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    "title": "Volume 437, September 1 – September 3, 1941",
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        "Henry Morgenthau, Jr. Papers",
        "Diaries of Henry Morgenthau, Jr."
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    "ocrText": "Draft of Secretary Morgenthau's Speech\ndiaft\n188\nto the Advertising Club of Boston\nSeptember 9, 1941.\nDeft\n3.\n1941\n9.00 H.M H.M\nTwenty miles from here, at the wooden bridge at Lexington,\nthe cen of New England first proved that Americans could defend\nwhat they held dear. Today the people of these States are\nproving that they are still the same New Englanders. Whatever\ntheir origin - and they have come from many lands - they are\ntrue descendants of the Minute Men. In hundreds of factories\nand shipyards from Connecticut to Maine, the people of New\nEngland are responding magnificently to their country's needs.\nI am glad to be here tonight to pay my tribute, on behalf of\nthe entire administration in Washington, to the great work\nthat New England is doing to make America strong.\nI am glad also that my host tonight is the Advertising\nClub of Boston, for the advertising profession is 8. mighty\nforce in creating public understanding. We cannot make\nourselves the arsenal of democracy and the defender of\nRegraded Unclassified\n189\n- 2 -\nfreedom unless we understand the tremendous issues involved\nin this Battle for the World. In the same way we at the\nTreasury cannot accomplish the financing of the defense\nprogram unless the public sees clearly the need for greater\nsacrifice and for greater effort.\nIn particular, I think it is high time for the American\npeople to become aware of the economic and social danger that\nmust not be allowed to cripple our defense program, the problem\nthat occupies more and more of my time and thought 8.5 Secretary\nof the Treasury, the problem of inflation.\nRegraded Unclassified\n- 2a\n190\nconfront 8. Secretary of the Treasury now a days are not\ncold and impersonal problems of high finance, they are\nproblems that cannot be solved without 8. clear, public\nunderstanding of the issues involved, and of these there is\nno problem that occupies more of my time and thought in the\nTreasury than the danger of inflation which hangs over us\ntonight.\nWe have been talking about inflation for 8. long time\n8.8 if it were & threat remote from our daily lives. It is\na distant threat no longer. We are facing it now and we\nmust deal with it at once.\nIf we are timed or selfish or shortsighted in facing\nthis issue, the consequences may haunt us and our children\nfor years, But if we are courageous we can beat this thing.\nIf we keep always in mind the interests of our country 88\na whole, if we provide promptly the appropriate means and\nRegraded Unclassified\n- 3 -\n191\nuse them vigorously whenever necessary, me can prevent\ninflation from fastening its grip upon us.\nThat task calls for alertness and mental toughness\non the part of everyone in the executive departments of the\nGovernment, everyone in the halls of Congress and every one\nof us here tonight.\nThe word \"inflation\" is cold and lifeless, so cold\nthat even an advertising man might have difficulty in making\nit real, but the thing it describes is treacherous and cruel.\nMemories are so hort that I suppose many of us have forgotten\nwhat happened the last time inflation struck us 25 years ago,\nbut the effects of that inflation lasted for many years and\nbrought untold heartbreak and misery in their train. We are\nnow just where we were in 1916 - on the very edge of inflation.\nI can think of no subject more worthy of hard thinking on the\npart of this great audience and of the American people as a\nwhole.\nRegraded Unclassified\n4 -\n192\nLet us look at the record to see what happened a. genera-\ntion ago. In 1916 the cost of living began to rise sharply\nbut there were few who saw its significance. It was only\nwhen prices had risen by 70 percent that President Wilson\nrecommended any steps to prevent inflation. In fact, the\ncountry was so blind to its dangers that as late 8.8 June,\n1917, Congress actually hastened inflation by reducing the\nreserve requirements for member banks of the Federal Reserve\nSystem. By 1920 8. ten pound bag of sugar cost $2.67, 8. dozen\neggs cost 92 cents, a ten pound bag of flour cost 88 cents,\nB. pound of butter cost 76 cente and a pound of pork chops\ncost 50 cents. By that year prices had skyrocketed to twice\nthe level of five years earlier. The money the housewife\npaid for one loaf of bread in 1914 bought only half a loaf\nin 1920. The money she paid for a pound of bacon in 1914\nbought only half a pound in 1920. The money she paid for 8.\nyard of cotton cloth was only enough to buy only 1/3 of a yard\nRegraded Unclassified\n- 5 -\n193\nin 1920. The family with no increase in income found its\nthat\npurchasing power cut in half. It found food, fuel, shelter\nand clothing that cost a dollar in April, 1916, had risen\nto almost two dollars by 1920.\nWe have now, as we had then, a moderate rise in the cost\nof living, 8. great rise in wholesale prices, and a still\ngreater rise in the prices of basic commodities like wheat,\nthe\nhogs, cotton and lumber. It is & rise in the prices of basic\ncommodities that constitutes our danger signal today, for\nthey are always the advance guards of 8. rise in the cost of\nliving.\nIf prices continue to rise as they did from 1916 to\n1920, we shall find that food, fuel, shelter and clothing\nthat now cost 8 dollar will once more cost almost twice as\nmuch before the process has ended.\nRegraded Unclassified\n- 6-\n194\nThe rise in prices is by no means confined to food-\nstuffs and clothing. I have before me, for instance, the\nactual figures on the cost of constructing 8 standard six-\nroom frame house in one of our typical cities. This home\nthat could have been built 8. year ago for $6,000 now costs\n$7,140 to build. Here we have an increase in prices of\nnearly 20 percent and if it goes along the 1916 pattern, we\nare only at the beginning of the story.\nNot only is the cost of building homes rising but even\nfor the millions who do not own their homes higher rentals\nare on the way. We find already in scores of areas where\nindustrial expansion has first taken hold, rents rising 10,\n20, 30 percent and even higher.\nThere is, however, one great difference between conditions\ntoday and 1916. We now know what is going on. This time our\nRegraded Unclassified\n- 7 -\n195\neyes are open to the dangers that lie ahead of us. We now\nknow that the time to do something about inflation is before\nit occurs, not after it has gathered momentum. We should\nprofit by our greater knowledge and take prompt and effective\naction now.\nThere is no need for me to remind this audience in detail\nof the reasons why prices have already risen. The reasons are\nplain for everyone to see. Our economy today resembles an\noverloaded steam boiler. The fire under the boiler is being\nfed by billions of additional purchasing power in the hands of\nthe public. The fire is growing hotter and is generating more\nsteam than the boiler can safely hold. If we are to prevent\nthe boiler from bursting, we must damp down the fires by with-\ndrawing purchasing power, and we must also enlarge the boiler\nby increasing the supplies of goods available to the consumer.\nRegraded Unclassified\n- 8 -\n196\nIn speaking of these things I am not being an alarmist\nor defeatist. We can, as I have said before, defeat this\nthreat, just as we can lick the forces of evil that have been\nlet loose upon this earth. But we need to understand the\nissues and we need to see clearly the consequences of inaction\nor delay. I should like, therefore, to look at the problem\nfirst\nquite coollyfor a few minutes, to see A what we have done and\nand then what Are need 6 do\nwhat NO need to do in order to stop prices from rising further.\nIn the first place, Congress is on the point of passing\n8. huge tax bill designed to raise almost four billion dollars\nin additional revenue, thus withdrawing a great amount of\npurchasing power that competes with the defense effort.\nSecondly, the Treasury in its borrowing program is trying\nto obtain as large a portion of its funds 8.5 possible from\ncurrent consumers' income. Through a new form of note -\nthe tax anticipation note - it is seeking to increase the\nRegraded Unclassified\n- 9 -\n197\neffectiveness of the income tax as a check on current purchasing\npower, and I am happy to report to you that more than a billion\ndollars' worth of these notes were sold in the month of August.\nThe Treasury has also begun a program of selling Defense\nSavings Bonds and Stamps to people of moderate and low incomes.\nThe people have responded to a tune of a billion and 8. quarter\ndollars in four months, without coercion of any kind;and in\nthat response the people of Massachusetts and of New England\ngenerally have stood in the forefront.\nThe President has recently issued an order authorizing\nthe Board of Governors of the Federal Reserve System to\ncontrol consumers installment credit. The Congress is considering,\nand I hope will pass, a bill to limit price rises and to\nsupplement the efforts of the Office of Price Administration,\nto limit price rises by voluntary cooperation.\nRegraded Unclassified\n- 10 -\n198\nAll these are useful steps to a necessary end, but they\nare not enough. We may have to extend general controls over\nbank credit and create controls over selected capital expendi-\ntures. I hope that we may extend the social security program so as\nto increase the flow of funds to the Treasury from current\nincome during the emergency and increase the outflow of funds\nwhen needed in the post defense period. We shall have to\nreduce the Federal lending and underwriting program such as\nnon-emergency housing expenditures and mortgage guarantees.\nWe must, as I have said many times, reduce nonessential Federal\nexpenditures. We must also appeal for economy in state and\nlocal government expenditure and B. curtailment of their borrowing\nfor nondefense purposes.\nAll of these measures would attack the problem by attempting\nto reduce the demand for goods now and by helping to build up\n8. backlog for the post war world. But we should also attack the\nRegraded Unclassified\n- 11 -\n199\nproblem from the opposite direction by making every effort to\nincrease the supply of goods available to the consumer wherever\nthis can be done without encroaching upon the defense program.\nAbove all, we must make full use of those supplies that are\navailable not only in defense production but in the civilian\ngoods which do not compete with defense output.\nI wonder if the housewife knows when she pays 20 percent\nmore than she did a year ago for a bag of flour that our\nsupply of wheat is the largest on record, and that 498 million\nbushels of two years' crops are stored in Canada. I wonder\nif she knows when she pays 15 percent more for 8 pound of\nsugar than 8. year ago that there are unusually large sugar\nstocks in this country and in Cuba. I wonder if she knows\nwhen she pays 25 percent more for butter, that we have great\nstocks of butter in storage, and large reserve stocks of\nRegraded Unclassified\n- 12 -\n200\nfarm products of many kinds which should be released for\nconsumption as fast as necessary to prevent unreasonable price\nrises.\nThe Government now owns 7 million bales of cotton in\nreserve, and cotton prices have risen from 21 cents a pound\non August 1, 1939 to over 16 cents 8 pound at the present\ntime. We ought not to withhold surpluses from the market\nin this manner. The housewife ought not to be made, in times\nlike these, to pay 8. tribute to profiteers and speculators\nwhen she buys a cotton sheet for her home or 8 shirt for her\nhusband or 8. suit for her child.\nMillions of people still go without the milk, butter and\neggs which nutrition experts have found necessary to good\nhealth and good morale; yet we are withholding the largest\nreserve of milk, butter, eggs and cheese in our history.\nI know from experience on my own farm that within two months\nRegraded Unclassified\n- 13 -\n201\nwe could increase our supply of milk by feeding some of our\nhuge surplus of corn to the cows. I know that we could use\nsome of our surplus grains as feed for chickens and get more\neggs, yet the price of a standard poultry ration has increased\n60 percent since the war began. This has been historically\na land of milk andhoney. There is still plenty of milk and\nhoney but too much of it is in the warehouse. Let's make it\nflow. If we were to let it flow to the public we would not\nonly help in keeping prices stable but we would be doing some-\nthing even more important; we would be helping to make our\npeople healthier and happier.\nIt is sheer folly from the farmer's point of view to be\npushing prices up by creating scarcities in times like these.\nThe farmers suffered cruelly for twelve long years after the\ncollapse of the inflation of 1920 and 1921. It is sheer folly\nin the same way for labor leaders to seek continual increases\n- 14 -\n202\nin wages which in turn produce higher manufacturing costs,\nhigher prices, and a higher cost of living. It is short-\nsighted for landlords to charge all that the traffic will\nbear in cities where housing space is at a premium because\nof defense needs.\nThere are always selfish groups in any country which\nthink they can profit from inflation. They are dead wrong.\nInflation does more than merely to rob the wage-earner\nof 8 portion of his earnings. It does more than saddle the\nfarmer with a load of debt which he cannot repay. It is\nmore destructive of morale than any other single force.\nInflation divides the country. It sets up producers against\nconsumers, workers against employers, the people who owe\nto\nmoney against the people/whom the money is owed. No group\nin a community profits from inflation in the long run except\nTHE THREE HORSEMEN_ - THE SPECULATOR, THE PROFITEER AND THE\nHOARDER.\nRegraded Unclassified\n- 15 -\n203\nThese are truths that should be self-evident. They\nshould be especially 80 now, in view of the fact that rising\nprices will only add to the cost of our defense program and\nmake the arming of our country steadily more difficult. They\nshould be self-evident now in the light of the experience\nthat we suffered only 25 years ago.\nYou in New England have 300 years of experience behind\nyou. The American people 8.8 a whole have 150 years of self-\ngovernment behind them. We are not children any longer. We\nare a mature nation, and we should be able to face up to our\nresponsibilities as mature men and women. My plea to you\ntonight is that we should learn from bitter experience. My\nhope and my belief is that no group among us - whether farmers,\nworking men or business men - shall be tempted by the illusion\nof selfish gain into allowing prices to rise unchecked. The\ncost of inflation is too ruinous to producer and consumer alike\n- 16 -\n204\nfor anyone in authority to tolerate it now. I can give you\nonly this pledge - that we at the Treasury will do everything\nhumanely possible to check the rise in prices before it will\ndo any lasting damage to our economy. But we at the Treasury\nmust have the firm support and the clear understanding of\n130 million Americans behind us. If we have that support\nand that understanding, I know that we shall not fail.\n205\nSeptember 3, 1941\n10:15 a.m.\nRE EXCESS RESERVES\nPresent:\nMr. Bell\nMr. Stewart\nMr. Bernstein\nMr. Haas\nMr. Murphy\nMr. White\nH.M.Jr:\nWell, now, Dan, how will we run this thing?\nBell:\nWell, I hardly know. Have you read George's\nmemorandum?\nH.M.Jr:\nVery hastily.\nBeil:\nIt is & good memorandum, and personally I\nagree with him.\nH.B.Jr:\nEverybody come closer. Come within my ten-foot\nvision.\nDoes somebody want to take the argument, why\nwe should do what the Federal Reserve wants\nus to do? Will somebody take that side?\nStewart:\nWell, I will make an observation. I think the\nmemorandum is a good memorandum. I think it\nis very persuasive, and I think it is par-\nticularly persuasive because it really comes\nto a conclusion quite convenient to the Treasury.\nI don't mean that to be funny. I mean, it is\nRegraded Unclassified\n206\n- 2 -\none of those cases where it is awfully diffi-\noult to come to any other kind of decision. I\nthink it depends on how seriously you take\nthe threat of inflation, and I take it seri-\nously. I think it depends--\nH.M.Jr:\nI take it terrifically seriously.\nStewart:\nI think the next step is to say where you\nthink the inflation is serious. I think,\namong other places, it shows itself in the\nbond market now. Now, if you look back on\nthese periods of incipient inflation, the\naction is always too late. This has a remi-\nniscent quality. There are two experiences\nwe went through.\nH.M.Jr:\nJust one minute, for my speech. You are quoting\nLloyd George.\nStewart:\nThat is right.\nH.M.Jr:\n\"Too late moving here, too late in arriving\nthere, too late in coming to this decision,\ntoo late in starting enterprises, too late in\npreparing for this war, the footsteps of the\nAllied forces have been dogged by the mocking\nspecter of 'too late.'\" That is the quota-\ntion.\nStewart:\nIt certainly applies to all these problems\nof monetary control.\nH.M.Jr:\nThe way you put it, \"too little and too late.\"\nStewart:\nThat is right.\nH.M.Jr:\nWell, they have been using it, but that is the\nquotation.\nStewart:\nI was thinking of two earlier periods in our\nexperience. There is the 1919 post-war period\n207\n- 3 -\nwith the Treasury on one side and the Reserve\nSystem on the other, chiefly.\nH.M.Jr:\nIs that a public document?\nStewart:\nThat is in the files. There was B. long corre-\nspondence. At the time it was rate control,\nthe question of rates and when rates ought to\nbe brought up.\nBell:\nJust before the Victory Liberty Loan.\nStewart:\nBy 1920, yes, a collapse.\nH.M.Jr:\nNow, what is the position that Treasury took?\nStewart:\nTreasury at that time was arguing that the\nFederal position was not unsound, that it had\nthis financing to do, that it would be at\nunnecessarily higher rates. They could carry\nthrough on the war basis and Strong was argu-\ning for the immediate correction of the dis-\ncount rate in New York. I don't pretend that\nthat is the only factor in that position, but\nthe correspondence is long and well written.\nBell:\nYes, it is good.\nStewart:\nIt is good correspondence.\nH.M.Jr:\nI thought at that time that David Houston\nwas blamed by the farmers for the collapse\nof the twenties.\nStewart:\nWell, Harding did as much of it as anybody\ndid during those days.\nH.M.Jr:\nWhat were the steps taken?\nStewart:\nThe real incipient period, or at least the\nclimax on top of the war period is the period\nthat comes in the Victory Loan in 1919.\nRegraded Unclassified\n208\n- 4 -\nH.M.Jr:\nWell, you see I am not - I have never studied\nthat. It was when, in--\nBell:\nIt began in January, I think, 1919.\nStewart:\nRight after the Armistice and the demobilization\nyou have got this period of cleaning up the\naccumulated indebtedness.\nH.M.Jr:\nIs that & very long correspondence?\nBell:\nYes, quite a bit.\nH.M.Jr:\nHow much?\nBell:\nOh, it is a file about an inch or so thick.\nH.M.Jr:\nCouldn't somebody digest that for me? I wish\nyou would have it done promptly and then have\nreferences in case I want to do it some more.\nThat was in connection with the Victory Loan.\nHow big a loan was that?\nBell:\nThat was a four and a half billion dollar loan.\nH.M.Jr:\nWhat rate?\nBell:\nThere are two issues of Victory Notes, one of\nthree and three-quarters and the other of four\nand three-quarters.\nII.M.Jr:\nDid my interrupting spoil your thought?\nStewart:\nNot a bit.\nH.M.Jr:\nGo ahead.\nStewart:\nWell, the other period, and it is not unlikely,\nis the 1928 period, controversy between the\nReserve Board and the New York bank at that time.\nThe Reserve Board was arguing for direct action\nas against rate action. The New York bank\nRegraded Unclassified\n209\n- 5 -\nargued for rate action. Again it was a sort\nof division in monetary authorities. Now\nlooking back on both those periods, the time is\nlost when you say it is too late. It is the\ntime consumed in discussing which method ought\nto be used. They really should have done both\nthings.\nH.M.Jr:\nDone what?\nStewart:\nBoth the direct control and the rate.\nH.M.Jr:\nWhat is the direct control?\nStewart:\nThe direct control is the thing George argues\nfor here, a selective process. In 1928 it was\nthe security loan. Now it is giving way for\nthe defense industry and shutting off the non-\ndefense industry. It is perfectly rational.\nBut it isn't to my mind entirely persuasive\nthat at this stage one ought to choose between\nmethods before one closes the book. One ought\nto see whether or not both methods may not be\nnecessary and desirable.\nH.M.Jr:\nAnd therefore you lean--\nStewart:\nI am not yet ready to say in view of all the\nimplications and using the Reserve restrictions\nthat that is what I want to do at this moment.\nI do say just at the first reading of this -\nI haven't read the Federal Reserve memo or\ntalked with George - I do say I would not shut\noff the possibility of doing both things if\nI took inflation seriously.\nH.M.Jr:\nI haven't read the Federal Reserve memorandum.\nWhat was it?\nHaas:\nI just got it.\nH.M.Jr:\nI asked them for one, didn't I? I asked Gaston\nRegraded Unclassified\n210\n- 6 -\nto ask them for one.\nHaas:\nI wasn't here and Henry did it and--\nH.M.Jr:\nYou see, when I heard this last week - I sense\nthese things. I heard about it, and I said,\n\"Well, get the Federal Reserve to give us of\nmemo and get Haas' shop to give us a memo and\nwe will sit down and thrash this thing out,\nbecause I take it very seriously.\nStewart:\nI thought you did.\nH.M.Jr:\nThis is the way I feel without having gone\ninto the ground work too thoroughly. I would\nbe willing to increase their reserves by the\nmaximum, irrespective of what it costs us in\nour borrowing, if I was convinced that by doing\nthat I was really foresighted, you see. The\nthing that - and then the other thing, on the\nsmall end of it, the personal end of it - there\nis always the human element that enters into it.\nWe are all small. Having them in on that is\nthe next move that they want, legislation to\nhave much further control, you see.\n(Secretary held an unrecorded telephone con-\nversation with Miss Grace Tully.)\nStewart:\nYou know, we humans that you refer to were\nequally present in these other episodes to\nthe point where friendships were broken. Men\nwho had had long associations with each other\nfelt quite bitter, and for long years--\nH.M.Jr:\nYou see, all of this is a closed book. If I\ncan draw on you for the experience--\nStewart:\nWell, I think that this is the time where\nprospective is entirely unimportant. These\npersonalities disappear. But you do find them\nin the action that is taken. I think any\n211\n- 7 -\ncorrespondence or action that is taken has to\nput the Treasury's position in such a fashion\nthat it has the farsighted concern. You can\nput it and say, \"I don't believe that such a\npolicy, viewed in the long run, is a wise thing\nto do because of its implications.\" You can't\never afford to say that you wouldn't do it\nbecause you would pay a low rate. You can't\nafford to do that.\nH.M.Jr:\nBut you see, I am going to let you read this\ndraft of my talk which covers the whole field\nof inflation and it is finished. If you care\nto listen to it, I will give you a chance to\nhear it tomorrow morning, but I want to let you\nknow how serious I am about it.\nStewart:\nHow seriously do you regard inflation in the\nbond market? Prices are higher and yields are\nlower than it will be possible to sustain them\nin the light of the present prospective develop-\nments. That is a definition of inflation, to\nme.\nH.M.Jr:\nWell, let me put it this way. The price of the\nbond market has been high and interest rates\nhave been low long before we had national\ndefense. Right?\nStewart:\nYes.\nH.M.Jr:\nSo we can't compare the - I mean--\nStewart:\nBut you introduce a new element of national\ndefense. That is one of the factors in affect-\ning one's judgment, as to the capacity to\nsustain that level of rates.\nH.M.Jr:\nWell, let me give you - make 8. statement which\nis not an answer to your question but bears on\nthe point.\n212\n- 8 -\nWhat I was trying to answer you was this: If\nwe are going to do something like this three\nmonths from now or six months from now - in\nother words, you get the bond market to give\nit a shock and see just what will happen to\nit, there will never be a better time than\nright this week. I mean, if we are going to\ndo this thing, I will say I doubt if we will\never have a better time for the rest of my\nterm than right now. Now, it is like the\nPresident - he cancels the cotton bill freez-\ning and cotton goes up, so we might - if we\nare going to do something about reserves, I\nsay for God's sake let's do it now and see\nwhat happens and see whether the bond market\nis or isn't inflated. That isn't reasoning,\nbut it is the old elbow, and I won't have &\nbetter chance, because I have got a working\nbalance of just under two billion, and I can\ntake it in my stride, and I can go on either\nwith bills or notes and see what happens. So,\nas I say, that isn't--\nStewart:\nThe time is appropriate.\nH.M.Jr:\nNothing scientific, but what I am trying to\nanswer you is, I am not afraid to do this\nthing. Now, let's say we do this thing, and\nlet's say that the bond market takes it in its\nstride. Well then, it isn't inflated. If it\ngoes down four or five points, then it is in-\nflated. I don't know. Of course, the last\ntime they did it, it took them eighteen months\nto get over it. They went - it was about\neighteen months that we had & bad bond market,\nwasn't it? Life insurance bought what the\nbanks sold and saved the day. They did it\npractically dollar for dollar. I realize\nperfectly what I am saying, but I feel this way,\nthat if the Fed feels that this thing is an\ninflated market and enough people around here\nfeel it is deflated, and they want to squeeze\nRegraded Unclassified\n213\n- 9 -\nthe water out, now is the time to do it. I\ndon't want - I have got too many things, and I\ndon't want this thing hanging over my head.\nThere has been enough talk. It has all been\nwritten up in the press. I mean, somebody\nin the Federal Reserve System has been talking.\nThe other day I heard this woman, Sylvia Porter,\nin New York with a whole story on it. Gold-\nsmith in the bond letter had the thing, 50 it\nis all out.\nBell:\nEverybody is talking about it.\nStewart:\nIt is hanging over everybody's head.\nH.M.Jr:\nAnd as I say, I realize I am not being very\nscientific.\nStewart:\nThat is the only science I know is to test the\nmarket and what you would do, you would say\nthis is the most convenient time to make 8.\ntest. There isn't any other wisdom possible.\nEveryso often you have to test it to find out\nwhether or not it behaves right.\nH.M.Jr:\nThey can raise it about another billion\ndollars?\nHaas:\nA little over a billion, reducing from five to\nfour the excess reserves. But the market\nwould want to know if that ends it, whether you\nwould want to join with the Federal Reserve is\nto ask for legislation to give them more power,\nyou see, and if they think this is just the\nbeginning of it, that is one thing, or if you\nare going to give assurance that ends it and\nfrom there on you are going to use selective\ncontrols, that is another problem. And if you\ngive it a drastic crack, the Federal's staff\nand the Board feels that the way to handle the\n214\n- 10 -\nbond market is to control it through\ntap security and they handle the whole mar-\nket by buying back and forth.\nA.N.Jr:\nWhat kind of security?\nlinas:\nTap securities.\nM.M.Jr:\nWhat are they?\nlinas:\nIn other words, continue a sale. You con-\ntinue as tap or continue as a sale. They\ncontrol the market. It seems to me that\nif this is artificial, what we have got\nnow, that sort of thing is just making\ntrouble and putting a distinctly artificial\nsituation in where it is not required at\nall.\nBell:\nIt seems to me if we are going through with\nit then we ought to let the market alone\nand let it settle to itslevel and not have\nthe Federal Reserve try to peg the rate\nat two and a half percent.\nS.M.Jr:\nDid you say that in the memorandum?\nhaas:\nOh, yes.\nMurphy:\nThey suggested a memorandum that they wrote\nRegraded Unclassified\n215\n- 11 -\nthis thing, that it would be well to get it\nmarked down in one piece so the climb wouldn't\nhang over, and it simultaneously would increase\nreserve requirements. We should put out & tap\nissue of three to four percent, offer an un-\nlimited amount of it, and thereby cause the\nmarket to drop off like a precipice, after\nwhich it could be stabilized for good.\nH.K.Jr:\nAt three or four per cent?\nMurphy:\nThey say three dash four.\nHaas:\nAnd I question whether it will be an important\nfactor in it - in controlling inflation. In\nother words, if you are going to do this, the\nmemos from the staff - Goldenweiser mentioned\nit in his, but the other - you have got to\nhave these specific controls on top of this\nother one to really control inflation, because\nall the commercial ones they will go ahead and\nthe Board will continue on. An increase in\nrate won't defer them any. People will pay it.\nSo if this solves the problem you could say,\n\"Well, now, inflation is under control. We\nhave it in the bag. We made this sacrfice.\"\nThat is one thing. But if you 20 ahead and\nrun the rates up to three or four per cent\nand then you still have your inflation prob-\nlem on your hands, you will find out, and I\nthink you have got to weigh it very care-\nfully.\nH.M.Jr:\nThe reason I say what I did is, I am willing\nto remove all personal feelings out of this\nthing and just set them aside. I have never\npermitted myself to let personal feelings\ninterfere with our welfare. If I am convinced\nthis is the right thing to do, hell, let's do\nit. You have never heard my--\nRegraded Unclassified\n216\n- 12 -\nBell:\nNo, that is right.\nH.M.Jr:\nIf a fellow has got some deep feeling that this\nis the way to do the thing and this is going\nto end it, and it is right, then do it.\nStewart:\nI am in the same mood. This doesn't answer\nthe problem. The only question is her or\nnot there aren't & multitude of things you will\nhave to do.\nHaas:\nWe might compromise and go the limit if they\ncould give assurances that from then on it will\nbe used for specific controls.\nStewart:\nDo you want that sort of thing?\nHaas:\nThat is it. That practically ties the Federal\nReserve and says, From then on you mean nothing.\"\nH.M.Jr:\nAgain, to get on the personal basis, you\ndon't know who is doing the thing over there?\nIs it one man or is it a group? Is it the Board\ntogether?\nBell:\nI think it is the Board.\nHaas:\nDraper, I think, dissents, isn't that right?\nMurphy:\nI gathered that impression when I was over\nthere. He didn't say 80 in so many words.\nH.M.Jr:\nWere you over there?\nMurphy:\nYes, sir. I met with Draper and Szymozak and\nClayton and Thurston and Thomas and Piser and\nLongstreet. I had intended to meet those\npeople at Mr. Gaston's suggestion. He asked me\nto get in touch with them. I called up Thomas\nand when I came over he had that group assembled.\n217\n- 13 -\nH.M.Jr:\nHere is the thing that isn't clear in my mind.\n1 know there are & great many forces which are\nworking for higher prices and locking up this\nmoney, I just don't see how that stops people\nfrom wanting to spend the money on non-defense\narticles. Now, I wish somebody would explain\nit to me.\nStewart:\nIt doesn't. It deals with one area of\ninflation, to my mind, which is the bond market.\nThe Government bond market is a base line for\nevery other article in the bond market. The\nresult is that if it is inflated it tends to\ncreate the same position all the way through,\n80 that either during or after the war you have\na problem of the readjustment of your base\nline, whether your base line is near enough in\nline with what you expect to be able to carry\nthrough - let's put it the other way around.\nSuppose we say, \"Well, this rate is all right.\nNot merely - I don't mean to test it, but we\nhave & capacity and it is good. Take two or\nthree per cent rate, carry the financing through\non it, and hold that position post-war, so that\nyou say, \"This is a pegged thing.\" Now, my\nown belief is that it is an extremely difficult\nart in the long term money market. I think\none of the weaknesses in currency is the\nmanagement of this long term rate over a long\nand indefinite period. Therefore, I believe\nthe present market to be inflated, but I\nwouldn't go beyond saying that this is a cor-\nrection of one of the places where I think it\nis inflated and therefore do it for readjustment\nat some time, and I would rather have the re-\nadjustment at some convenient stage than I\nwould after I had had another thirty billion\nof debt accumulated and in the hands of the\npublic. I don't think a war of this magnitude\ncan be conducted on a two per cent basis\nor a two and a half per cent basis.\n218\n- 14 -\nH.M.Jr:\nWell, let's say that instead of two and & half\nwe tion? go to three. How does that stop infla-\nStewart:\nOne half per cent better. One half per cent\nless readjustment, which is ten points.\nH.M.Jr:\nBut how does --\nStewart:\nIt doesn't. That puts you into a whole area\nof what we all mean when we talk about inflation,\nwhich is 80 wrapped in mystery and logic and\nsubterfuge.\nH.M.Jr:\nBut let me get this thing straight. If what\nthese people are worrying about is the readjust-\nment after the war, that is one thing. Or if\nit is that they feel that the present price of\nbonds is too high and the price should be\ndriven down, that is something else.\nStewart:\nAre some of them saying that?\nH.M.Jr:\nI don't know. Here is the thing. Supposing\nwe say, \"We will do this.\" All right, we\nincrease the reserves and lock up another billion\ndollars. That is what we do, isn't it?\nStewart:\nYes.\nH.M.Jr:\nMake the banks hold it. And then we go and\nget out what, a long term issue on the new\nbasis? That would be one way. A three per\ncent issue. Or I say I am not convinced that\nthe price of bonds is too high and I don't want\nto sell any more long term issues because I am\nnot sure. Therefore, I get out a five\nyear note. That increases reserves because\nit will go solely to the banks, won't it?\nStewart:\nIncrease the deposits, yes. There is no question\nabout it. You have got a much more difficult\nask here than existed in either of the other\ntwo episodes.\n219\n- 15 -\nH.M.Jr:\nCouldn't you have an in-between thing and say,\n\"All right, instead of giving the bond market\na terrific shock, let's have 8. creeping interest\nrate. Let it go up gradually.\nMurphy:\nNo rate. one likes to buy bonds on a creeping interest\nH.M.Jr:\nOf course the answer is that they will if they\ncan't get anything else. That is the trouble.\nYou have got to be terribly frank with each\nother. The trouble is, there are no new\nmoney bond issues.\nStewart:\nAnybody in the banking business that shows &\nloss on a book value of an earlier issue, that\nslows down a new issue --\nH.M.Jr:\nBut the trouble is, I think if you go through\nthe last - back to the first of January --\njust do it for fun, I mean not now. See how\nmany new issues were brought out as bond issues.\nI doubt if there have been a hundred million\ndollars.\nStewart:\nOf new money?\nH.M.Jr:\nOf new money, Henry. Now, the fellow is faced\nwith this. He says, \"I have got to earn my\nsalary and my payroll and I may take a loss\nbut I am going to buy these Government bonds\nanyway, although everything tells me I shouldn't.\"\nSo he goes against his better judgment and\nwe force his hand.\nStewart:\nHe goes a little longer than he meant to go\nin order to get the yield.\nH.M.Jr:\nIf this is all right, it is too high. We had\nthat fellow from Baltimore, remember? He was\na smart old fellow. What was his name? That\nbank?\n220\n- 16 -\nBell:\nMcAdams of the Baltimore Trust?\nH.M.Jr:\nWell, he just - they tell me he is one of the\nsmartest trading fellows. He spends a lot of\ntime on his three farms, but he sat here and\ntold us - called a spade a spade, didn't he?\nBell:\nYes, he was very frank.\nMurphy:\nThere is quite 8. time factor, though, Mr. Sec-\nretary, while the acquisition of income may\nbe ultimately necessary, you can always\ntemporize with cold cash, and it seems to me\nthat bond buyers generally are much more ready\nto buy on a low market or high market than on\na falling market, and that a falling market,\ngradually falling, creates a very bad environ-\nment for selling bond issues.\nH.M.Jr:\nHere is the way I feel. This thing isn't -\nthe trouble with the damn Federal Reserve\nmemos is that they are 80 long.\nHaas:\nThis is very short. He didn't want to put it\non that level, he said, 80 he addressed it\nto me, but I think he hoped you would read it.\nH.M.Jr:\nIs it short?\nHaas:\nTwo and a half pages.\nH.M.Jr:\nWhere is it? It only came this morning?\nHaas:\nLast night.\nMurphy:\nAbout six o'clock.\nHaas:\nI will give you the whole batch.\nBell:\nWhose memorandum is this?\nMurphy:\nI don't know. It was given to me by Thomas\nas an academic discussion, a rather thorough\ndiscussion of the matter. It was written by\n221\n- 17 -\nthem in the spring. I found it quite interest-\ning. It is in that memorandum that they say,\n\"If you are going to raise the rates, you ought\nto raise them fast.\nHaas:\nI think it comes down to this, Mr. Secretary,\nwhat Walter Stewart mentioned. Is this rate\ntoo low? Do you want a higher rate?\nDoing it isn't going to be an important factor\nin inflation. In fact, these memos that you\nhave there, they indicate that to do this with\ngold inflation you have got to increase your\ntaxes much more. You have got to put in forced\nloans. So what you wind up with, you do this\nas & method of raising the general interest rate\nand then do all the other things that are nec-\ne ssary to control inflation, including these\nselective controls. Isn't that right, Walter,\ndoesn't it come down to that?\nStewart:\nThat is the only thing you can argue, it is\nto diminish the magnitude of your task. You\nsomewhat make your total task easier, though\nyou see by the same methods it won't be easier\nin the long run.\nH.M.Jr:\nA lot of these arguments in the memorandum are\nout of date. There is no criticism today of\nthe banks extending credit. They are doing\na beautiful job. You would think he was writing\nthis two years ago. How much have the banks\nincreased the loans?\nHaas:\nAbout two billion eight hundred million, but\nthat is inflation, too. That has to be\nimproved.\nH.M.Jr:\nAnother thing, I don't like, \"The decision must\nbe made to support the rates selected.\"\nHaas:\nThat is the tap.\n222\n- 18 -\nH.M.Jr:\nThat is just as artificial as anything else.\nHaas:\nI think it is more artificial.\nIt is a rate peg in the market. They look at\nit and the Government's credit is standing on\nits own feet.\nH.M.Jrs\nI don't mind saying I think that is 8. very,\nvery weak memorandum. I mean, I would state\nhis case much better than that. He stated\nit very badly, don't you think so?\nStewart:\nYes, I think the mood to approach this in is\nthat --\nH.M.Jr:\nI think it is terrible.\n(Mr. White entered the conference).\nI am terribly disappointed. I would state it\nbetter than that.\nStewart:\nIt is rather different from the others.\nWhile there were differentials of monetary\nauthority, the real control is here.\nH.M.Jr:\nIt should be, shouldn't it?\nStewart:\nYes, it is all right. And the real borrower\nis here. So you have got & peculiar two-fold\nresponsibility. Entirely apart from the motives\nwith which this sort of recommendation is\nmade and what else they have in their mind,\npersonalities, whether the arguments are good\narguments, all I say is that this is a good\ntime to be aware of this responsibility and\nappraise it in the light of prospective problems\ninstead of the immediate situation.\nHaas:\nMr. Secretary, did you notice the British press\ncomments on the January statement of the Board?\n223\n- 19 -\nH.M.Jr:\nNo.\nHaas:\nI have forgotten whether I sent those in.\nThey came over in a pouch from the British\nEmbassy. That is the type of headline they\nhad. There were several papers of the same\ntenor all the way through.\nH.M.Jr:\nI will tell you what I would like to do, Dan.\nCould you get this group together maybe this\nafternoon?\nBell:\nThis group?\nH.M.Jr:\nYes. and do a little more threshing around.\nI don't think we have done enough of that in our\nown place and --\nBell:\nWe haven't read any of this stuff from the Fed-\neral Reserve. We just got that. Unless\nGeorge read it.\nH.M.Jr:\nI won't have a chance, unfortunately, to touch\nit again until eleven tomorrow, but if anybody\ngets any ideas --\nBell:\nYou have got a conference at eleven.\nH.M.Jr:\nWith these two men, tomorrow.\nI don't mind talking perfectly frankly before\nthem. I think, Walter, - and Viner is here.\nYou might send him - he will be here tomorrow.\nYou might send him a wire to be here at nine\nfifteen tomorrow.\nBell:\nIsn't he coming?\nH.M.Jr:\nHe is coming. He will be here.\nBell:\nI thought he would be here.\nH.M.Jr:\nThat is right, he will be here.\n224\n- 20 -\nBell:\nWho notified him, Mrs. Klotz?\nH.M.Jr:\nI notified him to be here tomorrow. He will\nbe here.\nWell, I just think if you could get this group\ntogether this afternoon - Harry will have to be\nexcused because he is working with Kuhn on\nthis other thing. O.K.? I mean, don't you\nthink - and just remember this. If we are\ngoing to do it, now is the time to do it.\nStewart:\nYes.\n225\n(COPY)\nSeptember 2, 1941\nSecretary Norgenthau\nMr. Heas\nsubject: Excess Reserves, Gredit Controls, and Treasury\nFinancing\nSUMMARY\nThis assereadus 10 prepared at the request of Mr.\nGaston made following a telephone sall which be\nreceived from Chairman Reeles while you were away.\nA copy of Mr. destom's necorandes to you summaris-\ning his conversation with Chairman Recles is at-\ntached herete.\nChairman Ecoles sake that the Treasury consur with\nthe Reserve Board in reising reserve requirements\nto the present statutory limits and in requesting\nfrom Congress a further increase in such limits.\nBe recognizes that such action will depress the\nmarket for Government securities, bet believes it\nnecessary in order to combat inflation. He urges,\ntherefore, that leng-term financing be deferred\nuntil after the announcement of such a program in\norder that both the Treasury and the Reserve Board\nsay be spared any assusation of bad faith.\nExcess reserves nov amount to about 85.0 billions,\na decrease of $1.9 billions since the all-time high\nreached on October 23, 1940. Barring changes is\nofficial policy or the import of substantial amounts\nof gold from Russia, total reserves appear likely to\nfluetuate within a nartow range for the nort year or\nso. Any further decrease in 020000 reserves, there-\nfore, 15 likely so come only free as increase in\nrequired reserves due to continued deposit expansion.\nRegraded Unclassified\nSecretary Morgenthau - 2\nsuch transfermation of ****** PERIFICE into deposits\n- at A ratio of about 85 of Aspecito to $2 of n-\n.... reserves -- would be inflationery. rether than\ndeflationary. in 185 implications.\nwhile the immediate effect of raising reserve require.\nments is to increase interest rates, its stated ob-\njective 18 to combat inflation. This objective would\nbe achieved in soze degree by the more psyahological\noffect of the imerease. In order to be of permanent\nvalue as an anti-inflationary neasure, however, an\nincrease in reserve requirements must result in equees-\ning secie borrowers out of the market. This would be\ndone by making berrowing more expensive and 00 causing\nthe Government and the defense industries to compete\nwith other borrowers on - price basis. This naturally\nleads to the question of whether an increase in in-\nterest rates is the best method of squeezing 000-02-\nsential berrowers out of the market.\nA consideration of this question leads to the cenela-\nsion that the direct exclusion of non-essential bor-\nrowers from the market would be proferable to exclusion\nby rate competition. Selective credit controls -- such\nas control of consumer credit, of housing credit, of\nnew capital issues, of stock exchange loans, and of\nbank loans for non-defense purposes - appear, therefore\nto be superior to the general eradit control proposed\nby Chairman Zeeles.\nIt is consequently suggested that you should not conser\nin Chairean Secles' request that you join with the\nReserve Beard in recommending as insrease is reserve\nrequirements. In such A case there reems to be no\nreason to defer leng-term Treasury financing beyond\nthe time when 11 would otherwise be adviseble.\nI. Chairman reeles' Properal\nOn August 22, Chairman feeles called Mr. Gaston to express\nhis hope that the Treasury would offer no long-term securities\nin September or at any time up to December, but that sech new\nmoney as sight be required in the meantine should be procured\nby ----- of Treasury bills. & copy or Mr. Gasten's monorandum\nRegraded Unclassified\nSecretary Morgenthan - 3\nto you unmarising his telephone conversation is attached\nhereto. Ky. Gasten requested \" to consult with neabers of\nthe staff of the Beard of Governors conserning Chairman\ntooles' proposal and to prepare a necerantus to you.\nChairmas Zeoles' renceming is se follows:\nThe present level of deverment Dest prices is justified\nonly by the existence of & large volume of ****** reserves.\nIt is desirable is the interest of the centrol of inflation\nthat this volume of excess reserves be reduced sharply. No\nwuld like to have the Treasury consur with the Receive Board\nin increasing reserve requirements up to the present state-\ntery limits and in asking Congress to increase these limits,\nthereby giving the Reserve System authority to increase reserve\nrequirements yet further. These actions would probably cause\na substantial deeline in the bond market. He is partieularly\nconserned about this decline in the case of the two new leag-\nterm taxable issues, as he believes that the tax-exempt issues\nand all short-torm issues can take care of themselves. Ee is\nvery anxious, therefore, that no new long-term taxable issues\nbe put out at the present leval of the market. to do se at\nthis time. and shortly thereafter to take the action which he\nconsiders necessary with respect to reserve requirements, would,\nhe believes, subject both the Treasury and the Reserve Board to\njustifiable accumations of bad faith.\nChairess Escles' views appear to present the following\nquestions:\n(1) Is it desirable to increase recerve requirements\nat this time?\n(2) If this is not desirable, should say alternative\nmeasures be taken?\n(3) If reserve requirements are to be raised. should\nlong-term finameing be postposed until such action\nhas been taken or at least recommended 10 Congress\nby the Reserve Board and the Treasury?\n(4) Could the Treasury finance itself for some menths\nentirely by short-term berrowing, as suggested by\nChairman Keelee?\nThe last two questions present mush the ensier problems and\nmay be considered first.\nRegraded Unclassified\nSecretary Morgenthan - 4\nAction of the character propesed would be likely to made\n& substantial deeline in the market. The Treasury would,\ntherefore, be open to a justifiable assucation of bad faith\nIf it should undertake long-term financing while contemplating\njoining in such a recommendation.\nFinancing Treasury needs for the next few months exclu-\nsively by short-term issues would appear to present no special\ndifficulties, except that most of the securities se sold would\ngo into commercial banks and so would result in increasing bank\ndeposits. Such an increase sould be easily justified, however,\nif 18 were morely the first stop in a program which would yes\nsult in the long FUA in the sale of fewer, rather than more,\nsecurities to commercial banks.\nIt would seem, on the other hand, if you do not propase\nto conour with the Reserve Board in recommending an increase\nin reserve requirements, that there is no need for postposing\nlong-term financing lenger than night be indicated by the other\nfactors in the situation.\nThe advisability of adopting Chairman Koolee' specific\nsuggestions with respect to current financing operations, there-\nfore, turns upon the broader question of the advisability or\ninadvisability of consurring with the Reserve Board in their\nproposal to increase reserve requirements.\nII. The Present Situation with Respect\nto Sxeess Reserves\nExcess recerves amounted, on August 27, to $5.0 billions.\nThis is a decrease of $1.9 billions einee the all-time high\nreached on October 23, 1940. The factors accounting for this\ndecrease are shown in the following table:\nRegraded Unclassified\nSecretary Margentham - 5\nFastors Ascounting for Decrease in Excess\nReserves, October 23, 1940, to August 87, 1941\n(In billions of dollars)\nFactors absorbing excess reserved\nIncrease in money in circulation\n1.7\nIncrease in Treasury sash and deposite\nin the Federal Reserve Banks\n.5\nIncrease in required reserves\n.6\nAll other\n.4\n3.4\nFactors creating excess reserved\nIncrease in monetary gold stock\n1.3\nA11 other\n.2\n1.5\nDecrease in excess reserves\n1.9\nIt will be observed from the above table that total 74\"\nserves declined during this period by only 11.1 billions --\nthe remaining 30.5 billions of the decline in excess recerves\nbeing caused by an increase In required recerves resulting\nfrom deposit expansion during the period.\nAbout $0.7 billions of the decrease in total reserves was\ncaused by an increase in Treasury deposits and other more or\nless non-recurring factors. The remaining $0.4 billions of\nthe decrease was caused by the excess of the increase in money\nin circulation over the increase in monetary gold stock. The\nmovements of these two factors are likely to dominate future\nmovements in total reserves for some time to come.\nAs nearly as can be estimated -- barring changes in of-\nfioial policy, or the import of substantial amounts of gold from\nRuesia -- total reserves appear likely to fluotuate within &\nrelatively narrow range for the next year or NO. This menns\nRegraded Unclassified\ncerretary Margenthes - 6\nthat any further substantial decrease in excess reserves 10\nlikely to cose only from as increase in required reserves due\nto continued deposit expansion. Deals & decrease is ******\nreserve would, of course, be inflationary, rather than de-\nflationary, in its implientions, as it would near that some\nof the proviously existing excess reserves had been trans-\nformed lato deposits - at a ratie of about $5 of deposits\nto $1 of ****** reserves -- and had no noved one stop further\ntoward the spending streem.\nIII. Probable Consequences of an Increase\nIn Reserve Requirements\nThe objective of raising reserve requirements 10 to and at\nin preventing inflation. The immediate effect of euch as in-\norease would be to reduce the available supply of bank credit\nand so to make banks less ready to lend and to purchase securi-\nties. It night also incline sany of them to sell securities\nalready held. This would be especially true as as increase in\nreserve requirements weuld hit the New York City banks the\nhardest and other banks are inclined to follow the lead of the\nNew York City banks is handling their security portfolios. 1/\nThe following table indicates the distribution by classes of\ncities of ****** reserves or June 25, 1941, and the amounts\nto which they would be reduced if reserve requirements were\nincreased to the present statutory limits:\n:\nI\nExcess Reserves if\n(Actual Excess\nRequirements Increased\n# Reserves\nto Statutory Limits\n1\n(In millions of dellars)\nCentral reserve cities 2,612\n1,976\nReserve cities\n1,750\n1,398\nCountry banks\n869\n604\nTotal\n5,231\n4,058\nThe above table sakes no allowance for withdrawals of\ninter-bank balances incident to increasing receive 70-\nQuirements. The staff of the Beard of Governors ostimates\nthat such withdrawale would not exceed #75 millions.\n(This footnote continued on next page)\nRegraded Unclassified\n201\nSecretary Morgenthau - 7\nAB increase in reserve requirements would consequently\nincrease interest rates and put down bond prices. This was\nagreed to by all members of the staff of the Reserve Heard\nwith whom the matter was discussed.\nThe extent of the increase in interest rates - and de-\ncrease in bond prices -- would depend whom the character of\nthe action taken and in difficult to prodict. An increase in\nrequirements to the present statutory limits, coupled with a\ndefinite assurance that no further increase was contemplated,\nsight have very little market effect, A contemplated increase\nin requirements above the present statutory limit, however,\nwould be bearish to an indeterminate degree depending upon its\nimnact upon banker psychology. An increase in reserve require-\nsents sufficient to reduce excess reserves below $1 billion\ncould very easily put new long-term borrowing on A 3 percent\nbasic and put down the price of the new taxable 2-1/2's of\n1956-58 by 89 much as 10 points. (This is about the same as\nthe average deoline in the prices of long-term Treasury bonds\nbetween the high reached in June 1939 and the low after the\noutbreak of the war.)\nAn increase in reserve requirements would also put down\nsharply the prices of all outstanding partially tex-exempt\nsecurities. It is true, of sourse, that such securities, be-\ncause of their growing soarcity, would have a better chance\nof staging a. recovery than would texable securities, the supply\nof which is being constantly increa ed, but such a recovery\naight be a matter of years.\nIf reserve requirements worm raised substantially, it\nwould also probably be necessary to start new series of savings\nbonds at substantially higher rates than those now being of-\nferred and to refund into much new series many of the outstanding\nbonds which whould be presented for each redemption in order to\ntake advantage of the higher rate. It might even be necessary\n(for reasons of public morale) to make the higher rates retro-\nactive on savings bonds already sold.\n(Pootnote 1/ continued from preceding page)\nIf reserve requirements were increased to 25 percent above\nreserve city banks w ula have been reduced as of June 25 to about\nthe present statutory maximum, the excess reserves of central\n1712 millions and the aggregate reserve deficiency of all banks\nhaving reserve deficiencies would have been about $600 millions.\naggregate excess reserves of all member banks have decreased\nSince June 25, the date to which the above figures apply,\nsbout $241 millions.\nRegraded Unclassified\nSecretary Morgesthes + 8\nIncreasing the coat of horrowing to the Government would\nnot in itself help solve the problem of inflation. It should\nbe considered rather as a disadvantage of the proposed method\nof attack and should be weighed against its supposed advantages.\nThe first benefit in the fight against inflation likely\nto be derived from increasing reserve requirements is payche-\nlogical. Increasing reserve requirements is a traditional\nmethod of combating the inflation insident to business booms\nand its use at the present juncture would probably be inter-\npreted as a token of sincerity. The annoumcesent of such a\npolicy night tend, therefore, to dames speculation in the\ncommodity markets.\nSuch a psychological advantage would be short-lived, have\never, unless the increase in requirements had more fundamental\nconsequences also. The primary consequence of the increase\nwould be, as we have seen, a stiffening in interest rates,\nThis stiffening would apply to all borrowers - governmental\nand non-governmental, assential and non-wesential alike. It\nwould be effective in controlling prices, however, only as 11\nactually reduced borrowing and hence spending. In order for\nthe action to be effective, come borrowers would have to be\naqueesed out of the market. The Government and the defense\nindustries would not be among the borrowers 00 squeered out.\nThey would have to pay whatever rate was necessary in order\nto obtain the requisite credit. This leads naturally to the\nquestion of whether an increase in rates is the beet method\nof aquaesing non-essential borrowers out of the market. This\nis the fundamental problem of the relative desirability of\ngeneral ve. selective credit controls and will be considered\nin the next section.\nIV. Relative Merit of General and Selective\nCredit Controls in the Present situation\nIt is the purpose of all credit controls to reduce borrow-\ning and hense spending, and so to restrain price increases\nJudged to be undecirable. Credit controls my be alaceified\nan general and selective.\nGeneral credit controls operate by cousing an all-around\nscareity of lendable funds, thereby putting a general pressure\non all borrowers to reduce their borrowings and honce their\nmendings. General credit controls to be effective must bring\nRegraded Unclassified\n233\nSecretary Morgenthan - 9\nabout an increase in the rate of interest, since it 1s through\nsuch an increase that general pressure is brought to bear MORE\nborrowers. An increase in member bank reserve requirements is\na general credit control. Open market operations (selling\nGovernment securities) by the Federal Reserve Banks constitute\nanother.\nSelective credit controls operate by wholly or partially\nshutting out a given class of borrowers from access to the\nexisting supply of lendable funds. In this way, total borrow-\ning -- and hence total spending -- is out down without any\nnecessity for a rise in the rate of interest. Relective credit\ncontrols already in operation consist of some limitation of\nstock market borrowing (by means of margin requirements) and\ngome limitation of consumer credit. Other selective controls\nwhich might be availed of at the present time would be limits-\ntion of housing credit, restriction of now capital issues, and\nrestriction of bank loans for other than national defense pur-\nposes.\nThe relative appropriateness of the application of general\nor selective credit controls to any situation showing evidences\nof incipient inflation, depends upon the character of the situs-\ntion. If a more or less uniform contraction of borrowing all\nalong the line is desired, general credit controls are more\nappropriate. If, on the other hand, it is desired to contract\nborrowing only in certain fields, selective controls APO in-\ndieated. It 10, of course, by no means barred that the appro-\npriate remedy for some situations might be the application of\nboth general and selective controls of verying dogrees of 10-\ntensity.\nThe present situation appears to call for the application\nof special and not general controls. The reasons for this con-\nclusion are simple. The application of general controls would\nplace a pressure (reflected by higher interest rates) upon bor\nrowers all along the line. There are two very important classes\nof borrowers, however, who will not contract their borrowings a\ncent under this pressure, nor is it socially desirable that they\nshould. These borrowers are the Federal Government and the\nnational defense industries. Between them they will probably\naccount during the current fiscal year for st least three-quarters\nof total borrowing, and they will have to pay whatever rate is\nnecessary to secure the needed funds.\nThe pressure engendered by general credit controls, there-\nfore, can be effective only with respect to the remaining\nRegraded Unclassified\nSecretary Morgenthau - 10\n234\nborrowers who together will probably account for not over\nmore, under present incipient been conditions, will be very\none-quarter of total borrowing. Even these borrowers further-\nhard to dissourage by means of rate increases. The net effect\nof applying stringent general credit controls at the present\ntime, therefore, would be to increase greatly the ocet of bar-\nrowing to the Federal Government and to the national defense\nindustries, in order to effect a relatively small contraction\nwould have & less drastic effect on interest rates, but by the\nin borrowing for other purposse. Mild general credit controls\nsame token, would be even less effective in combating inflation\nsince it 18 only through the medium of all increase in interest\nrates that general credit controls are able to effect reductions\nin borrowing and spending.\nSelective credit controls, on the other hand, may be GOA-\ncentrated solely on those areas of the esonomy where contraction\nis desired. Borrowing may be wholly or partially blooked out\nin these areas, thereby increasing the proportion of the total\nsupply of funds available to the Government and the national\ndefense industries. This seens more desirable than tightening\ncredit conditions generally and foreing the Government and other\ndefense borrowers to compete on a price basis for an expanding\nproportion of a limited supply of credit. The use of solective\ncredit controls might be compared in this respect to the present\npolicy of probibiting the use of aluminum for pots and Dans and\nmoderate price. The use of general credit controls could, by\nno permitting its purchase for national defense purposes at a\nthe same tokan, be compared with & policy of out-bidding the pot\nand pan industry for the available supply of alusinum. Either\npolicy night be nade to result in a diversion to defense needs\nof any given proportion of the total supply of aluminum - but\nat very different costs.\nV. Conclusions\ncontrols appears should be relied upon for use in the present situation.\nIt that colective, rather than general, credit\nmay be applied without increasing the gost of borrowing to\nSuch controls will be more effective is einecking inflation the and\nGovernment and the defense industries.\nmarket Selective loans and to consumer credit. Stock market leans at the\ncontrols AN already being applied to stock\npresent time constitute no problem. If at some time in the\nRegraded Unclassified\nDecretary Morgenthau - 11\n235\nfuture they should give signs of doing so, the existing con-\ntrols should be tightened as mush as necessary. The Reserve\nBoard has just commeneed the regulation of consumer credit.\nThe initial regulations are very mild and will have to be\ntightened very considerably if the volume of such credit is\nto be substantially reduced.\nother fields in which solective credit controls may be\nnecessary are housing, new capital issues, and bank loans for\nother than national defense purposes.\nHousing credit could be reduced very substantially by the\napplication of selective controls. AS the present time the\nexpension of such credit is being actually promoted by adver-\ntising campaigns by the THA and other agencies.\nNew capital issues do not present an important problem at\nthe present time, but should be regulated by selective controls\nwhen and if they do.\nPerhaps the most fruitful and immediate - all well all the\nnost complex - field for the operation of solective credit son-\ntrole is that of non-defense leans by banks. Member bank loans\nexpanded by $2.8 billions during the fiscal year 1941 - a great\ndeal of which must have been for non-defense purposes. If this\nexpansion is in whole or part undesirable -- a necessary premise\nfor the adoption of general credit controls -- some sttempt should\nbe made to get at it directly. The British have attempted to do\nthis and their in this regard has been an important fastor\nin accounting for the lew rate at which they have been able to\nfinance the var. British banks have been instructed to relax\ntheir standards for defense borrowers, but to exercise rigid con-\ndespite over the increase in leans for defense purposes, total \"Advenes\"\ntrol all credit for non-defense purposes. AS & result,\nof the London Clearing Banks have declined by about 1126 millions\nsince the beginning of the war, and an equal our has consequently\nbeen placed at the disposal of the Government without an\nincrease in bank deposits.\nthe Reserve Board in a recommendation to ralse reserve require-\nIf, as suggested above, you should decide not to consur with\nments, there would appear to be no necessity to defer long-term\nfinancing longer than night be indicated by factors in the situs-\ntion other than the proposed increase in reserve requirements.\nRegraded Unclassified\n236\nCOPY\nAugust 22, 1941.\nKENORANDER\nTO:\nSecretary Morgenthau\nFROM:\nMr. Gasten\nMarriner Keeles called me today to say that he\nwas leaving tomight to be gone for three or four weeks\nand he would like to give us his thoughts on September\nfinancing, If there should be any, a subject on which\nbe had not had an opportunity to talk to the Secretary\nalthough he had mentioned it briefly to Mr. Hell.\nMr. Coolee hopes there will be no long term securi-\nties offered in September or at any time up to December,\nbut that such new money as ve may require may be pro-\ncured by cesns of bills. His reason was that the\nmarket today 10 based on a large volume of 830050 reserves.\nThere are few lang term taxable bonds outstanding. The\ntwo issues out are both selling on a two per cent yield\nbasis. If there should be any how long term finansing in\nSeptember it would naturally be priced at near today's\nmarket. This would mean in effect freezing of the present\nsituation. By that be meant that OUR hands would be\ntied as to any action to change reserve requirements. We\nhave not yet used the present power to increase reserves,\nwhich amounts to about a billion and a quarter. He thinks\nFederal Reserve should consider with the Treasury an in-\ncrease in the reserve requirements up to the limit of\nexisting power. Not only should this be done before any\nnew long term securities are issued, but he thinks that\nthe Treasury and the Federal Reserve should Join in ear-\ning that it coens advisable to get further powers for\nincreasing reserve requirements and that both these things\nshould be done so that the market can absorb their effect\nwise he thinks the Administration, including the Federal\nbefore any new long term securities are put out. Other-\nReserve as well as the Treasury, would be open to charges\nof bad faith.\nCopy tol\nMr. D. W. Bell\nRegraded Unclassified\nBOARD OF GOVERNORS\n237\nOF THE\nFEDERAL RESERVE SYSTEM\nOffice Correspondence\nDate September 2, 1941\nM. George Hans\nSubject:\n\"re S. À- Goldenweiser\nyou\nThis memorandum is for the purpose of raising the question of\nthe advisability of deferring long-term Treasury financing until after\nn. decision has been reached in the matter of raising member bank reserve\nmirements.\nIn the light of developments in the last few months, it is\nclear that, from the monetary point of view, it would be in the public\ninterest at this time to raise reserve requirements of member banks to\nthe extent authorized by law. This would fix the requirements at double\n11.0 ratios stated Ln the law and would reduce excess reserves by about\n:1.25 billion to about 13.8 billion. Consideration should also be given\nto the advisability of seeking additional authority over reserves to be\navailable for use when the occasion arises.\nAn increase in reserve requirements would be in line with\nother nessures undertaken by the Government to prevent inflation, such\nas, for example, the request for authority to control prices and the\nadoption of restrainte on instalment purchases. An increase in bank\nreserve requirements would reinforce the public's confidence that the\nGovernment is determined to control inflation. Such an assurance to the\npublic would in itself reduce the danger of inflation which is accentu-\nated by B. widespread tendency to buy goods in excess of needs \"before\nprices go up\".\nAn increase in reserve requirements would also diminish the\n-ressure on banks to find outlets for their funds and would strongly\nreinforce the policy pursued by the Treasury to place its issues with\npurchasers other then banks in order to tap existing funds rather than\nto create new ones. So long as the banks have unlimited reserves it\nwill be difficult to limit their purchases of United States Government\nobligations. During the fiscal year 1941 banks absorbed an amount equal\nto nearly all the open-market securities offered by the Treasury. If\nAccurities issued are not available to banks, they will be in a position\nto buy outstanding securities from other investors who will, in turn,\nbuy the new issues, The banks will also be under pressure to extend\ncredit in other directions.\nRegraded Unclassified\n238\n- 2 .\nSelective credit controls, such as regulation of instalment\ncredit, have a place in the program. They cannot, however, take the\nplace of general controls, for several reasons. So long as banks have\nunlimited funds and there is active demand for credit, the banks will\nfind outlets for their funds, If one field 10 restricted, they will\nmove into another field, No matter what kinds of loans or investments\nbanks make, there is an expansion of deposits available for spending by\nthe public. Also the problems of selective controls are new, complex,\nand there has been little experience in handling them, They also raise\nproblems of discrimination, Selective controls are useful in directing\nthe flow of credit out of undesirable into desirable channels, but they\nare not an adequate means of restricting the total growth of bank credit\nand deposits.\nIn connection with the problem of reserve requirements, it\nis recognized that in present circumstances ooordination of all financial\npolicies is essential to the public interest and that nothing should be\ndone that would conflict with the Government's defense effort. Agreement\non a policy with regard to reserves 10, therefore, necessary before ac-\ntion is taken,\nIn this connection the question arises whether it would be\nfeasible for the Treasury to defer amouncement of any contemplated long-\nterm new financing until, say, October 15, when the question of increas-\ning reserve requirements will have been explored. It would not seem\ndesirable to issue a long-term security in September, and immediately\nafter that to raise reserve requirements, In view of the volume of\navailable funds in the hands of banks and other investors, raising re-\nquirements to the limit authorised by law should not result in any\nmaterial change in money rates, though there may be some temporary re-\naction in the market, In that case, the purchasers of the new issue may\nfeel that it was not fair of the Treasury to sell the bonds under now\nprevailing market conditions without letting the public know that action\non reserves was under consideration. It would seem to be far better to\nhave the question of the course of action to be pursued with respect to\nreserve requirements decided before the Treasury makes another long-time\noffering to the public.\nThe Treasury and the Federal Reserve System are in a position\nto establish and maintain any rate on Treasury borrowing that they may\ndetermine as the most desirable, and it would be the System's duty, when\nthe decision has been made, to support the rate selected. But it is a\nlegitimate question whether a slightly higher cost for borrowed money\nwould not, in the long run, be cheaper for the Government, which is the\nlargest purchaser, se well as more consistent with the public interest\nthan a slightly lower cost achieved at the risk of a general rise in\n- 3 -\n239\nprices of defense and other commodities. Besides, an interest rate de-\nclining constantly to lower and lower levels, which is the tendency\nunder present conditions, raises many far-reaching problems for the\neconomy as a whole,\nSales of savings bonds and tax-anticipation certificates have\nexceeded expectations, and it is believed that the Treasury has ample\nfunds with which to meet its current requirements for some time to come,\nso that it would be entirely practicable to defer new financing to the\nmiddle of October.\nE.b. goldenweing\nKPT\n240\nARE\n3/26/41\nRegraded Unclassified\nThe Role of the Danks is Preasury Financing.\nin Relation to Froblems of Credit Control\nla neeleting the Treasury to raise whatever funds are re-\nquired. supplementary to tax revenues, to place purchasing power la\nthe hands of the Government during the next few years of val-\nfare, the banks have two functions 10 perform. One of those functions\nis that of dealers in outstanding Lesues. The other is absorption of\npart of the increasing Deverament debt in their investment pertfelies.\nLittle discussion of the dealer function is required. No\nmatter what credit policies are adopted, the Government can arrange\nto have this function adequately performed. & brief analysis of this\nquestion is given in an appeadix.\nThe basic issue at the present time, both for Treasury\nfinancing and for credit control, is this: bev seriously should the\nGovernment take the senventionally respectable idea that participation\nof the banks in Government financing should be hald down to a sinimm\nin time of vaz or economic way?\nThe Issue my be expressed is three more 07 less equivalent\nforms. Should the grovis of bank assets and deposite be held down?\nshould interest rates be increased? Should come attempt be made to\nreduce the Adle funds of investors? (Is vill be shown balow that\nactually it will be impossible to reduce idle funds - spart from\ntheir activation by an inflationary development - except by a complete\nimediate ourtailment of bank credit. Such dractic action is not pro-\nposed or considered in this nonorandes.)\n241\n- 2 -\nArguments an the negative side are very poverful. Streng\naction to hold devs the growth of bank assets eight seam a breaklews\nof the defense effort through interference from the\nside of finance. It would involve a collapse in market values of\nthe present assets of banks and other institutions. These and other\narguments are outlined in the first main section of this memeration.\nOn the other side there are arguments for early and fores-\nful action to hold the participation of the banks in Government fl-\nnancing to an absolute sistem. These arguments are legically coherent,\nbut 11 is not likely that they will find general acceptance. They are\npresented in the second section of this\nSome sort of a compremise solution is pessible. Issuatial\nelements of this program would include: (1) stability of interest\nrates: (2) unilization of all possible devices short of restriction\nof excess banking reserves to test out and stimulate the absorptive\npowers of the non-bank investment market; (3) full exploitation of\ntaxation and selective credit centrols to moderate the feree of -\nnumer demande. The 1dea of decisive astion to prevent inflation through\ncredit controls would be abandened, the banks would M alleved to 002-\ntribute as fully as Recessary to the may moress of Treasury financing\nin doing its part is \"visaing the oceasmic var\", and the Government\nwould hope to avoid the choice between inflation and rigerens regula-\nvion of consumption by carrying out a broad program of fiscal and\nother controls.\nRegraded Unclassified\n242\n- 3 -\nthe present commanie situation is is may vays very dif-\nforent from that to which va have become habitasted in the past overal\nyears. There is Lew saly & small and gradually disappearing margin\nof everonpacity in basic unafastering, transportation and electric\npower industries. We are assured of a powerful street of effective\npurchasing demand for sees time to come. to long M the Government's\nexpenditures under the defense program continue to increase, and pos-\nsibly for a while thereafter, the Federal Reserve System seed not have\nthe alightest fears that my notion of credit control vill be followed\nby a serious researion is business activity. Although the conditions\nwhich limit Federal Reserve policy have been tightened by the necessity\nof \"Vianing the - they have been relaxed in mother direction as -\nresult of this certainty of prosperity.\nAcceptance of Government centrels of economic life during a\nperiod of economic varfare is wash more general new than twenty-five\nyears age. In the first World Var our Government imposed as centrels\nuntil 1917; under the stimulus of a becaing export trade with the Allies\nand as a result of other events in the world at var, the wholesale\nprice index had already risen W 75 per cent and the cast of living\nby 25 per cent. Marlier recognition of the problem of preventing\ninflation raises the hope that we may avoid inflation this time.\n(A doubling-and-s-hulf of the price level, such as occurred beliver\n1915 and 1920, mit be regarded as tree inflation.) Revever, there\nis no more intention nov than there was in 1915, 1916. or even 1917\nand the first half of 1915. of imposing rigoreus centrols upon Number\nRegraded Unclassified\n243\n-\nbuying. 1/ Depend this, there is - faster MM process, not present\ntventy-five years ago, which seriously threatens the INCROSE of price-\n1evel stabilization. this is unprecedented ench liquidity in the\nbanking eyelem and - - and investors.\nMajor uncortainties is the present citention, which make\ndecisions on credit policy difficult, are (1) the creatual sine and\ntiming of defense expenditures and (2) the - and distribution of\nslack still remaining in the country's productive expecity. These\ntwo uncertainies are related sinee espacity to not absolute but is\ncapable of growth at a limited rate. It is only natural that these\nuncertainties will continue to be reselved is favor of decisions be\nsvoid for-reaching controls - stem consumption taxes and price-fising\nand retioning of consumers' goods - at least until use neasure of\ntrue inflation of the cost of living has already taken place. Shalls\nCorms of control are is themselves still abherrent to a. democracy.\nDate imposed, their reneval after the VAP would have serious scenomie\nreperduasions values performed with eare.\n21 \"Price fixing on consult goods was limited to the regulation of\nprossessre' and distributors' mrgins on feed and cool. This Vall\nof limited effectiveness because 11 we not provible to centrol\nthe farm prices of Regal was the only consumers'\ncommodity subjected to rationing. Only w the -\nof 1918 were plans belog más to fix the prices to constitute of\ncome other articles with as shoes.\nRegraded Unclassified\n244\n- , -\nAgreements against proventing banks from greatly increasing their\nholdings of servicities\n(1) The new powerful argment 10 the fear that 11 would prove\nquite impossible be dispose of the Treasury's eubput of an securities\nwithout calling upon the banks to absorb a considerable part. This\nArgument is consult weakened If 10 is proposed only to reluse 020000\nreserved, my to $2,000,000,000 in that case this problem would not be\npressing at first. vithin a fairly limited time, havever, it weld\nnesers itemlf. and my plane made nov must look above for enveral years.\n(2) The next mest powerful argument Le that & rise is 10mg-\ntarm interest rates would result is a tremmious drop of noticet values\nof bonds MM held by the beaking system and other institutions. Insi-\ndentally. while the question at issue La whather of not a growth is bank\nholdings oughts to be substantially provented, this could not be -\nplashed without - elisination or substantial retustion of emerge 10-\nserves. (For even if banks were flatly prohiMited from to\nnew 1 newse they could by - outstanding ascurities.) There is differ-\ncode of opinion about the impliate offert - lang-tem interest rates\nof the imposition of a \"colling\" plan suiting - reserved say to\none-third their prosent values. It seras evident, hoverer, that leag-\ntarm interest rates would neek a higher level all the remining -\nreserves vere absorbed and - 1010 depesite of Investore vere drown\ninto the Treasury either W tenation of terroving, oven though M neb\ndecline is ide funds would occur. fush as eventual rise of leng-term\nTates sight If might not be discounted by the make the the outsor.\nRegraded Unclassified\n6 -\n245\na program for the prevention of make\nfurther growth is bask investments would include action w the Treasury\nto insure that this insvitable visa in Interest rates took place Imail-\nat are for all. this could be accomplished very effectively w\nthe Treasury offering leng-term ml internatiate corrities on tap in\nmilmited quantities at par with & 4-3 per cent range of rates. (This\nis approximately 1 per east above the presently enticlpated yiside on\nfully terable bonds.) this notion, is conjunction with - out is -\nreserves, would lead to a impliate end fairly presise readjustemt of\nbond prices. The fersed visa in yields on the new top Issues, and there-\nfore on all Lesses competing with them, wild be greater than any former-\nable future rise flowing only from the at is emoss recerves. It is -\nlikely that the tap terms would be unacceptable to investore, that these\nissues would - to & discount, of that the general level of yiside wold\nrise beyond the rate stracture cavisaged w the expense - those isease.\nSubsequent flastuations of bend prices word.de be mush maller then these\nVS have become normatemed so.\nthat notion to faree a impliate readjuctment of bond prices\nand yields has mush to - $1 as part of & realistic progres of\nrestricting bank investments. 2018 the prospert of a 15-point decline\nin market values of partfolio bands would be classing both to bankers\nand the deverament.\n(3) The rise in interest Issues accompanying mish & shift in\nyielde would be of as - advantage to the base if they viti to be\norbstantially deprived of the opportunity to by the selv high-rate bonds.\nRegraded Unclassified\n- 7 -\n246\nloan rates world visa, and M lease termst - the bealth'\nprose enrolage workd Insurance.\nyrea the Trustly's point of view, haverer, the higher rates\nworld sppear very cestly. On thirty OF furty billies dollars of BOV\ndate, & difference of 1 per omt in rate vould calarge the -\ninterest changes w three of four Instred million dollars. Added to\nthis there would be the extra charges an Lewse to refund materities\nduring the years the high rates remained in affect,\n(4) Finally. argumate my be advanced an comminio gremial\nthe rise is rates would acceptants the unequal distribution of nation-\nel incomes it would be injurious to cometries and Ininstry and perhaps\noven to the defense offert class 10 werld inhille expension of Inbit-\ntrial and bearding expecity: higher rates would be is\nthese andern days what industrial productivity has returned the dename\nfor capital far below the supply.\nThese argments. unlike the others, my be wislly dismissed.\nThey indicate too - habituation to the economic climate of research\nyears, of they assume, fullaciously. that the higher lord case 100\nposed would be permanent. liversion of issue from to\ninvestore. undecirable in normal times, will be desirede in \"ver-time\"\n(provided that the extra income paid to investors can be receptured,\nby texation preferently, or at least w terroving) because & temperary\nreduction in consumption will be nacessary. A reinction is BOV boundng\nconstruction will be particularly desireMe at a time when durside\nautorials and labor will be source. Industrial expansion, unlike\nRegraded Unclassified\n- I -\n247\nhousing construction. is almost totally insousitive to interest rate\nchanges] and profite (even after high corporation taxes), supplemented\nby misrate we of the new-security markets and of bank lease - 10mg\nas they remain availaMe, and further supplemented W direct twen-\nnet financing, will provide sufficiest funds for all expeasion -\npenditures which prove nationally for defense of otherwise perulacible.\nFinally, the opportunity of - again lowering interest rates and\nof making loan funds fresky available veaid be of positive value in\ncombatting post-ver resortion.\nIn summary, three powerful obstadles oppose my therough-\ngoing effort at present to restrict the organsion of bank assets and\ndeposites fear of a brothim of Treasury finance, fear of a great\ndrop in institutional neest values, and dislike of an increase in the\nTreasury's costs of financing. Marcever. these obstactes vill persict.\nThe seesnt and third my - to som less Expertent if inflation of\nthe cost of living gots under way. but the fear of a breakdown is\nTreasury fluense will be greater. not loss, if restriction of the\ncredit have is propesed later, at a time when the Treasury will have\nbecome theroughly habituated to relying - the banks for a substantial\npart of its an may.\nRegraded Unclassified\n- , -\n248\nArguments is favor of proventing banks free greatly Increasing\ntheir holdings & permittion.\nTo make a case against the powerful arguments which have just\nbeen considered, 11 10 first to establish a rensonable pre-\nsumplies that the economic wall SM be financed vithout the activitance\nof the banks, sessont be bring forward pesitive argumsts for the acces-\nsity of limiting bank expension, and third to show that other objections\nare immaterial.\nThe conductions which can be reached are by no neas irresis-\ntible. They como out something like this.\n(1) Treasury financing can get along without such assistance\nfrom the banks. If taxes are relead sufficiently and are supplemented w\nforced loans in the event that the defense progres is materially is-\ntreased beyond present amportations, if the outlook for future interest\nrates is clarified and the Deverment's determination to prevent inflation\nis made obvious, if a rise in interest rates 10 not only permitted but\nauthorised w the Treasury, and if a \"seiling\" plan of bank reserved is\nadopted compled with a plan for the Federal Reserve Banks be absorb 100-\nporary or persistent Treasury shartages without at the - time emplying\nthe member banks with an additional bace for multiple deposit expension.\nFor a - of reasons, if Treasury financing is over to get along without\nB great deal of assistance from the backs during this period of\nvar, the measures which wald make this possible met be undertaken very\nDOGE, The outleek for future interest rates will remain hasy and there\nwill be resurring expectations of inflation DE long all credit restriction\nremains a fature possibility and ast & present fast. This - that\nRegraded Unclassified\n- 10 -\n249\ninvestore will centinue to duy any from the bond market. On the other\nhand, the Treasury's pleas for fature interest rates will not be santly\naltered case they are nade, and they would underbiedly have to be altered\nat a time of obstaining from bank flamse. The total morato to be raised\nby taxation as over against terreving can be adjusted only manually, and\nfor a period lying several manths is the future. No solden increase in\ntaxation will be possible at the memost that credit restriction becomes\ndesirable.\n(2) If 11 An assemed that inflation of the cost of living and\nof real estate values comparable with that which courred in the last\nvar must be prevented this time, ni if 10 is believed that this con\nbe done with the aid of massary controls, preparation must be made\nnow to utilise monetary centrols at the appropriate nonest. Fiscal\narrangements must help to keep (mml in lime with available\nsupplies of basic comedities and Geveranent pelicy must continue to\nbe directed at increasing supplies and seeing that they are fearly die-\ntributed more the defense and man-defense infustries at reasonable\nprices. But rigorens regulation of the seaseme? hinself as in Germany\n(or of the purchaser of real estate) 10 neither desirable MP likely\nto be adopted is time. Therefore, almost assuredly, will m-\ntuelly have to be taken, and perhaps vithin a year, that will sharply\nreduce the availability of many to consumers and speciaters and to\nbusiness firms and corporations trading in inventories, at the meal\nwhen M A result of pressure free affective consumer deramá the viclous\ncycle of price-sest-price inflation begins. Unfortunity, because of\nthe unpresedented each liquidity of individuals (as wall as banks).\nRegraded Unclassified\n- 11 -\n250\nthis action to far free cortain to accomplish I'm purpose. Merely to\nclose the private less market at that future menant vill not necessarily\nmffice. for idle funds vill your tuto the real setate market, the steek\nmarket, and - no far as possible - into purchases of consumption goods.\nThe most that can be said is that the chances of vill be graster\nthe more nearly idle funds have been hold to their prosent level instead\nof heing allowed to increase at a rapid rate, with the help of stock\nmarket regulation, perhaps the psychological sheck of n complete cleetage of\nthe loan market vill be enough to prosipitate a temporary reversed of the\nboom peychology. despite the proseure of consumer demands, Net\nIf idle fuste are allowed to continue to pile mp before this time casse,\nand it 1s hard to see how this one be avoided, the chances of uncesse will\nbe negligible.\nTetimates are given below which suggest that demand deposits\nand currency now held for Investment purposes by individuals or hearded\namount to something like 17 billies dollars, an compared with perhape\n7 OF 8 billions in 1929. It to farther suggested that If stability of\nthe price level CAR be maintained during the news two years vitimat 10-\nstricting hand arpansion, and If in fact the Treasury berrows $15 billions\nfrom the banks out of & potential two-year total financing of close to\n#30 billions, V the growth of deposite is excess of the requirements of\ngovernments, comporations and consumers sight 1 to smother 017 billion,\nbringing the total of individuals' 1810 fends to vell over 130 willioms!\n11 This 10 on en assumption that annething hamena to eten - defense\noutlays free . now probable $30 billions to the billions during the\ncalendar years 1941 and 1947.\nRegraded Unclassified\n251\n- 12 .\n& very early restriction of besir expansion - ne Pap employee\nby the use of the celling reserve plan with 010000 reserves out to a\nthird - 1s therefore If any reliance at all to to be placed\non the nower of closing the private lean market completely. that the\nvirtue of this settem new would not he solely is its supech of pro-\nparation for other netton later. Is a must more consrete and certain\nvary it would help to estatels the conditions that would make the later\naction never necessary. The Treasury is agreeing to this program would\ncomait itself to an extremely heavy schedule of taxes and forned leans,\nfor only is this way seald 11 get along without mush help from the\nbanks. Returning to the figures eised in the proceding paragraph, If\nthe Treasury were to expect only $5 instead of #15 billions from the\nbanks out of prospective two-year berrowing requirements of say $29 bil-\nItems, while other institutional searess wight he created on for 05 MI-\nlions of the most, 10 would have to mayo to get no billions tastead\nof $9 from individuals. In M esnecivable any could 11 get ansk a -\nwithin . two-year period vithout reserving to storp Issue and payroll\ntaxes and fereed leass. And nothing could more antiefactorily perform\nthe task of transferring purchasing power from consences to the Gevera-\nnext in a very that would avoid price inflation.\nThe central argument for restricting bank expansion therefore\nhas tve On the one hand this policy weald diminish the notes-\ntial further growth of 1410 funds (but not stop 19): on the other hand\nIt would neconsitate staff texasion and forced lease which offer the\nRegraded Unclassified\n252\n- 13 -\nonly were against inflation - short of completely affective\nprine-fixing and rationing - If the defense progress is to be colarged\nbeyond present expectations.\nIf the defense program does not exceed the propertions\nthat nan new be enviuaged - if defense entlays in the salendar years\n1941 and 1942 are not to exceed say $30 billions, and financing 70-\ncuirements in the GAME period are not to exceed any 121 billiems w\ncording to tax plans now expected - a more rigorous termina schome\nmy not be required. But in this case the higher interest rates, and\nabove all the fixed internet rates, which the plan outlized on pages\n5 and 6 would bring, would certainly be of assistance is disposing of\nsavings bonds and long-term issues.\n(3) If inflation is almost ineritable in the absenes of ofther\nricorons control of the consumer or foresighted neastary controls, and\nIf inmediate monetory controls are remove the necessity for future -\ntrols by permanding consumers to part with their may OF by seasing the\nTreasury to force them to part with 14, them it 10 easily verth the cost\nto the Treasury of - astra interest hurden of a few hundred million\ndollars a year to take its share of lendership is planning ench monotary\ncontrols.\nThe temorary shook to the bookkeepers of bead values, 1a-\nplieft in my plan which relses interest rates, Le of ne real -\nmisse, There to no need for any bank to sell boads before enturity,\nmeh less for any bank to fail AR a result of doing 66, New high-rate\nbonds vill be mis more not lass attractive since there vill be -\nRegraded Unclassified\n253\n- 14 -\nexcellent change of their appreciating in the years imediately fol-\nlowing the mP when interest rates are levered.\n10 will be observed that these enselvations have been been\non a series of three assumptions rirst, that the industrial and fiscal\ncontrols likely to be undertaken is the abornes of Imediate credit\ncontrol are not likely to prevent the assergence of the visions aycle\nof inflations second, that the in lationary eycle when 11 cameges my\nconsibly he killed by clostag the private leas market, but certainly\nnot If investors' 1410 funds have continued to increase at a rapid rates\nthird, that \" 10 politically and administratively feastble to undertake\nthe proliming credit controls and the additional fiscal planning which\nvill be necessitated (and which, in from will be the most valuable pro-\ndues of the gradit enstrols). Without arguing these sesuritions, the\nreasoning unterlying the conclusions - be developed with the help of\ncome figures,\nThe two charte attenhed show the extimated ownership of 100\nposits and currency over the past donade, There estimates are fairly\naccurate for the years 1934-1938. screwhet 1000 - for earlier and later\nyears. In the second shart the each of \"individual\" (tatended to -\nclude is AS approximate very the cash of unincorporated bustnesses) to\nbroken down into (1) sevings deposits, (2) \"consumption cash\" arbitrarily\ntolten equal to half a month's \"national Income payments*. and (3) other\ncash. Changes in the last calegory rengly represent changes is reserve\ncash of investore and heards. As an Inter of heards OF \"1410 повид\" is\nRegraded Unclassified\n254\n= 4 e\nthe sense of unsturally large investment reserves, 100 variations\nfrom STORES probably understate the real situation w # or 13 billion\nis 1931 and 1938 and may everstate 10 w #1 or $2 billion is recent\nyears. As of the at of 1935 \" to indicated that\nmoney was about n billion greater than in 1929, w the end of 1940\nthe excess was $9-1/2 billions,\nthe table brings together s number of significant faste -\nInting to the distribution of Government dabt and of each heldings\nsince the end of 1935, along with four sole of hypothetical statements\nfor the years 1941-42. The first two of these represent developments\nwith the defense program and tax strusture approximately as assumed is\nMr. Edulaton's assorandes of March 24, 19411 the first selum\nadoption of the program en pages 5 and 6 of this and no rise\nin the price level, while the second - a to per eent rise is\nprices over the two years. Sinilarly, the assent of the last pair of\ncolumns assumes a to per cont price vise under s considerably enlarged\ndefense program, As will be shown later. the construction of a table\nlike this for fature partods involves the hiddem accumption that the\namount of surrent saving (or increases is individual assets) implied w\nthe figures is constatent with the assumptions made shout national Income\nand the price level, and measures taken to enforce seving.\nOne more column wight have been asset to illustrate the -\nample that vas effed on page 11 above. This examle constmed the -\nsupption as to price level of solumn A-2 with the accumption as to\nRegraded Unclassified\n255\n- 16 -\ndistribution of Government dabs of estumn n-?, The empropriate \"tenree\nPAY he derived by accise $10 billion to lines 8. \" 5. and 13 or solum\nA-2. and demoting no billion from Itme 1ᵗʰ, the other \"tgares in that\n00/100 reasining anchanged.\nA brief consent may be name upon each of the main items. In\n1011 and 1942, Government financing with the banks and while will be\net a rete from 10 to 15 times the EVERAge rate of the 1net five years.\nConnercial bank holdings will increase at least twice as fast, perhaps\nE OF 6 times as fact. The growth of deposits and mereney outstanding\nwill erened the growth of compercial bank investments as in past years,\nthough this vill MY he the NOTO to expansion of loans than to gold\ninflove. Holdings of \"nonindividuals\" my either increase or decrease,\ndepending most importantly upon the effect of price changes 2002 non-\nfinancial business holdings. The figures for the latter understate the\nchanges in total business each am aquivalent (from on estimated level\nor about $13 billion at the and of last year) because 11 has been assemed\nthat 12 billion of 6. special offering of Government amegrities vill be\npurchased by corporations.\nUnder any circumstances short of en estaal decline in handr\nmeants, 11 sonsare cortain that individuals' cash holdings vill In-\nthe rath of increase All he granter then even in\n1239 and 1940. The - will he true of the growth of individuals⁴\neach, descite the probably 2078 ranté increase in\ncovings Amounts and in each needed for surrent\nsurnover.\nRegraded Unclassified\n256\n- 17 -\nthe amounts of Government securities to be absorbed w\nindividuals is 1941 and 1942 under the various accurptions, se shown in\nthe last line of the table, are derived \" deducting the assemed increases\nin bank and other institution heldings from the figures is line 1. is\nevery .... these anounts are well-migh astronemical as compared with\nindividuals' net absorption of Severances securities is resent years.\nIndividuals have been buying several hundred millions a year of sevings\nbonds, and disposing of other issues on belance. that 18 required,\nthem, is as increase is the absorption of savings bonds and a reversal\nof the aggregate position of individuals toward the marketable issues.\nThe Treasury hopes that the now sevings bonds will bring in free $2-1/2\nto the billions a year. If other issues ean be sold to the noninstitutional\npublic is annual volume of say $2 or 03 billions a year, 11 would be\npossible to fulfil the conditions of thyse of the hypothetical colume.\nThat 10, with a defense program not exceeding $21 billions in 1941-\n1942 (or $15 billions is fildal 1942) it should be possible to got aleas\nvithout solling 2570 than $5 billions to the consersial banks (colum\nA-1), and If there vas se restriction of bank credit the financing\nproblem would be still easier (column B-1). Likevise if there 10 a\nsubstantial expansion is the defense program as assumed is solum 1-2\nthe financing problem visi not be too difficult, If $15 out of $29 bil-\nliene to be borroved are obtained from the banks. In each of these\ncases foreed leans would presumsbly not be necessary during the period\nconsidered, but 11 would be a great help la obtaining the marginal $1\nor $2 billions to be able to offer higher interest rates then nov\nRegraded Unclassified\n257\n- 18 -\nprovail and to be able to assure investors that the rates offered would\nbe the maximum ever 10 be available. This will be particularly Laper-\ntest If a positive offert to limit bank expension is undertaken through\nan imediate out in ****** reserves.\nIf the defense effort 10 yet to be enlarged again is the near\nfuture, 10 as expenditure total of say #20 billions is fiscal 1942, .\nthoroughgoing and successful program to prevent inflation w reducing\n#XC009 receives and restricting bank expansion would require the sale\nof perhaps $19 billion of securities to individuals 1/. or also equiva-\nlest assures of extre texation and forced lending. this is the example\nshown is column A-2, and already emationed on page 12 above. To repeat\nwhat was said there, nothing could accomplish the purpose of preventing\ninflation mN satisfactorily then this kind of a fiscal progres to\nkeep Government dobt out of the banks.\nAre the hypethetical figures for \"individuals\" heldings* is\nthis table, especially is column A-1 (presently estimated defense program\nwith centrol of bank expansion), consistent with other applicable date\nsuch as the estimated sverage national Income of about 890 billion over\nthe ive-year period ahead? And can figures arrived at M these are\nby a calculation of residuale be taken to represent B probable or\npossible situation? the extimation of change is total holdings of\ncash offere no difficulty, case accumptions have born asdo as to the\nnovent of change in bank assots. The figures for other holdings\n1/ The taxes assumed in deriving this figure already include com\nadditional levies to become effective immediately during the\nfiscal year 1943.\nRegraded Unclassified\n258\n- 19 -\nmay be in error, but they reflest as for as BAG be ontimated\nthe probable desires of the various greeps to hold cash; considere-\ntion 10 also gives to such fasters as volume of capital expenditures\nor investments and availability of funds from earnings or berrovings.\nThere 10 nothing inherent is & great increase is bank deposits which\nautomatically forees enyone OF any group to hold its proportionate\nshare of the increase. But can similar reasons be offered to explain\nvhy individuals are likely to hold just the amount of cash that the\nresidual calculation has allotted to them? Is there not something\nparadoxical in the expectation that individual cash holdings will\nincrease se sharply while at the same time the assumption 10 being\nsade that individuals will aboorb a very large volume of new courtry\nofferings?\nThis question is pased is . most violent way by the figures\nin column 1-2, where individuals are expected to absorb a total of\n030 billion of each and Government securities (or perhaes submit to\nheavy taxation), and in column 1-2, where they are expected to aboorb\n124.5 billion (the total of figures in fifth and bottom lines). Cel-\num A-2 offers the lesser difficulty. because 11 was assumed in this\ncase that price stabilization suscess. It supprede only through\nvery drastic taxation, as a substitute for part of the assumed borrow-\nlag. or through forced leans. The very same thing that maintains\nprice stability - and thereby justifies the settantes nade for non-\nindividuals and the vhole residual calculation - will forms individuals\nRegraded Unclassified\n259\n- 20 -\nto absorb Deverament dobt (or be further taxed) on top of a rather\nlarge normase is their aggregate cash holdings, especially is those\nheld 141e by investors or as heards.\nThe case of seless M to conorbat different. The assemptions\nhere are: ao restriction of bank expansion, and a 40 persont price\nrise by the end of 19421 national income will therefore average about\n$110 billion. The greater rise is national money income calls for a\nconsiderable increase is eash turning over free week to veek, and this\nincrease is individuals' average holdings will no doubt be in the\nnature of as addition to whatever other increases in individuals'\nassets might occur as the result of what 10 ordinarily called saving.\nThere vill also be & secordst greater them ordinary increase is savings\ndeposite, and a very considerable increase in business sach holdings,\npermitted by larger profise end required by the higher price level of\ncommedities and labor. These the final residual of \"individuale\"\ninvestment and idle each\" (8.5) when added to the assumed absorption\nof Government securities by individuals (9.0) address to a total no\nlarger than that accused is column A=1 (6.9 + 11.0). This is iteelf\ndone not necessarily validate the 1.1 ever If the 1-2\nestimates are acceptable. Despite the probably higher level of in-\ndividual sevings is case 3-2, 11 La probable that under been conditions\n5. part of these savings would be placed is real estate ml stocks\nrather than is each and bonds. If, is the final analysis, 11 should\nbe decided that the residual optimate is column 1-2 does net correspond\nto the probable facts of the situation as defined, then the vaole\nRegraded Unclassified\n260\n- n\nsituation met be redefined. It micht be that with Government supendi-\ntures as large as here assumed, and with to restriction os bank\nvion, that the price increase would be even greater, that business\ncash would be built up still more, and that a revised residual calse-\nIntion of individuals' holdings would finally check with a direct\nand independent estimate.\nFinally, ve return to the case presented in column 1-1\n(presently estimated defense program wish centrol of bank expansion).\nThe residual calculation of increase is total individual heldings\n(including savings deposite and turnover each) 10 $11 billion, and\nthe assumption of individuals' absorption of Government securities\nis another $11 billion for the two-year period. Can ve conclude,\non independent greends, that these are reasonable figures and that\nthe basic accumption of avoidance of price inflation is therefore\nvalidated?\nLes us first compare the yearly average total increase of\ncash sad Government dobt holdings of individuals, $11 billion,\nwith the corresponding average for 1936-1940, 03 billion & year.\nThis is not encouraging at first sight. on the other hand, the rate\nof individuals' saving (abstention from consumption or increase in\nnot worth), will average considerably higher in 1941-1942 than in\n1935-1940, some estimates would seem to place the probable differ-\nsace as high as $4 or 05 billions. Bev sevings placed is life insurance\nwill apparently continue at mash the same rate as in the earlier period.\nIn the earlier period the not aggregate change is individuals' ascete\nRegraded Unclassified\n261\n- 22 -\nother them each, Government securities, and insurance appears so have\nbeen rather small and perhaps negative, according to the rough esti-\ncates that are available, In the carlier part of the period seme\nnet saving vas probably applied to repayment of dobta: in the latter\npart some my have gone into home equities: individuals appear to\nhave been net sollers of private securities on balance. If ve can\nsecure that the part of BOW saving coing into these and other sis-\ncellameous forms will continue to be small or even negative en bal-\nance is the coming period - and the restriction of credit vill help\nby reducing residential construction activity - we still Ha to\nbe sbout $3 or 14 billions a year short of the necessary $11 billions.\nThe following alternative conclusions AN indicated: either the\nadditional necessary new eaving w individuals can be induced w\nstabilizing and increasing interest rates, with the help also of\nsa intensive promotion campaign for savings bonds, or the original\nconclusions that the price level could be stabilised without more\ndrastic increases in taxation appeare to be invalidated.\nOne other angle of the problem decerves attention. New\nare the changes is eash holdings and in hand holdings likely to be\ndistributed as between the rich sall the less well-te-do? It 10\nprobable that the major part of presently existing \"investness and\nidle funds\", perhaps twe-thirds of 11 or note at a guast, belengs\nto the group who reported taxable incomes ever $5,000 is 1936 and\n1937 and who had as aggregate taxable income of about \" billion a\nyear out of national income payments to individuals of about\nRegraded Unclassified\n262\n- 23 -\n470 billion in those years. Wash of the aggregate net saving of\nrecent years that vest into each and sevings boads vas probably\nperformed by these people, but 11 door not coom likely that even\nwith their total incomes after taxes reaching say $12 billion a\nyear they are likely to GATE 2070 then a half, let M say, of the\nrequired 011 billions a year. Time, not only wast total -\nenving of individuals be increased, but new saving of the large\nlower-inceme greep met copecially be stimulated. The lever group\ncan be expected to \"save\" - 1.0., add to its holdings -- most of\nthe $1/2 billion a year increase in active consumption cash. 10\nvill also acquire a siner part of the added savings deposits and\nidle eash. Beyond this, 11 mut be stimulated or If necessary\nformed to lend to the Government, or be taxed, if we 470 to pass\nthrough 1942 vithout the beginnings of price inflation.\nIn conclusion, the one point which decerves nest emphasis\nis & discussion of general credit restriction so that the chief\nvirtue of such a policy lies is the Treasurys' adherence to 10,\nimplying a determination to at down, w taxation, voluntary seving\nor foreed saving, the effective consumer denamão which compate in\ntime of sconomic var with the Government's WE demands for relatively\n\"CATOO supplies of labor and goods.\nRegraded Unclassified\n263\nE\nADML\n3/27/41\nAmendia\nThe Banks as Dealars la Government Securities\nThe attractiveness of Government securities as investants\ndepends not only on the perfect certainty of receiving interest and\nprincipal payments when due, but also en their liquidity - the\npossibility of disposing of them at any time at a fair price.\nCoverament securities my be either negotiable or Ma-\nnegotiable. Liquidity is given securities -- such\nas the outstanding savings bonds and the proposed nov Lessee of\nsavings bonds - by the Government's promise to redeem on denand\nor after a specified notice period. The Treasury would flad 10\nundesirable to have a very large part of its dobt redeemable upon\nnotice 02 demand. It will therefore continue to issue marketable\nsecurities, even If it adopts the tap mothod of sale for come of\nthem.\nMarketable securities ml have a market. the banks are\nnov as indispensable part of this market. Individual transactions\nin Government securities frequently reach a meh larger sise then\nis ever reached by individual transactions in stecks on the archanges,\nor over by 'secontary distributions\" of stock holdings through syndi-\ncates of underwriters and dealers. The half-dosen non-bank dealers\nin Government securities reald provide, by themselves, as utterly\ninadequate market. or course, may of the large sales come free\nbanks. but even if ve imagine the banks seasher forced to hold\nRegraded Unclassified\n- I -\n264\ntheir Government securities to naturity, never solling my part of\ntheir holdings, the nen-bank dealors would provide M Inadequate\nmust for other offerings.\nThere are three vage is videh this inadequate earlist 4dd\nbe supplemented. Cas 10 the present ver. vhareby banks is general\nbuy and sell and seas banks in particular operate special trading\ndepartments. Be long as other arrangements are net note to provide\nas adequate market, 10 would be entirely inadvisable to prevent\nbanks frem buying and solling my Government securities that are to\nbe otherwise negotiable. Iven If 620000 recerves vere greatly N°\nduesd or eliminated the banks could be freely allowed to carry out\nthis function of noting as dealers. The Federal Recerve System\nnight provide special discount facilition, at a low rate, to finance\ndealer transactions on a insurer basis.\nA second var of providing as adequate market 10 to let\nboth the neuber banks and the Federal Receive Banks deal is securi-\nties. The Federal Receive Banks sight enter the market parely as\nbroker-dealers, accepting the bide and offers of others, or they\nnight operate as tradere initiating transactions. the more they\noperated as traders the nore nearly the market could be pegget.\nIt my be desirable to pag the market during a poried is which s\nvast quantity of securities are to be cold. One usual objection\nto the Federal Reserve Banks' operating is this vary is that their\noperations vould affect the reserve position of the nomber basks.\nRegraded Unclassified\n265\n- 3 -\nThis objection my Loss its force is the present situation. On the\none hand, if a program of credit restriction is adopted it night\ninclude the \"coiling\" reserve plan, under which multiple expension\non newly acquired reserves 10 not possible. Not only could the\nBeserve System safely pos the market; 10 could safely stand\nready to abserb my persistent shortage of funds. This would net\nat rest fears that credit restriction sight cause a real breakdown\nin Treasury finance. On the other hand, if a program of credit\nrestriction is not adoprod, changes in excess recerves due to\nFederal Receive trading operations would be of little consequence.\nThe third vay of providing a adequate market is for the\nFederal Receive Banks to supplant the member banks entirely. In\nthis case 11 would be pessible to prehibit banks free purchasing\nany Government securities during the emergency and to prohibit them\nfrom ever solling Government securities before naturity. but as\npurpose would be served by this drastic innovation that could not\nbe well served in some other var.\nRegraded Unclassified\nNotimated and Hypethatical Changes is Cash Moldings, 1936-1942\n(excluding deposits at Federal Reserve Banks and Interbank deposite)\nAnd Hypothetical Amount and Distribution of Increase la Government Debt\n(in billions of dollars)\n2\n: Hypothetical, Tad 1940-Thad 1942\nNationated Changes\n:\n2 years\ndel 1935- and 1938- 1 Nat'l defense = Vat'l defense\n: M 1938 : Red 1940 exp. = 30 : exp. = 40\nI 3 years : 2 years : A-1 2. 3-1 : 1-2 : w\nCov't public securities, 1as1. estings bands 3/\n+5.9\n+4.2\n+21.0\n+21.0\n+29.0\n+29.0\nGor't securities of commercial backs\n+1.4\n+2.7\n$5.0\n+5.0\n+5.0\n+15.0\nTotal heldings of deposite and currency B/\n47.3\n+10.7\n+20.5\n+13.5\n+10.5\n+20.9\nHoldings of \"monintividuale\"\n$2.2\n+2.8\n-0.5\n+1.0\n-0.5\n45.0\nReldings of \"Individuals\"\n$5.1\n+7.9\n+11.0\n+12.5\n+11.0\nCLASS\nHoldings of \"megindividuals\":\nU. 1. Deverament\n-\n-0.2\n40.8\n+1.0\n+0.8\n+1.2\nOther public bedies\n+0.4\n+0.4\n+0.1\n40.2\n40.1\n+0.2\nForeignare\n40.5\n+0.7\n-0.3\n-0.4\n-0.3\n-0.4\nFinancial corps. and bask trust depts.\n¥\n40.2\n+0.5\n-0.4\n-0.4\n-0.4\n-0.5\nNonfinancial business, eary. and other\n$1.1\n+1.4\n-0,7\n+0.6\n-0,7\n4.5\nHeldings of \"individuals\":\nSerings deposits\n+2.1\n+1.9\n+3.1\n+3.5\n+3.1\n+4.0\nCurrency and demand deposite held for\nconsumption s/\n+0.2\n+0.6\n+1.0\n+2.0\n+1.0\n+3.0\nDenand deposite al current) hold for\nInvestment # hearded 6/\n+2.5\n+3.6\n+6.9\n+7.0\n+6.9\n$8.5\nCovit securities to be absorbed Y \"Isti-\nRegraded Unclassified\nviduals\" if additional tenties\nwere mt Imposed 1/\n+1.1\n+0.7\n+11.0\n+8.0\n+19.0\n49.0\nReta: It is assumed that actional Income at present prices, restive $160 William w the el of 194e.\nOrder A-1 at A-2 \" Le assemed there is 20 price rice, univer 3-1 20 persons, usier w be\n266\nperson.\n1/ Includes guaranteed debt. Excludes adjusted service bonds and securities hold by trust funds\nand agencies. Under columns A-1 and D-1 the amount is fiscal 1942 would be 11.5, under column\nA-2 and B-2, 16 billions. Tax revenues are assumed as is Mr. Eduiston's assorandum of March 24,\n1941, except that under 4-2 and B-2 still other additional taxes are assumed in fiscal 1943. to\nyield 14 billions incodiately.\n2/ Holdings are the Board's figures for \"Total deposits and surrency in the United States\", with as\nadditional deduction of float to allow for checks is transit between payers and receivers. (The\nusual adjustment for flest is for Items in transit between banks.) the hypothatical figures in\nthe last four columns assume, is addition to the increase is commercial banks heldings of Gerera-\nsest securities shown is the line above, M increase in other leans at Investments of 40 at\ncommercial and savings banks and an increase is currency and/or bank reserves of 3.1; also as\nincrease is flost between depositors of 1.6.\n3/ The hypothetical decreases are minly for life insurance companies.\nby The hypothetical changes come is all casse that 2.0 of Government securities AFO purchased.\nCash and marketable securities is assued to increase 10 persent under A-2 and 4-2, 20 percent\nunder D-1 and no percent under D-2.\n5/ IN is assumed that may held for consumption purposes is equal to me-half month's 'sational\nincome payments'. See Note below table.\ns This is a residual Item.\nV The 1936-1938 figure excludes 0.7 of adjusted service bonds. The hypothatical figures for\nsecurities to be absorbed by individuals are computed by subtracting line 2 free line 1 and further\nsubtracting $5 billion for securities sold to life insurance companies (2). antual savings banks\nand other finencial institutions: (1), and nonfinancial corporations (2). The unit absorbed w\nindividuals is the fiscal year 1942 would be about half the figure is each of the last four columns.\nSee fectuate 1 for the taxes that have been correct.\n267\nRegraded Unclassified\n268\nConfidential\nB-1259\nAugust 11, 1941\n(Revised)\nANALYSIS OF RESERVE POSITION OF 'D'SER BANKS,\nveek ENDEC WEDNESDAY, JUNE 25, 1941\nby\nJohn E. Horbett,\nAssistant Chief, Division of Bank Operations\nMember bank excess reserves during the week ended June 25, 1941\namounted to approximately 5.2 billions. If reservo requirements were increased\nto twice basic statutory requirements (the meximum allowable under present law)\nORDORS reserves would be reduc be by approximately 1.2 billions. If the law\nword amended and requirements wor. increased to two and ono-hnlf times the\npresent basic statutory requirements, excess reservos would be reduced by 3.4\nbillions and would then amount to 1.8 billions. The summary figures by classus\nof are shown in the following table:\nEXCUSE\nRoduction which would rosult if\nresurvos\nrequirements Were increased to--\nClass of banks\non prosent\nTwice basic\n2-1/2 timos basic\nbesis\nrequirements\nrequirements\n(Millions of dollars)\nAll arti banks--total\n5,231\n1,172\n3,423\nDeserve city banks\nNo York\n2,202\n531\n1,588\nChicago\nLao\n105\n311\ncity banks\n1,750\n352\n1,031\nCountry brice in places vith a\nregulation of--\n111,000 or more\n230\n47\n127\n19,000-100,000\n326\n72\n193\n15,000\n313\n65\n173\nAn analysis has noon mndo of the reserve position of individual member\nwring the rock unded June 25, 1941, and the results are shown in the\nvin at tements. The analysis is brand on information supplied by the\nMiserve Banks in response to the Board't telegram of July 11. One part\niffect of nn incroase in reserve requirements to twice basic statutory\nnts: th. other showe th offoct o of on incruase to two and ono-half times\ntutory requirements.\nRegraded Unclassified\n269\n- 2 -\n1. If reserve requirements were increased to twice basic statutory\nrequirements== 26% 20, and 110% on demand deposits nd 6% on time deposits--\nAll but 43 member banks could meet such an incroase in requirements\neither out of their present excess reserves or by converting up to\none-half of their belances with other banke into reserve balances.\nThe 43 banks would have an aggregate deficiency of\n$782,000 after converting one-half of their bank\nbalances into reserve balances; 23 of them would\neach have a deficiency of $5,000 or loss.\nThe largest of thoso 43 banks had total assote of\n27 millions, the scoond largost 14 millions, and\nthe third largost 6 millions.\n35 of the 43 banks word country benks located in\nplaces with E population of less than 15,000. The\naveragd ratio of loans and investments to total\ncasots of those 35 banks was els. compared with\n645 for all country banks and 62% for all mar.ber\nbonks. Over eno-half of these 35 banks wore in\nthe three eastern Foderal Recorvo districts.\nA statement listing these 43 banks and showing their\nloans, investments, deposito, oto., on June 30 is\nattached. It will he observed that in nearly all\nonses the ratio of bank balances to deposits of these\nbanks wes considerably below that of the average bank.\n1,141 banks with rusorvo bulances less than twice basio statutory\nrequirements could moot such an incroase by converting up to cno-\nhalf of thoir belanous with other banks into reserve balanoos;\ntheir aggregato doficiencios before such conversion would be 67\nmillions.\nAbout throe-fourths of the banks whose reserve balances were not\nsufficiont to most an incronse to twice basic requirements would\nhave sufficiont ruserves after convorting not more than 10 por\ncent of thoir bank balanous into reserve balances. Thore word a\nf-w banks, however, that would not have enough reserves even after\nconverting all of their bank balances into reserve balances. The\naccompanying table distributes the member banks according to the\npercentage of bank balances that would have to be converted into\nreserve balances.\nB-1259\n(Revised)\n- 3 -\n270\nDISTRIBUTION OF YEARER RAYKS ACCORDING TO THE PERCEPTAGE\nOF BANK B..LANCES THAT VOULD HAVE TO BE CONVERTED INTO\nRESERVE BALANCES TO NEET AN INCREASE IN RESERVE\nREQUIREMENTS TO THICE BASIC REQUIREMENTS\nNumber\nNumber of banks that rould have to convert\nTotal\nwith\nthe following percentages of bank balances\nnumber\nsuffi-\ninto roservo balancos--\nClass of banks\nof\nciunt\n10%\n11-\nbanks\n21-\n31-\n51-\n71-\nOvor\nroserves\nor\n20%\nloss\n30%\n50%\n70%\n100\n100%\n..11 nomber banks\n6,549\n5,065\n1,105\n216\n61\n59\n7\n17\n19\n1.594\nControl reservo\ncity binker\nNow York\n36\n26\n10 2\n3\n1\n3\n--\n--\n1\nChiorgo\n12\n8\nJ --\n2\n1\n1\n--\n--\n--\nROBERTE city banks\n345\n265\n40 60\n14\n4\n1\n--\n1\n--\nCountry hinks in places\nwith o population of--\n-\n3\n100,000 or moro\n199\n138\n45\n9\n3\n3\n--\n--\n1\n15,000-100,000\n1,001\n733\n219\n32\n5\n7\n1\n2\n2\nUnder 15,000\n4,956\n3,895\n779\n156\n47\n44\n6\n14\n15\n1,061\nB-1259\n(Rovised)\n4 -\n271\n2. If reserve requirements word increased to two and ono-half\ntimes bario statutory requirements -- 32-1/2%, 25%, and 17-1/2% on\ndonand doposits and 7-1/2% on time doposits--\n261 nomber banks would have to provido additional rosorvos after\nconverting one-half of their balances with other banks into\nreserve balances. These banks would have an aggregate deficiency\nof 180 millions after converting one-half of their bank belances\ninto recerve balances.\n2,977 banks with reserve balances loss than two and ono-half\ntimes basic statutory requirements could meet such an increase\nby converting up to one-holf of their balances with other banks\ninto resorvo balances.\n3,311 banks--about half the total number of member banks--had\nreserve balances sufficient to meet an increase to two and one-\nhalf times the basic statutory requirements.\nB-1259\n(Revised)\nCann'T 1\n273\nHypothetled,\nDISTRIBUTION BOLLINGS\npresent\nOF Virusits AND CURRENCY\n1929-1943\nme restriction\nof bank LICENSE Lon\n32\nBO\n70\nTOTAL HOLDENGS\nOF CASH\n60\n60\nto\n\"Toke1 hoposits sad\ncurrency Ld U.S.T\n50\n$5\nhers\n2:010\n40\nThis\n30\nIndividuals\n20\n10\n1329 1930 1931 1932 1933 1334 1935 1936 1937 1938 1939 1943 1341 1862\nRegraded Unclassified\nCHART 2\n27:5\nHypothetical\n(see chart 1)\nCASH HOLDINGS DE\n1929-1940\nSuvings deposite\n20\n00\n\"Invertment nhe idite deposits one currendy\"\nis\n10\n\"Currancy und deposits for purposes\"\n0\nCO\n$0\n50\n40\n4\n22\nRatings Deposits\nto\n20\nConsumption\ncash\n10\n10\nInvestment and Idle cach\n270 1971 1979 1965 1334 1388 1336 13:7 1338 1033 1343 1941 1342\nRegraded Unclassified\nCOMPIDENTIVE\nMACKIN TO RESERVE POSITION or DATES, ...ET ENDED WEDNESDAY. JUNE 25, TORO\nThink Instruction AR increase in PRODUCTION requirements to twice tasle statuing reserve requirements\n(Basod on averages of drive Claures: amounts in thougands of Gollars)\nControl Reserve\nCountry bruine\nAll\ncity bonks\nReservo\nIn places with a population of--\nmember\ncity\nTotal\nbanks\nNew York\nChioago\n100,000\n15,000-\nLoss than\nbanks\nand over\n100,000\n15,000\nReserve percentages, if incressed to\ntwo basic statutory requirements:\nOn demand deposits\n26\n26\n20\n14\n14\n14\n34\nOn time deposits\n6\n6\n6\n6\n6\n6\n6\n1. Banks with reserve belances sufficient to neot the increase\nin reserve requirements:\nThribor of banks\n5,065\n26\n8\n265\n4.766\n138\n733\n3,895\nExcoss reserves if roquirements wore incroased\n4,127,300\n1,673,301\n307.908\n1,432,567\n713,524\n189,143\n266,422\n257,999\n2. Banks that could noot the increaso by convorting not more\nthan mlf of their back belances into reservo belance:\nNumber of banks\n1,443\n9\n4\n79\n1,349\n60\n263\n1,026\nDeficiency in reservos before converting bank balances\n-67,408\n-1,974\n-2,325\n-34,695\n-28,414\n-6,566\n-12,432\n-9,416\nExcose reserves after converting half of tank\nbalances into reserves\n540,973\n2,402\n2,893\n213,423\n322,255\n80,692\n151,272\n90,291\n3. Banks that would have to provide additional reserves aftor\nconverting half of bank balancus into reserve beloness:\nNumber of banks\n43\n1\n:\n1\nW\n1\n5\n»\nDeficioncy in reserves before converting bank belancos\n-1,230\n-567\n--\n-52\n-611\n-18\n-135\n1888\n-Doficioncy in roservos after converting half of bank\nbalances into resorves\n-782\n-463\nI\n-25\n-294\n-14\n-\n=56\n-224\n4. All member bankas\nNumber of banks\n6,549\n36\n12\n345\n6.156\n199\n1,001\n4,956\nExcess reserves on present basis\n5,230,447\n2,201,546\n410,160\n1,749,663\n869.078\n229,634\n526,163\n313,281\nExcess reserves if requirements wore increased to\ntwice basic statutory requirements\n4,058,662\n1,670,760\n305,583\n1,397,820\n684,499\n182,559\n253,855\n212,085\nRote: Due to the fact that balances due from banks are deductible from domend doposits subject to reserve, - withdrawsl of such balances results\nIn some increase in required reserves. If allowance is mado for this, two banks would MOVE from group 2 to group 3 and yould have mill\ndeficionsiss in reserves after converting ono-half of bank belance into reserve balances,\nB-1259\n(Ruvised)\nRegraded Unclassified\nCONFIDENTIAL\nANALYSIS UT RESERVE POSITION OF \"E'DE Stard. FEW\nTable an Increase àn reserve requirements to twine Indio statutory reserve requirements\nDistribution of mmber of banks, tv classes.\nNumber of banks, by Federal Peserve districts--\nTotal\nNew\nPhila-\nCleve-\nRich-\nAtlenta\nChicago\nSt.\nMines-\nRecess\nassuming an increase in reserve requirements to\nDellare\nSen\nnumber\nBoston\nYork\ntwice basic statutory requirements*\ndelphia\nland\nmond\nLouis\napolis\nCity\nFrancisee\n1. All sumber banks-total\n6,549\n346\n787\n655\n667\n437\n317\n880\nLes\n452\n731\n570\n276\n4. Recerve balances sufficient\n5,065\n249\n655\n501\n558\n344\n245\n735\n337\n334\n521\n1,30\n176\nbe Reserve balances plus 1/2 bank belances sufficient\n1,441\n94\n118\n145\n106\n91\n72\n144\n88\n114\n214\n155\n100\n0. Reserve balances plus 1/2 bank balances insufficient\n43\n3\n14\n9\n3\n2\n-\n1\n-\n4\n2\n5\n-\nLB\n36\n:\n-\n12\n-\n-\nI\n-\n-\n2. Central resorve city banks--total\n:\n-\n-\n34\n-\n26\n-\n-\n:\nI\n8\n-\n--\n-\n-\n:\nas Reserve balances sufficient\nbe Reserve balaness plus 1/2 bank balances sufficiont\n13\n-\n9\n-\n--\n-\n-\nL\n-\n--\n--\n--\n-\nOz Reserve balances plus 1/2 bank balances insufficient\n1\nI\n1\n-\n-\n-\n--\n-\n-\n-\n-\n:\n-\n1\n20 Reserve city banks-total\n345\n10\n11\n22\n33\n34\n21\n65\n24\n9\n50\n36\n30\n4a Reserve balances sufficient\n265\n9\n8\n19\n30\n31\n12\nLE\n17\n6\n36\n29\n23\nbe Reserve balances plus 1/2 bank balances sufficient\n79\n1\n3\n3\n3\n2\n9\n20\n7\n5\n14\n7\n7\nC. Rosorve balances plus 1/2 bank belances insufficient\n1\n1\n-\n-\n-\n-\n1\n--\n-\n-\n-\n-\n-\n1.0 Country banks, population 100,000 and over-total\n199\n36\n40\n19\n26\n3\n11\n14\n17\n16\nó\n2\n9\nBe Roserve balancos sufficient\n138\n24\n26\n17\n20\n2\n10\n9\n12\n9\n3\n1\n5\nbe Reserve balances plus 1/2 bank balances sufficiont\n60\n12\n14\n2\n6\n1\n1\n5\n5\n6\n3\n1\n4\nas Rosorve balances plus 1/2 bank balances insufficient\n1\n--\n--\n-\n-\n-\n:\n--\n1\n1\n-\n-\n--\n5. Country banks, population 15,000=100,000~total\n1,001\n106\n163\n92\n113\n13\n72\n151\nlate\n50\n51\nlib\n40\nas Reserve balances sufficient\n733\n72\n130\n69\n95\n50\n54\n112\n34\n31\n27\n34\n25\nbe Reserve balances plus 1/2 bank balances sufficient\n263\n34\n30\n21\n18\n23\n18\n39\n10\n19\n24\n12\n15\n0. Reserve balances plus 1/2 bank belances insufficient\n5\n-\n3\n2\n-\n-\n--\n-\n-\nI\n-\n-\n-\n6. Country banks, population loss this 15,000-total\n4.956\n194\n537\n522\nLOS\n327\n213\n638\n340\n377\n630\n466\n197\n3,895\n144\n465\n396\n43\n261\n169\n561\n274\n268\n455\nas Reserve belances sufficient\n346\n123\nb. Roservo balances plus 1/2 bank balances sufficient\n1,026\nLa\n62\n119\n79\n65\nE\n76\n66\n86\n173\n135\n74\nOs Reservo balances plus 1/2 benk balances insufficient\n35\n3\n10\n7\n3\n1\n-\n1\n-\n3\n2\n5\n-\n\"The groupines a, b, and 0, under each min classification, show-\n(a) the mmber of banks that had reserve balance sufficient to most in incroase to twice belances besic statutory roquirements,\n(b) the mmber that could have not such an Increase by convorting mlf of their bank balances into reservo belances, and\nB-1299\n(0) the nator that could not have not such on incroase by converting H.lf of their brak into reserve belances.\n2\n275\n:\n5\nRegraded Unclassified\nCONFIDENTIAL\nANALYSIS OF RESERVE POSITION OF MEMBER BANKS, WEEK ENDED MEDNESDAY, JUNE 25, 1941\nTable 2--Assuming an increase in reserve requirements to two and one-half times basie statutory reserve requirements\n(Basod on averages of daily figuros: amounts in thousands of dollars)\nContral Reserve\nAll\nCountry banks\nmember\ncity banks\nRoacrve\nIn places with - population of--\nbanks\ncity\nTotal\nNew York\nChicago\n100,000\n15,000-\nLess than\nbanke\nand over\n100,000\n15,000\nInservo percentages, if increased to two and\none-half times basic statutory requirements:\nOn dessind deposits\n32-1/2\n32-1/2\n25\n17-1/2\n17-1/2\n17-1/2\n17-1/2\nOn time deposits\n7-1/2\n7-1/2\n7-1/2\n7-1/2\n7-1/2\n7-1/2\n7-1/2\n1. Barden with reservo balances sufficient to most the increase\nin reserve requirements:\nNumber of banks\n3,311\n16\n7\n147\n3,241\n90\n409\n2,562\nhouse reserves if requirements were increased\n2,391,655\n738,454\n114.538\n1,002,968\n535.695\n142,896\n199,217\n193,582\n2. Banks that could moot the incroase by convorting not more\nthan half of their bank balances into resorve balances:\nNumber of banks\n2,977\n6\n$\n180\n2,788\n99\n481\n2,200\nDeficiency in reserves before converting bank balances\n-340,992\n-5.437\n-9,463\n-179,867\n=146,225\n=38,209\n-61,200\n-46.736\nExcess reserves after converting half of bank\nbalances into reserves\n928,826\n1/-551\n16,150\n396,075\n515,152\n124,372\n207.406\n163,372\n3. Banks that would have to provide additional reservos after\ncorrerting half of bank balances into reserve balances:\nNumber of banks\n261\n14\n2\n18\n227\n10\n31\n186\nDeficiency in reserves before converting bank balances\n-242,785\n-119,601\n-6,181\n-104,386\n-12,417\n-1,998\n-14.457\n-6,368\nDeficiency in reserves after converting half of bank\nbalances into reserves\n=180,202\n-109,695\n-3,767\n-61,224\n-5,516\n-615\n-2,016\n-2,365\nAll mmber tanks:\nNumber of banks\n6,540\n36\n12\n345\n6,156\n199\n1,001\n5,230,447\n2,201,546\n410,160\nW/A\nRccess reserves on present basis\n1,749.663\n865,078\n229,634\n320.103\n315,252\nRcooss reserves if requirements were increased to\ntwo and one-half times basis statutory requirements\n1,507,878\n613,216\n96,894\n710,715\n377,053\n105,009\n133,560\n110.600\nNotes Due to the fact that balanges due from banks are dedoctible from domand duposits subject to reserve, 5 withdrawal of each belance results in\nincruase in reserve requirements. If allowance is más for this, a cumber of the banks in group 2 would novo into group 3 and rould\nhave scas deficionsius in reserves after converting cao-half of bank balances Lato reserve balances.\nThis aggregate net deficiency is due to the increase in reserve requirements which results from a. withhouse!\n94%\nInlances\n-\nfrom\n0-1299\n27.6\nbanks.\nRegraded Unclassified\nCONFIDENTIAL\nANALYSIS OF RESERVE POSITION OF MEMBER HAVES. YEAR ENDED 201 SDAY, JUNE 25, DAA\nTable 26--Assuming an incrusse in reservo requirements to two and ono-helf times brain statutory reserve riquirements\nDistribution of number of tanks, by classes,\nNumber of banks, by Federal Roserve districts--\nTotal\nassuming 6D increase in reserve requirements to two\nNew\nPhila-\nCloru-\nRich-\nAtlanta\nChiongo\nSt.\nMinno-\nKansas\nDillas\nSAN\nnumber\nBoston\nand ono-half times basic statutory requirements*\nYork\ndolphia\nland\nmond\nLouis\napolis\nCity\nPrancisco\n6,549\n346\n787\n655\n667\n437\n317\nBBO\n425\n452\n737\n570\n276\n1. All member banks-total\n194\n304\n280\n84\n3,311\n158\n468\n325\n381\n235\n141\n530\n211\n\" Reserve balances sufficient\nbe Reserve balances plus 1/2 bank balances sufficiont\n2,977\n162\n256\n275\n265\n195\n173\n338\n208\n240\n416\n268\n179\n261\n26\n63\n55\n21\n7\n3\n12\n6\n18\n15\n22\n13\nas Reserve belances plus 1/2 bank balance insufficient\n12\n-\n--\n-\n-\n48\n36\n-\n:\n--\n--\n-\n--\n2. Contral reserve city banks-total\n16\n--\n-\n-\n7\n-\n-\n-\n-\n-\n23\n-\n--\na. Roservo balance sufficiont\n3\n-\n-\n-\n-\n-\n6\n--\n--\n-\n-\nbe Reserve balances plus 1/2 bank balances sufficient\n9\n-\n14\n-\n2\n--\n-\n:\n-\n-\n16\n-\n--\n:\na. Rosorvo balances plus 1/2 bank balances insufficient\n-\n345\n10\n11\n22\n33\n34\n21\n65\n24\n9\n50\n36\n30\n30 Reserve city banks--total\n8\nLe Reservo balances sufficient\n3\n12\n21\n19\n5\n28\n5\n2\n15\n17\n12\n147\n180\n1\n5\n8\n12\n14\n15\n34\n16\n7\n34\n19\n15\nbe Reserve balances plull 1/2 bank balances sufficient\n2\n1\n1\n3\n3\n-\n1\n-\n3\nde Reservo balances plus 1/2 bank balances insufficient\n18\n1\n3\n-\n199\n36\n40\n19\n26\n3\n11\n14\n17\n16\n6\n2\n9\n1+0 Country banks, population 100,000 and over-total\n90\n14\n18\n10\n16\n2\n5\n9\n4\n2\n1\nAX\n\" Resorve balances suffisiont\n21\n9\n9\n1\nZ\n9\nB\n8\n4\n1\n7\nbe Reserve balances plus 1/2 bank balances sufficiont\n99\n18\n1\n--\n-\n-\n4\n--\n-\n--\n6a Reservo balances plus 1/2 bank balances insufficient\n10\n4\n1\n--\n-\n1,001\n106\n163\n92\n113\n73\n72\n151\nWe\n50\n51\n40\n40\n5. Country banks, population 15,000-100,000-total\n489\n46\n103\n48\n66\n31\n29\n75\n21\n18\n20\n15\n13\nto Roservo balance sufficient\n31\n20\n481\n55\n47\n39\nLA\n40\n43\n76\n23\n31\n20\nbe Resorvo balances plus 1/2 bank balances sufficient\n0. Reserve balances plus 1/2 bank balances insufficient\n31\n13\n5\n3\n2\n--\n-\nt\n1\n-\n1\n1\n5\n4,956\n194\n537\n522\n495\n327\n213\n630\n340\n377\n630\nLF6\n197\n6. Country banks, population less than 15,000-total\n100\n415\n176\n170\n267\n243\n2,562\n90\n328\n255\n278\n183\n57\n4. Recerve balances sufficient\n2,208\n88\n177\n219\n200\n140\n111\n216\n161\n194\n310\n222\n131\nbe Reserve balances plus 1/2 bank balances sufficient\n186\n16\n32\n48\n17\n4\n2\n7\n3\n13\n1/4\n21\n9\n0. Reserve balances plus 1/2 bank balances insufficient\nThe be and 0, under each main classification, show->\n(a) the number that sould have not such an increase by converting half half of of their bank balances into belance.\ngroupings a, of banks that had reservo balance mfficiont to meet an increase thoir bank to two balances and one-half into ruservo time balanoos, basic statutory and requirements,\nB-1259\n(b) (o) the the manber number that could not have not such an increaso by converting reservo N\n(Revised)\nRegraded Unclassified\nCONFIDENTIAL\nASSSTS JED LIABILITIES OF 10:38 BUICS VHICH, AFTER CONVENTING HALF 02 THEIP DATE BALANCES INTO RESEIVE DALUMES, LOULD HAVE TO PICVIDE\nADDITIONAL RESERVES IN ORDEP TO VEET AN INCREASE IN RESERVE REQUIRD/ENTS ,0 A ICE BASIC STATUTORY REQUIREMENTS\n(The figures of assots and liabilitics are ns of Juno 30, 1941, but the resurve analysis was based on averages\nof daily ficures for the wook endod Juno 25, 1941)\nRatios\n(per oent)\nP.R.\nAddi-\nTotal\nU.S.Govt\nOther\nBalances\nDo-\nLoans and\nU.S.Govt.\nOther\nBank\nDist,\ntional\nassets\nLoans\nsecur-\nsecur-\ndue from\nLoins\nName of bank\nities\nposits\ninvest-\nsecuri-\nsecuri-\nbalances\nCity and State\nreserves\nities\nbanks\nto\nBo.\nconts to\nties to\ntics to\nto\nneeded\nasseta\nIn thousande of dollars\nassots\nassets\nassets\ndeposits\nCENTRAL RESERVE CITY BANK\n2\nFor York, Befo\nSohroder Trust Company\n463\n27,128\n4343\n12,093\n3,619\n270\n23,375\n73.2\n15.3\nWhite\n13.3\n1.2\nRESERVE CITY BARK\n5\nBoltimoro, Ed.\nCalvort Bank\n25\n13,908\n2,723\n3,836\n2.776\n148\n12,630\n67.1\n19.6\n27+6\n20.0\n1+2\nCOUNTRY BAHK IN A PLACE ITH á POPULATION\nOF 100,000 OR MORE\n9\nMinnespolis,Minn. Pidolity Stato Bank\n14\n2,636\n1,870\n205\n259\n9\n2,467\n88.5\n70.9\n7.8\n13.6\nall\nCOUNTRY BANKS IN PLACES LITE A POPULATION\nOF 15,000-100,000\n2\nOrucuwich, Conne\nFirst Intional Bank\n13\n4,886\n2,212\n1,7Le\n53\n77\n4,468\n62.0\n45-3\n35-7\n1.1\n1.7\n2\nHackensack, Red.\nBargon County National Bank\n6\n3.541\n1,504\n723\n667\n35\n3,095\n61.7\nLe.5\n20als\n16.8\n1.1\n2\nMiddletown, N.Y.\nNational Bank of\n15\n4,607\n1,342\n1,927\n470\n110\n4,034\n61,2\n29.1\n41.8\n10m2\n2.7\n3\nShamokin, Pa.\nRest End Entional Bank\n5\n1,659\n423\n263\n628\n55\n1,309\n79.2\n25-4\n15.8\n37.8\n4-0\n3\nShamokin, Pa.\nNational-Dino Bank\n17\n4,838\n1,563\n1,038\n975\nle\n3,864\n73+9\n32.3\n21.5\n20.2\n1.3\nTotal, 5 country banks in placos with c.\npopulation of 15,000=100,000\n56\n19,531\n7.044\n5.693\n2,793\n326\n16,850\n79.5\n36.1\n29.1\n1/1-3\n1.9\nCOUNTRY BARKS IN PLACES TITH 2. POPULATION\nOF LESS THAN 15,000\n462\n251\n60\n30\n854\n71.6\n12.8\n21.4\n7.4\n1\nLebanon, N. He\nNational Bank of\n10\n1,080\n3.5\nEnosburg Fulls Intional Bank\n5\n454\n305\n8\n76\n10\n369\n05.7\n67.2\n1.8\n1607\n1\nEnoshurg Falls,Vt.\n2.7\nPoultncy National Bank\n11\n769\n575\n27\n35\n16\n610\n82.6\n74.5\n3.5\nhas\n1\nPoultncy, Vt.\n2.5\n5\n606\n402\n74\n69\n6\n511\n89+9\n66.3\n122\n11.4\n2\nCato, H. T.\nFirst National Bank\n12\nDolaware National Bank\n17\n1,883\n1,067\n388\n106\n9\n1,650\nR2.9\n96.7\n20+6\n5+6\n-5\n2\nDolhi, N. T.\n5\n714\n452\n92\n35\n25\n605\n79+7\n63.3\nNational Bank of Florida\n12.9\n4.9\nLI\n2\nPlorida, N. T.\n7\n630\n435\n26\n50\n3\n481\n81.1\n69.0\n41\n2\nFirst National Bank\n7+9\n&\nHeadon, n. Y.\n4\n362\n174\n54\n78\n2\n292\n04.5\n60.1\n14.9\n21.5\n2\nFirst National Bank\n=7\nHarrisvillo, N.Y.\nB-1259\n2\n(Revised)\n7\n8\nRegraded Unclassified\nCONFIDENTIAL\nASSETS AND LIABILITIES OF 1'52'RED RATES HICH, AFTER CONVE TINO R/LF OF THLIR PARK SALANCES INTC RESERVE BALANCES, 100LD we TC PROVIDE\nADDITIONAL RESERVES IN ORDER TO FEST AM INCREASE IN R_SERVE REQUIREMENTS TO TWICE BASIC STATUTORY REQUIRE/ENTS\nFare 2\n(The rigures of assote and liabilities are as of June 30, 1941, but the reserve Analysis was based on avorages\nof daily figures for the work ended June 25, 1941)\nRatios (por cent)\nF.R.\nAddi-\nU.S. govt.\nOther\nBalances\nTotal\nDo-\nLoans and\nU.S.Govt.\nOther\nBank\nDist.\ntional\nLorna\nscour-\nsocur-\ndue from\nCity and State\nName of bank\ninvest-\nLoans\nassots\nposits\nsocuri-\nsocuri-\nbalances\nNo.\nreserves\nities\nitics\nbanks\nto\nmonta to\ntios to\nties to\nto\nneeded_\nassota\nIn thousands of dollars\nassets\nessets\nassota\ndeposits\n(Contimed)\n2\nHermon, J. Y.\nFirst National Bank\n2\n124\n222\n51\n59\n2\n319\n78-3\n52.4\n12.0\n13.9\n-6\n2\nHicksvillo,N.Y.\nLong Island National Bank\n8\n2,412\n1,143\n4\n53\n31\n1,151\n83.1\n79.2\n.3\n3-7\n2.7\n2\nLiborty, y. Y.\nNational Bank of\n21\n2,878\n1,372\n516\n631\n37\n2,495\n87.5\n47.7\n17.9\n21.9\n1.5\n2\nBosson, X. T.\nFirst National Bank\n3\n701\n118\n292\n203\n11\n620\n87.4\n19.2\n41.7\n29,0\n1.8\n2\nWarronsburg, K.T.\nEmoreon Intional Bank\n8\n1,366\n893\n75\n244\n11\n1,197\n81.4\n65.4\n5.5\n10.5\n«9\n3\nTeam River, H. de\nFirst National Bank\n13\n5,604\n3.136\n672\n984\n53\n4537\n85.5\n56.0\nLc.0\n17.5\n1.2\n5\nBakorton, Pa.\nFirst National Bank\n4\n529\n154\n218\n68\n13\n436\n83.2\n29.1\n41.2\n12.9\n3.0\n3\nCateriana, Pc.\nCatawises National Bank\n14\n912\n715\n28\n45\n2\n690\n86.4\n78.4\n3+1\n4.9\n+3\n3\nDouphin, Pa.\nDouphin National Bank\n1\n270\n168\n25\n28\n4\n223\n81.9\n62.2\n9+3\n10.3\n1.8\n3\nMartinsburg, Pt.,\nFirst National Bank\n1\n264\n130\n25\nLe\n4\n225\n746\n10.2\n9+5\n15.9\nLf\n3\nUlstor, Pa.\nFirst National Bank\n2\n506\n169\n39\n219\n15\n419\nBlacks\n33.4\n7=7\n43.3\n3.6\n3\nWontharly, Pa.\nFirst Intional Bank\n2\n706\n329\n64\n140\n12\n583\n75.5\n46.6\n9.1\n19.8\n2.1\n4\nGoorgotown, Ry.\nFirst National Bank\n4\n643\n255\nlle\n43\n&\n545\n69.5\n39.7\n23.2\n6.7\n*9.5\n4\nMasontown, Pa.\nScoond National Bank\n2\n1,035\n277\n268\n317\n32\n913\n83.3\n26.8\n25.9\n30.6\n3.5\n4\nStoystown, Po.\nFirst National Bank\n1\n299\n174\n17\n57\n2\n218\n82.9\n58.2\n5+7\n19.1\n+9\n5\nLoxington, Va.\nRookbridgo National Bank\n4\n1,978\n1,240\n293\n105\n75\n1,702\n62.8\n62.7\n14.8\n5+3\n44\n7\nBettle Ground,Ind.\nButtle Ground State Bank\n3\n347\n245\n40\n2\n25\n291\n82.1\n70.0\n11.5\n.6\n8.6\n9\nLosion, 8. D.\nFirst National Bank\n6\n681\n319\n236\n19\n18\n607\n843\n16.8\n3407\n2.8\n3.0\n9\nManistique, Nicha\nStato Savings Bank\n8\n808\n124\n121\n122\n20\n723\n82.5\n52.5\n15.0\n15.1\n2.8\n9\nUtophen, Winn.\nFirst National Bank\n1\n372\n237\n55\n36\n5\n327\n88.1\n63.7\n14.8\n9.7\n1.5\n10\nSt. Marys, Kans.\nSt. Marys State Bank\n2\n998\n377\n107\n25\n30\nL98\n85,1\n63.0\n17.9\n42\n6.0\n10\nGranito,Okla.\nFirst National Bank\n1\n283\n138\n20\n84\n5\n237\n85.5\n48.8\n7.1\n29.7\n2.1\n11\nAmona, Tox.\nFirst National Bank\n3\n109\n84\n-0-\n3\n6\n70\n79.6\n77.1\n:\n2.8\n0.6\n11\nCemoron, Tax.\nCitizons National Bank\n30\n6,030\n598\n908\n3,914\n121\n5.787\n89.9\n9.9\n15.1\n64.9\n2.1\n11\nDodson, Tex\nFirst stato Bank\n1\n192\n136\n25\n1\n6\n120\n843\n70.8\n13.0\n.5\n5.0\nP=1259\n279\n(Revised)\nRegraded Unclassified\nCONFIDENTIAL\nASSETS AND LIABILITIES OF FEMBER BATS WICH, AFTER CONVERTING PALF OF THEIR BANK BALANCES INTO RESERVE BALANCES, WOULD AVE 16 GAVIDE\nADDITION'I RESERVES IN ORDER TO MELT AN INCREASE IN RESERVE REQUIREMENTS TO TWICE RASIC STATUTORY\nPage 3\n(Thu figuros of assots and liabilition are as of June 30, 1941, but the reservo analysis who based on avers HE\nof daily figures for the week ended June 25, 1941)\nU. 8.Govt\nRatios (per cent)\nF. Rs\nAddi-\nOther\nBalances\nDist.\ntional\nTotal\nsecur-\nDo-\nLoans and\nU.S.Covt.\nOther\nBank\nLoans\nsecur-\ndue from\nCity and State\nName of bank\nreserves\nassets\nitics\nitios\nbanks\nposits\ninvest-\nLoans\nsecuri-\nsecuri-\nbalances\nNo.\nneeded\nments to\nto\nties to\nties to\nto\nIn thousands of dollars\nassets\nassets\nassets\nascete\ndeposits\n(Continuod)\n11\nDuma, Tex.\nFirst Stato Bank\n13\n543\n364\n38\n26\n56\n489\n78.6\n67.0\n7.0\n46\n11.5\n11\nOgloohy, Tox.\nFirst National Bank\n2\n143\n87\n7\n7\n24\n106\n70.6\n60.8\n4+9\n49\n*22.2\nTotal, 35 country banks in places with &\npopulati n of loss than 15,000\n224\n36,163\n17.372\n5,193\n7,906\n773\n30,941\nBlue3\n48.0\n1404\n21.9\n2.5\nTotal, la country banks\n294\n58,330\n26,286\n11,091\n10,958\n1,108\n50,258\n62.9\n45.1\n19.0\n11.F\n2.2\nAverage ratios for all country banks,Apr.4,1941\n64.3\n31.3\n20.0\n13.0\n19.5\nGrand Totr.1, 43 banks\n782\n99,366\n33,152\n27,020\n17,353\n1,526\n86,263\n78.0\n33.4\n27.2\n17.4\n1.8\no\n280\n0-1299\nAfter converting ops-hnlf of bank br.lanoos into roserve balances.\n(Rovised)\nAverage balances due from banks, as reported for the wook onded Juno 25, 1941, word considerably bolow the amount shown in the June 30 c:11 report.\n280\nRegraded Unclassified\n281\nSeptember 3, 1941\n2:30 p.m.\nHMJr:\nHello.\nOperator:\nMrs. Klotz is back now.\nHMJr:\nWhere's Mr. Henderson?\nOperator:\nI have him right here. Go ahead.\nHMJr:\nHello.\nLeon\nHenderson:\nHello. Did you have a good rest?\nHMJr:\nYes, I did. Is this Leon?\nH:\nYes.\nHMJr:\nHow are you?\nH:\nI'm in pretty good shape.\nHMJr:\nSay, Leon, this is something that normally\nI'd rather talk to you about across the\ntable, but I'm sure it was an oversight\non your part. Remember you and I had sort\nof a gentlemen's agreement as to that\nbusiness of Ways and Means, that if you\nwere going to do anything on taxes, you'd\ntalk to me first?\nH:\nYeah.\nHMJr:\nWell, Senator George has sent me down this\ncorrespondence from you on joint returns\nH:\nYeah.\nHMJr:\nand calling 8 spade & spade - I mean,\nI Just think it - that waen't the understanding\nyou and I had.\nH:\nOh, why then - then that's my fault, Henry.\nI meant about testifying.\nHMJr:\noh.\nRegraded Unclassified\n282\n- 2 -\nH:\nAll we did was this. We did some work on\njoint returns\nHMJr:\nYeah.\nH:\nand I had spoken about it and the\nfellows worked it up and came in here one\nmorning\nHMJr:\nYeah.\nH:\nand asked me whether it wouldn't be a\ngood thing to send it on down to him.....\nHMJr:\nYeah.\nH:\nand I didn't think - I was busy, and\ndidn't think anything more about it.\nHMJr:\nYeah.\nH:\nThat's the only thing we've sent down. I\nthought - I meant about\nHMJr:\nWell\nH:\nI had in mind testifying. It never occurred\nto me on this thing.\nHMJr:\nWell, frankly George didn't seem to sort of\nlike it and\nH:\nWhat?\nHMJr:\nhe didn't kind of like it, see? And\nI thought I'd - normally I'd eit down, but\nI didn't want to take up your time.\nH:\nWell, you can rest assured on that. That's\nthe only thing we've done\nHMJr:\nYeah.\nH:\nand I won't do any more of them - even\nwhat seems as harmless as that. It looked\nto me as just a little technical work.\nRegraded Unclassified\n283\n- 3 -\nHMJr:\nWell, you know how hard it 18 keeping your\nown stable.\nH:\nSure. It was.....\nHMJr:\nI'm not making A.....\nH:\nIt was absolutely an oversight on my part.\nHMJr:\nI'm sure it was.\nH:\nAnd.....\nHMJr:\nNow, in return, Leon, that price statement\nwhich they wouldn't let me give before the\nCommittee\nH:\nYeah.\nHMJr:\nI'm going to give it Tuesday night in Boston.\nH:\nYou're going to be called as a witness one\nof these days.\nHMJr:\nI know. But I'm going to say all the things\nup there that they wouldn't let me say. And\nsometime - hello.\nH:\nThey didn't get to you.\nHMJr:\nI know, but\nH:\nThey haven't finished with me yet, you know.\nHMJr:\nNo. But sometime I'll tell you why I think they\ncalled me off.\nH:\nWell, I don't think there - there wasn't any -\nthere wasn't anything back of that. It was\njust they had not - they wouldn't let go of\nme.\nHMJr:\nThey wouldn't?\nH:\nNo. There was - there's no hidden reason\nthat I can see.\nRegraded Unclassified\n284\n- 4 -\nHMJr:\nWell, I personally - I don't know. Maybe\nit's just suspicion, but I think - I showed\nthe thing to three fellows from the Depart-\nment of Agriculture\nH:\nUh huh.\nHMJr:\n.....and within the same day Ed O'Neal got\nvery interested in what I was doing.\nH:\nUh huh.\nHMJr:\nHello.\nH:\nYeah. Well, I don't - this had nothing - it\nmay have.\nHMJr:\nThen the next thing I knew was they didn't\nwant me.\nH:\nWell\nHMJr:\nBut anyway, I'm going to give this; and I'd\nlike very much if Ferdie Kuhn could come\nover and show it to you tomorrow.\nH:\nAll right\nHMJr:\n.....and get\nH:\nWell, it better be in the morning, because\nin the afternoon I'll be before the Maloney\nCommittee on this oil business.\nHMJr:\nWell, then he - it won't be ready, 80 maybe -\nwould you want to take it home or would you\nwant it Friday morning?\nH:\nWell, when - I'll tell you. When Ferdie\ngets it done - when you get it done, why\ndon't he call me and we'll decide then.\nHMJr:\nAll right. I'll send one copy to you and\none to Miss Elliott.\nH:\nAll right.\n285\n- 5 -\nHMJr:\nBecause she was very helpful when you were\nup on the Hill.\nH:\nAll right.\nHMJr:\nBut I'm sure there's nothing in there but\nwhat you'd like, but there might be, and\nyou might have some good suggestions.\nH:\nAll right. Well, then, consider that I've\napologized for violating.\nHMJr:\nWell.....\nH:\n.....as I say, the boys had been working on\nit\nHMJr:\nYeah.\nH:\n.....and I didn't - they brought it in one\nmorning and said, \"How about sending this\nto George?\" I sat thinking about it and I\nsigned a note and out it went and out of\nmind even.\nHMJr:\nI - well, 80 much for that. I mean, there's\n80 much to do you and I can't afford to have\nany squabbles.\nH:\nThat's right. That's right.\nHMJr:\nLet me ask you this. Are you happy over the\nnew setup?\nH:\nI'm happy in that it's - we - you've got a\nspirit of working.\nHMJr:\nYeah.\nH:\nand Don has taken hold, and I'm happy\nabout that\nHMJr:\nYeah.\nH:\nI'm not - I would rather have had a full-time\nworking Board\n286\n- 6 -\nHMJr:\nYeah.\nH:\n.....\nthat 1s, it's & full-time job, as I\n800 it.....\nHMJr:\nYeah.\nH:\nnot something for busy people to do.\nHMJr:\nNo.\nH:\nI'm not 80 happy with the prospect of three\njobs that I've got when price is about enough\nHMJr:\nYeah.\nH:\nbut we were short on material, Henry, for\nthese civilian supply jobs\nHMJr:\nI see.\nH:\nAnd it's going to mean an extra load for me,\nbut it's got more promise in it than anything\nwe've ever seen.\nHMJr:\nGood. Good.\nH:\nSay, if you've got your pencil there - if\nyour girl's on I've got & new number.\nHMJr:\nNo, the girl's not on.\nH:\nWell, that's all right. Republic 0154.\nHMJr:\nWait a minute. Republic.....\nH:\n0154.\nHMJr:\nSay it again.\nH:\nRepublic\nHMJr:\nYeah.\nH:\n01\nHMJr:\n01.\n287\n- 7 -\nH:\n54.\nHMJr:\n0154 - Republic.\nH:\nYeah. That's my desk's private number.\nHMJr:\n0154 - I'll give it to her.\nH:\nAll right, Henry.\nHMJr:\nTake care of yourself.\nH:\nAll right, fella.\nHMJr:\nGood-bye.\nH:\nGood-bye.\n288\nMEMORANDUM\nSeptember 3, 1941.\nTO:\nSecretary Morgenthau\nJLS\nFROM:\nMr. Sullivan\nAt noon today the Senate Finance Committee took up the\ntax bill and before recessing at three o'clock this afternoon they\nhad tentatively agreed on everything in the bill except the follow-\ning items, which were passed over because they were controversial\nand will be taken up when the Senate meets tomorrow forenoon at\neleven o'clock:\nLowered personal exemptions,\nRepeal of the special 10% excess profits tax,\nCommunity property,\nEstate and gift taxes,\nAdmissions tax,\nCoin operated devices,\nSocial Security tax amendments.\nThere is a possibility that the wine tax may be reopened,\nalthough it was tentatively agreed to this afternoon.\nI talked with Senetor Barkley about wiring absent senatore\nto return and he said everyone had been wired last night. He agreed,\nhowever, to wire them again this afternoon.\nRegraded Unclassified\n289\nSeptember 3, 1941\n3:30 p.m.\nRE DEFENSE SAVINGS STAFF\nPresent:\nMr. Sloan\nMr. Buckley\nMr. Kuhn\nMr. Callahan\nMr. McCarty\nMr. Pulte\nMr. Olney\nMr. Duffus\nMr. Mahan\nMr. Edward\nMr. Sparks\nMr. Graves\nGraves:\nHave you anything particular you would like\nto ask me about?\nH.M.Jr:\nOh, as we go along I have got a little - I\nhave got no list.\nGraves:\nTo start off with?\nH.M.Jr:\nNo list of complaints.\nGraves:\nI think we might begin, then --\nR.M.Jr:\nI have got one little one. I never heard\nfrom Cole Porter. Did you write him a\nletter?\nKuhn:\nAfter you left, Mr. Secretary, Jerome Kern\nwrote saying that he was doing a song and\nhe was going to get together with Gershwin,\nbut I never saw a letter from Porter.\nRegraded Unclassified\n290\n- 2 -\nCallahan:\nI think we asked Mr. Gershwin first and he\nsaid that he could work much better with\nJerome Kern and we couldn't very well tell\nhim that we insisted on Cole Porter. I\ndon't know whether there is anything between\nthem or not.\nM.S.Jr:\nWho is going to do the song now?\nCallahan:\nGershwin and Kern.\nS.H.Jr:\nThat is all right.\nKuhn:\nCouldn't get anyone better.\nH.M.Jr:\nHow about a follow up on it?\nCallahan:\nWhat do you mean?\nH.M.Jr:\nWrite Gershwin how he is coming.\nCallahan:\nBoth of them wrote in the other day and said\nthey were getting together on it and they\nhoped to give us a report in a week or ten\ndays.\nM.C.Jr:\nWonderful. That is all I have got. I will\nthink of some things as we go along.\nCraves:\nYes, sir. Then Mr. Mahan might tell us\nabout postage. You asked me the other day\nabout the status of that and I told you\nand I will let Mr. Mahan confirm that.\nMahan:\nMr. Secretary, we have been concentrating\non the distribution --\nN.P.Jr:\nWhere is Sloan?\nGraves:\nSloan stayed outside for a minute to take\ncare of some other business.\nK.M.Jr:\nAll right.\nRegraded Unclassified\n291\n- 3 -\nMahan:\nWe have been concentrating on the retail\nposters. It has been probably the greatest\ndistribution of display material that has\never been made. There have been around\nthree million pieces distributed and\narrangements made for those pieces to be\npicked up and actually delivered to retailers,\nas Mr. Pulte will tell you later. Now, as\nyou know, there were a million and a half\nof the Minute Man posters distributed.\nThere have been ten thousand of the \"Buy &\nShare in America\" posters and there is\nanother hundred thousand on order that will\nbe distributed in about ten days, approximately.\nH.M.Jr:\nDo they like that poster?\nMahan:\nLike it very much.\nH.M.Jr:\nI mean the \"Buy a Share in America\".\nMahan:\nWe have had very good comments on it and it\nshows up very well. I saw one in Mr. Sparks'\nbank. He stole one of the first that was\nissued and it looked very well in the frame.\nIt looked better than the other poster, I\nthink.\nWe have ordered a hundred thousand more of\nthose in the large size and a hundred thousand\nin the small size. Both of those are due\nin ten days. We have ordered ten thousand\nof the prize winning poster as a pilot\nquantity for distribution to the states and\nto get the comment on that poster, and then\nwe are going to order a quantity of those\nfor payroll allotment posting. That is a\nparticularly good one with the two hands and\nso forth.\nH.M.Jr:\nThat is all right. It is very good.\n292\n- 4 -\nGraves:\nYou mean, Mr. Mahan, to be put out in the\nfactories and plants?\nMahan:\nYes, in connection - ask about our payroll\nallotment plan. That is & particularly good\nposter for that. I think the important\nthing is the three million pieces that have\nbeen distributed ready for this September\nfifteenth show. Now, we might cover albums\ntoo.\nH.M.Jr:\nWe don't begin to have anything like the\ncoverage they do in Canada, for instance.\nI mean, you can't go anywhere in Canada but\nwhat you are conscious all the time of their\nsavings posters. It is the only poster they\nhave but you bump into it every where you\ngo, which you don't with ours.\nMahan:\nThat is the best distribution we will have,\nis this three million. That will mean\npractically every retail store of any size\nis covered, not with one but with several.\nOn the ten cent album which we wanted to\nhave ready at the opening of school, ten\nmillion of those are now on their way to\npost offices and fifteen million additional\nhave been ordered so that as that supply is\nused up we will have a new one coming and\nand we think that is very important as a\npart of this retail activity, to have it -\nas many children as possible with albums.\nGraves:\nI might say this. I don't know whether you\nknew, but when we ordered stamp albums to\nbegin with we did not order anything for\nthe ten cent stamp.\nH.M.Jr:\nYou did not?\nGraves:\nWe did not, and we have had great demand\nfor the same kind of album in the ten cent\nstamp that we have had all the time for\n293\n- 5 -\nthe other denominations and this represents\nthe initial supply of ten cent albums.\nMahan:\nThat is right, first album. There was\none other activity this morning on - the\nCunningham Drug Stores want to print two\nhundred thousand copies of the song\nthemselves at their own expense and\noffer it both through full page newspaper\nads and also over the radio.\nH.M.Jr:\nWhere are those stores?\nMahan:\nIn Detroit and Michigan. They have stores\nthroughout Michigan. They were very very\nhelpful.\nH.M.Jr:\nGot any more whiskey ads?\nMahan:\nI don't know about the whiskey situation.\nH.M.Jr:\nWho put that field over?\nGraves:\nDo you know about it, Sid, the Seagram ad?\nMahan:\nNo, I don't know about it. I have simply\nseen it. I don't know what the circumstances\nare. As a matter of fact, the representative\nis going to be down tomorrow.\nGraves:\nThey did that on their own, I assume, without\nany --\nMahan:\nI think SO. We will know tomorrow. But\nI think --\nSparks:\nThey phoned for a meeting for tomorrow to\ntalk over a plan that they had but at that\ntime they said nothing about publishing an\nadvertisement.\nH.M.Jr:\nIt is not too good.\n294\n- 6 -\nMahan:\nI think we are perfectly agreeable to this,\nthough.\nH.M.Jr:\nThat is all right.\nMahan:\nFine. I think that is everything, Mr. Graves.\nGraves:\nIs there anything further about the distrib-\nution of the song that you know about, Sid?\nMahan:\nNo.\nBuckley:\nI have a record on the total number\ndistributed, if that is what you mean.\nGraves:\nYes, that is right.\nH.M.Jr:\nThe last I heard it was a hundred and seventy-\neight thousand. That is the memo you (Sloan)\nsent me, is that right?\nBuckley:\nWe have sent out so far about a hundred and\neighty-five thousand but there are forty-five\nthousand cards that haven't been counted\nyet. They sort of pile up on us. That\ngives us a total of about one hundred and\nseventy-five thousand cards received and a\nhundred and eighty-five sent out, not\nincluding the forty-five thousand that\nhaven't been counted. If there was just one\napiece it would bring it up to something\naround about two hundred thirty thousand.\nH.M.Jr:\nThere is something wrong with our mailing\nlist. He tells me that twenty thousand\npostal cards have been returned on account\nof the wrong address.\nBuckley:\nEighteen thousand five hundred ninety-five,\nup to this point.\nGraves:\nIs that disproportionate?\nRegraded Unclassified\n295\n- 7 -\nBuckley:\nIt is out of two million. One percent of\ntwo million would be twenty thousand,\nwouldn't it?\nGraves:\nYes.\nBuckley:\nI don't think that is out of line.\nH.M.Jr:\nOne percent of --\nBuckley:\nIt is out of line of a customers' list.\nIt wouldn't be out of line of a prospects'\nlist. This isn't quite one percent. But\nit isn't - ordinarily that wouldn't be\nconsidered out of line.\nH.M.Jr:\nBut that list is supposed to be kept up to\ndate.\nGraves:\nBut no closer than that. I doubt if it\never would be any more nearly correct than\nthat one percent that this is developing.\nH.M.Jr:\nAll right.\nBuckley:\nThis of course gives us a chance to check\nour list, too, which is a good thing, and\nbring it up to date automatically.\nGraves:\nI think Mr. Pulte should tell you some\ndetails about this Retailers for Defense\nWeek.\nH.M.Jr:\nGo ahead.\nPulte:\nWell, the Retailers for Defense Week, Mr.\nSecretary, is opening on September fifteenth,\ncontinuing until the twentieth. We expect\nby that time to have five hundred thousand\nretail stores cooperating in the selling\nof Defense Savings Stamps. Every one of the\nRegraded Unclassified\n296\n- 8 -\nforty-eight states now has material that\nis being distributed through various sources\nto the retail merchants. In connection\nwith that, President Roosevelt has issued\na proclamation for the week reading,\n\"Retailers for Defense Week, to aid in\nthe sale of Defense Savings Stamps.\"\nH.M.Jr:\nDid he issue that?\nPulte:\nHe issued that proclamation. It appeared\nin the Sunday morning Times, the New York\nTimes, it appeared in papers all over the\ncountry. Where we have Defense Savings\ncommittees, that is, local committees,\nthey have handled the contact with the\nmerchants through the merchants associations,\nvarious trade associations, Chambers of\nCommerce, and other groups. They have\nmade arrangements for the distribution of\nmaterial and arrangements for the retailers\nto obtain Defense Savings Stamps from\ntheir post offices or having wholesalers\nbuy the stamps and re-sell them to the\nretailer for sale to the consumer.\nWhere we are not organized, Chambers of\nCommerce and merchants groups have worked\nhand in hand with the retailers and with\nthe newspapers in arranging for the\ndistribution of material and also working with\nthe postmasters very closely in the towns\nfor distribution of the Defense Savings\nStamps and we are - there is an indication of\nhow close their cooperation is being\nextended. Chambers of Commerce are\ncontacting the post offices to find out\nhow many stamps they have got on hand before\nthe drives open so the post offices can\norder sufficient stamps. As an example\nof distribution, also, large companies -\nfor instance, the Standard Brands Corporation\nRegraded Unclassified\n297\n- 9 -\nof New York - have you heard about that?\nH.M.Jr:\nMr. Sloan wrote me a very excellent\nmemorandum and brought me up to date on\nall this stuff.\nPulte:\nThen I am just reiterating.\nH.M.Jr:\nI read it and I guess I remember it.\nPulte:\nWell, then, I will sum it up by saying\nthat --\nH.M.Jr:\nYou have really got to give me something\nthat is pretty new because Sloan did a\ngood job.\nPulte:\nThen I will give you something that is new,\nI hope. In Michigan the retail stores\nfrom a period of July tenth to July thirty-\nfirst averaged about a dollar per day in\nsales of stamps. That is, the chain stores,\nthe records we have.\nH.M.Jr:\nA dollar a day?\nGraves:\nPer store?\nH.M.Jr:\nDo you think that is good?\nPulte:\nWe think it is because it has a cumulative\neffect. It starts people off buying stamps.\nH.M.Jr:\nWhat period?\nPulte:\nJuly tenth to July thirty-first, a twenty\nday period.\nH.M.Jr:\nIt sounds terrible to me.\nPulte:\nWell --\n298\n- 10 -\nGraves:\nI don't think it is. The sales of\nstamps - we have of course no report\nyet for August, but sales of stamps in\nMay, June and July ran roughly three\nmillion dollars per month. Is that\nright?\nPulte:\nThat is right.\nGraves:\nNow, suppose you have five hundred\nthousand outlets and suppose that average\nshould be maintained. I doubt if it\nwill, but suppose it should be. That is\na half illion dollars a day or twelve or\nfifteen million dollars a month as against\nthree million, which has been the rate of\nsale, or was the rate of sale for the\nfirst three months.\nH.N.Jr:\nSay that again.\nGraves:\nAssume that this dollar a day that Mr.\nPulte says was the average in Michigan -\nassume that dollar & day is attained by\nthe five hundred thousand outlets that\nwe will have selling stamps from the\nfifteenth of September. That would give\nus a half million dollars a day, or from\ntwelve to fifteen million dollars a month\nfor stamps, compared with three million\ndollars a month which was the rate of sale\nof stamps during May, June and July.\nH.M.Jr:\nNow let me give you a few figures, see.\nHere is my problem. You might as well get\nmy problem. The Bureau of the Budget says\nwe are going to spend twenty-two hillion\ndollars. The tax bill may raise twelve\nbillion dollars. It leaves ten billion\ndollars I have got to raise and the thing\nthat I have got to figure is how much I am\ngoing to raise through this organization\nRegraded Unclassified\n299\n- 11 -\nplus Tax Anticipation certificates and\nhow much I have got to go out and borrow\nfrom the banks, 80 that is the thing that\nI have.\nGraves:\nWell, on the stamp thing, I view it this\nway, that --\nH.M.Jr:\nWe can't do it all by stamps.\nGraves:\nNo, no, it is cumulative. That lays a\nfoundation for the purchase of bonds which\nwill become increasingly effective as\ntime goes on. I think people will get in\nthe habit of buying their stamps at the\nstores. You are going to find that dollar\na day --\nH.M.Jr:\nOh, I am for this. You and I hoped we\nwould have fifty thousand stores by the first\nof September.\nGraves:\nI guess we had them.\nMahan:\nI am sure we have them.\nPulte:\nOh, we have more than that.\nH.M.Jr:\nBut when you say a dollar a day per store,\nit seems awfully little, that is all.\nGraves:\nThat is right. It does.\nH.M.Jr:\nIt seems awfully little.\nMahan:\nI think that is partly accounted for, Mr.\nSecretary, by the fact that a great many of\nthem were not selling right from the outset.\nThey probably - there was probably a lag\nin there of several days in the case of many\nstores.\nH.M.Jr:\nI wouldn't have raised the point except it\nRegrade Unclassified\n300\n- 12 -\nwas said as though it was to impress me\nand the only way it impressed me was as to\nhow little.\nGraves:\nI don't think he intended to impress you,\njust inform you.\nPulte:\nThat was all, inform you.\nH.M.Jr:\nO.K. I was impressed if you have fifty\nthousand stores and I will be overcome if\nyou have five hundred thousand stores by\nthe first of October.\nGraves:\nMerely putting stamps on sale in retail\nstores doesn't by any means insure the sale\nof stamps. We have got to get going with\nthése local community committees every-\nwhere before we can expect to have the\nmaximum possible result. Does that finish\nyou up, Mr. Pulte?\nPulte:\nYes, I think it does, Mr. Graves.\nGraves:\nSupposing Mr. Buckley tells us about the\nmail order thing.\nH.M.Jr:\nDon't misunderstand me. I wouldn't have\nsaid anything about the dollar. If you have\ngot your fifty thousand by the first of\nSeptember, I am delighted. If you have\ntwo hundred fifty thousand by the first of\nOctober, I will be very much pleased, and\nif you get your five hundred thousand by\nthe first of January, I would be very much\npleased.\nPulte:\nWell, the cooperation has been so splendid\nthat - and the pledges of cooperation from\norganizations of retailers all over the\nUnited States indicate that five hundred\nthousand or more merchants by September fifteenth\n30:\n- 13 -\nwill be selling stamps.\nE.I.Jr:\nWell, if it is, it is amazing, an amazing\nachievement.\nTaves:\nBy the way, Mr. Sloan or Mr. Mahan, what\nis this invitation to the Secretary to\nappear at the - at B. meeting of these\nretail people again?\nMahan:\nThat is September fifteenth, a clinic to\nbe held at the Mayflower Hotel from two\nuntil five o'clock and we will have on\nexhibit there everything pertaining to\nstamps and there will be speeches made\nby several of the prominent retailers,\nin which I hope they will indicate. we\nare going to have our five hundred*\nthousand and quite & program has been\narranged preceding the Don Nelson dinner\nand the committee would very much like\nto have you open that shindig if you\nwould, Mr. Secretary, and say a few\nwords of welcome to them.\nH.K.Jr:\nWhat is the Don Nelson dinner?\nMahan:\nThat I do not know much of in detail.\nIt is a dinner, I believe, given by the\nNational Retail Dry Goods Association\nto their honorary president. It is\nentirely a merchants --\n...,Jr:\nIf I am here on the fifteenth I will do it.\nChhan:\nThat would be fine.\nKuhn:\nIsn't that the day you testify on the Hill?\nM.M.Jr:\nSupposedly. I won't be here on the sixteenth.\nThis would be in the afternoon?\nRegraded Unclassified\n302\n- 14 -\nMahan:\nYes.\nH.M.Jr:\nThey will still be sober at two, won't they?\n(Laughter)\nMahan:\nWe would like to, of course, have you open it,\nif you will. That would please the boys very\nmuch.\nH.M.Jr:\nWell, if I am here, Harold, I will do it.\nGraves:\nFine.\nMahan:\nFine.\nGraves:\nNow, Mr. Buckley.\nBuckley:\nThis report, Mr. Secretary, is based on a complete\npicture of what has been accomplished in the\nMail Order Division of the Defense Savings Staff\nsince its inception last spring. The chart of\nactivities includes:\n\"(1) Regular Purchasers - those who, B the\nresult of previous solicitation, are buying at\nregular intervals. To this list (approximately\n100,000 at the present time), we are S tarting\nthis month to send a special le tter and three\norder forms, asking their cooperation in bring-\ning the bonds to the attention of others.\n\"(2) Customers - all those who have bought but\nwho haven't agreed to buy regularly. To this\nlist (approximately 2,000,000 as of July 31st),\nwe are sending a letter urging adoption of\nthe Regular Purchase Plan, a colorful folder and\na Regular Purchase order form. These start\ngoing out this Friday, September 5th.\n\"(3) Prospects - large investors - taken from\nthe Customer and I. R. files. To this list\n303\n- 18 -\n(375,000 corporations, partnerships, associa-\ntions, etc.), we have just sent a special mail-\ning consisting of a letter, order form and folder\nfeaturing F and G bonds.\n\"(4) Prospects - smaller investors. These\nare the 1. R. names (approximately 4,874,000\nas of July 31st) that we are testing - in 8\nvariety of different ways - in order to find\nthe formula that will produce maximum results.\n\"Before we discuss the results of our testing\nto date, let me raise one point that seems to\nme to be vitally important. In one\nsense, this mail order campaign - including all\nof our mail selling efforts - is different\nfrom practically all others. In any commercial\nmail order business, the product is available\nonly by mail and results are measured in but\ntwo ways - the mail orders that come back and\nthe repeat business that follows.\n\"In this mail order campaign of ours, results\nshould be determined by :\n\"(1) The number of people who are induced\nto send their orders direct.\n\"(2). The amount of money received in\nrelation to the cost of getting it.\n\"(3) The amount of potential repeat\nbusiness that becomes available at\na very low selling cost.\n\"(4) Equally important - the educational\nwork done on the entire list.\n\"Thus, from Test Series No. 1 for instance,\nwhich went out June 21st, It should be remembered\nthat in addition to getting 300 people to buy\nover $140,000 worth of bonds at a cost of\n85/100th of 1 percent, the mailing called on\n94,256 other people - told them the entire\n304\n- 16 -\nSavings Bond story, and provided one more link\nin the chain of publicity and advertising being\nused to raise money for national defense.\n\"From Series One, relative returns mean more than\ntotal orders or dollars received. We put these\nten tests in the mail, with existing material,\nto find out things and from that standpoint,\nthey accomplished their purpose.\n\"We learned, for instance, that it was safe for\nus to circularize on Defense Savings Staff\nstationery; that a mailing on E bonds was as\ngood, if not slightly better, than a mailing\non all three bonds; that there was an extreme-\nly small demand for F bonds. We also learned\nthat if our best test had been sent to the\nentire list, the selling cost would have been\ndown to 73 cents for each $100 worth of bonds\nsold.\n\"That should represent 8. maximum selling cost\nfor future mailings, since none of the assemblies\nin Series No. 1 contained specifically pre-\npared mail order material, and had the further\ndisadvantage of being sent out during one of\nthe poorest mail selling seasons of the entire\nyear.\n\"From Series Two, which went into the mails\nJuly 19th, we are likewise getting some useful\ninformation. While returns are incomplete, it\nseems safe to conclude that the best test, both\nfrom the standpoint of orders and dollars\nreceived, will be an E mailing - thus confirm-\ning what we discovered in Series No. 1. We\nhave also learned that with all other factors\nbeing equal, our new folder \"How to Buy a Share\nin America\" is outpulling the blue and white\nDefense folder used in the first tests; that\nthe State of Massachusetts produces twice as\n305\n- 17 -\nmany orders as the State of Michigan; that 8.\ncombination of letter, folder and order\nform.\n\"From Series No. Three, which went into the\nmail last Saturday, August 30th, we will get a\ncomparison between the pulling power of I.R.\nnames with incomes over $5,000, incomes under\n$5,000 and a mixture of the two. This list check-\nup is being made in California, Georgia and\nMaryland. Also being tested are several new\nletters; an advertising message on the envelope\nversus a plain window envelope; and as another\nconfirmation, the pulling power of E bends ersus\nall three.\n\"This third series is going out at a very favor-\nable time. In a comparatively short while it\nshould give us an indication of the returns\nthat can be expected from the approximately\n2,000,000 new over $5,000 names that have just\nbeen put on plates, as compared with the greater\nnumber of under $5,000 names that are available\nif it is found desirable to circularize them.\nII.M.Jr:\nI have no comment.\nGraves:\nMr. Duffus?\nH.M.Jr:\nOnly where the hell is the movie on \"Any Bonds\nToday?\" for the newsreels?\nDuffus:\nWell, it was my understanding, sir, that that\nwas discontinued. I will contact Mr. Dietz\ntomorrow morning and find out about that, but\nI thought that was dropped because of that one\nof Barry Wood. I thought they were letting\nthat go. I will follow through on that\ntomorrow.\nH.M.Jr:\nHe said he was going to do us a good one,\nRegraded Unclassified\n306\n- 18 -\nDuffus:\nI will find out about that right away.\nH.M.Jr:\nHe said that song track was all right and for-\nget about the photographer.\nDuffus:\nI will check on that in the morning and give you\nan answer on that tomorrow.\nH.M.Jr:\nThat was what I heard.\nDuffus:\nThat was my understanding from Mr. Dietz, that\nit was discontinued after his talk.\nH.M.Jr:\nMaybe that - he said, now, was the sound track\nall right? It was fine. He said, \"Forget\nthe photography and let me take care of that.\"\nThat is the last I heard.\nDuffus:\nI will find out about that. We opened Treasury\nHouse in New York this noon at Rockefeller Plaza\nwith Colonel Patterson introducing. First they\nhad a band and then Colonel Patterson introduced\nMr. Willkie, who introduced Mrs. Hull, who cut\nthe ribbon. I talked with them two hours after\nit was opened. They have had 8. continual sale\nof stamps, the crowd was so big. We open a\nsimilar House tomorrow in Boston.\nH.M.Jr:\nWho is responsible for putting it in Rockefeller\nPlaza?\nDuffus:\nThe Esso people.\nH.M.Jr:\nWouldn't they go to Fourteenth Street or\nTwenty-third?\nDuffus:\nWe told them it was our wish that it be at\neither Fourteenth Street or Twenty-third,\nbut in a meeting in Colonel Patterson's office\nthey said they wanted it there at Rockefeller\nPlaza, where of course the Rockefellers are\ninterested and where they have been having\nthese shows like the penguins and the seals\n307\n- 19 -\nall year, and they have been building up the\npublicity and attractiveness of it. They\nhave guide tours through it and it was close\nto the N.B.C. radio broadcasting studios, from\nwhich we will draw a lot of talent.\nH.M.Jr:\nWell, can they get an airplane in there?\nDuffus:\nYes. They don't have it in. It goes in\non the fifteenth, the same type of plane\nthat we had over here, right in the center of the\nPlaza where they had all the Mexican cactus\nand all. It is spotted in there and goes in\nthe fifteenth of September. They have now\none of the biggest searchlight anti-aircraft\nunits with twelve men on it, so that any time\na plane flies over New York City the crowd\ncan gather around and they can detect & plane\nthat is out of sight and see it when it flies\nover. They can pull in something, I have for-\ngotten, it is thirty or fifty miles away, they\ncan hear 8. plane from that base. It is & very,\nvery fine show. Then I thought you might be\ninterested on the sixteen millimster film of\n\"America Preferred\". We had two hundred prints\nmade of that. We talked with Chief Wilson of\nthe Secret Service and figured out the best\nway to handle that, which was to turn over ten\nprints to him, which he in turn fastened to\nthe end of \"Know your Money\", so that every time\n\"Know your Money\" is shown any place in the\ncountry, they also see \"America Preferred\".\nNow, we are along with the retail store plan\nhaving additional copy written saying that stamps\nare on sale at the stores, which will be tacked\non to the end of the film because right now we\nare starting to show it in schools and colleges\nand mass meetings, and the unions are starting\nto use it in their union meetings all over the\ncountry.\n308\n- 20 -\nH.M.Jr:\nHow is the sales picture of me telling the\nretail fellows?\nDuffus:\nWe will have that in tomorrow afternoon, 30\nthat we can look at it Friday. Have you\nseen the new room downstairs?\nH.M.Jr:\nNo. Is it finished?\nDuffus:\nThe seats will be in the first of the week,\nand then it will be - it is all ready to use\nnow, but the new chairs aren't in.\nH.M.Jr:\nI will go down there.\nDuffus:\nIt is very fine.\nH.M.Jr:\nIs it?\nDuffus:\nWe will have the other one over here, and if\nyou are free we will see the retail film.\nH.M.Jr:\nThat all sounds good.\nGraves:\nIs that all you had?\nDuffus:\nThat is all I had.\nH.M.Jr:\nMr. Callahan can review the radio situation.\nCallahan:\nWe have \"America Preferred\" resuming on the\nair Saturday night. The following Saturday\nnight we have Suzanne Stem and under\nyour name and in your absence last week we\nwired some eighteen outstanding artists. We\nhave received sixteen replies, all favorable,\nall very enthusiastic.\nH.M.Jr:\nThe seventeen who have the income tax examinations?\nCallahan:\nWe have one from Rio de Janeiro. Melchoir,\nJosef Hoffman, out in Hollywood and says his\n309\n- 21 -\nknee is bad and he is awfully sorry, but he will\ndo anything in the world. He wished he could\nplay, but he can't. A flock of them. They\nare very favorable. I mean, not only accepting\nthe invitation, but expressing thankfulness\nthat you invited them.\nH.M.Jr:\nWhat program do they go on?\nCallahan:\nOn the \"America Preferred\".\nH.M.Jr:\nThat Saturday?\nCallahan:\nAn artist each Saturday night.\nKuhn:\nThat is the Deems Taylor one.\nH.M.Jr:\nDid Deems Taylor pick these?\nCallahan:\nHe and Alfred Wallenstein, who got together and\npicked all these people. Then Deems Taylor\nand Wallenstein meetavery week and discuss\nthe music.\nH.M.Jr:\nWho meets with them?\nCallahen:\nRainey. He acts in the same capacity as Mr.\nMonroe in the Treasury Hour. We have a new\nprogram going on Saturday, September 16, called\nthe \"Brush Creek Follies\".\nH.M.Jr:\nBrush?\nCallahan:\nBrush Creek Follies. (Laughter)\nH.M.Jr:\nWhat is this? You know, I am going to have\nto travel with a radio to listen to all the\nprograms.\nCallahan:\nThat is a sort of a hill billy program which\nhas been on the air for the past several years\nfrom Kansas City. It has been over the Columbia\nnetwork. We had a man out there last week,\n310\n- 22 -\nand they said beginning that Saturday, that\nthey wanted to devote the program to bonds\nand farmers. stamps. It is a program that appeals to\nH.M.Jr:\nIs it coast-to-coast?\nCallahan:\nCoast-to-coast. Twelve o'clock on Saturdays\nand I think eleven o'clock our time.\nH.M.Jr:\nWonderful.\nCallahan:\nOf course you know we first had the Treasury\nHour.\nH.M.Jrs\nI congratulate you on that. I showed that to\nthe President Saturday. He was very much pleased.\nCallahan:\nI think that is about all. Bendix is all set.\nThey have signed a contract with the National\nBroadcasting Company.\nH.M.Jr:\nWho is going to run that show?\nCallahan:\nMr. Monroe will be in the picture. I don't\nknow. Now, I have talked with Mr. Dietz --\nH.M.Jr:\nCould you come tonight and be fifteen minutes\nearlier, get there about 8. quarter past seven?\nCallahan:\nYes, sir.\nH.M.Jr:\nI would like to talk a little bit about that\nbefore Mr. Dietz comes.\nCallahan:\nThat is all I have.\nGraves:\nMr. McCarty is Mr. Callahan's man who handles\nthe press and magazines and publications and\n80 on. Suppose you tell the Secretary something\nabout what you are doing, Mr. McCarty.\nMcCarty:\nAll right, sir, Mr. Graves.\nRegraded Unclassified\n311\n- 23 -\nWe have a few late results, Mr. Secretary, on\nBaseball Defense Bond Day, which originated\nin the Press Section, and you have already,\nthrough Mr. Sloan's report, heard about how we\nset that up nationallyand I think there were\nsome of the results in there from the leading\ncities of the country, but since then we have\ngotten in more results to give us an idea of\nthe way it went all over, and now there was\nscheduled that day 8. hundred and forty-two\ngames over the country, professional baseball\ngames, both the major and the minor leagues.\nThe results show that a few of those were rained\nout. There were one or two - & few others we\nhaven't heard from yet, but we have had definite\nword that a hundred and twenty-one of those\ngames did see a celebration of the defense\nprogram, of Defense Bond Day, that there were\nbands marching, that local celebrities appeared\nand sat in boxes behind the home plate, and\nthe players pledged themselves to buy bonds,\nall of which resulted in a good bit of\nattendant publicity in the newspapers and on\nthe radio.\nIn New York, for instance, there were pictures\nin the New York Sun and the Brooklyn Eagle.\nhere were whole columns given over to it.\nI just had 8. late report this morning that a\nhundred and ten stations reported that there\nwere over five hundred announcements over\nBaseball Defense Bond Day on radio stations.\nThese were good results and pleased us 8\ngood bit. Now we are hearing from the\nteams who were away from home that day that\nthey would like to have a Baseball Defense\nBond Day in their own home town when they go\nback, 80 we want to help them with that\nenthusiasm and are sending out additional\ntranscriptions of your speech and of the intro-\nduction by High Commissioner Landis, as well\n312\n- 24 -\nas the literature which will be handed out by\nthe Boy Scouts to these teams, additional\nones who are coming back home and want to have\ntheir own day, and among those of course is\nincluded Washington, which unfortunately was\naway from home when we had the big Baseball\nDefense Bond Day, and the Washington club is\nvery anxious to have their day here on Septem-\nber 13, which is a week from Saturday. So\nthat will take care of our local team.\nCallahan:\nThe Secretary might come to the game if he is\nin town.\nMcCarty:\nWe would like very much to have you at the game,\nMr. Secretary, if you are going to be in town\non that day.\nH.M.Jr:\nWhat day?\nMcCarty:\nA week from Saturday, the thirteenth.\nH.M.Jr:\nI won't be here.\nMcCarty:\nWe will miss you.\nH.M.Jr:\nAll right?\nMcCarty:\nJust one other thing I might mention, which is\nthe addition of several new lists of publication\nmedia, including labor publications and the\nshipping newspapers. We have just made out a\nrather comprehensive list of almost a hundred\nlabor publications which are now going to\nreceive material regularly as well as shopping\nnewspapers. I don't believe there is a shopping\nnewspaper in Washington. I know there are\nnone in New York. But over the country there\nare about B. hundred and eighty shopping\nnewspapers. They are give-aways, but they are\nvery important in some cases.\nH.M.Jr:\nWe get one in Washington. They throw one at\nmy front door.\n313\n- 25 -\nMcCarty:\nOh, they do have one here?\nH.M.Jr:\nI am familiar with it.\nMcCarty:\nIn Los Angeles, for instance, the Downtown\nShopping News, has a million circulation.\nWe are also going to cover the Negro press,\nthe rade publications, the dailies, the week-\nlies and the foreign language groups.\nH.M.Jr:\nI thought you might like to know, Harold,\nthat coming down on the train Harry Hopkins\nsaid that in the eight years he has been in\nthe Government, he thought the best public\nrelations job that has been done by any Depart-\nment is the one that you people are doing, and\nhe said it in front of - what is the fellow from\nTime Magazine?*\nKuhn:\nBelair?\nH.M.Jr:\nHe said it in front of Felix Belair, so it\nwasn't just something for me, and strictly in\nthe family, the President said the worst job\nhas been done by Harold Ickes on gasoline\n(Laughter).\nMcCarty:\nAnd Mr. Secretary, just a couple of magazines\nI picked up on the way over because they have\njust come off the press and both carry 8.\nvery nice Defense Bond Message. One is\nLiberty, which of course has 8 very wide\ncirculation, and then a woman's magazine,\nHarpers Bazaar, which gives us four pages,\ntying it up with fashions. And then there\nare two more pages on the other side.\nH.M.Jr:\nThis is interesting. National City Bank\nhas something in here.\nMcCarty:\nYes, several banks.\n314\n- 26 -\nH.M.Jr:\nIt is just where they are turned down?\nMcCarty:\nThere are four pages in all, sir. They have\na series.\nH.M.Jr:\nBanking people, is that the ones who take care\nof the girls?\nMcCarty:\nWell, that is to sell clothes and also bonds.\nH.M.Jr:\nDoes he pick the girls?\nMcCarty:\nHarpers Bazaar picks the girls.\nH.M.Jr:\nI thought South Carolina there picked the girls.\nI thought he was doing a good job.\nMcCarty:\nYou have probably been seeing some of the\ncomic results that have been appearing over\nthe country, those that have been mentioned\nover the reports.\nH.M.Jr:\nDo you want this back?\nMcCarty:\nNo, you may keep that. I brought it to you.\nH.M.Jr:\nI got that comic stuff from Sloan. In that\nflier did you call it --\nMcCarty:\nThose were initial results. Just this morning\nin the Post there were two additional ones, and\nI believe we can be assured that they will keep\nup like this for an almost indefinite time, be-\ncause we have the support of practically all the\nsyndicates in the country who have gone to their\nartists and given them the material we prepared\nfor them.\nH.M.Jr:\nThat helps.\nMcCarty:\nI think we can keep that up.\nH.M.Jr:\nGood. That is good work.\nGraves:\nDoes that finish you, Mr. McCarty?\n315\n- 27 -\nMcCarty:\nYes, sir.\nGraves:\nI think you might want to hear from Mr. Edward.\nH.M.Jr:\nI don't think you know what I mean. Come\nhere, Edward, and look at these pictures.\nEdward:\nI know what you are talking about, but that\nis twenty years ago. (Laughter)\nH.M.Jr:\nAll right.\nEdward:\nMr. Secretary, during the month of August\nwe have had the wholehearted cooperation of\nmy friends down at the Federal and the state\nsuperintendents of banks throughout the\ncountry, and with the state secretaries, and\nthe result is that there are quite B. number of\nother banks who are not qualified to sell\nbonds, but have lately qualified. The reports\nare not available 8.8 yet except from three of\nthe Reserve Districts. Atlanta, Kansas City,\nand Dallas have sent in their reports. The\nothers will probably be in within the next three\nof four days. In these three districts during\nthe month of August forty-one additional\nnational banks and & hundred and fifty-nine\nadditional state banks qualified. This per-\ncentage holds good with the other nine districts.\nIt is reasonable to predict that some seven\nhundred or eight hundred additional banks will\nqualify during August. Including these two\nhundred above mentioned, we now have approxi-\nmately ten thousand two hundred banks quali-\nfied, and these figures do not include approxi-\nmately a thousand branch banks. The head\noffice is the only one counted in the calcula-\ntion. Therefore in the banking fraternity\nwe have about eleven thousand two hundred\nagents of issue for Series E Bonds.\nH.M.Jr:\nHow are we coming along with fixing up these\nbanks to carry the E Bond without collateral?\nEdward:\nMr. Bell has that on his desk now. I worked on\n816\n- 28 -\nit last week with Mr. Batchelder ann some\nof the fellows and We have made some sug-\ngestions for you, and I think you will\nprobably see it in the next three or four\ndays. I talked to Danny about it today, and\nhe is about ready to bring it to you. We are\nnot having a great deal of complaint from\nbanks about putting up collateral, although\nthe trouble is, I think, as Harold said\nseveral times, we are afraid that 8. good many\nbanks are not stocking the bonds as they\nwould if they didn't have to put up collateral,\nand therefore run out of bonds. For instance,\nout of this eleven thousand two hundred banks\nthat have qualified, only about twenty-two\nhundred of them have actually pledged collateral.\nThe other ones are just getting the sixty-\nfive hundred dollar maximum amount of bon\nand the result is that they have been running\nout of bonds. It probably would help some if\nthey were allowed to have more bonds, and\nwhile we are on the subject, my recommenda-\ntion, my suggestion to Mr. Batchelder was\nthat banks might have these bonds up to the\noxtent of - that is, insured banks, up to fifty\npercent of their canital in surplus with &\nmaximum of five hundred thousand dollars to\nany bank, subject to some provision by the\nFederal. Mr. Batchelder sent out a questionnaire\nto the Federal Reserve Banks in all the\ndistricts asking their experience and their\nrecommendations about this collateral. Ten\nout of the twelve Federal Reserve Banks recom-\nmend that we withdraw it, that we furnish\nthe bonds without collateral.\nGraves:\nDoes that apply to all agencies or exclude\nbuilding and loan, for instance?\nMdward:\nWell, the banks, of course - the Federal\nReserve didn't make any reference to the banks,\nbut my suggestion or recommendation was that -\nRegraded Unclassified\n317\n- 29 -\nMr. Sparks was in on this conference with the\nbuilding and loan people. Our recommendation\nwas to furnish the bonds to insured banks\nand also to insured building and loan associa-\ntions on the same basis, In other words,\nif they have insurance, let them all come\nunder the blanket. Let the insurance feature\nbe the determining factor as to whether or not\nthey could have bonds without collateral.\nNow, about the sale of E Bonds, I was talking\nto Mr. Sloan today and the statistics seem to\nindicate that August was not as good AS July\nthroughout the country, but I am very happy\nto tell you that I think we sold more bonds in\nSouth Carolina in August than we did in July.\nIl.M.Jr:\nIs that right?\nEdward:\nI know my bank did, and I believe that we are\nactually going to sell more bonds in the state\nin August than in July, although the Nation\nshows a decrease, I think, of around twenty\npercent, isn't it?\nGraves:\nEighteen, I think, of the E Bond.\nTell the Secretary where South Carolina stands\nin the roll of states on this thing.\nEdward:\nRight square on top. (Laughter).\n.1.1.Jr:\nI congratulate you.\nGraves:\nOn the basis of its proportionate share of\nnational income.\nR.M.Jr:\nThat is wonderful.\nEdward:\nWe sold in South Carolina in July twice as\nmany bonds as were sold in North Carolina,\nRegraded Unclassified\n318\n- 30 -\nand North Carolina is twice 25 big 8 state\nwith three or four times the wealth.\nmindr:\nIt is amazing. It shows what can be done.\ntraves:\nThat is right.\nEdward:\nAnother thing, throughout the Nation the banks\nhave sold approximately twice as many E Bonds\nas the post offices have sold. South Carolina\nbanks in July sold six times as many bonds LS\nthe post offices sold. You don't mind ay\nbragging a little bit, do you?\nI would be disappointed if you didn't.\n(Laughter) Mile we are on that, harold, I\nwish you would take un with Danny Bell - I\nwish we could ret a little more publicity on\nthe twelve hundred dollar tax certificate. I\ndon't think we are getting enouch publicity on\nthat. If you could nour on n little bit more\npublicity on the twelve hundred dollar one,\nGraves:\nYes, sir.\nEdward:\nMy bank is e taxpayer. I bought two hundred\ntwelve thousand two hundred dollars worth of\nthose things last week.\nL. .Jr:\nAll right?\nGraves:\nMr. Sparks has the renort of the Field Division.\nI think you mi nt begin, Sob, if you don't mind,\nby showin\" the Secretary that map.\n20arks:\nI brou int this down with the Idea of leaving it\nwith the Secretary if he would like to Leep\nit. je hope it will be & little bit neater\nnext week. It is the first experiment at\npresenting nictorially the picture of the\npresent status.\nR...Jr:\nPennsylvania looks awfully bi- to me.\nraves:\nKentucky and llebraska and Iowa and Utah and\nRegraded Unclassified\n319\n- 31 -\nWyoming have people in contact with the folks\nin those states and we hope within the next week\nor so to have the beginning of on organization.\nthere are only about, I think, six or seven\nstates where we absolutely have done nothing.\nSparks:\nThat is right.\nGraves:\nAnd maybe in another month--\nH.L.Jr:\nOh, we have got to clean those up, Harold, in\nSeptember. By the first of October there can't\nbe any white states. No whites by the first of\nOctober. We have just got to. I don't want\nto see any white spaces by the first of October.\nWe have just got to fix that, that is all.\nRegraded Unclassified\n320\n- 32 -\nGraves:\nWe have had some killing luck in some of\nthese cases, You remember I told you General\nWestervelt had accepted the chairmanship in\nIllinois. I just talked with him on the\nphone before I camein here and the Vice Presi-\ndent has asked him to come to Washington to\ntake part in all this new organization, and\nhe wants to be excused.\nH.M.Jr:\nWell, no whites in October.\nGraves:\nI think that is reasonable.\nH.M.Jr:\nBy the first of October.\nGraves:\nAnd we will make every effort--\nH.M.Jr:\nHere is New Hampshire. What is the matter\nwith John Sullivan?\nGraves:\nJohn and I have talked about that a good many\ntimes. He has a man in mind.\nH.M.Jr:\nAnd Mrs. Ed Foley from Montgomery, Alabama.\nI bet you she could find somebody for you.\nAlben Barkley certainly could recommend some-\nbody.\nGraves:\nThat is the trouble, Senator Barkley has\nrecommended a man in Kentucky that won't do,\nand we have got to struggle with that situa-\ntion.\nH.M.Jr:\nAnd you ask the head of the Civil Aeronautics,\nHinckley. He is an awfully good man. I bet\nyou he could find somebody. lle won't recommend\nanybody who won't do.\nGraves:\nWe have a man in Utah today.\nH.M.Jr:\nBob Hinokley is an awfully good man.\nRegraded Unclassified\n321\n- 33 -\nGraves:\nI think we will have Utah and Nyoming. I\ntalked to Senator O'Mahoney today about\nWyoming. He has recommended a man to us for\nadministrator there. I think we will clean\nup those western states.\nH.M.Jr:\nDid you ask Senator Norris about anybody in\nNebraska?\nGraves:\nNo. We have 8 chairman for Nebraska, a man\nnamed McDermott, who I think is--\nSloan:\nVice president of the First National in Omaha.\nGraves:\nI was going to say he hasn't accepted but is\nexpected to accept.\nH.M.Jr:\nGentlemen, by September 30 you have got to\nclean up the United States. That is May,\nJune, July, August, September, five months.\nI don't say they have all got to be red.\nOh yes, that is the first color.\nSparks:\nThere should be some color in them.\nGraves:\nWell, I think we can very nearly guarantee\nthat.\nSparks:\nI think SO. We will do everything under the\nsun.\nH.M.Jr:\nI have been patient. Five months. All\nright now, what else?\nGraves:\nOf course I would like to say on that point\nthat I am the fellow, myself, that has held\nback on this state organization. It isn't\nMr. Sparks that is in any way in default on\nthat.\nH.M.Jr:\nI know. You shouldn't give me a map though,\nwith white states on it.\nRegraded Unclassified\n322\n- 34 -\nSparks:\nWe wanted to let you set the goal for us,\nMr. Secretary. We will do everything we can\nto make that the zero hour for you.\nH.m.Jr:\nSeptember 30 is the zero hour.\nSparks:\nWe have sent out for more detailed information\non this entire picture. We have received the\ninformation from twenty-eight states so far\nthat report that they plan & total number of\nfive thousand and twenty-seven state and\nlocal committees in those twenty-eight states.\nThat is the number planned. The number\norganized in those twenty-eight states so far\nis three thousand four hundred and ninety,\nwhich represents about seventy percent of the\ngoal in those twenty-eight states. Of that\nthree thousand four hundred ninety, seventeen\nhundred and sixty-seven are city committees\nalready organized and seventeen hundred and\ntwenty-three are county committees already\norganized. The total membership actually at\nwork on these state, county, and city commit-\ntees in the twenty-eight states that have\nreported amounts to forty-three thousand\neight hundred and fifty persons on these com-\nmittees in twenty-eight reporting states.\nWe have been trying to gather factual informa-\ntion on the salary allotment plans as per your\ninstructions, and we have on actual record,\nhaving reported to us 50 far, the names of\nfour thousand three hundred and sixty-seven\ncompanies that have actually reported a salary\nallotment plan and most of them have sent\ncopies of their plans. The total personnel\nin these four thousand three hundred sixty-\nseven companies amounts to one million four\nhundred nine thousand eight hundred fifty-\nsix employees. The percentage of participa-\ntion is our main headache. We are still wor-\nrying with it and doing everything possible--\nRegraded Unclassified\n323\n- 35 -\nH.M.Jr:\nIt is very few people.\nSparks:\nWell--\nH.M.Jr:\nIf you have got thirty-six million people\nat work - it is somewhere between thirty-\nsix and forty million people that work.\nGraves:\nIf you will permit me, Bob, on that point\nwe don't feel that we should attempt to cover\nany except the large and responsible employers\nwith a payroll allotment plan sponsored by\nthe Treasury.\nH.M.Jr:\nHarold, as many people as we have got, God\nthat is nothing.\nGraves:\nI know, but it is a beginning. What I am\ntrying to say is that we have got to leave\nout side this plan the persons who work in\nbeauty parlors and stores and so on where\nthere are only two or three or four. We can't\nencourage the establishment of payroll allot-\nment plans in institutions of that kind.\nH.M.Jr:\nI am not sure that you are right.\nGraves:\nWell, there is the risk of default, the risk\nthat employers will not turn in the money\njust as we have a certain fringe of de-\nfaulters in Social Security taxing where\npeople don't pay it over to the Internal\nRevenue.\nH.M.Jr:\nHave we got & group that is doing nothing but\npayrolls?\nGraves:\nRight.\nH.M.Jr:\nHow many people are there in that group here\nin Washington?\nRegraded Unclassified\n324\n- 36 -\nSparks:\nTwo.\nH.M.Jr:\nIt is not enough. You see, what you fellows\nforget, I am standing off a forced - a plan\nfor forced payroll deductions by telling them\nthey can do it this way. Here you have got\ntwo people.\nSparks:\nIn addition to that, Mr. Secretary, we have\neight field representatives, all of whom are\nwell trained in salary allotment, but they\nare not concentrating their entire time on\nthat.\nH.M.Jr:\nWell, if you don't mind my saying it, you\nshould have a thousand people in the field.\nSparks:\nWell, all of these volunteer workers are be-\ning trained in that also.\nH.M.Jr:\nIt isn't enough. I am terribly - you ought to\nhave a thousand people going after the factories.\nMy God! a thousand people can't cover this\ncountry. I mean, your publicity is way ahead.\nand you follow up on a thing - it is very\ndisappointing. How can two people look after\nthe business of the United States? I mean,\nhere you have a - I don't know, the last I\nheard, Opacs had a thousand people here in\nWashington with all the business in the\nUnited States, and we have got two.\nGraves:\nWell, Mr. Morgenthau, I don't think that is\na fair analysis. Our--\nH.M.Jr:\nWell, Harold, I don't know whether it is thir\nor not, but the statement is fair that you\ncan't look after the business of the United\nStates with two people in Washington.\nCraves:\nI am not so sure. That is the point that I\nhad in mind when I said what I did. Our\nRegraded Unclassified\n325\n- 37 -\nreliance in this whole thing is on these\nstate and local committees and the two people\nthat we have specializing on this are largely\npeople who go around and instruct our state\nand local committees to do this work. Mr.\nSparks just told you that we have got--\nSparks:\nEight field representatives.\nGraves:\nTwenty-five thousand members of state and\nlocal--\nSparks:\nForty-three thousand eight hundred and\nfifty.\nCraves:\nThere is the agency we have got to count on\nin the long run to do this job. The two\npeople are merely going about from territory\nto territory advising with these state and\nlocal committees.\nH.M.Jr:\nNow, look, I make this flat statement. Now,\nI have been around long enough. Whether it\nis fair or not, I will make it. That you\nhaven't got one one-hundredth enough people\non this payroll thing, and you will never get\nit done with these three thousand committees\nor not. Here we have been going four months\nand the people we have got to count on to do\nthe saving are the factory workers, and you\ncan't do it with eight field people paying\npart of their attention to this thing and two\npeople in Washington looking after eight.\nWe can get all the money we want, and I haven't\nput the pressure on you in this thing, but\nfrom now on I am going to. The people we\nhave got to reach Are in the big factories.\nTake a corporation like Chrysler. It would\nbe worth while to have a half dozen people\njust working with Chrysler to put the thing\nacross.\nRegraded Unclassified\n326\n- 38 -\nGraves:\nWell, our principle has been to induce the\nunion people to do that work for us.\nH.M.Jr:\nBut supposing you had - I don't know how\nmany branches Chrysler has got. Certainly\nthey have got a lot, all over the United\nStates, and if there was one Treasury man with\nevery branch and with every factory who could\ngo to every union meeting and everything else\nto follow the thing up until the thing was\ngoing - you can't do it with the organization\nyou have got and it isn't lack of money.\nEdward:\nMr. Secretary, the bankers are sponsoring this\npayroll plan also. They are working on it.\nK.M.Jr:\nIt isn't enough, Harold.\nGraves:\nWell, it isn't that we haven't had the money\nas you say. We have done it the way we are\ndoing it because we have supposed that in the\nend that was the most effective way to work\nthrough these state and local committees in-\nstead of through salesmen that we would send\naround to contact the management directly, and\nwe have avoided that.\nH.M.Jr:\nAfter four months the net result is that we\nhave a little over a million people, I take\nit, with each one setting aside their savings.\nGraves:\nNo, it isn't even that good. As I understand\nwhat Mr. Sparks has said--\nSparks:\nNo, that is right, it is not that good. A\nmillion four hundred is the total personnel\nin those companies. We don't know what the\npercentage of participation is.\nK.M.Jr:\nThen I say it is even worse than I thought it\nwas. It has got to be better, Harold.\nRegraded Unclassified\n327\n- 39 -\nGraves:\nWell, I still feel that our proper approach\nis through these state and local committees.\nH.M.Jr:\nI agree with you.\nGraves:\nAnd not through paid people out of Washington.\nH.M.Jr:\nI don't care how you do it, but I am 8 aying\nto you that if there is only 8. million four\nhundred that are signed up and of those we\ndon't know what the percentage is, who are\nsaving systematically each month, I am saying\nthat after four months it isn't enough.\nGraves:\nThat is right, I agree with you.\nH.M.Jr:\nAnd last month the national defense ran over\n& billion dollars and we are not keeping up\nwith it. We have got to find some way of\ndoing it and getting more people because if\nwe don't I can't stand off this pressure for\nforced savings.\nGraves:\nLet me just sum up the way I feel about it.\nIt all goes back to the slow progress that\nwe have been making in setting up our state\nand county and city organizations, and once\nwe are able to bridge that gap, I think we\nwill make much more rapid progress.\nSparks:\nI think the progress is going to be very\nrapid as we fill in those white spaces and as\nthe yellows turn to blue. You will find\nmost of these in the red states.\nH.M.Jr:\nNow Michigan is really organized.\nGraves:\nThat is right.\nH.M.Jr:\nCan't you put in there some kind of a plan\nof payrolls the way you have on retail and let's\n328\n- 40 -\nwork it out in Michigan and let's find &\nproper way to get Michigan, an industrial\nstate - I suppose it is one of the most\ntwo or three highly industrial states in the\ncountry - to get it so that we can do as well\non the payroll in Michigan as we have on the\nretail.\nSparks:\nI think we can.\nH.M.Jr:\nI mean, let's concentrate on Michigan and\nfind out. You concentrated on Michigan and\nyou worked out a beautiful plan on retail\nstores. Let's take Michigan and say, we have\ngot to get way, that if there are so many\nmillion employees working in the factories,\nthat we will work a way out to get those\npeople 80 that a high percentage of them are\nsetting aside their savings. The thing will\njust be taken out of my hands. I don't want\nto do it the forced way, the Fascist way.\nI want to do it the democratic way, but if\nI am going to do it the democratic way, we have\ngot to do it.\nSparks:\nI think we can make a demonstration in Michi-\ngan.\nH.M.Jr:\nLet's make a demonstration in Michigan and we\nwill get these people in factories. I have\nsaid again and again - I have asked that the\nlist of factories in Michigan under Social\nSecurity, do we have a copy of it in Washing-\nton? I will make a bet we haven't got it.\nSparks:\nWe haven't got the list, no.\nH.M.Jr:\nI have asked for it for over a month, that\nthat list, a copy of it, be here in Washing-\nton, that we get a copy of the list of the\nemployees in Michigan, 80 that we can watch\nit and check it off.\n329\n- 41 -\nSparks:\nSocial Security lists show that there are\nfourteen million four hundred sixty-five\nthousand employees employed in companies\nemploying eight or more employees.\nH.M.Jr:\nWhere?\nSparks:\nIn the United States.\nH.M.Jr:\nGet the Michigan list and get it here and let's\ncheck it off. Let's put on a compaign in\nMichigan on the payroll thing. What I am say-\ning here 18 in the room. It mustn't get out.\nI must be able to talk to you people frankly.\nWhen somebody does a good job, I am delighted.\nIf you are not doing something, we have just\ngot to do better. Just get me a Social\nSecurity list of employees in Michigan and\nlet's have it here and watch it and work out\nsome way for the State of Michigan that we\nwill get these men to saving money. Then\nafter we solve it in Michigan, we can use it\nin other places. If you don't do it, take\nmy word, they will pass some legislation\nwhereby they will do this thing through a\nforced method. I don't want to do it that\nway. That is why I am so insistent that we\ndo it some other way. Now, forty-three\nthousand people on the committee sounds lovely,\nbut we have got to do this payroll thing, and\nthe way to do it is to send enough people into\nthe field to work with the unions. When I\nfirst talked about it, they were trying to\nsettle the Ford question. They settled the\nFord question. And then something else. They\nwill have plenty to do. But they always have\nplenty to do. How about it, Harold?\nGraves:\nI think your last comment is absolutely right,\nthat our proper approach to this thing has\nbeen through the unions and that--\n330\n- 42 -\nH.M.Jr:\nWhere is what's-his-name? I haven't seen\nhim for five weeks?\nGraves:\nHe has gone back to Chicago. He has Mr.\nHyatt who is working on this particular job\nin collaboration with Mr. Sparks' people.\nH.M.Jr:\nI want a section set up under somebody here\nthat I can talk to, myself, who is going to\nbe r esponsible for the payroll deduction\nplan. I want a Mr. Smith or Mr. Brown. I\nwant somebody.\nGraves:\nYou have that.\nH.M.Jr:\nWell, who is it?\nGraves:\nMr. Touchstone.\nH.M.Jr:\nWhere is he.\nGraves:\nHe is in the field.\nSparks:\nIn the field right now working on salary\nallotments.\nH.M.Jr:\nDammit, let's have somebody so every time\nI ask for him he isn't out of Washington.\nGraves:\nThat is & job that has pretty nearly got to\nbe done out of Washington, this job of\nTouchstone's.\nH.M.Jr:\nWell, I would like to talk to some fellow who\nis going to do the State of Michigan for me.\nI would like to talk to him myself.\nGraves:\nAll right.\nH.M.Jr:\nThen let's say that whoever the man is, that is\nhis responsibility. Who is the man--\n331\n- 43 -\nGraves:\nHyatt, I believe.\nH.M.Jr:\nNo, Houghteling. Either this is Houghteling's\njob or it isn't, but I haven't seen Houghteling\nin six weeks. He hasn't been here for six\nweeks. I don't know what he was doing.\nGraves:\nHe works. He was here last week.\nH.M.Jr:\nHe is not here when I am here. All right,\nHarold?\nGraves:\nAll right.\nWe will restudy that whole thing.\nH.M.Jr:\nGive me something next week and have some-\nbody here in the middle of the week to say,\n\"Now this is what we are going to do in\nMichigan.\"\nGraves:\nFine. Does that cover your statement, Mr.\nSparks?\nSparks:\nYes, that does.\nGraves:\nI think that is all, Mr. Morgenthau, unless\nyou have something.\nH.M.Jr:\nNow, we have got the retail thing. That is\ngoing beautifully. Now let's get the payroll\nthing, and get our state organizations by the\nfirst of October; and, as I say, our publicity\nthing is running way ahead of the rest of the\nstuff. Let's build that up now. We have got\nthe eighty thousand employees in the Treasury.\nYou can have all of them if you want to work\non this thing.\nSparks:\nThat does not include the governmental employees?\nH.M.Jr:\nJust the Treasury alone, there are eighty\n332\n- 44 -\nthousand employees.\nGraves:\nWell, if you mean that in relation to this\npayroll allotment plan, I think that some-\nthing like eighty-five percent of the Treasury\nemployees are--\nH.M.Jr:\nNo, I meant to put & program across. I don't\nknow how many employees we have got in Michigan,\nbut I mean I am willing to throw the whole\nTreasury back of this thing to get this thing\ngoing.\nSparks:\nI think we can put on a very effective demon-\nstration, one that will spread very rapidly\nthrough all the red states, and we will\nkeep changing the colors as rapidly as pos-\nsible on that so that they will all be red.\nI think the Secretary appreciates that, even\nthough it is e small percentage of the total\nnumber, that the volunteer workers in the\nred states are responsible for most of that\nproduction.\nH.M.Jr:\nI am an old hand at this business, and I know\nwhen a thing is going well and when it isn't,\nand this particular part of the thing isn't\ngoing well enough, and I think it has got to\ngo better, that is all there is to it. I am\nsure it can.\nGraves:\nWell, as I said, I think there is a worse\naspect which has been developed here. Mr.\nSparks gave you a figure of a million four\nhundred thousand people.\nSparks:\nThat is right.\nGraves:\nEmployed by the concerns which have the plan\nin operation, but the number actually par-\nticipating is some small percentage of that\ntotal.\n333\n- 45 -\nH.M.Jr:\nYou can't move a step in any office or\nbusiness or street or town anywhere in\nCanada that you don't trip over one of\ntheir posters. I mean, you can't move anywhere\nand here in our own post office, when I go\ninto the Hyde Park post office, they haven't\neven got a poster. Right in Hyde Park there\nisn't even a poster. So we just haven't\nscratched the surface. The President's own\npost office, there isn't a single poster.\nThere was one in the back room. If you\nscrew your neck up you can see it.\nGraves:\nMaybe they need 8. new postmaster up there.\nIt certainly is not our fault that they\nhaven't got a poster in that post office.\nH.M.Jr:\nHarold, if I had the time to go around and\ntravel - and maybe I am going to have to make\nthe time - to go around and - I would just\nlike every place I move to see one of our\nposters. We have got to raise a hell of 8.\nlot of money, and We have got to mop up this\nextra payroll. What is the objective? They\nare spending all of this money, a billion\ndollars for defense, and it is up to the\nTreasury Department to mop this money up and\nsave it so that it doesn't all go into non-\ndefense and just make these prices go up and\nup and up through the scarcity if there isn't\nenough stuff being manufactured for the\npeople to buy it. Our job is to mop up these\nsavings and to keep inflation from going\nthrough the ceiling and that is what I am\nexcited about. Now, don't let's lose sight of\nthe fact that each person has a little job,\nand we have got this ten or twelve billion\ndollars one way or the other to raise. If\nwe don't, we have just got to go to the banks\nand we just aggravate the whole situation,\nand it is this whole question of inflation.\nNow, the people have got the money, they are\n334\n- 46 -\ngetting it, and the roll is beginning to\ngo in their pockets. We have got to go and\nget a goodly share of their earnings either\nfirst through taxes and second through their\nsavings, and this thing, and we have been at\nthis thing five months. We have just gotto\ndo a better job. I know this organization\ncan do it under Harold Graves. He has never\nfailed me yet, and he isn't going to fail me\nnow. All right.\n335\nReport From Mail Order Division\nSeptember 5, 1941\nThis report is based on a. complete picture of what has\nbeen accomplished in the Mail Order Division of the Defense\nSavings Staff since its inception last spring.\nThe chart of activities includes:\n(1) Regular Purchasers - those who, as the result of pre-\nvious solicitation, are buying at regular intervals. To\nthis list (approximately 100,000 at the present time), we\nare starting this month to send a special letter and three\norder forms, asking their cooperation in bringing the bonds\nto the attention of others.\n(2) Customers - all those who have bought but who haven't\nagreed to buy regularly. To this list (approximately 2,000,000\nas of July 31st), we are sending a letter urging adoption of\nthe Regular Purchase Plan, a colorful folder and a Regular\nPurchase order form. These start going out this Friday,\nSeptember 5th.\n(3) Prospects - large investors - taken from the Customer\nand I. R. files. To this list (375,000 corporations, partner-\nships, associations, etc.), we have just sent a special mailing\nconsisting of a letter, order form and folder featuring F and\nG bonds.\n(4) Prospects - smaller investors. These are the I. R.\nnames (approximately 4,874,000 as of July 31st) that we are\ntesting - in a variety of different ways - in order to find\nthe formula that will produce maximum results.\nBefore we discuss the results of our testing to date, let me\nraise one point that seems to me to be vitally important. In\none sense, this mail order campaign - including all of our mail\nselling efforts - is different from practically all others. In\nany commercial mail order business, the product is available\nonly by mail and results are measured in but two ways - the\nmail orders that come baok and the repeat business that follows.\nIn this mail order campaign of ours, results should be determined\nby:\nRegraded Unclassified\n336\n(1) The number of people who are induced to\nsend their orders direct.\n(2) The amount of money received in relation\nto the cost of getting it,\n(3) The amount of potential repeat business\nthat becomes available at a very low\nselling cost.\n(4) Equally important - the educational work\ndone on the entire list.\nThus, from Test Series No. 1 for instance, which went out\nJune 21st, it should be remembered that in addition to\ngetting 300 people to buy over $140,000 worth of bonds at\nE. cost of 85/100th of 1 percent, the mailing called on\n94,256 other people - told them the entire Savings Bond\nstory, and provided one more link in the chain of publicity\nand advertising being used to raise money for national defense.\nFrom Series One, relative returns mean more than total orders\nor dollars received. We put these ten tests in the mail, with\nexisting material, to find out things and from that standpoint,\nthey accomplished their purpose.\nWe learned, for instance, that it WELB safe for us to circularize\non Defense Savings Staff stationery; that a mailing on E bonds\nWES as good, if not slightly better, than B. mailing on all three\nbonds; that there WHS an extremely small demand for F bonds. We\nalso learned that if our best test had been sent to the entire\nlist, the selling cost would have been down to 73 cents for each\n$100 worth of bonds sold.\nThat should represent a naximum selling cost for future mailings,\nsince none of the assemblies in Series No. 1 contained specifically\nprepared mail order material, and had the further disadvantage of\nbeing sent out during one of the poorest mail selling seasons of\nthe entire year.\nFrom Series Two, which went into the mails July 19th, we are like-\nwise getting some useful information. While returns are incomplete,\nit soems safe to conclude that the best toot, both from the stand-\nRegraded Unclassified\na\n337\npoint of orders and dollars received, will be an E mailing -\nthus confirming what we discovered in Series No. 1. We have\nalso learned that with all other factors being equal, our\nnew folder \"How To Buy A Share In America\" is outpulling the\nblue and white Defense folder used in the first tests; that\nthe State of Massachusetts produces twice as many orders as\nthe State of Michigan; that a combination of letter, folder\nand order form is more productive than a card, folder and\norder form.\nFrom Series No. Throe, which went into the mail last Saturday,\nAugust 30th, we will get G. comparison between the pulling\npower of I. R. names with incomes over $5,000, incomes under\n$5,000 and a. mixture of the two. This list check-up is being\nmade in California, Georgia and Maryland. Also being tested\nare several new letters; an advertising message on the envelope\nversus e plain window envelope; and, 58 another confirmation,\nthe pulling power of E bonds versus all three.\nThis third series is going out at B. very favorable time. In\na comperatively short while it should give us an indication\nof the returns that can be expected from the approximately\n2,000,000 new over $5,000 names that have just been put on\nplates, as compared with the greater number of under $5,000\nnames that are available if it is found desirable to circularize\nthem.\nRegraded Unclassified\n-\n1\n(\n-\ne\n-\nPW\ni\nN\n1\n//\n1\nR\n-\n1\nCLEARTYPE\nPRIMPAL MAP\n- THE\nUNITED STATES\nRegraded Unclassified\n339\nSeptember 3, 1941\n4:50 p.m.\nHMJr:\nI'm all right, Breck.\nBreckenbridge\nLong:\nWell, Henry, I thought maybe you could take\nan interest in this over in your depart-\nment and see if you couldn't - let me present\nthe thing to you briefly.\nWe're troubled in this country by a lot of\nGerman propaganda films.\nHMJr:\nYeah.\nL:\nThey're some of the very bad things floating\naround here.\nHMJr:\nYeah.\nL:\nThere's one, \"The War On The Western Front\"\nHMJr:\nYeah, I know about it.\nL:\nAnd there are three or four more. The tendancy\nwas just to scare our people\nHMJr:\nYeah.\nL:\nand subdue them\nHMJr:\nYeah.\nL:\nand we've been trying every way to\nget some action to either take these filme\nor to intercept, and\nHMJr:\nWell, let me interrupt you, Breck, because\nI know all about this.\nL:\nWell\nHMJr:\nAny that come in - have been coming in now\nfor some time - we don't let them get out\nany more.\nL:\nYeah.\nRegraded Unclassified\n340\n- 2 -\nHMJr:\nBut those which are out, we can't do 8.\nthing about it.\nL:\nWell, I wondered if you couldn't by a\nstretch of interpretation - you do, now,\nhold those from coming in by taking their\nbills of lading.\nHMJr:\nYeah. Well, we.....\nL:\nYou freeze the bills of lading, in other\nwords.\nHMJr:\nWell, I don't know how we do it; but those\nthat come in now, they just never get on the\nmarket.\nL:\nThat's right.\nHMJr:\nBut those which are out - I've been all\nthrough that, and there ien't a thing that\nwe can do unless the Attorney General can\nthink up something.\nL:\nUh huh. It just occurred to me - we had a\nmeeting here about it this afternoon\nHMJr:\nYeah.\nL:\n.....\nthat this UFA thing, they come to UFA -\nU - F - A - and UFA is simply a wholly-owned\nsubsidiary of this German parent company\nHMJr:\nUh huh.\nL:\nWhich, in itself, 18 fostered and subsidized\nby the German government.\nHMJr:\nI'm a hundred percent with you, and if anybody . -\nif the Attorney General can tell me how to do\nit - I'd love to do it.\nL:\nUh huh.\nHMJr:\nI can promise you that for over a month now\nthere have been no more coming in.\n341\n- 3 -\nL:\nYes.\nHMJr:\nThe last time we showed one we had the\nAttorney General here. It was a picture\ncalled, \"Bismarck\".\nL:\nUh huh.\nHMJr:\nAnd we all voted on it and the amusing thing,\nMrs. Biddle said, \"Don't let it come in,\"\nand Biddle said, \"Let it come in,\" to be\ndifferent.\nL:\n(Laughs)\nHMJr:\nWe out-voted him.\nL:\nYeah.\nHMJr:\nBut we haven't let any come in. It's a month\nor six weeks, now.\nL:\nYes, I knew that. But these other old things\nare still marching around.\nHMJr:\nWe can't do a damn thing about it.\nL:\nUh huh. Well, I just thought that maybe you -\nit hadn't come to your personal attention.\nHMJr:\nNo, I happen to know all about it, but.....\nL:\nWell, then I won't bother you with it or take\nany more of your time.\nHMJr:\nbut I can promise you that no more will\ncome in.\nL:\nYeah. Yeah. Well, we're. - have been very\nmuch interested and have been wrestling with\nit for a month or six weeks here, and I just\nthought that it hadn't come to your personal\nattention; but you've had it, why that's all\nI got to say.\nHMJr:\nThank you, but call me any time.\nL:\nAll right, Henry, thank you.\n342\nTHE WHITE HOUSE\nWASHINGTON\nSeptember 3, 1941\nMy dear Mr. Secretary:\nMy friend Mr. Guthrie W&E not among those\nmentioned in the newspaper clipping that you sent me yesterday.\nI have made inquiry B.S to the basis of the news-\npaper report, and I find that it is in reference to an attempt\nto get some order out of the chaos that has prevailed in the\nArmy trading posts. It appears that there is no uniformity of\nprices even for standard products. I have been told that in\nsome instances the prices charged for nationally-advertised\nproducts at Army posts are higher than those charged in private\ndowntown shops. Mr. Guthrie has been seeking to get some\neystem of centralized buying 80 that variations in prices from\npost to post may be eliminated. Even cigarette prices vary\nfrom post to post.\nThe new setup, as I understand it, will make it\npossible for each trading post to buy any place it wishes on\ncondition that the wholesale prices it must pay to local jobbers\nare no higher than the prices quoted to the central buying\noffice in New York. At the same time, & definite mark-up is\nto be provided. In this way, there will be a top limit to\nthe prices that can be charged to soldiers at the Army posts.\nMoveover, in the case of some nationally-advertised brands,\nthe proposed procedure will make it possible to sell certain\ncommodities at prices below those which prevail in private\nstores.\nCordially,\nIsador Lubin\nIsador Lubin\nThe Honorable\nThe Secretary of the Treasury\nWashington, D. C.\nRegraded Unclassified\n343\nSeptember 2, 1941\nDear Mr. Lubin:\nWhat about this story? Is it\na reflection on your friend about whom\nyou spoke to me?\nSincerely yours,\nH.m.g.\nHonorable Isador Lubin,\nThe White House,\nWashington, D.C.\nBy Memenger Stringth 4:05 pm\nRegraded Unclassified\n344\nARMY EXCHANGES\nCENTRALIZE BUYING\nViar Dept. to Set Up Off\nHere After Report Additional\nObjections' Hit Program\nPLAN PRICE AGREEMENTS\nEach Post Unit Will True\nFrom Manufacture B\nof These Quotations\nThe War Department\nrentral purchasine\nVonday for Army port\nAL 111 Eighth\nlearned yesterday\nThis action injury\npublished in Tab\nTIMES last Sumber\nthat \"arbitrary 0bjective\npart of high-ranhing\nvisis were threaterms\nthe centralized administration\ngreat exchanges.\nThe purchasing\nwhich will be under\nScionel Frank\n\"\ne price agreements\nwith manufacturers\n>Ands of articles shirt\nchanges.\nmanges then will\nque basis of such 11\nAccounting permits\ninstructrative\nArmy's post exchange\nremain in Washington\nposted that the\ndi an annual business\n£ 10,000,000 и year\nColonel Mansficial\nM by Captain Juide IF\nFurmerly connected F\nKresge Company and\nRobert E. Coupon\nMontgomery Want\nGrocery interes's -\nresterday by the Am Tro\nund men had Decreased\nwhat they descriptions -\nary delay in entime 11,00 heat -\nchange program operating THE\nhad complained that Mailing\nofficials had\ntions advanced ley humber\nwho had gone to Washington\nspecifically to help Lot getting the\npost exchange processor organized\nand operating\n345\nSeptember 8. 1941\nDear Mr. Mackensie:\nIn the last fev crowded years I have not many,\nand become quite intimate with some, spleadid personalities\nrepresenting your government. There were few, however,\nwhom I case to like more. whose talents and services in\nthe cause of Britain I estimated higher, and whose loss\nI could feel more desply, than that of Arthur Purvis.\nThough you and I have never not, we have in\ncommon the bond of the loss of one whose both of us called\nour friend. I wish you to know how profoundly I appreciated\nyour thoughtfulness in writing to mo.\nTours sincerely,\n(Signed) 4. Morgenthan, 35.\nMr. Noir Mackensie\n21 Tothill Street\nLondon, S.V.1\n20:0h\nin Clipper\nchannely\nRegraded Unclassified\n346\nFEDERATION OF BRITISH INDUSTRIES\nTELEGRAME.\nPOSUSTRY, PARL LONDON\nTELEPHONES\nWHITEHALL 8711\n110 Limit\nDIRECTOR\nGUY LOCOCK. C.M.S.\nform FBI\n21, TOTHILL STREET,\n- SECRETARY.\nLONDON, S.W.1.\nD. L. WALKER.\nBUTAL CHARTER\nYour REF.\n18th August, 1941.\nOUR REF.\nHenry Morgenthau, Esq..\nSecretary of the Treasury,\nTashington, D.C.,\nU.S.A.\nDear lun. Morgenthan\nTe have never met, but 1 feel compelled to write to\nyou to express my deep and real sympathy with you at the\npassing of your friend Arthur Purvis. 1 can well believe\nthat his death, and in such tragic circumstances, must have\nbeen 1 terrible blow to you.\n1 think you will be glad\nto know that when he lunched with me just = couple of days\nafter his arrival here he spoke of you in glowing and\ngroteful terms for your consistently wise council and help.\nFrom a National point of view his many friendships\nin both countries, and his immense understanding of our\nnutusl problems. would seem to render him irreplacable.\nAs one who held him in deep regard may 1 venture to say\nthat I share with you your sorrow et the death of our friend.\nlours faithfully\nluoir luacnerryie.\nRegraded Unclassified\n347\nWillard Hotel,\nWashington, D.C.,\n3rd September, 1941.\nDear Mr. Secretary,\nI have your letter of September 2nd\nstating that you have designated Dr. H.D. White\nto be the Treasury's liaison officer for all\nmatters of lend-lease arrangements and of the\nBritish dollar position.\nI shall be glad to arrange for all\ncommunications and enquiries on these subjects\nintended for Treasury consideration to be\nchanneled through him in the future.\nBelieve me,\nDear Mr. Secretary,\nYours sincerely,\nHhillips\nThe Honourable\nHenry Morgenthau, Jr.,\nSecretary of the Treasury,\nWashington, D. C.\nRegraded Unclassified\n348\nSEP 2 1941\nn dear Bir Fredwrick:\nI have designated No. L D. White to be the\nTreasury's lisisen officer for all mathers of Lond-Loase\narrengrame and of the Britten dollar position. In\nfuture, therefore, I would aggirestate 18 if all committ-\nsations and a there subjects intended for\nI i des. I I I\nSincerely yours,\n(Signed) 1. Morgenthau, in\nBearetary of the Treasury.\nBir Frederisk Hillige,\ni I I r I\nI 1 Types 1 s WASH\nWillard Motal,\nWankington, D. c.\nFile to Mr. Thompson\nInv Serya office\nRegraded Unclassified\n349\nTREASURY DEPARTMENT\nINTER OFFICE COMMUNICATION\nDATE\nSeptember 3, 1941\nTO\nSecretary Morgenthau\nH. D. White\nFROM\nSubject: American airplanes in the United Kingdom\n1. Colonel Roy A. Dunn, one of General Arnold's men, has just\nreturned to the U.S., after making an intensive inquiry as to the\nnumber of unused American airplanes in Britain. He told Coe that:\na. He had himself counted 1,200 unused American planes,\n8 large number of which were still in crates.\nb. He knows the places where they are.\nC. Various explanations were given him as to why they\nwere not in use --lack of personnel, laok of proper\nequipment, absence of spare parts, and the desire to\nre-test on the spot the planes received.\nTwo additional reasons may be (1) the influence of vested air-\nplane contractors' intereste in England, and (2) the suspicion of\nhigh British air officials of certain kinds of American equipment.\n2. Stacy May, of O.P.M., also made some inquiries. The British\ngave him the following figures:\nTomahawke in R.A.F.\n456\nTomahawks \"arrived\" but \"not been delivered\" to\nR. A. F.\n283\nOther American planes \"arrived\" but \"not been\ndelivered\" to R. A. F\nAbout 500\nThere are other American planes in \"storage reserve\" and these\nmay make up the 1,200 Dunn spoke about. Mr. May 18 \"eatisfied he has\nthe full story and that, considering the value of P-40, the British\nare using it as well as they can\".\n3. Coe stated that because you omitted reference to the question\nof American airplanes in your recent cabled instructions to him, he is\nnot following up that subject. You may want to contact the two men\nfor the full story. (May is due back in the U.S. if he is not al-\nready hers).\n(Coe to Secretary, August 18)\nRegraded Unclassified\n350\nnn\nTREASURY DEPARTMENT\nINTER OFFICE COMMUNICATION\nDATE September 3, 1941\nTO\nSecretary Morgenthau\nFROM\nMr. Kamarck\nSubject: British Article on the Flying Fortress\nThe following are excerpts from an article in the London\nTimes' *Trade and Engineering\" periodical, August 1941 issue.\nThe Fortress 1\n\"The official British name for the B 17 0, known in the\nUnited States as the Flying Fortress, is to be the Fortress 1.\nThe original order of 20 machines has now been completed and\ndelivered, and as these giant bombers have proved to be every\nbit 88 good as their American manufacturers claimed, it is\nhoped that many more will be flown over soon. Further\ndeliveries have been promised under the Lease and Lend Act,\nand it 18 expected that these will be a later and improved\nversion, the B 17 E. If there is any criticism which could\nbe made of the Fortresses which have so far been sent over for\nthe use of the R.A.F. it 18 that, like almost every other\nAmerican machine, they are under-armed.\n\"The writer recently had the opportunity of inspecting\nthe last of the original deliveries at & Ministry of Aircraft\nProduction depot, where they were being overhauled before\nbeing sent on to an operational squadron of the R.A.F. Bomber\nCommand.\nThe Fortress's ceiling is put at 41,000 ft. when\ncarrying 39,000 lb., but even though it 1s known to be an\nexcellent performer at high altitude, this may be rather an\nover-atatement.\n\"Major Carl Brandt, senior tost pilot of Boeings, case\nover in one of the first machines delivered across the Atlantic\nto give the British authorities the benefit of his advice and\nto instruct teat pilote in flying them. The Fortress 16\nalready extremely popular with the R.A.F. crews, for, having\nbeen constructed originally for civil purposes, it is roomy\ndepot to an R.A.F. officer with 8. long experience of bomber\nand extremely comfortable.\nThe test pilot at this M.A.P.\naircraft -- told the writer that the Fortress was the best\naeroplane that he had ever flown. It was completely free from\nvices and, when once one had got accustomed to the instrument\npanels, it was quite easy to fly, in spite of its great also.\nRegraded Unclassified\n351\n- 2 -\nDivision of Monetary\nResearch\n\"An interesting development at this depot is the establish-\nment of special engine shops for handling the three main types\nof American motors -- the Allison, Pratt and Whitney, and\nWright Cyclone. One shop has been set aside exclusively for\nthe assembly, overhaul, and reassembly of Allison engines, which\nare now being used by the R.A.F. in great numbers in the\nTomahawk fighters which have given such a fine account of them-\nselves in the Middle East and elsewhere. This move should\ngreatly simplify the problem of the maintenance of American\naircraft and engines in this country, which, in the past, has\ngiven no small amount of trouble.\"\nRegraded Unclassified\n352\nTREASURY DEPARTMENT\nINTER OFFICE COMMUNICATION\nDATE September 3, 1941\n10\nSecretary Morgenthau\nFROM\nH. D. White\nSubject: Post-War Policy of Free Trade\nMany British officials are uncertain whether the United\nStates realizes the implications of its request that Britain\ngo along with B. post-war policy of free trade. They question\nwhether the U.S. Government 1e going to be willing to lower\nits tariffe, make the necessary internal economic adjustments,\nand grant the large credits necessary to enable the rest of\nthe world to abandon exchange and trade controle.\nSome British Treasury officials have said to Coe \"that\nthey would be all for free trade if after the war England, and\nother countries, have sufficient foreign exchange income to pay\nfor the goods they will need\". Many fear, however, that Eng-\nland will not be able to abandon exchange controls after the\nwar and that a return to \"free trade\" E9 it used to be concei-\nved 16 not going to take place.\nMr. Bexter's section of the Ministry of Post-War Planning\n18 tackling ae their first job the problem of freer trade, be-\ncause of the President's request for a statement of policy.\nThey are in a quandary; they do not wish to displease the Uni-\nted States, and yet they do not know that they will be able to\nabandon foreign exchange control.\nThe Times editoriel of August 18 on the Roosevelt-Churchill\nconversation (which Coe anclosed) manifeste 8. real doubt 8.8 to\nwhether what the United States seems to be seking can really be\nschieved. Coe suggests that the U.S. Treasury should earmark\nsome men for full time study of these problems.\n(Coe to Secretary, August 18)\nRegraded Unclassified\n353\nMURRAY HILL 2-1160\nmergency Committee for Zionist Affairs\n41 EAST sEnd STREET\nROOM 1121\nNEW YORK CITY\nSeptember 3, 1941\nHon. Henry Morgenthau\nSecretary of the Treasury\nU.S. Treasury Department\nWashington, D.C.\nMy dear Mr. Morgenthaus\nI an writing you following the conversation I had with\nyour secretary Mrs. Klots. Since it is uncertain whether you will\nbe able to see me tomorrow, Thursday, I am taking the liberty of\nenclosing copy of a memorandum which we have submitted to Under\nSecretary Welles, following several conversations which we had with\nhim. In the last interview he assured me of his readiness to ap=\nproach the British Government through Mr. Winant, in order to re-\nceive the desired assurance that nothing is being done or will be\ndone at this time to affect the status of Palestine.\nWe have had no word on the subject from Mr. Welles since\nthen. In the meantime, however, we have received from Dr. Weizmann\ncertain documents which confirm our supposition that negotiations are\nbeing carried on with the Araba which directly and indirectly affect\nPalestine. There are matters in this connection which I would prefer\nto discuss with you orally, and will be glad to have the opportunity\nof doing so the latter part of next week.\nWith deep appreciation of your helpful interest, I em\nEmannetherment Very sincerely yours,\nEmanuel Neumann\nEno.\nRegraded Unclassified\nC\nD\n354\n7\nI\nAugust 7, 1941\nMon. Summer Wellos\nUnder Secretary of State\nWashington, D. 0.\nDear Mr. Secretary:\nSupplementing the recent meeting which\nMr. Emanuel Neumann on behalf of the Emergency Committee\nfor Zionist Affairs had with you, I have the pleasure of\nsubmitting herewith the memorandus which he undertook to\nsubmit on our behalf. We hold ourselves in readiness for\na conference with you touching this problem, should you\nfind it necessary further to discuss the matter with us.\nI all, dear, dear Mr. Secretary, with most\nhearty greetings\nFaithfully yours,\nStephen S. Wine\nRegraded Unclassified\nMEMORANIUM SUBMITTED TO UNITER SECRETARY OF STATE\nTX CONORABLE SUMMER\n354.A\nBY THE EMERGENCY COMMITTEE FOR ZIONIST AFFAIRS\nb. It has been generally assumed that British policy with regard to Palestine would\nno important modification during the progress of the war, In Zionist circles it\nas hoped that no further steps would be taken toward implementing the White Paper of 1939\nind it was beliefed that there would certainly be no basic change in the status of Palestine\nT of the Palestine Mandate.\n2. 1 recent address delivered by the Secretary of State for Foreign Affaire, Mr.\nothony Eden, made specific reference to a coming change in the status of Syria and Lebanon\nand promised support by the British Government for a. scheme of federation in the Middle\nlast as yet undefined.\nDr. Stephen 8. Wise and Dr. Nahum Goldmann conferred with you shortly thereafter, and\nou were kind enough to state that in your view it was extremely improbably that the\nritish Government would take any steps involving the status of Palestine either by the\nclusion of Palestine in a federation or otherwise, without prior consultation with the\novernment of the United States;and furthermore, that if proposals affecting the status of\nalestine or of the Jewish National Nome were forthcoming, the American Government would\naccord the representatives of American Zionism adequate opportunity to present their views\nefore taking any position on such questions.\nWe take this accasion to express our profound appreciation of these statements made\ny you at the time to our representatives.\n3. Since the interview referred to took place, signs have been multiplying that the\nquestion of new political dispositions in the Middle East have been occupying the attention\nd' important British circles following the termination of the Syrian campaign. There is in\nFUE considered judgment reason to believe that the possibility of effecting 8. political\nreorganization in the Middle last is being considered in British official quarters. This\nas given rise to a certain apprehension leet under the pressure of war and of military\nivelopments in that region, stops may be taken or commitments made which involve the\nstatus of Palestine and of the Jewish National Home, in & manner and direction we can not\nforesse or judge at this distance. Such steps or commitments, if made either publicly or\nRegraded Unclassified\n- a -\n355\nrivately, may conceivable lead to the result that the Mandate for Palestine would be\naterially affected at a time when neither the League of Nations nor its permanent\nKandates Commission are in a position to function. A further consequence would be that\nruch international settlement as may be expected to take place at the end of the war my\ne prejudged by such commitments or by the creation of accomplished facts.\n4. No would therefore respectfully suggest that it would be most helpful if the\nimerican Government would elacit from the British Government authentic information OF este\nhis subject as well as an assurance that it does not intedd to carry on negotiations or make\ncommitments involving a change in the legal and political status of Palestine or a dero-\nration of the position of the Jewish National Home, whether by promoting a union between\nalestine and other territories, or otherwise; and that no steps will be taken without\nrevious consultation with the government of the United States.\nTo wish to record our gratitude to you for BO kindly offering to act promptly in\nthis matter, and to express the hope that we may be informed of the result in due course.\nRegraded Unclassified\n356\nTREASURY DEPARTMENT\nINTER-OFFICE COMMUNICATION\nDATE September 3. 1941\nTO Secretary Morgenthan\nFROM Mr. Cochran\nThe following table presents 8 breakdown of our silver purchases by sources:\nSources of Silver Purchased Under\nthe Silver Purchase Act -- 1941\nCountry of Origin\nJan.-June\nJuly\nAugust\nJan.-August\n(In thousands of dollars)\nNew Production Silver\nArgentina\n$ 201\nW :\n$ 80\n$ 281\nCanada\n1,263\n420\n420\n2,103\nHonduras\n659\n79\n147\n885\nJava\n59\n180\n:\n239\nPeru\n2,014\n307\n280\n2,601\nNot Designated*\n3,428\n333\n538\n4,299\n(\nPotal New Prod.\n$7,624\n$1,319\n$1,465\n$10,408\nOther Silver\nChina\n$ 282\n--\n--\n$\n282\nJapan\n918\nI\ni\n918\nMexico\n175\n--\n:\n175\nnot Designated*\n280\n$ 210\n$ 201\n691\nTotal Other\n$1,655\n$ 210\n$ 201\n$ 2,066\nGrand Total\n$9,279\n$1,529\n$1,666\n$12,474\n*A large part of the \"Not Designated\" silver is believed to represent importe\nfrom Mexico. For comparison purposes, total silver imports into the U.S.\nfrom Mexico are given below, according to type of silver:\nJan.-June\nJuly\nAugust\nJan.-August\n(In thousands of dollars)\nNew Production\n$2,796\n$ 577\n$ 198\n$ 3.573\nOther (refined)\n9,875\n2,148\n2,005\n14,028\nTotal\n$12.673\n$2,725\n$2,203\n$17,601\nB.M.S.\nRegraded Unclassified\n357\nSeptember 3, 1941.\nDear Mr. Director:\nThis will acknowledge receipt of your letter\nof August 27, on the subject of measures for the\nprotection of places and facilities essential to the\nNational defense and asking that I name a responsible\nperson in the Treasury Department who may confer with\nBrigadier General Gasser, of your office, on the matter.\nI designate Herbert E. Gaston, Assistant Secre-\ntary of the Treasury, as my representative with respect\nto the matters of which you write. Mr. Gaston will\nshortly write you with respect to the questions raised\nin your letter.\nSincerely yours,\n(Signed) E. Morgenthau. Jr.\nSecretary of the Treasury.\nHonorable F. H. LaGuardia,\nU. S. Director Civilian Defense,\nWashington, D.C.\nFile to M.L. Daston\ncc- Minor Charmey\nRegraded Unclassified\n358\nRegraded Unclassified\nMINUTES OF THE BOOWONIC before BOARD SEPTEMBER J, 1961\nPresent at the mesting -\nAssistant Secretary of State Dear Achemes,\nAssistant of State Breakinridge\nLong, Under Secretary of War Robert P.\nPatterson, Assistant Secretary of the listy\nAdlai Sterenson, Mr. Marry White represented\nthe Secretary of the Treasury, Mr. be he\nWheeler represented the Secretary of Agriculture,\nand Mr. will Clayten represented the Secretary\nof Commres,\nMr. L. P. Nickell, Maritine Commission also\nattended.\nAssistant Secretary of State Long reported that the State\nDepartment and the inter-Departmental committee, had been studying\ncoffee. South American countries using soffee have progressivaly\nreised offer prices. It was reported by the Assistant Secretary\nof State that Columbia has not fiftern different prices en coffee\nrecently) each - price being higher than the last. Be stated that\nMr. Henderson, of Office of Production Management, has filed reces-\nnendations regarding seffee prices. Assistant Secretary of State\nAchesoa said that Mr. Paul Daniels has given mass study to coffee.\nThe Vice President asked Mr. Laurence Duggan, of the State Depart-\nment, and hr. L. A. Wheeler, of the Department of Agriculture, to\nconsult with Mr. Mano, of the Office of Production Management, and\nMr. Paul Damiels, and report back to the Defease Board.\nThe Vice President stated that hereafter any problems will\nbe handled is their preliminary stages outside of formal Board seet-\ntage, recomendations of the staff being processed to the Ressomia\nDefense Board. Se mid that the Reseonde Defense Board now has an\noffice at Kew Apartments, telephone Republie 5030, Extension 1000.\nMr. will Claytom stated that an exporter is compelled to \"\nthrough six different agencies before be Income whether be enti export\nenterials at this time. It was his opinion that in view of the\nPresident's policy that after the Supply Priorities and Allocations\nBoard has made a ruling, there should be no need for specific export\nlicenses. The Vice President said that he is informed by B.\nDonald Nelson, Executive Director of the Supply Prierities and\nAlloentions Board, that 10,000 export licenses have less prated,\nthat there are 20,000 export licenses pending, and several thousand\nhave been decied. There is a bottlemeek because of alowness is\ndeciding upon export licenses, is E. Helson's opinion. Mr. Selson\nmys that be will clear the shole situation up in one week's time. b.\nwill Clayton said that sany exports to South America are not subject\nto priority and that it should not be necessary for South American\ncountries to procure exports licenses for such commodities. The Vice\nPresident asked that Mr. Clayton discuss this watter with Mr. Donald\nHelson.\nUnder Secretary of War Patterson stated that Russia has min\nsuch large demands upon the United States for materials, that we will\nnot be able to help South American countries substantially. Mr.\nClaytom stated that one-third of our copper acess from South America\nand that we must return SOING copper and other miterials to South\nAmrior. The View President asked Mr. Clayton and Mr. Acheson to\ndiscuss this situation with Mr. Donald Nolson.\nThe Vice President asked Assistant Secretary of State Long\nfor a report on the final destination of oil which is being shipped\nfrom Port Arthair, Texas to Spain. Assistant Secretary of State Long\nstated that the report that much of this oil is going to Germany and\nItaly is probably incorrect, but that the State Department is not\nyet ready to file its report und recomendation.\nThe Vice President stated that his information is that little,\nIf any, goods are now being shipped to Japan. Assistant Secretary\nof State Acheson stated that soue goods are going from the Philippines\nto Japan. Mr. Earry white said that it may be advisable to adopt\nproclusive selling am well as preclusive buying. It was his receipt\nmendation that ne should learn exactly what goods are being sold by\nJapan to the Philippines and South America and that we should under\nsoll Japan on such materials. Mr. Will Clayton stated that Jupan 10\nbuying such less from South America now and 18 not selling any goods\nin South America due to the freesing of Incanese funds in the United\nStates and the failure of Japen to get raw materials. Mr. Clayton\nstated that Federal Loan Agency has & $8,000,000 fund for the purpose\nof de-Germanising Bouth American air lines. No said that quarts\ncrystals, platimum, and industrial diamonds and wisa are being service shipped\nfrom South America to Italy by airplane and that this air\nshould be stopped.\nRegraded Unclassified\nNATIONAL INSTRUCE PIPE LINE - SCUTHEASTERN PIPE LINE SYSTEM\n360\nBY THE PRESIDENT OF THE UNITED STATES OF AMERICA\nA PROCLAMATION\nWHEREAS the not of Dongress entitled \"An act to facilitate\nthe construction, extension, or completion of interetate petroleum\npipe lines related to national defense, and to promote interstate\ncompree\", approved July 30, 1941 (Public Law 197 - 77th Congress),\nvests in the President certain powers rolating to the construction,\nextension, completion, operation, and mintenance of interetate\npipe lines related to national defense.\nNOW, THEREYORE, I, FRANKLIN D. ROOSEVELT, President of the\nUnited States of America, under and by virtue of the authority vosted\nin me by sections 2 and 3 of said act of July 30, 1941, do horeby\nfind end proclaim (1) that 1t 12 necessary for national defense pur-\nposes that there be constructed and completed c. pipe line system for\nthe transportation and distribution of petroleum and petroloum products\nmoving in interstate commerce, the route for which 1a generally indicated\non e. map which 1e on file in the Office of the Petroleum Coordinator\nfor National Defense, detailed survey hape of which shall be of record\nin the setd office, commencing at Port St. Joe, Florida, and extending\nin & northerly direction through the States of Florida and Georgia,\nand into Tonnossee to B. point on the Tennossee River et or in the\nvisinity of Chattanooga, Termossoo, (2) that Southeastern Pipo Line\nCompany, a private corporation organized under the leve of the State\nof Delaware, has commenced the work necessary for the construction of\nsuch a pipo line system, and has partially constructed the same and\nroprosonte that It 10 prepared to complete said pipo line eyetem,\nand (3) that it 1s necessary for the purposos of construction, com-\nplotion, operation, and maintonance of said pipo line system that\nthe Southeastern Pipo Line Company have the right to acquire, by the\nexorcise of the right of eminent domaln ao provided in the eforomaid\nact, along the route and between the points hereinbofore identified,\n(a) much parcels of land or any interests therein, not in excess of\n100 acros in each separate parcel, for the location of its storage\ntanks, pumping stations, delivery facilities, and other [acilities\nin connection therewith, and (b) easemento end rights of way, not in\nexcess of 100 feet in width, for the construction. completion, opera-\ntion, maintenance end removal of the pipe lines, Including right of\nAccees thereto over adjoining lands: Provided, That such right of\neminent domain be exercised by the Southeastern Pipe Line Company for\nthe eferesaid purposes prior to June 30, 1943.\nThe pips line hereinbefore !dentified shall De constructed,\ncompleted, operated, and maintained subject to such terms and undi-\ntione as the President may hereafter from time to time prescribe se\nnecessary for national defense purposes.\nIN WITNESS WHEREOF, I have horounto net my hand and caused\nthe seal of the United States to be affixed.\nDONE at the of Weithington this third day of September\nin the year of our Lord nineteen\nhundred and forty-one, and of the\n(EEAL)\nIndopendence of the United States\nof America the care Included and\nuixty-wisth.\nFRANKLIN D. ROOSEVELT\nBy the President:\nCORDELL HULL,\nSecretary of State.\nRegraded Unclassified\n361\nFOR THE PRESS\nIMMEDIATE RELEASE\nFOR THE PRESS\nSEPTEMBER 3, 1941\nAnnouncement. was made today of appointment by the\nPresident of the membership of the Mission to Russia 85 follows:\nChairman, W. AVERELL HARRIMAN, now serving as the President's\nSpecial Representative in London on Material Aid to the\nBritish Empire.\nMAJOR GENERAL JAMES li. BURNS, Executive Officer, Division of\nDefense Aid Reports associated with Marry L. Hopkins.\nGeneral Burns has served with distinction in the Ordnance\nDepartment of the Army.\nMAJOR GENERAL GEORGE H. BRETT, Chief of Air Corps, at present\non a special Mission to Great Britain and the Middle East\nin connection with deliveries of American aircraft.\nADMIRAL WILLIAM HARRISON STANDLEY, U. S. NAVY, former Chief\nof Naval Operations, 1933-37. Admiral Standley was a\nprovider of the Dilegation of the United States to the\nConcral Disariment Conference hold in London, 1934,\n1100 a delegate on the part of the United States to the\nLondon Navel Conference of 1935.\nVHAN'S L. EATT, Deputy Director, Production Division, Office\ndi Production Management. Chairman, Business Advisory\nCouncil for the Department of Connercu. Lr. Batt is\nPresident of S.K.F. Industrics, Inc., and Chairman of\nthe Board, American Management Association.\nThe Mission will join with E similarly constituted\nBritish Mission under the Chairmananip of Lord Beavorbrook\nfor & conference in Mosdow with the Ruscian Government regard-\ning the supplying to Russia by the United States and Creat\nBritain of munitions, raw materials, and other supplies needed\nby Russin for her defonse against German aggression.\nThe holding of this conference W&S agreed to between\nthe President and the prino Minister at their recent meeting\nat 808,\nRegraded Unclassified\nTREASURY DEPARTMENT\n202\nINTER-OFFICE COMMUNICATION\nDATE September 3. 1941\nTO\nSecretary Morgenthau\nFROM\nMr. Cochran\nSTABILIZATION AGREEMENTS\nChina:\nOn July 14, 1937 the Treasury entered into an agreement with the\nCentral Bank of China to purchase yuan up to B total of $50,000.000 U.S. currency.\nThe agreement has been renewed each six months and now expires December 31, 1941.\nAt present we hold 65,000,000 yuan, whose book dollar value 1e $19,112,500. and\nagainst which $19,379,015.65 in gold is held at the Federal Reserve Bank of New York\nDE collateral. The rate of interest is 1/2% above the current rediscount rate of\nthe Federal Reserve Bank of New York,\nBrazil:\nOn July 15, 1937, the Treasury entered into an agreement with the\nUnited States of Brezil, which expires on July 15, 1942. We agreed to purchase\nmilreis up to a total value of $60,000,000, with Brazil leaving on deposit in New\nYork gold collateral to guarantee the repurchase of the milreis by Brazil. The rute\nof interest is 1/2 of 1% above the current rediscount rate of the Federal Reserve\nBank of Sev York. There have been transactions under this arrangement, but et pres-\nC\nent we are holding no milreis. This agreement also provides for the sale of up to\nA mazimum amount of $60,000,000 in gold by the United States to be held under earmark\nin our vaulte for the account of Brazil. This agreement was modified on September 2.\n1938, to permit Brazil to ship gold from abroad to be held in this eermarked account.\nUp to August 30, 1941, $29,465,770.90 in gold had been sold by us to Brazil and\n111,532,765.19 had been shipped by Brazil to New York to be held under enrmark.\nArgentina:\nOn January 1, 1941, the Treasury entered into en agreement with the\nFanco Central de la Republica Argentina and the Government of Argentina, Under this\nagreement we undertake to purchase Ar entine pesos up to the equivalent of $50,000,000\n7.S, currency. No collateral is required. The interest rate is fixed at 1-1/2%.\nThe agreement comes into operation and effect upon ratification and confirmation by\nArgentina of the authority under its constitution and laws to enter into this agree-\nwent. Up to the present time the foregoing conditions have not been met and the\nagreement is inoperative. The agreement Web drafted to expire on June 30, 1941. An\noxtension of the agreement has also been drefted, but cannot be made effective until\nthe arreement itself becomes operative.\nIntional Cuinn: Government of the Republic of Chine and the Central Bank of China. This cells\nOn April 1. 1941, the Treasury entered into an agreement with the\nfor the purchase by the Treasury of Chinese yuan up to the equivalent of $50,000,000\nC.S. currency. No collateral is required. The agreement expires June 30. 1942.\nInterest at the rate of 1-1/2%. China has not yet called for the $50,000,000. The\nGhinese-Americnn-British Stabilisation Roard in China, on which Mr. à. Menuel Fox in\nthe American representative, did. however, begin to operate in the middle of August.\nTop Chinese Government banks have deposited with the Federal Reserve Bank of Sew York\ntheir contribution of $20,000,000 to the joint Stabilization Fund.\nRegraded Unclassified\n363\n2\nMexico:\nAn agreement with the Government of the Republic of Mexico and\nthe Banco de Mexico is practically ready for signature. This involves purchases\nof Mexican pesos by the United States up to the equivalent of $40,000,000 U.S.\ncurrency. There 1a no collateral. The rate of interest is at 1-1/2%. The\nrepurchase clause with Mexico gives that country 180 days' notice and then an\nadditional 180 days within which to repurchase. This 1e a generous departure\nfrom our usual 30 days' notice. The Department of State expects its related\nnegotiations with Nexico to be consummated in time for the signing of the\nStabilization agreement before September 16, The Treasury is also to agree to\npurchase up to 6,000,000 ounces of silver monthly from Mexico, under an arrange-\nment similar to that which we have with Canada.\nColombia:\nThe Ambassador of Colombia has recently returned from his country\nto which he went a few weeks ago with a draft Stabilization agreement with the\nStabilization Fund of the Government of Colombia, the Banco de la Republica,\nBogota, Colombia, and the Government of the Republic of Colombia. under which\nthe United States would buy Colombian pesoa up to the equivalent of $3,000,000\nU.S. currency. No collateral is involved. The interest rate would be 1-1/2%.\nWe should have further discussions with the Colombian Ambassador shortly.\nSouador:\nWhen the Ecuadorian Minister of Finance visited Washington in\nAugust he discussed with the Secretary, and subsequently with the Secretary's\nassistante, the question of a Stabilization agreement which might provide as\nmuch as $5,000,000 U.S. currency. It is not believed that more than perhaps\nhalf of such a sum could at all be justified. The Department of State has re-\nquested that we continue negotiations with the Ecundorian Ambassador,\nBolivia:\nWe have promised the State Department that we would consider a\nBolivian request for monetary assistance.\nB.M.S.\nRegraded Unclassified\nC\n36₫\no\nP\nY\nBRITISH EMBASSY,\nWASHINGTON, D. C.,\nSeptember 3rd, 1941.\nWith the Compliments of Mr. W.\nRitchie\nCopy of letter dated September\n3rd to Mr. Dean Acheson\nMr. Merle Cochran,\nU. S. Treasury Department,\nWashington, D.C.\nCopy:mew 9/4/41\nRegraded Unclassified\nC\n365\nF\nI\nBRITISH EMBASSY,\nSAFE HAND\nWASHINGTON, D.C.,\nSeptember 3rd, 1941.\nDear Mr. Acheson,\nThe following 18 the text of a statement made by Mr.\nIden in the House of Commons on August 6th:-\n\"The Honorable members will remember that about & week A/CO\nI announced certain freezing measures, which had been\ninstituted by the United States, the Net erlands and the\nBritish Empire against Japan AB a result of the Jenanese\nseizure of bases in French Indo-China. Those freezing\nmessures are not, as seemed to be thought by some\nHonourable members in the debate, framed so 8.0 to permit\ntransactions which are not expressly forbidden. On the\ncontrary the operation in the reverse. They automatically\nforbid all transactions except those which are expressly\npermitted. As the House will understand, I cannot now\ndieclose the details of the manner in which this policy\nis to be applied but there has been throughout closest\ncollaboration and frankest discussion between His Majesty's\nGovernment at home, in the Dominions, in India, Burma end\nin the Colonies, and the Governments of the United States\nand the Netherlands; and the two latter Governments have\nfurnished us with full particulare and with comprehensive\ninformation of their actions. The same collaboration is con-\ntinuing regarding the operation of these measures 88 WAS in\nevidence in former days. The House will understand that it\nis bound to take B. little time to exchange the views end\ninformation which are necessary for common understanding of\nsuch a far-reaching experiment as freezing orders will\npresent. But that work is now practically completed.\nThere is one assurance I would like to give the House; these\nsteps were not lightly taken. The Freezing order was\nseriously intended and it will be seriously executed.\"\nHr. Dean Acheson,\nAssistant Secretary of State,\nState Department,\nWashington, D. C.\nITEH:WR:TMI\nCC to Mr. Cochran\nRegraded Unclassified\n366\n- 2 -\nI am sorry you have not had this before, but I have\nonly just received it myself.\nI am sending a copy of this letter to Mr. Cochran\nfor his information.\nYours sincerely,\n(Sgd) Noel F. Hall\nCopy:mew 9/4/41\nC\no\n367\nP\nY\nDEPARTMENT OF STATE\nWASHINGTON\nSeptember 3. 1941\nIn reply refer to\nEA 840.51 Frozen Credits/3254\nThe Secretary of State presents his compliments\nto the Honorable the Secretary of the Treasury and\ntransmits a copy of despatch mailed August 13, 1941\nfrom the American Consulate General in Hong Kong con-\ncerning the reaction in Hong Kong to recent freezing\norders and the placing of the Colony of Hong Kong in\nthe sterling bloc.\nEnclosure:\nMentioned above.\n0\n0\nP\nY\n368\nVOLUNTARY\n(Supplementing radio message No. 293 of August 6, 4 p.m.)\nCONFIDENTIAL\nHONG KONG REACTION TO RECENT FREEZING ORDERS\nAND THE PLACING OF THE COLONY IN THE\nSTERLING BLOC\nFrom:\nJohn H. Bruine\nAmerican Consul\nHong Kong\nDate of Completion:\nAugust 11, 1941\nDate of Mailing:\nAugust 13, 1941\nApproved:\nAddison E. Southard\nAmerican Consul General\nRegraded Unclassified\n0\n0\nP\n369\nY\n1. Bank \"Runs\" of Short Duration:\nOn the two business days following the announcement\nof the freezing of Chinese assets. local Chinese with-\ndrew considerable suma in local currency from their local\nbank accounts. This small \"run\" soon stopped, and there\nwas nothing approaching a panic. Hong Kong banks were\nnot embarrassed by this withdrawal, as nearly all of than\nare overburdened with deposits which are difficult to\nloan out advantageously.\n2. British Control Orders Slow in Arriving:\nThe principal complaint of most bankers is the\nslowness in arrival of the official British orders re-\ngulating both the \"freesing\" and the entry of Hong Kong\ninto the sterling bloc. It is pointed out that such\nregulations have been in force in Singapore for many\nmonths, and that all the details should have been in-\nmediately available here. American banks in Hong Kong\nhave also received conflicting telegrame from their\nNew York headquarters, and the atmosphere of uncertainty\nprevails. This is regarded as an annoyance and ⑉ an\nadded business risk, which will probably be removed in\nthe course of B. week or two.\nRegraded Unclassified\n370\n- 2 -\n3. Uncertain Status of Bills Payable:\nThe principal difficulty is the status of bills\npayable. Most of these are in Chinese names. The pur-\nchase of such bills is an important part of banking\nbusiness here. Telegraphic inquiries to New York by\nthe local banks have brought equivocal replies. The\nNational City Bank continues to buy them. The Chase\nBank continues to handle them in small amounts. The\nAmerican Express Company has declined to handle them\nuntil the situation is clarified. The Chase Bank reports\nthat some such bills sent to New York early in July,\nlong before the present orders were issued, have been\nrefused payment. It has been requested by its New York\nheadquarters to supply a full report on the number and\namounts of such bills now in transit.\n4. Difficulties of Shanghai Arbitrage:\nLocal banks used to sell Shanghai dollars to in-\nporters, and covered by sending foreign currency equi-\nvalent to Shanghai. Under the now \"sterling bloc\"\nregulations, it is apparently impossible to send out\nsuch foreign currency remittances. Such transactions\noccur\n371\n- 3 -\noccur mainly in connection with textile imports from\nShanghai (at least such part of the business as has not\nfallen into Japanese hands), local importers thus re-\nquiring Shanghai dollars in payment. Before negotiating\nbusiness of this type, banks have satisfied themselves\nthat the business is being carried on by a bona fide\nChungking-sponsored firm. Some bankers are inclined to\nattribute the weakness in Shanghai currency in recent\ndays to the aforementioned lack of demand for it, at-\ntributable in turn to the inability of supplying cover.\nThe manager of the American Express Company stated con-\nfidentially to-day that he had just been authorized to\nsupply the sterling cover from their London office to\nShanghai. He explains this by the fact that every such\ntransaction requires exhibition of bills of lading and\nthus represents goods coming into the Colony and also\nby the fact that reimbursement comes to him in the form\nof Hong Kong dollars which are a controlled currency.\nThe above is another example of non-uniformity in prac-\ntice due to conflicting orders under which the banks\nare at present operating.\nUneven\nCopy:wec:9-3-41\n- 4 -\n372\n5. Uneven Spote in Administration:\nThere are numerous instances of inconvenience and\nannoyance. The manager of the Chase Bank mentioned two\ninstances. Last April his New York headquarters recom-\nmended the transfer of all U. S. dollar accounts in\nHong Kong to New York, in view of the uncertain situs-\ntion in the Far East. This was carried out. Many of\nthese accounts were in the names of Chinese persons.\nSome difficulty has been experienced in obtaining re-\nlease of money for their children's education in the\nUnited States, although it is understood provision has\nbeen made under a general license for such living 02-\npenses. The second is an instance of a Chinese person\nhaving a loan of about US$1,000,000 against about two\nmillion dollars worth of securities. The market having\nbeen favorable, securities to the value of about\n$1,000,000 were sold in New York to liquidate the loan,\nbut cannot now be transferred, and interest must still\nbe paid on the loan. It is also understood that quasi-\nChinese Government institutions such as the Postal Bank\nand the Central Trust of China have not been granted\ngeneral licenses.\n373\n- 5 -\n6. Americans Obligated to Report All Holdings:\nBritish subjects were formerly compelled to re-\ngister their holdings abroad. Recent Hong Kong regu-\nlations have extended this obligation to all nationali-\nties. Thus, American citizens now in Hong Kong are\nobligated to report to the British authorities all of\ntheir holdings, even in the United States, and to offer\nthem to the British authorities at the convenience of\nthe latter against payment in sterling or local currency.\nThus far, there has been no compulsion exercised in re-\ngard to holdings of local Americans in the United States.\nHowever, this matter has already caused one American\nmillionaire to leave the Colony suddenly, and has also\nmade impossible the operation of American brokerage\noffices here, dealing in American securities. There\nare two such vis: Levy Bros. and Swan, Culbertson &\nFrits.\n7. Colony Reconciled to Trade Curtailment:\nSpecial permits from the local currency control\nauthorities are required before any personal remittances\nabroad may be made. For example, nearly all men make\nconstant remittances to their wives who have been evacuated,\nand\n-\n374\n- 6 -\nand each such transaction now calls for a permit.\nThus far they have been freely issued. On the other\nhand, business remittances are closely scrutinized, and\nit appears inevitable that the inclusion of the Colony in\nthe \"sterling bloc\" will result in a serious curtailment\nof trade.\n800\nI\nRegraded Unclassified\n-7-\n375\n800\nJFB:bp\nDistribution:\nIn quintuplicate to the\nDepartment (by air mail);\nHectograph copy to the\nDepartment:\nCopy to Embassy. Chungking;\nCopy to Embassy, London;\nCopy to Consulate General,\nShanghai.\nRegraded Unclassified\n-8-\n376\nSources of Information:\nInterviews with Hong Kong\nbankers as noted in the\ntext;\nRecent Hong Kong Government\nFinancial Regulations;\nUnited States Executive\nOrder 8389 as emended by\nExecutive Orders No. 8785\nand No. 8832. Also gener-\nal licenses 54 to 69 issued\nunder these Executive Orders.\nRegraded Unclassified\n377\nC\no\nP\nY\nDepartment of State\nWashington\nSeptember 3. 1941.\nIn reply refer to\nRA\nThe Secretary of State presents his compliments to\nthe Honorable the Secretary of the Treasury and encloses\nfive copies of a paraphrase of telegram No. 444. dated\nSeptember 1, 1941, 5 p.m., from the American Consulate\nat Manila, Philippine Islands, transmitting a message\nfor the Secretary of the Treasury from Mr. A. Manuel Fox.\nEnclosure:\nFrom Consulate, Manila,\nNo. 4444. September 1,\n1941.\nCopy:mew 9/3/41\nRegraded Unclassified\nCOPY\n378\nPARAPHRASE OF TELEGRAM RECEIVED\nFROM: American Consulate, Manila, Philippine Islands\nDATE: September 1, 1941, 5 p.m.\nNO.: 444\nSTRICTLY CONFIDENTIAL\nTHE FOLLOWING IS FOR THE SECRETARY OF THE TREASURY\nFROM FOX.\n\"Business as usual\" continues to be the attitude in\nShanghai, Every effort is being made by both the Board\nand myself to impress upon licensed banks that an emergency\nexists. The only bank that is cooperating is the Hong Kong\n& Shanghai Bank, A few others, such as American banks,\ngive lip service cooperating only for a day or two.\nDrastic action with respect to license No. 59 may be\nnecessary if the losses of the Board are to be kept within\nreasonable limits. As immediate action, it is suggested\nthat licensed banks be threatened and warned of the with-\ndrawal of its privileges under this license.\nAs an alternative, I could recommend to the Board the\nlowering of an official rate. However, from our many\ndiscussions of the subject, I am confident that this would\nhave a bad psychological effect in China where, in view\nof rumors of peace, they are especially sensitive at the\npresent time,\nWith respect\n379\n-2-\nRegraded Uncla\nWith respect to license No. 59. threat and warning\nwould have an effect, especially if it were done publicly,\nin Chungking. The suggested warning and possibly even more\ndrastic action would be an essential step before the lower-\ning of the official rate by the Board should it prove to\nbe necessary to make such a reduction,\nWith regard to telegram No. 206: The subject of\nimporte into China is covered in some detail in my memorandum,\nUnited States trade with China urgently needs to be closer\ncontrolled. I decidedly recommend either the revoking of\ngeneral licenses Nos. 58 and 64, except for trade via Rangoon,\nor the adopting of the system of export licenses lines of\nthe order of August 25 of the British Board of Trade. The\nDepartment is in the best position to make the final choice\nin this matter,\nI have just learned from Noble of the Export Control of\nthe Philippines that there has been a loosening of control\nof United States exports to Shanghai instead of a tightening\nas it appears that it is comparatively easy to get licenses\napproved in Shanghai. Taylor had already been instructed to\nprepare the material on the questions which were raised in\ntelegram No. 206. This information will be forwarded at\nthe earliest opportunity to the Department.\nIt is most desirable to have family remittances reach\nthe Board automatically. It is necessary that each important\narea\n380\n- 3 -\narea have & point of centralization. In the United States\nthe authorised channel could be the efficient Bank of China.\nAfter local consulations, I an suggesting that the Central\nBank of China be the point of centralisation in the Philippines.\n(It was recommended previously that the Philippine Bank of\nCommunications have this position.)\nShould the Central Bank of China, which already has\n& deposit account with the Philippine Bank of Communications,\nopen a deposit account with the China Banking Corporation\nin Manila, all remittances could funnel through the Central\nBank of China there. I am urging the Government of China\nto approve this procedure rather than that which was previously\nrecommended. I an also making arrangement through the office\nof the High Commissioner along these lines.\nWould it be possible for action to be taken when the\nremittances are centralised in the U.S. to provide that\nthese be made at the official rate of the Board? Should\nthis be so, parallel action in the Philippines could easily\nbe taken.\nThere is great opportunity at the present time for\neconomic survey and recommendations provided the Government\nof China is made aware of the definite interest and the\nsupport of Washington. There are many urgent questions on\nwhich there is a good chance of some remedial actions.\nIt is proposed that native talent be used; however,\ndirection and supervision is needed in such matters.\n381\nIt would be appreciated if Adler could be made available\nto ne for work in Hong Kong and China. At the present time\nAdler is in Manila. Since Adler has previously worked with\nFar Eastern problems and freesing, he would be of great help.\nThe relation of the Board to the Agency is important.\nA Frankenstein is created by the letters of April 25 in\nproviding for the agency to which all foreign exchange\nfrom remittances and exports may accrue, with parallel\npowers to the Board. There is convincing proof that an\nattempt is being made to take full advantage of the latitude\nof the provisions of April 25.\nAt the present time, the Agency is being set up as 8\nhighly political coplection. All members of the Board\nare greatly worried by the highly political complection\nof the Agency as it is now being set up. A clash between\nthe Agency and the Board will inevitably develop - leading\nto an ugly situation for the Department - if nothing is done.\nIt is therefore recommended strongly that the Depart-\nment consider this--preferably in collaboration with the\nBritish. Hall-Patch is quite disturbed. I know that he\nwould welcome such action which would advise the Board and\nthe Government of China that:\n(a) It is the opinion of the Treasury General Counsel\nthat the Board should be set up by Executive Yuan decree,\ndated August 12, especially as the Agency has been so set\nup and as no difficulty is experienced in China in predating\ndecrees.\n382\n-5-\n(b) It is the considered opinion of the Department\nthat the Agency should concentrate on policy matters and\nthat the exchange operations should be reserved to the\nBoard particularly because of its technical competency and\ncompactness. To save face for the Agency it could be sug-\ngested that it pass a resolution that the Board handle all\nof the exchange transactions.\nPlease stress the urgent need for action since the\nChinese members have already been requested to return to\nChungking to attend the initial meeting of the Agency but\nwere advised by me to await my return there.\nThis is the end of the message.\nHICKOK\nSATRE\nEA:PAX\nCopy:bj:9-3-41\n3\n383\nparaphrase OF TELEGRAM RECEIVED\nFROM: American Consulate, Saigon, French Indeching\nDATE: September 3, 1941, 0 2.\nNO.: 80\nA complaint has been made to this Consulate by the\nInspector General of the Bank of Indochina in regard to\nthe proceeds of a shipment of welfram which Amounts to\n$15,289.13. This vas credited to the blooked account\nof the French-American Banking Corporation on May 28,\n1941. The Inspector General also complained that the\nTreasury had refused to allow the transfer of the credit\nunder reference to \"special account A\". This notion, the\nInspector General claims, is in violation of the licensed\nwhich vas issued in accordance with Executive Order No.\n8389 on the seventh of Hareh.\nThis Consulate would be glad to learn if and (7 when)\ndisposition (1 is) 69 made) of the proceeds in question\nin order that this Consulate may use this information for\nits own guidance in future dealings with the Bank of\nIndochina.\nThis BOSSIER WAS sent to Cavite in order that it\nmight be repeated to the Department for its information.\nBROWNE\n(HOTE) A repetition of the garbled groups has been\nrequested. should the correction be other\nthan that interpreted, the proper persons\nwill be notified.)\nMAIPAX\n840.81 Prozen Credits/3341\nRegraded Unclassified\n384\nTREASURY DEPARTMENT\nFor Miss Chaune y\nINTER-OFFICE COMMUNICATION\nDATE September 3, 1941\nTO Secretary Morgenthau\nFROM Mr. Cochran\nconfidential\nRegistered sterling transactions of the reporting banks were as follows:\nSold to commercial concerns\n1 79,000\nPurchased from commercial concerns L122,000\nOpen market sterling held steady at 4.03-1/2, and there were no reported\ntransactions.\nIn New York, closing quotations for the foreign currencies listed below were\nas followe:\nCanadian dollar\n10-9/16% discount\nArgentine peso (free)\n.2374\nBrazilian milrois (free)\n.0505\nColombian peso\n.5800\nMexican peso\n-2070\nVenezuelan bolivar\n.2750\nUruguayan peso (free)\n.4425\nCuban peso\n1/2% discount\nIn the unofficial exchange market in Shanghai, the yuan advanced 1/16 to\n4-13/16#. The sterling-dollar cross rate worked out to 4.04, off 1-3/84.\nThere were no gold transactions consummated by us today.\nThe Federal Reserve Bank of New York reported that the Bank of Canada\nshipped $2,759,000 in gold from Canada to the Federal for account of the\nGovernment of Canada, for sale to the New York Assay Office.\nWe were informed that the Bombay gold price on August 30 vas equivalent\nto $34.14, or 124 higher than the quotation for August 23. Silver was priced\nat the equivalent of 44.704. up 1/84.\nThe prices fixed in London for spot and forward silver remained unchanged\nat 23-1/2d and 23-7/16d respectively. The U.S. equivalents were 42.67# and\n42.55$.\nThe Treasury's purchase price for foreign silver was unchanged at 35#.\nHandy and Harman's settlement price for foreign silver was also unchanged at\n34-3/4#.\n385\nCONFIDENTIAL\n- 2 -\nWe made two purchases of new production silver smounting to 100,000 ounces\nunder the Silver Purchase Act. This silver, which was bought for forward\ndelivery, came from various foreign countries.\nThe report of August 27. received from the Federal Reserve Bank of New York,\ngiving foreign exchange positions of banks and bankers in its district, revealed\nthat the total position of all countries was short the equivalent of 4,898,000,\nen increase of $127,000 in the short position since August 20. Net changes were as\nfollows:\nShort Position\nShort Position\nChange in\nCountry\nAugust 20\nAugust 27\nShort Position*\nEngland**\n$ 38,000 (Long)\n$ 166,000\n+ $204,000\nEurope\n2,769,000\n2,700,000\n- 69,000\nCanada\n154,000 (Long)\n100,000 (Long)\n+ 54,000\nLatin America\n112,000\n36,000 (Long)\n- 148,000\nJapan\n71,000\n116,000\n+ 45,000\nOther Asia\n2,019,000\n2,091,000\n+ 72,000\nAll others\n8,000 (Long)\n39,000 (Long)\n- 31,000\nTotal\n$4,771,000\n$4,898,000\n+ $127,000\n*Plus sign (+) indicates increase in short position, or decrease in long position.\nMinus sign(-) indicates decrease in short position, or increase in long position.\n**Combined position in registered and open market sterling.\nNMR\nRegraded Unclassified\n386\nBRITISH EMBASSY,\nWASHINGTON.\nSeptember 3rd, 1941.\nPERSONAL AND SECRET.\nDear Mr. Secretary,\nI enclose herein for your personal\nand secret information a copy of the latest\nreport received from London on the military\nsituation.\nBelieve we,\nDear Mr. Secretary,\nVery sincerely yours,\nR. I. Capbell\nThe Honourable\nHenry Morgenthau, Jr.,\nUnited States Treasury,\nWashington, D.C.\nRegraded Unclassified\n387\nTAL WORAM FROM LONDON DATED SEPTEMBER 1st, 1941,\nAngust 20th/Slat.\n\" I tome of high explosives and nearly\n1,000 incondiaries dropped Cherbourg. Many burste\nseen in dooks area.\nof\n31 Blenheims bombed industrial buildings\nLille, aerodreme in Britanny, and shipyards near Rowen.\nPortress from $6,000 ft. dropped bombs in the centre\nof Bromen. Fighters escorting Blenheims destroyed 1\nenemy fighter. He lost 2 fighters.\n8.\nNight of 31st/september let.\nearly 200 sircraft despatched; targets\nincluded Cologne and Seeen; 7 missing.\n4.\nNight of August 30th/51mt.\n9 Wellingtons attacked TripoliL.\nOne ship hit and set on fire.\n5.\nMalts. August 30th/31st.\nFive torpedo bombers attacked 1200 ton enemy\nmerchant vessel near Lampedusa. One hit scored left\nship listing heavily.\n6.\nGerman AIR Force. ANG. Slat/Sept. lat.\n93 aircraft operating of which 35 crossed\ncoast. One destroyed by night fighters. Main consentra-\ntion on Mull and neighbouring district. Some damage to\nhouse property and some casualties.\nRegraded Unclassified\n388\nNO OBJECTION TO PUBLICATION IV SERVICE JOURNALS\nMILITARY INTELLIGENCE DIVISION\nTENTATIVE LESSONS BULLETIN\nWAR DEPARTMENT\nNo. 153\nWashington, September 3, 1941\nG-2/2657-235\nNOTICE\nThe information contained In this series of bulletine\nwill be restricted to items from official sources which are\nreasonably confirmed. The lessons necessarily are tentative\nand in no sense nature studies.\nThis document is being given an approved distribution,\nand no additional copies are available in the Military Intel-\nligence Division. For provisions governing its reproduction,\nsee Letter TAG 350.05 (9-19-40) M-B-M,\nTHROUGH SUN AND SANDSTORM TO SOLLUM\nSOURCE\nThis bulletin is based on E. translation of an article which was\nwritten by a Germen var correspondent. The article was published in\nApril in the Woelkischer Beobachter, a Berlin daily newspaper.\nIntended propagandistic effects should not be overlooked.\nNO OBJECTION TO PUBLICATION IN SERVICE JOURNALS\n- 1 -\nRegraded Unclassified\nNO OBJECTION TO PUBLICATION IN SERVICE JOURNALS\n389\nTHROUGH SUN AND SANDSTORM TO SOLLUM\nThe men of a reconnalesance detachment were the first German\nsoldiers to reach the Libyan-Egyptian frontier and to occupy the\nEgyptian frontier station of Sollum. They first set foot on African\nterritory in the middle of February, and scarcely eight weeks later\nthey were a full 1700 kilometers - reckoning only the distance on the\ncoast road - away from their starting point, Tripoli. And in those\nhundreds of kilometers were embraced the most difficult marches under\nthe greatest privation; days and nights of wakefulness end fighting,\nof defonse, of attack and reconneissance; sandatorms end the scorching\nheat of the sun - an accomplishment of men and materiel 80 incredible\nthat it 18 almost indescribable.\nWhen they reached Africa, the men knew nothing of the desert:\nthey knew the land only from books and stories. But they saw it with\ntheir own eyes, and they lived It on a march which took them from\nTripoli to Sirte in less than two days. That trok alone was en achieve-\nment for men and machines, and it showed what could be accomplished,\neven under completely unfamiliar circumstances, by will power and\nintelligent leadership: for even the commend of the German African\nCorps had not expected that the detachment could travel to Sirto in\nsuch an amazingly short time.\nJust behind Sirte lay the main battle line of the Italians,\nThe detachment took but one day's rest and then pushed forward again,\nacross the Italians' main battle line and on to Nofilia, 130 kilometers\nfrom Sirte.\nAt Nofilia the detachment was detailed to hold the enemy, to\nreconnoitre in his direction, and to throw him back If he should\nmake en sttempt to attack the German position. Many were the tasks\nthat had to be performed, tasks which were fitting for B. reconnais-\nsance detachment. All branches of service represented in the detnch-\nment were well supplied with work, The armored reconnaissance cars:\nthe infantrymen; the crews of accompanying gune: the pioneers; the\nentitank guns; the intelligence personnel; the motorcycle riflemen\ncompanies; the transport crew; the red cross personnel; all folt the\nload, Day and night everyone was prepared and on guard,\nThree weeks went by. Slowly the front was pushed farther\nforward into the region of Arco dei Fileni. Again and again\nreconnaissance troops approached the enemy in an effort to ascertain\nthe strength of opposing forces. Twice these reconnaissance troops\ncame in contact with the enemy. The first clash between German and\nEnglish troops in Africa took place on the morning of February 24, who 1941,\nsoutheast of Agedabia. The skirmish was costly for the English,\nNO OBJECTION TO PUBLICATION IN SERVICE JOURNALS\n- 2 -\nRegraded Unclassified\n390\nR OPJECTION TO PUBLICATION IN SERVICE JOURNALS\nlost both men and materiel, While German troops thue faced the enemy,\nthey familiarized themselves with the desart, in which, as they well\nknew, they soon would have to fight 8. battle unlike any they had ever\nfought before.\nIn the gray of dawn on March 24, exactly 8 month to the day\nafter the first meeting of German and English strength, the attack\nrolled on 21 Agheila, which a wenk British force had occupied by\nsurprise. Frontally, and with B flanking movement, the Germans ad-\nVanced on El Agheila and took it, The well-mined terrain in front of\nthe position delayed, but did not stop the attack: and once again the\nreconnaissance detachment could rest, only to advance 1,000 kilometers\nless than two weeks afterwards,\nEl Brega was the next goal. After a stubborn resistance, it\nwas taken on the dawn of March 31, by sections of the reconnaissance\ndetachment in conjunction with tanks, Stukes, and machine gun units.\nFrom then on the advance against the enemy continued at A pace that had\nhitherto been thought impossible in desert country. After securing\nthe right flank of the German troops at El Brega, and then capturing\nAgedabia on April 2 and securing the left flank, the reconnaissance\ndetachment began its really great period with the advance on Bengasi.\nWould Bengasi be defended? Was it the strong position that\nthe English said it was? Would not the enemy do its utmost to hold\nthis port? Over the road to Bengasi the convoy rolled, and above it,\nlike great invisible question marks, hovered those thoughts. As al-\nways, the scout troops were in the van to guard against surprise.\nTo the side of the road, deserted refueling camps and ruined vehicles\ngave their little victures of the great war. Kilomater after kilometer\nground away under wheel, Ever searching, the men's eyes looked out\nacross the countryside and abeed and down the road, Over there-isn't\nthat an English tank behind that truck that's shot to pieces?\nCautiously the vanguard stalked closer. There was no movement; it\nlooked suspicious. The young lieutenant colonel, automatic Distol in\nhand, walked up to the scene; his eyes widened. In 8 tent, sleeping\nquietly and peacefully as if there were no Germans, were three Tommiee.\n\"Morning boys, the voice of the lieutenant colonel started the three\nup out of their sleep. One reached quickly for his Distol, but let it\nfall when he saw the threatening barrel of the automatic pistol in\nfront of him.\nThe flanking guard stretched far out into the desert on both\nsides of the road; Bengasi was approached on a broad front. Night\nturned to morning - Bengasi was in German hands. It could hardly be\nbelieved. The city, the possession of which meant so much, had fallen\ninto German hands without a struggle. And just as the Germans could\nscarcely believe it, the Italians were beside themselves with happinees\nNO OBJECTION TO PUBLICATION IN SERVICE JOURNALS\n- 3 -\n391\nNO OBJECTION TO PUBLICATION III SERVICE JOURNALS\nand joy: they prepared a tremendous reception for their allies. All\nthe cares and anxisties, the privations and sacrifices that had been\nstored up. were changed in a flash to one great transport of Joy.\nThe march continued, and the position was made secure beyond\nBengasi, After that 170 kilometer jump from Agedabia to Bengasi,\nthere was a two-hour rest. The soldiers stretched out under palm\ntrees, ate and refreshed themselves, showed each other the first bite\nof booty, and scrubbed some of the dirt out of their sweet-covered\nfaces. And from there, too, the radio message went out that Bengasi\nhad fallen. Suddenly, out of a clear sky, came B. good luck omen,\nGeneral Rommel, who \"in always everywhere, and always in the front,\nB.B. one of the men once said, stood in the midst of the officers and\nmen of the reconnaissance detachment.\nA burning heat covered the land as the detachment turned to-\nward the east, eway from the coast road and into the desert, March,\nmarch, march, came the order: do not lose sight of the enemy again:\nstay right on his heels. The commander of the reconnaissance detach-\nment knew the deep significance of his mission, and he fulfilled that\nmission 60 well, that, at the victorious conclusion of this great\nadvance all the way to the Egyptian border, the Fuhrer and Commander\nin Chief bestowed upon him the Enight's Cross of the Order of the Iron\nCross for his brilliant leadership and personal bravery. Included in\nthis reward to Lieutenant Colonel Beron von Wechmar, of course, was\nrecognition of the splendid achievement and the exemplary fighting\nspirit of his detachment,\nNo longer vas the road smooth under the vehicles' wheels;\nsand and stones alone paved their way. Above, was only the sun and\nthick dust. Mouths grew dry and tongues too lazy to speak - even if\nthey could speak in that furnace of hell. But onward, ever onward,\npushed the detachment. Benina was reached and passed. Suddenly word\ncame from the van - machine gun nests and strong fortifications are\non the heights, and tanks are in the hollow. Already the enemy\nartillery was flashing; everything halted. In a trice the detachment\nvas broken up, the artillery WAS brought into position, and everything\nhumanly possible was done to meet the sudden fire. The decision was\nreached immediately - attack; tenks forward! A dense, raging curtain\nfire confronted the attacking tenits, but they paid no attention to it,\nnor to the nine fields that had to be crossed and the toll those mines\ndemanded. The tanks rolled toward the hill fortification and fought\ntheir way through it, but a broad antitenk trench brought then to a\nhalt, And they had to turn back. The enemy immediately began an in-\nfantry counterattack, but German motorcycle riflemen were ready, and\nthey threw themselves against the counterattackers. Pioneers were\nalready breaking paths through the thick mine fields, Artillery on\nboth sides thundered unceasingly. Step by step the men worked their\nБО ORJECTION TO PUBLICATION IN SERVICE JOURNALS\n4\n392\nNO OBJECTION TO PUBLICATION IN SERVICE JOURNALS\nway toward the enemy position; the machine gun neste which had not al-\nready been disposed of by the tanks, were mopped up by the infentrymen.\nUnder cover of derkness, the men reached the antitank tranch; there\nthey held their position all night. Forgotten were duet and weariness;\nonly the law of war applied, and that permits but one thought - to\nfight.\nWhile the battle was raging, pioneers were working feverishly\nto repair explosion craters in the winding road that lead to Fort\nRegima; the vehicles had to have B. clear road during the planned attack.\nSlowly the din of fighting died down; alert and watchful, the Germans\nvaited. Only the cries of the wounded interrupted the still of the\nnight. At dawn Nazi troops came out of their cover and stalked closer\nto the fort. A terrific tension hung over the men, No shots fired?\nConfound it, why don't they fire? Cautiously the men felt their way\nforward; the top seemed an eternity away to them, but they finally\nreached it. The fort had been evecuated in the night, and only a part\nof the garrison was still there. That part surrendered, and numerous\nprisoners were taken.\nOnce egain the desert swallowed up the long column, now march-\ning in convoy, Through the sand it moved, across El Abier and then\nstraight toward El Mechili. No longer were there roads; the compase\nwas the only road sign, And the vehicle techometers the only kilometer\nstones.\nSuddenly one avening the venguard reported that some 40 enemy\ntanks were approaching in a frontal attack and that approximately the\nsame number were coming from the north. It looked bad, very bad.\nEighty tanks were not going to prove en easy foe, The only redeeming\nfeature was that they apparently had little heart for attack. At any\nrate they hesitated, Swiftly the column turned and made for a\ncommending height to the rear; then it formed a defense front against\nthe superior tank forces of the English. The detechment took up 8.\nhedgehog formation, so that it could instantly neet attacks from any\nside; but nothing happened.\nIn the early afternoon a reconnaissence patrol surprised and\ncaptured E 3ritish gasoline convoy on its way to the tanks with\nnecessary fuel. As it took little thought to realize that if the\nEnglish tanks had no more gasoline, they could not stey in battle very\nmuch longer, it was decided to break through the line of tanks. The\nmission had to be accomplished; no more time could be lost. At twi-\nlight the detachment started on its med night march through the\ndesolate wasteland of gorges, wedies, and send. It could only travel\nat en average of ten, or at most fifteen, kilomaters per hour; the\nvehicles had almost to feel their way forward, as they bounced from\nside to side on the rocky ground. In the morning the riddle was solved.\nNO ORJECTION TO PUBLICATION Ill SERVICE JOURNALS\n- 6 -\n393\nNO OBJECTION TO PUBLICATION IN SERVICE JOURNALS\nMany of the tanks were standing in the desert; some were still with\ncrews, some deserted, Their gasoline supply had run out, and they\nlay helpless at the mercy of the Germans, Without much delay the\nJourney was continued, until a mine field just in front of Mechili\nbarred the advance and made a rather long stop necessary.\nBut the desert had not shown all of her obstacles yet. &\nheavy sandstorm started up and the march became 8. torture. Despite\neverything, however, the detachment reached Mechili at the very\nmoment that other German units were taking the village, The catch\nmade there was wonderful. Not only were six generale and 2000 men\ntaken prisoner and 14 German prisoners set free, but immessurable\nmaterial booty was also captured. From tanks to golf clubs, from\nBerious weapons to the tools of the Englishman's sports, from whiskey\nto fruit preserves - everything was there. Think what that meant to\ntroops which had not had anything hot to eat for five days; for men\nwho had had to exist on a half liter of water per day and who had\nperhaps even poured that in the rediator of their conveyance simply\nbecause the motor needed it even more than did the thirsty men!\nIn spite of the tremendous exertions of the days gone by, no\nrest could be given the troops. The advance on Tobruk by the coast\nroad had begun. The attempt to veer around the enemy far to the south\nhad failed because of the insurmountable difficulties of the terrain.\nIn the meantime, units of the machine gun battalion had gained\npossession of a route over which Tobruk could be passed to the south.\nTo be sure, that meant marching more than 70 kilometers in the worst\npart of the desert, but that made no difference the main thing was\nthat it could be done at all. The second great desert trek began.\nThe way lead across Acroma, and soon English reconnaissance tanks\nbobbed up. But the antitank defense was alert, and two of them were\nput out of commission, The others retreated; but from B. distance they\ncould still direct the fire of a battery on the marching detachment,\nA bigger loop had to be made to the southwest to avoid that battery,\nEverything comes to an end sooner or later. At noonday the\ndetachment marched on past El Adem and then once more through the\nworst kind of sandy desert. & sigh of relief went up in the ranke\nwhen the wheels once more struck the senst road, The detachment was\nnow behind Tobruk's own defenses and could take up the task of advancing\npast Berdia to the Libyan-Egyptian frontier. Very ceutiously, on the\nnight of April 11, it set out along the coast road toward Bardia. To\nthe right and left of the road British reconnaissance cars and tanks\nwere still wandering about in the countryside. Just as the first\nGermen vehicles approached the city, the harbor road vas blown up and\nfire poured out of the magazines, signs that the English had just with-\ndrawn. Considerable booty in materiel and supplies fell into the hands\nNO OBJECTION TO PUBLICATION IN SERVICE JOURNALS\n- 6 -\n394\nNO OBJECTION TO PUBLICATION IN SERVICE JOURNALS\nof the Germans, who quickly occupied Bardia and extended their defenses\nto the heights in back of the city. Then the giant hedgehog, with\nweapons bristling, stood watch, while reconnaissence troops scouted\nin the direction of Sollum, Unceasingly, British low flying planes\nand bombers raked the advancing detachment, but with little success.\nWhat German soldiers have once attained they do not give up, no matter\nhow hard the enemy may resist, On the evening of April 12, the message\ncame from the advance units: \"6:40; Libyan-Egyptian border crossed\nand Sollum occupied,\" - there was great joy.\nFor eight weeks this reconnaissance detachment hed been on\nAfrican soil. Always facing the enemy, never et rest: waking and\nfighting, attacking and defending itself; the desert had become its\nhome.\nRe alone who has felt the hot breath of the desert, who has\nendured to the end the torture of thirst without water, who has, in\nnear desperation, reached for the iron ration, can know what it means\nto fight in the desert. Only he who for hours and days in the Ghibli\nhas sat in a conveyance or stretched out in A tent with a handkerchief\nover mouth and nose, who, with a few comrades, has pushed in sheer\ndesperation, and to exhaustion, a vehicle stuck feet in the sand, who\nhas looked In vain on the smooth flat surface of the desert for cover\nfrom a lov flying plane, knows what African fighting is,\nNO OBJECTION TO PUBLICATION IN SERVICE JOURNALS\n- 7 -\nRegraded Unclassified\n395\nRESTRICTED\n0-2/2657-220; No. 483 M.I.D., W.D. 11:00 A.M., September 3, 1941\nSITUATION REPORT\nI.\nEastern Theater.\nGround: The German drive from Gomel southeastward made\nalight progress on August 31st. Another German Armored Division suc-\nceeded in reaching the Briansk-Kiev railroad to the northeast of\nVoromezh. To the south of Berezna, progress was also made. In this\nsector German infantry units are approaching the Desna River. The\nsix German bridgeheads east of the Dnepr River were not enlarged on\nAugust 31st.\nNo definite information has been received with re-\ngard to operations on the Yartsevo-Roslavl-Bryanak front, although\nRussian counterattacks appear to be continuing at various points along\nthis line.\nGerman advances continued in the Leningrad sector\non the 31st. A German column advancing northeastward from Toano reach-\ned the Neva River at Ivanoyskoye, a town to the northeast of Kolpino.\nFarther east a German combat group, advancing northeastward from Chud-\nowa down the Volchov, has reached the railroad station of Myslowe on\nthe Leningrad-Jaroalavl railroad.\nTo the southwest of Leningrad, German forces advan-\ncing from Kingisepp have captured the village of Bisguinzy. Unoffi-\ncial reports from Berlin state that the German advance has actually\nreached the area just south of Krasnoyeselo.\nAir: The Italian communiques reported German hombings of\nlarge forces of Russian aircraft concentrated on the Kiev-Gomel-\nSmolensk line.\nII. Western Theater.\nAir: British planes made night raids on Berlin, starting\nB. large number of fires,and also operated over northern central and\nsouthwestern Germany. German activity was reported over airports in\nthe Midlands and ports on the British east coast.\nIII. Middle Eastern Theater.\nGround: Little of importance.\nAir: British air activity has been strong recently against\nTripoli, Bengazi, Bardia and Gambut. Fleet Air Arm claims bombed air-\ncraft at the Italian bases of Gherbini and Comiso, Sicily. Malta was\nraided by Italian planes and British ground forces are reported by the\nItalians to have been machine-gunned in the Jarabub oasis.\nRESTRICTED\nRegraded Unclassified\nPerspkrease of Code Cablegrom\nCONFIDENTIA\nReserved n the Yes Department\nat 1102 - September \" 1941\n396\nLandon, fileds 4:37 Date, September 3, 1941.\n1.\na. Right of 49 tens of s, including - 4000\npremit - and 5800 incondisivies were dropped in Cologue. 10 teme\nof ME - also dropped - secondary targets.\nb. Day of September 2. A total of 401 fightere - employed\nM follows: 116 in the protection of shipping, 55 - interveption\npatrols, 196 - offensive nissions and 34 on special operations. orr\nStarranger, 3 Desufarte attacked , notor vessels, claiming hits w\nterpodes a - motor vessel of 7000 tena and an escart vassel. Both\nvessels - believed smk. These aircraft vere engaged w 3 German\nMo-109 3 direct bite - a 4000 ton noter vessel off the Belgian\nconst ware claimed in an attack w 3 with fighter occart.\n2 B-17's, with had been dispatched to Dulsborg and lianburg, was\ndaned their adssions Income of had waster. A third B-17 attached\nfrom from 30000 foor. to German aircraft apposed this attack.\nOne of the basks dropped - observed to buret in the custom of the\ncity.\ns. A total of 299 beniers - die-\npatched as fallows: 125 to Frankfert, 32 7 Halifax, 6\nstirlings and 4 to Barlin, 20 to Octend, and 15 en -\nmining off the Frisian Inlands. Although atmospherie conditions\nover the targets - good, there - widosprood fog over the\nBritish Inles and must airsraft will compelled to land my free\ntheir - Income.\n2. Owner Air Activity one Britain.\nCONFIDENTIA\nRegraded Unclassified\n397\na. 25 CONFIDENTIAL aircraft, 15\nLang range bashers and 3 fighters www used.\nb. s nine layers, 5 recommaisente\nstreraft and 25 long range beabers ware employed.\n6. Day of Neptember 2. Defensive fighter patrols were sain-\ntained in the area of Calais.\nd. Eight of September 2-3. Defensive night fighters patrelled\nin the area of Charbourg. Offensive might fighters operated ever\nEast Anglis and Lineolmshire. Long range banbers very active over\nst. Abb's Hoad and Whithy.\n3. Aircraft Leases Reparted.\n4. Britter Income. During the day of September 2, ne fighters\nwill lost. 1 terpodo earrying Beaufighter failed to return. 1\nBlankein will look by anti-aireraft fire off the Belgian coast, Box)-\n# leases during the night of September 2-3 were as fullows. Trub-\nfert raid, 4 last, 5 creshed in England, the crew of ene of which\nw killeds Berlin raid, 2 Hempdoms, 2 Halifax and 1 Manchaster lest,\nand ⑉ staing adesion, 2 lost.\nbe And leases. On September 2, British fighters shot, down 2\nNo-109's. Another Me-109 - destroyed in the engagement with -\nfighters.\n40 British Air Activity. Other Theaters.\na. Marth African Theater. 16 tens of ME were dropped on the\nhusber of Tripeli by 9 Wellingtons during the night of August 31-\nSeptember 1. 2 neter vessels were reported mak. Beughasi harber\nwas also attached this might. , Blenheims began this attack w\nbening a tasker and gesoline storage barge from an altitude of\nCONFIDENTIAL\nRegraded Unclassified\n398\nCONFIDENTIAL\n20 feet (1). at the - time the town was bombed w 2 Maryland\nbenders. 6 Wellingtons reasond the attack 2 hours later, drop-\nplag 5 teme of banks, During the day of September 1, direct hits\n- the power station at Tripeli were claimed in an attack by 7\nWellingtons. Adis shipping and the sund tions factory at Cretems\n(7) ware attacked - this day with good results W 7 Hlenhoims.\n5. Avia Air Activity, Other Theaters.\n4. Middle Eastern Theater. The Germans have based a equal-\nren equipped with 6 Feeks Wulfs at the Klousis airdress in Crete,\napparently intended for operations against shipping in the Red Sea,\naccording to a statement by the British Air Ministry.\nLEK\nI. B. 18, 3.00P, 9/3/41\nDistribution:\nChief of the Army Air Forces\nState Department (2)\nAccistant Chief of Staff, 0-2\nw Plane Division\nOffice of Havel Intelligence (2)\n0. 1. 8.\nRecord Section\nIntelligence Branch\nSecretary of Treasury\nA.C.W.A.\nSection File\nCollection Section\nB.B.\n0-3\nA.C.\nCE2B AM\nCONFIDENTIAL\nRegraded Unclassified"
}