
such war. If, as appears almost certain, England makes no consitment
with respect to Eastern Europe and the Franco-Soviet pact is weakened,
then Poland will be on the side of Germany.
Can Poland oursue an independent policy? Probably not, especially
if she is to continue an aggressive policy which requires the support
or at least the tolerance of Germany and/or Russia. As Russia is for
the present interested in the preservation of the status quo, an aggres-
sive policy on the part of Foland therefore involves greater cooperation
with Germany.
The choice which confronte Poland 16 extraordinarily difficult. It
is not sufficiently powerful to keep too peace between its two neighbors
and will inevitably be involved in any conflict between them. Whichever
side she chooses, or whoever is the victor in a Russo-German war, her
independence will be threatened.
Its decision as to which side she will support on the coming conflict,
therefore, will be dictated first and foremost by the final alignment of
forces on each side.
275
POLAND
I. Recommic Signation
or almost that of California.
Area and Population, The area of Poland is 150,000 equare miles,
Its population is 34 millions, with the enormous rate of increase
of half a million per annon, or 14 por thousand. Its birth rate 18 one
of the highest in Europe. In 1936 it was 26.2 per 1,000 and the death
rate 14.2. Both rates have fallen significantly in the last ten years,
The death rate, however, fell by only 15 percent as compared with a do-
cline of almost 20 percent in the birth rate, Almost 70 percent of the
population 1a engaged in agriculture and 25 percent, in wining, manufac-
turing and the distributive industries.
Not more than two-thirde of the population is Polish. The leading
minorities are Ukrainians, Jews, Russians and Germans. Though serious
attempts have been made to Polonize the minority groups, 80 far their
attempts have had small success. These groups were not originally on-
thusisetic about their incorporation in Poland when Poland was revived
as a political entity, and the subsequent policy and practice of the
Polish Government have searcely tended to strengthen their allegiance.
Should war break out some of the minority groups - though by no means
all - could not be depended upon to remain loyal to the present Polish
Government.
Poland is fairly rich in natural resources. Fifty percent of its
land 18 arable, 22 percent is under forest, and 18 percent is pasture
land. The land is fertile and rich in timber. Foland 18 also fairly
rich in mineral resources, being & large producer of coal, lead, sine,
salt and potash, and having miseable reserves of oil and iron ore. She
has to import cotton, wool, hidee, copper, rubber and other tropical
products. Foland produces no gold. Silver production, which amounted
to over half a million ounces in 1930 and 365,000 ounces in 1931 has not
exceeded 100,000 cunces since, being only 25,000 ounces according to the
Director of the Mint's estimates in 1936. This drop 1s explained by the
severe fall in the production of lead and sine, of the wining of which
silver is a hy-product, which is still way behind 1929 levels.
But owing to a lack of cardtal its natural productivity is extremely
low. The standard of living 10 miserably low. Its peak national income
was reached in 1929, when it THE 26 million sloties, which at the then
prevailing rate of exchange was scarcely 13 billions. (According to the
estimate of the German Virtschartdienst, however, it was only 17.4 bil-
lions.) In 1932 it fell to 14 billion sloties, and while there has been
considerable recevery in the last two or three years, 1929 levels have
1/ Report prepared chiefly by 8. Adler
Edited by 8. D. White and H. Glasser
276
- 2 -
not yet been regained. The lack of capital seriously retards her Indus-
triel development and the exploitation of her natural resources.
It 18 predeminantly an agricultural country, Polant 10 & large pro-
ducer of wheat, rye, barley, eats, potatoes, bests, flax and neat products.
The vast majority of the farms are small and the distribution of land is
extremely mequal. Almost two-thirds of the total mumber of farms are
under 13 acros and almost 90 percent under 25 acres. Forty-five percent
of the land is owned by .6 percent of the farmers and only 15 percent of
the land by 65 percent. Though some attempts to bring about a more
equitable distribution of the land and to raise farming standards have
been made, the social and economic organisation of agriculture remaine
extremely backward. The large landomers still constitute one of the
dominant political influences in the country.
Poland's leading industries are timber, textiles, steel and the nin-
ing of coal, iron ore, potash, lead, sinc and petroleum. Poland has
19.8 million acres of forest, and produces 760 million cubic feet of us
ber per year. She is a large exporter of timber, paper and furniture.
The textile industry, employing over 130,000 workers, is the largest single
employer of labor. Poland produces about 30 million tons of coal a year,
about a third of which is exported. with an annual sine production of
about 100,000 tens, it produces 10 percent of total world output. Steel
production 1s about one million tons per annum and crude oil output 500,000
tons per annum.
The most important recent development in Polish industry was the
passing of the National Development Bill in February 1937, anthorizing
the Government to spend 2.4 billion zloties in the next four years on
military, industrial and economic schemer. The most spectacular feature
of this plan is the contemplated transference, for strategic reasons, of
large segments of important national industries to the so-called "tri-
angle". (See amp.) The center of this area 10 to he Sandomiers at the
confluence of the San and the Fistula.
Poland's foreign trade declined by 66 percent from 1929 to 1934, tet
has since experienced a considerable revival, despite its failure to de-
value, Exports for the first two months of 1936 show a slight decline
and imports an increase of nearly 25 percent on the first two months of
1937.
Regraded
277
- 3 -
Polish Foreign Trade
(In millions of alotise)
Exports
Imports
Export Surplus
1929
2,813
3,111
1930
- 298
2,433
2,246
+ 187
1931
1,879
1,468
+ 411
1932
1,084
862
+ 222
1933
960
827
. 133
1934
975
799
4 176
1935
925
861
+ 64
1936
1,026
1,003
+ 23
1937
1,196
1,254
- 58
Jan.-Feb. 1937
191
172
- 19
Jan.-Feb. 1938
176
213
- 36
The tendency for Poland's trade balance to become increasingly un-
favorable was maintained in the first two months of 1938, when the excess
of imports was 36.3 million sloties as compared with an excess of exports
of 18.2 million aloties for the same period in 1937. The progressive
industrialisation of the country has entailed an increasingly large In-
portation of capital goods, which has absorbed most of the favorable
trade balance of previous years.
Poland's exports consist chiefly of raw materials, and to E much
lesser extent of manufectured goods. Her most important exports are:
Winderal products, chiefly coal, sinc, rye, barley, bacon, timber and
metals.
Recovery
in
exports
in
the
Poland - Imports by Selected Commodities, 1934, 1936 and 1937
(In thousands of sloties)
1934
1936
1937
Total exports
975,342
1,026,246
1,195,551
Mineral products
210,397
171,598
233,463
Food, cork, and mfre., and
basket work
179,624
165,312
201,584
Vegetable products
168,459
209,291
139,803
Common metals and afrs.
115,504
96,985
138,252
Animals and animal prede.
139,181
178,362
204,244
Textiles and afre.
54,317
71,760
89,400
Prepared foodstuffs and
tobacco
33,453
56,046
90,771
Regraded
Uclassified
272
- 4 -
hides, machinery and vehicles, scrap iron, fruit and tobacco. Imports
factures and verstable products. Its chief imports are cotton, wool,
Importe consist larguly of textile run materials, machinery, many-
of machinery and metals and manufactures have more than doubled since 1934.
Poland - Importe by Selected Commodities, 1932, 1936 and 1937
(In thousands of sloties)
1932
1936
1937
Total imports
798,760
Machinery and whiches
1,003,445
1,254,298
68,326
122,421
Common metals and mfrs.
160,651
83,800
Textile THE materials
129,249
202,805
and afrs.
256,505
312,594
Vegetable products
347,791
95,174
90,582
Charicals and pharmaceuti-
107,643
cals and dyestuffs
51,843
63,868
67,303
Hides, skins, fure and
leather afrs.
69,647
84,907
96,844
Poland's chief customers are England and Germany. Than 0000 the
United States, Sweden, Belgium, Netherlands, Austria and Italy. The
United Kingdom, Germany and the United States account for between 40 and
50 percent of Poland's total exports.
Poland - Experts by Principal Countries, 1934, 1936 and 1937
(1,000 sloties)
1934
1936
1937
Total
975,342
1,026,246
1,195,544
United Kingdom
191,922
221,601
219,241
Germany
161,596
145,333
173,019
United States
22,842
67,272
100,922
Sweden
45,087
59,556
75,155
Belgium
58,284
84,347
68,989
Netherlands
40,076
45,989
61,175
Austria
57,216
58,840
58,667
Italy
37,034
22,019
54,153
Caechoslevakia
50,430
49,184
51,949
France
40,709
43,670
49,213
279
Regraded Uclassified
- 5 -
Peland's doief fources of supply are Germany, the United Kingdom,
imports. and the United States, which together account for 40 percent of total
Importe by Principal Countries
(Thousands of sloties)
1934
1936
1937
Total
798,760
1,003,445
1,254,298
Germany
108,471
142,886
United Kingdom
182,166
86,208
141,637
United States
149,204
121,085
119,298
149,145
Anstria
36,683
44,867
Netberlando
57,838
29,426
37,267
57,683
Belgium
25,348
43,448
56,320
Foland during the depression extended governmental control over
foreign trade. It developed a system of clearing and compensation
agreements, import licenses, and export subsidies very much in the
nanner of Germany, though, of course, on a smaller scale. Tariffs
were raised in October 1933. Clearing agreements have been made with
the chief European countries with which it trades, and compensation
trade agreements have been entered into with South and Central American
countries, and Palestine; commercial treaties have also been concluded
with several British dominions in the last year.
Since 1933 the system of import licenses was gradually extended
until in May 1936 licenses ware required for all imports. For a time
export subsidies were granted to a large number of agricultural prod-
ucts. They totalled 23 million aloties in 1935-1936, but were reduced
to 10 million sloties in 1936-1937.
U.S. Trade with Poland
United States trade with Poland is insignificant from our point
of view, Our foreign trade with Poland is less than 1 percent of total
foreign trade. But Polish importe from the United States constitute
12 - 15 percent of total Polish imports, and exports to the United States,
between 5 and 7 percent of total Polish exports.
280
- 6 -
United States - Folish Trade in 1936 and 1937
(In thousands of dollars)
1936
1937
United States exports
20,278
26,290
United States importe
12,138
19,568
Raw cotten constitutes a third of United States exports to Foland.
The chief single import in 1936 was has and bacon, which accounted for
almost half our total imports.
Foland receives most-favored nation treatment from the United States.
The prospects for a trade agreement with Poland do not appear to be too
bright. In the preliminary conversations several serious obstacles have
been encountered:
(a) Poland has acked us to promise that we shall never impose
countervailing duties on any of her imports.
(b) She has asked for the retention of preferences with respect
to adjacent Raltic and Denubian countries.
However, these preliminary discussions are still continuing.
Poland's balance of payments is characteristic of that of a debtor
country. Until 1937 it usually has had a sizeable favorable balance of
trade. Recause of the large number of Polish immigrants in the United
tates and other countries, it also has a sizeable balance of imaigrant
remittances. As Germany has to pay Poland for railroad services through
the Polish corridor, it usually has a surplus on the communications item
in its service account. Put it bas had to pay over 150 million sloties
& year in interest and is a net importer of capital. The rates of 10-
terest it has had to pay on its foreign borrowings have been as high as
7 and 8 percent.
Aa a result of the decline in the favorable balance of trade and
the increasingly imfavorable balance of payments, Poland, which had
already adopted a system of clearing agreements with sose countries,
formally adopted exchange control in April 1936 and suspended payments
on its debt service in June 1937. Since then Poland has come to an
duesd the rete of interest payable to Feles holding dollar and sterling
agreement with writish and some United States bandholders and has you
bonds of the Folich Government to 43 percent.
Regraded Uclassified
281
- 7 -
U.S. - Polish balance of payments
For the first six months of 1937 Poland had & net favorable balance
of payments of #34 million.
First Half Year - 1937
(In millions of dollars)
Trade
Services
Interest
Capital
Total
Receipts
10.560
8.051
-
.38
18,649
Expenditures
12.587
.775
.931
828
15,121
Net
- 2.027
+7.275
- .931
- .790 + 3,528
Polish obligations to the United States
Poland is not meeting its full interest obligations to the United
States. 71th the suspension of debt payments in June 1936 there was a
partial defsult on the interest due to the United States bondholders.
Prolonged negotiations with United States bondholders ensued and a Polish
vission to settle outstanding issues was sent to the United States at the
end of 1936. According to a consular report of January 18, 1938, $68 mil-
lion of Polish obligations are now held in the United States. of this,
about one-third in the hands of three principal creditors, the Mesian-
American Corporation, Vien & Company, and the Vellon-owned tandard Car
Finance Company, is serviced satisfactorily.
The outstanding $45 millions worth of dollar bonds are widely held
in the United States and have not yet been funded. Poland wiches to con-
vert them to a 43 percent interest basis, but United States bondbolders
do not want to go below 5 percent, especially as the Pritish bondholdere
are holding out for 51 percent. British bondholders are in a more favorable
bargaining position, becauses
(a) Sterling bonds are not as widely held as the outstanding
dollar bonds. British bondholders are, therefore, better or-
ganised, and their protective council works in close conjunction
with the British Covernment and the London banks.
(b) The Angle-Polish trade balance makes possible the applica-
tion of the British-enforced clearing law.
source of both long- and short-torm credits, whereas there is
(c) The London money market is now indispensable to Poland all a
little hope of raising any loans in New York.
282
- 8 -
Throughout the depression Poland pursued & deflationary policy
and prices continued to fall until 1935. The price of food and drink
fall even nore than the general sholesale price level. From 74 in 1929
it fell to 49 is 1935 and was still only 57 in December 1937. The ef-
fects of the Government's deflationary policy were aggravated by the
precipitous decline in agricultural prices since 1929, which still fun-
ther impoverished the country and reduced the people's already low
standard of living,
1929
1932
1934
1935
1936
1937
Jan.
1938
General wholesale
price level
100
68
58
55.1
56.1
61.7
60.3
Cost of living
100
87.7
65.6
63
60.1
63.9
63.4
Industrial pro-
duction
100
53.9
63
66.4
72.2
85.3
89.6
Number of unen-
ployed (thousands)
December 31st
185.3
220.2
413.7
402.8
466
470
549
In common with other gold bloc countries Poland was late in exper-
iencing recovery. Frices did not begin to rise until 1936, foreign
trade continued to fall till 1935 and unemployment increased steadily
until the end of 1934. The increase in industrial production from
1932-1934 which occurred even though the depression was continuing,
was largely due to a large scale Government public works program. Ro
covery could not be substantial until a significant increase in agri-
cultural prices had occurred. The increase in the number of unemployed
since 1935, simultaneously with an increase in the number suployed, is
due to the fact thats (a) The Government has made registration a con-
dition for obtaining employment on public works; and (b) recovery has
not been substantial enough to take care of the natural increase in
the number of people coming on to the labor market.
The present recovery does not show any imediate signs of coming
to an and. West of the economic indices continue to register alight
but steady improvements, The index of industrial production for
January 1938 is higher than for any month since 1930, and the volume
of foreign trade continues to rise.
Poland is ODE of the few countries which have not devalued their
currency. he a result of its refusal to devalue, it was compelled to
adopt a system of import licenses and quotas in 1933, and finally
thorough-going exchange control in April 1936 after a heavy run on
283
9
the Bank of Poland. The Government has not only refused to depreciate
the value of its currency) it has also attempted to force through a
policy of compulsory price reduction on the part of the leading cartals
and syndicates. It is the pursuit of her deflationary program and its
attendant hardships which has been largely responsible for a. consider-
able amount of agrarian discontent,
Why did Poland not devalue during or before 19361
Poland is the only member of the gold bloc which had net devalued
at the end of September 1936. Contrary to the expectations of our
legation, Poland did not value in spite oft
(a) A considerable diminution in gold and foreign exchange
reserves from the end of December 1934 to the beginning of
July 1936.
(b) The social unrest created by the fall in agricultural
prices and the deflationary policy of the Government.
(e) The handicap to Polish exports as a result of devaluation
by all competing countries.
In an official statement on monetary policy on December 1, 1936,
y. Kwiatkowaki, Vice-Premier and Vinister of Finance gave the follow-
ing reasons for the Government's decisions
(a) Poland had already carried through a sharp process of defla-
tion and did not wish at such g. late stage to forego the advan-
tages of this policy, the imposition of which had involved heavy
sacrifices.
(b) It wished to avoid a depreciation in the value of Government
paper and private savings and a decline in the real value of
earnings.
(c) The Government wished to avoid increasing the spread between
the prices of goods the farmer bought and gooda the farmer sold.
(c) After painfully balancing its budget it did not wish to do
anything which might increase the possibilities of 1 deficit.
of these reasons only (a) and (b) would seem to have any validity.
284
- 10 -
In addition
(a) The disactrous experiences of the inflations of 1919 and
1923-1924 difficult. made the introduction of devalnation politically
(b) Peland had already introduced 8 system of exchange control
and import licensing in April 1936, though the other gold bloc
currencies were still attached to the gold standard.
(c) A temporary suspension of transfers on foreign debt service
was announced on June 27th, 1936.
(d) The world recovery in agricultural prices was mbancing the
value of Polish exports.
(e) Poland had adopted a policy of export subsidies and vas
foreing the export of mineral products by selling them below
world prices.
(f) Poland had already adopted a far-reaching echeme of clearing
agreements with sone of the most important of the countries with
which it traded.
(e) A noticeable rise in prices occurred in Poland immediately
after the adoption of devaluation by the other gold bloc countries.
(b) The sise of its foreign debt in terms of the zloty was
diminished by 1ts maintenance of the sloty. The eise of the
foreign debt fell from 3,282 million zloties on January 1, 1936
to 2,921 million zloties on October 1, 1936, largely as a result
of the devaluation of the franc and other gold bloc currencies.
The Pank of Poland's gold and foreign exchange holdings fell heavily
from 1929 right down to July 1936 when they reached the low point of
874 million cloties.
March
1929
1932
1933
1934
1935
1936
1937
1938
(Willion aloties)
Gold
701
502
476
503
Wells
393
435
438
Foreign Assets
526
137
88
28
27
30
36
18
The explanation for the decline in the gold and foreign exchange
assets of the Pank of Peland is to be soughts
(a) In the withdrewal of foreign capital. The withdrawal of
foreign capital was stimulated by the Polish Government's action
in taking over and encouraging the taking over of certain foreign
enterprises.
285
- 11 -
(b) In the flight of domestic capital, which reached consid-
erable dimensions just before exchange control was introduced.
(e) In the fact that Toland's customarily fevorable balance
of trade did not suffice to meet foreign debt obligations.
"ince 1936 the Bank of Poland's position has improved. Voreover,
there is reason to believe that Foland's gold holdings in the first
quarter of 1937 increased by more than the 42 million sloties which
the official figures indicate. According to a consular report of May 7,
1937, the excese of 30 million :loties in the import of gold over the
increase of 13 million zloties in the gold holdings of the Bank of
Poland in the first three months of 1937 WSB probably being held at
the disposal of the Polish Army instead of being entered into the gold
reserves of the Bank of Poland.
This increase in the gold holdings of the Polish Government was
apparently due to sales by the Government and private factories of war
materials and equipment to the Spanish Government and to General Franco's
forces. In addition, Polish textile wills were executing large orders on
account of the Spanish Government, 80 that there in reason to believe
that concealed increases in Polish Government gold holdings continued
throughout 1937.
The vloty exchange rate is stable within narrow limits at 18.9 cents,
Prior to our devaluation the sloty was worth 11.2 cents.
Notes and coins in circulation and hank deposits have risen steadily
since 1933, but are not now unduly expanded.
Since December 31st, 1929, when the total note and metal currency
in circulation was 1,600 million sloties, with a gold and foreign cur-
rency cover of 61.9 percent, there was & steady decline until the end
of 1932 when circulation was 1,325 million zloties and the statutory
cover 45 parcent.
In March 1933 8 la was passed eliminating foreign assets from the
statutory cover, and the statutory minimum reserve was reduced from 40 per-
cant to 30 percent of all sight liabilities above 100 million sloties.
Fince then notes and coin in circulation have risen steadily to 1,531 mil-
lion vloties in Varch 1938, the statutory cover being about 35 percent.
Total 1933 to 1,048 millions in 1936 and 1,349 millions in 1937. millions cur-
bank deposits have risen considerably from If low of 850 million
aloties rent and in sight accounts increased from 456 millions in 1933 to 697 from the
but 5 percent the average private bank rate on 4 - 5 months' bills is high
in 1936 which had prevailed since 1934 to 4.5 percent inDecember still as 1937,
and 749 millions in 1937. The discount rate was reduced
se 8.5 percent.
Regraded Uciassified
286
- 12 -
Budgetary situation
In spite of its rigid deflationsry policy, until the year 1936-
1937, the Polish Government had accumulated a budgetary deficit of
almost 11 billion sloties, since when it has succeeded in keeping
its budget in balance. Expenditures in 1936-1937 totalled 2.2 bil-
lion sloties and in 1937, 2.3 billions. Almost half these expenditures
were on amants. The size of the national debt is about 5 billion
sloties, internal Sebt being approximately 2 billions and foreign debt,
3 billions,
hat are Poland's economic prospects? Foland's economic welfare
is largely tied up with the course of world agricultural prices and
the prospects of her attracting foreign capital. As long as world
agricultural prices are maintained, Poland's economic position is
comparatively secure. But the prospects of any substantial increase
in her national income are not encouraging. The political situation
is extremely unstable. Poland needs foreign capital but will have
increasing difficulty in ottaining it because of (a) the reneral poli-
tical uncertainty, (b) Poland's had record in meeting debt obligations,
and (e) her policy of nationalising or terming over to her nationale
[oreign investments in Poland.
2. Political Situation
The Folish volitical system is a dictatorship tempered by mild
and Innocuous doses of democracy. The President of the Republic is
elected for & term of 7 years, chosen from two candidates, one nomi-
nated by the retiring President, and the other, by the \spembly of
electros, consisting of 50 members of the Sejm and 25 members of the
Fenate. The President hirself nominates a third of the Senate and
elections to the Sejm are carried on in conditions which allow the
dominant political machine to obtain its desired result.
The President's powers are extremely broad but the most powerful
single person in Poland is not the Prosident but the Inspector-Seneral
of the Army, the post originally occupied by Milaudski, and now by
Smigly-Ryds, who is the leader of the roling justs. This junta 18
largely composed of nembers of the famous land of 300 legionnaires,
organized by Pileudski during the war. Original members of this band
still occupy almost all the strategic positions in the Polish army and
politics.
Regraded Uclassified
287
- 19 -
Is the internal political situation stable? Not very. The danger
of social and political discontant is always present as long as -
employment exists in the tome and the social and economic organiza-
tion of agriculture remains 80 backward.
The expression of political opposition to the Government 18
Ledged around with numerous restrictions. Last year a decree pronul-
gating the dissolution of political parties was issued, and while it
does not appear to have been enforced, the legal status of the poli-
tical parties is highly insecure. Under Government sponsorahip
Colonel 10am Roe - another of Pilsudski's 300 legionnaires and 01-
President of the Bank of Poland (he resigned from the governorabip
of the bank in April 1936 as a result of his persistant opposition
to the inevitable introduction of exchange control) - launched the
National Unity Movement in order to concentrate all political activity
within one pro-Goverment party. This movement, which was Faccist in
character, failed to obtain popular support. His failure did not con-
tribute to the enhancement of the present regime.
Though there is not yet outright dictatorship in Poland, there
are several powerful reactionary, if not pro-Pascist, groups, both
within the political parties, such AS the extremely nationalistic
Indeka, and within the ruling junta. Colonel Koe, the leader of the
pro-Fascist groups, was removed from leadership of the National Unity
llovement in January - as a result of strong opposition by the war ret-
erans to increasing Fascist tendencies. Only very recently the Union
of Toung Poland, which he organised to serve as a nucleus among college
students, was purged of its too openly Fascist leaders.
The DEW leader of the National Unity Vovement, General Skwarczynski,
18 trying to broaden its base by excluding the extreme nationalists and
by making its policy only moderately nationalist and anti-Semitic and
non-totalitarian and turning it into a conservative pro-Goverment party.
He is carrying its appeal any from the nationalist youth and city middle
class to the peasants.
The strongest party among the peasants, however, is the anti-
Government Peasants' Party, which probably has the largest following
in the country and whose leader, Witos, is now in exile. The Congress
of the Peasents' Party held in Cracow in February showed unmistakably
that there was a growing gulf between the Government and the people.
Together with the Peasants' Party, the Socialist Party constitutes the
basis of the opposition. It is opposed to the Government's rapprochement
with Cermany and to the extreme manifestations of Polish nationalism.
In the last year its activities have increased; for the first time in
many years it sent a deputation to the President to protest acainst the
present direction of Government policy.
288
- 14
As yet the Government has been able to resist the pressure for
:iton' recall and for democratic concessions to both of these parties,
but the political situation is endemically mstable. According to our
consular reports large-scale riots occurred in 1936 due to prolenged
unexployment and agrarian distress. The existence of a large body of
unemployed in the city and of land-hungry, impoverished and indebted
peasants in the country is not conducive to political stability, but
there is no reason to expect any rapid change for the worse.
Poland 1a in an extremely vulnerable position from a military point of
view. It lies across the grest esstern European plain between Ceruany
and Russia. Poland has a land frontier of about 3,500 miles and ad-
joins Germany, Russia, Czechoslovakia, thimania, Lithuania and Latvia,
It has a connon frontier of 1,000 miles with Cermany and 800 miles with
Pussia. Its heavy industries are especially exposed to attack in case
of war, as they are concentrated in Upper Silosia on the German border,
and it will take some time before they can be affectively transferred
to the strategically safer "triangle", It has a strip of 80 miles on
the Paltic Coast with the port of Odynis, and two other outlate on the
Taltic - Dansig on the mouth of the Vistula and now l'enel at the nouth
of the Wiemen,
Surrounded on all sides by countries which are potential enemies
and at best but lukeware friends - with perhaps the exception of
Rumania - the mainstay of her foreign policy before Hitler's coming
to power was her alliance with France. France undoubtedly rainly was
responsible for saving Poland from Russia in 1921 and had in the course
of years extended considerable credits to her. Her two most powerful
neighbors, Germany and Russia, have both been historically eneries of
an independent Poland, and in the event of a clash between the two
Poland would most probably be the battleground. Her relations with
Ozechoslovakia are embittered by the presence of a Polish minority on
the Czechoslovakian frontier at Teschen; she had no official relations
with Lithuania for over 17 years until last month.
that are Foland's relations with France? Since 1921 the backbone
of Poland's foreign policy was its alliance with France, but events
since 1933 have served to wesken this alliance. It has been claimed
by many responsible writers that Pilsudeki in 1933 invited the French
to wege a punitive war against Cermany before it was too late. The
Yasis had so often indicated that the Polish corridor, not to mention
Poland as & result of the "plabiscite" of 1921, must be restored to
the highly industrial area of Upper Silesia which had been granted to
Termany that the Poles wanted to ware war against Germany before it
was too late.
289
- 15 -
The French refusal and Witler's obvious desire for I rapproche-
ment with Poland hastened the evergence of the Folish-Cerman pact of
non-aggression in January 1934, which runs for 10 years. The compan-
stive insctivity of French foreign policy since the assessination of
Barthou in 1934 in the face of German aggression has cerved to weaken
Poland's relations with France. Even Poland's economic ties with
France are weaker than they used to be. The Franco-Polish commercial
treaty of 1924 was denounced by Foland in 1935, and there have been
sere disputes over Polish treatment of French capital invested in
Poland. However, the 2.6 billion francs loan made by France to Poland
for expenditure on armaments went a long way towards redressing the
balance, both economically and politically. Nonetheless, future
developments may compel her to abandon the political conditions which
were probably attached to the loan.
That are Poland's relations with Russia?
Since the conclusion of peace in 1921 relations with Ruseia have
never been amicable. Poland had only averted defeat in 1921 no a
result of last minute French assistance and the activities of the
Communist International constituted a permanent threat to her internal
stability. But aring to the rapid rise of the Nazis after 1930,
Poland agreed to a non-aggression pact with Ruesia in 1932, nubse-
quently renewed in 1934 for 10 years.
Poland thue has non-ag/ression pacts with its two most powerful
and most dangerous neighbors, But circumstances are such that it is
very difficult to maintain both consistently.
Poland has been steadily drawing closer to Germany.
The conclusion of the non-suression pact in January 1934 marked
a turning point in Polish foreign policy. Prior to its consumnation
Polish-German relations had usually been strained. One of the terms
of the Versailles Treaty which Germany had particularly objected to,
was the creation of the Polish corridor and the subsequent treatment
of the German minority in Poland had only served to exacerbate Serman
sunceptibilities.
In 1934 and 1935 France and Russia pushed hard for an eastern
Locarno to be joined by all the Eastern Fowers in order to guarantee the
status que in eastern Europe, and when Jernany turned it down flatly,
Poland was only too glad to follow in her footsteps. Poland has indi-
cated that, like Gernany, it prefere bilateral to multilateral non-
aggression pacts. The conclusion of the non-aggression pact of 1934
has been followed by renewed press agreements by which each power
provises to control press and radio references to the other.
290
- 16 -
The present Forwign !!tnister is Col. Josef rock, notorioualy
anti-Russian and anti-French (In 1923 when he was a member of the
Polish Embassy in Paris he was expelled from France under humiliat-
ins circumstances - he was accused of violation of diplomatic
privileges) and would appear to be inclined in the direction of
sympathy for
Poland's very strong antipathy to Caechoslovakia 10 another factor
which serves to draw Poland closer to the Germans. Though in the last
few years Czechoslovakia has made overt attempte to improve its rela-
tions with Poland, olend has not only rejected these offers but has
-anifested a nors hostile attitude to her southern neighbor. It has
been claimed by the usually well-informed Manchester Cuardian Central
European correspondent that one secret ites in the non-aggression pact
with Cermany of 1934 was that Poland was not to oppose Cerman ambitions
in Cwechoalovakia. Toether in return the corridor was to be allowed
to remain in the hands of the Poles or whother, in addition to this
concession, Cermany W&E to allow Poland to take over Teschen, is not
known. Poland 10 now claining that there are 250,000 Poles in
Sechoslovakia, withough the number has usually been estimated at not
nore than 100,000 to 125,000; this claim is being nade to support the
rights of Poland to inter'ere in Czechoslovakia. Another recent move
parallaling those of Termany and laying the ground for joint action
with Germany is the Polish complaint that anti-Polish communist propaganda
is emanating from omechoslovakia.
In addition, several other factors point in the direction of a
closer intimacy with Cermany than with the 1.8.8.2.
(a) Poland has consistently opposed any attempte to freese the
status quo in Eastern Europe. Pussia 18 strongly in "avor of
such attempts, while Cornany in as strongly opposed.
(b) "Incidents" between Poland and Russia Are continually
occurring. There have been a number of frontier clashes and
since 1935 neither country has permitted entry to journalists
from the other.
(c) In the final choice between comany and Russia the decisive the
voice of the land-owning nobility would prefer Bermany as
lesser of two evils.
Yet, there is also evidence pointing in the opposite directions
(a) received a credit of $121 million from France for expendi- that
be alliance with France has never been abrogated. In 1936
Foland war materials and fortifications. It is unlikely secret
France that it would at least not be used against Trance's assistance al-
ture on would have made the Rambouillet loan without some
lies, guarantee particularly Romain with which France has a mutual
pact.
Regraded Uclassified
291
- 17 -
(b) The question of Dansig has not yet been definitely settled
though the probability is that Poland is resigned to the com-
plate absorption of Densig by Cermany,
(e) The treatment of the Polish minority in Germany and of the
Cerman minority in Poland 18 still a source of friction.
(d) There are still several outstadding economic questions he-
tween Poland and Termany:
1. Cermany has not been meeting its payments on Polish
reilroad services re ularly.
2. The status of Tanzig currency has not yet been Finally
decided.
(0) above all, any extension of Cermany's power santward noces-
earily endangers Poland, Such an expansion is not only a threat
to the Polish corridor but also to Poland's very national exis-
tence. At the very best, in the event of a successful German
expansion eastward, Poland, even if given territorial corpensa-
tion in return for its assistance, would have to content itself
with 8 subordinate position under the hegemony of Jernany. This
cannot but be known to the powers that be in Foland.
Poland and Lithuania
Since the seizure of Vilna by Poland in 1920 there have been no
diplomatic relations between Poland and Lithuania. While Poland had
pressed for resumption of such relations, Lithuania had obstinately
refused to participate in League of Nationa attempte at conciliation.
Lithuania has refused to accept the conquest of Vilua. While it has
a non-aggression pact with the U.S.S.B., this pact affords it no pro-
tection against third-party aggression. Mthuania thue has DO important
allies in Europe and is defenseless against the more powerful Poland.
Thy did Poland force the resumption of diplomatic relations this "arch?
The most obvious interpretation of Poland's =1timatur to (Sthuanda
demanding the recognition of the Polish status of Tilra and the risume
tion of normal diplomatic and commercial relations is that Foland
utilized the uncertainty grising from the German invasion of Austria
for its OWN imediate purpose. It has also been suggested that the
failure of the Dovernment-Launched National Unity Vovement and the
growing opposition of the Peasants' Party If manifested at its Cracos
Congress in February made a spectacular success essential for the main-
benance of the Government's prestige and that [dthuanda provided the
easiest outlet.
Regraded Uclassified
292
- 18 -
to dater Polands
or the four important powers which might have done something
(a) Cernany had nothing to lose and everything to gain by
encouraging Poland to follow in its footstaps. Poland's no-
pudiation of collective action could not but be 8 blow to
France and could not but increase her dependence on Germany.
It is even possible that Poland had Germany's consent before
it went 41 far as it did.
(b) Prance certainly used its offices to keep Polish demande
at & sinimm, but it did very little else.
(e) England was primarily interested in the immediate sain-
tenance of peace and therefore exerted whatever pressure it
could on both sides to come to a reasonable agreement.
(d) Russia, it is plausibly rumored, first attempted to per-
suade Lithuania to put up a stand; but when it was clear that
nothing could prevent a Polish victory, it ceased opposition
to the ultimatum.
Poland was carrying out an action parallel to that of Germany in
Austria. Whether Poland was persuing an entirely independent and
opportunistic policy, exploiting the European political certainty for
its own immediate advantage, or whether it was acting at least with
Germany's tacit consent cannot be known for certain. The greater
plausibility of the latter interpretation, however, is confirmed by
the fact that
(a) Germany simultaneously increased its concentration of troops
near Memel.
(b) German press comments R. day or two after the Polish ultim-
tum was issued and its troops nassed on the frontier were all
favorable to Poland.
What ie Poland's foreign policy likely to be in the neat future?
From every point of view it is to the interest of Poland that peace
be preserved. But as the possibility of a war between Germany and Russia
increases, Foland must decide what her policy will be in the event of
such war, especially as she will probably be the battleground and 10
certainly not in a position to resist invasion from both countries.
Poland's decision most necessarily be affected by the general alignment
of forces in Europe. Thus, if an alliance between England, Trance, and
Regraded
Uclassified
293
- 19 -
Russia were to amage, the probability would be that Poland would be OR
the side of that alliance. If, however, as appeare to be much more
likely at present, England does not make any consitment in the East,
and if the Franco-Sovist pact is weakened, as it may well be, then Poland
is almost certain to be on the side of Germany. Its lukenaruness toward
Barthou's project for an Eastern Locarno strengthens this conclusion.
The future orientation of Polish foreign policy, therefore, is still
far from certain, though the weight of the evidence leans toward the view
that Poland's relationship to Cermany 18 closer than its relationship to
Russia. There is no doubt that French influence in Poland has diminished;
Bitler, in his speeches, continuously singles out Poland as a country
with which, next to Japan and Italy, Germany has the most friendly rela-
tions; and the fear of Communiem in Poland is enhanced by the proximity
of Russia.
Can Foland pursue an independent role?
Probably not.
Poland can pursue a policy of aggression only If it has the support
or acquiescence of Cermany or/and Russia. If she steps on the toes of
either, she would immediately be involved in a war with 8. stronger neighbor
and would have to seek the assistance of the other power. By doing 60
she would inevitably be losing her independence of action.
Poland cannot embark on an eastward expansion without at least the
tolerance of Cermany. (It was rusored that when Poland concentrated
troops on the Lithuanian border the number of Gerran troops near Vemal
was immediately increased.) Gernany's tolerance is needed because
Russia's policy at this time is the preservation of the status quo.
An expansion southward, 1.0., in Czechoalovakia, would be impossible with-
out Germany's prior approval.
Poland is inevitably faced with a choice between Germany and Ruesia.
If it sides with Germany and Germany loses, the existing regime would be
docred. If it sides with Russia and Russia loses, the existing regise
would likewise be doomed. If it sides with Ruasia and Russia wins, the
danger of Communism would be very great. On the other hand, if it sides
with Germany and Germany wins, there would be an immediate threat to the
survival of an independent Poland. Its choice is, therefore, extraordinarily
difficult. Poland is not sufficiently powerful to keep the peace between
its two great neighbors, and it must Inevitably be involved in any conflict
between them.
Its decision, therefore, will be dictated, f1.st and foremost,
by the aliromat of forces upon each side.
S.A.
SA:lrs
5/3/38
Regraded Uclassified
L
BALTIC
ELITHDANIA
NONE
Titlet
Injury
EAST PRUSSIA
hings
$
or
Line
Oriende
E
WI
to
Technolo
$
Maile
from
Matyvick
Sypte
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Lips
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I
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Place
Develope
Warmaws
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Grede
-
Labie
Oniginal
Germals
And
I
1
-
AV-N
E
-
Widness
Briefax
I
-
Form
1
Dates
Quality
/
Name
Destro
Delive
SOV
Love
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1
Big Twich
HY
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Willing
(Tea)
Have
Tring)
Var
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Budapest
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Instruct
Know
Airport
/
-
No.:
party
HUNDS RV
and