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Volume 223, November 17 – November 22, 1939
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Volume 223, November 17 – November 22, 1939
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Henry Morgenthau, Jr. Papers
Diaries of Henry Morgenthau, Jr.
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DIARY
Book 223
November 17 - November 22, 1939
- B -
Book Page
Bank of America
HMJr asks Landis for assistance; Dean Lloyd Garrison
(University of Wisconsin) also to be asked;
also Greenbaum - 11/22/39
223 345,348,357
- C -
China
See War Conditions
Colombia
See War Conditions: Latin America
- E -
Economic Security, Committee on
Bell memorandum of meeting (11/16/39)
225
- F -
Farm Credit Administration
Myers' letter to HMJr concerning relation between
Farm Credit Administration and Department of Agriculture - -
11/18/39
233
Financing, Government
Open Market Committee meeting - 11/22/39
238
Non-callable and callable bonds, Treasury notes:
Hadley memorandum - 11/22/39
255
- G -
Garrison, Lloyd (Dean, University of Wisconsin)
8ee Bank of America
Gold
See War Conditions
Gustemala
See War Conditions: Latin America
- H -
Hanes, John W.
Press Club Speech: original draft, FDR's memorandum to
General Watson concerning, copy corrected exactly in
accordance with FDR's suggestions - 11/22/39
279
Harbor Improvement Project
See Taxation
Hinkley, Mr. (Collector of Internal Revenue, Utah)
See Investigations, Treasury Personnel
Housing
United States Housing Authority: New financing plen - 11/22/39.. 220
- I - -
Book Page
Investigations, Treasury Personnel
Hinkley, Mr. (Collector of Internal Revenue, Utah):
FDR asks HMJr concerning - 11/21/39
223
208
-, L -
Landis, James M.
See Bank of America
- 0 -
Open Market Committee
See Financing, Government
- 8 -
Securities and Exchange Commission
See War Conditions: Latin America
- T - -
Taxation
Harbor Improvement Project: Tax plans considered by
Secretaries of War, Commerce, and Treasury by direction
of FDR: Hanes' report - - 11/22/39
229
- 0 -
United States Housing Authority
See Housing
- I - -
War Conditions
Airplane Shipments: Bolton asks Knoke's assistance in
effecting clearance of orders already completed through
Customs - 11/17/39
10
a) Knoke's reply - 11/20/39
112
Belgium-Netherlands: Cochran examines State Department's
cablegrams of November 4th to date at request of HMJr. -
11/18/39
48
a) Agreement that Germans had actually planned
attack for 11/12/39
1) Queen Wilhelmine apparently panic-stricken
and inclined to let German Army pass through
without military resistance
Business situation for week ending 11/18/39:
Haas memorandum
78
- W - (Continued)
Book
Page
Nar Conditions (Continued)
Canada: Ralston, Minister of Finance, asks HMJr to
see Towers, Governor of Bank of Canada, before he
leaves for conference of Dominion Ministers in
London - 11/20/39
223
54
a) Conferences - 11/21/39
131,168
China:
Universal Trading Corporation: Tentstive list of
purchases (approximately 875 million) - 11/20/39
115
a) Map of highways and railroads in
Southwestern China
125
Foley memorandum as to whether Reconstruction Finance
Corporation can make loans to an American corporation
to purchase Chinese tin and then resell in American
market - 11/20/39
126
a) Memorandum
128
"Tin Loan" to Chinar White memorandum - 12/22/39
212
Peace Prospects: Statement prepared but not aigned by
Chinese Ambassador - 11/22/39
215
Exchange market resume - 11/17/39, et cetera
5,57,
166,354
Foreign Trade: United States exports highest in October
for two years - 11/18/39
29
Germany:
Economic information further censored, thus preventing
comparison of World Mar economic situation with that
existing during present conflict - 11/17/39
11
Financial resume provided by Kirk - 11/17/39
13
German-U.S.S.R. Trade Pect: resume of first stage -
11/21/39
144
Gold:
White memorandum on utilization of holdings - 11/20/39
99
White memorandum on gold and capital movements during
first ten weeks of war
104
Memorandum prepared on Sections 3 and 8 of Gold Reserve
Act of 1934 not shown to FDR by Hanes - 11/21/39
210
High-Grade Securities Markets:
Current Developments: Haas memorandum - 11/20/39
64
Latin America:
Colombia: Conference on finances; present: representatives
of Treasury, and Frank and Lincoln of Securities and
Exchange Commission - 11/21/39
183,324
a) Proposed agenda on loan to
340
b) Jones' memorandum on conference with Jaramillo
341
e) Welles' memorandum reporting conference between
Jaramillo and United States Ambassador to Colombia
Braden
343
Economic Assistance to South America, Informal Committee
for: Frank's answers to certain questions as to statutory
powers of Securities and Exchange Commission with respect
to defaulted foreign bonds - 11/16/39
25
- il - (Continued)
Book Page
War Conditions (Continued)
Latin America (Continued):
Guatemala Conference:
Gaston reminded conference should not commit
governments to anything beyond further discussion
and study - 11/17/39
223
1
Washington desired for 1940 conference - 11/18/39
51
a) Treasury answer: invitation cannot be accepted -
11/19/39
52
1) HMJr and Cochran confer
97
b) Gaston asks Hames for reconsideration - 11/20/39
59
Noble, Edward: Welles and HAJr discuss FDR's intention
to instruct Noble to consult HMJr and Welles before
taking any action - 11/22/39
360
a) For Noble's conversation with HMJr,
see Book 224, page 146
Munitions Control Board (National):
Tin-plate Scrap: Licenses for exportation of
during 1940 to be discussed at meeting - 11/21/39
133
a) Basil Harris to represent Treasury
Netherlands-Belgium: For examination of State Department's
cablegrams from November 4th to November 18th,
see War Conditions - Belgium-Netherlands
Neutrality Act of 1939: Map showing effect sent by Berle
to HMJr - 11/22/39
253
Purchasing Mission (British-French):
Monnet to head organization with main office in London
Bullitt cable - 11/18/39
27
a) British-French Board for synchronization between
purchasing missions of Great Britain and France
and with United States Government also to be
established: Arthur Purvis to be chairman
1) Deladier anxious to know whether Purvis
is persona grata in the highest degree
to United States Government
a) Approval indicated in reply - 11/20/39
111
Joint mission lauded in entire French press - 11/18/39
34
British and French foreign exchange resources:
White memorandum - 11/21/39
173
France:
Duralumin: Speed-up of French orders placed with
Aluminum Corporation of America considered by Welles
and Collins - 11/21/39
147
a) To be discussed st conference in Har Department -
Wilbur, of Aluminum Corporation of America,
to be present - 11/20/39
209
b) Actual conference; present: Chief of Army Air
Corps, two representatives from Navy Air Corps,
representative from Johnson's office, Wilbur,
and Collins - 11/22/39
237
1) Johnson's interest in meeting discussed by
HAIr and Colliner See Book 224, page 137
- W - (Continued)
Book Page
War Conditions (Continued)
Purchasing Mission (British-French) - (Continued)
Great Britain:
Disposal of British-owned dollar securities on
American market discussed by Whigham, Gifford,
Pinsent, HMJr, Frank, Cochran, and Butterworth -
11/20/39
223
93
a) HMJr explains neither United States
Government nor any of its agencies
should make loans against these securities
b) Publicity discussed
e) Liquidation of indirect investments
also discussed
d) Discussed by Treasury group and Frank -
11/21/39
156
1) Cochran memorandum on meeting
in Frank's office - 11/21/39
163
Strategic War Materials:
Tin-plate Scrap: Licenses for exportation of
during 1940 to be discussed at meeting of
National Munitions Control Board - 11/21/39
133
a) Basil Harris to represent Treasury
Switzerland:
Straessle confers on military situation with HMJr,
White, and Puleston - 11/21/39
132
Tyler, Royall:
Opinion concerning Switzerland, the Balkans, et cetera,
discussed with Bullitt - 11/21/39
149
U.S.S.R.:
German-U.S.S.R. Trade Pact: resume of first stage -
11/21/39
144
1
PARAPHRASE OF TELEGRAM SENT
TO:
American Legation, Guatemala
DATE: November 17, 1939, 7 p.m.
NO.: 52
FROM TREASURY FOR GASTON.
We are told by the Department of State that 60 far
the Washington meeting has been occupied only in prelimi-
nary formalities and the work of organizing. Financial
and monetary questions are to be considered by one of the
three committees that have been constituted, but the work
of this committee has not yet really been started and will
not reach any phase of important discussion until Monday,
the 20th.
The State Department indicates, and we concur, that
there is no need for your delegation to be over-anxious
concerning the possibility of overlapping in study but
forethought should, of course, be taken and any necessary
arrangements for coordination be made.
We assume, in accordance with our talk before you
left, that the conference at Guatemala will not undertake
to commit governments to anything beyond further discussion
and study.
WELLES
Acting
EA:FL:MSG
Regraded Unclassified
NOV 21 1939
TUESDAY, NOVEMBE
Reserve Bank
Here Is Acting
As Allies' Agent
NY Henald -Trelane
Roosevelt Authorized War
Purchase Payment Chan-
nel Early This Month
From the Herald Tribune Buffex
WAHINGTON, Nov. 20.-An om-
clal of the Federal Reserve Board
admitted today that the Federal Re-
serve Bank of New York is acting as
the paying agent of the British and
French for their purchases in the
United States.
Purthermore, the board was au-
thorized to act in this capacity by
President Roosevelt after an appli-
cation had been made by a New
York bank to be the paymaster of
the Allies.
While the New York bank was not
mentioned by name, It is recalled
that, during the World War, Morgan
& Co. acted not only as the fiscal
but as, the purchasing agents of the
Allies.
The Federal Reserve Bank will
have nothing to do with the pur-
chases, but will only disburse sums
of money already deposited by the
central banks of England and of
France on the order of their pur-
chasing missions sent to this coun-
try. In this way. the Administra-
tion conceives that a more meticu-
lous check can be kept on the cash
clauses of the neutrality act, which
forbids even ordinary commercial
credits of from thirty to ninety days
to be extended to belligerents.
In recent years the Bank of Eng-
land and the Bank of France have
kept dollar balances with the Fed-
eral Reserve system. From time to
time these dellar balances are ex-
pected to be sugmented 1th further
purchases of dollars by the foreign
banks, so that these will always be a
balance on hard. In LES way there
never need tion about
credits. even so as an hour,
being extended to belligerent gov-
ernments. The records will in time
be open to public perusal under the
present plan.
The present system. which has al-
ready been Insugurated, has the nd-
vantage also obviating any trou-
bles over the envernion of bid sent
over for purchases. since in dividuals
in this country may no longer pos-
sess the yellow met
The New York Reserve
Bank nas soloe of
functions of
a central bank for this country.
While. thinkal It might be called
upon by the Chirmas Reichsbank to
pay out sums X money for war-
time purchases, It has not been
asked to do so.
When it arranged with Great
Britain and France to pay for their
purchases in the United States as
their agent, It was not considered
that any change had been made in
policy but only in technique.
The new arrangement has been in
effect since shortly after the passage
of the neutrality act early in No-
vember.
2
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE November 17. 1939
TO
Secretary Morgenthan
FROM Mr. Cochran
At 12,55 this noon, Governor Harrison of the Federal Reserve Bank of
New York told me by telephone that late this forenoon an important New York
Bank had let his know that the financial editor of the A.P. is to have an
article published on Sunday with respect to the implications, political and
otherwise, of the Federal Reserve Bank acting as fiscal agent of foreign
governments. The 1. P. had telephoned to Mr. Sproul's office and had told
his secretary that be would like to have any comment from Mr. Sproul upon
the article, and desired to know whether Mr. Sproul wished to see it. To
reply to the A.P. had yet been given by Mr. Sproul. Governor Harrison told
ne that he had called ne after finding that Under Secretary Hanes was not
in the Department.
I told Governor Harrison that I would call him back after thinking the
question over, and after talking with Hr. Duffield. Mr. Duffield had left
for lunch by the time this conversation VBS ended, and when I returned from
lunch, Mr. Duffield had left his office.
Governor Harrison called se a second time at 3 P.M., He said that a
friend of his in one of the New York banks had seen the article under
reference, and was going to send it to the Governor. Mr. Harrison had been
told that the article was quite critical, making the point that the New York
banks do not like the plan in question; that it constitutes a violation of
the Neutrality Act; and that the Germane will protest against it. The
Governor did not know how we could stop the publication of the article. Re
thought it might make the situation worse if the Federal Reserve Bank
accepted an advanced copy from the A.P. and assumed any responsibility for
editing it. Mr. Harrison planned to phone Governor Ransom about it as 8.
matter of record.
later this afternoon I spoke with Mr. Duffield. He told ne that he had
consistently warded off questions in regard to the special accounts with the
Federal Reserve Board for purchasing commissione by stating that this was a
matter simply between central banks, and that the only place in Asshington
from which information in regard thereto could be obtained was the Board of
Governors of the Federal Reserve System. Mr. Duffield and I discussed the
desirability of his talking with Mr. Elliot Thurston in regard to the coming
A.P. story. It WBC decided, however, and after I had talked over the matter
with Mrs. Klots, that no action should be taken by no in the absence of the
Secretary. If the Federal Reserve Bank asks us to confer before the article
appears, Mr. Duffield would see Mr. Thurston, Otherwise, the appearance of
the article will be avaited.
sus.
Regraded Unclassified
3
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE November 17, 1939
TO
Secretary Morgentham
FROM Mr. Cochran
The Secretary telephoned me from Arizona at 11:00 o'clock this morning.
He instructed me to bring myself to date on cablegrams from the Notherlands
and Belgium BO that I can give him & sumary thereof on Monday morning.
After our conversation ended, I made arrangements with Mr. Stone in the Office
of the Secretary of State to permit ne to see cablegrams on Belgium and the
Netherlands either this afternoon or Saturday morning.
The Secretary asked no when our friend from London (Mr. Whigham) vas
coming to Washington. I replied that Mr. Pinsent had let me know that
Mr. Whigham was due here today, and that I had remarked that this was
fortunate since he could get in touch with the Secretary on Monday. The
Secretary asked about Butterworth. He indicated his desire to see Mr. Whigham
early next week. Consequently, I telephoned Mr. Pinsent after speaking with
the Secretary and, after consultation with Mrs. Klots, fixed a tentative
appointment for 11:30 Monday morning. If this hour mut be changed, Mr. Whigham
can be reached through Mr. Pinsent or at the Carlton Hotel.
H.W.
TREASURY DEPARTMENT
4
INTER OFFICE COMMUNICATION
DATE November 17, 1939
TO Secretary Morgenthan
FROM Mr. Cochran
Upon reading Cablegram #51 from Guatemala City this morning, I went
to Mr. Hanes' office and learned that be would not be in until Monday.
Consequently, I took the responsibility of seeing that an answer went out
to the final paragraph of Mr. Gaston's cablegrem.
Since no one in this Department was familiar with the developments
of the Pan-American Consultative Committee Meetings in Washington, I spoke
with Dr. Feis and asked that he prepare a cablegram to Guatemala, bringing
our delegates to date. He dictated a. message to his secretary, which
mine took down, and which Dr. White and I then examined. I telephoned
back a slightly revised text. It vas understood that this should be sent
out. If Acting Secretary Welles made any change therein, Dr. Feis agreed
to telephone ne before dispatching the cablegram. He also promised to
send no copies of the outgoing message.
B.M.S
5
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE November 17. 1939
TO
Secretary Morgenthsu
FROM
Mr. Cochran
The foreign exchange market experienced another dull day. Testerday sterling
closed in New York at 3.93-1/8. This morning it was quoted at 3.92-13/16 in
Amsterdam, and leter in the day at 3.92-9/16. At the opening in Bew York, the
sterling rate was 3.91-3/4. Some selling of spot starling by the Japanese de-
pressed the rate to 3.89-3/8 early in the morning. After this selling vas ab-
morbed, the rate recovered to 3.90-1/4, but about noon it receded to 3.89-1/2.
During the afternoon the quotation moved higher and subsequently closed at
3.90-1/4.
The Japanese were also sellers of forwards, centering their offerings on one
month's sterling. Under pressure of these offerings, the discount increased to
2-3/40 per pound, equal to a yield of 8-7/16% per annum. One month sterling seb-
sequently recovered to 2-1/2# per pound discount, equal to 7-11/16% per annum.
The discount on three months' sterling increased to 6-3/80 per pound, equal to
6-1/2% per anman. The actual business done in forward sterling was very small.
Sales of spot sterling by the four reporting banks in New York totaled
1381,000 from the following sourcest
By commercial concerns
1 70,000
By foreign banks (Far East, Europe and South America)
1 311,000
Total
L 381,000
Purchases of spot sterling amounted to L443,000, as indicated below:
By commercial concerns
L 352,000
By foreign banks (South America, Far East and Europe)
18 91,000
Total
1 443,000
or the four reporting banks, the Guaranty Trust Company was the only one
that sold sterling to the British Control, It sold a total of à 25,000 at the
official rate of 4.02. All of this sterling represented cotton bills.
The Federal Reserve Bank purchased 180,000 Danish kroner for the Bank of
Latria.
The other important currencies closed as follows:
French france
.0221-1/8
Guilders
-5309
Swine france
2245-1/2
Belgas
.1644
Canadian dollars
12-9/16% discount
CONFIDENTIAL
- 2 -
6
The discount on the Cuban peso narrowed from 14-1/2% to 13-1/2%.
To purchased the following amounts of gold from the earmarked accounts of
the Banks indicated:
$2,500,000 from the Netherlands Bank
1,010,000 from the National Bank of Belgium
$3,510,000 Total
During the period between August 30 and November 15 the carnarked gold of
the following banks at the Federal Reserve Bank of New York decreased as indicated:
Bank of France
$ 70,000,000
Netherlands Bank
63,000,000
Bank of Sweden
43,000,000
National Bank of Switzerland
34,000,000
National Bank of Belgium
31,000,000
Total
$241,000,000
From November 1 to November 15, the Bank of England's balance with the Federal
Reserve Bank of New York decreased $25,000,000.
The Federal Reserve Bank of New York reported to us the following shipments
of golds
# 2,241,000 from England, shipped by the Bank of England, consigned to the Federal
Reserve Bank of New York, for account of the Swies National Bank, the
disposition of which is unknown to us at the present time,
507.000 from England, shipped by Kleinwort Sons & Co., consigned to Goldman
Sache & Co., New York, for sale to the U. S. Assay Office at New York.
99,000 from England, shipped by the Westminster Bank, consigned to Chase
National Bank of New York, for sale to the U. 8. Assay Office at
New York,
766,000
from India, shipped by the Chartered Bank of India, Australia and
China, consigned to the Chartered Bank of India, Australia and China,
New York, for sale to the U. S. Assay Office at New York,
411,000
from India, shipped by the National Bank of India, consigned to the
Chase National Bank of New York at San Francisco, for sale to the
U. S. Mint at San Francisco,
407,000 from Canada, shipped by Johnson Mathey & Co., consigned to Johnson
Mathey & Co., New York, for sale to the U. S. Assay Office at Nov York.
4,431,000 Total
The equivalent of today's London spot silver price WISS 41.284 and the forward
price 41.08#. Handy and Harman's price for foreign silver was unchanged at 34-3/44.
the Treasury's price was also unchanged at 35¢.
In New York TO más four purchases of silver totaling 275,000 ounces under the
Silver Purchase Act.
CONFIDENTIAL
On November 16 the Bank of Manhattan inquired of the Federal Reserve Bank of
Non York If it #58 permissible, under the Neutrality Act, to ship to belligerent
countries bank notes of such countries, the title to which 16 to be retained by the
Bank of Manhattan until the amount of the currency is credited to its account by
the bank to which the currency is shipped. This inquiry was referred to me, and
I submitted it to Mr. Bernetein who stated that this question might be one for con-
sideration by the Customs Division. This morning Mr. Bernatein called and informed
cur that Mr. Dwan of our Legal Department, who handles customs matters, would call
the Federal Reserve Bank direct regarding the inquiry. Later in the day, Mr. lang
of the Federal Reserve Bank of New York called Mr. Dietrich and informed him that
a. tentative decision rendered by Mr. Dwan in this matter was that such 8. shipment
of currency is considered an "article" under Section 2 (c) of the Neutrality Act.
Mr. Dwan also informed Mr. Lane that If an official decision WSS dealred, he would
be glad to take the matter up.
Dr. Randolph Burgess telephoned me at 12:25 today. He stated that Mr. Straesle
of the Credit Suisse would come to Mashington Sunday night and would be in town on
Monday and Tuesday. Mr. Strassle is to telephone me at 10:30 on Monday morning to
inquire in regard to an appointment with the Secretary, Dr. Burgess suked me to
Assist Mr. Straesle to get in touch with Governor Ranson and other officials in
Whehington who might be interested in talking with the Swins visitor.
I talked with Mr. Pinsent, Financial Counselor of the British Embasey, this
morning by telephone. He stated that he had talked with Kr. Hackworth of the State
Department two days ago after he had reported to ne two questions which were up
under the Neutrality Act. The first of these WHB that of the attempted sale by
the British Consul General in New York of & draft drawn on the British Foreign
Office to the Chase Bank, the latter requiring a clearance from the State Depart=
ment lest this contravene the Neutrality Act. The second question arose from the
doubt of the Guaranty Trust &B to whether British Banks officially authorised to
deal in foreign exchange do not thereby acquire an official character which makes
it impossible to have private credit dealings with them under the Neutrality Act.
Mr. Pinsent stated that Vr. Eackworth had promised to give him some information
yesterday on these points. Having not heard from him no far, Mr. Pinsent tele-
phoned Mr. Eackworth this forenoon, but was informed that the latter was in con-
ference. Mr. Pinsent in particularly perturbed in regard to the question raised
by the Guaranty Trust. I obtained from the State Department this morning several
copies of their press release #597 providing an analysis of requirements of
Section 2 of the Neutrality Act. I have sent Mr. Pinsent one copy, and have
given three to our Legal Division.
Short
CONFIDENTIAL
Regraded Unclassified
8
TREASURY DEPARTMENT
WASHINGTON
DEFICE OF
IMMISSIONER OF INTERNAL REVENUE
KNOWESS REPLY To
DIMMISSIONER - INTERNAL REVENUE
AND BEFER to
IT:P:CA
CAA
November 17, 1939.
REPORT FOR SECRETARY MORGENTHAU:
In regard to closing agreements which have been requested,
the following applies:
De Laval Steam Turbine Company
No word has been received from the Navy Department. From
telephone inquiries made by a. representative of the company, it
appears that the company is prosecuting its request before the
Navy Department for an expression of opinion.
The Midvale Company
There have been no further developments. Under the under-
standing had with the company it is presumed that the Navy
Department is actively engaged in making its investigation
preparatory to making & certificate.
New matters developed as follows:
Camden Forge Company, Camden, How Jersey
This company filed a request for a closing agreement; see
report of interview of November 13, 1939.
Consolidated Airoraft Corporation, San Diego, California
This is the same concern as referred to in earlier reports
as having filed a. request for a. closing agreement. A new request
9
-2-
was filed during the week grounded upon conditions made in a
bid filed with the Navy Department on October 18, 1939. This
matter is receiving active consideration by the Treasury personnel.
Inquiries for information:
A request for information was made orally by a representative
of Walter Kidde and Company, Incorporated, Mills Building,
Washington, D. C.
May Commissioner. Hebring
1070 MOA $0 M1 4 35
of ME TISA
76(a)
FEDERAL RESERVE BANICTED
10
OF NEW YORK
H. M. Cochran
OFFICE CORRESPONDENCE
DATE November 17, 1939.
To CONFIDENTIAL FILES
SUBJECT: TELEPHONE CONVERSATION WITH
L. 1. Knoke
BANK OF ENGLAND.
FROM
Mr. Bolton called at 1:25 p.m. Be understood that
difficulties had developed in getting shipments of planes already
bought and paid for (Lockheed and North American contracts) cleared
through the customs. Would I please find out what kind of papers
were required? As far as he could make out the Custom House insisted
on some form of guarantee to the effect that the shipments were
not made in contravention of the Neutrality Act. They were naturally
most anxious to get this thing settled in a hurry. Once they knew
what was needed for clearing purposes they would, of course, wish
to rearrange future contracts.
The British sir attache Group Captain Perie was lending
8 hand in New York to try to straighten out the problem.
eser
BECEINED
Regraded Unclassified
11
PARAPHRASE OF TELEGRAM RECEIVED
FROM: American Embassy, Berlin
DATE: November 17, 1939, 9 a.m.
NO.: 2069
Censorship in Germany of economic information has been
by
extended further A confidential instruction re-
ceived from the Newspaper and Periodical wholesalers' Federa-
tion, which forbids dissemination to the public of all printed
matter, with the exception of current periodicals which have
appeared since the first of October, containing illustra-
tions, tables or texts pertaining to the location, sales
or production figures, number of employees, capacity or
stocks of public utility plants, branches of industry or
individual industrial plants, from August 1, 1914 to
January 1, 1919, or since the beginning of 1933; also it
prohibits the loaning, selling or exhibiting of economic
sketches or economic charts, city maps indicating the lay-
out of public utilities or industrial plants, posters dis-
closing arrangemente of industries, or maps of industries
or transportation.
In addition to the military significance of this regu-
lation, which is obvious, it would also seem to be intended
for the preservation of the morale of the public in prevent-
ing them from comparing the World War economic situation
with that existing during the present conflict. An order
from the president of the Reich Press Chamber (an adjunct
of
12
-2-
of the Ministry of Propaganda) is said to be the base of
this order of the Federation of Newspaper and Periodical
wholesalers.
This telegram should be repeated to the Treasury
Department.
KIRK
03V13038
ESCI asvon
EA:MSG
13
PARTIAL PARAPHRASE OF TELEGRAM RECEIVED
FROM: American Embassy, Berlin
NO.: 2070
DATE: November 17, 1939, 10 a.m.
According to the Just published statement of the
German Treasury, the Reich's short-term debt increased
1,994,000,000 marks during August, which was approximately
double the rate of short-term borrowing during the pre-
ceding four months of the present fiscal year. On August
31 the total short-term debt was 12,319,000,000 marks of
which some 9,087,000,000 marks consisted of so-called
floating debt (Treasury bills and loans from the Reichs-
bank) 3,124,000,000 marks of new finance plan tax oer-
tificates and 108,000,000 marks of other tax certificates.
No figures for the funded debt have been published since
July 31 of this year when it stood at 24,957,000,000
marks.
If we assume that there was a private issuance of
some of the Government bonds to insurance and savings in-
stitutions during the month of August, the Reich's total
disclosed debt, short and long term, amounted, on August 31,
to between 37,000,000,000 and 38,000,000,000 Reichsmarks,
presumably. To this we should add the Reich's hidden debt,
estimates of which (mainly sonderwechsel) range, in Reichs-
marks, from ten to eighteen billion.
Apparently the Reichsbank was the ultimate source of
the greatest part of the short-term funds which were
borrowed
14
-2-
borrowed during August by the Reich. If we assume, however,
that the August 31 short-term debt statement was correct,
the Government did not borrow to quite as great an extent
(contrary to what many of the financial authorities thought
at first) from the Reichsbank. At first these financial
observers believed that the discount of the new Government
paper was largely responsible for the rise in the Reichs-
bank bill portfolio amounting to 1.8 billion marks; however,
issuance of such paper during August, as shown by the debt
statement, was only slightly more than one billion marks.
In August the Reich took increased advantage of the
provision in the new Reichsbank law of June 15 removing the
one hundred million mark limitation on direct government
borrowing from the institution. During the month it in-
creased government operating credit with the Reichsbank
by a further 126 million marks to a new high of 680 million
marks.
The amount of new finance plan tax certificates issued
in August was 845 million marks the largest amount issued
in any month since the adoption of the plan. If tax certif-
icates were issued to the same extent during the last two
months that this plan was in force the total amount issued
when this plan was terminated on November 1 was well over
4-1/2 billion marks.
The
15
-3-
The following information has until now been published
concerning the funds available for Reich expenditures during
the first six months of the present fiscal year.
Tax revenue April 1 to September 30 11,399 million
marks.
Increase in floating debt April 1 to August 31
2,552 million marks.
Tax certificates issued April 1 to August 31 3,125
million marks.
Increase in funded debt April 1 to June 30 725
million marks.
17,801 million marks 1s the total amount.
Figures which have not been published yet for the
present 6-month period are outlined as follows: There was
likely a larger increase in the floating debt during the
than in preceding months
month of September, due to the fact that the army was granted
authority for the issuance of promissory notes and also the
Reich was able to borrow from the provisional central bank
(the Reichskreditkasse) which has been set up in the part
of Poland which is occupied by German troops. Tax certif-
icates,--the amount of which is another of the figures not
yet published; 750 million reichsmarks was the average monthly
amount issued from May to and including August. Another
figure not yet published is the amount of increase in the
funded debt from July through September; 725 million marks
was the amount of increase for the first 3 months of this
fiscal
16
-4-
fiscal year.
It would appear from the data that is available, how-
ever, that the Reich's expenditures totaled more than
21 billion reichsmarks in the first 6 months of this fiscal
year, which figure compares with an estimate giving total
expenditures of the Central Gov't. as less than 30 billion
marks during the whole fiscal year 1938-1939.
Further information has not been made public concern-
ing the Reich's plans for the financing of its war expendi-
tures. However, banking groups believe that in the first
of next year a large government loan will be floated.
The state railways loan of recent date 1s believed to
have been oversubscribed to a substantial extent. Pos-
it
sibly/is the wish of the Reich to make good use of the
present market situation which 1s favorable.
This message is to be repeated to the Treasury Department.
KIRK
0391303R
-
EA:MSG
Regraded Unclassified
17
HSM
GRAY
London
Dated November 17, 1939
Rec'd 12:50 7. E.
Scoretary of State,
Washington.
2389, November 17, 6 D. =,
FOR TREASURY.
1, In apite of the increase in the weekly Treasury
bill offering to 665 million this WEEK the rate moved
only from last WEEK'S 51.39.4.39d. to bl.3s.8.01d. This
is not survrising in view of the plentiful supplies of
credit which have been evident and which WEDE reflected
in the Bank of England's return reported in the third
section of my 2378 of November 16, 6 D. m. Applications
totalled 6105,830,000 and the lowest bidders (syndicate)
were allotted 49 percent of their tenders.
2. A further increase in the cost of living index
of 2 1/2 percent from 165 to 169 on the 31st of October
(July 1914 equals 100) compares with a rise in the first
month of the war of 6 percent 2.3 reported in my 2167 of
of October 25. The index for food alone to the End of
October was also un 2 1/2 percent standing at 154, this
increase being influenced by the increase in bacon prices
and
18
ham -2- No. 2389, November 17, 6 P. m., from London
and the largely seasonal increase in Egg prices. The
butter price was also up but it is pointed out in a Food
l!inistry memorandum that by the substitution of, for
Example, margarine for butter and fish for bacon the
housewife need not necessarily have spent more on the
family budget.
Meanwhile the Board of Trade's index of wholesale
prices rose again from 105.2 for September to 110.7 for
October (1930 Equals 100) as compared with 98.1 for August.
Wholesale food prices rose to 109.2 as compared with 100.7
in September and 90.4 in August. The same tendency is
evident as in September when basic materials and inter-
mediate products largely imported rose more heavily than
manufactured articles while building materials rose only
from 107.3 to 107.7.
Though the upward trend of prices in October was less
drastic than in September the whole question of the price
level continues to give rise to anxisty as to the possi-
bility of a vicious spiral in spite of the passage of the
prices of goods act under which a list of products will
shortly bE issued for which the charging of prices higher
than are warranted by increased costs will become a punish-
able offense,
3. The recovery in the gilt-sdged market brought the
FINANCIAL TIMES index to a record war-period level yesterday,
while
19
han -3- No. 2389, November 17, 5 P. m., from London
while the FINANCIAL NEWS ordinary share index is still
below the peak of November 7 and has recovered less from
the low of the last WEEK in November.
The FINANCIAL NEWS index for ordinary shares (July 1,
1935 equals 100) which stood at 80 on August 13 and touched
low at 66.4 in the last week of September had recovered to
a war-period high of 75.4 on November 7 and subsequently
declined to 73.6 on November 13, but has since shown con-
tinuous improvement to date, the index for November 16
being 74.4. The FINANCIAL TINES index of Government
securities (November 15, 1926 equals 100) which stood at
103 on August 15 and remained at the low of 99.4 during
the period when the fixed minimum prices were Effective,
yesterday reached a high for the war period of 104.3 which
is one point above the level on November 6 when it was 104.2
after which it fell by November 10 to 103.4 recovering
stadily since that date.
KENNEDY
VPD
20
CJ
GRAY
PARIS
Dated November 17, 1939
Rec'd 5:47 p.m.
Secretary of State,
Washington.
2779, November 17, 6 p.m. (SECTION ONE)
FOR THE TREASURY.
The promised decree "simplifying" collection of the
salaries' tax (our telegrams Nos. 1872, September 9, 1 D.m.,
and 2632, November 1, 7 p.m.) was published in the Journal
Official of today. In addition to "simplifying" procedure
the general rate was raised from 4% to 5% the special rate for
non-mobilized men remaining at the 15% originally fixed,
As indicated the previously existing 2% rate will bE
collected until January 1, 1940; the special 15% tax,
however, starts to run from November 1 though collection is
deferred until receipt of notice, There are certain speci-
fied Exemptions to the 15% tax (such as for men between the
ages of Eighteen and forty-nine not yet called to the colors
or rejected for physical reasons, fathers of six children,
etc.) and it is collected only on that portion of sclary or
professional income in EXCESS of 7000 francs with additional
Examptions of 1000 francs for scoh child.
(END OF SECTION ONE)
BULLITT
EMB
21
CJ
GRAY
PARIS
Dated November 17, 1939
Rec'd 5:55 p.m.
Secretary of State,
Vas ington.
2779, November 17, 6 p.m. (35CTION TWO)
Further decrees increase the tax on owners of radio
sets from 50 francs to 90 francs, domestic letter postage
from 90 contimes to 6 francs, applicable after December 1
and foreign letter postage from 2.25 francs to 2.50 francs.
Rates for telephone communications are increased from 85
centimes to 1 franc for local calls and from 1.70 to 2
francs for suburban calls. These increased may, however,
bE termed minor ones.
As scheduled (our telegram 2768, November 13, 4 p.m.)
the 1940 civil budget was presented to the Chamber Finance
Commission this afternoon. It is EXPECTED that the first
quarter's military estimates will not be ready for presenta-
tion until about the middle of DECEMBER.
BULLITT
EMB
22
PAP
GRAY
PARIS
Dated November 17, 1939
Rec'd 7:10 p.m.
Secretary of State
Washington
2779, November 17, 6 p.m. (SECTION THREE).
The security market was firm today and most rente
issues advanced fractionally. Official exchange rates
were unchanged.
Deposits in ordinary (private) savings banks during
the first half of October totalled 91,500,000 francs and
withdrawals 32,100,000 thus showing the expected marked
improvement over the previous month. Since January 1 with-
drawals from such banks exceeded deposits by approximately
480,000,000 francs.
The weekly statement of the Swiss National Bank of
November 15 shows a reduction in gold reserves of 41.2
francs to 2,312,100,000. Foreign exchange holdings again
advanced by 24,600,000 to 341,000,000. Note circulation
shows a decrease of 26,100,000 to 1,975,400,000. Sight
obligations are up 11,000,000 to 863,200,000. Gold coverage
dropped from 82.46% to 81.45%.
Dutch trade statistics for the first ten months of the
year
23
PAP -2- 2779, November 17, 6 p.m. (SECTION THREE) from Paris
year show imports totaling 1,213,000,000 florins as against
1,119,000,000 for the same period the previous year; ex-
ports were 823 as against 865 million. Indirect tax receipts
for the first ten months of this year were 306,200,000
as against 336,700,000 the previous year,
(END OF MESSAGE),
BULLITT
EMB
BECEIAED
YMU?A38T
of to with
missing sill at but
24
November 17, 1939
My dear Mr. Frank:
In the absence of Secretary
Morgenthau, I am acknowledging receipt
of your letter of November 16th with
which you enclose answers to certain
questions which were raised at the
recent meeting of the Informal Com-
mittee for Economic Assistance to
South America.
I shall be glad to bring this
matterial to his attention as soon
as he returns to the office.
Sincerely yours,
(Signed) H. S. Klotz
H. S. Klots
Private Secretary
Hon. Jerome N. Frank, Chairman,
Securities and Exchange Commission,
Washington, D. C.
Regraded Unclassified
25
MEMORANDUM
November 16, 1939
TO:
Informal Committee for Economic
Assistance to South America.
FROM:
Chairman Jerome N. Frank,
Securities and Exchange Commission.
SUBJECT: Answers to questions asked at recent conference
with Informel Committee for Economic Assistence
to South America.
1. The following is in answer to certain questions
AB to the statutory powers of the SEC with respect to
defeulted foreign bonds:
(a) Registration of Stamped Bonds Issued in the
Adjustment of Foreign Debts.
The circumstances of each case govern the necessity
for registration. The stamped bond 1s a new security and
the stamping constitutes an exchange of the outstanding
bond for the stamped bond. Section 3(a) (9) of the Securities
Act provides for exemption from registration, if the security
1a exchanged by the issuer with its existing security holders
exclusively, where no commission is paid for soliciting the
exchange. The examination by the Commission of registration
statements covering securities issued in read justment is
directed to the adequacy of disclosure as to the new security
and the position of the issuer. The Commission 18 not
empowered to pass on the fairness or merits of readjustment
plans or securities issued in connection therewith.
(b) The Registration of Certificates of Deposit issued
by a committee.
Certificates of deposit of securities of a new issuer
(the Protective Committee) must be registered. The informa-
tion required in registration relates, generally speaking, to
the Committee issuing the certificates of deposit, its
deposit agreement, the trustee, the original issuer, the
plan of adjustment, if one has been drawn up when the certifi-
cates of deposit are to be issued, and a new issuer, if there
18 to be one (as when a government issues securities in
exchange for bonds of a political subdivision).
Regraded Unclassified
No.2
26
It should be noted that in the adjustment of foreign
defaults, the deposit of securities and the issuance of
certificates of deposit has generally not been used. A
committee seeking neither deposits nor powers of attorney
need not register. In some circumstances, a committee
seeking powers of attorney need not register.
(c) Stetutory Powers of the SEC as to Negotiations.
The Commission has no power to negotiste concerning the
adjustment of defaulted foreign bonds or the terms of new
securities to be issued in connection therewith.
2. The facilities of the Commission for supplying your
Committee with information are 88 follows:
(a) Information Filed in Registration Statements. The
Commission has 8. substantial amount of information with
respect to certain Central and South American governments
which has been filed in registration statements under the
Securities Act of 1933 and the Securities Exchange Act of
1934. There are in our files certain papers and documents
which may not be generally public.
(b) Protective Committee Study. A study of Protective
Committees for Holders of Defaulted Foreign Bonds was
conducted by the SEC for several years, and an elaborate
printed Report (of 833 pages) on the subject was published
by the Commission in 1937. I am sending you with this letter,
a copy thereof. There is much unpublished information
collected in connection with that Report, and several of the
technicians who developed the material for that Report are
still on the staff.
Regraded Unclassified
27
PARAPHRASE OF TELEGRAM RECEIVED
FROM: American Embassy, Paris
NO.:
2783
DATE: November 18, 1939, 1 p.m.
STRICTLY CONFIDENTIAL FOR THE ACTING SECRETARY.
It has been announced by the French and British
Governments that they have appointed Jean Monnet to head
the whole organization which they announced last night
had been established for copperation during the war.
Monnet will have his main office in London.
There is not much more to add with reference to
this subject since I have made such full reports by
letters and telegrams during recent months. There is
etill one point which the British and French have not
yet settled and that 1s the mechanism for making pur-
chases in the United States.
There is now being tentatively considered (in accordance
with the opinions which were expressed in your telegram
no. 1378 of November 10, 6 p.m.) & plan to establish a
joint British-French board which would handle synchroniza-
tion between the purchasing missions of Great Britain and
France and synchronization with the United States Govern-
ment. The chairman of this board would be Arthur Purvis,
who 1a Director General of Purchases of Great Britain's
mission
Regraded Unclassified
28
-2-
mission in the United States; the head of the French
Mission for distribution will be the vice chairman.
It 18 considered by both the French and the British
Governments that it is proper for a British subject to
be appointed as the chairman of the organization in the
United States since Monnet 18 going to be at the head of
the entire organization in London. However, before
Daladier consents to this arrangement, he 1s very anxious
to find out whether the United States Government will con-
sider Purvis persona grata in the highest degree. I have
been asked by Daladier to determine, most confidentially
and most urgently, whether the same kind of cooperation
that Was extended last winter to Monnet will be accorded
to Purvis. (Daladier is still deeply grateful for the way
in which Monnet was treated.)
Since no decision will be made with reference to the
purchasing agencies in the United States until after your
reply has been received, I trust that it will be possible
for you to send me as soon as possible a strictly confi-
dential answer to Daladier's inquiry.
It 16 Monnet's plan to go from Paris to London tomorrow
for the purpose of setting up the joint organization, He
probably will go to the United States in the early part of
December for brief talks. (END MESSAGE)
BULLITT
EA:EB
TREASURY DEPARTMENT
29
INTER OFFICE COMMUNICATION
DATE November 18, 1939
TO
Mr. White
FROM
Miss Kistler
Subject: United States Exports in October
Preliminary data of our exports of United States merchandise during
October show the following:
Our exports in October were the highest in two years. We exported $323
illion, which is 14 percent more than in the previous month, and 18 percent
ore than in October of last year.
Geographical distribution of our exports:
1. Shipments rose to all areas outside what is known as the combat
area of Europe. Exports to the United Kingdom were 14 percent lower
than in September 1939, and 7 percent less than in October 1938.
Exports to France continue at the level of a year ago.
2. Exports to Scandinavia showed the largest increase (86 percent
over October 1938 and 67 percent over September 1939).
3. A startling increase occurred in our exports to the U.S.S.R. These
were three times as large as in September and one and one-half times as
large as the monthly average for the first ten months of this year.
4. Shipments to Latin America also rose sharply. Exports to our
seven largest Latin American customers -- Cuba, Mexico, Argentina,
Brazil, Colombia, Chile and Veneruela -- totaled $48 million in
October, or $9 million more than in the previous month, and $15
million more than in October 1938.
5- The rise in our exports to Canada and Japan was continued. Exports
to Japan have increased by almost 100 percent since August 1939 and
exports of Canada by 42 percent.
Changes in exports by leading Commodities:
1. Our cotton exports in October were the largest since November 1936
and were 92 percent higher than in October of last year. The United
Kingdom accounted for one-third of the cotton shipped abroad in
October, and France and Japan for one-fourth.
Division of Monetary
- 2 -
Research
2. Exports of leaf tobacco were 83 percent lower than a year ago
30
and 58 percent below the September figure.
3. Coal exports continue two-thirds again as high as last year,
although shipments of anthracite coal were not maintained in
October at the level of the preceding month.
4. Wheat, meat products, and fresh fruits are not being shipped
abroad in as large a volume as a year ago. The recently announced
prohibition of imports of fresh apples and pears into the United
Kingdom and France is estimated to cost our fruit growers $15 million
during the next crop year.
5. Exports of copper, lumber, and aircraft are also smaller than
last year, although the decline in aircraft exports may be expected
to be temporary.
6. -Iron and steel products, metal working machinery, automobiles
and parts, and preserved fruits are being exported in larger quantities
than last year. Exports of canned fruit were only slightly lower than
in September, when they reached a record high for any month in recent
years.
31
United States Domestic Exports by Countries
(In millions of dollars)
Percentage
October 1939
October 1938 1/
Increase
September 1939
323.3
274.1
18
284.0
Thope:
United Kingdom
51.9
56.1
- 7
60.0
Thrance
12.4
12.3
1
12.1
Weden
15.8
8.7
82
8.1
Torway
5.9
2.3
157
4.2
.S.S.R.
5.5
3.0
83
1.8
Tenmark
3.0
2.3
30
2.5
in America:
Labs
10.3
6.6
56
9.2
Trazil
8.5
5.4
57
6.0
Traxico
8.4
4.5
87
5.5
Argentina
6.9
6.0
15
4.9
Genezuela
5.6
3.4
65
5.0
blombia
4.7
3.2
47
4.1
Metherlands West Indies
3.7
4.1
- 10
4.4
while
2.7
2.1
29
2.1
Sada
59.6
41.9
42
50.2
Ten
23.3
19.5
19
19.3
Tury Department, Division of Monetary Research
November 18, 1939
Sports by countries include reexports.
32
United States Exports by Commodities
(In millions of dollars)
Percentage
October 1939
October 1938
Increase
September 1939
Shotton
46.2
24.1
92
34.9
and steel scrap
5.6
3.2
75
5.0
9.3
5.7
63
9.6
and steel semi-manufactures
16.2
10.5
54
14.8
mill manufactures
6.2
4.2
48
5.6
Drved fruits
10.8
7.7
40
6.7
working machinery
9.6
7.8
22
10.0
leum products
36.2
32.2
12
35.9
obile parts & accessories
18.9
17.3
9
12.5
Trical machinery
9.5
9.2
3
8.1
6.0
7.6
- 21
7.8
and wheat flour
3.0
4.0
- 25
3.4
Shaft
3.0
4.9
- 39
8.1
fruits
2.9
5.5
- 47
2.2
4.9
29.5 1/
- 83
8.4
Tury Department, Division of Monetary Research
November 18, 1939
strictly comparable to figures given for the other two months.
33
HSM
PLAIN
London
Dated November 18, 1939
Rec'd 8:15 a. m.
Secretary of State,
Washington.
2395, November 18.
FOR TREASURY.
The October overseas trade returns indicate some
recovery since September, a movement which was doubtless
gaining momentum, especially in the second half of the
month. Exports improved by 7 per cent while imports rose
by 24 per cent as compared with September with a result-
ing increase in the surplus of imports from L24 1/2 million
in September to L35.2 million. Exports of coal showed the
largest increase but all the three main categories also
expanded, manufactures by 4 per cent, food Et cetera by
5 per cent, and raw materials, influenced by coal, by 35
per cent. A further increase in both imports and exports
may bE Expected this month.
KENNEDY
RR
34
CJ
GRAY
PARIS
Dated November 18, 1939
Rec'd 3:22 pame
Secretary of State,
Washington,
2785, November 18, 2 p.m.
FCR THE TREASURY:
The entire French press headlings the joint declara-
tion of Daladier and Chamberlain yesterday on the allies
joint Economic efforts in the war and synchronization of
their purchasing, transport and similar problems. Like
their British counterparts, French commentators exult in
pointing out that comparable neasures of cooperation were
not reached in the last war until three years after the
opening zun and in Emphasizing the wasteful competition
in transportation and foreign murchasing which will thus be
avoided. The declaration and the joint Anglo-French
coordinating organizations SET up are, of course, played
up in part as an answer to German efforts
to separate the two allies and recent prophetic propaganda
of discord between then on foreign purchasing and the
wasteful bidding against Each other which would ENSUE -
the implication being that France would receive decidedly
the short End of it. The present concrete EVIDENCE of
"complete
Regraded Unclassified
35
-2- #2785, November 18, 2 p.m., from Paris
"complete solidarity" therefore is hailed as full answer to
the German radio.
(END SECTION ONE)
BULLITT
CSB
36
Paraphrase of Sections Two, Three, Four,
Five, Six and Seven of No. 2785 from
Paris, November 18, 1939.
Today we had lunch with Arragon (of Morgans) and
Rueff at the home of Arragon. Rueff made the remark
that although the "Franco-British accord" mentioned above
represented a "war", there are still many details which
must be worked out. He stated that nothing final had
been drawn up in the conversations between Reynaud and
Sir John Simon when Reynaud visited London (reference 18
made to our telegram no. 2768 of November 16, 4 p.m.)
although a general understanding was reached with refer-
ence to the manner in which British army expenditures in
France would be covered in francs and it was also generally
agreed that French balances of sterling in London would
be used to pay for French purchases in the British Empire.
(He confirmed the report that the greater part of
"repatriated" French sterling capital had been allowed to
remain in London.) We have been informed by other sources
that it is possible that the conversations were not in
all respects a.6 cordial 8.8 was implied by Couve de Murville.
We were told by Rueff that although it had been
announced by Reynaud (our telegram no. 2707 of November 9,
7 p.m.) that since the beginning of the war one billion
more france had been repatriated than had been paid out
abroad
37
-2-
abroad, this small gain applied only to capital which had
actually been handed over to the Foreign Exchange Office.
He stated that 25 billion francs was the total amount of
French "repatriations" to date since the beginning of the
war. Between five and six billion of this amount was in
cash in foreign exchange and approximately the same amount
was in the form of foreign exchange holdings in accounts
in French banks, which 1s considered as repatriation
(see our telegram number 2340 of October 5, 6 p.m., and
number 2394 of October 9,7p.m.). The remainder of the
25 billion francs was made up of foreign securities which
have either been physically transferred to France or are
accounts of banks in France, he said. Rueff also said
that since the beginning of the war the French have made
total payments in dollars of approximately ten billion
francs for airlines etc. Arragon said that it seemed to
him that the billion franos of foreign exchange gained
by Rueff (mentioned above) was surprisingly small since
50 percent of the gain was accounted for by the half
billion francs of foreign exchange over and above remit-
tances abroad which had been turned over to the Foreign
Exchange Office by Morgan alone, in spite of foreign
exchange purchases for oil companies and other importers.
With reference to this, Rueff remarked that it was unfor-
tunate that the position had been taken by a number of
banks
38
banks on behalf of some of their clients who held dollars,
that it was enough if they merely delivered to the client
the franc equivalent of his dollar holdings while they
took advantage of the opportunity to liquidate their own
sterling balances and delivered the equivalent sterling
to the Foreign Exchange Office instead of delivering
dollars. He stated that it was his plan to instruct the
banks that this practice Was a violation of the spirit
of the regulations because naturally France is more
anxious to obtain dollars than sterling and most of the
capital which has been "repatriated" has, unfortunately,
been sterling. Rueff also said that there has been a
continuation of the capital inflow since the time limit
was extended for basing declarations of foreign exchange
holdings to December 31 (mentioned in our telegram no.
2765 of November 15, 7 p.m.).
Confidentially, it is our understanding in this con-
nection that an especially fast one was pulled by Lazard:
Lazard gave to his French clients who held dollars or
dollar securities which they wanted to repatriate the
franc equivalent; then he bought Dutch florins with the
dollars; then he bought French Mendelssohn loan 1ssues
at about sixty with the Dutch florins; then he was able
to make a neat profit by exchanging these Mendelssohn
loan issues (for which there is B. very poor market) for
national
See p.3a
Regraded Unclassified
39
-3a-
(He was assured by Arragon that Morgan's had never
engaged in that practice since they realized that 1 thras
contrary to the spirit of the regulations.)
40
national defense bonds at par, having previously made an
agreement for this exchange with the French Treasury.
It was remarked by Rueff that he thought that next
week a ruling would be issued with reference to the matter
of exporters invoicing in francs and the assurance which
was originally required that the france turned over in
payment are "legally transferable". (Reference is made
to our telegram no. 2524 of October 19, 6 p.m. and no.
2587 of October 26, 7 p.m.) He stated that procedure
would be greatly "simplified" by the new ruling.
It is our understanding that Rueff is also consider-
ing making a change in the technical requirement mentioned
in our telegram no. 2587 of October 26, 7 p.m. that foreign
residents in France (including Americans) must bring their
entire income back to France from abroad. While BO far
as we know, no attempt has been made to enforce this
requirement since the French authorities have been very
"liberal" in their treatment of Americans, and while it
appears that the French authorities are fully aware of
the loss in foreign exchange which will probably result
because of the departure of wealthy foreign residents
(and also of the problems which will confront lawyers in
advising their clients), they have not previously felt
that it would be advisable to change the requirement.
(END SECTION SEVEN)
EA:EB
RFP
GRAY
41
Paris
Dated November 18, 1939
Rec'd 6:55 p.m.
Secretary of State
Washington
2785, November 18, 2 p.m. (SECTION EIGHT).
At the last moment Reynand's budget was revised upward
to include substantial outlays such as soldiers' family
allowances, indemnities and maintenance cost for refugees
and the railway deficit (hitherto covered by loan issues).
The total is therefore some 79,000,000,000 francs and, as
indicated, all purely military expenditures are excluded
(as against some 68,500,000,000 francs for the ordinary
budget of 1939). The additional revenue required--for this
civil budget is allegedly balanced-- is expected to be
derived largely from the new increase from 4% to 5% in
the salaries tax (our telegram No. 2779, November 17, 6 p.m.),
the 15% special salary tax on unmobilized men, retention by
employers
of 40% of overtime pay for the solidarity
fund and excess war profits taxes.
(END SECTION EIGHT).
BULLITT
NPL
42
RFP
GRAY
Paris
Dated November 18, 1939
Rec'd 7 p.m.
Secretary of State
Washington
2785, November 18, 2 p.m. (SECTION NINE)
Members of the Chamber Finance Commission following Reynaud's
description of his budget took occasion to voice some
criticism of some of the obvious important hindrances to
the country's economic revival which we have emphasized
in previous telegrams: unnecessary over-requisitioning
by the military, retention in active service of too many
over-age reserve officers which would be more useful in
civil employment, delays in furnishing raw materials to
industry and delays in payment of military requisitions.
A decree published in the JOURNAL OFFICIAL today
suspends until the end of the war (one) the provisions of
Article Three of the Decree of November 12, 1938 (see
page 3 of enclosure No. 1 to despatch 3272 of November
15, 1938) which limited the levy under the cedular tax and
the general income tax to 50% of the gross revenue, and
(two) the provisions of the last paragraph of Article 117
of the general code of direct technicalities limiting to
32% the offective rate of the general income tax in relation
to
43
RFP -2- #2785, November 18, 2 p.m. (SECTION NINE) from Paris
to net global revenue.
(END OF MESSAGE)
BULLITT
NPL
IVISODE
TREASURY DEPARTMENT
In
44
INTER OFFICE COMMUNICATION
DATE November 18, 1939
TO
Secretary Morgenthau
FROM
Mr. Haas P.A.
The Works Progress Administration has revised its
statistics on the number of workers employed to those given
on the attached tables and chart. The total for the week
ended November 8, 1939 was 1,930,000 persons, an increase
of 29,000 from the preceding week, which, in turn, was prac-
tically unchanged from the figure for October 25.
Attachments
WORKS PROGRESS ADMINISTRATION
Number of Workers Employed - Weekly
45
United States
Week Ending
Number of Workers
1939
(In thousands)
March 1
3,032
March 8
3,009
March 15
3,015
March 22
3,009
March 29
2,980
April 5
2,906
April 12
2,761
April 19
2,752
April 26
2,751
May 3
2,736
May 10
2,660
May 17
2,623
May 24
2,609
May 31
2,600
June 7
2,593
June 14
2,590
June 21
2,578
June 28
2,551
July 5
2,388
July 12
2,289
July 19
2,250
July 26
2,200
August 2
2,082
August 9
2,054
August 16
1,977
August 23
1,898
August 30
1,842
September 6
1,662
September 13
1,696
September 20
1,735
September 27
1,790
October 4
1,903
October 11
1,875
October 18
1,898
October 25
1,902
November 1
1,901
November 8
1,930
Source: Works Progress Administration.
WORKS PROGRESS ADMINISTRATION
46
Number of Workers Employed - Monthly
United States
Number of Workers
1936
(In thousands)
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
3,053
August
3,153
September
3,219
October
3,346
November
3,319
December
3,094
1939
January
2,986
February
3,043
March
2,980
April
2,751
May
2,600
June
2,551
July
2,200
August
1,842
September
1,790
October
1,902
Source: Works Progress Administration.
Monthly figures are weekly figures for the latest
week of the month.
They include certified and noncertified workers.
WORKS PROGRESS ADMINISTRATION
47
Number of Workers Employed
United States
Monthly W.P.A. Employment
Weekly W.P.A. Employeens
1935
1930
1937
1938
1939
1938
-
M
*
$
a
J
#
N.
-
M
-
#
.
J
M
M
-
.
MAR.
MAY
JULY
SEPT.
a.
JAS.
MILLIONS
MILLIONS
ANY
SEPT.
NOV.
MILLIONS
LIFE
vr
of
MOVIERS
WORKERS
acesens
3.5
3,5
3.4
3.4
3.2
3.3
1.3
3.2
3.2
2,8
at
3.1
3.1
3.0
3.0
os
2.4
2.9
2.9
2.8
2.8
2.0
2.0
2.7
2.7
2.6
2.6
(vis
1.6
2.5
2.5
2.4
2.4
2.3
2.)
1.2
1.2
2,2
2.2
2,1
2.1
.8
.8
2.0
2.0
1.9
1.9
:
1.8
1.8
1.7
1.7
o
1.0
et
2
L.
E
E
-
E
o
u
1.6
IF
M
in
N
e
IN
JAN.
MAR.
MAY
JULY
SEPT.
NOV.
we
Mt.
NOT
JILY
E
1935
1936
1938
1535
1930
1935
1937
SOURCES WORKS PROGRESS ADMINISTRATION
Office of the Secretary of the Treasury
7
- of - - Statistics
18
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE November 18, 1939.
TO
Secretary Morgenthau
FROM Mr. Cochran
STRICTLY CONFIDENTIAL
In accordance with the Secretary's instructions telephoned from Arisona
yesterday forenoon, I visited the Department of State this morning and examined
their cablegrams from November 4 to date in regard to the Netherlands and Belgium,
These cablegrams, coming from Brussels, the Engue, Paris, Berlin and London,
differed on several points. There was a pretty thorough agreement, however, that
the Germans had actually planned an attack against the Netherlands, and perhaps
also Belgium, for November 12, Material for pontoon bridges had been taken up to
the Dutch border, Às to the reasons for calling off or delaying such & move, our
Ambassadors vary. One report is that the Italian and Spanish governments let
Germany know that such a move would be considered uneympathetically by them, con-
sidering the close relations between Italy and Belgium, and the sentiment of Spain
toward small neutral nations. There is no conviction at all that the danger is
definitely removed. The hope is that Hitler may have seen how strongly world
sentiment would be against & violation of Dutch and Belgian territory.
One strictly confidential cablegram intimated that the British and French
themselves would not be too unhappy at seeing the Netherlands and Belgium invaded
and forced into the war on their side, especially since this would give the allies
& chance to fight back at Germany through the lowlands instead of having to go
through the west wall. The French are reported to have taken such mobile equip-
ment up to the Belgian frontier with the idea of transporting troops and gune
across Belgium to meet the German attacks.
While some pledge between the Belgian and Dutch Governments is believed to
exist, there 1s no knowledge of a definite pact of mutual assistance that would
become operative if one of the two countries were attacked by Germany.
There was some belief that the Dutch Queen had become panio-stricken by the
threat of German invasion and that she had been inclined to let the German Army
pass through without military resistance. There was the other suggestion that
the Germans themselves had forced the Belgian and Dutch rulers to make their
peace proposal, insisting that the neutral nations, if they are to contimue to
enjoy their neutral liberties, must take action more definitely in the line of
procuring peace for Cermany.
The cablegrame from Paris indicated an official belief that Germany will
strike against France yet this year, and that the Notherlands and Belgium are
simply spared for the moment, Paris does not expect actual warfare between Bussia
and Finland, but some sort of an amicable sottlement.
Minister Gordon's talk with Quem Wilhelmina W44 not significant.
B.W.K.
Regraded Unclassified
TREASURY DEPARTMENT
33
INTER OFFICE COMMUNICATION
DATE November 15, 1939
TO
Secretary Morgenthan
FROM
Mr. Cochran
The foreign exchange market was very quiet. In Amsterdam sterling opened
at 3.90-3/16 and closed at 3.90-9/16. In New York the opening quotation was
3.90, and after fluctuating in a narrow range it closed at 3.89-7/8.
The discount on forward sterling continued to widen. One month sterling
was quoted at 3-1/4 per pound discount, equivalent to 10% per annum, and
three months' at 6-13/16# per pound, equivalent to 7% per annua.
Sales of spot sterling by the four reporting banks in New York totaled
L203,000 from the following sources:
By commercial concerns
1 33,000
By foreign banks (Far East and Europe)
L170,000
Total L203,000
Purchases of spot sterling amounted to £60,000, as indicated below:
By commercial concerns
1 41,000
By foreign banks (Durope)
1 19,000
Total 60,000
of the four reporting banks, the following sold sterling to the British
Control at 4.02:
18,000 by the Guaranty Trust Company
11,000 by the National City Bank
2,000 by the Chase National Bank
631,000 Total
All of this sterling represented cotton bills.
We sold to the Central Bank of Argentina $2,000,000 in gold, to be added
to their earmarked account.
Va purchased from The Netherlands $2,000,000 in gold, from their earnarked
account.
CONFIDENTIAL
- 2 -
50
The Federal Reserve Bank of New York informed us that there were no
shipments of gold to this country reported to it.
The B.I.S. cabled to the Federal Reserve Bank of New York to apply for
a license to transfer approximately $1,125,000 in gold from its Account #2
to its Account 4. Account #2 is the B.I.S.'s own account, and Account #4
is gold owned by the Central Bank of Turkey. This transaction represents
the sale of gold by the B.I.S. to Turkey, which is, in turn, held by the
B.I.S. as collateral for commercial credits granted by it to the Central
Bank of Turkey.
10ml.
confidential
51
PARAPHRASE OF TELEGRAM RECEIVED
FROM: American Legation, Guatemala
DATE: November 18, 1939, 11 a.m.
NO.: 52
RUSH
From Gaston for the Acting Secretary of the Treasury.
A strong sentiment has been indicated by the Guate-
malan Minister of Finance and others that the United States
should offer to be host for the 1940 meeting, the exact
which
date of which should be set by the country/will be the host.
They argue that there would be advantage in meeting in
Washington where the permanent committee is located and
will have been functioning for a year, and they also men-
tion that a meeting there would attract the Finance Minis-
ters of all the countries. As I must make reply Monday
to the Conference, I request prompt instructions.
DESPORTES
EA:FL:MSG
PARAPHRASE OF TELEGRAM SENT
52
TO: American Legation, Guatemala
DATE: November 19, 1939, 3 p.m.
NO.: 54
For Gaston from the Treasury.
The courteous and friendly attitude prompting the aug-
gestion reported in your 52, November 18, 11 a.m., that the
Treasury Representatives meeting in 1940 should be held in
Washington 16 appreciated; we have every desire to be help-
ful and to play our full part, but we cannot accept the in-
vitation, since we feel that it would be much more satis-
factory and advisable to hold the meeting elsewhere.
For the confidential information of Gaston and Duggan.
Since in all probability the Advisory Committee will continue
to meet in Washington, and the United States will have the
responsibility of host and of general direction of that
committee, it 18 quite impossible for us to accept the ad-
ditional task. Furthermore, if both committees meet here,
there would certainly be created some sense of undue share
of monopoly of their work, and this we wish to avoid.
WELLES
(Acting)
EA:FL:MSG
53
TELEGRAM SENT
hsm
GRAY
November 20, 1939
3 p. m.
AMERICAN LEGATION
GUATEMALA CITY
RUSH
55.
FOR GASTON FROM SECRETARY OF THE TREASURY.
WE have reconsidered this matter and discussed
it with the State Department. WE are both agreed that
for various conclusive reasons WE cannot undertake to
have the 1940 meeting of Treasury representatives held
in Washington.
WELLES
ACTING
EA:HF:EB
(HF)
54
November 20, 1939
6:10 p.m.
HMJr:
Yes?
J. L.
Ralston: Mr. Secretary, this is J. L. Ralston speaking,
Minister of Finance, Canada.
HMJr:
How do you do.
R:
How do you do, sir. Will you excuse me for calling
you at your home?
HMJr:
Quite all right.
R:
a situation has come up that I wanted to have
a word with you about.
HMJr:
Please.
R:
I've been hoping that I could have the pleasure of
going down and just having a neighborly chat with you,
HMJr:
Right.
R:
but we're still at war up here.
HMJr:
Yes.
R:
And we've been terribly busy. I was hoping that it
might be next week, but a certain -- this situation
has arisen that Mr. Towers, , the Governor of our Bank
of Canada
HMJr:
Yes.
R:
18 being -- this 18 very confidential, of course,
-- 18 being sent to represent the Government of Canada
at the conference of Dominion Ministers which is now
being held in London.
HMJr:
Yes.
2:
He was expecting to go on the Clipper on Saturday. It
was postponed until today and now I'm afraid it has
been postponed until Saturday.
HMJr:
Yes.
55
- 2 -
R:
I wondered if you would receive him if he slipped down
to Washington just to talk with you on the general
situation.
HMJr:
Surely - - I'd be glad to.
R:
I'd -- I know he's Central Bank; he's not from the --
not direct from the Department at the minute, but
he's -- I want to assure you that he's representing
us and represented -- represents our full views.
HMJr:
Well, that -- that endorsement 18 sufficient.
R:
And, as I say, we think enough of him to be sending
him over to England to represent the Government there.
HMJr:
When could Mr. Towers come down?
R:
He's in New York now and I was going to telephone him
tonight and ask him if he could go tonight or tomorrow
to -- to Bee if there was any -- and I called really
to find out if there was any time when you thought you
might receive him.
HMJr:
Well, your Minister has an appointment at 10:30 tomorrow
morning. Would that be
R:
Any
HMJr:
Would that be it?
R:
No, I don't think it -- I -- not that I know of.
Excuse me just a minute, Dr. Clark, my Deputy Minister,
18 right here now; I'll just ask him.
(Talking aside: Mr. Morgenthau says that Christie has
an appointment tomorrow morning at 10:30. He wondered
if, by any chance, that might be it.)
No, he says not, Mr. Morgenthau.
HMJr:
Well, he could -- he could come
R:
We could get in touch with Christie and Christie could
arrange with you.
HMJr:
Yes. I mean, why couldn't Mr. Christie bring him in
at 10:30?
Regraded Unclassified
56
- 3 -
R:
Well, that would be most convenient. We'll call him,
right away.
HMJr:
I mean, there's no reason -- I mean
R:
Oh, you know you can see him -- see him with Christie.
I mean, Christie 18 quite
the situation and
HMJr:
Well, why wouldn'
R:
talk with Christie then.
HMJr:
Why wouldn't that be a happy idea?
R:
I think that would be a very fine idea.
HMJr:
Well, then I'll look forward to seeing him at 10:30,
and I hope that we'll be able to meet soon.
R:
Well, I -- I look forward to it very much indeed, and
it's only because things are pressing here 80 that
I haven't been able to give myself the pleasure of
being down before.
HMJr:
And I'm glad you felt free to call.
R:
Thank you very much indeed, Mr. Morgenthau.
HMJr:
Goodbye.
R:
Goodbye.
TREASURY DEPARTMENT
57
INTER OFFICE COMMUNICATION
DATE November 20, 1939
TO
Secretary Morgenthmi
FROM
Mr. Cochran
The foreign exchange market van again dull with e fairly substantial turn-
over in sterling transactions. In Few York the opening quotation for sterling
was 3.89-3/4. At that time, the reporting banks stated that they had not re-
ceived any orders from abroad, either to purchase or sell sterling. About 10
o'clock some buying orders were received from Amsterdam, and the rate strengthened
to 3.93-1/8. Shortly before noon it eased to 3.92-1/8. About mid-afternoon
rubber intereste came into the market to acquire sterling, and the rate reached
the high of 3.93-1/2. It closed at 3.93-1/2 offered.
From the turnover figures given below, it will be observed that sales of
sterling exceeded the purchases by L151,000 which ordinarily would depress the
rate. However, the rate appreciated indicating that short positions were being
covered or long positions created or extended.
Sterling forward rates showed improvement today. One month sterling was
quoted at 3# per pound discount, equivalent to 9-3/16% per annue, and three
months' vas 6-1/4# per pound discount, equivalent to 6-3/8% per annus.
Sales of spot sterling by the four reporting banks in New York totaled
1541,000 from the following sources:
By commercial concerns
1 290,000
By foreign banks (Far East)
1. 251,000
Total
I 541,000
Purchases of spot sterling amounted to 1390,000. as indicated below:
By commercial concerns
I 159,000
By foreign banks (Europe and Far East)
1 231,000
Total
L 390,000
Of the four reporting banks, the National City Bank vas the only one that
sold sterling to the British Control. It sold cotton bills amounting to 12,000
at the official rate of 4.02.
The other important currencies closed as follows:
French france
.0223
Guildere
.5310
Swime france
.2245
Belgas
.1647
Canadian dollare
13% discount
CONFIDENTIAL
58
a * *
Vo purchased $2,500,000 in gold from the earmarked account of the Netherlands
Bank.
The Federal Reserve Bank of New York reported to us the following shipments
of gold:
$5,000,000 from Japan, shipped by the Yokohama Specie Bank, consigned to the
Tokohama Specie Bank, San Francisco, for sale to the U. S. Mint at
San Francisco.
2,088,000 from South Africa, shipped by the South African Reserve Bank, consigned
to the Federal Reserve Bank of New York, to be earmarked for the account
of the Netherlands Bank.
1,468,000 from South Africa, shipped by the South African Reserve Bank, consigned
to the Federal Reserve Bank of New York, to be earmarked for the account
of the Bank of Sweden.
$8,556,000 Total
With reference to the shipment of gold to be earmarked for the account of the Bank
of Sweden, this gold was evidently purchased in the South African market by that
bank, and it is the first shipment of gold from South Africa to the U. S. for account
of the Swedish Central Bank.
The equivalent of today's London spot silver price WEE 41.22d and the forward
price was 40.854- The price for foreign silver fixed by Handy and Harman WBG un-
changed at 34-3/44. The Treasury's price for similar silver was also unchanged at
35#-
In New York, we made aix purchases of silver totaling 470,000 ounces under
the Silver Purchase Act.
not
CONFIDENTIAL
Regraded Unclassified
November 20, 1939
59
10:32 a.m.
Operator:
Mr. Hanes 18 on the line.
Outside
Operator:
Hello, Mr. Hanes.
John
Hanes:
Hello.
Outside
Operator:
All right. Just a moment.
Operator:
Mr. Hanes, I want to say a word to Mr. Gaston.
Do you mind?
H:
No, sure. Do you want to say it first?
O:
Yes.
H:
All right.
Herbert
Gaston:
Hello.
0:
Hello, Mr. Gaston.
Outside
Operator:
All right. Put your party on.
O:
Mr. Hanes is on.
Outside
Operator:
Thank you, operator.
Hanes:
Hello.
Outside
Operator:
Hello, Mr. Hanes.
H:
Hello.
Outside
Operator:
Go ahead, please.
Herbert
Gaston:
Hello.
John
Hanes:
Hello, Herbert?
60
- 2 -
G:
Hello, Johnny. How are you?
H:
Fine, thank you. Just a minute, the Secretary's
operator wants to speak to you.
G:
Yes.
Operator:
Hello, Mr. Gaston.
G:
Yes.
(Brief pause.)
O:
Mr. Hanes, do you want to make a record on this?
H:
Yes, I've got
0:
Don't forget to turn it off.
H:
I've got it
0:
All right. Go ahead.
H:
Hello, Herbert.
G:
Yes, how are you?
H:
Fine, thank you, and how are you?
G:
Well, I'm all right. I'm a little exhausted with a
lot of entertainment, but I'm really feeling fine.
H:
Oh, good.
G:
What I called you about, John, is this - that -- I
wondered if they couldn't reconsider that matter
about holding the meeting in Washington. We're a
little bit on the spot. The proposition was first
put up to Venezuela and they turned it down, and
then they decided that they wanted it in Washington,
and they asked us formally in a meeting if they
couldn't hold it in Washington and I replied that
of course we felt complimented that they should make
that suggestion but that we would have to consult
our Government.
H:
Yes.
Regraded Unclassified
61
- 3 -
G:
And now, John, I'm afraid that the thing has gone
pretty well, considering all the circumstances, but
I'm afraid if there's a bad mixup about the meeting
date it will sort of leave a bad taste.
H:
Yes.
G:
And it -- we could fix our own dates, you know, at
our own convenience.
H:
Yes.
G:
And I think it would leave B. much better atmosphere.
They seem -- they seem to be pretty well agreed that
they want Washington and -- they first asked Venezuela,
as I said, and they -- and Venezuela couldn't have it.
H:
Yes.
G:
I'm wondering if you couldn't talk it over again and --
and see whether you could come to any other conclusion.
H:
Yes. Well now, Herbert, the Secretary 18 late. He's
not here, and last night I talked with Herbert Feis
G:
Yes.
H:
and Herbert said they had considered it very
carefully over at the State Department.
G:
Yes.
H:
And in view of the fact that 1940 is the year that it
18-- you understand
G:
Yes.
H:
...... -- they thought it would be - that coupled with
the fact that we were having this other economic con-
ference here
G:
Yes,
H:
- it would Just -- just mean too much for this
Government to undertake at one time, and especially
at the time just -- it would probably be either just
before the Conventions or it would be after the
Conventions and during the campaign.
- 4 -
62
a:
Well, we could put it off until after election.
H:
You could?
G:
Oh, yes.
R:
Well now, I'll make that suggestion to Herbert Feia
and Sumner Welles
G:
We could choose our own time.
H:
Yes. Well, I'll make -- I'll suggest to them that
you called up and that you felt that we ought to
make some effort at having it here if possible, and
ask them to reconsider their decision.
G:
Yes. They -- they rather put us on the spot on the
thing, as I say, by formally putting it up to us,
G:
Yes.
G:
And BO I'd appreciate some word. How's everything
going at the Treasury?
H:
Everything 1e going fine here, Herbert.
G:
Yeah.
H:
Not a thing -- everything has been very quiet since
you and the Secretary went away. We haven't had
very much to alarm you.
G:
Well, will you tell -- tell the Secretary that I'm
doing all -- tell Henry I'm doing all right. I'm
sorry I couldn't get home any sooner, but I had
to stay until the thing was over here.
H:
Right. When do you contemplate leaving?
G:
The first plane I can grab here 18 -- 16 Thursday
morning and I'll be in Washington early Friday.
H:
Yes. Thursday morning?
G:
I will arrive Friday.
F:
You arrive here Friday?
Regraded Unclassified
63
- 5 -
G:
Yes.
H:
I see. All right, Herbert. Now, I -- I think I'll
wait until the Secretary comes back. I'll talk to
Feis right away and tell him what you've said, and
then I'll wait until the Secretary comes back.
He'll be here any minute now.
G:
And then you'll either -- then you can either call
me on the phone or -- or send a plain -- send a
plain wire if you want.
H:
All right.
G:
Whatever is the quickest way.
H:
All right, fine.
G:
All right, Johnny.
H:
Thank you, Herbert, and good luck to you.
G:
Thanks a lot, John. Goodbye.
H:
Goodbye.
$4
TREASURY DEPARTMENT
CONFIDENTIAL
INTER OFFICE COMMUNICATION
DATE November 20, 1939
TO
Secretary Morgenthau
FROM
Mr. Haaa ooDA
Subject: Current Developments in the High-Grade Securities
Markets
SUMMARY
(1) Sale of $41 millione of Government bonds and notes by
the Federal Reserve banks featured the market develop-
ments of the past two weeks. The Government security
market rose almost uninterruptedly during the two-week
period, the average yield of all long-term Treasury
bonds felling by eleven basis points (Chart I). The
upswing carried all but the shortest maturity class to
new high levels for the recovery movement (Chart II).
The Federal Reserve banks permitted their bills to run
off further (Chart III). New York City banks added
substantially to their Government security holdings,
picking up 8 large volume of Treasury bills (Chart IV)
and guaranteed issues, presumably the new RFC notes.
(2) Eleven local housing authorities sold $49,675,000 of
six-month notes last week to yield Just under .60 per-
cent. The repayment provisions of these notes are
such as to make them guaranteed in effect by the United
States. The rate paid by the local authorities does
not compare favorably with that currently paid by other
borrowers of first-rate credit (Chart V).
(3) High-grade corporate bonds rose in price during the
past two weeks, and the average yield fell to 2.93 per-
cent on November 18 (Chart I). Defeat of pension plans
in Ohio and California contributed to the strength of
municipal security prices. State of California warrants
sold on a 3 percent basie the day after the election as
compared with 4 percent previously (Chart VI).
(4) On November 7 the British Government asked Parliament
for authority to increase Government borrowing by
1250 millions for war purposes. To date the war had
been financed by the issuance of Treasury bills. The
position of the money market at the present time 1e not
greatly different from its position before the war.
This differs sharply from the position prior to the first
war loan in 1914 and 1s due primarily to the prompter
institution of money market controls.
C5
Secretary Morgenthau - 2
I. United States Becurities
Liquidation of a portion of the Federal Reserve holdings
of Government bonds and notes (mainly guaranteed issues) for
the first time in nearly seven years featured the develop-
ments in the Government securities market for the past two
weeks. All sections of the market have been strong, and
prices declined on only one day, Friday, November 10, when it
was reported that investors hesitated to make holiday week-end
commitments owing to the possible disturbing character of
foreign news. Federal's sales of $40.6 millions -- which
started on November 8, but which were concentrated on Tuesday,
Wednesday, Thursday and Friday of last week (November 14-17)
- were viewed bullishly by the market. According to the
press, they were taken as an indication that the Reserve
authorities felt that the bond market could not only stand on
its own feet, but was strong enough to absorb some increase in
the market supply of Government securities.
The average yield of all long-term Treasury bonde de-
creased .11 percent during the past two weeks, closing at
2.43 percent on Saturday, November 18 (Chart I). The relative
movement. of the different maturities of Treasury securities
during the past two weeks 18 shown in the following table:
:
:
Average price change
:
Week
:
Week
:
:
ended : ended : Total
: Nov. 11 : Nov. 18 :
(In thirty-seconds)
Notes
1 to 3 years
o
+ 3
+ 3
3 to 5 years
+ 5
+ 7
+12
Bonds
Under 5 years to call
+ 3
+ OK.
+11
5 to 15 years to call
+ 9
+31
+40
15 years and over to call
+10
+44
+54
The upswing of Government security prices during the past
two weeks continued the recovery movement that has been in
process since September. It brought all maturity classes
(except the very shortest maturi ty class) to & new high level
for the present upswing (Chart II). By Saturday long-term
bonds had recovered 68 percent and medium-term bonds had re-
covered 79 percent of the decline suffered between August 19
and September 25. Short bonds and Treasury notes, it will be
remembered, reached their lows on September 6. Eighty percent
66
Secretary Morgenthau - 3
of the deolines from August 19 to that date has now been
recovered by the shortest bonds (under five years to call),
86 percent by the 3-5 year notes, and 85 percent by 1-3 year
notes.
In addition to the reduction in ite Government security
portfolio occasioned by the above-noted sale of notes and
bonds, the Federal Reserve banks permitted their bill holdings
to decline by another $55 millions during the past two weeks.
The Federal Reserve banks now own only $105 millions of
Treasury bills 8.8 compared with $477 millions on June 21
(Chart III).
The run-offs of the Federal Reserve portfolio of Treas-
ury bills during the last few weeks and the three additional
issues of $50 millions each offered by the Treasury in October
have greatly enlarged the market supply of such securities.
Since September 27, for example, the increase in the privately
held marketable supply of Treasury bills has amounted to $287
millions. The entire amount of this increase has been added
to the portfolios of weekly reporting member banks in New York
City.
With respect to other United States securities, New York
City banks sold $30 millions of Treasury bonds and bought B.
slightly greater amount of Treasury notes during the three
weeks ended November 15 (Chart IV). Banks outside New York
City acted in the opposite manner (data through November OF
only) however, selling a small volume of Treasury notes and
acquiring about the same amount of Treasury bonds. Although
we have not yet obtained data on the amount of the new RFC
1ssue purchased by banks, it appears that that issue was
popular with New York City banks at least. For the week
ended November 15, those banks acquired some $80 millions of
guaranteed issues, presumably principally the new RFC notes
issued during that week.
II. New Housing Authority Notes
On Tuesday, November 14, eleven local housing authori-
ties sold $49,675,000 of six-month wholly tax-exempt notes
to a nation-wide syndicate of 52 banks at prices to yield
Just under .60 percent. The repayment provisions of the
notes are such 88 to make them guaranteed in effect by the
United States, for they are secured by an irrevocable agree-
ment under which the USHA agrees to make available at the
Federal Reserve banks three days prior to the maturity of
these notes an amount of funds equal to the principal and
interest thereon.
07
Secretary Morgenthau - 4
Unfortunately, no direct comparison 1e available of the
rate paid by the local housing authorities with what the money
would have cost if borrowed through the medium of a direct or
fully guaranteed obligation of the United States, issued in
the regular manner. This ie because the yields on all direct
and guaranteed obligations of such short maturities are domina-
ted primarily by right values.
It seems a reasonable estimate, however, that the funds
would have cost not in excess of .10 percent if borrowed
through the issuance of United States Treasury bills, nor in
excess of .15 percent if borrowed through the issuance of six-
month USHA notes. Within the limits of the accuracy of these
estimates, it would appear, therefore, that borrowing directly
by the local housing authorities resulted in an interest cost
of at least four to six times that which would have been
incurred had an equivalent sum been borrowed directly by the
United States, or through the issuance in the ordinary manner
of guaranteed obligations.
It should also be noted that the rate vald by the local
housing authorities does not compare very favorably with that
currently being paid by other borrowers of first-rate credit
(Chart V). The Federal Intermediate Credit banks, for example,
whose ooligations are not guaranteed by the United States,
borrowed six-month money during the past week at 30 percent.
A few weeks ago, the State of New York borrowed money for B.
seven and one-half month period at a cost of .20 percent, and
the State of Pennsylvania obtained seven-month money for .44
percent.
III, Other Domestic Securities Markets
In contrast to the sharp rise in Treasury bonds, high-
grade corporate bonds rose only slightly in price during the
past two weeks. The Treasury average of the yields of high-
grade corporate bonds declined from 2.97 percent at the close
on November 4, to 2.93 percent on Saturday. The spread between
the average yield on corporates and the yield on long-term
Treasury bonds increased from .43 percent to .50 percent in the
same period (Chart I).
Municipal securities have also been strong, rising for
the seventh consecutive week. The defeat at the polls, on
November 7, of pension plans in California and Ohio contri-
buted to the improvement in municipal security averages. In
California, where the vote was more decisive than that of 1938,
long-term bonds of the State and of its municipalities rose
sharply on the election news. State of California, 4 percent
bonds, due 1985 (callable after 1950), for example, rose from
Regraded Unclassified
68
Secretary Morgenthau - 5
108-1/2 the day before the election to 110-3/4 on Saturday,
November 18. The day after the election, the State sold $5.7
millions of short-term warrants at 3 percent. This rate 00m-
pares with a 4 percent rate immediately preceding the election
(Chart VI).
New public offerings of securities of over one year
maturity in the week ended November 11 were limited to the
municipal field and amounted to only $2.4 millions. In
contrast, public offerings in the week ended November 18
totaled $38.5 millions, the largest volume in any week since
the outbreak of war, Included in this amount were $30 mil-
lions of New York City one- to thirty-year serial bonds sold
on Tuesday, November 14 on an interest cost basis of 2.56
percent. It was reported that about a half of the new issue
was sold on the afternoon of offering, and more than two-
thirds was disposed of by Friday night. In addition to the
above, it was reported that the Pennsylvania Telephone Corpora-
tion placed privately with twelve insurance companies some
$5.2 millions of 3-1/4 percent refunding bonds at a price of
101-1/4.
IV. Setting for the First British War Loan
On Tuesday, November 7, Sir John Simon, the British
Chancellor of the Exchequer asked Parliament for authority to
increase Government borrowing by L250 millions, equivalent to
about $1 billion at current rates of exchange. Proceeds of
the loan will be used to finance war purchases and to repay
maturing obligations. Details of the proposed financing have
not yet been made public; but the market has been expecting
a war loan for several weeks.
A comparison of the setting for the proposed British war
loan with the setting for the first war loan in 1914 brings
into bold relief the differences in the market conditions fac-
ing the British Government then and now. These differences
are due, to a great extent, it appears, to the degree of market
control exercised by the authorities on the two occasions.
Official controls were slow in coming into action in
1914, for war broke out suddenly and a short conflict was
anticipated. The Stook Exchange was closed from July 31
until January 4, 1915, 80 that prime investments were thoroughly
frozen for a five-month period. The Bank Rate was held at 5
percent after the first week of war, moreover, despite the
declines in the market rates of interest from the peaks reached
early in August, The yield on Treasury bills remained high,
and was at 3.68 percent in November 1914 at the time of the
first war loan, as compared with 3.78 percent, the high follow-
ing the outbreak of war, and with 2.53 percent in July 1914.
C9
Secretary Morgenthau - 6
In the present instance, the situation in London is
quite different. The authorities instituted controls promptly,
and the British money market has by this time largely regained
the ease which ruled before the outbreak of war. The Bank
Rate has been reduced from 4 percent to 2 percent, and the
average rate on three-month Treasury bills has dropped to
1,18 percent, as compared with 3.72 percent immedately follow-
ing the outbreak of war, and with .78 percent on August 18.
Comparable recoveries have occurred in other short-term money
rates.
Long-term Government bonds, moreover, have recovered
somewhat more than the ground lost since mid-August. The
2-1/2 percent console closed at 68-3/8 on Friday, November 17,
to yield 3.68 percent, as compared with 65-7/8 to yield 3.83
percent on August 18. Similar improvements have occurred in
the prices of other British Government issues.
The British Treasury it appears has financed the first
few months of the present war in much the same manner as it
financed the first few months of the World War -- by the
issuance of Treasury bills. The bill volume has increased
about 6250 millions since the middle of August -- an amount
equal to about one-quarter of the Government's expected
deficit for the entire ourrent fiscal year.
It is interesting to note in connection with the British
financial program that Mr. J. M. Keynes proposed last week,
through the London Times and with that paper's approbation,
that the war be financed in part by means of forced loans.
His plan involves graduated contributions from all earnings
of over L150, part in the form of an income tax and part in
the form of the foroed purchase of bonds at 2-1/2 percent,
the bonde not to be salable except for urgent reasons until
after the end of the war.
Attachments
Regraded Unclassified
Chart I
TO
COMPARATIVE YIELDS OF AVERAGE OF ALL LONG TERM U.S. TREASURY
AND AVERAGE OF HIGH GRADE CORPORATE BONDS
1938
JAN. FEB. MAR APR. e MAY JUNE JULY - AUG. BY SEPT. " OCT. NOV. DEC JAN. N. FEE 11 MAR APR MAY JUNE 1939 JULY AUG. SEPT. OCT. NOV. DEC.
1939
a
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.
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.
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-
as
,
NOV
1
inversed Scale
BY
Inverted Scale
-
4
.
is
DEC.
.
PER CENT
PER CENT
Inverted Scale
WEEKLY, Saturday Quotations
PER CENT
DAILY
2.2
22
22
24
Long Term Treasury" (M years as more to contrat self -
2.4
24
26
2.6
26
28
2.0
Long Term
Treasury
2.8
5.0
3.0
3.0
32
3.2
3.2
Corporates
Corporate
3.4
3.4
3.4
3,6
3.6
3.6
18
3.8
3.8
4.0
4.0
4.0
PER
PER
PER
CENT
CENT
CENT
1.00
1.00
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60
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Spread Between Long Term
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Spreed
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MAR
APR
MAY
JUNE
JULY
AUG.
SEPT
OCT
NOV
DEC
JAN.
FEB.
MAR.
APR.
MAY
JUNE
JULY
AUB.
SEPT.
OCT.
NOV.
DEC
OCT.
NOV.
DEC
1938
1939
1939
"Bread a - instructor atange - comparation of Lang Term Treasury everage
lifes el - Secretary all be Trusey
- of - - -
F-S0-1-2
Points Plotted Represent Differences from Average Price of Each Maturity Class on June 5.
JUNE 5
Aug. 19
SEPT. 6
SEPT. 25
OcT. 25
POINTS
Nov. 18
(NET CHANGE)
POINTS
(NCT CHANGE)
+1
+1
NOTES, 3-5 YEARS
o
0
NOTES, 1-3 YEARS
-1
-1
-2
-2
-3
-3
BONDS,
UNDER 5 YEARS TO CALL
-4
-4
-5
-5
BONDS,
5-15 YEARS TO CALL
-6
-6
-7
-7
-8
-8
BONDS,
OVER 15 YEARS TO CALL
-9
-9
-10
-10
-11
-
JUNE 5
Aue. 19
SEPT.6
SEPT.25
OCT. 25
Nov. 18
-11
Office el the listretary of the Treasury
71
Date of - - Into
F - 131
Regraded Unclassified
72
Chart III
DISTRIBUTION OF OWNERSHIP OF TREASURY BILLS
1935
1936
1937
1938
1939
DOLLARS
DOLLARS
BILLIONS
DOLLARS
BILLIONS
BILLIONS
Call Dates
Wednesday
2.8
2.8
2,8
Held by:
ALL OTHERS
2.4
2.4
2.4
WEEKLY REPORTING MEMBER BANKS
FEDERAL RESERVE BANKS
2.0
2.0
2.0
(.6
1.6
1.6
1.2
1.2
1.2
.8
.8
.0
.4
4
.4
o
o
MAR.4
o
NOV.1
MAR.4
Dec.31
JUNE 30
Dcc.31
JUNE 30
DEC.31
FEB.
MAR.
APR.
MAY
JUIE
JULY
AUG.
SEPT.
OCT.
NOV.
DEC.
JUNE 29
Dcc.31
JUNE 30
MAR.31
MAR.7
SEPT.28
1939
1935
1936
1937
1938
Note: HOLDINGS OF WEEKLY REPORTING MEMBER BANKS OUTSIDE OF N.Y. CITY AND CHICAGO ON NOV. 15, ESTIMATED.
et the Secretary el the Treasury
1 j % I I
F 126
ONE
U.S. GOVERNMENT SECURITY HOLDINGS
WEEKLY REPORTING MEMBER BANKS
Cumulative Net Change From Feb 21, 1939
Mar.
Apr
May
June
July
Aug
Sept
Oct
Nov
Dec.
DOLLARS
Jan.
Feb
Mar.
Millions
DOLLARS
New York City
Millions
800
Total
800
600
600
Bonds
400
400
Bills
200
200
0
o
Notes
- 200
Mar.
Apr.
May
June
600
July
Aug.
Sept.
Oct.
-200
Nov.
Dec.
Jan.
Feb.
Mar.
600
All Other
400
400
Bonds
200
200
o
Bills
o
-200
-200
Notes
-400
Totall
-
-600
Mar.
Apr.
May
June
1000
July
Aug.
Sept.
Oct.
-600
Nov.
Dec
Jan.
Feb.
Mar
1000
All Cities
800
800
600
Bonds
600
400
400
Total
200
200
o
o
Bills
-200
-200
-400
-400
Notes
-600
-600
-800
-800
Mar
Apr.
May
June
July
Aug
Sept.
Det.
Nov
Dec
Jan
Feb.
Mar.
1939
1940
. Direct Securities Only
- al the Servicery el -
73
- . - - -
FINA
Regraded
Uncla
Check
CONFIDENTIAL
74
INTEREST COST TO BORROWERS OF SHORT TERM MONEY
November 1939
PER
PER
CENT
CENT
.7
.7
ESTIMATED
.6
.6
ACTUAL
.5
.5
.4
.4
.3
.3
.2
.2
.1
.1
o
U.S. TREASURY
U.S.N.A.
o
STATE OF N.Y.
F.I.C.B.
STATE OF PA.
LOCAL HOUSING
BILLS
NOTES
NOTES
DEBENTURES
NOTES
AUTHORITY
NOTES
6 MONTHS
6 MONTHS
71 MONTHS
6 MONTHS
7 MONTHS
6 MONTHS
⑉
Regraded Incl:
75
Chart VI
INTEREST COST ON CALIFORNIA STATE SHORT - TERM WARRANTS*
1938
1939
1940
J
,
M
A
M
J
J
A
8
o
N
D
J
F
M
A
M
J
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A
$
o
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D
J
,
#
A
M
J
PER
PER
CENT
CENT
NO BIDS RECEIVED
4.0
4.0
3.5
3.5
DAY AFTER ELECTION
3.0
3.0
FIRST HAM AND Eges ELECTION
2.5
2.5
2.0
2.0
1.5
1.5
1.0
1.0
SECOND HAM AND Eess ELECTION
.5
.5
0
o
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F
M
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$
o
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,
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AMJJASONDJP
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1938
1939
1940
.
INTEREST COST OF ONE REPRESENTATIVE ISSUE PLOTTED FOR EACH MONTH; MATURITIES ARE LESS THAN I YEAR
Office al the Secretary el the Treasury
Regraded Unclassified
76
November 17, 1939
My dear Mr. Frank:
In the absence of Secretary
Morgenthau, I an acknowledging receipt
of your letter of November 16th with
which you enclose answers to certain
questions which were raised at the
recent meeting of the Informal Com-
mittee for Meonomic Assistance to
South America.
I shall be glad to bring this
matterial to his attention as soon
as he returns to the office.
Sincerely yours,
(Signed) H. S. Klotz
H. 8. Klots
Private Secretary
Hon. Jerome 3. Frank, Chairman,
Securities and Exchange Commission,
Washington, D. 0.
Enclosure and "Report of the Study and Investigation of the
Work, Activities, Personnel and Functions of Protection and
Reorganization Committees" - Part V (sent to Dr. White 11-18-39)
Regraded Unclassified
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON
77
FFICE OF THE CHAIRMAN
November 16, 1939
The Honorable
Henry Morgenthau, Jr.,
Secretary of the Treasury.
Dear Mr. Secretary:
I enclose 8. memo in answer to the questions
addressed to me at the recent conference which I
attended in your office with the members of the
Informal Committee for Economic Assistance to
South America.
I shall be glad to confer further with your
Committee if you 80 desire.
Yours sincerely,
Jame Jerome Chairman N. 4. Frank Frank
Copies to:
Hon. Sumner Welles
Hon. Jesse Jones
78
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
CONFIDENTIAL
DATE November 20, 1939
TO
Secretary Morgenthau
FROM
Mr. Haas 90H
Subject: The Business Situation,
Week ending November 18, 1939.
Conclusions
(1) Industrial production has continued to increase on
the basis of a large volume of unfilled orders, but during
the past month or more widespread expectations of a business
setback in early 1940 have discouraged new buying and brought
& downturn in new orders. This will tend to limit the extent
of any further immediate gains in industrial production.
Significant among recent developments is the fact that
excessive speculative buying has been effectively discouraged,
and that no malad, justments sufficient to bring about B. serious
business setback have yet appeared. On the contrary, various
factors offering additional support to business are coming
into the picture. It may well be, in fact, that the widely-
expected reaction has already been partly completed, through
the efforts of businessmen to discount such a reaction. Any
further substantial rise in business activity, however, 18
contingent upon a renewed upturn in new orders.
(2) Some evidence of the lack of speculative maladjust-
ments in this business recovery appears in two pertinent com-
parisons:
(a) Stock prices remain unusually low in relation
to business activity and to current earnings; and the
fact that brokers' loans, as well as other loans for
purchasing and carrying securities, are elightly lower
than before the outbreak of war, suggests that specula-
tive stock holdings may have been reduced on balance
rather than increased during this period.
(b) The price spread between high grade bonds and
second grade bonde has been widening for two months,
indicating 8 relative decline in the demand for specu-
lative investments.
79
Secretary Morgenthau - 2
Serious corrective setbacks in business seldom arise
from such a background. If, on the contrary, public senti-
ment were strongly optimistic, real grounds would exist for
apprehension over the business outlook, particularly in the
event of an early end to the war. Present indications suggest
that the possibility of this latter development has to a large
extent already been discounted.
(3) The business outlook is favored by a rising trend
of consumer incomes at A time when the outstanding volume
of installment sales 1s apparently at a conservative figure.
The offtake of manufactured goods has not yet risen to its
normal level in relation to national income.
The general situation
Industrial production during the first half of November
has apparently exceeded its 1936-37 high and closely approxi-
mated the all-time high reached in the spring of 1929.
The rise continues, however, under a cloud of widespread
skepticism among businessmen and the public generally, who
recall their unfortunate experiences with inventories in the
1936-37 recovery and believe this recovery to be of the same
type. A business setback is therefore widely expected during
the early part of 1940, particularly if large-scale warfare
should fail to develop; and this expectation has served aa an
effective damper on speculative buying.
The cautious attitude of businessmen has been reflected
in a considerable decline in new orders, particularly for
steel and textiles. (See Chart 1) The sharp drop in early
November has been exaggerated by the Armistice Day and Election
holidays, and by the failure of steel manufacturers to clarify
the price situation by announcing prices for first quarter
delivery.
If the present peak in production were being established
against & background of high public optimism and reckless
speculative buying, as in the spring of 1937, the decline in
new orders would provide grounds for concern over the business
outlook. The fact that a coming reaction in business has been
widely publicized, however, and that industry during the past
month or more has proceeded with caution, minimizes the signi-
ficance of the present falling off in orders.
80
Secretary Morgenthau - 3
It may be that instead of a business setback next spring,
as expected in many quarters, an almost unnoticed correction 16
now being made by businessmen themselves in their attempts to
discount such e setback. In a somewhat similar manner, the
unfavorable effects of war were fully discounted last summer by
the efforts of businessmen to anticipate them.
Conservative buying trends
Evidence that buying in all fields has apparently been
restrained by the tenor of business sentiment in recent months --
except during the period of war-inspired buying early in
September -- appears in several directions:
(1) Stock prices have made no further gaine in two months,
the Dow-Jones industrial index having reached its high during
the second week of September. The lack of speculative interest
18 indicated by the fact that loans to brokers and dealers dur-
ing the week ended November 8, as reported by all Federal Reserve
member banks, totalled only $594 millions, as compared with $608
millions during the week preceding the war outbreak. Loans "to
others for purchasing and carrying securities" likewise declined
during this period from $519 millions to $500 millions.
This decline in speculative interest, together with sell-
ing from Europe and other factors, has held stock prices at lower
levels in relation to industrial production than in any other
comparable period in recent years. (See Chart 2) Nevertheless,
corporation earninge during the last quarter of 1939, as estimated
by Standard Statistics, will show an unusually sharp rise (Bee
lower section of chart) though lagging somewhat behind the rise
in production.
(2) A tendency to refrain from speculative commitments
during the present period of war and business uncertainty is
also revealed by B. relatively smaller rise in prices of second
grade bonds than in prices of high grade bonds. (See Chart 3,
lower section) Used as B. measure of general confidence, this
indicates that a substantial corrective movement has been under
way since early September.
(3) A gradual decline in prices of sensitive industrial
materials during the past month or more, contrary to the rising
trend of business activity, ( eee Chart 4) reflects a reduced
speculative demand for commodities since the period of heavy
buying early in September. The decline has itself been an
effective deterrent to speculative buying.
Regraded Unclassified
81
Secretary Morgenthau - 4
Sources of further business improvement
Apart from the fact that no evidences of overproduction
have yet appeared, the trend of business shows various indica-
tions of inherent strength from which support may be derived
In 1940:
(1) The recent upturn has been based largely on an
improved domestic situation, and only to a limited extent
on prospective war orders.
(2) A strong increase in capital goods expenditures,
as various industries find themselves handicapped by
capacity limitations, suggests that we may be entering a
long-delayed period of industrial expansion.
(3) Stock prices show evidence of underlying strength
which, if released, would provide an incentive for new
capital financing.
(4) War orders already placed or in prospect, together
with increasing orders from South American and other neu-
tral countries, promise additional support to business in
1940.
(5) The buying power of domestic consumers 1a being
increased by & continued rise in national income.
Increased consumer buying in prospect
An expansion in consumer buying, financed in part by an
increasing volume of installment sales, seems in prospect in
coming months. The trend of national income has been steadily
upward since the summer of 1938, but retail sales and other
evidences of the movement of goode into consumption have
lagged behind national income, probably in part because of
the liquidation of installment debte previously contracted.
In Chart 5 we compare our index of sales (in dollar
values), representing the offtake of manufactured goods, with
an index of the "sales equivalent" of monthly national income
payments, which is based on the normal relationship between
the two indices over 8. period of years.
Regraded Unclassified
82
Secretary Morgenthau - 5
It will be noted that in 1935, 1936, and 1937, the sales
index continued somewhat above normal in terms of national
income, apparently because of an expanding volume of sales on
deferred payments. In 1938, B. considerable part of consumer
incomes was used to meet payments on previous installment pur-
chases, and current purchases dropped sharply below normal in
relation to incomes.
The sales index expanded rapidly during August and
September, but has not yet reached its normal position in
relation to national income. An expansion in installment
sales in connection with the 1940 automobile season may again
carry the sales index above the national income level.
Current business news
The New York Times index (shown in Chart 4) rose 1.9 points
to 107.2 during the week ended November 11, the highest since
the week of September 4, 1937, despite a sharp decline in the
adjusted index of automobile production caused by a complete
stoppage at the Chrysler plants.
Sensitive commodity price indices have shown divergent
trends in recent weeks. Moody's index of spot prices has
gradually declined, while the Dow-Jones futures index has
remained steady. Reuters' index of British prices shows a
gradual uptrend.
Steel scrap prices have shown a substantial recession
from their early October peak, the Iron Age composite quota-
tion now standing at $19.83, as compared with & peak of $22.50.
This and other developments in the steel industry have led to
a general belief that little or no increase in steel prices
will be made next quarter. Meanwhile, the soundness of the
present situation in the steel industry 1s indicated by the
Iron Age statement that: "Pressure from steel consumers for
delivery provides strong evidence this week that much of the
production of the steel industry
18 quickly passing into
finished products, end that inventories of most consumers are
still at far below normal."
Private construction awards during October were but
slightly under the September total, (see Chart 6) while public
awards declined to the lowest figure since early 1938. Heavy
construction awards during the week ended November 14, as
reported by the Engineering News Record, rose sharply to the
highest figure, with one exception, since June 22, 1937.
83
Chart 1
CONFIDENTIAL
INDICES OF NEW ORDERS
Combined Index of New Orders and Selected Components
1938
À
M
J
1939
1940
PERCENTAGE
J
A
5
o
N
D
J
5.
o
N
B
4
POINTS
PERCENTAGE
POINTS
160
160
150
150
140
140
130
130
120
120
TOTAL (COMBINED INDCA)
110
1936 . 100
110
100
100
90
90
80
80
70
70
60
60
TOTAL EXCLUDING STEEL AND TEXTILES
50
50
40
40
STEEL ORDERS
30
30
20
20
10
10
TEXTILE ORDERS
o
0
A
M
J
J
A
$
o
as
3
a
,
M
A
-
J
J
A
5
o
.
D
J
,
M
1938
1939
1940
Office of the Secretary of the Treasury
- of - - -
I - 85 - B
Chart 2
CONFIDENTIAL
84
INDUSTRIAL STOCK PRICES AND CORPORATE EARNINGS
COMPARED WITH INDUSTRIAL PRODUCTION
Quarterly, 1932 to Date
PER
PER
CENT
CENT
(PRICES)
Stock Prices and Production
(PRODUCTION)
150
-
120
130
110
PRICES or 350 INDUSTRIAL STOCKS
1926 = 100, STAND. STAT.
110
100
90
90
70
60
INDUSTRIAL PRODUCTION, F.R.B.
50
1923 - 125 = 100
70
30
60
1932
1933
1934
1935
1936
1937
1938
1939
1940
⑉
PER
PER
CENT
CENT
(CARNINGS)
Earnings and Production
(PRODUCTION)
110
110
EARNINGS, 120 INDUSTRIAL CORPORATIONS
1926 = 100, STAND. STAT.
85
100
09
90
35
60
10
INDUSTRIAL PRODUCTION, F.R.B.
70
1923 - *25 = 100
-15
60
1932
1933
1934
1935
1936
1937
1938
1939
1940
Office of the Secretary of the Treasury
d - - -
c - 270
INDEX OF CONFIDENCE AND BUSINESS ACTIVITY
1933
1934
1935
RATIO
1936
1937
1938
1939
(PER CENT)
PER CENT
Monthly
75
120
70
110
65
100
60
90
INDEX or CONFIDENCE
55
80
50
70
INDUSTRIAL PRODUCTION, F.R.B.
45
1923-125 - 100, ADJ.
60
40
1933
1934
1935
1936
1937
1938
50
1939
1937
RATIO
1938
1939
(PER CENT)
PER CENT
Weekly
70
110
65
100
BUSINESS ACTIVITY, N.Y. TIMES
EST. NORMAL . 100, ADJ.
60
90
55
80
or CONFIDENCE
50
70
45
J
,
-
A
M
J
J
A
5
o
M
D
J
,
M
A
M
J
J
A
$
o
N
D
J
F
M
A
=
60
1937
J
J
A
5
o
.
D
1938
1939
CONFIDENTIAL
Chart 3
. RATIO OF VIELD ON MOODY'S AM BONDS TO VIELD ON BAA DONDS.
the of the Secretary of the Treasury
- of - of -
C5
c - 264
Regraded Unclas
BUSINESS ACTIVITY AND PRICES OF SENSITIVE INDUSTRIAL MATERIALS*
1938
1939
JUNE
AUG.
ocT.
DEC.
FEB.
APR.
JUNE
AUG.
PERCENT
ocT.
DEC.
(PRICES)
PERCENT
(ous. ACT.)
Weekly
135
105
125
100
115
95
BUSINESS ACTIVITY, N.Y. TIMES
EST. NORMAL = 100, ADJ.
105
90
95
85
PRICES OF SENSITIVE
as
INDUSTRIAL MATERIALS
1936 = 100
80
75
75
65
JUNE
AUG.
ocT.
DEC.
FED.
APR.
70
1938
JUNE
AUG.
OCT.
DEC.
1939
CONFIDENTIAL
Chart 4
INDEX INCLUDES SPOT PRICES of STEEL SCRAP, TIN, COPPER, LEAD, ZING, WOOL, PRINT CLOTH, NUMBER AND NIDES.
Office of the Secretary of the Treasury
93
- of - - -
C - 274
Regraded Uncla
INDICES OF SALES AND SALES EQUIVALENT OF NATIONAL INCOME
1936 = 100
PERCENT
PERCENT
120
120
SALES, DOLLAR VOLUME
110
110
100
100
90
90
80
80
SALES EQUIVALENT OF NATIONAL INCOME
70
70
60
60
50
50
1933
1934
1935
1936
1937
1938
1939
1940
PERCENTAGE
PERCENTAGE
POINTS
POINTS
DEVIATION OF SALES FROM
SALES EQUIVALENT OF NATIONAL INCOME
+10
+10
0
o
-10
-10
-20
-20
1933
1934
1935
1936
1937
1938
1939
1940
. REPRESENTS OFFTAKE OF MANUFACTURED GOODS
87
Office of the Secretary of the Treatury
C 291
Division of - - -
Chart 5
COMF Regraded Uncla
CONSTRUCTION CONTRACT AWARDS CLASSIFIED BY OWNERSHIP OF PROJECTS
Monthly Totale, F. W. Dodge Corporation
DOLLARS
1933
1934
1935
1936
1937
1936
1939
1940
DOLLARS
WILL TONS
MILLIONS
400
400
360
360
TOTAL
320
320
280
280
240
240
200
200
160
160
120
120
80
80
PRIVATELY OWNED
PUBLICLY OWNED
40
40
o
o
1933
1934
1935
1936
1937
1938
1939
1940
Chart 6
Office of the Secretary of the Treasury
B
I 1 I 1 %
Regraded
Unclass
09
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE November 20, 1939
TO
Secretary Morgenthau
FROM Mr. Coohran
Mr. Straessle of the Credit Suisse, Zurich, and Mr. Lindsay, of the
Swiss American Corporation in New York, called on ne at 10:15 this morn-
ing. They desire an appointment with the Secretary and will call back all
3:30 this afternoon.
They had no particular business to take up. Mr. Straesale, who left
Switzerland on October 12, gave no certain information with respect to
economic conditions in that country following the outbreak of the mr, All
securities and valuables, except the currency necessary for the day's busi-
ness, have been transferred from Basle to interior points. Banking opera-
tions continue normally at Basle. The banks in Zurich have not evacuated
their holdings, but are prepared to do so on six hours notice, The Crédit
Suiese has leased the Hotel Savoy at Interlaken and has built vaulte in
the basement of this building to house ite valuables. Basle is strongly
fortified, and most of the downtown streets are barricaded with sandbags.
Train service suffered much the first two weeks of the war, due principally
to mobilization, but service 1s now perhaps 90% of normal, except that the
trains nove slower than formerly. Switserland has built up an important
reserve of coal for use in case the Germans should put the hydro-electric
plants, which now furnish most of the power for Svice railways, out of com-
mission. The allies are permitting Switzerland to have only sufficient raw
materials for her domestic needs and this consequently hampers the export
industry.
There is no need for exchange control sad Mr. Straessle looks for the
franc to hold steady. He remarked that the note circulation had increased
to two billion, as compared with a normal circulation. of seven hundred mil-
lion Swiss france. Be said this hoarding took place principally in Switzer-
land, but that there were considerable amounts of notes held in France and
Germany. He looks for some of those borded in France to be returned to
Switzerland as the French regulations in regard to holdings of france in
foreign exchange become effective. The effort is being made to encourage
Swine holders to give up their notes against securities offering increased
interest rates.
Mr. Stracaule has not been in Germany since the was broke out, but has
talked with sany people from Germany. While the economic situation is not
good, he said that the country was 80 well disciplined that no breakdown
can be expected in the near future. Ee, in fact, thought that the earliest
possible date that any upset in the German internal situation could coma
about would be & year from this vinter. He expects a war of one and one-balf
to two years duration. Re is worried about the Bolahevistic threat if the
German arzy should be defented.
10mg
TREASURY DEPARTMENT
103A
Office of the Secretary
Secret Service Division
MEMORANDUM
90
November 20, 1939
To:
Mrs. Klotz
From:
Chief Wilson
We attach for your information copy
of the President's itinerary to Warm
Springs, Georgia, and return.
THE PRESIDENT OF THE UNITED STATES
Hon. Franklin D. Roosevelt and Party
91
Washington, D.O.
fars Springs, Gs.
Asheville, X. 0.
Washington, D. C.
Tuesday - November 21st:
Lv. Washington, D.C.
Southern Railway
3:00 PM ET
Ar. Weyburn, 7a.
#
M
5:15 PM If
Water and Goal
Lv. Weyburn, Va.
#
#
5:30 PM ET
Ar. Charlottesville, Va.
-
#
5:50 PM ET
Stop to allow Mrs. Hoosevelt to board train.
Lv. Charlottesville, Va. Southern Railway
5:51 PM ET
Ar. Monroe, Ta.
#
7:30 PM ET
Water - Change crews
Lv. Monros, Va.
Southern Railway
7:55 PM ET
Ar. Greensboro, N.O.
-
#
10:50 PM ET
Water
Lv. Greensboro, N.O.
-
.
10:55 PM ET
Wednesday - November 23nd:
Ar. Spencer, N.O.
N
13:10 AM ET
Change Engines and Crews.
Lv. Spencer, N.C.
#
#
13:15 AM ET
Ar. Hayne, S. o.
.
3:10 AM ET
Water and Doal
Lv. Hayne, 8.0.
#
3:15 AM ET
Ar. Greenville, S. 0.
.
.
4:00 AM ET
Water - Change Engine Crews
Lv. Greenville, 8. 0.
#
.
4:05 AM ET
Ar. Gainesville, Ga.
#
6:30 AM ET
Water
Lv. Gainesville, Ga.
.
6:35 AM ET
Ar. Atlanta, Ga.
#
#
8:00 AM ET
Change Engines and Crews
Lv. Atlanta, Ga.
#
#
7:10 AM OT
Ar. Williamson, Ga.
#
8:50 AM OT
Water
Lv. Williamson, Ga.
-
#
8:55 AM or
Ar. Warm Springs, Ga,
#
#
10:00 AM OT
Destination
RETURNING:
Tuesday, November 28th:
Lv. Warm Springs, Gs.
Southern Railway
8:00 AM 07
Ar. Williamson, Oa.
#
.
9:00 AM OT
Water
Lv. Williamson, Ga.
#
$:05 AM or
Ar. Atlanta, Ga.
#
#
10:45 AM 07
Change Engines and Crews.
Lv. Atlanta, Ga.
.
#
11:50 AM ET
Ar. Gainesville, Ga.
#
#
1:00 PM ET
Water
92
RETURNING (CONT'D)
Lv. Gainesville, Ga.
Southern Railway
1:05 PM ET
Ar. Greenville, 8. c.
#
3:00 PM ET
Water - Change Engine Crews
Lv. Greenville, 8. 0.
#
#
3:05 PM ET
Ar. Hayne, 8. 0.
.
#
3:50 PM ET
Change Engines and Crews
Lv. Hayne, 8. 0.
#
3:55 PM ET
Ar. Melrose, N. 0.
#
#
4:45 PM ET
Water - Get Helper.
Lv. Melrose, N. 0.
M
If
4:50 PM IT
Ar. Saluda, N. 0.
-
If
5:02 PM ET
Out off Helper
Lv. Saluda, B. 0.
#
#
5:04 PM ET
Ar. Biltmore, I. 0.
W
M
6:10 PM ET
Turn Train - Change Engines and Crews.
Lv. Biltmore, N. 0.
Southern Railway
7:30 PM ET
Ar. Old Fort, N. C.
#
#
8:30 PM ET
Water
Lv. Old Fort, N. c.
#
#
8:35 PM ET
Ar. Statesville, N. 0.
#
a
10:45 PM ET
Water.
Lv. Statesville, N. 0.
#
#
010:50 PM ET
Ar. Spencer, N. d.
#
#
11:45 PM ET
Change Engines and Crews.
Lv. Spencer, N. 0.
If
#
11:50 PM ET
Wednesday - November 29th:
Ar. Danville, Va.
#
и
3:10 AM ET
Water.
Lv. Danville, Va.
#
.
2:15 AM ET
Ar. Monroe, Va.
#
#
4:30 AM ET
Coal and Water - Change Train and Engine Crews.
Lv. Monroe, Va.
Southern Railway
4:35 AM ET
Ar. Weyburn, Va.
If
If
6:35 AM ET
Coal and Water.
Lv. Weyburn, Va.
.
.
6:40 AM ET
Ar. Washington, D. C.
-
.
9:00 AM ET
Destination.
TREASURY DEPARTMENT
93
INTER OFFICE COMMUNICATION
DATE November 20, 1939.
TO
Secretary Morgenthm
FROM Mr. Cochran
By appointment, Mesers. Whighem and Gifford, who are to represent the
British Government in the matter of disposing of British owned dollar
securities on the American market, accompanied by Mr. Pincent, Financial
Counselor of the British Embasey, were received today at 2:45 p.m. by
Secretary Morgenthan, with Mr. Jerome Frank, Chairman of the Securities
and Exchange Commission, by his side. Mrs. Klots and Megers. Cochran and
Butterworth were present. Mr. Whigham is the representative who has been
mentioned in our cablegrams, He is a partner in the banking firm of Robert
Fleming and Company, and & member of the Council of the Bank of England.
Carlyle Gifford 1s the head of & number of Scotch investment trusts.
After cordially greeting the visitore, the Secretary stated that he
would be glad to hear what they had to say. Mr. Whigham spoke very
directly. He stated that his Government desired to make purchases on this
market and wished to have the cash available to pay therefor. The Secretary
complimented such an honorable proposition. Mr. Whigham said that
the British estimate was that their dollar requirements for the next twelve
months would be approximately L100,000,000, or $400,000,000. It is their
desire to take early steps to arrange for at leget three months' require-
ments through liquidating holdings of dollar securities. He stated that
British holders had of their own initiative, and without supervision other
than that involved in obtaining permits, been disposing of such securities
since the var began, due partly to the rise in quotations on the American
market and partly to the cain by exchange with sterling depreciating. He
said that the returns to the British authorities were not sufficient to show
the exact magnitude of these transactions, since mimbers of abares were
reported, but not the value thereof. It was their estimate, however, that
these private sales had been around $1,000,000 per day, and had perhape
increased slightly the past few days. Mr. Frank confirmed that this vas
approximately his figure. Mr. Whigham pointed out that such sales for &
300-day year would provide $300,000,000 or 175,000,000.
Mr. Whigham said that the question arose as to how the British should
Not the securities, whether to borrow against them or to have them vonted
in the Government and then proceed to dispose of them.
The Secretary very politely, but definitely. explained to the visitors
that it Was the position of this Government that neither the Government nor
any of its agencies should make loans against the British dollar securities.
Mr. Frank added that it would take a. very brave government to envisage any
different position. Both Mr. Whigham and Mr. Gifford were quite frank in
stating that after reading the Neutrality Act, which was only on the vire when
they left Europe, they were necessarily and decidedly of the opinion that the
Regraded Unclassified
- 2 -
94
legislation forbade any loan by our Government against the securities. Con-
sequently. the idea of a loan Vas diecorded,
Mr. Whigham said the question then was whether or not his Government should
proceed to vest itself with the ownership of the securities which have been
registered, or a part thereof. Since 8. loan cannot be made against them, he 120
ciste that the securities be actually in the United States before he sells them.
It was the opinion of the two British banking representatives that they should
recommend to their Government that within the next few days, possibly a. week
from this coming Sunday, the Government take title to a portion of the registered
securities which should be ample to meet British dollar requirements for three
months, or a little over. Mr. Whigham explained that over 750,000 returns had
been made to the British Government, registering over 3,000 different types of
securities. It would be their recommendation, however, that only 53 different
securities be talcen over as the initial step. Most of these would be securities
which could be readily disposed of without weakening the market. Throughout the
conversation, the visitors stressed their desire to cooperate with the Treasury
and the Securities and Exchange Commission as completely as possible to guarantee
an orderly market and to insure the most profitable liquidation of the British
holdings.
In answer to the Secretary's inquiry as to just what the first step in tak-
ing title to the securities involved, Mr. Whigham explained that the Treasury
would simply announce that certain classes of securities would be taken over
entirely, and not pro rata. It was their understanding, however, that if they
desired they could call up certain amounts or blocks of any desired security
without taking over everything registered of this one issue. For instance, they
will hesitate to take over at one time all of the shares of one international
mining stock since for the British Government to acquire all of the shares thereof
registered with them would give the Government a secondary controlling interest
in this particular security, which would come under the regulations of Mr. Frank's
Commission. Furthermore, for it to be known that the British Government held
such an important part of the shares might react unfavorably on the market. Mr.
Whigham explained that when the vesting takes place, it will be necessary for
the Government to announce the names, but not the mumbers, of the shares that
are taken over and the per security price in sterling paid therefor, The alter-
native would be for the British Government to ask for & voluntary turning in of
securities which are now registered. It is the opinion of the British experte
that this step should not be risked, since there is no assurance that ample
shares would be surrendered or that the types most readily salable would be
received.
One highly technical market transaction, involving the British putting up
their check against future purchases of the shares which they intend to liquidate,
Vas mentioned, but Mr. Frank thought this would meet with many difficulties on our
market. The visitors agreed that this 1dea should be discarded. This measure
was not fully described in the meeting, but had been discussed serlier by Mr.
Butterworth with Messrs. Frank, Purcell and Bernstein.
The Secretary appreciated the attitude which his visitors ware taking and
reassured them of his desire and that of Mr. Frank to be at helpful as possible.
S5
3
Be told them that whenever they were ready to submit concrete proposals which
ve could discuss with then, he and Mr. Frank would be ready to go shead, and he
VAS quire that little time would be lost. Mr. Whigham stated that he Was ready
at the moment to go ahead. He said that he had come here for the sole purpose
of looking after this security business and was quite prepared to go into details
with Mr. Frank and with anyone the Secretary nominated. The Secretary told him
that he would be represented by Mr. Walter Stewart. (It was later decided, at
Mr. Stewart's request, that his role be that of Advisor, and that Mr. Cochran be
the Secretary's representative.) It was arranged that Mr. Whigham and Mr. Gifford
should meet tomorrow morning with Meesrs. Frank and Coohran. Mr. Butterworth
will meet with the group BE long a.s he is in this city. The matter WB left
therefore at that point. That is, the British group will recommend to their
Government that the Government vest ownership of fifty-three types of securities
in itself as early as possible and that the means for their disposal on this
market be discussed with the American authorities. Secretary Morgenthau let
them know that it was entirely acreeable to the President and himself that the
Bank of Montreal act as agent in this matter. Mr. Whigher said this was quite
convenient, since some of the securities to be disposed of already lodged with the
Bank of Montreal.
Before the meeting broke up, Mr. Frank raised the question of publicity.
He stated that his Commission had been pressed for information in regard to
security sales, particularly from abroad, and that en open letter had been
addressed to him implying criticism for his alleged failure to keep the public
informed of security sales from abroad, while he was seeking 60 much information
with respect to domestic market transactions. He thought a statement to the press
before the British began operations might be advisable, and placed his press
service at the visitors' disposal. Mr. Whigham had never talked to the press
end did not like to begin now, but would look into the matter. The Secretary
thought something might be gained by a clear statement of purpose which would
avoid speculation and the publishing of erronsous information. The visitors
were a little concerned, however, lest information might be released which
would complicate their undertaking,
It is understood that Mr. Pinsent will also meet with the British repre-
contatives when they consult with the American officials, and that he vill
probably carry on here 89 their representative when the banking experts are
in New York or elsewhere.
At one point in the conversation the visitors mentioned the estimate which
they had seen in the press of British sales of dollar securities representing
5% of the market trading at New York. Neither Mr. Frank nor Mr. Cochran could
confirm this, and both denied that their respective organizations had given out
such an estimate.
The meeting WBE very cordial in tone and the two British banking experts
gave B favorable impression, both for their knowledge of their field and their
honest approach to the problem.
It should be added that during the conversation Secretary Morgenthau in-
quired no to whether the British representatives present were limited to handling
the liquidation of indirect investments, or whether they were also authorized to
Regraded Unclassified
- 4 -
96
work with the disposal of indirect British investments. The British visitors
replied that they were dealing only with securities and had no instructions
with respect to liquidation of direct investments in this country.
BMT;
TREASURY DEPARTMENT
97
INTER OFFICE COMMUNICATION
DATE November 20, 1939
TO
Secretary Morgenthan
FROM Mr. Cochran
CONFIDENTIAL
At 12:00 noon yesterday, Sunday, Mr. Livesey telephoned me from the
State Department the substance of Mr. Gaston's cablegram #52 of November
18 sent from Gustamala, seeking instructions as to whether the United
States desiring to act 80 host for the meeting of Ministers of Finance in
1940. It was noted that Mr. Gaston was obliged to give & reply to the
conference on Monday. After a further conversation with Mr. Livesey, who
had passed the cablegram on to Dr. Feis and Acting Secretary Welles, we
agreed upon a tentative draft of & negative reply to Mr. Gaston. It was
understood that this message would not be sent until I had talked with the
Secretary.
At approximately 2:15 yesterday afternoon, I reached the Secretary by
telephone in Arisona. I told him of the tentative reply which had been
drawn up. I thought this would be satisfactory unless the United States
Treasury had & definite program which it wished to advance with the Latin-
American countries. If we had such a program, I thought it would be to
our advantage to have the next conference in Washington. The Secretary
stated that there was no such program. He reminded me of his lack of
faith in conferences; and approved the reply in a negative sense. I no-
cordingly telephoned Mr. Livesey and the reply went out in the form of
cablegram #54 dated November 19, 3:00 P.M.
J.M.L
Regraded Unclassified
S8
November 20, 1939
To:
The Secretary
From: Mr. Hanes
Herbert Feis is extremely anxious to see you before
noon today in regard to an important cable from Ambassador
Bullitt concerning the head of the Anglo-French purchasing
agency to be designated in this country.
We also have to make a decision and give Herbert Gaston
an answer in Guatemala before this afternoon.
It would be very helpful if you could see Feis before
lunch.
J.W.H.
TREASURY DEPARTMENT
S9
INTER OFFICE COMMUNICATION
DATE November 20, 1939
TO
Secretary Morgenthau
FROM
Mr. White
Subject: Utilization of our gold holdings
1. A plan for providing cash to lend abroad and to invest in
United States governments, rather cruday outlined in the appended
draft of a bill, is submitted as a suggestion of a possible means
to accomolish the following:
(a) provide ample funds to carry out our Latin American
program, to make BL loan to China, and to participate in
reconstruction loans elsewhere after hostilities cease --
all without additional appropriation of funds by Congress.
(b) make possible the use of our gold holdings, silver
seignorage and part of our Stabilization Fund without
increasing the volume of excess reserves.
(c) convert some of our gold holdings into interest bearing
assets, thereby reducing our tax burden.
(d) strengthen the financial position of the Treasury and
promote continuation of low interest rates.
(e) buy America back without endangering the stability of
our security markets.
(f) dissipate some of the criticism against Treasury gold
policy, and enhance the prestige of gold.
2. I suspect you will not care much for the plan, yet it may
suggest some related or alternate method of accomplishing the
above-mentioned objectives. The essentials of the plan could be
accomplished through simpler devices (outlined in an alternate
bill, appended) which you may deem less unattrative, but I feel
the 1dea needs to be given a gilt covering if it 18 to be at all
palatable to Congress and the public.
3. The plan presupposes that:
(a) Within the next couple of years our gold holdings will
have passed the $20 billion mark.
100
Secretary Morgenthau - 2
(b) There 1s very little prospect of a net outflow of gold
of large dimensions within the foreseeable future.
(c) A sum of $8 billion is more than adequate as a metallic
base for our domestic monetary needs under present statutory
requirements -- provided, of course, we have ample amounts
to meet any possible sustained adverse balance of payments
we are likely to experience in our international account.
(d) That portion of our gold holdings -- at least over $8
billion -- which serves no useful monetary purpose may be
justly regarded as a frozen asset though it may be rightly
assumed to have potential international purchasing power.
(If you are interested, the advantages and disadvantages of
the measures proposed can be submitted for discussion.)
H. D. White
101
November 18, 1939
The Gold Investment Act of 1940
Purposes of the Bill:
(a) To increase the earning capacity and usefulness of our gold
holdings;
(b) To help correct the maldistribution of the world's gold and
to strengthen the monetary systems of the rest of the world with-
out weakening our own;
(c) To promote foreign trade recovery and a higher national income
at home, and increased productivity abroad;
(d) To help stabilize foreign exchange rates and reduce artificial
barriers to the free movement of goods and capital among the nations
of the world;
(e) To help promote peace among nations and to facilitate post-war
reconstruction programs, and other purposes;
(f) To protect our domestic security market;
(g) To reduce the possibility of inilation.
1. There shall be created a special committee to be known as the "Gold
Investment Committee", consisting of the following members: (1) the Secre-
tary of the Treasury, who shall act as chairman of the committee; (2) the
Chairman of the Board of Governors of the Federal Reserve System; (3) the
Director of the Budget; (4) the Chairman of the Securities and Exchange
Commission; (5) the Chairman of the National Resources Committee; (6)
Administration of the leading agencies.
The duties of the committee shall be to advise the Secretary of the
Treasury in the performance of his duties pertinent to the bill, to
initiate and execute such investigation and studies as are necessary to
properly carry out the purposes of the bill, and to prepare reports for
the President on matters dealt with by the committee.
2. The Secretary of the Treasury shall be authorized to issue, with the
approval of the President and of the "Gold Investment Committee" Gold
Notes against the following collateral in such amounts and at such times
as he deems in the public interest, provided the amount issued shall at
the time of issue not exceed the purchase price of the collateral, and
provided further that the total issue shall not exceed $20 billion:
Unclassified
- 2 -
102
(a) Gold at monetary value, which shall constitute at least
40 percent of the face value of Gold Notes outstanding;
(b) Interest-bearing bonds of foreign governments which are
not in defsult to the United States Government, and which are
not prohibited from borrowing in the United States under terms
of the Neutrality Act; securities of American corporations held
by residents of foreign countries or by foreign corporations or
by foreign governments, provided the securities are listed on
the New York Stock or Curb Exchange, and provided further that
the purchase price shall not be in excess of 5 percent less than
the quoted market price;
(a) Interest-bearing bonds of the United States Goverment hav-
ing naturity in excess of five years from the date of purchase.
3. The Gold Notes issued under the authority of this Act shall have the
attributes now possessed by gold certificates with respect to the constitu-
tion of reserves against Federal Reserve Notes and deposits, and converti-
oility into gold bullion. Any restrictions upon the holding and use of
gold certificates shall apply also to Gold Notes.
4. The Secretary of the Treasury shall be authorized, with the approval
of the Committee and of the President of the United States, to exchange
Gold Notes for gold certificates (or certificate credits) outstanding,
provided however, that the amount of gold certificates (or gold certifi-
cato credits) outstanding shall not be reduced below 38 billion. Gold
bullion held against gold certificates so exchanged shall bei covered Into
a gold note fund, to be held as collateral against Gold Notes.
5. The Secretary of the Treasury shall be authorized to purchase with
the approval of the President and the Gold Investment Committee the inter-
est bearing bonds eligible as collateral for Gold notes in such amounts,
at such times, and at such rates as he deems to be in the public interest,
and to pay for such bonds out of any funds in the Treasury not otherwise
appropriated, provided however, that the amounts purchased shall not exceed
the amount of Gold Notes which may be issued against them as collateral.
6. The bonds acquired by the Gold Investment Committee shall be carried
in a Gold Note Fund at their purchase price.
7. The Secretary of the Treasury shall be authorized to empower a committee
set up for that purpose by the Securities and Exchange Commission to liqui-
date American stocks and bonds as have been acquired under the authority
of this Act, except U. S. government bonds, as the Secretary of the Treasury
with the approval of the Gold Investment Committee shall deen in the public
interest, provided the special committee entrusted with the sale of the
securities shall be given a period of 10 years within which to sell the
securities.
Regraded Unclassified
- 3 -
103
8. The Secretary of the Treasury shall be authorized to make such
regulations as are necessary to prohibit the acquisition by foreigners
of any securities identical with those held by the Gold Investment
Committee except from the Committee via their selected broker and only
at the market price.
9. The interest received on any investments shall be permitted to
accumulate a fund to be known as the Gold Investment Fund until it has
reached the sum of $200 million. Any losses on investments that will
be sustained shall be deducted from this fund at the end of each year
in which the losses are actually sustained. Any gains that shall accrue
shall be added to this fund. Interest and/or gains received in excess
of 3200 million shall becovered into the General Fund of the Treasury
as a miscellaneous receipt.
10. The Secretary of the Treasury as Chairman of the Gold Investment
Committee shall have published monthly & statement showing operations
undertaken during the prior month and a statement of the account of the
Gold Investment Fund. Once a year there shall be published a record of
the meetings held by the Gold Investment Committee, which shall include
all decisions made and any minority held by members of the Committee.
11. Congress shall appropriate $100,000 for the expenses of the Committee
the first year and shall authorize the expenditure thereafter from the
income of the fund of an annual fund not in excess of $100,000 a year to
carry out the purposes of this bill.
12. The Federal Reserve Board shall have the power, at their discretion
but with the approval of the Secretary of the Treasury, to increase the
proportion of reserves against deposits required to be maintained with
the Federal Reserve banks by members of the Federal Reserve System by
percentages sufficient to offset the sum of Gold Notes, ggold certificates,
and silver certificates outstanding in excess of a combined total of
(18 billion.
104
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE November 20, 1939
TO
Secretary Morgenthau
FROM
Mr. White
Subject: Gold and Capital Movements in the First Ten Weeks of
War 1/
1. There has been a net outflow of capital from the United States
of $25 million since the declaration of war. In the month of
September there was a net inflow of $93 million but in October
the movement was reversed and a net outflow of $91 million
occurred. In the first week in November there was a further out-
flow of $27 million.
Net Capital Inflow
(Net outflow appears as (-))
lst Week
September October in November Total
(In millions)
Short-term banking
funds 2/
$ 75.5
$- 63.2
$-21.0
$
8.7
Domestic security
transactions
- 1.3
- 40.5
- 7.9
- 49.7
Foreign security
transactions
19.1
11.5
1.8
32.4
Total
$ 93.3
$- 90.9
$- 27.1
$- 24.7
2. Dollar balances of belligerent countries with the exception of
United Kingdom declined $92 million -- United Kingdom balances
rose $12 million. Dollar balances of non-belligerent countries
with the exception of Latin American countries increased $63
million.
Prepared by J. S. Hooker.
Including brokerage balances.
105
Secretary Morgenthau - 2
The important changes by countries were 88 follows:
Official
Private
Total
Balances
Balances
Balances
(In millions of dollars)
Belligerent countries:
United Kingdom
+ 141
- 129
+ 12
France
- 18
- 40
- 58
Canada
+ 10
- 42
- 32
Germany
0
- 2
-
2
Non-Belligerent C antries:
Italy
0
+ 19
+ 19
Netherlands
+
2
+ 24
+ 26
Switzerland
+ 21
+ 14
+ 35
Other Europe
+ 67
- 31
+ 36
Latin America
-
5
- 32
- 37
Far East
+
4
+ 19
+ 23
All other
0
- 1
- 1
3. Foreign net sales of domestic securities have totalled $50
million since the war started. The net sales for British account
since August 30 have amounted to $79 million and for Canadian
account $11 million. Dutch and Swiss accounts have purchased
over $25 million of domestic securities.
The net purchases or sales (-) by countries were as follows:
Belligerent Countries
Other Countries
(In millions)
United Kingdom
$- 78.6
Italy
$+ .3
France
+ 2.2
Netherlands
+ 8.1
Canada
- 10.5
Switzerland
+ 17.4
Germany
- .6
Other Europe
+ 3.1
Latin America
+ 2.7
Far East
+ 9.0
All Other
- 2.8
106
Secretary Morgenthau - 3
4. Gold held under earmark in the United States has declined
$82 million since the outbreak of war. The important changes
by countries were as follows:
Belligerent countries
Other countries
France - $-45 million
Belgium
$ -20 million
United Kingdom, Germany
Netherlands
-27
III
and Canada had no gold
Sweden
-23
#
under earmark during
Switzerland
-26
#
this period.
Argentina
+34
.
Brazil
+ 7 -
Thailand
+ 9 #
All other
+ 9 II
5. Net gold imports into the United States adjusted for ear-
marking amounted to $331 million in September, $139 million in
October and $34 million in the first week in November, a total
of $504 million since the outbreak of hostilities.
Net gold imports (adjusted for earmarking) by countries were
as follows: (Net exports appear as (-))
(In millions of dollars)
1st Week
September
October
in November
Total
Belligerent countries
United Kingdom
$ 170
$ 11
$ 3
$184
France
-
35
10
45
Canada
121
9
0
130
Australia
5
5
8
18
Other countries
Belgium
1
17
2
20
Netherlande
28
5
0
33
Switzerland
13
10
10
33
Italy
0
6
0
6
Sweden
- 2
25
o
23
Japan
13
13
5
31
Argentina
-25
- 6
-
2
- 33
Other
7
9
- 2
14
Total
$331
$139
$34
$504
107
PARAPHRASE OF TELEGRAM RECEIVED
FROM: American Embassy, Berlin
NO.: 2087
DATE: November 20, 1939, 9 a.m.
My 2004, November 9, 5 p.m.
The bill portfolio of the Reichsbank increased
261,000,000 marks during the second week of November to
a total of 9,886,000,000 marks. Holdings of eligible
securities on the other hand declined from 1,218,000,000
marks on November 7 to 1,127,000,000 on November 15.
Miscellaneous assets declined by 395,000,000 marks to
1,233,000,000 marks representing a total decrease of
641,000,000 marks since the previous ultimo which cor-
responds quite closely to the rise of 616,000,000 marks
in the last week of November.
Reichsbank notes in circulation declined from
10,583,000,000 marks on November 7 to 10,345,000,000
marks on November 15. Coincidentally with the appear-
ance of the Reichsbank mid-month statement the Rentenbank,
a Reichsbank subsidiary, published its October report
which showed a further issuance of 116,000,000 marks of
Rentenbank notes during the month. The total circulation
of Rentenbank currency on October 31 was 970,000,000 marks
of which, however, 168,000,000 marks were held by the
Reichsbank.
108
-2-
During the second week of November there was again
an increase in the Reichsbank's holding of silver coin,
from 345,000,000 marks to 373,000,000 marks. Besides the
action of the Reichsbank in partially retiring silver
currency from circulation and replacing it by Rentenbank
notes of small denomination, it has been announced by
the Reich Treasury that after January 1, 1940 the "old
style" two-mark silver pieces which were issued mostly
prior to 1933 would no longer be legal tender. The new
issues have a slightly smaller silver content than the
old issue coins. It is stated in the announcement of
the Reich Treasury, however, that the majority of the
two-mark pieces which are still in circulation is made
up of issues which will still be legal tender.
Repeat to Treasury.
KIRK
PAY
EA:EB
109
CJ
GRAY
PARIS
Dated November 20, 1939
Rec'd 3:50 p.m.
Secretary of State,
Washington.
2793, November 20, 6 p.m.
FOR THE TREASURY.
Under a convention between the state and the amorti-
zation fund dated November 15 which will bE approved by
Article XVII of the Finance Law (1940 budget) it is provided
that in addition to the amortization charges on the public
debt already assumed by the amortization fund (which as you
are aware is the recipient of revenues derived from the
match and tobacco monopolies and inheritance taxes) the
latter will assume certain additional amortization charges.
Those carried for the current year totalled 4,750,000,000
francs (page 6, despatch No. 3631, January 10, 1939): the
amortization fund will now assume amortization charges on the
5% forty year loan issued last May (10,685,000,000 francs
outstanding), the 4% thirty year conversion loan issued in
Switzerland and Holland in January (3,583,000,000 francs
outstanding), and the 3 3/4% six year loan issued in
Holland and Bwitzerland last May (2,030,000,000 francs
outstanding). (END SECTION ONE)
BULLITT
NPL:EMB
110
CJ
GRAY
PARIS
Dated November 20, 1939
Rec'd 5:23 p.m.
Secretary of State,
Washington.
2793, November 20, 6 p.m. (SECTION TWO).
With reference to Paragraph Two of our telegram 2499,
October 17, 10 p.m., this morning's JOURNAL OFFICIEL carries
mornson
the appointment of M. (?) "Comptroller General First Class
of the Army" to approve payments in the United States.
This morning's AGENCE ECONOMIQUE ET FINANCIERE quotes
with pleasure a recent financial news article reporting that
the B.I.S. has decided not to transfer gold valued at
6600,000 belonging to the Czachoslovak National Bank in
spite of the Reichsbank's request. The article states that
a "high official" of the Czech Bank who succeeded in leaving
Prague for Basel has protested against such transfer Energe-
tically in the name of that bank and that the B.I.3. is con-
sequently taking cognizance of his protest.
The securities market after opening firm declined on
profit taking and most rente issues and variable revenue
shares closed with moderate losses. Official foreign EX-
change rates were unchanged. (END OF MESSAGE)
BULLITT
EMB:NPL
Regraded Unclassified
111
PARAPHRASE OF TELEGRAM SENT
TO: American Embassy, Paris
NO.: 1417
DATE: November 20, 1939, 6 p.m.
STRICTLY CONFIDENTIAL FOR THE AMBASSADOR
Refer to Department's no. 2783 of November 18, 1939.
Purvis' appointment would be agreeable to U. 8;
Daladier may be assured of that.
He can count certainly on every branch of the U.S.
Government to cooperate with him in every proper and
feasible way. Exactly what kind of cooperation should
be feasible or necessary will be quite impossible to
determine until specific matters are presented for
consideration, as you will understand.
WELLES
Acting
EA:MSG:EB
77(e)
Noted
FEDERAL RESERVE BANK
OF NEW YORK
E. 1. Cochram
112
FFICE CORRESPONDENCE
DATE November 20, 1989.
CONFIDENTIAL FILES
SUBJECT: TELEPHONE CONVERSATION WITH
L. W. Knoke
BANK OF ENGLAND.
DM
I called Mr. Bolton at 10:20 today to give him my reply
to the questions asked last Friday in connection with the clearing
of planes bought by the British Air Ministry and paid for, which
are now ready for shipment. I told his that we had gotten in
touch with the Custom House and mumorated to Bolton the papers
necessary. I added that copies of them are now on the way to
London by this morning's clipper. I explained that according to
what we had been able to find out at the Custom House, there seemed
to be no delay in shipment of any such planes and that at any rate
the requirements were simple and could undoubtedly be complied with
without a hitch once the shipper knew what was expected of his and
had been able to set up the necessary machinery.
I asked Bolton that Mr. Watson's address was in Buenos
Aires and explained why ve needed the information. Belton will
cable us.
I mentioned that the post office hed notified us that
hereafter all mail for Great Britain will go on what they call
"confidential sailings" which seant that we would no longer know
by what boat a certain letter had gone forward and could not, there-
fore, trace it in the future unless the mail was forwarded by clipper.
Would the Bank of England be willing to choose that route at their
expense? Bolton will let as know.
Regraded Unclassified
14 6TM 3-37
FEDERAL RESERVE BANK
113
OF NEW YORK
FFICE CORRESPONDENCE
DATE November 20, 1939.
CONFIDENTIAL FILES
SUBJECT: TELEPHONE CONVERSATION WITE
L. V. Knoke
DM
BANK OF HEGLAND.
2
There was little news from Burope, Belton said. People
in England, he thought, were expecting the worst to happen in
Holland and Belgium; the decision to invade had only been deferred
by Hitler and something was sure to break out there sooner or later.
LUK:KW
11-20-39
file
114
TO TATE
ONLY
CONNENT
will
115
SUMMARY
Classification of Materials & Supplies
Price
I. Automotive Equipment
$ 16,748,000
II. Gasoline and Lubricants
11,452,300
III. Ferrous and Non-Ferrous Metals
24,683,300
IV. Electrical Equipment
5,600,000
V. Medical Supplies
3,600,000
VI. Textile Materials
3,440,000
VII. General Machinery
2,151,000
VIII. Railway Equipment
4,000,000
IX. Machinery for Tin Mining
3,000,000
$ 74,674,600
Regraded Unclassified
116
TENTATIVE LIST OF ARTICLES TO BE PURCHASED
BY UNIVERSAL TRADING CORPORATION
I. Automotive Equipment
No. of Units
Unit Price
Total Price
average
1. Trucks, including
9,500
$1,600.00
$15,200,000
chassis,bodies,
tires and parts.
2. Repair Shops
10
$40,000.00
$ 400,000
3. Mobile Machine Shope
100
$ 5,880.00
$ 588,000
4. Mototcycles,inoluding
800
$ 4 730.00
$ 560,000
tires and parts
$16,748,000
Regraded Unclassified
117
II. Gasoline and Lubricants
No.ofUnite
Unit Price
Total Price
Aviation Gasoline
3,000,000
0 .25/8/
6 750,000
gal.
Automobile Gasoline
40,000,000
. .20/5.
$8,000,000
(for the supply of 9500
gal.
trucks for 6 to 7 months)
Motor oil
1,750,000
. .43/8.
$ 752,500
à
. Gear 011
200,000
e .47/8.
$ 94,000
gal.
. Marine Engine Oil
300,000
0 37/8.
$ 111,000
à
Engine 011
500,000
e ,48/g.
$ 240,000
gal.
. Cylinder Oil
200,000
@ .34/8.
s 68,000
gal.
. Diesel Oil light
15,000
e 853/2
$ 795,000
tons
Diesel 011 heavy
5,000
0 845/T
$ 225,000
tons
. Kerosene
100,000
e ,18/54
8 18,000
à
. Brake 011s
20,000
@ .50/g.
s 10,000
à
. Grease
500,000
. .73
8 365,000
lb.
Brake Fluid
14,000
e 1.70
$ 23,800
gal.
$11,452,300
118
III. Ferrons and Non-Ferrous Vetale,
Kind
Quantity
Value
Steel
28,090 tone
s 3,007,800
Copper
11,500 .
4,500,000
Lead
6,000 #
720,000
Zino
3,000 #
600,000
Brass
7,490 .
2,621,500
Steel Tubes
2,400 #
384,000
Pig Iron
31,000 #
930,000
High Speed Tool Steel
2,500 #
2,500,000
Alumipum
200 #
140,000
Materials for Steel Plant
43,000
#
5,050,000
Chemicals
2,500 #
500,000
Finplate Steel Sheets
2,300 #
375,000
Working Tools
3,000 #
360,000
Rubber Sheete
150 .
75,000
Refractories, Ferro-alloys,etc
3,000
#
1,600,000
Replacements for Machinery
Parts
1,020,000
Miscellaneous
300,000
$24,683,300
IV. Electric Equipment
119
adio Equipment and Materials.
No. of Units
Unit Price
Total Price
1. 1 KW Short Wave and Medium Wave Radio
Telephone and Telegraph Mobile Stations
100
$5,150.00
$515,000.00
2. 15 W Short Wave Radio Telephone and
Telegraph Portable Sets.
500
725.00
362,500.00
3. 10 W Ultra Short Wave Radio Telephone
Portable Sets.
1,000
575.00
575,000.00
4. Radio Communication System for cen-
tralized control of truck traffic along
Highways.
100,000.00
5. Component Parts, vacuum tubes, resist-
ances, condensers, transformers, meters,
instruments, wires, etc.
200,000.00
6. Power Supplies, dry cells, storage bat-
teries, dynamotors, engine-generators, etc.
145,000.00
7. Materials, insulators, fibre, metals, etc.
90,000.00
E. Tools
12,500.00
2,000,000.00
Telephone Equipment
No. of Units
Unit Price
Total Price
1. Magneto Desk Telephones
20,000
Set
$ 18.00
$360,000.00
2. Magneto Field Telephones
30,000
Set
26.00
780,000.00
3. Magneto Indoor Switchboards
:
2,500
Set
100.00
250,000.00
4. Magneto Field Switchbaards
2,500
Set
120.00
300,000.00
Field Cable
350,000,000
Ft.
3.00 per
1,050,000.00
thousand feet.
5. Galvanized Iron Wires
7,000,000
Lb.
4.00 per
hundred lbs.
280,000.00
7. Copper Wires
1,400,000
lb.
16.00 per
hundred lbs.
224,000.00
8. Accessories
356,000.00
$ 3,600,000.00
TOTAL
$ 5,600,000.00
120
V. Medical Supplies
No. of Units
Unit Price
Total Price
Pharmaceutical Products, inclu-
ding Chemicals
310,000 Kg.
Tablets
180,000 tins
varies ac-
Aethyl Chloride
1,000,000 c.e.
cording to
Necarsphenamina
60,000
different
$1,600,000
tubes
products.
Parraffinum Molle
800 Barrels
Surgical Instruments and Sup-
plies, including
Adhesive Plaster and Tapes
2,070,000 rolls
Catgut (1/2 ->
4,000
dos.
Scalpels
#
Scissors
6,000 dos.
Forceps
#
Amputating & Resetting sete
400 sets
X-Ray Machines
40 sets
-
$2,000,000
Power Plants
40 sets
Microscopes
100 sets
Autoclave
20 sets
Syringes & Needles
12,000 sets
Dressing Instruments
9,000 sets
Compression Tubes
4,000 pes,
Rubber Gloves
20,000 pcs.
Rubber Tubing
1800 lbs.
Thermostat
1,000 dos.
Medical Chests
14 sets
Total
$3,600,000
121
VI. Textile Materials.
No. of United
Unit Price
Total Price
1. Khaki Cloth
6,000,000
$ .148
6 900,000
yards
2. Blankets
4,000,000
pieces
8 .63
$ 2,540,000
$3,440,000
122
VII. General Vachinery
No.of Units
Unit Price
Total Price
General Machinery and Material
including drills, cass, wood-
working machinery, Diesel en-
give, misc. mechanice tools,
forging material, oil can tin,
mule carts and tires.
Prices vary according to
$ 380,000
different items.
Highways Construction Mach 1- 1-
nery, including Pumps & Parts
40
$300
$ 12,000
Drill Rods
1000 tone
4#/1b.
$ 1001000
Striking Hammers
46,700
$ .60
8 28,000
Transits
20
8750
$ 15,000
Reinforcing Bar
3,500 tons
$ .03/lb
$ $240,000
Rock Drill Machines
40
$8,150
$ 326,000
Road Building Machanes,
such as roller, shov-
els, scrapers
50
average
$16,000
$ 800,000
$1,901,000
Absolute Alcohol Plants
2
$125,000
250,000
(for fuel use)
$2,151,000
123
VIII. RAILWAY EQUIPMENT
No.of Units
Unit Price
Total Price
1. 12 Kg. narrow gauge rails with
steel sleepers and accessories
500 miles
$2,000/mile
$1,000,000
2. a. Diesel Locomotives, 75 H.P.
100
$7,000
700,000
b. Diesel Locomotives, 40 H.P.
200
$4,000
800,000
3. Care, 7 Tons
1,000
8 200
200,000
4. Signals
200,000
5. Railroad shop equipment and
accessories
200,000
6. Bridges
900,000
$4,000,000
124
II. Equipment for Tin Mining.
Total Price
kining Equipment and Machinery
for the improvement of the
existing tin mines
....... estimated at
$ 3,000,000
KANSU
TSINGHAI
the
KILLING
HONAN
0001
she
KIANGSU
SHENSI
ANHWEI
HUPEH
YANN
CHEMITU
SIKANG
SZECHWAN
-
CHEKIANG
/
NAMCHANG
THANKING
i
HUNAN
$
a
KIANGSI
BRILINAT
FUKIEN
KWEICHOW
-
KNOMATERS
E
KUNNING
ILLNOW
KWANGTUNG
YUNNAN
KWANOSI
-
CANTEN
nome
BURMA
->
1000
-
MANDALRY
MAP OF HIGHWAYS AND
RAILROADS IN
SOUTH-WESTERN CHINA
LEGEND:
HISHWAY COMPLETED
1 go
7115 completed
INTERNATIONAL
INDO-CHINA
PROVINCIAL SOUNDRY
HANAN
SCALE E 114500,000 "
Regraded Unclassified
126
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE
TO
Dr. Harry D. White
NOV 20 1939
FROM
E. H. Foley, Jr.
You have asked whether the Reconstruction Finance Corporation
would have authority to make loans to an American corporation for the
purpose of purchasing Chinese tin and reselling such tin in the American
market.
Section 5(d) of the Reconstruction Finance Corporation Act au-
thorizes the Corporation "to purchase the securities and obligations of,
and to make loans to, any business enterprise when capital or credit, at
prevailing rates for the character of loan applied for, is not otherwise
available: Provided, That all such purchases of such securities and ob-
ligations and all such loans shall be, in the opinion of the Board of
Directors of such sound value, or so secured as reasonably to assure re-
tirement or repayment; may be made or effected either directly or in
cooperation with banks or other lending institutions through agreements
to participate or by the purchase of participations, or otherwise; shall
be made only when, in the opinion of the Board of Directors, the business
enterprise is solved; and shall be made under such terms, conditions, and
restrictions as the Corporation may determine: ***,*
Under the broad authorisation conferred by this section but
subject to the provisos contained therein, the Reconstruction Finance
Corporation would have authority to make loans to an American corporation
for the purposes indicated in your request.
9.11.76
a
was
w
128
MEMORANDUM
November 20, 1939
Repeated inquiries have been received in the past few weeks
from China regarding the progress of the proposed loan against tin.
On the China side, plans have been completed to make shipments by avail-
able steamers regularly to the United States and the first shipment of
500 tons has already commenced its journey from Yunnan. In the meantime,
due to the war situation in Europe, several European countries have
approached China with the object of securing this tin and, naturally,
these negotiations are being held up until a decision is arrived at on
this side.
China is the only important producer of tin which has not
participated in the international tin agreement. Without being subject
to export quote control, China is free to increase her production and
export in order to meet the increasing needs of the United States. Annual
consumption of tin by various industries in the United States varied from
48,860 long tons in 1938 to 87,000 tons in 1929. Although the proposed
shipment of Chinese tine of 10,000 tons a year only fulfills a small
portion of the United States requirement, it is important to have such an
independent source of supply in view of the war situation and control of
the international tin agreement.
Recent developments in the Far East due to the landing of
Japanese forces near Pakhoi threaten to interfere with some of China's few
remaining means of communication with the outside world. As to how serious
this threat is depends on further developments. The mere landing of enemy
Regraded Unclassified
-2-
129
troops near Pakhoi creates no serious situation as this has been
anticipated for some time and communications with that part of the sea-
coast were cut off by the Chinese authorities long ago. The Japanese,
in landing troops near Pakhoi, may have two objectives in view. They
may advance north-westward and attempt to cut the Kwangsi motor road
connection with Indo-China near the international border. According to
the opinion of some military experts, accomplishment will be most diffi-
cult as the mountainous terrain (known as "10,000 Huge Mountains") is
right in the path and it will take at least 120,000 troops to undertake
the expedition. So, if movement is along this direction the objective
may be to occupy enough territory in order to safely establish an air
field from which land planes may be dispatched to do damage to trucks and
roads in the Provinces of Kwangsi, Kweichow and Yunnan. The second
objective may be to move north-eastward and advance to Huen-sien, Tatang
and Liuchow to cut off the interprovincial motor roads and to threaten the
rear of the Chinese military base at Hengyang. This move will be more
significant in a military sense but besides the difficult mountainous
terrain near the Kwangtung-Kwangsi border, Chinese fortifications along this
route are more formidable. Such a move will necessitate a tremendous
military force and will take many months to operate. It is, therefore,
safe to say that while the Pakhoi landing does add another threat to South-
western transportation, actual danger is not yet at hand.
China's determination to resist to the last man will not be
affected by this landing. There are twenty arsenals located in safe
localities turning out munitions and light arms every day, but materials
for their manufacture must be imported in sufficient quantities without
Regraded Unclassified
-3-
130
interruption, and heavy arms and munitions needed for replenishments
must be supplied from time to time. Heavy field guns and aeroplane
bombers in sufficient numbers, which are absolutely essential in driving
the enemy off the occupied soil and which China is so sadly lacking,
must be supplied in some way.
Besides, numerous materials and supplies which are essential
for the continuation of China's national existence must be continuously
supplied. The loan of $25,000,000.00 against tung oil has been allocated
and practically used up. Purchases made have been of diversified lines
and widely distributed among various industries and among many states.
Tung oil importation and distribution by the Universal Trading Corporation
has proven to be of real benefit to the paint, varnish and other wood oil
using industries as openly recognized by the National Paint, Varnish and
Lacquer Association of the United States.
A new loan on tin to be concluded at this time will not only
supply the urgently needed new funds for the continuation of purchases
of necessary materials to the mutual benefit of United States manufacturers,
producers and China, but may serve as encouragement of immeasurable value
in helping the morale of the Chinese people at a time when it would appear
that other democratic countries are too busy or indifferent to China's
struggle against agression.
131
November 21, 1939
10:30 a.m.
Conference in Secretary's Office, attended by: Secretary Morgenthau,
the Canadian Minister to the United States, Sir Herbert Marler,
Mr. Towers of the Bank of Canada, Mr. Viner, and Mr. White.
The Canadian Minister said he had nothing special to talk a bout
except to report that the man coming from England had been delayed and
would come later.
Mr. Towers stated he was leaving for England in a few days by
Clipper.
The Secretary suggested that if Mr. Towers had time he could
confer with Mr. Viner and Mr. White on Canadian-dollar exchange matters
and that if ater the discussion there were some questions they wished
to raise with the Secretary he would be glad to see them the next
morning. Mr. Towers indicated he would be glad to do SO.
Subsequently a conference was held in Mr. Viner's office, with
Mr. Towers and Mr. White present, and numerous points of detail were
cleared up. It was agreed at the meeting that it would not be neces-
sary to see the Secretary again at that time.
HOW
132
Conference in Secretary's Office, November 2, 1939
Present: Secretary Morgenthau, Mr. Straessle of Switzerland,
and Mr. White
Mr. Straessle said that the burden of mobilization in Switzerland
was very heavy. Switzerland had a half million men under arms, which
in a country with a population of four million was obviously very high;
that the mobilization was costing the Swiss Government about 5 million
Swiss france 8. day.
Mr. Straessle stated: That Switzerland was greatly strengthening
its defenses against a possible German attack and felt that in the
event Germany did attack, Switzerland could delay the Germen advance
for a week or ten days but 80 long as Italy remained neutral they
felt reasonably safe, He also said that air attacks against Switzerland
were very hasardous because of the mountainous character of the country.
He stated that exports to France and England were continuing
without difficulty and that the Swiss watch manufacturers were making
timing instruments for shells for the Allies instead of watches; that
the Allies were watching very carefully the raw materials entering
Switzerland to make certain that none of the exports to Germany would
contain imported raw materials.
He said there was considerable hoarding of Swiss franc notes and
some hoarding of United States currency. He also expressed the view
that before long England would have to depreciate her currency much
more in order to acquire foreign exchange unless the United States ex-
tended sufficient credits to make that unnecessary.
The Secretary asked him if he would confer with Captain Puleston,
who was called in, and relay to him his views on the military situation
in Switzerland. Mr. Straessle said he would be glad to do so and he
went with Captain Puleston to the latter's office.
HDW
133
November 21, 1939.
My dear Mr. Secretary:
The receipt is acknowledged of your letter dated November 18,
1939. (co). in which you inform me of your proposal that a meeting
of the National Funitions Centrol Board be hold as 2130 p.m. on
Tuesday, November 28, 1939. in room 360. Department of State Build-
ing. for the purpose of adopting rules of procedure to govern the
issuance of licenses for the exportation of tin-plate screp during
the calendar year 1940.
In accerdance with your request that I designate to
net as By representative at this meeting, I have had pleasure is
selecting M. Basil Harris, Assistant to the Secretary and Commie-
siener of Customs. I have communicated this information by sole-
phone to Mr. Jeseph c. Green of your Department.
Sincerely yours,
(Signed) H. Morgenthau, Jr.
Secretary of the freasury.
the Honorable
Summer Welloo,
Acting Secretary of State.
11/21/39
By hand
134
November 21, 1939.
Dear Mr. Harris:
I hereby designate you to not is By name and stead
at the meeting of the National Munitions Control Board
to be hold - November 28, 1939.
Very truly yours,
(Signed) H. Morgenthau, Jr.
Secretary of the Treasury.
Mr. Basil Harris,
Assistant to the Secretary,
Treasury Department.
File to Mr. Thompson
HMG/rom
Diven to me. to be given
11/21/39
to Mr. Hannis in person
Regraded Unclassified
- TICIAL COMMUNICATIONS TO
THE SECRETARY OF STATE
WASHINGTON, D.C.
135
DEPARTMENT OF STATE
WASHINGTON
In reply refer to
Co
November 18, 1939
My dear Mr. Secretary:
I propose that a meeting of the National Munitions
Control Board be held at 2:30 p.m. on Tuesday, November 28,
1939, in room 360, Department of State Building, for the
purpose of adopting rules of procedure to govern the issu-
ance of licenses for the exportation of tin-plate scrap
during the calendar year 1940. It is my intention to
recommend, for approval at this meeting, the adoption of
rules of procedure for 1940 similar to those now in effect.
A draft of the proposed rules is enclosed for your consid-
eration.
I intend to designate Mr. Joseph C. Green, Executive
Secretary of the Board, to act in my name and stead at
this meeting. I should appreciate it if you would com-
municate informally to Mr. Green the name of the person
whom you will designate to act as your representative.
Similar
The Honorable
Henry Morgenthau, Jr.,
Secretary of the Treasury.
136
-2-
Similar letters have been addressed to the other
members of the National Munitions Control Board.
Sincerel yours,
Acting Secretary Dally
Enclosure:
Draft of proposed rules
of procedure
137
DRAFT OF PROPOSED RULES OF PROCEDURE TO GOVERN
THE ISSUANCE OF LICENSES FOR THE EXPORTATION OF
TIN-PLATE SCRAP DURING THE CALENDAR YEAR 1940
In furtherance of the purposes of the Act of Congress
approved February 15, 1936, which, ae stated therein, are:
"to protect, preserve, and develop domestic sources
of tin, to restrain the depletion of domestic re-
serves of tin-bearing materials, and to lessen the
present costly and dangerously dependent position
of the United States with respect to resources of
tin,"
and in order to assure in the public interest the fair and
equitable consideration referred to in Section 2 of the
Act which reads as follows:
"There shall not be exported from the United
States after the expiration of sixty days from the
enactment of this Act any tin-plate scrap, except
upon license issued by the President of the United
States. The President is authorized to grant 11-
censes upon such conditions and regulations as he
may find necessary to assure in the public interest
fair and equitable consideration to all producers
of this commodity."
The Secretary of State, acting under and by virtue
of the authority vested in him by Executive Order No. 7297
of February 16, 1936, hereby prescribes, by and with the
advice and consent of the National Munitions Control Board,
the following rules of procedure to govern the issuance
of licenses for the exportation of tin-plate scrap during
the calendar year 1940 under the regulations governing
the export of that commodity prescribed on December 7,
1936:
(1)
REQUESTS FOR ALLOTMENTS. Each producer of
tin-plate scrap who desires to export that com-
modity during the calendar year 1940, 8.6 well
as every producer whose scrap 16 sold to and
ultimately exported by third parties, should
eubmit to the Secretary of State not later than
December 20, 1939, & request for an allotment,
specifying in long tone the quantity of tin-
plate scrap which he desires to export or to
sell for export between January 1 and Decem-
ber 31, 1940.
Regraded Unclassified
138
-2-
(2)
ORIGINAL ALLOTMENTS.- Allotments will be
granted to producers of tin-plate scrap only
and will be assigned to producers whose applios=
tions have been submitted in accordance with
the provisions of paragraph (1). Allotments
will be based on the individual producer's re-
quest therefor with the provision that no allot-
ment of more than 25 long tone shall exceed in
amount 20 percent of the quantity of tin-plate
sorao produced by him during the calendar year
1938. Requests for allotments of 25 long tone or
less may be granted in full, without reference
to the quantity of tin-plate scrap produced dur-
ing the calendar year 1938, provided the producer
concerned presents convineing evidence, in the
form of e sworn statement, establishing that he
will, BO far a.6 can be foreseen, during the oalendar
year 1940, produce at least the equivalent of the
allotment which he requests. No allotment assigned
under the provisions of this paragraph to any one
producer, including his affiliated or associated
companies, shall exceed 2,000 long tons.
(3)
SWORN STATEMENT OF 1938 PRODUCTION.- No pro-
ducer shall be eligible to receive an allotment
under the provisions of paragraph (2) until the
Secretary of State has received from him a sworn
statement setting forth the quantity of tin-
plate scrap, in long tons, produced by him dur-
ing the calendar year 1938. Sworn statements
submitted under the provisions of this paragraph
shall include the name and address of the producer,
the name and location of each factory, and the
quantity of tin-plate scrap produced at each
factory.
(4)
APPORTIONMENT OF TOTAL ALLOTMENTS.- In the
event that it shall be necessary, in order that
the quantity of tin-plate scran to be exported
during the calendar year 1940 shall not exceed
the total figure to be agreed upon by the National
Munitions Control Board, such total shall be
apportioned among the applicants for allotments
on the basie of 1938 production, with the pro-
vision that no allotment shallexceed the quantity
specified in the individual producer's request
therefor. If an apportionment 18 unnecessary,
allotments will be granted in the order of the
receipt of requests therefor until the total figure
referred to has been exhausted.
(5)
ADDITIONAL ALLOTMENTS. - In the event that
conditions then existing shall varrant such
action, additional allotments may be granted
after July 1, 1940, upon such conditions as may
be agreed upon by the National Munitions Control
Board and announced by the Secretary of State.
(6)
Regraded Unclassified
39
(6)
FAIR AND EQUITABLE CONSIDERATION. An allot-
ment may be granted at any time during the
calender year 1940, without regard to previous
assignmente of allotments, to any producer of
tin-plate scran who presents to the National
Munitions Control Board, through the Secretary
of State, convincing evidence that he 18 not
receiving the fair andequitable consideration
referred to in Section 2 of the Act approved
February 15, 1936. Allotments assigned under
the provisions of this paragraph shall be granted
in such quentities as will assure in the public
interest fair and eduitable consideration to the
producer concerned, All applications for allot-
ments under the provisions of this paragraph
shall be accompanied by sworn statements, in
quintuplicate, setting forth complete and detailed
information in support thereof.
(7)
LICENSES, No tin-plate scran may be emorted
unless a license authorizing such export shall
have been issued by the Secretary of State. 11-
censes may be issued to any producer who has been
assigned An allotment or to any other person
or persons authorized by such producer to
export tin-plate scran under his allotment, nro-
vided that licensee will not be issued during
the first six months of the calender year for
the exportation of tin-plate scran in quantities
in excess of 50 percent of any allotment of 50
long tone or more.
(8)
LICENSES ISSUED 00 PERSONS OTHER THAN PRODUCERS
OF TIN-PLATE SCRAP. Any producer who has received
an allotment may, if be so desires, authorize
any other person or persone to anply for license
to export under his allotment tin-plate scrap
produced At his factory or factories, The Depart-
ment of State should be informed promotly of
such authorizations when made. Persons other
than producers should, in submitting applications
for license, assure themselves that an allotment
has been assigned covering the particular tin-
plate scrap which they desire to export and they
should include in the application a statement
setting forth the name and address of the fectory
or factories at which the tin-plate scrap was
produced and the quantity produced at each factory.
(9)
GENERAL STATEMENT,- As stated in paragraph (3)
of the regulations governing the exportation of
tin-plate scrap, the Secretary of State will
issue emort licenses to cover proposed shipmente
of tin-plate scran when, in the opinion of the
National Munitions Control Board, the issuance
of such licenses may be consistent with the Dur-
Doses of the Act approved February 15, 1936. The
National
Regraded Unclassified
140
National Munitions Control Board may revoke, cancel,
or modify at any time allotments or licenses granted
under the rules of procedure herein announced
and may modify these rules of procedure whenever,
in its opinion, such action 1s required in order
to carry out the purposes of the Act.
The allotments under the above-mentioned rules of pro-
cedure and those hereinafter authorized will be assigned
under the conditions set forth below, which conditions are
to remain confidential unless circumstances shall warrant
the publication by the Secretary of State of pertinent pro-
visions thereof:
The National Munitions Control Board agrees that
the total allotments assigned under the provisions of
paragraphs (2), (4), and (5) of the rules of procedure
set forth above for the exportation of tin-plate scrap
during the calendar year 1940 shall not exceed 15,000
long tons. If, on July 1, 1940, there shall remain an
unassigned balance of this maximum tonnage, the Secre-
tary of State 16 hereby authorized to assign, under
the provisions of paragraph (5) of the rules of proce-
dure, additional allotments until such maximum tonnage
shell have been reached, subject to the following
conditions:
(1)
These additional allotments shall be granted
to producers of tin-plate scrap only and shall
be assigned on or after July 1, 1940, in the
order of the receipt of requests therefor, pro-
vided that, in the event that it shall be neces-
sary in order that the quantity of tin-plate
scrap to be exported during the calendar year
1940 shall not exceed the total figure agreed
upon by the National Munitions Control Board,
the available balance of such total shall be
apportioned among the applicants on the basis
of their production during the first six
months of 1940. Allotments will be based on
the individual producer's request therefor
with the provision that no allotment of more
than 25 long tons shall exceed in amount 20
percent of the quantity of tin-plate scrap
produced by him during the first six months
of the calendar year 1940. No allotment as-
signed under the provisions of this paragraph
to any one producer, including his affiliated
or associated companies, shall exceed 1,000
long tons. Requests for allotments of 25 long
tone or less may be granted in full, subject
to the qualifications set forth under paragraph
(2) below.
(2)
Regraded Unclassified
141
(2)
No producer shall be eligible to receive
an allotment under the provisions of para-
graph (5) of the rules of procedure until
the Secretary of State has received from him
a sworn statement setting forth the quantity
of tin-plate scrap, in long tons, produced
by him during the first six months of the
calendar year 1940, provided that requests
for 25 long tons or less may be granted in
full, without reference to the quantity of
tin-plate scrap produced during the first six
months of 1940, if the producer concerned pro-
sents convincing evidence, in the form of a
sworn statement, establishing that he will,
80 far as can be foreseen, produce during the
calendar year 1940 at least the equivalent
of the allotment requested by him in excess
of the total of any allotments previously as-
signed to him for export during the calendar
year 1940. Sworn statements submitted under
the provisions of this paragraph shall include
the name and address of the producer, the
name and location of each factory, and the
quantity of tin-plate scrap produced at each
factory.
Regraded Unclassified
142
HSM
PLAIN
London
Dated November 21, 1939
Rec'd 12:48 D. m,
Secretary of State,
Washington.
2414, November 21,
FOR TREASURY.
With further reference to my 2305 of November 8,
Sir John Simon, in reply to a question in the House of
Commons, announced today that the time has not arrived
for the issuance of a loan on the open market but that
two securities will be on sale as from tomorrow morning
designed to enable all citizens EVEN of small means to
make their contribution to the war effort.
The first will be a new issue of national savings
certificates to replace the current issue. The purchase
price of the new certificates will be unchanged at 15s.,
but the interest will bE slightly increased so that the
certificates will accumulate to 17s.6d. after five years
and to 20s.6d. after the full period of ten years. (The
price of the current issue on sale since March 1935 has
been 15s. maturing at 10 years at 20s. The price quoted
in telegram No. 2305 of November 8 was that of the 1922
issue.)
The
Regraded Unclassified
hsm -2- No. 2414, November 21, from London
143
The second security will be known as a defence bond
and will be purchasable in units of L5, It will be on
sale tomorrow and until further notice and issued at par
to bear interest at 3 per cent per annum, It will be
repayable BEVEN years from the date of purchase at a
premium of h1 per gent if not cashed before. In view
of the special privileges attached to theae bonds no
individual will bE allowed to hold more than 61000 but
he may purchase up to 61000 worth of the bonds in addi-
tion to holding the maximum of 500 savings certificates,
KENNEDY
RR
BECEINED
PARAPHRASE OF TELEGRAM RECEIVED
144
FROM: American Embassy, Berlin
NO.: 2102
DATE: November 21, 1939, 4 p.m.
Reference 1a made to my telegram no. 1740 of October
18, 2 p.m.
There will soon be brought to a close, according to
officials of the Reich, the first stage of the trade nego-
tiations between Germany and Russia, which have been going
on since September 28 when notes were exchanged between the
two countries' Foreign Ministers making provision for the
elaboration of a German-Russian economic program. It is
the hope of the German Government, however, that following
this first stage there will be standing consultation and
cooperation with a view toward improving transportation and
exchanges between Germany and Russia.
Bo far, according to one of the German delegates, the
Russian negotiators have demonstrated a willingness to
accommodate. The German delegation was agreeably surprised
by this attitude since they had expected that the negotia-
tions would be difficult and that there would be a great
deal of haggling over quantities and prices. A member of
the Embassy staff was told by Ambassador Ritter, who 1e in
charge of the German delegation, that he had not expected
such great results and that 80 far it had been agreed by
the
145
-2-
the Russians that "several million marks" worth of raw
materials, including foodstuffs, would be supplied by
them.
The German press has announced that BO far the U.S.S.R.
has agreed to deliver one million tone of feed grain (prin-
cipally barley) to Germany. (Reference is made to my
telegram no. 1870 of October 28, 12 M.) A member of the
Embassy staff was informed by Wiehl, who is in the Foreign
Office and 1s nominally the head of the trade negotiations
although it seems that with reference to some matters he
18 now subordinate to Ritter who was his predecessor, that
it had also been agreed that Russia was to furnish one
million tons of petroleum products. Wiehl stated that
this was a preliminary amount which would be increased
later. It 18 also known that Germany gained another
advantage in the Russian Government's agreement to accord
German exports to and imports from Iran, Afghanistan and
the Far East free transit over the territory of the U.S.S.R.
It has been announced by Ostwirtschaft, which is a semi-
official publication having to do with the eastern trade
of Germany, that the Russian trade representative in
Berlin will issue special licenses for transit to and from
these countries.
We are also informed that it had been agreed by the
Soviet
146
Soviet Trade Commission that during the next year it would
furnish 100,000 tons of cotton to Germany. Obviously it
is necessary to confirm this report because normally
Soviet exports of cotton are several times smaller than
this figure.
Although, according to German officials' statements,
the Russian trade negotiations have been more successful
than the German authorities had anticipated, it is stated
by sources in touch with these negotiations that Germany
does not have reliable indications or assurances that the
Soviet has adopted as a permanent policy the expansion of
trade with the Reich. It is stated by these sources that
although at the present time Russia finds that economically
it is advantageous or necessary to buy certain equipment
from Germany (principally machinery but also armor plate
strips, artillery, and submarine naval equipment, accord-
ing to some reports), obviously the real reasons for the
new willingness on the part of Russia to trade with Germany
are political and that it is therefore highly uncertain
whether the present situation will continue.
Please inform Treasury.
KIRK
EA:EB
TREASURY DEPARTMENT
PROCUREMENT DIVISION
of THE DIRECTOR
WASHINGTON
November 21, 1939
MEMORANDUM FOR THE SECRETARY
on November 13th Secretary Welles of the State Department phoned me concerning
orders of duralumin placed by the French with the Aluminum Company of America,
Re told me that the President had directed him to contact me with a view to
seeing whether deliveries of duralumin to the French Government could not be
expedited.
That same day I talked with Mr. Wilber of the Aluminum Company of America, and
without disclosing the purpose of my visit, learned from him that the indicated
requirements of American manufacturers for the next year would permit of an ap-
preciable tonnage of duralumin being made available for other uses,
The result of my visit to Mr. Wilber was reported orally to Secretary Welles,
and he subsequently informed me that the President desired that the Quartermaster
`eneral of the Army, the Paymaster General of the Navy, and the Director of Pro-
curement confer with a view to seeing what, if anything, might be done to assist
the French.
This conference was held yesterday and developed the fact that the presently
indicated requirements through 1940, when compared with the total output of the
Aluminum Company of America, would permit of that company's furnishing an ap-
preciable tonnage of duralumin to the French Government. I talked with Secretary
Welles by phone, told him the result of the conversation and suggested to him
that I further contact Mr. Wilber to discuss the question of speeding up
deliveries to the French. Mr. Welles told me that he thought that before I did
this the matter should be cleared with the President, and I yesterday afternoon
ao informed General Watson.
last evening the President called me by phone and told me to get in touch with
1/r. Wilber to see what, if anything, could be done to help the French.
This morning I spent over two hours with Mr. Wilber, and during the course of
our conference he talked at length with Pittsburgh concerning the possible
speeding up of French deliveries. After this conversation he informed ne that
they are entirely sympathetic with the French wants, that everything possible
would be done to male deliveries at the earliest possible date to the French
Government, but that the Aluminum Company of America did not feel that their
inventories should be reduced to a. point where they could not make emergency
Regraded Unclassified
-2-
148
deliveries when called upon by the aviation industry of this country; that
they were putting an additional plant of theirs into operation and that after
the first of January it was believed that deliveries to the French could be
appreciably stepped up, but that it was not possible at this time to state in
what quantities deliveries could be made. He further advised me that, in the
event there is any change in the situation, he would so inform me.
Director My of Procurement
149
PARTIAL PARAPHRASE OF TELEGRAM RECEIVED
FROM: American Embassy, Paris
NO.:
2801
DATE: November 21, 1939, 6 p.m.
SECTIONS ONE, TWO, THREE AND FOUR
FOR TREASURY.
This morning we had a call from Royal Tyler, who
was on his way to spend a few days in England. He said
that he had just come back from Geneva and stated that
although the passage of time has inevitably resulted in
a lessening of tension, the Swiss (and especially the
military authorities) are still very fearful that their
country will be invaded by Germany. However, it 18
reported by the Bwiss that Germany has made no unusual
troop concentrations near the Swiss frontier, and it 1e
their belief (which we believe to be an optimistic view
on their part) that the Germans would need approximately
twenty divisions in order to go through Switzerland. There
1s no doubt about the fact that if invaded, the Swiss would
fight. Tyler states that it is not too late for invasion
of the area in the north concerned, from the standpoint
of the season of the year.
With reference to the Balkans Tyler said it 1a his
belief that in return for better treatment of the Hungarian
minority
Regraded Unclassified
-2-
150
minority in Transylvania, Hungary would "accept" her
present Rumanian frontier (partly because of the appear-
ance of Russia as a new neighbor). (Of course Tyler is
most familiar with Hungary since he spent fourteen years
in the capacity of financial adviser for the so-called
League of Nations reconstruction loan.) This acceptance
on the part of Hungary would facilitate efforts which are
being made to form & more or less compact neutral bloo in
the Balkans. However, in view of increasing Russian
influence in Bulgaria as a result of Stalin's recent
"triumphs", Tyler 1s not sure of the attitude of that
country toward such efforts.
It 18 Tyler's belief that it will be found necessary
by the French exchange control authorities as time goes
on to subject the franc accounts of foreigners in France
to a rather strict control or supervision. An increasing
number of people, he said, will find that the complete
liberty of action which now exists to deposit francs to
accounts of foreigners provides & loophole, and more and
more people will take advantage of that loophole. With
reference to this point we are inclined to agree with
Tyler, but as yet there 16 little evidence that this
practice has been indulged in to any great extent,
although this particular loophole was discovered some
time
Regraded Unclassified
151
time ago (our telegram no. 2253 of September 29, 7 p.m.,
for example). Tyler also said that in Hungary an "escape
value" had been found in applying exchange control. This
"escape value" Was the fact that there were no restric-
tions on the importation of pengos into the country. It
prevented the black market from running away, and he had
found it particularly helpful.
We remarked that up to now, at least technically,
France does not restrict the importation of france, although
as with all other currencies and means of payment, francs
must be declared when they are brought into France. (It
is presumed that some investigation would be made of the
source if any one person brought in a quantity of French
banknotes which seemed excessive.)
It was pointed out by Tyler that a comparable flexi-
bility does not exist in Germany, Italy, Spain and other
countries where control systems exist. He thought it was
an example of the intelligent manner in which exchange
control is being administered by the French.
(END SECTION FOUR)
BULLITT
EA:EB
CJ
GRAY
PARIS
152
Dated November 21, 1939
Rec'd 7:07 p.m.
Secretary of State,
Washington.
2801, November 21, 6 p.m. (SECTION FIVE)
After a weak opening the securities market firmed today
and most variable revenue securities registered small gains.
Rente issues advanced fractionally on the improved firmness
of the franc in NEW York. The two Exchange guaranty issues
of 1925 and 1937 also continued their advance moving up
2.95 and 2 francs respectively. The market indices of the
AGENCE ECONOMIQUE (based on the End of December, 1930) show
French rentes on November 20 at 81.3 as against 79.7 on
September 4; the exchange guaranty issues at 139.7 as
against 114.2. The general stock Exchange market index is
104.1 as against 89.7 on September 4.
BULLITT
EMB
REB
GRAY
153
Paris
Dated November 21, 1939
Rec'd 7:17 P. me
Secretary of State,
Washington.
2801, November 21, 6 P. m. (SECTION SIX)
The Belgian National Bank statement for the week
Ending November 16 shows gold holdings at 18,037,000,000
up 7.5 million; foreign Exchange holdings down 323.5
million to 3,602,000,000; domestic commercial advances
up 403,000,000 to 3,699,000,000, and commercial
advances abroad down 224,000 to 18,313,000. Advances on
public funds are up 315.5 million to 1,076,000,000.
Note circulation increased 363,000,000 to 27,558,000,000.
The Treasury account is down 1,3 million to 5.9 million.
Gold coverage is 63.40 as against 64.20 the previous
WEEK,
It is reported that Belgian Treasury notes in the
amount of 35,000,000 florins issued in the Netherlands
will bE renewed for a further three months period from
February 2. The maximum term of the issue is one year
which Expires on May 1, 1940.
(END OF MESSAGE)
BULLITT
NPL
TREASURY DEPARTMENT
10SA
Office of the Secretary
Secret Service Division
MEMORANDUM
November 21, 1939
154
To:
Mrs. Klotz
From:
Chief Wilson
For your information we attach
schedule of the President's trip to
Warm Springs, Georgia, on Tuesday,
November 21, and Wednesday, November
22.
CONFIDENTIAL
deenting
Trip of the President
-to-
255
Warm Springs, Georgia,
Tuesday, November 21, 1939.
Lv. Washington.. (Southern Railroed)
3:00 pame
Wednesday, November 22, 1939.
Ar. Atlanta, Ga
8:00 a.m.e.t.
Lv. Atlanta, Ga. (Southern Railroad)
7:10 n.m.c.t.
Ar. Warm Springs, GR
10:00 B.M.
Members of the party:
The President.
Mrs. Roosevelt.
General E. N. Watson.
Admiral Ross T. MoIntire.
Captain D. J. Callaghan.
Miss M. A. LeHand.
Mr. William D. Hassett.
Miss Grace Tully.
Mr. H. M. Kannee.
Miss Roberta Barrows.
Miss Toinette Bachelder.
Miss Louise Hachmeister.
Mr. George A. Fox.
Mr. Dewey E. Long.
Mr. Leo A. de Waard.
Secret Service Agents.
Newspaper ment
Mr. George E. Durno,
International News Service.
Mr. Douglas B. Cornell,
The Associated Pross.
Mr. Thomas F. Reynolds,
The United Press.
Mr. Felix Belair,
The Now York Timos.
Mr. Walter Trohen,
The Chicago Tribune.
Mr. Wm. C. Murphy,
The Philadolphia Inquiror.
Mr. Coleman Jones,
The New York Herald Tribune.
Mr. Fred Pabley,
The New York Daily Nows.
Picture ment
Mr. George Skadding,
Associated Press Photos.
Mr. F. I. Thompson,
International News Photos.
Mr. John Tondra,
Fox Movietone News.
Mr. B. M. Williams,
Fox Moviotone News.
Paramount News.
Broadcasting representatives:
Mr. Carleton Smith,
National Broadcasting Co.
Mr. A. B. Johnson,
National Broadcasting Co.
Mr. Granville Klinck,
Columbia Broadcasting System.
Tolegraph representatives:
Mr.c. S. Linkins,
Western Union Telograph Co.
Western Union Telegraph Co.
Mr.J. N. Willis,
Postal Telegraph Company,
Mr. W. C. Spencer, D.P.A.,
Southern Railroad,
In charge of Transportation.
Regraded Unclassified
156
RE BRITISH SECURITIES
November 21, 1939.
3:40 p.m.
Present:
Mr. Hanes
Mr. Frank
Mr. Stewart
Mr. Cochran
Mr. Foley
H.M.Jr:
Mr. Frank wanted to tell me what happened this
morning.
Frank:
Supposing I briefly indicate it. We met two
British representatives this morning. They
repeated substantially what they said yesterday
as to their intentions. They widened their list
to 62, as I recall it now, selected stocks.
Stewart:
Sixty-seven.
Frank:
Sixty-seven, on either the close of the market on
Saturday night or Sunday
H.M.Jr:
of this week?
Frank:
of this week. They advanced it a week. They
are proposing - recommending that the British
Government, pursuant to their statutory announce-
ment, take over those securities at a price to be
named but the amount of the securities will not be
disclosed so that the publication will simply say
the following stocks were taken over. Then as
to the securities they do not take over, the British
nationals will continue to have the right to sell
on permit. They propose to sell these securities
that they are taking over now at the rate of, as
near as they can keep it up, a million three & day.
It has been about a million a day and they are
going to step it up slightly, but they will subtract
from that amount the amount that is procured by
British nationals selling from the securities not
taken over. They will try to make it about a million
three if the market can stand it.
Foley:
Would that be in addition to the ordinary turnover?
Frank:
No, they are stepping it up about three hundred
thousand. What they are taking over will be more
than enough - it will be about 200 million, as I
recall, their first takeover, and that will be
more than enough to run them for a four-months
Regraded Unclassified
157
- 2 -
period. They wanted to widen the list a little.
Hanes:
Did I understand you to say they are going to
pay 8. given price and state the price?
Frank:
That has to be named.
Hanes:
It is an actual purchase?
Frank:
Yes, they take title. They are going to try to
avoid - they were warned that they should not have
it transferred to the name of the British Govern-
ment or anybody who could be identified because it
would be a little easier to trace it in the market.
They stress the fact that their desire to have
publicity as to the amount they have got and how
much they are selling avoided, because as the war
progresses they are fearful that if Germany knows
they are getting to the bottom of their barrel,
that will just encourage the Germans, so they have
enjoined us to do everything we could to avoid any
publicity.
Our suggestion, I should say, or at least as B. result
of our comments, they are recommending that there
be released in London at the same time as this
formal statutory announcement B. short press release
from the British Treasury which will say that they
are taking these over. That is pursuant to the
policy heretofore announced. The statement would
say that it 18 to the interest of ordinary marketing
and that it is not anticipated that the volume of
sales will be substantially greater than heretofore.
They have fussed around a lot about the release.
After you (Stewart) left, they read us the proposed
cable and they said something to the effect that
they had shown us the statement they are cabling
and we had no objection. They wanted to put in
that we approved, and I said, "For heaven's sako
don't do that, but I okayed, "We have no objection."
Several questions were raised. One is, you (H.M.Jr.)
will recall that you cabled the Ambassador suggesting
among other things that arrangements be made so that
the Treasury and SEC would receive daily reports
from them of their activities. That is correct,
isn't it, Mr. Cochran?
Regraded Unclassified
158
- 3 -
Cochran:
Yes. And they were surprised to hear that; they
said they hadn't heard of that. So we informed
them of it and they are cabling for permission to
do that. The cable, as it went, was broader than
I had recognized. It said not only that we wanted
to get reports of what they had done, daily, but
what they intended to do. I am not so sure we
need that latter or that we want it.
H.M.Jr:
I don't even remember It.
Frank:
I am not sure we even want to know what they are
going to do, but we need to know what they have
done, daily, because they might have knocked our
market off and we would want to know what was
happening to the market. If we knew it in advance,
we might fix it up, but that 1s an awful responsi-
bility to take.
N.M.Jr:
I would rather not have it.
Stewart:
Their cable said their plans. We do not want to
know exactly what they are going to do, but we do
want to know 1f 1t is their intention over EL period
of time to raise & certain sum of money.
Frank:
But we don't want to know from day to day what they
want to do.
H.M.Jr:
Did you tell them that?
Frank:
No, I didn't.
H.M.Jr:
They are coming in at 4:30.
Frank:
If you agree with me that we don't want to know in
advance their day to day sales but we do want to
know if at the end of the day or the close of the
market - there is one thing we didn't discuss that
occurred to me afterward. I don't know what you
can do about this, but in line with the policy of
having the British Government turn in funds into
the Federal Reserve so no bank can take advantage
of it, it seems to me there is the danger, doesn't
it to you, John, that if they don't handle their
sales very carefully some particular houses in
New York are going to have an awful inside track
here. It occurred to me afterward that maybe we
Regraded Unclassified
159
- 4
could help them on shuffling their cards around
80 that nobody would know it. I think it can
be done but it will have to be done very care-
fully because otherwise some one or two houses
down there may know from day to day what the
British will do and tip that off to their cus-
tomers and if it ever came out it would be a
scandal and it couldn't do anything but hurt the
British Government from their own point of view
that they ought not to get in that position.
I think some warning and assistance on the me-
chanics is indicated.
Then they did say something while I wasn't there -
they said it to Purcell - they recognized that
the Government couldn't make them a loan and they
recognized - before you gentlemen came in we dis-
cussed that - that no private agency or bank or
person could make them e loan, but they did ask
whether the Bank of Montreal couldn't make them
a loan and the Bank of Montreal - and it was im-
plied in that apparently that the Bank of Montreal
in turn would be a borrower. Well, certainly if
the Bank of Montreal were borrowing on those
British securities, I would think that would
violate everything, wouldn't it, Ed? In other
words, if those securities are owned by the British
Government and the Bank of Montreal 18 a depository,
no matter what hokus pokus you use, it is the
British Government borrowing and I would think
they would violate the Johnson Act and the Neutrality
Act.
Now, 1f the Bank of Montreal borrows on open account,
on its own credit, whether that would violate the
"eutrality Act, I wouldn't know, or whether that
would be an agency for the British Government.
Stewart:
Did the two men say that or did Pinsent say that?
It doesn't sound like the two.
Frank:
Maybe it was Pinsent. I liked them. They went
right to the point and they knew what their rights
were. I didn't hear it. It sounds more like Pin-
sent.
Hanes:
That was suggested one time before, Jerry, and I
think we all agreed that that would be doing by
180
- 5 -
indirection what they can't do by direction.
Foley:
Who would they borrow from?
Hanes:
What they had in mind was this, that they would
deposit the securities in the Bank of Montreal
and a loan would be made to the British Govern-
ment against those securities and in turn the
Bank of Montreal would re-hypothecate those
securities in New York.
Frank:
I think if they start monkeying with any of that
sort of thing
Hanes:
We said that was just out.
Frank:
Well now, it does leave us with - we are going
to have a hot potato, there isn't any question,
on the question of publicity. I mean we are
going to get crowded. I don't think I spoke to
you about this, John. I spoke to the Secretary
about it the other day. You saw Leslie Gould's
letter, didn't you?
Hanes:
I heard about, I didn't see it.
Frank:
Leslie Gould called on us to give out the figures.
Somebody - I don't believe it was over here and I am
afraid it was some leak in our place and I can't
find out where - gave out 6. figure two days later
that their average had been 82 percent of the
total volume and that has caused all kinds of dis-
cussion, you may have noticed.
Hanes:
I was thinking about the time when we appeared
before the Weights, Coinage and Measures Committee,
when they asked us what percentage of American trans-
actions were involved in the foreign field end Harry
White said not more than 10 percent at any time
and it averaged between 5 and 10 percent. It may
be they picked that out of there and said 88.
Frank:
No, because 8 is darn near right.
Hanes:
I don't think we did it,
Cochran:
No, I checked up with all that crowd.
Regraded Unclassified
161
- 6 -
Frank:
I don't know who did it, but it has caused all
kinds of talk in the papers and has increased
the pressure because they say, "Well, 82 per-
cent on the selling side," and when and why and
BO forth. I know we are going to be subjected
to pressure for release of those figures. We
will have to stand up and take it, I think.
Hanes:
Jerry, it hasn't been 8.8 much as 88 on the selling
side, has it?
Frank:
No, 83 percent of the total. But then the New
York Times came out and said, "81 percent of what,
on the buying or the selling, or how is it divided,"
and so on.
Stewart:
But you are in a position, so far as they are con-
cerned, aren't you, to give them assurance that
the figures they give you will not be made public?
Frank:
We will have to, but then the pressure will be on
us to put them out.
Stewart:
The only way in which they appear is in the Treasury
bulletin three months later. I don't think we have
quite finished our staff work on this. I would
like to talk with Purcell, for example, about it.
I rather warned these men. They raised the question
with you. I thought we wanted to do some more work
on that.
E.M.Jr:
Cochran, Stewart and John, will you three gentlemen
be here? They are coming in at 4:30. The only
thing I have to say is, "I talked it over with
Mr. Frank and he has authorized me to say, for the
both of us, that we don't want what they are going
to do, only what they have done."
Frank:
And we would like that daily.
Cochran:
But you don't want the securities described, just
the total in dollars?
Frank:
It might be advisable to have it divided into stocks
and bonds. Are they taking any bonds?
Cochran:
Yes.
162
- 7 -
Frank:
Don't you think they should divide it that way?
Hanes:
I think 80.
Cochran:
But not identify the specific issue.
Frank:
No.
183
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE November 21, 1939.
TO
Secretary Morgenthau
FROM Mr. Cochran
As arranged yesterday afternoon, there was a meeting held in Mr. Frank's
office this morning at 10:00 o'olock, which lasted until 1100 o'clock. Those
present were Messrs. Frank, Loughbridge and Purcell of the Securities and
Exchange Commission, Messrs. Whigham and Gifford from London, Mr. Finsent from
the British Embassy and Mesare. Stewart, Cochran and Butterworth of the Treasury.
Mr. Whigham summarized for the benefit of those who were not present at
yesterday's meeting the conversation that took place and the pointe that were
decided upon at that time. In brief, the British representatives were of the
opinion that they should discard other possible alternatives, and cable s.
recommendation to the Government that it take title to & certain mumber of
British owned dollar securities and proceed with the ordinary liquidation of
the securities once they are received in America. Since yesterday's meeting,
the British had decided to add fourteen securities to the list of fifty-three,
making & total of sixty-seven to which title should be acquired through the
initial operation. It was the idea that better maneuvering could be accomplished
with 8. larger selection and lot of securities, and that it might be well to call
up A second lot before this first is entirely disposed of.
It WB8 explained that fifteen days notice would have to be given the holders
for turning over and receiving payment from the Government for the securities.
Since not more than 50% of the first lot of securities are actually in the United
States, the arrival of the portion from London would have to be awaited before
the plan for their disposal could be fully implimented.
The British representatives were drafting a cable to their Government carry-
ing the above recommendation and advising that the securities should be taken
over this week-end, with the formal announcement thereof published by Monday
morning. The question of giving out an accompanying statement in explanation of
the procedure was also considered and the British planned to comminicate their
ideas on this point to the British Government by cable. It see understood that
there would be no statement by American authorities, but that the statement made
available in Ingland should also be released simultaneously in the United States,
presumably through the British official representatives.
It was explained that the British representatives would like to be liquidat-
ing dollar securities on an average of $1,300,000 per day, as compared with the
average of approximately $1,000,000.1 par day at which rate private holders have
been selling their dollar securities, under official permit, since the opening
of the war. The securities which will be taken over, will be taken over entirely,
so that there will be no further sales in these specific issues by private
parties. No effort will be made to check private liquidation of securities, but
154
- 2 -
cimply an effort to ration total males, both official and private, at around
$1,300,000 per day. The speed of liquidation would vary, of course, with the
condition of the market. The British naturally do not want to depress the
mrket.
The estimate of Mr. Whighen of the total dollar securities registered with
the Bank of England WSD $1,000,000,000. Re has two lists compromising the 10-
portant part of such holdings. & third containing the least marketable
securities, many of which are in mall lots, is now enroute to this country.
It is the plan to dispose of the securities in normal trading practice, at
least the readily salable ones on the first list. Where exceedingly large
blocks are held, taking title thereto will be postponed, and they may be taken
over in installmente when the time comes, BO that the British Government will
not at any time have 6. controlling interest in any security. It is envisaged
that with the securities more difficult to sell there my be some direct are
rangement made between the sellere and the companies whose securities are for
sale, Similarly, special purchasers may be found for exceptional blocks or
odd lote of securities without their being offered on the regular market.
Messrs. Frank and Purcell laid considerable stress upon the question of
publicity, arguing that they wight be pressed to divulge figures with respect
to sales of foreign owned dollar securities. The British were disturbed lest
this might involve giving out information of value to the enemy. It NES as-
cided to go further into this point.
Mr. Stewart undertook to consult with the representatives further as to
the procedure that should be followed by the British in transferring proceeds
of security sales from the Bank of Montreal to the Federal Reserve Bank of
New York,
In reply to our question, the British representatives stated that decision
as to whether sales of gold from the British official reserves should be inter-
spersed with sales of dollar securities rested with the British authorities in
London. This WES 8 matter of high policy to be determined by the British
Government. It we obviously the opinion of Messrs. Whighen and Gifford that
the sale of dollar securities should now be pushed, if the market proved at all
receptive, and that the gold reserve should be hold.
The British are anxious to got the sale of their securities under my be-
fore the French Government starts disposing officially of French owned dollar
securities. We gave to the British the latest word as to the delay on the part
of the French Government in requisitioning such securities. They cannot now be
taken over by the French Government before the middle of January.
At 4:30 this afternoon, Mogors. Whigham, Gifford and Pinsent were received
by the Secretary, after be had had a preliminary talk with Mr. Frank. Mossrs.
Hanes, Stewart and Cochran also were present. Mr. Whigham summarized to the
Secretary the developments of this forenoon and seemed gratified at the rapid
progress which had been mde, Mr. Pinsent, through Mr. Stewart, raised the
question of publicity, and indicated British concern lest information night be
released which would let the Germans know when the British were approaching the
- 3 -
165
end of their resources. The Secretary replied that he could speak for the
Administration in promising that no information given by the British Treasury
to the American Treasury in confidence would be disclosed in any manner that
was not first approved of by the British. This met satisfactorily the position
of the British.
The Secretary informed his visitors that, in agreement with Mr. Frank, he
was not disposed to ask the British to keep us informed of their plans, but did
desire to receive a daily statement of transactions, including the total sales,
segregating bonds from shares, and giving the net dollar value and number of
each, without describing the securities themselves, The British were cabling for
approval of this system. Mr. Stewart offered the suggestion that the British
representatives give such information to Mr. Pinsent, who would pass it on to
Mr. Cochran, who, in turn, would transmit it to some named officer in the Securities
and Exchange Commission.
The Secretary reiterated his desire to cooperate with the British represen-
tatives, indicating his hope that they call on him at least once each week, parti-
cularly during the first few weeks the plan is being developed and put into
operation.
November 22, 1939.
Mr. Frank talked with the Secretary alone this morning. The Secretary
definitely objected to Mr. Frank's suggestion that a big investment trust take
over the British dollar securities. Mr. Frank also reiterated his worry about
being pressed to give out figures on foreign sales. The Secretary maintained the
position that security sales figures should only be given out with the customary
lag which the Treasury has established. The Secretary yielded to Mr. Frank's
suggestion that he, Mr. Frank, if necessary, let some friendly newspaper man know
that it is & matter of Treasury policy that the lag be preserved.
TREASURY DEPARTMENT
166
INTER OFFICE COMMUNICATION
DATE November 21, 1939
TO
Secretary Morgmathan
FROM Mr. Cochran
The foreign exchange market vas extremely quiet although the volume of sterling
transactions vas substantial. Sterling opened at 3.93-1/2 and shortly after noon,
it strengthened to 3.94-1/2. The rate remained fairly steady for the balance of
the day and closed at 3.94-1/8.
Sales of spot sterling by the four reporting banks and the Federal Reserve
Bank of New York totaled 1797,000, from the following sources:
By commercial concerns
1 174,000
By foreign banks (Far East, Burope and South America)
& 573,000
By Federal Reserve Bank of New York (for Norway)
is 50,000
Total
20 797,000
Purchases of spot sterling amounted to $564,000, as indicated below:
By commercial concerns
i 327,000
By foreign banks (Far East, Europe and South America)
1 237,000
Total
1 564,000
The Guaranty Trust Company sold cotten bills amounting to 29,000 to the
British Control at the official rate of 4.02.
The belga was strong today. It closed at .1647 in New York yesterday and
vas quoted at .1654-1/4 in Amsterdam this morning. After the opening in New York,
the rate continued to improve to .1660 and it subsequently closed at .1661.
It vas reported that the improvement in the rate was due to the purchasing of
spot belgas by Amsterdam in order to provide cover for contracts maturing at the
end of this month.
The rates for the other important currencies were fairly steady.
lio purchases of sales of gold were consumated by us today.
The Federal Reserve Bank of New York reported to us the following shipments
of goldi
$3,134,000 from the Fetherlands, shipped by the Netherlands Bank, consigned to the
Federal Reserve Bank of New York, to be earwarked for the account of the
Netberlands Bank.
1,438,000 from England, shipped by Eleimwort, Sons & Co., consigned to Goldman Bachs
& Co., liev York, for sale to the U. S. Assey Office at You York.
896,000 from India, shipped by the Compteir National d'Escompte, consigned to the
French American Banking Corporation, New York, for sale to the U. 5. Assay
Office at New York.
5,468,000 Total
CONFIDENTIAL
167
- 2 -
Vo received a cable from the American Consul at Hong Kong that the following
shipments of gold were made on the 88 President Coolidge leaving Hong Kong on
November 18;
$136,000 shipped " the Chase Bank, consigned to Chase National Bank,
San Francisco.
116,000 shipped by the National City Bank of New Tork, consigned to the
American Trust Company, San Francisco.
36,000 shipped by the Chartered Bank of India, Australia and China, consigned
to Bank of California N.A., San Francisco.
20,000 shipped by Banque Belge pour l'Etranger, consigned to Bank of America,
N. 2. & S. B., San Francisco.
$358,000 Total
All of this gold will be sold to the U. S. Mint at San Francisco.
On the report of November 15 received from the Federal Reserve Bank of In
York, giving the foreign exchange position of banks and bankers in its district,
the total position of all currencies vas short the equivalent of $18,029,000,
S.B. increase of $1,095,000 in the short position for the week. The not changes
in position are as follows:
SHORT POSITION
SHORT POSITION
INCREASE IN
COUNTRY
NOVEMBER 8
NOVEMBER 15
SHORT POSITION
England
$ 4,190,000
$ 5,754,000
$1,564,000
Europe
8,898,000
9,487,000
589,000
Canada
515,000
419,000
(Long)
934,000
(Decrease)
Latin America 363,000
408,000
45,000
Far last
2,937,000
2,760,000
177,000
(Decrease)
All Others
31,000
-39,000
8,060
Total
$16,934,000
$18,029,000
$1,095,000
The equivalent of today's London spot silver price vas 41.61# and the for-
ward price, 41.25% The price fixed by Handy and Harman for foreign silver
vas unchanged at 34-3/4#. The Treasury's price vas also unchanged at 35#.
In New York, ve made three purchases of silver totaling 275,000 cunces under
the Silver Purchase Act. Ye also purchased from Canada 390,000 ounces of
silver under our regular monthly agreement. This makes a total of 885,000
ounces purchased from Canada during November.
dre
CONFIDENTIAL
168
November 21, 1939
10:30 am
Present:
Mr. Loring C. Christie,
Canadian Minister to US
Mr. Graham Towers, Governor
of Bank of Canada
Mr. Hanes
Dr. Viner
Dr. White
HM,Jr: I took it for granted that you did not
mind my combining these two visits.
Mr. Christie: From our point of view, that was
the understanding. I thought I would report I had a
telephone conversation with Colonel Ralston around 7
o'clock and he told me of his conversation with you and
I told him it would be agreeable to you that Mr. Towers
would come in for the same appointment, and the position
is 8. little different than when I asked you for the ap-
pointment. I asked you for the appointment for the
purpose of ascertaining when and how it might be con-
venient for Colonel Ralston to come down and then Mr.
Towers' trip occurred and Colonel Ralston thought that
for the moment it would be suitable 1f Mr. Towers would
come in and explain to you that Mr. Towers was going to
London 88 the representative of the Canadian Government
for certain conversations that are to go on there, so
that the appointment is slightly different than when I
first asked you.
HM,Jr: And Mr. Ralston has changed his mind and
does not want to come?
Mr. Christie: Not that. He could not come 1m-
mediately and he also 1s keeping in mind the idea of
coming himself as soon 8.8 he can and I would like, in
the next few days, to talk to you about that. So at
the moment I have nothing more than to introduce Mr.
Towers.
HM,Jr: How do you do!
169
-2-
Mr. Towers: Ralston is still on a seven-night
week, but he's going to mend his ways very, very
quickly.
HM,Jr: I see.
Mr. Towers: And then he has in mind he would
like very much to come here.
HM,Jr: Any time, with a day or two notice.
Mr. Towers: He has fallen heir to a lot of
things since he started to work in Ottawa a couple of
months ago.
HM,Jr: Yes. We All do in the Treasuries.
Some we like and some we don't, that we fall heir to.
What about this trip of yours?
Mr. Towers: I came to New York to catch the
Clipper and, perhaps fortunately for me, the Clipper
has been delayed. I think she sails now next Satur-
day, and I will be on board provided the mail 18 not
too heavy.
HM,Jr: I see.
Mr. Towers: If it is too heavy, I suppose I
will have to hang over until Monday.
HM,Jr: Can't they put. you in a mail sack?
Mr. Towers: I will investigate that. I might
get posted from here.
HM,Jr: Well, your people must have -- the Govern-
ment -- you must have just as much, how shall I say, in-
fluence as we have.
Mr. Christie: She is sailing from & United States
port, United States mail.
HM,Jr: But she lands at Great Britain.
Mr. Towers: Lisbon, and then have to go by rail.
170
+
HM,Jr: Are you really having trouble getting on?
Mr. Towers: I am a passenger, but because of the
delays, they have missed various sailings you see, and
that means the mail has accumulated. The last I heard
they thought there would still be room for a few passen-
gers and that I would be on board, but they could not be
sure.
Mr. Christie; As a matter of fact, I was going
to take this occasion to ask you, if there was any dif-
ficulty, who might be approached if we needed any of-
ficial intervention?
HM,Jr: John, you know Mr. Tripp.
Mr. Hanes: We know him very well.
Mr. Christie: Might be some difficulty between
the Post Office. I understand you are fifth on the
list. If the mails fill up the boat, nobody goes on.
Mr. Towers: Yes, that's right.
HM,Jr: If he has trouble, if you will let Mr.
Hanea know.
Mr. Hanes: I will be glad to do it.
Mr. Towers: That would be very helpful because
Mr.
, one of the Ministers on the other side,
has been for some weeks talking to the people over there
and I know they are very anxious to get ahead with it.
Hence my hurried trip.
Mr. Hanes: You let me know if I can help and I
will be glad to do it.
Mr. Towers: Thank you very much.
Since we had our last conversation, in April,
we have had to embark on exchange control and I really
had in mind a wonder as to whether there are any aspects
of that which are of interest to the States, to the
Treasury here; whether there are any questions I could
171
answer, either yourself or whether you would care to
turn me over to some of the others and have them
raise any inquiries that are in their minds.
HM,Jr: I am a little cold on it. See? What
I would like you to do 18 talk to Viner and White.
Mr. Towers: Yes.
HM,Jr: This morning.
Mr. Towers: Yes.
HM,Jr: And then if out of that -- I don't know
how much time Mr. Christie wants to give to this -- but
Viner and White are available, and talk to them, and
this afternoon if there are questions out of your con-
ference you would like to talk to me about, I would be
available this afternoon or, better still, tomorrow morn-
ing.
Mr. Towers: Yes.
HM,Jr: But if you two gentlemen -- when Cochran
comes back bring him in, please, because he's over now
on another mission -- and then I think if you would go
with these people
Mr. Towers: Yes.
HM,Jr: I am, frankly, cold on it. And then
after that, out of that will undoubtedly come questions,
then you could see Mr. Hanes and myself either this af-
ternoon or tomorrow morning. Awfully crowded this after-
noon.
Mr. Towers: I will be here tomorrow.
HM,Jr: Let's say tentatively 11 o'clock. I will
make a "reservation" for you, because the days go by 80
fast. And I think the thing to do is take Mr. Towers
and, if you ask me now I just don't know because the only
thing I know about the Canadian dollar 1s a fellow out
on the ranch, last year he did not like the way things
were going in Washington so he took $50,000 and bought
Canadian dollars and he wanted to know what he could do
with it now and I said "You are out of luck. You are
172
-5-
in for the duration of the war." Is that right?
Mr. Towers: It's first cousin to being right.
HM,Jr: That's my only contact with the Canadian
dollar.
Mr. Towers: Well, I will go along with Viner and
White now.
o0o-o0o
TREASURY DEPARTMENT
173
INTER OFFICE COMMUNICATION
DATE November 21, 1939
TO
Secretary Morgenthau
FROM
Mr. White
Subject: Foreign Exchange Resources of England and France
Summary
The total foreign exchange resources of the British and
French Empires which can be liquidated within the next two years
are more than $15 billion.
Of this $15 billion approximately a third can be liqui-
dated very easily, an additional third only with permanent losses
to the economic power of Great Britain. The last third would be
liquidated only if England were desperate and only at & serious
permanent economic cost to the British Empire.
1. The United Kingdom alone has almost $5 billion of for-
eign exchange assets, the bulk of which could be easily liqui-
dated in the United States.
Amount which could
be realized on in
Face Value
2 years
Official balances held in the
Federal Reserve Bank in N.Y.
$ 200
$ 200
Dollar balances of British res-
idents
375
225
Gold holdings of British
Government
1,900
1,900
British gold holdings in the
United Kingdom
700
500
Holdings of United States se-
curities
1,000
700
British direct investments in
the United States
700
350
Total
$4,875
$3,875
In addition, British investments in neutral countries other
than the United States could probably be sold in the United
States to yield at least $2 billion within the next two years.
174
Division of Monetary
Secretary Morgenthau - 2
Research
If pressed still further, the British could raise at least
$2 billion more through the sale of her properties located in
British Empire countries which Americans might be willing to buy
if the course of the military operations did not jeopardize the
value of the investments to Americans.
2. The readily available foreign exchange assets of the
British Dominions, most of which will doubtless be placed at the
disposal of England in the prosecution of the war should it be-
come necessary to do so, amount to more than $3 billion.
(a) Gold holdings
$1,800 million
(b) Dollar balances
325
#
(c) U.S. security holdings and di-
rect investments in the U.S.
1,000
#
Total
$3,125
#
3. France has almost $4 billion of foreign exchange which
may be regarded as part of the pool of resources available to
the Allies.
(a)
Gold
$3,200 million
(b) Dollar balances
250
If
(c) U.S. securities and direct
investments
300
Total
$3,750
TREASURY DEPARTMENT
15
INTER OFFICE COMMUNICATION
DATE November 20, 1939
TO
Mr. White
FROM
Mr. Glasser
Subject: Foreign exchange resources of England and France
1. The foreign exchange assets available to England and France
to finance the war should be estimated to include the foreign
exchange assets of the entire British and French Empires. It
would be an error to assume that the foreign exchange assets of
the various countries of the Empires do not, in effect, consti-
tute a common pool from which England and France will draw
when and if the need arises, for it is inconceivable that either
England or France would Jeopardize the effectiveness of their
military operations because of the scarcity of foreign exchange
assets while any portion of the Empire has substantial sume of
foreign exchange left. Doubtless each country and each dominion
will regard its gold security holdings, dollar balances, etc.,
as part of its own foreign exchange assets; and it may possibly
become true that there will be some unwillingness to contribute
to the general pool and that such an unwillingness might well
constitute an important factor with respect to the conduct of
the war. However, such a contingency could hardly arise until
& very advanced stage in a prolonged and costly war.
The allocation of foreign exchange by the dominions and
colonies will probably take the form of supplying raw materials
and commodities to the Mother countries and the arrangements
will doubtless be matters for continuous negotiation and
modification, but these are essentially matters of bookkeeping.
In the beginning stages the policy seeme to be that of permitting
the maximum amount of autonomy in colonial and dominion opera-
tions with B. maximum amount of voluntary cooperation, but 88
the need becomes more acute, joint efforts will doubtlees be
more closely interlocked.
Therefore, while it is both significant and interesting
to note the foreign exchange assete of each country separately,
it would, I believe, be an error to assume, in the discussions
with England, that England's foreign exchange assete are to be
regarded independently from those of her Empire in estimating
the total resources at the disposal of the Allies.
Division of Monetary
- 2 -
Research
176
2. The foreign exchange assets of France, England, and the
dominions are estimated below. The assete are listed in approx-
imately the order of their liquidity, although there has been
no attempt to setimate the order in which they are likely to be
disposed of.
United Kingdom -- Foreign exchange assets
Face
Amount which could
value
be realized on
within two years
(In millions)
(a) Official balances held with
the Federal Reserve Bank in
New York
$200
$200
(b) Dollar balances of British
residents
375
225
Since a certain amount of dollar deposits must be
kept as working funds for commercial purposes, it is
difficult to conjecture how much could be used without
interfering with commercial relations. The minimum
amount needed should be much less than the amounts which
were kept on balance during peace time, in view of the
centralization of control over imports invested in the
Ministry of Supply and the Exchange Control authorities.
It would seem reasonable to estimate that $150 million
would be adequate balances to maintain in this country,
although further study would be necessary before re-
liance could be placed in this estimate.
(c) Gold holdings of the British
Government
1,900
1,900
(d) Private gold hoards in the
United Kingdom
700
500
In March 1939, Phillips stated to Butterworth
that the private gold hoards in England were estimated
to be $850 million. There probably was some reduction
in private hoards between March and September of this
year.
(e) Holdings of United States
securities
1,000
700
Division of Monetary
- 3 -
Research
177
Our statistics of foreign investments in the United
States indicate that the British have about $1 billion
of American securities. The British have said that some
$700 million of American securities have already been
registered with the Bank of England, although the
registry is not complete.
The British holdings may not equal the $1 billion
that our figures show since a part of what we have
recorded as British-owned securities may actually be
owned by continentals who have utilized British names
to mask the real ownership. On the other hand, British
residents may have acquired American securities by
operating through Dutoh, Swiss, and French brokers,
although the amounts of the latter are probably not as
large as of the former, and only a portion of the latter
may be registered with the British authorities.
The liquidation value of the British holdings of
American securities will depend upon the level of stock
and bond prices in the United States, upon the urgency
with which the funds are needed and upon the character
of the securities. The level of prices in the United
States will probably be relatively high if war purchases
in the United States are on the scale that is likely were
the British forced to liquidate an important part
of her foreign exchange assets. To the extent that they
hold a large proportion of the stock of any particular
corporation they may have considerable difficulty in
liquidating those securities at satisfactory prices.
It is quite understandable that England should be
reluctant to resort to this source of foreign exchange
because, in the first place, she would like to interfere
8.8 little 8.8 possible with private property rights over
foreign investments; secondly, disposing of these secu-
rities would permanently out down a source of future
foreign exchange revenue; thirdly, the possession of
these securities provides England with an asset which
might be used as collateral for borrowing from the United
States; fourthly, foreign investments of American stocks
and bonds represent an indispensable field of investment
for 3ritish insurance companies and investment trusts.
(f) British direct investments
in the United States
700
350
Division of Monetary
Research
178
The Department of Commerce reported that indirect
investments, consisting of branch plants, real estate
holdings, etc., were valued at $700 million. These in-
vestments are, of course, less liquid than the bulk of
the security holdings, and the British Government would
doubtless be even more reluctant to foroe the sale of
these assets. If the need became great enough, however,
the United Kingdom would be able to realize about a half
billion dollars from this source within R. few years.
(g) British investments in
neutral countries other
than the United States
7,000
2,000
British foreign investments in areas of the world
outside the British and French Empires have a face value
of $7-5 billion. In Latin America alone their investments
have a face value of almost $5 billion.
The liquidation value of investments in neutral
countries is a matter of sheer conjecture. A large part
of British holdings in Latin America are in default, but,
on the other hand, some of the most valuable properties
in Latin America are owned by the British. British hold-
Inge in Argentina's railways, for instance, which are
valued at more than $1 billion, are a good investment from
any point of view and could no doubt be liquidated in the
United States at close to their face value and 8. portion
may be used to settle an unfavorable balance of payments
with Argentina during the war, British investments in
China, which have been estimated as having been worth as
much as $1 billion, prior to the outbreak of hostilities,
are probably still worth substantial sume even though
the bulk of these investments are in Japanese occupied
areas.
On the whole, the liquidation value of these holdings
might conservatively be estimated at $2 billion.
(h) British investments in her
Empire outside the United
Kingdom
10,000
2,000
The face value of these investments have been eati-
mated at about $10 billion. The ability of the British
to sell these investments for foreign exchange depends
in large part upon the prospects of the outcome of the
war. British investments in Canada, South Africa,
Division of Monstary
- 5 -
Research
179
Australia and India will have & liquidation value that
will be affected by exchange risks, dangers of military
and political control by uncooperative countries, and
the economic position of the countries themselves.
Furthermore, B. part of these investments will be available
for liquidation directly by the British since steps have
already been taken to sell some of these investments to
the dominions themselves as the means for settling the
balance of payments between England and the dominions.
Some of these properties represent items that would
be extremely attractive to American investors and to
the United States Government, provided England does not
appear to be loeing the war. For if she were Americans
would be most reluctant -- as & neutral -- to purchase
properties that may involve questions of clear title with
a. victorious Germany. England could no doubt raise large
sums by selling her ownership in enterprises located in
her Empire if the fortunes of war were not going against
her. The best examples, of course, would be British
shares in the gold mines in South Africa, copper mines in
Rhodesia, tin mines in Malaya, rubber and tea plantations
in the South Pacific.
Obviously, setting any eum as a liquidation value
would be sheer conjecture in view of the uncertainty 88
to the eventual outcome of hostilities; but it app are
that $2 billion would be & minimum sum which the British
may raise by selling shares in these assets provided, of
course, that she was not in a desperate military plight.
Americans would be willing to buy since American economy
1E, to a large extent, directly dependent upon the con-
tinued operation of these enterprises.
(g) Total foreign exchange re-
sources of the United
Kingdom
$21,875
$7,900
3. The foreign exchange assets of the British dominions.
The foreign exchange assets of the British dominions will
probably be used by England indirectly, and England herself
may play no part in the liquidation of these assets. Judging
from the arrangements now being discussed between England and
Canada, England will probably follow the policy of borrowing
from her dominions and liquidating British holdings of
Division of Monetary
- 6 -
Research
180
dominion securities to settle balances between England and
the dominions. The dominions, in turn, will utilize their
foreign exchange assets for meeting the unfavorable balance of
payments with foreign countries that will develop aa a result
of exporting goods and services to England.
The ability of the dominions to export capital to England
will depend upon the volume of their own holdings of foreign
exchange assets to meet the unfavorable balance of payments
with foreign countries. In this indirect manner, the foreign
exchange assets of the dominions will be at the disposal of
England in the prosecution of the war. In later phases of
the war the British may utilize the foreign exchange asseta
of the dominions more directly but that point would only be
reached at & very late stage in a prolonged war.
The British dominions have the following assete:
(a) Gold holdings
$1,800 million
(b) Dollar balances
325
-
(c) United States security hold-
ings and direct investments
in the United States
1,000
#
Total
$3,125
M
The bulk of the foreign exchange assets of the British dominions
16, of course, in Canada. The monetary metal hoards of India
may be beyond the control of England. In fact, England may be
forced to settle her balance of payments with India by selling
to her silver and gold, 88 she did in the past war. The
political relations between England and India are so uncertain
and precarious at this time that England probably cannot rely
upon using India's gold and silver reserves for purposes of
conducting the war.
South Africa and the British colonies have large current
earnings in foreign exchange, but this income 18 normally
passed on to the British in servicing British investments.
4. France has roughly $4 billion of foreign exchange, as
follows:
(a) Gold
$3,200 million
250
W
(b) Dollar balances
(o) American securities and
direct investments in the
300
#
United States
Total
$3,750
French residents probably own more than the stated amount
of American securities but it is doubtful that the Franch
Division of Monetary
- 7 -
Research
281
Government would be able to obtain more than the specified amount.
The French Empire outside of France has very little foreign ex-
change resources.
5. The total foreign exchange resources of the British and
French Empires which can be liquidated within the next two years
is thus more than $15 billion.
These assets represent the economic power of the empires,
the bulk of the earning power of England, and the resources which
are vital to both England and France if they are to control and
to participate in the peace and reconstruction which will follow
the conclusion of the war. The economic and social structure of
England is based upon 8 favorable balance of payments on service
account of more than $2,000 millions annually; and England as
now constituted must depend upon her foreign investments to
suoply a large part of this current foreign exchange income.
To carry this analysis to its logical conclusion, the
Britien Empire's foreign exchange resources are inexhaustible,
and the only limit to the amount of foreign exchange which she
can acquire 1s the ability and willingness of foreign countries
to purchase the assete in exchange for the commodities which
England wishes to buy. The British Empire can offer for sale
to Americans (and to other foreign countries able to supply
commodities or foreign exchange) the economic enterprises in
the dominions and colonies which are owned by the citizens of
those countries. The British can offer for sale the business
enterprises in England itself, if there 18 a market value for
them in the light of the military situation. Further, the
British may offer to sell some of her colonies in the Western
Hemisphere to the United States Government, and there may be a
sales value attached to other colonies in Africa, Asia and the
Southern Pacific.
But the British would be willing to raise funde in this
manner only if she were in the last extremity and only if the
short-run dangers were 80 overwhelming that the long-run con-
siderations were without significance.
Every effort will be made to prevent any losses of foreign
exchange, for the war will be followed by peace, and in the
peace to come the economic resources may be the decisive factor
in maintaining the position and cohesion of the empires. In
fact, it should not occasion surprise if England actually added
to her foreign exchange reserves, especially during the early
stages of this war.
- 8 -
Division of Monetary
Research
182
England and France will liquidate their foreign exchange
reserves with the greatest reluctance, and only when the alter-
native courses of action are more unpleasant to their short-
and long-run interests. In any circumstances, for England and
France to go beyond the sale of $10 billion would be extremely
disastrous to the long-run interests of the Empires, and before
they would do so, the immediate military situation would need
to be very desperate indeed.
183
RE COLOMBIAN FINANCE
November 21, 1939.
3:15 p.m.
Present:
Mr. Hanes
Mr. Foley
Mr. Bernstein
Mr. Riefler
Mr. Cochran
Mr. White
Mr. Frank
Mr. Lincoln
H.M.Jr:
We are having this meeting tomorrow. Who is
going to be teacher now for this homework? Harry,
have you got this at your fingertips?
White:
I can outline It very briefly.
H.M.Jr:
You have seen me now in the raw or lack of the
raw, whatever you want to call it.
White:
Colombia had about 160 million dollars of out-
standing debts, most of which was held here.
Frank:
Including local as well as national?
White:
Local as well as federal, which they are undertaking
to handle together, I understand. They have repur-
chased some of their bonds from the market, how much
we do not know. They have risen - the bonds have
risen about a third in the last month, last month
and a half.
R.M.Jr:
Good.
White:
They were around 23 or 24. I think they are now
34 or 35. I haven't seen what they are today. They
may have gone up today. The reason for the rise, I
take it, is the expectation that they were going to
make a good offer. The offer that we understand from
Mr. Welles that they are about to make is three per-
cent on their debt and to step that up to four some-
time within - whether it 15 four or ten years is not
clear because the information differs from two sources
and no scaling down of the principal, so from the
point of view of the bondholders, that would seem to
be an excellent offer.
Frank:
Anything for back interest?
184
- 2 -
White:
There is no indication whether that includes
payment on the arrears. There 1s about 55 million
dollars arrears, I think.
H.M.Jr:
How much?
White:
I think it is 55.
Frank:
That is about right, isn't it?
Lincoln:
That 1s about right.
Frank:
It is since 1930.
Lincoln:
'31 and '34.
White:
Nothing was stated of the arrears. It may exclude
it. It seems like a very good offer from the bond-
holders' point of view.
From Colombia's point of view, however, it is an
offer which they can well take in their stride,
so there doesn't seem to be any immediate prospect
of their defaulting. In other words, they are not
offering more than either their budget or their
balance of payments can reasonably stand, so that
there is reasonable expectation that they will meet
their obligations if they are accepted.
They are going to ask, as I understand, for a 101
million dollar loan, with the hope later of getting
some more, possibly up to 25 million. It is not
clear to us whether that 10$ million is to be used
wholly for short-term purposes, that is, whether
they will set it aside in order to meet what they
may feel to be special demands occasioned by their
loss of the German market for coffee or whether
they hope to use part of it to keep some of the
public works programs which they have started and
which they have felt is in jeopardy, so that the
question 1a to the use of the funds and the specific
amount is something, I take it, we will hear to-
morrow, but in both communications there is no
clear indication of either of those points. They
had hoped several months ago to ask for 8. larger
sum to be used for expansion of their transportation
system, improvement of their agricultural system
and for the short-term balance of payments needs
but that information dates from a communication of
185
- 3 -
a couple of months ago from the State Department
and we haven't heard anything about it since.
H.M.Jr:
Well now, we are talking here kind of in the family
and - does anybody know what this so-called Bond-
holders Protective Committee - did they have any
tentative agreement with these people before we got
into the picture?
Frank:
Do you know, Mr. Lincoln?
Lincoln:
I don't think they have ever been able to get them
to make an agreement.
H.M.Jr:
What I am getting at 1a, I wonder 1f we have any
way to sort of feel out this Bondholders Protective
Committee and say, "Now, what would you consider
would be a good deal,' and sort of get them to
commit themselves, you see. What would you con-
sider a fair deal?
Lincoln:
I think this is a fair deal. I wasn't clear as to
what they were going to do with their department
and city debt.
White:
My understanding was that this was to be on their
total debt which takes over also the local and the
state debt and they indicated no additions for
amortization or sinking fund, but Mr. Jones in talking
it over with their representative indicated that he
thought that & payment of $600,000 for amortization
could be easily paid over. Now, certainly they
could very easily include that in this sum but it
wouldn't amortize the debt, obviously. It would be
a help.
Riefler:
If they have been buying back any quantity of their
bonds at these low prices, they would be able to
put those in for the amortization payments and
substitute those for amortization and simply escape
that charge completely. I think it is quite important
to find out how much they have bought back.
Lincoln:
It is known that Colombia holds 6 million of the
national government bonds in their treasury. I
think it 18 5,997,000.
Riefler:
Do we know the state and local, what they have
bought back?
Regraded Unclassified
186
- 4 -
Lincoln:
I don't think anyone has any figures on that.
Riefler:
What is the face value of the national?
White:
The national debt is 160 less 80, in other words,
about half. 82 million is the local government
obligation. There 1s about 12 million in sterling
and I take it that question hasn't arisen. I take
it that any settlement they would make with dollars,
they would make with sterling. There is only 12
million outstanding. They may have got some of
that back, so that 1f they have bought back some
of the federal debt, then they might have as low
as 60 or 50 million.
Lincoln:
I think the outstanding federal is probably well
under 50 now, aside from what they have bought
back.
White:
Our most recent figures are that they had about
76 outstanding federal public debt and from that
sum we know that they have purchased some back.
Lincoln:
That includes, I guess, the guaranteed bonds of
some of their banks.
White:
Yes.
Lincoln:
That would bring it below that figure.
White:
That is right. But it appears that they have an
excellent basis for a reasonable settlement there.
Wouldn't Mr. Feis know, Mr. Secretary, about that?
H.M.Jr:
I don't know.
White:
I am sure he would, because he is supposed to be
on all those committee meetings.
H.M.Jr:
What contact have you people got with the Bondholders
Protective Committee?
Frank:
There is B. Board of Visitors consisting of - it is
functioning through Bill Douglas and Mr. Feis.
Mr. Lincoln really did the work.
187
- 5 -
Lincoln:
I know those people, have talked to them over the
telephone, and I think they would give us any in-
formation they have.
S.2.Jr:
I wonder if you would consider it an SEC matter to
call them up and simply say, "What would you con-
sider a fair settlement?"
Peank:
Would that be out of line with your previous work?
Lincoln:
I have never asked them that much before, but I
don't
/rank:
I see no objection to it.
R.M.2r:
I would rather do it, if you don't mind, this way
than to do it through the other way.
Frank:
I suppose we - ought we not to consult Herbert be-
fore we do that?
H.M.Jr:
That is up to you.
/pank:
Don't you think so, Harry?
White:
I do. I think it would be less trouble that way.
H.M.Jr:
Does he represent them any more than the SEC?
Frank:
Yes, probably, because our function is really - the
Board of Visitors' official function was to scrutinize
their accounts and the conduct of their affairs
rather than to pass on the wisdom of any settlements
they make. Is that correct?
Lincoln:
Yes.
H.M.Jr:
Could I throw this in your lap, to ask you 1f, through
whatever means you feel proper and ethical, you would
find out from the Bondholders Protective Committee
what they would consider a fair settlement.
Frank:
Before tomorrow's meeting?
H.M.Jr:
If possible. Would you take that up, Jerome?
Frank:
Yes. You wouldn't mind if I asked Herbert?
188
- 6 -
E.H.Jr:
I will leave that to you.
rank:
I think it would be unwise not to ask Herbert,
What I mean, It is perfectly obvious you are the
first one. If we could get an good or better than
what we wanted, why then the chances of their - they
can't criticize us.
Lincoln:
I should doubt very much if they ever had any hope
of getting more than 4 percent.
Frank:
This is probably better than they ever were.
Thite:
My understanding WELF that their response to an
earlier offer of 18 to 3 percent was a statement
that they wanted 4. Now, whether they would at
that time have accepted 3, I suspect they would
have.
I think 1f we could know that by tomorrow 1t would
be helpful.
White:
Is it clear that the offer is 39
Lincoln:
Yes. I wasn't clear that in the national government -
from what I have on it - I think that memo of yours -
I think that the national government intended to have
the offer applied to the departments. The national
government has always veered away from that subject.
Vhite:
I am not perfectly clear on that either. It may be
in the letter that you received from Mr. Welles.
Blofler:
Aren't there no considerable number of things to be
found out, whether it applies to the arrears and
how many they have bought back? I should think
that would be quite important.
Frank:
This letter says it includes the arrears. This is
from Mr. Jones.
"I had B. very pleasant hour and n half with Mr. E.
Jaramillo, discussing with him the situation with
reference to the Colombian national debt held in
this country, and the possibility of some additional
credits for Colombia by the Export-Import Bank.
189
- 7 -
"I stated to Mr. Jaramillo that, in my view, the
five years of over-due interest should be refunded
at 3 percent instead of the coupon rate of 6 percent;
that the bonds should be extended at 3 percent for
10 years and 4 percent thereafter; that a sinking
fund of not less than $600,000 a year should be set
up with which to buy bonds annually on tender; that
it would be desirable to have some such arrangement
as would permit individual bondholders to convert
their bonds into milreis that could be used in
Colombia for the purchase of things to export, having
in mind that this would result in increasing Colombian
exports.
"I told Mr. Jaramillo that I would make this report
to you and to Mr. Welles."
H.M.Jr:
I think that last part is - there is too much in it.
White:
And it is too easy to substitute that type of export
for the other type.
H.M.Jr:
It is making it too damn uncomfortable.
Lincoln:
There is much to be said against that proposition.
H.M.Jr:
Too complicated.
Lincoln:
Yes, and it sets up an automatic system by which you
repatriate and pretty soon you don't pay your interest
and you use your money to repatriate.
Frank:
It sounds as 1f they are working on it.
Lincoln:
Yes.
White:
That is Jones' suggestion as to what they might do.
They gave no indication. Do you have Mr. Welles'
letter?
H.M.Jr:
Yes, but that is ahead of that.
White:
I thought that Mr. Welles' letter contained the
specific offer they made.
H.M.Jr:
This is it:
"Personal and Confidential.
190
- B -
"With reference to your consideration of the
Colombian financial problem, you will be inter-
ested to know that we have just had a despatch
from our Ambassador to Colombia reporting B.
conversation with Doctor Jaramillo who, 68 you
have been informed, has been designated by the
Colombian Government as its representative in
the conversations we have suggested and who is
due to arrive from Colombia in New York today.
"Dr. Jaramillo told Ambassador Braden thet promptly
after his arrival in Washington he would endeavor
to reach & settlement of Colombia's foreign debt
held in the United States on the basis of three
percent interest payments with the provision that
such payments are to be increased over & period
of years to four percent. If an agreement can
be reached on these terms, he will endeavor to
obtain a loan of $10,500,000 from the Export-Import
Bank or from other sources, with the hope that If
these arrangements prove satisfactory, further
credits can be obtained in the United States
in the future up to B. total of $25,000,000.
"The American Ambassador has confirmed my own be-
lief that any arrangements entered into in Wash-
Ington by Dr. Jaramillo will be approved by the
Colombian Congress and by Colombian public opinion
because of Dr. Jaramillo's personal prestige in
his own country."
White:
You notice he said Colombia's foreign debt, and I
take it that includes state and local.
Could Harry and Win - could you fellows get together
with Herbert Fels tonight and say some of the things
which are bothering us and then fix B. little agenda
up for tomorrow and have these things cleared up?
defler:
What is happening tomorrow? Are the gentlemen going
to be here?
M.R.Jr:
No, just Welles. I asked for the meeting and I
want to talk about this and the reason I did this
this afternoon was just to see what would come up
and Harry is only a pretty good teacher, he doesn't
know all the answers himself, and so I think if
between now and 10:00 o'clock tomorrow you can
191
- 9 -
find out the whole story and then get us up a
little agenda, with Feis, then we would have the
thing, and what they would agree to and what they
wouldn't, and just where we are.
Riefler:
I think finding out about the foreign bondholders
is very important because this apparently 1a well
within their capacity to pay. It isn't going to
strain them terribly. It is pretty reasonable.
Lincoln:
I think the more you study Colombia the surer you
get that it will pay.
Riefler:
What do they expect to get from their new 011?
H.M.Jr:
Would Mr. Lincoln be available to sit with our
people?
Lincoln:
Yes.
Frank:
If you are going to contact Herbert, why don't you
find out what Herbert thinks about contacting...
Riefler:
We could do that, yes.
H.M.Jr:
Could you stay on with these fellows and fix up a
little agenda for us?
Lincoln:
Yes.
H.M.Jr:
What do you think, Johnny?
Hanes:
I think it is all right.
H.M.Jr:
Yes.
Foley:
Bernie could sit in with them.
E.M.Jr:
Right.
I think that is that. Have you got something else
on your mind?
Frank:
Have you got a minute about what happened this
morning?
Cochran:
May I ask one question, Mr. Secretary? Is there
192
- 10 -
any plan to have anyone here from the bondholders
association before you go?
8.2.Jr:
Well, this was sort of taken in lieu of it.
Cochran:
You might get & lot you wanted out of them 1f you
had them come down here.
Mether:
Technically, would we have to consult them before
it went through? Wouldn't they have to ratify it?
Cochran:
They are the ones who represent the bondholders,
after all. I thought you might got something worth
while from them before you got into these conversa-
tions.
/rank:
You know they have no deposits.
S.M.Jr:
That 1s just the question I am going to ask. How
many dollars of deposits do they have?
Lincolnt
They don't go through the mechanics of deposits.
Frank:
Don't they negotiate, then go out and see the bond-
holders? They don't have powers of attorney for
the bondholders, do they?
Lincoln:
No.
-rank:
Really no real status at all,
Lincoln:
Their status solely arises from the fact that they
grew out of the meetings called by the Treasury and
the State Departments and were given, you might say,
official blessing as the proper voice for bondholders
in 1933. Their technique in arranging resumption of
interest payments has been to haggle out the best
terms they could get out of the foreign governments,
and when it was announced, say, "We have approved
this as the best that could be expected, or else
they will, as in the case of Chile, say, "This is
bad."
Frank:
They have no real legal status, either by way of
deposits or power of attorney or anything else.
I think you would have to take this into account.
If they were to severely criticize 1t, It would
be bad public relations. Other than that, I don't
think they have any legal status of any kind.
Regraded Unclassified
193
- 11 -
Lincoln:
It would all be sweet and lovely to have them say
afterwards, "We approve this."
H.M.Jr:
That 1s the thing I had in mind, that I personally
didn't feel that we should go much further than
that, to call them up and ask them what they had
in mind, what they think is a good settlement.
Frank:
Do you think there is any danger in that?
Lincoln:
I don't think so. I think Fox knows right now
what they consider a good settlement.
H.M.Jr:
I am sure he does.
Riefler:
It would be smart to get them in before the end.
H.M.Jr:
As far as I am concerned, I wouldn't like to go
any farther tonight than to ask them the question,
through any means that you want, what they consider
would be a fair settlement, how they feel.
Frank:
Yes.
H.M.Jr:
I wouldn't want to go any further than that tonight,
would you, John?
Hanes:
No, I don't think so.
(Discussion off the record)
Foley:
Who is counsel for the committee, Jerry?
Frank:
They have no lawyer.
Lincoln:
They have no counsel.
H.M.Jr:
Let's think that over. I am willing for these gentle-
men to work up something tonight with the State
Department and have something ready and if Mr. Lincoln
could stay behind, I think that would be nice.
Frank:
Certainly.
194
GROUP MEETING
November 21, 1939.
9:30 a.m.
Present:
Mr. Hanes
Mr. Riefler
Mr. Thompson
Mr. Bell
Mr. Haas
Mr. Viner
Mr. Harris
Mr. Duffield
Mr. Foley
Mr. Cochran
Mr. White
Mr. Stewart
Mrs Klotz
H.M.Jr:
Gene, do you have anything?
Duffield:
No.
Foley:
Bill Campbell and Sam Klaus came in this morning.
I thought maybe you might want to shake hands with
them.
H.M.Jr:
Definitely, more than that. I would like to kiss
them on both cheeks.
Thompson:
Who?
H.M.Jr:
Sam Klaus and Bill Campbell.
Did you (Mrs. Klotz) say you wanted to do that, too?
I can't hear you.
Klotz:
Is my face red!
H.M.Jr:
Well, anyway, before I do that I want to ask Summer
Welles whether he wants to meet on South America.
Mrs. Klotz and I will see the others.
Incidentally, did you (Foley) say something about
ducks to me?
Foley:
Yes, sir.
H.M.Jr:
When can I get delivery on those?
Foley:
Today.
195
- 2 -
H.M.Jr:
I told Mrs. Morgenthau last night we were going
to have some legal ducks.
Foley:
That 1s right.
H.M.Jr:
Is that for tonight?
Foley:
That is for tonight.
H.M.Jr:
Would it be embarrassing to ask how many there
are? Are there two?
Foley:
Four.
H.M.Jr:
I mentioned it to her and she said, "How do I know
what to order," and I said, "Well, I will find out."
White:
Would it be embarrassing to ask whether you (Foley)
shot them?
Bell:
Did you get them, Ed?
Foley:
Yes, I got them. There are some better ones but
they won't be ready until next week.
H.M.Jr:
(On phone) Hello. (Telephone conversation with
Sumner Welles follows:)
196
November 21, 1939
9:36 a.m.
Sumner
Welles:
Hello, Henry. Welcome back.
HMJr:
Thank you. How are you?
W:
I'm fine. I hope you had some rest.
HMJr:
Oh, wonderful 1 I had a complete -- I recommend it
to anybody who wants to have
B......
W:
Well, I'm delighted that you got the chance.
HMJr:
Sumner, Thanksgiving 18 Thursday, I believe.
W:
Yes.
HMJr:
I wondered whether you and Jones and I wouldn't want
to get together today, or tomorrow, on Colombia,
W:
I'll be very glad to. Has Jesse brought you up to
date?
HMJr:
He wrote me a letter
W:
I see.
HMJr:
on the matter, yes.
W:
Um-hm.
HMJr:
So I -- I think I'm up to date.
W:
I'll be glad to. I'm afraid I'll have to make it
tomorrow, Henry. I've got every minute today.
HMJr:
All right. How about 10:30 or 11:00.
M:
(Aside: My desk book for tomorrow.) Will you wait
just a second?
HMJp:
Surely.
W:
(Brief pause.) Would it be equally convenient for
you to make it early in the afternoon?
HMJr:
Tomorrow?
- 2 -
197
W:
Yeah.
HMJr:
Not as good, no.
W:
Well, would it be possible then to make it before
10:30, because I have appointments from 11:00 until
1:00?
HMJr:
Yes, do you want to make it 10:00 o'clock?
W:
10:00 o'clock will be fine.
HMJr:
And I'll let Jones know.
W:
All right thanks, Henry. I'll be in your office at
10:00.
HMJr:
Righto.
W:
Thanks. Goodbye.
138
- 3 -
P.M.Jr:
Which of the three "E's" are here?
Stewart:
We are all here.
H.M.Jr:
Which of the three "3's" are going to concentrate
on helping on this Colombia thing, or South America?
Stewart:
Mr. Riefler.
H.M.Jr:
Is that it?
Riefler:
Yes.
S.V.Jr:
Well, let's say this - will you (Foley) tell Campbell
and Klaus 3:00 o'clock?
Folny:
All right.
H.L.Jr:
And then let's say at 3:15 we have E dress rehearsal
on Colombia. I don't know who all is interested. The
legal section is. And you (Stewart) at 3:00 o'clock
and Campbell and Klaus. Harry, will you round up the
people for 3:15, please?
Just so we know, on the question of sales of British
securities, Merle Cochran will be the Treasury staff
representative with Mr. Walter Stewart acting as con-
sultant to me on it. Right?
Stowart:
Right.
They are going to have a meeting at
Stewart:
10:00 o'clock.
R.C.Jr:
10:00 o'clock. Have you got fixed up about Campbell
and the ducks?
Poley:
I have this letter on the movie cases. Do you want
me to send that to Eddie Creenbaum and Knollenberg?
R.H.Jr:
Very much. And that letter can be ready for me
Monday?
Poley:
Sure.
H.P.Jr:
Before I see it, I would like it to be initialed by
Helvering
199
- 4 -
Foley:
It will be initialed by those people before it
goes out.
H.M.Jr:
And then when it comes back to be initialed by
Hanes and me - but let's go up to the top - and
then it comes back Monday and Hanes and I see it
Monday, is that right?
Hanes:
Yes.
Foley:
This is in reply to a letter that was sent to
Phil Wenchel by Sam Klaus, and I prepared it for
my signature. Is that all right? It is a legal
letter to the Assistant Attorney General. Now,
it could be prepared, it seems to me, for the
Commissioner, Phil Wenchel or myself.
H.M.Jr:
In writing these two gentlemen, why don't you ask
them who they think should sign it, or do you think
you ought to sign it?
Foley:
I think we ought to sign it.
H.M.Jr:
It is a legal letter?
Foloy:
Yes. I think I should sign it, but if you would
rather have it for the Commissioner's signature,
that is all right with me. I think it might carry
a little more weight if I sign it. That is the
only reason I did it that way.
H.M.Jr:
Then leave it that way, Is that all right with
you?
Hanes:
That is all right.
H.M.Jr:
I would like to read it Monday.
Foley:
All right, sir, I will have it for you.
H.M.Jr:
Anything else?
Foley:
No.
H.M.Jr:
Walter?
Stewart:
Nothing.
200
- 5 -
Cochran:
Here 1s a memorandum of my conversation with
Mr. Straessle yesterday.
H.M.Jr:
Oh yes.
Have you seen Straessle?
White:
No.
H.M.Jr:
Supposing you are here at 11:00.
Anything else?
Cochran:
No, sir.
H.M.Jr:
George?
Haas:
I have nothing this morning.
H.M.Jr:
Jake?
Viner:
Nothing.
Riefler:
Nothing.
H.M.Jr:
My wife had tea with your wife, Sunday. She sent
you her love.
Viner:
In Chicago?
H.M.Jr:
In Chicago.
Jake, I am dividing you fellows up. If you don't
like it, you can all say 80 at any time as long
as you be good today. I would like you here today
at 10:30. The Canadian Minister is coming in and
Ralston called me on the phone last night, asking
if I would see Towers because he is going to London
to represent the Canadian Government.
Viner:
10:30 tomorrow morning?
H.M.Jr:
Today. Viner can be here on this Canadian thing,
and Riefler can concentrate on Colombia, and Mr.
Stewart on British securities. I am dividing you
fellows up and if you don't like 1t....
201
- 6 -
Viner:
All Gaul.
White:
That makes you Caesar.
H.M.Jr:
I don't know how you spell Gaul, but
Write:
In this case, it would be right in either spelling.
Is that meeting going to be in connection with the
correspondence?
A.K.Jr:
No. You are invited, too.
White:
If it were - I mean you
H.M.Jr:
No.
White:
Because there was supposed to be an agenda.
E.X.Jr:
I couldn't get it very close, but I gather that
the meeting was on the British Empire and he seems
to represent Canada on finance.
White:
And not the letter that be had sent you?
H.M.Jr:
No, this is something special. So, 1f Cochran and
Viner and White will be here at - oh, you can't,
Cochran?
Cochran:
I can't.
H.K.Jr:
Then White, will you keep minutes and let Cochran
have a copy? Viner doesn't know how to spell.
Basil?
Harris:
No, I have nothing.
B.M.Jr:
Harry?
White:
I have EL review of the gold and capital movements
since the war began, 1f you want to look at it, and
then a proposal of how to utilize your gold holdings
that I think you ought to glance over. We have &
memorandum on the foreign exchange resources of
England and France and it is different in conclusion
with the apparent prevailing opinion at the British
Treasury, as indicated by some cables that we....
202
- 7 -
H.M.Jr:
If you will give those to Mrs. Klotz to be marked
for Thanksgiving day on the farm.
White:
Right.
Then there is a memo on China. I don't know whether
you want to take that up today or not.
H.M.Jr:
No. I will take that with me to the farm.
White:
The figures on the October trade are in. They are
rather interesting because they show very large
increases, almost double, of exports to Scandinavia
and a very large increase to Russia and B. drop to
the belligerent countries and an increase to Latin
America. The net result is an increase.
Then there are some cables here that I think you
ought to read.
H.M.Jr:
Put it all - mark all of it for the farm, because
I won't get a chance between now and then.
White:
There is nothing here that needs to be gone over
right now.
H.M.Jr:
Anything else?
White:
No.
H.M.Jr:
Dan?
Bell:
Will you want an Open Market meeting for this Tuesday
thing?
H.M.Jr:
I don't think 50.
Bell:
I don't think you need it, but we have always had
them.
H.M.Jr:
Well, I want to talk with the President - perhaps
I will make this for lunch today.
White:
Did you want the SEC in on this Colombia meeting?
I should think SO,
H.M.Jr:
You mean the one this afternoon?
203
- 8 -
White:
Yes.
H.M.Jr:
Yes. Would Jones come - no, this is just a dress
rehearsal for tomorrow. Do you want the SEC here?
White:
They either ought to be here or be informed as to
what is up.
H.M.Jr:
Well, they will be here tomorrow.
White:
Do they receive the letters you receive both from
Welles and Jones?
H.M.Jr:
No, call them up and say if they would like to
attend the dress rehearsal they can come this after-
noon.
White:
O. K.
H.M.Jr:
If they come this afternoon they wouldn't have to
come tomorrow morning, would they?
White:
Well, I imagine if you were going to continue what
you have started they would have to be here tomorrow.
Possibly to avoid any subsequent difficulties, I can
merely inform them as to what the situation is so
they won't be in on the Treasury dress rehearsal.
H.M.Jr:
I will be glad to have them at the dress rehearsal.
White:
0. K.
H.M.Jr:
What else?
White:
That 1s all.
H.M.Jr:
Dan?
Bell:
The Fed sold four million one hundred thousand yester-
day.
H.M.Jr:
You want to sell a little, don't you?
Bell:
Yes.
H.M.Jr:
You are going to finance Tuesday and you want to
sell
204
- 9 -
Bell:
I think it is getting a little close now. I think
the first few days of this week would have been
all right.
H.M.Jr:
Do you want to sell a little today?
Bell:
I don't think it would hurt anything, since we have
got some of those long ones in the Postal Savings
that we could let go at a little profit.
H.M.Jr:
How many two percent notes are we supposed to have
gotten?
Bell:
One hundred and twenty, I think.
H.M.Jr:
Don't let's sell. I don't like to sell the Postal
Savings. How many?
Bell:
120 million.
F.M.Jr:
Especially not the long ones.
Bell:
I like to sell at the top and pick them up at the
bottom.
H.M.Jr:
So do I.
Bell:
We have got two to three dollars profit doing that.
H.M.Jr:
I have seen men go broke trying to do that.
Bell:
That is three percent return for three years.
I suppose you have seen in the paper all this trouble
about the food stamp plan in Rochester.
E.M.Jr:
I saw this cartoon in the Washington Herald this
morning.
White:
Are you going to see Milo Perkins? You said you
were after you came back.
H.M.Jr:
Why don't you (Bell) post me?
Not today (to Mr. White).
Bell:
I will just give you a little background. He sent
a telegram that they were going to withdraw this
205
- 10 -
food stamp plan from Rochester if the banks put
on this service charge. I am afraid it will
develop just like the social security trouble
did on the unemployment compensation payments.
They will get the whole community and all the
banks so mad they won't even speak to & Govern-
ment official and then they will call the Treasury
in to straighten it out.
White:
Except in this case the Treasury is with the grocers
and with agriculture and not with the banks.
Bell:
Nevertheless, I think it could be worked amicably
without all this trouble.
H.M.Jr:
What is your suggestion?
Bell:
This is strictly a banking problem and I think if
the Treasury could get in it we could work it out
like we did the agriculture problem.
H.M.Jr:
Will you call up Milo Perkins?
Bell:
All right.
E.M.Jr:
Why don't you tell him what you did for social
security.
Bell:
The same bank that is in this trouble also was in
the social security, and for ten thousand dollars
deposit they are doing a million dollars worth of
business and perfectly satisfied.
M.M.Jr:
Will you call him up right away?
Bell:
Yes.
H.M.Jr:
It is a good idea.
Bell:
O.K.
Thompson:
I wonder if you could see Mr. Harris and me for
about two minutes?
H.M.Jr:
Harris?
Thompson:
Yes.
206
- 11 -
H.M.Jr:
2:45?
Thompson: Yes.
H.M.Jr:
Let me just go over what we have got today to see
if I have skipped anybody who wants to come. At
10:30 I am seeing the Canadian Minister. At 11:00
o'clock I am seeing Straessle. At 11:30 Preston
Delano and the others report on the comings and
goings of one Giannini. At 1:00 I am lunching with
the President. At 2:45, Harris and Thompson.
3:00 o'clock, Campbell, Klaus and Klotz. At 3:15
Colombia, and so to bed.
I will say right after this Colombia thing at 4:00
o'clock. How is that?
Duffield:
Fine.
H.M.Jr:
Is everybody happy? Have I left you out of anything,
Dan, that you want to come in on?
Bell:
No.
November 21, 1939
207
2:19 p.m.
HMJr:
Hello.
Captain
Collins:
Yes, Mr. Secretary.
HMJr:
Collins, I've read your memorandum. I had no oppor-
tunity to discuss it with the President.
C:
Yes, sir.
HMJr:
I didn't gather what you said to me just before I
left. You want to send a copy of this to Welles?
C:
Oh, no. No, I have B. separate one for him which is
much briefer. That's the whole story of the case.
One 18 going to Welles -- has gone, as a matter of
fact, 18 practically what 18 contained in the last
two or three paragraphs of the memorandum you have,
sir.
HMJr:
That's all right.
C:
Because he has been kept informed by -- by all mes-
sages
HMJr:
That's right.
C:
ever since this transaction started.
HMJr:
Well just -- anything else like this, just keep me
informed in the same way.
C:
Oh, I certainly shall, sir.
HMJr:
That's all right.
C:
All right, sir.
HMJr:
Thank you.
C:
Goodbye.
November 21, 1939
208
2:40 p.m.
Operator: Go ahead.
Guy
Helvering: Hello.
HMJr:
Hello, Guy?
H:
Yes.
HMJr:
The President of the United States tells me you have
summoned a Collector Hinkley from Utah.
H:
Yes. He's here now.
HMJr:
Oh.
H:
We're in Mr. Hanes' office.
HMJr:
He's in Hanes' office now.
H:
Yes.
HMJr:
Oh, you're giving him & hearing?
H:
Yes.
HMJr:
I see.
H:
The report showed certain things about that -- I
thought he ought to be given a chance to -- I had
it up to Mr. Hanes last week.
HMJr:
Well, when you get through - you've made up your
mind what you're going to do, let me know.
H:
Yes. All right.
HMJr:
Be good.
H:
You bet.
November 21, 1939
209
4:58 p.m.
Captain
Collins:
Mr. Secretary
HMJr:
Yes, Captain.
C:
I had a phone call from Loui 8 Johnson just about
ten minutes ago.
HMJr:
Yeah.
0:
And there's to be a meeting over in the War Department
tomorrow morning.
HMJr:
Yes.
C:
And I will go to it at eleven o'clock.
HMJr:
Yes.
C:
And Mr. Wilbur of Aluminum is also to be there, as
well as the chief of the Aeronautics of the Navy.
HMJr:
Yeah.
C:
This plant that I spoke of in the memorandum, why
they are going to try to put some pressure on to try
to get some of this plate released.
HMJr:
Right.
C:
So I'll be in touch with you after that meeting, sir.
HMJr:
O. K.
C:
All right, sir. Goodbye.
210
November 21, 1939
Hanes told HM, Jr that he did not show this memo-
randum to the President and that the matter was dropped.
HM,Jr told him that he was "all wet" about it.
MEMORANTAM FOR THE PRESIDENT:
Sections 3 and 8 of the Gold Reserve Act of 1934 provide in
part 12 follows:
The Secretary of the Treasury phall, by regulations
issued hereunder, with the approval of the President,
prescribe the conditions under which gold may be acquired
and hold, transported, selted or treated, imported, exported,
or earmarked - # "," (Underscoring added.)
with the approval of the President. the Secretary of
the Treasury my purchase gold in any amounts, at home or
abroad, with any direct obligations, coin, or currency of
the United States, authorized by Lov, or with any funde in
the Treasury not otherwise appropriated, at such retea and
upon each terms and conditions 4,2 be MY deep most ed-
vantegeous to the public interest + 10,0 (Underscoring added.)
& January 31 end February 1, 1934, the Secretary of the Treasury,
with the approvel of the President, anounced that the United States
would buy imported gold at the $35 price subject to the regulations
issued under the Gold Reserve let. At the BAGO time the Secretary
of the Treasury, with the approval of the President, issued regulations
prescribing, among other things, the conditions under which gold night
be imported and under which gold would be purchased by the United States.
The Secretary of the Treasury, with the approval of the President,
has the legal authority to revoke or modify the existing procedure and
regulations relative to the importation of gold and the purchase by
the United States of imported gold and to impose any terms and con-
ditions on the sale of imported gold to the United States. There
10. nothing in the Neutrality Act which would limit the legal power of
the President or the Secretary of the Treasury. However, any regula-
tions relating to the importation of gold, of the sale of imported
gold to the United States, which constituted a discrimination ogninst
a belligarent might raise a question under the international law at
neutrality. day legal obligation to purchase gold under the Triportite
Accord my be terminated on twenty-four hours' notice.
Regraded Unclassified
BK223
TREASURY department
212
INTER OFFICE COMMUNICATION
DATE November 21, 1939
TO
Secretary Morgenthau
FROM
Vr. White
Subject: "Tin Loan" to China
1. China needa additional funds to purchase more equipment.
The 125 million five-year Export-Import Bank credit to the
Universal Trading Corporation is almost exhausted and the
Universal Trading Corporation has a tentative list of goods
to be urchased approximating 375 million. Though these items
are not vital to China's continuation of the war they would
substantially strengthen her staying power against Jecan, and
Decrease her dependence upon Russian assistance.
2, A credit could be extended to China with future tin ship-
-inte to the United States as security against the loan. The
Depart-Import Bank has very little left uncommitted, but funds
cossibly could be made available by some shifts in loans between
the Export-Import Bank and the R.F.C.; or the R.F.C. may be able
to lend as American cornoration (The Universal Trading Corpora-
tion) the funds with which to buy future shipments of tin. (See
schended memo from the Legal Division on that point.)
3, 76 have been importing about 3,000 tons of Chinese tin an-
num11y. This tin is of inferior quality (sometimes referred to
13 Grade 0), which is used for specific ourposes suitable to a
lower grade product. We do not know how much the use of this
inferior tin can be expanded in the United States; nor do we
know how long it would take and how much capital would be neces-
sery for Ohina to improve the quality of the tin that she ex-
-orta 20 13 to compete with high grade tin coming from the
Straits Settlements. (Our Procurement Division has undertaken
to test Chinese tin for possible uses by the United States
Government.) These are matters which should be discussed with
some of the large domestic tin users. Te have contacted our
government tin experts in Washington but get varied opinions.
The Bureau of Mines 18 beginning a survey for possible usea
of Chinese tin but the survey will not be finished for some
months to come. In view of the fact that Grade o tin sells
for only R few cents less per pound than does the better grade,
it appears that the possible uses are adequate to consume at
lesst 10,000 tons e year without any significant reduction in
price.
Division of Monetary
213
Research
- 2 -
#. The Central Government claims it now has control over an
output of 13,000 tons of tin, almost entirely Grade 0, (10,000
tons in Yunnen province and 3,000 in Kwangsi). This tin is
stalted near the mines by the Chinese but in refined in Hong
Long by British refineries. Whether those refineries will
continue to operate on Chinese tin for excort to the United
States is a matter which requires further investigation.
So long as the French Indo-Chine route is open the tin
couling from Yunnan can be delivered. Should it close the
Central Government will be able to ship very little tin to
the United States.
Exports by the Central Government of the 3,000 tona of tin
produced in Kwangsi +111 probably soon be blocked. The Japanese
218 just initiated a campaign against Pakho1 area in order to
use the line of communications from Kwangai to the port of ship-
art. Though they may not be able to advance very far into the
mountainous territory they will probably be able to out the line
of communication 80 that receipts of tin from Kwangsi are uncer-
tain during the duration of the war.
The average price of Grade A tin in New York for the nast
(Ive years has been about $960 & ton (it has had a low of
1740 in May, 1938 to EL high of $1,180, August 1937). Grade A
tin is now selling about $1,020 B short ton. Grade 0 tin sells
for about $50 8 ton under the price of Grade A.
Te import more than 50,000 ton A year. Great Britain, France,
the Metherlands control almost two-thirds of the world's output
and through the International Tin Cartel control more than
30 percent of the world's sale of Grade A tin. In view of the
fect that British interests virtually control the Tin Cartel
our tin consumers would be greatly interested in insuring sup-
1168 outside of the Cartel control.
5. A loan could be arranged patented after the tung oil loan.
The Universal Trading Corporation will contract with the Chinese
Government to import 10,000 tons during the next ten years --
Reginning possibly with 5,000 tons for the coming year end
stepping it up rapidly to reach an average of 10,000 tons over
. ten year period. This tin would be sold to the American con-
sumers, possibly at 8. slight discount from the market price.
Fifty percent of the dollar proceeds could then be employed to
reg interest and amortization of the debt. That would not
leave the Chinese Government very much foreign exchange on
their tin sales currently because of the high foreign exchange
Division of Monetary
214
Research
- 3 -
cost of shipping, refining, etc.
If China can export 100,000 tons of tin to the United
States over a ten year period, its total value should be
in the neighborhood of $75 million B.B it 18 not unreasonable
to anticipate an average price of $750 a ton for Grade C tin
during the next ten years. A loan of $35 million might be
feasible on that basie.
6. The risks of financial loss to the Export-Import Bank
(or R.F.C.) are not great despite the war in China. Repay-
ment would be jeopardized only if Japan destroys the Central
Government. If peace be made either directly by the Central
Government or with a puppet government which involves the
tin area any government of China will be reluctant to discon-
tinue servicing either the tin oil or the tung oil loans be-
cause of their desire to obtain further economic assistance
from the United States during the inevitable period of re-
construction.
The greatest risk involved is the possibility of the ces-
sations of payment for the duration of the war should the
Jacanese completely block Chinese outlets to the outside world.
À further risk 1s that the Communists would obtain control
over the whole of south China and would not meet the commit-
ments of the Chungking Government.
Political considerations in this loan are, of course,
paramount and that the State Department will doubtless have
definite views on the political desirability of making the
loan at this time.
7. The next steps in the consideration of the loan might be
the following if you approve:
(a) Discussions by somebody in the Treasury with large
tin consumers with a view to ascertaining the possibil-
ities of uses for 10,000 tons of Grade C tin, and any
serious technical problems that may arise in the con-
templated arrangements.
(b) Obtain more definite information with respect
to the possibilities of (1) continued shipments of tin
into Hong Kong; (2) the feasibility of constructing re-
fineries on Chinese territory, and (3) whether the
British will continue to refine Chinese tin for export
to the United States.
strictly Confidential
Approx 11/22/39
cort
I
Statement on the prospects of vence oversred but not
215
signed by Chinese Ambassador; original viven to Secy. Hull
During the months of July, August and early September,
Chinese leaders were greatly disturbed by the threatening and
rapidly changing situation in Europe. They were apprehensive
of cortain possible contingencies: (1) that Great Britain and
France might be forced to enter into some understanding with
Japan which might be detrimental to China's war of resistance:
(2) that these democratic powers might give up their Settle-
ments and Concessions which had been the few islands of refuge
for Chinese population and interests in the occupied areas:
and (3) that they might even be compelled by Japan to close
the Indo-China and Burma Routes to Chinese goode and munitions.
After the publication of the Soviet-German Pact of August
23, Chinese fears were enhanced by the additional possibility
of the U.S.S.R. coming to some agreement with Japan, and dis-
continuing her material aid to China. First reports of the
Soviet-Japanese truce on the border war almost substantisted
these fears.
It was natural that, during those hectic months, Chinese
leaders should cherish the hope that an early ending of the Sino-
Japanese conflict might be brought about through the mediation
of the President of the United States before the situation de-
teriorated too far to the disadvantage of China.
In an interview with the United Press on September 27,
Dr. Wang Chung-hui, Minister for Foreign Affairs, went 80 far
as to state that the United States was in & favorable position
to act as mediator and bring the undeclared Chinese-Japanese war
to an early end.
Regraded Unclassified
- 2 -
216
Two days after the above interview (September 29), the
Japanese "Embassy" spokesman, in a written statement, said:
"As is well known, the Japanese Government considers
the dispute between China and Japan purely a two-
party conflict, not to be settled by the intervention
or mediation of a third party."
In the same statement, the Japanese spokesman characterized
Minister Wang's interview as China "imploring America" to
mediate, and expressed the hope that the United States might
not "be thus tricked by China".
In the meantime, certain larger aspects of the international
situation seemed to become more clarified. (1) The Soviet-
Reich Pact has apparently left a deep and lasting wound on
Japan, whose pride has been hurt and who has now declared the
Anti-Comintern Pact dead. (2) This feeling of desertion and
betrayal by her own ally has led Japan to hesitate - at least
at the present moment, - in using force to oust the British and
French from China. The Japanese military pressure on Shanghai
and Hongkong has been temporarily eased. (3) While there has been
some announced restriction (changing almost every week) of
transportation of Chinese war materials through Indo-China, 80
far the French route, as well as the Burme route, has remained
open to Chinese traffic. (4) The Soviet-Japanese truce has
turned out to be no more than a local truce, and there has been
80 far no attempt to negotiate a non-aggression pact between
the U.S.S.R. and Japan.
And then, during the first week of October, the Chinese
armies defending Changsha, Hunnan, scored a number of victories.
- 3 -
217
repulsed the Japanese armies, and broke down the Japanese
offensive. The victories of Changsha were celebrated throughout
China: and they greatly elevated Chinese morale.
Thus, 40 days after the outbreak of the European Var, China
is gradually recovering from her earlier apprehensions and is
regaining her courage and calm. If she can be assured of the
right of way through French Indo-China and British Burma and
if she can from time to time secure more financial and material
aid from her friends abroad, she will be able to fight on for
a fairly long time to come.
II
This does not mean that China desires no early peace.
If a peace can be obtained which shall meet the sense of justice
of the American Government and the American people, and which
shall not violate the principles of the Nine-Power Treaty, -
such a peace will be most eagerly accepted by China. If such
B. peace can be obtained through mediation by the United States,
China will not hesitate to seek such mediation.
No one desires such American mediation more devoutly than I.
For more than two years, I have been speculating about its
possibilities and difficulties. There are at least these almost
unsurmountable obstacles to mediation by the U. 3. Government
in the Sino-Japanese Conflict.
(1) Japan, however eager she may be for such mediation,
will not be willing to officially ask for it. Like Hitler, she
may fear that such a request may be interpreted as a confession
of workness. (2) What the U. S. Government and people consider
- 4. -
218
as "just peace" can not be acceptable to Japan now. Japan 18
seriously planning to liquidate the war by making peace with B.
new "central" Chinese Government of her own making.
(3) A peace acceptable to Japan now will in all probability
be condemned by the liberal and radical press of China and
America as a "Par Eastern Munich", which will surely bring
about unpopularity and even strong opposition to whosoever
sponsors such a peace.
(4) It is very difficult to imagine 8. peace which is accept-
able to Japan and which at the same time will not violate the
spirit of the Nine-Power Treaty or the American doctrine of non-
recognition of situations created by force in violation of
existing international treaty obligations.
(5) Japan probably will reject all such compromise devices
as recommended by the League of Nations Commission of Inquiry
with regard to Manchuria.
(6) A recent and most reasonable procedure of joint use
and joint government in 8 disputed territory WAB worked out last
year between the American and British Governments with regard to
the Canton and the Enderbury Islands in the Pacific Ocean. But
such an amicable method, while working satisfactorily between two
powers of traditional friendship and mutual understanding, may
not be applicable to two countries of too great inequality in
military strength and too deep-rooted mutual suspicion and hatred.
(7) Recent history of the European peace efforts of
September, 1938, shows that it 1e not enough to make the weaker
party to the dispute agree to substantial concessions and
sacrifices. It is absolutely necessary for the mediator (or
- 5 -
219
mediators) to be prepared to use the power at his command to
bring the stronger party to its senses and reasonableness.
(8) The same recent history further shows that even a
peace solemnly signed by the heads of four great European
Powers was worthless in preserving the independent existence
of Csechoslovakia after she had made all the great territorial
sacrifices six months previously. Can & mediated peace in the
Far Bast provide for better and more effective guarantees and
sanctions?
These difficulties are enumerated here in the sincere
hope that 8 frank recognition of these implications may be
useful in any comprehensive consideration of the question of
American mediation in the Far Eastern Conflict.
October 16, 1939.
Prepared by: H. C. Murphy
Wesley Lindow
o
TREASURY DEPARTMENT
220
INTER OFFICE COMMUNICATION
DATE November 22, 1939.
TO
Secretary Morgenthau
FROM
Mr. Haas OA
Subject: The New Financing Plan Inaugurated by the USHA
I. Summary and Conclusions
The new USHA plan involves the public issuance by local
housing authorities of six-month notes guaranteed in effect
by the USHA. The effects of the plan may be summarized as
followe:
(1) Local authorities will pay lower rates of
interest than if they borrowed from the
USHA.
(2) The savings are only possible, however,
because the borrowing 18 done for short
periods. There is a grave question whether
such short-term financing 1a justified.
(3) The net interest cost to the USHA and the
local authorities combined will be consider-
ably higher than if USHA borrowed for the
same period and reloaned to local authori-
ties. In other words, the indirect use of
USHA credit 18 more expensive than the d1-
rect use,
(4) Private capital will be tapped to no fur-
ther extent under the new plan than at
present.
A further weakness of the new plan lies in the fact
that additional fully tax-exempt securities are created.
This 1s not important 80 long a.B the securities are for
short terms, but if the plan 1s extended to include long-
term issues, this would be & serious weakness.
Secretary Morgenthau - 2
21
II. Description of the New Plan
The new USHA plan involves the public issuance by local
public housing authorities of temporary loan notes, which
will mature in six months and be noncallable. They will, in
effect, be guaranteed by the USHA through a pledge to loan
the local authority the amount of the notes and interest
thereon three days prior to maturity. The USHA "agrees to
cause the proceeds" of its loan to be deposited at the bank
at which the temporary loan notes are payable.
The notes will be offered to bidders who will have the
option of designating the interest rate, the denominations of
the notes, and the bank at which they will be paid, The
notes will be wholly exempt from Federal income taxes, and
In most 08688 from State income taxes.
The new plan 1e expected to result in substantial inter-
est savings to the local authorities. The saving would rep-
resent the difference between the market rate of interest on
the new notes and the lending rate of the USHA (currently
3-1/4 percent).
It is not clear whether the new plan contemplates the
temporary notes actually being paid off at maturity from the
proceeds of USHA advances, or whether it 18 hoped to refund
the notes publicly. A press release of the Authority explain-
ing the plan states that the notes n
will be redeemed
from the loan advances of the USHA, 86 they are deposited at
the later date." On the other hand, Mr. Straus was quoted as
maying that:
"This temporary small-scale financing will
proceed inevitably to permanent large-scale f1-
nancing of public housing projects with private
funds, thus tapping huge reservoire of idle cap-
ital.
"There 18 every reason to believe that,
within & year or two, most of the hundreds of
millions of dollars invested in constructing
public housing projecte will flow through the
normal channels of the private investment mar-
ket, relieving the Treasury of this operation
and limiting Federal participation to the sub-
sidies necessary for low-rents.
"Then, indeed, the alliance of business and
Government in economic revival through housing
will be demented."
Regraded Unclassified
Secretary Morgenthau - 3
222
III. Critical Analysis of the Plan
There appear to be two main reasons for the adoption of
the new plan: first, reduction in interest costs to the local
authorities, and second, the tapping of "private" capital for
housing projects. The remainder of this memorandum will con-
sider how well these objectives will be achieved by the plan.
Under the United States Housing Act, loans to local au-
thorities bear interest at the same rate regardless of matu-
rity. It 18 contemplated that the loans will run for a long
term, and the interest rate is accordingly set on B. long-term
basis. More specifically, the rate 18 set at not less than
the rate specified in the last Federal Government bond issue
with a maturity of ten years or more, plus 1/2 of 1 percent.
On the first offerings of the new notes, made a few days ago
by eleven local authorities to the amount of $50 millions,
the interest cost averaged slightly less than .60 percent.
Compared with the current 3-1/4 percent lending rate of the
USHA, the new plan would thus provide savings of 2.65 percent
in the interest costs of the local authorities.
This saving arises because the local authorities are able
to borrow directly in the market for short periods at rates
cheaper than the USHA is required by law to charge on its
loans. Presumably, the USHA would be willing to make such
short-term loans, but the statute does not permit reduced in-
terest rates for shorter maturities. The use of USHA credit
indirectly, instead of directly, gets around this difficulty.
The question naturally arises a.B to why short-term loans
should be resorted to in the financing of projects which will
ultimately be amortized over periods as long as sixty years.
The answer seems to lie in the establishment of two financing
periods, one covering the period of construction, and the
other covering the period of use. The new notes are presum-
ably to be used as B. vehicle for financing during the con-
struction period.
This separation for financing purposes of the period of
construction from the period of use 1s open to grave logical
objection. Waiving this question, however, it should be noted
that local authorities have to pay a relatively high interest
rate, even with & USHA guarantee, This 1g easily seen by ref-
erence to the interest rate on other issues of similar matu-
rity. Early in November, New York State sold an 1ssue of
seven and one-half month notes at a rate of .20 percent, and
the State of Pennsylvania sold seven-month notes at a rate of
.44 percent. A few days ago, the Federal Intermediate Credit
banks sold an issue of six-month notes at & rate of .30 percent.
Regraded Unclassified
223
Secretary Morgenthau - 4
Moreover, the rate on the last issue of three-month Treasury
bills was only .02 percent, and certainly would have been under
.10 percent if the term had been six months.
On the basis of these issues, it 18 clear that the USHA
could sell six-month securities at a far more favorable rate
than the .60 percent paid by local authorities (notwithstand-
ing the difference in the degree of tax exemption accorded,
which 18 B. relatively minor matter in the case of short-term
loans). As a matter of fact, we estimate that a six-month
USHA issue could be sold at a rate of about .15 percent. Ob-
vioualy, the use of USHA credit through the medium of a guar-
antee 16 not as efficient as it would be if used directly.
Consequently, it would be far more efficient if the USHA
borrowed the money and loaned it to local authorities. This
is true, irrespective of whether the money is to be borrowed
for a short or long term, and irrespective of the rate to be
charged to the local authorities by the USHA. Logically, the
lowest possible rate should be obtained from the market for
the period for which the money 1s borrowed, The question of
how the benefits of this rate should be distributed between
Federal taxpayers, local taxpayers, and tenants of the local
housing projects 18 one of broad public policy beyond the
scope of this memorandum.
The alleged advantage of the new plan in tapping private
capital is without foundation. The fact that the USHA, in
effect, guarantees the loans of local authorities means that
the issues are attractive to about the same classes of in-
ventors as USHA securities themselves. It 18 interesting to
note, in this connection, that the $50 millions of local au-
thority notes sold a few days ago were taken up entirely by
B. banking syndicate.
An additional weakness in the new plan arises because
the new notes will increase the supply of fully tax-exempt
securities, whereas securities of the USHA would be only par-
tially exempt from Federal income taxes. This 19 not impor-
tant so long as only short-term obligations are issued, but
in the case of long-term obligations it would be a very seri-
ous weakness. At a time when the Administration 18 endeavor-
ing to eliminate tax exemption from future issues of public
securities, it seems unfortunate, to say the least, for the
USHA to encourage an increase in the amount of fully tax-
exempt securities outstanding.
224
November 22, 1939
To:
The Secretary
NA
From: Mr. Hanes
During your absence the Secretary of Labor called a
meeting of the Committee on Economic Security. I was
unable to attend so asked Mr. D. W. Bell to go for us.
The attached memorandum gives you the result of this
meeting.
JwH
TREASURY DEPARTMENT
225
WASHINGTON
November 16, 1939.
MR. HANES:
As requested by you, I attended a meeting of the Committee
on Economic Security held this morning in the office of the Secre-
tary of Labor. Those present were: The Secretary of Labor, Secre-
tary of Agriculture, Mr. Altmeyer, Mr. Littell, representing the
Attorney General, and myself.
The Secretary of Labor referred to the letter of August 31,
1939 from the President which, in effect, continued the life of
the Committee created in 1934, and the President in addition wrote
letters to the Secretary of Labor, the Secretary of the Treasury,
the Attorney General, the Secretary of Agriculture, the Secretary
of Commerce and Mr. Altmeyer of the Social Security Board, asking
them to serve on this committee.
Viss Perkins stated that she was desirous of studying several
matters which were before the Board, some of which were there by
reason of its original study of the social security problem and
others were there by reason of the President's reference. She
said that the President had asked this committee to study the many
old age and health schemes which had been presented. She said that
the President had also reconstituted the Inter-departmental Committee
on Health and Welfare, headed by Miss Josephine Roche, and asked
that that committee coordinate its work through the Committee on
- 2 -
226
Economic Security. She said that no doubt in the course of the
next few months this Inter-departmental Committee would submit
plans for the consideration of the Economic Security Committee.
She then said that the President had asked the Treasury,
the Post Office and the Labor Departments to study the question
of the sale of annuities by the Federal Government. Miss Perkins
asked me if I had made any study of the question of the sale of
annuities and I told her that I had been studying this subject
for the past two weeks. I also explained what was done in 1934
when the matter of selling Government annuities was under con-
sideration by the Congress when it had before it the original
Social Security bill, but before the bill got through the two
Houses the provision for the sale of Government annuities was
eliminated.
Miss Perkins then said that she would like to know the
status of the Old-Age Reserve Account and just what happened
to the money that the Treasury was collecting under the provisions
of the Social Security Act. I explained to the Committee just
what had been done with the money that we had collected up-to-date
and would continue to collect up to December II, 1939; that begin-
ning January 1, 1940 the plan was changed some by the amendments
of August 10, 1939 but that the method of investment might con-
tinue on about the same basis as it had in the past except that
instead of bearing an interest rate of three per cent, the obliga-
tions would carry an interest rate more comparable to the average
rate of interest on the public debt.
- 3 -
227
She then asked Mr. Altmeyer to go over the many details that
he had been studying for the past few months and which this Committee
should consider within the months to come. He stated that one of the
questions before this Committee would be the amount of Federal grants
to states for old-age assistance and children's benefits. He also
said that the reserve now being built up under the Unemployment
Compensation Act would have to be considered as well as the amount
which a participant could draw during the period specified in the
law. He agreed to prepare a memorandum on all of these points and
circulate it to members of the Committee.
Miss Perkins then said that she hoped the members of the
Committee would be prepared to meet again early in December and
possibly early in January to formulate these various programs.
own
PROBLEMS IN SOCIAL SECURITY
228
1. Making present program more effective
(a) Extending present benefits to more people
(1) Agricultural and domestic employees
(b) Making benefits more adequate
(1) Variable grants to states
(2) Unemployment compensation benefits
2. Creating new types of benefits
(a) Various forms of public assistance
(1) General assistance
(2) Disability assistance
(3) Medical assistance
(b) Permanent disability insurance
(c) Temporary disability insurance
(d) Health insurance
3. More effective administration
(a) State or Federal administration
(b) Coordination of existing administrative arrangements
Please #
229
File
November 22. 1939.
To:
Secretary Morgenthau
From:
Mr. Hanes
1. On December 10, 1938, the President, in connection with
his consideration of a harbor improvement project, directed the
Secretary of War to have a study made in cooperation with the
Commerce and Treasury Departments to see if tax plans could be
drawn up to collect from the users of rivers, harbors and canale
one-half the present cost to the Federal Government of operating
and maintaining waterway improvements and aids to navigation.
This would mean additional taxes on such users of about
$23,000,000 annually.
2. Pursuant to this letter the Secretary of War asked the
Treasury Department to appoint representatives to an inter-
departmental committee. I appointed Roy Blough and Philip Young
to serve on this committee.
3. The Committee has held several meetings and is expecting
to agree today on the wording of its report. The report 1B to
be signed by the Committee members and transmitted to the
President by the Secretary of War before December 1, 1939.
4. The report of the Committee will probably describe two
alternative plans for imposing annual taxes measured by the
tonnage (length or horsepower in some cases) of vessels engaged
in any form of water transportation, together with fees for the
passage of locks. Preference will be expressed by the Committee
for one of the plans.
5. The sentiment of the Committee is against the imposition
of special shipping taxes of the size under consideration.
However, no recommendation will be made regarding their
desirability, as it is deemed that the President's letter
precludes a recommendation against such taxation.
6. A copy of the proposed report will be available in a day
or two. Mr. Blough and Mr. Young would like to have your approval
for them to sign the report or your instructions for other action.
T.w.H.
COPY
THE WHITE HOUSE
230
WASHINGTON
December 10, 1938.
Dear Mr. Secretary:-
I have your letter enclosing report on
Northeast Harbor, Maine.
Admittedly Northeast Harbor 1a used almost
entirely for Summer anchorage for the pleasure craft of
Summer visitors and for visiting pleasure craft during
the Summer season.
On two previous occasions I have tried to
enlist the aid of the Board of Engineers for Rivers and
Harbors and the Chief of Engineers in an effort to reduce
the annual maintenance appropriations for our rivers and
harbors by finding B. formula of taxation which would
return at least a part of the annual cost.
As I remember it, the annual maintenance
cost is between sixty and seventy million dollars - a
direct charge against the Treasury.
I etill think that we ought to get returned
to us at least half that amount, and I suggest a study of
two possible ways of revenue.
The first would be a very small annual
tonnage tax for coastwise shipping and a somewhat larger
tonnage or over-all length tax for pleasure craft which
are propelled either by sail or engines.
This tax should be small enough not to be
in any way burdensome or to retard coastal commerce.
The second tax could be copied from the
British method. As I understand it, they have in every
harbor of England which has buoys and anchorages, &
special port tax for pleasure craft. In cruising along
the British coast in a sailing yacht or cabin cruiser,
the harbor master rows out to your boat as soon as you
anchor and collects a small port charge - as low, I
think, as sixpence for very small boats and running up
to ten shillings or a pound for larger yachte. In these
two ways Trinity House collecte enough money to maintain
the dredged channels, the buoys and other aids for
navigation throughout their jurisdiction.
-1-
231
In regard to the 1dea that our Coasts constitute
great water parks and that the boating public should be
treated like the automobile public in our National Parks
is a beautiful theory worthy of a great Nation which can
provide everything free for its citizens.
In regard to the National Parks, I have always
been of the opinion that there should be a small entrance
fee. For example, if the 500,000 people who visited the
Yellowstone National Park in 1937 had paid twenty-five
cents apiece, the Park service would have received
$125,000 -- probably $100,000 of this being net, and
this would have gone at least part way to meet the very
heavy expenses of maintaining Yellowstone.
I wish you would have the whole subject ro-
studied in conjunction with the Department of Commerce
and the Treasury Department and see if some plan can be
evolved whereby we could get revenue of twenty-five or
thirty million dollars A year toward the maintenance cost
of our channels and harbor work,
In the matter of Northeast Harbor, Maine, I
am approving this particular project, with the request,
however, that the Chief of Engineers try to work out
with the local authorities the removal of all sewage dump-
ing into Northeast Harbor.
Furthermore, I wish the Corps of Engineers
would study a change of policy in two respects -- first,
declining to approve projects for yacht anchorages unless
these yacht anchorages are in fact a part of commercial
harbors and included in the work of providing anchorage
for commercial vessels.
Second, a restudy of those projects which
call for dredging and maintenance of short channels
leading from main channels up to a single factory,
lumber wharf, etc., etc. It seeme to me that no private
company should have the right to demand through its
Member of Congress that the Government dredge & channel
for what is essentially only for its own use. If B. single
plant is deliberately located up a creek, it ought to
pay for its own access to the main channel.
Very sincerely yours,
(signed)
Pranklin D. Roosevelt.
The Honorable
The Secretary of Var
Washington, D.C.
Regraded Unclassified
232
November 22, 1939.
Dear Bill:
Thank you for your letter of November 18th
in regard to the Farm Credit - Department of
Agriculture situation. I appreciated your writing
so about it.
Ve had a perfectly delightful time in
Arizona, and the trip proved successful in every
way. Now I an trying to clear up my desk to get
off to the farm for Thankagiving. I hope that
your own holiday is a happy one.
With all good vishes,
Sincerely,
Henry
Dr. William I. Myere,
Department of Agricultural Economics
and Farm Management,
Cornell University,
Ithnea, New York.
GEF/dbs
NEW YORK STATE COLLEGE OF AGRICULTURE
AGRICULTURAL EXPERIMENT STATION
act
CORNELL UNIVERSITY
ITHACA, NEW YORK
nee.
DEPARTMENT OF AGRICULTURAL ECONOMICO AND FARM MANAGEMENT
233
November 18, 1939
Personal
The Honorable Henry Morgenthau Jr.
Secretary of the Treasury
Washington, D. C.
Dear Henry:
After you have time to get straightened around, McReynolds
or Hill can tell you of the exciting developments of the past
week in the relations between the Farm Credit Administration and
the Department of Agriculture. A very serious mistake has been
averted at least temporarily, and the decision of their future
relationships has been left to a committee of which, I understand,
you are a member. I sincerely hope that McReynolds may be in-
cluded because he combines a broad over-all knowledge of govern-
ment administration with experience in the practical operation
of government departments.
I hope that you and Mrs. Morgenthau enjoyed Arizona as much
as we did and that you have returned in the best of condition.
Cordially Why yours,
W. I. Myers
IN:EA
non
ss
Ja38
C34
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE November 22, 1939
TO
Secretary Morgenthau
FROM
Mr. Haas POR
Subject: Wheat export sales and other market data from the
Federal Surplue Commodities Corporation.
Oct. 31: Export business in Manitoba wheat was the best
in several days and estimated sales were about
1,000,000 bushels, for shipment to the United
Kingdom, Copenhagen, Norway and the Continent.
Sydney, Australia, cables indicated that about
17,000,000 bushels of the 1938-39 wheat crop had
been acquired by the Australian government, and
of this amount 10,000,000 bushels have been sold
to the English government at about 48 cents F.O.B.
Since the war started in Europe, Argentine export-
ere have cleared wheat a.s follows: to the United
Kingdom 4,340,000 bushele, to the Continent
8,535,000 bushela, others 11,784,000, or a total
of 24,659,000 bushels for eight weeks.
Nov. 2: A good demand was reported for Canadian cash wheat
with estimated amounts of from 700,000 to 1,000,000
bushels having been sold for export. Large orders
were said to have been received from the United
Kingdom.
It is thought that Canada will make a major decision
within the next two months on its war-time wheat
policy. The government will decide if it 18 to
continue the present open trading in wheat or suspend
futures trading on the Winnipeg Grain Exchange and
conduct all trading through a central agency. Farm-
ers organizations favor closing the Winnipeg Exchange
and dealing with the British buyer through a central
agency.
Nov. 3:
Sales of Canadian wheat to Europe the last two days
are estimated at between 4,000,000 and 5,000,000
bushels, Late today it was reported that England
had bought 7,500,000 bushels of wheat from Argentina
at 441 cents F.O.B. boat.
235
Secretary Morgenthau - 2
Nov. 6:
Export sales of Canadian wheat are estimated at
400,000 bushels, mostly to the United Kingdom. The
Greek steamer Nicholas M. Embricos, sunk in the
English channel, carried 256,000 bushels of American
wheat.
About 300,000 bushels of United States corn was sold
for export from Montreal.
Nov. 7:
Norway 1s reported having a steamer en route to
Albany, New York, due to arrive November 9, to take
200,000 bushels of No. 3 Manitobas and No. 2 Canadian
western rye to home ports. Export sales of Canadian
wheat reported at about 400,000 bushele.
The ability of England to secure large quantities
of wheat from Australia and Argentina at very low
prices is considered in Canada to have placed the
Canadian government at a big disadvantage in deal-
ing with the British buying agency.
Nov. B:
A large business was done in Manitoba wheate with
the English government buying approximately
3,000,000 bushels. Since November 1, Great Britain,
it 18 estimated, has taken more than 8,000,000 bushele
of Canadian wheat. The Continent bought about
300,000 bushele of Canadian wheat, some in store and
some for later shipment.
Export flour sales from the United States have been
very light the past few weeks.
Nov. 13: Over the week-end it was reported that the United
Kingdom had taken three cargoes of about 750,000
bushels of Manitoba wheat.
Prese reports intimated that Brazil may buy wheat
supplies in the United States because of unfavor-
able exchange conditions between Brazil and the
Argentine. It is estimated that the Brazilian
requirements are about 30,000,000 bushels annually.
236
Secretary Morgenthau - 3
Nov. 14: No sales of Canadian wheat reported today.
Sales of 280,000 bushels of corn were reported
made for shipment from the Gulf to the Netherlands.
It was also reported that a fair amount of South
African corn 19 being received in Antwerp.
Nov. 15: The Northwestern Miller reports that Southwest
mille booked orders equal to 28 per cent of mill-
ing capacity 88 against bookings the previous week
of 59 per cent of capacity.
Nov. 16: Argentina reported that Britain had recently pur-
chased several cargoes of Argentine wheat. Export
sales of Canadian wheat today are estimated at about
500,000 bushels. Some good flour sales were also
reported, but the amount was not made known.
Nov. 17: About 115,000 bushele of No. 3 Manitoba wheat were
sold to Norway from Vancouver, B. C., and a ship
was chartered to take 300,000 bushels of grain from
Albany to Scandinavia, The cargo will consist of
Canadian wheat and rye and some United States corn.
It 18 now reported that approximately 2,000,000 bush-
els of wheat and flour had been taken by the United
Kingdom at Winnipeg on Thursday.
After the close today it was reported that a cargo
of American corn had been worked from Atlantic ports
to Scandinavia. Lately Switzerland has bought large
amounts of Argentine corn, and the corn will be
shipped through Genoa, Italy.
Nov. 18: It 1s thought that purchases by the United Kingdom
of Canadian wheat have averaged about 1,500,000
bushels per day during the past two weeks, and it 16
understood that they expect to keep buying on this
basis for some time.
Export inquiry for United States corn continued, and
sales over Friday were reported at about 250,000 bush-
ele which included a small cargo worked from the Gulf
to Holland and some additional business from Albany,
destined for Scandinavia.
BK223
TREASURY DEPARTMENT
237
PROCUREMENT DIVISION
OFFICE OF THE DIRECTOR
WASHINGTON
November 22, 1939.
m
MEMORANDUM FOR THE SECRETARY
A conference was held in the War Department, at which
were present: General Arnold, Chief of the Army Air Corp;
Colonel Byrnes, from the Assistant Secretary's Office; two
representatives from the Navy Air Corp; Mr. Wilber of the
Aluminum Company of America, and the Director of Procurement.
As a result of a discussion of the probable require-
ments of the French Government, it was agreed that a. report
would be made to Assistant Secretary Johnson, suggesting that
the French Ambassador indicate some representative of the French
Government who could speak with authority as to the quantity
of aluminum plate that would be required.
It is anticipated that a meeting for a discussion of
this representative will be held the early part of next week.
Director of Procurement.
238
OP&N MARKET meeting
November 22, 1939.
2:15 p.m.
Present:
Mr. Harrison
Mr. Bell
Mr. Hass
Mr. Murphy
Mr. Hadley
Mr. Hanes
H.V.In:
Well, Mr. Bell, what does it look like?
Bell:
Well, I don't know whether you want to go over
the balances again, Mr. Secretary. You remember
last time we discussed this problem we had in the
picture 250 million dollars for RFC and 450 million
dollars for the Treasury bills, beginning late in
October and extending through the first two weeks
in December.
H.W.Jr:
Yes.
Bell:
We got out of that picture 150 million dollars in
bills. Now, 1f we raise 500 million additional
cash in December, that would be 175 million dollars
since we got 25 million RFC, 30 we have about 200
additional money than they contemplated on our
last estimate. lie would go into December with
about 8. billion four, and go out of December with
about a billion 660 million.
H.M.Jr:
How much?
Bell:
A billion 660 million. That would carry us into
March, taking out the United States Housing Authority,
about & billion 350, B. good balance.
Now, you could leave this at 500, you could cut it
to 400, or you might cut the March. We contemplate
600 million in March.
H.N.Jr:
600 in March?
Bell:
Yes, we contemplated 600 million in March. 500 will
give you a healthy balance, but not any healthier
than we have had in the past.
H.M.Jr:
What do we do on the 15th of December?
Bell:
That is one question I wanted to ask you.
239
- 2 -
H.M.Jr:
Does that bother you?
Harrison:
In the past we haven't liked it very much.
(Discussion off the record)
H.M.Jr:
I kind of like to keep the thing on the 15th,
quarterly dates, if we could.
Boll:
The date really 1sn't important from the stand-
point of the security, Mr. Secretary, because
M.V.Jr:
It would be silly to have something on December
first.
Murphy:
The maturity wouldn't have to be on December first.
You could have an odd first coupon and after that
have It come along regularly.
Bell:
Make it mature on the quarter date, that is what
we would want to do.
Harrison:
We have been working in the market so long to stop
these issued quotations, anyway, and are making
some progress. I think 1f you had two weeks between
the date of the issue and the effective date, it
would invite necessarily & good deal of trading.
How would you like to have 1t?
Harrison:
I don't know whether it would be too difficult, but
it seems to me you could issue it on December first
and then have it mature on the quarter date. It
would be better.
Dell:
I think it would be better to have It issued on
December 15th than December first because you are
doing this on November 28th. It only gives you
two days.
R.M.Jr:
December ten would give me five days to the 15th.
Bell:
We have always allowed seven or eight days after
the notice to the issuing date.
H.M.Jr:
December 10th is a Sunday, anyway. It would have
to be December 11th.
240
- 3 -
Harrison:
Couldn't you do it, Mr. Secretary, as of the
15th, only use your basis without - just post-
poning your announcement? Why do you have to
do it now?
H.M.Jr:
Oh, I want to get it out of the way.
George, I don't know how you feel, but things
are quiet and the Government bond market is
booming and nothing in the offing and I just never
know - I don't know, I thought to myself I was
sitting on a keg of dynamite. I don't know what
is going to happen.
Harrison:
I am a week off, really.
H.M.Jr:
I have another reason. I don't want to do approxi-
mately two billion dollars at one time and that
1s the more important reason.
Harrison:
I see,
H.M.Jr:
That is the real reason and that is why I am
going to do this, and I thought maybe around the
4th or the 11th or the 5th or the 12th we might
do the refunding and then we are through until
the 15th of March.
Harrison:
I think that is a good program. My only point
was the long period of sales on an issued basis.
4.M.Jr:
Bell will work with your office. I don't give
B. damn whether it is the 11th or the 15th. I
will leave that to you fellows.
Bell:
Yes, we will thrash that out.
H.M.Jr:
How is that?
Harrison:
That is fine. I would prefer to do that, anyway,
because the others know more about the technical
problems than I do,
H.M.Jr:
O. K.?
Harrison:
Suits me.
241
- 4 -
Boll:
In talking with Hadley and Bob Rouse and B. few
other people, apparently the market is thinking
of a security some place within the eight to the
twelve-year period, and of course their purpose
is for B. definite maturity. I think there are
three of those out, but they are always prepared,
I think, to take one with A call period, which
I think from our standpoint would be better if
you think you might like to reopen it on the
refunding of the March maturity.
H.M.Jr:
I don't want that.
Bell:
You don't?
H.M.Jr:
No, I don't think it is exactly fair to these
fellows to sell them and then to figure out &
maturity and then a week or ten days later you
como along and increase it by another 500 million.
That security will go down.
Harvison:
I think that is & sound objection.
H.M.Jr:
It is all right 1f you do it six months from now
when the thing is well seasoned, or & year from
now, but when you just have it out and it is in
season and add another 500 million, it 18 too
close.
Sell:
Well, would you want to fix it so that you might
reopen it, say, in March? You ought to have a
call date 1f you ever contemplate reopening it,
because if you put 500 million in one day you
wouldn't went to increase it more than 200 million
at the most.
H.M.Jr:
Let me tell you without having talked to anybody,
what I had in mind, and you can shoot me 1f you
want to. I had in mind selling something over
five years, see, with B fixed maturity and then
coming along on the March refunding and offering
them E fairly long issue bond with an alternative
for a five-year note. Then if the note doesn't
go very big, subsequently, we can add to it, but
we don't put - it gives them B. choice of two things.
Bell:
I think you have got to give them B. choice on the
March maturity; it 1s too b1g, otherwise.
242
- 5 -
H.M.Jr:
Some of you sharpshooters shoot at that.
Enas:
You want it long enough, Mr. Secretary, don't you,
so that you wouldn't cut the coupon under two?
B.M.Jr:
On the long one?
Bell:
The 500 million.
E.M.Jr:
I am just studying.
Hanes:
When you say something over five years, what did
you have in mind, how much over five years, depend-
ing upon the rate?
H.M.Jr:
This is the first time I have thought about it,
John, just now. You could go....
Bell:
....go eleven, probably, eleven years three months
to three percent. That would be March, 1951.
H.H.Jr:
Which comes at a fairly good time, doesn't it?
It isn't so crowded.
Bell:
There isn't anything occurring on March 15th, 1951.
A call period is in there but that is - December 15th
is a blank date.
Harrison:
On the basis of the present year, where does that
put the premium?
Bell:
Around 101.7 to 13. Probably, as Hadley says, it
will be on the up side because generally we have
had an under-priced security with a definite
maturity date, haven't we?
Hadley:
That is right.
Bell:
It is a little more popular than we figure when we
issue.
Harrison:
For some while I have been favoring in my own mind
a reduction from the premiums that you were giving
on the new issues. I think it has been pretty
rich, frankly.
Bell:
I think that is true.
243
- 6 -
Harrison:
I don't know whether this is the right time to
begin a reduction after the stock we have had
at the market and the fact that while there has
well. been a recovery, it hasn't yet settled down very
Bell:
This recovery has been better than B. point within
what, two weeks?
hadley:
Ten days ago these issues would have been around
par, ten days ago, same issue that is around 101.7.
HROS:
It is the first cash, too, since the war.
Harrison:
I don't think you could cut that premium now, I think
it would not be wise to try.
H.M.Jr:
Supposing we struck two percent, eleven years and
three months. You could make it eleven years and
six months or eleven years - I mean, in that range -
and then B. couple of weeks later came along, let's
say, D. five-year note and then A 22 percent long
bond.
Harrison:
Well, we don't have to cross that bridge, anyway.
R.M.Jr:
No, but I am trying to think out loud and let you
know what I have got in my mind. What do you think
of that, Dan?
Bell:
I have no objection to that program. I always lean
toward a callable bond, because it gives the Treasury
more flexibility but I realize the market wants that
maturity.
H.M.Jr:
I mean the next one, a two and a half year, went
just as long as it could comfortably with & five-
year call date. Have we sold & long bond this
year?
Murphy:
Not for cash, but we had & refunding in March.
The two and three quarters. '60-'65.
H.M.Jr:
We haven't done anything since March?
Murphy:
No.
244
- 7 -
H.M.Jr:
Would two long issues & year be too much?
Murphy:
I shouldn't say so.
H.M.Jr:
And it keeps the thing nicely balanced.
Harrison:
I think it is fair to say that as a result of
the experience we have gone through in September,
the banks as a whole are a little skittish about
overloading themselves. Contrarywise, you have
B. greater area of investors who are looking for
that long maturity and who really are counting
for a very sharp rise of some five points in the
longest maturity in the last few weeks, so if you
give the banks the choice of the five-year note
or the long bonds and don't make the premium
too great
H.M.Jr:
On the five-year note?
Harrison:
Yes. You might then satisfy the situation without
pushing the bank to take the bond.
4.M.Jr:
I wouldn't want to - they don't have to take the
five-year note and you and I know that the - then
they are going to try to sell it and make a little
money out of 1t. But at least our conscience is
clear.
Harrison:
Yes, you have given them their choice.
A.M.Jr:
Haven't forced them. How does it sound to you,
John?
Hanes:
All right.
H.M.Jr:
This is all preliminary. It was just a lucky break
for me that George Harrison was in town, so I in-
vited him over.
Bell:
The attitude of the banks has changed B. little,
hasn't it, Governor, in the last six months, toward
the short maturities and the long? For instance,
they are considering anything up to three years,
their primary reserve, and they are sticking pretty
well to that. It doesn't yield them anything and
245
- 8 -
then they are going to be on the six and seven
definite? year period for earnings. Isn't that pretty
Harrison:
Yes, I think anything up to ten or twelve years.
I question whether they want twenty or twenty-five
years.
Bell:
But they are going beyond that period. That is the
reason I think our 42-year note was a little un-
popular. It didn't just quite fit into that recent
development and their attitude toward different
types of securities.
H.R.Jrt
All the notes are above par, aren't they?
Madley:
The three-quarter percent note hit par just before
it came to me.
Harrison:
I think Mr. Eccles feels - and I am saying this not
because I am agreeing with him but because he so
bluntly said to me before he went away - that first
the question of whether it is necessary for the
Treasury to raise any money at all comes up.
S.M.Jr:
I know why. I assumed that on account of the atti-
tude that the President took with me.
Marrison:
And second, that as a permanent policy, not merely
a temporary one, you shouldn't borrow on time at
all.
Sanes:
Shouldn't what?
Harrison:
Shouldn't borrow on long time. And you may remember
the Board members filed a memorandum with Mr. Hanes
while you were absent to that effect.
H.M.Jr:
Within the last week?
Hanes:
Oh, no. You mean three months ago?
Harrison:
In August.
H.M.Jr:
Well, you don't expect any comment on that?
246
- 9 -
Harrison: oh, no. I am Just saying it. As long B.B. I am
in the same committee with him it wouldn't be
fair
Hanes:
He would favor more bills?
Harrison:
If you think you need cash.
Hanes:
If necessary.
Enroison:
That is right.
llanes:
But in the absence of necessity, let the cash run
down?
Marrison:
That is right. He thinks the cash is pretty high
anyway.
H.M.Ar:
Well, I cleared this. Before I made any statement
as to what we were going to do, the day I left I
cleared it with the President first and then I
cleared it with him yesterday.
Marrison:
I am in favor of your taking cash, personally, now,
and I think you have got a good time to do it and
the market is strong. They are expecting it. I
think it would be & helpful influence because it
will tend to dampen it a little bit and after all,
as you say, you are in B. very difficult era of
world affairs and you don't know when you may need
cash, and I think it is wise not to let your balances
run too low.
E.M.Jr:
If the balances bother Mr. Eccles so much we will
just let our bills run up. If it bothers him so,
let our bills run off.
linnes:
You could always take them back and we would be
permanently prepared in our finances if any
emergency does arise or we get into severe diffi-
culties.
George, don't you think it would be a good healthy
thing for the market generally if the Secretary
was out of the way and had this stuff all behind
him? Don't you think next year would be B. lot
better off to have that all behind it, without
this chance hanging over the market?
247
- 10 -
Marrison:
I think it would be very wise fiscal policy to
be out of the way because we don't know when
we may have another Munich or enother Poland
or another Netherlands and you may possibly
strike B. period when It would be very unwise
for the Treasury to try to float anything, al-
though we all admit you could float anything at
any time, but where it would be unwise policy
in doing it, and I would clear the decks the
best I could with the world as it 1s today.
H.N.Jr:
If some of the money theorists are bothered be-
cause we have too big balances
Harrison:
I don't want you to act on the suggestion I made
about Mr. Eccles. I don't think I would - I know
he doesn't want you to let the bills min off and
I think he merely thought that the balances were
not too big but rather that they did not require
you to borrow on the bond issue to raise new cash,
which is very different from saying your balances
are too big.
Well, I have been terribly lucky. I have been
able about twice & year to sell note issues and
about twice a year long bond issues. That way
I got B. nice balance on the thing and I have
kept my ammunition and my powder dry on the bills
so that If and when - say if ve had to go through
& period like September for six months - I have
always got the bills. I have to keep reiterating
that to them because somebody gets in and tells
them something else. My memory isn't so short-lived
that I can't remember the heartaches that I have had
sitting here trying to finance.
Harrison:
Frankly, I fear that if the Treasury is going to
refund with a long bond, 2@ or 3 or 4 or whatever
you fix it, and the banks take a large part for
profit or for credit, that if we have another month
like September we ought to have some more comon
understanding between the Open Market Committee
and the Treasury 8.8 to how we would handle another
set-back, because I, personally, even though I
might vote for your putting out your long issue,
would argue against our supporting the market as
vigorously B.S we did last time or spending the
money doing so.
248
- 11 -
H.M.Jr:
George, there is no difference between Treasury
and you on that.
Harrison:
No, but though I think you might be wise in
putting out long ones, I wouldn't want the im-
plication that in the event of another stock,
we would have to go in like we did last time.
H.M.Jr:
You won't go in unless the people on the Federal
Reserve force you?
Harrison:
That is right.
H.W.Jr:
I am glad to know that you still feel the way you
did - I mean you are going to do your praying in
the marble halls.
Bell:
I don't believe they will do the next one 88 b1g
as that. I think they have learned something.
Banes:
Do you know how many bonds have been sold?
Harrison:
About 45 million.
H.K.Jr:
The boys know to & dollar.
Hanes:
That is not very many.
Hans:-
About 41, I thought.
Bell:
They have sold since your report.
H.M.Jr:
40 or 45 million.
Marrison:
I know that when I left the bank yesterday, we had
only 5 million leeway on & 50 million amount.
Bell:
Out of the 400 million, the Treasury bills that
have run off and what they have sold, they have
got a net increase of about 200 million since
September - August 23rd - so they have let over
200 million go off, plus the sales.
Hanes:
That is after we take out - whatever we took out.
Bell:
This is the Federal Reserve portfolio alone.
249
- 12 -
Harrison:
We took out about 75 million.
H.H.Jr:
George, would you talk to your boys? I will be
on the farm Friday and Saturday and it may be
Rouse might like to corte up there or even bring
somebody up with him.
Harrison:
This week?
H.W.Jr:
Yes.
Dell:
One thing I wanted to ask you was whether you
wanted him to talk with any of the market boys
on Friday, not say 1t was going to be Tuesday,
but what would we do 1f the Treasury wanted to
do something this week.
H.M.Jr:
And 1f they want to talk to me on the farm Satur-
day, it would be nice. Do you want to go up to
New York Friday?
Bell:
I will 1f you want me to. I will be glad to.
H.M.Jr:
You could go up with them and then you and Rouse
might want to run up to see me.
Bell:
Yes.
H.M.Jr:
How would that be?
Harrison:
Fine.
Bell:
I could go up Thursday night and be there Friday.
H.M.Jr:
George, how does that sound to you?
Haas:
I think it sounds very well. Only one thing occurs
to me that hasn't been mentioned here in connection
with the fixed maturity of a call, a bond with a
call provision. Ordinarily, I would strongly favor
one with the optional call date, even longer call
dates than we have been putting out, but there is
one consideration that may weigh heavily here
in favor of the fixed maturity and that is this,
that 1f you have another disturbance, fixed maturity
will hold up much better than the one with a call
because you will get a shuffling back of people
250
- 13 -
who start figuring on the maturity date and the
fact that this is the first cash offering. You
mi nt want that to hold up as well as it could
and the fixed maturity will hold up better, I
am positive, than the optional call date.
H.M.Jr:
And I don't see - we have only got - no, three -
'45, '47, '48.
Murphy:
There is a '41.
H.M.Jr:
Well, that is four.
Bell:
That is a note, Henry.
H.M.Jr:
'41, '45, '47, '48, and this would drop somewhere
along in '51. That is not bad.
Harrison:
I would favor the fixed maturity. I think this
is good enough for the first talk and then I
think if you fellows know how I feel - did you
ask them for an Open Market meeting at 11:00
o'clock?
Bell:
11:00 o'clock Monday.
H.M.Jr:
Why don't you tell Peyser what we were talking
about then?
Bell:
I have told him that we were considering Tuesday
as the date and he is thinking about the problem.
H.M.Jr:
Well, tell him how we were talking today.
Bell:
0. K. There are one or two questions I would like
to ask. I want to send out some material over the
week-end.
H.M.Jr:
Yes,
Bell:
We have discussed in the past putting in a provision
in the next bond issue for trust funds, government
trust funds. Remember, we started in June to put
one in and then we decided to issue a note instead
of a bond. Now if we are going to issue B. bond,
I wondered if you wanted to reserve, say, 50 million
dollars additional for a government trust fund.
251
- 14 -
11.M.Jr:
Oh, yes,
Hell:
Put in that provision?
Yes.
toll:
This is the thing I would like to talk to the
Now York fellows about, give the small fellow
a break, and every time we have tried it there
have been a lot of free riders padding in the
lower limits. I am wondering 1f you would like
to experiment on this one by putting out a
$5,000 limit giving preferential allotment up
to 5,000, provided the subscribers take regis-
tered bonds with the understanding that they will
not have their registration released for a period
of 30 days. That keeps them off the market and
makes the fellow put up the cash.
N.M.Jr:
My first reaction is, I don't think these are -
30 days is nearly long enough.
will;
That is pretty well after the secondary distri-
bution.
H.W.Jr:
I would make it six months.
3021:
That is something I would like to talk to the New
York boys about before we do it.
11.1.Jr:
If you were going to do it, I would mal:e it six
months. If a fellow wants it bad enough then let
him keep it.
12568:
That would take care of the church.
call:
That is right.
R.N.Tr:
He would have to keep it for six months. How long
do you have to keep a baby bond?
Bell:
Sixty days.
Madley:
You don't get a return for the first year.
Murphy:
It 18 redeemable in 60 days from the first day
of the month on which you bought it. If you buy
it on the first of the month, you have to wait
252
- 15 -
two months. If you bought it at the end of the
month, thirty days.
H.M.Jr:
I would make it six months for the Hyde Park Church.
Bell:
Well, that will take care of the small investors.
H.M.Jr:
Can't sell it for six months.
Bell:
Now, the other thing, Ransom called me and said
that you had asked him to attend a conference at
10:00 o'clock on Monday and he wondered 1f the
11:00 o'clock wasn't the....
H.M.Jr:
He wanted to know what time he would have to be
back. I said I thought 1f he were back by 10:00
it would be time enough.
Bell:
What are we going to do about getting the President's
approval?
H.M.Jr:
When we decide, we will send a plane down.
Bell:
All right.
H.M.Jr:
There is nothing settled, but I just wanted to talk
with you.
COVI
253
DEPARTMENT or STATE
Washington
November 22, 1939.
My dear Mr. Secretary:
I enclose, for your information, & map of the
world which has been made up by the Geographical Division
of this Department, showing the effect of the Neutrality
Act of 1939 and preclasations and regulations issued there-
under.
It should be noted that on this - Dyria and
Palestine do not appear as belligerent areas. This is
because they are nandated arvas and a mandatory power
apparently does not have the legal right to put then lite
a state of war. It should be understood, however, that
the de facto operations of the mandatory power may change
the factual status of the country, exactly as the de (note
operations of Demany, which are recognised kg this
ment, have caused the protectorstes of Behemia and Maravia
and Slovakia to assume the status of belligarent exuntries.
Very truly yours,
Inclosure:
(Signed) A. he BIRLE, JR.
Map
The Honorable
Berry Morgenthau, Jro,
Secretary of the Treasury.
com of AFTIST - SEPUBLICA
I I 2
small -
!
255
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATENovember 22, 1939
TO
Secretary Morgenthau
2:00 P.M.
FROM 1. H. Hadley
NON-CALLABLE BONDS
Offering
Market
Maturity
Coupon
Yield
Price
Price
Premium
8-1/2 years
1-3/4%
1.68
100
101.11
1 pt. 11/32
(6/15/48)
1,60
100
101.6
1 pt. 6/32
9 years
1-7/8%
1.65
100
101.30
1 pt. 30/32
(12/15/48)
1.67
100
101.22
1 pt. 22/32
9 years 3 mos.
1-7/8%
1.67
100
101.23
1 pt. 23/32
(3/15/49)
1.70
100
101.15
1 pt. 15/32
9-1/2 years
1-7/8%
1,69
100
101.20
1 pt. 20/32
(6/15/49)
1.72
100
101.11
1 pt. 11/32
9 years 9 mos,
1-7/8%
1.72
100
101.11
1 pt. 11/32
(9/15/49)
1,75
100
101.3
1 pt. 3/32
10 years 3 mos.
1-7/8%
1.76
100
101.2
1 pt. 2/32
(3/15/50)
1.79
100
100.25
25/32nds
10 years 6 mos,
x
1,78
100
102.3
2 pts. 3/32
(6/15/50)
1.81
100
101.29
1 pt. 29/32
11 years
2%
1,84
100
101.20
1 pt. 20/32
(12/15/50)
1.86
100
101.14
1 pt. 14/32
11 yrs. 3 mos.
2%
1.86
100
101.13
1 pt. 13/32
(3/15/51)
1,88
100
101.7
1 pt. 7/32
256
CALLABLE BONDS
Offering
Market
Meturi ty
Coupon
Tield
Price
Price
Premium
8 - 10 yrs.
28
1.75
100
101.28
(12/15/47-49)
1 pt. 28/32
1.78
100
101.20
1 pt. 20/32
1-7/8%
1,75
100
100.30
30/32nde
1.78
100
100.22
22/32nds
BI - 101 yrs.
X
1.81
100
101.17
1 pt. 17/32
(6/15/48-50)
1,83
100
101.11
1 pt. 11/32
9 H 11 yrs.
2-1/8%
1,86
100
102.5
2 pts. 5/32
(12/15/48-50)
1.88
100
102.
2 points
X
1,86
100
101.5
1 pt. 5/32
1.88
100
101,
1 point
91 - 11} yrs.
2-1/8%
1.90
100
101.30
1 pt. 30/32
(6/15/49-51)
1,93
100
101.22
1 pt. 22/32
97 - 114 yrs.
2-1/8%
1.92
100
101.26
1 pt. 26/32
(9/15/49-51)
1,95
100
101.17
1 pt. 17/32
104 - 12/ yrs.
2-1/8%
1,97
100
101.15
1 pt. 15/32
(3/15/50-52)
2.00
100
101.5
1 pt. 5/32
104 - 134 yrs.
2-1/8%
2,00
100
101.5
1 pt. 5/32
(3/15/50-53)
2.02
100
100.29
29/32nde
101 - 12) yrs.
2-1/8%
1,99
100
101.9
1 pt. 9/32
(6/15/50-52)
2.01
100
101,3
1 pt. 3/32
10$ - 13} yrs.
2-1/4%
2.02
100
102.6
2 pts. 6/32
(6/15/50-63)
2.05
100
101.28
1 pt. 28/32
2.02
100-3/4
102.6
1 pt. 14/32
2.05
100-3/4
101.28
1 pt. 4/32
11 - 14 yrs.
2-1/4%
2,08
100
101.20
1 pt. 20/32
(12/15/50-53)
2.10
100
101.14
1 pt. 14/32
12t - 171 yrs.
2-3/8%
2.18
100
102.
2 points
(3/15/52-57)
2.21
100
101.33
1 pt. 23/32
13 - 18 yrs.
2-3/8%
2.22
100
101.20
1 pt. 20/32
(12/15/52-57)
2.25
100
101.13
1 pt. 13/32
257
TREASURY NOTES
Offering
Market
Maturity
Coupon
Yield
Price
Price
Premium
4 yrs. 9 mos.
1%
0.82
100
100.26
26/32nds
(9/15/44)
0.87
100
100.19
19/32nds
1-1/8%
0.82
100
101.13
1 pt. 13/32
0.87
100
101.6
1 pt. 6/32
5 years
1$
0.85
100
100.24
24/32nds
(12/15/44)
0.90
100
100.16
16/32nds
1-1/8%
0.85
100
101.11
1 pt. 11/32
0.90
100
101.3
1 pt. 3/32
258
HM
PLAIN
London
Dated November 22, 1939
Rec'd 2:40 p.m.
Secretary of State,
care
Washington.
need
2431, November 22.
FOR TREASURY.
Further details regarding the savings certificates
and baby bonda, the issue of which was announced yester-
day and reported in No. 2414 of November 21 are now
available,
Press commentators consider the most important
feature of both these securities to bE the safety against
capital deprecintion which is of greater importance to
the smoll investor than the rate of interest. The
defence bonds are, according to the Chancellor of the
Exchequer, designed for those who have already acquired
the maximum 500 of saving certificates allowed to bE
hald by any one individual. The saving certificates
are cashable at any time but the d Efence bonds are not
(bmontha motice very required)
-taly
cashable EXCEPT in the CASE of "private Emergency".
A feature suggested by KEYNES in his forced saving
scheme.
The yield
-2- #2431, November 22, from London
259
The yield of the savings certificates over the
full ten year period is 63. 3s. 5d. or just under
3 1/6 percent ns compared with 52. 18s. 4d. or just
over 2 1/5 percent which was the yitld of the savings
certificates issue on sale between 1935 and yesterday.
The yiEld of the new certificates is Equal to 54. 170.
6d. subject to tax at 7s. in the pound or 55. ls. 6d.
less tax at 7s. 6d. in the pound. The cost to the
Government however is little above the 63. 3s. 5d.
percent because the majority of potential subscribers
are not subject to income tax.
The defence bonds are subject to income tax 30
that their yiEld of 63. 2s. 10d. or 3 1/7 percent is
less than that of the savings certificates but more
than the yield of the nearest Stock Exchange gilt-sdged
securities, (E.g. conversion 2 1/2 percent 1944/49 at
95 1/2 yislding 63. 1s. 3d. to redemption and national
defence 2 1/2 percent bonds at 98 1/8 yitlding 62. 17s.
9d. percent). The new bonds may divert a certain
amount of money from Existing securities but though
transferable they will not be dealt in on the stock
Exchange and it 18 EXPECTED that they will have no ad-
verse Effect on gilt-Edged prices. The reaction to the
announcement
260
-- #2431, Nov ember 22, from London
announcement of these issues on the Stock Exchange today
was favorable, British securities being firm and 1/8 to
1/4 up on the day, war loan closing 1/8 up at 92 3/8.
The yitlds of the new securities compare with 2 1/2
percent interest on Post Office savings accounts and 1/2
percent on ordinary bank deposits.
The press unanimously welcomes the Early introduction
of securities for the small investor to whom no appeal
was made in the last war until 1916 and urges the small
investor to respond in his own interest so that he may
at the same time help to win the war and to keep prices
stendy.
Asked in the House of Commons last night whether
the Government had given consideration to the Keynes
plan for compulsory savings the Chancellor of the Ex-
chequer said that hE had no statement to make on the
subject. Nevertheless the wide publicity given to
Keynes' plan would seem to have been not untimely since
the mere suggestion that compulsory saving might bE de-
sirable can but lend strength to the appeal for voluntary
saving which 18 to bE launched by tonight's broadcast
by the Chancellor of the Exchequer.
In contrast to the early months of the last war the
machinery for a national savings campaign is in Existence
with a
261
⑉4⑉ #2431, November 22, from London
with a 23 years' continuous Experience and organization.
There is n National Savings Committee of which Sir Robert
Kindersley is Chairman, twelve commissioners, 50 assistant
commissioners, 1200 local committees, 120,000 voluntary
workers, and 30,000 local savings groups and the organi-
zation can bE rapidly increased.
Incidentally the yiEld for the ten year period of
63. 3s. 5d. compares with the yitld of the first war
savings certificates issued between 1916 and 1922 of
65, 6s. 2d. This yield was gradually reduced in the
subsequent issues until in the fourth issue which ran
from August 2, 1932 until May 1933 the yiEld was re-
duced to L3. 78. ld. Two subsequent reductions brought
the yield to L2. 18s. 4d. in March 1935.
2. With reference to the fourth paragraph of No.
2305 of November 8, the revenue returns for the week
Ended November 18 reveal a second reduction in the tap
Breasury bill total from 6706.6 million on November 4
to 695.6 on November 11 and 6687.5 on November 18.
Meanwhile the tender issue increased from L580 million
to L605 million and 6630 million respectively and will
reach L665 million 1f this week's total L65 million
tnder is allotted on Friday. Government expenditure
for the
262
-5- #2431, November 22, from London
for the WEEK Ended November 18 was L36 million as
L32.9
compared with/ . million and L34.4 million in the
WEEKS Ending November 11 and 4 respectively. REVENUE
was 19.6 million for the WEEK Ended November 18,
L20.9 million for the previous WEEK and L20.3 million
for the WEEK EndEd November 4.
3. Since November 16 the only changes in official
Exchange rates have been in the belga which has now
appreciated to 24.05.30.
KENNEDY
HPD
CEVISORA
eser 18 1. VON
263
PARTIEL PARAPHRASE OF TELEGRAM RECEIVED
FROM: American Embassy, Paris
NO.:
2811
DATE: November 22, 1939, 8 p.m.
SECTIONS ONE TO FIVE, INCLUSIVE
FOR TREASURY
We had lunch today with Mr. Barrett of the Guaranty
Trust. He told us that in spite of the extension of the
time limit for declaring holdings abroad (refer to our
no. 2765 of November 15, 7 p.m.), the return flow of
capital had stopped completely since the 15th of November
as far as his bank was concerned. However, he added, that
not
this might/be typical of the general situation since the
majority of his clients are either French commercial firms
or private American citizens. There are signa, he indi-
cated that already some informal supervision over franc
accounts of foreigners is beginning to be exercised by
the exchange control authorities. (Please refer to our
no. 2801 of November 21, 6 p.m.) The banks, in fact, have
been asked confidentially to scrutinize all such accounts
carefully and to find out if possible whether deposits
made to these accounts represent france which are legiti-
mately "transferable". However, he inclines toward the
view (as do we) that to date this outstanding loophole
in
264
in the foreign exchange regulations has not occasioned
excessive leakage.
The impression we have gained from French sources
to the effect that in view of the small volume involved
the existing black market has as yet caused little or no
concern, was confirmed by Barrett. However, he stated
that a certain number of small peddlers are selling dollar
currency to peasants and other hoarders in the rural dis-
tricts at approximately 80 francs to the dollar, He said
that if this goes on, the morale of the country, particu-
larly in the rural districts, is bound to be affected by
the activities of these unpatriotic operators and the fears
which they are deliberately sowing regarding the future of
the frano. It is our understanding that American dollar
currency is not sold by any responsible bank here except
to persons who are bona fide travelers.
It was added by Barrett that bringing French dollar
bonds over from the United States (which, of course, 18
permitted) and selling them in Paris is a legitimate and
rather profitable operation which ispopular now. This
arbitrage operation is made worth while by the spread in
price.
Barrett says that the bank's normal credit operations here
have been stopped by the recent neutrality law ainoe it has
been
265
been held by the head office that title has not been
entirely divested of goods if the bank's branch here
instead of the importer holds the shipping documents for
products afloat. Re said that unless the documents were
in its own hands, the bank would care to assume the risks
with reference to few, if any, importers, in view of the
amount of money involved in most transactions. Therefore
the Guaranty's "French competitors" are receiving most of
this business.
He said, on the other hand, that the Paris branch
had been authorized by the head office to go on holding
French Treasury bills which bear dates previous to Novem-
ber 3. Decision regarding the purchase of later bills has
not yet been reached.
He made the remark incidentally that word had been
received from Havre following the announcement by the
French and British of a joint purchasing organization,
that for the time being orders for American cotton would
be held up. He thinks that this is due to a pending
centralization
266
centralization through a joint organization in London of
all cotton buying.
A delegation called on Reynaud today to express
their anxiety over the present handicaps to trade and
industry. Reynaud received them sympathetically and announced
that he has worked out a solution of the problem of the
heavy "patente" taxes which will conciliate "legitimate
interests of business with the exigencies of budgetary
equilibrium of the local entities". He also said that a
decree limiting profits for enterprises other than those
working on national defense quotas would appear in the
near future and would authorize the heade of such enter-
prises to count the normal wage scale in determining the
profits subject to limitation. He emphasized "the liberal
character of this forthooming measure and the appreciable
advantage which would result therefrom for all the heads
of small or medium sized concerns.
(END SECTION FIVE)
EA:EB
267
BJS
GRAY
PARIS
Dated November 22, 1939
Rec'd 11:30 P. m.
Secretary of State,
Washington
2811, November 22, 8 P. me (Section Six)
A Communique issued today by the amortization fund,
which administers the tobacco and match monopolies,
Explains that the recent decision (SEE telegram 2753
November 14, 7 P. m. ) to increase the price of tobacco
by 28 % was not made with a view to increasing the profits
of the monopoly but to check consumption and reduce imports
of tobacco from abroad (notably from the Far East and from
America) as a measure to conserve to the greatest possible
Extent France's gold and foreign currency reserves.
This morning's PARIS HERALD under the headline "Federa
RESERVE is buying agent of allies in unit "carries a des-
patch from the Washington bureau of the NEW York Herald
TRIBUNE, the pertinent portions of which read ns follows
" an official of the Federal RESErVE Board admitted today
that the Federal RESERVE Bank of NEW York is acting ns the
paying agent for Franco-British purchases in the United
States.
BULLITT
WWC
268
MP
GRAY
Paris
Dated November 22, 1939
Rec'd 11:41 p.m.
Secretary of State,
Washington.
2811, November 22, 8 p.m., (SECTION SEVEN)
NE declared that President Roosevelt had authorized the
move after an unidentified NEW York bank, presumably the
Morgan bank, acting as an agent for Great Britain completed
the largest single transaction of its kind in history
when it bought 750,000 tons of scrap iron for more than
$15,000,000. Observers speculated on the sale's possible
effect on the country's currently high strel production,
since scran iron is vital to the Republic if production
is continued at its present rate". This article is recopied
in the AGENCE ECONOMIQUE ET FINANCIERE and in this evening's
LE TEXPS.
This morning's Journal Official carries B. decree
providing that henceforth no category of scrap iron may be
held, ut lized or sold without the authorization of the
Minister of Armament.
BULLITT
WWC
269
BJS
GRAY
PARIS
Dated November 22, 1939
Rec'd 11:45 p. m.
Secretary of State,
Washington
2811 November 22, 8 P. m.
(SECTION EIGHT)
It is further provided that the latter may SET up an
inter-professional organization empowered to give such
authorization and that holders and producers of scrap
iron must make declaration of such holdings. The form
which such declarations are to take will bE published in
an arrete later.
The securities market was active and fairly strong
today and French rentes continued to gain on the franc's
firmness in NEW York. The Exchange guaranty issues were
up 1.95 and 2.30 francs respectively and other issues gain
major fractions. The curb market was less firm.
BULLITT
WWC
270
MP
GRAY
Paris
Dated November 22, 1939
Rec'd 12:45, 23rd
Secretary of State,
Washington.
2811, November 22, 8 p.m.
(BECTION NINE).
The Netherlands Bank statement for the WEEK ending
November 20 shows a reduction in gold reserved from 1059
million florins to 1039 millions. Total liabilities are
1367 millions as against 1357 millions. Gold coverage
dropped from 78.05 to 76 per cent. The statement likewise
shows that the Dutch Government has placed 20 million
florina of treasury bills directly with the bank of 183UE.
Fress reports from Bern indicate that the new Swiss budget
law in order to cover mobilization costs of 5 million franco
per dr.y. will include a number of new sources of revenue
and supecially = capital levy designed to produce between
500 and 700 million francs. A general business tax is
Expected to Field 150 millions and 250 millions will be
derived from devaluation profits of the National Bank. A
large mobilization loan to care for the treasury's needo
pending anplication of the foregoing measures is Expected
to replace present short term treasury paper carried by
the banks.
(End of Message).
PEG
BULLITT
CJ
GRAY
271
PARIS
Dated November 22, 1939
Rec'd 5:31 p.m.
Secretary of State,
askington,
2810, Hovember 22, 7 p.m. (section ONE)
FCR THE TREASURY.
The well-known authority Frederic Jenny published
in last evening's LE TENES El leading article entitled
"Prices". Cile it does not contain a great deal that is
new in VIEW of the authority of the author and the able
way in which he has summarized Trance's internal war fin-
ence problem WE 31VE below a full summary.
""DE financing of the war depends strictly on the
problem of prices. It has often been said that war can bE
waged only with the aid of three procedures: taxation,
borrowing OZ inflation. The dangers of the last named
are obv. ous and WE have chosen the former two; and our
Hinister of Jinance is endeavoring reasonably to combine
them. But this will not be sticessful unless certain con-
ditions are fulfilled. A more substantial portion of re-
VENUE produced by the national Economy must become evailable
to the Treasury nore than in peace time.
BULLITT
EMB
272
MJD
GRAY
PARIS
Dated November 22, 1939.
Rec'd. 5:28 P. m.
Secretary of State,
Washington.
2810, November 22, 7 P. m. (SECTION TWO)
A circuit must bE Established: the state of putting money
in circulation by its expenditures and recovering them in
the form of taxes and loans, Et cetera. This presupposes
in the first place that the expenditures of private indi-
viduals must bE less than their income tax and thus savings
accrue which is automatically provided in part, thanks to
taxes. The repatriation of capital and the issue of bank-
notes--incidentolly VETY small-which took place at the be-
ginning have increased the volume which enters into the cir-
cuit since the war. The Intter must continue without too
much leakage but on one condition that the sums which re-
volve therein are not absorbed by an increase in prices.
It is clear that a too rapid prior rise would both diminish
the possibility of savings and increase public expenditures.
The Treasury would then bE led to cover its deficit and
that of individuals by inflation, that is to say by the
manufacture of artificial and illusory wealth.
(END SECTION TWO)
BULLITT
NPL
EMB
273
NJD
GRAY
PARIS
Dated November 22, 1939.
Rec'd. 5:40 P. m.
Secretary of State,
Washington.
2810, November 22, 7 p. m. (SECTION THREE)
The healthy methods which WE have chosen compel us
to onpose any rise in prices. The Government has decided
to stabilize mases (our telegram No. 2768, November 16,
4 P. m.) in order to block the wincipal internal cause
of a rise in prices. But there are others, one is of
foreign origin and is already being felt namely the in-
creased cost of imported products. This may be due to an
increase in foreign prices or to exchange rates or to both.
If WE let the franc depreciate our imports will be-
come more and more costly. It would bE more to our inter-
est to raise the level of the franc if possible. Our EX-
ports can still Endure a margin of price increase but the
exchange rate is not only a cause; it is also an Effect.
If the EXCESSIVE cost of imports should upset our balance
of payments WE could not really maintain our exchange rate
EXCEPT at the Expense of our gold reserves.
BULLITT
EMB
274
mjd
GRAY
PARIS
Dated November 22, 1939,
Rec'd. 6:02 p. m.
Secretory of State,
Washington.
2810, November 22, 7 P. m. (SECTION FOUR)
WE are not without means of defense in this connection,
The control of forsign commerce has for its objective the
restriction or exclusion of superfluous imports. TE can
nlso not on foreign prices thanks to a skillful purchasing
policy coordinated between the Allies so as to avoid
wastage and competitive bidding on the markets. The Allies
have a similar interest in reaching an understanding as
concerns their mutual interchange and supscially for the
sole and readle of products from their colonico and dominions.
The decisions taken by the Fronco-British Supreme Council
cannot but have fortunate results.
.The other COUSES of a rise in prices against which WE
must struggle are of on internal order: wastage in personnel
and material, over-Expensive contracts, and in general a
shortage of products end discquilibrium between supply and
demand. If the supply of products should diminish in ratio
to demand it would bE useless to apply toxation, controls
and regulations, as restraints could only delay the rise
while aggravating its couse.
(END 3ECTION FOUR)
JRL
BILLITT
MJD
GRAY
275
PARIS
Dated November 22, 1939.
Rec'd. 6:30 P. m.
Secretary of State,
Washington.
2810, November 22, 7 P. m. (SECTION FIVE)
It would in effect discourage production and COMMETCE by
destroying the hope of profit end would thus contribute
towards depleting suppliss. Experience has shown this =
hundred times. Doubtless by contracting wages and other
income a rise in prices would be limited since purchases
could not EXCEED gains but the appearance would bE almost
the same as that of El rise in prices; burdensome restric-
tions end = decrease in the possibilities of savings and
consequently of the resources of which the Treasury has need.
There is only one sure way to prevent a rise in prices:
to produce. To increase the quantity of commodities and to
facilitate their circulation. For that, first, man power is
needed. Equilibrium must bE found between the number of
productive workmen and that of persons maintaining the com-
batant and administrative units. The man power of the
armits and the administrations depends on production and
the finances of the country,
(END SECTION FIVE)
BULLITT
JRL
NPL
276
MJD
GRAY
PARIS
Dated November 22, 1939.
Rec'd. 6:40 P. m.
Secretary of State,
Washington.
2810, November 22, 7 D. m. (SECTION SIX)
If WE must make a long war and = var of materials WE are
all the more compelled to make a war of production thus to
give ourselves the means of carrying it on. Total war is
not e. mess levy of man power.
This is, moreover, just a simple problem of the quan-
tity of the forces of labor. Privote initiative must be
stimulated, a profitable competition must come into play.
UDELEOS controls, purposeless red tape, regulations which
unnecessarily hold up transactions and make life difficult,
all that weakens the national economy, is harmful to our
national defense. With abundant production and Easy commerce
prices will not rise to a dangerous extent. The French will
then bear heavy taxes without too much hardship; and they
will DAVE and bring their savings to the State in order
that the war may be corried on to victory."
(END SECTION SIX)
BULLITT
NPL
EMB
277
PARAPHRASE OF SECTIONS SEVEN AND EIGHT OF
TELEGRAM NO. 2810 FROM PARIS, NOVEMBER 22,
1939, 7 p.m.
With reference to the foregoing, Professor Rist
remarked, when he made a call on us this morning, that
it was his belief that the maintenance of a stable exchange
rate was the most important need in order to prevent an
undue increase in prices. He says that this will be pos-
sible if the Bank of France will agree to release gold;
however, he is not completely certain that the Bank will
be willing to do this in case of necessity.
Rist again deplored the fact that there were no statistics
and he criticized the military authorities for not being
willing to allow the publication of any figures about any-
thing (the notable exception being the Bank of France's
weekly statement). An effort is being made, he said, to
get them to allow the publication of some kind of export
and import statistics and perhaps some on production and
60 forth. He was convinced that export figures up to date
would make very sad reading.
We inquired whether any reasonably reliable estimate
with reference to the average daily cost of the war was
available to him. He replied that he had been told that
including foreign purchases, the amount totaled between
700,000,000 and 800,000,000 francs, but he was not sure
that this figure was accurate.
We
-2-
278
We referred to the recent sinking of ships due to
mines and remarked that at last the Allies had been
furnished with the alibi they had been seeking for blockad-
ing German exports. (First paragraph of our no. 2736 of
November 13, p.m.) He smiled and said that this was true
and that the French and British had been trying for more
than a month to find some reason for initiating such a
practice which would not elicit too much protest from the
neutrals; he recognized frankly that this practice was not
generally sanctioned under international law. He said that
the loss of 80 many lives had indeed been unfortunate but
the desired reason-reprisal--had been furnished the Allies
by the German Mines. (It has just been announced, as was
expected, that a similar policy will be adopted by the
French blockade authorities.)
(END OF MESSAGE)
BULLITT
EA:EB
279
November 22, 1939
To:
The Secretary
From:
Mr. Hanes
I attach hereto: (1) original draft of the Press Club
speech which was sent to the President on Monday night,
(2) the President's menorandum to General Watson, (3) a
copy of the speech corrected exactly in accordance with the
President's suggestions.
T.w.H.
280
President HaCHTEN distinguished guests, members of the Press
Club.
I an not going to read you a long drawn-out document filled with
generalities and high sounding phrases designed to confuse the mind
and evade the issue. I appreciate too much your invitation to come
here and talk with you off the record to ask you to sit through such
an ordeal.
I am, therefore, going to state my opinions on the tax question
frankly and honestly.
These
opinions
E
ay
680
1
and
-
to
share them, and, at the outset, 1 absolve the Secretary of the
4
19919
good
engabling
I have said many times that I do not believe it necessary that we
all think alike - but I do consider it necessary that we all think. For
your earnest consideration, therefore, I submit some of the fundamental
thoughts which have guided me in my work in the Treasury and before
the Committees of Congress.
First, I have consistently stated and restated the basic problem
confronting our country is, and will continue to be, economic recovery.
Every move I have made during my two years in Washington has been designed
281
- 2 -
to aid business. That may seem to you to be an approach founded upon
selfishness. It is - that is a selfish desire to maintain the type
of government that we know and love. Without that economic recovery
which will put to work our of unemployed at decent wages
this system as we know it must break down. With economic recovery and
of the
reamployment of the major portion of Un million unemployed in productive
labor, we are home - and our problems in the Treasury are largely solved.
Eventually I believe the budget must be balanced. There are three ways by
which it might be accomplished: (1) new taxes, (2) by reducing expenses,
(3) a combination of those two plus & broad economic recovery.
With these preliminary remarks I submit to you my philosophy on
taxation, part general, part specific.
Certain general principles are so familiar that it 10 hardly necessary
to state them, and BO elementary that they require no detailed elaboration.
chief frocal
They are the principles which govern the point of view of the
an of the govt.
Be has no axe to grind, no special favors to confer, nor special
burdens to impose upon special classes, no mission to use taxation to effect
3 -
282
see of Treas.'s
social change. The
task is to find revenue for the
Government, and, so far as he is able, to resist the efforts of those
who have some other objective, avowed or concealed, than that of
enabling the Government to pay its bills with the minimum distortion
and disturbance to the economy of the country.
Such generalizations are elementary and almost self-evident. Yet
they may perhaps be useful by way of preface to make clear the point of
view from which the following more specific comments are made.
In general, taxation ought to be devised (1) to produce the most
revenue, (2) with the least injury to the taxpayers and to the country's
economy and (3) with the least expense and trouble to the taxpayers and
the Treasury.
Contrary to the general impression, the tax problem (without the
injection of too many lawyers) is not such a complex or complicated
subject. I refer you to the chart on the wall. Simply stated, we have
only 5 sources of revenue - (1) customs, (2) estate and gift tax,
(3) individual income, (4) corporate income and privilege, (5) the sales
taxes (vis: all others).
Regraded Unclassified
4
283
You will note that I leave out one very important item, namely
or Social security
the payroll n taxes. That is not a source of revenue. It is a trust
fund which is paid into the Treasury for safekeeping. The Treasury
has been borrowing these funds for current purposes, paying therefor
interest at the rate of 3 percent per annum. This has served to keep
down the amount you see in the block entitled "borrowings and Balances,"
which would have totaled $2,298 million in 1938 but for these payroll
taxes.
In the fiscal year 1938, we collected the largest revenue ever
known in the history of this Government. I have chosen that year,
therefore, as the subject for discussion. The system produced in that
year a total income from all sources of $6,240 million. We spent in
that same fiscal year $7,691 million.
up
the
Let us take the five sources of revenue in ^ order mentioned.
1. Customs - You will see by the chart that we collected
$359 million from that source in 1938. Due to the war we estimate a
real shrinkage from this level next year. In any event, the only way
- 5 -
that tax can be increased is through more travel and more purchases
abroad by our citizens. That means peace and prosperity (or economic
recovery again) here at home.
2. Estate and gift taxes - To a considerable extent the Government
of the United States (and of some of the states) are spending capital
for their current outgo. Estate and inheritance taxes are capital taxes.
Gift taxes on large gifts are capital taxes. The capital of estates of
decedente and living donors is being
spent by government for
current operating expenses. Once tainsa and opent for
this capital cannot produce future income
It
involves the dissipation of savings; and until new savings are formed
a bookkeeping item and thus an academic 284 question
there in that much less capital available for constructive purposes,
recovery, and reemployment. Knowing these facts I still favor a tax on
inheritances. Since it is a subtraction from the Treasury's income-
so far as possible
producing assets, it should be used only for the purpose of reducing
the national debt. It is sound finance to reduce a capital liability
with each reduction of a capital asset, This statement of course
crosed increasing the national Sebt becomes the
would only be applicable when we and has
budget balanced. otherwise it
Regraded Unclassified
285
- 6 -
There is no greater illusion than that, because there have been
times when savings outbalanced consumer spending power, that therefore
we can safely abolish all incentive to save, and finance recovery by
spending capital instead of saving it. As well argue because some folks
overeat people would be better without any food at all.
3. Individual or personal income taxes - Taxes which are destructive
of the incentive to save are destructive of future income, and therefore
of the source of future revenues to the government. Such taxes include
not only the direct taxes on capital already mentioned, vis: (high estate and
inheritance taxes and high taxes on large gifts, but also taxes nominally
on incomes but at rates so high as to leave the taxpayer no margin for
reinvestment, or even to make it necessary for the taxpayer to infringe
on capital. Taxes which lead the taxpayer to retire from enterprise and
seek shelter in tax-exempt securities, or even in safe and rickless
securities, tend to prolong the depression and unemployment, increase the
burden of relief expenditures by the Government and dry up sources of
income and future revenues of the Government. I do not mean to imply that the
upper bracket taxpayers are the only source of new investment in enterprise.
They may not even form a major portion of the source of new investment.
- 7 -
286
Normal taxes ought to be higher and exemptions ought to be lower.
In the middle brackets the surtax ought to be higher and in the higher
brackets the surtax ought to be lower. This is necessary both to increase
the revenue of the Government and to encourage venture capital. This is
not politics. But it is public finance. Until these elementary principles
in regard to the income tax are recognized we shall have an unbalanced
budget and the Treasury will be burning the candle at both ends. There
will be a shortage of revenue because the rich are not rich enough and
there are not enough of them to finance the Government. If we should
take all of the income (100% of it) of every citizen in the United States
having income of $100,000 and over, we would get only enough revenue
to run the Federal Government less than 45 days. Excessively high rates
will deprive our economy of the impetus of venture capital which can only
be provided by the well-to-do; and it is venture capital which will
provide reemployment. Safety first capital will never do that. Savings
banks, insurance companies, government bonds, and post office savings,
etc., provide a sanctuary for the savings of the poor and moderately
well-to-do. They cannot and should not be asked or even allowed to provide
venture capital.
- 5 -
287
provide venture capital.
It would be highly Sesisable if
4. Corporation income tax The corporation! Income tax
made
could
A equal to but not greater than the normal personal income tax (which
eventual
should be higher as above stated) - (this is not an argument for reducing
revenues), and corporation dividends if the corporation pays an income
tax should be exempt from personal normal income tax in the hands of the
stockholders, but not exempt from surtax. Double taxation of corporate
income, (or triple taxation 1N the case of intercorporate dividends), or
taxation of corporate income at EN higher rate than the personal normal
income tax, penalizes venture capital and tends towards the discouragement
of enterprise and towards the overcapitalization in bonds and under-
capitalization In stocks or equities of our corporate undertakings. A
stockholder has a share in the company, in its risks, and in its profits.
When the company pays its income tax it pays for the accounts of its
Page 8 and 9 taken
out at Pres'. suggestion -
- % take out 288
stockholders. When it has so paid for his account he ought not to be
taxed again on its income. Interest on corporate debt is a proper
deduction from corporate income in determining the corporation's income
taxes. The corporation bondholder pays an Income tax on the income, but
he has not previously had it paid by the corporation on the same income.
There is no reason why a corporation stockholder should have to pay
normal income tax twice on the income he receives from the corporation,
(once from the corporation itself and again when he receives it); while
the corporation bondholder properly ways only once. And there is no sound
reason why he should have to pay normal tax at a higher rate through the
corporation in which he owns shares than on the other income. This
discrimination against the corporation stockholder is a bad thing for
effort shows be made eventually to
the
national
economy,
and
14
refurnated.
eliminate ih.
5. Excise or sales taxes - Those taxes are easily collected, and
if the rate of taxation is kept low in proportion to the value of the
thing or service taxed, they do not then unduly burden business and
industry and do not dry up the sources of revenue. It should be borne
16-a
leave 1 289
11 mind, however, that excise taxes in effect tax income, and that the
proportion of income of people of small means taxed through excises taxes
tends to be much greater than the proportion of income 80 taxed of people
of large means. The poor have 20 spend & greater proportion of their
incomes on consumption goods and services than the rich. Thus, excise
tax tends to burden taxpayers in inverse proportion to their wealth.
This is precisely the opposite of the income tax itself which burdogs
disproportionately the people of large wealth. If it were thought
politically possible to have an ideal income tax in the United States and
to tax adequately amall incomes, as they do in England for instance,
then there would be B. good deal to be said for dispensing with excise
taxes altogether and throwing the whole burden on the income tax. But
as long as it is thought to be politically inexpedient to tax small
incomes directly, except at nominal rates, it will be financially necessary,
to collect a considerable part of the revenue through excise taxes.
16a
-19-
290
So much for the tax situation in general. Perhaps the question which
is uppermost in your minds at the moment is, "just what is the situation
as of today". I will go back and recite the history of the past few months
in chronological order so that you may have a clearer picture of the
answer to that question.
(1) As one of the last acts of the first session of the 76th Congress
the House of Representatives passed a resolution authorizing its Ways and
Means Committee to make a thorough study of the tax situation and report
to the Congress.
(2) The Ways and Means Committee net and directed its Subcommittee
to comply with that resolution.
8 sut- com.
(3) As & result, Chairman Jere Cooper. in the last two weeks of that
Congress, conducted a series of meetings with the staff of the Treasury and
Internal Revenue Taxation
the staff of the Joint Committee of the Ways and Heans and of the Senate
Finance Comittee.]
(4) As a result of these meetings, the Subcommittee instructed the
themecloss
Joint Committee staff, and the staff of the Treasury, to devote itself to
study and preparation of data upon many phases of the revenue law.
231
(5) At the same time, the Treasury was instructed to conduct on behalf
of the Subcommittee of the Ways and Means Committee informal hearings with
taxpayers and the public generally with a view of getting from all groups
interested as much information as possible on the practical approach to
improving the revenue structure.
(6) Following these instructions, we sent out letters to approximately
educational institutions
1,500 people representing labor, agriculture, industry. the professions
and the general public.
The response to this appeal was instantaneous, and the good-will
developed thereby has become increasingly apparent. More than 300
individuals have appeared in person at a series of informal conferences
conducted here in the Treasury, and we have collected a mass of very
valuable data which, I hope, will form the nucleus for a permanent record
for the future.
It has been a long. tedious task but I believe has definitely created
the impression throughout the entire country that we are trying to do
a sincere and earnest job.
We are busily engaged at this moment digesting this data. I am
-14-
292
hopeful that, prior to January 1st, we will be ready to submit our final
report on this phase of the work to the Congress.
So far as the Treasury is concerned, it has no tax program to submit
at this time. We are still devoting ourselves to a thorough-going study
of every phase of the problem so that if, as and when we are called upon
we shall not be unprepared.
THE WHITE HOUSE
283
WASHINGTON
November 21, 1939.
EMORANDOM FOR GENERAL WATSON:
Here are some thoughts on Johnny Hanes' speech:
Page 1:
He cannot segregate his own opinions on
taxes from those of the Treasury and the Administration --
nor can he in paragraph three express his OWN personal
fundamental thoughts if he says that they have guided
him in his appearances before committees of the
Congress. Tell Johnny that when 80 working or 80
appearing, he is necessarily representing the government.
Page 2:
No one knows whether there are ten million
unemployed or not. There are thousands of unemployed
who will only take 8 special job of their own choosing.
There are thousands of others who refer to work only
part time. My own guess 1a that there are not more
than five million unemployed who are wholly willing,
at any time, to take a job.
Page 5:
I do not think the analysis of estate and
gift taxes 18 sound. The statement that "once taken
and spent for current purposes this capital cannot
produce future income" 18 saying, in effect, that no
government expenditure produces future income. That
18 8. complete fallacy. The further statement that estate
and gift taxes should be used only for reducing national
debt may be theoretically sound but does not hold water
if the government is increasing national debt and becomes
a bookkeeping quibble.
Page 6:
This sounds too much like the old idea that
the upper bracket tax payers form B. major portion of the
reinvestment or new investment total as a nation.
Page 8:
This is 8. plea for removal of taxes on
incorporate dividends and wholly contrary to the policy
of the Administration and if this whole paragraph were put
into effect, the government would lose a great part of
its personal and corporate tax revenue.
F.D.R.
294
President Hachten, distinguished guests,
members of the Press Club -
I am not going to read you 8 long drawn-out
document filled with generalities and high
sounding phrases designed to confuse the mind
and evade the issue. I appreciate too much
your invitation to come here and talk with you
off the record to ask you to sit through such
an ordeal.
I am, therefore, going to state my opinions
on the tax question frankly and honestly.
- 2 -
295
I have said many times that I do not believe
it necessary that we all think alike - but I do
consider it necessary that we all think. For
your earnest consideration, therefore, I submit
a few thoughts which occur to me at the moment
to be necessary for any discussion of the tax
question.
First, I have consistently stated and restated
the basic problem confronting our country 1s,
and will continue to be, economic recovery.
Every move I have made during my two years in
Washington has been designed to aid business.
That may seem to you to be an approach founded
upon selfishness. It is - that is a selfish
desire to maintain the type of government that we
know and love.
- 3 -
that
296
Without the economic recovery which will put
to work our unemployed at decent wages this
system as we know it must break down. With
economic recovery and reemployment of the major
portion of the unemployed in productive labor,
we are home - and our problems in the Treasury
are largely solved.
Eventually, I believe, the budget must be
balanced. There are three ways by which it
might be accomplished: (1) new taxes, (2) by
reducing expenses, (3) a combination of those two
plus a broad economic recovery. -
- 3 -
- 4 -
297
With these preliminary remarks I submit to
you my philosophy on taxation, part general,
part specific.
Certain general principles are so familiar
that it 18 hardly necessary to state them, and
so elementary that they require no detailed
elaboration. They are the principles which govern
the point of view of the chief fiscal officer of
the government. He has no axe to grind, no special
favors to confer, nor special burdens to impose
upon special classes, no mission to use taxation
to effect social change. The Secretary of the
Treasury's task is to find revenue for the
Government, and, 80 far as he 18 able, to resist
the efforts of those who have some other objective,
- 4 -
- 5 -
298
avowed or concealed, than that of enabling the
Government to pay its bills with the minimum
distortion and disturbance to the economy of the
country.
Such generalizations are elementary and
almost self-evident. Yet they may perhaps be
useful by way of preface to make clear the point
of view from which the following more specific
comments are made.
In general, taxation ought to be devised
(1) to produce the most revenue, (2) with the
least injury to the taxpayers and to the country's
economy, and (3) with the least expense and trouble
to the taxpayers and the Treasury.
- 5 -
- 6 -
289
Contrary to the general impression, the
tax problem (without the injection of too many
lawyers) 18 not such a complex or complicated
subject. I refer you to the chart on the wall.
Simply stated, we have only 5 sources of revenue -
(1) customs, (2) estate and gift tax, (3)
individual income, (4) corporate income and
privilege, (5) the sales taxes (viz: all others).
You will note that I leave out one very
Important item, namely the payroll or social
security taxes. That 18 not a source of revenue.
It is a trust fund which 18 paid into the Treasury
for safekeeping. The Treasury has been borrowing
these funds for current purposes, paying therefor
interest at the rate of 3 percent per annum.
- € -
- 7 -
300
This has served to keep down the amount you see
in the block entitled "Borrowings and Balances,"
which would have totaled $2,298 million in 1938
but for these payroll taxes.
In the fiscal year 1938, we collected the
largest revenue ever known in the history of this
Government. I have chosen that year, therefore,
as the subject for discussion. The system
produced in that year a total income from all
sources of $6,240 million. We spent in that same
fiscal year $7,691 million.
Let us take up the five sources of revenue
in the order mentioned.
- 7 -
- 8 -
201
1. Customs - You will see by the chart
that we collected $359 million from that source
in 1938. Due to the war we estimate a real
shrinkage from this level next year. In any event,
the only way that tax can be increased is through
more travel and more purchases abroad by our
citizens. That means peace and prosperity (or
economic recovery again) here at home.
2. Estate and gift taxes - To a considerable
extent the Government of the United States (and of
some of the states) are spending capital for their
current outgo. Estate and inheritance taxes are
capital taxes. Gift taxes on large gifts are
capital taxes. The capital of estates of decedents
and living donors 18 being spent by government for
current operating expenses.
- B -
- 9 -
302
It involves the dissipation of savings; and until
new savings are formed there 18 that much less
capital available for constructive purposes,
recovery, and reemployment. Knowing these facts
I still favor a tax on inheritances. Since it 16
a subtraction from the Treasury's income-producing
assets, it should be used so far as possible only
for the purpose of reducing the national debt.
It 18 sound finance to reduce a capital liability
with each reduction of a capital asset. This
statement of course would only be applicable when
we had ceased increasing the national debt and the
budget balanced. Otherwise it becomes a bookkeeping
item and thus an academic question.
- 9 -
- 10 -
303
There 18 no greater illusion than that,
because there have been times when savings
outbalanced consumer spending power, that, therefore,
we can safely abolish all incentive to save,
and finance recovery by spending capital instead
of saving it. As well argue because some folks
overeat people would be better without any food
at all.
or
3. Individual not personal income taxes -
Taxes which are destructive of the incentive to
save are destructive of future income, and therefore
of the source of future revenues to the Government.
Such taxes include not only the direct taxes on
capital already mentioned, viz: high estate and
inheritance taxes and high taxes on large gifts,
- 10 -
- 11 -
304
but also taxes nominally on incomes but at rates
so high as to leave the taxpayer no margin for
reinvestment, or even to make it necessary for
the taxpayer to infringe on capital. Taxes which
lead the taxpayer to retire from enterprise and
seek shelter in tax-exempt securities, or even in
safe and riskless securities, tend to prolong the
depression and unemployment, increase the burden
of relief expenditures by the Government and dry
up sources of income and future revenues of the
Government. I do not mean to imply that the upper
bracket taxpayers are the only source of new
Investment in enterprise. They may not even form
t. major portion of the source of new investment.
- 11 -
- 12 -
305
Normal taxes ought to be higher and
exemptions ought to be lower. In the middle
brackets the surtax ought to be higher and in
the higher brackets the surtax ought to be lower.
This 1s necessary both to increase the revenue of
the Government and to encourage venture capital.
This is not politics. But it is public finance.
Until these elementary principles in regard to the
income tax are recognized we shall have an unbalanced
budget and the Treasury will be burning the candle
at both ends. There will be a shortage of revenue
because the rich are not rich enough and there are
not enough of them to finance the Government.
If we should take all of the income (100% of 1t)
of every citizen in the United States having
- 12 -
306
- is -
income of $100,000 and over, we would get only
enough revenue to run the Federal Government less
than 45 days. Excessively high rates will deprive
our economy of the impetus of venture capital which
can only be provided by the well-to-do; and it 18
venture capital which will provide reemployment.
Safety first capital will never do that. Savings
banks, insurance companies, government bonds, and
post office savings, etc., provide a sanctuary for
the savings of the poor and moderately well-to-do.
They cannot and should not be asked or even allowed
to provide I venture capital.
4. Corporation income tax - The corporation
income tax is now at the highest level in our
history, namely 18 percent. It is at this source
- 13 -
- 14 -
207
of revenue which we must aim in pleading for
complete economic recovery. During the year 1929
the net profit base upon which tax was levied
reached the total of $11 billion. The taxable
base upon which we have been working during the
past few years has shrunk to a little more than
one-half of this figure. I feel that the rate
upon corporations 18 about as high as it should
be allowed to go. Under an ideal tax system it
would be highly desirable if the corporation income
tax could be made equal to, but not greater than,
the normal personal income tax which, as I have
said before, should be higher. One specific
weakness in the corporate tax structure 18 the fact
that interest on corporate debt 1s allowed as a
- 15 -
308
deduction from corporate income in determining
the corporation's income tax. This 2. same
deduction is not allowed in the case of dividends
on preferred stock. The tendency of the present
law 18 to encourage, thretoxe therefore, corporate
financing by first or second mortgage bonds, rather
than with equity securities. In the long run this
encourages heavy overcapitalizations by corporations
with bonded indebtedness and creates an unsound
financial condition causing many unnecessary and
expensive reorganizations. This 16 a matter which
has been referred to many times by Chairman Jerome
Frank of the Securities and Exchange &p Commission.
- 15 -
- 16 -
309
5. Excise or sales taxes - These taxes.are
easily collected, and if the rate of taxation 18
kept low in proportion to the value of the thing
or service taxed, they do not then unduly burden
business and industry and do not dry up the sources
of revenue. It should be borne in mind, however,
that excise taxes in effect tax income, and that
the proportion of income of people of small means
taxed through excise taxes tends to be much
greater than the proportion of income so taxed of
people of large means. The poor have to spend a
greater proportion of their incomes abo on
consumption goods and services than the rich. Thus,
excise tax tends to burden taxpayers in inverse
proportion to their wealth. This 18 precisely
the opposite of the income tax itself which burdens
- 16 -
- 17 -
310
disproportionately the people of large wealth.
If it were thought politically possible to have
an ideal income tax in the United States and to
tax adequately small incomes, as they do in
England for instance, then there would be 8. good
deal to be said for dispensing with excise taxes
altogether and throwing the whole burden on the
income tax. But as long as it is thought to be
politically inexpedient to tax small incomes
directly, except at nominal rates, it will be
financially necessary, to collect a considerable
part of the revenue through excise taxes.
So much for the tax situation in general.
Perhaps the question which 18 uppermost in your
minds at the moment 1s, "just what 1s the situation
- 17 -
- 18 -
311
as of today.' I will go back and recite the
history of the past few months in chronological
order 80 that you may have a clearer picture of
the answer to that question.
(1) As one of the last acts of the first
session of the 76th Congress the House of
Representatives passed a resolution authorizing
its Ways and Means Committee to make a thorough
study of the tax situation and report to the Congress.
(2) The Ways and Means Committee met and
directed its Subcommittee to comply with that
resolution.
(3) As a result, Chairman of the Subcommittee,
Jere Comparex Cooper, in the last two weeks of
that Congress, conducted a series of meetings with
the staff of the Treasury and the staff of the
- 18 -
- 19 -
312
Joint Committee on Internal Revenue Taxation.
(4) As a result of these meetings, the
Subcommittee instructed theJoint Committee staff,
and the staff of the Treasury, to devote themselves
to study and preparation of data upon many phases
of the revenue law.
(5) At the same time, the Treasury was
instructed to conduct on behalf of the Subcommittee
of the Ways and Means Committee informal hearings
with taxpayers and the public generally with a view
of getting from all groups interested as much
information as possible on the practical approach
to improving the revenue structure.
(6) Following these instructions, we sent out
letters to approximately 1,500 people representing
labor, agriculture, industry, educational institutions,
the professions and the general public.
- 20 -
313
The response to this appeal was instanteous,
and the good-will developed thereby has become
increasingly apparent. More than 300 individuals
have appeared in person at a series of informal
conferences conducted here in the Treasury, and we
have collected a mass of very valuable data which,
I hope, will form the nucleus for a permanent record
for the future.
It has been a long, tedious task but I believe
has definitely created the impression throughout the
entire country that we are trying to do a sincere
and earnest job.
We are mustrix busily engaged at this moment
digesting this data. I am hopeful that, ats prior
to January 1st, we will be ready to submit our
final report on this phase of the work to the
Congress.
- 21 -
314
So far as the Treasury is concerned, it
has no tax program to submit at this time. We
are still devoting ourselves to a thorough-going.
study of every phase of the problem so that if,
as, and when we are called upon we shall not be
unprepared.
- 21 -
315
GROUP MEETING
November 22, 1939.
9:30 a.m.
Present:
Mr. llanes
Mr. Riefler
Mr. Stewart
Mr. Thompson
Mr. White
Mr. Foley
Mr. Harris
Mr. Cochran
Mr. Haas
Mr. Graves
Mr. Bell
Mrs Klotz
Mr. Duffield
S.T.Jr:
Anything on your mind?
Manes:
Nothing except this letter from K. P. Chen that
you were anxious to get that information on. I
acknowledged that.
M.M.Jr:
Good. I might as well read it now and give it
back to you.
Lumes:
I thought you might want to keep it.
1.0.29:
O. K.
Foley:
Sam Klaus says there is 8, very important develop-
ment in the Annenberg case and wants to talk about
1t.
O. K.
(oley:
Would you be free sometime to see Campbell end
Clark?
-.K.Jr;
No, I don't think 80, I can't just stop every-
thing. I have got an impossible day. It is just
impossible.
Toley:
It isn't something that has to be done.
R.U.Jr:
I could have done it yesterday but he couldn't.
Foley:
I assume he was talking with the Attorney General
about the thing they wanted to talk to us about.
H.M.Jr:
He will be here again.
316
- 2 -
Foley:
Yes.
H.M.Jr:
What else?
Poley:
Nothing.
Cochran:
Just had this letter for Mr. Harris on that tin
proposition.
11.M./r:
I have this letter from Welles, a most peculiar
document, in which he asked me to designate
somebody to represent me on the Munitions Board.
Inasmuch B.S it is mostly in and out stuff - last
time I had Huntington Cairns but this time I will
have Basil Harris represent me on the Munitions
Board. It is all stuff to do with shipping. Will
you be willing?
Harris:
Yes.
A.X.Jr:
And I think 1f you could - somebody could post you
on this stuff.
Poley:
He can talk to Huntington. Whenever he can't 80,
Huntington can 80 for him.
B.M.Jr:
Have you got those memos ready?
Cochran:
Yes. The one is completely finished and the other
is being typed now. They will both be ready this
morning.
H.M.Jr:
Will you see that I get them?
Cochran:
Yes, absolutely.
H.R.Jr:
I think the President ought to know about it. Does
anybody know when Butterworth 1s going back?
Cochran:
I asked him yesterday and he seemed to think this
is the center of interest right now.
Rarris:
He told me within two weeks.
Cochran:
He hasn't fixed any definite date.
B.K.Jr:
I don't blame him.
Regraded Unclassified
317
- 3 -
Cochran:
I don't either.
H.K.Jr:
You are still doing some staff work on that stuff?
Stewart:
Yes.
H.M.Jr:
George?
Where is Bell?
Hans:
You haven't seen these for a little while (handing
report to Secretary).
I have something I would like to show you, Mr.
Secretary. It will take about five minutes.
H.M.Jr:
You are out of luck, George. Not this week.
(Mr. Bell enters the conference)
Have you got a written excuse? Where is it?
Duffield:
Did you write it in there?
Bell:
I have got the evidence. See that swelling (indicat-
ing face).
White:
Take the gum out of your mouth.
H.M.Jr:
Anything else, George?
Haas:
No.
Riefler:
Colombia at 10:00 o'clock?
H.M.Jr:
Yes. All right?
Riefler:
Yes. Yesterday we found in talking to Feis that
there is quite a bit of background on this that
we weren't too well posted on. I think it would
be a good thing to have Welles bring him. He
didn't know anything about the meeting at all.
H.M.Jr:
Well, I don't like to
White:
He said Welles knew everything that he knew.
Riefler:
He said he had told Welles everything that he knew.
Regraded Unclassified
- 4 -
318
H.M.Jr:
I don't like to call up Welles and tell him -
do you fellows know it now?
White:
We know what he told us, yes.
Riefler:
It was background that we didn't have.
H.M.Jr:
How am I going to get that between now and
10:00 o'clock?
Riefler:
You can got it then easily enough.
H.V.Jr:
0. K.
Riefler:
I think he ought to be here. I hope Welles brings
him.
H.M.Jr:
Have you got an agenda?
White:
Yes. Well, it is very simple. The first point
of the agenda is to find out just what is going
on, which apparently we were slightly misinformed
on or not told the whole story.
H.M.Jr:
Take & minute and tell us now.
White:
Simply that according to Feis there has been no
definite offer nor is there any certainty of any
definite offer, so that our presumption that they
are going to offer three percent, move up to four,
may or may not be the situation. I gathered - my
impression from Feis' statement was that he would
be much surprised If there had been a definite
offer made.
Riefler:
Those terms were terms which he had suggested to
them which they had thought Colombia might approve
and we are hearing them, but there is no indication
at all that they are prepared to make them.
H.M.Jr:
Well, I think the thing that we
White:
He is somewhat annoyed at the way the thing is being
handled.
H.M.Jr:
Who?
- 5 -
319
White:
Feis, He thinks too many people have got their
fingers in this pie.
H.M.Jr:
By that, does he mean the Treasury?
White:
I don't know who he means.
H.M.Jr:
Well, I think the thing to do is - I had this in
mind anyway, but this just strengthens my opinion -
that we ask Mr. Welles that if we are going to
continue that I have a chance to see the credit
representative of Colombia and talk to him myself.
It seems to me that that is the easy way to do it.
White:
I should think it would be essential.
Riefler:
Oh, yes.
Cochran:
I just have one little reservation. If you are
going to speak with the bondholders association
at all - I don't know whether it is advisable -
I would do it before that.
H.M.Jr:
Before what?
Cochrant
Before seeing Jaramillo.
H.M.Jr:
Why?
Cochran:
I think they have B. lot of background that we
probably haven't here. After all, they are the
ones who & on representing the bondholders, trying
to get agreements and I think it would help them
quite B. bit 1f we at least consult with them or.
get their views, whether you take them or not.
H.N.Jr:
What did you fellows do last night about it?
White:
We talked about what the specific procedure might
be. Feis was asked specifically how he would
handle the situation. I don't know if it is
legitimate to give his reply. Do you think he
would object to that?
Riefler:
I don't know.
White:
After that preamble, I suppose I had better give
it.
320
- 6 -
He felt that the way to handle the situation now
would be for him to get in touch with this repre-
sentative and see whether he cannot get B. definite
offer from him that would be acceptable and let
everybody else for the moment step out of the
picture until he has obtained & definite offer from
them, and then, I take 1t, he would confer with
the bondholders to induce them to accept it if it
were reasonable. Then after that
E.M.Jr:
What has been going on for the last two and a half
weeks?
White:
I don't know, sir. The only thing we know are those
two letters which you received. He fells that the
bondholders in this instance have so far done a very
good job and that those who are criticizing are not
aware of all the facts.
Riefler:
What came out of our meeting mostly was the fact
that it seemed to us that this meeting this morning,
each person should first of all give & complete
report of everything he knows about it. It is
obvious that different departments have been making
moves and that the others aren't completely informed
and it 1s terribly important that at this meeting
this morning we simply try to get the whole picture
on the table or else somebody is going to slip up.
That is why I brought up the question of his coming
here.
H.M.Jr:
Well, I am back - yesterday we had one meeting and
today we are having another. I can't move any
faster. I think the staff work on it is - shall I
say lousy? Compare with that what we did in two
days for these other people. They were here two
days. I took the responsibility. We got them
cleared up in two days and they are gone, I could
do the same thing in Colombia in three days 1f
these people would let me. In two days the thing
is cleaned up and they go home. They could sale
tomorrow night if they wanted to. But the State
Department won't let me do it. There's no use
kidding ourselves. If it was my responsibility,
I could clean up Colombia in a week.
White:
I think a lot of the misunderstanding will be cleared
up at this meeting, in response to specific questions.
321
- 7 -
M.M.Jr:
On the other thing, the SEC was simply swell and
we went through these things and got fixed up and
there was about a thousand times 88 much money
involved. Right?
{iefler:
The problem here is that there is so much background.
E.M.Jr:
That is up to you gentlemen to get it and 1f you
don't mind my saying 1t, the Treasury didn't have
the background last night in the dress rehearsal.
White:
There is only source of information we can have
on private negotiations going on between the State
Department and the Pan-American countries and that
10 the State Department and 1f they don't tell us,
why, we could ask for it 1f you want us to push
1t. If that is what you want, I will either get
the information or get them to say that they won't
tell us; that is easy enough.
R.R.Jr:
I asked you gentlemen to do that before you left.
White:
That 18 why we got Feis down and got some informa-
tion.
H.M.Jr:
You got him down after you came out of my dress
rehearsal and we didn't know it.
White:
I was under the impression, Mr. Secretary, that
that letter I WELS permitted to look at was highly
confidential and for you only. I didn't even
know whether I could tell the State Department
that I had seen it.
E.M.Jr:
Let's go on from here. White and Riefler and
Cochran, I am pushing this thing, and either push
your way through until you get it or come to me
and say you can't get it.
White:
If we have your permission to do that, I am sure
that we
E.M.Jr:
You can. I just can't always have to be the self-
starter on this thing.
Cochran:
Could we have your permission - I haven't talked
to Harry to see whether he agrees or not - to
322
- 8 -
get one of the bondholders' men here, the
association's - I mean if Harry and Riefler
agree with me on that?
H.M.Jr:
Let's announce today that we will. I would
like to meet one of those fellows myself. I
don't know who - could you get that book?
White:
I have it in my desk.
H.M.Jr:
Send for it now and let's take a look at it.
One fellow there I know is & mighty nice fellow.
Stewart:
You couldn't get a better man on there.
H.H.Jr:
I was thinking about having Traphagen come up
in the country this week-end to talk to me,
Harris:
They have the Swiss Minister in there now on this
watch movement and it is going along. I don't
know what is going to come out of it. You may
want to lay it before the State Department. It
is very involved. I am trying to carry out your
wishes on it.
H.M.Jr:
0. K.
Harold?
Graves:
Nothing.
H.M.Jr:
Bell, I have changed my mind. Last night about a
quarter of seven the Acting Chairman of the Federal
Reserve called me on the phone and said that he
had heard that there was going to be a financing.
Bell:
Ransom?
H.M.Jr:
Yes. Did you tell him?
Bell:
I told him we probably would not have an Open Market
meeting but there might be some financing this
week.
H.M.Jr:
I think we had better have one so we will mark it
11:00 o'clock Monday. Sometime today or tomorrow
I have got to see you and George and I am awfully
cold on this thing.
323
- 9 -
Bell:
Well, I would like to see you sometime today on
this program.
H.M.Jr:
Let's see how long this darn meeting on Colombia
lasts. I will tell you now. I will see you and
George and anybody else that comes in on it at
2:15 and have a preliminary talk on financing.
That is today. O. K.?
cell:
That is all right.
A.H.Jr:
But I would like an Open Market - is Viner bringing
in Towers?
White:
We had a long talk with Towers and then Viner talked
with him after that and he decided after we got
through that there was no special reason for him to
talk with you, that we got whatever he had on it.
Our man that we had down there in Venezuela has
returned. He is here. Mr. Fox of the Tariff Com-
mission, who is in charge of the Commission, has
asked to borrow him until they get through writing
their final report, which may be
U.M.J.:
Let's see who are the Directors of the Bondholders
Protective Committee.
White:
There 13 a much longer list of Directors than I have.
H.M.Jr:
Traphagen - he would be as good a man as any, wouldn't
he?
Cochran:
Yes. Francis White is an active member in the
negotiations but Traphagen, I think, 13 good.
Francis White, I don't know.
324
RE COLOMBIAN FINANCE
November 22, 1939.
10:00 a.m.
Present:
Mr. Hanes
Mr. Welles
Mr. Frank
Mr. Lincoln
Mr. Foley
Mr. White
Mr. Riefler
Mr. Cochran
H.R.Jr:
Gentlemen, I have this letter from Mr. Jones,
which I am sure you are familiar with, and also
the letter from you (Welles) and I don't know
whether there is anything between us up to date
as to what is the relation of our Government
with Colombia, other than these letters.
welles:
There is nothing that I know of other than that.
H.M.Jr:
Well, we had a little meeting last night. I
haven't seen this. Supposing I read this out
loud.
"1. What offer is the Colombian Government making
with respect to -
"(a) servicing the federal debt?
"(b) servicing the local government obligation?
"(c) servicing of the arrears of interest payments?"
Do you know what the answers are?
Welles:
Unless it is contained in Jesse's letter.
B.M.Jr:
No. This is information that we don't have.
Welles:
I am afraid I can't give you that.
H.M.Jr:
You haven't got another copy, have you?
White:
Yes.
H.N.Jr:
Will you give Mr. Welles one and also Mr. Frank.
Welles:
This is contained in Jesse's letter to you.
Regraded Unclassified
325
- 2 -
H.M.Jr:
Well, what 18 the answer to that?
White:
To which question?
H.M.Jr:
This "c"? point 1. Does Mr. Jones answer "a", "b" and
White:
No, I don't think he answered it. He gave the
representative of Colombia his ideas of what a
settlement would be, but I thought there was some
indication in Mr. Welles' letter that they might
be prepared to make a specific offer. It didn't
go into detail.
Welles:
From what the Colombian representative has said
to me, what they have in mind is the immediate
resumption of interest payments at three percent.
H1s ideas, I think, coincide with the 1deas ex-
pressed by Mr. Jones here, that is, B. ten-year
period at three percent and four percent there-
after.
Frank:
Is the interest to be funded?
Welles:
That is to be handled, I believe, in another way.
What the Colombians have in mind is one percent
on the default. Jesse expressed the idea to me
that that should be handled in a different way.
I don't know what he means here: (Reading) "It
would be desirable to have some such arrangement
as would permit the individual bondholders to
convert their bonds into milreis." He 18 confused,
I imagine, with Brazil there. I think the situation
really is this: The Colombian Government's idea
is more or less along the idea of what Jesse con-
siders fair and reasonable. The Colombian repre-
sentative, however, has written by airmail to the
President of Colombia, communicating to him the
impressions that he got from Jesse Jones, and is
now waiting until he hears further. I don't
think there is any material divergency between
what Jesse indicates here and what they feel about
the matter.
H.M.Jr:
In the Treasury, we think it just complicates the
matter by adding that it would be desirable to have
some such arrangement to permit individual bond-
holders to convert their bonds into milreis to be
326
- 3 -
used in Colombia to purchase things for export.
We think that is Just superfluous.
Valles:
I don't see any particular reason for it.
H.M.Jr:
SEC - Mr. Lincoln's office - might find a method
of juggling their payments.
Lincoln:
In default it works out very badly. You set up
an automatic system for repatriation and you keep
your exchange exhausted so that It is all the more
difficult to make interest payments.
Welles:
That, I may say, was not an idea expressed, at least
not to me, by the Colombian representative. I think
it may be Jesse's own idea.
H.V.Jr:
As far as we are concerned - I don't know if I can
speak for the SEC - we would just as lief see that
part dropped.
Lincoln:
I think in that line there would be something to be
said for having the bonds already bought back in
Colombia; have 8. Colombian domocile, you might say,
converted in milreis and get them out of the picture.
I think that 1s something that should well be con-
sidered because there is commonly supposed to be -
there are known to be 10 million - I mean 6 million
of the national government bonds back. How much
more, no one knows, but it seems there might easily
be 8 or 10 million more. That is just 8. guess In
the dark because there is no 11ght on the subject.
But it would be something to have those back out
of our picture.
Dates:
There is another serious disadvantage to the sugges-
tion of Mr. Jones on economic grounds. I don t know
whether you want to take it up here. It may provide
for a large supply of milreis on the part of those
who want to take advantage of that clause, who in turn
will attempt to sell it on the market for whatever
they could get and would tend to depress the rate
or create another rate and upset their own exchange.
I wonder whether they have thought the thing through
or whether it appears to be the thing indicated on
the surface, but if it is the latter I am doubtful
whether in their own interests it would be desirable
unless they blocked those balances and didn't permit
their use except under very careful conditions.
327
- 4 -
Wellen:
That in itself would be D new complication.
White:
Yes, I should think no.
E.M.Jr:
As I understand the situation now, the Colombian
Ambassador has written back and is waiting to hear
from them, is that right?
Welles:
That is right.
H.S.Jr:
And just as soon as he hears, could you, Jones and
I sit down with him and
Welles:
Well, I think that is one point that ought to be
determined because apparently Jesse has made certain
very definite proposals which he regards as authori-
tative proposals. I see the Treasury Department has,
I think, B. very reasonable objection to it. I think
it 13 unnecessary.
H.M.Jr:
In the Administration family, can I ask - I mean
did Jones see this man with the approval of the
State Department?
Welles:
Jesse said he would like very much to see him before
he went for his holiday and I arranged it myself,
but my understanding was that he was going to listen
to what Colombia was going to propose and not make
proposals himself.
8.M.Jr:
Well, in order that the Administration have B. united
front, I don't know when Jones gets back but there
1s nobody there who can talk for him?
belles:
No one,
H.M.Jr:
But aren't you anxious to clean this up?
Welles:
I am not only anxious but I am terribly anxious to
clean it up.
H.M.Jr:
I am ready, beginning with next Tuesday, to sit on
this thing until we do clear it up.
Welles:
Well now, if he has B. reply by that time - do you
want to wait until Jesse gets back or do you want
to wait until then?
$28
- 5 -
H.M.Jr:
What we ought to do is gèt busy on the phone and
then you and I sit with this gentleman until we
do get it.
Welles:
All right.
H.M.Jr:
And I am willing to get Jones on the phone and
tell him that this is what we are going to do
and he could advise by phone. He calls up his
office two or three times & day anyway.
141102:
All right.
I will tell them to let me know 1f he calls up his
office today. He to usually on the phone several
times a day. How does that strike you?
Welles:
I think that is a very good idea. Did you say
that you would be back here on Tuosday?
I will be back here Sunday night.
Velles:
I think it might be well to clean up some of these
things before we start talking business.
S.M.Jr:
I will do financing Monday. That 1s the reason
I say Tuesday.
cllos:
If you will see him for a short period Nonday after-
noon, I will arrange the meeting.
S.M.Jr:
All right.
hellos:
lie speaks English very well.
Knowing that you have this, I would just like to
sit continuously and in two. or three days we ought
to be able to clean it uo. He could use the phone,
couldn't he, down there?
wellos:
I think 30.
R.M.Jr:
Would it be helpful to have Traphagen here?
Telles:
Not in the least. I don't seo any reason. There
is too much that he has to do down there. I don't
see anything in particular that he could contribute.
329
- 6 -
E.M.Jr:
The thing that bothers me, I would like to have
some way to bring in this Bondholders Protective
Committee so that we can sort of get them to
commit themselves by saying they are satisfied.
Before you came in, Mr. Frank said that 1f some-
body could come down here Friday from the Bond-
holders Committee he would like to sit down with
them and talk with them and get them to say how
they feel about it.
Welles:
Your thought 18 to how the men on that feel about
it?
H.M.Jr:
Yes, try to get the benefit of whatever they have
and then when we do make this deal we will have
the hope that they will say they are satisfied.
Welles:
My only thought was that probably the better way
to handle it would be for us to determine here
what we thought fair and equitable. Then 1f the
Colombian Government is willing to make an offer
that we consider fair to the bondholders, the
offer would then be made on their own initiative
without any intervention on the part of this Covern-
ment through the Protective Council of the bond-
holders.
E.M.Jr:
Well, do you want to talk en this? You are one
of the people pushing me, saying that you feel
you ought to see them before you make the deal.
Riefler:
I agree with Er. Welles as far RS the correctness
of the official procedure. I think it would be
dangerous if we got between them in any official
way - I mean after all, they represent the bond-
holders and we don't want to get the honors for
a settlement that they will criticize because there
will be 8 lot of criticism which can arise on these
things.
On the other hand, it seema to me terribly important
not to leave them with the appearance of holding
the bag, that we could see them beforehand and get
some sort of understanding and it would go through
much smoother.
Welles:
I agree with you, If you could get it. Have you
any reason to believe that you will?
320
7 -
Mefler:
I don't know the Council at all. That is why
I think that part has to be very carefully ex-
plored. I know that there 10 a chance here for
terrific criticism. I happened to participate
in B. local session up at Princeton the other
day and there can be B. lot of nasty criticism
beforehand. come out unless that is carefully worked through
Trank:
Your suggestion, Mr. Welles, it might be dangerous
to get them in too soon because then they could
begin their criticism that much sooner, 1s that
it?
Velles:
That 1s my fear. As I see it, the only way that
this Government should get in the picture is in
this way. The Colombian Government wants facili-
tation of credit immediately amounting to about
10 million dollars. We or Jesse Jones should
announce that he is prepared to advance those
credits on whatever basis may be agreed upon and
that this Government is taking this step because
of its knowledge that the Columbian Government
has made, through the bondholders, a fair and
reasonable offer. That 18 where our opinion as
to the fairness and reasonableness of the offer
legitimately comes in. I think you \H.M.Jr.) and
I have agreed from the beginning that we should
not act as a debt collector or negotiator.
U.K.Jr:
I still feel this: I have never met any of them.
I have damned them unfairly but I have never met
any of them. Mr. Frank isn't acquainted with them
and the thought was that 1f we got these people
down here and talked with them and treated them
like human beings and, as somebody suggested here
yesterday, 1f Francis White 18 impossible, say to
give us somebody who we think is reasonable and
can be satisfied, maybe we can get somebody. Isn't
that what you had in mind?
Frank:
That is right.
V.M.Jr:
And as I gather, Mr. Frank, you are willing to
take the time on Friday and just sit down and
get acquainted with these fellows.
Regraded Unclassified
231
- 8 -
Prank:
If that 1s what everybody thinks is desirable.
K.M.Jr:
If they are going to be the organization who
finally have to announce that this 1a an agree-
ment, I think to just get acquainted, meeting
with them now, would be helpful, rather than
to do everything and say, "Here is an agreement,
you take it and like it."
trank:
If you gave it to them abruptly that way and they
wouldn't accept It, then it would spoil the whole
situation. On the other hand, there is the danger
Mr. Welles points out that if you put it out too
early you enable them to build up their arguments
against it. It seems that the latter is the
lesser evil.
White:
Couldn't the latter be somewhat avoided by morely
meeting them to get their views without in any
way indicating what the Colombian Government has
offered or stating that they have offered anything,
and let them state their views and let us get some
notion of what they are thinking about. Apparently
they already know there 18 some offer in the wind
because of the way the bonds are acting. The
market seems to be very hopeful so that I take it
they have some familiarity with what 10 going on,
yet some conversation with them might give us a
line 83 to what is running in their minds.
Welles:
I think the idea that Dr. White suggeste is ex-
ceedingly desirable. What I was afraid of was
that 1f you gave them any indication of what we
considered fair and reasonable along the lines of
Jesse's letter, that they would immediately build
up to the New York Herald Tribune and certain
other papers 8. wild attack and get the bondholders
persuaded at the outset that we were sponsoring
something unfair and make it so that probably the
bondholders wouldn't accept it.
Riefler:
I am afraid of the former one. After all, this
settlement, even though it means a big resumption
for the bondholders, is 8 heavy cut in their con-
tractusl obligations and I am afraid they would
go out and say we couldn't do any more because
the United States Government said this, and put
the whole onus on us for giving away the bondholders'
732
- 9 -
money. That is why they have got to approve 1t.
They have to say that It is 8. fair settlement
and 8. good one.
White:
I don't think they would get much publicity for
saying that going up that much 18 S. serious
scaling down of their rights,
H.M.Jr:
But you are not doing anything on the back in-
terest.
Velles:
The Colombian Government is prepared to deal with
that.
B.M.Jr:
My own feeling is this: If the SEC are willing
to sit down and just get acquainted with them,
having somebody from the Treasury and somebody
from the State Department and sit down and sort
of have a get-acquainted meeting, I think it
would be very good.
/rank:
Mr. Lincoln does know the Council. He is optimistic
about getting their currents because, as he puts it,
they are on the spot and they have got to show some
accomplishment. To reject an offer such as this
and have nothing by way of an alternative would be
very difficult. After all, their record of accom-
plishment hasn't been very great.
Aincoln:
I feel very optimistic.
Welles:
I am glad that you feel that way. I think that
out of the President's statement at the White House
there was a conflicting interpretation taking on
a political reflection, as we all know, and I hope
you are right.
Lincoln:
Based on the past, I should feel that It wouldn't
be impossible to deal with them.
Welles:
I am satisfied if Mr. Frank is willing to invite
them to come down.
Frank:
I think the thing to do would be to invite them
down. I will meet with them and anybody else
that wants to. We will just chat, get their Ideas,
let Mr. Lincoln who knows them bring out their
views, smoke them out.
333
- 10 -
Hanes:
Do you think it would be advisable to keep it
down as small as you could? I don't know how
this committee functions but there is one man
on that committee that you can talk with who I
know is a fine fellow and that is Traphagen.
If we get one man down there and tell him what
the problem 1s
Frank:
If you know him, why don't you call him up and
just say that this is an informal talk and why
not come down; it is not official.
Hanes:
That is my idea. Get him working for us on that
committee and say, "Hell, we have got to do some-
thing, what are we going to do? Maybe we can get
some better deal here.
Frank:
John
Welles:
If you are talking about personalities, I am
afraid you cannot persuade him to take the point
of view of that other thing. I think he is the
most violent member of that committee.
Hanes:
Maybe I can't, but I have known him for 20 years
and I have never had any trouble with him. He
may have the Republican viewpoint. I will take
a shot at it, anyway.
H.M.Jr:
Is it the 1dea that you see whether you could get
him to come down Friday?
Hanes:
My thought was, Mr. Secretary, that we not make
a big meeting out of it because at a big meeting
we are just not going to get him to say anything.
H.M.Jr:
Are you going to be here Friday?
Hanes:
Yes, sir.
H.M.Jr:
Could I make this suggestion, that you invite him
to have lunch with you and Mr. Frank and Mr. Welles.
Hanes:
I think that is too big a meeting.
Welles:
Leave me out.
Hanes:
I....
334
- 11 -
H.M.Jr:
Can't you see him alone?
Hanes:
Sometime Jerry could do it or Jerry and myself
or
"ellos:
Leave me out.
Hunes:
You don't like him?
Welles:
I think it would be much easier for you to handle
it.
Trank:
Why don't you ask him to come down and ask Mr. Lincoln
to come over as a technician.
Hanos:
Swell. Mind you, I don't want to inject myself into
this thing. I just think it would be helpful - you
can certainly get the fellow to talk by himself and
you cannot get him to talk before a bunch of Govern-
ment officials. He just won't do it. He just closes
up like e clam.
H.M.Jr:
Supposing you do it your way.
Manes:
won't call it my way, let's call it our way.
H.M.Jr:
But let's do it Friday.
Manes:
O. K.
M.M.Jr:
And then you can let us all know what happens.
Frank:
And 1f you want Mr. Lincoln to come over, he will
be glad to come.
Banes:
I arji setting out on something I know absolutely
nothing about, but I will try to settle this if
somebody will tell me what the bill of goods is,
Welles:
Do you think he knows anything about what the
details of these negotiations are?
Hanes:
I don't think he does. I would rather he didn't,
for that matter.
Welles:
I thought the basic idea Mr. Frank had was to try
to find out what they themselves were thinking
about as a basis for
335
- 12 -
Hanes:
And my suggestion was that we just get one member
of that committee to work in that committee for
us to tell us what they are thinking about.
Frank:
Just soften them up a little.
Hones:
I would just say, "Here, we are not going out here
and make some proposition to these people and have
you fellows come around and kick us in the backsides
about it. What we want you to do 1s tell us now and
tell us what kind of a deal you are going to agree
to. Maybe we are barking up the wrong tree, maybe
you don't want to make any deal. If that is the
case, tell us now."
Welles:
I think that is something, of course. So far as
the information 1s concerned, we have the information
as to what the Council has stated they consider &
fair deal.
H.M.Jr:
What is that?
Welles:
I haven't got the figures before me. My impression
is that it is 5 a percent interest immediately and
full payment on the defaulted coupons.
Hunes:
Did they suggest a full payment of the defaulted
coupon in cash or was it in a new security?
Welles:
I think it was in a new security, a refunding opera-
tion bearing the same interest.
Ranes:
And resumption at 5% percent?
Welles:
Yes. For the first time they have now stated
definitely that they would begin at 3 and go to 4.
Hanes:
They are not 80 far apart, if you could get them
to give some kind of new security for their back
interest.
Frank:
You suggested one percent on the back interest.
Welles:
I didn't suggest it, that was what they were talking
about.
Frank:
Yes, one percent on the back interest, as funded
at some lower rate of interest than the principal.
236
- 13 -
Jr:
That is about 50 million dollars spart, roughly
figuring, from what Jenes writes us.
Lincoln:
This back interest would only doal with the
federal government. They are not talking about
the local overnments.
1100:
That 1n right, the national debt.
Lincolnt
Roughly, four years at 6 percent and there are more
than 40 million outstanding in this country 1f
you take out the bonds that have been taken back
into Colombia.
Idea:
Those arrears in interest have accrued at D. nominel
rate. If there is to be e scaling down of interest,
theirs ought to be a sceling down 0" arrears.
rand:
Sounds 11ko B. Voll Street banker.
I am more convinced than ever that If VO are going
to follow the formula laid down by "r. Melles,
eventually this is coin to be announced by the
Bondholders Protective Connittoe. The sooner we
ret In touch with them, the better. Certainly I
think It is terribly important if we Are to
use that mochanism, because what is the 1138 of
my meeting with this fellow Tuesday and own may,
we all have a nice mail, new then we GBJ, "Hare
it is und you can announce 1t."
I think the Protective Council is the determining
factor. I don't think there in E: bondholder in
this country that wouldn't -laoly accept some
point like that.
lie may not need to nise them. I vould 11ke to cross
that bridge before we to any farther.
At least we can ret them to hold off and not fight
you or boil a fire under you. Don't you think so,
Summer?
Julles:
I think that is true and I think It 1s very desir-
able to avoid any situation of that kind, but I
have reached the decision unless the Protective
Council is radically overhauled - and I hope
Mr. Frank agrees with me - that It is not zoing
to be able to serve the position for which it
was created.
237
- 14 -
Hanes:
Is the chairman of that committee - is he the
he? fellow that is completely out of step? Who is
Welles:
Francis White is the president of it.
(Discussion off the record)
Riefler:
As far as this particular Colombian negotiation 1a
concerned, we have got to work with the assistant
counsel.
Welles:
Mr. White actually runs the Council. I think he
has the complete support of the executive committee
and he himself undertakes the negotiations that are
held in this country.
Hanes:
Maybe we had better talk to him first. It looks
to me like
Welles:
Perhaps you could get a much better idea.
H.M.Jr:
This is the first time I have ever seen a full
directory. It looks to me like B. bunch of fellows
all sitting home doing nothing.
Frank:
That is right.
Lincoln:
That is my impression. I have never known who the
personalities were on the committee and what force
they exert.
Welles:
I think they 0. K. everything that White says.
Lincoln:
They O. K. what White says?
Welles:
Yes.
Hanes:
Some of them?
Welles:
Every one of them.
Cochran:
I was at a luncheon one day with Mr. Clark, when
they had me down to the India House, and they
had a meeting on Latin America while I was there
and permitted me to stay on and there was a very
lively debate and one debate on Colombia - I have
338
- 15 -
forgotten the point now, it was a year ago - so
that they didn't just "rubber-stamp" White's
position at that time.
U.M.Jr:
If Johnny Hanes is willing to assume the responsi-
bility for the Administration at this stage, to
sort of get acquainted with them and find out how
they feel, and so forth and so on, I would be
tickled to death to have him do 1t.
Funos:
I will try. I will do the best I can. The first
thing I think I will do is call Traphagen on the
phone and find out first of all just how active
he is and how familiar he is with it and ask him
the perfectly frank question, would he like to
come down hore and sit down and talk with us about
this Colombian situation which 1s going to come
up, not telling him any of the details. Would
that be satisfactory?
Frank:
Yes. Wouldn't it be a good idea in the quite near
future that the Board of Visitors will call on the
Council shortly? I think that mi tht have a good
effect; not immediately, but after you have seen
Traphagen.
H.M.Jr:
And you (Welles) will bring the Colombian Ambassador
around sometime Monday afternoon?
Selles:
Not the Ambassador, the nan who is acting for the
Colombian Government. If you don't mind, I won't
bring him myself.
H.M.Jr:
I don't think we can do much more today.
Welles:
I think as soon as he gets a reply from his Govern-
ment, he then will want to sit down with you. In
the meantime, Johnny will be trying to get the
Protective Council into line.
H.M.Jr:
O. K.?
Hanes:
That is a big order.
10. H.M. nur. 27,1939
339
We need further information from the Colombians with respect to:
1. The exact amount of their Federal and local bonds
held outside of Colombia;
2. What has happened to her foreign trade since the
war began?
3. How much gold and foreign exchange does she now have?
4. Does she contemplate placing any restrictions on any
of her imports? If so, which imports?
5. How much revenue and how much foreign exchange is
Colombia going to obtain from the newly opened oil
fields?
340
Agenda for Conference on Loan to Colombia, November 22, 1939
1. What offer 1s the Colombian Government making with respect
to
(a) Servicing the Federal debt?
(b) Servicing the local government obligations?
(o) Servicing of the arrears of interest payments?
2. Will the Council of Foreign Bondholders be likely to ap-
prove the offer?
3. What kind of loan is Colombia seeking to obtain?
(a) Specifically what use is to be made of the proceeds?
(1) The dollar proceeds;
(2) The local currency proceeds obtained from the
sale of the dollar?
(b) What agency is to make the loan?
4. What procedure is to be followed ith respect to obtaining
the views DI cooperation with the Council of Foreign
Bondholders?
-
interne - - - AUTHORITY
FEDERAL - ADMINISTRATION
- are - CONTARY
- LOAN CORROAATION
- - -
FEDERAL - - - part
automa ASSOCUPON
FEBERAL - - USAR INTERNANCE
REPORT - - - -
FEDERAL LOAN AGENCY
WASHINGTON
notes my AV white
Jesse H.JONES
FEDERAL LOAN ADMINISTRATOR
November 16, 1939.
Dear Mr. Secretary:
I had a very pleasant hour and a half with Mr. E.
Jaramillo, discussing with him the situation with reference
to the Colombian national debt held in this country, and the
possibility of some additional credits for Colombia by the
Export-Import Bank.
I stated to Mr. Jaramillo that, in my view, the
five years of overdue interest should be refunded at 3% in-
stead of the coupon rate of 6%; that the bonds should be
extended at 3% for ten years and 4% thereafter; that a sink-
ing fund of not less than $600,000 a year should be set up
with which to buy bonds annually on tender; that it would be
desirable to have some such arrangement as would permit indi-
vidual bondholders to convert their bonds into milreis that
could be used in Colombia for the purchase of things to export,
having in mind that this would result in increasing Colombian
exports.
I told Mr. Jaramillo that I would make this report
to you and to Mr. Welles.
Sincerely yours,
June Jonez
Administrator
Honorable Henry Morganthau, Jr.
Secretary of the Treasury
Treasury Department
Washington, D. C.
Dr. White kept a copy of
this to prepare material
for the Secretary.
origianl to Mr. Hanes to
read 11/14/39
November 14, 1939
342
My dear Mr. Welles:
Your letter of November 13th,
in regard to the Colombian financial
problem, arrived during Secretary
Morgenthau's absence from Washington.
He expects to return from the
West the early part of next week and
I shall be pleased to bring your let-
ter to his attention at that time.
Sincerely yours,
H. 3. Klots
Brivate Secretary
Hon. Summer welles,
Under-Searetary of State,
Department of State.
- OFFICIAL COMMUNICATIONS TO
THE SECRETARY OF STATE
WASHINGTON, D.C.
DEPARTMENT OF STATE
343
WASHINGTON
November 13, 1939
Personal and
Confidential
Dear Henry:
With reference to your consideration of the Colom-
bian financial problem, you will be interested to know
that we have just had a despatch from our Ambassador to
Colombia reporting a conversation with Dr. Jaramillo who,
as you have been informed, has been designated by the Co-
lombian Government as its representative in the converse-
tions we have suggested and who 18 due to arrive from Co-
lombia in New York today.
Dr. Jaramillo told Ambassador Braden that promptly
after his arrival in Washington he would endeavor to reach
& settlement of Colombia's foreign debt held in the United
States on the basis of three percent interest payments with
the provision that such payments are to be increased over
& period of years to four percent. If an agreement can be
reached on these terms, he will endeavor to obtain a loan
The Honorable
Henry Morgenthau, Jr.,
Secretary of the Treasury.
-2-
344
of $10,500,000 from the Export-Import Bank or from other
sources, with the hope that if these arrangements prove
satisfactory further credits can be obtained in the United
States in the future up to a total of $25,000,000.
The American Ambassador has confirmed my own belief
that any arrangements entered into in Washington by Dr.
Jaramillo will be approved by the Colombian Congress and
by Colombian public opinion because of Dr. Jaramillo's per-
sonal prestige in his own country.
Believe me
Yours D A very sincerely
Halls
345
November 22, 1939
11:14 a.m.
Dean
Landis:
Hello.
HMJr:
Henry Morgenthau, Jr.
L:
Yes.
HMJr:
How are you?
L:
Fine, thank you.
HMJr:
I would like to have some more help next week, if I
could, on this Bank of America thing, see?
L:
Yeah.
HMJr:
And what I'd like to do would be to sit down with
you myself, see?
L:
Yeah.
HMJr:
And go into the thing -- well, and definitely make up
our mind next week what we were going to do.
L:
Yeah.
HMJr:
And I wondered whether you'd be available next week.
L:
Yes, I could come down -- let me see, just let me
check on next week. (Brief pause.) Tuesday or
Friday.
HMJr:
Tuesday would be perfect.
L:
"uesday would be all right?
HMJr:
Yes.
L:
All right.
HMJr:
Now let me ask you this - do you know and work well
with Dean Lloyd Garrison?
L:
Oh, yes.
HMJr:
What?
- 2 -
346
L:
Yes.
HMJr:
You do?
L:
Yes.
HMJr:
Because -- of Wisconsin.
L:
Yes.
HMJr:
It's Lloyd Garrison, isn't it?
L:
Yes, it's Lloyd Garrison.
HMJr:
I was going to ask him if he'd come down too.
L:
Uh-huh.
HMJr:
This thing 18 getting BO hot (chuckling) I want to
impress the President
L:
Yeah.
HMJr:
......&8 much as possible.
L:
Yeah.
HMJr:
And I thought I'd ask Mr. Garrison, who I don't know,
whether he could come down on - I haven't called him.
L:
Yeah.
HMJr:
See?
L:
Yeah.
HMJr:
Because I want to prepare a statement to make up our
mind, with the help of you gentlemen, and then pre-
pare -- submit it to the President.
L:
Yeah.
HMJr:
I don't know whether you saw the statement the
Attorney General made on this thing.
L:
No, I didn't.
Regraded nclassified
- 3 -
347
HMJr:
That was more on Transamerica.
L:
Well, the statement -- the one statement that he made
earlier that there were no -- there was nothing
criminal here.
HMJr:
Yeah.
L:
You saw that?
HMJr:
Yes. Well, could we leave it this way - if you don't
hear from me again I expect you Tuesday?
L:
All right, fine.
HMJr:
I'll be ever BO much obliged.
L:
Fine.
HMJr;
Do you -- do you want -- there's nothing new we have
to submit but I Just want to spend a whole day on it
myself.
L:
Yeah, yeah. Well, I turn up then
HMJr:
Tuesday.
L:
I'll be available around nine or ninethirty.
HMJr:
Fine.
L:
Uh-huh.
HMJr:
Fine.
L:
All right, sir.
HMJr:
Thank you.
L:
You're welcome.
HMJr:
Goodbye.
November 22, 1939
11:20 a.m.
348
HMJr:
Hello.
Operator:
Dean Garrison has & class now and he'll be through
at 12 o'clock our time.
HMJr:
I'd like to talk to him then.
0:
All right.
HMJr:
And that's that.
O:
All right.
11:57 a.m.
0:
Go ahead.
Lloyd
Garrison:
Hello.
HMJr:
Henry Morgenthau, Jr.
G:
Yes. Hello.
HMJr:
Is this Dean Garrison?
G:
Yeah.
HMJr:
The reason I'm calling you up 18 this - I want a
favor from you. I have got a very difficult case
in the Treasury and I'd like some outside advice.
G:
Yeah.
HMJr:
And I'm asking you and Dean Landis to come down, if
you would, and spend a day or two with us going over
it to advise me personally on it.
G:
Yeah.
HMJr:
It's a case -- for your information, it's the case
of Treasury in connection with the Bank of America.
G:
Yes.
HMJr:
And we've got to make up our minds whether or not we
are going to bring charges against the management
- 2 -
349
before the Federal Reserve, who under the law act
as judges, BO to speak.
G:
Yeah.
HMr:
Now it's -- the whole thing is it's a matter of
judgment and a question of whether or not tre have
B. good case, and I'm very anxious, if you could
give me a day or two, to advise me personally.
G:
Yes. Well -- well now, let me ask you a few things
about it.
MJr:
Please.
G:
How -- how urgent 18 this?
170r:
Well, I
G:
The time.
HMJr:
Yes. It's -- it's quite urgent because we've gotten
to & point now where we've Just got to make un our
mind we're either going to go ahead or not, and we
have 8. bill of particulars which we sent them on
October 3rd which would be available to you.
5:
Yeah.
HMr:
And I -- I told the President that I was going to
ask you and Mr. Landis to 50 over it. Mr. Landie
has been down once before on this last week. And
that with the help of you two gentlemen I wanted
to draw up & sort of a brief to submit to him.
€:
Yes.
HMJr:
Because it's one of the most difficult and one of
the most important decisions I've ever had to make
since I've been here.
5:
Yes. Well now, would there be -- I'm Just -- I'm
just thinking of the
MJr:
Pardon me?
E:
I'm just thinking of the time element involved.
That's the only thing that -- I'd need to do some
adjusting on here.
- 3 -
250
HMJr:
Yes.
C:
How much -- how much could you send me in the way
of material before I came down?
HMJr:
I think I could send you all that's necessary and
I could even send one of these lawyers with it if
you wanted me to, who has been working on it.
C:
Yeah.
HMJr:
To give you an idea, I asked Landie whether he could
come down next Tuesday, and he said he could come for
one day.
G:
Yes.
HMJ1:
And he said he could come Tuesday.
G:
Yeah.
HMJr:
I don't know what your schedule 18.
C:
Well now, I'm going to be down on Saturday and
Sunday on the Attorney General's committee on
edministrative procedure.
HMJr:
I see.
G:
And I'm afraid I just couldn't -- you see, I -- the
difficulty 1s I -- I've got classes here
HMJr:
Yeah.
G:
every day in the week. I've got an unusually
heavy schedule this semester and I just -- I just
can't do justice to my job and do too much cutting.
HMJr:
Yes.
0:
I've been under some -- some local criticism during
the past year for being away too much.
HMJr:
I see.
G:
It's not serious, but it's -- it's one of those
things that I have to take some account of here.
And I'm afraid that that would -- that would mean
that I wouldn't get back here really until Thursday
- 4 -
351
and it would meanppractically - with the -- with
the classes I'm going to miss in connection with
going down this weekend - it would mean really a
week out, and I just couldn't do that. I was
wondering if there would be any possibility of --
of getting this stuff to me before I leave on
Friday
HMJr:
Oh, yes. It
G:
I could read it on the train going down and perhaps
see you over the weekend.
HMJr:
Well I -- well here's -- here's my schedule. You
see, in New York State we celebrate Thanksgiving
this Thursday.
G:
Yeah.
HMJr:
And I was going home to get backhhere Sunday night.
G:
Yes.
HMJr:
And -- and Monday we have a big financing, that's
why I made it Tuesday.
G:
Yes.
HMJr:
But I could get all of this material to you tonight
and if you were here Saturday and Sunday why Ed
Foley would be available.
G:
Well now, why wouldn't that -- why wouldn't that be
at least -- at least a start on the thing.
HMJr:
And then possibly you could -- if you would, maybe
you could dictate some memorandum before you left
Sunday.
G:
Yes.
HMJr:
How would that be?
G:
Well, that would be O.K. Now, I think probably the --
what I had better do 18 if you -- the point 18 to get
this material to me just as fast as you can.
HMJr:
Well, I --
I
.
- 5 -
352
G:
I can start digging into it.
HMJr:
Well, we can send it to you airmail right away.
G:
Yes. Well, that would be swell.
HMJr:
You'll have it by morning.
G:
Yeah.
HMJr:
What address should we use?
G:
Well, I -- you can send it to the University of
Wisconsin Law School
HMJr:
Right.
G:
Madison, and then when I get to town -- get to
Washington Saturday morning I'll call Foley up and
make a date to see him either that day or Sunday.
HMJr:
Fine.
G:
And it may be that the thing will be so clear one
way or the other that you -- you won't feel that
you
HMJr:
Well
G:
-- me personally any further.
HMJr:
It's not that clear, unfortunately.
G:
No, I -- I just
HMJr:
It's -- it's a matter of - not only the law, it's a
matter of judgment.
G:
Yeah, yeah.
HMJr:
And if it was that clear I wouldn't have to be asking
your help.
G:
Yeah, of course. I
HMJr:
But we'll give you everything we've got and I don't
know whether you have followed it -- I mean, there's
a political pressure on this thing and it's the worst
I've ever had since I've been here.
Regraded Unclassified
- 6 -
353
G:
Well, where does it come from?
HMJr:
From the Gianninis. You Bee, they're using every
possible avenue that they can, and it's been going
on for two years and I just want to -- I either want
to make up my mind that they are fit to run the bank
or they are not.
G:
Yes.
HMJr:
And if they are not, then we should start proceedings
to remove them, and if they are why then we've got to
make up our mind we've got to live with them.
G:
Yes.
HWr:
But within the next week or ten days I want to make
up -- that decision.
G:
Yes.
HMJr:
And of course we've got their record now for six years.
5:
Yeah. Now, Mr. Secretary, I don't know the first
thing about the law on this subject.
HMJr:
Yes.
G:
It's an entirely new field for me, and If there are
any -- any memoranda or anything else that has been
prepared that would be helpful to sort of bring me
up to date fast on it, I wish you would include those
with what you have.
HMJr:
I -- I'll see that they do that.
S
Good.
HMJr:
We'll get the whole thing off early this afternoon.
G:
All right, fine.
HMJr:
I'm ever BO much obliged to you.
G:
Goodbye.
HMJr:
Goodbye.
TREASURY DEPARTMENT
54
INTER OFFICE COMMUNICATION
DATE November 22, 1939
TO
Secretary Morgenthau
FROM
Mr. Cochran
The foreign exchange market vas thin with pressure on the sterling rate, In
New York sterling opened at 3.93-1/8 and shortly thereafter moved up to 3.93-5/8.
About noon some scattered selling appeared and the rate declined to 3.92-1/4.
During the early part of the afternoon, Jepanese selling came into the market, at
a time when there was no demand for starling, and under their repeated offerings,
the rate declined by stages to, and closed at, 3.89.
Sales of spotsterling by the four reporting banks totaled 1534,000, from the
following sources:
By commercial concerns
: 196,000
By foreign banks (Far Enst and Europe)
1 338,000
Total
I 534,000
Purchases of spot sterling amounted to 1424,000, as indicated below:
By commercial concerns
I 321,000
By foreign banks (Far East and Durope)
1 103,000
Total
1 424,000
Of the four reporting banks, the following sold cotton bills totaling L162,000
to the British Control at the official rate of 4,02:
1119,000 by the Guaranty Trust Company
6 22,000 by the National City Bank
1 21,000 by the Chase National Bank
6162,000 Total
Shortly after noon it was reported that orders were received from a San
Prancisco Bank to buy between L250,000 and 6300,000 for spot delivery, against
which it wanted to sell the same amount of forward sterling for any date obtain-
able. This transaction appears to be one where either the sterling vas needed
immediately to cover commercial commitments, or it was being done to extend &
forward short position which the purchaser of the spot sterling did not wish to
liquidate at the present time. It is understood that a very small amount of
this avap was completed. The discount on sterling for 30 days widened to 3-3/44
per pound, equivalent to 11-7/16% per annus and for 90 days, 7-5/16# per pound,
equivalent to 7-7/16% per annum,
CONFIDENTIAL
2
355
The rate for the belga did not maintain the improvement of yesterday and
receded today to .1652. The discount for the Canadian dollar widemed to 13-7/8%
discount, due to commercial offerings of that currency.
The other important currencies closed as follows:
French france
.0221
Guilders
+5309
Swise france
.2244
The Cuban peso improved to 12% discount, as compared to yesterday's quotation
of 13-1/8% discount.
We purchased the following amounts of gold from the banks indicated;
$10,000,000 from the Bank of France
365,000 from the National Bank of Belgium
340,000 from the Bank of the Republic, Colombia
66,000 from the National Bank of Nicaragua
$10,771,000 Total
The Federal Reserve Bank of New York reported to us the following shipments
of gold:
$2,971,000 from England, shipped by the Bank of England, consigned to the Federal
Reserve Bank of New York, to be earmarked for the account of the Nether-
lands Bank.
2,087,000 from South Africa, consigned to the Federal Beserve Bank of New York,
to be sarmarked for the account of the Netherlands Bank,
516,000 from Chile, shipped by the Central Bank of Chile, consigned to the
Federal Reserve Bank of New York, to be earmarked for the account of
the Central Bank of Chile.
$5,574,000 Total
Testerday the Federal Reserve Bank of New York applied for a license to permit
the B.I.S. to transfer gold valued at approximately $1,690,000 from its Account A
to the earmarked account of the Central Bank of Turkey at the Federal Reserve Bank
of New York. This gold vas originally sold by the B.I.S. to the Turkish bank and
then pledged with the B.I.S. as collateral to secure commercial credits obtained
from that bank by the Central Bank of Turkey. Permission to make the transfer vae
granted. Previously, the Central Bank of Turkey cabled to the Federal Reserve
Bank of New York to inquire if it would make an advance against this gold. After
obtaining the approval of both its Board of Directors and the Board of Governors
of the Federal Reserve System, the Federal Reserve Bank of You York cabled to the
Turkish central bank that it was prepared to make an advance up to $1,520,000 for
three months against the gold. Testerday the Federal received from the Central
Bank of Turkey & request for the advance mentioned above, stating that it was for
the purpose of meeting their temporary requirements of foreign exchange. At the
advances to the Central Bank of Turkey total $4,829,000, secured by $5,367,000
close of business tonight, the Federal Reserve Bank of In York's outstanding
in gold, earnarked at the Federal Reserve Bank of New York in the - of the
Central Bank of Turkey.
CONFIDENTI.
-3-
356
The equivalent of today's London spot silver price was 41.61$ and the forward
price 41.364. Handy and Harman's price for foreign silver vas unchanged at 34-3/44.
The Treasury's price was also unchanged at 35#.
In New York we made three purchases of silver totaling 250,000 ounces under
the Silver Purchase Act.
CONFIDENTIAL
November 22, 1939
857
3:06 p.m.
HMJr:
Hello.
Eddie
Greenbaum: Hello, Henry. How was the trip?
HMJr:
Oh, fine.
G:
It was, eh?
HVJr:
I never saw your friends, they never showed up.
G:
Well, they were over around - north of Phoenix.
UMJr:
Oh.
G:
You looked wonderful in the ten-gallon hat.
HMJr:
Yeah, good publicity.
G:
Did Ellie have 8.6 bad a time 8.6 she had expected?
HMJr:
No.
G:
She really liked it?
HMJr:
Yeah.
G:
That's fine.
HMJr:
Yeah. Eddie, I'm calling you up on this on -- I'd
like you to help out the Treasury on another dif-
G:
ficult case.
G:
Yeah.
HMJr:
And this time the Bank of America.
G:
Oh, I thought you had
HMJr:
Well, we've got Dean Landis and I've also asked
Dean Lloyd Garrison.
G:
Yeah.
HMJr:
And he's going to be down Saturday and Sunday to
study it. Now, Landis 18 coming Tuesday. Hello?
G:
Yes.
- 2 -
358
HMJr:
And we all would like to have you sit in on it.
G:
When, next Tuesday?
HMJr:
Yeah. I'm going to devote all day to it.
G:
I see.
HMJr:
At least, and if you could do it why I'd like to
have Ed Foley send the stuff up to you today 80
that you could be spending Thankagiving on it, you
see?
G:
That's a pleasure!
HMJr:
Isn't that wonderful?
G:
How long would it be?
HMJr:
Well, Landis can only stay Tuesday.
G:
Well, when 18 Jim Landis coming, Tuesday?
HMJr:
On Tuesday.
G:
Yeah.
HMJr:
Yeah.
G:
Well, I 'm not in my office now and I'll try to
rearrange things so I can do it.
HMJr:
Well
G:
Get Foley to send the stuff up to my house special
delivery
HMJr:
I'll do that.
G:
80 I can have a good Thankagiving.
HMJr:
I'd appreciate it because -- well, I think this 18
even more difficult than the other one.
G:
Well, I thought Landie was -- he was down before,
wasn't he?
HMJr:
He was, and now I -- what I want 18, I want to pre-
pare a brief. Well, in the first place, I want to
have you fellows advise me what we should do. My
mind 18 still open.
359
- 3 -
G:
Well, what about Lloyd Garrison? Is he -- will he
be there Tuesday?
HMJr:
No. No, he can't come but he's going to -- he's
coming down on another matter Saturday and Sunday
and he said he would confer with Foley at that time
and leave a memorandum behind.
G:
I got you.
HMJr:
See?
G:
Yeah.
HMJr:
And then I thought that we could sit down with you
and Landis on Tuesday and try to decide what we're
going to do because I told the President by the time
he got back I'd have a suggestion for him how we
should handle the thing in writing.
G:
Well, isn't he going to keep two Thanksgivings?
HMJr:
Well
G:
(Laughs)
HMJr:
Yes, I think 80, Yeah.
G:
All right. Well, I'll -- you can expect me then
unless I phone to you to the contrary
HMJr:
Wonderful.
G:
tomorrow.
HMJr:
O. K. And I'll tell Ed Foley to send the stuff up
to you to your house.
G:
Yeah, to the house. All right, Henry.
HMJr:
Thank you 80 much.
G:
O. K.
November 22, 1939
3:10 p.m.
380
HMJr:
Hello.
Sumner
Welles:
Henry
HMJr:
Yes,
W:
You are a very quick worker.
H/Jr:
Why?
W:
I've never known anybody in this administration
work with the extraordinary racidity and effectivness
that you do.
HMJr:
Are you being sarcastic?
V:
I'm being absolutely sincere.
HMJr:
Why, what happened?
W:
The President called me up Just a minute ago
HMJr:
Yes.
V:
and referred to that meeting in the Department
of Commerce yesterday.
RMJr:
Yes.
W:
And said that he was sending e. telegram immediately
to Ed Noble
HMJr:
Yes.
V:
which was going to be very blunt and in which
he was to be instructed to talk to you and to myself
about anything that he was discussing over there.
HMJr:
Well, I -- I didn't talk to the President, If you're
giving me this credit.
W:
You did not?
HMJr:
No.
W:
Well, who else could have?
- 2 -
361
HMJr:
I didn't. I don't deserve this.
W:
Why, that's amazing.
HMJr:
No.
W:
I thought, of course, you had been talking with him.
HMJr:
No, I don't -- thanks for the kind words and the
bouquet, but I don't deserve it.
W:
You deserve all the -- all the bouquets that I'm
capable of offering you.
HMJr:
Well, that's
W:
I thought in this case you had.
HMJr:
No, I -- I'm
W:
Well, at any rate, he's gotten ahold of it from some
other source then.
HMJr:
Well, I -- no, I haven't -- from the minute you left
the room I haven't talked to anybody about it.
W:
I see.
HMJr:
No.
W:
I thought, of course, that he had been speaking with
you.
HMJr:
Thanks
W:
Well, at any rate, he's gotten shold of it and he's
sending off this telegram at once.
HMJr:
Well, thanks for 'them' kind words.
W:
(Laughs) They are maintained just the same. So I
suppose that Ed will be calling you/myself and in the
near future.
HMJr:
Well, I'll be up stuffing stuffed turkey into me.
W:
(Laughe) All right, Henry.
HMJr:
O. K.
W:
Goodbye.
HMJr:
Thank you.