Volume 145, October 8 – October 13, 1938

DIARY Book 145 October 8 - October 13, 1938 Regraded Uclassified - B - Book Page Bank for International Settlements Cochran reports on first meeting after summer recess - 10/11/38 145 178 a) Conversation with Schecht b) " II Trip (Netherlands Bank) 183 c) II IT Janssen (Belgian National Bank) 185 d) " n Bachmann (Swise National Bank) 187 e) " " Assolini (Bank of Italy) 189 f) II If Fournier (Bank of France) 191 Belgium See Bank for International Settlements Brazil Draft for final agreement for establishment of gold fund of Brazilian Government with Federal Reserve Bank discussed in Caffery cable - 10/10/38 168,349,359 a) Draft 171 Budget Conference with FDR on 1940 budget and possibility of increased taxes; present: HMJr, Hanes, and Bell - 10/10/38 78 Conference; present: HMJr, Hanes, Taylor, Bell, and Haas - 10/10/38 99 Business Conditions Haas memorandum on situation for week ending 10/8/38 146 - C - China Kung message in connection with Chen's second mission, and Treasury answer - 10/8/38 69 Trucks discussed by HMJr and James Moffett - 10/11/38 248 White memorandum on "recent conferences with Chen mission": one of China's own traffic technical experts coming by Clipper - 10/12/38 331 a) Maps attached b) Plans for purchase of one thousand trucks under way HMJr and Chen confer with FDR concerning suggested American advisers: Hancock (of Lehman Brothers), Dick Fuller, Lessing Rosenwald, and Roger S. Green (former representative of Rockefeller Foundation) - 10/13/38 386 Countervailing Duties See Germany Czechoslovakia Goering decree that Czech currency in Sudeten hands can be exchanged for reichmarks at rate of twelve pfennigs for one Czech crown - 10/11/38 201 Possible arrangement by German Government for something in nature of customs union discussed by American Embassy, Berlin - 10/11/38 202 a) Heath (American Embassy, Berlin) reports conversation with Blessing of Reichsbank - 10/13/38 369 Regraded Uclassified - F - Book Page Financing, Government See National Resources Committee Fiscal Committee See National Resources Committee France See Bank for International Settlements " War Conditions - G - Germany Conditions as pictured by Schacht at meeting of Bank for International Settlements - 10/11/38 145 178 Countervailing Duties: White memorandum forwarding significant material (memorandum, Treasury decisions, press release, et cetera) 294 Gold See also Brazil Great Britain: Success of recent shipments and amount now hoarded in London discussed by Knoke and Bolton - 10/11/38 195 Great Britain See Gold - I - Italy See Bank for International Settlements - M - Magruder, M. Hampton (Collector of Internal Revenue - Baltimore, Maryland) See Political Activities of Treasury Employees - N - National Resources Committee Fiscal Committee to advise HMJr discussed at 9:30 meeting - 10/10/38 83 Possibility of Fiscal Committee discussed by HMJr, Eccles, Hanes, Taylor, and Upham - 10/11/38 252 Netherlands See Bank for International Settlements Regraded Uclassified - P - Book Page Political Activities of Treasury Employees Magruder, M. Hampton: Letters, et cetera, from and to Treasury Department concerning participation in Maryland election 145 4 Treasury answer to Senator Sheppard concerning political activities of Treasury employees read and discussed at 9:30 meeting - 10/10/38 90 Procurement Division Painting and Sculpture Section: Resume leading up to change of name to Section of Fine Arts - 10/13/38 376 - R - Reconstruction Finance Corporation Jones advises substantial note issue since market is favorable - 10/8/38 72 a) Discussed at 9:30 meeting - 10/10/38 89 b) n " " 11 - 10/11/38 207 Resume of loans on preferred stock of banks to March 31, 1938, prepared by Division of Research and Statistics 75 HMJr consults Jones concerning "refunding $300 million in notes due on December 15" - 10/10/38 161 a) HMJr confers with Eccles 165 - S - Self-Help Washington Self-Help discussed at conference; present: HMJr, Miss Lonigan, Bell, McReynolds, Williams, and Ross - 10/11/38 218 Social Security Board Altmeyer answer to Treasury latter stating willingness under certain conditions to maintain balances of Treasury funds in banks handling benefit payment accounts of state unemployment compensation agencies as means of compensation for banks' services - 10/11/38 206 Surplus Commodities See War Conditions Switzerland See Bank for International Settlements Regraded Uclassified - T - Book Page Taxation Possibility of increased taxes in connection with 1940 budget discussed at conference with FDR by HMJr, Hanes, and Sell - 10/10/38 145 78 Federal Real Estate: Bell transmits to HMJr memorandum to FDR and copy of Federal Real Estate report - 10/12/38 304 Treasury Department: Garage Plans for as outlined by Peoples - 10/8/38 65 FDR's objection discussed by HMJr and Burlew - 10/11/38 257 - W - War Conditions Foreign policy (general): conference on proposed letter to FDR; present: HMJr, Oliphant, White and Gaston - 10/11/38 259 (For final draft of letter 10/17/38 see Book 146, page 105) a) HMr wants to take to FDR something positively concrete showing that the law directs the Secretary of the Treasury to take certain specific action if Germany or Japan "do so and 80" b) HMJr wants to talk "in terms of using our financial resources generously to check Germany in Central and South America" 1) FDR considers trade treaties too slow c) Oliphant's idea of "a financial Monroe Doctrine" discussed d) HMJr fears that Hitler may proceed from the Baltic to the Black Sea; wants to freeze them there and not let them get into Central America, Asia, Russia, et cetera France: Decree signed authorizing War Department to contract during 1938 "expenditures to the amount of 1,420,000,000 francs over and above those for national defense which have already been authorized"; Navy Department also authorized in another decree to contract during 1938 "expenditures to the amount of 8873 million francs over and above those already authorized for that Department"; coordination of rail and road traffic also authorized, et cetera - 10/13/38 371 HMJr and Bell consult concerning wheat for strategic war materials - 10/13/38 386 Works Progress Administration Status of funds for balance of year discussed at conference; present: HMJr, Miss Lonigan, Bell, McReynolds, Williams, and Ross - 10/11/38 218 Regraded At 1 RAW PLAIN London Dated October 8, 1938. Rec'd 8:45 a.m. Secretary of State, Washington, 1144, October 8, noon. FOR TREASURY FROM BUTTERWORTH. 1.In connection with the subject matter of my 1128 of October 5, 5 p.m., it is worthy of note J.M. Keynes should conclude a letter to THE TIMES with the following sugges- tion: "In the circumstances of the moment I suggest that the balance of trade position and the net disinvestment in this country's foreign assets which is probably going on (about which WE have as usual no adequate statistics) also needs particular attention -- not indeed by an aggravation of tariffs but by a new and now necessary machinery for linking up exports with imports 80 as to make sure that those from whom WE buy spend a reasonable proportion of the proceeds in corresponding purchases from 118. WE can no longer afford to leave the barter aspect of for- Eign trade to look after itself". It Regraded Uclassified 2 -2- 1144, October 8, noon, from London, It is safe to predict that in Ensuing months this type of suggestion is going to come very much to the fore. 2. Reuter reports that a Czechoslovak financial dele- gation headed by Pospischil, formerly Governor of the National Bank, is EXPECTED to reach London today "to open negotiations concerning the Economic reconstruction of the new Czechoslovakia", 3. With Paris closed and therefore no demand for dollars against offerings of francs the dollar has not been actively bid and the volume of trading has been small. The rate has remained around 4.78 5/16. Gold fixing of 257 bars at 145s.4 1/2d. constituted a premium of 1/2d and the British authori- ties gave a substantial part of the fixing. The British au- thorities indicated to the market that they were prepared to take francs at 179 but little business has transpired. KENNEDY HPD Regraded Uclassified 3 PARAPHRASE OF TELEGRAM RECEIVED FROM EMBASSY AT RIO DE JANEIRO, BRAZIL, DATED OCTOBER 8, 1 p.m. Secretary of State, WASHONGTON. 234, October 8, 1 p.m. My telegram No. 233, October 4. I am informed by the Director of Exchange of the Bank of Brazil that exchange will be granted this week for daily quotas and maturities from August 27 to August 30, inclusive. Exchange has also been granted on October 5 for August 26. I have also been informed that purchases of German compensa- tion marks except for cotton, coffee and cocoa have been resumed. Notify Commerce. CAFFERY. BECEINED 8992 not 130 - - Regraded Uclassified House GLIms 4 October 8, 1938. The following is my recollection of the events leading up to the action taken by the Honorable M. H. Magruder, Collector of Internal Revenue, Baltimore, Maryland, during the month of August, 1938, when he asked the deputy collectors of Internal Revenue under his jurisdiction to come to his office, at which time he read a pre- pared statement to them, the purpose of which was to explain Treasury Department Circular No. 518, promulgated August 2, 1934, and supple- mented September 10, 1934, covering the political activities of Treasury employees: Prior to August 11, 1938, I have no recollection of ever having met Collector Magruder and apparently with this in mind the Collector of Customs for the Baltimore District, the Honorable Gilbert A. Dailey, telephoned me asking if he and Mr. Magruder could call at my office on Thursday, August 11, and possibly have lunch with me. I replied I would be very glad to have lunch with them on that date. Collector Magruder stated be was in a quandary as to how far his political activities were proscribed by the Treasury Depart- ment circulars mentioned above, promulgated in the year 1934. He stated that several of his deputies had made inquiries as to what they should do in the primary contest then being waged between Congressman Lewis and Senator Tydings - how he intended to vote and whether he had any instructions to give them as to what actions they could take or could not take, some of them claiming that they wanted Regraded Uclassified 5 - 2 - to do whatever the Collector desired etc. The Collector stated that he had told them they could follow their own inclinations; that in effect they were to let their conscience be their guide; and that he had no instructions whatsoever to give them in this matter. at that moment but that probably at 8 later date he might advise them as to his own position. He further stated that he had determined, after due reflec- tion, to not only vote for Congressman Lewis in the primary but to do whatever he could to help him without violating the Treasury orders al- ready mentioned, and wanted to know if he wes prohibited from advising any of his deputies, either individually or collectively, whom he in- tended to support in the primary campaign and advise them 88 to the extent of the political activities in which they could engage. I ad- vised him I thought that neither Treasury Circular No. 518 or supplement thereto in any way prohibited him from advising anyone how he intended voting and he was not restricted to freely give his reasons therefor. As e matter of fact, I secured a copy of Treasury Circular, dated June 5, 1934, addressed to all officers and employees of the United States Treasury Department, together with Department Circular No. 518, dated August 2, 1934, and supplement thereto, dated September 10, 1934, and pointed out the activities these two circulars permitted a Treasury employee to engage in, as well as the prohibitions named therein. I advised Collector Magruder that, in my opinion, there was nothing in either of these circulars to prohibit him from advising any of his deputies making inquiry as to how he intended voting, but I felt in fairness to them he should again call their attention to the Treasury Regraded Uclassified 6 - 3 - circulars already cited and to be very careful not to make any state- ment which might be construed 88 trying to influence them in the exercise of their political prerogatives. I further told him I thought it advisable to write out the statement he intended making to them 80 that it could not be mis- understood or subsequently misconstrued, and to further protect him I suggested that be submit said statement to me before reading same to his deputies that I might auggest any changes which I considered ad- visable. He promised to have this statement prepared and sent to me the next day, August 12. However, the letter to Commissioner Helvering enclosing & copy of his prepared statement was dated August 17, 1938. It will be recelled that Secretary Morgenthau, Commissioner Helvering, and Mr. Gaston were all absent on vacation on August 11, when Collector Magruder visited my office, and I also left Washington on Saturday, August 13, for 8 vacation. The statement which the Collector prepared was sent to me by my office and, as subsequently stated in Collector Magruder's letter of September 14 to Senator Sheppard, Chairman of the Cempaign Expenditures Committee, I made two changes in seme and telephoned my office to advise the Collector of the nature of the changes. end tell him that he could release said statement if end when he desired. 7 - 4 - I returned from my vacation on September 6th, the day after Labor Day, and about September 12th Collector Magruder called at my office and read to me a copy of a letter which he proposed sending to Senator Sheppard, calling attention to the fact that he had requested permission to appear before the Campaign Expenditures Committee for the purpose of answering certain statements made by Senator Tydings in his campaign to the effect that the permanency or security of positions of non-civil service employees in Collector Magruder's office depended upon how they voted in the primary. The letter was 8. protest against the action taken by the committee, refusing him this request, and its decision that the Collector had violated the "spirit" of the statute. The further purpose of the letter was to advise the committee 88 to the steps he had taken prior to reading his statement to the non-civil service employees of his office, including the information that he had called on me and recited practically the same facts as related by me above in this memorandum. His letter contained the additional statement that in accordance with what he conceived to be the "propriety of things", and in deference to Senator Tydings, he had gone to the Senator's office to advise him of the Collector's intention to support the Senator's opponent, Congressman Lewis. He also brought out the fact in his letter that Senator Tydinga questioned his right to take this action and that the Collector advised the Senator in his judgment it was proper, fortified as he was by authority from the Treasury Depart- ment. Regraded 8 - 5 - He also related in his letter to Senator Sheppard that the Press having heard that he had read a statement to his non- civil service employees, wanted a copy, and not being able to secure same W : - began immediately to ventilate what it supposed ... he had said, endeavoring to create the impression in the public mind that the Collector had coerced his employees to support Congressman Lewis, and that he himself had been forced to declare for the Congress- men, end it was due to this misstatement of the facts that he had sought and obtained authority from the Treasury Department to release as statement to the Press. His letter, copy of which appears in the file, concluded with the statement that he was of the opinion that the Senator' 8 Com- mittee, with the information easily obtainable, might have accompanied ita findings with some statement in his behalf, to the effect that he had been authorized both to read and to publish the statement issued, and he sincerely felt he was entitled to a statement from the Committee, which in some measure would tend to lessen the personal sting, and at the seme time counteract a false impression in the public mind. I saw no objection to permitting him to address such 6 letter to Senator Sheppard, but consulted Mr. Gaston before granting him permission to mail it. I telephoned Mr. Gaston, who came to my office, and after the Collector had again read the letter aloud to us, Mr. Gaston agreed that it would be perfectly all right for him to mail said letter, after one or two minor changes had been suggested and made. Regraded 9 - 6 - The attached file contains a memorandum from Mr. Gaston showing that a few days after August 29th, the date of his return to the office, Collector Magruder called on him and he authorized him to give to the Press the statement which he read to his employees. Regraded Uclassified Oct. 8. 1938 10 To: The Secretary From: Mr. Gaston KS Supplementing Mr. Gibbons' statement of this date, I can add the following: I returned to Washington from vacation on Monday, August 29. A few days after my return I received a visit from Collector Magruder, who asked me whether it would be proper to give to the newspapers a copy of the statement which he had previously read to his employees with the sanction of his superiors. He said that the newspapers had printed the fact that he had read such a statement but that the contents of the statement had not been accurately reported. He showed me a copy of a statement which he said was the same as that he had read to his non-cávil service employees in his office. After reading the statement I said I saw no reason why it should not be given out to the press and advised him to take that action. I added that the statement itself was a wholly proper one for him to make publicly. but that the only thing that might be questioned was the proprity of his action in reading it to employees in a Federal office. He gave the statement to the press the same or the next day. Regraded Uclassified Oct. 8. 1938 11 Regraded Uclassified To: The Secretary From: Mr. Gaston ms Supplementing Mr. Gibbens' statement of this date, I can add the following: I returned to Washington from vacation on Menday, August 29. A few days after my return I received a visit from Collector Magrader, who asked me whether it would be proper to give to the newspapers a copy of the statement which he had previously read to his employees with the sanction of his superiors. He said that the newspapers had printed the fact that he had read such a statement but that the contents of the statement had not been accurately reported. He showed me a copy of & statement which be said was the same as that he had read to his non-cevil service employees in his office. After reading the statement I said I saw DO reason why it should not be given out to the press and advised him to take that action. I added that the statement itself was a wholly proper one for him to make publicly, but that the only thing that might be questioned was the proprity of his action in reading it to employees in a Federal office. He gave the statement to the press the same or the next day. 12 October 8, 1958. The following is By recollection of the events leading up to the action taken by the Honorable M. H. Magruder, Collector of Internal Revenue, Baltimore, Maryland, during the month of August, 1988, when he asked the deputy collectors of Internal Revenue under his jurisdiction to come to his office, at which time he reed a pre- pared statement to them, the purpose of which was to explain Treasury Department Circular No. 518, promulgeted August 2, 1954, and supple- mented September 10, 1934, covering the political activities of Treasury employees: Prior to August 11, 1938, I have no recollection of ever having met Collector Magruder and apparently with this in mind the Collector of Customs for the Baltimore District, the Honorable Gilbert A. Dailey, telephoned me asking if he and Mr. Magruder could call at By office on Thursday, August 11, end possibly have lunch with ms. I replied I would be very glad to have lunch with them on that date. Collector Magruder stated be was in - quandary as to how far his political activities were prescribed by the Treasury Depart- ment circulare mentioned above, promulgated in the year 1934. He stated that several of his deputies had made inquiries as to what they should do in the primary contest then being waged between Congressman Lewis and Senator Tydings - how he intended to vote and whether he had any instructions to give them as to what actions they could take or could not take, some of them claiming that they wanted Regraded Uclassified 13 - 2 - to do whatever the Collector desired etc. The Collector stated that he had told them they could follow their OWN inclinations; that in effect they were to let their conscience be their guide; and that be had no instructions wheteoever to give them in this matter,st that moment but that probably at a later date he might advise them as to his OWN position. He further stated that he had determined, after due reflee- tion, to not only vote for Congressman Lewis in the primary but to do whatever he could to help him without violating the Treasury orders al- ready mentioned, and wanted to know if he was prohibited from advising any of his deputies, either individually or collectively, whom he in- tended to support in the primary campaign and advise them as to the extent of the political activities in which they could engage. I ad- vised him I thought that neither Treasury Circular No. 518 or supplement thereto in eny way prohibited him from advising anyone how he intended voting and he was not restricted to freely give his reasons therefor. As a matter of fact, I secured a copy of Treasury Circular, dated June 5, 1934, addressed to all officers and employees of the United States Treasury Department, together with Department Circular No. 518, dated August 2, 1934, and supplement thereto, dated September 10, 1954, and pointed out the activities these too circulars permitted a Treasury employee to engage in, as well as the prohibitions named therein. I advised Collector Magruder that, in my opinion, there was nothing in either of these circulars to prohibit him from advising any of his deputies making inquiry as to how he intended voting, bet I felt in fairness to them be should again call their attention to the Treasury Uclassified - 8- circulars already cited and to be very careful not to nake any state= ment which might be construed as trying to influence them in the exercise of their political prerogatives. I further told him I thought it advisable to write out the statement he intended meking to them 80 that it could not be mis- understood or subsequently misconstrued, and to further protect him I suggested that be submit said statement to me before reading same to his deputies that I might suggest any changes which I considered ed- visable. He promised to have this statement prepared and sent to no the next day, August 12. However, the letter to Commissioner Helvering enclosing a copy of his prepared statement was dated August 17, 1938. It will be recalled that Secretary Morgenthau, Commissioner Helvering, end Mr. Gaston ware all absent on vacation on August 11, when Collector Magruder visited 4) office, and I also left Washington on Saturday, August 18, for a vacation. The statement which the Collector prepared was sent to no by my office and, as subsequently stated in Collector Magruder's letter of September 14 to Senator Sheppard, Chairman of the Campaign Expenditures Committee, I made two changes in same and telephoned W office to advise the Collector of the nature of the changes and tell him that he could release said statement if and when he desired. Regraded Uclassified 13 - 4 - I returned from , vacation on September 6th, the day after Labor Day, and about September 12th Collector Magruder called at R office and read to me a copy of a letter which he proposed sending to Senator Shappard, calling attention to the fast that be had requested permission to appear before the Campaign Expenditures Committee for the purpose of answering certain statements máse by Senator Tydings in his compaign to the effect that the permanency or security of positions of non-civil service employees in Collector Magruder's office depended upon how they voted in the primary. The letter we a protest against the action taken by the committee, refusing him this request, and its decision that the Collector had violated the "spirit" of the statute. The further purpose of the letter was to advise the committee as to the stops he bed taken prier to reading his statement to the non-civil service employees of his office, including the information that he had called on If and recited practically the - facts as related by M above in this amoreadem. His letter contained the additional statement that in accordance with what he conseived to be the "propriety of things", and is deference to Senstor Tydings, he had game to the Senator's office to advise him of the Collector's intention to support the Senetor's oppenent, Congressmen Lewis. Be also brought out the fast in his letter that Senator Tydings questioned his right to take this action and that the Collector advised the Senstor is his julgest 12 was proper, fortified as he ⑉ by authority from the Treasury Depart- amt. Regraded Uclassified 16 - 5 - He also related in his letter to Semator Shoppard that the Press having heard that be had read a statement to his M. civil service employees, wanted a copy, and not being able to secure came . . . began immediately to ventilate what it supposed . # he had said, endeavoring to create the impression in the public mind that the Collector had cooreed his employees to support Congressmen Lewis, and that be himself had been forced to declare for the Congress- man, and it was due to this misstatement of the facts that he had sought and obtained authority from the Treasury Department to release 4 statement to the Press. Hie letter, copy of which appears in the file, concluded with the statement that he was of the opinion that the Senator' e Com- mittee, with the information easily obtainable, night have accompanied its findings with some statement in his behalf, to the effect that he had been authorized both to read and to publish the statement issued, and he sincerely felt be was entitled to & statement from the Committee, which in come mare would tend to leasen the personal sting, and et the sans time counteract e false impression in the public mind. I saw as objection to permitting him to address such a letter to Senster Shoppard, but consulted Mr. Gaston before greating his permission to mail it. I telephoned Mr. Gasten, ubo same to W/ office, and after the Collector had again read the letter aloud to w, Hz. Custom agreed that it would be perfectly all right for him to mill said letter, after one or two aisor changes had been suggested and made. Uclassified 17 - 6 - The attached file contains a memorandum from Mr. Gaston showing that a few days after August 29th, the date of his return to the office, Collector Magruder called on him and he authorised him to give to the Press the statement which he read to his employees. Regraded Uclassified 18 TREASURY DEPARTMENT INTERNAL REVENUE SERVICE FICE OF THE COLLECTOR BALTIMORE, MD. DISTRICT OF MARYLAND October 3, 1938. IN REPLY REFER TO 10/0/38 The Honorable Stephen B. Gibbons, Assistant Secretary of the Treasury, Treasury Department, Washington, D. C. My dear Mr. Gibbons: Pardon my delay in acknowledging your letter of September 23, 1938, in which you enclosed me clipping from the Baltimore Sun of September 20th, headlined, "Morgenthau Backs Action of Magruder - - "Treasury Head Refuses To Make Any Move Against Collector Here" - "Step Held Presaging Open War With Senate Campaign Committee", written by P. C. Trussell of the Washington Bureau of the Sun. It was a very splendid statement, and I appreciate the candor of Mr. Morgenthau. I had already seen the paper containing the state= ment, and have it for my scrap book. I thank you exceedingly for your interest in the matter. Sincerely yours, Collector. MHM:KSB Regraded Uclassified 19 October 3, 1938. The Honorable Stephen B. Gibbons, Assistant Secretary of the Treasury, Treasury Department, Washington, D. C. My dear Mr. Gibbons: Pardon my delay in acknowledging your letter of September 23, 1938, in which you enclosed me clipping from the Bultimore Sun of September 20th, headlined, "Morgenthau Backs Action of Magruder " - "Treasury Head Refuses To Make Any Vove Against Collector Here" - "Step Held Presaging Open Var With Senate Campaign Committee", written by P. C. Trussell of the Washington Bureau of the Sun. It was a very splendid statement, and I appreciate the candor of Mr. Morgenthau. I had already seen the paper containing the state- ment. and have it for my scrap book. I thank you exceedingly for your interest in the matter. Sincerely yours, M. H. Magruder Collector. CECA ciraons PENICE 06 MRM:HSB 1998 OCL 2 VII 8 sa DBEVENSA DEBI RECEIAED Regraded Uclassified TREASURY DEPARTMENT Washington 20 Office of September 10, 1934. The Secretary POLITICAL ACTIVITY OF TREASURY EMPLOYEES 1934 Supplement to Department Circular No. 518 of Aug. 2, 1934. o Officers and Employees of the Treasury Department: As a result of numerous inquiries received by the Treasury Department re- uesting information as to whether holding a certain office or engaging in a articular activity viclates a spacific section of Treasury Department Circular D. 518, regarding political activity of Treasury employees, heretofore issued by B on August 2, 1934, the following explanation of said Circular No. 518 is issued or the guidance of Treasury Department employees not under Civil Service: Generally, the regulations are not intended to curtail or interfere with the exercise of a person's civic rights and duties as a citizen. The instructions contained in said Circular should not be construed: 1. To restrain an employee from voting as he or she desires or from expressing his or her opinion, privately or publicly, on political subjects. 2, To prevent any such employee from voluntarily contributing to the campaign fund of the party of his choice, if such contribution is made freely and without coercion or improper solicitation, and is not made to a person in the service of the United States. 3. To prevent any such employee from introducing speakers, or from making speeches on public questions or the work of a particular office, provided offensive partisanship is not displayed in said speeches. 4. To prevent such employee from attending & county, state or district convention as a member or a delegate, if such employee does not act as Chairman of the convention, attempt to use the power of his public office to control or manipulate the proceedings or display such obtrusive partisan- ship AB to cause public scandal. 5. To prevent such employee from holding positions on boards of education, school committees, public libraries, religious or eleemosynary institutions incorporated, established or sustained by State or municipal authority. Employees of the Treasury Department may engage in the above-mentioned activities, provided the attention required by such activity does not interfere with the regular and efficient discharge of the dutios of their office in the Treasury Department, and provided the time used for such activities is charged against the employees' annual leave or leave with- out pay. Under no circumstances should any such activity be performed at the Government's expense. HENRY MORGENTHAU, Jr., Secretary of the Treasury. Regraded Uclassified TREASURY DEPARTMENT Washington 21 Office of August 2, 1934. The Secretary POLITICAL ACTIVITY OF TREASURY EMPLOYEES 1934 Department Circular No. 518 To Officers and Employees of the Treasury Department: The following regulations with respect to political activity of officers and employees of the United States Treasury Department will become effective September 1, 1934. From and after that date no officer or employee of the Treasury Department will be permitted: 1. To hold any other public or political office. 2. To become a candidate for a political office. 3. To be a member or officer of any official committee of a political party, or of any other committee that solicits funds for political purposes. 4. To own, edit, or manage a political publication. 5. To display such obtrusive partisanship as to cause public scandal. 6. To attempt to manipulate party primaries or conventions. 7. To use his position to bring about his selection as & delegate to conventions. 8. To act as Chairman of a political convention. 9. To assume the active conduct of & political campaign. 10. To use his position to interfere with an election or to affect the result thereof. 11. To neglect his public duties. These regulations are not to be construed as abating any of the pro- visions of the laws of the United States with respect to the political activity of Government officers and employees, nor are they to be construed as modifying, changing, or repealing any existing regulations of the United States Civil Service Commission with respect to the conduct of classified employees. Copy of these regulations shall be placed in the hands of every employee of the Treasury Department and no violation of the provisions contained herein will be excused on the ground of lack of knowledge. HENRY MORGENTHAU, Jr., Secretary of the Treasury Regraded Uclassified 22 TREASURY DEPARTMENT Washington June 5, 1934. TO ALL OFFICERS AND EMPLOYEES OF THE UNITED STATES TREASURY DEPARTMENT: I desire to call to the attention of all officers and employees of the United States Treasury Department, including all officers and employees of Bureaus and subordinate brenches of the Treasury, provi- sions of the laws of the United States respecting political activity by Government employees and tho solicitation, of contributions for political purposes. The law on these subjects is summarized in 8 recent bulletin of the United States Civil Service Commission, a copy of which I am enclosing. I particularly desire to direct attention to two sections which: (1) Make it unlawful for any officer or employee of the United States to solicit or receive political contributions from.any other officer or employee, and (2) Make it unlawful for any person, whether an employee of the United States Government or not, to solicit or receive political con- tributions in any room or building occupied by Government offices. I quote these two sections of law: U.S. Code, Title 18, Section 208 (Criminal Code, Sec.118) It is unlawful for any Senator or Representative in, or Delegate or Resident Commissioner to, Congress, or any candidate for, or individual elocted as, Senator, Representa- tive, Delegate, or Resident Commissioner, or any officer or employee of the United States, or any porson receiving any solary or componsation for services from money derived from the Treasury of the United States, to directly or indirectly solicit, receive, or be in any manner concerned in soliciting or receiving, any assessment, subscription, OF contribution for any political purpose whotever, from any other such officer, employee, or person. U.S. Codo, Title 18, Section 209 (Criminal Code, SCC. 119) No porson shill, in any room or building occupied in the discharge of official duties by any officer or employee. of the United States montioned in section 20B of this titlo, or in any navy yord, fort, or arsenal, solicit in any mannor whatever or receive any contribution of money or other thing of value for any political purpose whatever. 23 2 - These provisions of the statutes are sweeping and definite in their terms. It is my intention that they shall be understood 'and- obeyed both in letter and spirit by every employee of the United States Treasury Dopartment. The law of the United States guarantoes to every Federal employee the right to be completely free from solicitation by superior officers, or by follow employees, to contribute to political funds. It guaran- toos to all Fedoral officers and employees the right to be free while engaged in their work in a building occupied by Federal offices from any ruch solicitation by any person whomsoever. I am determined not to tolorate any infraction of these provisions of law, either direct and open infraction of them or any effort to accomplish in an indirect way what they forbid. Wherever they are vio- lated by persons in the employ of the Treasury Department it is my in- tention that those who are guilty shall, BC soon as their guilt is 06⑉ tablished, be removed from the Federal service and further that the evidence against them shall be furnished to prosecuting authorities. I intend to exercise the name vigilance to protect Treasury employees from invasion of their rights by those who are not Treasury employees. Whenever any employee of the Treasury Department loarns of any violation of those sections, I shall count it a favor if he or she will communicate directly with me. I give my personal pledge that no employee shall suffer any prejudice in his or hor status as a Government employee by reason of making such a complaint or giving such information. I invite the cooperation of all of you in obtaining complete-snd faithful obedience to and observance of the spirit of the law. Sincerely yours, HENRY MORGENTHAU, Jr. Secretary of the Treasury. Regraded Uclassified [POST CONSPICUOUSLY] UNITED STATES CIVIL SERVICE COMMISSION 24 WASHINGTON, D. C. WA RNING POLITICAL ACTIVITY OF CLASSIFIED EMPLOYEES PROHIBITED Political activity by classified employees in city, county, State, or national elections, whether primary or ségular, or in behalf of any party or candidate, or any measure to be voted upon, in generally prohibited. Officers are probibited from requesting or requiring any political service or any political work from subordinates. Civil Service Rule I: No person in the executive civil service shall use his official authority or influence for the trpose of interfering with an election or affecting the results thereof. Persons who by the provisions of these rules be in the competitive classified service, while retaining the right to vote as they please and to express privately their vinions on all political subjects, shall take no active part in political management or in political campaigns. The restrictions as to political activity apply to temporary employees, employees on leave of absence with or (thout pay, substitutes, and classified and unclassified laborers. Some of the forms of activity held to be forbidden by the rule are- Serving on OR for ANY political remmittee or other similar Serving in any position of election officer, unleas the election panization. law of the State requires service regardiese of Federal emplay- Serving - officer of . policical club, M member or officer of ment and provides A penaliy for refusal to serve, of the committees, addressing such & club ur being active In Publishing or being connected editorially, managerially, or organization. financially with any pullical cowspaper or writing for pebil- Serving to connection with preparation for, organizing, or con- calion or publishing any letier or article, signed or unsigned, to getting . political meeting or raily, addressing such & meeting, favor of or against any political party. condidate. fastion, as taking any other active part therein escept as a speciator. measure. Giving public expression to political views, engaging le politi- Becoming a sundidate for comination or election to or bolding discussions or conferences while OR duty or In public places, local office. renvesing a. district or solleiting political support for any Distributing campaign Illevaigre, bedges or buttoms. or were- my, faction, candidate, or measure. Ing such budge or button Manifesting offensive activity at Che polla, al primary or regu- Distrtbuting or displaying campaign attckers, signs, or gicrores elections, solleiting votes, montating volers to mark hallmin, at of candidates on automobiles or in windows. getting out the roters on registration or election dara Circulating. but not signing, political petitions, Including leich- Acting as recorder, checker, watcher, ur challenger of any ative and referendum, recall, and nomination petitions, any OF faction. Assuming political leadership or becoming prominently Idea- Assisting in counting the vote, or engiging in any other activity lified with any political movement, party, or feetion, or with the polla except marking and depositing the employee's nen the success of feiluze of any candidate for election to public office. PRESIDENTIAL OFFICERS THE FOLLOWING APPLIES TO INCUMBENTS OF EXCEPTED OR UNCLASSIFIED POSITIONS Presidential appointees are Corbidden by statule to use their official authority or Influence to cuerce the political sellon of any - er bady, to make any contribution for a pullical object to any other officer or employee of the United States, or to solicit or selve contributions for political purposes from alher Federal officers or employees, or to discriminate among (beir employees or plicants for political reasons. The use of such authority or Induence to interfere with an election or affect the results thereof is also hidden by the ciril-sorvice rales. Officers are prohibited from requesting or requiring any political service or any political work from purdination Diherwise, . presidential appointee will be allowed to take such a part in political campaigna se le taken by any private citizen. that under regulations Insued by many of the Departmento he will not be permitted- To held a position se a member or officer of any patitival 4. To dae his position to bring about We entection -- . delegate sommitties that eolicita funds. to a convention. To display nuch obtrusive partionnehip as to caboe public 5. To set " chairman of # political convention. & To assume the active conduct of . pullical compaign 1. To sitempt to manipulato party primarios of conventions. T. To negleci bis public dutles. Pustmarters-The following order has been Issued by the Postmaster General: é - missing is genned by The nisi - replated of the Premises Geseral, Ba - ad - bie to - - - bin. the - treasi the puble abroid de that of - restang del Me - la strictly Inpartal, and (Ini all pairest be trested with the - - set - as have a - - - la milles a began the required Lime and elimibe - given la - de - - about, - la mind chass a - não - - la and pethod or to pariles. pollical POLITICAL ASSESSMENTS, SOLICITATIONS, AND DISCRIMINATIONS - TM. 115, 12b, sod (2) of the Criminal Code (me as tues, provide that M logislative alive, - al condidate be election, of - corretire, - - after - amplicance - without - new or ha - - wilstling at resiring any - - destribution for patitical - from any sibe der - employee of the that - - - miss of printial - ad - nade any - la MI - of bellding - in the discharge of efficial fallowing MY -- - - of de United Dising that as am 4d - shill be dislarged - ha intering la make any le political payment end Gal - - - malays of Des - disectly - fine - hand - le any del - - - la the antre of the United States - se 40 Member . - Congress my - - the - shoug the - provider of any shjed stairm. - as of the Criminal Code that - - - ay pride of the for stall - fined sei - liss $4,000 - - - - - theme I 1 Purchase Information - named is 150L - of was - be and he la la Dietrict Managers or - - One Service - Vehicle D. a is to the of - - leving services - the of - of the pride d - Drill Berrie Bale - Criminal Code to refunds - Caste to the U. A. Forms May, - U. S. CIVIL SERVICE COMMISSION. I - - Regraded Uclassified Political activity 25 magrader. m. H September 23, 1938. Dear Mr. Magruder: I have received your letter of September 16th, with regard to your authority for the statement that you made to the employees of your office before the recent Maryland primary. You have undoubtedly since the date of your letter seen the published statement of Secretary Morgenthau in this matter. However, for your ready reference I am enclosing 8. clipping from the Baltimore Bun of September 20th, from which you will note that the Secretary advised the Senate Campaign Investigating Committee that your statement as well as the use to be made of it had received Departmental approval, and that he saw no reason for further action. of course 90 all regret that this incident was made the subject of an investigation by the Senate Committes. How- ever, from the standpoint of the Department, as you can see, this is considered as 8 closed matter at this time. Sincerely yours, (Signed) Stephen B. Gibbins Assistant Secretary. Honorable 1. E. Magrader, Collector of Internal Revenue, Beltimore, Maryland. Enclosure. FCR/dls/hm the mrs Regraded Uclassified 26 September 23, 1938. Dear Mr. Magruder: I have received your letter of September 16th, with regard to your authority for the statement that you made to the employees of your office before the recent Maryland primary. You have undoubtedly since the date of your letter neen the published statement of Secretary Morgesthau in this matter. However, for your ready reference I at enclosing a clipping from the Baltimore Sun of September 20th, from which you will note that the Secretary advised the Senate Campaign Investigating Committee that your statement as well 18 the use to be made of it had received Departmental approval, and that he saw no reason for further action. of course no all regret that this incident was made the subject of an investigation by the Senate Consittee. How- ever, from the standpoint of the Department, as you can 100, this 16 considered as & closed matter st this tixe. Sincerely yours, Assistant Secretary. Honorable LL. H. Magruder, Collector of Internal Revenue, Baltimore, Maryland. Enclesure. FCR/dls/hm Regraded Uclassified 27 mi TO: FROM: MR. GASTON'S Sibons OFFICE I their already informed the news faces that his statement was anthorized and they have IN reported The Se within has written to Shephard that magruder's affident statine he had Treasury approval is entirely correct. yes Regraded Uclassified 28 FRCM MR. GIBBONS TO-- Mr. Acken Mr. Anslinger Mr. Ballinger Mr. Dow Mr. Gorman Mr. W.R. Johnson Miss Klawans Mr. Mark Mr. Moyle Mr. Rose Miss von Toerne Admiral Waesche Mr. Wood Bath Dave Please see me. sept 20 S.B.G. Date 9/19/38 Regraded Uclassified 29 Baltimore, M. September 16, 1938. The Honorable Stephen W. Gibbons, Assistant Secretary of the Treasury, Treasury Department, Washington, D.C. My dear Mr. Gibbons: In view of the fact that I had authority from the Treasury Department both to read and to publish the statement, which has been subject to the Campaign Expenditures Committee's investigation, and in view of its conclusions to the effect that, I had violated the "spirit" of the statute, I earnestly feel that the Treasury Department should give to the press some- thing in confirmation of the fact that I had complete authority not only by reason of Circular No. 518, but by virtue of the Supplement, to read and to publish the statement. You can well understand it was not with any pleasure, because of my long friendship with Senator Tydings, that I sup- ported Congressman Lewis; but I did 50 because I was in accord with the Administration. I understand that the Circular plus the Supplement was issued by the Treasury Department after careful consideration, and the findings reached after two decisions of Attorneys General of the United States. As the matter standa now, by virtue of the Campaign Expenditures Committee's decision, I am branded as a violator of the "spirit" of the statute, without any official statement from the Treasury Department to the effect that I wes clearly within my rights both in the reading of the statement to my employees and its publication in the newspapers. You can well see the pub- lic 18 of the opinion that I violated the "spirit" of the statute, and is completely ignorant of the fact that despite the ruling of the Committee. I did not violate even the "spirit" of the aot in so far as the interpretation of the statute 18 concerned by the Treasury Department. Regraded Uclassified 30 -8- In other words, I want the public to know through the press, and I imagine the press would at least now publish a statement, if it can be procured from Mr. Morgenthau, to the effect, in 80 far as the Treasury Department is concerned, that I was clearly within Ky rights and I did not violate the "spirit" of the law. I feel I am amply justified in making this request, in view of the circumstances. I an enclosing you herewith copy of my letter to Senator Sheppard, and likewise a copy of the statement I both read and published, in order that the Secretary of the Treasury may have before him all the facts. I am enclosing also the preface to what I read, which was verbal, but which is accurate, because I in fact memorized this language before I uttered it. I will appreciate the joint cooperation of Mr. Gaston and yourself in this matter. Respectfully yours, MHM:HSB Encls. Regraded Uclassified 31 Upper Marlboro, m. September 14, 1938. Senator Morris A. Sheppard, Chairman, Campaign Expenditures Committee, U. S. Capitol, Washington, D.C. Dear Sir: Mr. Joseph Cannon, one of the investigators of your Committee, called me yesterday, and in substance stated that in a speech delivered by Senator Tydings in Baltimore, weference was reportedly made to oor- tain Federal employees who had declared against his Senatorial candidacy, and the language allegedly used by him indicated these employees had been coerced into the support of Mr. Lewis by persons occupying commanding positions in the Federal Service, and in view of these implications, your Committee was anxious to learn if there was any justification for this statement. If I correctly understood Mr. Cannon, you are advised that no person either without or within the Federal Service, by word or action, said anything or did anything that could be remotely construed as force. or threat, or coercion against no. When the newspapers announced it was the purpose of your Committee to investigate the matter of My statement to my employees, you will recall my having sent you & telegram asking the privilege of appearing before Regraded Uclassified 32 it for the purpose of answering the charges preferred by Senator Tydings to the effect, in substance, I had indicated to By employees in the statement read that the permanency or security of their posi- tions depended upon how they voted in the primary. It was my desire, and I feel I had the right to appear before your Committee and inform it of the entire circumstance; and having before it all the fasts, its findings would be the result of full and complete information. I was not accorded this right, and your Committee's decision was in substance that I had violated the "spirit" of the statute. I an not passing on the correctness of this decision, but I feel had your Committee been given the complete picture, there would have been some pelliating state- ment accompanying your published findings. Believing, as I did, that some in the office might be inclined to transgress the definite limitations on political activities, and knowing the predilection of others, and having been asked by many what by own position might be in the Senatorial primary. I thought it advisable to consult the Assistant Secretary of the Treasury, the Honorable Stephen Gibbons, with the purpose of obtaining his advice both as to the wisdom of calling their attention to the provisions of Circular 518, together with the Supplement, and at the same time the propriety of answering the inquiry of many as to By own position. I called on Mr. Gibbons, discussed the matter with him. and he concurred conditionally, provided Regraded Uclassified 33 + I should submit the proposed statement to him for approval. This I did, stating that he was of sourse free to delete anything that was not strictly in accord with the provisions of both the Circular and the Supplement. He delated a single sentence and suggested one substitution; and thus corrected, it was read. It was intended to be a matter between my en- ployees and me only. with no idea of publication. Preceding this statement, and in accord with what I conceived to be the propriety of things, and in deference to Senator Tydings, I went to his office to let him know of my intention to support his opponent. From my point of view, it was manifestly e matter of both duty and pro- found respect for him. In this conversation I told him I intended to advise my employees I was for Lewis, and why I was for him. Be questioned my right to do this. I told him. in By judgement, it was proper, forti- fied at I was by authority from the Treasury Department. Shortly after reading the statement, the press heard about it and wanted a copy. I was out so far as the press was concerned, because having no intention in the beginning of publishing the statement, and no authority in fact for its publication, it was withheld. The press began immediately to ventilate what it supposed I had said. and endeavored to create the impression in the public wind that I had coersed my employees to support Lewis. This propaganda went on relentlessly for several days; the public drawing two inferences; first, that I had been foreed to do- clare for Lewis, and second, that I in turn had cooreed my employees to Regraded Uclassified 34 do likewise. In order that the public night know that neither was the care, I sought and obtained authority from the Treasury Depart- ment to release the statement to the press. I have given you the particulars in detail. You have the statement, together with the prefece. You have my affidavit, which contains among other things, the recital that I was authorized by one Assistant Secretary of the Treasury to read the statement, and by another Assistant Secretary of the Treasury to publish the state- ment. The proof of my having obtained authority both to read and to publish, could have been obtained without delay or difficulty by your Committee from Mr. Gibbons or Mr. Caston of the Treasury Department, before your announcement that I had violated the "spirit" of the statute. My chugrin, if I my be permitted to state it, is that your Committee with the information easily obtainable, might have accom- panied your findings with 80m statement in my behalf to the effect in substance that I had been authorised both to read and to publish the statement I issued. I all coldly branded by your Committee as a violator of the Federal Statute, without a solitary word on your part of extenuation. I sincerely feel I all entitled, even at this late date, to - statement from your Committee, which in some measure at least, will tend to lessen the personal sting and at the sure time counteract & Regraded Uclassified 35 + a false impression in the public mind. Respectfully yours, MHM:HSB Regraded Uclassified 36 I have asked you here to talk to you about a matter that concerns you as employees in the Internal Revenue Service as well as myself as Collector of Internal Revenue, and what I am about to say to you I am putting in writing in order that there may be no misunderstanding, no misinterpretation, and no misquotation. Regraded Uclassified 37 I have asked you here for the purpose of discussing with you the purport and effect of Department Circular #518, promulgated August 2, 1934, supplemented September 10, 1934 defining the political activities of Treasury Employees with special reference to the forthcoming Democratic Senatorial Primary to be held throughout Maryland on September 12th next. I am addressing myself solely to Democrats, because none other can par- ticipate therein, and solely to Democrats not under Civil Service. I am assuming that none of you are at this time holding any other office and that none of you are candidates for political office. You and I are definitely free to vote as we please and are like- wise free to openly express our preference for any candidate for United States Senator. You and I have the unquestioned right to refrain from voting if we 80 elect. You and I can make campaign contributions voluntarily, but not to a person in the service of the Government. You and I can make speeches provided they are without offensive partizanship on public questions. You and I are free to serve as delegates to the State Convention. You and I have no right however to use Government time during office hours to engage in political activities. You and I can neither solicit nor receive in any Federal building money or other things of value for any political purpose whatsoever. With this brief resume of the definite things we are free to do and the definite things we are excluded from doing, let me make this further statement in response to a question which many of you have asked Regraded Uclassified 38 me, "Whomwill I support for United States Senator in the primary election on September 12th"? I am willing to answer this question definitely, name the person and state the reasons which impell me to make a choice, with the distinct understanding that you shall be free regardless of any preference I may have to follow your own inclinations and vote for the candidate of your choice. Those of you who were appointed by my predecessor, Mr. Ray, when he came into office were in fact sponsored by persons who were definitely in accord with the policies of the administration. You will recall that when I came into office in September, 1935, I re-appointed all of you, and this was in complete accord with the wishes of your sponsors, who together with others, were likewise my own sponsors. You know, of course, that my own is a Presidential appointment and sub- ject to senatorial confirmation. When I came in then in September, 1935 and you were all covered by blanket re-appointment, our sponsors, and I were beyond question in complete accord on administration policies. Now with regard to those of you who have been appointed since. All of you, with few exceptions, have had the same sponsors. I have acquiesced in this sponsorship with the fond hope and the keen desire that some how, in some way, one of your sponsors and one of mine might continue to support at least a major portion of administration policies. It is now manifest that this is not the case. So when I came into office all my sponsors were with the administration. If some of them have seen fit to change their attitude, I see no reason why I should be persuaded to alter mine. Consequently, I shall support David J. Lewis for United Regraded Uclassified 39 States Senator in the September 12th primary. This attitude of mine, by repetition, is for the purpose only of letting you know my position and the reason for my choice. It must be understood that you are to have complete freedom in making your own choice, and whether that choice is in accord with mine or contrary to mine must rest finally with you. It must be understood, also, that you are free to exercise your civic rights and duties as a citizen. Regraded Uclassified Magrider, you ASSISTANT SECRETARY OF THE TREASURY 40 August 23, 1938. Memorandum: Returned by Mr. Gibbons from Westhampton approved except that he suggested the omission of the last sentence in the third paragraph on page 1, reading as follows: "You and I have the right to unoffensively seek the aid of others in helping the candidate of our choice." He also suggested changing the last line on page 1 from "the Custom House" to "any Federal building" -- both of which amendments are noted on the copy of Mr. Magruder's remarks attached. The original papers were returned to Mr. Schoeneman in Internal Revenue direct, he and r. Carter having been advised by phone. JOR Regraded U ASSISTANT SECRETARY OF THE TREASURY 41 August 23, 1938. Memorandum: Returned by Mr. Gibbons from Westhampton approved except that he suggested the omission of the last sentence in the third paragraph on page 1, reading as follows: "You and I have the right to unoffensively seek the aid of others in helping the candidate of our choice." He also suggested changing the last line on page 1 from "the Custom House" to "any Federal building" - both of which amendments are noted in the copy of Mr. Magruder's remarks attached. The original papers were returned to Mr. choeneman in Internal Revenue direct, he and r. Carter having been advised by phone. ASSISTANT SECRETARY OF THE TREASURY August 20, 1938. Mr. Gibbons: I as attaching memorandum of August 19th from Mr. Carter, Acting Commissioner of Internal Revenue, enclosing a letter of August 17th to Mr. Helvering, who is absent of course, from Mr. Magruder, Collector of Internal Revenue at Baltimore, together with a statement regarding political activities which he proposes to dis- juss with the employees of his office, and bout which he has apparently had conversation Hth you. George Schoeneman phoned me this sorning nd called attention to the fact that Mr. agruder is asking for a reply within 48 hours, I am sending this to you by special delivery 1th the suggestion that, if possible, you hone me Monday morning and let ne know whether his statement meets with your approval. Upon ceipt of advice from you, I will advise Mr. arter by phone. I am attaching for your ready reference a extra copy of the Secretary's orders on olitical activity. 43 August 19, 1958. AACITES ASSORANDUM for Assistant Secretary Gibboms: I as transmitting herewith a communication addressed to this office under date of August 17, 1938, by Collector Me H. Magruder of the Varyland Collection District, with emelosed statement which he proposes to make to the employees of the Maryland District in order that any transgression of Treasury Regulations sonserning political activity my be avoided. It will be noted that Mr. Ingruder has submitted this statement to the Treasury Department, through chamnels, as the result of a suggestion made to his by you in order that you might have an opportunity to delete whatever part of the statement, in your judgment, should be emitted, This office has reviewed Fr. Ingrudor's proposed state= ment and is of the opinion that his interpretation of the regulations is a proper one, and insuruch as the statement has been prepared in accordance with your suggestion 2 assume that there is no reason why this office should question the propriety of Mr. Magrodor's waking the comments that he proposes. It will be noted that Collector Magruder desires inform- tion concerning this matter within the next forty-eight hours, and 1 would be pleased to have the benefits of your advise in the premises in order that his request my be complied with, Comissioner, Enclosures. Date Regraded Uclassified C 0 44 P Y TREASURY DEPARTMENT Internal Revenue Service Baltimore, Md. ice of the Collector August 17, 1938. istrict of Maryland PERSONAL Honorable Guy T. Helvering, Commissioner of Internal Revenue, Washington, D.C. My dear Mr. Helvering: In view of the fact that on the 12th of September next there will be a United States Senatorial Primary in Maryland, and the employees in this office are being daily importuned by candidates for support, applicable particularly to Senatorial Candidates, and in view of the further fact that Application Circular #518, pro- mulgated August 2, 1934, supplemented September 10, 1934, definitely limits the political activities of the Treasury Employees, I have in mind the thought that I should call the employees attention to the Department Circular above mentioned in order that the extent of their political activities might be called to their attention, to prevent transgression. In this connection a number of the employees in this office have asked ne my own position with regard to the two United States Senatorial Candidates in Waryland. Under the circumstances I feel constrained to advise them definitely my position in this matter. I recently discussed this matter with the Honorable Stephen Gibbons, Assistant Secretary of the Treasury, and he concurred in this suggestion. In fact, he suggested that any thing I might feel necessary to be said should come through regular channels, and then to be submitted to him for approval, with the understanding that he was privileged to delete whatever in his judgment should be omitted. I an enclosing what I have prepared with the request that it be transmitted to Mr. Gibbons. I urge promptness in this regard, in fact I would like to have a reply, if obtainable, within the next 48 hours. Very truly yours, (Sgd) W. H. Magruder W. H. MAGRUDER, Collector. MEM:E Encl. Regraded Uclassified C o 5 TREASURY DEPARTMENT Internal Revenue Service Baltimore, Md. fice of the Collector August 17, 1938. District of Maryland PERSONAL Honorable Guy T. Helvering, Commissioner of Internal Revenue, Washington, D.C. My dear Mr. Helvering: In view of the fact that on the 12th of September next there will be a United States Senstorial Primary in Maryland, and the employees in this office are being daily importuned by candidates for support, applicable particularly to Senatorial Candidates, and in view of the further fact that Application Circular 1518, pro- sulgated August 2, 1934, supplemented Se tember 10, 1934, definitely limits the political activities of the Treasury Employees, I have in mind the thought that I should call the employees attention to the Department Circular above mentioned in order that the extent of their political activities might be called to their attention, to prevent transgression. In this connection & number of the employees in this office have asked as by own position with regard to the two United States Senatorial Candidatos in Maryland. Under the circumstances I feel constrained to advise them definitely ay position in this matter. I recently discussed this matter with the Honorable Stephen Gibbons, Assistant Secretary of the Treasury, and he concurred in this suggestion. In fact, be suggested that any thing I aight feel necessary to be said should come through regular channels, and then to be submitted to him for approval, with the understanding that he was privileged to delete whatever in his judgment should be omitted. I as enclosing what I have prepared with the request that it be transmitted to fr. Gibbons. I urge prosptness in this regard, in fact I would like to have 6 reply, if obtainable, within the next 48 hours. Very truly yours, (Sgd) #. H. Magruder 1. H. MAGRIDER, Collector. Eacl. Regraded Uclassified C 46 0 P Y TREASURY DEPARTMENT Internal Revenue Service Baltimore, Md. I have asked you here for the purpose of discussing with you the purport and effect of Department Circular #518, promulgated August 2, 1934, supplemented September 10, 1934, defining the political activities of Treasury Employees with special reference to the forth- coming Democratic Senatorial Primary to be held throughout Maryland on September 12th next. I am addressing myself solely to Democrats, be- cause none other can participate therein, and solely to Democrats not under Civil Service. I am assuming that none of you are at this time holding any other office and that none of you are candidates for political office. You and I are definitely free to vote as we please and are likewise free to openly express our preference for any candidate for United States Senator. You and I have the unquestioned right to refrain from voting 1f we so elect. You and I have the right to unoffensively cook the eid of others in helping the eandidate of our choice. You and I can make campaign contributions voluntarily, but not to a person in the service of the Government. You and I can make speeches provided they are without offensive partizanship on public questions. You and I are free to serve as delegates to the State Convention. You and I have no right however to use Government time during of- fice hours to engage in political activities. You and I can neither any rederal building solicit nor receive in the Cuptom House money or other things of value Regraded Uclassified - 2 - 47 for any political purpose whatsoever. With this brief resume of the definite things we are free to do and the definite things we are excluded from doing, let me make this further statement in response to a question which many of you have asked me, "Who will I support for United States Senator in the primary election on September 12th"? I am willing to answer this question definitely, name the person and state the reasons which impel me to make B choice, with the distinct understanding that you shall be free regardless of any preference I may have to follow your own inclinations and vote for the candidate of your choice. Those of you who were appointed by my predecessor, Mr. Ray, when he came into office were in fact sponsored by persons who were definitely in accord with the policies of the administration. You will recall that when I came into office in September, 1935, I re-appointed all of you, and this was in complete accord with the wishes of your sponsors, who together with others, were likewise my own sponsors. You know, of course, that my own is a Presidential appointment and subject to senatorial confirmation. When I came in then in September, 1935 and you were all covered by blanket re-appointment, our sponsors, and I were beyond question in complete accord on administration policies. Now with regard to those of you who have been appointed since. All of you, with few exceptions, have had the same sponsors. I have acquiesced in this sponsorship with the fond hope and the keen desire that LOSS how, in some way, one of your sponsors and one of mine might continue to support at least a major portion of administration policies. It is now manifest Regraded Uclassified 48 - 3 - that this is not the case. So when I came into office all my sponsors were with the administration. If some of them have seen fit to change their attitude, I see no reason why I should be persuaded to alter mine. Consequently, I shall support David J. Lewis for United States Senator in the September 12th primary. This attitude of mine, by repetition, is for the purpose only of letting you know my position and the reason for my choice. It must be understood that you are to have complete freedom in making your own choice, and whether that choice is in accord with mine or contrary to mine must rest finally with you. It must be understood, also, that you are free to exercise your civic rights and duties as a citizen. Regraded Uclassified C 0 P 48 I TREASURY DEPARTMENT Internal Revenue Service Baltimore, Md. I have asked you here for the purpose of discussing with you the purport and effect of Department Circular #518, promulgated August 2, 1934, supplemented September 10, 1934, defining the political activities of Treasury Employees with special reference to the forth- coming Democratic Senatorial Primary to be held throughout Maryland on September 12th next. I an addressing syself solely to Democrats, be- cause none other can participate therein, end solely to Democrate not under Civil Service. I am assuaing that rone of you are at this time holding any other office and that none of you are candidates for political office. You and I are definitely free to vote as we please end are likewise free to openly express our preference for any candidate for United States Senator. You and I have the unquestioned right to refrain from voting If we so elect. You end I have the right to unoffensively seek the old of others in helping the condidate of our choice. You and I can make campaign contributions voluntarily, but not to a person in the service of the Government. You and I can aske speeches provided they are without offensive partisanship on public questions. You and I are free to serve as delegates to the State Convention. You and I have no right however to use Government time during of- fice hours to engage in political activities. You and I can neither solicit nor receive in the Quotom House Money or other things of value any Federal building Regraded Uclassified 50 - 2 - for any political purpose whatsoever. with this brief resume of the definite things " are free to do and the definite things we are excluded from doing, let se nake this further statement in response to & question which many of you have asked no, "Tho will I support for United States Senator in the primary election on September 12th"? I aa willing to enswer this question definitely, name the person and state the reasons which impel no to make a choice, with the distinct understanding that you shell be free regardless of any preference I say have to follow your own inclinations and vote for the candidate of your choice. Those of you who were appointed by ay predecessor, Mr. Ray, when he case into office were in fact sponsored by persons who were definitely in accord with the policies of the administration. You will recall that when I came into office in September, 1935, I re-appointed all of you, and this was in complete accord with the wishes of your sponsors, who together with others, were likewise ay OWE sponsors. You know, of course, that ay own is a Presidential appointment and subject to senstorial confirmation. When I came in then in September, 1935 and you were all covered by blanket re-appointment, our sponsors, and I were beyond question in complete accord on administration policies. Now with regard to those of you who have been appointed since. All of you, with few exceptions, have had the sene sponsors. I have acquiesced in this agensorahip with the fond hope and the keen desire that some how, in some way, case of your sponsors and one of sine might continne to support at least a major pertion of administration policies. It is D/V manifest Regraded Uclassified 51 - 3 - that this is not the case. So when I case into office all ay sponsors were with the administration. If some of them have seen fit to change their attitude, I see no reason why I should be persuaded to alter sine. Consequently, I shall support David J. Lewis for United States Senator in the September 12th primary. This attitude of mine, by repetition, is for the purpose only of letting you know By position and the reason for ay choice. It must be understood that you are to have complete freedom in saking your OWN choice, and whether that choice is in accord with mine or contrary to sine must rest finally with you. It must be understood, also, that you are free to exercise your civic rights and duties as & citizen. Regraded Uclassified 52 TREASURY DEPARTMENT Washington FOR RELEASE, MORNING NEWSPAPERS, Press Service Monday, September 12, 1938. No. 14-51-A 9/10/38. Secretary Morgenthau today made public the following letter to Senator Morris Sheppard as Chairman of the Special Committee to Investigate Campaign Expenditures of the Senate: Regraded Uclassified TREASURY DEPARTMENT 53 Washington, D.C. Office of the Secretary September 9, 1938. C O P Y My dear Senator: Noticing on my return last week from vacation that during my absence questions had boon raised before your committee as to political activities by Treasury employees, I wrote to you sending you copies of the regulations on this subject that I have issued for the guidance of all employees of this Department. The subject is, as you know, one in which I have taken a great deal of interest ever since I assumed my present duties. I have been anxious not only that all employees of this Department should abide both by the letter and the spirit of the law on this subject, but that they should rofrain from taking any position or committing any acts whose propriety could be questioned in view of thoir responsibilities as revcnue-collecting agents of the Government. Investigations which I caused to be mado in 1934 revealed out- right violations of the law with respect to solicitation of political contributions, and as a result soveral officors were required to resign and disciplinary action was taken in other cases. The regulations which were issued following the first of these dovelopments demanded strict obedience to the law as it was understood in the Treasury Dopartment and also established regulations for Treasury employees more exncting in a number of particulars than the statutes, as you will no doubt have observed on reading them. Regraded Uclassified 54 - 2 - Reports in the newspapers, however, lead ne to believe that the position that you have taken on one matter-thet of political con- tributions-differs from that taken by the Treasury Department. The supplement of September 10, 1934, to Department Circular No. 518 of August 2, 1934, contains the following: "The instructions contained in said circular should not be construed: ... "2. To prevent any such employee from voluntarily contributing to the compaign fund of the party of his choice, if such contribution is nade freely and without coercion or improper solicitation, and is not rade to a person in the service of the United States." I or led by reports in the newspapers to believe that your position is that the law forbids any political contributions whatever by Federal employees, whether made under these voluntary conditions or not, and that in arriving at that position you have been guided by the provisions of Sections 208 and 211 of Title 18 of the U. S. Code, which forbid, respectively. the receiving by a Foderal officer or candidate for Fedoral office of political contributions from Federal employees, and the giving by Federal employees of political contributions to a Federal officer or candidate for office. In taking the position that neither of these sections is in- tended to prevent the making of voluntary contributions to party cam- paign funds by Treasury employees, we have been guided by decisions of Attorneys General in prior Administrations. Both sections are de- rived from provisions of the same import in the Act of January 16, 1883, Regraded Uclassified 55 3 - (22 Stat. 403, 406) which was construed by the Attorney General in 1896 (21 Op. Atty.Gon. 298) The Attorney Goneral stated (at page 299): "It is well settled that the intention of this act was not to forbid voluntary contributions for political purposes by persons in the employ of the Government, but to protect such persons from solici- tation or coercion with respect to such contributions. Knowing the difficulty of detecting the actual opera- tion of menns and influencos whose employment had become a public ovil, Congress absolutely prohibited the solicitation or receipt of political contribu- tione by all persons in the Government service in any placo or in any way, and forbade such solicitation or receipt by any person in any room or building occupied in the discharge of official duties. All who are in the Government service are thus protected against tho possibility of actual coercion and from that of the coorcion impliod in the relation of the porson soliciting or receiving to the Government or impliod in solicitation or receipt in a public office: but Congress did not attempt to prohibit solicitation by or payment to persons not in the Government ser- vice otherwise than in Government offices." The position of the Attornoy General in that opinion was reiterated with approval in (1902) 24 Op. Atty. Gen. 133,135. We have been unable to find in the regulations of the Civil Service Commission with respect to employees in the classified ser- vice any furthor guidance on this question of voluntary contributions. I remain, as I have always been, detormined that the conduct of Treasury employees shall be abovo reproach in any respect as to which I have the right to act under the law. I am enxious, therefore, to have all authoritative guidance possible, and I would be glad to have you indicate any respects in which you think the limits of political activity permissible to Treasury employees have been transconded. Regraded Uclassified 56 - 4 - In addition, I would ask: (1) Is it your view that the Treasury regulations, copies of which have been sent to you, permit acts which are repugnant to the letter or spirit of the law, (2) Do you contend that it is a violation of the law for a Federal employee to make a voluntary contribution to the campaign fund or to the genoral funds of a political party, (3) Is it your position that it is a violation of the law for such an employee to mako a voluntary contribution to a fund which is to be used for the purpose of ad- vocating a particular candidate for Federal office in a primary campaign? I shall greatly appreciato hearing further from you on this subject. Very truly yours, (Sgd) HENRY MORGENTHAU, JR. Secretary of the Treasury. Honorable Morris Sheppard Chairman Special Committee to Invostigate Campaign Expenditures United Statos Senate. --000-- Regraded Uclassified BALTIMORE SUN - October ?. 1938. 57 ENTIRE SENATE "On de contracty, the committee be- lieves the action of the collector of internal revenue at Ballin.org Wes e TO STUDY Buy CASE violation of the spirts, If net the letter of the law, that it WAR a breader of the Treasury Department's OWN regular lations, that is was violative of sound OF MAGRUDER administrative principles, that no - cuse is to be found for It and Unit the action of the collector in to be 1007 7 severely condemned 1938 To Report To Senzie Probe Committee Flatly "The committee will make its report on this case to the Senate with such Opposes Vindication By recommendations 4d a may deem Treasury Department proper to make." Completing its record of another case involved in the Maryland primary, the committee to and, after considering the FHA Upheld In Dismissal report of its investigators. that the dis- or Henry W. Webb, Di- missial of Henry W. Webb, State di- rector of the Rederal Housing Admin- rector For Maryland Istration. was not due to his alleged refusal to support Lewis epiost Sen- ator Tydings. d) GERALD OHIFTS The Webb dismissil had been placed Weshtagton Bureau of The Sun] before the committee by A. E. Hun- Washington, Oct. 6-Flatly disagree- gerford, who also can in the Demo- cratic Senatorial primary. Officials of ling with the position taken by the the FHA previously had denied that Treasury Department, the Senate cam- Webb's discharge was connected with paign investigating committee today\the election, and the Senate committee expressed its emphatic disapproval of today this Aubstantisted the FHA's the activities during the Marylandcontention. primary campaign of M. Hampton Ma- Other Probe Pending gruder, collector of internal revenue Senator Morris Shoppard (Dem., at Tenasi, chairman of the committee, said that nothing further has been The committee announced that it will heard from the Postoffice Department submit 11a report and recummendations regarding its investigation of the an the Magruder case to the Sensie political activities of Mrs. Mande R. The nature of the recommendation Toulhon, postmistress at Salisbury, the committee may decide to make Wés who supported Lewis. not disclosed. Senator Sheppard, in discussing the committee's sharp criticiam of Ma- Blatement By Committee gruder and Secretary Morgentheu, de- After considering Magroder's an- clined to go into possible recommends- nouncement of his support of Repre- Lions dealing with this apecific case sentative David J. Lewis L. the Mary- Be relierated his suggestion, however, land primary campaign and after that legislation be proposed at the next studying the letter of Henry Morgen- sessino of Congress to prevent - repeti- thau, Ii, Secretary of the Treasury, Lion of such activity. approving Magruder's action, the Sen- Magruder was elted by the com- ate committee issued & statement ay- millee last month as having violated ing: the apirit of the civil service laws "The committee does not agree with when be called his non-civil service the position taken by the Secretary employes into his office and announced of the Treasury, that he - supporting Lewis in the primary. AL that Cime the committee ent its Anding to Margenthau and Regraded Uclassified 58 asked Jum what be proposed to do, pelitical activity in behalf R Sensice about the care. Hattie W. Careway, Morganthau, replying to the com- millee a week after the election in The committee did not diaplose, the which Senator Tydings was renomi- of lia Andings in This passey nated, said he who unable to discover marry stating that it found there yas any reason for further action an his no need for Conthate divestigation. part. It voted to Investigate charges in He pointed out that the Treasury Indiana relating to pollical accivity Department, in advance, had given anong WM employes and decided for its approval to Magruder's statement its Investigation of the Ini- to his staff. and he disagreed with the nota and Williams primaries, Senate committee's interpretation of In cash, Albert Hilliant, MII- lage relating to the political activi- successful appoint of Senaire PM ties of Government employes. McCaryan for the Democratic Sine The matter rested at that point un- torial nomination in Nevalia, had in the commitiee, called into resaldo charged that George Turpin, of Memo today, voted its disapproval get only had been disentised as # deposity of Magroder's action but of Morgan- United States marahal of all thau's defense of that action. legad political activity in behalf of Hilliard. Civil Service Act Cited Senator Shepperd indicated that the Turpin Ouster Upheld committee members were unanimously The committee found that Turpin convinced that Magruder's enhounce- had has migaged in *excember politi- ment was contrary to the provisions of callectivity" and that he was The Civil Service Act which prohibit properly, on dies civil employes of the Government If Mind - basis for 4 Course that from using their official authority or of the HOLC will Sincer IVID influence to codere the political action L D., There being insured for politics: of any person. purpose The committee deferred until to- Charge at Representative Claims limith. who was defented in the Mo- morrow or possibly Saturday its study- of Its investigations into charges aris- sindal primary la Oklahoma by Tu- log from the Pennsylvania, Kantucky ator Ront Thomas, - toums to be a general as la Surnish the begin and Tennessee primarias. for Inventigation Bmith was informed Today, in addition to reporting on the Magruder case, the committee an- of this Builing and that given - op- nounced that "at the proper lime" a portunity W present specific coth- will submit to the Senate its findings plaints, and recommendations relating to To Watch Georgia Centest Homer M. Adkins, collector of internal Dealing with # custine filed with the revenue at Little Rock, Ark. committee by Engene 4% Proba Turne To Incians plaining that the Georgia Denitorist Adkins and other Federal officials In primary result was la be ministed Arkensen ware charged with undus the committee decided to observe the results of this content before deter- mining whether it has any jurialic- fion in the matter. Other charges arising in the Georgia orimary, in which Senater Walter F. George ran ahead of Telmadge and Walter S. Camp are will under in- institution by the Senate committee Regraded Uclassified NEW YORK TIMES - October 7. 1938. 58 Simiement of the Committee SENATE TO GET CASE Announcing Its sction on the Bac- relary's letter concerning the OF TRBASURY AIDE charge against Mr. Magruder, the committee Codey maid: OCT 1938 "The committee bas considered the reply of Recretary Morgenthun Committee Will Urge Action of Sept. 16 to the letter of the com- Against Baltimore Collector mittee of Sept. 12 to Becretary Mor- gentheu, submitting the consentt- Accused of Political Activity Year's findings in the CARE of M. Hempton Magruder. Collector of law for Internal Revenue at Baltimore. "The committee does not agree MORGENTHAU IS CRITICIZED with the position taken by the Sec- retary, On the contrary, the enm- mittee believes the action of the Disagreeing With Mis Defense Collector of Internal Revenue gt Baltimore was & violative of the of Magruder, Report Holds spirit, If net the letter, of the IAWA that it was a. Dieach of the Trees- That Latter Violated Law any Department's own regulations: that it was violative of antind #d- ministrative principles: that no 45- cuse to to be round for II, and that Speciali YRS Not for Tome the action of the collector is to De WASHINGTON. Oct. 6-The Ben- severaly condemined. ate Committee on Campaign Ex "The committee will make its is penditures will report to the Senate port on this case to the Menate with the action of Secretary Morgenthau such recommendations as If may in approving the alleged political deem proper to make,' activity of M. Hampton Magroder, Civil Selvice Law, Involved Collector of Internal Revenue st The committee originally found Baltimore, during the recent pet- that Mr. Magruder had violated Paragraph 6 of Section 2 of the mary elections. Recommendations Civil Service Law, and also the as to steps to be taken would be regulations of the Treasury which made to the Senate, the committee prohibit any official from "attempt- announced, but their nature WAS the to interfere in A. primary elec- not Indicated. Non or to use his position to Influ- me - millect the outgome thereof.' Mr. Magruder was charged by) The committee called Mr. Magen- Senator Tydings's campaign com- der's case to Secretary Morgen- mitter with having summoned em- than's attention. In a reply sent on ployes to Date office where be read Sept. 16. Mr. Morgenthau said that to them . statement in which he FOD for any further action." he was "unable to discover any rea- said that be would vote for Repre- Mr. Morgenthau added that the sentative Lewis, who was Mr. Treasury bad approved of the state Tydinga's opponent for the Demo-ment Mr. Magruder read to his etatic Senatorial nomination. Sec- subordinates and said the "use he retary Morgenthau upheld the 88- made of It bad had departmental approval." Bon of the collector. Senator Sheppard, chairman of The Sepate committee, however. the campaign expenditures commit- held Mr. Magruder's action to be a tee, indicated that there had beep 4. violation of the spirit, et Teast, of heated discussion of what the com- mittee should do, Some committee- the law governing the political ac- men had suggested calling Mr. Mor- livities of Federal employee under genthau bafore the committee. elvil service, and also of the Treas- The committee found also that any Department's own regulations, Secretary Morgenthan workghilly which should be "severely upheld Homer M. Atkins, Internat con- demned." Revenue Collector for Arkansas, to what the committee called "undue political activity" and paid that at the proper time and without Purcher investigation of the CRBO 12. world make Be statement or l'indings and recommendations to the Sexis As to the disinismal of Herry M. Ween M Maryland State director of the Federal Housing Administra- tion. Use committee found that " had not bean due to his support of Zenaler Tydings is alam held that George Tarpin. deputy Marahal, of Renn had been property dientized for political activity, Regraded Uclassified YORK HERALD TRIBUNE - October 7. 1938. Censure Voted port ONE this case to Mr Senate with quels M % may proper to mails Magruder for Senators - Meeting Participating in the committee meeting today were Berm/Dire Ship- Primary Work (ard. Pat Harrison, of Minissippi, and Joseph C. O'Mahoner of Wyo- mins, all Democrati, and Wallace 11. White Jr., Republican, of Maine. Senate Committee Befuses In clearing Mr. Magrider, Smiller to Accept Morgenthwu's any Morgenthau had revaled that Use collector's action In reading to . Defense of BaltimareAld group of non-civil service employees Who Opposed Tydings in his Baltimore office a statement of bis Intention to vote for Repra- from the Renald sentative David J. Lewis for Senator WASHINGTON, Oct. 6-The Sen- as against Senstor Millard E. Ty- ate Campaign Investigating Commit- dings, in the September 18 primary, bad been approved by the Treasury tes today formally condenined the Department officials in advance of Maryland primary intervention of M. the reading. Hampton Magruder, Baltimore's Col- At the same time, the committee lector of Internal Revenue. and voted announced that is would present so to report the case to the Senale for the Benate "Its findings and recom- appropriate action. The committee's mendations" In the case of Homer decision TM arrived at despite the Adking, Collector of Internal Rev- fact that Heary Mongenthau Jr., Box- onlys for Arknosas, relaty of the Treaspry, bad officially cleared Mr. Magruder of all charges. Other Declaions Deferred The committee's action, foremat- On three other major CASEL in- Ing possible reperoussion in the next volving the Democratic primaries to session of Congress, was set forth in Pennsylvania, [Centucky and Ten- & statement made public by Genntor bessee, the committee deferred no- Morris Sheppard, Democrat, of Tersa, tion until tomorrow, Senator Shap- chairman M follows: pard announcing that the final The committes has considered the declaion would be reached probably reply of Secretary Morgenthau of by the end of the week. September 16 la the letter of los The Pennsylvania investigation, committee of September 13 to Becre- said to have been completed, turns lary Morgenthau, submitting the on a letter soliciting campaign funds committee's findings to the case or from Works Progress Administration M. ampton Magruder, Collector of workers mont by the Pennsylvania Internal Revenue at Baltimore. The Democratic state committes over the committee does not agree with the signature or Senator Joseph F. Gut- position taken by the Secretary on fey. The Eentucky investigation in- the contrary. the committee belleyer volven double-barreled charges of the action of the Collector of In- the use of Federal funds in the ternal Revenue at Baltimore was a campaign of Senator Alben W. violation of the spirit, If not the Barkley and state funds to behalf letter. of the law, that It was & of the unancessaful campaign of brench of the Treasury Department's Governor A. B. ("Happy") Chandler. own regulations, that It was violative The same charges were made in or sound administrative principies, Tennessee, where Senator George . that no excuse It to be found for 11., Berry, Democrat, who spüt with the and that the action of the collector Administration, WILD defeated for the is to be severely condemned. Senatorial nomination by a Tom "The committee will make lls re- Blowart Regraded Uclassified WASHINGTON POST - October 2, 1938. C1 Funds Inquiry Thears Agents Report The committee met resterdas to Condemns consider agents investigation, n. porta (rom nine States where charges have heen mude. Today Magruder program reports will Be Timerd from investigators recently returned from Pennaylvania, Tennessee and Boxt Kentucky. Contradlets Morgenthau The committee reported it had found no basis for charges that Broke 'Spirit of Law Henry Webb had been dismissed las head of the Maryland office of To Recommend Action the Federal Housing Administration Bensuse be refuned to support Lewis The OCT Tydings made that charge and Expends tures Committee de Arthur E. Hungerford, third man agreeing with Secretary of vin the Maryland race, filed a simi- the Tax charge before the committee Treasury Morgenthau. last night While keeping other Georgia "severely condemued" M. Hamps lon Magruder Baltimiure Internal matters under investigation, the Revenue collector, for political 200> joinmittee decided to observe prog- tivity in the Maryland primary, reas of the contest there by former The committee announced It WIII Coe Engene Talmadge, who lost report the case to the Senate later "X" Senator Walter F. Genrge in the with suitable recommendations Senate primary and who denied The group had discussed behind the result's finality. closed doors Morgenthan's letter ne Plam Indians Inquiry September 16, In which be approved the action of Magruder In advising Continuing an Illinois investige- lion. the committee then voted Le any TO Baltimore office that be Invored investigate Indiana charges of po- Representative Lewis, who lost to litteat activity among WPA work- Senator Tydings in the Senate raco, ers. Sensior Morris Sheppard of The committee charged previously Texas committee chairman, told that Magruder's action violated reporters that Oklahoma charges elvil service law, Morgenthan an- made by Representative Gomer wered he did not no consider Smith, defeated in the Senale DTI- Magruder's action. mary by Senator Elmer Thomas Yesterday the committee can were so gendral "") to furnish no ported: leasts for an Investigation "The committee does not agree The committee further found that with the position taken by the George Turpin, of Reno, Nev. had Secretary, On the contrary, the heen engaged in "excessive polit- committee believes the action of loat setivity and had been justly the collector of internal revenue at removed from his past as deputy Baltimore was in violation of the United States marshal, This and spirit, if not the letter. of the law, awered charges to that effect soade that it was a breach of the Treas- by Albert Hilliard, who last 12 uty Department's own regulations, Senator Pat McCarren last month. that it was violative of sound ad- Cousidering South Daketa, the ministrative principles. that THE ex- committee's investigator found nº cuse is to be found for 1% and that basif for a charge that employes the action of the collector is to be of the Nome Owners Loan Cer- severely condemned." poration were assessed for polit- Senate action on the Magruder ital purposes. After voling to con- case is considered unpredictable. linue a Wisconsin investigation the but come committee members said your adjurred today that the most likely result would be . resolution cansuring Magra- der. Regraded Uclassified WASHINGTON HERALD - September 20, 1938. C2 Vote Quiz Snubbed By Morgenthau 3 1938 "Mr. Magruder's statement to He Refuses to Punish his affidavit that the document he read to non-civil service employee of his office had previously been Magruder for Aid approved by his superiors in the Treasury Department fully ac- To Lewis cord with the facts. Not only the Washington Borrid document but the use he made of Secretary of the Treasury 16 had departmental approval." Morgenthau yesterday sharply Mr. Morgenthau said. mubbed the Senate Campaten "In response to your request for Committee investigating charges & statement as to what action I Internal Revenue collectors en- intend to take in this matter. gaged In political activities in please be advised that I am unable Maryland and Arkansas. to discover any reason for any Morgenihau wrote the commit- further action on my part." ten the collectors had done no wrons and be intended to take no WPA Charge Dropped action against them. The Arkansas case involved a Defends Magruder collector, accused by Representa- tive John McCiellan of supporting his opponent. the successful Sen- The Maryland case involved Colé ator Hattie Caraway. Once again. lector M. Hampton Magruder, of Morgenthau declared: Baltimore, who read E statement "The result of the investigation to his employes. announcing his/indicated that the charges were support of Representative David J. without basis. In the circum- stances, there would appear to be Lewis In the recent primary. won no further need for investigation by Senator Millard E. Tydings. or action in this case." The committee branded this po- The rebuffed committee mean litical activity. while announced Its agents found no substantiation of a charge that WPA workers in Wisconsin were being solicited for funds to aid the renomination of Senetor F. Ryan Duffy. Democrat, Regraded Uclassified NEW YORK TIMES - September 20, 1938. 63 MORGENTHAU FIRM FOR LEWIS BACKER Reg York Times Says Baltimore Collector's Statement in Primary Had Treasury Approval SEP 9 1938 SHEPPARD STILL OBJECTS Senate Campaign Committee Renews Inquiry on Guffey Letters in Pennsylvania WASHINGTON, Sept. 19 0P- Secretary Morgenthan said today that M. H. Magruder, Internal reve- hue collector at Baltimore, had the Treasury's approval of a statement read to nno-civil service employee expressing his preference for the candidacy of Representative Lewis In Maryland's Democratic primary. Mr. Lawis, supported by President Ronsevelt, was detented by Senator Tydings. Mr. Morgentheu advised the Ban- ate Campaign Expenditures Come mittee that not only had Mr. Ma- gruder's superiore approved the statement, "but the Dae he made of it had had departmental approval." Senefor Report, chairman of the committee, said on Sept. 11 that be believed Mr. Magruder's action was "In violation of the spirtt of Paragraph # of Section 2 of the Civil Service Act." "To response to your request for 5 statement as to what action I intend be take in this matter," Mr. Morgentheu wrote to reply, "please be advised that I am unable to die- GOVER any reason for any further action on my part, Mr. Shappard and the reply had not observed bis that Mr. Magridar's action underfilited & vio- lation of the law. 754 Excute committee bas ordered . Cursber investigation of B. leater stated to Pennsylvania Democrate - August over the purported signa- - of Benetor Guffay saking con- terms - the State Campaign OrganiStes. A committies Investi- - presidely Interviewed Mr. luttey, who bed denied, through ALP any prowledge of the datay sent to Federal office- bolders Benefor an Investi- getor will & be Postrolvania for additional inquiry ADE a complete report would be Tal balore the com- mittee about Oct. Regraded Uclassified WASHINGTON POST - September 20, 1938. 64 Morgenthau Stia demand Init a Tenoust came after Alesandro had made . simi- for demand Saturday, D'Alesandro, Won't Punish however, indicated he would whin- draw nie demand IF his present elimate proves correct. Magruder The two congremional candidates have sec-sawed in the primary TO- lurns since the upeticial count Derhington Poot started last Monday wight: Unit Says Baltimore Adde the official tabulation began. d'Ait- endro claimed € victory by, 43 Had His Approval in votes The recent, it - said. probably Backing Lewis Against will delay Boal results for four or Bve days because of increasing de- Tydings mands for recounts in class Mary. SEP V 1000 land counties in the gubermatorial By James D. Secret titg-of-war Secretary Morgenthau yesterday Four Country larolved exonerated M. Hampton Magruder, With Mayor lowerd W. Jack- Internal revenue collector at Balti- son and Attorney General Herbert more. of any wrong doing In the R. O'Conor juggling for enough Tydings-Lewis Senatorial campaign second-choles voles to assure nomi- 4c demands for recounts beclouded nation at the convention Septem the bitterly contegled Democratic ber 28. recounts were underway Tast. gubernatorial and Battimore Con- night in four counties. gressional primary results. O'Coner forces had naked for The Secretary of the Treasury in- recounts in three of the counties in formed the Senate Campaign Ex- which Jackson led. They are Fred- penditures Committee that Magru- erick Allegany and Anne Arundel der had his full approval when he Jackson aides instigated the re- read a statement supporting Repre- count in Queen Anne's County, sentative Lewis to a group of non- where O'Conor was ahead. An givil service employes under his investigation of reports of vote- jurisdiction. buying also was underway, The committee had referred the The recount in Frederick County matter to Morgenthau after Anding was the latest to be ordered, 11 that the Internal revenue collector will not begin before Thursday. ac- ned violated the spirit of the civil cording to G. Hunter Bowers, presi- service act. Senator Tydings had dent of the board of election super- Bled the complaint egalist Ma- visors. Jackson carried the county gruder. by a margin of 238 votes Morgenthan Refuses Active While the relabulation liegen in the Allegany courthouse at Cum- Secretary Morganthau advised Chairman Sheppard (Democrat), of berland before is packed browd of O'Conor and Jackson supporters, IV Texas, that Magruder's superiors WWW.R and that the qutoome may not not only had approved the state- be known Inc five or are days. ment he made in behalf of the pen- Wackson's Dist-eount lead was 34 storial candidate backed by Previ- votes, dent Roosevelt, but "The use he If the recount gives the county's made of It BE well." "In response to your request (or a seven votes to O'Conor, the young attorney general will be abte to statement as to what action I Intend elinch the nomination, it appeared to take in this matter." he sald, yesterday, without the aid of the *please be advised that I em unable seven votes from Prince' Georges to discover any reason for any fur- Countr. The latter unles will be ther artion on my part" controlled by Lanadale a Samcer, Senator Sheppard said that Mot- fourth gubernatorial candidate, am genthau's reply hail not changed the materity of second-cholce voise his opinion that Magroder's act con- were marked William Gordy, Jr. stituted s. vidiation of the law. who was - poor third la the race Meanwhile, in Baltimore Repre- The sult filed by O'Conor's alder sentative Palmisano, chairman of In Anne Arunde) County elleged the House District Committee, des irregularities in the counting of manded . recount of all votes in voins in all of the county's 40 pall- the Third Congressional District ing places, which Jackson carried before his revt. Tommy d'Alekandro, 6,416 to 4,960. was declared the victor by 56 votor: The number of demands for TE- According to an official canvasi counts has astonished many Mary- completed late laud night The final land voters who believed that the efficial vote was: d'Aleaandro, 12,971; automatic balloting machines. used Palmisano, 12.918. for the first time in the nevel pri- The upsel In Patmisano's calcule- mary, would forestall auch CUP- Bons of Sunday, when he predicted lemary political maneuvers that he would win by 52 votes. came As there are no written ballots. In The Eighteenth Ward. which was the recount consists movete of 1 imbulated late yesterday Instead check of Agures recorded by the of carrying 1t by nine votes. as voting machines spint figures D- expected, Palmisario lost II by ML parted by the election judges, Regraded Uclassified 65 TREASURY DEPARTMENT PROCUREMENT DIVISION OFFICE OF THE DIRECTOR WASHINGTON October 8, 1938 demorandum TO THE SECRETARY: Re: Treasury Underground Garage For nearly three years we have been trying to obtain funds for & parking garage beneath the South Garden of the Treasury building. Under date of July 5, 1938 we proposed to Secretary Ickes that unexpended balances for 6 completed projects under P.W.A. funds amounting to $232,000 now on the books of the Procurement Division, be transferred into 8. new project for the Treasury Underground Carage as per copy of letter hereto attached. This project will provide parking accommodations for approximately 100 cars. This is one of the projects included in the Ten-Year Program recently recommended by the President's Committee appointed to study federal housing needs in the District of Columbia; it has been before P.W.A. and the Budget on several occasions in an effort to secure the special appropriation therefor. We have now pointed the way by providing the funds ourselves. All we need is authority from P.W.A. to combine the unexpended balances under six other projects, which have been completed and standing to our credit, into a new account for the Treasury Under- ground Garage. Director of Procurement HE 23V.000 14,000 6 13.9 Regraded Uclassified COPI 86 July 5, 1938 Honorable Harold L. Ickes, Federal Emergency Administrator of Public Works, Washington, D. C. My dear Administrator: It is requested that $232,000 be allotted to the Treasury Department for the purpose of constructing a parking garage beneath the south garden of the Treasury building, this sun to be provided from allotments heretofore made for projects under control of this Department. It is recommended that the allotment requested be pro- vided from funds which are hereby released from the following proj- ects in the amounts indicated. Federal Project Number Project Amount 7 Alhambra, California, Post Office $10,076.57 35 Atlantic City, N.J., Post Office 44,138.08 43 Richmond, Virginia, Parcel Post Bldg. 11,582.67 105 New York City, Postal Sta. "D" 18,074.66 438 Phoenix, Arizona, Post Office 14,128.02 443 Washington, D.C., Extension to Internal Revenue Building 134,000.00 $232,000.00 The projects above listed are now completed, and, with the exception of projects No. 438 and 443, the amounts released exhaust the unobligated balances of the funds. For the past several years the parking and handling of of- ficial automobiles and trucks at the Treasury building has presented & difficult problem. The only entrance available for trucks, and for automobiles engaged in anything other than passenger carrying bus- ness, is in the narrow areaway along the west side of the building. Space for the parking of official care is extremely limited. Neces- sary parking by Members of Congress and officials of other depart- ments having business at the Treasury interfere seriously at times with the movement of mail and delivery trucks, particularly in the Regraded Uclassified 67 Underground Garage H norable Harold L. Ickes -2- Treasury Department of the large money trucks operating between the Treasury building and the Bureau of Engraving and Printing. Virtually до space is regularly evailable for parking accomodations for Congressess and officials of other depart eate except a small space on 15th street, authorized by the Traffic Bureau, which is wholly inadoquate. There is no interior court available for parking, similar to that provided at most of the other departmental buildings in the City. In order to relieve the existing situation it is proposed to excavate the southwest lawn of the Treasury, and the greater portion of the terrace along the south front, and to provide under this area park- ing accounodations for approximately 100 cars. The project contemplates the construction of an underground parking 4168 of reinforced concrete flat slab type designed structurally to support the existing lawn, approaches, a.d statue just south of the building. Some forced ventilation will be necessary. Facilities will be provided for parking only, no provisions for repairing cars being contemplated. Upon completion of construction work the existing Lawn, approaches, and statue will be restored to their existing condition with DO change in the exterior appearance of the building and grounds. A careful study of the cost of the proposed work has been made, and it is estimated that in order to do the necessary work, including the cost of plans, specifications, superintendence, and office expenses, the amount of $232,000 above requested will be required. Attention is invited to the fact that this project is one of those included in the Ten-Year Program recently reco ended by The President's Co mittee appointed to study Federal housing neede in the District of Columbia. Your early and favorable action on the above recomendation will be greatly appreciated. Very truly yours, (8) a. Morgenthau, Jr. Secretary of the Treasury. PT:88 Regraded Uclassified 68 October s, 1938 TELEGRAM TO: THE PRESIDENT HYDE PARK NEW YORK (VIA WHITE HOUSE PRIVATE WIRE) WOULD APPRECIATE YOUR SETTING ASIDE NEXT WEEK SUFFICIENT TIME FOR JOHN HANES, DAN BELL AND MYSELF TO DISCUSS WITH YOU NEXT YEARS BUDGET AND TAX PROGRAM HENRY MORGENTHAU JR Regraded Uclassified S9 October 8, 1938 Dear Dr. Rungs Many thanks for your letter of August 30, 1938. You can rest assured that Mr. Chen will receive my heartiest cooperation in exploring those problems that are our mutual concern. Naturally we have been sware of the importance of China's economic development and were cognisant of the progress she was 50 rapidly making. I share your keen disappointment at the tragic interruption of that progress, and fervently hope with you that China will soon be able to again concentrate its efforts and resources OD its constructive program. It is indeed reassuring that the Chinese nation is ac- tusted by ideals which we are proud to think have 80 much in common with those of the United States, and I hardly need assure you that we here are watching with the deepest interest and sympathy the unfolding of events in the Pacific. with best wishes for the success of your economic on- deavors and kindest personal regards, Sincerely, Rad, in Dr. n. 1. Kung, The Executive Tuan, Changking, China. (llote: ltr malled via the CHINA CLIPPER which leaves Son Francisco wednesday, 10/12/38 - BE per becretary's instructions - mas)(11:45 a.m. 10/8/38) HDn HDW:lrs AMERA COPY 10/5/38 Regraded Uclassified 70 THE EXECUTIVE YUAN NATIONAL GOVERNMENT. CHINA. PERSONAL Chungking, China. August 30, 1938. Dear Mr. Morgenthau: As Mr. K. P. Chen, Adviser of the Ministry of Finance, is coming to your country, I take great plessure in sending you this message of greetings end remembrance which I trust will find you in the full enjoyment of your health. Mr. Chen's second mission to your Capital reminds us once more of the courtesy and kind consideration which you showed to him and his colleagues during their first mission in 1936 and also the friendly cooperation which your Government extended through you to make his mission B. success. Both of these I recall with renewed appreciation. As Mr. Chen is no longer a stranger to you and in view of your friendship in the past, I have every reason to believe that in his present mission he will enjoy again your kind reception and ready assistance. For this fact allow me to express my appreciation in advance. I am sure you will agree with me that the interruption of China's progrees in economic and financial develop- ment which has been caused by Japan's armed aggression is a great tragedy in history. Left alone, we would have been able to con- tinue and hasten our program of reconstruction which had already acquired a momentum that was remaking the country and improving the trade relations between China and America as well as other countries. However, we are resolutely and courageously facing the urgent problems that confront us in the present crisis and we are optimistic that, with our resources and the assistance of friendly peoples, our economic structure will stand up well under the strain imposed by the hostilities. Needless to say, the continued assistance and cooperation of America will not only help us in the successful prosecution of this war against aggression and snarchy but will be even more valuable when we come to tackle the greater problems that will arise at the end of the hostilities. Signs of the time unmistakably show ever growing community of ideals and interests between our two nations, and it is my sincere hope that the unfoldment of the Pacific history will find us joining hands closer than ever in the protection and promotion of these common ideals and interests. In this spirit, may I express the hope that, through your invaluable assistance, Mr. Chen's present mission may yield results that will further cement the economic bonds and friendly relations between our two countries. with kindest personal regards, I am, Sincerely yours, H. HY Rung. The Honourable Henry Morgenthau, Jr. Secretary of Treasury, Washington Regraded 71 October 8, 1938 To: The Secretary From: Mr. Hanes For your information I am putting down the items which I took up with you Thursday afternoon on the way home. (1) As I reported to you, I have worked out with Guy Helvering a short form of income tax blank which will be sent to corporations having gross income under $250,000. and net income under $25,000. This form will be reduced in size from the present long and tedious form of six pages to B much simplified version of only four pages. The Bureau of Internal Revenue estimates that the number of corporations effected by this change will be approx= imately 460,000. This will leave approximately 70,000 corporations that will be required to file on the long forms. I believe this will be tremendously well received publicly and, at the proper time when all details have been completed, I wish you would make appropriate references to it in your press conference. (2) We have agreed upon P. change in Form 1040 which is purely mechanical, making the fold at the end rather than at the side, or book form, as at present. (3) Mr. Stam again urged, on behalf of the Joint Committee, that we actively support the Committee in the enactment into law of the Internal Revenue Code. The Joint Committee is anxious to have this presented for one of the first acts of the new Congress. I have advised Mr. Stem that we are willing to support them in this effort. (4) I have asked Guy Helvering to send to the field for copies of all form letters used in communications with taxpayers. Guy is very sympathetic to our idea that these form letters should be watched very carefully as 8. matter of good public relations volicy, and that we insist upon Revenue Agents using B. standard form of courteous approach to all taxpayers. (5) I advised you regarding the discourteous treatment of Mr. Wayne Taylor, through his secretary, by a Mr. Burnham in the Bureau of Internal Revenue. I an going to follow this matter up with Mr. Helvering- Regraded Uclassified REGONSTRUCTION FINANCE CORPORATION WASHINGTON JONES THE BOARD October 5, 1938 Deer Henry: I hope you will give further consideration to the matter of offering a substantial RFC note issue at this time 0.8 the market is probably as favorable as it ever will be. When the Corporation was established, Congress knew we would be called upon to make loans that would entail extra- ordinery risks, end that inevitably substantial losses would occur. That has been and continues to be the situation. Congress gave the Corporation the benefit of govern- ment credit by unconditionally guaranteeing its borrowings, end, 8.6 you know, the time limit for such borrowings was fixed at not exceeding five years. Repayments of our loans have probably averaged nearer three years than any other time. So, as I have often stated to you, our directors feel that we are entitled to and should be given the benefit of the government rate. As stated in our conference yesterday, we have out- standing with the public notes maturing December 15th, Series K, in amount of $299,072,666.67. We owe the Treasury approxi- mately $600,000,000. We would like you to give consíderation to offering say $500,000,000 at this time with such maturities, between one and five years, as best suits your purpose. Then, when the December notes come due, we can either pay them or offer an exchange. Sincerely yours, Honorable Henry Morgenthau, Jr. Secretary of the Treasury Washington, D- C- Regraded Uclassified 10-8-38 Federal Surplus Commodities Corporation 73 Sunnary of Comodities Procured - Fiscal Year 1938 and Fiscal Year 1939 to date (Figuree in thousands) : : Total : : fiscal 7/1/38:7/7/38 7/14/3817/21/38:7/28/3816/4/38 Connodity : Unit : year to to to : to to :8/11/38:8/18/38:8/25/3819/1/38:9/A/38 S :9/15/38:9/22/3819/30/381 Total 7/2/38 : : ending :7/6/38:7/13/38:7/20/38:7/27/38:8/3/35 to $ 6/30/38* : 10/5/38 1) Apples (Dried) Pounds 14,557 - - - - - - - - - - - 1 - - - (1) 2) Apples (Fresh) Bushels 5,625 - - - , , - - - - , - - - 3) Apricote (Dried) Pounds 2,990 3 3 2 - - - - - - - - I . - - - - - (3) 4) Beane (Dried) Pounds 56,600 - - - - - - - - 1 - 4 - 6 - - - - (4) 5) Beane (Snap) Bushels 33 5 9 3 4 1 1 1 - - 1 1 - 38 (5) 6) Bests (Fresh) Bushele 11 6 7 18 13 9 5 6 5 5 2 2 2 39 65 164 (6) 7) Blackberries (Canned) Cases - - - - - - - - - - - 80 - - - 50 (7) B) Butter Pounds 15,035 - - - - - - - - - 130 338 2,343 40 3,377 5,109 11,297 8 9) Cabbage Bushels 990 26 31 45 62 36 30 66 81 56 134 163 357 370 1,497 (9 0) Cane syrup Gallons 237 107 - - - - - - - - - - - , - 107 (10) 1) Carrota Buchels - 1 2 11 7 7 6 7 10 12 8 15 & 7 6 107 (11) E) Usuliflower Crates - - - - - - - - - - 19 2 - - - 21 (12) Delery Bunches 1,174 - - - - 17 65 39 15 13 4. 8 6 9 5 183 (1/ (1) Cereal (Whole wheat) Backs 408 - - - - - . - - - - I - - - - (14 5) Cheese Pounds 3,446 - - - - - - - - - - F - - - - (15) 6) Corn Baoks - - - - - - 1 4 3 - - - - - - 6 (16) 7) Cotton Bales - - - - - - - - - - - is 1 5 - 10 (17 8) Cotton fabrio Yarde 1,133 - - - - - - 10 49 1 29 144 14 - 3 150 (16) 9) Cottonseed oil Pounds 9,780 - - - . - - - - - - - - - - - (19 0) Egge (Shell) Cases 270 - - - - - - - - - - - - - - - (20 1) Fish Pounds 3,677 - - - - - - - - - - - - - - - (21 2) Flour Barrels 2,699 - - - - - 279 - - , - - , - - 279 22 3) Grapefruit Boxes - - - - - - - 23 401 - - - - - - - - 4) Grapefruit Juice - - - - - - - - - 464 - 7 - - 471 (24) Cases 552 Tone 8 - - - , - - - - # - , - - (25) 5) Grapes - - 6) Labela Labela - - - - 15,560 - I , 15,560 (26) - - - - - - - 2,550 (27) - - - - - - - - - - - - - 7) Mattress Ticking 2,550 - Yards Pounds 21,520 - - * - - - - 2,681 5,960 - 320 - - 5,961 (28) B) Milk (Dry skia) - 12,497 497 515 523 528 525 538 530 531 522 509 515 524 415 534 7,206 (29) 9) Milk (Fluid) Quarts 0) Onions Pounds 3,000 - - 300 25 8 11 22 16 le 7 39 53 181 78 752 (30) 1) Oranges Boxes 1,932 2 46 59 57 38 46 49 55 50 50 66 55 64 54 693 (32) 9,075 - - - - 9,075 (32) 2) Paper bags Bags 21,825 - - - - - - - - - 3,523 (33) 3) Peaches (Dried) - - , - Pounds 1,223 - - 2,300 - 2,534 - - - - - - - - - - 6 Peaches (Fresh) Bushels 8 2 4 - - - - - I - (5) Pears (Fresh) Boxes 318 - - - - - 31 96 73 17 12 - 229 - - - - - (36) I - - 6) Peas (Canned) Cases 862 - - - - - - - - - I - - - (37) - - 7) Peas (Dried) Pounds 6,000 - - - - - - - - - - 271 - - - (1) Peas (Fresh) Bushale - 1 I - I où B. (39) - - - - - 39) Potatoes (Sweet) Bushels 440 - - - - - - 42 232 2,301 (40) (40) Potatoes (White) Bushels 4,315 1 466 483 120 44 167 266 142 219 108 12 - - - - (41 - - - - - , - - (41) Potato starch & flour Pounds 2,562 - - - - - - - . - , 1 55 - - - - Prunes (Dried) Tons - - , - 5 5 3 - 13 - - - - - 1 - - - - - - - 11 (N4 (4) Prunes (Fresh) Bushels 11 - I - - Tons - - - - - - - (45) (44) Raisine 15 I - - - - - - - - - , (45) Rice (Milled) Pounds 73,190 - - - - - - - (46) - - 1 - - - - 145 (47) (46) Tobacco 3,500 - - - - - - 130 15 - - - - - Pounds (47) Tomatoes (Canned) 50 - - - - 1 7 18 22 16 20 4 1 - 114 (48 Cases 1 - 22 (48) Tomatoes (Fresh) Bushels 282 3 - - - October 8, 1938 Treasury Department, Division of Research and Statistics. . Weekly figures reported by Federal Surplus Commodities Corporation are based on telegraphic reports and are unrevised. Fiscal year totals have been revised to include all contract cancellations and other adjustments. Regraded Uclassified 1939 1980 Recepts $/5.00 4,850 6836 7426 W.P.A. 2,149 1500 8.985 8.926 Lef $13.985 44,076 Ot.10.1938 75 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE October 10, 1938.» TO Mr. Taylor FROM Mr. Murphy H2ml Subject: Beconstruction Finance Corporation loans on the preferred stock of banks. From the commencement of operations to August 31, 1938, the Recon- struction Finance Corporation had disbursed $1,081,879,000 for the purchase of preferred stock and capital notes and debentures of banks and had received repayments of $536,755,000, leaving a net amount outstanding as of that date of $545,124,000. As of the unme date the total smount of loans made on the preferred stock of banks (no loans are made on capital notes or debentures) amounted to $15,149,000 and repayments to $8,289,000. leaving a net amount outstand- ing of $9,860,000. As of that date, therefore, total disbursements for loans on preferred stock amounted to only about 1.7 percent of total dis- bursements for the purchase of preferred stock, etc., and the amount of loans on preferred stock outstanding amounted to only about 1.8 percent of total holdings of preferred stock, etc. The attached table gives the number of borrowers in each State, the amount disbursed on preferred stock loans to March 31, 1938 (the last date for which such a breakdown is available) and the amount of proferred stock loans outstanding as of that date. It should be noted that the number of borrowers is not identical with the number of banks, since in many cases loans are made to several different borrowers with respect to the same bank. The above information was obtained from published reports of the Reconstruction Finance Corporation as time did not permit securing new tabulations for the purpose of the present memorandum. Mr. Griffin of the Reconstruction Finance Corporation tells me that as of the present time 386 loans (in some cases more than one to a borrower) are outstanding with respect to 138 banks. It 18, of course, the number of banks concerned that is of the most significance. About half of the total outstanding amount of loans on preferred stock of banks is represented by the following three loaner 76 Mr. Taylor - 2 September Company, with respect to the Anglo-California National Bank of San Francisco $2,294,000 Trentrustco, with respect to the Trenton (New Jersey) Trust Company 1,730,000 First National Company of Birmingham, with respect to the First National Bank of Birmingham, Alabama 707,000 $4,731,000 No other loans, Mr. Griffin tells me, are outstanding in amounts comparable to these three. Mr. Griffin informs me that most of the loans are on "B" preferred instead of "A" preferred stock and have been made in order to extend the banks more financial assistance than the Corporation thought justified in extending on the security of the stock alone. Most of the exceptions to this are cases where the "A" stock bore double liability and the Corpo- ration made loans against it rather than purchasing it, in order to protect itself against the double liability. The loan to the September Company is 8 particular exception as it is made on "A" preferred stock without double liability. Loans secured by preferred stock in general bore B. rate of 6 percent prior to July 1, 1933, of 5 percent from July 1, 1933 to April 1, 1934. of 4 percent from April 1, 1934 to November 10, 1935, and of 31 percent there- after. The last reduction was conditional upon the borrowers agreeing to apply any differential between the return on the underlying bank preferred stock and the interest due the Reconstruction Finance Corporation to the re- duction of the loan. old loans have, in general, been given the benefit of the reduction in rates on new ones. These rates are not uniform with those on purchases of preferred stock, etc. This rate 18 now 3 percent. The loan to the September Company is an exception to the rule on inter- est rates also. It was disbursed on June 28, 1933, and the rate was 5 per- cent from the date of disbursement until April 1, 1934, and has been is per- cent thereafter, although the company has agreed to apply the differential between the return on the underlying bank preferred stock (6 percent) and the interest charged by the Reconstruction Finance Corporation to the Tax duction of the loan. Attachment. Regraded Uclassified 77 Reconstruction Finance Corporation Loans on Preferred Stock of Banks and Trust Companies to March 31, 1938 State I Number of : Amount : Amount out- : borrowers : disbursed : standing : : : Alabama : 9 : $ 3,148,575 : $ 1,040,966 Arizona I 1 : 50,000 : 24,962 Arkansas 1 7 : 549,500 : 348,635 California # 5 : 2,531,300 : 2,304,393 Connecticut : 1 : 149,800 : 14,999 Florida I 7 : 134,200 : 40,195 Georgia I 1 1 25,000 : Idaho 1 1 : 25,000 : Illinois # 1 : 12,500 : 10,213 Ioma : 1 : 50,000 : Kansas I 2 : 25,000 I 24,972 Maino 1 4 : 525,500 : 508,076 Maryland. : 1 : 30,630 : Massachusetts : 3 : 506,000 : 196,708 Michigan I 2 : 432,200 : 316,719 Minnesota. I 8 : 174,025 I 149,573 Mississippi 1 1 I 22,650 : 13,967 Nontana : 1 i 10,000 : 2,900 Nebraska : 106 : 2,563,000 : 701,406 New Jersey 1 29 : 3,226,950 : 2,455,228 New York I 42 : 1,979,200 : 1,406,668 North Carolina : 3 : 175,000 : 19,654 North Dakota : 1 : 20,000 : 19,900 Ohio : 1 : 2,400 : 2,273 Oklahoma : 6 : 526,500 : 14,611 Pennsylvania I 12 : 383,450 : 247.074 South Dakota I 1 1 6,100 : 4,430 Tennessee # 2 : 300,000 : 95,000 Teras I 5 : 151,250 : 111,196 Virginia - 1 : 15,000 : West Virginia : 1 : 200,000 : 140,350 Wisconsin - 3 : 83,000 : 46,841 Wyoming I 2 : 115,000 : 46,419 I : : : Total : 271 : 18,148,730 : 10,308,326 : 78 CONFERENCE WITH THE PRESIDENT ON THE 1940 BUDGET AND THE POSSIBILITY OF INCREASING TAXES. October 10, 1938. Besides the President the Secretary of the Treasury, Assistant Secretary Hanes and Mr. Bell were present. The Secretary asked me if I would give the President a picture of the 1940 Budget as compared with the 1939 estimates. I told the President that the Budget summation issued in July showed for the fis- cal year 1939 estimated receipts of $5,000,000,000 and estimated ex- penditures of $8,985,000,000, leaving a deficit of $3,985,000,000; that of the total estimated expenditures $2,149,000,000 represented the WPA program, including an additional $500,000,000 to be secured from Congress next February. I told him that the tentative revenue estimates which I had received from the Treasury for 1940 aggregated $4,850,000,000. representing a reduction of $150,000,000 from the estimates for 1939. Also I understood that in this 1940 figure there is an increase of $250,000,000 in miscellaneous internal revenue and a reduction of $400,000,000 in income taxes, or a net reduction of $150,000,000. On the expenditure side, exclusive of any amount whatever for WPA the estimate indicates expenditures of $7,426,000,000, leaving a deficit of $2,576,000,000. The President then said "Well, if you add $1,500,000,000 for WPA and I doubt if we can get by with any less, then we would have a deficit of $4,000,000,000 for the fiscal year 1940." He seemed quite disturbed and shocked at the figures. He then indicated that what we Regraded Uclassified 79 -2- might do from here on is require a reduction in Hopkins monthly ex- penditures as Mr. Ickes monthly expenditures increased. He thought that possibly there was not the same ratio of employment but we could work out some method to show a proportionate reduction. There was then some discussion of the tax situation. Mr. Hanes explained that in order to obtain $2,000,000,000 in additional revenue it would be necessary to increase the rates in the lower brackets, lower some of the exemption provisions, and increase quite materially the estate and inheritance taxes. He thought it was possible to increase the annual revenue from estate and inheritance taxes of about $400,000,000, to about $1,000,000,000, and that we also might get as much as $800,000,000 or $1,000,000,000 from more than doubling the rates between the net income of $8,000 and $75,000. The President then said that in his opinion he had to have some- thing he could sell to the country - we just could not send up B. budget for $4,000,000,000 deficit or even 2½ billion deficit and ask for an increase in taxes of $2,000,000,000 without some very good plan to educate the taxpayer. He did not think that he could ask B. person who now was paying 835 to $50 to increase his tax to $70 to $100 a year. He thought that he might point out to those people that the expenditures which unbalance the Federal budget in 1940 are two items - (1) large increase in expenditures for national defense, and (2) relief of unemploy- ment, and on this basis ask them to pay a special tax for the purpose of paying for these expenditures, with the understanding that when the Regraded Uclassified 80 -3- national income reaches 75 or 80 billion dollars a year the tax would automatically be decreased by a certain percentage. No definite con- clusions were reached as to just what should be proposed but the President asked Mr. Hanes if he would give further study to the matter and at the next meeting two weeks from today give him a chart of the increases under the plan proposed by Senator LaFollette in the last session of Congress and work up alternate plans for increasing the revenue. He asked him particularly to study the problem of special taxes so that the country could expect that as soon as the national income was sufficient to produce revenue to run the Federal Government on a normal basis, the special taxes could be reduced and finally eliminated. DWB Regraded Uclassified 81 GROUP MEETING October 10, 1938. 9:30 A. M. Present: Mr. Oliphant Mr. Gaston Mr. Haas Mr. Taylor Mr. Hanes Mr. Gibbons Mr. White Mr. Upham Mr. McReynolds Mrs. Klotz H.M.Jr: Mac - McReynolds? McReynolds: Herbert (meaning Herman - Mr. Oliphant) had a draft of a letter to Sheppard. H.M.Jr: (Telephone) Excuse me. Hello. 0. K. Huh? Klotz: (Low) McReynolds: Herman had a draft of a letter to Sheppard that I think you will probably agree is the proper answer. As far as I can see, except in the news- papers, there doesn't seem to be any issue. H.M.Jr: Let's read it out loud. Oliphant: It's being retyped, and will be in in a very few minutes - by the time you get around to me. H.M.Jr: All right. McReynolds: You may want that today; (hands H.M.Jr. memo) this is a memorandum on the conference on - that Delano memorandum. There is a memo Peoples gave me this morning, in the event you talk to anybody further about that Treasury garage; it's just a reminder of (talking low. H.M.Jr: George, did you write a memorandum about that conference over at Mr. Hull's? 82 - 2 - Haas: Yes sir. H.M.Jr: Did you? (Speaks to Mrs. Klotz.) McReynolds: (Speaks to Mrs. Klotz - low) H.M.Jr: What else, Mac? McReynolds: I have nothing. Upham: Mr. Delano will be here about ten o'clock, and he suggested the possibility of us having a little meeting with Mr. Foley, to have him report to us what went on. H.M.Jr: I can't do it today. Upham: Perhaps the rest of us ....? H.M.Jr: Yes, you people can; I can't do it; I'd like for him - I want to see Foley later on, but I can't do it today. Upham: We could arrange it some other time, if you prefer. H.M.Jr: I can do it at three thirty. Upham: All right. Fine. H.M.Jr: Huh? You want to do that? Upham: Yes, that's fine; I'll just step out and tell him not to come over now. H.M.Jr: All right. Upham: Excuse me. H.M.Jr: Harry? White: There is a draft of that ready any time today you want it. H.M.Jr: Will you give it to Mrs. Klotz? White: Well then - well, all right; yes, I'll give it to her. 83 - 3 - H.M.Jr: What about the map? White: That's being .... H.M.Jr: See that Mrs. Klotz gets that, so I can take it to the White House at lunch. The other thing, I don't want to take to lunch. What else? White: (Nods "Nothing.") That's all. H.M.Jr: Steve? Gibbons: I have written out the history of this Magruder thing, any time that ...... Mr. Gaston read it, and you told us to write out what's happened. H.M.Jr: Yeah. Gibbons: Any time you want it. McReynolds: (To Mr. Gaston:) Well, your memorandum - and you have his memorandum? Gaston: No, Steve has the whole thing, including my sup- plementary memorandum. Gibbons: I don't think there's any use of your bothering with it now. It's all brought up to date. H.M.Jr: Well, I'd like to read it. Gibbons: All right, I can leave it with you. H.M.Jr: Harry, give it to me. (Memo from Mr. Gibbons to Mr. White, to Mrs. Klotz, and she hands it to H.M.Jr.) H.M.Jr: Thanks. I'll take that home. Gibbons: That's all. H.M.Jr: (Nods to Mr. Hanes.) Hanes: You said you wanted to take up that National Resourses Committee suggestion. Regraded Uclassified 84 H.M.Jr: Yes. Let me tell you what's happened; let me tell everybody what's happened. During the past year, on various occasions, the National Resources Committee suggested that there be a Fiscal Committee appointed, of which I should be Chairman, Mr. Eccles a member, Mr. Douglas a member, a member from the National Resources Committee, the Director of the Budget. Mr. Delano was over here once, and we had quite a talk about it. Then on August 20, they wrote a memorandum to the President. The President asked me to speak to them about it. I just never had the chance. So on Friday I had Delano, and Merriam, and this fellow Ruml, for lunch, and Mac was there. I told them this: that as far as I was concerned, that if anybody thought they could help mc on fiscal policy that I'd welcome them with open arms, but that it was a very important matter, and what I suggested was a trial marriage, and that if the President was willing - up to now he never had been - but as we progressed on our budget and tax matters, that I would invite these gentlemen, informally, to come over and sit down with me, and I would explain to them, as we progressed - we'd be more than pleased to listen to their advice, and that nothing had been lost to date because we hadn't even had our first meeting with the President. If that was agreeable to him, I'd be more than agreeable to do it that way. So I am going to ask the President at lunch today whether it is agreeable to him, you see? What I didn't say to them, but I say to my own crowd - they mentioned it themselves - their own record of success hasn't been very startling. As they mentioned, they haven't even been able to settle where the Bureau of Forestry is controlled. Mr. Delano is head of the Interdepartmental Committee to solve the housing problem, and has never been able to do anything. But they are pushing, and there are able people on it; there are honest people on it. God knows, if I can get any help, I am more than pleased to get it, but I didn't want to formalize this thing. Regraded Uclassified 85 - 5 - Mr. Bell pointed out that under the law the responsibility is his and mine, and we wouldn't have the right to divide that responsibility, but we certainly have the right to consult. And the way I always feel, if the people down here helping the President think they've got something to contribute, why, come on in; the water's fine. So that's what I told them, you see? And I don't know how the President will feel. Up to now he's - he's showed me their memorandum on tax matters, and other matters, and he's always, for some reason or other, always kind of leaned backward. Whether he wants me to invite these people in and consult and confer with them, as the facts progress - develop, I don't know, but I am going to recommend it to him at lunch, and we'll see what happens. The only suggestion I made was I didn't want S. E. C. on it at the beginning, because I can't see what they could contribute. I said, if we, as we went along, came to that blind spot where we were always saying, "If we only had a representa- tive of S. E. C. here n that would be time enough to invite them in, but I can't see where they would fit in at the beginning. You agree? Hanes: I do, yes. H.M.Jr: Huh? And furthermore, I told them, in strictest confidence, every time we've had a committee with S. E. C. there's always been a leak; there's always some power (?) that's got it sooner or later. I know our experience on hot money, two or three years ago, when we were working on it, it wasn't very long before Mr. Gourrich - is that his name? Hanes: Gourrich. H.M.Jr: ... spilled the whole beans - the whole thing appeared. I don't know - I forget who he told it to, but he told it to somebody. We have always had that experience. Regraded Uclassified 86 - 6 - With the Budget we just can't have a leak, or with the tax program; it's too dangerous. I told them that in strictest confidence. I told them if every time we met on it, we thought, "Oh, if we only had a representative of S. E. C.," why we'd invite them over very quickly. That's where this thing ..... And tell Mr. Blaisdell - what's his name? Hanes: Blaisdell. H.M.Jr: Tell him where it stands. These people working with me, of course, will sit with me, and if Mr. Ruml, or Mr. Merriam has got something to con- tripute, swell. They're only going to send one person - didn't say who. I don't know how you feel about it, Mac; I didn't have a chance to ask you. McReynolds: Well, I can't see a lot in it; they set it up, a purely informal arrangement, calling them in as consultants, and incidentally, to which they all three agree. I see no danger to it. I think the matter of a formal committee - creation of a formal organization to take away from you and the Budget is a major responsibility that you have. Under the law I think it's out of the question. Hanes: Where had the suggestion come from? Was it com- ing from the National Resources Committee origin- ally? H.M.Jr: Mr. Delano personally came over, within the last twelve months, and tried to sell it to me. I think their idea is a very pretty one - that we plan expenditures; a question of looking forward; we ought to have a list of Public Works ready that we can uncork at the right time, and I take it, although he didn't say so, that while times are good, begin to cork the bottle up, and that pressure of prosperity in this country is hooked up with our spending money for Public Works. I think the idea, as I say, is a very pretty one, but unfortunately when you sit down with the President and get down to planning the Budget and the taxes, it's never worked out that way, and, as I say, I didn't want -"I appreciate the sincerity of you people," but I didn't want to 87 - 7 - be sarcastic, so I didn't say, "Why don't you first solve the problem of the number of acres Harold Ickes placed under irrigation, and the amount of new land that he furnishes in connec- tion with Wallace's program to grow less." there are I mean,/so many things that - when the engineers of the War Department create a new river, and open up a new area, that there is nothing there to maintain the area, or anything else. I mean, there are so many of these big broad national resources problems, which they never touch, but I don't want anybody to say that I think I know it all, because I realize how little I do know on the question, and if they think they've got something to contribute, ..... There are only so many sincere fellows in Washington, and I think these men are absolutely sincere. So if they've got something to boost the economists who work down the line under it, and if they think they've got something to help, why, fine. And instead of having Mr. Eccles go up on the Hill and talk against our program, and Mr. Jones go up and talk against our program, and Mr. Kennedy go up and talk against our program, maybe they will talk it over here. I don't know; I doubt that, but maybe they will. McReynolds: It will give them something more to talk about. H.M.Jr: I am willing to try it, because I realize we've got practically an impossible task, and we are talking about the spending program for 139-140, on the eve of election. And if they think that this pasture looks green, let them come on in and let them get indigestion the way I've had it; let them have acute indigestion. Taylor: Well, the worst you can get out of it is a net plus, isn't it? H.M.Jr: Yes. I can't - these fellows are sincere fellows; they are honest fellows; they are intelligent fellows. They think there is a great mystery about this thing. I'd be tickled to death to have them do what the President calls a "rule of thumb." 88 8 McReynolds: What you have proved so far doesn't go to the point of what they make In their memorandum, of building up a separate under the organization of this committee, to run - doing that will run alongside the Treasury's Budget. H.M.Jr: If the President's willing, and I am going to recommend it openly and honestly, I'd be delighted to have them come in and take a look at the great mystery of how we make the Budget. I'd love to have them see how we all get it fixed - if Wallace gets an extra half a million without our knowing anything about it; and while we're on this subject, we are going to see the President .... (few words misunderstood) ... back processing tax on farm products. You want to put that in your portfolio? You can just put that in your portfolio; we can just ask the President whether that's so or not. That's a good illustration, see? I don't want to be too sarcastic, but I've been through it now for four years, and if these boys have got some- thing to contribute, fine. Particularly interest- ing will be to see if this trend is going to be up or what are they going to do about Public Works. So that's that story. You got anything else? Hanes: No. H.M.Jr: (Nods to Mr. Taylor.) (Speaks aside to Mrs. Klotz.) (Nods to Mr. Taylor.) Taylor: (Nods "Nothing.") H.M.Jr: I spoke to both Eccles and Harrison last night about the possibility of refunding those three hundred million notes of the R. F. C. on the first of November, and I see that somebody has given out a story on "R. F. C. Note Issue Now Regarded as Probable,' so Harrison thought it was all right, 88 - 9 - and Eccles said he'd let me know Tuesday. Would you mind calling up Marriner and telling him I'd like to know by three o'clock today? On account of this story I think I'd better say something about it. Do you know how much it is? Taylor: Just under three hundred. H.M.Jr: Is it two and a quarter? Taylor: What? H.M.Jr: Is it two and a quarter. Taylor: I've got an idea it's two ninety-seven, or something. H.M.Jr: You haven't got the rate? Taylor: I've got that memo from Jesse. H.M.Jr: Jones was over here asking whether we could bor- row additional money; I told him, "No, this thing would look silly at this time for us to take on another three hundred cash." I told him to wait, and two or three-year money - when the R.F. C. notes were available we could borrow on their credit rather than ours, because all of our short term stuff is filled up. He saw that, and then he said, "What about my three hundred million which comes dues on the fifteenth of December?" I hadn't thought about it because he's always sold those to the banks over the phone. He suggested that we anticipate that, in as much as we'd expect to handle nine hundred million of our own. So I think we might just as well do it on November first and get it out of the way. There is no reason why Eccles can't tell us this afternoon. I mean, he doesn't need until tomorrow; might just as well do it. The banks all hold it anyway. Anything else? Taylor: (Nods "No.") H.M.Jr: George? 90 - 10 - Haas: I have nothing with me; there will be 8 few things come in during the morning. H.M.Jr: You are coming in at ten thirty? Haas: That's right. During the morning I'll have your business statement. H.M.Jr: And Taylor and Hanes are coming in. Haas: I have that material which you asked for. H.M.Jr: O. K. (Nods to Mr. Gaston.) Gaston: I have this letter to Senator Sheppard. This was drafted mainly by Mr. Oliphant, in consultation with Mr. Cairns and me. You want to go into it at all now? H.M.Jr: Yes, please. Gaston: Mr. Sheppard's letter said that in response to our various questions, said that our various regulations were not repugnant to the letter and the spirit of the law, but they did not cover the subject in that they did not make specific reference to Section 211 of the Code which forbids employees to give voluntarily, directly or indirectly, to an officer of the United States, a Senator or Representative, Delegate, and so on, who is a candidate for office. In this reply we are thanking him for his advice, but pointing out that we did circulate to the employees, in 1934, and again in August of this year, a Civil Service regulation which specifically calls attention to Section 211, and paraphrases that Section. There was nothing in the letter of Senator Sheppard's in criticism of the Treasury Department except that statement that they did not think our regulations covered the subject, in failing to cover 211. We are showing them that they did. Now that story in the Times, the head and the lead were entirely gratuitous; they were not based on anything in the Committee's letter at all. - 11 - 91 H.M.Jr: That's what I thought. You mind reading the letter? How long is It? Gaston: The letter is only a couple of pages. H.M.Jr: Let's read it out loud. Gaston: "My dear Senator Sheppard: "I have received your letter of October 7, 1938 in answer to my letter of September 9, 1938 and I appreciate your response to my request for your observations on the spirit as well as the letter of the law governing political contribu- tions by Federal employees. "Referring to your answer to my first question, I am gratified to learn that your Committee is of the opinion that the Treasury regulations are not repugnant to either the letter or the spirit of the law. Concerning your further suggestion in this connection that the Department's regula- tions should make specific reference to Section 211, Title 18, U. S. Code, I may say that United States Civil Service Commission Form No. 1982, warning against political activities, contains a specific reference to, and a paraphrase of, Sec- tion 211 (see copies attached). The Treasury Department on June 5, 1934 and August 23, 1938 circulated this Form to all the employees of the Department. "I am further gratified to note that your views in response to my second question coincide with the opinion in the Treasury Department that it is not a violation of the law for a Federal employee to make a voluntary contribution to a political party. Concerning your further observa- tion that contributions by Federal employees to any special committee promoting the campaign of a Senator or Representative would violate Section 211, that also has been the position of the Treasury. In addition, I am sure you will agree with me that your reference to such special com- mittee is a reference to but one of many possible devices prohibited by the term 'directly or indirectly' in Section 211. The instructions given to Treasury employees by the circulation of Form 1982 mentioned above were not limited to any single device. 32 - 12 - "Again I am pleased to observe that your Com- mittee's response to my third and final question merely states what, in effect, the Treasury De- partment stated to all its employees on September 10, 1934 in the underlined portion of paragraph 2 of the Treasury's regulations of that date: ":The instruction contained in said circular should not be construed: * # * 12. To prevent any such employee from voluntarily contributing to the campaign fund of the party of his choice, if such contribution is made freely and without coercion or improper solicitation, and is not made to a person in the service of the United States.' "I appreciate your cooperation because the subject 1s, as I have advised you, one in which I have taken a great deal of interest ever since I assumed my present duties." E.9.Jr: Now how do you think we can handle that Times matter, because it is certainly most unfair? What suggestion have you got? Gaston: I think 9.1.Jr: Alt - excuse me. (Short pause.) Go ahead. Gaston: I think about the only way is to call attention to the fact in a press conference that several of the stories were grossly unfair on this matter; that they introduced matter that wasn't covered by the Committee at all. Oliphant: You have done several things to prevent improper political activities, that's not been mentioned by the Committee. There's quite a lot of reserve ammunition there. I think it would be well, when the unfairness of these stories is mentioned, that you also give them some of the various things you have done. For instance, you prohibited - our regulations prohibited an employee being a member of one of these committees, and a number of other things where we have gone farther than the law requires. 33 - 13 - H.M.Jr: Could you have those ready by four o'clock? Gaston: Yes. Oliphant: Gaston has all these figures. H.M.Jr: Herbert, you've got to go further than a press conference. My thought is this, that you call up Arthur Krock and ask him to see you, and ask him whether he wants to handle it here, or should you go up on the five o'clock train this after- noon and see Sulzberger - one or the other. Because certainly, nobody in the Government has taken more pains than I have to keep politics out of the Department. It is grossly unfair - and prejudiced. McReynolds: Deliberate. Oliphant: I don't think any Department has taken as much pains as the Treasury Department. H.M.Jr: It's just a question of whether Krock wants to handle it, as head of the Washington Bureau, or whether he wants you to take the five o'clock train and go up and see Sulzberger. I'd like one or the other. Gaston: All right, I think that's fine; I'll call Krock. H.M.Jr: If Krock will handle it, it's all right; if he won't you call up Sulzberger and tell him you're coming up on the five o'clock train, and will he see you. I'd just as leave call him myself. Gaston: You want it definitely handled, one way or the other. H.M.Jr: I want it positively handled; have the handling of this with the President's handling of the Administrative changes in Wallace's office. Wallace makes a change and he gets wonderful newspaper cooperation. Here we've got a record which is better than any other Department's in Washington, and we get this sort of thing. Now it's a question of public relations; it's a question of handling it right. The Times writes a thing like this, and the Star writes that 94 - 14 - Gaston: cartoon. H.M.Jr: cartoon, and everything is picked up over and over, Taylor: Did you read Ernest Lindley this morning? H.M.Jr: No. Taylor: You ought to; you'd like it. H.M.Jr: Well, you get it for me, Mrs. Klotz. I want it either - I don't want Krock to say we went over his head and didn't give him first chance. If he doesn't, then you take the five o'clock train and go up and see either Sulzberger or James. Gaston: The Tribune story was also bad; it wasn't as bad as the Times though. I am just wondering if somebody in the Committee didn't suggest these ideas to them. H.M.Jr: Possibly. Possibly. I mean, where we've got a clean record - I mean, I've been so careful not to compare this Department with any other Depart- ments in Washington, because that wouldn't be fair; that if the Committee is so holy now, why don't they ask for the rules and regulations of every Department in Washington. I want to get four years of work and repute over that there is no Department in Washington that's been handled as carefully as this has been, politically. I don't want to let it go. I feel this very keenly, just to see four years of effort go down the sewer because the Times takes this position. Oliphant: I agree with Gaston - the handling of this specially, but I also think we've been a little modes. You've got a record here on this thing - it's as clean as can be, but you haven't told it to anybody. I'd like to see in black and white a statement of all the things done to keep politics out of the Treasury. H.M.Jr: Let's do it Regraded Uclassifie 95 ST I I Gaston: I don't know a feature of it that hasn't been covered pretty extensively in the papers. Gibbons: I think Herman is right. No other Department has had the nerve to do what you have done. H.M.Jr: All true, Steve, but we can't say we are better than the next Department. Gibbons: No, no; just recite what you have done, or have somebody - have some columnist write what you have done. H.M.Jr: It's got to be done; you've got to start right with the meanest one, and that's the toughest. Taylor: Don't you think it could be handled in the form of a letter, either from you or from somebody else in the Treasury? I think, to the Times for instance, Steve could do it. Gibbons: I think we could get Arthur Krock to. Taylor: Herbert could do it, or I'd be glad to do it - "As a personal experience," and give the record. H.M.Jr: I don't pretend to be an expert at this; Herman and Gaston are, and I want him to concentrate on this thing and handle it, see? I appreciate it, Wayne; it's all right. When he gets through, I don't want to be in position for Krock to say, "Why didn't you give me a chance? I'd have handled it." The person to handle it is Krock. If he doesn't want to handle it, I'd like Sulz- berger to know about it, but I don't - I mean, the person to do it, and think about it, and concentrate on it is Gaston. Gaston: Krock is spiteful; he probably will handle it in an unsatisfactory way, but I agree with you that we ought to go to Krock first. Oliphant: I wouldn't want Krock to handle it. H.M.Jr: He did mention it once before, and it wasn't too bad; he's handled this Sheppard thing once before. 96 - 16 - I don't want Krock to be in a position to say, "Well, I am the manager of the Washington Bureau; why didn't they come to me first?" Gaston: Surely; that's right. H.M.Jr: And if you tell Krock that I want Sulzberger to know about that, he will put it right on the wire to Sulzberger; he'll enjoy it. I want him to see the head; I want him to see Sheppard's letter, and our answer. And then just let their editorial board of the New York Times just read those two things and let them decide. I mean - that is, I just want - I want Sheppard's letter and my answer brought to the attention of the editorial board of the New York Times. Gaston: You see the Magruder thing isn't involved in this at all. H.M.Jr: Will you take it? Gaston: Yes, but N.M.Jr: But I'd like it done today. Then we can give this out at four o'clock. Gaston: Yes. H.M.Jr: Then we'll also get a list of (talking too low to hear.) Oliphant: Get that in black and white. H.N.Jr: Pardon? Oliphant: Get that in black and white. H.M.Jr: Yes, by four o'clock. Will you see it (letter to Senator Sheppard) goes up by hand. Gaston: Yes. H.M.Jr: No, I appreciate, Wayne, awfully, but, as I say, I get off my chest how I feel about it; anybody that's been with me knows how meticulous we have been here, and it gets down to a question of selling it; now, that's Herbert Gaston's job. 97 - 17 - Taylor: All right; you think it over. I know what I have suggested; I think that may be the form in which it H.M.Jr: It may be. Taylor: in which it can be utilized. H.M.Jr: You've been here long enough to know. For instance, if I call up Sulzberger, and don't speak to Krock, and Krock gets sore- and he has an excuse to be dirty - he most likely will be dirty anyway, but I don't want to give him any excuse to be dirty, see? He most likely will be dirty about it anyway, but, ah - Taylor: I think, if I may make another suggestion, if Herbert will talk to Krock from the standpoint of how to handle it, rather than whether he will or not, he will get better results, don't you think so? H.M.Jr: Well, we know Krock. Gibbons: Well - if you can depend on him. H.M.Jr: Yeah. Well, I Gibbons: Our last battle was on this fellow McGrath, with Jinmy, you know - the Collector up in Boston, and then to have a thing like this come out H.M.Jr: And what I went through with Senator Roy (Robert) Bulkley, in Cleveland. Gibbons: You can go right on through the line - Buffalo, Cleveland, Detroit McReynolds: and Newark. Gibbons: Newark. H.N.Jr: There is a whole list. Gaston: There's two California men we compelled to resign from the Young Democratic League. It wasn't a clear case of being a Barty committee, or a committee which solicited funds, but we made them resign. 88 - 18 - H.M.Jr: We run up against the Duffy machine twice - the fellow in Philadelphia - what's his name? Gaston: Fix. H.M.Jr: Fix. And this fellow Dave Lawrence; Dave Lawrence resigned and became his campaign manager. Gaston: Joe Wolf, at St. Paul, resigned as Collector of Internal Revenue. H.M.Jr: Seventeen (or twenty-seven) men and women have resigned political positions since I cam in - members of the National Democratic Committee. Gibbons: They were all collecting money for the Treasury, and at the same time, collecting money for the National Democratic Committee. Gaston: You've got to remember this, if the newspapermen all know that - and this whole thing is an effort to show that the Department in the Government which is the cleanest in political matters - they'll try to hang something on the Administration by attacking something on the political side and attempting to show them up. H.M.Jr: I still believe, and I'm willing again to be a pollyanna, if these facts can be brought to the attention of the editorial board of the New York Times - that's what I want - editorial board of the New York Times, and let them decide. I think I'll get a fair deal. Gibbons: I think you would from the Tribune. Oliphant: I think Gaston is probably right. The newspaper men know of these individual cases, but the cumu- lative effect of sweeping them all together - that's the story. Gibbons: This is just the news - what happens. H.M.Jr: Well, please make it number one, Herbert, will you? Gaston: Yes - surely. H.M.Jr: 0. K. Mac, will you stay, please. 99 BE BUDGET October 10, 1938. 10:30 8.m. Present: Mr. Hanes Mr. Taylor Mr. Bell Mr. Haas H.M.Jr: We'll start with Professor Bell. Bell: Mr. Hass gave me a figure on Saturday of - quite rough - and the revenue for 1940 is estimated at $4,850,000,000. H.M.Jr: Four billion now much? Bell: ....850 million dollars. U.M.Jr: For what year? Bell: 1940. As compared with $5,000,000,000 for the fiscal year 1939. I understand in that estimate there is an increase in miscellaneous revenue of about $250,000,000 and there is a loss of $400,000,000 in income tax esti- mated, so - making a loss for the year of about $150,000,000. Now for the fiscal year 1939 we estimate that we'll spend on everything $8,985,000,000, giving us a deficit of $3,985,000,000. Of that $8,985,000,000, $2,149,000,000 represents WPA. When we come to the fiscal year 1940 - and this is 8 rough expenditure estimate based on the appropria- tion estimates now in the office adjusted by some of the systems - tue regular expenditures, including some of the public works, will amount to about $7,400,000,000, or $600,000,000 above the regular expenditures for 1939. Of course, ne have no estimate for WPA for 1940, but I just put down a figure of a billion aná a half collars, making $8,926,000,000 for the fiscal year 1940, which is just about the same as 1939, leaving a deficit of $4,076,000,000. Now, those are very rough figures, and it may be that we can get that expenditure figure down some; but we can certainly expect a substantial increase in the regular departmental expenditures in 1940 over 1939. H.M.Jr: It's good you (Hanes) had your stomach ache Saturday. 100 -2- Hanes: Got another one now. H.M.Jr: Well Bell: This brings it down into the pit of the stomach. The WPA figure I just stuck in there. I don't know what that will be. H.M.Jr: Danny, is that last figure for 1940 - is that for the fiscal year beginning in July of next year? Bell: Yes, July 1, 1939. Hanes: Uh-huh. That shows a budget deficit of approximately what? Bell: four billion 100 million, say, in round figures. Hanes: AS against three billion 800 million? Bell: Three billion 985. H.M.Jr: Practically the same thing. Taylor: Roughly hundred million increase. Bell: Hundred million increase in deficit over '39, which is accounted for by loss in revenue, practically. See, I've taken the same - I've taken a billion and a half WPA, which is 649 million less than is contem- plated to be spent this year, but that figure can very well be two billion before we're through with it. H.M.Jr: Well, when you say four billion 850 revenue for '40, you're figuring as though there were no change in the tax bill. Hous: That's right. I'll tell you, if you want a rough idea of it, what we're figuring on business activity. H.M.Jr: Yes, I do. Haas: This is just a working thing, Mr. Secretary. We have to go over this thing cerefully again. But here's 101 -3- about what it looks like for the calendar year - on the Federal Reserve Board index, calendar year 138, 82; calendar year '39, 87. H.M.Jr: This is average. daas: Average on FRB. And the fiscal year 139, FRB would average 86; for the fiscal year 1940, 91. In order to get these averages, here's how it would look each month. Gets up to 98. - Bell: What was the low in '38? Haas: 76. H.M.Jr: That's very conservative. Bell: I think so too. Taylor: 91 for fiscal '40. Bell: 82 for '38. Hanes: Supposed to be 90 this month. H.M.Jr: It's - well, it was 90 for September. Hanes: Oh, for September. Haas: That's their guess on it. Hanes: That's their guess, but it isn't accurate yet. Haas: It'll be around there. Bell: You mean end of September; doesn't average all the way through. Haas: Youget the month of September. We just stuck it. in that way. It may come out - the first figures are more optimistic, but it may work out about 90. Bell: I should think 82 would be very conservative as an average for calendar year '38, and if things continue I should think 87 for 139 would be. Heas: Yes, our figure - this five figure that we've got - we'll probably get more than that. 102 -4- H.M.Jr: Five? Heas: You know, the five billion figure for '39. That's conservative. I think we'll be happy we made it that way. H.M.Jr: I'll never forget when I went over to the President - went over with two figures, one based on an average of 90, one on an average of 95 on Federal Reserve. I recommended 90. If we took 90, it would have meant that the deficit was just over one billion dollars, see? So he says, "No, I'll take the figure 95, because it looks better to have a figure under a billion dollars." But your figure of 90 - was 90 for the year, this fiscal year - is not going to be very far off. But I think that beginning from January 1 on - I think it will be well above 90. Haas: I think the five billion estimated for this fiscal year will be low. That'll be good. And this is probably a little on the conservative side. But I sort of thought - I mean for 8 preliminary, better to start that wey. Bell: I do too. H.M.Jr: How much public works in the seven billion four have you got - for public works? Bell: Five hundred million. That's Ickes' stuff. H.M.Jr: Is that all? Bell: That's - there's the general public works of about 600 million, which is continuing projects. H.M.Jr: but you've got new in there 500 million. Bell: That's part of the billion dollar program this year, and what's hanging over from last year. H.M.Jr: Let's call it - how do we get a nine billion dollar program for next year? Seems terrible. Bell: Let me tell you something. H.M.Jr: God, it just seems .... 103 -5- Hones: Let's see where you get It. Bell: We've got. 8 25 million dollar increase in the Civilian Conservation Corps; that's assuming they're going to keep the same number of camps. I don't think you cen get rid of any. Got 5 hundred million dollar increase of expenditures on account of Ickes. Next year we're going to feel the brunt of this problem. $36,000,000 in Railroad Retirement Doard; $38,000,000 in Rurel Electrification. $75,000,000 in United States Muritime Commission; now that may come down some, but they 've got a lot of ships. $3,000, 000 in Veterens. Then your Agricultural Adjustment program; 8 nundred million of that repre- sents these parity payments, and if they're not going to be made this year they'll nang over till next year -$212,000,000. $200,000, JJJ for form enancy. May cut that. 35,000,000 for your general public works. Jr: How much for general public works program? BRIL: 435,000,000. Be 8 substantial Increase In general public works program because of action Congress took last year - flood control, rivers and narbors, so fortn. $8,000,000, Department of Commerce. Now, Department of Commerce lost Aeronautics, but tuey gained $20,000,000 for Census, so they 're up $8,000,000 net. Interior 15 up four - very small. Justice is up six. Havy Department is up 123 million. Post Office deficiency will be up ten. Treasury Department's up 129: 57 million on interest and H.M.Jr: Where's the other? Bell: 24 million on refunds and about 50 million old age reserve. Regraded Uclassified 104 -6- War Department's up $28,000,000, which is very small, because War Department's increasing very fast. There you are, They just add up, and add up big amounts - 75 and 100 million dollars, quick. Every department is on the increase. H.M.Jr: What are those pretty pictures there? Bell: And they've got good justification for it because of additional laws. Hanes: Something - you mentioned here one day that you'd like to see a picture of what the various steps of the revenue would be in case the national income did go to a hundred billion dollars. So George Haas has been working and figuring as a base - George, you better explain this. Haas: Go ahead. Hanes: He's taken this, say, as the base. This was actual - this is where we were: 60 billion income, 82 for the Federal Reserve Board index, and 80 for the Bureau of Labor Standards wholesale prices. H.M.Jr: What year is that? Hanes: This is 1938. Haas: Just hypothetical. Hanes: Hypothetical, not the actual. But that's what we believe 138 will be: estimated revenue, four billion 982 million, including payroll taxes. H.M.Jr: Yes. What's this? Hanes: This is based on & 70 billion dollar income, with the Federal Reserve Board index at 108 and the Labor Bureau prices at 85. H.M.Jr: Excuse me - is that a sign - if that's 70, that has to be 108? Haas: No, the reason I put these others here, Mr. Secretary - several combinations of these things and other factors 105 -7- would give 70. H.M.Jr: I see. HABS: But that's to give some idea of what combination we took. AS a matter of fact, see, even to get up to 8 hundred billion dollars we had no inflation from - that is, no increase - get that much increase in production; if you had some inflation this curve would be way up here, because of price increases. H.V.Jr: In other words, wholesale prices can go to B hundred. what year is that based on? Haas: we took a decade. Hanes: Next ten years. H.M.Jr: Production would have to go to 149 in order to get a hundred billion dollar national income. Haas: with prices only going to there, to a hundred. H.V.Jr: And then you show down there .... Hanes: That's the percentage that the various taxes yield. Income tax this year would be 36 percent, this mis- cellaneous revenue 40 percent, and that's the percentage under those conditions. This is the percentage with the hundred billion dollars income; income tax would go to 43 percent, 29 percent for miscellaneous. H.M.Jr: Just let's - excuse me, and we'll go over this again - supposing we had E 70 billion dollar income. How much revenue would that produce? danes: Six billion seven. H.M.Jr: I get you. That's very nice. That's the whole pic- ture. That's swell, George. Hanes: It seems to me that the answer to this revenue problem from both ends - both the expenditures on one side and the income on the other - is that increase in national income. If we don't get that, it's going to be an awful nesdache to raise the amount of revenue necessary. d.V.Jr: That's El swell job, George. 106 -8- Taylor: At 80 you get off the nut. Hanes: Well, you balance before 80. Taylor: Approximately at 80 you're off. Hanes: From the fact your extraordinary expenses would come down because of the unemployment relief program. Bell: You mean you'd balance the budget if you got rid of some relief. Hanes: You would automatically with an increase in business cut down your relief. Bell: In theory you should. H.M.Jr: Well, you would. Hanes: We're being somewhat theoretical, naturally. We're dealing in guesses. This is the same thing with the actual revenue of the Treasury, leaving off the payroll taxes. You see? This is exactly the same thing, except that we just leave off the payroll taxes, assuming that those payroll taxes are going to be put in trust funds. H.M.Jr: And inasmuch as the payroll taxes wash each other out. That gives .... Hanes: That gives you the true picture. H.M.Jr: This is better to show to the President. I'd show nim that one first. Hanes: You might leave that other one here entirely. Leave it here. H.M.Jr: I think - I mean the purpose of this is a dress rehearsal, and Dan can check me - I mean if he's only allowed a half hour, we get in there 20 minutes late, so we get just - get ten minutes. I'd just show him one. What do you think? Hanes: It's nice to see what the result would be. But that has really the true picture there. 107 -9- Bell: "hat's the difference between them, again? Heas: Took off the payroll taxes, both Railroad Retirement and Pocial Security old age. Bell: I see. O.K. H.M.Jr: *hey wash each other. DO might just as well, Dan. What? Bell: That's all right. Now, how much trouble is it to do these things by tens - Federal Reserve index? Haas: Well, what we did it by, Dan, was by the national income. We can do it by fives; if you want the national income then we'll get another figure down here for the production index and the price index. Henes: Take your production index at about 100. Bell: These have to have some relation, don't they, anyhow? See, what I had in mind, Mr. Secretary, in writing a story sround this table, was to say that when the Federal Reserve Board index is at 85, we ought to get an income of so much - that is, taxes - and when it's at 95 we ought to get so much. H.N.Jr: George's way - instead of that you talk in terms of 70 billion, 80 billion, 90, 100. Bell: That might be better. Taylor: I think it is. H.M.Jr: I think if you make it 75, it's too much to break it down. Bell: No, I'm not thinking of bresking that down. That's probably better, to do it this way. Rather than putting this (national income) in multiples of ten, I think - was thinking of putting that (FR index) in multiples of ten. H.M.Jr: Of course, the Federal Reserve index is something - I can hear the President - "a man on the street 108 -10- doesn't understand, but he does know what 60 billion dollars 1s." Haes: And your taxes, Mr. Secretary, based on .... H.M.Jr: George, that's 8. beautiful job. Hanes: Danny, when you get to 70 billion dollars income - take 1937, when you had a 69 billion dollar income; the Federal Reserve Board figure was 110, and this figure was 86. Bell: Yes. Hanes: So that figure - and we produced six billion 200 million dollars of revenue. No we didn't either. Six billion two less your security taxes. Bell: Had five or six hundred million dollars. That isn't far off. Haas: You can't compare that exactly, because you have 8 lag in taxes. There is no lag here; this is tax liability. Bell: But it isn't far off. Hanes: That picture is about right, because if you take off from six billion two your security taxes you'd be right back to five billion 558, wast that figure shows. Bell: After these are thoroughly checked, is there any objection to using a thing like that publicly? Haas: Well, here's one objection to using it, but it may not be serious. Before we have used it publicly, I'd like to get a group of some other people down and try out some uestions I had in my own mind about it. Hanes: I've got some questions too. I wouldn't do it yet. We just started this. Bell: I mean for the budget message, see, in January. H.M.Jr: Being checked by able people, there is no reason why I think it's - I've never seen it more clearly put on one page than that. You'd have a Regraded Uclassified 109 -11- month to check - two months to check this thing. Haas: Here's the kind of thing Taylor: Still be using the same principles and same type of presentation. Hanes: Just a question of getting our economy back on a basis where we will yield the revenue and cut out the necessity for this relief; that's all there is to it. H.M.Jr: Well, I'd - let me put it. That's one attitude to take, see, that we've just got to sit back and see until this thing comes up to that point, and then these other things will naturally slough off, see? There's another viewpoint to take - I mean I'm not saying I'm taking it - and the other viewpoint is that you accelerate recovery if, for instance, in Hopkins' case he stops, say, taking on any new men from now on, which means how many thousand - natural turnover would be Bell: Well, it's probably five percent a month, the turnover. H.M.Jr: Well, I mean that, for instance, if he just took no new men on relief, his payroll would go from three billion one - go off to 100, 150 million a month. See what I mean? I mean gradually let this thing - not lay off anybody, but just not take on any people. that's the way we handled it before, see? Bell: And you might have to freeze it for - freeze a certain figure during the cold months, take on enough people to take up the slack. H.M.Jr: Incidentally, isn't he running way behind his Bell: Oh yes, I asked Colonel Harrington the other day - three million, one hundred and some thousand, as compared with an average of two million eight. H.M.Jr: Of course, we've always got to be practical, and I don't think there's much sense in putting up B holler on this until the day after elections. Regraded Jclassified 110 -12- Bell: That's right. H.M.Jr: But I just wonder - I'm thinking out loud; this is the first time we've sat around the table - one alternative is that we simply - the Administration does everything to increase the national income to E hundred billion dollars, and we admit from now on it's going to cost nine billion dollars to run this government, see? The other attitude is that if we've got recovery now and are going to spend 600 million dollars for public works anyway, way put in another 500 million on top of that, you see, and why not I'll bet you a nickel that if I went in to the President of the United States and showed him nothing, just said, "Mr. President, what's in your mind the uppermost figure that would run this government next year? Let's each write it down" - I bet you he'd put down about eight, huh? Bell: Probably. H.M.Jr: Ge'd put about eight; and I just wondered whether eight wouldn't be a good mark to shoot for, - it's nine this year - whether we're asking an awful lot If we ask them to trim this thing a billion dollars. Dell: You can't trim it to eight next year if he has any sizable amount for WPA. Can't be done.' H.M.Jr: How much you got in there for Agriculture? bell: Got too many things started. H.J.Jr: How much you got in there for Agriculture? Bell: 4% billion 370. B.V.Jp: Well, if he didn't give .... bell: That's asngover, a lot of it. H..,Jr; But supposing he didn't give Ickes anything new. Bell: I'm in favor of thet. H.d.dr: And just gave Agriculture 500 million dollars. Regraded Uclassified 111 -13- Bell: Well, it's all right to talk about giving Agriculture 500 million dollars 88 an appropriation, but Agricul- ture nas got funds that are available in 1939 that will not hit the Treasury until 1940, and that's where you're stuck, And that's also true of Ickes. It's also true of your general public works program. That's to the extent of almost - the three put together, about eight or nine hundred million dollars. H.M.Jr: All true, Dan, but I'm just - all the more reason - I mean if you want to get this thing down How much are we committed to for Agriculture without - before we vote another dollar, and public works? Bell: Well, I haven't got those figures. H.M.Jr: This is 8 great surprise to me. I didn't - I didn't taink it would go over eight, had no idea it would approach nine. Bell: Of course, you've got à billion and a half WPA in there, you know. H.M.Jr: I know, but even with that And then there's the other thing, question of whether you don't want to wait for recovery, and do you want to increase the taxes? Hones: or course, every time you increase the taxes, you just delay getting to that real business recovery just by that muen, that's all. You're just taxing where you're weakest every time you raise those taxes. Now the smount of tax Increase that's going to be required if you're going out to raise seven billion dollars - it's going to out a S.M.Jr: Have you got some pletures on it? Hunes: Yes. I haven't got any charts showing it, but I've got BY rough outline of the figures. where - what would you do? Hunes: You'd get it from your individual income tax by raising from one billion one to two billion. That's one. You'd get it from your estate and gift tax by raising from Regraded Uclassified 112 -14- 400 million, which is the present yield, to about a billion. That's where your two large Increases come; that'll give you practically your total increase, d.M.Jr: You mean it will give you two billion more? Hanes: Give you two billion more. You'd have to raise your corporate flat tax probably to 21 figure of, we'll say roughly, around 20 percent. 11.2.Jr: What is it now? Hanes: It's about 163 percent flat now. But that involves also the taking off of your capital stock tax end your excess profits tax, which ought to come off really, because it will do more to stimulate your industrial mind than anything else. Not paying less dollars; actually paying more dollars, but in E very much more painless way, and not doing crystal-gazing such 85 he has to do now in trying to estimate what his capital stock is worth based on his earnings for the next three years. No human being can tell you that, and everybody in the Treasury is agreed that those two taxes - I say everybody; Ros and all the staff back here are agreed that those taxes ought to be removed, and we ought to. No one thinks we're going to get any less tax bill on the corporates, and the corporations themselves would be delighted if you would take those two taxes off and raise the other tax even as much as three and a half percent - on the flat tax; SO they would pay more dollars, but it'd be very, very, much less burdensome. Now that would give you approximately seven billion - give you approximately seven billion revenue based on - based on our present tax structure. That cells for the renewal of your exioses and so forth. We're getting now out of your excise and miscellaneous taxes - we're getting 600 million dollars. This calls for E. slight decrease, taking away some of the ones that don't produce much r evenue but are terrible nuisances. Whether they will just want to renew them in block or not, I don't know. If they do, that will bring you a hundred million dollars more. H.M.Jr: Well, supposing the President asks you this. Bell sits on the budget side. And let's just say he says, Regraded Uclassified 113 -15- "All right, it's nine billion dollars." Then he turns to either you (Hanes) or me and says, "Do you think we should increase the taxes?" What would you say? Names: Well, personally, if I hed my way about it, I'd say that the way to get that revenue was out of the estate and gift taxes and out of the middle brackets in the income tax. Now, that's not going to be popular politically, as you all know. And lowering the exemption from 82500 to $2000 and from 81000 to $800 - it's going to bring about six million more people - variously estimated from four to six million people will be included in the next year's tax bill, as against the present very much smaller number than that. We had last year total taxes - total number of income taxes submitted were about seven million; that includes 500, 000 of your corporate income taxes. or tast smount about two and a nalf million paid tax. This would bring about four million more people in the tex bill; that's not going to be popular with the Congress, you know as well as I do. That first bill be comes payable in March of 1940; now you know - and that being the election year, that's not going to be popular, for when a man thinks, "Well, great God, I'm bringing four million more people in this income tax" - that's not going to sit well, is it, Danny? Bell: I shouldn't think 30. H.M.Jr: well, estate and inheritance tex wouldn't bother them any. HADES: I don't believe it would bother them any. But that would call for B lowering of your present exemption, probably of $40,000 - your present exemption - call for 8 lowering of that present exemption. H.S.Jr: That wouldn't make an awful lot of difference, would it? Taylor: Got an awful big increase from 400 to E billion. Hanes: Yes. Taylor: That is, I don't - I think it will sit vll right, but I just wonder whether you're going to get that. Sounds like en awful big increase. 114 -16- Benes: VI course, the Income tax sounds like a big increase; it's a hundred percent increase in the Income tax too. That isn't going to - that isn't going to sit well with the population. Don't think for B minute they're going to jump up end creck their neels over that one. And when you take the four million people you're going to adu to that bill, there's going to be hell raised, no question about that. But after ell, you've got the problem. Here's the problem: now we going to raise seven illion dollars? That's the problem. And you've only got a few places to 00 it. You've got your liquor tax. There's B. lot of people think the liquor tax is SO high now that you're encouraging bootlegging. R.M.Jr: I do. I was opposed to the raise of the quarter. I didn't want it to go above two dollars. Banes: There's a lot of bootlegging going on, of course. That will continue as long ES it is profitable to blockede. H.M.Jr: Have you got in your problems the consolidation of the estate and inheritance tax? Hanes: We've been studying that thing for a long time. Personally, I'm in favor of moving that gift tax up closer to the inheritence tax. There's a lot of opposition to that, nowever. There's B lot of people say that they want to encourage gifts during lifetime, don't want us to have that tax same BS the inheritance LEX. And there's no - I don't think the minds in the Tressury are met on that subject et all. But you see, here's what it would involve to raise two billion dollars from this income tax. You start off with a 10 percent tex at your lowest tex against your present lowest of 4 percent, and you go straight away at two thousand dollars to 12; two to three, to 14 sgeinst your present 4. Your nighest tax now - I mean your lowest tex, is four and you jump to eight on $5,000. Well, we jump to 18 percent on $5,000 income, and it takes It rignt straight on up to your 70 percent bracket; it's just a tremendous increase throughout that whole middle bracket of income tex. Bell: Lower the exemptions? Regraded Uclassified 115 -17- Hanes: Lower exemptions from $2,500 to $2,000 married, and single to $800. That'll bring approximately a million five hundred thousand new people under the income tax. H.M.Jr: You lower the married from $2,500 to ... Hanes: ... $2,000. H.M.Jp: And the single? Hanes: 800 from a thousand. H.M.Jr: Of course, I've always felt .... Hanes: You see, that's not a thousand dollars total income, that's a thousand dollars of taxable income. That doesn't mean, of course, .... H.M.Jr: I always thought, unless you do that - I mean unless we increase the number of people that pay the tax - I mean we'll never get anywhere. I mean I don't do it so much for revenue purposes as I do to make these people tax-conscious. Got to make them tax-conscious. I think LaFollette's absolutely right on that. Hanes: He only missed it by one vote in committee last time, I think. Bell: Trouble with it, it's a little late. H.M.Jr: He had a favorable vote, then they knocked it out, didn't they? He did it while they were at lunch. Bell: In the committee. H.M.Jr: Is that what it WHS? No, I think on the floor of the Senate. Taylor: On the floor of the Senate. H.M.Jr: Yes. Hanes: Well, you've got another problem facing you there too. You've got 950 million dollars back taxes due on - under your processing tax alone. H.M.Jr: Which isn't worth two cents. Wight just as well write it off and lay off the people. I mean I've heard Wallace Regraded Uclassified 116 -18- Bell: Can't write off the refunds, H.L.Jr: Wallace started tast he was going to get what, 150 million on that? What? Then he steadily dropped it - wasn't it 150? - and we've gotten what, 6 or 8? HERS: Yes. Hahes: No, I say I don't know what your total refund bill is going to be. Dan is figuring on some more refunds next year. Well, those - there hasn't been but some 16 million dollars refunded under that 950 million dollars of claims, and some time in the next two years you're going to have a lot more refunds on those processing taxes. H.W.Jp: George, whatever happened to that study I asked you and White to do over the summer as to the possible ceiling of the national debt? Remember? I asked you and Harry to do me a job on that. Hass: on, in the connection that you might make a speech or something. H...Jr: Yes. libes: Well, we put together a lot of material on that. Have to gatner it up now. H.V.Jr: Will you? Not for a speech but for this. I mean the question Hnns: That thing was started on that basis. M...Jr: Well, the President will say, "All right, Henry, can you finance another four billion dollar deficit?" He's got El right to ask me that question, see? dones: There's been en awful lot written and a lot of guesses made on what the ceiling is. I'm sure I've never seen one that impressed me. Taylor: Just picking it out of the air. Bell: There isn't any. H.E.Jr: I'm just tainking. I mean I've - I'm not going to do it - never have - never going to go over there and Regraded Uclassified 117 -19- run the baby act or pound the table, neither of which are effective, as Dan knows. And I don't know - want to make any statements to frighten him which I don't believe myself; but supposing he turns to me and he says, "Well, what are you worrying about? Can't you finance another four billion dollar deficit?" How about it, Wayne? Taylor: (Shakes head doubtfully) Bell: Well, whatever he says or decides today, you've got to finance snother four billion dollar deficit. Whatever taxes you levy won't come in until '41. 140 is over the dam, it's gone. danes: Here's snother thing bothers me like the dickens: this terrific bill that comes from the states and the sub-divisions. Now, we took out of the community last year about 12 billion 700 million dollars. H.M.Jr: For what? Banes: For taxes. H.M.Jr: You mean state and local texes. Banes: Poth. H.M.Jr: How much? Hanes: 12 billion 700 million, out of 60 billion income. H.M.Jr: You mean exclusive of national? Hanes: No, total tax bill for government. H.W.Jr: Is how much? Banes: 12 billion 700 million. H.M.Jr: Where do you get that figure? Bell: Better than 2J percent, adding Federal revenue in, state revenue, end sub-divisions. 12 billion 700 million. H.s.Jr: What percent is that? 118 -20- Hanes: It's a fifth. Bell: Better than 20 percent. H.M.Jr: Good figure. I just never heard that figure before. Hanes: Now, when you're talking about raising seven billion dollar - now the states are talking about raising ten; that's 17 billion dollars out of 60 billion, say. Well, my God, that's & luxury we just can't afford, that's all there is to it. Just comes a point where you can't go any further. You can't extract that much money. H.M.Jr: Well, I'm putting it a little differently. You say you can't extract it from the tax side, which for the moment is - I mean is your responsibility. You know what I mean when I say that. Hanes: Yes. H.M.Jr: on the other hand, can you extract another four billion dollars out of these boys? Hanes: I don't believe anybody in the world can answer you that question today. The thing will happen like nappened in 1929, when we were extracting from the economy billions of dollars for new investment, and all of B sudden they just said, "It's enough, it's gone too far." H.M.Jr: What year? Hanes: 1929. And calamity hit us then, when we thought we were in B new era. Well, I've never seen anything by way of the ceiling on this Federal debt which impressed me at all as having anything concrete. It's a guess. H.M.Jr: What we're doing, John - the Government is extracting it now instead of private industry. Hanes: That's right. And I Was saying, "Some day you'll extract until somebody 17 Bell: ... somebody says, "That's enough." Regraded Uclassified 119 -21- Hones: V somebody says, 'That's enough. It just spreads like wildfire. Banks quit buying, bonus go down, and we're in a mess. B.M.Jr: what we had last January - we had a balanced budget, we nad a picture When I made that speech on November 11 last year, we were just approaching the place where I hoped that private industry would take it up. And along came Mr. Tekes with his speech, Mr. Jackson with nis speech, and those two boys, I think, are ES much responsible as anybody for knocking the thing into a cocked hat. I don't know whether you (Hanes) agree with me or not. dones: I agree with you. d.V.dr: But we were right et that point - take what we have now - take the fact that our inventory turned in November - the inventory picture began to get better last November; that's what George's figures show - and the thing turned, and if that thing would have come, private industry would have begun. We were on E cash besis - we were balanced on a cash drawer basis. But then those boys just came elong and I think those two speeches just knocked the thing into 2 cocked nat, and & special session of Congress and everything else. But I don't see any encouragement for private industry if they see staring in their face another four billion. Now, the only thing that I can see out of this thing, Dan, is, if we do this with the President, and I think he'll go along - I haven't said a word to him, see - tast if we do this again, I'll say, "Look, Mr. President, we don't know - Let's do the same trick we did again; let's only put in a billion for relief and see now Lung it goes. You've always said you don't know now far it's - you're not going to let anybody starve. Det's only pat down ès billion. Let's see waere me are next Harch or April, and try It." I don't taink I'll get snywhere. "Don't put down snything for public works; you've elready got 600 million dollars. And only put in 500 million for Agriculture. Let's see wast happens." Now, Wallace keeps stying - I think ne argues that in our present five billion of taxes, 500 million is Regraded Uclassified 120 -22- really earmarked for Agriculture, and Marvin Jones ergues that way. What? Bell: Marvin Insists that it's 620. H.M.Jr: Well, Christ, for my sake - I don't care, but I mean for this - I mean in this room. bell: That's right, in this room. But I care as far 83 Marvin is concerned. H.V.Jp: In this room it's 500; as far as Marvin, it's 500. You and I are together on that. I'm just trying to think out loud. I say, "Why don't we do this, Mr. President. See, we've actually got nothing to lose. Say 500 for Agriculture, at billion for relief, and nothing for public works, and explain that we're in the midst of an upswing, that you're trying to guess 18 months at & time, and that you will take snother look at this thing the last month Congress is in session. and that you delay doing snything, on that basis, on your tax program until the lest month in session. And then, depending on what Congress does, you'll nola that LS a whip-handle on what you ao in the texes." Now, if ne did that - if ne did that, what would that mean? HON much would you save? pelli Five nunored aillion. E.M.Jr: No, no. Five hundred million on relief. Nothing for public works. bell: 1 deven't got anything new for public works. H.d.Jr: You got five hundred million. Sell: Upon contract entered into. Got to be liquidsted. H.M.Jr: No, no, new. Dian't you put enother five hundred million cell: General public works. belade: Yes, Regraded Uclassified 121 -23- Bell: Just isn't any use arguing. Let me tell you. You've got & contract - got an authorization of about 250 million dollars for good roads. You've got a flood control bill on your books of about seven or eight hundred million. H.M.Jr: Dan, let me try. Let me put it up and let them knock it down. It's no harm to put it up and knock it down - for him to knock it down. If you only put in & billion for relief, you save five hundred, don't you, and nothing now for public works, because you've already got 600 million, haven't you? Bell: Have six or - five or six hundred million of expendi- tures. You'll have more than .... H.M.Jr: Nothing for - in the new budget for public works. How much? Bell: It would be five hundred million of the general public works program In the budget; that's new appropriation. H.M.Jr: All right, five hundred. And now only five hundred for Agriculture. How much? Bell: Well, we've got a billion .... - no, part of that is good roads - got à billion and 75 million; take 850 million. you H.K.Jr: How much would/save? Bell: 350 million. H.H.Jr: Is that all? How much you got down for good roads? Bell: 225 million in Agriculture, most all of which - practically all of which is good roads. H.P.Jr: He was willing last year to go ahead on = hundred million for good roads, the average for the last five years. If you cut that 150, you'd have 500 million saved. Let's just put it down. Let's put it down. It doesn't do any harm. Be a billion and D half off. And then if ne'd do that and then say - instead of nine you'd have eight - you'd have El seven and e 122 -24- half billion dollar budget - and then say, "Gentlemen, I won't increase the taxes until I see what Congress does, and I'll hold back my tax program." Hanes: Any hope of starting snother economy program in the enlargement of these administrative bureaus around here? Of course, they're just growing by leaps and bounds everywhere. Bell: That's true, but that isn't where your money is being spent. danes: That's not the big money, but you might .... H.M.Jr: But boys, you see? Just let me leave this. I'll be back in three minutes. Want to go in there because Archie isn't there. If the President went to the country with & seven and a half billion dollar program instead of a nine billion dollar one and then this thing was increased, then he can put it on Congress and then let the people fight with Congress. It gives us E chance, you and me, to make some speeches. It also gives him a chance to say, "We won't do anything about taxes, depending upon what Congress does." Then if Congress increases this by a billion and a half, he can say, "All right, it's up to Congress to raise another billion and a half in taxes." It gives the man something to trade with. Hanes: Yes, sure. H.I.Jr: And he says, "All right, Congress, if you increase this by 8 billion and B. helf, reise me another billion and a half taxes, " instead of saying, "Congress, god- damn it, you've got to raise snother billion and a nelf." It puts the burden on them. daes: It doesn't make the outlook so hopeless. H.M.Jr: Right. If things get so much better, maybe we won't need It. Maybe we can save a billion dollars. When I argue like this - I argue forcefully - I'm just thinking out loud. Hanes: Sure. H.M.Jr: But I'm thinking of something that would taste good and that the burden won't have to be - to be that we originate a plan to raise D billion and a half taxes. 123 -25- It isn't so crazy, is it, Wayne? Huh? Taylor: No, sir. (H.M.Jr goes out) George, on this four billion plus, whatever your - I don't know what your state figure will look like in terms of Hass: Four eight - you mean for 1940. Taylor: I'm just thinking of whatever it may be in terms of deficit financing, and so on; and you've got your states, which will be local bodies, which will be doing some of that too, I assume. I don't know whether you've got any figures. Haas: How do you mean? You mean taking out of national income? Taylor: Yes. Haas: Well, of course, on that, Wayne, they're really not taking out and throwing it in the ocean. What you're doing - you're diverting 20 percent of your national income and socializing it. Taylor: (Nods yes) Haas: That's what you're doing. Taylor: What I'm getting at is, using these same figures that you have there Haas: For the Federal? You mean this thing here. Taylor: That same type of computation. Haas: I see. And include the state and local income. Taylor: There are certain things that you can go into in the past and show how much savings, let's say, the national income - a national income of 60 can produce. I'm talking about savings. Haas: All right. I get what you mean. 124 -26- Taylor: See what I mean? Heas: Uh-huh. Taylor: All right, if you take, let's say, five or six total between state and local out of your - your national savings out of a given income, what have you got left over for private? See what I mean? Haas: For private savings. Taylor: Yes, private capital. daes: In order to add to your plant and that sort of thing. We can make some estimates, but that's rather - I mean we can make some estimates on it. Taylor: Well, the only Heas: In other words, you're trying to find out whether there's anything there, and you're checking it. Bell: You're using all your savings for taxes. Taylor: Well, not in taxes. I'm talking about this. Let's say here's your market level, which is a given market level. It's full, yousee. Let's say that your pail's about there, you see, and that's in balance. You've got national income which in the following year is going to produce so much In savings. Haas: Uh-huh. Taylor: Maybe that's ten billion, I don't know. dass: Yes, yes. Taylor: All right, if you get this four billion or five billion or six billion deficit that's going - I mean for public purposes - I mean how much is there left over for your private purposes in the form of actual savings? Hass: I get you. Taylor: I think you'll - in order to try to answer the ques- tion that Henry's got on his mind - "All right, how long can you keep on doing that?" 125 -27- Hass: Yes. Well, of course, there's other things. Taylor: There are other things in there, but ..... Haas: It's balance between income, savings, and investment. Taylor: That's right. Haas: And government taxation. Taylor: Yes. Hass: Well, I'll tell you what we'll do. Let's put it together; lot of it will be guesses, but you'll see what it is. Taylor: You're reaching for an answer which we ought to have. Can't be an accurate one. Heas: It depends & good deal on the tax structure, where you're pulling this. Now, I mean where your - whether your revenue is coming out of people that ordinarily would have spent or if it's coming out of people who normally would save the money. See, it's where you're sucking it out. Taylor: If you'll go back far enough, you'll see - these boys that I hear about are reaching around for something, but I don't think they've got it. Haas: Two schools on it. Some of them think that in the past we got into trouble because we didn't draw enough; too much saving. Taylor: But if there was any over-saving period, you get into trouble. But there's some place there where she's kind of in balance. Hass: I think I can make a pretty good series of estimates, so we can see historically on that thing. Taylor: That's what I mean. Heas: I can put together estimates that have been made by different people, so you can see what the thing is. Regraded Uclassified 128 -28- Taylor: Let's say obviously if it's 49 or 50, or whatever it may be, there isn't any excess stuff. Hans: I get it now. I'll get that together. Hones: Some fine day the thing will stop without anybody's knowing anything about it, or why. Heas: When they give up hope, it will stop. When they can't see any light for this thing to continue on It may not be rational at all. Bell: It will stop if they get a chance to put their money some place else. Taylor: out the money nes to be there, Dan. Haas: Yes, when they - it seems to me that it will stop when the - when & group of people who are important, so to speak, give up; they feel that the only outlet is that from here on you go into inflation, and that snock will cause a crack-up of the thing, and from that crack-up you get inflation. Rationally I think you can go a long ways farther than this. But you've got to handle it awful carefully. And that's why I think it's awfully important for the Secretary to ask the President to make up his budget that way, because that gives the public some hope. But to come out with the President's budget, the same four billion dollar deficit - I don't know; it may ride all right. Bell: Well, I think the attitude of the people on your four billion dollar deficit Is in terms of your program from there on. You've got to have another four billion dollar deficit. There isn't any way out of it. But from there on is what you've got to hold out hopes for - 1941 - where you've got to begin. (H.M.Jr comes back) H.W.Jr: Dan, you can't go to the - the President can't send up a budget message asking for nine billion dollars. Just can't do it, that's all. Bell: Well, it's quite obvious on its face when you look at it. a.V.Jr: What? Regraded Uclassified 127 -29- Bell: It's quite obvious on its face when you look at it. H.l.Jr: That it's nine billion? Bell: les. S.U.Jr: "hat? Bell: Yes, sir. H.M.Jr: Yes, but then if he does it my way - if he does it my way and cuts this thing a billion and a half and makes it a seven and E half billion dollar budget, then it gives him 8 chance; if Congress raises it, he says, "O.K., for every dollar you raise, give me another dollar's worth of taxes, and he's in a nice trading position. Bell: Well now 6.M.Jr: The other way he says - the other way you're going to have him say, "The budget is nine billion and we're going to raise five - we're not going to raise any new taxes." Or are you going to have him say, "I want a billion and DE nalf to two billion dollars more taxes," and he's got to take the full responsibility? Bell: I talked 8 little to the President the other day about this same question that I discussed with you coming down In the car the other morning, and he seemed very much interested, and he said he'd like to see the thing worked out that I discussed with you and a story written around it. Now, it seems to me that what you've got to do is submit 8 budget for 1940 along the lines that I have shown - I showed you that today - and then discuss where the cuts can be made and what's got to be left in, and for which we've got to raise taxes in the future, and frankly admit that 1940 is over the dam and - in SQ far as the budget picture is concerned, after eliminating WPA. What we do on that will be a matter for decision along towards the end of Congress. And he did not seem to object to a committee to study this whole relief problem. And maybe before Congress adjourns you can have some very definite program on the future relief, both 140 and '41; if not 140, certainly '41. And after they set that program, then it will be time to lay the taxes around what is E national policy from there on. Regraded Uclassified. 128 -30- It steems to me that's the way you've got to tackle this thing. Got to admit that '40 is gone. Got to admit there's E billion dollar for public works In 1940 which you can't throw out the window at that time, because the contracts are entered into. But to sky this figure of a billion dollars could and snould be eliminated for the future. Den, I think the comelttee is O.K., but I nave yet to See DIG committee ever have any effect on the President. I have yet to.see any committee have any effect on nim. was: di course, getting back for 5 moment to this revenue, there's L. way - there's E way that 8 great deal of revenue could be raised and should be reised, in my spicion. I don't know 23 snybody agrees with me / bout this, but I've talked - I talked with Ros about it for nours on end, and I know there's a way here that can be found. Here's the thing, here's the figure that stirred my imagination. When I found out that our total five hundred thousand income tax blank returns from corporations snowed a gross revenue for those five mundred thousand corporations of 30 billions of dollars, and out of the 30 billions, 10 Billion of it - they were occupying the broad highway of trade and commerce and only 20 billion out of 30, or two-thirds, were gaying any road tax. Now, I began to 5 tudy from what - my own knowledge of net nappens in El corporation is this. You get down first your total sales. Then we get cost of sales, ano supply. That gives us wast we know as gross revenue. and then we have in the tax law - the frogework calls for a certain number of deductions, ano there's where the snenanigens begin, and you come to the apex of this inverted triengle, this thing où call È net profit, and it's 9 pin-prick. The result is tast that 30 billion collars here of gross revenue - we're only collecting income tex on 20 billion dollars of tisst gross. Now, somewhere there is 3 place of moving that figure - that point there up to some place here, which is going to bring into the revenue somewhere approximating wast sught to be in the revenue from that 30 billion dollars of gross income. Regraded Uclassified 129 -31- H.M.Jr: Well, what would your thought be? Go the whole hog and tax them on their gross revenue? Hones: I wouldn't - that's so unpopular to talk about - I wouldn't call it that. I would approach that .... That would be the ideal situation, from my standpoint, but there you run afoul this suggestion that that is not based on the ability to pay, because the corporation that doesn't earn any money can't pay any tax. Bell: Many corporations in that triangle have deficits. Hanes: Hun? Bell: Many corporations will have deficits. Hanes: Many of them do. They're paying tax now in capital stock tax, of course. So that this they're hollering about - this is approaching - when you get up to that gross revenue, this is approaching a sales tax, general manufacturing and sales tax, in the last analysis. Just speaking now about raising revenue. In the final analysis, there's where you're going to come out if you're ever going to raise the revenue. H.V.Jr: It doesn't make me sick. Hanes: What? H.M.Jr: It doesn't make me sick. Hanes: It doesn't make me sick either, because we got - 57 percent of our tax bill comes in now through sales tax. And Mr. Wallace wants to put another sales tax on, 300 million or 500 million on food or clothing. Calls them processing taxes, but they're not process- ing taxes at all, but they're sales taxes. Taylor: As you say, John, you have to kick this ability to pay right out the window, don't you? Hous: Uh-huh. Hanes: That's what your processing tax does. Taylor: I mean all those things of that kind. Regraded 130 -32- Hanes: Inst's what our excise taxes do. Getting down to the baby's milk on every one of those things, no question about it. But again, you're confronted with the reality. H.W.Jr: And of course, the consumer tax is the easiest to estimate and varies the least. lisnes: That's right. N.A.Jr: Is that right, George? Name: that was my impression too. This summer we made a study way back and we found out that they made larger errors on the miscellaneous taxes than on income, historically. E.M.Jr: Out the window with that one. Heas: I was very much surprised et that. Hones: That thing causes the Department of Internal Revenue more headaches perhaps than any other one thing, because the cost to the Bureau of verifying those figures, which - US I say, there's B lot of shenanigans going on; you know you're charging everything you possibly can to expense; it may be a capital expendi- ture, but it goes in the expense item. And those d.V.Jr: Well, maybe I'm not up-to-date and all the rest of tapt, but Dell: (Laughs) 1.2.Jr: I'm just mnybe an old-fashioned boy, but to face another four billion dollar deficit - I just can't see it. Taylor: That's 5 billion dollar deficit financing every quarter. H.M.Jr: Yes. Toylor: (Nods negatively and laughs) HEAS: And the fact that you've had it running since when, '31? 131 -33- @.M.Jr: We've got a lot of - we've and B lot of breaks. Gold coming here on account of lack of confidence in Europe, rather than confidence in America, knowing it's a place you can't bomb; at least, they don't think they can. All those things. But I taink I'm right when I say that the increase in our gold is - just check this statement, George, will you; I mean you may not be able to check it - that the increase in gold we've gotten in the last four years, after you've deducted the newly-mined gold - every dollar of 1t. has come out of France. Haas: Out of France. H.N.Jr: I think that statement is correct. Just check that once, Now, if that statement is correct, and I think it is within & few millions, see - that the gold we have acquired, after deducting the newly-mined gold of the world, nas all come out of France - now, If that statement is correct, then you figure up how much, France has got and you know how much more we can get, and It's damn little, see? I mean it almost works out that way. does: Inst's very close. H.M.Jr; What? Hass: That's very close. d.d.Jr: And It's never been put just that way, see? So the Japanese doesn't amount to so much, but if you look sround where's the rest of the gold going to come from? The only place it's going to come from is newly-mined gold, and I think when all these people are worried and everything else about 50 much gold - you can take e look at that - it pretty near gets down to wast we can get from now on, which is newly-mined gold and not much else, George? AMES: That's about à billion two or something. d.V.Jr: Yes. Bee? So Taylor: Billion two annually. Heas: Annually, yes. Regraded Uclassified 132 -34- A.S.Jr: What? Iny Lor: About a billion two annually. H.M.Jr: Yes. Wast I'm getting at is that any great big flight of capital this way - I don't think the capital is left to come here; I think it's all pretty much here. Talking in general terms. Which enters into our financing. And 1f we got a 60 billion dollar revenue or 70 billion dollar revenue, Is there four billions there of money which would go into Government bonds? Taylor: That's while you were out what we were talking about. 1.1.Jr: What? Taylor: If tust's there, and we'll assume that it is there, now much is there left over for any other purpose of investment? H.W.Jr: Nell, my guess would be damn little. Danes: That's just about what we were putting into private enterprise in the period from 1925 to 1930. We were putting about five billion dollars annually back into the community. Haven't been doing it since then. D.J.Jr: How much? Junes: About five billion. H.M.Jr: I think my figures on that golá, George, are about right. Very easy to check. Bota: YES, I'll check. H.M.Jr: Does that check with about what you (Taylor) ..... Inylor: (Nous yes) lists: There is another thing that relates to all this, which 16, offuand, we've been doing some work - Wayne 083 ssked about the banking picture. I think the situation gets more and more difficult to handle, and I think the mechanism is an important part of the whole picture, and our banking structure is so fixed that It Regraded Uclassifie 133 -35- is a very awkward instrument to handle. Taylor: Awful. dess: we've been working up something - Wayne thought there might be some legislation coming, we ought to be set, have something, but it has a direct bearing on this. Taylor: If you're going to have the '39 deficit and the '40 deficit, and so on, to finance, this structure that you've got - why, H. .Jr: You mean with the reserves and all that stuff? Taylor: (Nods yes) does: And the big portfolios in the banks. You've got some tricks to work on that, but you can handle it very slick. B.V.Jr: Have you any charts with you finished? TayLor: I was just thinking the machinery may not be good enough. S.L.Jr: well, I'd like to listen, Coulen't do it this morning, but I want to listen. have you (Haas) got your bubble chart? Heas: Yes. Bell: Can I take - I'm going to write those figures In the last column, 1940 - I want to leave the WPA blank. H.2.Jr: O.K. Bell: Don't want to put any suggestions in his head of a billion and a nalf. 1 want a seven and a half billion dollar picture. Inst's what I'm going 'to suggest to the President. lices; Mr. Secretary, these white bubbles are their estimates that they gave Dan in July, and nere's how it actually worked out. This is a cash deficit we're looking at; in other words, when they weren't able to spend as 134 -36- (No transcript content at this point; this page merely inserted to explain error in page numbering) Regraded Uclassified 135 -37- much. and these orange ones are the recent estimates for these months. BRANDR: Inis is the total? hand: This is total dericit, and on the expenditure side each month they were less than last year; and on the receipt side. This works out about 7 percent secumu- lated for those three months; spent 7 percent less than estimated. On the receipts, we got in 5 percent more than we estimated. This one is right on the head and this Is 8 little over. H.M.Jr: All right, now what else you got? HARS: Next one is & breakdown of this curve here. Here's Aarry Hopkins. In July he estimated this way - those white dots. He's up there. That's 193, this is 194, and ne's moved these up to that level. I can SHOW you before he had them down here. Now, nere's Ickes. You see, he's missed his sharply escâ time. Dut instead of cutting these nown toward the end of the year, de raises nis amount he's going to spend at the end of the year; but ne figures each month he's going to do it faster. Dell: Going to get up to that point. Beasi He figures, in other words, he's not going to make what ne's estimated for the total year, but he's going to make E little more Here's national defense. Been running pretty close. This is somewnat irregular inhere. This is the interest, of course. Aná here's Agriculture; they fell aswn the last month. And the big spender nas done pretty well. Jesse Jones - he's got nis - you see where he estimated on this side that much, and he took in that much more than that. And over here ne said he was going to pay out, but he ectually took some in net. H.A.Jr: Good old Jesse. Why don't we give Jesse Hopkins's job, nuh? wast? 136 -38- Taylor: Switch jobs there, why, .... H.W.Jr: Yes. Haas: 4ne boys figuring these percentages say, "He's giving us a lot of trouble, because he says we're going one way tage." and he goes the other way. Can't figure percen- Bell: How much he's off. Haas: How much he's off. This is the first chart I showed you, on a different basis, showing cumulative. You see here the deficit; the 38 percent ran off the chart - less than estimated in July. H.m.Jp: 38 percent. daas: And the expenditures are 7 percent less than estimated, and the receipts are 5 more. H.M.Jr: Yes. Baas: And the only purpose of this chart is it shows - it's cumulative here - the receipts, those three big items, and over here are the three different estimates sent in to Dan. H.M.Jr: That would only confuse me and the President. I don't want to take that. Put that to one side, please. Haas: Let's see. Well, this is the - this is the same thing as this, only for this breakdown, see? H.M.Jr: Yes. But this breakdown is good, isn't it? Should he see this? Haas: You have it there. Cumulative up to there. Hopkins is ahead ten percent, and you can see it over there. H.M.Jr: Do I want to take this as well, or doesn't he get it all when he gets that? Hass: I think ne gets it all on that. 137 -39- sell: I think SO. H.W.Jp: won't you think so? What? dats: I think SO. I think you'll be confusing it by more. H.A.Jr: Those two. dras: Jh-huh. H.A.Jr: I think those two, George. nnes: All right. S.S.Jr: Don't you think so? Dell: Yes, I should think SO. H. . Jr: Nov, you've got the revenue one there, haven't you, the 60, 70, 80, 90? You've (Hanes) got that? Hines: Yes. H...Jr: I've got this. what'll we do with this? "sat to put these with that? M. .Jr: No, I talnk you nandle that. Thes: That's that estimate. cell: Johnny's got one too, 30 you won't need to take it if you don't want to. 11.1.Jp: That's all right. I don't see that we can do much more, unless somebody else wants to make a speech. (lass: want a breskdown of those estimates. That's a detailed one. - All right. Anything more? bull: No, I've said enough. 8.0.0p: wayne? Regraded Uclassifie 138 -40- Taylor: (Nods nothing) H.M.Jr: George? Haas: Sir? H.m.Jr: Want to say anything more? Haas: No. H.2.Jp: John? Hanes: No, I haven't anything else. Taylor: Not now. I feel awfully sick. H.M.Jr: I had my stomach removed about two years ago. Hanes: If we can just get some economic recovery in this country, this problem will get very, very much less burdensome. 00 I think we ought to - I think we ought to bend every effort to start with him on the basis of doing everything we can to encourage private enterprise to go back to spending money. Bell: And of course, that raises the question as to what you're going to consider more or less of 8 normal year. If your national income - if you consider '38 a normal year, 70 billion dollars national income, then you start by raising taxes from a point much above your present budget estimate. Haas: Ought to get your revenue up above that, but are we going to get 70 billion dollars? Bell: No, but we nad 70 billion plus in '38, d-as: '37, you mean. Bell: But your 138 budget was built on that. Heas: Inat's right. Bell: No that year you had 6 billion 300 million dollars of revenue. Now, if that's a normal year, then there's where your new taxes should start from, and not four and 8 half billion dollars. I mean if your theory is good, isn't that right? 139 -41- Hanes: Sure. H.M.Jr: George, that one that shows a national revenue - would you have one done for me? Haas: I can go back and get one right now. H.M.Jr: You got one? Haas: Yes. H.M.Jr: Phone for it. Well, the only possible place we differ is - my thought is that what I'm going to set up for the President to knock down is - we talk about a seven and a helf billion dollar budget on the present tax structure, and then wait and see what Congress does; and then wait and see what Congress does, and then if they raise, for every dollar they raise we ask for another dollar of taxes. Now, the other way would be does anybody think we ought to say, "Well, no matter what the budget is, we ought to ask for increased taxes"? Hanes: I didn't hear that last. That no matter what your .... H.M.Jr: I mean in his budget message should he ask for additional taxes over and above the five billion? "0 you see? There's two things. What I'm saying to nim is that he put this thing down to seven and a half billion, which would include B billion of new money for relief, and that's all; nothing for public works, nothing over 500 million for Agriculture. Now he puts himself in a position - "Now gentlemen, here it is. If Congress thinks we need more money or Congress thinks we require we get more money, O.K., but for every dollar over and above that I want a dollar of additional taxes." Hanes: Are you going to make any recommendation to him as to what you think the tax bill ought to be in toto? H.M.Jr: No, I'm going to let you do that. Hanes: Well, I - I'm not in the position to do that. H.M.Jr: No. Maybe you don't understand me. What I'm thinking 140 -42- of saying is, leave the taxes the way they are if the budget is seven and a half billion, see? But if Congress raises the budget over and above seven and a half billion, then he should ask Congress that for every dollar they raise above seven and a half billion, they should raise a dollar of new taxes. wet that be his program. Then if they shoot it up another billion, all right, we'll ask for another billion of new taxes. Bell: Yes, but that doesn't mean that you won't ask for any taxes up to the seven and a half. H.d.Jr: We'll ask for five billion. Bell: Five billion H.M.Jr: of taxes. Hanes: Keeping your 1938 H.M.Jr: levels. Not necessarily the same taxes, but the levels. Hanes: The level of taxes about the same. H.M.Jr: Yes, yes. Hanes: That's what Bell: You mean you're starting with a base of five billion now in the structure. Well now, if you've got a seven and a half billion budget, that means B. two and a half billion deficit. Are you going to ask anything for that two and a half billion deficit? H.M.Jr: No, no, no, because I think it would just be foolish. Haas: Waiting for business to pick up. H.M.Jr: What I'm saying to you two gentlemen is, I'm willing to go across the street if you fellows will back me up and agree with me, because this is terribly impor- tant, to say to the President that if he will keep the budget down to seven and a half billion the Treasury is willing to stick on a five billion dollar basis of taxes. We want shifts within that, but we want five billion dollars, or a two and E half billion 141 -43- dollar deficit, provided the President will say in his budget message toat if Congress raises the appropriation above seven and E half billion dollars, for every million dollars they go a bove it ne's going to ESK for a million dollars additional taxes. Do I name myself clear? Unedist Yes, The reason I agree with you there is because in U normal year - I say in E normal year, if we get back to something like normal conditions, we'll get aut of the present tax bill approximately six billion dollars. Now, If you canget him to agree to seven and C nolf billion dollars, you're not going to have a very large deficit in there; not going to be nearly 15 difficult to finance ES the four billion dollar figure we're talking about. But I taink that's ressonable. I mean I want to be reasonable with him. Anó I think ne'll grab at that, especially when ne sees Den's figures. And then he's got tue whip-hund, and it doesn't put nim in the position - 8124 If De keeps dinging that home and lets 18 it HOME - "Nor look wast this means. every time you 60 above C. dollar, this 1a what It means, uni tals is where you've got to get it from" - instead of just going over there end saying, "For Christ's Same, we've got E four billion dollar deficit. Nothing we can do about it." Signature Don't you get this out of It, too, which is the most Important thing in the whole lot: that you've got to have an du billion national Income and you've got to nake all your bets on getting that. Otherwise, you deven't got much chance. Tnat is, saying Instead of your mundred - why, your numbred - way, she comes in fine; but to actually Eet off tue not, way, you've got to have 80. E...Jr: Yes, but 00 you see now - Instead of taking the posi- tion that we started with this morning, E four billion dollar deficit, Let's dó à little trading, not with the President but with the Congress. AE a matter nnst (to Bell)? 0.211 (Remains silent) Inst's 611, and nets said it before; and I think that Regraded 142 -44- out of that, instead of having a four billion dollar deficit, maybe we'll get a three billion dollar deficit, and if we can save a billion dollars, why, I'd say that we earned our salaries. And it puts the President in a position that he's got the leverage, ne can keep pounding this thing, and he can let the Treasury keep pounding and pointing out all the time what this means every time they put through another appropriation. Gentlemen, Pat Harrison will just hate this thing - I mean if it's put on that basis. Bell: I think you can do that for 1941, but for 1940 I think you're sunk. H.V.Jr: "ell, I don't. Bell: Now, I don't say too much about fiscal years .... H.M.Jr: Let me put it this way, Dan. You've got no objection to my trying this? Bell: No, I naven't, and I certainly will be behind you. H.M.Jr: O.K. Bell: But I think we've got to look at the practical side of the thing. H.M.Jr: Well, I'm trying to be practical. Bell: The expenditures for 1941 are pretty well set, outside of your relief, WPA, and regular departments. n...Jr: I just don't believe the President of the United States, if he wants recovery - and I think if he goes before the country with a message the first week of January that shows a nine billion dollar expenditure and a four billion dollar deficit - if there is any fight left in the people, whatever's left. is going to be frightened out, that's all. Bell: Well, that's just the reason that I've been worried about & budget message - to write a story around this Regraded 143 -45- thing that holds out hope for 1941 and 1942. Rahes: Danny, I think your thought of dividing that budget message into two parts, your regular and normal expenditures of Government and these extraordinary expenditures - and your extraordinary expenditures are dependent entirely on our national income, so the problem then comes back to the basic one: how we going to get our national income up? That is, through increased H. .Jr: John, what you say fits into what I say. The President can say, "We've got seven end a half billion dollars expenditures, five billion dollars revenue based on the present level of business. But if business picks up, and I think it will " Hanes: 11 and I'm going to do something to help it " d.m.Jr: " and I'm going to do something to help it, and I want business to go shead, why, this deficit may only be a billion or a billion and a half." Janeb: That budget message could be made the most bullish business factor in this country if it is properly done, and could be made the most bearish business factor if it is badly done. And if you don't mind my saying, Dan, here in the room, if we did it in the wsy - the way the figures say it, I think it would be the worst news that's come out of here in a long time - if we do it the way the cold figures are. Haes: That's right. Bell: Well, by splitting them up, showing the categories they're for Jr: The fellow adds it all up - all through and done, nine billion dollars expenditures, five billion revenue, four billion dollars deficit. And every headline in the country is going to scream "Four Billion Dollar Deficit Again" - after the eighth year, isn't it? Let me stick my neck out there - it doesn't do & bit of narm - and let's do it this way. You show 144 -46- the President the cold figures, let him get the shock. Then I'll come along and say, "Now Mr. President, that's what the figures say, but will you consider this and sleep over it: this way - doing it this way, see?" And then he'll think it over. And I'm going to say, "Today's Monday, will you see us again Wednesday or Thursday after you've thought it over?" Hanes: First of next week would be better. H.M.Jr: He's going to be up in the country. Going up to Hyde Park again Friday or Saturday. Taylor: Here's your selling talk right there (national income chart). H.M.Jr: But he's going back to Hyde Park Saturday. Re's going to be up there. Maybe he can see us up there. Hanes: Be better if we could go up there and see him; have more chance at nim. And also, after we get some slant about the way he's thinking today, we could have so much better ammunition ready for him next week. A.M.Jr: we can ask nim. You (Bell) weren't with Magill and me when we saw him up there, when we had that tax thing. It was just Magill and myself, wasn't it? Bell: I guess 50, I don't think I was there, H.M.Jr: Oh boy, ne saw us, but poor Ros never had such an uncomfortable evening in nis life. Never slept a wink. Banes: Why? H.M.Jr: The President went at him awfully hard. Ros came into my room when I was getting into bed. We spent the night there at Hyde Park. 0h boy, was he sick! Bell: Laying the groundwork for Johnny. Henes: Have to get our armor on. H.M.Jr: Well, we've never - Bell or I, we've never - we've always done it in a perfectly serious way, but we've never gotten dramatic, we've never gotten hysterical. 145 -47- Lew Douglas used to get hysterical about the thing. Never got him anywhere, never saved the country a dollar. Made him a sick man. Made him really a sick man. And as I say, it didn't do the country any good. Well Hanes: Nothing to get excited about. My Lord, the facts are just - they're facts, and we didn't make them, so we can't change them. Now here they are and there's the problem. H.M.Jr: But Bell, I'm not going to take '40 for granted. I may be a damn fool, but I'm not going to do it. Bell: As I told you when I went over these figures, I thought I could reduce them somewhat and hoped George could raise his revenue estimates a little. TREASURY DEPARTMENT 146 INTER OFFICE COMMUNICATION DATE October 10, 1938. TO Secretary Morgenthau FROM Mr. Haas M MA Subject: The Business Situation, Week ending October 8, 1938. Conclusions (1) A continuation of the general recovery movement, which for 8. time threatened to be interrupted by adverse develop- ments abroad, may get under way now that the immediate war threat has been removed. The outlook, however, is by no meens entirely clear, chiefly because of uncertainty over possible further developments in Europe. (2) Basic conditions in the United States, apart from the foreign situation, have continued to point to a general rising trend of business. The upturn in industrial produc- tion which began last June set in motion 8. cumulative series of recovery forces. Inventories have been reduced to manage- able proportions. The monetery expansion program has continued to operate 88 a recovery factor. The spending program has been gaining momentum 8.8 & direct stimulus to business. Con- sumer buying has been maintained at e relatively high level in relation to production. (3) While evidence of & recent flattening out of the business trend has appeared in the seasonally adjusted data on steel and textile activity and in the New York Times index, the broad advance in stock prices this week, together with the fall expansion in automobile output, may bring a sufficient increase in industrial buying to turn the trend again upward. (4) The outstanding uncertainty at present 10 the probable trend of commodity prices. The failure of foreign curren- cies to show more than moderate recovery after the passing 247 Secretary Morgenthau - 2 of the immediate war orisis suggests that other important deflationary influences still exist. While an increasing domestic demand may offset these influences, the relative strengthe of these two opposing forces are yet to be deter- mined. The general business picture With 8. general belief this week that the prospect of war has been removed, the basic forces of recovery in the domestic situation are again asserting themselves. Although over- shadowed last month by the depressing influence of the European situation, which threatened for a time to nullify the effect of the national recovery program, basic domestic conditions have remained favorable for 8. general rise in the business trend. The monetary expansion program adopted earlier in the year had created an upward pressure on security and commodity prices. Industrial inventories by early summer had been reduced to manageable proportions. Industrial production had turned upward in June, under condi- tions which left little doubt that business had actually turned the corner. The usual cumulative effects of such a turn began to show themselves in increased business confidence, increased orders, increased production, and increased payrolls. With consumer buying maintained at 6. level in excess of pro- duction, a further step-up in production to meet this demand WAB indicated, In August, however, it became evident that the strength of the upturn was being overcome by the ominous war develop- ments in Europe, with accompanying deflationary pressure on commodity prices. New orders fell off steadily during August, and general price indices declined to new lows instead of rising with increased business activity. Following the Munich peace agreement, the original forces of recovery have again come into play. The pressure of idle investment funds, together with & strong improvement in busi- ness optimiem, has carried security prices to new high levels (See Chart 1), and caused an increased demand for industrial raw materials. Rising confidence in the American business outlook has brought increased foreign buying of our securi- tiee, which was a factor in this week's rise in industrial stock prices to new highs for the year. (See Chart 2) The business outlook cannot be entirely clear, however, 80 long 88 the European situation remaine in its present unsettled state, and BD long BB confidence in peace may easily be disturbed. 148 Secretary Morgenthau - 3 The price situation Of the four factors which had previously diotated A cautious appraisal of the near-term business outlook - (1) declining new orders, (2) an uncertain inventory situa- tion, (3) weakening foreign currencies, and (4) an unsatis- factory trend of commodity prices --- the first two have taken a favorable turn. New orders have turned sharply upward, and the recent increase in business optimism has minimized the possibility of & renewed movement to liquidate inventories. Foreign currencies, however, remain relatively weak, suggesting that commodity prices muet etill contend with importent deflationary influences abroad. The fact that sterling exchange (See Chart 3) has improved only to the level immediately preceding the moet critical days of the war scare, and the franc likewise, euggests that the Munich agreement has minimized but not removed the influences which have weakened foreign currencies and tended to depress com- modity prices. Deflationary influences, apparently growing out of the European armament race, seem still to exist. Commodity prices this week have failed to show the strong improvement that might have been expected in view of the marked rise in stock prices and the increase in industrial demand. While copper, hides, rubber, and some other indi- vidual commodities have shown satisfactory price increases, and the general trend during the past few days has been promising, the improvement 80 far has not been general enough to have much effect upon the broader price averages. Increasing industrial demand would have a strong influ- ence in raising the level of commodity prices, affecting par- ticularly those commodities for which the supply situations have recently become more favorable. This may serve to offset further pressure from abroad, and maintain prices on st least a stable trend. The relative strength of the two opposing forces, however, 16 yet to be determined. Business levelling out Some evidence of 8. levelling out of the business trend has appeared in the seasonally-adjusted indexes for the two leading industries, steel and textiles, and in the New York Times index. Steel activity, seasonally adjusted, has remained at approximately the same level since the first of 149 Secretary Morgenthau - 4. September, and the adjusted index of cotton mill activity has shown B downward trend since the middle of August. These have been important factors in holding the New York Times index of business activity around the 85 level since the letter part of August. The New England hurricane and floods may have had an influence on business activity, though the rehabilitation of that area is creating a strong demand for building materials and household goods, including structural steel for A great number of bridges that were washed out, which may crovide a temporary stimulus to business in that section. The war scare also had some effect on business. A drop In steel orders last week WaB attributed in the trade to that factor. Orders reported by the United States Steel Corporation declined to the equivalent of 42 per cent of capacity, which compares with 53 percent for the previous week. Following the peace agreement, trade reports indicate that denand has shown some improvement. The weekly index of new orders for the first week of October (See Chart 4) declined to about the level of the second week previous, largely because of the drop in steel orders and some decline in textile orders. Normally an increase in orders could be expected to follow this week's broad upturn in stock prices, and trade reports seem to indi- cate that this has occurred. An increase in orders at this time of year 18 to some extent seasonal. Factory production normally reaches its fall peak in November, and the unadjusted Federal Reserve Board index must increase by 4 per cent from September to November to maintain the adjusted index at a constant level. Current business news The New York Times adjusted index for the week ended October 1 continued to indicate 8 levelling out of business activity, holding practically unchanged at 84.4, which com- pares with 84.3 for the previous week. Somewhat greater than seasonal advances in automobile production, cotton mill activity, and miscellaneous carloadings during the week were offset by slight declines in the steel, power, and lumber production indexes. Automobile production, though retarded somewhat by labor troubles, has embarked decisively on its fall rise. Output increased nearly 50 per cent this week to 37,700 units, which Regraded Uclassified 150 Secretary Morgenthau - 5 compares with 25,400 units last week. The trend is closely approximating that of last year, though at a lower level, the corresponding week of last year showing an increase to 72,000 units as compared with the previous week's outturn of 45,900 unite. Steel operations increased this week to a new high for the year at 47.9 per cent of capacity, though on a seasonally adjusted basis the index remains within the range of the past month. Some further expansion in buying of automobile steel 18 reported, but the demand from this source remains die- appointing in view of the advanced stage of production on new models. A substantial inventory of finished steel is reported to have been built up by the steel companies, par- ticularly of automobile materials. The increase in department store sales during the week ended October 1 was less than during the corresponding week last year, total sales during the week for 254 reporting firms being 15.2 per cent below last year, as compared with 8. decline of 6.2 per cent last week. While this was the week of the war crisis, another important influence in reducing sales was the fact that pay day came at the end of the week, while last year it was a day earlier. Reports on merchandise deliveries of 300 stores in metropolitan New York for the first four days of the following week show an average decline below last year of only 1 per cent, as compared with a decline of 10 per cent the previous week. Regraded Chart 1 EXCESS RESERVES, SECURITY PRICES AND COMMODITY PRICES Weekly 1937 1936 A. M J J A 1 o N D J F M A M J A 0 . . , M DOLLARS GOLLARS BILLIONS BILLIONS 2.5 2,5 2.0 2.0 EXCESS RESERVES 1.5 1.5 1.0 1,0 PRICE IN PCR CENT BOLLARS VIELD YIELDS ON LONG TERM TREASURY BONDS 110 2.4 100 2.6 106 2.8 104 3.0 10 INDUSTRIAL BOND PRICES, DOW-JONES 90 PRICE IN DOLLARS no SECOND GRADE BAIL BOND PRICES, DOW-JONES 80 8 70 70 3 50 50 50 PER CENT STOCK PRICES 40 142 PER CENT COMMODITY PRICES 1.34 PRICES OF 90 STOCKS, STAND. STAT. 1926 = 100 85 125 80 118 75 110 2 102 65 94 00 86 COMMODITY FUTURES, JONES, 1924 -126=100 55 78 50 70 45 o - D 62 à , M A . J J A $ o N D J , M A 3 J J A $ 1936 1937 Regraded Uclassified Office al the Secretary the Chart 2 STOCK PRICES AND FORBION TRADING IN DOMESTIC STOCKS Confidential Daily Hovement, Dow-Jones Industrials and Poreign Net Purchases and Bales 152 1937 VEBELT 1030 DAILY - WAT MFT. - NAT - 1930 COLLARS - or any Aug. Beyt, Org. Nov. DOLLARS DOLLARS 190 100 - 30 INDUSTRIALS lide, Las and Cast 30 INDUSTRIALS High, Los and Class 180 180 too 170 170 170 160 160 100 180 150 190 140 140 140 130 130 130 192 180 un 116 110 110 (8) 100 100 a 90 - - 1 ! JALY un. MCY, - - MAY AAY SEPT. apv. - - 2 9 16 as as - 13 R a 1 1 17 a - it # a $ 12 : e DOLLARS DOLLARS DOLLARS allias Williams - FOREIGN TRADING FOREIGN TRADING image of Only a au America AST Purchases 4 4 4 o 0 0 NET Seuts NET SALES 9 1 1/ FOR 7 ! 1 : / If 19 23 30 . 11 4 a FO 24 - 17 42 K JULY MPI. 5 - F - JULY MPT. 1030 July Ave. Sept. Oct. - 1937 1038 1930 If I a # I 4. I 1-10-5 - - - - - Regraded Uclassified Cheet 3 STERLING EXCHANGE AND PRICES OF COMMODITY FUTURES 153 1936 FEBRUARY MARCH APRIL MAY JUNE JULY AUGUST SEPTEMER OCTOBER JAMUARY 27 6 13 20 27 3 in 17 24 I 6 22 29 REVENUES 15 5 12 19 26. 3 DECEMBER 23 10 é 13 20 10 17 24 31 7 14 21 28 4 11 16 25 a 9 16 23 30 6 13 20 11117 27 4 16 11 IS 25 9 THE If FER BILLARY - CENT not mail POUR 56 5.00 55 5.04 54 5.02 33 3.00 W 4.98 Sterling Enchange 51 4.96 50 4.94 49 4.M when 46 4.90 47 4.00 46 4.00 Dow-Jones Futures 1924 - 125 . 100 45 4.04 44 4.82 43 1.80 E 4.78 un mm 41 4,76 17 24 If 21. % 4 II 12 2 9 16 23 20 5 13 20 27 4 11 10 a € , 15 22 OF e 13 20 27 e 13 20 27 3 10 17 24 a 15 u % - 12 19 26 3 ID I JANUARY JAY AUGUST SEPTEMBER OCTOBER LOVEMBER DEDEMBER FERRUARY MARCH APRIL MAY JUNE 1938 Office - the Secretary of the Treasury M 1 I % I I Chart 4 Confidential INDICES OF NEW ORDERS 1936 = 100 154 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 o 0 J F M A M J J A S 0 N D 1938 Office of the Secretary of the Treasury Division of Research and Statistics 1 - 85 Regraded Jclassified Monday 155 October 10, 1938 12:04 p.m. HMJr: Hello. Operator: Governor Harrison. Go ahead. HMJr: Hello. George Harrison: Oh yes, Henry. HMJr: Hello, George. H: Well, Henry, I've thought that over and I've talked it over here-with the men here in the shop.- HMJr: Yes. H: And in view of the story in the Wall Street Journal last week I made some very discreet inquiries of both Levy - Levy and Mills. HMJr: Yeah. H: And we all are pretty much in agreement that - ah - you ought to refund of course some exchange and you ought to do it as soon as you can. HMJr: All right. H: And I don't think you can do it before November one. HMJr: No. H: The time is a little short. HMJr: Yeah. H: And with Sproul and Matteson we rather feel that ah - you should not go out beyond the life of the corporation. HMJr: No, no, we won't do that. That's - we have to stay within three years. H: You've got to - you've got to stay with three years or less. HMJr: Yeah. 156 - 2 - H: Ah - there are too many banks who wouldn't buy them. HMJr: Yeah. H: Ah - that means, I should think, that you would either open up the issue that was offered last June - HMJr: Yeah. H: - 3 years 7/8ths percent, now selling at thirteen thirty-secs premium - HMJr: Yeah. H: - or else put out a new 3 year one beginning in November. HMJr: Well, that bridge we could cross - ah - H: Yeah, that - that's just a question - at - at 7/8ths. HMJr: Yes. H: And that just depends upon the market at the time; you don't have to determine that yet. HMJr: Could we do a - could we - we could do another 3 years and 7/8ths, couldn't we? H: You could do it - ah - all right, I think, es- pecially if you made an adjustment of interest. HMJr: Uh huh. Well, all I wanted was just your opinion whether we should do it and you think we should. II: Yeah, I think you should and we're all in agreement. HMJr: Swell. H: And I - - Eccles called me about it t 00 and I told him just what I told you and he's in agreement. HMJr: 0. K. H: But you'd better let him speak for himself. Regraded Uclassified 157 - 3 - HMJr: I will and he can. H: (Laughs) All right, Henry. HMJr: Thank you. Goodbye. Regraded Uclassific 158 Monday October 10, 1938 12:07 pm HMJr: Hello. Operator: Mr. Williams. HMJr: Hello. 0: Go ahead. HMr: Hello. Aubrey Williams: Hello, Mr. Secretary. HMJr: Hello, Aubrey. W: Fine. ah - we're all ready to make that allot- ment of one hundred thousand dollars over there or such a portion of it as you all think that you would want immediately - HMJr: Good. %: But I think that I ought to sit down with you and talk over what - what - continuing if any responsibility you feel we might have with regards to the accounting for those funds. HMJr: Uh huh. W: Ah - HMJr: That's all right - that sounds reasonable. W: What - what - I'm trying to get away from here tonight. - Are you terribly tied up this after- noon? HMJr: Yes, unfortunately I'm booked solid. W: Gosh! HMJr: Ah - W: Uh huh. HMJr: I mean I'm not tomorrow but today I'm booked solid. Regraded Uclassifie 159 - 2 - W: But tomorrow you could? HMJr: I could, yeah, I could do it in the morning. W: Well, then I think I'd better stay here because I want to get this thing off - HMJr: Right. W: And I know you people are anxious to do it too. HMJr: Yeah. W: So what's your convenience in the morning? HMJr: Well, how is ten-thirty? W: Good enough. HMJr: What? W: I'll be there. HMJr: Ten-thirty and then - ah - - maybe we can talk a little bit about the general relief picture, - W: All right. HMJr: - which I am very much interested in. W: I'll be very glad to. HMJr: And what your plans are for the balance of this year. W: All right. I'll be very glad to. HMJr: Maybe, if it's agreeable to you I think maybe I'll have Bell here. W: All right. HMJr: What? W: Fine. HMJr: Is that all right? W: Yeah. - 3 - 160 HMJr: Yeah, I - I - - W: Yes. HMJr: I haven't had a talk with you in a long time. W: Well, I'll be glad to do it - HMJr: So ah - supposing you say ten-thirty. W: All right. HMJr: That'll be fine. W: Ah - do you want to have Miss Lonigan in on this at the same time, or not? HMJr: Sure. We'll have her on the first part - W: All right. HMJr: And then we'll ask her to step out and we'll talk - W: All right. HMJr: - on the W: I'll be there at ten-thirty. HMJr: That a boy. W: Good bye, Henry. Regraded Iclassifie Monday October 10, 1938 161 3:48 p.m. HMJr: Hello. Operator: Mr. Jones. HMJr: Thank you. 0: Go ahead. HMJr: Hello. Jesse Jones: Hello, Henry. HMJr: Hello, Jesse. J: Yes. HMJr: The reason I am calling you is this - ah - it's in regard to refunding your 300 million notes coming due on the fifteenth of December. J: Yeah. HMJr: And - ah - I've checked around and talked to the President and I thought we'd do it, if it's agreeable to you, as of November one. J: Yeah. That's all right. I talked to Mulligan Saturday - HMJr: Yeah. J: - when I wrote thatnote and I - he didn't see much point in doing that and - but - HMJr: Doing what? J: In refunding those particular notes. But then ah - he thought you'd do it by November first. HMJr: Yeah. J: And refund the three? HMJr: Just refund the three hundred. And then I'll talk to you about your interest rate. J: All right. Regraded Uclassifie 182 - 2 - HMJr: See? J: All right. HMJr: I'll make you happy on that. J: All right. HMJr: And ah - the reason - there was this story in the Wall Street Journal about it this morning and I have a press conference at four. J: Yeah, well I - I know nothing about how that started - I read that too. HMJr: And so I thought that I'd clear with Eccles and talk to George Harrison and if we were going to do it we'd better get the market ready for it, see? J: Yeah. HMJr: So I simply thought I'd say that the Treasury was going to do this for the R.F.C. as of November one. J: All right. HMJr: And - it's ah - it's an exchange of notes I guess. J: All right. HMJr: What? J: That - yeah, that's what it is. HMJr: Yeah - whatever it is - I mean we'll do it as of November one. J: All right. HMJr: Is that all right with you? J: Fine. HMJr: How are you feeling? J: Pretty good. Regraded Uclassifie 163 - 3 - HMJr: Take care of yourself. J: Thanks. HMJr: And I'll see you about the interest rate. J: All right. Thanks. 3:57 p.m. Operator: Go ahead. HMJr: Hello, Jesse. Jesse Jones: Hello, Henry. HMJr: Yeah. J: What would you - why don't you give yourself a little latitude and say that in refunding those you might or might not add a little? I just thought - HMJr: Well - J: Huh? HMJr: Ah - the reason that we - we've got such a tremendous balance here, Jesse. J: Yeah. HMJr: And I just - J: Well, all right. Well, I just thought you might want to just leave yourself a little latitude on the - HMJr: Well, what I was going to say is I'm going to say we're going to refinance J: I see. HMJr: Because that covers a multitude of sins. J: All right. 164 - 4 - HMJr: But - J: I just thought maybe you might want to do that. HMJr: But, frankly, if we give you what amounts to the market rate on what you owe the Treasury - J: - perfectly all right. HMJr: I - I hate to - I'll tell you right now so that there's no argument - we'll give you a one percent rate for this - for this period. J: Yeah. HMJr: You can't kick on that. J: Well I just thought - that's perfectly all right. I just thought maybe you would - ah - want to leave a little latitude for just - for - HMJr: Well - J: Not - I didn't - what I mean was - not to be too specific - HMJr: Oh. Well - J: - this would be just exactly refunding. I thought if you refunded those three you might want to add a hundred or SO. HMJr: Well, I - I really think it would be a mistake. I - I - J: Well - HMJr: - think we'd all have to - I think I'd have to be apologizing. J: Well, you handle it yourself to suit you. HMJr: Is that agreeable with you? J: Perfectly all right. HMJr: Thank you so much. J: Goodbye. Regraded Uclassified 185 Monday October 10, 1938 4:41 p.m. HMJr: Marriner. Marriner Eccles: Oh yes, Henry. HMJr: I got your word about those R.F.C. notes and I announced it at my regular press conference at four o'clock. See? E: Yeah. HMJr: Then as to - ah - we can talk over tomorrow how we're doing all the rest of that. But on account of that Wall Street Journal story I wanted to get it out and let them know just what we were going to do. See? E: Yeah. Wayne called me of course and I - ah - it's a matter that's - there really isn't very much to talk about on it. HMJr: No. But - ah - E: It's - the only - the one question I raised - that was the question of ah - of an exchange which involved rights or the - HMJr: Well, there won't be any rights. E: Well, but what I meant was that if it's an exchange of course there - it will mean they - that involves rights. HMJr: Well - we can fix it. I - I hadn't thought of that until Wayne mentioned it. R: Yes, that was the point I made and ah - HMJr: Well we can E: But it seems - it seems to me that that in itself wouldn't justify borrowing the money in the market and holding it for forty-five days at - and - and paying one and a half percent on the outstanding issue. HMr: Uh huh. 166 - 2 - E: And - HMJr: Well, I - - I'd like to get your viewpoint tomorrow but I figured that the market ought to be ready and I want to save that date of November 24th for ourselves. E: Yeah. HMJr: Monday. E: Yes. HMJr: And give them as much notice as possible. Jesse was very anxious to get some new money but I told him there was no - no reason - I mean he isn't, I think, unbalance - I think he's taking money in. E: Well, of course if you're going to get - for him to get new money - with all these - with all the balances and the gold that you've got in the Treasury it would be pretty difficult to explain to Congress. HMJr: I told him it would be just silly. E: And I - I - I absolutely think that it would be a mistake. Of course you are in this beautiful position, even though you announced last summer that the R.F.C. would likely get seven hundred million and they've only used two. You can - you can say that all that's happened is - it's just a matter of deferrment. HMJr: That's exactly what - except I used the word "postponement." E: Ah - that they'll get five hundred million and then you can use them to get it - some time next year in the Treasury they'll not get any new money. HMJr: That's right. E: And let them pay you and let them go to the market and you keep out of it. HMJr: That's right. Regraded Uclassified 167 - 3 - E: And ah - so that that seems to me that the - that no one can say that - that there's any inconsistency merely because you have deferred it. HMJr: That's right. Well, thank you so much. E: All right. Goodbye. HMJr: Goodbye. Regraded Uclassified 188 PARAPHRASE OF TELEGRAM RECEIVED MA FROM: American Embassy, Rio de Janeiro DATE: October 10, 1 p.m. NO.: 236 See my despatch No. 922 of September 26. Today I an in receipt of a letter signed by the President and Director of Exchange of the Bank of Brazil, dated October 10, (and paraphine) /which reads in translation as follows: "Reference is made to our letter of August 24, 1938 regarding the understandings reached between the Bank of Brazil and the Federal Reserve Bank through your inter- mediary. We have the honor to transmit the draft for the final agreement for the establishment of a gold fund of the Brazilian Government with the Federal Reserve Bank which we are authorized to sign on behalf of the Brazilian Government, the authority for which will be exhibited in time. We request of Your Excellency that you kindly transmit the text of the enclosed draft to the fiscal agents of the United States Government and their opinion would be appre- ciated in order that we may conclude the contract in question." The plan which this letter transmitted is identical with the one transmitted to the Department in my despatch under reference except for article 1 of "agreement" which now begins as follows: "in conformity with the agreement signed Regraded Uclassified 189 -2- signed between the Secretary of the Treasury of the United States, Mr. Morgenthau, and the Minister of Finance of Brazil, Mr. Arthur de Souza Costa, by letter dated July 15, 1937 the Bank of Brazil in its capacity as official agent, et cetera." The Federal Reserve Bank 18 requested by the Bank of Brazil to inform it through this Embassy at the earliest possible moment, by cable, if this plan 18 acceptable. The Department is requested by the Bank of Brazil to inform the Federal Reserve Bank of New York that the ship- ment of gold bars forwarded on the 88 WESTERN PRINCE on September 29 (reported in the last paragraph of my telegram No. 222 of September 24, noon) will be turned over to the Federal Reserve Bank of New York in accordance with tele- graphic instructions today being sent to the Guaranty Trust Company. The ship arrived in New York October 13th. It 1s desired by the Bank of Brazil that the Federal Reserve Bank of New York accept this gold 8.8 the first deposit in our nection with the new plan. Inasmuch as the Bank of Brazil now wishes to avoid selling this gold, this procedure is a change from the procedure reported in my telegram No. 222, of September 12 1 p.m. Will you please inform Commerce. CAFFERY EA:DJW Regraded Uclassified - arricial COMMUNICATIONS TO 170 THE SECRETARY OF STATE | di di DEPARTMENT OF STATE WASHINGTON In reply refer to EA 832.5151/1196 October 11, 1938 The Secretary of State presents his compliments to the Honorable the Secretary of the Treasury and en- closes a copy of despatch No. 920, dated September 23, 1938, from the American Embassy at Rio de Janeiro, with its enclosures, namely, the text and translation of & letter from the Bank of Brazil acknowledging the receipt of the communication from the Federal Reserve Bank of New York which was transmitted to the Embassy by this Department's telegram No. 102, September 3, 4 p.m. Copies of the despatch and enclosures have also been sent to the Federal Reserve Bank of New York. Enclosure: From Rio de Janeiro, No. 920, September 23, 1938, with enclosures. Regraded Uclassified TRIPLICATE 174 Rio de Janeiro, September 25, 1938. No. 980. SUBJECT: Shipment of Gold to the United States. ORIGINAL AND THREE COPIES BY AIRMAIICONTINMATION COPY BY STEAMBR. The Honorable The Secretary of State, Washington, D.C. Sirt I have the honor to refer to the Department's telegram No. 102, September s, 4 Pelha, transmitting a strictly confi- dential communication from the Federal Reserve Bank of New York for delivery to the Bank of Brasil. This communication was delivered to the Bank of Brasil on September 5th and I 1/ am now in receipt of a reply dated September 21st, copy and w translation/ Regraded Uclassified 178 + translation of which are enclosed herewith. As the Department will perceive, this reply is merely in the nature of an acknowlsdgment and states that the com- munication of the Federal Reserve Bank is being studied by the Brazilian authorities. In order that the records may be kept complete, I suggest that the enclosure be forwarded to the Federal Reserve Bank of New York, Respectfully yours, For the Ambassador: R. M. Scotten, Counselor of Embassy. Enclosures: 1. Copy of letter from the Bank of Brazil, dated Sept. 21, 1938, 2. Translation of above letter. PAN/SWH File No. 851,51 A trae CODE of the eigned original not (alceed) Regraded Uclassified Inclosure No. 1 to Despateh No. 920 of September 23, 1938, from the Embassy at R10 de Janeiro, 17B COPY BAACO DO BRACIL I Favor Citar Na Responte Direcção Geral DITCA Indereço Telegraphico "DATELGUSRAL" Rio de Janeiro, (Cains Postal 1150) 21 de Setembro de 1938. lamo. Snr. Jefferson Caffery, ⑈.0. Embaixador doe Metados Unidos de America do Norte. Temos e honra de nousar o recebimento de Bun carte do 6 de corrente, an que V. Form. teve oportunidade de transmitir et cominicação confidencial que nos foi feite pelo Federal Re- serve Bank to New York, a propósito dos entendimentos on curso sôbre a possibilidade da constituição do fundo ouro nos Estados Unidos en nome dêste Banco e 00:10 agents do Coverno brasileiro. To1 para nös motivo de matisfaqão el scolhide que nere- cou ii nonne proposta inicial, que fizemos devidamente autorizades elo banc. Cur. Ministro do Pagenda, A refarldo commissione foi transmitide no mesmo Min- intro que doate do 200 autoriser a redigir os terms definitivos de 1100 acordo, hoje submetidos a apreeiação do Coverno . nn 000⑉ formidade to twis entendimentos. As providEnciac que disse exeme india- (entain) e que sinde não LOS peraltem une responte definitive no Feleral Seserve Bank, parão au conhecimento de V. 8. logo que rejemes autorizados c. apresenter 3 projeto to acêreo 00m todos on detallos. Quairo To 32. nositer 00 protector 10 nessa considers- 880. Pelo BANCO DO BRASIL (signed) Marques dos Rein Presidente Teneredo Ribas Carneiro Diretor da Corte1Regradad Ubtassified 174- inclosure No. a to Despatch No. 980 of September 23, 1938, from the Tebacco at No de Janeire, TRANSLATION BANK OF BRAZIL In replying, please cites raministration VALID Telegrophic Address) Rio to Janeiro, "BATELGERAL" (P.C.Box 1100) Deptember 21, 1939, 110 Excellency Jufferson Caffery, Ambersador of the United States of North America. " o have the honor to noknowledge the receipt of your letter of the 3th Ecote, in which Your Excellency transmitted a con- fidential communication to us from the Federal Reserve Bank of New York, with regard to the discussions now taking place 600m corning the possibility of the establishment of 6 gold Esessive in the United States in the name of this Bank as agent of the Oranilien Government. It 1s a natter of satisfaction to us that our initial proposition, which 196 made in accordance with instructions E1790 by His Bruellency the Minister of Finance, has been so received. The above mentioned communication was transmitted to the Vinister, who bee just authorized us to formulate the definite terms of this agrement which has been submitted today for the overidoration of the devernment, in accordance with such cla- The steps resulting from this indispensable examination, which do not as yet permit us to make B. definite reply to the Federal Reserve Bank, will be brought to Your Excellency's ate tention as soon as we are authorized to present the draft of the agreement with all details. 03V170000, Your Excellency, the securances of our considers- faa for the Bank of Trazil: YRU21397 (signed) Marques dos Reis ely - (simer) - - Presidents Tangredo Vibes Carneiro, Director of the Exchange Dept. Regraded Uclassified 175 Department of State EAU EA DIVISION ENCLOSURE TO Letter drafted ADDRESSED TO TREASURY $ U.S. GOVERNMENT PRINTING OFFICE 1-1031 170 H REB GRAY London Dated October 10, 1938 Rec'd 3:40 P. me Secretary of State, Washington. 1154, October 10, 6 P. m. FOR TREASURY FROM BUTTERWORTH. British security markets have been uncertain today and the dollar has been bid. Given the background of trade and other factors affecting sterling in particular and the feeling of uncertainty about the outlook in general Hitler's speech of last evening has somewhat jangled the nerves of not a fEW in the city who are incidentally becoming acutely aware of the present position of inferiority. The inferiority opening rate of the dollar was 4.78. The British authorities attempted to check the movement but the rate moved rapidly to 4.761, where they made a decided stand. The rate has fluctuated between 4.76 1/8 and 4.76 3/8 the latter part of the day. The demand for dollars was not enormous but persistent; towards the End of the day the British authorities were less active, NEW York Regraded Uclassified 171 REB 2-#1154, From London, Oct.10,6p.m. NEW York having come in with a tendency to sell dollars. The gold price went from 145 shillings 10 pence at the fixing to 146 shillings ONE pence this afternoon. 287 bars were sold at the fixing. KENNEDY NPL Regraded Uclassified 178 PARAPHRASE OF TELEGRAM RECEIVED nn FROM: American Embassy, Paris, France DATE: October 11, 1938, 9 a.m. NO.: 1730 FROM COCHRAN. This morning I returned from Basel, where the first meeting after summer recess was held by BIS directors. The meeting's routine business involved discussion of the decline in the balance sheet of the Bank for Septem- ber, which resulted from withdrawal of deposits by central banks to achieve liquidity during the recent crisis, and the conduct of affairs of the Bank during that time. The international political crisis and its repercussions upon economic and monetary systems were the topice most discussed in informal talks. I saw Schacht in the corridor, and he greeted me with an inquiry as to whether I had any bright ideas about B. commercial agreement with Germany; he asked me to come into his office, and inquired 8.8 to what I thought of the latest moves made by his Government. I recalled my visit to him four years ago in Berlin, and reminded him that he had then said he hoped that Germany might soon have armed sufficiently for defense purposes and for satisfaction of national aspirations, 80 that he (then being Minister of Economics) Regraded 179 - 2 - Economics) could convert the armament plants into heavy industrial concerns to manufacture goods for export. I said to Schacht that I believed his country now had that chance if Hitler would only repay Chamberlain in kind and not go ahead to the foolish fate which was Napoleon's; Schacht agreed that this chance is now held out to Germany, if it will only be grasped by Hitler. Such a turn would provide a lead toward real peace in Europe, which should help toward normalization of trade and monetary affairs. Schacht reviewed recent developments, and expressed his admiration for Chamberlain and his thanks that when that emergency arose Chamberlain and Daladier were in office. In his view the French people had maintained remarkable calm. His only criticism was sharply against Flandin. In my conversation with Schacht, he was cheerful and cordial. However, some of my friends told me they found him more serious and inclined to be ironical. He remarked to one of my friends that the population of Germany had been brought up to 80,000,000 - but said how were they to feed them. To another friend he mentioned that some sore spots such B.B Memel and Eupen still remained. When I was talking with Schacht and he got on this line, I recalled the recent promises at made by Hitler, and suggested that their country stop with present achievements and not press on 180 - 3 - on for Cincinnati and Milwaukee. One friend of mine visited Schacht in Berlin on his way to Basel; Schaoht remarked to him that he thought German tactics had been "crude and unintelligent"; Schacht was fearful lest dangerous currency inflation result from the continuing high costs of Germany's adventures. On Sunday one of my neutral friends at the B.I.S. had talked for four hours with Schacht and his German colleagues, insisting to them upon the opportunity Hitler now has to go down in history as a hero rather than a marauder by taking the initiative in peace measures which are constructive. My friend also told them that while Hitler had accomplished much through force and through threat of force, the world doubted that in peace he would be great. My friend was seriously urged by Vocke of the German Delegation to come to Berlin to talk along such taunting lines with Hitler, in the hope that he might be influenced toward 8. policy of conservatism. A manifestation of confidence in the promises given by Hitler to Chamberlain was recommended by some of my friends, in the thought that if an opposite policy is followed the danger of war will only be continued. Still others felt that their Italian colleagues should use their influence with Mussolini toward restraining Hitler from wrong moves. It is the opinion of most of my friends that Hitler Regraded 181 - 4 - Hitler has in his hands the immediate future of Europe, and that the rest of us might as well recognize this fact. During my talk with Schacht he recalled to me his many warnings of the past that Hitler was not affected by democratic attacks except to be embittered by them, and more determined to carry through his program, and that a return to a balance of power in arms was the best way to guarantee peace in Europe. The problem of Germany financing her undertakings was not minimized by any one. All were cognizant of the fact that by acquiring the Sudeten areathe country had gained metallurgical, toy and pottery industries which will compete with already existing German industries of the same kind. In addition, the iron ore and many other raw materials for these industries will have to be provided by Germany; furthermore, there will be a reduction in American and other favorable outlets for the former Czech wares. It is apparently Germany's intention to take over the assets of the Sudeten region without assuring liabil- ities - as for example, a share of the internal and ex- ternal debts of the Crechs, redeeming bank notes which are circulating in the region, and 80 on - and this policy received considerable criticism. Doubt was expressed by Governor Rooth of the Swedish Central Bank that the United Regraded Uclassified 182 5 I I United States would take any part in granting or guarantee- ing an international loan to Czechoslovakia. He said that in this regard he would veto any Swedish participation. The general assumption was that Czechoslovakia would be a vassal state of Germany, in view of the fact that Benes is no longer in office and Chavolsky has been named as Minister for Foreign Affairs. The feelings of the German colleagues were not spared by my friende in referring to the lack of popular support for war in Germany - which was evidenced by the cold silence that greeted the Pomeranian troops which paraded through the city of Berlin at the height of the crisis, the eager- ness with which the German people grasped such foreign radio news as could be obtained with regard to the real situation in Europe, their sumprise when they learned how nearly Hitler had gotten them into a war, and their relief when assured that they would have peace. The argument put forth by Schacht in talking with me was that people were willing to make endless sacrifices for the head of a state when they saw him accomplish such feats as Hitler had achieved. However, according to all appearances, increasingly heavy demands are being made by the Government at present. As an example, German commines cannot keep and use for local public works, and 80 on, the taxes which they Regraded 183 - 8 - they collect. On the contrary, they are obliged to invest, them in the Reich loan which is now being issued to consolidate the new type of Treasury bill issued since April of this year. The success of this loan is even now not yet assured, despite communes, savings banks and insurance companies being called upon to take important portions. My friends realize that Schacht's ability to exert restraining influence on Hitler is very limited; they understand that Schacht has not had 8. talk with Hitler since in May, and February 4 was the date of the last Cabinet meeting. I had a talk with the Governor of the Netherlande Bank, Trip. He reiterated his growing conviction that monetary inflation is coming for the world. Trip told me that Colijn, because of the international crisis, was not able to hold out as stubbornly as he should have done the to restrict/1939 budget on expenditure allotments. The deficit for the 1939 budget appears as only 61,000,000 florins, but Trip insiste that actually the deficit is between 150,000,000 and 200,000,000 due for the most part to the Government failing to pay into pension funds certain required amounts. For the present this irregularity is covered up, but it is Trip's belief that unless Colijn fights on this issue and perhaps realigns his Cabinet, he will fall. In Netherlands, Trip said, the main worry was Regraded 184 - 7 - was the budget; there is still a great deal of unemployment, but the budget constitutes the only immediate danger. END SECTIONS ONE TO NINE, INCLUSIVE. WILSON. DEPARTMENT # TX We / / / / EA:LWW Regraded Uclassified 185 PARAPHRASE OF SECTIONS TEN AND ELEVEN, TELEGRAM NO. 1730 of October 11, 1938, from Paris. During my talk with Trip he said that in the recent crisis he had, despite stiff opposition, convinced his Government that monetary as well 8.8 political independence should be maintained. Therefore during the decline of sterling, he had quit pegging the florin to that currency. In his view & very important problem is presented in the dollar-sterling relationship. Trip expressed the hope that the United States will keep a stable currency, and will use its influence toward the same end with Great Britain. Trip told me that he did not at any time expect that the western powers would go to war; the decision of his country to mobilize, he said, was mainly because the Belgians were worried lest the French would use Luxemburg to attack Germany. I have been informed, incidentally, that during the crisis six army divisions were mobilized by Belgium on her French frontier, and on her German border Belgium had only two divisions. I had & talk with Governor Janssen of the Belgian National Bank. He said that lately he had been quite happy that the belga was attached to gold, although in the past he had sometimes wished it were tied to sterling. Gold had been gained by his Bank and the belga had been firm. The Swimm Regraded Iclassified 186 - 2 - Swiss and Dutch on the other hand had had to out loese from sterling, and their currencies were weakened thereby. In Janssen's view, the primary requisite of B. currency to which others may be tied is that there should be no question as to its stability. His country was most benefited by recent experiences through the clear demonstration that the belga is not tied to the French frano and that any change in the latter will not immediately affect the belga. Unless a general wave of devaluation should set in involving the dollar, he does not expect to devalue the belga. The Belgian ordinary budget for the year 1939, comprising around 11 billion Belgian francs, has been balanced through a very well planned increasing of taxation. END SECTIONS TEN AND ELEVEN. WILSON. EA:LWW Regraded Uclassified 187 PARAPHRASE, SECTIONS TWELVE AND THIRTEEN, TELEGRAM NO. 1730 of October 11, 1938, from Paris For the 1939 budget the figure has been reduced to 1.6 billion Belgian francs, the extraordinary figure for 1938 having been 2.5 billion. For the 1938 budget there still remains a deficit of approximately one-half billion franos. The economic situation in Belgium, in Janasen's view, is at least as good as in France and in the United States. Fe does not look for an early change in the Government or the Government's policies. I had a talk with Bachmann, President of the Swiss National Bank. He made reference to his letter of Sep- tember 16 to me (reference: my telegram of September 19, No. 1504) and said that subsequently sterling had weakened so much that he was forced to stop pegging against it or the Swiee franc would have been depreciated more than 30 percent below the level fixed on the third of June, 1931. A committee of the Swies Federal Council had been called for consultation, and it was decided that the Swise National Bank should have the freeCiom of 1 1/2 percent on either side of 30 percent for the range of franc depreciation. Thus the gold buying and selling prices set forth in the Swiss declaration made to us on the twenty-eighth of October, 1936, are widened correspondingly. During the crisis there was some increase in the Bank of Switzerland's note circulation, but circulation is returning to normal already. Regraded Uclassified 188 - 2 - already. At present the chief worry of Bachmann is the sterling weakness. He would in particular like to know whether the United States will exercise its right to devalue the dollar further in the event there is increased weakness and a significant decline in sterling. END SECTIONS TWELVE AND THIRTEEN. WILSON. 11 , STATE N EA:LWW - / Regraded Uclassified 189 PARAPHRASE OF SECTIONS FOURTEEN TO TWENTY-TWO, INCLUSIVE of telegram No. 1730 of October 11, 1938, from Paris I have been told that The Governor of the Bank of Italy, Azzolini, has purchased two British flage to hang out from the Bank when Chamberlain comes to Rome to sign the final Anglo-Italian agreement. I was assured by Assolini that a most cordial welcome would be given Chamberlain by Italians of all classes, because they were all 80 grate- ful to him for having avoided a war. The tourist trade in Italy this past season has been disappointing, he said, due partly to competition from the French with a depreciated frano, and partly to some foreign uneasiness over the international political affaire. The trade deficit of Italy for the first eight months of 1938, on the other hand, is much lower than for the same period in 1937. Observers who have felt that the conflict in Spain was a serious danger to Europe's peace are happy to see that now the prospects are good for an early withdrawal of Italian troops from Spain. Such & move will facilitate improvement in relations between Italy and Great Britain, and perhaps the relations between Italy and France will also show improve- ment. Hope was expressed by those who thought France had not been wise last spring in not trying to approach the Italians at the same time advances were made by the British, that the present good opportunity will not be missed by France. At Basel there WAS one rumor that in return for such an Regraded Uclassifie 190 - 2 - an agreement Italy will demand Tunisia, but this rumor is denied by my Italian friends. Furthermore, they insisted that their country will not try to hold any land in Spain or in the Balearic Islande. The entire Italian air and sea forces and all the Alpine tropps, my friends admitted, had during the crisis been quite ready. I was told by Yanagita of the Bank of Japan that he thought the Munich settlement and an adjustment of the Spanish affair would have & lot to do in discouraging the Japanese military element, and leading to 8. conclusion of the Chinese conflict. According to Kano of the Yokohama Specie Bank, an end of the war would even be welcomed by the Japanese Military Party, and within one month and even before the fall of Hankow, some proposition may be made to the Chinese. Every month for the past twelve months he has been anticipating such a step. The Bank of England Governor, Norman, was not yet able to make the trip to Basel. Cobbold, his alternate, was there; he is anxious to see the Germans given a chance to carry out their promises to Chamberlain without too many doubts about their intention being suggested before- hand. Cobbold is mildly optimistic that some capital may move back from New York into sterling, especially in view of the approaching election period in the United States, and the increase in labor quarrels. When Regraded Uclassified 191 - 3 - When Niemeyer getsback to London he is to consult with Pospisil and other members of the Czechoslovak delagation with regard to financial aid. He said that he does not know whether the ten million pounds announced 80 far is 8. bona fide loan or more of a gift. It would seem that the Bank of England is sorry now that time was not taken at Munich to make more definite arrangements as to financial questions pertinent to the change in Csechoslovak territory. I spoke with the Bank of France Governor, Fournier, who said that the note circulation of the Bank of France has been reduced in recent days by 7 billion france from over 124. Since the end of September the Treasury, he said, had taken in over 3 billion france through bills and short term loans. During the month of October there are no important maturities, therefore he does not expect the Treasury to have any trouble getting through the month satisfactorily, but it may have to draw on the Bank of France against its remaining 1 1/2 billion franc credit. The Governor told me that he was urging the Government to limit the number of its special financial and economic decrees, to perhaps fifteen, and that they should be got out as quickly as they could. For the present he does not think Bank of France gold stocks will be revalued; certainly such action will not be taken B.G an isolated measure. Pur- ther devaluation is definitely opposed by Fournier. Pessimism Regraded 192 - 4 - Pessimism about the French financial and monetary out- look was expressed by most of my friends. Both the frano and the Bank of France has been left weaker each time by successive crises. The Treasury has now had added to its burdens heavier military expenditures; therefore it is likely that even if the Treasury gets through October satie- factorily, the maturities of November will give trouble. The speech which was made by Hitler at Saarbrucken became known in Basel on Monday, and the impression was not favor- able 80 far as the peaceful intentions of Hitler are con- cerned. But my best balanced friends believed that the speech was mainly for domestic consumption, and there should not be too much unhappiness over it. A further break in the franc as well as the pound resulted therefrom, neverthe- less. Until some formula is discovered to make the rich pay more and the poor work more, there is little hope for sound French finance and a firm franc. The French outlook is 80 discouraging in Trip's opinion that unless some marked improvement is shown soon he is going to request that Mendelssohn not renew the banking credit of around 150,000,000 florins to the French which reaches maturity in November, In Niemeyer's view the French will not be aided by further devaluation of the frano; however, he does not think that such devaluation should bee too strenuously opposed by Great Britain. For many months Pennacio of the Bank Regraded Uclassified 193 - 5 - Bank of Italy has felt that unless the wealthy people of France bring their capital back into the country and put it to work, there will be a serious Socialist conflict in France. International political factors are responsible for part of the present weakness of sterling, but most observers are convinced that & number of adverse elements in the situation in Great Britain will not permit the pound to come back to 4.86, and that it may be pushed considerably below 4.80. In the unsettled circumstances of the present - and some fear these are likely to be prolonged - they see no reason why flight capital from Europe should move out of the dollar into sterling. For the present, almost every one expects that the dollar will remain strong. The view was expressed by Jacobsson that within the next six months currency inflation 16 bound to come in the United States, with resultant weakening of the dollar vis-a-vie sterling, in view of our inflexible wage scale being BO far out of line with prices, and with a continuing Treasury deficit inevitable for some time unless the United States is willing to increase the number of unemployed in the country. I was told again by some of the central bankers who have gold dealings with our country or are aware of something like the volume of the British operations with us (sic.) that Regraded Uclassified 194 9 1 I that they etill think the 1/4 percent American handling charge is excessive, and that international cooperation toward steadiness of currencies is not aided thereby. It is believed by some observers that there is now under way a liquidation of political unrealities in Europe. They would like to 868 the way clear for Chamber- lain to carry his Birmingham businessman peace plan for Europe 8.9 far as he can. They think that the greatest con- tribution the United States could make would be to achieve our own domestic recovery on a firm basis, and all nations would eventually benefit thereby. The dollar stability is apreciated by these observers, but they feel that if we took early steps to abolish such policies as that involved in our silver purchases, we would inspire more confidence in the monetary leadership which is now enjoyed by the United States. These observers are genuinely anxious to Bee the United States successful in attaining a sound and lasting recovery, in working out a redistribution of gold, and in advancing freedom of trade. They expressed the view that steps in this direction are not being taken when we subsidize wheat and barter tax cotton for silver. November 14 has been set as the date of the next meeting of the BIS. END MESSAGE. WILSON. EA:LWW Regraded Uclassified 195 FEDERAL RESERVE DANK OF NEW YORK M OFFICE CORRESPONDENCE DATE October 11, 1938. CONFIDENTIAL FILES SUBJECT: TELEPHONE CONVERSATION WITH L. W. Knoke BANK OF ENGLAND. I called Mr. Bolton at 11:10 s.m. I referred to his cable in which he spoke of strong speculative and far eastern demand for dollars and asked what that was. Bolton replied that & fair demand for dollars had come from @hanghai. Today he had sold $8,000,000 to the Banque de L'Indo Chine, $2,000,000 to Dreyfuse and $2,000,000 to Lazard. Commercial demand for dollars in Paris as well as in London had been insignificant; as regards the Paris market he had closely checked into it with Cariguel. Es was now of the strong opinion that there was under way a speculative effort to bring sterling dow. The rate had opened today at 4.75 1/2 and in less then five minutes he had sold about $6,000,000. In addition he had put £750,000 gold into the market at B price to emable its being shipped to New York and thus furnishing more dollars. The market had absorbed between $12,000,000 and $13,000,000 by mid-day. They had bided their time until the Paris Bourse opened and then he had pushed the sterling rate up a little but he wouldn't make any attempt to fores it up any higher. His total sales 20 far had been $11,000,000. How long this present movement against sterling would last he didn't know but it very obviously had its origin in the bister disappointment over Hitler's speech which seemed to put an end to the so-called pasce that they believed they had secured at Munich. I referred to reports in our newspapers to the effect that Regraded Uclassified 196 FEDERAL RESERVE BANK OF NEW YORK OFFICE CORRESPONDENCE DATE October 11, 1938. CONFIDENTIAL FILES SUBJECT: TELEPHONE COMVERSATION WITH L. W. Knoke BANK OF ENGLAND. 2 Governor Norman proposed making 6 trip to this country, Was there any truth in that? Belton replied that he had heard nothing at all but that he would make some inquiries. Governor Norman had been away from the bank since the beginning of September, partly on a holiday and partly in order to recover from his recent illness, and was not expected back in the bank until November. I asked Bolton what his latest figures were on foreign gold hearded in London; he thought they were "something under £200,000,000." He hadn't seen an sccurate figure for the last work or two but as far as he knew there had been 8. reduction during that period of about £20,000,000. I spoke of the three recent special shipments (Nashville, Honolulu and Somers) and mentioned that the first shipment had safaly been delivered into the Assay Office here without causing any comment anywhere and that the second was being taken off this afternoon. We had made and would make no custom house entries 80 that no asni- fests would be available to the public. The custom house would simply be instructed by the Treasury Department, of which it is a part, in its records to take note of these shipments. The problem which was now facing us was that the Department of Commerce published once a week detailed figures of imports and exports of gold assording to countries. These figures are published Wednesdays and Thursdays. They would show a jump of $25,000,000 (the first shipment) in the Regraded Uclassified. FEDERAL RESERVE BANK 197 OF NEW YORK OFFICE CORRESPONDENCE DATE October 11, 1938. CONFIDENTIAL FILES SUBJECT: TELEPHONE CONVERSATION WITH L. #. Knoke BANK OF ENGLAND. 8 near future and two further jumps of $25,000,000 each thereafter. No details as to shipper and consignee would, of course, be given. Considering the way gold was now pouring in here such $25,000,000 increases would probably cause no comment here. Severtheless, I wanted to ask him whether they would be embarressed in case some- thing should loak out. Bolton repeated what Bawker had told se in the past, namely, that the British customs had not been advised of these shipments but added that an unexpected look here "can't embarrass us." They had been extremely lucky in svoiding the attention of the press) "I think it 10 just as well to keep the matter quiet now." Bolton advised that he was shipping £5,000,000 gold to us on the Queen Mary from Paris. I asked whether that nearly cleaned up their earmarkings in France but Bolton replied that they still had 8 fair amount there. However, they bad to move quite carefully because such shipments caused a good deal of disturbance in France where the position continued to be very difficult. Politically there was a possibility of the Socialist party breeking up. If that hap- pened it would give the Radical Socialists their own majority in the Chamber, all of which night be for the good, but that was only a rumor. Meanwhile Daladier had decided against the further devaluation and also against exchange control. The stabilization fund, hovever, Regraded Uclassified. MISC 12 FEDERAL RESERVE BANK 198 OF NEW YORK OFFICE CORRESPONDENCE DATE October 11, 1958. CONFIDENTIAL FILES SUBJECT: TELEPHONE CONVERSATION WITH TO TROM. L. 1. Knoke BANK OF ESGLAND. 4 could not be in a very happy frame of mind and it was reasonable to essume that it did not have sufficient gold or exchange to meet 8 big drain now. "There is going to be a disaster over there one of these days." LWK:KW Regraded Uclassified