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Volume 141, September 15 – September 20, 1938
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Volume 141, September 15 – September 20, 1938
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Henry Morgenthau, Jr. Papers
Diaries of Henry Morgenthau, Jr.
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DIARY
Book 141
September 15 - September 20, 1938
Regraded Uclassified
- B -
Book Page
Bank of America
Oliphant informs HMJr Smith and he agree Bank of
America and Transamerica cannot be separated -
9/15/38
1/1
15
Upham instructed to return to Washington - 9/15/38
17
Securities and Exchange Commission asked to send one
of the commissioners to meeting at which Treasury,
Federal Reserve, Federal Deposit Insurance Corporation,
and Reconstruction Finance Corporation will be
represented - 9/15/38
20
HMJr tells Oliphant FDR suggests injunction in
District of Columbia to prevent payment of dividends -
9/16/38
71
Brazil
Orville Schmidt (sent to Brazil by Treasury) report -
9/15/38
27
Business Conditions
Haas resume - 9/17/38
122
Report of Committee on Credit for Industry to the
Interdepartmental Committee on Legislative Matters
250
a) Upham resume
246
b) Szymczak's covering letter
248
- C -
Canada
See Trade Agreements
China
See also Surplus Commodities
Secret Chinese delegation arriving by Clipper reported -
9/14/38
57-C
Financial mission arrives accompanied by Nicholson,
Treasury Attache at Shanghai - 9/20/38
259
White memorandum: "What China has left in silver and
foreign exchange resources" - 9/20/38
263
Comptroller of Currency
Rentschler consults HMJr concerning consolidation of
legal department with that of Treasury General Counsel -
9/15/38
7
Jones (Jesse) end Smith (Tom K.) suggestions for
Comptroller - 9/16/38
70
FDR consulted about appointment - 9/19/38
153
a) Suggests Senator Pope; OK's Upham for First Deputy
Customs, Bureau of
Resignation of Judge Moyle discussed at 9:30 meeting -
9/20/38
240
Csechoslovakia
For discussion between FDR and HMJr, see War Conditions
Regraded Uclassified
- F -
Book Page
France
See Stabilization
See also War Conditions
Credit National: Cochran memoranda concerning -
9/19/38
141
160
- G -
Gold, Transportation of
See War Conditions
Government Bond Market
Harris resume - 9/19/38
117
Government Losses in Shipment Act (approved 7/8/37;
effective 8/1/37)
See War Conditions: Gold, Transportation of
Great Britain
See Stabilization
- M -
Moyle, James H. (Commissioner of Customs)
Resignation discussed at 9:30 meeting - 9/20/38
240
S I I
Silver
See China
" Spain
Spain
Silver Litigation: Oliphant asks HMJr to assist in
establishing diplomatic status for Zabala
(Vice President, Bank of Spain) so that Sullivan
and Cromwell cannot examine him as a witness - 9/19/38
116
a) HMJr talks to Moffat - 9/19/38
158
Stabilization
France: Exchange market movements resumé - 9/16/38
65
Great Britain: Exchange market movements resume - 9/15/38
56,58
Surplus Commodities
Buck cables concerning use of wheat and cotton by
International Famine Relief Committee and Shanghai
International Red Cross Committee - 9/19/38
144,145
- T -
Temporary National Economic Committee
Peoples' progress report - 9/17/38
87
Trade Agreements
Hull, Sayre, and HMJr confer concerning call by Canadian
Minister on Treasury in lumber negotiations without
knowledge of State Department - 9/15/38
1,3,10
a) HMJr and Sir Herbert Marler confer - 9/15/38
12
Cairns memorandum concerning discussions with Canadian
Minister - 9/15/38
35
Transamerica
See Bank of America
Regraded Uclassified
- U -
Book
Page
Upham, Cyril B.
Statement of qualifications
141
82
- V -
Viner, Jacob
Returns; present at 9:30 meeting - 9/20/38
239
- W -
War Conditions
Gold, Transportation of:
Knoke asked to approach Bank of England concerning
transportation of gold on Nashville now at
Gravesend - 9/15/38
23
a) War risk insurance feature discussed by
Knoke and Bolton - 9/15/38
56,58
b) FDR tells HMJr and Hull Nashville will bring
over $25 million in gold; Knoke to ask
British whether they object - 9/16/38
69
1) Bank of England has no objections;
arrangements authorized - 9/19/38
146,147
c) Bolton's reply - 9/16/38 and 9/17/38
76,80,90
d) FDR brought up to date by HMJr - 9/19/38
154
e) Leahy asked to send Nashville to Portsmouth
for loading - 9/19/38
156
f) Knoke informs Bolton of arrangements which
have been made - 9/19/38
198
g) Hull's authorization - 9/19/38
224
1) Butterworth's report of shipment -
9/20/38
231
Oliphant memorandum on authority for moving gold
with insurance (Government Losses in Shipment Act,
which was approved on July 8, 1937) - 9/19/38
201
Entire gold situation discussed by HMJr, Mallet,
and Lochhead - 9/19/38
206
France: Bullitt resume of French reaction (relief and
delight) at visit of Chamberlain to Hitler - 9/15/38.
44,226
Chief of Staff memorandum No. 12 - 9/14-15/38
57-A
Secret Chinese delegation arriving by Clipper reported -
9/14/38
57-C
Chief of Staff memorandum No. 13 (political and military) -
9/15-16/38
57-D
Price control under absolute neutrality of United States
in event of disturbance in Europe: report of Attorney
General's Special Committee presented by Peoples -
9/16/38
73
a) Oliphant consulted by Peoples concerning authority
to prevent "a run-up of prices" - 9/16/38
75
Regraded Uclassified
- W - (Continued)
Book
Page
War Conditions (Continued)
Berchtesgaden conversation: Praha reaction reported
by Carr - 9/17/38
141
95,112,187
Daladier and Bonnet to leave for London -
$
Bullitt reports - 9/17/38
99,100
Brussels reaction reported by Davies - 9/17/38
102
Plebiscite or German-Polish-Hungarian intervention
discussed in Chief of Staff memorandum No. 14 -
9/16-17/38
104-B
Berlin: Wilson reports on long conversation with
Neville Henderson - 9/18/38
108,217
Defensive war only by France and Czechs discussed
by FDR and HMJr - 9/19/38
115
a) FDR prepared to go a long way in
demonstrating American sympathy
b) Kennedy and Bullitt discussed
c) Hull criticized by HMJr for first time
Oliphant discussion at 9:30 meeting of Treasury steps
to be taken in event of European war - 9/19/38
134
a) Everything arranged for except liquidation
of foreign securities
Bucharest, Roumania: Reaction reported by Hibbard -
9/19/38
221
Chief of Staff memorandum No. 15 (political and
military) - 9/18-19/38
145-A
Chief of Staff memorandum No. 16 (political and
military) - 9/19-20/38
224-A
Regraded Uclassified
1
September 15, 1938.
11:35 a.m.
H.M.Jr:
Hello.
Operator:
Secretary Hull.
H.M.Jr:
Hello.
Secy.Hull
Yes, the Secretary 1s coming right on,
Operator:
Mr. Morgenthau.
H.M.Jr:
Thank you. Hello. Hello.
0:
He'll be right on.
H.M.Jr:
Hello.
Cordell
Hull:
Hello, Henry.
H.M.Jr:
Cordell?
H:
What's going on today?
H.M.Jr:
Well, I owe you an apology.
H:
I don't know why.
H.M.Jr:
Well I'll explain it. It has just come to my
attention this minute, that last Saturday the
Canadian Minister called up Wayne Taylor.
H:
Yes.
H1M.Jr:
He wanted to see the Customs people in the
Treasury in regard to the marking of lumber.
H:
Yes.
H.M.Jr:
Without the State Department knowing anything
about it. Well, they did see him Monday and
Tuesday, and it's just been brought to my
..
attention now, by Mr. Oliphant, and I'm going
to call up the Canadian Minister and tell him
I'm very sorry but we do not see foreign
representatives without the knowledge and the
approval of the Secretary of State.
H:
Hadn't you better - hadn't you better call
Sayre and - you see we are - we are working on
the Canadians on that lumber proposition, and
Regraded Uclassified
2
- 2 -
they are indicating that they will help us.
H.M.Jr:
Yes.
H:
Against Great Britain.
H.M.Jr:
Yes.
H:
And in order not to cross wires, don't you think
it would be a good idea if you'd talk to Sayre?
H.M.Jr:
I'll do anything you suggest.
H:
Well then if you'll do that now -
H.M.Jr:
I'll do anything you suggest.
H:
Because that might - it might get up a little
friction, you understand.
H.M.Jr:
Well the whole point. I want to let you know.
I've got an absolute policy here, that anything
that has to do with foreign affairs, we'll let
you know first.
H:
Well, those things happen, you know. We just
can't help it sometimes.
H.M.Jr:
And - I - I'm sorry, and -
H:
There's no trouble - the only thing 18 Just 80
we don't get wires crossed and get them peeved
right at a time when they are -
H.M.Jr:
Maybe Sayre knows about this.
F:
How's that?
H.M.Jr:
Maybe Sayre knows he's over here.
H:
Yes. Well -
H.M.Jr:
I'll call him.
H:
All right. Thank you.
H.M.Jr:
But I wanted you to know personally.
H:
Yes. Thank you Henry.
3
(Asst. Sec'y of State)
September 15, 1938.
11:38 a.m.
H.M.Jr:
Hello.
Operator:
Mr. Sayre.
H.M.Jr:
Hello.
Francis B.
Sayre:
Hello. Good morning Mr. Morgenthau.
H.M.Jr:
How are you? Sayre, I'm calling you, after
talking to Mr. Hull, and at Mr. Hull's
suggestion.
S:
Yes.
H.M.Jr:
I wondered if you're familiar with the fact that
the Canadian Minister has been coming over here
in the last couple of days on the question of
marking of lumber?
S:
I - no I didn't know he was over there on that,
H.M.Jr:
You did not.
S:
No.
H.M.Jr:
Well now, here's what happened. He called up
Wayne Taylor, Saturday, and said he wanted to come
over here but he didn't want the State Department
to know about it, and nobody in his own Legation
knew about it, and I only heard about it five
minutes ago.
S:
First I heard about it.
H.N.Jr:
And I was very much distressed to learn that we
were seeing any foreign representative on any
subject without the approval of the State Department.
Now I told Mr. Hull I wanted to call up the
Canadian Minister and say - tell him that he'll
have to work through you, and then Mr. Hull said
to call you because he didn't want to do anything -
S:
Yes.
H.M.Jr:
To offend the Canadian Minister.
S:
Yes.
H.M.Jr:
I'm - I'm very much annoyed to think that he'd
try to come in here through the back door.
Regraded Uclassified
4
- 2 -
S:
Well now - here's the first thing to find out,
is whether he 18 attempting back door methods.
Hadn't I better get in touch with Wayne Taylor?
H.M.Jr:
Wayne Taylor is in Chicago.
S:
Oh, he's in Chicago.
H.M.Jr:
I've got the memorandum here.
S:
Oh you have?
H.M.Jr:
Yes. And since then our people here have seen
him.
S:
Oh!
H.M.Jr:
A couple of times.
S:
Uh-huh.
H.M.Jr:
See?
S:
Well, who's been seeing him? White?
H.M.Jr:
No, Kearns and Johnson.
S:
Uh-huh. That's Johnson of the Customs.
H.M.Jr:
Customs, yes. But Kearmsis entirely familiar with
it.
S:
Uh-huh. Well, now -
H.M.Jr:
Would you care to see -
S:
You ran it down enough to know whether it is back
door stuff.
H.M.Jr:
Yes, definitely.
S:
Uh-huh.
H.M.Jr:
Keartsis sitting here and I've got two written
memorandums, absolutely back door stuff.
S:
Well, I wonder if I hadn't better get in touch
with Mr. Kearns.
Regraded Uclassified
5
- 13 -
H.M.Jr:
Well, if you tell me when, I'll send him over.
S:
Let me see, it's now - what about twelve fifteen?
H.M.Jr;
He'll be there.
S:
Righto.
H.M.Jr:
And then whenever you decide, after you've seen
him, would you mind giving me EL ring?
S:
I will.
H.M.Jr:
Because I'm really very much distressed about it.
I - we've never had anything like this before.
S:
Well I think you're absolutely right. It ought to
be curbed or it will get us into trouble.
H.M.Jr:
I know. I mean, of all the people around the
town I - I'm most meticulous about seeing foreign
representatives.
S:
Yes, I know. I know you are Mr. Morgenthau.
H.M.Jr:
So 1f you'll seeKearns and then let me know what
you want me to do, because he's calling - the
Canadian Minister has called twice this morning
to seeKearns and Kearns doesn't answer the phone.
S:
Yes. All right. Well, I'll talk to him and then
after I've had a talk with him I'll call you up,
Mr. Morgenthau.
H.M.Jr:
Thank you so much.
S:
It's awfully nice of you. Thanks 2. whole lot for
your cooperation.
H.M.Jr:
Well I imagine this is a sort of the nub
of the troubles over there, isn't it?
S:
Not the marking, no. Our real troubles are with
U.K. on lumber, we've been demanding free entry
of lumber. Now U.K. 18 the one that's been making
the trouble and the Canadians, -
H.M.Jr:
Well -
Regraded Uclassified
6
- 4 -
S:
Have been siding with us against U.K.
H.M.Jr:
I see.
S:
So that the Canadians have been playing the game
very fairly with this - in our pending Canadian
trade agreement, the Canadians have given us all
kinds of things. The Canadian trade agreement
is bully.
The trouble we're having 1s
with U.K.
H.M.Jr:
Well, there's something funny in this.
S:
We're getting the Canadians to gang up with us
against U.K. on this lumber situation.
H.M.Jr:
I hope you're right.
S:
Well, now - I'll look into it anyway. I
appreciate it an awful lot, your thought.
H.M.Jr:
All right.
S:
Righto.
H.M.Jr:
Goodbye.
Regraded Uclassified
7
September 15, 1938.
11:45 a.m.
H.M.Jr:
Hello.
Operator:
Mr. Rentschler.
H.M.Jr:
Hello.
Gordon
Rentschler:
Hello Henry. Good morning.
H.M.Jr:
How are you?
R:
How are you?
H.M.Jr:
I'm fine.
R:
Keeping busy?
H.M.Jr:
What?
R:
Keeping busy?
H.M.Jr:
Most busy.
R:
Henry, the reason I called you is because we got
a story up here that Oliphant was going to take
over the legal work in the Comptroller's department,
and I wondered whether that meant any essential
change as far as our contacts were concerned.
H.M.Jr:
Your contacts with who?
R:
With the Comptrollers. Is that the present plan?
H.M.Jr:
Well, why should it make any difference?
R:
Well, I just wondered. We've had a very comfortable
contract there and I just wondered what the set up
was, whether -
H.M.Jr:
Well, I can't go into it on the phone, Gordon.
R:
I see.
H.M.Jr:
But - I just can't go into it.
R:
I see.
H.M.Jr:
Yes.
about it
R:
Well, I'll chat with you/sometime when I see you.
Regraded Uclassified
8
- 2 -
H.M.Jr:
That's right. I mean it's - it's nothing to
worry about. I can assure you it's 8 move in
the right direction.
R:
I see. Well, that's - that's simply all that I
want.
H.M.Jr:
I - I assure you it's a move in the right
direction.
R:
That ties it right back to you.
H.M.Jr:
Exactly.
R:
All right then, that's all - that's everything
I went to know, and I'll chat it out with you,
but that's all I went to know.
H.M.Jr:
No, I mean, I can't
R:
No don't do it, because as long - as long as I
get that -
H.M.Jr:
No, I - - it's just -
R:
As long as it's backed by you fellows a hundred
per cent, O.K.
H.M.Jr:
Well, he's simply Oliphant is -
R:
I had a lot of fun with bonds the last couple of
days.
H.M.Jr:
Right. But I can assure you it's - it's a con-
structive move and it's all right, take my word
for 1t.
R:
I'll take a hundred per cent. That takes out
any concern that we have at all.
H.M.Jr:
Right.
R:
Fine. And I appreciate it Henry.
H.M.Jr:
Thank you so much.
R:
The bond market has given us quite a party, the
last couple of days, but if you'll stop that war
it ought to give a very good account of itself.
Regraded Uclassified
9
- 3 -
H.M.Jr:
Well - I'm - I'm still hoping for the best.
R:
Yes. I think this fellow Chamberlain did a
masterful thing Henry.
H.M.Jr:
Well, let's hope 80.
R:
Yes, I think that's pretty good.
H.M.Jr:
Righto.
R:
Thanks very much Henry.
H.M.Jr:
Goodbye.
R:
Bye. Bye.
Regraded Uclassified
10
(Asst. Secy. of State)
September 15, 1938.
12:57 p.m.
H.M.Jr:
Hello.
Operator:
Mr. Sayre. Go shead.
Francis B.
Sayre:
Hello.
H.M.Jr:
Hello.
S:
How are you Mr. Morgenthau? I Just have been
talking with Kearns, over here, about that
situation, and all of us feel that although it was
very irregular for the Canadian Minister to say
that he was doing an improper thing, in the
substance of the thing it wasn't improper, it
was a very technical matter which he conversed
in the light of an emergency with the technical
officials in the Treasury Department. If he had
come here in the first place, we would have sent
him right over to talk with the Treasury, 80 that
I wonder if the wisest way to handle the thing
now is to let Mr. Kearns mention that he has
talked with us in the State Department about 1t,
BO that the Minister will be disabused of any
idea that he's doing anything covert, and let
the thing go shead.
H.N.Jr:
Well, of course, you're putting a very favorable
light on it, but -
S:
Well, I - I don't know. First he talked with
Weyne Taylor and Wayne Taylor told Johnson end
Johnson told Kearn. Now there mey be something
in it that none of us know about, but on the
other hand what would the alternative be if - if
things were directed into the chennels which
they should have taken at the beginning, all
you could do would be to tell the Minister to
come and see us, then we, in turn, would have to
refer him back again to Kearns, and it would be
kind of B. -running around the barn.
H.M.Jr:
Well, that's all right, but I don't like the idea
of the Canadian Minister thinks he can talk to
the Treasury without the State Department knowing
1t.
S;
Well, I - I think you're absolutely right, and I
sppreciate tremendously your whole reaction in
that. The thing was improper.
Regraded Uclassified
11
- 2 -
H.M.Jr:
Well, I'm going to call him up and tell him
that I've informed Mr. Hull that he's coming
here.
S:
Yes.
H.M.Jr:
And that if he wishes to continue to come that
the State Department has no objections.
S:
Yes. All right. All right. I think that's
perfectly in order.
H.M.Jr:
Because I don't - I don't want them or the
English Government to think that we have any
back door.
S:
Yes. Well, I think that's absolutely right and
proper.
H.M.Jr:
O.K.
S:
On the other hand, we'll have to let him continue
to have these conversations.
H.M.Jr:
That's all right.
S:
Yes. I think you'redeadright. Well, thanks an
awful lot for calling up Mr. Morgenthau.
H.M.Jr:
Goodbye.
Regraded Uclassified
12
September 15, 1938.
1:04 p.m.
H.M.Jr:
Hello.
Operator:
Sir Herbert Marler.
H.M.Jr:
Thank you.
0:
Go ahead.
H.M.Jr:
Hello.
Sir Herbert
Marler:
Yes.
H.M.Jr:
Henry Morgenthau, Jr.
M:
Yes. How do you do, Mr. Morgenthau?
H.M.Jr:
How are you?
M:
I'm very well, sir. I read about you. I hope
your trip was pleasant.
H.M.Jr:
Very.
M:
That's good.
H.M.Jr:
Mr. Minister.
M:
Yes.
H.M.Jr:
The reason that I'm calling up 1e to explain that
I asked people in the Treasury, today, after they
had told me about your visits down here, to give
me a chance to think about it.
**
Yes.
H.M.Jr:
And I was quite disturbed because, quite frankly,
we work very closely with the State Department.
M:
Yes, I know you do.
H.M.Jr:
And the four years I've been Secretary of the
Treasury I have never conducted any affairs with
a foreign representative without first explaining
to Mr. Hull.
M:
Quite 80. I quite - my visit, Mr. Morgenthau was
entirely irregular.
Regraded Uclassified
13
- 2 -
H.M.Jr:
Well, I wanted to explain that I have talked to
Mr. Hull.
M:
Yes.
H.M.Jr:
And Mr. Hull 1s entirely satisfied and would like
us to continue talking with you at your pleasure.
11:
Oh that's - that's first rate.
H.M.Jr:
And Mr. Kearns is at your disposal at any time to
see you here or at your Legation.
M:
Oh that's extremely kind of you Mr. Morgenthau.
H.M.Jr:
But I Just wanted to explain it - it was my fault
that no one talked this morning.
M:
There wasn't any necessity of explaining that
Mr. Morgenthau.
H.M.Jr:
We would be very glad to have Mr. Kearns call on
you or - he's at your disposal any time today.
=
Well thank you. I'll call him up for a few
minutes then, as soon as I can get him.
H.M.Jr:
Right.
M:
I wasn't taking any exception to that. I under-
I quite understood that my visits were quite
irregular in that way. The matter was one though,
such urgent importance that I thought that instead
of leaving it to one of the secretaries to go and
see the Department about it I'd better go myself.
H.M.Jr:
Well, we're always glad to see you but, if you
don't mind, I do have to let Mr. Hull know.
11:
Oh, decidedly 80.
H.M.Jr:
Fine.
M:
The reason I didn't go through Mr. Hull, 8.8 a
matter of fact, Mr. Morgenthau, was BO as to make
it as informal as possible.
H.M.Jr:
Well -
Regraded Uclassifie
14
- 3 -
M:
And I'll have to apologize and I intended to
apologize to Mr. Hull for not having - going
through him first.
H.M.Jr:
Well, he's perfectly happy about it.
M:
Oh, he is.
H.M.Jr:
And I've already apologized.
M:
Thank you very much indeed.
H.M.Jr:
So, I think you'll find that you'll be received
in a most friendly spirit there, in the State
Department, and here as 18 always.
M:
Thank you very much, Mr. Morgenthau.
H.M.Jr:
Thank you.
M:
Ever so much obliged to you.
H.M.Jr:
Thank you.
M:
Goodbye, sir.
Regraded Uclassified
15
September 15, 1938.
2:33 p.m.
Hello.
H.M.Jr:
Hello.
Herman
Smith
out
Oliphant:
Tom and I have talked that/ and agreed that you
can't thank of the Bank of America detached from
the Trans-America.
H.M.Jr:
Yes.
0:
And so on, and there ought to be somebody here,
but it ought to be a man 88 high up as you can
get, one of the men who have a sense of responsibilit
HJM.Jr:
Well Hanes is coming in here, in a minute or two
and I'll ask him. Hello.
0:
Yes.
H.M.Jr:
I'll ask him.
0:
Who to get.
H.M.Jr:
I'll call up -
0:
But we're clear that it - they ought to be here.
H.M.Jr:
You're clear that they should be here.
0:
Yes. That you can't think of the bank - you can't
work on the Bank of America -
H.M.Jr:
Oh, I think BO, and I think that -
0:
It's all one picture and we might mess up some of
theirs and theymight mess up some of ours. We
don't move hand in hand.
H.M.Jr:
We'll have them here.
Thank you.
0:
All right.
Regraded Uclassified
16
September 15, 1938.
2:35 p.m.
H.M.Jr:
Hello.
Operator:
Judge Haley is attending a committee meeting,
but I can get him if you'd like me to.
H.M.Jr:
Yes, get him.
0:
Right.
Regraded Uclassifie
17
September 15, 1938.
2:52 p.m.
H.M.Jr:
Hello.
Operator:
Mr. Upham calling.
H.M.Jr:
Hello.
0:
Go shead.
H.H.Jr:
Hello.
C.3.
Uphem:
Hello, Mr. Secretary.
H.V.Jr:
Hello, Cyril?
U:
Yes,
H.M.Jr:
How are you, you - what are you doing out
there, digging in them - there hills for gold?
U:
Oh, I'm reading the papere, that's all.
P.M.Jr:
Well, come on back,
U:
All right. This afternoon.
- Jr:
Yes.
U:
Fine.
H.M.Jr:
They're getting along all right down here.
U:
Good.
H.V.Jr;
And Tom Smith's here, you know.
M:
Yee, that's fine.
H.M.Jr:
And he said that he could use you very nicely.
U:
Be fine.
H.M.Jr:
Said he wents to work with you.
to
Fine.
H.M.Jr:
So I'd come on in and - did you hear anything
out there?
U:
No, not a thing.
Regraded Uclassified
18
- 2 -
H.M.Jr:
All right.
U:
Everything's quiet.
H.M.Jr:
All right -
U:
I was down at the Reserve Bank yesterday, they
don't seem to know anything.
H.M.Jr:
Well -
U:
And I didn't say anything.
H.M.Jr:
Well -
U:
They have Board meeting today.
H.M.Jr:
Uh-huh. I don't know why Justice is supposed
to be blind, but that's what she's always shown.
U:
Yes.
H.M.Jr:
Well we're taking the hood off her eyes.
U:
You knew that other outfit declared a dividend?
H.M.Jr:
No, when?
U:
Same day.
H.M.Jr:
Oh - well - I - and I've been asking around -
when?
It's -
U:
Oh, forseveral days.
H.M.Jr:
What?
U:
For several days.
H.M.Jr:
They did it the same day.
U:
Yes. The same day.
H.M.Jr:
Well -
U:
Too bad.
Regraded Uclassified
19
- 3 -
H.M.Jr:
What's the matter with these fellows anyway.
U:
Plenty I'm afraid.
H.M.Jr:
They declared it on the same day?
U:
Yes.
H.M.Jr:
That was the 13th?
U:
That's right.
H.M.Jr:
Well, if I wasn't on the phone - well, I - I
don't want to burn the wire.
U:
(laughs) Well, we'll try to change things.
H.M.Jr:
Well it doesn't - it - none of it's - of course
we could have given them the same telegram and
proceeded the same way.
U:
That's right.
H.M.Jr:
That's a damned shame. Well, I don't know -
well, it's all right. You brought it to me in
time,as far as I know.
U:
Yes.
H.M.Jr:
All right, Cy.
U:
Goodbye.
H.M.Jr:
Goodbye.
Regraded Uclassified
20
(Robert E. Healy -
SEC)
September 15, 1938.
2:53 p.m.
H.M.Jr:
Hello.
Judge
Healy:
Hello.
H.M.Jr:
Judge Haley?
H:
Yes.
H.M.Jr:
Morgenthau?
H:
Hello Mr. Morgenthau.
H.M.Jr:
How are you?
H:
Very well thank you. You?
H.M.Jr:
Fine. Mr. Hanes and I have been talking over the
matter that he came over to see you on two days
ago.
H:
Yes.
H.M.Jr:
And we're having E. meeting at my office at four
o'clock.
5.
Uh-huh.
H.M.Jr:
At which the Federal Reserve, FDIC and RFC will
be present, and I'd like very much to have SEC
represented.
H:
At four o'clock?
H.M.Jr:
Yes.
H:
At your office?
H.M.Jr:
Yes.
H:
All right. I'll have somebody there.
H.M.Jr:
Now wait a minute Judge. Not somebody.
H:
All right.
H.M.Jr:
I want a body.
Regraded Uclassified
21
- 2 -
H:
All right.
H.M.Jr:
What's the matter with yourself?
H:
Oh!
H.M.Jr:
This is highly confidential.
5
I know it.
H.M.Jr:
And dynamite.
H:
But there's one man in the Commission here, who
knows more about it than the Commissioners do.
H.M.Jr:
Who's that?
H:
David Schenker.
H.M.Jr:
Who?
5°
David Schenker.
H.M.Jr:
Now, just a minute. Let me ask Henes. No. No
staff members today, Judge. It's only the
Commissioners.
H:
Oh!
H.M.Jr:
No, not at this meeting. Any - any one of your -
as many of your Commissioners are welcome, but
I - I'm keeping this to the presidential appointees.
H:
I see. Well, all right, one of us will get over
there.
H.M.Jr:
Uh - it's important Judge.
H:
Well, the only reason that I hesitate 18 that
there's only three of us here.
H.M.Jr:
Yes.
5:
And there's a case being argued before the
Commission this minute.
H.M.Jr:
Yes.
H:
The information that we got on this subject, we
got through our investment trust study.
Regraded Uclassified
22
- 3 -
H.M.Jr:
Yes.
H:
And it came to us by way of Mr. Schenker.
H.M.Jr:
Yes.
H:
That was our whole introduction to it, and when
Johnny Hanes came over here the other day to dis-
cuss it, we called Schenker in.
H.M.Jr:
Yes.
H:
So that he heard the whole thing. However, if
it's your wish that the Commissioner be there
rather than somebody else, why we'll be very
happy to conform to that.
H.M.Jr:
Well, it is my wish.
4:
We just simply have somebody - just have to walk
out of this hearing if it isn't over.
H.M.Jr:
Well, I consider it important enough that a
Commissioner of the SEC be present.
5.
All right. All right, Mr. Secretary, we'll have -
one of us will be there.
H.M.Jr:
Thank you very much.
H:
All right.
Regraded Uclassified
23
September 15, 1938,
3:27 p.m.
H.M.Jr:
Hello.
Operator:
Mr. Knoke.
H.M.Jr:
Hello.
Knoke:
Yes, Mr. Secretary.
H.H.Jr:
Knoke?
K:
Yes, sir.
H.M.Jr:
One Archie Lochhead has been telling me about
the Bank of England, and war risk insurance and
all the rest of that stuff, see?
.
K:
Yes.
H.M.Jr:
Now I want you to kind of sleep on this.
K:
You want me to do what?
H.M.Jr:
I want you to think this over.
K:
Oh!
H.H.Jr:
Supposing you, in your conversation, would say
tomorrow, to the Bank of England, "You know it
just 80 happens, by accident, that U.S. has got
the battleship Nashville at Gravesend, and she's
going to sail in 8 couple of days to come home
to be replaced by another."
K:
Yes.
H.M.Jr:
"And it would be perfectly possible to put a hundred
million dollars worth of gold on her and bring it
back. It just BO happene that she's there and it
just 80 happens she's coming back."
K:
Yes.
H.M.Jr:
What would they think of it?
X:
Yes.
H.M.Jr:
See?
K:
Yes.
Regraded Uclassified
24
- 2 -
H.M.Jr:
Now you sleep on that.
K:
All right, sir.
H.H.Jr:
But you won't be talking to them again today?
X:
No, not today.
H.N.Jr:
And you might mention it to George Herrison, see?
K:
Yes.
H.V.Ir:
And then talk to me about it in the morning, or
he can talk to me.
K:
All right, sir, I'll do that.
H.V.Jr:
Just by accident the Nashville 18 at Gravesend.
K:
Yes.
H.M.Jr:
Just by accident she's coming home.
10:
I understand.
H.N.Jr:
And 1f just by accident we out on a hundred
million dollars, would there be any accident?
K:
(laughs) All right, sir.
H.M.Jr:
'Nuff said?
M.
Yes.
H.M.Jr:
Do you like it?
K:
Yes, I - Archie and I discussed it before end
I think that 1s the approach.
H.V.Jr:
Well -
X:
I - I'm hopeful that it won't be necessary because
I rather think that they - that tomorrow morning
they'll have some suggestion.
H.M.Jr:
Well you know - well we'd make four hundred
thousand dollars on that.
K:
Yes, that's all right. You wouldn't make four
hundred thousand dollars on it if anything
happened to the warship.
Regraded Uclassified
25
- 3 -
H.M.Jr:
Well - who's going to touch the warship?
K:
Oh, - I'm not - that is right. Suppose she does -
something does happen - she runs on an iceberg
or 80.
H.M.Jr:
Well, we'll take the Southern route. Well anyway-
K:
Yes, I think it's safe enough, I only wanted to -
H.M.Jr:
Well, I'd only be doing it to help out the
British, you see?
K:
Well, that's - I'm confident that 18 - that would
be the - the proper approach.
H.M.Jr:
Yes.
K:
But I'm still also confident that they have -
that they may have something to - to suggest that
will make it unnecessary.
H.M.Jr:
Well you think on 1t.
K:
All right, sir.
Jones
H.M.Jr:
Did you see my little statement on the Dow/ticker?
X:
Yes, I saw it. I saw it on two tickers.
H.M.Jr:
Two tickers. Well I only know the Dow Jones.
What's the other ticker?
K:
:
The New York News.
H.M.Jr:
Well I don't know that.
K:
That's good. The Times have covered things
that the Dow Jones has not.
H.M.Jr:
How did you like the Dow Jones one?
K:
Very good.
H.M.Jr:
O.K.
K:
Very good. I hope it won't boost the dollar too
high.
H.M.Jr:
All right, Goodbye.
Regraded Uclassified
26
Treasury Department
Division of Monetary Research
Date
10/6
1938
To:
Secretary Morgenthau
This is the report by Mr. Schmidt
(the young man who went to Brazil).
I haven't attempted to edit it, as I
thought you might be interested in
seeing what he could do on his own.
MR. WHITE
Branch 2058 - Room 200
Regraded Uclassified
TREASURY DEPARTMENT
Mt
INTER OFFICE COMMUNICATION
27
DATESeptember 15, 1938
TO
Mr. "Hte
FROM
"r. Schrdat
utdact: Genoral Impressions of Current ituation in Brazil
1.
Introduction:
In this paper are set forth the impressions of the writer
concerning the various sopects of the economic and political
life of Trazil. Since various reports concerning recent develop-
ments are already on file, no attempt will be made to give a
detailed enalysis. The writer will instead endeavor to vive a
veneral picture of the current situation setting forth the in-
formation in such a manner as to snswer the questions that the
reader might be expected to ask,
11. November 11 COUD motivated by argas' desire to remain in
power.
Detulio Vargas, present head of the `rezilian Government,
first came to power wi.en he and his followers - most important
of when were Oswaldo Aranha and General Goes Monteiro - custed
President ashington Luiz in 1930. Vargas then declared himself
to be the head of a Provisional Government. In 1932 he succeeded
in quelling a major rebellion of the state of " 80 Paulo and in
1934 he promulgated a new Prazilian constitution envisaging a
"democratic" form of overment. lie became the first president
under the new constitution, Oswaldo ranha, who had served as
Vinister or Finance since 1030, nas appointed Ambessador to the
"nited states, and leneral loes Vonteiro was retained in high
military capacity. True to pressure of various groups, the 1934
constitution contained a provision preventing the President from
succeeding himself and his term was to expire in early 1938.
The year 1937 was thus characterized by political activities
in view of the presidential elections coming due January 1938.
In the Autumn of 1937 there were three major contestants
campaigning for the office of President. Armando Salles,
Covernor of Sao Paulo, was at first expected to receive the sup-
port of lergas, but no sooner had Falles announced his candidacy
than Vargas decided to support 8 nationalistically inclined
Regraded Uclassified
28
Mr. White - 2
radical, Jose America, who was not generally trusted. The third
candidate, Plineo Salgado, was the head of a rapidly growing
Integralista Party which openly favored a fascist form of govern-
ment. In October 1937 the Integralista party supposedly discovered
a Communist plot to take over Prazil and Vergas immediately de-
clared the existence of a state of war. Under cover of the state
of war General Goes Vonteiro arranged to have the various state
E litias absorbed by the Federal Army and hostile state Governors,
deprived of their power, were replaced by Federal Interventors,
Maving thus set the stage, Vergas, on November 10, dissolved both
houses of Congress and announced that he would give a new consti-
tution to Prazil.
It is generally believed that the significant developmente
leading up to the coup d'etat were arranged by Vargas, who was
motivated primarily by his desire to remain in power. Had Vargas
not sponsored an undesirable candidate for President and had he,
before November, hindered the growth of the Integralista Party
the political horizon would not have been as stormy as it was just
prior to election time and there would have been less of an ap-
parent need for action of the type taken by him.
UII. Vargas! position ^airly strong as long as he receives the
support of armed forces.
Perhaps the chief factor in Vargas' favor is the general be-
lief that he, more than any other possible alternative, will be
able to maintain comparatively peaceful and stable conditions within
Grazil. He has already been at the head of the Brazilian Government
longer than any other president and he is considered to he a cool,
shrewd man, and a clever politician. On the other hand, there is
a general feeling of resentment against the new constitution and
the complete removal of important democratic processes. The leaders
of the Integralista Party, which Vargas disbanded immediately after
his coup was successfully accomplished, also oppose him as do var-
ious members of the /rmy and Navy who have been demoted by him. The
general feeling, however, is such that he is considered to be in an
invulnerable position as long as he can maintain the support of the
armed forces, which he has thus far successfully done.
IV. Coup d'etat had significant economic repercussions.
Although it is felt that the coup d'etat was motivated primarily
by Vargas' desire to remain in power, its economic repercussions
were important. Since the president, by his action, placed himself
on the defensive, he was compelled to embark upon a program designed
Regraded Uclassified
29
Mr. White - 3
to win wide popular support as well as the support of the armed
forces.
Moving quickly, to support his contention that he had been
hampered by political intrigues within the legislative bodies, he
immediately suspended all payments on the Bratilian foreign debt,
removed important restrictions on coffee exportation, called a
state conference to remove state export taxes, created e depart-
ment of industrial and agricultural credit to stimulate Brazilian
economic development, and instituted a study of various plans of
developing Brasilian iron and mineral resources. In order to
strengthen and maintain the support of armed forces he embarked
upon 8 program of armament purchase which, as is later indicated,
was an important factor in the reinstitution of rigid exchange
control:
V. Reinstitution of exchange control necessitated by mismanage-
ment and political considerations.
From 1934 through 1936 Brazil had been making substantial
progress in the removal of exchange control and by the Spring of
1937 the Bank of Brazil was holding an active balance of about
$9,000,000 sterling. At this time, however, the Director of
Exchange embarked upon a policy of selling foreign currencies
and not only depleted the holdings of the Bank of Prazil but also
engaged in future contracts for the delivery of somewhere around
66,000,000 sterling which the Bank did not possess. As a result
of this action, the milreis strengthened during the summer, coffee
sales were unfavorably effected, and the exchange position of the
Bank of Brazil was severaly weakened.
The coup d'etat of November 10 placed Vargas in a position
of dependence upon the support of the Prazilian armed forces and
he immediately embarked upon armament purchase program in order
to strengthen their good will as well as their fighting power.
The need for spot exchange was consequently markedly increased.
This factor alone might not have disturbed the exchange market
unduly, but, taken together with the weakened position of the Bank
of Prazil, it made necessary the reinstitution of severe exchange
control.
VI. Rigid control makes purchase of exchange difficult but
United States drafts given slight preference.
The reinstitution of rigid exchange control was decreed
Devember 23, 1937. Thereafter it was impossible for anyone legally
to purchase spot exchange, importers being obliged to wait approx-
imately one month after presenting drafts in order to secure 60
to o day future contracts. In view of the fact that the Prazilian
Regraded Uclassified
30
White - &
invernment, in an exchange of notes supplementary to the Brazilian
Trade Agreement, committed itself to furnish spot dollars to im-
porters of merican nerchandise, the Pirector of Exchange was pre-
"ailed upon to accord slightly better treatment to American drafts
than to drafts in other currencies. Utilizing the opportunity to
increase its own collection business, the Penk of Prazil, upon
closing exchange, at present rives spot dollars for drafts cover-
inc American merchandise exported to Trazil when such drafts are
sent to it for collection. Upon closing exchan e in favor of
other drafts, the Bank ives a 60 day future contract. This
60 day advantage is granted only to importers of American merchan-
dise who operate on a draft basis and is denied to fime operat-
Ing on open account or on a quota basis. Even with this advan-
tace, importers of /merican merchandise must wait about one month
from the time their drafts are presented for collection until
coot dollars are obtained.
T. Prazilian gold exported because of exchange shortage.
The Prazilian Government has since 1933 been purchasing all
wald mined domestically and by January 1938 had accumulated a
stock worth about 32 million dollars. The -irector of Exchange
favored a plan of utilizing this gold as security against which
to obtain a short term loan but no definite decision was reached
with respect to any plan of action. Since a payment of £500,000
sterling WAS due in February on destroyers being constructed in
Incland for Trazil, the Trazilian lovernment decided to send
gold to London to be deposited as security for this payment and
the gold was imediately exported. In "ay another shipment of
the same size was made, arain as a deposit against the destrovers.
In neither case was any official announcement made of this action,
*he 'overnment treating the watter at a military secret. In July
tire Government decided a rain to export gold worth 1300,000 and
contemplated exporting all gold rined thereafter within Brazil.
Tive latter policy would tend not only to relieve the exchange short-
SUB but also to free the Trazilian "overnment from the expense of
miding idle gold.
VIII. Payments on foreign debt suspended as a result of exchange
shortage and the failure to arrive at a final settlement.
Payment of services on the Prazilien foreign debt was sue-
bended in 1898 and 1914 and in each case the unpaid amounts were
funded and the Government subsequently contracted new loans and
resumed payment of the services. Then Brazil suspended payment
in 1932 and the Aranha planwas subsequently negotiated it was
felt by the Brazilian authorities that a final settlement should
be attained by the time of its exciration in early 1938.
Regraded Uclassified
31
Mr. White - 5
The Drazilian Vission to the United States in 1937 had
hoped to be able to reach some understanding with the American
bondholders protective committee in accordance with which they
could liquidate their dollar indebtedness by paying considerably
less than their contractual obligations. The American committee,
however, was unwilling to accept the Prazilian proposal and the
Prazilians attributed this unwillingness to influence of the
British over the committee.
The government was becoming aware of the exchan e shortage
in Autumn and when Vargas addressed the people on the evening of
the coup d'etat he stated: "The situation requires, for the tire
being, the suspension of payment of interest and amortization
until it is possible to readjust our obligations without impover-
tehing or sepping the strength of our economic organization. l'e
can no longer continue to pay off ancient debts through the ruinous
process of contracting new and larger ones Payments of debt
service were immediately suspended despite that fact that the
ranha plan would have expired within several months and no steps
have yet been taken toward their resumption.
IX. Compensation mark trade with Germany placed on more restricted
basis.
Under the stimulus provided by Germany's plan of compensation
trade, Prazilian imports from lermany have increased until at
present Germany vies with the United States as the source of the
largest percentage (value) of Brazilian imports.
Germany's policy with respect to prazil during the last
year seems to have been that of making large purchases of Brazilian
products in order to increase the quantity of compensation marks
held by the Bank of Prazil. The Termans then attempted to utilize
this position to acquire more favorable exchange terms for their
producte in Prazil. At the time of reinstitution of rigid ex-
chan e control in Trazil, the German's were able to make use of
their position, in that German hanks were able to extend spot
credits on the basis of future exchange contracts because of the
large stocks of compensation marks possessed by the Pank of Frazil.
Importers from other countries were not able to obtain spot credits
on the basis of their contracts as easily since there was no such
guarantee of the Bank's ability to "ulfill its contracts in other
currencies.
Py the Spring of 1937 the Bank of grazil was holding more con-
pensation marks than was considered to be safe. The Bank of Frazil,
determined to liquidate ite compensation mark holdings, first
Regraded Uclassified
32
Dr. Write - 6
lowered the milreis purchase price of marks and then forbade sales
of cotton and coffee on a compensation mark basis. The German
interests responded by purchasing a hure quantity of Brazilian
cocoa and the Bank of Brazil in June suspended purchases of com-
pensation marks. Proceeding then to allocate compensation marks
for the purchases of armanents and coal, the Bank reduced its
long position. It has since allowed Termans to resume purchase
of commodities other than coffee and cotton on a compensation
mark hagis,
Important factors in the Prazilian actions with respect to
compensation mark trade are: The eneral opposition to undue
Nazi influence; the feeling that Cermany may be readling Prazilian
products in the international market; American opposition to such
trade. There is, however, strong feeling in "avor of compensation mark
traie on the part of producers of Prozilian raw materials who fear that
restriction of such trade will result in the loss of the German market.
T. Plans for establishment of a Prazilian Central Bank dropped
at the time of the coun d'etat.
During September and October of 1037 the Prazilian contress
was concerned primarily with the drafting of & law to establish a
Central Reserve Bank of Prazil, Although there was some opposition
to the establishment of such an institution, most of the discus-
sion concerned the form of the law and not the desirability of
creating a central bank. When Congress was dissolved by President
Vargas, the establishment of such an institution was dependent
solely upon the feelings of him and his advisers. Although the
Vinister of Finance definitely favored the creation of a new central
bank, other of the President's advisers felt that the Bank of Drazil
wan better suited to the needs of Prazil and opposed the establish-
ment of another institution. The opposition of the latter, combined
with exchange difficulties and the feeling that there really were
very few assets which could be turned over to such a bank at that
time, seen to have sidetracked the project.
U. Change of coffee policy brings favorable results.
Ever since the collapse of the coffee valorization scheme in
1929 the Brazilian Covernment has burdened coffee exporte with re-
strictions and taxes for the purpose of maintaining its price on
the world market. Py Autumn of 1937, however, it was felt that
Trazil was bearing the burden of e plan which was benefiting only
Regraded Uclassified
33
Vr. White - 7
her competitors and general opinion was coming strongly to favor
relaxation of the restrictions. One of Vargas' first acts, after
his successful coup d'etat, was that of removing a substantial part
of the hurdens claced upon coffee. Government purchases for the
perpose of supporting coffee prices internally were stopped and
the general emphasis was placed upon the stimulation of exporta-
tion. Although the price of coffee dropped substantially when
the restrictions were relaxed, Frazil has experienced 8 large in-
crease in the Quantity of her sales. The apparent results of the
new volicy have been perticularly pleasing to -razilians because
the coffee sales of her competitors have declined during the same
period end they feel that they are regaining ground lost by the
policy of undue restriction.
YTI, Pouular feeling favorable toward the United States.
During his stay in Trazil the writer received the impressi on
that the "razilians as a people feel very friendly toward the
United States and things American. The man on the street thinks
of us BE heing very wealthy and buying a major portion of Prazil's
coffee; he is fond of American movies which exert a power
fevorable influence there. English is coming to replace French
es the lauruale to he mastered by the educated classes and students
Are hoping to come here to study where before, I an told, they
thought only of going to Europe.
Among the important governmental advisers there is a small
pro-American group which is inclined to trest American interests
with special consideration but, as may be imagined, there are also
groups with opposite points of view, It is felt, however, that
should the United States Government exert pressure in order to
obtain more favorable exchange treatment or greater concessions
for American exports, it would probably be successful.
XTII. Low standards of achievement an important factor in explain-
in- general Prazilian failure to progress,
fter living in Prazil for one year, the writer has come to
feel that he understands more cleerly than before the reason for
the general failure of that country to progress economically, and
in other directions, 88 rapidly as might be expected on the basis
of generally understood factors in the Prazilian situation. A1-
though it obviously is not the complete explanation of the situa-
tion, the writer was impressed by the general lack of high standards
in most undertakings of a serious nature. Important decisions seem
Regraded Uclassified
34
Mr. White - 8
to be made on the basis of superficial study or investigation and
little effort is involved in becoming an expert or writing a book
or report in any field. Men of little competence are often placed
in important positions and tend immediately to formulate plans to
revise completely the manner of conducting the affairs of that
office. The educational standards are low and the percentage of
illiteracy high. Combined with these factors is a happy-go-lucky
attitude on the part of Brazilians about the course of events and
a feeling that nothing is to be taken too seriously. While the
latter is in many respects an admirable trait, it does not make
for rapid progress. Realizing that the answer to the problem is
not simple, the writer wishes nevertheless to call attention to
these factors as important elements in the explanation.
Regraded Uclassified
35
September 15, 1938
MEMORANDUM FOR THE SECRETARY'S FILES:
Discussions with Canadian Minister With
Respect to Marking of Canadian Lumber
Saturday morning, September 10, Assistant Secretary Taylor
called Mr. Johnson into his office and stated that he had been in
communication (by telephone, I believe) with the Minister of Canada,
that the Minister of Canada had made a particular point of the fact
that he was communicating with Mr. Taylor without the knowledge of
the Department of State or the personnel in his own Legation. The
Minister stated that he realized the irregularity of his action and
therefore desired that it be regarded as confidential. Re regarded
the irregularity necessary because of the urgency of the request he
wished to make to the Treasury. That request was that the Treasury
Department explore with the most sympathetic consideration the pos-
sibility of special measures to relieve from the marking requirements
of Sec. 304 of the Tariff Act of 1930, as amended by Sec. 3 of the
Customs Administrative Act of 1938 (Public, No. 721, 75th Congress)
shipments of lumber from Canada now held at ports of entry in the
United States or in transit thereto.
Mr. Taylor stated that he had advised the Minister that he
was about to leave Washington and had referred him to Mr. Johnson or
Mr. Gibbons with a promise to acquaint one or both of them with the
Minister's problem. Mr. Taylor promised the Minister that Mr. Gibbons
or Mr. Johnson would get in touch with the Minister Monday morning.
Mr. Johnson expressed the view, with which Mr. Taylor agreed,
that Mr. Gibbons should be the one to talk to the Minister.
Early Monday morning Mr. Taylor's secretary called Mr. Johnson
to say that the Canadian Minister was very anxious to get in touch
with him in order to make an appointment to discuss the subject of
his conversation with Mr. Taylor. Mr. Johnson called Mr. Gibbons
on the telephone as soon as possible and acquainted him with the
substance of his talk with Mr. Taylor on Saturday morning. He asked
that the Canadian Minister be advised that he would see him at 3:00
or 3:30 that afternoon. Mr. Johnson communicated this information
to Mr. Taylor's secretary, who transmitted it to the Canadian Minister,
and the appointment with Mr. Gibbons was arranged for 3:00 o'clock
Monday afternoon.
At Mr. Gibbons' request, Mr. Johnson went to his office
immediately before that hour to bring him up to date as to the pro-
visions of the law and the regulations. Mr. Johnson then waited out-
side his office while be talked with the Minister, and after the
Regraded Uclassified
3S
- 2
Minister's departure Mr. Johnson talked again with Mr. Gibbons and
learned the substance of the Minister's proposals. At Mr. Gibbons'
request, Mr. Johnson prepared a memorandum of advice for the Minister
concerning his proposals, which he cleared through me on Tuesday
morning.
At 5:18 p.m. Wednesday I outlined to Mr. Oliphant the discus-
sions which the Treasury Department has had with the Canadian Minister
with respect to the marking of lumber. I advised him It was V under-
standing that the State Department had no knowledge of these discus-
aiona, and that they were to be kept absolutely secret.
I told him that the Canadian Minister first approached Mr.
Taylor, who promised him that either Mr. Johnson or Mr. Gibbons
would communicate with him. Mr. Gibbons requested a memorandum of
advice on the marking of lumber from Mr. Johnson. Mr. Johnson pre-
pared the memorandum after discussing the matter with me, and I ap-
proved it and transmitted it to Mr. Gibbons. Mr. Gibbons telephoned
Mr. Oliphant Wednesday at approximately 10:40 and requested him to
permit ne to leave the staff meeting and communicate with him by
telephone. I called Mr. Gibbons st 10:58. Mr. Gibbons asked me to
see the Canadian Minister about the marking of lumber. I telephoned
the Canadian Minister and had a conference with him at 12 o'clock.
Mr. Johnson and Mr. Merchant Mahoney, Commercial Counselor of the
Canadian Legation, were also present at the conference, which WSB
devoted to 8 discussion of the legal requirements of the marking of
Canadian lumber.
As soon as the above facts were brought to Mr. Oliphant's
attention Wednesday afternoon, he directed that all men in his de-
partment cease to have any connection with the matter until it had
been brought to the attention of the Secretary. He also telephoned
to Mr. Gibbons and stated that he wanted it clearly understood that
he had no responsibility for the conduct of the discussions, and sug-
gested that, if he were in Mr. Gibbons' position, he would not proceed
any further without the approval of the Secretary. Be stated that the
personal relationship of the Secretary and Mr. Hull might be involved.
At 11:35 a.m. today I handed to the Secretary the two non-
randa, dated September 14, 1938, covering the discussions with the
Canadian Minister with respect to the marking of lumber. After
reading them, he at once called Mr. Hull, repeated the substance of
the memoranda to him, explained that the matter had just that minute
come to his attention, and apologized for the fact that the Treasury
Department had seen the Canadian Minister without the knowledge of
the State Department. He stated that it was the policy of the
Treasury Department not to 868 foreign representatives without the
knowledge and consent of the State Department, and that he was
Regraded Uclassified
37
meticulous in seeing that this policy was observed. He said that it
was his intention to telephone the Canadian Minister and outline this
policy to him. Mr. Hull expressed great appreciation of the Secretary's
action, and suggested that he communicated with Mr. Sayre because of
the trade negotiations which were being carried on by Mr. Sayre with
the United Kingdom and Canada. Mr. Hull said the Canadians were
backing us up against the United Kingdom on lumber concessions, and
that we did not want to cross any wires or to offend the Canadisns.
The Secretary stated that be would do this.
The Secretary telephoned Mr. Sayre and repeated the substance
of the above paragraph to him. Mr. Sayre requested that I see him
in his office at 12:15 p.m. today to discuss the matter.
At 12:15 p.m. today I BBW Mr. Sayre at the State Department.
Mr. Alger Hiss and Mr. Hawkins were also present. The State Department
took the view that the action of the Minister was highly irregular, but
that inasmuch as the subject matter of the Minister's discussions did
not involve any question of international negotiations, the Treasury
should continue its discussions. Mr. Sayre stated that if the Minister
had approached him in the first instance he would have sent the Minister
to the Treasury immediately, as the questions that were raised were
purely of technical significance. Mr. Sayre suggested that the Treasury
Department might wish to inform the Canadian Minister that the State
Department had been advised of the transactions.
I returned to the Secretary's office and informed him of the
above discussion. He telephoned Mr. Sayre while I WES present and Mr.
Sayre stated the above views to him. The Secretary reiterated his
views of the policy of the Department, and added that be intended to
advise the Canadien Minister of what had transpired. I told the
Secretary there were two views on the latter point. There is a view
that the Canadian Minister should know that the Treasury Department
does not conduct its discussions with foreign representatives without
the knowledge of the State Department. There is also the view that
we should, before communicating with the Canadian Minister, ascertain
the basis of Mr. Taylor's action; that I had only hearsay knowledge
of Mr. Taylor's relations with the Canadian Minister, and added that
I thought we should follow the first course,
I also told the Secretary that I had been informed that the
Canadian Vinister had telephoned me several times this morning, and
that he also telephoned Mr. Gibbons and Mr. Johnson and was unable to
reach any of us; that he had thereupon left word with my secretary that
I need not bother to communicate with him and that he could not be
reached this afternoon.
Regraded Uclassified
38
- 4 -
The Secretary telephoned the Canadian Minister and told him
that the matter had first been brought to his attention early this
morning and that upon his instructions all action by Treasury employees
with respect to the matter had been suspended. He stated that he had
discussed the matter with Mr. Hull, and that Mr. Hull and he were
satisfied to have the discussions continue. The Canadian Minister
stated that he knew his action was highly irregular and that after the
discussions had been concluded he intended to apologize to Mr. Bull
for not consulting the State Department in the first instance. The
Secretary said that he felt that he should inform the Canadian Minister
that the Treasury Department could not discuss matters with foreign
representatives without the knowledge of the State Department, but
that the State Department had now been apprised of the conversation
and it was entirely agreeable to both Departments for the discussions
to continue, He stated that Mr. Cairns would be available at any
time this afternoon to continue the discussions with the Canadian
Minister either at the Treasury Department or at the Legation at the
pleasure of the Canadian Minister. The Canadian Minister expressed
great appreciation of the Secretery's attitude.
The Secretary requested me to return promptly to my office
in order to be able to receive the Canadian Minister's call. At
1:15 p.m. the Canadian Minister telephoned me and repeated the
apologies he offered the Secretary. He added that he intended to
call Mr. Hull tomorrow and apologize personally.
Huntington Times
Regraded Uclassified
39
OFFICIAL
COLONEL MARVIN H. MOINTYRE
PRESIDENTS SPECIAL TRAIN B.+0.
Sept. 15, 1938
CONNELLSVILLE PENNA
VIA WESTERN UNION
WOULD APPRECIATE YOUR ARRANGING AN APPOINTMENT FOR ME
TO SEE THE PRESIDENT AT HIS EARLIEST CONVENIENCE FRIDAY
MORNING
HENRY MORGENTHAU JR
BEB I 1480
1100
MORGENTHAU SAYS FLIGHT OF FOREIGN CAPITAL
TO THE DOLLAR LARGEST IN HISTORY - U S DEMONSTR-
ATING ABILITY TO COPE WITH SITUATION
WASHN -
ADD MORGENTHAU
REPEATED-
SEP 15 1938
WASHN - SECY OF TREASURY MORGENTHAU SAID
TODAY THAT THE FLIGHT OF CAPITAL TO THE
DOLLAR IS THE GREATEST IT EVER HAS BEEN BUT THAT
THE UNITED STATES AS THE CENTER OF THE WORLD
HAS DEMONSTRATED ITS ABILITY TO COPE WITH THE
SITUATION AND TO PREVENT ANY DISADVANTAGE TO
THE AMERICAN PEOPLE
-0-
ADD MORGENTHAU
11113
WASHN - THE TREASURY SECRETARY SAID THAT
WHEN YOU CONSIDER THE NERVOUSNESS ALL OVER
THE WORLD DUE TO THE EUROPEAN
SITUATION -IT IS EXTREMELY REMARKABLE
THAT THERE HAS BEEN SO LITTLE FLUCTUATION
IN THE FOREIGN EXCHANGE- - THE REASON is THAT
CONGRESS HAS GIVEN THE U S TREASURY
POWER TO SEE THAT NO GROUPS MANIPULATE THE
DOLLAR TO THE DISAOVANTAGE OF AMERICAN PEOPLE
HE SAID
HE STATED THAT HE WAS REFERRING TO THE
STABILIZATION FUND AND THE
TRIPARTITE AGREEMENT
THE TREASURY SECRETARY STATED THAT HE WA
NOT AT ALL WORRIED ABOUT THE SITUATION AND
THAT IF THE CONDITIONS OF TODAY WERE COMPARED
WITH SIMILAR SITUATIONS IN THE PAST IT CAN
BE SEEN THAT THE U S IS PROVING THAT IT CAN
RESIST REPERCUSSIONS FROM THIS TYPE OF
NERVOUSNESS OR JITTERS
-THERE IS NO REASON TO BE ALARMED- SECTY
MORGENTHAU SAID
PEOPLE IN FOREIGN COUNTRIES ALONG WITH
GOVERNMENTS AND CENTRAL BANKS WANT TO SEND
THEIR MONEY OVER HERE HE SAID ADDING -WE-LL
TAKE CARE OF IT-
SECTY MORGENTHAU STATED THA THIS GOVERNMENT
IS HELPING OTHERS TO DEFEND THEIR CURRENCY
BUT IT IS BEING DONE WITH THE FUNDS OF THE
OTHER GOVERNMENTS AND THAT THERE IS A
SETTLEMENT EVERY NIGHT - ASSISTANCE OF
THIS TYPE IS BEING ACCORDED THE COUNTRIES
IN THE TRIPARTITE AGREEMENT - DOLLARS
ARE BEING MADE AVAILABLE TO ANYONE WISHING
TO BUY THEM HE STATED
ANOTHER DEMONSTRATION SECTY MORGENTHAU
SAID OF ABILITY OF THE U S TO HANDLE THE
FOREIGN EXCHANGE SITUATION DURING TRYING
TIMES is IN THE FACT THAT DURING THE RECENT
ECONOMIC RECESSION EXPORT OF AMERICAN
MANUFACTURED PRODUCTS WAS THE BRIGHTEST SPOT
IN THE AMERICAN TRADE PICTURE - THAT WAS
BECAUSE OF A STABLE DOLLAR - -THAT IS TERRIBLY
IMPORTANT- MR MORGENTHAU SAID - HE ADDED
THAT THE RELATIONSHIP OF THE DOLLAR
TO OTHER CUR ENCIES HAD NOT YET CHANGED
TO A POINT WHERE IT IS JEOPARDIZING
AMERICAN EXPORT TRADE
-0-
ADD MORGENTHAU
11.43
SEP 15 1938
WASHN - SECY MORGENTHAU REVEALED THAT HE is
IN CONSTANT TOUCH WITH REPRESENTATIVES
OF TRI RI-PARTITE COUNTRIES
AS TO THE RECORD FLIGHT OF CAPITAL TO
THE DOLLAR THE SECRETARY STATED THAT HE CONSID-
ERED IT A SORT OF -PLEASANT WORRY- - HE FELT
THAT IT IS MUCH BETTER THAN HAVING THE FLIGHT
AWAY FROM THE DOLLAR
THE TREASURY -FOR THE MOMENT- IS GOING TO
CONTINUE TO HANDLE THE GOLD INFLUX AS IT HAS
BEEN DOING IN THE RECENT PAST ALTHOUGH CONFER-
ENCES HAD BEEN HAD WITH
-THE BEST FINANCIAL BRAINS IN THE U S- ON
SUGGESTIONS FOR HANDLING THE PRESENT GOLD SITUA-
TION
SECY MORGENTHAU CONTENDED THAT HE
PRICE OF 35 DLS AN DUNCE ON GOLD CONSTITUTES
THE ONLY STABLE PRICE OF MONEY IN THE WORLD AND
THAT HE U S TREASURY DOES NOT HAVE TO 00 ANY-
THING TO DEFEND THE DOLLAR IN FOREIGN EXCHANGE -
AS TO THE OTHER CURRENCIES THE U S TREASURY is
ASSISTING THEM IN MAINTAINING THEIR CURPENCY
THROUGH THE MACHINERY WHICH HAS BEEN SET UP UND-
ER THE LAWS OF CONGRESS AND WHICH PERMITS THE
TREASURY TO MAKE DOLLARS AND GOLD AVAILABLE
STILL ANOTHER INDICATION OF THE TREASURY-S
ABILITY TO meet WITH THE PRESENT SITUATION AND
DEMONSTRATE THAT THE US IS THE CENTER OF THE
FINANCIAL WORLD WAS IN CON ECTION WITH THE SALE
OF GOVERNMENT BONDS AND NOTES FOR CASH
LAST WEEK HE SAID
SECY MORGENTHAU FOLD HIS PRESS CONFERENCE
TODAY THAT THE FEDERAL TREASURY IS TRYING TO AS-
CERTAIN DETAILS OF THE FOREIGN INVESTMENTS IN
THIS COUNTRY BUT THAT NO STATISTICS ARE NOW
AVAILABLE SHOWING THE AMOUNT OF CAPITAL THAT HAS
FLED TO THE U S DOLLAR OR THE CLASSES OF INVEST-
MENTS THAT HAVE BEEN MADE
-0-
44
PARAPHRASE
M
No. 1465, September 15, 11 a.m., from Paris
Section One. Confidential. All circles in France
with the exception of the Communists, other agents of
the Russian Government, and certain Jews have received
with intense satisfaction and a relief which verges on
gaiety the news of the British Prime Minister's visit to
Hitler.
Peri comments in an extremely sour manner in the
Communist newspaper The Humanity, but The Populaire, the
Socialist paper, has an editorial by Blum voicing approval
whole-heartedly. The remainder of the French press gives
applause.
Naturally the Foreign Office is delighted. To secure
intervention by England in the Czechoslovak busthess has
been the principal objective of Bonnet's foreign policy.
The British had consistently declined seriously to become
involved before Bonnet and Daladier came into office. Ac-
cordingly, the personal visit of Czechoslovakia to Hitler
18 a personal triumph for Bonnet, who is gleeful. As re-
ported in my brief telegram last night to the Department,
upon finding conversation with Mr. Messersmith unsatis-
factory due to static, it is felt by Bonnet that there has
disappeared the peril of general war in Europe.
It 18 not true, as circulated by the press in France,
that Chamberlain's visit to Hitler was suggested by Daladier.
BULLITT
45
SECTION 2
As reported to the Department by me Chamberlain
was called up on the telephone by Daladier and Dalediar auggested
to him that there be & conference of French, British and
German representatives. His talk with Chamberlain was
highly unsatisfactory because of Daladier's not knowing
any English and because of the imperfect knowledge of
the French language which Chamberlain has. All that was
known by Bonnet yesterday afternoon was that the British
held the view that there should be held some sort of
conversation with the Germans. About 9 o'clock last
night the British Ambassador told me that he had only
told Daladier at about 8 o'clock of Chamberlain's in-
tention to go to Berchtesgaden to visit Hitler.
It 18 sure that any arrangement which may be pos-
sible for Chamberlain to make with Hitler will have the
support of the French Government. As pointed out by me
to the Department repeatedly in my telegrams since early
last May the sole reason for the French readiness to make
war for Czechoslovakia 18 because honor 18 involved. It
18 felt here today that that point of honor will be taken
care of completely by Chamberlain and that in the eyes of
the French people their Government will be justified in
following his lead and 80 will the world no matter what
46
that lead may be and however hard for the Czech au-
thorities to swallow. (End Section 2)
BULLITT
Regraded I Iclassified
47
SECTION 3
Any analysis of French opinion must take into account
the fact that the number of people believing that France
should fight to maintain her traditional prestige and
power in Eastern and Central Europe has grown steadily
less during the past year. Aside from Paul Reyneau
and a tew prominent officials in the French Foreign Office,
there are almost no individuals in influential positions
who still believe that France should go to war to maintain
this traditional policy. Moreover, the conviction is now
general that the Treaty of Versailles is one of the most
stupid documents ever written by man. This 1s not, of
course, admitted by men like Mandel, who share responsi-
bility for its provisions. Daladier and Bonnet both
temporarily wrecked their careers by fighting the Treaty
of Versailles and telling the truth when it was unpopular
to do so. Both are convinced that the Treaty must
be revised and at bottom regard a change in the Czecho-
slovak State as & necessary revision, - a necessity
which they pointed out nearly twenty years back.
Regraded
Uclassified
48
SECTION 4
For example I was told by Daladier several days
ago that Mandel and he had had quite an argument. Mandel
had wanted him to mobilize the army but he had terminated
the argument by telling Mandel that he had no intention of
sacrificing France's entire youth just to whitewash the
criminal mistakes that Mandel and Clemenceau, his friend,
and the other members of the big four had committed during
the peace conference which wrote the Versailles treaty.
Recently both Bonnet and Daladier have told me that
immediately the Czech business is solved it is their hope
to commence negotiations designed to unite in real friend-
ship France and Germany. It 1s hoped by them that through
these negotiations there would result cooperation between
France, England, Italy and Germany and that there may be
established peace in Europe. They now hope that the Hitler
Chamberlain conversation may be the commencement of this
negotiation. (End of telegram)
BULLITT
Regraded Uclassified
469
En fileo most 49
EG
GRAY
London
Dated September 15, 1938
Rec'd 11:10 a.m.
Secretary of State,
Washington.
934, September 15, 2 p.m.
My 929, September 14, 7 p.m.
Lloyds today decided to exclude war-risk from
maritime insurance and voted to give usual 48 hour
notice to this Effect.
This means that the insurance companies, under
the terms of a general policy, will not be responsible
for losses due to war. War-risk insurance now becomes
a matter to bE handled in a separate policy, at terms
to be negotiated in each Case. Other coverage is not
affected and the old coverage applies to goods now at
DEA,
Simultantously with its decision to treat war-risk
insurance separately from general coverage Lloyds also
decided to abolish "open covers". Under this plan the
shipper has been able to secure automatic protection
up to a certain amount as part of the terms of his
policy. Henceforth the amount to bE covered, like
war-risk,
50
-2- 934, SENTEMBER 15, 2 p.m. from London
war-risk, becomes a matter of individual negotiation.
Lloyds action brings to a close temporarily at
least the efforts made to stabilize war-risk insurance
since the outbreak of the Ethiopian war in 1935. The
market is now very chaotic, with rates showing extreme
variations for the same trade.
The Chairman of Lloyds, who yesterday felt that
the likelihood of war was n "toss up", today feels that
the situation is "slightly better". Lloyds' action in
withdrawing war-risk insurance, however, indicates
more aloquently than words the grave view of the situa-
tion taken by those who have been described as "the
smartest guessero in the world".
Please advise United States Maritime Commission.
KENNEDY
KLP:DDM
Regraded Uclassified
51
NC
GRAY
London
Dated September 15, 1930
Rec'd 2:32 p.m.
Secretary of State
Washington
937, September 15, 6 p.m.
FOT TREAT Y FROM butter yore.
The City has reacted feverably to Chimberlain's initia-
tive in arranging a meeting with Titler. Thile it regards
the atmosphere as lega managing the feeling of grave
caution remains. All British securities have improved;
war loan, for EXAMPLE, closing at xr.
The dollar has been erratic; opening dealings were
at about 4.824, the low point of the day. The British
authorities gave support at verying levels and the dollar
closed at 4.80 5/8 bid. Dealings have not been as large na
yesterday.
Notice of termination has now been served on all Lloyds
war-risk open coverage contracts and maritime wor-risk
insurance can only bE obtained by direct negotiation in Each
individual instance. There is, of course, no uniformity of
rates. Coverage of gold shipments to NEW York which formerly
were at the rate of 6 pence per hundred pounds is now being
quoted at from 2 chillings 6 pence to 5 shillings or not at
all and C. parcel post package of securities which formerly
went
52
NC -2- 4937 from London, September 15, 1938
vent at 1 shilling now costs from 5 shillings to 10 shillings.
Should this state of affairs continue, if it does stop
private gold arbitrage altogether, it will at least limit
the amount decidedly because Ench arbitrageur must obtain
insurance facilities before the 11 o'clock fixing. In the
circumstances there has been C. tendency to create = new
gold point of 34.74.
KENNEDY
KLP
RGC
Regraded
53
Close SEPT. 15, 1938
GOLD HELD IN LONDON GOLD HELD IN AMSTERDAM
$179,400,000
$11,000,000
Insurance arranged for following ships:
Sailing
Steamship
Amount
Amount
Sept. 16
Pres. Harding
$10,700,000
$ -
Sept. 17
Brittanic
11,000,000
-
Sept. 17
Champlain
10,000,000
-
Sept. 17
Niew Amsterdam
-
11,000,000
Sept. 21
Normandie
11,300,000
1
Sept. 23
Manhattan
11,300,000
-
Sept. 24
Paris
11,000,000
-
Sept. 28
President Roosevelt
10,300,000
-
Sept. 28
Queen Mary
6,000,000
-
Sept. 30
Georgic
6,000,000
-
$87,600,000
$11,000,000
54
PARAPHRASE OF TELEGRAM RECEIVED
FROM: American Embassy, Paris, France
M
DATE: September 15, 1938, 6 p.m.
NO.: 1475
FROM COCHRAN.
At noon today the Bank of Italy representative came
to see me. This representative eaid he is unhappy over
the statement that the Japanese will side with Germany
and Italy, especially since he feels his own country has
been quite circumspect in the present situation. In his
opinion the British will find a way out, which may lead
to a real turning point in the whole of international
affairs.
I have had talks with a number of By central bank-
ing friend. Some of them have emphasized to me what an
influence they think the financial aspect of a war has
had on the policy of the British. In their opinion, the
British have been shocked by the recent flight from the
pound, the alacrity with which funds have been taken out
of London by sterling bloc members, particularly the
Scandinavians, and the large amount of gold which, as a
result of these developments, has been officially lost
to Great Britain. These friends point out that since
sterling was thus 80 weak before a war had started,
since immense expenditures are in view if the present
rate of rearmament is to be continued, since foreign trade
is
55
- 2 -
is increasingly bad, and since there is no present possi-
bility that funds could be borrowed from the United States
and France strtent would be at least temporarily a weak
ally from a financial point of view, British statesmen
who understand finances as well as Chamberlain does will
go far to avoid a conflict which, not counting humanitarian
considerations, would mean such a great financial under-
taking and risk.
This evening at a. quarter of six the French stabiliza-
tion fund has lost between 150 and 200,000 pounds on balance
for the day; this morning it had gained 90,000 pounds.
The British stabilization fund had lost on balance the
equivalent of $10,000,000 by four o'clook this afternoon.
In my friend's opinion, Friday would have witnessed real
panic on world markets if Chamberlain had not decided to
visit Hitler today. Under the present circumstances,
there 1s better sentiment in Paris now. The September 8
statement of the Bank of France showed discounts up
1,400,000 france, coverage 45.89 versus 46.44, and an
increase in circulation of 1,200,000.
END OF MESSAGE.
BULLITT.
EA:LWW
56
FEDERAL TWE
UPINGP one
CORRESPONDENCE
DATE September 15, 1928.
CONFIDENTIAL FILES
Summer TELEPHONE CONVERSATION WITH
L. W. Knoke
BANK OF ENGLAND,
Mr. Bolton called at 2120 p.m. They had had rather a
difficult time today and had sold a total of $15,500,000. The fact
which had probably more to do with the firmness of the dollar was
the decision of Lloyds to cancel all war risk clauses in general
policies covering gold shipments and, until further notice, to
write war risk insurance separately at higher rates. As a result,
war risk insurance on shipments tomorrow had today been written et
the rate of 2s 64 compared with the old rate of sd. The market's
capacity for further insurance, he thought, would be very small
and further developments would depend on news on the political
situation. They were watching the situation at the bank with a
great deal of interest and had taken the matter up with the Treasury.
They intended to arrive at some arrengement which would *mooth
things over." The outcome would depend on what the Government was
willing to dos he was trying to force 6 very early decision which
would emable gold to be moved about with freedom. I asked did he
hean that the British Government would insure gold shipments but
Bolton answered he didn't know what they were willing to undertake.
Be inquired whether we had always insured gold shipments against
all risks and I confirmed.
The position was a difficult one, Bolton continued, and
he couldn't ask us to do anything more than we had done. They
would, however, be grateful if ve would carry on if necessary this
Regraded Uclassified
57
FEDERAL RESERVE BANK
OF NEW YORK
FREE CORRESPONDENCE
DATE September 15, 1978.
CONFIDENTIAL FILES
SUBJECT TELEPHONE CONVERSATION WITH
L. w. Knoke
BANK OF ENGLAND.
=
evening, ES usual. I assured him that I was confident that the
Treasury would went to take care of the market here surely this
afternoon if anything happened. If we had to take any large amount
of sterling and there was some feeling here about our taking more
gold in London, he would take the position over from us; they would
try, as far as possible, to relieve our enxiety. I replied that "
appreciated that but that I could tell him that it was the present
intention to carry on exactly as heretofore except that we would
probably want to adjust the price of our gold order to the higher
war risk premium. We felt that at today's increased premium we
should pay 54.78 instead of 34.77. Would that interfere with his
plans? Bolton replied, "No." I continued that " would send him
a cable tonight adjusting our price which I said was exactly what
the market had done in London this morning when, at fixing, it bid
for the equivalent of $54,7282. That, Bolton said, suited them
and repeated that the matter was under discussion now and they were
trying to get this thing smoothed out.
LWK:KW
Regraded Uclassified
G-2
57A
CONFIDENTIAL
JM
WAR DEPARTMENT
WAR DEPARTMENT GENERAL STAFF
G-2,2657-204
MILITARY INTELLIGENCE DIVISION, 04
WASHINGTON, D.C.
we
September 15, 1938.
MEMORANDUM NO. 12 FOR THE CHIEF OF STAFF:
Subject: The present European situation to
midnight, September 14-15, 1938.
In 6. cable from the Military Attache in Prague, dated
5:00 P.M., September 14, 1938, certain unimportant troop movements
were reported. The remainder of the despatch paraphrased is B.S.
follows:
"... The frontiers are guarded by police, ous-
toma and finance guards, and probably by frontier
battelions.
"I interviewed G-2, who claims that the Sudetens
had been armed by the Germans by means of shipment of
arms which had been camouflaged as foodstuffs. G-2
further claimed that center for organization of dis-
turbances is in Selb. Throughout southeast Silesia
and northeast Austria German forces have been slight-
ly augmented chiefly in air units. In the Chemnitz-
Dresden area there has been a small mechanized con-
centration. The resolution of the Czechs to defend
the nation has undergone no change.
"While G-2 is afraid of an ultimatum from Ger-
many, the American Minister says that Krofta told him
only a short while before that the military do not
believe that Hitler contemplates intervention at this
moment."
The important information as to the extent of calling
of reserves, or partial mobilization by the Czechs is unfortunate-
1y amitted by the Military Attache.
There is no change in the general military situation in
the various countries from that already reported.
The events connected with the incidents in the Sudeten
area indicate that they are not wholly spontaneous but rather are
CONFIDENTIAL
Regraded Uclassified
57B
CONFIDENTIAL
planned affairs, supported by German arms and perhaps controllable
by official German or Sudeten organs. When the Czech police and
military act with decision and force, the incidents are effectively
suppressed. This leads to the belief that if an agreement as to
the disposition of the Sudetens could be reached among Germany,
Czechoslovakia, Britain and France that the acquiescence of the
Sudetens themselves would follow.
The wholly unexpected visit of Chamberlain to the Fuhrer
in Berchtesgaden will probably lead to important and decisive de-
velopments in the immediate crisis.
- 2 -
CONFIDENTIAL
Regraded Uclassifi
5
ALAN it. DALIF. -- A CHINESE DELEGATION TRAVELING WITH GREAT SECRECY
RIVED SRE TODAY ABOARD THE PHILIPPINE CLIPPER. CHINATOWN REPORTS
AID- THE DELEGATION WAS HEADED BY T, V. SOONG, FORMER FINANCE
KINISTAR AND BROTHER-IN-LAW OF GENERALISSIMO CHIANG KAI-SHEK, AND THAT
THE ORIGI WAS TO RAISE COMMODITY AND CASH LOANS TO BOLSTER CHINA'S
CHANGE IN PREPARATION FOR WAR-NEED PURCHASES ABROAD.
27
THE PAN-AMERICAN CLIPPER PASSENGER LIST DESCRIBED THE MYSTERIOUS
PASSENCERT AS "FOUR CHINESE PASSENGERS TRAVELING CONFIDENTIAL--NAMES
NOT GIVEN
REPORTS FROM CHINESE SOURCES HERE IDENTIFIED THE OTHER THREE
ENBARS OR THE DELEGATION AS X. P. CHEN, FINANCE EXPERT: Mi T. TSE, AN
FFICIAL OF THE CHINESE CENTRAL BANK, AND 0. YOUNG.
9/14--JE524P
Regraded Uclassified
57C
September 15, 1938
lub.
MEMORANDUM for Secretary Morganthau:
ticker.
The morning paper reports the arrival in San Francisco
of the individuals who have just made the trip by clipper.
I have called for information as to the source of the
telegram in the New York TRIBUNE calling attention to the arrival
of this party in Manila and the action of Marines as guard and
as crew of the launch in which they departed from the clipper.
Regraded Uclassified
0-2
CONFIDENTIAL
JM
CLS
WAR DEPARTMENT
0-2/2657-204
WAR DEPARTMENT GENERAL STAFF
AA
MILITARY INTELLIMENTE DIVISION, N-4
WASHINGTON. O.C.
Lockhead
September 16, 1938.
White
mr
MEMORANDUM NO. 13 FOR THE CHIEF OF STAFF:
Subject, The present European situation to
midnight, September 15-16, 1938,
Political Situation. In suspense, pending the outcome
of the preliminary Chamberlsin-Hitler meeting of which all details
have been kept strictly secret. The general impression from the
best informed press accounts is that some optimism has been created
by frank discussions of the problem, for the first time, between
the highest German and British authorities. These discussions
soon to have created the possibility of lifting negotiations from
the plane of the isolated Sudeten question to that of B. general
European settlement. The situation, while still critical, neems
to offer a chance, which has long been laoking, for the four
great powers to discuss fundamental European problems, without
which there can be no peace in Europe.
Military Situation. Except for a progressive strongthen-
ing of the Crechoslovakian martial law over the disturbed Sudeten
areas and general defensive preparations, there have been few known
important developments. Prague announced yesterday that two ad-
ditional classes of reserves had been called. Since a. Crech class
has a strength of about 70,000, this means e. total of 140,000 ad-
ditional men. Very rough estimates place the number of zen under
arms in Csechoslovakia at about 475,000.
It is reported in press accounts that Hungary is taking
active precautionary measures in moving troops to her frontiers,
but no mobilization is reported.
No naw developments are reported from France. This cour-
try has just placed orders in this country for one and one-half
million gas masks, delivery to start in thirty days.
From Great Britain highly confidential information has
been received of plans for the initial employment of the air
foroes. While this information is largely of plans, it is the
CONFIDENTIAL
Regraded Uclassified
57E
CONFIDENTIAL
first report of specific precautionary measures, indicating a higher
degree of preparedness in the air arm than had previously been known.
- 2 -
CONFIDENTIAL
Regraded Uclassified
58
FEDERAL RESERVE BANK
OF NEW YORK
FFICE CORRESPONDENCE
DATE September 16, 1938.
CONFIDENTIAL FILES
SUBJECT TELEPHONE CONVERSATION WITH
L. V. Knoke
BANK OF ENGLAND.
Mr. Bolton called me at 12:45 today. Their total sales
were just over $20,000,000 up to that moment. The market was very
quiet and steady. A good deal of the bidding for dollars originated
with dealers who had previously gone short of dollars and long of
gold in London and who were now reversing their transactions. In
addition there were, of course, others, among them central banks,
who were anxious to build up 8. small dollar reserve. There was no
big market movement just now. Chamberlain had just arrived from
his visit with Hitler and made an announcement which was quite
pleasant. He had had 8 very friendly talk with Hitler, Chamberlain
said, and intended to talk with him in Cermany next week. Both he
and Hitler were now quite aware of what was in each other's mind.
That, Bolton was hopeful, would help to quiet the market down.
The question which was worrying him now was the effect
of the cancellation by the insurance market of all war risk policies.
The position in the insurance market at the moment was that there
were certain underwriters who would quote 2a 6d percent for war
risk on gold for immediate shipment to New York but the market was
very small, probably not more than £500,000. They had taken up the
question both with Lloyds and with the Government but it would take
some time to arrive at a decision. They were, however, determined
not to leave the situation in its present state. Meanwhile they
Regraded Uclassified
59
FEDERAL RESERVE BANK
OF NEW YORK
FFICE CORRESPONDENCE
DATE September 16, 1958.
CONFIDENTIAL FILES
SUBJECT:
TELEPHONE CONVERSATION WITH
L. W. Knoke
BANK OF ENGLAND.
#
vere concerned about their private arrangement with us and had
decided on the following program which he hoped would neet with
our approval:
They will continue as usual to hold the dol-
lar market as steady as they can and supply the market
with dollars from the following sourcest
(a) their own present dollar balances.
(b) their war reserve in Canada (I tried
to find out how much that was but
Bolton simply replied it didn't
amount to such).
(c) they will borrow dollars for short
periods by means of swaps in the
market.
(d) they will use the gold now in transit
$45,000,000.
(a) they are going to make the following
additional shipments beginning next
weeks
$15,000,000 on the Normandie
10,000,000
I
-
Sumaria
15,000,000
.
.
Menhattan
10,000,000
I
Caledonia
10,000,000
Paris
15,000,000
-
Queen Mary
10,000,000
-
.
Georgic
$85,000,000 Total
It will be up to the British Government to
decide what they will de about insurance.
$45,000,000 on the water and $85,000,000 to
be shipped in the near future they hope would cover
Regraded Uclassified
CO
10 KA
FEDERAL RESERVE BANK
OF NEW YORK
FRICE CORRESPONDENCE
DATE September 16, 1988.
CONFIDENTIAL FILES
SUBJECT: TELEPHONE CONVERSATION WITH
L. W. Knoke
BANK OF ENGLAND,
8
things during the next week or 20. Meanwhile they
would like us to continue our order for gold to be
earmarked in London. They would, however, not make
use of that unless there was a serious emergency.
In addition to the two gold prices which he would
continue to quote us as heretofore, he would give
us two sterling rates, buying and selling, against
which " could operate for his account if we felt
so disposed and if we didn't want to take any more
gold in London.
I replied that I thought that was a splendid program
and that I was sure that our Treasury would appreciate this proof
of their desire to over the burden between the two of us. I added
that I was confident that the Treasury would want to continue the
old gold orders (except at lower prices, of course, to nest rising
insurance premia, etc.) and that it was everybody's wish here that
he should make use of these orders if it was necessary. Also that
I hoped that we would not make use of his sterling orders for his
oza account unless " should simply be swamped. I explained that
this hope and belief on my part was based on the fact that to the
best of my knowledge at least there was no intention whatever on
the part of our Treasury not to continue as heretofore but on
the contrary to do whatever we possibly could do. Bolton replied
Regraded Uclassified
C1
FEDERAL RESERVE BANK
OF NEW YORK
FFICE CORRESPONDENCE
DATE September 16, 1958.
CONFIDENTIAL FILES
SUBJECT: TELEPHONE CONVERSATION WITH
L.E. Inoke
BANK OF ENGLAND.
that quite obviously the situation was a difficult one and that
" don't want you to participate in the risk."
Bolton then referred to our cable of last night #279/35,
the third paragraph, in which " reduced the gold price to $34.75,
and asked me to tell his whether that applied, to past or to future
sales. I replied that it would apply to dollars sold by him be-
ginning today. Was that satisfactory? He said it was.
I inquired whether, in his opinion, it would be possible
for them to pack some of the gold which we now held in London so
that we could have it ready for shipment if, as and when an opportunity
presented itself. I explained that I was aware of his recent re-
quest to give him several days notice when asking them to make
shipment but that the purpose of my discussing this matter with
his again was to try to have some gold ready for immediate shipment
if, for instance, one of our banks which had arranged for shipment
say on a Wednesday beat would come to us on Tuesday and offer us
that space because they had decided to cancel their shipment. I
suggested that he let this thing go through his head and talk to
no the next time he vas on the telephone. Bolton replied that
everything depended upon the capacity of their bullion department
which, as I knew, had been taken off its feet by the recent rush
of gold to New York.
LUK:KW
Regraded Uclassified
62
EG
PLAIN
London
Dated September 16, 1938
Rec'd 2:28 Paris
Secretary of State,
Washington.
946, September 16, 5 p.m.
FOR TREASURY FROM BUTTERWORTH.
The mere fact that Chamberlain's stay at Berchtes-
gaden was for a shorter time than scheduled caused an
initial decline in the prices of British securities and
stimulated the demand for dollars. In this connection
the immediate reaction of Paris, which was very pessi-
mistic, had an Effect but as the day wore on a wait
and SEE attitude of necessity came to the fore. The
volume of trading was small.
The dollar opened at 4.80 1/2 bid. The demand
was very large and the British fund intervened actively.
The rate went to 4.80 1/8 with the British fund still
there and gradually the demand decreased. On balance
the volume had not been large until the late afternoon
when Continental and NEW York demand for dollars in-
creased the pressure and the British fund was again
active, holding the rate at 4.79 7/8. Only 270 bars
were
Regraded Uclassified
63
-2- #946, September 16, 5 Dalla from London
WERE bought at gold fixing at 1443,8 1/2D. The only
arbitrageurs participating being those whose blanket
cover contracts have not yet expired (last paragraph
939, September 15, 6 p.m.) and who incidentally reaped
B substantial profit inasmuch as the fixing price was
geared to A 28, 6D. war risk insurance rate. Inciden-
tally, Reuter reports that NEW York banks have decided
to discontinue gold arbitrage pending clarification in
the insurance rate position and also that the USS
NASHVILLE and HONOLULU are standing by at Gravesend
to embark gold on behalf of the American Stabilization
Fund.
With reference to the third paragraph of 890,
September 9, 7 p.m., today's treasury bill average
rate jumped to 18S. 10 3/4D. as compared with 11S.
pounds
11D. a WEEK ago. Bills on offer WERE 40 million/which
was Eight million pounds less than maturities. The total
allotment was thirty seven million pounds which repre-
sented 66 percent of applications tendered. The Exchange
Equalization accounts further gold sales made it convenient
for the authorities to short-allot the issue. The harden-
1ng of the rate is attributable to a number of causes, in-
cluding the dearth of outside funds depleted by dollar and
gold
Regraded Uclassified
64
⑉3⑉ #946, September 16, 5 p.m. from London
gold purchases and the general desire for liquidity, the
technical Effects of the Exchange Equalization accounts
gold losses on the money market similar to the situation
when French funds were repatriated in May (SEE No. 431,
May 21, 4 p.m.) and also to the probable policy of the
joint stock banks to increase their reserves those
institutions having been very small buyers of bills in
the discount market during the WEEK.
Yesterday's Bank of England return showed a drop
in public deposits to the still abnormally high level
of twenty two million pounds as compared with thirty
two million pounds a WEEK ago, and a rise in bankers'
deposits from ninety one million pounds to ninety nine
million pounds. The City Editor of the TIMES interprets
the return to mean that the authorities are not anxious
to SEE money rates harden unduly.
KENNEDY
ALC
Regraded Uclassified
65
PARAPHRASE OF TELEGRAM RECEIVED
FROM: American Embassy, Paris, France
DATE: September 16, 1938, 5 p.m.
NO.: 1483
FROM COCHRAN.
There was some recurrence of nervousness today on
the market in Paris as a result of reports from Czecho-
slovakia and Germany. There has been a resultant
decline in stocks, and the franc has dropped as compared
with the dollar. On the exchange market there has been
a tendency, however, to balance positions for the weekend
and to see how things turn out,
The French stabilization fund was even on balance
this forenoon, but had sold 170,000 pounde by five o'clock
this afternoon. The equivalent of $15,000,000 had been
lost by the British equalization fund by half-past three
this afternoon.
In last night's L'INFORMATION, Paris, there was
what appeared to be an officially inspired article
stating that it 18 likely, in view of exceptional ex-
penditures for armaments, that the next statement of
the Bank of France will show & drawing on its credit
by the French Treasury with the Bank of France. So
far the market has been too much concerned with the
major problem of the likelihood of war to pay much
attention to the question of French finances, the
unsatisfactory
Regraded Uclassified
66
-2-
unsatisfactory state of which will be suggested by
such a drawing. (END MESSAGE)
BULLITT
BECEIAED
8891 of 932 EA:LWW:EB
amount odj to
I I = / I
Regraded Uclassified
67
FEDERAL RESERVE BANK
OF NEW YORK
September 16, 1958.
Dear Mr. Secretary:
Offerings in the market for new corporate securities have de-
clined to about one good-sized issue a week, and the total for the month
of September will show a sharp contraction from August. As yet, however,
there have been no instances of large high grade issues being postponed
because of unsettlement in the market or because of demands for higher
interest rates. Bidding for some municipal issues has become a. little
more cautious, and several cities have rejected all the bids received for
comparatively small scheduled issues. In the corporate field, however,
the decline seems to be due almost entirely to the absence of potential
issuers of high grade securities who feel a need for more funds. The non-
appearance of medium and lower grade issues 1a, of course, a different
matter.
This week, the only corporate flotation was $25,000,000 of At-
lantic Refining Company debenture 5a of 1955. Comparison of the yield of
about 3.09 per cent on this issue of debentures, rated A by Moody's, with
the yield on the new issue of Treasury 2 1/2s of somewhat shorter maturity
shows how slight is the additional compensation of investors for the lower
degree of security, absence of tax-exemption, etc. Nevertheless, this issue,
after being delayed two hours to permit receipt of overnight news from Europe,
was successfully marketed on Thursday and is quoted at a fractional premium.
The funds raised are for new capital, though mainly to repay bank loans which
were used for capital expenditures.
Regraded Uclassified
2.
FEDERAL RESERVE BANK OF NEW YORK
Secretary Morgenthau,
9/16/58
C
During the week there were also two private sales of corporate issues, the
larger of which was $2,000,000 of preferred stock in the New York Post, subscribed by
stockholders to repay indebtedness in conjunction with a plan for employees to lend the
company 10 per cent of their salaries, without definite maturity, at 2 per cent interest.
Michigan Consolidated Gas Company bonds and notes totaling $42,000,000, for re-
funding, are scheduled for marketing September 21, and $37,500,000 of Virginia Electric
and Power Company mortgage bonds have just been registered. Thus the immediate prospect
is for & continuation of the current modest activity.
The rejection of bids for three or four municipal issues has already been
mentioned. Awards this week of $7,500,000 is about in line with recent weeks, which is
well below the average rate of municipal bond maturities and retirements. Most of the
recent awards have been to dealers outside of New York City. Of issues on which in-
formation 18 available here, some have moved unusually slowly while a few have been
entirely sold the day of offering. Dealers' inventories show a tendency to increase,
but their portfolios are still small by normal standards. Existing circumstances of
expectancy and precaution have occasioned a little hesitation in bidding for some
municipal issues at the record low yields which have been prevailing.
Yours faithfully,
Manage Mlan Sproul,
First Vice President.
(on. Henry Morgenthau, Jr.,
lecretary of the Treasury,
Teasury Department,
ashington, D.C.
Regraded Uclassified
69
September 16, 1938.
H. M. Jr., said that the President and Mr. Hull
are letting the light cruiser Nashville bring over 25 million
gold and, therefore, told Lochhead to ask Knoke to put it up
to the British as to whether they have any objections. He
told Lochhead that they ought to get started a week from now.
Regraded Uclassified
70
September 16, 1938.
Jesse Jones came in this morning to see H.M.Jr.,
and handed him the following slip bearing the names of four
people whome he suggested for Comptroller of the Currency.
Tom Smith also gave Mr. Morgenthau the following recommendation.
TO:
Henry -
Bile Myers
is a natural
for Comptroller
Tomment
9/16-38
TATLOR
Regraded Uclassified
71
September 16, 1938.
11:37 a.m.
Operator:
Mr. Oliphant.
Herman
Oliphant:
Yes.
U.M.Jr:
Herman?
0:
Yes.
H.M.Jr:
I was just talking to the President. I had a
chance to talk about the bank.
0:
Yes.
H.H.Jr:
And he raises the suggestion - Just a minute.
(aside -Thank you.) He raises the suggestion
of bringing an injunction suit in the District
of Columbia.
O:
Yes.
H.M.Jr:
To enjoin them from paying their dividends.
0:
Yes. I've thought of that. Shall I give you the
other plan now?
you
H.M.Jr:
No. I will see/a little later though.
n:
But I've got the answer.
H.M.Jr:
Well, I'll see you 8 little later.
0:
I mean I've got the answers.
H.M.Jr:
I'll see you in 2. little while.
0:
O.K.
Regraded Uclassified
72
September 16, 1938.
11:40 a.m.
H.M.Jr:
Hello.
Operator:
Dr. Myers 18 out keeping two appointments, and
he'll be back in about an hour. He is going to
RFC and the White House.
H.M.Jr:
Well get them - find out whether he's at - he's
at the RFC?
0:
They say he's going to the RFC end to the White
House.
H.M.Jr:
Where is he now?
: :
I think he's going to the RFC first, but he hasn't
had time to get there.
H.H.Jr:
Well when he gets there I want to talk to him.
0:
All right.
H.M.Jr:
He goes to the RFC first.
0:
I think so. Yes, sir.
H.M.Jr:
O.K.
Regraded Uclassified
BK141,
73
TREASURY DEPARTMENT
&
not
PROCUREMENT DIVISION
OFFICE OF THE DIRECTOR
WASHINGTON September 16, 1938
CONFIDENTIAL
30. TO THE SECRETARY:
Re: Attorney General Special Committee ss to what could,
or should be done to control prices under absolute
neutrality of our own country in event of disturbance
in Europe.
The above committee WES called to meet in the Department of Justice at 3:30 P.M.
Rednesday efternoon.
Present: Golden Bell
Justice
Mr. Meeken
Commerce
James 11. Morris
"
Mr. Everett
"
Alexander Holtzhoff
"
Mr. Brown
n
J. P. Fowler
"
C. J. Peoples Procurement Division
Dr. Emekiel
Agriculture
Yr. Appleby
"
It appears that Mr. Morris was present at B. recent cabinet meeting on this particular
mission; WGS detailed to the Department of Justice with injunctions for an early report.
Two differences of opinion immediately arose. Agriculture and Commerce advocated
that the principle of indirect price control, such as Agriculture has been endeavoring to
inke effective in certain agricultural commodities, be extended to essential war materials
and 43 steel, copper, chemicals, woolen textiles, etc., even to the extent of the govern-
ment buying surplus capacity and later selling it in the market to retard inflation of
intices.
Procurement contended that the principles of agriculture control are entirely
different from that of industrial control. Procurement could not agree that the federal
stocks of cotton and wheat, which had been accumulated for the relief of agriculture, WBB
L mot reason why the federal government should set iself up in business with enormous
stocks of steel or chemicals, merely to sell on the market at lower urices in order to
RED prices down.
Purthermore, the military forces were vitally concerned in this matter of price
In & neutral status, inasmuch as their war plana, prepared under the Mobilization
1st, contemplated B. Price Control Committee as 8. part of the Var Resources Administration,
and that It would be well to hook the two plans up together.
The Chairman, Mr. Morris, appointed two committees; one consisting of Agriculture and
Connerce to explore the idea of "Indirect Price Control" and the other - the Director of
Procurement - with respect to the principle of "Direct Price Control" either through
voluntary agreements with industry, and/or the powers of the government with respect to
irensportation, export, licenses, shipping, etc.
Regraded Uclassified
Vemo. to the Secretary
-2-
Sept. 16, 1938
74
After consultation with the Chief of Staff of the Army, and the Chief of Naval
.erations yesterday, a meeting was called in the Office of the Director of Procurement
this morning at 10:00 A.M.
Present:
General C. T. Harris
War
Alexander Holtzhoff
Justice
Col. R. M. Jones
"
Walton Hamilton
"
Major W. H. Sadler
"
Leon Henderson
Temporary National
Vajor C. C. Fenn
"
Economic Committee
Comór. E. D, Foster
Navy
Jos. J. O'Connell, Jr.Mr. Oliphant's office
Captain F. A. Daubin
"
C. J. Peoples
Procurement Division
The trend of thought of all present confirmed, in general, the original opinion of
Procurement, and a number of valuable suggestions were offered, the substance of which
is so lengthy that it will be consolidated into shape by Monday, and made the subject
of a separate report.
Director of Procurement
Regraded Uclassified
BK 141
75
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE
SEP 16 1938
TO
Secretary Morgenthau
Herman Oliphant
FROM
For your information -
Admiral Peoples celled me this morning, esking me to send B. man
to e conference which he was having pursuant to instructions given at the
Cabinet Meeting to James Morris, who was Acting Attorney General. Admiral
Peoples esked me to mention it to you, for which there was no opportunity
during the day.
The President asked Morris what authority there was in law to
prevent e run-up of prices in America during a European war, with America
strictly neutral, and asked him to confer with Agriculture, Commerce end
Procurement. Morris had a meeting with representatives of these depart-
ments and there was 8 difference of opinion. Agriculture contended that
all prices in such B situstion should be regulated as they are now regula-
ting the price of such things as wheat (Hat Ha!). Peoples contended it
should be done in cooperation with Army and Navy under the pending legis-
lation for E War Resources Administration. As 8 result, Morris appointed
two committees, one headed by Ezekiel to develop Agriculture's plan, the
other headed by Admiral Peoples to consider the plan he had outlined.
I sent O'Connell to Admiral Peoples' meeting today with repre-
sentatives from War, Navy and Justice. Leon Henderson was also there. At
this meeting there was much talk about whet could be done immediately,
and without legislation, most of it in terms of various indirect pressures
which might be applied.
do
Regraded
76
FEDERAL RESERVE BANK OF SEW YORK
To: Confidential Files
Date: September 16, 1938
From: L. 7. Knoke
Subject: Telephone Conversation
with Bank of England
Mr. Bolton called no at 12:45 today. Their total sales were just over
$20,000,000 up to that moment. The market was very quiet and steady. A good
deal of the bidding for dollars originated with dealers who had previously gone
short of dollars and long of gold in London and who were now reversing their
transactions. In addition there were, of course. others, mong them central
banks, who were anxious to build up a small dollar reserve. There was no big
market movement just now. Chamberlain had just arrived from his visit with
Hitler and made as announcement which was quite pleasant. He had had a very
friendly talk with Hitler, Chamberlain said, and intended to talk with him in
Germany next week. Both he and Hitler were now quite aware of what was in each
other's mind, That, Bolton was hopeful, would help to quiet the market down.
The question which was worrying him now was the effect of the cancellation
by the insurance market of all var risk policies. The position in the insurance
market at the moment was that there were certain underwriters who would quote 2a
6d percent for war risk on gold for immediate shipment to New York but the market
was very small, probably not more than L500,000. They had taken up the question
both with Lloyds and with the Government but it would take some tim to arrive at
a decision. They were, however, determined not to leave the situation in its
present state. Meanwhile they were concerned about their private arrangement with
the and had decided on the following program which he hoped would meet with our
approval:
Regraded Uclassified
77
-2-
They will continue as usual to hold the dollar market as steady as they
can and supply the market with dollars from the following sources:
(a) their own present dollar balances.
(b) their war reserve in Canada (I tried to find out how much that
was but Bolton simply replied it didn't amount to much).
(c) they will borrow dollars for short periods by means of swaps in
the market.
(d) they will use the gold now in transit $45,000,000.
(e) they are going to make the following additional shipments be-
ginning next week:
$15,000,000 on the Normandie
10,000,000 # # Samaria
15,000,000 # # Manhattan
10,000,000 If . Calendonia
10,000,000 # . Paris
15,000,000 # # Queen Mary
10,000,000
-
I
Georgic
$85,000,000 Total
It will be up to the British Government to decide what they will do about
insurance.
$45,000,000 on the water and $85,000,000 to be shipped in the
near future they hope would cover
Regraded Uclassified
78
-3-
things during the next week or so. Meanwhile they
would like us to contimue our order for gold to be
earmarked in London. They would, however, not make
use of that unless there was a serious emergency.
In addition to the two gold prices which he would
continue to quote us as heretofore, he would give
us two sterling rates, buying and selling, against
which we could operate for his account if we felt
so disposed and if we didn't want to take any more
gold in London.
I replied that I thought that was a splendid program
and that I was sure that our Treasury would appreciate this proof
of their desire to even the burden between the two of us. I added
that I was confident that the Treasury would want to continue the
old gold orders (except at lower prices, of course, to meet rising
insurance premia, etc.) and that it was everybody's wish here that
he should make use of these orders if it was necessary. Also that
I hoped that we would not make use of his sterling orders for his
own account unless we should simply be swamped. I explained that
this hope and belief on my part was based on the fact that to the
best of my knowledge at least there was no intention whatever on
the part of our Treasury not to continue as heretofore but on
the contrary to do whatever we possibly could do. Bolton replied
Regraded
79
that quite obviously the situation was a difficult one and that
"we don't want you to participate in the risk,
Bolton then referred to our cable of last night #379/38,
the third paragraph, in which we reduced the gold price to $34.73,
and asked me to tell him whether that applied, to past or to future
sales. I replied that it would apply to dollars sold by him be-
ginning today. Was that satisfactory? He said it was.
I inquired whether, in his opinion, it would be possible
for them to pack some of the gold which we now held in London so
that we could have it ready for shipment if, as and when an opportunity
presented itself. I explained that I was aware of his recent re-
quest to give him several days notice when asking them to make
shipment but that the purpose of my discussing this matter with
him again was to try to have some gold ready for immediate shipment
if, for instance, one of our banks which had arranged for shipment
say on a Wednesday boat would come to us on Tuesday and offer us
that space because they had decided to cancel their shipment. I
suggested that he let this thing go through his head and talk to
me the next time he was on the telephone. Bolton replied that
everything depended upon the capacity of their bullion department
which, as I knew, had been taken off its feet by the recent rush
of gold to New York.
LWK:KW
Regraded Uclassified
Date: September 17. 1938
80
FEDERAL RESERVE BANK OF new YORK
To: Confidential Files
Subject: Telephone Conversation with
Bank of England
From: L. W. Knoke
I called Bolton at 9:15 this morning. He had probably read in the papers.
I said, that one of our cruisers happened to be in European waters at present.
It 80 happened, I continued, that this cruiser was scheduled to home waters in
the near future. It might be possible for us to put some of our London gold on
her (say $25,000,000) which would give us more elbow room for future gold opera-
tions in London. What I would like him to do was to let this thing go through
his head over the weekend and lot no know early next week what be and his
associates in the bank thought of such & scheme and how, in his and their opinion,
news of such a use of en American cruiser would be received in Europe.
I had not half finished my speech before Bolton cut in to say that be could
anticipate what I had on my mind. He knew that the Nashville was already in the
Thames and that the Honolulu was arriving shortly. They had already discussed
it but thought it probably best not to make my suggestion of this sort to -
because they didn't know the relationship between our Treasury at our Havy
Department. It would probably be a relatively simple matter for them to put
some gold (Bolton said they had thought of 6500,000) aboard the Nashville probably
without any comment at all. "We people here think that we could probably get a
fair amount of gold on either of these cruisers without causing a great deal of
comment." The question would be whether the leading should be done in the lower
regions of the Theses or whether the cruiser should put into Portland. Did I
know the route which the cruiser was expected to take? I replied that I had no
Regraded Uclassified
81
-2-
idea: that, as & matter of fact, he seemed to have many more details about the
names of the cruisers, their locations, etc., than I had here. Assuming that
they could get the gold aboard quietly, Bolton continued, would this scheme cause
a great deal of comment at our end. If the chances were that it would, wouldn't
it then be better to be quite open about it and issue a frank statement explain-
ing that the shipment was made because the insurance market had practically
clamped down on war risk insurance. If there were any publicity it seemed to
him it would be better to make a public statement. I replied that to the best
of my knowledge there had been no discussion of this matter in the press but that
I understood that early yesterday morning a news commentator had stated over the
radio that according to information furnished by B high official something of
this nature was under contemplation. I checked into the matter and had been in-
formed that no official had discussed this matter with any outsider.
Bolton is going to think the matter over during the weekend and make some
tentative inquiries among his associates and will call me on the telephone by
noontime on Monday.
As regards today's market, Bolton said they had had & relatively nice morn-
ing: his sales had been $3,000,000 in the market plus smother $3,500,000 to
central banks, principally the Swedish Riksbank. The Swedes had shown more alars
during the present crisis than any other country in Europe.
Regraded Uclassified
82
Cyril B. Upham
1915
-- A. B. Morningside College, Sioux City, Iowa.
1915
-- Summer months in the law office of Carter,
Brackney and Carter, Sioux City, in charge
of commercial department.
1915-18 -- Graduate student in Government at the State
University of Iowa; and during summers,
research assistant for the State Historical
Society of Iowa. Several monographs published.
1917
--
M.A.
State University of Iowa.
1918
-- Ph.D. State University of Iowa.
1918
-- April-November -- In the United States Army,
being discharged with rank of 2nd Lieutenant,
Reserve Corps.
1918-19 -- Research Assistant, State Historical Society
of Iowa.
1919-20 -- Instructor in Political Science, State
University of Iowa.
1920-24 -- National City Bank of New York, New York City,
in various departments in training for service
with their foreign branches; later in the
Commercial Credit Department of the Foreign
Regraded Uclassified
83
- 2 -
Banking Division, becoming a section chief;
later assistant to an Assistant Vice
President in the development of the bankers
acceptance business of the bank, both foreign
and domestic, including syndicate credits
to cotton cooperative associations, and
other cooperatives. During this period
I took special courses in banking at
Columbia University and the American Insti-
tute of Banking, New York Chapter, and did
some writing in the banking field.
1924-29 -- On the staff of the Finance Department of
the Chamber of Commerce of the United States,
engaged in banking and financial research
and writing; the analysis of financial legis-
lation; and working with the Chamber
Committees on banking, on Federal expendi-
tures and revenues, and fiscal matters
generally. During this period I served as
Secretary for the National Conference on
the Prevention of Fraudulent Transactions
Regraded Uclassified
84
- 3 -
in Securities, in cooperation with the
Investment Bankers Association of America,
the Better Business Bureaus, and the
Securities Commissioners of the States.
Also assisted in organization and financing
of Flood Credits Corporation for relief
and rehabilitation of flooded areas of the
South.
1927
--
L1.B.
George Washington University Law
School.
1928
-- Member of the District of Columbia Bar.
1929-33 -- Chief of the Banking Division, United
States Daily. Supervision of the finan-
cial news of the Federal and State
Governments for the paper.
1929-30 -- November-April -- Member of the Advisory
Board of Shields and Company, New York
Stock Exchange firm.
1929-31 -- Lecturer on Commercial Law, George Wash-
ington University.
1930-32 -- Staff of Committee of Federal Reserve Board
on Branch, Group and Chain Banking, special-
izing on group or holding company banking.
Regraded Uclassified
85
- 4 -
1931-33 -- Special writer on finance for the Consoli-
dated Press Association.
1932-33 -- Editor of The Banking week.
1932
-- Columbia University School of Law --
Adolf Berle's course in Law of Corpo-
rations.
1933
-- March-September; Research Department of
United States Chamber of Commerce.
1933
-- September-December -- Staff of Brookings
Institution, writing book on Closed and
Distressed Banks, and special financial
articles for their news service under
the direction of Felix Morley,
1934
-- January-November -- Assistant to Herbert
Gaston, Treasury Department.
1934
-- Gave course on "Banking and the New Deal"
at American University School of Public
Affairs Summer School.
1935-37 -- Lecturer on Banking, American University
Graduate School.
Regraded Uclassified
86
- 5 -
1937-38 -- Adjunct Professor of Banking, American
University Graduate School.
1937-38 -- Lecturer on Money and Banking, American
Institute of Banking, Washington Chapter.
1938
-- L1.D. Morningside College.
1934-38 -- Special Assistant to the Secretary of
the Treasury.
September 15, 1938
Regraded Uclassified
87
TREASURY DEPARTMENT
PROCUREMENT DIVISION
OFFICE OF THE DIRECTOR
WASHINGTON
MEMORANDUM TO THE SECRETARY
September 17, 1938.
Reference: Procurement Division activities with respect to the
work of the Temporary National Economic Committee.
The Procurement Division Group of the Treasury Depart-
ment Sub-Committee of the Temporary National Economic Committee was
established, in nucleus form, on July 25, 1938. Since that date the
assigned staff, now consisting of three persons, togethor with por-
sonnel temporarily loaned, from time to time, by some of the permanent
groups of the Division, has been continuously engaged in research,
studies, and conferences necessary to define the scope of the work, to
appraise the magnitude and the practicability in operation of the
several possible methods of approach, and to determine upon a procedure
that is both practically workable and reasonably sure to reveal the
information Hought.
Á definite course of procedure WES determined upon on
September 10, 1938. The necessary inquiries supported by the requisite
forms and explanatory circulars were placed in the hands of fifty-six
executive departments and independent offices of the Federal Govern-
nent on September 14, 1938.
The principal data sought are expected to reveal B compre-
Bensive picture of the total dollar volume of all Federal Government
urchases, the proportional part thereof that involves contracts
arranged pursuant to receipt of identical bids, the numorical frequency
with which identical bidding appears in the negotiation of government
purchases, the various kinds of industries which follow the practice
of identical bidding, the range of sizes of purchases in which the
practice is encountered, and the geographical limitations, if any, of
territories in which the practice is most provalent in verious commod-
ities. The nature of the data expected to be received should permit
numerous analyses corollary to the principal information sought.
The Procurement Division Group is now engaged in the ar-
rangement of details of methods to be employed in the tabulation,
coordination, and consolidation of date as they are received from the
respective contributing agencies and in locating suitable personnel
qualified to handle the specialized types of work required. The num
cleus staff will be enlarged from time to time as the volume of work
requires, with the first additions probable during the coming week.
Displer Dirgotor 07 Proourement
Regraded Uclassified
88
CORRECTED COPY
JR
PLAIN
London
Dated September 17, 1938
Rec'd 8:50 a.m.
Secretary of State,
Washington.
951, September 17, 1 p.m.
FOR TREASURY FROM BUTTERWORTH.
The attitude of grave coution continues in the
absence of authentic news of the outcome of the Chamberlain-
Hitler conversations. The dollar opened at the pro-former
rate of 4.60 but the first dealings were done at 4.79-3/4
with the British fund giving dollars. The market was
unusually idle with the rate changing little during the
morning and closing at 4.79-3/4. 179 bars of gold were
sold at the fixing at 144s, 9-1/2d giving EL discount
of about ld to 1-1/2d, the price being fixed on the basis
of private supply and demand. With reference to the last
paragraph of 939, September 15, 6 D.m., notice was
given last evening by the chairman of Lloyds the Effect
of which is to postpone from midnight tonight until
midnight Monday the expiration of the original 48 hours
notice of termination of wor risk inclusion in policies.
The
Regraded Uclassified
89
-2- #951, SEPTEMBER 17, 1 pem., from London.
The postponement is publicly stated to have been
made in order to give brokers a little more time in
which to negotiate and issue separate policies
covering war risks. Incidentally advices are reaching
the London bullion market indicating that South
African gold shipments may bE temporarily hEld up
pending clarification of the war risk insurance
situation but the London bullion market believes
that South Africa hns substantial gold deposits in
London so that presumably the amounts coming forward
for sale will bE maintained at a fairly normal lEVEl.
KENNEDY
CSB
BECEIAED
REGI
SUBJECT
- - - - -
Regraded Uclassified
-
90
FEDERAL RESERVE BANK
OF NEW YORK
OFFICE CORRESPONDENCE
DATE September 17, 1950.
CONFIDENTIAL FILES
SUBJECT:
TELEPHONE CONVERSATION WITH
L. 1. Knoke
BANK OF ENGLAND.
10011
I called Bolton at 9:15 this morning. He had probably
read in the papers, I said, that one of our cruisers happened to
to be in European waters at present. It so happened, I continued,
that this cruiser was scheduled to return to home waters in the near
future. It might be possible for us to put some of our London gold
on her (say $25,000,000) which would give us more elbow room for
future gold operations in London. What I would like him to do vas
to let this thing go through his head over the weekend and let me
know early next week what he and his associates in the bank thought
of such 8 scheme and how, in his and their opinion, news of such a
use of an American cruiser would be received in Europe.
I had not half finished my speech before Bolton out in to
say that he could anticipate what I had on my mind. He knew that
the Nashville was already in the Themes and that the Honolulu was
arriving shortly. They had already discussed it but thought it
probably best not to make any suggestion of this sort to us because
they didn't know the relationship between our Treasury and our Havy
Department. It would probably be & relatively simple metter for
them to put some gold (Bolton said they had thought of £500,000)
aboard the Nashville probably without any comment at all. "
people here think that we could probably get I fair amount of sold
on either of these cruisers without causing a great deal of comment."
The question would be whether the loading should be done in the lower
Regraded Uclassified
91
of
FEDERAL NESSAYE name
OF NEW YORK
FFICE CORRESPONDENCE
DATE September 17, 1958.
CONFIDENTIAL FILES
SUBJECT: TELEPHONE CONVERSATION WITH
L. W. Enoke
BANK OF ENGLAND.
R
regions of the Thames or whether the cruiser should put into Portland.
Did I know the route which the cruiser was expected to take? I
replied that I had no idea; that, as a matter of fact, he seemed to
have many more details about the names of the cruisers, their loca-
tions, etc., than I had here. Assuming that they could get the gold
aboard quietly, Bolton continued, would this scheme cause a great
deal of comment at our end. If the chances were that it would,
wouldn't it then be better to be quite open about it and issue a
frank statement explaining that the shipment was made because the
insurance market had practically clamped down on war risk insurance.
If there were any publicity it seemed to him it would be better to
make 8 public statement. I replied that to the best of my knowledge
there had been no discussion of this matter in the press but that
I understood that early yesterday morning 1 news commentator had
stated over the radio that according to information furnished by
a high official something of this nature was under contemplation.
I checked into the matter and had been informed that no official
had discussed this matter with any outsider.
Bolton is going to think the matter over during the week-
and and make some tentative inquiries among his associates and will
call ne on the telephone by noontime on Monday.
Regraded Uclassified
MSC 1.2 60M-6-18
92
FEDERAL RESERVE BANK
OF NEW YORK
FICE CORRESPONDENCE
DATE September 17, 1958.
CONFIDENTIAL FILES
SUBJECT: TELEPHONE CONVERSATION WITH
Las I. Knoke
BANK OF ENGLAND.
3
As regards today's market, Bolton said they had had a
relatively nice morning; his sales had been $5,000,000 in the
market plus another $5,500,000 to central banks, principally the
Swedish Riksbank. The Swedes had shown more alara during the present
crisis than any other country in Europe.
LWK:KW
p
" OF a In / / /
Regraded Uclassified
93
AH
EG
GRAY
Berlin
Dated September 17, 1938
Rec'd 10:10 a.m.
Secretary of State,
Washington.
452, September 17, 1 p.m.
The German press continues to attack the Czech
Government with ever increasing violence. News items
featured are the dissolution of the Sudeten German
party, issuance of warrant for HEnlEin's arrest, the
Entrance into the REich of a total of 23,000
Sudgten refugees, growing discontent among the Slovaks,
Hungary's protest against Czach mobilization on its
border and Praha's order demanding surrender of all arms
and other instruments possible for USE as such. The last
clause of this order permitting the authorities to grant
Exceptions is interpreted to mean that the Government is
arming the Communists and "underworld" Elements against
whom the Sudeten Germans will bE rendered EVEN more help-
less to protect themselves than they already are.
Editorials represent largely a reiteration of the
comment which has appeared during the last three days.
The
Regraded Uclassified
94
-2- #452, September 17, 1 Dema from Berlin
The points Emphasized are that European statesmen have
now realized the necessity of Russo determination in
Caschoslovakia and that Henlein's demand for a return
to the Reich has found a "world Echo", that in its ob-
vious refusal to recognize this Praha is leading Europe
toward a general conflagration, that Moscow is Encouraging
Praha in its present course and is endeavoring to create
a second Spain in the heart of Europe and that Germany
will not stand by and SEE this happen.
The BERLINER BORSEN ZEITUNG publishes on its front
page of NEW York news despatch to the Effect that on his
return from Europe former Ambassador Schurman made a
statement criticising the policy of the Czech Government
for the last twenty years and supporting the right of the
Sudsten Germans for self determination.
The noon press features alleged maltreatment of two
members of the German Legation in Praha whose, car was
stopped by Casch soldiers.
WILSON
CSB
Regraded Uclassified
95
NC
This telegram must
Praha
be closely paraphrased
before being communicated
Dated September 17, 1938
to anyone. (=)
Rec'd 11:50 a.m.
Secretary of State
Washington
197, September 17, 1 p.m.
The nature of the Chamberlain conversations at Ber-
chtesgaden continues to cause much speculation. Masaryk
telephoned from London last night and stated that hE had
been unable to secure any information. A Foreign
Office official told mc that the Government was not consulted
and had no advance notice of visit. HE also said that the
Government will not accept a plebiscite and the majority
of the press correspondents agree, SOME holding that if the
Government should agree to a plebiscits it would bE over-
thrown by the people and 8, military dictatorship established,
The feeling among the people is intense despite their
outward calmness and those with whom the members of the
Legation have talked have invariably said their prople
would fight rather than accept & plabiscite which in the
psculiar circumstances would result in the transfer of the
Sudeten territory to Germany. This present attitude
may
Regraded Uclassified
96
110 -2- #197 from Praha, September 17, 1938
may be altered however, if Great Britain and France re-
linquish & firm attitude toward support of this country.
HEASON for present attitude toward plabiscite is that the
new boundary would bring Germany within 12 miles of Praha
and a few miles of Pilsen and would make it inevitable that
the whole of Bohemin and Moravia including their capital
would soon be taken over and they claim they would rather
go to war with certainty of defent and die fighting than
come under the domination of Germany with certainty of
treatment similer to that of Austria,
(Gray) Yesterday the Minister of Railways stated
publicly that no Government here could survive acceptance
of 5 plabiscite and added that it could not prove a solution
because of the large number of Germans outside the
Sudeten area. Notwithstanding the violent German pro-
paganda to the contrary the country is fairly quiet
and no serious incidents have been reported during the past
36 hours. The Government is in complete control. There
ARE many rumors aflont md people are apprehensive. The
attempts of Sudeten ngithtors to coll a general strike in
the Sudeten area SEEMS not to have succeeded after being
condemned by the two Irrgest German labor unions as harmful
to the prople of the Sudeten area. Henlein's proclamation
Expressing
Regraded Uclassified
97
NC -3- #197 from Praha, September 17, 1938
expressing the desire of the Sudetens to bE incorporated
in the Reich and the order advising Sudetens to defend
themselves and resist state authority has given Government
legal grounds for dissolution of Sudeten party which was
done last night. Government pleased at favorable reaction
from abroad to this mensure and people here are Enthusiastic
in show of strength ut n. time when complaint was heard
that the Government wr.a too supine. (End Gray)
Confidentially informed that BENES is negotiating
with the Slovaks looking to their participation in Govern-
ment perhaps being offered two portfolios in Cabinst.
German Social Democrats and f. group of former Sudeten
party moderotes have also privately expressed their
satisfaction at Government's strong stand in dissolution
of Sudeten party ns move for authority and pence. I
am also told that officials are thinking of calling Elections
in December to Establish new conlition.
CARR
GT.
Regraded Uclassified
98
EG
GRAY
Bombay
Dated September 17, 1938
Rec'd 2:40 a.m.
Secretary of State,
Washington.
SEptember 17, 11 a.m.
FOR THE SECRETARY OF THE TREASURY.
Political situation, dollar appreciation and an
announcement that Lloyds was considering canceling war
risk insurance schedule caused sharp fluctuations in
the silver market. Ready opened at rupees 50-11 per
100 tolas shot up to 52-12 closed at 51-12. Stocks
Estimated at 3600 bars average daily offtake 30 bars.
Imports during the WEEK 1540 bars.
Opening steady around rupees 36-7 per tolas ready
gold advanced to 36-9-6 closed at 36-6-3.
WATERMAN
CSB
Regraded Uclassified
99
EG
This message must bE
Paris
closEly paraphrased be-
fore bEing communicated
Dated September 17, 1938
to anyone. (Br)
Rec'd 12:16 p.m.
Secretary of State,
M
Washington.
1500, September 17, 5 pom.
Bonnet has just informed me hE and Daladier will
leave for London tomorrow morning. HE has no informa-
tion with regard to the conversation at Berchtesgaden
or the conclusion of the British and EXPECTS none
before his arrival in London.
BULLITT
RR
Regraded Uclassified
100
JR
This telegram must bE
Paris
clostly paraphrased bE-
fore bEing communicated
Dated September 17, 1938
to anyone. (br)
Rec'd 12:35 p.m.
Secretary of State,
Washington.
1499, September 17, 3 p.m.
The British Ambassador has informed me that on
behalf of the British Government hE has invited Daladier
and Bonnet to 80 to London for a consultation with
Chamberlain and Halifax. HE added that his Government
had not transmitted to him or to the French Government
any account of the conversation between Chamberlain
and Hitler at Berchtesgaden or any indication as to the
proposals which the British Government had drawn up.
This statement has been confirmed to me by the French
Government.
The British Ambassador said that both the account
of the conversation and the British proposals would
bE submitted to the French Ministers on their arrival
in London.
Since both Daladier and Bonnet have been at Rambouillet
today lunching with the King of Bulgaria, it has been
impossible to ascertain the exact hour of their departure
for London.
BULLITT
RR
Regraded Uclassified
101
NC
GRAY
Berlin
Dated SEPTEMBER 17, 1938
Rec'd 4:25 p.m.
Secretary of State
Washington
AH
455, September 17, 7 p.m.
The Evening papers continue to indulgtin bitter
invective against Praha. Various additional acts of
Czech oppression are featured; notably the shooting as
deserters from the army of four Sudetens. The report 1s
emphatically denied that Henlein has fled to Germany.
It being stated that although his present whereabouts must
obviously bE kept secret hE yesterday visited Eger where
he conferred with several of his followers. Other
Sudeten party leaders are said to have refused to quit
their posts and a message from Kundt is quoted which urges
the Sudeten Germans to maintain iron nerves and "to wait
until the fateful convention between Hitler and Chamberlain
has ended".
Editorial comment concentrates on attacking BENES and
on revealing the influence of Moscow on Czech policy
analogous to that exerted in Spain.
WILSON
ROW
EMB
Regraded Uclassified
102
NC
GRAY
M
Brussels
Dated September 17, 1938
Rec'd 7:55 p.m.
Secretary of State
Washington
88, September 17, 9 pame
FOR THE PRESIDENT AND THE SECRETARY OF STATE.
SEE my telegram 83 September 2, 10 a.m. and 87,
September 13, 3 p.m.
Concerning the situation from this angle, I have to
advise further as follows:
The situation here in Belgium and Luxembourg is character-
ized by a calm attitude, Nevertheless there is acute appre-
hension over this Czechoslovakian crisis.
Following Hitler's speech and before HENLEIN's demand
for secession, meetings of the BElgian Cabinet were called.
My information warrants the statement that for the past
several WEEKS troop movements have been quistly made in
BElgium in anticipation of any Eventuality.
In Luxembourg it is indicative of the Government's
attitude that the Foreign Minister was suddenly recalled
from attendance at the League of Nations meeting at GENEVA
and that the Grand Duchess has cut short her holiday and
returned to the capital. Some days ago there were
indications
Regraded Uclassified
103
NC -2- #88, September 17, 9 p.m. from Brussels
indications of panicky fear lest Luxembourg might bE made
the first battle ground through attempts at occupation by
Either the French or the Germans, This fear has subsided
somewhat, influenced by the opinion Expressed in some offi-
cial quarters that there is little probability of such an
eventuality under present conditions because the impregna-
bility of the Belgian, French and the German frontier
defenses makes Luxembourg strategically 1ESS important,
I personally travelled along the frontier on the Luxembourg
side this WEEK and saw miles of newly ErEctEd barbed wire
entanglements and great activity in concrete construction
on the German side.
Chamberlain's dramatic visit to Hitler generally is
regarded as a noble and daring effort but the dominant
conjectures sem to bE that if a solution is to bE immediately
projected from the proposals made it must come through
speedy acceptance by Great Britain and France and Czechoslo-
vak1a what is suspected to bE Hitler's final demand for
complete separation of the Sudeten areas from Czechoslovakia
Either through political or through territorial revision and
absorption by the Reich and the neutralization of the remain-
1ng Caschoslovnk state, Apprehension and fear arise out of
what
Regraded Uclassified
104
NC -3- #68, September 17, 9 p.m. from Brussels
what decision the democracies may make.
In spite of the strong attitude taken by Britain and
France
Inst week in backing Czechoslovak's fourth plan
with EVEN the threat of war, the opinion seems to bE;
growing here that the resistance of both London and Paris
is weakening EVEN to the extent that they may possibly accede
to Hitler's terms in n final desperate concession to avoid
the horrors of war and to Effect what might bE regarded as
12 personent composition of European pence. There is more
certainty in the conjecture LS to what Hitler's demands are
than there is in what may bE the French attitude and the
British attitude after Parliament is convoked.
Outstanding in the public reaction among BELGIANS
is the conviction, held with extreme satisfaction, that
events have served to emphasize the wisdom of Belgium's
policy of isolation and independence.
DAVIES
ROW
EDA
Regraded
104A
RESTRICTED
us
Paraphrase of Code Radiogram Received at the
War Department September 17. 1958
From Berlin
Sept. 17, 1938
9:55 s.m.
#768, Sept. 17.
The question of Sudeten autonomy now a dead issue. A
plebiscite or German-Polish-Hungarian intervention is now the only
solution. In North Germany no mobilization or concentration of
troops has taken place. It is also probable that mp abnormal mili-
tary measures have been taken in South Germany. From Austria and
Silesia no reports have been received.
SMITH
RESTRICTED
Regraded Uclassified
G-2
CONFIDENTIAL
104B
JM
WAR DEPARTMENT
WAR DEPARTMENT GENERAL STAFF
G-2/2657-11-90
MILITARY INTELLIGENCE DIVISION, G-2
WASHINGTON, D.C.
wb.
September 17, 1938.
MEMORANDUM NO. 14 FOR THE CHIEF OF STAFF:
Subject: The present European situation to
midnight, September 16-17, 1938.
General Situation. No change.
Military Situation. The following information,
dated 9:55 A.M., September 17, 1938, was received from the
Military Attache in Berlin:
"The question of Sudeten autonomy now a
dead issue. A plebiscite or German-Polish-
Hungarian intervention is now the only solu-
tion. In North Germany no mobilization or
concentration of troops has taken place. It
is also probable that no abnormal military
measures have been taken in South Germany.
From Austria and Silesia no reports have
been received."
Otherwise no known changes in the military situa-
tion.
CONFIDENTIAL
105
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE: September 17, 1938
To
Secretary Morgenthau
FROM
A. Lochhead
Close SEPT. 17, 1938
GOLD HELD IN LONDON
$188,000,000
irance arranged for following ships;
Sailing
Steamship
Amount
Sept. 21
Normandie
$11,300,000
Sept. 23
Manhattan
11,300,000
Sept. 24
Paris
11,000,000
$33,600,000
Regraded Uclassified
Sun 106
J.P.M.
P.N.
Dear M Securary:
9-18-38
Hru are sme telegrams.
The two key telepans,
hamm, The Secretary pupers tr
hot left oh your house Etres in
paraphrase, but of ym mill
telephone me when you sets in,
I shall mm one to your Rinde,
So That you can nead There +
Then lock Them up fain. There
an I When mg 2 crpies, the
Pt's The Sec'go, V it is the lotter
I shall bring om.
My number is North 42-81
yrs
Regraded Uclassified
107
PARAPHRASE OF TELEGRAM
FROM BERLIN
No. 456, September 18, 2 p.m.
AAK
Strictly Confidential
Hendereon and I just had A. long conversation.
Henderson 18 under greater stress of emotion than I have
ever noticed in him and he awaite with quite evident
lack of patience the London Cabinet's decision and the
resulte of the Daladier conversations. There was not
given to Henderson by Chamberlain a real idea of what
WAS In the mind of the latter. Chamberlain contented
himself with A resume of hie talk with Hitler. Henderson
feels extremely apprehensive of any delay. In fact he
was, he said, in despair over the circumstance that he
had preached for four months that It was urgent, that
back nome he had been listened to by nobody, and that
he was, he felt, A voice in the wilderness.
No more than did Weizsecker did he try to give an
account in detail of the Berchtesgaden conversation. All
the same I got the same impression of the situation as
I got from what I was told by Weizeacker, and there was
even use of the same words "cession of territory". It
was explained by Henderson that Chamberlain had employed
this phrase and that in hie mind it was probably the
synonym of self-determination.
The telegrame which Henderson had sent to London
in the past two days were brought out. He made the
following points. Chamberlain's coming forestalled
Regraded Uclassified
108
-2-
military action. Chamberlein has been promised by Hitler,
and Hitler will not break his promise unless calamitous
events occur in Czechoslovakie, that no military move
will take place until Chamberlain and he can hold the
next meeting. It has been vigorously reported by Henderson
that should the Western Powers refuse the adoption of the
right of self-determination or even adopt it hedged about
with numerous conditions, to talk to Hitler again will be
quite useless. In fact, Hitler will march and the result
will be general war in Europe. On the contrary, 1f the
British and the French are willing unconditionally to
adopt the principle of self-determination in their talks
with Hitler 1t. should be possible for them to gain cer-
tain concessions with regard to the manner of effecting
this principle. Henderson hae urged a further necessary
point in that pressure to accept self-determination be
put upon Benes at once. Naturally the very sericus risk
exists that there will be refusal on the part of Benes
or that in the event thet he accepts self-determination
the Czechoslovak people will revolt. Should this occur
Germany will intervene and B local war will occur.
SECTION II No. 457, September 18, 2 p.m.
It 18 argued by Henderson and it hee been 20 reported
by him that there remains the choice, if war must come
out of this, between a widespread war on A poor cause
Regraded Uclassified
109
-3-
which involves the reputation of the democratic idea of
self-determination or a small limited war. To his mind
best
the/choice is clear. Ae he puts it, England and France
must make the choice between war with Germany and the
adoption without conditions of the principal of self-
determination. If the second is chosen they will neces-
sarily, however repugnant they may find the task, have
to force Benes to accept. If the idea of self-determination
finds acceptance, the coercion of Benes in some way can
not be avoided, either through friendly pressure by the
British and French or German armed pressure.
A gathering of troops north of Vienna in Austria
is also being reported by Henderson. He 18 not certain
but ne believes that there are going forward certain
military preparations near Breslau ( Bee my 451, September 15,
noon, reporting summary by military attache) I have just
been told oy our military attache that the Commander-in-
Chief and the Chief of Staff last night entertained
the military attaches at dinner in East Prussis. Accord-
ingly it 1s obvious that there was no incident contemplated.
I was told by Henderson that just before he left
Nuremberg his Government had telegraphed him to stay and
to send word to Ribbentrop that there was forthcoming an
urgent message.
For the reason that Henderson recognized the peril
of an additional warning, he did not either notify the
110
-4-
German Foreign Minister nor remain at Nuremberg, and he
told his Government so. This incident must have happened
at just about the same moment as Henderson gave to the
prese his statement.
Yesterday afternoon the British Ambassador eaw
Goering at the (?) Kerinhall and urged upon him to do
everything in his power for the maintenance of Deace, no
matter what the provocation, until Hitler could again
talk with the British Prime Minister. Henderson was
reassured by Goering in this respect and declared that
Hitler had given his word and that unless there RPC some
calamitous upheaval in Crechoslovekia, nothing would be
done until there had been started further negotiations.
It was said with emphasis by Goering that to attach any
conditions in accepting self-determination would be
provocative and of no use, and he urged that the British
Government be told BO by Henderson. In regard to German
oreparedness Goering spoke in confident terms and as
for the air, it was declared by him that Greet Britain,
Czechoslovekia and France combined were weaker than Germany.
Goering did not bluster, according to Henderson, but his
very restraint was ominous. According to Goering he was
expecting visite from the Hungarier Minister and the
Polish Ambassador and he expected that they would both
talk about their minorities.in Czechoslovakia and make
Regraded Uclassified
111
-5-
the request that in any settlement these minorities
should be taken care of. It was said by Goering that he
intended to Bay that the German interest was in the
Sudetene only and not in what might happen to any other
part of Czechoslovakia.
This message is not being repeated to London or
Paris because of the reasons mentioned in my 453. It
may be desired by you to inform them.
WILSON
Regraded Uclas
112
PARAPHRASE OF TELEGRAM
FROM PRAGUE
No. 204, September 18, midnight.
I was informed today by the Minister of Foreign
Affairs that it was his emphatic belief that the unity
of Ozechoslovakia 1s complete with regard to defending
the country, this unity including even the Communists
among whom are splendid soldiers and who are considered
to be 8. strong factor in the defense of the country
because of the communists'horror of Nazidom and because
of their anti-Fascist opinions.
The fact that Slovak participation in the Government
coalition would be invited (my no. 197) was confirmed by
him and he remarked that in the defense of Czechoslovakia
all Slovaks including the followers of Hlink would Join.
There has been made a protest by the German Under
Secretary for Foreign Affairs to the Czechoslovak Charge
d'Affaires against the reported Czechoelovakian troop
mobilization. According to the Czech Minister for For-
eign Affairs there has not been mobilization but some
thousands of reservists have been called to man the
border fortifications which had been virtually emptied
of troops because of withdrawals to preserve order.
Furthermore to maintain state authority and to defend
the nation the present move was absolutely indispensable.
Regraded Uclassified
113
-2-
With regard to the address by Mussolini today his
opinion was expressed that although the Duce would like
E conflict to be localized, nevertheless 1f there should
occur B war with the Powers lining up, on the German side
there would be found Italy and this in spite of the raot
that everyone except Mussolini in Italy 1s aware that in
the long run it would be disadvantageous to their country.
Answering my inquiry it was said by the Foreign
Minister that there had been made arrangements to evacu-
ate the Government on the Slovakian-Morovia line but
that this evacuation would only be emergency action to
be preceded by the setting up at the selected loostion
of a skeleton organization of government departments. It
was emphasized by me that all my inquiries were indicative
of no special worry but corresponded merely to measures
in anticipation. The Foreign Minister declared that this
was understood by him and that his own government had been
thinking in exactly the same terms as this.
Although this Government's maintenance of an unyield-
ing attitude with regard to a plebiscite has been fully
known to me nonetheless I discussed the matter once more.
I was left by him altogether unconvinced of the adequacy
of his argument against & plebiscite. His references were
merely to geographic, economic and historical considern-
tions and this did not seem to envisage conceding the
Regraded Uclassified
114
-3-
plebiscite for the sake of avoidance of the frightful
consequences of general war in Europe.
CARR
Regraded Uclassi
R6141
115
September 19, 1938
The President says that it is his opinion that the
Czechs will fight and I told him that I thought the Czechs
would fight. He says that he has thought out this idea to
get word to France that if she gets into this fight that
she 1ª not to attack but stay behind the Maginot line and
that the countries surrounding Germany if they decide to go
to war should make it a defensive one and then both on land
and sea to shut off Germany's supplies. He asked me what
I thought about it. I said, "I think it's an excellent idea;
that if properly carried out there is a 60-40 chance of
bringing Germany to her senses". And the President added,
"If the various countries should attack Germany they only
have a 40-60 chance of being successful".
The President gave me the feeling that he is ready
to RO pretty far in demonstrating United States sympathy in
such a move. Be sald, "The time is past for speeches on my
part". I said, "How are you going to get this across to the
English and French". He said, "That is my worry". He said,
"What about Kennedy?" I said, "You know, Mr. President, you
can't trust Kennedy" and he said, "That is right". He said,
"What about Bullitt?" I said, "You can trust Bullitt abso-
Iutely, unless his emotions get the best of him". The
President said, "I guess my best bet is the old boy up at the
British Embassy". (meaning Sir Ronald Lindsay) And I said,
"I think that is right". I said, "When are you going to do it"
and he said, "If I am going to do it, I am going to make a
move this afternoon". He said, "Bullitt is coming in at
2 o'clock and I am going to put it up to him".
I then did something which I had never done before -
I criticized Hull to the President. I said, "You know
Mr. Hull, as represented to the public, is about 100% different
than the real Mr. Hull". The President agreed readily. I
was encouraged. I said, "You know last June or July you put
up to him this question of assisting the Chinese and he
followed his usual policy by trying to wear all of us out and
then do nothing". The President said, "That is right"
I said, "You know, Mr. President, if we don't stop
Hitler now he 1s going right on down through the Black Sea -
then what?" I said, "The fate of Europe for the next hundred
years is settled". "There is no question in my mind that If
the countries around Europe would establish a blockade we
could choke Germany to her knees and that is our last chance."
The President said he saw no reason why we should not
give this gold shipment publicity.
116
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE Sept. 19,1938
Secretary Morgenthau
TO
Herman Oliphant
FROM
Re: Spanish Silver Litigation
Conzala Zabala, a Vice President of the Bank of
Scrin, recently enme to this country on business for the
Co-list Government. When Sullivan and Cromwell learned of
this they sought to examine him as 9 witness. After discus-
time the matter with us the Spanish Embassy asked the State
Department to recognize Zabola's diplomatic status 30 that he
would not have to testify. The Spanish Embassy has just told
1. that Stute Department has refused to issue the certificate
recognising Zabala's diplomatic status. I suggest that you
telephone Hull, tell him of our interest in the metter, and
=sk that the proper certificate be issued immediately.
KL
Regraded Jclassified
TREASURY DEPARTMENT
117
INTER OFFICE COMMUNICATION
DATE September 19, 1938
To
Secretary Morgeathan
FROM M. 1. Harris
& Short Boview of the U. 8. Government
Security Market during the Past Week
Wide fluctuations were shown in the government security market on
most days of the past week and substantial not losses were recorded by
both Treasury bonds and notes. Losses by Treasury bonds ranged from
about 3/40 of a point to 1 1/4 points and losses by Treasury notes
ranged from 1/4 of a point to 3/4s of a point. These losses, plus an
average loss of about 1/2 of a point by bonds in the last three days of
the provious week, places the average of those issues due or callable
after eight years about 1 3/8 points below that of September 7th, the
day before the terms of the September financing were made known.
During the entire week the market was contimously under the in-
fluence of developments in the Csechoslovakian crisis. The new financing,
which substantially increased the supply of securities in the market, and
the acceptance of subscriptions for $100 millions more of the securities
than had been previously indicated, thus giving the market & larger
supply than had been anticipated, also were factors in the course of the
market. Although the response to the financing program was most satis-
factory, the new issues were particularly vulnerable when the market
weakenned due to news from abroad. On Monday, when news was particularly
upsetting, prices started downward and as a. result the premiums on the
new iscues were substantially reduced. This brought about heavy selling
Regraded Uclassified
118
-8-
of the new issues w the so-called "free riders". Buyers, wash as
insurance companies, who usually enter the market following a financing
were reluctant to do so and as a result the weakness became more pro-
nounced. Although selling was centered in the new issues, the lower
price of these issues brought on a correspondingly lower level of prices
on outstanding issues. Nevertholess some buying support from time to
time was given the market by large banks and insurance companies.
The new 2 1/2= of 1950/52, which were quoted on September 8 as
high as 101 1/2 on a when issued basis, opened the week at 101.4/32nds
bid, reached & low of 100.12/32nds bid and closed the week at 100.16/32nds
bid. The 1 1/8% Treasury notes due 6/15/43 reached a low of 100.5/32nds
bid, after having been quoted as high as 101.8/32nds bid on September 8,
and closed on Saturday at their low of 100.5/32nds bid.
Dealers' Portfolios
Below is given the holding of U. S. Government securities and
guaranteed obligations by reporting dealers on September 10 and 17th
and the change for this period. Also given is the total bolding, as well
as the holding of Treasury bonds on each day last weeks
(in millions of dollars)
Holdings
Holdings
Sept. 10
Sept. 17
Change
Treasury bonds
4 31.4
+ 21.1
- 10.3
-
notes (1 year)
4 46.9
4 46.8
- 0.1
IS
.
(1=5 yrs.)
+ 13.6
- 1.7
+ 15.3
.
bills
+ 8.1
+ 7.6
- 0.5
H.O.L.C. bonds
4 17.2
+ 5.5
- 11.7
T.P.M.C. bonds
8 2.4
- 3.8
- 6.3
+ 92.4
+ 78.9
- 13,5
Regraded Uclassified
119
Total holding
Holding of Treasury
by dealers
bonds by dealers
Sept. 12
$ 126,2
4 42.4
13
$ 104,5
4 29.5
14
a 88.6
4 25.6
15
+ 90.4
+ 26,3
16
4 84.4
+ 24.1
17
4 78.9
4 21.1
From the above figures it can be seen that dealers reduced their
total holdingsduring the week $47,300,000, of which $21,300,000 was from
their holdings of Treasury bonds.
New Security Issues
Corporate security financing this week amounted to $27,000,000
which was largely made up of the $25,000,000 offering of Atlantic Re-
fining Company debenture 3s of 1953, rated A by Moody's. This issue
was offered at 99 and was very well received. Municipal bond awards
mount to about $7,300,000.
Corporate Bond Market
Although all sections of the market lost ground during the past
week, the movement of prices was usually confined to fractions, with
the exception of Wednesday when news from abroad was particularly
unsettling. Daily volume was increased but turnover did not exceed
moderate proportions.
High grade bonds held steady on early days of the past week,
dropped about 1 point on Wednesday and recovered somewhat the last part
of the week. Moody's AAA bond price average at the end of the week was
about 1 1/8 points below the highest levels reached in August and about
1/4 point above Wednesday's low. Medium grades slumped about 1 3/8 points
Wednesday and, unlike the M issues, did not recover during the balance
Regraded Uclassified
120
of the week. Moody's BAA bond price average finished 3 1/4 points
below the highest levels reached in August.
Foreign bonds were weak throughout the week and on Wednesday the
break was the broadest since the beginning of the present European
situation. On that day 90 percent of the issues selling registered
declines, with the weakness most pronounced in the Prague 7 1/2s of
1952, which lost 7 points for the day and the Cxechoslovakian 8e'of
1951 which lost 3 1/2 points.
Federal Reserve System Account
For the purpose of maintaining an orderly market during periods of
decline $75,032,000 U. S. Government securities were purchased, consist-
ing of $20,002,000 1 1/8% Treasury notes due 6/15/43 and $55,030,000
various Treasury bonds. Under the arrangement between the Treasury and
the System that purchases be divided on & 50-50 basis, the System's share
was $37,767,000. which consisted of all the notes and $17,765,000 Treasury
bonds. It is my understanding that these purchases will be used in
replacement of Treasury bills maturing on Wednesday.
The only other transactions were the replacement of last week's bill
maturity amounting to $66,600,000 by purchases of a like amount of other
Treasury bills and exchanges in the market of $4,000,000 of 1 5/8%
Treasury notes due 3/15/40 for $3,000,000 of the 1 1/2% Treasury notes
due 6/15/40 and $1,000,000 of the 3 3/8% Treasury bonds of 1940/43
Regraded Uclassified
121
- B-
Treasury Accounts
The Treasury's share of the purchases mentioned above was
$37,265,000. all of which were bonds. $25,000,000 of those bonds
were taken by the Government Life Insurance Fund and the balance,
$12,255,000 by the Postal Savings System.
The only other transactions were the following purchases:
$43,000 2 3/40 of 1958/63 a/c D. C. Teacher's Retirement Fund.
100,000
M
-
s/c Alien Property Custodian.
250,000 .
.
a/c U. S. Housing Authority.
Note: This memo does not take into consideration the improvement in
the tone of the various markets today which, in the case of Treasury
bonds, amounted to gains of 4 to 8/32ada and, in the case of Treasury
notes, 1 to 5/32nde.
Regraded Uclassified
TREASURY DEPARTMENT
122
INTER OFFICE COMMUNICATION
CONFIDENTIAL
DATE September 19, 1938
TO
Secretary Morgenthau
FROM
Mr. Haas YOU
Subject: The Business Situation,
Week Ending September 17, 1938.
Conclusions
(1)
Current indices of business activity, reflecting commit-
ments made some time back, continue to be well maintained
though some alight evidence of B. slackening tendency has
appeared recently. The FRB index for August (preliminary)
stende at 86, showing a gain of 3 pointe over July. The New
York Times index dropped back somewhat during Labor Day week,
after advancing for six weeks. Barron's weekly index has
for three weeks shown eigne of levelling off,
(2)
The sharp break in stock prices this week, which has
carried the industrial stock average to the lowest level since
the end of June, has foreibly brought home to American business-
men the seriousness of the war situation. It appeare to confirm
other indications pointing to some interruption in the recovery
trend this fall; first, because the decline in stock prices
will adversely affect new buying: and second, because the drop
in industrial stocks below the lowest prices of July and
August, following earlier declines of the railroad and utility
groups, will be accepted in many quarters 88 indicating funda-
mental weakness in the business outlook.
(3)
Business in some linee has already begun to be affected
by the crisie abroad. A resort to hand-to-mouth buying in the
last few days is reported from the textile, shoe and leather
trades, Previous to the market break, a declining trend of
orders for lumber, and B. less satisfactory demand for steel in
some important districts, had been reported. In certain war
commodities, on the other hand, & speculative run-up in prices
has occurred.
Regraded
123
Secretary Morgenthau - 2
(4)
The experience of 1914 provides no adequate guide to
what may hannen to our economy in case of war, since condi-
tions now are radioally different. An analysis of the pos-
sible reactions suggests that (1) the first impact, 8.8 in
1914, would be a rush for liquidity on the part of domestic
security holders but with foreign liquidation probably a
much less important immediate factor: (2) Government bonds
would be more vulnerable than in 1914, owing to the much
larger volume outstanding and to their concentration in
banks as speculative investments, although increases in
both short- and long-term interest rates would be held in
considerable check by the far stronger position of the
American banking system: $3 billions of excess reserves,
huge gold reserves, and little possibility of great foreign
demand for repatriation of funds.
Outlook affected by market decline
The sharp break in the stock market this week 18 signi-
ficant in the business picture from two points of view: it
brings strikingly to the attention of American businessmen
the seriousness of the European situation, and it provides
the first clear warning that everything may not be satis-
"sctory in the domestic business outlook,
During the past month or more an almost unanimous belief
developed in this country that B. fall business boom was in
the making, and that it would become evident after Labor Day.
Yet the trend of industrial orders showed no indication of
such a boom, and some evidence appeared that the rate of
activity during August reflected in part a speculative anti-
cigation of orders. Actual orders have not materialized as
expected, apparently because of the weakness in the foreign
situation and 1:8 resulting pressure on commodity prices.
"1th the psychological background somewhat unfavorable to
begin with, business confidence has been severely shaken by
the stock market break. The fact that industrial stock
prices have dropped below the lowest levels of July and
August, following previous similar action by the railroad
and utility groups, will raise the question in many quarters
as to the soundness of the domestic business outlook.
Regraded Uclassified
124
Becretary Morgenthau - 2
(4)
The experience of 1914 provides no adequate guide to
what may happen to our economy in case of war, since condi-
tions now are radically different. An analysis of the DOB-
sible reactions suggests that (1) the first impact, 89 in
1914, would be B rush for liquidity on the part of security
holders but with foreign liquidation probably B. less impor-
tent immediate factor; (2) Government bonds would be more
vulnerable than in 1914, owing to the much larger volume out-
stending and to their concentration in banks 8,8 speculative
investments, although increases in both short- and long-term
interest rates would be held in considerable check by the
far stronger position of the American banking system: $3
billions of excess reserves, huge gold reserves, and little
possibility of great foreign demand for repatriation of
funds.
Outlook affected by market decline
The sharp break in the stock market this week 16 signi-
floant in the business pioture from two points of view: it
brings strikingly to the attention of American businessmen
the soriousness of the European situation, and it provides
the first clear warning that everything may not be eatis-
factory in the domestic business outlook.
During the past month or more an almost unanimous belief
developed in this country that a fall business boom was in
the making, and that it would become evident after Labor Day.
Yet the trend of industrial orders showed no indication of
such B boom, and some evidence appeared that the rate of
activity during August reflected in part a speculative anti-
cigation of orders. Actual orders have not materialized A.8
expected, apparently because of the weekness in the foreign
situation and its resulting pressure on commodity prices.
Tith the peychological background somewhat unfavorable to
begin with, business confidence has been severely shaken by
the stock market break. The fact that industriel stock
prices have dropped below the lowest levels of July and
August, following previous similar action by the railroad
and utility groups, will raise the question in many quartere
- to the soundness of the domestic business outlook.
Regraded
125
Secretary Morgenthau - 3
Though the market decline has been generally attributed
to the war crisis, some economic writers have already begun
to raise the question of its significance in the outlook for
business. The Annalist, for example, says that the "collapse
in stock prices has introduced B. new element of uncertainty
into a situation in which the prospects for uninterrupted
recovery were already becoming somewhat less clear. Aside
from the increasingly critical nature of the European position,
there has been observable a tendency toward & slackening in the
rate of recovery, despite brisker retail trade and despite the
unquestionably satisfactory nature of August trade statistics.'
The New York Times index for the week ended September 10
declined to 84.5, as compared with the previous week's figure
of 85.3, after having advanced for six successive weeks,
though the decline may have been due to imperfect adjustment
for the Labor Day holiday. Barron's weekly business index
has tended to flatten out for three successive weeks.
The FRB index for August, estimated at 86, showed a 3-
point gain over July largely because of a sharp improvement
in steel and textiles. Steel activity at present is apparent-
ly running at & rate in excess of current orders. Cotton mill
activity has been declining since the middle of August, follow-
ing its very sharp summer rise. (Bee Chart 1.)
Some curtailment of orders reported
The less optimistic views of business analysts, together
with the impact of the market break itself, seems very likely
to cause a further curtailment of new buying. Since factories
now, in most industries, have no large backlogs of orders to
sustain production, this would be reflected very soon in a
curtailment of operations.
Some evidence of curtailed buying following the European
crisis has already appeared, according to trade reports. In
the Worth Street textile market, sales fell off markedly as
buyers held aloof and watched European developments. Until
the uncertainty dies down it 1s felt in the trade that buying
of textiles will be confined to nearby needs.
In the shoe and leather trade, despite 8. bullish domestic
situation, buyers are reported to be unwilling to make advance
commitments under present uncertainties and for the time being
have adopted B. hand-to-mouth buying policy.
Regraded Uclassified
126
Becretary worgenthau - 4
Representatives of the lumber trade, confirming our
previous opinions, explain the decline in lumber orders since
the middle of July as having been due to previous excessive
buying, which went into inventories. Our figures show 8.
steady decline in average orders per mill from 505,800 board
feet during the week ending July 16 to 364,500 board feet
during the week ending August 27.
Steel orders so far in September, according to the Iron
us, have falled to expand as much as had been expected. In
the Pittsburgh district, while incoming business 18 reported
AS slowly improving, it does not show the same activity as a
month and a half ago. For the Chicago district, second in
importance, it 18 stated that "A note of disappointment is
enderent in this district, due probably to the failure of
specifications from all sources to expand as rapidly after
Labor Day as opinion indicated they might." Our confidential
reports from the U. S. Steel Corporation show orders last week
it the same level ae the previous week, equivalent to about
37 DET cent of capacity.
Buying in the markets for certain traditional war mate-
risio, such as wheat, sugar, copper, and other non-ferrous
retale, hes become more active. A considerable part of the
buying, however, 18 apparently speculative, part of it repre-
renting short covering.
The situation in 1914
In referring to the trends of economic indices in 1914
(See Chart 2) for guidance in estimating the effect of war
in our economy, it must be kept in mind thet the 1914 situa-
tion in certain important respects offers no parallel to the
present situation:
1. The large volume of foreign holdings of our
securities are of 8. different character from
those in 1914. Being here primarily for safety
rather than for investment, foreign holdings are
not likely to be liquidated and repatriated on
the outbreak of war. Moreover, there 18 high
probability that much of such holdings would be
nationalized by foreign governments and arrange-
ments subsequently made for their orderly
liquidation.
Regraded Uclassified
127
Secretary Morgenthau - 5
2. The character of the Government bond market is
now entirely different, hence, the stable tendency
of high grade bonds in 1914 cannot be considered
as a precedent. With the present huge volume of
Government securities outstanding, largely held as
8 semi-speculation by banks, the bond market would
be much more vulnerable to any rush for liquidity,
although increases in both short- and long-term
interest rates would be held in considerable check
by the far stronger position of the American bank-
ing system: $3 billions of excess reserves, huge
gold reserves, and little possibility of great
foreign demand for repatriation of funds.
Ae we view the situation, A break in the securities
markets at the outbreak of war, largely as a result of liquida-
tion by domestic Molders, would be unavoidable. The crisis
during the past week, we believe, was sufficiently acute to
provide some guide to the probable reaction to an actual
declaration of war. Business would almost certainly be
affected rather quickly, since the lack of any large backlog
of orders and the recent tendency to accumulate stocke have
made business vulnerable to adverse developments.
The present outlook
Excluding the war factor, an analysis of the immediate
outlook suggests that business recently has become over=
optimistic, has gone ahead somewhat too rapidly to be main-
tained, and that temporarily at least a period of irregular
or declining business activity 16 probable. Having apparently
turned the corner into an upward trend, however, business has
gained a momentum which will tend to support it on any setback
and will make a further recovery easier when the next favorable
development occurs.
It seems doubtful that a peaceful settlement of the
Czechoslovakian problem would prevent a period of irregularity
this fall. While it would tend to strengthen foreign currencies,
and bring a strong improvement in international business senti-
ment, it would probably not be sufficient to offset the evidence
of underlying weakness in the business situation which had
begun to appear before the European crisis gave business its
recent shock. This has been reflected in our new orders index,
shown in Chart 3. Contrary to widespread expectations of an
Regraded Uclassified
128
Secretary Morgenthau - 6
improvement in orders during September, our total index for
the second week of September (preliminary) declined to a low.
that has been reached only once since the third week of June.
While steel orders have improved moderately, other orders have
shown further declines.
Regraded
Ucla
129
COTTON MILL ACTIVITY
Chart 1
PER
CENT
Est. Normal = 100, Adjusted
140
120
36
37
100
38
80
60
N. Y. Times
40
JAN.
MAR.
MAY
JULY
SEPT.
NOV.
Regraded Uclassified
Chart 2 130
SELECTED ECONOMIC INDICES
1912 - 1917
PURCENT
PERCENT
ALACENT
yratt
COMMODITY
VIELD
PRICES
(INVERTED)
AND
125
3.6
TO
INDUSTRIAL STOCK PRICES
1926 - 100
55
115
3.8
60
105
4.0
8
y5
4.2
30
as
4.4
RAW MATERIAL PRICES
1926 - 100
45
75
4.6
?
65
4.8
market
35
55
5.0
HIGH GRADE CORPORATE BOND VIELDS
30
45
5.2
25
35
5.4
20
25
5.6
1912
1913
1914
1915
1916
1917
PERCENT
DOLLARS
NILLIORS
INDUSTRIAL
PRODUCTION
EXPORTS
90
600
INDUSTRIAL PRODUCTION
1926 - 100
80
500
70
400
300
60
U.S. EXPORTS
200
36
100
40
o
30
1912
1913
1914
1915
1916
1917
-
STAND. STAT.
B.L.S.
* NA. FOR. AND DOM. COMM.
- of The Trainery
C - 225
of - - -
Regraded Uclassified
Chart 3
CONFIDENTIAL
INDICES OF NEW ORDERS
131
1936 = 100
1938
J
F
M
A
M
J
J
A
S
0
N
D
PER
PER
CENT
CENT
110
110
100
100
90
90
TOTAL (COMBINED INDEX)
80
80
70
70
60
60
50
50
40
40
?
TOTAL EXCLUDING STEEL
30
30
20
20
STEEL ORDERS
10
10
0
0
J
F
M
A
M
J
J
A
S
o
N
D
1938
Office of the Secretary of the Treasury
1 - 85
Division of Research and Statistics
Regraded Uclassified
132
September 19, 1938
The President said he saw no reason why we should
not give this gold shipment publicity.
Regraded Uclassified
133
Monday
September 19, 1938
9:04 a.m.
H.M.Jr:
Hello.
Operator:
Go ahead.
H.M.Jr:
Hello.
Admiral
Leahy:
Good morning, Mr. Secretary, this is Admiral
Leahy speaking.
H.M.Jr:
Good morning to you.
D:
I had a talk with the President Saturday afternoon.
H.M.Jr:
Yes.
L:
And I'd like to come over and see you for a minute
and explain the situation in regard to that shipment
business.
8.M.Jr:
Uh huh.
L:
Before you see the President. You're going to see
him today, are you not?
K.M.Jr:
Yes, I am.
L:
Well, could you give me five minutes?
H.N.Jr:
Can you come right away?
L:
Yes sir.
H.M.Jr:
I'll be delighted to see you.
L:
Well, I'll be right over, sir.
Regraded Uclassified
134
GROUP MEETING
September 19, 1938.
9:30 A. M.
Present:
Mr. Oliphant
Mr. Gaston
Mr. Haas
Mr. Hanes
Mr. Lochhead
Mr. White
Mr. Gibbons
Mr. Upham
Mr. Thompson
Mrs. Klotz
H.M.Jr:
Herman?
Olighant:
One item of news. Mr. Johnson's informed that
the Standard Oil Company of New Jersey
H.W.Jr:
Louder.
Oligiant:
Mr. Johnson informs me that the Standard 011
Company of New Jersey are initiating a plan
against dumping of oil from Mexico. As far as I
see, there is nothing to do but advise the State
Department.
M.W.Jr:
Well, advise the State Department, and when you
and I get a minute to think, I want to understand
it myself. See? Advise them, but please
Oliphent:
I'll hold it, and talk to you.
H.W.Jr:
Yes. I want to know about it.
What else, Herman?
Olighant:
In going over those various things which the Depart-
ment would have to do in the event of an outbreak
- that A
of European war, everything seems to be in ship-
shape, and it can be done quickly except one large
P.134
area, and that is the general arrangement for
liquidating foreign securities; that is, to
prevent
H.M.Jr:
Well, Mr.
Regraded Uclassified
134A
74
TREASURY DEPARTMENT
eye
INTER OFFICE COMMUNICATION
DATE
September 16, 1938.
TO
Secretary Morgenthau
FROM
Herman Oliphant
The following are things which might be necessary for the
Treasury to do immediately if a general European war breaks out:
(1) Revoke the general license under which foreign
exchange transactions are now taking place, thus
reinstituting the foreign exchange control which
we had prior to November 12, 1934. Such control
should probably be extended to ordinary commer-
cial transactions, which were not previously covered.
This can be done without legislation. Within this
frame, any degree of control desired could be
carried out.
(2) Plans should be developed with SEC and the Federal
Reserve Board for dealing with the sudden liquida-
tion of foreign-owned securities and for support-
ing the Government bond market. This might enteil
the closing of the stock markets and would cer-
tainly involve the setting up of machinery for the
orderly liquidation of foreign-owned securities.
(3) Telegraphic notices have been prepared for col-
lectors of Customs and Coast Guard officers to pre-
vent the departure of vessels intended for hostilities,
or to supply war ships of belligerents and generally
to enforce neutrality.
(4) All the papers have been prepared interning vessels
of belligerents in American waters, if that is
desired.
For your later use, I will send you e memorandum covering
other steps which would not need to be taken at once, but which might
come along in the course of B. few weeks.
Regraded Uclassified
135
- 2 -
oligmants
And that is broader than 8. E. C.
H.
Well, Judge Haley said on the return of Mr.
Douglas, he and Judge Haley will come over to see
me on the other matter, and I want you and Hanes
here, and when they come we can take that up,
in case of world war. He said as soon as Douglas
gets back he will call me.
0110han:
I think it will take several days to develop a
plan.
9.9.Jrt
Well, let's wait until they come over, and then we
can start it - set up a little consittee, between
the two of us, and work it out. I AM not very
nervous about selling of European stocks. I
don't see why we should sell. Do you (Hanes)?
Banes:
No, I can't. They had a meeting about that over
at the S. E. C. last week; I can't see why the
individual investors would be dumping stocks on
this market.
L.W.Jrs
Certainly, any Government would take over any
securities - their nationals - they would want to
keep the market up. I covered that with the
President, and Mr. Hull, and I can't see any reason
there should be, and the longer this thing is over
our heads, the longer opportunity individuals have
time to adjust themselves. Is that right?
Hanes:
That's right.
Huh? But I still say that when Douglas comes over -
I don't want to call him; I've gone as far as I
can, bringing this other matter to their attention;
1f I go any further, it's a question of usurping
my authority. Judge Haley said as soon as he got
back, he'd call. There is such a thing - well, I
don't want to have S. E. C. say, "We're responsible
to the President, not you." I don't want to do
that.
(Nods to Mr. Oliphant.)
White:
Before you go on to that, Mr. Oliphant, you might
want to point out to the Secretary that dumping
would have to be the Secretary's decision because
it involves injury, and because the injury is
Regraded Uclassified
136
- 3 -
determined here, so that the finding doesn't relate
to the State Department yet.
H.M.Jr:
Well, the knowledge that the Standard Oil of New
Jersey has this in mind- certainly should be
acquainted with that.
White:
But I wanted to make sure you knew the decision
was yours.
H.J.Jr:
What else, Herman?
Oliphant:
Doris - well, that's ...
H.V.Jr:
What?
Oliphant:
That's all.
H.W.Jr:
I'll see you during the day.
I'd like to see you during the day.
H.M.Jrs
You will.
Herbert?
Gaston:
I have a reply from Senator Sheppard to your letter
of the twelfth, which was the letter in which you
called his attention to your regulations, and he
says that since you seek authoritative guidance,
the most authoritative will be the Committee
itself, and they are going to hold a meeting in
about twelve or fifteen days, and he will submit
your letter to them for reply.
H.M.Jr:
(Laughs) Oh boyl That's very funny.
Ciston:
I don't think this requires any reply. It can
just go in the file.
H.S.Jr:
Oh, aren't you going to tell the press about this?
I'll leave it here. Bring it to me just before
the press conference.
deston:
Here is a letter from
Mr. Gaston: It's a personal matter.)
(Reporter, to Mr. Gaston: A letter from whom?
Regraded Uclassified
137
- 4 -
R.C.Jr:
On that, I wish you'd get Harry to give you
another four hundred names. There is no use keep-
ing that thing in hand. W111 you talk to Harry?
Oneton:
I'll talk to Harry.
A.R.Jrs
(Aside to Mrs. Klotz:
next time Mr. Jones
comes over.)
Anything else?
(astent
Nothing else. It seems to me they have a perfectly
sound proposition there.
.'.In:
Will you start a new system in your office, 30 that
when somebody says something moderately pleasant
about me, it will be brought to my attention, as
well as are the unpleasant ones? This last week
Kiplinger devoted a full page to me; I never saw
it.
I thought you were reading the Kip letter.
No. I thought somebody might have said something
nice about me. was it so nice?
(loth
Yes.
0. K.
George?
Muns:
I have nothing out some more new figures.
P.M.Jr:
Right.
That big sheet - I don't know whether your're
interested in that.
ANN
When are you going to give me your business one?
Thas:
At noon.
N.M.Jr:
All right.
Heast
A little before that if you need it. Italy is
on that stock chart now. Harry's working on Japan,
via the Department of Commerce, to get some figures.
Regraded Uclassified
138
- 5 -
H.M.Jr:
I wish you'd give me something on - just a little -
British stock. I'd like to have something about
British Consul and War Loan bonds. British Consuls
and British War Loan bonds.
Hoas:
0. K.
H.S.Jr:
(Side conversation with Mrs. Klotz.)
I'd like to have that by noon.
Haas:
Right.
R.M.Jr:
Anything else?
HANS:
That's all.
H.W.Jr:
(Nods to Mr. Hanes.)
Hanes:
Mr. Secretary, the S. E. C. wants to have a meeting
with somebody in the Treasury Department who - who
knows about this depreciation, and uniform account-
ing. I don't know - I guess that comes in the
Department of Internal Revenue, but they are anxious
to find if there isn't some way at arriving at a
conclusion of a uniform system of accounting for
the depreciation. The Treasury and the S. E. C.,
and the stockholders are all getting different
kinds of depreciation items and they are anxious
to get some uniform system worked out between the
two places.
R.M.Jr:
You know anything about it, George?
Hans:
Yes, there is a unit over in the Bureau, but they
will have considerable difficulty because the
statute sets up depreciation for oil companies, for
example, that are different from special arrangements
for different types of
....
Hanes:
I think it is utilities more than anything else
they are interested in.
H.M.Jr:
Where would that be, George?
Hnes:
It's 8 part of the income tax unit - Sherwoods, I
think.
H.M.Jr:
Will you look it up for Hanes, and let him know?
Regraded
139
0 * T
BAS:
I will.
Hanes:
That's all I have.
H.M.JT:
I see you're a good bowler.
Banes:
I missed the whole thing - rolled completely down
the gutter, all the way.
H.M.Jr:
Well, it's good sportsmanship anyway - nice thing
to do.
Lockberd:
The exchange is up a little bit, though not
carrying through hard now. You asked me whether
the strike would affect the movements today. So
far the strike hasn't affected the shipping in
New York, but it has held it up down the Bay.
The Queen Mary is down the Bay and it is doubtful
whether she will get up in time to unload today.
11.2.Jr:
You've started that thing, in writing, haven't
you?
Yes. You'll have a complete story, up to date.
They haven't heard further.
H.M.Jr:
0, K. Anything else?
(Nods "No.")
nhith:
We made a brief study of the Japanese situation
again. You might be interested to know they have
cut their gold losses, their monthly gold losses,
in half now, so they are losing only about seven
million dollars per month, and they've done that by
very stringent restrictions on imports. They have
cut down their imports drastically, and they've found
it necessary to do that in order to protect what
they've got left. They've got approximately two
hundred million dollars in gold left. Indications
are they feel something like that is an irreducible
minimum.
B.W.,Tr:
How much have they got left?
Phito:
About two hundred million dollars, that they could
realize on their various foreign holdings,
securities, etc. Their trade figures are very
misleading, in case anyone should quote them to you,
because an increasing share of their exports are
Regraded Uclassified
140
- 7 -
going to North China and Manchuria, from which they
get no foreign exchange. In addition to that,
their exports are decreasing pretty sharply, so
on the whole, their economic situations is becoming
worse all the time, notwithstanding the fact they
are losing less gold.
Mexican situation is weaker - down to six one on
the exchange. The Mason Digest, which Nicholson
and McHugh send over, which you might want to
glance at before Nicholson comes,
Harry, are you familiar with what the Export-
Import Bank is doing in South America? Do you
get that - I mean, I wish you'd make arrangements
that you could find out just what they are doing
so that I could know.
shitet
with the Export-Import Bank?
Well now, I'll tell you exactly - I've asked for
a written memorandum. Jones has lunch with me,
puts up the following, that some concern - he didn't
mention the name - wants to make a five million
dollar loan to Portugal on railway equipment, and
somebody else, a seventeen or eighteen million
dollar bridge to Portugal. I said as far as I
know Portugese finances are all right, to a limited
extent, but please to send me over a memorandum,
over his name, and ask me to sign it. It's all
too loose; something will come up a year from now -
"Morgenthau approved credit for Portugal,' and
nobody in the office will know about it, and I will
have forgotten about it.
In the first place, look up Portugal. I don't know
how Taylor handles it, but It's all done 60 loosely.
With Pierson down there, according to newspapers,
you'd write a ..... letter - tell them I'd like a weekly
very active
Well, in the first place, if
report of their activities.
mates:
For your signature?
W.M.Tr:
Yes, I'd like to have a report of their activities
since the first of January, 138, to bring us up to
date, and if they give us a weekly report from his now
on. After Mr. Taylor's return it will go over
desk, but until he returns I want it to go over your
desk.
Regraded Uclassified
141
- 8 -
Lochhead:
I'd like just to say on that, that Taylor spoke to
me last week, and said that the question had come
up over there in the R. F. C., and he'd given them
my name as a channel to clear through, in the
meantime, but I haven't heard anything from them.
M.M.Jr:
Between you and Harry, do it, but it leaves me high
and dry. I couldn't, over a lunch table, say
yes to a two or three hundred million dollar -
I don't know whether Mr. Selisar (phonetic) is
on his way up or on his way down. I don't know
what the English position is; I mean, I just don't
know. I don't know whether anybody in the Treasury
knows, but
.....
In other words, I want it sewed
up; I want to know who handles it in the State
Department. Maybe it's just talk, but if they are
going to lend real money, I'd like to know about
it. Jones doesn't know anything about Portugal;
he says he doesn't.
Thite:
There is a letter from Pittman which was answered;
another letter was received before the answer left.
Health:
Oh dear, I gave it to Miss Chauncey this morning.
Whiter
The first answer might do for the second, but the
second raises certain problems which I think should
be treated separately.
Let the first go. And I sent, registered mail to
Sheppard, giving him Magruder's name
(To Mr. Gibbons:) Did you talk to the man - did
he call you?
Gibbons:
Yes. I told him I couldn't get the one fellow,
and I talked to the other and everything was all
right. He said he's doing all he can.
S.V.Jr:
No more obstruction?
Gillions:
I talked to Jim this morning and he said he's not
doing anything, and he wouldn't. He said, "You've
got nothing to worry about; I've instructed my
people to watch their step."
H.V.Jr:
I appreciate your calling him up very much. I
appreciate it very much.
Regraded Uclassified
142
- 9 -
Gibbons:
The strike in New York, as Cogill reported, is
not interfering with the moving of this silver.
B.A.Jr:
I've kept in touch.
Gilanns:
They're still picketing our South Ferry Importers.
of course, every other building and store in New
York is being picketed today; people marching up
and down, and they'd lose their distinction if
they weren't doing it with us.
H.M.Pr:
(Side conversation with Mrs. Klotz.)
B.L.Jr:
Cy.
Uphon:
There are two or three things I ought to see you
about some time.
C.A.Jr:
You'll get a chance.
(Nods to Mr. Thompson.)
Thooman:
I have nothing.
White:
There is one other thing. It came to my attention -
a contemplated article in the Time Magazine about
the Treasury. Next week, I understand, while not
certain, Time Magazine
Gestans
No, Time - the young lady from Time got some
biographical material about Mr. Lochhead and dr.
White - nothing about policies, but just who they
were.
White:
They were going - that was part, the young lady said,
of a contemplated, rather ambitious article which
she said was to be in Time. I don't know anything
more about it than that.
M.M.Jr:
Well, the young lady in question - I haven't met
her, but she is an assistant to Davenport, isn't
she?
Ouston:
working for Davenport, in Fortune; this young lady
No, this is a Miss Mary Johnson. Miss McKeeno is
is on the Time Magazine. I'll ask Miss Johnson what
this story is going to be.
H.M.Jo:
What's his name - the publisher of Time? The
publisher of Time?
Regraded Uclassified
- 10 -
143
Hanes:
Henry Luce?
H.M.Jr:
Every time I say that, I get five different names,
and I can't think of his name. Henry Luce has
got his name down as Editor. He was formerly -
this man I am talking about was formerly Editor
of Fortune.
Gaston:
Modgins?
Hanes:
Dewey Larson?
H.M.Jr:
Let's, for heaven's sake, settle this for once and
for all. Well, any way ....
(Mr. Kieley comes in.)
(I.M.Jr:
Will you get me a copy of Time Magazine. It doesn't
have to be a recent one.
The point I an getting at, if you are all bothered,
he was at the house two Saturdays ago and his
attitude was very friendly, and he is willing to
submit what they are going to write.
Gaston:
I'll ask Miss Johnson.
H.M.Jr:
If you are bothered at all, they are always willing
to submit in advance, to have a discussion - is it
or isn't it factual.
Hanes:
Al Grovel?
Gaston:
I'll offer another - John Martin.
H.M.Jr:
No. Herbert, I'm not going to - that's
.....
I didn't know about that. Is it in your hands, Herbert?
Gaston:
Yes, I'll do it.
H.M.Jr:
I'll be tickled to death to read an account about
Lochhead and White; I've always wanted to know what
their life was. Wouldn't you (Mrs. Klotz) like to know?
Klotz:
Yes. (Laughs.)
H.M.Jr:
All right. Well, if Mr. Upham, and Hanes, Gaston,
and Oliphant will stay please, a few minutes.
Regraded Uclassified
144
PARAPHRASE OF CABLE
From: Treasury Attache's Office
Professor Buck
Date: September 19. 1938
At the request of Mr. X. P. Chan, Mr. J. 3. Baker is in Hongkong to
discuss use of wheat and cotton from America. He is a member of the
International Famine Relief Committee and Shanghai International Red Cross
Committee. He assisted China Flood Relief Committee for 1931 in distribution
of wheat from America. It is his opinion, he states, that on account of the
closure of the Yangtse River and the limited transportation facilities from
other porte to interior China, such products can be taken in only limited
quantities. There is urgent need of cash to swell foreign exchange balances.
Pei, of Bank of China, informs me that three banks have only about twelve
million pounds foreign exchange balances. It is stated by General Cohen,
adviser to General Wa Teh Chen and Governor of Iwangtung Province that a
Japanese representative is now in Hongkong for purpose of persuading Hong-
zong authorities to connive with Kwangtung authorities to declare independence
from Central Government when Hankow is taken by Japanese. The Japanese, in
return, would promise not to attack South China. According to Cohen he is
certain suggestion will have cold reception by Hongkong authorities and even
if presented to Kwangtung authorities, it would not be considered. is -
lated in my report mailed September 7 this checks with Leung's interview.
CONFIDENTIAL
Regraded Uclassified
145
PARAPHRASE OF CABLE
From: Treasury Attache's Office
Professor Buck
Date: September 19, 1938
As reported by L. Soong. head of the Southwest Transportation Company,
which 1e a government organization transporting military supplies, ship-
sent of supplies is nearly completed. On the Canton-Hankow Railway recent
disruption of traffic is unimportant compared to what it would have been
last January. Re have one-sixtieth of the former amount of supplies to
ship. For several months 2,000 tons were shipped per day whereas before
improvement of transportation organization it was 500 tone per day. My
Company had 2,500 trucks, mostly Dodge and White, but 2,000 were handed
over for military use. Almost any quantity of goods can be handled by my
Company if shipmente are financed. There have been only & fow thousand
tons of military supplies shipped over Tunnan railway to Kun Wing. Shipping
goods that way is too expensive for it is too slow and the distance from
Run Ming to the front is too great. There are shorter routes and we have
many ways of shipping other than railways, such as waterways and overland
methods. Re Leung's interview, my report mailed Sep. 7 concerning return of
Japanese to Hongkong am reliably informed from careful checkup that only
70 Japanese have returned out of 1700 who left. September 16 am leaving
for Hanoi.
NFIDENTIAL
Regraded Uclassified
0-2
145A
CONFIDENTIAL
JM
WAR DEPARTMENT
6-2/2657-11-90
WAR DEPARTMENT GENERAL STAPF
MILITARY INTELLIGENCE DIVISION, -
WASHINGTON, D.C.
me
September 19, 1938.
MEMORANDUM NO. 15 FOR THE CHIEF OF STAFF,
Subject: The present European situation to
midnight, September 18-19, 1938.
Politionl Situation. The popular conseption of the Sudeten
problem that Britain and France are selling Csechoslorakia "Down the
River" is grossly over-simplified. In the proposed separation of the
Sudeten Germans from the Slav state, two important and complicated
international errors of the paat are bearing their inevitable fruits.
First, the unstable social and political orystallization
created in Creohoslovakia by the Versailles Treaty is being subjected
to irrestible forces arising from the dynamism of new Germany.
Second, the years of voluntary disarmament, moral and physical, in
Great Britain have subjected the Empire once more to & situation
which can be met only with compromise. The embarrasaments to Great
Britain created by Mussolini in the Abyseinian Affair are being re-
peated by Hitler in the Sudaten Question, and principally because
those center-to-left Englishmen who now onll for German blood would
not furnish the means to maintain the British defensive foross in
condition in keeping with British responsibility.
There are many logical military arguments why Italy should
consider remaining neutral in the present situation. Many observers
believe Muscolini will remain so. His Trieste speech, however,
places him definitely on the side of Germany. This alignment us
doubtlass known, or was expected, by Chamberlain when he went to
Berohtesgaden. Much trouble has been caused to Britain and France
by not taking the Duce's statements literally. Italian military
forces should be combined with German ones in future estimates of
military strength facing the democracies in the Csechoslovakinn
Problem.
Military Situation.
Great Britain - No change.
France - Evidences that the French are unobtrusive-
ly calling to active duty numbers of officers and sen in mddition
to the regular classes and those in the fortifications garrison,
CONFIDENTIAL
Regraded Uclassified
145B
CONFIDENTIAL
thus gradually reinforcing interior divisions and antiairoraft
unite.
Germany - No reported change.
Creohoslovnkia - Following is the substance of a
State Department report from Prague, dated 12:40 P.M., September 17.
Sudeten area completely in control of troops,
police and gendarmeric. The frontier is occupied but
not as extensively as in May. Some troops in readiness
at strategic points and near large cities, the rest held
in barracks.
The Creohs have proceeded with caution BO as
to avoid the appearance of mobilisation - which so in-
censed the Germans in May.
Reservists have been called from several classes
to the estimated number of 200,000, but no complets single
class has been called. Total number of troops estimated
et 350,000.
Creoh G-2 states large concentrations of German
units around the Caeoh frontiers continue, including air
and mechanized units, mainly in Saxony and Austria.
Conclusions. Barring unexpected incidents, Hitler probably
will suppress any forceful solution pending the outcome of British-
Frenoh acceptance of hie demands.
If these demands are not met practically in toto, and with-
out undue delay, Hitler may attempt a. solution by foroe, and abruptly,
under the assumption that he oan localize the conflict.
The most dangerous elements in the situation are: reaction
in Britain and France to the Chamberlain concessions sufficient to
tie the hands of the two Governments; attempts of Britain and France
to bargain on details to the extent of infuriating Hitler with
"League of Nations methods", 9. refusal of the Crechs to accept the
concessions demanded in the belief that Hitler will again be -
neuvered into the position of the aggressor, and in the hope that
France and Britain will be involved even against their will,
CONFIDENTIAL
- 2 -
Regraded Uclassified
148
September 19, 1938.
Secretary Morgenthau spoke to Knoke at the Federal
Reserve and learned that the Bank of England had no objections
to the shipment of gold on the American cruiser, Nashville.
At the Secretary's request, Lochhead called Admiral
Leahy in the Navy Department and advised him that the shipment,
which had already been discussed with him, was to be made
and the Federal Reserve Bank of New York was instructing the
Bank of England to deliver twenty-five million dollars in
gold to the Nashville at Gravesend. Admiral Leahy stated
the cruiser Honolulu was due to arrive in Southampton
September 22d or 23d and, therefore, the Nashville would
not leave Gravesend until at least that date and, if necessary,
could be held at Gravesend a few days longer. Lochhead told
Admiral Leahy that the loading could probably be accomplished
on or before September 22d. Admiral Leahy stated that he
would cable immediately to the commanding officer of the
Nashville to receive the shipment of gold in question and the
Nashville would proceed to the Brooklyn Navy Yard in New York.
Lochhead mentioned to Admiral Leahy that the Bank of
England thought that they could keep the loading secret and
asked him to see that the Navy Department gave no publicity
to the shipment unless they received instructions from the
Secretary of the Treasury.
Lochhead then called Knoke, at the Federal Reserve
Bank, and requested him to notify the Bank of England to
deliver a shipment of twenty-five million dollars of gold,
held by the Stabilization Fund, in London, to the commanding
officer of the cruiser Nashville. Knoke stated he would
endeavor to contact Bolton by telephone to-day.
Regraded Jclassified
147
Monday
September 19, 1938
11:24 a.m.
H.M.Jr: Hello.
Operator:
Mr. Knoke stepped out of his office. They're
trying to ind him.
H.M.Jr:
Thank you.
11:26 a.m.
H.M.Jr:
Hello.
Operator:
Mr. Knoke.
Go ahead.
H.M.Jr:
Hello, Knoke.
L.W.
Knoke:
Yes, Mr. Secretary.
H.M.Jr:
Have you heard from the English about loading
this gold?
K:
Nothing yet. No.
H.M.Jr:
Well now, look, if I don't hear by one o'clock -
I've got to see - I'm seeing the President at
lunch and I'm going to recommend it and go ahead.
Now you'd better call them. I mean, they've had
this since Saturday - Hello.
K:
Yes, yes.
H.M.Jr:
And this - ah - battle cruiser has to come back.
K:
Yes.
H.M.Jr:
Now, please put in a call and I'm going to see
the President at one.
K:
All right, sir. I - ah - all right, I'll put
in a call -
H.M.Jr:
Well, we've done them the curtesy of asking them
Saturday and I don't think - It's now half-past
five -
Regraded Iclassified
148
- 2 -
K:
Well -
H.M.Jr:
- in Lon - what?
K:
Mr. Secretary, I asked him would he let me know
by noon time on Monday.
H.M.Jr:
All right.
K:
So - ah -
H.M.Jr:
Well, if you - well -
K:
See I'll put in a call...
H.M.Jr:
Yeah.
K:
And - ah - he will...
H.M.Jr:
Then let me know.
K:
Yes. All right, sir.
H.M.Jr:
Thank you.
11:51 a.m.
H.M.Jr:
Hello.
Knoke:
Mr. Secretary.
E.M.Jr:
Talking.
K:
Knoke.
H.M.Jr:
Yes.
K:
I got them. The first statement was that they
had decided until
- until conditions change -
H.M.Jr:
May I interrupt you, please?
K:
Yes.
H.M.Jr:
Did they open the conversation or did you have to
press them for it?
K:
Oh, they opened it.
Regraded
- 3 -
149
H.M.Jr:
They opened it.
K:
They opened it. He talked to me about the market
first and said in that connection confident ially
for your information, "We will not insure war risk
until conditions clear up in the insurance market."
H.M.Jr:
You mean they won't take out war - they won't -
K:
They will make their shipments uncovered against
war risk.
H.M.Jr:
I see.
K:
That's one thing. I thought that would -
H.M.Jr:
Yeah.
K:
- help you in your decision.
H.M.Jr:
Yeah.
K:
As to - ah - the Saturday's discussion - the use
of a war sh - of a cruiser.
H.M.Jr:
Yeah.
2:
They stated that with any luck they figured they
could probably do the loading without causing any
comment.
H.M.Jr:
Uh huh.
K:
They felt that they had man - that they had worked
out plans which, in his words, were "seventy-five
percent fool-proof" -
H.M.Jr:
Fine.
K:
And - fool-proof as to avoiding publicity at
their end, that is.
H.M.Jr:
Right.
K:
They are ready to 80 ahead unless we tell them --
That entirely of course, they point out, takes -
does not take into consideration what the - what
publicity there might be at our end.
H.M.Jr:
I understand.
Regraded Uclassified
150
- 4 -
Missing:
They figure that they can reasonably well avoid
publicity there. If anything comes out - they say
of course that depends upon conditions. If condi-
tions are bad no matter what may be said it won't
be believed anyhow.
H.M.Jr:
I -
K:
I mean the quotation will be the worst possible.
H.M.Jr:
Uh huh.
X:
They see no objections,
H.M.Jr:
Well, then I can work it out here because that
cruiser will go to the Brooklyn Navy Yard.
K:
Yes.
H.M.Jr:
And we'll unload there.
IC:
Yes.
H.M.Jr:
There'd be nobody to observe it and I - we
haven't had a chance but we'll work it out in a
way to get the gold from the Brooklyn Navy Yard
over to your vaults, see?
K:
Yes. Well - yeah, that's easy. But how about
the Customs figures - Custom House figures?
H.M.Jr:
Oh, well - we'll think something out. We - give
us time on that.
K:
Uh huh.
H.M.Jr:
Give us time on that.
it
K:
Well, that is the - ah - that I think/will leak
out as time
-
H.M.Jr:
Well I don't know whether there's anything under
the law which says that we have to give it to the
Customs this week or a month from now.
K:
Well, I can't - I don't -
H.M.Jr:
Well, we don't know, we'll have to - the main thing
is/get it on the boat and while she's coming over we
to
Regraded Iclassified
151
- 5 -
can work that out.
X:
Yes. And they said they are ready to ah - to go
ahead as soon as the signal is given.
H.M.Jr:
Well, I'm going to give you the signal now. Archie
is sitting here and he'll work it out with you.
K:
All right.
q.M.Jr:
Because the only person that knows about it -
that there's a possibility of its coming is one
person and that's the Captain of the Nashville.
And nobody knows it except the Captain of the
Nashville.
K:
Uh huh.
H.M.Jr:
Now the thing is for you and Archie to work it out -
how the instructions should go and how they're going
to do it. But they want to pull the Nashville out
of there in two days and I think that she should be
loaded tomorrow, Tuesday.
K:
Yes, I see.
H.M.Jr:
See?
K:
Then I'll suggest to the bank that they begin packing
tonight anyhow.
B.M.Jr:
Fine.
K:
And I think they are doing that.
E.M.Jr:
Fine. We'll take twenty-five million.
K:
Twenty-five?
E.M.Jr:
Yeah.
:
That's a big amount, Mr. Secretary.
H.M.Jr:
Well, you might just as well lose twenty-five million
as - ah -
K:
Well, ah - may I just say this thing - - I think you
want to give a thought to ah - to ah - the effect
that might have on the market. I mean people might
talk about - about unnecessarily risking the taxpayers'
money or something like -
Regraded Uclassified
152
- 6 -
H.M.Jr:
Well - I'll - I'll have to - I'll take that
personally.
K:
All right.
H.M.Jr:
I'm also risking -
K:
I thought I should mention it.
H.M.Jr:
Well, I'm also risking a hundred and eighty-eight
million right now in London; that's taxpayers' too.
X:
Yes. But I think that is fairly safe. (Laughs)
U.M.Jr:
Well, I'd just as leave have it on a cruiser as I
would have it in London.
K:
Yeah.
H.M.Jr:
Listen, if the English will handle it all right we'll
take care of our end.
K:
Yes. Well I'm - I'm -
M.M.Jr:
And if the Federal Reserve will handle it it will be
very secretive.
K:
Well, I - ah - I'm - speaking for myself I'm sure.
(Laughs)
H.M.Jr:
All right. Well, make sure for everybody down the
line.
K:
Yes.
I.M.Jr:
All right. Now, Archie'll talk to you from his room
and we'll proceed now.
K:
Yes. All right, sir.
M.M.Jr:
Now, as to the risk involved, why it's between -
the President and I'll just have to take that.
M
Yes.
H.M.Jr:
All right.
K:
Very good.
H.M.Jr:
Thank you.
Regraded Uclassified
153
September 19, 1938
Lunch with the President.
I said, "Mr- President, I want to talk to you about
the obsition of the Comptroller of the Currency." I
said, "What we need for this position 19 a man as good
AB a former New York State Senator by the name of Franklin
D. Roosevelt who led the fight against Tammany Hall." I
said, "He has to have courage to take on one of the b1g-
reat fights that we have ever had and," I said, "I would
like to have you recommend somebody to me.
So he thought a while and he said, "I am going to
suggest somebody who has the courage and character, but
I don't know whether he has the knowledge." He said,
"You will be surprised." He suggested Ex-Senator Pope
of Idaho.
I sald, "Well, Mr. President, I have had only one
experience with Senator Pope and Mrs. Pope. We had
dinner with them last spring at the Sayre's. Mrs. Pope
got sick at supper and left the table and Senator Pope
went tight asleep over his coffee.' The President
howled! So I said, "That's my only experience." So
I soid, "Can I sleep it over?" and he said, "Yes." He
said, "I don't know how much push he's got, but" he said
"he ia a man of character and he's a gentleman."
I said, "What reservations have you got on Bill
Myers?" And I said, "I want you to know that his TR me
was given to me amongst others by Jesse Jones." 1 sald,
"With 1940 in the offing, whenever Jesse Jones makes a
recommendation, I look under the table." The President
have a knowing smile. He said, "My reservations on
Bill Myers are that he continued to play in with the
chain bankers in the Minnesota district and,' he said,
"I had the greatest trouble getting him to change the
situation in the Omaha district." He said, "I Just
can't get those two things out of my head." I said,
"You have no doubts about his integrity?" and he said,
"No, but whether he 18 guile enough to see through a
situation, I don't know.'
Regraded Uclassified
154
-2-
I then gave him Upham's record, which I nad
not read myself, and when the President got through
he shook nis head from side to side and said, "How
muld you feel if I recommended to you a man who
first was with the National City Bank, then five
years with the Chamber of Commerce, then a number
of years with David Lawrence, then with the Brook-
Ines Institute and finally with the Secretary of the
Ineasury?" He said, "You would not take it." So
I said, "All right, Mr. President. I am recommend-
LNE to you Cy Upham as First Deputy. He has been
with me four years and he knows the work. He has
proven his loyalty to you and to me, and I recommend
it." He said, "All right. I accept the recommen-
dation.
So I sald, "Mr. President, I would like to
talk it over with my group in the Treasury about
Senator Pope and then come back to see you again."
He shid, "That's allright."
I then gave him the conversations of September
16th and 17th that Knoke had with the Bank of England
n8 I said I felt he ought to have this as a background
in his dealings with the English, as these particular
conversations showed the great pressure financially
that the English were under.
I then asked him if he knew about Kennedy's
telephone conversation with Admiral Leahy asking Leahy
to keep a cruiser at Gravesend. The President SA11
that Leahy had told him 60.
I then told the President that we had word from
the English that they had no objection to our going
shead and bringing gold over on B. United States warship.
The President said, "Now, you are not going to
out on more than $25,000,0007 I said, No. He said,
"Nay are you 80 nervous about gold in London?" I
anid, "On account of the air raids." He said, "Well,
why not send it to Liverpool or to Dublin?" "Well,"
I sald, "that would not help much. No particular
place to deposit it. I want to get it back to the
United States." I said, "We have got $188,000,000
over there now." He said, "Well, taking & chance --
155
-3-
hurricane, iceberg --" and I said, "I know all that,
but," I said, "I am willing to say to you that I
recommend that we do it. The President gave a
salute with his hand and said, "All right.
If
I said we were thinking of putting another
$10,000,000 on the Manhattan. She's already bring a
little over $11,000,000 which'is insured, but we find
that the English have got $15,000,000 on the Manhattan
in addition to our $11,000,000, so I don't want to
put any more on the Manhattan. He said, "That's right.
o0o-o0o
Regraded Uclassified
156
Monday
September 19, 1938
2:15 p.m.
H.V.Jr:
Hello.
Operator:
Admiral Leahy.
Go ahead.
M.M.Jr:
Hello.
Admiral
Leahy:
Hello, Mr. Secretary. This is Admiral Leahy speaking.
H.V.Jr:
Yeah. Now, the Bank of England has phoned back and
they say they have no facilities for loading the
Nashville at Gravesend. And also they couldn't keep
it a secret. So they'd like her to go around to
Portsmouth, the naval base.
L:
Go down to where?
H.M.Jr:
Portsmouth.
L:
Portsmouth.
4.M.Jr:
The naval base.
L:
Uh huh.
B.M.Jr:
At Portsmouth. And they say they could handle it
from there.
L:
All right. We'll - ah - we'll get permission from
the State Department to send the - the Nashville to
Portsmouth and to -
I've already told them to
receive that shipment and I'll just send them a
despatch and tell them to proceed to Portsmouth and
receive the shipment there.
Right. Now - then, the Honolulu had better go to
Portsmouth also.
L:
Oh, Lordy!- I've already got everything under way
to send her to - ah -
H.M.Jr:
Well, it's only two miles apart you know.
L:
Uh huh.
E.M.Jr:
It's only -
3
I think we'd better let her go to Southampton now -
Regraded Uclassified
157
- 2 -
H.M.Jr:
Yes.
L:
And then send her over to Portsmouth later. They
don't want to deliver it at Southampton I suppose,
either?
H.M.Jr:
No, they want it in the naval base.
L:
Oh, I see.
H.M.Jr:
They're only - you know, Southampton and Portsmouth
are very - practically next to each other.
L:
Yes, I know they are. The only point is to - we
have to get diplomatic permission, you see, to send
the damn thing to Portsmouth and we've already asked
for it for - asked to have it go to Southampton.
However, I'll work it out.
H.M.Jr:
Well, that - I mean, if she goes to Southampton
and ties up and then you move her and then move her
to Portsmouth, doesn't that attract more attention?
L:
I suppose SO.
H.M.Jr:
And - ah -
Well, I'll leave that to you.
Now, the Bank of England said that they will work
through your naval attache in London.
L:
Uh huh.
H.M.Jr:
Is that all right?
L:
That's all right.
B.M.Jr:
That they'll - that they'll work out the details
with him and then a little on if it's agreeable to
you I'll have Mr. Lochhead call you - there's some
other things.
L:
Yeah, that's fine. That's all right. We'll -
I told the captain of the Nashville of course that
this was secret and that he wasn't to say anything
about it to anybody. But if they tell the naval
attache to see him it'll be all right.
H.M.Jr:
Thank you.
L:
Fine.
H.M.Jr:
Thank you.
L:
Thank you, sir.
Regraded Uclassified
158
Monday
September 19, 1938
3:37 p.m.
H.M.Jr:
Hello.
Operator:
Mr. Moffat.
Go ahead.
B.M.Jr:
Hello.
Jay Pierrepont
Moffat:
Yes, Mr. Secretary.
H.M.Jr:
How are you?
M:
All right.
H.M.Jr:
Mr. Moffat, we need a little help.
M:
Fine.
H.M.Jr:
There's a Mr. Gonzala Zabala.
M:
Yes.
H.M.Jr:
Who is Vice President of the Bank of Spain.
M:
Yeah.
R.M.Jr:
And the Spanish Ambassador wants him recognized
as a financial attache.
M:
Oh, yes,-yes.
H.M.Jr:
See?
M:
Yes. I know a little about him.
H.M.Jr:
Do /You want to know more or do you just want to know
that the Treasury would like to see him recognized?
M:
Oh, you would?
H.M.Jr:
Very much.
M:
Oh, well that's - that's interesting because the
difficulty arose that there was this law suit and
our protocol people felt that they were trying to
cloak him with diplomatic immunity to get him
out of the suit.
Regraded Uclassified
159
- 2 -
R.M.Jr:
Well that's just what we want.
M:
You want it done? Well, I'll tell that to our
protocol people right away.
H.M.Jr:
That's just exactly what we want. We don't want
him in the suit.
M:
Right. I'll go down and see them at once.
H.W.Jr:
Thank you so much.
M:
And say, I hope that the thing hasn't been done but
I know that the case was called for last Saturday -
I think. So I'll get to work at it immediately.
H.M.Jr:
You mean that he's been thrown out, or what?
M:
Yes, but we do -
that he was not going to be given
immunity.
H.M.Jr:
Well -
M:
And I'll - I'll get at that right away.
H.M.Jr:
Mr. Oliphant who brought it in to me thinks there's
still time.
M:
All right, - Good. I won't lose a minute.
H.M.Jr:
If I don't hear from you again he's - I'll -
M:
We'll - we'll - we'll take care of it.
H.M.Jr:
I thank you.
M:
Right.
Regraded Uclassified
200
Paria, September 19, 1938.
Dear Er. Secretary:
You will recall that in our conversation with
Governor Fournier of the Bank of France the "Crédit
National" was mentioned as an institution providing
medium term credits to French business. At our
Normandie luncheon Rueff mentioned this organization
as well as the "Banque Populaire" in connection with
medium term loans. You asked me to send you a report
on each of these bodies.
Since our old friend Baumgartner 1s at the head
of the Crédit National, I approached him for date
on his concern. He has been good enough to draw
up a summary of its organization, functions and
operations which I have translated into English and
appended hereto. There are also attached the various
documents relating to the Crédit National listed
below.
I am sending this material in this personal
mannér
The Honorable Henry Morgenthau, Junior,
Secretary of the Treasury,
Washington, D. C.
Regraded Uclassified
161
- 2 -
manner lest you might consider using some of it
in your planning and would prefer to have the complete
documentation in your own hands only. Within the
near future I hope to be able to report on the
Banque Populaire.
With kindest personal regards, I am,
Faithfully yours,
H. Merle Cochran
First Secretary of Embassy
Enclosures:
Translation of memorandum on
Crédit National.
(1) Textes Relatifs à la
Constitution du Crédit
(2) National. Crédit National - Règlement
(3) Intérieur. Crédit National. Rapport du
5 octobre 1937.
(4) Crédit National. Rapport du
14 juin 1938 de l'Assemblée
Générale Extraordinaire.
(5) Crédit National. Assemblée
Générale Ordinaire des
Actionnaires, 14 05 juin 1938.
a
In triplicate.
HMC/ams
Regraded Uclassified
162
Brief Study of the Crédit National
A - Structure :
The Crédit National, which was organized in 1919,
is a. limited company, with a capital of 100 million
francs. Its capital, now completely paid up, was
subscribed at the origin by the principal banks and
credit institutions and by the principal industrial
enterprises of Paris and the provinces. As the Bank
of France and the Crédit Foncier, to which it is closely
allled, the Crédit National, in its foundation, is
therefore a private institution. But the mission with
which it was charged by Parliament has given it a public
character similar to that of the Bank of France and the
Crédit Foncier and, as in the case of these two
organizations, the State reserves for itself powers
of direction and supervision in the Crédit National.
The General Manager of the Crédit National, who 19
Chairman of the board of directors, and the two
assistant managers, are appointed by decree and the
operation of the institution is subject to examination
by the "Inspection Générale des Finances".
B - Attributions :
(1) Operations carried out for the account of
the State :
The dominating 1dea at the time of the creation
of the Crédit National was to create an organization
Regraded Uclassified
a . I
183
which, backed by the State and by the principal
industrial enterprises, would be capable of attracting
investors and thus to float loans susceptible of covering,
at least partially, the enormous expenditures which
France was obliged to undertake immediately after the
war for the reconstruction of the devastated regions.
To this end, the Crédit National has, with success,
made loan issues, enjoying the guaranty of the State
for an amount exceeding 25 billion francs. The payments
made by it to those in the North and East of France
who had suffered damage from the war have substantially
exceeded this figure, for the reason that the Crédit
National, in fact, had been entrusted with the settlement
of all damages, including those which had been covered
by direct payments from the public Treasury. At
December 31, 1937, these payments amounted to more
than 63 billion france.
of course, as time went on, and little by little
8.3 the war period receded, this activity of the Crédit
National gradually diminished. However, this activity
reappeared, at intervals, under other forms. Several
French Governments, in fact, have asked the Crédit
National to take part in the financing of certain
categories of public expenses, of an economic order
and of an exceptional character. Thus, by virtue of
agreements concluded in 1934, the Crédit National was
entrusted with the settlement of unpaid comminal works
programs (under the heading of "subventions for the
collectivities") and in 1937 it agreed to participate
in the financing of outlays for public works, under
Regraded Uclassified
104
the budgets of 1937 and 1938, intended to serve to
reduce unemployment. In order to procure necessary
resources, in these different cases, the Crédit
National, in its own name, made successful loan
issues guaranteed by the State (for a total, to date,
of more than 3-1/2 billion francs).
To sum up, under this first part of its
attributions, the Crédit National plays the röle of
of provider of capital for the satisfaction of certain
public requirements. The service of the loan issues
which it makes is assured by annuities entered in the
budget of the State and increased by an allowance
intended to permit the institution to oover the
corresponding part of its overhead expenses. In this
respect it has been astimated at various times that
the ensemble of this mechanism was advantageous for
the Treasury. It does seem, in effect, in taking into
account the various elements of the problem (expenses
of personnel, the good credit standing of Crédit
National securities to which lottery features may be
attached in virtue of special legislative authority,
et cetera) that the financing operations in question
would have been more costly to the State if the latter
had undertaken them itself, and at the same time they
would have weighed more heavily on the rentes market.
C - Attributions =
(2) Operations carried out by the Crédit
National for ita own account.
If
Regraded Uclassified
105
If the rôle of the Crédit National had been
limited to the attributions analysed in the
preceding paragraph, this institution would not, so
to speak, have the character of a banking organization.
But, following its foundation, consideration was given
to the question of using it to make up for the absence
of organization of credit in France, by entrusting it
with the making of medium-term advances to commercial
or industrial enterprises.
Provisions to this end were introduced into
the initial convention concluded between the State
and the Crédit National on July 7, 1919. Since that
time they have been modified or completed and actually
they constitute an ensemble the essential points of
which may be summarised as follows :
The Crédit National is enabled to grant medium
term advances reimbursable during a minimum period
of three years and a maximum of ten years to French
owned industrial and commercial enterprises established
in France. A total advance of not more than 15 million
francs may be made to each borrower. On these lines,
such operations are susceptible of permitting either
the consolidation, at least temporary, of a banking
debt, of replacing a bond issue rendered difficult
by the situation of the financial market, or of
directly permitting either the financing of equipment
programs or the extension of working funds. Special
measures have been taken with the view of facilitating
the financing of exportations payable by annuities
guaranteed
Regraded Uclassified
- 5 -
186
guaranteed by the State Credit Assurance (law of
August 10, 1928, and subsequent laws). In this case,
no maximum has been fixed to advances that may be made
to sach applicant and the minimum and maximum periods
of reimbursement are respectively reduced to two years
and increased to twelve years.
The rate at which advances are granted is fixed
after taking the different elements into consideration,
under the reserve in certain hypothesis, of the agreement
of the Minister of Finance. Actually, as B. general rule,
it 1s 7.15 per cent, all taxes.being being paid by the Credit
National.
The medium-term advances of the Crédit National
are financed through two categories of resources,
those belonging to the institution, and those placed
at its disposition by the State.
This last formula was utilized at the beginning
in order to facilitate the start of operations. The
State authorized the Crédit National to take a sum of
500 million francs from the proceeds of loans carrying
guarantee of the State, which was set aside for financing
medium-term credits. It should be noted that a recent
convention, dated December 10, 1937, increased this
initial endowment of 500 million francs to 1 billion
francs. Naturally, the ensemble of these funds, in
last analysis, being advanced by the State, the Crédit
National turns back to the Treasury the service of
interest and amortization of corresponding advances,
after deduction of a certain sum to cover its costs
Regraded Uclassified
- 6 -
C7
and appropriation for its reserves.
With respect to capital belonging to the Crédit
National itself, which also serves to finance loan
operations, it comprises on the one hand the ensemble
of the capital of the institution (capital and various
reserve accounts) and, on the other hand, the proceeds
of certain series of bonds which have been issued to
the public without the guaranty of the State, over the
sole signature of the institution, for an amount of
about 400 million francs. (1)
During the past two years, the medium-term
advances of the Crédit National have very rapidly
and substantially developed, both on account of the
requirements of enterprises and of the scarcity of
funds on the financial market. They reached about
1 billion francs at December 31, 1936; they will very
probably exceed 1,500 millions at the end of 1938.
of this total of 1,500 millions the capital utilized
is drawn, in approximately equal proportions, therefore
about one half, from the institution's own resources
and from funds placed at its disposal by the State.
It should be noted that further extension of the
activity of the Crédit National in this field, which
appears probable and necessary, 8.8 the figures recorded
are still modest in absolute value, will, unless the
financial situation changes substantially, necessitate
support either from the State, or from an organization
such as the Caisse des Dépôts et Consignations. It
(1) It should be noted that the Crédit National in not
authorised to receive banking deposits, even for
fixed periods.
is
Regraded Uclas
- 7 -
168
is clear, in effect, that the high cost of money does
not permit the Crédit National (in spite of the favor
which its securities, whether or not guaranteed by the
State, enjoy on the market) to obtain capital at
sufficiently reasonable rates. In other words, in the
present state of French economy and finance, it 1s not
sufficient, in order to assure the development of
medium-term credit, to possess an organization by means
of which a large clientele of borrowers is able to
benefit by its first rate credit on the financial
market. (1) It will be necessary, at least provisionally,
under B. form to be determined (interest rebates, fiscal
exemption, et cetera), for the State to make 8. contribution.
(1) which, in another domain, during the years preceding France.
the war, was done by the Crédit Foncier de
Regraded Uclassified
163
Paris, September 19, 1938.
Dear Mr. Secretary:
You will recall that in our conversation with
Governor Fournier of the Bank of France the "Crédit
National" was mentioned as an institution providing
medium term credits to French business. At our
Normandie luncheon Rueff mentioned this organization
as well as the "Banque Populaire" in connection with
medium term loans. You asked no to send you a. report
on each of these bodies.
Since our old friend Baumgartner 10 at the head
of the Crédit National, I approached him for data
on his concern. He has been good enough to draw
up 8. summary of its organization, functions and
operations which I have translated into Inglish and
appended hereto. There are also attached the various
documents relating to the Crédit National listed
below.
I an sending this material in this personal
manner ...
The Honorable Henry Morgenthau, Junior,
Secretary of the Treasury,
Washington, D. C.
Regraded Uclassified
170
- 2 -
manner lest you might consider using some of it
in your planning and would prefer to have the complete
documentation in your own hands only. within the
near future I hope to be able to report on the
Banque Populaire.
with kindest personal regards, I am,
Faithfully yours,
H. Merle Cochran
First Secretary of Embassy
Enclosures:
Translation of memorandum on
Crédit National.
(1) Textes Relatifs à la
Constitution du Crédit
National.
(8) Crédit National - Reglement
(3) Intérieur. Crédit National. Rapport du
5 octobre 1937.
(4) Crédit National. Rapport du
14 juin 1958 de l'Assemblée
Générale Extraordinaire.
(5) Crédit National. Assemblée
Générale Ordinaire des
Actionnaires, 14 juin 1938.
In tripliente.
HMC/SMS
Regraded Uclassified
Brief Study of the Credit National
A - Structure E
The Credit National, which was organized in 1919,
is a limited company, with a capital of 100 million
france. Its capital, now completely paid up, was
subscribed at the origin by the principal banks and
credit institutions and by the principal industrial
enterprises of Paris and the provinces. As the Bank
of France and the Credit Poncier, to which it is closely
allied, the Credit National, in its foundation, is
therefore a private institution. But the mission with
which it was charged by Parliament has given it & public
character similar to that of the Bank of France and the
Credit Foncier and, as in the case of these two
organisations, the State reserves for itself powers
of direction and supervision in the Credit National.
The General Manager of the Crédit National, who is
Chairman of the board of directors, and the two
assistant managers, are appointed by decree and the
operation of the institution is subject to examination
by the "Inspection Générale dos Finances".
3 - Attributions 1
(1) Operations carried out for the account of
the State :
The dominating idea at the time of the creation
of the Credit National was to create an organization
which
Regraded Uclassified
- 2 -
72
which, backed by the State and by the principal
industrial enterprises, would be capable of attras
investors and thus to float loans susceptible of con
at least partially, the enormous expenditures which
France was obliged to undertake imadiately after the
var for the reconstruction of the devastated regions.
To this end, the Crédit National has, with success,
made loan issues, enjoying the guaranty of the State
for an amount excoeding 25 billion francs. The payments
made by it to those in the North and East of France
who had suffered damage from the war have substantially
exceeded this figure, for the reason that the Grédit
National, in fact, had been entrusted with the settlement
of all damages, including those which had been covered
by direct payments from the public Treasury. At
December 31, 1957, these payments amounted to more
than 65 billion francs.
or course, as time went on, and little by little
as the war period receded, this activity of the Credit
National gradually diminished. However, this activity
reappeared, at intervals, under other forms. Several
French Governments, in fact, have asked the Credit
National to take part in the financing of certain
categories of public expenses, of an sconemic order
and of an exceptional character. Thus, by virtus of
agreements concluded in 1954, the Credit National was
entrusted with the settlement of unpaid ecummal works
programs (under the heading of "subventions for the
sollectivities") and in 1937 it agreed to participate
in the financing of outlays for public works, under
Regraded Uclassified
- 3 -
173
the budgets of 1937 and 1950, intended to serve to
reduce unemployment. In order to procure necessary
resources, in these different cases, the Credit
Mational, in its our name, made successful loan
issues guaranteed by the State (for a total, to date,
of more than 3-1/2 billion francs).
To - up, under this first part of its
attributions, the Credit National plays the role of
a provider of capital for the satisfaction of certain
public requirements. The service of the loan issues
which it makes is assured by anmuities entered in the
budget of the State and increased by an allowance
intended to permit the institution to cover the
corresponding part of its overhead expenses. In this
respect it has been estimated at various times that
the ensemble of this mechanism was advantageous for
the Treasury. It does seem, in effect, in taking into
account the various elements of the problem (expenses
of personnel, the good credit standing of Crédit
National securities to which lettery features may be
attached in virtus of special legislative authority,
et cetera) that the financing sperations in question
would have been more costly to the State if the latter
had undertaken them itself, and at the same time they
would have weighed more heavily on the rentes market.
o - Attributions -
(2) Operations earried out by the Crédit
National for its own assount.
If
Regraded Uclassified
- 4 -
174
If the role of the Credit National had been
limited to the attributions analysed in the
preceding paragraph, this institution would not, so
to speak, have the character of a banking organization.
But, following its foundation, consideration was given
to the question of using it to make up for the absence
of organisation of credit in France, by entrusting it
with the making of medium-term advances to commercial
or industrial enterprises.
Provisions to this end were introduced into
the initial convention concluded between the State
and the Credit National on July 7, 1919. Since that
time they have been modified or completed and actually
they constitute an ensemble the escential points of
which may be superised as follows I
The Credit National is enabled to grant medium
term advances reimbursable during a minimm period
of three years and & maximum of ten years to French
owned industrial and commercial enterprises established
in France. A total advanoo of not more than 15 million
france may be made to each borrower. On these lines,
such operations are susceptible of permitting either
the consolidation, at least temporary, of & banking
debt, of replacing a bond issue rendered difficult
by the situation of the financial market, OF of
directly permitting either the financing of equipment
programs or the extension of working funds. Special
masures have been taken with the view of facilitating
the financing of exportations payable by annuities
guaranteed
Regraded Uclassified
175
- 5 -
guaranteed by the State Credit Assurance (law of
August 10, 1928, and subsequent laws). In this case,
ne maximum has been fixed to advances that may be made
to each applicant and the minimum and maximum periods
of reimbursement are respectively reduced to two years
and increased to twelvo years.
The rate at which advances are granted in fixed
after taking the different elements into consideration,
under the reserve in certain hypothesis, of the agreement
of the Minister of Finance. Actually, as a general rule,
it is 7.15 per cent, all taxes being paid by the Credit
National.
The medium-term advances of the Crédit National
are financed through two categories of resources,
those belonging to the institution, and these placed
at its disposition by the State.
This last formula was utilised at the beginning
in order to facilitate the start of operations. the
State authorised the Crédit National to take a - of
500 million franss from the proceeds of loans carrying
guarantee of the State, which was set aside for financing
medium-term credits. It should be noted that a recent
convention, dated December 10, 1957, increased this
initial endoment of 500 million france to 1 billion
france. Naturally, the ensemble of these funds, in
last analysis, being advanced by the State, the Crédit
National turns back to the Treasury the service of
interest and mertisation of corresponding advances,
after deduction of a certain over to cover its costs
Regraded and Uclassified
- 6 -
76
and appropriation for its reserves.
with respect to capital belonging to the Crédit
National itself, which also serves to finance loan
operations, it comprises on the one hand the ensemble
of the capital of the institution (capital and various
reserve accounts) and, on the other hand, the proceeds
of certain series of bonds which have been issued to
the public without the guaranty of the State, over the
sole signature of the institution, for an amount of
about 400 million france. (1)
During the past two years, the medium-term
advances of the Crédit National have very rapidly
and substantially developed, both on account of the
requirements of enterprises and of the searcity of
funds on the financial market. They reached about
1 billion francs at December 31, 1936; they will very
probably exceed 1,500 millions at the end of 1938.
or this total of 1,500 millions the capital utilised
is drawn, in approximately equal proportions, therefore
about one half, from the institution's own resources
and from funds placed at its disposal by the State.
It should be noted that further extension of the
activity of the Credit National in this field, which
appears probable and necessary, as the figures recorded
are still modest in absolute value, will, unloss the
financial situation changes substantially, nooossitate
support either from the State, or from an organization
such as the Cainse des Dépots et Consignations. It
(1) It should be noted that the Crédit National is not
authorized to receive banking deposits, oven for
fixed periods.
Regraded Uclassified
- 7 -
177
is clear, in effect, that the high cost of money does
not permit the Crédit National (in spite of the favor
which its securities, whether or not guaranteed by the
State, enjoy on the market) to obtain capital at
sufficiently reasonable rates. In other words, in the
present state of French economy and finance, it is not
sufficient, in order to assure the development of
medium-term credit, to possess an organization by means
of which a large clientele of borrowers is able to
benefit by its first rate credit on the financial
market. (1) It will be necessary, at least provisionally,
under a form to be determined (interest rebates, fiscal
exemption, et cetera), for the State to make a contribution.
(1) which, in another domain, during the years preceding France.
the war, was done by the Credit Foncier de
Regraded Uclassified
178
Paris, September 19, 1958.
Dear Mr. Secretary:
You will recall that in our conversation with
Governor Fournier of the Bank of France the "Crédit
National" was mentioned as an institution providing
medium term credits to French business. At our
Normandie luncheon Rueff mentioned this organization
as well as the "Banque Populaire" in connection with
medium term loans. You asked no to send you a report
on each of these bodies.
Since our old friend Baungartner is at the head
of the Crédit National, I approached him for date
on his concern. He has been good enough to draw
up a summary of its organization, functions and
operations which I have translated into English and
appended hereto. There are also attached the various
documents relating to the Crédit National listed
below.
I an sending this material in this personal
manner
The Honorable Henry Morgenthau, Junior,
Secretary of the Treasury,
Washington, D. 0.
Regraded Uclassified
179
- 2 -
manner lest you might consider using some of it
in your planning and would prefer to have the complete
documentation in your own hands only. within the
near future I hope to be able to report on the
Banque Populaire.
with kindest personal regards, I as,
Faithfully yours,
H. Merle Cochran
First Secretary of Embassy
Enclosures:
Translation of memorandum on
Crédit National.
(1) Textes Relatifs à la
Constitution du crédit
(2) National. Crédit National - Reglement
(3) Intérieur. Crédit National. Rapport du
5 octobre 1937.
(4) Crédit National. Rapport du
14 juin 1938 de l'Assemblée
Générale Extraordinaire.
(5) Crédit National. Assemblee
Générale Ordinaire des
Actionnaires, 14 juin 1958.
In triplicate.
HMC/ems
Regraded Uclassified
Drief Study of the Credit National
A - Structure :
The Credit National, which was organized in 1919.
is a limited company, with a capital of 100 million
france. Its capital, now completely paid up, was
missoribed at the origin by the principal banks and
credit institutions and by the principal industrial
enterprises of Paris and the provinces. As the Bank
of France and the Credit Poncier, to which it is closely
allied, the Credit National, in its foundation, is
therefore a private institution. But the mission with
which it was charged by Parliament has given it a public
character similar to that of time Bank of France and the
Credit Foncier and, as in the case of these two
organisations, the State reserves for itself powers
of direction and supervision in the Credit National.
The General Manager of the Credit National, who is
Chairman of the board of directors, and the two
assistant managers, are appointed by decree and the
operation of the institution 18 subject to examination
by the Inspection Genérale des Finances".
D - Attributions I
(1) Operations earried out for Lia# account of
the State :
The dominating Idea at the time of the creation
of the Credit National WAS to 010016 an organization
which
Regraded Uclassified
- 8 -
-L1
which, backed by the State and by the principal
industrial enterprises, would be capable of attrasting
investors and this to float loans susceptible of covering,
at least partially, the expenditures which
France was obliged to undertake immidiately after the
was for the reconstruction of the devastated regions.
20 this end, the Credit National has, with success,
made loan issues, enjoying the guaranty of the State
for an amount expeeding 25 billion franes. the payments
made by it to those in the North and East of France
the had suffered damage from the was have substantially
exceeded this figure, for the reason that the Credit
National, in fast, had been entrusted with the settlement
or all damages, including those which had been covered
by direct payments from the public Treasury. it
December 32, 1957, these payments amounted to more
than 65 billion france.
or course, as time went on, and little by little
as the war period recoded, this activity of the Credit
National gradually diminished. However, this activity
resppeared, at intervals, under other forms. Several
Prench Governments, in fact, have asked the Credit
National to take part in the financing of certain
categories of public expenses, of an economic order
and of an exceptional character. Thus, by virtue of
agreements consluded in 1904. the Credit National we
entrusted with the cettlement of unpaid comminal works
programs (under the heading of "subventions for the
sollestivities") and in 1087 it agreed to participate
in the financing of outlays for public works, under
the ...
Regraded Uclassified
- s -
82
the budgets of 1957 and 1908, intended to Derm to
reduce unexployment. In order to procure necessary
resources, in these different casse, the Crédit
National, in its om - made successful loan
Lesses guaranteed by the State (for a total, to date,
of more than 5-2/8 billion france).
To as up, under this first part of its
attributions, the Credit National plays the role of
& provider of capital for the antisfaction of certain
public requirements. The service of the loan issues
which it makes is assured by anmitties entered in the
budget of the State and increased by an allowance
intended to permit the institution to corer the
corresponding part of its overhead expenses. In this
respect it has been estimated at various times that
the ensemble of this mechanism was advantageous for
the Treasury. It does coom, in effect, in taiding into
account the various elements of the problem (expenses
of personnel, the good credit standing of Credit
National securities to which lottery features may be
attached in virtue of special legislative authority,
ot cetera) that the financing sperations in question
would have been more costly to the State if the latter
had undertairen them itself, and at the - time they
would have weighed more heavily on the rontes market.
e - Attributions a
(s) Operations earried out by the Crédit
National for its om account.
If
Regraded Uclassified
- 4 -
183
If the role of the Credit National had been
limited to the attributions analysed in the
preceding paragraph, this institution would not, so
to speak, have the character of a banking organization.
Dut, following its foundation, consideration vus given
to the question of using it to make up for the absence
of organisation of credit in France, by entrusting 10
with the making of medium-term advances to commroial
or industrial enterprises.
Provisions to this end were introduced into
the initial convention concluded between the State
and the Credit National on July 7, 1919. Since that
time they have been modified or completed and actually
they constitute an ensemble the essential points of
which may be superised as follows #
The Credit National is enabled to grant medium
term advances reimbursable during a minimum period
of three years and a maximum of ten years to French
camed industrial and commercial enterprises established
In Prence. A total advance of not more than 10 million
france may be made to each borrown. a these lines,
such operations are susceptible of penitting either
the consolidation. at least temporary, of a banking
debt, of replacing a bond 10000 rendered difficult
by the situation of the financial market, or of
directly permitting either the financing of equipment
progress or the extension of vorking funds. Special
masures have been taken with the visa of facilitating
the financing of exportations payable by smmities
guaranteed
Regraded Uclassified
- s -
LU4
guaranteed by the State Credit Assurance (law of
August 10, 1920, and subsequent laws). In this case,
no maximum has been fixed to advances that may be made
to each applicant and the minimum and makes periods
of reimbursement are respectively reduced to two years
and increased to twelvo years.
The rate at which advances are granted 10 fixed
after taking the different elements into consideration,
under the reserve in certain hypothesis, of the agreement
of the Ministor of Finance. Actually, as a general rule,
it is 7.15 per cent, all taxes being paid by the Credit
National.
The medium-term advances of the Credit National
are financed through two categories of resources,
those belonging to the institution, and those placed
at its disposition by the State.
This last formula was utilized at the beginning
in order to facilitate the start of operations. The
State authorised the Credit Mational to take a as of
$00 million france from the proceeds of loans earrying
guarantee of the State, which me not saide for financing
medium-term credits. it should be noted that a resent
convention, dated December 10, 1587, increased this
initial endoment of 500 million france to 1 billion
france. Naturally, the ensemble of these funds, in
last analysis, being advanced by the state, the Crédit
National turns back to the Treasury the service of
interest and amortisation of corresponding advances,
after deduction of a certain our to cover its costs
and
Regraded Uclassified
- e -
LUS
and appropriation for its recerves.
with respect to capital belonging to the Credit
National itself, which also serves to finance loan
operations, it comprises on the one band the ensemble
of the capital of the institution (capital and various
reserve accounts) and, on the other hand, the proceeds
of certain series of bonds which have been issued to
the public without the guaranty of the State, over the
sole signature of the institution, for an amount of
about 400 million france. (1)
During the past two years, the medium-term
advances of the Crédit National have very repidly
and substantially developed, both on account of the
requirements of enterprises and of the searcity of
funds on the financial market. They reached about
1 billion franes at December 31, 1933; they will very
probably exceed 1,500 millions at the end of 1958.
of this total of 1,800 millions the capital utilised
is druwn, in approximately equal proportions, therefore
about one half, from the institution's own resources
and from funds placed at its disposal by the state.
It should be noted that further extension of the
activity of the Credit National in this field, which
appears probable and necessary, as the figures recorded
are still modest in absolute value, will, unless the
financial situation changes substantially, necessitate
support either from the State, or from an organisation
such as the Caisse doe Depota et Consignations. It
(1) It should be noted that the Credit National is not
authorized to receive banking deposits, even for
fixed periods.
Regraded Uclassified
- , -
106
10 clear, in effect, that the high cost of money does
not permit the Crédit National (in spite of the favor
which its securities, whether or not guaranteed by the
state, enjoy on the market) to obtain capital at
sufficiently reasonable rates. In other words, in the
present state of French economy and finance, It is not
sufficient, in order to assure the development of
medium-term credit, to possess an organization by means
of which a large clientele of berrowers is able to
benefit by its first rate credit on the financial
market. (1) It will be necessary, at least provisionally,
under 4 form to be determined (interest rebates, fiscal
exemption, ot catera), for the State to min a contribution.
(1) which, in another domain, during the years preceding France.
the war, was done by the Credit Foncier de
Regraded Uclassified
mr. En fikes mojpat
187
493
JR
GRAY
Praha
M
Dated September 19, 1938
Rec'd 10:29 a.m.
Secretary of State,
Washington,
206, September 19, 1 p.m.
National Bank statement of SEptember 15 just released
shows very serious changes in comparison to SEptember 7.
Visible foreign Exchange holdings fEll 15% and their
credit portfolio items rose 37%. Ratio gold cover to
all sight liabilities reached unprecedented low of
26%. Legal minimum 25%. End last WEEK figure stood
at 31.7%. Bank note circulation increased to all high
of 9,600,000,000. Estimate that deposit withdrawals
from all banks was 2,500,000,000; cause for withdrawal:
(1) purchase of foodstuffs; (2) hoarding.
Czech bonds still reported weak on London Exchange.
While there has always been a qualifying provision
regulating transportation on the Elbe this provision
primarily drawn for adjustment of transportation
schedules. German restrictions for crossing the
frontier became Effective on 17th. There is no apparent
ground for the belief that this is an attempt of an
Economic
Regraded Uclassified
188
-2- #206, September 19, 1 p.m., from Praha.
Economic squeeze but represents war risk measures in the
same terms as London Lloyds rates. It is also possible
that above development was influenced by tightening up
of devisen allocated to transport by Czechoslovak
National Bank although National Bank denies allegation
that devisen for that purpose is being refused. Back of
all this devisen question is the old background conflict
over the USE of devisen for transporting in which there
appears to bE nothing
new but the usual arrangement
at the moment for refusal is A liberty used.
Please inform Commerce.
CARR
KLP:DDM
Regraded
Jclassified
nane - SAME
169
or
OFACE CORRESPONDENCE
DATE September 19, 1938.
CONFIDENTIAL FILES
SHOULD TELEPHONE CONVERSATION WITH
L.. W. Knoke
BANK OF ENGLAND,
I called Bolton at 12:45 and asked whether there was
enything new. He replied that they had had & very quiet market and
had done nothing at all, which was & very great relief. Rates had
been steady in London between 4.80 and 4.80 3/4 and closed at 4.80 S/S.
He then referred to the report that the Queen Mary had
not gotten into New York harbor because she was held by the fog off
Ambrose; this I confirmed.
On the question of war risk premium, Bolton stated that
on any gold which they would send over for their own account they
would not attempt to cover the war risk but would carry it them-
selves. The reasons were twofold: (1) war risk insurance couldn't
be placed in the market at the present time, and (2) they thought
their stepping out of the market would help to quiet it down a
little. They would follow this procedure until there was some
definite improvement in the insurance market.
Mr. Bolton then referred to our conversation of Saturday
afternoon (that 1e, the use of a cruiser for the transportation of
gold) and stated that they had thought it over in the meantime and
balieved that with luck they might be able to make the shipment
without raising very much comment. They weren't, of course, certain
but they thought they might be able to do that. But what would be
the effect on our side? I enswered that that was beyond the scope
of my responsibilities and that Washington would have to decide
Regraded Uclassified
190
FEDERAL RESERVE NAME
OF NEW 70%
OFFICE CORRESPONDENCE
DATE September 19, 1938.
CONFIDENTIAL FILES
Subject. TELEPHONE CONVERSATION WITH
be V. Knoke
BANK OF WIGLAND.
that question. Bolton repeated that they weren't, of course, certain
that they could insure secreey but that they might have a fair chance.
If the general news were bad, any public statement on this shipment
would not be believed by the public but would be interpreted by the
latter in its own way. However, they had completed their tentative
plans and felt that these were about 75 per cent fool-proof. At any
rate they vere ready to go ahead when they heard our decision. Until
then they would do nothing further.
I specifically inquired whether he saw any objections to
this scheme and Bolton answered in the negative and added that they
vantrito do everything they could to assist us over there. Details,
of course, would have to be arranged later on.
I asked whether he was ready to tell me what he thought
would be 8 reasonable amount to ship in the way contemplated and
Bolton thought $20,000,000 to $25,000,000; they were ready to load
up to $50,000,000.
I suggested that it might help if they started packing
imediately.
LWK1KV
Regraded Uclassified
191
497
REB
GRAY
Enfiles
Berlin
Dated September 19, 1938
Rec'd 1:10 P. m.
Secretary of State,
Washington.
458, September 19, 1 P. m.
The .erlin papers issued special editorials Saturday
night reporting HENLEIN'S announcement of the foundation of
B Sudeten "Free Corps" on German territory. The Monday
papers carry a second appeal by Tenlein which after refer*
ring to the sufferings of the Sudstens reads: "The hour
of delivery approaches. Offer resistance again and again.
undreds of thousands of Sudsten German comrades are
streaming into the ranks of the Free Corps".
This morning's press further reports that the number
of persons entering the "Free Corns" is so great that it
has been necessary to limit until further notice its
composition to four groups each consisting of 10,000 men.
All men between the ages of 18 and 50 who flee to the
Reich and wish to join the corps are ordered to report to
stations Especially established for this purpose all along
the frontier. A mass meeting of fugitives at which
Beberovsky, Gudeten German press chief will speak is
announced
192
REB
2-#458, From Berlin, Sept.19,lp.m.
announced to take place in Dreaden tonight. The total
number of fugitives as of yesterday 5.9 placed at 84,000.
The German press as yet entirely ignores Hodza's
speech of yesterday but concerns itself with an editorial
in the Praha paper PRAVDA LIVDT which in asserting Praha's
refusal to compromise states that "perhaps WE are not
strong Enough to defeat Germany but WE are strong enough to
draw all Europe in a war". This is described 03 a
firsbrard and DER CONTAG states that Praha is bent upon
sabotage "because an agreement between France and England
which might redound to Germany's favor would prevent EXECU-
tion of oscow's order to draw all Europe into a war."
Hearty approval is naturally given to Mussolini's
spetch yesterday and Praha is represented as DEing entirely
isolated from any support in Europe EXCEPT from Russia
whose assistance is ostensibly established by publication
of photostat copies of compromising documents. The
VOELNISC' ER EOBACITER amid a welter of descriptions of
furt' ET alleged outrages against the Sudeten Germans
reports descrtions from Czechoslovakia of other minority
peoples as proving that no one wishes to live any more
under the Czech state.
In
193
REB
3-7458, From Berlin,Sept.19,1p.m.
In a fairly temperate editorial in yesterday's
FRAMTUNTER ZEITUNG Kircher places primary responsibility
for "an imadiate radical settlement" upon France and
Great Tritain which aided in creating the artificial
Ozech state. Praha he says shows little inclination
to accept such a solution although it is obvious to
everybody that a Czech state which would be freed of the
German quastion and of minorities who wish to leave it
would bE assured C safe Existence and moreover would
have nothing in the least to fear from Germany. RE says
that Denes might bE disposed to renounce that which he is
unwilling to give up voluntarily if third parties would
assume responsibility. Kircher writes that a courageous
decision be the leading powers would put a quick End to
Sudeten German suffering. Should Encland and France fail
in this respect then the consequences would bE terribly
grave.
WILSON
RGC
194
JR
PLAIN
London
Dated September 19, 1938
Rec'd 1:30 p.m.
SECRETARY of State,
Washington.
969, SEptember 19, 6 p.m.
FOR TREASURY FROM BUTTERWORTH.
British security markets have only shown a
fractional improvement over Friday's close, The
attitude of the City is in general one of perplexity.
There is no authoritative information available to
the City on the Chamberlain-Hitler or Chamberlain-
Daladier deliberations and the rumors renching it
from Paris of a virtual acceptance of the German
demands are Evoking mixed sentiments. There is, on
the one hand, a sense of profound relief that a
world war may bE avoided; many, however, USE the
word postponed. There is, on the other hand, a
feeling that the price of avoidance at this time
will bE high, entailing a loss to Great Britain of
prestige, a commodity on which the City cashes in,
and perhaps also prestige to the National Government
which
185
-2- #969, September 19, 6 p.m., from London.
which may foster domestic difficulties. In general,
the City has made n beginning to the process of
retionalizing submission the future course of that
process will depend on events and methods which have
not yet made their appearance.
The dollar opened, offered and quickly went
to 4.802 and during the rest of the day its fluctuations
have been near that level. Indecision has kept the
volume small. Likewise, the gold fixing was only
155 bars at 144S.7D. Gold arbitrageurs report
considerable difficulty in arranging with brokers
yor risk insurance facilities for individual shipments.
KENNEDY
ALC
Regraded Uclassified
196
JR
GRAY
Paris
Dated September 19, 1938
Rec'd 1:36 p.m.
SECRETARY of State,
Washington.
1504, September 19, noon.
FROM COCHRAN.
I have today received a letter dated September 16
signed by President Bachmann and Director WEbEr of the
Swiss National Bank which reads in translation:
"DEVELOPMENTS in the international monetary
situation lead us to inform you briefly to date upon
the attitude adopted by the Swiss National Bank. The
persistent weakness of the pound sterling since last
July has been Evidenced by an increased demand for
Swiss francs. As WE have immediately converted into
gold the pounds which WE have acquired, and as on the
other hand the price of gold at London has had a
tendency to rise, the Swiss franc has slightly weakened
in comparison with the dollar.
Following the politionl uneasiness, there has
recently developed a recrudescenc. of international
capital movements. WE now record a diminution in
our
197
-2- #1504, S ptember 19, noon, from Paris.
our foreign Exchange holdings. The National Bank has
sold dollars at high prices; to date these operations
amount to Eleven million dollars in round numbers.
In spite of the considerable fluctuations which
have been produced between the pound and the dollar,
WE have been able to maintain the Swiss franc within
the limits prescribed by the Federal Council, that is
at n rate of devaluation of approximately thirty per
cent of its former parity. Thus the official Swiss
monetary policy has not undergone any modifications."
BULLITT
HTM
M*
FEDERAL RESERVE 14/6
OF NEW YORK
We
OFFICE CORRESPONDENCE
DATE September 19, 1988.
CONFIDENTIAL FILES
SUBJECT TELIPHONE CONVERSATION WITH
be W. Knoke
BANK or HUGLAND.
I called Bolton at 2:00 s'clock to advise him that the
Havy Department in Washington was instructing the commanding officer
of the Nashville at Gravesend to receive from the Bank of Rugland a
shipment of gold, I added that as I understood it the Bashville
VII scheduled to luave Gravesend September 22 or September 28. The
amount which the Treasury intended to nove on the Bashville was
$25,000,000.
Bolton asked me whether he was right in assuming that
this decision had been prompted by conditions in the insurence
market and I replied that that was surely what had brought the
matter to a head. Would 16 discontinue this method of transportation
after the insurance market had returned to normal? I replied that
I would take that for granted although, of course, I couldn't be
expected to know what the powers that be contemplated doing.
Bolton realized that and emphasised that this was just 9 personal
talk between his and se.
The tentative plans which they had prepared, Bolton on
tinued, had in mind leading at Portmouth and delivery to Portmouth
by road in nevel lerries.
If they were pressed for time he proposed swapping some
of their gold which is already packed against serve of our unpacked
holdings. I assured his that anything that would facilitate proupt
shipment would be walcomed by us.
LUKIKE
Regraded
Uclassified
133
PESCHAL Dated
OF MEW your
<<< CORRESPONDENCE
DATE September 19, 1928.
CONFIDENTIAL FILES
Support
TELEPHONE CONVERSATION WITH
L. ", Knoke
BASK OF ENGLAND.
Mr. Belton called at 2:50 p.m. What he needed from us,
if possible by tomorrow morning, were instructions by secret and
confidential cable as follows:
for him for him
(1) Our authority to release from our account
about 700,000 cunces of fine gold to be delivered to
(the name of the commender of the Nashville),
commanding officer of the Nashville - et a port to be
specified.
for him
(2) Our authority to secept 4 discharge from
the commending officer of the Nashville - he pointed
out that as 8000 as the sold leaves the bank they have
practically lost control and after it is placed on the
Nashville it is on United States territory.
(8) Our authority for not to insure any risk be
treen the Bank of England and the Mashville.
(4) Our authority to charge any expenses to
us.
That such for instructions which they needed.
They expected to make shipment on September 22 and to make
all final arrangements through the United Mates Navel Attache in
London. They furtherwore expected Portmouth to be the port of
mebarkation. As for as Gravesend was seneerned leading there seant
100 such publicity because of the umber of people hanging around,
Regraded Uclassified
200
FEDERAL RESERVE BANE
OF NEW YORK
ICE CORRESPONDENCE
DATE September 19, 1938.
CONFIDENTIAL FILES
SUBJECT: TEEPHONE CONVERSATION WITH
L. ". Knoke
BANK or ENGLAND.
8
furthermore there were not the necessary nevel facilities to place
the gold about the steamer and that to assure a meximum of secreey
the loading would have to be done at one of the navel bases. Any
undue publicity of this affeir at the present moment night have a
bad effect on the market.
Finally, they expected, if necessary, to swep 700,000
cunces of their gold already pecked against s like amount of our
unpacked gold.
às for as they were conserned, Bolten continued, the
whole thing was practically all com up and that what they new
had to arrange was the movement of the gold between the bank and
Portmouth.
LUKIKE
Regraded Uclassified
201
TREASURY department
INTER OFFICE COMMUNICATION
DATE
TO
Secretary Morgenthau
September 19, 1938.
FROM
Herman Oliphant
Responding to your request for advice on authority to move
ten million dollars of gold, without insurance, on the SS MANHATTAN
alling from England September 23, in addition to $11,300,000 which
112 code on that ship covered by insurance, you are edvised that you
We actority to do this.
The Trensury sponsored, and the Congress enacted, the Govern-
not Losses in Shipment Act which wes approved on July 8, 1937. This
et sets Mo n. system of self insurance covering the movement of valuables
19 the Government and its branches and agencies.
On August 12, 1937, the Acting Secretary of the Treasury issued
(in order exempting from the mandatory provisions of the Government Losses
in Shinment Act the shipment of gold and silver to or from foreign coun-
tries, Except for this order, government shipments of gold and silver
to and from foreign countries would now be moving without private insur-
nice under the self- insurance of the Government Losses in Shipment Act.
Tou my, of course, revoke or modify this order, in which event the gold
in rection would not need to be privately insured and would code within
/E. act. An appropriate order is being prepared for your signature.
For your information, I attach a sheet indicating the scope of
operations and the savings to the Government under the Government Losses
In Shipment Act.
Attachment
Human
Regraded Uclassified
(COPY)
TREASURY DEPARTMENT
202
INTER OFFICE COMMUNICATION
DATE September 9, 1938
TO
Secretary Morgenthau
FROM
Berman Oliphent
For your information
The total face value of all valuables shipped without insurance
anou. the Government Losses in Shipment Act from its effective date
(Auguat 1, 1937) to September 6, 1938 is $32,385,176,618, representing
0 savings in premiums for the same period (based upon an average of rates
MI 25 the Treasury from 1933 to 1937, inclusive) of $235,823.
In computing this figure, valuables have been divided into four
doe.
These classes, and the values in each case, are in general 88
follows:
(a) Currency, coin, specie, etc.
$ 2,898,090,973
(b) Negotiable securities
$ 5,316,811,906
(c) Cancelled coupons
+
767,790,363
(a) Miscellaneous valuables not previously
insured, including cancelled bonds,
abstracts of title, mortgages, deeds,
etc. The valuation given articles in
this class has been arbitrarily fixed
at the face or principal value, if
any. This class has not been included
in the computation of premium sevings
$23,402,483,376
(Initialed) HO
203
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE: September 19, 1938
TO
Secretary Morgenthau
FROM
A. Lochhead
Close SEPT. 19, 1938
GOLD HELD IN LONDON
$188,000,000
Insurance arranged for following ships:
Sailing
Steamship
Amount
Sept. 21
Normandie
$11,300,000
Sept. 23
Manhattan
11,300,000
Sept. 24
Paris
11,000,000
$33,600,000
me.
an files
204
JR
GRAY
498
Berlin
Dated September 19, 1938
Rec'd 2 pame
Secretary of State,
Washington.
RUSH.
461, September 19, 6 pame
The London communique as well as Osusky's reported
remark upon leaving the French Foreign Office that "HERE
you 3EE one who has been condemning without being
heard" are taken as implying that the French and British
Premiers have associated themselves with the German
standpoint in the Czech affair.
The tone of the evening press, therefore, is one of
distinct and unmistakable warning to Praha. The
BERLINER TAGEBLATT says that BENES has a last chance to
avoid 8 catastrophe and that hE must have the courage
to form and carry through the all decisive resolution.
This paper remarks, however, that he seems to bE far from
this step and that as for the Czech Generals their
intentions as the "willing tools of Moscow" are
sufficiently known. It states that no other result than
war can Engue if at the last minute the right of self-
determination is not accorded the various peoples in
Czachoslovakia
Regraded Uclassified
205
-2- #461, September 19, 6 p.m., from Berlin.
Caschoslovakia. States that in the Csongradaz that
the state of Czechoslovakia of 1919 must disappear in
one way or another, Silex states that in the race
between deplomatic action and local EVENTS in
Czschoslovakia the former must hasten to catch up
with the latter. HE says that "the statesmen may
COME too late with their pens if the great world
surgeon has alrendy applied the cleansing cut of the
knife."
The rest of the press is unanimous in placing
the fateful decision squarely before Praha.
WILSON
KLP
Regraded Uclassified
206
September 19, 1938
2:45 p. m.
Present:
Mr. Mallet
Mr. Lochhead
Mrs. Klotz
HM,Jr: I thought it would be best, for your
Ambassador, yourself and your Government to know what
we are doing and you might take notes.
I never know how to distinguish as between the
Treasury and the Bank of England, but anyway, one or
the other is sending gold over here now, far in excess
of what anybody knows. Just putting it on. For ex-
ample, the maximum the Manhattan will carry for two
days is $11,000,000 and the British Government is slap-
ping on another $15,000,000. Whether that's insured,
I don't know.
Mr. Lochhead: We don't know.
HM,Jr: In addition to what is coming from
private sources. The maximum the Manhattan could
carry is $11,000,000. I am using that as an example.
And they go ahead and put on another $15,000,000 and
they are doing everything they can to continue unin-
terruptedly this flow of gold which 1s coming this way
and we want to do everything that we can to assist.
You see?
Mr. Mallet: Yes.
HM,Jr: Giving you an example: today if the
Queen Mary gets in, carrying $42,000,000, there will
be 8. total of $100,000,000 gold arrive in New York
today.
Mr. Mallet: I saw it was an enormous shipment.
HM,Jr: Biggest ever. And also it exceeds
the total gold holdings of the German Empire. One
day!
Now, what we are doing and what we did Saturday,
207
-2-
we have conversations -- the Federal Reserve, our
fiscal agent, have conversations with Bolton, and
we told Bolton this light cruiser, the Nashville,
which is now at Gravesend, will be coming back in
a day or two and will be replaced by the Honolulu
and we thought 88 she is coming back, there is BO
much gold over there and there 1s no space and we
can get no insurance, we might put $25,000,000 on
and bring it back and we put that up to him Saturday
and today at noon Bolton phoned back that they had
no objections.
Now, the 1dea 1s simply to keep this moving
and I don't mind telling you, because the British
Treasury knows it anyway, that as of last night we
had $188,000,000 that we owned in London and the rate
at which it 1s coming over it will take at least A
month to get it over.
Mr. Lochhead: Practically frozen over there
because of no insurance.
HM, Jr: Practically frozen. 30 now it 18
between the two Governments. And I want to make
it plain your people understand and I am sure you
will too. They are using every effort to keep the
pound-sterling steady and the only way you can keep
it steady is if we supply the dollars in exchange
for gold, which we have been doing and will continue
to do. I think you saw my statement?
Mr. Mallet: Yes, I did.
HM,Jr: In order to keep that thing rolling,
we have to get it over here. If we get too much
over there I may be subject to criticism -- why did
you permit $200,000,000 or $300,000,000 gold to pile
up in London? So I was willing to recommend to the
President that we take whatever slight chance there
is and put this gold on the Nashville, but the whole
thought back of it 18 to Just keep this stuff coming
A8 uninterruptedly as possible.
Mr. Mallet: Keeping up an uninterrupted flow
60 there will not have to be too big a. shipment at
one time.
Mr. Lochhead: We are not 80 much interested
208
-3-
in promoting the flow of gold as we are to provide
the facilities to help the foreign exchange market;
that you and we are trying to do everything therefore
to facilitate the physical operation to see that gold
18 uoved. The gold 1s just an instrument.
Mr. Mallet: Yes.
HM.Jrr Let me give you the conversation with
Knoke; give you the background. If you will read
these two that will give you the background on this
thing.
Mr. Mallet: Yes.
HM,Jr: No reason why you shouldn't read these.
(Mr. Mallet read the two phone conversations
between Knoke and Bolton, copies attached.)
HM,Jr: That gives you the background. And
this is too important. So we just think it will be
helpful to keep this thing moving. You can see how
your people feel about it and we are doing it really
in a spirit of being helpful.
Mr. Mallet: Oh, certainly:
HM.Jr: And we gave them from Saturday to today
and I am sure they have had a chance to consult the
Treasury.
Now, the only place I differ -- I want to sleen
on this -- I don't know whether it might be better to
say openly that we are doing it rather than have it
leak out and let some newspaper man give his interpre-
tation -- that we might not openly say that we are doing
it and 1f you could I would like to have Bir John
3imon'e reaction on that 1f you could get it for me.
Mr. Mallet: Yes, sir.
HM,Jr: In twenty-four hours. See?
Mr. Mallet: As regards publicity for the ship-
ment of $25,000,000 in the Nashville.
HM,Jr: Yes.
Mr. Mallet: Yes.
Regraded Uclassified
209
+
HM.Jr: My own feeling 1s, I don't think you
can keep it secret. Then somebody knows it and he
-ives it his interpretation. Seei
Mr. Mallet: Yes.
HM,Jr: And I Just wonder if it isn't better
for us to announce it.
Mr. Mallet: Uh-huh. I see.
HM,Jr: But I don't want to do anything to en-
carrass your Government and if they feel it 18 going
to be embarrassing we will let it come over and take
our chances. They have changed and they don't want
it loaded at Gravesend. They say they can't handle
it there. They haven't got the facilities and they
can't keep it secret. So we are moving, tonight, the
Nashville down to Portsmouth Navy Yard.
Mr. Mallet: Oh, yes.
HM,Jr: And they say they can handle it from
there and we will unload it at our Brooklyn Navy Yard.
Mr. Mallet: Oh, yes.
HM,Jr: But there are some 3,000 cases involved.
Now, whether you people can move 3,000 cases and keep
it secret
....
Mr. Lochhead: We checked back; may be only
five or six hundred cases. It's a bulky proposition.
Mr. Mallet: I saw one reference in the conversa-
tions about nearly 500,000L.
Mr. Lochhead: In the conversation with the Bank
of England, they were taking of a shipment beforehand they
would think very seriously about $2,500,000 when you
and they mentioned 500,000 b. I can't see why
consider they are moving this $85,000,000 for their
own account.
Mr. Mallet: This is B. question of the $25,000,000.
Regraded Uclassified
210
-5-
HM,Jr: Yes. And the machinery 18 moving.
They have had from Saturday to noon today and they
have said yes.
Mr. Mallet: And they are now, presumably,
retting that gold on the Nashville.
HM,Jr: Yes. And they did not want to move
it from Gravesend, so we have moved the Nashville
from Gravesend to Portsmouth and the Honolulu will
prrive in two days. She will go to Portsmouth or
Southampton, one or the other. I think it will be
Portsmouth.
Mr. Mallet: So there 18 a possibility of the
operation being continued when the Honolulu arrives?
HM,Jr: Yes, it might be continued. We have
not crossed that, but It is possible that it may be,
10 it keeps increasing that way and no space available.
Mr. Mallet: Yea. Yes.
HM,Jr: We have got to keep that gold moving
and I don't know any other way to get it over here-
Mr. Mallet: The thing you want to put to Sir
John Simon: you have not made up your mind whether
official publicity 1s better than have it leak out
end you would want to know beforehand if it would em-
barrass our Government.
HM,Jr: My inclination is to give it publicity,
but I think it will leak out anyway, and therefore I
think it 18 better that we give it the kind of inter-
pretation that we want. My inclination definitely 1g
to -ive it publicity, but I don't want to do 80 -- I
have no strong feelings about it, so 1f Sir JohnSimon
says no; he would rather not -- it's all right with me.
Mr. Mallet: Quite. And he would not feel it
is necessary to add any statement to whatever you said.
HM,Jr: The announcement would come from here.
But I would like if possible a fairly prompt answer.
I would like to have it, 11 I could, not later than
Wednesday morning.
Regraded Uclassified
211
-6-
Mr. Mallet: Yes, I should think so.
HM,Jr: You understand they are boxing this
gold up and it's rolling and I imagine they will
ship it tomorrow.
Mr. Mallet: He would know that?
HM,Jr: on, he must! And you can see they
seem to know all about it. The Bank of England has
A good intelligence service.
Mr. Mallet: Yes.
HM,Jr: What was the sum of figures of gold on
the way? $85,000,000?
Mr. Lochnead: $85,000,000 -- they are going
to put on -- and $45,000,000 on the water.
HM,Jr: And we have over there now, which be-
longs to us, $188,000,000 80 there you are. It does
not bother me, but I would like to keep it moving.
We will take it Just as fast as they want to sell it
to us. You must keep this stability. If they begin
to worry about the pound and the dollar -- financial
communities are sufficiently upset now, you don't want
to give them anything more.
Mr. Mallet: Quite. Quite.
HM,Jr: Well, that's that!
Mr. Mallet: Thanks very much. And I will see
you have an answer not later than Wednesday morning.
HM,Jr: Is Bewley going to stay over indefinitely?
Mr. Mallet: He's coming back. I think ne 18
sailing next week. I think he gets baok on the 6th
of October.
000-000
Regraded Uclassified
212
September 17, 1938
FEDERAL RESERVE SANK OF not YORK
for Confidential Files
Subject: Telephone Correrention with
Bank of England
front L. V. Inske
I called Bolton at 9:15 this morning. Be had probably read in the papers,
I said, that one of our cruisers happened to be in European vators at present.
It a happened, I continued, that this cruiser - scheduled to have wtere in
the near future. It might be possible for us to pat - of our London gold on
ber (say $25,000,000) which would give - more elber room for future gold spora-
tiese in Lendon. that I wald like his to de vos to let this thing P through
his hand over the vockend and let DO know early next week what be and his
associates in the bank thought of such a scheme and how, in his sal their opinion,
Deve of rash & use of a American cruiser would be received is Barope.
I had not half finished my speech before Bolton at in to say that be could
anticipate what I had on my mind. Se know that the Hashville was already is the
Thanes and that the Bacelulu was arriving shortly. They had already discussed
is but thought 11 probably best net to miss my suggestion of this sort to -
because they didn't know the relationship between our Treasury at our Bary
Department. It would probably be a relatively simple miter for the to put
sees gold (Delton said they had thought of 500,000) aboard the Nashville probably
without my - at all. " people hare think that va could probably got a
fair mount of gold as either of these cruisers without easing 6 great deal of
The question would be whether the leading chould be dose is the lower
regions of the from or whether the cruiser should pas into Portland. Md I
know the reute which the craiser was expected to take? I replied that I had as
Regraded Uclassified
213
Regraded Uclassified
ideal that, M a matter of fact, he comed to have may more details about the
- of the craisers, their locations, ets., than I bad here. Assuming that
they could get the gold about quietly. Bolton continued, would this scheme cases
a great deal of comment at our and, If the chances were that it would, wouldn't
it then be better to be quite open about it and issue & frank statement explain-
ing that the shipment was made because the insurance market had practically
clamped down 00 var risk insurance. If there were any publicity it seemed to
his it would be better to nake & public statement. I replied that to the best
of my knowledge there had in M discussion of this matter is the press but that
I understood that early yesterday norning a news commentator had stated over the
radio that according to information furnished by 8 high official something of
this nature as under contemplation. I checked into the matter and had been in-
formed that no official had discussed this matter with any outsider.
Bolton is going to think the matter over during the weekend and make was
tentative inquiries arong bis associates md will call no on the telephone by
soontime on Monday.
As regards today's market, Bolton said they had had a relatively nice som-
ing: his sales had been $3,000,000 in the market plus mother $3,500,000 to
central banks. principally the Swedish Rikebank. the Seedes had shown more alam
during the present crisis than may other country in Europe.
COPY
214
FEDERAL RESERVE BANK
OF NEW YORK
To: Confidential Files
Date:
September 16, 1938
From: L. Y. Knoke
Subject: Telephone Conversation
with Bank of England
Mr. Bolton called me at 12:45 today. Their total sales were just over
$20,000,000 up to that moment. The market was very quiet and steady. A good
deal of the bidding for dollare originated with dealers who had previously gone
short of dollars and long of gold in London and who were now reversing their
transactions. In addition there were, of course, others, among them central
banke, who were anxious to build up a small dollar reserve. There was no big
market movement just now. Chamberlain had just arrived from his visit with
Eitler and made an announcement which was quite pleasant. He had had 8 very
!riendly talk with Hitler, Chamberlain said, and intended to talk with him in
Germany next week. Both he and Hitler were now quite aware of what was in each
other's mind. That, Bolton was hopeful, would help to quiet the market down.
The question which vas worrying him now was the effect of the cancellation
by the insurance market of all war risk policies. The position in the insurance
market at the moment was that there were certain underwriters who would quote 2a
6d percent for war risk on gold for immediate shipment to New York but the market
vas very small, probably not more than L500,000. They had taken up the question
both with Lloyds and with the Government but it would take come time to arrive at
a decision. They were, however, determined not to leave the situation in its
present state. Meanwhile they were concerned about their private arrangement with
de and had decided on the following program which he hoped would meet with our
approval:
Regraded Uclassified
215
- 2 -
They will continue asumual to hold the dollar market as steady as they
can and supply the market with dollars from the following sources:
(a) their own present dollar balances.
(b) their war reserve in Canada (I tried to find out how much that
was but Bolton simply replied it didn't amount to much).
(c) they will borrow dollars for short periods by means of aways in
the market.
(d) they will use the gold now in transit $45,000,000.
(e) they are going to make the following additional shipments be-
ginning next week:
$15,000,000 on the Normandie
10,000,000
.
Il
Samaria
15,000,000
"
a
Manhattan
10,000,000 # # Calendonia
10,000,000 - . Paris
15,000,000 If
If
Queen Mary
10,000,000
.
.
Georgic
$85,000,000 Total
It will be up to the British Government to decide what they will do about
insurance.
$45,000,000 on the water and $85,000,000 to be shipped in the near future
they hope would cover things during the next week or so. Meanwhile they would
like us to continue our order for gold to be earmarked in London. They would,
however, not make use of that unless there was 8. serious emergency. In addition
to the two gold prices which he would continue to quote us as heretofore, be
would give us two sterling rates, buying and selling, against which we could
operate for hie account if we felt 80 disposed and if ve didn't want to take
any more gold in London.
Regraded Uclassified
226
3
I replied that I thought that was a splendid program and that I was sure
that our Treasury would appreciate this proof of their desire to even the burden
between the two of us. I added that I was confident that the Treasury would want
to continue the old gold orders (except at lower prices, of course, to meet rising
insurance premia, etc.) and that it was everybody's wish here that he should make
use of these ordere if it was necessary. Also that I hoped that we would not
nake use of his sterling orders for his own account unless we should simply be
swamped. I explained that this hope and belief on By part was based on the
feet that to the best of my knowledge at least there was no intention whatever on
the part of our Treasury not to continue 88 heretofore but on the contrary to do
whatever we possibly could do. Bolton replied that quite obviously the situation
was a difficult one and that "we don't want you to participate in the risk."
Bolton then referred to our cable of last night #379/38, the third paragraph,
in which we reduced the gold price to $34.73. and asked me to tell him whether that
applied, to past or to future sales. I replied that it would apply to dollars
sold by him beginning today. Was that satisfactory? He said it was.
I inquired whether, in his opinion, it would be possible for them to pack
some of the gold which we now held in London 80 that we could have it ready for
shipment if, as and when an opportunity presented itself. I explained that I vos
Aware of his recent request to give him several days notice when asking them to
take shipment but that the purpose of my discussing this matter with him again
vas to try to have some gold ready for immediate shipment if, for instance, one
of our banks which had arranged for shipment aay on B Wednesday boat would come to
us on Tuesday and offer us that space because they had decided to cancel their
shipment. I suggested that be let this thing go through his head and talk to of
the next time be was on the telephone. Bolton replied that everything depended
upon the capacity of their bullion department which, M I knew, had been taken off
its feet by the recent rush of gold to New York.
LWK:EV
Regraded Uclassified
217
PARAPHRASE OF TELEGRAM
FROM BERLIN
No. 419, September 19, 4 p.m.
STRICTLY CONFIDENTIAL
I received a visit today from the Czech Chargé
d'Affaires who declared that in the Czech newspapers
he had Juet read reports from Washington with regard
to the possible assumption of Czech interests by the
United States in the event of war. He had come in, he
sald, without being instructed and in an entirely per-
sonal capacity to inform me that it had been the inten-
tion of his Government to request the United States,
should war occur, to perform this service but that
there had been no steps taken with regard to this for
the reason that at all costs it was their wish to avoid
enything that might have the appearance in German eyes
of provocation. If there should suddenly be an outbreak
or war it was said by him that he would give instructions
to turn over as a temporary measure the Czechoslovakian
Consulatesto the American consular officials. This
would be pending 8. request to Washington on the part
at the Czech Government and the Secretary of State's
decision in regard thereto. The part of Radio Bulletin
no. 218 dealing with Mr. Hull's talk on this subject with
Regraded Uclassified
218
-2-
the newspaper reporters was read to the Chargé d'Affaires
by me.
I was told by him that the leading Czech residents
in German cities had been arrested as hostages and that
the Czechslovak Government had been given notice by the
GermanCharge at Prague of this and it had been said by
the Chargé that the shooting of any Sudeten would be
met with retaliation on these hostages. There has been
a protest by the CzechChargé here on the grounds of
international law but small satisfaction has been re-
ceived by him. It was added by the Chargé that his chief,
Mr. Mastny, who had gone from Nuremberg to Prague, would
not come back to his post immediately. At Prague the
German Minister 1s absent as well, and the Czechs will
have their Minister remain in Prague pending what occurs.
Another statement was made by the Czechslovek
Chargé. Von Weizsalcker had called him in on Satur-
day evening and he had been told that, according to in-
formation received by the German Government, in Czecho-
slovakia, seven or eight classes had been summoned to
arms and that it 786 the wish of Weizsalcker to declare
that this could result differently than in the month of
May. Von Weizsalcker was told by the Czech Chargé that
the German news report was not correct because there had
Regraded
219
-3-
been called only one class.
WILSON
Regraded, Uclassified
220
PARAPHRASE OF TELEGRAM RECEIVED
FROM: American Embassy, Paris.
NO.: 1508.
DATE: September 19, 1938, 5 P.M.
FROM COCHRAN.
Very little sterling was yielded by the stabiliza-
tion fund up to 5 p.m. today in order to keep the rate
at 178,31. There was a much quieter market for London
than last week and it was practically square for the
day. Awaiting the outcome of international conversa-
tions and negotiations in the political field, Paris
exchange operators are continuing to keep their position
balanced.
It is reported in the press that rail shipment of
160,000,000 francs of gold and silver bars has been
made from Loyalist Spain to France for transshipment
to the United States for use in payment of goods.
BULLITT
EA:EB
Regraded Uclassified
221
PARAPHRASE OF TELEGRAM
From BUCHAREST
No. 102, September 19, 6 p.m.
In every quarter, opinion over the Central European situa-
tion indicates oontinued alarm as it becomes more (evident?)
that any solution averting war gives promise of a precedent which 18
unhappy for Rumania, which has large minorities. There is
being paid to the Hungarian border especial attention, because
there 18 a. rumor that if Czechoslovakia should be entered by
the Germans A similar move will here be made by Hungary. How-
ever no troop movement has been made because the Government
does not wish to take any action which could be understood as
taking sides with either party. I am not able in this connec-
tion to confirm that any understanding whatsoever with Russia
has been reached, although there are persistent reports from
abroad in that sense. Here there is general admission that
despite large expenditure of funds, Rumania 1s pitiably not
prepared for either attack or defense, and that therefore.
for the moment, the only policy she can adopt is to remain
quiet and hope ardently that there can be maintained peace.
HIBBARD
Regraded Uclassified
222
PARAPHRASE OF TELEGRAM
FROM PARIS
No. 1510, September 19, 6 p.m.
Section 1.
RUSH AND STRICTLY CONFIDENTIAL - FOR THE SECRETARY
The Vice President of the Radical Socialist Party,
Jacques Kayser, who 16 confidential diplomatic adviser
to the French Prime Minister and was his assistant in
London, and I have Just had a conversation. His opinion
of the meaning of the agreement which was reached in London
is that peace 18 preserved for at least a day but in addi-
tion that nothing has been settled by the agreement.
Kayser understands very clearly that demands would
be brought forward at once by the Hungarian and Polish
Governments and it was indicated by him that he did not
like at all to have France and Great Britain make &
guarantee of the integrity of that part of Czechoslovakia
which would be left after the Sudeten area had been ampu-
tated because the guarantee would be issued with the pros-
pect of having it rendered illusory in the near future
because of plebiscites in the Hungarian and Polish areas.
Authoritative word from Prague had just come to him
to the effect that highly disappointing information had
been received by the Czeoh Army from military leaders in
the U.S.S.R. and indicated that the Czechs could not
count on Russia. For the moment the possibility that the
Regraded Uclassified
223
-2-
British-French proposal might be refused by Benes had been
diminished greatly by this but the possibility had again
been revived by a later communication from Moscow.
Section 2
Kayser was asked by me to forecast what would eventuate
in France if the proposal should be rejected by the Czecho-
alovaks and Czechoslovakia should be invaded by the German
armed forces. The opinion he expressed was precisely
contrary to Bonnet's opinion which I reported on Sep-
tember 19, 5 p.m., in my no. 1509. It. was said by Kayser
that without doubt the French would come near to civil war.
Members of all parties from the extreme Left to the extreme
Right, as well as the Communists, would be in favor of war
on the theory that France would be dishonored if she should
not go to war. It W&B his certain opinion that widespread
riots and strikes would result and he felt that finally
France would make war. He continued by predicting that
even if there should be submission on the part of the
Czechs the action taken by the French Government and by
the British Government would cause public opinion to swing
away from parliamentary democracy. It was not his belief
that France would turn communistic nor could he foretell
to what individual leader France would look but it was his
feeling that the French democratic parliamentary system
had been dealt 6. blow from which that eyetem might never
make 8 recovery.
BULLITT
Regraded Uclassified
324
PARAPHRASE OF TELEGRAM SENT.
TO: American Embasey, London.
DATE: September 19, 1938, 6 p.m.
NO.: 543.
STRICTLY CONFIDENTIAL
FOR BUTTERWORTH FROM SECRETARY OF THE TREASURY.
It has been arranged to ship twenty-five million
dollars in gold from the holdings of the United States
Stabilization Fund with the Bank of England on the boat
Nashville which saile this week from Portsmouth. For
your information, this manner of making the shipment is
being used because of the large amount of the United
States gold holdings in London, and in order that our
cooperation with the British fund may continue in accord-
ance with the terms of the Tri-partite Agreement. Also,
it is difficult to obtain insurance in New York on this
gold. The Federal Reserve Bank in New York has discussed
this shipment with the Bank of England and the latter
has shown their approval. It is evident that the Bank
of England has been in oonsultation with the British
Treasury on the subject.
It has not yet been decided whether or not this
matter should be given publicity.
HULL
EA:DP
Regraded Uclassified
CONFIDENTIAL
H2
224A
JM
WAR DEPARTMENT
4-2/2657-11-90
WAR DEPARTMENT GENERAL STAFF
MILITARY INTELLIGENCE DIVISION. 0-3
WASHINGTON, D. c.
MA
September 20, 1938.
MEMORANDUM NO. 16 FOR THE CHIEF OF STAFF:
Subject: The present European situation to
midnight, September 19-20, 1938.
Political Situation. The French and British Cabinets have
both accepted the Chamberlain plan in souldng the solution of the
Sudeten problem by the anneration by Germany of the preponderantly
German areas. The British and French people both are deeply cha-
grined by this additional surrender to the diplomacy of intimidation.
However, they are relieved to escape the immediate consequences of
war to which their own military weakness has rendered them vulnerable.
The resotion of the Caschoslovakians to their loss of sup-
port from the democracise is one of extreme bitternes. It will
require all the segacity of Benes to lead his countrymen to accept
the insvitable without internal disturbanom or provocative incidents
during the coming negotiations.
Military Situation. No known important developments have
occurred in countries other than M stated below. The following
peraphrased cable from the Military Attache in Berlin dated 2,17 P.M.,
September 19, is interpreted as meaning that Hitler will permit no
relaxation of pressure in assuring and expediting the solution he
demunds:
"In Austria to the north of Danube and also in
Sexony German troop movement in definite, also probably
in Silesia and Bavaria. There is being formed a Sudsten
German Free Corps of some 40,000 men, composed of de-
serters from the Csechoslovakian Army and of S.S. Troops.
"Chamberlain has been assured by Hitler that no
military action will be undertaken in Czechoslovatia un-
til after the meeting in Godesberg, unless notive opera-
tions are undertaken by the Caechs in the Sudeten area
in the neantime.
CONFIDENTIAL
Regraded Uclassified
224B
CONFIDENTIAL
"The Fushrer has demanded that France and England
agree to the principle of self-determination of people
in settlement of the dispute, adding that if the principle
is accepted, Germany will be willing to compromise with
regard to the execution of the principle. Chamberlain,
It is known, assured Hitler that be personally fevored a.
readjustment of frontiers."
Whereas the Italian press denies any ambiguity in Musso-
lint's Trieste speech, declaring it meant definitely that Italy would
be with Germany, the Military Attache in Rome is of the following
opinions
"That officers of the Italian Army and Navy, general-
ly speaking, are not pro-Germad in sympathy. He does not
believe Italian Army would or could strike effectively
against continental France, but that Italian efforts
might be directed against Tunis and in Spain with greatly
increased efforts against Spanish Loyalists.
"No outward evidence of mobilization but it is
understood full plans for mobilization in 06.86 of noces-
sity are ready."
- 2 -
CONFIDENTIAL
Regraded Uclassified
225
JR
GRAY
Paris
Dated September 20, 1938
Rec'd 7:35 a.m.
Secretary of State,
Washington.
1514, September 20, 11 a.m.
The reaction
of the people of France to the
EVENTS of yesterday was Expressed completely by Leon
Blum in the following words:
"War is probably avoided; but under such conditions
that I, who have never ceased to fight for peace and for
many years have dedicated my life to peace, cannot feel
joy and that my Emotions are divided between a cowardly
relief and shame."
Five minutes ago the French Foreign Office received
a telephone call from the French Minister in Fraha
reporting that he had received neither the reply of the
Czech Government nor any intimation as to the nature of
the reply.
BULLITT
RR
HH
226
PARAPHRASE OF TELEGRAM
FROM Paris
No. 1515. September 20, noon.
Section 1.
STRICTLY CONFIDENTIAL
We were told by the Hungarian Charge last evening that
orders from Budapest had not yet been received by him to
tell the French Foreign Office in an of icial manner of the
stand of Hungary with respect to the problem of their min-
ority in Czechoslovakia. He 1s expecting to receive at any
moment his instructions.
Up to the present he said every effort had been made
by his Government to remain quiet with respect to this
problem, as it was not their wish to render more complex
the solution of the Sudeten-German problem which was being
sought or to be brought into the quarrel between Czecho-
slovakia and Germany. In the assumption of this attitude
the Hungarians had taken for granted that no matter what
rights in the end were given to the German minority in
Czechoslovakia. these rights would in all fairness be
granted to an equal extent to their own minority in Czecho-
slovakia. According to him it would not be possible for
the Imredy Government to remain in office if it should
not succeed in obtaining equal rights for the Hungarian
minority.
Regraded Uclassified
227
-2-
minority. There would expand with overwhelming strength
the Hungarian-Nazi movement which the Prime Minister 18
trying as hard as he can to keep under control, and the Gov-
ernment would be thrown out being charged with neglect of
its duty to protect the Hungarians in Czechoslovakia.
Section 2.
The Hungarian Charge declared that it had been with
stupefaction that he read that the British and French Gov-
ernments were thinking over the question of a guarantee of
Czechoslovakia's borders after the Sudeten district had been
amputated. He declined to believe that such a guarantee
had really been agreed to by the British. Nothing, he said,
could be more short-sighted for the French and British
Governments to do than to attempt to withhold the right
granted to the German minority in Czechoslovakia from the
Hungarian and Polish minorities. The Polish Government would
be provoked to military measures by such an effort, and in
Budapest a Nazi Government would be set up.
BULLITT
Regraded Uclassified
228
PARAPHRASE OF TELEGRAM RECEIVED
FROM: American Embassy, Paris
DATE: September 20, noon
NO.: 1517
FROM COCHRAN.
At noon today, when I paid a visit to the Bank of France,
the French stabilization fund had sold one hundred thousand
pounds spot and one hundred and eight thousand pounds forward
in order to hold the usual rates versus the sterling rate.
Although sterling had improved against the dollar by *** that
hour, the British control had neither sold nor bought dollars.
Since there is a tendency to dump national defense and short-
term Treasury bonds, the Bank of France is buying these Be-
curities daily in its open market. Discounts at French Bank
continue to gros and their statement to be issued on Thurs-
day will show & further increase of almost five billion
francs in the circulation of notes. This statement will also
reveal new drawing by the Treasury on the bank for three
billion francs. The Treasury wanted to make this ten billion
but the bank still hopes it can keep the amount down to three.
EA:DJW
Regraded Uclassified
URRESPONDENCE
DATE
September 20, 1955.
CONFIDENTIAL FILES
TELEPHONE CONVERSATION WITH
L. #, Knoke
BANK OF ENGLAND.
Bolton called at 12:55 and stated that they had made
all the arrangements which they were able to makes the Nashville
would be in Portmouth tomorrow afternoon; they would send two
convoys of two lorries each on Thursday, the first convoy to leave
at 9:30 and the second at about 12:30, arriving in each case three
hours later. He thought everything would go through "fairly amoothly"
and "reasonably well."
As regards the market, they had had a much quieter time,
operating on 8. very small scale both ways prior to 11 o'clock this
morning. Since then no intervention had been necessary; they had
managed to buy about £1,500,000 worth of gold (these are current
pounds sterling, not gold pounds).
with reference to the political situation, Bolton stated,
the Csech Government had not as yet accepted the proposals and
further delay might lead to some disturbances in the market to-
morrow. The Czechs were reported to be trying to have the Russians
intervene in their behalf. Until they received their answer from
Russia the situation was obviously open to further disturbances.
I referred to his sterling orders (that is to buy or
sell sterling for his account) and explained that the 1/16 in the
rate which we added to the price actually paid out by us represented
the compensation which we allowed to the bank acting as our agent.
I emphasized that as far as we were concerned we made no money on
these orders. Bolton asked whether 10 had my objections to
Regraded Uclassified
230
- 1.0
FEDERAL RESERVE BANK
OF NEW YORK
OFFICE CORRESPONDENCE
DATE September 20, 1958.
CONFIDENTIAL FILES
SUBJECT: TELEPHONE CONVERSATION WITH
C
FROM. L. V. Knoke
BANK OF ENGLAND.
2
receiving sterling limits from his at the moment. I said "HO,"
but added I hoped we would soon have en opportunity to operate
against his gold limit if only to prove to him that we had in no
way changed our policy.
LUKIKU
Regraded Uclassified
231
JR
PLAIN
London
Dated September 20, 1938
Rec'd 2:25 p.m.
Secretary of State,
Washington.
976.
September 20, 6 p.m.
FOR TREASURY FROM BUTTERWORTH.
The captain of the NASHVILLE colled about the
shipment mentioned in your 543, September 19, 6 p.m.;
and, after talking with Bolton of the Bank of England,
I gave him the following details, namely, that the gold
would bE sent by road to Portsmouth in two consignments
the first of which would arrive about noon September 22
and the second later that afternoon. A Bank of England
official will accompany Ench convoy and present the
usual documents for the captain's signature.
British security markets have again shown a
further improvement, war loan 3-1/2 per cent bonds, for
Example, closing at 100-3/4, up 7/8 on the day. But the
volume of trading has been as small ns during the
latter part of last WEEK; the price increases have in
Effect been merely a marking up by dealers of their
own security holdings. The attitude of the city
remains
Uclassified
232
-2- September 20, 6 p.m., from London.
remains much as described in No. 969 of September 19,
6 palley and there is no (repeat no) ready assumption of
confidence, in the absence of any authoritative
indication of Czechoslovakia's ultimate attitude and
with mother Hitler-Chamberlain meeting in the offing.
It is mignificant that both British and American banking
firms state that almost no large positions are being
unhooked.
The dollar opened at 4.81-1/4 offered and rapidly
moved to 4.32-1/2, it fluctuated sround that point until
NEW York come in = - buyer of dollars. The volume vas very
smell and there few 1f any individual big declings.
Likerise gold fixing totalled 283 bors at 144S. of which
153 WERE mouried.
The joint ruting committee of Lloyde his responded
to the call for greater uniformity of war-risk rates by
recommending (repect recommending)
1 new achle of minimum rates. The principal rate for
voyages from the United Kingdom western continental
ports to NEW York is 23. 6D, per à 100. This action
vill doubtless facilitate the issuance of war-risk cover.
KENNEDY
KLP
Regraded Uclassified
233
PARAPHRASE OF TELEGRAM
A
From PARIS
No. 1518, September 20, 2 p.m.
Section 1.
STRICTLY CONFIDENTIAL FOR THE SECRETARY.
While the British Ambassador, Sir Eric Phipps. and
I were having lunch there was a telephone call from Bonnet
who said in great excitement that Benes had just told
him that the Government of Czechoslovakia was still un-
decided as to what course to follow, but there were two
alternatives under considerations The first to make an
appeal for general arbitration of the Czechoslovak minority
problem, the second acceptance of the French-British pro-
posal.
It WAB further said by Bonnet that it was his belief
that should Benes make an appeal for arbitration, Czecho-
slovakia would be entered tonight by the German army.
Therefore he was on the point of urging as strongly as
possible that Czechoslovakia immediately accept the pro-
posal which the British and French had made.
Section 2.
According to the British Ambassador, his reply to
Bonnet was that he was 80 positive of his Government's
position that he would immediately call up the British
minister
Regraded Uclassified
234
-2-
Minister in Prague by telephone without first consulting
London and tell the Minister to tell the Czechs that if an
appeal for arbitration should be made by the Czech Govern-
ment their country would definitely be entered by the German
army tonight.
Sir Eric went on to Bay that the British and French
Governments had both made it perfectly clear to Benes that
if the French-British proposal should not be accepted by
him and Czechoslovakia should be invaded by the German army,
neither France nor Great Britain would give any support to
the Czechs. Then Sir Eric telephoned to Prague to the
British Minister and to the Foreign Office in London A.B. well,
and the Foreign Office gave an indication that his actions
and opinions met with their entire agreement.
Bonnet expects a final answer from Czechoslovakia this
afternoon at 3.
BULLITT
Regraded Uclassified
235
JR
GRAY
London
Dated September 20, 1938
Rec'd 2:15 p.m.
Secretary of State,
Washington.
978, SEptember 20, 7 p.m.
Just been advised by Cadogan message to bE given
to Newton, British Minister, shortly after 6. No
indication yet what the answer is. Small cabinet
meeting when note arrives. Will advise later.
KENNEDY
RGC
Regraded Uclassified
236
PARAPHRASE OF TELEGRAM
FROM Paris
No. 1521, September 20, 3 p.m.
MI
Strictly confidential for the Secretary
The British Ambassador and I talked over today
the problem of the guaranty to Czechoslovakia by Great
Britain and it was asked by me whether the meaning of the
guaranty was that possession to Czechoslovakia of the
parts of the country in which Hungarians, Ruthenians,
and Poles lived would be guaranteed. On the contrary,
sald the British Ambassador, there would be held plabiscites
in these districts and only that part of the Czechoslovak
state which remained after detachments on account of
these plebiscites would be guaranteed by Great Britain.
BULLITT
Regraded Uclassified
237
EDA
GRAY
BERLIN
Dated September 20, 1938
RECEIVED 3:10 p.m.
Secretary of State
Washington
466, September 20, 6 p.m.
The evening press in toto give marked prominence to
demands from Warsaw and Budapest that the Polish and
Hungarian nationalities in Czechoslovakia be accorded
full rights of stlf-determination. Poland is reported to
be desirous of the acquisition of Teschen without the
formality of a plabiscits. The papers also forecast
that in his speech this Evening Mussolini will raise
the question of the necessity of El "total" solution
which may EVEn envisage the return of the Slovak and
Ruthenian minorities to Hungary.
Reliable newspaper sources state that the Hungarian
Premier and Foreign Minister have just departed from a
conference with Hitler at Berchtesgaden.
These developments perhaps indicate that the question
is Entering upon a DEW phase, namely, that which has been
advocated repeatedly by the German press that a general
partitioning of the present Ozech state is necessary.
WILSON
KLP
Regraded Uclassified
238
PARAPHRASE OF TELEGRAM RECEIVED
FROM: American Embassy, Paris, France
DATE: September 20, 1938, 6 p.m.
NO.: 1526
FROM COCHRAN.
This evening by a quarter of six the British control
had not intervened on the exchange market. For the day,
the French stabilization fund had yielded 600,000 pounds
spot sterling and about the same amount forward. The
latter amount included about 50 percent speculative opera-
tions which are developing on prospect of the Bank of
France's next statement showing that the Government has
borrowed from it.
BULLITT.
STATE
EA:LWW
Regraded Uclassified
239
GROUP MEETING
September 20, 1938.
9:30 A. M.
Present:
Mr. Oliphant
Mr. Gaston
Mr. Viner
Mr. Hanes
Mr. Lochhead
Mr. White
Mr. Gibbons
Mr. Upham
Mr. Bell
Mr. Thompson
Mrs. Klotz
H.M.Jr:
Hello, Jake. Glad to see you. (Shakes hands with
Mr. Jake Viner.)
(Mr. Viner shakes hands around the room.)
H.M.Jr:
You know Mr. Hanes, don't you?
Viner:
Yes, I just met him.
H.M.Jr:
Thompson?
Thompson:
(Nods "Nothing.")
H.M.Jr:
Bell?
Bell:
I have nothing except to ask you whether the
Greek Minister has called you up to deliver a check?
H.M.Jr:
Not that I know of.
Bell:
He has not? He has a check, and he wants to
deliver it personally, and I have the letter, and
the receipts.
H.M.Jr:
Well, Mrs. Klotz, if you will call up the Greek
Minister ....
Bell:
Oh, I think he will probably call you.
H.M.Jr:
Oh, then I'd probably better wait.
Regraded Uclassified
240
- 2 -
Bell:
He'll call you.
H.M.Jr:
As long as I don't have to drink any of that Greek
wine, with rosin in it, with him. Has anybody
here drank any Greek wine?
Viner:
Not here, but I've drunk Greek wine.
H.W.Jr:
With rosin in it?
Viner:
With rosin in it.
N.M.Ir:
(To Mrs. Klotz:) Well, if he calls
Bell:
I've a formal receipt already signed, when he
delivers it.
ILM.Jr:
(Side conversation with Mrs. Klotz.)
Anything else, Bell?
Bell:
No, that's all.
M.M.Jr:
(Points to Mr. Gibbons.)
Cibbons:
(Nods "Nothing.")
V.M.Jr:
Well, I might as well give you this message right
here. This is serious; I am not kidding. I
asked the President - I told him that Customs
were constantly getting more difficult; that I would
like to get the resignation of Judge Moyle. He
said, "Well,
" and he repeated what he said
once before; "he's an old Swedey." He doesn't want
to do anything; he's hard - his hearing is getting
worse. He said, "All right," - end this is where
you come in - "Call up Senator Thomas, of Utah,
and tell him that we feel that the old boy should
retire, and we'd like to ask the Mormon Church
whether they could take care of him."
Now, I'm giving it to you word for word. Whether
they would take care of him, and how soon they can.
Now listen, he asked Jim Farley to do the same thing.
Now I want you to call up Thomas. We'd like him
Could he take it up with the Mormon Church to find
to do it, and we don't want to hurt his feelings.
out if they could take care of it. He didn't say
it with a smile either. He was serious about it.
Regraded Uclassified
- 3 -
241
Gibbons:
Jim didn't do anything about it, I suppose.
H.M.Jr:
The President told me to do this six months ago.
ago. He told me to call up the Morman Church, six months
01/bons:
(Laughs.)
H.W.Jr:
It's a good day to do it.
Gibbons:
Yeah. Wait till Friday.
H.M.Jr:
Seriously, will you do it?
Gibbons:
Yeah, I'll do it.
H.N.Jr:
You're as much interested as I am.
Cy?
Upham:
(Nods "Nothing.") Nothing.
Gibbons:
You know what Al Cohen said - "Nobody but a Mormon
will pay ten per cent to his church."
H.M.Jr:
(Nods to Mr. Lochhead.)
Lochhead:
Sentiment is still good; sterling's at 4.82 3/4;
the stock market is opening up; the price of steel
is up a couple points; Government bonds are pick-
ing up; the new two and a halves are quoted 101.
H.V.Jr:
I don't want to sell.
Lochhead:
I have reconfirmed that; they're very anxious, up
in New York again. You saw what they did yester-
day.
H.M.Jr:
I told Ransom we put these Government bonds in
Postal Savings and Government Life. He said,
"Don't you think we should sell?" I said, "Get
yourself in shape." I don't want to buy and sell
any Government Life and Postal Savings on a - not
on a point.
White, and Lochhead, if you will make available to
Dr. Viner all the cables on the foreign situation,
and you (Viner) want to make use of Magill's room?
Viner:
Any room.
Regraded Uclassified
242
4
All right, I think you will be less disturbed there,
and give him plenty of good news, so he doesn't
of necessity, N. R. A., or something like that,
You never know what that fellow will do. See?
But put him to work. You might explain to him,
Harry, what we're trying to do with China - get
his reaction, but the main thing is, I want his
and then you want to talk with Bell on this Question
of the gold, you see. I mean, I'd like that thing,
and George Harríson insists we are not sterilizing.
I tell him I disagree, but I don't went to argue
about it, but the fund is up there; I think we
ought to make up our minds. I've got some frienis
of yours coming down tomorrow morning. I think
we ought to
(To Mrs. Klotz:) Make no appoint-
ments for tomorrow.
White:
I have a brief statement of the Chinese situation,
in case you want to read it. It's just very brief.
All right.
We've prepared a statement of the various powers
which the Administration of the Government has now
that it did not have in 1914, with respect to
control of the economy in one significant direction
or another. If you are interested, I thought we
could turn it over to the legal staff, and have
them correct it and probably expan it so that
when it gets to you it will
H.V.Jr:
When will it get to me, after it gets over to the
legal staff?
Oliphant:
Well, you know, do you, thut Jim Morris 18 Chrirman
of the Committee that is studying the whole roblem
of price control of the economy?
F.V.Jr:
What do you expect to get out of that?
Olighant:
Well, not a lot.
7.4.Jr:
But this - he isn't talking about - he's talking
just about Treasury.
Mite:
All Treasury, plus. Not only Treasury - just now to
give that weren't possessed in 1914 to meet the situation,
some idea of what powers are possessed
which would include price, and other situations.
Regraded Uclassified
243
- 5 -
Oliphant:
The other study - official - Procurement is
Bell:
That study take it through to 1917?
White:
It includes that, because we are comparing the
present situation with 1914.
Bell:
Well that didn't come in till 1916, '17.
White:
That's right. If you're interested
9.U.Jr:
Yes, I'm interested.
White:
Well, I'll turn it over to them.
H.M.Jri
I was amused, talking about committees, Pearson
and Allen had this secret committee of S. E. C. -
did you see it? Everybody working on how to
close the stock exchanges.
Daston:
They came out yesterday with the announcement. the
plan was to close the stock exchange.
H.M.Jr:
I don't know whether you saw my off-the-record
remarks yesterday - that everything was to be done
to keep them open.
Are you through, Harry?
White:
Yes. Those two are not inconsistent.
H.V.Jr:
Tell Dr. Viner of your great scheme.
White:
You mean my last one?
Viner:
For closing the stock market?
H.M.Jr:
I don't want to quote Dr. White for fear I might
give a slight misinterpretation of his humor.
White:
I'll see he gets a full account.
H.M.Jr:
There's lots of humor around here, Jake.
Viner:
I have no doubt.
H.M.Jr:
(Nods to Mr. Hanes.)
Hanes:
I have nothing.
Regraded Uclassified
- 6 -
244
H.M.Jr:
You haven't had time.
Viner:
Not yet.
H.M.Jr:
Nobody carried your speech in Minnesota - or
Minneapolis.
Viner:
It's a good thing for me,
H.W.Jr:
I said, "I am inviting in the great financial brains
of America, and consulting him." I told that to
the press.
Viner:
Newspapers carried the story you were going to invite
me, and friends said, "I hear you're going to
Washington." I said, "No, I am not."
H.M.Jr:
You admitted it.
Viner:
I didn't admit anything.
Gaston:
I suppose I'd better admit to the boys today that
Dr. Viner is here, as one of us.
H.M.Jr:
I am not ashamed of it.
Viner:
A social visit.
Gaston:
I'll tell them you said it's a social visit.
The boys continue to ask about the Chinese. Do
you want to admit you have an appointment with them
today?
R.M.Jr:
I have no appointment.
Gaston:
You've got no appointment. And will you let me
know whether that date for this evening
M.M.Jr:
Yes - seven-thirty for you and Mr
Gaston:
Davenport.
H.M.Jr:
Who?
Gaston:
Davenport.
H. .Jr:
Mr. White and Mr. Lochhead. Seven-thirty. I told
the cook to get either two ducks or one lamb,
245
- 7 -
whichever was the cheaper; which one she got, I don't
know. After Mrs. Morgenthau arrives this evening,
she can do it, but I said I didn't know which was
cheaper to buy.
Incidentally, you will appreciate this story.
Sir Frederick Phillips came over, secretly, to
spend the day with me at Rouen. They brought in
this bill of fare, and we sat down - Butterworth,
Cochran, Sir Frederick Phillips, and myself, and,
as you know, Rouen is famous for one thing, and
that's eating ducks. We all ordered duck; and
on the bill of fare was Yorkshire ham. Sir
Frederick Phillips ordered the Yorkshire ham, and
when it came it was the toughest you could imagine,
and here we were, this duck just melting in our
mouths, and Sir Frederick Phillips' ham as tough
as could be. We tried our best to get him to take
it, but no, he was going to have Yorkshire ham -
and they us to be versatile.
Gaston:
They weren't Long Island ducklings, were they?
H.M.Jr:
No, they were Rouen ducks. Want to admit anything else?
Gaston:
I have something else; I won't admit it in public.
That's the only thing I want to ask about.
H.M.Jr:
Herman?
Oliphant:
There is the order accepting that stuff that
can't be secured otherwise.
H.W.Jr:
Accepting what stuff? We are not going to do it. any
of that. I can't sign that without reading
Today's Tuesday; Mondays I sign without reading,
but Tuesdays I don't. I read on Tuesday.
What else?
Oliphant:
Nothing.
(Mr. Kieley comes in.)
H.M.Jr:
(Over telephone:) Tell Naster to come in, please.
Kieley, able again in Magill's room. He will be couple
will you see that Dr. Viner is made here comfort- a
days.
if Oliphant, Hanes, and Upham will to stay, read please. that
And, Now, Jake, I'll see you during the day,
stuff.
Regraded Uclassified
246
September 20, 1938
For the Secretary:
On May 10, 1938 Mr. Szymczak, Chairman of the
Committee on Credit for Industry, reported to the
Interdepartmental Committee that his Committee recom-
mends that for the balance of the current year some
independent group or agency, designated for the purpose,
observe and study the experience of the RFC in making
loans and purchasing obligations under its new authority
to find out if "the extension of credit under the
existing facilities fails to meet the needa of industry
and business for capital or credit."
It is the view of the Committee that the now-
existing authority is adequate for present purposes
and that there is no need for the immediate estsblish-
ment of B. permanent organization sponsored or financed,
in whole or in part, by the Federal Government to supply
credit or capital to business and industry.
The Committee submitted 8 plan for a set of regional
banks with stock subscribed by the Government which would
be supervised by an independent governmental authority
Regraded Uclassified
247
- 2 -
which could be made use of in the event that it was found
by the independent group or agency studying the matter
that some permanent institution sponsored by the Federal
Government should be set up.
Mr. Szymczak pointed out that the Board of Governors
of the Federal Reserve System thought that such a plan is
not necessary or desirable.
Upm
Regraded Uclassified
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON
"
ADDRESS OFFICIAL DORRESPONDENCE
May 10, 1938
TO THE BOARD
The Interdepartmental Committee,
Fashington, D. C.
Dear Strat
There Is transmitted herewith the report of the committee
appointed by the Interdepartmental Committee to consider what
additional steps, if any, it may be desirable for the Government
to take in order to provide needed credit for business and indus-
try which cannot be obtained from existing sources.
In the opinion of the committee there is no need for the
immediate establishment of a permanent organization spensored in
whole or in part by the Federal Government to supply credit or
capital to business and industry. It is the view of the committee,
however, that the experience of the Beconstruction Finance Cor-
poration in making loans and purchasing obligations under its new
authority should be carefully observed and studied during the re-
mainder of the current year by some independent group or agency
designated for the purpose with a view to ascertaining the respects,
if any, in which the extension of credit under the existing facil-
ities fails to meet the needs of industry and business for capital
or credit.
Should it appear, in the light of the studies to be made
by the independent group or agency, that some permanent agency
sponsored by the Federal Government should be set up to supply
credit to business and industry, the committee suggests that 1.
study be made of the feasibility of a. plan which might follow in
B. general way the tentative outline contained in the appendix to
the committee's report.
In submitting this report I feel that I should point out
that it 18 the opinion of the Board of Governors that the plan
outlined in the appendix to the committee's report is not neces-
committee sary is not now recommending the adoption of such A plan but
or desirable. I should also like to point out that the
is merely submitting it all B. basis for study. It is assumed that
249
The Interdepartmental Committee
Page 2.
any committee appointed for the purpose of giving further study
to the need of creating a permanent agency to supply credit to
business and industry would also consider other plans that asy
be suggested or appear desirable in the light of their studies.
Respectfully submitted,
Mr Committee M. S. Szyncens, on Credit Chairman for Industry.
Inclosure
Regraded Uclassified
250
CONFIDENTIAL
REPORT OF COMMITTEE ON CREDIT FOR INDUSTRY
TO THE INTERDEPARTMENTAL COMMITTEE ON
LEGISLATIVE MATTERS
This Committee was appointed by the Interdepartmental
Committee on Legislative Matters to consider what additional
stops, if any, it may be desirable for the Government to take
in order to provide needed credit for business and industry
which can not be obtained from existing sources. The subject
has been carefully studied by the members of the Committee in-
dividually as well as by the Committee as a group. The Committee
has had several meetings to discuss the results of its studies
and a number of different possible courses of action have been
considered. The views and conclusions of the Committee are set
forth below.
Since June 1934 the Reconstruction Finance Corporation
and the Federal Reserve banks have had authority to make loans
to business and industry subject to certain conditions and limi-
tations and they have approved about $350,000,000 in applications
under this authority. While this authority of the Reconstruction
Finance Corporation and the Federal Reserve banks continues in
effect, there was some evidence prior to the enactment of the
recent amendment to the Reconstruction Finance Corporation Act,
approved April 13, 1938, that there was still 8. need on the part
Regraded Uclassified
251
- 2 -
of business for credit which was not obtainable from existing
sources, especially among smaller businesses. Under the amend-
ment referred to, the Reconstruction Finance Corporation is
authorized to make loans to or purchase the obligations of any
business enterprise, when capital or credit 1a not otherwise
available at prevailing rates. There is no limitation in the
statute on the amount of the credit which may be extended to any
one enterprise or on the nature of the business to which credit
may be furnished. Although under the law as it now exists the
Corporation may not make such loans after June 30, 1939, there is
no limitation on the maturity of the loans it may make or of the
obligations it may purchase prior to that date.
In view of the broad terms of this power granted to the
Reconstruction Finance Corporation to provide funds for business,
in addition to the credit which has been extended to business by
the Reconstruction Finance Corporation and the Federal Reserve banks
under authority which they still have, it is the view of the Committee,
on the basis of such information as is available, that the now exist-
ing authority for the extension of credit by these Governmental
agencies to industrial and commercial borrowers which are unable
to obtain funds from the usual credit sources is adequate for present
purposes. The Committee is of the opinion, therefore, that there
1a no need for the immediate establishment of a permanent organi-
sation sponsored and financedin whole or in part by the Federal
: -
252
Government to supply credit or capital to business and industry,
It in the view of the Committee, however, that the ex-
perience of the Reconstruction Finance Corporation in making loans
and purchasing obligations under the new authority should be care-
fully observed and studied during the remainder of the current year
by same independent group or agency designated for the purpose, with
e. view to ascertaining the respects, if any, in which the extension
of oredit under the existing facilities fails to meet the needs of
industry and business for capital or credit, The Committee wishes
to suggest that the Reconstruction Pinance Corporation be requested
to maintain a record with respect to each loan application, In-
cluding preliminary applications, not approved by the Corporation,
in such form R.S. to show in detail the reasons for not approving the
loan. Such record should contain sufficient information to enable
conclusions to be drawn therefran as to whether additional facilities
are needed in order adequately to supply the reasonable credit needs
of any classes or types of business enterprises. It may develop from
B. study of the experience of the Reconstruction Finance Corporation
that some further investigation by the independent group or agency,
perhaps through field men, should be made to ascertain whether there
are any credit needs that are not adequately being taken care of by
existing agencies. with this experience 6.6 a basis, such remedies,
if any, as may be needed can more readily be determined upon.
If, in the light of the above studies, it appears desirable
that some permanent organization sponsored by the Federal Government
Regraded
Uclassified
253
4 -
should be set up to supply credit or capital to business and industry,
the Committee is of the opinion that & study should be made of the
feasibility of B. plan which might follow in a general way the tente-
tive outline which is contained in the Appendix to this report. The
tentative plan there outlined provides for e set-up or organization
consisting of four principal parts: (a) Local lending as.cciations,
wherever needed, composed of businessmen; (b) from aix to twelve
regional corporations with stock subscribed by the Government, which
would in turn subscribe to stock in the local associations and super-
visa their operations; (c) from six to twelve regional banks with
stock subscribed by the Government, where the local associations
could borrow or rediscount; and (d) an independent Governmental
authority with supervisory powers, located in Washington.
The local associations would receive and pass upon ap-
plications for credit. Whether local business enterprises in need
of additional credit or capital funds would be willing to make avail-
able to the management of such B. local association, composed of local
borrowers. sufficient information as to their operations to enable
the association intelligently to pass upon loan applications, is a.
question with respect to which careful study and investigation
would have to be undertaken before final conclusions were reached
with respect to the advisability of establishing such associations.
Regraded Uclassified
254
- 5 -
Your Committee is also of the opinion that there are
certain other steps which should be taken at this time in order
to facilitate the obtaining of capital and credit by business and
industry from private sources. Consideration is now being given
by the Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation and the Comptroller of the Currency to
the possibilities of changes in examination policy which will tend
to encourage B. more adequate extension by banks of credit to busi-
ness, In addition, the Committee feels that n. liberalization of
the regulations of the Comptroller of the Currency relating to the
purchase of investment securities by member banks of the Federal
Reserve System would do much to provide e. market for the obligations
of business and Industry, particularly small business and industry,
and it is suggested that it would be helpful if this problem can be
given prompt and sympathetic consideration. The Securities and Ex-
change Commission has already liberalized its regulations with re-
card to registration requirements for securities. The Committee
suggests, however, that the Commission be requested to continue its
study of this matter with a view to taking such further action in
liberalizing its requirements as may be possible under the law and
consistent with the purposes for which it was enacted.
Respectfully submitted,
M.D. MSKryers Charrean amm get
John Hahry
Regraded Uclassified
255
APPENDIX
Tentative Outline of Plan for Purnishing Credit to
Industry in Case There Proves to Be a Need for Such
& Plan
There is set for th below a tentative outline of a plan
for a. permanent organization sponsored by the Federal Government
to supply oredit or capital to business and industry and to be
composed of four parts: (a) a Governmental supervisory authority,
(b) regional oredit corporations, (a) regional credit banks, and
(a) local oredit associations. It is the suggestion of the Committee
that, in the event the experience of the Reconstruction Finance Cor-
poration over the next few months shows that there is A need for
such a permanent organisation, the various points contained in this
outline be taken as B. basis for a study of the type of organization
most practicable for the purpose.
A. Supervisory Authority
An independent Governmental authority, appointed by the
President with the advice and consent of the Senate, with offices
in Washington, with general supervisory authority over the proposed
industrial credit system.
B. Regional Credit Corporations
(1) Not leus than six nor more than twelve regional in-
dustrial credit corporations, the number thereof and amount of their
capital to be determined from time to time by the supervisory authority,
Regraded Uclassified
256
- 2 -
and the capital to be provided by the Government. Such corporations
would supply the capital for and supervise the operations of local
credit associations.
(2) A regional corporation would have authority to wind
up the affairs of and liquidate any local credit association whenever
in its judgment there is no longer a sufficient need for the services
of the association to warrant its continued existence.
C. Regional Credit Banke
(1) Not less than six nor more then twelve regional in-
dustrial credit banks, the banks to correspond in number and terri-
tories to the industrial credit corporations, with the amount of
capital to be determined from time to time by the supervisory author-
ity and supplied by the Government. These banks would discount or
purchase obligations acquired by local credit associations and make
loans to the associations secured by their assets.
(z) The regional banks would also have power to deal
directly with business enterprises in 08588 where local credit as-
sociations are unwilling or unable to do so. In such cases the
borrower would be required to subscribe to A special class of stock
in the lending regional bank in an amount equal to five por cent of
the amount borrowed.
(3) The regional banks would also be authorized to issue
their consolidated obligations in such form, with such maturities,
257
- 3 -
and secured in such manner as might be determined by the supervisory
authority in Washington. Such obligations would not be guaranteed
by the United States but would have the same tax exemption BE de-
bentures of Federal Intermediate Credit Banks. They would be eligible
for purchase by Federal Reserve banks to the same extent and under
the same conditions as are bonds of the Federal Land Banks and de-
bentures of the Federal Intermediate Credit Banks and would also,
in accordance with the terms of present law, be available for use
ao security for advances to member banks by Federal Reserve banks.
It may be found practicable to combine the functions of
the regional credit corporations with those of the regional credit
banks.
D. Local Credit Associations
(1) Local credit associations to be organized wherever
needed by the regional credit corporations. Such associations
would have two classes of stock. Voting stock would be held by
borrowers only, who would be required to subscribe thereto in an
amount equal to at least five por cent of their borrowings. Non-
voting stook would be subscribed by regional credit corporations
and also could be taken by investors.
(2) Such local credit associations to be empowered to
(a) make direct loans to business enterprisse; (b) buy bonds, de-
bentures or other similar obligations from husiness enterprises;
258
- 4 -
and (o) to make commitments to such business enterprises covering
such loans or purchases. The associations to be authorized to 00-
operate with banking institutions in extending credit.
(3) Local credit associations to be empowered to sell 8.8-
sets or borrow money when permitted under regulations prescribed by
the supervisory authority in Washington.
(4) No limit to be prescribed by statute upon the amount
of funds to be made available to any one business enterprise or upon
the terms or maturity thereof, all such matters to be subject to
general regulations of the supervisory authority in Washington.
(5) Local credit associations, as well as regional banks,
to be authorized to extend oredit to commercial and industrial enter-
prises only.
Regraded Uclassified
PK141
259
КУМОВАЯТИМ FOR MR. LOCENRAD'S VILES
September 20. 1938
The following gentlemen arrived at the Treasury today from China
on a financial mission:
Mr. I. P. Ches:
Ngr. Ranghai Commercial & Sevings Bank, Shangbai
Mr. Rei
Mgr. Central Bank of China. Shanghai
Mr. 3. 1. Rent
Chinese Foreign Affairs Commission.
Acting M Secretary to Mr. Chen
it. 8. 2. Nicholeon, Treasury Attache at Shanghai, also arrived at
the Treasury with the above-mentioned gentlemen. it. Nicholson 1e où an
independent mission is commestion with his duties in Shanghai.
F. Districh
FDiek
Regraded Uclassified
260
September 20, 1938
At 11:00 a.m. Mr. Walter W. Smith, President of the
Federal Advisory Council, Mr. Edward E. Brown and Mr.
R. E. Harding, members, called on the Secretary of the
Treasury in his office.
Mr. Smith referred to the talk about the possibility
of the establishment of twelve regional industrial credit
banks and of the fear of the Federal Advisory Council that
they might engage in making capital loans. He referred to
the survey made by Dr. Viner in 1934 and said that the
Council wondered whether the Treasury might not look Into
the necessity for regional banks of this character. The
Council is of the opinion that there is no demand for
financing facilities of this character.
Mr. Morgenthau asked him if he referred to intermediate
credit loans of from five to ten years and he said, yes,
but there must be a distinction between equity financing
and credit.
Mr. Brown said that there is plenty of credit availa-
ble but not enough equitable capital. If the bank makes
the study, it is supposed it will be discounted, but if
Uclassified
201
- 2 -
the Treasury makes one, it will be looked upon as impertial
and reliance placed in it. He referred to the Viner and
Hardy survey of the availability of credit in the Seventh
Federal Reserve District in 1934 and gave as his personal
opinion that 8 similar study at this time for all twelve
Districts would be highly desirable and stated that the
whole Council thinks it should be done. He added that
whether it was done before or after election seemed to him
to be immaterial.
Mr. Morgenthau said that he saw no reason why the
election should be an influence one way or the other if
it were determined that the study should be made. He
pointed out that in 1934 we had emergency banking money
which has now been taken away from us. He also referred
to the report issued by the Investment Bankers Conference,
the moving spirit behind which was Ben Griswold of Beltimore
who undertook the study at the Secretary's request.
Mr. Smith referred to the section of the Berle memo-
randum having to do with the difficulty of concerns who
desire to float small issues finding facilities and stated
that Mr. Berle's information is incorrect. Many of the
St. Louis issues are for such an amount as 1$ million.
262
- 3 -
Mr. Brown stated that the WPA seemed to have a good
deal of money for grants, traffic count, etc., and he
suggested that probably there are a good many unemployed
college graduates who could be used for such an effort.
Mr. Morgenthau said that Dr. Viner is here for a
couple of days and that he will talk to him and others
about it.
Mr. Smith concluded that the Federal Advisory Council
is unanimous in its view that there is no need for any
such system of banks.
Upm
Regraded Uclassified
TREASURY DEPARTMENT
263
INTER OFFICE COMMUNICATION
DATE September 20, 1938
TO
Secretary Morgenthau
FROM
Mr. White
Subject: What China has left in eilver and foreign exchange
resources.
1. We estimate the total foreign exchange assets of China to
be from 75 to 85 million dollars, 88 follows:
(a) Nicholson reported that the four Government banks
have $30 million in actual foreign exchange, but reports
from Buck, on information he obtained from Pei of the
Central Bank of China gives the total amount of foreign
exchange available at approximately $50 million.
(b) The Chinese Government now has $50 million in gold
against which a loan of 348 million has been made. The
interest and handling charges must be deducted from the
remaining $2 million which would leave about $11 million.
(c) Nicholson reports that as of June 30 the Government
of China had 54 million ounces of silver in London still
unsold. However, there are two loans: One of about
$10 million from the Hong Kong and Shanghai Bank, and
another of approximately $15 million from the Swies Bank,
French Bank and Mendelsohn & Company against which silver
has been earmarked. The silver on earmark is probably all
held in London and is included in the 54 million ounoes
referred to above. From Nicholson's statement we can not
be certain of this point however.
(d) Chine has 3 million yuan newly minted coins in Sen
Francisco that we could buy. It would yield about
$1 million.
(e) There are about 45 million ounces of silver available
(besides hoards) in areas not under Central Government
control. So it cannot be included in her saleable assets,
(f) We estimate the Central Government has for sale
50 to 100 million ounces of silver out of which she can
spend only about $15 to $25 million.
264
Secretary Morgenthau - 2
2. Total silver purchased from the Chinese Government from
November 4, 1934 to September 15, 1938: 447 million ounces
at $200 million.
3. There remains to be purchased under present agreement
10 million ounces, on which no bid has as yet been made.
205
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE: September 20. 1938
To
Secretary Morgentheu
FROM
A. Lochhead
Close SEPT. 20, 1938
GOLD HELD IN LONDON
$188,000,000
Insurance arranged for following shipe:
Sailing
Steamship
Amount
Sept. 21
Normandie
$11,300,000
Sept. 23
Manhattan
11,300,000
Sept. 24
Paris
11,000,000
$33,600,000
FD:kma
Regraded Uclassified