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Volume 179, April 14 – April 16, 1939
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Volume 179, April 14 – April 16, 1939
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Henry Morgenthau, Jr. Papers
Diaries of Henry Morgenthau, Jr.
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DIARY
Book 179
April 14 - April 16, 1939
- A -
Book Page
Amenberg, Mos
Nationwide News Service: See Tax Evasion
Appointments and Resignations
Magruder, Calvert: Declines post of General Counsel - -
4/16/39
179 329
- B -
Bailie, Earle
will join Treasury staff - 4/14/39
202
Brinkmann, Rudolf
See War Conditions: Germany
- C -
Countervailing Duties
Italy: Countervailing Duties on Silk Goods:
Attorney General's opinion - 4/14/39
70
a) HMJr's answer - 4/15/39
309
b) HMJr informs State Department - 4/15/39
307
Csechoslovakia
See War Conditions
- E -
Ernst, Morris
See War Conditions: Germany
- F -
Financing, Government
Borrowing power of those Government agencies whose obligations
are outside of formal public debt limit: Duffield memorandum
on possible aid in current Government financing
(Reconstruction Finance Corporation, Federal Deposit
Insurance Corporation, and United States Housing Authority) -
4/14/39
129
France
See War Conditions for public debt as of 2/28/39
- G -
Garner, John Nance
Germany
Gold Bullion
Government Bond Market
Great Britain
See War Conditions
Regraded Unclassified
- H -
Book Page
Hanes, John W.
Refund of $6,750.89: Helvering memorandum, et cetera -
4/14/39
179
195
Hansen, Alvin H.
See War Conditions
Hooker, Henry S.
Memorandum proposing solution of economic distress in
United States - 4/14/39
130
- I -
Italy
See Countervailing Duties
If War Conditions
- L -
Lending Agencies
HMJr tells McReynolds FDR has said recommendation of
Bureau of Budget is to transfer all of them to Commerce
Department - 4/14/39
153
- 11-
Magruder, Calvert
See Appointments and Resignations
Missouri, State of
Pendergast case: Governor Stark thanks HMJr for
assistance - 4/15/39
299
- N -
Natiomwide News Service
See Tax Evasion: Annenberg, Moe
- P -
Pendergast, Thomas J.
See Missouri, State of
- R -
Revenue Revision
Duffield's second draft of tax statement - 4/14/39
1
HMJr explains to 9:30 group object of tax statement: to let
country know in what direction it is headed 80 far as
public debt and deficits are concerned - 4/14/39
155,179
Regraded
Unclassified
- R -
Book Page
Riefler, Winfield
See War Conditions
- S -
Statements by HMJr
Duffield's second draft of tax statement to be made by HMJr
before Committee on Ways and Means - 4/14/39
179 1
HMJr explains to 9:30 group object of tax statement: to
let country know in what direction it is headed 80
far as public debt and deficits are concerned - 4/14/39
155,179
Stark, Lloyd (Governor, Missouri)
See Missouri, State of
Stewart, Walter
Surplus Commodities
Switzerland
See War Conditions
- T -
Tax Evasion
Annenberg, Moe: Nationwide News Service: Foley memorandum
on proposed sale of assets - 4/14/39
24-A
Taxation
See Revenue Revision
Treasury Bulletin
Duffield asks to be relieved of responsibility for -
4/15/39
313
- V -
Viner, Jacob
See War Conditions
- W -
War Conditions
Bailie, Earle: will join Treasury Staff - 4/14/39
202
(Hansen, Alvin
(Riefler, Winfield
(Stewart, Walter
(Viner, Jacob
Plans discussed for work in event war is declared -
4/15/39
278
Regraded Unclassified
Book
Page
War Conditions (Continued)
Foreign exchange restrictions, et cetera - (proposed
Executive Order): Attorney General's opinion -
4/16/39
179
330
France: Public debt 2/28/39 as published in Journal
Officiel - 4/14/39
61
Garner, John Nance: Memorandum asking "Has United
States Government ever used public funds to enable
American citizens to collect on their foreign
investments?" answered by White - 4/14/39
74
Germany: American Embassy, Berlin, reports on conversation
with Puhl (Vice President, Reichsbank) - 4/14/39
55
a) Exchange stringency greater than ever
b) Reichsbank is "loyally" meeting Czech importers'
heavy commitments abroad
c) Standstill Agreement: no substantial change con-
templated
d) Brinkmann will probably never resume position as
Vice President
Morris Ernst reports to HMJr that "New York banks had
paid huge tributes to get their deposits out of
Germany - 4/14/39
68
Gold Bullion: Messersmith memorandum concerning problem
of many European corporations holding a substantial
portion of liquid reserves in the form of bullion on
deposit in England, Holland, and Switzerland - 4/15/39.
310
Government Bond Market: Plans for stabilizing discussed at
conference; present: HMJr, Hanes, Bell, White, Lochhead,
Viner, Eccles, and Harrison - 4/14/39
210
Second conference; present: representatives of Treasury,
Reconstruction Finance Corporation, Federal Reserve
Board, Federal Reserve Bank of New York, Securities
and Exchange Commission, Agriculture, and State -
4/15/39
241
Security Markets; Protection of: White memorandum -
4/14/39
208
a) Securities and Exchange Commission memorandum on
advisability of closing security markets in
United States in event of war - 4/15/39
284
Great Britain: Financial regulations to be put into
operation upon outbreak of war - 4/14/39
25,63
Proposed course of action - Jerome Frank told by HMJr
that Great Britain has asked if United States Government
can provide some way to lend them money against the
stocks which they may take over - 4/14/39
150
a) HMJr transmits answer to Butterworth for British
Treasury - - 4/16/39
323
Foley memorandum regarding proposal to lend against or
purchase American securities "nationalized" by a
foreign country - - 4/15/39
273
Regraded Unclassified
- W -
Book Page
War Conditions - (Continued)
Surplus Commodities: Wallace memorandum on proposal to
sound out British Government concerning exchange of
surplus cotton and wheat for - 4/15/39
179
314
Switzerland: Cochran reports on meeting of Board of
Management of Swiss National Bank concerning United
States Treasury's inquiry - 4/14/39
53
War Risk Insurance: HMJr consults Bell concerning -
4/15/39
294
Wasserman, "illiam S. (President of Investment Corporation
of Philadelphia and of Delaware Fund, Incorporated):
New York Times story on investment trusts denied by
Jesse Jones, Jerome Frank, and HMJr - - 4/14/39
143,146,150
a) Butterworth reports on comment in London papers -
4/15/39
317
War Risk Insurance
See War Conditions
Wasserman, William S. (President, Investment Corporation of
Philadelphia and of Delaware Fund, Incorporated)
See War Conditions
Regraded Unclassified
Duffild #2
april 14. 1937
1
9.30 A.M.
I should like first to say that I appreciate this
opportunity to present to your Committee my views on
necessary revenue legislation. You have heard the saying,
"No year is a good year to suggest a tax bill." Certainly
this remark would seem to be an accurate forecast of 1940,
a year in which a national election will command the atten-
tion of the country. Therefore, my appearance here today
may well be my last before this Committee on the broad subject
of tax legislation.
For that reason, may I digress a moment to thank
this Committee and especially its Chairman, Representative
Doughton, for the cooperation and consideration which have
been extended to me throughout my term in office.
Representative Doughton, your Committee, Senator Harrison
and the Senate Finance Committee have served the welfare of
this country in a manner of which we may all be proud.
Working with this Committee and with the Senate Finance
Committee has been an experience which I shall remember with
pleasure.
When I appeared before this Committee on March 24th,
I said that the Treasury would soon be ready to give to the
appropriate Congressional committees its recommendations for
changes in the tax system. Representative Doughton and
Regraded Unclassifie
2
- 2 -
Senator Harrison have expressed a desire to receive the
recommendations for action at this session.
Some revenue legislation during this session is
a recognized necessity, The income taxes on corporations
expire at the end of the calendar year, and excise and sales
taxes yielding about $500 millions annually expire during the
summer. I hope that Congress will not simply extend the
expiring levies and adopt the usual technical changes, but
will take this opportunity to adopt those few basic reforms
which we badly need to make the revenue system fit the needs
of the country.
At the present time we stand at a point of
incomplete business recovery. To move ahead toward complete
recovery, we must have a willingness among the people of this
country to invest in the future of American productive enter-
prise. If there are elements in our tax system which dampen
that willingness, we should remove them. If uncertainty
over possible future tax demands is hampering business
expansion, I believe Congress should point the way toward
a sound and adequate fiscal policy which will encourage
recovery and reemployment.
If we are to accomplish these helpful, fundamental
reforms in the field of taxation, I believe this year is the
one in which to achieve them. Congress now has an opportunity
Regraded Unclassified
3
- 3 -
to perfect the work on the tax system which we have had to do
in recent years under the stress of depression demands for
revenue.
Since 1932 Federal tax collections have more than
trebled, rising from $1,900,000,000 to an all-time high of
$6,000,000,000. Although a part of the increased collections
is attributable to improved business conditions, the more
important part results from tax rate increases enacted during
the past seven years or from the denial of some tax deductions
previously allowed. In 1932 Congress raised the income tax
rates to approximately the levels prevailing after the world
war, estate taxes were roughly doubled, and a long list of
excise taxes was imposed. Liquor taxes were added in 1933.
Collections of social security taxes began in 1935. Income,
estate and gift taxes were raised again in 1934 and in 1935.
Corporation income taxes were basically changed in 1936 and
again in 1938 while in 1937 legislation was enacted closing
loopholes in the individual income tax. Each year since 1932
has brought some change in our tax structure, usually a change
dictated by the demands of the moment.
I suggest that Congress look back over this revenue
legislation of the past seven years and, by granting tax
allowances at strategic points, remove any obstacles which
now seem to be standing in the way of business expansion.
The following revisions, which I am submitting for your
Regraded Unclassified
n
- 4 -
consideration, appear to me to offer the most important and
effective means for lightening the tax burdens which fall
especially hard on new and expanding business.
1. We now have four different taxes applicable
to ordinary business corporations: a remnant of the
1936 undistributed profits tax, a capital stock tax
and an excess profit tax enacted in 1932, and the
ordinary income tax. The corporation tax system
would be greatly simplified, its justice measurably
increased and the burden on new and uncertain enter-
prise diminshed if all four taxes were consolidated
into a single tax on corporate incomes yielding the
same revenue as the four existing taxes. This new
tax would preferably be at a flat rate with some
concession to corporations having less than perhaps
$25,000 net income.
Although this change would completely eliminate
what remains of the undistributed profits tax,
I believe we can now take this step without sacrific-
ing the objectives which we sought when the undistri-
buted profits tax was proposed in 1936. The very
effective taxation of "incorporated pocketbooks",
that 1s, personal holding companies, which was enacted
in 1937 has closed the loophole which had been used
to avoid high personal surtaxes and which the un-
distributed profits tax had sought to close in a
different manner.
Regraded Unclassified
5
- 5 -
2. In my opinion we should reinstate the
allowance under which the corporation which sustains
a net business loss in any one year can carry forward
that loss and deduct it from taxable income realized
in subsequent years. Taxation of income in annual
segments is an arbitrary measure of corporation earn-
ings which is made necessary by administrative re-
quirements. We should not, however, push this
arbitrary annual basis for measuring taxable income
to the extent of refusing to recognize alternating
periods of profit and loss. The present system of
allowing no carry-over of business losses for normal
tax purposes places the tax system in the position
of deterring both the volatile durable goods industries
and new investment.
3. I also suggest that capital gains and
losses of corporations be handled for tax purposes
in the same manner as ordinary business profits or
losses. Under existing law a corporation may get
little or no tax credit for a loss sustained on
a capital investment, a fact which may discourage
new investments.
4. Dividends received by individuals, in my
opinion, should be given a tax allowance comparable
to that which was in effect prior to 1936.
At present corporation income 1s taxed, and then
Regrade
6
- 6 -
when the income 1s paid out as dividends, the
stockholder pays the full individual income tax on
his dividends with no allowance for the fact that
the corporation has already paid a tax on the same
earnings. This tax arrangement, moreover, en-
courages corporations to finance themselves by
going into debt rather than by selling stock be-
cause corporations may deduct interest payments
from their taxable income but may not deduct divi-
dends paid. Interest is taxed once, while dividends
are taxed twice.
5. At the present time one of the most irksome
situations for the taxpayer arises out of Federal-
State-local tax conflicts. Numerous overlapping
taxes have grown up especially during the last ten
years, as both national and State governments
reached out for new revenue sources. I suggest
that Congress enact legislation creating & national
commission to study this problem. The commission
should be made up of men having the highest possible
level of ability and public confidence and represent-
ing not the Federal, State and local governments as
such, but the national interest at large. Their
function would be to study intergovernmental fiscal
policy in its many ramifications and report to
Congress within the next two years.
Regraded Unclassified
7
- 7 -
6. One of the most important suggestions
which I should like to offer today is at combination
of proposals to encourage the idle private savings
of this country to play their normal part in finano-
ing business expansion and reemployment. During
recent years much has been said about high individual
income tax rates which reach a peak of 79 per cent
in the top bracket. These taxes, combined with
state and local taxes in many jurisdictions, are
said to discourage the ordinary assumption of risk
by investors because the tax collector would take
so great & share of any income realized from
a business venture.
In view of other features of our income tax
structure, such as the method of taxing capital
gains of individuals and the tax exemption extended
to State and Federal securities; I can not agree
that the surtaxes on individual income are too
high. Very large portions of big incomes escape
taxation in whole or in part. However, I should
like to suggest the following measures which, if
enacted in combination, might increase the equity
of our tax system and encourage the employment
of venturesome capital: tighten the capital gains
section of the income tax law, increase estate and
gift tax rates, remove tax exemption from future
Regraded Unclassified
8
- 8 -
issues of Federal, State, and local securities and
then reduce the surtax rates in the top brackets of
our income tax.
I should like to enlarge on the proposals which
I have just suggested as prerequisites to lowering the highes
surtax rates. The individual income tax law still contains
provisions which need strengthening, and the most important
of them are those I have Just mentioned. More specifically,
I should like to offer the following changes:
1. Present capital gains and losses provisions
of the individual income tax can be improved. A pro-
fit from the sale of a stock or a bond or & piece
of real estate or any other capital asset is now
taxed at a maximum rate of 15 per cent if the asset
has been held more than two years. Compared with
the income tax rates that apply to salaries,
interest, dividends, and rents, the rates on these
long-term capital gains are very low. One reason
given for setting them 80 low 1s that the deduction
of capital losses is somewhat restricted.
A fair tax system can not be achieved by
matching an unjustified concession by a harsh
restriction. A more sensible procedure 1a to re-
move both the concession and the restriction.
Hence, I suggest for consideration an increase in
the tax rates on long-term capital gains, and
Regraded Unclassifi
- 9 -
9
possibly also on intermediate gains (now taxed at
& maximum of 30 per cent), coupled with more liberal
allowance of capital losses. Perhaps capital losses
could be carried forward several years to be offset
against future capital gains. The net result should
be no deterrent to genuine long-term investment,
especially in view of the suggestions made later
concerning surtax rates. It would increase the
revenue somewhat and fairness among individuals
& great deal.
2. The present law allows large fortunes to
escape their fair share of taxation through the
loophole of gifts. The present type of gift tax
1s powerless to prevent such escape. The gift and
estate taxes should be coordinated BO that from the
tax point of view there would be no substantial
difference whether a man gave away his estate dur-
ing his life or at his death. This coordination
would in effect consider gifts and the final dis-
tribution of the estate at death as a unified
series of transfers, with one exemption and one
rate scale, in place of the two exemptions and two
rate scales in the present law. If Congress
desires to give some special inducement to gifts
made prior to death, this can be accomplished
through special credits. The revenue increases
from the coordination of gift and estate taxes
Regraded Unclassified
- 10 -
10
would be realized gradually but would eventually be
substantial.
I would like to suggest also that Congress consider
increasing the yield of the estate and gift taxes by
providing somewhat lower exemptions and higher rates
in the lower and middle brackets and by eliminating
the present exemption for life insurance.
3. Tax exemption can be eliminated from future
issues of government and government guaranteed bonds.
The Treasury Department has already recommended this
action. Removal of tax exemption will tend to push
into new or expanding business enterprises the kind
of private capital which can afford to undertake the
hazards of business development. Furthermore, the
taxation of the interest on future government and
government guaranteed bonds is one of the most obvious
steps towards tax justice. While the revenue yield
will be small in early years, it will eventually be
quite substantial.
Furthermore, the income tax could be strengthened
by limiting the present depletion allowances for oil and min-
ing properties and by doing away with the special status en-
joyed by income taxpayers living in community property states.
Thus far I have been discussing in detail revisions
of the tax laws which have been enacted over the past seven
years. I should like now to turn to the more sweeping problem
of pointing the way for future tax policy and fiscal policy.
Regraded Unclassified
11
- 11 -
An important fiscal obstacle to complete recovery
during a period when Government expenditures are exceeding
revenues 1a the fear of the business man and investor of the
unpredictable tax burdens which may be placed upon him at
some date in order to bring the Government's budget into
balance. Much of this fear 1s groundless. The Federal tax
system now in force has yielded more than any other in the
history of our country. With substantial increases in
business and in the national income, revenue should rise
even higher under existing taxes and with a reasonable re-
duction in expenditures should balance the budget in pros-
perous years. The present revenue system will not, however,
prevent net increases in the public debt over a long period
of time -- good years and bad -- unless there is a radical
reduction in expenditures. With relief and national defense
absorbing
percentage of our Federal disbursements
I can not foresee any immediate opportunity to bring about
such a curtailment in expenditures.
Unless we are to commit ourselves to a philosophy
of continuing increases in the public debt, I believe that
Congress must some time enact measures which would bring in
additional revenue, When the road toward a balanced budget
has not been charted, the man who has saved money or who is
in charge of a business enterprise may refuse to undertake
an ordinary investment or expansion because he expects
heavier taxes ahead and he can not foresee how they will
Regraded Unclassified
- 12 -
12
affect him. Because he can not appraise the hazards of the
future, he may mark time.
It 1s my sincere hope that this Congress, this
year, will dispel much of this uncertainty by pointing the
way which tax policy and fiscal policy are to move toward
a balanced budget. The adoption by Congress of a program
which commits us to a trend toward a balanced budget during
the next five years 18, in my opinion, much more important
than the exact date of budget bal ancing. Such a program
means to me to play a vital part in increasing the national
income.
In closing, may I suggest for your consideration
steps which I believe should be a part of any such program:
First, the continuation of the sales and excise
taxes which otherwise expire this year.
Second, the program of tax adjustment and revision
which I have outlined above.
Third, an increase in the middle bracket income
tax rates, a reduction of the income tax exemptions to $800
for single persons and $2,000 for married persons.
Fourth, and most important, a declaration by
Congress in unmistakable terms of a policy which would lead
toward gradual balancing of the budget.
I would not have you infer that if the proposals
which I have suggested this morning be adopted, business
would at once expand to boom proportions. These measures
Regraded Unclassified
13
- 13 -
are not a shot in the arm. They are like proper care and good
food to a patient convalescing after a long illness. They do
not cause his recovery overnight but they smooth his way to
recovery.
14
April 14, 1939.
Proposed Statement for Secretary Morgenthan to Make
Before Ways & Means Committee - on Tax Legislation
I should like first to say that I appreciate this opportunity
to present to your Committee my views on necessary revenue legisla-
tion. You have heard the saying, "No year is a good year to
suggest a tax bill." Certainly this remark would seem to be an
accurate forecast of 1940, a year in which a national election will
command the attention of the country. Therefore, my appearance
here today may possibly be my last before this Committee on the
broad subject of tax legislation.
For that reason, may I digress a moment to thank this Committee
and especially its Chairman, Representative Doughton, for the
cooperation and consideration which have been extended to me
throughout my term in office. Representative Doughton, your
Committee, Senator Harrison and the Senate Finance Committee have
served the welfare of this country in a manner of which we may all
be proud. Working with this Committee and with the Senate Finance
Committee has been an experience which I shall remember with
pleasure.
When I appeared before this Committee on March 24th, I said
that the Treasury would soon be ready to submit its recommendations
for changes in the tax system. Representative Doughton and
Senator Harrison have expressed a. desire to receive the recommenda-
tions for action at this session.
Regraded Unclassified
15
- 2 -
Some revenue legislation during this session is a recognized
necessity. The income taxes on corporations expire at the end
of the calendar year, and excise taxes yielding about $500 millions
expire during the summer. I hope that Congress will not simply
extend the expiring levies and adopt the usual technical changes,
but will take this opportunity to adopt those few basic reforms
that we badly need to make the revenue system fit the needs of the
country.
At the present time we are still in a period of incomplete
recovery. To get complete recovery there must be willingness
to go shead, and especially willingness to invest in new under-
takings. If there are obstacles in the tax system that stand
in the way of our going shead, we should remove them. At the
same time we should promote the underlying tax justice that is
80 necessary to long-run business soundness and public welfare.
Congress can, in my opinion, help to remove obstacles now
standing in the way of investment and business expansion and at
the same time promote equity by providing tax allowances at certain
strategic points. The following seem to me to be the most important
and effective ways to relieve the tax burdens that fall especially
hard on new and expanding businesses:
1. We now have four different taxes applicable
to ordinary business corporations: a remant of the
1936 undistributed profits tax, a capital stock tax
Regraded Unclassified
16
- 3 -
and an excess profit tax enacted in 1932, and the
ordinary income tax. The capital stock tax is not
based on the actual value of a company, nor is the
excess profits tax actually a tax on excessive
profits. In its emasculated form, the undistributed
profits tax is meaningless. The corporation tax
system would be greatly simplified, its justice
measurably increased and the burden on new and
uncertain enterprise diminished, if all four taxes
were consolidated into a single flat tax on corporate
incomes, with some concession in rate to corporations
having less than perhaps $25,000 net income.
2. In my opinion, we should allow corporations
sustaining net business losses in any one year to
carry such losses forward and deduct them from income
realized in subsequent years. At present a business
which has lost $50,000 a year for three years and has
then netted $150,000 in the fourth year must pay a
normal tax on the full $150,000, although the plain
fact is that the business has made no profit at all
over the 4-year period. Taxation of income in annual
segments is an arbitrary measure of corporation
earnings which is made necessary by administrative
requirements. However, we should not push this
Regraded Unclassified
17
arbitrary basis for measuring income to the extent of
refusing to recognize alternating periods of profit
and loss. The present system of allowing no carry-
over of business losses of corporations for normal
tax purposes places the tax system in & position of
deterring new investment.
3. The existing provisions for capital losses
sustained by corporations are another example of how
the existing tax laws discourage new investments.
If a corporation suffers a loss on capital assets,
this loss can be deducted only against capital gains,
if any, which the corporation has made in the same
year, plus $2,000. In many instances, therefore, a
corporation does not in practice get any tax allowance
for a capital loss, a fact which discriminates against
a risk-taking enterprise.
4. Dividends received by individuals should be
exempt from the normal income tax. At present
dividends are twice taxed, once as corporation income,
and again to the stockholder as dividends. This tax
arrangement incidentally encourages corporations to go
into debt rather than to sell stock because corpora-
tions may deduct interest payments from their taxable
Regraded Unclassified
18
- 5 -
income but may not deduct dividends paid. Interest
is taxed once, while dividends are taxed twice.
5. During recent years a great deal has been
said about the high taxes on individual incomes
which reach a peak of 79 percent in the top
bracket. These taxes combined with the State and
local income taxes in many jurisdictions are said
to discourage the ordinary assumption of risk by
investors because the tax collector takes 80 great
a share of any income realized from a venture.
However, these high rates are many times merely
nominal. Other features of our present income tax
structure, such as the capital gains section of the
income tax law and the exemption which is extended
to interest from State and Federal securities,
permit very large portions of big incomes to escape
taxation in whole or in part. It is my opinion that
the surtax rates in the top brackets of our income
tax should be reduced but only if these loopholes are
removed as suggested later in my statement.
6. We need to make the process of computing and
paying taxes a less complicated one. Much effort
has been given in the past few years to help the
19
- 6 -
taxpayer through decentralizing administration and
in other ways. At the present time one of the most
irksome situations that the taxpayer faces arises.
out of Federal-State tax conflicts. Numerous over-
lapping taxes have grown up, especially during the
last ten years as both national and State governments
reached out for new revenue sources. I suggest that
Congress in this session enact legislation creating
a small, temporary national commission to study this
problem. The commission should be made up of men
having the highest possible level of ability and
public confidence and representing not the Federal,
State and local governments as such, but the national
interest at large. Their function would be to study
intergovernmental fiscal policy in its many ramifica-
tions and report to Congress within the next two years.
Beyond this matter of specific changes to remove deterrents is
a general one. An important fiscal obstacle to complete recovery
appears to be the fear of the businessman and investor that our
tax system is not powerful enough to insure a fully balanced
budget over a period of years. As long as that fear exists the
man who has saved money or who is in charge of a business enterprise
may hesitate to invest because he expects heavier tax rates ahead,
and he cannot foresee how they will affect him.
Regraded Unclassified
20
- 7 -
Much of this fear is groundless. The Federal tax system
has been greatly strengthened by tax laws passed in 1932 and
subsequent years. The tax revenue has risen from $1,900,000,000
in 1932 to an all-time high of $6,000,000,000 in 1938. With
substantial increases in business and the national income, and
the resultant reduction in expenditures, the revenue increases
should balance the budget in prosperous years.
There is still foundation, however, for the fear that the
present tax system may not be sufficiently productive to provide
enough revenue to insure a long-run balance. Such a balance
involves reducing the public debt in good times as much as it
is increased in bad times. In my opinion, nothing would 80
strengthen business sentiment as a clear prospect of long-run
budget balancing and the provision at this session of additional
revenue to insure such a prospect.
Some additional revenue will also be required to offset
losses from removing restrictive features which I shall later
discuss.
We can get the needed revenue from sources which will not
hamper business recovery and which at the same time need to be
done to increase the equity of the tax system. I suggest your
consideration of the following:
Regraded Unclassified
21
- 8 -
1. The practice of issuing tax-exempt securities
by governments and their instrumentalities might be
eliminated. The Treasury Department has already
recommended this action. Removal of tax exemption
will tend to push into new or expanding business
enterprise the kind of private capital which can
afford to undertake the hazards of business develop-
ment. Furthermore, the taxation of the interest on
future government bonds is one of the most obvious
steps towards tax justice. While the revenue yield
will be small in early years, it will eventually be
quite substantial.
2. Present capital gains and losses provisions
of the individual income tax can be improved. A
profit from the sale of a stock or a bond or a piece
of real estate or any other capital asset is now
taxed at a maximum rate of 15 percent if the asset has
been held more than two years. Compared with the
income tax rates that apply to salaries, interest,
dividends, and rents, the rates on these long-term
capital gains for individuals with high incomes are
very low. One reason given for setting them 80 low is
that the deduction of capital losses is somewhat
restricted.
Regraded Unclassifie
22
- 9 -
A fair tax system cannot be achieved by matching
a harsh restriction by an unjustified concession.
A more sensible procedure is to remove both the con-
cession and the restriction. Hence, I suggest for
consideration an increase in the tax rates on long-
term capital gains, and possibly also on intermediate
gains (now taxed at a maximum of 30 percent, coupled
with more liberal allowance of capital losses.
Perhaps capital losses could be carried forward several
years to be offset against future capital gains. The
net result should be no deterrent to genuine long-term
investment, especially in view of the suggestions made
later concerning surtax rates. It would increase the
revenue moderately and fairness among individuals
substantially.
3. Excessive depletion deductions for oil and gas
wells and certain types of mines can be eliminated.
As the Treasury has often pointed out, 8. large amount
of revenue can be recovered by closing this loophole.
4. Revenues from the estate and gift taxes can be
increased. These taxes now produce less than 7 percent
of our Federal revenues. The present law allows large
fortunes to escape their fair share of taxation through
the loophole of gifts. The present type of gift tax is
Regraded Unclassifie
23
- 10 -
powerless to prevent such escape. The gift and estate
taxes should be coordinated so that from the tax point
of view there would be no greater inducement to give
away property during life than was deemed to be
desirable in the public interest, and that the induce-
ment would extend uniformly to persons with different
amounts of wealth. This coordination would in effect
consider gifts and the final distribution of the estate
at death as a unified series of transfers, with one
exemption and one rate scale, in place of the two
exemptions and two rate scales in the present law.
If Congress desires to give some special inducement
to gifts made prior to death, this can be accomplished
through special credite.
I would like to suggest also that Congress consider
increasing the yield of the estate and gift taxes by
reducing exemptions, eliminating the $40,000 insurance
exclusion and increasing rates in the lower and middle
brackets.
If additional revenue is needed, it can be secured
most equitably and with little disturbance to business
by raising the rates on the middle income brackets. It
would also be desirable to lower the income tax
exemptions to bring into the income tax system a larger
percentage of the population.
Regraded Unclassified
24
- 11 -
As I pointed out earlier, if we are to accomplish these few
fundamental reforms, this year is the one in which to achieve
them.
I would not have you infer that if the proposals that I have
suggested this morning are adopted, business will at once expand
to boom proportions. These measures are not a shot in the arm.
Rather, they are like proper care and good food to a patient
convalescing after a long illness. They will not cause his
recovery overnight but they will, in my opinion, remove obstacles
to that recovery. Furthermore, they are highly desirable to
increase the equity of our tax system. For these reasons I suggest
them for your consideration.
24A
TREASURY DEPARTMENT
10:30
INTER OFFICE COMMUNICATION
DATE April 14, 1939
Secretary Morgenthau
DM E.H. Foley, Jr.
Joley here be
For your information
Re: Nationwide News Service
I have just been informed that Nationwide News Service is planning
o sell its assets to a new corporation for the purpose of divorcing
ationwide News Service from the Cecelia Company to avoid possible anti-
rust litigation by the Department of Justice. Nationwide News has asked
or & closing agreement. I understand that Mr. Irey is planning to discuss
this with the Commissioner. The Commissioner has given instructions not
to release the agreement.
E.W.7L
Regraded Unclassified
this ms ack our phone
by Hu Jr.
25
Deary
LONDON, W. 1.
April 14, 1939.
Strictly Confidential
Dear Mr. Secretary:
I am transmitting herewith the two copies of the
British financial regulations that will be put into
effect upon the outbreak of a war to which I referred in
my telegram No. 483, April 14, 7 p.m. Beside Phillips'
statements quoted in that telegram he also mentioned that
these regulations were, of course, subject to change if
such appeared desirable.
I gathered that he "threw out the suggestion" that
you might wish to give one copy to the Chairman of the
Federal Reserve Board because these regulations would,
of course, have a bearing on the relations between the
Bank of England and the Federal Reserve.
I
The Hon. Henry Morgenthau,
The Secretary of the Treasury,
Washington, D.C.
Regraded Unclassified
26
-2-
I think I should also mention again how strongly
Phillips urged upon me the necessity of ensuring that
the contents of these documents be kept absolutely
secret and confidential.
with best respects,
Sincerely yours,
Wasten Tweterworer
P.S. You will no doubt note that paper preparations
at any rate have reached the point where 1939 is
printed on such war regulations!
W.D. w. D
Regraded Unclassified
27
SECRET
EXTRACT FROM DRAFT DEFENCE
REGULATIONS, 1939.
PART V.
FINANCE.
93.-(1) Except with permission granted by or on behalf of the
Restriction
Treasury, no person other than an authorised dealer shall, in the
on purchase,
sale and
United Kingdom, buy or borrow any foreign currency or any gold
loans of
from, or lend or sell any foreign currency or any gold to, any person
foreign
not being an authorised dealer.
currency
and gold.
(2) In this Regulation the expression authorised dealer means,
in relation to any transaction in respect of gold, a person authorised
by or on behalf of the Treasury to deal in gold, or, in relation to any
transaction in respect of foreign currency, a person authorised by
or on behalf of the Treasury to deal in foreign currency.
94.-(1) Subject to any exemptions which may be granted by Restriction
order of the Treasury, no person shall, except with permission currency,
on export of
granted by or on behalf of the Treasury,-
gold and
(a) take or send out of the United Kingdom any bank notes, securities,
gold, securities or foreign currency, or transfer any &e
securities from the United Kingdom elsewhere, or
(b) draw or negotiate any bill of exchange or promissory note,
transfer any security or acknowledge any debt, so that a
right (whether actual or contingent) to receive a payment
in the United Kingdom is created or transferred as
consideration-
(i) for receiving a payment, or acquiring property, outside
the United Kingdom, or
(ii) for a right (whether actual or contingent) to receive
a payment, or acquire property, outside the United
Kingdom,
or make any payment as such consideration.
(2) The preceding paragraph shall not restrict the doing of
anything, within the scope of his authority, by & person authorised
by or on behalf of the Treasury to deal in foreign exchange, and
shall not restrict the doing of anything which is certified by or on
behalf of the Treasury to be necessary for the purpose-
(a) of meeting the reasonable requirements of 8 trade or business
carried on in the United Kingdom, or
(b) of performing a contract made before the
day
of
nineteen hundred and thirty-nine, or
(c) of defraying reasonable travelling or other personal expenses.
(8) Any person who, on any occasion is about to leave the United
Kingdom (which person is hereafter in this paragraph referred to as
Regraded Unclassified
2
the traveller shall. if requested so to do by the appropriate
officer.- (d) declare whether or not be has with him any bank notes, gold,
(h) produce any bank notes, gold, securities or foreign currency
securities or foreign currency;
which he has with him:
and the appropriate officer and any person acting under his directions which
search the traveller and examine or search any article whether
the may traveller has with him, for the purpose of ascertaining
he has with him any bank notes, gold. securities or foreign currency,
and seize any bank notes, gold, securities or foreign currency
produced may or found upon such examination or search unless either-
(i) the appropriate officer is satisfied that the traveller is,
in respect of any bank notes, gold. securities or foreign
currency which he has with him on the said occasion,
exempt from the restriction imposed by paragraph (1) of
this Regulation: or
(ii) the traveller produces to the appropriate officer such
a certificate granted by or on behalf of the Treasury as
shows that the exportation by the traveller of any bank
notes, gold. securities or foreign currency which he has
with him on the said occasion does not involve a contra-
vention of that paragraph:
Provided that no female shall be searched in pursuance of this
paragraph except by a female.
(4) Nothing in the preceding provisions of this Regulation shall
apply in relation to the taking or sending of anything from oné part
of the United Kingdom to another or from the United Kingdom to
the Isle of Man, or in relation to any person travelling between one
part of the United Kingdom and another or between the United
Kingdom and the Isle of Man.
(5) As respects any goods, being goods consigned from the United
Kingdom to a destination outside the United Kingdom, the appro-
priate officer and any person acting under his directions may examine
or search the goods for the purpose of ascertaining whether there are
being eent therewith any bank notes, gold, securities or foreign
currency. and may seize any bank notes, gold, securities or foreign
currency found upon such examination or search unless there appears
to the appropriate officer to have been granted by or on behalf of
the Treasury a certificate which shows that the sending as aforesaid
of the bank notes, gold, securities or foreign currency does not
involve a contravention of paragraph (1) of this Regulation.
(6) For the purposes of this Regulation-
(a) any bills of exchange or promissory notes payable otherwise
than in sterling shall be deemed to be foreign currency
Regraded Unclassified
28
8
(b) the expression transfer" includes transfer by way of loan
or security, and a person shall be deemed to transfer
securities from the United Kingdom elsewhere if he
transfers securities from a register in the United Kingdom
to a register outside the United Kingdom; and
(c) the expression the appropriate officer" means any officer
of Customs and Excise, any immigration officer, any
constable or any person authorised by a Secretary of
State to act under paragraphs (8) and (5) of this
Regulation :
and for the purposes of 50 much of paragraph (1) of this Regulation
as restricts the taking or sending of securities out of the United
Kingdom, documents of title relating to securities shall be deemed
to be securities. and references to securities in paragraphs (8) and (5)
of this Regulation shall be construed BB including references to such
documents of title BE aforesaid.
98.-(1) Every person resident in the United Kingdom who has Acquisition
power to sell, or to procure the sale of, any gold shall offer that by Treasury
gold. or cause it to be offered, for sale to the Treasury or to 8.
of gold coin
and bullion.
person authorised by the Treasury to act under this Regulation, at
such price as the Treasury may fix, being a price which, in the
opinion of the Treasury. is not less than the market value for the
time being of the gold :
Provided that the preceding provisions of this paragraph shall
not impose upon any person an obligation to offer any gold for sale
or to cause any gold to be offered for sale, il-
(a) be satisfies the Treasury or a person 80 authorised-
(i) that all the persons interested in that gold, other than
persons interested therein merely as trustees or
merely by virtue of any mortgage, pledge or charge
created before the
day of
nineteen hundred and thirty-nine, but including
any persons beneficially interested in the gold under
a trust, are not resident in the United Kingdom, or
(ii) that the gold is required for the purpose of performing
a contract made before the said day, or
(iii) that the gold is held for the purpose of meeting the
reasonable requirements of & trade or business
carried on in the United Kingdom otherwise than
by way of dealing in gold, or
(b) he is, in respect of that gold, exempted from this Regulation
by the Treasury or by a person so authorised.
(2) The operation of section eleven of the Currency and Bank 18 & 19
Notes Act, 1928, shall be suspended during the continuance in force Geo. 5. e. 13.
of this Regulation.
Regraded Unclassified
Acquisition
Every person resident in the United Kingdom who which has
by Treasury
foreign
this the Treasury, or to a person authorised by the Treasury to act
power Regulation applies shall offer it, or cause it to be offered, under
96.-(1) to sell. or to proenre the sale of, any foreign currency to for sale
of certain
currency,
de
this to Regulation, at such price as the Treasury may determine.
(2) Every person resident in the United Kingdom who has power
the United Kingdom. in respect of any credit or balance at a bank,
to assign, or to procure the assignment, of any right to receive outside
tion applies, shall, unless the Treasury or a person authorised by the
payment of any amount in a foreign currency to which this Regula-
Treasury to act under this Regulation gives him notice to the contrary,
do all things necessary for the purpose of assigning that right to the
Treasury or to a person so authorised.
The sum payable as consideration for any assignment made in
accordance with this paragraph shall be such BE the Treasury may
determine.
(3) The preceding provisions of this Regulation shall not impose
upon any person an obligation in respect of any currency or right to
receive payment of any amount, if-
(4) be satisfies the Treasury or a person authorised by the
Treasury to act under this Regulation that all the persons
interested in that currency, other than persons interested
therein merely as trustees or merely by virtue of any
mortgage, pledge or charge created before the
day
of
,
nineteen hundred and thirty-nine,
but including any persons beneficially interested in the
currency under a trust, are not resident in the United
Kingdom, or
(b) be satisfies the Treasury or a person 60 authorised that the
currency or amount, as the case may be, is held or is
required for the purpose-
(i) of performing n contract made before the
day
of
nineteen hundred and thirty-
nine, or
(ii) of meeting the reasonable requirements of a trade
or business carried on in the United Kingdom other-
wise than by way of dealing in foreign exchange, or
(iii) of defraying reasonable travelling or other personal
expenses, or
(c) he is, in respect of that currency or right, 88 the case may be,
exempted from this Regulation by the Treasury or by &
person 80 authorised.
(4) The foreign currency to which this Regulation applies is such
foreign currency as may from time to time be designated by the
Treasury for the purposes of this Regulation, by notice published in
the London, Edinburgh and Belfast Gazettes.
Regraded Unclassified
29
97.-(1) The Treasury may, by notice published in the London, Acquisition
Edinburgh and Belfast Gazettes, direct the owners of any securities
by Treasury
specified in the notice, being securities which, in the opinion of the
of certain
securities.
Treasury, are likely to be marketable outside the United Kingdom,
to make to the Bank of England, in such manner and within such
period as may be specified in the notice, a return giving such
particulars with respect to those securities as may be 80 specified.
(2) The Treasury, if they are of the opinion that it is expedient
BO to do for the purpose of strengthening the financial position
of the United Kingdom, may by order transfer to themselves
any such securities as aforesaid specified in the order, at a price so
specified, being a price which, in the opinion of the Treasury, is not
less than the market value of the securities on the date of the
order: and where such an order is made-
(a) the securities to which the order relates shall forthwith vest
in the Treasury free from any mortgage, pledge or charge,
and the Treasury may deal with the securities as they
think fit;
(b) the owners of any of the securities to which the order relates
and any person who is responsible for keeping any
registere or books in which any of those securities are
registered or inscribed or who is otherwise concerned with
the registration or inscription of any of those securities,
shall do all such things as are necessary or 88 the Treasury
or the Bank of England on their behalf may direct to
be done for the purpose of securing that the securities and
any documents of title relating thereto are delivered to
the Treasury or to such person as the Treasury may direct
and, in the case of registered or inscribed securities, that
the securities are registered or inscribed in the name of
the Treasury or such person ne the Treasury may direct.
(8) The duty to deliver any security under the last preceding
paragraph shall include B. duty to do all such things as are necessary
to secure that any dividends or interest on that security becoming
payable on or after the date of the order will be paid to the Treasury;
and where, in the case of any security payable to bearer which is
delivered in pursuance of the said paragraph, any coupons repre-
senting any such dividends or interest are not delivered with the
security, anch reduction in the price payable therefor shall be made
as the Treasury think fit :
Provided that, where the price stated in the order in relation to
any securities is ex any dividend or ex any interest, this paragraph
shall not apply to that dividend or interest or to any coupon repre-
senting it.
(4) A certificate signed by any person authorised in that behalf by
the Treasury that any specified securities are securities transferred
Regraded Unclass ed
6
the Treasury under this paragraph shall be treated by all persons
securities are registered or inscribed, or who are otherwise
to responsible for keeping any registers or books in which concerned the
with the registration or inscription of those securities, as conclusive
evidence that the securities have been BO transferred.
(5) This Regulation shall not apply to any security if the
Treasury are satisfied that at all times since the beginning of the
day of
nineteen hundred and thirty-nine,
all the persons interested in the security, other than persons interested
therein merely as trustees or merely by virtue of any mortgage,
pledge or charge created before the said day, but including any
persons beneficially interested therein under a trust, were not resident
in the United Kingdom.
Control of
98.-(1) It shall not be lawful, except with the consent of the
capital
Treasury and in accordance with such conditions as the Treasury
issues.
may impose, to make an issue of capital in the United Kingdom or
to renew or postpone the date of maturity of any security maturing
for repayment in the United Kingdom:
Provided that this paragraph shall not apply to the issue of shares
for B consideration not exceeding one hundred pounds in all to the
subscribers to a memorandum of association.
(2) It shall not be lawful to issue any prospectus or other doeu-
ment offering for subscription any securities which does not include a
statement that the consent of the Treasury has been obtained to
the issue of the securities.
(8) For the purposes of this Regulation a person shall be deenied
to make an issue of capital who-
(a) issues any securities (whether for cash or otherwise), or
(b) receives any money on loan on the terms, or in the expecta-
tion, that the loan will or may be repaid wholly or partly
by the issue of any securities, or by the transfer of any
securities issued after the making of the loan.
Exemption
from stamp
99.--(1) Stamp duty shall not be chargeable on any security by
duty.
reason only of the assignment, transfer or negotiation thereof to the
Treasury, and shall not be chargeable-
(a) on any instrument whereby any security is assigned or
transferred to the Treasury (whether on sale or other-
wise), or
(b) on any contract note for, or relating to, any sale of securities
to the Treasury.
(2) This Regulation applies only in relation to assignments,
transfers, negotiations or sales of securities effected during the con-
Part of these Regulations or otherwise.
tinuance in force of this Regulation, whether in compliance with this
Regraded Unclassified
30
7
(8) In this Regulation the expression " contract note" has the
meaning assigned to that expression by subsection (8) of section
seventy-seven of the Finance (1909-10) Act, 1910.
10 Edw. 7. &
1 Geo. 5. c. 8.
100. In this Part of these Regulations, unless the context
Interpreta-
otherwise requires, the following expressions have the meanings
tion of
hereby respectively assigned to them, that is to say :-
Part V
bank notes" means bank notes which are legal tender in the
United Kingdom or in any part thereof;
foreign currency" means any currency other than sterling;
" gold means gold coin or gold bullion;
" owner," in relation to any security, includes any person who
has power to sell or transfer a security, or who has the
custody thereof, or who receives, whether on his own
behalf or on behalf of any other person, dividends or
interest thereon, or who has any other interest therein;
and
security" includes shares, stock, bonds, debentures, debenture
stock and Treasury bills, but does not include a bill of
exchange or promissory note.
81% 8 VIOX
RED VIVE
Regraded Unclass
d
en
-
XCIV B. (43)
6th April, 1939
4.
30
-
MI
SE
tack
every
FOR esty
Der
the Treasury
5
Res
Hasted
now
401
way
THE
provider
different
100
IF
OF
completive
Important
THE
(p)
S
SECRET.
31
DEFENCE REGULATIONS Nos.
Notice to Banks and Bankers conducting business in the
United Kingdom.
1. The Bank of England have been authorised to deal in foreign exchange and gold
and to appoint other authorised dealers. A list of the authorised dealers now appointed
is attached.
The public should continue to transact their foreign exchange business through the
agency of their own bankers, whether authorised dealers or not.
2. SALE OF EXCHANGE.
Until further notice exchange will be made available for the following purposes:-
(a) To enable ez contract made before
to be complied with.
The intention is to facilitate the completion of outstanding commercial and
financial contracts.
N.B.-Long-term contracts (e.g., goods to be shipped after 90 days) are not included
and should be specially referred.
(b) To meet the reasonable requirements of a trade or business carried on in the
United Kingdom. This is intended to cover imports of goods, insurance
treaties, premiums and claims, ships' disbursements, freights, agents'
commissions, royalties, film rents, copyrights, salaries, pensions, etc.
(c) To defray reasonable travelling or other personal expenses.
Rates at which exchange may be sold will be communicated to authorised dealers and
published from time to time.
3. APPLICATIONS FOR EXCHANGE.
Applications for exchange must be made on the appropriate form signed by the
applicant. Satisfactory evidence must be produced in all cases.
(a) IMPORTS Exchange may be sold without further question in the following
cases:-
(i) Where goods had already been imported before
(ii) Where the certified exchange control copy of B Customs Entry Form is
produced for goods imported after
(iii) Where a declaration is made that the certified exchange control copy of a
Customs Entry Form will be produced in respect of goods not yet
imported.
Applicants for exchange in respect of imports must complete Form E
in duplicate and attach Customs Entry Form if available. The duplicate form
will be retained by the applicant in (iii) above and must be returned in due
course to the banker concerned with the certified exchange control copy of the
relative Customs Entry Form (which importers must obtain from the Customs
at the place of entry) attached.
(b) TRAVELLESS: Applicants for exchange for travelling expenses must complete
Form T and obtain Certificate C duly certified by the authorised dealer for
surrender to the Customs or Immigration Officer before leaving the United
Kingdom.
(c) Applicants for exchange in all other cases must complete Form E (not in duplicate).
N.B.-Applications by persons ordinarily resident in the United Kingdom for gold
or foreign exchange for purposes other than those set. out in paragraph 2
above should be refused unless special circumstances appear to warrant
reference to the Bank of England.
Regraded Unclassified
Applications by persons ordinarily resident outside the United Kingdom for gold
or foreign exchange for purposes other than those set out in paragraph 2
above should be referred in each case to the Bank of England.
4. PURCHASE OF EXCHANGE AND GOLD,
A list of currencies will be published which must be offered to the Treasury, Such
currencies may be bought by authorised dealers at rates which will be published from time
to time. Other currencies may be purchased by authorised dealers at their discretion.
Gold bullion and coin offered for sale should be settled through the agency of an
authorised Bullion dealer.
5. Export OF CURRENCY, ETC.
Export of bank notes, gold, securities or foreign currency is prohibited except with
permission. Permission may be granted by authorised dealers in cases covered by paragraph 2
above. Applicants should complete Form X which should be stamped by the authorised
dealer and obtain Certificate C for surrender to the Customs or Immigration Officer at the
time of export.
6. STERLING TRANSFERS.
No sterling transfer in any form may be made from a United Kingdom source to A
foreign account unless it is accompanied by Form E.1 duly completed by the person making
or applying for the transfer. Sterling transfers may be made freely between two foreign
accounts or from a foreign to 8 domestic account.
Cheques and Bills of Exchange remitted from abroad prior to
may be cleared without question.
H.M. Embassies, Legations and Consulates may be credited to a foreign account without
Sterling Bills, Cheques, etc., drawn by members of H.M. forces serving abroad and by
completion of Form E.1 and without question.
7. Loans, Overdrafts and Credit Facilities (including Acceptance Credits) to firms
legitimate persons not carrying on business in the United Kingdom should be granted only to facilitate or
trade or business.
8. Credits and Authorities entered into prior to
of revocable this Notice. should be revoked if their tenor is contrary to the terms of the Regulations which or
are
purposes. Bank of England, other requests for forward facilities must be refused genuine or referred commercial to the
9. Forward All exchange transactions are permitted solely for
with 11. correspondents should apply for permission to the to maintain Bank of their England.
foreign 10, Bankers other then authorised dealers who wish normal relations
by
a
uniform All scale bankers of commission should obtain their remuneration on transactions with their
Earny deals with 18. 12. Act. a Special All banker. these arrangements not instructions so authorised, to will are be be agreed subject will made make between with to DO the regard charge the provisions to Banks. to Colonial the of An non-authorised the and authorised Trading Empire dealer currencies. banker. customers who
with
the
NOTE.-Banken to explain them are requested where to bring the Regulations to the notice
upon them. Decemary and to report desubtful cases before of their taking customers. action
The Bank YORKS of England Applications have for authority permits on beliaff of H.M. Treasury to
whom the application is kade must bear the recommendation give of the permits Bank in through special
Regraded Unclassifie
32
SECRET.
MEMORANDUM TO AUTHORISED DEALERS IN
FOREIGN EXCHANGE.
1. Authorised dealers, who should co-operate closely with the Bank of England, may
sell exchange to other banks or to the public if satisfied that a transaction falls properly under
one of the permitted headings (see notice to Banks paragraph 2). Applications which do not
fall under any of these headings or which are not supported by evidence satisfactory to the
authorised dealer concerned, or which appear in any way exceptional, should be referred to the
Bank of England.
2. The Bank of England will notify authorised dealers, probably daily, of a list of rates
of exchange for various currencies, both spot and forward.
3. The Bank of England will open accounts in these various currencies with the
appropriate authorised dealers. Authorised dealers should maintain normal relations with
their foreign correspondents.
The Bank of England will be prepared to accept responsibility for balances held by
authorised dealers with their foreign correspondents as agents for the Bank of England.
Foreign balances which authorised dealers may choose to hold for their own account will not
be covered under this arrangement.
4. If it is convenient to all parties concerned a proportion of any surplus of exchange
that may be accumulated by the Bank of England will be sold spot to authorised dealers
and hought back for forward delivery. This arrangement is intended to prevent A disturbance
in the London Money Market or in other centres,
5. SALES OF CURRENCY.
(a) At the close of business each day each authorised dealer should advise the Bank of
England of the total amount of currency sold.
(b) At the opening of business on the following day the authorised dealers should
hand to the Bank of England a statement of the previous day's transactions.
(c) On the value date authorised dealers should debit the Bank of England's currency
account with the amount sold and the Bank of England will debit the authorized
dealer's account at the Hank of England with the sterling equivalent.
(d) Completed declarations (Forms E and T) should be forwarded to the Back of
England in due course.
6. PURCHASES OF CURRENCY.
A similar procedure will be followed.
7. With the exception of forward transactions all Ireation enternal is
between the Bank of England and authorised dealers will, the mir of provider and
simplicity, be booked as spot contracts.
8. Statements of currency accounts should be forwarded amily to lbr of
England.
9. Commission.
Authorised dealers doing beines with - Bank, which in net - advised draier. ell
to by the Bank of England at . rate to la agreed, Deladion of giving
covering much operations should be stanged de - of begr Ins d'ar
deals. The commission should be claimed be the Benk of England
Regraded Unclassified
33
SECRET.
MEMORANDUM TO AUTHORISED DEALERS IN GOLD.
1. Dealings in gold coin or bullion are prohibited except with authorised dealers. A list of
authorised dealers is attached.
2. Applications to purchase gold coin or bullion should be referred to the Bank of England.
Until further notice gold will be made available by the Bank of England for the following
purposes :-
(a) To enable the buyer to perform a contract made before
(b) To meet the reasonable requirements of a trade or business carried on in the United
Kingdom otherwise than by way of dealing in gold.
8. Form c, duly signed and completed, must be obtained in respect of every sale of gold and
handed to the Bank of England.
4. Prices for the purchase and sale of gold coin and bullion will be announced by the Bank of
England from time to time.
5. Advances against gold and forward dealings in gold are not permitted except with permission
from the Bank of England.
6. Melters, refiners and assayers may conduct their normal business but may not hold gold for
any other purpose.
7. Authorised dealers should-
(a) Weigh and examine assays, meltings, etc., of any gold coin or bullion offered to them
for purchase.
(b) Purchase such gold for account of the Bank of England.
(c) Deliver such gold to the Bullion Office of the Bank of England against payment.
8. Commissions to be agreed will be paid by the Bank of England to authorised dealers in
respect of gold purchased and sold.
Regraded Unclassified
SECRET.
Serial No.
FORM E.
DECLARATION TO BE MADE BY A PERSON OR FIRM
APPLYING FOR FOREIGN EXCHANGE.
To
(Name of Bank or Banking Firm to whom application is addressed).
I/We, the undersigned, request that the undermentioned amount of Foreign Exchange
be placed at my/our disposal.
Amount and Currency required
(In figures and in words) Say
Purpose for which required
(Precise information of nature
of goods, Services, etc., for
which Exchange is required
must be stated)
Exchange to be paid to
(Give full details)
State whether draft, cable or
mail transfer or other form
of delivery
Date when required
I/We declare that the purpose for which this exchange is required in no way contravenes
the provisions of Defence Regulation No.
Name and full postal address
(Name of Person, Firm or
Corporate Body making
request)
Signature(s)
Date
Stamp of the Bank certifying the signature(s) as authorised
Stamp of Authorised Dealer
to sign on the banking account of applicant(s)
(including date)
Rate
This space is reserved for the use of the Bank of England.
Posted
Date received
Checked
Regraded Unclassified
SECRET.
FORM T.
APPLICATION FOR FOREIGN EXCHANGE FOR TRAVELLING
PURPOSES AND FOR PERMISSION TO EXPORT FOREIGN
EXCHANGE AND/OR BRITISH BANK NOTES FROM THE U.K.
To
I/We
of
being desirous of travelling to
for purpose of
wish to purchase
(State Foreign Currency Required)
and to receive permission to take
(State Amount of British or Foreign Currency)
out of the United Kingdom.
I/We shall be leaving the United Kingdom on
and returning on
Date
Signed
Regraded Unclassified
SECRET.
FORM X.
To
I/We
of
beg to apply for permission to export the undermentioned bank notes, gold, securities and/or
foreign currency from the United Kingdom :-
Description
Weight Fine Oz.
Date Acquired
Gold
Description
Amount
Date Acquired
Notes
Description
Amount
Date Acquired
Securities
(Please continue overleaf)
I/We hereby declare that I/we are the true and rightful owners of the above-mentioned
bank notes, gold securities and/or foreign currency.
Date
Signature
Address
N.B.-Proof of ownership should be attached.
Regraded Unclassified
SECRET.
FORM C.
CERTIFICATE FOR EXPORTATION OF BANK NOTES, GOLD,
SECURITIES OR FOREIGN CURRENCY IN ACCORDANCE WITH
REGULATION
OF THE DEFENCE REGULATIONS, 1939.
This is to certify that
of
is authorised to export the undermentioned articles from the United Kingdom and in so doing
is not contravening Defence Regulation No.
Description
Weight Fine Ozs.
Gold
(words and figures)
Description
Amount
Notes
(words and figures)
Description
Amount
Securities
(words and figures)
STAMP OF BANK ISSUING CERTIFICATE.
Signed
For and on behalf of the Lords
Commissioners of His Majesty's
Treasury.
Date of Issue
Valid for period of one month only from date of issue.
Regraded Unclassified
SECRET.
Serial No.
FORM G.
DECLARATION TO BE MADE BY A PERSON OR FIRM
APPLYING FOR GOLD.
To
I/We, the undersigned, request that the undermentioned gold be placed at my/our
disposal.
Gold Coin or Gold Bars
Ounces fine (or approx. £
value)
Purpose for which required
(Give full details)
Date when required
I/We declare that the purpose for which this gold is required in no way contravenes the
provisions of Defence Regulation No.
Name and full postal address
(Name of Person, Firm or
Corporate Body making
request)
Signature(s)
Date
Price
STAMP OF AUTHORISED DEALER.
FOR OFFICIAL Use ONLY.
Number of Gold Bars or
Amount of Sovereigns
delivered
Ounces Fine
Numbers and Markings of
Gold Bars
Sterling Equivalent
Regraded Unclassified
SECRET.
FORM E. 1.
STERLING TRANSFERS TO FOREIGN ACCOUNTS.
Name and Address of
Transferor
£
s
d.
Amount-
(words and figures)
Say
Name and Address of
Transferee
Purpose of Transfer (give
full details)
I/We declare that the above-mentioned transfer is not contrary to Defence Regulation,
1939, No.
Date
Signature
STAMP OF PAYING BANKER.
Regraded Unclassified
40
SECRET.
EXTRACT FROM DRAFT DEFENCE
REGULATIONS, 1939.
PART V.
FINANCE.
93.-(1) Except with permission granted by or on behalf of the Restriction
Treasury, no person other than an authorised dealer shall, in the
on purchase,
sale and
United Kingdom, buy or borrow any foreign currency or any gold
loans of
from, or lend or sell any foreign currency or any gold to, any person
foreign
not being an authorised dealer.
currency
and gold.
(2) In this Regulation the expression authorised dealer" means,
in relation to any transaction in respect of gold, B. person authorised
by or on behalf of the Treasury to deal in gold, or, in relation to any
transaction in respect of foreign currency, a person authorised by
or on behalf of the Treasury to deal in foreign currency.
94.-(1) Subject to any exemptions which may be granted by Restriction
order of the Treasury, no person shall, except with permission on currency, export of
granted by or on behalf of the Treasury,-
gold and
(a) take or send out of the United Kingdom any bank notes, securities,
gold, securities or foreign currency, or transfer any &e
securities from the United Kingdom elsewhere, or
(b) draw or negotiate any bill of exchange or promissory note,
transfer any security or acknowledge any debt, BO that a
right (whether actual or contingent) to receive & payment
in the United Kingdom is created or transferred as
consideration-
(i) for receiving a payment, or acquiring property, outside
the United Kingdom, or
(ii) for a right (whether actual or contingent) to receive
a payment, or acquire property, outside the United
Kingdom,
or make any payment as such consideration.
(2) The preceding paragraph shall not restrict the doing of
anything, within the scope of his authority, by a person authorised
by or on behalf of the Treasury to deal in foreign exchange, and
shall not restrict the doing of anything which is certified by or on
behalf of the Treasury to be necessary for the purpose-
(a) of meeting the reasonable requirements of a trade or business
carried on in the United Kingdom, or
(b) of performing a contract made before the
day
of
nineteen hundred and thirty-nine, or
(c) of defraying reasonable travelling or other personal expenses.
(8) Any person who, on any occasion is about to leave the United
Kingdom (which person is hereafter in this paragraph referred to as
Regraded nclassified
2
the traveller") shall, if requested 80 to do by the appropriate
officer,-
(a) declare whether or not he has with him any bank notes, gold.
securities or foreign currency
(b) produce any bank notes, gold, securities or foreign currency
which he has with him;
and the appropriate officer and any person acting under his directions
may search the traveller and examine or search any article which
the traveller has with him, for the purpose of ascertaining whether
he has with him any bank notes, gold, securities or foreign currency,
and may seize any bank notes, gold, securities or foreign currency
produced or found upon such examination or search unless either-
(i) the appropriate officer is satisfied that the traveller is,
in respect of any bank notes, gold, securities or foreign
currency which he has with him on the said occasion,
exempt from the restriction imposed by paragraph (1) of
this Regulation: or
(ii) the traveller produces to the appropriate officer such
a certificate granted by or on behalf of the Treasury BE
shows that the exportation by the traveller of any bank
notes, gold, securities or foreign currency which he has
with him on the said occasion does not involve a contra-
vention of that paragraph :
Provided that no female shall be searched in pursuance of this
paragraph except by a female.
(4) Nothing in the preceding provisions of this Regulation shall
apply in relation to the taking or sending of anything from one part
of the United Kingdom to another or from the United Kingdom to
the Isle of Man, or in relation to any person travelling between one
part of the United Kingdom and another or between the United
Kingdom and the Isle of Man.
(5) As respects any goods, being goods consigned from the United
Kingdom to 8 destination outside the United Kingdom, the appro-
priate officer and any person acting under his directions may examine
or search the goods for the purpose of ascertaining whether there are
being sent therewith any bank notes, gold, securities or foreign
currency, and may seize any bank notes, gold, securities or foreign
currency found upon such examination or search unless there appears
to the appropriate officer to have been granted by or on behalf of
the Treasury a certificate which shows that the sending 88 aforessid
involve a contravention of paragraph (1) of this Regulation.
of the bank notes, gold, securities or foreign currency does not
(6) For the purposes of this Regulation-
(a) any bills of exchange or promissory notes payable otherwise
than in sterling shall be deemed to be foreign currency:
Regraded Unclassified
41
8
(b) the expression transfer" includes transfer by way of loan
or security, and a person shall be deemed to transfer
securities from the United Kingdom elsewhere if be
transfers securities from B register in the United Kingdom
to a register outside the United Kingdom; and
(c) the expression the appropriate officer means any officer
of Custome and Excise, any immigration officer, any
constable or any person authorised by & Secretary of
State to set under paragraphs (8) and (5) of this
Regulation:
and for the purposes of 80 much of paragraph (1) of this Regulation
& restricts the taking or sending of securities out of the United
Kingdom, documents of title relating to securities shall be deemed
to be securities, and references to securities in paragraphs (8) and (5)
of this Regulation shall be construed BB including references to such
documents of title as aforesaid.
98,-(1) Every person resident in the United Kingdom who has Acquisition
power to sell, or to procure the sale of, any gold shall offer that by Treasury
gold, or cause it to be offered, for sale to the Treasury or to & of gold coin
person authorised by the Treasury to act under this Regulation, at
and bullion.
such price as the Treasury may fix, being & price which, in the
opinion of the Treasury, is not less than the market value for the
time being of the gold :
Provided that the preceding provisions of this paragraph shall
not impose upon any person an obligation to offer any gold for sale
or to cause any gold to be offered for sale, if-
(a) he satisfies the Treasury or a person 80 authorised-
(i) that all the persons interested in that gold, other than
persons interested therein merely B8 trustees or
merely by virtue of any mortgage, pledge or charge
created before the
day of
nineteen hundred and thirty-nine, but including
any persons beneficially interested in the gold under
B trust, are not resident in the United Kingdom, or
(ii) that the gold is required for the purpose of performing
& contract made before the said day, or
(iii) that the gold is held for the purpose of meeting the
reasonable requirements of a trade or business
carried on in the United Kingdom otherwise than
by way of dealing in gold, or
(b) he is, in respect of that gold, exempted from this Regulation
by the Treasury or by a person so authorised.
(2) The operation of section eleven of the Currency and Bank 18 & 19
Notes Act, 1928, shall be suspended during the continuance in force Geo. 6. c. 13.
of this Regulation.
Acquisition
06.-(1) Every person resident in the United Kingdom who has
by Treasury
power to sell, or to procure the anle of, any foreign currency to which
of certain
foreign
this Regulation applies shall offer it, or cause it to be offered, for sale
currency,
to the Treasury, or to a person authorised by the Treasury to act under
&e.
this Regulation, at such price as the Treasury may determine.
(2) Every person resident in the United Kingdom who has power
to assign, or to procure the assignment, of any right to receive outside
the United Kingdom, in respect of any credit or balance at a bank,
payment of any amount in a foreign currency to which this Regula-
tion applies, shall, unless the Treasury or 8 person authorised by the
Treasury to act under this Regulation gives him notice to the contrary,
do all things necessary for the purpose of assigning that right to the
Treasury or to a person so authorised.
The sum payable as consideration for any assignment made in
accordance with this paragraph shall be such as the Treasury may
determine.
(8) The preceding provisions of this Regulation shall not impose
upon any person an obligation in respect of any currency or right to
receive payment of any amount, it-
(a) he satisfies the Treasury or a person authorised by the
Treasury to act under this Regulation that all the persons
interested in that currency, other than persons interested
therein merely as trustees or merely by virtue of any
mortgage, pledge or charge created before the
day
of
nineteen hundred and thirty-nine,
but including any persons beneficially interested in the
currency under a trust, are not resident in the United
Kingdom, or
(b) he satisfies the Treasury or a person 80 authorised that the
currency or amount, as the case may be, is held or is
required for the purpose-
(i) of performing a contract made before the
of
day
nine, or
nineteen hundred and thirty-
(ii) of meeting the reasonable requirements of a trade
or business carried on in the United Kingdom other-
(iii) of defraying reasonable travelling or other personal
wise than by way of dealing in foreign exchange, or
expenses, or
(c) he is, in respect of that currency or right, as the case may be,
person so authorised.
exempted from this Regulation by the Treasury or by a
foreign currency as may from time to time be designated the
(4) The foreign currency to which this Regulation applies is such
the Treasury for the purposes of this Regulation, by notice published by in
London, Edinburgh and Belfast Gazettes.
Regraded Unclassi
42
97.-(1) The Treasury may, by notice published in the London, Acquisition
Edinburgh and Belfast Gazettes, direct the owners of any securities
by Treasury
specified in the notice, being securities which, in the opinion of the
of certain
securities
Treasury, are likely to be marketable outside the United Kingdom,
to make to the Bank of England, in such manner and within such
period 88 may be specified in the notice, & return giving such
particulars with respect to those securities as may be 80 specified.
(2) The Treasury, if they are of the opinion that it is expedient
80 to do for the purpose of strengthening the financial position
of the United Kingdom, may by order transfer to themselves
any such securities as aforesaid specified in the order, at a price 80
specified, being 8 price which, in the opinion of the Treasury, is not
less than the market value of the securities on the date of the
order: and where such an order is made-
(a) the securities to which the order relates shall forthwith vest
in the Treasury free from any mortgage, pledge or charge,
and the Treasury may deal with the securities as they
think fit;
(b) the owners of any of the securities to which the order relates
and any person who is responsible for keeping any
registers or books in which any of those securities are
registered or inscribed or who is otherwise concerned with
the registration or inscription of any of those securities,
shall do all such things as are necessary or as the Treasury
or the Bank of England on their behalf may direct to
be done for the purpose of securing that the securities and
any documents of title relating thereto are delivered to
the Treasury or to such person as the Treasury may direct
and, in the case of registered or inscribed securities, that
the securities are registered or inscribed in the name of
the Treasury or such person as the Tressury may direct.
(8) The duty to deliver any security under the last preceding
paragraph shall include a duty to do all such things as are Decessary
to secure that any dividends or interest on that security becoming
payable on or after the date of the order will be paid to the Treasury;
and where, in the case of any security payable to bearer which is
delivered in pursuance of the said paragraph, any coupons repre-
senting any such dividends or interest are not delivered with the
security, such reduction in the price payable therefor shall be made
as the Treasury think fit :
Provided that, where the price stated in the order in relation to
any securities is ex any dividend or ex any interest, this paragraph
shall not apply to that dividend or interest or to any coupon repre-
senting it.
(4) A certificate signed by any person authorised in that behalf by
the Treasury that any specified securities are securities transferred
6
the Treasury under this paragraph shall be treated by ali persons
securities are registered or inscribed, or who are otherwise concerned
to responsible for keeping any registers or books in which the
with the registration or inscription of those securities, as conclusive
evidence that the securities have been 80 transferred.
(5) This Regulation shall not apply to any security if the
Treasury are satisfied that at all times since the beginning of the
day of
nineteen hundred and thirty-nine,
,
all the persons interested in the security, other than persons interested
therein merely as trustees or merely by virtue of any mortgage,
pledge or charge created before the said day, but including any
persons beneficially interested therein under 8 trust, were not resident
in the United Kingdom.
Control of
98.-(1) It shall not be lawful, except with the consent of the
capital
Treasury and in accordance with such conditions as the Treasury
issues
may impose, to make an issue of capital in the United Kingdom or
to renew or postpone the date of maturity of any security maturing
for repayment in the United Kingdom:
Provided that this paragraph shall not apply to the issue of shares
for a consideration not exceeding one hundred pounds in all to the
subscribers to a memorandum of association.
(9) It shall not be lawful to issue any prospectus or other docu-
ment offering for subscription any securities which does not include a
statement that the consent of the Treasury has been obtained to
the issue of the securities.
(8) For the purposes of this Regulation B. person shall be deemed
to make an issue of capital who-
(a) issues any securities (whether for cash or otherwise), or
(b) receives any money on loan on the terms, or in the expecta-
tion, that the loan will or may be repaid wholly or partly
by the issue of any securities, or by the transfer of any
securities issued after the making of the loan.
Exemption
from stamp
99.-(1) Stamp duty shall not be chargeable on any security by
duty,
reason only of the assignment, transfer or negotiation thereof to the
Treasury, and shall not be chargeable-
(a) on any instrument whereby any security is assigned or
transferred to the Treasury (whether on sale or other-
wise), or
(M) on any contract note for, or relating to, any sale of securities
to the Treasury.
transfers, tinuance negotiations or sales of securities effected during the
(2) This Regulation applies only in relation to assignments,
Part of in force of this Regulation, whether in compliance with con- this
these Regulations or otherwise.
Regraded Unclassified
43
7
(8) In this Regulation the expression contract note" has the
meaning assigned to that expression by subsection (8) of section
seventy-seven of the Finance (1909-10) Act, 1910.
10 Edw. 7.6
1 Geo. 5.d.&
100. In this Part of these Regulations, unless the context
Interpreta-
otherwise requires, the following expressions have the meanings
tion of
hereby respectively assigned to them, that is to say :-
Part V
"bank notes" means bank notes which are legal tender in the
United Kingdom or in any part thereof;
" foreign currency" means any currency other than sterling;
" gold means gold coin or gold bullion;
"
owner," in relation to any security, includes any person who
has power to sell or transfer a security, or who has the
custody thereof, or who receives, whether on his own
behalf or on behalf of any other person, dividends or
interest thereon, or who has any other interest therein;
and
" security" includes shares, stock, bonds, debentures, debenture
stock and Treasury bills, but does not include a bill of
exchange or promissory note.
ar, a VIDE
EVE VESAY Liven
SECRET.
DEFENCE REGULATIONS Nos.
Notice to Banks and Bankers conducting business in the
United Kingdom,
1. The Bank of England have been authorised to deal in foreign exchange and gold
and to appoint other authorised dealers. A list of the authorised dealers now appointed
is attached.
The public should continue to transact their foreign exchange business through the
agency of their own bankers, whether authorised dealers or not.
2. SALE OF EXCHANGE.
Until further notice exchange will be made available for the following purposes :-
(a) To enable a contract made before
to be complied with.
The intention is to facilitate the completion of outstanding commercial and
financial contracts.
N.B.-Long-term contracts (e.g., goods to be shipped after 90 days) are not included
and should be specially referred.
(b) To meet the reasonable requirements of a trade or business carried on in the
United Kingdom. This is intended to cover imports of goods, insurance
treaties, premiums and claims, ships' disbursements, freights, agents'
commissions, royalties, film rents, copyrights, salaries, pensions, etc.
(c) To defray reasonable travelling or other personal expenses.
Rates at which exchange may be sold will be communicated to authorised dealers and
published from time to time.
3. APPLICATIONS FOR EXCHANGE.
Applications for exchange must be made on the appropriate form signed by the
applicant. Satisfactory evidence must be produced in all cases.
(a) IMPORTS Exchange may be sold without further question in the following
cases:-
(i) Where goods had already been imported before
(ii) Where the certified exchange control copy of a Customs Entry Form is
produced for goods imported after
(iii) Where a declaration is made that the certified exchange control copy of a
Customs Entry Form will be produced in respect of goods not yet
imported.
Applicants for exchange in respect of imports must complete Form E
in duplicate and attach Customs Entry Form if available. The duplicate form
will be retained by the applicant in (iii) above and must be returned in due
course to the banker concerned with the certified exchange control copy of the
relative Customs Entry Form (which importers must obtain from the Customs
at the place of entry) attached.
(b) TRAVELLERS : Applicants for exchange for travelling expenses must complete
Form T and obtain Certificate e duly certified by the authorised dealer for
surrender to the Customs or Immigration Officer before leaving the United
Kingdom.
(c) Applicants for exchange in all other cases must complete Form E (not in duplicate).
N,B.-Applications by persons ordinarily resident in the United Kingdom for gold
or foreign exchange for purposes other than those set out in paragraph 2
above should be refused unless special circumstances appear to warrant
reference to the Bank of England.
Regraded Unclassified
Applications by persons ordinarily resident outside the United Kingdom for take
or foreign exchange for purposes other than those set out in paragraph 2
above should be referred in each care to the Bank of England.
4. PURCHASE OF EXCHANGE AND GOLD,
A list of currencies will be published which must be offered to the Treasury. Brudy
currencies may be bought by authorised dealers at rates which will be published from time
to time. Other currencies may be purchased by authorised dealers at their discretion.
Gold bullion and coin offered for sale should be settled through the agency of as,
authoried Bullion dealer.
3. EXPORT OF CURRENCY, ETC.
Export of bank notes, gold, securities or foreign currency is prohibited except with
permission. Permission may be granted by authorised dealers in cases covered by paragraph 2
above. Applicants should complete Form X which should be stamped by the authorised
dealer and obtain Certificate C for surrender to the Customs or Immigration Officer at the
time of export.
6. STERLING TRANSFERS.
No sterling transfer in any form may be made from a United Kingdom source to as
foreign account unless it is accompanied by Form E.1 duly completed by the person making
or applying for the transfer. Sterling transfers may be made freely between two foreign
accounts or from a foreign to a domestic account.
Cheques and Bills of Exchange remitted from abroad prior to
may be cleared without question.
Sterling Bills, Cheques, etc., drawn by members of H.M. forces serving abroad and by
H.M. Embassies, Legations and Consulates may be credited to & foreign account without
completion of Form E.1 and without question.
7. Loans, Overdrafts and Credit Facilities (including Acceptance Credits) to firms or
legitimate persons not carrying on business in the United Kingdom should be granted only to facilitate
trade or business.
8. Credits and Authorities entered into prior to
of revocable this Notice. should be revoked if their tenor is contrary to the terms of the Regulations which are or
Bank purposes. of England, requests for forward facilities must be refused genuine or referred commercial to the
9, Forward All other exchange transactions are permitted solely for
with 11. correspondents should apply for permission to to the maintain Bank of their England.
foreign 10. Bankers other than authorised dealers who wish normal relations
deals by a uniform with a banker, scale of not commission so to be agreed between the on Banks. transactions with their customers who
All bankers should obtain their remuneration
12. authorised, will make no charge to the An non-authorised authorised dealer banker.
18. All Special arrangements will be made with regard to Colonial and currencies.
Enemy
Act. these instructions are subject to the provisions of the Trading Empire with the
NOTE.-Bankers to explain them are requested where to bring the Regulations to the
upon them. necessary and to report doubtful cases notice before of their taking customers, action
The Bank cases of England Applications have for authority on behalf of H.M. to
whom the application is permits trade, must bear the recommendation Treasury give of the permits Bank in through special
Regraded Unclassified
SECRET.
MEMORANDUM TO AUTHORISED DEALERS IN
FOREIGN EXCHANGE.
1. Authorised dealers, who should co-operate closely with the Bank of England, may
sell exchange to other banks or to the public if natisfied that a transaction falls properly under
one of the permitted headings (see notice to Banks paragraph 2). Applications which do not
fall under any of these headings or which are not supported by evidence satisfactory to the
authorised dealer concerned, or which appear in any way exceptional, should be referred to the
Bank of England.
2. The Bank of England will notify authorised dealers, probably daily, of a list of rates
of exchange for various currencies, both spot and forward.
8. The Bank of England will open accounts in these various currencies with the
appropriate authorised dealers. Authorised dealers should maintain normal relations with
their foreign correspondents.
The Bank of England will be prepared to accept responsibility for balances held by
authorised dealers with their foreign correspondents as agents for the Bank of England.
Foreign balances which authorised dealers may choose to hold for their own account will not
be covered under this arrangement.
4. If it is convenient to all parties concerned a proportion of any surplus of exchange
that may be accumulated by the Bank of England will be sold spot to authorised dealers
and bought back for forward delivery. This arrangement is intended to prevent a disturbance
in the London Money Market or in other centres.
5. SALES OF CURRENCY.
(a) At the close of business each day each authorised dealer should advise the Bank of
England of the total amount of currency sold.
(b) At the opening of business on the following day the authorised dealers should
hand to the Bank of England a statement of the previous day's transactions.
(c) On the value date authorised dealers should debit the Bank of England's currency
account with the amount sold and the Bank of England will debit the authorised
dealer's account at the Bank of England with the sterling equivalent.
(d) Completed declarations (Forms E and T) should be forwarded to the Bank of
England in due course.
6. PURCHASES OF CURRENCY.
A similar procedure will be followed.
7. With the exception of forward transactions all exchange transactions entered into
between the Bank of England and authorised dealers will, for the sake of convenience and
simplicity, be booked as " spot contracts.
8. Statements of currency accounts should be forwarded weekly to the Bank of
England.
9. COMMISSION.
Authorised dealers doing business with 8. Bank, which is not an authorised dealer, will
be remunerated by the Bank of England at a rate to be agreed. Declarations and advices
covering such operations should be stamped " Commission due " and kept separate from other
deals. The commission should be claimed from the Bank of England monthly.
Regraded Unclassified
46
SECRET.
MEMORANDUM TO AUTHORISED DEALERS IN GOLD.
1. Dealings in gold coin or bullion are prohibited except with authorised dealers. A list of
authorised dealers is attached.
2. Applications to purchase gold coin or bullion should be referred to the Bank of England.
Until further notice gold will be made available by the Bank of England for the following
purposes :- :-
(a) To enable the buyer to perform a contract made before
(b) To meet the reasonable requirements of a trade or business carried on in the United
Kingdom otherwise than by way of dealing in gold.
3. Form C, duly signed and completed, must be obtained in respect of every sale of gold and
handed to the Bank of England.
4. Prices for the purchase and sale of gold coin and bullion will be announced by the Bank of
England from time to time.
5. Advances against gold and forward dealings in gold are not permitted except with permission
from the Bank of England.
6. Melters, refiners and assayers may conduct their normal business but may not hold gold for
any other purpose.
7. Authorised dealers should-
(a) Weigh and examine assays, meltings, etc., of any gold coin or bullion offered to them
for purchase.
(b) Purchase such gold for account of the Bank of England.
(c) Deliver such gold to the Bullion Office of the Bank of England against payment.
8. Commissions to be agreed will be paid by the Bank of England to authorised dealers in
respect of gold purchased and sold.
Regraded Unclassified
SECRET.
Serial No.
FORM E.
DECLARATION TO BE MADE BY A PERSON OR FIRM
APPLYING FOR FOREIGN EXCHANGE.
To
(Name of Bank or Banking Firm to whom application is addressed).
I/We, the undersigned, request that the undermentioned amount of Foreign Exchange
be placed at ray/our disposal.
Amount and Currency required
(In figures and in words) Say
Purpose for which required
(Precise information of nature
of goods, Services, etc., for
which Exchange is required
must be stated)
Exchange to be paid to
(Give full details)
State whether draft, cable or
mail transfer or other form
of delivery
Date when required
I/We declare that the purpose for which this exchange is required in no way contravenes
the provisions of Defence Regulation No.
Name and full postal address
(Name of Person, Firm or
Corporate Body making
request)
Signature(s)
Date
Stamp of the Bank certifying the signature(s) as authorised
Stamp of Authorised Dealer
to sign on the banking account of applicant(s)
(including date)
Rate
This space is reserved for the use of the Bank of England.
Posted
Date received
Checked
Regraded Unclassified
SECRET.
FORM T.
APPLICATION FOR FOREIGN EXCHANGE FOR TRAVELLING
PURPOSES AND FOR PERMISSION TO EXPORT FOREIGN
EXCHANGE AND/OR BRITISH BANK NOTES FROM THE U.K.
To
I/We
of
being desirous of travelling to
for purpose of
wish to purchase
(State Foreign Currency Required)
and to receive permission to take
(State Amount of British or Foreign Currency)
out of the United Kingdom.
I/We shall be leaving the United Kingdom on
and returning on
Date
Signed
Regraded Unclassified
SECRET.
FORM X.
To
I/We
of
beg to apply for permission to export the undermentioned bank notes, gold, securities and/or
foreign currency from the United Kingdom :-
Description
Weight Fine Oz.
Date Acquired
Gold
Description
Amount
Date Acquired
Notes
Description
Amount
Date Acquired
Securities
(Please continue overleaf)
I/We hereby declare that I/we are the true and rightful owners of the above-mentioned
bank notes, gold securities and/or foreign currency.
Date
Signature
Address
N.B.-Proof of ownership should be attached.
Regraded Unclassified
SECRET.
FORM C.
CERTIFICATE FOR EXPORTATION OF BANK NOTES, GOLD,
SECURITIES OR FOREIGN CURRENCY IN ACCORDANCE WITH
REGULATION
OF THE DEFENCE REGULATIONS, 1939.
This is to certify that
of
is authorised to export the undermentioned articles from the United Kingdom and in so doing
is not contravening Defence Regulation No.
Description
Weight Fine Ozs.
Gold
(words and figures)
Description
Amount
Notes
(words and figures)
Description
Amount
Securities
(words and figures)
STAMP OF BANK ISSUING CERTIFICATE.
Signed
For and on behalf of the Lords
Commissioners of His Majesty's
Treasury.
Date of Issue
Valid for period of one month only from date of issue.
Regraded Unclassified
SECRET.
FORM G.
DECLARATION TO BE MADE BY A PERSON OR FIRM
APPLYING FOR GOLD.
To
I/We, the undersigned, request that the undermentioned gold be placed at my/our
disposal.
Gold Coin or Gold Bars
Ounces fine (or approx. £
value)
Purpose for which required
(Give full details)
Date when required
I/We declare that the purpose for which this gold is required in no way contravenes the
provisions of Defence Regulation No.
Name and full postal address
(Name of Person, Firm or
Corporate Body making
request)
Signature(s)
Date
Price
STAMP OF AUTHORISED DEALER.
FOR OFFICIAL Use ONLY.
Number of Gold Bars or
Amount of Sovereigns
delivered
Ounces Fine
Numbers and Markings of
Gold Bars
Sterling Equivalent
Regraded Unclassified
SECRET.
FORM E. 1.
STERLING TRANSFERS TO FOREIGN ACCOUNTS.
Name and Address of
Transferor
£
d
Amount-
(words and figures)
Say
Name and Address of
Transferee
Purpose of Transfer (give
full details)
I/We declare that the above-mentioned transfer is not contrary to Defence Regulation,
1939, No.
Date
Signature
STAMP OF PAYING BANKER.
Regraded Unclassified
53
PARAPHRASE OF TELEGRAM RECEIVED
FROM: American Embassy, Paris, France M
DATE: April 14, 1939, 9 a.m.
NO.: 727
FROM COCHRAN.
I refer to my telegram of April 13, No. 723.
At eight o'clock this morning I had a telephone call
from Pfenninger from Bern. Last night a special meeting
was held there by the Board of Management of the Swiss
National Bank in order to consider the inquiry from
Secretary Morgenthau. It was found that this matter
was entirely within the province of the Central Bank at
the present stage
and only if some special decisions were to be taken would
Government approval be required.
The Management wanted to let us know, Pfenninger
said, that they are always ready to discuss these ques-
tions with me or with my people, adding that someone
from the Management could come to Paris for this purpose
at any time. They expressed a preference for direct dis-
cussion alone rather than any round table discussions
among all the members of the Tripartite Agreement. Be-
cause of the political position of the Swies they mv.st
be very careful, and they asked for absolute secrecy.
The idea was put forth by Pfenninger that it might be
feasible to have talks in Basel at the time the monthly
meetings
Regraded Unclassified
54
- a -
meetings of the BIS are hold, when there would net be
much risk that they would attract attention. If necessary
[eninator] could get to Basel a little before the usual
the parties interested
meetings, or remain a day after.
BULLITT.
BECEIAED
open 11 oce
THJWT8A93G VHURAIRT
pastage ods is NO
- - at Marries -
EA:LWW
Regraded Unclassified
55
PARAPHRASE OF TELEGRAM RECEIVED
M
FROM: American Embassy, Berlin, Germany
DATE: April 14, 1939, 9 a.m.
NO.: 249
No. 14 for Treasury from Heath.
Puhl, who has taken Brinkmann's place provisionally
as Vice President of the Reichsbank because of Brinkmann's
illness, and I had a long talk. The President of the
Reichsbank is Funk, the Minister of Economics, but Puhl
has in his hands the actual administration of the Bank.
My contact admitted frankly that Germany's exchange
stringency was greater than it had ever been. He told
me definitely that, contrary to general belief, the Czech
National Bank's liabilities in foreign exchange were
greater than its assets, since the Reichsbank was
"loyally" meeting and would in the future continue to
meet Ozech importers' heavy credit commitments abroad.
Under normal conditions, an importer would receive new
credits from fereign suppliers when he paid off one
foreign credit, but Puhl admitted that because of the
international situation, fresh credits were not being
granted often to Ozechoslevakia.
It was not possible for no to get an estimate of
the assets in gold and foreign exchange which were ac-
quired when Ozechoslevakia was taken over. I made mention
of estimates which appeared in the newspapers that
Germany
Regraded Unclassified
56
- 2 -
Germany had acquired a gold reserve of 80,000,000 dollars
and foreign exchange availabilities of 200,000,000 dollars,
but he meroly repeated that the liabilities of the Oxech
Bank were greater than the assets.
As far as the Reichsbank was concerned, he told me,
it did not favor absorption of the Csech Central Bank by
the Reichsbank. Its preference was for the Czech Central
Bank to remain as "a more or less" autonomous institution,
although working closely with the Reichsbank, issuing
Czech currency. If it were determined that it would be
"politically inadvisable" to issue Czech currency, it
could issue its own form of Reichamark currency.
Puhl made reference to the recent negotiations between
the Reichsbank and Slovak officials. He asserted that
the first thought of the Slovak officials was to issue
their own monetary unit, getting rid of the Czeeh
currency.
The "new financial plan" was described by Puhl
as a provisional measure made necessary by the over-
issuance of long term Reich leans to the point where
necessary 200888 to the money market was not available
to industry.
END SECTION ONE. 03V1303#
GEIST.
ases " mus
KA:LWW
be valid
15/min D at terms knot
Regraded Unclassified
57
PARAPHRASE, SECTION TWO, TELBURAM NO. 249
of April 14, 1939, from Berlin
Regraded Unclassifie
Puhl said that the new plan was in effect merely a
cessation of long term borrowing by the Reich in favor
of borrowing on short term. The inflationary dangers
of over-issue of tax certificates were frankly admitted
by Publ. However, he said that & real effort was being
made to reduce governmental expenditure, as it was realized
that governmental cocnomy was necessary. Incidentally,
I may add my personal comment that Puhl is inclined to
take the optimistic view.
Puhl made reference to the imposition of counter-
vailing duties on imports into the United States of
German goods as "regrettable", but said that there was
no present possibility that there would be devaluation
of the mark. The present political situation he said
was frankly one resembling war. It was not possible to
consider mark devaluation or relaxation of trade and
exchange restrictions in view of this atmosphere and
with exports still declining. Only if there should be
appeasement could such a step be taken.
As for the Reichsbank, Puhl asserted that it would
do all it could to promote reasonably normal financial
relations. He insisted that the new President, Funk,
was " very reasonable man", who told his staff when
he took over his duties that he "was not & wild Nasi
Minister"
58
- 2 -
Minister" and that they need have no fear of his policies.
Puhl made reference to the April 25 meeting of the
Standstill bankers in Berlin. He said that no substan-
tial change was contemplated in the Standstill Agreement,
except that in the course of time the Agreement had
become very complicated and an endeaver would be made to
simplify and clarify it.
The books of the Reichsbank still carry the name of
Brinkmann as Vice President, Puhl said, because Brinkmann's
doctors still are not ready to admit that he could not
completely recover from the nervous breakdown from which
he is now suffering. However, the indication was that
this recovery would not be sufficient to permit him
to resume his position as Vice President of the Bank.
END SECTION TWO.
END MESSAGE.
GEIST.
03V13038
acor 11000
YOUTA of
H&T to
paint will by hottal
EA:LWW
Regraded Unclassified
59
PARAPHRASE or TELEGRAM RECEIVED
Regraded Unclassifie
FROM: American Embassy, Paris, France
DATE: April 14, 1939, 5 p.m.
MA
NO.: 736
FROM COCHRAN.
The uncertainty over rates of war risk insurance
on gold has affected continental exchange markets. The
British Government 1s now striving to relieve this
question. The failure of the Belgian authorities yes-
terday and early this morning to pog the belga may have
been due to the foregoing. Today in small amounts
the French control has been both a buyer and a seller
of sterling. Because of the international outlook
French rente and share markets are weak and nervous;
this is mainly due to reports that the French army
has requisitioned heavy commercial delivery trucks, and
to rumers on the Bourse that general mobilization is
imminent.
Pressure on both the Swiss and Dutch markets.
On these markets fereigners are selling securities,
and are withdrawing their holdings. Part of the funds
of the Swing authorities As being transferred to
Great Britain and the United States. There are reports
in the press that Dutch businessmen are traveling heavily
to Lendon, allegedly for the purpose of spreading their
investments.
There are three stories in AGENCE ECONOMIQUE of
Paris today coming from the United States, regarding
80
- 2 -
economic and financial measures to be taken in & crisis.
There is included & report of a meeting held in Wash-
ingten on Tursday of the principal officials interested
in financial market centrol. Mention was made of the
idea of an orderly liquidation of foreign securities
through a pool in collaboration with foreign govern-
ments.
END SECTIONS ONE AND TWO.
BULLITT.
EA:LWW
Regraded Unclassified
61
REB
GRAY
Paris
Dated April 14, 1939
Rec'd 4:52 P. ma
SECRETARY of State,
Washington.
736, April 14, 5 P. m. (SECTION THREE)
The French Government published a new form of state-
ment of the public debt in today's JOURNAL OFFICIEL. It
reveals that the total debt stood at 427,135,000,000
francs as of February 28, 1939. Borrowing during the
first two months of the yEar totaled 10,932,000,000
francs. About 30% of this amount represented long term
and about 70% medium term borrowing. On the other hand
the statement shows that medium and short terms maturing
(877)
during the current year were reduced by 4,186,000,000
francs, the perpetual debt by 1,000,000 and the debt to
the Bank of France by 60,000,000. The net increase of the
debt from January 1 to February 28 was therefore
6,684,000,000 franos.
The total debt of the state indicated above does not
include the debts of the railways, of the departments and
communes, Et cetera nor does it include the war debts.
If
Regraded Unclassified
62
REB
2-#736 From Paris, Apr.14,5p.m.
(SECI Three)
If WE add the joint published figures for the
foreign debt (which do not include the war debts) of
16,000,000,000 francs, the railway debt of 102,000,000,000,
the debt of the departments and communes of 40,000,000,000,
and that of the colonies and certain state institutions
of 10,000,000,000, WE arrive at a total public debt as of
February 28, 1939 of approximately 595,000,000,000 francs.
END OF MESSAGE)
BULLITT
NPL
EMB
BECEIAED
Now 12 loso
ТИЗИТНАЯЗО Ya /BAIT
- - of Malarial will
Regraded Unclassified
63
MM
GRAY
London
Dated April 14, 1939
Rec'd. 7:12pm.
SECRETARY of State
Washington, D.C.
RUSH.
483, April 14, 7pm.
FOR THE SECRETARY OF THE TREASURY FROM BUTTERWORTH.
STRICTLY CONFIDENTIAL.
OnE. At Sir Frederick Phillips' request I called
at the British Treasury this afternoon and hE gave ME
two copies of the British financial regulations which
will bE promulgated upon the outbreak of a war together
with copies of the various forms and notices, on the
understanding that these documents bE treated as secretly
and confidentially as any information can bE because if
anything leaked very real difficulties would bE created.
Accordingly Phillips requested that these documents bE
mrs iceotel
sent directly to you and that no reproductions bE made
has These
documents
of them. HE also said that two were being supplied
inasmuch as you might wish to place one in the hands of
the chairman of the Federal RESERVE Board. They go in a
letter addressed to you in the pouch which leaves London
tonight for the QUEEN MARY. Phillips referred to the
fact
Regraded Unclassified
64
mm 483, April 14, 7pms from London.
⑉2⑉
fact that BEWLEY is scheduled to sail for England on
April 21; consequently he had authorized him to bE pre-
pared to stay on in Washington for a day or two longer
in the EVENT that you wished to clarify through discus-
sion with him any aspects of these documents.
Two. Phillips then stated that hE was instructed
by the Chancellor of the Exchequer to Express appreciation
for the American memorandum (my 473, April 13, 2pm) and
to agree in principle to the consultations suggested
therein. HE added that the Extent to which the British
Treasury could Enter consultative Exchanges was condi-
tioned by whether bilateral Exchanges were intended or
"a general confabulation". HE was obviously leary of
any such general consultations and therefore I ventured
to Express a personal opinion that no such suggestion was
intended; that the intended procedure was for Cochran to
consult with the continental adherents of the tripartite
accord just as I had with him and if the other countries
wished to undertake any bilateral conversations with Each
other naturally they WERE at liberty to do 80. I added,
however, that I would obtain from you confirmation on
this matter and would communicate with him again. HE
said that they wanted the position to bE thus clarified
before proceeding further.
Phillips
Regraded Unclassified
65
mm
483, April 14, 7pm. from London,
-3-
Phillips then went on to any that he thought the
American figures of British holdings of American securities
WERE quite wide of the mark due to the amount of foreign
operations through London and that he Estimated holdings
by British residents of American securities were no more
than pounds (Sterling) 150,000,000 to pounds (Sterling)
200,000,000 and probably much nearer the former than the
latter figure. HE also said that hE understood and
appreciated our desire to prevent panicky selling by
forsigners of American security holdings upon the out=
break of a war but he did not understand the signifi-
cance of the reference to foreign balances in the United
States and to the commodity and money markets, As to the
prices of commodities in the United States upon the out-
break of a war hE thought it was "anybody's guess what
would happen".
Phillips concluded by saying that any background
information as to what WE had in mind would bE very much
appreciated and in this general connection he referred
to the two documents mentioned above and Expressed the
hope that WE would reciprocate in passing on to him
information regarding Emergency measures WE propose to
take in the EVENT of on outbreak of a war in Europe.
Three.
66
mm 483, April 14, 7pms from London. -4-
Three. In the course of a conversation with Sir
Frederick Leith-Ross, hE referred to the financial
Economic implications of the recent guarantees given to
Poland, Greece and Rumania and confirmed that these
countries which, as reported in my 80 January 20, 3pm
have for some time past been seeking financial facilities,
particularly through the pounds (Sterling) 10,000,000
"political" Export credit guarantee schems, are now
pressing most strongly for such assistance on the basis
of war needs. HE implied that they are asking mainly
for arms, material and other supplies needed in time of
war, and that they had suggested that if Great Britain
was not in a position to make them available, they wanted
funds with which they could make similar purchases,
particularly in the United States. I gather that the
traditional British answer of "no parliamentary authority
to do so" is wearing pretty thin under the stress of
dynamic Events. Incidentally I learned from the Export
credit guarantee department that it is anticipating that
a substantial increase will bE made in the Existing
pounds (Sterling) ten million political credit scheme
and steps are already being taken to expand 1ts organiza-
tion facilities.
From
Regraded Unclassified
67
mm
483, April 14, 7pm. from London, ⑉5⑉
From these and other conversations it SEEMS clear
that the British monetary authorities feel themselves
faced with a dilemma; whether an immediate war is
sufficiently inevitable to make it desirable for them
to spend lavishly their not unlimited financial
resources in aiding potential allies or whether they
should conserve their resources against all contingencies
and only make available to their potential alliss Enough
to keep them in line but not Enough from the point of
view of military safety. Furthermore regardless of
Expenditure the problem of supplying war materials to
potential allies without interfering with the British
armament program will require foresighted and careful
handling if price rises through bottlenecks are to bE
avoided.
KENNEDY
CSB
BECEINED
osof at 000
ТИЗМТНА930 YRUPAIRT
adi by will
named ast at Medical
Regraded Unclassified
68
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE
TO
Secretary Morgenthau
April 14, 1939
FROM
E. H. Foley, Jr.
Morris Ernst tried to see you this afternoon, and when he found
you were tied up, he asked no to mention to you that be had learned
that some of the New York banks had paid huge tributes to get out of
Germany their deposits in that country. He thought you might want to
look into this as a possible means of showing that Hitler, Goobbels,
et. al, are political grafters. This might be followed up by Archie
Lochhead through the Federal Reserve Bank in New York or by the
Comptroller of the Currency.
E. E.N.7h
Regraded Unclassified
69
Secretary Morgenthan
April 14, 1939
E. N. Foley, Jr.
Morris Erast tried to see you this aftermoon, and when be found
you were tied up, he saked so to mention to you that be had learned
that some of the New York banks had paid huge tributes to get out of
Germany their deposits in that country. He thought you might eant to
look into this as a possible means of showing that Hitler, Goabbels,
et. al, are political grafters. This might be followed up by Archie
Lochhead through the Federal Reserve Bank in New York or by the
Comptroller of the Currency.
(Initialed) 1. 1. F., 3r.
EHFts Typed 4/14/39
Regraded Unclassifie
70
April 140 1939.
The Hosorable,
The Secretary of the Treasury.
My dear Mr. Secretary:
Reference is made to your letter of April 11, 1939,
transmitting a proposed Treasury Decision imposing countervailing
duties, under section 303 of the Teriff Act of 1930, upon *silk
goods" imported into the United States from Italy, end requesting
Ky opinion as to its form, substance, and legality.
Section 303 of the Teriff Act of 1930 (46 Stat. 687;
USS.C., title 19, sec. 1303), reads:
"Ubsnaver say country, dependemcy, colony,
province, 02 other political subdivision of govern-
mest, person, partnership, association, cartel, or
corporation shall pay or bestow, directly or indirectly,
say bourty or great upon the manufacture or production
or export of any article or norchandise manufactured
or produced is má country, dependency, colony, pro-
vinee, or other political mbdivision of government,
and such article or merchandise 18 dutiable under the
provisions of this set, then upon the importation of
say such article or merchandise into the United States,
whether the - shall be imported directly from the
country of production or otherwise, of whether such
article or merchandise is imported in the - condition
as when exported from the country of production or has
boen changed in condition W or other-
vise, there shall be levied and paid, is all such cases,
in addition to the duties otherwise imposed w this set,
a additional duty equal to the net - of such
bounty or great, howver the - be poid or bestowed.
The Secretary of the Treasury shall from time to time
asseriain of determine, or actimate, the net mount
of seeh mch bounty or great, and shall declare the
Regraded Unclassified
71
- 2 -
Regraded Unclassified
net amount 60 determined or estimated. The Secre-
tary of the Treasury shall make all regulations he
may deem necessary for the identification of such
articles and merchandise end for the assessment and
collection of such additional duties."
From supplemental date submited on April 13, 1939, it
appears that the Treasury Department has found the following
factual situation to exist:
=Investigations by the Treasury Department have
disclosed that Royal Decree No. 1267, dated May 29,
1937, and published in the Gaszetta Ufficiale Del
Regno d'Italia of August 4. 1937, provides for cer-
tain payments to be made to Italian exporters by reason
of exportations of silk goods. The price to be paid for
Itelian silk cocoons is fixed annually bk the Italian
Government. On the basis of this price for eocoons, the
price to be paid by manufacturers of raw silk is fixed
in advance for one year. The basic rate of payments
made in connection with exports, referred to in Decree
No. 1267 as the 'integration quota'. equals the dif-
ference between the fixed Italian price and the monthly
average New Tork-Yokohama price for rew silk. An ex-
tra amount of 4 lire per kilo is paid on exports to the
United States. The basie rate is adjusted for different
silk products according to the the of silk used and the
stage of its manufacture. On the basis of available
data for the last half of 1938, the subsidy for the
silk year 1938-1939 will range from 6 to 63 lire (30#
to $3.30) per kilo (2.2 1bs.) of silk in the exported
articles."
Time the exporter of Italian silk products, upon export-
ing any such products to the United States, is paid a substantial
percentage of the government-fixed cost or value of the POW silk
entering into much products--the amount 00 paid being dependent in
seah case upon the kind ofralass of good exported and the extent
to which they have been manufactured. Such payments are made only
with respect to goods exported. The Italian Royal Decree No. 1267,
72
- 3 -
4097 usd treaslation of which you furnished, states that the purpose
of mch payments is to facilitate wise exportation of silk products"
and to GOTO? the *expenses instduct to our a the Incrion
markets. The offect, maifectly intended, is to give the Italian
exporter of silk products milk financial aid as will onshle his
successfully to compete in the markets of this country. This
constitutes the payment or bestowel of hounties or greate upon the
"masufecture or production or export" of silk articles or If
chandise within the neasing of section 303 of the Teriff w of
1930. Downs 7. United States, 187 U. s. 496; Nicholas & Co. V.
United States, 249 U. S. 340
It is my opinion, therefore, that it is the duty of the
Secretary of the Treasury to impose countervailing duties under
section 303 of the Tariff Act of 1930 upon datiable silk marchan-
dise imported into the United States from Italy, 38 op. A.G. 489;
at I find the proposed Treasury Decision submitted by you up
propriate in form at nicht to accomplish that purpose.
Respectfully,
(Signed) Frank Murphy
Attorney General.
Regraded Unclassified
at 7.
TREASURY DEPARTMENT
74
INTER OFFICE COMMUNICATION
DATE April 14, 1939
TO
Secretary Morgenthau
FROM
Mr. White
Subject: Vice President Garner's Request of March 14, 1939:
Question: Has the United States Government ever
Used Public Funda to Enable American
Citizens to Collect on their Foreign
Investments?
1. The United States Government has made no loans to a
foreign country for the purpose of enabling that foreign
country to pay its obligations to United States Citizens.
2. However, there have been numerous cases in which the
United States Government has "intervened" or "interposed"
with its military or diplomatic power for the purpose of pro-
tecting or promoting claims and property interests of American
investors in foreign lands. Almost all of such instances have
occurred in Latin American countries.
The United States Government has also used pressure on
American banking and business interests to make investments
in foreign countries which would facilitate the development
of the foreign policy.
3. The Export-Import Bank was an attempt at a new policy
in that public funds were used for the first time to finance
American exporters or exports. In one case this financing
operation facilitated the collection of debts arising from
prior commercial transactions.
4. Loans (or tariff concessions) extended by the Government
to a foreign government for the stated purpose of facilitating
trade and strengthening the economy of the borrowing country
may be made the inducement (and directly or indirectly may
provide the funds) for additional payments to foreign holders
of defaulted obligations of that country.
There have been instances when the State Department dis-
approved of loans by the Export-Import Bank because the bor-
rowing governments had not made satisfactory settlements with
the Foreign Bondholders Protective Council on defaulted debta.
75
Secretary Morgenthau - 2
The attached memorandum and appendix contain a des-
cription of instances illustrating governmental assistance
in the collection of private debt and the promotion of
financial and economic interests.
Regraded Unclassified
76
Protection and Promotion by the United
States Government of American Economic
and Financial Interests in Foreign Countries
The notable instances of American governmental action
to protect and promote American economic and financial in-
terests abroad may be summarized under four headings: Our
general Caribbean policy, our Mexican policy, our Cuban
policy, and our Chinese policy.
I. Outside Cuba and Mexico our Caribbean policy has been
dictated largely by the strategy of security and protection,
for which purposes we have sought to forestall any excuse
for foreign intervention other than American.
A. We acted to insure that any economic dependency of
& Caribbean state shall be a dependency on the United
States and not on a European power:
1. We urged Santa Domingo, Nicaragua, Haiti,
Honduras and Guatemala to pay off debts to foreign
countries through American private loans. We urged
American bankers to undertake such loans apparently
with the understanding that adequate safeguards
would be provided for the protection of the loans.
2. We discouraged the granting of major business
concessions to foreign interests in Panama, Costa
Rica, Nicaragua, Haiti and Colombia.
3. Some instances of efforts to cause 8. transfer
of public debts from European to American hands
follow:
a. During 1910-1912 the State Department urged
American bankers to develop a financial plan
for Nicaragua and to convert the public debt
held by European interests into an American loan.
State Department negotiated with Nicaragua 8.
treaty safeguarding a loan contract which was
negotiated with Nicaragua by American bankers.
When the United States Senate refused to ratify
the treaty, American bankers went ahead with a
smaller loan and by private arrangement secured
the right to select a Collector General of Cus-
toms, nominated by the bankers and approved by
the State Department (1912).
Report prepared by Mr. Schmidt, Mr. Spiegel and Mr. Hanson
Regraded
77
- 2 -
b. During 1908-1911 the State Department ad-
vised Honduras to reject & British refunding
contract 8.8 onerous and urged American bankers
to undertake the refunding. American bankers
arranged a loan contract while the State Depart-
ment negotiated a treaty to safeguard it. Treaty
was rejected by Honduran Congress, criticized by
American Congress, and loan contract was withdrawn
by American bankers.
0. In 1910 the State Department exerted pressure
to obtain American participation in the National
Bank of Haiti and again in 1920 to obtain full
American control of the Bank.
d. From 1915 to 1922 the State Department worked
to arrange & private American loan for Haiti that
would lessen the ties with European bankers and
bondholders.
B. We safeguarded the processes by which Caribbean nations
could meet their obligations both to foreign and American
interests:
1. We temporarily intervened in Panama seven times,
in Honduras five times, in Nicaragua six times, and
once in Guatemala and Costa Rica. We set up mili-
tary governments in Cuba and the Dominican Republic,
and maintained permanent forces for long periods in
Haiti and Nicaragua. We set up customs receiver-
ships in Nicaragua, Haiti, Salvador, and the Dominican
Republic.
2. We used, as devices of influence, recognition
and non-recognition of governments, displays of
force, and arms embargoes.
3. Between 1854 and 1913 we disembarked military
forces some fifty times "to protect life and property
of American citizens" in Latin America. Of these
fifty, fourteen occasions were on the Isthmus of
Panama.
4. Some specific instances of this safeguarding
process are the following:
a. The State Department appears to have refused
to recognize the Theodore and Sam governments in
Haiti because they would not submit to American
customs control. Overthrow of Zamor and Theodore
governments (1914) was largely due to lack of
Regraded Unclassified
78
- 3 -
money which was in turn due to action of the
American-operated National Bank whose action
was not disapproved of by the State Department.
b. Military occupation of Haiti in 1915.
American forces were maintained until 1934 during
which time American administrators exerted pressure
for the adoption of a new constitution and for the
submission of all proposed. legislation to the
United States for approval.
0. 1902-1907. Originally acting in defense of
an American company, the State Department was led
to take over the Dominican customs to prevent
partial receiverships by other foreign creditor
nations.
d. The State Department assumed a military govern-
ment of Dominican Republic from 1916 to 1922 in
an attempt to compel acceptance of a treaty pro-
viding greater safeguards to foreign creditors
than were offered by the Convention of 1907.
e. Evacuation treaty of 1924 in Dominican Republic
continued customs collection under American direc-
tion.
f. In Honduras 1910-1911, we impeded revolution
by the presence of 8. cruiser and impeded existing
government by setting up neutral zone. American
arbitration of the matter followed.
g. Mediation of the Honduras-Guatemala boundary
dispute of 1917-1918.
h. In 1911 a loan contract brought funds from
the United States bankers to Nicaragua 8.8 well
as an American collector general of customs.
Abolition of concessions granted under previous
governments was negotiated and & mixed claims
commission (composed of one Nicaraguan and two
Americans) was established to consider claims
arising from this set.
1. In Nicaragua American troops were landed in
1912 to suppress a revolution and remained steadily
in Nicaragua until 1925. Armed support was extended
a presidential candidate in 1912 (subsequently
elected) and again in 1926.
Regraded Unclassified
79
4
J. In the Dominican Republic recognition was
withheld from governments in 1914 and 1916 pend-
ing their acceptance of American supervision of
collections of internal revenue.
C. We have refused to attach significance to contrac-
tual stipulations whereby American firms renounced the
right to ask support of their Government and have even
discouraged the making of contracts containing such sti-
pulations.
D. Upon numerous occasions the State Department has
acted directly upon appeal of American enterprises in
the Caribbean Republics. Eleven instances are cited
below:
1. Upon appeal of San Domingo Company (American-
owned) in 1902, the State Department helped to ne-
gotiate & settlement.
2. Upon appeal of sugar planters against sugar tax
enforced in Dominican Republic in 1905 the State
Department entered upon negotiatory activity.
3. Hollander was engaged to investigate Dominican
situation in 1905-1906, leading to the debt-adjust-
ment plan.
4. The State Department indicated disapproval of
& port-charges action by Dominican Republic in 1906
as unfriendly act toward American enterprise.
5. Upon an appeal by American-owned railway in Haiti
in 1913, the State Department induced Haiti to accept
delivery of certain sections of the railway, with ap-
propriate financial action.
6. Upon an appeal by the American-owned railway in
Haiti in 1914, the State Department advised Haiti
that it would act to safeguard the rights of the
company.
7. Upon request by the American-operated Bank, the
State Department furnished a ship to transfer gold
to New York, despite the protest by Haitian govern-
ment against such transfer.
8. Upon the suggestion by the American-operated
Bank that issue of paper was undesirable, the State
Department protested to Haiti.
80
- 5 -
9. The State Department insisted in the Haitian
Constitution of 1918 upon a clause permitting for-
eigners to hold land in Haiti.
10. The State Department refused to recognize the
law of 1920 in Haiti which restricted the right of
foreigners to acquire land.
11. Upon suggestion of American interests, neutral
areas were established in Nicaragua during disturbed
periods in 1910, 1912, and 1926-27.
E. Sometimes the State Department's action has been
favorable to American interests, although there is lack-
ing clear evidence that the action followed upon appeals.
1. The tariff law of 1919 under the Dominican mili-
tary government favored American trade, aided big
American sugar companies using heavy machinery, and
aided American manufacturers whose market was broadened.
There is wide belief that American sugar planters did
not feel that the intervention was 8. good idea for
them.
F. Some observations worthy of note:
1. There 18 abundant evidence that the State Depart-
ment has used pressure on private banks and firms
to get action which would assist our foreign policy,
as well as having shaped our foreign policy to pro-
tect private interests.
2. Among the conditions that American private enter-
prise has liked abroad are cheap labor, cheap land,
high interest rates, and a government that can be in-
fluenced easily. The recent attempts by Latin American
countries to raise wage levels and the standard of
living of the population, and to provide low interest
rates for native industry has reduced the attractive-
ness of these countries a.B a field for investment by
American interests.
3. Private business has not always considered its
interests aligned with the bonded debt interests that
sought State Department protection. At the present
time, particularly, the interests of United States
exporters are in opposition to the interests of bond
holders.
4. Actual military engagements are not necessary to
exert influence. The mere presence of a warship has
great moral influence.
Regraded Unclassified
81
9 I I
II. In Mexico:
A. We have insisted upon the right to protest against
internal economic policy. The State Department has pro-
tested vigorously against Mexican laws and constitutional
provisions relating to taxation, forfeiture of mining
properties, expropriation of land, and exploitation of
oil properties, that were allegedly confiscatory or dis-
criminatory.
B. Such devices as recognition and non-recognition and
arms embargoes have been used to influence Mexican-American
relationships. On one occasion, for example, a non-
retroactive interpretation of a law was projected as B.
condition for recognition.
C. Some instances are cited in which the State Department
has insisted that "American property shall not be confis-
cated" and has protested against Mexican laws that have
an allegedly confiscatory effect upon American holdings.
1. 1915 - Villa decree that mines abandoned for
60 days shall be subject to forfeiture.
Also, that exploitation work must be con-
ducted on each five contiguous pertenencias.
ACTION. Mining men protested to State
Department which in turn protested to Villa
that the act was confiscatory of American
property. Also, the State Department pointed
out the impossibility of continuous operation
because of revolutionary conditions. Decree
was not enforced.
2. 1916 - Similar decree by Carranza. Suspension of
mining operations for over two months in suc-
oession or for three months in one year would
subject property to forfeiture.
ACTION. State Department requested annul-
ment on ground that it is confiscatory of
property which Americans could not operate
because of uncertain railway service or ex-
cessive railway rates or confiscation of sup-
plies. Modification of decree followed.
3. 1917 - 1918. 1917 Constitution vested subsoil
ownership in the nation and raised question
of status of properties owned by Americans.
The chief issue was whether it wa.B retroac-
tive for properties acquired before May 1917.
Regraded Unclassified
82
- 7 -
ACTION. For several years the answer was
not clear. When Obregon became President
the State Depar Department tment set up a non-retroactive
interpretation as. a condition to recognition.
A United States-Mexican commission in 1923
reached agreement: A mutual statement making
a distinction between those who had performed
positive act toward using subsoil and those
who had not, which was part of the basis for
recognition in 1923.
4. 1925 - Law provides that if they have performed
positive act toward oil exploitation before
May 1917, owners may register their holdings
and exchange oil rights for a 50 year conces-
sion. The 50 year period was to run from
date of the positive act so that if done in
1885 the remaining period of exploitation
would have been very short.
ACTION. State Department objected to the
act as confiscatory. Calles Amendment fol-
lowed the Court decision holding the Act
unconstitutional.
5. 1915 - Carranza agrarian decree provided for ex-
propriation of land for villages.
ACTION. United States-Mexican Commission
of 1923 debating on methods of indemnifica-
tion agreed on indemnification in bonds for
lands up to 1700 hectares but for beyond that
size the payment was to be cash. Also, it
was agreed that payment in bonds shall not
constitute a precedent for payment by bonds
for expropriation of any other property.
6. 1925 - Alien land law attempted to oust foreigners
from ownership of real property. Mexico as-
sured that it was not retroactive. But one
clause 1s disturbing, 1.e., that foreign cor-
porations holding stock in company owning
rural land shall divest self of holdings
within 10 years. Idea was that they intended
to cut off inheritance of real property, and
since corporation's life was perpetual, such
a 10. year clause was inserted.
ACTION. State Department protested.
Regraded Unclassified
83
- g -
7. 1938 - Cardenas issued a deoree expropriating
properties of oil companies in Mexico. On
March 30 and again on July 21, Secretary Hull
made statements relating to proper procedure
and me thod of payment in expropriation of
property.
D. Regarding taxation, State Department's view has been
that it will not ob ject to taxes properly levied unless
they are confiscatory or discriminatory.
1. 1915 - Tax decree affecting Mexico City Americans.
ACTION. State Department admitted that it
was not confiscatory or discriminatory but
because conditions for payment were unsatis-
factory, it protested. Decree was annulled
as far as affected foreigners.
2. 1915 and 1916 - Forced loans and contributions
requested of foreigners.
ACTION. State Department protested.
3. 1915 - Carranza tax on mining properties.
ACTION. State Department protested because
it 1s more than the industry can bear and
therefore confiscatory.
4. 1916 - Mining tax on a progressive rate basis.
ACTION. State Department protested to it
as confiscatory in its object.
5. 1917 - Tax on oil and petroleum.
ACTION. Lansing instructs ambassador to
protest as confiscatory of American rights.
6. 1918 - Carranza deoree. Double tax on oil indus-
try by taxing both the land and the production.
ACTION. State Department protested as con-
fiscatory. Mexico stated it 18 merely fiscal
legislation and that it can not accept inter-
ference on such matters.
7. 1916 - Carranza decree created an issue of currency
and made it compulsory to accept at certain
ratios for payment of debt.
ACTION. State Department refused to accept
the decree because depreciation of currency
diminished and therefore confiscated existing
obligations.
Regraded Unclassified
84
- 9 -
E. Action by the United States Government which has
been less clearly and directly on behalf of private
enterprise includes the aid reported to have been con-
tributed by Ambassador Wilson to the downfall of Madero;
non-recognition of Huerta and the arms embargo, capture
of Vera Cruz, etc; and the sending of Pershing into
Mexico to capture Villa.
III. In Cuba:
A. Our intervention was a decisive factor in the secur-
ing of independence, and the Platt Amendment established
a peculiar political status that facilitated the exercise
of influence on Cuba and anticipated intervention under
certain conditions.
B. Among the devices used have been recognition and non-
recognition, arms embargoes, landing of armed forces,
display of force, and military government. In addition
to such activity, which served to protect the life and
property of American citizens, direct influence has been
asserted over the granting of concessions and the capacity
to borrow.
C. The State Department apparently acted to avoid inter-
vention if possible, and for a considerable period sought
to act 80 that the cause for intervention would not arise.
D. From an economic viewpoint, the United States Govern-
ment interpreted the Platt Amendment as giving it a sort
of advisorship over Cuban loans and the right to pass on
concessions granted by Cuba to foreigners, lest the con-
cessions or loans prove an improvident strain on the
Treasury:
1. In 1911 and 1912 the United States on several
occasions protested the granting of concessions to
both American and European companies.
2. A typical instance of control exercised over
Cuban governmental borrowing was that in 1921 when
approval by the United States of a large loan was
conditioned upon improvement of financial adminis-
tration.
E. In 1903 a reciprocity treaty between Cuba and the
United States gave Cuban products, including sugar and
tobacco, a 20 percent reduction from American tariff
Regraded
Inclassifie
85
- 10 -
rates and American products 8 20 to 40 percent reduc-
tion from Cuban rates.
This treaty and the Platt Amendment were abrogated
in 1934 when & series of measures were taken as part of
a policy of active cooperation with the Mendieta regime:
1. In accordance with the Jones-Costigan Act, Cuba
was assigned an annual quota of 1,902,000 short tons
of sugar in the United States market. At the same
time President Roosevelt lowered the duty on Cuban
sugar from 2 to 11 cents a pound. This assured Cuba
a definite place in the market of 1ts principal cus-
tomer.
2. A new Cuban-American trade agreement further re-
duced the duty on Cuban sugar and also lowered tariff
duties on Cuban rum, tobacco, and fresh fruits and
vegetables. In return, Cuba reduced its tariff rates
on many American products.
3. In 1934 the Export-Import Bank loaned $4,000,000
to the Mendieta Government. This was the first loan
by 8. United States governmental agency to a foreign
country.
F. Other activity included:
1. Landing of armed forces following difficulties
arising out of presidential elections of-1905, and
administration of the Government by an American
governor from 1906 to 1909.
2. Landing of armed forces in 1912 to protect mines
and sugar mills during the negro insurrection.
3. Sending of naval vessels and landing of forces
in 1916 upon the outbreak of a rebellion against
Menocal to which rebellion the United States indi-
cated its opposition.
4. Landing of troops in 1917 to prevent possible
destruction of sugar by revolution against Menocal.
Troops not withdrawn until 1922.
5. Arrival in 1921 of General Crowder as personal
representative of President Wilson. Crowder investi-
gated local situation thoroughly, acted as Ambassador
from 1923 to 1927, and participated actively in the
Cuban Government's effort to deal with an adverse
economic and electoral situation.
Regraded Unclassified
86
- 11 -
6. Placing of an embargo on munitions sales to
insurrectionists of 1924 and sale of war equipment
to the existing government.
7. Ambassador Welles' activity as intermediary
between Machado and opposition groups.
8. Refusal to recognize Grau San Martin Government
in 1933 and recognition of Mendieta Government in 1934.
9. Arms embargo of 1934 prohibiting export of arms
and ammunition to Cuba except on application for 11-
cense and approval by the Cuban Government.
IV. In China:
The United States Government has at different times en-
couraged and discouraged the making of loans by American bankers.
Also, naval vessels have been available in strategic places
during disturbed periods. Some instances of American action
are:
A. 1895-1900. The American Minister supported American
activity to secure railway contracts.
B. 1909. Secretary Knox proposed that China be lent
enough money to purchase all the railways in
Manchuria.
C. 1911. President Taft sent personal telegram to the
Chinese ruler requesting "equal participation
by American capital" in the Hukuang Railway loan.
D. 1913. The United States Government refused to sup-
port American participation in the six-power
consortium, but reversed its attitude in 1917.
E. From 1914 to 1921 the American Minister sought to
induce American capitalists to make loans to
China, but little interest was shown in Chinese
loans by the American financial community.
F. 1938. The Export-Import Bank made 8. $25 million
loan to China, to be used solely for the pur-
chase of commodities in the United States.
As far as 18 known, no stipulations were ex-
acted from China as to matters of debt settle-
ment, treatment of American business interests
in China, or as to relations with third coun-
tries. This transaction was probably unique
in that respect.
Regraded Unclassified
87
- 12 -
V. State Department has attempted to prevent Export-Import
Bank loans to Latin American countries which have not made
satisfactory settlements on defaulted debts.
Department of State maintains the policy of discourag-
ing loans by the United States Government or by government
corporations to those countries which have not made a settle-
ment of their foreign debt which is satisfactory to the
Foreign Bondholders Protective Council. This policy is evi-
denced in its recommendation to the Export-Import Bank to
decline a loan to the Chilean railroads in March 1938. The
action with regard to the request for a loan by the Chilean
railroad had its precedent on November 11, 1936 when a sim-
ilar request for a loan by Colombia was recommended for dis-
approval because of the failure of the Colombian Government
to reach a satisfactory settlement of its debt with the
Foreign Bondholders Protective Council.
Regraded Unclassified
88
- 13 -
Summary of the Foreign Economic Policy of the Taft Admin-
istration -- "Dollar Diplomacy"
1. Knox urged Santa Domingo, Nicaragua, Honduras, Guatemala
and Haiti to pay off debts to European countries through
American private loans and urged American bankers to under-
take such loans apparently with the understanding that ade-
quate safeguards for protection of loans would be provided.
As guarantees he sought to obtain control of customs collec-
tion for the bondholders.
a. Nicaragua: During 1910-1912 the State Department
urged American bankers to develop a. financial plan for
Nicaragua and to convert the public debt into an American
loan. State Department negotiated with Nicaragua B. treaty
safeguarding 8. loan contract which was negotiated with
Nicaragua by American bankers. United States Senate re-
fused to ratify treaty and loan contract was abandoned.
However, the American bankers went ahead with & smaller
loan than was contemplated originally by the proposed
treaty, and by private arrangement they secured the right
to select & Collector General of Customs, nominated by
the Bankers and approved by the State Department (1912).
b. Guatemala: In 1912 the State Department tried to
dissuade British Government from supporting claims of
British bondholders whose bonds were in arrears and offered
8. plan for refunding by American bankers. The British,
however, rejected the proposition and used a display of
a warship to enforce its demands on Guatemala.
c. Honduras: During 1909-1911 the State Department
advised Honduras to reject a British refunding contract
8.8 onerous and urged American bankers to undertake the
refunding. American bankers arranged a loan contract
while the State Department negotiated a treaty to safe-
guard it. Treaty was rejected by Honduran Congress,
criticized by American Congress, and loan contract was
withdrawn by American bankers.
d. Haiti: In 1910 the State Department exerted pressure
to obtain American participation in the National Bank
of Haiti.
e. Santa Domingo: During 1909-1913 the State Department
displayed interest in broadening the Convention of 1907
(customs receivership) in order to provide greater safe-
guards to foreign creditors.
Regraded Unclassified
89
- 14 -
2. Knox asked American bankers to participate in an inter-
national refunding loan to Liberia in 1910. The loan guar-
anteed by an international receivership plan was accomplished
in 1912.
3. Knox, in 1909, devised a plan for private bankers (in-
cluding both American and European) to finance and control
all the railways in Manchuria. Proposal for internationaliza-
tion failed.
4. Knox and Taft insisted successfully that American private
bankers be allowed participation in the Hukuang Railway loan
in 1909 (China). Taft sent a personal telegram to the Chinese
ruler requesting "equal participation by American capitel in
the Hukuang Railway loan".
5. Knox expanded the interpretation of the Platt Amendment
to include the right to pass on concessions granted by Cuba
to foreigners on the ground that such concessions might re-
sult in an improvident strain on the Treasury. Some examples
follow:
a. In 1912 the State Department objected to the contract
with the Cuban Ports Company (British concern) as involv-
ing an obligation that might exceed Cuban capacity to pay.
b. In 1912 a concession to drain the Zapata Swamp was
emphatically disapproved by theState Department as an
"improvident and reckless waste of revenue and natural
resources". Later indications that there was very little
timber in the swamp and that American capital was involved
were followed by adjustments to meet the objections of
the State Department.
C. In 1912 the State Department disapproved of & con-
cession to build the Caibarien-Nuevitas Railway under
the erroneous belief that it was sought by British cap-
italists. Objection ceased when presence of American
capital was revealed and the opposition of important
British interests was disclosed.
6. Knox opposed a Panamn railway concession to British and
German capital in 1912, for strategic reasons.
7. Knox laid down the fundamentals of his policy before the
Foreign Relations Committee, May 24, 1911:
"Shall the government of the United States make American
capital an instrumentality to secure financial stability, and
henoe prosperity and peace, to the more backward republics in
the neighborhood of the Panama Canal? And in order to give that
measure of security which alone would induce capital to be such
an instrumentality without imposing too great a burden upon the
countries concerned, shall this government assume towards the ous-
toms collections a relationship only great enough rRegraded Unolassifled
30
- 15 -
Summary of the Foreign Economic Policy of the
Wilson Administration
1. Wilson in 1913 enunciated the doctrine that concessions
to foreigners by Latin American countries are dangerous be-
cause foreign interests are apt to dominate domestic affairs.
However idealistic this doctrine may have been in origin, the
practical effect was to keep out European capital and to per-
mit development by American private interests. Some examples:
8. In 1913 the United States Government opposed an 011-
docks-harbor concession to British interests in Colombia.
This opposition caused concessionaires to abandon their
negotiations.
b. Although Wilson's refusal to recognize Huerta in
Mexico had a purely idealistic origin, the desire to ex-
clude British interests whom Huerta was believed to favor
probably did something to stiffen the successful opposi-
tion to Huerta.
C. In 1915 the United States Administration refused to
confirm an oil concession in Haiti which had been approved
by the local government.
d. The State Department urged a Costa Rican Government
to cancel concessions granted by the previous government
when the only concession in question was E British oil
concession.
2. Wilson disavowed the principle of revenue controls in
1913 when he refused to encourage American bankers' parti-
cipation in B. consortium loan to China because he was dis-
inclined to accept responsibility for protecting it. However,
later his administration placed less emphasis on administra-
tive independence of borrowers and more emphasis on the se-
curity of loans. In this regard there may be noted the effort
made during the Wilson Administration to extend customs con-
trol to full revenue control in Haiti, Dominican Republic and
Nicaragua, as well as the securing of customs control in
Haiti in 1915, setting up of military government in the
Dominican Republic in 1916, and the favoring of American
bankers' participation in the consortium loan negotiations
for China in 1917.
3. The Wilson Administration protested in the usual fashion
against discriminatory or confiscatory economic policies
adopted by the Mexican Government.
Regraded Unclassified
91
- 16 -
4. The Wilson Administration in 1917 openly indicated to
Ecuador its power to withhold approval from American pri-
vate loans to the Ecuador Government unless it met its
obligations to an American-owned company.
5. The Wilson Administration in urging American interests
to acquire remaining control of National Bank of Haiti was
continuing the policy of theprevious administration.
6. In Cuban-American relations the Wilson representatives
exercised the usual powers assumed by the United States
under the Platt Amendment.
Regraded Unclassified
92
- 17 -
Summery of the Foreign Economic Policy of the
Harding-Coolidge-Hoover Administration
1. Under these administrations independence of borrowers
was still held secondary to security of American private
loans and investments. The Coolidge statement that "the
person and property of & citizen are & part of the general
domain of the nation, even when abroad" illustrates the
sweeping claims to the power of protection and the low
significance attached to the concept of sovereignity of
debtor countries.
The evacuation treaty with the Dominican Republic con-
tinued customs controls, receiverships in Haiti and Nicaragua
continued, and Salvador accepted 8. customs control arrange-
ment with 8. refunding loan in 1923. The State Department
was less directly involved in the Salvador negotiations than
in similar arrangements under previous administrations.
2. Under Harding the State Department asked American bankers
to keep it informed of projected foreign loans so that it
might have an opportunity to object should it care to do 80.
It should be noted, however, that the State Department did
not require American bankers to consult it, did not undertake
to pass on merits of foreign loans as business transactions,
did not assume responsibility therefrom. The aim was merely
to be allowed to voice objection in the light of possible
national interests involved.
Secretary of Commerce Hoover recommended that American
capital should not be used to finance foreign raw material
monopolies and succeeded in discouraging American banking
participation in such financing in some instances.
4. Support of Republicans who had previously opposed the
treaty with Colombia which aimed to make amends for the
Panama incident of 1903 was thrown to approval of the treaty
in the United States Senste in 1921. The entrance of the
oil-concession question in Colombia coincided with this change.
5. There was a continuing tendency, noted already in several
previous administrations, for application of State Department
protection to be more in support of economic rights and less
in obtaining security for persons of American citizenship.
93
- 18 -
The Export-Import Bank (1934-19_)
1. The Export-Import Bank has furnished accommodations for
two types of transactions -- direct advances and guarantees
with and without recourse.
2. It has extended credits in connection with exports of
agricultural products to various countries, including coun-
tries in default on intergovernmental debts. It has extended
credits directly to American firms desiring to export indus-
trial products, particularly heavy machinery and railway
equipment; in the usual transaction the Bank has purchased
the obligation of the foreign purchaser representing up to
50 percent of the credit extended such purchaser by the
American seller. In exceptional cases the Bank's participa-
tion has been much higher. In some cases it has assumed a
portion of the risk without recourse to the American manu-
facturer or exporter. Trade with more than 20 countries has
been aided by the Bank; the agricultural exports mainly to
Europe, China, the industrial exports to Latin America and
the Far East.
3. It has approved loans to American exporters whose work-
ing capital has been reduced because of failure of foreign
governments to provide their own nationals with sufficient
exchange to enable them to meet their dollar obligations.
Such advances are only made against the guarantee of the
foreign government concerned or of a responsible foreign
bank or both.
4. In addition, the Bank has taken over from the R.F.C. and
F.C.A. certain promissory notes of the Republic of China and
certain Cuban debts held by the Bureau of Internal Revenue.
5. The Bank has handled four coinage programs for the
Republic of Cuba.
6. A loan of $25,000,000 was made to China.
Regraded Unclassified
94
APPENDIX I
Background and Significant Facts Pertaining to American Relations
with Mexico
1. Porifirio Dias was the dictatorial head of Mexico from 1876 to
1911. During his regime American and foreign interests secured
large tracts of oil, mineral and agricultural lands in Mexico. By
aiding foreign interests to acquire holdings in Mexico and by mak-
ing the following two changes in Mexican law, Diaz prepared the way
for the difficulties that were to follow:
a, In 1884 the Diaz Government changed the old Spanish law,
until then applied in Mexico, under which sub-soil wealth was
not included in the title to land surface. The new law gave
ownership of sub-soil wealth to the owner of the surface.
b. In 1886 a law was enacted requiring all landholders to
prove title to their holdings. Since most small landholders
had no legal title and much land was held communally, large
interests - both Mexican and foreign - were able to claim
valuable lands which had hitherto been considered to be the
property of others. Under the Diaz regime the concentration
of landholding increased to such an extent that by 1910 most
of rural Mexico was included in 8,000 holdings. During the
Diaz regime, relations with the United States were friendly
and in 1910 a personal meeting of Taft and Diaz took place at
the international boundary as an expression of good feeling.
2, In 1911 Diaz was forcibly overthrown by Madero, a liberal whose
strength seems to have come primarily from the support of the
Mexican people. Although some writers contend that the American
oil interests backed Madero, available evidence does not clearly
substantiate this contention. Madero was promptly recognized by
the United States Government.
3. The American Ambassador to Mexico under Taft - Henry Lane
Wilson - is believed by some students of Mexico to have signi-
ficantly contributed to the downfall of the liberal Madero Govern-
ment. His appointment was due to the political influence of his
brother, former Senator John M. Wilson, Republican boss of the
State of Washington, who was in turn a close associate of Richard
Ballinger, Taft's first Secretary of Interior. In the Ballinger-
Pinchot controversy Ballinger's close relationship with the
Guggenheims was revealed and it is contended that Ambassador Wilson
acted on behalf of the Guggenheim interests - American Smelting
and Refining Company - which were in conflict with the Madero
interests in Mexico.
Regraded Unclassified
95
- 2 -
The following actions attributed to imbassador Wilson are
interpreted by some as contributing to the downfall of Madero:
a. Successive exaggerated reports to Washington about
internal disorders.
As a result of these reports American armed forces were
on February 4, 1912 mobilized on the Mexican border. This
act of apparent American opposition to the Madero Government
encouraged banditry and uprisings within Mexico. Immediately
Orozco staged an uprising in the North and Zapata revolted
in Morelos.
b. Helping to furnish arms to rebels,
This charge is supported by the following evidence: On
March 23, the Ambassador telegraphed Washington for 1,000
rifles and 1,000,000 cartridges for defense of the American
colony. On March 26, he requested an additional 1,000 rifles,
1,000 field service belts, and 1,000,000 cartridges for
Mr. George W. Cook and Mr. Emanuel Back whom he described
as "wealthy and responsible Americans in Mexico City". Al-
though the Department of State was "disinclined to accede"
to the latter request, a large shipment of arms was sent to
the Ambassador. On May 3, the Mexican Government discovered
that an American concern conducting a "mail order business"
under the name of the Tampico News Company was delivering
arms to the rebel Zapata. Two of the Ambassador's close as-
sociates were directors of this concern - one of them being
Mr. Beck.
C. Conferring with and encouraging the rebels while discourag-
ing the Madero Government.
On February 15, 1913, the Ambassador called a meeting of
the British, German and Spanish diplomats and the group dele-
gated the Spanish minister to ask Madero to resign. The Cuban
Minister to Mexico later wrote of Wilson's conduct: "... as
I saw it, then and later, with the testimony of the Spanish
Minister, Senor Cologan, and the numerous proofs which had
been accumulating since, the [American/ embassy was not other
than the center of a true conspiracy against the Government..."
On February 20, when Madero was overthrown, the Ambassador
wired the Department of State that "a wicked despotism had
fallen" and two hours later asked for instructions "as to
the question of recognition of the Provisional Government now
installed and evidently in secure position."
96
- 3 -
4. Although Ambassador Wilson strongly advised the Wilson Admin-
istration to recognize Huerta - who overthrew Madero - the Wilson
Administration refused to do 80 and subsequently recalled Ambassador
Wilson.
Under President Wilson, the American Government actively inter-
vened to cause the downfall of Huerta, Although some writers con-
tend that President Wilson was acting solely to protect American
private interests, available evidence seems to indicate that Wilson
may have been motivated by more idealistic considerations.
The following measures were taken by the United States Covern-
ment to bring about the downfall of Huerta:
a. Refusal of recognition.
In addition to withholding United States recognition, the
Wilson Administration influenced other Governments to withhold
recognition of Huerta. On May 31, 1913 Ambassador Morgan wired
from Brazil: "Both Argentina and Chile have inquired what ac-
tion Brazil contemplates. Brazil desires to know whether or
not the United States would be incommoded if the three Powers
should recognize before the United States found it convenient
to do 50." Secretary Bryan replied: "This Government is not
ready to consider recognizing Mexico. It is hoped the countries
mentioned in your telegram of May 31 may see their way clear to
withhold action until our course has been determined." On
June 2, Morgan replied: "Acting Minister for Foreign Relations
assured me this afternoon that Brazil would withhold recognition
of Mexico until our course had been determined."
b. Requests for his resignation.
- In August President Wilson sent a confidential representative
to lay down conditions to Huerta, calling for his resignation,
and "an early and free election" in which all parties were to
participate but in which Huerta was not to be a candidate and
by the result of which all parties agreed to abide.
C. Threatening statements,
On November 24, 1914, the United States Government sent a
note to all governments of the world stating "... the present
policy of the Government of the United States is to isolate
General Huerta entirely; to cut him off from foreign sympathy
and aid and from domestic credit, whether moral or material,
and to force him out.
97
4
"It hopes and believes that isolation will accomplish
this end and shall await the results without irritation or
impatience. If General Huerta does not retire by force of
circumstances it will become the duty of the United States
to use less peaceful means to put him out ..." Other notes
in similar vein were sent to other Governments of the world.
d. Placing and removing of arms embargo.
On August 14, 1913 the United States Government forbade the
exportation of arms to Mexico. On February 3, 1914, when up-
risings were occurring, the arms embargo was removed. When
Carranza was recognized on October 19, 1915, the embargo on
arms shipments to Mexico was restored.
8. Military force.
On April 14, 1914 Secretary of the Navy Daniels ordered
the Atlantic fleet, with the first regiment of Marines, into
Mexican waters. On April 20, President Wilson appeared be-
fore a joint session of Congress and asked approval "to use
the armed forces of the United States" in Mexico. On April 21,
American armed forces landed and captured Vera Cruz and held
it until after Huerta resigned.
5. On August 22, 1914, Carransa set himself up as chief executive
of Mexico. On October 19, 1915, the United States Government granted
him recognition and restored the embargo on arms shipment to Mexico.
In thus supporting Carranza the Wilson Administration gave its moral
support to a Mexican Government which was to take steps injurious to
American interests in Mexico. It is to be observed, however, that
when the Carranza Government - shortly after being recognized by
the United States - declared all acts of Huerta authorities to be
null and void, Secretary Lansing demanded that such declaration
"should not be applied to American citizens who acquired titular
interest during the Huerta regime."
In 1916 Wilson sent American troops under General Pershing to
try to capture Villa in Mexico. This action on the part of the
American Government was apparently due to Villa's raids into the
United States and was not directly related to the protection of
American private interests in Mexico.
In 1917 the Carranza Government adopted a new constitution,
Article 27 of which provided?
S8
- 5 -
"The ownership of lands and waters ... is vested originally in
the nation, which has the right to transmit title thereto to
private persons, thereby creating private property ...
"The Nation shall have at all times the right to impose upon
private property such restrictions as the public interest may require,
as well as the right to regulate the development of natural resources
in order to conserve and equitably distribute the public wealth
"In the nation is vested direct ownership of all minerals or sub-
stances (in the subsoil) solid mineral fuels, petroleum, and all
hydro-carbons -- solid, liquid or gassous
"The ownership of the nation is inalienable ... Concession shall
be granted to private parties or ... corporations organized under the
laws of Mexico, only on condition that said resources be regularly
developed, and on the further condition that the legal provisions
be observed.
"Legal capacity to acquire ownership shall be governed by the
following provisions:
"Only Mexicans by birth or naturalization and Mexican companies
have the right to acquire ownership in lands, waters, and their ap-
purtenances, or to obtain concessions to develop mines, waters, or
mineral fuels in the Republic of Mexico. The Nation may grant the
same right to foreigners, provided they agree before the Department
of Foreign Relations to be considered Mexicans in respect to such
property, and accordingly not to invoke the protection of their
Governments in respect to the same, under penalty, in case of breach,
of forfeiture to the Nation of property Bo acquired...
The United States Government filed numerous protests against
these provisions and laws based upon provisions of the Constitution
of 1917.
In 1919-1920 a Senate Sub-committee investigated Mexican Affairs.
The committee recommended that no Mexican Government be recognized
unless it exempted Americans from certain provisions of Articles 3,
27, 33 and 130 of the Constitution of 1917. It further recommended
that if the Mexican government refused to accede to these conditions
and had not after due warnings "restored order and peace ... and ef-
fectively extended protection to our citizens ⑉ a police force con-
sisting of naval and military forces of our government" be sent to
Mexico.
99
- 6
6. In 1920 the Carransa Government was overthrown and Obregon as-
sumed office on December 1. On June 7, 1921, the Department of
State announced that it would not recognize the Obregon Government
unless it signed in advance a treaty guaranteeing American rights
"against confiscation".
In 1923 a conference was held to discuss American-Mexican dif-
ficulties. The United States and Mexican Governments were each rep-
resented by two commissioners and an agreement was reached concerning
Mexico's oil policy and the method of payment to American owners for
lands taken by the Mexican Government. Shortly after the close of
this conference recognition was extended by the United States to the
Obregon Government, and in December the Coolidge Administration agreed
to sell arms to Obregon to enable him to suppress a revolt. No laws
were enacted by the Obregon Administration putting into effect provi-
sions of the Constitution conflicting with American interests in Mexico.
7. Calles became president of Mexico December 1, 1924.
On December 31, 1925 a law was enacted compelling all owners of
petroleum properties to register their holdings and to apply not
later than December 31, 1926, for 50 year exploitation concessions,
to be granted without cost. It was declared that failure to do so
would not mean confiscation of the land, nor would concessions be
granted to anyone but the owners of the surface, Compliance with
the law was a prerequisite to the granting of drilling and operating
permits, Twenty-one of 147 petroleum companies operating in Mexico
refused to comply with this law,
In addition to making formal protests, the State Department re-
sorted to the following measures to bring pressure to bear on the
Mexican Government:
a. On June 12, 1925 Secretary of State Kellogg gave to the
press a note on Mexico in which he stated:
It will be remembered that we entered into two claims
conventions with Mexico under which joint claims commissions
were appointed to adjust claims of American citizens for prop-
erties illegally taken by Mexico and for injuries to American
citizens of their rights... Our relations with the Government
are friendly, but nevertheless conditions are not entirely
satisfactory and we are looking to and expect the Mexican
Government to restore properties illegally taken and to in-
demnify American citizens.
1 have seen statements published in the press that
another revolutionary movement may be impending in Mexico
Regraded
100
it should be made clear that this Government will con-
tinue to support the Government in Mexico, only 80 long as it
protects American lives and American rights and complies with
its international engagements and obligations
b. On November 15, 1926, Assistant Secretary of State Robert
Olds called in representatives of the Associated Press, United
Press and the International News Service, telling them that re-
lations between the United States and Mexico had reached an
acute stage and that the State Department was "morally certain
that a warm bond of sympathy, if not actual understanding" ex-
isted between Mexico City and Moscow, and that a "steady stream
of Bolshevist propaganda" had been filtering from Mexico down
through Central America, aimed at property rights and designed
to undermine Society and Government as now constituted." lie
asked that this picture be presented to the American people and
suggested that "Mexican and Bolshevist hegemony in Central
America might be said to be menacing our control of the Panama
Canal."
From 1925 to 1927 the United States Government was continu-
ally negotiating with the Mexican Government on behalf of
/merican private interests in Mexico. In 1927 Dwight Morrow
was sent to Mexico and in December of that year the Mexican
Congress passed & law doing away with the provision for 50 year
concessions and providing for concessions of indefinite length.
Ambassador Morrow declared the new concessions to be practi-
cally a confirmation of old titles.
8. Both the Calles and Cardenas Administrations followed the policy
of expropriating large landholdings of both Mexicans and foreigners
for the purpose of returning the land to the Mexican people.
9. Under the Cardenas Administration a labor struggle led to ex-
propriation of American and British oil properties in Mexico. On
November 3, 1936 the Syndicate of Petroleum Workers submitted de-
mands for wage increases with which the companies refused to comply.
On appeal of President Cardenas, a conference was held between workers
and oil representatives lasting from December 1936 to May 25, 1937,
but no agreement was reached. On May 27, the workers struck and on
June 7 the Syndicate agreed to submit the dispute to the Labor Board
as a conflict of "economic order". After investigations by its
committee of experts, the Labor Board on December 18, 1937 recom-
mended increases in wages and extensive welfare benefits. On December
28, the oil companies filed a petition for injunction with the Mexican
Supreme Court against the recommendations of the Labor Board. On
March 1, 1938, the Supreme Court denied the injunction and sustained
the Labor Board in its findings. The 17 oil companies then issued
101
- 8 -
a statement declaring that "their inability to comply remains un-
altered by today's verdict" and the Labor Board set Monday noon,
March 7, as the deadline for compliance with the award. When this
hour passed without any move on the part of the oil companies, the
Government, acting on petition of the Syndicate, embargoed the cor-
poration's bank deposits in amount necessary to cover payrolls dur-
ing the strike (May-June 1937) but made no further move. President
Cardenas conferred with the oil companies in an unsuccessful attempt
to work out a solution. On March 14, the Labor Board warned the
companies that they must accept the recommendation by the following
day. On that date the companies formally advised the Board that
they were unable to comply. On March 18, the Board, in response to
union demands, declared the labor contract between companies and
the workmen broken, making the former liable under the Labor Law
for dismissal wages to all their employees. As a consequence,
union leaders ordered work suspended on midnight of that date and
that evening (March 18, 1938) Cardenas issued a decree expropriat-
ing the properties of the oil companies. The decree states that
payment for the properties is to be made within ten years.
On March 27, 1938 the Secretary of the United States Treasury
announced that monthly purchases of Mexican silver would be dia-
continued after April 1.
On March 30 Secretary Hull issued a public statement, recognizing
the right of the Mexican Government "to expropriate properties with-
in its jurisdiction" but pointing out that" accordance with every
principle of international law ... the properties of its nationals
so expropriated are required to be paid for by compensation represent-
ing fair, assured, and effective value to the nationals from whom
these properties are taken".
On July 2, Secretary Hull, in & note to the Mexican Government
which explicitly referred only to prior agrarian expropriations,
contended that expropriation unaccompanied by prompt and adequate
payment was "contrary to the accepted practices of international
law" and proposed arbitration of the question "whether there has
been compliance by the Government of Mexico with the rule of com-
pensation as prescribed by international law" in the case of American
lands siesed since 1927,
102
Appendix II
Background and Significant Facts Pertaining to American Relations
with Cuba
1. By Joint Resolution of April 20, 1896, the American Congress an-
thorized the use of military force to effect Spanish withdrawal from
Cuba and declared that Cuba should be independent. The Treaty of
Paris (April 11, 1899) terminated Spanish sovereignty over Cuba and
made the United States temporary trustee. The United States estab-
lished a temporary military government in Cuba immediately following
cessation of hostilities. The military government was under the di-
rection of the United States Department of War.
In March 1899 Congress passed the Foraker Amendment to the Mili-
tary Appropriations Bill providing that no franchises or concessions
were to be granted by the United States during its occupation of Cuba.
It was subsequently ruled that this amendment did not cover mining
claims, not prevent the construction of a railroad on purchased property,
nor prevent cancellation of old franchises, nor preclude the grant of
a ten-year monopoly to the Jai Alai Company.
2. The United States military government called a constitutional con-
vention which met in November, 1900. On February 21, 1901 a Constitu-
tion was adopted leaving the nature of Cuban-American relations un-
specified. To remedy this situation, Congress passed the Platt Amend-
ment to the Army Appropriation Bill, approved March 2, 1901, outlining
the terms under which withdrawal of American troops might be authorized.
This amendment specified that the Cuban Constitution was to contain
provisions specifying, among other things, that Cuba could not make
compacts with foreign powers impairing its independence and that the
United States might intervene to preserve Cuban independence or to
protect life, property and liberty on the island. The Constitutional
Convention rejected the amendment and sent a Commission to Washington.
On May 28, 1901 the Convention accepted the Platt Amendment but added
its own interpretation. The United States Government refused to ac-
cept it in this form and on June 12, 1901 the Convention adopted the
Amendment as passed by the United States Congress. It was made an an-
pendix to the Constitution and was included in a permanent treaty be-
tween the United States and Cuba. On May 20, 1902 the American military
government was terminated.
3. In 1903 Congress approved a Reciprocity Treaty between the United
States and Cuba, giving Cuban products, including sugar and tobacco, a
20 percent reduction from American tariff rates and American products
a 20 to 40 percent reduction from Cuban rates.
A Reciprocity Treaty had been urged earlier by Roosevelt, Root,
and Wood, but the domestic beet and cane sugar producers had united
to oppose the measure. It was felt the measure would benefit primarily
the domestic refiners. When the possibility of closer trade relations
Regraded Unclassifie
103
- 2 -
between Cuba and Europe, especially Great Britain, arose, Roosevelt
sent Colonel Fliss to Havana to negotiate. A Reciprocity Treaty was
signed December 11, 1902, Congressional approval came December 17,
1903.
4. The presidential elections of 1905 occasioned the second military
intervention of the United States. Cuba's first President, Estrada
Palma, a Moderate, was elected to succeed himself, after the Liberals
had stayed away from both primary and final elections. Prior to the
elections, numerous local officials had been dismissed and replaced
by Moderates, and the final registry of voters was alleged to contain
thousands of fraudulent names, Estrada Palma took office for his
second term May 20, 1906. Revolt broke out August 16, 1906. On
September 8, 1906, Steinhart, U. S. Consul General in Cuba, telegraphed
the State Department in Washington that President Palma had requested
war vessels; this was followed by several similar messages. Two war
ships were sent, arriving September 12. Taft and Bacon were sent to
Havana to negotiate, arriving September 19. Their proposals were re-
jected by Estrada Palma who then resigned, together with the Vice
President and Cabinet, on September 28, 1906. Thereupon the Moderates
decided to stay away from Congress which was then without a quorum.
Cuba had no government. On September 29, 1906 Taft published a pro-
clamation establishing a Provisional Government under the control of
the United States.
Magoon, an American, became governor on October 13, 1906. Under
his Administration Cuban government expenditures increased heavily.
Public works, especially roads, were built on a big scale. American
firms obtained contracts for large public works projects in Havana and
Cienfuegos, and toward the end of the Administration contracts were
swarded to American firms on projects to be completed after the American
Government had terminated. Many of these were abrogated in 1909 by the
Gomez Administration. It is claimed that jobs were created to meet
patronage demands. Among the achievements of the Magoon Administra-
tion were changes in the law governing elections and a census to enu-
merate the voters. Presidential elections were held in 1908 and were
won by Clomez and Zayas, Liberals. In 1909 the United States withdrew
its Provisional Government.
5. In September of 1911 a Cuban veterans organization made strong
pronouncements against officeholders who had been Spanish sympathizers.
The possibility of another revolution arose. Then on January 17, 1912,
Secretary Knox informed the Cuban government that the United States
was concerned and intimated that Cuba ought to prevent developments
that might compel the United States to take measures. Thereupon the
veterans' organization reached an agreement with the government whereby
the campaign against officeholders ceased.
Regraded Unclassified
I04
- 3 -
On March 5, 1912 the State Department sent instructions to
Minister Beaupre to prevent action on & proposed British railway
(Nuevitas-Calibarien) concession involving a Cuban subsidy. Later
it developed that the proposed subsidy was to go to an international
group, including some Americans, and that the real protest against
the subsidy had arisen from the British-owned Cuban Central Railway.
The British protest abated when it was announced that the loan would
be floated in London and the State Department dropped its objections.
Though Gomez had announced his intentions not to resort to a
loan, a loan of $16,500,000 was placed with Speyer and Company in
June 1912 to continue the sewage and paving projects in Havana and
the sewage and aqueduct projects in Cienfuegos which had been author-
ized by Magoon.
An additional loan to continue work on the Havana-Cienfuegos
project became necessary in 1914, during Menocal's administration,
when a $10,000,000 loan was contracted for with J. P. Morgan and
Company.
6. On May 20, 1912, a negro insurrection arose. It is sometimes
alleged that the insurrection was instigated by Gomez or that the ob-
ject of the revolution was American intervention. On May 25, 1912,
the United States notified Cuba that troops would be landed if the
Cuban government failed to protect American lives and property, and
at the end of May marines were actually put on shore at Daiquiri to
protect property of the Spanish American Iron Company. Several days
later troops were stationed at El Cobre to protect copper mines and
at sugar mills. In response to a cable from Minister Beaupre, battle-
ships were ordered to Havana.
On June 6, 1912, Minister Beaupre cabled Washington that Cuba
might need funds for suppressing the revolt and that this might be
an opportunity for imposing some fiscal control. This did not even-
tuate and when Cuba later found it necessary to borrow for other
reasons in 1913-14 no fiscal control was imposed.
7. On June 18, 1912, Gomez gave forest privileges and public lands
in the Zapata Swamp to the Compania Agricultora de Zapata. Thereupon
Minister Beaupre reported to Washington, on July 5, 1912, that valuable
timber lands were being given away and asked for instructions to object
to the concession. Secretary Knox responded July 17, 1912 with in-
structions to convey to the Cuban Government the disapproval of the
United States. Upon investigation, it was discovered that an American
contractor named Isaac P. Champion was interested in the concession
and agents of the United States Covernment reported that the timber
in the swamp was relatively valueless. Ultimately, the State Depart-
ment withdrew its objections.
Regraded Unclassified
105
4
8. In February 1911 the Dredging Concession was granted the Porte
Company of Cubs. The company was to improve a number of harbors and
maintain them in return for which port dues were to be assigned to
it. The contract for the work was let to the T. L. Houston Contract-
ing Company, in which T. L. Houston and Norman H. Davis were inter-
ested, and the financing was arranged by the Trust Company of Cuba,
of which Davie was General Manager. The company issued bonds to the
extent of $7,000,000, of which $6,000,000 were taken by Sperling and
Company and offered in London. Shares were issued to the promoters.
On June 23, 1911 the United States delivered a protest to the
Cuban Minister against the scheme and requested that the project be
revised. A year later the State Department criticized the scheme as
in conflict with the Platt Amendment and for failing to provide for
termination of the concession at an equitable valuation. Thereupon
Comez issued a decree May 12, 1913, with the approval of the United
States, providing that Cuba might terminate the concession by purchase
of outstanding stock at a value to be fixed by a board on which the
United States was represented.
Shortly thereafter Menocal came into power. On June 18, 1913 he
cancelled the May 12 arrangement and on August 4, 1913 he cancelled
all rights of the Ports Company. The United States made strong rep-
resentations to Cuba, claiming the action was tantamount to violation
of the Platt Amendment. Menocal then endorsed indemnification of the
bondholders, once on March 18, 1915 before a legislative committee and
again on June 21, 1916 in B. special message to Congress. Meanwhile,
both United States and Cuba had entered the World War. Norman H.
Davis had become financial adviser to the Treasury Department in
Washington, on allied loans. Cuba was interested in a $15,000,000
loan for war purposes. On April 3, 1918, Menocal issued a decree
authorizing the exchange of $7,000,000 of 5 percent Cuban Treasury
bonds for the same amount of bonds of the Ports Company. At the same
time the assets of the company were returned to it. That same month
Cuba received her war loan of $15,000,000 from the United States.
9. The Presidential elections of November, 1916 between Menocal and
Zayas were so hotly contested that some of the returns were thrown out
as fraudulent and new elections ordered in some districts. Liberals
claimed they had been deprived of a victory by government chicanery.
Revolt broke out in February. With the outbreak of the rebellion,
the United States definitely allied itself on the side of the Menocal
regime and issued statements indicating its opposition to the revolt.
American war vessels were stationed at Santiago, troops were landed
there and at Guantanamo and were sent to points where important American
properties were thought to be threatened. The revolt was virtually
broken by the capture of Gomez early in March. Supplementary elections
were held in February and April. Liberals made no attempt to parti-
cipate. In the Santa Clara election more votes were cast for the
Conservatives than there were registered voters. The election of
Menocal for a second term was thus confirmed and he assumed office on
May 20, 1917.
Regraded Unclassified
106
- 5 -
10. Cuba entered the World War shortly after the United States and
during the war period adopted many of the war measures inaugurated in
the United States. Menocal retained the extraordinary powers granted
him in consequence of the February revolution and of the declaration
of war and thus remained a virtual dictator to the end of his rule.
In 1917 he asked the United States to send troops to Cuba to prevent
damage by revolution to much needed sugar. Troops were sent to
Oriente and to Camagusy and were not withdrawn till 1922.
Cuba naturally became involved in the sugar control scheme in-
augurated during the war period. The International Sugar Committee
had fixed a price of 4.6 cents per pound for Cuban sugar, to which
the Cuban producers were not at first willing to agree. Then a flour
shortage developed in Cuba. Food cargoes from the United States were
delayed in shipment and proper licenses could not be obtained from
Washington officials. Finally in January 1918 contracts were signed
by Cuban representatives, appropriate decrees were issued in Havana,
and full allotments of food and other supplies moved to Cuba.
11. Long before Menocal's second term was up, there were rumblings
about the forthcoming election. Upon the invitation of both Conserva-
tives and Liberals, General Crowder came to Cuba in March 1919 to as-
sist in drawing up an election law which, when finally framed, placed
great reliance upon the judiciary. In August 1920 the Liberale threatened
to stay away from the polls, whereupon the United States announced that
it would have official observers on hand for the November elections.
The observers came but could not prevent election evils. As a result
of difficulties growing out of the elections, President Wilson sent
Crowder to Cuba in January 1921 as a personal representative. Crowder
objected to the delays in decisions on disputed cases. Action was
taken, elections in many districts were annulled, and new partial
elections scheduled for March. The Liberals stayed away again and
Zayas won, Despite protest by the Liberals, the United States recog-
nized Zayas in April, and on May 20, 1921, he was inaugurated.
12. Meanwhile, Crowder turned his attention to finances. The War
and the accompanying rise in the price of sugar created unprecedented
prosperity for Cuba. The sugar boom reached its climax in May 1920.
The price of sugar broke at the end of May and declined with increas-
ing rapidity through August and September. Banks had made heavy loans
to finance the sugar crop and their security was wiped out. Bank runs
developed and on August 10, 1920, a moratorium was declared and later
extended, American interests wanted removal of the moratorium. Crowder
endorsed two measures introduced by Senator Torriente, one providing
for gradual lifting of the moratorium and the other for liquidation
of banks. Both were pushed through the Cuban Congress. Meanwhile,
the sugar market rallied a bit under efforts of the Suga Export Com-
mittee but this advantage was wiped out when the Emergency Tariff Bill
Regraded Unclassified
107
- 6
passed by the American Congress in April 1921 raised the duty on
Cuban sugar. On April 9, 1921, the Banoo Nacional, a government
depositary, closed its doors, followed by other banks in May and
June, when the Banco Espanol was turned over to the Liquidation
Commission. Seeking expert advice regarding the banking system,
Crowder caused W. P. G. Harding, of the Federal Reserve System, to
be invited to Cuba. Harding studied the situation for some months
and drew up a plan for the Cuban banking system, but nothing came
of it.
13. When Zayas assumed office in 1921, Cuban government finances
were in bad shape. Almost immediately Cuba fell behind on her debt
service. Loans were authorized by the Cuban Congress, but Crowder,
in July 1921, advised the United States State Department to withhold
consent till Cuba agreed to grant the American Minister general fi-
nancial supervision. The United States also insisted on a balanced
budget, authorization of additional revenues, and reorganization of
customs. The State Department failed to approve a loan and in August
1921 advised Cuba to cover the floating debt by a cut in the budget.
Meanwhile Crowder had also insisted to Zayas that before Cuba could
get a loan, the unfulfilled contracts with the Department of Public
Works would have to be straightened out. In August 1921, Zayas is-
sued a decree anmulling illegal contracts and forcing an adjustment
on others. This necessitated an investigation which was carried out
by a United States military attache.
In October 1921, Dwight Morrow, representing J. P. Morgan and
Company, arranged a contract for a five million dollar loan which
was ultimately to become part of a fifty million dollar loan to be
advanced after Cuba had reduced the budget and enacted certain cus-
toms and other legislation. The first part of the contract was
carried out in January 1922 after the State Department decided not
to impose any conditions on the five million dollar loan.
Popular clamor for the dismissal of certain members of the Zayas
Cabinet brought resignation of the Cabinet on June 15, 1922 and the
appointment of the so-called "Honest Cabinet", in the selection of
which Crowder was reputed to be active. It reduced the budget and
straightened out the contract situation in the Department of Public
Works.
The question of a fifty million dollar loan now arose. Publica-
tion of Crowder's famour Memorandum No. 13 of July 21, 1922, disclosed
Crowder's demand for a fifty-five million dollar budget and a sales
tax as prerequisite to American approval of a fifty million dollar
long-term external loan. A storm of disapproval arose but the re-
quired measures were adopted. The loan was awarded to J. P. Morgan
and Company in 1923. Most of the proceeds were applied to the float-
ing debt.
Regraded Unclassified
108
7 -
14. Aroused over waste and corruption, the War Veterans organized
in 1923. In April 1924 a revolt broke out under Colonel Prederico
Laredo Bru, but was quickly put down. The United States put an
embargo on sales of munitions to the insurrectionists and sold war
equipment to Zayas.
15. Gerardo Machado was elected President in the Fall of 1924 as a
candidate for the Liberal party. He assumed office at a time when
Cuba was beginning to suffer from the effects of world overproduction
of sugar. To improve the economic life of the Republic, he attempted
to raise the price of sugar by restricting production; he inaugurated
a protective tariff policy to increase local agricultural production,
and embarked on an ambitious Public Works program, the feature of
which was the construction of a 700 mile central highway. Orginally
Vachado took a strong position against foreign loans and announced
his intention to run for only a single term of four years. In 1928,
however, he brought about his re-election for a term not to expire
until May 1935.
16. When it became evident that the special taxes authorized in the
Law of 1925 would not provide necessary funds for the Public Works
program envisaged in that Law, the Government made arrangements for
a foreign loan, In February 1927 the Government made an agreement
with the Chase National Bank whereby the latter was to purchase road
construction certificates against work completed up to an amount of
$10 million dollars. Still hoping to avoid a long-term foreign loan,
Machado in June 1928 made a second contract with the Chase Bank trans-
forming the original $10 million into a revolving credit of $60 mil-
lion. Under this agreement the bank sold $20 million of work certi-
ficates to the American public and advanced $37,700,000 of its own
funds against Cuban Government certificates which it retained in its
own portfolio. These certificates matured between 1932 and 1935.
Unable to repay these certificates by the date stipulated, the Cuban
Government made still a third agreement with the Chase Bank in 1930
providing for an $80 million issue of bonds maturing in 1945. The
bank agreed to purchase $40 million of these bonds, cancelling the
short-term certificates it held, and in addition granted the Cuban
Government a one year $20 million credit. In addition to these ob-
ligations the Government had borrowed $9 million from J. P. Morgan
in 1927, due in 1937. Moreover, in 1930 a bond issue of $42million
was authorized in connection with the Chadbourns Sugar Plan. The
result was that on December 31, 1932, the total public debt of Cube
amounted to $178 million plus a floating indebtedness of between
$35 and $75 millions.
Again unable to meet interest payments on its Chase obligations,
the Government signed a contract with the Chase Bank in June 1932,
under which the latter advanced more than $2 million to meet forth-
coming service charges and signed a second contract in December of
109
1932 for a further loan of more than $3 million to meet service charges
falling due at that date. Foreign oil companies also agreed to ad-
vance certain sums for six months to be credited against future taxes
and in March 1933 the Chase Bank agreed to extend for 90 days the
$20 million credit originally made in 1930 for one year. In April
the Congress authorized the President to declare a delay in the ser-
vice of both the external and internal debt.
17. In August of 1931 a revolt against Machado had broken out but
was quickly suppressed. Political difficulties multiplied rapidly
thereafter. An organization known as the A.B.C. came into existence
and worked constantly against Machado. Terrorist activities and
political murders by both sides resulted. By the Spring of 1933 the
country was in a state of ferment.
Shortly after his inauguration, President Roosevelt appointed
Sumner Welles as Ambassador to Cuba. Welles succeeded in opening ne-
gotiations between Machado and the opposition groups for restoration
of constitutional Government. In August of 1933, however, a general
strike followed by defection of the Army forced Machado and members
of his cabinet to resign and flee. General Herrera then became act-
ing president and appointed as his Secretary of State Manuel de Cespedes.
Herrera then resigned and Cespedes became President.
18. On September 5, 1933, less than a month after formation of the
Cuban Government, the rank and file of the Cuban army revolted under
the leadership of Sargeant Fulgencio Batista and promptly replaced the
Cuban Government with a committee of 5 which then elected Dr. Grau
San Martin as president. Dr. Grau San Martin assumed office on
September 10, 1933. The new Government was frankly revolutionary
and radical. When reports of the revolution and attendant disorders
reached Washington, war vessels were ordered to Cuban waters, virtu-
ally the entire Atlantic fleet was marshalled for quick action, and
1,000 marines were concentrated at Quantico. The United States re-
fused to recognize the Grau regime. Politically the regime could not
claim to represent even a majority of the revolutionary factions and
public order was threatened by the anomalous position of the army
whose commissioned officers were in revolt against the main body.
Non-recognition by the United States had the effect of strengthen-
ing the Government by arousing anti-American feeling. To allay this
sentiment, Secretary Hull issued a statement on September 11, in which
he asserted Washington was willing to let Cuba solve its own problems.
A few days later the Secretary announced that Americans in danger would
be asked to come to port towns for protection and that landing parties
would be used only for the protection of lives and not property.
Regraded Unclassified
110
- 9
The Grau Government suspended deposits of public works' revenues
with the Chase Bank and on January 12, 1934, ordered cessation of all
payments on the public works' debt. On December 30, 1933, it siesed
a $10 million property of the Cuban-American Sugar Company in Oriente
Province. On December 6, the President issued a decree drastically
lowering the rates to be charged by the Cuban Electric Company and
when a strike occurred in January, the Government assumed control of
the concern for three weeks.
On January 15, 1934, Grau was forced out of office. Hevia became
President of Cuba but his regime was denied support and on January 18
he presented his resignation to Batista. That same day Colonel Carlos
Mendiata became the new President. Shortly thereafter on Jamuary 23,
President Roosevelt announced recognition of the Mendiata Government.
At the same time the United States withdrew some of its war vessels,
though the last vessel was not withdrawn until September 1934 follow-
ing the signing of the Reciprocity Agreement between Cuba and the
United States.
19. On March 9, 1934, the second Export-Import Bank was established
in the United States and on April 30, 1934, this bank loaned Cuba
$4 million for the purchase of silver to be coined and used for Govern-
ment salaries, agricultural reforms, and public works. On April 10,
1934, the Government stopped amortization payments on the external
funded debt until such time as the total annual Government revenues
should exceed $60 million. A week later a commission was appointed
by the Cuban Government to study the question of the Chase Public
Works loans contracted by Machado. This commission in its report
rendered on June 18, declared that the right of repudiation of the
Chase Bank loans was incontrovertible, but advised the authorities
on ethical grounds to make some settlement with those who had bought
the bonds in good faith.
On Jamiary 29, 1934, Roosevelt signed an Arms Embargo prohi-
biting the exportation of arms and ammunition to Cuba except upon
an application for a license and approval by the Cuban Government.
20. The two most important Acts of the Roosevelt Administration
as regards Cuba were: (1) The repeal of the Platt Amendment and
(2) measures to revive Cuban-American trade. On May 29, 1934, the
two Government signed an agreement setting aside the permanent treaty
except in so far as the Naval Base at Guantanamo is concerned. Eco-
nomically Cuba was aided both by the Jones-Costigan Act of May 9,
1934, and by the Reciprocal Trade Agreement of October 24, 1934.
The Jones-Costigan Act made sugar a basic commodity under the
Agricultural Adjustment Act which authorized the Secretary of Agi-
culture to flx maximum quotas for importation of sugar from Cuba
and insular possessione of the United States. At the time of pas-
sage of this Act Roosevelt lowered the duty on Cuban sugar from
Regraded Unclassified
111
- 10 -
2$ to 12# per pound. Under the Reciprocal Trade Agreement the duty
on Cuban sugar was lowered still further to 9/101 per pound and re-
ductions were also made on such products as rum, molasses, tobacco,
fresh fruits and vegetables. The Cuban Government in return reduced
import duties on American goods, usually by increasing the American
preference established by the 1902 Treaty, making especially valuable
concessions on lard, wheat, flour, passenger automobiles, cigarettes,
and other articles.
21. Economic improvement failed to present political peace and in
March 1935, discontent came to a head in a general strike. At the
urging of Colonel Batista, the Government adopted an aggressive
policy, constitutional law was suspended, a state of siege was de-
clared, and army rule established throughout the island. Civil
rights were suspended; the death penalty was prescribed for sabotage.
These extreme measures were successful and on March 12, the workers
began to return to their jobs.
On June 12, 1935, a new constitutional law was decreed providing
for general elections in December of the same year. Election diffi-
culties resulted in the invitation to Dr. Harold W. Dodds, President
of Princeton University, to serve as Advisor. Dodds suggestions were
not wholly acceptable and after further difficulties President Mendiata
presented his resignation on December 11, 1935. The election, which
was finally held in January 1936, gave victory to Gomez who was inaug-
urated May 20 of that year. Gomez was removed from office in December
1936 and Frederico Lareda Bru, the Vice President, became chief
executive.
Regraded Unclassified
112
Appendix III
Significant Facts Relating to American Intervention
in Nicaragua
1. During the regime of the Nicaraguan dictator Zelaya, the George
D. Emery Company, an American concern, secured a concession for
lumber operations in Nicaragua. After the company had been operat-
ing for some time, it fell into a dispute with Zelaya, who contended
that the company was not fulfilling the terms of the contract. After
some controversy the Government of Nicaragua cancelled the concession
and the company filed claims for damages. The Government of the
United States took up the claim of the Emery Company and Secretary
of State Knox secured an agreement with Nicaragua on May 25, 1909,
to submit the dispute to arbitration. The tribunal awarded to the
United States Government "for and in behalf of the George D. Emery
Company," the sum of $600,000 in gold to be paid in installments
for a complete release of all its claims against the Nicaraguan
Government. Before all payments were made, however, the revolution
described below broke out and this claim remained against Nicaragua
for subsequent settlement.
2. Another American interest of prime importance in Nicaragua was
the La Luz and Los Angeles Mining Company, which was working the
United States Nicaragua Concession. Important American citizens
were connected with this mining concession and Philander C. Knox,
before becoming Secretary of State, had served in his capacity as
a lawyer, as counsel for the company and had passed upon the validity
of the original agreement. This company also became involved in
difficulties with Zelaya, who insisted that the concession was
objectionable and wished to cancel it. In hearings held before
the Senate Foreign Relations Committee in 1927, Thomas B. Noffat,
the American Consul at Blufields, Nicaragua, during the period under
discussion, declared that this claim was "the cause of the desire
to eliminate Zelaya."
In October 1909, a revolution against Zelaya occurred. Accord-
ing to the testimony brought out in the Senate hearings, the resi-
dent manager of the company operating the United States Nicaragua
Concession had suggested to the American Consul that Adolfo Dias,
local secretary of the company, be installed in the Presidency of
the republic and told the American Consul that his future promotion
would be assured if he would "put Adolfo over the line there."
Several days before the revolution occurred, the American Consul
at Blufields informed the State Department that in his opinion a
revolution would start on about October 8. A few days later he
announced that a revolution had occurred, that the new Government
113
- 2
was "friendly to American interests," and that "the foreign business
interests are jubilant."
As soon as the uprising occurred, Secretary of State Knox severed
diplomatic relations with the Nicaraguan Government.
According to testimony given in the hearings of the Senate Com-
mittee, money and arms were supplied to the rebels by the Americans
in Nicaragua. At this same hearing one of the rebel leaders also
testified he had been assured the support of the American Government
in any uprising which he might undertake.
While the revolution was under way, the United States Government
sent American forces under Major Smedley Butler to Blufields, where
they prevented Government forces from pursuing the rebels who held
the town at the time. When the Nicaraguan Government attempted to
blockade the harbor of Blufields in order to prevent revolutionists
from obtaining arms and supplies, the United States acted to keep
the harbor open, compelled payment of customs to the rebels, and
informed the chief of the Government forces that a shot fired at
an incoming American vessel would mean declaration of war against
the United States.
The rebels gained complete control of Nicaragua and two rebel
leaders - Estrada and Diaz - were installed as President and Vice-
President of the new Government. In February 1911, the American
minister to Nicaragua reported that "the natural sentiment of an
overwhelming majority of Nicaraguans is antagonistic to the United
States," and a month later, he wrote: "As the matter now looks to
me, Estrada is being maintained solely by the moral effect of our
support and the belief that he would unquestionably have that sup-
port in case of trouble."
3. Shortly after his installation as President of the Nicaraguan
Republic, President Estrada was informed by the American Minister
that he must resign and leave the country as the United States
Government would no longer recognize him. Estrada complied with
this request and Adolfo Diaz - former local Secretary for the
American mining company was installed in the Presidency. The American
Minister announced the news to the State Department and added that
"2 war vessel is necessary for the moral effect", The American
vessel Yorktown was ordered from Panama to intercept a filibuster-
ing movement against the Diaz Government. Secretary of State Knox
instructed the American Minister in Nicaragua to inform Dias that
the United States "renews assurances of support in assisting his
Government in 80 far as it properly may," and to warn the principal
rival of Diaz that "since Diaz is the constitutional President,
recognized by this Government as such," the General "must see it
to be indispensable to his own interest that Diaz remain in office".
Regraded
114
- 3 -
4. In 1909 Zelaya had refunded the Nicaraguan foreign debt, the
Sthelburga Syndicate acting as his agent. Debt service was sus-
pended at the time of the revolution and the British Government
protested on behalf of British bondholders. The State Department
suggested to American bankers that they undertake the conversion
to dollars of the Nicaraguan foreign debt and sent a financial ex-
pert to investigate the financial status of Nicaragua.
On June 6, 1911 the Knox-Castrillo Convention was signed. In
this convention Nicaragua agreed to refund its public debt and
promised to give the refunding loan a first lien on its customs
duties. The Collector General of Customs, "who need not be a
Nicaraguan," was to be chosen with the approval of the United States
and was to be afforded full protection in the discharge of his duties.
The Nicaraguan Government agreed to settle all claims and to estab-
lish its finances on a sound and stable basis, and it was further
specified: "The Government of the United States, should the circum-
stances require, will in turn afford such protection as it may find
requisite." Shortly thereafter, American bankers arranged to float
a 15 million Nicaraguan loan, but when the American Senate refused
to ratify the treaty, they refused to float the loan.
When the American Senate refused to ratify the convention of
June 1911, a Treasury Bills Agreement was signed September 1, 1911,
with the Nicaraguan Government. The American bankers agreed to take
up 12 million Nicaraguan Treasury Bills and in return received
almost complete control over the financial life of the country. A
Mr. Clifford D. Ham, an American citizen, was nominated by the
bankers, approved by the American Secretary of State and appointed
Collector General of Customs by the President of Nicaragua. The
bankers were given an option to secure 51 percent of the shares of
the National Bank, which was to be established under the Treasury
Bills Agreement and also secured an option to purchase 51 percent
of the stock of the Pacific Railway, together with its steamship
lines. The National Bank was to have the exclusive right to issue
legal tender notes and it was made the fiscal and disbursing agent
for the Government and depository of Goverment funds. The Pacific
Railway was to be reorganized and incorporated in the United States
with its management under control of the bankers.
A tribunal composed of one Nicaraguan and two Americans was
also established to pass upon claims lodged against the Government
of Nicaragua by foreigners, including American citizens and con-
cessions.
115
- 4
5. In July 1912, American troops suppressed a revolution against
Diaz. Diaz then had himself reelected - although self-succession
was prohibited by the Nicaraguan Constitution - and the United
States immediately recognized him. After this election, most American
troops were withdrawn but a so-called legation guard remained
stationed in the capital. In October 1913, American bankers ex-
tended another $1 million loan to the Nicaraguan Government and
exercised its option to buy 51 percent of the stock of the Pacific
Railway. The contracts covering both of these financial transac-
tions were first submitted to the State Department for approval.
6. In 1916 the Bryan-Chamorro Treaty was signed, giving the United
States the right to construct a canal across the isthmus by any
route through the territory of Nicaragua and granting the United
States 99-year leases on certain strategic positions to be used
as naval bases. In return the United States paid Nicaragua $3 mil-
lion which was to be spent under United States supervision. Most
of this money was used to satisfy claims of foreigners against the
Government, although the internal financial situation was difficult.
Both Costa Rica and Salvador protested against provisions of the
treaty and their complaints were submitted to the Central American
Court of Justice for consideration. The Court decided unanimously
in favor of Costa Rica and Salvador but the Nicaraguan Government
ignored the findings.
7. American marines were stationed in Nicaragua continuously until
1925. Throughout this time, the American Government and American
interests controlled the economic and financial life of the republic
of Micaragua. Shortly before the /merican military forces were with-
drawn, they supervised a Nicaraguan election in which a coalition
government was elected. As soon as the marines withdrew, Chamorro,
a conservative candidato, rebelled against the elected government.
He soon induced the elected President to resign and set himself up
as President. Fighting soon began between backers of the elected
Vice-President - Juan B, Sacasa - and Chamorro, and large numbers
of American marines were again landed. Through efforts of the
/merican forces, Congress was called into a special session and
Adolfo Dias (whom Americans had put into the Presidency in 1910) was
made President and immediately recognized by the United States. The
constitutionally elected vice-president, however, was recognized
by other countries as President of Nicaragua and fighting was re-
sumed between the liberal and conservative forces. American troops
were landed to protect the Dias Government.
In 1927, President Coolidge sent Henry L. Stimson to study the
situation and to make adjustments. Stimson decided that Diaz should
complete his term and that the opposition should be disarmed. In
Regraded Unclassified
116
- 5 -
1928 when Dias' term came to an end, an election was held under
American supervision and the liberal leader Jose Moncada, one of
the leaders of the insurrection against Diaz, was elected by a
large majority.
8. The Hoover Administration began withdrawal of the American
marines from that country. In 1930 about 500 men were withdrawn,
leaving better than 1,800 still in Nicaragua.
In the Congressional elections of November, 1930, supervised by
American forces, the liberals won a majority and in the presidential
elections two years later, Juan B. Sacasa, whom the United States
had refused to-recognize in 1926, was elected President. Early in
January, 1933, the remaining American marines were withdrawn from
Nicaragua but some remained in order to officer the Nicaraguan
National Guard.
Although the National Bank of Nicaragua and the Pacific Railway
were resold to the Nicaraguan Government in 1920, American citizens
still serve on the controlling boards of these institutions. Clifford
D. Ham served as Collector of Customs in Nicaragua from 1915 to
1928 and Americans are still in charge of customs collection.
Regraded Unclassified
117
Appendix IV
Significant Facts Relating to American Intervention
in the Dominioan Republic
1. The Dominican Republic was ruled from 1882 to 1899 by Ulisse
Heureaux under whose administration the Dominican foreign debt was
greatly increased. Prior to 1892 Heureaux floated loans having e
nominal value of L1.5 million with Westendorp and Company, a Dutch
firm. In 1892 an American concern known as the San Domingo Improve-
ment Company bought out the interests of Westendorp and Company and
thereafter made loans to Heureaux exceeding $121 million and guar-
anteed by austoms of the Dominican Republic.
2. In 1899 Heureaux was shot. The new Government, headed by
Velasquez clashed with the San Domingo Improvement Company, which
it considered to be an agent of Heureaux. In 1901 the company ap-
pealed to the State Department, declaring its unwillingness to have
its claims settled in the courts of the Republic. In 1902 the
company again asked for intervention on its behalf and authorized
the American Vinister to facilitate negotiations. In July 1904 an
agreement was signed between the United States Government and that
of the Dominican Republic. By the terms of this agreement the claims
of the San Domingo Improvement Company were scaled down and four
customs districts were designated as security to be taken over if
regular payments were not made by the Dominican Republic.
3. On October 20, 1904, the Puerto Plata Customs House was taken
over by an agent of the United States Government to be administered
on behalf of the Improvement Company, Subsequently, the Monte Cristi
Customs House was similarly taken over.
4. European countries, observing the action of the United States,
threatened likewise to intervene on behalf of the claims of their
nationals. The State Department suggested to the Government of the
Dominican Republic that it ask the United States to collect all
customs of the country. The Dominican Republic accepted this sug-
gestion and on February 4, 1905, a treaty was signed between the
two Governments. By the terms of this treaty the United States
Government was to collect all customs of the Dominican Republic,
to administer its finances and to effect a settlement of its debts.
The American Senate refused to ratify the treaty. Roosevelt then
entered into an executive agreement with the President of the Domin-
ican Republic in accordance with which the United States collected
Dominican customs beginning April 1, 1905.
118
- 2 -
5. In 1907 the American Senate ratified a revised treaty with the
Dominican Republic in which it W&B provided: (a) That the President
of the United States should appoint a customs collector for the
Dominican Republic; (b) that the Dominican Government could not
increase its debts or lower its taxes without the consent of the
United States; (c) that an American Receiver-General would issue
a $20 million loan refunding the Republic's debt, the United States
Government collecting customs for 50 years in order to meet inter-
est payments on the loan.
6. In 1908 a $20 million loan was floated by the Guaranty Trust
Company of New York on behalf of the Dominican Republic, to be
used in accordance with the provisions of the treaty of 1907.
7. In 1912, President Taft sent two special commissioners and
715 marines to investigate an uprising of 1911. The American dele-
gation persuaded the provisional president to resign.
8. In 1913, Secretary of State Bryan notified revolutionary ele-
ments in the Dominican Republic that if they were successful the
State Department would not recognize them and would "withhold the
portion of the customs collection belonging to Santo Domingo."
American commissioners were sent on warships to supervise elections
in 1913 and 1914.
9. In 1914 the National City Bank loaned $1.5 million to the
Dominican Republic. The loan contract specified that the loan was
made "in conformity with the convention between the United States
of America and the Dominican Republic, ratified July 8, 1907, the
payment of the principal and interest of which ..... is secured by
the pledge by the Republic of its customs revenues ...."
10. In November, 1914, the State Department withheld recognition
of newly elected President Jimenez until he agreed to have internal
revenues collected under the supervision of American officials.
11. In April 1916, United States landed troops in Santo Domingo to
put down an uprising against the Government. In July the Dominican
Congress elected Francisco Henriquez President. When his Government
refused to sign a new treaty giving the United States Government
control over the Dominican customs, Treasury, Army and Police, the
United States refused to recognize him and withheld all funds due
to the Government from the customs revenues. The Dominican Govern-
ment still refused to sign the treaty. The United States forces in
Santo Domingo then dissolved the Dominican Congress, ousted the
Government officials and established a military Government operat-
ing under martial law,
119
- 3 -
12. In 1920 the American military governor issued a proclamation
setting forth the conditions under which the United States forces
would withdraw from the country. Among these was specified (a)
ratification by the Civil Government elected of all acts of the
military Government; (b) creation of a native constabulary to be
organized and trained by an American military mission; (c) the no-
gotiation of a $21 million loan to complete improvements begun by
the military Government and extension of the powers of the American
Receiver General to safeguard the loan. These terms were not ac-
cepted by the Dominican Republic and evacuation did not take place.
13. In 1921 the American military dictatorship floated a $2} million
loan on behalf of the Dominican Republic. The Equitable Trust
Company of New York handled the issue.
14. In 1922 a $6.7 million bond issue was floated by the military
Government on behalf of the Dominican Republic. Lee Higginson and
Company of New York handled the issue.
15. In 1924 American forces were withdrawn after a general elec-
tion was held under their supervision. The United States retained
control of Dominican customs and collections and the Dominican
Republic agreed not to increase its debt unless permission was
granted by the United States Government.
16. In 1926, two new loans totalling $8.3 million were floated
by Lee Higginson and Company of New York for the Government of the
Dominican Republic.
17. In 1930 the diplomatic representatives of the American Govern-
ment induced President Vasquez to resign when a revolt against him
took place. In the election that followed, General Rafael Leonidas
Trujillo - once a private in the American Marine Corps - was made
President.
18. In 1934, Trujillo secured from the American State Department
and the Foreign Bondholders Protective Association an extension of
the date of maturity of foreign bonds of the Dominican Republic.
8 a result the American control over Dominican Republic customs
was extended to 1970.
120
Appendix V
Background and Significant Facts Relating to
American Intervention in Haiti
1. In 1910, with the aid of the State Department, the National
City Bank and three other American banks purchased an interest in
the National Bank of Haiti. Under the terms of a loan contract,
the National Bank was to continue as the Treasury of the country and was
to be the sole depository of Government funds.
2. About this time an American company was granted a concession
to build a railroad in Haiti. Under the terms of the concession,
the Haitian Government guaranteed six percent interest on the bonds
issued to cover cost of construction. In 1913 work on the railroad
was suspended, although the project was not completed. The Haitian
Government refused to accept the work of the company and to issue
bonds to it, contending that it was defective and extravagantly
constructed. The company appealed to the State Department and the
latter induced the Haitian Government to issue bonds to the rail-
road company for the work completed. In 1914, however, the Haitian
Government refused to pay interest on the bonds issued, charging
the company with nonfulfilment of its contract. The railroad
company again appealed to the State Department despite the fact
that its contract provided "In no case and for no reason shall
disputes that may arise as to the interpretation of the clauses of
the present contract give occasion for diplomatic recourse." Fore-
closure proceedings instituted by the Haitian Government against
the railroad were suspended at the insistence of the State Department
and the question was still pending when the United States interven-
tion occurred in 1915.
3. During the uprising against the Haitian Government in the early
part of 1915, British, French, German and American warships landed
troops in Haiti to protect property of their nationals. The other
countries were then induced to withdraw their forces and United
States forces remained in charge.
In July 1914 the National Bank of Haiti refused to advance funds
to the Government of Haiti in accordance with the budgetary convention
then in effect. The American minister to Haiti reported his belief
that the Government was being deliberately pressed by the bank in
order to force it to ask aid of the United States and thus obtain
Regraded Unclassified
121
- 2 -
United States supervision of customs collections. Although the State
Department had protested in 1910 against the unisual powers granted
to the bank, it did not in 1914 protest when the bank refused to
advance funds to the Government.
Anticipating B. financial shortage as & result of the bank's action,
the Haitian Government issued paper money to meet its expenses. A
representative of the National City Bank then, with the help of United
States Marines, removed $500,000 from the vaults of the Haitian
National Bank; these funds were then transported on an American war-
ship to the United States. where they were deposited in the vaults of
the National City Bank in New York. The Haitian Government protested
against this removal of Government funds which were not the property
of the bank but Secretary Bryan justified the action on the grounds
that revolutionaries might otherwise use the funds for non-legal
purposes.
4. Theodore was elected President of Haiti in November 1914. The
State Department ordered the American minister to inform the Haitian
Government that Theodore would be recognized as provisional president
when he appointed a commission to negotiate at Washington a conven-
tion covering: (a) Control and collection of the Haitian customs by
the United States Government; (b) settlement of outstanding questions
between the Haitian Government and the American railroad. The Haitian
Government refused to comply with this request,
Historians agree that both the Zamor and the Theodore Governments
were unable to continue largely because of lack of funds as B. result
of action by the Haitian National Bank.
In February 1915 the Haitian Government ordered customs duties
to be paid to various specified agents in Haiti instead of to the
National Bank. The State Department ordered Admiral Caperton to see
that this Treasury service was restored to the Bank in accordance with
the contract of 1910.
5. American Marines were again landed in Haiti during an uprising
in 1915. Admiral Caperton, who was in charge of the American troops,
postponed general elections until & candidate acceptable by American
interests could be found. It is reported that Mr. Leger, who was
first sounded out, refused to run, saying, "At this time I could not
possibly accept the Presidency. I am for Haiti, not for the United
States." A Mr. Dartiguenave, who contended that "Haiti must and will
accede gladly to any terms proposed by the United States,' was then
elected to the Presidency under American protection. This President
122
- 3 -
then signed & treaty giving the United States control over Haitian
customs, police forces, and finances. In order to guarantee its
ratification by the Haitian Senate, however, American Marines seized
all customs houses - thus depriving the Government of all revenue -
and declared martial law. When the Senate still refused to ratify
the treaty. the State Department instructed Admiral Caperton to tell
the cabinet that his "Government (had) the intention to retain control
in Haiti until the desired end (was) accomplished, and thus succeeded
in obtaining ratification.
6. American Marines under Admiral Caperton remained in charge of
the Island and in 1916 precipitated B. bloody uprising against them
by forcing private citizens to work on the roade.
In 1918 the Haitian Government was forced to sign a. treaty
agreeing to submit all proposed legislation to the United States for
approval. Subsequently, the United States Government asked Haiti to
adopt a new constitution embodying provisions of the treaties in
force with the United States. The American administrator of Haitian
finances withheld salaries of all Government officials in order to
force the Government to live up to the provisions of the treaty of
1918. When the Haitian Congress refused to ratify the new consti-
tution, the American forces dissolved both houses and called for a
plebiscite. Haitian citizens, voting at polls which were guarded
by American Marines, adopted the constitution in which it was de-
clared that "All acts of the Government of the United States during
its military occupation in Haiti are ratified and confirmed." The
constitution also abolished & long-standing provision of Haitian law
which prevented foreigners from holding land in Haiti.
In 1920 the Haitian Congress passed a law placing restrictions
upon the right of foreigners to own land. Contending that this law
was passed without its approval, the United States Government refused
to recognize it. The law was unenforced and in 1925 a new law, more
favorable to the United States, replaced it.
While the Government was controlled by American forces, a $40
million 30-year loan was floated, a subsidiary of the National Bank
handling the issue. The funds were used to meet arrears on the
foreign debt and to strengthen the country's finances.
7. In 1917, National City Bank acquired the holdings of National
Bank stock of other American bankers. In 1920, supposedly at the
suggestion of the State Department, the National City Bank also
acquired the shares held by French bankers, thue obtaining complete
- 4 -
123
control of this institution. In 1921 the American Senate investigated
the Haitian situation and American forces in Haiti were reorganized.
8. American forces were maintained in Haiti from 1915 until 1934,
during which time the United States maintained control of the political,
economic and financial life of the country. Although military forces
were withdrawn in 1934, American influence in the economic and finan-
cial life of the country still persists. The National Bank of Haiti
was, in 1934, sold to the Haitian Government but a majority of its
board of directors must be Americans until all debts owed to citizens
of the United States are repaid. The American members serving on this
board are to be nominated by the American Foreign Bondholders' Pro-
tective Council and the National City Bank of New York. The Haitian
Government also agreed that the National Bank is to be the sole de-
pository of Haitian public funds and is to have the right to inspect
the collection of customs of the Haitian Government. In order to
obtain adoption of the 1934 treaty embodying these provisions, the
American-protected President of Haiti had to expel from the Haitian
Congress all senators who had opposed its ratification and virtually
appoint men in their places who would agree to vote for it.
Regraded Unclassified
124
Appendix VI
Significant Facts Pertaining to the American
Acquisition of Hawaii
1.
In 1874 the ancient royal family of Kamehameha became
extinct and the island legislatore under the influence of American
missionaries chose a. new king, David Kaladaua, who ruled until
1890. During this time, American interests in Hawaii were rapidly
developing. A commercial treaty between the United States and
Hawaiian Governments was signed in 1875, giving Hawaiian sugar
free entry into the United States. Within the next ten years
sugar exports to the United States increased by over ten times
and American property holders in Hawaii were exceedingly pros-
perous. The McKinley Tariff Act of 1890, by putting sugar on
the free list, thereby causing Hawaiian planters to compete with
those of Cuba and Java, caused a severe depression in Hawaii.
Under date of November 20, 1892, United States Minister to Hawaii,
Stevens, wrote, "The loss to owners of sugar plantations and
mills
has not been less than $12 million, a large portion of
this loss falling on Americans residing here and in California.
Unless some positive measures of relief be granted the deprecia-
tion of sugar property here will continue to go on, Wise bold
action by the United States will rescue the property holders
from grave losses,'
2,
On January 12, 1893 an uprising against the Hawaiian
Government took place. Upon the request of United States Minister
Stevens, the American naval vessel, Boston, had been stationed at
Honolulu and while the uprising was in progress, marines were
landed. Under the protection of the marines, an American
organized Committee of Public Safety proclaimed the downfall
of the Hawaiian monarchy and declared the existence of a provi-
sional government "until terms of the union with the United
States have been negotiated and agreed upon." Immediately, the
American minister accorded recognition to the provisional govern-
ment, Historiano treat this revolution as an American enterprise.
United States Minister Stevens confirms this point of view by
referring to the leaders of the revolution as "Four highly
respectable men with Judge Dole at the head,
P.
C.
Jones
is
& native of Boston, Mass., wealthy, possessing property interests
in the islands and a resident here for many years.' A delegation
consisting of four Americans and one Englishman was then sent to
Washington to petition annexation of the islande. The leader of
this delegation, Lorrin A. Thurston, described its purpose as &
defence of American property rights which had become so great that
"it is no longer a simple question of political advantage to
the United States or of charity or justice to a. weak neighbor
which the authorities at Washington have to deal with: but it is
a question involving thousands of their own blood and millions
of their own property."
Regraded Unclassified
125
- 2 -
3. Very shortly after the revolution a treaty of annexation
was drawn up and submitted to the Senate. The treaty was still
before the Senate when Cleveland took office and one of his
first acts was to withdraw it, Walter Gresham, Secretary of
State under Cleveland, wrote as follows concerning our action
in Hawaii: "It is fair to say that Secretary Foster's state-
ments were based upon information which he had received from
Mr. Stevens and the special commissioners, but I an unable to
880 that they were deceived. The troops were landed, not to
protect American life and property but to aid in overthrowing
the existing government. Their very presence implied coercive
measures against it." (Foster had been Secretary of State prior
to Cleveland.)
Gresham closed his statement as follows: "Should not the
great wrong done to a feeble but independent state by abuse of
the authority of the United States be undone by restoring the
legitimate government? Anything short of that will not, I
respectfully submit, satisfy the demands of justice.
"Can the United States consistently insist that other
nations shall respect the independence of Hawaii while not
respecting it themselves. Our Government was the first to
recognize the independence of the islands and it should be
the last to acquire sovereignty over them by force and fraud."
4. On May 31, 1894 the Senate unanimously approved Hawaiian
independence, non-interference by the United States and a
declaration to the effect that we should view any interference
by other nations as unfriendly to ourselves. Hawaii was finally
annexed by joint resolution passed during the heat of the
Spanish-American War (July 7, 1898).
126
Appendix VII
Significant Facts Relating to American Action in
Panama
1. In 1903, Colombia delayed in ratifying the American treaty
concerning American rights to construct a canal in Panama,
Shortly thereafter & revolution occurred in Panama and American
warships, stationed in the vicinity at the time, were instrumental
in preventing Colombian suppression of the revolt. Three days
after the outbreak of the revolution the provisional government
of Panama was recognized by the United States, Seven days later
President Roosevelt officially received Bunau-Varilla as &
representative of the Panama Government and five days after that
a treaty was signed giving the United States Government the
desired concession.
Seven years later, in a speech at Berkeley, California,
Mr. Roosevelt is reported to have said: "I am interested in
the Panama Canal because I started it. If I had followed the
traditional conservative methods, I would have submitted a
dignified State paper of 200 pages to Congress and the debate
would have been going on yet. But I took the Canal Zone and
let the Congress debate and while the debate goes on, the Canal
does also."
2. The right of police intervention in Panama by the United
States is limited by Article 7 of the Canal Treaty to the cities
of Panama and Colon and to adjacent territory. The United States
appears to have sent troops to occupy these cities upon three
occasions: In 1818, when elections were postponed; in February
1921, when B. local mob broke into the presidential palace and
denounced President Porras as a traitor; and in the rent riots
of 1925. Upon each occasion the American troops remained only
a short time. In the first case the United States intervened
without the request of Panama; in the second case the interven-
tion was apparently in response to an oral request from President
Porras: in the third case, intervention came after the Panama
Cabinet had authorized the president to invoke Article 136 of
forces. the Panama Constitution, thereby calling in the United States
Appendix VIII
127
Significant Facts Pertaining to American Relations
with China
1. During the years 1895-1900 various railway schemes were promoted
and assumed importance because of political implications. Minister
Charles Denby took vigorous but unsuccessful steps in an effort to
get the contract for the Hankow-Peiping (Peking) line for Americans.
He went so far as to demand that the Foreign Office in Peiping instruct
the Chinese negotiator at Shanghai to contact an American company
regarding construction of the line. When Americans lost the Hankow-
Peiping contract, they were promised the Hankow-Canton contract, but
this also fell through,
2. In 1909 Secretary Knox proposed "neutralisation" of Manchurian
railways by lending China enough money to buy all the railways in
Manchuria, including the Chinese Eastern and the South Manchurian
railroads. Opposition from Russia and Japan prevented this.
3. Participation in the Hukuan railway loan of 1911 made the United
States a recognised member of the national banking groups which came
to be known as the Consortium. During the negotiations over the
Hukunng contract, President Taft sent a personal telegram to the
Chinese ruler requesting "equal participation by American capital
in the present railway loan". In explaining this telegram to the
press the Secretary of State advanced as one reason for American
insistence, the fact that general revenues of the Chinese central
government were involved. The Hukuang loan totalled 6 million pounds,
to be shared equally by four countries, including the United States.
Interest was defaulted in December 1924, approximately one coupon
a year being paid thereafter. In April 1937 the Chinese government
announced a plan for servicing the loan on an adjusted basis,
4. A loan to Manchuria for purposes of currency reform and indue-
trial development was negotiated in 1911 by B. four-power group,
later enlarged to include Japan and Russia. The American banks
withdrew, however, before the final contract was signed in April
1913. Their withdrawal from the consortium took place because
after a change in the administration, their request for continued
support had brought an unsatisfactory reply. The government reply
on March 18, 1913 pointed out that "The conditions of the loan seem
to us to touch very nearly the administrative independence of China
itself and this administration does not feel that it ought even by
implication to be a party to those conditions." A divergence in
policy between the Wilson and Taft Administrations on this par-
ticular point appears evident.
128
- 2 -
By late 1917 the State Department had again reversed its
attitude towards the consortium and wired the American Minister
to China that American participation was being favorably considered.
After long negotiations with the French, British and Japanese Gov-
ernments, the China Consortium Agreement was signed in October 1920
with the apparent support of the State Department. It is alleged
that this change in attitude by the State Department was caused by
American unwillingness to see Japan and the allied group make addi-
tional loans to China without American participation. The consor-
tium expired in 1925 without having extended any loans to China,
5. In the period 1914 to 1921 Paul S. Reinsch, American Minister
to Peking, under President Wilson, made mimerous efforts to induce
American capitalists to make loans to China. For the most part,
however, the American financial community showed little interest
in Chinese loans.
6. The existence of an unstable government in China has resulted
in the presence of foreign troops and war vessels in China for
the protection of foreign lives and property. An outstanding
example of the use of force in protecting foreigners was the
incident at Socony Hill, Nanking. On March 24, 1927 Nationalist
troops entered Nanking. Despite efforts of the American consul
to obtain protection from the Chinese authorities, Nationalist
soldiers began to loot foreign quarters and killed five foreigners.
A group of foreigners took refuge in the Standard 011 Company head-
quarters on Socony Hill. When the place was attacked, American
and British vessels in the harbor threw a barrage around the place
and drove away the Chinese with some loss of life. The foreigners
were then evacuated.
7- In its anmial report for 1936 the Foreign Bondholders Protec-
tive Council estimates the United States holdings of Chinese dollar
debt at $11 million. This includes & $5,500,000 issue in 1919 of
2-year Treasury notes which went into default in November of 1921,
and & $5,500,000 issue of 2-year Treasury notes dated 1919, not
publicly offered but taken by the Pacific Development Corporation.
(Also in default since December 1921.) In April 1937 the Chinese
Government announced a plan for servicing the publicly offered
issue on an adjusted basis. These two issues and the Hukuang
railway loan of 1911 are the only Chinese government securities
mentioned by the Foreign Bondholders Protective Council as being
offered and held in the United States.
A
129
April 14, 1939
FOR THE SECRETARY:
Some time ago you asked for a study of borrowing
power of those Government agencies whose obligations are
outside the formal public debt limit. I have received
from the Legal Division and from Accounts and Deposits
a complicated set of material which seems to indicate
that about $5,700,000,000 could be borrowed by agencies
empowered to issue their own obligations either with or
without the guarantee of the Government. Most of this
borrowing power is in the R.F.C., F.D.I.C. and the
U.S.H.A. Since these agencies are not substantially
indebted to the Treasury, the only way they could aid
in current Government financing would be to borrow this
money on their own obligations, leave it on deposit
with the Treasury and, in effect, lend the money to
the Treasury by allowing the Treasury to use it for general
Government expenses.
ESD
130
April 14, 1939
Henry Hooker gave this to the Secretary.
Regraded Unclassifie
THE SOLUTION.
131
DEDICATION
TO 1. R. WHO HAS MIN
THINKING AND SAYING, TO
THE DISTRESS OF THE AUTHOR,
THAT THERE IS NO SOLUTION
KNOWN TO HER OR TO ANYONE KLSE.
PREFACE.
In the President's anmal message to Congress last Jamary,
he emphasized that the most important consideration before the country
was to make Democracy work. Democracy, of course, can only work when its
economy works. Its economy, as at present constituted, can only work
when profits or the possibility or the hope of profits are present.
Recovery can only come by restoring this hope of profit. A full recovery
would permit the Government to balance its budget and at the same time
fulfill its obligations. The President brought out this point when he
expressed the hope that the National income would approach eighty or
ninety billion dollars.
Senator O'Mahoney, Chairman of the T. N. 3. C., expresses
the same thought in different words as follows:-
"The ABC of the problem is clear:
4. Government deficit-spending is bad, but it
must contime until private spending takes
its place.
B. Private spending must take its place or the
government will go broke.
0. If government spending stops before private
spending begins, the depression is renewed.
Therefore. we met find the way to bring
about that revival of all private business.
both corporate and unincorporate. without
which there can be no permanent recovery.
Regraded
132
this is not a brief for the abuses of the capitalistic
system. If these abuses had. not been attacked by this Administration
through the so-salled refere measeres the capitalistic system would have
- to an and. Is will still case to an onl together with the refer
Y 10th 5 s I s I 1 = 1
It is universally recognized that at the present -
private business is in large part paralysed because expectation of
reasonable profits M longer exist in may fields. 26 is idle to wgo
people to carry as the American commy without hope of prefit the my
they might lay down their lives in time of man without going into
this subject in great detail, 20 1s apparent that persons who are willing
to lay down their lives for their country in time of me are not willing
to engage in economic purmits without the hope of profit. There is m
contradiction here. In one case they try to seve their country and in
the other to conserve their preparty.
I base solution only on those elements of which I
have had personal knowledge. It is as follows:
1. MODIFICATION OR REPEAL or THE GAPITAL GAINS TAX.
The cartent so which the Capital Gains fax has paralyzed
initiative is not contained in any statistics known to the Goverment.
Statistics only record things that happen. The Capital Gains Tax prevents
things from happening, and the extent of its prevention is not statis-
tically recorded. Statistion dividing the ment reselved from the tat
as between returns from stock market operations and from intestry proper
are entirely immaterial to our inquiry. What we are interested in is a
different matter. Ve are interested to what extent the tax has Medical
activity and a division of this figure, If you 11ke, between market
operations and industrial ventures. Percome in active contact with
-2-
Regraded Inclassified
133
business of their - knowledge that this tax has destroyed a vast
1 of prespective business. I called your attention so the case of
the American Formant Company, which m within my personal knowledge,
wherein the Federal and State Gevernments lest reverns of NOTO the
$1,500,000. through the operation of the Mr. The Government - to
feel that this tax affects a for rich persons only. whereas, is fast,
11 daily affects nearly the whole phase of venturesoms enterprise
throughout the country.
the New York Times of March 12, 1939 had this to say in
connection with New York City's pending attempt to my the B.M.T. Railread.
"Among the reservations más W the company
negotiators are several important ones.
presenting serious difficulties and in -
cases invelving factors beyond the centrol
of the company spelessmen. These spekeemen
insisted that they retain the right to with-
draw from the agreement if the transaction
involves payment of any substantial anount
of Federal or State taxes: ....
The most important element in the tax situs-
tion is the matter of the Federal tex on
capital gains. Reserve of the nanner in which
the B.M.T. has been keeping its books, with the
expital set-ups of its rapid transit, street car
and bus units Dupt separately for tax parposes,
there exists the possibility that the Treasury
Department will impose a capital gains tax
of all sundh as $20,000,000. when the city take
over the properties. There is. on the other hand,
the possibility that a tax hevy all low as $5,000,000.
will be involved, should the Treasury Department
consent to lump the expital set-ups for tax purposes.
It is cold to be the hape of the negotiators that
the government w be personal to view the trans-
estion as 4 "reargunization" of the city's our
transit system and forego any capital gains tax at all.
the city's have más 28 clear that they
will not recomend that the city pay my part of
any such tax the company negotiators, a the other
hand, are equally insistant that the agreement must
- 3 -
Regraded Unclassified
134
fail if & substantial tax must be not w the -
penion invelved. ...
the B.M.S. negatiators, 11 is unierstand, will
invist, before my unification doal 10 closed
with the city, upon callafactory ralings by the
Treasury Department on these points."
Here 10 a transation which my nover be consumnated 00
account of the Capital Galms the Insidentally, 11 is internating to
note in passing that the negotiators will try to find out from the
Treasury Department in advance of conditing themselves just what the
ruling in this particular case would be.
& questionnaire on this subject was sent out with
the result that a large persentage of the businessmen questioned placed
this tax as the principal deterrent. If the Government would make as
intensive inquiry on this point. which as far as I know has never been
done w 10, I feel certain 11 would arrive at a similar conclusion.
AB a revenue preducer the tax is comparatively unimportant compared
to the has which 11 does. The Inglish carefully studied the conse-
quenses of such a law and determined never to adopt 11 and never have
adepted it. This tax can be largely avoided by doing nothings whereas
Estate taxes cannot be avoided, since all some day must die.
Many years ago one of the ablest English industrialists,
Sir Huge Conliffe-Oven, hand of British-American Tobacco Company, told
no that 10 could never have a seand business situation in America M long
as this tax existed. Be had absolutely 20 personal interest and spoke
without the elightest bias.
- 4 -
Regraded Unclassified
135
It might be argued that the tax was in existence during
the boom of 1000, and therefore and not provent that boon. the tem
of 1999 - a very visions phonemenon and w the of the
crush which followed. 10 is universally consel that the Capital chinas
fax had a large hand in creating that ushoolthy situation.
2. REVISION 07 INDOME TAX.
Am important thing to determine in comention with my
income tax is the point, if any, at which 10 prevents normal recevery.
Am annual National income of eighty billion dellars M
suggested w the President is met an unreasonable expectation. This
amount was exceeded in the years 1936. 1937. 1920 and 1929, but in those
years the soubined maximum peak rate was only mr. Today the rate is
nos. not including state, County and Roal Estate taxes which brings the
maximum peak rate to about 90%. Those eighty billion dollar years did
not result from artificial Government spending. Each of these years
showed a large Treasury surplus. They were proceded w a period of
years of stendily increasing National incomes and steadily decreasing
tax retes, as follows:
Peak Rates
Individual
Calender
National
surtex Plus
Year
Income
1922
1922
1995
1926
#####
1925
. 8 -
136
I a fully anyo there was probably other factors -
helped bring about the Insuranced business activity net ont above, -
it is certainly significant that there is - inverno ratio between the
else of the partentage w the Income to and the Metional income. 2
cannot tall without date from the treasury Department at what polat the
law of divinishing returns to the Government sets in, but this would be an
interesting inquiry tee.
The Under Secretary of the Treasury John Names on this
point said:
"I believe that the Treasury will collect a
larger total of tax dollars with & text Mill
that takes tabe broad consideration the
effect of the dollars 11 will leave the tax-
payer for expansion and development whither
will by consentrating on the highest pessible
dollar it can extract from the business,
profession or compution of the taxpayer.
In other words, what is left to the texpayer
is as important to the country's sotuary at
what is taken from him.
the point is that, in my judgest, harsh or
debetrant tax Laws do not produce the
flow of revenue."
I have referred above to the fast that there is 4 -
difference between Natate - which cannot be avoided and the Ospital
Going the which defeats 190 on purpose if large enough, because the tax
plus the risks involved kills initiative. The Income for in its nature
would - so be half my between these two. If the Issues fax is too
large 10 daters issues which - as of what might be called venture
enterprisse, but it will only return what wight be called investment Issume.
In part therefore the arguments abronced in commention with
the Capital Gains 9ax applies is lesser degree to the Income the and to
- 6 -
this Lesser degree the latter tax is a business deterrent. I have been
137
told that cos represents the peak in my individual case of Income to
in Great Britain, whereas in the United States the made State and
Federal taxes my run w. M we have coon, to between eighty and minety
persent at the present time.
If tax increase La needed 11 milght wall take place a Estate
taxes. Here the point of diminishing returns would only be reached if
the Estate taxes became so great as to discourage these who are enimited
by a desire to leave property to their children. This point has certainly
not been reached, especially in the Lower brackets as may be seen by
glancing at the following tablet
Net Estate
Federal Tax After
Her York
Total Federal
Before Deducting
Allowing Oredit
Estate
and New York
Exemption
for N,I. Tax
Tax
Zatate -
$100,000.
$4,200.
$1,000.
$8,200.
800,000.
70,400.
13,500.
63,900.
1,000,000.
177,800.
40,500.
220,200.
3. OF A HURRAU FOR
AIRENISTRATIVE DECLARATORY RULINGS.
I have speken about this matter to Leon Henderson, Harry
Hepkins, Same Arnold and others many times. I an clad to say that
the plan advocated come to be on the my to adoption. In the New York
Times of March 12, 1939 is the following:
us. Arneld is understood to have prepared
legislation to set up a presedure wordby
business - my - to the Department of
Comerce for advice on how the anti-trust
laws affect their problems.
This will be a form of the 'administrative
declaratory ruling' which coveral numbers
of the condittee favored is & discussion at
one n last week's hearings."
- , -
138
Every Lawyer knows that - of the desisions interpreting
the anti-trust laws cannot be reconsiled. Every lawyer also knows that
a great doal of Instruct which would relieve unsuployment and which is
in the public interest to not entered into through fear of crininal or
civil presecution under the anti-trust laws. As the situation stands
new, those who would initiate this business are sold to proseed at their
peril. Consequently they do not proceed. they Americans with good in-
tentions should not definitely know what is legally right and what is
legally wrong does not máins sense, especially at this time when all
America's enterprise and gentus should be ensouraged to make the nation
powerful. The English tackled this problem through their Beard of Trade
and evolved a system which utilizes the constructive efforts of its Nationals
for the good of the Empire.
4. FORBID OFFICIALS so MAKE IRRESPONSIMLE
SPENCHES NOT BASED ON FACT.
No come new to what some to - the most important -
sideration in the whole Solution-the Spirit of approach. Whether we like
it or not, Capitalism is timid. It will not function in a hostile stuer
phere. the spirit with which the problem is approached will count more,
in my opinion, than anything else that has been referred to. Capitalian
18, as we have seen, dependent en the Profit System, but it is empress of
& Profit and Loss System. In our deliberations we must not forget the
Loss System. Practically every reilred in the United States rests en
the bones of lesses ovidented w bankruptates and recrgnisations.
The Country vas built on taking risho in the hope of profit
and its - will not work if this hope is removed. that we should
try to remove is injustice, corruption and I stupidity.
- e
CONSUBION.
If the American System cannot function fee the 139
- good it enght to be aballabed. Date: as is abolished, houseer,
I $ 2 1 END I 1 1 B i # = €
going to addption the place. If the present eystem Se a failure, is to
legitimate and profitable to disemse a - system. 29 is wt) legithmis
or profitable to mark down the misting system as a failure if that failure
has been assed in great part w - easily correctible -
I - that - wishes so adopt the Totalitarian
tystem of Germany and Italy. or the Communistic System of masta, but
the danger is that one of these systems will adopt w is 19 permit our
present coonsuy to collegue. It is for this reason that the mest certers
consideration should be given to what X have here written, and I values
the reaction of the best technical tax - that you law on these points.
I have limited M solution to these deterrents of which I have personal
knowledge, because I wanted to be brief. Its elements can be greatly
added no, but not in this short There is ample credit and
the banks are leaded with the many. We can - ahead for the -
good if we will toskie and reserve the deterrents I have commerated.
I realise that our problem to more difficult n assemb
of the mashine element, and that those who are unemployed must be talam
care ef. This should be easily accomplished if resevery is permited to
take place. I in perfectly courtneed that if the solution not est above
is adopted the meet causing change in the National walfare of all the
people will easur, The Nation will become solidly behind the Prosident.
the which m has placed upon the and which - w
badly needed will be assestated with presperity and / and become
permant,
Intel, A 1
H.S.N.
4pril 14, 1989.
-9-
240
FEDERAL RESERVE BANK
OF NEW YORK
April 14, 1939
Dear Mr. Secretary:
Despite three or four weeks of recession in the stock market, and
continual war scares, the new securities market has been giving a rather good
account of itself. It is true that three isues have been postponed - the award
of $17,500,000 Port of New York Authority bonds, a large refunding operation by
the Gatineau Power Company of Canada, most of which was to be carried out in the
New York market, and an exchange of preferred stock of the Consolidated Gas,
Electric Light and Power Company of Baltimore for preferred stock carrying a
lower dividend rate. Nevertheless three corporate issues were successfully
floated this week, which raised more new capital - $41,500,000 - than has been
raised in any one week since last October, and the two offerings now open to
stockholders of the Eastman Kodak and Commonwealth Edison Companies are reported
to be progressing satisfactorily. The success of most of this financing may be
attributed to the fact that serious market weakness has not extended to the
highest grade bond market, but some receptivity is being shown, too, to grade A
bonds and to prime common stocks.
The most conspiouously successful operation this week was the market-
ing of $40,000,000 of Texas Corporation debenture 3a of 1959 at 101. The syndi-
cate sold the issue the first day, and it has been quoted at a very small premium.
Though rated An by Moody's, debentures raising 20-year new capital yielding the
investor about 2.93 per cent are evidence of strong demand at least for high
grade issues. In addition, however, offerings of $3,800,000 West Coast Telephone
Company first mortgage 4a of 1964, $1,500,000 Philippine Long Distance Telephone
Company first mortgage 65 of 1953, and the two largest municipal awards during
the first part of this week are all reported to have met with a good reception.
Municipal bond awards this week reported up to today totaled about $10,000,000.
The Eastman Kodak Company stock is now quoted in the market about 18
points above the price of the new offering, $127.50, and the Commonwealth Edison
Company debentures are still at a 5 or 6 point premium. Barring an unexpected
turn for the worse, it is expected that stockholders will take up almost all
these issues.
No large corporate flotations are scheduled for next week, unless one
of the 1s offered.
Yours faithfull
very it one
TRANSPHATE TAUSANT
patment - is -
Allan Special,
NO - also
First Wice President.
Hon. Henry Morgenthau, Jr.,
Secretary of the Treasury,
Washington, D. C.
Unclassified
141
Return to Room 286
WHolley
April 15, 1999.
Dear Mr. Sproul:
For the Secretary I - asknowledging
your weekly letter dated April 14th.
is you know, Mr. Morgentham to always
most interested in studying your current
survey of the now securities market.
Sincerely years,
R. 8. Klets,
Private Secretary.
Mr. Allan Sproul,
First Visa President,
Federal Reserve Thank of New York,
New York, New York.
GEF/dbs
142
April 14, 1939
9:26 p.m.
HMJr:
Hello.
Operator:
Mr. Delano. Go ahead.
HMJr:
Hello.
Preston
Delano:
Good morning, Mr. Secretary.
HMJr:
How are you?
D:
I'm pretty good, sir. I have those letters, and
any time at your convenience, I thought we might sit
down and discuss the situation.
HMJr:
You mean the letters from......
D:
The Federal Reserve and from Leo Crowley.
HMJr:
Uh-huh.
D:
Bearing on this thing -- you remember, we -- the firs
step was to clear that letter with them.
HMJr:
Yeah.
D:
I've raised some questions -- I thought if you could
give Mr. Hanes and myself a few minutes.
HMJr:
Well, I've got a group coming at nine-thirty and the
first free minute I have -- you're going to be in
all day?
D:
Yes, sir.
HMJr:
O. K. I'll be calling you.
D:
Right.
HMJr:
Thank you.
143
April 14, 1939
9:27 a.m.
HMJr:
Hello.
Operator:
Mr. Jones.
HMJr:
Hello.
Jesse
Jones:
Hello, Henry.
HMJr:
How are you?
J:
All right.
HMJr:
Jesse, I don't know whether you've had time to read
the New York Times, the story about a man by the
name of Wasserman who 18 going to buy up all the
English and French stocks with -- with the help of
your financing.
J:
Wasserman?
HMJr:
Yes.
J:
Yeah. I have not.
HMJr:
Well, if you would read it and then after you've read
1t I'd appreciate it, if you could throw the story
down.
J:
Yeah, I will.
HMJr:
And I'll tell you why. For your own very confidential
information, we're in the process of dealing directly
with the French and British treasuries.
J:
Yeah.
HMJr:
On their securities.
J:
Yeah.
HMJr:
The -- we just late last night got a cable as to
whether if they pooled them could they borrow money
on it.
J:
Uh-huh.
HMJr:
And -- and I had Foley look it up. If -- he thinks
it's possible, and as soon as he gives me a ruling
I was going to get in touch with you.
Unclassified
144
- 2 -
J:
Yeah.
HMJr:
But we're doing it between governments.
J:
Yeah.
HMJr:
And I'd -- -- I'd like -- I would appreciate it if you
would throw that Wasserman story down because he
-- definitely says here they had a rough outline
which would involve financial backing from the R.F.C.
J:
Yeah.
HMJr:
And it would give -- he keeps mentioning R.F.C. over
and over and over again. So
J:
I'll be glad -- I must do it, because he came to see
me, Henry, and I -- I turned him down and said, "No"
and said everything in the world
HMJr:
Yes.
J:
that I could say without -- well, I didn't know
the man but a fellow -- somebody made an appointment
for him.
HMJr:
Well, if you would throw it down it would be helpful
to me.
J:
I'll do it without fail.
HMJr:
Thank you. And then, sometime during today or tonight
I'll be getting in touch with you.
J:
All right.
HMJr:
Because -- 8.8 this thing progresses, because -- we're
doing everything we can to make arrangements to keep
the markets open. That's what we're trying to do.
J:
Yes.
HMJr:
And, as I say, this cable from the British only came
in late last night.
J:
Put me down when you can. I want to have a talk with
you.
HMJr:
I'm anxious to talk with you also.
145
- 3 -
J:
So just -- if you will put that down just as soon as
you can why I'll
HMJr:
I'm sorry -- I -- I would have called earlier but I've
been working day and night on this thing and the
President has been pressing me very hard and I just
haven't seen anybody other than just work on this
European thing.
J:
All right, thanks.
HMJr:
But you will -- whenever -- I will be giving you a
call today or tomorrow.
J:
All right, fine.
HMJr:
Thank you.
Regraded Unclassified
146
April 14, 1939
10:33 a.m.
HMJr:
Hello.
Operator:
Mr. Krock. Go ahead.
HMJr:
Hello.
Arthur
Krock:
Yes, sir.
HMJr:
How are you?
K:
All right.
HMJr:
Arthur, in the first place, your boys -- everybody
treated me beautifully yesterday on the statement
what we were trying to do
K:
Yes.
HMJr:
to keep the markets open.
K:
Yes.
HMJr:
And I -- I mean, I -- and then your people up in
New York went off on the deep end on this Wasserman
statement and -- the investment trusts.
K:
Yes.
HMJr:
Now, I talked to Jesse Jones and Jesse said he'd
like to throw down that statement that appeared on
the front page in today's Times. See?
K:
Yes.
HMJr:
I don't know whether you've noticed it.
K:
Oh yes, I read it with great care. That -- that's
Jerry Frank's story.
HMJr:
No, I -- I'm talking about -- well, Jerry Frank and
Wasserman.
K:
Yes, that's right.
HMJr:
Well now, that isn't in the wood at all.
K:
Isn't it?
147
- 2 -
HMJr:
It 16 not. And I just talked to Jones, and I ---
I'm quite sure if you send somebody around he will --
he said he'd like to throw this statement down and
throw it down hard.
K:
Yes.
HMJr:
Now what 1s in the wood 1s Just what I told the boys
yesterday off the record.
K:
I see.
HMJr:
And what we're trying to do 18 to do something in an
orderly way and all the agencies are working together
and if the English or the French read this thing they
won't understand it.
K:
All right. I -- we -- we'll get it straightened out
today then. I'll have somebody go to see Jones and
if there's any checking needed with you -- I -- he
can see you too.
HMJr:
That's right.
K:
All right.
HMJr:
I'd appreciate it because you people -- the people
up in New York did go off -- Wasserman sold them a
phony bill of goods.
K:
I sée.
HMJr:
See?
K:
I see. All right, Henry, I will check on it and get
started on it right away.
HMJr:
Thank you BO much.
148
April 14, 1939
11:12 a.m.
HMJr:
Hello,
OPerator:
Congressman Taylor.
HMJr:
Thank you.
0:
Go ahead.
HMJr:
Hello, Mr. Taylor.
Edward T.
Taylor:
Hello, Mr. Morgenthau -- Mr. Secretary. Say, I
called you to ask you about a matter -- some informa-
tion that you have down there that I thought would
be helpful to our investigating committee of the
W.P.A.
HMJr:
Please.
T:
And because you were engaged, why I talked to Mr.
McReynolds.
HMJr:
Did he take care of you?
T:
Why yes, I think 80. Yes, and I had Mr. O'Neill,
a member of my sub-committee, talk to him about
some -- some data there, and I -- I'd like to have
you speak to him and Bee that it's -- see that it's
all right. We want to avail ourselves of all the
authentic information we can, you understand, and --
and personally, why I want to be able to make a
report that will be helpful.
HMJr:
Well, Mr. Taylor, anything that the Treasury -- we've
got, we'll give you.
T:
Well, I appreciate that ever SO much. As a matter of
fact, you know, there's -- there's efforts to hamp
string and smear and discredit 8. committee all over --
going on more or less all the time, and I'm endeavoring
to steer as clear as possible of that and to -- and to
get at some really constructive information if it's
possible.
HMJr:
Well, I'll tell McReynolds right away that -- to give
you a hundred per cent cooperation.
T:
All right. Thank you every BO much, Mr. Secretary.
HMJr:
Thank you.
T:
Much obliged. Good bye.
149
April 14, 1939
11:13 a.m.
HMJr:
Mac.
McReynolds: Yes?
HMJr:
I Just talked to Congressman Taylor of Colorado,
and he wanted me to tell you, which of course is
unnecessary, to give him a hundred per cent
cooperation.
M:
Oh! I'll -- he just talked to me.
HMJr:
He said he did.
M:
And O'Neill also, who is the head of that investigating
committee on W.P.A. -- and I also talked to him --
from his office. He wanted the copy of the -- the
material that we dug up on that W.P.A. study a year
ago; he knew about that. I told him it was in line
with the President's requests.
HMJr:
Well, let me see -- we'll talk about it later, Mac.
M:
O. K.
HMJr:
0. K.
Regraded
Unclassifi
150
April 14, 1939
11:45 a.m.
HMJr:
Hello.
Operator:
Mr. Frank.
HMJr:
Hello.
Jerome
Frank:
Hello.
HMJr:
Morgenthau.
F:
Yes, Mr. Secretary.
HMJr:
It's terribly nice of you to have written me that
letter, but it was unnecessary.
F:
Well, sir, I felt it very deeply.
HMJr:
Well, I appreciate it, and Ed Foley is in here now
and I gather that between you and Jones and myself --
I gather we've made the New York Times a little 111.
F:
Yes, I think 80. And -- our boys tell me that there
were three denials yesterday before the story was
printed in the hands of the New York Times.
HMJr:
Well, that -- that's outrageous. I mean, that they
should print it after those denials.
F:
Inexcusable.
HMJr:
Yeah.
F:
I -- I also called Wasserman and gave him
hell.
HMJr:
Yeah.
F:
And he says that he's issuing a denial.
HMJr:
Well
F:
But -- but he got an approbation.
HMJr:
He's -- he's a third-rater, you know.
F:
Well, you know, I met him first through Henry Wallace;
they are very close, and he is an interesting fellow,
but garrulous and he talked to me about this thing
151
- 2 -
and I said -- a few days ago -- and I said, "Well,
it's a very complicated problem; I -- I can't say
anything about 1t. It involves en expenditure of
Government funds and that's none of our business
here." Then he called me and asked me whether --
if the New York Times came to see me -- anybody from
them, I would talk to them off the record. And I
said, "Well, I'll talk to anybody about anything,
but I -- I don't particularly care to." He was
told by them, he claims, that they -- they twice
contacted me yesterday, which 1s a complete false-
hood.
HMJr:
Did you talk to Krock?
F:
No, I tried to get him, but he's out. I'm trying to
get him now.
HMJr:
But I called him this morning and told him that if
he would call up Mr. Jones that he would tell him
that there was nothing to it.
F:
Yes.
HMJr:
Well, I think between the lot of us -- we'll most
likely -- back in the real estate notice get a little
two inches of denial, most likely.
F:
Yeah. Yeah, it's very likely. You know about the
story of the man who's name was printed in the death
column and objected and the next day they printed
his name in the birth column.
HMJr:
(Laughter)
F:
That's the way this will be.
HMJr:
Well, that's -- now look, sometime between now and
Saturday night I want to Bee you people. When you're
ready -- to talk about -- if you've made up your mind
how you're going to handle the exchange.
F:
Well, I'll canvass it with the other commissioners
and then let you know.
HMJr:
Will you?
F:
Yes, indeed.
HMJr:
And did Ed tell you about the message we got from
England?
152
- 3 -
F:
No.
HMJr:
Well, we got a comeback from them -- this is, of
course, very confidential, and they wanted to know,
and that's what upset me today -- that if they did
take over the stocks, could they borrow money from us
-- could the Government provide some way to lend them
money against the stocks if they took them over.
F:
Yeah.
HMJr:
And then -- having got that late last night and then
to see this Wasserman story this morning, naturally
I was upset.
F:
Yes.
HMJr:
But the English have asked us that very question, and
Ed's working on that now.
F:
Yes.
HMJr:
Whether it 18 legal, under the Johnson Act, for --
they used the word, if they set up a straw man, is
what they said.
F:
Yes.
HMJr:
Could they borrow against those stocks rather than
selling them. Well, that would be perfect, wouldn't
it?
FL
Yes.
MMJr:
Huh?
F:
Yes.
HMJr:
But we don't need Mr. Wasserman.
F:
No. All right, thank you very much.
HMJr:
Again thank you for writing that letter.
F:
Thank you.
153
April 14, 1939
(after return from Cabinet,
which was held today from
12 to 1 to permit President
to go to Mount Vernon to
make an address)
I got an opinion from the Attorney General.
(To Mr. McReynolds: We are to let the State Department
know that we have such a ruling and they should give
Italy 30 days' notice.)
I brought up the question of coal and Miss
Perkins said anybody can get all the coal they want.
I said we could not, 80 the President said we should
contact Miss Perkins.
The President said the Bureau of the Budget
had recommended that all lending agencies be trans-
ferred to Hopkins. (To Mr. McReynolds: I want to
know if that is so.)
Construction of public buildings to be trans-
ferred from Procurement to Public Works. Can the
President create a new department of Public Works?
(Mr. McReynolds: Not a department; I have talked to
Dan about that. HM,Jr to Mr. McReynolds: Let me know
about that.)
Cobint april N.1939 37
THE WHITE HOUSE
154
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155
RE TAX STATEMENT
April 14, 1939.
Mr. Hanes
9:30 A.M.
Present:
Mr. Blough
Mr. Duffield
Mrs. Klotz
Mr. Gaston
Mr. Magill
Mr. Shoup
Mr. Viner
Mr. McReynolds
H.M.Jr:
Well, gentlemen and lady, what I am trying to do,
and fortunately we've got plenty of time, 1s this.
I think the Secretary of the Treasury should once
more, and most likely for the last time, bring
to the attention of Congress what I think, as
far as the Treasury is concerned, 1s the one big
worry the people have got, and also that they
have Just cause for this worry. And that is:
in what direction 1s this country headed as far
as public debt and deficits are concerned?
Nobody can work out a policy on that except
Congress, but I do think it 18 my obligation to
point to Congress that there is no policy.
Now, I'd like to make the opening part of my
statement - I mean I've been thinking about this
and I'm not being didactic about it; I mean
that's the idea of having you people here to
disouse this - but after having thought a lot
about this thing, I think that the opening
part of this statement should be laying down,
pointing the way to Congress as to a fiscal
policy, 80 that the man on the street knows
whether this Administration has a fiscal policy.
I don't - and that if we can get him to believe
that we have one, via Congress, and get him to
stop worrying - I think that is one of the
biggest deterrents why people won't put their
money into venturesome schemes.
After we have laid down this fiscal policy, then
I think we ought to take up the question of what
we can do in the tax structure which will look
towards a balanced budget, retirement of the
debt; and then take up the question also of what
are the tax deterrents which might be removed
156
- 2 -
in order to put people to work via the channels
of private initiative.
Now, that's the way I feel as of this morning.
Now, I take it everybody in the room has seen
this statement.
Duffield:
Just barely.
H.M.Jr:
What?
Duffield:
Just barely.
H.M.Jr:
And I'd like to sit back and listen. Anybody
can talk that wants to.
Duffield:
May I - if you are through
H.M.Jr:
Yes, definitely.
Duffield:
tell you one trouble we run into when
we try to approach it from that point of view.
Right off on the fiscal policy angle, and there-
fore right in the first of the statement, we run
into the question, what are we going to do about
the "no tax" statementsof the recent past? The
fiscal policy as suggested in all of the drafts
80 far called for some additional taxes.
H.M.Jr:
Well, I can answer that one; at least I'll make
a bold effort. I could interpret that statement
that the President made as "no new taxes as of
this session."
Duffield:
So that any suggestions in here for estate and
income taxes would not be suggestions for enact-
ment at this session?
H.M.Jr:
Well, let me put it a little bit differently.
I think it 80 happens that what I am going to
say I think 1s good politics, because it's good
fiscal policy. I really think that people are
justified in being worried about what way is
this Administration being headed along fiscal
channels. Now, I think we've got to lay down
what these people close to me think is a good
fiscal policy, and if it should happen to run
157
- 3 -
contrary to some statement that the President
made, after all he did change his mind within
three weeks and he might change it again. And
as you people know - I think we went there on
a Tuesday and he said he wanted to increase the
social security taxes and on Thursday he was
willing to - suggested that we give four alter-
native plans, and subsequently he told Bob Doughton
no increase in the social security. So if he can
change three times within six weeks, there's no
reason why, if we think it 1s good sound fiscal
policy, we can't lay it down, present it to him,
if we all are in agreement afterwards, and then
if it doesn't Just happen to jibe maybe he'll
give in.
I mean I'm thinking about it, and the more I
think of it - and again I just sort of want to
have something in my vest pocket in case he
should tell Mr. Johnny Hanes and myself that we
didn't know what was good politics, 80 I asked
Mr. Farley to write the forty-eight State Chair-
men and give them a copy of my social security
statement and ask if they thought it was good
politics. We have gotten answers from thirty
of them and they all think it's the best thing
that's happened and they are all for what they
call recommendation number four, which 1s no
increased taxes. Now, thirty of them have come
in. Now, if State Chairmen don't know what
politics are, certainly you can't expect me to.
And I think that - as I say, I don't want to
stress the political end, but I don't see why
anybody should risk his money on & long-term
basis if he doesn't know what the Government's
own fiscal policy 18. And does that
Duffield: Yes, it does. But should we suggest in this
statement that the treatment of income taxes
and estate taxes be handled at this session,
Just to be specific?
H.M.Jr:
I wouldn't use the words "this session." I
think I would - again I'm answering your ques-
tion - I would address myself to "this Congress,"
158
- 4 -
which sits for two years. I would address myself
to "this Congress, to "the Congress."
Duffield:
I would like - I don't know whether you want to
disouss this now and take your time, but I would
like very much to have an expression from the
people in the group 8.6 to whether they think a
sound fiscal policy 1s to call for these tax
increases.
H.M.Jr:
Well, if you don't mind, before we get that I'd
like to talk in terms of philosophy first.
Duffield:
Sure.
H.M.Jr:
Do these gentlemen that are here think what I
said - does that make sense, 800?
Duffield:
Surely.
H.M.Jr:
Is that what they think 1s my first responsibility
as far as domestic recovery 16 concerned? Is that
my first responsibility or isn't 1t? I'd rather
address myself to that first, see, and not
And, this being fiscal, and not having had any
chance to discuss it, if Jake doesn't mind I'd
like to ask him if that 1a what he would say is
my number one responsibility, or is that one of -
or number two? Ought I as Secretary of the Treasury -
you (Viner) have 80 often talked to me - as my
responsibility, do you think I ought to do that?
Viner:
Yes, I think you ought to. I think it is a duty
of the financial officer of the Government to
explain as best he can the policy of the Govern-
ment to the public. And the more you do that
sometimes the harder it may be for you, but the
greater 1e the service you are rendering to the
public. The public has & right to know. And
I think this Administration on the whole has -
well, I haven't compared it with others, 80 that's
unfair - but on B. number of things, because they
didn't have to, they didn't explain to the public -
really explain frankly just why they were doing
certain things. I think the public has the right
to as good an explanation as can be made. The
Government never knows - doesn't always know
159
- 5 -
fully just why it does things, but in 80 far
as it can formulate its own thinking, it has
an obligation to let the public know.
And ordinarily, if the parties are fairly evenly
balanced, it is forced to explain it in the
process of getting the legislation enacted or
executing the policy; but when it is as strong
as this Administration was most of these years,
it doesn't have to do it, and very often, I
think, this Administration has not really told
the public why. And the more the officers feel
obliged to do it, I think the more they are
carrying out a basic obligation.
So I am all for your trying to formulate long-
run policy for the Administration. I also think,
however, that there ought to be clearing of the -
I believe myself that it is important that any
Administration speak with as unified & voice as
it can.
H.M.Jr:
Now what do you mean by that?
Viner:
Well, that isn't with specific reference to
this statement, but in general I'd say that if
you deliver a statement there ought to be full
clearance with the President beforehand.
H.M.Jr:
oh. Well, there will be.
Viner:
That's a routine, of course; I suppose it would
come in any case. But 8.8 far 6.8 possible I
think the Administration shouldn't have contra-
dictory statements. The next day somebody else
shouldn't come out
H.M.Jr:
Well, that's & democracy.
Viner:
I think it is not merely democracy, it is a
badly operating Cabinet. You see, the Cabinet
or some such thing ought to clear these views
and establish them as Administration views.
Otherwise, you see, what may come 1s that this
will start a debate within the Administration
rather than a debate of the Administration
with Congress or with the public.
160
- 6 -
H.M.Jr:
Well, I'll go through & sincere effort to show
it to Mr. Ecoles and show it to the other groups
around - I'll go through all the motions in the
best way I can, with the hope that we can get
something; but I can't do the impossible.
Well now, just continuing, let's just go around
as to whether this is - let's 880 whether this
should be the emphasis of this statement, Bee,
and then everything else would fall in its place.
Viner:
Emphasis being on the long-run necessity of a
financial program which puts the Government's
finances in strong shape and keeps them there.
H.M.Jr:
Right. That would be the keystone of the state-
ment. What?
Viner:
That's right.
H.M.Jr:
Shoup?
Shoup:
Yes, I quite agree that that is a thing to be
done. I would even be inclined to add that the
attempt to formulate the reasons and fulfill
this duty will in itself be valuable, since it
will help one to actually discover a program.
And there is the two-fold aspect to it; in other
words, I think not only of explaining why one
does things, but understanding what one might
do and getting perhaps & more incisive view for
one's self of the thing. All of us, I suppose,
feel that way, that as we go through an attempt
to explain a situation new ideas occur and the
thing takes new shape and we come out with a
clearer point of view for ourselves, which of
course means a clearer point of view for others.
H.M.Jr:
Ros?
Magill:
Well, I quite agree with both Jake and Carl,
but I'd add a third thing, which you (H.M.Jr.)
have essentially said in what you have stated,
and that is that it seems to me it 16 essential
for the country's welfare that a statement of
this kind should be made. I don't see, as you
have said - I don't 800 how business can be
161
- 7 -
expected to go on or people can be expected to
make investments, proceed on other than 8. hand-
to-mouth basis, when for years we have gone
along without any clear statement of what the
fiscal policy is. I think you owe it to the
country not merely as a matter of informing the
country, as Jake has said, as to what the pur-
poses and policies of the Administration are,
but you certainly owe it to the country if you
expect to get anything out of the country on
this basis.
To answer Gene's proposition, I think it ties
in with what I have just said. I think it 18
highly important, as 8. matter of your sane
fiscal policy
H.M.Jr:
Sane or same?
Magill:
Sane - s-a-n-e -
that you should set
forth that you do expect to seek additional
revenue, and I wouldn't care too much what
statements had been made as far AB you're con-
cerned. Now, if it 1s necessary to build a
bridge to past statements, you can always say
that the effective operation of these taxes
which you are suggesting will not come into
play for some time to come; that, as we pointed
out in earlier editions of this statement, you
are talking about a sort of B. five-year plan
at the minimum and that, supposing you passed
an income tax and estate tax this year, you
wouldn't commence to get any money for several
years ahead of this.
But I think you would be, in my judgment, dere-
lict in presenting a statement of fiecal policy
if you did no more than say, "Well, let's allow
a net loss carryover, let's do this, that and
the other thing, to ease some of the creaks in
the wagon," without putting & motor in the
thing.
H.M.Jr:
Well, that's a thing I've wanted to discuss.
I mean I never had & more difficult time or
worked harder in my life - I think we had either
seventeen or twenty-seven drafts of the statement
I gave in November '37, as you know.
162
- 8 -
Magill:
Uh-huh.
H.M.Jr:
And when you read over that part which has to
do with taxes, I could almost repeat that state-
ment word for word; I wouldn't want to change
a word of it.
I don't know whether it 1s or 18 not necessary
to have the tax base 80 that it will produce
more revenue under similar business conditions
than it does now. And that leads me to what
Shoup says, that the advantage of - the princi-
pal by-product of a Job like this 1s that it
does clear my own thinking, and I haven't been
thinking hard about it in a year and a half
because - oh, what was the use? You see? And
another reason is that George Haas Just visited
these principal business concerns, who report
to us their new orders each week and the one
thing they unanimously all said was that they
are all buying on & hand-to-mouth basis; they
are only buying each day what they need and
they won't make any commitments because they
don't know what the policy is in Washington.
Take this automobile situation. I'm sending
Seltzer back again Monday. They had all de-
cided that they had enough cars on hand; they
were afraid they weren't going to do any more
for the moment. The buying seems to be 8. little
bit above what they expected - rather their
sales - and they may have to revise their pro-
gram. And they are running into an August
schedule. That's secret. There 1s a secret
agreement to bring out models in August. They
are not prepared for this increase, getting
ready for their August models. Parts manufac-
turers are getting their orders. And they may
find themselves in condition that they can't
take care of their business.
I'm trying to get a car for my wife and the
earliest delivery we can get is three weeks.
I mean it's just - I mean proving that there
is this hand-to-mouth situation. I mean you
can't - you've got to go down, and McReynolds
has to use all his political influence in
163
- 9 -
order to get my wife a Buick. I mean it's
ridiculous, it's absolutely ridiculous.
McR:
They are not manufacturing except on orders.
There's nothing in the factory except on orders.
They've got to have 8. signed order before they
will take anything off the line.
H.M.Jr:
I'm illustrating. And I think that here in the
Treasury we definitely contribute toward that
situation, because the people don't know. What?
Magill:
You're right.
H.M.Jr:
See? Johnny, do you want to say & piece?
Hanes:
No, I haven't finished reading - I Just saw this.
H.M.Jr:
Just throw that aside a minute.
Hanes:
I agree - you know how I feel about this other
thing - I agree with you. I think you ought to
start off the statement with the budget - start
out with a policy that's going to lead us to a
balanced budget within a period of three to five
years, if possible, and state very definitely
what the policy 1s and then suggest preferably
some alternatives rather than specific plans
for taxation.
H.M.Jr:
But as to the
Hanes:
As to your main philosophy and the objectives,
I am in thorough agreement with it - absolutely.
Duffield:
Could I ask Mr. Hanes - would you tell us a
little more about what you mean by alternatives?
Hanes:
Well, I will when we get started talking about
details.
Duffield:
All right. I guess I'm too interested in details.
H.M.Jr:
Well now, let me just stop and catch my breath
a minute. Mac, do you want to express yourself!
McR:
Well, I am delighted to see something of this
kind done, because I think the most effective
and the most logical criticism there's been
Unclassified
164
- 10 -
from responsible sources of this Administration
has been the lack of & statement of fiscal
policy during the entire Administration, and
I think you can oure it here if you oan get
this out in & responsible way. I don't think
there is any question about that. Just 8.8 an
observer, seeing what the reactions have been,
I think the most logical criticism that's been
made 1s the lack of such a statement of fiscal
policy.
H.M.Jr:
Herbert?
Gaston:
Well, I think a frank statement as to what you
believe as to future fiscal policy must be
reassuring, even if the statement includes an
indication that the tax structure - the yield
will have to be strengthened, because I think
everybody fully believes that anyway. And the
mere fact that you have some fairly definite
1deas will itself be reassuring. And I think
you can strengthen that somewhat by some
specific indications of the direction in which
you think tax changes ought to go.
of course, there are these various statements
that have been made, but I think that can be
overcome if, for instance, we can find changes
in the corporate tax structure that for the
present will not yield more than the corporate
tax structure itself yields, and if we can
find changes in the individual structure 80
that it will not for the immediate present
yield more than the present structure yields.
I think that will be as nearly in compliance
with these statements that have been made as
anyone can reasonably expect.
H.M.Jr:
Blough?
Blough:
Well, I am very strongly in favor of it. I
think 80 far as those statements are concerned,
they oughtn't to be too great a barrier. For
one thing, many of these changes should pro-
bably not be made effective until 1940, and
that might be one way of explaining one's way
around these statements. That 1s, there are
165
- 11 -
no new taxes affecting present business, which
is perhaps the thing that was particularly in
mind; I don't know. But I am very strongly in
favor of the policy.
H.M.Jr:
As to the approach?
Blough:
That's right.
H.M.Jr:
Well, we've got a unanimous opinion here. Well
then, 1a it the thing to do, because in fairness
to everybody, seeing that you might say I have
changed as to the method - although I did say
to you (Duffield) that I wanted to bring the
fiscal thing up to the front, you remember.
Duffield:
Uh-huh.
H.M.Jr:
And you disagreed with me, what? And the second
I saw that fiscal thing - I mean the more I saw
it - I made the statement that I'd rather go up
on the Hill and say that and say nothing else,
didn't It
Duffield:
Yes.
H.M.Jr:
I asked who brought that particular thing in,
remember? We were teasing about it. I don't
know who did.
Duffield:
Shoup.
Shoup:
The first draft?
Gaston:
The fiscal thing was Ros's.
Magill:
That's mine. And that's the bad feature of this
present draft; in my judgment, you've eliminated
the best feature of the first draft.
Duffield:
Well, we'll argue about that.
Magill:
I mean if the Secretary wants to do what he says
he does, then all that stuff ought to be not only
back in but ought to be at the beginning, and you
ought not to have all this monkey business in here
about let's do this thing, that thing, some other
little thing.
166
- 12 -
H.M.Jr:
Well, Ros, in order to give everybody time -
I mean after all I'm trying to do something
which I hope will be very helpful - now
wouldn't you men want to go to 8. room and
chew this thing over, or do you want to
probe me some more?
Magill:
Not necessary, I think.
Duffield:
I would like to say one thing.
H.M.Jr:
Do you want to probe me some more?
Magill:
I don't think that's necessary.
Duffield:
I don't believe the Secretary's situation is
exactly as a good many of us stated here this
morning, that there has been no fiscal policy
and that we can speak accordingly, because as
I understand it there has been a very definite
policy of leaving the present tax structure
approximately as it 18 and letting the budget
balance itself, BO to speak, as business im-
proves. Now, a different statement seems to
me not only to be 8. new statement but to differ
from 8. policy which has now for some time been
at least tacitly understood.
H.M.Jr:
I think you're right. I think that if I had to
explain 1t I would say that the policy of the
President was that we look forward to an
eighty billion dollar national income and when
we reach that the present tax base would balance
the budget. Now, I would say that that was the
President's policy. Now, what we are saying
here is that we are not satisfied with it.
Duffield:
That's right, precisely. I just think we ought
to understand that we are saying that.
Hanes:
Aren't we going a step further and saying that
you're going to try to help this economy arrive
at an eighty billion dollar income by taking
out such things as you feel are stopping the
progress towards that goal?
H.M.Jr:
Well
Unclassified
167
- 13 -
Hanes:
I think you are following definitely that
policy; what you are trying to do 1a to
remove the obstacles to the capital market.
Viner:
I think you ought to distinguish between in-
creasing the tax load and reconstructing the
tax structure 80 it gets its revenue in the
least troublesome way.
Hanes:
That's what I mean by alternatives. When I
said alternatives, I had in mind just that
very point, to suggest that over 8. period of
five years rather than over a period of one
year or two years - to suggest ways and means
by which the structure could be strengthened
and more taxes could be brought about at the
proper time, not necessarily now. But you can
say, "Over a period of five years, here are
the ways in which we can first remove the
deterrents to business," and by deterrent I
mean those things which are causing - which
are stopping the flow of capital to the
venturesome capital market. I'm thinking in
terms of taking away those things, starting
business going, coaxing, urging, cajoling,
urging or bribing, if necessary, to get capital
back into productive enterprise, because until
you do that you are not going to get ten million
people reemployed, and that after all 18 our
fundamental problem.
H.M.Jr:
Well, I think we're all thinking along the same
line. I think over a week I have been gradually
shifting the emphasis to & fiscal policy from
& tax policy, the fiscal policy being the key-
stone. And then in order to bring about an
orderly financial capitalistic system, what do
we have to do? We have to do what we all agree -
there are certain tax deterrents which - their
nuisance value far outweighs their productivity.
And those things should be removed in order to
bring about this thing which 1s going to make a
capitalistic system work.
But I think the first thing we've got to do is
to lay down what we think - where we're going to,
and say to Congress, because it is Congress in
Unclassified
168
14 1 I
the final analysis, will Congress lay down the
policy 80 that the man who has money to invest,
money to employ people and Jobs to give, will
go ahead and build a car. Last year, at least,
they were building cars - they took & chance,
Chrysler did, to build for seven days in advance
of orders. But now they won't even build -
last year Chrysler would run his factory for a
week; now evidently they don't run it unless
they've got a signed order. I don't know any
better illustration, and I don't know why we
can't use that B.B an illustration: that we
have arrived at a point where a manufacturer
won't manufacture unless he's got 8. signed order.
NoR:
of course, specifically what they have done 1s
to get orders from all of their agents, all of
their distributing agencies, for what those
fellows will sign up for, and then they out off.
In addition to that, if you want anything outside
of that, anything that hasn't been contemplated,
they've got to have 8. signed order before they
go ahead with it.
H.M.Jr:
Well now, again, does anybody want to probe me?
Shoup:
I would like to raise one further point if I
might, and that 1s with respect to the degree
of emphasis to be put on the effort to be made
to balance the budget eventually. Is there
something to be said for erring, if at all, on
the side of over-emphasis, because of the fact
that the forces in the economy working the other
direction are 90 strong? That is, looking at
this from the point of view of what may happen,
I am continually impressed by the results of the
breakdown of the past eight years of the former
psychological taboo against unbalanced budgets.
There has been, I think, a change in the mental
climate, BO to speak, of the country as a whole
that makes for a willingness to accept an un-
balanced budget, of course, much more readily
than formerly; and that breakdown - I don't use
that word necessarily in any value or judgment
sense - that breakdown, it seems to me, is still
going on and the actual chances of 8 balanced
budget during the next few years seem to me
personally to be 80 doubtful as things stand,
189
- 15 -
that any effort to get one must carry 8. good
deal of driving force behind it and possibly
err, as I say, on over-emphasis. I raise
that question rather for discussion; I don't
know.
H.M.Jr:
Let me philosophize a minute. I think that this
question of & balanced budget or fiscal sanity
1s & world condition that we have to meet with,
and that I don't want at this stage to raise
the taxes on account of the competition we are
up against outside America. And I'll explain
what I mean.
A month or two months ago I had a survey started
as to what proportion of governmental expendi-
tures was going for armaments. And the first
thing you run up against is Germany, which last
year spent for armament purposes somewhere between
sixty and seventy percent. And up to a year ago
England's fiscal policy and tax policy was held
up to us as an ideal policy; they were more or
less going along on B. balanced budget basis,
they were paying their way, and they had an
excellent tax system. And then over night they
Just had to crack that whole thing, throw it
to the winds. Why? Because they found they
were against & different kind of society, they
were up against a different philosophy. In order
to meet that, they couldn't go along on a balanced
budget basis. They threw it to the winds, and
they are now going ahead in this race of arma-
ments and they've got the disease of deficits.
Now, we can't sit here and say we're going to
have 8. balanced budget in one, two, three, four
years as long as this disease of armaments con-
tinues; it's contagious, and the last country
to succumb was England.
Now I just ordered the study to be made when
Chamberlain came out with his statement in the
House, and that said that if this thing continues
it means financial chaos for everybody and every-
body 1s headed towards a precipice; but we are
all going that way.
170
- 16 -
Now, again going back to Germany, what are they
using for money? They are no longer - they
first used the tax receipts last year - not tax
receipts - they used bills which were only
cashable when a contract was completed. They
used that up and now they are giving a fellow a
tax receipt which - money which he can use to
deduct from his income tax if he uses - I think
it's up to forty percent or something. I mean
they exhausted the one scheme and now they've
got this. And Dr. Schacht, who tried to keep
some sort of order, was forced out. His second
in command - what's his name?
Viner:
Brickmann.
H.M.Jr:
Not Funk. No, Brickmann made a statement which
I understand was more or less along sound finan-
cial lines, and they clapped him into an insane
asylum. That's true. I'm right. And you're up
against that sort of situation.
And, as somebody put it, on the first of March
the German cash till was empty, 80 they walked
across the border in Czechoslovakia and stole a
hundred million dollars from the Czechs.
Bo when you're talking about balancing the budget
and you've got an armaments bill of the kind that
we have and you're up against that kind of fiscal
policy, it's just like - a person has to be
realistic and I don't see why you can't say some
of those things in this statement. And just to
say, "Well, we're going to increase the taxes
another billion dollars" - that isn't going to
solve anything. It's the same thing we're up
against in world trade. And to think that trade
treaties, when you're up against this other sort
of technique
After all, these people that get these countries -
I don't know how true this statement is by this
Russian General in this week's Saturday Evening
Post, that they secretly transferred most of the
Spanish gold to Moscow - I don't know whether
it's true or not, but they say that most of the
supposedly Spanish Government gold 1s now in
Moscow. But I mean you've got these - literally
Regraded
171
- 17 -
these bandits, and here we are 8 democracy and
we are talking about a fiscal policy.
Well now, why not say some of this stuff? I
mean I don't want to be in the position - and
what I've always said is that to be thoroughly
consistent and in order to meet this thing and
to prove that this kind of Government is right,
we've got to make our machinery internally go
better than we have ever made it go before;
and the old machine isn't working good enough
now.
Now, Johnny Hanes says to even bribe them. I
haven't gone quite that far. I'll say I'll do
anything that's honorable to adjust the taxes
to make our internal economy work, BO that after
eight years of Mr. Roosevelt you can say, "Well,
this kind of Government works ," and not say
that you've got to do the way the Germans do,
that eighty percent of their business is on a
unit basis and they only use twenty percent for
cash. Now what's the use in talking in terms
of a little this and a little that when that's
what we're up against?
Now, why can't I blow some of this stuff into
this speech?
Shoup:
Well, I think the general point
H.M.Jr:
I mean that's the kind of thing England up to
now - 1a it six months or twelve months ago
that they suddenly came out with her armament
program?
Magill:
Between the two, I think.
H.M.Jr:
Well, it's somewhere in there. Up to that time
she was going along, setting aside 8 little money;
then over night - bingo! - they come out with
two and a half billion dollars in a rearmament
program, and there goes their fiscal policy. Now,
that's the kind of competition we're up against,
and we are going to arm and we are going to be
strong enough that we can defend ourselves.
Unclassified
172
- 18 -
Now, how am I as Secretary of the Treasury,
going to explain this to the people so that
they will understand it and still not have them
send me to an insane asylum?
Shoup:
It would be important then, wouldn't it, to
have the statement realistic in the sense that
it wouldn't promise too much. I think that was
what I was attempting to get at indirectly, in
the sense that it wouldn't give the impression
that the thing is easy and we'll just do it by
saying something about it; rather, that we are
up against a really difficult problem and that
the degree of the difficulty 1s the measure of
our earnestness about it.
H.M.Jr:
Well, as I say, the picture 18 about the way I
have painted it. We must quiet the fellow, not
give him narcotics, but give him food in his
stomach 80 that he will be quiet and go to work
and make our own internal economy click. That's
the task, isn't it?
Shoup:
Exactly.
H.M.Jr:
What? And what I am asking for isn't an easy
thing, because nobody in the world has solved it.
Now, can I get up and say that kind of a thing?
Jake says we haven't said it. The reason we
haven't said these things 1s because they are 80
darned hard.
Now, we did get out - and with his help - a
thirty-page statement on gold after four years,
which has been universally accepted. I have had
no - it's a good statement, but it took us four
years in order to express ourselves, and we
finally came out with what we've been trying to
do on gold. And I was pleased to see the National
City Bank - in their monthly bulletin they devoted
a lot of space, quoted it liberally, and every-
thing else. They are okaying our gold statement.
But it took four years, Jake.
Viner:
Yes. The situation 1s now quite different in
these two respects: that the gold statement
could have been made substantially, except for
some historical changes, a year ago or say, within
a few months after the Tripartite Agreement.
173
- 19 -
H.M.Jr:
That's three years; that's three years.
Viner:
Your problem was simpler there than 1t 1s going
to be here. I am again returning to the point
I made originally, that on gold the Administration
has left that to you and you can say within limits
what you please; you can form your policy and it
will be accepted as the Administration policy.
Even Congress leaves you alone on that. But here
you are in something where every spending agency
has an interest, where the advisers of the Presi-
dent have an interest, where the President has
an interest, and where the Congressmen have &
vital and burning interest. So you've got a
tougher job here; that's my point.
H.M.Jr:
It's the toughest nut to orack in the whole Adminis-
tration: to get out a statement like this. I
don't know anything that 1s more difficult.
Gaston:
Because it involves the whole budget policy.
Viner:
That's the point.
H.M.Jr:
Now, I said it in '37, I still believe in it, and
the President believed in it then, and then cir-
cumstances sunkua. Now a year and a half have
passed and I'd like to, with the help of you
gentlemen, try it once more. It is certainly
a worthy cause now and it will be terrifically
difficult to do, but I want to make the effort.
Now, I don't know, when we get all through and
done it may look 80 terrible that we may not
do anything.
Viner:
One question I'd like to ask. I haven't read
this draft; I read the earlier draft, and as I
recall it that takes the present level or even
a higher level of expenditure for granted through
the years. And as & tax statement, now, 18 that
what you are after, or are you after a budget
policy statement including expenditure as well
as revenue?
H.M.Jr:
Well, when you talk budgets do you mean fiscal?
Viner:
Well, by the budget I mean the two sides, not
merely how you're going to get enough revenue
Regraded
Unclassifie
174
- 20 -
to meet this expenditure program but what sort
of an expenditure and revenue program you are
going to have.
H.M.Jr:
Do you mind if I make another little speech to
try to answer you? I don't know whether I can
answer you or not. I don't know what the
percentage at present of our armaments expendi-
tures is; whatever they are, they can't be
reduced and if they go any way they'll go up.
The only item that can possibly be reduced 18
that one which goes toward employment.
Viner:
Relief, you mean.
H.M.Jr:
I use the word "employment," because I think of
public works, roads, and relief.
Viner:
Agriculture.
H.M.Jr:
Agriculture, which 1s also relief. And I think -
I don't know, I think that roughly it's a three
billion figure that I carry. Does that include
armaments or is that just
Magill:
That's relief and agriculture, I think.
Viner:
Relief and agriculture.
Magill:
Three billion three or something like that.
H.M.Jr:
All right. That's the only figure you can play
with.
Viner:
That's & pretty large sized figure; that's a
sizeable figure to play with.
H.M.Jr:
All right, now here we are faced - we are right
now entering the peak of expenditures, and if
Congress doesn't do something - on account of
this war scare in Europe we are not getting the
benefit of the present expenditure level. Once
it's spent, it's gone; it isn't something that's
cumulative. Is that right?
Viner:
That's right.
175
- 21 -
H.M.Jr:
And sometime in July, August, or September the
thing will begin to slump off. Therefore it 10
desperately necessary, unless we are going to
have a really severe depression, that ye do
something to get private capital to work. Now,
if we could do something which really would con-
vince these fellows they could go to work - and
we've seen the thing turn over night in France -
then the present level of expenditures could go
down because the relief bill would go down, and
that's the only answer I could give you. Can
we do something now, in the next sixty to ninety
days, through the legislative channels which will
convince the people that they should go to work
and build cars ahead, etcetera, etcetera, and
give people jobs, or if we don't then the only
other thing is - the present level of expenditures
won't even be enough. Now does that answer you?
Viner:
Well, it answers me - at least it indicates that
this memorandum will refer to the expenditure
level and its determinants, and not merely to the
revenue aspect itself. It 1s an answer.
H.M.Jr:
We are at the crossroads once more. Once more
we are at the crossroads. Are we going to make
one last effort to let private capital do this
job or are we going to sit back and let the
Government do it? And, being at the crossroads,
I'd like to point out once more that sentence
that the driving force of private capital 1s
the only avenue which I think can save the
capitalistic system. I'd like to do it once
more.
And you've heard me make the statement 80 fre-
quently that I find I'm riding two horses like
an acrobat, one foot on old "Capitalistic System"
and the other one on "State Socialism" and that
these two horses separate and I fall between the
two of them and both trod me under and kill me.
And that's been the great trouble; we've had our
foot on two horses and they have gradually been
going further and further apart.
How does this strike you, what I've been saying
the last ten minutes, Johnny?
Hanes:
All right. I like it. I agree with it.
176
- 22 -
H.M.Jr:
But I don't think in talking about fiscal policy
that you can disregard what other countries are
doing in the rest of the world. Now, those
figures on war armaments and the proportion they
bear to expenditures - you've (Duffield) got
them.
Duffield:
(Noda yes).
H.M.Jr:
The expenditures of the rest of the world. That
work has all been done. We've had the help of
the State Department. To show you what they
think of disarmament, they couldn't even remember
who was in charge of the Bureau - they had a
Bureau on disarmament and the poor old thing
hadn't been talked of for 80 long that he was
a forgotten man over there. It's tragic.
This 1s my day, gentlemen, subject to an adjust-
ment to get the best out of you people. I've
got two gentlemen coming in at 11:00, I've got
Cabinet at 12:00, and I can not go to Mt. Vernon
with the President and be available right after
lunch, since the Federal Reserve are coming
back at 4:00. Now, would you people want to
see me after lunch, or would you want to see me
Viner:
I think after lunch would be too soon. I think
that this 1s quite & job and
H.M.Jr:
Well, when? I mean I'd save my - Mr. Eccles
I will only give a half hour, 4:00 to 4:30.
Viner:
You mean coming in connection with this? They're
coming in this afternoon?
H.M.Jr:
No, this is
Duffield:
No, he'll give Eccles a half hour.
H.M.Jr:
No, this thing I'm doing with them is in connec-
tion with what I call my trial run in case some-
thing should go wrong in Europe. He's coming in
with George Harrison from 4:00 to 4:30.
Duffield:
We could be back at 4:30?
177
- 23 -
Viner:
4:30, yes.
H.M.Jr:
At 4:30.
Viner:
Is that - don't you think it's better than
trying to have
Blough:
Yes, we can't do the other, I'm pretty sure.
Viner:
No, we can't do the other.
H.M.Jr:
Then I can go to Mt. Vernon.
Magill:
I'd rather do it at 3:00, but if you want to
go to Mt. Vernon
H.M.Jr:
No, I've already told Mrs. Morgenthau we weren't
going.
Duffield:
Do you (Magill) think we will be through at
3:00?
Magill:
No, I don't think we'll be through at 3:00,
because this thing this morning opens up &
lot of avenues. However, in my judgment it
18 important to see the Secretary again at
3:00 with what we have at 3:00.
Duffield:
Rather than waiting until
Magill:
Yes.
Viner:
I don't think it will work out that way.
Magill:
Because as I see the net of this thing this
morning, why, it's a matter of another week or
ten days.
Viner:
Well, it's not a hurry-up thing and it would be
& mistake to make it a hurry-up thing. I don't
know what the program is, are we working on this
tomorrow morning? Are you?
H.M.Jr:
What I was having - also in striet confidence -
I have invited - I think they're coming; haven't
heard yet - Hansen here tomorrow and Walter
Stewart and Riefler, and that was something
178
- 24 - -
entirely different. That was to try to invite
you people, in case of war, to be - the four
of you to sit as a Brain Trust for me.
Now, when do you people want to see me?
Duffield: I'd be willing to come back at 3:00 o'olock on
this.
Magill:
I'd like to see you at 3:00, if I can, because
I pretty nearly have to go back at 4:00 this
afternoon.
H.M.Jr:
I see. I'm available at 3:00 o'clock. Then
we'll meet again at 3:00.
179
RE TAX STATEMENT
April 14, 1939.
3:00 p.m.
Present:
Mr. Hanes
Mr. Gaston
Mr. Duffield
Mr. Viner
Mr. Magill
Mr. Shoup
Mr. Blough
Mr. McReynolds
H.M.Jr:
where are we at?
Magill:
Chairman Viner.
Viner:
Chairman Magill.
H.M.Jr:
I'll tell Hanes we've started.
(On phone) Tell Mr. Hanes we've started.
Magill?
Magill:
Well, there - I'll reluctantly act as Chairman -
there are two things, two major things I think we
are bringing back to you for your answers. One is
over-all; that is, who is to do this? And I feel,
at least, and I believe some of the others share
my feelings, that the best thing from your point of
view would be to designate some one individual and
have him prepare it, and then if you want to have any
of the rest of us check it over
....
Viner:
Prepared here. Has to be here.
Magill:
Yes, it ought to be prepared here by somebody who
is here right straight along.
Then there are a series of specific questions that
have occurred to us; we have spent the morning dis-
cussing matters with each other and also going over
some of the various declarations that have been made
from time to time with respect to fiscal policies.
If you like, I'll just run over some of these ques-
tions that have occurred to us.
One comes out immediately. Are you willing in this
Unclassified
180
-2-
statement to - or do you want to declare yourself
for increased revenue by way of increased tax rates,
or do you wish to speak primarily in terms of
specific tax allowances of one sort or another?
In other words, is your concept of proper fiscal
policy one in which we attempt to secure revenue
over a five-year period and to balance the budget
by means of decreasing expenditures on the one hand
and increasing tax rates on the other, or is your
philosophy rather that we should make some of these
tax allowances and that as a result of this and
possibly other Administration action at this time
national income will increase to such B degree
that no increased tax rates will be requisite?
Now, what's the philosophy there? I get the
impression that some members of the group here
feel that it would be undesirable to indicate
in this statement of your own a view that higher
tax rates and increased tax revenues secured in
that way may be necessary if the budget is to be
balanced in the course of five years. Now, tying
right in with that, do you want to say anything in
this statement regarding the level of expenditures
or not? And then, simply as a part of the same
picture, to what degree are you willing to commit
yourself to a five-year program of balancing the
budget?
Then we have various questions with respect to the
character of the statement. They are more or less
of this sort:
To what extent must the draftsmen of the statement
pay attention to what has been said in other parts
of the Administration, either - or such things
as might be said by Mr. Accles or Mr. Hopkins or
some of the other people?
Now then, more concretely, is this statement to be
shaped primarily as a personal statement of your
own, or is it to be shaped as a statement which is
to be regarded as an Administration statement?
Is it to be shaped with a view to obtaining the
President's approval? Is it to be shaped as a
181
-3-
statement which the President will permit you to
give without his approval? Or just what is the
character of the statement?
I think that's about all the jaw-breakers that I
need to give you.
H.M.Jr:
"ell, I want to be fair to myself as well as the
rest of you. I'm watching the clock, and I can't -
on any one of those things you can very well run
around the hour. It's ten minutes past three and I
can't in the next twenty minutes - because to be
mutually useful to each other, it ought to be a
discussion and not my just laying down the law, so
to speak. The only way 1 have ever developed a
statement is through exchange of ideas, and I
frankly - I'm just stopped by the clock.
Viner:
well, some of these questions are very personal;
I don't think anybody can answer them but you.
I mean I don't see how anybody could draft a
statement - its whole tone and character might
change according to how you answer these questions.
H.M.Jr:
I can - some of them are very easy to answer,
others are very difficult.
"ill I show it to the President and consult with
the President? Of course I will. I mean the only -
to make the statement useful it would be my hope and
desire to draft such B kind of statement that it
would be an Administration statement.
Now, can I stop Mr. Bccles from talking and sniping
and double-crossing me? No.
But as far as the President and myself are concerned,
yés. I mean the President, last time I made a
statement, was kind enough - actually he went over
it three different times. "hen he got through, he
was satisfied; and he spent & tremendous amount of
time on it.
Now, as to - while we may not have a more clear
fiscal policy, if anybody's to blame I'm to blame
that I haven't brought it to his attention more
forcibly; but I haven't felt that I saw the thing
182
-4-
clearly enough myself. I'm not sure that I do
now.
But I don't want to repeat what I said this morning.
Put what I'd like to do is to get something down where
at least I felt satisfied and the people advising me
felt satisfied - felt it was a worthwhile statement.
I don't want to go up and say that I'm in favor -
and Hanes agrees with me on this - that I'm in
favor of incorporating all corporation taxes into
one and have a flat tax. 1 mean that's about the
position that we're in now, and by - without going
into the whole thing, but we - without going into
any Right? explanation, we were traded into that position.
Hanes:
That's right.
H.M.Jr:
Now to go up and make a statement like that for
myself would be meaningless and - well, it wouldn't
accomplish what I want. I mean I want a double-
barreled effect. I want something that will be
helpful on the short run, by which I mean over the
next - I mean which would catch on within three
months, let's say, and have a beneficial effect;
and the other barrel is something which would tend
to satisfy the people who honestly are worried about
which way we're headed over the long time, by which
I mean three to five years.
Once it's down and I'm satisfied and the people I
show it to are satisfied, the people that are help-
ing me on it, of course, I want to take it across
the street and get nis ideas. The man is a very
able person and he's got & lot of ideas. And as
a matter of fact, when you go over the things we
have brought to him now, the only thing that he's
at all bucked up on is this question of the surplus
tax; and I've asked two or three times for an
explanation for myself - to explain the incorporated
pocketbook law of 137, which takes the place of that,
which I've been told takes the place of it, and why
we don't need the surplus tax. I mean the thing he
was worried about was the incorporated pocketbook
as well as ... And I haven't got that.
But when you go back over the time Magill and I saw
Unclassified
183
-5-
him in November 137, or October - I don't know
when it was -
...
Magill:
End of October.
H.M.Jr:
... we weren't so far apart as to the tax changes.
But I think it's a whole question of how we approach
him. But I very, very much want to bring it to his
attention, I want to consult with him, I want to get
his advice, and I'm very anxious that it should be
an Administration statement as much as the November
'37 statement was.
Now, does that take care of that question? That
was the last one he had on the list.
Viner,
What would you say on the question of deficit financing
and pump-priming? If it would be an Administration
statement, the Administration is so committed to big
and even g rowing deficits whenever the economy isn't
working well that you can't give them a five-year
plan along those lines which will ever get to a bal-
anced budget, or certainly which would promise it.
H.M.Jr:
Well, the thing has never been put up to the Presi-
dent on that basis. Now, after all - to answer you -
I've never had the opportunity, and I think nobody
else has, of sitting down and ever talking about
more than six to three months on the question of
relief. I don't think he's committed himself more
than seven months in advance on relief or spending.
"gain coming back, I keep blaming myself, although
I'm only one of many; but I don't know how he'd
react if we came to him with a fair plan on a fiscal
policy. I certainly wouldn't be timid about bringing
it to him, and I think I'm negligent if I don't.
Magill:
Well now, I had this idea.
H.M.Jr:
That's the way I feel. I mean there's a double-
barreled thing: the three months, something that
will catch on within three months; and something
that will be good for three to five years.
Magill:
I had this idea to start with, but I gathered that
I was almost alone in having it this morning, and
that was that what you wanted from us, at least from
184
-6-
us outside the Treasury, was our own best judgment
as to the measures which should be taken along
fiscal lines at this time, and that we should
give you that without pulling punches or shading
it any on account of what statements might have
been made at a time or another in the past.
H.M.Jr:
that's right.
Magill:
Now, I think one reason why the statements that we've
got now are watered down to the degree that they
are, has been by means of the attempt to take what
we have given and make it into something - bridge
it over into Administration policy/one sort or
another.
of
H.M.Jr:
I don't think that's fair to the people who have
worked on it, because the only watering that I
know has been done I'm responsible for. I've said
that there are two things which I wasn't sold on.
One was the abolishing the intercorporate dividend,
the other was consolidated returns.
Magill:
That isn't what I mean at all.
H.M.Jr:
I've said that consistently, remember - when you
first brought it to me.
Magill:
No, on that - I perhaps should just say ....
H.M.Jr:
And I don't think they are important in a big broad
program.
Magill:
I should say, just to clear myself, I'm sure, as
far as I'm concerned, any of the propositions which
I might suggest I should expect you to correct and
change or throw out, as you might see fit. That's
quite within the possibilities.
On the other hand, I took it and I take it from
what you have just said that what you want presented
to you is a statement which represents the best
judgment of the people that are preparing it, and
doesn't represent their ideas of what Marriner
Accles might think, or Harry Hopkins might think,
or somebody else might think.
H.M.Jr:
These people have worked with me closely enough by
now that 1 think they know that I've never asked
185
-7-
them to give me & politic statement. If I've asked
them, I've never got it.
So I'm not asking for that, and what I was asking
was that - and I said it was one of the most diffi-
cult tasks I have ever had confront me - that,
in view of the world situation and the world
competition in spending money for armaments, what
is a good sound fiscal policy to see the United
States of America over this present desperate situa-
tion? That's what I want.
Now, I don't know whether - if my memory serves me
correctly, I don't think that Viner wants additional
taxes at this time.
Viner:
Oh no. This year?
H.M.Jr:
Yes.
Viner:
No. Dut the issue is presented differently, in
terms of a five-year program, which would show a
way whereby the budget would be, say, probably
balanced within five years, and there you can
space any additions to taxation that might be
necessary, as you think is expedient. But I'd
certainly say that no statement ought to come from
the Administration urging any net increases in tax
rates this year; I'd say decidedly not. Psychologi-
cally the situation is not at all proper for that.
H.M.Jr:
Well, that's the kind of advice that 1 want. Then
you fellows say, "Well, do you agree with that or
not?" and then I can say "Yes" or "No." and I
would say that the best judgment that I have and
that the President has - that I would underwrite
what he says for this year.
Now, where do we go the second, third and fourth
year? That's the sort of thing, you see. And
everybody seems to be sort of - a kind of - over-
polite; I don't know just what is the matter.
Duffield:
That meeting yesterday spoiled you.
H.M.Jr:
"hy?
Duffield:
Because they weren't polite in that one.
186
-8-
H.M.Jr:
Oh.
No, but we've had - the last two days we've
accomplished a lot, and I don't feel very peppy;
I haven't got very much drive to put into this thing.
Magill:
Have you got any
....
Viner:
"hat about
....
Magill:
... observations you want to make
Viner:
the expenditure side? The drafts that I read -
I didn't have time to read all of them; I read two
of them - the drafts I read said virtually nothing
about expenditures. And in the first place, you
can't talk about any program of balancing the
budget or unbalancing the budget unless you take
into account the expenditure side, what is the
schedule of expenditures and what should it be?
Now, there again I'd also say that I would not
support any deliberate reduction in expenditures
this fiscal year.
Magill:
"hat would you do over five years?
Viner:
But over five years - well, I'd have to study the
lay-out; I haven't got a figure on hand now. Dut
I feel pretty sure that there isn't enough in our
program that's worthwhile keeping for what it does
at the cost it involves, to justify more than a
six and a half billion dollar top for our - as a
continuing load.
Magill:
Get it down to six and a half and I'll give you a
Jefferson nickel.
Viner:
Well, there let me say that that's the kind of
change that can't be made without some form of a
political convulsion, so that the existing Admin-
istration, instead of eating its own words, is
just lambasting a previously ousted Administra-
tion. In other words, it will be a new Adminis-
tration that will put our budget in order. That
seems to me perfectly clear. -fter six years or more,
it will be impossible
Hanes:
There's no way to get the budget reduced - the 140
budget.
187
-9-
Viner:
I mean the plan on the books. 1 think it's quite
clear that it will have to be a new Administration.
Hanes:
This Congress is going to appropriate somewhere in
the neighborhood of ten billion dollars.
Gaston:
It seems to me that the exact dimensions of the
budget over the next four or five years don't neces-
sarily have very much to do with your tax program.
You've got some necessities which go beyond your
limitations in the way of reasonable tax increases,
and it seems to me you can work out a tax program
that fits the situation in either case. If it's to
be a tax speech rather than a budget speech, I think
your program would be about the same in either
event, whether you anticipate expenditures in the
neighborhood of seven billions or whether you antici-
pate expenditures in the neighborhood of nine billions
over the next three or four years.
Viner:
I don't see that. What's the line of reasoning?
here's a two billion dollar difference, and to say
that doesn't matter is
....
Gaston:
That isn't the reason. The line of reasoning is
that our necessities outrun our limitations in the
way of feasible tax increases, SO that our limit
of expenditures lies outside of what is feasible
in the way of tax increases over the next five
years.
Viner:
Well, I wouldn't like that approach, because it
assumes that the expenditures are inevitable and
that there are limitations on our tax program
independent of whatever our expenditure program
is; whereas, my own advice would be that you
mustn't speak of the tax program except in con-
stant reference to the expenditure program, and
particularly to Congress.- that they mustn't
ever separate expenditures from the notion of
the necessary taxes by which to defray the expendi-
tures.
Gaston:
We can just be hopeful about the expenditure side.
Viner:
That isn't to me fiscal management at all; that's
something else.
188
-10-
Shoup:
Well, as a matter of fact, isn't one of the chief
points of bringing up this whole fiscal policy
question the point of reminding ourselves and
Congress that there must be this tie between taxes
and expenditures ultimately?
H.M.Jr:
There must be what?
Shoup:
This tie between taxes and expenditures ultimately.
That is one of the main purposes of this statement,
that it would be one of - the beginning of a series
of constant reminders that that must be the case even
if we are not very hopeful of in fact getting the
balance at
....
Gaston:
That doesn't mean you have to fix your expenditure
limits over the next four or five years, that you
have to be definite about that.
Viner:
I'd say you ought to be definite within limits; you
ought to relate definitely your tax program to
whatever expenditure program you lay down.
Gaston:
You can't lay down the expenditure program, I should
say, in this; I don't feel that that is the object
of the speech, to lay down an expenditure program.
Shoup:
If we can't lay down an expenditure program, we can't
lay down a budgetary or deficit-balancing program,
by definition.
Viner:
All that's left, which is not important, would be
some recommendations as to changes in the tax
structure which would either maintain their yield
or reduce it or increase it.
H.M.Jr:
"ell, I don't agree with Gaston. I agree with
Shoup.
Hanes:
Don't agree with what?
H.M.Jr:
I agree with Shoup, that if you're going to talk
about fiscal management you've got to talk about
both expenditures and taxes - 1 mean if the thing
is going to make any sense.
danes:
I'd like to see you put down 8 statement there that
will sound from every standpoint, because that's your
189
-11-
job in this Government. You're the fiscal officer
of the Government, and if we could get together
a statement that was sound, no matter whose views
it represents - it would represent your views no
matter who else it represented - I'd like to see
you make that statement and make a fight to make
that statement as sound fiscal policy for this
Government to pursue. Now, whether they pursue it
or not - that's beyond your control.
H.M.Jr:
And I think it's a fight not only worth making,
but, as far as domestic things are concerned, that
I'd rather make than anything else in the Treasury.
Hanes:
Sure.
Duffield:
May I suggest then ...
H.M.Jr:
Excuse me, I want - Mr. Magill ought to be going if
he's going to go; you can stay a bit, can't you,
Shoup?
Shoup:
Yes, I can stay a little later this afternoon if
you like me to.
H.M.Jr:
I would like you to.
Shoup:
Very well. I have to leave this evening, but I
can stay on now.
H.M.Jr:
If you could stay on.
Magill:
I can stay if you want.
H.M.Jr:
Well, that's - I thought you said you had to get
the four o'clock.
Magill:
It would be better. I'd rather not go up on the
night train. I've been two nights on the train.
H.M.Jr:
Well, thank you very much.
Magill:
Let me know if there's anything 1 can do up there.
H.M.Jr:
You'll ask Kieley for a car, won't you?
Magill:
Thank you very much. (Leaves)
190
-12-
Duffield:
May I
H.M.Jr:
Please.
*uffield:
I think if we're going to do that, this group has
got to be supplemented with somebody who can give
us some sort of an expenditure program, and I cer-
tainly don't feel equipped to sit down here and do
it.
6.2.Jr:
Well, Danny Bell's available. bell's available.
Tomorrow is nis last day at the Dudget; ne says,
"Thank God." I mean beginning with Monday we've
got nim full time. He knows more about it than
anybody else in the United States.
Shoup:
Would there be anything in the possibility of writing
the thing in terms of alternatives; that is, assuming
expenditures of X level, assuming at Y, assuming at
2 level; and then to get before the people some
general idea of the quantities involved, being not
very definite at all, rather indefinite, but just
uefinite enough to probe some of the possibilities.
If 1 got your chief objection, Mr. Gaston, it is
because you don't want to tie the thing down to a
specific figure.
Gaston:
My sole point was this, that the question of what
is to be the exact volume of expenditures over the
next few years can't be the final determinant about
what the tax program is to be. It is desirable to
indicate that the expenditures ought to be within
the limits of our tax resources; but 1 would say
that we would have to advocate about the same tax
program no matter what we fix as the probable tax -
the probable expenditure program.
Shoup:
I'm afraid I wouldn't agree.
Gaston:
Because we have so many obligations coming on and
because we have such a large volume of debt that
ought to be reduced, that it runs beyond the limits
of what we can feasibly do in any event; our neces-
sities outrun our capacities as to taxation within
the next few years.
191
-13-
H.M.Jr:
I think, if you don't mind - I think if 1 took
that attitude - I think it's that hopeless atti-
tude
Gaston:
Now, I'm not speaking about balancing the budget.
I'm not saying that balancing the budget is
hopeless. I'm saying that even if your program
of taxation and your program of expenditures would
be balanced, with a surplus, within two years,
that you'd still need that strong a revenue struc-
ture because you need to reduce your debt and you
need to anticipate the increase in Social Security
expenditures.
Viner:
Well, our worry - the difference is, then, that
our worry was that you shouldn't approve of a tax
program - our worry was lest you approve of a tax
program which would be only inadequate to match
a scale of expenditures already in prospect; your
worry is - yours is the same worry, isn't it? You
want the tax structure to be heavy enough to take
care of almost any reasonable expectations.
Gaston:
I think that our necessities outrun the limitations
in the way of a tax program.
Shoup:
You conceive of there being a maximum up to which
we must push the tax program, because even the
maximum can't be too little; is that
Gaston:
Can't be too great.
Viner:
I thought you had in mind the other thing, that
you were pressing down our tax program.
Gaston:
No.
H.M.Jr:
Just speaking to Gaston, I don't think there's any
real difference between you and Shoup.
Viner:
de would modify the tax program if it were found
that the expenditure program when laid down turned
out to be lower than was actually realized ...
Shoup:
Be would have more flexibility in the total amount
of taxes.
Viner:
But the difference is not very reat.
Regraded Unclassified
192
-14-
Gaston:
I consider our necessities greater than you seem
to consider them.
Viner:
Necessities for revenue. I couldn't tell whether
you meant necessity for ...
Gaston:
I saw I didn't make my point clear. I was just
merely saying that 1 don't think it is possible to
be very definite about expenditures, but 1 don't
think it needs to make much difference in our tax
program because that wants to be as strong as the
traffic will bear.
H.M.Jr:
I thought you were talking the other way.
Let's just - where are we now? What else can I do
to clear up?
Viner:
Well, you have certainly cleared up a couple things
on which I certainly wasn't clear, as to what sort
of a statement you were contemplating.
I think that I subscribe very much to what Magill
said, that this is - the job of making a tentatively
final draft of this is a job of at least a few days -
I'd say it's a job of a week - and that it ought to
be done by somebody here, not necessarily somebody
here now, but somebody that could be kept here for a
week, where he can consult you as questions come up
and talk to you, and where he can get all the
material that is available here and get the help of
all the resources here.
H.M.Jr:
I agree with you.
Viner:
I think I hope very much that you will make a
statement, that you will work out an outline of
your policy. I think you ought to, the Adminis-
tration and you owe it to yourselves to do it.
DO I say if you can possibly reach a statement
that is satisfactory to yourself - an attempt to
do it - that would be my advice.
H.M.Jr:
Well, that's the way I feel, but it's this - it's
this - I need the best help I can get; that's what
I need. And I think if I don't make it, then the
statement that you made is correct, that this
193
-15-
administration - then no one will make it in
this Administration.
Now, I don't - so it gets down to, can I - not
can I, but will I make it? And the will is there
if I canget the help; that's what it amounts to.
And I certainly don't expect the President to sit
down and write such a statement.
Viner:
"ell, there are now four or five or six drafts,
and my own opinion is that in those four or five
or six drafts there is already the material - 90
percent of the material for a good statement, but
that picking out what things to say and how to
say them, and the order in which to say them, the
distribution of emphasis, and checking up with you
as the questions arise - that that's a matter for
at least several days, and it would be a mistake
to try and rush it too much. After it's finished,
it ought to lay cold for a day or two, and then
the people go over it once more, because it can be
a very important statement.
H.M.Jr:
Well now, what I'd like to do is this, if I could,
and I think, if you don't mind, I'd like to talk
to you about what this other thing is that 1 have
in mind and then I'd like to have a few minutes with
Shoup and find out just what his plans are for the
future. Put If I could see each of you for a couple
minutes alone, see? Do you think that would be
possible?
Viner:
we're at your service.
H.M.Jr:
You're here for tomorrow, aren't you? And you're
(Shoup) going to go home ...
Shoup:
I can be here tomorrow or this evening as late as
you ++++
H.M.Jr:
If you can just give me ten minutes with Viner,
then if I could have five or ten minutes with you,
then I can tell better where I am at; and then if
you people would take what we've got for the rest
of the day and see if you can get something. I mean -
well, after - I think since we've talked possibly it
will clear the thing a little bit.
194
Copy of Memorandum given McReynolds by Secretary
Cabinet April 14, 1939.
President said - Bureau of Budget recommended that all
lending agencies be transferred to Commerce Department.
DWB one no- - and Pe would not agrer
Brounlairs Committee #************* make the suggretion
Construction of Public Bldgs. transferred from Procure-
OK
ment to Public Works. Can President create a new
department of Public Works - no Buthe can
Have Procurement contact Miss Perkine
create independent admmistration
with same jurisdiction as the
it were a sept
is
toes Lania 16mms/ree The
that 9 for the list, put
& X
195
April 14, 1939
To:
The Secretary
From: Mr. Hanes
The attached memorandum from Commissioner Helvering
is in accordance with your suggestion that I ask him to
examine this refund carefully to see that everything is in
order. I also asked the Commissioner if he would submit
this case to the Joint Committee of Congress. He tells me,
however, that the Joint Committee will not take jurisdiction
in any case involving less than $75,000 refund.
Both Commissioner Helvering and Phil Wenchel seem to
think the situation is perfectly clear, and if it is OK
with you I will let it take its normal course.
J.w.H.
TREASURY DEPARTMENT
196
WASHINGTON
OFFICE OF
April 10, 1939.
DIVISIONER OF INTERNAL REVENUE
ADDRESS ein?
: OF MM INTERNAL to LEVENUE
Memorandum for the Secretary:
In re: Hon. John W. Hanes,
Washington, D. C.
I have a letter dated April 1, 1939, from the Under
Secretary of the Treasury, requesting that an investiga-
tion be made of the claim filed by him for refund of in-
come taxes for the year 1936, for the purpose of deter-
mining whether the overassessment of income tax in the
amount of $6,750.89, indicated as a result of a field
examination, is entirely in order.
I have examined the file in the Under Secretary's
case, and I find that the overassessment in the amount
of $6,750.89 for 1936 has been correctly determined in
accordance with the law and regulations.
In the event this conclusion is satisfactory to
the Under Secretary, it is suggested that he execute
and return the agreement, form 873, previously mailed to
him, to the internal revenue agent in charge, 90 Church
Street, New York, New York, to whom the file will be re-
turned in accordance with the usual procedure.
Commissioner.
K.
197
April 14. 1939
901
The Secretary
From: Mr. Hanes
The attached memorandum from Commissioner Helvering
is in accerdance with your suggestion that I ask his to
examine this refund carefully to ⑉ that everything is is
order. I also asked the Commissioner If he would submit
this case to the Joint Committee of Congress. He tells no.
however. that the Joint Committee will not take jurisdiction
in any case involving less than $75.000 refund.
Both Commissioner Helvering and Phil Venchel seem to
think the situation is perfectly clear. and if 11 is OK
with you I will let 10 take its normal course.
JWH:jr
Regraded Unclassified
198
April 14, 1939
To:
The Secretary
From: Mr. Hanes
My brother, R. M. Hanes, and I agreed some months ago
to address the Indiana Bankers Convention. They have put
us both on the same program at a luncheon meeting May 4th.
I would like very much to fill this engagement provided you
have no objection. and also provided that conditions here in
the Treasury and abroad are such that I can be away.
JwH.
ok.
mh.
Regraded Unclassified
199
April 14. 1939
To:
the Secretary
From: Mr. Names
My brother. R. M. Hames, and I agreed some months age
to address the Indiana Bankers Convention. They have put
us both on the same program at a luncheon meeting May 45h.
I would like very much to fill this engagement provided you
have no objection. and also provided that conditions here in
the Treasury and abroad are such that I can be away.
JWH:jr
Regraded Unclassified
TREASURY DEPARTMENT
200
INTER OFFICE COMMUNICATION
DATE
TO
Secretary Morgenthau
April 14, 1939
FROM
E. H. Foley, Jr.
For your information
Larry Bernard reports that the legislation to continue the
Stabilization Fund, etc., is on the House calendar for debate on
Tuesday and Thursday of next week.
I shall continue to keep you informed.
E.rth.
Regraded Unclassified
201
April 14, 1939
FOR THE SECRETARY:
Leo Crowley is much exercised over a resolution
introduced yesterday by Senator Townsend, the ranking
Republican member of the Banking and Currency Committee.
The resolution, in effect, calls for the monetary and
banking study advocated by the Federal Reserve Board.
Mr. Crowley urges that you speak to Senator Wagner against
this resolution. He is going to speak to Senator Glass.
ESD
Regraded Unclassified
202
April 14, 1939
9:20 a.m.
HMJr:
Hello.
Earle
Bailie:
Good morning, Henry.
HMJr:
How are you, Earle?
B:
I'm fine.
HMJr:
Good!
B:
Henry, subject to the physical limitations that you
know I have
HMJr:
Yes.
B:
I'll put on B. Sam Browne belt with you the day
the European war starts.
HMJr:
Wonderful!
B:
And I think I'll be able to do a full job.
HMJr:
Wonderful !
B:
Now, Henry, let me ask you this question.
HMJr:
Yeah.
B:
On the first page of the "Times" this morning.....
HMJr:
Yes.
B:
there 1s an article about how interested the
Treasury 1s in getting investment trusts to buy up
all the foreign securities.
HMJr:
Yeah. No -- no that story is inaccurate.
B:
Well, of course it is, and here's -- I wanted -- I
want to talk to you about it for just a second for
this reason.
HMJr:
That's entirely inaccurate. I've got the statement
here before me that the Dow Jones has, which is
correct.
203
- 2 -
B:
Well, let me -- let me tell you what I know about
that story.
HMJr:
Yes.
B:
In the first place -- I don't know whether you know
that fellow Wasserman or not.
HMJr:
I once crossed on a steamer with him. That's ae much
as I know him.
B:
Well, he's a, I think, rather second-rate fellow.
HMJr:
Yeah.
B:
I talked to Robert Lehman about him.
HMJr:
Yeah.
B:
And Robert Lehman said that in his early days he had
been distinguished for not keeping his engagements.
HMJr:
Uh-huh.
B:
He said he thought maybe he had gotten over that later
on but that he was the sort of a fellow that Robert
Leaman wouldn't trust.
h
HMJr:
Yeah.
B:
He has been running around the "Street" pretending
that he was talking for Jesse Jones and tried to get
people to come to his office for personal advertise-
ment yesterday afternoon, and all of the leading
people in the industry refused to do 80.
HMJr:
Yeah.
B:
I tried to get ahold of Jesse Jones on the phone but
couldn't reach him, to ask him whether he was, by any
chance, interested. But you know very well that the
investment companies would have no proper voice in
any
handling of that foreign exchange problem.
HMJr:
Well
B:
They haven't got the resources
HMJr:
Well no, but we have our
204
- 3 -
B:
Huh?
HMJr:
When you come down I'll tell you we have all of our
arrangements made with the English.
B:
I was sure you had.
HMJr:
Yeah, they're all made.
B:
Well, exactly. But I -- the -- the whole thing is
another example of the lack of astuteness of the
financial editor of the "Times".
HMJr:
Well, I'm going to -- I'm going to -- I think I'll
get ahold of Krock today.
B:
Yes.
HMJr:
To throw that story down.
B:
Well, I'm going to -- I'm going to call up Arthur
Sulzberger
HMJr:
Yeah.
B:
and tell him that he 1s again a false victim
to a cheap effort for self-advertising on the part
of Mr. Wasserman.
HMJr:
Right.
B:
Let -- let's both do it.
HMJr:
I'll do it from this angle.
B:
Because it's -- it's very harmful from the point of
view of -- it isn't as terrible as incognizant
HMJr:
Yeah.
B:
to a series of what I'm sure are very seriously
thought out plans.
HMJr:
Well, if you could get hold of -- do you get the
Wall Street Journal?
B:
Well, I -- I don't get it out here in the country, no.
HMJr:
Oh. Well
205
- 4 -
B:
I can -- I can have it read to me.
HMJr:
Well, have it read; it's entitled, "Open Markets
if War Comes 1s Washington Plan".
B:
Right!
HMJr:
"The administration to confer on steps to keep
industry on an even keel."
B:
Yes, exactly.
HMJr:
And -- and the statement 1s -- is accurate and as far
a.s -- I've Just got it before me -- I don't see any
reference to this other thing which the "Times" has.
B:
Well, exactly. I'm sure there's no connection between
it.
HMJr:
Right.
B:
And the only -- the only possible connection there
would be
HMJr:
Yeah.
B:
would be. As you know Jesse 1s a politician
at heart, and always likes to be friendly to every-
body, whether he knows them or not.
HMJr:
Well, I'll take care of him.
B:
And somebody might have walked into Jesse's office
with some big plan
HMJr:
Well
B:
and Jesse says, "That's quite interesting."
HMJr:
Yeah.
B:
And -- or something or that sort.
HMJr:
Yeah.
B;
But the investment companies would have their -- have
their
cut out for them.
HMJr:
Right.
206
5 -
B:
(Laughter) Don't you know?
HMJr:
Well, see
B:
HMJr:
No, it -- it -- the arrangements will be -- in
The arrangements are all made.
B:
You can see, Henry, how very smart the fellow in the
"Times" is who sells himself to a fellow like
Wasserman, to take advantage of a hint about those
plans from Washington and putting old Wasserman up
in front.
HMJr:
Well
B:
Well, I'll be seeing you -- I'll be seeing you
Thursday night probably then.
HMJr:
And I'll be -- I'll tell you -- I'll tellyou then
what -- how far we've gone.
B:
0. K.
HMJr:
And by that time I'll also have a tax statement of
fiscal -- it's really B. fiscal apology tax statement,
more than a tax statement.
B:
Right you are. Well, I've got -- I've got several
ideas.
HMJr:
Well, I'm glad that your wife and your Dr. think that
Washington will be a builder up.
B:
Washington, in the event of war, they think 1s a
perfect answer.
HMJr:
I 800.
B:
I'm hoping that we'll never have to try the per-
scription.
HMJr:
I hope 80.
B:
All right, old fellow.
HMJr:
Delighted.
- 6 -
207
B:
Well, I'll be seeing you Sunday.
HMJr:
Thank you.
B:
Good bye.
Regraded Unclassifie
208
Protection of
Security Markets.
april 14, 1939.
Unclassifi
INDEX
209
2. Agenda
2. Course of Action for Tripartite Members Proposed for Discussion.
3. Proposed draft of statement to be communicated to governments
adhering to the Tripartite Accord.
4. Data relating to foreign holdings.
(a) Table - Estimated Holdings of Tripartite Countries in
United States.
(b) Table - Estimated foreign holdings in the United States.
(c) Chart - Stock Prices and Foreign Trading in Domestic
Stocks - From September 1938 on.
5. Experience of security and commodity markets.
(a) Chart and Tables - Index of the Price of Twenty Industrial
Common Stocks, 1912-1919.
(b) The New York Stock Exchange in the three weeks preceding
the outbreak of the European War.
(c) Behavior of security markets during the war.
(d) Table on Foreign Exchange Rates - Monthly 1914-1921.
(e) Table - United States Exports - 1911 to 1920
(f) Table on Foreign Trade
(g) Commodity Prices During the Great War
6. Proposed ways of protecting the security market.
(a) Keep the Security Markets Open
(b) Close the Stock Exchange
(c) Transactions on the Security Market Limited to a Pre-
determined Range of Fluctuation of Security Prices for
any one day's Activity
(d) Purchase of Securities by a Government Agency to Maintain
Prices on the Stock Market
(e) Formation of a Government Agency to Extend Credit to
Foreign Governments using as Collateral the Foreign
Holdings of Their Nationals
(f) Proposal for controlling the market for government
securities in the event that the stock exchange is closed.
we
Agenda
1. Consideration of draft of statement to be communicated to
governments adhering to Tripartite Accord.
2. What action, if any, should be taken with respect to security
markets?
(a) Keep the exchanges open and rely upon arrangements with
Tripartite countries for orderly marketing of securities.
(b) Close the exchanges until the acute period passes.
(c) Limit the extent of declines permitted each day.
(d) No sales permitted at prices lower than those consummated
on some previous day.
(e) The establishment of a government coporation to extend
credit to foreign governments using as collateral the
American securities held by the government.
(f) Creation of a private agency with government support or
of a government corporation to purchase, hold and later
sell securities under conditions designed to prevent
security market from dropping below a pre-determined level.
3. What action, if any, should be taken with respect to commodity
markets?
4. What action, if any, should be taken with respect to government
bond market?
Unclassified
J.
2
Course of Action for Tripartite Members Proposed for Discussion
1. All Tripartite members other than the United States will
requisition all foreign balances, securities, assets and gold owned
by their nationals.
2. The United States will revoke general foreign e xchange li-
cense and will tighten foreign exchange control and restrict payments
by banking institutions in the United States. Copies of the documents
accomplishing this marked Exhibit "A".
3. The United States will also require complete reports to be
filed with respect to all foreign-owned balances, securities and all
assets located in the United States. Copies of such report forms
are annexed.
4. Other members of the Tripartite will require similar com-
plete reports to be filed with respect to all foreign owned balances,
securities and all assets located in their respective countries.
Te will furnish the foreign countries with copies of our report forms
as a suggestion with the end in view of having all countries requiring
comparable information to be filed.
5. All the information thus obtained will be made reciprocally
available to the members of the Tripartite Accord.
- 2 -
The foregoing will facilitate enormously the Tripartite members
in acquiring assets in this country belonging to its nationals, since
the foreign nationals will know that we will have information as to
their assets in this country which we will turn over to their govern-
ments. The foreign exchange control will prevent the foreigner from
pulling the assets out of the United States while this system is being
set up. It would seem probable that in a comparatively short time,
say two weeks, the Tripartite members will have acquired all of the
assets in this country owned by their nationals 80 that it will be
possible to loosen the foreign exchange control. This program would
likewise have the advantage of facilitating the carrying out of the
government foreign policy.
6. There will be set up a committee consisting of representatives
of each of the Tripartite members. This committee will coordinate the
utilization of the foreign exchange assets of each of the Tripartite
members located in the United States and elsewhere; and will also co-
ordinate the liquidation of foreign securities. This committee will
have complete information as to the foreign exchange assets of each
country, each country's need for foreign exchange, the conditions of
the markets in the United States as well as elsewhere and will there-
fore be in a position to facilitate an orderly use of foreign-owned
assets in this country. Fundamentally this committee will only be of
an advisory capacity, yet the likelihood is that it will be able to
exercise great influence in view of the desires of the other Tripartite
members to gain our cooperation. In connection with the formation of
Regraded
- 3 -
this committee and the taking of the action aforementioned, it will
be desirable to make public a statement of the action to be taken and
thereby instill confidence in the public and assure them that the
governments involved have complete control of the situation and thus
minimize the probabilities of panic conditions resulting.
7. A statement should be prepared to be presented to the various
members of the Tripartite (except England, who should be informed of
the measures taken), either by way of Cochran or by way of the financial
representatives of the governments in Washington. Exhibit "C" is
suggested draft of the statement to be given to the four foreign
governments.
After having received the reaction of the various governments
to the proposal we will be in a better position to decide the next
move.
In alternative method of approach would be to first communicate
with the French and indicate our belief that they should go along
with the British proposal. Once having gained French approval, we
would then consult with the French and British about the plan above
mentioned. The approach to the junior members of the Tripartite
would be made after an agreement is reached between the senior members
thereby being able to bring stronger pressure to bear on the junior
members if necessary.
8. Consultations with Canada for the purpose of obtaining similar
arrangements with the Canadian Government to be undertaken.
Unclassified
the
OF
3 5
the
(
the
MY
Proposed draft of statement to be communicated to
governments adhering to the Tripartite Accord
The countries who are members of the Tripartite Accord and
their nationals now hold in the United States over $500 million
of earmarked gold, over $1 billion of bank deposits, over $2 bil-
lion of American securities and over $1 billion of direct in-
vestments. Doubtless each of the countries likewise has sub-
stantial holdings of assets in other countries.
It has been the policy of the United States freely to offer
its banking, investment and gold facilities to the governments
and nationals of foreign lands and thus to provide a haven for
funds seeking investment and security, and it is our hopeful
desire, as it is no doubt yours, that we shall be able to con-
tinue to do so.
We feel that the interests of the members of the Tripartite
Accord now make it desirable that there be prompt consultation
directed toward protecting the security, commodity and money
markets in the event of war in Europe, and agreeing upon effec-
tive measures for that purpose; with particular regard to prevent-
ing panicky marketing and utilization of assets in the markets of
the other countries.
Our joint interest in this problem, together with the record
of satisfactory cooperation among the members adhering to the
Tripartite Accord should assure the success of such consultations.
We would appreciate a prompt expression of the attitude of
your Government with respect to this proposal.
1
1
the STATE the
Estimated Holdings of Tripartite Countries in United States
(In millions of dollars)
:
:
:
:
:
:
Stocks &
1
Short-Term
: Earmarked
:
Other
: Total
:
Bonds
:
Balances
:
Gold
: Investments
:
:
:
:
2
:
United Kingdom
900
468
31
164
1,563
France
220
216
194
53
683
Netherlands
580
131
143
129
983
Switzerland
490
240
139
68
937
April 12, 1939
Regraded Unclassified
Estimated foreign holdings in the United States
(In millions of dollars)
&
#
:
#
#
:
#
Net foreign
=
$
Short-torm
1
Direct
a
2
:
:
a
:purchase of sales:
I
Earnarked
a invest-
Common
Preferred
#
a
:
Bonds
#
Other
:
1 (-) of domestic
:
banking
:
gold,
ments
stocks
a
I
stocks
1
(par
2 invest-
:
Total
securities
funds
:
:
:
:
as of
I
(book
(market
I
1
(par
#
value)
a
:
2
Jamary 2,
as of
ments
:
a
April 5.
1 value)
value)
value)
I
:
#
#
:
1935 -
2
March 15.
:
I
1939
$
#
:
#
:
:
: March 15, 1939
:
1939
1
United Kingdom
678
233
135
87
164
1,297
458
468
31
Trance
24
81
18
50
53
226
73
216
194
Fetherlands
224
133
20
207
129
713
215
131
143
Switzerland
91
101
25
63
68
348
299
240
139
Cermany
- 23
20
-
Italy
68
47
36
40
44
235
-
5
13
-
Other Europe)
56
278
104
Canada
367
333
89
49
169
1,007
22
222
-
latin America
6
13
4
8
9
40
26
272
41
1st last
60
242
21
60
261
24
32
114
491
All other)
9
38
-
Total (as of end
of 1934)
1,518
1,202
351
536
750
4.357
1,190
2,139
673
Total (as of and
of 1937) 2/
1,675
1,850
430
565
750
5,270
Sweden hold $85 million of the total of $104 million.
Estimates of Bureen of Foreign and Domestic Commerce.
Latest available breakdown by countries is for end of 1934.
Regraded Unclassified
STOCK PRICES AND FOREIGN TRADING IN DOMESTIC STOCKS
DAILY
Sept.
Oct.
Nov.
Das.
Jan.
Pob.
I
13
a
12
9
a
3
as
Mr.
a
,
is
17
a
7
é
14
21
If
a
.
May
if
#
is
a
4.
II
=
a
19
&
13
20
n
-
COLLARD
-
190
30 INDUSTRIALS
high, Lee al Close
5
180
IN
170
-
100
150
150
10
140
130
130
139
120
Foreign Trading - . Persontage of Total N.T.S.R. Transactions
PRICENT
is
to
$
in
.
0
I # 17 24 I - IS a a 3 12 19 26 , 10 17 as a 1 34 a 28 4 it is 25 4. " 19 25 I 8 IS a 20 4 is a 27
DOLLARS
Williams
Millions
FOREIGN TRADING
.
#
NET Month
4
4
o
0
T
T
NOT Sexes
4
9
3
IS
17
18
4.
u
=
a
-
-
a
22
a
6
=
20
If
N
-
.
IS
#
39
5
4
=
26
3
to
17
x
34
H
a
a
4
II
25
Sept.
Def.
Nov.
Das.
4
70.
Mr.
Apr.
my
1950
1030
- of - levery of the -
- # - - -
Regraded Unclassified
5
ATERAIRS OF STOCE PRICES - daily from January strough Inc 1917
LD
123
Twenty guilreads
LA
90
Twenty industriale
82
72
60
50
to
to
Jan. # if 24 - - a as $ # a 36 N + e rf as 1 15 M # # June 1 e 17 5 3º
1917
Feb,
Mar,
April
May
Regraded Unclassified
Average of Prices of Twenty Industrial Stecks
(Dow-Jones)
:
1914
:
Date
:
June
1/:
1/:
1915
July
Ang,
: Sept,
:
Oct.
=
Nov,
#
Dec,
:
January
1
58.82
58.35
2
2
58.48
58.58
54.63
3
58.71
59.04
.
&
58.96
55.44
inio
58.98
#
Exchange closed on account of War
55.50
59.19
59.13
55.40
7
*
59.27
56.08
8
59.30
59.41
56.55
9
59.43
59.28
56.54
10
59.45
59.06
*
11
59.28
59.02
57.37
12
59.39
*
54.72
57.44
13
59.25
58.74
*
57.35
14
*
58.92
56.76
57.51
15
59.17
58.36
55.60
57.90
16
59.04
58.42
55.35
57.19
17
58.86
58.41
55.36
*
18
59.02
58.53
55.09
58.12
19
59.08
*
55.20
58.11
20
59.22
58.41
*
58.42
21
*
58.66
54.46
58.51
22
59.26
58.72
54.42
58.21
23
58.98
58.49
53.46
58.52
24
58.28
57.90
53.17
*
25
57.60
57.87
58.06
26
58.16
.
53.34
58.24
27
58.19
57.44
*
57.07
28
*
55.41
54.55
57.25
29
58.11
55.73
54.58
56.54
30
58.59
51.88
54.55
57.16
31
54.58
+
High
59.45
59.41
56.76
58.52
Low
57.60
51.88
53.17
54.63
1
Adjusted.
2
Holiday.
.
Sunday.
Regraded Unclassified
Average of Prices of Twenty Industrial Stocks
(Dow-Jones)
:
Date
1917
:
January
:February
:
March
:
April
:
May
:
June
1
1
88.52
91.10
.
93.42
97.89
2
96.15
87.01
92.82
97.06
92.48
97.59
3
99.18
89.97
93.63
96.34
90.98
*
4
97.15
*
*
95.83
90.45
97.00
96.16
92.03
95.04
94.61
90.20
1
96.75
92.81
95.30
1
*
98.43
7
.
92.19
95.30
93.10
91.20
98.16
8
96.40
90.94
95.28
*
90.22
98.58
9
97.64
90.20
96.46
92.41
89.08
99.08
10
95.70
91.56
96.78
91.20
90.41
*
11
96.02
*
e
92.82
89.77
97.86
12
95.75
95.03
93.10
89.62
97.52
13
95.13
92.37
95.05
93.18
*
98.31
14
*
91.86
95.16
93.76
90.78
97.95
15
95.59
91.65
95.63
8
90.19
97.22
16
97.55
91.81
95.65
92.21
92.26
96.95
17
96.60
92.70
96.22
91.87
92.75
*
18
97.50
*
*
91.63
91.96
94.89
19
97.35
93.66
96.97
91.83
92.37
95.36
20
97.97
94.91
98.20
90.84
.
94.78
21
*
93.97
97.61
90.98
93.47
95.77
22
96.60
1
96.78
.
94.09
96.63
23
96.26
92.56
97.27
90.96
94.26
97.60
24
96.66
92.22
97.73
90.66
95.20
*
25
97.41
#
*
92.98
96.76
97.57
26
97.36
93.35
96.32
93.06
97.58
96.81
27
96.71
92.68
96.46
93.10
e
95.98
28
.
91.56
97.01
92.65
97.20
95.41
29
95.78
96.75
*
97.41
95.38
30
95.83
96.72
93.23
1
95.87
31
95.43
95.41
97.38
High
99.18
94.91
98.20
97.06
97.58
99.08
Low
95.13
87.01
91.10
90.66
89.08
94.78
1
Holiday.
Sunday,
Average Of Prices Of Twenty Railroad Stocks
(Dew-Jones)
:
1914
:
Date
1915
:
June
:
July
:
Aug.
:
Sept.
:
Oct.
:
Nov.
:
Dec,
:
Jamuary
1
102.53
102.05
1
2
101.80
102.24
88.46
3
102,12
102.68
+
-
102.37
1
5
102.35
el
89.63
102.70
Exchange closed on account of War
89.95
6
102.91
89.43
7
.
103.05
89.94
8
103.01
102.76
89.85
9
103.38
102.75
89.95
10
103.30
101.85
*
11
103.02
101,80
90.83
12
103.28
*
90.21
90.78
13
103.20
101.06
*
90.58
14
*
101.34
92.29
90.91
15
103.14
100.70
90.95
91.22
16
102.86
100.63
90.89
91.28
17
102.60
100.01
90.88
.
18
102.78
100.49
90.78
92.00
19
102.94
.
91.01
92.91
20
103.06
98.30
*
93.18
21
*
98.77
90.13
94.05
22
103.54
98.49
89.73
93.51
23
102.91
97.95
87.91
93.46
24
101.73
97.05
87.40
*
25
100.63
97.16
93.23
26
101.31
+
87.75
93.70
27
101.39
96.58
*
92,21
28
*
93.14
88.80
92.52
29
101.28
94.12
88.50
90.80
30
102.41
89.41
88.19
91.60
31
1
88.53
*
High
103.54
103.05
92.29
94.05
Low
100.63
89.41
87.40
88.46
Holiday
Sunday
Regraded Unclassified
Index Numbers For the Prices of Twenty Industrial Common Stocks
(Geometric average for 1909-13 = 100)
:
#
1912 January
91.2
1915
January
76.6
1918
January
131.1
February
86.1
February
75.3
93.7
February
141.6
March
March
78.0
March
103.8
139.9
April
April
98.2
April
May
105.8
141.3
May
98.1
May
June
105.7
151.6
June
99.8
June
July
104.8
155.5
July
101.1
July
August
107.1
159.3
August
116.8
August
September
110.6
161,8
September
130.0
112.4
September
161.8
October
October
143.8
October
160.7
November
107.5
November
143.2
November
156.0
December
99.5
December
140.8
December
158.5
1913
January
94.7
1916
January
135.9
1919
January
160.2
February
89.5
February
133.4
February
163.8
March
85.0
March
134.8
March
174.3
April
86.4
April
127.6
April
188.0
May
80.1
May
128.5
May
207.6
June
71.8
June
128.2
June
228.5
July
75.2
July
122.9
July
245.4
August
80.0
August
129.1
August
227.6
September
82,8
September
142.4
September
235.7
October
76.2
October
153.5
October
252.6
November
74.5
November
168.2
November
241.5
December
75.1
December
155.7
December
229.6
1914
January
84.6
1917
January
150.7
February
89.7
February
137.7
March
87.3
March
149.1
April
81,8
April
147.4
May
52.2
May
149.4
June
81.6
June
158.8
July
73.8
July
153.8
August*
August
148.8
September*
September
136.3
October*
60.2
October
129.0
November*
63.1
November
118.2
December
71.7
December
118.0
a
The New York Stock Exchange was closed from July 31 to December 12,
1914, No data were available for the month of August and September,
Indices for October and November were computed from unofficial quota-
tions published in the Financial Review.
INDEX OF THE PRICE OF THENTY COMMER STOCKS.
1909-1913 100
Source: Review of Economic Statistics, 1921, Vol.3, P 264,
Note: New York Stock Exchange closed from July 31 to
December 12, 1914. Indices for October and
November were computed from unofficial
quotations published in the Financial Review
FED.
MAR
APR
MAY
JUN
M.
AUG.
SEP.
OCT.
NOV.
DEC.
FEB.
MAR
APR
MAY
JUN
JUL.
AUG.
SEP.
ocT.
NOV.
DEC
JAN,
PER,
MAN.
APR.
MAY
N/W
"inr
AUG
SEP,
OCT
NOV.
DEC
JAN.
FEB.
MAR
APR
AVR
JUN,
A/L.
AUG.
ID.
OCT.
NOV
DEC.
JAN,
FEB.
MAR
APR
MAY
JUN.
ML
JAN.
FEB.
MAR.
AUS.
APR.
MAY
JUN.
JUL.
AUG.
SEP.
OCT,
NOV,
DEC
JAN.
FEB.
MAIT
APR.
MAY
JUN.
JUL.
AUG.
SEP.
OCT
NOV
DEC.
JAN,
FEB.
MAR.
APR.
MAY
JUN.
JUL
AUG.
SEP.
OCT.
NOV.
DEC.
JAN.
FEB.
MAR.
APR.
MAY
JUN.
JUL.
AUG.
SEP.
OCT.
NOV.
DEC
JAN.
1912
19.13
1914
1916
1917
19.18
19.19
1920
1915
COPY
Jamiary 6, 1937
Mr. White
Mr. Ostrander
Subject: The New York Stock Exchange in the three weeks
preceding the outbreak of the European War,
August 1, 1914
The history of the New York stock market in the last three weeks
before the outbreak of the World War may be divided into 4 periods:
(1) a period of complete indifference to the European situation and
concentration on minor domestic problems; (2) a period of continued
concentration on domestic problems, but with a recognition of heavy
foreign sales; (3) a period in which the market was dominated by
foreign sales with, however, heavy buying on domestic account; and
(4) a short period in which the domestic buying market began to col-
lapse, and overnight it was found impossible to reopen the Stock
Exchange.
1. In the business week, July 13th to 18th, only domestic factors
were mentioned as influences on market conditions. These factors in-
cluded the rather poor state of trade, the unfavorable railroad posi-
tion due to an expected unfavorable rate decision by the I.C.C., and
the rather favorable crop situation. There was, however, mention of
the fact that Amsterdam was selling throughout the week "on arbitrage
account." The New York Times average of 50 stocks closed at 66.63 on
Saturday, July 18th. The volume of sales throughout the week stood at
between 200 and 300 thousand shares.
2. In the period, July 20th to July 23rd, domestic factors con-
tinued to hold the center of attention as influences upon market con-
ditions; however, it was acknowledged that heavy sales were being made
on foreign account. The slight weakness of the market (New York Times
average, July 20th, 65.81, July 21st, 66.25, July 22nd, 66.20, July 23rd,
65.76) was ascribed to continued difficulties in rails, including the
Government suit against the New Haven railroad, the failure of reorgani-
zation plans for the Rock Island railroad, and the continued influence
of the I.C.C. rate decision. Large sales on foreign account were men-
tioned in the market reports each day. The sterling exchange rate rose
throughout this period and on Wednesday, gold was sent to Canada, and
Mr. White, 1/6/37 - 2
on Thursday $2} million of gold was shipped to Paris. Market re-
ports laid the exchange movement to the repatriation of funds, as a
result of foreign sales of American securities, and to the influence
of higher discount rates in European financial centers.
3. On Friday, July 24th, for the first time, the unsettled
European situation and sales of securities on foreign account were
mentioned as the predominant market influences. The domestic purchas-
ing was strong, however, throughout this period which lasted through
Wednesday, July 29th. The New York Times average showed two periods
of weakness in each case, followed, however, by slight strengthening
of the market (July 24th, 65.00, July 25th, 65.06, July 27th, 64.69,
July 28th, 62.29, July 29th, 62.42). It was estimated that on Friday,
July 24th, approximately 25 thousand shares were sold for foreign ac-
count, and over the week-end financial writers admitted that the cur-
rent weakness of the market had much more to do with the European situa-
tion than they had formerly realized. During the first three days of
the next week, the volume of sales increased tremendously and it was
generally held that foreign selling amounted to about one-quarter of
the total. (Volume of sales: July 24th, 290,000, July 27th, 475,000,
July 28th, 1,020,000, July 29th, 800,000.) Throughout this period,
although there was some domestic short-selling, domestic purchasing
always far exceeded the volume of domestic sales. Odd-lot buying was
heavy as was investment buying. In general, it may be said that through
July 29th, the New York market did not conceive the possibility of the
outbreak of a general European War. No reasons were advanced for the
heavy selling of American stocks by foreigners other than the fact that
after Monday, July 27th, the New York Stock Exchange was the only free
market for liquidation of securities into cash, as from Monday on
European bourses were closed or restrictions on trading were in effect.
One feature of this period was the almost complete absence of any pur-
chases for foreign account. However, through July 29th, American buy-
ing absorbed the huge volume of sales with only a relatively slight
decline in average prices, in fact the market rallied on Wednesday,
July 29th and the New York Times average rose .13.
Heavy gold shipments to Canada and Europe continued, amounting to
nearly $30 million on Monday, Tuesday, and Wednesday, July 27th to 29th,
In spite of the shipment of gold, the demand for sterling and other
European currencies continued to rise above the export point. The ex-
change situation became very chaotic, and the cost of insurance on gold
shipments rose rapidly.
4. The pressure of foreign sales on Thursday, July 30th, in addi-
tion to heavy domestic sales, more than offset heavy domestic investment
buying, and the market fell heavily with a total volume of sales of
Mr. White, 1/6/37 - 3
nearly 1,300,000 shares. On this day the New York market began to
realize that a European War was inevitable; domestic buyers began
to hesitate, and after the market closed, they withdrew entirely.
The New York Times average of 50 stocks fell to 57.77. The New York
Stock Exchange was the only exchange remaining open. An additional
$9 million of gold was engaged on this day, but the new level of in-
surance rates made even the withdrawal of gold almost an impossibility.
The exchange market was paralyzed, and credit transfers abroad were
impossible.
Although it had been decided that the New York Stock Exchange
would open as usual on Friday, July 31st, the realization that European
War was already a fact came to the New lork market overnight, and by
nine-thirty on Friday morning, it was realized that no domestic buying
sentiment existed, and that to open the Exchange would be disastrous.
After a hurried meeting of the Board of Governors, the Stock Exchange
was ordered to remain closed, and it did not open again for 4 months.
The New York Times financial headline read "Stock Exchange suspends
trading as a measure of protection against foreign liquidation."
FTO:Jr:hhj
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE April 11, 1939
TO
Mr. White
FROM
Mr. Gass
Subject: Behavior of security markets during the war.
1. European stock markets met the outbreak of the great
wer by closing their doors. Even the London Stock Exchange,
which had never before suspended business even in the Napol-
eonic wars, shut down indefinitely on the morning of July 31,
1914. Half an hour before the time for opening business on
July 31 the Board of Governors of the New York Stock Exchange
said they would remain open but before the regular opening
hour of 10 o'clock they changed their minds and closed the
exchange until further notice. It was not reopened to un-
restricted trading until April 1915. On July 30, the day
before the exchange suspended business, many important securi-
ties had fallen to prices 20 to 30 percent below those of the
few weeks before.
It is said that before the stock exchange governors de-
cided to close on the morning of July 31, they had obtained
definite information of a. wholly unprecedented volume of
selling orders cabled overnight from Europe to New York bank-
ing houses for execution at any price obtainable when the
market should reopen. It was estimated that in July of 1914
foreigners held $2,400 million worth of stocks and bonds of
American companies. With European exchanges all closed, it
was impossible for Americans to liquidate their foreign
securities. It was believed to be impossible that the American
market could buy back $2,400 million worth of securities if
Europe insisted on selling. Prices would have to fall to un-
precedented lows.
2. The closing of the Stock Exchange during the four
months after July 1914 had put an end to large scale buying
or selling of stocks and bonds whether by domestic or by
foreign investers. However, sales between individuals were
resumed. After the first few weeks B. group of unofficial
brokers began to assemble every day on the Wall Street side-
walk to deal in stocks. The Stock Exchange denounced this
practice and forbade its own members to take part in it.
Secretary Morgenthau - 2
This W8S called the "outlaw market". In October B. few of
the sidewalk brokers began to publish typewritten sheets
of daily closing prices. The prices caused surprise be-
cause the shrinkage over the July 30, 1914 closing level
was very slight. On December 11, the last day on which
prices were quoted in the outlaw market, most of the stand-
ard investment shares were selling at practically the same
prices as those of July 30
Dealinge in bonds alone with minimum prices prescribed
so that panio breaks were impossible and with requirement
that the origin of sales based on foreign orders should be
declared by brokers executing them, had already been re-
sumed on November 28. Bond prices after & momentary de-
cline had gone above the final July quotations. When
transactions in stocks were resumed on December 12, it was
required by the Stock Exchange authorities that all sales
should be made for cash. Advances occurred at once beyond
the stipulated minimum prices and beyond the highest outlaw
market quotations. On April 1, 1915 the Stock Exchange,
now completely reassured, removed all restrictions. A very
rapid advance occurred in all kinds of shares with unusually
large transactions. This advance continued through 1915.
3. In 1915 and 1916 rumors of peace negotiations were
constantly accompanied by declines on the Stock Market. On
one day of March 1916, when unfounded peace rumors were
spread, declines of 2 to 7 points occurred on the Stock
Market.
In October 1916, somewhat better substantisted rumors
8 became of Germany break a German known actually of 10 request that to 20 appealed President percent. for American to Wilson the Finally mediation neutral had in asked December powers were the followed and belligerent 1916, when when by it
governments to state their war aims 80 that common ground
a panic peace occurred on the Stock Exchange where the decline in
for negotiations might be established, something like
prices was the most violent of the whole war period.
4. Stock market was not closed in April 1917. The Stock
Market had previously undergone 8. sweeping decline in December re-
1916. In February 1917, on news of rupture of diplomatic fell
lations with the German Government, industrial shares
10 to 20 In April, following the President's war
message, oline they the autumn months brought prices of actively traded the
points. broke 5 to 10 points further, and a rapid de-
stocks in to 40 below the level where they had stood at
beginning tive gains of 1915 year and 1916. Fifty active of 1917 railway at almost and exactly
30 of the 1917. This wiped out the great specula- indus-
the trial average shares reached stood in by the them last in the week panio of July 30, 1914.
Foreign Exchange Rates - Monthly 1914 - 1921
I
:
=
:
:
a
I
$
4
1914
1
1915
#
1916
I
1917
:
1918
#
1919
1.
1920
#
1921
#
:
$
:
a
I
I
I
Dollarsper pounds
United Kingdom
January
4.863
4.842
4-759
4.758
4-753
4.766
3.678
3.742
February
4.858
4.820
4.761
4-755
4-753
4.765
3.381
3.876
March
4.862
4.800
4.763
4.750
4.753
4.715
3.726
3.911
4.662
3.929
April
4.870
4-794
4-765
4-757
4.755
3.931
May
4.882
4-790
4-758
4-755
4-755
4.668
3.848
3-975
June
4.884
4.774
4.758
4-754
4-753
4.621
3.950
3.782
July
4.901
4.765
4.758
4.755
4-753
4.429
3.865
3.632
August
5.055
4.693
4.758
4.756
4.756
4.272
3.622
3.654
September
4.986
4,677
4-757
4.755
4-755
4.179
3.510
3.724
October
4-945
4.674
4-757
4-752
4-755
4.184
3-475
3.873
4.098
3-437
3.970
November
4.890
4.668
4.757
4.752
4-757
December
4.869
4.720
4-755
4.752
4.758
3.812
3.492
4.156
Cents per franc
France
Jamiary
19.25
19.30
17.10
17.10
17.45
18.30
8.48
6.43
February
19.30
19.10
17.00
17.10
17.50
18.30
7.04
7.17
March
19.30
18.90
16.85
17.10
17.50
17.70
7.19
7.03
April
19.35
18.80
16.70
17.35
17.50
16.69
6.25
7.24
May
19.40
18.60
16.85
17.45
17.50
15.80
6.86
8.37
15.65
8.07
June
19.40
18.00
16.90
17.40
17.50
7.92
July
20.50
17.80
16.90
17.40
17.50
14.39
8.13
7.81
August
19.55
17.15
16.95
17.30
17.90
12.76
7.18
7.76
September
19.65
17.00
17.05
17.25
18.25
11.76
6.74
7.28
October
19.60
17.00
17.10
17.40
18.25
11.62
6.53
7.25
November
19.50
16.95
17.10
17.35
18.38
10.62
6.01
7.20
December
19.45
17.10
17.10
17.45
18.36
9.24
5.92
7.84
Department
Regraded Unclassified
United States Foreign Trade - 1911 to 1920
(In millions of dollars)
:
:
Trade with
:
Trade with
:
Trade with
Total
Year :
:United Kingdom:
France
:
Italy
Exports:Imports:Exports:Imports:Exports:Imports:Exports:Imports
1911
2,093
1,532
539
250
128
122
61
46
1912
2,399
1,818
607
313
155
134
74
52
1913
2,484
1,793
591
272
154
139
79
55
1914
2,114
1,789
600
287
170
104
98
55
1915
3,555
1,779
1,198
258
501
78
270
52
1916
5,483
2,392
1,887
305
861
109
304
60
1917
6,234
2,952
2,009
280
941
99
419
36
1918
6,149
3,031
2,061
149
931
60
492
24
1919
7,920
3,904
2,279
309
893
124
443
59
1920
8,228
5,278
1,825
514
676
166
372
75
Treasury Department, Division of Monetary Research.
April 14, 1939
Regraded Unclassified
Foreign Trade - Three Countries, 1913-1938
(In millions of dollars)
:
United States
:
United Kingdom
:
Italy
Year
: Exports Imports : Balance Exports Imports Balance : Exports Importe Balance
:
1913
2,484
1.793
+
691
3,089
3,741
-
652
485
704
-
219
1914
2,114
1,789
+
165
2,581
3,417
-
836
426
563
-
137
1915
3,555
1,779
+ 1.776
2,300
4,048
- 1,748
400
743
-
343
1916
5,483
2,392
+ 3,091
2,874
4,514
- 1,640
472
1,283
-
811
1917
6,234
2,953
+ 3,281
2,837
5,059
- 2,222
440
1,862
- 1,422
1918
6,149
3,031
+ 3,118
2,531
6,258
- 3.727
438
2,103
- 1,665
1919
7,920
3,904
+ 4,016
4,264
7,197
- 2,933
690
1,890
- 1,200
1920
8,228
5.279
+ 2,949
5,706
7,082
- 1,376
585
1,333
-
748
1921
4,485
2,509
+ 1,976
3,118
4,178
- 1,060
355
726
-
371
1922
3,832
3,113
+
719
3.646
4,443
-
797
443
750
-
307
Treasury Department, Division of Monetary Research.
April 12, 1939.
:
France
Year :
Exports : Imports Balance
1913
1,787
2,070
-
283
1914
1,270
1,541
- 271
1915
1,051
2,306
- 1,255
1916
1,576
4,043
- 2,467
1917
1,663
5,398
- 3,735
1918
1,392
4,517
- 3,125
1919
2,264
5,628
- 3.364
1920
2,564
4,242
- 1,678
1921
1,883
2,114
- 231
1922
2,232
2,492
-
260
Regraded Unclassified
United States - Index of all Comundi is Prices and Prices of Specific Communities
Monthly - 1-314 - 1918
1 Index I Cement-100al,am:
:
Coypar
Cotton
Pig Lron
Lead
:Petroleum:
Rubber
,
Silk,
:
1.
all COSE. Portland: threoite:
:
I
Whent
American
para, fine
:
Japen
Bool
:
:
I
:
:
I
:Midding
1
:
:
:
I
July 1913:Dollar : Dollar : Dollar :American Dollar
:
: Dollar
: Dollar
iper bar-:per ton ¹per pound¹ Dollar
I
Dollar
:
par ent-
Dollar
per ton
:
Dollar
1
Dollar
I
E
per
4
rJune 1914: rel in tin N. Y.lin N. T. :Per pound¹
in
per pound
lon
per pound
par pound,
bushel
: = 100 :N. I. 1/:
:
:
in
N.
La N.Y.
:
per pound
Cincinnati:
tin N. I.
in N.Y.
in N.Y.
a
in N. I.
in Boaton
:
1914
Jan.
100
$1.5800
$5,2000
.1428
.1270
$13.8500
.0411
.1200
.6050
$4,0250
.9139
-5600
Fab.
100
1.5800
5.2000
-1448
.1280
13.8100
.0405
.1200
.6550
4.1750
+9431
.5600
Mar.
99
1.5800
5-1922
-1418
.1326
14,0000
.0397
-1200
-6950
4.3250
.9591
.5600
Apr.
98
1.5800
4.6988
.1418
.1318
13.8000
.0381
-1200
.6950
4.2625
-5700
May
97
1,5800
4-7843
-1400
-1345
13,7500
-0390
.1200
.7250
4.2625
.9838
-5700
June
97
1.5800
4.8596
-1365
,1346
13.3700
.0390
-1200
.6100
4-3750
.9483
.6000
July
97
1.5800
4.9911
.1335
-1313
13,3000
.0389
.1200
.5750
4-4750
-9331
.6000
Aug.
101
1.5800
5.0416
.1227
.1200
13.2500
.0388
.1200
.5800
4.4250
1.1300
.6100
Sept.
101
1.5800
5.1601
.1200
2/
13.2500
.0383
.1200
.6000
4,0750
1.1850
.6100
Oct,
99
1.5800
5.1869
.1130
2/
12.9000
.0358
.1200
.5250
3.6750
1.1278
.6300
Nov.
98
1.5800
5,2000
.1163
Eglo"
12,9000
.0368
.1200
.4950
3-2875
1,1597
-6500
Dec.
98
1.5800
5.1958
.1284
.0759
12.5000
.0380
.1200
.6300
3.3250
1.2190
.6500
1915
Jen.
100
1.5800
5.1901
.1352
.0828
12,4000
-0373
.1200
7100
3.3250
1,4060
.6700
Teb.
100
1.5800
5.2000
.1417
.0854
12.4000
.0383
.1200
.5500
3.4250
1.6066
.6700
Mer.
100
1.4400
5.1738
.1434
.0899
12.2700
.0405
.1200
-5350
3.3750
1.5485
.6800
Apr.
100
1.4000
4.6979
.1648
.1029
12.3400
-0422
.1200
-5350
3*4750
1.5903
-7400
May
100
1,4000
4.74%
.1741
.0984
12.4000
-0427
.1200
.5450
3.4750
1.5760
.7400
June
100
1.3375
4.8222
.1875
.0967
12.5000
-0593
.1200
-5450
3.4250
1.3575
.7700
July
102
1.3375
4.9265
.1772
.0920
12.7100
-0566
.1200
.5350
3.4250
1.4316
-7700
Aug.
102
1-3375
5.0590
.1646
.0938
13.7100
.0466
.1200
-5225
3.4250
1.2025
.8100
Sept.
102
1.4225
5.1569
.1675
.1098
14.1500
.0461
.1200
.5000
3.5250
1.0547
7900
Oct.
104
1.4225
5.1947
.1732
.1250
14.7800
.0460
.1200
-5075
3.7125
1.0769
-7700
Nov.
107
1.4225
5.1964
.1841
.1189
16.1500
.0516
.1200
-5475
4.1250
1,0589
-7200
Dec.
111
1.7500
5.1896
.1973
.1236
17.1000
.0536
.1300
.6550
4-9250
1.2035
.7200
1916
Jan.
115
1.6700
5.2726
-2307
.1240
17.9000
.0592
.1300
.8850
4.6500
1,2875
7200
Feb.
118
1.6700
5.2770
.2603
.1174
17.9000
.0625
.1300
.6850
5.2500
1.2940
-7400
Mar.
121
1.6700
5.2780
.2590
.1194
17.9000
.0714
.1200
.7050
6.5500
1.1666
-7700
Apr.
123
1,6700
5.2949
.2716
.1206
17.9000
.0763
.1200
.6950
6.2500
1.2313
.8200
Mey.
123
1.6700
5.0380
-2737
.1291
17.9000
.0745
.1200
.6600
5.1500
1.2005
.8200
June
122
1.6700
5.1082
.2510
.1294
17.3400
.0694
.1200
.5900
5.2000
1.1163
.8000
July
123
1.6700
5.2092
.2361
.1304
16.9000
,0635
.1200
.5900
4.9500
1.1878
.8000
Aug.
125
1.6700
5.3057
-2467
-1454
16.7000
.0624
.1200
.5850
5,3000
1.4514
.7700
Sept.
127
1,6700
5.3990
.2593
.1584
17.2800
-0681
.1200
.5825
5.3500
1.6322
.7900
Oct.
132
1.6700
5.4210
.2717
.1812
18.0300
.0700
.1200
.6650
5,2500
1.7976
7900
Nov.
141
1,6700
5.4338
-3038
.2006
22.4000
.0704
.1200
.6700
5-7500
1.8567
.8900
Dec.
144
1.8950
5.4500
-3174
.1824
25,9000
.0751
.1200
.7200
5.7500
1,7470
.8300
1917
Jan.
148
1.9200
5-4345
.2805
.1763
26.1000
.0763
.1200
.7000
5.5850
1.9215
.9000
Fab.
151
2.0200
5.4388
3174
.1631
27.5250
.0864
.1200
.6800
5.4875
1.8410
.9800
Mar.
156
2.0200
5.4261
.3218
.1859
31,9000
.0920
.1200
.7500
5.3563
1.9873
1.0300
Apr.
170
2.1500
4.9226
.2924
2033
37,4000
.0929
.1200
.7400
5.5875
2.3100
1.1000
May
178
2.1500
5.4242
.3011
-2076
41.9000
.1021
.1200
7250
5.6450
2.9510
1,0000
June
183
2.1500
5.5334
.3036
-2545
45.1500
.1117
.1200
-7250
6,1250
2.7675
1.0300
July
189
2.1200
5.6350
-2759
.2612
49.9000
.1071
.1200
.7050
6.6438
2.5680
1.3300
Aug.
187
2.1200
5.7420
.2658
.2586
49.9000
.1059
.1200
.6125
7.3150
2.6175
1.4400
Sept.
186
2.1200
5.8970
.2537
.2271
49.9000
.0868
.1300
-5950
6.5438
2.2000
1.1900
Oct.
183
2.1200
5.8981
-2350
.2813
35.9000
.0671
.1300
-5675
5.9950
2,2000
1,8000
Nov.
183
2.1200
5.8959
.2350
.2991
35.9000
.0625
.1300
.5050
5-7750
2,2000
1.8300
Dec.
182
2.1200
6.2118
.2350
.3060
35.9000
.0638
,1400
-4675
5.7500
2.2000
1.7800
1918
6.2500
.2350
.3236
35.9000
.0678
.1600
5005
Jan.
185
2.1425
5.7500
2.2000
1,6500
187
2.1500
6.2500
.2350
-3185
35,9000
.0697
.1600
Feb.
.4788
5.7500
2.2000
1,5700
188
2.1500
6.2181
.2350
.3386
35.9000
.0720
.1600
.4831
Mar.
5,8900
2.2000
1.6900
191
2.3500
6.0172
.2350
.3172
35.9000
.0677
.1675
.5150
6,5075
2.2000
Age.
1.7200
190
2.5660
6,0500
.2350
-2749
35.9000
.0682
.1700
+5663
6.9600
2.2000
May
1.6300
189
2.5925
6.0666
.2350
.3039
36.0750
.0761
June
.1700
,5900
7.3000
2.2000
1,6100
193
2.6000
6.3319
.2589
.3123
36.6000
.0803
-1710
-5900
7-7625
2.2600
1.6500
July
196
2.6000
6,3500
2600
-3446
36.6000
.0605
.1750
.5900
7.7500
2.2688
1.6800
Aug-
201
2.9000
6.6500
.2600
-3578
36.6000
0805
.1750
-5900
7.6000
2.2656
1.6800
Sept.
201
3.2000
6,6500
.2600
3249
37.6000
-0805
.1750
+5720
7-5375
2.2665
1.6800
Date
201
3.2000
7-5733
.2600
-2953
37.6000
.0805
.1750
-5700
7.6300
2.2706
1.6800
Nov.
203
1,2000
7-7000
.2529
-3042
37.6000
-0656
.1750
-5480
7.2833
2.2830
1.6800
Doc.
Barrel
of
1bs.
from
in
1913:
380
1bs.
del
Le
1914
.
1918.
400
31
No quatations
Regraded
Commodity Prices During the Great War
General movements of commodity prices
The first half of 1914 was a period of mild depression.
Prices dropped 4 percent from December 1913 to May 1914. When
the war broke out at the end of July food prices, particularly
the prices of sugar and grains, took a sharp leap upwards so
that the index number of all commodities compiled by the War
Industries Board advanced 4-1/10 percent in one month. However,
by November the price index had sagged back to 98, only one
point above the level in the previous May.
Thereafter the price index remained stationary at 100 for
the first six months of 1915. No important rise of prices took
place until late in the fall of 1915. From October 1915 to
July 1917 the advance was exceedingly rapid, averaging over
2-1/2 percent a month. Already in August 1916 prices stood
25 percent above the pre-war level; by February 1917 they were
over 50 percent above the pre-war level and by May of the same
year over 75 percent. The greatest rises occurred in the months
of April and May 1917 immediately after the entry of the United
States into the war. The War Industries Board index of all
commodities rose 9 percent in the single month April 1917, From
February 1917 to July the price index rose over 25 percent.
After the entry of the United States into the war, measures
were taken to curb the price rise. Prices receded from August
through December but they resumed their rise in 1918. Though
the rise in that year was much more gradual than in 1916 or 1917,
still the price index for the period 1914-1918 was at its highest
point at the end of the year 1918, being almost exactly twice
as high as when the war broke out.
Prices of principal commodity groups
Chemicals had the most dramatic price history of any of
the groups into which commodities were divided by the Mar
Industries Board, The United States had been largely dependent
upon Germany for chemicals before the war. Chemical prices con-
sequently began to rise in September 1914, and had doubled by
March 1916. Thereafter domestic chemical production was greatly
stimulated and the index number of chemical prices fell from
- 2 -
201 in March 1916 to 157 in February 1917. Chemical prices
rose again when the United States entered the war but they
never quite attained the level of March 1916. Price rises
were kept to relatively moderate levels after the entry of
the United States into the war, largely as a. result of the
system of government price controls.
Metal prices fell on the outbreak of the war. The pre-
war levol of metal prices was not passed until May 1915. From
that point forward, however, the rise was exceedingly rapid.
From May 1915 to July 1917, the index number of metal prices
rose from 101 to 333. The periods of most rapid advance were
in the Autumn of 1916 and in the months immediately following
the American declaration of war. Upon the entry of the United
States into the war government control over metal prices was
established and the index number consequently fell 125 points
between July and December of 1917. Thereafter metal prices
rose only 8 points, from 208 to 216 during the duration of the
war.
Fuel prices were also unfavorably affected by the out-
break of war in 1914. Fuel prices had been falling slowly
at the beginning of that year and they continued to fall until
August of 1915. After that they rose, though remaining until
April 1918 below the level of the index of all commodities.
The clothing group also declined on the outbreak of war
and only began to move upward in January of 1915. Thence
the index rose steadily throughout the war, every single
month showing an advance over the preceding month. No es-
pecially great rise took place immediately after the entry
of the United States into the war, However, during the latter
part of 1917 and during 1918 the index for the clothing group
gradually outstripped the index of all commodities. It ended
the war at a higher level than any other group index.
Food prices reacted sharply to the outbreak of the war
but the rise of the first two months was not maintained. In
October of 1915 the index stood at only 99, compared with 104
for the preceding year. By April 1917, however, the index
had risen to 157, still 23 points below the index of all nom-
modities. However, the advance was maintained throughout the
war. At the end of December 1918 the index of food prices
was twice as high as it had been on the outbreak of war.
- 3 -
Building material prices did not rise as much during
the war as other groups. Even in 1916 during the great con-
struction boom, building prices remained more stable than
other prices. At the end of 1316 the building material
price index had risen to only 119 compared with 96 at the
cutbreak of war. In 1917, however, the rise was almost
twice as rapid. The rise was maintained throughout 1918.
Still the building materials group ended the war with an
index number of only 185 compared with an index of all com-
modities of 203.
The rubber, paper, and fibers group advanced less than
any other during the war. The advance was continuous but
quite gradual, A comparatively sharp rise took place in the
month of the outbreak of the war, the index number moving
from 96 to 101 from July to August, 1914. However, this
rate of rise was not maintained. Indeed, in September 1915
the index mumber stood 11 points below the level of the pre-
ceding year. No especially sharp rise took place when the
United States entered the war, This index moved only from
146 in April 1917 to 163 when the war ended.
Prices of individial commodities
The prices of wheat and wheat products moved up very sharply
on the outbreak of War in 1914. The index rose from 96 in
July to 150 in March of the following year. After that it
fell, largely as a result of the phenomenally good crop of
1915 which reached about 1 billion bushels. The 1916 crop
was only about half as large as the 1915 crop. Prices of
wheat and wheat products consequently rose from 120 in July
1916 to 189 in March of 1917. The entry of the United
States into the War brought unprecedentedly great rises from
an index number of 189 in March 1917 to 221 in April and 267
in May. The average price of wheat in Chicago during May 1917
was $2.95 a bushel. It was therefore necessary to establish
price controls over wheat products. The price of wheat for
the 1917 crop was fixed at $2.20 a bushel. The index of
prices of wheat and wheat products gradually subsided from
267 in May 1917 to 202 in January of 1918. The rise from
January 1918 to the end of the War was relatively slight
only 9 points on the index.
The index of the prices of corn and corn products also
rose sharply on the outbreak of War in July 1914. However,
unlike the case of wheat and wheat products, this rise was
not maintained. By the end of the year the index had fallen
considerably below the level of July. During 1915 it remained
relatively stationary. In December 1915 the index of the
prices of corn and corn products stood at 99, the same level
as in June of 1914. A rise of about 25 percent took place
in 1916. With the entry of the United States into the War,
however, much greater rises took place. The index moved
from 150 in March 1917 to 188 in April, to 205 in May and
reached 8. peak of 258 in October. In November 1917 corn sold
on the Chicago exchange for $2.25 a bushel, In the next month,
however, the average price was only $1.59 a bushel. These
prices remained relatively stable showing slight fluctuations
but no decided movement until August 1918. After that there
were very considerable price falls,
American prices of livestock, meats and fats showed no
important movement in one direction or the other for the
first six months of the War. There was & slight decrease in
this price index during 1915. By the end of 1915 the index
of the price of livestock, meats and fats stood at 92 compared
with 103 in July 1914. After this prices rose steadily showing
an especially sharp rise when the United States entered the
War in April 1917. The index moved from 138 to 150 between
March and April 1917. A more gradual rise continued throughout
1917 and 1918. At the end of December 1918 this index stood
at 193 compared with 103 in July 1914.
Cotton prices fell rapidly at the end of 1914. This was
the result of an unprecedentedly large crop. The index of
the prices of cotton and cotton products fell from 100 in
July 1914 to 73 by the end of the year. Special relief measures
for cotton farmers were provided by the national government.
Cotton was selling at about 7 1/2 cents a pound in New York
in December 1914. In 1915, however, cotton prices rose from
an index number of 72 at the beginning of the year to 100 at
the year's close. The rise wes much more rapid during 1916
particularly at the end of the year. In December 1916 the
index reached the level of 160. A sharp rise followed the
entry of the United States into the Mar. Prices thereafter
- 5 -
rose continually during 1917 and 1918. In September 1918
the index reached a peak of 267. Cotton was selling during
that month in New York at about 36 cents a pound, By the
end of the year the price had fallen to 30 cents.
Copper prices fell on the outbreak of the European War,
Only in January 1915 did the upward movement begin, The price
of copper in New York moved from about 14 cente & pound in
January 1915 to almost 20 cents at the end of the year. The
rise was well maintained during 1916, the December price in
New York at the end of that year being almost 32 cents a
pound. The general trend during 1917 was falling prices.
By the end of 1917 copper was selling in New York for about
23 1/2 cents 8. pound. No rise took place during the first
half of 1918. During the last half of the year, however, the
price moved up to 26 cents. Therefore when the War ended
copper in New York was selling at nearly twice the price which
had prevailed when the War broke out,
Even the prices of iron and steel products did not react
favorably to the outbreak of War in Europe in 1914. The index
of the prices of iron, steel and their products which stood
at 92 in June 1914 was only up 1 point in June 1915. & great
rise began in the last half of 1915 and continued through
1916 and the first half of 1917. During the year 1916 the
index rose from 138 in January to 221 in December. The entry
of the United States into the War was marked by exceptionally
rapid rises in this index. It moved from 254 in March to
370 in July. Thereafter government price control succeeded
in bringing about & great decline. By the end of the year 1917
this index had been reduced 153 points to 217. It remained at
substantially the same level until the end of the War,
Regraded Unclassified
at
Keep the Security Markets Open
Advantages
Disadvantages
1. This policy would reassure in-
1. It could not stop a liquidation.
vestors by suggesting that "bus-
iness as usual" was to be the order
2. It might prevent some selling, but
of the day. Investors would be re-
it could scarcely induce those with
lieved of the fear that they would
cash to purchase. Therefore, prices
be unable to obtain cash at such a
would drop and speculation would en-
time.
hance these price drops. When drastic
news appears people really want to
2. The security markets may not be
change their commitments, to get liquid
subject to the pressure now antici-
and to wait and see what will happen.
oated and therefore intervention may
"Official confidence" cannot overcome
be unnecessary. The public and bus-
this if the news itself requires indi-
iness will be saved the shock incident
viduals to make revised decisions and
to the closing of the market.
new plans, as has always been the case
on the outbreak of major wars.
3. Trading over the counter without
publicly quoted prices with its
3. Repercussions upon investment and
accompanying danger of loss to the
employment of a panic stock market are
bound to be bad and therefore the stock
unsophisticated seller or purchaser
of stocks would be avoided.
market will have more adverse news to
feed upon.
4. Freedom of the exchanges would
assist the process of adjustment in
4. A falling stock market generates
the American economy that will be
pessimism, irrespective of the real
economic prospects.
necessary as the greater part of
the world goes on a war basis.
Close the Stock Exchange
Advantages
Disadvantages
1. Prevent a sharp break in the
1. Inconvenience to domestic interests
market, a break which would be
who may need to liquidate.
solely the result of panic and
which will, by itself, further in-
2. "Illegal" markets will spring up
tensify panic and demoralization
throughout the country which will quote
throughout the country.
prices and partially offset the advan-
tages which may derive from closing the
2. It is a step which proved
exchanges.
successful at the outbreak of
the last war, and the public gen-
3. If quotations on over the counter
erally expects that the same
transactions are published, the psy-
action will be taken again.
chological effect of a weak market is
not avoided; if quotations are not pub-
3. Provide a breathing space in
lished, the ordinary buyer or seller
which arrangements can be made,
can be easily cheated.
if necessary, for orderly liquida-
tion of large blocks of stocks,
particularly foreign held stocks.
4. If the United States is the
only world stock market open, the
selling pressure will be parti-
cularly severe as it will provide
the only avenue left to the world
for large scale liquidation of
investments.
5. It would be easy to open after
a few days, during which time new
limitations on trading could be
prepared in the light of the cur-
rent developments.
Regraded
Unclassified
Transactions on the Security Market Limited to a Pre-detemined Range of
Fluctuation of Security Prices for any one day's Activity
Advantages
Disadvantages
1. It has all the advantages of
1. The news that on several successive
an open market with the added
days prices have dropped by the full
advantage that price declines
amount allowed will create uncertainty
during the first one or two weeks
as to how far down the bottom will be
of alamed opinion would be lim-
found and may therefore increase specu--
ited to a definite percentage
lative selling. If pressure continued,
each day. If necessary the range
the exchanges might still have to be
of fluctuation could be narrowed
closed and the combination of price
as time went on. The acute per-
pegging followed by exchange closing
iod could thus be met with limita-
might well be worse for business con-
tions upon the extent of decline.
fidence than an initial shut-down.
The knowledge of such protection
should reduce the amount of shares
2. The measure allows the brokers a
thrown on the market for sale.
great deal of power in selecting the
individuals whose shares they will
2. The initiation and adminis-
sell at the start of the day.
tration of such measures could be
undertaken without government
3. If only a part of the day's offers
assistance.
and demands could be completed within
the range prescribed, over the counter
trading would disrupt the range of
limitations.
Purchase of Securities by a Government Agency to Maintain
Prices on the Stock Market
Advantages
Disadvantages
1. The knowledge that such a step
1. There would be great pressure on
is to be taken would of itself
the part of security holders to pre-
calm the fears of security holders
vent the government corporation from
and substantially reduce the amount
unloading securities and lowering
of stock that would be offered on
stock market prices after the crisis
the market both now and in the event
is passed. The fact of the Govern-
of an outbreak of war.
ment holding large stocks of securi-
ties would always be a bearish factor
overhanging the stock market.
The magnitude of the sums involved
in government purchases might serve
to shock business confidence as to
have the opposite effect from that in-
tended. If it were thought the Govern-
ment would not keep up such a purchasing
program, there would be a greater rush
to sell.
2. In the course of this program the
Government may be faced with a large
loss on securities purchased at prices
which cannot be maintained.
3. This government agency would be
able to set the price for any security
on the market and in so doing would be
subject to a great deal of pressure to
set the prices higher than any figure
they may decide upon.
4. It would involve a large expenditure
of government funds at a time when the
Treasury may be faced with difficulties
in selling new issues of securities to
the public.
5. It would be very difficult for a
government agency to operate on the
stock market under emergency conditions
and on a scale so large as is contem-
plated to prevent leaks of information
to the profit of certain individuals
unassociated with the Government.
Formation of a Government Agency to Extend Credit to Foreign Governments
using as Collateral the Foreign Holdings of Their Nationals
The Johnson Act does not prohibit the Government or its agency from
making loans to governments which have defaulted. Section 2 of that Act
excludes from the provisions of the Act any public corporation created by
special authorization of Congress or any corporation which the Government
of the United States has or exercises the controlling interest.
Inasmuch as the proceeds of the borrowing would doubtless be used for
purchases in the United States, the Export-Import Bank might be the appro-
priate agency for which the credit could be extended except for the fact
that they now have the new limitation of $100 million. The RFC could, how-
ever, extend credit to the foreign governments up to say 60 percent of the
market value of the securities.
Advantages
Disadvantages
1. The knowledge that such credit
1. It might be regarded as a viola-
would be forthcoming would make it
tion of the spirit of the Johnson Act.
unnecessary for the foreign govern-
ments to liquidate their holdings
2. It would be in conflict with our
nearly so soon as would be the case
Neutrality Act.
could they not obtain such credits.
2. The Johnson Act does expressly
prohibit any person from making any
loan to England or France. There-
fore, unless the Johnson Act were
altered the credits would have to
be by a government agency (or cor-
poration in which the Government
has exercised the controlling
interest.
3. The Government could, by making
loans, set conditions upon its use
with respect to the type and price
of commodity purchased.
Proposal for controlling the market for government securities
in the event that the stock exchange is closed
It would probably be desirable to maintain prices of government
securities and to provide means whereby holders of government securi-
ties could liquidate them during a crisis period. The following are
suggestions which may be developed into satisfactory procedures for
this purpose.
1. The Open Market committee of the Federal Reserve
System to agree to expand its holdings of governments by as
much as $5 billion in order to support the government market
at a level somewhat below the present level.
2. If the Open Market Committee is not agreeable to
such a suggestion it may be desirable to invoke the Thomas
Amendment which would direct the °pen Market Committee to
buy $3 billions of government securities and if this were
not enough, to authorize the Treasury to issue $3 billion
in greenbacks to purchase government securities.
3. The Treasury to announce that it would purchase all
government securities offered to it at par, the funds to buy
these securities to be raised through a combination of the
following procedures:
(a) The sale of 90 to 270 day Treasury bills
to banks.
(b) The issuance of a billion dollars in
silver certificates.
(c) The use of a part of the Stabilization Fund
assets.
(d) The use of cash assets of government corporations.
(e) The use of the free gold now in the General
Fund of the Treasury ($700 million).
Regraded
210
RE PLANS FOR STABILIZING GOVERNMENT
April 14, 1939.
BOND MARKET IN EVENT OF WAR IN EUROPE
4:00 P. M.
Present:
Mr. Hanes
Mr. Bell
Mr. White
Mr. Lochhead
Mr. Viner
Mr. Ecoles
Mr. Harrison
H.M.Jr:
All right, gentlemen.
Eccles:
George, I'll report on one aspect and you talk
about the market, the way you think it ought
to be operated.
Harrison:
All right, sir.
Eccles:
If you will do that.
We have been in touch with the members of the
Committee outside on the phone and we have
a unanimous authority to increase the port-
folio up to five hundred million. They are
coming in next week on another matter and at
that time we can ratify the action and get
any additional authority that may be necessary.
In discussing the matter this morning with
the Executive Committee - what we would like
to suggest to the Treasury 1s that we operate
on joint account with them up to the hundred
million, to the extent that you use up these
funds, and then we would undertake from then
on, feeling that it 1s our primary responsi-
bility, to operate until such time as - if
we felt at any time we wanted help, we'd get
in touch with you on the matter. And we'd
expect of course to be in touch with the
Treasury anyway, and if the operation at any
time was unsatisfactory to the Treasury, we'd
expect them of course to say so.
H.M.Jr:
Well
Ecoles:
And then if such a situation developed - then
of course we would try to make it satisfactory,
make every effort we could; if we couldn't,
211
- 2 -
why, then we'd have to withdraw and let them
operate it. But we wouldn't anticipate any
such development.
We feel that the two hundred million that we
would operate on joint account, that it may not
be necessary to go beyond that; and if it is,
why, I believe that we can operate it in a
manner that will be satisfactory.
Now, we have been discussing that question as
to what would be satisfactory to the Committee
members themselves, which is something to iron
out, and I suggest that George give to you his
views and the discussion we had on the matter
of the practical operation and see what you
people think about it.
Bell:
What 16 the amount, five hundred million?
Eccles:
Yes.
Bell:
Is that additional to
Eccles:
We have authority to purchase up to five hundred
million.
Bell:
Now, or do you have to get that?
Eccles:
We have it now. Then you have the hundred million;
that would be six hundred million together with
what the Treasury has.
Bell:
Haven't you exhausted some of that authority since
you last got it?
Eccles:
No, none of it. That's what we got today.
H.M.Jr:
They went out and got some new authority.
Eccles:
We got this just now.
H.M.Jr:
That's what they've been doing. They bought them-
selves some new authority.
Harrison:
On the handling of the market, it is very hard
to say in advance of a situation that hasn't
yet developed what we should do. If it were
- 3 -
212
necessary for a committee or the Treasury to
decide today what should be done, I think that
the most practical thing to do perhaps would be
to say, "Here, George Harrison, is six hundred
million. Do the best you can." However, I
wouldn't want any such loose authority as that,
and for that reason asked the Board today to
talk with me in broad outline about possible
methods of handling an emergency. My own thought
has been that if, for instance, war 1s declared
tomorrow morning and we are faced with a panicky
situation, and you might have the opening bids
off 25/32nds or a whole point - well, let's
assume it's a point - I would suggest that we
meet the opening bids by putting in bids ourselves,
whatever they are. Maybe they're down a point
or a point and & half. We might try to bid them
up at the outset, to meet the market at the
opening bid after the bad news is out. And then
during the period of the day keep bids in to
keep it as orderly as we can, but not to hold
our necks out 80 we invite all holders of bonds
to come in and say, "Here, Federal Reserve, you
bail us out and let us keep our book profit,
but to keep the market orderly without at the
same time guaranteeing profits to holders of
bonds at high prices.
Bell:
In other words, you're still providing a cushion
and not support, ien't that ght?
H.M.Jr:
Well
Harrison:
What's that?
Bell:
Are you bidding under the market?
Harrison:
It will depend a lot on how it happens. Let me
finish; then I think it will be a little easier.
Then you can ask the questions you want.
I would think that if war were declared and there
were & very panicky situation, the wise thing
for us to do would be to start, as I say, the
bids - use our judgment as the day goes on as to
how fast we pay the money out, as to whether we're
meeting the market right on & bid or under it.
213
- 4
The chances are you couldn't tell where you were
a good part of the day.
But we'd have an agreement with the market, which
would be entered into at the outset after the
declaration of difficulties, that we would put
8. minimum price on trading for that day, have &
drop of one point from the opening prices, with
the understanding that the market would stop
trading after bond prices had gone down a point
beyond the opening, somewhat 88 the Stock Exchange
people are contemplating doing, only in their
case it's a ten percent drop which they discussed.
They plan, as you know, to do that not only for
stocks but for corporate bonds as well.
Now, there 1e some question as to whether that
1s the best procedure. You might say that you
should keep going all day, feeding money out
regardless of where the bonds go. I think, and
my associates in New York feel, that the most
strategic and successful way of handling the
market would be to put that minimum price on
trading. Now, whether it's to be & point or
point and a half would be something to be dis-
cussed in the light of circumstances. But we'd
let the market know and the country know that
80 far as we were able we would stop trading
in any issue that had gone down more than X,
whether it's a point or point and & half that
we agree on.
H.M.Jr:
May I interrupt you there? That doesn't carry
out what I think we had in mind. We were going
to put up a sign: "Business as Usual." Now,
please talk - I haven't had & chance to consult
with everybody here. You fellows have been
thinking about this all day. But that doesn't
carry out what I had in mind.
Viner:
May I ask a question? Do you mean by the market -
you don't mean merely the Stock Exchange, but
you mean the over-the-counter market.
Harrison:
The over-the-counter market.
Hanes:
George, when you say "stop trading," you mean by
that that you would say no trade below that level.
214
- 5 -
Harrison:
That's right.
Hanes:
You wouldn't stop trading.
Harrison:
No, trade below that level.
H.M.Jr:
What does that mean?
Bell:
That means pegged for that day, at least, as
a minimum.
Harrison:
The market for that day would probably be
almost entirely in the Federal Reserve Bank.
Hanes:
Well now, would you stop buying there or would
you maintain your price there?
Harrison:
We'd maintain our price there and continue to
buy.
Hanes:
And continue to buy.
H.M.Jr:
I thought you meant that if the bonds were
102 and went to 101, went below 101, you'd
say, "We won't deal any more in that particular
issue."
Bell:
That day.
Hanes:
That's what I thought he meant, too.
Viner:
That means there might be a blank market at
five points under, and that next morning you
might have the opening bids two points under,
if that's the lowest you permit, and everybody
trying to get rid of their portion at that,
and you put a quota on it.
White:
It's not clear. There are two different points
of view.
H.M.Jr:
Do you mind - talk in terms - take any bond
and talk in terms of dollars and quotations.
Give us an example.
Harrison:
All right. Let's take your 2ge '50-'52 and let's
assume they're selling at 104 today - or 1041
they are - and war is declared tonight. Tomorrow
215
- 6 -
morning the opening bids for any trade, we'll
say, are 103, off a point and a half. We'd
begin trading at that point; we'd do the best
we could. We wouldn't peg it there, but if the
flood of offerings in that issue got to a point
where even on reasonable support - and let's
not argue the amount of that for the moment -
the price goes down to 102, we would still
continue buying and we'd have bids in at 102,
but if there were no takers at that - no
offerers at that, trading would cease, because
there wouldn't be any other bidders, presumably.
H.M.Jr:
But why wouldn't they continue to offer, as
long as you stood there?
Harrison:
What's that?
H.M.Jr:
They'd continue to offer as long as you keep the
peg at 102.
Bell:
They would if they couldn't get more. I mean if
the market continued to go down they'd sell at
102.
White:
They'll take all that's offered at 102. Would
you - had you reached that stage?
Viner:
No guaranty.
Harrison:
Oh no, because let's suppose - let's take the
case of the First National over here in Baltimore.
They're pretty smart traders, and they have a
hundred forty million of bonds, we'll say, and
they know that this thing is apt to go down a
point a day, we'll say, and they figure we're
going to stand out there and continue to buy
at 102. They'd dump the whole portfolio on
us. Well, we wouldn't do that. What I mean
is that we'll be in there with a reasonable
amount of bids at that price, and if it gets
to that price and we are then offered huge
volumes and we don't want to go below, we'll
Just say, "No more trading."
H.M.Jr:
You mean no more trading on the part of the
Federal Reserve System.
Harrison:
On the part of the Federal Reserve System.
216
- 7
White:
You mean you won't buy any more.
Harrison:
That's right.
White:
But that doesn't mean no more trading.
Harrison:
If you'll let me finish. We would also try to
get every dealer and every banker that's dealing
and try to get them to agree to do just as they
do in the Stock Exchange and the Chicago Pit:
that when a particular issue drops down a certain
amount, trading would stop rather than to allow
people to keep dumping, dumping, dumping all
through the rest of the day.
Now, you can do it the other way if you want;
I think you could say, "All right, we won't
have a minimum price," but I believe that if
you do that you run the risk of a drop of
3, 4, 5 points in a day instead of a one-point
drop.
I am sure we could get dealers and I am sure
we could get banks and all others to agree
that the wise thing to do - or if we agreed,
determined that the wise thing to do would be
to stop trading after a drop of one point in
one day in any one issue.
White:
Won't they anticipate if that happens and you
find the flood of offerings 80 large that you
cease trading, and under the terms of the
voluntary agreement trading ceases when you
cease?
Harrison:
Yes.
White:
Would it not be reasonable to suppose that the
following day the same thing will begin over
again and that that will occur on successive
days? Let's assume that it does oocur on
successive days. Do you have in mind now where
you would give increasing support as it went
down?
Harrison:
Yes, I have that, but that's the difficulty,
you haven't let me get beyond even the first
day or the second day.
217
- OR -
My thought would be - it's not worked out on
paper in any great detail - that in this par-
ticular issue if it dropped from 103 to 102
on the first day, we'd put in bids at 102
on the opening next morning, and we would
stop trading, we'll say, again if the offerings
drive the price down to 101. My thought was
that we'd continue that but that our degree
of activity would increase as we approached
par, with & view - trying not to peg it there,
but insure if we can, with reasonable support
of this kind that the thing will level out
before it gets below par; and rather than to
stick our necks out and do our heaviest
bidding at the outset, let the owners now who
have Government bonds at the highest prices take
some of the loss, and for us to be more active
the lower the bond market gets, rather than at
the outset.
White:
Do you have any idea now as to any quantitative
indications of what you regard as reasonable
on the way down?
Harrison:
I don't think you can tell that, Dr. White,
frankly, because you couldn't tell what would
be the volume of offerings. Sometimes you have
a great deal of activity on really very small
offerings, or you merely have a rapid change
of price on relatively an inactive market. In
that case we could afford to do more. But if,
for instance, after we were going for half an
hour we found we were being flooded with offers
from all over the country even within that first
spread of one point, there 1a no point in our
using up our five hundred million, we'll say,
right then, even though we planned to go another
five hundred million beyond, because all we
would be doing would be protecting the profits
of fellows the first day at the high point
rather than to make them take some of the loss
and get out at lower points in succeeding days.
Viner:
This first day is the first day of what -
declaration of war?
Harrison:
First day of any panic, and I don't care what
causes it.
218
- 9 -
Viner:
of course, you'll have a creeping depression of
the bond market for possibly & week or two weeks
before, and the bonds will already possibly -
unless the thing breaks suddenly, bonds may
already be down three or four or five points
from their peak before the actual declaration
of war occurs.
Eccles:
That hasn't been true for the last week. Your
bonds have been holding pretty even. Now, if
there is 8. declaration of war, actual hostilities,
they could
White:
You're assuming that it would become more acute.
Viner:
I say it too strongly, but it may work that way.
And I wonder whether you contemplated, you see,
that your action - my only point is that your
action on the first day of what you call the
panic stage ought to be governed in some way or
other by what had happened in the preceding two
weeks, if the market had already been off,
wobbly. I'm not saying how you ought to act,
I haven't thought it out, but I don't think you
ought to work out in advance the plans for the
first day independently of what had preceded.
Ecoles:
Well, in our discussion, the impression I got
was that it was on the assumption of the present
high market. In other words, we were thinking
of this here as being ready for something hap-
pening over the week-end. That's what we've
been working on here. Now, next week it may
be an entirely different picture. But from what
the picture was today, if hostilities started
tomorrow and by Monday morning we had to be
prepared, this would be the type of program, and
it would be based upon this present very high
market.
Viner:
In other words, your program is subject to amend-
ment week by week.
Eccles:
If the market should gradually work down in an
orderly way without any necessary support and
you had a market down at four or five points
below where it is now, BO that the profit 60
far as the banks were concerned was pretty well
wiped out, then it would seem to me to be B. very
different matter. I think under those conditions
219
- 10 -
it would be my opinion that far more vigorous
action should be taken to hold that market.
Hanes:
That's not quite like the idea of stopping at
the point - after all, what you're doing 1s
holding an umbrella up on the profits that
are now in the bond account.
Eccles:
We'd let it drop more than a point.
Hanes:
I hate the idea of ever trying to peg anything;
that's an invitation in all the markets that
I've ever seen for everybody to dump on you.
Ien't it, George?
Harrison:
Well, I've expressed myself fully. If you
thought I meant that - I did make one statement
that was misleading when you asked what happens
when you get to 101. I meant that at that -
I was being very, very literal - at that point
we would buy somewhat and if that didn't stop
it or didn't turn it about, we would stop
trading in it at that point. And that would
not be with a view to pegging it at all, but
rather to conserving resources and avoiding
a lot of fellows dumping everything on us at
101. We would stop buying completely and hope
to close the market BO that you wouldn't have
quotations below that anywhere for the rest
of that day and I think you could pretty
effectively do it except for a lot of bootleg
transactions which would be insignificant any-
way. If Tom Smith wants to sell to Bill Jones
at 50, he'd be a damn fool but I have no
objection to his being & damn fool if he wants
to; that is a side trade all by itself and has
nothing to do at all with the market operations.
But I feel this, that as a part of any program
I would like to think that the New York banks,
as I think I mentioned here yesterday, would
agree - not promise, but agree as & principle -
that they are not going to try to get liquidity
through the sale of bonds, they're not going
to try to protect paper profit by the sale of
bonds, they're going to sit tight, not out of
any favor to us but because it would be damned
foolish for them all to try to unload at one
time and protect themselves.
220
- 11 -
Viner:
If you could show them a rediscount rate on
Government bonds
Harrison:
We would announce that we were going to lend
at our discount rate at par, 80 they could
get all the liquidity they want - not only for
member banks, but non-member banks as well.
As to corporations and individuals, we would
just announce we had the right to make loans
but we would expect them to go their banks
for accommodation in usual course.
Viner:
I would do one more thing there. I would assure
them in advance - not necessarily as a legal
matter - assure them it 18 your intention
that no matter what happens to your rediscount
rate, you'll rediscount bonds at a rate not
higher than the rate yielded by the bonds.
Harrison:
Well, don't you think that would scare the life
out of them?
Viner:
It's 80 much higher than the rediscount rate
1s apt to be.
Bell:
Wouldn't want to make that announcement right
now, would you?
Viner:
No, let the rumor go out that they intend
White:
That possibility that Johnny Hanes' remark
suggests - I imagine you've considered it, and
I wonder how much you would weigh it against
yours, and that is the thought that in the
event of war bond prices are going to go down,
if it lasts any length of time, in any case,
because of the repercussion here, increased
business activity, and BO forth, and that it
may be desirable to take advantage of the
critical panicky period and take the rap all
at once and decide ahead of time on some
approximate level to which you will let it go
and then support it indubitably for & long
time at that level, rather than cuchion it
very softly on the way down and have a series
of bad days or bad weeks; in other words,
let the market take the rap right away,
Regraded Unclassified
221
- 12 -
which won't have much of an effect on business
conditions if it 1s very short and if the
knowledge is there that beyond that point the
Government or the Federal Reserve System intend
definitely to support the market very strongly,
60 that you get it over and done with and you
are at & level which 18 more easily supportable
and more in accord with the basic economic
conditions that are likely to prevail should
the war continue for several months or more.
Bell:
That would induce everybody to try to unload
before it reaches that level. You'd have a
panic.
White:
You decide to peg it and keep it at a particular
rate. Let it be known. You might say you'll
buy them at par.
Harrison:
I think there are two disadvantages to that.
The British did it by saying in September that
they wouldn't allow the War Loan, at three and
a half percent, to go below 92; it had been up
around 104. The week prior to Munich, it got
down to 97. They announced 92 as a minimum
below which they would not permit trading.
That meant there would be no official quotations
below 92. In the case of the British, with a
closely-knit market, well-organized market,
that was not construed as an appraisal of the
value of the bonds, and the bonds in fact did
not go below, I think, 94% If, however, we
should make an announcement that we were going
to peg bonds, these same 2ge, we'll say, at 94,
I think that nine out of ten bankers in this
country would construe that as our appraisal
of what they were worth, and every one of them
would try to unload at once.
Then, even if you did that, you would have the
second problem of bailing everybody out and
agreeing to redeem bonds, in effect, at 94 80
long 8.8 the war lasts, which might or might not
be wise. We know of times when three percent
bonds have gone well below 94. And I would
think myself - discussing that - I would think
myself that that would not be the best technique
222
- 13 -
for this country, with the variety of holders
you've got, the broad area, and the difficulty
of making them understand that that was not
our appraisal of their worth.
H.M.Jr:
Now, could I interrupt? I want & period of
absorption. I mean I want to sleep on this
thing, see?
What I'd like to do at this time is to call
up Jerome Frank and find out when - I called
him this morning - SEC 18 going to be ready
to talk. Eccles said, "Let's close this thing
up tomorrow," and I think he's right. I think
by the time we go to bed tomorrow night we
ought to know approximately where we are, see?
As to the idea of going each a hundred million
first and then you people doing the next four
hundred million, why
Eccles:
Well, we'd do it indefinitely then. I mean if
we thought we wanted some help, we'd come to
you or if you thought we weren't handling it
right you'd say so.
H.M.Jr:
The way I feel is, I'd like to start that way,
huh?
Hanes:
Yes.
H.M.Jr:
And I think there has got to be an understanding
in the first place. In times like this, nobody
can pick a fight with me. I mean we'll have
to all do the best we can to come to an agree-
ment and there's not going to be - hell, we've
been through these things before with the Fed
and we've had differences, but there's never -
on the way you've handled the market - but I
don't think I've raised my voice in five and &
half years as to any differences when times
were bad. Is that right?
Harrison:
I think that's right.
H.M.Jr:
It isn't as though I had just arrived here and
we didn't know.
Regraded
Unclassified
- 14 -
223
Now, I think that I want - I haven't had a chance
to talk this over with my associates; I want to
talk this thing over and Bee where we are at.
But as to the general idea, as of tonight, I mean,
it sounds pretty good. What do you fellows think?
Hanes:
I think it sounds fine. The only - and this I
say out of ignorance and not with any thought of
giving you advice about the Government bond mar-
ket, because I'm not familiar with it - but I am
familiar with the other markets and I have seen
other markets work where you were trying to pro-
tect markets and what you're trying to do 1s to
create an absence of selling as well as & presence
of buying, which gives you & stable market on the
way down. And as I visualize this thing, you're
not going to have very much difficulty supporting
the market at par; it's above par, where they're
trying to protect that profit, that you're going
to have difficulty, and you want to cushion that
shock as much as you can without using all your
purchasing power at one fell swoop.
Well, I should think the reaction on me, as 8.
holder of the bonds, would be far better if I
knew that market was wide open all the time;
even though it's at a somewhat lower market, I
know the market is there for me and if I need
the money I can get it. I'd feel a great deal
more comfortable in holding the bonds than if
I know the market is going to be withdrawn and
trading suspended.
Harrison:
Only for the balance of that day.
Hanes:
Well, that again isn't in accordance with our
thought of business as usual, which is 8. free
and open market as long as - even at decreasing
prices. And after all, it isn't 88 though
your bond was going below par. Below par I
would feel far differently about it, but above
par that's a premium you're talking about.
Eccles:
I was going to say, Johnny, that par doesn't
necessarily mean anything, because some of
these bonds yield two and B. half - two percent,
some two and a half, some four; and par on one
224
- 15 -
bond would be high and on another it would be
very low. Bo I mean the par doesn't
Hanes:
But none are selling below par at the moment.
Eccles:
The thing of it 1s that some are selling at a
very high premium, and certainly if your 41s
got down to par, your 228 ought to be 90 in
proportion. So I don't think you ought to
talk about par on some issue
Hanes:
Well, we'll talk yields then; say if the average
yield 1s 80 much, let it go down with that
market wide open all the time, and back away
from it all the time and take it on a scale in
moderate amounts; let it go down, in other words,
seeking its own level rather than the artificial
level.
Harrison:
Well, that's the way we've attempted to do in
the past. It would be an easy way for us to do
it now. And I'm not attempting to be dogmatic
about it. This suggestion 1s just for considera-
tion.
Hanes:
Mind you, I'm Just saying how the thing reacts
on me as an outsider, because I am an outsider;
I don't understand it, don't know much about
this.
Viner:
But there are two different techniques. One
is giving it support when it is on the down
grade, but giving no pegs or guaranties or
closing the market. The other one 1s
Harrison:
Well, the difficulty, as I see it, with that
theory 1s that you are facing perhaps a con-
dition that we have never faced before, and
you may find that in that first day you will
have a ten-point drop and the next day they
are back four points or five points, and you
wipe out a lot of people, you have a lot of
bad feelings, and you may have done a great
deal more damage than if you try this other
plan of
Eccles:
Control.
225
- 16 -
Harrison:
of a minimum price per day. That's the
reason I favored what the Stock Exchange pro-
posed. I think it is 8. very wise thing.
Eccles:
This is in line with what the commodity markets
do. They put a limitation.
H.M.Jr:
As I say, I've got to have a period of absorption
and I'd like to sleep on this thing, seef And
at least if war is declared tomorrow morning,
you know what to do; I mean you could go to work.
Eccles:
Oh yes, we're already to go to work; it's Just
a question of the technique.
H.M.Jr:
Well, if war came tomorrow, George could start
in buying tomorrow morning and use his judgment
and buy ten, fifteen - or buy - I mean buy - I
mean he can get hold of us and we're here. But
I mean the thing that I was afraid of was that
war might be declared and Harrison wouldn't have
any purchasing power. And the principal thing
that I am impressed with in what we have accomplished
the last two or three days as concerns the bond
market - we have provided buying power. That's
the big thing, isn't 1t?
Eccles:
Well, we're prepared to do something.
Hanes:
On some basis. Sure. I think you'll find you
might change your tactics as the thing goes on.
Harrison:
That's what I say; frankly, it's such a new
field for us.
Viner:
You ought to feel your way.
Harrison:
And we can't define today any definite plan of
action for one day, two days, three days, any
amount; we may have to change in the middle of
the first day. But I was just trying to expound
a little bit on what my philosophy might be as
to the best way of causing the least damage if
you have a real panio.
Now, there 16 one more factor you've got to
remember.
Unclassified
226
- 17 -
H.M.Jr:
Do Frank? you mind if while you're talking I call up
Harrison:
Not a bit. And that 1s that the publicity we'll
get to banks that they can borrow from us at
par will be a great reassurance - at our discount
rates - including non-member banks, all banks,
savings banks and the rest. That will be tre-
mendous. Now, there are very, very few banks
in this country - and they are the nervous
holders - who are pressed for reserves at the
moment. Most of them have plenty of liquidity.
I can't conceive of any bank really wanting to
sell except for the purpose of protecting a
profit.
Eccles:
That's all.
Harrison:
And I think it would be a great mistake for the
Treasury and for the Federal Reserve to step
in there and protect those profits to any great
extent. I would think therefore that on our way
down we wouldn't be too vigorous but we'd do
enough to keep the market open until you reach
a minimum price or, if you adopt your (Hanes)
theory, until the day 18 over. I think with
your theory, which I understand 18 just a sug-
gestion for consideration too, you'd run the
risk on the first day after a declaration of
war, which we can't anticipate the effect of,
of a much broader swing than you would like to
see with 8. bound back maybe two days later that
would have caused a great deal of damage to
some and a great deal of profit to others. And
that's the thing that I'm trying to avoid; if
we can do it by way of some such mechanism as
this, that will be a fair measure of control.
Now, I think it would be much better understood
if the Stock Exchange 18 going to do what they
indicated yesterday they would do. It is pro-
bably about what the British will do in one
form or another. The theory of minimum prices
isn't new in this country. We did it after
the Stock Exchange reopened in 1914. It didn't
work for long because the bond market - rather
the stock market started to go up again.
227
April 14, 1939
4:40 p.m.
HMJr:
Hello.
Operator:
Mr. Frank. Go ahead.
Jerome
Frank:
Hello.
HMJr:
Henry Morgenthau.
F:
Yes, sir.
HMJr:
I wondered if you knew now if you'd be ready tomorrow
to -- to sort of -- 80 we can close up the weekend
knowing about where we were at.
F:
Yes, I think BO.
HMJr:
Well now, in case of trouble -- what I was thinking of
I mean, I was thinking of -- possibly tomorrow have an-
other meeting.
F:
Very good, any time you say.
HMJr:
Well now, just a minute, I've got Eccles and some
others here. Let me see if it would be convenient.
(Pause)
Just a moment, please.
F:
Yes, sir.
(Pause)
HMJr:
Well, Eccles has got to cancel an appointment, but he
says he will if -- if you people will be ready to talk
turkey at three tomorrow.
F:
Three. Very good.
HMJr:
What?
F:
Yes. Be at your office?
HMJr:
Would you?
F:
Yes, indeed.
HMJr:
And I'll get word to -- to Wallace.
Uncla
228
- 2 -
F:
Very good.
HMJr:
All right. Thank you.
F:
Thank you.
229
- 18 -
H.M.Jri
Excuse me.
(On phone) Hello. (Conversation with Frank
follows:)
Regraded Unclassified
230
- 19 -
Lochhead:
Mr. Harrison, one thing I wented to ask you
about your idea. After all, a lot of us don't
really know what's going to happen to the bond
market in the event of war. We all know that
everybody is going to watch the bond market
and people are going to try to take the lead
from us rather than the general market. Now,
the general 1deas you have, I think, are all
right and I agree with you that in the beginning
of a market you can't say you're going to use
up all your money that one day. But I do
think that if on the first day you keep an
orderly market but, say, let the market drop
a point on & million dollars worth of purchases,
you are giving the lead to the market that the
market 1s going to go down. I don't say you
should spend five hundred million, but I'd
like to have some idea that you wouldn't let
the market go down a point, that you'd be
willing to spend twenty-five or fifty million
dollars the first day. That gives 8. lead to
the market. If it just seems we're going to
step aside and let this thing go down - we
found that in various cases when we really
went in and bought bonds, it dried up, but if
we just keep under the market and go down with
it
Eccles:
Archie, it depends on where the market 1a. It
depends on where the market is when you start.
I would agree with you fully if you had a
market three points, four points below the
present market. But at. the present market it
seems to me that, with every market in the world
going down - stook markets, commodity markets,
all markets - to make the bond market look
entirely abnormal - it seems to me that these
prices would be a mistake. I don't say that
you should only buy a million.
Lochhead:
I'll say this, that if you were spending a
couple hundred million to keep your thing
pegged, that's one thing; but if it were a
question of Just simply putting in two hundred
fifty thousand dollars every quarter of a point,
that's nothing. In other words, let the market
231
- 20 -
decide at that high point, but don't give it a
downward lead. I think we ought to be willing
to spend 8. little bit of our money on the first
point.
Eccles:
I think what you'll find is that - I personally
am somewhat in favor of trying at least this
proposal that George has made; we discussed it
in the Committee over there for about an hour
this morning, the pros and cons of the thing,
and the thing that appealed to me, and I think
the others, was that if you don't do something
of this sort there 1s the possibility of having
to put in an awful lot of money in order to
prevent a very wide break and protect the profits
of the banks. Otherwise, if 8 market should
break five points or four points and they read
in the paper that night that the Government bond
market went down five points or four points,
the psychology of that thing is terrific. Now,
if you freeze the thing at the one point for the
day and the next day, say, & point and the next
day - I mean the shock of & point & day for
several days, increasing gradually the support
on the thing a.B you get down to around your
White:
Providing you don't close the market. When you
close the market
H.M.Jr:
Gentlemen, would you be a little charitable with
me, and I'd like to close my desk and I'd like
to think about this. You'll (Harrison) stay and
be here at 3:00 tomorrow, won't you?
Harrison:
Sure.
H.M.Jr:
And I'll Bee you. We'll try to get our own selves
ready. And we're not going to have any trouble.
I feel very much pleased over what we have been
able to do 80 far, and I'm not worrying.
Harrison:
I don't think we're going to have war anyway.
Don't put that in the record, though.
H.M.Jr:
That's all right. We'll find out.
232
- 21 -
Could my own people stay & minute please?
Eccles:
Is that definite for 3:00?
H.M.Jr:
That's right.
Eccles:
That's O.K. with Frank, is it?
H.M.Jr:
Yes, he said 80. The reason we're slow - we
haven't got our opinion yet from the Attorney
General.
Ecoles:
Haven't you got that yet?
Harrison:
I'll give you one.
Eccles:
Maybe you need a war to get the Attorney General
in action.
Harrison:
All right, sir.
H.M.Jr:
O.K., good night. Thank you.
Regraded
Unclassifie
1 12 MM DE 50
56(e)
FEDERAL RESERVE BANK
OF NEW YORK
233
FFICE CORRESPONDENCE
DATE April 14, 1980.
CONFIDENTIAL FILES
SUBJECT:
TELEPHONE CONVERSATION WITH
L. W. Knoke
BANK OF ENGLAND.
OM
Mr. Tong first and then Mr. Bolton called at 11:14 a.m.
There was very little change. Things were quiet. The demand for
dollars continued. They were selling at the rate of $1,500,000 per
hour, so far today $11,000,000 in the market alone. To the best of
their knowledge there was no speculation, the business going on being
the transfer from London of foreign capital and anticipation by
commercial houses of their doller requirements for the whole year.
Samuel Montagu had just inquired of them whether we were
ready to receive gold shipped by them consigned to us for account
of the National Bank of Yougoslavia and I explained that if the
bill of lading showed us as consignee and Samuel Montagu as agent
acting on behalf of the National Bank of Yougoalevia, we would be
ready to receive such gold for account of the latter.
I expressed my surprise at the high figure at which gold
had been fixed in London today, too high, I explained, bearing in
mind the over-night jump in insurance rates. Bolton replied that
he was sending me a cable tonight explaining in some detail that a
bill was being formulated by the Government for the latter to assume
all risks on shipments to and from the United Kingdom. Under this
bill the insurance rate on bullion would remain unchanged at la 3d
and the gold point between New York and London should accordingly
continue as heretofore at about 34.76 1/4. Shipments from Continental
ports to New York would not be affected by this arrangement and the
LISC, 32 SOM 1038
234
FEDERAL RESERVE BANK
OF NEW YORK
FFICE CORRESPONDENCE
DATE April 14, 1930.
CONFIDENTIAL FILES
SUBJECT: TELEPHONE CONVERSATION WITH
L. W. Knoke
BANK OF ENGLAND.
OM
2
new insurance rate quoted in the market at between three and four
times the old would cause the gold point for, for instance, the
belga to be considerably lower than heretofore.
LWK:KW
BECEIAED
oral it 900
TRENTRA920 YRUPAIST
MI to valid
att of WHIT
Regraded Unclassified
235
RFP
PLAIN
London
Dated April 14, 1939
Rec'd 2:28 p.m.
SECRETARY of State
Washington
484, April 14, 7 p.m.
FOR TREASURY FROM BUTTERWORTH.
The nervous atmosphere continued to affect the
various financial markets today. The stock Exchange was
weak with most prices lower, war loan closing 5/8 down at
93%
The average rate for today's Treasury bills tender
was stlg 1 lls. 2d. as compared with stlg 1 6s. 3d, Last
week, in spite of slightly Easier credit conditions follow-
ing official purchases of Treasury bills in the past few
days and a broadening of the credit base by stlg 7.8 million
indicated in the Bank of England return,
The dollar remained steady at 468 1/16 but the takeoff
was heavy, the British fund giving dollars steadily and
operating also in the forward market offering one months
dollars at 15/16 and three months at 2 7/8,
Another indication of nervousness was the heavy
dishoarding of gold. Of the 276 bars dealt in at fixing
206 were married and the remainder was all market gold,
After
Regraded Unclassifier
236
RFP -2- #484, April 14, 7 p.m. from London
After fixing there were moderate dealings but the British
fund furnished none. The price was fixed at stlg 1 48s. 6d.
and was not affected as EXPECTED by yesterday's announcement
of increased war risk insurance rates owing to the British
Government's announcement of a scheme for reinsurance which
in Effect will make the rate ls. 6d.
The franc was weak Early in the day but small sales of
sterling by the Bank of France brought a turn in the
market which closed unchanged on the day at 176,75 with the
Bank of France buying sterling.
A flurry in the belga followed rumors of an assassina-
tion in the German district of BElgium and the rate went
to 27.841 but a denial of the rumors brought it back to .82.
KENNEDY
WWC
MECEINED
0001 are
YYU ACT
patient cell ....
perce of 1 social
237
PARAPHRASE OF TELEGRAM RECEIVED
FROM: American Embassy, Geneva
DATE: April 14, 6 p.m.
NO.: 77
On April 15 the Credit Suisse Bank, Geneva, will
ship gold ingots valued at 1,230,158 Swiss france to
the Bankers Trust Company, New York, via the steamship
Queen Mary from Cherbourg. Also, on April 6, Credit
Suisse shipped gold ingots valued at five hundred
thousand Swiss francs to the Chase National Bank,
New York, via the steamship Washington from Le Havre.
BUCKNELL
03V13338
orop it OCA
YRUZAHRT
must od) N valid
permit sei # Metweet listed
238
PARAPHRASE OF TELEGRAM RECEIVED
FROM: American Embassy, Paris
NO:
744 (Section 1)
DATE: April 15, 1939, 1 p.m.
FROM COCHRAN
Weakness of the belga is a feature of this
morning's unofficial exchange trading. There is
gossip to the effect that the belga will be devalued
this weekend, while technicians are attributing the
slip in the peg rate to the effect on the gold points
of the increase in rates for war risk insurance on
gold shipments. I am sure that the rumor regarding
devaluation of the belga this weekend is wrong.
There was little trading this merning in French,
Dutch and Swiss currencies, but I am told by my bank-
ing friends from Switzerland that there has been
exceptionally heavy pressure there this week on
exchange and also on securities. They inform me that
nervousness continues. (END SECTION ONE).
BULLITT
BECEINED
orge 21 OCA
THINTAN3G YEQ2A3RT
KA:EB
all to will
resort 5ff of testaure -
239
MJB
GRAY
Paris
Dated April 15, 1939
Rec'd 3 p. m.
Secretary of State,
Washington.
744, April 15, 1 p. m. (SECTION TWO)
AGENCE ECONOMIQUE carried Evidently inspired story
denying report that French Government has made return of
Bank of Spain gold conditional upon removal of Italian
- troops from Spains
Financial press particularly British refers to French
debt statement published yesterday and commends Reynaud
upon his success in repatriating capital which has gone
into short term treasury paper and Enabled the Government
so far to meet its heavy Expenditures without appealing
to the long term capital market.
Norwagian Government is to ask Parliament for Exception-
al appropriation of 20,000,000 crowns for defense purposes
to bE covered by a special tax 1939-40.
Press gives considerable attention to Egyptian embargo
upon
240
MJB - 2 - No. 744, April 15, 1 Do me (SECTION TWO) from
Paris.
upon gold exports, and to reported Wassermann plan in the
United States.
(END MESSAGE)
BULLITT
HTM:CSB
BECEIAED
prol 81 oct
ТИЗИТНАЯЗО YHURANT
- la will
- sit # under
241
RE PLANS FOR STABILIZING MARKETS
April 15, 1939.
IN EVENT OF WAR IN EUROPE
3:00 P. M.
Present:
Mr. Hanes
Mr. Gaston
Mr. White
Mr. Bell
Mr. Lochhead
Mr. Bernstein
Mr. Jesse Jones
RFC
Mr. Ecoles
Mr. Harrison
Mr. Frank
of
Mr. Purcell
Mr. Wallace
Mr. Robbins
Ang.
Mr. Feis 64754
H.M.Jr:
Well, supposing, gentlemen, we start. Mr. Purcell,
would you rather wait for Mr. Frank for me to ask
what you people have decided on the New York Stock
Exchange?
Purcell:
I think perhaps that would be better, if you
don't mind, Mr. Secretary.
H.M.Jr:
Well, let's start, if it's agreeable to the Federal
Reserve - Marriner, do either you or George want
to sketch what we are prepared to do in the Govern-
ment bond market?
Eccles:
Well, yes, I can report what I reported yesterday
afternoon. You're not interested in the way we
conduct the market.
H.M.Jr:
Just what we - and I want to say once more for
everybody here that this must be kept confidential,
and I'm sure it will be. I mean we're talking
here - we just can't have any leaks, and I'm sure
there won't be any. I'm sorry to interrupt you;
now, go ahead.
Eccles:
The Reserve System 1e prepared to give support
to the Government bond market, that is, without
any idea of pegging it but of providing a market,
keeping a market open for Government bonds, and
attempting to maintain an orderly market.
The Open Market Committee have been communicated
with either in person or on the telephone, every-
one of them, and there WAS a unanimous response;
242
- 2 -
and the Executive Committee of the Open Market
Committee - there's five members out of at total
committee of eleven making up the Executive
Committee - have been given the authority to
increase the portfolio up to five hundred million
of securities. The Secretary the other day
stated that they had, I think, a hundred million
of trust funds, 80 that that would make available
six hundred million at the present time.
Next week it is expected that members of the
Committee will meet and review the situation 80
that we will be prepared to take further action
if the situation should warrant it.
(Wallace, Robbins, and Feis come in)
H.M.Jr:
If you fellows can quit fighting about cotton
for a minute and let Mr. Jones settle it
All right. Do you mind going over the ground
once more?
Eccles:
The Secretary was just asking us to report with
reference to what the Reserve System would be
prepared to do with reference to protecting the
Government bond market, and I was Just reporting
that the members of the Open Market Committee,
the committee that has responsibility for the
operations in the Government bond market, have
been contacted either by telephone or in person;
as a matter of fact, all but three were here;
the Board and Mr. Harrison and Mr. Leach were
all here, and the other three members were con-
tacted. And I reported to them these conferences
and the purposes, and we got unanimous agreement -
that 1s, the Executive Committee, which consists
of five members of the full Committee and have
direct charge of the policy in the interim between
the meetings of the full Committee, were authorized
to purchase, that 1e, increase the portfolio, up
to an amount of five hundred million. That,
together with the hundred million which the
Treasury have of Trust Funds, would make available
that amount for the purpose of maintaining an
orderly market.
243
- 3 -
The idea would certainly be not to attempt in
any way to peg the market or to protect the
very substantial profits that the investors and
banks already have as B. result of their Govern-
ment bond holdings. There would be no need for
any selling of bonds in 80 far as pressure WAB
concerned, because all of the banks, with
practically no exception, have substantial excess
reserves. In other words, what they lack is a
place to put their funds, either investments or
loans. So that any selling would not be a result
of credit pressure but would merely be from a
desire on their part to cash in on appreciations
which they now have, with the thought of course,
likely, that they would be able to buy in cheaper.
And any market operation would have to take that
into account, of course. And the Committee had
the thought in mind that in attempting to operate
in the market it would certainly not be with the
1dea of guaranteeing or letting them cash in on
all the profits that they have.
At the same time, it would be necessary to avoid
B. complete panic in the market or to prevent the
absence of a market. And I think that Mr. Harrison,
the New York Bank being the agent for the Open
Market Committee and carrying out operations under
his direction, would be better able if anything
needs to be said further with reference to that.
H.M.Jr:
My thought was just to go around the room and see
if we are ready BO that if the President
Eccles:
Well, we are ready to that extent.
H.M.Jr:
Then what you're saying - I've got nothing to add
to it as far as the Treasury goes. I don't know
whether you (Harrison) have anything to add.
Harrison:
I have nothing to add, other than what I said yes-
terday.
H.M.Jr:
All right. Does anybody want to ask Mr. Ecoles
any question about the Government bond market?
Wonderful! Sold!
244
- 4 -
Mr. Frank, could you tell us how far you have
progressed in connection with exchanges?
Frank:
I think it may be well for me to read this
memorandum, since it has been approved by the
view. Commission and will not express merely my own
H.M.Jr:
Could you talk a little louder, please?
Frank:
This memorandum which I am about to read expresses
the views of the Commission and not merely my
own views. I think I had better read it 80 as
to avoid any possible misunderstanding.
"We are of the opinion that it would be desirable,
both from the point of view of public psychology
and of the end that our investors may be provided
with a continuous market for the purchase and
sale of securities, that our markets should remain
open at all times. However, conditions over which
there may be no control may 80 demoralize those
markets as seriously to jeopardize the interests
of our investors and unduly affect the public
psychology. It 18 therefore our view that all
possible measures should be taken in advance of
an outbreak of war to control those detrimental
influences and that a close watch should be kept
for the appearance of uncontrollable factors in-
dicating the advisability of taking measures
toward the closing of the market in order to ward
off the effect of panic conditions.
"We understand that negotiations have been insti-
tuted in an effort to obtain assurances from the
member governments of the Tripartite that American
securities as well as other interests and pro-
perties in America owned by nationals of those
governments, will be taken over and held and will
not be sold on our markets without prior consulta-
tion with our Government. If obtained, these
measures should go far toward preventing undue
selling pressure in our markets.
"We respectfully suggest, however
-
I'll make a suggestion which needs further dis-
cussion -
#
that the terms of the
245
- 5 -
agreement sought should be widened to the extent
of obtaining guaranties that in the event of the
outbreak of war these countries will place upon
their nationals a prohibition against selling of
American securities in American markets in the
absence of an express permission issued after
consultation with our Government. This suggestion
is advanced in an attempt to prevent a specula-
tive raid upon our markets through the employment
of the device of short selling, the use of which
would not be forestalled by the assurances presently
held or which have been discussed with the British
Government and are being sought from the other
members of the Tripartite.
"We propose to make arrangements between this Com-
mission and the governing officials of our
national security exchanges, particularly the
New York exchanges, establishing a complete system
of minute-to-minute observation of factors entering
the market and of current interchange of information
in hand. Thus it will be possible to detect the
point of danger at which selling orders in nature
and extent 80 predominate over buying orders as
to presage a demoralization of the price structure
and resultant panic conditions.
"Should this point arrive, it is our considered
opinion, as expressed in the memorandum of
April 12, 1939
- a copy of which was
delivered to the Secretary of the Treasury after
being summarized before this meeting on the after-
noon of that date
that steps should
be taken to close our national securities exchanges
and to obtain cooperative measures from organiza-
tions of brokers and dealers in the over-the-counter
market. Thereafter every effort should be made
to reopen those markets at the earliest possible
time and under such restrictions and supervision
as may seem necessary or desirable.
"The suggestion has been made that even if matters
reach a serious panio stage, rather than to take
the immediate course of closing the markets they
should be permitted to remain open, even in the
face of such panic conditions, under some type
of restrictive limitations. With this view we
246
- 6 -
cannot agree, and in this connection reference
18 again made to the memorandum of April 12,
1939. As already pointed out, our Commission
18 fully prepared, once the approval of the
President is obtained, to issue orders closing
our exchanges within a space of a few minutes,
if that becomes necessary."
I might add that the papers that we have prepared
have been examined by the Attorney General and
he approves of their form.
"We reiterate, however, that every endeavor should
be made to keep our markets open and available
if that can possibly be done consistently with
the best interests of the holders of the securi-
ties of our American enterprises, as well as
potential investors in those enterprises."
H.M.Jr:
Anybody want to ask Mr. Frank any questions or
argue with him or criticize their
Frank:
I might say that the one novel idea suggested
here was developed in our discussion since our
last conference here, and that was that even if
the securities held by nationals of foreign
countries were fully taken over by those respective
countries, there would be the possibility of short
selling, which might be very serious; and we
suggest that the possibility of precluding that
kind of eventuality should be considered.
Hanes:
Would the changed rule make any difference on
that, on the short selling?
Frank:
It might. I would not think that we could com-
pletely meet the situation by the Exchange rules
or our own rules.
Purcell:
No, because there 18 no indication when & selling
order, as you know, Mr. Hanes, comes from abroad
that it actually 1s short selling.
Hanes:
You have changed it now so you can sell all you
want at the last sale? Is that correct?
247
- 7 -
Purcell:
Bo long as that last sale 1s higher than the
one previous.
Hanes:
It isn't the way it was before, when it had to
be an eighth higher, which precluded the short
selling.
White:
Mr. Frank, suppose you don't get an agreement
among all these nations. Would that alter your
proposal or suggestion in any way?
Frank:
No, because it will simply mean that if we did
not get it the possibility of matters reaching
the panic stage would be the greater; but our
endeavor would be not to close the exchanges
until that condition appeared to exist.
H.M.Jr:
I take it that that memorandum you're going to
leave with me.
Frank:
Yes. I want to make a typographical change,
then I'll leave it here.
Jones:
Can you limit short selling?
Frank:
Yes sir.
H.M.Jr:
Definitely.
Hanes:
You can abolish it.
Frank:
What?
Hanes:
He said, "Can you limit it?" You can abolish it,
if you want to.
Purcell:
Specific authority under the Exchange Act.
Frank:
We can play on it like a piano.
Lochhead:
It would seem to me that you'd probably have to
control - I can't envisage any action by all the
Tripartite members and the other ones going that
far within the length of time that you need it.
I think if you were counting on that form of
cooperation too strongly, it wouldn't be a good
idea.
248
- 8 -
Frank:
of course, the fact 1s we really can't control
foreign selling at all - short selling. We
can't control it. Bo that means we'd Just have
to see what the consequences are.
Now, what we had in mind 1s this. The underlying
postulate of the arrangements that are being made
with these foreign countries 1s that they would
take all the American securities owned by their
nationals; if they did, then any sales from abroad
would necessarily be short sales, and if that 1s
80 it seems to us that they might be willing to
do something to bar the sales, since they could
not be legitimate long sales.
Hanes:
But they couldn't borrow stock in their own
markets. They'd have to come to this market
to borrow the stocks to make the delivery.
80 you'd atch them on the delivery in this country.
Frank:
You would unless there had been some kind of
violation of their own prohibition, or unless,
John, they were able to borrow from some other
country that wasn't subject to the
Hanes:
That's right.
Frank:
I might add that short selling would obviously
be to the disadvantage of the several countries,
since they as owners of the securities would
not want to see the market driven down.
But you (Lochhead) think it would be unlikely
that we get that?
Lochhead:
As you know from the conversations, the British
are working along these lines. These other ones -
it's a question of negotiating with them. But
I don't think their interests are quite identical
with England's. I don't think we could count
White:
I wouldn't say it's unlikely.
Frank:
But not certain.
White:
Not certain.
249
- 9 -
H.M.Jr.:
I want to say that in our talks with these
countries, particularly countries like Switzer-
land, Holland, and Belgium, they're just scared
to death to think that it may get out, because
they want to take a position publicly that they
are neutral, and any leaks that they are talking
about doing something in case of war - they're
just 80 fearful that that might be the last
straw, and they plead with us to use the utmost
secrecy, not to let it be known that they are
even talking to us.
Harrison:
May I ask a question?
H.M.Jr:
Sure.
Harrison:
Mr. Frank, even assuming that the foreign govern-
ments requisition the holdings of their nationals
in American securities, can you fairly assume
that any other sales would necessarily be short
sales?
Frank:
Well, perhaps I overstated it.
Harrison:
It would probably be easier for them to requisition
the American securities held in this country, in
fact, than it would be to requisition those that
may be in lock boxes in England, for instance.
Frank:
Well, if - perhaps my assumptions weren't correct,
but if you assume that those countries by fiat
in their own country become the owners of all
American securities in those countries, then
there could be no American securities owned by
the nationals of those countries. In that event,
no sale could be anything but a short sale,
because they wouldn't - as I understand it, it
would not mean merely a physical transfer of the
securities but a transfer of title to the
respective governments. And it would seem to
me, therefore, that if that were true any sales
from any of those countries which had 80 under-
taken by law to bring that about, would have
to be a short sale.
Eccles:
Short selling in this country would give you no
trouble because of your ability to control it.
250
- 10 -
Frank:
Yes.
Feis:
Mr. Secretary, I don't know whether your scheme
1s to go around and have each member report on
each aspect of the subject that 18 within their
various provinces; but 80 as to get complete
discussion of each point
H.M.Jr:
Yes, right now.
Feis:
That's your idea rather than to get the complete
discussion now?
H.M.Jr:
No, I'll ask each of these people on their par-
ticular problems, their particular responsibility,
to report how far they are as of 3:00 o'clock this
afternoon.
Feis:
The reason 1s I feel that particularly this last
memorandum read again raises questions of dimen-
sions far greater than there are any signs of
the authors of this memorandum recognizing, and
that I would like to talk for 8 few minutes on
the whole general problem when you think it is
in order, either now or after you have gone around
the room.
H.M.Jr:
Well, if you can - I think it would be in order
after we have gone around the room. I mean it
is in order at any time, but
Feis:
You mean it would facilitate things
H.M.Jr:
I want everybody to stay calm until we have been
around the room. I almost called the meeting off
after I read the President's message, I was so
excited about it; but then I thought
Wallace:
Is a draft of the message out?
H.M.Jr:
Oh yes. And I thought that we might better go
ahead, and after all no one knows what Mr. Hitler
or Mussolini would do. And if after this message
they should throw him down, then we might have
to be ready quicker than ever. So after talking
it over we decided we would have this meeting
this afternoon. But it's a great message.
251
- 11 -
Harrison:
I think it's important because certainly the
message will shorten the period of uncertainty
one way or the other.
H.M.Jr:
Yes, we've got to out bait or fish, one or the
other.
Now, let's see, Mr. Wallace, do you want to talk
about commodities?
Wallace:
The action we would take would be very simple,
doesn't amount to much. It consists of B. letter
which the President would send to me and a tele-
gram which I would send to the commodity exchanges.
The letter and the telegram are short. Shall I
read the two?
H.M.Jr:
Sure.
Wallace:
"Dear Mr. Secretary:
"In view of the outbreak of hostilities in Europe,
it is desirable that measures be taken to insure
the continued functioning of our established com-
modity markets without the violent price fluctua-
tions that sometimes arise from the impact of
war news. Consequently, I ask you to request all
commodity futures exchanges in the United States
to take appropriate action, effective immediately,
to prohibit trading in any commodity futures during
any day at prices varying more than five percent
from the closing prices of the previous day."
H.M.Jr:
Five?
Wallace:
Five percent.
"This smaller range of permissible price fluctua-
tion would, of course, be desirable wherever
practical.
"I believe the various commodity exchanges will
be glad to cooperate in this manner. Requests
should be directed to all commodity future
exchanges regardless of whether they are operated
252
- 12 -
Act." as contract markets under the Commodity Exchange
The telegram would state merely: "I urge that
you take M - This would be addressed to
the exchanges - #
that you take immediate
action to effectuate a request of the President
which has been transmitted to me as follows."
And then quote.
I may say, in the first place, that I do not share
the views which are here 80 prevalent that Europe
is on the imminent verge of war. I think war 1s
coming inevitably but not at this time. I agree
fully with those here present that we should be
prepared in case it does come at this time, but
I do not share your views that it 1s 80 certain
to come right now, although I think it is inevi-
table, say, some months away.
I'd like to say, furthermore, that the need of
supervising the commodity exchanges in event of
war is perhaps not as great as in the case of the
stock exchanges. This would be the action that
we would recommend.
H.M.Jr:
Anybody want to ask any questions of Mr. Wallace?
Hanes:
Is that fluctuation up as well as down, Mr. Secre-
tary?
Wallace:
Yes.
Hanes:
Both ways?
Wallace:
Both ways.
H.M.Jr:
You (Harrison) want to ask him something?
Harrison:
I was just wondering whether the action that might
be contemplated in those letters about the commodity
exchanges would be inconsistent in any way with
the implications in the Commissions memorandum
about minimum prices or daily maximum fluctuations
on the Stock Exchange. Did I misunderstand that
253
- 13 -
memorandum, Mr. Frank? I was wondering - didn't
that in effect say that you do not agree with
the suggestion that has been made that they might
fix maximum fluctuations in individual stock for
each day?
Frank:
We were inclined to think that it would be in-
efficacious and might do perhaps more harm than
good. Have you got our prior memorandum at the
earlier conference, at which I think you were not
present; we read & memorandum on that subject, and
perhaps it might bear repetition on that point now.
Harrison:
Well, I am particularly interested because in
studying the problem of how to handle the Govern-
ment bond market the suggestion has been made,
though not formally adopted and no one sufficiently
interested to be convinced that it 1s right, that
we might fix minimum fluctuations in Government
bonds for any one day as B. means of avoiding a
very drastic drop, for instance, on the first day
after war 18 declared and then a sudden upswing
the next day or two following. And I don't know
whether it 1s really practicable to work that
with the Government bond market, but if the
commodity exchanges adopt some such rule and if
the Commission were to approve of the stock ex-
changes doing the same thing, then I think there
might be merit in our considering it for Govern-
ment bonds as well.
Frank:
Well, let me say that 80 far as the exchanges are
concerned, we have neither the power to compel
nor the power to disapprove of the exchanges
adopting such a device.
Harrison:
But they wouldn't do it unless you did approve,
would they?
Frank:
Probably wouldn't if we said we didn't think it
desirable; probably would not, but they could.
Would you mind - I'll ask Mr. Purcell to read
Pardon me.
254
- 14 -
Wallace:
Pardon me, go right ahead. This is not - this
1s another - you can go right ahead with this now.
Purcell:
"Another alternative which had been considered 18
to keep the markets open but set a limit for the
decline on any one day. This alternative, no
doubt, was discussed on prior occasions when the
market was closed, and probably abandoned for the
following reasons: Under such instructions the
market immediately seeks the lower limits. Offer-
ings are put in at those prices. No transactions,
therefore, can be effected and the market 1a in
reality closed. Banks and brokers' housee, however,
try to liquidate customers' losses at the lower
limits, which they do not do when markets are
officially closed. Potential buyers are dis-
couraged by seeing prices seek the lower limits
and bids are withdrawn."
Harrison:
That was not & fact, was it, after the markets
were reopened in 19147
Purcell:
Not after the markets were reopened, no, sir.
Harrison:
But they had minimum prices then.
Frank:
Well, the point of view of this earlier memorandum
was to this effect, that in the event of panic
conditions it wuld be desirable to close the
markets for a short period and then open them
under restrictions; that that process of stopping
them completely and then opening them would permit
you gradually to meet the emergence of an upward
market, but that to try to meet the panic condi-
tion by such devices as this without closing the
markets, we feel, would not be effective. That's
assuming & terrific volume of selling.
Harrison:
Yes.
H.M.Jr:
Anybody else want to ask Mr. Wallace anything?
To report on our own part of the thing, which has
to do with talking with these countries, we have
made as good progress as we could in this short
time. I might say that 60 far we have gotten the
best cooperation from England. I think we will
255
55 I I
get complete cooperation from England. Some of
the other countries are a little bit slower in
answering.
There 18 one thing that England has asked us and
we haven't had a chance to ask Mr. Jones, because
I only got the memorandum from Mr. Foley at
five minutes of 3:00. They have asked us this
question. They put it this way, that if they
decided to take over all the securities in England
and that they should set up what they call a
straw man - that's the way they put it - could
they borrow money in this country against these
American securities? You see? And I'm only
asking this today. I would like to get off an
answer late tomorrow afternoon and I'd like to
answer that particular question, if you would
think about it, 80 that they'd have it Monday
morning, you see?
Jones:
Give it to you tomorrow.
H.M.Jr:
Could you? I mean if they want to - that particu-
lar question would be the British Government wanting
to borrow against
Jones:
American-owned securities.
H.M.Jr:
American-owned securities.
Bernstein:
Against British-owned American securities.
H.M.Jr:
British-owned American securities.
Foley:
Yes.
Jones:
I think, of course, without going through it with
my attorneys - my guess is they'd have to organize
an American corporation, which they could do and
own stock of, just like the Amtorg is owned here
by Russia.
H.M.Jr:
And Universal by the Chinese, huh?
Jones:
That would be my theory about it, but we will of
course investigate it.
256
- 16 -
H.M.Jr:
Is it pressing too hard to have an answer
Jones:
No, no.
H.M.Jr:
oh, sometime
Bell:
Would the Johnson Act come into the picture,
Foley?
Foley:
No.
H.M.Jr:
Foley has given an opinion there.
Foley:
Neither the Johnson Act nor the Neutrality Act
apply to that situation.
Jones:
Would the Johnson Act
Foley:
Doesn't apply to the Government, you see.
Jones:
Is there any inhibition against banks lending
money?
Foley:
Yes, private persons cannot lend the money.
Jones:
You mean a bank couldn't lend money to the British
Government on these securities.
Foley:
We think it 1s extremely doubtful.
Jones:
Could they lend through a British-owned corporation
on these securities?
Foley:
Don't think 80.
Bernstein:
By British-owned do you mean owned by the British
Government or by a private Britisher?
Jones:
Either way.
Wallace:
Therefore, this would be a political problem.
Jones:
What?
Wallace:
Nevertheless, the political issue would be raised
if the news got out that there was perhaps a
legal way of getting what they intended to prevent.
257
- 17 -
H.M.Jr:
Is that it - let's say we, the Administration,
loan a corporation owning American securities -
loan them money.
Wallace:
I was Just making an observation as to what
might politically happen, not as to the legality.
H.M.Jr:
politically? But, I say, what do you think would happen
Bell:
Doing something indirectly you couldn't do
directly.
Eccles:
Evading the intent.
Foley:
It would be a means of getting around the intent
of the Johnson Act, I think the Secretary has in
mind, which would be politically unwise.
Wallace:
I'm not saying it 1s politically unwise, necessarily,
but I'm just stating the political implications.
White:
Ed, was the intent to prohibit the Government from
extending credit? It certainly 1sn't indicated
in any of the discussion of the law.
Foley:
The Johnson Act expressly says that any corporation
in which the Government of the United States has
or exercises a controlling interest through stock
ownership or otherwise 18 excluded.
White:
That's right.
Bell:
Put in particularly for that, wasn't it?
Foley:
That's right.
H.M.Jr:
If it's excluded, I don't think you're going around
Wallace:
You wouldn't have any excuse for political action
then.
H.M.Jr:
What, Henry?
Wallace:
Judging from that statement there, Senator Johnson
wouldn't have any excuse for political action.
258
- 18 -
Foley:
Not as to Mr. Jones making - the law would apply
to a corporation created in this country by
British interests.
Frank:
It was expressly taken out of the statute.
Foley:
Sure, but I gather the question Secretary Wallace
raised was a different question, that of a loan
by private interests in this country to a cor-
poration created abroad, which would be privately
controlled. I gather that the question was that.
H.M.Jr:
Well, I don't - the British don't make this con-
dition, but they have asked the question and it
would be nice if we could answer them.
Jones:
We can answer it tomorrow.
White:
Does Mr. Jones want to answer the question with
respect to the RFC or some other Government agency?
They asked two questions.
H.M.Jr:
Well, this memorandum which Mr. Jones - as I say,
he hasn't had any advance notice and he's got to
have 24 hours, at least, to think about it. And
it points out that either RFC or Export-Import
or the Stabilization Fund
Well, the
Stabilization Fund shouldn't do it.
What other question are they asking?
White:
Well, they asked whether a Government agency or
whether a straw man - two separate questions.
H.M.Jr:
Well, the thing - Archie, if you will furnish
Mr. Jones with that particular part of the cable
where the British ask that question, 80 that he
knows just what they are asking - BO that he
can answer it - will you?
But all I can report 1s that we are making progress,
and I'm not - and, again, all of this 1s confidential.
And the Canadian Government sent down 8. representa-
tive; he got down today and we're getting along
very nicely with him. So all these countries are
on notice and they all said they'd like to discuss
it. And, being on notice, I think that's half
259
- 19 -
anyway, don't you? I mean they know how we feel
and they are quite excited about it:- I mean as
to go. just what we mean and how far we're going to
Well now, Herbert Feis.
Wallace:
Just one moment. I did ask for
H.M.Jr:
Oh, I'm sorry.
Wallace:
If the President did write a letter like this to
me and I did send out the telegram, not because
the content of either the letter or the telegram
would in itself be in any way particularly alarming,
because it would not except as part of a whole
dramatic action, I think it might be advisable if
I issued at that time 8. kind of a statement of
reassurance to the farmer - -"Boys, there isn't any
particular change to make in the Triple A program,
and just go ahead the way you have been planning
to do anyway and leave your crops
II Just
something - I worked out a mild reassuring state-
ment of that sort which I think really ought to
go along with it. I don't think there 1s any
need particularly of reading it at this time,
but I just think that ought to be a part, and I
had indicated it.
H.M.Jr:
Didn't you say the other day you did not have the
power to close it?
Wallace:
That's right.
H.M.Jr:
Well then, you're going to have to do it as a
matter of appeal.
Wallace:
That's right. That's the way this letter reads.
H.M.Jr:
But you don't have the authority.
Wallace:
And we are not suggesting they be closed, not in
the first instance, at any rate. See, the tendency
in most of the exchanges, except for cotton, would
be for the prices to go up. It's & different
problem altogether from the Stock Exchange.
260
- 20 -
H.M.Jr:
Well, Just before Herbert Feis philosophizes and
defends the democracies, I wanted to say we ought
to get this thing down as a sort of a brief; then
I thought I'd ask the President again to 888 us
the way he did the other day, and we could report
to him where we stood and then ask him whether
he approved of the program. And I thought I'd
ask him whether he'd see us on Monday, you see,
and by that time we'd know pretty well where we
are at, and then he can tell us what he thinks of
it, the way he always does.
Ecles:
There was one other thing that I neglected to
report and that was that we are taking up with
each of the Reserve Banks the 1dea of getting them
to agree to make loans to all member banks as well
as non-member banks on Government bonds at par,
and make such an announcement. That matter is
under way.
M.M.Jr:
I thought they all did that, except two, now.
Eccles:
Well, they do it as a matter of practice but there
18 no public announcement and it 1e a day-to-day
operation. They do it 86 a matter of practice,
but in this particular instance, the real benefit
would come to the general market by an announce-
ment on the part of all of the banks to that effect.
As a matter of fact, the New York Bank, because of
their rate being the lowest rate - discount rate -
would likely get - if there was such borrowing,
they would possibly get practically all of it.
But it should be announced by all of the banks in
order to get the psychological benefit.
H.M.Jr:
O. K.
Harrison:
There 1s one other difference in the plan. We are
prepared to lend to our member banks at the present
time at our discount rate. We are not prepared
to lend to non-member banks at our discount rate,
believing that that is business that should be
arranged between a non-member bank and a member
bank. However, in the event of this emergency,
we could announce we would lend to non-members
as well as members at our discount rate.
261
- 21 -
Jones:
What is your discount rate, George?
Harrison:
One percent.
H.M.Jr:
And it would be good advertising for the Federal
Reserve System.
Eccles:
Well, it wouldn't hurt it any, wouldn't hurt it any.
Jones:
Do you think they need some good advertising?
H.M.Jr:
Don't you?
Eccles:
I think we could all do with a little, Jesse.
H.M.Jr:
After you (Jones) have been telling them once
8 month they should lend some money?
Harrison:
As to individuals and corporations other than
non-member banks, we have the right to make loans
on Government securities and we would be prepared
to say that we have that authority, but we would
not lend to them at our discount rate, believing
they should first go to their member banks or to
their bankers. Our present rate to the United
States Steel Corporation, for instance, on
Government securities would be three and one-half
percent, and I don't think we would change that
except by perhaps one half of one percent - bring
it down to three.
Eccles:
Now, they could go to their bank and get what they
wanted, possibly one percent, BO it really doesn't
mean anything.
Lochhead:
Secretary Wallace would probably be interested in
what the Canadians mentioned about their commodity
market. They stated that the only commodity
market they had that they thought would be in-
portant would be the wheat market, and they say
as long as wheat 1s practically 8. Government
agency up there, they didn't think there would
be any trouble in regard to that.
Wallace:
I presume we would, 8.8 a part of our activities -
might perhaps be calling on the State Department
to make inquiries with regard to these exchanges
in other lands.
262
- 22 -
Feis:
Yes.
Wallace:
But I don't think that would be necessary in the
first instance, during the first few weeks. I
doubt if it would be.
Robbins:
No.
Jones:
I doubt if it would be.
Robbins:
No.
Jones:
I move that Dr. Feis be recognized.
H.M.Jr:
Just as long as we coordinate our things, Henry -
as you know, the inquiry - at your suggestion
I included the words "commodity market" - that
I sent out to these six countries.
Wallace:
Yes.
H.M.Jr:
I included the word "commodity."
Wallace:
Well, that's fine. That will take care of it.
H.M.Jr:
Remember, you asked me.
Wallace:
Yes, that's right. That will take care of it.
H.M.Jr:
That was included in it.
Well, Mr. Jones wants to hear from Mr. Feis.
Feis:
Mr. Secretary, when these remarks are published,
since I see that devilish little machine operating,
the title I suggest is "The Irresponsible Paren-
theses," which I'll explain later.
Jones:
The irresponsible what?
(Hearty laughter)
Feis:
I'll explain that later.
What I've got to say here doesn't touch on any
suggestions that are made in regard to the Govern-
ment bond market or the similarly calm suggestions
in regard to the commodity market. But the
263
- 23 -
discussion a.8 regards the treatment of securities -
and I mention for the first time the irresponsible
parentheses, because 1t 18 in parentheses - "as
well as the other interests and properties in
America" - that's the parentheses I have in mind.
Frank:
Before you resume with that discussion, let me
say that that was put in simply to complete the
thought, that having been said at the previous
conference; the Securities and Exchange Commission
18 not interested in the parentheses. So if you
will address your remarks, Mr. Feis, to that
parentheses, they should not be leveled at the
authors of the memorandum.
Feis:
What you tell me about it just proves that it 1s
irresponsible, which 1s what I thought.
And the word "calm" was mentioned. I may not show
all the calm of manner that might be desired, but
on the other hand I don't share the excitement
of attitude which I have found expressed 80 often
in these discussions and which I think is somewhat
mistaken.
Apart from these two matters that have been 80
simply disposed of, your Government bond market
and your commodity market, there's still as far
as I can understand - the only danger that 1s
disturbing us 18 what might happen in certain
stock markets. Now, in all the discussions that
have taken place about stock markets in the course
of the last six years, I have never seen the
question of security fluctuations elevated to an
importance in world affairs that they would attain
if dealt with in accordance with some of the sug-
gestions that have been put forward. After all,
foreigners only own a small fraction of our
securities. After all, we have had very substantial
security movements primarily due to domestic
conditions. My own guess would be that even if
war should come the resultant stock movement
would not be likely to exceed very greatly the
stock movement that you have had in the last
few weeks.
264
- 24 -
I am still not suggesting inertness, but I Am
suggesting that some of the proposals put forward
are completely incommensurate with the importance
of the problem that you've got in mind, and in
addition would have consequences immediate and
ultimate that far outweigh anything that could
happen to the stock market under any circumstances.
Let me explain. We have engaged now in preliminary
interchange with six other governments. The Secre-
tary has already brought out the fact that in
their replies to us practically one and all have
said, "You are raising questions of the most
vital interest to us and if any news of this
should appear in the press our whole situation,
economic and political, would be disturbed,"
and they would be and they will be.
Now, to speak on that B. little bit further. or
the six countries we have talked to, three cer-
tainly want to bend all their efforts to be
neutral. The position of Canada 18 not as clear,
18 not finally established either. In the case
of those countries, any clear suggestion in
advance of knowledge of exactly what is under
discussion, of intimate discussions with Great
Britain and the United States, might very well
become a factor in the decision of Germany and
Italy - and it 1s for these reasons that I hate
to have that damned machine going - deciding
whether to move east or move west or not move at
all. And I am sure that we have already set
the Federal Council' of Switzerland and the
Cabinet of Belgium quivering. Holland 1s more
stolid.
The neutrals in their position, furthermore, when
they come into discussions, are going to visualize
their position more or less as ours; and we may
anticipate, and let's regard our suggestions very
carefully, that they will suggest that we do this
on & reciprocal basis, and if we, without thought,
begin to ask them to impose this control and that
control and the other control, their reply will
be, "Will you do it, will you take over all the
securities of Americans? We don't want our
markets to break by Americane selling." And the
265
- 25 -
American ownership of certain of the securities
of these small countries may be larger fraction-
ally than our ownership of their securities, and
you will be led into
Wallace:
You meant the reverse of what you said, didn't
you?
Feis:
The American ownership of the securities listed
on their exchanges may be greater proportionally
than the Dutch or Swiss or Belgian ownership of
the securities listed on the American exchange.
So much for the neutrals' position.
When you get to France and England, there seemed
a moment to me when we were getting on even more
dangerous ground, and here I introduce again the
irresponsible parentheses that Mr. Frank tells
me the Commission put in Just because it was too
lazy to have a stenographer take it out.
Frank:
Oh no, that wasn't the suggestion. The suggestion
was that for the purposes of discussion that that
memorandum was directed to, namely, what the SEC
proposed to do if certain events occurred - that
the comment in that parentheses was totally super-
fluous and was put in there merely by way of
naming the character of the discussion at the last
conference, which went beyond the interests of the
SEC. Bo that if you are directing your discussion
to the security market, you may ignore that paren-
theses. If the parentheses 1s irresponsible in
the sense that it 1s factually inaccurate, just
ignore it and don't excite yourself.
Wallace:
Is it a part of the executive order?
Frank:
I don't know, Mr. Wallace, and I am not concerned,
and if it 16 an inaccurate statement of what
the Treasury has proposed, then Mr. Feis's remarks
are superfluous. If it 1e an accurate statement
of what the Treasury has proposed, then I suggest
he address himself to the Treasury and not SEC.
Feis:
I am earnest and not irritated. Please believe me.
266
- 26 -
Frank:
We theses. are not concerned with what 18 in the paren-
Feis:
Even if it 18 not in the parentheses, there is
inquiry. still a mention of the original things in the
H.M.Jr:
Let's keep this discussion both good-humored
and courteous, please.
Feis:
I think it has been both.
Frank:
I think BO, Mr. Feis.
Feis:
Merely emphatic and earnest. And I, as far B.6
I could be, Mr. Secretary, would like to be both
emphatic and earnest.
of course, these words likewise figure in the
inquiry that we have presented to several govern-
ments. Those words "other assets, gold, bank
accounts" - that's the life blood of certain
belligerent countries if war breaks out. It
certainly has been one of the reasons for their
interest in the Tripartite Agreement. It 1s
one of the reasons behind the movement of this
capital and gold. You can have very little doubt -
there 1s very little doubt in my mind - that had
not this thought been in the minds of the Govern-
ments of France and Great Britain, they would
have long ago imposed controls on the movement of
that gold and capital to this country that were
not imposed. Now, the minute you bring that up
to them, and that 1s evident in the document
coming back to us from London, you then strike,
as Mr. Frank has said, into a field far beyond
the security field and one of such immense 1m-
portance, relating quite directly to such things
as the President's messages of yesterday, that
I'd explain by that fact what may have appeared
to some of you as overexcitement.
H.M.Jr:
Do you imply that what the Treasury - the con-
versations that we are conducting with these
countries are not in sympathy with the Presi-
dent's message of yesterday?
267
27 -
Feis:
No sir. I am suggesting that in the original
inquiries and in some of the preliminary con-
versations we have introduced a matter of the
utmost moment and utmost possibilities that goes
way beyond anything connected with the regula-
tion of the securities exchanges.
H.M.Jr:
Well now, Mr. Feis, if you don't mind - after
all, you said most of this the other day. Since
then the President of the United States read the
inquiry and I have personally read it over the
phone to Mr. Rull. Neither the President of the
United States nor the Secretary of State nor
the Secretary of the Treasury felt that there
was any reason why it shouldn't go, and the
President of the United States and I felt it
should go. Now, if you've got something new to
suggest as to why the State Department - Mr. Hull
feels that I shouldn't continue these conversa-
tions, why, I'd be very glad to hear from you,
but as to what we're doing or saying - that it
1sn't carefully thought out - I'm sorry
Wallace:
What bearing does the President's message have
on these conversations?
H.M.Jr:
I don't know that it has any.
Feis:
Mr. Secretary, I don't think that I'm making what
I have in mind.
H.M.Jr:
I don't think you're making it clear, and if you
don't mind my saying it, I think I know what you
have in mind and I wish you'd say 1t, but on the
other hand Mr. Hull has had this thing - I take
it he sees these cables - and the President does
know it. I have had the four ablest economists
in America in this morning going over this whole
question. Nobody that I can find agrees with you.
And as I say, unless Mr. Hull wants to let me
know that he feels he'd like to talk to me and
that I should discontinue these conversations -
then I'd be very glad to see the President with
Mr. Hull. In the meantime, every step we are
taking 1s being very carefully checked. This
isn't going to hurt your trade treaties. And
if you don't mind my saying, unless you've
268
- 28 -
got something new or Mr. Hull wants to take some
action or communicate with me, why, I think I'll
just go ahead as we are.
Feist
Mr. Secretary, the decision 18 certainly in your
hands and the only thing I am trying to do 18 to
try to contribute to the correct decision. I
felt that it was part of my job to call as clear
attention as I could to some of the possible
meanings of some of the suggestions that have
been brought forward in the discussions, and when
I find it coming in again in a memorandum read
as representing the opinion of the Securities and
Exchange Commission, and presumably therefore
offered as part of a report to the President,
I think I would simply be failing in my duty if
I did not try to explain how, from the point of
view of the State Department, this thing seems
to carry possible consequences; and that's what
I tried to do.
H.M.Jr:
Well now, you have - as far as I am concerned,
you have again served notice on me that you feel
that these conversations are very dangerous. I
don't agree with you. I feel that the situation
1s dangerous, that I would be negleotful of my
duty if I didn't explore every possibility as to
what might happen if there was & war in Europe.
The inference that what we are doing might bring
about a war, I think, 1s just preposterous. And
as I say, I have moved very carefully, I have
pointed out everything that you said to the
President, and these other gentlemen that were
here - I mean everything that I said while you
were here I repeated to the President, making it
just as black as possible, 80 that he 18 entirely
aware - there were seven or eight people that
heard me do it. I then read the thing over the
phone to Mr. Hull.
Now, I can say if Mr. Hull wants to call me up
and would like me to come over and talk to him,
I'd be very glad to do it, but lacking such &
message I frankly am
After taking
consultation with what I consider four of the
outstanding economists in America, none of them -
and you recognize them as such - and none of them
269
- 29 -
seemed to be at all worried; in fact, they en-
couraged me to continue what we are doing. Bo,
as far 8.8 your obligation to warn me, you've done
it.
Feis:
May I Just add, Mr. Secretary, that most of the
considerations which I have pointed out do not
fall in the realm of the economists, and therefore
I feel that someone connected with the State
Department might be aware of special considerations.
Secondly, I think I ought to say, since the matter
has taken this turn, that I was with the Secretary
of State when you talked with him on the telephone
and certainly in no conscious way am I trying to
develop an individual position, and I can only do
my best while I am here, since the Secretary can't
be here, to try to bring forward those things
that would naturally occur to members of the Depart-
ment. And I think your final statement defined
exactly what I have been trying to attempt to do:
to try to bring out, as far as I could see it,
what is implicit in this matter that we have in
hand, and that's Just what I've been trying to do.
Wallace:
Secretary Morgenthau, I guess I'm a little slow in
understanding
H.M.Jr:
I'm sure you're not.
Wallace:
but I am still 8. little bit at a loss to
know whether Mr. Feis's concern 18 primarily in
the international political field or in the
possible eventual developments in the domestic
economic field. I am putting together his pre-
sentation of today with his presentation of &
couple days ago.
Feis:
Mr. Secretary, my presentation of a couple days
ago was concerned with the second: developments in
the domestic field. When I saw the actual results
of our previous discussions, I found myself in
complete agreement with the general tenor of the
statement, and therefore did not discuss those
again today.
Today my preoccupations have been with the inter-
national and solely and wholly with the international
aspects of the question, those having been somewhat
270
- 30 -
sharpened and completed since by virtue of the
correspondence that has taken place.
Wallace:
Then your fears are at rest with regards to the
domestic field.
Feis:
As far as any suggestion that I have heard put
forward, certainly yes.
H.M.Jr:
They are with the domestic or they are not?
Wallace:
His fears have been put to rest with regard
Feis:
in the domestic field. I mean there may
be small differences of judgment between individuals.
But the remarks of a few days ago are passed and
I was moving into a new - I was going through an
unpleasant performance for the second time, because
it is unpleasant.
Frank:
Mr. Secretary, just to clear the record and without
attempting to be facetious, I am proposing before
I hand this memorandum to you - the memorandum which
I formally read - to strike out the parentheses,
80 that as between Mr. Feis and the Securities and
Exchange Commission there need be no disagreement,
since he 1s in accord on the fundamentals of the
handling of the domestic situation.
H.M.Jr:
Mr. Eccles or Mr. Harrison - I mean do you want to
say anything to Mr. Feis or anything?
Eccles:
Well, it seems to me - it's somewhat aside from
our particular responsibility - that as I see the
issue as presented by Mr. Feis, the matter relates
entirely to the international situation and the
question as to the advisability of the procedure
of the Treasury in connection with the communica-
tions abroad. So far as my particular responsi-
bility is concerned, it is somewhat outside of
that and
Feis:
Mr. Eccles, all my preoccupation, really serious
preoccupation, either on the domestic aspects or
on the foreign aspects, practically goes with the
taking out of that parentheses; I would say that
if we are just talking about how to handle the
securities markets, I don't think the State Depart-
ment has any great interest as to whether you
271
- 31 -
leave them open or you close them or you regulate
the selling of foreign securities. The inter-
national consequences are secondary. It was the
suggestion of last time, again reappearing, that
we are going into the field of other assets, bank
accounts, gold, other properties - those are the
things that created my anxieties of last time and
kept them alive in a different way this time.
Do I - I'm trying to make myself as clear as I
know how.
H.M.Jr:
Well, I don't - I frankly - I just don't understand.
Feis:
I don't think I'm making myself clear.
H.M.Jr:
Not to me. I'm completely bewildered as to what you
mean. I am perfectly clear as to what my own ob-
jective is, but as to what your objective is I
am completely bewildered.
But just let me understand: by removing the paren-
theses, you withdraw your objections?
Feis:
Three-quarters. I was expressing apprehension
rather than objection, and three-quarters of my
apprehension goes with the removal of that paren-
theses, which creates a far vaster field than any
other that we are discussing.
H.M.Jr:
Then I thank Mr. Frank for removing the parentheses.
Foley:
But that doesn't apply to the Treasury. That
applies only to the SEC.
H.M.Jr:
What we're going to do is, I hope to have a draft
of a cable ready sometime between 5:00 and 6:00
tomorrow in answer to Butterworth, and I'm going
to ask Mr. Feis to come to the house at that time
and go over the draft and then he'll have a chance
of getting down to specific things, if there 1s
anything. But we'll do it sometime between 5:00
and 6:00 tomorrow.
White:
Mr. Secretary, I wonder if it 18 clear that there
has been only one communication that has left the
Treasury - one orally to Canada, and the other
272
- 32 -
written ones to the other governments - and that
was cleared. I am afraid I get the impression
that some think apparently a good deal more than
that has happened.
H.M. Jr:
There was one memorandum, which the President saw.
I read it over the phone to Mr. Feis - rather,
Mr. Feis came over here after that and read it
and said that was entirely satisfactory to him.
That's the only communication we have had with
any other government. There has been no other.
We've got lots of answers. We're going to try
to draft an answer. I want to look over it late
tomorrow afternoon, and if we can come to an
agreement, I expect to show it to the President.
There's been no other than that one memorandum
which all of you saw. There's been no other
communication.
And as I say, I consulted with our own people and
some very able other people who are recognized
both in this country and the rest of the world
as outstanding people, and they seem to think
that we should get prepared to meet any emergency
and that the Treasury 1s on the right track.
Now, has anybody else got anything? Thank you all
very much.
272A
April 16, 1939
3,00 P.M.
Those present were: The Secretary, Hanes, Gaston, White,
Bell, Lochhead, Bernstein, Ecles, Harrison, Jones Frank,
Purcell, Wallace, Robbins, and Feis.
The Secretary explained that he wanted to get all of the
various points summarized and then he thought the group should
again report to the President, perhaps on the following Monday.
Mr. Ecoles WBB the first to report, 8.8 follows:
"The Reserve System 18 prepared to give support to the Govern-
ment bond market, that 18, without any idea of pegging it, but
of providing 8. market, keeping 8. market open for Government
bonds, and attempting to maintain an orderly market. He noted
that with a $500,000,000 authorization in the hands of the
Executive Committee and with $100,000,000 available in Govern-
ment trust funds, a total of $600,000,000 was ready to be used in
supporting the market. In addition, he said, the Board was
taking up with each Reserve Bank the suggestion that they agree
to make loans to all member and non-member banks on Government
bonds at par, and that such an announcement be made if the neces-
sity arose.
Mr. Frank read 8. memorandum from the SEC expressing the
following views: (1) The stock markets should, if possible,
remain open at all times. (2) Arrangements should be made
between the SEC and the exchanges, establishing a complete
system of minute-to-minute observation of factors entering the
market so that it will be possible to detect the point of danger
which might indicate a demoralization of the price structure.
(3) Should this point arrive, the stock exchanges should be
closed and cooperative measures should be arranged in the
over-the-counter market. Papere closing the exchanges are pre-
pared and their form has been reviewed by the Attorney General.
(4) The Commission can not agree with the suggestion for price
limitations. (5) Any action by foreign governments to restrain
selling of American securities by their national would reduce
the possibility of disturbance on American exchanges.
(6) The Commission reiterated that every endeavor should be
made to keep our markets open.
Mr. Lochhead cautioned against relying too heavily on the
possibility that foreign governments would agree to cooperate
by restricting the activities of their nationals.
Mr. Wallace reported that he had drafted a letter for
the President to send to him and 8. telegram for him to send to
the commodity exchanges if the need should arise. The letter
from the President to the Secretary asked him to request all
commodity futures exchanges in the United States to prohibit
trading in any commodity futures during any day at prices
272B
- 2 -
#
varying more than 5 percent from the closing prices of the
previous day. The telegram from the Secretary to the exchanges
would quote the President's letter and request that immediate
action be taken in accordance with his wishes, Mr. Wallace
added: "I'd like to say, furthermore, that the need of super-
vising the commodity exchanges in event of war is perhaps not
A8 great as in the case of the stock exchanges." He pointed
out that the probable effect would be for all commodities except
cotton to react favorably. Mr. Wallace also suggested that he
might find it advisable to issue a reassuring statement to
farmers, urging them to go ahead with their crops in a normal
way.
There was A brief discussion between Mesers. Jones, Foley,
Wallace, and Morgenthau on the application of the Johnson and
Neutrality Acts to Government corporations.
At the conclusion of the meeting, Mr. Feis expressed
8 feeling that although the plans for the commodity and Govern-
ment bond markets were quite appropriate, the discussions about
the stock market had, in his opinion, spread out into fields
much larger than the stock market problem itself warranted,
He mentioned the communication to the five Tripartite countries,
and particularly the implication that this Government might do
something about such basic matters as gold, security, and
foreign exchange resources which other nations have in this
country. These matters, he pointed out, were the life blood of
two potential belligerents, Great Britain and France. Secondly,
he referred to the delicate position in which Holland, Belgium,
and Switzerland -- all desiring to be neutral -- would find
themselves if they entered into discussion with Great Britain
and the United States. Thirdly, he felt that the United States
might be asked to take reciprocal action to supervise the
activity of American citizens in foreign stock markets,
Mr. Feis said that these reservations all had to do with the
international aspects of the situation, and that he now found
himself in agreement with the domestic aspects of the various
suggestions; therefore, his remarks the other day on the domestic
aspects were a thing of the past. Secretary Morgenthau replied
that 86 to the international aspects he had now been warned twice
by Mr. Feis, and that he disagreed with Mr. Feis's opinion that
the inquiries being made abroad were dangerous. Furthermore,
he pointed out that Secretary Hull had cleared the inquiry which
had been addressed to the Tripartite countries.
(The Secretary, Secretary Wallace, Jesse Jones, Jerome Frank,
Marriner Eccles, and Mr. Hanes went to the White House on April 18,
where Mr. Frank, Mr. Ecoles, and Mr. Wallace made practically the
same report as had been outlined herein.)
Regraded
273
TREASURY DEPARTMENT
C
0
INTER OFFICE COMMUNICATION
P
Y
DATE
April 15, 1939.
Secretary Morgenthau
TO
E. H. Foley, Jr.
FROM
The attached memorandum regarding a proposal to lend against or
purchase American securities "nationalized" by a foreign country may be
summarized as follows:
I Loans
(a) By private persons - extremely doubtful because of the
Johnson and Neutrality Acts.
(b) Loans by Federal Government or agencies thereof - not
prohibited by Johnson or Neutrality Acts, not inconsistent
with the international law of neutrality. Such loans could
be made by RFC, Export-Import Bank or Stablization Fund.
There are limitations as to the use of and the amounts to
be loaned by such instrumentalities which are discussed
in greater detail in the attached memorandum.
II Purchases
(a) By private persons. RFC could finance private persons
and could also finance a newly created corporation which
would buy such securities.
(b) The Export-Import Bank could buy American bonds up to a
limited amount but could not buy stocks.
(c) Stabilization Fund could make the purchases.
The attached memorandum deals solely with existing powers and
Government agencies.
(Initialed) E.H.F. Jr.
EHF:akm
Original given to Jessie Jones by Secy 4/15'39
Sec'y has 1 copy which he took to White House 4/16'39
274
C
April 15, 1939.
0
P
I
Secretary Morgenthan
Mr. Foley, Acting General Counsel
Res Proposal to Lend against or Purchase
American securities "nationalized"
by a foreign country.
I. LOANS
A. Private Persons.
It would seen that such advances by individuals to governments in
default in the payment of their obligations to the Government of the United
States, whether such advances were made directly or to "struw nen" Pacting
for or on behalf of" such foreign governments would be prohibited by the
Johnson Act, which prohibits loans to such foreign governments 02 any or-
ganisation acting for or on behalf of such governments. It would also -
that such loans by individuals to belligerent governments or any person not-
ing for or on behalf of such governments would be prohibited by Section 3 of
the Neutrality Act. However since it could be argued that the Johnson and
Neutrality Acts were not intended to apply to loans collateralised by American
securities having a greater value than the amount of the loan, it might be
desirable toggt to an opinion from the Attorney General on the question.
B. Government Loans.
Weither the Johnson Act nor Section 3 of the Neutrality Act prohibits
advances to foreign governments by the Government of the United States or
its agencies against American securities requisitioned by foreign govern-
ments from their nationals. Neither Act sentions the Government of the
United States and it is a well-settled principle of statutory construction
that the soversign is not bound by statutes that may tend to diminish any
of its rights and interests unless the sovereign 10 named in the statute
by specific and particular words. The Johnson Act excludes from its prohibi-
tions " public corporation created by or pursuant to special authorisation
of Congress, or a corporation in which the Government of the United States
has or exercises 8 controlling interest through stock ownership or otherwise".
During the course of the debate on the Johnson sct, Dr. Makeynolds of the
House Committee on Foreign Affairs, in response to inquiry, indicated that
Section 2 would permit the Government or its agencies to loan soury to any
"person" to include " partnership, company, association, or corporation,
foreign government (1934) 78 Cong. Rec. 6049. The Neutrality Aet defines
NO well as a natural person" but does not indicate as intention to include
& government or an agency thereof within the definition of the term "person".
A question may possibly be raised as to the propriety of our government or
an agency thereof making loans which the Neutrality Act prohibits a private
person to make, This is a policy question.
275
- 2 -
While the Johnson and Neutrality Acts do not apply to the Govern-
sent or agencies thereof, it is to be observed that voluntary loans or
extensions of credit by a neutral government to a belligerent government
constitute a breach of neutrality in international law at distinguished
from the domestic law of the United States. 1 Phillimore, Commentaries
upon International Law (1879) P. 2471 2 Oppenheim, International Law (5th
Ed., 1935) 9. 6041 Lawrence, The Principles of International Law, (7th M.)
P+ 6301 Taylor, International Public Law (1901) P. 673; See also, Hall
International law, (8th Ed.) P. 7101 2 liyde, International Law, P. 7551
7 Moore, International Law Digest pp. 978-979. However, it is not clear
from the authorities that the rule of international las applies to loans
or extensions of credit where the collateral is at least equal to the
amount of the loan and probably far exceeds in value the amount of the
loan.
In any event, a valid argument may be made that the proposed loan
under consideration does not violate the international law of neutrelity.
This Government, even though neutral, has the right to protect its
economic, financial, and monetary structure from the shock of war between
foreign countries. The loans would be made not for the purpose of siding
6. belligerent, but for the purpose of preventing the throwing on to the
American market, st a time when the American market would not be able
ad@quately to absorb them, large blocks of foreign-owned American securities.
It is obvious that if & belligerent government were to liquidate its
snormous holdings of American securities or threaten to do BD penicky
conditions sight very likely occur in our stock markets and seriously
affect our whole economic and monetary structure. The belligerent govern-
sent could obtain its dollar funds by thus liquidating its securities,
By our making the advance to the belligerent government collateralized
by securities having 8 far greater value then the amount of the advance
10 do not provide the belligerent government with any dollar funds that
it could not obtain by liquidating its American securities. What DE do
accomplish by saking these advances is avoid disturbance to our economy
which this Government, acting as & neutral, must be permitted to do under
the rules of international law. The loans here contemplated would even more
clearly be with the view of protecting American interests than use true
in the case of the Chinese-American foreign exchange agreement which was
under consideration in 1937 when a comparable question was raised and
discussed with the State Department. It was agreed that even if var vere
found to exist between China and Japan the agreement with China would not
constitute a violation of the international law of neutrality. I believe
neutrality since the protection given American interests by the proposed
that the present proposal does not violate the international law of
advance Is far greater then 985 true in the Chinese situation.
Regraded Unclassified
276
3
(1) Loans by R.F.C. and Repart-Import Bank, Section 5 of the
Reconstruction Finance Corporation Act, as anended, authorises the
Corporation to make loans to certain banks and other financial institu-
tions "to aid in financing agriculture, commerce, and industry, including
facilitating the exportation of agricultural and other products". Such
loans must be fully and adequately secured, and may not be made for 4
period extending beyond five years from the date such loan was made ori-
ginally (including extensions of time of payment). Such loans may not
be made "upon foreign securities or foreign acceptances AM collateral or
for the purpose of assisting in the carrying or liquidation of such foreign
securities and foreign acceptances". The aggregate amount of advances
which can be made under this section to any one corporation, its subsidiaries,
and affiliates, at any one time can not exceed 2 5/8 per centum of (1) the
authorised capital stock of the Heconstruction Finance Corporation plus (2) the
aggregate amount of bonds of the corporation authorised to be outstanding
when the capital stock is fully subscribed. Accordingly, 1f the foreign
government were to create in this country some corporation to act on its
behalf the RFC could lend to such corporation approximately $105,000,000
collateralized by the nationalised American securities, particularly if the
money thus loaned were to be used for mking purchases in the United States.
The Export-Import Bank is authorised to make loans etc mid in financing
and to facilitate exports and imports and the exchange of commodities between
the United States and other nations". Accordingly, the Export-Import Bank
could make the loans either directly to the foreign government or to BOXE
corporation not up in this country to act on behalf of the foreign government.
However, the Export-Import Bank may not have outstanding at any one time
loans or other obligations to it in excess of $100,000,000.
(11) Stabilisation Fund. Under the provisions of Section 10 of the
Gold Reserve Act setting up the Stabilization Fund "for the purpose of
stabilising the exchange value of the dollar" and authorizing the dealing
in "gold and foreign exchange and such other instruments of credit and
securities" as may be deemed necessary to carry out the purpose of the
section, I believe that there is leval authority for the Stabilisation Fund
to make loans to & foreign government collateralised by foreign-owned American
securities where the effect of such loan would be to prevent a disruption
of our entire economy and thus stabilise the internal of well as foreign
exchange value of the dollar. or course, there would be an important policy
question in thus using the Stabilization Fund, and il you indicated in your
testimony to the congressional committees, you might wish to consult such
committees before thus using the Stabilization Fund.
Regraded Unclassified
277
- 4 -
II Purchases
An inter-governmental committee could be set up to coordinate
the liquidation of the American securities which the foreign govern-
ment nationalized. Such securities could be liquidated in 4d. mmber
of wayst
(a) By sale to Americans and American institutions.
The RFC wight lend money to American institutions
which would enable them to purchase such securities,
Another device would be to create a corporation
which would purchase all foreign owned American
securities as the foreign government needed dollars.
This corporation would then liquidate the securities
as the market could absorb them. A corporation thus
created would be financed by the RFC. A set of
papers creating such a corporation was fully prepared
at the time of the September crisis and is in our
files ready for use if desired.
(b) The Export-Import Bank would have authority to
purchase bonds and other instruments of indebtedness
which the foreign government would acquire, but the
Export-Import Bank would not be authorised to use
any of its funds to purchase American stocks which
the foreign government night nationalize.
(e) For the reasons indicated above, the Stabilisation
Fund would have legal authority to purchase the
foreign securities nationalised by a foreign govern-
ment.
(Initialed) L.H.F. Jr.
278
April 15, 1939
2:30 p. n.
Present:
Dr. Viner
Dr. Riefler
Dr. Hansen
Mr. Walter Stewart
Mr. Stewart: It turned out, in discussion
among us -- I thought we could make a general state-
want. ment to you that would give you, I think, what you
In the event of war, or sufficient threat
of war, all four of us come at your call on full
time. Viner and Hansen, however, will need to make
arrangements for leave from their universities and
their situation is somewhat different from us. In
these circumstances, we are prepared to stay in
Washington as long as experience and methods of
developments, of consultation, indicate it may be
desirable. What we mean by methods of consultation
18 that after the initial period, the three of us,
Riefler, Viner and myself feel we could work most
effectively through Viner to you, giving him what
was on our minds, but always leaving you with the
option to see all of us on any occasion you thought
it was desirable.
HM,Jr: Let's say there is war. Then I
understand that you people, subject to the confirm-
ation of your Universities, will come down at once,
all four of you. Then, do I understand, you are
saying that after you get the thing going, you are
going to leave Viner here?
Mr. Stewart: No. After we get the thing
going, and no one can predict what form it will
take, but our belief now would be that in the kind
of problems we would be confronted with it might be
more useful. to have one of us to whom you could turn
279
-2-
to, but perhaps we would be most effective working
through Viner to you rather than through all of us.
Dr. Viner: It's not my proposal.
Mr. Stewart: But if anything came up that
you said you wanted to see all of us, we would ...
HM,Jr: I don't have to cross that bridge now.
Mr. Stewart: Prior to a call from Washington,
White has volunteered to keep us informed.
HM,Jr: I have already told him that every night
he is to send you a summary of what has happened -- a
digest of cables.
Mr. Stewart: And then, for our part, we desire
a minimum of publicity and none if the situation requires
it.
HM,Jr: There is no reason why there should be
any publicity until you actually came.
Is that the whole story?
Mr. Stewart: Yes.
HM,Jr: I would say it is very good news for me.
Dr. Riefler: I think there are two points about
this suggestion of working through Viner that are cloudy.
Part of our discussion was you might find it easier to
work with us, all of us being here full time, by keeping
very close to Viner and he keeping close to us.
Dr. Viner: None of this is mine. It's a
question of how to work it.
HM,Jr: I might like cornflakes and might like
a little puffed rice for a change and Viner might say,
"Do I have to go in and meet that disagreeable, cranky
person every morning? Can't someone else take it?"
What I would do is -- those things have to be
worked out mutually advantageously and whichever way
280
it looked all right, but the main thing I want to
know is if this thing comes, have I got people who
have the training and the experience to advise me as
to how to meet this situation. In you four people
I have what I think are the best people and all I
have been trying to do all week was to equip the
Treasury 80 we could meet this situation, which is
entirely new and we can't say we did it this way or
did it that way. You just don't know. And the
United States has never been the center. Here every
country is using us as B. springboard and I Just don't
know, but knowing that I have you people to call on,
why
Mr. Stewart: We agreed that we would come on
your call.
HM,Jr: How we work -- through one or through
all -- that's something we can tell after a couple of
days, but I think the main thing 1s to advise you people
and keep you posted as these things come along and I
think the best thing to do 18 to have White prepare &
summary every night and send it air mail and you will
get it in the morning.
This fellow, Towers, 1s a smart fellow. It
didn't take him three minutes. When we got through
he said, "I don't know whether we can impound the stock
of our Nationals -- securities. But he got the thing
very fast. And I said, Well, one of the things we are
bothered about is the possibility of using Canada as B.
back door and we don't want that to happen.
So, contrary to our cables, they have not been
sounded out by the British Treasury. Definitely not.
This is the first communication they have had and they
have not had it up in their Cabinet. But I did not
have to draw any diagrams to explain it to Towerd.. He
got the thing very fast. But he's interested and he
said, particularly in the oase of copper, for instance,
there are only eight or ten men who control the output
and in all their basic metals there are very few people
you have to talk to. The thing there is very much
simpler.
I think for one week we have covered a lot of
281
-4-
ground. His idea was minimum prices on the stock
exchange up there rather than closing the doors.
Maybe close for the first day.
This is most pleasing to me. Is there some-
thing you have picked up during the morning you think
I ought to have or do you think we are going off the
deep end?
Mr. Stewart. White reported to us some of
the problems belonging to the Government bond market
and some questions of Securities Exchange, but I did
not have anything I wanted to bring up.
Mr. Hansen: I thought it might be useful to
have a very brief discussion about the bond market.
We did have some fairly vigorous discussion about that.
HM,Jr: What's your idea on that?
Mr. Hansen: My idea is I should not like to
see such a weak action on the part of the Federal Re-
serve System as we did in 1937. I should like to see
vigorous action.
HM,Jr: I agree. All these things get down
to personalities. It all depends upon who takes charge
over there. When Ronald Ransome was running it, he was
very vigorous and gave it a lot of attention. If I have
Randolph Burgess down here, I don't think I will have to
worry.
Mr. Hansen: He wasn't very vigorous before.
He was inclined to let the thing takes its course. I
have heard him talk about it and I am strongly of that
impression.
HM.Jr: I see.
Mr. Hansen: I feel, personally, a little worried
Just from that angle.
HM.Jr: You mean about Burgess?
Mr. Hansen: Yes. Speaking quite frankly, I do.
282
-5-
HM.Jr: Of course, the bond market, right now,
is pretty high and if it went off two or three points
it would not be any great tragedy. And then, after
the first sluff off, then we get the shift back. When
I was looking after it here, we bought $30,000,000 to
$40,000,000 worth of bonds in a day. We did it when
the President made his famous Green Bay speech. And
I don't think, Hansen, you can draw up any rules or
regulations on that. I think it's a question of watch-
ing it and then my getting disagreeable about it.
Mr. Hansen: I agree as to that.
HM,Jr: You think Burgess might be a little
hesitant on this?
Handen: Yes.
HM.Jr: Possibly. I wonder if he would be
different now that he is out.
Dr. Viner: He might.
Dr. Riefler: It will be different here from
up there.
HM,Jr: I get what you are saying. I don't
have to be hit over the head more than once.
What else are you worried about?
Mr. Hansen: That's the only thing I have to say.
Dr. Viner: You will have to write, in the case
of Hansen.
Mr. Hansen: I wonder if I had not better take
it up with them personally and I can write to the Secre-
tary and maybe I will have to ask the Secretary to write
to them.
Dr. Viner: In my case, the reason I wanted it
that way, because they can't say no to the Secretary
but they can to me.
283
-6-
HM.Jr: I will call President Hutchins on
Monday on the phone.
Dr. Viner: Make it clear that it is a con-
tingent call; that you want me to have permission
to drop my work there and come in case war breaks
out and I don't want a request for leave of absence
now.
Mr. Hansen: In my case, I think I would pre-
fer to see them first and I will then let you know.
Dr. Riefler: I have a contingency I forgot
to mention. I am going over to Geneva to attend
a meeting -- Sir Frederick Phillips will be there --
and I can't imagine the two conflicting.
HM.Jr: I think your tip-off will be if the
King and Queen sail, you can sail.
What is the date?
Dr. Riefler: June 15th to July 10th.
HM.Jr: Lots of things can be settled before
then.
The Italians have 100,000 troops in Albania
today. For what? This thing that the President
has done, I am tickled to death. It's either "fish
or out bait".
I appreciate your spirit and I hope I may
never have to call on you.
000-000
apul 15, 1939
SECURITIES AND EXCHANGE COMMISSION
284
MEMORANDUM
The views of this Commission have been sought
concerning the advisability and desirability of closing
the securities markets of this country in the event of an
outbreak of hostilities in Europe.
We are of the opinion that it would be most desir-
able both from the point of view of public psychology and to
the end that our investors may be provided with a continuous
market for the purchase and sale of securities that our markets
should remain open at all times. However, conditions over
which there may be no control may so demoralize those markets
as seriously to jeopardize the interests of our investors and
unduly affect the public psychology. It is therefore our view
that all possible measures should be taken in advance of an
outbreak of war to control those detrimental influences, and
that a close watch should be kept for the appearance of un-
controllable factors indicating the advisability of taking
measures toward the closing of the markets in order to ward
off the affects of panic conditions.
We understand that negotiations have been instituted
in an effort to obtain assurances from the member governments of
the Tripartite that American securities
owned by nationals of these
governments, will be taken over and held and will not be sold
on our markets without prior consultation with our government.
If obtained, these measures should go far toward preventing
undue selling pressure in our markets.
We respectfully suggest, however, that the terms of
the agreements S ought should be widened to the extent of ob-
taining guarantees that in the event of the outbreak of war,
these countries will impose upon their nationals a prohibition
against selling of American securities in American markets in
the absence of an express permission issued after consultation
with our government. This suggestion 18 advanced in an attempt
to prevent 8. speculative raid upon our markets through the em-
ployment of the device of short selling, the use of which would
not be forestalled by the assurances presently held from the
British government and being sought from the other members of
the Tripartite.
We propose to make arrangements between this Com-
mission and the governing officials of our national securi-
ties exchanges -- particularly the New York exchanges --
- 2 -
285
establishing a complete system of minute-to-minute ob-
servation of factors entering the market and of current
interchange of information in hand. Thus it will be possible
to detect the point of danger at which selling orders in nature
and extent 30 predominate over buying orders as to pressage
& demoralization of the price structure and resulting panic
conditions. Should this point arrive it is our considered
opinion, as expressed in the memorandum of April 12, 1939
(a copy of which was submitted to the Secretary of the Treasury
after being summarized before the conference on the afternoon
of that date) that steps should be taken to close our national
securities exchanges and to obtain cooperative measures from
organizations and of brokers and dealers in the over-the-counter
markets. Thereafter, every effort should be made to reopen
these markets at the earliest possible time, and under such
restrictions and governmental supervision as may seem neces-
sary or desirable.
The suggestion has been made that even if matters
reach a serious panic stage, then, rather than take the im-
mediate course of closing the markets, they should be permitted
to remain open, even in the fact of such panic conditions,
under some type of restrictive limitations. With this view
we cannot agree, and in this connection reference is again
made to the memorandum of April 12, 1939, referred to above.
As already pointed out, this Commission is fully
prepared, once the approval of the President is obtained,
to issue orders closing our exchanges within a space of 8. few
minutes. We reiterate, however, that every endeavor should
be made to keep our markets open and available if that can
possibly be done consistently with the best interests of the
holders of the securities of our American enterprises, 88
well as potential investors in those enterprises.
286
April 12, 1939
MEMORANDUM
To:
The Commission
From:
The Trading and Exchange Division
Re: Action with Respect to Securities Markets in
Event of the Outbreak of War in Europe.
In the event of a declaration of war, the following may
be anticipated:
(a) Foreign holders of American securities will
dump;
(b) Domestic security holders will liquidate;
(c) Potential buyers of securities will withdraw.
(a) As to the first contingency, it is estimated that
there are somewhat less than $2,000 millions of holdings of
common stock, $300 millions of preferred stock, and $500 millions
of bonds. It would probably be impossible to dump on our exchange
markets any substantial part of these preferred stocks and bonds,
in which the market would probably disappear. On this assumption
the small amount held would probably not present much of a. problem.
On the other hand, there may be some market for common
stocks. A concerted effort to sell them, however, would shortly
destroy whatever market there was. Thus, without other provisions,
it may be safely predicted that the closing of the exchanges would
be imperative. However, if foreign governments managed to expropri-
ate and withhold, say, one-half of these securities, some relief
may be expected, but should the remaining half be dumped, the same
demoralizing results may be anticipated. Experts do not anticipate
that foreign governments would succeed in expropriating more than
one-half of such holdings. Therefore, It is unlikely that foreign
agreements to expropriate and withhold from dumping would prevent
panic conditions in our domestic security markets.
(b) When it is realized that so small a percentage of
holdings could demoralize our security markets, such as those of
foreigners, to wit, $2600 millions out of & total estimated at
$260,000 millions value, it will be realized what an unpredictable
effect the outbreak of hostilities would have on our domestic holders.
It is not at all unlikely that the markets would be asked to absorb
$500 millions to $1000 millions worth of stocks upon the announce-
ment of outbreak of hostilities. The market's ability to absorb
on the technical position in which the market was at the time. At
such quantities an with any semblance of reason would depend partly
this writing there has been a substantial mark-down in the price of
securities. Loans to brokers, however, have not declined very sub-
- 2 -
287
stantially, although they are relatively low, amounting to $721
millions. Loans by banks on securities amount to $539 millions
at present (April 5, 1939).
It 1s difficult to determine the margin condition of
these loans but they probably are not good because they never are
after an extended decline in the market. In fact, the only avail-
able index indicates that restricted accounts for brokers had in-
creased in the last report period covered.
If the declaration of war or the outbreak of hostilities
would cause disorderly liquidation by domestic holders, it is un-
likely that expropriation and withholding of foreign holdings would
deter any substantial amount of domestic selling. Domestic sellers
would be influenced by the uncertainties of war and its outcome.
The withholding by foreign governments for eventual resale would
not deter them because they would realize that this stock would be
sold eventually and that they would thus be assured of B. supply when
they were ready to repurchase their own securities.
Reverting again to the technical position of the market,
the averages are, in spite of the recent decline, substantially
above the low points of 1938. Indices of domestic business are
discouraging. Had the same war scare been extant in 1938, it is
likely that the averages would have been lower then. There are
strong probabilities that the outbreak of hostilities in Europe
would be the occasion for selling by domestic holders of stocks
to such an extent as to create panic conditions irrespective of
steps that might be taken by foreign governments to withhold dump-
ing by their citizens.
(c) What the potential buyer of stocks will do in a
crisis is equally important 8.8 what the seller will do. The poten-
tial buyer would not be attracted to come into the market by foreign
withholding, realizing that this supply of stock would subsequently
be available to him. There is no influence which 80 strongly
deters a potential buyer as the influence of a panic market. If
it may be anticipated that selling by domestic holders of panic
proportions would result from the outbreak of hostilities, it may
be taken as axiomatic that buyers and buy orders would be withdrawn.
If the above reasoning is sound, only two courses would
seem to be offered:
1. To keep the markets open, supervised and managed
by government authorities and perhaps even with prices pegged by
the government or an agent thereof; or
2. Temporary closing of all exchanges and regulatory
préhibition of trading by registered brokers and dealers.
It would seem the wisest course to consider the employ-
ment of both of these alternatives, first closing the market
temporarily to mitigate the effect, and thereafter, and as briefly
as conditions indicate, to reopen it on a restricted basis and
8
288
and under careful supervision. The security markets have been
closed heretofore on several occasions and each time the decision
has appeared to have been wisely taken. In fact, there has been
no criticism or even hindsight suggestion that an alternative
method might have been employed. There is of strategic advantage
in the fact that our exchanges open after the European exchanges
have closed and when it 1s on in the afternoon in Europe. If
preparations are made in advance, our exchangee can be closed upon
ten minutes' notice. Psychologically, it is probable that in-
vestors anticipate the closing of our exchanges in the event of
war. There have been several near crises during which the clos-
ing of the exchanges was rumored, and such closing must not be
considered 8 shock to the public mind. It would, no doubt, be
B. fine showing to be able to keep the exchanges open in 8. crisis,
but the risk of having to close them ingloriously should aepanio
ensue is not worth the glory. When markets are closed for a while,
and fear and passion cool off, the experience of the past indi-
cates that sell orders are withdrawn, reduced or limited and the
buyers begin to take stock, to nibble, and to enter real orders.
It should not be long until & market can be reopened on a care-
fully regulated basis.
The objections to closing a market are (a) that boot-
leg markets spring up, and (b) the difficulties of reopening.
As to (a), it is doubtful that there was much volume of curb deal-
ings in the early months in which the market was closed in 1914,
and, in addition, there is at present the Commission with authority
to require disclosure of information concerning over-the-counter
dealings, which in itself would be an inhibiting force. As to
reopening, there is again the great moral force of the Commission
which could arrange to have its representatives in important
financial centers, inspecting transactions to make sure that they
were bona fide, that there were no short sales, and that specula-
tion was cut to the minimum.
The suggestion that the government provide a peg for
securities may also be considered an advantageous proposal. If
the government stands prepared to buy securities, 1t is uncertain
how many would be offered for sale. However, the fact that the
government stands ready to purchase would, no doubt, retard 8. great
many sellers and encourage potential buyers. The suggestion 15
risky, however, the public psychology being AS uncertain AS it is,
and if the device feils, the government would be in the unfortunate
position of accumulating a large amount of securities which it must
sventually dispose of. The failure of the device would entail
cumulative effects and may result in B greater panic. Such
results have followed before from pegged market situations. On
the other hand, if the market should have declined to B. very low
level, this device might be given consideration.
289
Incidentally, with respect to the closing of the mar-
lcet, it is assumed that other foreign markets would likewise
however. be effectively closed. This would not be a necessary condition,
Another alternative which has been considered is to keep
the markets open but to set a limit for the decline on any one
day. This alternative, no doubt, was discussed on prior 00-
casions when the market was closed and was probably abandoned
for the following reasons: Under such instructions, the markets
immediately seek the lower limits; offerings are put in at those
prices; no transactions, therefore, can be effected; and the
market is, in reality, closed. Banks and brokers, however, try
to liquidate customers' loans at the lower limits which they do
not do when markets are officially closed. Potential buyers are
discouraged by seeing prices seek the lower limit, and bids are
withdrawn. This alternative, therefore, while preserving 8. sem-
blance of an open market, is most unsatisfactory.
There has been some consideration given to the current situa-
tion and a suggestion that B. hint or trial balloon be offered to
the public indicating that the government 18 in negotiation with
foreign governments for the withholding of foreign securities.
Such EL hint would probably stimulate buying, temporarily, at least,
prevent further declines in the market, and even cause a sharp
and sustained advance. In the event that it would have this
result, it would leave the stock market in 8 worse technical
condition and thus more vulnerable to selling should a crisis
materialize and would not, under such circumstances, in any
event, prevent panic psychology. In fact, having shot the bolt
and assured the public in advance of the withholding of foreign
securities, there would be nothing left to reassure them if and when
the crisis arrived. It would be preferable that the market should
continue its present course, anticipating and discounting a
crisis, and the persons who are fearful should liquidate under
present conditions. This would permit the rapid reopening of
markets, which is the important thing to provide for, and make
the closing merely a temporary affair. On the other hand, a.
hint of government negotiation for withholding of foreign
securities might react as an alarm to the public mind and sug-
public realized. In this event, a near panic might result without
gest that the government was aware of more dangers than the
actual cause.
Regraded Unclassified
CONFIDENTIAL
Federal 18, 1959 290
Resew
Regraded Unclassified
Third draft
If there should be way in Darope -
Trading on the New York Stock Exchange should be brought under
drastic control, by being put under the supervision of as Imergency
Committee that would forbid all trades at prices below specified sist-
sum limits. These sinimum limits should be at the outset the closing
prices of the last day before the control goes into effect, and they
should subsequently be adjusted from time to time by the Committee.
Eventually, as the market stendies, one group of securities after
another should be released from the control.
This is the mechanism that WAS invented during the time that the
Exchange was closed in 1914 and successfully employed when the
was reopened late in that year. All the rulings of the Exchange Com-
mittee that acted at that time are available in print and many of them
could be used again with very little change.
It should be arranged if poesible to have this action taken by
the Exchange itself, since they have the patterns, the experience,
and the facilities for enlisting cooperation from the trade, As a
matter of law, however, the SEC has outhority, with the approval of
the President, to take this action as well as the authority to close
the Exchange altogether. The smaller exchanges would cooperate fully
in any event. On the voluntary basis, at least, enough cooperation
to serve the purpose could be obtained now, 88 it was in 1914, from
dealers who operate "over the counter".
This action would prevent demorelization by preventing sales at
panie prices. It would shock the country end the world for less than
closing the Exchange altogether. It could be 80 operated as to keep
the bulk of the trading throughout the war, in stocks at least, on the
exchanges, where it can be subjected to control, instead of driving it
altogether off the exchanges where much of it could probably sacape
control.
The emergency control should be established whether the London
Stock Exchange 10 closed or not. It must be remembered that their
mechanism is no different from ours that for practical purposes trading
in individual securities can be suspended, and often 10 suspended,
without notual closing of the Exchange.
If any special circumstances should cake it necessary. at the
outset, for the Government to order the Exchange to close altogether,
it would be desirable for this action to be accompanied by some state-
ment of intention to not up as soon as possible a mechanism similer
to that of 1914 for trading in securities at or above sinimum prices.
Fedure Kaseme
291
April 12, 1939
In view of the outbreak of hostilities in Europe,
and in anticipation of any possible demands for cash or credit
arising out of the disturbed international financial conditions,
the Board of Governors of the Federal Reserve System wishes to
call attention to the strength of the financial structure of the
United States today and to the powers possessed by the Federal
Reserve System to assure that all legitimate demands upon it are
promptly met.
The United States at the present time has a stock of
gold emounting to $15,000,000,000, of which $12,500,000,000 is
held as security against gold certificates in the hands of the
Federal Reserve banks. These banks have $7,400,000,000 of re-
serves in excess of the amounts required to be held against their
deposit and note liabilities. Consequently the Federal Reserve
banks are in a position to engage in open-market operations and to
make discounts and advances in amounts that are sufficient to meet
all conceivable demands upon them.
It will be the policy of the Federal Reserve System for
the Federal Reserve banks to stand ready to make advances on Gov-
erument securities at par to member banks, nonmember banks and
other individuals, partnerships, and corporations.
Regraded Unclassified
292
- 2 -
In view of the large volume of reserves in excess
of legal requirements held by the member banks and the ample
supply of funds in the hands of the public to meet business
requirements, the Board does not expect that a large demand
for credit at the Federal Reserve banks will arise. It makes
this announcement, however, for the purpose of informing the
public that the System has ample powers and resources to meet
any conceivable demands that may be made upon it.
The Federal Reserve banks in the twelve Federal Re-
serve districts are issuing statements of the plans that have
been made for carrying out this policy of the Federal Reserve
System.
T he must certain
293
way of proply closing commadets
ex changes would be for the
President to issue a. est atement
requesting the exchanges
to else-
S hall we prepare
Regraments
294
April 15, 1939
9:10 a.m.
HMJr:
Hello.
Operator:
Mr. Bell. Go ahead.
Dan
Bell:
Good morning.
HMJr:
Good morning, Dan. Dan, there's a piece in the Wall
Street Journal saying that during the World War the
Treasury ran a war risk bureau - insurance bureau.
B:
Yeah.
HMJr:
Would you look into it and talk to me about it --
whether we should do something like that.
B:
Yes, I'll attend to it. It probably ought to be
operated maybe by the Veterans Administration.
HMJr:
Veterans?
B:
You see the Veterans Administration really grew out
of the old war risk insurance. We established a war
risk insurance and then it went right on with not
only insuring vessels and cargos, but insuring soldiers.
HMJr:
For heavens sake!
B:
And then the war risk insurance bureau was changed
to the Veterans Administration.
HMJr:
Well
B:
And I expect they have all the files, but there's
quite a report of it in the annual reports.
HMJr:
Well, get me up a record of what you think we ought to
do.
B:
All right.
HMJr:
Will you?
B:
Right.
295
April 15, 1939
9:12 a.m.
Preston
Delano:
Hello.
HMJr:
Good morning.
D:
I'm seeing Giannini late in the morning.
HMJr:
Yeah.
D:
And I thought I'd ask you if there was any indication
HMJr:
Yes, I've been waiting to hear from Hanes. I got word
from the White. House last night at eight-thirty --
the President said it was all right to make the letter
read of the Comptroller of the Currency and nobody
else.
D:
Well, if I just make that change, then, and present it
to him this morning.....
HMJr:
Pardon me?
D:
I say, if I just make that change
HMJr:
Just make it read the Comptroller of the Currency.
D:
Right. And -- and no other change.
HMJr:
And no other change.
D:
And I'll go ahead and Bee him then this morning.
HMJr:
No, I got word at eight-thirty last night......
D:
Right.
HMJr:
that it was -- that it was entirely agreeable to
the President.
D:
Fine, Mr. Secretary. Well, I'll proceed accordingly.
HMJr:
Righto.
D:
Right.
HMJr:
Keep me informed.
D:
Yes, sir.
HMJr:
Thank you.
296
April 15, 1939
9:13 a.m.
Operator:
Go ahead.
HMJr:
Hello, Johnny.
John
Hanes:
Good morning, sir. How are you?
HMJr:
Pretty well. I wanted to tell you -- in the meantime
Delano called in and I got word from the President
last night at eight-thirty.
H:
Yes.
HMJr:
It was all right to get the letter read only the
Comptroller.
H:
Yes.
HMJr:
And I've just hung up -- I've Just told that to the
Comptroller.
H:
O. K. Fine. And he's going to see Giannini this
morning, I guess.
HMJr:
That's what he said, and I said to keep us posted.
H:
Righto.
HMJr:
But that -- that was what I wanted to get to you
last night.
H:
I saw Mrs. Morgenthau at the -- at the
party. I was sorry thatyoudidn't call me. I left
word here where they could find me; I didn't know I
was going out last night, so
HMJr:
I mean, if it's -- I never bother you evenings unless
it's -- I mean, I thought that this was -- was good
news.
H:
Yes. Yes.
HMJr:
If you were home I'd get you.
H:
Yes.
HMJr:
They told me where you were and I didn't think it was
worth bothering.
H:
Yes.
- 2 -
297
HMJr:
But I called up Miss LeHand at eighty-thirty, and I
said, "What about it"? She said, "Oh," she said,
"My, I had forgotten," she said, "I had the answer
for you and I forgot it."
H:
Yes.
HMJr:
So
H:
Well, I'm glad it got -- there -- there was plenty
of time as long as we got it by this morning anyway.
HMJr:
Well, I just hung up. Now, there's something else,
Johnny -- oh, I asked Jesse Jones to come to the
meeting at three o'clock this afternoon.
H:
Yeah.
HMJr:
But if we're going to have to let -- let him lend
money, I thought -- B. fellow feels much better if
he's sitting in on it.
H:
Yeah.
HMJr:
Now, if during the morning -- if Foley finds out --
you know I hadhim look up- whether it would be legal
for the R.F.C. to lend to what the English called --
they set up a straw man, you know, under the
H:
Yes.
HMJr:
It wasn't contrary to the Johnson Act -- you -- you
know what I mean.
H:
Yes.
HMJr:
Then I thought if you got that and -- and, if it was
all right -- if you could inform Jesse before three
o'clock -- you see?
H:
Yes.
HMJr:
So that he'd know what it was about and wouldn't
come in cold.
H:
Right.
HMJr:
Now, will you carry that for me?
H:
I will. Indeed I will.
298
- 3 -
HMJr:
And then -- then if it......
H:
Foley is looking it up now.
HMJr:
Foley 1s looking it up.
H:
And opinion. I'll tell him to give it to me when he gets an
HMJr:
Give it to you, and then when you get it bring Jesse
up-to-date -- in fact, tell him everything that we've
done the last couple of days.
H:
I will.
HMJr:
And -- 80 that he knows and hewn'tcome in
H:
This 1s all to do just with the -- with the securities
business and exchange and 80 forth.
HMJr:
That's the idea.
H:
All right. Fine.
HMJr:
And I thought that -- there's nobody better to do --
to do it better than you can.
H:
0. K. I'll get -- -- I'll get Ed and then I'll tell
Jesse.
HMJr:
Righto.
H:
Thank you.
299
April 15, 1939
11:30 a.m.
HMJr:
Hello.
Operator:
Go ahead.
HMJr:
Hello.
Governor
Stark:
Mr. Secretary?
HMJr:
Talking.
S:
This is Governor Stark from Missouri.
HMJr:
How do you do?
S:
I'm very glad to call you up and to thank you for
the splendid work your department 18 doing out there.
HMJr:
Uh-huh. Well
S:
Are you going to be at your office long?
HMJr:
Well, I'm here all day.
S:
Oh, you are here all day?
HMJr:
Yes.
S:
You mean this afternoon too?
HMJr:
Well, I'm tied up this afternoon, Governor.
S:
I see.
HMJr:
I'm staying here for a special purpose.
S:
Well, I just wanted to drop by and personally thank
you for everything you've done and everything your
department has done in helping us clean up the
Missouri situation.
HMJr:
Well
S:
You are going to be at the Gridiron tonight, I guess,
won't you?
HMJr:
Yes.
300
- 2 -
S:
Well, I'll try to see you there then.
HMJr:
Either that or
S:
Beg pardon?
HMJr:
Well, you see, I -- -- I've got an important conference
on all afternoon. I don't know where you are now.
S:
I'm down at the Mayflower.
HMJr:
Oh! If you could get here at twelve I could see you.
S:
At twelve?
HMJr:
Yes.
S:
But I would have to run away pretty briefly after --
pretty quickly after that. I'm sure that would be
satisfactory to you. I -- I have & luncheon engage-
ment down at the Press Club at about twelve-fifteen.
HMJr:
Well
S:
If you don't mind I'll run over there about five
minutes to twelve. Would that be too early?
HMJr:
No, five minutes to twelve would be all right.
S:
That's fine. Well, I'll run right over there then.
HMJr:
O. K.
S:
Thank you, sir.
CONFIDENTIAL
301
Regraded Unclassified
April 15, 1939.
Subject: The European Situation.
Following is a resume of information received from offi-
sial sources!
General. Momentarily there is a period of confused quies-
sence in Europe while all governments are taking inventory of the
results of Italy's seizure of Albanie and the partially subsecaful
counter-move of the democraties in consolidating neasures for M-
curity arong the Balkas States. The atmosphere continues to be full
of rumors, but little information exists as to notable changes in
the military or politionl situation.
Military. The only official reports from Spain are uncon-
firmed and frequentary, and no clear picture can be obtained of any
decisive military developments. The appearance of Spaniah troops at
La Lines, opposite Gibralter, now can be explained as a normal con-
tingen's of Spenish troops returning to stations. Nevertheless the
British are reported to be taking all precautions on their wide of
the neutral sone, including the digging of trenches and electrifica-
tion of the around barriers. No identification can be made of any sig-
nificant concentration either of Spanish or Italian troops.
Franco-Spanish relations are described in high French
circles as being very unsatisfactory. It is felt that oven though
Franco might remain neutral in 0888 of a general war, be will likely
afford facilities in the way of airplane and submarine bases to Italy
and Germany.
The British Military Attache in Rome was officially in-
formed that the expeditionary force in Albenia consists of three
corps, astimated at from 90,000 to 100,000 men. It was stated that
the troops 2019 ordered to remain as far is practical from the Yugo-
alavian and Greek borders, and also that due to the costly nature of
the expedition they would be withdrawn all soon as circumstances par-
mit. It was sategorically denied that any Corman troops were in
SNITAL
CONFIDENTIAL
302
Italy or Libya. Our - Military Attache, however, states that remore
are persistent that considerable numbers of German specialists have
arrived in Italy in the guise of "Strength Through Zey" tourists.
Italian officials claim to be genuinely disturbed over the French
consentration of troops in the vicinity of Mentoms. They state that
Italian dispositions at Vintimille are purely for defensive purposes,
whereas the French troops nom to have an offensive character.
The German Military Attache in Belgrade, a general officer,
whose forecasts in the past have been extraordinarily accurate, stated
to our Military Attachs consumbat as follows: If was comes, it will be
within the next four weeks. Due to disturbing economic conditions in
Commany, if war is lenger postponed Germany will be seriously handi-
capped in 8 military my. He added that there is no danger of a alash
in the immediate future, since Goering and other key military MS 679
about from Germany. The greatest point of friction at the noment,
be mid, is the situation along the Hungarian-Rumanian frontier.
An interesting contradiction to the last observation comes
from Budapost, where 8 high Hungarian official stated that the Brit-
1sh guarantee to Rumania had created a situation necessitating a post-
penement of Hungarian aims of recovering lost territories. He ad-
mitted that & clash with Rumania at this time would likely precipitate
a general war, and added that no came government could take any such
responsibility. It was will appreciated in Hungary, be said, that the
Rumanian concentration in Trunsylvania was designed for protestion
against Germany, and not against Hungary.
CONFIDENTIAL
303
April 15, 1939
MA
To:
The Secretary
From:
Miss Lonigan E.L.
The total number of wpa workers
YOR
on April 8, 1939 is 2,901,350.
The decrease from April 1 to
April 8 was 74,790 workers.
304
WORKS PROGRESS ADMINISTRATION
Number of Workers Employed
United States
Monthly V.P.A. Employment
Weekly W.P.A. Employment
1935
1936
1937
1938
1939
$
a
,
M
M
J
1
.
J
1938
-
1939
-
di
&
N
J
M
#
J
$
N
J
.
3
-
$
N
MAR.
MAY
JULY
SEPT.
SEPT.
ILLINOIS
NOV,
JAM.
MAR.
MAY
JULY
NOV.
TWILLIONS
MILLIONS
TTT
WILLIONS
3
OF
OF
or
WORKERS
WORKERS
WORKERS
3.5
3.5
3.2
3,4
3,4
3.2
3.3
3.3
3.2
3.2
2.8
2.8
3.1
Jul
3.0
3.0
2,4
2,4
2.9
2.9
.
2.8
2,8
2.0
2.0
2.7
2.7
2.6
2.6
1.6
2.5
2.5
1.6
2.4
2.4
1.2
2.3
2.3
1.2
2.2
2.2
2.1
2.1
-8
.8
2.0
2.0
1.9
1.9
A
,4
1,8
1.8
1.7
1.7
o
0
1.6
1.6
SEPT.
NOV.
-
-
#
J
M
.
-
.
of
E
E
of
II
M
.
a
M
M
M
N
JAN.
MAR.
MAY
JULY
SEPT.
NOV.
JAN.
MAR,
MAY
JULY
1935
1936
1937
1938
1939
1938
1939
SOURCE WORKS PROGRESS ADMINISTRATION
Office of the Secretary of the Transury
- of - of -
WORKS PROGRESS ADMINISTRATION
Number of Workers Employed - Weekly
United States
305
Week ending
Number of Workers
1938
(In thousands)
June 4
2,693
June 11
2,712
June 18
2,736
June 25
2,767
July 2
2,807
July 9
2,853
July 16
2,899
July 23
2,938
July 30
2,967
August 6
2,993
August 13
3,017
August 20
3,039
August 27
3,067
September 3
3,086
September 10
3,102
September 17
3,114
September 24
3,120
October 1
3,129
October 8
3,137
October 15
3,167
October 22
3,201
October 29
3,245
November 5
3,263
November 12
3,258
November 19
3,244
November 26
3,216
December 3
3,185
December 10
3,139
December 17
3,083
December 24
3,021
December 31
2,986
1939
January 7
2,967
January 14
2,927
January 21
2,898
January 28
2,883
February 4
2,966
February 11
2,964
February 18
3,010
February 25
3,043
March 4
3,034
March 11
3,009
March 18
3,012
March 25
3,007
April 1
2,976
April s
2,901
Source: Works Progress Administration
Confidential.
WORKS PROGRESS ADMINISTRATION
306
Number of Workers Employed - Monthly
United States
1936
Number of Workers
(In thousands)
January
February
2,926
March
3,036
2,872
April
May
2,570
2,340
June
2,256
July
2,249
August
2,377
September
2,482
October
2,581
November
2,483
December
2,192
1937
January
2,138
February
2,146
March
2,115
April
2,070
May
1,999
June
1,821
July
1,569
August
1,480
September
1,451
October
1,476
November
1,520
December
1,629
1938
January
1,901
February
2,075
March
2,395
April
2,582
May
2,678
June
2,767
July
2,967
August
3,067
September
3,120
October
3,245
November
3,216
December
2,986
1939
January
2,883
February
3,043
March
3,007
Source: Works Progress Administration
a/ Confidential
Monthly figures are weekly figures for the
latest week of the month
They include certified and non-certified
workers.
307
April 15, 1939.
My dear Mr. Secretary:
Under date of April 3. 1939, Dr. Herbert Feis of your
Department was advised by the Bureau of Customs with respect to
its conclusion ghat countermiling duties should be imposed
under Section 303 of the Tariff Act of 1930 (U.S.C., title 19,
600. 1303) on dutiable importations of silk goods from Italy.
This Department fully concurs with the statements made in this
letter from the Bureau of Customs.
The Treasury Department is also satisfied from information
before it that grents are being bestowed upon Italian exports of
cotton, wool and leather goods. These exports are eided by the
issuance to the exporters of special permits for the importation
of rew materials. Such importations are ostensibly to replace the
rew materials used in producing the exported goode, but in feet
cover substantially nore than replacement amounts in many, if not
all, cases. The Italian restrictions upon imports are such that
these permits have 4 substantial value, which in some cases may
amount to as much as 200% of the value of the goods which may be
imported under them.
The insurance of these permite gives the Italian exporter
e subsidy having a value equal to the price obtainable for so
such of the permit as covers goods in excess of the quantity re-
quired to replace like material used in producing the exported
articles. A somewhat similar situation was the subject of Downs
To United States, (1903) 187 U.S. 496.
Section 303 of the Tariff Act of 1930 (U.S.C., title 19,
see. 1303) requires the Treasury Department to determine or esti-
mate the net amount of the subsidy allowed with respect to each
shipment of dutiable merchandise from Italy to the United States
in connection with which the above described procedures obtain.
However, Treasury representatives who have visited Italy for the
purpose of investigating this matter have been denied access to
necessary information.
I understand that your Department desires to give the
Italian Government an opportunity to submit pertinent information
concerning the prosedures obtaining with respect to the four
elesses of goods above mentioned. The Treasury Department will
Unclassified
308
. 2 e
therefore withhold positive action in the matter until May 15. 1939.
In this commention it La requested that your Department
nake the assessary arrengements through diplometic shammels 80
that Italien merchants shipping merchandise to the United States
my be permitted and encouraged to disclose the information which
will facilitate the orderly and expeditious determination or esti-
nation of the net smount of subsidies allowed in connection with
their shipments to the United States, in order that unheesesery
hindrances to trade, such as deposits of estimated scuntervailing
duties in excess of these which may be reasonable in the light of
full disclasures and long delays in liquidating duties, may be
avoided.
Very truly yours,
(Signed) H. Morgenthau Jr.
Secretary
The Memorable
The Bearetary of State
4/26/39
309
April 15, 1939.
My dear Mr. Attorney Generals
I have your letter of April 14, 1939, giving your
opinion that it is By duty to impose countervailing duties
under Section 303 of the Teriff Act of 1930 upon dutiable
silk merchandise imported into the United States from Italy,
and that the proposed Treasury Decision submitted by no is
appropriate in form and substance to accomplish that purpose.
Your special courtesy in handling this matter is deeply ap*
presisted.
I also have your letter of April 14, 1939, seking
whether I have any objection to publication of the above
mentioned opinion.
At the instance of the Department of State, the
countervailing duty order is being temporarily withheld
pending sonsideration of representations which may be made
by the Italian Government. In these circumstances, I do
not believe the opinion should be published at this time,
but when the matter is further developed, I shall communicate
with you again.
Very truly yours,
(Signed) H. Morgenthau Jr.
Secretary
The Honorable
The Attorney General
4/14/39
Regraded Unclassified
generate the secing
by m. measersimeth
310
approx
4-15-39
I have a personal communication from a friend, an
American, who happens to be the head of one of the most
important companies in Europe. This company has wide
interests in practically every part of the world and
owns productive companies in many countries in Europe,
in South America and in the Far East. He writes me in
the following sense:
A number of European corporations besides Central
Banks, are holding a substantial portion of their liquid
reserves in the form of gold bullion. Most of this gold
is deposited at present in England, Holland and Switzerland.
The question arises whether it is expedient to leave this
gold in these countries: it concerns not only the interests
of the depositors.
First, there 1s a danger of the gold falling into
enemy hands. Second, access to the strong room containing
the gold may be temporarily impeded at the very time when
it would be most desirable to have it available for private
or public use.
It seems that the regulations in the United States,
as they stand at present, preclude the deposit of gold in
the United States, exceptions being made solely in favor of
certain Central Banks. The suggestion is put forward that
this
311
⑉2⑉
this ruling should be relaxed without departing from the
principle that the Federal Government shall be the only
authorized buyer of gold in the United States.
In substance the suggestion 1e that the facilities
already afforded to Central Banks be extended to other
holders of gold. In order to facilitate supervision and
to avoid petty accounts, R minimum of $1,000,000 might be
stipulated for each deposit. Bullion imported for deposit
would be delivered to the Federal Reserve, it being under-
stood that this institution would be precluded from
transferring it to any buyer in the United States other
than the Federal Government, but would be authorized to
transfer it (under the same proviso) to the account of a
foreign buyer or to export it following the depositor's
instructions.
In reply to the foregoing communication from my
friend, I said that I did not know of any probability that
a change would be made in the regulations now existing in
this country with respect to gold. I was not familiar, I
said, with the details of our regulations. I said further
that the rules and the practices of the Treasury are such
that the relaxation to which he referred would almost
inevitably involve a change in practice with regard to
American citizens. It did not seem likely that the Treasury
would consider such a practice, as my correspondent suge
gested, with respect to American citizens, and under these
circumstances
312
-3-
circumstances it would probably not consider a change in
the rule with respect to foreign persons or firms. I
put forward the thought that the only procedure which I
could see practicable for the present would be for foreign
firms and holders of gold to purchase dollars for deposit
in this country. This was all that I could see that
American citizens could do.
In reply my correspondent made the following comment.
The objection raised against his original suggestion did
not strike him as conclusive. The British Government has
reserved itself a right to commandeer gold in the hands of
its nationals but has made it known that in no event will
it take possession of foreign gold deposits. On the other
hand, a deposit of gold in the United States at the free
disposal of a foreign owner would enable him to ship gold
whenever and wherever his business interests might require.
A holding in dollars would not serve his purpose unless the
American Government or the Federal Reserve were prepared to
sell him gold at any moment at a fixed price.
313
April 15, 1939
FOR THE SECRETARY:
May I suggest that you consider turning the
supervision of the Bulletin over to somebody else now
that it has been started and is fairly well established.
My primary reason for making this suggestion 1s that
I believe the Bulletin should be attached to someone of
fairly permanent status in the Department Bo that the
Bulletin' would not be left an orphan if and when I leave
the Department. In addition, however, it has been
suggested to me that the Bulletin from now on might
develop better if it were under the guidance of someone
of greater statistical training who could devote more
time and skill to planning its improvement.
ESD
show
to Harry White
314
DEPARTMENT OF AGRICULTURE
CARD 1 DEPARTMENT )
WASHINGTON
July
April 15, 1939.
The Honorable
The Secretary of the Treasury
Dear Mr. Secretary;
Enclosed herewith are some brief comments
on the current proposal to sound out the British
government on the matter of exchanging some of our
surplus ootton and possibly wheat for rubber and
possibly other strategic raw materials to be used
as reserves outside the channels of current commerce.
Sincerely,
JAWallace
Enclosure
Secretary
обулоня
revenerT
0821 VI99A
in
Regraded Unclassified
4/14/39
315
The Proposal to Exchange Surplus Farm Products of the United States
for the Essential Raw Materials of Other Countries.
1. We urgently need reserve stocks of strategic raw materials. The
available appropriations and appropriations that might be made avail-
able in the legialation now before Congress would fall far short of
adequately taking care of this need. It is therefore desirable to
secure as large supplies as might be possible for exchange for sur-
plus agricultural products.
2. The same considerations might move other foreign governments.
For example, British and Dutch producers are now restricting their
production of rubber to 50 percent of normal, and of tin to 40 percent
of normal.
3. The cotton and wheat we would exchange would be held as reserves
abroad and not enter into usual commercial channels, not to be released
unless prices go beyond certain points.
4. The strategic materials acquired by us would be ample security
for existing loans against cotton and wheat.
5. The expense of procuring the strategic materials in question
would greatly increase in the event of an international conflict.
6. It is impossible to tell what disposition we will find on the
part of other countries as regards their willingness to enter into
such interchanges. That would necessarily have to be a matter for
future diplomatic discussion.
7. An exchange of cotton for rubber could be accomplished without any
cost to the Treasury if the necessary authority is given to the Com-
modity Credit Corporation.
8. The cost of carrying cotton is twice as much as the cost of carrying
rubber on a pound basis, and four times 88 much on a dollar basis.
9. Shipments of rubber are now being held down by the International
Rubber Relations Committee in line with the reduced level of consumption.
Stocks are not excessive. Any accumulation by the United States for the
exchange of cotton would therefore be a matter of considerable time.
Negotiations for an exchange of this sort would probably have to be in
terms of our standing ready to release cotton in amounts equivalent to
the increase in production of rubber in excess of current commercial
requirements. Any substantial excess production of rubber for this
purpose would probably take a considerable longth of time.
(COPY:FE:HES)
316
No. 73
AMERICAN CONSULATE
Baigon, French Indochina, April 15, 1939
SUBJECT: Shipment of War Material Through Indoohina,
THE HONORABLE
THE SECRETARY OF STATE,
WASHINGTON.
SIR:
I have the honor to report that, although the
entry at Haiphong and shipment in transit from that
port to Yunnan and Kwangei of war material as such is
etill prohibited, the customs declarations of shippers
of all merchandise otherwise designated and belonging
or consigned to the Ohinese Government are accepted
apparently without question by the French customs au-
thorities at Haiphong, according to sources considered
reliable.
The same sources advise that between thirty and
forty trucke mostly loaded leave Haiphong for Nanning
every night and cross the Chinese border at Nacham.
Truoks arriving at Lang Son, Tonkin, empty are offered
paying loads of petroleum products consigned to Nanning
and Ohungking.
Considerable congestion of trucke and merchandise
at Nacham is reported, due to the fact that the Ohinese
customs authorities and the nearest bank are located at
Lungchow at a distance of thirty-five kilometers from
the border. With & view to remedying this situation it
is understood that Mr. Neprud, an American citizen em-
ployed by the Chinese Customs Service, recently visited
Nacham; and that representatives of American companies
interested in expediting clearances through the Ohinese
customs have recommended that B. Chinese customs repre-
sentative be stationed in the Branch of the Bank of
Ohina at Haiphong for the purpose of arranging there
for customs clearances at least in respect of merchandise
owned by the Chinese Government.
No early alleviation of the congestion at Haiphong
appears probable. It is understood that between March 1
and 15 all available freight cars on the Haiphong-
Yunnanfu Railroad were reserved for the shipment of mer-
chandise belonging to the Ohinese Government. In 80-
with instructions from the French customs au-
Hong Kong and Haiphong are limiting cargo bookings to
cordance thorities British steamship companies operating between
four thousand tons monthly exclusive of automotive
G.I.V
rebioles.
Very truly yours,
arop EYEM
Peter H.A. Flood
American Consul
telatury
Regraded Unclassified
317
CJ
PLAIN
London
Dated April 15, 1939
RECEIVED 8:22 a.m.
SECRETARY of State,
Washington.
Rush 489, April 15, noon.
FOR TREASURY FROM BUTTERWORTH.
OnE. With reference to the subject matter of my
473, April 13, 2 peme and paragraph No. 2 of 483, April
14, 7 p.m., the London press carries reports of an al-
leged plan "as described by Mr. William S. Wasserman,
President of the Investment Corporation of Philadelphia
and of the DElaware Fund Incorporated" whereby American
investment trusts insurance companies and banks with the
assistance of the United States Government would take over
British and French holdings of American. securities and
arrange a program for orderly disposal in the EVENT of
war.
The city aditor of the TIMES comments as follows:
"In all sections of the city much interest was Expressed
in the NEW York report that the Rgconstruction Finance
Corporation had indicated its willingness to finance the
orderly sale of British and French security holdings in
the
318
⑉2⑉ # 489, April 15, noon, from London
the United States of America in the EVENT of war. It
appears that this represents B. spontaneous suggestion
on the part of the Reconstruction Finance Corporation
presumably at the instance of higher quarters in
Washington rather than the outcome of any actual Anglo-
American negotiations on the subject. And although the
offer is not to be regarded as pure charity since the
orderly realization of securities would bE in the in-
terests of the United States no less than ourselves it
Evidently to some Extent represents an Expression of
political good will. The fact that a government finan-
cial agency is apparently proposing to take the lead
in such financing is a reminder of the Extent of govern=
ment incursion into the financial fiEld since the war,
When securities were realized and credits raised against
securities in the United States of America between 1915
and 1918 EVERY transaction was left in the hands of a
banking consortium headed by Messrs. J. P. Morgan. It
is quite probable however that despite a measure of
government intervention the financial arrangements would
bE left for the most part to the usual banking quarters,
It is certainly desirable in view of their Experience
that this should bE so. The reports so far mention only
United
310
-3- #489, April 15, Noon, from London
United States security holdings. During the last war
however funds were raised in America on a wide range of
securities other than actual dollar stocks. SEcurities
accepted as collateral ranged from South American and
other foreign government bonds to British railway ster-
ling debentures."
NEEdlEss to say it would bE useful to have confir-
mation or otherwise of this report.
Two. The feature of the foreign Exchange market this
morning was the erratic movements of the Belga about which
there are being circulated rumors of impending devaluation,
It is noteworthy that the one months' Belga has moved to
a greater relative Extent than the three months.
Of the 178 bars dealt in at fixing 165 were married
and there were considerable dealings both before and
after fixing.
KENNEDY
RR
BECEIAED
VOD I? loss
TW3MTHA930 YRUZAIRT
not to win
si CF
320
PARTIAL PARAPHRASE OF TELEGRAM RECEIVED
FROM: American Embassy, Paris, France
DATED April 15, 1939, noon
NO.: 743
FROM COCHRAN.
Reference is made to my telegram No. 722 of
April 13, 7 p.m., last two paragraphs.
I received by telephone at 11:30 this morning the
following message from Secretary de Jong of the Nether-
lands Bank:
"(1). The Netherlands Government is gladly pre-
pared to consult with the United States Government in
the matter referred in the message under reply.
(2) The Netherlands Government wishes however to
draw the attention to the fact that apart from the gold
carmarked in the United States the assets mentioned
in the message under reply, that is, the bank deposits,
securities, and investments, belong as far as the
Netherlands are concerned to private institutions or
individuals.
END SECTION ONE
BULLITT.
03V13038
KA;LWW
0801 21 pen
number et to 1219
NAME así at
321
REB
SPECIAL GRAY
Paris
Dated April 15, 1939
Rec'd 10:48 P. m.
SECRETARY of State,
Washington.
743, April 15, noon. (SECTION TWO)
Three. In the opinion of the Netherlands Government
the sale of the gold earmarked in the United States cannot
present any difficulties. On the other hand it is not
to bE EXPECTED that the private institutions and individuals
aforementioned would in the EVENT of the European war
proceed to panicky selling of the assets which they hold
in the United States.
Four. ThE Netherlands Government has not the
intention to mobilize and to SEll the assets hEld in the
United States by Dutch subjects or residents in the
Netherlands,
Five. If in the EVENT of a European war mobilization
of such assets became necessary the Dutch Government is
prepared to consult with the Government of the United
States before proceeding to realization or sale of the
assets in question.
Six.
322
REB
2-#743, From Paris, Apr,15,noon.
(Sec. Two)
Six. The Netherlands Government is of opinion that
it would not bE advisable to hold a conference of repre-
sentatives of the countries who are members of the
tripartite accord and that after what has been said above
as far as the Netherlands are concerned there is no
reason for such a conference."
(END OF MESSAGE)
BULLITT
BECEIAED
1 at BCA
ТИЗМТЯАЧЗО YRUPAIRT
adt le valid
person MI of Instruct
323
CA
TELEGRAM SENT
GRAY
April 16, 1939
8 p.m.
AMERICAN EMBASSY
LONDON (ENGLAND)
263
FOR BUTTERWORTH FROM SECRETARY OF THE TREASURY
STRICTLY CONFIDENTIAL
Please convey the following to the British Treasury.
WE note with satisfaction the plans of the British
Treasury as outlined in cable No. 428 of March 31, 1939
with respect to measures to bE taken to insure orderly
liquidation of British-owned American securities in CASE
of Eventualities in Europe.
WE refer to your cable No. 473 of April 13, 1939, in
which the British Treasury inquires with respect to their
ability to borrow here on the collateral of requisitioned
American securities of British residents.
It would appear to us that the dollar funds which the
British Government might need during the early stages of
any conflict might preferably bE obtained either through
the utilization of the dollar balances or through the sale
of gold rother than from the immediate sale of any sub-
stantial amount of securities. The British Government, in
the EVENT they adopted the measures indicated in their
cable
324
CA
--2--263 to London..
cable No. 428, would have dollar funds for their immediate
needs, In such EVENT, there should bE ample time, after
the outbreak of hostilities, in which to canvass the
possibility of further supplies of dollar Exchange from
securities.
Without having time to consult the Attorney General
it is the informal opinion of the Treasury Counsel that
under the Johnson and the Neutrality Acts, private sources
in this country would bE unable, in the EVENT of war to
Extend credit Either to the British Government directly
or through the medium of an agency of the British Govern-
ment or a "straw man"; but that the Johnson and the
Neutrality Acts would not prohibit such loans against
American securities requisitioned from British residents
if made by the United States Government or any agency
thereof, either directly to the British Government or one
of its agencies.
REference is made to your cable No. 483 of April 14.
WE shall bE glad to receive the documents referred to
relating to the British financial regulations to bE promul-
gated upon the outbreak of war, and shall treat them, of
course, with utmost SECRECY. WE also appreciate the Efforts
of the British Treasury in arranging for BEWlEy to remain
in this country for purposes of consultation.
In view of the apparent desire of the British
Government
325
CA
--3--263 to London..
Government to proceed with the discussions on a bilateral
basis, WE are willing to proceed on this basis. In the
EVENT that subsequent developments, in the opinion of
Either Government, indicate the desirability of altering
this procedure, the matter can, of course, bE discussed
again.
WE have formulated tentative plans for the protection
of our government bond, security, and commodity markets.
WE would bend EVERY Effort toward keeping these
markets open for the orderly conduct of business.
In your cable No. 489 of April 15, 1939 you request
information as to the press report of an alleged plan for
orderly disposal of foreign holdings of American securities.
The only official discussions which are going forward with
respect to this matter are joint consultations among
appropriate governmental agencies. Our Government has
publicly denied consulting with Wasserman and others on
the plan referred to in the press reports of April 14,1939.
On Saturday the Secretary of the Treasury conferred
with Governor Towers of the Bank of Canada conveying to
him the message similar to that of cable No. 261 of April
12, 1939,
BEREINED
HULL
(HF)
0501
4-16-39
CABLE TO AMERICAN EMBASSY
strictly confidential 326
LONDON
FOR BUTTERWORTH FROM SECRETARY OF THE TREASURY
PLEASE CONVEY THE FOLLOWING TO THE BRITISH TREASURY
We note with satisfaction the plans of the British Treasury
as outlined in cable No. 428 of March 31, 1939 with respect to
measures to be taken to insure orderly liquidation of British-
owned American securities in case of eventualities in Europe.
We refer to your cable No. 473 of April 13, 1939 in which
the British Treasury inquiries with respect to their ability
to borrow here on the collateral of requisitioned American
securities of British residents.
It would appear to us that the dollar funds which the
British Government might need during the early stages of any
conflict might preferably be obtained either through the
utilization of the dollar balances or through the sale of
gold rather than from the immediate sale of any substantial
amount of securities, The British Government, in the event they
adopted the neasures indicated in their cable No. 428, would
have dollar funds for their immediate needs. In such event,
there should be ample time, after the outbreak of hostilities,
in which to convass the possibility of further supplies of
dollar exchange from securities.
- 2 -
327
Without having time to consult the Attorney General it is
the informal opinion of the Treasury Counsel that under the Johnson
and the Neutrality Acts, private sources in this country would be
unable, in the event of war to extend credit either to the British
Government directly or through the medium of an agency of the British
Government or a "straw man"; but that the Johnson and Neutrality Acts
would not prohibit such loans against American securities requisitioned
from British residents if made by the United States Government or
any agency thereof, either directly to the British Government or
one of its agencies.
Reference is made to your cable No. 483 of April 14.
We shall be glad to receive the documents referred to
relating to the British financial regulations to be promulgated
upon the outbreak of war, and shall treat them, of course, with
utmost secrecy. We also appreciate the efforts of the British
Treasury in arranging for Bewley to remain in this country for
purposes of consultation.
In view of the apparent desire of the British Government
to proceed with the discussions on a bilateral basis, we are
willing to proceed on this basis. In the event that subsequent
developments, in the opinion of either Government, indicate the
desirability of altering this procedure, the matter can, of course,
be ased again.
We have formulated tentative plans for the protection of
our government bond, security, and commodity markets.
328
. 3-
We would bend every effort toward keeping these markets
open for the orderly conduct of business.
In your cable No. 489 of April 15, 1939 you request
information as to the press report of an alleged plan for
orderly disposal of foreign holdings of American securities.
The only official discussions which are going forward with
respect to this matter are joint consultations among appropriate
governmental agencies. Our Government has publicly denied
consulting with Wasserman and others on the plan referred to in
the press reports of April 14, 1939.
On Saturday the Secretary of the Treasury conferred with
Governor Towers of the Bank of Canada conveying to him the
message similar to that of cable No. 261 of April 12, 1939.
Approved by the President - 6 P.M. April 16, 1939
8 Sowell Street
Law Sheljeel of Barbato University,
Cambridge, Mass. 16 april/34
Sear lar. Secretary,
329
I am up here fn a few days,
standing by for an addition to
hig family.
after under consideration
I your offer, I am still
a by job, and one with which I
unprefored to a celft. it is
am so information, un that a year
and 4 balf would be too show and
make any impression wfon T.
a Time for me to master is
Therefore, my disided feeling is
à
that I ought to decline your
offer. M you care to tale will
the further when Iget back to
washing 50, I shall be haffs
to come over to See you. hear -
while I want you to feel
relieved of any com instruent
to in and free to look
Elsenhure. and affreciate
the honor or of lowing been
invited into New your official
Mig
family
ing
Sincerely your
Calvert leagualis.
her. Secritary
Washington D.C
inst
330
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE April 16, 1939.
TO
Secretary Morgenthau
FROM E. H. Foley, Jr.
Attached is & copy of the letter signed by the Attorney General
to be delivered to the President tomorrow in regard to our proposed
Executive Order imposing foreign exchange restrictions and for other
purposes. Miss Baumgartner, the Attorney General's secretary, read the
letter to me over the telephone and stated that the Attorney General
had signed it this morning.
For our purposes, the letter, in my opinion, is satisfactory. In
light of the draft which the Attorney General submitted at our meeting
yesterday afternoon, it represents a substantial compromise decidedly
in our favor.
E.N.7h.
Attachment
331
My dear Mr. President:
I am herewith transmitting a. proposed executive order, prepared in
the Treasury Department and informally submitted for my consideration,
regulating transactions in foreign exchange, transfers of credit,
payments, and the export of coin, bullion and currency.
Legal doubt exists only with respect to that provision which requires
detailed reporting of foreign-owned assets in the United States. It is
believed, however, that the order would be upheld even in that respect if
issued under conditions of national emergency, the existence of which you
should determine.
The proposed order cites as authority section 5(b) of the Act of
October 6, 1917, 40 Stat. 411, as amended by section 2 of the Act of
March 9, 1933, 48 Stat. 1. It amends Executive Order No. 6560 of January
15, 1934 and places further restrictions upon transactions in foreign
exchange, transfers of credit, payments, and export or withdrawal of coin,
bullion, or currency. This phase of the order follows substantially
the express language of the statute and is wholly free from doubt.
The order also provides for the filing of detailed reports concerning
foreign-owned assets in the United States. The statute does not, in express
terms, provide for the filing of such reports, but I am satisfied that such
requirement issustainable and would be upheld if made during & period of war or
national emergency.
The statute relied upon for authority reads as follows:
332
-2- -
"(b) During time of war or during any other period of
national emergency declared by the President, the President
may, through any agency that he may designate, or otherwise,
investigate, regulate, or prohibit, under such rules and regula-
tions as he may prescribe, by means of licenses or otherwise,
any transactions in foreign exchange, transfers of credit
between or payments by banking institutions 88 defined by the
President, and export, hoarding, melting, or earmarking of gold
or silver coin or bullion or currency, by any' person within the
United States or any place subject to the jurisdiction thereof;
and the President may require any person engaged in any trans-
action referred to. in this subdivision to furnish under oath,
complete information relative thereto, including the production
of any books of account, contracts, letters or other papers
in connection therewith in the custody or control of such person,
either before or after such transaction is completed. Whoever
willfully violates any of the provisions of this subdivision or
of any license, order, rule or regulation issued thereunder,
shall, upon conviction, be fined not more than $10,000, or if a
natural person, may be imprisoned for not more than ten years,
or both; and any officer, director, or agent of any corporation
who knowingly participates in such violation may be punished
by 8. like fine, imprisonment, or both. As used in this subdivision
the term 'person' means an individual, partnership, association,
or corporation."
It is believed that the words "investigate, regulate or prohibit"
in the statute could be relied upon 88 implying authority to require the
reports if the order were issued during a period of war or other national
emergency, upon the theory that knowledge of the nature, location, and
ownership of all foreign-owned property would be necessary for the proper
and efficient administration of foreign exchange control.
It must be observed, however, that violations of the statute and
orders or regulations issued thereunder are punishable, upon conviction,
by fine and imprisonment. Thus, in the final analysis any implication
in the statute is to be resolved by the courts. Whether the courts would
sustain the implied authority in my opinion would depend upon the nature
333
- 3 -
of the emergency existing. The extent to which public opinion approved
the exercise of the power would unquestionably have a bearing upon the
successful administration of the order.
Subject to the above observations the proposed order has my approval
as to form and legality.
Respectfully,
/
(Signed) Frank Murphy
The President,
The White House
334
April 16, 1939.
Secretary Morgenthau
E. H. Foley, Jr.
Attached is a copy of the letter signed by the Attorney General
to be delivered to the President tomorrow in regard to our proposed
Executive Order imposing foreign exchange restrictions and for other
purposes. Miss Faumgartner, the Attorney General's secretary, read the
letter to ne over the telephone and stated that the Attorney General
had signed it this norning.
For our purposes, the letter, in my opinion, is satisfactory. In
light of the draft which the Attorney General submitted at our meeting
yesterday afternoon, it represents a substantial compromise decidedly
in our favor.
(Initialed) 1. E. MM 397
Attachment
EHF:akm 4-16-39
335
April 16, 1939.
My dear Mr. President:
I an herewith transmitting a proposed executive order, prepared in
the Treasury Department and informally submitted for my consideration,
regulating transactions in foreign exchange, transfers of credit,
payments, and the export of coin, bullion and currency.
Legal doubt exists only with respect to that provision which requires
detailed reporting of foreign-owned assets in the United States, It 10
believed, however, that the order would be upheld even in that respect if
issued under conditions of national emergency, the existence of which you
should determine.
The proposed order cites as authority section 5(b) of the Act of
October 6, 1917, 40 Stat. 411, as amended by section 2 of the Act of
March 9, 1933, 48 Stat. 1. It amends Executive Order No. 6560 of January
15, 1934 and places further restrictions upon transactions in foreign
exchange, transfers of credit, payments, and export or withdrawal of coin,
bullion, or currency. This phase of the order follows substantially
the express language of the statute and is wholly free from doubt.
The order also provides for the filing of detailed reports concerning
foreign-owned assets in the United States. The statute does not, in express
terms, provide for the filing of such reports, but I an satisfied that such
requirement is metainable and would be upheld if nade during a period of war or
national emergency.
The statute relied upon for authority reads as follows:
336
- 2 -
*(b) During time of war or during any other period of
national emergency declared by the President, the President
may, through any agency that he say designate, or otherwise,
investigate, regulate, or prohibit, under such rules and regula-
tions as he may prescribe, by seens of licenses or otherwise,
any transactions in foreign exchange, transfers of credit
between or payments by banking institutions as defined by the
President, and export, hearding, melting, or earmarking of gold
or silver coin or bullion or currency, by any person within the
United States or any place subject to the jurisdiction thereof;
and the President may require any person engaged in any trans-
action referred to in this subdivision to furnish under oath,
complete information relative thereto, including the production
of any books of account, contracts, letters or other papers
in connection therewith in the custody or control of such person,
either before or after such transaction is completed. Whoever
willfully violates any of the provisions of this subdivision or
of any license, order, rule or regulation issued thereunder,
shall, upon conviction, be fined not more han $10,000, or if a
natural person, may 16 imprisoned for not more then ten years,
or both; and any officer, director, or agent of eny corporation
who knowingly participates in such violation may be punished
by 6. like fine, imprisonment, or both. As used in this subdivision
the term 'person' weans an individual, partnership, association,
or corporation."
It is believed that the words "investigate, regulate XT prohibit"
in the statute could be relied upon as implying authority to require the
reports if the order were issued during a period of war 02" other national
emergency, upon the theory that knowledge of the nature, location, and
ownership of all foreign-owned property would be necessary for the proper
and efficient administration of foreign exchange control.
It must be observed, however, that violations of the statute and
orders or regulations issued thereunder are punishable, upon conviction,
by fine and imprisonment. Thus, in the final analysis say implication
in the statute is to be resolved by the courts. Whether the courts would
sustain the implied authority in my opinion would depend upon the nature
Regraded Unclassified
337
- 3 -
of the energency existing. The extent to which public optations 1
the exercise of the power would unquestionably have a hearting - to
successful administration of the order.
Subject to the above observations the proposed order has 4 enrol
as to form and legality.
Respectfully,
(Signed) Frank Murphy
The President,
The White House