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Volume 244, March 1 – March 3, 1940
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Volume 244, March 1 – March 3, 1940
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Henry Morgenthau, Jr. Papers
Diaries of Henry Morgenthau, Jr.
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DIARY
Book 244
March 1 - 3, 1940
Regraded Uclassified
- B -
Book Page
Business Conditions
Economic Developments: Noble (Commerce Department)
memorandum - 3/1/40
244
186
- C -
China
See War Conditions
- F -
Financing, Government
3/15/40:
Haas memorandum: "Selection of Issues" - 3/1/40
147
Market discussed at Treasury conference - 3/3/40
264
Finland
See War Conditions: Finland; Scandinavia
France
See War Conditions: Purchasing Mission
- G -
Germany
See War Conditions
Great Britain
See War Conditions: Purchasing Mission - Agricultural Products
- N -
Norway
See War Conditions: Scandinavia
- R - -
Research and Statistics, Division of
Projects during February, 1940
120
- S -
Smokeless Powder
See War Conditions: Strategic Materials
Sweden
See War Conditions: Scandinavia
- U -
U.S.S.R.
See War Conditions
- V -
Viner, Jacob
"The Short View and the Long in Economic Policy":
Article in American Economic Review - - March, 1940
154
Regraded Uclassified
- W -
Book
Page
War Conditions
Airplanes:
Machine Tool Industry: American Consul's report
(Birmingham, England) - 3/1/40
244
137
a) Discussed at Treasury conference - 3/1/40
116
China:
In connection with Export-Import Bank loans to
Scandinavian countries, HMJr tells Cotton (who is
at Jones' meeting) he wishes China included too -
3/1/40
101
a) HMJr-Jones conversation
105
Caobang Road as means of transportation to China
via Indo-China reported on adversely by American
Consul, Hanoi - 3/2/40
262
Closing Agreements:
Conference (outline on page 84); present: HMJr,
Magill, Sullivan, Viner, Helvering, et cetera -
3/1/40
1
a) Sullivan states history as a background
for refreshing memories
b) Change in attitude of aviation industry
during something less than two months
noted: president of Glenn Martin Company
states in a speech that of all facilities
aviation industry will suffer least from
any kind of war-time recession because
demands for commercial planes in this
country and of United States Army and
Navy will be adequate to keep additional
facilities employed
17
1) Therefore, if closing agreements had
been executed last November and entire
cost of expansion written off during
1940 as the industry itself requested,
result would have been disadvantageous
to the industry itself
c) First two closing agreements under Vinson-
Trammell Act reviewed (Colt Patent Firearms
Company and Consolidated Aircraft Company);
Hercules Powder Company also reviewed
19,24.53
d) Viner's definition of "obsolescence" given
35
e) Magill asked by HMJr to re-state problem
involved
38
f) HMJr states "from standpoint of national defense,
best thing that has happened in this country is
when the French came in and provided the money
with which to build up these factories"
44
g) Magill states two great things accomplished by
1938 Revenue Act were (1) to provide for future
closing agreements and (2) to provide for
litigation under statute of limitations
47
h) Hercules-British loan and contract discussed
58
1) Commissioner's ruling versus closing agreement
discussed
76
j) HMJr advocates publicity for closing agreements
exactly as with Commissioner's rulings
81
Regraded Uclassified
- W - (Continued)
Book
Page
War Conditions (Continued)
Finland:
Navy reports request for 150 pursuit planes -
3/2/40
244
208
Germany:
Kirk (American Embassy, Berlin) reports on deliveries
from U.S.S.R. as agreed upon in February 11th
trade agreement - 3/2/40
199
Purchasing Mission:
Agricultural Products: British purchases discussed
in memoranda left by British Ambassador with Hull -
3/2/40
234
France:
Vesting of French securities discussed at conference;
present: HMJr, Leroy-Beaulieu, and Cochran -
3/2/40
210
a) Reynaud's message concerning
222
Cochran memorandum concerning conference - 3/2/40
229
Scandinavia:
Additional loans to Finland, Norway, and Sweden
announced by Export-Import Bank - 3/1/40
98
a) Cotton memorandum
143
Shipping:
Harris memorandum on situation - 3/1/40
183
Strategic Materials:
Smokeless Powder: Navy (Rear Admiral Spear) memorandum
for HMJr concerning request of Anglo-French Purchasing
Mission for release of supply by Army and Navy -
3/1/40
85
a) Johnson's memorandum to FDR calling attention
to fact that smokeless powder is on priority list
89
b) watson's memorandum to FDR stating that Navy has
promised, under certain circumstances, to offer
600,000 pounds now in reserve
92
c) Purvis-HMr conversation - 3/1/40
107
D.S.S.R.:
Kirk (American Embassy, Berlin) reports on deliveries to
Germany as agreed upon in February 11th trade agreement -
3/2/40
199
Shipments on SS Norbryn - 3/1/40
207
Regraded Uclassified
1
RE CLOSING AGREEMENTS
March 1, 1940.
9:30 a.m.
Present:
Mr. Magill
Mr. Gaston
Mr. Bell
Mr. Blough
Mr. Sullivan
Mr. Tarleau
Mr. Foley
Mr. Viner
Mr. Helvering
Mr. Mooney
Mr. Gayton
Mrs Klotz
H.M.Jr:
Let's 60 ahead. What I asked this meeting for
is this: We have got some difficult problems
here and following my plan when I am not entirely
sure of anything myself, I thought we would have
a little debate here and I have asked Mr. Sull1-
van, who is in charge of this work, to present
the thing. What I am going to try to do is be
an impartial judge and If we permit Sullivan to
get up and say one thought at a time and then I
think if Magill or Viner want to interrupt him
and ask him questions, or anybody else does - is
that agreeable to you?
Sullivan:
Entirely, sir.
H.M.Jr:
Пе has got this thing down to the history of the
closing agreements, which is the first thing.
Then 1f you will indicate, Mr. Sullivan, when you
sort of come to B. break.
Bullivan:
Yes. Well, that is merely in as background to
refresh our recollections as to what led up to
the present situation. The question arises be-
cause of El request by American manufacturers for
prospective closing agreements relating to muni-
tions contracts with foreign belligerents and
realizing that if we were to execute such 8.
closing agreement we would then be obliged to
execute similar agreements in the case of manu-
facturers for domestic consumption and that that
would open up an entirely new field in which pros-
pective closing agreements were to be applied.
We felt that it would be desirable to survey the
entire situation before taking any forward step
at all.
Regraded Uclassified
2
- 2 -
Closing agreements first appeared in the statutes
in 1921. At that time the statute of limitations
ran for five years and there was B. great deal of
complaint, both on the part of the Government and
on the part of the taxpayers, that it took entirely
too long to close up any past year, and in 1921,
at which time the statute of limitations was re-
duced from five to four years, closing agreements
were adopted into the statute and the Bureau was
authorized to execute them after there had been
a determination and an assessment of the tax and
after that tax had been paid.
In 1922 there were 117 such closing agreements and
that increased to 834 closing agreements in 1927,
but the House Ways and Means Committee had felt
that this was merely a drop in the bucket, that we
weren't making sufficient progress along that line,
and they modified the statute in that year and dis-
pensed with the necessity of the tax having been
determined and assessed and paid and urged the
Bureau to extend its policy of executing closing
agreements. The Bureau did that. The Bureau was
the noving party requesting the closing agreements.
In fact, in every case where there was e. change
in tax liability, either upward or downward after
audit and examination, a closing agreement was more
or less insisted upon, as it was also in every
case where the tax exceed $50,000. That caused
these closing agreements to jump from 800-odd in
1927 to 38,000 in 1928 and 141,000 in 1929. About
that time the Bureau suddenly realized that It
was losing & substantial amount of money and the
taxpayers who discovered that there had been errors
in the computation of their tax liability and who
were foreclosed from attempting to recover that
overpayment were pretty much worked up, because
the Government itself had been the moving party
asking for those closing agreements and that re-
sulted in a necessary change in policy on the part
of the Bureau.
They decided that they would execute closing agree-
ments thereafter only when they were requested by
the taxpayer or when there was some special reason
why it was to the Government's interest to have
Regraded Uclassified
3
- 3 -
a closing agreement executed, and immediately
they started to drop in number. There were
87,000 in 1930, 4700 in 1931, and it ducked
down to 161 in 1937.
In 1938, the law was changed to provide for
the possibility of execution of closing agree-
ments relating to a current year or a future
year. Now, I think that is the - all I wanted
to say on the background of the situation:
Somebody else may want to comment upon it.
Magill:
I think that 1s the story as I know it. There
is one other element in there, I think, and that
is that in about 1933 or '34, as you know, there
was, I think, a third restriction in the use of
closing agreements, so far as the Bureau was
concerned, and I think that 1t was at that time
that this doctrine was introduced that you men-
tioned, that the closing agreement ought to be
entered into only 1f it was to the advantage of
the Bureau for some reason or other or if it was
some kind of a special case, the reason for that
being, I think, that the Bureau discovered that
there were B. large number of cases, among them
fraud cases, in which closing agreements were
sought for no particular reason except that the
taxpayer wanted that assurance that the Govern-
ment wouldn't be going after him any further,
and hence it was thought desirable to tighten
down on it a bit.
H.M.Jr:
Well, I am not satisfied with the explanation
why the Bureau changed its policy from giving
closing agreements to not giving them. From
1929 they started to give less and it seems to
me that somebody ought to explain why at that
time they changed. To be a little facetious,
that might be a new reason given for the depres-
sion, because as your number of closing agree-
ments became less, business became worse. It
1s almost a chart we could follow. I am not
satisfied with the explanation why - first, why
did they give 187,000 and why did they suddenly
stop it? There must have been something.
Sullivan:
There were 141,000 closing agreements. That is
& lot of closing agreements and e proper closing
Regraded Uclassified
4
- 4 -
agreement has to be handled by very, very com-
petent men who have plenty of time to do it
and, as I get the story, there were a number
of errors and yet the taxpayer couldn't go
behind the closing agreement and there was a
howl on the Hill.
H.M.Jr:
But the initiative for a closing agreement in
those days --
Sullivan:
....was on the part of the Government.
H.M.Jr:
On the part of the Government?
Sullivan:
That is right.
H.M.Jr:
They asked for it?
Sullivan:
That is right.
H.M.Jr:
Oh, they would send it to the taxpayer?
Sullivan:
That is right.
H.M.Jr:
And the Government would demand a closing agree-
ment?
Sullivan:
That is right.
Viner:
What were their means of obtaining the consent
of the taxpayer, what did they threaten him
with if he didn't consent?
Sullivan:
I am not sure it 1s necessary to threaten at
all. The taxpayer is always anxious to conclude
his tax negotiations on any reasonable grounds
and if he knows that it settles it entirely,
that is inducement enough.
Viner:
What happened was the two came to the agreement
on the basis of their then knowledge as to what
was EL reasonable tax and then the Internal Reve-
nue said, "Will you enter into a closing agree-
ment on this?"
Sullivan:
That is right. Now, there might have been a mere
mistake of arithmetic; there might have been a
Regraded Uclassified
5
- 5 -
cipher or a decimal point misplaced. It is per-
fectly apparent to everybody. Yet, nothing
could be done about it when that closing agree-
ment was signed.
Viner:
That didn't close against later discovery of
fraud, did it?
Sullivan:
No, nor did it preclude a - no, I guess we don't
need to go into that yet.
Magill:
Well, fraud wasn't SO simple then, Jake. You see,
you've got a lot of these things over here for
signature where the Bureau has determined there
is fraud in a closing agreement and then it has
to be set asíde. Well, it has to be set aside,
I guess, more formally than it is entered into
in the first place and there has been recently,
for instance, this last week, a case in the
Supreme Court in which 8, taxpayer was contesting
the setting aside of a closing agreement on the
grounds of fraud.
H.M.Jr:
Well, I mean - it seems to me that - I wasn't
aware of the fact that we had entered into B.S
many closing agreements as mentioned here, but
is anybody connected with the Bureau who wants
to take either side of that question? Mooney,
were you with the Bureau then?
Mooney:
Yes. I would merely like to add to what Mr.
Sullivan has said, that the initiative was taken
by the Bureau and furthermore it is evidenced
by the fact that at one time I believe the final
closing agreement was, in effect, an agreement
concerning the assessment of the tax, which 1s
their regular form 870 now, as well as a final
closing agreement. It was a combination of both,
the idea being that it is advisable to have this
signed by the taxpayer in order to close once
and for all his tax liability so that when the
taxpayer would agree to the deficiency, he would
sign at the same time with knowledge that he
was signing not only consent to the tax but a.
final closing agreement. Then it developed that
later on because of some undiscovered deductions
which the taxpayer was entitled to, which had
been overlooked by him in the Bureau, he filed
Regraded Uclassified
6
- 6 -
his claim for refund. He didn't know it at
that time. He filed his claim for refund.
Then he would be met with the fact that he
had finally entered into an agreement which
finally determined his tax liability and this
agreement can't be set aside except on account
of fraud or malfeasance or misrepresentation
of facts, so he had to admit in that case the
taxpayer had overpaid his tax but the statute
would cover that.
Magill:
May I ask there, Mooney, because I think that
is very important, it may be what the Secretary
is driving at. Sullivan said - that was a sur-
prise to me - that in 1928 or '29 or along in
there, there was a drive by the taxpayer against
the closing agreement and that they - the men
on the Hill were upset about the use of closing
agreements. Is that so?
Mooney:
That is B. fact, and it is evidenced by the fact
that with these taxpayers, after they had filed
their claims for refund - when they were met by
the fact that they had signed the final closing
agreement at that time and were precluded now
from getting a refund, that was what gave rise
to the drive on the part of the taxpayers to
not enter into these final closing agreements.
Magill:
Is there really anything to be said to the tax-
payer in that situation? What I have in mind is
this: I should think those cases typically arise
where some lawyer gets hold of the taxpayer after
this case has been closed and says, "If you had
had me in your employ, I could have saved you
$10,000, because here is B. deduction you should
have taken," and so on.
Viner:
What about a new court decision?
H.M.Jr:
Do you mind, just one at a time, please.
Mooney:
That is true, possibly, to a certain extent,
Mr. Magill, but there are other instances such
as new court decisions that have just been men-
tioned. Likewise, in connection with an investi-
gation of the taxpayer's liability for 8. subse-
quent year. Here is an item of deduction which
Regraded Uclassified
7
7 # #
NO say 13 not here. It isn't B deduction in
the year 1935, it is El deduction in the year
1933. The statute is open for the year 1933.
We could give the taxpayer's money back for
that year, because we are going to propose 8.
deficiency just by shifting his deduction from
one year to another, but then he is faced with
the proposition that here in '33 I find B. final
closing agreement. His liability has been finally
determined. He can't get his money back. Such
things as that. Furthermore, it worked to the
disadvantage of the Government also, because
subsequent to the time we had closed the tax-
payer's case in connection, say, with an inves-
tigation of 8. subsequent year, we find an item
which would produce el deficiency, then we were
precluded, because the liability had been finally
determined. We couldn't assess any further de-
ficiency for that year in the absence of freud,
malfeasance or misrepresentation of facts.
Sullivan:
Nor, on the other hand, pay any refund.
Mooney:
Nor pay any refund. It worked both ways.
Sullivan:
Dr. Viner's question is whether or not B. closing
agreement is subject to a subsequent court de-
cision which reverses the law in this situation.
The answer is that the closing agreement 18
above that. It is subject only to El change in
the statute.
R.N.Jr:
You mean there is no appeal?
Sullivan:
No.
Ragill:
It is all done.
Sullivan:
The closing agreement contains the provision that
it is subject to any future change in the law.
However, it 1s not subject to B. change because
the court reverses opinions that have been for-
merly handed down.
H.M.Jr:
There is one statement you made which I would
like to 80 into further and that is that these
closing agreements cost the Government money.
Regraded Uclassified
8
- B -
Practically everything that Mr. Mooney said
is that the taxpayer's objection was that if
he subsequently discovered something, he
couldn't get any refund. Has any study been
made on the 100-odd thousand closing agree-
ments - I mean, who would have been the loser
and the gainer, because practically everything
you said was about the taxpayer who couldn't
get EL refund when he had found he had made
some mistake.
Mooney:
That is true, but the shoe was also on the
other foot.
E.M.Jr:
Where did it pinch more?
Mooney:
That is pretty hard to say.
Sulliven:
You can't tell.
H.M.Jr:
Then it is about 'even Stephen,' 1s that a
pretty fair statement?
Mooney:
Yes.
Sullivan:
In the long run, I would anticipate it would
be 'even Stephen, but it would be even because
of inequity on the part of the texpayers.
H.M.Jr:
Then the statement that the Government lost
money on this thing wouldn't necessarily be
correct?
Sullivan:
No, I am telling you what the attitude of the
Bureau was at that time as reported to me.
E.N.Jr:
No, but the impression I got was that through
these closing agreements, that the Government
lost money on them.
Magill:
I think the chances are that it did, but I
still think the 'even Stephen' is probably
the way to look at it, that is, why I say
that is this: that the taxpayers probably
would not sign one of these things unless
they thought that from their point of view
it was 8. pretty good break, or, to put it
Regraded Uclassified
9
- 9 -
another way, the taxpayer had open to him the
possibility of contesting this liability fur-
ther in courts or before the Board or some
place or signing & closing agreement. If he
didn't think the thing was reasonably favor-
able to him, he would contest it and since
taxpayers are shrewd and hire good attorneys,
and 80 forth --
H.M.Jr:
Sometimes.
Magill:
Sometimes. The chances are that the scales
would weigh a little in their favor on the
closing agreements, I imagine, just as a general
guess, but I think that it - it seems to me the
main issue here - I don't wish to pre-judge this -
is this: A lot of people in the country, including
the Congressmen, think that the objective is to
settle tax cases on their merits. The thing must
be decided right, whatever that is, and that if
there is a subsequent decision or a change in
our philosophy, or something or other, everything
must be reopened, in order to give everybody the
benefit of this new situation, whatever it is.
Well, the other possible point of view which
isn't so widely held, except by more technical
people, is that the really important thing is
not so much whether the cases are settled right
or not as that they are settled, to get the job
done and get it out of the way, which is very
important to the taxpayer and very important
to the Bureau, and you may find five years later
that you could have made a $10,000 better deal,
but the chances are that it was worth more than
$10,000 to you to get the thing out of the way
and not be fussing about it.
H.M.Jr:
May I go back - was '28 the peak year?
Sullivan:
'29, I think.
*****E
Let's take '28 or '29. Now, I am a manufacturer
in '28 and '29. I want to expand my plant.
Now, do I understand - let's say it was in '28.
Do I understand that the Bureau would send for
me and would urge on me a closing agreement in
the year '28?
Regraded Uclassified
10
- 10 -
Gaston:
They didn't have prospective closing agreements
then.
Sullivan:
Everything that has been said so far relates
to closing agreements on past transactions.
H.M.Jr:
Well, look, give me - for the year, let's say,
'28 or '29. I mean, what happened? Somebody
was in there. Were you in the Bureau then?
Mooney:
Yes.
H.M.Jr:
Now, I am a manufacturer and I want to expand
my plant by $100,000, put a $100,000 addition
on it. What happened?
Sullivan:
You couldn't submit that proposal or agreement.
Gaston:
That case wouldn't come up.
H.M.Jr:
What happened?
Gaston:
They were dealing with the past, not the future.
Sullivan:
You just went ahead and did it.
H.M.Jr:
I want to get this. I want a typical example
of what happened.
Magill:
Your example would be this: You are the "X"
Manufacturing Company and you file your return
for 1927 and along about '29 or '30 the Bureau
got around to examining it and you or your
lawyers, or you had discussions with the Internal
Revenue Agents over a dozen items, depreciation,
perhaps some retirement of some securities, this
that and the other thing, the liquidation of B.
subsidiary, or whatever that is, you may have had
8. dozen different questions. These salaries you
paid your officers, and so forth. Well, finally
you get down to the place where the Bureau said,
"We will allow this, but we are going to dis-
allow that, If and 30 on, "and net, you owe us
$10,000." Then they say, "Now, we, having
arrived at this conclusion, we want you to sign
on the dotted line agreeing to pay $10,000 and
closing the case on that basis, and you talk
Regraded Uclassified
11
- 11 -
to your lawyer, and 80 forth, and you say,
"Well, it 1s worth $10,000 to me to get it
out of the way, so I will do that," and you
do it.
H.M.Jr:
Supposing I refuse to.
Magill:
If you refuse to, the Bureau gives you a de-
ficiency letter for $10,000 or maybe $25,000.
Viner:
That was what I had in mind. Didn't they call
it the practice of raising the deficiency
assessment if you didn't sign?
Magill:
I don't know whether they did or not.
Viner:
The taxpayer probably did.
Bell:
All Sullivan was trying to do was give you the
history of the case up to '38.
Sullivan:
You asked me to pause when I got to a certain
point.
H.M.Jr:
But this thing we are talking about isn't what
I am interested in.
Sullivan:
That is what I told you, I was giving you the
history of the closing agreements and I said
that up to this time closing agreements were
restricted to past transactions.
H.M.Jr:
But that wasn't emphasized. I want to just get
the history. Supposing I said, "All right, I
won't settle for my '27 tax." You were talking
to me, I take it, along about in '32. Then
what?
Magill:
The Bureau sends you a deficiency letter and
says, "All right, we are going to assess you
twenty-five."
H.M.Jr:
Is that what they did?
Magill:
That is what they would be apt to do.
Regraded Uclassified
12
- 12 -
Mooney:
I would like to take exception to that.
Magill:
All right, then you would only assess them
fifteen, and then you would take it to the
Board of Tax Appeals or to the court. Maybe
you would have to pay 25 or maybe 10 and maybe
nothing, according to how you came out.
H.M.Jr:
Give Mooney a chance.
Mooney:
The Revenue Agent would audit the accounts
and say, "Now, I think you owe $10,000."
You would agree that you owed $10,000. Then
the agent would say, "Now here, will you sign
this agreement? This agreement consents to
the assessment of tax, because we can't assess
it until you agree unless we send out & 90-day
letter and give you the right to go before the
Board. We are desirous of closing this liability
once and for all, so you have the right at this
time to also sign this final closing agreement."
If you do that, that is the end of it and the
case can't be reopened thereafter except on the
grounds of fraud, malfeasance and misrepresente-
tion of fact.
It was a request that the taxpayers sign the
final closing agreement for the purpose of
finally closing the tax liability. If the
taxpayer said, "No, I am willing to consent to
this assessment, If he would then sign the 870,
which would permit us to assess the tax, but
he would say, "I won't sign this final closing
agreement because it is possible by reason of
some court decision, change in the law, or change
in the audit in a subsequent year, I will be
entitled to a refund and I don't want to pre-
clude my rights in that respect," particularly if
the taxpayer was represented by counsel. Counsel
would advise him against the signing of the final
closing agreement and it would not be entered
into. That is why, we found out, and I believe
it 1a a fact that can't be denied that in the
majority of these cases, the final closing agree-
ment was not hurting the taxpayer who was repre-
sented by counsel. It was hurting the little
fellow who wasn't represented by counsel. He
Regraded Uclassified
13
- 13 -
had agreed to the determination made by the
Bureau which would be correct at that time,
based upon the tax that was assessed then.
He would sign the final closing agreements,
thinking it was advisable to once and for
all settle his case. Then later on, because
of the discovery of an item he was entitled
to, when he filed his claim for refund he
was the one that was precluded from getting
the refund.
H.M.Jr:
In this day of our Lord 1940, how do you do
it today? Today we make no request for a
final closing agreement. The initiative is
taken by the taxpayer and then the Government
will then go into the final closing agree-
ment where there is no disadvantage to the
Government and if it is good business propo-
sition, enter into it. The only difficulty
is that the initiative is with the taxpayer,
but otherwise, you go through the same pro-
cedure?
Mooney:
Right.
H.M.Jr:
Is that the only difference?
Mooney:
Yes.
Viner:
On the retrospective ones.
Mooney:
That is right, 80 far as the determination of
tax liability based upon the returns that have
been filed.
H.M.Jr:
I mean, the difference between the taxpayer and
the Bureau today, the taxpayer has to take the
initiative. After he has done it, the mechanics
are just the same.
Mooney:
Yes, sir.
H.M.Jr:
Then you enter into a closing agreement?
Mooney:
Yes.
14
- 14 -
Viner:
That is a retrospective closing agreement, not
B. prospective.
H.M.Jr:
Yes, right.
Magill:
How many did you enter into last year? Is that
the only difference? How many did you enter into
last year?
Mooney:
Very few. I haven't the figures, but roughly,
I would say this. It 1s evidenced by the per-
sonnel that was necessary to handle these final
closing agreements. In 1930, '29 and '30, we
had about 62 people down in the Bureau function-
ing on these closing agreements.
H.M.Jr:
Isn't this done now in the field offices?
Mooney:
Not to the extent that it was done in these
prior years. Today we have about two people
down there that are able to handle the work
in connection with the final closing agree-
ments.
H.M.Jr:
I understand what happened in the roaring '28s
and '29s --
Sullivan:
To the tranquil '30s?
H.M.Jr:
Shall we go on from there?
Sullivan:
In 1937 Mr. Oliphant had given e great deal of
time to the idea of declaratory rulings, thinking
that they would be helpful to taxpayers in in-
terpreting the tax laws, and according to his
device, machinery was to be set up so that before
a ruling was made on any question, a taxpayer
would have a chance to be heard and not only
one particular taxpayer but all taxpayers whose
tax liability would be affected by that particu-
lar ruling and then there was provision for
quasi-judicial review of that ruling after it
had been made, after which time that would be
pretty binding on all of the people who found
themselves in that particular situation and
any person who had a similar interest could be
heard, either at that hearing or at the time
Regraded Uclassified
15
- 15 -
of the judicial review of it. That failed in
Congress. A previous effort had been made to
provide for the declaratory rulings and matters
relating to Customs and it was defeated in Con-
gress, but out of it all came the change in the
law which removed the restriction of closing
agreements to past taxable years, and under the
law at the present time it is possible - it is
legal to execute a prospective closing agree-
ment. I think Mr. Oliphant contemplated this
type of situation, that if a taxpayer requested
a ruling as to what year in which Associated Gas
& Electric stock became worthless, there would
be a hearing, B ruling, a judicial review, and
then that fact as established would prevail in
the return of any person who was reporting B. loss
on that stock.
Under the present situation, under the present
law, a closing agreement can be entered into
between Mr. Helvering and myself determining that
my Associated Gas & Electric stock became worth=
less in 1940, and yet that wouldn't prevent
Mr. Bell from claiming that it didn't become
worthless until 1941 and it wouldn't prevent
Mr. Magill from claiming that it became worth-
less in 1939 or 1940. In other words, the closing
agreement would be conclusive on the rights of
merely the particular taxpayer who executed it
with the Government, and I think that that dis-
tinction is something that it is pretty well to
bear in mind, because I think that in one of our
discussions a remark that you (Secretary) made
led me to believe that you felt one closing
agreement could set up a standard in the formula
that would apply to all people in similar situa-
tions. That is not so under the present law.
I think it might be helpful if we sort of re-
viewed for a minute the type of closing agree-
ment that has been executed since that law was
changed, opening the doors to prospective closing
agreements.
There have been B. total, up until February 9, of
923 closing agreements executed in about 45
Regraded Uclassified
16
- 16 -
different cases. The great majority of those
have been in reorganization and liquidation
cases. There are included in that number two
closing agreements under the Vinson-Trammell
Act. There are & couple of questions on the
value of real estate. One of them in the TVA
matter, but - and on the value of stock and
forgiveness of indebtedness, but I think the
significant thing about these closing agree-
ments that have been executed up to now is that
with the exception of the Vinson-Trammell Act,
although they relate to prospective action, they
are based upon definitely established facts that
are just as sure as though they had transpired
in 1938 or '39. Is that right, Mr. Gayton?
Mr. Cayton has had charge of that work in the
Bureau and I think it would be helpful if he
would tell us about that.
Geyton:
In what respect?
Helvering:
What to require.
Gayton:
The typical case of & reorganization, they are
required to submit their plans that they intend
to adopt. If it is 8. statutory merger, they
are required to submit the papers that they
intend to file with the different Secretaries
of State to make it & statutory merger. The
purpose of the transaction must be set forth in
elaborate detail so that the Bureau can make sure
it is & business transaction and not & mere tax
avoidance example. All the minutes to be adopted
by the stockholders and directors must be sub-
mitted, all under oath.
Sullivan:
So that when you pass on the closing agreement,
you have definite facts there that are just 8.8
surely established as though this were a com-
pleted transaction that had transpired a year
or two ago.
Cayton:
Yes, indeed, the assets to be moved must be
specified and their cost determined on the basis
to the corporation agreed to. Every taxpayer
that is interested in the deal must come in
and agree to & final decision.
Regraded Uclassified
17
- 17 -
Viner:
In other words, you are not granting prospective
closing agreements. It would have to be pro-
phesied or forecast.
Gayton:
No, they are facts.
Viner:
But you are authorized to do so.
Gayton:
They are facts which will occur in the future
and they must do it in accordance with their
method laid down in the closing agreement. Then
the answer is before them and the case is closed.
H.M.Jr:
I am still waiting.
Sullivan:
All right. The first departure from that prin-
ciple occurred this fall when there was at great
deal of publicity about closing agreements under
the Vinson-Trammell Act. There were only two
closing agreements executed. Those two closing
agreements took the major part of the time of
10 men for three months and were finally con-
summated. A situation developed there that I am
reminded of by Dr. Viner's remark, but these
agreements that had been executed were really
not prospective ones and I think Mr. Gayton an-
swered that they were agreements in which the
facts were certain. The importance of certainty,
I don't think, can be overestimated.
Throughout October and November, we had repeated
pressure from munitions makers, both those con-
templating contracts with our own Army and Navy
and those who were expanding their facilities
for foreign orders, and they attempted to tell
us in a great variety of ways that the - it would
be impossible to go ahead with this situation
unless we would agree to write off the entire
cost of new facilities in the first year. We
were repeatedly told that their plants would be
junked, that it would be of no value at all after
this one order was executed, and yet this week
the President of Glenn Martin Company, at a
speech reported in the Wall Street Journal,
advised the trade that of all facilities, the
aviation industry would be the least to suffer.
Regraded Uclassified
18
- 18 -
Now, that is a change in attitude that has
been produced in something less than two
months.
H.M.Jr:
Least to suffer from what?
Sullivan:
Would be the least to suffer from wartime
recession, that the demands for commercial
planes in this country and the demands of
our own Army and Navy would be adequate to
keep those additional facilities employed.
Now, in November these people were telling us
that these plants would have to be disbanded
and they wanted prospective closing agreements
executed by the Bureau which would enable them
to - which would enable them to write off 100%
of the cost of those additional facilities when
this one contract was completed. The Bureau
refused to do that for two reasons. In the
first place, they didn't believe that that would
be the fact and in the second place, it was
altogether too uncertain and indefinite. Had
those closing agreements been executed, the
entire cost of expansion of those plants would
have been written off during the year 1940.
Viner:
To the loss of the companies. It would have
been a disadvantage to them and an advantage
to you that they should have done 80.
Sullivan:
I beg your pardon?
Viner:
It would have been an advantage to the Internal
Revenue that they should have presented that
way.
Sullivan:
I submit to you that that is purely an academic
question and must always remain so, because
whether or not a change in policy 18 going to
result in & gain to the Government or to the
taxpayer is something only an ouija board could
foretell.
Viner:
I don't think that is what the companies really
wanted. It would have been foolish for them.
Regraded Uclassified
19
- 19 -
Sullivan:
We recognize that they were foolish.
Viner:
I don't think that is what they wanted at
all.
Sullivan:
Well, that is what they requested.
H.M.Jr:
Let me - I think it would be helpful to me,
because this is all for my benefit, 1f you
described these two closing agreements that
we are talking about under the Vinson-Trammell
Act.
Sullivan:
I would be very happy to do 80.
H.M.Jr:
Let's talk about it, because this is all for
my benefit.
Sullivan:
The first closing agreement related to a con-
tract between the War Department and the Colt
Patent Firearms Company. It was & small con-
tract for, I believe, 85 or 95 automatic small
cannons to be used on aircraft. It was pretty
much an experimental order and the dies and
J1ga and machinery, all except the heavy
machinery, which it was necessary that they
should make in order to be able to produce
these guns, were absolutely useless for anything
else except that particular gun, so we were con-
fronted with & very - a comparatively simple
problem, because without any closing agreement,
as soon as they abandoned the jigs and dies
they had bought to make this particular gun,
they would be entitled to a deduction equal to
the cost of that machinery to them. The only
question that presented any difficulty there
was the treatment of the other more or less
standard additional machinery that they had to
acquire for this purpose. That was machinery
which would have not only salvage value but
would have continued useful life after this
contract was executed. However, a closing
agreement with them --
H.M.Jr:
What did you do?
Regraded Uclassified
20
- 20 -
Sullivan:
We did for them exactly what would happen if
they had no closing agreement when we allowed
them to write off against the contract and for
their income tax purposes also the special
jigs, dies and tools.
H.M.Jr:
Over how long a period?
Sullivan:
Over the period of the contract.
H.M.Jr:
How long?
Sullivan:
They contemplated, I think, that it would take
about a year and a half to make those guns and
you see, under the Vinson-Trammmell Act, they
could not report by years. The reports are
filed by contracts.
H.M.Jr:
Well, if it was 18 months, do you remember how
much they could write off in the calendar year
of '40?
Sullivan:
You mean on their income tax?
H.M.Jr:
Yes.
Sullivan:
I think they were allowed to write off the de-
preciation ratably over those two years, 50
percent & year.
Viner:
How about the standard equipment?
Sullivan:
They were given the same rights of depreciation
as other standard equipment in the factory.
Viner:
What did they gain?
Sullivan:
Nothing, and nobody ever gains anything by a
closing agreement except assurance. It is not
at all possible by a closing agreement to con-
fer upon the taxpayer any relief which he would
be entitled to without it.
Gaston:
Well, he would be relieved from doubt.
Foley:
He would get his assurance before he bid what
his tax situation is going to be. So in making
Regraded Uclassified
21
- 21 -
up his estimates, he has some relation of
the treatment he 18 going to get from the
Bureau and can make his approximations with
a little more degree of certainty.
H.M.Jr:
Wasn't the price for these guns settled before
we got the closing agreements?
Sullivan:
No, sir. You will recall that the reason why
you agreed, with the Secretary of War and the
Secretary of Navy, to execute closing agree-
ments in regard to the Vinson-Trammell contracts
was because the manufacturers were protesting
that they couldn't bid intelligently upon con-
tracts unless they knew what their tax situation
was to be.
H.M.Jr:
Well then, they would come down here; I take it
the Colt sought us out, did they?
Sullivan:
I beg your pardon?
H.M.Jr:
Did Colt seek us out?
Sullivan:
oh, yes.
H.M.Jr:
Colt would come down here and they would say,
"Now look, Treasury, we have an opportunity,
or we have Were they singled out by the
War Department? They weren't bidding, were
they.
Sullivan:
They were in this particular case, but that
wouldn't be the ordinary case. They would say,
"Vie are considering bidding on an article."
H.M.Jr:
But in this case, they were sought out?
Sullivan:
Yes, I think they were.
H.M.Jr:
And we have an opportunity to build 95 special
machine guns. But their attitude was, "Before
we want to bid or accept this contract, we
have got to lay out so much money and we want
to know what our taxes will be," is that the
attitude?
Regraded Uclassified
22
- 22 -
Sullivan:
That is right. They are mostly concerned not
with their income tax situation but with the
Vinson-Trammell situation. In other words,
what can they be assured they can put into their
report under the Vinson-Trammell Act as cost,
because they are limited to a 12% profit in
that instance.
H.M.Jr:
I see. Well, in this case was there any plant
involved?
Sullivan:
No, sir.
H.M.Jr:
It was just the machinery?
Sullivan:
That is right.
H.M.Jr:
Well, before we go on to the next contractor,
does anybody want to ask anything about the
Colt, because the next one involves a plant.
This involves machinery.
Gaston:
What I wanted to ask was this: In the case of
all these prospective closing agreements which
you are dealing with, what you are dealing with
is not absolutely the amount of the tax which
will be assessed, but the principles which will
be applied in estimating the amount of the tax,
isn't that correct, John?
Sullivan:
That is right.
Viner:
With respect particularly to the rate of de-
preciation you will allow, isn't it?
Sullivan:
That is right.
Gaston:
Various other things.
Helvering:
Obsolescence and depreciation.
Viner:
That whole complex.
Sullivan:
That is correct.
H.M.Jr:
One other question in the case of Colt. Supposing
that at the end of 18 months period, this gun is
Regraded Uclassified
23
- 23 -
proved to be a success and the Army says, "We
want to order another hundred," and the mach-
inery - well, it is still there. What happens?
Helvering: They pay the tax on the entire property.
Sullivan:
That is right.
Helvering:
After it is charged off.
Viner:
They have no more depreciation to charge off,
because they have already been allowed 100%.
Sullivan:
Just a minute. In Colt, there was an option for
a further number of guns after that first one
had been completed. In other words, when the
Army tried this gun out, if they decided it was
good, then they could have so many more and if
the option were exercised, then that depreciation
would be spread over the length of the subsequent
contract.
H.M.Jr:
But I take it at a lower price.
Helvering:
A lower rate, yes.
H.M.Jr:
A lower rate for the additional guns?
Sullivan:
Yes.
Viner:
Or a higher tax on the excess profits?
Sullivan:
No, I think it was - no, because we were to know
before the first contract period was completed
whether or not that option was to be exercised,
so on their Vinson-Trammell report, before they
made it, on the first contract, they would know
whether it was the depreciation - whether the
depreciation was to be extended over a - more
than one contract.
Viner:
I think the question is this: Didn't the Navy,
or the Army, whichever it was, did they have two
prices in the contract, one on the basis of no
no renewal of the contract, and the second and
lower one on the basis of a supplementary con-
tract?
Regraded Uclassified
24
- 24 -
Sullivan:
I didn't see that particular contract, Doctor,
but I am very sure that the guns on a subsequent
contract would be lower in price. They always
are in both the Army and Navy contracts.
Foley:
Well, the cost of that machinery wouldn't be in-
cluded.
N.M.Jr:
Just for my own - this was the gun that went into
the Bell, wasn't it?
Bullivan:
I don't know which plane it went into, sir.
H.M.Jr:
Well, does anybody want to - we can come back to
this point. Let's go to the next one.
Sullivan:
Then along came Consolidated and Consolidated,
as with almost all others, it wasn't a case of
the taxpayer coming to us, it was a case of the
Navy bringing him over to us.
Selvering:
Aircraft?
Sullivan:
Consolidated Aircraft, yes. In that case, the Navy
certified that an entirely new plant of about two
million dollars would become worthless in 18 months,
that as soon as this contract was completed those
entire facilities would be not worthless, but would
have depreciated 60% and the request was for a
closing agreement that all new facilities should
be written off at the rate of 60% against the
contract. That, we refused to do.
Negotiations continued over a period of three
months and there was finally executed 8. closing
agreement which the proper - the provisions of
which were exactly the law, which would apply 1f
the contract had been completed today and there
was no closing agreement. There was a great deal
of pressure there, because of additional plant
to accord to them B. rate of depreciation upon
their new factory, out of line with the rates that
prevail in other lines of industry, and we refused
to do that.
Magill:
Did you enter into a closing agreement with them?
Regraded Uclassified
25
- 25 -
Sullivan:
Yes.
Magill:
What rate did you give them?
Sullivan:
Just the usual rate that prevailed throughout
the industry.
Viner:
That is, you granted them no special obsolescence?
Sullivan:
None at all.
Magill:
Was that as compared to your 60% that they asked
for?
Sullivan:
I don't know what type of construction it was.
I think they got 5%, but I am not sure. I
haven't those closing agreements. I thought
Ryland was coming over and was going to bring
them. I think it was five.
Gaston:
Per year?
Sullivan:
That is right.
Viner:
May I ask one question there? This concern, if
it weren't that it was contracting with the Gover-
ment and the price they were getting from the
Government depended upon the arrangements they
were making with you, would never have entered
into that agreement with you, because they might
have gotten a better obsolescence from the con-
tracts, isn't that so? They have no interest
now; they don't care what you do as long as the
Navy will make it up for them in the price they
pay them. This has no bearing on the taxpayers.
It isn't dealing with the Navy or somebody else
whose finds out what price they have to pay and
say, "All right, we will pay you B. price which
covers that tax."
Sullivan:
No, this isn't the ordinary case. These two are
Army and Navy contracts.
Viner:
Let me repeat my questions, because I think it
1s important for me that I get that answer. That
taxpayer would never have asked you or consented
Regraded Uclassified
26
- 26 -
to that closing agreement if he weren't dealing
with the Government on a special kind of con-
tract of that sort.
Sullivan:
Oh, yes.
Viner:
Why should he? You say you recognized no obso-
lescence there?
Sullivan:
That is right.
Viner:
There is going to be, in all probability, sub-
stantial obsolescence.
Sullivan:
I would doubt that very much.
Viner:
Well, there is certainly a chance of it.
Sullivan:
Oh yes, there is a chance of it.
Viner:
If there is a chance of it and it does occur, he
will have a chance in the courts to get an allow-
ance for this.
Sullivan:
Yes.
Viner:
If he doesn't enter into a closing agreement. He
gains nothing by that except by his relations
with the Navy.
Sullivan:
And you seem to think because it 1s relations
with the Navy he had to execute the agreement
with us.
Viner:
No, but he has to figure costs and he doesn't
know what the taxes are until he knows what the
costs are and his business normally isn't done
on the cost-plus basis of that sort. The taxes
are a matter of importance to the person who
deals with the Army or Navy. You can double the
tax and he will double the price to the Navy and
the Navy will pay it and he doesn't care what
you do to him.
Magill:
Jake, isn't this true, too. I would like to be
sure on that point. The tax, of course, is one
Regraded Uclassified
27
- 27 -
element in his cost, but the depreciation on his
building is another and much more important ele-
ment. Now, 11' he is only going to get 5%, for
instance, as against the 60, which he wanted in
the first place, the amount he gets from the
Navy is going to be very much less, as I under-
stand it, under the Vinson-Trammell Act than it
would be under what he wanted.
Viner:
In other words, he can't tell the Navy that he
thinks his depreciation is going to 30% that
year, although the tax people are only allowing
him five. He has got to make his own cost esti-
mate conform to what the Internal Revenue thinks
it is going to be.
Bullivan:
That is correct.
Viner:
Then I take it back. It 1a EL matter of concern
to him, too. In other words, he is still capable
of losing a lot of money on that contract,
Magill:
Yes, sure.
S.M.Jr:
Well, this was only with the Navy, wasn't it?
Sullivan:
That is right.
I.S.Ir:
Well, the way the thing was closed and according
to this, there was no advantage in their having
it. I don't see what the advantage was in their
having it.
Bullivan:
I can tell you why he signed the closing agree-
ment, 1f you want to know. It was Major Fleet,
who is a very talkative gentleman, who had
assured his Board of Directors that he was going
to Eet a closing agreement out of the Treasury
Department if it was the last thing he did.
H.M.Jr:
And he got one?
Sullivan:
He got one. It was signed about the middle of
December and it was the same one that was offered
to him on the 10th of October, with two minor
revisions in our favor.
Regraded Uclassified
28
- 28 -
Viner:
I think he was making B. serious mistake for
his corporation in doing that, in the light
of what has been presented, that he has been
trapped and that he should never have done
this or he had trapped his corporation.
Sullivan:
I don't think he has trapped his corporation.
Viner:
I think he has, on that basis.
Sullivan:
Well then, according to your theory, any tax-
payer is always B. fool to execute a prospective
closing agreement.
Viner:
No, it depends on whether the agreement is reason-
able or not.
Helvering:
Well, you are discussing it from just a tax angle.
Viner:
Yes, I know. There may be other things there.
Magill:
As the thing works out, isn't he gambling really
on what his income from aircraft is going to be
in future years? I don't mean where it comes
from, because 1f he should discover three or
four years from now - the fact is, this plant
is completely obsolete and he can't use it, and
so forth. He can write it off, assuming that he
has the income to write it off.
Gaston:
Yes, that would depend on the income he has.
Viner:
It is really more complicated. He may assume
that his company is going to have a fortunate
year over the next 10 years and that he is
really fooling you by being able to postpone
again the high profit years, the writing off
of depreciation, which is really actually accord-
ing to this year, 80 that it may be that both
of you were smart.
Magill:
I think Sullivan 18 right, that the chances are
on the figures he has given, the chances are
this fellow hasn't made a very good deal from
his own point of view, but at the same time I
Regraded Uclassified
29
- 29 -
don't know you could say he has made a bad
deal.
Viner:
Supposing he thinks that the corporate tax
is going to go up in the next five years.
That would be an argument in favor of entering
into this closing agreement, because he 18
postponing the writing off of the depreciation.
Magill:
I think Mr. Gayton can testify to this better
than I, but I think it is true that taxpayers
are trying to postpone their depreciation at
the present time rather than take it quick.
I don't know if that is true in wartime con-
tracts, however.
Viner:
What was the rate? Was it five or twenty or
fifteen percent, or, in other words, how long
a life on the plant?
Sullivan:
I think it was five.
Magill:
Five, of course, is very low.
Sullivan:
Well, of necessity, he was putting up 8. tremendous
building there.
Helvering:
And a permanent building.
Sullivan:
Yes.
Blough:
In terms of the income tax, it seems to me what
has been said is quite pertinent, but when you
are saying he has made a good deal for himself,
aren't you leaving out of consideration the
profit tax under the Vinson-Trammell Act?
Helvering:
That is right.
Blough:
I don't see how he can be making a good deal for
himself with respect to the Vinson-Trammell Act.
Magill:
No, I don't think he is.
H.M.Jr:
I may want to come back to this, because this
thing isn't clear in my mind, what we are talking
about, yet, but I would like to just get the
Regraded Uclassified
30
- 30 -
full - everything on the table and why you can
do one and why you can't do the other, see.
There are at present - well, I know of three.
I have seen them with my own eyes. I haven't
seen the others. There are three plants which
have been built with foreign money. There is
one for Glenn Martin in Baltimore and one at
East Hartford for Pratt Whitney and one at
Paterson for Curtis Wright. I have seen them
with my own eyes. They have all been built with
foreign money and I believe that the question
of - well, the Vinson-Trammell doesn't come into
this. I imagine all of their cases are pending
before the Bureau now. They went ahead and
built the plant and didn't ask for B. closing
agreement.
Sullivan:
Pratt & Whitney did.
S.N.Jr:
Did they?
Sullivan:
Yes.
H.M.Jr:
Well, the building is built.
Sullivan:
It is now, yes.
H.M.Jr:
The building is built and none of the three have
& closing agreement.
Sullivan:
That is right.
H.M.Jr:
None of the three have it. All right, here are
three buildings having been built. None of them
had closing agreements before the building was
built and just in the room here, I mean, how are
we going to treat these three companies?
Sullivan:
I would disapprove of executing a closing agree-
ment with them. Now, bear in mind the develop-
ment of this thing.
H.M.Jr:
Excuse me. The reason I am - the case of Pratt &
Whitney and Colt, the manufacturer wouldn't go
ahead and enter into a contract until he had 8.
closing agreement.
Regraded Uclassified
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Sullivan:
In the case of Consolidated and Colt.
H.M.Jr:
That is right. Here are three finished buildings
and they are going to have to come to some kind
of an agreement after the building is completed.
Sullivan:
Why?
H.M.Jr:
Why?
Sullivan:
Yes.
H.M.Jr:
Well, they are going to have to pay a tax on it.
Sullivan:
Yes, but why are they any different from any other
taxpayers in the country?
H.M.Jr:
I am not saying that they are, but I am saying
that here are three buildings which have been
built. Now, how is the Bureau going to treat
these three buildings, that is what I am asking.
Sullivan:
Just as they treat the other thousands of build-
ings that have been put up in the last year.
H.M.Jr:
How is that?
Sullivan:
All right, the premises are inspected, the type
of construction is examined and it is determined
what is the life of the building.
Helvering:
Entire, fireproof, concrete, steel construction,
three percent.
Sullivan:
And the rate is imposed in accordance with the
type of construction and the probable length of
life of the building.
H.M.Jr:
I was going to say, there are these three com-
panies who have completed their plants. Then
there is another kind of case of - supposing
you describe Atlas to these gentlemen.
Sullivan:
Well, in the Atlas case, the British Purchasing
Agency wanted them to build a new plant. The
Atlas people didn't want to do that, although
the British offered them the funds with which
to erect the plant. They didn't want to do
that if it were to be treated as income at the
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time the advance was made, for fear that when
the war ended and they abandoned the plant,
it might occur in & loss year and although they
would have B. substantial deduction, there would
be no income against which it would be offset,
and so they finally executed a contract which
contained a provision that the British would
lend, say, for easy figuring, a million dollars
and Atlas would execute to the Commission a
note for a million dollars, non-interest bearing.
Atlas would then erect the plant and there was
established in the contract E formula by which
certain credits were to be created against the
repayment of the note. There was to be B. credit
of one cent a pound upon delivery and of course
those amounts would become income at that time.
The important provision was that at the end of
the contract or at the end of ten years, whichever
occurred the sooner, Atlas would decide whether
they were to abandon their plant or convert it
into B. warehouse and have it revalued, and when
that was done, there was to be created & credit
equal to the difference between the new value
of the converted facilities and the adjusted
cost basis of the plant, which amount was to
become a credit against the repayment of the
loan and which, of course, would be treated as
income at that time.
The Bureau gave them a ruling in which they held
that 8. loan would not be income at the time it
WBB made.
Hercules Powder came along. They were offered
a similar proposal by the British and they wanted
B. closing agreement which would determine prac-
tically all of the debatable tax questions that
would arise in any way connected with the company
during the life of that contract and we wouldn't
give it to them. We offered them a similar ruling
to that which was given to the Atlas and they
said no, the only other basis upon which they
would execute this contract would be that the
British would pay them the day they signed the
contract 125% of the cost of the new plant and
that is where the matter stands today.
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H.M.Jr:
And that is - how about duPont?
Sullivan:
The duPont situation is about the same. I mean,
they are letting Hercules fight the battle for
them. I am not so sure how much ammunition they
are furnishing to Hercules, but --
H.M.Jr:
Well, what we are getting at is - we are getting
down to the case. This is the thing which is
more or less on' the carpet right now, 1a the
Hercules case.
Magill:
What would happen to this 125%?
Sullivan:
That would be income in 1940, assuming that the
payment were made and the contract were executed.
Magill:
Are you sure of that?
Sullivan:
Are you suggesting that it might be a capital
contribution?
Magill:
I am just wondering.
Sullivan:
Well, I would wonder the other way on that one,
Ros. They have made every effort to sell us the
bill of goods on capital contribution and we
haven't agreed. In the first place, it isn't
intellectually honest and in the second place,
it doesn't jibe with the facts and the negotia-
tions that have occurred.
Viner:
If they scrapped the plant at the end of 12
months, that would be gross income with an off-
set at the same amount or value of the cost of
the plant in the course of 12 months. Otherwise,
you would let them deduct 5% depreciation.
Sullivan:
No, it would be much greater, because these
munitions plants are really just shacks, cor-
rugated sheet. The allowable rate of depreciation
is very much greater. It might easily run as
high as 20%.
Magill:
I WR.8 just thinking out loud and the way that
works out is that if Hercules scrapped the thing
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at the end of the year, they would get 100%
deduction in substance, but they would have
to scrap it in order to get the 100% deduction.
Sullivan:
They can abandon - you can get the same deduc-
tion, Ros, with a bona fide abandonment. You
don't have to tear down a building.
Magill:
I don't know, under that Tidal insurance case
that came up from Philadelphia, would you be
sure of it?
Sullivan:
That was & question of obsolescence and where
that went off the hoops was the fact that that
didn't result from external factors. That was
an amalgamation and a planned proposition.
Magill:
Do you think this is external?
Sullivan:
Yes, I do. It 1s EL matter over which the par-
ticular company involved has no control. That
is what I mean when I use that particular ad-
jective.
Viner:
This company might conceivably keep this plant
going and scrap another plant that it had. It
might decide that this had been slightly better
located and If it was going to scrap, it would
scrap the other side.
Sullivan:
It gets a comparable advantage from the scrapping
of the other.
Viner:
No, it may have already deducted 70% depreciation
on the other.
Sullivan:
I know, but you wouldn't want to get an extra
75% depreciation out of that other building,
would you?
Viner:
No, the other building - let's say it was a --
Sullivan:
Then the answer to that, Doctor, is that if
that plan is economically useful and that is
the reason why they are not scrapping it,
they are not entitled to any deduction.
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Viner:
I would like to see some authority for that,
either economic or accounting or legal.
Sullivan:
I haven't any brief on it. It seems to me
that is sheer common sense, that 1f a building
has economic use, then on what ground do you
justify giving them a deduction for abandoning?
Viner:
A hundred percent. You are defining obsolescence
of abandonment and I say the only place I know -
and I have hunted - where I can find the identi-
fication of abandonment and obsolescence is in
the Bureau of Internal Revenue literature and
nothing else.
Sullivan:
What is your definition of obsolescence?
Viner:
Loss of value because of special external things
like disappearing of the market value of the
product or like a new product which makes this
way of doing it excessively costly.
Sullivan:
Let's go ahead on your basis. Here is the plant
they are not abandoning because they are going
to continue to use it.
Viner:
That is right.
Sullivan:
Instead of abandoning that, they abandon another
plant. They are allowed to take whatever value
is left in the old plant. Do you think on aban-
doning the old plant they should be allowed to
take the same deduction they would get if they
abandoned the new one?
Viner:
I would say the abandonment is required. The
only function of abandonment is to tell you there
has been a hundred percent obsolescence, but even
that has no special value. It might be ninety-
nine percent.
Sullivan:
Well, you say they leave that plant up. Are they
manufacturing in 1t?
Viner:
Well, sure - that is irrelevant.
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Sullivan:
Then isn't the plant economically useful?
Viner:
Certainly.
Sullivan:
Then why should they be given B. deduction on it?
What difference does it make whether they are
manufacturing powder for the British or manu-
facturing dynamite for American contractors?
Viner:
None at all.
Sullivan:
Then why give a deduction on it?
Viner:
If there has been loss of value through external
circumstances of this sort, that is what obsoles-
cence means.
Sullivan:
What is the loss of value if the plant is still
running? What is the loss to them?
Viner:
What you are describing is physical operations.
They are not value operations. The product they
are producing may have fallen in price because
someone else may have devised methods of producing
it more cheaply.
Sullivan:
I don't think you can go into that matter of re-
finement.
Viner:
That refinement is the basic notion of obsolescence
and has been there for all time.
Sullivan:
But your concept of obsolescence is one that has
never been recognized by taxing authorities.
Viner:
The word is older than you or I.
Sullivan:
But your concept of it isn't older than you or I.
Viner:
I beg your pardon. It was the Internal Revenue
that did the investigating.
Sullivan:
I am afraid we are getting off on something else.
Viner:
Oh, I don't think so. I think that is the basic
issue. The rest is just machinery.
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H.M.Jr:
Let me start off again. Let's look at this
thing from three sides. In just a minute I
am going to ask Magill if he minds stating this
case from three standpoints. Here 1s the pro-
posal. In the first place, there 1s B. buyer
who needs a lot of powder and he can't buy it
because all the present production in this
country is engaged. You can't buy this powder.
From my standpoint, it doesn't make any dif-
ference. It might just as well be shoes. I
want to buy a million pairs of shoes and I
can't buy them because the entire product or
production of the country is engaged. All right,
now, I come in and I am the buyer and I want to
buy a million units of something. I can't get
it. I go to Mr. Manufacturer and I say, "I
want to buy," and the whole question comes up
in his mind, in the first place, where he is
going to get the capital from, second, if he
builds his plant his attitude is, "Before I
build it, I want to know how much taxes I have
to pay on this operation," and then thirdly,
the Government comes in, you see, and "What is
our share? Under the law, should we tax this
man for his cooperation?"
What I am going to ask you to do, if you will,
18 to state it from three viewpoints, the Govern-
ment, the manufacturer and the buyer, you see.
I mean, put it three different ways for me, and
then let's - from my standpoint, it doesn't make
any difference what it is, but - and there will
be other cases and that is why I am interested.
There will be constantly more and more cases of
a buyer who wants to buy a product of which the
output is entirely sold out, It is going to
require additional plants. Do you see what I
want? Grope your way into it, but I want this
thing stated that there are three people, three
principles, the Government, the buyer and the
manufacturer. Let's take a look at it through
the eyes of each of the three.
Magill:
As I get your proposition, the buyer --
H.M.Jr:
I mean, what I want you to do for me - these other
people, I guess they are all above this, but for
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me, I am your one pupil and - Mrs. Klotz and I -
everybody else understands this and this 1s &
proposal you are laying before your class, you
see, for us to think about, so first you lay
down the problem, right?
Magill:
Now, you are talking my language.
H.M.Jr:
You are laying down this problem to this class.
Here is the problem, pupils, and then you would
ask, I take it, in your class, questions which
would bring out and develop the problem, wouldn't
you?
Magill:
Correct.
H.M.Jr:
What I am trying to say in the best way I can is
this, but I want you to restate it here as B.
class. We are trying to learn something about
taxation and I have given you the problem. I
want you to put it back and then ask the ques-
tions from these experts which would develop the
three viewpoints. Am I clear?
Magill:
Yes.
H.M.Jr:
I take it that is the way you would do in a class
you are trying to teach.
Magill:
Yes.
As I understand the situation, and I may not have
the facts exactly straight on that, because I have
had nothing whatever to do with these foreign con-
tracts --
H.M.Jr:
It isn't necessarily foreign contracts.
Magill:
No, I understand. Here someone comes along and
he wants a million pairs of shoes. Let's take
shoes instead of powder, and the manufacturer
said, "Well, I can't make them with my present
equipment and I don't like your contract very
much anyway, because after I get done making
the million pairs of shoes, I will have expanded
to that capacity and what am I going to do with
it after I get done? I get into a lot of trouble,"
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and whoever is buying is so anxious to Eet the
shoes that he says, Well, we can take care of
that, I presume, in either of two ways. %e will
either build you the factory, give you El million
dollars for that purpose, we will loan you the
money, If you want, and you can build the factory,
or we will pay you five dollars 8. pair for the
shoes, instead of four, so that you yourself can
build the factory and you will have that extra
profit that you can use for that purpose.' There
are various ways in which the buyer might offer
to do this.
low, 1f I may say there, I am not quite so sure
as Mr. Sullivan is about this capital contribution
as speaking of the case, that is, whether if the
buyer advances a million dollars to the seller for
the purpose of building a plant, that It is neces-
sarily going to be held that that million dollars
is income, because it so happens that there are
a lot of cases, including one by the Supreme
Court, the Cuban Railroad case back there --
Sullivan:
And the Chanber of Commerce cases.
Ingill:
But the Cuban Reilroad case 1s the only Supreme
Court case I know of. Cuba advanced 9. lot of
money to an American railway company to build
this railroad and the question was whether the
advance was income to the rallroad company and
the Supreme Court said no. Now, this is not very
satisfactory and I don't think any one has been
very clear as to what the case stood for and no
one can bet any money on what Er. Justice Douglas
would hold today, with respect to that proposition
which occurred five years ago, or something like
that, but as Mr. Sullivan says, in addition to
the Cuban Railroad case, there are a lot of tax
appeals cases in which you, up at your farm,
wanted to get electric lights and there were no
electric light poles near your house and the
company said, "Well, we will give you electric
light but you have got to pay for the poles,"
and that was a thousand dollars. So you give
the company B. thousand dollars and they put up
the string of poles and give you the electric
lights. There is & thousand dollars income to
the company.
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There have been a lot of cases that have said
no, it is not. So I would think --
Viner:
Whom do the poles belong to when they are put
up?
Magill:
They are the company's poles and there are a
lot of cases of switch tracks and any amount
of cases - Chamber of Commerce, that situation,
or the Chamber of Commerce of Fishkill wants
to get in a canning factory and they say, "We
will give you B. thousand dollars or we will
give you a piece of land, or something or
other, "if you will build here." The company
says, "0. K., here is that income." There
are lots of cases where it is not.
Blough:
No depreciation has ever been allowed on those
assets.
Magill:
You have no question of depreciation, because
you don't get that far. The substance of the
case is that this is not a capital advance.
It is not income, and that is that, as far as
the company is concerned.
H.M.Jr:
Just one second and we will come back. Could
you skip that particular thing and then come
back to it? I don't want to get bogged down
on rules of the Supreme Court for the moment,
but I can see this is important. I want it
done just like a classroom. I want to follow
it.
Magill:
I would say to the class and I would say to you -
and I think this might satisfy Sullivan - that in
my own opinion this is a very moot question. I
don't know how it would be decided. I don't
know whether this case is like the Cuba rail-
road case or whether it isn't. I don't know
whether the Cuba railroad case would be decided
today the same way, so it is - I would debate
that with the class if I were going through
this performance.
Well now, secondly, from the point of the company.
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H.M.Jr:
Excuse me. Sullivan, we will come back and
EO over the thing just 88 many times - I am
trying to get the problem stated.
Sullivant
I have got it.
Magill:
The company's general point of view, I suppose,
from what has been said here, is the same as
we - in general, as when Mr. Ford comes around
to a tire company and says, "I want to buy
20 of your output for my Ford cars." The
tire companies, I understand, don't like those
contracts, because they had experience when
Mr. Couzens was running Mr. Ford's plant that
he would enter into EL contract like this end
get the production jacked up to take care of
Mr. Ford's cars. Then Couzens would come
around and say, "Unless you take a dollar off
the price of your tire, I an going to leave
you flat. I will take my contract and give
it to Goodrich." So the companies don't like
to obligato 30 much of their output to B.
single purchaser, and of course in our shoe
case or powder case, it seemed worse, because
they know perfectly well in some period of
time they are not going to need these facili-
ties at all, or an equivalent amount of facill-
ties. I think you can see readily enough why
the company doesn't want to get into it.
The second aspect of the company's point of
view is this: They know that they are going
to make a lot of money from these contracts,
currently. That is why they go into them.
They also know, if past experience is any guide,
that in the next few years, whenever that 18,
after the war is over, they are going to be in
the dumps. They are not going to have any in-
come. The Bureau of Internal Revenue is going
to tell them that the depreciation goes on
over this period whether they have income or
whether they don't, and from the company's point
of view, therefore, they are very anxious to
get the cost of that plant charged, as far as
possible, against the years in which they have
the big income and not possibly charged against
future years in which they may have little or
no income.
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From the company's point of view, you get the
further factor that Dr. Viner has adverted to,
namely, that the new plant presumably will be
a more modern and up to date affair than the
existing plant. Consequently, if the company
is cut down to its normal output, what the
company will probably do, what it would like
to do, would be to use the new plant rather
than the old plant, because it 1s apt to be
more up to date and more efficient, and so
forth, so if they are going to abandon any-
thing, it will be the old plant.
Well then, as you see, Mr. Sullivan and his
friends on the Bureau will say, "Well you
haven't abandoned this at all, you are using
this plant all the time. You are not en-
titled to any particular deduction on account
of the obsolescence, because what you aban-
doned were these old facilities and not the
new ones."
Well, now again, I would leave that, if I
might, with the class, at exactly the same
point I would leave the first point as to the
buyer. That 1s, the problem, so far as the
taxpayer is concerned, the American company
is covered with a great deal of doubt and
confusion and he knows that he is gqing to be
in trouble. He knows he is going to be fighting
with the Bureau for years on the proposition.
I was saying earlier this morning to somebody
around here that I participated once in one
of these wartime obsolescence cases under the
1918 Act and the case was finally decided by
the Court of Claims in 1937. In other words,
it took them 20 years to get it established
as to what the situation was. Well, it so
happens that they won, finally, but it was
not BL complete victory, if there ever was one,
because meantime they had spent as much on
the lawyers as they had recovered, so they
would be the first to feel that this was just
exactly the kind of contract that they don't
want to get into, too expensive.
I think, from the point of view of the Govern-
ment, there is one of the - Mr. Sullivan has
Regraded Uclassified
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mentioned one set of factors and I want to
put another one before you with not any un-
due emphasis, because all I am trying to do -
I don't know whether I am doing it or not -
is to put this before you on a perfectly
even keel.
H.H.Jr:
You are doing what I asked you to do.
Vagill:
The one side of it is this: If Pratt & Whitney
erect this factory and they want a closing
agreement in advance, it 1s true that it takes
E. lot of work to determine on what basis a
closing agreement can be entered into with them
and what the depreciation rates should be and
try to foresee the situation. You need an
extremely competent man to do it and fortunately
the closing agreement machinery at the present
time is in the hands of very competent men in
the Bureau. They are doing a verygood job. But
you need first rate men and it is a hard job
and it takes time and so it 18 easy to see why
the Commissioner may say, "Well here, if we
give this kind of treatment to these two or
three fellows, we are going to get asked for
many others and we are going to need a lot of
men and it will be & lot of work and we are
pre-judging all these things and that isn't
very satisfactory," and let's take the cases such
as these that you have described where the facts
are pretty clear and can be set forth on a piece
of paper and you don't have to BO to East Hart-
ford to see what the situation is.
Now, the other side of that, to complete the
story is this, that as you can see, sooner or
later the Bureau is going to have to decide
that question anyway. Sooner or later they
have got to decide what the depreciation is
on this plant and what is to be done about
obsolescence and abandonment and all these.
Now, it is perfectly true it is much easier to
decide anything after the event than before the
event. It is much easier to decide depreciation
on a factory after the thing is built and be-
fore it is sitting there and it is much easier
to decide any tax after it has been concluded
Regraded Uclassified
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than it is in advance. Nevertheless, I do feel
that - I think what you come down to as far
as the Government is concerned is this, basically,
how much are you interested in two things, first,
how much are you interested in having these con-
tracts made; how much are you interested in
this flow of business to the United States. Do
you regard this as, on the whole, 8. desirable
thing from the general point of view of the
economy as a whole, because I look at it as a
much bigger thing than what the convenience of
the Bureau of the Internal Revenue is. You have
got to look at it from the point of view of the
nation as B. desirable thing. Should it expand
for this purpose and sell powder and whatnot?
I don't know and I think you yourself pretty
well have to decide that.
H.M.Jr:
I can answer that question.
Magill:
I imagine you could.
H.M.Jr:
Do you want me to answer it now?
Magill:
You don't need to, but you can if you want to.
H.M.Jr:
You are putting it on the basis I want.
Sullivan:
With it being based on an assumption.
Magill:
If there are any assumptions I haven't stated,
we should bring them out.
Sullivan:
Excuse me, Ros, I will come back to it.
H.M.Jr:
Magill has done a remarkable job of this for me.
He is absolutely cold as to what has been going
on here and he has done just what I have asked
him to do. In order to help - I have two in-
terests in these things. From the standpoint
of national defense, the best thing that has
happened to this country is when the French came
in here and gave us the money with which to build
up these engine factories. Congress wouldn't do
it. We got this money instead of having - the
way we had last January, 139, some 5,000 men
Regraded Uclassified
45
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working In all of the engine factories in
the United States, we have now got el little
over double that. We just didn't have the
people and with foreign money we are building
up our airplane engine plants so that we have
the plant capacity to take care of our own
needs in case we should get into a critical
situation where we have to defend ourselves
and I am impressed particularly in this In-
dustry by what & very, very slow job it is to
train people in order to do airplane engines,
so It has been et tremendous windfall from
the standpoint of national defense.
From the standpoint of the companies - that -
they have everything to gain. They have
nothing to lose, because the money is advanced
entirely by foreigners. Now, that also holds
true to powder. I have been going into this
powder business and our powder capacity is
very, very limited and they want to come along
and buy this powder and we don't need the
capacity at present, but it is all there. If
the plant is there, we have it in case this
world situation should get worse, so I can't
see from the standpoint purely of national
defense that this isn't altogether to the good.
But now there is an entirely different question
why I am so interested in this thing and that
is the thing - has nothing to do with national
defense and has nothing to do with the Allies
wanting to - and this is what I said the other
day, in the frame of mind that I have a business
instead of being what I am. I am 10 years older.
I am 60 or 65. I have no children. I have got
B nice business and making B. good profit. I
don't - my plant 18 running at capacity and I
am booked up for a couple of years. Let's say
I an in the machine tool business or in the
shoe business or - and somebody comes along
and he wants to give me an order and with all
the uncertainties, all the fights and all the
difficulties that I have to go through, I say,
"Well, I am sorry, it isn't worth it," and I
think the discouragement for American manu=
facturers on domestic business, the more I
Regraded Uclassified
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listen to this thing, 1f I was in that busi-
ness, I wouldn't build any new plants, be-
cause I wouldn't be bothered with all the
trouble.
Now, the more I listen to it, the more I am
convinced that 1f I was in business the less
I could see of these fellows, the happier I
would be, and I want to be corrected in my
belief and the two things are the same. I
mean, the man - whether it is an order to build
powder or engines or build - some paper man
just went into the business of building Victor
records. Where it gives them a new operation
and I have got to build a new plant and this
whole question of how the Bureau is going to
treat this thing - I mean, to me, I want this
thing settled in my own mind, because it is
a tremendous question.
Magill:
That is right.
H.M.Jr:
And they are parallel, because the question I
have, it doesn't make any difference whether
I have got B. nice little business up in Albany
and it is going along like a house afire and
I have arrived at the point - I don't want
any more business, or whether I am at the
duPont and also had 8. nice business and the
Allies are begging me to build an additional
plant and give them additional powder. I mean,
the frame of mind American business men are in,
when they have an opportunity to go ahead, I
think there 1s something wrong with us. But,
everything that I say here is within the room.
Maybe I am over-emphasizing 8. little bit, but
I have to make my point and I would like to
be proven right or wrong.
Now, in order not to have Sullivan's blood
pressure go through the ceiling - you people
have what is in my mind. Do you want to say
something?
Sullivan:
Yes, I do. When I say that I thought Mr. Magill's
remarks were based on an assumption, the assump-
tion was that the execution of prospective
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closing agreements would accelerate business
and I think your own experience in the last
five months has disproved that. You have
seen the biggest growth of commercial avia-
tion this country or any country has ever
known and it has been accomplished without
closing agreements.
H.M.Jr:
I have said this publicly. Publicly, I have
defended the Bureau first, last and always.
You know that. Helvering, I mean, I have
gone around and made that statement two or
three times.
Sullivan:
First of all, I would like to discuss for just
a minute the Cuban railway case and the
Chamber of Commerce --
Magill:
On your assumption, I am just a little curious,
because I didn't intend, and I don't think I
did in any way say - I didn't intend to assume
one way or the other. I don't think I men-
tioned it.
Sullivan:
You didn't, Ros, but the assumption was implied.
Magill:
I will say for the record, 1f you want, that
in my judgment, and I have said this to that
young man over there (Helvering) and probably
his friends on both sides, that my judgment
is that the two great jobs that the 1938
Revenue Act did were, one, to provide for
future closing agreements and two, to provide
for litigation of the statute of limitations.
Those were the two good things we got. As 8.
matter of fact, I will match them against
most anything that has been done in any Reve-
nue Act in 20 years.
H.M.Jr:
Who was in charge at that time?
Magill:
I don't know, a fellow called Tarleau or Kent
or somebody.
H.M.Jr:
I see. Where was Magill?
Magill:
Out in the haystack fast asleep.
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So your assumption is correct, although I don't
think it has anything to do --
H.M.Jr:
The point gets down - we have the machinery to
make future commitments and in this particular
case we are not using it.
Sullivan:
And the question at issue is whether or not
closing agreements are going to be used to
handle all phases of every taxpayer's future
tax liability situation, because you can't
give it to Hercules Manufacturing Powder or
Great Britain and then refuse to give a closing
agreement to a fellow who is considering setting
up a trust fund.
H.M.Jr:
What about that?
Magill:
Your first statement is exaggerated, as you
know, that no one would ask you to deal with
all phases of everybody's tax liabilities.
Sullivan:
That is what we have got to anticipate.
Magill:
You can anticipate, if you want to, but I
would say they are still not going to do it.
What I mean by that 18 this: You take any
cooperation, Hercules or anybody else, for a
settlement of any given year's tax liability.
They will have 25 or 50 questions they will
iron out with the revenue agent. They are
not going to ask you in advance for 8. ruling
on each and every one of those 50 questions.
What are they going to ask you for? They are
going to ask you for rulings on situations in
which there really is grave doubt as to what
you are going to do with them, in the case,
for instance, of your reorganizations, or in
the case of these new plants and things of
that sort. Now, secondly, I am glad you gave
me an opportunity to say this. Mr. Sullivan
and I - and I daresay Mr. Helvering - are con-
cerned about where you are going, that is,
you might be willing to grant a closing agree-
ment in the case of these three or four people
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that are now in front of you, but what about
the several hundred that may come down Penn-
sylvania Avenue wanting the same thing? Well,
one possibility, 1t. seems to me, in this type
of situation, is to apply the kind of test I
was trying to suggest a minute ago, that 1s,
the test of public interest in these things.
Is this case one in which there really is some
public concern as to whether or not this fellow
does what 1s involved or is it & case of your
trust situation - you certainly wouldn't deal
with it on that basis. If I asked you what
you were going to do to me if I set up a trust
for my wife and children along such and such
lines, you may or may not want to give me a
closing agreement, but at least I couldn't
qualify on any test of public interest in
this situation.
Let me ask you this. Is there any precedent
for this, to say that future closing agree-
ments would only be entered into when it is
a question of new plant expansion?
Vagill:
One thing I would be fairly sure of, and that
is I wouldn't like to see them limited to that
case, because you will certainly have other
cases. I take it that most of the cases Mr. say-
ton has handled have not been cases in which
there was plant expansion contemplated. Isn't
that true? You have had reorganization cases
and all other sorts of things, 30 I don't think
you ourht to limit it to that category. You
ou,lit to ¿ive him more freedom than that.
Conversely, I am not at all sure that you ought
to ¿ive It to 8 taxpayer in all cases in which
there was & new plant expansion contemplated.
Waston:
There is a question of novelty and uncertainty
involved, isn't there, Ross? The novelty of
the transaction, the proposed transaction, and
the degree of uncertainty with respect to tax
liability in that kind of a transaction.
Magill:
Yes. You see, of course, the plain fact is on
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these closing agreements, this is one aspect.
This is the one that concerns you, now. The
fact is that there are a number of very large
realms, problems in connection with the income
tax, in which everybody is in great uncertainty
as to what the result is going to be and it
is very hard to make conjectures when you haven't
any idea how you are going to be taxed. I think
you can fairly say - I should suppose, as you
have said, that the building of 8. plant for air-
craft by Pratt & Whitney is a matter of great
public interest, a matter of great concern. It
may mean the employment of several thousand
additional men, and so forth. Now, at the same
time I think we are all conscious of what Mr.
Sullivan says, that it may be true that that
plant is good for '40-'41 and isn't worth a
darn after that. It may be worth - that plant
may be perfectly good for the expected life -
physical life of any such plant. It may be good
for 15 or 20 years and it may be today you will
find it very hard to tell which is the fact.
Nevertheless, I had better state one assumption
that I do have in my mind and that is the one
I mentioned 8. minute ago. I always thought,
ever since I cut my teeth in this business, that
the really important thing is to get tax cases
settled, get the agreement. People then can
go on and do their work and that is what you
want them to do, and of course if you settle
them today and the Supreme Court grinds out a
decision ten years from now involving today,
you may find that you have settled on the wrong
basis. We are finding that all the time today.
The Supreme Court is exploring new fields every
time it hands down opinions. But I still think
that the welfare of the country and also the
welfare of the Bureau - I don't mean to speak
for the taxpayers - lies in getting this grist
ground instead of piling it up in the back of
the shop until you have all the light you can
possibly obtain with respect to it. If you
follow that latter rule, you just don't get
cases settled,
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Sullivan:
May I interrupt at that point? You are not
getting anything done in advance with a
closing agreement; the same work will have to
be done subsequently when the returns are
filed.
Magill:
Well, much less work.
Sullivan:
oh, I don't think so, because you have got
particularly to examine that particular re-
turn to see if the facts are consistent with
the facts set forth in the closing agreement.
Magill:
The one I participated in was this TVA situe-
tion and 8.8 Mr. Gayton said, the facts on
that 8.8 to what the TVA proposed to do and
what the Commonwealth & Southern proposed to
do were laid before the Sureau and the Bureau
came to e. conclusion as to, in that case, the
legal method which should be employed in the
taxation of the transfer of those properties,
and so forth.
Well now, it is perfectly true that when the
returns are filed for 1939, it will be neces-
sary for the Bureau to examine them as it
always does, to see whether or not in this
case, whether or not the Commonwealth R: Southern
did carry out the terms of the arrangement
which they said to the Bureau they were going
to carry out.
Now, how much of an examination is that? You
can bet your boots in B. case involving that
much money, that the attorneys for the company
and the company itself have done every darried
thing they know how to do to make the trans-
action conform with what they told the Bureau.
They are just as aware as you are of the
importance of exact conformance with the facts
which they gave to you and I should say in 99
out of every 100 cases, you would find that the
taxpayer had carried out exactly what he told
you.
All right, if he has, then you have already
given him B. statement as to how the thing is
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to be handled and that is the end of it and
you do not need in 1941 or '42, or whenever
you examine the case, to go into it very
carefully, when it has now been decided in
advance to what the legal incidents of this
transaction are, so I should think it is
obvious that the examination of the Bureau
after one of these closing agreements is
done with will in most cases at least be
very, very much less than the one if you
never had any such consideration.
Gaston:
I would like to make a comment that even if
you had to do all the work over again, just
the same as 1f there had been no prospective
closing agreement, if in certain cases 8.
plant was built and men were put to work
who would not have been put to work 1f there
hadn't been a prospective closing agreement,
then it wouldn't matter if you did have to
do the work all over.
Sullivan:
I will agree with that, that if these benefits
are here, the additional work should be no
real deterrent, but I think there are some
other things we have to decide before we get
that far. Now, the basis of all - excuse me.
H.M.Jr:
Bo ahead, I will wait.
Sullivan:
The basis of this whole thing is that it is
going to quiet down American business men and
give them B. confidence that will enable them
to proceed and I say that that is B. false
premise because on every one they come into
us with, where they want closing agreements,
they want 8 closing agreement which will en-
title them to things the Bureau will not
grant, which are not reasonable, and the type
of closing agreement or ruling that we offer
to them in conformity to the present law
doesn't satisfy them at all and will not, and
the only way the business men who are calling
for closing agreements will be satisfied will
be to give them some immunity, some benefit
they do not think they are entitled to under
a reasonable application of the present law.
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Viner:
Oh, I don't think that is --
Magill:
John --
Sullivan:
Wait B. minute, excuse me, just a minute now.
We have seen this thing happen in just two
cases. In Vinson-Trammell, the Colt case,
they were perfectly reasonable throughout the
operation. They were splendid. In Consolidated,
they were the other way around. They wanted
something extra all the time and we wouldn't
give it to them. We have many other applications
pending over there for closing agreements under
Vinson-Trammell where the demands are entirely
unreasonable. We have been subjected to sub-
stantial criticism of the taxpayers and the
service departments because we would not execute
those closing agreements which were entirely
unreasonable. Now, I would like to call to
your attention one thing, that if the practice
is invoked of executing closing agreements
with one specific group who will come in and
get the first closing agreements and subsequent
developments in their particular trade are such
that those previous closing agreements are re-
vealed to be unreasonable, we certainly wouldn't
execute similar closing agreements with future
manufacturers who applied for them and hence
we would be conferring a preference on those
we now execute them with, that would almost
confer B. monopoly on them. We are trying to
forecast too much into the future with these
closing agreements.
B.N.Jr;
On that basis, you had better never enter any
agreement, because if you ever make 8 mistake,
you are always giving that fellow a preference.
Magill:
Look, John, you were talking - you were talking
to a different point. No one would urge you,
certainly I wouldn't, to enter into a closing
agreement with anybody, Consolidated or any-
body else, on a basis which you regard is con-
trary to the law and your regulations and
practices, and so forth. In other words, as
I understand 1t, the issue which you were
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presenting to 118 here was what your policy
was going to be with respect to entering into
closing agreements in cases In which the tax-
payer presented something to you which was
within the law, and he wants a determination
of what you will do in that case within the
law and within the regulations.
H.K.Jr:
May I just say something? In the first place,
at no time since I have been here have I asked
anybody connected with the Bureau to do anything
which I didn't think was first, fair from the
standpoint of the Government. I don't have to
even defend my record on that.
In order to make a little progress, I would 11ke
to offer this as a suggestion. We have a par-
ticular problem which has been handled in a
particular way. It may be the right way. That
13 the Atlas Powder. lie have refused to give
them e closing agreement. What I would like to
do is just discuss Atlas, then see if amongst
you people here we can decide from the Govern-
ment's standpoint what would be fair, not
whether we should give them a closing agree-
ment, 1f we were going to give them a closing
agreement, what kind of a closing agreement
would be fair. Then, having agreed in the
room here what kind of a closing agreement
would be fair, then take that and apply it
around and what kind of trouble would it get
the Bureau in, because, having done it, we
immediately would make it public and I just
want to say one other thing. The reason I have
insisted on publicity on all of these things
is simply - and I have said this again and
again - that in case we did make & mistake,
it would be immediately brought to our atten-
tion by the public and therefore, I have in-
sisted that every agreement we have gone into
would be made public, so if there was anybody -
because we had one Senator who was very much
interested in the Colt contract and I said we
would make it public and immediately it was
made public, all interest dropped. There has
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been no criticism. I wouldn't be ashamed of
making & closing agreement and subsequently
finding we were wrong, because I am sure the
Bureau does - does many things every day where
the Bureau is wrong. They always make mis-
takes. We are all human. So the fact that
we might make BL closing agreement in which we
might be wrong, to me isn't an argument why we
should not do it. In order to get this thing
down, I would like to confine the discussion
for a little bit not to should we or shouldn't
we, but let's say we are going to give these
people a closing agreement, see, and from a
Government 8 tandpoint, what would be B. fair
closing agreement, then, having agreed on that,
let's say, "Well, what possible damage can this
do to the Internal Revenue?" Who else would
come in, and all the other things, you see.
Let's just take that angle for 6. minute. I am
going to ask you (Sullivan) what, in your
opinion, should we or shouldn't we - what, in
your opinion, as the man responsible, would
you feel would be the fair kind of agreement
for the Government to enter into with Atlas.
Which is the one that is pertinent?
Sullivan:
Hercules.
S.M.Jr:
All right, then, Hercules.
Sullivan:
If there were to be prospective closing agree-
ments executed on unknown and predicted facts,
& closing agreement could be executed there in
that case, 9. good --
H.M.Jr:
Unknown and predicted?
Sullivan:
Unknown but predicted forecasts.
H.M.Jr:
Can you have that? How can you have unknown
and predicted.
Sullivan:
That is right. A prediction isn't anything
you know and that is what we would have to
proceed on.
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H.M.Jr:
Anyway, you go ahead.
Sullivan:
Hercules comes to us and says, "We don't know
what the situation is going to be during the
next four years in which we are fulfilling
the orders under the contract." They think
it is going to be 80 and so and so and so.
"We would like a closing agreement with the
Government here. We have decided to go ahead
with the loan formula. We would like --"
H.M.Jr:
You will have to give him more information.
Sullivan:
It is the same loan formula as the lease I
told you about. The British lend the money
to them in the first instance and a note comes
back. At the end of the contract, the note
is to be repaid, less such credits as are
credited during the life of the contract.
Foley:
John, isn't the answer to the Secretary's first
question simpler than we are making it here
and can't we confine our discussion to the
second question, namely, the effect of giving
a closing agreement to Hercules in this in-
stance? You haven't given him a Commissioner's
ruling and wouldn't it be & very 8 imple matter
to translate into & closing agreement what you
have in the ruling?
Sullivan:
Yes, it would, but that isn't what Hercules
wants.
Foley:
I understood that was what the British wanted.
Sullivan:
That isn't what Hercules wants. That is right,
and that is what I thought Hercules was getting
to when they left my office at S. quarter past
12:00 and they were going to submit one question
to Mr. Burrus and Mr. Rylander and they got over
there at 2:30 and they had B. list of questions.
H.M.Jr:
Now, from a Government standpoint, what would
be fair, see, what would be fair, that is what
I am asking.
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Foley:
You will agree, John, that you can put every-
thing in a closing agreement that you have in
the room here.
Sullivan:
I do agree.
Foley:
Well, let's start from there.
H.M.Jr:
That is good.
Helvering:
Could I just say a word?
H.M.Jr:
Sure. You have been very good.
Helvering:
In the Atlas Powder case, we had a ruling in
which we said to them that this loan advanced
to them by the British Government wouldn't
be treated as income. Now, that could just as
well have been a closing agreement as it was
& ruling.
Sullivan:
That is right.
Helvering:
I thought it had the same standing, myself,
when I signed it. I considered it as having
the same standing as though it had been a
closing agreement.
Gaston:
But it doesn't bind the future Commissioner.
Helvering:
No.
Foley:
The only problem, as I understand it, was whether
or not the vehicle we used was a closing agree-
ment or a Commissioner's ruling. The British
sat here and said that Hercules would feel a
lot better about this if it were binding upon
the future Commissioners and not just upon
Guy Helvering and I thought that the only pro-
blem that we discussed here was whether or not
the precedent that we would establish by giving
effect to this ruling through B. closing agree-
ment would have on future situations of this
character, were we letting ourselves in for
such an administrative problem that it would
bog down the operation of the Bureau. I thought
that was the situation.
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Sullivant
It would be perfectly simple 1f that were so,
because obviously the Buroau could execute B.
closing agreement in any case where it could
give a ruling.
Polay:
That was why I kept quiet when we were dis-
cussing It here in the room.
H.M.Ir:
Which time?
Poley:
The other time when John and Berbert and Dan ..
H.M.Jr:
I think you are correct now.
Sullivan:
No, I think not, sir.
Caston:
I think we have been getting aside into the
question of what should be gone into in a
closing agreement, which is not the main ques-
tion at issue.
Sullivan:
I think I can explain to you how important it
is, although it isn't the main question. Her-
cules was in the office. They left to get the
same information, the same ruling on that one
specific point and they got over there at 2:30
and they had nine complicated points about
which I doubt if the Bureau would care to give
even a ruling and that is why I say, you start
off on the simple premise that you can give a
closing agreement wherever you can give B. ruling
but that isn't going to solve the problem.
8.M.Jr:
But following the lead Foley has just given me,
wasn't what the British asked was if we could
have & closing agreement, we then feel we could
get these people to sign a contract with us?
Sullivan:
That was what the British said, yes, sir.
Magill:
I guess I am the only one in the room that is --
as to really what this is all about in the case
of Hercules or Atlas, or whoever it is. Now,
I am up to this point. As I understand it,
the British want 8. loan. Hercules, 18 it, 18
that the one?
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- 59 -
Sullivan:
That is right.
Magill:
They want a loan of a million dollars to build
a plant, is that right?
Sullivan:
That is right.
Magill:
Then every time Hercules turns out a bag of
powder, there 1s to be a cent credit on the
loan.
Sullivan:
A cent a pound.
Magill:
And that, everybody agrees, is income. The
loan isn't income and the repayment is.
Sullivan:
You mean the credits against the repayment?
Magill:
Yes. Now, as I understood you, you had one
other string to your bow, that by and by you
will get to the point where $450,000 of this
loan has been paid by these means of these
cent a pound credits. There is still a
$550,000 company. What are you going to do
there?
Sullivan:
If the building is abandoned, there is a credit
against the loan of $550 million.
Magill:
You mean the British credit Hercules if they
abandon?
Sullivan:
That is right.
Magill:
What do they contemplate in abandonment?
H.M.Jr:
Demolishment.
Sullivan:
Not necessarily. If the machinery is taken out,
the insurance is cancelled, their is no main-
tenance, no supervision, no upkeep, that is
abandonment. You don't necessarily have to
tear down the building.
Magill:
Is it expected that would be defined in the
British-Hercules contract?
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Sullivan:
Well, it would relate to the present regu-
lations on abandonment, but it could be
defined.
Magill:
At that point, there would $550,000 more which
you would hold as income.
Sullivan:
That is right.
Magill:
Well now --
H.M.Jr:
In the last year of the contract.
Sullivan:
That is right and that would be offset by the
deduction whenever that may occur.
Viner:
But the one million dollars spent in building
the plant would have been counted as expense
deducted from gross income, wouldn't it?
Magill:
Not at all. Now, could you enter into a closing
agreement these points I have mentioned?
Sullivan:
Yes, we could.
Magill:
Then what else does Hercules want?
Sullivan:
I am sorry I haven't their list of nine ques-
tions, but in one of them they wanted & closing
agreement as to the reasonableness of corporate
salaries for the next ten years. Would you con-
sider it wise to incorporate that in view of
the shifting opinions on that subject?
Magill:
No, and I don't see that you need to. I mean,
so far, I take it, we are primarily concerned
here with the British-Hercules arrangement.
Sullivan:
That is right, but instead --
H.M.Jr:
Excuse me, John, and again saying 1f we do
come to an agreement, all right, here is a
pattern. What damage or what harm or pressure
can that set on American industry, good or
bad?
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Magill:
Now, of course, the reasonableness of corporate
salaries, any of us can see what their point
1s there. They are saying, "Well, if we are
going to be doing millions of dollars worth of
business for the British, the President of our
company ought to be paid more money and we want
something on that," but then aren't you getting
pretty well away from this British contract and
shouldn't you --
Sullivan:
No, because the other eight things they demanded
in their ruling were no further away than that
example I have given you.
Magill:
All right --
Foley:
You didn't give them a ruling on that, John.
Sullivan:
No, they didn't ask for B. ruling.
Magill:
John, you have got to draw two lines here, it
seems to me, and the boys will buck but still
I think you have got to draw the line. First
of all, we would all agree just as a matter of
rock bottom foundation that you can't give any
of these people rulings of closing agreements
or anything else that are not justifiable under
the law and under the regulations as they stand.
H.M.J.:
Amen!
Magill:
That 1s obvious and if they come in and say,
"Well, we want this," and you say, "Under the
regulations, you can't have it," that is the
end of it, it seems to me.
Foley:
That is right, Ros, and the reason all this
heat is in this discussion is because some of
these manufacturers got the idea that we were
going to give them more than they had ever
had before by way of closing agreements and
we had to go through all the grief of that
thing. Now, I think we have got that all
behind us and the thing that John and the
people in the Bureau are afraid of is if we
open it up, we are going to have to go through
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the whole thing again. That, I am not con-
vinced about, and I think that is the only
thing for us to discuss here today.
Sullivan:
That 1s the real issue here. I think we are
all in accord with Mr. Magill when he says
that a closing agreement could be issued -
executed, which would embody the feature in
the ruling in the Atlas case, which was the
same problem. Now --
Magill:
I don't see why you can't come out publicly
and say, "Now, everybody in the Treasury is --"
It is one of the ways, we just happen to be
administering it now and everybody comes in
the front door and there isn't any back door
by way of closing agreements, or anything
else and we will enter into them when it
appears to be in the public interest to do so,
but we do it on the basis of law and if you
don't like the law, go up on the Hill and ask
the boys to change it.
Mooney:
May I ask B. question, as & pupil?
Magill:
You have got to go to the registrar and pay
your money first.
Mooney:
I would like to hear from Mr. Magill how far
removed the question of whether we should
enter into 8. final closing agreement is to
the reasonableness of the compensation of
the officers of the company for the succeeding
ten years, how far removed that is from the
question of whether or not we should enter
into a closing agreement now as to the amount
of depreciation or obsolescence upon the build-
ing, based upon the conjecture of what busi-
ness or economic conditions are going to be
in the future, when the war abroad is going
to terminate and how the war abroad is going
to affect business conditions in this country.
Magill:
Aside from the "have you stopped beating your
wife" part of it, I will answer it as best I
can. Let me, if I may, do what I would do
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with my class. I always like to start with
the thing which seems reasonably plain and
then move on from there to the dubious case.
The situation that seems to be reasonably
plain is the Hercules case as it is so far
presented, and it is certainly a lot plainer
than the reasonable salary or depreciation
situation. Why? Because this, I take it,
presents to Mr. Helvering and Mr. Foley and
the rest of them & pure question of law.
Here is EL proposed contract. Your facts
are agreed. There isn't any doubt about the
facts. And that is the case that Mr. Sulli-
van and Mr. Gayton advised us is the kind of
one on which future closing agreements can
most happily be entered into here. Your
facts are settled and all you have to do is
interpret the law and apply it to the facts.
So it seems to me that is B. good case for &
closing agreement.
Now, we all know that the reasonableness of
salaries, the reasonableness of depreciation
is at best a mixed question of fact and law,
that there are various possibly disputed
factual elements that have to do with it. It
is not easy to get the facts straight and you
can never be sure that you have all the facts
in your possession. Hence, for that reason,
you can certainly fairly go slow and indeed,
I might even, if I knew more about it than I
do, I might join Mr. Sullivan in a suggestion
that 1f the question is primarily a factual
one that you won't close it with B, closing
agreement because it is just too hard to find
out all of these things in advance. Now, I
don't know. Your difficulty is in trying to
decide now the certain reasonableness of
salaries.
Now, on the depreciation, I think there is
this small additional element to bear in
mind and that is that I have always felt the
Bureau made too much fuss about depreciation,
as to whether the rates should be this or that,
because assuming that it is not a fly-by-night
taxpayer, but it is a company which is going
Regraded Uclassified
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to be in business year after year and the
Bureau is going to be in business year after
year and tax rates are not going down, at
least not very markedly, well, it doesn't
make a terrible lot of difference, so far
as the Bureau 1s concerned. It does to the
taxpayer. It doesn't make so much difference
whether you let him have six percent of five
percent this year or indeed, whether you let
him have fifty or ten.
Now, it undoubtedly amounts to a lot of dollars
in the particular case, but bear in mind that
in any event all you are going to give him is
the total cost of what he has laid out on the
plant and the corporate is B. flat rate, so that
from many points of view I don't think, as I
say, I don't think depreciation is worth quite
the amount of ammunition you expend.
Viner:
You are assuming full carryover provisions.
Magill:
Yes, so that if the Hercules people say, "We
would like to depreciate that thing 8. hundred
percent over this British contract," and your
engineers look into it and find the chances
are they will use it to make dynamite even
if the war should end at Christmas, well, it
would be the type of case where I would think
you might arrive at 8 closing agreement on
the basis of putting the difference on some
kind of a formula that you might adopt, that
you might say, "Well, we won't give you 8.
hundred percent. We will give you fifty."
Booney:
It doesn't make so much interest, so much
in dollars and cents. What difference does
it make, then, as far as that thing is con-
cerned, when you allow them five percent on
their building or 1f you should allow them
60 percent?
Magill:
All I am saying - I realize that I am sticking
my neck out by making any such statement as
I am, because it is one of these relative
statements which you can't - it isn't black
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and white. You notice what I said was, I have
always had the impression for e long time that
the Bureau spends too much time on depreciation
rates. Obviously it is important and in many
cases it is very important and in some it may
be vital, but if you are dealing with & reputable
taxpayer - and you will be in some of these cases -
I can see where it might be perfectly legitimate
to sit down around the table with him and say,
"Now, we think that it is a fact that you are
going to be good for ten years. You are going
to be manufacturing some time, so we think on
the basis of that assumption you are not entitled
to full depreciation. We think a ten percent
rate, or a six percent rate, or some other rate
would be about right. He says, "Well, I want
100%". Well, as I say, I can conceive of ceses
where it would still be good policy on the part
of the Bureau to ait down around the table and
arrive at B. result. Now, I can also see, as
Mr. Sullivan can and does, that there will be
some cases where he just can't sit down around
the table, because he isn't that kind of & guy.
I would get him out as quickly as you can, but there
will be cases --
Viner:
How far can you 80 under the law upon the re-
strictions under the present law?
Nagill:
You can 80 B. long way because of wear and tear.
Foley:
Jake wants to interject the other problem. I
think we have to talk about the mechanics first.
Magill:
When you talk about that, I will leave the room
and let you and Jake argue it out, because I don't
know about the mechanics.
Helvering:
I agree with you, Magill, that it does not matter
what the rate of depreciation is if it is any-
where near at all, because we only charge out
the 100%, but I think you were here when Congress
cleared this up and were going to compel the
Bureau of Internal Revenue after they found
depreciations to reduce it arbitrarily to 20 to
Regraded Uclassified
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25%, and that resulted in the promulgation of
Treasury Decision 44-22.
Magill:
Right.
Helvering:
So we are not as free as your remark would lead
us to believe.
H.M.Jr:
For my purposes, this does not help me any.
What I am going to come back and back again to,
the thing I said, supposing we enter - in the
first place, there is no reason why we can't
enter into a closing agreement with Hercules
or anyone else.
Magill:
The door is wide open.
H.M.Jr:
Coming back - and I asked Mr. Sullivan, "Is there,
in your opinion, certain factors which in your
opinion were legal and proper for us to agree
in advance on a contract that Hercules wants to
enter into with the Allies?
Sullivan:
Yes, sir; and they will not execute such a closing
agreement.
H.M.Jr:
Up to now the background has been, not as to
whether the facts are reasonable and legal, but
I think facts - listen close, Ed - facts, dis-
cussion has been that we will not enter into any
closing agreement.
Sullivan:
That is a matter of policy.
H.M.Jr:
What I am saying here is, aren't there certain
bases, basic agreements, which would be legal
and proper for Hercules or anybody else for us
to enter into B. closing agreement? Is the
closing agreement something we should not use
under any circumstances?
Sullivan:
I think the answer to your question is --
H.M.J.:
Because your position is, as I have understood
it, no closing agreements under any circumstances.
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Sullivan:
May I state what I think the issue is?
H.M.Jr:
Am I right?
Sullivan:
You are right. I think the issue is whether
or not we should go ahead and execute prospective
closing agreements in the restricted legitimate
field recognizing that there is going to be a
tremendous demand for prospective closing agree-
ments in the illegitimate field, which will un-
doubtedly cause a great deal more dissatisfaction
and unrest among American business men than pre-
vails today.
H.M.Jr:
That's one way of putting it. I have learned
here this morning, certainly so far, that there
is no reason, legal, ethically or morally or
any other reason why we should not enter into
a closing agreement with anybody.
Sullivan:
Except in so far as it opens up the doors.
H.M.Jr:
But there is no reason - there was 8. law and in-
strument for that purpose. Is that right?
Magill:
That's right.
Sullivan:
That's right.
H.M.Jr:
What I would like to do, again boiling this down,
because I can deal better with the concrete than
theoretically, what I would like you to do for
me is take Magill and Foley and these people and
see if you people could agree from the Govern-
ment standpoint what would be reasonable for us
to agree. to in 8 closing agreement with Hercules.
Sullivan:
I can give you that right now.
H.M.Jr:
No, they will want to argue on that.
Sullivan:
Excuse me. I think this will be helpful. We
would agree - at least I would - to give them
B. closing agreement that incorporated the ruling
in the Atlas case, which said merely that the
loan was not income at the time it was made.
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||.P.Jri
That 1a something new you are saying.
Rellivan:
No. And the reason, I have said before, is
because of the things it opens up and here it
1s, on the 17th of February these men from
Hercules went with Mr. Rieling in the Bureau
and they stated that a closing agreement that
incorporated merely the ruling, that one pro-
vision that this loan would not be treated as
income, would not be enough and they would not
execute a contract and one of the things they
demanded was E closing agreement that would
uphold the various terms and conditions with
respect to this loan which would make it 1m-
possible for the Sritish ever to collect any-
thing back on the loan regardless of how the
contract worked out. In other words, they
were asking us for a closing agreement that
would uphold a loan as not being income when
the terms of the contract were such that it
could not be a loan in anything except in
name.
But, John, if I am sitting across the table
from you and you consistently tell me you won't
[ive me a closing agreement, = am arguing on
ne basis, an entirely different basis from
you and say yes, I will give you 8 closing
agreement if you will be reasonable.
Pallitant
Oh, no! Excuse me. Mr. Rieling asked them
1f a closing agreement embodying the ruling
in the Atlas case would satisfy them and I
am giving you part of the answer they gave to
them in response to that question.
But you have never intimated to them, Hercules,
that you would ive them 8 closing agreement.
Swillivm :
No, sir, I never did, but Mr. Rieling asked
them 1f such a closing agreement would be
satisfactory.
oley:
John, I think the confusion here is that the
British said that they wanted the Treasury to
give Hercules 8. closing agreement embodying
what the ruling contained and I thought that
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was what we were debating that day in the
Secretary's office.
Sullivan:
I think that was the only question that they
raised, but I knew about this other matter.
Foley:
Well, if we limit ourselves to that, would
you be willing to incorporate in the closing
agreement what is in the ruling?
H.M.Jr:
This is entirely important and I didn't get
it. Ed, state your question again, please.
Foley:
I am asking John, if you would be willing to
embody in a closing agreement what is con-
tained in the ruling that the Commissioner
has already executed.
Sullivan:
I say that that can be done, Ed. I say that
once you get into these closing agreements
you are then opening up the entire field and
you run the risk of incurring great disad-
vantages in proportion to the small advantages
you get.
Foley:
I recognize that, John. I think that is a
policy question that we can debate, but what
I want to know is, would you be willing to
recommend that we use the closing agreement
instead of the ruling? That is all the British
asked the Secretary.
Sullivan:
Yes, that is all that they asked him. No, I
would not recommend it because I believe that
the trouble - the difficulties you are going
to get into, are going to far outweigh the
advantages.
Foley:
Then I think we can eliminate what would be a
fair closing agreement, because, as I under-
stand it, the British only want you to sub-
stitute a closing agreement for the ruling
and what is in the ruling can be put into a
closing agreement and it would be fair.
Sullivan:
Yes, it would be.
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Foley:
Then I think we are talking about only one
thing, and that is whether we are letting
ourselves in for an impossible administrative
problem 1f we open up the door and we give
Hercules 8. closing agreement.
Tolvering:
We could give Atlas a closing agreement on the
same ruling.
Vagill:
I don't see where you are. Nobody has asked
me, but I don't see where you are on that point,
because we all know that the Commissioner and
Mr. Foley maintain an interpreting division for
the purpose of giving out rulings in situations
of this general character where the question is
one of law and that is all this question is.
Now, if we have brains enough to make rulings
on these questions, it seems to me we have
brains enough to make closing agreements and I
don't know why you shouldn't do it. I don't
know why it opens the door, John, because the
next fellow that comes along, you have got -
well, I can think of two answers to him right
away. He starts talking about reasonable sal-
aries, for instance. You say first of all the
reason we entered into this closing agreement
is that there is a great public interest in-
volved. That was reason number one why we
thought it was important to get the thing
settled and you certainly wouldn't require much
effort to prove it was a matter of rare public
importance.
Secondly, it involved a question of law. It
doesn't involve any questions of fact. That 1s
the kind of thing we handle every day. We have
350 lawyers who do that sort of thing. If
you want us to rule on some fact question, that
is something entirely different and we will
have to take that under advisement and we pro-
bably won't do it at all.
selvering:
of course, if the Hercules want a closing agree-
ment on the advanced loan they are getting,
there is no reason why the closing agreement
can't be made instead of the ruling and that
may satisfy them more from the standpoint that
they may think I will only be over there signing
EL ruling two months or two years or whatever it
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1s, and some fellow coming in my place after-
wards will overrule it, while they wouldn't
in the closing agreement overrule it.
H.M.Jr:
Guy, the whole point that I want to keep saying
over and over again 18 that all of this dis-
cussion is only in my own office here, it is
no where else. I couldn't help but feel that
when the English were asking that we give them
a closing agreement instead of EL ruling, the
facts being the same, that opposition was un-
reasonable.
Helvering:
of course, as far as I was personally concerned
in signing the ruling in the Atlas case, it
had just the same effect as a closing agreement,
but you could never convey that to the taxpayer
and he has B. right to say that some other Com-
missioner or other Secretary might overrule 1t.
H.V.Jr:
But rather than - and Sullivan feels so strongly
about this thing - and I have given him 100%
support, and that is why I want this meeting
and if we don't get anywhere, I want two or
three more, but I am more convinced today after
these couple of hours than I was before that
if we gave this - made this ruling a closing
agreement that we might be making it that more
easy for these people to place orders here and
I - talking on the economic fund, practically
every Government economist, just as I submitted,
working in the various departments is saying
that we are going into a constant falling busi-
ness level and the only thing that they can
see on the horizon that might offset this - and
they are all in agreement, I have yet to find
one that isn't - would be some orders from
abroad. But that answers the question. They
are all agreed that this talk of the Federal
Reserve index dropping down and that is another
reason why I am so interested in these - and
all of the orders that these - at least, that
is what they say for the time being, are stymied
pending more or less this decision. It is A
pretty big thing we are talking about and why
don't we do this: Wouldn't you like to do
this, Sullivan, because - do you want time to
think about it and we will meet after lunch?
Regraded Uclassified
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Sullivan:
If there is to be any departure from the
present situation, it would be very speci-
fically limited to the field in which
rulings are now used. How does that strike
you?
Mooney:
In other words, do I understand you to mean
this, that in any case in which the Commissioner
of Internal Revenue would issue a ruling, there
would be no objection to the issuance of a
closing agreement?
Sullivan:
Yes.
Mooney:
But in a case where the Commissioner of Internal
Revenue felt that he wasn't justified in ren-
dering an opinion because the facts were not
certain enough from which he could draw a con-
clusion, he would refuse to enter into a ruling
or a final closing agreement, but in cases which
he would enter into a ruling, he would enter
into a closing agreement if the taxpayer re-
quested?
Sullivan:
How does that strike you, Tom?
Mooney:
I am a hundred percent for that.
H.M.Jr:
Wait a minute, Mr. Helvering has got to talk.
Helvering:
As I say, Mr. Secretary, if the facts are pre-
sented as in this loan question in the Atlas
case, there we know just what 1s going to
happen. Now, I issue a ruling on that. I am
just as willing to give them a final closing
agreement, because I think we are absolutely
right, but I wouldn't want to go into some
crystal gazing as to what might happen to the
length of the contract, what the depreciation
would be and whether or not they would have
income at the end of it to offset the depre-
ciation and all that.
Gaston:
As to that, you wouldn't issue a ruling.
Foley:
You wouldn't give them a ruling.
Regraded Uclassified
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H.M.Jr:
What Mr. Mooney stated in technical language,
I gather, boiling it down the way I understand
it, is that if you were willing to give them
8. ruling, and they asked for a closing agree-
ment instead of a ruling, would you be willing
to give it to them?
Helvering:
Absolutely.
H.M.Jr:
Is that it?
Magill:
There is one point that I take it we are all
aware of, that is that at present you men give
a closing agreement in the kind of a case in
which you would give a ruling. What I am trying
to cover is this, that you only rule now on
transactions, as a general rule.
Sullivan:
Oh, no.
Mooney:
Oh, no.
Foley:
This ruling that he has given, Ros, is on a
future transaction.
Magill:
That is all of that, then.
Mooney:
That comes back to our old reasonable salary
issue; for instance, we might have a case in-
volving the year 1938 in which the question
involved was a reasonable amount of salaries.
We would reach a conclusion mutually agreeable
to you and the Government. We would have no
hesitation about entering into a final closing
agreement as to what the liability was or that
we would close the case on a basis of allowance
of so much salary, but we would not want to
enter into a final closing agreement that this
amount will be considered a reasonable salary
for the next consecutive five or ten years.
You would agree with us?
Magill:
Certainly. I would think it is entirely reason-
able.
H.M.Jr:
Tarleau, have you got anything to say?
Regraded Uclassified
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Tarleau:
No, I think the conclusion that you have
reached is perfectly sound and it 1s cer-
tainly in line with what we had in 1938.
It does give that amount of certainty. Of
course, as will be pointed out, I suppose,
very shortly, you have done part of the job.
You have certainly answered the British who
wanted a closing agreement rather than a
mere ruling. Now, beyond that, of course,
1s a vast number of questions on which
people might like both rulings and closing
agreements in order to expedite transactions
and in which you haven't decided anything
as yet. For example, you take your matter
of your plant, Mr. Secretary. That still
isn't under our inspection. We haven't
gotten that part of the discussion under way.
H.M.Jr:
No, but I mean the same way if 8. man came in
and asked for a ruling because he wanted to
build an extension to his plant, and you
would normally give him 8. ruling --
Tarleau:
If we would give him & ruling, we would give
him a closing agreement.
H.M.Jr:
What I want to do is - I realize this 1a 1m-
portant. I want to give Sullivan and Helvering
and you people a chance to think this over a
couple of hours. I don't want to rush you
and I would like to see them again at 2:15,
which gives you a couple of hours to think it
over and think of new objections, and so forth
and so on. Do you see? I take it you are
going to take the 4:00 o'clock, aren't you?
Magill:
At your service.
H.M.Jr:
So that gives Sullivan a chance and anybody
else to think this thing over. I don't want
to rush anybody. You will come back at 2:15
and we will continue the discussion, but it
is along the lines that I wanted the discussion
to take, but I don't want to rush anybody.
Guy, I want you to think it over and I want you
to come back and say, "Now wait a minute, if
we do this thing - I have thought of this and
that and so forth.'
Regraded Uclassified
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Helvering:
We gave a great deal of thought to the Atlas
ruling.
H.M.Jr:
What we are saying is that this thing now
in the case of Hercules or Mr. "X", we are
willing to give him B. ruling or a closing
agreement. I want you to think it over a
couple of hours and what are the things you
haven't thought of, because after all, if we
decide to go ahead with it, then it is up to
Mr. Sullivan to continue. I mean, he is
carrying the ball for me.
Sullivan:
I think those who have more liberal views
toward the situation should reexamine the
situation and make up their minds whether or
not they think that is going to be adequate.
Magill:
I don't know. I have been reflecting on that,
too, John, and it seems to me this is certainly
the situation as to these future agreements.
We have always thought, I think, we had better
proceed B. step at a time. It is not easy to
forecast the whole future as to what the policy
is to be any more than - now, here all of our
minds as lawyers work much better on concrete
situations than on any other kind and you have
got here, as I understand --
H.M.Jr:
Including farmers, too.
Magill:
You have got here B. concrete case that we are
trying to arrive at a policy on. Now, when
duPont or somebody else comes down on some
other kind of B. case, I would be disposed to
take a look at that when it comes and see what
you want to do about it. In other words, if I
am 8. liberal, and I don't know whether I am or
not, I wouldn't be much interested in going
very much beyond, at this minute, what we have
said here.
Gaston:
It is far enough to go right now.
Magill:
Take B. crack at it and see how that works and
when somebody wants some more, let's see what
that looks like.
Regraded Uclassified
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Helvering:
The only thing I object to, I don't want to
have these fellows come in and ask us to de-
termine that we will guarantee to them that
United States Steel will be 88 in 1945. That
is what some of them are asking.
H.M.Jr:
If you could, I would like to come around and
see you after this meeting.
Magill:
Introduce us to that fellow, will you?
Helvering:
That is what they are asking.
Sullivan:
That is right.
H.M.Jr:
I again say, Guy, in the whole time you and I
have worked together, I don't think I have ever
asked you to do anything unreasonable, from the
standpoint of the Government and I am not going
to begin now, but I don't want to feel that
the position we are taking is unreasonable and
I have felt it was unreasonable.
Helvering:
Of course, I could say this as well now, Mr.
Secretary, as I could in two hours or two days,
but the ruling in Atlas company, the way we
handled that, we studied it very carefully. We
went over it very thoroughly and that could be
made a closing agreement just the same as it
could have been made a ruling.
H.M.Jr:
I don't want to rush Sullivan.
Sullivan:
You are not rushing me, sir.
H.M.Jr:
Do you want to clean it up right now?
Sullivan:
Sure, 1f the other boys are satisfied.
H.M.J.:
Who are the other boys?
Sullivan:
Dr. Viner has had some other questions here.
Viner:
I think this is just a question of administrative
procedure; the difference between the Commissioner's
ruling and a prospective closing agreement 18 1m-
portant in the long run but minor in terms of
the 1940 economic situation. I have no opinions
one way or the other.
Regraded Uclassified
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H.M.Jr:
I know what Viner has, but this conference
is on closing agreements.
Viner:
I have no opinion one way or the other.
H.M.Jr:
I don't want to get into the question of
obsolescence at this time and I am not pre-
pared for it mentally. I haven't prepared.
I mean, the point that we are now, es far
as I am concerned - you gentlemen have helped
me to see this thing more clearly. I mean,
I am going to talk with Viner and I want to
find out more and maybe we will have another
session on what he has.
Viner:
I would like to make clear my position that
as far as the discussion has gone this morning,
I don't think I have a thing to say on that
question. I like the drift of the decision,
but it is an administrative procedure question.
I have no judgment on the matter. The men who
have had experience with how these cases come
up and how formal you can make a commitment
are the ones to have the judgment. I would
have none at all. My own feeling is that the
drift has been all right, but I don't think it
is very important in the light of what I thought
was the broader question that was up. I was
wrong.
H.M.Jr:
Well, your broader question may come up in its
turn, but it wasn't for this morning. Who else
do you (Sullivan) want to ask?
Sullivan:
Well, I don't know whether this satisfies Mr.
Caston or not.
Gaston:
Yes, it does, John. I think it is enough of
a step to take at this time.
Sullivan:
Because you remember when you and Bell and I
talked about it last. That was the only thing -
we brought up this very question as to whether
or not the same amount of effort went into a
ruling that went into a closing agreement and
I said yes, and that they were virtually the
same thing except that the succeeding Com-
missioner or Secretary could except.
Regraded Uclassified
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Gaston:
I couldn't see then why the material that went
into a Commissioner's ruling couldn't go into
B. closing agreement and I thought it would be
an advantage to the taxpayers in the way of
assurance of future Commissioners to do that
and I am still at the same point, but I don't
think we are prepared now to go further.
Viner:
Doesn't a closing agreement also give the tax-
payer better protection against an adverse
court decision?
Mooney:
Oh, yes.
Viner:
So it is not merely against a new Commissioner,
it is also against - in other words, the court
would respect a closing agreement even though
for succeeding cases it tells you, "Don't do
it that way. It makes it still more valuable
to the taxpayer.
Helvering:
The main objection they make is that the Com-
missioner is uncertain in his terms. This may
be ten years from now when it is finally closed.
But the court decision would make no difference.
H.M.Jr:
Well now, John, you are going around the room.
Who else do you want to ask?
Sullivan:
I was wondering about Roy Blough.
Blough:
I think the economic progress depends a whole
lot on the certainty and stability and that
the closing agreement permits the making of
certain and stable situations for the business
man and that it would be a distinct benefit
in encouraging business commitments. It seems
to me that aside from the administrative as-
pect, on which I wouldn't want to pass any
judgment, that from the point of view of taxa-
tion and economics it would be a desirable
move to make.
H.M.Jr:
Do you mind saying it again?
Blough:
I was saying I wouldn't want to pass any judg-
ment as to the administrative aspects, but
Regraded Uclassified
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assuming those to be taken care of, from
the point of view of economic effects, it
seems to me it would be a distinctly valuable
thing to do this, because it does stabilize
and make certain some portion of the future
and therefore helps business men to make up
their minds and to make commi tments.
S.M.Jr:
You are talking my language.
Sullivan:
Ed, what do you think about it?
Foley:
I am satisfied, John.
Sullivan:
Well, Mr. Tarleau and all the Bureau men are
satisfied. I think that when the announcement
is made it should be pretty definitely set
forth that this is to be - the work is to be
carried on within the limits in which rulings
are now issued. That is a detail to be worked
out.
H.M.Jr:
Now let me ask, how is Mr. Sullivan feeling?
Sullivan:
Mr. Sullivan is very happy about this.
H.M.Jr:
So?
Sullivan:
Yes, sir.
Magill:
Well, I would think you would want to be careful
in the announcement you make, 1f you do make
an announcement.
Foley:
Why do we have to make an announcement? All
we do is change the procedure.
Sullivan:
I think that is only fair, Ed. We have been
turning them down.
H.M.Jr:
Well, we only make it after we have made a
closing agreement.
Sullivan:
I meant when the first one you made --
Viner:
Then I suppose you would say in general you
will, leaving you B. loophole.
Regraded Uclassified
80
- 80 -
Sulliven:
No, Ed, I meant in the press release at the
time the first one is announced, If Hercules
is given one, it should be given the same
publicity that the Colt closing agreement
was given.
Poley:
Oh, sure.
Sullivan:
And the Atlas ruling. I think you want that,
sir, don't you?
H.M.Jr:
Yes.
Vagill:
I think you want to watch this. I am saying
this in fairness to you, because I take it
your position 18 - you are quite uncertain
as to what your course ought to be. I per-
sonally would hate to see you announce in any
way that this is far as we are ever going to
80, we are extending our policy to this degree
but this is all we are ever going to do, be-
cause I think it is quite possible that this
situation may so develop that within a rela-
tively short time you may want to make closing
agreements or it may become economically de-
sirable to make closing agreements in some
other classification of cases which at present
we could not very adequately define, 50 I
would personally hate to see you make an
announcement in which you say we are going to
do this, but don't ask us for anything more.
Foley:
I agree with that, Ros. I don't think we have
to make any general announcement. What they
are talking about is that each time we enter
into one of these closing agreements, after
it has been executed, we give a general an-
nouncement as to that particular closing
agreement and that has been our policy, but
we make no general statement as to any change
in procedure in the Bureau.
Caston:
We publish these in the bulletin the same as
we do a ruling.
Foley:
Sure.
Regraded Uclassified
81
- 81 -
H.M.Jr:
Well, the policy that I would like to see
followed if we go ahead with this is that
as we take each step forward, the facts are
given to the public. We don't have to inter-
pret them. Here are the facts. We have done
this. Here you are.
Helvering:
Now, in this publicity, we make many closing
agreements that we never publish at all or
never think about them in these corporation
reorganizations. On all public agreements,
there is no necessity for it.
Viner:
How about prospective ones? Could you give
the publicity only on prospective ones?
Blough:
These reorganization cases are prospective.
Magill:
I don't know why you shouldn't do it. That
is the Commissioner's job, I take it. I don't
know why you don't do it on the same basis
you do on the rulings. He makes thousands
of rulings a year which are published in the
Internal Revenue Bulletin.
Helvering:
No, I meant a press release, Ros. I thought
maybe we could confine this to these questions
about these special contracts, about munitions
and airplanes.
H.M.Jr:
Let's be very frank. If you publish B. ruling -
do you publish EL ruling in your bulletin?
Helvering:
Yes.
H.M.Jr:
Do you publish closing agreements in your bulle-
tin?
Helvering:
No, I don't think we do.
Magill:
He publishes about one in ten of his rulings.
H.M.Jr:
I think you ought to publish your closing agree-
ments.
Magill:
The same way you do your rulings.
Regraded Uclassified
82
- 82 -
H.M.Jr:
The only reason I am insisting on press re-
leases on anything to ao with munitions is
that I sit here and try to do the best job
that is humanly possible, but the only way
I can keep in tune with public sentiment is
to let them know when I am doing something,
which is different. It has to do with war.
Therefore, on a thing like this, I want the
public to know about it. If I am wrong, it
gives me a chance and I won't have to come
down here a couple of years from now and
spend six months of my life before the in-
vestigating committee. Therefore, F think
what I am doing is right, but I don t know
what 130 million people think and the only
way I can find out, when I am doing some-
thing now with the belligerent nation is
to give it out and there is nothing secret
about what I em doing.
Helvering:
But I just wanted to clarify the --
H.M.Jr:
That is why I want all this publicity.
Magill:
I think that is a good line to hew to, if
you want to, that as 8. general thing you will
give publicity on the munitions situations
and as a general thing you will give publi-
city to other situations only on the basis
that you give publicity to rulings today,
that they are a matter of general interest.
H.M.Jr:
All right, gentlemen. Now, John, once more,
if there is anything in your mind on which
there is the slightest doubt or that you
can't carry out enthusiastically on this
thing, I will give you another chance this
afternoon.
Sullivan:
No, sir.
H.M.Jr:
If there is anything in the back of your head
that you are not entirely satisfied on --
Sullivan:
I haven't the slightest mental reservation
about the execution of a closing agreement
on BL matter on which we would be willing to
issue 8. ruling. Beyond that, I am not willing
to go.
Regraded Uclassified
83
- 83 -
H.M.Jr:
Well, no one is asking you to.
Thank you all.
Regraded Uclassified
84
Conference re closing agreements
March 1, 1940.
A. History of closing agreements.
B. Difference between Oliphant plan and present law.
C. Field in which closing agreements are now being executed.
D. Distinction between these cases and truly prospective cases.
E. The development and expansion of closing agreements in
Vinson-Trammell cases.
F. The administrative difficulties involved in further extension
of the program.
G. Disadvantages of possible impairment to revenue.
Regraded Uclassifi
is - - - - - of -
incom, - - - of - -
1 1
- %
NAVY DEPARTMENT
A18-1/P(123)(00)
BUREAU OF SUPPLIES AND ACCOUNTS
WASHINGTON, D. C.
1 March 1940
TIAL
MEMORANDUM FOR
HON. HENRY MORGENTHAD, JR.,
THE SECRETARY OF THE TREASURY.
STATEMENT:
Anglo-French Purchasing Board requests release of
mackeless powder by United States Army and Navy to
replace a 4 months' productive capacity amounting
to 2,000 tons lost by a recent explosion in England.
Enclosure:
(A) Memorandum request of the Anglo-French Purchasing
Board for the above release.
1.
Acting upon the above request, the President's Liaison Committee
has been able to obtain the following concessions from both military branches
of the United States Government:
From the Navy.
The Navy is willing to surrender 4 months' capacity from the
DuPont Company, which Company 18 now delivering to the Navy at the
rate of 150,000 pounds of smokeless powder per month, 4 months being
equal to 600,000 pounds of normal capacity at the present rate of
deliveries. It 18 possible that the DuPont Company, by reason of
the Havy's surrender of deliveries during the next 4 months, my by
shift operations increase the quantity of production which the Navy
might expect to receive during this 4 months period. But the quantity
surrendered by the Navy is at least 600,000 pounds.
From the Army.
Due to the fact that the Army has recently released 600,000 pounds
of mokeless powder to the Government of Finland, and because of a defin-
ite loading program now being carried out, the Acting Secretary of War
desires to limit the release of powder to the Anglo-French Purchasing
Board to a definite quantity, 1.0., 1,200,000 pounds during the four
months, March, April, May, and June 1940. This release will pertain to
powder under contract with the Hercules Powder Company, Wilmington, Del.
2.
The Committee will await your instructions bafore taking further
RAY SERAR
Rear Admired, U.S.N.
Member, President Liatson Committee.
Regraded Uclassified
CANNON niteocellulose POWDER
EMERGENCY REQUIRIMENT FOR GREAT BRITAIN
for requirement:
As a result of an explosion at one of the important
obodite factories in Great Britain, an unexpected shortage of 2000
book of cannon powder has developed. As all calculations of re-
quir ments had been based on the as:umption that the maxinam capacity
of 11 British factories would be available, it is not possible to
secure any replacement of these 2000 tons from Great Britain. The
deficit can only be made up from outside sources, and by the employ-
not of nitrocellulose powder which, although not the standard
charge, can be used in certain British guns.
Position of American supplies:
The only U.S. manufacturers of cannon nitrocellulose
powder (apart from the U.S. Government) are the du Pont and Hercules
companies. Their plants are already fully occupied in producing
material for the U.S. Government and it has not therefore been
possible to obtain from them any material to meet the British energency
requirement.
Negotiations with both du Pont and Hercules are in
hand with a view to the erection of a new plant or plants for the
production of cannon nitrocellulose powder for Great Britain (or
France) in the United States. It will, however, be many months
before any new factory for cannon powder is in production and this
source of supply cannot meet the present situation.
Pos libility of U.S. Government concessions:
Provided the U.S. Government are prepared to make
the necessary concessions, it might be possible to meet the emer-
every requirement in two ways:
(a) From existing stocks already held by the U. S.
Government.
(b) By switching over the production from existing
plants from U. 8. Government orders to the
manufacture of material for Great Britain.
It is recognized that under procedure (b) there
be some delay in meeting the requirement but, even so, a con-
on of this kind of the U. S. Government would be extremely
le.
of powder required:
Owing to shortage of time and lack of a range of British
In North America, it has not been possible to carry out the ex-
to ballistic tests with modern cannon nitrocellulose powders
classified
2
which would have enabled a decision to have been made as to the
satimbility of a large range of sizes of powder for British guns.
Sex tests have, however, been made in Canada and, subject to final
confirmation by Great Britain (which has been asked for by cable),
the following types of powder would be suitable:
(1)
Material of web thickness 0.021" (multi-
perforated) and of composition 87 parts
nitrocellulose of nitrogen content 13.1%,
10 parts dinitrotoluene, 3 parts dibutylphthalate,
und stabilized with one part diphenylamine.
(2)
Material of web thickness 0.0225" and of com-
position 85 parts nitrocellulose as in (1)
10 parts dinitrotoluene, 5 parts dibutylphthalate
with 1 part diphenylamine. It is understood
that material of this kind approximates to
the standard U. S. powder for the 75 mm. A.A.
gun.
(3)
Material of composition as in (2), but with
web thickness 0.021". It is understood that
powder of this kind was formerly used in the
75 mm. U.S. Pack Howitzer which is regarded
as to some extent obsolescent.
If material of the above types is not available,
or if the quantities which can be obtained are insufficient, any
cannon nitrocellulose powder which would be expected to give ballistics
equivalent to the above types would receive the most serious consider-
ation by the British authorities.
hitworth
28, 1940
Anglo-French Purcussing Board
CHARLES C.T. T. Secretary Ballantyne BALLANTYNE General
Regraded Uclassified
88
March 1.
See memorandum of 3/4 and diary
entry of 3/12 when HM, Jr spoke
to Woodring who said he had o.k'd
the release of the powder and did
not know what Louis Johnson was
talking about in the memo attached.
evatem will and you the
WAR DEPARTMENT
WASHINGTON
March 1, 1940.
nemorandum FOR THE PRESIDENT
SUBJECT: Priority on Supply of Smokeless Powder for the
British Government.
Your attention is invited to the third paragraph of
the attached memorandum of February 29, 1940, to the Chairman
of the President's Liaison Committee.
Powder is one of the critical items for which the
stock is below requirements for the Protective Mobilization
Plan.
hours John
Acting Secretary of Har.
1 Inclosure.
Regraded Uclassified
February 29, 1940.
MEMORANDUM FOR THE CHAIRMAN, PRESIDENT'S LIAISON COMMITTEE.
SUBJECT: Priority on Supply of Smokeless Powder for the
British Government.
1. Reference is made to informal request by Secretary
Morganthau, transmitted by you on February 28, 1940, concerning
powder making capacity which the War Department might release
for the next four months to offset the loss of British capacity
at Waltham-Abbey.
2. A study of the problem in the War Department Indi-
cates that during the months of March, April, May and June, 1940,
delivery schedules for cannon powder to the Mar Department from
two commercial sources and Picatinny Arsenal will total 4,475,000
pounds. Of this quantity, all of the deliveries from one of the
commercial sources and from Picatinny Arsenal are required for
use on complete round or propelling charge orders for the fiscal
year 1940 amminition production program. Of the deliveries from
the second commercial source, 300,000 pounds are corrigned to load-
ing orders and 1,800,000 pounds are for war reserve. However, a
recent concession of 600,000 pounds of the capacity for war reserve
bulk powder was made to the Government of Finland, leaving a net
available capacity for powder in this category of 1,200,000 pounda.
3. The War Department does not desire to release any of
the remaining capacity already contracted for, but if the Presi-
dent decides to accomodate the British Government, it is believed
that the release should be limited to the 1,200,000 pounds being
manufactured for the war reserve. The loading program should not
be disturbed, since any diversion from the needs of this program
would cause a serious disruption of WAT Department procurement
under the current armament appropriations.
Acting Secretary of Nar.
Copy for The Presidens.
Regraded sified
THE WHITE HOUSE
WASHINGTON
March 11, 1940.
morandum FOR
THE SECRETARY CF THE TREASURY
FOR YOUR INFORMATION AND
RETURN FOR MY FILES.
F.D.R.
THE WHITE HOUSE
WASHINGTON
March 9, 1940.
12 MORANDUM FOR THE PRESIDENT:
In connection with the
attached, Louis Johnson informs me
that the Navy has promised, under
certain circumstances, to furnish six
hundred thousand pounds of smokeless
powder that they have in reserve.
Enur
E.M.T.
Regraded Uclassified
STRICTLY CONFIDENTIAL
TREASURY DEPARTMENT
93
INTER-OFFICE COMMUNICATION
DATE March 1, 1940
TO Secretary Morgenthau
FROM Mr. Cochran
When talking with me this morning in regard to daily sales of dollar
securities, Mr. Pinsent spoke of the extended conversations which his
Embassy is now having with the Department of State in regard to economic
problems, particularly the decline in British purchases of American agri-
cultural products. Mr. Pinsent stated that in making their case the
British Embassy was obliged to utilize much of the confidential informa-
tion which he has conveyed to Secretary Morgenthau in recent weeks in
regard to British financial resources. Pinsent wanted us to know this,
lest we might be surprised to find that some of the figures obtained for
the Secretary of the Treasury and given to him in strictest confidence are
now available to the Department of State. Pinsent stated that most of their
arguments were with Dr. Feis.
10.00
Regraded Uclassified
94
TREASURY DEPARTMENT
INTER-OFFICE COMMUNICATION
DATE
March 1, 1940
TO
Secretary Morgenthau
FROM
Mr. Cochran
CONFIDENTIAL
Following yesterday's decline to 3.92-1/2, the rate for sterling exhibited
E. somewhat steadier tendency today. After opening at 3.92-1/2, sterling advanced
to 3.93-1/2 by noontime. During the afternoon, the quotation eased in a thin
market and closed at 3.93.
Sales of spot sterling by the six reporting banks totaled L418,000, from
the following sources:
By commercial concerns
L 262,000
By foreign banks (Far East, South America and Europe)
1 156,000
Total
I 418,000
Purchases of spot sterling amounted to 1446,000, as indicated below:
By commercial concerns
I 254,000
By foreign banks (Europe and South America)
I 192,000
Total
1 446,000
The following reporting banks sold cotton bills totaling 122,000 to the
British Control on the basis of the official rate of 4.02-1/2:
I 19,000 by the Guaranty Trust Co.
3,000 by the National City Bank
I 22,000 Total
The other important currencies, with the exception of French francs and
Canadian dollars, which moved in sympathy with sterling, showed almost no move-
ment during the day and closed as follows:
French france
.0222-7/8
Guilders
.5311
Swiss france
.2242-1/2
Belgas
.1690
Canadian dollars
13-3/4% discount
We sold $400,000 in gold to the Central Bank of the Argentine Republic to
be added to its earmarked account.
We purchased $3,400,000 in gold from the earmarked account of the Bank of
Finland.
Regraded Uclassified
95
- 2 -
The Federal Reserve Bank of New York reported that the Swine Bank Corporation,
Zurich, was shipping from Switzerland to its New York agency $2,988,000 in gold, for
mie to the U. S. Assay Office.
The Federal Reserve Bank of New York received cables from the B.I.S. and
the Netherlands Bank requesting it to anply for B. license to transfer approximately
15,000 ounces of gold (about $560,000) from B.I.S. Account 12 to the account of
the Netherlands Bank at the Federal Reserve Bank. B.I.S. Account #2 is gold owned
by that institution. The Treasury granted permission to the Federal to make this
transfer.
In the past fortnight, the Bombay quotation for spot silver worked up grad-
jually from an equivalent of 39.26# on February 14 to yesterday's rate of 41.12d.
It was reported that this upward movement vas caused by a demand for silver in
Bombay stimulated by the rumor that the import duty on silver would be raised at
the end of February. Official notice was received in New York today that no change
in the import duty was contemplated by the Indian government and today's Bombay
silver quotation registered a decline of 7/16# to 40.67$.
In London the spot silver price was fixed at 20-3/16a. off 5/16d. and the
forward fixing price was 20-1/4d, off 3/16a. At 35.67# and 35.60$ respectively,
the U. S. equivalente reached a new low level since the outbreak of the war,
Local speculative reselling was reported to have been responsible for the down-
ward movement in the London prices, and Indian interests were buyers on the fall.
Handy and Harman's price for foreign silver was fixed at 34-3/46. unchanged.
The Treasury's price was also unchanged at 35$.
In New York we made nine purchases of silver totaling 522,000 ounces under
the Silver Purchase Act, all of which consisted of new production from foreign
countries. Ordinarily, this type of silver is offered to us for forward delivery
but today one refining company made an offer of 82,000 ounces on a spot basis,
which vas accepted. The remaining 440,000 ounces vas purchased for forward de-
livery.
By telephone this morning, Mr. Knoke gave me the following information in 70-
and to Russian balances with the Chase Bank. As of February 20, the cash account
of the Russian State Bank with the Chase Bank amounted to $3,800,000. At the
close of business on February 28, this account was $2,200,000. During the same
period the letter of credit account remained stationary at $7,000,000. The Antorg
cash account with the Chase declined from $2,000,000 to $1,700,000 and Amtorg
letters of credit were fixed at $2,200,000. The principal in-payments to the
Pussian State Bank account during the period under review were: $1,500,000 from
the Swiss Bank Corporation and $750,000 from the Rotterdam Bank (presumably in
payment for gold which the Notherlands purchased from Russia.) Out-payments
from the Russian State Bank account included $1,000,000 to letters of credit,
$3,000,000 to Amtorg and $350.000 to the International General Electric.
CONFIDENTIAL
Regraded Uclassified
96
3
With reference to Dr. White's question raised in the staff meeting yester-
day about a "$25,000,000 increase in Russian credits in New York". I read back to
Enoke the following sentence from his letter of February 23: "Foreign official
funds in this market increased $24,200.000 during the week. About one-half of
this increase was for the account of Russia and reflected in part the sale of
601d imported in the previous week and in part credits opened in this country
on behalf of Russia. We are at present discussing this credit item with the re-
norting bank to determine whether it is the type of transaction which should be
included in our figures." From this it will be seen that only about one-half
of the increase of $24,200,000 was attributed to Russia. Knoke told me that the
Russian gain was something over $13,000,000. This resulted in part from the
Russian gold shipment of $5,600,000 which came recently from Vladivostok to San
Francisco, and in part from the fact that the Chase Bank started, for the first
time, to include in its weekly capital movement reports to the Federal as &
Russian credit the amount set up with the Chase Bank for letters of credit, The
funds for such letters of credit had been taken from the Russian State Bank cash
account with the Chase. The above paragraph reveals the division of Russian funds
into cash end letters of credit. The setting up of these letters of credit began
only in December when American exporters were no longer willing to grant credits
to Soviet Russia. It became necessary, therefore, for a letter of credit to be
established and a corresponding amount was set aside by the Chase Bank from the
cash balance of the Russian account. The Chase Bank only realized this last
week that it had omitted reporting these items as credits, and there is still a
question with the Federal Reserve Bank of New York 8.8 to whether they should be
so listed. The matter is still under consideration.
BMR
CONFIDENTIAL
Regraded Uclassified
3-1-40
TO:
SECRETARY MORGENTHAU
97
0
Statement being put out by Mr.
Jones this afternoon.
JPC, Jr.
From: MR. COTTON
98
COPY
IMMEDIATE RELEASE
FLA-17
FEDERAL LOAN AGENCY
WASHINGTON
March 1, 1940
STATEMENT BY JESSE JONES, FEDERAL LOAN ADMINISTRATOR
The President has advised me that he will sign the Export-
Import Bank capital increase bill, and the Trustees of the Bank have
allocated $20,000,000 for additional loans to the Finnish-American
Trading Corporation for account of Finland, also $15,000,000 to the
Bank of Sweden to finance American exports to Sweden, and confirmed
$10,000,000 to Norway, heretofore announced.
The proceeds of these loans may only be expended for
purchases in this country and no part of the money may be used for
arms, ammunition, or implements of war listed in the President's
proclamation under the Neutrality Act of 1939, except commercial aircraft.
The Act increasing the Bank's capital permits loans for the purchase of
aircraft exclusively for commercial purposes. We have had no applications
for loans to buy aircraft.
Regraded Uclassified
99
TREASURY DEPARTMENT
INTER-OFFICE COMMUNICATION
DATE March 1, 1940
TO
Secretary Morgenthau
FROM
Mr. Hase PA.
Subject:
Wheat export sales and other market data from the
Federal Surplus Commodities Corporation.
Feb. 19: There was very little trading in cash corn. One
cargo was sold to go from the Atlantic Coast to the
United Kingdom.
Feb. 21: At the start of the crop year, July 1, 1939, it was
estimated that the world might import about 584,000,000
bushels of wheat. From indications now, it 1s quite
probable that this figure will be revised downward to
520,000,000 or even less.
In Northern China there 1a a scarcity of wheat, made
more acute by alleged price fixing and the commandeer-
ing of stocks by Japanese and Chinese authorities.
Japanese residents are obtaining what they need at 8.
fixed price but the Chinese population, particularly
the poorer classes, are unable to obtain any cereals
at all.
Feb. 23: Wheat shipments have been interrupted because of B.
shortage of ships. All Norwegian and Danish freight-
ers, even though under long term charter contracts
with North and South American firms, have been com-
mandeered by their respective governments and ordered
home immediately.
Spain 18 in the market for good quantities of wheat
and yesterday made arrangements to take about 6,000,000
bushels of French wheat, which 18 surprising in view
of the fact that France 18 in the war. Spain has
also arranged to take 15,000,000 bushels of Argentine
wheat and would be interested in some American wheat
if it could be secured at competitive levels.
There 18 some speculation a.e to what European yields
will be, in view of the fact that the weather through-
out Europe this year has been the coldest for over
500 years, although the varieties of wheat grown in
Northern and Central Europe are usually resistant to
extreme cold.
Regraded Uclassified
100
Secretary Morgenthau - 2
Feb. 24: Argentine wheat shipments for the week were almost
4,000,000 bushels. Evidently shipments of the
present week will be heavy, too, for five ships
were chartered Saturday to carry wheat from Argentina
to Antwerp at a price equivalent to 85 cents per
bushel.
Argentina 18 also beginning to realize that the corn
crop there is apt to be one of the largest on record,
and that later on all available ships may be needed
to conduct trade in that cereal.
Feb. 26: Private reports yesterday indicated that the Australian
crop might be as much as 250,000,000 bushels. If 80,
this will be the largest crop ever raised by that
country. If the private reports prove to be correct,
it means that Australia has a supply in the form of
carryover and exportable surplus of 200,000,000 bush-
els of wheat and this, with the present supply in
Canada of about 350,000,000 bushels, is certainly
ample enough to take care of the world trade.
Regraded Uclassified
101
March 1, 1940
12:50 D.M.
H'Jr:
Hello, Joe.
Joseph P.
Cotton:
Yes, Mr. Morgenthau. I'm over here at a meeting
that Mr. Jones called suddenly this morning.
HVr:
Yeah.
C:
He wants to put out a statement on this -- fore-
casting loans to Finland and Sweden, which he says
he has cleared -- he had a wire from the President
saying that the President was going to sign the --
this bill increasing the Export-Import Bank capital
and wanted him to go ahead. I -- he said he hadn't
been able to talk to you about it although he had
tried to get you.
HVJr:
That's right.
C:
I'd just like to -- perhaps T could just read you
the statement - it's very short - to show you what
it -- what it would involve.
MJr:
Go ahead.
C:
He says, "The President has advised me that he will
sign the Export-Import Bank canital increase bill,
and the trustees of the Bank have allocated 20
million dollars for additional loans to the Finnish-
American Trading Corporation for the account of
Finland: also 15 millions to the Bank of Sweden to
finance American exports to Sweden and that the pro-
ceeds of these loans can only be expended for our-
chases in this country, and 80 on, and not war
materials."
I asked Judge Moore, representing the State Depart-
ment over here, whether the State Department wanted
to reconsider this whole skin Navy end Loan policy
in view of what's happened since the bill went into
Congress and now, and he -- he said no, but I mean --
he perhaps -- I mean, he didn't seem to consider it.
This is -- this 1s of course -- virtually commits us
to go on ahead, although in terms it's an allocation
Regraded Uclassified
102
- 2 -
rather than -- than a. formal authorization. It
just seemed a very -- rather important thing and
Mr. Jones sprang it -- I -- we didn't know it was
coming along.
SMJr:
Where are you talking from?
C:
I'm talking from his office.
HMJr:
20 million for Finland?
C:
Yeah.
H'Jr:
And 15 for Sweden.
C:
Yeah.
HVJr:
Does that leave any for China?
C:
Well, he only -- he said that he was going to do
something for China and that the feeling un on
the Hill 1s in favor of that too and he intends
to work it out but he didn't want to -- he didn't
think it was wise to say anything about it in this
statement.
HMJr:
Why not? I'd like to have them all announced. I'd
like to have the 20 million announced for China.
C:
I see.
HMJr:
Definitely!
C:
Well, I -- I'll bring un that point.
HMJr:
Yes.
C:
Well, how do -- it seems to me, although it's
primarily A State Department responsibility, that
this thing ought to be rather carefully considered.
I mean, it certainly, to 8. layman, it looks R.8 if
Finland was going down, but
HVJr:
Well, has he got -- he has the approval of the
President?
Regraded Uclassified
103
- 3 -
C:
Yes.
H/Jr:
Well, why don't you do this, if you could go in
the meeting and tell Mr. Jones that I'm free now -
I've been in the meeting all day - and I'd like to
talk to him. You see?
3:
Right.
HMJr:
And if you could stand by.
0:
I'll do that, and I'll bring up the point about
China.
HMJr:
Yes, but if you could do it in the next five minutes,
0:
I'll do it right away.
H'Jr:
Will you?
0:
Right.
MJr:
Ask him whether he'd mind coming to the phone and
you could stand by and listen.
0:
Yeah. It just seems -- the obvious point seems to
me, Mr. Morgenthau, 18 that -- I mean, it looks
awful late on these Finnish and Scandinavian things,
but
HMJr:
Well, if it was my sole responsibility, I'd vote
yes.
C:
Well, I'd be inclined to too, but it's -- I wondered
why, as a matter of procedure, it was necessary to
put out a statement which would virtually commit
the Government, that's all.
HVJr:
I don't know. But I mean, 26 far 2.8 they are con-
cerned I'm willing to have you vote yes.
C:
Right.
include
H/Jr:
But I'd like them to / the Chinese thing.
C:
Well, I'll tell him that and
Regraded Uclassified
104
- 4 -
HMJr:
See if you can't get him to the phone.
C:
All right. Fine.
HMJr:
And I'll -- I'm here. I'll hang up but I'm here.
C:
Right, sir. Thanks a lot.
Regraded Uclassified
105
March 1, 1940
12:55 p.m.
Jesse
Jones:
Hello, Henry.
HMJr:
I hear you're going to spend a little money.
J:
Well, we thought we hadn't called on you for a
long time, we'd better call on you.
HMJr:
God, I need -- you're making Marriner Eccles look
like & piker.
J:
I understand that you want to lend this money all
to Haiti.
HMJr:
No, not all, but I would like if you're going to
make an announcement, I'd love to see you tell them
you're going to lend 20 million to China.
J:
Well, I think we need a little -- 8. little further
investigation on China. We're going to reserve
20 million for China.
HMJr:
You are?
J:
Oh, yes.
HMJr:
I see.
J:
But I think we'd better -- in that I need -- I called
you earlier this morning and you were
HMJr:
Well, I was in a tax meeting.
J:
And I wanted to discuss that with you.
HMJr:
Yeah.
J:
And I want to go in -- particularly into the details
of the China matter with you.
HMJr:
Well, I'm ready any time you are, but I was -- I
locked myself up on a tax matter.
J:
Yeah. The -- Finland 18 the thing that's uppermost
in everybody's mind right now.
Regraded Uclassified
106
- 2 -
HMJr:
Yeah.
J:
And BO
HVJr:
The only question I had, the way Joe Cotton read
it -- I mean, are you safe in announcing this be-
fore the President signs the bill?
J:
Perfectly. He told me to go ahead.
HMJr:
He did.
J:
Yeah. He wired me last night.
HVJr:
To -- I mean, before he signs it.
J:
He said he would sign it and we could go ahead.
HMJr:
I see. Well, if you're safe on that that's O.K.
I'm with you.
J:
I just want to say something today as cuick as we
can on Finland.
HMJr:
Yeah.
J:
And I out in Sweden there for -- because they want
to
the stuff, and I expect they are going
to help Finland also.
HWr:
All right. And you are going to earmark 20 million
for China?
J:
Certainly SO.
HVr:
Well, any time you're ready, Jesse, I am.
J:
O. K.
HMJr:
Give me a little notice.
J:
All right. Fine. Thank you.
Regraded Uclassified
107
March 1, 1940
3:15 p.m.
HMJr:
Hello.
Operator:
Mr. Purvis.
Arthur
Purvis:
Hello.
HMJr:
Purvis
P:
Yes; good afternoon, Mr. Secretary.
HMJr:
How are you?
P:
Very well, thank you. I just got back from Ottawa.
HMJr:
Good. Mr. Purvis, I have been working on this
powder business, you see?
P:
Yes, sir.
HMJr:
And I have made this much progress but it's always
subject to the approval of the Commander-in-Chief.
P:
Quite.
HMJr:
It may be possible to get from Dupont
P:
Yes.
HMJr:
on Navy release 150 thousand pounds a month
for four months
P:
Yes.
HMJr:
of smokeless powder.
P:
Yes.
HMJr:
And from Hercules, a million 200 thousand pounds
for March, April, May and June.
P:
That's a million 200 thousand pounds in total over
March, April, May and June.
HMJr:
From Hercules.
Regraded Uclassifie
108
- 2 -
P:
Yes.
HMJr:
The one case 600 thousand.
P:
Yes.
HMJr:
And the other case a million two.
P:
Yes, quite.
HMJr:
Now, one 1s a Navy release; the other 18 an Army
release.
P:
Oh, I see. (Laughs)
HMJr:
You see?
P:
Yes, I do.
HMJr:
Now, the thing that I thought that you might be
finding out is this: This isn't easy and I don't
want any flare-back, you see?
P:
No, quite.
HMJr:
Could you find out whether Dupont and Hercules --
how many shifts they're working. You see?
P:
Yes.
HMJr:
And if they're only working, say -- one or two,
would it be possible for them to go to three
shifts
P:
Yes.
HMJr:
during those four months.
P:
Yes.
HMJr:
And whatever the extra charge would be I should
think you would be willing to pay it.
P:
Yes.
HMJr:
But it would make it look better from our standpoint.
Regraded Uclassified
109
- 3 -
P:
Oh, yes, We wouldn't have any worry about the
extra charge at all.
HMJr:
Do you see what I mean?
P:
Oh, I see exactly what you mean.
HMJr:
During those four months' period both with the --
both with Dupont and With Hercules.
P:
Yes.
HMJr:
The -- getting the final approval from the Presi-
dent if he thought it was wise.
P:
Yes, quite.
HMJr:
It would make it better all around if it was --
if during those four months' period while they
were working on those two orders they would go
to three shifts.
P:
I'll find out the possibilities and whether they
are on them now or whether they're not.
HMr:
Yes.
P:
And I'll let you know.
HMJr:
Will you?
P:
I will.
HMJr:
And then, always bearing in mind when I tell you
that you have the green light that the formal way
will be that we'll be asked formally to do this
by each company.
P:
Yes, yes, yes.
HMJr:
I mean, that the Hercules and Dupont will formally
request -- let me just get this -- the Navy con-
tract 18 Dupont and the Army contract is Hercules.
P:
Yes, that's right.
110
- 4 -
HMJr:
And in each case the formal request will come from
the company to the Navy and the Army.
P:
Yes.
HMJr:
Do you see?
P:
I see.
HMJr:
That all will look much better.
P:
Yes, exactly.
HMJr:
Now, I'll know -- I'll know by Monday or Tuesday.
P:
Will you?
HMJr:
on, yes.
P:
Good. That's very good indeed.
HMJr:
But if you could let me know by Saturday, because
I hope to -- I have an appointment to see the
President Sunday.
P:
Yes, I see. I shall do that without fail.
HMJr:
So, if you could let me know Saturday sometime.
P:
I'll get that this afternoon.
HMJr:
I'll be in the office from ten to twelve Saturday.
P:
Oh, you will? Good. Thank you very much; I'll
get that.
HMJr:
Now, one other thing.
P:
Yes?
HMJr:
I read in the paper that you bought 20 million
dollars' worth of bombers from Douglas.
P:
Well, that -- that 's the formal contract of some-
thing that was done about two months ago.
Regraded Uclassified
111
- 5 -
H/Jr:
oh, because nobody here in the Army or Navy seems
to know anything about it.
P:
oh, it's merely -- it's merely -- it's something
of the same nature -- I -- I'm sure it has been
on our list to Collins for many, many, many weeks,
but I'll check that. You see?
TVJr:
Good.
Naturally it's -- it's something which 18 half-way
akin to the Curtis-Wright contract which has taken
some time to formalize, though I find that wasn't
by any means All our people bought.
END:
I see.
e:
But it's -- it's something which I think will have
been on the list for at least seven or eight weeks.
However, I will check on that.
Please, because they don't seem to know about it.
At least Admiral Spear, who 18 noting in Collins'
place, knew nothing about it.
Well now, if that's 80 there -- there would -- it
would mean a very serious slip on our list which
we really, I felt, had gotten down to a pretty
fine point. But I'll check that un, Mr. Secretary.
IMJr:
And -- well, that's that. And you got my message,
didn't you, that I wes the high Government official
who said there was nothing doing on giving the orders
to three companies?
oh, yes I -- (Laughs) -- I got that.
Good.
I -- I think on that the -- I had a talk yesterday
in Ottawa for 8. few minutes with Henry Phillips (?)
Yes.
who is trying to get rid of one or two Canadian
things and get down here, and I told him that I was
Regraded Uclassified
112
- 6 -
very anxious that he should have & talk with you
promptly if you could arrange it.
HMJr:
Oh, yes.
P:
Now, Pleven and Jacquin should be here also in
the very early future. Would it be all right for
all three of them to come at once?
HMJr:
Surely.
P:
Good.
HMJr:
When you come down I'll tell you why I had to do
that. It was somebody -- it was all over Washing-
ton and it came from somebody on our side and I --
I just had to do it that way.
P:
Yes.
HMJr:
I don't think it did you any harm.
P:
It -- I don't think BO -- I really don't, because
after all, as I see it now, we start afresh with
-- with a problem that's got to be reconciled.
We're going to have the great advantage, I find,
Mr. Secretary, of having on this side of the water
people who will have a very high degree of techni-
cal ability to decide. I think -- I think they've
set the calibre -- they are sending the calibre of
people which will prevent this eternal cabling back
and forth.
HMJr:
Well, there was a whispering campaign here about
favoring three companies, you see?
?:
Yes, I see. Well of course I can see how you can't
very well tolerate that.
HMJr:
And I thought the best way was just to kill it.
P:
Yes. Good.
HMJr:
All right.
P:
Thank you very much, sir.
Regraded Uclassified
113
- 7 -
HMJr:
And you will let me know tomorrow?
P:
Yes, I will.
HMJr:
Thank you.
P:
Thank you.
HMJr:
Goodbye.
Regraded Uclassified
114
GROUP MEETING
March 1, 1940.
4:30 p.m.
Present:
Mr. Gaston
Mr. Viner
Mr. Cotton
Mr. Sullivan
Mr. Cochran
Mr. Foley
Mr. Thompson
Mr. White
Mr. Haas
Mr. Schwarz
Mrs Klotz
Mr. Bell
H.M.Jr:
I see you got trimmed in the Export-Import
Bank.
Cotton:
Well, perhaps so.
H.M.Jr:
How did the thing go over there? If you don't
understand my reference, I am referring to
your haircut when I say you got trimmed.
Cotton:
Oh no, that was yesterday.
H.M.Jr:
In my talk with Jones, I thought this was in-
teresting, did I understand that there is now
20 million for Finland and 15 million for
Sweden, is that right, and over the telephone
they agreed to earmark 20 for China.
Cotton:
Yes.
H.M.Jr:
But wouldn't announce it. They were trying to
get him to announce it today.
Anything else happen over at the Export-Import?
Cotton:
Well, there was quite a long discussion on the
general situation. I guess there was nothing
important. It was sort of B. rambling discussion,
nothing terribly definite.
H.M.Jr:
0. K.
Then the other thing, how did your thing go
last night, Harry?
White:
I thought very well. They certainly were very
Regraded Uclassified
115
- 2 -
interested in it, at any rate. They were
supposed to adjourn sharply at 9:00 o'clock,
but they asked questions until about 10:30.
H.M.Jr:
How many Congressmen did you have?
White:
There were about 30-odd persons there, I
think, and I imagine over 20 of them were
Congressmen. There was one Senator, Senator
Thomas.
Gaston:
Elmer?
Foley:
From Oklahoma?
White:
Oklahoma.
Gaston:
Utah.
Foley:
No, that is Oklahoma.
White:
The silver-haired fellow.
H.M.Jr:
You were satisfied?
White:
Yes, I think so.
H.M.Jr:
Has anybody got anything? I am coming in to-
morrow at 10:00 to see Leroy-Beaulieu.
What you (Sullivan) told me early this morning,
will that keep until Monday?
Sullivan:
Yes, sir.
H.M.Jr:
Does he (Foley) know about it?
Sullivan:
He does.
H.M.Jr:
That will keep?
Sullivan:
He keeps it.
H.M.Jr:
I mean, will it keep until Monday?
Sullivan:
Yes. I am leaving tonight.
Regraded Uclassified
116
- 3 -
H.M.Jr:
What you told me will keep?
Sullivan:
Yes.
Cochran:
I have a wire here from Mr. Nicholson which
he desires communicated to Mr. Lochhead, 1f
you approve. I also wish to show a copy of
it to Gaston.
H.M.Jr:
You two fellows decide. Did you get off that
cable to that Consul?
Cochran:
I left it on your desk this morning.
H.N.Jr:
I gave it to Sullivan yesterday?
Sullivan:
I thought you did.
H.M.Jr:
I think 30.
Sullivan:
I haven't seen it.
H.M.Jr:
It is in your hands. You had it in your hands.
Sulliven:
I think I did. I will look for it the minute
I get back there. I haven't laid eyes on it
since.
H.M.Jr:
Well, you better.
Sullivan:
I hope SO.
Cochran:
I have copies of it.
Sullivan:
I was just thinking of that thing when you men-
tioned it, wondering where you or I put it.
S.M.Jr:
You don't want to put it off.
Sullivan:
I bet you handed it to me. I wouldn't bet I
have still got it, but I think you handed it
to me.
H.M.Jr:
Before you go, it is one of the most interesting
things in the - in the Consul in Birmingham.
Regraded Uclassified
117
- 4 -
It is an amazing statement of the way the
English machine tool fellows feel about our
business and the way they feel about their
own government. It is amazing. I want more
information.
Sullivan:
Do you want me to give that to Mr. Cochran?
H.M.Jr:
Yes.
Cochran:
It is all right to go now?
H.M.Jr:
Yes, but I thought he might want to ask some-
thing.
Cochran:
I got from the State Department this afternoon
the instructions which they sent out calling
for the information. Commerce has been in-
terested in it and I have the memorandum here
which Commerce gave the State Department.
S.M.Jr:
Oh, that is the way it came in?
Cochran:
Yes, sir.
Sullivan:
Incidentally, Stilwell told me that they had
sent to England enough machine tools to pave
the streets over there at least six times, and
he didn't --
E.M.Jr:
Well, this memorandum is very interesting. I
would just suggest if anybody wanted --
Thompson:
I have a little report on political activity.
I don't know whether you want it now.
Bell:
That will keep until Monday, too.
(Discussion off the record)
H.M.Jr:
I will take it home with me.
Thompson:
Mr. Helvering is in entire accord with it, al-
though he didn't sign it.
H.M.Jr:
O. K., I will see you all Monday.
Regraded Uclassified
118
ADDRESS THE COMMANDART, U.S. COAST GUARD
AND PEFER TO a.
TREASURY DEPARTMENT
me
UNITED STATES COAST GUARD
HEADQUARTERS
WASHINGTON 1 March, 1940.
From:
Spagent, Shanghai, China.
To :
Mr. Districh.
Message from Mr. Nicholson.
With the consent of the Secretary of the Treasury,
please mail the following to Mr. Lochhead:
"United American Asiatic Corporation of Hongkong today
shipped ex motor vessel Torrens 119 long tons and 865 pounds
bulk wood oil to Interchemical Corporation of New York at
24 3/4 American cents per pound cost and freight. Insurance
and war risk effected New York. Is this shipment for ulti-
mate account of Universal? If not, the oil probably smuggled
out of China. This may be an investigation. Mr. Jacques
Maguite of suspected third international connections who is
now in Hongkong is vice-president of United American Asiatic
Corporation of New York. If interested see Gorman of Customs
Bureau for report on Maguite. Otherwise the above informa-
tion is strictly confidential."
Note: 'Inderlined words probably should be "bear".
Regraded Uclassified
Treasury
119
PARAPHRASE OF TELEGRAM RECEIVED
From: Rangoon
To:
Secretary of State
Date: March 1, 1940.
STRICTLY CONFIDENTIAL
Only war reexports to China during the first half
of February consisted of two French tanks worth 80,700
rupees or 24,000 American dollars and supplies from the
United States consisting of aircraft parts including
some radio equipment, explosives and powder valued at
733,500 rupees or about $220,000. The airplane materials
were valued at $56,000. $164,000 was the value of the
other American shipments.
517.07
notice Did & as 5 8
OF
Regraded Uclassified
120
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE March 1, 1940
TO
Mr. Thompson
FROM
Mr. Haas BA.
In response to your request of December 26, 1939, there
is submitted herewith for the Division of Research and Statis-
tics a memorandum listing, with brief descriptions, the studies
or projects completed or under way, and the names of persons
working on each, for the month of February 1940.
Regraded Uclassified
121
DIVISION OF RESEARCH AND STATISTICS
Report of Studies or Projects Completed or Under
Way, and the Names of Persons Working on Each,
for the month of February 1940
For convenience of reference, the studies listed are
grouped under general subject heads.
The names shown for persons working on each project
include only those who participated fairly directly, as ex-
plained in the introductory note' to the corresponding report
submitted on December 28, 1939. No attempt has been made
to cover also persons whose responsibility in each parti-
cular case was mainly in planning, supervising, or consulting.
Financial Analysis
I. Projects or studies completed
1. Reviews of current developments in the high-grade seou-
rities markets were prepared, and memoranda were trans-
mitted to the Secretary on the following dates: February 6
and 20. - Mr. Haas, Mr. Murphy, Mr. Lindow, Mr. Turner,
Miss Eyre, Mr. Conrad
These reviews contained, in addition to analysis of the
current situation, special studies, as follows:
(1) Factors responsible for the growth in the volume
of excess reserves (Review of February 6, page 3). -
Mr. Turner
(2) The price movements of British and French Govern-
ment securities since July 1938 (Review of February 6,
page 5). - Mr. Turner
(3) Comparison of the yields on the new Triborough
Bridge Authority bonds with comparable yields on
United States Treasury bonds and notes (Review of
February 20, page 3). - Mr. Lindow
(4) The movement in rights values during the past year
(Review of February 20, page 4). - Mr. Lindow
(5) Growth of the over-all public debt in the United
States since 1913 (Review of February 20, page 4). -
Mr. Lindow
2. Memorandum on the setting for the March financing was
prepared, and was transmitted to the Secretary on
Regraded Uclassified
122
- 2 -
February 28. - Mr. Raas, Mr. Murphy, Mr. Tickton,
Miss Eyre
This memorandum contained the following special studies:
(1) Discussion of who holds the issues to be refunded. -
Mr. Tickton
(2) The volume of "short" maturities of United States
Government direct and guaranteed securities out-
standing during the past four years. - Mr. Tickton
(3) Discussion of the special position of high-coupon
obligations refunded in advance of maturity. -
Mr. Tickton
3.
Yield rates on United States securities, direct and guar-
anteed, on the basis of over-the-counter closing quotations
were calculated daily. These were summarized each day in
8. table showing for each 1ssue the closing price and
yield that day, the change in price and yield from the
preceding day, and the price range since date of issue
and also for the years 1939 and 1940 to date. A chart
for each issue was kept up to date showing recent daily
price and yield figures together with comparative monthly
data since 1933 or since date of issue. - Mr. Brown,
Mr. Moody, Miss MoCoy
4.
Five proposals of the RFC, including one for the Export-
Import Bank, that the Secretary of the Treasury request
that corporation to purchase the preferred stock of
banks, were examined. - Mr. Murphy, Mr. Turner, Miss Eyre
5.
Tables and charts showing estimated cash income and outgo
of the Federal Government were revised on basis of data
available in February. - Mr. Tickton
6.
A table showing the amount of food-order stamps issued
by the Federal Surplus Commodities Corporation was brought
up to date as of January 13, 1940. - Mr. Tickton
7.
Memorandum to the Secretary regarding employment in
the aviation manufacturing industry, February 1. -
Mr. Lindow
8.
Memorandum on the budgetary aspects of the farm program
was prepared in response to a request from Under Secre-
tary Bell, and WAB transmitted to him on February 5. -
Mr. Lindow
9.
Comments on the Budget speech of Senator Taft, which W&B
delivered in Chicago on January 5, 1940, were prepared in
Regraded Uclassified
123
- 3 -
response to the request of Vr. Schwart, and were trans-
mitted to him on February 6. - Mr. Murphy, Mr. Lindow
10. Memorandum on the changes in the amounts of public debt
outstanding since 1933 was prepared in response to &
request of Under Secretary Bell, and was transmitted to
him on February 7. - Mr. Murphy, Mr. Lindow, Mr. Tickton
11. Memorandum on the statements of the President and of
Mr. Thomas Dewey with respect to debts was prepared in
response to a request from Under Secretary Bell, and
W&B transmitted to him on February 7. - Mr. Haas,
Mr. Murphy, Mr. Lindow, Mr. Tickton
12. Chart on the administrative structure of Federal lending
agencies was prepared in response to & request from
Mr. Bartelt, Commissioner of Accounts and Deposits, and
was transmitted to him on February 10. - Mr. Lindow,
Mr. Tickton
13. A letter, for the signature of Under Secretary Bell,
commenting on the bill S. 3265, "To further amend the
Federal Farm Loan Act by increasing the limitatione of
loans, was reviewed and initialled, February 19. -
Mr. Lindow
14. À letter, for the signature of Under Secretary Bell,
commenting on the bill S. 3283, "To extend to closed
building and loan associations and for the liquidation
of assets of such associations the same assistance that
le now extended to closed banks and for the liquidation
of their assets," was reviewed and initialled, February 19.
- Mr. Lindow
15. Memorandum regarding the reason for the increase in money
in circulation during the past 12 years was completed in
response to B. request from Under Secretary Bell, end was
transmitted to him on February 26. - Mrs. Wadleigh
II. Projects or studies under way
1. Preparation of summary data and charts on United States
securities and on the relation of the market for United
States securities to that for other high-grade securities,
to preface the charts on prices and yields of individual
issues of United States securities. - Misa Eyre
2. Statistical (graphic correlation) analysis of factors
affecting high-grade interest rates. - Mr. Turner
Regraded Uclassified
124
- 4 -
3. Study of the relationship between the yields and maturi-
ties of high-grade securities immediately preceding
prior major bear markets in such securities. - Mr. Turner,
Mr. Conrad
4. Comparison of relative amplitude of price fluctuations
of long-term and short-term securities. - Mr. Lindow,
Mr. Conrad
5. Study of the effect of the size of the issue on the prices
and yields of U. 8. securities. - Mr. Lindow, Mr. Conrad
6. Chart and annotations with respect to the factors
influenoing the movement of interest rates during the
last World War. - Mr. Turner
7. Discussion of various problems encountered and solutions
devised in connection with war borrowing. - Mrs. Wadleigh
8. Memorandum comparing and contrasting war and depression
deficit-financing. - Mrs. Wadleigh
9. Preparation of composite chart on unemployment for the
Secretary's chart book. - Mr. Lindow
10. Estimate of distribution, by classes of holders, of direct
and guaranteed Federal securities outstanding June 30,
1939. - Mr. Lindow
Revenue Estimates
I. Projects or studies completed
1. The regular monthly statement was prepared for the Office
of the Commissioner of Accounts and Deposits showing the
latest revised estimates of receipts, by months and by
principal sources of revenues, for the period February
1940 through June 1941, and was transmitted on February
5. - Mrs. Stanley
2. The regular monthly summary comparison of estimated
receipts and actual receipts in January and in the first
seven months of fiscal year 1940, on the daily Treasury
statement basis, was prepared, February 6. - Mrs. Stanley
3. The regular monthly detailed comparison of estimated and
actual receipts in January 1940 and in the first seven
months of the fiscal year 1940, based on the collections
classification, was prepared, February 28. - Mrs. Stanley
Regraded Uclassified
125
- 5 -
4. In the light of the latest information the Budget esti-
mates of March income tax receipts were reexamined. -
Mr. Leahey, Mr. Driver
5. A limited computation of corporate earnings data, by
quarters, for calendar years 1936-1939, inclusive, was
studied from published reports in the standard business
services, by years and by broad industrial groups, for
use in the estimation of the corporation income tax
base. - Mr. Leahey
6. A detailed study and analysis was completed of recent
trends in customs duties by tariff schedules and by
geographical areas, as well as a broad analysis of the
recent trends of nondutiable imports. - Mr. Wilson
7. The 57 page agenda of the proposed meeting of the General
Committee on Statistics of Income was studied and members
of the staff attended the meeting which was held on
February 12. - Mr. O'Donnell, Mr. Driver, Mr. Leahey,
Mrs. Stanley
8. Suggestions were prepared for the Subcommittees on the
Statistics of Income concerned with the business clas-
sification of sole proprietors and with the proposed
tabulations to be made of data from the 1939 returns
in connection with the Public Salary Tax Act, and two
meetings of these Subcommittees in the Statistical
Section of the Bureau of Internal Revenue were attended. -
Mr. Driver
9. Several conferences were held with the Statistical
Section of the Bureau of Internal Revenue in deciding
on the way of handling the tabulation of data from the
1939 corporation income tax returns 80 that the tables
would be best adapted to revenue estimating purposes. -
Mr. Leahey
10. Proposed tables for use in compiling data from estate
tax returns filed during the calendar year 1939 were
reviewed. - Mrs. Stanley
11. Estimates were prepared of the revenue effect of each of
the following nine proposale for raising additional revenue
from the individual income tax. Work requested by and
completed for the Division of Tax Research (Request of
January 19). - Mr. Driver
(1) A flat rate tax of 35 percent of the present combined
individual normal and surtax with B. limitation that
the added tax should not exceed 35 percent of the
Regraded Uclassified
126
- 6 -
net income remaining after present Federal income
taxes.
(2) What rate and corresponding limitation for the
suggestion in (1) above would yield $300 million?
(3) A graduated normal tax on present base (additional
to the present 4 percent rate) as follows: 2 percent
on the first $2,000 of taxable base; 4 percent on
the next $2,000; and 6 percent on the balance, with
the limitation that in no case should the additional
tax exceed 10 percent of the net inoome remaining
after present Federal income taxes.
(4) What bracket rates for the suggestion in (3) above
would yield $300 million?
(5) What would the yield in (3) above be if the rates
were made applicable to surtax net income instead
of income subject to the normal tax?
(6) What bracket rates for (5) above would yield $300
million?
(7) A flat tax of 1 percent on surtax net income under
present law.
(8) A flat 10 percent tax on unearned net income
defined as all income which is not at present de-
fined as earned income.
(9) What rate for the suggestion in (8) above would
yield $300 million?
12. Estimates of the revenue effect of the following proposals
were completed in response to & request from the Division
of Tax Research (Request of January 17, 1940):
(1) Each of the four attached individual income surtax
rate schedules, giving effect to the suggested
changes in the personal exemptions noted on the
respective schedules. - Mr. Driver
(2) An additional 1 percent individual income normal
tax rate. - Mr. Driver
(3) An additional 11 percent corporation income tax
rate. - Mr. Leahey
(4) An increase in the tax on beer from $5.00 to $7.00
per barrel. - Mrs. Stanley
Regraded Uclassified
127
- 7 -
(5) An increase in the tax on distilled spirits from
$2.25 to $2.50 per gallon. - Mrs. Stanley
(6) A one-half cent increase in the gasoline tax. -
Mrs. Stanley
13. Nineteen estimates of revenue effects based on eleven
proposed surtax rate schedules for the individual
income tax were prepared in response to & request from
the Division of Tax Research for the Joint Committee
on Internal Revenue Taxation, and were forwarded by
Assistant Secretary Sullivan to Representative Doughton,
Chairman of the Joint Committee and to Mr. Stam, Chief
of Staff, on February 14. - Mr. Driver
14. Estimates were prepared of the revenue effect of allowing
corporations with five or less stockholders to file income
tax returns and to be taxed as partnerships. Work requested
by and completed for the Division of Tax Research,
February 16. - Mr. Leahey
15. Estimates were made of the revenue effect of each of three
amendments to the income tax law as proposed by Senator
LaFollette, relating to reduced exemptions and increased
normal tax and surtax rates, singly and in combination.
These estimates were made in response to a request from
the Division of Tax Research and were forwarded to the
Senator by Assistant Secretary Sullivan. - Mr. Driver
II. Projects or studies under way
1. Request dated October 30, 1939, from the Division of Tax
Research.
Revenue effect of:
(1) With respect to individuals.
(a) Redefine short-term capital gaine and losses
to include only gains and loases realized upon
sale or exchange of capital assets held twelve
months or less instead of gains and losses
from assets held eighteen months or less as at
present; and correspondingly redefine long-
term gains and lossee to include in the first
statutory period those taken into account
upon assets held more then twelve months but
not more than twenty-four months instead of
those upon assets held more than eighteen
months but not more than twenty-four months
as at present; assuming all other provisions
with respect to the treatment of capital gains
and losses remain unchanged. - Mr. Driver
Regraded Uclassified
128
- 8 -
(b) Redefine short-term capital gains and losses
to include only gaine and losses realized upon
sale or exchange of capital assets held twelve
months or less instead of gains and losses
from assets held eighteen months or less as
at present; correspondingly redefine long-
term capital gains and losses to include
those taken into account upon assets held
more than twelve months instead of more than
eighteen months as at present; and provide
for the same treatment of all long-term
capital gains and losses as at present ac-
corded capital gains and losses from assets
held more than twenty-four months. - Mr. Driver
2. Improvement of method of estimating farm income, for
revenue estimating purposes. - Miss Rastall, Mr. Smith
3. Investigation of average hourly earnings as a factor
in forecasting payrolls for revenue estimating purposes. -
Miss Rastall, Mr. Smith
4. Projects for revising and improving the methods of
estimating revenues from the following taxes: - Miss Rastall,
Mr. Smith
(1) Lubricating oil.
(2) Wines, domestic and imported.
(3) Transportation of oil by pipeline.
(4) Electrical energy.
(5) Tires and inner tubes.
(6) The seasonal distribution of the revenues from
the cigarette tax.
Economic Conditions Related to Fiscal
and Revenue Matters
I. Projects or studies completed
1. Memoranda on the business and price situation were
prepared and transmitted to the Secretary on the fol-
lowing dates: February 5, 14, 20, and 26. - Mr. Haas,
Mr. Daggit, Mrs. May, Miss Rastall
2. A table and a chart showing employment under the Works
Projects Administration were brought up to date
Regraded Uclassified
129
- 9 -
and transmitted to the Secretary on the following dates:
February 6, 23, and 26. - Miss Rastall
3. Memoranda summarizing reports from Federal Surplus Com-
modities Corporation on wheat export sales and market
data were prepared and were transmitted to the Secretary
on the following dates: February 1, 8, and 23. -
Mr. Daggit, Mrs. May
4. A memorandum on retail bread prices was prepared and was
transmitted to the Secretary on February 1. Thereafter
it became necessary to substitute 8. monthly memorandum
for the previous weekly one, because the Bureau of Labor
Statistics discontinued its weekly series on retail
bread prices. - Mrs. May
5. Method of estimating unfilled orders of U. 8. Steel
Corporation was completed. (Data used on Chart 1 were
attached to business memorandum of February 5). - Mr. Daggit,
Mr. Smith
6. Method of estimating output and inventories of finished
products of U. 8. Steel Corporation Wa8 completed. -
Mr. Daggit, Mr. Smith
7. A review of the Division's forecasts of the New York
Times weekly business index was prepared in response to
request, and was transmitted to Mrs. Betts on February 16. -
Mr. Chevraux
8. A memorandum on "The Business Outlook" was reviewed on
February 27 at the request of the Secretary, for the
purpose of discussion. - Mr. Haae
9. A report was prepared for the Secretary on the Business
Outlook meeting held in the Federal Reserve Board Room
on February 28 by representatives from a number of
Government departments and organizations. Report was
transmitted on February 29. - Mr. Haas
II. Projects or studies under way
1. Index of unfilled orders.
An attempt is being made to improve our information on
the volume of unfilled orders by working out a composite
index based on data from individual industries. Work on
the U. S. Steel Corporation, a large and representative
segment of the steel industry, W&B completed during
February. - Mr. Daggit, Miss Rastall
Regraded Uclassified
130
- 10 -
2. Indications of business maladjustment.
Various indications of business maladjustments, shown
in graphic form, are being brought together for con-
venient reference. - Mr. Daggit
3. Export trends.
Since the trend of exports 18 likely to be an important
business factor during the coming year, 8 project has been
started which 18 designed to interpret export movements
in terms of their business significance. A number of
charts are in preparation, and a study is under way to
determine the number of points in the FRB index repre-
sented by exports of steel. - Mr. Daggit, Mrs. May,
Mr. Chevraux
4. Forces determining trends of basic commodity prices.
This project involves individual price studies for various
basic commodities, a number of which have been completed,
which are intended eventually to be combined into a
general index representing the basic price trend, after
allowance for the effect of supplies, industrial demand,
and other separable factors. - Mr. Daggit, Mrs. May,
Miss Rastall
5. Trends of individual commodity prices and price factors
during the World War period.
This project 1s patterned after the general study of
prices and price factors, 1913 to 1922, made in October,
but deals with six individual basic commodities - wheat,
cotton, hogs, steel, copper, and zinc. The project is
designed to determine the principal price factors ae-
sociated with the wartime rise and subsequent collapse of
prices of these commodities. - Mr. Daggit, Mrs. May
6. Index of commodity stocks.
This project 18 designed to develop B. composite index
of basic commodity stocks as 8 measure of one important
factor in the general price level. Stocks of 16 important
industrial materials, expressed in terms of their net
effect on prices, are being compiled for this index. -
Mrs. May
7. Index of goods inventories.
A better index of inventories of finished goods 1e needed
as an indication of business maladjustments, with a break-
down as between inventories of finished goods held by
Regraded Uclassified
131
- 11 -
manufacturers and those held by others. An attempt to
develop such an index 18 under way. - Mr. Daggit, Miss
Rastall
8. Index of buying on deferred payments.
A study of the volume of installment buying and consumer
credit has nearly been completed. This study is designed
eventually to provide a monthly index of the volume of
buying on deferred payments, which at times 18 an
important business factor. - Mrs. May
Actuarial Problems
I. Projects or studies completed
1. Board of Actuaries of the Civil Service Retirement and
Disability Fund.
The Board of Actuaries, of which the Government Actuary
1e & member, approved tables of factors for use in con-
nection with the joint and survivorship options of the
Civil Service Retirement Act. The Board also prepared
regulations in connection with the amendment of the
Civil Service Retirement Act. - Mr. Reagh, Mr. Brown
Memoranda were prepared by the Board regarding the "Amend-
ment of the Civil Service Retirement and Disability Act
in accordance with Senator Bulow's suggestions of
October 13, 1939," and showing cost estimates of amending
the Act in accordance with H. R. 3702, 76th Congress,
lst Session. - Mr. Reagh, Mr. Brown
2. Retirement plan of the Alaska Railroad.
H. R. 8046 "To amend section 1 of the Aot entitled 'An
Act for the retirement of employees of the Alaska Rall-
road, Territory of Alaska, who are citizens of the United
States,' approved June 29, 1936," was referred by the
Bureau of the Budget for comment. A report was made on
February 13. - Mr. Reagh
3. Preparation of amortization schedules for use by the
Reconstruction Finance Corporation.
Mr. J. Morgan Glover, of the R. F. C., requested as-
sistance in the preparation of a schedule amortizing a
$10,000,000 loan, the terms of which provide for rates
of interest of 2# percent, 30 percent, and some unknown
Regraded Uclassified
122
- 12 -
rate lees than 5 percent such that the rates would be
equivalent to a uniform coupon rate of 32 percent. This
work was completed on February 19. - Mr. Brown
II. Projects or studies under way
1. Calculation of joint and survivorship annuity tables.
à recent amendment to the Civil Service retirement law
permite retired employees to elect a joint and survivor-
ship annuity in lieu of a single life annuity. The
Board of Actuaries has submitted a new mortality table
for use in computing the amount of the joint and survivor-
ship annuities payable under the amended law. Computa-
tions have been completed for the extensive tables required
for this purpose and the tables are being put into final
form. - Mr. Reagh, Mr. Brown
2. Preparation of interest tables for use by the State Depart-
ment under the Foreign Service retirement law.
The Foreign Service retirement law requires that records
of contributions with interest be maintained in respect
to each individual coming under the retirement law.
Interest tables are practically completed to facilitate
the maintenance of these records and to record the data
in & form suitable for use in actuarial valuations of the
fund. (Under the recent amendment to the Foreign Service
Retirement Act actuarial valuations are made by the Treas-
ury Department). - Mr. Reagh, Mr. Brown
Estimate of the cost of lowering the optional retirement
age of Foreign Service Officers from 60 to 55 years.
A request to prepare this cost estimate was received
from Mr. Hosmer, Chief of the Office of Fiscal and Budget
Affairs, of the State Department. This work 18 pending
due to difficulties encountered because of the lack of
basic data. - Mr. Reagh, Mr. Brown
4.
Retirement Committee of the President's Committee on Civil
Service Improvement.
This Committee 18 making 8 comprehensive study of the Civil
Service retirement law. Its report will recommend several
changes designed to improve the present service. A revised
draft of the report has been prepared and will be reviewed
at B. meeting of the Committee in the near future. -
Mr. Reagh, Mr. Brown
Regraded Uclassified
133
- 13 -
5. Study of horse race results.
This study was undertaken at the request of the Legal
Division, for use in connection with the Annenberg case.
The results of some thirteen thousand horse races have
been recorded on punch cards, and are being tabulated to
show the financial results of betting under various
systems and of following the selections of different
expert handicappers. The results are expected to prove
that it 18 impossible to exercise skill to any important
extent in betting on horse races - that 1s, that such
betting is primarily & matter of chance rather than of
skill.
During February no progress was made on this project
due to the fact that the tabulating equipment of the
Bureau of Customs, Section of Statistics, was not
available for our use. - Mr. Reagh, Mr. Brown
6. Report of the Civil Service Assembly of the United
States and Canada on "The Retirement of Government
Employees".
A first draft of the chapter on "Financing the Plan"
18 in process of preparation. - Mr. Reagh
7- Retirement of employees of the land-grant colleges.
S. 1850 "To aid the States and territories in making
provisions for the retirement of employees of the land-
grant colleges" WAB submitted by the Bureau of the
Budget for comment. A report is now in process of
preparation. - Mr. Reagh, Mr. Brown
Other Projects or Studies
1. Treasury Bulletin.
Data were prepared or reviewed for the January issue of the
Bulletin, as follows:
Prepared -
Average yielde of long-term Treasury bonds and high-
grade corporate bonds. - Mr. Lindow, Visa Eyre
Reviewed -
Amount of interest-bearing debt outstanding, the
computed annual interest charge and the computed
rate of interest. - Mr. Lindow
Regraded Uclassified
134
- 14 -
Estimated customs duties and taxes, and value of
dutiable and taxable imports, by tariff schedules. -
Mr. Lindow, Mr. Wilson
Estimated receipts from taxes imposed by various
revenue acts on imports. - Mr. Lindow, Mr. Wilson
Computed duties collected, by countries. - Mr. Lindow,
Mr. Wilson
Treasury criminal cases. - Miss Michener, Mr. Lindow
2. Other material for publication.
(1) Report of the Central Statistical Board for December
1939 and January 1940 was reviewed, at the Board's
request, February 1. - Mr. Haas, Mr. Reagh
3. Correspondence.
Replies were prepared to letters of inquiry on subjects
relating to the work of the Division, and letters drafted
elsewhere and submitted to the Division for that purpose
were reviewed. - Miss Michener, Miss Ziegler, and other
members of the staff in appropriate fields of work.
During February 268 letters were received in the Division
and 251 were handled as required.
4. Charts.
Charts are prepared and continually brought up to date
for use in memoranda and in chart books on special subjects,
and corresponding photographic, photostatic, and multilith
work 18 carried on. This 1s done in the Graphic Section
under the supervision of Mr. Banyas. A statistical
report on the work of the Graphic Section for the month
of February 1s attached.
Uclassified
135
Work completed in the Graphic Section, Division of
Research and Statistics, February 1 to 29, 1940
For Division
For
Type of work
of R & 8
Total
Others
aphies
New charts:
Total charts completed
46
6
52
Charts brought up to date:
3 bond bhart books brought up to date
24
(times)
-
24 (times)
All other charts brought up to date
663
16
678
Miscellaneous:
Total jobs
8
5
11
otographic:
Photographs:
Total jobs
51
38
89
Number of-
Negatives
66
79
145
Contact prints
218
729
947
Enlargements
75
151
226
Photostats:
Total jobs
88
13
101
Number of-
Lettersise copies
320
144
464
All other copies
584
284
868
Multilith:
Total jobs
4
4
-
Number of-
Zinc plates
-
66
66
Miscellaneous:
Total jobs
1
2
$
wlt
7
Regraded 1 Jclassified
136
Statistical Report on Work Completed by the
Graphic Section, Division of Research and Statistics, by months,
beginning January 1940.
Regraded Uclassified
Type of Work
I
Jan.
I
Feb.
#
Mar.
a
Apr.
-
May
I
June
I
Total
4. Graphic
New charts completed
41
52
Charts brought up to date
773
678
Bond book charts completed
57
Bond books brought up to date
-
24(times)
Miscellaneous jobs completed
49
11
B. Photographic
Photographs:
Total jobs
69
89
Number of-
Negatives
179
145
Contact prints
192
947
Enlargements
604
226
Photostats:
Total jobs
137
101
Number of-
Lettersise copies
2,361
464
All other copies
781
868
Multilith:
Total jobs
2
4
Number of-
Zinc plates
65
66
Miscellaneous:
Total jobs
6
3
137
Hareh 1. 1940
Dr. Feis
Mr. Cochren
will you kindly send & cablegram along the fellowing lines:
"AMERICAN CONSUL. BINMINGHAM, HEGLAND
The Secretary of the Treasury has read with much interest Consul
Vilkinson's despatch Fumber 368 of January 29 on the mehine tool
industry which has provided nest timely and helpful information.
Secretary Morgenthma would approciate receiving further reports on
this subject. It is specifically suggested that effort be made to
report upon the question of plant expansies in other Biraingham
industries, preferably those producing engines or airplanes If any,
and that explanation be made of the treatment assorded such plant
expansion by British tax ambhorities."
nms.
MC/rm 8/1/40
Regraded Uclassified
138
PARAPHRASE OF TELEGRAM SENT
TO: American Consul, Birmingham, England
DATE: March 1, 1940, 5 p.m.
NO.: 3
Consul Wilkinson's despatch No. 368 of January 29
was read by the Secretary of the Treasury with much
interest. The despatch has provided information which
is most timely and helpful. Further reports on this
matter would be appreciated by the Secretary of the Treasury.
He makes the specific suggestion that effort be made to
report on expansion of plant in other industries of
Birmingham - preferably those which produce engines or
airplanes, if there are any producing these products -
and that the treatment which is accorded such plant
expansion by the tax authorities of Great Britain be
explained.
HULL
(FL)
May
EA:LWW
Regraded Uclassified
139
GENERAL E M WATSON
SECRETARY TO THE PRESIDENT
EN ROUTE TO WASHINGTON
MARCH 1, 1940
THANKS TAKE BOTH FOR APPOINTMENTS. YOUR MESSAGE OF REGARDS FEBRUARY TWENTY NINE. I WILL
HENRY MORGENTHAU JR
"CLEAR"
Sund Hgue
Mond ( per
POWU
Regraded Uclassified
140
GENERAL E M WATSON
SECRETARY TO THE PRESIDENT
EN ROUTE TO WASHINGTON
MARCH 1, 1940
THANKS FOR YOUR MESSAGE OF FEBRUARY TWENTY NINE. I WILL
TAKE BOTH APPOINTMENTS. REGARDS
HENRY MORGENTHAU JR
"CLEAR"
savo
Regraded Uclassified
- OFFICIAL COMMUNICATIONS TO
141
THE SECRETARY OF STATE
WASHINGTON, D.G.
DEPARTMENT OF STATE
WASHINGTON
March 1, 1940.
The Secretary of State presents his compbiments
to the Honorable the Secretary of the Treasury, and
encloses for his information a copy of telegram No. 38
of February 15 sent to the American Embassy, Rome,
Italy, with regard to certain payments to Italian
silk exporters.
10 1HE 20091 1731
LECHNICY
10 -
are NY I by 2 21
RECEIVED
IBEVENED
It
Regraded Uclassified
142
TELEGRAM SENT
February 15, 1940.
6 p.m.
AMERICAN EMBASSY
ROME
38.
FROM TREASURY.
Concerning current situation Italian silk products
cable whether payment of 4 lira per kilo of raw silk content
on Italian exports to United States has been abolished
and amount Ufficio Serico Italiano plans or has planned
to pay to Italian silk exporters during silk year 1939-40
and whether any changes in such payments have occurred
during present silk year.
HULL
(GSM)
200
SIT
DD = bill 2.21
10
Regraded Uclassified
TREASURY DEPARTMENT
143
INTER OFFICE COMMUNICATION
DATE March 1, 1940
TO
Secretary Morgenthau
FROM
Joseph P. Cotton, Jr.
Ret Export-Import Bank action in
connection with Scandinavian
Loans, and Mr. Jones' press
statement of today.
In view of the President's assurance to Mr. Jones that he will sign
the bill recently passed by Congress to increase the capital of the Bank,
the Bank took action today to "allocate" $20 millions to Finland, and to
authorize loans of $15 millions to Sweden and $10 millions to Norway. On
the basis of this action Mr. Jones proposes this afternoon to make public
the statement, copy of which was sent up to you earlier this afternoon.
It should be noted that the $10 millions commitment to Norway is intended
in substitution for a commitment in a similar amount hitherto made by the
RFC.
Mr. Jones discussed the general situation rather fully. He said
that Congress passed this legislation in the expectation that it would be
made use of for an immediate loan to Finland, and that the President
specifically approved the proposed action which he sought to have the Bank
adopt. There was a little discussion as to whether or not the time had
not passed when aid to the Scandinavian countries might be conducive to
the desired results. Mr. Jones frankly said that the Finnish loan could
only be considered sound upon the assumption that 8. negotiated peace will
terminate the war between Russia and Finland, of which he apparently has
some hope. In view of the risks in this situation he thought it desirable
that the Bank should act merely to "allocate" resources in the case of
Finland while definitely authorizing loans in the case of Sweden and Nor-
may. By "allocate" he means that the Finns should be permitted to con-
tinue to purchase beyond the existing $10 millions credit so long as the
situation would appear to justify helping them. Before getting in touch with
you on the telephone I asked Judge Moore whether, in view of the course of
events since the Export-Import Bank bill was introduced in Congress, the
State Department did not wish to reconsider its position in respect to loans
to Finland and Scandinavia in general. The response was in the negative. I
also asked whether anybody in the group had any reliable figures showing the
extent of allied aid to Finland and whether any attempt to trade upon the
proposed action of this country to obtain assurances of allied help were con-
templated. The answer was that nobody knew of any reliable figures and that
the State Department did not desire any arrangement with the allies in this
matter. I also asked whether anybody in the group had seen any purportedly
Regraded Uclassified
144
- 2 -
reliable report es to the military situation in Finland. The response wes
in the negative.
Mr. Noble expressed some apprhension that the action taken might be
A disservice to Finland if it contributed to the continuance of a war in
which there is little hope of a. successful outcome from Finland's standpoint.
There was considerable discussion 88 to the advisability of includ-
ing in Mr. Jones' statement reference to Sweden and Norway as well as Finland.
Objections were tentatively put forward by Judge Moore and Mr. Noble, but
were overruled by Mr. Jones, who said that he assumed full responsibility
for the public statement. Incidentally, neither Mr. Jones nor Judge Moore
cleared this statement with Mr. Hull.
In connection with the Swedish loan, Mr. Jones pointed out that
last year Sweden had an adverse balance with the United States of approxi-
mately $50 millions, that the situation was undoubtedly worse now; hence
that Sweden could not continue to buy from the United States on anything
like the scale which prevailed in the past unless afforded credits. He
also said that in view of the action being taken and the statement being
made including reference to the several Scandinavian countries, it would be
difficult in the future to avoid doing something for Denmark. He was,
however, leery of this situation because of geographical proximity to
Germany.
Mr. Jones indicated that the action taken would go far to exhaust
the anticipated additional resources of the Bank resulting from recent
congressional legislation. The Bank at the present time is committed over
end above the old $100 millions to the extent of about $30 millions, which,
plus the "allocation" and authorizations made today, result in total com-
sitments of $175 millions, leaving a noncommitted balance of only about
$25 millions. In this connection he said that he had no intention of lay-
ing aside the Chinese matter and that he had found the Committees of Congress
sympathetic. There was some discussion as to whether it would not be de-
sirable to include a reference to China in his statement. The China matter
he discussed with you over the telephone. Mr. Jones said that he was ready
to go ahead with 8. $20 millions loan to China and that the only point which
he was doubtful about was the capacity of the Chinese to export tin. Re
was against any reference to China being included in the statement because
he felt that certain problems in this connection remain to be worked out.
Re said he intended, however, to go into the matter fully next week.
It should be noted that the action taken by the Bank today commits
all but a small portion of its increased resources. Mr. Jones said that
this of course left little, if anything, for Istin America, but that we
Regraded Uclassified
145
- 3 -
would have to cross this bridge when we came to it as in the past. This,
of course, means in practice trading with the RFC to get them to do part
of the business. In this connection the possibility of a small loan to
Colombia, should the debt settlement eventuate, and the Brazilian steel
project were touched upon. Mr. Jones evidenced considerable interest in
the steel project situation and said that he would like to get those U. S.
Steel people who had been to Brazil down here.
P.P.C/s. e/s.
Regraded Uclassified
=
Prepared by: Mr. Murphy
Mr. Lindow
Mr. Tickton
Mr. Haas
146
An
147
TREASURY DEPARTMENT
CONFIDENTIAL
INTER OFFICE COMMUNICATION
DATE March 1, 1940
TO
Secretary Nongenthau
FROM
Mr. Haas SA.
Subject: Selection of Issues for the Maroh Financing
I. Selection of Maturities of New Issues
The maturities of new Treasury issues should obviously be
selected to accord, as far as possible, with the preferences
and interests of both the market and the Treasury. This may,
of course, involve some concessions on the part of each.
With respect to the preferences of the market, & sharp
distinction must be drawn between those issues which the pro-
spective purchasers plan to hold to maturity and those issues
which they plan to turn over at B. profit, either immediately
or at some later date. As far 8.8 the market's preference for
new issues to hold is concerned, there can be no question but
that such preference is for short issues.
Allowing, however, for the natural desire of the holders
of the maturing securities to obtain as large a premium as
possible on their exchange subscriptions and for the greater
ease with which such premiums may be obtained on medium- or
long-term securities, the current preference of the market for
a new security to be issued at the present time seems to lie in
the early Fifties. Beyond this point the preference curve
falls sharply, and we are advised that any attempt to place &
new issue beyond the middle Fifties would probably meet with
sharp resistance on the part of the market; and that, even if
such an issue were initially successful, it would be followed
by widespread secondary distribution.
As against these market considerations, the fiscal inter-
ests of the Treasury would seem to call for an intermediate- to
long-term maturity.
Chart I shows (on the left-hand side) the amount of public
debt (direct and guaranteed) first callable or maturing in each
calendar year; and (on the right-hand side) the oumulative
amount of debt callable or maturing through each year. It will
be noted that none of the debt now outstanding becomes first
callable in the years 1952 to 1954, inclusive, while none
Regraded Uclassified
148
Secretary Morgenthau - 2
finally matures in the years 1957 and 1958, and maturities in
1955 and 1956 are very light. The "real" maturities in 1954,
moreover, are substantially smaller than appears from the
chart, since $1,037 millions of the "nominal" maturities of
that year are in the form of B. 4 percent issue first callable
ten years earlier.
It would seem, then, that the preferences of the Treasury
and the market might best be reconciled by an issue with a
two- or three-year call period, beginning in the early and ex-
tending to the middle Fifties. The offering of such an issue
should probably be coupled with that of a Treasury note for the
benefit of the holders of the maturing securities who prefer to
take the sharp sacrifice in yield involved rather than accept
a longer security.
II. Coupon-Carry on Issues Being Refunded
As we pointed out in our memorandum of February 28, the
coupon-carry (1.e., the interest accrual at the coupon rate)
between March 15 and June 15 amounts to 27/32 on the 3-3/8 per-
cent bonds and to 12/32 on the (1-1/2 percent) June notes.
These coupon-carries represent the approximate premium values
of the two Lesues, respectively, in the absence of any refund-
ing offer whatsoever. Only that part of the premium on 8. new
issue which is in excess of these coupon-carries represents a
real margin of safety, as far as the new offering 18 concerned.
It 18 clear, therefore, that & larger premium on the new
issue 16 necessary to insure the exchange of the 3-3/8 percent
bonds than 1B necessary to insure that of the June notes.
There are only $353 millions of the bonds outstanding, however,
8.8 compared with $738 millions of the notes. It would, conse-
quently, seem desirable that some method should be found by
which the position of the bonds and notes might be more nearly
squalized, so that the full extre premium necessary to make the
exchange offering attractive to the holders of the bonds would
not also have to be given to the holders of the notes.
It 1a suggested that this objective can best be accom-
plished by making & special adjustment with respect to all the
3-3/8 percent bonds exchanged for new bonds, such as to give
them the equivalent of their full 3-3/8 percent coupon (but
not double interest) up to June 15. The value of such an ad-
justment would vary with the coupon of the new bond. In the
Regraded Uclassified
149
Secretary Morgenthau - 3
0898 of a 2-1/4 percent issue, it would be about 9/32. Such
an adjustment, while it would apply to the bond alone*, would
permit the premium on the entire new issue to be shaved by
that much without impairing ite real margin of safety.
III. A Technical Difficulty in Pricing
The pricing of an intermediate bond on the present occasion
involves greater than usual technical difficulties. Chart II
shows the yields of Treasury bonds having two-year, three-year,
and five-year call periods, respectively. Separate curves are
fitted to the yields of the bonds with each call period. Only
bonds with coupons of less than 3 percent have been included.
It will be noted that the curves connecting the points for
bonds with three-year and five-year call periods, respectively,
pass through, or practically through, all of the points without
difficulty. The curve connecting the points for bonde with &
two-year call period, however, passes through only three of the
four points while the other point falls considerably off the
curve. The latter issue -- the 2-1/2's of 1950-52 -- has a
higher premium than the two adjacent issues, but this hardly
seems adequate to account for the full amount of the difference
in yield. This issue has et premium of about 5-1/2 points 8.8 com-
pared with premiums of 3 and 3-1/4 points on the nearby issues
- the 2-1/4's of 1951-53 and the 2's of 1948-50, respectively.
As a result of this unusual irregularity in the yields of
the outstanding issues, the pricing of new issues in the very
early Fifties 1e subject to considerable variation, depending
upon how much weight 1s placed on the yield of the outstanding
50-52's as compared with those of the other two issues just re-
ferred to. On the whole, estimates of probable prices appear
to have greater reliability for first call dates beginning
sbout 1952.
IV. Selection and Pricing of Particular Issues
The attached table showe the probable yield basis, the
probable premium, and the "real margin of safety" of a number
of issues deemed to be suitable for refunding the June notes
and bonds. The table is divided into two parts, the upper
part showing the issues selected for consideration 1f no
And only on exchanges into new bonds.
Regraded Uclassified
150
Becretary Morgenthau - 4
interest adjustment 18 made on the June bonds, and the lower
part showing the 1ssues selected for consideration if an in-
terest edjustment of the type previously discussed should be
Recided upon.
The bonds suggested for use in case no interest adjust-
dent 18 made have been selected SO that their initial gross
prenium would be about 1-5/8 points. Their "real margin of
safety" ranges from 22/32 to 28/32. In the case of the bonds
suggested for use if an interest adjustment is to be made, the
basic initial premium has been reduced to about 1-3/8 points.
The "real margin of safety" of the verious issues in this cage
renges from 24/32 to 27/32.
It 15 suggested that the I percent note due September 15,
1944 (originally issued last December) should be reopened at
seyon-eighths of a point premium 1f no interest adjustment 18
to be mede and at three-quarters of a point premium if such an
adjustment 18 to be made. In the prices given in the table,
there ie a differential of from 6/32 to 14/32 in favor of the
bonde over the notes (including, where relevant, the interest
adjustment). This is probably large enough to insure that the
usjor portion of the exchanges would be for bonds, but still
offers a reasonably "free" choice to those investors with a
preference for notes. The differential could, of sourse, be
readlly adjusted either in the direction of weighing the scales
more Mavily in favor of the bonde, or of offering B. somewhat
vore "even" choice to investors preferring the notes.
No new note issue has been suggested. This is partly be-
cause no 5-year or 4-3/4 year note would fit satisfactorily
into B dual pricing scheme and partly because it is improbable
in any event that sufficient of the new notes would be taken
to justify a new issue. For these reasons, it is believed
that it would be much more satisfactory to reopen the Septem-
ber 1944 note (now outstanding in the amount of only 6283 mil-
11026) than to stert a new issue.
It will be observed that the 10-12 and 10 - 12-1/2 year
bonds surgested in the table do not fit in very well with the
zaturity schedule of Treasury bonde. These insues have been
included as possibilities, however, because of the strong
feeling in some quarters that any longer 1seue would be unwise.
Attachments
Regraded
151
Probable Premiums on New Issues
(Basis of closing bids, February 29)
:Probable:
"Real
: yield
:
Probable
margin of
: basis
:
premium,
safety" 1/
(Percent)
(Decimals are
thirty-seconds)
Issues suitable in 08.88 no interest ad-
justment 1s made
Note
Reopen 1'ε due 9/15/44 at 7/8
premium (now selling at 102.05)
1.09
.14
Bond
10-12 year 2'B due 3/15/50-52
1.83
1.17
.22
11-1/2 - 13-1/2 year 2-1/8's
due 9/15/51-53
1.96
1.22
.27
12-15 year 2-1/4's due 3/15/52-55
2.09
1.22
.27
13-1/4 - 15-1/4 year 2-1/4's
due 6/15/53-55
2.10
1.23
.28
Issues suitable in case interest ad-
justment is made on June bonds as
suggested in this memorandum
Note
Reopen l's due 9/15/44 at 3/4
premium (now selling at 102.05)
1.13
.18
Bond
10 - 12-1/2 year 2'a due 3/15/50-
9/15/52
1.86
1.09
.25
12-1/2 - 15-1/2 year 2-1/4's
due 9/15/52-55
2.12
1.13
.27
14-16 year 2-1/4's
due 3/15/54-56
2.14
1.10
.24
reasury Department, Division of Research and Statistics March 1, 1940
Applicable to exchanges of 3-3/8 percent bonds. The margin of safety
on the June notes is, of course, larger.
Regraded Uclassified
152
Chart I
MATURITY SCHEDULE OF INTEREST BEARING PUBLIC DEBT, FEB. 1940
Including Guaranteed
BY CALENDAR YEARS
CUMULATED BY CALENDAR YEARS
DOLLARS DOLLARS
DOLLARS
Billions Billions
DOLLARS
Billions
Billions
Amount Due or First Becoming Callable
5
44
44
5
Overantaed
Colleble lesues
Direct
Overenteed
40
4
4
40
Fixed lazues
Direct
Cumulated Amount
Due or Callable
36
36
3
3
2
############
32
"
2
28
20
I
-
24
24
o
o
Cumulated
40
42
44
46
48
so
52
54
56
58
30
62
164
%
se
Amount Maturing
5
5
20
20
Amount Maturing
4
4
16
16
3
3
12
12
2
//////////
2
4
a
I
IIIIIIII.
4
-
4
o
o
o
o
40
42
1940
42
44
#
48
"so
"52
14
#
"$8
%
62
V4
$
68
44
46
45
to
$2
54
"5b
56
60
12
14
"
16
a Passel Savings Bonds a us Sevings Bonds a Adjusted Service
Bonder NI Special - - Government Agencies and fruit funds
- die hereby the Treatury
I I 1 !
Regraded Uclassified
YIBLDS OF TREASURY BONDS WITH 2 YEAR, 3 YEAR AND
5 YEAR CALL PERIODS*
Based on Closing Bids, February 29, 1940
1942
1944
1946
1948
1950
1952
1954
1956
1958
1960
1962
PERCENT
PERCENT
5 YEAR CALL
2.4
2.4
2.2
2.2
3 YEAR CALL
2.0
2.0
1.8
1.8
1.6
1.6
2 YEAR CALL
1.4
1.4
1.2
1.2
1.0
1.0
.8
.8
.6
.6
1942
1944
1946
1948
1950
1952
1954
1956
1958
1960
1962
* EXCLUDING ISSUES WITH If OR HIGHER COUPONS
1
Office of the Secretary of the Treasury
5
- of - and
F - - 161
Regraded Uclassifie
3-1-40
154
THE SHORT VIEW AND THE LONG IN ECONOMIC POLICY
BY
JACOB VINER
Preprinted from
AMERICAN ECONOMIC REVIEW
Volume XXX, No. 1, March, 1940
Regraded Uclassified
WITH THE COMPLIMENTS
OF THE AUTHOR
THE SHORT VIEW AND THE LONG IN ECONOMIC POLICY
Presidential Address Delivered at the Fifty-second Annual Meeting of the American
Economic Association, Philadelphia, Pennsylvania, December 27, 1939
Once upon a time an academic economic theorist, by some freak of fate
not likely to be often repeated, got himself slightly entangled in the machin-
ery of formulation of government economic policy. What I plan to tell you
tonight reflects largely, though not I hope too explicitly, what the process
of policy-formulation did to his academic theorizing, and what his theoriz-
ing failed to do to the process of policy-formulation.
As an active participant in the policy-making process, the academic
theorist suffers from a number of handicaps more-or-less peculiar to him-
self. For purposes of teaching, or of acceptable writing for his restricted
audience of fellow-theorists, his conclusions are of little importance; and
what matters above all is the rigor and elegance of his manner of reaching
them. For policy, on the other hand, conclusions are vital, and often are
all that is vital. For the purposes of academic theorizing, the premises
the theorist starts from may without serious penalty be arbitrarily selected,
narrowly restricted in range, and purely hypothetical in nature, But the
selection of premises controls the conclusions reached, and for policy-
determination it is therefore vital that all the important variables be
covered by the analysis, and that the conclusions be not affected by the use
of premises which are irrevelant for their purposes or less realistic than
it is possible with the aid of available information to make them. To vio-
late these rules in policy-making is to be guilty of the grossest irresponsi-
bility. If he is not to be wholly in the way of the policy-maker, therefore,
the theorist must emerge from his ivory tower,-which is almost as hard
as to return to it.
The theorist's habitual methods of analysis are such as to lead to "right"
or "wrong" answers to manufactured problems, the premises and the
criteria of rightness being so chosen as to make this not only possible but
necessary. For the policy-maker, however, the problems are for the most
part not of his own devising, but are presented to him by outside forces,
in vague and ill-defined fashion, and what he asks of his advisers con-
sists as much of help in determining what the problems are as of help
in finding solutions for them. The theorist here is likely to find himself
uninformed and unskilled.
2
Jacob Viner
(March
1940]
Short and Long View in Economic Policy
3
The theorist's analysis is ordinarily couched in descriptive 4a distin.
guished from normative terms, If choices as between social values in-
as disinterestedly, coôperate in common tasks AS loyally, think as straight
fluence his thought, these choices are largely left implicit in his selection
within their own special fields of competence, as does the ordinary run
of premises, and are earely, and then usually apologetically, exprealy
of college professor. They certainly do not live on the moral heights con-
avowed. The policy-maker, however, is rarely satisfied with purely descrip-
timously, but they are called upon more often than academic men to rise
tive analysis. He insists that he be advised not only what will be the ob-
to them, and, in my honest judgment, they respond to the call as often
jective consequences of a specific line of action, but whether or not these
and as fully as in all probability we ourselves should under like circum-
are desirable consequences. While he has always some notions of his Own
stances.
with respect to the values which policy should serve, in my experience he
In one respect in particular, of special interest to economists, I have ob-
always demands of his economists that they guide him also in the determi-
served them with ever-increasing admiration-namely, their patience and
nation of what is socially desirable, and he expects the economist to ac-
generosity in their dealings with their economic advisers. In the course of
guidance. knowledge and to display some professional competence in giving such
expounding the economic verities, the economists repeatedly expose their
divided. counsels. They especially reveal that conflict within their ranks
There are always a number of different values to be considered, more-
between ancient dogmas and resurrected or newly-invented heresies with
over, and satisfaction of one often involves disregard of the other. This
which much of the remainder of my talk will deal. Those officials who
makes necessary a sort of weighing process, in which the decision is pre
come into frequent contact with squads of economists, as they note the
sumably made partly on the strength of quantitative information as to the
repeated conflict of testimony, must feel at times like the English judge
number of persons affected by alternative courses of action, their economic
who remarked that he had for years been trying motoring cases in which
status and needs, and so forth, and partly on the basis of a qualitative
two cars, each of them on the right side of the road and each of them
ranking of values in terms of some sort of scale of worth. The theoria
stationary, had been involved in a head-on collision-or even like that
AS such here also lacks experience. He is hampered, moreover, by his
magistrate in a native court in Ceylon who, disgusted by the flagrant
tendency to dissect the mental processes by which decision is reached in
contraditions in the evidence of the successive witnesses, said to the officer
such matters, and he tends to feel and to give discomfort by his reluctance
of the court: "Call the next liat." This failure of the economists to speak
to express in definite and assured terms the conclusions which he knows
as with one voice is a severe trial for the officials. I suspect, however,
he has reached only by vague and imperfectly communicable processes of
that they would find us even more trying if, when unpalatable advice was
thought.
offered by one economist, they could not feel that there was a good chance
The effect of the action on the subject is all that the theorist has been
that with a little search another economist could be found happy to swear
trained or conditioned to think about with respect to public policy. The
that the advice which had been given was incredibly bad economics, or even
official and the legislator, on the other hand, should, and in any case in-
was "orthodox" or "sound" economics, which are now very forceful epithets
variably do, think also of the effect of the action on the actor. The econo-
indeed in some high quarters.
mist conditioned to the purity of abstract thought is liable to be unreason-
To proceed with my catalogue of the handicaps of the economic theorist
able in his refusal to recognize that the official, in choosing his time for ao
as a policy-maker. The economists of my generation and earlier were
tion and his manner and degree of action, must give regard to their impact
trained to concentrate on so-called long-run analysis in their pure theoriz-
on his relations with superiors, colleagues, Congress, and the public, and
ing. When they ventured into the discussion of questions of public policy,
to their effect on the prestige of his agency and the morale of his staff.
they accordingly tended to be preoccupied with the long view, with the
But the official must operate in this way if those with whom he has to desl
effects which a given action would have on the more distant future, and
from day to day are to give him that coöperation and good will which are
to disregard or to weigh lightly its more immediate effects. A good illus-
essential not merely for his own personal success and comfort but for the
tration of what I have in mind is the famous poor-law controversy in
satisfactory execution of his functions,
England in the 1830's. The leading economists of the time all emphasized
The higher officials in Washington, whether they be political appointees
the allegedly injurious effects on the productive capacity and the will to
work and to save of the poor which would result from generous, long.
or career men, in my opinion, need make no apologies for their standards
sustained, and assured poor-relief to the able-bodied. They stressed even
even to college professors, elect of the elect though we be. As far as I have
observed, the higher officials in Washington as a group work as hard,
more the growth of population and the consequent impairment of the
basic earning power of labor which they believed would ultimately result
Regraded Uclassified
4
Jacob Viner
[March
1940]
Short and Long View in Economic Policy
their own efforts for the means of subsistence of themselves and their on
from any substantial liberation of the poor from dependence solely
solution, the quickly-working one, is of necessity a defective one The
children. The extreme conservatives and the extreme radicals of the time-
immediate solution to a problem no doubt frequently serves also with
also the humanitarians and clergy, stressed in opposition to the Views
who, as so often in history, were on the same side on a specific issue-and
tolerable satisfaction as a permanent one, and in some cases may well be
identical with the optimum permanent solution. Many problems, more-
of the economists the moral and political rights of the needy to be given
over, are themselves temporary in nature, and require therefore only
food and shelter with a minimum of humiliation and of deliberate inter-
temporary solutions. The immediate solution may be the only one for
ference with their accustomed patterns of family and social life. lo this
which public acceptance is obtainable, su that there is really no choice.
instance, as in many others, it was possible plausibly to picture the clash
There are circumstances, moreover, under which even a benevolent dictator,
between the long view and the short as a clash between the humane and
with no need to give heed to public clamor, would be wise to adopt a
the hard-hearted, although the economists of the time of course insisted
partial and temporary, but quick-working, solution in preference to a
that the policy they advocated, while immediately severe, would ulti-
more complete and more lasting one which would yield its benefits only
mately prove to be the kinder of the two to the poor.
after considerable delay. Mr. Keynes, speaking with at least a. trace of the
Although it is obviously not without direct relevance to present-day
accent of revelation, has told us that in the long run we'll all be dead
problems, I am not concerned here with the merits of this ancient Con-
What I presume he meant by this apparently crystal-clear dictum was that
troversy. I have cited it only to help make clear the differing tum which
if we took the long view, we, including our otherwise potential posterity,
may be given to public policy accordingly as the long view or the short
would-or might-all be dead-or dead or unborn-before that view
is dominant, and to illustrate the characteristic approach of the orthodos
could justify itself. This warning is scarcely much needed either by the
economist, from that day to this, to policy questions,
public official or by the ordinary legislator, but for the reasons I have
Now this habit of taking the long view is not only characteristic of the
stated and not only because in respectable communities the dead and the
orthodox economic theorist, but in the discussion of matters of economic
unborn cast no votes. But for the academic economist it is a sound warn-
policy it is often the principal characteristic by which he can be distin-
ing, and perhaps even a needed one. In times of severe social strain there
may be real menace of catastrophe if there is not resort, even at the cost of
guished layman from other professional economists or even from the intelligent
bad after-effects, to a quick-working remedy which tides the economy over
In the day-to-day process of adapting public policy to meet felt needs.
the crisis. At such times, the patience of the orthodox theorist may be out
on the other hand, the problems always manifest themselves in the form
of place. But in the past, at least, such times have come only rarely.
of immediate pressures of one sort or another, and the legislator or
Closely related to the habit of the theorist of preoccupying himself
official tends to look for correspondingly immediate solutions. This is
with those effects of proposed legislation which are more distant in time
"natural" behavior, in the sense both that it is what one should expect
is his habit of searching for the repercussions of legislation which are 50-
to-speak more distant in space. Politicians are experts in tracing one kind
to occur, and that it has its socially useful aspects.
Legislators and officials are typically busy and harried men. Except
of repercussion, the political. But they are indisposed to take account of
under the special circumstances of major election campaigns, when the
economic repercussions, as the history of tariff controversy abundantly
pattern of party debate may by chance turn on the relative merits of the
demonstrates. This indisposition, I think, they share with the general lay
public, to whom, in matters of economic analysis, one step at a time is
long-run programs of the contending parties, and except for the occasional
enough, if not too much. And since what the public doesn't know can't
opportunity of the legislator or the official to divest himself of the care
of the moment and, assuming the rôle of the statesman, to give patient
hurt the legislator, he has at least no selfish motive for following the
examination to the needs of the future, there is constant preoccupation
theorist in his unsteady and circuitous wanderings from the proximate to
with the problems which are immediately pressing, and little stimulus to
the secondary, to the tertiary effects, and is content to act in terms of the
take thought as to whether the proffered solutions are likely to prove
seen, with worry about the unseen left to the economic theorist as a sort of
lasting ones. There is especially little urge to go hunting for problems
occupational psychosis.
which are not yet felt as such but which may prove troublesome in the
I do not include in my list of the handicaps peculiar to the economic
distant future.
theorist as a participant in the policy-formulating process two items which
would probably appear high on such a list if prepared by those with
It would be a mistake, however, to take for granted that the immediate
whom the economist works-namely, first, his ignorance as a rule of the
Regraded Uclassified
6
Jacob Finer
[Mant
1940]
Short and Long View in Economic Policy
7
legal framework and legal folklore to which legislative drafting and the
administration of the laws must conform; and second, his lack of experi-
dogmas, preconceptions, or even in some cases thoughts, the fortunate man
feasible. These are omitted, however, not because the ordinary economic
ence and insight with respect to what is and what is not administratively
can move freely in any direction, wherever the wind may list. If he feels
the need for guidance, there is always available today yesterday's position
does have command of these skills, and not because they are unimportant
of his official superiors and tomorrow the different position they took today
for such is decidedly not the case in either instance, But barriers to tifec
In finding good-sounding reasons for what has already been decided upon,
tiveness of this general type, instead of being peculiar to economic theorists
he has a distinctive and useful function, both because the vitality of the
are common to all kinds of specialized participants in : coöperative then
democratic process is dependent upon our continuing to believe that it
prise such as policy-formulation which makes demands upon a wider
provides us with reasonably wise and beneficent government, and also be
range of skills than single individuals can reasonably be expected to
cause statesmen's intuitions have often a genuine economic logic dimly in
possess. The lack of legal and administrative training on the part of the
their background. He shares also with other types of economists the use-
ful rôle of finding good uses for bad laws, and thus contributes to the
economic theorist may be regrettable, but it is not fatal as long as he is
not permitted to decide policy questions all on his own,
most important function of the art of public administration: the making
In the ordinary course of events, policy is, of course, ultimately decided
of silk purses out of legislative sows' ears.
The handicaps of the academic theorist of the older dispensation as
not by the technical experts as such, whether they be economists or engi-
à useful member of a policy-formulating staff are probably even more
neers or political scientists or sociologists, but by the legislators and the
clearly visible to other members of the economic profession than to members
responsible executives with the aid of advice by the experts. That excellent
of other professions. There is in fact a definite cleavage between the habits
formula, "The expert should be on tap, not on top" would be almost
of thought of this species of theorist and those of other groups in the
equally valid if it went, "The expert is on tap, not on top." This applier no
profession, including many of those who help guide Leviathan in its daily
more and no less to the economist than to the other professions-except for
gyrations. The continued depression has obviously made a deep impression
the lawyer, who is on tap and on top, and omnipresent, omniscient,
on the latter, and made them impatient of or even violently hostile to the
omnipotent, and omnivorous in addition. In the process of tapping the
traditional corpus of economic theory, which they look upon as an instru-
experts for their specialized knowledge and skills, the technical equip-
ment for the exercise of the tyranny of the dead mind over the living. They
ment of one profession provides the offset for the gaps in the capacities
seem to believe increasingly that its róle has been, even in the long-past days
of the others. And for those many things which in a world not clearly
of its almost unchallenged dominance, "to light fools the way to dusty
designed for full comprehension by man are beyond human knowledge, the
death." The world it approvingly describes of atomistic competition, and
lawyer always stands ready to provide precise formulae acceptable to the
the ethical approval which, as they read it, it translates to the actual world
Supreme Court as unambiguous expressions of legislative intent.
by its failure clearly to contrast the ideal with the real, make it appear
Even with these two items omitted, the list of handicaps of the academic
to them too far divorced from the present-day realities and values to wat-
economic theorist as a participant in the formulation of public policy
tant faith in its usefulness as an aid to the guidance of social policy. In
which [ have given is discouragingly long. Others, moreover, would prob-
stead of the economy of effective competition, of freedom of individual
ably think they could easily make it even longer and even more discourag
initiative, of equality of economic opportunity, of steady and full employ-
ing to the theorist. Let it be clear, however, that I am not identifying
ment, pictured in the traditional theory, they see an economy dominated
the few "academic economic theorists" with economists in general, and
by giant corporations in almost every important held of industry outside
that I recognize that there are many other types of economists whose
agriculture, an economy marked by great concentration of wealth and
serviceability in policy-formulation and in other activities of government has
economic power, and great disparity of income and of opportunity for
been amply and unquestionably demonstrated.
betterment. They note the apparently unending flow of evidence from
The non-theoretical economist, in particular, or the economist who dis
investigating committees and courts of the flagrant misuse of concentrated
claims any theoretical prejudices, is in fact much more adaptable to public
economic power. They observe with alarm the failure of our economy for
service than the economic theorist with some body of theory to which
ten successive years to give millions of men able to work and anxious to
he remains faithful, whatever its species. The non-theorist can adjust
work the opportunity to earn their daily bread. And seeing the actual
himself quickly to the changing flow of events and issues. He is not bound
world so, they refuse to accept as useful for their purposes a type of
by any set mode of analysis. His mind but lightly encumbered by doctrines,
economic theory which as they read it either ignores these evils or treats
Regraded Uclassified
8
Jacob Viner
UMarch
1940]
Short and Long View in Economic Policy
9
them as temporary, self-correcting aberrations or excrescences of what
basically ture of the a sound economic system, Having rejected the conventional is
over the lay notions bodily. Some of them have, in fact, given them a
proaching equal conventionalization, but following another pattern, 4p-
system, they tend increasingly to adopt another one, rapidly pic-
theoretical elaboration which for subtlety, refinement, and elegance need
make no apologies to the older economics, and which remains faithful
which the evils are inherent in the system and cannot be excised without its to
to older theorizing in at least one respect, that the tradition of unintelligi-
drastic reconstruction and its substantial operation by government.
bility to the layman is scrupulously observed. It is the quality of the judg-
Their account of the traditional economic theory is not wholly a carics-
ment displayed, and not the quality of the analytical skill, which I ven-
ture, but it is overdrawn and distorted. It deliberately disregards the failure
ture to question. No matter how refined and how elaborate the analysis,
of government to behave according to the rules laid down by the orthodox
if it rests solely on the short view it will still be close to the layman's eco-
theory as necessary if its conclusions are to have practical validity, and
nomics and still be a structure built on shifting sands.
it especially overlooks the long line of great men in the orthodox tradi-
My aim this evening is not to praise the old-fashioned economic theorist,
tion, by no means already at an end, who by no stretch of the imagination
but only to help protect him from premature burial. The strongest line of
can be charged with having exploited it to protect evils against reform.
defense I find available is the argument that he is the special custodian for
But this is in the present connection significant only as it prejudices these
society of the long view in economic matters, and that even in troubled
zealous reformers against utilizing for their own good purposes the aid
periods that view is entitled not to undisputed dominance but to a full
the old doctrines can still furnish, Their picture of the evils of the present
hearing. Since its value with reference to any specific issue can be tested
economic system may also be painted in too strident colors, but it is un-
only empirically and therefore only after a substantial period of time has
doubtedly close enough to the truth to make complacency indefensible
elapsed, I shall present my case for the long view forward by taking the
Where in my opinion they are most gravely in error, however, is that in
long view back into history with respect to several of the doctrines in
rejecting lock-stock-and-barrel the traditional economic theory, they are
the orthodox tradition. Not to make it too easy for myself, I shall deal
abandoning habits of mind and analytical tools which are still essential if
only with doctrines that have been so conventionalized through time that
evils are not only correctly to be identified but are to be ascribed to their
they seem to the short-viewers Aagrant examples of the freezing of doctrine
proper causes, and if remedies are not to be advocated which may prove
into dogmas whose venerability is their only claim to virtue.
worse than the diseases they are prescribed for.
An underlying characteristic of the orthodox Anglo-American economics
As a by-product of the breach with the older body of doctrine, the
during its entire period of dominance was its basically optimistic outlook
economic profession is tending to wipe out that line of cleavage which in
on the prospective trend of events. As a cursory inspection of the files of
this country has been SO marked almost since the foundation of the Eco-
presidential addresses before the American Economic Association and its
nomic Association between the teachings of the professional economists,
English prototype would confirm, the economists of the time believed that,
on the one hand, and the practices of government and the beliefs of the
despite wars, mistakes in government policy, and cyclical disturbances,
lay public, on the other hand. I, for one, would welcome this reconcilia-
private initiative, technological progress, and the improvement and wider
diffusion of education had resulted in and would continue to result in a
tion if it resulted from our final conversion of the lay public. I think
however, that the reverse has happened to a substantial extent, and that
slowly rising secular trend of per capita income, enjoyed by steadily-grow-
economic doctrine is now following public opinion and government prace
ing populations. Imbued with this moderately optimistic long view, the
tice much more than it is influencing them. For obvious reasons which have
economists listened neither to the occasional prophets of impending and
lasting woe nor to the more frequent peddlers of patented devices for
no counterpart in this country, this is now of course the routine situation
in totalitarian countries. Its occurrence in this country is not, I am certain,
antedating the millennium. For the period up to 1914 at least, they proved
due to any significant extent to a new subservience of the profession to
on the whole to have been right. In the flush days of the 1920's, however,
we were told: that what was then would continue to be, forever and ever;
external opinion. Its explanation lies largely, I think, in the fact that under
the impact of depression conditions the economists have in large numbers
that the problem of the cycle had been solved by the Federal Reserve Board:
abandoned the traditional economic doctrines, with their emphasis on the
and that we had entered upon a new era of perpetual boom. The great
long view, and have turned instead to the short view which government
bulk of the economic profession, taking the long view, refused to give
and the lay public have always tended to take. It is true that in adopting
credence to this blissful picture. How right they proved we are unfortu-
the short view many of the younger economists have not merely taken
nately only too well aware. The perpetual boom having come to its dramatic
end, it later subsequently became increasingly apparent that all the days
Regraded Uclassified
IN
Jacob Viner
[March
1940)
560m and Long View in Economic Policy
IL
of the 1930's were to be black, or gray, Some economists, simulating too
the unemployment, governments should point with pride to their lusty
dosely, I think, the technocrats" over-emphasis of the purely technological
and bouncing deficits, instead of apologizing for them or shamefacedly
elements in economic process and under-emphasis of the compensating and
concealing them as if they were born out of wedlock, the long view tells
stimulating functions of the price system, and responding too sympatheti-
me that while this may not be the road to ruin it at least blazes a trail to
cally to the prevailing depression, have announced a second new era, but
it. It must not be forgotten that spending in itself is for the spenders the
this time an era of perpetual gloom, the advent of the stagnant economy.
supreme pleasure, is the politicians' delight, and that what temperance in
There is even developing among the preachers of the new pessimism in.
resort to it has prevailed in the past has been wholly due to the belief that
patience with talk in terms of the concepts of business-cycle analysis, as
somebody, some day, would have to be taxed to pay the bills. Even if this
carrying the unnecessarily optimistic implication that what goes down
belief were properly to be regarded as completely a myth, it would still be
may some day come up. I have no doubt myself that these economists
one of the large class of highly useful myths.
have genuinely succeeded in finding historical trends in our economic
structure and process which operate to make the attainment of full cm-
Two related theses of the liberal tradition in Anglo-American thought
ployment increasingly difficult. But that must always have been true, and
have been: first, that under a system of free individual enterprise a higher
the weight to be attached to such findings should not be decided until
level of economic well-being was attainable than under any other form of
equally ardent search has been made for factors operating in the opposite
economic organization; and second, that A society organized on this
direction, Here, I take it, is an instance where appeal to the long view
economic basis was the only one compatible with the maintenance of
may save us from accepting as an adequately historical approach what
political democracy. These, of course, are dogmas, not axioms, one eco-
fuller appeal to history would suggest was rather a hysterical approach
nomic and the other political in nature. Now that political democracy is
under attack, frankly from the fascist right and as menacingly though not
It has long been standard dogma that budgets must be annually balanced,
as frankly from the communist left which, like the serpent, licks its victim
and that public debts must not be allowed to grow indefinitely, Govern-
over before it swallows it, the political dogma has become increasingly
ments, of course, have frequently violated the dogma, and not only have
acceptable even to those who reject the economic dogma. My concern
such violations not invariably been followed by disaster, but it would be
here, however, is only with the economic dogma, whose acceptability has
a difficult task to disprove the proposition that in a substantial number of
been destroyed or seriously impaired even for many economists by ten years
instances they proved highly beneficial. But as I read the history of the
of sustained and severe depression.
budget-balancing dogma, it developed as a convenient rule-of-thumb pro-
There are perhaps some economists who would deny that an individual-
tection against the defense of uncontrolled expenditure and continuous
istic system is at all desirable economically. This view I will not discuss,
deficits by the plea that the appropriate time for budget balancing was not
since even if I were to reject a substantially individualistic system on
quite yet but just around the corner. I am even convinced that most of
economic grounds, I should still prefer it, on non-economic grounds, to
the distinguished advocates of budget balancing during the nineteenth
what seems to me to be its only practicable alternative, 2 comprehensively-
century would have conceded, though no doubt grudgingly, that even 2
planned economy under which, as some one has said, "All our hairs would
continuous growth of public debt, given a moderate and asymptotic pat-
be numbered, and all gray." There are many, however, who hold the view
tern of growth, would not in fact necessarily lead to disaster. On this
that while a system of free individual enterprise would be ideal if attain-
question of the menace of a growing debt that virtuoso of the long view,
able, it is no longer possible in these modern days of great concentration of
Adam Smith, maintained his usual balance. When. during the American
ownership and control of productive facilities, where the economic units
Revolutionary War, a young friend, Sir John Sinclair, lamented to him the
are to di large extent huge corporations and trade unions rather than the
misfortunes, presumably financial, in which the war was involving Britain.
single individuals of traditional economic theory, and where such com-
and exclaimed, "If we go on at this rate, the nation must be ruined!"
petition as persists tends increasingly to be competition between giants
Adam Smith replied. "Be assured, my young friend, that there is a great
instead of the atomistic competition of orthodox theory, and therefore to
deal of ruin in a nation."
be cost-raising rather than price-reducing.
But when for the old dogma that budgets should be annually balanced
When, some four or five generations ago, freedom of private initiative
there is substituted a new dogma that budget balancing is merely a fetish,
was first systematically advocated as the ideal basis for an economic aysi
that (LS long as there are unemployed resources, whatever the cause of
tem, the menace of monopoly to the proper working of a system so organized
Regraded Uclassified
12
facob Viner
[March
1940]
Short and Long View in Economic Policy
15
business-men was clearly perceived. It was then widely believed, however, that, although
admittedly found abhorrent the impact upon themselves of
systematically and without protest, of identical bids and of list prices higher
than even the monopolists can obtain in what remains of the open market;
other persons' competition and grasped every opportunity to escape
monopolistic power could not come into being on a large scale, or at leas it,
approval, and even enforcement, for regulated industries such as rail-
roads, of rate policies which make rates behave even more perversely, as
could not long maintain itself, except with government aid and sanction.
far as cyclical flexibility is concerned, than the prices of unregulated mon-
In justice to those who were of this view, it should be noted that the
opolies; encouragement to and protection of labor monopolies; deliberate
grant of a corporate charter was then universally regarded as the grant of
schooling of agriculture in the pleasures and profits of monopolistic be-
special privilege potentially dangerous to society, and it was therefore then 2
havior.
assumed as a matter of course that such grants would be made only
The record of government encouragement to monopoly, when looked at
ingly and would be jealously circumscribed, in each specific instance, by
in conjunction with government's spasmodic efforts to enforce competition
restrictions as to permitted size, nature and range of activities, and right
and its intermittent clamot against monopoly, reminds me, and justifiably
of participation in the civil liberties enjoyed by genuine individuals.
so, of an old cartoon I once saw, depicting a political demonstration in
Whether now, after several generations of unrestrained grant of corpo.
the streets of London, in which the determined-looking marchers carried
rate charters and of great development of mass-production requiring large
two banners, one of which bore the slogan, "NO MONOPOLY!" and the
economic units for its operation, it is still possible, through proper regula.
other the slogan, "NO COMPETITION!"
tion and restriction by government of the activities of large corporations, to
All that I suggest, therefore, with respect to the dogma that free com-
restore an essentially competitive price system, is a question to which I
petition can substantially survive if government gives it due protection
freely confess I do not see a clear answer, although I look forward eagetly
and encouragement, is not that its validity under modern conditions is
for much-needed enlightenment to those sessions of this meeting where this
obvious, but that we have not the right definitely to reject it before it has
question will be discussed by an exceptionally-qualified group who, I have
been given an honest and thorough test,
reason to know, have been giving it very serious and disinterested con-
sideration. The only point I wish to make now is that the old dogma,
As 1 final illustration of the possible survival of usefulness of old dogmas
that monopoly power is basically the product of governmentally protected
which were the product of the long view, 1 cite the proposition that the
or sanctioned special privilege and will not survive on a large scale if such
timidity of capital makes the maintenance of "business confidence" neces
special privilege is withdrawn or kept to its practically minimal limits,
sary if investment is to be maintained at the level required for sustained
still has sufficient plausibility to warrant further inquiry. It seems to me
prosperity. According to this dogma, the capitalist will hoard his own
a reasonable hypothesis, one worth examination, for instance, that if much
money, or will send it abroad-be there any safe place to send it-and
of the impressive array of governmental encouragements to monopoly
will refrain from borrowing other people's money for investment purposes,
could be removed, or, where removal was impracticable, if government
if even a faint shadow is cast on the political security of his investment.
regulation were directed to foster cyclical patterns of price-behavior fol-
The spokesmen for capital have found this dogma very much to their
lowing the competitive pattern, the chief evil product of monopoly, the
liking, and have been claiming for some six years that a political shadow
price-inflexibility problem, would shrink to easily tolerable dimensions.
has been cast over the security of their investments, and that this has been
Consider for instance, some of the elements in the prevailing pattern of
responsible for the low rate of new investment, and consequently for the
government relationship to monopoly and to price-inflexibility. Promiseu
persistence of depression. To reinforce their claims, they have done their
ous issue of wide-open corporate charters by the states; until within the
trembling in public, with vocal accompaniments.
last year or two slack and faint-hearted enforcement of the anti-trust laws,
There is no specific invocation of old dogmas, I understand, which the
already gutted by court sabotage; protection of monopolistic price-struc-
economists of the new enlightenment regard is more absurd, more insub-
tures by the federal tariff; positive encouragement of monopolistic price.
stantial and unsubstantiated, than the claim that the timidity of investment
practices by such legislation as the N.R.A. act, the Webb-Pomerene act,
capital under the impact of political feats has been 2 significant factor in
the Guffey Coal act; so-called "fair-trade" laws which compel business-
causing the low rate of new investment of the past six years or so. The
men to act as if they were monopolists even if they wish not to; concealed
capitalist, they agree, is a timid beast, but they assert that it is only the risk
protection of monopoly by doctored building and other ordinances; tacit
of loss he is really timid about. He invests, they say, when he sees a clear
encouragement to monopoly through acceptance in government contracts,
chance of profit, and hoards when he doesn't, regardless of whether the
Regraded Uclassified
14
lacob Viner
[March
1940]
Short and Long View in Economic Policy
15
out that the annual volume of new investment was even smaller in 1931
government of the day is stroking his fur or barking at him They point
or desire that such a hearing would lead to a cessation or even slowing-
and 1932 than in any year since 1933, although if in these earlier
up of the present endeavors to find remedies for prevailing evils through
political shadows were being cast on the security of investment they could years
positive government action. Obedience to some of the old dogmas would
in fact lead to an intensification of governmental action. As far as I am
not have been more than mere foreshadowings of prospective shadows.
concerned, I have been much more impressed by the undue inertia of
They cite also the substantial recovery of the new investment level in 1936.
government in the face of acknowledged evils than by its rash venture-
37, when capital was still insisting that it was scared. They have even
someness in action, although I think I have seen both qualities displayed.
produced a statistical proof that "confidence" has nothing to do with the
It is not 1 middle way between action and inaction, therefore, which I
volume of investment, which takes the form of a demonstration that the
urge. It has been said that throughout all the history of man Confucius
rate of investment is so highly correlated with the rate of retail sales or
alone succeeded in making the middle way either emotionally exciting or
of consumers' spending that no other factor need be invoked to explain
intellectually stimulating, and I have my doubts even about Confucius, As
its major fluctuations.
many persons who appeal to the middle way use the term, it really be-
To my perhaps naive mind, the dogma still carries some shreds of
comes a disguised plea that we should halt between the premises and their
credibility, despite those weighty inductive refutations. As 1 understand
conclusions. That is not what I am pleading for. Let evils be dealt with,
it, the dogma is not that the degree of confidence in the intentions of
promptly and decisively. But in choosing the manner and direction of
government with respect to invested capital alone governs the rate of in-
action, let us pay heed to the old as well as the new wisdom, and let us
vestment, but merely that some minimum degree of such confidence is a
especially beware of old poisons in new bottles.
necessary condition of the continuance of investment at a high level. The
JACOB VINER
correspondence of the rate of investment with the rate of retail sales seems
University of Chicago
at least as available to support the thesis that the rate of investment deter-
mines the level of national income, to which thesis even the most timid
capitalist will happily subscribe, as to support the argument that the rate
of spending of income governs the rate of investment. But the only price
tical lesson I care to draw from the possible validity of this dogma of the
timidity of capital in the face of political threats is that, if government
has any designs on capital, it would be wiser to bite before and bark after-
wards, if bark it must.
I hope-but do not expect-that I shall not be misunderstood as holding
that full and invariably appropriate guidance for government policy under
present-day conditions can be found in the old dogmas or in what could
until recently be called "accepted" economic doctrine. I know no economist
who would take this position, and if one were to be found I should agree
that he was trying to make a fool's paradise out of his private ivory tower.
My claim is much more moderate and, I hope, much more sensible. What
I contend is that for various reasons, but chiefly as a psychological re-
action to the impact of continued and acute depression, some economists
have been discarding too indiscriminately their inherited intellectual ballast,
with the result that they sway too easily with each passing wind. With
apologies to you for the form in which I state my claim, I contend merely
that there is life in the old dogmas yet. I concede that new light is needed
and all that I ask is that our minds be kept open to acceptance, strictly and
only on their merits, of both the old lights and the new.
Nor do I ask for a sympathetic hearing for the old dogmas in the belief
Regraded Uclassified
TREASURY department
155
WASHINGTON
OFFICE OF
COMMISSIONER OF INTERNAL REVENUE
ADDRESS REPLY TO
COMMISSIONER OF INTERNAL REVENUE
AND REFER TO
March 1, 1940.
IT:P:CA
CAA
REPORT FOR SECRETARY MORGENTHAU:
In regard to closing agreements under the Vinson-Trammell
Act, there were no developments during the week.
Commissioner.
Regraded Uclassified
156
Hareh 1, 1940.
IT:P:CA
CAA
REPORT FOR SECRETARY
In regard to closing agreements under the
Act, there were no developments during the work,
(Signed) Guy T. Helvering
Commissioner.
CAA/MIA
Regraded Uclassified
157
JR
GRAY
INS
TNS LS
Paris
Dated March 1, 1940
Rec'd 12:35 p.m.
Secretary of State,
Washington.
278, March 1, 3 p.m. (SECTION ONE)
FOR THE TREASURY FROM MATTHEWS.
Reynaud delivered last Evening one of his usual lucid
and admirably phrased radio talks "Explaining" the new
financial and restrictive measures and the need therefor
in words which the public can WELL understand. Financially
hE said France has hEld its ground, while economically
it has slid rapidly downhill. "To produce less and
consume as much as before, that can not long continue."
Thus far the situation has been faced utilizing capital
reserves. "Not only have WE drawn on our domestic reserves
but WE have had recourse to our reserves abroad. In order
to make purchases abroad gold has to bE delivered. If WE
ran into our gold reserves very little, it was because
during the first three months of the war WE had a massive
repatriation of capital, but to live on repatriated capital
is also to USE up reserves.
MURPHY
Regraded Uclassified
158
JR
GRAY
Paris
Dated March 1, 1940
Rec'd 1:17 p.m.
Secretary of State,
Washington.
278, March 1, 3 p.m.
(SECTION TVO)
The Government let this go on in efinitely". Turning to
the rise in prices of the past several months and the ensuing
demand for increased wages hE explained in simple words
what the vicious circle of inflation means. "If
satisfaction is given to all demands for increases
EVEryone will have more banknotes in his pocket. But
will that result in an extra chop at the butcher's or an
additional pair of shoes at the shoE store? Obviously no.
The new WAVE of banknotes will create a new wave of price
raising without improving anyone's position and the whole
circle will bE started again."
On the financial side he said: "WE have signed but
one financial decree: that approving a convention with the
Bank of France. The object of this convention is to
mobilize two categories of reserves for our foreign and
domestic payments.
For our foreign payments WE are putting aside a
fraction of our war treasure, the USE of which will
henceforth be secret to ESCAPE the Enemy's Eyes.
CSB
MURPHY
159
HSM
GRAY
Paris
Dated March 1, 1940
Reo'd 3:05 P. m.
Secretary of State,
Washington.
278, March 1, 3 P. m. (SECTION THREE).
"For our domestic payments WE have drawn part of
the reserve which the Treasury had with the Bank of France
which resulted from the fact that in November 1938 the
gold stocks were revalued at 9. price below their real
value. I shall not Enter into technical Explanations
but shall say at the risk of offending German propagandists
that the franc's value will bE the same tomorrow as it was
yestErday and that the total of the Bank of France's tem-
porary advances to the Treasury will remain the same.
Tax returns and subscriptions to armament bonds
have been such that the circuit is now closed. This
agreement with the bank is merely an act of foresight."
With reference to relaxation of Exchange control
formalities between Great Britain and France he said:
"Another decree signed today supplements the Anglo-French
financial accord by Eliminating exchange control formalities
on commercial transactions between France and Great Britain.
The SCOPE of application of the Franco-British financial
accord must bE further Extended.
CSB
MURPHY
160
HSM
GRAY
Paris
Dated March 1, 1940
Rec'd 3:05 p. m.
Secretary of State,
Washington.
278, March 1, 3 p. m. (SECTION FOUR).
WE have a weapon which will serve after the war to
reconstruct a livable Europe. America recognizes Anglo-
French collaboration as 8. basis for such future Economic
reorganization of Europe. Past mistakes will not bE
repeated."
Today's Journal Official contains the following
financial restrictive and Economic measures included
in the program:
OnE. The pertinent articles. of the brief decree
approving the convention with the Bank of France read
as follows:
"Article I. The convention reached February 29,
1940, between the Minister of Finance and the Governor
of the Bank of France of which the text is annexed to the
present decree is hereby approved.
Article II. For the duration of hostilities the
Exchange stabilization fund established by Artiele 3
of
Uclassifie
161
hsm -2- No. 278, March 1, 3 p. m., (Section 4) from Paris
of the law of October 1, 1936, is authorized to invest
temporarily its available franc assets in three months
Treasury bills."
MURPHY
CSB
Regraded Uclassified
162
JT
GRAY
PARIS
Dated March 1, 1940
Rec'd 4:25 p.m.
Secretary of State,
Washington.
278, March 1, 3 p.m. (SECTION FIVE)
Two. The attached agreement with the Bank of Franes
reads as follows:
"I - revaluation of reserves - reimbursement of pre-war
advances to the state.
Article 1. The Bank shall proceed to the revaluation
of its gold reserves and its available assets in foreign EX-
change under the conditions established in Article 1 of the
agreement of September 25, 1936 on the basis of a gold weight
of 23.34 millegrams nine hundred thousandths fine per franc.
Article 2. The increase in value resulting from the re-
valuation provided in the foregoing article shall in con-
formity with the provisions of Article 8 of the convention of
November 12, 1938 be applied in due amount to the definitive
reimbursement of the provisional advances granted to the
public Treasury by the Bank of France in application of Ar-
ticle 3 of the aforesaid convention.
The non-rtimbursed balance shall bE covered from avail-
able
Regraded Uclassified
163
-2- #278, March 1, 3 p.m. (SECTION FIVE)
able assets of the Exchange stabilization fund.
II - cession of gold by the Bank of France to the
state and delivery in payment of negotiable Treasury bills.
MURPHY
CSB
Regraded Uclassified
164
HSM
GRAY
Paris
Dated March 1, 1940
Rec'd 3:10 p.m.
Secretary of State,
Washington.
278, March 1, 3 P. m, (SECTION SIX).
"Article III. The Bank of France shall CEdE to
the state for the Exchange stabilization fund the gold
appropriated from its cash on hand to the amount of 30
billion francs on the basis of 23.34 milligrams of gold
nine hundred thousandths fine per franc.
Article IV. In settlement of the cession provided
for in Article 3 of the present convention the Bank of
France shall receive in the nominal amount of 30 billion
francs Treasury bills of three months maturity bearing
interest at the rate in force for ordinary 75 to 105 day
Treasury bills and negotiable on the market.
Article V. The Bank of France shall enter on a
special line in its balance sheet of assets the nominal
amount of negotiable bills which it is receiving in
Execution of Article 4 of the present convention.
It shall open in its balance sheet of liabilities
under the heading 'conte annexe d'interets' an account
for the purpose of receiving the necessary amounts for
interest SERVICE due to purchases of these bills in Case
they are placed on the market.
CSB
MURPHY
Regraded Uclassified
165
JT
GRAY
PARIS
Dated March 1, 1940
REC'd 4:51 p.m.
Secretary of State,
Washington.
278, March 1, 3 p.m. (SECTION SEVEN)
"The conditions for the administration of the two
aforesaid accounts shall bE governed by an Exchange of
letters between the Minister of Finance and the Governor of
the Bank of France.
In case of the retrocession of gold by the state to the
bank the total of negotiable bills provided for in the pre-
ceding articles shall be reduced by an Equivalent amount.
If the total of negotiable bills held in portfolio by
the bank is less than the total of the retrocession adnew
convention shall determine the conditions of the operation.
Article 7. The total of negotiable bills received by the
bank in EXECUTION of the present convention shall not bE in-
cluded in the statistics of productive circulation serving
as basis for the calculation of the charges and stamp taxes
provided by the laws and conventions in Effect.
Article 8. The state shall pay the bank as reimburse-
ment for Expenditures undertaken by it through the operation
stipulated
Regraded Uclassified
166
-2- #278, March 1 (SECTION SEVEN) from Paris
stipulated in the preceding articles, a commission Equal to
three per mille per year on the total nominal amount of ne-
gotiable bills delivered to it.
MURPHY
CSB
Regraded Uclassified
167
JT
GRAY
PARIS
Dated March 1, 1940
Rec'd 4:36 p.m.
Secretary of State,
Washington.
278, March 1, 3 p.m., (SECTION EIGHT)
"this commission shall bE paid quarterly in advance at
the moment of the delivery of the negotiable bills and their
SUCCESSIVE renewals.
III, NEW advances to the state.
Article 9. The Bank of France agrees to grant the state
on demand of the Minister of Finance, in addition to the ad-
vances provided in article one of the convention of September
29th, 1938, provisional advances to a total of 20 billion
francs.
Article 10. In return for the advances agreed to in
application of article 9 of the present convention there shall
bE delivered (to the bank) Treasury bill of 3 months maturity
without interest and renewable until reimbursement of the
afore said advances.
Article 11, The Bank of France shall receive B.S re-
imbursement for Expenditures undertaken by it for the SERVICE
of the advances stipulated in article 9 of the present con-
vention
Regraded Uclassified
168
-2- #278, March 1, 3 p.m. (SECTION EIGHT) from Paris
vention a commission of five per mille per year of the
actual total of the aforesaid advances.
MURPHY
CSB
Regraded Uclassified
169
JT
GRAY
PARIS
Dated March 1, 1940
REC'd 4:55 p.m.
Secretary of State,
Washington.
278, March 1, 3 p.m. (SECTION NINE)
"Article 12. The provision stipulated in Article 8 of
the convention of "OVEMBER 12, 1938 for the reimbursement of
advances granted in conformity with Article 3 of the afore-
said convention shall similarly be applied to the definitive
reimbursement of the advances stipulated in Article 1 of the
convention of September 29, 1938 and in Article 9, of the
present convention,
The total advances granted in EXECUTION of Article 9
of the present convention shall not bE included in the
statistics of productive circulation serving as a basis for
calculating the charges and stamp taxes provided by the laws
and conventions in Effect".
MURPHY
NPL
Regraded Uclassified
170
JT
GRAY
PARIS
Dated March 1, 1940
Rec'd 4:25 p.m.
Secretary of State,
Washington.
278, March 1, 3 p.m. (SECTION TEN)
Four, A decree relative to Expenditures abroad. It
provides that Each year, beginning with 1940, an estimate of
public and private Expenditures and receipts abroad shall bE
drawn up and that no expenditures abroad shall bE contracted
or paid in EXCESS of these Estimates, The Estimates shall bE
divided according to their category into annual French
commercial or financial credits abroad. Each Ministry shall
draw up its own Estimate of Expenditures payable abroad
or in foreign Exchange including private imports placed under
its control by the law of July 11, 1938. The estimates shall
be approved by decree Endorsed by the Prime Minister and the
Ministers of National DEfEnsE, War, Foreign Affairs and
Finance, and the approval for Estimates of Expenditures and
receipts shall bE separate.
MURPHY
CSB
171
JT
GRAY
PARIS
Dated March 1, 1940
Rec'd 5:49 p.m.
Secretary of State,
Washington.
278, March 1, 3 p.m. (SECTION ELEVEN)
Article 5 of the decree reads: "In order to facilitate Equi-
librium of the foreign balance of payments the Minister of
Finance may stipulate the currency of settlement applicable
to certain foreign commercial transactions". Article 6
provides that pending the drawing up of these stimates the
total Expenditures abroad which may bE contracted or paid
shall bE fixed Each month by the Prime Minister and the
Ministers of National Defense, War, Foreign Affairs, and Fin-
ance. A decree Endorsed by the aforesaid ministers and the
Minister of Colonies shall f1x the conditions of application
of the foregoing measures to the coloniss, protectorates, and
mandated territories.
MURPHY
NPL
Regraded Uclassified
172
JT
GRAY
PARIS
Dated March 1, 1940
Rec'd 5:15 p.m.
Secretary of State,
Washington]
278, March 1, 3 p.m. (SECTION TWELVE)
Five. A decree supplementing the decrees dated October
13 and November 18 concerning purchases abroad (my telegrams
numbers 2499, October 17, 6 p.m. and 2839, Novmber 27, 7 p.m.
and despatches numbers 4104, November 17 and 5453, DECEMBER
15). The decree dated November 18 is modified (Article 2
bis new) to provide that all contracts involving Expenditures
abroad EXECUTED Either directly in France or by pertinent
administrations must bE approved by the Minister of Finance.
Similarly Article 2 ter new provides that contracts payable
in francs on budgetary credits which stipulate partial or
total delivery to the state of supplies purchased abroad in
view of their retrograssion to the state must bE approved
by the Ministry of Finance prior to ordering of said supplies.
MURPHY
NPL
Regraded Uclassified
JR
GRAY
173
Paris
Dated March 1, 1940
REC'd 3:15 p.m.
Secretary of State,
Washington.
278, March 1, 3 pam. (SECTION THIRTEEN)
(The next six decrees published in today's Journal
Official are designed to restrict consumption).
Seven. A decree provides that as of April 1, 1940
EVERY person residing in France must bE in possession of
an individual and non-transferable ration card. The
various categories of foodstuffs, articles or products
to be rationed will bE fixed by subsequent decree, the
quantities to which each person is Entitled being
determined by his age and occupation. Cards are to bE
applied for an obtained from the Mairie of the district
in which the applicants resided on March 1, 1940. A card
must bE Exhibited before a commodity listed thereon can bE
purchased.
MURPHY
CSB
Regraded Uclassified
174
JT
GRAY
PARIS
Dated March 1, 1940
Rec'd 5:20 p.m.
Secretary of State,
Washington.
278, March 1, 3 p.m. (SECTION FOURTEEN)
Eight. The provisions of another decree, which will
enter into Effect on the dates bo bE SET by the Minister of
Agriculture, relate to : (a) manufacture and sale of only
fixed quality breads; (b) limitation on the amount of bread
to bE served in public Eating places (150 grams per person
for a meal costing more than 15 francs, 300 grams if the cost
of the meal does not EXCEED this sum); (c) closing of pastry,
confectionery and chocolate shops three days per WEEK and
prohibition at such times of the sale of products normally
sold in them by grocers and other Establishments dealing in
foods, and (d) manufacture and sale of only fixed quality
chocolate.
MURPHY
NPL
Regraded Uclassified
175
JT
GRAY
PARIS
Dated March 1, 1940
Rec'd 5:30 p.m.
Secretary of State,
Washington.
278, March 1, 3 p.m. (SECTION FIFTEEN)
Nine. A decree on which the Minister of Agriculture is
also authorized to SET the Effective date, pertains to
limitations on the consumption of food in all public Eating
places. A meal may not consist of more than two principal
dishes only one of which may bE meat, VEgEtablES are not to
be considered as part of a principal dish. Restaurant menus
are to list but nine dishes for any one meal the number being
reduced to SEVEN on "meatless" days.
TEn. A decree fixes at 2% the amount of bean flour which
may bE mixed with flour used for the manufacture of bread.
Eleven. A lengthy decree provides for a stricter control
over and reduction in civil and military consumption of gaso-
line.
MURPHY
NPL
Regraded Uclassified
176
JT
GRAY
PARIS
Dated March 1, 1940
REC d 5:25 p.m.
Secretary of State,
Washington.
278, March 1, 3 p.m. (SECTION SIXTEEN)
Twelve. A decree forbids the sale or "free offer" on
three days a WEEK of alcoholic spirits and aperitifs to bE
consumed in the premises of restaurant, bar, Etc. Commencing
July 1940 moreover the retail sale for consumption off the
premises of such drinks shall bE limited to quantities of not
less than two liters. (Three of the decrees published deal
with agriculturs).
Thirteen. A decree provides for the sale to the farmers
for this spring's sowing of "Florence-Aurore" wheat seeds at
the current price for native wheat SEEDS,
Fourteen. A second concerns the cultivation by the troop
of lands situated in Evacuated areas.
Fifteen. The/third authorizes the reduction of customs
duties on tractor parte.
MURPHY
NPL
Regraded Uclassified
JR
GRAY
177
Paris
Dated March 1, 1940
Rec'd 3:45 p.m.
Secretary of State,
Washington.
278, March 1, 3 p.m. (SECTION SEVENTEEN)
Sixteen. Certain additions are made to the decree
dated September 9, 1939 concerning the control of prices
(my telegram 1999, SEptember 16, noon) they define various
illegal practices which tend to circumvent the provision
of the decree prohibiting any increase in the production,
wholesale or retail prices of merchandise or foodstuffs
above levels Existing on September 1, 1939.
Seventeen. Another decree is designed to further
Exports from France: duties or taxes levied in France
on the materials Entering into C product manufactured in
the country will bE refunded when the product is exported
abroad.
MURPHY
WWC
Regraded Uclassified
178
JT
GRAY
PARIS
Dated March 1, 1940
Rec'd 6:35 p.m.
Secretary of State,
Washington.
278, March 1, 3 p.m. (SECTION EIGHTEEN)
Eighteen. A decree calls for a census of all women and
girls desirous of obtaining employment. Should the number
thus listed bE less than the Existing demand for feminine
labor, a decree may bE issued providing for a compulsory
census of all available women (?) The women and girls covered
by it may if necessary bE requisitioned.
Nineteen. A second labor decree relates to apprentice-
ship regulations during time of war.
Twenty. A further decree introduces certain changes in
the decrees of October 30, 1935 and July 28, 1937 relating
to the control of Expenditures in the public administrations
and the army. The various financial control committees
created by such decrees are to EXERCISE a strict supervision
over all proposed public disbursements with the object of
possible
preventing waste and Effecting all
Economies.
Special "Economies services" are to perform a similar function
with the armed forces.
MURPHY
NPL
Regraded Uclassified
179
JT
GRAY
PARIS
Dated March 1, 1940
REC'd 6:02 p.m.
Secretary of State,
Washington.
278, March 1, 3 p.m. (SECTION NINETEEN)
Today's JOURNAL OFFICIEL likewise contains two other
items of interest: An arrete with respect to the rente
fund concerns the utilization of its available resources;
and notice to approved intermediaries from the Foreign
Exchange Office contains the pertinent necessary instruction
with reference to the relaxation of Exchange formalities
covering Franco-British commercial transactions (my telegram
No. 273, February 29, 6 p.m.).
The first reactions in banking circles which I have been
able to gather today to the foregoing comprehensive program
have been generally favorable and the censored press of course
likewise has in general registered its approval. With re-
spect to the gold measures my banking friends seem to take
the view that the government was wise and foresighted to take
thesesteps during the present period of calm and relative
financial Ease.
MURPHY
JRE:NPL
Regraded
180
REB
GRAY
Paris
Dated March 1, 1940
Rec'd 5:55 p. m.
Secretary of State,
Washington.
278, March 1, 3 p. m. (SECTION TWENTY)
There is, however, a slight undertone of anxiety in
certain quarters lest certain Elements in the population
may bE or are being kept below the bare minimum subsistence
lEVEl.
The securities market was firm but not particularly
active. French industrial issues particularly chemicals
and utilities advanced while rentes were down fractionally.
Official Exchange rates are unchanged.
Couve de Murville was obviously pleased when I con-
veyed your message through him this morning and said that
he was sure Minister of Finance Reynaud would greatly
appreciate it.
(END OF MESSAGE)
MURPHY
RL
Regraded Uclassified
181
PARAPHRASE OF TELEGRAM RECEIVED
FROM: American Embassy, Rio de Janeiro
NO.: 79
DATE: March 1, 1940
Reference is made to my telegram no. 78 of February
29, 7 p.m.
I was again reminded today by Aranha that President
Vargas will leave Rio on the 6th of March, 80 if & debt
settlement is to be made, it must be done before that
date. (The Minister of Finance 1s 111 and plans to leave
March 8 to spend some time in the south.)
Aranha again stated firmly that he believed the
interrelationships contained in the Aranha plan were
fair; it is his belief that BO far as concerns the
underlying equities, Grades I and II would be given even
more advantage over Grade III by a court of law and
equity than the new plan provides. He repeated that
the only reason he had offered to increase Grade III
as much as he has (which he said was done against his
better judgment) was to satisfy us. He added that
because of this he would have to begin Grade IV (which
are also Federal loans) at 45% instead of 40% in order
to compensate French bondholders for the loss of further
application of the gold clause in franc loans.
He
Regraded Uclassified
182
-2-
He said that in other respects his offer stands
as I have already reported it to you. As it works out,
he said, the United States bondholders, who hold only
35.4% of the capital amount of Brazil's foreign indebted-
ness, would receive 38.1% of the proposed payments,
while the British bondholders, who hold 60.8% of the
total, would receive only 59.1%.
It has been difficult for me to secure these favor-
able percentages. (At the present time we have no
unfavorable balance of trade with Brazil about which we
can even talk, while Great Britain and France have
unfavorable balances which are rapidly growing.)
CAFFERY
TW:
15A MM 00
EA:EB
Regraded Uclassified
183
MEMORANDOM FOR THE SECRETARY:
MARCH 1, 1940.
Shipping Situation
There have been no pronounced changes or outstanding
developments this week up until today.
Time charter and net form charter rates are firm on &
restricted volume of business. Free vessels of suitable nationality
are somewhat scarce and charterers who require ships are fearful of
running the market up on themselves.
A vessel was chartered to move grain from the River Plate
to Ireland at approximately $35.00 per ton and 8214 per 100 lbs. was
paid for a steamer to carry grain from the North Atlantic range to
Ireland.
$4.10 was paid for a charter in the West Indies trade,
reflecting a strengthening in that market which will be intensified
in a short while when the sugar grinding is completed in Cuba.
A strong demand is reported for ships to move coal to Italy,
an American-flag steamer being paid $17.50 per ton. This market
should also go higher as press reports are that Great Britain will
stop the movement of coal from Germany to Italy.
The quantity of grain on hand at New York is constantly
decreasing and is not being replenished. This is due to the rail
rates to the outports being lower than to New York and it probably
will not be until navigation on the barge canal is open, several weeks
hence, that a building up of the stocks at New York will commence again.
On February 1st there were at New York in railroad cars and
elevators, and in boats, 4,281,000 bushels, whereas today there is 8.
little over 3,000,000 bushels on hand.
Regraded Uclassified
184
+
The export freight moving through New York continues
at about the same pace - an average of about 750 cars per day
lightered for export.
The railroad lighters on demurrage
Thursday, February 29th, were 96.
The railroads have in covered storage awaiting export,
3170 cars, compared with 2143 cars on January 3. The space thus
occupied in railroad facilities in only one third of that available.
Railroad carloadings are decreasing weekly although
still running far ahead of the same period last year.
The decline
is attributed principally to a falling off in steel production for
domestic use; the export demand for steel is expanding.
The rate on grain to Antwerp - which is practically the
only market aside from Ireland in northern Europe where the ocean
freight rate is not fixed by the government of the country - 1s
holding firm around 85 - 8724 per 100 lbs.
The newrby situation
is strong from the ship's standpoint but the announced entry of the
Holland America Line into the North Atlantic to Antwerp trade will
have a depressing influence on future rates.
Banil thanis
Regraded Uclassified
185
BUREAU OF FOREIGN AND DOMESTIC COMMERCE
OFFICE OF THE DIRECTOR
3/2/40
From
DIRECTOR
To
Hon. Henry Morgenthau, Jr.
Secretary of the Treasury
For
Sent to you at the request of
Mr. Noble, Under Secretary of
Commerce.
Games m. yom 7
James W. Young
186
March 1, 1940
ECONOMIC DEVELOPMENTS
Regraded Uclassified
SUMMARY OF THE CURRENT BUSINESS SITUATION-February passed without any
signs of an expansion in the basic factors of demand which would
bring a near-term reversal in the business downturn.
The flow of new orders is still generally restricted and below
the volume of production.
Industrial output has declined sharply during the past two months
and even with this reduced rate of activity, backlegs of unfilled
orders have been lowered further.
Consumption has cased off from the high December pesition.
The latest data available, as of the end of January, show & fur-
ther substantial increase in inventories.
The only major factor to resist the weakening tendency in busi-
ness so far this year 1a export trade.
REVIVAL OF NEW PURCHASING which is essential to halt the decline has
not appeared. There has been sporadic purchasing in some lines of
business, and, of course, a sessonal rise in some consumer goods
industries. Is the durable goods industries, however, which hold
the key to the business prospects, there has been no indication in
February of 8. renewed buying novement. High export demand in some
lines has made for exceptions--e.g., aircraft end machine tools.
In the aggregate, nov orders apparently did not improve from the
January position which was lower than that of December.
EXAMPLES: Several not order series are shown on the accompanying
charts. Our tabulation from the monthly industry survey shows
the following change in incoming business for 223 corporations:
Percent Change
January 1940 from
January 1940 -
$294.5 million
December 1939 -
310.4
-
- 5
January 1939 -
264.7
#
+11
SIGNIFICANCE: New orders are still below the rate of shipmest
end consequently, unfilled orders on the books are being reduced.
If new buying does not develop som an extension of the reses-
sion in industrial production can not be avoided. This situation
is not confined to the durable goods industries. In textiles, for
example, the resent high rate of output can net be oustained 1
longer with the current rate of ordering.
187
THOUSANDS
THOUSANDS OF TONS
2500
STEEL
MALLEABLE
100
BARRELS
CASTINGS
2000
75
1500
50
1000
25
500
0
1922-24=100
1926 = 100
250
175
FOUNDRY
METAL TRADES IN
EQUIPMENT
MASSACHUSETTS
200
150
150
125
100
100
50
75
THOUSANDS OF TONS
1926 = 100
700
PAPERBOARD
TEXTILE MILLS IN
250
MASSACHUSETTS
600
200
500
A
150
400
100
300
50
JULY AUG. SEPT. OCT. NOV. DEC. JAN. FEB.
JULY
AUG.
SEPT.
OCT.
NOV.
DEC.
JAN. FEB.
1939
1940
1939
1940
D.D.40-85
NEW ORDERS RECEIVED BY SELECTED MANUFACTURING INDUSTRIES, 1939-40
NOTE.- THE INDEXES OF NEW ORDERS (VALUE) RECEIVED BY TEXTILE MILLS AND METAL TRADES IN
MASSACHUSETTS ARE COMPILED BY THE ASSOCIATED INDUSTRIES OF MASSACHUSETTS. THE OTHER
SERIES ARE THOSE REGULARLY SHOWN IN THE SURVEY OF CURRENT BUSINESS AND REPRESENT
QUANTITY, EXCEPT THE INDEXES FOR "FOUNDRY EQUIPMENT" WHICH ARE ON A VALUE BABIS.
Regraded Uclassified
188
WEEKLY AV. JAN.-JULY 1939 - 100
300
WOOL CLOTH
250
WOOL YARNS
200
150
100
LUMBER
50
0
WEEKLY AV. JAN-JULY 1939-100
800
700
COPPER
600
ZINC
500
400
300
200
100
o
5
12
19
26
2
9
16
23
30
7
14.
21
28
4
II
18
25
2
9
16
23
30
6
13
20
27
3
10
17
24
2
9
16
23
30
AUGUST
SEPTEMBER
OCTOBER
NOVEMBER
DECEMBER
JANUARY
FEBRUARY
MARCH
1939
1940
a.a.40-55
NEW ORDERS FOR SELECTED COMMODITIES, BY WEEKS, 1999-40
NOTE.- RELATIVES HAVE BEEN COMPUTED FROM THE WEEKLY DATA(QUANTITY) WITH AVERAGE WEEKLY ORDERS FOR THE 30 JANUARY I TO JULY 29. 1539, AS 100.
THE DATA ARE BURSTANTIALLY COMPARABLE FOR THE PERIOD COVERED. ALTHOUGH BLIGHT VARIATIONS accue EN THE NUMBER or LUMBER MILLE REPORTING.
Dences FOR WOOL YARN AND WOOL CLOTH ARE COMPILED BY THE NATIONAL ASSOCIATION ar WORK MANUFACTURERS, COPPER ORDERS ARE BALED or DOMESTIC PRO-
DUCESS AS REPORTED IN THE AMERICAN VETAL MARKET, AND SALES OF - AM TIRE ARE FROM THE AMERICAN ZINE INSTITUTE
Regraded Uclassified
189
. 2 -
CONTRACTION or INDUSTRIAL PURCHASING has had as 8 corollary the weeks
ing in the prices of you commedities. The February index of 16
basic industrial rev materials recently made available by the Do-
partnent of Labor averaged about 116 (August 1939=1.00) as compared
with the December peak of 129.6; the more than ene-third of the
post-August price rise in these commedities has been cancelled.
On the average prices of fare products end feeds eased off during
January and February, though some important commodities noved against
the general trend,
EXAMPLES of price changess
Series
Unit or base
Des. High
Jan. 27
Feb. 29
Copper
s per 1b.
12.50
11.50
11.50
Tin
#
52.50
45.50
47.70
Cotton
#
11.11
10.42
10.72
Hoge
6 per ent.
5.08
5.40
5.35
Steers
-
8.88
8.88
8.63
Wheat
$ per be.
1.09
0.99
1.03
Wholesale Price Indexest
Farm products
1926=100
68.5
69.2
69.4*
Foods
I
72.1
72.4
71.04
Other commodities
-
8406
84.0
83.3*
Textile products
-
78.6
76.7
74.2*
Hides & leather
products
a
104.4
103.9
102.7*
Raw materials
#
73.6
73.3
72.9"
Seninenufactures
#
83.5
81.2
79.6*
*Week ended February 24.
SIGNIFICANCES In the main, the wholesale price situation has been
one reflecting the dealine in business activity and the uncertainty
concerning spring business. Bome commodities have recently rism
in price because of special feators. Tin quotations, for example,
rose slightly after the lewering of the export quote and foreign
sales were a contributing factor in the late February increase of
copper prices. The rise in wheat prices has resulted from the sup-
ply situation; cotton prices have been sided by foreign sales.
Regraded Uclassified
190
- , -
PRODUCTION TRENDS have not changed from the situation described in
last wook's report. It my simply be noted that the decline dur-
ing the first quarter has been more repid then the advance during
the final quarter of 1939. Recall that the Index last August vid
103 and that now it is but little above that figure.
EXAMPLES:
Trand Strong
Trend Vesk
Enchinery
Textiles
Electrical Equipment
Fuels
Aircraft
Shoes
Machine Tools
Steel
Automobiles
Paper
SIGNIFICANCE: Certain industries, dominated by the 42 and national
defense, can be expected to hold to 4) high level of production to
goinst the trend-s.go, aircraft, machine tools, shipbuilding.
Others still at 6. high lovel, however, can not be expected to re-
sist any general recession in business for an extended period-e.g.,
automobiles, industrial machinery, electrical equipment.
THE CONSTRUCTION INDUSTRY enters the Active spring building serson with
& far sealler backleg of public work then in 1939 when the trasendous
awards under the 1938 Public Forks program were on the books. Conse-
quently stimulus from this source -ill be such less than 12 months
cerlier. Construction undertakings financed from private funds have
held et & high level. Residential building contracts have been run-
ning about on a. per with year-earlier volume-a position that is but
moderately lower on a seasonally corrected basis then last summer.
Private construction other than residential has been somewhat higher
than & year age though not showing signs of attaining any such vol-
use AS that in the first helf of 1937. The seards of contracts for
factory building did not record major gains in the fourth quarter
of last year and there are for indications of any major increase in
this field.
KLAMPLYS,
Construction Contracts Awarded in 37 Pasters States
(Thous. of Dollars)
Dec. 1938
Jan, 1939
Jan. 1940
Total
389,439
251,673
196,191
Public
279,403
147,916
92,532
Private
110,036
103,757
103,659
Residential
71,883
66,936
60,034
Nonresidential
29,389
28,553
31,476
Commercial Buildings
13,957
17,326
15,924
Factory Buildings
7,028
7,092
12,865
Bouroes y. N. Dodge Corporation.
Regraded Uclassified
191
4 -
SIGNIFICANCE: This area has been Lecked to as a major source of
positive stimulus this year. Last fall with the sharp advance
in general activity, - increase in construction occurred, but
this trend was not maintained. Be far this year, however, now
undertakings did not show signs of major expension which night
offset resessive tendencies in other excas of the economy.
THAT TOTAL INVENTORY HOLDINGS should be accumulating at a less rapid
rate than during the late months of 1939 is a reasonable deduction
from the character of the current business pattern. Just as the
business expansion of last cutumn The based n largely upon the in-
crease in this velatile investment area, # now the rapid decline
in activity appears to be the result of leasened stock accumulation.
No doubt this will show up to a greater degree when data for Febru-
ary become available. During January there was a further substan-
tial increase in inventories although even in that month the rate
of increase was apparently & little lower than in December.
The change is indicated w the following datas
Nenufacturers Wholesalers
(Desember 1938=100)
1939
June
98.5
104.1
October
101.5
112.7
November
104.5
112.6
December
107.5
110.8
1940
January
109.8
116.6
SIGNIFICANCES Wholesalers' inventories increased about 5 percent
in January-- seesonal rise is usual-after 6. such less than -
sonal decline in the previous month. There was, however, a smaller
increase in manufacturers' stocks in January than in December and
these in total are in the neighborhood of four times as large as
wholesalers' holdings. The major question here continues to be
the attitude of business toward the higher inventory holdings
which, by the end of March, will probably reach & nov pack. L1-
quidation from that level is still & possibility, if the dow-
trund in business is not prosptly reversed,
Regraded Uclassified
192
- 5 -
REDUCTION IN THE FLOW OF INCOME PAYMENTS as early as Jenuary is indice-
tive of the broad character of the business contraction. The de-
cline in this also moving index was 0.4 points in Jenuary on a ⑉
sonally adjusted basis, with the figure for that month 89ch (1929=100).
There is little doubt that a more sisable decrease in the income pay-
ments index will be shown by the February figures. Nonetheless, the
flow of income is still relatively high,
EXAMPLES:
Annual rate of income payments
January 1940 -
73 billion dollars
Average 4th quarter of 1939 - 72 billion -
Year 1939 -
70 billion
#
SIGNIFICANCE# The interesting fact about the situation is the
promptness with which income payments turned downward. This has
been reflected in the more-tham-seesonal downturn of retail trade
though automobile sales were a conspieuous exception.
Regraded Uclassified
193
FORSIGN TRADE NOTES
Italy: The stimuleting influence of the was svidently is not sufficient to
counterest BORD of the fundamental difficulties in the Italian economic
situation.
The increase in the cost of living, as reflected is the price of many
ordinary foodstuffs and articles of clothing, is very pronounsed in
spite of the price control by the Government. It is anticipated that
the use of ration cards will be extended shortly to a number of commod-
ities, such as soap and olive oil. Coffee is new limited to about one-
eighth of a pound per month, and the supplies of sugar, too, olive oil,
soap, meet extrects, and 8. few other foodstuffs, have on many occasions
been BO mall " to allow the sale of only small quantities to each
customer. The mesures edopted by the Covernment to curtail consumption
are regarded by the Italian public as a result of the war and also in
the nature of 6 preparation for Italy's oventual participation.
The efforts of the Itelian Government to bring about the repatriation of
Itelian capital from abroad through the importation of essential sommod-
ition have been unsuccessful in spite of the feet that the Government
was willing to approve applications for such imports without asking any
questions as to the source of the exchange. The payment of a premium
of 20 persent os foreign exchange surrendered by Itelian exporters of
certain commodities, which has been announced by a secret sireular, is
equivalent to 8 disguised develuation of the lira.
Brazil: It is reported that important German firms, unable to obtain supplies
of electrical equipment from Germany, are now buying local stocks of
such materials as batteries for flashlights, radios, doorbells, sockets,
bulbs. and similar products, sovering erticles of any origin and pres-
tically at any cost. This marks BE effort on the part of those firms
to renain in business. A firs representing one of the largest German
firms has bought out 6 Brasilian manufacturer of certain types of flesh-
light and other betteries. It is reported that in buying up the
supplies of lesal dealers, the firms representing German manufacturers
are requiring signed agreements that the previous owners of stocks or
fasteries will not engage in the come type of business for a priod of
5 years.
Belgium: The British restrictions on the shipment of lubricating oil to
Belgium have affected American companies using Antworp as a distribe-
tion center. The socumulation of stocks st Antworp is taken as 8 basis
for British restrictions on edditional shipments.
Dominican Republic: The loss of the French market for Dominican coffee is
6 serious blow to the growers, since coffee is the third largest
Dominices erop, sold mostly to France. The difficulty in finding all
alternative market in the United States is due to the inability of the
Dominions exporters to guarantee a fixed quantity of a certain grade
or to furnish coffee of the quality demanded by the American number,
While the Dominican coffee 10 of - good type, the mothods of picking
and drying are inadoquate to satisfy the American standards.
bureen of Foreign and Domestic Commerce - February 29, 1940.
Regraded Uclassified
194
RESULT VEOLENALE PRICE INSURERS
(1926 - 100)
1
-
I
1939
I
1940
'Pereent increase
'Teb, 24. 1940 from
Group
I
-
,
#
#
#
Feb.
#
I
Aug.
Sept.
Feb.
Feb.
I
I
.
#
I
Feb.25,
Aug.26,
25
26
16
17
24
1939
1939
-
I
I
e
I
I
.
I
-
,
1
I
I
I
11 commodities
76.8
,
74.8
1 79.3
-
78.3
I
78.6
-
2.3
. 5.1
Farm products
67.7
I
61.1
-
69.7
,
68.6
6
69.4
I
2.5 . 13.6
Foods
71.4
I
66.7
, 75.5
I 70.5
#
71.0
I
- 0.6 ,
6.4
all consodities other than
e
-
.
.
.
I
farm products and foods
80.4
I
80.4
I
82.4
#
83.3
-
83.3
#
3.6
.
3.6
Hides and leather products.
92.4
,
92.6
* 98.3
I
103.1
.
102.7
I
11.1
I
10.9
Textile products.
65.6
.
67.4
. 71.4
.
74.4
.
74.2
1
13.1
.
10.1
Fuel and lighting materials' 73.4 . 73.2 . 74.1 * 73.0 # 73.0 # - 0.5 # - 0.3
Metals and notal products
.'
94.5
,
93.5
# 94.9
.
95.3
#
95.3 I
0.8 ,
1.9
Building materials.
90.0
.
69.7
e
90.7
-
....
93.2
I
93.0
. 3.3
I
3.7
Chemicals and drugs
....
76.0
#
74.2
.
77.1
-
77.5
e
77.7
I
2.2
I
4.7
House-furnishing goods.
86.6
e
87.0
.
87.1
.
09.6
1
89.5 ,
3.3
1 2.9
Miscellaneous
73.0
-
73.1
1
76.1
I
77.2
-
77.2
-
5.8
I 5.6
I
-
I
I
.
#
law naterials
70.9 I 66.2 # 73.0 . 72.4 , 72.9 . 2.8 . 10.1
Seciasnufactured articles
74.4
.
74.4
-
82.0
.
79.6
I
79.6 #
7.0
I 7.0
Finished products
80.4
I
79.3
1
62.3
.
81.4
.
81.5
#
1.4
:
2.8
8
.
I
I
#
-
+
buree: 0. 8, Department of Labor, Bureeu of Labor Statistics.
Regraded Uclassified
195
SELECTED COMMODITY PRICE seams
#
F
1
I
1939
1940
Commodity
.
Unit
I
-
March 1
-
August 30
Sept. 13
9
Feb. 21
Feb. M
8
5
-
-
-
opper, electrolytic,
Nov York
per 1b.
11 1/4
I
10 1/2
12
11 1/2
I
11 1/2
eed, prompt shipment,
lieu York
de
-
4.75
-
5.05
#
5.50
#
5.00
5.25
inc, New York
de
I
4.84
5.24
#
6.64
# 5.89
6.14
in, straits, New York'
do
1
457/8
,
493/4 49
75
1
467/20
477/20
abber, plantation,
In York
de
.
163/4
.
16 13/16
22 1/2
18 7/8
18
15/16
idea, light native
coss, Chicage.
do
-
20 1/2
I
11
#
15
13 1/4
13 1/4
lik, 13-15 denier,
785 scriplane, N.I. s per 1b.
2.34
I
2.72
-
3.21
-
3.08
3.03
ttom, middling, ever-
age 10 markets
,"t
per
1b.
8.67
8.53
#
9.01
1
10.70
10.75
rimt cloth, 60x64,
38 1/2 inches, N.I. " per yd.
4
45/8
.
53/8
#
51/8
s
al tops, March 1940
futures, New York. ⑇ per 1b.'2/m.2
13/81.5
$1111.9
.
99.4
99.7
yar, res, w, duty
free, New York
w
2.50
1
2.92
.
3.70
I 2.83
2.88
cos, Accre, New York'
s
0
4.75
4.38
-
6.45
9
5.35
.
5.32
ffee, Sentos, No. 4.
New York
de
I
8
75/8
73/4
71/2
-
71/2
ard, cash, Chicago.
de
.
6.72
1
5.65
-
7.75
6.07
I
6.00
ttonseed oil, March
1940 futures, N.Y.
s
7.05
y 5.61
V
7.30
6.98
6.90
eat, May 1940 for
tures, Chicago
per
mill
.68
3/4'2/
.67
1/4'2/
.85 3/8
1.05
1/2*
1.03
1/2
gs, good and choice,'
220-240 lbs., Chi. n per cotig/ 8.10
6.88
8.13
5.25
5.35
the É
750-1,100 lbs., Chil.'
do
.
9.23
8.38
8.88
8.63
8.63
9
Nominal. 3/ March 1939 futures. s December 1939 futures. w May 1939 future.
Hoge weighing 220-250 pounds.
All commodities, with the emerption of well tops, cottenased oil, hoge, and
cers, are taken from the Journal of Commracy mal tope and outhouseed all are taken
the Ball Street Journal; and hoge and stores are from the V. 1. Department of
riculture, Burnen of Agricultural Homenton,
Regraded Uclassified
196
COMPOSITE PRICES OF PIA INS, sm. SCRAP, AND FINISHED seme
1
$
1
Pig Irem w
9
Steel Scrup w
1
Finished Steal 3/
Date
-
1
I
1
.
(Dollars per gross tom)
I
(Gests per pound)
0
8
e
19390
.
I
#
February as
8
20.61
-
15.08
#
2,286
August 29
-
20.61
I
15.62
#
2.236
September 19
I
22.61
-
19.25
9
2.236
October 3
.
22.61
.
22.50
I
2,236
November 28
I
22.61
-
18.58
2.261
I
#
1940s
#
9
-
February 20
$
22.61
.
16.71
I
2.261
February 27
I
22.61
1
16.71
I
2.261
-
.
I
Based on average for basic iron at Valley furnace and foundry
iron at Chicage, Philadelphia, Buffale, Valley and Southern irom
at Cincinnati.
3/ Based on Be. 1 heavy melting steel quotations at Pittsburgh,
Philadelphis, and Chicage.
1/ Based on steel bare, beans, task plates, wire, rails, black pipe,
sheets and hot-rolled strip. These products represent 85 percent
of the United States output.
Sources The Iron Age.
Regraded Uclassified
197
PRICES OF - one FORES
Meter gaseline, Light full oil, Riesel edi, oil, grade
Date
1
w ostano I - n 90, cargoos
e
(Gests per gallen)
0
--
(Dollars per herrel)
9
1939:
March 1
4.50 - 4.75
3.25 - 3.375
August 30
September 19
6.25 - 6,875
3.875 - 4.00
= 0.825 - 1.00
0.675 - 0.70
4.95 - 5.00
3.375 - 3.75
February n
5.50 - 6.00
4.125
= 1.70 119 1.70
0.75 - 0.00
1940Γ
February as
5.90 - 6.00
4.125
1.00 1:00 - 1.05
1.00 - 1.05
Sources Platt's Oilgram.
THEYPARA
10:30
BVO PIVES S W 10 30
RECEIVED DEEICE OE
Regraded Uclassified
Collins
198
Ceme
March 1/40
L6>'n >
Will you please call Mrs. Klotz with reference
to the Secretary's conversation this afternoon with
the
Mr. Purvis and advise her that depending inquiry for
the 300 Douglas bombers with spare engines and air screws
are covered by item 3 in statement C of the original
British list showing the status as of December 27th, filed
by Mr. Purvis with Captain Collins on January 5th. The
engines were completed on February 20th and covered 150
of these bombers with spare parts. This transaction is
appearing as an order placed in statement A covering the
period February 19th to 24th, which statement will be filed
with Captain Collins in the ordinary way.
Regraded Uclassified
199
PARAPHRASE OF TELEGRAM RECEIVED
FROM: American Embassy, Berlin, Germany (via Bern)
DATE: March 2, 1940, 9 a.m.
Rec'd: March 5, 1940, 10:05 a.m.
NO.: 534
With apparent conviction, official sources in Germany
state their impression that there 18 serious intention
on the part of the Government of the U.S.S.R. to deliver
the quantities agreed upon in the February 11 trade
agreement. However, these sources point out that the
February 11 agreement provides essentially only for the
exchange of commodities, and that the Ruesian and German
Governments have not as yet carried on negotiations to
the end of establishing such thoroughgoing economic
cooperation as was agreed on by the French and the British.
They make specific reference to the fact that no arrange-
ments have been made for any extended use of experts from
Germany in organizing transportation and production in
the U.S.S.R. Transportation facilities are adequate for
handling the volume of trade which the agreement envisaged,
German officials insist. They point out that in addition
to shipping facilities in the Baltic and in the Black
Sea, there are eight points of rail contact.
A report has come to the Embassy that under the
agreement, Russia is to export to Germany during the
next year -
Petroleum
Regraded Uclassified
200
- 2 -
Petroleum products
900,000 metric tons
Cotton
100,000 tons
Apatite (phosphate)
500,000 tons
Manganese
300,000 tons
Feed grains
800,000 tons
Bread grains
200,000 tons
Various ores
1,000,000 tons
Including iron ore....
600,000 tons
#
chrome ore.. 100,000 tone
Flax
15,000 tons
Timber
18,000,000 marks worth
In addition to the above contingents it 1s reported that
Russia will export to Germany various amounts of the follow-
ing: pig iron, scrap iron, platinum, bran, oil seeds,
butter, technical and edible oils, and fish meal.
END SECTION ONE.
KIRK.
EA:LWW
Regraded Uclassified
201
PARAPHRASE, SECTION TWO, TELEGRAM NO. 534 OF MARCH 2,
1940 FROM BERLIN.
The quantities mentioned above should, on the basis
of customs values in 1937, have a total value of about
300,000 (?) marks. Deliveries at the rate of 90 million
marks per year must be added to this for the commodities
promised by Russia under the August 19 trade agreement,
and perhaps 30 or 40 million marks for oil seeds, platinum,
and other minor commodities about which the Embassy can
get no detailed information. Russia would presumably furnish
goods to Germany in the amount of something over 400
million marks during the next year, if she lives up to the
two trade agreements; this amount would be approximately
one-seventh of what Germany imported in 1938 from enemy
countries and those which the blockade had out off.
There is little possibility, it 18 admitted, that total
imports from neutral countries of Europe other than Russia
can be increased over the levels for 1938, and it 1s admitted
that decreased imports from other countries will offset
the increased shipments of oil from Rumania.
Trade lost for Germany through the blockade could not
be made up by the imports from Russia under the new agreement;
however, certain important commodity needs would be fairly
substantially relieved if not filled by such imports.
Thus, petroleum products from Russia in the amount of
one million tons, in addition to & possible increase in
imports
Regraded Uclassified
202
- 2 -
imports from Rumania of one million tons - compared with
deliveries in 1938 from Rumania - would be more than 40
percent of net imports by Germany in 1938, which aggregated
4.8 million tons. It has been reported that Germany 1s
actually accumulating oil reserves in view of the present
military inaction and the prohibition of civilian passenger
automobile operation. There is some confirmation for
the belief in view of the fact that oil is still a fair
traffic in Berlin of delivery vehicles which perform
services not strictly essential to war and civilian needs.
However, Germany would obviously not be provided with the
oil reserves necessary for offensive operations over a long
period, compared with the campaign against Boland in Septem-
ber, by obtaining oil from Russia; it is reported that
Germany consumed one million tons of oil in that offensive.
END SECTION TWO.
KIRK.
EA:LWW
Regraded Uclassified
PARAPHRASE, SECTIONS THREE, FOUR AND FIVE OF
203
NO. 534 of March 2, 1940 from Berlin
The amount of 100,000 tone of cotton to be imported
from Russia - about one-eighth of all that Russia produces -
contrasts with the amount of 250,000 tons of spinning
cotton imported by Germany in 1938. On this point it
has not been possible for the Embassy to obtain expert
opinion, but it is possible that if the delivery of the
100,000 tons of cotton is effected for Germany, it may be
sufficient to satisfy domestic consumption for the present,
in view of the severe rationing restrictions as introduced
recently having diminished consumption.
It may be that the manganese contingent of 300,000
tons will be sufficient, although in 1938 426,000 tons were
imported into Germany, and 550,000 tone in 1937. The
Embassy has heard, in this regard, that an even larger amount
would have been granted Germany by the Russian negotiators,
but the German negotiators favored increased supplies of
other commodities and refused B. larger amount of manganese.
Approximately one million tons of phosphate have
previously been imported by Germany each year; she would
be able to satisfy about one-half of her import requirements
through Russian deliveries of 500,000 tons of this commodity.
Phosphate 18 of the greated importance to agriculture in
Germany, and it is believed that her inability to get
phosphate from former sources of supply should result,
after two years, in 8. decrease in crops. However, it 18
to
Regraded Uclassified
204
- 2 -
to be noted that deliveries from Russia, which presumably
will be imported via the Baltic, will probably not get
to Germany in time for use during the present crop year.
The feed grains to the amount of 800,000 tons which
Russia will presumably export to Germany under the agreement
contrasts with the imports during 1938, from countries
now cut off by the blockade, of barley, oats, corn and
minor cereals to the amount of 2.16 million tons. It 18
possible that the imports from Russia this year might
only restore fodder supplies to present insufficient
levels if it 18 confirmed that the cold spell which has
just come to an end has caused considerable spoilage of
potatoes which were stored for feeding hogs, and if the
grain crop this next season should suffer due to bad planting
and cultivating conditions because of the continued
excessive snowfall and continued cold weather. During
1938 Germany imported from enemy and overseas countries
780,000 tons of wheat and rye, as contrasted with the
200,000 tons of bread grains to be imported from Russia
under the agreement. However, Germany's major worries
at present do not include the bread grains situation.
The iron ore in the amount of 600,000 tons to be
imported by Germany from Russia is only a small fraction
of that taken by Germany in 1938 from countries with which
it can no longer trade, in the amount of 9.7 million tons.
Iron
Regraded Uclassified
205
- 3 -
Iron ore could technically still be imported by Germany
from Norway, some 1.1 million tons having been imported
from that country in 1938. However, no iron ore was
imported from Norway during the first four months of the
war, according (million?) to available information, 80 that something
like 10.8/tone would be the deficit for Germany, measured
by her full peace time requirements. This deficit, accord-
ing to observers here, could be filled only partially
and that very gradually through increased exploitation
of mines in Germany and in Sweden.
With regard to the flax contingent of 15,000 tons,
this is slightly greater than the amount imported in 1938,
which aggregated 14,000 tons, enemy and overseas countries
supplying less than 2,000 of this amount.
Timber from Russia 18 of relatively less importance
to Germany in view of her access to the forests in Poland;
this explains the low quantity of 18 million marks which
the agreement 1s said to provide for.
It may be said of the new trade agreement, in resume,
that while it may help Germany substantially, it will not
meet the full war-time requirements of Germany for such
important commodities as petroleum products and iron ore
and feed grains necessary to overcome the shortages in meats
and fate.
It is requested that the Treasury be informed of the
foregoing. END MESSAGE.
EA:LWW
KIRK.
Regraded Uclassified
206
PARAPHRASE OF TELEGRAM SENT
TO: American Embassy, Rio de Janeiro
NO.: 48
DATE: March 2, 1940
Reference is made to your telegrams 78 and 79.
We have made as vigorous a presentation as possible
of the matter to White and have taken it up separately
with Traphagen of the Bondholders Council. The Executive
Committee will consider it at a special meeting which
will be held Monday morning. As soon as possible
thereafter we will telegraph you.
HULL (AAB)
10
JL
we
CT
BECHHIONS
SIGNAD
to 103 SAM 00
sure
1857
EA:EB
Regraded Uclassified
207
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE March 2, 1940
TO
Secretary Morgenthau
FROM
Mr. White
Subject: Shipments to U.S.S.R.
Following are details of the S.S. Norbryn which sailed
March 1 for Russia:
Domestic exports:
Industrial machinery
$1,501,528
Brass ingote, strips and
castings
880,684
Copper and products
846,210
Electrical machinery and
apparatus
289,094
Ferro-vanadium
118,063
Molybdenum ore and con-
centrates
80,178
Bismuth metal
62,987
Stainless steel sheets
21,035
Scales and balances
8,959
All other commodities
30,457
Total domestic exports
$3,837,195
Re-exports:
Straits tin
245,186
Standard T/N Shellac
46,875
Liquid Latex
23,028
Tantalite ore
7,026
All other commodities
3,609
Total re-exports
325,724
Total cargo
$4,162,919
cc: Mr. Gaston
Mr. Basil Harris
Mr. Cochran
Regraded Uclassified
208
March 2, 1940
To:
Secretary Morgenthau
From:
McHugh
Admiral Spear called up at 12:55 and dictated the
following message to me. He said he thought it might be
of use to you when you saw the President tomorrow:
For the information of the Secretary of the Treasury.
"We have received this morning in the Navy Department
an oral request from the Minister of Finland that the
Navy or the U. S. Government supply 150 pursuit planes.
The Navy is investigating and taking the preliminary
steps to gather the information, but it will be
suggested to the Finnish Government that they submit
their request to the President's liaison committée -
Captain Collins, Chairman.
STRICTLY CONFIDENTIAL
209
TREASURY DEPARTMENT
INTER-OFFICE COMMUNICATION
DATE March 2, 1940
TO Secretary Morgenthau
FROM Mr. Cochran
Mr. Chen called on me today at 12:15. He stated that Dr. Buck was due
to arrive in Washington on Sunday and Mr. Sheahan on Tuesday or Wednesday.
Mr. Chen had not yet procured much information on the question of the
Irrawaddy River prospects. He stated, however, that he understood that the
road across Burma from the head of navigation to the Chinese border was in
very bad condition. The Chinese Government had approached the Burmese
Government with the view to obtaining the construction of a new road, for
which the Chinese Government was willing to pay. The Burmese Government had
refused, presumably because it did not want competition from this source with
the Burmese railway, which is Government owned. Chen stated that his people
were receiving favorable rates and other good treatment at the hands of the
Burmese railway and would hesitate to do anything now which might jeopardize
their good relations with the Burmese railway and the Burmese Government.
Mr. Chen is remaining in Washington until next Thursday evening.
Regraded Uclassified
210
Re VESTING OF FRENCH SECURITIES
March 2, 1940.
10:10 a.m.
Present:
Mr. Leroy-Beaulieu
Mr. Cochran
Mrs Klotz
Leroy-B:
I received a cable when I arrived yesterday by
which - that was two days ago - which said I
was to come and see you as soon as possible in
order to let you know why we have done this
convention with the Bank of France and in the
cable they told me that I had to tell you all
that was in the letter which was supposed to
have been brought to me by Mr. Pleven, but
Mr. Pleven is still in Lisbon. He is waiting
for the plane.
H.M.Jr:
Isn't he on the Washington?
Leroy-B:
No. He and Jacquin are in Lisbon since last
Monday. On the Washington, there is Mr. Rist
and Mr. Ashton-Gwatkin.
H.M.Jr:
You know they were to come over here quietly.
Leroy-B:
Yes.
H.M.Jr:
You saw the publicity yesterday out of Paris?
Leroy-B:
Yes.
H.M.Jr:
The understanding was they were to come over very,
very quietly.
Leroy-B:
Yes.
H.M.Jr:
But all this announcement came out of Paris yes-
terday.
Leroy-B:
Yes.
H.M.Jr:
They also said that everything must be very
quiet and they would just drop in to see us,
Leroy-B:
The only thing that I know is that the Embassy
was instructed to go and see the State Department
and to ask them what they thought about this
coming --
Regraded Uclassified
211
- 2 -
H.M.Jr:
Before or after It was given out?
Leroy-B:
Before. Saying that it was to be given out, yes.
I.M.Jr:
Oh, they cleared it in the State Department?
Leroy-B:
Yes, in the State Department.
H.S.Jr:
O. K.
Leroy-B:
So I can't give you any more, I think, about
the convention than you have from Matthews.
H.M.Jr:
That is right.
Leroy-B:
Because the only thing I know is that already
ten days ago and I see that what I read in the
papers is what I was told when I left, but I
think from what I heard from Cochran yesterday,
you know all the details.
Cochran:
Yes, we have it.
H.M.Jr:
That 1s right.
Leroy-B:
So then as far as the vesting of securities is
concerned, I have here & message for you from
the Minister of Finance which I brought in
French and which I translated into English, but
then I don't know whether the translation is
absolutely diplomatically correct, because it
is mine.
H.M.Jr:
It is good enough.
Leroy-B:
Yes.
H.M.Jr:
Did they have 8. swimming pool on the boat coming
back?
Leroy-B:
Yes, but they didn't use it because it is an
open one.
H.M.Jr:
"1) The Minister of Finance has studied with
special attention the various observations and
suggestions made to his Financial Attache by
Regraded Uclassified
212
- 3 -
the Secretary of the Treasury in reference to
the financing of the purchases made by the
French Government in the United States of
America. Like Mr. Morgenthau himself, the
Minister of Finance has been concerned over
this important question.
"2) The estimate of the requirements of France
in dollars for her payments in the United States
during the first year of the war was the sub-
ject of a communication from the French Embassy
on behalf of Mr. Paul Reynaud, and this estimate
contained all necessary reservations as to its
final character.
"The same communication indicated the conditions
under which the expenses made during the first
months of the war were covered.
"3) The question of financing expenses abroad
during the war has been examined by the French
Government, in close collaboration with the
British Government, in the spirit of the f1-
nancial agreement concluded on December 4, 1939,
of which Mr. Morgenthau was duly informed.
"It was recognized that 1f the two allies, in
order to meet their payments in dollars, have
to utilize all their available resources, gold
reserves, currency, bonds and stocks, this
problem at the present time presents itself
under quite different conditions for each of
them.
"4) In the first place, the distribution of the
resources of France and of Great Britain is not
identical. The latter has available in total
and proportionately, a much greater amount of
dollars in stocks and bonds than France. The
liquidation of these bonds would normally con-
stitute an important item in the financing of
purchases, but in the case of the French Govern-
ment it would constitute a relatively unim-
portant item.
213
"Moreover, from a purely practical point of
view, It should be recalled that the inventory
of currency and bonds held abroad by French
citizens is now being undertaken and that no
step can be considered until this inventory
has been completed and its results are avail-
able.
"5) For these various reasons, the French Govern-
ment has agreed with the British Government that
the latter would be free to undertake first the
recall and disposal of the American bonds owned
by its citizens. This procedure seems to take
into account the concern expressed by Mr. Morgen-
thau.
"6) In the 11ght of these observations, the
Minister of Finance is anxious to establish
with Mr. Morgenthau as close & contact as
possible in reference to all decisions to be
made concerning the questions raised by the
American Treasury.
"The Minister will not fail to inform Mr. Morgen-
than, as soon as they are available, of the re-
sults of the inventory of American bonds and
stocks held by French citizens.
"Purthermore, he is in a position to give Mr.
Morgenthau the assurance that no French trans-
action on the United States stock market will
take place without prior consultation with the
American Treasury. The recent suggestions which
Mr. Morgenthau sent through Mr. Leroy-Beaulieu
will be examined with the greatest care.
"Mr. Paul Reynaud wishes to express his personal
thanks to Mr. Morgenthau for his initiative and
he Interprets his suggestions as an indication
of the interest which the Secretary of the
Treasury takes in the solution of the difficulties
which the war has imposed on the Allies, and
wishes to re-affirm his continued willingness
to cooperate under the stipulations of the tri-
partite agreement atill operative."
214
- 5 -
Loboy-5:
so, I should like, Mr. Secretary, to add a
few amendments on this to tell you exactly
how I found my Minister and how we had to
come to this conclusion. When I came there,
I found him B. little upset by my cables and
then he told me, "I don't know what the
situation is. It was very difficult for the
British and I wish you would tell Mr. Morgen=
than why and how we reached this conclusion."
We, as you know haven't been as rapid as the
British when the war started to make a deci-
sion about those foreign stocks. We first
said we would make an inventory. The first
results of this inventory were indicated
to Matthews in Paris and they showed that
the amount of American stocks owned by French
people didn't seem to exceed roughly between
150 and 200 million dollars and the second
indication given was that they seemed to be
much more widespread in the population than
we had first thought.
We had a very big number of exceedingly small
returns and we were very much amazed to see
that the man in 8. small place, EL small village,
even in the south of France, should have one
U. S. Steel or two General Motors, so it made
& problem from the political point of view a
little different because we couldn't ask the
people when they delay which, 8.8 I told Cochran,
was the first of February for the civilians
and the first of April for the mobilized
people. There were two different dates. We
put in & thousand and they - Mr. Morgenthau
wonders - and to say that the delay of the
first should be put to the first of March or
something like that, it seemed to us exceed-
ingly hard to do, so I told them I didn't
think that was your wish, because the people
there are - you know how French people are.
They are always exceedingly upset by this
financial consideration and, for instance, I
would see my brothers at the front and the
first thing they asked me was about what about
these returns, how can we do it without taking
a furlough, and 00 on, see, and it is true of
215
- 6 -
many people when they are there, they have
to first have their leave to see their bankers
and stockbrokers and see even how they stand.
So I don't think --
H.V.Jr:
I understand it is difficult.
Leroy-B:
Yes. We have five million men mobilized between
20 and 50. That is over half of our popula-
tion between 20 and 50.
H.M.Jr:
They are actually mobilized?
Leroy-B:
Yes.
H.M.Jr:
They don't work in the factories in uniform?
Leroy-B:
Oh no, never, that is the Army.
H.M.Jr:
And they don't, say, put 50,000 men in factories
or on the railroad?
Leroy-B:
No, those are not mobilized.
H.M.Jr:
Are the men who are working the railroads mobilized?
Leroy-B:
No. You see, we have a hundred divisions at the
front, which means about two million and a half
and then you have all the services, supply ser-
vices and all that, you see, and then behind the
lines you have to have some, too, so that made
the problem different from us and the British,
30 what I wanted to avoid was that the British
should say when we begin, and I thought it was
perhaps possible to concentrate on the Franco-
British Communique and be asked by you to send
us American securities, to invest our securities
and that the Franco-British Communique on the
fourth of December had said when the British
start first, because their problem was differ-
ent. They have over a million pounds of securi-
ties, you see. We have 150 million dollars.
H.M.Jr:
Bit I don't want you to tell the French soldiers
mobilized, "We have got to take your one stock
of General Motors away from you because that
Regraded
216
- 7 -
so-and-so Morgenthau is insisting on that."
Leroy-3:
No, we won't do that. You see, that was a
problem.
H.N.Jr:
It is very nice for you.
Leroy-B:
No, I didn't say SO,
H.K.Jr:
No, but I got that all right. I hope that isn't
the way it develops.
Leroy-B:
No, no.
K.M.Jr:
Because I want to go back some day to France.
Leroy-B:
No, but I wanted to tell you that because it
is a fact which is probably ignored in this
country but which Cochran is aware of, because
he knows how the distribution of wealth stands
in France and this particular little thing, you
see, say, of two General Motors, is so sacred
a thing which he has put away in order that if
he dies, or things like that, his daughter
should have it, and those things - it wouldn't
even be possible to vest them the first of
April. That is only between you and me.
R.M.Jr:
I am not crowding you on this. Don't --
Leroy-B:
No.
E.E.Jr:
No. If you have any such --
Leroy-B:
Then I am glad to hear that.
R.Y.Jr:
Oh no, all I have done is to ask. I have never
even inferred that I have urged them to do this.
Cochran:
No, sir, you just asked as to an estimate as to
what their needs would be for this year and how
they are going to be met, by sale of securities,
by gold, or by what.
Leroy-B:
Then we are under the impression, I think, it is
because when you asked us to start, you know,
to sell under this scheme directly with the
companies, so they got the impression that we
are in a hurry.
Regraded Uclassified
217
- 8 -
H.M.Jr:
No, that is not correct.
Leroy-B:
So I thought it might be --
H.M.Jr:
I wish you would get this --
Leroy-B:
Possibly we could meet your wishes by saying
when the British start to collect, then we
would start later on.
H.M.Jr:
I want you to get this. At no time, I am con-
fident, have I ever urged the English or the
French. All I was trying to find out was this,
was to get some indication from the two govern-
ments what proportion, how they were going to
raise their money for this coming year, what
proportion was gold, what proportion was securi-
ties and estimates, and that I don't even know
whether I asked for it, but the British gave me
a breakdown of what they were going to spend
that money for in this country, which I think
was voluntary. As far as I know, I never asked
for it, but please tell Mr. Paul Reynaud that I
am simply - I simply raised the question so
that I would be informed and I explained that
if I knew, it would be easier for me to answer
the constant criticism of our buying all the
gold in the world, but at no time, nor do I
now urge you to do it.
Leroy-B:
I am glad to hear that, because it was my per-
sonal impression, you see, and I told Mr. Reynaud,
"I think you are too nervous about the thing and
I am sure that when I come back with this message
Mr. Morgenthau will quite understand the situation," "
you see.
H.M.Jr:
Did he maybe pick that up in London?
Leroy-B:
I don't know, but I found them B. little nervous
and the idea they had was that there was some -
after a certain date that you would refuse buying
gold, or things like that. I don't know how they
got this information.
H.M.Jr:
I would like to know whether they picked that up
in London.
Regraded Uclassified
218
- 9 -
Leroy-5:
I think 1t came from London, because I don't say
I can show you my cables. I never gave them the
impression that there was anything --
E.N.Jr:
I would like to know where they got that from
and from whom. It didn't come from this office.
Leroy-B:
No, I think it was the whole thing, you know,
of this past - about what happened, about
what such and such a man says and with Vanden-
berg speaking one way on the gold and other -
from those two principal men, and the whole
thing, you see.
H.N.Jr:
Well, if nothing else, at least you can clear
up what I should think would be very important
for Mr. Reynaud to know.
Leroy-5:
Yes.
H.V.Jr:
Not only wouldn't I press you, but I would con-
sider it improper for me to press you.
Leroy-B:
Yes.
E.M.Jr:
Alr I asked for now was information. I can say
about what it says here, as far as I am concerned,
it is entirely satisfactory.
Leroy-B:
I see. Then as far as the information is con-
cerned, we gave you some time ago from the Em-
bassy a very rough estimate of what our - of what
we thought our needs would be, I think.
Cochran:
Yes, the Counselor came in --
Leroy-B:
The Counselor of the Embassy. The Secretary
wasn't there.
H.M.Jr:
Somebody has been doing something malicious
around here and I would like to know where
it comes from. It doesn't come from my office
and after all, I am the only person who is
authorized to speak on these matters.
Leroy-B:
Yes, and so this rough estimate was 35 billion
francs.
Regraded Uclassified
219
- 10 -
Cochran:
That was on February 15, I think.
Leroy-B:
Of course, this estimate is perhaps no longer
right. For instance - well, aviation, it all
depends on what is going to be done, you see,
by this new aviation purchase and it may be
that if we have more for aviation we would
have less for machine tools.
S.M.Jr:
Well, I carry a figure - as I say, there is so
much happening that - the last cable that I sew
was from Matthews in which he said that the
French Government would be spending about 45
million dollars 8 month in this country.
Leroy-B:
Yes.
Cochran:
That is right.
H.M.Jr:
Is that the last?
Cochran:
Yes.
E.M.Jr:
I can't remember it all, but that is the last
number of dollars & month.
Leroy-B:
That doesn't - 35 billion francs. Yes, it is
600 million dollars. Well, you see, I think
that we will be soon in & position to give you
a little more precise information on that.
So far as our reply is concerned, Mr. Secretary,
I think we will be able to give you e little
more information because when I left Paris they
were making this inventory of all the different
Ministers to know what their requirements were
and after that there was planned an order to
know exactly what foreign - they would need and
then to make sort of 8. program, they said,
"Well, 1f we need 80 much for
then we
won't buy any Dutch cheese or we won't buy
any --" You see, all of that, because the
different Ministries gave us such huge figures
that Mr. Reynaud was very anxious and said,
"If that is so, I don't know how I can finance
it." After all, he has only three billion
dollars in gold.
Regraded Uclassified
220
- 11 -
B.M.Jr:
I understand he cut this thing in half and then
this airplane thing came along and it went
right back to the original figure. Is that
right?
Leroy-F:
That 1s about right. You see, the first figure
we got from all the Ministers put together, was
the figure which reached nearly & hundred billion
francs for 1940. That is in dollars, pounds,
and everything, of which about 60 billion francs
were in pounds.
E.V.Jr:
Are you giving us new, fresh figures today?
Leroy-B:
No, I mean that is what was asked by the Ministers,
so then they had to have a conference with the
Finance Minister and the Prime Minister to cut
this figure down and this will be done probably
before, I think, the end of the month. Vie have
to agree.
E.K.Jr:
Then when they get the new figures, if you will
tell Mr. Reynaud to let me have them and until
then we take these as the most recent figures.
Leroy-B:
Yes. When we get more recent figures, I will
give them to you (Mr. Cochran).
H.M.Jr:
Please get this over to Mr. Reynaud. I am asking
for information, which is one thing I would like
to have if he wants to give it to me.
Leroy-B:
He will give it to you, all right.
E.M.Jr:
And the other thing is, the last thing in the
world I am going to say to the French Government
is, "I am putting pressure on you to sell your
securities."
Laroy-B:
I am very glad to hear that.
H.M.Jr:
I em disturbed to think that there have been SO
many people in our own Administration who were
not in complete sympathy with what I was doing
with the English on securities, and those people
normally stay in London.
Regraded
221
- 12 -
Leroy-B:
I see what you mean, yes.
H.M.Jr:
And I think if you talk a little bit - and I
just wondered if possibly somebody put something
up in London and passed it on, you see, which
would not necessarily represent what Mr. Roose-
velt and I think.
Leroy-B:
Yes.
E.M.Jr:
See?
Leroy-B:
Well, maybe that was it, Mr. Secretary. I don't
know. I should hate to report the information,
but it may be that, because I had the impression
it came & little from London and I know that
somebody in your Administration who usually stays
in London came to Paris on his way here and he
may have given a false impression.
F.M.Jr:
I would like to know, because I know that Lord
Lothian is quite disturbed about what has been
going on, as far as France is concerned and what
happened in this country while he was here. Ask
Pinsent about it.
Leroy-B:
Yes, I saw Pinsent yesterday.
222
February 18, 1940.
MESSAGE FOR MR. MORGENTHAU
FROM MR. PAUL REYNAUD.
1) The Minister of Finance has studied with special atten-
tion the various observations and suggestions made to his
Financial Attaché by the Secretary of the Treasury in refe-
rence to the financing of the purchases made by the French
Government in the United States of America. Like Mr. Morgen-
thau himself, the Minister of Finance has been concerned over
this important question.
2) The estimate of the requirements of France in dollars
for her payments in the United States during the first year
of the war was the subject of a communication from the French
Embassy on behalf of Mr. Paul Reynaud, and this estimate con-
tained all necessary reservations as to its final character.
The same communication indicated the conditions under
which the expenses made during the first months of the war
were covered.
3) The question of financing expenses abroad during the
war has been examined by the French Government, in close col-
laboration with the British Government, in the spirit of the
financial agreement concluded on December 4, 1939, of which
223 2.
Mr. Morgenthau was duly informed.
It was recognized that if the two allies, in order
to meet their payments in dollars, have to utilize all
their available resources, gold reserves, currency, bonds
and stocks, this problem at the present time presents it-
self under quite different conditions for each of them.
4) In the first place, the distribution of the
resources of France and of Great Britain is not identical,
The latter has available in total and proportionately, a
much greater amount of dollars in stocks and bonds than
France. The liquidation of these bonds would normally
constitute an important item in the financing of pur-
chases, but in the case of the French Government it would
constitute a relatively unimportant item.
Moreover, from a purely practical point of view,
it should be recalled that the inv intory of currency and
bonds held abroad by French citizens is now being under-
taken and that no step can be considered until this in-
ventory has been completed and its results are available.
5) For these various reasons, the French Government
has agreed with the British Government that the latter
would be free to undertake first the recall and disposal
of the American bonds owned by its citizens. This proce-
dure seems to take into account the concern expressed by
Mr. Morgenthau
Regraded Uclassified
224 3.
6) In the light of these observations, the Minister
of Finance is anxious to establish with Mr. Morgenthau as
close a. contact as possible in reference to all decisions
to be made concerning the questions raised by the American
Treasury.
The Minister will not fail to inform Mr. Morgenthau,
as soon as they are available, of the results of the in-
ventory of American bonds and stocks held by French
citizens.
Furthermore, he is in a position to give Mr. Morgen-
thau the assurance that no French transaction on the
United States stock market will take place without prior
consultation with the American Treasury. The recent sug-
gestions which Mr. Morgenthau sent through Mr. Leroy-
Beaulieu will be examined with the greatest care.
Mr. Paul Reynaud wishes to express his personal
thanks to Mr. Morgenthau for his initiative and he inter-
prets his suggestions as an indication of the interest
which the Secretary of the Treasury takes in the solution
of the difficulties which the war has imposed on the
Allies, and wishes to re-affirm his continued willingness
to cooperate under the stipulations of the tri-partite
agreement still operative./.
225
/8 Février I940.
MESSAGE POUR M. MORGENTHAU
de la part de M. Paul REYNAUD
I:-
Le Ministre des Finances a étudié avec une attention
particulière les diverses observations et suggestions faites à
son Attaché Financier par le Secrétaire de la Trésorerie, au
sujet de la couverture des dépenses du Gouvernement français
dans les Etats-Unis d'Amérique. Il est, comme M. Morgenthau,
préocoupé de cette importante questian,
2.-
L'évaluation des besoins en dollars de la France pour
see paiements aux Etats-Unis pendant la première année de la
guerre a fait l'objet d'une communication de l'Ambassade de
France, de la part de M. Paul Reynaud, cette evaluation étant
accompagnée de toutes les réserves qui s'imposent quant à son
caractère définitif.
La même communication a indiqué les conditions dans
lesquelles les dépenses des premiers mois de la guerre ont sts
couvertes.
226
2.
3.-
La question de la couverture de seg dépenses à l'étram
ger pendant la guerre a été examinée par le Gouvernement français
en liaison stroite avec le Gouvernement britannique, dans l'es-
prit de l'accord financier du 4 Décembre 1939 dont M.Morgenthau
8. eu connaissance.
Il a été reconnu que si les deux alliés devaient Stre
conduits pour faire face à leurs paiements en dollars à utiliser
toutes leurs ressources disponibles, réserves d'or, avoirs en
devises, portefeuille de valeurs mobilières, la question se
posait actuellement pour chacun d'eux dans des conditions sensi-
blement différentes.
5.-
En premier lieu, la répartition des ressources de la
France et de la Grande-Bretagne n'est pas la même. Cette dernière
a, en chiffres absolus et proportionnellement, un portefeuille de
titres en dollars beaucoup plus important que la France. La
réalisation de 008 titres constituerait normalement un mode de
financement substantial : pour le Gouvernement français elle ne
peut Stre qu'un appoint.
D'autre part, d'un point de vue purement pratique, il
faut rappeler que l'inventaire des devises et valeurs détenues à
l'étranger par des Franqais est en cours et qu'auoune mesure ne
peut Stre envisagée avant qu'il soit terminé et que ⑉ résultats
soient connus.
227
3.
5.-
Pour 068 différents motifs le Gouvernement français
a convenu avec le Gouvernement britannique que 00 dernier serait
libre de commencer d'abord la réquisition et la vente des valeurs
américaines détenues par ses ressortissants. Cette procédure pa-
raft répondre en fait aux préoccupations exprimées par
M. Morgenthau.
6.-
Sous le bénéfice de 000 observations, le Ministre des
Finances est désireux d'etablir avec M. Morgenthau un contact
aussi étroit que possible paur toutes les décisions à prendre au
sujet des questions soulevées par la Trésorerie américaine.
Il ne manquera pas en particulier de lui faire connaftre
dès qu'ils seront en sa possession, les résultats de l'inventaire
des valeurs mobilières amérioaines,
Il peut, d'autre part, lui donner l'assurance qu'auoune
opération française sur le marché des valeurs des Etate-Unis ne
86 fera sans consultation préalable de la Trésorerie américaine,
Les suggestions récentes que M. Morgenthau a fait transmettre par
l'intermédiaire de M. Leroy Beaulieu seront examinées avec un
soin particulier.
7.-
1. Paul Reynaud tient à remercier personnellement
M. Morgenthau de son intervention # 11 y voit une nouvelle marque
228
4.
de l'intérêt que porte le Sedrétaire de la Trésorerie à la
solution des difficultés que la guerre crée aux alliés , et
de/son désir de coopération dans le eadre, toujours vivant,
de l'accord tripartite.
TREASURY DEPARTMENT
INTER-OFFICE COMMUNICATION
DATE March 2, 1940
TO
Secretary Morgenthau
FROM
Mr. Cochran
STRICTLY CONFIDENTIAL
Mr. Leroy-Beaulieu, Financial Counselor of the French Embassy, was received
today at 10 c'clock 'oy Secretary Morgenthau. Mrs. Klotz and Mr. Cochrun were
present. and during the first part of the conversation the stenotype operator
took notes.
After Leroy-Beaulieu, who had returned from France two days ago, had de-
livired to Secretary Morgenthau certain missages from Vinister of Finance
the stenotype operator left the room and an informal conversation fol-
lored. Hr. Leroy-Beaulieu presented to the Secretary a clip of machine gun
cartridges taken from a Gèrman Messerschmidt plane which had been brought down
in France by an American Curtiss plane. Leroy-Beaulieu's brother had given
this souvenir to Leroy-Beaulieu who, in turn, desired Secretary Morgenthau to
care it, considering the latter's helpful interest in the Allies' aviation
program. Leroy-Seaulieu stated that the Curtiss planes were proving their
superiority on the western front. Leroy-Beaulieu did not have precise informa-
tien in regard to the latest and speediest type of Nesserschmit plane which,
the Secretary understood from Mr. Ziegler, had been produced.
In accordance with the Secretary's request, Leroy-Beaulieu gave at gicture
of the European war situation. He was not able to predict what would happen
this spring. He said there were definitely tvo schools of thought. Eis own
opinion was that the Germans would be extrenely foolish to start a big offensive
with their army. He said they made this mistake in 1914 in their attacks against
3/1gium and Northern France. To launch a big military campaign now would cost
the Leavily in the copper, steel and other materials for which they have the
ratest need. He thought the wiser plan from the German standpoint would be
to wear down the Allies. He is definitely of the opinion that the Allied block-
ede of Germany as now operated will not be successfully effective. Ee empha-
used that Germany has through her conquest of Poland and Czechoslovakia acquired
Unirty million slaves who can be forced to work long hours producing the arri-
cultural requirements of Germany, with no remuneration above that necessary to
Beg them barely alive. Leroy-Beaulieu thought the two articles absolutely
necessary to Gerdany's conduct of the war are petroleum and iron ore. He men-
tionei northern Sweden as the important source of the iron ore now reaching
Germany, In this connection Secretary Morgenthau asked me if the Department of
State naintains an office at Narvik, the port from which it is understood most
of this iron ore is shipped, When I replied negatively, the Secretary instructed
28 to write a letter to Secretary Bull requesting the sending of an American
Vice Consul to this port. (I an first checking information Of- Swedleh iron are
ablyments. Warvik, the port mentioned by Leroy-Beaulieu, is in Formay.)
Leroy-Beaulieu stressed the difficulty of the British carrying out an ef-
Certive patrol of the northern waters. Fe gave an interesting insight into the
problems England is experiencing in its own shipping trade &E a result of German
submarines and mines, the latter still being responsible for more sinkings than
the former. Leroy-Beaulieu stated that the seaports on the west of Ingland are
inadequate to take care of the imports coming from overseas, with the result
Regraded
I
-2-
230
that ships from the American and the Par East are frequently routed around the north
of Scotland and brought down to eastern and channel porte of Ingland, Making this
trip through the northern waters they suffer serious losses at the hands of the
enemy. Not only are the ports inadequate, but the railway connections between porte
and the industrial and population centers of the British Ieles are insufficient.
Even the domestic coal carrying trade by coastal vessela has broken down this past
vinter.
with respect to French freight traffic, there have been comparatively few sink-
Ings. To mine the Mediterranean Sea and that part of the Atlantic Ocean which borders
Trance on the west would require German planes to cross over French territory. This
would be very perilous because of the detectore OD the French-German border which
could at once report the planes passing the frontier and call out combat planes to
stop them before reaching the matere desired to be mined, For this same reason it
is comparatively simple for the Cermane to approach the mouth of the Thames, flying
over water, and then to attack London, only five minutes distant by air from the
coast. Leroy-Beaulieu stated that the French convoys from America went directly to
Casablance, Morocco, when carrying airplanes. This southern route below the Azorea
avoids the danger area. The planes are assembled at Casablanca and flown to the
continent. At present Leroy-Beaulieu thinks the transport of planes is about keep-
Inc up with the delivery of planes by American manufacturers in this country. Porte
such as Bordeaux and Marseilles are used for the receipt of materials other than
planes,
Leroy-Beaulieu explained in considerable detail the reasons why there was delay
and hesitancy over agreeing to 9. tremendous Allied plan for purchasing American planes.
It was not only necessary for the French and British to be in accord on this idea,
but It also raised a big question for the French Minister of Finance who, consider-
ing his limited resources, could not treat the airplane program as an isolated project,
spart from the needs of other Departments of the Government. In this connection,
Leroy-Beaulisu stated that France had ample artillery equipment, except perhaps for
an increased supply of airplane detectors to aid the artillery. He emphasized the
need of obtaining airplanes from the United States. At the same time, the French
wanted a program followed which would permit them to obtain machine tools, aluminum,
etc. from the United States in ample quantities to enable them to carry out the
French manufacture of planes.
Referring to an estimate submitted to the Secretary on February 1 by the French
Embassy with respect to French expenditure over the first year of the war, Leroy-
Feaulieu stated that this estimate would have to be revised depending upon the
airplane purchase program adopted and upon other factors. He sas of the opinion
after being in the United States only two days that sentiment for the Allies here
is not as favorable as when he left this country in January. He referred particular-
ly to the arguments being put forward by the State Department in favor of the Allies.
particularly Great Britsin, purchasing more agricultural products. Leroy-Beaulieu
thought that the Treasury realized very clearly that France must conserve her
foreign exchange and other financial resources for absolutely necessary articles,
those to be obtained from the United States being principally airplanes. He in-
sisted that France WBI obliged to make certain purchases from Turkey and other
countries of the Near Sast or see these countries thrown directly into the arms of
Germany. Consequently, he felt that the American authorities and people insisting
upon the Allies buying agricultural products here in present circumstances were
definitely taking B. position inimical to the Allied cause,
231
During the informal part of the conversation, the Secretary gave Mr.
Leroy-Beaulieu considerable information in regard to his efforts to co-
ordinate the machine tool and airplane manufacturers in this country. There
was also an exchange of views in regard to prospects for plane deliveries,
but Leroy-Beaulieu contributed nothing new on this subject.
Leroy-Beaulieu stated that detailed information in regard to the economic
problems of the Allies would be available with the arrival of Meanrs. Rist and
Ashton-Gmathin next week on the S.8. Washington. Then the Secretary remarked
upon the publicity which was attending their mission, Leroy-Beaulieu volunteered
that the French Embassy communique in regard thereto had been first submitted to
our Department of State.
Leroy-Beaulieu got on to the subject of Finland. He noted with regret that
American papers evidently had not received or carried full information in regard
to the extent of the assistance which has been given Finland by France. He
stated that as early as December 15 the French Government had sent airplanes
to Finland, with civilian pilots, and that the total number thereof has reached
100; the British have provided 150. He stated that France had also sent important
quantities of guns and rifles, without which the Finns could not possibly have
fought successfully as long as they have.
In discussing the European military situstion, Leroy-Beaulieu stated that
France had 100 Divisions at the front, as compared with 130 by the Germans,
The British have along the western front only 6. He stated that in 1914 the
number of British Divisions was only 4. He emphasized the slowmess of training
and sending British soldiers to the Continent. He admitted that the British
big requirement is for manning their navy. At present France has 10 Divisions
in Syria.
Leroy-Beaulieu stated that the Ministry of Finance and the top officials
In the other ministries are all in Paris. Only certain unimportant and sub-
ordinate services are located in the center of France. Most women have returned
to Paris, but have left their children in the country. Taxis and subways are
functioning almost normally except that certain subway stations have been con-
verted into air raid shelters and cars no longer stop there. The rationing
eyetem now being adopted he thought was quite rigid. He remarked upon the tendency
of French people to gather in restaurants and cafes at night in present circum-
stances to keep in touch with each other and suffer less unhappiness from the
blackout,
In the official part of the conversation, the stenotype notes will record
the French observations upon the difficulty of making a census of foreign 18.
curities held by French citizens, 5,000,000 of whom are under arms. Leroy-
Beaulieu stressed the delicacy from a French political standpoint of requisition-
ing such securities suddenly, particularly when held in small numbers by private
investors.
woment in the reception room. I stressed the urgency of his explaining to his
Then Leroy-Beaulieu left the Secretary's office he spoke with me for A
Regraded Uclassified
232
Minister of Finance the Secretary's exact attitude in the matter of dollar se-
curities held by the Allies. Leroy-Beaulieu told me that he thought the mis-
understanding in France had come principally from London, and specifically from
Ambassador Kennedy. He stated that Couve de Murville, the young French official
who succeeded Rueff as Director of the Movement of Funds section of the Ministry
of Finance, was quite astonished that Ambassador Kennedy should call on him,
while passing through Paris, and discuss this question. Leroy-Beaulieu did not
know just what this conversation had been. I reminded Leroy-Beaulieu that the
Treasury had not only refrained from recommending any early vesting of French
securities, but had even recommended & delay in the entire allied procedure
that would permit study of the possibility of certain blocks of securities being
disposed of before actual vesting orders might come out.
10mg.
Regraded Uclassified
TREASURY DEPARTMENT
233
INTER-OFFICE COMMUNICATION
DATE March 2, 1940
TO
Secretary Morgenthan
FROM
Mr. Cochran
STRICTLY CONFIDENTIAL
The foreign exchange market was featureless today. After opening at 3.92-3/4,
the rate for sterling moved within a narrow range and closed at 3.92-7/8.
Sales of spot sterling by the six reporting banks totaled L287,000, from the
following sources:
By commercial concerns
I 203,000
By foreign banks (Europe)
L 84,000
Total L 287,000
Purchases of spot sterling amounted to L280,000, as indicated below:
By commercial concerns
L 170,000
By foreign banks (Europe and Far East)
L 110,000
Total
I 280,000
The following reporting banks sold cotton bills totaling L198,000 to the
British Control on the basis of the official rate of 4.02-1/2:
I 159,000 by the Guaranty Trust Company
20,000 by the Irving Trust Co.
13,000 by the National City Bank
6,000 by the Bank of Manhattan
L198,000 Total
The other important currencies closed as follows:
French france
.0222-3/4
Guilders
.5312-1/2
Swiss francs
.2242-1/2
Belgas
.1690
Canadian dollars
13-5/8% discount
We sold $1,600,000 in gold to the Central Bank of the Argentine Republic
to be added to its earmarked account.
The State Department forwarded to us 8. cable stating that Mocatta and
Goldsmid, London, shipped $1,058,000 in gold from England to the Banque Belge pour
l'Etranger, New York, for sale to the U. S. Assay Office.
The Bombay silver quotation was unchanged at 40.674.
B.M.S.
- OFFICIAL COMMUNICATIONS TO
234
# THE SECRETARY OF STATE
MASHINGTON D.C.
DEPARTMENT OF STATE
WASHINGTON
March 2, 1940.
My dear Mr. Secretary:
As promised you this morning, I am enclosing
a copy of 8. strictly confidential memorandum left by
the British Ambassador with the Secretary of State
on February 14 relating to British purchases of agri-
cultural products in the United States and a copy of a
supplementary memorandum of February 16 amending the
memorandum of February 14. There 18 also enclosed a copy
of a memorandum of inquiry and comment which Secretary
Hull handed to the British Ambassador on February 21.
Bincerely yours,
Herbert Feis
Herbert Feis
Adviser on International
Economic Affairs
The Honorable
Henry Morgenthau, Jr.,
Secretary of the Treasury.
COPY:EA:EB
MENCRANDUM
Strictly
Points for discussion with Mr. Rull on purchases
Confidential
of agricultural products.
I.
The outbreak of var will compel the Allies to
reorganise their economic life from top to bottom in
order to be able to cope with Germany's aggression.
The precedents of previous wars are now completely over-
passed. Germany has organised herself for years on a
quasi wartime basis, and totalitarian government has
turned by an easy transition to totalitarian war in
which the maximum proportion of the nation's energy is
devoted to the war, and the satisfaction of ordinary
human neede in Germany is out down to the lowest possible
point. To meet & menace of this kind the Allies are
forced to make similar efforts to put the maximum pro-
portion of their energy into the conduct of the war and
to reduce the ordinary consumption of the population to
the minimum. Their national production as B. whole oan
be increased in certain directions by organisation and
by the progressive utilization of all the man-power
available after the needs of the fighting forces have
been provided for. But the total national production is
limited, and if the maximum effort is to be made to win
the var, a very high proportion of the national production
has to be consumed for the purely destructive purposes of
the var itself. Only the residue of the national produc-
tion, changed to some extent in its composition by the
process of foreign trade, and supplemented directly or
indirectly
Regraded Uclassified
236
+
indirectly w the dissipation of foreign assets, Le
available for the consumption of the population. This
is not a matter which depends on governmental policy:
it is a matter of necessity. A failure to reduce the
consumption of the population to the lowest point con-
sistent with health and efficiency would mean one thing
only: that the Allied Governments were not exerting
their saximum effort to win the war, and that the var
would be correspondingly prolonged or victory endangered.
Moreover, it is certain that in proportion M the VAP
lasts the pressure on the population to tighten their
belts and consume loss must be progressively increased.
The organisation and the necessary strengthening of our
fighting forces takes time, and as it proceeds over-growing
supplies of munitions will be required.
In Great Britain the reorganisation falls loosely
under two header
On the one hand dreat Britain is introducing a
rationing system at home in order to diminish the
consumption and importation of luxuries and non-
cosentials. Thus the rationing of bacon, butter,
ment, etc., has already been announced. If the var
lasts long it is certain that these restrictions
will be increased, partly to enforce savings as the
only means of financing var expenditure without
uncontrollable inflation, and partly because of the
difficulty of paying for imports and of the necessity
of economising shipping.
On the other hand Great Britain will have to
expropriate the dollar securities belonging to its
nationals
Regraded Uclassified
23%
-3-
nationals, and tender its available gold, in order
to pay for the large volume of munitions and other
essential war supplies which it must purchase from
the United States and which it cannot pay for either
by exports to the United States or by triangular
trade with the British Empire countries in the
sterling area.
We have not been informed of the exact amount of
dollar exchange which Great Britain can obtain by requi-
sitioning dollar securities. The Federal Reserve Bullstin
for December estimated at $735 millions the negotiable
securities hold in Great Britain, and at $2,000 millions
the British gold reserves. While not accurate these
figures represent broadly the facts. They represent the
total capital assets of Great Britain which must as the
var proceeds be gradually transferred to the United States,
until they are exhausted, for essential var purchases.
II.
The present estimate of the British Treasury of the
balance of payments between the United States and Great
Brivain during the first year of VAP is as follows:
Estimated U. I. Purchases in U. 8. A. in
First Year of War.
(willion b)
x of total
Raw materials:-
Cotton
26
54
24.36
Other
2/22(m)
18 9
6.60
45.6
Foodstuffs(a)
15.23
011
General manufactures
25
43.31
31
12.69 21.83 354
Machine tools
Purchases by Air, Military
Marchant sep.
and Naval Services:-
Aircraft 23
Munitions 12
19.29 21.1
Other
3
22
197
100.00
Estimated
Regraded Uclassified
238
Estimated U. K. Receipts from U. s. A. in
First Year of War.
Club a
Tot total
U. x. exports to
U. S. A.
30
Net balance of invisible
exports
30
U. K. adverse balance
208
145
145
E
includes Cuba and U. 8. dependencies, to be excluded
in a revised statement.
III.
Estimates of transactions between the United States
and the rest of the sterling-using area, 1.0. the British
Empire - other than the United Kingdom - excluding Canada,
Newfoundland and Hong Kong but including Egypt, Sudan and
Iraq) are as follows:-
(million b)
Exports to U. 8. A.
85
Imports from I
so
a
invisible
&
07
Favourable balance
21
leaving a net estimated
adverse balance for the
whole of the sterling
117
5184 million
area of
While ve derive help from the rest of the sterling
area in the form of their favourable balance with the
United States and their production of newly-mined gold we
have to provide foreign exchange for their requirements
as well as for our own, and their requirements are greatly
increased by higher freights and high prices, particularly
for oil which they buy in great quantities from foreign
sources.
What counts is the total amount of the adverse
balance
Regraded Uclassified
-B-
balance resulting from purchasee by the sterling area
from countries outside that area, which have to be net by
sales of gold and foreign ssourities. The total adverse
balance of trade of the area has been and undoubtedly
will be still more gravely affected, spart from var pur-
chases, by a reduction in the volume of exports, by
higher prices for imports and by very greatly swollen
payments to neutrale in respect of shipping.
It might be thought that the newly-mined gold produe-
tion of the Empire would provide an additional resource
which could be utilised for the purchases from the United
States of the agricultural and other non-essential goods
which have to be restricted in order to preserve our gold
reserves and dollar securities for our escential war pur-
chases from the United States. There is.unfortunately no
such possibility. The total adverse balance of the
sterling area with countries other than United States
which will have to be covered in gold or foreign exchange
will certainly exceed the current gold production of the
sterling area.
IV.
The estimated adverse balance of the United Kingdom
with the United States in the first year of war shown 583 in
II is was 145 millions, amounting at $4.02 to the 1" to $651
millions.
The net adverse balance of the United Kingdom
(deducting the surplue on services account from the
deficit on commodities account) during recent years of
peace has beent
Year
Regraded Uclassified
240
Year
Million dollars
1934
- 202
1935
- 204
1936
- 120
- 1937
- 199
- 1938
- 808
or an average for 1934 - 1938 of $208 millions. The
deficit on commodities account for 1939 is estimated at
8355 millions and although the surplus on services account
is not known it is almost certainly less than the $95
millions estimated for 1938. It will therefore be seen
that the adverse balance of the United Kingdom with the
United States for the first year of VAT is likely to be
three times the AVOIDED of the last years of DEASE.
The statement in II of estimated United Kingdom pur-
chases in the United States in the first year of war
shows that this deficit on commodities account is due to
purchases of strictly military supplies as defined in the
Neutrality Act to an extent less than 20 percent of the
total. Purchases of (a) raw materials, foodstuffs and
oil account for 46 percent and of (b) machine tools and
general manufactures for 34 percent. Difficulties of
classification make it impossible to give any precise
analysis, but generally speaking it can be said that
Great Britain is buying from the United States in the
first year of war
Less of:
and
More of
Raw materials (other
Cotton.
than cotton)
011 Products.
Foodstuffs
Machine Tools.
seni- and finished
Aircraft.
manufactures (other
than machine tools)
Munitions.
It
Regraded Uclassified
241
It is not known whether or not purchases of ships from
the United States by the British Ministry of Shipping
are included in this estimate. The value of such purchases
up to February 3, 1940, was $7,210,625.
The figure for military purchases however only takes
into account orders which have been already placed and
makes no provision for the immensely larger aircraft and
other areasent programmes now under discussion, nor for
the plans for greatly increased purchases of propellants
and other essential VAP supplies which are having isso-
diate consideration. The indirect beneficial influences
of these huge potential expenditures on the American Pay
material and agricultural industries should not be under-
estimated in any calculation of the effects of the Allied
var purchasing policies on the American agricultural
economy.
V.
Bo much for the first year of war. But it must be
remembered that in measuring our visible resources against
our prospective requirements from the United States the
Allied Governments must be prepared for a var which may
last three years or even more, and that the drain on our
gold and foreign exchange assets to provide for essential
war purchases on the present scale, leaving aside the
expenditure which will be necessitated by these contemplated
programmes, will be considerably higher in succeeding years
than in the first year of the war. The additional orders
for aeroplanes under consideration but not yet ordered
provide for a further expenditure of about $1,000,000,000,
including
Regraded Uclassified
including the cost of capital construction and taxation.
There are also large additional orders for propellants on
the way. It will take some time for our military purchases
in the United States really to make themselves felt and
moreover as the manufacturing capacity of Great Britain
becomes progressively more fully employed we shall neces-
sarily have to turn more and more to the United States
and other foreign countries for additional purchases
which will inevitably be found to be required by our
expanding fighting forces. This will add to the drain
in two ways. Larger purchases vill probably have to be
made and, secondly, owing to the exhaustion of the menu-
facturing capacity of Great Britain, we shall probably
be unable to restrict our purchases in as large & dagree
as at present to raw materials and will have to buy more
manufactured goods. It is of course quite impossible to
estimate what the effect on the balances of payments in
the second year of the war may be. But if there were an
adverse balance on United Kingdom account up to
4162,000,000 in the first year it is likely to be far
greater in the second year.
The foregoing points to the fact that these con-
templated programmes will bring a long way nearer the
date when Great Britain will have transferred to the
United States all its dollar resources and all its gold
reserves, and will be forced to discontinue the purchase
of any further supplies (beyond the small amount which
can be paid for by United Kingdom merchandise exports
and the favourable balance accruing from the rest of the
sterling area) whatever the effect on the war may be.
In
Regraded Uclassified
In order to postpons as long as possible this date, unless
there is an unforessen change in the whole situation, far
more drastic restrictions on the consumption of even rela-
tively essential supplies at present purchased from the
United States will have to be imposed on the British
civilian population. The whole population may be 008-
pelled to live at a rigidly controlled standard of living
in order that they may 800 the var through to the end.
VI.
It is in these circumstances that the British Gov-
arnment have had to consider the intake of importe of
agricultural products from the United States, and the fol-
lowing are notes on the situation of the more important
of them as Lord Lothian seen it.
TOBACCO. At the outbreak of the war there vas
rather more than two years' stock of American tobaooo
in Great Britain. At the time the British tobacco buyers
had bought about one third of their normal needs from the
1939 crop, and the British Government ordered a. discon-
tinuance of the allocation of any further dollar exchange
for the purpose. It is understood that the Commodity
Credit Corporation of the U. S. Department of Agriculture
bought the unsold two-thirds and is holding it with an
option up to July lst, 1941, to the British tobacco buyers,
in consideration of approximately $1,000,000 which they
have expended on handling charges, etc., to buy it later.
No statistics are available as to present stocks in
Great Britain of United States tobacco but the latest
available estimates indicate that consumption may be
expected
Regraded Uclassified
244
-10-
expected to decrease and that present stocks may last
for more than two years. This estimate is conjectural
and confidential. It is difficult to say how far the
British Government will feel it necessary to lessen
tobacco consumption as a paramount measure of var economy
or whether, as was the case in the last war, the demand of
the soldiers in the field for tobacco will foree up their
consumption. Moreover it is necessary to hold tobacco
for a considerable period to nature it properly and it
would seen that it will not be possible to use up the
whole of the existing stock before buying fresh supplies.
The essential fact in the tobacco problem is that
provision has been made for taking care of the 1939 crop
and there remains for discussion and consultation between
the United States Government and producers on one side
with the British Government and buyers on the other, the
problem of the provision to be made for taking care of
the customary United Kingdom intake of the 1940 crop.
This position had not changed since October but in
January there vas injected the question of the future
British purchases of tobacco from Turkey and Greece which
aroused public and political attention to the whole
tobacco situation. A considerable exchange of views and
information on this question has taken place between the
two Governments but the British Government are ready and
willing to discuss it more exhaustively with the object
of placing 18 in its true perspective, especially in the
eyes of the United States public and producers.
The
Regraded Uclassified
245
The recent agreement with Turkey has been rendered
necessary by the fact that Turkey is an essential bastion
in the defensive arrangements of the Allied Governments
and Turkey has made it a condition of its adherence to
the Allied Gause that it should be given a large loan of
approximately 600 million for areaments and that tobacco
should be taken to the amount of about L870,000 n year
for 20 years as the service of this loan. Similarly in
order to maintain Greece, another vital element on the
Allied side in the Mediterranean, it has been necessary
to enter into an arrangement whereby the United Kingdom
will take about 6800,000 worth of tobacco per annual so
long as the way trade agreement between the two Govern-
ments remains in force. His Majesty's Government regrets
that var necessities thus make it necessary for it to
commit itself to buying Mediterranean tobacco for so long
as twenty years but the total amount which it is committed
to buy is less than one tenth of the normal consumption of
American tobacco in the British Iales.
APPLES. Sizilarly, and solely impelled by the neces-
sity of preserving dollar exchange for the purchase of
essential supplies, the British Government decided in
September that it would be unable to purchase apples and
pears from the United States M these were in the nature
of & luxury and it is possible to obtain reduced supplies
from Canada which do not involve the use of U. s. dollar
exchange. The
British
Regraded Uclassified
246
- 12 -
British Government, however, have been under strong
pressure from Italy to buy certain rav materials, e.g.
sulphur, sercury and hemp, and agricultural produce,
including apples. Stoppage of Italian imports by sea of
coal from Germany and Poland will cause a proportionate
reduction in Italian exports to Germany, which is by
far Italy's best market for agricultural produce, and
noooptance by Italy of this fundamental change in her
economic relations with Germany is dependent on Great Britain
buying some Italian agricultural produce which would other-
wise be unsaleable. We do not want to buy any produce
from Italy and to do 80 will cause difficulties with
domestic and Empire producers, but our relations with
Italy cannot be jeopardised by a refusal to negotiate.
Purchases will, however, be kept at the lowest figure
possible without wreeking negotiations.
We had contemplated expending 6250,000 in Italy on
apples but in deference to American feeling it has now
been decided to. out out this item. We shall also try as
far as possible to avoid buying any Italian agrioultural
products for which the United States is an alternative
nource of supply. We may however have to buy some rice,
although this vill cause trouble with Burma and Queensland.
The British Government would not have negotiated for
these purchases except that the effect of the embargo on
German exports would otherwise be to inflict such damage
on Italian agricultural producers AS possibly to bring
Italy into the var against us, or at least make her 6. very
unbenevolent neutral, with mont serious connequences to
the Allied strategic position.
COTTON.
Regraded Uclassified
- 13 -
247
COTTON. British purchases of American cotton
during the first months of var have on the other hand
been very greatly in excess of purchases in corresponding
months of previous years and provision of dollar exchange
appears to have been made for maintaining them at that
high level during the first year of var, but there are
serious difficulties which may become aoute in the shortage
of shipping. The oriterion for such continued provision
however must increasingly be what is essential for the
var. The supply of cotton to be manufactured for the
export trade 10 a war essential, but for domestic use it
may not be.
LUMBER. The State Department will have received
information from the British Government departments concerned
as to the contemplated large purchases of American lumber,
including Southern pine. Here again there are serious
difficulties in providing the necessary shipping.
BACON AND HAMS. In September the British Ministry
of Food plased maximum prices on imported bacon and hame
and in January, when a surplus importation vas threatened,
they were subjected to import licenses to enable the Ministry
to secure proper control in order to regulate prices and
ensure the best use of the quantities imported. In the
meantime the bacon which Canada exports to the United
Kingdom 10 being replaced by baoon imported into Canada
from the United States, and according to a recent press
cable from Toronto in precisely the same quantity.
LABR. Similar treatment in regard to prices and import
licenses has been applied to lard. It 10 stated by the
U.S. Department of Commerce that prices have not been
attractive for substantial exports of lard from the United
States
Regraded Uclassified
- 14 -
States to the United Kingdom. Nevertheless the British
Ministry of Food is authorising large purchases of lard from
the United States but is bound to resist the pressure from
Chicago packers to raise prices against it and French
buyers.
PORK. In consequence of the addition of baoon and
has to the list of goods which may not be imported except
under licence the American packers were on the point of
rending to the United Kingdom large quantities of pork,
possibly as much as 6700,000 worth, which ve do not vant.
Pork will therefore be added to the list of meats subject
to the import licences, and the addition is regarded 98 8.
perfectly logical and Justifiable corollary to the action
hioh had to be taken in regard to bacon and hame.
CANNED NEAT. The same action will be taken in regard
to canned meat, which in any case would have to be added
to the list on purely currency grounds.
GRAIN. Ye have no adequate information in Washington
on the present and prospective situation of British purchases
of wheat, flour, corn and barley. The British Ministry
of Food is interested in some acquisition of American corn.
CANNED AND DRIED FRUITS. We have no estimate of
probable purchases.
CANNED VEGETABLES. The United States Department of
Commerce reports exports to the United Kingdom in the last
six months of 1939 to have been more than twice as ureat
no in the name period of 1938, and in December ten times
more than in December of 1938.
CANNED
Regraded Uclassified
249
- 15 -
CAMELED BALMON. Packers report a heavy demand
from the United Eingdom.
ROBIN AND TURPENTINE. PHOSPHATES. British purchases
of these economics are a substantial contribution to the
economy of southern States.
VII.
To our up, British wartine purchases benefit some
branches of American agriculture directly and all indirectly,
80 long as dollars and ships are available, but adversely
affect others notably tobacco and apples. But with the
increasing stringeney in the availability of dollars and
ships, and with the likelihood of severe restrictions having
to be imposed on civilian consumption in Great Britain for
the essential purpose of financing a long war to a success-
ful issue, eash purchases of non-essential American agricul-
tural products and even of those now regarded as essential,
must be reduced to & minimum. Further, in addition to
these considerations of dollar exchange and shipping and
civilian restriction of consumption, imperative political
considerations which are vital if the Allies are to win
the war may necessitate the diversion of purchases of some
agricultural products from the United States to other
countries. It is no part of the policy of the British
Government in imposing restrictions, in reducing its pur-
chases in the United States, and in buying elsewhere
commodities which could be supplied by the United States
if the means of payment vere available, to divert trade
from the United States to other countries. That diversion
is imposed on us by war necessity and by the "cash" and
"carry"
Regraded Uclassified
- 16 -
250
"carry" requirements placed on Great Britain for the
conduct of its vartime trade with the United States. It
will come to an end when the var is over.
VIII.
His Majesty's Government fully appreciate the concern
of the United States Government as to the effects of the
British, in coordination with the French, wartime purchasing
policies on American agricultural interests, particularly
on those of the tobacco producers; they desire equally with
the United States Government to consider with them all
aspects of these effects and all practical suggestions
for redueing to a minimum avoidable disturbances to the
American agricultural economy; they would be glad that
the consultations which have taken place between Mr. Cordell
Rull and Lord Lothian and by Mr. Herbert Feis and Mr.
Pierrepont Moffet with Sir Owen Chalkley should continue;
and for their part they are preparing for the British
government departments concerned to have full and frank dis-
cussions with the American Chargé d'Affaires and Agricultural
Attaché of the American Embassy in London on all the issues
involved. They ATO also hopeful that the forthcoming visit
to Washington of Mr. P. Ashton-Owatkin and Monsieur Rist,
economic experts of the British and French Governments,
will provide an excellent opportunity for conveying the
views of those Governments to the appropriate departments
of the United States Government and for reporting to their
own Governments on the situation no they find it is viewed here
BRITISH EMBASSY,
WASHINGTON, D.C.
February 14, 1940.
Regraded Uclassified
COPY
251
Strictly Confidential.
Attached is a revised statement of estimated
United Kingdom purchases in the United States in first
year of war, excluding U.S. dependencies and Cuba, to
be substituted for statement on page 4 of British Embassy
memorandum of February 14, 1940.
The reduction of 617 million in this revised
estimate 1e principally accounted for by exclusion of
purchases of
1.
Petroleum from Netherlands West Indies
17,000,000
Sugar from Cuba and U.S. dependencies
4,000,000
Hemp from Philippines
800,000
Reduction in estimate of machine tools
likely to be procurable by end of
August, 1940
12,000,000
and by the inclusion of
Tobacco purchased from 1939 crop
7,000,000
Merchant shipe
6,000,000
and by the revision of other items.
In consequence of this reduction of 117 million
compared with the figure shown in the memorandum, the
estimated adverse balance of the United Kingdom 18 reduced
to 6145 millions, and of the United Kingdom inclusive of
the rest of the sterling area to 6117, or at the rate of
$4.02 to the 6 to 0583 millions and $470 millions
respectively. The necessary corrections should therefore
be made on pages 2, 4 and 6 of the memorandum.
The estimated percentage distribution of purchases
shown
Regraded Uclassified
252
- 2 .
shown on page , of the nonorandum should also be
corrected, as follows:
Military supplies
21.1 percent
Raw materials, food-
stuffs, tobacco and
oil
45.5 0
Machine tools, general
manufactures and ships 35.4
#
BRITISH ENBASSY,
WASHINGTON, D.O.
February 16, 1940.
Regraded Uclassified
253
Entimated U.K. Purchases in U.S.A. in First Year of War.
Million 1
Percentage
(f.e.b. values)
of total.
Raw Materials:
Cotton
25.0
Iron & Steel
9.0
Lumber
3.5
Wood pulp
2.0
Other
9.5
49
27.22
Foodstuffs
Cereals and
cereal prod-
uots
3.5
Hog products
2.6
Fruit
4.5
Canned salmon
1.5
Other
1,0
13*
7.22
Tobacco (1939 crop)
7
3.89
Petroleum
13
7.22
General manufactures
23
12.78
Machine tools
31
17.22
Merchant shipe
6
3.34
Air, Military and Naval services:
Aircraft and
engines
19.5
Munitions
13.0
Naval
3.0
Other
2.5
38
21.11
180
100,
Provisional estimates subject to modification owing to
price factor or otherwise.
Regraded Uclassified
CSA
February 21, 1940.
MEMORANDUM
It is recognized that the British Ambassador's
memorandum of February 14, as amended by the memorandum
of February 16, is tentative in its various estimates.
The following comments are likewise in part tentative
and in any event would be subject to amendment to oor-
respond to any further changes which might be made by
Lord Lothian in his memorandum.
I
Foreign Exchange Resources of the United Kingdom
The great importance to the United Kingdom of its
gold and foreign capital assets 18 fully understood. It
may be inquired, however, why the estimate of "the total
capital assets of Great Britain" which is given on page
three of the Ambassador's memorandum should include only
gold and negotiable dollar securities and should omit
(a) The British short-term balances in this
country, estimated by the Federal Reserve Board to
have been 596 million dollars at the end of August,
1939.
(b)
Regraded Uclassified
255
a , 8
(b) The British "direct and other investments"
in the United States eited in the dame survey.
(e) British direct and security investment in
third countries which if liquidated at all are likely
to be sold to American investors.
(a) The central gold recerves of the rest of
the sterling area (a half-billion dollars).
Further, although the memorandum justifiably does
not include the gold, dollar balances and American invest-
ments of Canada and France, it may be noted that these
amounted to over 4.5 billion dollars and constitute a
fund which in some measure undoubtedly will be available,
directly or indirectly for the needs of the British Gov-
ernment in a protracted var.
These inquiries and comments are put forward in our
endeaver to appraise whether the "total capital assets of
Great Britain' say not lie somewhere above the 2,735 million
dollars cited in the Ambassador's memerandum.
II
Estimated Balance of Payments between the
'sterling area" and the United States
(20 It is the estimate of the neverandum that,
emitting the sale of newly mined gold, the *sterling area
will have 8 negative balance of payments with the United
States
Regraded Uclassified
256
3 -
States for the first year of the war (September 1939 -
August 1940) of 117 million pounds sterling or 470 million
dollars. Considerations of cuation would obviously indi-
cate the wisdom of making such an estimate on a most con-
servative basis. However, 1% would appear that, even on
n. conservative basis, the net result presented by this
estimate may overestimate the prospective net adverse
British balance - perhaps by as much as 100 to 160 million
dollars. Without entering into detailed discussion, it
would seem pertinent to inquire:
(a) Whether it is justifiable to assume that
American imports from the United Kingdom will be all low
as in 1934 or the exceptional year of 1938, as is done
in the British estimate.
(b) Whether the dollar value of American
imports from the rest of the sterling area is not likely
to be substantially in excess of the 1939 value, which
10 the value assumed in the British estimate.
(e) On what basis the British Treasury has
reduced the "not balance of invisible exports" to the
United States to 5 million pounds (20 million dollars)
when, according to our estimates, the "service" items in
the balance of payments between the two countries has
varied between 66 and 134 million dollars annually in
the past six years (always in favor of the United Kingdom).
(2)
257
- 4 -
(2) It would be useful to have more information
on the state of the adverse balance of the sterling area
(as defined) other than the United Kingdom for which the
newly mined gold will be required.
Since most of this newly mined gold will undoubtedly
be sold, directly or indirectly, to the United States
Government, it is pertinent to inquire why the dollar ex-
change proceeds cannot be spent for American agricultural
products instead of diverting the British purchases of the
1922 products to other countries, paying therefor with the
proceeds of American purchases of newly mined gold (assum-
ing of course that American prices are competitive world
prices).
III
The Situation in Agricultural Products
The American Government is aware of the gravity of
the British foreign exchange problem and fully understands
that the British Government has strong reasons for reducing
imports of non-essential products in order to conserve its
resources for the procurement of commodities essential to
Great Britain in time of war. With respect to any partiou-
lar product, the cogenoy of the British position is such
as to command the sympathetic understanding of the American
Government. Unfortunately the cumulative effects of British
measures
Regraded Uclassified
258
- 8 -
measures for the control of trade bring direct loss and
curtailment to American agriculture, which has a long-standing
interest in the maintenance of foreign markets, while
fostering an ephemoral trade in certain products directly
related to the prosecution of the war, and for which the
demand will largely coase with the end of the war. Hence,
although fully understanding the position of the British
Government, this Government cannot avoid concern over the
loss of export outlets for its agricultural products in
the United Kingdom. This loss would furthermore appear to
be in considerable part the result not of reduced total
British imports and consumption of such products, but of
policies of diversion from American to other sources of
supply. The United States is faced with the danger that
its agricultural products may be shut out of their normal
market in Great Britain because the United States is in a
position to supply other products which are of the utmost
importance to the British Government.
Approximately 35 percent of American gricultural
exports (about so percent, excluding cotton) normally have
gone to the United Kingdom, and a considerably higher
percentage in the case of a number of individual products. For
example
259
example, almost half of the total of American tobacco
exports and about 85 percent of our has exports are
normally sent to the United Kingdom. It appears that
various measures adopted by the British Government have
completely closed the British market for American products
which in recent years have accounted for almost half of
our agricultural exports to the United Kingdom, that the
trade in a number of other products has been severely
curtailed, and that the outlook for the other agricultural
products 10 far from reassuring.
The Department is currently giving attention to the
various individual agricultural and forest products dis-
cussed in the Ambassador's memorandum. It would not
appear to serve any useful purpose to enter into discus-
sion of the details of the Embassy's comments, pending
the more complete and, it is to be hoped, definitive
talks which will be held upon the arrival of Mr. Ashton-
Owatkin. It may be remarked in general, however, on the
basis of such incomplete information as the Department
has been able to obtain from London and other sources,
that the outlook for American agricultural exports to the
United Kingdom (with the possible exception of cotton) is
decidedly uncertain, particularly with respect to tobacco,
fresh fruits and pork products.
Finally
260
-7-
Finally, note may be taken of the Ambassador's
statements that # each purchases of non-essential
American agricultural products and even of those now
regarded as sesential, must be reduced to a minimum"
(page 16), that "imperative political considerations ...
may necessitate the diversion of purchases of some agri-
cultural products from the United States to other coun-
tries" (page 17), and that diversion of trade from the
United States to other countries "1s imposed on us by
var necessity and by the 'eash' and 'earry' requirements
placed on Great Britain for the conduct of its wartime
trade with the United States" (page 17).
It is true that loans to belligerent governments
are prohibited. But it may be observed that it is
unjustified to conclude that this imposes trade diversion
upon Great Britain and the British Empire.
(a) The memorandum claims that the sterling
area has large adverse balances elsewhere for which it
has to recerve the equivalent of its new gold production.
Since these balances are not settled by credits or even
by bilateral barter, there can be no economic reason
(even of a vartine character) for diverting trade in
agricultural products from the United States to these
other countries. In either case the balance has to be
not
Regraded Uclassified
261
met out of British resources.
(b) It is stated that Great Britain is making
loans for "imperative political considerations" to third
countries and diverting trade from us in order to be repaid.
(0) It 18 stated that Great Britain is buying
in other countries to keep them out of the German orbit
or to keep goods from getting to Germany.
Actions (b) and (o) may be understandable enough for
a nation at war. However, it cannot be maintained that the
diversion 1a due to American legislation. Even if American
loans were legal and American investors were willing to
extend such credits, it would appear that the British
Government would still be motivated by the same political
and strategic considerations and would still be trying
to divert trade in important products away from the
United States. And such diversion may or may not "come
to an end when the var is over". The experience of coun-
tries which have subarked upon bilateral arrangements and
trade diversion under the plea of emergency needs bears
witness to the fact that such systems of trade tend to
create their own justification for continuance and although
the "emergency" say change in nature, it seldom passes.
KAISTINEBOVER:ED:NES
COPY
262
(COPY:FE:APS)
AIR MAIL
NO. 59
AMERICAN CONSULATE GENERAL
American Foreign Service, Hanoi, Indochina, March 2, 1940.
SUBJECT: Closing of the Caobang Road.
The Honorable
The Secretary of State,
Washington.
Sir:
I have the honor to refer to my despatch no. 49 of January 30, 1940.
in regard to the then prevailing opinion as to the usefulness of the Caobang
road as a route of transportation to China via Indochina, and to report that
recent developments have confirmed that unfavorable opinion. The Department
will recall that the Caobang road was closed for B. period of a week or more
during early February, because of B. number of small landslides, and I have now
to report that the road is again closed, perhaps for an indefinite period.
Within the last week, representatives of the various oil companies and of
other organizations interested in transportation to China, have individually
expressed to me their profound scepticism in the future of the Caobang road,
at least until the rainy season in Kwangei is well pest. Upon the basis of
the reports of these observers, most of whom have vainly endeavored to enter
China by this road, I venture to reiterate the previously expressed belief that
any optimistic statements by the Chinese or by advisors to the Chinese National
Government as to the immediate value of the road must be discounted as publicity
intended
263
H
- 2 -
intended to create optimism where as optimism exists.
During & recent trip to the frontier, involving unbelievable hardships, a
representative of an American firm saw 60 trucks almost hopelessly mired down in
the stretch between Tran Khan Fu and the frontier (about 24 kilometers), 3 completely
wrecked trucks, and a mumber of others in various stages of collapse as a result
of road conditions and bad driving. He was informed by the Indochina Customs
officials at Tran Khan Fu that the Indochina section of the road would not be
ready for sustained traffic under two months, these officials expressing at the
same time their belief that the Chinese section of the road, between Pingma and
Hochi, was in even worse condition.
I have had reports from other sources that the Chinese section between Pingma
and Hochi is in terrible condition and that B. number of bridges have been washed
away by floods. If such adverse conditions obtain at the present time, before
the onset of the rainy season, it is difficult to visualize the Caobang road
functioning to any great extent within some months.
Respectfully yours,
For the Consul at Saigon,
CHARLES S. REED II,
American Consul
In duplicate to the Department (Original by air mail)
Copies to the Embassy, Chungking and Peiping
Copies to the Consulates General, Hongkong and Shanghai
Copies to Consulates, Kunming and Saigon
815.4
CSR:csr
=
2
RE OPEN MARKET
March 3, 1940.
10:40 a.m.
Present:
Mr. Gaston
Mr. Bell
Mr. Haas
Mr. Murphy
Mr. Hadley
Mr. Lindow
H.M.Jr:
Mr. Bell, how does the financing look to you
today, as of the close of the market?
Bell:
Well, I think the last two days the bonds
that we have been talking about, the 21% has
been extended as much as a half year and it
is just a question in our minds as to whether
that isn't getting out B. little too far at
this time and you might like to consider a
2-1/8, which looks now as though it might be
on the face of a 12, 8. 14% year, or you might
even go back to & 2% coupon, which would be B.
10-3/4 to a 12-3/4 year.
B.M.Jr:
Supposing I say what I have in my mind, which
may help these fellows. I read Haas' two
memoranda. I was impressed with two facts.
One, that doing a 3-3/8 - 3-5/8, isn't it?
3/8 note and & 11 - 3-3/8 bond and B. 12% note,
you have got to do something which wouldn't
necessarily - you wouldn't necessarily do if
you had just one or the other. You have got
two different pieces of merchandise which
are quite different and of course the second
suggestion that you fellows made, that in order
to overcome the desire on the part of the
people to give up that interest for three
months, you might have to pay the 3-3/8 until
the 15th of June. Still you have got a diffi-
cult piece of merchandise there.
Gaston:
3-3/8?
Bell:
Yes, that is the coupon on the balance.
Heas:
They are calling before maturity, Herbert.
Murphy:
People have the legal right to get their full
interest.
265
- 2 -
Gaston:
Oh, that is the present coupon?
Haas:
Yes.
H.M.Jr:
It 1s calling two things, you see,
Gaston:
Oh, yes.
H.M.Jr:
I am impressed with the other thing, that
there really 18 & shortage of three to five-
year paper on the market. It isn't very
much, but you people planned that out. It
has been getting less. We have been forcing
the banks into a long discount. Therefore,
I would like to put on the table the thought
that we only do the note and the possibility
of doing a five-year note at 3/4 of a percent,
which is damned attractive and then pick up
the 3-3/8 bond any time and the longer you
wait, the more you could tailor it. Then
you could tailor the thing just for that.
You wouldn't have to be trying to do - as far
as I know, I don't think I have ever done 8.
note and a bond at the same time, refunding.
Sell:
Oh, I think you must have.
Gaston:
I think so. We have offered a bond for B.
bond and a note for a note.
H.M.Jr:
We have called the bond and given them the
choice of 8 note or 8. bond, but we have never
called a bond and a note and then tried to
offer two different things at the same time.
Gaston:
I thought we had.
Murphy:
It would be as far back as the middle of 135,
because we haven't called any bonds since
October, '35.
H.M.Jr:
You take 738 million dollars worth of notes
and offer them a 5-3/4% note and you would
do about 700 million. I think that I am right
that that would fall at B. good time.
Regraded
285
3
Sadley:
Yes.
I.M.Jr:
I mean March 15, '45. There is nothing there?
Dadley:
No, there are no others.
H.M.Jr:
What the hell is the matter with that? You can
shoot.
Failey:
Well, in the first place, the market is ex-
pecting this 3-3/8 to come through and they
feel since you have made no announcement about
financing, you may have something that you know
about the European situation which, if you hold
this 3-3/8 back, they will say, "Well, you
are only doing a five-year note and it is about
the shortest issue you have put out, even in-
cluding the September crisis," and they will
say, "We were expecting something longer, If and
if the short one comes out and no bond, they
will say, "Well, maybe there is something coming
up that we don't know about," and it will un-
settle the market.
S.M.Jr:
Well, 0. K. If you don't mind, it is an argu-
ment but not an awfully heavy one. I mean, it
is not an awfully heavy argument.
Sell:
In September, 135, we offered e 12-year, 2)
bond and a 11%, 3 and 6-year notes and gave them
their choice. In addition, we had 500 million
dollar notes for cash.
That was five years ago.
Bell:
It was quite B. ways back.
H.M.Jr:
But I mean, is there some unusual excuse for
not doing it?
Hadley:
The market has got both those issues tied to-
gether and they don't put the weight on that
interest adjustment that some might consider
they would.
H.M.Jr:
Well, it is worth 9/32nds, and if my memory
Regraded Uclassified
267
-
10 correct, that interest for three months --
Murphy:
On the coupon in the new security that you
put out, it would be worth 9/32nds.
Bell:
It would be worth more than that at three-
quarters and that pushes your rights way down.
Murphy:
Of course, we proposed that the interest ad-
jus tment be made only on the exchange of bonds
for bonds.
H.M.Jr:
I know, but - well, aside from the fact that
the market would be disappointed, we would be
borrowing 700 million dollars at three-quarters
of a cent, which we have already done once
before. What would happen to the bonds if we
did that to the bond market?
Hadley:
Your right values would go down. Your short
bonds would drop off. It wouldn't affect
your longer bonds much except for the fact
that they might tie it in to something
coming that they don't - can't see and they
think you see, unless you explain why you are
doing it.
H.M.Jr:
Well, the explanation is that it 18 very diffi-
cult to find something which is suitable both
to the holders of the bond and the holders of
the note and 735 million is still a lot of
money.
Hadley:
I don't think the market would accept the argu-
ment there, because they have it pretty well
figured out about what type of issue would go.
H.M.Jr:
What do they think?
Bell:
Then we have had so many finencings larger than
this, I think they would put S. question mark
after it. That is what worries me.
Hadley:
The market's first preference 1s a reopening of
the '48-'50s, and second, reopening of 51-153a,
Regraded Uclassified
268
- 5 -
or something in the early fifties, 2-1/8, 2-1/4.
H.M.Jr:
You fellows are recommending 8 2% --
Hadley:
As far as the possibilities, the preferable one
right now is a 2-1/8, 12-1/4 - 14.
H.W.Jr:
Well, unless - I want to talk to Gaston and Haea
and Bell, so 1f you men have got anything you
want to say, you three, would you say it now
and then I will ask you to wait outside,
Henry?
Murphy:
I would merely like to add that if we put out a
3/4% note it will take about maybe 3/4 of a point
off right values.
Bell:
It will affect the 25-year price.
Murphy:
Yes. It takes 3/4 of a point at present and that
gradually decreases as you go into the future, but
it might affect the securities - the effect night
E° out even beyond five years as it gradually
decreases and while we know that this is a
technical adjustment, from the standpoint of the
non-technical reader it is merely a decline in
the bond market and that decline, accompanied by
the unexpected omission of EL financing would
naturally give rise to - tie the two things
together and what would in fact be quite an
illegitimate tie, but which would sound plausible
and to the lay reader would sound more reason-
able than a technical explanation.
H.M.Jr:
Supposing for some reason we didn't do any
financing at this time.
Murphy:
I think it would not have this repercussion on
right values. The technical adjustment in right
values which hasn't anything to do really with
the general level of the bond market or con-
fidence in the future of money rates, can't be
ment bond prices and it seems to me while I
separated out. It is just 8. decline in Govern-
feel that rights are too high, I don't - what
Regraded
209
- 6 -
we are really doing 1s, no are taking a shot
at them and we put them down sharply and it
seems to me that it would be interpreted un-
fortunately.
Lindow!
I agree with the sentiments both of Mr. Hadley
and Mr. Murphy.
H.M.Jr:
Supposing you three gentlemen - do you mind
waiting outside in the room out there and make
yourselves comfortable.
(Mr. Murphy, Mr. Hadley and Mr. Lindow retired
from the conference)
H.M.Jr:
You see, this is the thing that bothers me.
You see, when I came back from Arizona I had
8. note from the President in which he said,
"Don't do any financing, don't even talk to
the bankers until I get back." Well, whereupon
Bell and I sent him B. cable recommending that
we go ahead and refund both of these and he
came back and he said, "No, I haven't got
all the figures out here and what 16 so sacred
about the Ides of March? Wait until I come
back.' But I have been worrying about it more
and more and this Eccles-Lasser thing, I think,
sort of shows which way the wind is blowing
and then phoning around - I may be wrong, but
my guess is that they are going to try to get
me to take a million dollars worth of gold
out of the stabilization fund to pay off these
securities, you see, and that way change the
debt limit and that 1s 8, signal to Congress
that they can 60 ahead and spend money on
agriculture or whatever they want. They put
in the 45 billion, didn't they?
Sell:
Yes.
H.M.Jr:
I don't want to say how I arrived at it, but
I have been doing a little snooping and I
think I have hit it on the head. Now, I am
will see me today or tomorrow. My thought 19,
supposed to see the President at 4:00. He
I em in A much stronger position. That is
what I want to discuss. If I go in and 886
270gge
7
the President this afternoon and say, "Xr.
President, here is the program that we have
worked out in Treasury and I would like you
to approve it," and he will say, "What is it?"
Now, if I present him a program to refund
738 million dollars on the 12 notes at three-
quarters of B cent, 1t 18 6. damn sight harder
for him to turn that down than if I'm talking
about B. billion one of two and two and an
eighth percent bonds and something, and he
will say, "What percent goes into bonds and
what percent notes?" And I will have to
honestly say about 75% will go in the bonds,
80 what I am thinking of 1s not to hell with
the market and the rights and all the rest,
what I am thinking 1s I want to put up a
program which looks 80 attractive that it makes
it almost impossible for the President to turn
it down because I am paying too much and he
then has got to say, "No, I don't want this,
but I want something else." In other words,
I want to be in a position I have been for
years. I have always gone and said, "Mr.
President, and said what I want and I would
like his approval and I am not going to start
in arguing and simply say, "What do you want,
Mr. President?" "This is what the Treasury
thinks the best and I would like to do it -
like your okay to go ahead and do this thing
next Thursday." Now, supposing it gets to the
point that the President says, "No, you can't
do it," and the thing is public, that he and
I have had a break. What have we broken about?
The President of the United States has said I
can't borrow 738 million dollars at three-quarters
of B. percent for five years. He has refused to
let me do it. I mean, where does it leave him?
Now, you fellows come back at me and that 13
why I thought this thing out and that is why
I have changed. I want to make the program
60 reasonable that in his mind and in the
minds of the public it makes it almost im-
possible for him to turn it down. If he goes
to Eccles and says 2% bond, Ecoles will say,
"If he refuses to use gold or silver certi-
ficates, then make him use bills or notes,"
271
321
- 8 -
but I want to meet the Eccles school more than
half way and come to this and later on, this
is what I have got in mind, in a month from
now if we want to reopen that other note - you
see, Dan? What 1s 1t, the December note?
Bell:
No, it is the March, '44.
H.M.Jr:
Then if we want to go back and reopen that
note and refund the Junes into that, we are
still all right.
Bell:
You mean the bonds?
H.M.Jr:
Yes. In two months from now or three months
or one month from now, we want to reopen that -
which 18 the one you recommended?
Bell:
The March, '44.
H.M.Jr:
Reopen the March, 144, we can always do that
before these 3-3/8ths.
Bell:
350 million.
Haas:
Here 1s an argument that occurs to me.
H.M.Jr:
Do you get the picture, Herbert?
Gaston:
Yes, I get it.
H.M.Jr:
Go ahead, gentlemen.
Haas:
What if he says to you then, "No, I don't want
that. I want you to get all these obligations
to use the silver." It seems to me that B. very
important thing from his standpoint, even if he
made up his mind to do it, that to use - to
retire these obligations in silver would have
this disadvantageous effect on the bond market.
It would eliminate these rights. In other words,
by using & note when the market 18 expecting a
bond, you would eliminate some of them, but
using the silver you would more or less eliminate --
Bell:
You would just hit them all at once.
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Haas:
Oh, you would hit the whole thing and with
the business situation as it 18, you don't
want to disturb the Government bond market
that way. Even if he has made up his mind
to spend the silver, that technically is not
the way to do it. The way is to use it in
new money or if you must retire the Govern-
ment debt, retire that part of the debt which
does not disturb the bond market, which is
bills.
H.N.Jr:
Granted, but we are going to do that normally
anyway.
Haas:
Well, there is a billion three in bills out
and there is how much of the new money?
Bell:
Well, there 1s only 500 million in new money
outside of Savings bonds.
H.M.Jr:
You are suggesting we let the bills run off --
Haas:
You don't hit the Government bond market that
way.
E.M.Jr:
And issue more certificates.
Haas:
For the new money.
Bell:
If you are going to use the gold or silver
seigniorage, first use it to meet current
expenditures. That puts it back in the
hands of the public and the people want this
money in the hands of the public. If he
doesn't want to do that, he wants to show
8. debt retirement, then this retiring bills,
rather than retiring something that has a
value in the market and you disturb your
whole bond market which is largely tied in
with your private financing, which has been
going good in the last two months. I am
afraid you will disturb that whole thing.
Haas:
Even if I believed and if you believed that
you wanted to get the silver out, then you
would ask yourself the question, "How,
technically, is the best way to do 1t?"
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273 #
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H.M.Jr:
You see the point, that I don't want to be
B. party to 1t. I can't object if the Presi-
dent of the United States says, "Due to the
unemployment situation I want to spend another
billion dollars worth of money for unemploy-
ment and I am going to Congress or send them
B. message," and then Congress debates it and
approves or disapproves it. Then it 1a up to
me to raise the money.
Bell:
It is up to them to raise the debt limit.
H.E.Jr:
It is up to them to raise the debt limit, but
this thing that I see 18, some person has
said to him, "Now, by using the silver certi-
ficates instead of gold, what it amounts to,
you increase the debt limit by & billion
dollars." Isn't that what it amounts to?
Bell:
Yes, if you use this to retire it you would
increase 1t about 8 billion one.
E.M.Jr:
And that is the signal to Congress to go ahead
and spend another billion dollars. I think
Congress will be just sore. The budget message
is only two months old and I become a part of
the trick of another white rabbit and that is
what I object to. He won't say to me that this
is what he has in mind, but I have smelt this
thing. They tried to keep it from me and I
am almost sure that I am right, but I have
done a lot of work in the last 24 hours and
then by giving them another billion dollars
worth of public debt, that is the signal to
Congress to give agriculture what it wants
or this person or the unemployed, and 80 forth,
and everybody will say, Well, Morgentheu 18
just part of the trick."
Haas:
Well, when you --
H.M.Jr:
And I don't want to be part of any tricks.
Gaston:
It makes the budget message dishonest, of course.
Haas:
Aren't you 8. little better off. Mr. Secretary,
274
WF
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personally, if you suggest to him the bond or
the note, because if he goes just the note, you
are sort of half - well, a little half way, sir.
Gaston:
They want a billion dollars. If you take three-
quarters of B. billion dollars away from them,
that sort of gums up the scheme.
Haas:
Yes.
Bell:
You don't suppose that they would permit you
to go on with this refunding, which is already
in the market, in the minds of the people in
the market, and then take these funds and retire
the December notes, 738 million dollars also?
H.M.Jr:
I have that in mind, but I don't want to say
anything about it because they haven't done
their job, because Harold Smith hasn't gone
after that 700 million from Farm Credit and
RFC. If they go after that, we are all right.
The thing gets down to the point, if we get
the 700 million the President mentioned in the
budget message, that is the leeway. It 18 down
so close you might say there is no leeway,
lacking that. Is that right, Dan?
Bell:
That is right. It is awfully close.
H.M.Jr:
And there is another 700 million worth of bonds
coming due in December, as Dan says, but if I
was the President, I would certainly want - be-
tween now and the time Congress adjourns, I
would want to give them a review of where the
public debt stands and just where the whole
business stands and I just feel this way. If
I give an inch at this time on silver certi-
ficates, gold in the stabilization fund or any
one of these devices, well, I might just as
well hand over the Treasury to Eccles and
Lasser and be done with it. I might just as
well. I mean --
Bell:
Well, it isn't going to stop at the billion if
you give in.
Regraded Uclassified
275
III
- 12 -
Gaston:
No, it 1s going to be both silver certificates
and gold.
Bell:
Three billion three is going out, that is all,
silver certificates and the gold.
Gaston:
And all the gold.
Bell:
That is right.
Gaston:
And you just can't consent to taking that gold
in view of what you have said to the Congres-
sional committees without going to Congress.
H.M.Jr:
I can't? Remind me of what I have said.
Gaston:
You told them that they identified - I don't
know the exact language - they identified the
two billion dollar gold reserve with the
stabilization fund. You told them that resource
was not going to be touched for any purpose
except stabilizing the value of the dollar, if
any such proposal was made, that you personally
would come up to Congress and ask them for per-
mission to do it, and it seems to me that in
this jugglery of using the gold, which 1s the
real resource, without making it a charge
against the stabilization fund on the books,
they would regard as a trick, which means
nothing, which 18 just B. shabby device. Don't
you think so, Dan?
Fell:
Well, I think there might be that intimation,
but I don't think the Secretary went quite as
far as you seem to think he did. I think he
was talking about loans to foreign governments,
and 80 forth, and said that he wouldn't make
any loans to foreign governments without first
consulting Congress and then they raised the
question about using this gold for some pur-
pose of that kind. The Secretary said he
wouldn't use it in case of a war unless he came
to the Committee.
H.M.Jr:
Well, but I made the plea that this thing should
be used as a first line of defense against
276
#
- 13 -
depreciation of currency going on somewhere
in the world and this isn't using it for that
purpose. Now, I feel in my own mind that I
would be breaking - I consider myself sole
trustee of this fund. I made the fight. The
President didn't lift & little finger to help
get this thing through.
Bell:
I think you pointed out in that letter to the
President --
Gaston:
Lasser said something like that, that the only
reason he would consent to the continuation of
this stabilization fund was because that locked
it up so they couldn't spend it for running
expenses.
H.M.Jr:
Well, looking on it from the other side, does
anybody think I should exceed that?
Bell:
Well, not unless you have --
H.M.Jr:
I don't have to do anything, Dan, that I don't
think is right. After all, Congress gave this
to me. They didn't give it to - I am the
trustee. That is the way I consider myself.
Bell:
You have got a very great responsibility in the
matter. I think you will be criticized if you
are 8. party to it.
Gaston:
I would think this, that as to the gold in the
stabilization fund reserve gold, no, until
Congress gives it consent. As to the silver
certificates, I should think in view of what
you said about if Congress didn't raise the
debt limit you would just be forced to use
silver certificates, I think the time to use
silver certificates is when you are up against
it and you haven't got any other resources,
but not now when you have got resources.
H.M.Jr:
As to gold, you say what, Herbert?
Gaston:
I would say no. I would stand against any use
of the gold without the specific consent of
Congress. As to the silver certificates, I
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277
#
- 14 -
wouldn't use them until you are up against
it and have got to use them to maintain the
Government credit and pay its bills.
H.M.Jri
Now, I've spoiled Mrs. Morgenthau's week-end.
Supposing they sent for me up in Congress.
She said, "What would you say If they asked
you if you used the gold?" I said, "I would
say no.
Gaston:
I haven't had just the same idea about the gold.
I felt that it is an extra resource to protect
and in view of all the assaults on the Treasury,
but that there were some pretty good arguments
for using it now to retire the debt or part of
it at least, but I don't think you can do that
without getting a release from Congress.
E.N.Jr:
Let me explain that that thing, if you don't
mind my saying so, is e specious argument,
because if you retire a billion dollars worth
of these bonds now with the deficit running,
you have just got to get out B. billion dollars
of something else in place of it.
Gaston:
Well --
H.M.Jr:
Silver certificates are something. You have just
got to replace 1t as you spend the money with
something else.
Bell:
In other words, you are just using it to increase
your present borrowing power.
Gaston:
My objection to using 1t, I think, is along the
same line as yours. My objection to using it
is at a time when it just gives an excuse to
increase the expenditures beyond they point
where they wouldn't increase. If it wasn't so,
then I think it would be good policy to use a
billion end a half or more for current running
expenses, but I am morally certain if you did
use it now or make known your intention to use
it now, you would just result at this time in
shooting up your appropriations and therefore
I say, don't do it. But theoretically --
278
#
- 15 -
H.M.Jr:
There is another thing, Herbert. Look at
what the French do. The French wait until
they are in the war. They are in the war
three months and now they are beginning to
use their gold.
Caston:
Yes.
H.M.Jr:
Believe me, the President doesn't know how
lucky he was in September that I was 90 days
ahead of my financing.
Bell:
He certainly was,
H.M.Jr:
And that is another argument, to say that the -
he says, Well, we won't argue now. We will
delay it." Today, I am going to say, "No,
Mr. President, I am not going to delay because
supposing this spring drive materializes and
one of these big cities in Europe are laid
waste, I can't finance. Then I am e failure.
I have got this gain of 90 days. The market
is in beautiful shape and now is the time to
take it." He certainly was in B. damn lucky
position last September, entirely due to my
foresight.
Gaston:
That 13 why I may wait until you are up against
it in all these devices.
Bell:
That 1s the position you took in your letter,
that you may need these funds in a critical
time.
E.M.Jr:
I wonder if we could get a copy of that letter.
Bell:
It is in my files some place.
Haas:
I am afraid, Mr. Secretary, his mind may be
running somewhat like this, like it was in the
spring of '38. If business is going down, it
needs some kind of help. In '38 he used the
monetary thing plus - now, spending may be
difficult to get because of Congress unless
he works along the lines of the Secretary's
suggestions, but you see we have got these things.
Regraded Uclassified
279
- 16 -
Why not use them now? Business is going down.
We have got to get business to turn up and we
will give it the monetary stimulus and there-
fore use them. That may be the pattern that
his mind may be running to, just like it WB.S
in the spring of 138.
Gaston:
Some economists right now are worrying about
B. minaway inflation, due to war orders. If
you superimpose this, you will get a good pusli
for runaway inflation that would cause an awful
lot of hardship.
H.M.Jri
Private financing is going along - it was
140 million last week, wasn't it?
Haas:
I have forgotten. It was B. big issue.
H.N.Jr:
Ask Henry if that Issue went well.
Haas:
It went all right. Do you recall the date it
went? Shall I ask him?
H.V.Jr:
Ask him, to make sure.
Gaston:
What I think might be 8 strong argument is that,
"You presented the budget message only two months
ago with B. picture which has been accepted by
the country. Now, why kick it apart now?"
Haas:
On that Bethlehem, it went slow at the beginning
of the day but he says that it was just fair.
They closed the books and so on, the under-
writers, but there is a good deal of it still
hanging around and the Kentucky one is B. low-
grade bond and that went not 8.8 well as the
Bethlehem.
H.M.Jr:
Did you find it?
Bell:
The cases are locked and I can't find the keys.
I could get it if you wanted it this afternoon.
H.M.Jri
No, I think not.
Hass:
Mr. Secretary, If you get this thing, do it more
or less normally, irrespective of what you have
Regraded Uclassified
280
336
- 17 -
done afterwards, I think it 1a - it would help
out the business picture by keeping the Govern-
ment bond market in good shape. It seems to
me that ought to be quite an argument.
H.M.Jr:
No, this thing - I may be wrong - would upset
people terribly. It would upset them the way
it upset me.
Haas:
But if you pay off these issues, Mr. Secretary,
there is & mechanical upsetting due to this
right thing which is in addition to the psycho-
logical thing.
Bell:
Haven't you got to sort of see how the trend of
the conversations go and then try to meet it
by what he advances, because he may have an
entirely different --
H.M.Jr:
Yes, that is what I have been trying to do for
the last two days is think of every argument.
Bell:
Don't give up the whole refunding until you
see which way the trend goes.
H.M.Jr:
You stick to the whole one and then say, "I
want to go ahead with my refunding."
Bell:
Yes, and you might bring in the other picture,
how about the notes. There would be no argument
against that.
H.M.Jr:
You mean not give up the two right away?
Heas:
That is what I would do.
H.M.Jr:
Fine. All right, than, you.
Regraded Uclassified
281
#
PARAPHRASE OF TELEGRAM RECEIVED
FROM: American Embasey, Rio de Janeiro
NO.: 82
DATE: March 3, 1940.
Reference is made to my telegram no. 79 of March 1.
Aranha telle me that upon making a closer check he
finds that under his last offer holders of dollar bonds,
who hold only 34.4 percent of the total debt, would
receive 38.9 percent of the proposed payment; comparable
figures for the other holders would be as follows:
holders of sterling bonds, 60.8 percent and 58.4 percent;
holders of franc bonds, 3.4 percent and 2.4 percent;
holders of florin bonda .4 percent and .3 percent.
CAFFERY
EA:EB
Regraded Uclassified