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    "contentType": "document",
    "title": "Volume 246, March 7 – March 12, 1940",
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    "collections": [
        "Henry Morgenthau, Jr. Papers",
        "Diaries of Henry Morgenthau, Jr."
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    "ocrText": "196\nTaken to White House lunch\n3/11/40\n197\nFOR COLONEL HARRINGTON:\nbe you know, 98 have had some difficulty during the past\nyear is getting funds made available from energency appropriations\nto carry on the se-called self-help projects. In fact, the\nComptroller Concral ruled that the Werks Progress Mainistration\nappropriation for the fiscal year 1940 was not available for\nthis purpose.\nIn order that n will not emcounter this come difficulty\nis 1941, I should like for you to include language is the Works\nProgress Administration MII which will permit projects and\ngrants to aid self-help and cooperative associations or corpora-\ntions for the benefit of needy persons, limiting the amount that\nmight be made available for this purpose to $1,000,000. if, in\nyour opinion, this ansunt is sufficient to fully take care of\nthe projects which I have in mind.\npurB\nWithin\n3-11-40\nRegraded Uclassified\n198\nMENORANDUM TO THE DIRECTOR OF THE BUDGET:\nThere is transmitted herevith a copy of my\nnecorandum of today to Colonel Harrington regarding\nthe inclusion in the fortheoming relief bill of a\nprovision to take care of the se-called self-help\nprojects.\nI wish you would follow this and see that\nlanguage is included in the bill in such fore as will\ngive use the authority to make grants to care for these\nprojects as we have prier to this year.\nMarch 8, 1940\nDMB\nRegraded Uclassified\n199\nMarch 11, 1940.\nMEMORANDUM FOR THE SECRETARY'S RECORD:\nOn Friday, March 8, after a Cabinet meeting, Secretary Hull\nspoke to Secretary Morgenthau and stated that he would like to have\nMr. Pasvolsky of the State Department talk to someone in the Treasury\nabout financial aspects of peace conference. Mr. Hull said that the\nmatter was highly confidential. Secretary Morgenthau replied that\nMr. Pasvolsky should see Mr. Harry White.\nMr. Pasvolsky subsequently telephoned and made an appointment\nwith Mr. White.\nHDW\nRegraded Uclassif\n200\nTREASURY DEPARTMENT\nINTER OFFICE COMMUNICATION\nDATE March 11, 1940\nTO\nSecretary Morgenthau\nFROM\nMr. Haas HA\nSubject:\nThe favorable side of the business picture.\nOn various fronts, business in recent weeks has taken a\nmore optimistic turn. While it cannot yet be said that defi-\nnite signs of an impending business rise have appeared, increas-\ning evidence of a flattening out of the decline lends support\nto the belief that the present setback in industrial activity\n18 likely to be of relatively short duration.\n1. The steel outlook has turned more favorable.\nA distinct improvement in sentiment has occurred in the\nsteel industry during the past two weeks, due to tangible\nimprovement in several underlying factors:\n(a) The industry is becoming impressed with the increasing\nvolume of export sales of steel products. The Iron Age\nreports that February export sales for some steel compa-\nnies will exceed those of any month since September, with\norders and inquiries increasing from both belligerent and\nneutral countries. The growing volume of war orders being\nplaced in Canada is reported to be filling the books of\nDominion mills and causing a larger overflow of steel\norders into the United States.\n(b) Although the rising trend of export sales has been\noffset in part by a lagging trend of domestic steel buy-\ning, the total of new orders in the industry 1s currently\nrunning somewhat higher than a few weeks ago. According\nto the Iron Age of March 7, \"The moderate improvement\nnoted a week ago has continued, thereby raising hopes\nthat the recession of the past two or three months has\nbeen checked.\"\n(c) Increased activity in the automobile industry -- most\nimportant consumer of steel -- has been followed by some\nincrease in ordering of steel by most automobile makers,\nlargely for quick shipment.\nRegraded Uclassified\n201\nSecretary Morgenthau - 2\n(d) Structural steel orders in February exceeded those\nfor that month in 1938 and 1939; and orders in the first\nweek of March were the largest for any week since\nOctober 1939.\n(e) The decline in steel output has recently slowed up,\nand in some districts operating rates have been moder-\nately increased.\n(f) Steel scrap prices have shown 8. firmer tone.\n2. Business indices beginning to resist further decline.\nThe uninterrupted decline in various indices of business\nactivity that has been under way since the end of December\nshows some evidence of slowing up. (Bee Chart 1) Barron's\nweekly index (seasonally adjusted) rose elightly during the\nweek ended February 24, though a further decline was recorded\nin the following week. The New York Times adjusted index\nshowed 8. slight rise during the week ended March 2, the first\nimprovement since the last week of December. An upturn in\nprices of various industrial materials in recent weeks (lower\nline on Chart 1) 18 of important significance, reflecting an\nincrease in industrial demand.\n3. Metal buying increasing.\nA marked expansion in nonferrous metal buying, particu-\nlarly of copper, has often occurred at or near the bottom of\n8. business decline. (See Chart 2) Domestic sales of refined\ncopper increased in February to the huge total of 147,000 tons,\nthe highest monthly figure since last September and the sixth\nlargest on record.\nThe expansion in copper buying has been followed by heavy\nincreases in sales of lead and zinc. Unfilled orders for Prime\nWestern zino, according to the Annalist, are now about as large\nas they were at the beginning of the business upturns in the\nearly summer of 1938 and in the third quarter of 1939.\n4. Automobile production and sales increasing.\nUnexpectedly large retail sales of automobiles, which\nhave continued through January and February, have caused\nautomobile manufacturers recently to increase their production\nschedules. The output of cars and trucks in February totalled\n412,000, a February total exceeded only in 1929. Production in\nMarch 1e expected to rise to about 440,000 units.\nRegraded Uclassified\n202\nSecretary Morgenthau - 3\nIt 18 difficult to foresee an extended business decline\nwith the automobile industry continuing to operate at an\nunusually high level, and with such industries as aircraft,\nmachine tool, and shipbuilding at practical capacity.\n5. Rising export volume supports industry.\nAny expectation of an extended business decline seems in-\nconsistent with the rising trend of exports and the continued\nheavy volume of foreign purchases in this country. Total ex-\nports in January were the highest since March 1930. (See\nChart 3) Since about 75 per cent of recent exports have oon-\nsisted of manufactured and semi-manufactured products, they\nhave a direct bearing on the level of business activity.\nData we have collected on the movement of export freight\nto Atlantic ports indicate that the movement of goods for ex-\nport 18 gradually increasing, and that recent export figures\nhave probably understated the actual volume of the export move-\nment.\nChart 4 shows the gradually rising trend of export ship-\nments to New York and to nine other North Atlantic ports, by\nweeks through March 2.\nIn Chart 5 we show the accumulation of lighterage freight\nin storage and on hand for unloading at New York harbor (in car-\nloads), by weeks beginning October 21. Approximately 90 per\ncent of this represents freight to be shipped abroad, which has\naccumulated at the port because of a shipping shortage. In view\nof this accumulation, figures on actual exports for the past\nfew months have apparently understated the amount of goods mov-\ning for export. The accumulation of freight, however, is not\napproaching a state of congestion.\n6. Commodity price trend levelling out.\nOptimism over the business outlook 18 strengthened by\nthe recent trend of sensitive commodity prices. Following 8\ngeneral decline during January, sensitive price indices have\nbecome stabilized and have held steady throughout February\nwith a slightly rising tendenoy, despite further declines in\nbusiness activity. (See Chart 6)\nSharply rising price trends abroad, where inflationary\ninfluences appear to be gaining ground in spite of official\nefforts at price control, may in some degree be influencing\nprices in this country. (See Chart 7)\nRegraded Uclassified\n203\nSecretary Morgenthau - 4\nThe inventory situation\nAn encouraging feature of the present business outlook,\nwhich tends to confirm other indications pointing to a rela-\ntively short business setback, 1s the smallness of the in-\ncrease in inventories of finished goods on the recent business\nupturn. Inventories of finished goods, goods-in-process, and\nraw materials normally increase as business expands, to take\ncare of increased sales volumes and increased raw material\nrequirements. Under present conditions, furthermore, business\nprudence requires that inventories be kept somewhat larger than\nusual as & safeguard against unexpected price increases and\nsupply restrictions due to war conditions.\nOn the recent business rise, however, all evidence indi-\ncates that inventories (as the term is generally understood)\nhave in most industries been held at conservative levels in\nrelation to sales. The quick downward reaction in prices after\nthe war boom last September, and the memory of severe inventory\nlosses in 1937, were strong influences restraining speculative\ninventory accumulation.\nAn expansion in capital goods investment, due to war fears,\nwas an important feature of the late-1939 business upturn, rep-\nresenting in some degree an advancing of new investment that\nhad originally been scheduled for the following year. This\nexpansion in capital goods investment, considered by many\neconomists as & desirable development in the national economy,\nhas in some quarters been confused with inventory accumulation\nof finished goods. While corporation balance sheets make no\ndistinction between \"speculative\" inventories and stocks of\nraw materiale, goods-in-process, etc., accumulated for filling\nthe actual orders for capital goods, the two types of inven-\ntories obviously differ decidedly in their significance in the\nbusiness outlook. Freight care, machine tools, and new build-\nings will not be liquidated when business falls off, 8.8 were\nthe stocks of textiles, shoes, and automobiles accumulated in\n1937.\nLittle statistical evidence of large\nfinished goods inventories\nWhile published statistical data on inventories are\ninadequate, and it 1e not clear what types of goods are included,\nthe following figures compiled from sample data show little evi-\ndenoe of inventory expansion in recent months beyond that needed\nto handle the actual increase in sales volume.\nRegraded Uclassified\n204\nSecretary Morgenthau - 5\nInventories in the hands of manufacturers at the end of\nDecember 1939 were only 7.5 per cent higher than at the end\nof December 1938, according to estimates made by the Department\nof Commerce from company reports covering more than one-fourth\nof the total inventories of all manufacturing corporations. In\ncomparison with this moderate increase, other data of the\nDepartment of Commerce show that sales (shipments) of manufac-\nturers in December 1939 were about 20 per cent larger than in\nDecember of the previous year.\nInventories of wholesalers at the end of January 1940, in\ncomparison with January 1939, increased at the same rate as the\nincrease in sales, leaving the stock-sales ratio for 1,644\nwholesale concerns at the same figure as a year ago, according\nto B. study by the Bureau of the Census in cooperation with the\nNational Association of Credit Men.\nInventories of goods in retail channels, Juding from\nFederal Reserve Board data on department store stocks, have\ndeclined in relation to sales. Department store stocks at the\nend of January 1940 exceeded those of the previous year by only\n3.0 per cent, while department store sales in January were 4.5\nper cent higher, and in December 7.9 per cent higher, than in\nthe previous year.\nFinished goods stocks higher in some industries\nIn two industries -- automobiles and textiles -- some\nevidence of excessive stocks of finished goods has recently\nbeen mentioned by trade commentators. Inventories of new cars\nat the end of February, according to Ward's Reports, were close\nto 500,000 units, as compared with 430,000 a year earlier.\nThis would represent an increase of 16 per cent. As compared\nwith sales, however, this represents a relative decline in\ninventories, since retail passenger car sales in January were\n32 per cent higher than a year ago, and the gain has apparently\nbeen maintained through February. General Motors' sales in\nFebruary were 49 per cent higher than in February of the previ-\nous year.\nStocks of cotton textiles at mills have recently been\nincreasing, according to some trade comments. On the other\nhand, stocks of cotton goods in retail establishments are\nreported to be relatively low, retail sales have been well\nRegraded Uclassified\n205\nSecretary Morgenthau - 6\nmaintained, and the time 1s near at hand when heavy spring\nbuying of textile goods in the wholesale markets usually\nmakes its appearance. Our index of new orders for textiles\nincreased in the first week of March to the highest figure,\nwith one exception, since last October.\nInventory situation in contrast with 1937.\nInventories of finished goods could become excessive\nunder two conditions: (1) If manufacturers failed to adjust\ntheir production promptly to the volume of orders on their\nbooks, but continued to produce for stock, as they did in\n1937; or (2) if retail buying fell off sharply, making the\nprevious normal inventories become excessive in relation to\nthe reduced sales volume.\nNo evidence of either of these developments has appeared.\nOn the contrary, industrial production has been adjusted quick-\nly and sharply to the reduced volume of new industrial orders,\nand retail buying BO far has been well maintained.\nThe marked contrast between the present situation and\nthat in 1937 is shown by our index of basic demand (an approxi-\nmate measure of the level of consumption) and our index of\nsales (representing the actual \"offtake\" of manufactured goods).\n(See Chart 8)\nThe FRB index of industrial production in November and\nDecember 1939 rose temporarily about as far above the basic\ndemand index as it did in November and December of 1936.\nInstead of continuing above, however, and causing an accumula-\ntion of finished-goods inventories that later would have to be\nliquidated, production has dropped sharply to adjust itself to\ndemand. No evidence appears in this chart of any accumulation\nof finished-goods inventories comparable with that which\noccurred between the summer of 1936 and the fall of 1937.\nThe index of sales (lower section of Chart 8) continued\nupward in January 1940, in contrast with a drop in January 1937,\nand current reports indicate that sales have been fully main-\ntained in February. This provides further evidence that\nfinished-goode inventories are not burdensome.\nRegraded Uclassified\nINDICES OF BUSINB86 ACTIVITY AND PRICES OF INDUSTRIAL MATERIALS\nWeekly\n1939\n1940\nMAR\nMAY\nPERCENT PERCENT\nJULY\nSEPT.\nNOV.\nJAN,\nMAR.\nMAY\nJULY\nSEPT\nNOV.\n(BARRON'S) (N. Y,\nPERCENT\nTIMES)\n(PRICES)\n120\n106\nBARRON'S INDEX\n85\n1923-25 # 100°\nN. Y. TIMES\n110\n100\nEST. NORMAL - 100\n80\n100\n94\n75\nINDUSTRIAL MATERIAL PRICES\nB. L. S., 1926 - 100\n90\n88\n70\n80\n82\n65\n70\n76\n60\n60\n70\nJAN.\nMAR.\nMAY\nJULY\nSEPT.\n55\nNOV.\nJAN.\nMAR.\nMAY\nJULY\n1939\nSEPT.\nNOV.\n1940\nChart 1\n*ADJUSTED FOR SEASONAL, NOT FOR TREND\n206\n- of the Secretary of the Treasury\nMile of - ad -\nRegraded Uclassified\nDOMESTIC SALES OF COPPER AND INDUSTRIAL PRODUCTION\n1935\n1936\n1937\n1938\n1939\n1940\nSHORT TONS\nPER\nTHOUSANDS\nCENT\n360\n130\n330\n125\n300\n120\n270\n115\n240\nINDUSTRIAL PRODUCTION\n110\nF.R.B. 1923-25 = 100\n210\n105\nDOMESTIC SALES OF COPPER\n(THOUSANDS OF TONS)\n180\n100\n150\n95\n120\n90\n90\n85\n60\n80\n30\n75\n0\n1935\n70\n1936\n1937\n1938\n1939\n1940\nBivision of - el -\n207\nChart 2\nOffice of the Secretary of the Treasury\nC - 302\nRegraded Uclassified\nU.S. FOREIGN TRADE\n1929\n1930\n1931\n1932\n1933\n1934\n1935\n1936\n1937\n1938\n1939\n1940\nDOLLARS\nDOLLARS\nMillions\nMillions\n500\n500\n450\n450\n400\n400\n350\n350\nExports\nImports\n300\n(including Resuparts)\n(General)\n300\n250\n250\n200\n200\n150\n150\n100\n100\n150\n150\nTrade Balance\n100\n100\nso\nso\n0\no\n-so\n-50\n-100\n1930\n1932\n1934\n-100\n1929\n1931\n1933\n1935\n1936\n1937\n1938\n1930\n1940\nOffice of the Secretary of the Trumy\n- of - - -\nC-900-1\nChart 3\n208\nRegraded Uclassified\nRECEIPTS OF FREIGHT FOR EXPORT AT NEW YORK\nAND AT 9 OTHER NORTH ATLANTIC PORTS\n1939\n1940\nNOV.\nDEC.\nJAN.\nFEB.\nMAR.\nAPR.\nMAY\nJUNE\nCARLOADS\nCARLOADS\nTHOUSANDS\nTHOUSANDS\n5.5\n5.5\n5.0\n5.0\n4.5\n4.5\n4.0\n4.0\nNEW YORK\n3.5\n3.5\n3.0\n3.0\n2.5\n2.5\n9 OTHER PORTS\n2.0\n2.0\n1.5\n1.5\n1.0\n1.0\n.5\n.5\n0\no\n28\n11\n25\n9\n23\n6\n20\n3\n17\n2\n16\n30\n13\n27\n11\n25\n8\n22\nNOV.\nDEC.\nJAN.\nFEB.\nMAR.\nAPR.\nMAY\nJUNE\n1939\n1940\n209\nCONFIDENTIAL\nChart 4\nOffice of the Secretary of the Trunery\nI 1 % 1 1\nC - 304\nRegraded Uclassifie\nLIUNTERAGE FREI 14 IN STURAGE\nAND ON HAND FOR UNLOADING IN NEW YORK HARBOR*\n1939\n1940\nNOV.\nDEC.\nJAN.\nFEB,\nMAR,\nAPR.\nMAY\nJUNE\nCARLOADS\nCARLOADS\nTHOUSANDS\nTHOUSANDS\n10\n10\n9\n9\n6\n8\n7\n7\n6\n6\n5\n5\n4\n4\n28\n11\n25\n9\n23\n6\n20\n3\n17\n2\n16\n30\n13\n27\n11\n25\n8\n22\nNOV.\nDEC.\nJAN.\nFEB.\nMAR.\nAPR.\nMAY\nJUNE\nCONFIDENTIAL\nChart 5\n1939\n1940\ne\nLARGELY EXPORT FREIGHT, BUT ABOUT 10% REPRESENTS FREIGHT FOR LOCAL\n210\nAND COSTAL SHIPMENT. FIGURES EXCLUDE GRAIN.\nOffice of the Secretary of the Treasury\nof - - -\nC - 303\nRegraded Uclassified\n211\nCOMMODITY PRICE INDEXES IM U.S. AND U.E.\nDaily\nChart 6\n1939\n1940\nJULY\nAUGUST\nSEPTEMBER\nOCTOBER\nNOVEMBER\nDECEMBER\nJANUARY\nFEBRUARY\n23\n30\n6\n13\n20\n27\n3\n10\n17\n24\n-\n.\n15\n22\n29\n5\n12\n19\n26\nMARQU\n2\n9\n16\n3\n10\n17\n24\n34\n7\n14\n21\n20\n4\n11\nIS\n25\n3\n10\n17\n24\n31\nPER\nPER\nCENT\nBENT\nSCUTER, MOODY\n-\n195\nas\n192\n$\n189\n43\n186\n62\n183\n61\n180\n60\n177\n99\nCOMMODITY FUTURES (DDP-JONES)\n1924 - 126 - 100\n174\n58\n171\n57\n168\n56\n165\n55\n162\n54\n159\n53\nMODEY'S INDEX IN V.S.\n156\nMI. 31, 1931 = 100\n52\n153\n51\n150\n50\nREUTER'S INDEX IN U.K.\n147\nSEPT. 18, 1931 - 100\n49\n144\n40\n14)\n47\n136\n46\n135\n45\n132\n#\n129\n43\n2\n9\n16\n23\n30\n6\n13\n20\n27\n3\n10\n25\n3\n10\n17\n24\n31\n17\n24\nALY\nI\n6\n15\n22\n29\n$\n12\n19\n25\n3\n10\n17\n24\n31\n7\n14\n21\n28\n4\nIl\n18\nAMMIST\nSEPTEMBER\nOCTOBER\nNOVEMBER\nDECEMBER\nJANUARY\nFEBRUARY\nMARCH\n1939\n1940\nOffice of the - of - Travely\n- of - - -\nP-101-1\nWHOLESALE PRICES IN SELECTED COUNTRIES\n1928 - 100\n1933\n1934\n1985\n1936\n1987\n1930\n1989\n1940\n1933\n1934\n1935\n1936\n1937\n1936\n1939\n1940\nPER\nPER\nPER\nPER\nCENT\nCENT\nCENT\nCENT\nU.S.\n90\n90\n110\nFrance\n110\n80\nso\n100\n100\n70\n70\n90\n90\n60\n60\n80\n80\nCanada\n90\n90\n70\n70\n80\n80\n60\n60\n70\n70\n50\n50\n110\nU.K.\n110\n100\n100\nItaly\n100\n100\n90\n90\n90\n90\n60\nso\n80\nso\n70\n70\n70\n70\n60\n60\n60\n60\n50\nso\n1933\n1934\n1935\n1936\n1933\n1934\n1985\n1936\n1937\n1936\n1939\n120\n1987\n1988\n1939\n1940\n1940\n120\n120\n120\nSweden\n110\n110\n110\n110\nBelgium\n100\n100\n100\n100\n90\n90\n90\n90\n80\n140\n80\nso\n70\n130\n70\n70\n120\n120\n60\n60\nJapan\n110\n110\n110\n110\nNetherlands\n100\n100\n100\n100\n90\n90\n90\n90\n80\n60\n60\n80\n80\nGermany\n80\n70\n70\n70\n70\n60\n60\n60\n1933\n60\n1934\n50\n50\n1935\n1936\n1937\n1938\n1939\n1940\n1983\n1934\n1935\n1936\n1937\n1938\n1939\n1940\nOffice of - Secretary of the Treasy\nI - - -\nFD-137\n212\nChart 7\nRegraded Ucla ssified\nChart 8\nCONFIDENTIAL\nINDICES OF BASIC BUSINESS TRENDS COMPARED\n213\nWITH INDUSTRIAL PRODUCTION\n1923 - '25 = 100, SEASOMALLY ADJUSTED\nPER\nPER\nCENT\nCENT\n130\n130\n120\n120\nESTIMATED BASIC DEMAND\n110\nCar\n110\n100\n100\n90\n90\nINDUSTRIAL PRODUCTION, F.R.B.\n80\n80\n70\n70\n1936\n1937\n1938\n1939\n1940\n140\n140\n130\n130\n120\n120\nINDEX OF SALES\n.\n110\nEst\n110\n100\n100\n90\n90\nINDUSTRIAL PRODUCTION,\nF.R.B.\n60\n80\n70\n70\n1936\n1937\n1938\n1939\n1940\n. \"REPRESENTS \"OFFTAKE\" OF MANUFACTURED GOODS, IN PHYSICAL VOLUME\nOffice of the Secretary of the Trumy\nof 1 and -\nC - - 245 - A\nUclassified\n214\nParaphrase of telegram No. 613 from London, March 11, 1940\nSecretary of State,\nWashington.\nIt has been agreed by the Export Credit Guarantees Department to give\n& credit of five million pounds sterling to Iran.\nWhen Great Britain was first sounded out with respect to this credit,\nprior to the beginning of the war, Iran desired it for the purchase of rail-\nroad supplies, a request which was later enlarged to cover armaments and 80\nforth. An embarrassment of requests made to the British Government for like\naccommodations has been caused by the generosity with which Turkey's requests\nfor credit were received. From what I have heard I do not gain the impression\nthat Great Britain has agreed to make available a million dollars to be spent\nin the United States. Indeed, I understand that the only agreement has been to\nuse its best efforts to make available to Iran the needed British products\nit requires, to the extent that the present situation will allow. At the\nsame time the Government is extremely anxious that it give no offense to\nthe Shah. Iran's needs are also the products which the Empire most needs.\nTherefore, this credit of five million pounds can for the present be thought\nof as not to be paid out but as & token of willingness to oblige the Iranian\nGovernment.\nThis information should be considered strictly confidential as it was\ngotten on the understanding that it would be so treated. Under no circum-\nstances should it get back to Iran.\nKEENEDY\nDGA:GHK:MEK\nRegraded Uclassified\n215\nJR\nPLAIN\nLondon\nDated March 11, 1940\nRec'd 12:45 p.m.\nSecretary of State,\nWashington.\n318, March 11.\nFOR TREASURY FROM BUTTERWORTH.\nSupplementing my No. 594 of March 9, noon; London\nbanks are informed that the Australian Exchange Control\nauthorities have introduced provisions applying to all\n(repeat all) exports from Australia to the destinations\nspecified in the above mentioned cable, requiring payment\nby one of the three alternative methods in the currencies\nnamed therein. Exporters in Australia will bE required to\nsatisfy the local Exchange control that any sterling credits\nopened in their favor for such Exports, which must contain\nan approved reimbursement clause, have been registered with\nthe Bank of England.\nAll other sterling payments for Australian Exports to\nthe listed destinations must bE accompanied by confirmation\nfrom the remitting bank that the sterling has been purchased\nafter September 3, 1939, by a sale to a bank in the United\nKingdom of one of the listed currencies.\nOR\n1100\nRR\nKENNEDY\nRegraded Uclassified\n216\nMarch 11, 1940\n9:15 am\nPresent:\nCaptain Collins\nHM,Jr: Let me get over to you what I want.\nWe are seeing the President this morning.\nCaptain Collins: Sometime after 11.\nHM,Jr: Between now and 11, and you had better\nbe here at a quarter of 11. But give me what was the\nsquare footage of the Curtiss-Wright and the Pratt-\nWhitney ....\nCaptain Collins: That's Wright Aeronautical.\nHM,Jr: Yes. Pratt-Whitney, and Allison,\nany date before any of these foreign orders developed.\nWhen was that? Last January?\nCaptain Collins: Yes, about that.\nHM,Jr: And, if possible, their capacity.\nJust as well give us the number of feet; take too\nlong to get capacity. Then I would like to know\nhow much they increased it by these orders that have\ncome in. When this present development is complete,\nwhich I take it will be June or July, how many people\nemployed; how many engines turned out, and size of\nthe plant.\nThen I want them to give you rough guess what\nthis new order means. How much plant they have to\nexpand? How many more people they have to put on and\nhow many more engines, because this is the argument I\nwant for the President. I want to say, \"Mr. President,\nif we can give these people, off the drawing board, the\nRegraded Uclassified\n217\n-2-\nvery latest 1941 models and most advanced -- not the\nP-40 which they showed you, Mr. President, in November,\n1938 and everybody else knows about -- but the 1941\nmodels which are still on the drawing board, that's\nwhat these people want.\" If we get it, what it will\ndo to the industry.\no0o-o0o\nRegraded Uclassified\n218\nMarch 11, 1940\n11:55 am\nPresent:\nMr. Bell\nMr.Cochran\nDr. White\nMrs. Klotz\nHM,Jr: We have this information, which 18\npretty reliable -- I can't tell you from where --\nthat the Finns and the Russians have made peace.\nPuleston has a way of getting this ahead of anybody\nelse.\nDr. White: Anything about terms?\nHM,Jr: No. But he has a way of getting it\nfaster than anybody else. He says the source has\nnever been wrong. Incidentally, Chamberlain made\na speech in the House offering the Finns all kinds\nof military aid. The question 1s, did he know of\nthis peace offer.\nWill it have any effect on our bond market?\nDr. White: I think it means a longer war. I\nthink the Allies are in the worst position, definitely,\nand whether that means they will be more anxious to\nmake peace or less so, I am inclined to think it means\nthe latter, that they may be more inclined but the solu-\ntion 1s more difficult.\nHM,Jr: Sure, because it releases the Russians ...\nDr. White: They can throw their weight ....\nHM,Jr: They can help the Germans more. They\ncan throw their weight against Germany.\n219\n-2-\nMr. Cochran: And it eliminates Scandinavia\nfrom possibly coming in on the side of the Allies.\nDr. White: It's a severe setback. You\nmight have noticed yesterday the political commenta-\ntors in the Times, two of them, referred to it as a\nsetback of equal importance to the Polish loss.\nHM,Jr: Here we go to the Allies last week and\nsay the Finns want 166 planes. \"Will you release them?\"\nand they said no. You (Cochran) had the nice Job of\ncalling Procope and saying he could not get the planes\nin the United States.\nDr. White: If the French had replied, \"Now, those\nplanes. You will not get them in two months. What we\nwill do is send you these right away\". But if they did\nnot reply that, then the Finns must have realized that\nthey have to depend wholly on themselves.\nHM,Jr: The inference I got from the French was\nthey had gotten all they could, because \"not only have\nwe sent planes, but we have sent aviators to fly them\".\nDr. White: Why should they object to 1667\nMr. Cochran: Dangerous months were coming now\nwhen they had to conserve their planes for themselves.\nHM,Jr: \"We are here to buy planes, not to sell\nthem\", that's what Bloch-Laine said. And that was why\nI sent that word to the President Thursday about one\no'clock, through Pa Watson, and Watson never delivered\nit and I brought it up again Thursday night about the\nFinns not being able to get planes, because I thought\nhe might throw his weight into it, and that same night,\nwhile I was there, Berle called up the President to tell\nhim that the Finns were in Moscow making peace and the\nPresident said, \"Well, I don't know how good that 18.\"\nMr. Cochran: It's a blow to the Allies, because\nyou read this Italian announcement how the British re-\nleased their coal. They would not have taken that\nbackward step unless they were worried.\n220\n-3-\nDr. White: No. I thought that was a sign of\nstrength. 100,000 tons of coal does not mean anything\nto them.\nMr. Cochran: They give a decision it is to be\nheld, and then release it and Ribbentrop rushes down\nthere.\nHM,Jr: As I remember, the English were going tp\nhold the coal from Italy until Italy agreed to let them\nhave planes and uniforms.\nMr. Cochran: They would give them British coal\nif they would sell planes.\nHM,Jr: Now that the British have given in, the\nBritish won't get planes from Italy, 80 it's too bad.\nDr. White: I interpret it differently. What\nthe British were doing, they said, We will hold up this\ncoal. We are going to force the Italians to give us\nairplanes and unforms and other war materials.\nMr. Cochran: Yes, and they would give them British\ncoal and German coal would not be delivered.\nDr. White: These are the facts. They are giving\nthis 100,000 tons of coal back, which 1s nothing in the\ngeneral picture with the understanding they are not to\nget any more coal by way of the sea. Such coal they\nget by land 18 very much reduced and more expensive,\nwhich means Italy now has to buy her coal from Italy and\nshe has to pay under England's terms. What those terms\nwill be, if those terms will be favorable to Italy, then\nyou are right. If the terms will be favorable to Eng-\nland\nHM,Jr: But the factshave not come out that Italy\nis going to buy coal from England.\nBut we still get back, what, if anything, we can\ndo here. Wonder how it will affect our market.\nDr. White: I think if the public thoroughly\nRegraded Uclassified\n221\nappreciates what it is -- on the whole picture, it\nlooks more dismal as a consequence of this step.\nHow they would interpret that -- to mean, we would\nbe more apt to share in a war boom, which I think\nis likely, I think the British would step up on their\npurchases and program now.\nThe point 1s this: If Russia feels she cannot\ntake Finland very quickly, then her terms are going\nto be easy. If she feels she can take it quickly,\nthen the Finns are going to give in. I think there\nwill be peace in a few days.\nHM,Jr: Well, I am going downstairs to rest and\nif anything happens, Mrs. Klotz, that needs my decision,\nincluding if the President calls, I will come up.\nMr. Bell: I should doubt the public would inter-\npret this. I should think your market might flop around\nfor a few days and probably go down, but I should not\nthink we would have a drastic decline like we had last\nSeptember.\nDr. White: I should not think so either.\nMr. Bell: Unless there is something serious on\nthe Allies side that shows up, but there might be enough\nwhere we should buy some, but certainly not to the extent\nwe went last year.\nDr. White: I think it ought to be supported. I\nsuppose somebody is following it closely.\nMr. Bell: Don't use the word \"support\". Cushion.\nHM,Jr: That letter of mine of last week may become\nhistorical on this bond issue.\nMr. Bell: May have wished we had.\no0o-o0o\nTREASURY DEPARTMENT\n222\nTO\nSecretary Morgenthau\nINTER-OFFICE The COMMUNICATION\nDATE March 11, 1940.\nFROM\nMr. Haas\nThe attached table has been prepared in response to\nyour telephone request for information as to the various\nestimates of revenues which you made for fiscal year 1940.\nAttachment.\nEstimates of Receipts to General and Special Accounts in Fiscal Year 1940\n:\n:\nIncrease (+) or\n:\nDate\n:\n:\ndecrease (-) from\n:\nEstimate\nof estimate\n: December 1938 estimate\nPublicity given\n:\n:\n:\n:\nAmount\n: Percent\n:\n(millions)\n(millions)\nDecember 1938\n$5,669.3\n--\n:\nReleased in 1940 Budget\nDecember 1939\n5,703.8\n+$34.5\n+ 0.6\nReleased in 1941 Budget\nJuly 1939\n5,406.4\n-262.9\n- 4.6\nNot published -- sent to\nDirector of the Budget\nOctober 1939\n5,525.6\n-143.7\n- 2.5\nNot published -- sent to\nDirector of the Budget\nTreasury Department,\nDivision of Research and Statistics.\nMarch 11, 1940.\n223\nRegraded Uclassified\n224\nHSM\nGRAY\nParis\nDated March 11, 1940\nRec'd 1:45 P. m.\nSECRETARY of State,\nWashington.\n323, March 11, 4 P. m. (SECTION ONE).\nFOR THE TREASURY FROM MATTHEWS.\nMy telegram No. 320, March 10, noon.\nA leading article by Frederic Jenny in this\nmorning's AGENCE ECONOMIQUE ET FINANCIERE Emphasizes\nthe importance of the memorandum handed Monsieur Reynaud\non Saturday with respect to our Economic foreign policy\nand the reply of the French Government. \"This document\"\nwrites Jenny with reference to the memorandum \"addressed\nto the governments of fifty nations bears witness to the\nExtreme anxisty of the United States to SEE when the war\nis over the reestablishment of normal commercial inter-\nchange between different countries, interchange which it\nquite properly considers as the sine qua non of & durable\npeace. When the Washington authorities proclaim that\nhealthy international commercial relations are the indis-\npensable foundation of the wellbeing of man, when they\ndeclare that in order to permit commerce to play its role\neach\nRegraded Uclassified\n225\nham -2- No. 323, March 11, 4 P. m. (Section 1) from Paris\nEach nation must have normal access to the resources of\nthe entire world and find outlets for their EXCESS pro-\nduction, EVERYONE must Endorse such statements.\nMURPHY\nRR\nRegraded Uclassified\n226\nHSM\nGRAY\nParis\nDated March 11; 1940\nREC'd 1:55 p4 ma\nSecretary of State,\nWashington.\n323, March 11, 4 p. m. (SECTION TWO).\nThe principle thus SET forth is the fact fundamental.\nIt is that of the division of labor between nations\na principle which 1s the very basis of the Enormous\nEconomic progress which humanity Enjoyed in the course\nof the nineteenth and the beginning of the twentieth\ncenturies\". HE goes on to say that German policy of\nautarchy is the very opposite of this and that the\nReich's narrow Economic nationalism is ONE of the deter-\nmining causes of the present conflict. HE then con-\ntinues: \"it is indispensable to overturn the barriers\nblocking trade; to abolish or reduce EXCESSIVE customs\nduties; to return to monetary liberty; to prevent the\ndiversion of the natural flow of goods through bilateral\narrangements which under the form of clearings or other\nrearranged systems can only lead international trade\ntowards the barbarous regime of barter.\nMURPHY\nWWC\nRegraded Uclassified\n227\nHSM\nGRAY\nParis\nDated March 11, 1940\nREC'd 2:20 p. me\nSecretary of State,\nWashington.\n323, March 11, 4 p. m. (SECTION THREE).\nFruitful solutions can only result from a broad develop-\nment of international credits of which the first condition\nwill bE the suppression of Exchange control.\" Taking his\nCUE from Reynaud's communique and revealing a certain\nlatent anxisty I have observed here as to American reaction\nto the recent Franco-British agreements, Jenny proceeds:\n\"Moreover France and Great Britain in facilitating as far\nas possible trade between their Empires and by reducing\nto a minimum the monetary and other formalities of a\nnature to hinder this trade, have already in the midst\nof war given proof of their liberalism. Once the victory\nis won these arrangements may bE Extended to all nations\nready to rally to the same principles, and the regimenta-\ntion which the war today imposes will then promptly bE\nabolished.'\nMURPHY\nCSB\nRegraded Uclassified\n228\nHSM\nGRAY\nParis\nDated March 11, 1940\nREC'd 2:30 P. m4\nSecretary of State,\nWashington.\n323, March 11, 4 p. m, (SECTION FOUR).\nJenny concludes on a note which may naturally\nbE EXPECTED and which will surely bE heard more and\nmore as time goes on, namely, what will bE our contri-\nbution to this desirable new world? HE says \"for this\ninitiative also implies a promise, A promise that the\nUnited States whose Economic and financial foreign policy\nhas not always been entirely liberal will give the needed\nExample, For the authorities at Washington can clearly\nnot disguise the fact that certain tariff barriers which\nhave arism on the coasts of America are also EXCESSIVE,\nthat the anxiety to SEE world trade again become normal\nrequires on its part a liberal settlement of the war debts\nquestion, always in suspense, that the United States more\nthan any other country is in a position to assist in that\ndevelopment of international credit recognized as indis-\npensable\".\nMURPHY\nCSB\nRegraded\n229\nHSM\nGRAY\nParis\nDated March 11, 1940\nRec'd 2:45 P. m é\nSecretary of State,\nWashington.\n323, March 11, 4 p.o m. (SECTION FIVE).\n\"That America itself has the greatest interest--\nconsidering Especially the fact that it has the major\nportion of the world's gold stock--that this inter-\nnational Economic Evolution in the aftermath of the\nwar shall conform to its suggestions, so much is certain.\nBut the merit of its initiative is not in the least\ndiminished thereby. It is on the contrary one more\nreason for hope, since the United States also is in a\nposition, thanks to the vastness of its resources, to\nplay in tomorrow's work of Economic restoration, the\nnecessity for which their Government shows today, a role\nin all respects decisive.\"\nThe American correspondent of the AGENCE ECONOMIQUE\nET FINANCIERE apropos of Senator Thomas' bill for the\nredistribution of gold stocks which hE says \"1s not\ntaken seriously at the moment in banking circles\" remarks:\n\"1t is absolutely certain that the Government of the\nUnited States will introduce no modification whatsoever\nin its gold policy prior to the conclusion of peace.\nMURPHY\nCSB\n230\nHSM\nGRAY\nParis\nDated March 11, 1940\nRec'd 2:25 P . m.\nSecretary of State,\nWashington.\n323, March 11, 4 P. m. (SECTION SIX).\nAs to the distribution of gold after the war it is\nclear that the country which already has seventy per cent\nof the world's gold stocks must inevitably aid the\ncountries which prefer to return to a gold standard\nrather than to follow the road of experiences with\nmanaged currency on an international scale. It is,\nhowever, certain that American public opinion 1s not\nyet ready for this type of active cooperation with other\ncountries of the world and that its Education will\nrequire much time and patience\". The same correspondent\nalso mentions briefly and apparently with some skepticism\na movement of \"a group of southern Senators\" to suggest\nthat \"in VIEW of the continuing increase in EXCESS reserves\nof member banks of the Federal RESERVE System credits bE\ngranted the allies for purchases of agricultural products.\nAll the funds the allies have, say these Senators, are\nEarmarked for the acquisition of war material thus they\nbuy no agricultural products at all\".\nMURPHY\nWWC\nRegraded Uclassified\n231\nHSM\nGRAY\nParis\nDated March 11, 1940\nREC'd 3:15 p. m.\nSecretary of State,\nWashington.\n323, March 11, 4 p. m. (SECTION SEVEN).\nThe French press, of course, giving considerable\nprominence to the agreement for close collaboration\nreached recently in London by representatives of the\nFrench Employers' Confederation and the Confederation\nof British Industries. The full text of this agreement\non principles 1s published in this morning's AGENCE\nECONOMIQUE ET FINANCIERE. I presume its nature has been\nreported from London.\nToday's JOURNAL OFFICIEL contains an arrete of the\nMinisters of the Interior, Agriculture, Public Works and\nFinance introducing certain changes in the decree of\nFebruary 29, 1940, relating to ration cards (my telegram\nNo. 278, March 1, 3 P. m.)..\nMURPHY\nWWC\n232\nHSM\nGRAY\nParis\nDated March 11, 1940\nREC'd 3:05 p. m.\nSecretary of State,\nWashington.\n323, March 11, 4 p.m. (SECTION EIGHT).\nApplication forms for such cards must bE submitted on\nApril 3, 1940, to the Mairie of the district in which\nthe applicant passes the night of April 2-3. Subse-\nquent instructions will fix the conditions under which\nthe cards will bE issued to the public. Ration cards\nwill bE in four categories, namely (a) children of\nunder three years of age; (b) children of from three\nto twelve years of agE; (c) persons of from twelve to\nseventy years of age who are not Engaged in manual labor;\nand (d) persons of from twelve to seventy years of age\nwho are Engaged in manual labor. Special declaration\nforms relating to coal consumption are to bE submitted\nby householders. (END MESSAGE).\nRM 029\nPAENT\nMURPHY\nWWC\nRegraded Uclassified\n233\nRio de Janeiro, March 11, 1940.\nNo. 2707\nSubject: Brasilian Press Comment on Resumption\nof Service on the Foreign Debt.\nORIGINAL & THREE COPIES BY AIR MAIL - CONFIRMATION COPY BY STEAMER.\nThe Honorable\nThe Secretary of State,\nWashington, D. C.\nSir:\nI have the honor to report, for the Treasury Department also, that\nlocal press comment on the Brasilian foreign debt decree quoted in my telegram\nno. 95 of March 7. midnight, has been meagre and has reflected the Govern-\nment's anxiety to avoid having its action in resuming service of the foreign\ndebt meet a hostile public opinion here. A note of apologia runs through all\nthe press notices, and the Ministers for Foreign Affairs and Finance have felt\nobliged to justify the settlement not only to the public but also to the\nother officers of the Government. (The President's own attitude vas well\nillustrated in the final stages of the discussions when his Minister for\nForeign Affairs told him that the Foreign Bondholders Protective Council consid-\nered Brasil's offer inadequate in amount and unsatisfactory in distribution; he\nreplied \"Well there you are: the Americans themselves are in complete agree-\nment with me - they too think it better for Brasil to pay nothing at all.\")\nThe Rio de Janeiro Jornal do Commercio of March 10th, reviews the argument\noften heard here that there is no good reason why Brasil should pay anything\non its foreign debt, that more has already been paid out in capital and\namortization than was actually received from the creditors in the first place,\nand that Brasil therefore really owes nothing more. The newspaper then\nendeavors to rebut this argument by pointing out the advantages of enjoying\nRegraded Uclassified\n234\n- 2 -\ncredit and confidence abroad, referring to Brasil's transportation\nand communication system, etc., which could not have been obtained\nwithout the aid of foreign financing, continuing:\n\"The reply to all this lakk of sense has\njust been given in the decree-law which, modify-\ning the plan of 1934, resumes service on the\nforeign debt -- just in time, happily. The merits\nof this legislative act are manifold. They include\nespecially a demonstration of good faith on the part\nof our country, a recognition of the necessity of\npreserving the country's credit abroad, and a proof that\nthe administration does not endorse, but denies, the\nsenseless point of view that would approve the\nrepudiation of obligations sealed with the national\ndignity.\"\nAfter an effort to justify the terms on which Brazil is to\nresume service of the debt, the paper then continues:\n\"Now let us fulfill the pledge, making\nour best efforts for the faithful and con-\ntinuing fulfillment of the obligation that\nwe have agreed to. Brazil's possibilities\nfor expansion are encrmous. Its potentialities\nfor work correspond to the obligation assumed.\nFor the credit of the country and for the sure continuance\nof its material development, we want the agreement to be\nfaithfully observed\nRespectfully yours,\nFor the Ambassador:\nWilliam C. Burdett,\nCounselor of Embasay.\nFile No. 851.\nWAILEF.\nInit.: LEF\nRegraded Uclassified\n235\nRio de Janeiro, March 11, 1940\nNo. 2700\nSUBJECT: Brasilian Foreign Debt Payment Offer.\nORIGINAL AND THREE COPIES BY AIR MAIL - CONFIRMATION COPY BY STEAMER.\nThe Honorable\nThe Secretary of State,\nWashington, D. C.\nSir:\nI have the honor to transmit herewith, for the Treasury Department\nalso, copies of both theEnglish and Portuguese texts of the letter\nregarding the resumption of service on the Brazilian foreign debt that\nI received from the Brazilian Minister for Foreign Affairs and quoted\nin my telegram No. 102 of March 9. 3 p.m.\nRespectfully yours,\nFor the Ambassador:\nWilliam C. Burdett,\nCounselor of Embassy.\nEnclosures:\n1. Translation of letter from Oswaldo Aranha\n2. Portuguese text of No. 1.\nWA:alc\nFile No. 851\nRegraded Uclassifie\n236\nCOPY\nEnclosure No. 1 to Despatch No. 2700 of March 11, 1940 from Embassy\nat Rio de Janeiro\n(Translation)\n\"Rio de Janeiro\nMarch 8, 1940.\n\"Mr. Ambassador,\n\"I have the honor to inform Your Excellency that the\nBrazilian Government has no worked-out plans for now or\nthe near future for the repatriation of bonds in excess of\nthe amortization indicated in this proposal. The Brazilian\nGovernment hopes that, in due time, improving trade and\nexchange conditions may permit it to avail itself of the\nprovisions of Article I(6) of the Aranha Plan Decree which\npermit such additional repurchases in the open market. Under\nno conditions, however, does the Brazilian Government intend\nto make more than moderate purchases of this character.\n\"Please accept the expressions of my highest consideration.\n\"Oswaldo Aranha.\"\nRegraded UUclassifie\n237\nEnclosure No. 2 to Despatch No. 2700 of March 11, 1940\nfrom the Embassy, Rio de Janeiro\nRegraded Uclassified\nRio de Janeiro,\nen 5 de Marco de 1940.\n\"Senhor Embaixador,\n\"Tenho & honra de communicar a Vossa Excelencia que o Governo\nbrasileiro nao tem planos preestabelecidos para & repatriacao de\ntitulos, al em da amortizacao indicada nesta proposta, para agora\nou para o futuro proximo.\nO Governo brasileiro esera que devido tempo, & melhoria das\ncondicoes de comercio e cambio lhe permita aproveitar-se das\ndisposicoes do Artigo I(6) do Decreto n? 23.829, de 5 de Fevereiro\nde 1934, que facultam tais compras adicionais no mercado livre.\nDe maneira nenhuma, no entanto, o Governo brasileiro pretende faser\nmais do que compras modicas dessa naturesa.\nAproveito o ensejo para reiterar os protestos da mais alta\nconsideracao com que no subscrevo\nde Tossa Excelencia\nOswaldo Aranha\"\n4 sua Emelencia o Senhor Jefferson Caffery,\nEmbaimdor dos Estados Unidos da America.\nSTRICTLY CONFIDENTIAL\n238\nTREASURY DEPARTMENT\nINTER-OFFICE COMMUNICATION\nDATE March 11, 1940\nTO\nSecretary Morgenthau\nFROM Mr. Cochran\nBy appointment made through Mr. Dunn of the Department of State, the\nSecretary received this morning at 10:15 the British Ambassador, the French\nAmbessador, Professor Rist and Mr. Ashton-Gwatkin. Mrs. Klotz, Mr. White and\nMr. Cochran were present.\nThe French Ambassador, Count de Saint-Quentin, thanked the Secretary for\nthe opportunity to present the two blockade experts, and asked Professor Rist\nto explain their mission. Professor Rist was appreciative of the assistance\nwhich the Secretary of the Treasury had been extending the Allies, particularly\nthrough Mr. Purvis. Professor Rist knew that Secretary Morgenthau was sware\nof the seriousness of the Allies' problems, particularly those pertaining to\nraw materials and especially metals for alloys. such as molybdemum and tungsten.\nProfessor Rist indicated his hope that they might have further discussions with\nthe Treasury in regard to the requirements and problems of the Allies. He hoped\nthat through such meetings the American ideas on these problems could be obtained.\nThe Secretary of the Treasury explained that any #000088 which he had\nachieved in cooperating with Mr. Purvis had resulted from the frankness in which\nthey had approached their tasks. He desired to be equally frank in the present\nmeeting. He let the visitors know that he had opposed their coming to the\nUnited States, if their mission was to deal with the question of the blocking\nof metals for alloys, etc. He stated that he had gone as far as he properly\ncould in his cooperation with Mr. Purvis. He complimented the efficiency of\nthis gentleman. The Secretary stated that Professor Rist had submitted through\nMr. Matthews ideas which could not possibly be carried out by us. The Secretary\nsaid there vas nothing we could do about stopping shipments of noy beans, copper\nor petroleum. The moral embargo idea had been stretched very far in blocking\nshipments of molybdenum and in leading to the withdrawal of American gasoline ex-\nperte from Japan and Russia. The Secretary reminded his visitors that the United\nStates is neutral and that the Secretary of the Treasury must respect such\nneutrality.\nMr. Ashton-Gwatkin grasped the Secretary's idea and advanced the formula\nthat he and Professor Rist should submit to Mr. Purvis such questions as they have\nwith respect to problems on which the Secretary of the Treasury might be consulted.\nMr. Purvis could then take these up with Secretary Morgenthau in their usual con-\nversations. The Secretary of the Treasury approved this idea. He was aware that\nMr. Purvis had not yet brought the experts up to date on certain points, and on\nthe other hand, that they svidently had certain information from Europe which\nshould be given to Mr. Purvis.\nMr. Ashton-Owetkin mentioned tungsten as a subject which they would like to\ndiscuss. The French Ambassador volunteered at this point that word had been 16-\nceived that shipments of tungsten, or of wolframite, had been unde from China,\nRegraded Uclassified\n239\n- 2 -\ndestined allegedly for the United States, but after arrival at Manila had\nbeen diverted to Vladivostok. The Secretary of the Treasury was not svare of\nany such diversion. He stated that inquiries had been made into the identity\nof the brokers at Hong Kong who were responsible for tungsten shipments, and\nthat it vali found that they were principally British controlled, rather than\nAmerican controlled. He knew of tungsten ore being held by the French in\nFrench Indo-China and did not know what disposition had been made thereof.\nHe was confident that any tungsten ore sold from China to the Universal Trading\nCorporation would not be diverted. He was willing to go into this question\nfurther and thought it might properly be considered unfinished business.\nThe British Ambassador seemed satisfied with the precedure suggested by\nAshton-Gwatkin and approved by Secretary Morgenthau. Lord Lothian raised the\nsuggestion of B statement to the press. It was the Secretary's idea, which\nmet with the approval of the visitors, that Mr. Schwarz simply let the press\nknow that the British and French Ambassadors had called today to acquaint the\nSecretary of the Treasury with their experts, Messrs. Rist and Ashton-Gwatkin,\nand that no business was discussed. The French Ambassador recalled that at the\npress conference in the Department of State the correspondents had been insistent\nin their questions as to whether some credits might be involved in the visit of\nthe two experts to this country. The opinion seemed to be shared by all in this\nmorning's meeting that official meetings between the experts and the Treasury\nshould be avoided lest they give rise to press speculation and misunderstanding\nwhich would injure rather than assist the cooperation now effective.\nThe Secretary spoke with the two ambassadors for a few moments after the\ntwo experts and the members of his own staff withdrew.\nAfter the departure of the visitors, Mr. Cochran telephoned Mr. Dunn at\nthe Secretary's request. He stated that the visitors had been received, but\nthat it was not anticipated that any later official visits would be made by them\nat the Treasury. Messrs. Ashton-Gwatkin and Rist are to consult with Mr. Purvis\nin regard to questions on strategic materials and Mr. Purvis will, in turn,\npresent these questions to Secretary Morgenthsu in the usual routine of their\nperiodic meetings. Mr. Dunn appreciated this information, was convinced that it\nwas the proper plan, and understood that the Department of State was not to send\nthese experts back to the Treasury Department.\nBMR\n240\nRio de Janeiro, March 11, 1940.\nNo. 2706\nSUBJECT: Brazilian Foreign Debt Situation.\nORIGINAL AND THREE COPIES BY AIR MAIL - CONFIRMATION COPY BY STEAMER.\nThe Honorable\nThe Secretary of State,\nWashington, D. C.\nSir:\nReferring to my telegram No. 102 of March 9. 3 p.m., transmitting\ncopy of a note from the Brazilian Minister of Foreign Affairs in re-\ngard to repatriation of Brazilian bonds in excess of the amortization\nindicated in the recent Brazilian proposal, I have the honor to state\nthat while I believe it to be true that the Brazilian Government has\nno worked-out plans in this connection, my opinion is that the Brazilian\nauthorities have in mind the possibility of being able to repatriate sooner\nor later within the next four years Brazilian federal bonds in an amount\nof, roughly, ten million dollars.\nÀs far as I know, they have no plans, even nebulous ones, as yet\nfor the repatriation of state and municipal bonds.\nRespectfully yours,\nJefferson Caffery.\nJC:alc\nFile No. 851\n241\nGROUP MEETING\nMarch 11, 1940.\n9:30 a.m.\nPresent:\nMr. Bell\nMr. Foley\nMr. Haas\nMr. Graves\nMr. Harris\nMr. Gaston\nMr. Cochran\nMr. Cotton\nMr. Schwarz\nMr. White\nMrs Klotz\nH.M.Jr:\nDidn't we send a cable to this fellow, one of\nthe Secretaries at Bucharest, asking a sort of\neconomic report?\nCochran:\nYes, sir.\nH.M.Jr:\nDid it come in?\nCochran:\nYes, sir, it came in.\nH.M.Jr:\nWell, would you and Harry get off a cable today\nfor more information on this Rumanian oil - on\nthat place up there? They are not letting any\nhigh octane gas out and it looks very interesting\nand Harry, Ashton-Gwatkin and Professor Rist will\nbe here at 10:15 and I would like you and Cochran.\nCochran:\nYes, sir.\nH.M.Jr:\nAre the Ambassadors coming?\nCochran:\nThey are coming, also.\nH.M.Jr:\nShall I send up for my high hat?\nCochran:\nI don't think 80.\nWhite:\nYou may remember this chap Gwatkin, he was the man\nwhom they sent to Czechoslovakia. Well, he was --\nH.M.Jr:\nHe made the study for that Minister of Commerce\nfor England on Czechoslovakia.\nWhite:\nYes, but judging from two books, one by Getty and\none by the other, he was engaged in two activities\nRegraded Uclassified\n242\n- 2 -\nin which the opposite move was taking place.\nI just thought you would be interested in\nwhat their comments might be on that, that\nhe was selling out the Czechoslovakians at\nthe same time he was dealing with them. Under\norder, I suppose, but I thought you might be\ninterested.\nH.M.Jr:\nWell, he was supposed to have made the survey\non which England sold them down the river.\nWhite:\nHe made the survey, but I think the comments\nof those writers were that the plans as to\nwhat to do with Czechoslovakia were known be-\nfore he even went down there. He just went\ndown to get them along.\nCochran:\nWell, he had been in the foreign office 88 an\nexpert on that part of Europe and he went in\nwith Runciman, you see.\nH.M.Jr:\nWell, he has been in the United States ten days\nand I wouldn't see him until his Ambassador\nbrought him down. I made it just as difficult\nas possible for him to get here. They have been\nwaiting ten days to see me. I have asked both\nAmbassadors to introduce them and I made it\njust as difficult as possible. I rarely do\nthat, but I have in this case. They have been\nhere about ten days, haven't they?\nCochran:\nYes.\nH.M.Jr:\nI made it as difficult as possible for them to\ncome over here.\nHarry, here is the letter from Eccles (March 9,\n1940) with a copy of his comments to Mr. Berle\non our Bank.\nBell:\nHere is another one dated the 8th.\nWhite:\nThis is dated the 9th. There are a series of\nthem.\nH.M.Jr:\nHerbert?\nRegraded Uclassified\n243\n- 3 -\nGaston:\nI don't think I know anything. I forgot to bring\nback with me a letter to you from Mr. Eccles which\nwould complete the record, which I think is suf-\nficient to complete the record. I don't think it\nneeds any attention. It is not even funny.\nH.M.Jr:\nNo, and I think --\nGaston:\nIt even weakens his case. It is like a man talking\nto himself.\nKlotz:\nIt is exactly like that.\nH.M.Jr:\nI thought that the record would be completed.\nGaston:\nIt is a very satisfactory completion of the record.\nH.M.Jr:\nIf anybody is interested in the Eccles-Lasser-Mor-\ngenthau correspondence, it can be seen.\nGaston:\nYou may have read Ernest Lindley's column in yes-\nterday's Post.\nH.M.Jr:\nNo.\nGaston:\nI think it 1s worth noticing.\nH.M.Jr:\nOn that subject?\nGaston:\nNo, it is on the necessity for another supplementary\nappropriation for work relief.\nH.M.Jr:\nWould you get it for me?\nSchwarz:\nYes, sir.\nH.M.Jr:\nO. K.\nEd?\nFoley:\nHere is a reference to the testimony of the Navy\nbefore the House Naval Affairs Committee on Elec-\ntric Boat. I thought you would be interested in\nit.\nAnd here is an article in Colliers called \"The\nSuicide Squadron,\" where they put the whole thing\nRegraded Uclassified\n244\n- 4 -\non the President because there wasn't any op-\nposition. I have marked the places you ought\nto read. I have extracted the testimony. I\ndon't think you want the copy of the testimony\nbefore the Committee.\nH.M.Jr:\nNo. What else? Anything on Sullivan?\nFoley:\nNo. I sent a memorandum over to Elmer on 3atur-\nday, giving him the material he wanted.\nH.M.Jr:\nWell, I am sitting tight.\nFoley:\nWell, John Sullivan arranged a meeting for\nWednesday at 10:00 o'clock.\nH.M.Jr:\nSee if I can remember - this is not for the\nrecord.\n(Discussion off the record)\nCochran:\nProfessor Rist telephoned a while ago. I haven't\nheard from him since he has been in town. He\nasked if we wanted to get out a press communique\nfollowing this meeting this morning.\nSchwarz:\nCommunique?\nCochran:\nI told him this was your regular day for a press\nconference.\nSchwarz:\nI was going to ask, in view of the many questions\npreviously, I would like to be able to tell the\nboys that they will be here. We almost told them,\nbut we --\nCochran:\nHe said he was going to draw up something to meet\ntheir idea and submit it, too, that they had come\nto discuss the economic repercussions from the\nwar on different countries, and so on.\nGaston:\nI think they are up to something. It is a little\ndangerous.\nH.M.Jr:\nWell, personally, I think the more that I can feel\nmy way - I think I was right when I told Purvis\nRegraded Uclassified\n245\n- 5 -\nto tell them the meeting was going to adjourn\nin New York and I am tickled to death he did\njust what I told him and that is fine, because\nnow the thing is out of the Treasury and the\npressure is on the Allies, 8.8 to what kind of\nplanes to buy, which is where it should be.\nI think this. I am thinking out loud. I think\nthe thing to say is just simply this, that the\nBritish and French Ambassadors brought their\nrespective boys down here to introduce them to\nme and the thing was simply 8. formal occasion\nand there may be other meetings later on, but\nnothing took place, other than an introduction,\nand the chances are nine out of ten that is all\nthat will take place today.\nCochran:\nWhile they are in here, you might recommend that\nthey say the same thing.\nH.M.Jr:\nO. K., just that they came here and were intro-\nduced. We didn't get down to any business.\nWhite:\nOr you could tell Mr. Rist that the Secretary\nsees important people all the time and doesn't\nget out a communique each time.\nCochran:\nI almost anticipated your reaction, because I\nsaid, \"You are just coming down to call on him\nthis morning with your Ambassadors and that 1s\nall that is to be done.\"\nH.M.Jr:\nI have never gotten out B. communique. That is\nall. I think that is enough, don't you think\nso, Chick?\nSchwarz:\nI think 80.\nH.M.Jr:\nHerbert?\nGaston:\nAt any event, it is your office and nobody who\nvisits you should give out any announcements\nabout & visit to you. You should give them\nout.\nSchwarz:\nThey might want to use it as a sounding board\nto show the folks back home they are working,\nbut that is their problem.\nRegraded Uclassified\n246\n- 6 -\nH.M.Jr:\nI think unless somebody develops - - does anybody\nknow they are coming at 10:15?\nSchwarz:\nNot yet.\nH.M.Jr:\nI wouldn't tell anybody and after they go, I\nwould simply tell them that Mr. Schwarz, who\nlooks after the press for me, will simply tell\nthem that they were brought down here to say\nhow do you do.\nHow far have we gotten?\nCochran:\nI was the last one.\nCotton:\nCould I see you for just a minute afterward?\nH.M.Jr:\nSurely. You ask so nicely. How did you like\nthe dancing at the Brazilian's Friday afternoon?\nCotton:\nThat was very fine, I thought.\nH.M.Jr:\nI have my spies everywhere.\nCotton:\nI think I know the one you mean.\nH.M.Jr:\nYes, surely.\nChick?\nSchwarz:\nTo complete another record, if you haven't al-\nready been informed, the case in Chicago where\nthe two Assistant U. S. Attorneys had been on\ntrial for alleged bribery resulted in a con-\nviction. I think that winds that up.\nH.M.Jr:\nGood. Anything else?\nSchwarz:\nThat is all.\nH.M.Jr:\nI will come to you, George, last, and I will\ngive you whatever time is left. The boys here\nwill want to hear you.\nHarris:\nWe had a little flurry over the week-end. Two\nCanadian Army aviators fell inside the American\nRegraded Uclassified\n247\n- 7 -\nlines and nobody knew what to do with them, so\nJustice 18 going to pass on them this morning.\nH.M.Jr:\nCouldn't you move the border?\nHarris:\nThe trouble is, one of them was injured a little\nbit and he couldn't move. Otherwise, I think we\nwould have. That is all I have.\nH.M.Jr:\nHarry?\nWhite:\nThere was an inflow of capital of 30 million\ndollars last week, nothing special.\nGreat Britain has eliminated all its earmarked\ngold. It had about 25 million. There is none\nthere now.\nSweden lost about 90 million dollars in the last\nfew months.\nH.M.Jr:\nHow much?\nWhite:\n90 million. I have a little memo on it. (Mar. 11)\nI have a copy of the conference with Mr. Purvis\nhere for the record, but there is appended a\nbrief note which I wish you would read and con-\nsider, some question.\nH.M.Jr:\nAll right.\nWhite:\nAnd I notice that - this may have been called to\nyour attention - that China is collecting five\nmillion more ounces of silver that is on its way\nhere.\nH.M.Jr:\nI didn't know that.\nWhite:\nIt is dated March 7. It is on the way to Rangoon.\nH.M.Jr:\nI ought to say how do you do sometime tomorrow to\nBuck.\nCochran:\nAll right, sir.\nWhite:\nThe detailed report that we were waiting for from\nItaly has come. It was sent by mail. It gives\nRegraded\nUclassified\n248\n- 8 -\nthe list of commodities that they are going to\nsubsidize by 20 percent. It covers a very large\nportion of their trade with us. We would have\nno choice but to post countervailing duties as\nsoon as the thing comes through. I am merely\nletting you know now.\nH.M.Jr:\nCan you wait until Mr. Welles sails?\nWhite:\nIt probably won't --\nH.M.Jr:\nIt will take at least another week, won't it?\nWhite:\nMuch more than that, but I mean from now on you\nwill probably be hearing about it.\nH.M.Jr:\nIs cheese on that?\nWhite:\nI don't know. We can investigate that more care-\nfully. Some of the dumping cases have been in\nthe books for five years. You can eat cheese for\nfive years more.\nH.M.Jr:\nDo you think it will stink?\nWhite:\nIt should smell better.\nH.M.Jr:\nI spent the week-end with my son, 80 I picked up\na little college language.\nWhite:\nColombia, in its reply to the Inter-American Bank\nquestionnaire, stated that they needed a gold\nloan of 15 million dollars, 10 million of which\nwould probably be needed this year when they were\nasked whether they could use any capital, and they\nalso said they would like to borrow 23 million\nfor developmental loans and they have got the\npurposes indicated. I thought you might be in-\nterested in the amounts.\nH.M.Jr:\nThere is our Director on the Export-Import Bank.\nWhite:\nYes.\nH.M.Jr:\nDoes he know about it?\nWhite:\nI don't think so. Do you?\nRegraded Uclassified\n249\n- 9 -\nCotton:\nI haven't seen it yet.\nWhite:\nThis 18 a small thing. I don't know whether\nthere 1s anything or not, but one of the boys\ncalled my attention to the fact that the pro-\nduction of coins in the Bureau of the Mint\nfluctuates very greatly and the number of em-\nployees fluctuates. Whether it 1s due to the\ncoins or not, I don't know, but there might be\na chance of either increasing coin production\nin anticipation of future needs in the next\nfew months or not.\nH.M.Jr:\nGive it to Harold.\nWhite:\nBut I don't know how much there is to it.\nH.M.Jr:\nGive it to Harold.\nBell:\nAppropriations available for the payment of em-\nployees might have something to do with it.\nWhite:\nExcept that anything the Government has control\nof certainly ought to be stabilized, if possible.\nThe British Government requisition of British\nships for the United States exports of cotton\nto the United Kingdom indicates that our cotton\nexports will be cut down very sharply during\nthe next five or six months unless they make\nsome change in their regulations, but they must\nhave anticipated their purchases when they made\nthese regulations, so that probably this 18 a\ngood forecast of what they are going to buy.\nIt has got down to 100,000 bales.\nThe preliminary figures for February trade are\nin now, I mean for the whole month. It is\n347 million dollars for the month of February.\nH.M.Jr:\nFavorable?\nWhite:\nThat is the total exports. We don't know our\nimports yet, 80 I don't know what the balance\nwill be.\nH.M.Jr:\n3479\nRegraded Uclassified\n250\n- 10 -\nWhite:\nYes, and that 18 compared wi th 369 in January.\nH.M.Jr:\nHow much in February of '399\nWhite:\nI haven't got that here, but it is substantially\nin excess of February, 139, but there is not a\nclear seasonal movement between January and Febru-\nary. This is greatly in excess of last February,\nwhich was low. Some of that - the figures would\nbe larger, we gather from the data which you\ninitiated and collected, which George will have\nsomething to say on, which is very interesting,\nbecause it indicates that stuff is piling up in\nthe docks. The stuff has been sold but doesn't\nappear in the export figures, because it is\npiling up. It will be probably five or ten per-\ncent greater than this in both January and Febru-\nary. That is all I have.\nH.M.Jr:\nHarold?\nGraves:\nNothing.\nH.M.Jr:\nDan?\nBell:\nAs long as Harry has mentioned the Government\nstabilizing everything which it has anything\nto do with, I might tell you that Eugene Meyers\ncame to see me two or three weeks ago, saying\nthat a number of merchants in Washington had\napproached him to start a newspaper campaign\nto get the Government to change its pay days\n30 that there would be stability in the flow\nof payrolls throughout the month. The merchants\nhere in town have to take on a number of em-\nployees for about three days right after each\npay day and then they have to let them go,\nwhereas if we had a number of pay days throughout\nthe month they could stabilize that employment\nand it wouldn't cause these peaks. I told them\nwe would look into it and I have appointed &\ncommittee.\nH.M.Jr:\nHow does he want us to pay?\nBell:\nWell, he would like to have us stagger the pay\ndays and there is some sense to 1t, but it is\nRegraded\nUclassified\n251\n- 11 -\ngoing to be awfully hard to get the employee\nunions in the departments to change their pay\ndays from the 31st and the 15th. It would be\na nice thing if we could have a pay day every\ntwo weeks, 26 pay days in the year, and say\nthe Treasury Department is paid on every other\nMonday and the Interior every other Tuesday,\nand 80 forth, so that we would have a pay day\nevery day in the year for the departments. I\nthink it makes a lot of sense. It would also\nstabilize our peaks - or iron out our peaks\nin the Disbursing Office and also eliminate\na lot of lines that we have in the Cashier's\nRoom down in the Treasury building.\nH.M.Jr:\nSounds all right.\nBell:\nThey reach almost around the building twice a\nmonth, but anyhow we could - the other day when\nwe were with the President he asked if he was\ngoing to get his usual reports in March.\nH.M.Jr:\nI have been sending those every day.\nBell:\nYou are sending the ones I send to you?\nH.M.Jr:\nEvery day.\nBell:\nThe 21% bonds, you asked me the other day if\nthere was any limit and I said I didn't think\nso, what we could sell for trust funds. The\nlimit was three months and it 18 up tomorrow.\nYou know what I mean.\nH.M.Jr:\nNo.\nBell:\nThe hundred million dollars --\nH.M.Jr:\nYes, there was a limit.\nBell:\nYou thought there was, but I didn't think there\nwas. It is three months and it 1s up tomorrow,\nso that there is 10 million 494 thousand left\nand the Postal Savings has made plenty of money.\nIt will give them 10 million four, anyhow.\nHow much do they have already?\nRegraded Uclassified\n252\n- 12 -\nBell:\nThey have had - well, I don't know. 30 or 40\nmillion, or something like that.\nH.M.Jr:\nI thought you had an idea.\nBell:\nWould you like to give them the balance?\nH.M.Jr:\nYes.\nBell:\nI sent Thompson's mother-in-law flowers and\nsigned \"The 9:30 Group,\" Saturday. She died.\nH.M.Jr:\nSurely.\nBell:\nSenator Thomas has written the President quite\na letter on his bill concerning gold and I\nthink we also have a request for a report from\nthe Committee on it. The President says, \"For\npreparation for reply for my signature.\" I\ndon't think you want to see it, do you? Shall\nI turn it over to Harry?\nH.M.Jr:\nYes.\nWhite:\nDid you get a request from the President?\nBell:\nI think there is one in. I think I have seen\nthat. And these are the two memoranda to sign\non the Self-Help.\nH.M.Jr:\noh, yes. I will do that when I have lunch.\nI know there is a letter from either the Governor\nor the Senator of California on the Bank of\nAmerica thing and I am almost sure I sent it in\nto you. It may have been the Governor or the\nU. S. Senator from California, which the Presi-\ndent wanted us to draft an answer for.\nBell:\nSenator Pittman.\nH.M.Jr:\nWas it Pittman?\nBell:\nYes.\nKlotz:\nPittman was the only one.\nBell:\nYou signed that.\nRegraded Uclassified\n253\n- 13 -\nFoley:\nYou initialled that on Thursday.\nH.M.Jr:\nI thought it was Senator - whatever his name\nis.\nFoley:\nYou mentioned it to me and I said Pittman and\nyou said no, it was --\nH.M.Jr:\noh, Pittman?\nFoley:\n....Downey, but I haven't seen it.\nH.M.Jr:\nThat is all right.\nBell:\nWhen I read the signature, the only thing I could\nmake out of it was Key Pittman. It was on the\nSenate stationery.\nH.M.Jr:\nAll right. 0. K.?\nBell:\nThat is the only letter I have seen.\nH.M.Jr:\nGeorge, tell us about your trip, the high spots.\nHaas:\nThe real interesting stuff is so confidential I\ncan't mention it. I can just mention very gen-\neral terms, unless you want me to.\nH.M.Jr:\nDid they give it to you so confidentially?\nHaas:\nVery much 80. The two places asked if it was\njust going to be for you. But I can say this\nmuch, Mr. Secretary, all the places that I\nvisited were surprisingly optimistic and their\nsales figures supported their position and\nonly one instance was the railway equipment\ncompany where their orders had gone down and\nthe whole - all the officials of the company\nwere tied up for two days that I was there with\nthe C.I.O. controversy, 80 I saw them before\n10:00 o'clock one day, but ordinarily this\nparticular official has been very pessimistic.\nI think he is naturally inclined that way, but\nnow he seems to be optimistic. Their orders\nhad dropped off, but he said they had such\ngood business for the last six months and he\nexpects them to be resumed, although he is\nrather indefinite where he expects the business\nto come from.\n254\n- 14 -\nH.M.Jr:\nI will tell you what I will do. I will see\nCotton and then I will see you.\nHaas:\nAll right, because there are many of these\nfigures that they asked me if they were just\nfor you.\nWhite:\nAre they good or bad?\nHaas:\nThey are good.\nWhite:\nI noticed that Clapper had an article which I\ntake it you are going to take up this morning,\nbecause it just came to my desk before the\nmeeting, in which he speaks of the U. S. being\nthe perennial sucker, taking gold, and so on,\nand paying $30.00 for gold that can be produced\nfor $11.00, and 80 forth. I was wondering\nwhether there was any feasibility in the sug-\ngestion of getting the columnists down, possibly\nsome of the reporters, and you holding a sort\nof gold conference and let them fire questions\nand let's set them straight on some of these\nthings.\nH.M.Jr:\nTalk it over with Chick, will you?\nWhite:\nYes.\nH.M.Jr:\nSee what he thinks about it.\nAll right, if Cotton stays, and then George, if\nyou will wait outside.\nSTRICTLY CONFIDENTIAL\nTREASURY DEPARTMENT\n255\nINTER-OFFICE COMMUNICATION\nDATE March 11, 1940\nTO\nSecretary Morgenthau\nFROM Mr. Cochran\nOfficial sales of British owned dollar securities under the vesting order\neffective February 19:\nNo. of Shares\n$ Proceeds of\nNominal Value\n$ Proceeds of\nSold\nShares Sold\nof Bonds Sold\nBonds Sold\nMarch\n11\n9,800\n466,611\nNil\nNil\n5\n9,600\n405,284\nNil\nNil\n6\n17,400\n897,636\nNil\nNil\n7\n30,100\n1,174,000\nNil\nNil\n8\n17,300\n743,048\nNil\nNil\n9\n3,100\n98,980\nNil\nNil\nTOTAL FOR WEEK\n87,300\n3.785.559\nNil\nNil\nSales from\nFebruary 22 to\nMarch 2, Incl.\n85,590\n2,787,807\nNil\nNil\nTOTAL FEBRUARY 22\nto MARCH 9. INCL.\n172,890\n6,573,366\nNil\nNil\nOn March 8, Mr. Pinsent telephoned me that he had received from Mr. Gifford\nthe summary which had been relayed from London, to the effect that for the week\nended March 2 there had been sold $5,500,000 of non-vested securities. Pinsent\nremarked upon the volume of sales which were actually being transacted without\nhaving any injurious effect upon the American market. He stated that Gifford\nnow has his own office; that he receives visitors; and that he has placed some\norders through other channels than J. P. Morgan and Company.\nThere is attached & copy of an item from the financial page of the New York\nHerald Tribune of March 5 indicating the ignorance of the market as to actual\nselling of British vested securities.\nAMP\nRegraded\n256\nN. Y. Herald Tribune\nMarch 5, 1940\n\"Foreign Selling\nNo concrete information has yet been made\navailable on the means the British expect to follow\nin disposing of the $60 stocks they sequestered\nfrom their nationals, but there is no evidence that\nliquidation has yet begun. Foreign liquidation of\nfree securities is currently at a comparatively low\nlevel, generally running at less than $500,000 a\nday, contrasted with more than $1,000,000 a day in\nOctober and November. Buying in small amounts continues\nfrom Holland, Switzerland and the Far East. South\nAmerican interests have also been accumulating small\namounts of United States securities. These purchases\nfrom non-belligerents occasionally exceed sales from\nthe warring nations and have had the effect recently\nof cushioning the effects of British and French liqui-\ndation. Total volume of foreign business, however,\nremains small and causes considerable worry to brokers\nwith extensive foreign establishments.\"\n257\nTREASURY DEPARTMENT\nINTER OFFICE COMMUNICATION\nRegraded Uclassified\nDATE March 11, 1940\nTO Secretary Morgenthau\nFROM Mr. Cochran\nCONFIDENTIAL\nThe reported volume of sterling transactions in the open market was greatly\nreduced from last week's daily average, as a result of Great Britain's new exchange\nmeasures relative to the payment for certain exports. The reduction in commercial\ndemand was the direct result of the regulations. Prior to our opening, sterling\ndeclined in Amsterdam from 3.87-9/16 to & current low of 3.85 and then returned to\n3.86-1/4. The initial quotation in New York was 3.86-1/4 bid. After reaching\n3.87-1/8 in the early forenoon, the rate developed an easier tone and moved off to\nclose at 3.86.\nSales of spot sterling by the six reporting banks totaled L366,000, from the\nfollowing sources:\nBy commercial concerns\nL 166,000\nBy foreign banks (Europe, Far East and South America)\n& 200,000\nTotal. L 366,000\nPurchases of spot sterling amounted to L543,000, as indicated below:\nBy commercial concerns\nLa 286,000\nBy foreign banks (Europe and South America)\n1 257,000\nTotal. ,L 543,000\nThe following reporting banks sold cotton bills totaling 264,000 to the\nBritish Control on the basis of the official rate of 4.02-1/2:\nL 34,000 by the Irving Trust Co.\n14,000 by the Bank of Manhattan\n9,000 by the Guaranty Trust Co.\n5,000 by the Chase National Bank\n2,000 by the Bankers Trust Company\nI 64,000 Total\nThe French franc, which is officially tied to sterling, also follows the\ncourse of the sterling rate in the open market. Today the rate declined to 6. low\nof .0218-3/16 in Amsterdam, then moved up to .0219-3/4 in the morning session\nhere and closed at .0218-7/8.\nThe belga has shown & firm tendency in the past week, possibly reflecting the\nmovement of funds from England and France. In New York today it advanced to .1701,\nthe highest rate recorded for that currency this year. It vas reported that an\nAmerican motion picture concern sought to purchase 700,000 belgas in this market.\nSince the belga market is small, this purchase exercised considerable influence\non the rate. The closing quotation vas also .1701.\n-\n258\nThe discount on the Canadian dollar widened to close at 17-3/4%. The con-\ntimed veakness in that currency is attributed to orders from Chicago to sell\nCanadian dollars. An the Canadian Exchange Control system drastically limits the\nutility of Canadian balances purchased in the open market, it is probable that the\ndiscount for the Canadian dollar will tend to increase.\nThe rates for the Dutch guilder and Swiss franc were steady and closed at\n.5310 and .2242 respectively.\nThe downward movement in the rate for the Ouban peso continued today with a\nwidening of the discount to 9-9/16%. The Mexican peso was quoted at .1672, un-\nchanged since Jamuary 3.\nThe Federal Reserve Bank of New York purchased 40,000 belgas for the account\n0:2 the Bank of Latvia.\nWe sold the following amounts of gold to the banks indicated, to be added to\ntheir respective earmarked accounts:\n$ 4,000,000 to the Central Bank of the Argentine Republic\n130,000 to the National Bank of Belgium\n$ 4,130,000 Total\nWe purchased $5,700,000 in gold from the earmarked Account #3 of the B.I.S.\nCold in this account is owned by the National Bank of Hungary.\nThe Federal Reserve Bank of New York reported that the following shipments of\n(old were being made to it by the banks indicated below:\nG\n4,501,000 from Switzerland, shipped by the Swiss National Bank for its own account.\nThe disposition of this shipment is unknown at the present time.\n3,654,000\nfrom Sweden, shipped by the Bank of Sweden, to be earmarked for its own\naccount,\n2,695,000 from South Africa, shipped by the South African Reserve Bank for account\nof the Netherlands Bank. Although the disposition of this shipment is\nunknown at the present time, it will probably be placed under earmark,\n1,025,000 from Mexico, shipped by the Bank of Mexico, to be earmarked for its own\naccount.\n$11,875,000 Total\nThe State Department forwarded to us cables stating that the following gold\nshipments would be made:\nFrom Switzerland:\n2,181,000 shipped by the Credit Suisse, Zurich, to the Guaranty Trust Company,\nNew York.\n189,000 shipped by the Banque Federale, Bern, to the National City Bank, New York,\nCONFIDENTIAL\nRegraded Uclassified\n- 3 -\n259\nFrom England:\n943,000 representing two shipments by Samuel Montagu and Co., London, to the\nBankers Trust Company, New York.\n83,000 shipped by Erlangers, Ltd., London, to the Manufacturers Trust Co.,\nNew York.\n46,000 shipped by Mocatta & Goldsmid, London, to the Banque Belge pour l'Etranger,\nNew York.\n3,442,000 Total\nThe above shipments will be sold to the U. S. Assay Office at New York.\nThe Bombay silver quotation worked out to the equivalent of 41.37#, off 1/44.\nIn London, the prices fixed for spot and forward silver both declined 1/4d to\n21-1/16d and 21d respectively. The U. S. equivalents were 36.49$ and 36.15$. The\nrecession in the London quotations was attributed to selling of new. production silver\nand Indian interests were reported as buyers on the fall.\nHandy and Harman's and the Treasury's prices for foreign silver were unchanged\nat 34-3/44 and 35# respectively.\nWe made seven purchases of silver totaling 725,000 ounces under the Silver Pur-\nchase Act. Of this amount, 200,000 ounces represented 2. sale from inventory and\nthe remaining 525,000 ounces consisted of new production from foreign countries, for\nforward delivery.\nSMV\nCONFIDENTIAL\nRegraded Uclassified\n260\nTREASURY DEPARTMENT\nINTER-OFFICE COMMUNICATION\nDATE March 11, 1940\nTO\nSecretary Morgenthau\nFROM\nMr. Haas BA.\nSubject:\nWheat export sales and other market data from the\nFederal Surplus Commodities Corporation.\nFeb. 27: It 1s evident from the reports that we get that\npossibly as much as 50 per cent of the loan wheat\nhas been liquidated by farmers.\nThe oats market would probably sell higher in view\nof the very small visible supply and excellent cash\ndemand were it not for the rather heavy imports of\nCanadian oats. Ending January 31, there has been\nabout 5,000,000 bushels of Canadian oats worked into\nthe United States in spite of an 8 cent per bushel\nimport duty.\nFeb. 29: There was a good demand for Canadian wheat for\nexport and cash premiums on Canadian wheat are firm.\nQuite a lot of the Canadian wheat sold today was for\nshipment after the opening of navigation. It is\nexpected that when navigation opens almost all this\nCanadian business that has been coming through the\nUnited States in the winter months will be diverted\nvia Montreal because transportation costs are con-\nsiderably cheaper by the St. Lawrence Gateway.\nSales of Canadian wheat yesterday were in excess of\n4,000,000 bushels, The bulk of 1t went to the United\nKingdom with a couple of cargoes to Scandinavian\ncountries. During the past week, the total sales of\nCanadian wheat have aggregated about 7,500,000 to\n8,000,000 bushels.\nMar. 1: Argentina 1s beginning to harvest its new corn crop\nand some of the large exporters in Argentina advise\nthat 30 days ago they looked for a crop of at least\n360,000,000 bushels of corn but, with the excellent\nweather in that country during the past 30 days, it\nis quite probable that the crop will be closer to\n400,000,000 bushels, as against a 10-year average of\nabout 320,000,000 bushels.\nRegraded Uclassified\n261\nSecretary Morgenthau - 2\nMar. 2:\nThe export demand was very slow both for American\nand Canadian wheat. It 18 estimated that the United\nKingdom, due to previous purchases, owns about\n50,000,000 bushels or more of Canadian wheat.\nRye closed + cent higher mostly due to the belief\nthat Finland and possibly other Scandinavian coun-\ntries would have to buy some American rye in the\nimmediate future.\nIt was reported that Finland and other Scandinavian\ncountries would be buying lard. With over 157,000,000\npounds in cold storage in Chicago, the largest March 1\nholding on record, the lard market advanced 5 to 10\ncents.\nMar. 4:\nSome buying of corn was on the belief that the exten-\nsion of credits through the Export-Import Bank to\nScandinavian countries, particularly to Norway, might\nresult in purchases of American corn. From the re-\nports we get, Scandinavian and Allied countries seem\nto be in need of feed grains.\nCable advices from Australia indicate they are find-\ning & very poor demand for their wheat and flour from\nChina. Reports indicate that the British Government\nhas apparently paid for about half of the 60,000,000\nbushels of wheat purchased a while back, although\nthey are unable to ship this wheat and it is being\nstacked or stored in all states. The supplies are\nhuge. It 18 interesting to note that almost exactly\nthe same thing occurred during the World War.\nAustralia had a large surplus of wheat and about\n70,000,000 bushels of their surplus deteriorated 80\nthat it became unmillable. Besides that, they lost\nlarge quantities due to deterioration in storage.\n262\nTREASURY DEPARTMENT\nINTER OFFICE COMMUNICATION\nCONFIDENTIAL\nDATE March 11, 1940\nTO\nSecretary Morgenthau\nFROM\nMr. Haas SA.\nSubject:\nThe Business Situation,\nWeek ending March 9, 1940.\nConclusions\n(1) The first upturn in the New York Times index since\nthe end of December has been added to other indications of an\nimproving business undertone, which include such significant\nitems as a recent marked expansion in buying of nonferrous\nmetals, an improvement in industrial material prices, and a\nsharp increase in textile orders.\n(2) The automobile industry continues to turn in excellent\nsales reports. General Motors' retail sales expanded markedly\nat the end of February. Total factory sales of cars and trucks\nin February are estimated at 33 per cent above the 1939 level,\nas compared with & gain of 26 per cent in January.\n(3) In the meantime, the adjusted FRB index of industrial\nproduction continues to decline, and no definite indication of\na coming upturn has yet appeared. The index for January has\nbeen revised downward to 119, which compares with the peak of\n128 in December, and the February index is estimated tentatively\nat 109.\n(4) An improving tendency in sensitive commodity prices\nhas affected prices of an appreciable number of industrial\nmaterials. (Chart 4) The improvement reflects an increase in\nindustrial buying and perhaps some influence of inflationary\nprice tendencies abroad.\nThe general situation\nThe improving business undertone has continued during the\npast week, and has been reflected in a slight upturn in the\nNew York Times index of business activity, the first increase\nsince the end of December. For the week ended March 2, this\nindex rose .6 point to 96.7, largely because of substantial\nRegraded\n263\nSecretary Morgenthau - 2\nimprovement in the indices of ootton mill production and elec-\ntric power production, which offset declines in the indices of\nautomobile, steel, and lumber production. Preliminary data\nfor the following week show slight further declines in the\nautomobile and steel indices.\nWhile an increasing number of indications point toward a\nflattening-out of the business decline, evidence of an impend-\ning upturn is still lacking and must await some influence that\nwill bring a marked increase in new orders for manufactured\ngoods. Our weekly index of new orders for the first week of\nMarch shows some seasonal improvement. (See Chart 1) The com-\nbined index has increased to the highest figure since January,\nowing to a marked upturn in sales of cotton textiles. This\nimprovement in orders may have been a factor in the increase\nin cotton mill activity during the week ended March 2.\nNew orders for steel remain relatively low, though trade\nreports indicate that the recent moderate improvement in new\nbusiness has continued, thereby raising hopes that the reces-\nsion in orders of the past two or three months has been checked.\nThe present level of orders, however, 1s apparently no higher\nthan about 40 per cent of industry capacity, considerably be-\nlow last week's 64.6 per cent operating rate. The announcement\nthis week of unchanged steel prices for second quarter delivery\nwould appear favorable for increased ordering, since any price\nuncertainty involving the possibility of lower prices tends to\nhold back steel buying.\nAmong steel developments during the week has been an in-\ncrease in structural steel awards to the highest total since\nlast October (see Chart 2), and an expansion in steel buying\nby automobile makers, most of it being for quick shipment.\nInquiries have been issued for 21,000 tone of shell steel by\na company in the Pittsburgh district that 1s figuring on a\nBritish shell contract, according to trade reports.\nIncreasing activity in automobile industry\nAutomobile production last week increased further to\n103,560 units, as compared with 100,855 units the previous\nweek. The increase, however, was slightly less than seasonal,\naccording to the New York Times calculations, Last week's\nproduction was 23 per cent higher than the 84,095 units pro-\nduced in the comparable week last year, but retail automobile\nRegraded Uclassified.\n264\nSecretary Morgenthau - 3\nsales are making an even more favorable comparison. General\nMotors' retail salee of passenger cars rose markedly in the\nlast period of February, raising the total for the month to a\nfigure 49 per cent higher than in February 1939.\nFactory sales of care and trucks in this country and\nCanada during January reached a total of 449,314 units, an\nincrease of 25.9 per cent over January 1939, according to\nDepartment of Commerce figures released last week. This is\nthe highest total ever recorded for January, surpassing the\n1929 figure by about 27,000 units. Factory sales in February,\naccording to the Automobile Manufacturers' Association, showed\na further percentage increase to 32.8 per cent over the same\nmonth of 1939.\nA shortage of skilled labor in the automobile industry,\ndue in large part to the unusual demand for such labor by the\naviation and machine tool industries, has reached such propor-\ntions that it may restrict the development program on 1941\nmodele, according to Ward's Reports.\nExtraordinary inducements offered by aviation and machine\ntool makers for skilled labor are said to have seriously de-\npleted the supply in Detroit, notably of tool and die makers,\nwhich 18 likely to handicap automobile makers in retooling\ntheir plants for new models. Added to this, according to Ward's\nReports, \"1s the absolute inability of obtaining tool equipment,\neven at premium prices.\"\nCommodity prices continue firm\nThe general level of commodity prices continues firm,\ndespite the business decline, and the BLS all-commodity index\nshows wholesale prices of goods in general to be in 8. more\ndefensible position in relation to raw material prices than\nthey were shortly after the war began. (Bee Chart 3)\nRecent increases in industrial raw material prices have\nin most cases been associated with an increased volume of buy-\ning. Copper has been B. leader in the movement, with a pro-\nnounced increase in sales in February and a continued high,\nthough somewhat lower level, for the first week of March. The\nrecent heavy buying of lead which helped to bring price in-\ncreases has now slowed down. This is not surprising, if trade\nestimates are correct that March needs have already been about\n90 per cent and April needs about 50 per cent covered.\nRegraded\n265\nSecretary Morgenthau - 4\nThe heavy sales of copper, lead, and zinc during\nFebruary have caused mine operators to revise earlier plans\nfor curtailing production during the spring. Orders on pro-\nducers' books are now probably large enough to justify main-\ntaining operations not far from the high levels of December\nand January.\nDaily and weekly futures prices for a selected group of\nindustrial materials are shown in Chart 4. Zino prices have\nshown the most pronounced rise among nonferrous metals, a\nrise which coincided with a striking increase in sales for the\nweek ending March 2, when total sales of 15,000 tons were re-\nported, as compared with & total of about 13,000 tons in the\nentire previous month. About two-thirds of these sales were\ncompleted before the price advance.\nTin prices have also increased, although, according to\npress reports, the market is still hesitant because of uncer-\ntainty about the value of the pound sterling and about the de-\ntails of a proposed British ordinance designed to limit re-\nexports of tin from the United States.\nSilk prices registered an increase, partly because 1m-\nports in February are reported in the trade to have been\nthe smallest for any month in more than 20 years, and stocks\nat the end of the month were low. Rubber and hide prices also\nadvanced somewhat on increased buying.\n266\nINDICES OF NEW ORDERS\nChart 1\nCombined Index of New Orders and Selected Components\n1938\n1939\n1940\nA\nM\nJ\nJ\nA\n$\no\nN\nD\nJ\nF\nas\nA\nM\nJ\nJ\nA\n$\no\nN\nD\nJ\nF\nM\nPERCENTAGE\nPEACENTAGE\nPOINTS\nPOINTS\n160\n160\n150\n150\n140\n140\n130\n130\n120\n120\nTOTAL (COMBINED INDEX)\n110\n110\n100\nMmmund 1936 100\nW\n100\n90\n90\n80\n80\n70\n70\n60\n60\nTOTAL EXCLUDING STEEL AND TEXTILES\n50\n50\n40\n40\nSTEEL ORDERS\n30\n30\n20\n20\n10\n10\nTEXTILE ORDERS\no\no\nJ\nJ\nD\n4\nF\nM\nA\nM\nJ\nJ\nA\n$\no\nN\nD\nJ\nF\nas\nA\nM\nA\n$\no\nH\n1939\n1940\n1938\nOffice of the Secretary of the Treasury\nI - 85 - B\n- of - and -\nRegraded Uclassified\nSTRUCTURAL STEEL ORDERS\nTONS\nTHOUSANDS\n80\n38\n60\n'39\n40\n20\n40\n0\nJAN.\nMAR.\nMAY\nJULY\nSEPT.\nNOV.\nOffice of the Secretary of the Treasury\nDivision of and Nation\nC-280\nChart 2\n267\nRegraded Uclass\nChart 3\n268\nB.L.S. ALL COMMODITY PRICE INDEX AND INDEX\nOF RAW MATERIALS\n1926 = 100\n1939\n1940\n1932\n1933\n1934\n1935\n1936\n1937\n1938\n1939\n1940\nJULY\nAUG.\nSEPT.\nocT.\nNOV.\nuce.\nJAN.\nFLB.\nMAR,\nPERCENT\nPLACENT\nPERCENT\nTTP\n(ALL COMM.\n(RAW MAT.)\n(ALL COMM.\nPERCENT\nMonthly\nWeekly\n(RAM MAY.)\n91\n94\n91\n94\n88\n89\n88\n89\nRAW MATERIALS\n85\n84\nB5\nB4\n82\n79\n82\n79\nALL COMMODITIES\n79\n74\n79\n74\nALL COMMODITIES\n76\n69\n76\n69\n73\n64\n73\n64\nRAW MATERIALS\n70\n59\n70\n59\n67\n54\n67\n54\n64\n49\n64\n49\n61\n44\n61\n44\n58\n39\n58\n39\n55\n34\n55\n34\n1932\n1933\n1934\n1935\n1936\n1937\n1938\n1939\n1940\nJULY\nAUG.\nSEPT.\nocT.\nNOV.\nDEC.\nJAN.\nFEB.\nMAR.\n1939\n1940\nOffice of the Secretary of the Treasury\nDivision Research sed Statistics\nP 18)\nRegraded Uclassified\nPRICES OF BELECTED INDUSTRIAL NATERIALS\nDaily Putures*\nWeekly Averages (Putures)\n1940\n1939\n1940\nFERMANY\n-\nAPRIL\nJULY\nSEPT.\nÉ\nJAB-\ni\nBAY\nJAY\nSEPT.\n18\nK\n3\n10\n17\n24\n31\n7\n14\n=\n28\n-\nGENTS\nMINTS\nE\nPER\nPER\nFER\nFEE\n-\nPOLICE\nPOUND\nI\nIf\nRubber\n22\nhubber\n19\n10\nR\n20\n19\n16\n17\n17\n14\n16\n14\n14\nis\n15\nBOLLARS\nBILLAR\nPER\nPER\nBOLLARS\n-\ndilk\n-\nBilk\n2\ne\n-\n1.00\n4.00\nFOUND\n2.80\n2.80\n3.30\n3.50\n2.40\n240\n3.00\n3.00\n2,40\n140\n2.50\n2.50\n2,20\n1.30\ncom\nEST\n2\n!\nFORD\nI\nCENTE\nSINTS\nNI\nPER\nRides\n-\nPOINT\nHides\n15\n13\n16\n16\n14\n14.\n14\n14\n13\n=\n12\n12\n12\n=\nCopper\n10\nto\n12\nu\n13\n13\nCopper\n\"\n12\n12\nII\n11\n\"\nto\n2\n10\n10\nP\n,\n9.\n#\n.\n8\n52\nas\n-\n60\nTin\nTia\nse\n55\n48\n-\n30\n50\n44\nas\ne\n45\n8\n8\n40\n-\n7.0\n7.0\nZine\n6.0\n4.0\nL.S\n6.5\nStae\n6-0\n6-0\n5,6\n1.8\n5.5\n3.5\n52\n5.2\n1.0\n5.0\n4.5\n4.5\n4.6\n4.8\n4,0\n4.0\n6.0\n$\n5.5\n6.5\nLoad\nLead\n4.0\n6.0\n5.6\nSult\n5.5\n5.5\n5.2\n5-2\n5.8\n5.0\n4.8\n5\n4.5\n4.5\n40\n4.0\n4.4\nu\nJULY\nSEPT.\nNOV.\n-\nÉ\nBIT\nJULY\nSEPT.\n10\na\n3\n10\n17\n36\n30\n7\n14\n21\n20\n1939\n1940\nFERMARY\nI\nAPRIL\n1940\nSEPT.\nSEX. FUTURES\nMAY\nMM.\nDEC.\n\"my\n2\nFUTVAES\n(sises, JUNE nmal)\nFUTURES\nAM FUTURE)\n269\nOffer of - Secretary the Treasury\n- di - - -\nChart 11.\nRegraded Uclassified\n270\nTREASURY DEPARTMENT\nINTER-OFFICE COMMUNICATION\nDATE March 11, 1940\nTO\nSecretary Morgenthau\nFROM\nMr. Haae JOA\nEmployment under the Work Projects Administration increased\nslightly during the week ended February 28, 1940, to 2,326,000\npersons. This figure compares with 2,319,000 persons employed\nduring the week ended February 21, 1940, and a revised figure\nof 2,266,000 persons at the end of January 1940.\nAttachments\nRegraded Uclassified\n271\nWORK PROJECTS ADMINISTRATION\nNumber of Workers Employed - Monthly\nUnited States\nNumber of Workers\n1937\n(In thousands)\nJuly\n1,569\nAugust\n1,480\nSeptember\n1,451\nOctober\n1,476\nNovember\n1,520\nDecember\n1,629\n1938\nJanuary\n1,901\nFebruary\n2,075\nMarch\n2,395\nApril\n2,582\nMay\n2,678\nJune\n2,767\nJuly\n3,053\nAugust\n3,153\nSeptember\n3,219\nOctober\n3,346\nNovember\n3,319\nDecember\n3,094\n1939\nJanuary\n2,986\nFebruary\n3,043\nMarch\n2,980\nApril\n2,751\nMay\n2,600\nJune\n2,551\nJuly\n2,200\nAugust\n1,842\nSeptember\n1,790\nOctober\n1,901\nNovember\n2,024\nDecember\n2,152\n1940\nJanuary\n2,266\nFebruary\n2,326\nSource: Work Projects Administration.\nMonthly figures are weekly figures for the latest\nweek of the month.\nThey include certified and noncertified workers,\n272\nWORK PROJECTS ADMINISTRATION\nNumber of Workers Employed - Weekly\nUnited States\nWeek Ending\nNumber of Workers\n1939-40\n(In thousands)\nJuly 5\n2,388\nJuly 12\n2,290\nJuly 19\n2,250\nJuly 26\n2,200\nAugust 2\n2,082\nAugust 9\n2,054\nAugust 16\n1,977\nAugust 23\n1,898\nAugust 30\n1,842\nSeptember 6\n1,662\nSeptember 13\n1,696\nSeptember 20\n1,735\nSeptember 27\n1,790\nOctober 4\n1,834\nOctober 11\n1,875\nOctober 18\n1,898\nOctober 25\n1,901\nNovember 1\n1,901\nNovember 8\n1,929\nNovember 15\n1,961\nNovember 22\n1,987\nNovember 29\n2,024\nDecember 6\n2,075\nDecember 13\n2,123\nDecember 20\n2,144\nDecember 27\n2,152\nJanuary 3\n2,160\nJanuary 10\n2,190\nJanuary 17\n2,222\nJanuary 24\n2,244\nJanuary 31\n2,266\nFebruary 7\n2,288\nFebruary 14\n2,306\nFebruary 21\n2,319\nFebruary 28\n2,326\nSource: Work Projects Administration\nRegraded Uclassified\n273\nWORK PROJECT ADMINISTRATION\nNumber of Workers Employed\nUnited States\nMonthly W.P.A. Employment\nWeekly W.P.A. Employment\n1935\n1930\n1937\nREGI\n1939\n1939\n1939\n1940\n#\na\n-\nM\ndi\nI\n.\nJ\nM\n-\nM\nM\nJULY\nSEPT.\nNOV.\nJAN.\ni\nMAY\nJULY\nSEPT.\nNOV.\nJAM.\nMAR,\nMILLIONS\n\"\nJ\n$\n.\nMAR.\nMAY\nWILLIONS\nof\nWILLIONS\nMILLIONS\nor\nWORKERS\nof\nor\nMORKERS\nWORKERS\nWORKERS\n3.5\n3.5\n3.4\n3.2\n3.4\n3.2\n1.3\n3.3\n3.2\n3.2\n2.0\n2.8\n3.1\n3.1\n3.0\n3.0\n2.4\n2.4\n2.9\n2.9\n2.8\n2.8\n2.0\n2.0\n2.7\n2.7\n2.6\n2.6\n2.5\n1.6\n1.6\n2.5\n2.4\n2.4\n2.3\n2.3\n1.2\n1.2\n2.2\n2.2\n2,1\n2.1\n.8\n.8\n2.0\n2.0\n1.9\n1.9\n1\n4\n1.5\n1.8\n1.7\n1.7\na\n1.6\no\n1.6\n$\n-\nN\n=\n.\n-\nJAN.\nMAR.\nis\n-\nSEPT.\nNOV.\nJAR.\nMARK\nMAY\nJULY\nSEPT.\nNOV.\nJAN.\nMAR.\n1935\n1936\n1937\n1938\n1939\n1938\n1939\n1940\nSOURCE WORKS PROGRESS ADMINISTRATION\nOffice of the Secretary of the Truasey\nN\nSide of - - -\nRegraded Uclassified\n274\nMarch 11, 1940\nI called Harry Woodring in connection with\nthe memorandum I received from the President send-\ning me Louis Johnson's memorandum. I spoke to\nWoodring at twenty minutes of five.\nI said, \"Look, Harry, do you know about the\n1,200,000 pounds of powder for the British?\" He\nsaid, \"Yes. Why?\" He said, \"I signed the thing\neither Friday or Saturday. It's all O.K.\" And\nhe said, \"My understanding is if we run short, we\ncan borrow 600,000 pounds from the Navy.\"\nSo then I told him about the note from John-\nson and he wanted to know when it had been written\nand I said I did not know; I had sent it out.\nI said, \"In case there is any trouble, will\nyou stand by me?\" He said, \"Absolutely! It's all\nO.K. I don't know what Louie Johnson is kicking\nabout.\"\nP.S. HM,Jr called Mr. Woodring back a few\nminutes later and told him Johnson's memorandum\nwas dated March 1.\n(p.277)\nRegraded Uclassified\nTHE WHITE HOUSE\nWASHINGTON\n5\nMarch 11, 1940.\nMEMORANDUM FOR\nTHE SECRETARY. CF THE TREASURY\nFOR YOUR INFORMATION AND\nRETURN FOR MY FILES.\nF. D. R.\nTHE WHITE HOUSE\nWASHINGTON\nMarch 9, 1940.\nMEMORANDUM FOR THE PRESIDENT:\nIn connection with the\nattached, Louis Johnson informs me\nthat the Navy has promised, under\ncertain circumstances, to furnish six\nhundred thousand pounds of smokeless\npowder that they have in reserve.\nEnur\n'WAR DEPARTMENT\nwith for\nWASHINGTON\nMarch 1, 1940.\n1.7ml\nD ORANDUM FOR THE PRESIDENT\nSUBJECT: Priority on Supply of Smokeless Powder for the\nBritish Government.\nYour attention is invited to the third paragraph of\nthe attached memòrandum of February 29, 1940, to the Chairman\nof the President's Liaison Comittee.\nPowder is one of the critical items for which the\nstock is below requirements for the Protective Mobilization\nPlan.\nhours John\nActing Secretary of Nar.\n1 Inclosure.\nRegraded Uclassified\nFebruary 29, 1940.\nMEMORANDUM FOR THE CHAIRMAN, PRESIDENT'S LIAISON COMMITTEE.\nSUBJECT: Priority on Supply of Smokeless Powder for the\nBritish Government.\n1. Reference is made to informal request by Secretary\nWorganthau, transmitted by you on February 28, 1940, concerning\npowder making capacity which the War Department might release\nfor the next four months to offset the loss of British capacity\nat Waltham-Abbey.\n2. A study of the problem in the War Department Indi-\ncates that during the months of March, April, May and June, 1940,\ndelivery schedules for cannon powder to the War Department from\ntwo commercial sources and Picatinny Arsenal will total 4,475,000\npounds. Of this quantity, all of the deliveries from one of the\ncommercial sources and from Picatinny Arsenal are required for\nuse on complete round or propelling charge orders for the fiscal\nyear 1940 amminition production program. Of the deliveries from\nthe second commercial source, 300,000 pounds are comsigned to load-\ning orders and 1,800,000 pounds are for war reserve. However, 5.\nrecent concession of 600,000 pounde of the capacity for war reserve\nbulk powder was made to the Government of Finland, leaving a net\navailable capacity for powder In this category of 1,200,000 pounds.\n3. The War Department does not desire to release any of\nthe remaining capacity contracted ---, hut if the Presi-\ndent decides to accommodate the British Government, it 18 believed\nthat the release should be limited to the 1,200,000 pounds being\nmanufactured for the war reserve. The loading program should not\nbe disturbed, since any diversion from the needs of this program\nwould cause a serious disruption of war Department procurement\nunder the current armament approprintions.\nActing Secretary of War-\nCopy for The Presidens.\nOciassii\n279\nMarch 11, 1940.\n11:16 a.m.\nH.M.Jr:\nThis is in answer to your call of Saturday.\nJerome\nFrank:\noh, yes, there were two things I wanted to talk to you\nabout. Will you hold the wire just A minute, do you\nmind?\nH.M.Jr:\nSurely,\nF:\nTheir first one was November 2nd, but the first one was\non the cuestion of the British securities.\nH.Y.Jr:\nYes.\nis\nI'd like to know whether we could get your current\nreports currently on their sales, on the understanding\nthat we were receiving them from you in confidence\nand subject to your orders, that we couldn't give them\nout unless you let 118, In other words we'd like to\nbe, have\nthat we have received them in\nconfidence and can't disclose them.\nH.Y.Jr:\nNov let me ask you something. Could you, would you\nmind outting it in 8 letter?\nE:\nNo, no, certainly.\nH.\".Jr:\nAnd then I'm sure you can have them, I'll say beforehand\nyou can have them, but I -\nE.\nOh we'll out it in writing certainly.\nH.\".Jr:\nIf you could.\nF:\nI'd like to for my protection 26 well 28 yours. Well\nnov the other thing I've forgotten, I'll try to\nremember it later and call you, if I may.\nH.V.Jr:\nWell surely, but you out it in a letter and you went\nthem on a daily or weekly bacis?\nF:\nWell, do you get them daily?\nH.M.Jr:\nWe get them daily.\nE.\nI'd like to get them daily then. Hello, I'll out it\nin 8 letter.\nH.K.Jr:\nYes,\nF:\nThank you very much.\nRegraded Uclassified\n280\nMarch 11, 1940.\n11:27 a.m.\nH.M.Jr:\nHello.\nHarry\nWoodring: Henry?\nH.M.Jr:\nHello Harry.\nW:\nYes. Say they told me this morning you called again\nabout lunch for Wednesday.\nH.M.Jr:\nI was trying to make it a day, I wanted to get hold of\nyou and Edison together.\nW:\nWell now I've got, I had this Tuesday and Wednesday\nlunched planned, Wednesday with Henry Wallace and some\nfriends and I just wanted to call you direct and tell\nyou that any other day, Thursday or Friday is 0. K. with\nme.\nH.M.Jr:\nOh. Well there -\nW:\nI didn't want you to think I was ducking you, you see.\nH.M.Jr:\nWell I - well then if, in view of your call\nW:\nIf what?\nH.M.Jr:\nThere isn't - you couldn't - I mean, would it be\ndifficult for you to shift tomorrow?\nW:\nI just can't do it, Henry.\nH.M.Jr:\nI see.\nW:\nBut I will be available Thursday or Friday.\nH.M.Jr:\nWell then I'll tell you what - if Edison is available\nThursday let's make it Thursday.\nW:\nWell all right, I'll wait until - I'll not make any\nappointments either Thursday or Friday until I hear\nfrom you.\nH.M.Jr:\nI wanted to tell you what I knew was in the minds of\nthe Allies on purchasing of planes.\nW:\nYes, all right.\nH.M.Jr:\nAnd I wanted to get your advice.\nRegraded Uclassified\n281\n- 2 -\nW:\nO.K. I'll be available either Thursday or Friday.\nH.M.Jr:\nWell, I'll have them call Edison.\nW:\nAnd then you can have them call me afterwards.\nH.M.Jr:\nThank you.\nW:\nAll right. Goodbye.\nRegraded Uclassified\n282\nMarch 11, 1940.\n2:40 p.m.\nH.M.Jr:\nArthur\nPurvis:\nGood afternoon, Mr. Secretary.\nH.M.Jr:\nCan you hear me?\nP:\nYes, I can cuite well, thanks.\nH.M.Jr:\nMr. Purvis, a couple of things.\nP:\nYes.\nH.M.Jr:\nWait a minute, I want to find out whether I'm on the\noutside wire. Do you mind just a second, I'm going\nto buzz for the operator.\nP:\nCertainly.\nH.M.Jr:\nHello.\nOperator:\nOperator.\nH.M.Jr:\nMrs. Spangler, am I on the outside wire?\n0:\nYes you are.\nH.M.Jr:\nAll right, thank you.\nP:\nThank you.\nH.M.Jr:\nHello.\nP:\nYes.\nH.M.Jr:\nI got your letter on nickel.\nP:\nYes.\nH.M.Jr:\nAnd I take it from that, that I'm to wait to hear from\nyou further.\nP:\nYes. As I understand it, the thing is this now. What\nI would like to do on that, is to get, sitting down at\n8. table, I was talking with Gwatkin this morning. I\nthought I would get down to the table with Gwatkin and\nRist and make up some sort of 1dea as to what we would\nlike to do and then get them to visit Ottawa, perhaps\nwith me and get hold of Norman Robertson, who is the\nman up there, you see, and come to what looks like\nRegraded Uclassified\n283\n2\nthe sensible sort of thing to do. Personally I\nfeel that the right kind of line to take 18 one based\non military defensive because I think that's the kind\nof line that the particular Government in question\nwould understand better than any other.\nH.M.Jr:\nWell the point I want to make clear the next move 1s\nun to you.\nP:\nYes, that's correct.\nH.M.Jr:\nRight?\nP:\nQuite correct.\nH.M.Jr:\nNow that's number one. Number two, the British and\nFrench Ambassadors respectively brought in Professor Rist\nand Ashton-Gwatkin this morning.\nP:\nOh yes.\nH.M.Jr:\nAnd I told them politely but very firmly that there was\nnothing I had to discuss with them.\nP:\nNo, cuite.\nH.M.Jr:\nThat I was getting along very well with you.\nP:\nYes.\nH.M.Jr:\nAnd that I would much prefer to continue it that way.\nP:\nQuite.\nH.M.Jr:\nAshton-Gwatkin got it immediately and Rist didn't.\nP:\nQuite.\nH.M.Jr:\nAnd he came back and saw Merle Cochran later on, very\nmuch upset and BO forth and so on.\nP:\nYes.\nH.M.Jr:\nAnd why couldn't he see me.\nP:\nQuite.\nH.M.Jr:\nSo Cochran explained, well that's the way the Secretary\nwants it and I think you'd better do it that way.\nRegraded Uclassified\n284\n- 3 -\nP:\nExactly.\nH.M.Jr:\nThen I asked the two Ambassadors to stay behind alone.\nP:\nYes.\nH.M.Jr:\nAnd I repeated to them that I thought what I was trying\nto do on the planes, etc., was a fairly useful nature.\nP:\nExactly.\nH.M.Jr:\nAnd that if I got into this thing with these two\ngentlemen, the first thing you knew, somebody in the\nState Department might say, \"Well, before we give them\nthe release on this engine, how about a little more\ntobacco?\"\nP:\nExactly. It's the very thing that you were pointing\nout to me a week ago.\nH.M.Jr:\nWell, I think Lord Lothian got it, but I don't know\nthat the Frenchman did.\nP:\nWell, I tell you what happened. Gwatkin rang me.\nH.M.Jr:\nYes.\nP:\nAbout twelve I think it was.\nH.M.Jr:\nYes.\nP:\nAnd said that he and Rist would very much like to have\na talk with me on the general background that they had\ncalled upon you and that they would like to have a\ntalk with me, and that he had understood that the\nsituation/to Wes be pursued with me,\nH.M.Jr:\nThat's right.\nP:\nAnd - rather than direct with them. I said, \"Well now,\nthat doesn't represent any change in my opinion over\nwhat we have understood from the beginning.\"\nH.M.Jr:\nThat's right.\nP:\nThe Secretary has a channel that he intends to keep.\nI said, \"As I Bee it, the next move is for you and\nRist and myself to get into a room and go over these\nthings, one by one and see what 18 in the wood, and\nRegraded Uclassified\n285\n- 4 -\nperhaps have some talk with some of the industrial\ncrowds and see what the thing looks like, and then\nif there's anything that recuires to be talked, I\ncould very easily talk it quietly with the Secretary\".\nH.M.Jr:\nThat's right.\nP:\nThat's the idea, isn't it?\nH.M.Jr:\nThat's it quite, and I also sent word to our State\nDepartment, please not to send them over here any more.\nP:\nNo, cuite.\nH.M.Jr:\nBecause it really, it'll get embarrassing to me.\nP:\nYes. And as a matter of fact, one break opposite the -\nit was all right for them to come in and make a call\nupon you, just -\nH.M.Jr:\nOh, definitely.\nP:\nBut it was to be limited to that. I really left them\nwith the understanding that they would just make a call\nand that it would be a formal contact.\nH.M.Jr:\nWell -\nP:\nOf course, possibly their anxiety to get somewhere\nor possibly some idea of some individual somewhere\nthere that they should push ahead may have muddled it\na little.\nH.M.Jr:\nWell, I don't really think that they have anything new.\nP:\nNo.\nH.M.Jr:\nI can't find out that they have anything. They talked\nabout tungsten, so I said \"Well that's up to you\ngentlemen to decide what you're going to do with the\ntungsten in Indo-China\".\nP:\nExactly.\nH.M.Jr:\nAnd I say you keep talking about American brokers in\nHong Kong who ship tungsten over here, and I said,\n\"To the best of my knowledge, they're English brokers,\nthey're not American brokers\".\nRegraded Uclassified\n286\n- 5 -\nP:\nExactly.\nH.M.Jr:\nAnd outside of that I don't think they have anything.\nP:\nNo.\nH.M.Jr:\nAnd 80 I explained it and I'm sure that Lord Lothian\ngot it.\nP:\nYes exactly.\nH.M.Jr:\nAnd I think from now on you'll find that you'll have\nthem on your doorstep.\nP:\nYes. Well P.S. a matter of fact it all helps to clarify.\nDo you know there are so many people who are anxious\nto sort of cut in a little.\nH.M.Jr:\nOh yes.\nP:\nAnd it doesn't do any good because, I think I understand\nthe kind of set up that 1s possible and there's always\na limitation of exactly what 1s possible.\nH.M.Jr:\nWell there's also a limitation to what I can do in these\nmatters.\nP:\nExactly. And if we muddy the tracks, all we do is to\nimpair the possibilities in another direction.\nH.M.Jr:\nImpair my usefulness.\nP:\nMr. Secretary, I saw in the paper, with considerable\npleasure, this morning - I don't know whether it's\ntrue or not, that the P-40 situation had cleared up.\nH.M.Jr:\nWell I don't know anything about that. Very very\nconfidentially, I asked the President to see\nGeneral Arnold and Admiral Towers, Collins and me this\nmorning.\nP:\nYes.\nH.M.Jr:\nAnd he had agreed to see us at eleven.\nP:\nYes.\nH.M.Jr:\nBut due to the President having a cold he postponed it\ntwenty-four hours.\nP:\nUhhuh.\nRegraded Uclassified\n- 6 -\n287\nH.M.Jr:\nAnd at that time we were to take this up.\nP:\nYes.\nH.M.Jr:\nNow they knew this meeting was coming.\nP:\nYes exactly.\nH.M.Jr:\nAnd so possibly Louis Johnson or somebody gave that out.\nP:\nYes.\nH.M.Jr:\nBut I don't know how official that is.\nP:\nNo, no. Well I thought I wouldn't say anything about -\nwe wouldn't treat it in any way as official until we\nheard how it had worked out with you.\nH.M.Jr:\nWell, the fact that the President 1s taking it up 1s\nonly for you.\nP:\nExactly.\nH.M.Jr:\nBut you see, I figured that he could grease the way if\nhe told them first what he wanted rather than having\nthem meet and turn you down.\nP:\nExactly. Yes, then you're always in the position of\nrecapturing lost ground.\nH.M.Jr:\nAnd I was with him Thursday night for a long time.\nP:\nYes.\nH.M.Jr:\nAnd I explained. I had ample opportunity to explain what\nyou wanted.\np:\nYes exactly.\nH.M.Jr:\nI mean to boil it down, I said you wanted 1940 by a\n'41 model.\nP:\nThat's it.\nH.M.Jr:\nAnd he understands. He's going to explain it to these\ngentlemen tomorrow.\nP:\nYes exactly.\nH.M.Jr:\nBut I'm going to ask you not even to tell anybody that\nuntil I -\nRegraded Uclassified\n288\n- 7 -\nP:\nAll right, I'll keep that entirely under my own hat.\nH.M.Jr:\nBut I wouldn't take any stock whether they do or don't\nrelease the P-40.\nP:\nNo. We'll forget that for the time being.\nH.M.Jr:\nAnd then - well that's that and I'll know more after\ntomorrow.\nP:\nYes.\nH.M.Jr:\nAnd what luck did you have in Wilmington?\nP:\nOne of the most - almost one of most disagreeable\noccasions that I've ever had since I came to this very\nhospitable country.\nH.M.Jr:\nOh I'm sorry.\nP:\nBut we did find out where it was.\nH.M.Jr:\nGood.\nP:\nThere were about eight men in the meeting. I had asked\nfor a meeting of 8.8 many who opposed me 8.6 possible.\nH.M.Jr:\nYes.\nP:\nAnd I traced it down to one man, but a very powerful\nman. It was the most surprising thing to me because\nI had known him twenty-five years ago and thought of\nhim as rather a pleasant individual. He was Chairman\nof the Board, Russell Dunham.\nH.M.Jr:\nRussell -\nHrrnks Power Co\nP:\nDunham.\nH.M.Jr:\nDunham.\nP:\nAnd he has his son-in-law in as President.\nH.M.Jr:\nOh!\nP:\nAnd the combination of the two 18 of course pretty bad.\nNow I thought as I went along that afternoon that I saw\ndefinite indications of friendliness on the part - and\nsympathy- on the part of several people there.\nH.M.Jr:\nHuhhuh.\nRegraded Uclassified\n289\n- 8 -\nP:\nAnd of course I did try & major Job of work.\nBloch-Laine was with me and also our lawyer Ballantyne.\nH.M.Jr:\nYes.\ne:\nThe reaction on Ballantyne, when he came out, was that\nhe was ashamed of such a spectacle, and the reaction on\nBloch-Laine was that he was extremely depressed.\n-H.M.Jr:\nWhat did they say, the vernacular, what's he -\n\"P\"\nIn a word what he said was that they were not prepared\nto consent to apply for 2 closing agreement which was\nreally based on & failure to meet the actual situation\nand which was really a subterfuge. The lawyer\nresponded - Ballantyne responded cuite definitely on\nthat by saving, \"But, Mr. Dunham you cannot take that\nposition because everybody has known the full facts, the\ncontract 18 being placed on the table and every word\nof it will be known to the Treasury in detail before\nit starts\". He said, \"I still say that we will not\",\nand he pounded the desk, \"put ourselves in the position\nof asking for an agreement which does not recite the\nfacts\". He said, \"This is not a loan, it's en advance.\"\nAnd Mr. Ballantyne said, \"Well supposing we called it\nan advance\". Well then he rushed off in another\ntantrum and we got the impression of real recalcitrance\nand of a very closed mind. There was absolutely a\nclosed mind there, we couldn't do anything with him.\nH.M.Jr:\nWell is it that he's anti-Roosevelt Administration?\nP:\nI couldn't - I came away puzzling very much, and I\ndecided that number one, that I must be very much in\na Republican stronghold which might be quite natural,\nbecause I know Wilmington has been somewhat that way.\nNumber two, that there might be some connection with\nthe thing that we talked about before, and that\nperhaps he had some intimate friend in the Armyend,\nwho had said, \"Now look here, if you hold firm you'll\nget the thing the way we want it\". Now that might\nbe however, that's one of those things that 18 80\npurely surmise that I have no right to say that,\nbut it just - he was 80 opinionated and 80 strong in\nthe expression of his views that one couldn't help\nfeeling there was something peculiar back of it.\nH.M.Jr:\nI'm just . - his name 18 Burnam?\nP:\nDunham. D-u-n-h-a-m,\nRegraded Uclassified\n290\n- 9 -\nH.M.Jr:\nDunham.\nP:\nRussell Dunham. He's Chairman of the Board. And as I\nBay he has his son-in-law Hirgins -\nH.V.Jr:\nRussell Dunham, and his son-in-law is - ?\nё:\nHiggins, H-1-g-g-1-n-s.\nH.M.Jr:\nHiggins.\nF\nis\nAnd it was really/perfectly amazing exhibition because\nas we said to them, I made this noint very clearly,\nI said, \"My. Dunham\", I said, \"I'm speaking after all\non behalf of two allied countries here. Here we have\nhad every assistance that we feel we are entitled to\nask in, from the Administration in enabling us to avoid\npaying taxes which they feel we should not Day to their\nGovernment. They have helped us arrive at E. modus vivendi.\nYou seem to have differences of view as to whether that\nis the correct one or not. Surely 10 they are brenared\nto -ive you e closing agreement, which I believe they\nprobably are prepared to do on the basis of 8 contract\nmade before them, surely you are not coing to insist\nthat we, as Allies, Day a Bum which they do not want\nto receive and which they do not think 18 necessary\nfor them to receive\". And we micht just A8 well have\nbeen talking to EL brick wall.\nH.M.Jr:\nIsn't that amazing?\nP:\nAnd a very interesting thing to Mr. Ballantyne, our\nlawyer, WAS this, Mr. Ballantyne, after all, had been\nvery largely dealing, not entirely, but very largely,\nwith their lawyer Graves.\nYes.\n6:\nHe did not have his lawyer in the meeting.\nP.M.Jp:\nYes,\nP:\nTherefore Ballantyne was unable to say to him, to ask\nhim the kind of question and I think the answer was\nthat Graves felt it was all right.\nH.V.Jr:\nI see,\nP:\nAnd that - and frankly, four minutes after we started,\nafter I hed made my opening\nRegraded Uclassified\n- 10 -\n291\nH.M.Jr:\nYes.\np.\nHe simply banged the door and he stayed there with it\nbanged all the rest of the afternoon. Now I really did\nevery single thing I could there, and what I've really\ncome to the conclusion 18 this, that I believe that\nthis thing would still be very valuable to us with\nother people. I think in this particular case we\nshould simply sa, \"Well, something has been chieved,\nwe got rid of an indeterminate non-known liability,\nthey are now - the strategy that has been pursued\non this thing and the help that you have given us\nhave enabled us at least to reduce it to a known\nfigure. It makes a difference of six cents a pound\non the price of the powder. All right we'd better\nraise the price of the nowder by that six cents a\npound, they agree to take any further tax increases\nthat may take place and therefore we are freed from\nthat terrible unknown liability and the pyramiding\neffect that I spoke to you about.\"\nH.M.Jr:\nYes.\nP:\nAnd that we'd better swallow hard now and take the\npowder.\nH.M.Jr:\nI see.\nP:\nNow I think that's what we should do on this particular\nthing because 1f we out it on the price of the\npowder we can avoid the precedence with some other\nmanufacturer.\nH.M.Jr:\nI see.\ne:\nBut when it comes to the actual payment it's really\na scandalous sort of thing because - and of course\nwhat would interest me P. great deal is this, I don't\nknow whether they expect to avoid paying that to\nthe tax - to the Treasury or not, because if they do\nthey would lay themselves open to a much more serious\ncharge of deliberately taking six cents a pound.\nNow I can't believe that there's that kind of thing\ngoing on. I think it's some, it's a genuine wrong\nheadedness, an opinionated man deciding that what\nhe has he's going to hold, and he - you know, the\natmosphere was, well it enabled me to understand,\nMr. Secretary, 8. great many things that have happened\nin this country that I haven't understood before.\nF.M.Jr:\nI see.\nRegraded Uclassified\n292\n- 11 -\nP:\n(laughs)\nH.M.Jr:\nTell me what was Higgins first name?\nP:\nI - I - I could let you - I don't know that offhand,\nI haven't it in front of me. He was not at the\nmeeting, he had gone down to Florida for a holiday.\nH.M.Jr:\nWell I can get it.\nP:\nI could get that - give it to you very easily.\nH.M.Jr:\nNo, but he wasn't there?\nP:\nPardon?\nH.M.Jr:\nHe wasn't present.\nP:\nNo he apparently had rushed off the night before.\nH.M.Jr:\nI see.\nP:\nAnd left his father-in-law in charge.\nH.M.Jr:\nI see.\nP:\nBut it was quite obvious you see, that really I\nbelieve, we all felt, the three of us, as we came\nout, that the sympathy of the majority there, that\nwe had obtained it and that we had weakened them\nvery much, but that they were absolutely up against\na man who was banging the desk and he kept on\ntelling us that they were unanimous in their\ndecision that they wouldn't do this.\nH.M.Jr:\nI see.\nP:\nAnd after he had said it about six times I began to\nwonder what kind of unanimity it was.\nH.M.Jr:\nI see,\nP:\nIt seemed to be the unanimity of one man, but as I\nsay his whole case is based on the theory that in\ncalling it a loan it does not accord with the fact\nbecause it isn't a loan it's something that we're\nadvancing. We pointed out to him that in one sense\nof the word it 18 a loan because if you were to say\nthat at the end of the time you would like to keep that\nfactory in complete being because you'd found another\na\nRegraded Uclassified\n293\n- 12 -\ncustomer to whom you could usefully employ it, you\nwould be very happy to put a figure upon it which\nwould be very much higher than it's scrap value.\nAnd that therefore we would not have to pay you\nunder the contract as much as we would otherwise\nand therefore it does justify the use of the word\n\"loan\".\nH.M.Jr:\nYes.\nP:\nBut well, all I can say 18 we just won't be a party\nto it one way, shape or form. We'll have nothing to\ndo with it.\nH.M.Jr:\nWell, that's too bad.\nP:\nIt's a peculiar thing.\nH.M.Jr:\nThat's right. All right.\nP:\nThank you. Anyway I did make it perfectly clear to\nhim at the end, that we had a great deal of\nappreciation for the consideration we had received\nfrom at least one party in this transaction, that\nwas the Treasury attitude.\nH.M.Jr:\nWell, that's something.\nP:\nWell I just thought, you see he was & little inclined,\nI wasn't going to have it left on the record that\nanybody had fallen down except Hercules.\nH.M.Jr:\nGood. Well here's hoping that you have a good time\nwith Mr. Ashton-Gwatkin and Professor Rist.\nP:\nThank you very much. (laughs)\nH.M.Jr:\nYou can add them to your staff.\nP:\nThank you very much indeed.\nH.M.Jr:\nAll right.\nP:\nGoodbye.\nH.M.Jr:\nGoodbye.\nRegraded Uclassified\n294\nOFFICE OF\nTHE SECRETARY OF THE TREASURY\n12 mouch 40.\nZince the netrober -\nmetter, I talken moth\nmr. Beer, Pressurs Beel\nstar confumed\ntalement made y m. Mordson\nAP\n295\nTREASURY DEPARTMENT\nPROCUREMENT DIVISION\nOFFICE OF THE DIRECTOR\nWASHINGTON\nMarch 12, 1940\nMEMORANDUM FOR THE SECRETARY\nIn compliance with instructions, I talked by phone with Mr. Phil Johnson,\nPresident of Boeing Aircraft; Mr. Woodson, Vice President of Bell Aircraft;\nand Mr. C. B. Squire, Vice President of Lockheed Company.\nMr. Johnson of Boeing stated that they have had no foreign orders. Therefore,\nthere could be no increase in price or delays in deliveries due to this cause.\nHe further stated that there has been no increase in prices to the Army and\nthat their schedule of deliveries is on time.\nMr. Woodson, Vice President of Bell Aircraft, stated that they have had no\nforeign orders. Therefore, foreign business could not affect their prices\nor deliveries. He further stated that they have two contracts, one for\n13 twin-engine 5-place fighters, and one for 93 P-39s. On the order for\n5-place fighters, which he said is more or less of an experimental type,\nthere has been a delay in the crystallization of final plans. On the P-39s,\nhowever, he said that, while delivery does not start until July, their produc-\ntion is on schedule.\nMr. Squire, Vice President of Lockheed, stated that their foreign business\nhas definitely not increased costs to the Government and has definitely not\ncaused any delay in their delivery schedules of military planes. He said\nfurther that the foreign orders have enabled them to perfect three models\nin three different sizes and ha#@given them a reserve backlog, the effect\nof which should be rather to move forward the dates of deliveries on military\norders by virtue of an increase and improvement in their production facilities.\nChairman, Committee\nPresident's Defreem Liaison\nRegraded Uclassified\n296\nTREASURY DEPARTMENT\n700\nINTER-OFFICE COMMUNICATION\nDATE March 12, 1940\nTO\nSecretary Morgenthau\nFROM\nMr. White\nThe memorandum which you requested on the character\nof the Finnish political system 1s attached. It has been\nprepared mainly by D. N. Wheeler. The leading points may\nbe summarized as follows:\n1. The traditions of democracy are deeply rooted in\nFinland. The struggle against the Tearist regime in\nFinland before the World War took the form of a fight for\ndemocratic rights and national self-determination for the\nFinnish people. The small farmers and workers who took &\nleading part in that fight have remained staunch defenders\nof democracy to this day. The leading party in Finland\ntoday, the Social Democrats, represented in the government\nby Tanner and several other Ministers, place at the head\nof their program the demand for the extension of democracy.\nThe powerful cooperative movement in Finland represents &\nventure in economic democracy which has been admired around\nthe world.\n2. Powerful authoritarian forces have persisted in\nFinland. Although Finland became & Republic in 1918, this\nwas an accidental result of the collapse of the German\nEmpire. The founders of the Republic had originally in-\ntended to make Finland a German Kingdom. Both General\nMannerheim and Regent Svinhufvud were Monarchist in their\npolitical views. A considerable part of the very influen-\ntial Lutheran clergy has favored an authoritarian form of\ngovernment. Dictatorial methods of government have also\nbeen supported at times especially under the impact of eco-\nnomic depression by the leaders of the timber trade, by\nhigh army officers, and by the banks.\n3. The bitter political conflicts of the civil war\nperiod have never completely died down under the Republic.\nFear of the U.S.S.R. has been a major factor in Finnish\npolitics since 1918. Under all these circumstances, demo-\ncratic civil liberties have not been secure. Measures aimed\nat restricting Communist activities have on occasion been\nextended to include progressive groups of all kinds. Thus\nin 1930 the Finnish trades unions were dissolved on the\nalleged grounds that they were Communist-controlled. But\nsince 1936 there has been 8. resurgence of democracy in\nFinland.\nRegraded Uclassified\nTREASURY DEPARTMENT\n297\nINTER-OFFICE COMMUNICATION\nDATE March 12, 1940\nTO\nMr. White\nFROM\nMr. Wheeler\nSubject:\nThe Politics of Finland\nThe Finnish Republic is not yet 22 years old. Yet those 22 years\nhave brought every crisis which can confront a state - industrial de-\npression, insurrection, foreign conflicts, and minorities quarrels.\nHow have Finnish democratic institutions withstood the strain of the\nbitter conflicts which have developed over these questions?\nThe traditions of democracy are deeply rooted among the Finnish\npeople. The struggle of the Finns against the Tsarist regime in the\nearly part of this century was fought chiefly for the extension of the\ndemocratic rights of the Finnish people. The Finnish labor movement\nplayed an important role in this struggle. In their cwn social and\neconomic life the Finns have built 02 a cooperative movement which has\nbeen the envy of cooperators throughout the world.\nThese cooperatives, which have played such a vital part in the\neconomic and social life of all the Northern countries, represent an\nextension of the democratic ideal to economic life. The Cooperatives,\naside from their immediate objectives of providing better and cheaper\ngoods to the poorest sections of the community, have had the larger aim\nof extending the spirit of cooperative endeavor in all spheres of public\nlife. Thus the Cooperators hope to solve the economic and social problems\nof the country through voluntary cooperative effort, without abridgment\nof individual liberties and without the tragic waste and bitterness\nof class struggle.\nMost of the population of Finland is engaged in the forest industries\nand in agriculture. Small farms and small businesses are the rule; only\nin the woodpulp and lumbering industries are there great industrial\nconcerns. Finland is therefore a land of small proprietors, and this\nfact is clearly reflected in the tone of Finnish politics. Even the\nSocial Democratic party, which is nominally & collectivist party, is in\nreality strongly individualist, in accord with the small proprietor\noutlook of its leaders.\nLiberal democracy in Finland is the political expression of the\ncooperative and the individualist trends in Finnish social life. Public\nopinion in Finland is lively and well informed. The Finns read an\nRegraded Uclassified\n298\nDivision of Monetary\n2\nResearch\nimmense volume of political literature of all kinds; most of the people\ntake an active part in the political life of the country through member-\nship in the political parties or in other groups. The policies of the\ngovernment are subject to constant scrutiny and criticism.\nThe Finnish Constitution guarantees to the people the right to\nreligious freedom, freedom of the press and of speech, and protection\nagainst illegal arrest or search. The people's Deputies to the Diet\nare immune to penalties for their political beliefs. Like the American\nConstitution, the Finnish Constitution provides that in part the de-\nfense of civil liberties rests with the Courts. The ordinary guarantee\nof these constitutional rights, however, rests with the Diet, which as\nthe democratically elected representative chamber has supreme power in\nFinland.\nIn general, the liberal guarantees in the Finnish Constitution\nhave been carefully observed. However, in some respects the civil\nliberties of minority groups have been seriously invaded. This is\nespecially true of the Communists. Since 1918, the Communist party\nhas been proscribed in Finland. The Communists evaded this restriction\nby organizing and working under another name - the Finnish Labor Party.\nUnder this name they were able to attract a considerable amount of support;\nin 1922 they elected 27 Deputies to a Dist of 200. The Finnish Government\nwas worried by the strength of the Communists, and consequently dissolved\nthe new party in its turn. The Communists were forced to reorganize under\nstill another name. In 1930, they held 23 seats in the Diet at the time\nof the rise of the Lapuan movement which aimed at forcing a fascist form\nof government on Finland. Under the pressure of the Lapuans, the Communist\ndeputies were arrested and imprisoned, their party and their press sup-\npressed. During the years from 1930 to 1932, the structure of civil\nliberties in Finland was largely destroyed. Kidnapping and beating of\nthe leaders of the liberal and radical parties was common. All forms of\nradical political activities were rigorously suppressed.\n1932, the political tension relaxed somewhat, and minority\ngroups were allowed more freedom. However, the prohibition against\nthe Communists remained, although it was no longer rigorously enforced.\nBy 1936, Finland had returned in large part to the liberal traditions\nof the late 1920's. Yet even in 1936 the shadow of social conflict lay\nover the liberal institutions of Finland. A significant example of\nthe frailty of the system of civil rights in Finland is contained in\na letter appearing in the English liberal weekly, The New Statesman,\nfor January 6, 1940, over the signature \"Barrister\". It appears that\nThe New Statesman had published an account of the ill-usage to which\nthe Finnish Communist, Antekainen, had been subject. This account was\nreprinted in a Finnish journal, Tuleskantaya, as a result of which the\nRegraded Uclassified.\n299\nDivision of Monetary\nResearch\neditor, Brid Wala was sentenced to four months in prison. After the\nelections of 1936, Wale appealed to the Appeal Court at Abo. He hoped\nthat, rith the return to a more democratic atmosphere in Finland his\nsentence might be reversed. But, on the contrary, his sentence was\nincreased to eight months.\nAnother examplo of the persistence of the conflicts of the civil\nwar period appears in the structure of the Finnish armed forces. The\nregular Finnish army is very small in peace time, less than 30,000 men.\nIn principle the obligation to erve in the regular army is universal.\nActually, the Civic Guard, with about 100,000 men has in many ways been\nmore important than the regular army. The Civic Guard (also known as\nthe White Guard, the Protective Corps, and otherwise) is the successor\nof the privately-organized White Guards of the 1917-1920 period. Its\ndirect historical affinity is with the various Freikorps organizations\nof Germany and Austria, who were everywhere the central nuclei of the\npost-war fascist parties. Although under the Republic the Civic Guard\nhas become a semi-public body, it has never entirely lost its political\ncharacter. Thus it does not accept men whose political antecedents\nsuggest socialist sympathies. The Social Democrats, for their part,\nhave been extremely suspicious of the Civic Guard. The Civic Guard was\ndeeply involved in the abortive insurrection of 1930. The Social\nDemocrats have forbidden their members to join it. James Aldridge,\nwriting in the New York Times for March 12, remarks that only a few\nweeks ago Vaino Tanner, the leader of the Social Democrats, \"swallowed\na bitter pill\" in allowing members of his party to join the Civic Guard.\nThe Social Democrats and other liberals have often complained that the\nCivic Guard was intended to be used against the labor movement.\nThe special position and influence of the Swedo-Finns has been a\ncause of disputes and ill-feeling in Finland. The Swedish colonists who\ncame to Finland during the long period when Finland was subject to\nSweden established themselves in a dominant position in Finnish affairs.\nSwedo-Finns controlled a large part of the wealth of the country; they\nestablished a quasi-monopoly of political offices, and they occupied\nthe leading positions in cultural life and in education. After Finland\nbecame independent, Finnish nationalists demanded that Swedish influence\nshould be curbed. The quarrel centered on the education question; the\nFinns demanded that educational expenditures should be strictly in\nproportion to the numbers of the Swedish- and Finnish-speaking population.\nThis would have been a severe blow to the Swedo-Pinns, who held a pre-\ndominant place in secondary education. A compromise was finally arrived\nat, which left the Swedes part of their advantage; although they represent\nonly 10 percent of the population, 20 percent of the secondary school\nexpenditures go to their schools. The quarrel has died down in recent\nyears, although some of the Finns are still dissatisfied.\nRegraded Uclassified\n300\nDivision of Monetary\nResearch\nGeography and Independence\nGeography has not favored the development of a strong and in-\ndependent Finnish nation.\nFinland has never had either the man power or the economic\nresources to support a successful national struggle against the\nexpansionist aims of her neighbors. Nor has her geographic position\nafforded her any sure protection; she has been repeatedly overrun\nby the armies of Sweden, Russia and Germany. Frequently political\nquarrels in Finland have opened the door to foreign domination. As\na result of these severe handicaps, the Finns throughout most of\ntheir long history have been a subject people.\nThe first Swedish crusade against the Finnish tribes was or-\nganized in 1154. By the end of the thirteenth century Sweden had\nconquered all of Finland and had driven the Russians behind the line\nof the Neva. Swedish colonists established themselves in a dominant\nposition in the social, cultural, and political life of the country.\nThe whole history of Finland before 1815 is, in large part, the\nhistory of the struggle between Sweden and Russia for mastery of the\nBaltic. With Sweden's decline in the eighteenth century her grip on Finland\nweakened, and Russia under Alexander conquered the country in 1809.\nFrom that time until 1917, Finland was an autonomous Grand Duchy under\nthe Russian Tsar. Finland had her own Diet, her own financial and\njudicial administration, and a Governor-General representing the\nTsar as Grand Duke.\nWith the collapse of the Russian Empire in 1917, Finland became\na German puppet state. Only as a result of the successive defeat\nand collapse of the Russian and the German Empires did Finland become\nindependent.\nRevolution and Intervention\nIn February 1917 the first Russian revolution broke out. The\nTsar was deposed, and a Provisional Government under the liberal\nPrince Lvov was formed. The Provisional Government acted at once to\nremedy some of the immediate grievances of the Finns. The Finnish\nDiet which the Tsar had refused to call was summoned; the liberal\nStahkovitch was appointed Governor-General to replace the hated Seyn;\nand many political prisoners were released and recalled from exile.\nBut on the fundamental question of Finland's relation to Russia\nthe Ivov government never adopted a clear position, nor did the\nsucceeding government of Kerensky. In July the Finnish Diet in which\nthe Social Democrats were a majority passed a Bill which claimed for\nRegraded Uclassified\n301\nDivision of Monetary\n5\nResearch\nFinland complete independence except in military and foreign affairs.\nTo this resolution the Kerensky government eventually sent a reply\nrepudiating the right of the Diet to decide the matter without the\nconsent of Russia. Stahkovitch dissolved the Diet and announced\nnew elections in which the public could decide on the July Bill.\nMeanwhile the storm of Social revolution was gathering in\nRussia and Finland alike. The Finnish conservatives formed a\nWhite Guard which they equipped with arms from abroad. The Social\nDemocrats organized a Red Guard armed by the sympathetic Russian\ngarrisons.\nIn the new elections the Social Democrats lost their majority;\ninstead of 103 members out of 200, they now had but 92.\nWhen the new Diet met the October revolution had brought the\nBolsheviks into power in St. Petersburg. The new middle-class\nmajority of the Finnish Diet was therefore particularly anxious to\nsever all connection with Russia. On November 15, they declared that\nsupreme power belonged to them by virtue of the feudal constitution\nof 1772. As the Bolsheviks in St. Petersburg did not oppose this\nmove, the Diet proceeded (on December 6, 1917) to proclaim Finland\nan independent state. The Bolshevik regime for a variety of reasons\ndid not oppose Finnish secession. Soviet Russia was the first state\nto recognize Finland; recognition by Sweden, France, Germany and\nother states followed.\nOn the night of Sunday, January 28, 1918, the Finnish Reds\ncarried out & coup d'etat. The Red Guards took over authority in\nHelsinki and in all the \"larger Finnish towns. Only in Northern\nFinland were the White Guards able to suppress the Red insurrection.\nThe Reds issued a provisional constitution along liberal parliamentary\nlines, and hastily set about building 2 Red Army at Helsinki.\nMeanwhile the Conservatives were rallying their forces at\nVaasa, on the Gulf of Bothnia. General Mannerheim, a former Tsarist\nofficer, was entrusted with the task of organizing the White Guard\nfor action against the Reds. The Vaasa Committee appealed to Sweden\nand to Germany for help. A number of Swedish officers volunteered with\nthe White Guard; many Tsarist officers, refugees from the Bolshevik\nrevolution, also joined the conservative forces. But the decisive\nhelp came from another source. Svinhufvud, the conservative leader,\nhad escaped from Helsinki to Germany on the outbreak of the insurrec-\ntion. There he had come to a close understanding with the German\nGovernment; Count von der Golts was appointed to head a German expe=\ndition to Finland.\nRegraded Uclassified\n302\nDivision of Monetary\n- 6 -\nResearch\nOn March 20, Mannerheim was ready to begin his campaign against\nTampere, the northern stronghold of the Reds. But the promised\nGerman aid had been delayed. Mannerheim telegraphed via Stockholm\nto Berlin: \"I consider it an urgent duty to hasten the arrival of\nthe German expedition. Delay fatal\". As there was no satisfactory\nreply, Mannerheim had to undertake the attack on Tampere without\nhelp. However, von der Golts's expedition finally arrived in time\ntc turn the tide. The Germans, landing at Hango, took the Reds\nfrom the rear, and Mannerheim was soon able to take Tampere.\nThe Germans captured Halsinki on April 12. The Reds were in\nfull retreat towards the Russian frontier, but their retreat was\ncut off by another German detachment at Lahti. After that the Red\nforces soon collapsed. On way 16, General Mannerhein entered\nHelsinki in triumph. According to Finnish government figures,\nfifteen thousand Reds were shot for their part in the insurrection;\n80,000 supporters of the Red regime were imprisoned in concentration\ncamps, where about 10,000 of them died of hunger or disease. The\nReds are estimated to have executed upwards of a thousand men during\ntheir months in power. Thus ended the war which is known officially\nin Finland as the War of Independence.\nNevertheless, German troops were in occupation of Helsinki, and\nthey had been sent to Finland, not to make Finland independent, but\nto make her one of 2 band of puppet Cerman States, stretching from\nthe Arctic Ocean to the Caspian Sea, which the German government hoped\nto create out of the fragments of the Russian Empire. Accordingly,\nin May the Finnish Diet was called, or more precisely, 109 of its\n200 members were called, for the Social Democrats were not allowed\nto take their seats. This rump Parliament elected Svinhufvud as\nRegent, and Svinhufvud asked Kaiser Milhelm II to put forward one\nof his sons as King of Finland. The Haiser refused the crown for\nhis sons, but allowed his brother-in-law, Prince Friedrich Karl to\nbe elected. Prince Karl spent an arduous summer learning Finnish;\nbut as the summer wore on he realized that Imperial Germany was on\nthe verge of collapse. The fall of the German Empire meant the end\nof German ambitions in the East. Thus the official War of Independence\nended with Finland a German vassal state. Finnish independence in\nactual fact came about as accidental result of the Allied victory\nover the Central Powers.\nThe Struggle Against Bolshevism\nThe coming of the Armistice failed to bring quiet to Finland's\nstormy foreign and domestic politics. The bitter struggles of the\ncivil war period were continued in a different form. With the\nRegraded Uclassified\n303\nDivision of Monetary\nResearch\ncollapse of German power, Svinhufvud was forced to resign as Regent.\nHis place was taken by Baron Mannerheim; for, although up until\nMay 1918 Mannerheim was regarded by the Allies (and particularly by\nLansing) as a tool of the Germans, he had succeeded in freeing\nhimself from this association and placing himself at the head of\nthe groups favoring close cooperation with the Allies.\nThe conservative parties were all agreed that the very existence\nof the Bolshevik regime in St. Petersburg constituted the greatest\nthreat to Finland's independence and indeed to all the things they\nheld dear. Therefore they were extremely anxious to obtain assurances\nfrom the Western powers of support against the Bolsheviks if it should\nprove necessary. And General Mannerheim's Government was ready to\ncooperate in any feasible plan for restoring the authority of the\nconservatives in St. Petersburg. The British government was also\nanxious to replace the Bolshevik regime with one more in line with\nRussian traditions, but serious difficulties arose between General\nMannerheim and the Allied governments, as a result of which full\ncooperation against the Bolsheviks was not achieved.\nWhen at the end of May 1919 the British 237th Brigade (of the\nexpeditionary force under Major-General Maynard's command) reached\nLake Onega, Mannerheim offered cooperation in return for Petrozavodsk,\non the Murmansk Railway. General Maynard refused Mannerheim's assistance,\nprobably because Mannerheim's ambitions conflicted with the aims of\nother Russian groups with whom the British were cooperating.\nA Finnish volunteer force nevertheless assaulted the town, but it\nwas driven back by the Red forces. Again, at the close of the year\n1919 when the White General Yudenich marched on Petrograd, Mannerheim\nsounded the Allies on Finnish intervention. Nothing came of his pro-\nposals.\nFinally at the end of May 1920 the Finnish Minister in Washington\nappealed to the American government for the aid of American warships\nin the Gulf of Finland to act against the Bolsheviks. The Finnish\ngovernment stated that if aid were not forthcoming, it might be nec-\nessary to conclude peace with the Bolsheviks. The American government\nthrough Hugh Gibson firmly declined to supply any warships for such\na venture. The Finnish government, therefore, gave up its hopes of\ngaining Karelia and other territory from the Bolsheviks. In October\n1920 the Treaty of Dorpat put an end to hostilities between Finland\nand the Soviets.\nRegraded Uclassified\n304\nDivision of Monetary\n8\nResearch\nThe Formation of the Constitution\nThe new Finnish Republic adopted a constitution which embodies\nprinciples drawn from the German, English and American political systems.\nA single Diet of 200 members has the supreme legislative power. The\nPresident is chosen by an electoral college, which unlike the American\nelectoral college exercises considerable discretion. The President of\nFinland is powerful; the control of foreign policy and of the armed\nforces is in his hands, and he has the right of issuing administrative\nedicts provided that these do not contravene existing laws. He appoints\nthe Cabinet members, not necessarily from the Diet, and he is not bound\nto take their advice. Finally, he has an effective suspensive veto.\nOn the other hand, the President's decisions must be countersigned by\nthe minister concerned, and his acts are furthermore subject to\njudicial review. The Finnish system is thus based in part on the\nAmerican idea of checks and balances.\nThe balance of political forces in Finland after the defeat of the\nReds made it inevitable that some form of moderate coalition would as-\nsume power, depending on the votes either of the Swedish conservatives\nor of the moderate socialists. The Social Democrats had expelled their\ncommunistic left wing; the Agrarian and Progressive parties had forced\nthrough a partial amnesty for imprisoned Red adherents.\nThe first great political problem which confronted the Republic\nwas the land question. Throughout central and eastern Europe, the\npeasant demand for land redistribution had become the paramount polit-\nical issue, and Finland was no exception. The Finnish Agrarian party,\nthe Social Democrats, and the Progressives agreed that in one way or\nanother land must be made available to the poverty-stricken peasantry.\nAt the same time, the Finnish government could not adopt a program of\ndrastic expropriation. The Kallio agrarian law therefore represented\na compromise; the peasants and rural workers themselves were obliged to\nbear part of the burden of redistribution, the State bore a share, and\nthe great landlords a share. While the Kellio law did not please all\npolitical groups, it did result in great extension of land holding among\nthe peasants and rural workers. Landholding is still far from universal;\nin 1930, 32 percent of the rural population were landless laborers.\nSeventy-six percent of the holdings are less than 25 acres (cultivated),\nwhile on the other hand there are 827 estates of 250 acres or more of\ncultivated land. Nevertheless, landholding in Finland has become more\nwidely dispersed than in France, the traditional country of small hold-\nings, and compared with the situation in Italy, Hungary, Poland, or\nSpain, Finland is indeed a land of democratic land ownership.\nRegraded Uclassified\n305\n- 9 -\nDivision of Monetary\nResearch\nFinland made rapid economic and political progress during the post-\nwar decade. Democratic political organizations and cooperative societies\ndrew into active public life great numbers of the Finnish people. The\ngreat political problems of the day were the subject of lively discus-\nsion and controvery which was carried on freely in the press and on the\nplatform alike. The only exceptions to a general regime of free dis-\ncussion and free political activity were the measures taken against the\nCommunists.\nWith the continued prosperity of the late 1920's, the social conflict\nin Finland died down and the occasion for repressive measures against\nextremist minorities disappeared. The Communists remained subject to\nthe legal ban, but in actual practice they were allowed to organize and\nagitate without much interference. By 1929, the regime of political\nliberty appeared to be as firmly established in Finland as in any country\nin Europe. But in fact Finland was about to enter another period of\nbitter political strife complete with violence and suppression of normal\npolitical rights.\nEconomic Depression and Political Reaction\nBy 1930, Finland was feeling the full effects of the great depression.\nAs & producer of building material, Finland suffered severely from the\ncollapse of building activity in Britain, her principal market. Unrest\nwas widespread in Finland. In November 1929, a group of farmers broke\nup a meeting of the Young Communist League in Lapua. This riot inflamed\npublic opinion throughout Finland, and Lapua became the center of &\ngrowing enti-Communist movement which reflected the suffering and dis-\ncontent of the farmers and middle-class people of \"inland. The Lapua\nmovement, led by Kosala, advanced a vaguely Fascist program; the Communists\nwere to be exterminated, the Social Democrats suppressed, the party\nsystem abolished, and the powers of the Diet handed over to a powerful\nexecutive. The Lapua movement found powerful support for its organiza-\ntion. The leaders of the timber trade, well-to-do farmers, the Lutheran\nclergy, the banks, high army officers, and the Neutral Cooperatives all\nlent their support, because they saw in the Lapua movement a political\norganization which promised to destroy once and for all the threat of\nCommunism in Finland.\nWith such powerful backing, the Lapua group did not hesitate to re-\nsort to direct action against the Communists and indeed against the\norganizations of the Left in general. Socialist printing presses were\nsmashed, Communists were kidnapped and beaten, and on July 5, 1930, two\nCommunists members of the Diet were kidnapped from a meeting of &\nStanding Committee in Helsinki and taken to Lapua for punishment. The\npolice were unable or unwilling to take any action against the Lapuans.\nRegraded Uclassified\n306\n- 20 -\nDivision of Monetary\nResearch\nUnder the pressure of the Lapuans, Prime Minister Kallio resigned his\noffice after having ordered the suppression of the Communist press. His\nplace was taken by Svinhufvud, who had been in retirement since 1922.\nSvinhufvud formed a conservative government which hastened to grant the\nessential demands of the Lapuans. The 23 Communist Deputies were arrested;\nthe rump Diet proceeded to pass a series of laws dissolving the Trades\nUnions outright and outlawing virtually every kind of political activity\nof the opposition parties.\nIn order to ratify these changes to the Constitution, it was nec-\nessary to hold new elections, in the course of which the Lapuans with\ngovernment toleration engaged in every variety of illegality in order\nto be assured of the two-thirds majority necessary to the ratification\nof the new laws. The elections of October, 1930 gave the conservatives\nthe necessary votes in the Diet (plus one) and the \"anti-communist\" laws\nwere passed.\nThe Lapuans had succeeded in large part in their political aims;\nbut their terrorist activities did not cease. After the October elections\na group of terrorists led by General Wallenius kidnapped President\nStahlberg and his wife, but they were released unharmed after a general\npopular outcry. Throughout 1931, kidnapping of socialists and over-\ninquisitive journalists continued. In July Wallenius was acquitted of\ncomplicity in the Stahlberg kidnapping, although he had made a full con-\nfession of his guilt at the time when charges were first preferred\nagainst him.\nIn the spring of 1932 General Wallenius, in cooperation with leaders\nof the White Guards, was planning a march on Helsinki. Before these plans\nhad been carefully matured, Wallenius' hand was forced by a riot in\nMantsala. Wallenius made immediate preparations for a march on Helsinki;\nbut the expected cooperation of the conservative leaders failed to\nmaterialize. Svinhufvud came out against the plan, and as a result the\narmed forces of Wallenius melted away before a shot had been fired. Once\nagain, however, the Lapuans were partially successful, for,a result of\nGeneral Wallenius' demonstration the government arrested and imprisoned\na large number of Communists, while Wallenius and Kosala were let off\nwith suspended sentences.\nThe fundamental reason for the failure of General Wallenius' attempted\ncoup was the fact that by 1932 the Lapua movement had lost the support\nof the propertied classes in Finland. The latter no longer felt the\nnecessity, (as they had in 1930) of relying on the Lapuan forces for\nkeeping Communism in check. Svinhufvud and his supporters felt that\nthe government was itself well able to cope with the Communists.\nRegraded Uclassified\n307\n- 11 -\nDivision of Monetary\nResearch\nAfter the defeat of General Wallenius' attempted coup, the Lapuan\nmovement developed internal quarrels and ceased to be an immediate\nthreat to the Republic. With the progress of economic recovery and\nexpansion after 1933, the moderate parties regained their former strength.\nThroughout his presidency (1931-1937) Svinhufvud had persistently\nrefused to accept any Cabinet containing a socialist, in spite of the\npredominant position of the Social Democrats in the Diet. The Social\nDemocrats determined to defeat Svinhufvud when he ran for reelection in\n1937. Therefore they formed a coalition with the Agrarians, and succeeded\nin electing the candidate of the latter, Kallio.\nKallio called on Professor Cajander, a Progressive, to form a Cabinet.\nSince 1937 Finland has been governed by a coalition cabinet, headed by\nCajander, including 5 Social Democrats, 5 Agrarians, and 2 Progressives.\nThe defeat of Svinhufvud seemed to be a serious reverse for the Con-\nservative forces. For the first time, they had failed to block the\ninclusion of Socialists in the Cabinet. A thoroughgoing realignment of\nnational politics seemed imminent. In fact, however, the revolution\nwas not very profound; the Social Democrats remained a minority party.\nRegraded Uclassified\n308\nDivision of Monetary\nResearch\nThe Political Parties and Their Policies\nAfter the destruction of the Bolsheviks in 1918, the political\ncenter of gravity shifted to the Agrarian party. But no one party\nin Finland is normally strong enough to form a cabinet alone.\nTherefore Finnish governments since 1918 have been formed on one\nor the other of two plans - a coalition of the Agrarians with the\nConservative parties, or a coalition of the Agrarians with the\nlarge Social Democratic party. The following table of the mimerical\nstrength of the various parties in the Diet shows how the Agrarians\nhold the balance.\n1936\n1939 (July 5)\n(Social Democrats\nGovernment\n83\n85\nParties\n(Agrarian\n53\n56\n(Progressive\n7\n6\n(Swedish party\n21\n18\n(Unionist Party (Concen-\nOpposition\ntration)\n20\n25\nParties\n(Patriotic National Movement)\n14\n8\n(Others\n2\n2\nThe Social Democratic Party is a party of industrial and farm\nworkers, professional and academic people, and small farmers. Formally,\nthe party is committed to a Socialist program. In fact, the Social\nDemocrats are essentially conservative in outlook. They do not\naspire to a dominant position in national politics, but rather regard\nthemselves as a pressure group working for increased Social Services\nand better working conditions within the limits of the traditional\neconomic and political system. They are essentially an administrative\nparty.\nThe Agrarian party is a centrist party of small farmers. Its\nprincipal asset is its historical achievement - the Lex Kallio which\nwas the legal basis of the revision of land tenure in Finland. Under\nthe Kallio law, tenants were given a certain amount of State aid in\npurchasing farms. Under this law, landholding in Finland has become\nmore general and there has been some reduction in the concentration\nof holdings. Compared with the situation in Poland, Italy, or even\nFrance, Finland has become a country of small holders. The Agrarian\nparty assumes the credit for this, although the Lex Kallio was\nRegraded Uclassified\n309\nDivision of Monetary\n- 13 -\nResearch\nalso supported by the Social Democrats. The Agrarian party has pur-\nsued a policy of protection for Finnish agricultural products as well\nas extension of tenure. By this policy, Finnish agricultural produc-\ntion has increased to about three times the level of 1913, and the\ncultivated area extended by 30 percent. This achievement must be\nreckoned as one of the most substantial victories of the new Republic.\nThe Agrarian party is a practical party, little concerned with\ngeneral principles of government or economics. It is not opposed to\nState controls of industry, but it is hostile to all forms of\nsocialism and particularly to Communism. In contrast to the French\nSocialist-Radical party, the Finnish Agrarians are under a pronounced\nclerical influence.\nThe Progressives are a very small party representing certain\nmiddle class groups of Liberal-Conservative tendencies. They work\nin coalition with the Agrarians.\nThe Unionist (Concentrationist) party together with the Swedish\nparty (and the Fascists) form the Right. These parties represent the\ntimber trade, the manufacturers, the larger landholders, the church\nhierarchy, and the Army. The conservative parties are the defenders\nof the traditional social order, the Lutheran Church, and the rights\nof property. They believe themselves to be the representatives of the\npermanent national interests and the unity of the nation. They have\nplayed the leading part in the fight against Bolshevism.\nThe Swedish People's party has its own peculiarities. Its\nprogram is ostensibly one of defense of Swedish language and culture,\nbut in fact the main interest of the party is in defending the\nprivileges of the wealthy and governing classes, a very large pro-\nportion of whom are Swedo-Pinns. By coming forward as the champion\nof the Swedish people, the party has been able to control practically\nall of the Swedo-Finn vote, although the majority of Swedo-Finns are\nfishermen, sailors, lumber workers, and farm laborers.\nThe Patriotic National Movement was a clerical fascist movement\ncentered in Lapua, which succeeded in dominating Finnish politics\nfrom 1930 to 1934. It has declined since then. In recent elections\nit lost half of its 14 deputies. In 1930 it was strong enough to\nmake full preparations for a coup, which failed because of dissention\nin the ranks of the conservatives. Although the Fascists did not\nsucceed in their coup, they did succeed in foreing the suppression\nof the Communist party, the arrest of all the Communist deputies,\nand they were permitted to engage in a terrorist campaign of beatings,\nkidnappings, and intimidations against the Left parties,\nRegraded Uclassified\n310\nDivision of Monetary\n14 I I\nResearch\nThe Communist party has never been allowed to exist legally in\nFinland since the defeat of the Bolsheviks in 1918. However, the\nCommunists have been able partially to evade the restrictions in-\nposed on them by organizing under other names and by working within\nthe Socialist party and the labor unions. Under the name of the\nFinnish Labor party, the Communists won 27 seats in a Diet of 200\nin 1922. Alarmed, the government outlawed the party, suppressed\nits press, and dissolved the Diet to which this dangerous number\nof Communists had been elected. The Communists reorganized once\nmore, and by 1929, under the name of the Finnish Labor party, they\nheld 23 seats in the Diet. In 1930, when the influence of the\nLapuans was at its height, the Finnish Labor party was once more\nsuppressed and its Deputies arrested and imprisoned. Since 1930,\nthe Communists have not had any recognized political party in\nFinland. They have probably entered the Social Democratic party,\nalthough known Communists are excluded from it.\nRegraded Uclassified\n311\nDivision of Monetary\n- 15 -\nResearch\nThe Cooperative Movement in Finland\nThe Finnish people combine an extremely tough kind of individual-\nism with a highly developed tradition of cooperation. The independent\nsmall holders who form the backbone of the country's agriculture are no\nless devoted to cooperation than the city workers. Over half the adult\nmale population of Finland belongs to some form of cooperative. The\nmost important of these organizations are the two consumer cooperatives,\norganized on the Rochdale pattern. They are both affiliated with the\nScendinavian Cooperative Union.\nThe two great consumer co-ops have a remarkable record in the pro-\nvision of goods and services to their members at reduced costs. The\ncoops have furthermore been 8 strong influence for the improvement of\nquality in merchandise in general.\nThe principle of cooperation in Finland has been developed in every\nbranch of economic life. Cooperative farm banks, cooperative production\nand marketing societies are well developed. The coops have gone into\nmanufacturing on a considerable scale.\nThe Finnish cooperatives are organized on a thoroughly democratic\nbasis. The entrance costs are very small, and the direction of the af-\nfairs of the cooperative are subject to the full control and criticism\nof the membership on an equal basis. Furthermore, the cooperatives\nhave a well developed literature of their own and an embitious educa-\ntional program. Thus the problems of the consumers and the operations\nof the management are continually subject to the discussion, study, and\ncriticism of the whole body of consumers.\nOf the two principal organizations, the Progressive Cooperative\nSociety, while it has refused affiliation with the Social Democratic\nparty, draws most of its strength from the working class, and it is\ngenerally pro-labour in outlook. The Neutral Cooperative Society, on\nthe other hand, is 8 farmer's cooperative and it has not been friendly\nwith organized labor. It refuses to bargain collectively with its\nemployees.\nIn its larger social aim of substituting the cooperative attitude\nin public life for the attitude of class rivalry, the cooperatives have\nnot been entirely successful. The relations of the two principal con-\nsumer coops have been bitter. They have frequently engaged in cut-\nthroat competition. In 1930, the Neutral Cooperative helped finance\nthe Lapuan Fascist movement, probably with the idea that by this means\nthe Progressive coops might be suppressed.\nRegraded Uclassified\n312\nDivision of Monetary\n- 16 -\nResearch\nSocial Security in Finland\nIn its program of social security, Finland lags behind the nations\nof western Europe. Unemployment insurance does not exist. An old-age\npension scheme was supposed to come into effect in 1940. Finland has,\nhowever, a. public health administration which is well supported. Un-\nfortunately, most of its resources are absorbed by the fight against\ntuberculosis, which is particularly prevalent in Finland.\nMost of the housing development in Finland has been undertaken by\nthe large companies. Many of these projects are modern and well planned;\nbut Finland has not escaped a serious housing shortage. In Helsinki the\naverage number of inhabitants per room was 1.5 in 1930. In Helsinki\nrents absorb about one-third of the income of unskilled workers. Housing\nconditions in the rural areas of Finland (as in most countries) are even\nworse than they are in the cities.\nThe security of Finnish workers is moreover impaired by the absence\nof a powerful trade union movement capable of advancing the interests\nof the workers. The weakness of the unions is the more surprising in\nview of the great numerical strength of the Social Democrats. At one\ntime Finland had a powerful labor movement; that was before 1918, when\nthe unions had 160,000 members.\nWith the triumph of the Conservatives in 1918, the trades unions,\nmost of which were under Bolshevik influence, were crushed. After peace\nwas restored, the unions slowly regained their strength, until in 1930\nthey numbered about 100,000 members. But in 1930, the unions were\nsuppressed again by the Svinhufvud government during the high tide of\nthe Lapuan movement.\nFrom the blow of 1930, the labor movement has never fully recovered.\nIn 1939 the Finnish trades union federation had only 87,000 workers.\nThe workers have not been strong enough to bargain collectively in the\ntimber or other big industries; in printing and some of the smaller\ntrades, however, they have been successful in obtaining collective\ncontracts.\nAs a result of the weakness of the labor unions, wages in Finland's\nimportant industries have remained low, From 1930 to 1932 wages dropped\nheavily; after that they rose slowly until by 1937 they were (in real\nterms) about 13 percent above the level of 1929. The low level of wages\nfrom 1930 to 1935 made it possible for Finland to accumulate capital,\nmodernize her industrial plant, and reduce her foreign debt.\nRegraded Uclassified\n313\nDivision of Monetary\n- 17 -\nResearch\nThe general standard of living in Finland falls considerably be-\nlow that of the other Scandinavian countries; however, it is undoubt-\nedly higher than in Poland, Italy or the Balkan countries.\nCulture and Education in Finland\nGerman culture was the inspiration and the model for the well-\nto-do and educated Finn throughout the 19th and on into the 20th\ncentury. The Finns bought a third of their imports from Germany;\nthey took a third of their ideas from there. The first Finnish secon-\ndary schools were modeled on the German Lyceums. Many of the concep-\ntions embodied in the Finnish constitution were derived from Weimal.\nHelsinki's first public buildings were the work of a German architect,\nEngel, and the best of Finnish graduates went to German universities\nto complete their studies. This cultural liaison was weakened by the\nrise of Hitler and the doser trade relations developed with England\nafter 1933. English ideas are now taking the place of German. Finns\nare wearing English clothes, operating English machines, dealing with\nEnglish salesmen and working with English technicians. A Finnish-\nBritish society flourishes in Helsinki and a similar society was or-\nganized in Turku in the winter of 1937-1938.\nIn Finland, all children are compelled to attend elementary\nschool between the age of seven and thirteen, after which 60 percent\nattend vocational schools until fifteen and 40 percent go on to secon-\ndary schools where they prepare for the civil service, teachers'\ntraining colleges or the University. Tuition is free at the state\nsupported institutions except for a nominal fee paid by the children\nof the well-to-do. Besides Helsinki University, which has an enroll-\nment of 6,600 students, half of whom are women, the state maintains a\nTechnical High School and a High School of Pedagogy with a combined\nenrollement of about 1,000. There are two small privately endowed\nuniversities at Tuiku, one Swedish-speaking and one Finnish-speaking.\nThey each have 300 students.\nRegraded Uclassified\n314\nDivision of Monetary\n- 18 -\nResearch\nAPPENDIX\nNotes on Finnish Leaders\nVaino Tanner, Foreign Minister of Finland, head of the Social\nDemocratic party, leader of the Finnish and the international coopera-\ntive movements. Born in Helsinki to working-class parents. In 1910\nhe became a member of the Central Committee of the International\nCooperative League. He joined the Social Democratic party, where he\nbelonged to the more conservative wing.\nTanner refused to associate himself with the Bolshevik majority\nof his party in the Revolution of 1918. He remained aloof from the\nRed insurrection. However, when von der Golts' troops occupied\nHelsinki, Tanner was arrested because of his association with the\nSocial Democrats. He was soon released, however, when it was es-\ntablished that he had not been in any way connected with the uprising\nof the Social Democrats. This episode has given rise to erroneous\nstories linking Tanner with the Finnish revolution.\nAfter the defeat of the Finnish Bolsheviks, the Tanner group\nassumed leadership of the Social Democratic party. Tanner was one of\nthe Finnish delegates who signed the Treaty of Dorpat with the Soviets\nin 1920. Tanner has worked to eliminate the radical and communistic\nwing from the Social Democratic party; he has pursued a policy of\ncooperating with the center parties.\nTanner has continued to be an active official of Elanto, a lead-\ning cooperative organization, and in 1927 he was elected president of\nthe International Cooperative Alliance.\nIn 1926 Tanner became Premier in a Social Democratic Cabinet.\nThe following year he received the salute of the Civic Guard (often\ncalled the White Guard) an act which caused bitter controversy within\nthe Social Democratic Party because of the reactionary associations\nof the Civic Guard. However, Tanner's act was in line with the policy\nof reconciliation with the conservative forces which he has consis-\ntently followed.\nTanner has also served as Finance Minister, in which position he\nmade his reputation as a cautious, conservative financier. Tanner\nis well liked by business and banking groups; in fact throughout the\ncivil war period he was able to maintain valuable friendships with\nthe conservative groups.\nRegraded Uclassified\n315\nDivision of Monetary\n- 19 -\nResearch\nRisto Ryti, banker and statesman, at present Premier of Finland,\nfor many years Governor of the Bank of Finland. Ryti was Finance\nMinister in the early years of the Republic.\nRyti studied law in England, and has many associations with\nEnglish life. He has been decorated as Knight Commander of the\nVictorian Order. Ryti has frequently represented his country at\ninternational conferences on economic and financial questions.\nRyti is extremely influential among all business and commercial\ngroups in Finland. He is highly respected in international financial\ncircles. Ryti is thought to be the principal initiator of Finland's\neconomic policies since he became Governor of the Bank in 1923. He\nhas favored the rigorous policy by which, at the cost of great\nsacrifice on the part of wage earners, Finland has been able to reduce\nher foreign debt and build up her capital since 1930. Ryti is also\nsaid to have been one of the leading sponsors of the program of\nagricultural expansion and industrial development since the war.\nRyti is a staunch defender of the idea that the Bank of Finland\nshould be independent of government control.\nBaron Carl Mannerheim, born to a noble Swedo-Finn family near\nAbo, educated at the St. Petersburg cavalry school. Mannerheim soon\nrose to the command of the Tsar's bodyguard. He fought in Manchuria\nduring the Russo-Japanese war and was promoted to the rank of Major\nGeneral. After the Russo-Japanese war he was stationed as Warsaw\nas commandant of the Imperial Russian cavalry.\nDuring the World War Mannerheim was stationed on the Roumanian\nfront. After the Finnish declaration of independence he returned\nto Finland where he took an active part in organizing the White\nGuard.\nAfter the Red coup of January 1918 Mannerheim was placed in\nsupreme command of the White Guard, and became in effect the supreme\nleader of the conservative forces. He depended largely on German\naid in overthrowing the revolutionary Red government in Helsinki.\nThe American Minister to Sweden, Morris, cabled to Secretary of\nState Lansing on April 2, 1918, strongly urging that no food should\nbe sent to General Mannerheim's government in view of the pro-German\nRegraded Uclassified\n316\nDivision of Monetary\n- 20 -\nResearch\nleanings of the Finnish conservatives. Morris' opinion was strength-\nened by the report of an Allied mission which had visited Mannerheim's\nheadquarters, and which stated that \"as far as they can see, the\nWhite Party of Finland is entirely under German influence\" and that\n\"they personally were insulted by Finnish officers with pro-German\nsympathies, although travelling with General Mannerheim's special\npassport\".\nBy May, however, General Mannerheim had dramatically changed\nhis orientation. He had quarreled with the authorities in Helsinki\non the issue of German influence in the army, had resigned his\nposition and had retired to Sweden. Svinhufvud, the pro-German\nconservative, became the leading figure in Finnish politics.\nWith the collapse of the German Empire, the return of Mannerheim\nwas made possible, for he had succeeded in a few months, from May\nto November, in winning the confidence of the Allied diplomats.\nAccordingly, Mannerheim took over the Regency which Svinhufvud was\nwas forced to resign when the Germans withdrew. He held this\nposition until the installation of the new constitution in 1919.\nIn 1920, Mannerheim attempted to organize an intervention against\nthe Soviets with British aid. When this plan fell through, he led\nan independent assault on the town of Petrozavodak on the Leningrad-\nMurmansk railway. This attempt was beaten back, and in the same\nyear peace was concluded with the Soviets.\nMannerheim has remained a powerful figure in Finnish politics.\nHe has been venerated by all the conservative groups, and hated by\nthe radicals. He has been the strongest opponent of comminism and\nof any policy of rapprochement with the U.S.S.R. On the other hand,\nhe has many close friends and associations in Britain, and has been\nmade Knight Grand Cross of the British Empire.\nRegraded Uclassified\n317\nMarch 12, 1940.\n5:24 p.m.\nH.M.Jr:\nHello.\nOperator: Mr. Stettinius.\nH.M.Jr:\nHello.\nEdward R.\nStettinius: Hello Mr. Secretary.\nH.M.Jr:\nHow are you?\nS:\nGood, how are you sir?\nH.M.Jr:\nI'm fine. I was at the White House from one to four.\nS:\nHuh.\nH.M.Jr:\nI was over at the White House from one to four o'clock.\nS:\nOh yes.\nThat was good.\nH.M.Jr:\nThat's why I didn't get to calling..\nS:\nI understood.\nH.M.Jr:\nHow do things look?\nS:\nWell, incoming orders this week are a little bit better.\nH.M.Jr:\nSwell.\nS:\nOperations are down a bit.\nH.M.Jr:\nYes.\nS:\nBut that shouldn't be particularly discouraging because\nit's a technical matter in connection with inventory\nmanufacture of ingots.\nH.M.Jr:\nI see.\nS:\nThe general sentiment yesterday in Pittsburgh, I was\nthere all day yesterday.\nH.M.Jr:\nYes.\nS:\nWas that things weren't going to slide off in the\nsteel industry from where they were now.\nH.M.Jr:\nThey were not.\nS:\nI think the opinion was divided between an upturn in\nthe next three or four weeks and stabilization at\nRegraded Uclassified\n318\n- 2 -\nthe present levels for the next sixty days.\nH.M.Jr:\nI see.\nS:\nGenerally speaking, I think it's safe to assume that\nthe outlook at the moment would be that we would\ncertainly stabilize and perhaps - and I think personally\nthat the industry will pick up in its operating rate\nprobably in another three or four weeks and will have\n2. better - we'll enter the second quarter better than\nthe last few weeks of the last quarter.\nH.M.Jr:\nGood.\nS:\nThe first quarter.\nH.M.Jr:\nI see.\nS:\nSo it could be a lot worse.\nH.M.Jr:\nWell - it could be a lot worse.\nS:\nYes.\nH.M.Jr:\nAny foreign orders materializing?\nS:\nYes. Last week, we booked a hundred and twelve\nthousand tons of stuff last week for abroad.\nH.M.Jr:\nWhat kind of stuff?\nS:\nWell, it was a very very interesting item of some\nship plates for Italy.\nH.M.Jr:\nYes,\nS:\nAnd the Scandinavian countries, and some tin plate\norders.\nH.M.Jr:\nYes.\nS:\nAnd also some semi-finished stuff for France and\nEngland.\nH.M.Jr:\nIs that right?\nS:\nThat they will re-roll themselves for various\ncommercial and munition purposes. Now without any\nofficial forecast our export fellows feel much more\nRegraded Uclassified\n319\n- 3 -\nhopeful of sone real tonnage from abroad during the\nsecond quarter then they did a week ago.\nH.M.Jr:\nYes.\nS:\nAnd of course I think it all depends upon the peace\neffort. If there were peace why of course it would\nstop, but if the things - if things get worse over\nthere, I'm confident that there's going to be much\nmore buying than anyone realizes.\nH.M.Jr:\nI see.\nS:\nAnd domestically, there's about - there's twenty tankers\nto be let the next few weeks.\nH.M.Jr:\nReally.\nS:\nThe automobile industry and the container\nindustries are going great guns.\nH.M.Jr:\nYes.\nS:\nAnd I think, all in all, that the situation is not\nanywhere near as bad as it might be.\nH.M.Jr:\nWell that sounds pretty good, doesn't it?\nS:\nYes.\nH.M.Jr:\nWell I think I'd like to talk to you again a week from\nnow.\nS:\nWell now I'm going to slip off and spend Easter\nwith my family.\nH.M.Jr:\nGood.\n8:\nIn the South.\nH.M.Jr:\nGood.\nS:\nSo if we can skip one Tuesday.\nH.M.Jr:\nThat's all right.\nS:\nAnd then if we can talk, Easter, the day after Easter,\nor that Tuesday.\nRegraded Uclassified\n320\n- 4 -\nH.M.Jr:\nI may not be back then myself.\nS:\nI see. Well I won't be here next Tuesday but I'll be\nhere from the following week right on through.\nH.M.Jr:\nO.K. When I get back, if I'm away, I'll give you a\nring.\nS:\nAnd I think the next time it might be a good plan for\nme to drop down and spend a half an hour there with\nyou with some real facts and atmosphere.\nH.M.Jr:\nThat would be fine. Come down and have lunch with me.\nS:\nYes, because I want to be helpful and I think that I\ncan give you some hot stuff off the griddle that'll\nmean something.\nH.M.Jr:\nI'd like to have you come down and have lunch with me.\nS:\nFine.\nH.M.Jr:\nThank you so much.\nS:\nGoodbye.\nRegraded Uclassified\nTREASURY DEPARTMENT\n321\nINTER-OFFICE COMMUNICATION\nDATE March 12, 1940\nTO\nSecretary Morgenthau\nFROM\nMr. Cochran\nSTRICTLY CONFIDENTIAL\nAs of February 28, Finnish balances and earmarked gold in New York were\nas follows:\nBank of Finland gold held under earmark\nwith N. Y. Reserve Bank\n$11,800,000\nBank of Finland dollar balances with\nN. Y. Reserve Bank\n$13,200,000\nBank of Finland dollar balances with\nother banks\n$3,300,000\nPrivate Finnish Funds with N. Y. Banks\n$7,100,000\nTotal\n$35,400,000\nThe above total of $35,400,000 showed a gain over the total of $33,600,000\nfor the preceding week, due to increases in the dollar holdings at the Federal\nReserve Bank of New York by the Bank of Finland, resulting from transfers to that\naccount by the Sveriges Riksbank.\nMr. Knoke has told me by telephone that on March 11 the Federal Reserve Bank\nreceived a cable to transfer from the Bank of Finland $1,660,000 to the Banca\nComerciale Italiana, at the instruction of the Finnish Legation. A similar order\nin the sum of $200,000 was received today. It is presumed that these transfers\ncover the purchase by Finland of Italian aircraft or other munitions of war.\n10ms\nRegraded Uclassified\nCONFIDENTIAL\n322\nTREASURY DEPARTMENT\nINTER-OFFICE COMMUNICATION\nDATE March 12, 1940\nTO\nSecretary Morgenthau\nFROM Mr. Cochran\nA heavy preponderance of offerings of sterling in the open market resulted\nin a sharp decline in the quotation for that currency today. After opening at\n3.85. the rate fell rapidly to 3.80-1/2, then returned to 3.83 by noontime. It\nreceded further during the afternoon, reaching a low of 3.77 just before the\nclose. The final quotation was 3.77-1/2.\nIt will be observed, from the turnover figures given below, that reported\nsales exceeded purchases of sterling by more than 600,000. In all probability,\nthis excess was absorbed mainly by the New York banks themselves, in the covering\nof short positions. The large sterling sales by commercial concerns probably\nrepresent liquidation of balances previously acquired in anticipation of the\npurchase of certain commodities, which balances can no longer be utilized for\nthe purposes intended, Another reason prompting commercial concerns to liquidate\nsterling balances would be the fear that subsequent British foreign exchange\nregulations may have the effect of blocking the balances of foreigners. The\nlatter reason could also explain the large sales for account of foreign banks.\nSales of spot sterling by the six reporting banks totaled L1,206,000, from\nthe following sources:\nBy commercial concerns\n6 475,000\nBy foreign banks (South America, Europe and Far East)\n1 731,000\nTotal\n£1,206,000\nPurchases of spot sterling amounted to L589,000, as indicated below:\nBy commercial concerns\n19 384,000\nBy foreign banks (Europe, Far East and South America)\nis 205,000\nTotal\n1 589,000\nThe following reporting banks sold cotton bills totaling 117,000 to the\nBritish Control on the basis of the official rate of 4.02-1/2:\n19 8,000 by the Irving Trust Company\n4,000 by the Guaranty Trust Company\n3,000 by the Chase National Bank\n2,000 by the Bank of Manhattan\nis 17,000 Total\nRegraded Uclassified\nCONFIDENTIAL\n323\n- 2 -\nThe rate for the Canadian dollar continued to show a weak tone and at one\ntime during the morning, business in that currency went through at 8 discount\nof 20%. The closing quotation was 18-1/46 discount.\nThe other important currencies closed as follows:\nFrench francs .0214\nGuilders\n.5313\nSvine france\n.2242-1/2\nBelgas\n.1698\nThe Federal Reserve Bank of New York purchased 60,000 belgas for account\nof the Bank of Latvia.\nWe purchased $10,000,000 in gold from the earmarked account of the Bank\nof France.\nThe Federal Reserve Bank of New York reported that the following shipments\nof gold were being made to it by the banks indicated below:\n$ 5,641,000 from South Africa, representing two shipments by the South African\nReserve Bank, to be earmarked for account of the Bank of Java.\n4,206,000\nfrom Canada, shipped by the Bank of Canada, Ottawa, for sale to the\nU. S. Assay Office.\n2,880,000 from South Africa, shipped by the South African Reserve Bank, to be\nearmarked for account of the Netherlands Bank,\n2,074,000\nfrom England, shipped by the Bank of England, to be earmarked for its\nown account.\n$14,801,000 Total\nIn Bombay, the silver quotation declined the equivalent of 13/16 to 40.56#.\nThe prices fixed in London for spot and forward silver were both 20-13/16d,\noff 1/4d and 3/16d respectively. The U. S. equivalents were 36.07¢ and 35.88$.\nThe decline in the London prices was again attributed to selling of new production\nsilver.\nHandy and Harman's price for foreign silver was unchanged at 343/44. The\nTreasury's price was also unchanged at 35#.\nWe made six purchases of silver totaling 700,000 ounces under the Silver\nPurchase Act. Of this amount, 450,000 ounces represented sales from inventory by\ntwo refining companies and the remaining 250,000 ounces consisted of new production\nfrom foreign countries, for forward delivery.\nA.M.P.\nRegraded Uclassified\nle mply address - the - of -\nUSH!\nletter, but the Bursen of Supplier and\nAmounts and\nBefor to No.\nNAVY DEPARTMENT\n(00)\nU OF SUPPLIES AND ACCOUNTS\n324\nUREAU OF SUPPLIES AND ACCOUNTS\nWASHINGTON, D. C.\n5.A.547\nare\n12 March 1940\nMEMORANDUM FOR THE ASSISTANT SECRETARY OF WAR\nSUBJECT:\nThe priority of supply of smokeless powder\nfor British Government.\nReference: Your memorandum of February 29, 1940, to\nChairman, President's Liaison Committee.\n1.\nIt was the understanding of this Committee that the\nWar Department had agreed to release to the Anglo-French Purchasing\nBoard not more than 1,200,000 pounds of powder, representing a\nquantity not required immediately for the War Department's loading\nprogram. In other words, the release of a greater quantity would\nresult in serious interference with the labor situation.\n2.\nThe above amount, together with a four months' productive\ncapacity at the DuPont plant assigned to the Navy, would make\navailable a total of some 1,800,000 pounds of powder which the two\nPowder Companies involved might utilize for other orders.\n3.\nYesterday, Monday, the Navy Department received word\ntransmitted through the War Department that it was desired that the\nNavy not release its 600,000 pounds of available capacity, the\nmemorandum indicating that the above emount, 1.0., 600,000 pounds,\nmight be required by the War Department.\n4.\nThe Committee will therefore appreciate information as\nto whether the War Department will actually require the 600,000\npounds of powder which the Navy previously had consented to release\nfor the purpose of filling foreign orders.\nRAY\nRear Adminity, S.C., U.S.Navy,\nMember, President's Lieison Committee.\nRegraded Uclassified\n325\nWAR DEPARTMENT\nOFFICE OF THE ASSISTANT SECRETARY\nWASHINGTON, D.C.\nMarch 12, 1940.\nMEMORANDUM FOR THE PAYMASTER GENERAL OF THE NAVY:\n1. With reference to memorandum of March 12, 1940,\nsubject: Priority of supply of smokeless powder for the\nBritish Government, the War Department will not require\nfor its loading program in the next four months the\n600,000 pounds of smokeless powder previously released\nby the Navy Department.\nLouis Johnson,\nThe Assistant Secretary of War.\nRegraded Uclassified\nin raply address - the of -\nletter, but the Burnen of Supplier and\nAccounts and\nRefer to No.\n(00)\n326\nNAVY DEPARTMENT\nBUREAU OF SUPPLIES AND ACCOUNTS\nWASHINGTON, D. C.\n13 March 1940\nMEMORANDUM FOR MR. MORGENTHAU,\nThe Secretary of the Treasury.\n1.\nUpon receipt of the attached memorandum\ndated March 12, 1940, from the Assistant Secretary of War,\nI phoned the War Department to ask the meaning of the\nwords, \"will not require for its loading program in the\nnext four months,\" and was informed that no importance\nshould be attached to those words, but that the memorandum\nwas intended to say that the War Department was in no way\ninterested in the Nevy's 600,000 pounds of smokeless powder\npreviously released, either during the \"next four months\"\nor any time.\nMember, Committee.\nRegraded Uclassified\nprof.\n327\nIN REPLY ADDRESS\nREAU OF ORDMANCE, MAYY DEPARTMENT\nNAVY DEPARTMENT\nAND PRICE TO No.\nHF/L11 (an)\nBUREAU OF ORDNANCE\nWASHINGTON, D.C.\nas March 1940\nINTREASING PONDER PRODUCTION AT INDIAN HEAD, MD.\nrior to March 1, 1950, production was\nHtspped up now to\n10,000 lbs. per day.\n15,000 #\n-\n.\nHext commonical stop is 10,000 more to\n25,000 -\n-\n-\nThis will take 195 more nes - some in 3 shifts, others\n2 shifts, end can be done in 1 month.\nwith this 10,000 lbs. extra made at Indian Head it will be unnecessary\nto order from DuPost the following amounts which the Navy was to order\nbased on previous consultation and agreement with the War Department\nand Dullants\nNavy's allotted\nNH Powder Navy\nPyro, air dried powder\nCapacity at\nmust retain at\nnot necessary to order\nYear\nDurent\nDuPont\nif Indian Head expends.\n1940\n2,067,675\n375,000\n665,675 (capacity not\nyet contracted\nfor in 1940).\n1941\n2,987,950\n375,000\n2,612,950\n1942\n3,325,400\n375,000\n2,950,400\nThe 375,000 lbs. (column 5 above) which the Nevy must continue to get from\nDaPont is - (non hygroscopie) powder of DuPont's formula for 101 end 5\"\ngms, 1.0., mall celiber powder.\nIndian Boad nakes Nevy Pyro sellulose powder.\nThe Assy uses the Dui oat formula powder and does not use the Havy powder\naccept a small amount in large Coast Artillery guns.\nIndian Head is not squipped with the type of machinery required for making\nthe kind of powder that the Army uses, namely, NH or as the Army calls it -\nPM (flashlass non hygroscopie).\nThe British say they will take the kind of powder DuPomt nakes for the Nevy,\nPyro celleloss air dried.\nRegraded Uclassified\n328\nW/LL1 (AB)\nThe Havy will want to w bank to DuPent for - powder (enough to\nkeep their hand in when the foreign demand disappears) because it\nhas been the Newy that through the years has kept the DuPont powder\nline in operation when the Army was buying very little powder. This\nwill require laying off come ma at Indian Read after the need for\nexpansion coases.\nN. 2. FURLONG\nChief of Bureen.\nRegraded Uclassified\nOrd. T\n7\nIN REPLY ADDRESS\n329\nIREAU OF ORDNANCE, NAVY DEPARTMENT\nNAVY DEPARTMENT\nAND REFER TO No.\nBUREAU OF ORDNANCE\n(F13)\nWASHINGTON, D.C.\nman 11, 1980\nSubject:\nDeferred Delivery of Smokeless Powder.\nSirs:\nThe Havy Department will accept four months,\nor 600,000 pounds capacity, deferred delivery of smokeless\npowder under the current contract to permit the E. I. du Pont\nde Nemours and Company to manufacture smokeless powder for\nother orders.\nVery truly yours,\nW. R. FURLONG,\nRear Admiral, U.S.N.,\nChief of Bureau of Ordnance.\nE. I. du Pont de Nemours and do., Inc.\nAttn: Mr. 7. w. Bradway,\nSmokeless Powder Division,\nWilmington, Delaware.\nMRG\nCancelled alled M phone\n3/8\nRegraded Uclassified\n330\n(COPY)\nCONFIDENTIAL\nMarch 9, 1940.\nMEMORANDUM FOR FILES - GREAT BRITAIN\nColonel Burns called at the office to say that General\nWatson informed the Assistant Secretary of War over the telephone\nthat the powder to be released by the War Department to the\nBritish is 1,200,000 pounds.\nHe stated that the War Department should get in touch with\nthe Navy Department and inform them that if the loading program\nof the War Department requires 1t, the 600,000 pounds which the\nNavy offered for release to the British will be considered as\navailable for the War Department needs.\nThis evidently means that only the War Department concession\nis being used to help the British in this present emergency, but\nthat if the War Department needs assistance later from the Navy\ncontracts, it will be up to the Navy Department to assist to the\nextent, at least, of 600,000 pounds.\nFor the Clearance Committee, Army & Navy Munitions Board.\nCHAS. HINES,\nColonel, U. 8. Army,\nChairman, Clearance Committee,\nArmy and Navy Munitions Board.\nCopies to:\nThe Secretary of War - in connection with powder study.\nThe Navy Department.\nConcurred in by Navy Dept., Bureau of Ordnance W.R.FURLONG\nCONFIDENTIAL\nRegraded Uclassified\nIN REPLY ADDRESS\nOF ORDNANCE, NAVY DEPARTMENT\nAND REFER TO No.\nNAVY DEPARTMENT\nHF/L11 (AB)\nBUREAU OF ORDNANCE\nWASHINGTON, D.C.\n12 March 1940\nINCREASING FOODER PRODUCTION AT INDIAN MAD, ED.\nPrior to March 1, 1938, production wes\nStepced up now to\n10,000 lbs. per day.\n15,000\n-\nNext economical stop is 10,000 more to\n25,000\nThis will take 175 KoΓo men - some in 3 shifts, others\n2 shifts, and can be done In 1 month.\nWith this 10,000 lbs. extra nade at Indian !feed it will be unhecessary\nto order from DuPont the following amounts which the Navy was to order\nbased on previous consultation and agreement with the Mar Department\nand Dul'on $1\nNavy's allotted\nNEL Powder Nevy\nPyro, air dried powder\nCepecity at\nmust retain at\nnot necessary to order\nYear\nDu ont\nDu ont\nif Indian Read expends.\n1940\n2,047,675\n375,000\n665,675 (caracity not\nyet c intracted\nfor in 1940).\n1941\n2,967,950\n375,000\n2,612,950\n1942\n3,325,400\n375,000\n2,950,400\nThe 375,000 lbs. (colum 3 above) which the lavy aut continue to not from\nDupont is NH (non hygroscopic) powder of Du 't's formulo for 121 end 3\"\ngine, i.e., small celiber (IO: der.\nIndian Head mokes avy yro cellulore nowder.\nthe Army uses the Duesnt formula po der not does not use the have newder\nexcept a small amount 1/ 16r Cuast Artillery 7038.\nIndian lieud 1s not soutyped vith the type of includery required for\nthe kind of owder tent the Arty u wa, Provide. 4, or the ANY calls it -\nPar (flushloom non hyproseopie).\nthe British say they will time the and of a nt for the havy,\nyro callelose air dried.\nRegraded Uclassi\nEF/L11 (AB)\nThe Navy will want to go back to DuPont for some powder (enough to\nkeep their hand in when the foreign demand disappeers) because it\nhas been the Navy that through the years has kept the DuPont powder\nline in operation when the Army was buying very little powder. This\nwill require laying off some men at Indian Head after the need for\nexpansion coases.\nK. R. PURLONG\nChief of Bureau.\n12-\n&\nRegraded Uclassified\ndird. T\nIN REPLY ADDRESS\nREAU OF ORDNANCE, NAVY DEPARTMENT\nNAVY DEPARTMENT\nAND REFER TO No.\nBUREAU OF ORDNANCE\n(F13)\nWASHINGTON, D.C.\nSubject:\nDeferred Delivery of Smokeless Powder.\nSirs:\nThe Navy Department will accept four months,\nor 600,000 pounds capacity, deferred delivery of mokeless\npowder under the ourrent contract to permit the E. I. du Pont\nde Nemours and Company to manufacture srokeless powder for\nother orders.\nVery truly yours,\n2. R. FURLONG,\nRear Admiral, U.B.N.,\nChief of Bureau of Ordnance.\nE. I. du Pont de Nemours and Co., Ino.\nAttn: Mr. F. W. Bradway,\nSmokeless Powder Division,\nWilmington, Delaware.\nMRG\n3/8\nRegraded Uclassified\n(COPY)\nMarch 9, 1940.\nMEMORANDUM FOR FILES - GREAT BRITAIN\nColonel Burns called at the office to say that General\nWatson informed the Assistent Secretary of War over the telephone\nthat the powder to be released by the War Department to the\nBritish is 1,200,000 pounds,\nHe stated that the War Department should get in touch with\nthe Navy Department and inform them that if the loading program\nof the War D partment requires it, the 600,000 pounde which the\nNavy offered for release to the British will be considered as\navailable for the War Department needs.\nThis evidently means that only the War Department concession\n1e being used to help the British in this present emergency, but\nthat If the War Department needs assistance later from the Navy\ncontracts, it will be up to the Navy Department to assist to the\nextent, At least, of 600,000 pounda.\nFor the Clearance Committee, Army & Navy Munitions Board.\nCHAS. HINES,\nColonel, U. S. Army,\nChairman, Clearance Committee,\nArmy and Navy Munitions Board.\nCopies to:\nThe Secretary of War - In connection with powder study.\nThe Nevy Department.\nConcurred in by Navy Dept., Burent of Ordnance W.R. FURLONG\nRegraded Uclassi fied\n335\nGROUP MEETING\nMarch 12, 1940.\n9:30 a.m.\nPresent:\nMr. Bell\nMr. Cochran\nMr. Graves\nMr. Cotton\nMr. Charlie Bell\nMr. Gaston\nMr. Foley\nMr. Haas\nMr. White\nMrs Klotz\nH.M.Jr:\nGood morning. Chick, phone somebody to get for\nyou Clarence Linz's story yesterday on the air-\nplanes.\nSchwarz:\nI've got today's.\nH.M.Jr:\nNo, yesterday's.\nHerbert, what 1s new?\nGaston:\nSorry, I thought you were looking the other way.\nH.M.Jr:\nNo.\nGaston:\nThis is a memorandum on diamonds. Just the first\ntwo paragraphs is the only thing new. (March 11)\nThese summaries of manifests on the Amtorg cargoes,\ndo you like to get them?\nH.M.Jr:\nI like to look at them, yes.\nGaston:\nHere is one I got yesterday that 1s about a week\nold, but it is the latest one.\nH.M.Jr:\nRight. Anything else?\nGaston:\nI don't know anything. I am going to hold a\nmeeting tomorrow afternoon on the question of\nthe weather ships with Navy and Maritime Com-\nmission and Weather Bureau and Civil Aeronautics.\nH.M.Jr:\nO. K.\nFoley:\nSome of our people were down before the Ways\nand Means Committee last week and McCormick and\nRegraded Uclassified\n336\n- 2 -\nCullen and Dingell and Robertson and Knutson\ntalked about the abolishment of the Surveyor\nof Customs and the Comptrollers of Customs\nand they are pretty red-eyed about it and\ntalked about the deep resentment of the Ways\nand Means Committee for Treasury, last year,\nin going to the Appropriations Committee and\ntrying to get the jobs abolished. Now, Steve\nSpingarn was there and Steve suggests. before\nthe reorganization plan is submitted, if you\nintend to go through with it, to abolish those\nJobs, that you ought to talk to those fellows,\nCullen and McCormick, and 80 forth, and explain\nthe situation to them or withhold sending the\nExecutive Order down there at this time.\nH.M.Jr:\nTalk it over with Basil Harris.\nFoley:\nI have and he asked me to bring it up this\nmorning.\nH.M.Jr:\nWell, he ought to be here himself. I would\npostpone it until tomorrow at 9:30.\nFoley:\nYes.\nBell:\nI think the order ought to be withdrawn, Mr.\nSecretary. I think you can get into a lot of\ndifficulties with that thing.\nFoley:\nI do, too. This is no time to do away with those\njobs. It is only going to save you $60,000 and\nit is going to cause a lot of trouble with the\nWays and Means Committee.\nH.M.Jr:\nI am not ambitious. I would like an analysis\non that (handing clipping to Mr. Foley).\nFoley:\nThis is an SEC bill.\nBell:\nIs that that thing that Wagner talked about?\nFoley:\nInvested Trust bill.\nBell:\nTarleau has been handling that. He came in to\nme last night and said Schenker had called him\nRegraded Uclassified\n337\n- 3 -\nup and had a little paragraph he wanted to put\nin Wagner's statement regarding the tax part of\nthe bill and I told him to tell Schenker that\nthat thing ought to be held over until Wednesday.\nApparently they didn't hold it over. Wagner\nmade this statement.\nH.M.Jr:\nI still would like an analysis.\nGaston:\nBy the way, did you see the Farm Credit Act of\n1939 introduced by Marvin Jones?\nH.M.Jr:\nNo.\nBell:\nWe are making an analysis of that.\nGaston:\nIt is a peach. Three percent for five years on\nall the mortgage loans and eliminating the stock\nownership in the National Farm Loan Associations\nand in the Land Banks.\nH.M.Jr:\nI still haven't heard anything on Sullivan.\nFoley:\nNeither have I.\nH.M.Jr:\nI was just checking and double checking.\nFoley:\nSam Clark called and said he would like to go\nover with me the additional investigations on the\nBoston series. They granted - the U. S. Attorney\ndown there in Boston refused to go ahead and he\nsent the case back several months ago and Sam\nClark brought it over here and said he would like\nto have it investigated and then go over with me\nthe facts that were brought out and the reinvesti-\ngation. He called up yesterday and said the case\nhad been reinvestigated and resubmitted to him\nand he would like to talk to me about it before\nhe decided whether or not he would go ahead. He\nindicated that he might be willing to go ahead\nnow, but I am going to see him tomorrow at 3:00.\nH.M.Jr:\nI am not familiar with it.\nFoley:\nThat is the one where the contractors made con-\ntributions to the National Committee.\nRegraded Uclassified\n338\n- 4 -\nH.M.Jr:\nI see.\nFoley:\nThen it arose out of the Curley business.\nH.M.Jr:\nWell, all these political contribution matters,\nI mean, I am not familiar with. Incidentally,\nI am very proud of the fact - this isn't for the\nrecord.\n(Discussion off the record)\nCochran:\nYou spoke yesterday of the appointment for\nMr. Buck. He went to New York on Friday night\nand hasn't come back yet, but he will be here\nsometime this week.\nH.M.Jr:\nSend word to him that I would like to see him.\nI got kind of 8. shock seeing him sit there.\nAfter all, he doesn't work for us any more.\nSeeing him in the room poring over a map was\nkind of a shock to me.\nCochran:\nI will send word to New York. We received some\nmore Swedish foreign exchange regulations yes-\nterday. I will give you a copy. I was talking\nwith Eriksson of the Swedish Legation yesterday\nafternoon about it. He got on this matter of\npeace and said they had had nothing with regard\nto these conversations with Moscow, and so on.\nHe didn't think much of the idea of the Allies\nsending a landing force into Finland.\nThe press this morning stresses that if they\ndid go up it would be just at. the point where\nthey would be cutting off the iron ore and\nnickel ore in Germany.\nDid you want me to give an hour and try to get\na definite appointment with Mr. Buck?\nH.M.Jr:\nOh, let me know. You don't know when he is\ncoming down?\nCochran:\nHe said he would be down this week.\nWhite:\nI had a luncheon engagement with him today and\nhe sent a message that he couldn't come today\nRegraded Uclassified\n339\n- 5 -\nbut he would be in Washington during the week.\nH.M.Jr:\nWell, I am doing a boy scout deed on Thursday\nand having luncheon with Edison and Woodring.\nIf he was going to be in town on Wednesday,\nI would like to have lunch with him.\nCochran:\nAll right.\nH.M.Jr:\nI would like to have him up at the house, see.\nJoe?\nIf you (Mr. Schwarz) stay behind, I want to go\nover these articles with you.\nSchwarz:\nThere is another one this morning you ought to\nsee.\nH.M.Jr:\nI got that one. Not so good.\nSchwarz:\nI think --\nH.M.Jr:\nYou stay behind.\nGeorge? When I get through with Chick I will see\nyou.\nHaas:\nI just have these figures (handing report to\nSecretary).\nH.M.Jr:\nThis is interesting. I have just been curious.\nThere has been a little discussion as to our\nestimates. In December, '38, we estimated and\nit was released in the 1940 budget that the\ntotal revenue would be five billion 669 million.\nIn December, '39, Haas got out another estimate,\nfive billion 703, which 1s up 34 million, which\nwas released in the '41 budget. In July, '39,\nnot published but sent to the Director of the\nBudget, five billion 406 million, down 262, and\nthen in October, 139, not published and sent to\nthe Director, five billion 529, down 143. Now,\non the record, December '39, is five billion\n703, which is up 34 million from the year pre-\nvious. Is that right?\nRegraded Uclassified\n340\n- 6 -\nHaas:\nYes, sir.\nH.M.Jr:\nAnd that five billion 703 is the only public\nthing, right?\nHaas:\nThose two top ones were public, made public.\nH.M.Jr:\nThis is for the fiscal year. How does it look\nto you now, George?\nHaas:\nI haven't looked it over recently. Oh, probably\n100 million, one way or the other.\nH.M.Jr:\nSupposing you do another one.\nBell:\nIt is liable to be up, isn't 1t, George?\nHaas:\nYes, I mean the receipts probably may be 100\nmillion.\nH.M.Jr:\nHow long will it take you to do another one?\nHaas:\nWell, after we get the returns in, then we have\na base, Mr. Secretary, and I can give you then -\nafter the close of this month.\nH.M.Jr:\nSupposing you keep this, see. You haven't done\none since October, '39.\nHaas:\nThat is right. It is a big job. It takes two\nor three weeks.\nBell:\nDecember, '39.\nH.M.Jr:\nWell, when you give me the next one, include\nthis, do you see?\nHaas:\nAll right.\nH.M.Jr:\nBecause there is considerable confusion in the\nPresident's mind.\nBell:\nI don't think it will be far off from that.\nH.M.Jr:\nHe has got it mixed up with the next year, hasn't\nhet\nRegraded Uclassified\n341\n- 7 -\nBell:\nThat is right.\nHaas:\nTheir small. percentage error is going to be very\nBell:\nTwo percent.\nH.M.Jr:\n0. K.\nHaas:\nI have these other materials here.\nH.M.Jr:\nWell, you stay behind.\nHarry?\nWhite:\nThat item, tantalum, was raised, you remember,\nby Mr. Purvis sometime in the past. Some of it\nis being reexported. It is chiefly a British\nproduct. Do you want to go into that at any\ntime.\nH.M.Jr:\nThe next time Mr. Purvis is down, make a note\nabout tantalum. Hold on to it.\nHarold?\nDan?\nBell:\nDo you want to discuss Savings bonds today?\nH.M.Jr:\nWell, yes. 3:30?\nBell:\nMay I have about ten minutes before or after\non some other matters?\nH.M.Jr:\nYes. I am supposed to be going to the White\nHouse at 11:00 and if I don't, I will have\nplenty of time.\nWhite:\nHave you wanted to go over that material you\nasked George and myself to prepare?\nH.M.Jr:\nWhat material?\nWhite:\nWith reference to the business picture, foreign\nand domestic.\nRegraded Uclassified\n342\n- 8 -\nH.M.Jr:\nDo I want what?\nWhite:\nHad you wanted to go over that before you saw\nthe President? You suggested that last week,\nthat you had.\nH.M.Jr:\nI have been waiting on you men. When are you\nready?\nWhite:\nI think we were ready Saturday.\nHaas:\nYes, I sent in a copy of the domestic side of\nthe thing. Harry has got the foreign side\nworked up.\nH.M.Jr:\nYou are going away tomorrow, aren't you, George?\nHaas:\nTonight.\nH.M.Jr:\nWhy not say 2:30 for the two of you? Want to sit\nin, Bell?\nBell:\nYes.\n(Charlie)\nBell:\nI have nothing to report, Mr. Secretary. Mr. Thomp-\nson will report tomorrow.\nH.M.Jr:\nIs he getting along all right?\nBell:\nYes.\nH.M.Jr:\nEverything else all right?\nBell:\nYes, sir.\nH.M.Jr:\nO.K.\nRegraded Uclassified\n343\nMarch 12, 1940.\n12:55 p.m.\nH.M.Jr:\nSometime, not later than three-thirty I may want to\nsee you on the following thing. Have you got a\npencil?\nCantain\nCollins:\nYes sir.\nH.M.Jr:\nThis Hansen Baldwin of the New York Times proposes to\nwrite a story tomorrow along the following lines and\nI may see him, I don't know. Number one, Lochheed,\nBell, and Boeing have raised their price to the Air\nCorps because of following orders. That's number one.\nHello?\nC:\nYes sir, I'm getting it.\nH.M.Jr:\nNumber two. That Lochheed and Bell are behind in\ndeliveries to the Air Corps which is attributed in\npart by the Army to the foreign orders.\n0:\nLochheed and Bell.\nH.M.Jr:\nAre behind in their deliveries to the Air Corps which\nis attributed by the Army to the foreign orders.\nC:\nYes sir.\nH.M.Jr:\nSee?\nC:\nYes sir.\nH.M.Jr:\nThat I'm responsible for the transfer of the Brewster\nfighters to Finland. I had nothing to do with it.\nThat I had nothing to do with.\nC:\nYes sir.\nH.M.Jr:\nThe Brewster thing.\nC:\nYes sir.\nH.M.Jr:\nWere you in on that? I wasn't.\nC:\nNo sir, I was not.\nH.M.Jr:\nAll right. Now just let me see what else they say.\nWell the main thing that question one and two - hello?\nC:\nYes sir.\nRegraded Uclassified\n344\n- 2 -\nH.M.Jr:\nI want you to call UD Lochheed, Bell and Boeing and\nask them that point blank. Those two cuestions.\nC:\nYes sir, I'll get on top of that right away.\nH.M.Jr:\nAnd I'll most likely see this man Hansen by three-thirty\nand you'll be here at that time and I want the answers.\nC:\nAll right sir. Well, I talked with Baldwin this morning.\nH.M.Jr:\nHansen?\nC:\nNo, Baldwin of the New York Times. He was in here and\nhe was fishing around. I didn't get an opportunity\nto mention that this morning.\nH.M.Jr:\nWell he's the - on you saw Hansen-Baldwin.\nC:\nNo I saw, yes Baldwin. He came in here and asked 8. lot\nof questions to which I did not know the answers and I\nproperly referred him to the Mission.\nH.M.Jr:\nThat's the man that wants to see me.\nC:\nYes sir. Well he's looking for a lot of things and I\nthink he's got a lot of dope. I told him I couldn't\ntalk with him at all. He said\"Well of course, I know\ncuite a lot of this whole deal\" and said the Army has\nclaimed by virtue of these foreign orders why there\nhave been delays in their deliveries and I said, \"Well\nof course, that's a matter for the Army to determine\".\nI don't know of any.\nH.M.Jr:\nGet down these two particular cuestions that I'm\nasking.\nC:\nYes sir.\nH.M.Jr:\nAnd I wish you'd call up these various companies and\nask them.\nC:\nYes sir I'll do that right away.\nH.M.Jr:\nNow the other thing, these figures that you got me\nfrom Pratt and Whitney and Wright.\nC:\nThat's right.\nH.M.Jr:\nAnd Allison, their production.\nRegraded Uclassified\n345\n- 3 -\n0:\nYes sir.\nH.M.Jr:\nWould there be any objection if I lumped them all into\none figure not saying which one -\nC:\nNo, not a bit in the world.\nH.M.Jr:\nI'll lump them all.\nC:\nNo that would be perfectly all right, because that\nwould be a. perfectly fair statement and be perfectly\nall right and say the total number of engines\nmanufactured before and the total number after the\nFrench order and the total number proposed.\nH.M.Jr:\nThat's right.\nC:\nNo, that would be perfectly all right.\nH.M.Jr:\nWell get after these two things. Now you've Rot them\nall right.\nC:\nYes now. The way I have it stands now that\nLochheed and Bell -\nH.M.Jr:\nAnd Boeing.\nC:\nAre behind in deliveries - and Boeing.\nH.M.Jr:\nLochheed, Bell and Boeing have raised their price\nto the Air Corps because of foreign orders.\nC:\nAnd then Lochheed and Bell are behind in deliveries\ndue to foreign orders.\nH.M.Jr:\nRight. Now I want the answer and you've got to call\nup the West Coast or wherever you get that stuff and\nhave it by three-thirty.\nC:\nAll right sir.\nH.M.Jr:\nIf you please.\nC:\nAll right, I'll be right on top of this.\n346\nMarch 12, 1940.\n4:58 p.m.\nH.M.Jr:\nHello.\nSenator\nWagner:\nHello Henry?\nH.M.Jr:\nBob, my apologies, I was at the White House from one\nto four.\nW:\nWell, you can't help that. I hope you had some luck.\nH.M.Jr:\nI did.\nW:\nSay Henry, we're in trouble on this silver thing.\nH.M.Jr:\nNo.\nW:\nYes. You've got to tell us - you've got to take some\nstand on that for us. I wondered if you could do this.\nBarkley and Pittman just talked to me, if it wasn't too\ninconvenient for you, if you could meet the three of us\nin Barkley's room tomorrow about nine-thirty.\nH.M.Jr:\nLove to.\nW:\nUh?\nH.M.Jr:\nI'll be there.\nW:\nNine-thirty in Barkley's room.\nH.M.Jr:\nAt nine-thirty -\nW:\nYes.\nH.M.Jr:\nIn Barkley's room at the Capitol.\nW:\nIn the Senate Office Building.\nH.M.Jr:\nSenate Office Building?\nW:\nYes.\nH.M.Jr:\nNine-thirty.\nW:\nYes.\nH.M.Jr:\nTomorrow.\nW:\nTomorrow.\n347\n- 2 -\nH.M.Jr:\nI'll try to think - shall I bring anybody with me or\ndo it alone?\nW:\nWell, whatever you want to do about that, we just wanted\nto discuss that one subject because the Administration\nhas got to take some kind of a stand on that or else\nwe're going - the votes are going to be against us.\nH.M.Jr:\nWell, I'll be there at nine-thirty.\nW:\nFine.\nH.M.Jr:\nAnd I'm for Dutchess County apples.\nW:\nYes. Well, so'm I. (laughs. ) All right Henry.\nH.M.Jr:\nThank you.\nRegraded\n3/12/40\n348\nMiss Chauncey --\nMr. Foley carried the original of this\nmemo into the Secretary at yesterday's 9:30 meeting.\nFor your information, the Secretary did not\nkeep the copy of the hearings referred to in the\nlast paragraph of the memo.\n8\nHour\n349\nTREASURY DEPARTMENT\nINTER OFFICE COMMUNICATION\nDATE\nTO\nSecretary Morgenthau\nMarch 8, 1940\nFROM\nE. H. Foley, Jr.\n(70your information)\nRst Electric Boat Company\nIn refusing to confer authority upon the Navy to award contracts\nwithout competitive bidding, and in insisting upon the retention of the\nprofits limitation provisions in the pending Neval Bill of 1940, the\nHouse Committee on Naval Affairs seems to have been strongly influenced by\nwhat the Committee deemed favoritism shown by the Navy Department to the\nElectric Boat Company.\nThe Naval Bill of 1940 as originally introduced on January 3, 1940,\nby Congressman Vinson of Georgia, Chairman of the Committee on Naval\nAffairs, authorized the Secretary of the Navy to negotiate contracts\nwithout competition \"provided that he shall determine the price to be\nfair and reasonable.\" (H.R. 7665, 76th Cong. 3d Sess.) As reported on\nFebruary 14, 1940 by the Committee on Naval Affairs to the House the bill\ndid not contain this authority. (H.R. 8026, 76th Cong. 3d Sess., Report\nNo. 1593.)\nThe original bill also omitted the provision for limiting profits\ncontained in the Vinson-Tremmell Act of 1934 but as reported specifically\nmakes all contracts subject to the provisions of the Vinson-Trammell Act.\nYou will recall that at & conference held in your office on December\n6, 1939 Secretary of the Navy Edison and Mr. Sutphen of the Electric Boat\nCompany requested you to approve & closing agreement permitting the\nElectric Boat Company to charge off as obsolescence one-half of the cost\nof a new building estimated to cost about $600,000. It was stated that\nthe building would be used to carry out & contract with the Navy Department\nfor furnishing B. mosquito fleet of twenty-three boats at a cost to the\nGovernment of approximately $5,000,000.\nYou explained to Secretary Edison and Mr. Sutphen that any deduction\nfor obsolescence beyond the usual reasonable allowance would not only\nresult in the Government's paying for the building but would also increase\nthe percentage of profit beyond that permitted by the Vinson-Trammell Act.\nYou repeatedly emphasized that you would not treat one taxpayer differently\nfrom all other taxpayers and therefore declined to execute such a closing\nagreement.\nTwo contracts between the Navy Department and the Electric Boat\nCompany were then entered into privately and without any advertisement\n350\n- 2 -\nfor competitive bids on the theory that the boats wore \"experimental,\" not-\nwithstanding that one bost (but not the plans) had already been bought at 6.\ncost of more than $280,000 and had been tested by the Navy.\nIt was represented st the conference in your office that & primary reason\nfor erecting a new plant in which to build the boats rather than to use exist-\ning DAVY yards or existing private facilities was the desire to keep the fact\nthat the boats were being built and their design a secret. Secretary Edison\ntestified, however, that the British Admiralty had licensed this design of bont\nfor export and that the French and the Dutch as well as the British were\nbuilding the identical type of boet. When questioned by Congressman Vinson as\nto why the Navy would be BO intensely interested in a design for which the\nBritish apparently had found a superior type, Secretary Edison replied that\nthis country was twenty years behind the British in boats for 8. mosquito fleet.\nAt one point (p. 2098) in the hearings, Chairman Vinson said to Secretary\nEdison that \"as one member of this committee I shall have to insist as much 6.8\nI know how to insist on sharp competitive bidding,\" and at another point (p. 1958)\nin the hearings in discussing the desirability of expanding the program at the\nNaval Aircraft Factory at Philadelphia (where a few Curtis scout observation\nplanes and Brewster scout bombers have been built in addition to naval training\nplanes) Chairman Vinson remarked that \"We cannot turn over all of the Govern-\nment's business and absolutely be at the mercy of industry.\"\nJust prior to this remark, Chairman Vinson had pointed out that because\nof the limited number of companies in the sirplane industry, \"competition does\nnot necessarily make a yardstick\" and that the record showed that some of the\nairplane companies \"were making such enormous profits that they practically\ngave planes to the Navy by charging only $1 apiece for some of them.\" This\nwas apparently intended as an allusion to the sale to the Army of fifty planes\nat $1 apiece by the Consolidated Aircraft Corporation. You will recall that\nthe Navy asked us to enter into a closing agreement with the Consolidated Air-\ncraft Corporation under which at least 60 per cent of the cost of a new\n$1,800,000 building would be allowed as obsolescence, and that you declined to\nexecute such 8. closing agreement for reasons similar to those in the Electric\nBoat Company case.\nIn this connection you may be interested to know that when Admiral Towers,\nChief of the Bureau of Aeronautics, remarked that \"those days are over because\nof the law which limits that profit to 12 percent,\" Chairman Vinson replied,\n\"Which I think 10 a rather high percentage. And, this committee\ndid not agree to the 12 percent; ye were forced to accept that on\nthe floor of the House because it was in the Army bill.\"\nAttached are a few excerpts from the hearings on this transaction. In\ncase you are interested in reading more of the testimony on Electric Boat than\nhas been typed, I have marked in & printed copy of the hearings where the\nmatter was discussed.\ni.N7L\nEXCERPTS FROM HEARINGS BEFORE THE\n351\nCOMMITTEE ON NAVAL AFFAIRS HOUSE OF REPRESENTATIVES\n(January and February, 1940)\n\"Mr. Cole. What is being done by way of construction\nwith the mosquito fleet?\n\"Admiral Robinson. We have 32 experimental, small\nboats, building now. They will all be finished up some\ntime during this calendar year, I believe.\"\n***\nMr. Cole. Is it true, sir, that an order was placed\nwith one company for 23 experimental ships, without bids\nbeing asked?\n\"Admiral Robinson. Yes; that is true. After the\noriginal placing of the experimental boats, the Navy\nDepartment purchased a type of boat - as 8. matter of fact,\nit was purchased by a private firm from an English firs\nand was not purchased by the Navy -\n\"Mr. Cole (interposing). Who purchased it?\n\"Admiral Robinson. The Electric Boat Co. purchased\nit and we purchased it from them. The Navy Department\nbought it from the Electric Boat Co. and they, in turn,\nbought it from an English firm. ***\n\"Mr. Cole. The boat was actually constructed - this\none that was purchased?\n\"Admiral Robinson. Oh, yes, sir; it was purchased by\nus after having half a dozen different boards considering 1t.\"\n***\n\"Mr. Magnuson. What company is that, Admiral?\n\"Admiral Robinson. The Electric Boat Co.\n\"Mr. Magnuson. You bought the original boat from them\nand then ordered 23 of the same kind of boat from this one\ncompany?\n\"Admiral Robinson. Yes sir.\n\"Mr. Magnuson. After they bought it from England?\n\"Admirel Robinson. Yes sir.\n\"Mr. Magnuson. And paid the middleman's profit?\n\"Admiral Robinson. Of course the 23 ordered are being\nbuilt in the United States. The first boat use built outside\nof this country.\nMr. Cole. But they are all being built by this one\ncompany? \"Admiral Robinson. They are all being built by this one\ncompany. \"Xr. Cole. And they got the contract without any competition\nat all?\n\"Admiral Robinson. Ioo air.\nRegraded Uclassified\n352\n2.\nRegraded Uclassifi\n*Ar. Cole. On a set of plans that was actually in existence.\n\"Admiral Rebinson. Yes, sir.\n\"Mr. Cole. Was that contract let with the approval of all\nthe proper officials of the Department?\n\"Admiral Rebinson. As far as I know, it was; yes, sir.\n\"Mr. Cole. I must confess, for myself, it exudes an odor that\nis not altogether pleasant.\n\"Admiral Robinson. Well, Mr. Cole, the subject was discussed\nat some length. I think everybody in the Navy Department was in\non the discussion ***,*\n\"Mr. Cole. Is the Electric Boat Co. the only one which\ncould build this boat?\n\"Admiral Robinson. Oh, no, sir. I think any one of the\nsmaller boat companies in the country could have built it.\nBut, of course, for this particular boat, they had the rights\nto it. I mean they owned the patent rights and everything of\nthat kind.\n\"Mr. Cole. Then what was it the Navy bought from them?\n\"Admiral Robinson. They bought the boat.\nMr. Cole. The bought just the ship?\n\"Admiral Robinson. That 1a right.\n\"Mr. Cole. And they reserved in the Electric Boat all\nrights to the ship; is that it?\n\"Admiral Robinson. That is always true of anything we\nbuy. We do not buy patent rights; at least we do not usually;\nI won't say they never have been.\"\n***\n\"The Chairman. In view of what has just been inquired\nabout by Mr. Cole, do not you gee the wisdom of taking out\nsection 9, which permits you to go ahead without competition, as\nlast year, one big ship was awarded without competition, or\nrather, just one industrial concern bid on it, it prompted no\nto introduce & bill providing, where you only had one bidder,\nthe navy yards must necessarily submit a bid also.\n\"I an trying to keep the Navy Department from getting in\nsome tight places and some investigations and as long as you\nhave open competition you are all right.\n\"Admiral Robinson. Yes sir.\"\n***\n\"fr. Magnuson. Has not the Electric Boat Co. got enough\nout of the Government without buying a boat in England and\ntying up the shipbuilding rights on something as important\nas this, and then selling it to the Mavy? They manufacture all of\nthe submarines, do they not?\n353\n3.\n\"Admiral Rebinson. No, sir; only about half of the\nsubmarines.\nTr. All of the privately built submarines\nto to the Electric Boat.\n\"Admiral Robinson. That is true.\nMr. Magnuson. And now they go to England, buy a ship,\nand tie up the builders' rights, charge the Havy for that, and\nthen the Havy goes around and gives them 8 contract for 23 ships -\nnot for experimental purposes, because the boat is already built,\nbut the experimental purposes are for naval tacties after you\nget the boats.\n\"Admiral Robinson. That is perfectly true.\nMr. Magnuson. I feel like Mr. Cole - it smells a little.\"\n***\n\"Mr. Cole. Did the Havy Department attempt to buy the\nspecification rights from the Electric Boat Co.?\n\"Admiral Robinson. No, sir; it did not.\n\"Mr. Cole. Bo that you would be in a position, then to\nsubmit this large order to competition?\n\"Admiral Robinson. No, sir; it did not. Any attempt\nto have placed that boat with somebody else I feel very sure would\nhave resulted in a delay of the whole business. In fact, it might\nwell have resulted in the inability to get it. ****\n\"Mr. Cole. Mr. Secretary, it is rather startling to learn\nthat out of this authorization of $15,000,000 which Congress gave\nto the Navy Department for experimental vessels an order was\nplaced for 28 boats of the same model, and By only interest is\nto know what the story of that order is and how it could be\njustified as experimentation.\n\"Mr. Edison. There were some $15,000,000 appropriated for\nthe development of the small-boat program on experimental boats.\nThere are two or three parts to that experiment. ***\n\"No started on this program of experimental boats by trying\ncompetitively to develop the best design. ***\n*** Prior to the completion of even the design competition\nI heard of a boat that had been designed in England, which\napparently was creating a lot of interest among foreign countries. ***\n\"Now, to ne there are no limits of geography when you come to\ncompeting for design plans. I mean you have got to pick up ideas\nanywhere in the world. ***\n*** In order to get actual boats of a proven design as\nquickly as possible to train personnel, develop tactical doctrine\nand production methods, I ordered replicas of the British boat\nbuilt in this country. ***\nRegraded Uclassified\n354\n4.\n**** Consequently, we tried to get somebody to take\nthese boats up and build a group of them. The Electric\nBoat Co. undertook to do that and were willing to build a\nplant for this purpose at their own expense. ***\n\"*** The Electric Boat Co. finally agreed to go along\nwith me on the third part of this program and spend of their\nown money and some six or seven hundred thousand dollars,\nprobably more, toward constructing & separate unit in their\nplant and work out this problem of nass production. ****\n***\n\"Mr. Cole. How much did the one boat cost, the original?\n\"Mr. Edison. The original Scott Paine boat cost about\n$283,095.\n\"Mr. Cole. It cost who that?\n\"Mr. Edison. The Government.\"\n***\n\"Mr. Cole. You have stated it was your purpose to interest\n& number of concerns in the construction of these small vessels,\nbut I am at a loss to see how you are going to interest others\nin the construction of them, thereby generating competition, if\nyou placed such a large order as that with one concern.\n\"Mr. Edison. The whole business might die if 23 boats\nwere all we were ever going to build. But if this experimental\nprogram proves small craft to be of real value, I visualize the\neventual building of a very much greater number than this.\"\n***\n\"The Chairman. From your answers to the questions, Mr. Secretary,\nI do not think there could be any criticism from an experimental\nstandpoint with a limited number, but when you bought 24 without\nany competition I an somewhat of the same opinion as Mr. Cole,\nthat it got beyond the experimental stage and got in the stage of\nproduction. Is not there some law which prohibits quantity\nproduction, even in the experimental stage, from being swarded\nwithout competition?\n\"Mr. Edison. There are laws that permit us to buy proprietary\narticles without competition.\n\"The Chairman. Yes, but this has gone past that stage.\"\n***\n\"The Chairman. Can you not go a little bit farther?\n\"fr. Edison. To can if we get negotiated contracts.\nRegraded Uclassified\n355\n5.\n\"The Chairman. Then I an afraid you will have to wait\na long time.\n\"Mr. Magnuson. Here is what I do not understand: Why could\nnot the Navy in picking this boat from England build it themselves?\nWhy did they have to pay the Electric Boat Co. for this so-called\nproprietary right or any patent covering it?\n\"Mr. Edison. It was felt cheeper to do it with this private\nconcern with 23 boats than build them ourselves.\"\n***\n\"Mr. Magnuson. I imagine they are in business for a profit.\nSuppose this boat proves a good thing and the Navy Department\nwants it. Does the Electric Boat Co. have it BO tied up we\ncannot build these any other place.\n\"Mr. Edison. No.\n\"Mr. Magnuson. Why you could not have done it before?\n\"Mr. Edison. You cannot build them unless the Electric\nBoat Co. is willing.\n\"Mr. Magnuson. Unless they are willing?\n\"Mr. Edison. No.\"\n***\n\"Mr. Cole. Is that the way you are doing with all of these\nexperimental projects?\n\"Mr. Edison. What is that?\n\"Mr. Cole. Is that the way you are doing with all of these\nexperimental projects, leaving in the inventor the proprietary rights\nto his invention which has finally been accepted by the Department?\n\"Mr. Edison. When you say 'all' I think that is probably too\ninclusive. I know it is customary at times.\"\n***\n\"The Chairman. Now, Mr. Secretary, I want to thank you for\nthe fine statement you have made, and we want to assure you that the\nNaval Affairs Committee has tried to work in harmony with you, even\nthough we may not agree with all the conclusions you reach, especially\nwith reference to negotiated contracts *\n(Hearings pages 2088-2135)\nRegraded Uclassified\n356\nMoreh 12, 1940\n- Chaton\nI á\nSTRICTLY CONFIDENTIAL\nIn telking w telephone with my friend neet is the Division of Unitions\nCentrol of the State Department this meraing 1 Insurance as to their latest\ninformation is regist to the activities of Measure. and Choose. Test\nend d that only yesterday they had born in brank with this fire again and had\nresisted the of the proctor rate by their representative orreral weeks -\nabou visiting Backlagion, to provide the Mate Department with a 4097 w\ntheir contract with Antong. I 100 Test Issue # and learned is strictest\ndones that Antorg had recently made too name payments to Wadgelo and Cheate,\ntotaling $26,900. Test promised to - Shie information, and sett that he\nwould look further into the prosibility of this consern having más additional\nsolyblement chipments. the would also investigate the possibility that Whippin\nand Cheate may be solling - other material to wore.\n16m.P.\nRegraded Uclassified\n357\nMarch 12, 1940\n4 p.m.\nPresent:\nMr. Bell\nMr. Foley\nDr. White\nMrs. Klotz\nHM,Jr: Now you fellows can cogitate. I am\nmeeting Senator Barkley at his office at 9:30 tomorrow\nmorning with one Key Pittman, one Senator Wagner and\none Barkley. Which of you want to go or all of you\nor should I go alone?\nMr. Bell: What's the subject of the conference?\nHM,Jr: Apples in Dutchess County. Heigh-ho,\nSilver!\nMr. Bell: Harry has been working on it and has\nsome statistics he ought to take.\nDr. White: I don't think that's the intent. I\nthink it is\nHM,Jr: This 1s policy, as far as the Democratic\nparty is concerned.\nDr. White: I don't think I could be of any assist-\nance.\nMr. Bell: I don't know. You will have to be the\njudge whether anybody can be of help to you on policy of\nthat kind.\nDr. White: Ed, the great manipulator here ....\nHM,Jr: Well, seeing you all feel that way about\nRegraded Uclassified\n358\n2-\nMr. Foley, I will take Mr. Foley up there with me.\nSupposing you (Foley) be at my house tomorrow morn-\ning at 9 o'clock.\nMr. Foley: Sure you don't want Harry? He\nknows more about it.\nHM,Jr: I can say what I am going to say up\nthere in two minutes.\nDr. White: Say it to Barkley or before the Com-\nmittee?\nHM,Jr: Before the Committee. Tell you what.\nYou both be at my house at 9 o'clock. You both be there.\nDr. White: If we are going to make a statement,\nI would like to write something out.\nHM,Jr: No, this 1s Just before Pittman, Wagner\nand Barkley. The two of you be at my house at 9 6'clock\ntomorrow morning.\no0o-o0o\nRegraded Uclassified\n359\nTREASURY department\nPROCUREMENT DIVISION\nOFFICE OF THE DIRECTOR\nWASHINGTON\nM\nMarch 12, 1940\nMEMORANDUM FOR THE SECRETARY\nAs a matter of information, a preliminary inquiry has been received\nfrom Sir Henry Self, acting on behalf of the Anglo-French Purchasing\nBoard, concerning the purchase of ordnance for the forthcoming\naviation program consisting of\n2,000 cannon (23 IIIII or 20 mm)\n20,000 machine guns (0.3 ins. & 7.5 mm)\n12,000 machine guns (0.5 ins. & 13.2 nm)\nThis matter has been referred to the Army and Navy members of the\nCommittee for an investigation and report.\nChairman,\nPresident's Liaison Committee\nRegraded Uclassified\n360\ntreasury department\nPROCUREMENT DIVISION\nOFFICE OF THE DIRECTOR\nWASHINGTON\nAAI\nMarch 12, 1940\nMEMORANDUM FOR THE SECRETARY\nConcerning your query of this afternoon, the A-20 for which\nDouglas Aircraft has a contract with the Army is the same\nship as the DB-7 at present being manufactured for the\nFrench with additional fuel capacity, resulting in the\nplane's being somewhat heavier, and in the A-20 Wright 2600\nCyclone motors are used instead of the 1830 P&Ws which are\nbeing used on the DB-7s delivered to France.\nChairman, President's Liaison Committee\nRegraded Uclassified\n361\nTREASURY DEPARTMENT\nPROCUREMENT DIVISION\nOFFICE OF THE DIRECTOR\nWASHINGTON\nMarch 12, 1940\nMEMORANDUM\nMeeting was held in the Secretary's office this morning at which\nwere present, in addition to the Secretary, Rear Admiral W.R. Furlong,\nChief, Bureau of Ordnance, Navy Department; Rear Admiral Ray Spear,\nChief, Bureau of Supplies and Accounts, Navy Department; and the\nDirector of Procurement.\nThe question of furnishing powder to the British Mission was dis-\ncussed at length. For the purpose of clearing the record Admiral\nSpear, at the suggestion of the Secretary, is to prepare a memoran-\ndum after consultation with the Army authorities which will definitely\ndevelop the fact that the 1,200,000 pounds of powder which the Army\nhas agreed to release is from their reserve account and will have no\neffect on the loading operations at their arsenals.\nChairman Lisison Committee\nRegraded Uclassified\n362\nTREASURY DEPARTMENT\nPROCUREMENT DIVISION\nOFFICE OF THE DIRECTOR\nWASHINGTON\nAMA\nMarch 12, 1940\nMEMORANDUM FOR THE SECRETARY\nThere is attached hereto a schedule of deliveries for the\nP-40 for both the French State and the United States Army\nwhich is self-explanatory.\nChairman, Liaison Committee\nJohn President's\natt.\nRegraded Uclassified\n363\nTREASURY DEPARTMENT\nPROCUREMENT DIVISION\nOFFICE OF THE DIRECTOR\nWASHINGTON\nP-40 Deliveries\nFrench\n1940\nU.S. Army\n-\nApril\n7\n- -\nMay\n36\n5\nJune\n44\n- -\nJuly\n45\n12\nAugust\n45\n13\nSeptember\n45\n23\nOctober\n45\n29\nNovember\n45\n18\nDecember\n45\n1941\n- -\nJanuary\n45\n- -\nFebruary\n45\n- -\nMarch\n45\nApril\n27\n- -\n100\n524\nRegraded Uclassified\nabout March 12. 940\nStreetly personal and confidential\n364\nMemo for Secretary\nI am getting mon and more\nconcerned about the aid the a.s. govt-\nis unwettingily giving Germ any. 2 dont\nknow what can be done about it but\nperhaps some remedy will sug gest elsety\nto you\nAdminal Stark in his liclimony said the\nS. would have to consider the prosibility-\nulingency of Germany winning. Embass ador\nusedy ( I am releably impormed) enuded\noom whereast he went Other minor\nvials have dis curred the prospects Z\nGerman victory, until Washington column.\nare talking about 50/50 chances.\nUnder Security Welles visit unfortunately\nvicided with the Russo- Finnish ne.\nnations; his seeking an audrence with\ntitter though a necessary part of\nUclassified\nal\n2\n365\nhis visit, was exploited in Germany\nas another Hitler trumph i m taylors\nvisit to the Vaturan about conceded\nwith non R bbsutrop's and will be used\nD evidence that we are seconding his\nyests to find a peaceful (terman)\nolution to the was\nThe Erman people are just emerging from\nhand writer full of privations, ur have\nformation that their own leaders (amy)\nvin not- figure out a way to win\nhe war; and ur give them aid and com-\nist equivalent to several amy Corpo\nsuggesting that our expects openion\nlicer the Germous have an even chance\nwinning\n2 have made a caupul survey\n2 our military and naval opinion; win the\nist- thought is that Emany cant\nO war.\nIt is certainly not to our\ninterest for Germany to wine\nRegraded Uclassified\n3\n366\nwar. and yet we are now playing\nits the hands of Germany by letting\nhe word be passed around that\nhe might win. the official altitude\n2 our government should be \" At is\npossible for Germany to win the was.\nil win.\" Such an attilude would\nL is only a question of when The allies\nRet not only the German people\nud their confidence in Hitler, but would\nfluence the attitude of all the\nentrals, particularly Italy.\nThis publicly assumed position would not-\nrevent our officials from they moisting privality\nEngland and France that must get on welt\nwat and made sure 7 an early valory\ntaking evergetic measures.\nRegraded Uclassified\n367\nTELEGRAM sent\nJT\nGRAY\nMarch 12, 1940\n5 p.m.\nAMERICAN LEGATION\nBUCHAREST (RUMANIA)\n65\nThe Secretary of the Treasury would appreciate re-\nceiving a cablegram in which Edson would bring as nearly to\ndate as possible the material provided in his comprehensive\nand helpful message No. 4, January 9, 11 a.m. Information\non current regulations regarding patroleum exports 18 parti-\ncularly desired.\nHULL\n(FL)\nEA:FL:LWW\nCO\nRegraded Uclassified\n368\nMarch 12, 1940\nM. Feis\nm. Cookran\nwill you kindly send a cablegram along the following lines:\n\"AMIRICAN LEGATION BUCHAREST.\nthe Secretary of the Treasury would appreciate\nreceiving & cablogram in which Mean would bring as\nnearly to date as possible the material previded in\nhis comprehensive and helpful message 4. January 9.\n11 a.m. Information on current regulations regarding\npetroloum experts is particularly desired.\"\nHM0:emkt3.12.40\nB.M.S.\nRegraded Uclassified\n369\nNEW YORK TIMES\nMarch 11, 1940\nRUMANIA CONSERVES OIL\nBans Export of Crude With\nHigh. Octane Index\nBy Telephone to Tax New YORK Truis,\nBUCHAREST, Rumania, March\n10-The oil commission has issued\nan order forbidding until further\nnotice the exportation of crude oll\nfrom which refined patroleum of\nsixty-aight octanés or more can be\nobtained, even If mixed with other\nkinds of dil. Export also 14 pro-\nhibited for pure or mixid petrol\nthat has been distilled from such\ncrude.\nThe exportation of cracking and\nreforming petroleum, if not so\nmixed, will be allowed. Every ex-\nport application must have a.cer-\ntificate showing that the oll prod-\nuet concerned does not come under\nthe prohibition and specifying the\noptanic index and origin.\nRegraded Uclassified\n370\nJesuary 2. 1940\nDr. Feis\nMr. Cechran\nThe Secretary of the Treasury would appreciate a message somewhat\nalong the fellowing lines being cabled to\n\"AMERIGAN LEGATION BUCHAREST\nAt the request of the Secretary of the Treasury you are instructed to\ncable at Treasury expense a review and summary of surrent wartine trade\nand goods traffic between Rumania and Germany, with particular regard to\noil. the Treasury ventures to suggest that Mr. Mson would be interested\nin preparing such a report and states that his cooperation would be such\nsppreciated.\"\n(Init.) E, Ma. la\nRegraded Uclassified\n371\nREB\nGRAY\nBucharest\nDated January 9, 1940\nRec'd 3:50 P. m.\nSecretary of State,\nWashington.\n4, January 9, 11 a. m. (SECTION ONE)\nFOR TREASURY FROM EDSON.\nIn accordance with Department's telegram No. 1,\nJanuary E, 7 P. m.\nIn statistics quoted below Germany includes Austria\nand Czechoslovakia; and the three month period September\nthrough November 1939 has been compared with corresponding\nperiod of 1938.\n(SECTION ONE). Imports into Rumania from Germany\nduring first three months of the war totaled 60.4000\nmetric tons, an 8% decrease from 1033 period. The lei\nvalue 0: these imports was 2,705,000,000, a 23% increase\nover 1038 period. Customs statistics do not indicate\nwhether this value increase was due entirely to higher price\nlevel or in part to qualitative changes in imports from\nGermany though it is generally believed that armaments from\nGermany, Czechoslovakia, and Poland constitute a larger\nproportion of total imports than in prewar period.\n(SECTION\nRegraded Uclassified\n372\nREB -2- #4, From Bucharest, Jan. 9, 11 B. In.\n(SECTION TWO). Exports to Germany during September-\nNovember period totaled 573,000 tons, a 10% increase over\n1938 period. Their lei value totaled 3,436,000,000,\na 100% increase over 1938 period due largely to oil price\nincreases. Exports of petroleum products discussed in more\ndetail below declined 15% from corresponding 1938 period\nbecause of transport difficulties and lumber exports declined\nto one-seventh. The increase in total exports is due to\nexports of 197,000 tons of cereals, an 86% increase over\n1938 period, and 13.9 tons of animals and animal products\nwhich was three times corresponding 1938 exports.\n(SECTION THREE). Petroleum exports to Germany during\nfirst eight months of 1939 totaled 961,000 tons, a 49%\nincrease over corresponding 1938 period. Of this total,\nvia\n479,000 was shipped. / Danube and negligible quantities by\nrail, leaving deepwater Constanza-Hamburg route carrying\nabout one-half of peacetime oil traffic. After imposition\nof the allied blockade shipments to Germany via Constanza\nceased entirely (there is no evidence here of any (?) trans-\nshipment trade via Italy). Wartime shipments to Germany were\nas follows, in thousands of tons: September 65 by the\nDanube 4 by rail; October 68 by the Danube 20 by rail;\nNovember 62 by the Danube 21 rail. Three months total\n240,000, 15% below the corresponding 1938 period.\n(SECTION FOUR)\n373\nREB -3-H4, From Bucharest. Jan. 9, 11 a. m.\n(SECTION FOUR). Futuro trends. Although the National\nBank does not publish clearing 01 balances by countries, customs\nfigures indicate that during the year of October 1938 to\nin\nSeptember 1930 Greater Germany Had? a favorable merchandise\nbalance with Rumania of 2,147,000,000 lei by the resulting\nlargely from Czech arm shipments. Therefore Germany's un-\nfavorable balance of 731,000,000 lei during the first three\nmonths of war, while larger than the usual scasonal adverse\nbalance, is not sufficiently large to cause payment diffi-\nculties in the near future. Germany's exports are, however,\nsubject to increasing qualitative restrictions; for example\nrubber cannot be exported at all and products containing\nmore than 10% of copper, tin and lead may not be exported.\nWith increasing pressure of work on Germany's metallurgical\nand chemical industries as blockade warfare continues\nGermany's ability to balance the clearing in the more distant\nfuture seems more doubtful. The revaluation of the mark\nlast month (see Legation's telegram of December 28, 4 p. m.)\nimproved Germany's terms of trade by only 13% but renewed\npolitical pressure could it is hinted force another rovalua-\ntion if Germany deemod it necessary.\n(END SECTION ONE)\nHIBBARD\nNPL\nRegraded Uclassified\n374\nPARTIAL no. 4 OF PARAPERASE OF TELEGRAM RECEIVED: SECTION TWO,\nJANUARY s, 1940 FROM AMERICAN LEGATION, BUCHAREST.\nTransport rather than payment difficulties therefore\ndominate the insediate future copecially as regards oil ship-\nments. Damise 012 shipments so greater Germany in passe time\naveraged 60,000 tome a month and highest monthly peak in\nhistory to all Dambiam area vas 112,000 teas. The Pantibe\nwas closed w 100 on Desember su and usually to not respense\nuntil March. Germany may be expected to increase river\ntenker tennage by nev construction and possibly by the transfer\nof Rhine tankers, though the latter vould require expensive\nadaptation to namina draft of one neter. No new river tanker\nconstruction is under way in Rumania and there 10 no reliable\ninformation here regarding German construction program. 012\nindustry believes that with mont efficient use of existing\ntonnage 100,000 tone a month sould be shipped to Germany via\nExpansion of rail oil shipments beyond 40,000 tome a\nsouth is problematical. 412 Rumanian tank care are needed\nfor internal traffic and are still prohibited from cressing\nthe frontier. November figures indicated Germany was then\nusing about 1000 tank ears for Rumanian traffic, the industry\nexpects December and January rail figures to be coment\nhigher. Newever, in addition to tank ear limitations, rell\nline capacity nots limits to expansion of rail traffic. The\nbettlemeek pass between Floosti and Pressy on the next direct\nroute to Cermany to already crewded with additional traffic\n4am to the Rumanian treep novement, and double tracking of\nRegraded Uclassified\n375\n- 8 -\nthis scotion will probably not be completed before September.\nTraffie on the recently responsd Cornauti-Lemberg route has\nthus far been severely restricted by Poviet red tape and 10-\nafficiency and no 011 has yet gone by this route. The local\nsil industry actimates 40,000 tons a month 18 marimum amount\nfor rail shipments regardless of number of tank care Germany\ncan send.\nPresent transport maxima may therefore he entimated at\n40,000 tone - month during three vinter months and 140,000\nn month during the rest of the year.\nCONFIDENTIAL:\nI have heard reliable runore that Rumante has agreed\nto furnish 130,000 tone 6. month to Germany, no part of the\nagreement; this figure is elightly larger than the transport\nmaxima estimated in the preceding paragraph. Recently,\nhowever, there has been considerable evidence of an 011-\nbuying campaign on the part of the Allies with the purpose\nof obtaining the greater part of the expertable surplus\nof Rumania - 4,000,000 toms a year. This campaign, if\ncontinued, will confront Germany with inability to fill\ntransport capacity and when the Danube there, if not earlier,\nit may precipitate a orisis. The price of oil has already\nbeen forced to double the f.o.b. basic price level through\nthe buying of the Allies; as a result of this, Humanie now\nsells\nRegraded Uclassified\n376\nB\nsells only to belligerents or to neutrals to when who\nhas treaty consituents. The companies prefer to sell their\nproduct to Englana, because that country grants free 020\nchange quota. According to informants in the industry,\n10 10 probable that the Rumanian Covernment may seen ask\n⑉11 companies, under threat of compulsion, to sell -inimum\nquotes to Gereany no that the Runenian Government may\nimplement its obligation to Germany. During the nutume\nthe principal shippers to Germany were Allied companies,\nbecause of obligations contracted before the war; havever,\nthey are refusing to renew the contracts now, and pressure\non the Allied companies on the part of the Rumanian Govern-\nment would inevitably result in diplomatic intervention\nby the Allies, and possibly the Allied blockade would be\nused to exert economic pressure. Limitations of transport\nhave up to the present protected the neutral position of\nRumanta, but whos the Danabe thave, the conflict between\nthe vil-buying campaign on the part of the Allies and the\nalleged consituent to Germany may foree Rumania's hand.\nEND OF RESSAGE.\n10 THE\nTMATSISSA JACINHOET\nOE THE\nBW m 10 ЫМ v 18\nBECEINED\nEAILEV\n1900\nCOPY FOR SECRETARY\nB.M.S 3/12/40\n11\n11.\n3\n377\nPARAPHRASE OF TELEGRAM RECEIVED\nFROM: American Legation, Bucharest, Rumania\nDATE: February 9, 1940, 5 p.m.\nNO.: 29\nA decree was signed by the Petroleum Commissioner\ntoday which prohibits, without the Petroleum Commission's\nprior approval, the installation, sale, renting or removal\nfrom one location to another of metal tanks of a capacity\nof over 10,000 liters.\nIt is the belief of informants in the industry that the\nmain purpose of this measure 1s to ensure that the Rumanian\narmy will have storage for aviation gasoline. Since Septem-\nber, the exportation of aviation gasoline has been prohibited\nby Rumania, and the Government hopes that by April it will\nhave a reserve for army purposes of 50,000 tons. A secondary\npurpose of the measure may be to prevent further leases of\ntanks such as the recent lease for Russian lubricating oil.\nThe first shipment of Russian lubricating oil it 1s under-\nstood is due in Constanza about the fifteenth of February,\nIt is further understood that because the Rumanian transport\nroutes to Germany are congested at present, the Germans\nplan to use this route only for Russian lubricating oil.\nDiesel oil and Russian gasoline are to be shipped either\nby barges vie the Russian river and canal systems and the\nBaltic, or by all rail routes.\nA reliable report has been received that Germany has\n3,200\nRegraded Uclassified\n378\n- 2 -\n3,200 tank cars available now for oil from Rumania. Thus\nif sufficient locomotives and loading facilities were\nalso made available, this would provide for Germany a\ncapacity of about 41,000 tons a month by rail.\nGUNTHER.\nTEA SNFOT of\nSS 11 SS MA si SAM NO\nIRCN MARK\nEA:LWW\nRegraded Uclassified\n379\nMarch 12, 1940.\nMEMCRANDUM\nJohn Crider of the New York Times was in to say that he had been\nasked by Hanson Baldwin, who plans to write a comprehensive aircraft\nstory for tomorrow's Times, to oheok on the following assertions by\nthe Army Air Corps:\n1. That Lookheed, Bell and Boeing have raised their prices\nto the Air Corps because of foreign orders.\n2. That Lockheed and Bell are behind in their deliveries to\nthe Air Corps, which is attributed in part by the Army to foreign orders.\n3. That Secretary Morgenthau was responsible for the release\nof the Brewster fighters by the Navy to Finland.\n4. That, on behalf of France, Secretary Morgenthau urged that\nthe first twenty-five Curtiss P-40s off the line should go to that\nnation, that Gen. Arnold objected, was called to a White House conference\nand the President said the matter should be put to the military affairs\nand foreign relations committees of both houses.\n5. That England and France, through their representatives here,\nare now saying that they will get advanced designs of the Bell P-39,\nthe Republic P-44 and the Douglas A-20.\nFelix Belair had planned to ask the President these questions this\nafternoon. Baldwin says the P-40 is a disappointment but the Army diehards\nstill don't want to release it.\nRegraded Uclassified\n380\nMarch 12, 1940.\nMEMORANDUM\nJohn Crider of the New York Times was in to say that he had been\nasked w Hanson Baldwin, who plans to wite a comprehensive aircraft\nstory for tmorrow's Times, to check on the following assertions by\nthe Any Air Corpos\n10 That Leckhood, Bell and Besing have raised their prices\nto the air Corps because of foreign orders.\n2. That Lookhood and Bell are behind in their deliveries to\nthe AP Corps, which is attributed in part by the Army to foreign orders.\n3. That Secretary Morgenthau was responsible for the release\nof the Brewster fighters w the Havy to Finland.\n4. That, on behalf of France, Secretary Morgenthau urged that\nthe first twenty-five Curtise P-40s off the line should P to that\nnation, that Come Arneld objected, was called to a White House conference\nand the President said the matter should be put to the military affairs\nand foreign relations committees of both houses.\n8. That England and France, through their representatives here,\nare now saying that they will get advanced designs of the Bell P=39,\nthe Republic Podt and the Deuglas\nFelix Belair had pleased to ask the President these questions this\nafternoon. Buldwin says the P=40 10 a disappointment but the Army dichards\nstill don't wast to release its\nRegraded Uclassified\nCapt Puliston:-\n381\njust received fallowing:- :-\n\"Berlin:- moscaw afficially\nconfirms Finns and Soviet\nconcluded place treaty\".\nDEM\n5:15pm 3/12/40\nTreasury Department\n382\nDivision of Monetary Research\nDate March 14, 1940\n19\no:\nSecretary Morgenthau\nWill it be all right to send copies of\nattached to the following:\nMr. D. W. Bell\nMr. Foley\nMr. Gaston\nyes\nMr. Sullivan\nMr. Haas\nhu.h\nMr. Cochran\nMr. Puleston\nMR. WHITE\nBranch 2058 - Room 208\n383\nTREASURY DEPARTMENT\nINTER-OFFICE COMMUNICATION\nCONFIDENTIAL\nDATE March 12, 1940\nTO\nSecretary Morgenthau\nFROM\nMr. White\nSubject: Foreign Economic Developments\n(Prepared by the Division of Monetary Research)\nUnited Kingdom\nThe British economy 1s still far from being on a full war\nfooting. After six months of war and the mobilization of one\nmillion men, there are still 11 million unemployed in England\nand unemployment 18 well above pre-war levels. Idle resources\nand man power continue in the war industries and in the export\nindustries. There have been increases in unemployment since\nAugust in -- surprisingly enough -- motor vehicle industry (in-\ncluding aircraft), explosives and other chemicals, as well &8 in\nluxury industries and industries producing for home consumption.\nThe Ministry of Labor has ceased to publish the total number\nof employed workers but taking account of mobilization of & mil-\nlion men and the increase in unemployment of over 200,000 it ap-\npears that there has been B. decline in the total number of employed\nworkers of between 3/4 of a million to & million. Statistics of\nindustrial activity are not available, but the unemployment f1g-\nurea and other information available suggest that there has been\n& decline in industrial activity since August, of 8.8 much as 5 to\n10 percent.\nThe Quest for Foreign Exchange. The United Kingdom is taking\nadditional measures to improve her balance of payments position.\n1. Great Britain now requires free foreign exchange from\nEmpire exports of tin, rubber, jute, whiskey, and furs, destined\nfor most foreign exchange areas. The immediate effect of this\nmove will be to reduce the price of sterling in the free market.\nThe lower price of sterling will help to promote exports of the\nEmpire which face keen competition from other countries, while\nEngland will get the maximum exchange proceeds from the Empire\nexports which face little competition.\n2, British manufacturers of cotton, woolens, and perhaps\nother commodities are being given special inducements to increase\nUclassified\n84\n- 2 -\nDivision of Monetary\nResearch\nexports. These inducements will no doubt help the manufacturers\nto overcome handicaps in their export business arising from the\nwar, and perhaps enable them to acquire new export outlets.\n3. Another type of control adopted is the prohibition\nplaced on the manufacture of linen except for export. This\nmeasure will force the manufacturers to expand export outlets,\nand at the same time reduce foreign exchange expenditures by\ncurtailing imports of flax for domestic use.\n4. The 2nd quarter 1940 export quota for tin has been\nsharply out from 120 percent to 80 percent. The effect will be\ntwofold: (1) to curtail stocks and therefore make shipments to\nunfriendly nations easier to detect; (2) raise the price of tin\nand thus provide England with more foreign exchange. (The re-\nduction in the tin quota may conflict with the desire of the\nUnited States to increase tin stocks in this country as 8 re-\nserve against contingencies.)\nFrance\nThe French Government is paying for the war almost entirely\nout of borrowings. Almost the whole of the war expenditures of\n18 billion francs per month 18 being raised by borrowing, while\nthe 6 billion francs per month of civil expenditures le raised\nby taxation and monopoly revenue,\nFrench Government Receipts\n(In billions of france)\nTaxes and monopolies\n6.0\nSales of gold\n2.2\nAdvances from Bank of France\n4.1\nTreasury bills\n2.7\nArmament bonds\n9.0\nTotal\n24.0\nMost of the armament bonds are apparently being bought by\nbanks, whose cash reserves have been expanded by the increase\nof over 30 billion france in circulating money which has taken\nplace since the week of mobilization. Only 8. relatively small\npart of the subscriptions for these bonds comes from savings or\nfrom reduced consumption.\n385\nDivision of Monetary\n- 3 -\nResearch\nFinancing the war by these methods involves the creation of\npurchasing power and not the transference of purchasing power,\nand is inflationary financing. This type of borrowing has the\neffect of inducing a progressive fall in the purchasing power\nof money. Henoe the costs of the war are borne primarily by the\ngroups whose wages, salaries, interest income and pensions are\nfixed or rise less rapidly than the cost of living.\nNo official price index 1s now published, but the authorized\nindividual prices indicate & substantial general price rise since\nAugust 1939. Rents, however, have decreased, and therefore the\ncost of living has probably not risen 8.8 much as general prices.\nCandid observers, such as the Under Governor of the Bank of France,\nare beginning to see that there will be inflation on a scale\nsomewhat comparable to that of the last war\".\nItaly\nItaly is enjoying a precarious war prosperity.\nOperations of the great northern metallurgical, chemical and\ntextile firms have been stimulated by war orders from abroad and\nfrom the Italian Government. Italian shipping lines are running\nfull schedules; in the middle of October all Italian lines in-\ncreased their freight rates by 15 to 25 percent and their pas-\nsenger rates by 50 percent. The index of the prices of the\nthirty leading stocks traded on the Milan exchange has risen\nabout one-third since the beginning of hostilities. But Italy's\nwar prosperity has not yet raised the living standard of the\nItalian people or brought about any considerable investment in\nproductive capital equipment.\nOther features of the economic picture have not been as\nfavorable. The agricultural year was mediocre. Unless the\nliving standards of the Italian masses are to deoline still fur-\nther during 1940, Italy will have to make heavy net imports of\ncattle, corn, wheat, edible oils and legumes. Such imports would\ndisplace raw materials for the making of armaments. Prices of\nfoods, clothing and fuels have risen rapidly since the outbreak\nof war. The cost of living was at least 25 percent higher in\nJanuary 1940 than in January 1938; only about 5 percent of this\nrise took place before September 1939. There have been no gen-\neral increases in wages in recent months, but there has been\nsome increase in employment.\nHowever, the prosperity -- such as it is -- is precarious\nbecause it is based on Italy's temporary position as a war sup-\nplier and trader. It is doubly precarious because it is based\nRegraded\nUclassifie\n386\nDivision of Monetary\nResearch\non the fabrication of munitions from raw materials which come by\nsea, with the sufferance of the British and French navies.\nItaly's war activity cannot continue without imports of cotton,\nwool, iron ore and scrap, copper, machinery, coal and petroleum,\nmost of which must pass through Gibraltar or other Allied control\npoints. Italy's war profite therefore depend on her ability to\nmaintain a delicate balance between the belligerents.\nItaly's economic weakness is further illustrated by her\nneed for coal imports. Italy has only insignificant energy re-\nsources. She has no coal worth mentioning, no petroleum, no\nnatural gas, and less wood than any other important European\ncountry. She has spent a great deal in developing water-power,\nbut her hydro-electric output is not much more than twice that\nof Switzerland, and Switzerland has less than a tenth of Italy's\npopulation. Consequently Italy must import 13 million or 14 mil-\nlion tons of coal & year and more than this if she is to have &\nreal war boom. Italy imports 70 percent of her coal from ter-\nritory now under German rule, and 27 percent from the United\nKingdom. By far the greater part of the German coal comes by\nwater, being shipped down the Rhine or the Vistula. It 1e very\ndifficult to re-route any considerable part of these shipments\nby land.\nItaly 18 extending the use of German currency devices to\nincrease her exports and foreign exchange revenues.\nSpecial exchange rates are being used to subsidize exports.\nOn February 1, the payment of a 20 percent bounty in lira was\ninaugurated on the export of a large number of commodities, in-\ncluding silk textiles. About the same time, according to con-\nsular reports from Milan, similar exchangepremiums up to 50 per-\ncent were initiated on exports of cotton, woolen goods, hides,\nskins, and leather goods.\nShe has permitted 8. de facto \"particularized\" depreciation\nof the lira. The official rate has depreciated about 5 percent\nsince war began, but the special \"tourist lira\" and \"emigrant\nremittance lira* have depreciated 10 percent and are now about\n20 percent below the official rate.\nIn at least one instance, \"blocked lira\" belonging to\nAmericans were allowed to be used -- at a great discount, said\nto amount to about 75 percent -- for the purchase of wines for\nshipment to the United States. Other forms of barter transac-\ntions at special ratee of exchange are evidently being permitted.\n387\nDivision of Monetary\n- 5 -\nResearch\nAlso, during February, according to information received by cable,\ncertain Italian wool importers were allowed to purchase foreign\nexchange from authorized exchange banks at the \"black bourse\"\nrate for converting lira into foreign exchange.\nThese measures are probably necessary to overcome the harm-\nful effects of the war situation on Italy's foreign exchange\nposition. The principal unfavorable effects were:\n1. The reduction of tourist revenue and emigrant re-\nmittanoes -- both of which have aided Italy in the\npast to meet its continuing excess of imports.\n2. Higher prices in Italy and higher costs of all\nimported goods.\n3. Intense competition with Britain and France -- whose\ncurrencies have depreciated almost 20 percent since\nlast August -- for a share of the rich export markets\nformerly supplied by Germany.\nGermany\nReliable economic information about Germany is scanty. A\nrecent confidential report, however, says that official German\nsources are emphatic in their insistence that they will actually\nget the imports agreed upon in their February 11th treaty with\nRussia. They say transportation is adequate with the Black sea,\nthe Baltie and 8 frontier railroad contacts. Russia has agreed\nto deliver raw materials during 1940 equal in value to 400,000,000\nRMs, or about one-seventh of the amount Germany imported in\n1938 from countries now out off by the blockade. These supplies\nwill therefore help Germany substantially though they will not\nmeet her full wartime requirements for such important commodi-\nties as petroleum, iron ore and feed grains.\nGerman sources claim that their exports to the Balkan\ncountries have been sharply increased. On a base September -\nDecember 1938 = 100, German exports during September - December\n1939 were: to Rumania 135, to Hungary 150, to Yugoslavia 127,\nand to Bulgaria 139. No figures are available on German trade\nwith Greece and Turkey during these months; there has probably\nbeen a slight decline in her trade with the former and & great\ndecline in trade with the latter. On the other hand, Yugoslavia\nhas made an outright gift to Germany by resuming payment on oer-\ntain pre-war Serbian loans.\nUclassified\n388\nDivision of Monetary\n- 6 -\nResearch\nLatin America\nThere 18 growing realization in Latin American countries\nthat the war in Europe will be of little advantage, at best\nto them. Here are the reasons:\n1. Hard bargaining by the Allies 1s rapidly dissipat-\ning hopes of large profits from price rises.\n2. Allied clearing agreements restrict freedom to\nbuy in the cheapest and most available markets.\n3. Allied preference for Empire sources of raw\nmaterials reacts unfavorably on some Latin\nAmerican export commodities.\n4. Allied food rationing decreases demand for Latin\nAmerican products.\n5. Loss of low-cost German imports compels use of\nhigher-cost American goods; loss of German market\nfor exports is serious.\nArgentina's production of meat, wool and hides places her\nin a strong war-time position. As a market Argentina 16 the\ncore of the British trade effort in this hemisphere; the British\nintend to maintain and improve their position in Argentina at\nall costs, realizing that retreat from this market would ser-\niously limit the possible success of 8 post-war trade drive.\nAnd yet the British drove a hard bargain for the 200,000 ton\nmeat order of October 17 and have delayed in placing further\norders.\nThe U. 8. mission to Venezuela has completed its report.\nThe first mission of American government officials to advise\na Latin-American country on fiscal matters under Públic 63\n(composed of A. M. Fox, Tariff Commission, M. Krost, Federal\nReserve Board, H.V.V. Fay, Tariff Commission, H.R. Spiegel,\nTreasury, and J.H. Edwards) has completed its report. The\nmore important recommendations were: lower tariff duties,\nadoption of an income tax, improvements in government person-\nnel, and raising of capital by bond issues (Venezuela has no\npublic debt). The Mission also warned against increasing taxes\non oil companies.\n389\nDivision of Monetary\n- 7 -\nResearch\nFifteen of the twenty Latin American Republics have re-\nsponded to the questionnaire on the proposed functions of an\nInter-American Bank. The replies indicated the following:\n(a) They are unanimous on two points: That the bank\n18 needed to provide long-term developmental\ncapital to Latin America, and that the Bank is\nnot likely to increase trade significantly among\nthe Latin American countries by providing short-\nterm oredits.\n(b) Six countries (Colombia, Nicaragua, Honduras, Haiti,\nCuba and Paraguay) express an interest in long-term\nloans of gold or exchange for currency stabilization.\n(o) Five countries (Nicaragua, Paraguay, Ecuador, Haiti\nand Colombia) believe the Bank might be useful in\nhelping to meet seasonal financing requirements.\n(d) Six countries believe that the Bank might improve\nthe mechanism of Inter-American payments and by\ndirect quotations narrow the spread between exchange\nrates.\n(e) There 1s some uncertainty as to the amount of prime\ncommercial paper and short-term Treasury obligations\nthat would be available to the Bank for purchase or\nrediscount, and the tendency is to put it at B. low\nfigure; skepticism is shown on the possibility of\nthe Bank's guarantee of prime paper effecting an\nimportant reduction in interest rates.\nReplies have not been received from Argentina, Uruguay,\nBrazil, Mexico, Costa Rica. The press reports that the Salvadorean\nTreasury has appointed B. committee to draft statutes for founda-\ntion of a branch of the Bank in Salvador.\nThe press reaction in Argentina 1s reported to have been\nunfavorable. The influential La Prensa comments:\n\"The project could be very good and could serve such\nhigh objectives with respect to the majority of the\nAmerican Republics, but not with respect to the Argentine\nRepublic as long as the hostility to its exports continues\nbeing in the United States a political banner which nobody\nis disposed to challenge. The project frankly does not\ninterest us. Nothing justifies our sacrificing in it\n20,000,000 pesos and exposing ourselves to a series of\ncomplications, especially in matters of money and exchange.\"\n390\nDivision of Monetary\n- 8 -\nResearch\nA difference of opinion is noted in some cases between the\nviews of the delegates in Washington and those expressed in the\nanswers to the questionnaire. It 18 likely that in some of the\ncountries, Central Bank and Treasury views diverge considerably.\nBrazilian Government 1s ready to make funds available for\nconstruction of steel plant. Since the United States Steel\nCorporation decided not to participate in the construction of\nan iron and steel plant in Brazil, the Brazilian Government has\nbeen trying to push the project ahead under some other arrange-\nment. Although German and British firms are reported to have\noffered to perticipate in the project on the terms rejected by\nthe United States Steel, the Brazilian Government is not ser-\niously considering their proposals.\nThe Brazilian Government has recently announced that B.\nBrazilian steel company is being organized, and that 500,000\ncontos (about $25,000,000) will be made available for the project\nthrough the Government savings banks, pension funds, and appro-\npriations under special public works budget. Brazil hopes,\nhowever, that the Export-Import Bank will cooperate by making\n$17 million available for the purchase of equipment in the\nUnited States. An American firm (Ford, Bacon and Davis) has\nlet it be known that it is interested in the project provided\nthe American Government 1s \"sympathetic\" toward the idea.\nMexico and Peru are now the only major Latin American coun-\ntries which are in complete default on their foreign debt. The\nrecent debt adjustments by Colombia and Brazil on debts of more\nthan a billion dollare and involving more than half of the total\nLatin American debte in default, is an important step forward in\nthe solution of the problem which has interefered most with the\nsmooth conduct of inter-American relations.\nAlthough a longer list of countries are in partial default,\nthe only Latin American Republics still in complete default are\nas follows.\nMexico\nEcuador\nPeru\nParaguay\nBolivia\nSalvador\nThe total foreign bonded indebtedness of these countries is\nunder $500 million, of which over half is Mexican.\nPanama suspended payments on her foreign debt during the\ndispute over payment by the United States of rental on the\nCanal Zone and 1s now negotiating a refunding issue.\n391\nDivision of Monetary\n- 9 -\nResearch\nJapan and China\nSince the outbreak of the European War, the United States\nhas become more important in Japan's foreign trade. We now\ntake 42 percent of Japan's total exports to foreign exchange\nareas, and supply Japan with 46 percent of her purchases in\nforeign exchange areas. A year ago the percentages were 29 per-\ncent and 44 percent respectively.\nSynthetic silk substitutes are not likely to displace a\nlarge part of our silk imports from Japan in the next few years,\nbut the price of silk (and the economic position of Japan) may\nbe affected much sooner. The manufacture of Nylon and other\nnew silk substitute hosiery fibers 18 still in the experimental\nstage. The low moisture absorption coefficient of the fibers,\nthe relatively high introductory prices proposed, and the small\nproductive capacity projected preclude any serious inroads into\nthe American silk market being made by these fibers in the near\nfuture. The Dupont's Nylon plant at Seaford, which is probably\nthe most publicized of the synthetic hosiery fiber plants, is\nreported to be capable of producing only four million pounds a\nyear. This is less than 10 persent of the annual consumption\nof silk in this country, but enough to have a. serious effect on\nthe price of silk.\nMase starvation is facing 25 million Chinese living in\nJapanese occupied areas of North China. A food shortage 18\nresulting from last September's floods. Food prices are ex-\ntremely high in North China cities and in Shanghai. The food\nsituation is aggravated because Japan herself 18 experiencing\na rice shortage and is purchasing Chinese food supplies for ex-\nport to Japan.\nIndia\nIndia 1s helping England to finance the war by taking\nsecurities in exchange for gold and commodities. By increasing\nher holdings of sterling securities nearly 650 million since\nAugust 1939, British India has helped to finance the United\nKingdom's unfavorable balance of payments. The increase in\nthe Reserve Bank of India's holdings of sterling securities\nhas resulted from the export of gold on private account, and\nan increasingly favorable balance on merchandise account, N-\nsulting in part from large British war orders.\nThe Indian Government is also taking advantage of India's\nfavorable balance of payments on current account to convert\nher sterling debts into Rupee obligations.\nRegraded Uclassified\n392\nDivision of Monetery\n- 10 -\nResearch\nTurkey\nIndustrial and commercial interests in Turkey are ex-\npressing di sappointment over the failure of the British and\nFrench to supply them with the kind and quantity of goods\nhitherto imported from Germany. Prices of manufactured articles\nurgently needed in Turkey are rising and Turkish Government\ndepartments, factories and merchants implore the agents of\nBritish manufacturers in vain to supply their requirements.\nGermany's efforts to renew commercial relations with\nTurkey may be listened to unless the British show more flex-\nibility in their business methods.\nCanada\nIndustrial and business activity in Canada is nearing\nboom proportions. The Financial Post Business Index for\nJanuary reached & peak of 135 (1926 = 100), a rise of 11 per-\ncent since the outbreak of war and 2 percent higher than the\nMarch 1929 high. Skilled labor 1s scarce with expert mechanics\nalready being drawn away from their regular employment to the\nmore lucrative munitions and aircraft industries. Difficulties\nin obtaining certain consumption goods, especially textiles, 18\nbeing reported by wholesalers, despite capacity or near-capacity\noperations in these industries.\nHeavy industries such as iron and steel, machinery, and\nrailway equipment, are enlarging their already high scale of\noperations. The mining industries are continuing to expand\ntheir record level of output. The foest industries are exper-\nienoing an increasing demand for their products at rising prices\nalthough the unprecedented transport difficulties have forced\na curtailment of output in British Columbia. The tempo of\nactivity in Canadian shipyards 18 also rising and will continue\nto do BO as the extensive shipbuilding program projected jointly\nby the British and Canadian Governments gets further under way.\nCanada's war expenditures during the first year of hostil-\nities are expected to total $375 million (Canadian). of this\nsum 40 percent is earmarked for repatriation of British-held\nCanadian securities, the proceeds to be used to finance British\npurchases in Canada.\n393\nDivision of Monetary\n- 11 -\nResearch\nGold and Silver\nSouth African gold production, which accounted for nearly\none-third of the world output in 1939, reached a new high in\nJanuary and will continue to increase since new mines are being\nput into operation. The large current expenditure on new gold\nmines (which will be further encouraged by recent changes in\ntaxes on gold production) is increasing the one-sidedness of\nthe South African economy, already more dependent on gold mining\nthan it was ten years ago. Gold production accounts for nearly\n8 fourth of the national income now, in contrast with a tenth,\nin 1927-29.\nAnother country withdraws silver coins from circulation.\nGreece recently ordered the withdrawal from circulation of all\nsilver coins of 10 and 20 drachmai denominations during the\nsecond half of 1940. There are about 350 million drachmai of\nsilver coins now in circulation, with silver content of more than\n3 million ounces.\n\"Dumping\" and Subsidies\nThe war-time commercial policy of the Allied belligerents\nand of Italy 1s running into conflict with the provisions of\nUnited States tariff laws providing protection against \"dumped\"\nor \"subsidized\" imports.\nFrantic British efforts to meet the foreign exchange cost\nof war by exportation rather than by reduction of capital assets\nhas already resulted in several actions which may involve subsi-\ndies and require the application of countervailing duties. 81m-\n1lar policies in France and Canada will likewise require study\nand possibly application of countervailing duties.\nItalian efforts at stimulating exports without admitting a\nfurther depreciation and revaluation of the lira have introduced\nsubsidies on the export of many Italian products, and it now ap-\npears likely that countervailing duties will have to be assessed\nagainst B. wide variety of our imports from Italy.\nBefore the war approximately half the cases received in the\nTreasury involving the question of dumping concerned German com-\nmodities. The virtual cessation of imports from Germany since\nOctober has reduced the average number of new cases involving\ndumping from 8 per month to 4 por month, butnearly 60 percent\nof the total number of new dumping cases received since November\nhave involved commodities imported from the United Kingdom.\n394\nhsm\nPLAIN\nLondon\nDated March 12, 1940\nREC'd 1:13 P. m.\nSecretary of State,\nWashington.\n629, March 12.\nFOR TREASURY FROM BUTTERWORTH.\n1. The list for subscription to the L300 million\nwar loan was opened today and will close tomorrow night.\nAlthough the Bank of England informally states that\nsubscriptions are coming in well, it could hardly say\notherwise, and in fact there is no reliable information\navailable. But given the terms of the loan, the Extent\nof the previous preparations and the character of the\nmechanism at the disposal of the British authorities it\ncannot but bE fully subscribed.\n2. I gather from my Canadian colleagues that there\nhave been discussions between the British and Canadian\nfinancial authorities which have resulted in a tentative\nagreement as to the maximum amount of Canadian debt\nrepatriation that can take place during the first year\nor so of war; the Canadians seem to bE well aware of the\nfiscal problem which debt repatriation Entails at a time\nwhen\n395\nham -2- No. 629, March 12, from London\nwhen their own capital outlay on war activity 1s large,\nI also gather that plans are being formulated to remove\nsome of the restrictions which now prevent United King-\ndom residents from selling any of their holdings of\nCanadian securities EXCEPT insofar as particular issues\nare preempted by and vested in the British Treasury.\nKENNEDY\nRR\n10 20315 THE YEA\n6 5\nSe E 23 \" PAW 000\nTABRY\n396\nCOPY\nRio de Janeiro, March 13, 1940.\nNo. 2722\nSubject: Brazilian Foreign Debt Service Decree.\nORIGINAL AND THREE COPIES BY AIRMAIL - CONFIRMATION COPY BY STEAMER.\nThe Honorable\nThe Secretary of State,\nWashington, D. c.\nSir:\nI have the honor to report, for the Treasury Department also,\nthat the decree covering resumption of service on the Brazilian\nforeign debt transmitted with my despatch No. 2693 of March 8, 1940\nhas now been duly published in the Diario Oficial of March 9. 1940,\nas Decree-Law No. 2,085 of March 8, 1940. The text is as enclosed\nwith the above despatch, which also carried a translation.\nRespectfully yours,\nFor the Ambassador.\nWare Adams,\nSecond Secretary of Embassy\nFile No. 851\nWA:AM\nMr. Tickton\nMr. Hans\n397\nTREASURY DEPARTMENT\nCONFIDENTIAL\nINTER-OFFICE COMMUNICATION\nDATE March 12, 1940\nTO\nSecretary Morgenthau\nFROM\nMr. Haas BA\nSubject: Developments in the High-Grade Securities Markets\nSUMMARY\n(1) Long- and medium-term Government securities rose\nsharply last week, following the announcement that\nthe refunding would consist of a note-for-note ex-\nchange. Short-term issues, with the exception of the\nJune 1940 notes and bonds, moved within a narrow range\nof prices (Chart I). The new note was selling to\nyield .58 percent at the close on Monday, March 11,\nand on that basis was well in line with the market\n(Chart II).\n(2) The high level of bids for the \"rights\" prior to the\nannouncement of the exchange offering indicated that\nthe market had anticipated a long or medium-long 18-\nsue. When the announcement came, 8. sharp downward\nreadjustment of prices naturally occurred (Chart III).\nThis downward adjustment was the sharpest which has\noccurred in connection with any note refunding since\nthe beginning of 1934 (Chart IV).\n(3) The entire amount of the Reserve banks' holdings of\nthe June notes ($137 millions) was tendered in ex-\nchange for the new five-year notes. This action of\nthe Reserve authorities, and various other operations\nin Government securities during 1939, have served to\nchange substantially the composition of the Open Mar-\nket Account, with the result that the Account no longer\nconcentrates its holdings in very short issues (Chart V).\nThis change in policy was discussed in some detail in\nthe Annual Report of the Federal Reserve Bank of New\nYork issued last week.\n(4) Domestic high-grade corporate and municipal securities\nmarkets remained quiet last week. The long-term Beth-\nlehem Steel and Kentucky Utilities issues brought out\non February 29 were reported to have moved slowly, and\nat the end of last week were selling at small discounts\nfrom their offering prices.\n(5) The 15-19 year British war loan announced last week\nbears a coupon rate of 3 percent. It appears to have\nbeen priced about in line with other British Govern-\nment securities in the market (Chart VI).\nRegraded\n398\nSecretary Morgenthau - 2\nI. United States Government Securities\nThe announcement that the March financing was to consist\nof a note-for-note exchange offering caught the market by sur-\nprise, and was followed by divergent price movements among the\nvarious maturity classes of Government securities, as investors\nbegan to adjust their positions (Chart I). Long- and medium-\nterm obligations rose sharply on the realization that the pre-\nviously anticipated addition to the volume of issues in this\nsector of the market would not materialize,\nShort-term issues, on the other hand, (with the exception\nof the June 1940 bonds and notes, which are discussed in some\ndetail below) moved within a narrow range, registering small\nlosses on Tuesday, March 5, and recovering to some extent later\nin the week. These price movements, by maturity classes, are\nshown in the following table:\n:\n:\nAverage price change\n:\nMarch 5 - March 11\n:\n(In thirty-seconds)\nNotes\n1 to 3 years\n- 1\n3 to 5 years\n- 1\nBonds\n5 to 15 years to call\n+ 16\n15 years and over to call\n+ 24\nThe new five-year note opened at 100-31/32 on & when-\nissued basis on Thursday morning. Around noon, it was quoted\nat 100-27/32, a price which held, with minor fluctuations\nthrough the close on Monday, March 11. At this price, the\nyield was .58 percent, and the issue was well in line with\nthe market (Chart II).\nIn this connection, it is interesting to note that the\naddition of some $700 millions of new securities at the long\nend of the note. market appears to have changed the shape of\nthe yield curve for notes. This curve, it will be recalled,\nhas ordinarily been relatively flat at the long end, due pri-\nmarily to a persistent demand for the longest fully tax-exempt\nFederal 1ssue outstanding. At the close on Monday, however,\na differential of six basis points separated the last two 1s-\nsues.\nRegraded Uclassified\n399\nSecretary Morgenthau - 3\nII. The Market's Adjustment to the Exchange Offer\nThe announcement -- which came after the close on Monday,\nMarch 4, -- that the exchange offering was to be limited to a\nfive-year note caused A sharp deflation on the following day in\nthe bids for the June issues. The notes dropped 20/32 of a\npoint, and the bonds, which the market had been expecting would\nbe taken care of by & refunding offer at this time, were off\n8/32 of a point (Chart III).\nThe high level of bids for the \"rights\" prior to the an-\nnounoement of the exchange offer -- 101-20/32 at the close on\nMarch 4 -- would seem to indicate that the market had antici-\npated that a long or & medium-long issue would be included as\none of the vehicles for the refunding. This would be in line\nwith the experience in past refundings when, it 1s recalled, the\nmarket has assumed that the new issues would be priced BO that\na larger premium would be carried by a long than by a short 10-\nsue offered in exchange, and has allowed its anticipation of\nthe length of exchange issue to control, to a considerable ex-\ntent, the level of its bids for the \"rights\".\nThe market's guess as to the length of the new issue was\nin error this time, and when the announcement came, & readjust-\nment of prices was to be expected. The extent of the market's\nerror in prising and a comparison with the experience in each\nof the other Treasury note refunding operations since the begin-\nning of 1934 are shown in Chart IV. In this chart, the market's\nbids for rights are compared with the premiums on the new issues\noffered in exchange. Rights values are taken as of the close\nof the month prior to the financing -- a date when the market\nhas not yet been influenced by any official intimations as to\nthe character of the new securities to be offered. The premiums\non the new issues are taken as of the close of the first day of\ntrading.\nIn the present instance, the bids for the new issue at the\nclose of the first day's trading were substantially less than\nthose for the rights on the last day of February. This defici-\nency -- amounting to 25/32 -- is, it will be observed, the\ngreatest shown on the chart.\nIII. Federal Reserve Open Market Account\nOn Friday, March 8, the Federal Reserve authorities ten-\ndered the $137 millions of June notes held in their Open Market\nAccount in exchange for the new five-year note offered by the\nTreasury. This action served to lengthen the average maturity\nof the Account, and to olose out of the Account all of the\nUnited States securities maturing within nine months. (The\nshortest United States securities now owned are December 15,\n1940 notes, of which the Account holds #106 millions.)\nRegraded Uclassified\n400\nSecretary Morgenthau - 4\nThe action of the Federal Reserve authorities in exchanging\ntheir June note holdings for the new note issue 1B similar to\nthat taken last November and last June when the Treasury made\nits previous note-for-note exchange offerings. On each of these\noccasions, the Reserve banks tendered the entire amount of their\nrights for exchange, selling none of them in the open market.\nSince last June, however, the Federal Reserve policy with\nrespect to composition of its Open Market Account has undergone\n8. significant change -- a change which would not have made it\nsurprising had the Open Market Committee followed & different\ncourse with respect to the liquidation of its June notes. (The\nAccount has, for example, liquidated its position in 1940-43\nbonds during the last few weeks by sales in the open market.)\nThis change in policy was dealt with in some detail by the Fed-\neral Reserve Bank of New York in its Annual Report released on\nMonday, March 4. In part, the bank said:\n\"The open market operations in which this bank\nparticipated during the past year were not undertaken\nprimarily with a view to affecting the reserve posi-\ntion of member banks, but rather with & view to exer-\ncising an influence toward the maintenance of orderly\nconditions in the market for Government securities.\n\"The net effect of (these operations) .... was to\nreduce total Government security holdings of the Re-\nserve Banks by $80,000,000 during 1939, and to lengthen\nthe average maturity of the securities held. In ear-\nlier years it had been the practice of the Reserve\nBanks to keep a substantial part of their portfolies\nin the form of securities maturing within & year or\ntwo, BO that, if it became desirable as a matter of\ngeneral credit policy, to reduce the volume of member\nbank reserves, that objective could be obtained in\nlarge part by permitting securities held by the Re-\nserve Banks to mature without replacement.\n\"Because of the great expansion in member bank\nreserves in the past few years, however, excess re-\nserves of the banks are now more than twice as large\nas the total holdings of Government securities of the\nReserve Banks; it is quite unlikely (therefore) that\nthe reserve position of member banks could be brought\nunder control merely by permitting short dated secu-\nrities in the System Open Market Account to mature\nwithout replacement. À policy which contemplates a\nportfolio of diversified maturities, rather than a\nportfolio of preponderant short term securities\n401\nSecretary Morgenthau - 5\nenables the System more offectively to exercise an\ninfluence toward orderly conditions in the Government\nsecurity market. It enables the System to buy, with-\nout restriction as to maturity, whatever securities\nare in oversupply in the market in circumstances such\n8.8 existed in September, 1939, and to offer in the\nmarket securities of maturities that are in special\nand unsatisfied demand, as it did in November and\nDecember 1939.\"\nThe change in Federal Reserve policy during the past year\nhas resulted in B. marked adjustment in the maturity distribution\nof the Federal Open Market Account. This is shown in Chart V\nin which the securities held in the Account at the end of each\nmonth are distributed by maturity classes.\nAt the beginning of 1939, it 1e noted, 30 percent of the\nAccount's holdings matured within one year, and 70 percent\nwithin five years. During the year, the portfolio was gradu-\nally lengthened by exchange operations, by purchases in the\nopen market, end by bill run-offe. At the present time (after\ngiving effect to the exchange of the June notes) about 5 per-\ncent of the Account matures in one year, and less than 50 per-\ncent matures in five years.\nIV. Other Domestic Securities Markets\nDomestic high-grade corporate and municipal securities\nmarkets remained quiet last week. High-grade corporate bonds\nmade small price gains, our average of the yields of such 18-\nsues having declined by two basis points. Yields of municipal\nbonds, as measured by the Dow-Jones average of the yields of\ntwenty 20-year bonds remained unchanged.\nThe largest new issue brought out during the week was the\n$18 millions offering of 30-year bonds by the Elgin, Joliet and\nEastern Railway Company. These bonds were sold at prices to\nyield 3.17 percent. They were reported to have moved slowly\non the day of issue. Interest was still centered in the large\nlong-term issues of the Bethlehem Steel Corporation and the\nKentucky Utilities Company which were offered on February 29.\nPortions of these issues moved slowly, and both issues were\nselling at small discounts from their offering prices at the\nend of last week.\n402\nSecretary Morgenthau - 6\nV. Foreign Securities Markets\nThe most important development in the high-grade securities\nmarkets abroad last week was the announcement in Great Britain\nof the new war loan. This loan will amount to 6300 millions and\nwill be raised by an issue of 3 percent 15-19 year bonds offered\nat par.\nIn the light of our own policy and experience with respect\nto the pricing of new security issues for the Government, it 1a\ninteresting to observe the practice followed by the British Gov-\nernment. This is brought out in Chart VI which shows the yields\nof selected British Government securities at the close on\nMarch 5, just prior to the announcement of the new loan. The\nyield of the new issue at its offering price of par 1a shown as\na line rather than as a point, in order to give due emphasis to\nboth final maturity and earliest call date. The issue, it would\nappear, 1s priced Just about in line with the market.\nOn other occasions, it will be recalled that the British\nGovernment has priced issues on a yield basis lower than the\nmarket for issues of comparable term and call period would seem\nto justify -- anticipating, a.a it were, that the market would\nmove up while the books were open, thus justifying the yield\non the new security. This appears to have been the procedure\nin January when B. new 2 percent 3-5 year bond was offered to re-\nfund an issue of 4-1/2 percent bonds called for repayment. In\nthis instance, however, the market failed to move as anticipated,\nand 80 a result the refunding was only partially successful,\nholders of more than a. quarter of the issue (which totaled\n6350 millions) advising the Treasury that they would not sccept\nthe new securities but would prefer cash settlement.\nThe new loan is the first long-term issue offered by the\nBritish Government during the present war. Previous new money\nborrowing has been wholly short-term through the issuance of\nTreasury bills (about 6300 millions since the outbreak of war)\nand the sale of national savings certificates and short-term\ndefense bonds (about L100 millions realized in the first fif-\nteen weeks of the sales campaign).\nAttachments\nRegraded Uclassified\n403\nChart I\nCHAMGES IN THE PRICES OF U.S. SECURITIES\nPoints Plotted Represent the Difference from June 5, 1030 Price of Bach Naturity Class\n1939\nSEPT.\nNOV.\n1940\n1940\nPOINTS\nJAB.\nMAY\nMINARY\ne\n(NCT CHARGE)\n13\n20\nFEBRUARY\nPOINTS\n27\n10\n24\n23\ndeturday Quotations\n(NET CHARGE)\n1117\nPOINTS\nDaily\n+16\n(MY -\n+3\n13\n+\n+1\nof\n&\n42\nT\nof\nall\n+\n+)\nof\n4\nNOTES,\n2.\n3-5 Yes\n+\n0\nMOTES, 3-5 Yes.\nMOTES,\n0\n0\no\n1-3 Yes.\n-1\n+\n1\n-1\nNOTES, 1-3 Yes.\n+\n+\n7\n7\nT\nT\n-1\n?\n-1\n-3\ntimes, 5-15 Yes,\ntome,\nTO CALL\n5-15 Yes,\n-1à\n-16\nTO CALL\nT\nT\n÷\n₹\nOVER 15 Yes.\nTO CALL\n-If\n-11\n&\n&\n-2\n4\n9\n9\n&\n&\n&\n&\n-7\n-7\n&\n&\nBours, OVER 15 Yes\nTO CALL\n&\n9\n?\n7\n-36\n*\n&\n&\n-3)\né\n-10\n-M\n-10\n-M\nT\nT\n-11\n-11\nt\n7\n-\n-12\n-12\nF\nJULY\nMPI,\nNOV.\nJAM.\nMAR.\nMAY\n6\n13\n20\n27\n3\n10\n17\n24\n2\n9\n16\n23\n30\nFEBRUARY\n-\n1939\n1940\nJAMARY\n1940\nOffice of the Secretary of the Transay\nF-133-1\n- il - - -\nRegraded Uclassified\nChart II\n404\nYIELDS OF TREASURY NOTES\nBased on Closing Prices, March 11, 1940\n1940\n1941\n1942\n1943\n1944\n1945\nPERCENT\nPERCENT\n.7\n.7\n.6\n.6\nNEW NOTE\nx\nX\n.5\n.5\nX\n.4\n.4\nX\n.3\n.3\n,2\n,2\"\n.1\n.1\no\no\n1940\n1941\n1942\n1943\n4944\n1945\nOffice of the Secretary of the Treasury\nF - 160\nDivision of Research - -\nIT\nPRICES OF JUNE NOTES AND JUNE BONDS\nDaily\nJANUARY\nFEBRUARY\nMARCH\nAPRIL\n6\n13\n20\n27\n3\n10\n17\n24\n2\n9\n16\n23\n30\n6\n13\n20\n27\nDOLLARS\nDOLLARS\n1024\n1021\n38% Borms JUNE 15, 1940\n102\n102\n101+\n101+\nH% NOTES JUNE 15, 1940\n101\n101\n100/-\n100+\n100\n100\nMARCH 4\n99t\n99th\n6\n13\n20\n27\n3\n10\n17\n24\n2\n9\n16\n23\n30\n6\n13\n20\n27\nJANUARY\nFEBRUARY\nMARCH\nAPRIL\n1940\n405\nOffice of the Secretary of the Treasury\nDivision of and -\nF - 162\nRegraded Uclassifi\nAGE\nChart IV\n\"RIGHTS VALUES\" COMPARED WITH PREMIUMS ON NEW ISSUES e\nExchange Offerings on Treasury Note Refundings, 1934 to Date\nPRICE\nABOVE PAR\nIN 32NDs.\nPRICE\nABOVE PAR\n70\nIN 32NDA.\n70\n\"RIGHTS VALUE\"\n60\nЦ\nPREMIUM ON NEW issue\n60\n50\n50\n40\n&\n30\n30\n20\n20\n10\n10\no\no\nAPR.\nJUNE\nMAR.\nJUNE\nDEC.\nMAR.\nJUNE\nSEPT.\nDEC.\nMAR.\nSEPT.\nDEC.\nMAR.\nJUNE\nSEPT.\nDEC.\nMAR.\nJUNE\nNOV,\nDEC.\nMAR.\n1934\n1935\n1936\n1937\n1938\n1939\n1940\n40\n40\nExcess of Premium Over \"Rights Value\"\n30\nSECURITY OFFERED IN EXCHANGE\n30\nNEW\nNEW\n2009\nADDITION TO\nNOTE\nBOND\n20\nOUTSTANDING ISSUE\n20\n10\n10\nof\nJUNE\nMAR.\nJUNE\nDEC.\nDEC.\nMAR.\nSEPT.\nSEPT.\nMAR.\nJUNE\nNOV.\nMAR.\no\no\n%\nAPR.\nMAR. JUNE SEPT.\nDEC.\nMAR,\nJUNE\nDEC.\nDEC.\n-10\n-10\n20\n-20\n30\n- 30 -\n1934\n1937\n1939\n1940\n1935\n1936\n1938\n. RIGHTS VALUES ARE AS of THE DID of THE PROCEDING MONTH; PREMIUMS ARE AS OF THE CLOSE or THE FIRST DAY or TRADING;\nMIDE MORE THAN OME NEW ISSUE WAS OFFERED THE NIGHEST PROMIUM is shown.\nF (43\nOffice al the Secretary of the Trunsary\nDivision of Reserrch and Satio\nRegraded Uclassified\nChart V\nFEDERAL RESERVE BANK HOLDINGS OF U.S. SECURITIES\nClassified by Number of Years to Maturity\nAMOUNT\nDOLLARS\nIllitions\nDOLLARS\nBilliams\n3.2\n3.2\n2.5\nz.a\n2.4\nOver 10 Years\n1.4\n2.0\n1. - 10 Years\n2.0\n1.0\n1.0\nL- a Years\n1.2\n1.2\n.8\n.8\n:\nUnder 1 Year\n.4\no\no\nJ\nF\nM\nA\nM\nJ\nJ\nA\n8\no\nN\nD\nJ\nE\nN\nA\nN\nJ\n1939\n1940\nIN PERCENT OF TOTAL\nPERCENT\nPERCENT\n90\nOver 10 Tears\nDO\n80\n80\n5 - 10 Years\nTO\n70\n00\n60\n30\n50\n1 - 5 Years\n40\n40\n30\n30\n20\n20\nUnder 5 Year\n10\n10\no\no\nJ\nF\nM\nA\nH\nJ\nJ\nA\nB\no\nN\nD\n/\nF\nis\nA\nM\nJ\n1940\n1039\n- view offect to the refunding of - - 1040 MINS.\n- of the Secretary - The Treasury\nInsure , - - -\nRegraded Uclassified\nYIELDS OF SELECTED BRITISH GOVERNMENT SECURITIES\nMarch 5, 1940\n1940\n'42\n'44\n'46\n'48\n'50\n'52\n'54\n'56\n'58\n'60\n'62\n'64\n'66\n'68\nPER\nPER\nCENT\nCENT\nF\n3.5\n3.5\n3.0\n3.0\nNEW 3% LOAN, 1955 -'59\n2.5\n2.5\n2.0\n2.0\n1.5\n1.5\n1.0\n1.0\n.5\n.5\no\no\n1940\n'42\n'44\n'46\n'48\n'50\n'52\n'54\n'56\n'58\n'60\n'62\n'64\n'66\n'68\n109\nFor of the Secretary of the Treasury\nof - - -\nRegraded Uclassifie"
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